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Sonoma Pharmaceuticals, Inc.Annual Report 2023 Annual Report 2023 Chair’s letter In 2023, Novartis made another substantial step in trans- forming from a diversified healthcare player into a focused innovative medicines company. With the successful spin- off and listing of our generics and biosimilars division Sandoz on the SIX Swiss Exchange in October, we con- cluded a major part of the portfolio transformation, which started 10 years ago and entailed the divestiture of sev- eral non-core businesses as well as the establishment of new therapy and technology platforms. The portfolio changes are integral to our strategy, which aims to position Novartis in highly innovative and fast-growing areas of healthcare, while focusing our organizational and operational structure. The shift from taking a broad market approach to going deep into select medical areas to achieve category leadership is set to guide our strategy in the future and is designed to spur sales and profit growth and create sustainable share- holder value. We are confident that our strategic direction and our oper- ational setup allow us to navigate the current market envi- ronment, which is characterized by a challenging macro- economic and geopolitical situation that is putting pressure on healthcare systems and is leading to major policy shifts. Our ability to adapt demonstrates the resilience of our business and our capacity to seize emerging opportunities. Having introduced more than 40 new molecular entities into the market over the last two decades, we are among the world’s most innovative pharmaceutical companies. By strengthening our expertise in specialized sectors, such as radioligand and RNA-based therapies, we can stay at the forefront of the rapid technological advances in our industry and differentiate ourselves from our com- petitors. To maintain this momentum, we will continue to invest substantial funds into research and development to cre- ate breakthrough therapies. Our executive leadership team has set in place a robust structure to fast-track our activities across our therapeutic areas and enable smooth project transitions between units. We also continue to make progress on our environmen- tal, social and governance (ESG) priorities. We made sub- stantial investments to reduce our environmental foot- print and renewed our commitment toward the creation of more equitable healthcare systems. We also made sig- nificant investments to advance our portfolio of potential treatments for neglected tropical diseases. I At the same time, we continued efforts to reinforce integ- rity across our organization and foster a business culture in which ethics and compliance take center stage. The Board of Directors will continue to focus on this area as we recognize that trust, in addition to leadership in inno- vation and further performance improvement, is vital for building stronger partnerships with healthcare stake- holders around the world and helping to create more resilient and equitable healthcare systems. 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% to CHF 3.30 at the next Annual Gen- eral Meeting. Sincerely, Joerg Reinhardt Chair of the Board of Directors CEO’s letter 2023 was a historic year for Novartis. With the Sandoz spin-off largely completing the multiyear transformation of our company, we are now completely dedicated to bringing innovative medicines to the world. As we enter this new era, our very strong financial and research and development (R&D) performance in 2023 underscores the benefits of our focused strategy and the progress we are making in creating value for sharehold- ers and society. We continued to show leadership in oncology, with strong growth for Kisqali and Pluvicto and important data read- outs that show the potential to bring these medicines to broader patient populations in early breast cancer and in earlier lines of treatment for advanced prostate cancer, respectively. Other standout performers include Entresto, our treat- ment for heart failure and hypertension that has now reached more than 2 million patients in the US, and Kes- impta, our treatment for multiple sclerosis that almost dou- bled in sales from the previous year and has now reached more than 85 000 patients across 87 countries. Alongside these achievements, we continued to deliver on our environmental, social and governance (ESG) commit- ments to broaden access to our innovative medicines, tackle major global health challenges, advance gender equity, and reduce our impact on the environment. At the same time, we are investing to meet rising demand for our medicines and ensure we can deliver our treat- ments to people who need them. During the year, we opened a new radioligand therapy (RLT) facility in the US that helped us more than double weekly production capacity of Pluvicto in the market. We also opened an RLT facility in Spain and announced plans for new facilities in China and Japan. We also achieved major innovation milestones that show the strength of our R&D pipeline and potential for future growth. One major highlight was the approval of iptaco- pan to treat a rare blood disorder—the first of what we hope to be many approved indications for this molecule, which was discovered and developed by Novartis. Our pipeline was further strengthened by the acquisition of Chinook Therapeutics, which added two promising Phase III assets for IgA nephropathy. Together with ipta- copan, these assets give us the potential to offer a trio of differentiated therapies for this rare, complement-medi- ated kidney disease. Going forward, we’re continuing to focus on improving our R&D performance and prioritization by fostering more streamlined collaboration between our research, devel- opment and commercial teams. We’re also investing in artificial intelligence to accelerate R&D while putting in place guardrails for the ethical use of this rapidly devel- oping technology. Culture continues to be foundational to our work, and I’m grateful for the ongoing commitment of our employees whose passion and dedication are driving our perfor- mance. This year, we largely completed the organizational transformation announced in 2022, helping to set a sim- pler structure for Novartis with streamlined processes and more agile decision-making. Our strong financial performance gives us confidence that our renewed strategy and simplified structure are enabling results, with 10% growth in sales (cc) and 18% growth in core operating income (cc). I’m filled with optimism for what’s to come. The past year has shown the strength of our company and set a robust foundation for growth. Looking ahead, we aim to build on this momentum and bring the same dedication to innova- tion and excellence to create value for patients, for soci- ety, and for our shareholders. Sincerely, Vas Narasimhan Chief Executive Officer II Table of contents Table of contents * Item 4. Introduction and use of certain terms .................................................................................................................................................................4 Forward-looking statements ...................................................................................................................................................................................5 PART I 7 Item 1. Identity of Directors, Senior Management and Advisers ...................................................................................................7 Item 2. Offer Statistics and Expected Timetable ...................................................................................................................................8 Key Information ........................................................................................................................................................................................9 Item 3. 3.A [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 4.C Organizational structure ...................................................................................................................................................................38 4.D Property, plants and equipment ...................................................................................................................................................38 Item 4A. Unresolved Staff Comments ......................................................................................................................................................... 40 * Item 5. Operating and Financial Review and Prospects ..................................................................................................................41 5.A Operating results..................................................................................................................................................................................41 5.B Liquidity and capital resources .....................................................................................................................................................75 5.C Research and development, patents and licenses .............................................................................................................87 5.D Trend information .................................................................................................................................................................................87 5.E Critical accounting estimates ........................................................................................................................................................87 Item 6. Directors, Senior Management and Employees ..................................................................................................................88 6.A Directors and senior management .............................................................................................................................................88 6.B Compensation .......................................................................................................................................................................................89 6.C Board practices.................................................................................................................................................................................. 118 6.D Employees ............................................................................................................................................................................................155 6.E Share ownership................................................................................................................................................................................156 6.F Erroneously awarded compensation ......................................................................................................................................156 Item 7. Major Shareholders and Related Party Transactions ....................................................................................................157 7.A Major shareholders ..........................................................................................................................................................................157 7.B Related party transactions ...........................................................................................................................................................158 Interests of experts and counsel ..............................................................................................................................................158 7.C Financial Information .......................................................................................................................................................................159 8.A Consolidated statements and other financial information ...........................................................................................159 8.B Significant changes .........................................................................................................................................................................159 The Offer and Listing ......................................................................................................................................................................160 9.A Offer and listing details ..................................................................................................................................................................160 9.B Plan of distribution ............................................................................................................................................................................160 9.C Markets ...................................................................................................................................................................................................160 9.D Selling shareholders ........................................................................................................................................................................160 9.E Dilution ....................................................................................................................................................................................................160 9.F Expenses of the issue ....................................................................................................................................................................160 Item 10. Additional Information .....................................................................................................................................................................161 10.A Share capital ........................................................................................................................................................................................161 10.B Memorandum and articles of association ............................................................................................................................161 10.C Material contracts .............................................................................................................................................................................164 10.D Exchange controls............................................................................................................................................................................165 10.E Taxation ..................................................................................................................................................................................................165 10.F Dividends and paying agents ...................................................................................................................................................... 170 10.G Statement by experts ..................................................................................................................................................................... 170 10.H Documents on display .................................................................................................................................................................... 170 10.I Subsidiary information .................................................................................................................................................................... 170 Item 8. Item 9. * “Item 5. Operating and Financial Review and Prospects,” together with the sections on our compounds in development and selected development projects (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 Item 11. Quantitative and Qualitative Disclosures About Market Risk .................................................................................... 171 Item 12. Description of Securities Other than Equity Securities ................................................................................................ 172 12.A Debt securities ................................................................................................................................................................................... 172 12.B Warrants and rights.......................................................................................................................................................................... 172 12.C Other securities ................................................................................................................................................................................. 172 12.D American Depositary Shares ...................................................................................................................................................... 172 PART II 174 Item 13. Defaults, Dividend Arrearages and Delinquencies .......................................................................................................... 174 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds ............................................. 175 Item 15. Controls and Procedures .............................................................................................................................................................. 176 Item 16A. Audit Committee Financial Expert ...........................................................................................................................................177 Item 16B. Code of Ethics .................................................................................................................................................................................... 178 Item 16C. Principal Accountant Fees and Services .............................................................................................................................. 179 Item 16D. Exemptions from the Listing Standards for Audit Committees ................................................................................180 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers ............................................................. 181 Item 16F. Change in Registrant’s Certifying Accountant ..................................................................................................................182 Item 16G. Corporate Governance ..................................................................................................................................................................183 Item 16H. Mine Safety Disclosure ..................................................................................................................................................................184 Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections .................................................................185 Item 16J. Insider Trading Policies ..................................................................................................................................................................186 Item 16K. Cybersecurity .....................................................................................................................................................................................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 Accounting Standards as issued by the International Accounting Standards Board. “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. Informa- tion 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 Novartis affiliate is legally separate from all other Novartis affiliate companies and manages its business independently through its respective board of directors or similar supervisory body or other top local management body, if appli- cable. Each executive identified in this Annual Report reports directly to other executives of the Novartis affiliate company that employs such executive, or to such 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; references to “euro” or “EUR” are to the lawful currency of the member states of the European Union in which it is the official currency; 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 Carib- bean; 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; ref- erences 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; 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; refer- ences 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 Exec- utive Committee of Novartis; references to “Bausch + Lomb” are to Bausch & Lomb Incorporated; references to “GSK” are to GlaxoSmithKline plc; references to “Roche” are to Roche Holding AG; references to “Gyroscope Ther- apeutics” are to Gyroscope Therapeutics Holdings plc; references to “ADACAP” are to Advanced Accelerator Appli- cations S.A.; references to “Novartis Gene Therapies” are to Novartis Gene Therapies, Inc.; references to “Endo- cyte” are to Endocyte, Inc.; references to “Chinook” are to Chinook Therapeutics, Inc. and references to “DTx Pharma” are to DTx Pharma, Inc. All product names appearing in italics are trademarks owned by or licensed to Novartis. Product names identi- fied by a “™” are trademarks that are not owned by or licensed to Novartis and are the property of their respective owners. Certain documents and information referenced in this Annual Report are available on our website. However, the information contained on our website, or any information that may be accessed by links on our website, is not included as part of, or incorporated by reference into, this Annual Report. 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,” “expect,” “will,” “plan,” “pipeline,” “outlook,” “may,” “could,” “would,” “anticipate,” “seek,” “likely,” “ongoing,” “esti- mate,” “believe,” “target,” “intend,” or similar terms, or by express or implied discussions regarding potential new products, potential new indications for existing products, or regarding potential future revenues from any such products or indications; or regarding the potential outcome, or financial 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 Novartis or potential shareholder returns; or regarding potential future credit ratings of Novartis; or by discussions of strategy, plans, expectations or intentions. Such forward-looking statements are based on the cur- rent beliefs and expectations of management regarding future events, and are subject to significant known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should under- lying assumptions prove incorrect, actual results may vary materially from those set forth in forward-looking state- ments. You should not place undue reliance on these statements. In particular, our expectations could be affected by, among other things: • Uncertainties regarding the success of key products, commercial priorities and strategy • Uncertainties in the research and development of new healthcare products, including clinical trial results and additional analysis of existing clinical data, and the use of new and disruptive technologies, including artificial intelligence (AI) • Global trends toward healthcare cost-containment, including new laws and regulations, ongoing government, payer and general public pricing and reimbursement pressures and requirements for increased pricing transpar- ency • Our ability to realize the strategic benefits, operational efficiencies or opportunities expected from our external business opportunities • Our ability to realize the intended benefits of our separation of Sandoz into a new publicly traded standalone com- pany • 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 IT projects and systems • 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 identify, attract, integrate, develop and retain key personnel and qualified individuals for critical roles 5 Forward-looking statements • 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 • Our ability to comply with evolving regulatory requirements and meet societal expectations concerning environ- mental, social and governance matters • Our ability to comply with cybersecurity and data privacy laws and regulations, and uncertainties regarding poten- tial 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 certain parts of the world • 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 • Uncertainties regarding our supply chain and future demand for our products These risks and others are discussed in more detail in this Annual Report, including under “Item 3. Key Informa- tion—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. It is not possible to predict or identify all risk to our business. Consequently, you should not consider the foregoing to be a complete discussion of all potential risks or uncertainties. We provide the information in this Annual Report as of the date of its filing. We do not intend, and do not assume any obliga- tion, to update any information or forward-looking statements set out in this Annual Report as a result of new infor- mation, 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 business faces 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. 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, slower than expected post-launch adoption, unexpected 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 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, management focus and resource allocation. Such competition could significantly affect the revenue from our products and our results of operations. This impact could also be compounded to the extent that such competition results in us making significant addi- tional investments in research and development, market- ing or sales. Furthermore, from time to time, we reassess how our business is organized to ensure we have the optimal structure with which to execute our strategy. An inability to successfully implement new organizational structures and operating models could have a material adverse effect on our results of operations and financial condi- tion. 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 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, ever-changing medical needs, while ensuring commer- cial viability and success. Our ability to grow our busi- ness and our product pipeline; to replace sales lost due to branded competition, entry of generics, or other rea- sons; and to bring products to market that take 9 Item 3. Key Information advantage of new and potentially disruptive technolo- gies, 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 devel- opment, integrate externally acquired assets in an effi- cient 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. We invest in new businesses, products, ser- vices and technologies, including artificial intelligence (AI), to achieve our goals, operate our business and reduce the time, effort and expense associated with identifying, developing and commercializing new prod- ucts. Our investments in new and disruptive technolo- gies may not ultimately achieve the intended benefits, may not result in an adequate return of capital and, in pursuing new strategies, we may incur unanticipated lia- bilities. For more information, see also “Item 4. Informa- tion on the Company—Item 4.B Business overview— Research and development.” 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. Additionally, if we fail to successfully progress late-stage assets and the core elements of drug devel- opment 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 finan- cial results. Another issue we face is the increasing challenge to adequately recruit a sufficient number of patients in the US for clinical trials due to the cost and effort associated with expanding our operations for the recruitment of patients into such trials. As a result, we may be unable to develop the necessary clinical evidence to support the desired indications and product profile for a partic- ular 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 requirements make the maintenance of regulatory approvals for our products increasingly expensive, and further heighten the risk of recalls, prod- uct withdrawals, changes to product specifications, loss of market share, and loss of revenue 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, our products, see “Research and development” and “Regulation” under “Item 4. Informa- tion on the Company—Item 4.B Business overview.” 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. If we fail to properly manage 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 develop- ment activities may not bring the expected benefits to us. 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 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—Price controls.” Recent trends in our external environment may have an impact on the likelihood of these pricing and reim- bursement pressures occurring. Slow economic recov- ery following the COVID-19 pandemic and the onset of war in certain parts of the world (which is contributing to challenges such as high energy costs and inflation) have led to an 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 10 Item 3. Key Information Assessment and 2023 EU Pharmaceutical Legislation Update) pose potential further pressures on pricing and timelines for reimbursement in these countries. For example, in August 2023, our cardiovascular drug Entresto was selected for the Medicare Drug Price Nego- tiation Program in the US and additional Novartis prod- ucts may be selected for price negotiation programs in the future. These external factors may materially affect our ability to achieve value-based prices; to achieve and maintain an acceptable return on our investments in the research and development of our products; and may impact our ability to research and develop new products. Alliances, acquisitions and divestments Risk description Failure to identify, execute or realize the expected ben- efits from our external business opportunities Context and potential impact As part of our strategy, we evaluate external opportuni- ties that could strengthen our portfolio by acquiring and divesting products, entering businesses or entering into strategic alliances and collaborations. For example, in 2023, we closed the acquisitions of Chinook Therapeu- tics and DTx Pharma. This strategy is partly dependent on our ability to identify strategic external business opportunities, including assessing the value of the early phase companies, and to close transactions with third parties on acceptable terms and timelines. 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. In addi- tion, we cannot be sure that pre-transaction due dili- gence will identify 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 commercialize acquired or licensed products, to inte- grate the acquired business or to achieve expected syn- ergies 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 timeframes or at all; differences in corporate culture, standards, con- trols, processes and policies; or other factors. Transac- tions 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. For more information about recent business acquisitions, see “Item 18. Financial Statements—Note 2. Significant trans- actions.” 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 of our products are protected by intellectual prop- erty rights, which may provide us with exclusive rights to market those products for a limited time, and to enable our purpose of reimagining medicine by sustainably financing our research and development. However, the strength and duration of those rights can vary signifi- cantly from product to product and from country to coun- try, and they may be successfully 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 reduction in net sales and operating 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 intel- lectual property rights. Such competition can also result from the entry of generic or biosimilar versions of another medicine in the same therapeutic class as one of our drugs or in a competing therapeutic class, from a Dec- laration of Public Interest or the compulsory licensing of our intellectual property by governmental authorities, or as a result of a general weakening of intellectual prop- erty 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 infringe- ment, or whose patents are still under legal challenge for validity, before final resolution of legal proceedings. We also rely in all aspects of our businesses on unpat- ented proprietary technology, know-how, trade secrets and other confidential information, which we seek to pro- tect through various measures, including confidentiality agreements with licensees, employees, third-party col- laborators and consultants who may have 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 medicines by third parties. If successful, these actions may involve payment of future royalties or damages, for example for patent infringe- ment, and may also involve injunctive relief requiring 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 a period of time or throughout the life of the asserted intellectual prop- erty right. Such damages or such an injunction 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 11 Item 3. Key Information 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 products, see “Item 4. Information on the Company—Item 4.B Business overview—Intellectual property.” Sandoz spin-off Risk description We may not successfully achieve our goals related to our separation from Sandoz and our failure to do so may have an adverse impact on our business Context and potential impact We recently completed the separation of Sandoz, our generics and biosimilars division, into a new Swiss pub- licly traded independent company, by way of a 100% spin-off. In connection with the Sandoz separation, we entered into a separation and distribution agreement and various other agreements. These agreements govern the separation and distribution and the relationship between Novartis and Sandoz going forward, including with respect to the allocation of assets and liabilities between Novartis and Sandoz. The agreements also provide for the performance of services by each company for the benefit of the other company for a period of time. The terms, scope and/or duration of these agreements could negatively impact our ability to pursue other strategic business interests as we will have to devote resources and capacity to fulfilling our obligations that we may pre- fer to direct elsewhere. If we or Sandoz are unable to satisfy our respective obligations under these agree- ments, we could incur losses or experience operational challenges or difficulties. These agreements could also lead to disputes over the performance of obligations under these agreements or the allocation of our respec- tive resources. For example, during the term of these agreements, we may have less flexibility to optimize our biologic manufacturing for our own products (or those of other third parties). In addition, pursuant to these agreements, we will perform technical development ser- vices for Sandoz, which may involve certain proprietary know-how. While we intend to retain the personnel involved in our technical research and development and to protect our trade secrets, provision of such services might create the incremental potential for the disclosure or misuse of such proprietary know-how, particularly in connection with technology transfer at the end of such arrangements. Additionally, we may not realize the anticipated stra- tegic, financial, operational, or other benefits from our separation of Sandoz. We cannot predict with certainty when the benefits expected from the Sandoz spin-off will occur or the extent to which they will be achieved. In addition, we incurred one-time costs and may encoun- ter operational inefficiencies in connection with the Sandoz spin-off that may negate some of the benefits we expect to achieve. If we do not realize these assumed benefits, we could suffer a material adverse effect on our financial condition. Further, if the spin-off does not generally qualify as a tax-neutral transaction for Swiss and U.S. federal income tax purposes, we, our shareholders, or both, could be subject to significant tax liabilities. The spin-off is intended to qualify for tax-neutral treatment for us and our shareholders for Swiss and U.S. federal income tax purposes. If, however, the spin-off fails to qualify as tax-neutral for Swiss and U.S. federal income tax pur- poses, we, our shareholders, or both, could recognize taxable gain with respect to the spin-off, resulting in Swiss and U.S. income, withholding and capital gains tax consequences. In particular, if the spin-off does not qual- ify as tax neutral for Swiss and U.S. federal income tax purposes, our shareholders who received shares of Sandoz in the spin-off as part of the separation would be subject to tax as if they had received a taxable distri- bution equal to the fair market value of such shares. For additional information about the potential tax conse- quences of the spin-off, see “Item 10.E Taxation—Tax consequences of the Sandoz spin-off.” Environmental, social and governance matters Risk description Failure to meet rapidly evolving environmental, social and governance expectations Context and potential impact Increasingly, in addition to financial results, companies are being judged by their performance on a variety of environmental, social and governance (ESG) matters, which can contribute to the long-term sustainability of a company’s performance. An inability to successfully per- form on ESG matters and to meet societal expectations could result in negative impacts on our reputation, recruitment, retention, operations, financial results, 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 12 Item 3. Key Information companies that perform well in such assessments are increasingly popular, and major institutional investors have publicly emphasized the importance of such ESG measures in making their investment decisions. Our actions related to ESG topics may in the long-term impact our operations and ability to achieve our strategic goals, and ultimately could have a potential negative impact on the value of Novartis. 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 the fast pace of change of external expectations, and a range of upcoming regulations, there can be no certainty that we will manage such issues successfully, that the ESG stan- dards we currently use to measure our performance against will remain the same, or that we will successfully meet society or investors’ expectations. Failure to meet rapidly evolving regulatory requirements and investor and societal expectations could also result in litigation or regulatory actions, which could have a material adverse impact on our reputation, recruitment, retention, operations, financial results, and share price. Addition- ally, external partners in our value chain that we do not control may not comply with ESG commitments and goals we set for ourselves, which may have a negative impact on our business. Operational risks Cybersecurity and data protection 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 also outsource significant parts of our IT infrastructure to third-party providers, and currently use these providers to perform business-critical IT services for us. We are therefore vulnerable to cybersecurity attacks and incidents on such networks and systems, whether our own or those of the third-party providers that 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 sys- tems make them potentially vulnerable to external and internal security threats; outages; malicious intrusions and attacks; cybercrimes, including state-sponsored cybercrimes; malware; misplaced data, lost data or data errors; programming or human errors; or other similar events. The risk of such threats and attacks has increased, as virtual and remote working have become more com- mon, and sensitive data is accessed by employees working in less secure, home-based environments. In addition, due to our reliance on third-party providers, we have experienced, and may in the future experience, interruptions, delays or outages in IT service availability due to a variety of factors outside of our control, includ- ing technical failures, natural disasters, fraud, or secu- rity attacks experienced by or caused by third-party pro- viders. Interruptions 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; the compro- mise of personal financial and health information; and 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. Strategic technology programs implementation Risk description Failure to successfully implement our IT strategy may disrupt our core business processes Context and potential impact We rely on various IT systems to operate our complex global business and several of our current IT systems are reaching the end of their useful life, which could cause disruptions to our operational stability. As a result, we are implementing several companywide IT programs to replace and consolidate outdated IT systems and to simplify and standardize our processes, systems and tools, and create a unified data marketplace. Implemen- tation and operation of these new systems involves cer- tain risks, including the potential for a failure of the new 13 Item 3. Key Information systems to operate as expected; a failure to properly integrate new systems with other systems we use; delays in adopting and scaling of new systems; potential loss of data or information; a failure of, or potential issues with, systems related to our payment and procurement pro- cesses; compliance issues; and cost overruns and delays. Our inability to timely and successfully implement our IT strategy may prevent us from materializing the expected business benefits and could lead to business disruptions, cost inefficiencies and potential exposure to legal, regulatory and reputational risks as our internal controls could be negatively affected. Any disruptions or malfunctions of new systems could cause critical infor- mation to be delayed, lost, defective, corrupted, or ren- dered inadequate or inaccessible, which could negatively impact our operations, the effectiveness of our internal controls and financial condition. Talent management Risk description Inability to identify, attract, develop and retain qualified talent for critical roles Context and potential impact We rely on identifying, attracting, developing and retain- ing a diverse, highly skilled workforce across our busi- ness and functions to achieve our 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 spe- cialists and skilled employees with key capabilities in key markets—our ability to achieve our major business objec- tives 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 in the long term. We face a challenge to attract and retain top talent in several areas, including biology, immunol- ogy, chemistry, clinical development, drug manufactur- ing, data, digital and IT, oncology, and advanced therapy platforms (i.e., gene and cell therapy, radioligand therapy and “xRNA”). In addition, many pharmaceutical and bio- technology companies, universities and research cen- ters, and government entities with significant capital are not only competing with us to attract the same skilled talent but are also aggressively pursuing our experi- enced talent. Furthermore, if we are unable to retain and engage key talent of companies that we acquire and inte- grate, we may not be able to realize the full value of these acquisitions. 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 us. In the United States, China and several other markets, the geographic mobility of talent is decreasing, as they find ample career opportunities available closer to home. The risks associated with the challenging talent mar- ket will be exacerbated if we are unable to retain and effectively develop employees, and to maintain an inter- nal pipeline with critical skills, experiences, and leader- ship to deliver our business priorities. As a result, devel- opment, engagement, motivation, succession planning and performance rewards for our critical talent are essential to achieve our business priorities. External partner risk management and human rights Risk description Failure to maintain adequate governance and oversight over external partner relationships, and failure of exter- nal partners to meet their contractual, regulatory or other obligations Context and potential impact We rely on external partners for the performance of cer- tain key business functions and services, including, among others, research and development, manufactur- ing operations and warehousing and distribution, certain finance functions, sales and marketing activities and data management. Some external partners, particularly those in developing countries, do not have internal compliance systems or resources comparable to ours. As a result, our investment and efforts in relation to external partner management include focusing on risk management and the oversight of such external partners. Our reliance on external partners poses certain risks, including the misappropriation of our intellectual prop- erty, the failure of the external partner to comply with regulatory and quality assurance requirements, the fail- ure of the external partner to comply with environmen- tal, anti-bribery and human rights standards and regula- tions, unexpected supply disruptions, breach of our agreement by the external partner, and the unexpected termination or nonrenewal of our agreement by the exter- nal partner. In addition, governments require us, and the public expects us, to take responsibility for and report on com- pliance with various human rights, responsible sourcing and environmental practices, as well as other actions of our external partner contractors around the world. Ultimately, if external partners fail to meet their obli- gations to us, we may lose our investment in the relation- ship with the external partners or fail to receive the expected benefits of our agreements with such external partners. While we aim to identify and assess any risk of harm to society caused by our external partners’ oper- ations, should any of these external partners fail to com- ply with the law or our standards, or should they other- wise act inappropriately while performing services for us, we could be held responsible for their acts, our rep- utation may suffer, and penalties could be imposed on us. Legal, regulatory, ethics and compliance Risk description Challenges posed by evolving legal and regulatory requirements, innovative and disruptive technologies, and societal expectations regarding ethical behavior 14 Item 3. Key Information Context and potential impact We are subject to an extensive and complex framework of laws and regulations across the jurisdictions in which we operate. 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; cyber and data security; use of technologies, including AI; data privacy; regulatory interactions; disclo- sure compliance; and intellectual property. Such matters can involve civil or criminal proceedings and can retro- actively challenge practices previously considered to be legal. There is also a risk that governance of our medical and patient support activities, and of our interactions with governments, public officials/institutions, health- care professionals, healthcare organizations and patient organizations may be inadequate or fail, or that we may undertake activities based on improper or inadequate scientific justification. Legal proceedings and investigations are inherently unpredictable, and significant judgments sometimes occur. Consequently, we may in the future incur judg- ments that could involve large payments, including the potential repayment of amounts allegedly obtained improperly, and other penalties, including treble dam- ages. In addition, such legal proceedings and investiga- tions, 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 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 set- tlements of such claims without bringing them to final legal adjudication by courts or other such bodies, despite having 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. From time to time, we may also initiate challenges to laws or regulations that we believe are illegal or unconstitutional. For example, in September 2023, we filed a lawsuit against the US Department of Health and Human Services and the Cen- ters for Medicare and Medicaid Services because we believe the drug price-setting provisions in the Inflation Reduction Act (IRA) are unconstitutional and will have long-lasting negative consequences for patients by lim- iting access to medicines now and in the future. The result of this and similar litigation we may pursue in the future is inherently uncertain and may negatively impact our business and reputation. For information on significant legal matters pending against us, see “Item 18. Financial Statements—Note 21. Provisions and other non-current liabilities” and “Item 18. Financial Statements—Note 29. 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 cause us to incur significant costs, including substantial time and additional resources, that are necessary to bring our interactions with healthcare professionals and organiza- tions into compliance with these evolving standards. To support our efforts to comply with the many requirements that impact us, we have a significant global ethics, risk 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 substan- tial liabilities that may not be covered by insurance, or to other significant 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. Regardless of whether our products and the related raw materials are developed and manufactured at our own manufacturing sites or by third parties, we must ensure that all development and manufacturing processes comply with regulatory requirements, as well as our own quality standards in order to deliver novel therapies while ensuring patient safety. Failure to comply with regulatory requirements may result in warning letters, suspension of manufactur- ing, seizure of products, injunctions, product recalls, fail- ure to secure product approvals, debarment or harm to patients or our reputation. In recent years, global health authorities have sub- stantially intensified their scrutiny of manufacturers’ compliance with regulatory requirements. Any significant 15 Item 3. Key Information 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 gene and cell ther- apy, radioligand therapy, and “xRNA,” all of which are particularly complex and involve highly specialized man- ufacturing technologies. For more information, see “Item 4. Information on the Company—Item 4.B. Business over- view—Production.” As a result, even slight deviations at any point in their production processes or in the materi- als used have led to, and may in the future lead to, pro- duction failures or recalls. 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, or geopolitical events, such as wars in certain parts of the world, and could lead to (i) a sudden increase in demand for selected medici- nal products, resulting in the short-term unavailability of critical materials; (ii) logistical and supply challenges that may lead to our inability to ship products from one loca- tion to another due to restrictions imposed as a result of a pandemic or geopolitical events and any related sanc- tions, which can also impact transportation and ware- housing costs; or (iii) our inability to properly operate a manufacturing site due to restrictions imposed as the result of a pandemic or any issues arising from geopo- litical events. Our or our 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 prod- ucts 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 individuals, 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); the California Consumer Privacy Act; Brazil’s General Personal Data Protection Law; and the Personal Information Protection Law in China. Such laws impose stringent requirements on how we and third parties with whom we contract collect, share, export or otherwise process personal 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 parties, could expose such personal information to unauthorized 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 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, which could interfere with critical busi- ness operations. 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. 16 Item 3. Key Information Falsified medicines Risk description Impact of falsified medicines on patient safety, and rep- utational and financial harm to Novartis and our products 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 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 Geopolitical tensions in various parts of the world wors- ened in 2023 and could continue to worsen in 2024 and beyond. Direct conflicts, including the ongoing wars in Ukraine and the Middle East, an increasingly challeng- ing economic landscape and social unrest, each have both a direct and indirect impact on the pharmaceutical industry and lead to a degree of uncertainty about the future. As a result of ongoing geopolitical tensions, certain countries have adopted, and may in the future adopt additional, protectionist measures including the imposi- tion of tariffs. Tariffs that are intended to shield domes- tic markets from foreign competition and the possibility of additional trade restrictions, such as export controls, could have a material impact on our business. If tariffs or export controls on pharmaceutical products or active pharmaceutical ingredients (APIs) were increased in cer- tain parts of the world, our supply chain and flow of our products could be immediately disrupted. There is also an additional risk that aggressive monetary and fiscal policies by governments and central banks to curb infla- tion may prompt market-specific recessions and raise the cost-of-living, further putting pressure on pricing and cost containment for the pharmaceutical industry. Collectively, unstable geo- and socio-political condi- tions could, among other things, disturb the international flow of goods and increase the costs and difficulties of international transactions. This could potentially impact our ability to develop and supply our products to patients in an undisrupted fashion, and further erode reimburse- ment mechanisms for our medicines. Macroeconomic developments Risk description Impact of macroeconomic developments Context and potential impact Our business may be impacted by deteriorating macro- economic and financial conditions directly affecting us, our suppliers, payers and consumers. Given that patients, in many countries, directly pay a sizable and increasing 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 to buy necessary inventory or raw materials, and to perform their obligations under agreements with us. Weakening growth and rising inter- est rates may also increase the credit risk of our coun- terparties. Although we make efforts to monitor the finan- cial 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 gov- ernment 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 may have an impact on our operating costs in the form of higher prices for supplies, energy, raw materials, wages, and capital, which could reduce our net income. Uncertainties around future central bank and other economic policies in the US and EU, including rising inter- est rates, as well as high debt levels in some countries could also impact world trade. Sudden increases in eco- nomic, currency or financial market volatility in different countries, such as appreciation of the US dollar, have also impacted, and may continue to have an unpredict- able impact on our business, or results of operations, 17 Item 3. Key Information including the conversion of our operating results into our reporting currency, the US dollar, as well as the value of our investments in our pension plans. For more information about the effect of price con- trols on our business, see “Item 4. Information on the Company—Item 4.B—Business overview—Price con- trols.” See also “Item 5. Operating and Financial 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 Statements—Note 16. Trade receivables” and “Item 18. Financial Statements—Note 30. Financial instruments – additional disclosures.” Climate change Risk description Failure to manage physical and transition risks from cli- mate change Context and potential impact We are exposed to a broad range of climate risks such as transition risks (e.g., regulatory frameworks, carbon pricing, and the cost of and access to capital) and phys- ical risks (e.g., heat, water scarcity, rising sea levels, 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, as well as rapidly evolving societal expectations. To comply with such legislation and meet such expectations, we may be required to increase our investment in technology to reduce our energy use, water use and greenhouse gas emissions. In addition, legisla- tive and regulatory action, both current and in the future, includes or could include, carbon pricing, climate risk-re- lated disclosures, and changes in zoning or building codes to increase climate resilience. As a result, the com- bined impact of these transition risks could increase our direct operating costs or be passed on to us through the impact on our supply chain. As a result of these transi- tion risks, we are committed to becoming carbon neutral in our own operations by 2025, and carbon neutral across our value chain by 2030. In addition, we are com- mitted 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 negative impacts on our reputation, our operations, and the price of our shares. Climate change has created, and will continue to cre- ate, physical risks to our business. Some of our produc- tion facilities that depend on the availability of significant water supplies are located in areas where fresh 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 substantial damage. 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. Tax laws and developments Risk description Changes in tax laws or their application 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. However, some countries already announced postponement to 2025 while others have not taken any implementation steps so far. Once changes to the tax laws in any jurisdiction in which we operate are enacted or substantially enacted, we will 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 given jurisdiction up to a minimum rate of 15%. In June 2023, the Swiss public voted to approve an amendment to the Swiss Constitution that provides the legal basis for the implementation of an OECD compli- ant minimum tax in Switzerland. In December 2023, the Swiss federal council partially implemented the OECD 15% minimum tax for the financial year 2024 in the form of a qualified domestic top-up tax (QDMTT), which will be assessed on certain qualifying profits earned by com- panies domiciled in Switzerland. This QDMTT will not be applied to qualifying profits earned by a company’s affil- iates domiciled in tax jurisdictions outside of Switzerland. The timing and specific provisions of any further tax reg- ulations remain subject to assessments in political and technical forums at both a federal and cantonal level. 18 Item 3. Key Information Due to the ongoing discussion in many countries on the implementation and additional guidance from the OECD, the full impact of the OECD minimum tax project on our financial position, income statement and cash flows cannot currently be estimated. On September 12, 2023, the EU Commission published two draft directives relating to international tax. The draft Business in Europe: Framework for Income Taxation (BEFIT) directive pro- vides common rules for determining the corporate tax base for EU-based entities that are part of a group with global consolidated revenues above EUR 750 million. The BEFIT proposal includes provisions for a formula-driven allocation of profits between relevant EU member states which would then be subject to the corporate income tax rate of the respective member state. The draft trans- fer pricing directive aims to harmonize transfer pricing rules within the EU consistent with the OECD Transfer Pricing Guidelines. It also clarifies processes for reliev- ing double taxation within the EU. Both draft directives require unanimous agreement among EU member states before they can be further implemented. In the US, the IRA was signed into law on August 16, 2022. The IRA creates a 15% corporate alternative minimum tax on the profits of corporations whose average annual adjusted financial statement income exceeds USD 1.0 billion. The IRA also includes a one percent excise tax on certain corporate stock repurchases. Additionally, the IRA also contains provisions that affect tax-exempt entities, including tax credit opportunities to encourage invest- ment in clean energy and expanded incentives for ener- gy-efficient construction by tax-exempt entities. While we have taken steps to comply with the evolv- ing tax initiatives of the OECD, the US and the EU, and we will continue to do so, significant uncertainties remain as to the outcome of our efforts. For more information, see “Item 18. Financial State- ments—Note 7. Income taxes” and “Item 18. Financial Statements—Note 13. 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, 2023, we had USD 18.4 billion of non-current financial debt, and USD 6.2 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 The Medicines Company, Endocyte, Novartis Gene Thera- pies, ADACAP, and Chinook Therapeutics. As a result, we may incur significant impairment charges in the future if the fair value of the intangible assets and the group- ings of cash-generating units containing goodwill would be less than their carrying value on our consolidated bal- ance 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 2023, for example, we recorded intangible asset impairment charges of USD 3.0 billion. For a detailed discussion about 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. Accounting policies” and “Item 18. Financial Statements—Note 12. Goodwill and intan- gible 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, which is 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. 19 Item 3. Key Information 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 fluctua- tions” and “Item 18. Financial Statements—Note 30. Financial instruments – additional disclosures.” 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 our consolidated financial statements. If environmental contamination resulting from our facility operations, business activities or products adversely impacts third parties or if we fail to properly manage the safety of our facilities, including the safety of our employees and contractors, and the environmental risks, we may face substantial one-time and recurring costs and other penalties, and be required to increase our provisions for environmental liabilities. Furthermore, our headquarters and a number of our major 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. See also “Item 4. Information on the Company—Item 4.D Property, plants and equip- ment” and “Item 18. Financial Statements—Note 21. Pro- visions and other non-current liabilities.” Key customers Pension plans Risk description Concentration among our key customers 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 15%, 13% and 8%, respectively, of net sales from continuing operations in 2023. The largest trade receivables outstanding were for these three cus- tomers, amounting to 17%, 13% and 8%, respectively, of the trade receivables at December 31, 2023. Historically, there has been a trend of consolidation among our cus- tomer base, which may continue in the future. As a result, we are exposed to a concentration of credit risk among our key customers. If one or more of our major custom- ers experienced financial difficulties, the effect on us would be considerable, 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 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 26. 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 Website: www.novartis.com 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 33. Novartis prin- cipal subsidiaries and associated companies.” For a description of important corporate developments since January 1, 2021, 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—Material contractual obligations and commitments.” The SEC maintains an internet site at http://www.sec. gov that contains reports, proxy and information state- ments, and other information regarding issuers that file electronically with the SEC. 4.B Business overview Overview Novartis is an innovative medicines company. Our pur- pose is to reimagine medicine to improve and extend people’s lives. Our strategy is to focus on high-value, innovative medicines that alleviate society’s greatest dis- ease burdens through technology leadership in R&D and novel access approaches. To support our strategy, we have clear focus areas where we commit most of our time, energy and resources. These core therapeutic areas are cardiovascular, renal and metabolic; immunol- ogy; neuroscience; and oncology. For more information about our strategy, see “Item 5. Operating and Financial Review and Prospects—Overview—Our strategy.” In 2023, Novartis achieved net sales from continuing operations of USD 45.4 billion, and net income from con- tinuing operations amounted to USD 8.6 billion. Head- quartered in Basel, Switzerland, we employed 76 057 full-time equivalent employees as of December 31, 2023. Our products are sold in approximately 130 countries around the world. Beginning in September 2023, we reorganized our operations into the following five organizational units: • Biomedical Research is our innovation engine, focused on creating new ways of fighting disease and turning scientific breakthroughs into new medicines with the potential to change lives. • Development oversees the development of potential new medicines through clinical trials to confirm their safety and efficacy, and steers the way to regulatory approval for use by patients. • Operations manufactures and delivers our medicines to customers, while also overseeing the global func- tions of IT, procurement and real estate services. • The two commercial units, US and International, focus on their respective geographic areas. They work with customers to provide innovative medicines and ser- vices that improve treatment options and raise the qual- ity of care for patients. These organizational units are supported by our global functions in areas such as corporate affairs, ethics, risk and compliance, finance, legal, internal audit, people and organization and strategy and growth. For more infor- mation about our Development unit, see “—Research and development—Development program” below. For more information about our Operations unit see “—Item 4.D Property, plants and equipment” and “Item 18. Financial Statements—Note 3. Operating segment and Note 4. Revenues and geographical information.” In 2023, Novartis completed its transformation into a pure-play innovative medicines business, with the suc- cessful spin-off of Sandoz. Effective October 4, 2023, Sandoz was listed on the SIX Swiss Exchange, with a Level 1 ADR program in the United States. To comply with International Financial Reporting Standards (IFRS®) Accounting Standards as a result of the spin-off, Novartis has separated the Company’s reported financial data for the current and prior years into “continuing” and “discon- tinued” operations. Continuing operations comprises the retained business activities that includes our innovative 21 Item 4. Information on the Company medicines business and continued corporate activities. Discontinued operations include the Sandoz generic pharmaceuticals and biosimilars division and certain cor- porate activities attributable to Sandoz prior to the spin- off up to the distribution date of October 3, 2023, and certain other expenses related to the spin-off. Included in 2023 is also the IFRS Accounting Standards non-cash, non-taxable net gain on distribution of Sandoz Group AG to Novartis AG shareholders. Sandoz operated in the off-patent medicines segment and specialized in the development, manufacturing and marketing of generic pharmaceuticals and biosimilars. The Sandoz business was organized globally into two franchises: Generics and Biosimilars. Except where noted, this Annual Report focuses on continuing operations. Key marketed products The following summaries describe certain Novartis key marketed products in certain indications. These prod- ucts are listed according to year-end net sales within each therapeutic area or reporting category. Some of them have lost patent protection or are otherwise sub- ject to generic competition, while others are subject to patent challenges by potential generic competitors. Please see “—Intellectual property” for general informa- tion on intellectual property and regulatory data protec- tion, and for more information on the status of patents and exclusivity for certain key marketed 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. Cardiovascular, renal and metabolic • 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 blood efficiently • In the US and other countries to treat most chronic heart failure patients with preserved ejection frac- tion (HFpEF). HFpEF is a disease in which the heart’s main pumping chamber (left ventricle) becomes stiff and unable to fill properly with 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 • In China and Japan to treat patients with essential hypertension (abnormally high blood pressure that is not the result of a medical condition) • Leqvio (inclisiran) is the first and only approved small-in- terfering 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 pro- fessional twice a year as an injection, following an ini- tial dose and another dose after 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 as an adjunct to diet. Leqvio is used in combination with the maxi- mum tolerated dose of a statin or a statin with other lipid-lowering therapies in patients unable to reach LDL cholesterol goals, or alone or in combination with other lipid-lowering therapies in patients who are statin-intolerant or for whom a statin is contrain- dicated. Primary hypercholesterolemia and mixed dyslipidemia are disorders characterized by high lev- els of fats in the blood • In the US to treat adults with primary hyperlipidemia, including heterozygous familial hypercholesterol- emia (HeFH), as an adjunct to diet and statin therapy to reduce LDL cholesterol. This includes patients who have ASCVD or HeFH, or are at an increased risk of ASCVD, meaning they have not had a cardio- vascular event but have other factors that increase their risk. Primary hyperlipidemia, also known as high cholesterol, is characterized by high levels of fats in the blood Novartis obtained global rights to develop, manufac- ture and commercialize Leqvio under a license and col- laboration agreement with Alnylam Pharmaceuticals, 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 (this indication is also approved in China). Psoriasis is a debilitating systemic inflammatory disease that is characterized 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). nr-axSpA is a long-term inflam- matory 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 22 Item 4. Information on the Company subtypes of juvenile idiopathic arthritis. If left untreated, they can lead to high levels of pain and disability • Adults with moderate to severe hidradenitis suppu- rativa (HS). HS is a chronic skin disease that causes recurring boil-like lumps that may burst into open wounds and cause irreversible scarring, often in the most intimate parts of the body. An intravenous formulation of Cosentyx is approved in the US for the treatment of adults with PsA, AS and nr-axSpA. autoinjector pen following three weekly starter doses. It is approved: • In the US to treat adults with relapsing forms of mul- tiple sclerosis, including clinically isolated syndrome, relapsing-remitting multiple sclerosis and active sec- ondary progressive multiple sclerosis. Multiple scle- rosis 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) • 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 28. 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 • Kesimpta (ofatumumab) is an anti-CD20 monoclonal antibody that enables the targeted depletion of B-cells, specifically in lymph nodes. Kesimpta is the only B-cell treatment for relapsing multiple sclerosis that is self-ad- the Sensoready ministered once-monthly via 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. • 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 SMN 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 Approved indications vary by country. Oncology • 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. • Kisqali (ribociclib) is a selective oral cyclin-dependent inhibitor of kinases 4 and 6 (CDK4/6) – two enzymes involved in the control of cell cycle progression. Kisqali is approved in the US, the EU and other countries to treat: • Pre-, peri- and postmenopausal women, and men (US and other countries), with locally advanced or meta- static hormone receptor-positive (HR+)/human epi- dermal growth factor receptor 2-negative (HER2-) 23 Item 4. Information on the Company breast cancer, in combination with an aromatase inhibitor as initial endocrine-based therapy. HR+/ HER2- breast cancer is the most common subtype of breast cancer • Pre-, peri- (EU) and postmenopausal women, and men (US), with locally advanced or metastatic HR+/ HER2- breast cancer, in combination with fulvestrant, as first- or second-line therapy Kisqali was developed by our Biomedical Research organizational unit (formerly the Novartis Institutes for BioMedical Research) under a research collaboration with Astex Pharmaceuticals. • Tafinlar + Mekinist (dabrafenib + trametinib) is an oral combination therapy. Tafinlar and Mekinist are kinase inhibitors of the BRAF and MEK1/2 proteins, respec- tively, approved in combination to treat patients who have certain types of cancer with a change in the BRAF gene (called a BRAF V600 mutation), including: • Adults in the US, the EU and other countries with unresectable or metastatic melanoma with a BRAF V600 mutation. Melanoma is a form of skin cancer; unresectable melanoma cannot be removed with sur- gery and metastatic melanoma has spread to other parts of the body. Tafinlar and Mekinist are also approved as single agents for this indication • Adults in the US, the EU and other countries with stage III melanoma with a BRAF V600 mutation as an adjuvant treatment (following surgery) • Adults in the US, the EU and other countries with advanced non-small cell lung cancer (NSCLC) with a BRAF V600 mutation. NSCLC is the most common type of lung cancer • Adults and children aged 1 year and older in the US and 6 years and older in other countries with unre- sectable or metastatic solid tumors with a BRAF V600E mutation whose cancer has progressed fol- lowing prior treatment and who have no satisfactory alternative treatment options Approved indications vary by country. Novartis has worldwide exclusive rights to develop, manufacture and commercialize trametinib granted by Japan Tobacco Inc. • 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 for development and commercialization in the indica- tions of oncology, hematology and GvHD outside the US. Incyte Corporation markets ruxolitinib as Jakafi® in the US. • 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 prostate-specific membrane anti- gen-positive metastatic castration-resistant prostate cancer (PSMA-positive mCRPC), a type of advanced cancer that has spread to other parts of the body (metastatic). These patients have already been treated with other anticancer treatments (androgen receptor pathway inhibition and taxane-based che- motherapy) • Lutathera (lutetium Lu 177 dotatate/lutetium (177Lu) oxo- dotreotide) is an intravenous targeted radioligand ther- apy approved in the US, the EU and other countries to treat: • Adults with somatostatin receptor-positive gastroen- teropancreatic neuroendocrine tumors (GEP-NETs). GEP-NETs are rare tumors found in the digestive tract Approved indications vary by country. • Scemblix (asciminib) is an oral kinase inhibitor that works by binding to a part of the BCR-ABL protein called 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 the chronic phase who have previously been treated with two or more tyrosine kinase inhibitors (TKIs). Ph+ CML is a can- cer that starts in the blood-forming cells of bone mar- row • In the US and other countries to treat adults with Ph+ CML in the chronic phase with the T315I mutation. The T315I mutation causes resistance to most avail- able TKI therapies and, as a result, patients with this mutation would otherwise have limited treatment options 24 Item 4. Information on the Company • Fabhalta (iptacopan) is an oral Factor B inhibitor of the alternative complement pathway, a part of the immune system involved in triggering inflammation and fighting infection. It is approved in the US to treat: • Adults with paroxysmal nocturnal hemoglobinuria (PNH). PNH is a rare chronic blood disorder in which red blood cells are susceptible to premature destruc- tion by the complement system Established 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 visual impairment due to diabetic macular edema. These conditions 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 28. Transactions with related parties— Roche Holding AG.” • 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 key projects currently in the Confirmatory Development stage and may also describe certain projects in the Early Develop- ment stage. Projects typically enter Confirmatory Devel- opment and become the responsibility of our Develop- ment organizational unit during Phase II testing. (For more information about our drug development program, see “—Research and development—Development pro- gram.”) Projects are listed in alphabetical order by com- pound code, or by product name where applicable. Proj- ects include those seeking to develop potential uses of new molecular entities as well as potential additional indi- cations or new formulations for already marketed prod- ucts. The table below, entitled “Projects removed from the development table since 2022,” 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 generally refers to the first patient’s first visit in the first trial in Confirmatory Devel- opment. In some cases, the first patient’s first visit in a Phase II trial can occur before the Confirmatory Devel- opment 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 proj- ects 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. 25 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 ≥2027/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 Giant cell arteritis Immunology Subcutaneous injection 2021 Polymyalgia rheumatica 1 Immunology Subcutaneous injection 2023 2025/III 2026/III Rotator cuff tendinopathy 1 Immunology Subcutaneous injection 2023 ≥2027/III EXV811 1 atrasentan ETA receptor antagonist IgA nephropathy Fabhalta iptacopan CFB inhibitor IgA nephropathy C3 glomerulopathy IC-MPGN 1 Cardiovascular, Oral Renal and Metabolic Cardiovascular, Oral Renal and Metabolic Cardiovascular, Oral Renal and Metabolic Cardiovascular, Oral Renal and Metabolic 2023 2024/III 2021 2024/III 2021 2024/III 2023 ≥2027/III FUB523 1 zigakibart Anti-APRIL monoclonal antibody JDQ443 opnurasib KRAS inhibitor Atypical hemolytic uremic syndrome Oncology Oral 2021 ≥2027/III IgA nephropathy Cardiovascular, Subcutaneous injection 2023 Renal and Metabolic ≥2027/III Non-small cell lung cancer 2 (monotherapy and/or combination therapy) Oncology Oral 2022 ≥2027/III KAE609 cipargamin PfATP4 inhibitor Malaria, uncomplicated Global Health Oral Malaria, severe Hormone receptor-positive (HR+)/human epidermal growth factor receptor 2-negative (HER2-) early breast cancer (adjuvant) Global Health Oral Oncology Oral 2017 2022 2023 ≥2027/II ≥2027/II US, EU registration Malaria, uncomplicated Global Health Oral 2023 2026/II Kisqali ribociclib CDK4 inhibitor KLU156 3 ganaplacide Non-artemisinin + lumefantrine falciparum inhibitor plasmodium Leqvio inclisiran siRNA (regulation of LDL-C) Secondary prevention of cardiovascular Cardiovascular, Subcutaneous injection 2018 events in patients with elevated levels of LDL-C Renal and Metabolic Primary prevention cardiovascular 1 risk reduction Cardiovascular, Subcutaneous injection 2023 Renal and Metabolic LNA043 TBD ANGPTL3 agonist Osteoarthritis 4 Immunology Intra-articular ≥2027/III ≥2027/III ≥2027/II 2024/III ≥2027/III ≥2027/III Immunology Immunology Oral Oral Neuroscience Oral 2021 2021 2023 2021 Oncology Intravenous infusion 2020 2024/III LOU064 remibrutinib BTK inhibitor Chronic spontaneous urticaria Lutathera Radioligand therapy targeting SSTR lutetium Lu 177 dotatate/ lutetium (177Lu) oxodotreotide Chronic inducible urticaria Multiple sclerosis Gastroenteropancreatic neuroendocrine tumors, 1st line in G2/3 tumors LXE408 TBD Proteasome inhibitor Visceral leishmaniasis Global Health Oral 2022 ≥2027/II Radioligand therapy targeting PSMA Metastatic castration-resistant prostate cancer, pre-taxane Oncology Intravenous infusion 2021 2024/III Pluvicto lutetium Lu 177 vipivotide tetraxetan/ lutetium (177Lu) vipivotide tetraxetan Metastatic hormone-sensitive prostate cancer Oncology Intravenous infusion 2021 2025/III 1 Project added to selected development projects table in 2023 – entered Confirmatory Development 2 Previously disclosed as non-small cell lung cancer, 2/3L 3 Project added to selected development projects table in 2023 (replacing KAF156) – entered Confirmatory Development, FPFV in Phase III expected in early 2024 4 Previously disclosed as knee osteoarthritis 26 Item 4. Information on the Company 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 QGE031 ligelizumab IgE inhibitor Food allergy Immunology Subcutaneous injection 2021 ≥2027/III Scemblix asciminib BCR-ABL inhibitor Chronic myeloid leukemia, 1st line Oncology Oral 2021 2024/III TQJ230 pelacarsen ASO targeting lipoprotein(a) Secondary prevention of cardiovascular Cardiovascular, Subcutaneous injection 2019 events in patients with elevated levels of lipoprotein(a) Renal and Metabolic 2025/III VAY736 ianalumab BAFF-R inhibitor Autoimmune hepatitis Immunology Subcutaneous injection 2018 ≥2027/II Lupus nephritis Immunology Subcutaneous injection 2022 ≥2027/III Sjögren’s syndrome Immunology Subcutaneous injection 2022 2026/III Systemic lupus erythematosus 1 Immunology Subcutaneous injection 2023 ≥2027/III Warm autoimmune hemolytic anemia (wAIHA) Oncology Intravenous infusion 2022 2026/III Immune thrombocytopenia, 1st line 1 Oncology Intravenous infusion 2023 Immune thrombocytopenia, 2nd line 1 Oncology Intravenous infusion 2023 2026/III 2026/III Vijoice alpelisib PI3K-alpha inhibitor Lymphatic malformations Oncology Oral 2023 ≥2027/III Xolair omalizumab IgE inhibitor Food allergy Immunology Subcutaneous injection 2019 US registration XXB750 TBD NPR1 agonist Hypertension YTB323 1 rapcabtagene CD19 CAR-T autoleucel Severe refractory lupus nephritis/ systemic lupus erythematosus Cardiovascular, Subcutaneous injection 2022 Renal and Metabolic ≥2027/II Immunology Intravenous infusion 2023 ≥2027/II High-risk large B-cell lymphoma, 1st line Oncology Intravenous infusion 2023 ≥2027/II 1 Project added to selected development projects table in 2023 – entered Confirmatory Development PROJECTS REMOVED FROM THE DEVELOPMENT TABLE SINCE 2022 Compound/product Potential indication Change Cosentyx Hidradenitis suppurativa Fabhalta KAF156 LOU064 MBG453 MIJ821 NIS793 Piqray PPY988 SAF312 SKO136 VDT482 Lupus nephritis Psoriatic arthritis (IV formulation) Ankylosing spondylitis (IV formulation) Paroxysmal nocturnal hemoglobinuria Malaria, uncomplicated Sjögren’s syndrome Myelodysplastic syndrome Unfit acute myeloid leukemia Major depressive disorder Pancreatic cancer, 1st line Ovarian cancer Geographic atrophy Chronic ocular surface pain Coronavirus infection Esophageal cancer, 2nd line Non-small cell lung cancer Nasopharyngeal carcinoma, 1st line Gastric cancer, 1st line Esophageal cancer, 1st line Localized esophageal cancer Hepatocellular carcinoma, 1st line Small cell lung cancer, 1st line Urothelial cell carcinoma, 1st line VPM087 Colorectal cancer, 1st line 1 Now in development as KLU156 2 Mutual termination of the agreement with BeiGene, Ltd. Commercialized Removed Commercialized Commercialized Commercialized Removed Removed Removed Removed Removed Removed Removed Removed Removed Removed Removed Removed Removed Removed Removed Removed Removed Removed Removed Removed 27 Reason Development discontinued Development discontinued 1 Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued Development discontinued 2 Development discontinued 2 Development discontinued 2 Development discontinued 2 Development discontinued 2 Development discontinued 2 Development discontinued 2 Development discontinued 2 Development discontinued 2 Development discontinued Item 4. Information on the Company Principal markets Novartis sells products in approximately 130 countries worldwide. Net sales are primarily concentrated in the US and Europe. The following table sets forth aggregate 2023 net sales by region: United States Europe Asia, Africa, Australasia Canada and Latin America Total Of which in established markets 1 Of which in emerging growth markets 1 2023 net sales to third parties USD millions 17 959 14 997 9 308 3 176 45 440 33 725 11 715 % 40 33 20 7 100 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. Novartis definition of Western Europe includes Austria, Belgium, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Malta, The Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Many of our products are used for chronic conditions that require patients to continue dosing of the product over long periods of time, ranging from months to years. However, certain of our marketed products and devel- opment 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 sea- sonal 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. We are continuing to integrate ADACAP manufactur- ing sites into our existing manufacturing and supply structure for radioligand therapies. We manufacture our products across the following technologies at facilities worldwide: large molecules, small molecules, cell and gene therapy, xRNA therapy and radioligand therapy (see also “—Item 4.D Property, plants and equipment”). In addition, we generate contract manufacturing sales from biotechnology services that we provide to third par- ties, which we include under “established brands” in our consolidated financial statements (see “Item 18. Finan- cial Statements—Note 4. Revenues and geographic information”). In our manufacturing network, we maintain state-of-the-art processes, with quality as a priority, and require our suppliers to adhere to the same high stan- dards we expect from our own people and processes. These processes include chemical and biological syn- theses; radioisotope handling; sterile processing, includ- ing CAR-T cell processing; gene modification and delivery; and formulation and packaging. We are con- stantly 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 third-party suppliers. Where pos- sible, we maintain multiple supply sources so that the business is not dependent on a single or limited number of suppliers. However, our ability to do so may at times be limited by regulatory or other requirements. We mon- itor market developments that could have an adverse effect on the supply of essential materials. Our suppliers of raw materials are required to comply with applicable regulations and Novartis quality standards. Because the manufacturing of our products is com- plex and highly regulated by governmental health author- ities, uninterrupted supply cannot be guaranteed. If we or our third-party suppliers fail to comply with applica- ble regulations, then there could be a product recall or other disruption to our production activities. We have experienced supply interruptions for our products in the past, and there can be no assurance that supply will not be interrupted again in the future. For more information on the risks related to the manufacturing of our products, see “Item 3. Key Information—Item 3.D Risk factors— Manufacturing and product quality—Inability to ensure proper controls in product development and product manufacturing, and failure to comply with applicable reg- ulations and standards.” We have implemented a global manufacturing strategy to maximize business continuity in case of such events. Marketing and sales Although specific distribution patterns vary by country, Novartis generally sells its prescription drugs primarily to wholesale and retail drug distributors, hospitals, clin- ics, government agencies and managed healthcare pro- viders. We reach healthcare professionals and patients in many markets and across our core therapeutic areas through integrated channels including field force 28 Item 4. Information on the Company operations, patient support programs and Novar- tis-owned digital platforms. We have 19 607 full-time equivalent field force employees, as of December 31, 2023, including super- visors and administrative personnel. These trained rep- resentatives present the therapeutic benefits and risks of our products to physicians, pharmacists, hospitals, insurance groups, managed care organizations and other healthcare professionals. In the US, Novartis adver- tises certain products via digital and traditional media channels, including the internet, television, newspapers and magazines. Novartis also pursues co-promotion or co-marketing opportunities as well as licensing and dis- tribution agreements with other companies in various markets. The marketplace for healthcare is constantly evolv- ing. Customer groups beyond prescribers have increas- ing influence on treatment decisions and guidelines, while patients continue to become more informed stake- holders in their healthcare decisions and look for solu- tions to meet their changing needs. Novartis is respond- ing 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 accelerated additional changes related to marketing and sales techniques in the healthcare industry. For example, many healthcare professionals increased their use of virtual platforms when interacting with pharmaceutical companies, and now prefer to receive information in a more convenient and personalized way. In response, Novartis is combin- ing traditional face-to-face visits with digital and other methods of engaging healthcare professionals to improve the efficiency and effectiveness of every interaction. We are similarly changing our approach to engaging health- care systems, payers and other healthcare providers. The growing number of so-called “specialty” drugs in our portfolio, such as Cosentyx and Kesimpta, has resulted in increased engagement with specialty phar- macies. Because many of these drugs require special handling and administration, we are rolling out an inter- national patient support program across our priority mar- kets that serves as a central resource for onboarding, education and support to help patients navigate their healthcare. With our radioligand therapy Pluvicto, extra steps must be taken to educate customers, in part because it can only be administered by those who are trained to handle radiopharmaceuticals. We are working to improve the customer experience by connecting patients with healthcare professionals throughout the disease man- agement process, including awareness and engage- ment, treatment site onboarding, referrals and imaging, preparation and infusion, and treatment follow-up. We have established a dedicated support team, a customer relationship management platform and an order man- agement platform as part of this effort. 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 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 existing 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 our products continues in the US and internationally, both within and across countries. This has increased our customers’ purchasing leverage and resulted in increased pricing pressure on our products. Moreover, we are exposed to increased concentration of credit risk as a result of the 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 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 ini- tiatives in the US, Europe and other markets. These include contract structures such as pay-over-time and outcome-based agreements. In 2020, Novartis Gene Therapies established a novel early access program for Zolgensma. It supports early patient access through customizable options including retroactive rebates, deferred payments, installment options, outcome-based rebates, and collaborations with healthcare systems to optimize disease manage- ment. We now have more than 40 early access agree- ments and pay-for-performance agreements (i.e., out- come-based arrangements) in place in various markets around the world. Zolgensma is approved in 51 countries. Additionally, in 2021 Novartis reached an agreement with the National Health Service (NHS) in England to implement a first-of-its-kind population health manage- ment approach designed to provide faster and broader access to Leqvio for certain high-risk patients with ath- erosclerotic cardiovascular disease. Novartis has engaged in similar collaborations with other 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. 29 Item 4. Information on the Company Like other selling companies patented pharmaceuticals, Novartis faces challenges from com- panies selling competing patented products. Generic forms of our products may follow the expiration of intel- lectual property protection or regulatory exclusivities, and generic companies may also gain entry to the mar- ket through successfully challenging our intellectual property rights and exclusivities. We use appropriate, legally permissible 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. Technology companies, for instance, are seeking to benefit from the increasing importance of data and data management in our industry, including the use of artificial intelligence. Research and development The discovery and development of a new drug usually requires approximately 10 to 15 years from the initial research to bringing a drug to market. This includes approximately six to eight years from Phase I clinical tri- als to market entry. At each of these steps, there is a substantial risk that a therapeutic candidate will not meet the requirements to progress further. In such an event, we may be required to abandon the development of a potential therapy 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 therapeutic candidate, the level of research and devel- opment investment required will be driven by many fac- tors. These include the medical indications for which it is being developed, the number of indications being pur- sued, whether the therapeutic candidate is of a chemi- cal or biological nature, the stage of development, and the level of evidence necessary to demonstrate clinical efficacy and safety. Research program Our research and early development program is con- ducted by our Biomedical Research organizational unit, which is the innovation engine of Novartis. This unit is responsible for the discovery of new medicines that bring value for patients and the Company. This requires hiring and retaining highly talented employees, focusing on fun- damental disease mechanisms that are relevant across improving different disease areas, continuously 30 technologies for drug discovery and potential therapies, working with patients to understand their diseases and the potential benefits of therapies, forming close alli- ances with clinical and commercial colleagues, and establishing strategic external alliances. We have 5 511 full-time-equivalent scientists, physi- cians and business professionals at Biomedical Research 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; immunology; and ophthalmology. Research at the Friedrich Miescher Institute focuses on basic genetic and genomic research, and our Global Health Disease Area (formerly the Novartis Institute for Tropical Diseases) focuses on dis- covering new medicines to fight tropical diseases, includ- ing malaria and cryptosporidiosis. In 2023, we made the decision to discontinue our respiratory research efforts to further focus our resources on priority areas. All drug candidates go through clinical trials to enable an early assessment of the safety and efficacy of the drug while collecting basic information on how the drug moves through the body and is tolerated, and adher- ing to the guidance for early clinical testing set forth by health authorities. When assessments are favorable, our Development organizational unit conducts confirmatory trials on the drug candidates to generate data that can be submitted to regulatory authorities to secure approval for patient use. Development program Our Development unit oversees and executes drug development activities, working collaboratively with Bio- medical Research, our commercial units and other parts of the Company on our overall pipeline strategy. It includes centralized global functions such as Regulatory Affairs and Global Clinical Operations, and global Devel- opment Units, and has 12 723 full-time equivalent employ- ees worldwide. The traditional model of clinical development consists of three phases: Phase I: The first clinical trials of a new compound – gen- erally performed in a small number of healthy human vol- unteers/patients (e.g., in oncology) – to assess the drug’s safety profile, including 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: 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 effi- cacy of the drug in the patient population, and determin- ing the appropriate doses for further evaluation. Phase III: Large-scale studies with up to several thou- sand patients, which aim to establish the safety and effi- cacy of the drug in specific indications for regulatory approval. Phase III trials may also be used to compare a new drug against a current standard of care to evaluate the overall benefit-risk relationship of the new medicine. In each of these phases, physicians monitor consenting volunteers or patients closely to assess the safety and efficacy of a potential new drug or indication. Item 4. Information on the Company Although we use this traditional model, we have tai- lored the development process to be simpler, more flex- ible and more efficient. This design ensures close col- laboration across R&D, enabling Development teams to initiate later-stage planning in parallel with early evalua- tions and research teams to better support later-stage activities. Our development process consists of two stages: Early Development to build confidence in the overall properties of the compound, followed by Confirmatory Development to confirm the concept in large numbers of patients. Early development consists of both Phase I studies in healthy volunteers as well as Phase Ib and Phase II studies in patients. This work includes a careful review of safety and tolerability, understanding of whether the drug is modulating the target of interest, and understanding of dose response and early evidence of disease efficacy. Biomedical Research conducts these trials and if this evaluation is positive, the drug moves to the Confirmatory Development stage and becomes the responsibility of Development. Confirmatory Development has elements of tradi- tional Phase II/III testing and includes trials aimed at con- firming 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 tri- als that compare the drug to the current standard of care for the disease in order to evaluate the drug’s overall ben- efit-risk profile. Further, with new treatment approaches such as gene therapy for rare diseases, elements of Early and Confirmatory Development may be combined and suffice for registration under certain conditions such as high unmet medical need and clinical data showing highly favorable benefit-risk profiles. In these cases, additional post-approval studies may be required by the regulatory authorities to continue to gather important data to fur- ther 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.” The Innovation Management Board (IMB), chaired by our Chief Executive Officer, drives our R&D portfolio strategy. The IMB endorses new early- and late-stage development projects, strategic plans and portfolio-re- lated priorities. It oversees our drug development bud- get; approves major project phase transitions; and makes key decisions, such as when to submit regulatory appli- cations to health authorities or when to discontinue proj- ects. IMB members include representatives from the Executive Committee of Novartis (ECN) and senior man- agement with expertise in different fields. To support our R&D strategy, we are investing in arti- ficial intelligence (AI) and other technologies that have the potential to enhance and accelerate the delivery of innovative medicines to patients. We are working with partners on scalable projects in early-stage research and in clinical development to help improve our deci- sion-making and generate actionable insights across our core therapeutic areas—from designing new compounds to predicting drug safety and conducting clinical trials. Alliances and acquisitions Novartis 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 current product line and are appro- priate 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 products and compounds we are considering licensing, using the same criteria that we use for our own internally discovered drugs. In July 2023, Novartis acquired DTx Pharma Inc., a US-based, preclinical-stage biotechnology company focused on leveraging its proprietary FALCON platform to develop siRNA therapies for neuroscience indications. Its lead program, DTx-1252, targets the root cause of CMT1A – the overexpression of PMP22, a protein that causes the myelin sheath that supports and insulates nerves in the peripheral nervous system to function abnormally. The transaction also includes two additional preclinical programs for other neuroscience indications. In August 2023, Novartis acquired Chinook Thera- peutics, Inc., a US-based, clinical-stage biopharmaceu- tical company with two late-stage medicines in develop- ment for rare, severe chronic kidney diseases. 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 31 Item 4. Information on the Company 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 our affili- ates: 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 either approves the NDA or BLA, or provides a “complete response” letter if the NDA or BLA application is not approved. If not approved, the letter will state the spe- cific deficiencies in the NDA or BLA that need to be addressed. The company making the application must then submit an adequate 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 32 Item 4. Information on the Company justify its responses. On Day 210, the CHMP will take a vote to recommend the approval or non-approval of the application, and their opinion is transferred to the Euro- pean Commission (EC). The final EC decision under this centralized procedure is a single decision that is appli- cable to all member states. This decision occurs 60 days, on average, after a positive CHMP recommendation. Under both the mutual recognition procedure (MRP) and the decentralized procedure (DCP), the assessment is led by one member state, called the reference mem- ber state (RMS), which then liaises with other member states, known as the concerned member states. 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 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 be strengthened – and to have a continued negative influence on the prices we are able to charge for our products. Direct governmental efforts to control prices United States: The Inflation Reduction Act of 2022 (IRA), signed into law in August 2022, mandates the negotia- tion of eligible Medicare Part B and Part D drugs; rede- signed the Medicare Part D benefit, including a USD 2 000 out-of-pocket cap for Medicare beneficia- ries; and imposed penalties for Medicare drugs that increase in price faster than the rate of inflation. Under the IRA, the US government will set Medicare prices for selected products it has defined as single-sourced small-molecule drugs that have been on the market for seven years following FDA approval as well as sin- gle-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 are being selected for the program as 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 price set by the government will be publicly avail- able and will become effective for selected drugs nine years after FDA approval for eligible small molecules and 13 years after FDA approval for eligible biologics. It will be implemented as follows: • Ten 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 • An additional 20 eligible combined Medicare Part B and Part D drugs each year after 2029 On August 29, 2023, the US government released the list of the first 10 drugs to be subject to the program, and Entresto was one of the selected products. Novartis has initiated the process of participating in negotiations because manufacturers that refuse to participate are subject to an excise tax of up to 95% of sales. Novartis has filed a lawsuit against the US Department of Health and Human Services (HHS) and the US Centers for Medi- care & Medicaid Services because we believe the IRA’s drug price-setting provisions are unconstitutional and will have long-lasting negative consequences for patients by limiting access to medicines now and in the future (for more information, see “Item 18. Financial Statements— Note 21. Provisions and other non-current liabilities”). Novartis may also be affected by other provisions of the IRA, 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, 2023, 23 US states had passed legislation intended to impact pricing or requir- ing manufacturers to report price increases to states, with eight of these states also allowing for drug afford- ability (i.e., price control) review boards. The disclosure 33 Item 4. Information on the Company requirements vary by state. Many states require multiple types of reporting, including for new drug applications, new drug launches, prior notice of price increases, and quarterly or annual reporting. It is expected that state legislatures will continue to focus on drug pricing in 2024 and that similar bills will be passed in more states. Europe: In Europe, our operations are subject to signifi- cant price and marketing regulations. Many governments are introducing healthcare reforms in a further attempt to curb increasing healthcare costs. In some member states, these include reforms to permit the reimbursed 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 more expensive brand-name pharmaceuticals by generic pharmaceuticals. All US states have generic sub- stitution 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 HHS must cer- tify that each state’s importation plan is safe and cost-ef- fective 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 Intellectual property (IP) rights are essential to our busi- ness as an innovative medicines company since they pro- tect our innovation and investments in research and development, manufacturing and marketing of our prod- ucts. IP rights include patents, trademarks, copyrights, know-how, trade secrets and regulatory-based protec- tion. Patents Among other things, patents may cover products them- selves, including the product’s active ingredient or ingre- dients and its formulation. Patents may cover processes for manufacturing a product, including processes for manufacturing intermediate substances used in the man- ufacture of the product. Patents may also cover partic- ular uses of a product, such as its use to treat a partic- ular 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. In the US, the EU and other countries, the law recog- nizes that product development and review by health authorities can take an extended period, and provides 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. These extensions are termed patent term extensions (PTEs) for the US and supple- mentary protection certificates (SPCs) for the EU. United States • In the US, a patent issued from an application filed today will generally receive a term of 20 years from the earliest application filing date as well as potential pat- ent term adjustments for delays in patent issuance based upon certain delays in prosecution by the United States Patent and Trademark Office (USPTO). A US pharmaceutical patent may also be eligible for a PTE. The PTE may only extend the patent term for a maxi- mum of five years, and may not extend the patent term beyond 14 years from regulatory approval. Only one patent may be extended for a product based on FDA review. 34 Item 4. Information on the Company European Union • Patent applications in Europe may be filed in the Euro- pean Patent Office (EPO) or in a particular country or countries. The term of a patent granted by the EPO or an EU country office is 20 years from the earliest appli- cation filing date. Pharmaceutical patents can be granted a further period of exclusivity under an SPC system. The SPCs may only extend the patent term for a maximum of five years, and may not extend the pat- ent term beyond 15 years from the date of the first EU marketing authorization. RDP and market exclusivity 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. United States • 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 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 (ODE) provides seven years of market exclusivity for drugs designated by the FDA as orphan drugs, meaning drugs that treat rare dis- eases. During this period, a potential competitor gen- erally may not market the same or similar drug for the same indication even if the competitor’s application does not rely on data from the sponsor. European Union • A new pharmaceutical ingredient receives 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 cannot be launched; and a pos- sible one-year extension of the market exclusivity period if, during the initial eight-year data exclusivity period, the sponsor registered a new therapeutic indi- cation with “significant clinical benefit.” • Orphan drug exclusivity provides for 10 years of mar- ket exclusivity, during which time an application for the same or similar medicine for the same indication will not generally be accepted or granted. Under certain circumstances, 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 USPTO through var- ious proceedings, including Inter Partes Review (IPR) and Post-Grant Review (PGR) proceedings. They may also be challenged through patent infringement litigation under the Abbreviated New Drug Application (ANDA) provisions of the Hatch-Waxman Act or under the Bio- logics Price Competition and Innovation Act (BPCIA). In the EU, patents may be challenged through oppositions in the EPO, or national patents may be challenged in national courts or national patent offices. The outcomes of such challenges 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. Additionally, even though we may own, co-own or in-li- cense patents protecting our products, and conduct freedom-to-operate analyses, a third party may never- theless assert that one of our products infringes a third- party patent for which we do not have a license, seeking remedies 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. For more informa- tion on the risks related to our IP protection, see “Item 3. Key Information—Item 3.D Risk factors—Intellectual property—Expiry, assertion or loss of intellectual prop- erty protection.” Intellectual property protection for certain key marketed products and compounds in development We present additional details below regarding certain IP protection in the US and the EU for certain key marketed products. For each, we identify issued, unexpired pat- ents by their general subject matter and, in parentheses, 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 35 Item 4. Information on the Company 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 assays. Infor- mation on such patents, where available, may be found in publicly accessible databases such as the FDA patent databases, online databases such as Espacenet™ and Pat-INFORMED, and patent office registers. 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 ODE, pediatric exclusivity (PE), PTE and SPC. Identification of a patent in the EU refers to national patents in EU countries and/or to the national patents that have been derived from a patent granted by the EPO. In the case of the EU, identification of a patent, supple- mentary protection certificate, marketing exclusivity or regulatory data protection means grant, authorization and maintenance in at least one EU country. However, it could be pending, not granted, expired or found invalid in others. We designate certain IP protection as “pending” if such IP protection has been applied for but not granted and includes years of expiration if estimable. Such pend- ing applications ultimately may or may not be granted. Where relevant, we indicate whether there is current generic or biosimilar competition for one or more prod- uct versions in one or more approved indications in either the US or one or more EU countries. We identify certain enforcement actions, or ongoing challenges to the dis- closed IP, including IPRs or PGRs if instituted by the USPTO, that have not been finally resolved (including appeals) unless noted. Resolution of challenges to the disclosed IP, which in the EU may involve IP in one or more EU countries, may include settlement agreements under which Novartis permits or does not permit future launch of generic versions of our products before expi- ration of that IP. We identify certain material terms of such settlement agreements where they could have a material adverse effect on our business. In other cases, such settlement agreements may contain confidential- ity obligations restricting what may be disclosed. 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 arrangements with respect to these products, see “— Key marketed products.” Cardiovascular renal and metabolic • Entresto. US: Two patents on combination (2023, 2023), PTE (2025), two PEs (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 labeling changes related to new clinical investigation (2024). EU: Patent on combination (2023), SPC (2028); patent on com- plex (2026), SPC (2030); patent on formulation (2028); patent on method of use (2034); patent on dosage reg- imen (2036); RDP (2026). There is no generic compe- tition in the US or the EU. In the US, certain patents, including the combination and complex patents, are being challenged in ANDA proceedings against generic manufacturers. In July 2023, the US District Court for the District of Delaware issued a negative decision regarding the validity of one of the combination pat- ents. Novartis has appealed to reverse the decision. In the EU, certain patents, including the complex patent, are being opposed in the EPO. In some EU countries, the combination patent 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); RDP (2026). There is no generic competi- tion in the US or the EU. • 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 (CAPS) use (2026); patent on familial Mediterranean fever (FMF) use (2026); patent on systemic onset juve- nile idiopathic arthritis (SJIA) use (2028); patent on gout use (2028); patent on hyperimmunoglobulin D syndrome, adult-onset Still’s disease (AOSD), and tumor necrosis factor receptor-associated periodic syndrome use (2029); patent on formulation (2029); ODE on AOSD (2027). EU: Patent on composition of matter (2021), SPC (2024), PE (2025); patent on SJIA use (2026); patent on FMF use (2026); patent on CAPS use (2026); two patents on formulation (2029, 2029). There is no generic competition in the US or the EU. Neuroscience • Kesimpta. US: Patent on compound (2031); patent on dosing regimen (2037). EU: Patent on use (2023), SPC (2028); patent on formulation (2028), SPC (2033); pat- ent on formulation and use (2028); two patents on dos- ing regimen (2037, 2037). There is no generic compe- tition in the US or the EU. • Zolgensma. US: Four patents on composition of mat- ter (2024, 2024, 2026, 2033), PTE pending (2029); 36 Item 4. Information on the Company four patents on methods of treatment (2028 (3), 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 patents on com- position of matter (2024, 2024, 2028), SPC (2029); two patents on methods of use (2028, 2028), two SPCs (2033, 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 copies of the SMN2 gene (2030); RDP (2030). There is no generic competition in the US or the EU. Oncology • Promacta/Revolade. US: Patent on salt form and throm- bocytopenia use (2025), PE (2026); five patents on tab- let formulations of different dose strengths (2027 (5)), five PEs (2028 (5)); ODE on severe aplastic anemia patients in combination with standard immunosuppres- sive therapy (2025). EU: Patent on compound (2021), SPC (2025), PE (2025); 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, a patent, other than the compound 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, certain patents, includ- ing the compound patent, are being challenged in ANDA proceedings against a generic manufacturer. In the EU, a patent, other than the compound patent, is being opposed in the EPO. • Tafinlar and Mekinist. Tafinlar. US: Two patents on compound (2030, 2030), two PEs (2030, 2030); patent on method of treatment (2029), PE (2029); patent on pediatric formulation (2038). EU: Patent on compound (2029); RDP (2024). There is no generic competition in the US or the EU. In the EU, patents, other than the compound patent, are being opposed in the EPO. Mekinist. US: Patent on compound (2025), PTE (2027), PE (2027); patent on method of treatment (2025), PE (2025); four patents on formulation (2032 (4)), four PEs (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 US, certain patents, including the compound pat- ent, are being challenged in ANDA proceedings against a generic manufacturer. In the EU, patents other than the compound patent are being opposed in the EPO. Use of Mekinist with Tafinlar or Tafinlar with Mekinist. US: Patent on combination (2030), PE (2031); four patents on method of use of combination (2025, 2030, 2030, 2033), four PEs (2025, 2031, 2031, 2034); ODE on non-small cell lung cancer (2024), PE (2024); ODE on adjuvant treatment of melanoma (2025), PE (2025); ODE on anaplastic thyroid cancer (2025), PE (2025); ODE on metastatic solid tumors (2025), PE (2025); ODE on pediatric glioma (2030). EU: Patent on combi- nation (2030); patent on combination for use in lung cancer (2030); patent on adjuvant melanoma use (2033); ODE on pediatric glioma (2035). There is no generic competition in the US or the EU. • Tasigna. US: 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 salt form (2026); patent on polymorph compound form (2026); three patents on capsule form (2027 (3)); patent on method of treatment (2030). There is no generic com- petition in the US or the EU. In the US, generic manu- facturers have filed ANDAs challenging certain patents 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 use (2026); patent on use in treatment of graft-versus-host disease (2026); pat- ent on salt form for graft-versus-host disease use (2028). There is no generic competition in 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. • Lutathera. US: Two patents on formulation (2038, 2038); ODE (2025). EU: RDP (2027); ODE (2027). There is no generic competition in the US or the EU. In the US, certain patents are being challenged in ANDA proceedings against a generic manufacturer. • 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 (2037); RDP (2032); ODE (2032). There is no generic competition in the US or the EU. • Fabhalta. US: Patent on compound (2034), PTE pend- ing (2037); patent on salt form (2041); RDP (2028); ODE (2030). EU: Patent on compound (2034). There is no generic competition in the US or the EU. Established brands • Lucentis. EU: There is generic competition in the EU. • 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. 37 Item 4. Information on the Company 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. 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 33. Novartis principal subsidiaries and associated companies.” 4.D Property, plants and equipment Our principal executive offices are located in Basel, Swit- zerland. We operate through a number of affiliates that have offices, research and development facilities, 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. Our Operations organizational unit manages the pro- duction, supply chains and quality of our products through a network of 33 manufacturing sites, as well as through external suppliers, and warehouse and distribu- tion centers. In addition, our Operations organizational unit 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—Production” for a discussion of our manufacturing processes. Major facilities Location (in square meters) Major activity Size of site Basel, Switzerland – St. Johann 481 448 Global Company headquarters; International organizational unit headquarters; research and development; production of drug substances and drug intermediates Kundl and Schaftenau, Austria 480 000 Production of biotechnological products, active drug substances and nucleic acids, drug products and finished products; product development East Hanover, New Jersey, US 277 015 US organizational unit headquarters; research and development Cambridge, Massachusetts, US 179 939 Research and development Menges, Slovenia Shanghai, China Stein, Switzerland 133 763 Production of drug substances and drug intermediates; Research and development for Biologics 105 614 China country headquarters; research and development 64 700 Production of sterile vials, pre-filled syringes and ampoules; capsules and tablets; active pharmaceutical ingredients; and cell and gene therapies Huningue, France 35 000 Production of drug substances for clinical and commercial supply Durham, North Carolina, US 15 794 Manufacture, package and release commercial Zolgensma product and certain clinical development activities Schweizerhalle, Switzerland 8 880 Manufacture of small-interfering RNA (siRNA) drug substance for Leqvio Indianapolis, Indiana, US 6 500 Manufacture, package and release clinical and commercial Pluvicto product for US and Canada Ivrea, Italy 2 100 Manufacture, package and release clinical and commercial Pluvicto and Lutathera products As our product portfolio evolves, the Company’s Oper- ations organizational unit is adapting our manufacturing capacity and capabilities to meet our changing needs, shifting from high-volume products toward lower-volume, customized and personalized medicines. As of Decem- ber 31, 2023, we have closed, exited or sold 13 Novartis manufacturing sites since 2020. We have continued to invest in manufacturing technologies implemented at our 38 Item 4. Information on the Company sites, such as our new targeted radioligand therapy pro- duction facility in Indianapolis, Indiana. We are leverag- ing innovation to increase the reliability and productivity of our manufacturing network, including using data and digital technologies. We continue to seek opportunities to manage our production facilities as efficiently as pos- sible, optimize external spend, and simplify and standard- ize across our manufacturing network to help us increase our cost competitiveness and optimize the value of our products. At the same time, we are working to improve our environmental sustainability, for example by reduc- ing 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 rapidly evolving environmental, social and governance expectations,” “Item 3. Key Information— Item 3.D Risk factors—Environmental matters—Impact of environmental liabilities,” and “Item 3. Key Informa- tion—Item 3.D Risk factors—Climate change—Failure to manage physical and transition risks from climate change.” See also “Item 18. Financial Statements— Note 21. Provisions and other non-current liabilities.” 39 Item 4A. Unresolved Staff Comments Item 4A. Unresolved Staff Comments Not applicable. 40 Item 5. Operating and Financial Review and Prospects Item 5. Operating and Financial Review and Prospects 5.A Operating results This operating and financial review should be read together with our consolidated financial statements in this Annual Report, which have been prepared in accor- dance with International Financial Reporting Standards (IFRS) Accounting Standards as issued by the Interna- tional Accounting Standards Board (see “Item 18. Finan- cial Statements”). “Item 5. Operating and Financial Review and Prospects” with the sections on our com- pounds in development and selected development proj- ects (see “Item 4. Information on the Company—Item 4.B Business overview”) constitute the Operating and Finan- cial Review (Lagebericht), as defined by the Swiss Code of Obligations. Overview Novartis is an innovative medicines company. Our pur- pose is to reimagine medicine to improve and extend people’s lives. In September 2023, we reorganized our operations into five organizational units. These are Bio- medical Research, Development, Operations, and two commercial units: US and International. Global functions support these organizational units in the execution of their work. We are engaged in the research, develop- ment, manufacturing, distribution, and commercialization and sale of innovative medicines, with a focus on the core therapeutic areas: cardiovascular, renal and metabolic; immunology; neuroscience; and oncology; as well as established brands. For information about this new orga- nizational structure, see “Item 4. Information on the Com- pany—Item 4.B Overview.” In 2023, Novartis completed its transformation into a pure-play innovative medicines business, with the spin- off of Sandoz. Effective October 4, 2023, Sandoz was listed on the SIX Swiss Exchange, with a Level 1 ADR pro- gram in the United States. To comply with IFRS Accounting Standards, as a result of the spin-off, Novartis has separated the Com- pany’s consolidated financial statements for the current and prior years into “continuing” and “discontinued” operations. For more information, see “Item 18. Financial Statements—Note 1. Accounting policies.” The disclosures and commentary in this “Item 5. Operating and Financial Review and Prospects” focuses on continuing operations. We also provide information on discontinued operations. Continuing operations include the retained business activities of Novartis, comprising the innovative medicines business and continued corporate activities. Discontinued operations include the Sandoz generic pharmaceuticals and biosimilars division and certain cor- porate activities attributable to Sandoz prior to the spin- off up to the distribution date of October 3, 2023, and certain other expenses related to the spin-off. Included 41 in 2023 is also the IFRS Accounting Standards non-cash, non-taxable net gain on distribution of Sandoz Group AG to Novartis AG shareholders. Sandoz operated in the off-patent medicines segment and specialized in the development, manufacturing, and marketing of generic pharmaceuticals and biosimilars. The Sandoz business was organized globally into two franchises: Generics and Biosimilars. Significant transactions are discussed in “Item 18. Financial Statements—Note 2. Significant transactions,” and “Item 18. Financial Statements—Note 29. Commit- ments and contingent liabilities.” With the spin-off of the Sandoz business, Novartis operates as a single global operating segment, as an innovative medicines company. Our business environment Progress in science and technology raises the possibil- ity of new types of medicines and more efficient drug discovery. At the same time, healthcare inequities remain entrenched around the world, while aging populations are putting pressure on healthcare systems in many countries. The major trends currently shaping our busi- ness environment include: • Scientific progress is opening new paths to treat dis- ease. Rapid progress in medical science is creating opportunities for new types of treatments. These advances highlight the importance of investment in R&D, including in next-generation technologies such as radioligand therapies and gene and cell therapies. • Demand for high-quality healthcare continues to rise. Demand for medicines in areas such as cancer, car- diovascular disease and immunology continues to grow in key markets. The US and EU markets are expanding. China is growing rapidly, while spending in Japan is forecast to remain stable. To meet demand and main- tain growth, companies are investing in developing new, innovative treatments. • Healthcare systems are under strain. In many countries, healthcare systems are under pressure. Healthcare professionals often feel overwhelmed and under-re- sourced. Staff shortages have occurred in both the US and Europe. This trend began with the COVID-19 pan- demic, but there are longer-term factors as well—aging and changes to lifestyle have led to a significant rise in noncommunicable illnesses such as cancer, diabetes and heart disease. • The policy landscape is changing. New legislation or regulations in the US, EU and China may change how governments pay for medicines. In the US, for exam- ple, the IRA will limit price increases in Medicare to inflation and impose price controls on select drugs in the Medicare program beginning in 2026. The EU is revising the legislative framework for medicines, trying Item 5. Operating and Financial Review and Prospects to balance access and affordability, while China has rolled out a volume-based procurement program to reduce prices for eligible medicines. See “Item 3. Key Information—Item 3.D Risk factors—Pricing, reim- bursement and access—Pricing and reimbursement pressure, including pricing transparency and access to healthcare,” and “Item 3. Key Information—Item 3.D Risk factors—Macroeconomic developments—Impact of macroeconomic developments.” • Patients want more say over their treatment. Increas- ingly, patients want their voice to be heard in the pro- cess of developing new medicines, so that the treat- ments address the outcomes that matter most to them. Patients also want more say over policies that affect their access to medicines and are becoming more important as data owners. As a result, companies are building patient engagement into their approaches— from research and clinical trials to commercialization and access programs. • Health inequities remain entrenched. Billions of people around the world struggle to get the medicines and healthcare services they need. Many of the issues are in low- and middle-income countries (LMICs), where people face the dual burden of infectious and non-com- municable diseases, as well as fragile and under-re- sourced health systems. Health inequities also affect people in higher-income countries, however, where causes are often linked to structural health system issues as well as demographic, social and economic challenges. • AI is poised to reshape the industry. Across the bio- pharmaceutical industry, we are beginning to realize the benefits of new technologies such as AI in auto- mating processes and generating insights that could help us design new compounds, predict drug safety or speed up drug discovery. The extent to which compa- nies can harness this potential will depend on their abil- ity to aggregate and analyze large volumes of ano- nymized health data. See “Item 3. Key Information—Item 3.D Risk factors—Research and development—Failure to successfully prioritize, integrate and execute our research and development programs for new products or new indications for existing products.” • Climate change threatens to widen health inequity. Cli- mate change and nature loss continue to have an adverse effect on human health, with people in LMICs disproportionately impacted. The World Health Orga- nization forecasts approximately 250 000 additional deaths per year between 2030 and 2050 due to cli- mate change, mainly from malnutrition, malaria, diar- rhea and heat stress. Respiratory illnesses are also on the rise due to air pollution. At the same time, health systems are aiming to build climate resilience—with 29 countries committing to net-zero carbon emissions in their health systems by 2050, according to the WHO. Information—Item 3.D Risk See “Item 3. Key factors—Climate change—Failure to manage physical and transition risks from climate change.” Our strategy Our strategy is to deliver high-value medicines that alle- viate society’s greatest disease burdens through tech- nology leadership in R&D and novel access approaches. The aim of our strategy is to create long-term value—to contribute to continued advances in human health, to deliver returns to shareholders and to benefit society. We focus on four core therapeutic areas with strong growth potential and high unmet patient needs: cardio- vascular, renal and metabolic; immunology; neurosci- ence; and oncology. A focused approach enables us to build depth in these areas to find new ways to treat and cure disease, intervene earlier in chronic illnesses and improve quality of life for patients. We focus on technology platforms where we have the depth and scale to discover, develop and commer- cialize therapies. These are two established platforms (chemistry and biotherapeutics) plus three newer plat- forms (xRNA, radioligand therapy and gene and cell ther- apy) that represent key sources of future growth. We focus on our priority markets—US, Germany, China and Japan—which together account for most of the expected growth in global healthcare spending over the next five years. In the US, our ambition is to become a top-five player. In Germany we aim to retain our cur- rent position as market leader, while in China and Japan we aim to be in third position in each market. Although these are our priority geographies, we maintain a strong presence in other markets worldwide. To support our focus areas, we have three strategic priorities: • Deliver high-value medicines. We aim to increase growth, driven by continued strong momentum in our existing portfolio of medicines—including Entresto; Kisqali, Kesimpta, Cosentyx, Scemblix, Pluvicto and Leqvio—and key upcoming launches. Over the longer term, we expect growth will come through delivering high-value medicines that sustain and replace our existing growth drivers. • Embed operational excellence. In an increasingly com- petitive environment, we are simplifying processes and reducing costs to become more efficient and effective in our decision-making and to free up resources for investment in new medicines. Our goal is to continue making attractive returns to shareholders while creat- ing value for patients, healthcare systems and society. • Strengthen the foundations of our business. We con- tinue to invest to strengthen the foundations of our long-term success. We have made progress in strength- ening our culture to attract and retain talent, while developing artificial intelligence capabilities in R&D and building stronger trust with stakeholders and society. 42 Item 5. Operating and Financial Review and Prospects Results of operations Financial year 2023 compared with 2022 Key figures1 (USD millions unless indicated otherwise) Net sales from continuing operations Other revenues Cost of goods sold Gross profit from continuing operations Selling, general and administration Research and development Other income Other expense Operating income from continuing operations Return on net sales (%) Loss from associated companies Interest expense Other financial income and expense Income before taxes from continuing operations Income taxes Net income from continuing operations Net income from discontinued operations before gain on distribution of Sandoz Group AG to Novartis AG shareholders Gain on distribution of Sandoz Group AG to Novartis AG shareholders Net income from discontinued operations Net income Basic earnings per share from continuing operations (USD) Basic earnings per share from discontinued operations (USD) Total basic earnings per share (USD) Year ended Year ended Dec 31, 2023 Dec 31, 2022 Change in USD % Change in constant currencies % 2 45 440 42 206 1 220 1 255 – 12 472 – 11 582 34 188 31 879 – 12 517 – 12 193 – 11 371 – 9 172 1 772 696 – 2 303 – 3 264 9 769 7 946 21.5 – 13 18.8 – 11 – 855 – 800 222 42 9 123 7 177 – 551 – 1 128 8 572 6 049 422 906 5 860 6 282 906 14 854 6 955 4.13 3.02 7.15 2.77 0.42 3.19 8 – 3 – 8 7 – 3 – 24 155 29 23 – 18 – 7 nm 27 51 42 nm nm nm nm 49 nm nm 9 10 – 3 – 6 11 – 3 – 22 147 31 39 1 – 11 nm 45 44 62 nm nm nm nm 70 nm nm Net cash flows from operating activities from continuing operations 14 220 13 039 Non-IFRS measures 2 Free cash flow from continuing operations 2, 3 13 160 12 123 9 1 For information on continuing operations and discontinued operations, refer to the Overview section above in this Item 5 and “Item 18. Financial Statements—Note 1. Accounting policies “, “Item 18. Financial Statements—Note 2. Significant transactions—Significant transactions in 2023,” and “Item 18. Financial Statements—Note 31. Discontinued operations.” 2 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” 3 Effective January 1, 2023, Novartis revised its definition of free cash flow, to define free cash flow as net cash flows from operating activities less purchases of property, plant and equipment. To aid in comparability, the prior year free cash flow amounts have been revised to conform with the new free cash flow definition. See “—Non-IFRS measures as defined by Novartis” nm = not meaningful 43 Item 5. Operating and Financial Review and Prospects Company overview Net sales from continuing operations were USD 45.4 bil- lion, up 8% in USD reported terms and 10% measured in constant currencies (cc) to remove the impact of exchange rate movements. Sales growth was driven by volume growth of 16 percentage points. Generic compe- tition had a negative impact of 4 percentage points and pricing had a negative impact of 2 percentage points. Sales in the US were USD 18.0 billion (+13%) and in the rest of the world USD 27.5 billion (+5%, +8% cc). Net sales growth was mainly driven by continued strong per- formance from Entresto (USD 6.0 billion, +30%, +31% cc), Kesimpta (USD 2.2 billion, +99%, +99% cc), Kisqali (USD 2.1 billion, +69%, +75% cc), Pluvicto (USD 980 mil- lion, +262%, +261% cc), partly offset by generic compe- tition mainly for Gilenya. In the US (USD 18.0 billion, +13%), sales growth was mainly driven by Entresto, Pluvicto, Kesimpta, Kisqali, Scemblix and Leqvio, partly offset by the impact of generic competition for Gilenya. In Europe (USD 15.0 bil- lion, +4%, +4% cc), sales growth was driven by Kesimpta, Entresto, Kisqali, Cosentyx and Leqvio, partly offset by increased generic competition for Lucentis and Gilenya. Emerging growth markets, which comprise all markets excluding the US, Canada, Western Europe1, Japan, Aus- tralia and New Zealand, grew +8% (+17% cc), includes China net sales of USD 3.3 billion (+11%, +17% cc). Operating income from continuing operations was USD 9.8 billion (+23%, +39% cc), mainly driven by higher net sales, lower restructuring charges, and income from legal matters, partly offset by higher impairments and higher selling, general and administration (SG&A), and research and development (R&D) investments. Operat- ing income margin from continuing operations was 21.5% of net sales, increasing 2.7 percentage points (+5.0 per- centage points in cc). Net income from continuing operations was USD 8.6 billion (+42%, +62% cc), mainly driven by higher operat- ing income and non-recurring favorable tax impacts. Basic earnings per share from continuing operations was USD 4.13 (+49%, +70% cc), growing faster than net income, benefiting from lower weighted average number of shares outstanding. Net cash flows from operating activities from con- tinuing operations amounted to USD 14.2 billion, com- pared with USD 13.0 billion in 2022. This increase was mainly driven by higher net income from continuing oper- ations adjusted for non-cash items and other adjust- ments, including divestment gains, which were partly offset by higher income taxes paid, mainly due to the tim- ing of payments. Free cash flow from continuing operations amounted to USD 13.2 billion (+9% USD), compared with USD 12.1 billion in 2022, driven by higher net cash flows from oper- ating activities from continuing operations. We also present our core results2, which exclude the impact of amortization of intangible assets, impairments, business acquisitions, divestments, and other significant items, including restructuring and related items, to help investors understand our underlying performance. Core operating income from continuing operations was USD 16.4 billion (+11%, +18% cc), mainly driven by higher net sales, partly offset by higher SG&A and R&D investments. Core operating income margin from con- tinuing operations was 36.0% of net sales, increasing 0.9 percentage points (+2.4 percentage points cc). Core net income from continuing operations was USD 13.4 billion (+13%, +19% cc), mainly due to higher core operating income. Core basic earnings per share from continuing operations was USD 6.47 (+18%, +25% cc), growing faster than core net income from continu- ing operations, benefiting from lower weighted average number of shares outstanding. Discontinued operations net sales in 2023 were USD 7.4 billion, compared with USD 9.4 billion in 2022, and operating income amounted to USD 265 million, com- pared with USD 1.3 billion in 2022. Net income from dis- continued operations in 2023 amounted to USD 6.3 bil- lion, compared with USD 906 million in 2022, driven by the IFRS Accounting Standards non-cash, non-taxable, net gain on distribution of Sandoz Group AG to Novartis AG shareholders, which amounted to USD 5.9 billion. Total Company net income amounted to USD 14.9 billion in 2023, compared with USD 7.0 billion in 2022, and basic earnings per share was USD 7.15, compared with USD 3.19 in the prior year, driven by the IFRS Accounting Standards non-cash, non-taxable, net gain on distribution of Sandoz Group AG to Novartis AG shareholders of USD 5.9 billion. Net cash flows from operating activities for the total Company amounted to USD 14.5 billion, and free cash flow amounted to USD 13.2 billion. 1 Novartis definition of Western Europe includes Austria, Belgium, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Malta, The Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. 2 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” 44 Item 5. Operating and Financial Review and Prospects Net sales from continuing operations The following table provides an overview of net sales from continuing operations by core therapeutic area and established brands: (USD millions) Cardiovascular, renal and metabolic Immunology Neuroscience Oncology Total promoted brands Established brands 3 Total net sales from continuing operations 3 Year ended Year ended Dec 31, 2023 Dec 31, 2022 1 6 391 7 798 4 043 4 756 7 287 3 038 13 590 11 176 31 822 26 257 13 618 15 949 45 440 42 206 Change in USD % Change in constant currencies % 2 34 7 33 22 21 – 15 8 36 8 34 23 23 – 12 10 1 Reclassified to conform with the 2023 organizational structure. 2 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” 3 Effective January 1, 2023, the discontinued operations Sandoz business bio-technology manufacturing services to other companies’ activities and the Coartem brand were transferred to the Novartis continuing operations. The financial information of the Novartis continuing operations and discontinued operations were adapted accordingly in 2022, in compliance with IFRS Accounting Standards. See “Item 18. Financial Statements – Note 3. Operating segment.” 45 Item 5. Operating and Financial Review and Prospects The following table provides the top 20 product net sales from continuing operations in 2023, as well as the change compared with 2022: US Rest of world Total Brands Entresto Brand classification by therapeutic area or established brands Key indications Cardiovascular, renal and metabolic Chronic heart failure, hypertension Cosentyx Immunology Promacta/Revolade Oncology Kesimpta Neuroscience Kisqali Oncology Tafinlar + Mekinist Oncology Tasigna Oncology Jakavi Oncology Psoriasis (PsO), ankylosing spondylitis (AS), psoriatic arthritis (PsA), non-radiographic axial spondyloarthritis (nr-axSPA), hidradenitis suppurativa (HS) Immune thrombocytopenia (ITP), severe aplastic anemia (SAA) Relapsing-remitting multiple sclerosis (RRMS) HR+/HER2- metastatic breast cancer BRAF V600+ metastatic adjuvant melanoma, advanced non-small cell lung cancer (NSCLC), tumor agnostic with BRAF mutation indication Chronic myeloid leukemia (CML) Myelofibrosis (MF), polycytomia vera (PV), graft-versus-host disease (GvHD) % change USD m USD/cc 1 % % change change cc 1 USD USD m % % change change cc 1 USD USD m 3 067 30 2 968 30 32 6 035 30 31 2 636 – 5 2 344 16 19 4 980 4 5 1 205 11 1 064 6 8 2 269 9 10 1 528 66 643 276 272 2 171 99 99 1 032 119 1 048 38 47 2 080 69 75 791 17 1 131 4 8 1 922 9 11 884 1 964 – 8 – 5 1 848 – 4 – 3 1 720 10 12 1 720 10 12 Lucentis 2 Established brands Xolair 3 Immunology Ilaris Immunology Sandostatin Established brands Zolgensma Neuroscience Age-related macular degeneration (AMD), diabetic macular edema (DME), retinal vein occlusion (RVO) Severe allergic asthma (SAA), chronic spontaneous urticaria (CSU), nasal polyps Auto-inflammatory (CAPS, TRAPS, HIDS/MKD, FMF, SJIA, AOSD, gout) Carcinoid tumors, acromegaly Spinal muscular atrophy (SMA) 1 475 – 21 – 20 1 475 – 21 – 20 1 463 7 9 1 463 7 9 686 20 669 19 24 1 355 20 22 829 4 485 11 15 1 314 6 8 372 – 14 842 – 10 – 7 1 214 – 11 – 9 Pluvicto Oncology PSMA-positive mCRPC patients 921 265 post-ARPI, post-Taxane 59 211 195 980 262 261 Gilenya 2 Established brands Relapsing multiple sclerosis (RMS) 359 – 69 566 – 34 – 33 925 – 54 – 54 Exforge Group Established brands Hypertension 13 – 7 700 – 4 – 1 713 – 4 – 1 Galvus Group Established brands Type 2 diabetes 692 – 19 – 11 692 – 19 – 11 Diovan Group Established brands Hypertension 52 – 5 561 – 6 – 1 613 – 6 427 29 178 27 26 605 28 – 1 28 Lutathera Oncology Gleevec/Glivec Established brands GEP-NETs gastroenteropancreatic neuroendocrine tumors Chronic myeloid leukemia (CML), gastrointestinal stromal tumors (GIST) Top 20 brands total Rest of portfolio 4 Total net sales from continuing operations 4 150 – 27 411 – 24 – 20 561 – 25 – 22 14 952 15 19 983 3 007 1 7 498 6 1 9 34 935 10 5 10 505 1 12 4 17 959 13 27 481 5 8 45 440 8 10 1 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” 2 In the first quarter of 2023 Lucentis was reclassified from other promoted brands to established brands and Gilenya was reclassified from neuroscience to established brands. 3 Net sales reflect Xolair sales for all indications. 4 Effective January 1, 2023, the discontinued operations Sandoz business bio-technology manufacturing services to other companies’ activities and the Coartem brand were transferred to the Novartis continuing operations. The financial information of the Novartis continuing operations and discontinued operations were adapted accordingly in 2022, in compliance with IFRS Accounting Standards. See “Item 18. Financial Statements – Note 3. Operating segment.” nm = not meaningful 46 Item 5. Operating and Financial Review and Prospects For the table providing the top 20 products net sales from continuing operations in 2022 see Results of Oper- ations 2022 compared with 2021, below in this Item 5. For the table providing the net sales from continuing operations by core therapeutic area and established brands for 2023 and 2022, see “Item 18. Financial state- ments—Note 4. Revenues and geographic information.” For information about the approved indications for certain products described, see “Item 4. Information on the Company—Item 4.B Business overview— Products.” CARDIOVASCULAR, RENAL AND METABOLIC Net sales in the cardiovascular, renal and metabolic ther- apeutic area were USD 6.4 billion (+34%, +36% cc), sales growth mainly driven by Entresto. Entresto (USD 6.0 billion, +30%, +31% cc) sustained robust demand-led growth. In the US and Europe, Entresto penetration grew through the continued adop- tion of guideline-directed medical therapy in heart fail- ure. In China and Japan, Entresto volume growth is fueled by heart failure as well as increased penetration in hyper- tension. Highlights of the year also included the approval of the pediatric indication and formulation in Europe with a 1-year extension of RDP to November 2026, and the inclusion of Entresto in the 2023 China Hypertension Treatment Guideline as a new drug category and 1st line treatment option. In the US, Novartis is in ANDA litigation with generic manufacturers. Novartis has appealed to reverse the negative US district court decision to uphold the validity of its combination patent covering Entresto and combinations of sacubitril and valsartan, which expires in 2025 (with pediatric exclusivity). No generics have tentative or final approval in the US. Any US com- mercial launch of a generic Entresto product prior to the final outcome of Novartis combination patent appeal, or ongoing litigations involving other patents, may be at risk of later litigation developments. Leqvio (USD 0.4 billion, +217%, +217% cc) launch in the US and other markets is ongoing, with focus on patient on-boarding, removing access hurdles and enhancing medical education. In July 2023, FDA expanded the label to include primary hyperlipidemia (patients at increased risk of ASCVD) and removed four adverse reactions from the safety section and Limita- tions of Use. In Q3 2023, Leqvio was approved in China and in Japan and is now approved in 94 countries. Novartis obtained global rights to develop, manufacture and commercialize Leqvio under a license and collabo- ration agreement with Alnylam Pharmaceuticals. IMMUNOLOGY Net sales in the immunology therapeutic area reached USD 7.8 billion (+7%, +8% cc), sales growth was mainly driven by Ilaris and Cosentyx. Cosentyx (USD 5.0 billion, +4%, +5% cc) continued demand growth across key regions, partly offset by rev- enue deduction increases in the US. Ex-US sales grew +19% (cc). Since initial approval in 2015, Cosentyx has shown sustained efficacy and a robust safety profile, treating more than 1 million patients across six systemic inflammatory conditions. Cosentyx demonstrated dura- ble efficacy and symptom improvement at 16 weeks with observed results at 52 weeks in patients with moder- ate-to-severe hidradenitis suppurativa. In May and October 2023, respectively, the European Commission and FDA approved Cosentyx as the first and only IL-17A inhibitor for hidradenitis suppurativa in adults and the first new biologic therapy for hidradenitis suppurativa in nearly a decade. Cosentyx hidradenitis suppurativa in adults is now approved in more than 60 countries world- wide. In October 2023, FDA has approved Cosentyx intravenous formulation for the treatment of adults with psoriatic arthritis, ankylosing spondylitis, and non-radio- graphic axial spondyloarthritis. Xolair (USD 1.5 billion, ex-US +7%, +9% cc) sales grew across all regions. Following EMA positive opinion in Feb- ruary 2023, the Xolair SmPC was updated with long term (48 week) efficacy and safety data on chronic sponta- neous urticaria (CSU) allowing continued treatment beyond 24 weeks. In November 2023, Novartis received EU approval for six new Xolair product configurations, including auto injectors and a new 300 mg strength. 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 1.4 billion, +20%, +22% cc) sales grew across all regions. Contributors to growth include strong performance in the Periodic Fever Syndrome (PFS) and Still’s disease indications (SJIA/AOSD) in the US, Europe and Japan, as well as in key markets worldwide. NEUROSCIENCE Net sales in the neuroscience therapeutic area were USD 4.0 billion (+33%, +34% cc), sales growth was mainly driven by Kesimpta. Kesimpta (USD 2.2 billion, +99%, +99% cc) sales grew across all regions mainly driven by increased demand and strong access. Kesimpta is a high efficacy B-cell therapy, with a favorable safety and tolerability profile and an at home self-administration for a broad population of RMS patients. Kesimpta is now approved in 87 countries with more than 85,000 patients treated. Zolgensma (USD 1.2 billion, –11%, –9% cc). Estab- lished markets are treating mainly incident patients. Sales declined in the US and Europe. Zolgensma is now approved in 51 countries with more than 3,700 patients treated globally through clinical trials, early access pro- grams and in the commercial setting. Mayzent (USD 0.4 billion, +10%, +10% cc) sales grew mainly in Europe. Sales continued to grow in patients with multiple sclerosis showing signs of progression despite being on other treatments. Aimovig (USD 0.3 billion, ex-US, ex-Japan +22%, +21% cc) sales grew mainly in Europe, driven by increased demand in migraine prevention. Novartis commercializes Aimovig ex-US, ex-Japan, while Amgen retains all rights in the US and in Japan. ONCOLOGY Net sales in the oncology therapeutic area were USD 13.6 billion (+22%, +23% cc), sales growth was mainly driven by Kisqali, Pluvicto, Scemblix and Promacta/ Revolade. Promacta/Revolade (USD 2.3 billion, +9%, +10% cc) sales grew across all regions, driven by increased use in second-line persistent and chronic immune thrombocy- topenia and as first-line and/or second-line treatment 47 Item 5. Operating and Financial Review and Prospects for severe aplastic anemia, according to the respective label in the countries. Kisqali (USD 2.1 billion, +69%, +75% cc) sales grew strongly across all regions, based on increasing recog- nition of its consistently reported overall survival in HR+/ HER2- advanced breast cancer. Updates to the NCCN Clinical Practice Guidelines in Oncology (NCCN Guide- lines®) for breast cancer, released in January 2023, rec- ommend ribociclib (Kisqali) as the only Category 1 Pre- ferred CDK4/6 inhibitor for first-line treatment of patients with HR+/HER2- advanced breast cancer in combina- tion with an aromatase inhibitor (AI). Positive, statistically significant interim and final efficacy results of the iDFS analysis of the early breast cancer pivotal Phase III trial NATALEE were presented at ASCO and SABCS 2023. Additional QOL information presented at ESMO demon- strated that the addition of Ribociclib to endocrine ther- apy did not compromise the QOL of patients. Submis- sion for approval in early breast cancer was completed in August to EMA and in December to the FDA. Submis- sions to other regulatory authorities are ongoing. Tafinlar + Mekinist (USD 1.9 billion, +9%, +11% cc) sales grew mainly in the US and emerging growth mar- kets, driven by demand in BRAF+ adjuvant melanoma and NSCLC indications, while maintaining demand in the highly competitive BRAF+ metastatic melanoma market. In addition, the tumor agnostic indication contributed to growth in the US. Tasigna (USD 1.8 billion, –4%, –3% cc) sales declined mainly in Europe. Jakavi (USD 1.7 billion, ex-US +10%, +12% cc) sales grew in emerging growth markets, Europe and Japan, driven by strong demand in both myelofibrosis and poly- cythemia vera indications. Incyte retains all rights to ruxolitinib (Jakafi®) in the US. Pluvicto (USD 1.0 billion, +262%, +261% cc) saw con- tinued sales growth in the US. Pluvicto is the first and only radioligand therapy approved by the FDA for the treatment of adult patients with progressive, PSMA-pos- itive metastatic castration-resistant prostate cancer, who have already been treated with other anticancer treatments (ARPI and taxane-based chemotherapy). Data from the Phase III PSMAfore trial was presented at ESMO. Pluvicto met its primary endpoint with a clinically meaningful and statistically significant benefit in radio- graphic progression-free survival (rPFS) in patients with prostate-specific membrane antigen (PSMA)-positive metastatic castration-resistant prostate cancer (mCRPC) after treatment with androgen receptor path- way inhibitor (ARPI) therapy, compared with a change in ARPI. In Q2 2023, approval was received for commer- cial production of Pluvicto for US patients at our radioli- gand manufacturing facility in Millburn, NJ and the expan- sion of manufacturing operations for EU commercial supply at our site in Zaragoza, Spain. In January 2024, Novartis received approval from the FDA for the com- mercial manufacturing of Pluvicto at state-of-the-art radi- oligand therapy (RLT) manufacturing facility in Indianap- olis. Lutathera (USD 0.6 billion, +28%, +28% cc) sales grew across all regions due to increased demand. Growth in the US was also driven by strong field execution. In Japan, growth was driven by increased demand follow- ing the transfer of the marketing authorization (MA) back to Novartis from Fujifilm Toyama Chemical. In Q3 2023, the Phase III NETTER-2 trial with Lutathera met its pri- mary endpoint, showing Lutathera is the first radioligand therapy (RLT) to demonstrate clinically meaningful ben- efit in a first line setting. Kymriah (USD 0.5 billion, –5%, –5% cc) sales declined in Europe and the US, partly offset by growth in Japan and follicular lymphoma indication launch across mar- kets. Piqray / Vijoice (USD 0.5 billion, +35%, +37% cc) sales grew mainly in the US, Europe and emerging growth mar- kets. In addition to PIK3CA-related overgrowth spectrum (PROS), Piqray is the first therapy specifically developed for the approximately 40% of HR+/HER2- advanced breast cancer patients who have a PIK3CA mutation, associated with a worse prognosis. Scemblix (USD 0.4 billion, +177%, +179% cc) sales grew across all regions, demonstrating the high unmet need for effective and tolerable treatment options for CML patients who have been treated with 2 or more tyro- sine kinase inhibitors. Scemblix has now been approved in more than 60 countries for patients with Philadelphia chromosome-positive CML in chronic phase who have been treated with 2 or more TKIs. In January 2024, Novartis announced that the ASC4FIRST trial met both primary endpoints, with clinically meaningful and statis- tically significant results vs. standard-of-care TKIs in newly diagnosed Ph+CML-CP patients while demon- strating a favorable safety and tolerability profile. Data will be presented at an upcoming medical conference and submitted to regulatory authorities in 2024. Votrient (USD 0.4 billion, –18%, –17% cc) declined due to increased competition, especially from immuno-on- cology agents in metastatic renal cell carcinoma. Adakveo (USD 0.2 billion, +1%, 0% cc) sales grew (cc) mainly in the US, offset by decline in emerging growth markets and Europe. In August 2023, European Com- mission endorsed the CHMP’s recommendation to revoke the conditional marketing authorization for Adakveo. Adakveo remains approved for use by the FDA for the reduction in frequency of vaso-occlusive crises (pain crises) in adults and pediatric patients aged 16 years or older with sickle cell disease. Novartis contin- ues to discuss the STAND study results with FDA and other health authorities globally. Tabrecta (USD 0.2 billion, +16%, +16% cc) sales grew mainly in the US. Tabrecta is the first therapy approved by the FDA to specifically target metastatic NSCLC with a mutation that leads to MET exon 14 skipping (METex14) in line agnostic setting. Novartis obtained global rights to develop, manufacture and commercialize Tabrecta under a license and collaboration agreement with Incyte Corporation. ESTABLISHED BRANDS The established brands had net sales of USD 13.6 billion (–15%, –12% cc). Lucentis (USD 1.5 billion, ex-US –21%, –20% cc) sales declined in Europe, emerging growth markets and Japan due to competition. Sandostatin (USD 1.3 million, +6%, +8% cc) sales grew mainly in emerging growth markets, Europe and in the US. 48 Item 5. Operating and Financial Review and Prospects Gilenya (USD 0.9 billion, –54%, –54% cc) sales declined due to generic competition mainly in the US and Europe. Novartis is in litigation against a generic manu- facturer on the method of treatment patent in the US, and against generic manufacturers on the dosing regi- men patent in Europe. Exforge Group (USD 0.7 million, –4%, –1% cc) sales declined mainly in Europe, partly offset by growth in emerging growth markets. Galvus Group (USD 0.7 million, –19%, –11% cc) sales declined mainly in Europe, partly offset by growth in emerging growth markets. Diovan Group (USD 0.6 million, –6%, –1% cc) sales declined mainly in Europe, Japan and in the US, partly offset by growth in emerging growth markets. Gleevec/Glivec (USD 0.6 million, –25%, –22% cc) sales declined due to increased generic competition. Afinitor/Votubia (USD 0.4 million, –20%, –18% cc) sales declined mainly in the US and Europe, driven by generic competition. Operating income from continuing operations (USD millions unless indicated otherwise) Gross profit from continuing operations Selling, general and administration Research and development Other income Other expense Operating income from continuing operations Return on net sales (%) Year ended Year ended Dec 31, 2023 Dec 31, 2022 34 188 31 879 – 12 517 – 12 193 – 11 371 – 9 172 1 772 696 – 2 303 – 3 264 9 769 7 946 21.5 18.8 Change in USD % Change in constant currencies % 1 7 – 3 – 24 155 29 23 11 – 3 – 22 147 31 39 1 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” Operating income from continuing operations was USD 9.8 billion (+23%, +39% cc), mainly driven by higher net sales, lower restructuring charges, and income from legal matters, partly offset by higher impairments and higher SG&A and R&D investments. Operating income margin from continuing operations was 21.5% of net sales, increasing 2.7 percentage points (+5.0 percent- age points in cc). Other revenues as a percentage of net sales from continuing operations decreased by 0.3 per- centage points (-0.4 percentage points cc). Cost of goods sold as a percentage of net sales from continuing operations was in line with the prior year (+1.0 percent- age points cc). R&D expenses as a percentage of net sales from continuing operations increased by 3.3 per- centage points (-2.4 percentage points cc). Selling, gen- eral and administration (SG&A) expenses as a percent- age of net sales from continuing operations decreased by 1.4 percentage points (+1.7 percentage points cc). Other income and other expense, net as a percentage of net sales from continuing operations, increased the margin by 4.9 percentage points (+5.1 percentage points cc). Non-IFRS measure Core operating income from continuing operations 1 (USD millions unless indicated otherwise) Core gross profit from continuing operations Core selling, general and administration Core research and development Core other income Core other expense Core operating income from continuing operations Core return on net sales (%) Year ended Year ended Dec 31, 2023 Dec 31, 2022 37 959 35 591 – 12 489 – 12 143 – 8 600 – 8 267 392 291 – 890 – 678 16 372 14 794 36.0 35.1 Change in USD % Change in constant currencies % 7 – 3 – 4 35 – 31 11 9 – 3 – 3 29 – 33 18 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 from con- tinuing operations to arrive at core operating income from continuing operations amounted to USD 6.6 billion (compared with USD 6.8 billion in the prior year). For more information, see “—Non-IFRS measures as defined by Novartis—2023, 2022 and 2021 reconciliation from IFRS Accounting Standards results to non-IFRS core results.” 49 Item 5. Operating and Financial Review and Prospects Core operating income from continuing operations was USD 16.4 billion (+11%, +18% cc), mainly driven by higher net sales, partly offset by higher SG&A and R&D investments. Core operating income margin from con- tinuing operations was 36.0% of net sales, increasing 0.9 percentage points (+2.4 percentage points cc). Core other revenues as a percentage of sales decreased by 0.2 percentage points (cc). Core cost of goods sold as a percentage of sales increased by 0.1 percentage points (cc). Core R&D expenses as a percentage of net sales decreased by 1.3 percentage points (cc). Core SG&A expenses as a percentage of net sales decreased by 1.6 percentage points (cc). Core other income and expense as a percentage of net sales decreased the margin by 0.2 percentage points (cc). Research and development The following table provides an overview of the continuing operations reported research and development expense and the non-IFRS measure core research and development expense1: (USD millions unless indicated otherwise) Research and exploratory development Confirmatory development Total research and development expense Research and development as % of net sales from continuing operations Non-IFRS measures Core research and exploratory development1 Core confirmatory development1 Total core research and development expense Core research and development as % of net sales from continuing operations Year ended Year ended Dec 31, 2023 Dec 31, 2022 – 3 640 – 2 938 – 7 731 – 6 234 – 11 371 – 9 172 25.0 21.7 – 2 988 – 2 784 – 5 612 – 5 483 – 8 600 – 8 267 18.9 19.6 Change in USD % – 24 – 24 – 24 – 7 – 2 – 4 Change in constant currencies % 1 – 22 – 22 – 22 – 5 – 1 – 3 1 Core research and development expense 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.” Research and exploratory development expenses increased by 24% (–22% cc) to USD 3.6 billion. Confir- matory development expenses amounted to USD 7.7 bil- lion, increasing by 24% (–22% cc) versus the prior year mainly due to higher impairments from discontinuation of early stage development projects. Research and development as a percentage of net sales from continu- ing operations increased by 3.3 percentage points to 25.0% of net sales from continuing operations. Total core research and development expenses amounted to USD 8.6 billion, increasing by 4% (–3% cc) versus the prior year mainly due to higher investments in recently acquired assets. Core research and develop- ment as a percentage of net sales from continuing oper- ations decreased by 0.7 percentage points (-1.3 percent- age points cc) to 18.9% of net sales from continuing operations. 50 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 from continuing operations. The following table provides an overview of non-operating income and expense from continuing operations: (USD millions unless indicated otherwise) Operating income from continuing operations Loss from associated companies Interest expense Other financial income and expense Income before taxes Income taxes Net income from continuing operations Net income from discontinued operations before gain on distribution of Sandoz Group AG to Novartis AG shareholders Gain on distribution of Sandoz Group AG to Novartis AG shareholders Net income from discontinued operations Net income Basic earnings per share from continuing operations (USD) Basic earnings per share from discontinued operations (USD) Total basic earnings per share (USD) Year ended Year ended Dec 31, 2023 Dec 31, 2022 9 769 7 946 – 13 – 855 222 – 11 – 800 42 9 123 7 177 – 551 – 1 128 8 572 6 049 422 906 5 860 6 282 906 14 854 6 955 4.13 3.02 7.15 2.77 0.42 3.19 Change in USD % 23 – 18 – 7 nm 27 51 42 nm nm nm nm 49 nm nm Change in constant currencies % 1 39 1 – 11 nm 45 44 62 nm nm nm nm 70 nm nm 1 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” nm = not meaningful Interest expense and other financial income and expense Interest expense amounted to USD 855 million, broadly in line with the prior year. Other financial income and expense amounted to an income of USD 222 million compared with USD 42 mil- lion in the prior year, mainly due to higher interest income partly offset by higher net losses from the impact of IAS 29 “Financial reporting in Hyperinflation Economies.” Income taxes The tax rate was 6.0%, compared with 15.7% in the prior year period. The current year tax rate was favorably impacted by the effect of tax benefits from the write- down of investments in subsidiaries, non-taxable net gains on unrealized foreign currency results, recognition of deferred tax assets on prior years tax loss carryfor- wards, non-taxable income related to legal matters, and other items including impact of tax rate changes. Exclud- ing these impacts, the current year tax rate would have been 15.3% compared with 15.7% in the prior year period. The decrease from the prior year was mainly the result of a change in profit mix. Net income from continuing operations Net income from continuing operations was USD 8.6 bil- lion (+42%, +62% cc), mainly due to higher operating income from continuing operations and non-recurring favorable tax impacts. Earnings per share from continuing operations Basic earnings per share from continuing operations was USD 4.13 (+49%, +70% cc), growing faster than net income from continuing operations, benefiting from lower weighted average number of shares outstanding. 51 Item 5. Operating and Financial Review and Prospects Non-IFRS measure Core non-operating income and expense1 The following table provides an overview of the non-IFRS measure core non-operating income and expense from continuing operations: (USD millions unless indicated otherwise) Core operating income from continuing operations Core loss from associated companies Core interest expense Core other financial income and expense Core income before taxes from continuing operations Core income taxes Core net income from continuing operations Core basic EPS from continuing operations (USD) Year ended Year ended Dec 31, 2023 Dec 31, 2022 16 372 14 794 – 13 – 855 430 – 11 – 800 140 15 934 14 123 Change in USD % 11 – 18 – 7 nm 13 – 2 488 – 2 177 – 14 13 446 11 946 6.47 5.48 13 18 Change in constant currencies % 18 1 – 11 nm 19 – 21 19 25 1 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” nm = not meaningful Core interest expense and other financial income and expense Core interest expense amounted to USD 855 million, broadly in line with the prior year. Core net income from continuing operations Core net income from continuing operations was USD 13.4 billion (+13%, +19% cc), mainly due to higher core operating income from continuing operations. Core other financial income and expense amounted to an income of USD 430 million compared with USD 140 mil- lion in the prior year, mainly due to higher interest income. Core income taxes The core tax rate (core taxes as a percentage of core income before tax) was 15.6% compared with 15.4% in the prior year period. The increase from the prior year was mainly the result of a change in profit mix. Core earnings per share from continuing operations Core basic earnings per share from continuing opera- tions was USD 6.47 (+18%, +25% cc), growing faster than core net income from continuing operations, benefiting from lower weighted average number of shares out- standing. Discontinued operations Discontinued operations include the Sandoz, generic pharmaceuticals and biosimilars division and certain cor- porate activities attributable to Sandoz prior to the spin-off up to the distribution date of October 3, 2023 and certain other expenses related to the spin-off. Included in 2023 is also the IFRS Accounting Standards non-cash, non-tax- able net gain on the distribution of Sandoz Group AG to Novartis AG shareholders of USD 5.9 billion, representing mainly the excess amount of the IFRS Accounting Stan- dards distribution liability, which is the estimated fair value of the Sandoz business distributed to Novartis AG share- holders, over the then carrying value of Sandoz business net assets. There were no operating results for the fourth quarter 2023 following the distribution date. The prior year includes the results for the full year. Discontinued operations net sales in 2023 were USD 7.4 billion, compared with USD 9.4 billion in 2022 and operating income amounted to USD 265 million com- pared with USD 1.3 billion in 2022. Net income from discontinued operations in 2023 amounted to USD 6.3 billion, compared with USD 906 mil- lion in 2022, driven by the IFRS Accounting Standards non-cash, non-taxable, net gain on distribution of Sandoz Group AG to Novartis AG shareholders, which amounted to USD 5.9 billion. For further information, see “Item 18. Financial State- ments—Note 1. Accounting policies; Note 2. Significant transactions—Completion of the spin-off of the Sandoz business through a dividend in kind distribution to Novartis AG shareholders and —Note 31. Discontinued operations.” Total Company Total Company net income amounted to USD 14.9 billion in 2023, compared with USD 7.0 billion in 2022, and basic earnings per share was USD 7.15, compared with USD 3.19 in the prior year, driven by the IFRS Accounting Standards non-cash, non-taxable, net gain on distribution of Sandoz Group AG to Novartis AG shareholders of USD 5.9 billion. Net cash flows from operating activities for the total Com- pany amounted to USD 14.5 billion, and free cash flow amounted to USD 13.2 billion. 52 Item 5. Operating and Financial Review and Prospects Financial year 2022 compared with 2021 Key figures1 (USD millions unless indicated otherwise) Net sales from continuing operations Other revenues Cost of goods sold Gross profit from continuing operations Selling, general and administration Research and development Other income Other expense Operating income from continuing operations Return on net sales (%) (Loss)/income from associated companies Interest expense Other financial income and expense Income before taxes from continuing operations Income taxes Net income from continuing operations Net income from discontinued operations Net income Basic earnings per share from continuing operations (USD) Basic earnings per share from discontinued operations (USD) Total basic earnings per share (USD) Year ended Year ended Dec 31, 2022 Dec 31, 2021 Change in USD % Change in constant currencies % 2 42 206 42 781 1 255 1 193 – 11 582 – 11 735 31 879 32 239 – 12 193 – 12 827 – 9 172 – 8 641 696 1 620 – 3 264 – 2 335 7 946 10 056 18.8 – 11 – 800 42 23.5 15 337 – 787 – 76 7 177 24 530 – 1 128 – 1 625 6 049 22 905 906 1 113 6 955 24 018 2.77 0.42 3.19 10.22 0.49 10.71 – 1 5 1 – 1 5 – 6 – 57 – 40 – 21 nm – 2 nm – 71 31 – 74 – 19 – 71 – 73 – 15 – 70 – 2 5 7 – 5 5 0 – 10 – 55 – 49 – 12 nm – 3 nm – 67 21 – 70 – 11 – 67 – 69 – 9 – 66 Net cash flows from operating activities from continuing operations 13 039 13 365 Non-IFRS measures 2 Free cash flow from continuing operations 2, 3 12 123 12 299 – 1 1 For information on continuing operations and discontinued operations, refer to the Overview section above in this Item 5 and “Item 18. Financial Statements—Note 1. Accounting policies “, “Item 18. Financial Statements—Note 2. Significant transactions—Significant transactions in 2023,” and “Item 18. Financial Statements—Note 31. Discontinued operations.” 2 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” 3 Effective January 1, 2023, Novartis revised its definition of free cash flow, to define free cash flow as net cash flows from operating activities less purchases of property, plant and equipment. To aid in comparability, the prior year free cash flow amounts have been revised to conform with the new free cash flow definition. See “—Non-IFRS measures as defined by Novartis.” nm = not meaningful 53 Item 5. Operating and Financial Review and Prospects Company overview Net sales from continuing operations were USD 42.2 bil- lion in 2022, down 1% in USD reported terms and up 5% measured in constant currencies (cc) to remove the impact of exchange rate movements. Sales growth was driven by volume growth of 13 percentage points, mainly driven by continued strong growth from Entresto, Kesi- mpta, Kisqali, Pluvicto and Cosentyx. Generic competi- tion had a negative impact of 4 percentage points, mainly due to Gilenya, Afinitor/Votubia, and Gleevec/Glivec. Pric- ing had a negative impact of 4 percentage points. Net sales from continuing operations in the US were USD 15.9 billion (+7%) and in the rest of the world USD 26.3 billion (–6%, +4% cc). In emerging growth markets, which comprise all mar- kets excluding the US, Canada, Western Europe1, Japan, Australia and New Zealand, net sales from continuing operations were USD 10.8 billion (+2%, +9% cc), driven by China (USD 2.9 billion) growing +3% (+7% cc). Operating income from continuing operations was USD 7.9 billion (–21%, –12% cc), mainly due to higher restructuring primarily related to the implementation of the previously announced streamlined organizational model, higher impairments and lower divestment gains. Operating income margin from continuing operations was 18.8% of net sales from continuing operations, decreasing by 4.7 percentage points (-3.8 percentage points cc). Net income from continuing operations was USD 6.0 billion compared with USD 22.9 billion in the prior year, impacted by Roche income in the prior year. Excluding the impact of Roche income, net income from continu- ing operations declined 9% (cc). Basic earnings per share from continuing operations were USD 2.77 com- pared with USD 10.22 in the prior year. Excluding the impact of Roche income, basic earnings per share from continuing operations declined 7% (cc). Net cash flows from operating activities from con- tinuing operations amounted to USD 13.0 billion, com- pared with USD 13.4 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, higher interest received and favorable hedging results. Free cash flow from continuing operations amounted to USD 12.1 billion, broadly in line with USD 12.3 billion in 2021. We also present our core results2, which exclude the impact of amortization, impairments, disposals, acquisi- tions, restructurings and other significant items, to help investors understand our underlying performance. Core operating income from continuing operations was USD 14.8 billion (+2%, +10% cc), benefiting from higher gross margin, partly offset by higher research and development (R&D) investments. Core operating income margin from continuing operations was 35.1% of net sales from continuing operations, increasing by 1.2 percent- age points (+1.8 percentage points cc). Core net income from continuing operations was USD 11.9 billion (–5%, +4% cc) as growth in core operat- ing income was partly offset by the loss of Roche core income. Excluding the impact of Roche core income, core net income grew from continuing operations +13% (cc). Discontinued operations include the Sandoz generic pharmaceuticals and biosimilars division and certain cor- porate activities attributable to Sandoz prior to the spin- off up to the distribution date of October 3, 2023, and certain other expenses related to the spin-off. Net sales of discontinued operations were USD 9.4 billion, com- pared with USD 9.8 billion in 2021, and operating income amounted to USD 1.3 billion, compared with USD 1.6 bil- lion in the prior year. Net income from discontinued oper- ations was USD 0.9 billion compared with USD 1.1 billion in the prior year. Total Company net income amounted to USD 7.0 bil- lion, and basic earnings per share were USD 3.19, com- pared with USD 10.71 in the prior year. Net cash flows from operating activities amounted to USD 14.2 billion, and free cash flow amounted to USD 13.0 billion. 1 Novartis definition of Western Europe includes Austria, Belgium, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Malta, The Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. 2 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” 54 Item 5. Operating and Financial Review and Prospects Net sales from continuing operations The following table provides an overview of net sales from continuing operations by core therapeutic area and established brands: (USD millions) Cardiovascular, renal and metabolic Immunology Neuroscience Oncology Total promoted brands Established brands 3 Total net sales from continuing operations 3 Year ended Year ended Dec 31, 2022 Dec 31, 2021 1 4 756 7 287 3 038 3 561 7 206 2 220 11 176 10 532 26 257 23 519 15 949 19 262 42 206 42 781 Change in USD % Change in constant currencies % 2 34 1 37 6 12 – 17 – 1 40 7 42 12 18 – 11 5 1 Reclassified to conform with the 2023 organizational structure. 2 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” 3 Effective January 1, 2023, the discontinued operations Sandoz business bio-technology manufacturing services to other companies’ activities and the Coartem brand were transferred to the Novartis continuing operations. The financial information of the Novartis continuing operations and discontinued operations were adapted accordingly in 2022 and 2021, in compliance with IFRS Accounting Standards. See “Item 18. Financial Statements – Note 3. Operating segment.” 55 Item 5. Operating and Financial Review and Prospects The following table provides the top 20 product net sales from continuing operations in 2022 as well as the change compared with 2021: US Rest of world Total Brands Cosentyx Brand classification by therapeutic area or established brands Immunology Key indications Psoriasis (PsO), ankylosing spondylitis (AS), psoriatic arthritis (PsA), non-radiographic axial spondyloarthritis (nr-axSPA) % change USD m USD/cc 1 % % change change cc 1 USD USD m % % change change cc 1 USD USD m 2 770 – 4 2 018 10 20 4 788 1 5 Entresto Cardiovascular, renal and metabolic Chronic heart failure, hypertension 2 354 38 2 290 25 37 4 644 31 37 Promacta/Revolade Oncology Gilenya 2 Established brands Tasigna Oncology Lucentis 2 Established brands Tafinlar + Mekinist Oncology Jakavi Oncology Zolgensma Neuroscience Xolair 3 Immunology Sandostatin Established brands Kisqali Ilaris Oncology Immunology Kesimpta Neuroscience Immune thrombocytopenia (ITP), severe aplastic anemia (SAA) Relapsing multiple sclerosis (RMS) Chronic myeloid leukemia (CML) 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 Oncology 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 4 Total net sales from continuing operations 4 171 – 67 341 – 18 – 8 512 – 45 – 41 12 753 6 19 384 – 5 5 32 137 – 1 3 182 10 6 887 – 7 1 10 069 – 3 15 935 7 26 271 – 6 4 42 206 – 1 5 4 5 1 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” 2 In the first quarter of 2023 Lucentis was reclassified from other promoted brands to established brands and Gilenya was reclassified from neuroscience to established brands. 3 Net sales from continuing operations reflect Xolair sales for all indications. 4 Effective January 1, 2023, the discontinued operations Sandoz business bio-technology manufacturing services to other companies’ activities and the Coartem brand were transferred to the Novartis continuing operations. The financial information of the Novartis continuing operations and discontinued operations were adapted accordingly in 2022 and 2021, in compliance with IFRS Accounting Standards. See “Item 18. Financial Statements – Note 3. Operating segment.” nm = not meaningful 56 Item 5. Operating and Financial Review and Prospects For the table providing the top 20 product net sales from continuing operations in 2021 and for the table provid- ing the net sales from continuing operations by core ther- apeutic area and established brands for 2022 and 2021, see “Item 18. Financial statements—Note 4. Revenues and geographic information.” CARDIOVASCULAR, RENAL AND METABOLIC Net sales in the cardiovascular, renal and metabolic ther- apeutic 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 Net 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 Net sales in the neuroscience therapeutic area were USD 3.0 billion (+37%, +42% cc), sales growth (cc) mainly driven by Kesimpta. 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. ONCOLOGY Net sales in the oncology therapeutic area were USD 11.2 billion (+6%, +12% cc), sales growth was mainly driven by Kisqali, Pluvicto, Promacta/Revolade, Tafinlar + Mekinist. 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. 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 2022, Tafinlar + Mekinist is the first and only therapy with a tumor-agnostic 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. 57 Item 5. Operating and Financial Review and Prospects 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 2022, EC approved Jakavi for the treatment of patients aged 12 years and older with acute or chronic GvHD who have inadequate response to corticosteroids or other systemic therapies. Kisqali (USD 1.2 billion, +31%, +38% cc) sales grew strongly across all geographies, based on increasing rec- ognition of its overall survival benefits in HR+/HER2- advanced breast cancer. It is a CDK4/6 inhibitor with proven overall survival benefit across all three Phase III trials of the MONALEESA program regardless of meno- pausal status, line of therapy, site and number of metas- tases, endocrine resistance, or endocrine partner. 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 2022, EC and FDA approved Kymriah for the treatment of adult patients with relapsed or refractory (r/r) follicular lym- phoma (FL) after two or more lines of systemic therapy. 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 2022. Piqray/Vijoice (USD 0.4 billion, +13%, +14% cc) sales grew mainly in the US, benefiting from indication expan- sion 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). 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. 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). ESTABLISHED BRANDS The established brands had net sales of USD 15.9 billion (–17%, –11% cc). Gilenya (USD 2.0 billion, –28%, –24% cc) sales declined mainly in Europe and in the US due to generic pressure. 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. 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. 58 Item 5. Operating and Financial Review and Prospects Operating income from continuing operations (USD millions unless indicated otherwise) Gross profit from continuing operations Selling, general and administration Research and development Other income Other expense Operating income from continuing operations Return on net sales (%) Year ended Year ended Dec 31, 2022 Dec 31, 2021 31 879 32 239 – 12 193 – 12 827 – 9 172 – 8 641 696 1 620 – 3 264 – 2 335 7 946 10 056 18.8 23.5 Change in USD % Change in constant currencies % 1 – 1 5 – 6 – 57 – 40 – 21 5 0 – 10 – 55 – 49 – 12 1 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” Operating income from continuing operations was USD 7.9 billion (–21%, –12% cc), mainly due to higher restruc- turing primarily related to the implementation of the pre- viously announced streamlined organizational model, higher impairments and lower divestment gains. Oper- ating income margin from continuing operations was 18.8% of net sales from continuing operations, decreas- ing by 4.7 percentage points (-3.8 percentage points cc). Other revenues as a percentage of net sales from con- tinuing operations increased by 0.2 percentage points (0.0 percentage points cc). Cost of goods sold as a percentage of net sales from continuing operations (0.1 percentage points cc) was in line with the prior year. R&D expenses as a percentage of net sales from continuing operations increased by 1.5 percentage points (1.0 per- centage points cc). Selling, general and administration (SG&A) expenses as a percentage of net sales from con- tinuing operations decreased by 1.1 percentage points (1.5 percentage points cc). Other income and other expense, net as a percentage of net sales from continu- ing operations decreased the margin by 4.5 percentage points (4.4 percentage points cc). Non-IFRS measure Core operating income from continuing operations 1 (USD millions unless indicated otherwise) Core gross profit from continuing operations Core selling, general and administration Core research and development Core other income Core other expense Core operating income from continuing operations Core return on net sales (%) Year ended Year ended Dec 31, 2022 Dec 31, 2021 35 591 36 002 – 12 143 – 12 756 – 8 267 – 8 150 291 296 – 678 – 901 14 794 14 491 35.1 33.9 Change in USD % Change in constant currencies % – 1 5 – 1 – 2 25 2 5 0 – 5 8 20 10 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 from con- tinuing operations to arrive at core operating income from continuing operations amounted to USD 6.8 billion mainly due to amortization, impairments and restructur- ing, compared with USD 4.4 billion in the prior year. Core adjustments increased compared with the prior year, mainly due to higher impairments and restructuring. For more information, see “—Non-IFRS measures as defined by Novartis—2023, 2022 and 2021 reconciliation from IFRS Accounting Standards results to non-IFRS core results.” Core operating income from continuing operations was USD 14.8 billion (+2%, +10% cc), mainly driven by higher gross margin, partly offset by higher R&D invest- ments. Core operating income margin from continuing operations was 35.1% of net sales from continuing oper- ations, increasing 1.2 percentage points (+1.8 percent- age points cc). Other revenues as a percentage of net sales from continuing operations decreased by 0.2 per- centage points (cc). Core cost of goods sold as a per- centage of net sales from continuing operations was in line with the prior year. Core R&D expenses as a per- centage of net sales from continuing operations increased by 0.1 percentage points (cc). Core SG&A expenses as a percentage of net sales from continuing operations decreased by 1.6 percentage points (cc). Core other income and expense as a percentage of net sales from continuing operations increased the margin by 0.5 percentage points (cc). 59 Item 5. Operating and Financial Review and Prospects Research and development The following table provides an overview of the continuing operations reported research and development expense and the non-IFRS measure core research and development expense1: (USD millions unless indicated otherwise) Research and exploratory development Confirmatory development Total research and development expense Research and development as % of net sales from continuing operations Non-IFRS measures Core research and exploratory development1 Core confirmatory development1 Total core research and development expense Core research and development as % of net sales from continuing operations Year ended Year ended Dec 31, 2022 Dec 31, 2021 – 2 938 – 3 209 – 6 234 – 5 432 – 9 172 – 8 641 21.7 20.2 – 2 784 – 2 809 – 5 483 – 5 341 – 8 267 – 8 150 19.6 19.1 Change in USD % 8 – 15 – 6 1 – 3 – 1 Change in constant currencies % 1 6 – 20 – 10 – 1 – 7 – 5 1 Core research and development expense 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.” Research and exploratory development expense decreased by 8% (+6% cc) to USD 2.9 billion. Confirma- tory development expense amounted to USD 6.2 billion, increasing by 15% (–20% cc) versus the prior year mainly due to higher impairment charges and higher invest- ments in development to support acquired assets. Research and development as a percentage of net sales from continuing operations increased by 1.5 percentage points to 21.7% of net sales from continuing operations. Total core research and development expense as a percentage of net sales from continuing operations increased by 0.5 percentage points (+0.1 percentage points cc) to 19.6% of net sales from continuing opera- tions, mainly driven by higher investments in acquired assets. Non-operating income and expense The term “non-operating income and expense” includes all income and expense items outside operating income. The following table provides an overview of non-operating income and expense from continuing operations: (USD millions unless indicated otherwise) Operating income from continuing operations (Loss)/income from associated companies Interest expense Other financial income and expense Income before taxes Income taxes Net income from continuing operations Net income from discontinued operations Net income Basic earnings per share from continuing operations (USD) Basic earnings per share from discontinued operations (USD) Total basic earnings per share (USD) Year ended Year ended Dec 31, 2022 Dec 31, 2021 Change in USD % Change in constant currencies % 1 7 946 10 056 – 21 – 12 – 11 15 337 – 800 42 – 787 – 76 7 177 24 530 – 1 128 – 1 625 6 049 22 905 906 1 113 6 955 24 018 2.77 0.42 3.19 10.22 0.49 10.71 nm – 2 nm – 71 31 – 74 – 19 – 71 – 73 – 15 – 70 nm – 3 nm – 67 21 – 70 – 11 – 67 – 69 – 9 – 66 1 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” nm = not meaningful Income from associated companies Income from associated companies was a loss of USD 11 million compared with an income of USD 15.3 billion in the prior year. This decrease was due to the divestment of our investment in Roche that closed in the fourth quarter of 2021 where a gain of USD 14.6 billion was rec- ognized. 60 Item 5. Operating and Financial Review and Prospects Interest expense and other financial income and expense Interest expense amounted to USD 800 million, broadly in line with the prior year. Other financial income and expense amounted to an income of USD 42 million compared with an expense of USD 76 million in the prior year, as higher interest income was only partly offset by financial expenses and currency losses. Income taxes The tax rate was 15.7% compared with 6.6% 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 15.4% compared with 15.7% in the current year period. The increase was mainly the result of a change in profit mix. Net income from continuing operations Net income from continuing operations was USD 6.0 bil- lion (–74%, –70% cc), impacted by Roche income in the prior year. Excluding the impact of Roche income, net income from continuing operations declined 9% (cc). Earnings per share from continuing operations Basic earnings per share from continuing operations were USD 2.77 compared with USD 10.22 in the prior year, mainly due to prior year Roche income. Excluding the impact of Roche income, basic earnings per share from continuing operations declined 7% (cc). Non-IFRS measure Core non-operating income and expense 1 The following table provides an overview of the non-IFRS measure core non-operating income and expense from continuing operations: (USD millions unless indicated otherwise) Core operating income from continuing operations Core (loss)/income from associated companies Core interest expense Core other financial income and expense Core income before taxes from continuing operations Core income taxes Core net income from continuing operations Core basic EPS from continuing operations (USD) Year ended Year ended Dec 31, 2022 Dec 31, 2021 14 794 14 491 – 11 – 800 140 991 – 787 – 38 14 123 14 657 – 2 177 – 2 129 11 946 12 528 5.48 5.59 Change in USD % Change in constant currencies % 2 nm – 2 nm – 4 – 2 – 5 – 2 10 nm – 3 nm 5 – 11 4 6 1 For an explanation of non-IFRS measures and reconciliation tables, see “—Non-IFRS measures as defined by Novartis.” nm = not meaningful Core net income from continuing operations Core net income from continuing operations was USD 11.9 billion (–5%, +4% cc) as growth in core operating income from continuing operations was partly offset by the loss of Roche core income. Excluding the impact of Roche core income, core net income from continuing operations grew 13% (cc). Core earnings per share from continuing operations Core basic earnings per share from continuing opera- tions was USD 5.48 (–2%, +6% cc), benefiting from lower weighted average number of shares outstanding. Exclud- ing the impact of Roche core income, core basic earn- ings per share from continuing operations grew 16% (cc). Core income from associated companies Core income from associated companies was a loss of USD 11 million compared with an income of USD 991 mil- lion in the 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 800 million, broadly in line with the prior year. Core other financial income and expense amounted to an income of USD 140 million compared with an expense of USD 38 million in the prior year as higher interest income was only partly offset by currency losses. Core income taxes The core tax rate (core taxes as a percentage of core income before tax) was 15.4%, compared with 14.5% 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 15.4%, in line with 15.4% in the current year. 61 Item 5. Operating and Financial Review and Prospects Discontinued operations Discontinued operations net sales were USD 9.4 billion compared with USD 9.8 billion in the prior year. Operat- ing income amounted to USD 1.3 billion, compared with USD 1.6 billion in the prior year. Net income from discontinued operations amounted to USD 0.9 billion, compared to USD 1.1 billion in the prior year. Total Company Total Company net income amounted to USD 7.0 billion in 2022, compared with USD 24.0 billion in the prior year, impacted by Roche income in the prior year (see “Item 18. Financial Statements – Note 2. Significant transac- tions and Note 5. Associated companies”). Basic earnings per share decreased to USD 3.19 from USD 10.71. Net cash flows from operating activities for the total Company amounted to USD 14.2 billion, and free cash flow amounted to USD 13.0 billion. 62 Item 5. Operating and Financial Review and Prospects Factors affecting comparability of year-on-year results of operations Significant transactions in 2023, 2022 and 2021 long-term strategy to focus Novartis as a leading medicines company, we announced and/or completed several acquisitions and divestments during 2023, 2022 and 2021. The comparability of the year-on-year results of our operations for the total Company can be significantly affected by acquisitions and divestments. As part of our A detailed description of significant transactions in 2023, 2022 and 2021, can be found in “Item 18. Finan- cial Statements—Note 2. Significant transactions.” Internal control over financial reporting The Company’s management has assessed the effec- tiveness of internal control over financial reporting. The Company’s independent registered public accounting firm also issued an opinion on the effectiveness of inter- nal control over financial reporting. Both the Company’s management and its independent registered public accounting firm concluded that the Company main- tained, in all material respects, effective internal control over financial reporting as of December 31, 2023. For more information, see “Item 15. Controls and Proce- dures.” 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 30. Financial instruments – additional disclosures.” Non-IFRS measures as defined by Novartis Novartis uses certain non-IFRS Accounting Standards metrics when measuring performance, especially when measuring current-year results against prior periods, including core results, constant currencies and free cash flow. These are referred to by Novartis as non-IFRS mea- sures. Despite the use of these measures by management in setting goals and measuring the Company’s perfor- mance, these are non-IFRS measures that have no stan- dardized meaning prescribed by IFRS Accounting Stan- dards. As a result, such measures have limits in their usefulness to investors. Because of their non-standardized definitions, the non-IFRS measures (unlike IFRS Accounting Standards measures) may not be comparable to the calculation of similar measures of other companies. These non-IFRS measures are presented solely to permit investors to more fully understand how the Company’s management assesses underlying performance. These non-IFRS measures are not, and should not be viewed as, a sub- stitute for IFRS Accounting Standards measures, and should be viewed in conjunction with the consolidated financial statements prepared in accordance with IFRS Accounting Standards. As an internal measure of Company performance, these non-IFRS measures have limitations, and the Com- pany’s performance management process is not solely restricted to these metrics. 63 Item 5. Operating and Financial Review and Prospects Core results The Company’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, impact of IAS 29 “Financial reporting in Hyperinflation Economies” to other financial income and expense, and certain acqui- sition- 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 Company’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 Accounting Standards measures and other measures as important factors in assessing the Company’s performance. The following are examples of how these core measures are used: • In addition to monthly reports containing financial infor- mation prepared under IFRS Accounting Standards, senior management receives a monthly analysis incor- porating these non-IFRS core measures. • Annual budgets are prepared for both IFRS Account- ing Standard measures and non-IFRS core measures. As an internal measure of Company performance, the core results measures have limitations, and the Compa- ny’s performance management process is not solely restricted to these metrics. A limitation of the core results measures is that they provide a view of the Company’s operations without including all events during a period, such as the effects of an acquisition, divestment, or amortization/impairments of purchased intangible assets, impairments to property, plant and equipment and restructurings and related items. Constant currencies Changes in the relative values of non-US currencies to the US dollar can affect the Company’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 Company’s performance, since they may assist us in evaluating our ongoing performance from year to year. However, in performing our evaluation, we also con- sider 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 Effective January 1, 2023, Novartis revised its definition of free cash flow, to define free cash flow as net cash flows from operating activities less purchases of prop- erty, plant and equipment. This new definition provides a simpler performance measure focusing on core oper- ating activities, and also excludes items that can vary significantly from year to year, thereby enabling better comparison of business performance across years. The prior year free cash flow amounts have been revised to conform with the new free cash flow definition to aid in comparability. 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 Accounting Standards. Free cash flow is presented as additional information because management believes it is a useful supplemental indicator of the Company’s abil- ity to operate without reliance on additional borrowing or use of existing cash. Free cash flow is a measure of the net cash generated that is available for investment in strategic opportunities, returning to shareholders and for debt repayment. Free cash flow is a non-IFRS mea- sure, which means it should not be interpreted as a mea- sure determined under IFRS Accounting Standards. 64 Item 5. Operating and Financial Review and Prospects Additional information (USD millions) 2023 2022 2021 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 Company’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 Company’s net debt, see “— Item 5.B Liquidity and capital resources — Company 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 net impairments of property, plant and equipment, right-of-use assets and of intangible assets. Operating income from continuing operations Depreciation of property, plant and equipment Depreciation of right-of-use assets Amortization of intangible assets 9 769 7 946 10 056 916 967 1 005 259 267 279 3 960 3 760 3 665 Impairments of property, plant and equipment, right-of-use assets and intangible assets, net 1 3 142 1 711 648 EBITDA from continuing operations Operating income from discontinued operations Depreciation of property, plant and equipment Depreciation of the right-of-use-assets Amortization of intangible assets Impairments of property, plant and equipment, right-of-use assets and intangible assets, net 2 EBITDA from discontinued operations 3 18 046 14 651 15 653 265 1 251 1 633 144 196 203 32 33 39 171 222 238 56 25 36 668 1 727 2 149 EBITDA 18 714 16 378 17 802 1 There were no impairments of right-of-use assets in 2021. 2 There were no impairments of right-of-use assets. 3 The EBITDA from discontinued operations for 2023 is for the period from January 1, 2023, to the October 3, 2023, Distribution date. ENTERPRISE VALUE Enterprise value represents the total amount that share- holders and debt holders have invested in Novartis, less the Company’s liquidity. (USD millions) Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Market capitalization 206 264 191 530 196 107 Non-controlling interests 83 81 167 Non-current financial debts 18 436 20 244 22 902 Current financial debts and derivative financial instruments Marketable securities, commodities, time deposits and derivative financial instruments 6 175 5 931 6 295 – 1 035 – 11 413 – 15 922 Cash and cash equivalents – 13 393 – 7 517 – 12 407 Enterprise value 216 530 198 856 197 142 65 Item 5. Operating and Financial Review and Prospects Reconciliation from IFRS Accounting Standards results to non-IFRS measure core results The following tables provide an overview of the reconciliation from IFRS Accounting Standards results to non-IFRS measure core results: 2023, 2022 and 2021 reconciliation from IFRS Accounting Standards results to non-IFRS measure core results – Total Company (USD millions unless indicated otherwise) IFRS Accounting Standards operating income from continuing operations Amortization of intangible assets Impairments Intangible assets Property, plant and equipment related to the company-wide rationalization of manufacturing sites Other property, plant and equipment Total impairment charges Acquisition or divestment of businesses and related items - Income - Expense Total acquisition or divestment of businesses and related items, net Other items Divestment gains 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 from continuing operations as % of net sales (Loss)/income from associated companies Core adjustments to income from associated companies, net of tax 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 from continuing operations Core net income from discontinued operations 2 Core net income Core net income attributable to shareholders of Novartis AG Core basic EPS from continuing operations (USD) 1 Core basic EPS from discontinued operations (USD) 1, 2 Core basic EPS (USD) 1 2023 9 769 3 730 2022 2021 7 946 10 056 3 585 3 528 3 044 1 293 5 39 286 85 3 088 1 664 – 174 149 – 25 – 4 8 4 360 219 40 619 – 66 107 41 – 225 – 166 105 260 – 724 – 38 – 229 1 180 – 34 1 856 – 38 865 – 608 66 – 51 364 – 602 – 698 123 – 190 6 603 64 1 595 6 848 170 – 277 289 247 4 435 16 372 14 794 14 491 36.0% 35.1% 33.9% – 13 – 11 15 337 – 14 346 – 855 – 800 – 787 222 208 42 98 – 76 38 – 2 488 – 2 177 – 2 129 13 446 11 946 12 528 889 1 406 1 566 14 335 13 352 14 094 14 331 13 352 14 097 6.47 0.43 6.90 5.48 0.64 6.12 5.59 0.70 6.29 1 Core earnings per share (EPS) is calculated by dividing core net income attributable to shareholders of Novartis AG by the weighted average number of shares used in the basic EPS calculation outstanding in a reporting period. 2 For details on discontinued operations reconciliation from IFRS Accounting Standards net income to core net income, refer to page 70. 66 Item 5. Operating and Financial Review and Prospects 2023, 2022 and 2021 reconciliation from IFRS Accounting Standards results to non-IFRS measure core results – Total Company 2023 (USD millions unless indicated otherwise) Gross profit from continuing operations Operating income from continuing operations Income before taxes from continuing operations Income taxes 5 Net income from continuing operations Net income from discontinued operations 6 Net income Basic EPS from continuing operations (USD) 7 Basic EPS from discontinued operations (USD) 7 Basic EPS (USD) 7 IFRS Accounting Amortization of intangible Standards assets 1 results Acquisition or divestment of businesses and related items 3 Impairments 2 3 319 3 730 3 730 310 3 088 3 088 – 25 – 25 34 188 9 769 9 123 – 551 8 572 6 282 14 854 4.13 3.02 7.15 Other items 4 Core results 142 37 959 – 190 16 372 18 15 934 – 2 488 13 446 889 14 335 6.47 0.43 6.90 The following are adjustments to arrive at core gross profit from continuing operations Cost of goods sold – 12 472 3 319 310 142 – 8 701 The following are adjustments to arrive at core operating income from continuing operations Selling, general and administration Research and development Other income Other expense – 12 517 – 11 371 1 772 – 2 303 28 – 12 489 411 2 737 32 – 409 – 8 600 – 10 51 – 174 – 1 196 117 1 245 392 – 890 The following are adjustments to arrive at core income before taxes from continuing operations Other financial income and expense 222 208 430 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 to technologies 2 Impairments: cost of goods sold, research and development, other income and other expense include net impairment charges related to intangible assets; other income and other expense includes also net impairment charges related to property, plant and equipment 3 Acquisition or divestment of businesses and related items, including restructuring and integration charges: research and development include restructuring and integration cost charges; other income includes a favorable stamp duties tax settlement related to a prior periods acquisition; other income and other expense include also transitional service-fee income and expenses related to the Sandoz distribution, restructuring and integration costs charges and reversals 4 Other items: 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 company-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; cost of goods sold and selling, general and administration includes also adjustments to provisions; research and development also include a write-off of prepaid expenses for a terminated development project; other income and other expense include fair value adjustments, divestment gains, losses and gains on financial assets, legal related items, adjustments to environmental provisions; other income includes also gains from the divestment of products and curtailment gains; other expenses also includes a fair value adjustment on a contingent receivable and other costs and items; other financial income and expense includes the impact of IAS 29 “Financial reporting in Hyperinflation Economies” for subsidiaries operating in hyperinflation economies and foreign exchange losses 5 Taxes on the adjustments between IFRS Accounting Standards and core results, for each item included in the adjustment, take into account 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 6.8 billion to arrive at the core results before tax amounts to USD 1.9 billion and the average tax rate on the adjustments was 28.4%. 6 For details on discontinued operations reconciliation from IFRS Accounting Standards net ncome to core net income refer to page 70. 7 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG. 67 Item 5. Operating and Financial Review and Prospects 2022 (USD millions unless indicated otherwise) Gross profit from continuing operations Operating income from continuing operations Income before taxes from continuing operations Income taxes from continuing operations 5 Net income from continuing operations Net income from discontinued operations 6 Net income Basic EPS from continuing operations (USD) 7 Basic EPS from discontinued operations (USD) 7 Basic EPS (USD) 7 IFRS Accounting Amortization Standards of intangible assets 1 results Acquisition or divestment of businesses and related items 3 Impairments 2 3 427 3 585 3 585 314 1 664 1 664 31 879 7 946 7 177 – 1 128 6 049 906 6 955 2.77 0.42 3.19 Other items 4 Core results – 29 35 591 4 4 1 595 14 794 1 693 14 123 – 2 177 11 946 1 406 13 352 5.48 0.64 6.12 The following are adjustments to arrive at core gross profit from continuing operations Other revenues Cost of goods sold 1 255 – 11 582 3 427 314 – 86 1 169 57 – 7 784 The following are adjustments to arrive at core operating income Selling, general and administration – 12 193 Research and development – 9 172 158 Other income Other expense 696 – 3 264 953 – 1 398 50 – 12 143 – 206 – 8 267 – 4 8 – 400 2 180 291 – 678 The following are adjustments to arrive at core income before taxes from continuing operations Other financial income and expense 42 98 140 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 company-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 impact of IAS 29 “Financial reporting in Hyperinflation Economies” for subsidiaries operating in hyperinflation economies and a revaluation impact of a financial liability incurred through the Alcon distribution 5 Taxes on the adjustments between IFRS Accounting Standards 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 6.9 billion to arrive at the core results before tax amounts to USD 1.0 billion and the average tax rate on the adjustments was 15.1%. 6 For details on discontinued operations reconciliation from IFRS Accounting Standards net income to core net income please refer to page 71. 7 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 from continuing operations Operating income from continuing operations Income before taxes from continuing operations Income taxes from continuing operations 5 Net income from continuing operations Net income from discontinued operations 6 Net income Basic EPS from continuing operations (USD) 7 Basic EPS from discontinued operations (USD) 7 Basic EPS (USD) 7 IFRS Accounting Amortization Standards of intangible assets 1 results Acquisition or divestment of businesses and related items 3 Impairments 2 Other items 4 Core results 32 239 10 056 24 530 – 1 625 22 905 1 113 24 018 10.22 0.49 10.71 3 419 3 528 3 738 619 41 619 – 14 531 344 247 301 36 002 14 491 14 657 – 2 129 12 528 1 566 14 094 5.59 0.70 6.29 The following are adjustments to arrive at core gross profit from continuing operations Cost of goods sold – 11 735 3 419 344 – 7 972 The following are adjustments to arrive at core operating income from continuing operations Selling, general and administration Research and development Other income Other expense – 12 827 – 8 641 1 620 – 2 335 109 360 – 45 304 71 22 – 12 756 – 8 150 – 66 107 – 1 213 1 023 296 – 901 The following are adjustments to arrive at core income before taxes from continuing operations Income from associated companies Other financial income and expense 15 337 210 – 14 556 – 76 – 16 54 991 – 38 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 company-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 considerations; 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 the impact of IAS 29 “Financial reporting in Hyperinflation Economies” for subsidiaries operating in hyperinflation economies and a revaluation impact of a financial liability incurred through the Alcon distribution 5 Taxes on the adjustments between IFRS Accounting Standards 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 9.9 billion to arrive at the core results before tax amounts to USD 504 million. Excluding the gain on the divestment of our investment in Roche, the tax on the total adjustments of USD 4.5 billion to arrive at the core results before tax amounts to USD 504 million and the average tax rate on the adjustments was 11.3%. 6 For details on discontinued operations reconciliation from IFRS Accounting Standards net income to core net income please refer to page 72. 7 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 2023, 2022 and 2021 reconciliation from IFRS Accounting Standards results to non-IFRS measure core results – Discontinued operations 2023 (USD millions unless indicated otherwise) Gross profit from discontinued operations Operating income from discontinued operations Income before taxes from discontinued operations Income taxes 4 Net income from discontinued operations before gain on distribution of Sandoz Group AG to Novartis AG shareholders Gain on distribution of Sandoz Group AG to Novartis AG shareholders Net income from discontinued operations Basic EPS from discontinued operations (USD) 5 IFRS Accounting Amortization of intangible Standards assets 1 results Acquisition or divestment of businesses and related items Impairments 2 Other items 3 Core results 3 403 265 214 208 422 5 860 6 282 3.02 165 165 165 34 43 43 57 712 718 – 5 860 3 659 1 185 1 140 – 251 889 889 0.43 The following are adjustments to arrive at core gross profit from discontinued operations Cost of goods sold – 4 044 165 34 57 – 3 788 The following are adjustments to arrive at core operating income from discontinued operations Selling, general and administration Research and development Other income Other expense – 1 728 – 671 56 – 795 10 – 1 25 – 1 703 – 24 654 – 661 31 – 141 The following are adjustments to arrive at core income before taxes from discontinued operations Other financial income and expense – 20 6 – 14 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 impairment charges related to property, plant and equipment 3 Other items: cost of goods sold, selling, general and administration, other income and other expense include charges related to the Sandoz distribution, the company-wide rationalization of manufacturing sites and other net restructuring charges and related items; cost of goods sold and selling, general and administration also include adjustments to provisions; other expense includes legal-related items; other financial income and expense includes the impact of IAS 29 “Financial reporting in Hyperinflation Economies” for subsidiaries operating in hyperinflation economies 4 Taxes on the adjustments between IFRS Accounting Standards and core results, for each item included in the adjustment, take into account 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 926 million to arrive at the core results before tax amounts to USD 459 million and the average tax rate on the adjustments was 49.5%. 5 Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG. 70 Item 5. Operating and Financial Review and Prospects 2022 (USD millions unless indicated otherwise) Gross profit from discontinued operations Operating income from discontinued operations Income before taxes from discontinued operations Income taxes from discontinued operations 4 Net income from discontinued operations Basic EPS from discontinued operations (USD) 5 IFRS Accounting Amortization Standards of intangible assets 1 results Acquisition or divestment of businesses and related items Impairments 2 Other items 3 Core results 221 221 221 24 23 23 4 463 1 251 1 194 – 288 906 0.42 93 376 399 4 801 1 871 1 837 – 431 1 406 0.64 The following are adjustments to arrive at core gross profit from discontinued operations Cost of goods sold – 4 937 221 24 93 – 4 599 The following are adjustments to arrive at core operating loss from discontinued operations Selling, general and administration Research and development Other income Other expense – 2 060 – 824 109 – 437 1 – 2 13 2 – 14 282 – 2 047 – 821 93 – 155 The following are adjustments to arrive at core income before taxes from discontinued operations Other financial income and expense – 22 23 1 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 company-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 4 Taxes on the adjustments between IFRS Accounting Standards 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 643 million to arrive at the core results before tax amounts to USD 143 million and the average tax rate on the adjustments was 22.2%. 5 Earnings per share (EPS) is calculated on the amount of net income, attributable to shareholders of Novartis AG. 71 Item 5. Operating and Financial Review and Prospects 2021 (USD millions unless indicated otherwise) Gross profit from discontinued operations Operating income from discontinued operations Income before taxes from discontinued operations Income taxes from discontinued operations 4 Net income from discontinued operations Basic EPS from discontinued operations (USD) 5 IFRS Accounting Amortization Standards of intangible assets 1 results Acquisition or divestment of businesses and related items Impairments 2 Other items 3 Core results 236 236 236 18 34 34 4 771 1 633 1 607 – 494 1 113 0.49 70 194 195 5 095 2 097 2 072 – 506 1 566 0.70 The following are adjustments to arrive at core gross profit from discontinued operations Cost of goods sold – 5 121 236 18 70 – 4 797 The following are adjustments to arrive at core operating loss from discontinued operations Research and development Other income Other expense – 899 232 – 412 9 – 55 62 – 1 – 52 177 – 891 125 – 173 The following are adjustments to arrive at core income before taxes from discontinued operations Other financial income and expense – 4 1 – 3 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 charges related to the company-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 4 Taxes on the adjustments between IFRS Accounting Standards 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 465 million to arrive at the core results before tax amounts to USD 12 million and the average tax rate on the adjustments was 2.6%. 5 Earnings per share (EPS) is calculated on the amount of net income, attributable to shareholders of Novartis AG. 72 Item 5. Operating and Financial Review and Prospects Reconciliation of 2021 IFRS Accounting Standards 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 Company’s performance in comparison with the prior year, we presented the 2021 IFRS Accounting Standards 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 Accounting Standards results and the non- IFRS measures core results and free cash flow to the 2021 results, excluding the impacts related to our Roche investment, due to its divestment. The table also provides a comparison of our 2022 IFRS Accounting Standards results and non-IFRS measures core results and free cash flow from continuing operations as published with the non-IFRS measure 2021 results excluding impacts from the divestment of our Roche investment. 2021 2022 (USD millions unless indicated otherwise) Operating income from continuing operations Income from associated companies Interest expense Other financial income and expense Income taxes 10 056 15 337 – 787 – 76 – 1 625 Our Roche investment impacts excluding Results as the divestment gain published 1 Gain on divestment of our Results excluding impacts from the divestment investment of our Roche investment in Roche Results as published Change in USD % Change in constant currencies % 10 056 7 946 – 21 – 12 – 785 – 14 556 – 16 – 4 – 787 – 92 – 11 – 800 42 – 1 625 – 1 128 nm – 2 nm 31 Net income from continuing operations 22 905 – 785 – 14 572 7 548 6 049 – 20 Basic earnings per share (USD) from continuing operations 10.22 – 0.35 – 6.50 3.37 2.77 – 18 Effective tax rate 2 6.6% 17.7% 15.7% Non-IFRS measures Core operating income from continuing operations 14 491 Core income from associated companies 991 – 995 Core interest expense Core other financial income and expense Core income taxes – 787 – 38 – 2 129 Core net income from continuing operations 12 528 – 995 Core basic earnings per share (USD) from continuing operations 5.59 – 0.45 Core effective tax rate 3 14.5% 14 491 14 794 – 4 – 787 – 38 – 11 – 800 140 – 2 129 – 2 177 11 533 11 946 5.14 5.48 15.6% 15.4% 2 nm – 2 nm – 2 4 7 nm – 3 nm – 9 – 7 10 nm – 3 nm – 11 13 16 Free cash flow from continuing operations 4,5 12 299 – 522 11 777 12 123 3 1 For information on continuing operations and discontinued operations, refer to the Overview section above in this Item 5 and “Item 18. Financial Statements – Note 1. Accounting policies “, “Item 18. Financial Statements – Note 2. Significant transactions – Significant transactions in 2023,” and “Item 18. Financial Statements – Note 31. Discontinued operations.” 2 Effective tax rate is calculated as Income taxes divided by Income before tax. 3 Core effective tax rate is calculated as Core income taxes divided by Core income before tax. 4 Effective January 1, 2023, Novartis revised its definition of free cash flow, to define free cash flow as net cash flows from operating activities less purchases of property, plant and equipment. To aid in comparability, the prior year free cash flow amounts have been revised to conform with the new free cash flow definition. See “-Non-IFRS measures as defined by Novartis.” 5 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 from continuing operations Adjustments for non-cash items Operating income adjusted for non-cash items from continuing operations Dividends received from Roche in Free cash relation to flow excluding dividends received from Roche the distribution of its 2020 net income 2 Free cash flow as published 1 10 056 6 419 16 475 10 056 6 419 16 475 Dividends received from associated companies and others 523 – 522 1 Interest and other financial payments, net Income taxes paid Other operating cash flow items, net Net cash flows from operating activities from continuing operations Purchases of property, plant and equipment Free cash flow from continuing operations – 929 – 1 856 – 848 – 929 – 1 856 – 848 13 365 – 522 12 843 – 1 066 – 1 066 12 299 – 522 11 777 1 Effective January 1, 2023, Novartis revised its definition of free cash flow, to define free cash flow as net cash flows from operating activities less purchases of property, plant and equipment. To aid in comparability, the prior year free cash flow amounts have been revised to conform with the new free cash flow definition. See “-Non-IFRS measures as defined by Novartis.” 2 In 2021, the dividend received from Roche in relation to the distribution of its 2020 net income was received in Q1 2021. 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 Company figures: In USD In constant currencies Percentage point impact 2022 – 61 – 62 – 9 – 10 % change excluding impacts from the divestment % change of our Roche investment 2022 as published 2022 % change excluding impacts from the divestment % change of our Roche investment 2022 Percentage point impact as published 2022 2022 Net income from continuing operations Basic earnings per share (USD) from continuing operations Free cash flow from continuing operations Core net income from continuing operations Core basic earnings per share (USD) from continuing operations – 74 – 73 – 1 – 5 – 2 – 20 – 18 3 4 7 – 54 – 55 – 4 – 9 – 9 – 70 – 69 4 6 – 9 – 7 13 16 74 Item 5. Operating and Financial Review and Prospects 5.B Liquidity and capital resources The following tables summarize the Company’s cash flows and net debt: (USD millions) Net cash flows from operating activities from continuing operations Net cash flows from operating activities from discontinued operations Net cash flows from investing activities from continuing operations Net cash flows used in investing activities from discontinued operations Net cash flows used in financing activities from continuing operations Net cash flows from financing activities from discontinued operations Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents 2023 2022 2021 14 220 13 039 13 365 238 6 719 – 1 123 1 197 1 904 – 436 1 706 4 897 – 689 – 17 564 – 20 681 – 16 290 3 286 100 119 – 32 5 876 – 4 890 26 – 266 2 749 Change in marketable securities, commodities, time deposits and derivative financial instruments – 10 378 – 4 509 14 017 Change in current and non-current financial debts and derivative financial instruments 1 564 3 022 6 847 Change in net debt Net debt at January 1 Net debt at December 31 Cash flow – 2 938 – 6 377 23 613 – 7 245 – 868 – 24 481 – 10 183 – 7 245 – 868 Financial year 2023 compared with 2022 Net cash flows from operating activities from continuing operations amounted to USD 14.2 billion, compared with USD 13.0 billion in 2022. This increase was mainly driven by higher net income from continuing operations adjusted for non-cash items and other adjustments, including divestment gains, which were partly offset by higher income taxes paid, mainly due to the timing of payments. Net cash flows from operating activities from discon- tinued operations amounted to USD 0.2 billion, com- pared with USD 1.2 billion in 2022. This decrease was mainly driven by lower net income from discontinued operations adjusted for non-cash items and other adjust- ments, including divestment gains and the Distribution (spin-off) of the Sandoz business on October 3, 2023. Net cash inflows from investing activities from con- tinuing operations amounted to USD 6.7 billion, com- pared with USD 1.9 billion in 2022. The current year net cash inflows from investing activities from continuing operations were driven by net proceeds of USD 10.6 billion from the sale of marketable securities, commodities and time deposits; USD 2.0 bil- lion from the sale of intangible assets (including USD 1.75 billion cash proceeds from the divestment of the ‘front of eye’ ophthalmology assets to Bausch + Lomb); USD 0.3 billion from the sale of financial assets; and USD 0.2 billion from the sale of property, plant and equipment (including proceeds from the sale and leaseback of real estate). These cash inflows were partly offset by cash outflows of USD 3.6 billion for acquisitions and divest- ments of businesses, net (including the acquisition of Chinook Therapeutics, Inc. for USD 3.1 billion, net of cash acquired USD 0.1 billion, and the acquisition of DTx Pharma Inc. for USD 0.5 billion, net of cash acquired USD 0.1 billion); USD 1.7 billion for purchases of intangible assets; USD 1.1 billion for purchases of property, plant and equipment; and USD 0.1 billion for purchases of financial assets. In 2022, net cash inflows from investing activities from continuing operations of USD 1.9 billion were mainly driven by net proceeds of USD 4.7 billion from the sale of marketable securities, commodities and time depos- its; and USD 0.5 billion from the sale of intangible assets, financial assets and property, plant and equipment. These cash inflows were partly offset by cash outflows of USD 1.3 billion for purchases of intangible assets; USD 0.9 billion for purchases of property, plant and equip- ment; USD 0.1 billion for purchases of financial assets; and USD 0.8 billion for acquisitions and divestments of businesses, net (primarily the acquisition of Gyroscope Therapeutics Holdings plc for USD 0.8 billion). Net cash outflows used in investing activities from discontinued operations amounted to USD 1.1 billion, compared with USD 0.4 billion in 2022. The current year mainly includes the cash outflow of USD 0.7 billion due to the derecognition of cash and cash equivalents of the Sandoz business following the Distribution (spin-off) on October 3, 2023. Net cash outflows used in financing activities from continuing operations amounted to USD 17.6 billion, com- pared with USD 20.7 billion in 2022. The current year net cash outflows used in financing activities from continuing operations were mainly driven by USD 8.6 billion for net treasury share transactions; USD 7.3 billion for the dividend payment; USD 2.2 billion for the repayment of two EUR denominated bonds (notional amounts of EUR 1.25 billion and of EUR 0.75 billion) at maturity. Payments of lease liabilities amounted to USD 0.3 billion. These cash outflows were partly off- set by cash inflows of USD 0.5 billion from the net increase in current financial debts. In 2022, net cash outflows used in financing activi- ties from continuing operations of USD 20.7 billion were 75 Item 5. Operating and Financial Review and Prospects 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 lia- bilities. These cash outflows were partly offset by cash inflows of USD 0.3 billion from the net increase in cur- rent financial debts. The current year net cash inflows from financing activities from discontinued operations of USD 3.3 bil- lion were mainly driven by USD 3.6 billion cash inflows from bank borrowings (including the USD 3.3 billion Sandoz business borrowings from a group of banks on September 28, 2023) in connection with the Distribution (spin-off) of the Sandoz business to Novartis AG share- holders, partly offset by transaction cost payments of USD 0.2 billion. Net cash inflows from financing activi- ties from discontinued operations in 2022 were USD 119 million. Financial year 2022 compared with 2021 Net cash flows from operating activities from continuing operations amounted to USD 13.0 billion, compared with USD 13.4 billion in 2021. This decrease was mainly due to unfavorable changes in working capital and lower div- idends 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, higher interest received and favorable hedging results. Net cash flows from operating activities from discon- tinued operations amounted to USD 1.2 billion, compared with USD 1.7 billion in 2021. This decrease was mainly driven by lower net income from discontinued operations adjusted for non-cash items and other adjustments, including divestment gains and unfavorable changes in working capital, which were partly offset by lower income taxes paid and lower payments out of provisions. Net cash inflows from investing activities from con- tinuing operations amounted to USD 1.9 billion, compared with USD 4.9 billion in 2021. In 2022, net cash inflows from investing activities from continuing operations were mainly driven by net proceeds of USD 4.7 billion from the sale of marketable securities, commodities and time deposits; and USD 0.5 billion from the sale of intangible assets, financial assets and property, plant and equipment. These cash inflows were partly offset by cash outflows of USD 1.3 billion for purchases of intangible assets; USD 0.9 billion for pur- chases of property, plant and equipment; USD 0.1 billion for purchases of financial assets; and USD 0.8 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 from continuing operations of USD 4.9 billion were mainly driven by proceeds of USD 20.7 billion from the divest- ment of our investment in Roche; USD 2.3 billion from the sale of marketable securities, commodities and time deposits; and USD 1.3 billion from the sale of intangible assets, financial assets and property, plant and equip- ment. These cash inflows were partly offset by USD 16.4 billion cash outflows for purchases of marketable secu- rities and time deposits, mainly due to the investment of a portion of the proceeds from the divestment of our investment in Roche; USD 1.5 billion for purchases of intangible assets (including the upfront payment to in-li- cense tislelizumab from an affiliate of BeiGene, Ltd); USD 1.1 billion for purchases of property, plant and equipment; USD 0.2 billion for acquisitions and divestments of busi- nesses, net; and USD 0.2 billion for purchases of finan- cial assets. Net cash outflows used in investing activities from discontinued operations amounted to USD 0.4 billion, compared with USD 0.7 billion in 2021. The 2021 amount includes the acquisition of GSK’s cephalosporin antibi- otics business for USD 351 million. Net cash outflows used in financing activities from continuing operations amounted to USD 20.7 billion, compared with USD 16.3 billion in 2021. In 2022, net cash outflows used in financing activi- ties from continuing operations 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 from continuing operations 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 EUR denominated bonds (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. Net cash inflows from financing activities from dis- continued operations amounted to USD 119 million, com- pared with USD 26 million in 2021. 76 Item 5. Operating and Financial Review and Prospects 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 Accounting Standards consolidated statements of cash flows to the non-IFRS measure free cash flow: 2023 2022 2021 IFRS Accounting Standards cash flow Adjustments IFRS Accounting Standards cash flow Adjustments 1 Free cash flow IFRS Revised Accounting Standards cash flow Adjustments 1 Free cash flow 1 Revised Free cash flow 1 14 220 14 220 13 039 13 039 13 365 13 365 238 238 1 197 1 197 1 706 1 706 14 458 14 458 14 236 14 236 15 071 15 071 6 719 – 7 779 – 1 060 1 904 – 2 820 – 916 4 897 – 5 963 – 1 066 – 1 123 904 – 219 – 436 154 – 282 – 689 377 – 312 5 596 – 6 875 – 1 279 1 468 – 2 666 – 1 198 4 208 – 5 586 – 1 378 (USD millions) Net cash flows from operating activities from continuing operations Net cash flows from operating activities from discontinued operations Total net cash flows from operating activities Net cash flows from/(used in) investing activities from continuing operations Net cash flows used in investing activities from discontinued operations Total net cash flows from/(used in) investing activities 2 Net cash flows used in financing activities from continuing operations – 17 564 17 564 0 – 20 681 20 681 0 – 16 290 16 290 Net cash flows from financing activities from discontinued operations 3 286 – 3 286 0 119 – 119 0 26 – 26 Total net cash flows used in financing activities 3 Non-IFRS measure free cash flow from continuing operations 1 Non-IFRS measure free cash flow from discontinued operations 1 Total non-IFRS measure free cash flow 1 – 14 278 14 278 0 – 20 562 20 562 0 – 16 264 16 264 13 160 19 13 179 12 123 915 13 038 0 0 0 12 299 1 394 13 693 1 To aid in comparability, the prior year adjustments and free cash flow amounts have been revised to conform with the new free cash flow definition that was effective as of January 1, 2023. 2 With the exception of purchases of property, plant and equipment, all net cash flows from/(used in) investing activities from continuing operations and from discontinued operations are excluded from the free cash flow. 3 Net cash flows (used in)/from financing activities from continuing operations and from discontinued operations are excluded from the free cash flow. 77 Item 5. Operating and Financial Review and Prospects The following table is a summary of the non-IFRS measure free cash flow: (USD millions) Operating income from continuing operations Reversal of non-cash items and other adjustments Depreciation, amortization and impairments Change in provisions and other non-current liabilities Other Operating income from continuing operations adjusted for non-cash items Dividends received from associated companies and others Interest received and other financial receipts Interest paid 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 from continuing operations Purchases of property, plant and equipment Non-IFRS measure free cash flow from continuing operations 1 Non-IFRS measure free cash flow from discontinued operations 1, 2 Total non-IFRS measure free cash flow 1 2023 2022 2021 9 769 7 946 10 056 8 383 61 728 6 965 1 318 451 5 559 806 54 18 941 16 680 16 475 2 735 1 323 523 11 – 768 – 693 – 940 – 2 787 – 1 702 – 1 856 – 1 534 – 774 – 1 571 – 1 138 1 202 342 – 775 – 565 492 14 220 13 039 13 365 – 1 060 – 916 – 1 066 13 160 12 123 12 299 19 915 1 394 13 179 13 038 13 693 1 To aid in comparability, the prior year free cash flow amounts have been revised to conform with the new free cash flow definition that was effective as of January 1, 2023. 2 In 2023, the free cash flow from discontinued operations was a cash inflow of USD 19 million (2022: USD 915 million, 2021: USD 1 394 million) consisting of USD 238 million (2022: USD 1 197 million, 2021: USD 1 706 million) net cash inflows from operating activities from discontinued operations, less purchases of property, plant and equipment by discontinued operations of USD 219 million (2022: USD 282 million, 2021: USD 312 million). Financial year 2023 compared with 2022 Free cash flow from continuing operations amounted to USD 13.2 billion (+9% USD), compared with USD 12.1 bil- lion in 2022, driven by higher net cash flows from oper- ating activities from continuing operations. For the total Company, free cash flow amounted to USD 13.2 billion, compared with USD 13.0 billion in 2022. Financial year 2022 compared with 2021 Free cash flow from continuing operations amounted to USD 12.1 billion, broadly in line with USD 12.3 billion in 2021. For the total Company, free cash flow amounted to USD 13.0 billion, compared with USD 13.7 billion in 2021. 78 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, 2023 Dec 31, 2022 9 514 10 764 1 410 1 431 23 341 29 301 26 879 31 644 205 4 309 3 806 143 3 739 3 521 69 464 80 543 5 913 7 107 3 033 7 175 8 066 2 739 1 035 11 413 13 393 7 517 30 481 36 910 99 945 117 453 46 750 59 423 18 436 20 244 1 598 2 248 4 523 1 538 2 686 4 906 26 805 29 374 4 926 6 175 230 5 146 5 931 251 15 059 17 328 26 390 28 656 53 195 58 030 99 945 117 453 There has been a significant change to the December 31, 2023 consolidated balance sheet resulting from the presentation of the Sandoz business as discontinued operations. This follows the September 15, 2023 share- holders’ approval to spin off the Sandoz business through a dividend in kind distribution to the Novartis AG share- holders (for further information see Item 18. Financial Statements – Note 1. Accounting policies; and – Note 2. Significant transactions). The December 31, 2022 consolidated balance sheet includes the assets and liabilities of the Sandoz business. The December 31, 2023 consolidated balance sheet excludes the assets and liabilities of the Sandoz busi- ness in the individual lines, due to the derecognition of the Sandoz business at the date of the October 3, 2023 distribution (spin-off). The consolidated balance sheet discussion and anal- ysis that follows excludes the impacts of the derecogni- tion of the Sandoz business assets and liabilities at the date of the distribution (spin-off). For information on the assets and liabilities of the Sandoz business derecog- nized at October 3, 2023, the distribution (spin-off) date, see Item 18. Financial Statements – Note 31 – Discontin- ued operations – Net assets derecognized.” Assets Total non-current assets of USD 69.5 billion increased by USD 0.5 billion compared with December 31, 2022, excluding the impact of the derecognition of the Sandoz business non-current assets related to discontinued operations. Intangible assets other than goodwill decreased by USD 3.3 billion mainly due to amortization and impair- ments and the divestment of the ‘front of eye’ ophthal- mology assets, partially offset by the impact of acquisi- tions, including Chinook Therapeutics, Inc. and of DTx Pharma Inc., additions, and favorable currency transla- tion adjustments. Goodwill increased by USD 1.5 billion mainly due to the acquisition of Chinook Therapeutics, Inc and DTx Pharma Inc. Deferred tax assets increased by USD 1.3 billion mainly due to higher deferred tax assets on intangible assets, inventory and tax loss carryforwards. Property, plant and equipment increased by USD 0.6 billion mainly 79 Item 5. Operating and Financial Review and Prospects as additions and favorable currency translation adjust- ments exceeded depreciation charge and disposals. Right-of-use assets, investments in associated compa- nies, financial assets, and other non-current assets were broadly in line with December 31, 2022. Total current assets of USD 30.5 billion decreased by USD 1.7 billion, compared with December 31, 2022, excluding the impact of the derecognition of the Sandoz business non-current assets related to discontinued operations. Cash and cash equivalents, marketable securities, commodities, time deposits and derivative financial instruments decreased by USD 4.4 billion mainly due to the dividend payment, and net purchases of treasury shares and intangible assets, partially offset by the cash generated through operating activities. Inventories increased by USD 0.9 billion. Trade receiv- ables increased by USD 1.3 billion, mainly due to the increase in net sales. Other current assets and income tax receivables were broadly in line with December 31, 2022. 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 ele- vated credit risk. We consider macroeconomic environ- ment, 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 Company to re-evaluate the expected credit loss amount of these trade receivables in future periods. As at December 31, 2023, 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 at December 31, 2023, and 2022, see “Item 18. Financial Statements— Note 16. 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 26.8 billion decreased by USD 1.7 billion, compared with December 31, 2022, excluding the impact of the derecognition of the Sandoz business non-current liabilities related to discontinued operations. Non-current financial debts decreased by USD 1.8 billion mainly due to the reclassification of USD 2.1 billion from non-current to current financial debts of a USD denominated bond with notional amount of USD 2.2 bil- lion maturing in 2024. Non-current lease liabilities, deferred tax liabilities and provisions and other non-current liabilities were broadly in line with December 31, 2022. Total current liabilities of USD 26.4 billion increased by USD 1.5 billion, compared with December 31, 2022, excluding the impact of the derecognition of the Sandoz business non-current liabilities related to discontinued operations. Current financial debts and derivative financial instru- ments were broadly in line with December 31, 2022, as the repayment of a 0.5% coupon bond with a notional amount of EUR 750 million and a 0.125% coupon bond with a notional amount of EUR 1.25 billion was largely off- set by the reclassification of USD 2.1 billion from non-cur- rent to current financial debts of a USD denominated bond with notional amount of USD 2.2 billion maturing in 2024. Provisions and other current liabilities increased by USD 0.6 billion, mainly driven by an increase of the pro- visions for deductions from revenue. Trade payables increased by USD 0.9 billion. Current income tax liabili- ties and current lease liabilities were broadly in line with December 31, 2022. In our key countries, Switzerland and the United States, assessments have been agreed by the tax author- ities up to 2019 in Switzerland and up to 2016 in the United States, with the exception of one open United States position related to the 2007 tax filing. Uncertain- ties also exist on the application of a taxing right based on a German non-resident tax regulation for specific rev- enues derived from German registered intellectual prop- erty 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 Company’s financial condition but could be material to the results of operations or cash flows in a given period. Equity The Company’s equity decreased by USD 12.7 billion to USD 46.8 billion, compared with December 31, 2022. This decrease was mainly due to the dividend in kind to effect the distribution (spin-off) of Sandoz Group AG to the Novartis AG shareholders’ of USD 14.0 billion (for further information see “Item 18. Financial Statements – Note 2. Significant transactions, and Note 31 – Discon- tinued operations”), the cash-dividend payment of USD 7.3 billion and the purchase of treasury shares of USD 8.5 billion. This was partially offset by the net income of USD 14.9 billion, and equity-based compensation of USD 0.9 billion. 80 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 Shares delivered to Sandoz employees as a result of the Sandoz spin-off Taxes on treasury share transactions Decrease of treasury share repurchase obligation under a share buyback trading plan Transaction costs, net of taxes Dividends Dividend in kind to effect the spin-off of Sandoz Net income of the year attributable to shareholders of Novartis AG Other comprehensive income attributable to shareholders of Novartis AG Other movements Balance at end of year Number of outstanding shares (in millions) Equity attributable to Novartis AG shareholders 2023 2022 2023 2022 USD millions USD millions 2 119.6 2 234.9 59 342 67 655 – 87.5 – 126.2 – 8 369 – 10 787 – 1.6 2.8 10.4 0.3 – 1.4 1.9 10.4 0.0 – 148 – 123 146 904 30 14 88 854 5 14 2 809 – 214 – 7 255 – 7 506 – 13 962 14 850 1 200 129 6 955 – 839 217 2 044.0 2 119.6 46 667 59 342 In 2023, Novartis repurchased a total of 87.5 million shares for USD 8.4 billion on the SIX Swiss Exchange second trading line. These repurchases included 52.8 million shares (USD 4.9 billion) under the USD 15 billion share buyback (announced in December 2021 and com- pleted in June 2023) and 23.0 million shares (USD 2.3 billion) under the new up-to USD 15 billion share buyback announced in July 2023. In addition, 11.7 million shares (USD 1.2 billion) were repurchased to mitigate dilution related to participation plans of associates. Furthermore, 1.6 million shares (for an equity value of USD 0.1 billion) were repurchased from associates. In the same period, 13.5 million shares (for an equity value of USD 1.1 billion) were delivered as a result of options exercised and share deliveries related to participation plans of associates. Consequently, the total number of shares outstanding decreased by 75.6 million versus December 31, 2022. These treasury share transactions resulted in an equity decrease of USD 7.4 billion and a net cash outflow of USD 8.6 billion. 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. Treasury shares As at December 31, 2023, our holding of treasury shares amounted to 233.5 million shares, or approximately 10% of the total number of issued shares. Approximately 93.8 million treasury shares were held in entities that restrict their availability for use. As at December 31, 2022, our holding of treasury shares amounted to 284.1 million shares, or approxi- mately 12% of the total number of issued shares. Approx- imately 99.0 million treasury shares were held in entities that restrict their availability for use. 81 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 from continuing operations and operating expenses based on IFRS Accounting Standards values for 2023, 2022 and 2021, for currencies most important to the Company: 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 2023 2022 2021 Net sales from continuing operations % Operating expenses from continuing operations % 1 Net sales from continuing operations % Operating expenses from continuing operations % 1 Net sales from continuing operations % Operating expenses from continuing operations % 1 42 24 1 7 4 2 2 1 2 1 14 37 20 22 4 2 1 5 0 1 0 8 40 25 2 7 4 2 2 2 2 1 13 38 21 22 4 2 1 2 1 1 1 7 38 27 2 7 5 2 3 1 1 1 13 37 23 20 4 3 1 2 1 1 1 7 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 Company’s results of oper- ations as well as the reported value of our assets, liabil- ities 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 Company’s consolidated income and cash flow statements, revenue, expense and cash flow items in local currencies are translated into US dollars at aver- age 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 Company 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 2023 and 2022, 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. Accounting policies,” “Item 18. Financial Statements— Note 6. Interest expense and other financial income and expense,” “Item 18. Financial Statements—Note 16. Trade receivables,” “Item 18. Financial Statements—Note 29. Commitments and contingent liabilities” and “Item 18. Financial Statements—Note 30. Financial instruments – additional disclosures.” 82 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 Company’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 2023 0.665 0.200 0.741 1.113 0.141 1.082 1.243 0.713 1.185 2022 Change in % 0.695 0.194 0.769 1.048 0.149 1.054 1.237 0.766 1.481 – 4 3 – 4 6 – 5 3 0 – 7 – 20 2023 0.683 0.206 0.755 1.189 0.141 1.107 1.275 0.707 1.111 2022 Change in % 0.678 0.189 0.738 1.081 0.144 1.065 1.207 0.757 1.380 1 9 2 10 – 2 4 6 – 7 – 19 The following table provides a summary of the currency impact on key Company figures due to their conversion into US dollars, the Company’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 Change in USD % 2023 Change in Percentage constant point currency impact 2023 currencies % 2023 Change in Change in Percentage constant point currency impact 2022 USD % currencies % 2022 2022 Net sales from continuing operations Operating income from continuing operations Net income from continuing operations Basic earnings per share (USD) from continuing operations Core operating income from continuing operations Core net income from continuing operations Core basic earnings per share (USD) from continuing operations 8 23 42 49 11 13 18 10 39 62 70 18 19 25 – 2 – 16 – 20 – 21 – 7 – 6 – 7 – 1 – 21 – 74 – 73 2 – 5 – 2 5 – 12 – 70 – 69 10 4 6 – 6 – 9 – 4 – 4 – 8 – 9 – 8 nm = not meaningful For additional information on the effects of currency fluctuations, see “Item 18. Financial Statements—Note 30. Financial instruments – additional disclosures.” 83 Item 5. Operating and Financial Review and Prospects Company liquidity, financial debts and net debt The following table shows Company 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 2023 2022 2021 – 18 436 – 20 244 – 22 902 – 6 175 – 5 931 – 6 295 – 24 611 – 26 175 – 29 197 13 393 7 517 12 407 1 035 11 413 15 922 14 428 18 930 28 329 – 10 183 – 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 2023 The Company’s net debt as at December 31, 2023, increased to USD 10.2 billion, compared with USD 7.2 billion as at December 31, 2022. Financial year 2022 The Company’s net debt as at December 31, 2022, increased to USD 7.2 billion, compared with USD 0.9 bil- lion as at December 31, 2021. Total financial debts amounted to USD 24.6 billion as at December 31, 2023, compared with USD 26.2 billion as at December 31, 2022. Non-current financial debts decreased by USD 1.8 billion mainly due to the reclassi- fication of USD 2.1 billion from non-current to current financial debts of a USD denominated bond with notional amount of USD 2.2 billion maturing in 2024. Current financial debts and derivative financial instru- ments were broadly in line with December 31, 2022, as the repayment of a 0.5% coupon bond with a notional amount of EUR 750 million and a 0.125% coupon bond with a notional amount of EUR 1.25 billion was largely off- set by the reclassification of USD 2.1 billion from non-cur- rent to current financial debts of a USD denominated bond with notional amount of USD 2.2 billion maturing in 2024. 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 3.3 billion under these three programs were outstanding as per December 31, 2023 (2022: USD 2.8 billion). Novartis also has a committed credit facility of USD 6.0 billion. This credit facility is provided by a syn- dicate 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, 2023, and December 31, 2022. Total liquidity decreased to USD 14.4 billion com- pared with USD 18.9 billion as at December 31, 2022. As of year-end 2023, 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. Total financial debts amounted to USD 26.2 billion as at December 31, 2022, compared with USD 29.2 billion as 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 as at December 31, 2021, and favorable currency transla- tion 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 as 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 84 Item 5. Operating and Financial Review and Prospects 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 as at December 31, 2023 and December 31, 2022, see “Item 18. Financial Statements— Note 30. 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, see “—Liquidity/short- term funding” and “Item 18. Financial Statements—Note 30. Financial instruments – Additional disclosures— Nature and extent of risks arising from financial instru- ments.” Information regarding the Company’s material con- tractual obligations and commitments as of the end of 2023 are provided in “—Material contractual obligations and commitments.” Liquidity and financial debt by currency The following table provides a breakdown of liquidity and financial debt by currency as at December 31: USD CHF EUR JPY Other Liquidity in % 2023 1 Liquidity in % 2022 1 Liquidity in % 2021 1 Financial debt in % 2023 2 Financial debt in % 2022 2 Financial debt in % 2021 2 67 7 22 4 100 85 4 7 4 100 92 4 2 2 100 67 7 23 1 2 62 6 29 1 2 57 12 27 1 3 100 100 100 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 August 2023, a 5-year EUR denominated bond of EUR 750 million with a coupon of 0.50% was repaid at matu- rity. In September 2023, a 7-year EUR denominated bond of EUR 1.25 billion with a coupon of 0.125% was repaid at maturity. 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 Company’s liquidity amounted to USD 14.4 billion as at December 31, 2023, compared with USD 18.9 billion as at December 31, 2022. Total non-current and current financial debts, including derivatives, amounted to USD 24.6 billion as at December 31, 2023, compared with USD 26.2 billion as at December 31, 2022. The debt/equity ratio increased to 0.53:1 as at December 31, 2023, compared with 0.44:1 as at Decem- ber 31, 2022. The net debt increased to USD 10.2 billion as at December 31, 2023, compared with USD 7.2 billion as at December 31, 2022. 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 Com- pany in the form of cash dividends, loans or advances, but these restrictions do not have an impact on the abil- ity of the Company 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 30. Financial instruments – Additional disclosures—Nature and extent of risks arising from financial instruments—Liquidity risk.” 85 Item 5. Operating and Financial Review and Prospects Material contractual obligations and commitments The Company’s material contractual obligations and commitments, entered into from time to time, consist of the following: • Non-current financial debt, including current portion (see “Item 18. Financial Statements—Note 20. Non-cur- rent financial debt”). For the table showing the matu- rity schedule of our current and non-current financial debt, see “Item 18. Financial Statements—Note 30. Financial instruments—additional disclosures—Nature and extent of risks arising from financial instruments— Liquidity risk”; • Leases on assets used in operations entered into in the ordinary course of business (see “Item 18. Finan- cial Statements— Note 11. Right-of-use assets and lease liabilities”); • Long-term research and development agreements with various institutions and pharmaceutical companies related to intangible assets. These agreements provide for potential milestone payments by Novartis, which are dependent on successful clinical development, or meeting specified sales targets, or other conditions that are specified in the agreements (see “Item 18. Financial Statements—Note 29. Commitments and contingent liabilities—Research and development commitments”); • Commitments related to the acquisition of businesses and interests in intellectual property focused on key disease areas and indications that the Company expects to be growth drivers in the future (see “Item 18. Financial Statements—Note 29. Commitments and contingent Liabilities—Other commitments”). In addi- tion, certain business acquisition arrangements include contingent payments, which the shareholders of the acquired company are eligible to receive upon the achievement of specified milestones. For the table showing the maturity schedule of contingent consid- eration liabilities, see “Item 18. Financial Statements— Note 30. Financial instruments—additional disclo- sures—Nature and extent of risks arising from financial instruments—Liquidity risk”; • Independent pension and other post-employment ben- efit plans (see “Item 18. Financial Statements – Note 26. Post-employment benefits for employees”); and • Property, plant and equipment purchase commitments in the ordinary course of business (see “Item 18. Finan- cial Statements—Note 10. Property, plant and equip- ment”). 86 Item 5. Operating and Financial Review and Prospects 5.C Research and development, patents and licenses Our research and development spending from continu- ing operations totaled USD 11.4 billion, USD 9.2 billion and USD 8.6 billion (non-IFRS measure core research and development from continuing operations USD 8.6 billion, USD 8.3 billion and USD 8.2 billion) for the years 2023, 2022 and 2021, respectively. Novartis has numerous products in various stages of development. For further information on these policies and these products in development, see “Item 4. Infor- mation 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 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 infor- mation. 5.E Critical accounting estimates See “Item 18. Financial Statements—Note 1. Accounting policies” for Critical accounting estimates. 87 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. 88 Item 6. Directors, Senior Management and Employees 6.B Compensation Dear shareholder, On behalf of the Compensation Committee, I am pleased to present our 2023 Novartis Compensation Report. 2023 company performance Novartis delivered a very strong performance in 2023, with a robust strategic (Sandoz spin-off), financial (top- and bottom-line growth) and innovation (large number of positive Phase III readouts) performance. The perfor- mance of our product portfolio (including Entresto, Kes- impta, Kisqali and Scemblix) together with the optimiza- tion of our commercial and supporting functions contributed to sales growth of 10% (constant currencies ‘cc’) and core operating income growth of 18% (cc), com- pared with the previous year. Innovation highlights included positive results from several Phase III clinical trials for investigational medicines with significant sales potential, including Pluvicto, remibrutinib and iptacopan, as well as additional approval indications for Entresto (for pediatric heart failure) in the EU and Cosentyx (for hidradenitis suppurativa) in the EU and US. Regulatory submissions were completed for Kisqali (for early breast cancer) in the EU and US. Transactions provided further substance to the pipeline, notably with the acquisition of Chinook Therapeutics to strengthen our renal portfolio. The one-year 2023 TSR performance of 26% was in the top 3 of our global healthcare peers. On October 4, 2023, we successfully spun off our Sandoz generics and biosimilars business, through a div- idend-in-kind distribution to holders of Novartis shares and American Depositary Receipts (ADRs). Each holder received one Sandoz share for every five Novartis shares or one Sandoz ADR for every five Novartis ADRs. While shareholders received the aforementioned dividend in kind, Performance Share Unit (PSU) and Restricted Share Unit (RSU) holders, including active and former members of the Executive Committee of Novartis (ECN), received instead ‘keep whole awards’ with the same vesting and performance conditions as the under- lying award. This ensured award holders were treated on an economically consistent basis to Novartis share- holders. For more information, see “—Sandoz equity res- toration plan.” 2023 realized compensation The company’s performance in 2023 resulted in an Annual Incentive payout of 185% for the CEO, and in a Long-Term Performance Plan (LTPP) 2021-2023 payout of 122%. These factors, together with an increase of 16% in the vesting price of the 2021-2023 LTPP (when adjusted for the Sandoz spin-off) resulted in the total realized CEO compensation of CHF 16 248 178 in 2023. These three outcomes contributed to the vast majority of the year-on-year increase in realized pay for the CEO. They also impacted the compensation outcome for the other members of the ECN, whose total aggregated com- pensation was CHF 47 205 005. For details on the real- ized compensation, see “—CEO and Executive Commit- tee 2023 realized compensation.” Changes to the executive compensation system in 2024 As part of our annual review, we identified that our exist- ing CEO compensation practices placed us in the low- est quartile versus global healthcare peers. We engaged extensively with our largest shareholders and proxy advi- sors to collect feedback about our executive compen- sation framework, in particular the challenges that Euro- pean companies face in the competition for talent. Following this engagement and the overall positive nature of the feedback received, the Compensation Committee and the Board of Directors agreed that it is necessary to take a global perspective to attract and retain the best talent at the top of the organization, and that the company could be more competitive in this regard. As a result, and while still mindful of the expec- tations of European-based investors and proxy advisors, we made the following changes to our compensation system, effective January 1, 2024: • CEO target compensation: We aspire to continue grow- ing our global business, with a particular focus on the US market. Aligned with this aspiration and our com- pensation philosophy, the Board of Directors decided to adjust the CEO target pay in a way that preserves alignment with shareholders. Specifically, we increased the LTPP target, which is fully performance driven based on three-year forward-looking targets, from 325% to 400% as a percentage of annual base salary. The additional two-year holding period for the CEO remains unchanged, thereby restricting the equities from sale for five years. The Compensation Commit- tee will continue to set stretch targets, with a robust assessment at the end of the cycle. No changes were made to the CEO base salary (beyond ordinary salary increases received by other Swiss employees) or the Annual Incentive target. This is the first significant increase in CEO target pay since 2019 and places his target compensation just above the lowest quartile of global healthcare peers, based on the last disclosed proxy information. • Annual Incentive metrics: The Compensation Commit- tee agreed to replace operating income with core oper- ating income in our ECN Annual Incentive. The Com- pensation Committee agreed that core operating income, which excludes certain one-time or non-recur- ring items, represents a better measure of the Compa- ny’s underlying performance. Additionally, core-ad- justed metrics are more commonly used by our global healthcare peers, which would enable easier peer per- formance comparisons. • Share ownership and Annual Incentive deferral: The Compensation Committee strongly affirms a commit- ment to the principle of aligning the interests of exec- utives with shareholders. To that end, we will continue to enforce an obligation that all ECN members become meaningful shareholders with a requirement to hold a multiple of their salary in Novartis shares. Currently, the Annual Incentive has a 50% mandatory deferral into equity, which is blocked for three years. The Com- pensation Committee decided that this aspect of the Annual Incentive should be more in line with relevant 89 Item 6. Directors, Senior Management and Employees market practice. For this reason, once an ECN mem- ber has met their shareholding requirement, the por- tion of the Annual Incentive that is mandatorily deferred will be reduced to 30%. To reinforce strong share- holder alignment, the CEO’s shareholding requirement will simultaneously be increased from 5x to 6x annual base salary. For more information about these changes, see “—2024 Executive Committee compensation system changes and increases.” 2023 compensation report structure and disclosure The Compensation Committee decided to make the fol- lowing changes to the 2023 Novartis Compensation Report: • The Compensation Report has been reorganized to enhance its readability. For this reason, a detailed pre- sentation of executive compensation outcomes can be found in the first part, and an explanation of our under- lying compensation philosophy, system and gover- nance in the second part. The Board compensation and governance information is in the final section. We trust that you will find this new structure more acces- sible. • In response to shareholder feedback, we provide more disclosure and transparency in the CEO bal- anced scorecard, with an increased focus on the link between pay and performance. • Aligned with our evolution from an organization with separate divisions each with a separate leader into a focused medicines company, we disclose target pay for the CEO (as the highest paid), the CFO and the Presidents of our International and US organizations individually, while all other ECN target pay is aggre- gated, see “—Compensation at grant value for the CEO and Executive Committee”. The Compensation Committee believes that this approach is more com- mercially appropriate while also maintaining our dis- closure at the upper end of Swiss practice. Notwith- standing this change, we continue to disclose the CEO and ECN realized pay, as well as any significant indi- vidual pay increases, buyouts and exit packages. 2024 Annual General Meeting (AGM) On behalf of the Compensation Committee, I would like to thank shareholders for their input and engagement during the consultation process. This has helped us shape the improvements to our compensation system presented here, as well as the changes in the format of the Compensation Report. At the 2024 AGM, as with prior years, shareholders will be asked to vote on: • The maximum aggregate amount of compensation for the Board of Directors from the 2024 AGM to the 2025 AGM • The maximum aggregate amount of compensation for the ECN for the financial year 2025 • This 2023 Compensation Report We trust that this Report and our 2024 Say-on-Pay bro- chure provides you with the information required for you to vote in favor of the above. We continue to welcome your feedback, which is invaluable in driving improve- ments in our compensation system and practices. Simon Moroney, D.Phil. Chair of the Compensation Committee 90 Item 6. Directors, Senior Management and Employees Executive Committee and Board 2023 compensation at a glance CEO pay for performance 2023 Annual Incentive % of target 200% Maximum Payout: 185% of target 2021-2023 Long-Term Performance Plan (LTPP) cycle % of target 200% Maximum 150% 150% 100% Target 100% Target Payout: 122% of target 50% 0% 1 CAGR = compound annual growth rate 50% 0% { • 3rd party sales CAGR1 (102% of target) • Core operating income CAGR (158% of target) • Innovation (108% of target) • Relative TSR (120% of target) CEO and Executive Committee total realized compensation The 2023 total realized compensation for the CEO and Executive Committee members was CHF 63 453 183. For more information, see “—2023 CEO Annual Incentive balanced scorecard”, “ —2021-2023 LTPP cycle performance out- comes” and “ —CEO and Executive Committee 2023 realized compensation.” 2023 annual base salary 2023 pension benefits 2023 Annual Incentive 2021 – 2023 LTPP cycle Other 2023 compensation Currency Cash (amount) Amount Cash & Equity Equity (value at vesting date) Amount Total realized compensation (incl. share price movement) CHF 1 822 334 170 125 5 075 255 8 921 546 258 918 16 248 178 8 551 936 CHF CHF 10 374 269 1 627 708 15 449 571 15 100 093 1 797 833 20 524 826 24 021 639 6 475 697 47 205 005 6 734 615 63 453 183 Vasant Narasimhan (CEO) Aggregate realized compensation of the other 11 Executive Committee members, including the member who stepped down during the financial year 2023 Total Board compensation The total actual compensation earned by Board members in the 2023 financial year is shown in the table below. For more information, see “—Board member total compensation earned for the financial year 2023.” CHF Board Chair Other members of the Board Total 2023 total compensation 3 803 784 4 787 933 8 591 717 91 Item 6. Directors, Senior Management and Employees CEO compensation and performance 2023 fixed pay and benefits Annual base salary The CEO 2023 annual base salary was: CHF 1 828 900 (2.2% salary increase effective as of March 1, 2023, in line with ordinary salary increases received by other Swiss employees). Pension and other benefits The CEO is a member of the Novartis Swiss pension funds, which provide company contributions on the base sal- ary and Annual Incentive up to the legal cap on the insured salary of CHF 882 000. No supplementary pension plans or savings plans are provided. The CEO’s employer pension contributions represent 9.3% of the base sal- ary. 2023 CEO Annual Incentive balanced scorecard This section presents the balanced scorecard for the CEO. Financial performance is measured in constant curren- cies (cc) to reflect operational performance that can be influenced. Performance outcomes for compensation pur- poses may differ from reported numbers in accordance with our compensation adjustments policy e.g. to reflect any currency impacts. Measure Weight (%) Target Performance Financial performance1 Group 3rd Party Sales (cc, USD million) Group Operating Income (cc, USD million) Group Free Cash Flow as a % of 3rd party sales (cc) 60 24 18 18 49 897 9 833 24.6% 52 282 10 673 26.8% Target achievement Significantly Above Significantly above Significantly above Significantly above 1 Group 3rd Party Sales, Group Operating Income and Group Free Cash Flow as a % of 3rd party sales include the continuing operations’ financial performance for the year ended December 31, 2023 and the Sandoz discontinued operations’ financial performance for the nine months ended September 30, 2023. Financial targets were re-calibrated following the Sandoz spin-off by excluding Q4 2023 Sandoz targets. This was to ensure targets were as stretched as the original targets after excluding the impact of Sandoz; and that they remain consistent with our financial reporting. 92 Item 6. Directors, Senior Management and Employees 2023 CEO Annual Incentive balanced scorecard (continued) In addition to the financial targets, the CEO also has five equally weighted strategic objectives across key priority areas, including targets related to environmental, social and governance (ESG) matters. We provide a summary of those targets that most influenced performance and their relevant achievements below. More details can be found in the Novartis in Society Integrated Report 2023. Measure Weight (%) / Performance Strategic objectives 40 Advance our new focused strategy • Sandoz spin-off successfully completed as planned on October 4, 2023 with positive value creation • More than 15 business development and M&A deals signed, strengthening the pipeline across key therapeutic areas and technology platforms Target achievement Above Above Maintain growth momentum and ensure successful launches Deliver pipeline and drive R&D productivity • Strong sales performance for growth drivers: Entresto, Cosentyx, Kesimpta, Kisqali and Significantly above Zolgensma were 105% of 2023 target in cc • Recent launches: Leqvio and Pluvicto, delivered 105% of 2023 target in cc • Fabhalta (iptacopan) launch preparations on track, after US approval was secured for paroxysmal nocturnal hemoglobinuria (PNH) in December • 22 regulatory approvals achieved in US, EU, China and Japan, including: Cosentyx for Above hidradenitis suppurativa (HS) in US and EU; intravenous (IV) formulation of Cosentyx in US; Leqvio for hypercholesterolemia in Japan and China • 18 submissions filed in the US, EU, China and Japan, including for Fabhalta (iptacopan) for PNH in EU and Japan and Kisqali (for early breast cancer) in EU and US • Nine positive phase III readouts/presentations including for Kisqali, Pluvicto, iptacopan, Lutathera, remibrutinib and atrasentan • Strong progress was made in the early-stage pipeline, with seven new molecular entity first patient first visits (NME FPFVs) and six pivotal trial-enabling first patient first visits (PTE-FPFVs), including two NMEs • 23 entries were made into the pre-clinical portfolio Execute on operational excellence & productivity • Core Margin exceeded target 37.9% in cc (vs. 2023 target 36.2%), when including policy Significantly above adjustments and considering 3rd party sales • Organizational transformation initiated in 2022 was largely completed and is on track to Strengthen foundations (ESG/ Human Capital) deliver over USD 1.5bn in savings • Technology transformation programs for our new ERP (Enterprise Resource Planning) system and master data management are on track • Increased weekly production of Pluvicto following US and EU production approval in Milburn and Zaragoza sites. Expanded capacity of sites in Slovenia and Italy to support Kisqali demand • 99.1% regulatory inspections of clinical and manufacturing operations acceptable • Targets for our sustainability-linked bond were exceeded: 1.6m patients reached in LMICs Above with strategic innovative therapies (vs. 2023 target 1.1m); 28.7m patients reached with flagship programs (vs. 2023 target 22.6m) • Invested USD 98.4m in R&D for neglected tropical diseases and malaria • 100% new launches with a global access strategy (vs. 2023 target 100%) • Reduction of greenhouse gas emissions by 63%, water consumption by 50%, and waste sent for disposal by 66% (all in our own operations; vs 2016 baseline) • Employee engagement score was 75 (vs. industry benchmark of 74), an increase of 2 percentage points over prior year • Employee share purchase plan on track: launched in North America, 27 countries in Europe, and 11 countries in Asia and the Middle East. A rollout to employees in other countries is scheduled in the near future • EPIC commitments achieved: 48% female representation in management (vs. 2023 aspiration of 48%–52%); 98% of total headcount with pay transparency to external and/ or internal benchmarks, where available (100% when considering exclusions mainly due to contractual or legal constraints and the ongoing integration of acquired businesses); pay gap at -0.9%, compared with external median +19%; 100% of recruitment no longer using historical salary data • 100% of eligible suppliers risk-assessed using our External Partner Risk Management framework Total 100 Overall assessment and payout for CEO Significantly Above Novartis delivered a very strong performance in 2023, surpassing its targets on almost all measures, a signifi- cant improvement versus 2022. Financial results exceeded target due to a strong performance on sales and significant savings from our organizational restructuring. Our TSR performance for the year 2023 was in the top quartile of the industry. Strategic objectives were also well executed: the spin-off of Sandoz was completed in Q4 2023 and our organic pipeline made good progress with several positive clinical trial results and important regulatory filings. We maintained strong positions in our priority ESG ratings, underscoring our progress in deliv- ering on our ESG commitments. In view of these achievements, the Board of Directors decided on an Annual Incentive payout of 185% (within the range of 0–200%), leading to a total amount of CHF 5 075 255. 93 Item 6. Directors, Senior Management and Employees 2021-2023 LTPP cycle performance outcomes The charts below illustrate the performance of the 2021-2023 LTPP cycle against target. These targets were intro- duced in early 2021 during the Covid pandemic and were set at ambitious levels relative to prevailing market and internal expectations at that time. The Board reviewed these targets again at the end of the cycle and decided they are still appropriate. As with the Annual Incentive, the financial LTPP targets were recalibrated to take the Sandoz spin-off into account. Given that these metrics measure the compound annual growth rate, Sandoz targets were removed for the financial year 2023. For the relative TSR measure, the dividend in kind distribution was treated as a one-time dividend that is not reinvested. A similar approach was taken for the targets in other ongoing cycles. 3RD PARTY SALES CAGR CORE OPERATING INCOME (COI) CAGR (25% weighting) (25% weighting) Vesting range 0–200% of target Vesting range 0–200% of target 8% 6% 4% 2% 0% Maximum: 8.8% (CAGR) Actual: 5.9% (CAGR) Target: 5.8% (CAGR) 3rd party sales CAGR payout 102% of target 14% 10.5% 7% 3.5% 0% Maximum: 14.4% (CAGR) Actual: 12.3% (CAGR) Target: 8.4% (CAGR) COI CAGR payout 158% of target Notes: A minimum achievement of 3.2% CAGR was required to receive a payout under this performance measure Notes: A minimum achievement of 2.8% CAGR was required to receive a payout under this performance measure Novartis achieved 3rd party sales CAGR of 5.9% (in constant currencies – cc) against the 5.8% target set at the beginning of the performance cycle, in large part due to Entresto, Kesimpta and Promacta, partly off- set by Beovu, Kymriah and Cosentyx. Novartis achieved a COI CAGR of 12.3% (cc) against the 8.4% target set at the beginning of the performance cycle as a result of significant productivity savings generated from the creation of our new organiza- tional structure. Following the application of the payout curve, the 3rd party sales CAGR (cc) achievement generates a payout factor of 102% for this met- ric. Following the application of the payout curve, the COI CAGR (cc) achievement generates a payout factor of 158% for this metric. INNOVATION (25% weighting) The following outcomes were considered in our 2021-2023 LTPP cycle innovation performance: • Cosentyx approved in the EU for childhood arthritic conditions; approved in the EU and US for HS; IV formulation approved in US • Entresto approved in the EU for pediatric heart failure; extending reg- ulatory data protection to November 2026 Position 1 – 2 Position 3 – 5 • Kymriah approved in the EU and US for adults with relapsed or refrac- Position 6 – 8 tory follicular lymphoma • Pluvicto approved in the US for the treatment of progressive PSMA Position 9 – 15 RELATIVE TOTAL SHAREHOLDER RETURN (TSR) (25% weighting) Novartis position in the peer group Payout range (% of target) 170% – 200% 130% – 160% 80% – 120% 0% Actual ranking 6th = 120% of target TSR for the 2021-2023 cycle was 31.2%. As a result, Novartis ranked No. 6 out of 15 healthcare companies (including Novartis) resulting in a payout of 120% for this metric. positive mCRPC • Kisqali submissions in EU and US (for early breast cancer) • Iptacopan submission in EU and approval in US for patients with PNH • Submissions for Pluvicto treating metastatic castration-resistant prostate cancer, ligelizumab in chronic spontaneous urticaria and canakinumab as adjuvant treatment in non-small cell lung cancer were delayed or not submitted In Biomedical Research, 19 pivotal trial enabling First Patient First Visits were achieved. Two Oncology targeted therapies and two radio-ligand NMEs were progressed to clinical investigation • Based on input from the Science & Technology Committee (STC), the Board of Directors approved a payout of 108% for this metric. 2021-2023 LTPP CYCLE PAYOUT Overall, the Board of Directors approved a 2021-2023 LTPP cycle payout at 122% of target, within the range of 0–200%. This resulted in an LTPP payout of CHF 8 921 546 for the CEO, including dividend equivalents of CHF 759 557 and Keep Whole Awards of CHF 523 862. The Committee did not exercise any discretion in relation to the vesting or share price changes following the spin-off. 3rd party sales CAGR 102% x 25% + COI CAGR 158% x 25% + Innovation 108% x 25% + Relative TSR 120% x 25% Final vesting 122% of target 94 Item 6. Directors, Senior Management and Employees Historic CEO incentive payouts since appointment The table below presents the CEO Annual Incentive and LTI payouts over the last six years since his appointment, out of a maximum of 200%. The average Annual Incentive and LTI payouts over this period were 132% and 111%, respectively. The high variability of the incentive payouts demonstrates a strong link between pay and performance, and provides evidence of stretch in the targets. For instance, the three lowest LTI payouts correspond to the cycles for which relative TSR performance was below the median of the peer group, and the payout was therefore 0% under this metric. Year ending STI payout LTI payout 2018 1 145% 99% 2019 1 160% 157% 2020 1 100% 126% 2021 100% 107% 2022 100% 57% 2023 185% 122% 1 For these cycles, two LTI plans existed: LTPP and LTRPP. Payouts represent the average CEO weighted payout Interim update regarding ongoing LTPP cycles How performance is tracking against target for our ongoing LTPP performance cycles is reported below. 2022-2024 LTPP cycle After the first two years of the three-year LTPP cycle, 3rd party sales CAGR and core operating income CAGR are tracking ahead of target. Innovation is on track. At the end of 2023, the relative TSR for Novartis was above median among our global healthcare peer group. 2023-2025 LTPP cycle After the first year of the three-year LTPP cycle, 3rd party sales CAGR and core operating income CAGR are ahead of target and innovation is tracking on target. At the end of 2023, the relative TSR for Novartis was in the top three of our global healthcare peer group. PERFORMANCE MEASURES 3rd party sales CAGR (25%) Core operating income CAGR (25%) Innovation (25%) Relative TSR (25%) T On or ahead of target TRACKING PERFORMANCE MEASURES TRACKING T T T T 3rd party sales CAGR (25%) Core operating income CAGR (25%) Innovation (25%) Relative TSR (25%) T T T T 95 Item 6. Directors, Senior Management and Employees CEO and Executive Committee 2023 compensation of joining and departing Executive Committee members Appointment of President, International Patrick Horber Patrick Horber joined the Executive Committee on December 1, 2023 as President, International. In line with the buyout policy of Novartis (see “—CEO and Executive Committee: appointments”), to replace entitlements forfeited from his previous employer as a result of joining Novartis, he was granted buyout awards of CHF 1 058 274 in cash to be paid out in March 2024 as well as CHF 3 084 694 in target PSUs and CHF 2 292 624 in RSUs, both of which will vest between 2024 and 2026. Departure of President, Innovative Medicines International & Chief Commercial Officer Marie-France Tschudin Marie-France Tschudin stepped down from the Executive Committee on September 15, 2023 and started her notice period on October 1, 2023. In determining her termination arrangement, the Compensation Committee ensured that contractual entitlements were respected, and all payments are in line with our plan rules and the Swiss Code of Obligations. Per policy (see “—CEO and Executive Committee: termination arrangements”), during her 12-month notice period, Marie-France is entitled to her base salary, pension, Annual Incentive and other benefits. No severance payments were made. Outstanding equity grants will vest in line with the respective plan rules and are subject to malus and clawback, including requirements defined by the U.S. Securities and Exchange Commission, as well as non-com- pete restrictions. No new LTPP grants will be made during the notice period. 96 Item 6. Directors, Senior Management and Employees CEO and Executive Committee 2023 realized compensation To aid shareholders’ understanding of the link between pay and performance, the Compensation Report discloses the realized compensation for the CEO on an individual basis, and for the other ECN members on an aggregated basis. Disclosing realized compensation means that the Annual Incentive and the LTPP are disclosed at the end of their respective performance cycles, reflecting actual payouts based on performance. The total actual payout may vary year on year depending on multiple factors, including the composition of the Executive Committee and the tenure of its members (as new members may not have equity vestings), compensa- tion increases, payout of variable compensation based on actual performance, share price fluctuations, and divi- dend equivalents. The table below shows compensation for all ECN members for the 2023 financial year, including base salary, pension, other benefits, 2023 Annual Incentive, 2021-23 LTPP cycle payout, and any buyouts paid or vesting within the year. Base salary increases were in line with the average of other Novartis employees, with the exception of three individuals as disclosed in Item 6B of the 2022 Annual Report. The portion of the Annual Incentive paid in shares for the year 2023 is disclosed using the underlying value of Novartis shares at the date of grant. The real- ized values of any other equity awards (including dividend equivalents) are calculated using the share price on the date of vesting. The table also includes the total 2022 realized compensation for all Executive Committee mem- bers for comparative purposes. To determine the appropriateness of 2023 CEO and executive compensation payouts under the Annual Incen- tive and LTPP, the Board of Directors and the Compensation Committee reviewed management’s performance against targets set at the beginning of the cycles as described in “—2023 CEO Annual Incentive balanced score- card” and “—2021-2023 LTPP cycle performance outcomes.” The incentive performance outcomes, combined with base salary and other benefits, pension, keep whole awards and dividend equivalents, resulted in 2023 total realized compensation for the CEO of CHF 16 248 178. Realized compensation for the CEO and Executive Committee (2023 compared with 2022) 2023 2022 In CHF (gross) 1 CEO Other ECN 2 Total CEO Other ECN 3 Total Annual Base Salary 1 822 334 8 551 936 10 374 269 1 786 500 9 122 792 10 909 292 Annual Incentive (performance achieved) Thereof cash Thereof equity LTPP Other payments 8 Pension benefits 10 5 075 255 15 449 571 20 524 826 2 684 321 10 130 159 12 814 480 2 537 599 6 149 179 8 686 778 1 342 125 4 211 841 5 553 966 2 537 656 9 300 392 11 838 048 4 1 342 196 5 918 318 7 260 514 5 8 921 546 15 100 093 24 021 639 6 3 307 422 10 025 047 13 332 469 7 258 918 170 125 6 475 697 6 734 615 9 1 627 708 1 797 833 11 499 445 174 488 9 716 294 10 215 739 1 978 304 2 152 792 12 Total 16 248 178 47 205 005 13 63 453 183 8 452 176 40 972 595 14 49 424 771 1 All compensation amounts are stated gross, before the deduction of social security contributions and income tax paid by the Executive Committee members. Amounts for Executive Committee members paid in USD were converted at a rate of USD 1.00 = CHF 0.8986, which is the same average exchange rate used in the Company’s 2023 consolidated financial statements (a similar rule applies to payments made in other currencies during the year). 2 Aggregate realized compensation of the other 11 Executive Committee members, including Marie-France Tschudin who stepped down during the financial year 2023. 3 Aggregate realized compensation of the other 15 Executive Committee members, including the members who stepped down during the financial year 2022. For more information, see item 6B of the 2022 Annual Report. 4 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 24, 2024) of CHF 93.53 per Novartis share and USD 107.55 per ADR. 5 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. 6 The amount represents the underlying share value of the 264 799 realized LTPP PSUs to the CEO and other Executive Committee members for the 2021-2023 LTPP cycle, including dividend equivalents for the three-year cycle of value CHF 759 557 for the CEO and CHF 1 228 736 for the other Executive Committee members, including the one who stepped down during the financial year 2023. The taxable value is determined using the closing share price, on the day the payout factor is approved by the Board of Directors (i.e., January 24, 2024), of CHF 93.53 per Novartis share and USD 107.55 per ADR. Includes vested keep-whole shares received in connection to the Sandoz spin-off. 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. As such, the information disclosed reflects their pro-rata 2021-2023 LTPP payouts attributable to the period in which they were members of the Executive Committee. Shreeram Aradhye rejoined Novartis, and Patrick Horber, Aharon Gal and Fiona Marshall joined Novartis after the 2021-2023 LTPP awards were made, and therefore did not receive an LTPP award for the 2021-2023 LTPP cycle. 7 Based on the closing share price of January 25, 2023 of CHF 85.30 per Novartis share and USD 92.81 per ADR for all members. 8 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 payments’. 9 Includes 2 042 realized PSUs, which vested on March 31, 2023 and 6 212 realized RSUs, which vested on May 1, 2023 and a cash buyout of CHF 469 071 (for a total value of CHF 1 553 135), to Fiona Marshall in lieu of the Annual Incentive and LTI that she forfeited when leaving her previous employer. 10 Includes social security contributions to the extent that they result in a pension entitlement. Includes also contributions to company provided pension plans. 11 This amount is out of total social security employer contributions of CHF 1 933 476 and pension employer contributions of CHF 1 852 898 paid in 2023 for all Executive Committee members. 12 This amount is out of total social security employer contributions of CHF 3 266 972 and pension employer contributions of CHF 2 608 462 paid in 2022 for all Executive Committee members. 13 Includes CHF 5 975 824 for the member who stepped down during 2023. 14 Includes CHF 20 967 229 for members who stepped down during 2022. 97 Item 6. Directors, Senior Management and Employees The 2023 total realized compensation for the CEO increased compared with the prior year, driven by (i) the higher performance payouts of the 2023 Annual Incentive (185% compared with 100% in 2022) and the 2021-2023 LTPP (122% compared with 57% payout for cycle 2020-2022), which will be blocked until January 2026, and (ii) the vest- ing share price of the 2021-2023 LTPP, which was 16% higher than the prior cycle (when adjusted for the Sandoz spin-off). For more information on the performance outcomes, see “—2023 Annual Incentive CEO balanced score- card” and “—2021-2023 LTPP cycle performance outcomes.” The performance outcomes of each measure com- pared with 2022 are provided below: ANNUAL INCENTIVE 3rd party sales Operating income 2023 2022 LTPP CYCLE ENDING Significantly above Significantly above Met Met 3rd party sales CAGR Core operating income CAGR Free cash flow/3rd party sales Significantly above Below Innovation Share of peers Strategic objectives Overall assessment CEO payout - 1 Above Significantly above Met Met Met 185% 100% Relative TSR Payout (weighted) 1 Share of peers was removed from the ECN Annual Incentive from performance year 2023, as disclosed in the 2022 Compensation Report 2023 102% 158% 108% 120% 122% 2022 43% 93% 92% 0% 57% The strong performance outcomes in 2023 were driven by several factors including: • Sales of Entresto, Kesimpta, Promacta, Lucentis and Ilaris • Savings generated from the new, more efficient organizational structure of Novartis • Strategic milestones achieved, including clinically meaningful Phase III data for multiple assets with blockbuster potential, patient reach in low-and middle-income countries, achievements against our EPIC pledge commitment and the launch of our all-employee share purchase plan • Significant improvement in the rTSR; 6th position for the 2021-2023 cycle (versus 12th position for the cycle end- ing in 2022), driven by a strong one-year 2023 TSR performance of 26% Sandoz equity restoration plan Novartis shareholders received a dividend in kind in Sandoz shares at the spin-off date. PSUs and RSUs held by Novartis employees are not entitled to dividends. To ensure equal treatment of PSU and RSU holders relative to Novartis shareholders, Novartis granted keep whole awards to its employees, including the CEO and members and former members of the Executive Committee. This was done in accordance with the Sandoz spin-off equity resto- ration plan as described in the 2022 Compensation Report: • The keep whole awards had a value similar to that of the dividend in kind that the beneficiary would have received had they been holding Novartis shares • The keep whole awards were granted in the same equity instrument (i.e., PSUs or RSUs) with the same vesting terms and performance conditions (if applicable) as the underlying award The total value of keep whole awards granted to the active members of the Executive Committee was CHF 4 704 902. This is equivalent to the estimated reduction in the value of the Novartis share price due to the dividend in kind dis- tribution, and as such is not considered additional compensation. The amounts realized from the vesting of keep whole awards will however be reported in the ECN realized pay for each respective year. 98 Item 6. Directors, Senior Management and Employees CEO and Executive Committee 2023 compensation at grant In accordance with the Swiss Code of Obligations, Novartis discloses total compensation at grant value for the CEO and Executive Committee. The CEO 2023 compensation at grant increase was mainly driven by the stronger performance on the 2023 Annual Incentive compared with 2022, as detailed in “—CEO and Executive Committee 2023 realized compensation.” 2023 compensation at grant for all ECN members remained broadly the same compared with 2022 (CHF 68 365 598 ver- sus CHF 70 819 358), as the higher performance payouts were offset by a reduction in the number of members reported. In 2022, five members stepped down, including the Sandoz CEO, who was not replaced, compared with one in 2023. The table below discloses the following information about compensation for the CEO and Executive Committee: • 2023 base salary • Actual cash portion and portion deferred in equity of the 2023 Annual Incentive • 2023-2025 LTPP cycle awards, which are reported at target grant date value, based on the assumption that the awards will vest at 100% achievement, excluding any share price movement and dividend equivalents that may be accrued over the performance cycle. The future payout will be determined only after the performance cycle con- cludes in three years (i.e., at the end of 2025), with a payout range of 0% to 200% of the target value • Other payments for 2023, which include other benefits, either paid in cash or granted in equity during the year • 2023 pension benefits • Total 2023 and total 2022 compensation at grant, for comparative purposes The highest-paid individual in 2023 was Vasant Narasimhan, CEO of Novartis. Compensation at grant value for the CEO and Executive Committee (2023 compared with 2022) In CHF (gross) 1 Annual Base Salary 2023 Annual Incentive (performance achieved) 2023-2025 LTPP cycle PSUs (target amount) 2 Other payments 3 Pension benefits 4 Total 2023 5 Total 2022 6 Vasant Narasimhan 1 822 334 5 075 255 5 943 960 258 918 170 125 13 270 592 10 960 639 Victor Bulto 859 085 1 642 520 2 161 211 359 772 137 180 5 159 769 2 948 867 Patrick Horber (from December 1, 2023) 7 83 333 132 560 – 6 455 092 14 007 6 684 992 – Harry Kirsch 1 103 917 2 315 616 2 880 581 47 744 180 055 6 527 912 5 426 373 Other ECN members 5 789 756 10 093 882 12 714 201 1 348 250 1 178 184 31 124 272 30 516 250 Subtotal 9 658 425 19 259 833 23 699 952 8 469 775 1 679 551 62 767 536 49 852 130 Members who stepped down 715 845 1 264 993 2 767 559 731 384 118 282 5 598 062 20 967 229 8 Subtotal Total 715 845 1 264 993 2 767 559 731 384 118 282 5 598 062 20 967 229 10 374 269 20 524 826 9 26 467 511 9 201 159 1 797 833 10 68 365 598 70 819 358 1 All compensation amounts are stated gross, before the deduction of social security contributions and income tax paid by the Executive Committee members. Amounts for Executive Committee members paid in USD were converted at a rate of USD 1.00 = CHF 0.8986, which is the same average exchange rate used in the Company’s 2023 consolidated financial statements (a similar rule applies to payments made in other currencies during the year). 2 The amounts represent the underlying share value of the target number of PSUs granted to Executive Committee members for the 3-year performance cycle, based on the closing share price on the grant date (January 24, 2024) of CHF 93.53 per Novartis share and USD 107.55 per ADR for all members. 3 Includes any other perquisites, benefits in kind, buyouts 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 payments’. 4 Includes social security contributions to the extent that they result in a pension entitlement. Includes also contributions to company provided pension plans. 5 Aggregate compensation at grant for the 12 Executive Committee members, including Marie-France Tschudin who stepped down during the financial year 2023. 6 Aggregate compensation at grant for the 16 Executive Committee members, including the members who stepped down during the financial year 2022. For more information, see item 6B of the 2022 Annual Report. 7 In line with the Company’s buyout policy (see “—CEO and Executive Committee: appointments”), Patrick Horber received buyout awards of CHF 1 058 274 in cash to be paid out in March 2024 as well as CHF 3 084 694 in PSUs, and CHF 2 292 624 in RSUs, both of which will vest between 2024 and 2026, in lieu of the Annual Incentive and LTI that he forfeited when leaving his previous employer. 8 Includes five members (James Bradner, Richard Saynor, John Tsai, Susanne Schaffert and Robert Weltevreden) who stepped down during the financial year 2022. 9 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 24, 2024) of CHF 93.53 per Novartis share and USD 107.55 per ADR. 10 This amount is out of total social security employer contributions of CHF 1 933 476 and pension employer contributions of CHF 1 852 898 paid in 2023 for all Executive Committee members. 99 Item 6. Directors, Senior Management and Employees Number of equity instruments granted to the CEO and Executive Committee (2023 compared with 2022) Variable compensation1 2023 Annual Incentive (performance achieved) Equity (number) 2 2023-2025 LTPP PSUs (target number) 3 Other Equity/PSUs (number) Vasant Narasimhan Victor Bulto Patrick Horber (from December 1, 2023) 5 Harry Kirsch Other ECN members Subtotal Members who stepped down 4 Subtotal Total 27 132 8 498 709 24 758 58 099 119 196 6 763 6 763 125 959 69 683 25 914 – 33 770 149 713 279 080 32 445 32 445 311 525 – – 62 981 – – 62 981 – – 62 981 Total 2023 96 815 34 412 63 690 58 528 207 812 461 257 39 208 39 208 500 465 Total 2022 90 145 14 016 – 43 749 218 563 366 473 178 653 178 653 545 126 1 The values of these awards are reported in the table “—Compensation at grant value for the CEO and Executive Committee.” 2 Vested shares, restricted shares and/or RSUs granted under the Annual Incentive for the 2023 performance period. 3 Target number of PSUs granted under the LTPP for the 2023-2025 performance cycle. 4 Marie-France Tschudin stepped down from the Executive Committee on September 15, 2023, and will end her contractual notice period on September 30, 2024. The LTPP grant for the 2023-2025 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 In line with the Company’s buyout policy (see “—CEO and Executive Committee: appointments”), Patrick Horber received buyout awards of 36 129 PSUs, and 26 852 RSUs, both of which will vest between 2024 and 2026, in lieu of the Annual Incentive and LTI that he forfeited when leaving his previous employer. Additional disclosures and other statutory information Fixed and variable compensation The following table summarizes the annual base salary and variable compensation at grant for the financial year 2023 for the CEO and Executive Committee. base salary, the Annual Incentive, realized LTI and other benefits). No other payments (or waivers of claims) were made to former Executive Committee members or to “per- sons closely linked” to them during 2023. Vasant Narasimhan Victor Bulto Patrick Horber (from December 1, 2023) Harry Kirsch Other ECN members 3, 4 Total Annual Variable Base Salary 1 Compensation 2 13.9% 17.1% 1.2% 17.4% 19.3% 15.8% 86.1% 82.9% 98.8% 82.6% 80.7% 84.2% 1 Pro-rated for ECN time. 2 See the table “–Compensation at grant value for the CEO and Executive Committee” with regard to the disclosure principles of variable compensation. 3 For the other seven active members at December 31, 2023. 4 Excludes the member who stepped down during the financial year 2023. Other payments to Executive Committee members During 2023, 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 contracts of Executive Committee members and in line with the Company’s LTI plan rules, payments were made to 12 former members. Of this, CHF 8 725 507 relates to the vesting of LTI awards. In addition, contrac- tual amounts totaling CHF 5 028 812 were made (com- prising the base salary, the Annual Incentive and other ben- efits), and tax equalization on variable compensation granted during international assignments/commuter arrangements amounted to a total of CHF 221 718. The highest paid former Executive Committee member was John Tsai, who received CHF 3 537 225 (comprising the Persons closely linked “Persons closely linked”, a definition used throughout the Annual Report, are (i) their spouse or equivalent, (ii) their children (under 18 years of age), (iii) any legal entities that they own or otherwise control, and (iv) any legal or natu- ral person who is acting as their fiduciary. Malus and clawback Consistent with our “—CEO and Executive Committee compensation philosophy and system,” in 2023 there was no legal or factual basis on which to exercise malus or clawback for current or former Executive Committee members. Award and delivery of equity to Novartis employees During 2023, 11.8 million unvested restricted shares (or ADRs), RSUs and target PSUs were granted, and 10.7 mil- lion Novartis vested shares (or ADRs) were delivered to Novartis employees under various equity-based participa- tion plans. Current unvested equity instruments (restricted shares, RSUs and target PSUs) held by employees repre- sent 0.92% of issued shares. Novartis delivers treasury shares to employees to fulfill these obligations and aims to offset the dilutive impact from its equity-based partici- pation plans. Note 28 to the Company’s audited consolidated financial statements The total expense for the year for compensation awarded to Executive Committee, using IFRS Accounting Stan- dards measurement rules, is presented in Note 28 to the Company’s audited consolidated financial statements. 100 Item 6. Directors, Senior Management and Employees Shares, ADRs and other equity rights owned by Executive Committee members as at December 31, 20231 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, 2023. At this date, no members of the Executive Committee, either individually or together with “per- sons closely linked” to them, owned 1% or more of the outstanding shares or ADRs of Novartis. As at December 31, 2023, all members who had served at least five years on the Executive Committee had 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, 2023 Total as at December 31, 2022 Vasant Narasimhan 250 240 Shreeram Aradhye Victor Bulto Aharon Gal Karen Hale Patrick Horber Harry Kirsch Robert Kowalski Steffen Lang Fiona Marshall Klaus Moosmayer Subtotal 0 1 780 47 660 5 481 0 342 730 0 124 349 5 010 21 559 77 324 17 523 32 000 39 241 18 527 27 561 35 944 21 450 28 821 44 643 15 396 15x 169 770 497 334 406 502 1x 3x 9x 2x 2x 29x 2x 14x 4x 4x 19 573 28 310 6 862 48 182 22 083 82 290 26 085 49 080 16 864 31 187 37 096 62 090 93 763 72 190 49 644 460 964 47 535 202 250 66 517 68 142 14 394 36 386 62 960 28 568 0 399 948 32 495 174 237 34 980 47 421 798 809 358 430 500 286 1 657 525 1 237 891 Members who stepped down 36 174 Subtotal Total 36 174 834 983 33 493 33 493 391 923 81 135 81 135 150 802 150 802 667 092 667 092 581 421 1 808 327 1 904 983 1 Includes holdings of persons closely linked to Executive Committee members (see definition “—Persons closely linked”). 2 Includes unvested shares and ADRs as well as other equity rights applicable for the determination of equity amounts for the share ownership requirements, as per the definition “— CEO and Executive Committee: share ownership requirements.” Also includes unvested keep-whole awards received in connection to the Sandoz spin-off. 3 The multiple is calculated based on the full-year annual base salary and the closing share price as at the end of the 2023 financial year. The share price and ADR price on the final trading day of 2023 was CHF 84.87 and USD 100.97, respectively. 4 The target number of PSUs is disclosed pro-rata to December 31, 2023, unless the award qualified for full vesting under the relevant plan rules. Also includes unvested keep-whole awards received in connection to the Sandoz spin-off. Executive Committee compensation approved by shareholders The total compensation dispensed by the Company in 2023 is within the Say-on-Pay budget approved by the share- holders at the 2022 AGM, including active Executive Committee members and those who stepped down in the course of 2023. 101 Item 6. Directors, Senior Management and Employees CEO and Executive Committee compensation philosophy and system Compensation philosophy 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, as well as their contribution to the Company performance and long-term value creation. The main elements of our compensation philosophy 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 Approach to market benchmarking Significant competition continues to exist for top execu- tive talent with deep expertise and the requisite compe- tencies and proven performance within the pharmaceu- tical and biotechnology industries. For this reason, external peer compensation data is one of a number of key reference points considered by the Board of Direc- tors and the Compensation Committee when making decisions on executive pay, so as to help ensure that the compensation system and levels at Novartis remain com- petitive. Novartis is committed to confirming benchmark- ing practices, including the healthcare peer group, to shareholders 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 global peers that is similar in size and scope of the oper- ations of Novartis enables shareholders to evaluate the compensation year on year and make pay-for-perfor- mance comparisons. Although Novartis is headquartered in Switzerland, more than a third of its sales come from the US market, and the US therefore represents a significant talent pool for the recruitment of executives by the Company. The Compensation Committee uses a pay comparator group of global healthcare companies to ensure that Novartis is able to attract and retain key talent globally. To ensure European and local practices are fully taken into account, the Compensation Committee also uses a cross-indus- try peer group of Europe-headquartered multinational companies of a similar size and scope. • Overarching emphasis on pay for performance GLOBAL HEALTHCARE PEER COMPANIES Alignment with Company strategy Our strategy is to focus on high-value, innovative medicines that alleviate society’s greatest disease bur- dens through technology leadership in R&D and novel access approaches. We made some strategic updates to our compensa- tion framework to ensure it remains aligned to our Com- pany strategy and compensation philosophy, while being market competitive. Details of these changes are pro- vided in “—2024 Executive Committee compensation system changes and increases.” AbbVie Biogen Amgen AstraZeneca Bristol-Myers Squibb Eli Lilly & Co. GlaxoSmithKline Gilead Sciences Johnson & Johnson Novo Nordisk Merck & Co. Pfizer Roche Sanofi EUROPEAN PEER COMPANIES Anheuser-Busch InBev L’Oréal AstraZeneca Merck KGaA Bayer BMW Nestlé Novo Nordisk GlaxoSmithKline Reckitt Benckiser Roche Siemens Sanofi Unilever 102 Item 6. Directors, Senior Management and Employees Components of CEO and Executive Committee compensation The compensation of the CEO and Executive Committee is comprised of fixed pay, including an annual base salary, pension and other benefits, in addition to a variable annual incentive and long-term incentive, which are entirely per- formance based. Fixed pay and benefits Annual base salary Pension and other benefits 2023 Annual Incentive PLAN OVERVIEW Target Annual Incentive • The annual base salary is based on the individual’s role, skills and experience. It is reviewed on an annual basis based on an external benchmark for the role, the performance of the individual, business performance and the external environment, salary increases across the Company and market movements. • Pension and other benefits are provided to the ECN members on the same terms as to all other employees based on local country practices and regulations. No supplementary pension plans or savings plans are pro- vided. • Pension and other benefits do not constitute a significant proportion of total compensation. • Globally the Company operates both defined benefit and defined contribution pension plans (see also Note 26 to the Company’s consolidated financial statements). • Novartis may provide other benefits according to local market practice. These include the provision of a com- pany car, tax and financial planning, and insurance benefits. Annual base salary x Target incentive % = 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 the Company • Strategic objectives (40% weighting) • The balanced scorecard targets and achievements of the CEO are detailed in “—2023 CEO Annual Incentive balanced scorecard.” • The balanced scorecards for individual Executive Committee members include the same company financial targets (60% weighting) as well as individual qualitative and quantitative targets (40% weighting). • 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 Annual base salary x Target incentive % x Payout factor (% of target: 0%–200%) = Realized Annual Incentive Payout vehicle • At the end of the performance period, 50% is paid in cash, and the remaining 50% is delivered in Novartis restricted shares or RSUs, deferred for three years. • 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. 103 Item 6. Directors, Senior Management and Employees 2021–2023 LTPP cycle PLAN OVERVIEW 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 LTPP, 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 • 3rd party sales CAGR (25%) • Core operating income CAGR (25%) • Innovation (25%) • Relative TSR (25%) Target setting Payout range Financial targets: Targets for 3rd party sales CAGR and core operating income CAGR are set based on the strategic plan of the Company. Innovation: Development targets are based on targeted filings communicated at the start of each performance cycle, weighted 70%. The Science & Technology Committee (STC) determines the most important Biomedical Research milestones, weighted 30%. 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 STC. A payout between 150–200% of target is only delivered for truly exceptional performance. Relative TSR: Performance on TSR is assessed relative to our 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. No payout for below median TSR applies. 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 Payout factor + Dividend equivalents = Realized PSUs 104 Item 6. Directors, Senior Management and Employees CEO and Executive Committee: share ownership requirements CEO and Executive Committee members are required to own at least a minimum multiple of their annual base sal- ary in Novartis equity as set out in the table below. The Compensation Committee reviews compliance with the share ownership guideline on an annual basis. Function Ownership level Additional holding requirements Time for achieving level Equity included in determination CEO CFO 5 x annual base salary 3 x annual base salary Equity vesting under the LTPP for a minimum of two years after the vesting date Other EC members None 5 years within hire or promotion. In the event of a substan- tial rise or drop in the share price, the Board of Directors may, at its discretion, amend the time period accordingly. • Vested and unvested Novartis shares or ADRs, and RSUs acquired under Novartis compensation plans (unvested PSUs excluded) • 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 CEO and Executive Committee: appointments 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. 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. 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. 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 105 Item 6. Directors, Senior Management and Employees CEO and Executive Committee: termination arrangements Retirement, termination by the Company for reasons other than performance or conduct, and change of control Pro-rata Annual Incentive is paid to reflect the portion of the year the individual was employed. Awards are released on the original blocking end date. Is subject to forfeiture in the event that a leaver joins a competitor company before the original vesting date. 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. Is subject to forfeiture in the event that a leaver joins a competitor company before the vesting date. Accelerated vesting is applied to equity pro-rated until last date of employment Elements Annual Incentive for period between start of notice and termination date Unvested equity: mandatory deferral of Annual Incentive into restricted shares/ restricted share units (RSUs) Unvested equity: voluntary deferral of Annual Incentive into restricted shares/RSUs/ American Depository Receipts (ADRs) (ADRs applicable for US employees only) Unvested equity: mandatory Long-Term Incentive performance share units (PSUs) Unvested equity: Buyouts or previous equity grants in restricted shares/ restricted share units (RSUs) Voluntary resignation Termination by the Company for misconduct or poor performance Death or long-term disability Annual Incentive is fully forfeited. Pro-rata Annual Incentive is paid to reflect the portion of the year the individual was employed. Unvested restricted shares and restricted share units (RSUs) are forfeited. Accelerated vesting is applied. Awards are not subject to forfeiture during the deferral period. All of the award is forfeited. Accelerated vesting at target is applied. All of the award is forfeited. Accelerated vesting is applied Further details are provided in in our “—Risk Management principles.” Malus and clawback policy 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 all long-term incentive plans. In October 2023, the Compensation Committee adopted a no-fault compensation clawback policy “for the recovery of erroneously awarded compensation” to all members of the Executive Committee and certain executive officers, in the event that the Company is required to prepare an accounting restatement, in full compliance with the U.S. Securities and Exchange Com- mission (SEC) Rule. 106 Item 6. Directors, Senior Management and Employees CEO and Executive Committee performance management To foster a high-performance culture, the Company applies a performance management process based on quan- titative and qualitative criteria. The CEO and the other Executive Committee members are subject to a formal three- step process, which consists of objective setting, performance 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, challenging and align with the strategic prior- ities of the Company. The key factors taken into account when setting targets include: • Internal and external market expectations • The strategic priorities of Novartis • Regulatory factors (e.g., new launches, patent expiries) • Investment in capital expenditure • Novartis 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 chal- lenging 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 Committee discuss their individual performance evaluations and determine their individual compensation. Prior to determining the final outcome, related factors such as perfor- mance relative to peers, wider market conditions, general industry trends and best practice are used to inform the overall performance assessment. Objective setting Performance evaluation Compensation determination • The CEO proposes his 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 business units or functions 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 LTPP 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. 107 Item 6. Directors, Senior Management and Employees 2024 Executive Committee compensation system changes and increases Novartis is today a pure-play innovative medicines company with a focused strategy. The Board of Directors and the Compensation Committee therefore decided to make certain changes to the compensation system, in partic- ular to reflect the ambition of Novartis to build its US business organically and become a top player in the US. In this context, the following changes align with our compensation philosophy, and will enable Novartis to com- pete for talent globally (see “—Compensation philosophy”): Annual Incentive metrics CEO target compensation As of the 2024 performance year, core operating income (which includes adjustments for certain one-time/ non-recurring items such as restructuring and M&A write-downs) replaces operating income in the financial objectives of the Annual Incentive. The weighting remains at 30% of the financial objectives. The Compensation Committee decided to make this change as core oper- ating income: • Is consistent with how investors and analysts measure underlying performance • Encourages executives to make bold investments with high return potential • Aligns with our global healthcare peers and the broader market, enabling more effective performance compar- isons Since 2019, the Board of Directors has made no mate- rial increases to the CEO compensation. As a result, the CEO’s target pay has fallen below the 25th percentile of global healthcare peers. Given the competitive landscape of the industry, the Board of Directors decided to increase the CEO LTPP target from 325% to 400% of his annual base salary as from the cycle 2024-26. This represents a 15.8% increase in total target compensation and moves him out of the bottom quartile to just above the 25th percentile of global healthcare peers, as shown in the figure below. The max- imum payout for the LTPP remains at 200% of target, and there will be no change to the metrics. For this review, we used the same global healthcare companies speci- fied in “—Approach to market benchmarking.” A reconciliation between our core operating income and operating income will continue to be provided in “—Item 5. Operating and Financial Review and Prospects —Non- IFRS measures as defined by Novartis —Reconciliation from IFRS Accounting Standards results to non-IFRS measures core results.” To maintain strong alignment between performance and pay outcomes, the Board of Directors will retain its discretion to consider any adjustment to the Annual Incentive payout of the CEO and other Executive Com- mittee members. Any such decisions will be disclosed in the Compensation Report. Share ownership and Annual Incentive deferral The CEO shareholding requirement increased from 5x to 6x the CEO’s annual base salary. Increasing the CEO shareholding requirement better aligns with shareholder interests and brings Novartis in line with its global health- care peers. The Compensation Committee also decided to amend the portion of the Annual Incentive that is mandatorily deferred into equity to make the compensation system more competitive, particularly in markets where bonus deferrals are uncommon (such as Switzerland and US, where much of our executive talent is sourced). As of the 2024 performance year, the portion of the Annual Incen- tive that is mandatorily deferred into equity is reduced from 50% to 30% for all Executive Committee members, provided that their shareholding requirement is met. Com- pliance with their shareholding requirement must then be maintained. Last disclosed global healthcare peer CEO target compensation (CHF millions) 2023 Novartis CEO target 2024 Novartis CEO target 5 10 15 20 25 Bottom quartile to median Median to upper quartile In making its decision, the Board of Directors was mind- ful of investor perspectives toward executive compen- sation of European companies. It therefore chose to make an increase to the LTPP target only (rather than to the base salary or Annual Incentive), which is fully per- formance-based (i.e. no use of restricted shares or stock options as used by many peers), to align with the Com- pany’s long term strategy. Targets will continue to be stretched as demonstrated in “—Historic CEO incentive payouts since appointment.” The Board of Directors considered it appropriate to act now so as to: • Align with the Company’s ambition to become a top player in the US. This requires a leader with significant knowledge and experience of the US market, and exec- utive compensation in US peer companies is more com- petitive than in Europe • Proactively avoid a further decline of the pay position- ing of our CEO, while providing a fair compensation system that rewards performance • Demonstrate its commitment to establishing a com- petitive system that promotes the retention and attrac- tion of executive talent capable of delivering value to shareholders 108 Item 6. Directors, Senior Management and Employees Executive Committee compensation increases Each year, we collaborate with our independent external advisors to benchmark the compensation levels of the Executive Committee members and assess the competitiveness of their total target compensation. 2024 compen- sation increases have been made in line with demonstrated performance and ability in role as outlined in “—CEO and Executive Committee: appointments.” Accordingly, the following Executive members will receive the following increases, effective 2024: Shreeram Aradhye, President, Development and Chief Medical Officer Dr. Aradhye, appointed in May 2022, led an operational improvement of our Development function, resulting in sig- nificant approvals and submissions for new medicines across US, EU, China and Japan, as well as promising results for many ongoing Phase III programs. Dr. Aradhye will receive a 4.7% increase in annual base salary and a 20% increase in LTPP target, as a percentage of annual base salary. Victor Bulto, President, US Mr. Bulto, appointed in April 2022, delivered a strong performance on almost all brands including Pluvicto, Kisqali, Kesimpta and Scemblix and ensured proactive launch-readiness for Cosentyx HS and Cosentyx IV. Mr. Bulto will receive a 4% increase in annual base salary and a 20% increase in Annual Incentive target, as a percentage of annual base salary. Aharon (Ronny) Gal, Chief Strategy & Growth Officer Mr. Gal, appointed in July 2022, made a significant impact in his first full year with the Company, integrating the new Strategy and Growth team across the key decision-making bodies. Under his leadership, several business devel- opment deals were completed in the year, including Xiidra, and Chinook. Mr. Gal will receive a 4% increase in annual base salary and a 20% increase in LTPP target, as a percentage of annual base salary. Karen Hale, Chief Legal Officer Ms. Hale, appointed in May 2021, successfully managed several large-scale transactions, such as the Sandoz spin- off, as well as successfully handling a number of important legal matters, a civil investigative demand involving Entresto, the Exforge antitrust litigation, a shareholder derivative lawsuit, and critical intellectual property matters. She also played a critical role in managing the obligations under the US Department of Justice’s deferred prose- cution agreement and SEC Order and led both to a timely and satisfactory conclusion. Ms. Hale will receive a 2.8% increase in annual base salary and a 20% increase in LTPP target, as a percentage of annual base salary. Rob Kowalski, Chief People & Organization Officer Mr. Kowalski, appointed in September 2021, provided critical support to the transformation of the company, includ- ing outstanding progress of the restructuring of the organization, successful completion of consultations with works councils and developing the ECN into a high-performing team. Mr. Kowalski will receive a 3.8% increase in annual base salary and a 10% increase in LTPP target, as a percentage of annual base salary. All other Executive Committee members will receive ordinary base salary increases received by other employees in Switzerland or the US, effective March 1, 2024. Their Annual Incentive and LTPP targets remain unchanged. Pay practice for other employees The Board of Directors is equally committed to ensuring fair and competitive compensation practices across the entire organization in 2024. Recent such examples include an approved global budget of USD 420 million for sal- ary adjustments during the year 2024, achieving our EPIC commitments, further closing our global pay gap, and launching the second wave of our all-employee share purchase plan which is now available to 64% of our global population. More details can be found in the Novartis in Society Integrated Report 2023. 109 Item 6. Directors, Senior Management and Employees Board compensation Board member total compensation earned for the financial year 2023 (compared with 2022) Positions as per 31 December Share-Based compensation Audit and Compliance Compensation Nomination Committee Committee membership Committee Board Governance, Sustainability and Science & Technology Committee Risk Committee Cash (CHF) (A) Shares 1 (number) Shares (CHF) (B) Social Security (CHF) (C) Total 2023 (CHF) Total 2022 (CHF) 2 (A)+(B)+(C) Joerg Reinhardt 3 Board Chair Chair 1 900 000 22 606 1 900 000 3 784 3 803 784 3 803 670 Simon Moroney Vice-Chair Chair Patrice Bula Nancy C. Andrews Ton Buechner Elizabeth Doherty Bridgette Heller Daniel Hochstrasser Frans van Houten Ana de Pro Gonzalo Charles L. Sawyers William T. Winters Lead Independent Director • Chair • Chair • • • • • • • • • • • • • • • • • • • John D. Young 4 • 4 Subtotal Board members who stepped down 5 Subtotal Total • • • • 230 000 2 736 230 000 – 460 000 456 228 205 000 2 438 205 000 3 784 413 784 398 670 • 180 000 2 141 180 000 – 360 000 360 000 Chair 210 000 2 497 210 000 4 675 424 675 424 560 • 225 000 2 676 225 000 215 000 2 557 215 000 – – 450 000 450 000 430 000 423 334 185 833 2 085 185 833 4 675 376 341 237 894 162 500 3 565 227 500 4 675 394 675 390 000 • 195 000 2 319 195 000 180 000 2 141 180 000 – 4 283 360 000 – – – 390 000 329 560 360 000 360 000 360 000 360 000 • 4 • 4 150 000 991 150 000 4 675 304 675 – 4 038 333 53 035 4 463 333 26 267 8 527 933 7 993 916 30 000 1 150 30 000 3 784 63 784 512 339 30 000 1 150 30 000 3 784 63 784 512 339 4 068 333 54 185 4 493 333 30 051 8 591 717 8 506 255 1 The amounts shown represent the gross number of shares delivered to each Board member in 2023 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 2023 for their service from the 2022 AGM to the 2023 AGM; and (ii) the first of two equity installments delivered in August 2023 for their service from the 2023 AGM to the 2024 AGM. The second and final equity installment for their service from the 2023 AGM to the 2024 AGM will take place in February 2024. 2 All amounts are before the deduction of social security contributions and income tax paid by the Board members. 3 No additional committee fees for chairing the Science & Technology Committee were delivered to Joerg Reinhardt. 4 From March 7, 2023. 5 Includes the compensation earned by Andreas von Planta, who stepped down at the 2023 AGM, as well as Ann Fudge and Enrico Vanni, who stepped down at the 2022 AGM. Compensation approved and dispensed In CHF Compensation earned during the financial year 2023 Compensation earned for the period January 1 to February 28, 2023 (2 months) Compensation to be earned for the period from January 1 to February 29, 2024 (2 months) Board of Directors 8 591 717 1 417 153 1 435 008 A B C Total compensation earned for the period from the 2023 AGM to the 2024 AGM A-B+C 8 609 573 Amount approved by shareholders at the 2023 AGM Compensation dispensed by the Company within the approved amount 8 750 000 Yes 110 Item 6. Directors, Senior Management and Employees 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 “persons closely linked” to them as at December 31, 2023, is shown in the table below. As at this date, 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 at the same date, no members of the Board of Directors held any share options to purchase Novartis shares. Joerg Reinhardt Simon Moroney Patrice Bula Nancy C. Andrews Ton Buechner Elizabeth Doherty Bridgette Heller Daniel Hochstrasser Frans van Houten Ana de Pro Gonzalo Charles L. Sawyers William T. Winters John D. Young Subtotal Number of shares at December 31, 2023 1,2 655 336 5 992 11 240 10 536 22 958 14 843 6 214 2 824 17 115 2 422 17 493 30 777 682 798 432 169 867 169 867 968 299 Board members who stepped down at the 2023 AGM Andreas von Planta Subtotal Total 1 Includes holdings of persons closely linked to Board members (see definition “—persons closely linked”). 2 Each share provides entitlement to one vote. Additional disclosures and other statutory information Other payments to Board members During 2023, 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 2023” (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 2023, no payments (or waivers of claims) were made to former Board members or to “persons closely linked” to them. Note 28 to the Group’s audited consolidated financial statements The total expense for the year for compensation awarded to Board members, using IFRS Accounting Standards measurement rules, is presented in Note 28 to the Group’s audited consolidated financial statements. 111 Item 6. Directors, Senior Management and Employees Board compensation philosophy and fee structure Philosophy and benchmarking 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. Following the acquisition of Credit Suisse by UBS in 2023, the Board of Directors revised its peer benchmarking group to a larger set of companies comprising ABB, Holcim, Nestle, Richemont, Roche, SwissRe, UBS and Zurich Insurance. This peer group was chosen for Board com- pensation due to the comparability of Swiss legal require- ments, including broad personal and individual liabilities under Swiss law (and criminal liability under Swiss rules regarding board and executive committee compensa- tion related to the Swiss Code of Obligations), and under US law, where applicable (due to the Company’s second- ary listing on the New York Stock Exchange). Each year, the Board of Directors reviews the compensation of its members, including the Board Chair, based on a proposal by the Compensation Committee and advice from its independent advisor, including relevant benchmarking information. To ensure independence of decision-mak- ing, the peer group used for the Board of Directors is dif- ferent 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. Share ownership requirements for Board members To ensure their interests are aligned with those of share- holders 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 of having joined the Board of Directors. 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 having retired from the Board of Directors. As at December 31, 2023, all current and former members of the Board of Directors who were required to meet the minimum share ownership requirements did so. Board fee structure 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 and remain unchanged from the prior term. Aggregate Board com- pensation is aligned with other large Swiss companies. 2023-2024 AGM annual fee 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 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. For 2023, the Board Chair voluntarily waived the increase in compensation to which he is contractually entitled. 112 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 infor- mation, see “—Corporate Governance” in Section 6C of this Report. 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. Approval process for key compensation decisions CEO Compensation Committee Board Chair Board of Directors AGM O T O O O O O O T T O T T Binding Vote Binding Vote Consultative Vote T T T T T Executive Compensation CEO Performance target setting and assessment Individual compensation Other EC members Performance target setting and assessment Individual compensation All Executive Committee Maximum aggregate amount of fixed and variable long-term compensation Board Compensation Board of Directors Fee structure for individual roles on the Board of Directors Maximum aggregate amount of compensation for the next term of office Other Board members, Executive Committee and other employees Compensation report Compensation policy and principles Variable short-term and long-term compensation payout factors for the Group O Propose T Endorse T Approve O O 113 Item 6. Directors, Senior Management and Employees Committee member independence Risk management principles 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 2023 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 Compensation Committee in determining the design and implementation of compensation and bene- fits. In 2023, the Compensation Committee retained Mitul Shah of Deloitte LLP, who was appointed in July 2022, as its independent compensation advisor. The indepen- dent advisor from Deloitte LLP and his respective team that advised and supported the Compensation Commit- tee are not responsible or rewarded for work on senior compensation beyond support provided to the Compen- sation Committee and the People & Organization func- tion. Meetings held in 2023 and self-evaluation In 2023, the Compensation Committee held six formal meetings. For the approval of the Board of Directors, in line with prior years, it collaborated with the Science & Technology Committee to review and endorse the inno- vation targets and achievements of the Annual Incentive and LTPP. The Compensation Committee will conduct a self-evaluation in 2024. The Compensation Committee, with support from its independent advisor, reviews market trends in compen- sation, and changes in corporate governance rules and best practices. Together with the Risk Committee, it also reviews the Novartis compensation systems to ensure that they do not encourage inappropriate or excessive risk-taking, and instead encourage behaviors that sup- port sustainable value creation. A summary of the risk management principles is outlined below. RISK MANAGEMENT PRINCIPLES • Rigorous performance management process, with approval of targets and evaluation of performance of the CEO by the Board of Directors • Balanced mix of short-term and long-term variable compensa- tion elements • Novartis Values and Behav- iors 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 compensation, 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 114 Item 6. Directors, Senior Management and Employees Mandates outside the Novartis Group According to article 34 of the Articles of Incorporation (https://www.novartis.com/investors/company-overview/ corporate-governance), limitations apply to mandates outside the Novartis Group for Board members and Execu- tive Committee members (see “-Item 6.C Board Practices-Board of Directors-Mandates outside the Novartis Group” and “-Item 6.C Board Practices-Executive Committee-Mandates outside the Novartis Group”). The following exter- nal mandates are subject to these limitations and are therefore presented in the Compensation Report. Board Members Joerg Reinhardt Swiss Re AG, Switzerland T • Member of the Board Nancy C. Andrews Charles River Laboratories International, Inc., US T • Member of the Board • Chair of the Science and Technology Committee Maze Therapeutics, Inc., US • Member of the Board Ton Buechner Burckhardt Compression AG, Switzerland T • Board Chair • Chair of the Strategy and Sustainability Committee Swiss Prime Site AG, Switzerland T • Board Chair • Chair of the Sustainability Board Tonality Holding AG, Switzerland (private holding)* • Director Bandinnera GmbH, Switzerland (private holding)* • Manager Great Apes Aviation GmbH, Switzerland (private holding)* • Manager Patrice Bula Schindler AG, Switzerland T • Member and Vice Chair of the Board Froneri Lux Topco Sarl, Luxembourg • Board Chair New Tiger LLC, US • Member of the Board • Chair of the ESG Committee Elizabeth (Liz) Doherty Corbion NV, Netherlands T • Member of the Board • Chair of the Audit Committee Royal Philips NV, Netherlands T • Member of the Supervisory Board • Chair of the Audit Committee Bridgette Heller Aramark, US T • Member of the Board DexCom, Inc., US T • Member of the Board Integral Ad Science Inc., US T • Member of the Board Newman’s Own Inc., US • Member of the Board Executive Committee members Steffen Lang Bachem Holding AG, Switzerland T • Board member T in listed companies * under common ownership Daniel Hochstrasser Daniel Hochstrasser AG, Switzerland • Board Chair • CEO Frans van Houten Absci Corporation, US T • Member of the Board Castor EDC, NL • Board Chair Synthesis Health Inc. US • Member of the Board FvH Capital BV, NL (private family holding) • Director Simon Moroney Biotalys NV, Belgium T • Board Chair • Chair of the Remuneration and Nomination Committee Ana de Pro Gonzalo Mobico Group PLC, UK T • Member of the Board STMicroelectronics NV, Switzerland T • Member of the Supervisory Board • Chair of the Audit Committee Charles Sawyers – William Winters Standard Chartered Bank plc., UK T • Member of the Board • CEO John Young Arvinas Inc, US T • Member of the Board Johnson Controls International plc., Ireland T • Member of the Board Imbria Pharmaceuticals Inc., US • Member of the Board Other Executive Committee members – 115 Statutory Auditor’s Report Statutory Auditor’s Report to the General Meeting of Novartis AG, Basel Report on the Audit of the Compensation Report Opinion We have audited the Compensation Report of Novartis AG (the Company) for the year ended December 31, 2023. The audit was limited to the information pursuant to Art. 734a-734f of the Swiss Code of Obligations (CO) namely the tables “Realized compensation for the CEO and Executive Committee (2023 compared with 2022)” on page 97, “Compensation at grant value for the CEO and Executive Committee (2023 compared with 2022)” on page 99, “Number of equity instruments granted to the CEO and Executive Committee (2023 compared with 2022)” on page 100 and sections “Additional disclosures and other statutory information” (CEO and ECN) on pages 100-101, as well as the “Board compensation” on page 110-111 and “Additional disclosures and other stat- utory information” (BoD) on page 111 of the Compensa- tion Report of Novartis AG for the year ended Decem- ber 31, 2023, hereinafter referred to as “disclosures made on the pages defined as subject to audit”. In our opinion, the information pursuant to Art. 734a-734f CO in the accompanying Compensation Report complies with Swiss law and the Company’s arti- cles 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 Compensation 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 require- ments. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other Information The Board of Directors is responsible for the other infor- mation. The other information comprises the information included in the annual report, but does not include the tables and disclosures in the Compensation Report men- tioned in the “Opinion” paragraph of this report, the con- solidated financial statements, the stand-alone 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 informa- tion and, in doing so, consider whether the other infor- mation is materially inconsistent with the audited finan- cial 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 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 Compensation Report The Board of Directors is responsible for the prepara- tion 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 designing 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 pursuant to Art. 734a-734f CO 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 assur- ance, 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 mate- rial if, individually or in the aggregate, they could reason- ably be expected to influence the economic decisions of users taken on the basis of this Compensation Report. 116 Statutory Auditor’s Report As part of an audit in accordance with Swiss law and SA-CH, we exercise professional judgement and main- tain professional skepticism 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 respon- sive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstate- ment resulting from fraud is higher than for one result- ing from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effective- ness of the Company’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting esti- mates and related disclosures made. We communicate with the Board of Directors or its rel- evant committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Board of Directors or its relevant committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. KPMG AG Richard Broadbelt Licensed Audit Expert Auditor in charge Basel, January 30, 2024 Norman Dittes Licensed Audit Expert 117 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. Novartis AG is subject to and compliant with the laws and regulations of Switzerland (in particular, Swiss com- pany and securities law, 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, appli- cable to foreign private issuers of securities. The Novartis corporate governance principles are 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 (GSNC) regularly reviews both the corporate gov- ernance principles and the key governance documents against evolving best practice standards and new devel- opments in line with our commitment to maintaining the highest standards. Governance bodies GENERAL MEETING OF SHAREHOLDERS Approves operating and financial review, Novartis Group consolidated financial statements, and financial statements of Novartis AG; decides appropriation of available earnings and dividend; approves compensation of Board and Executive Committee; elects Board members, 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, and on effectiveness of internal controls over financial reporting. 118 AUDIT AND COMPLIANCE COMMITTEECOMPENSATION COMMITTEERISK COMMITTEESCIENCE & TECHNOLOGY COMMITTEEGOVERNANCE, SUSTAINABILITY AND NOMINATION COMMITTEE Who we are 7 Novartis in Society Integrated Report 2023 Who we are We are Novartis Novartis is an innovative medicines company. Every day, we work to reimagine medicine to improve and extend people’s lives. In 2023, our medicines reached 284 million patients around the world. Item 6. Directors, Senior Management and Employees Group structure and shareholders Group structure Shareholders 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 33. Novartis principal subsidiaries and associated companies.” Significant shareholders According to the Share Register, as of December 31, 2023, 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 exemptions granted by the Board (see “—Item 6.C Board practices—Shareholder participa- tion—Voting rights, restrictions and representation—Reg- istration restrictions”):* Our operating environment and strategy Organizational structure Novartis is an innovative medicines company. Following the spin-off of Sandoz, it no longer has divisions. Its five organizational units represent parts of the Company along the research and development/production/commercial- ization continuum. These are Biomedical Research, Devel- opment, Operations and the two commercial units – US and International – which are, focused on their respec- tive geographic areas. Our performance in 2023 Governance, risk management and compensation Shareholders registered for their own account: Appendix Emasan AG, Basel 1 UBS Fund Management (Switzerland) AG, Basel Credit Suisse Funds AG, Zurich % holding of share capital Dec 31, 2023 3.9 2.7 2.2 I n t e r national ti o n s O p e r a Research and development n ctions Gl o b a l f u US 1 According to a disclosure notification filed with Novartis AG and the SIX Swiss Exchange, the beneficial owner of the shares registered for Emasan AG is Sandoz – Fondation de Famille, Liechtenstein. Shareholders registered as nominees: 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 Chase Nominees Ltd., London 1 % holding of share capital Dec 31, 2023 3.6 2.9 1.5 1.0 0.4 Shareholder acting as American Depositary Share (ADS) depositary: JPMorgan Chase Bank, N.A., New York 8.3 1 Chase Nominees, Ltd. (Chase) has informed us that as of December 2023, it will no longer register any shareholding positions on its own behalf. Shares held by customers of Chase will be registered for such customer’s own account. According to a disclosure notification filed with Novartis AG, Norges Bank (Central Bank of Norway), Oslo, held 2.4% of the share capital but was not registered in the Share Register as of December 31, 2023. Research and development Shareholdings Operations and global functions At the heart of our company is research and development (R&D): • Biomedical Research is our innovation engine, focused on creating new ways of fi ghting disease and turning scientifi c breakthroughs into new medicines with the potential to change lives. • Development oversees the development of potential new medicines, running large clinical trials to confi rm their safety and effi cacy, and steering the way to regulatory approval for use for patients. Operations manufactures and delivers our Majority holdings in publicly traded Group companies medicines to customers, while also overseeing The Novartis Group owns 70.68% of Novartis India Ltd., IT, procurement, real estate and other support with its registered office in Mumbai, India, and a list- services that we need to run our business. Novartis operates 33 production sites worldwide. ing on the BSE (formerly known as the Bombay Stock Exchange) (ISIN INE234A01025, symbol: HCBA). The Global functions provide support in areas such as fi nance; human resources; legal; ethics, total market value of the 29.32% free float of Novartis risk and compliance; corporate aff airs; and India Ltd. was USD 66.8 million on December 31, 2023, strategy and growth. Novartis Global Health using the quoted market share price at year-end. Apply- and Sustainability focuses on improving health in low- and middle-income countries (LMICs) ing this share price to all the shares of the Company, the and works to embed material sustainability and market capitalization of the whole company was USD ESG topics into our business. 227.8 million, and that of the shares owned by Novartis was USD 161.0 million. Commercial According to a disclosure notification filed with Novartis AG and the SIX Swiss Exchange, BlackRock, Inc., New York, held between 5% and 10% but was registered US and International are our two commercial with less than 2% of the share capital as of Decem- units, focused on their respective geographic ber 31, 2023. areas. They work with customers to provide innovative medicines and services that improve treatment options and raise the quality of care for patients. Novartis sells products in approximately 130 countries worldwide. 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. * Excluding 10.2% of the share capital held as treasury shares by Novartis AG or its fully owned subsidiaries (including Swiss foundations controlled by Novartis AG) 119 PURPOSE, VISION AND ORGANIZATION Our purpose is to reimagine medicine to improve and extend people’s lives. Purpose Vision Our vision is to become the most valued and trusted medicines company in the world. Our company Novartis organizational units represent parts of the research, development, production and commercialization value chain. Item 6. Directors, Senior Management and Employees 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, 2023 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 34 384 108 966 36 299 3 071 458 61 26 Total registered shareholders/shares 183 265 Unregistered shares Total % of share capital 0.09 1.92 4.38 3.46 6.01 5.46 35.45 56.77 43.23 100.00 1 At the record date of the 2023 Annual General Meeting of Shareholders (AGM), unregistered shares amounted to 16.3%. 2 Including significant registered shareholders as listed above Registered shareholders by type As of December 31, 2023, Novartis AG had approxi- As of December 31, 2023 Shareholders in % Shares in % mately 183 000 registered shareholders. Individual shareholders Legal entities 1 Nominees, fiduciaries and ADS depositary Total 96.79 3.17 0.04 100.00 19.98 41.74 38.28 100.00 1 Excluding 10.2% of the share capital held as treasury shares by Novartis AG or its fully owned subsidiaries (including Swiss foundations controlled by Novartis AG) Registered shareholders by country1 As of December 31, 2023 Shareholders in % Shares in % Belgium Canada France Germany Ireland Japan Luxembourg Switzerland 2 United Kingdom United States Other countries Total 0.11 0.04 1.99 5.82 0.48 0.18 0.06 86.84 0.67 0.24 3.57 1.01 0.68 0.48 2.15 0.55 0.52 0.96 54.61 11.99 24.68 2.37 100.00 100.00 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 10.2% of the share capital held as treasury shares by Novartis AG or its fully owned subsidiaries (including Swiss foundations controlled by Novartis AG) 120 Item 6. Directors, Senior Management and Employees Capital structure Share capital Convertible securities and options Novartis AG has not issued convertible or exchangeable bonds, warrants, options or other securities granting rights to shares, other than certain instruments granted under or in connection with equity-based participation plans of employees. 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, 2023, the share capital amounted to CHF 1 115 964 098.48 fully paid-in and divided into 2 277 477 752 registered shares with a nominal value of CHF 0.49 each. Shares are listed on the SIX Swiss Exchange (ISIN CH0012005267, symbol: NOVN) and on the New York Stock Exchange (NYSE) in the form of American Depos- itary Receipts (ADRs) representing American Deposi- tary Shares (ADSs) (ISIN US66987V1098, symbol: NVS). No conditional capital exists as of December 31, 2023 nor has a capital band been introduced in the Compa- ny’s Articles of Incorporation. 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 2021 2022 2023 • Capital reduction by CHF 16.32 million (from CHF 1 233 530 460.00 to CHF 1 217 210 460.00) • 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 1 217 210 460.00 to CHF 1 201 860 626.00) • Authorization of the Board to repurchase shares up to a maximum of CHF 10 billion between the 2022 AGM and the 2025 AGM2 • Capital reduction by CHF 63.12 million (from CHF 1 201 860 626.00 to CHF 1 138 738 876.00) • Authorization of the Board to repurchase shares up to a maximum of CHF 10 billion between the 2023 AGM and the 2026 AGM3 Shares canceled 32 640 000 30 699 668 126 243 500 EGM Shareholder decision 2023 • Capital reduction by CHF 22.77 million (from CHF 1 138 738 876.00 to CHF 1 115 964 098.48) by reducing the par value of each share from CHF 0.50 to CHF 0.49 Average repurchase share price (CHF) 1 80.57 81.82 81.56 AGM Proposal to the shareholders Shares to be canceled 2024 • Capital reduction by CHF 42.90 million (from CHF 1 115 964 098.48 to CHF 1 073 065 943.53) 87 547 255 Average repurchase share price (CHF) 1 86.36 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 121 Item 6. Directors, Senior Management and Employees Key Novartis share data Issued shares Treasury shares 1 Outstanding shares at December 31 2023 2022 2021 2 277 477 752 2 403 721 252 2 434 420 920 233 443 766 284 112 195 199 480 972 2 044 033 986 2 119 609 057 2 234 939 948 Weighted average number of shares outstanding 2 076 794 140 2 181 180 341 2 242 601 173 1 Approximately 94 million treasury shares (2022: 99 million 2021: 102 million) are held in Novartis entities that restrict their availability for use. 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 2023 4.13 4.10 6.85 2022 2.77 2.76 5.98 22.83 28.00 3.30 3.92 3.20 3.51 2021 10.21 10.14 5.96 30.31 3.10 3.33 1 Calculated on the weighted average number of shares outstanding, except year-end equity 2 2023: proposal to shareholders for approval at the AGM on March 5, 2024. 3 Translated into US dollars at the December 31, 2023, rate of USD 1.189 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. 2022 and 2021, 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 2023 14.1 3.9 2022 28.3 3.8 2021 8.2 3.9 1 Based on the Novartis share price at December 31 of each year Year-end share price High 1 Low 1 2023 84.87 93.87 74.62 2022 83.59 87.82 73.98 2021 80.28 86.75 73.44 Key data on ADRs issued in the US Year-end ADR price (USD) High 1 Low 1 Number of ADRs outstanding 2 2023 100.97 105.13 80.03 2022 90.72 93.75 74.61 2021 87.47 98.47 79.70 189 633 312 225 435 680 269 891 321 1 Based on daily closing prices 2 The depositary, JPMorgan Chase Bank, N.A., holds one Novartis AG share for every ADR issued. Year-end market capitalization (USD billions) 2 Year-end market capitalization (CHF billions) 2 206.3 191.5 196.1 173.5 177.2 179.4 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. 122 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” and “R&D day” capital markets event • Governance roadshow and TCs • Board Chair’s meetings with Swiss, US and UK investors • Annual ESG investor event, captioned “Impact and Health Equity” • Sandoz spin-off EGM TOPICS DISCUSSED WITH SHAREHOLDERS DURING 2023: GROWTH: • Replacement power • Growth drivers (including Cosentyx, Entresto, Kisqali, Kesimpta and Pluvicto) • 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 • Sandoz spin-off 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 health inequity • 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 • The linking of the compensation system to key strategic priorities • Risk oversight • Stakeholder expectations from the Board on ESG matters 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, shareholders must declare that they acquired the shares in their own name and for their own account. According to article 5, para- graph 3 of the Articles of Incorporation, the Board may reg- ister nominees with the right to vote. The Share Register is a 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 pro- vides that no shareholder shall be registered with the right to vote for more than 2% of the share capital. Given that share- holder representation at General Meetings has traditionally been comparatively low in Switzerland, Novartis AG consid- ers registration restrictions necessary to prevent a minority shareholder from dominating a General Meeting. The Board may, upon request, grant an exemption. Considerations include if 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, 2023, 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, 2023, was not registered but held 2.4% according to a disclosure notification filed with Novartis AG. No further exemptions were requested in 2023. 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 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, 2023, 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 123 Item 6. Directors, Senior Management and Employees 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 WEB PORTAL Registered shareholders will receive personal invita- tions to the General Meetings along with a registration/ proxy form as well as a personal access code and a QR code to log in to our web portal. By returning the regis- tration/proxy form or using the web portal, shareholders can order an admission ticket for the General Meeting or appoint a representative of their choice by means of a written proxy or the Independent Proxy to vote their shares on their behalf. If the Independent Proxy is appointed, shareholders can also give voting instructions on agenda items or on alternative or additional motions related to the agenda items either (i) following the recommendations of the Board for such alternative or additional motions; or (ii) 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 web portal as well as a refer- ence to www.novartis.com/investors/shareholder-infor- mation/general-meetings, where all relevant information is available. 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. Annual General Meeting (AGM) CONVENING The AGM must be held within six months of the end of our financial year (December 31), and normally takes place in late February or early March. According to article 12a of the Articles of Incorporation (www.novartis.com/investors/ company-overview/corporate-governance), the Board may foresee that shareholders who cannot be present at the venue of the AGM may exercise their rights through electronic means. The Board may at any time until June 30, 20281 also order that the AGM be held electronically without a venue. Extraordinary General Meetings may be requested by the Board, the external auditor, or share- holders representing at least 5% 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. If an explanatory statement is to be included in the notice of meeting, it must be submitted within the same period, and formulated in a short, clear and concise manner. 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, the consolidated financial statements and the report on non-financial matters • Approval of the financial statements of Novartis AG, and the decision on the appropriation of available earnings shown on the balance sheet, in particular with regard to dividends (including any repayment of the statutory capital reserves and the approval of interim dividends and the interim financial statements required for such purpose) • 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 suffi- cient to cover the compensation of newly appointed or promoted Executive Committee members, Novartis may use up to 40% of the amount last approved for the newly appointed or promoted Executive Commit- tee members • Discharge of Board and Executive Committee mem- bers • Delisting of the shares of Novartis AG • 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 1 In accordance with the statement by the Board issued on February 10, 2023, Novartis commits to submitting the corresponding authorization again to a shareholder vote at the 2025 Annual General Meeting, regardless of the time limitation stipulated in the Articles of Incorporation. 124 Item 6. Directors, Senior Management and Employees 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: • An alteration of the purpose of Novartis AG • The consolidation of shares, unless the approval of all affected shareholders is required • The introduction of a conditional capital or a capital band • An implementation of restrictions on the transfer of registe red shares, and the removal of such restrictions • The creation of shares with increased voting powers • The change of the currency of the share capital • The introduction of the deciding vote for the presiding officer at the General Meeting of Shareholders • A provision in the Articles of Incorporation allowing to hold the General Meeting of Shareholders abroad • An increase of the share capital out of equity, by con- tribution in kind, for the purpose of an acquisition of property or the grant of special rights • The delisting of the shares of Novartis AG • A change of the registered office of Novartis AG • The introduction of an arbitration clause in the Articles • An increase of the share capital out of equity, by con- tributions in kind by way of set-off against a receivable and the grant of special rights of Incorporation • The merger, split or transformation of Novartis AG under the Merger Act (subject to mandatory provisions) • A restriction or cancellation of rights of options to sub- • The dissolution of Novartis AG scribe 125 Item 6. Directors, Senior Management and Employees Board of Directors Composition (as per December 31, 2023) BOARD CHAIR: J. Reinhardt VICE-CHAIR: S. Moroney LEAD INDEPENDENT DIRECTOR: P. Bula N. Andrews T. Buechner E. Doherty B. Heller D. Hochstrasser F. van Houten A. de Pro Gonzalo C. Sawyers W. Winters J. Young AUDIT AND COMPLIANCE COMMITTEE E. Doherty (Chair) T. Buechner B. Heller D. Hochstrasser 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 D. Hochstrasser C. Sawyers W. Winters RISK COMMITTEE SCIENCE & TECHNOLOGY COMMITTEE T. Buechner (Chair) N. Andrews E. Doherty A. de Pro Gonzalo J. Young J. Reinhardt (Chair) N. Andrews F. van Houten S. Moroney C. Sawyers J. Young Changes to the Board of Directors Succession planning The GSNC prepares and reviews succession plans for the Board on an annual basis. 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 pro- fessional executive search company – with individual selec- tion criteria defined based on the evolving needs of the Company and a continuing focus on diversity, skills and experience. 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. John Young was elected as a new Board member at the 2023 AGM. Andreas von Planta, who had been a Board member since 2006, did not stand for re-election at the 2023 AGM. The biography of Mr. von Planta can be found in the 2022 Annual Report (page 136), which is available at www.novartis.com/news/media-library/novartis-an- nual-report-2022. 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 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 ethnicity – when evaluating candidates and exploring ways to increase Board diversity. 126 Item 6. Directors, Senior Management and Employees Independence Diversity GENDER GENDER 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, 2023, or has or had, a significant business relationship with Novartis AG or with any other Novartis Group company. No separate meetings of independent Board members were held in 2023. The independence of Board members is assessed annually. Each Board member completes an indepen- dence questionnaire that is reviewed by the GSNC. The GSNC then submits a proposal to the full Board, and the Board determines the independence status of each Board member. Diversity profile EXECUTIVE/NON-EXECUTIVE EXECUTIVE/NON-EXECUTIVE Novartis is dedicated to fostering an inclusive board where individuals from all genders and ethnic backgrounds can thrive and contribute their unique insights. We pledge to continuously advance our efforts to promote gen- der parity in the composition of our Board of Directors within a range of +/- 10 %. A diverse Board ensures that the appropriate balance of skills, expertise, experience and cultural background is represented to discharge its responsibilities and to support long-term value creation for shareholders, patients, employees and other stake- holders. Diversity remains a critical focus area for the Board, and the GSNC continuously examines opportuni- ties to further increase the Board’s diversity when iden- tifying new Board member candidates. We firmly believe that by valuing and respecting these differences, we can drive innovation and make more informed decisions and better serve our stakeholders. 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 27% p Swiss 23% p British 11.5% p Dutch 11.5% p German 11.5% p Spanish 7.5% p Irish 4% p New Zealander 4% p Male p Female 69% 31% p 55–60 p 61–65 p >65 23% 54% 23% p <3 y p 3–6 y p 7–9 y p >9 y 23% 31% 23% 23% 1 Please note that six 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. Within this set of competencies, the Board members were asked to identify their most relevant skills based on their edu- cational background, professional experience and per- sonal 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 54% 7/13 Environmental, social and governance (ESG) 61% 8/13 Data/digital 38% 5/13 Leadership/management 85% 11/13 Finance/accounting 61% 8/13 Law/regulatory/risk management 77% 10/13 127 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 Centers, 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 Education • Doctorate in pharmaceutical sciences, Saarland University, Germany Key skills x Medicine/healthcare/R&D z Environmental, social and governance (ESG) 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’s degree 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’s degree in chemistry, University of Waikato, New Zealand Key skills x Medicine/healthcare/R&D z Environmental, social and governance (ESG) g Leadership/management l Law/regulatory/risk management 128 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. Since 2023, Dr. Andrews is professor in residence of pediatrics at Harvard Medical School and is credited with conducting research that led to advances in understanding iron biology and iron diseases. Professional experience • Professor in residence of pediatrics, Harvard Medical School, US (2023-present) • 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–present) • 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 • Home secretary (since July 2023) and council member, National Academy of Sciences, US • Former council member (2013–2019) and member, National Academy of Medicine, US • Fellow (since April 2007) and former chair (2017 – 2023), American Academy of Arts and Sciences, 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’s and bachelor’s degrees 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 committee, Swiss Prime Site AG, Switzerland • Chair of the board of directors and the strategy and sustainability committee, Burckhardt Compression AG, Switzerland • Member of advisory committee to the Ministry of Economic Affairs and Climate Policy (“Adviescommissie Maatwerkafspraken Verduurzaming Industrie”), Netherlands • 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’s degree in civil engineering, Delft University of Technology, Netherlands Key skills z Environmental, social and governance (ESG) g Leadership/management m Finance/accounting l Law/regulatory/risk management 129 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 and vice chair, 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 z Environmental, social and governance (ESG) y Data/digital g Leadership/management m Finance/accounting 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 (2017–2023) • 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 130 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 x Medicine/healthcare/R&D z Environmental, social and governance (ESG) y Data/digital g Leadership/management m Finance/accounting l Law/regulatory/risk management 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 • Chair of the board of directors, Daniel Hochstrasser AG, Switzerland • 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 l Law/regulatory/risk management 131 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 • Board member, Absci Corporation, US • Board member, Synthesis Health Inc. US • Chair, Castor EDC, Netherlands • Member of the steering committee, European Round Table for Industry (ERT), Belgium (2014-November 2022) • Vice chair and member of the supervisory board, Philips Lighting, Netherlands (2016–2017) Education • Master’s degree in economics and business management, Erasmus University Rotterdam, Netherlands • Bachelor’s degree in economics, Erasmus University Rotterdam, Netherlands Key skills x Medicine/healthcare/R&D z Environmental, social and governance (ESG) y Data/digital g Leadership/management m Finance/accounting l Law/regulatory/risk management 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, Mobico 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’s degree in business studies, Complutense University of Madrid, Spain Key skills z Environmental, social and governance (ESG) y Data/digital g Leadership/management m Finance/accounting l Law/regulatory/risk management 132 Item 6. Directors, Senior Management and Employees 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 • 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’s degree, Princeton University, US Key skills x Medicine/healthcare/R&D 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 • 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 z Environmental, social and governance (ESG) y Data/digital g Leadership/management m Finance/accounting l Law/regulatory/risk management 133 Item 6. Directors, Senior Management and Employees John D. Young Board member since March 7, 2023 | Nationality: British/American | Year of birth: 1964 A scientist by training, John D. Young has over 35 years of experience in the healthcare industry and will bring a wealth of experience in leadership, strategy, business development and commercialization of innovative medicines to the Novartis Board of Directors. He joined Pfizer in 1987 as a sales representative and held positions of increasing seniority across the company, including as a member of Pfizer’s executive leadership team from 2012. As Pfizer’s group president and chief business officer from 2019 until 2022, John also played an integral role in the development and delivery of the Pfizer-BioNTech COVID-19 vaccine. Professional experience • Senior advisor to the CEO, Pfizer, US (January-June 2022) • Group president and chief business officer, Pfizer, US (2019-2022) • Group president, innovative health business, Pfizer, US (2018) • Group president, essential health business, Pfizer, US (2014-2017) • President and general manager, global primary care business unit, Pfizer, US (2012-2013) • Regional president, primary care business unit for Europe and Canada, Pfizer, UK (2009-2012) • Various managerial positions, Pfizer, UK and Australia (1987–2008) Mandates • Board member, Johnson Controls International, Ireland • Board member, Arvinas Inc, US • Board member, Imbria Pharmaceuticals, US • Board member, Haleon, UK (2022-February 2023) • Board member, GSK Consumer Health Joint Venture, UK (2019-2022) • Board member, Biotechnology Innovation Organization (BIO), US (2018-2021) • US bio-pharmaceutical representative, UK Government Life Sciences Council, UK (2007-2021) • Board member, National Committee for US China Relations, US (2014-2017) • Board member, European Federation of Pharmaceutical Industries and Associations (EFPIA), Belgium (2012-2017) Education • Master of business administration, University of Strathclyde, UK • Bachelor’s degree in biological sciences, University of Glasgow, UK Key skills x Medicine/healthcare/R&D g Leadership/management m Finance/accounting l Law/regulatory/risk management Corporate Secretary Charlotte Pamer-Wieser, Ph.D. 134 Item 6. Directors, Senior Management and Employees 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. The 2023 review is currently being undertaken by the consulting firm Egon Zehnder. Its results will be discussed during the second quarter of 2024. Questionnaire and Interviews Review Outcome • Each Board member fills out a • The preliminary results of the • The results of the in-depth 2023 assessment will be discussed during a Board Meeting in the first half of 2024. • Conclusions and results will be shared in the Annual Report 2024. questionnaire prepared by Egon Zehnder. • Individual interviews are scheduled, during which Board members have the opportunity to share their perspectives on their strengths and areas for development, best practices, and interaction between Board members, and between the Board and the Executive Committee. • The Executive Committee members are also interviewed individually to capture their perspectives on the Board’s functioning and its interactions with the Executive Committee, including focusing on ways to improve efficiency. questionnaires and interviews are then presented to the Board Chair. This qualitative review covers topics including Board composition; purpose, scope and responsibilities; processes and governance of the Board and its committees; meetings and pre-reading material; team effectiveness; and leadership and culture. • Thereafter, Egon Zehnder also undertakes a qualitative review with the full Board, sharing its key observations and recommendations, and holds additional individual feedback sessions with each Board member. Trainings Role of the Board and its committees The Board receives regular briefings and trainings on ethics, risks and compliance, ESG and other relevant topics. In 2023, each Board member completed train- ings on the following: • ESG, tailored for Board members • Doing business ethically • ‘Fit to Commit’, which focused on anti-bribery, insider trading and procurement • Information Management Our Chief Legal Officer also provides regular updates to the 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. Board members are expected to commit the time and effort required to fulfil all their Board and committee responsibilities. The Board has delegated certain duties and responsi- bilities to its five committees led by a Board-elected com- mittee 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 meet- ings, Board members receive materials to help them pre- pare for the discussions and to inform decision-making. 135 Item 6. Directors, Senior Management and Employees Attendance at Board and Board Committee Meetings in 2023 Name Position Board J. Reinhardt Board Chair S. Moroney Vice-Chair P. Bula Lead Independent Director N. Andrews T. Buechner E. Doherty B. Heller F. van Houten Member Member Member Member Member D. Hochstrasser Member A. de Pro Gonzalo Member C. Sawyers W. Winters J. Young 1 Member Member Member 1 Mr. Young was elected at the 2023 AGM. Further details can be found on pages 137 – 142. 9/9 9/9 9/9 9/9 9/9 9/9 9/9 9/9 9/9 9/9 9/9 9/9 7/7 Audit and Compliance Committee Compensation Committee Governance, Sustainability and Nomination Committee Risk Committee Science & Technology Committee 8/8 8/8 8/8 8/8 8/8 8/8 6/6 6/6 6/6 6/6 4/4 4/4 4/4 4/4 4/4 4/4 4/4 4/4 4/4 4/4 3/3 3/3 3/3 3/3 3/3 3/3 136 Item 6. Directors, Senior Management and Employees Board of Directors Primary responsibilities • Strategy: decides on the ultimate direction of the Company’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; and 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 2023 • Oversaw the Company’s strategy to become an innovative 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 organizational structure • Reviewed in depth the US market and our priorities to accelerate growth and become a top player in the market, including a briefing on our markets • Discussed updates from all organizational units • Reviewed and discussed strategic considerations around mergers and acquisitions (including the acquisition of Chinook Therapeutics), and the Company’s larger strategic moves to drive sustainable growth • Assessed and decided on the structure of Sandoz following the spin-off, including the designated Sandoz board (and its Committees) and the designated leadership team • Conducted the Sandoz separation through a 100% spin-off, including securing shareholder approval at the extraordinary General Meeting held on September 15, 2023 • Discussed the Company’s ESG strategy, plans and developments, and attended an ESG session jointly organized by the Audit and Compliance Committee and the Governance, Sustainability and Nomination Committee. • Discussed the upcoming non-financial disclosure regulations and Novartis non-financial reporting governance • Discussed longer-term Board succession planning and required profiles • Discussed and reviewed the annual Board self-evaluation Meetings Number of meetings held Number of members Approximate average duration (hours) Meeting attendance 9 13 6:12 100% The Board met nine times in 2023. This included regular meet- ings in January, April, June, August, October and December, J. Reinhardt (Board Chair) S. Moroney (Vice-Chair) P. Bula (Lead Independent Director) N. Andrews T. Buechner E. Doherty B. Heller and additional special meetings to deal with ad hoc matters. Board committees typically meet the day before the meetings D. Hochstrasser F. van Houten of the full Board. The Board held virtual, hybrid and physical A. de Pro Gonzalo meetings, with participants joining in person whenever possible. C. Sawyers W. Winters J. Young1 Documents • Articles of Incorporation of Novartis AG • Board Regulations www.novartis.com/investors/company-overview/corporate-governance 1 Mr. Young was elected at the 2023 AGM and has attended all Board meetings in 2023 following his election. 9 9 9 9 9 9 9 9 9 9 9 9 7 137 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 (FD)** Key activities in 2023 • Reviewed the timelines, milestones and accounting treatment of the Sandoz spin-off • Reviewed the non-financial reporting • Reviewed the accounting and financial reporting, focusing on those areas involving significant risk or judgment • Reviewed and discussed the Company’s approach to non-financial reporting and assurance, including audit scope, processes and the required involvement of the Audit and Compliance Committee (ACC) and the full Board • In a joint session with the GSNC received an overview of the current and emerging ESG reporting standards and regulations, in addition to the ESG reporting roadmap of Novartis • Monitored progress on the delivery of the transformation for growth targets • Received an update on the Novartis fraud risk management framework, including the assessment against the Committee of Sponsoring Organizations of the Treadway Commission (COSO) principles • 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) • Reviewed how Novartis is approaching integrated assurance • Reviewed the Novartis tax policy • Evaluated the performance of the external auditor of Novartis, KPMG, during 2023 • 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 any associated issues or problems Meetings Number of meetings held Number of members Approximate average duration (hours) Meeting attendance 8 6 2:30 100% E. Doherty (Chair, Audit Committee Financial Expert) T. Buechner B. Heller D. Hochstrasser 8 8 8 8 8 F. van Houten A. de Pro Gonzalo (Audit Committee Financial Expert) 8 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 138 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 2023 • Made decisions relating to Executive Committee and wider employee compensation during the year • Reviewed the Sandoz Swiss listing prospectus, Say-on-Pay and incentive plan rules including restoration principles for shareholders and equity holders • Determined the critical performance measures (including financial, strategic, operational, innovation and ESG) to be considered in the Executive incentive plan targets • Assessed the achievement of incentive plan targets for the Executive Committee members • Reviewed shareholder and proxy advisor feedback related to Novartis compensation practices and disclosures, in addition to those of peer companies • Reviewed format of 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 • Reflected on the effectiveness of the Company’s compensation programs in view of becoming a pure-play innovative medicines company Meetings Number of meetings held Number of members Approximate average duration (hours) Meeting attendance Documents 6 4 1:55 100% S. Moroney (Chair) P. Bula B. Heller W. Winters 6 6 6 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 139 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 2023 • Discussed the composition of, and the succession for, the Novartis Board and its committees on a regular basis • Discussed benchmarking data concerning the board size, composition, diversity, and committee structure of peer companies • Discussed the candidates for the Sandoz board and the Sandoz board committee structure • Discussed the new Swiss legal requirements on non-financial reporting and the corresponding shareholder vote on the 2023 report on non-financial matters at the 2024 AGM • Reviewed an update on ESG Strategy with a focus on trends regarding ESG disclosure regulations, access to medicines and environmental sustainability • Regularly reviewed updates on the ESG Scorecard to track progress against the sustainability targets for Innovation & Access, Human Capital Management, Environmental Sustainability and Ethical Standards; reviewed the 2024 ESG targets • Received an update on access to medicines, including the implementation of the Novartis access principles • Received an update on human capital management focused on leadership development, our company culture, the care agenda for associates, and hybrid working • Received an update on environmental sustainability, which covered performance against the targets of Novartis for climate, water, and waste, the impact of the Sandoz separation, the approach to reducing scope 3 emissions (including supplier engagement), and the Novartis carbon reduction glidepath to Net Zero in 2024. • Reviewed the company’s performance to date and upcoming regulations and future Novartis targets on gender balance, equal pay, and pay transparency • In a joint education session with the ACC received an overview of the current and emerging ESG reporting standards and regulations, in addition to the ESG reporting roadmap of Novartis • Evaluated the results of the 2023 AGM as well as investor and analyst feedback from ESG and Governance roadshows held during 2023 • Reviewed and updated the Board Skills Matrix Meetings Number of meetings held Number of members Approximate average duration (hours) Meeting attendance Documents 4 5 2:03 100% P. Bula (Chair) B. Heller D. Hochstrasser C. Sawyers W. Winters 4 4 4 4 4 • 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 140 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)** • Reviews regular updates from designated risk owners as well as the Chief Ethics, Risk & Compliance Officer and/or the Head of Risk & Resilience (FD)** Key activities in 2023 • Received updates on Enterprise Risk Management mitigation measures and results • Received an update on European Union regulatory measures and its associated risks and opportunities • Reviewed and discussed the current risks associated with key product launches in China and the US • Evaluated the risks associated with current geopolitical developments • Discussed the key risks associated with data science and artificial intelligence • Received an update on the Company’s supply network • Received an update on the main risks in our Research and Development organizational units • Reviewed the Source-to-Pay risks and mitigations • Received a deep-dive update on cyber security, including on data loss protection • Discussed enterprise data management and Lean Digital Core/ERP design and implementation Meetings Number of meetings held Number of members Approximate average duration (hours) Meeting attendance Documents 4 5 1:52 100% T. Buechner (Chair) N. Andrews E. Doherty A. de Pro Gonzalo J. Young1 4 4 4 4 4 • 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 Mr. Young became a member of the Risk Committee after the 2023 AGM and has attended all Risk Committee meetings in 2023 following his election. 141 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, at its own discretion, deem desirable in connection with its responsibilities (A/P)* Key activities in 2023 • Reviewed the strategy of our Biomedical Research organizational unit with its new leadership • Reviewed the strategy of the Novartis Venture Fund, and provided input on its future direction • Provided input on the Novartis plan for future equity investing • Reviewed R&D performance metrics, including benchmarking, and the Biomedical Research and Development organizational units’ plans to enhance performance • Provided guidance to Merger & Acquisition (M&A) and Business Development & Licensing (BD&L) teams on scientific aspects of key deals • Discussed the strategy of our Development organizational unit with its new leadership Meetings Number of meetings held Number of members Approximate average duration (hours) Meeting attendance 3 6 3:35 100% J. Reinhardt (Chair) N. Andrews F. van Houten S. Moroney C. Sawyers J. Young1 3 3 3 3 3 3 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 1 Mr. Young became a member of the Science and Technology Committee after the 2023 AGM and has attended all Science and Technology Committee meetings in 2023 following his election. 142 Item 6. Directors, Senior Management and Employees Board Chair Honorary Chairman 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 continuous 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 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 Incorporation (www.novartis.com/investors/company- overview/corporate-governance), the following limitations on mandates apply: Maximum number of mandates 10 4 shareholders, other stakeholders and the public Other listed companies 1 Mandates 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: Mandates in companies that are controlled by Novartis AG No limit Mandates held at the request of Novartis AG or companies controlled by it 5 Maximum number of mandates ”Mandates” shall mean any membership in the board of directors, in the executive board or in the advisory board, or a comparable function under foreign law, in a com- pany with an economic purpose. Mandates in different legal entities that are under joint control are deemed to be one mandate. For a full list of all external mandates subject to the above-mentioned limitations, please refer to the Com- pensation Report (see “—Item 6.B Compensation—”Man- dates outside the Novartis Group”). Vice-Chair and Lead Independent Director Vice-Chair The Vice-Chair has the following responsibilities: • Leads the Board in the event that, and for 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. 143 Item 6. Directors, Senior Management and Employees Executive Committee Composition (as per December 31, 2023) Vasant (Vas) Narasimhan Chief Executive Officer Shreeram Aradhye President, Development & Chief Medical Officer Patrick Horber President, International Victor Bulto President, US Aharon (Ronny) Gal Chief Strategy & Growth Officer Karen L. Hale Chief Legal Officer Harry Kirsch Chief Financial Officer Robert (Rob) Kowalski Chief People & Organization Officer Steffen Lang President, Operations Fiona H. Marshall President, Biomedical Research Klaus Moosmayer Chief Ethics, Risk & Compliance Officer Changes to the Executive Committee Role of the Executive Committee Marie-France Tschudin, President of the Innovative Medicines International unit and Chief Commercial Officer since 2022, stepped down from her role effective Sep- tember 15, 2023. The unit was renamed ‘International’ and was led by Mukul Mehta, its chief financial officer, on an ad interim basis from September 16, 2023 to Novem- ber 30, 2023. Mukul was not a member of the Execu- tive Committee during this period. Patrick Horber, M.D. became President, International, and a member of the Executive Committee effective December 1, 2023. The biography of Marie-France Tschudin can be found in the 2022 Annual Report (page 151), available at www.novartis. com/news/media-library/novartis-annual-report-2022. 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. 144 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 of the Executive Committee of Novartis as of December 31, 2023, 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 82% 18% p <45 p 45–50 p >50 0% 18% 82% p <2 y p 2–4 y p >4 y 45.5% 18% 36.5% 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 TENURE TENURE 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: Mandates in companies that are controlled by Novartis AG No limit Mandates held at the request of Novartis AG or companies controlled by it 5 Maximum number of mandates Mandates Other listed companies 1 Maximum number of mandates 6 2 1 Holding a chair position of the board of directors in other listed companies is not allowed. According to article 34, paragraph 3 of the Articles of Incorporation (www.novartis.com/investors/company- overview/corporate-governance), the following man- dates are not subject to the above-mentioned limitations: ”Mandates” shall mean any membership in the board of directors, in the executive board or in the advisory board, or a comparable function under foreign law, in a com- pany with an economic purpose. Mandates in different legal entities which are under joint control are deemed one mandate. For a full list of all external mandates subject to the above-mentioned limitations, please refer to the Com- pensation Report (see “—Item 6.B Compensation—”Man- dates outside the Novartis Group”). 145 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 • Committee member, Biopharmaceutical CEOs Roundtable (BCR), International Federation of Pharmaceutical Manufacturers & Associations (IFPMA), Switzerland • 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, 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, 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 146 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) Education • Doctorate in biochemistry, Massachusetts Institute of Technology, US • Bachelor’s degree 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 Patrick Horber President, International since December 1, 2023 | Nationality: Swiss | Year of birth: 1970 Professional experience • Senior vice president, AbbVie, president Immunology, AbbVie, US (July 2023–September 2023) • President, US commercial operations, Immunology, AbbVie, US (2020–June 2023) • Vice president and head of global marketing and commercial operations, AbbVie, US (2019–2020) • Vice president and managing director, AbbVie, Germany (2015–2019) • Managing director, AbbVie, Switzerland (2013–2015) • Managing director, Abbott, Switzerland (2012–2012) • Leadership roles at headquarters and country operations, Roche (2005–2012) Mandates • Member of the board and chair of the strategy and politics committee, Verband Forschender Arzneimittelhersteller, Germany (2016–2019) • Chair of the executive committee and member of the presidents bureau, Interpharma, the association of Switzerland’s research-based pharmaceutical industry (2015–2015) • Member of the executive committee and the board, Interpharma (2013–2015) Education • Doctor of medicine (M.D.), University of Zurich, Switzerland 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, 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 147 Item 6. Directors, Senior Management and Employees 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’s degree in pharmaceutical sciences, University of Wisconsin-Madison, US 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, Biomedical Research 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 Academy of Medical Sciences, and Royal Society of Biology, all UK Education • Doctorate in neuroscience, University of Cambridge, UK • Bachelor’s degree 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-founder and honorary board member, European Chief Compliance and Integrity Officers’ Forum • 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) • 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 148 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 (encompassing progress against company targets, including financial results) and fre- quent communications from the CEO on current devel- opments • 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 obtain an outside view, the Board and/or Board com- mittees occasionally invite external advisors (e.g., the independent advisor of the Compensation Committee, the external auditor) to attend a meeting and/or share their observations about a specific topic. Monthly financial reports Novartis produces comprehensive, consolidated (unau- dited) financial statements on a monthly basis for the Company. 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 IFRS Accounting Standards, as well as adjustments to arrive at non-IFRS measures core results, as defined by Novartis (see “Item 5. Oper- ating and Financial Review and Prospects—Item 5.A Operating results—Non-IFRS measures as defined by Novartis”). The IFRS Accounting Standards and non- IFRS measures core figures are compared with the pri- or-year period and targets in both USD and on a con- stant 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 Accounting Standards and non-IFRS measures core results (as defined by Novartis), together with related commentary. Annually, during the third quarter, 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 Accounting Stan- dards 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. 149 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 (which is 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 ORGANIZATIONAL UNITS AND GLOBAL 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, technology, 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 2023. 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 including lead- ership team members. In parallel, risk workshops were held in top countries by revenue and in certain focus markets. 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 2023, we further matured our ERM framework within the Novartis Risk & Resilience organization and developed additional risk management trainings and our risk intelligence forum, an event that brought together internal and external speakers to address emerging trends and threats. We also integrated a critical scope of activities (Health, Safety and Environment environ- mental remediation) into the Risk & Resilience depart- ment. Furthermore, the Enterprise Policy & Internal Con- trol team is progressing as planned to create a holistic framework by linking process governance with policies and controls and the Central Monitoring Coordination team is expanding 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. 150 Item 6. Directors, Senior Management and Employees Internal Audit 2023 INTERNAL AUDIT ACTIVITIES AUDITS 28 ADVISORIES 18 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 2023, 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 and adviso- ries performed in 2023, and key methodology steps when managing the Internal Audit cycle. 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. The audit plan is approved by the ACC biannually. 3 Execution and Reporting: 46 engage- ments delivered in 2023, 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 high-risk observations. Internal Audit performed 77% of planned activities (equat- ing to 46 of 60 engagements) in 2023. Due to method- ology redesign and tool development, the internal audit function’s engagement volume was impacted as associ- ates were actively involved in those projects. 151 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 Heidi Broom- Hirst, Global Audit Partner, began serving in their roles in 2022 and 2023, respectively. The ACC together with KPMG will ensure that these partners are rotated at least every five years. Auditing fees and additional fees The ACC monitors and preapproves the fees paid to the external auditor for all audit and non-audit services. It has developed and approved a policy with clear guide- lines on the engagement of the independent auditor firm. This policy is designed to help ensure that the indepen- dence of the external auditor is maintained. It limits the scope of services that the external auditor may provide to the Company, stipulating certain permissible types of audit-related and non-audit services, including tax ser- vices and other services that have been preapproved by the ACC. The ACC preapproves all other services on a case-by-case basis. The external auditor is required to report periodically to the ACC about the scope of the services it has pro- vided to the Company and the fees for the services it has performed to date. KPMG fees for professional ser- vices related to the 12-month periods ended December 31, 2023, and December 31, 2022, are as follows: Audit services Audit-related services Tax services Other services Total 2023 USD million 2022 USD million 26.8 2.5 0.3 0.0 29.6 22.5 0.7 1.2 0.0 24.4 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 Company’s internal control over financial reporting, and to issue reports on local statutory financial statements. Also included are audit services that can generally only be provided by the statutory auditor, such as the audits of the Compensa- tion Report, special purpose financial statement in con- nection with divestment transactions, information sys- tems and the related control environment; and 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: the limited assurance over the Novartis in Society Integrated Report, audits of pen- sion and other employee benefit plans; audits in connec- tion with non-recurring transactions; contract audits of third-party arrangements; corporate responsibility assur- ance; and other audit-related services. Tax services include tax compliance, assistance with historical tax matters, and other tax-related services. Other services in 2023 included procedures related to company specific training on emerging topics, bench- marking studies, 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 2023, 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, 2023. 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. 152 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 informa- tion on the Group’s results and operations. Novartis dis- closes financial results in accordance with IFRS Accounting Standards 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 the Novartis in Society Integrated Report, available at www.novartis.com/report- inghub, which provides an overview of our business, strat- egy and performance, and describes how we create value for stakeholders and society. The Novartis in Society Integrated Report is prepared in accordance with Art. 964b of the Swiss Code of Obligations, and in alignment with recommendations and standards issued by the Inte- grated Reporting Framework, the Sustainability Account- ing Standards Board (SASB), the Global Reporting Ini- tiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD). The information on Board and Executive Committee com- pensation is outlined in the Compensation Report (see “—Item 6.B Compensation” in general, and for certain compensation information with respect to our Board that is responsive to Item 6.C.2 of Form 20-F, see “—Item 6.B Compensation—2022 Board compensation—Philosophy and benchmarking”). Please also refer to articles 29-35 of the Articles of Incorporation (www.novartis.com/investors/company- overview/corpo- rate-governance). No change-of-control or ‘golden parachute’ clauses benefit Board members, Executive Committee members, or other members of senior management. Employ- ment contracts with Executive Committee members are either for a fixed term not exceeding one year or for an indefinite period with a notice period not exceeding 12 months, and do not contain commissions for the acquisition or transfer of enterprises or severance payments. No loans or credits are granted to Board and Executive Committee members. Information contained in reports and releases issued by Novartis is only correct and accurate at the time of release. Novartis does not update past releases to reflect subsequent events, and advises against relying on them for current information. Investor Relations Investor Relations manages the Company’s interactions with the international financial community. Several events are held each year to provide institutional investors and ana- lysts with various opportunities to learn more about Novartis. Investor Relations is based at the Company’s head- quarters in Basel. Part of the team is located in the US to coor dinate interaction with US investors. More infor- mation is available at www.novartis.com/investors. Website information Topic Share capital Shareholder rights Annual General Meeting of Shareholders Board Regulations Novartis code for senior financial officers Novartis in Society Integrated Report Novartis Annual Report and Form 20-F Novartis Financial Data Press releases Information Articles of Incorporation of Novartis AG https://www.novartis.com/sites/novartiscom/files/statuten-en.pdf 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, ECN and Senior Financial Officers of Novartis www.novartis.com/investors/company-overview/corporate-governance Novartis in Society Integrated Report www.novartis.com/reportinghub Novartis Annual Report and Form 20-F www.novartis.com/reportinghub 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 event calendar, registered office, contact and email addresses, phone numbers, etc.) Novartis Investor Relations www.novartis.com/investors The information on our website is not, and shall not be deemed to be, a part of this Annual Report or incorporated herein. 153 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. Our quarterly quiet periods commence on the first trading day of each cal- endar quarter and end at the beginning of the first trad- ing day after the subsequent release of the quarterly and/or annual results. In 2023, the following quiet periods applied: • January 1, 2023, until (and including) February 1, 2023 • April 1, 2023, until (and including) April 25, 2023 • July 1, 2023, until (and including) July 18, 2023 • October 1, 2023, until (and including) October 24, 2023 154 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, 2023 (full-time equivalents) USA Canada and Latin America Europe Asia/Africa/Australasia Total For the year ended December 31, 2022 (full-time equivalents) USA Canada and Latin America Europe Asia/Africa/Australasia Total Thereof continuing operations 2 Thereof discontinued operations 2 For the year ended December 31, 2021 (full-time equivalents) USA Canada and Latin America Europe Asia/Africa/Australasia Total Thereof continuing operations 2 Thereof discontinued operations 2 Total 12 846 3 721 464 182 1 668 34 459 723 25 031 Total 14 525 5 342 599 270 2 483 50 853 932 30 983 Marketing and Research and Production and sales development General and supply Operations 1 administration 5 219 1 732 8 426 5 194 1 310 461 327 8 519 11 811 12 347 4 061 2 718 659 1 019 4 035 5 182 27 724 18 235 16 166 10 895 3 037 76 057 Marketing and Research and Production and sales development General and supply Operations 1 administration 6 003 2 678 5 358 1 740 514 809 14 078 10 483 18 781 15 856 4 841 3 841 825 1 071 5 028 5 513 38 615 21 196 25 171 12 437 4 284 101 703 30 420 18 681 14 826 12 437 3 313 79 677 8 195 2 515 10 345 971 22 026 Marketing and Research and Production and sales development General and supply Operations 1 administration 6 074 3 116 5 324 510 1 938 1 426 15 163 10 307 17 630 16 927 4 812 3 570 879 1 116 5 108 5 696 Total 14 869 6 538 654 370 2 613 50 821 1 090 32 095 41 280 20 953 24 564 12 799 4 727 104 323 32 973 18 425 14 165 12 799 3 765 82 127 8 307 2 528 10 399 962 22 196 1 relates to full time equivalent employees (FTEs) from our Operations unit, excluding the Operations units’ production and supply FTEs 2 Continuing operations include the retained business activities of Novartis, comprising the innovative medicines business and continued corporate activities. Discontinued operations include the Sandoz generic pharmaceuticals and biosimilars division and certain corporate activities attributable to Sandoz prior to the spin-off up to the distribution date of October 3, 2023. As of December 31, 2023, the total number of our full- time equivalent employees decreased by 25 646 com- pared with December 31, 2022, mainly driven by the Sandoz spin-off at the October 3, 2023, distribution date, and the initiative announced in April 2022 to implement a new, streamlined organizational model. 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. 155 Item 6. Directors, Senior Management and Employees 6.E Share ownership The information set forth under “Item 6. Directors, Senior Management and Employees—Item 6.B Compensation— CEO and Executive Committee—Additional disclosures and other statutory information—Shares, ADRs and other equity rights owned by Executive Committee mem- bers as at December 31, 2023” and under “Item 6. Direc- tors, Senior Management and Employees—Item 6.B Compensation—Board compensation—Shares, ADRs and share options owned by Board members” is incor- porated by reference. For more information on our equi- ty-based participation plans, see the information set forth under “Item 18. Financial Statements—Note 27. Equity-based participation plans for employees,” which is incorporated by reference. 6.F Erroneously awarded compensation Not applicable. 156 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, 2023, Novartis had approximately 183 000 sharehold- ers listed in the Share Register of Novartis, representing approximately 56.8% of issued shares. Based on the Novartis Share Register and excluding treasury shares, approximately 54.6% of the shares registered by name were held in Switzerland, and approximately 24.7% were held in the US. Approximately 20.0% of the shares reg- istered in the Share Register were held by individual investors, while approximately 41.7% were held by legal entities, excluding 10.2% of our share capital held as trea- sury shares by Novartis AG or its fully owned subsidiar- ies (including Swiss foundations controlled by Novartis AG), and 38.3% 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 Swiss foundations controlled by Novartis AG (Foun- dation Shares) no longer carry the right to vote. As a result, these Foundation Shares are excluded from the calculation of the shares registered in the Share Regis- ter in the same way, as described above, that our trea- sury shares are excluded. 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, 2023, excluding 10.2% of our share capital held as treasury shares by Novartis AG or its fully owned subsidiaries (including Swiss foundations controlled by Novartis AG). 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 1 UBS Fund Management (Switzerland) AG, Basel, Switzerland Credit Suisse Funds AG, Zurich, Switzerland % of respective share capital beneficially owned as of: Ordinary shares beneficially owned as of Dec 31, 2023 Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 89 135 960 60 962 889 50 178 623 3.9 2.7 2.2 3.7 2.3 2.1 3.7 2.3 2.1 1 According to a disclosure notification filed with Novartis AG and the SIX Swiss Exchange, the beneficial owner of the shares registered for Emasan AG is Sandoz – Fondation de Famille, Liechtenstein. Shareholders registered as nominees: 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 Chase Nominees Ltd., London, England Shareholder acting as American Depositary Share (ADS) depositary: % of respective share capital held as of: Ordinary shares held as of Dec 31, 2023 Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 82 324 675 66 451 778 34 094 134 22 963 391 9 394 253 — 1 3.6 2.9 1.5 1.0 0.4 — 3.8 2.9 1.6 0.9 0.4 8.4 4.2 3.0 1.6 1.1 0.3 8.8 JPMorgan Chase Bank, N.A., New York, NY 190 038 312 8.3 9.4 11.1 1 Chase Nominees Ltd. (Chase) has informed us that as of December 2023, it will no longer register any shareholding positions on its own behalf. Shares held by customers of Chase will be registered for such customer’s own account. According to a disclosure notification filed with Novartis AG, Norges Bank (Central Bank of Norway), Oslo, Nor- way, held 2.4% of the share capital of Novartis AG, or 55 319 441 shares, as of December 31, 2023, but was not registered in the Share Register as of December 31, 2023. Provided that these shares are registered in the 157 Item 7. Major Shareholders and Related Party Transactions 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 Novartis AG in the Share Register as of December 31, 2023. As of December 31, 2023, no other shareholder was registered as owner of more than 2% of the registered share capital. The Articles of Incorporation provide that no share- holder shall be registered with the right to vote shares comprising more than 2% of the registered share capi- tal. The Board of Directors may, upon request, grant an exemption from this restriction. Considerations include whether the shareholder supports the Novartis goal of creating sustainable value and has a long-term invest- ment horizon. Exemptions are in force for the registered major shareholders as described above. Novartis has not entered into any agreement with any shareholder regarding the voting or holding of Novartis shares. 7.B Related party transactions The information set forth under “Item 18. Financial Statements—Note 28. Transactions with related parties” is incor- porated by reference. 7.C Interests of experts and counsel Not applicable. 158 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 3.30 per share to the shareholders for approval at the Annual Gen- eral Meeting to be held on March 5, 2024. Because we pay dividends in Swiss francs, exchange rate fluctuations will affect the US dollar amounts received by holders of ADRs. For the amount of dividends we paid in the past three years, see “Item 18. Financial Statements—Note 19—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 Novartis affiliate entered into a non-binding Memorandum of Understand- ing (MoU) with the Ministry of Health and Medical Educa- tion of the Islamic Republic of Iran. Pursuant to the MoU, the Iranian Ministry of Health acknowledges certain ben- efits that may apply to sales of certain of our medicines by third-party distributors in Iran. These include fast-track registration, market exclusivity, end-user subsidies, and exemptions from customs tariffs. Novartis receives no payments from the Iranian Ministry 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 2023, certain Novartis non-US affiliates made payments to government entities in Iran related to patents, trademarks, exit fees and other transactions ordinarily incident to travel by doctors and other medical professionals resident in Iran to attend conferences or other events outside Iran. From time to time, including in 2023, certain Novartis non-US affiliates enter into agreements with hospitals, research institutes, medical associations and universi- ties in Iran to provide grants and sponsor congresses, seminars and symposia, and with doctors and other healthcare professionals for consulting services, includ- ing participation in advisory boards and investigator ser- vices for observational (non-interventional) studies. Some hospitals and research institutes are owned or controlled by the government of Iran, and some doctors and healthcare professionals are employed by hospitals that may be public or government-owned. Because we have operations in Iran, including employ- ees, we obtain services and have other dealings inciden- tal to our activities in that country, including paying taxes and salaries either directly or indirectly through a ser- vice provider, and obtaining office rentals, insurance, electricity, water and telecommunications services, office and similar supplies, and customs-related services from Iranian companies that may be owned or controlled by the government of Iran. In addition, from time to time, representatives of our non-US affiliates participate in meetings with Iranian officials to discuss issues relevant to our business and the pharmaceutical industry. Certain Novartis non-US affiliates 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 trans- actions for employee payroll and local vendor payment purposes. These transactions are conducted for the pur- pose of facilitating the provision of medicine to Iran, in line with the humanitarian exceptions contained in Section 11 of Executive Order 13902 and other applicable sanctions legal authorities. No transactions are made with an Iranian financial institution designated on the SDN List in connec- tion with Iran’s support for international terrorism or pro- liferation of weapons of mass destruction. 8.B Significant changes None. 159 Item 9. The Offer and Listing Item 9. The Offer and Listing 9.A Offer and listing details Our ordinary shares are listed in Switzerland on the SIX Swiss Exchange under the symbol “NOVN.” Our ADSs, each representing one ordinary share, are traded on the New York Stock Exchange under the symbol “NVS.” 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. 160 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 the 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 Director (but the Director may participate in the discussion). (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, to ensure their interests are aligned with those of our shareholders, 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 of having joined the Board. 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.” 161 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. 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 regis- tered office). If the shareholder has not timely regis- tered 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, the consoli- dated financial statements and the report on non-fi- nancial matters • Approval of the financial statements of Novartis AG, and the decision on the appropriation of available earnings shown on the balance sheet, in particular with regard to dividends (including any repayment of the statutory capital reserves and the approval of interim dividends and the interim financial state- ments required for such purpose), 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 • The consolidation of shares, unless the approval of all affected shareholders is required • Increase of the share capital out of equity, by con- tributions in kind or by way of set-off against receiv- able, or the grant of special rights • Restriction or cancellation of subscription rights • Introduction of a conditional capital or capital band • Creation of shares with increased voting powers • Implementation of restrictions on the transfer of registered shares, and the removal of such restric- tions • Change of the currency of the share capital • Introduction of the deciding vote for the presiding officer at the General Meeting • A provision in the Articles allowing the General Meeting to be held abroad • Delisting of the shares of the Company • Change of the registered office of Novartis AG • Introduction of an arbitration clause in the Articles 162 Item 10. Additional Information • Merger, split or transformation of Novartis AG under the Swiss Merger Act (subject to mandatory statu- tory provisions) • Dissolution of Novartis AG Our shareholders are required, on an annual basis, to elect all Directors (including the Board Chair), the Compensation 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 legal representative or, by means of a writ- ten proxy, by a representative of choice. Furthermore, a shareholder may be represented by the Indepen- dent 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 meeting. 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 enumerated in the Deposit Agreement (such as the rights to vote, to receive a dividend and to receive a share of Novartis AG in exchange for a certain number of ADRs). The enumeration of rights, including any limitations on those rights in the Deposit Agreement, is final. There are no other rights given to the ADR holders. Only the ADS depositary, holding our shares underlying the ADRs, is registered as shareholder in our share register. An ADR is not a Novartis AG share, and an ADR holder is not a Novartis AG shareholder. The Deposit Agreement between our depositary, the ADR holder and us has granted certain indirect rights to vote to the ADR holders. ADR holders may not attend 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 above. (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. Under the Swiss CO, we may not cancel treasury shares without the approval of a capital reduction by our shareholders given that shareholders have not approved the introduction of a capital band. (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 by signed petition representing at least 5% 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 con- vened by publishing a notice in the Swiss Official Gazette 163 Item 10. Additional Information 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 addi- tion, see “—Item 10.B.3(b) Shareholder rights” regarding conditions for exercising a shareholder’s right to vote at a General Meeting. 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 and holders of ADRs described in “—Item 10.B.3(b) Shareholder rights.” 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.C Material contracts 10.B.8 Disclosure of shareholdings Under the Swiss Financial Market Infrastructure Act, per- sons who directly, indirectly or in concert with other par- ties acquire or dispose of our shares or purchase or sale rights relating to our shares are required to notify us and the SIX of the level of their holdings whenever such hold- ings reach, exceed or fall below certain thresholds – 3%, 5%, 10%, 15%, 20%, 25%, 33 1/3%, 50% and 66 2/3% – of the voting rights represented by our share capital (whether exercisable or not). This also applies to anyone who has discretionary power to exercise voting rights associated with our shares. Following receipt of such notification, we are required to inform the public by pub- lishing the information via the electronic publication plat- form operated by 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. Sandoz Spin-Off In connection with the spin-off of Sandoz, we entered into a Separation and Distribution Agreement, a Tax Mat- ters Agreement and several other agreements with Sandoz to effect the separation of the Sandoz business and provide a framework for our relationship with Sandoz after the spin-off. The Separation and Distribution Agreement sets forth the parties’ agreements regarding the principal actions to be taken in connection with the separation of the Sandoz business and the spin-off, by way of a distri- bution of shares of Sandoz Group AG by Novartis AG to Novartis shareholders, including the conditions of the spin-off and the rights and obligations of the parties with respect to the separation and distribution. The Separa- tion and Distribution Agreement identifies the assets to be transferred, liabilities to be assumed and contracts to be assigned to each of Novartis and Sandoz as part of the internal transactions effected prior to the distribu- tion and provides for when and how such transfers, assumptions and assignments should occur. Each party agreed to indemnify the other and each of the other’s directors, officers, managers, members, agents and employees against certain liabilities incurred in connec- tion with the spin-off and the parties’ respective busi- nesses (subject to certain exceptions). The Tax Matters Agreement imposes certain restric- tions and indemnity obligations on Sandoz designed to preserve the tax-neutral nature of the spin-off for Swiss tax and US federal income tax purposes. The Tax Matters Agreement also provides that Sandoz will be liable for any taxes accruing in the ordi- nary course of business of Novartis and its subsidiaries before the spin-off if such taxes are attributable to enti- ties which are transferred or allocated to the Sandoz Group as part of the spin-off, whereas Novartis will remain liable for any other taxes accruing before the 164 Item 10. Additional Information spin-off in the ordinary course of business, to the extent not attributed to Sandoz. In connection with the spin-off, we also entered into an employee matters agreement, a claims management agreement, manufacturing and supply agreements, a development and collaboration agreement, a transitional services agreement, an authorized generics agreement, and certain intellectual property agreements, each of which is not material to Novartis. 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. Dividends that we pay and similar cash or in-kind distributions 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 cir- cumstances, proceeds from repurchases of shares by us in excess of the nominal value) are generally subject to a Swiss federal withholding tax (the Withholding Tax) at a current rate of 35%. Under certain circumstances, 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 Admin- istration. The Withholding Tax is refundable in full to Swiss tax residents who are the beneficial owners of the taxable distribution at the time it is resolved and duly report the gross distribution received on their personal tax return or in their financial statements for tax pur- poses, as the case may be. Income tax on dividends. A Swiss tax resident who receives dividends and similar distributions (including stock dividends and liquidation surplus) on shares or ADRs is required to include such amounts in the share- holder’s personal income tax return. However, distribu- tions out of qualified capital contribution reserves are not subject to income tax. A corporate shareholder may claim substantial relief from taxation of dividends and similar distributions received if the shares held represent a fair market value of at least CHF 1 million. Capital gains tax upon disposal of shares. Under current Swiss tax law, the gain realized on shares held by a Swiss resident who holds shares or ADRs as part of his private property is generally not subject to any federal, cantonal or municipal income taxation on gains realized on the sale or other disposal of shares or ADRs. However, gains realized upon a repurchase of shares by us may be char- acterized as taxable dividend income if certain condi- tions are met. Book gains realized on shares or ADRs held by a Swiss corporate entity or by a Swiss resident individual as part of the shareholder’s business property are, in general, included in the taxable income of such person. However, the Federal Law on the Direct Federal Tax of December 14, 1990, and several cantonal laws on direct cantonal taxes provide for exceptions for Swiss corporate entities holding more than 10% of our voting stock for more than one year. Residents of other countries Recipients of dividends and similar distributions on our shares who are neither residents of Switzerland for tax purposes nor hold 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 165 Item 10. Additional Information 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. As of January 1, 2024, 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 Czechia Denmark Ecuador Egypt Estonia Ethiopia Finland France Georgia Germany Ghana Greece Hong Kong Hungary Iceland India Indonesia Iran 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 Türkiye 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, 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 realized on the shares or ADRs, and such person may qualify 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 166 Item 10. Additional Information 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 proce- dures 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. US federal income taxation The following is a general discussion of the material US federal income tax consequences of the ownership and disposition of our shares or ADRs that may be relevant to you if you are a US Holder (as defined below). Because this discussion does not consider any specific circum- stances of any particular holder of our shares or ADRs, persons who are subject to US taxation are strongly urged to consult their own tax advisors as to the overall US federal, state and local tax consequences, as well as to the overall Swiss and other foreign tax consequences, of the ownership and disposition of our shares or ADRs. In particular, additional or different rules may apply to US expatriates; banks and other financial institutions; regu- lated investment companies; traders in securities who elect to apply a mark-to-market method of accounting; dealers in securities or currencies; tax-exempt entities; insurance companies; broker-dealers; investors liable for alternative minimum tax; investors that hold shares or ADRs as part of a straddle, hedging or conversion trans- action; holders whose functional currency is not the US dollar; partnerships or other pass-through entities; per- sons who acquired our shares pursuant to the exercise of employee stock options or otherwise as compensa- tion; and persons who hold, directly, indirectly or by attri- bution, 10% or more of our outstanding shares. This dis- cussion generally applies only to US Holders who hold the shares or ADRs as a capital asset (generally, for investment purposes), and whose functional currency is the US dollar. Investors are urged to consult their own tax advisors concerning whether they are eligible for benefits under the Treaty. For purposes of this discussion, a US Holder is a ben- eficial owner of our shares or ADRs who is (i) an individ- ual who is a citizen or resident of the US for US federal income tax purposes; (ii) a corporation (or other entity taxable as a corporation for US federal income tax pur- poses) created or organized in or under the laws of the US or a state thereof or the District of Columbia; (iii) an estate the income of which is subject to US federal income taxation regardless of its source; or (iv) a trust (i) subject to the primary supervision of a US court and the control of one or more US persons; or (ii) that has a valid election in place to be treated as a US person. If a partnership (or other entity treated as a partnership for 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. 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 167 Item 10. Additional Information from us. Alternatively, a US Holder may claim the With- holding Tax as a deduction for the taxable year within which the Withholding Tax is paid or accrued, provided a deduction is claimed for all of the foreign income taxes the US Holder pays or accrues in the particular year. A deduction does not reduce US tax on a dollar-for-dollar basis like a tax credit. The deduction, however, is not subject to the limitations applicable to foreign tax cred- its, but may be subject to other limitations, and each US Holder is urged to consult its own tax advisor. The US Treasury has expressed concern that parties to whom ADRs are released may be taking actions incon- sistent with the claiming of foreign tax credits for US Holders of ADRs. Accordingly, the summary above of the 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, including 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 dol- lars on the date of receipt, the US Holder generally should not recognize foreign currency gain or loss on such con- version. 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 foreign currency gain or loss that a US Holder recognizes on a subsequent con- version or other disposition of the Swiss francs generally will be treated as US source ordinary 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 gen- erally will recognize capital gain or loss in an amount equal to the difference between the US dollar value of the amount realized on the disposition and the US Hold- er’s tax basis (determined in US dollars) in the shares or ADRs. This capital gain or loss generally will be US source gain or loss and will be treated as long-term capital 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 subject to US federal income tax at preferential rates, with a maximum rate of 15% (or 20% in the case of tax- payers with annual income that exceeds certain thresh- olds). 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 statutory threshold amount based on filing status. The deductibility of capital losses is subject to significant limitations under the Code. Deposits or with- drawals 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. Tax consequences of the Sandoz spin-off To implement the Sandoz spin-off, we distributed all of the Sandoz Group AG shares held by Novartis to Novartis AG shareholders, pro rata to their respective holdings. Each Novartis AG shareholder received one Sandoz Group AG share for every five Novartis AG shares or five Novartis AG ADRs they held or had acquired prior to the close of business on October 3, 2023. The following statements are based on the require- ment of the continuing effectiveness and validity of the written confirmations (the Swiss Tax Rulings) from the Swiss Federal Tax Administration and from the tax administration of the Canton of Basel-Stadt, a private letter ruling from the IRS (the IRS Ruling) and a written opinion of Cravath, Swaine & Moore LLP, counsel to Novartis (the Tax Opinion), each to the effect that the Sandoz spin-off qualifies as a tax-neutral transaction. 168 Item 10. Additional Information Material tax consequences to Novartis The following is a summary of the material tax conse- quences to Novartis in connection with the Sandoz spin- off that may be relevant to holders of Novartis AG shares. The Sandoz spin-off was preceded by several internal restructuring steps to separate the Sandoz business from Novartis. Novartis has received the Swiss Tax Rulings, the IRS Ruling and the Tax Opinion, providing that the spin- off should qualify for nonrecognition of gain or loss for US federal income tax purposes or preserve the tax-neutral nature for Swiss tax purposes, as applicable. In addition, the Swiss Tax Rulings provide that no Swiss withholding tax or stamp duty should apply to the distribution of Sandoz Group AG shares in the spin-off. The Tax Opinion and IRS Ruling are subject to the qualifications and lim- itations set forth below under “—Consequences to US Holders of Novartis AG Shares.” Additionally, Novartis has entered into a tax matters agreement with Sandoz, which restricts Sandoz from taking certain actions that could affect the qualification of the spin-off as tax-neutral. Consequences to Swiss Holders of Novartis AG shares General Subject to the qualifications and limitations set forth herein (including the discussion below relating to the receipt of cash in lieu of fractional shares), for Swiss tax purposes no gain or loss should be recognized by, or be includible in the income of, a Swiss Holder as a result of the tax-neutral spin-off, provided that Swiss Holders who hold Novartis AG shares as business assets accurately maintain the tax and book values of their Novartis AG and Sandoz Group AG shares. This means that for Swiss Holders who hold Novartis AG shares as business assets, the aggregate tax basis of the Novartis AG shares and Sandoz Group AG shares immediately after the distribu- tion should be the same as the aggregate tax basis of the Novartis AG shares held immediately before the dis- tribution, allocated between the Novartis AG shares and Sandoz Group AG shares. If a Swiss Holder that holds Novartis AG shares as business assets is classified as a “professional securi- ties dealer” or is a legal entity and receives cash in lieu of a fractional share, such Swiss Holder will generally recognize a capital gain or loss measured by the differ- ence between the cash received for such fractional Share and the Swiss Holder’s tax basis in that fractional Share. The same Swiss income tax treatment applies to Swiss Holders of Novartis physical share certificates (Heimverwahrer) held as business assets who receive cash due to non-response by September 19, 2023. If a Swiss Holder who holds Novartis AG shares as private assets receives cash in lieu of fractional Shares, the receipt of such cash will be tax-free to the holder. The same Swiss income tax treatment applies to Swiss Holders of Novartis physical share certificates (Heimver- wahrer) held as private assets who receive cash due to non-response by September 19, 2023. Novartis has received the Swiss Tax Rulings which cover the relevant Swiss tax aspects of the separation and spin-off. The Swiss Tax Rulings rely upon certain facts, assumptions, representations and undertakings from Sandoz and Novartis regarding the past and future conduct of the businesses of Sandoz and Novartis and other matters. If any of the facts, assumptions, represen- tations or undertakings described therein are incorrect or incomplete or not otherwise satisfied, Novartis may not be able to rely upon the Swiss Tax Rulings. Accordingly, notwithstanding the Swiss Tax Rulings, no assurance can be given that the relevant Swiss tax authorities will not assert, or that a court would not sustain, a position con- trary to one or more of the conclusions set forth above. Consequences to US Holders of Novartis AG shares The following is a summary of the material US federal income tax consequences to holders of Novartis AG shares or ADRs in connection with the Sandoz distribu- tion. For purposes of the following discussion, any ref- erence to Novartis AG shares includes Novartis ADRs. This summary does not address any US state or local or foreign tax consequences or any estate, gift or other non-income tax consequences. General The IRS Ruling and the Tax Opinion, described below, rely upon certain facts, assumptions, representations and undertakings from Novartis and Sandoz regarding the past and future conduct of Novartis and Sandoz busi- nesses and other matters. If any of the facts, assumptions, representations or undertakings described therein are incorrect or not otherwise satisfied, Novartis may not be able to rely upon the IRS Ruling or the Tax Opinion. Accordingly, notwithstanding the Tax Opinion and the IRS Ruling, there can be no assurance that the IRS will not assert, or that a court would not sustain, a position con- trary to one or more of the conclusions set forth below. Novartis has received the IRS Ruling and the Tax Opinion providing, in each case, that the distribution should qualify for nonrecognition of gain or loss under Section 355 of the Code. As a result: • no gain or loss should be recognized by, or be includi- ble in the income of, a US Holder as a result of the dis- tribution; • the aggregate tax basis of the Novartis AG shares and the Sandoz Group AG shares held by each US Holder immediately after the distribution should be the same as the aggregate tax basis of the Novartis AG shares held by the US Holder immediately before the distribu- tion, allocated between the Novartis AG shares and the Sandoz Group AG shares in proportion to their relative fair market values on the date of the distribution; and • the holding period of the Sandoz Group AG shares received by each US Holder should include the hold- ing period of its Novartis AG shares. Generally, if a Novartis AG shareholder holds different blocks of Novartis AG shares (generally Novartis AG shares purchased or acquired on different dates or at different prices), a US Holder must perform the tax basis allocation described above with respect to each block and will have a holding period in the Sandoz Group AG shares deter- mined with respect to the holding period of such block. A US Holder that receives cash in lieu of a fractional Share as part of the distribution will be treated as though it first received a distribution of the fractional Share in the distribution and then sold it for the amount of cash 169 Item 10. Additional Information actually received. The US Holder will generally recognize a capital gain or loss measured by the difference between the cash received for such fractional Share and the US Holder’s tax basis in that fractional Share, as determined above. Such capital gain or loss will be a long-term capi- tal gain or loss if the US Holder’s holding period for the Novartis AG shares is more than one year from the date of the distribution. Certain US Holders are eligible for reduced rates of taxation on their long-term capital gains. A US Holder of Novartis physical share certificates (Heimverwahrer) who receives cash due to non-re- sponse by September 19, 2023 will be treated as if the US Holder received the Sandoz Group AG shares with respect to its physical share certificates in the distribu- tion and then sold such Shares for the cash actually received. The deemed receipt and sale of the Sandoz Group AG shares for cash will be subject to the same treatment as the receipt of cash in lieu of a fractional Share for US federal income tax purposes as described above. Backup Withholding Payments of cash in lieu of a fractional Share and cash payments to a US Holder of Novartis physical share certificates (Heimverwahrer) who receives cash due to non-response by September 19, 2023 may, under cer- tain circumstances, be subject to “backup withholding”, unless the US Holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the requirements of the backup withholding rules. Corporations will generally be exempt from backup withholding, but may be required to provide a certification to establish their entitlement to the exemption. Backup withholding is not an additional tax, and it may be refunded or credited against a US Holder’s US federal income tax liability if the required information is timely supplied to the IRS. Information Reporting Treasury Regulations require each Novartis AG share- holder that, immediately before the distribution, owned 5% or more (by vote or value) of the total outstanding stock of Novartis, to attach to such shareholder’s US federal income tax return for the year in which the dis- tribution occurs a statement setting forth certain infor- mation related to the distribution. 10.F Dividends and paying agents Not applicable. 10.G Statement by experts Not applicable. 10.H Documents on display Any statement in this Form 20-F about any of our con- tracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the Form 20-F, the contract or document is deemed to mod- ify the description contained in this Form 20-F. You must review the exhibits themselves for a complete descrip- tion of the contract or document. The SEC maintains an internet site at http://www.sec. gov that contains reports and other information regard- ing issuers that file electronically with the SEC. These SEC filings are also available to the public from commer- cial document retrieval services. We are required to file or furnish reports and other information with the SEC under the Exchange Act and reg- ulations under that act. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescrib- ing the form and content of proxy statements, and our offi- cers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. 10.I Subsidiary information Not applicable. 170 Item 11. Quantitative and Qualitative Disclosures About Market Risk Item 11. Quantitative and Qualitative Disclosures About Market Risk The major financial risks facing us are managed centrally by the Company’s treasury function, which has estab- lished processes and procedures to identify, aggregate and manage our financial risk exposure. The Company’s 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 30. Financial instruments – additional disclosures” is incorporated by reference. 171 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 the deposit agreement that we entered into with JPMorgan Chase Bank, N.A. (JPMorgan), as depos- itary (as amended from time to time, the “Deposit Agreement”), 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 ADSs 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 Withdrawing underlying shares Acceptance of ADSs surrendered for withdrawal of deposited shares or for ADSs that are cancelled or reduced for any other reason Associated fee USD 5.00 for each 100 ADSs (or portion thereof) USD 5.00 (or less) for each 100 ADSs (or portion thereof) surrendered Cash distributions Distributing cash distributions made or any elective cash/stock dividend offered USD 0.05 (or less) per ADS Selling or exercising rights 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 Depositary services Services performed by the depositary in administering the ADRs Expenses of the depositary 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 USD 5.00 for each 100 ADSs (or portion thereof) USD 0.05 (or less) per ADS per calendar year (or portion thereof) 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 172 Item 12. Description of Securities Other than Equity Securities Fees payable by the depositary to the issuer Pursuant to a letter agreement effective as of May 11, 2017, as amended from time to time (“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 subsequent anniversary of the effective date of the Agreement (each such 12-month period is a “Contract Year”). Beginning in the sixth Con- tract Year, this annual contribution payment will equal: (a)(1) the applicable fixed contribution amount reflected in the table below, based on the average daily balance during such Contract Year of outstanding ADSs backed by ordinary shares 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) collectively 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 JPMor- gan’s legal fees, charges and out-of-pocket expenses in excess of USD 50 000 for such Contract Year. Average Daily Balance Range Start Average Daily Balance Range End At least 30 000 000 At least 67 000 000 At least 134 000 000 At least 201 000 000 At least 268 000 000 Up to 66 999 999 Up to 133 999 999 Up to 200 999 999 Up to 267 999 999 Fixed contribution USD 340 000 USD 680 000 USD 1 020 000 USD 1 360 000 USD 1 700 000 The fixed contribution amount payable under (a)(1) in respect of a given Contract Year shall be zero if the aver- age daily balance of outstanding ADSs backed by ordi- nary shares is less than 30 000 000 during such Con- tract Year. If the Custody Costs for a Contract Year exceed the fixed contribution amount for such Contract Year, JPMorgan will reduce the contribution payable to us by an amount equal to such deficit. 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. 173 Item 13. Defaults, Dividend Arrearages and Delinquencies PART II Item 13. Defaults, Dividend Arrearages and Delinquencies None. 174 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. 175 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 Com‑ pany are responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to pro‑ vide reasonable assurance to the Company’s manage‑ ment and Board of Directors regarding the reliability of financial reporting and the preparation and fair presen‑ tation 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. The Company’s management assessed the effective‑ ness of the Company’s internal control over financial reporting as of December 31, 2023. In making this assessment, it used the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Tread‑ way Commission (COSO). Based on our assessment, management concluded that, as of December 31, 2023, the Company’s internal control over financial reporting is effective based on those criteria. KPMG AG, Switzerland, an independent registered public accounting firm, has issued an unqualified opin‑ ion on the effectiveness of the Company’s internal con‑ trol over financial reporting, which is included in the Form 20‑F under “Item 18. Financial Statements—Report of independent registered public accounting firm.” See the report of KPMG, an independent registered public accounting firm, included in the Form 20‑F under “Item 18. Financial Statements—Report of independent registered public 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 30, 2024 176 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 in Item 16A of Form 20-F. The Board of Direc- tors has also determined that each member of the Audit and Compliance Committee is “independent” in accor- dance with the applicable requirements set forth under the listing standards of the NYSE and Rule 10A-3 under the Exchange Act, and has sufficient experience and ability in finance and compliance matters to enable them to adequately discharge their responsibilities. 177 Item 16B. Code of Ethics Item 16B. Code of Ethics In addition to our Code of Ethics and Doing Business Ethically Policy, which are applicable to all of our employ- ees, we have adopted Ethical Conduct Requirements that impose additional obligations on our principal exec- utive officer, principal financial officer, principal accounting officer, and persons performing similar func- tions. This document is accessible on our internet web- site at: https://www.novartis.com/investors/company-over- view/corporate-governance 178 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. 179 Item 16D. Exemptions from the Listing Standards for Audit Committees Item 16D. Exemptions from the Listing Standards for Audit Committees Not applicable. 180 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 11 383 594 91.91 10 500 000 10 147 593 87.02 10 000 000 11 145 700 85.02 11 000 000 9 092 383 98.58 9 000 000 10 018 880 102.20 10 000 000 10 871 925 100.29 10 847 255 5 026 486 100.98 5 000 000 4 446 306 102.80 4 400 000 4 250 523 101.17 4 200 000 4 494 588 96.85 4 400 000 4 426 601 95.48 4 400 000 3 821 670 98.39 3 800 000 89 126 249 95.55 87 547 255 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 7 433 6 628 15 762 14 966 14 050 13 071 12 625 12 228 11 846 11 461 11 087 10 763 8 030 7 061 17 252 16 736 15 450 14 537 14 493 13 903 12 998 12 705 12 701 12 793 2023 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 27. 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 2022 AGM for transactions in 2023. 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. 181 Item 16F. Change in Registrant’s Certifying Accountant Item 16F. Change in Registrant’s Certifying Accountant Not applicable. 182 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 NYSE listing standards, as applicable to for- eign private issuers of securities. The following summa- rizes some significant ways in which our corporate gov- ernance practices differ from those followed by domestic listed US companies under the listing stan- dards 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. 183 Item 16H. Mine Safety Disclosure Item 16H. Mine Safety Disclosure Not applicable. 184 Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. 185 Item 16J. Insider Trading Policies Item 16J. Insider Trading Policies Not applicable. 186 Item 16K. Cybersecurity Item 16K. Cybersecurity Protecting the security and integrity of the IT systems under our control and safeguarding the privacy of our customers, patients and employees is a top priority for us at all levels. Cybersecurity and data privacy risks are among the core enterprise risks evaluated through our annual enterprise risk management assessment. The Chief Security Officer oversees our cybersecu- rity risk management program in partnership with our Chief Information Officer and other business leaders. The program was developed to respond to the threat of security breaches and cyberattacks, and to protect and preserve the confidentiality, integrity, and continued availability of information owned by, or in the care of Novartis. Our Chief Security Officer reports to our Chief Information Officer, and is a subject matter expert on information security, privacy, information technology strategy and management with over 20 years of relevant experience across a number of industries, including pharmaceuticals, consumer goods, financial services and consulting. Our Chief Information Officer has nearly 25 years of experience as an IT professional, including 14 years with Novartis, and is responsible for our tech- nology strategy, delivery and operations globally. To address cybersecurity threats and prevent IT sys- tem interruptions, the Information Security & Compliance (ISC) team, which is headed by our Chief Security Offi- cer, has implemented enterprise-wide policies, pro- cesses and practices. We follow industry best practices, such as the NIST Cybersecurity Framework and ISO 27001 to manage information security. Novartis has risk- based services continuity and systems recovery plans in place for key business processes, which are tested periodically. We also conduct ongoing internal vulnera- bility analyses (including simulated hacking) as well as external testing via a third-party to ensure the effective- ness of our cybersecurity controls. We require employ- ees to report IT security incidents to a Cyber Security Operations Center (CSOC) that operates 24 hours a day, 7 days a week. CSOC is a function within ISC that is responsible for investigating all security incidents and alerts including determining the threat type, incident scope and incident severity. Where appropriate, major incidents are escalated to our Chief Executive Officer, who may then inform our Board of the incident pursuant to our internal procedures. Novartis has not experienced any material cybersecurity incidents in the three years through 2023. As part of its enterprise risk management oversight, the Risk Committee of our Board is responsible for ensuring that the Company has implemented an appro- priate and effective risk management system and pro- cess, including annually reviewing updates on cyberse- curity. The Risk Committee receives updates on cybersecurity risks, which address a wide range of top- ics, including recent developments, security incidents, evolving standards, vulnerability assessments, third- party and independent reviews, the threat environment, technological trends and information security consider- ations arising with respect to the peers and vendors of Novartis. At least once each year, the Risk Committee discusses the Company’s approach to cybersecurity risk management with the Chief Security Officer. 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 consolidated financial statements 1. Accounting policies 2. Significant transactions 3. Operating segment 4. Revenues and geographic information 5. Associated companies 6. Interest expense and other financial income and expense 7. Income taxes 8. Earnings per share 9. Changes in consolidated statements of comprehensive income 10. Property, plant and equipment 11. Right-of-use assets and lease liabilities 12. Goodwill and intangible assets other than goodwill 13. Deferred tax assets and liabilities 14. Financial and other non-current assets 15. Inventories 16. Trade receivables 17. Marketable securities, commodities, time deposits, derivative financial instruments, and cash and cash equivalents 18. Other current assets 19. Equity 20. Non-current financial debt 21. Provisions and other non-current liabilities 22. Current financial debt and derivative financial instruments 23. Provisions and other current liabilities 24. Details to the consolidated statements of cash flows 25. Acquisitions of businesses 26. Post-employment benefits for employees 27. Equity-based participation plans for employees 28. Transactions with related parties 29. Commitments and contingent liabilities 30. Financial instruments – additional disclosures 31. Discontinued operations 32. Events subsequent to the December 31, 2023, consolidated balance sheet date 33. Novartis principal 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-14 F-16 F-16 F-22 F-23 F-23 F-24 F-25 F-26 F-28 F-29 F-32 F-33 F-34 F-34 F-35 F-35 F-35 F-38 F-39 F-43 F-43 F-45 F-48 F-48 F-53 F-56 F-57 F-59 F-69 F-72 F-73 F-75 A-1 A-3 A-10 A-11 189 Item 19. Exhibits Item 19. Exhibits 1.1 Articles of Incorporation of Novartis AG, as amended September 15, 2023 (English translation). 1.2 Regulations of the Board of Directors, the Board Committees and the Executive Committee of Novartis AG, effective March 7, 2023. 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 as filed with the SEC on December 16, 2022). 2.2 Form of American Depositary Receipt (included in Exhibit 2.1 incorporated by reference to Exhibit 99.A to the Registration Statement on Form F-6 as filed with the SEC on December 16, 2022). 2.3 Description of Securities registered under Section 12 of the Exchange Act. 4.1 Separation and Distribution Agreement by and between Novartis AG and Sandoz Group AG, dated as of September 30, 2023. 4.2 Tax Matters Agreement by and between Novartis AG and Sandoz Group AG, dated as of September 30, 2023. 8.1 For a list of all of our principal subsidiaries and associated companies, see “Item 18. Financial State- ments—Note 33. Novartis principal 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 Sarbanes-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. Section 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. 97.1 Novartis AG Policy Governing the Recovery of Erroneously Awarded Compensation. 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). 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. 190 (This page has been left blank intentionally.) 191 Novartis consolidated financial statements Novartis consolidated financial statements Consolidated income statements (For the years ended December 31, 2023, 2022 and 2021) (USD millions unless indicated otherwise) Net sales from continuing operations Other revenues Cost of goods sold Gross profit from continuing operations Selling, general and administration Research and development Other income Other expense Operating income from continuing operations (Loss)/income from associated companies Interest expense Other financial income and expense Income before taxes from continuing operations Income taxes Net income from continuing operations Net income from discontinued operations before gain on distribution of Sandoz Group AG to Novartis AG shareholders Gain on distribution of Sandoz Group AG to Novartis AG shareholders Net income from discontinued operations Net income Attributable to: Shareholders of Novartis AG Non-controlling interests Basic earnings per share (USD) from continuing operations Basic earnings per share (USD) from discontinued operations Total basic earnings per share (USD) Diluted earnings per share (USD) from continuing operations Diluted earnings per share (USD) from discontinued operations Total diluted earnings per share (USD) The accompanying Notes form an integral part of the consolidated financial statements. Note 2023 2022 2021 4 4 45 440 42 206 42 781 1 220 1 255 1 193 – 12 472 – 11 582 – 11 735 34 188 31 879 32 239 – 12 517 – 12 193 – 12 827 – 11 371 – 9 172 – 8 641 1 772 696 1 620 – 2 303 – 3 264 – 2 335 9 769 7 946 10 056 5 6 6 – 13 – 855 222 – 11 15 337 – 800 42 – 787 – 76 9 123 7 177 24 530 7 – 551 – 1 128 – 1 625 8 572 6 049 22 905 31 2 31 422 5 860 6 282 906 1 113 906 1 113 14 854 6 955 24 018 14 850 6 955 24 021 4 0 – 3 4.13 3.02 7.15 4.10 3.00 7.10 2.77 0.42 3.19 2.76 0.41 3.17 10.22 0.49 10.71 10.14 0.49 10.63 8 8 F-1 Novartis consolidated financial statements Consolidated statements of comprehensive income (For the years ended December 31, 2023, 2022 and 2021) (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 Total comprehensive income for the year attributable to: Shareholders of Novartis AG Continuing operations Discontinued operations Non-controlling interests The accompanying Notes form an integral part of the consolidated financial statements. Note 2023 2022 2021 14 854 6 955 24 018 5 9 9 9 9 – 50 1 375 1 325 – 160 37 – 123 91 46 216 – 450 – 4 762 – 359 – 4 500 – 103 – 382 – 485 1 809 194 2 003 16 056 6 111 21 521 16 050 6 116 21 528 10 115 5 181 20 450 5 935 6 935 – 5 1 078 – 7 F-2 Novartis consolidated financial statements Consolidated balance sheets (At December 31, 2023 and 2022) (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 2023 2022 10 11 12 12 5 13 14 14 15 16 17 17 18 9 514 10 764 1 410 1 431 23 341 29 301 26 879 31 644 205 4 309 2 607 1 199 143 3 739 2 411 1 110 69 464 80 543 5 913 7 107 426 7 175 8 066 268 1 035 11 413 13 393 2 607 7 517 2 471 30 481 36 910 99 945 117 453 19 19 825 – 41 890 – 92 45 883 58 544 46 667 59 342 83 81 46 750 59 423 20 11 13 21 22 11 18 436 20 244 1 598 2 248 4 523 1 538 2 686 4 906 26 805 29 374 4 926 6 175 230 5 146 5 931 251 1 893 2 533 23 13 166 14 795 26 390 28 656 53 195 58 030 99 945 117 453 Novartis consolidated financial statements Consolidated statements of changes in equity (For the years ended December 31, 2023, 2022 and 2021) Note 9 9 19.2 19.1 19.2 19 19.2 19.2 (USD millions) Total equity at January 1, 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 Increase of treasury share repurchase 19.4 obligation under a share buyback trading plan 19.8 Transaction costs, net of taxes 19.6 Changes in non-controlling interests 9 Fair value adjustments on financial assets sold 9 Value adjustments related to divestments Impact of change in ownership of consolidated entities 19.5 19.7 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 Net income Other comprehensive income Total comprehensive income Dividends Dividend in kind to effect the spin-off of Sandoz Group AG Purchase of treasury shares Reduction of share capital Exercise of options and employee transactions Equity-based compensation Shares delivered to Sandoz employees as a result of the Sandoz spin-off Taxes on treasury share transactions Transaction costs, net of taxes 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, 2023 19.1 19.2 19 19.2 19.2 19.4 19.6 9 9 19.7 19.8 19.6 9 9 19.7 2 19.2 19.3 19.2 19.2 19.1 19.2 19.2 9 Non- controlling interests 68 – 3 – 4 – 7 Total equity 56 666 24 018 – 2 497 21 521 – 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 – 81 2 809 – 81 217 – 81 – 14 510 59 423 14 854 1 202 16 056 – 7 255 81 4 2 6 Share capital 913 Treasury shares – 53 – 12 – 18 18 0 5 0 Reserves Equity attributable Retained Total value to Novartis earnings adjustments shareholders 56 598 57 157 – 1 419 24 021 24 021 – 2 493 46 21 528 24 067 – 7 368 – 7 368 – 2 902 – 2 920 – 6 39 740 – 2 539 – 2 539 39 745 17 1 – 1 040 12 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 – 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 2 809 2 809 – 4 34 – 4 996 217 30 – 14 429 59 342 14 850 1 200 16 050 – 7 255 1 200 1 200 4 – 34 217 – 44 – 14 404 63 540 – 92 14 850 14 850 – 7 255 – 13 962 – 8 466 – 29 144 898 – 51 94 2 6 0 30 14 – 214 – 1 – 29 129 51 – 28 741 49 649 – 41 – 12 901 – 11 – 11 890 – 65 – 65 825 – 13 962 – 8 517 – 13 962 – 8 517 146 904 30 14 – 214 146 904 30 14 – 214 – 4 – 4 1 29 129 30 – 28 725 46 667 – 3 766 129 – 4 – 28 729 46 750 83 The accompanying Notes form an integral part of the consolidated financial statements. F-4 Novartis consolidated financial statements Consolidated statements of cash flows (For the years ended December 31, 2023, 2022 and 2021) (USD millions) Net income from continuing operations Adjustments to reconcile net income from continuing operations to net cash flows from operating activities from continuing operations Note 2023 2022 2021 8 572 6 049 22 905 Reversal of non-cash items and other adjustments 24.1 10 369 10 631 – 6 430 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 from continuing operations before working capital and provision changes Payments out of provisions and other net cash movements in non-current liabilities Change in net current assets and other operating cash flow items Net cash flows from operating activities from continuing operations Net cash flows from operating activities from discontinued operations Total net cash flows from operating activities 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 investing activities from continuing operations Net cash flows used in investing activities from discontinued operations Total net cash flows from investing activities Dividends paid to shareholders of Novartis AG Acquisitions of treasury shares Proceeds from exercised options and other treasury share transactions, net 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 2 645 1 252 523 11 – 751 – 667 – 643 90 – 17 71 – 26 – 297 24.2 – 2 787 – 1 702 – 1 856 16 123 14 609 14 213 – 1 534 24.3 – 369 – 774 – 796 – 775 – 73 14 220 13 039 13 365 238 1 197 1 706 14 458 14 236 15 071 – 1 060 – 916 – 1 066 237 158 211 – 1 693 – 1 323 – 1 490 1 955 – 106 348 170 – 115 133 – 1 686 – 188 440 – 59 4 24.4 24.5 – 11 – 24 20 669 – 3 558 – 840 – 205 – 641 – 34 695 – 16 403 11 248 39 357 6 719 31 – 1 123 5 596 1 904 – 436 1 468 2 298 4 897 – 689 4 208 – 7 255 – 7 506 – 7 368 – 8 719 – 10 652 – 3 057 153 100 53 – 2 223 – 2 575 – 2 162 546 252 – 3 547 – 258 – 262 – 278 192 – 38 – 3 72 24.6 24.6 24.6 Net cash flows used in financing activities from continuing operations – 17 564 – 20 681 – 16 290 Net cash flows from financing activities from discontinued operations 31 3 286 119 26 Total net cash flows used in financing activities – 14 278 – 20 562 – 16 264 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. 5 776 – 4 858 100 – 32 5 876 – 4 890 7 517 12 407 3 015 – 266 2 749 9 658 13 393 7 517 12 407 F-5 Notes to the Novartis consolidated financial statements Notes to the Novartis consolidated financial statements 1. Accounting policies Novartis is a multinational group of companies (Novartis or Company) specializing in the research, development, manufacturing and marketing of a broad range of innovative pharmaceutical medicines. The Company is headquartered in Basel, Switzerland. The consolidated financial statements of the Com- pany are prepared in accordance with International Financial Reporting Standards (IFRS) Accounting Stan- dards as issued by the International Accounting Stan- dards Board. They are prepared in accordance with the historical cost convention, except for items that are required to be accounted for at fair value. The Company’s financial year-end is December 31, which is also the annual closing date of the individual entities’ financial statements incorporated into the Com- pany’s consolidated 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, including the distribution liability and the non-cash, non-taxable gain recognized in connec- tion with the distribution of Sandoz Group AG to Novartis AG shareholders, 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. At the Novartis AG Extraordinary General Meeting, held on September 15, 2023, our shareholders approved the spin-off of the Sandoz business. Following the share- holder approval, IFRS Accounting Standards require the Sandoz Division and selected portions of corporate activities attributable to Sandoz’s business, as well as certain expenses related to the spin-off (the “Sandoz business”) to be reported as discontinued operations in the consolidated financial statements. As a result, the Sandoz business has been presented as discontinued operations in the consolidated financial statements. This requires the year ended December 31, 2023 consoli- dated income statement, consolidated statement of comprehensive income and consolidated statement of cash flows to present separately continuing operations from discontinued operations, with comparative amounts in the prior years restated on a consistent basis. There is no requirement for the restatement of the December 31, 2022 consolidated balance sheet related to the assets and liabilities of the Sandoz business that were derecognized in 2023 as at the October 3, 2023 Distri- bution date. For further information and disclosures refer to the section Distribution of Sandoz Group AG to Novartis AG shareholders in this Note 1, Note 2 and Note 31. Listed below are the material accounting policies of sig- nificance to Novartis or, in cases where IFRS Account- ing Standards provide 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 Com- pany 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 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 using a functional currency other than USD the subsidiary’s results, financial position and cash flows 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 F-6 Notes to the Novartis consolidated financial statements Distribution of Sandoz Group AG to Novartis AG shareholders At the Extraordinary General Meeting (EGM) of Novartis AG shareholders, held on September 15, 2023, the Novartis AG shareholders approved a special distribu- tion by way of a dividend in kind to effect the spin-off of Sandoz Group AG. The September 15, 2023, shareholder approval for the spin-off required the Sandoz Division and selected portions of corporate activities attributable to Sandoz’s business, as well as certain expenses related to the spin- off (the “Sandoz business”) to be reported as discontin- ued operations. The shareholder approval on September 15, 2023, for the spin-off the Sandoz business, required the rec- ognition of a distribution liability at the fair value of the Sandoz business. Novartis policy is to measure the dis- tribution liability at the fair value of the Sandoz business net assets taken as a whole. The distribution liability was recognized through a reduction in retained earnings. It was required to be adjusted at each balance sheet date for changes in its estimated fair value, up to the date of the distribution to shareholders through retained earn- ings. Any resulting impairment of the business assets to be distributed would have been recognized in the con- solidated income statements in “Other expense” of dis- continued operations, at the date of initial recognition of the distribution liability or at subsequent dates resulting from changes of the distribution liability valuation. At the October 4, 2023, distribution settlement date, the resulting gain, which is measured as the excess amount of the distribution liability over the then-carrying value of the net assets of the business distributed, was recognized on the line “Gain on distribution of Sandoz Group AG to Novartis AG shareholders” within the income statement of discontinued operations. The recognition of the distribution liability required the use of valuation techniques for the purposes of impairment testing of the Sandoz business’ assets to be distributed and for the measurement of the fair value of the distribution liability. These valuations required the use of management assumptions and estimates related to the Sandoz business’ future cash flows, market mul- tiples, opening share price of Sandoz Group AG on the first day of trading its shares on the SIX Swiss Exchange, to estimate day one market value, and control premiums to apply in estimating the Sandoz business fair value. These fair value measurements are classified as “Level 3” in the fair value hierarchy. The section “—Goodwill and intangible assets other than goodwill” in this Note 1 pro- vides additional information on key assumptions that are highly sensitive in the estimation of fair values using val- uation techniques. Transaction costs that are directly attributable to the Distribution (spin-off) of the Sandoz business to Novartis AG shareholders by way of a dividend in kind, and that would otherwise have been avoided, were accounted for as a deduction from equity (within retained earnings). Prior to the recognition of the distribution liability, these costs were recorded as prepaid expenses in the consol- idated balance sheet. For additional disclosures, refer to “Note 2. Signifi- in transactions—Significant transactions cant 2023—Completion of the spin-off of the Sandoz busi- ness through a dividend in kind distribution to Novartis AG shareholders,” and “Note 31. Discontinued opera- tions.” Acquisition of assets and businesses 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 Company obtains control. 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. Goodwill and intangible assets other than 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. Goodwill is allocated to groups of cash-generating units (CGUs) that is expected to bene- fit from the synergies of the combination, which are usu- ally represented by the operating segment. Goodwill is F-7 Notes to the Novartis consolidated financial statements tested for impairment annually at the level of this group of CGUs, and any impairment charges are recorded under “Other expense” in the consolidated income state- ment. Purchased intangible assets other than goodwill are initially recorded at cost. Intangible assets that have been acquired through a business combination are initially recorded at fair value using the acquisition method of accounting. Intangible assets available for use with a definitive useful life (which includes the categories Currently mar- keted products and Other intangible assets) are amor- tized on a straight-line basis and evaluated for potential impairment whenever facts and circumstances indicate that their carrying value may not be recoverable. Acquired research and development intangible assets that have not yet obtained marketing approval are recognized as in-process research and development (IPR&D). IPR&D is not amortized as it is not yet available for use. It is evaluated for potential impairment on an annual basis or when facts and circumstances warrant. Once a project included in IPR&D has received market- ing approval from a regulatory authority, it is transferred to the “Currently marketed products” category of intan- gible 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. An estimate is therefore 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 Company’s activities with regard to: • 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 Company’s esti- mated weighted average cost of capital, adjusted for spe- cific 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 and non- current financial assets Marketable securities are financial assets held for short- term purposes that are principally traded in liquid mar- kets and are classified within current assets on the con- solidated balance sheet. The financial impacts related to these financial assets are recorded in “Other financial income and expense” in the consolidated income state- ment. 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 consoli- dated 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 Company classifies and accounts for its market- able securities and non-current financial assets in the following categories: F-8 Notes to the Novartis consolidated financial statements • 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 Company assesses on a forward-looking basis the expected credit losses associated with its debt securi- ties valued at fair value through other comprehensive income. Impairments on debt securities are recorded in “Other financial income and expense.” For other financial assets valued at amortized 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. Options are valued based on a modified Black- Scholes model using volatility and exercise prices as major observable inputs. The Company enters into certain derivative financial instruments for the purpose of hedging to reduce the volatility in the Company’s performance due to the expo- sure to various business-related risks. The risk mitiga- tion 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 con- tractually 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 Company has designated certain long-term debt components as hedges of the translation risk arising on certain net investments in foreign opera- tions. On consolidation, foreign currency differences arising on long-term debt designated as net investment hedges of a foreign operation are recognized in other comprehensive income and accumulated in currency translation effects, to the extent that the hedge is effec- tive. The foreign currency differences arising from hedge ineffectiveness 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 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. 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). Charges for doubtful trade receivables are recorded as marketing and selling costs recognized in F-9 Notes to the Novartis consolidated financial statements the consolidated income statement within “Selling, gen- eral and administration” expenses. Revenue recognition 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. 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 cur- rent service cost for defined benefit pension plans and other post-employment benefit plans is included in the personnel expenses of the various functions in which employees are employed, and the net interest on the net defined benefit liability or asset is recognized as “Other expense” or “Other income.” Revenue on the sale of Novartis products and services, which is recorded as “Net sales to third parties” in the consolidated income statement, is recognized when a contractual promise to a customer (performance obliga- tion) 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 sup- ported 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. The provision represents estimates of the related obligations, requiring the use of judgment when estimating the effect of these reve- nue deductions. These rebates and discounts, applied using provision rates, are estimated based on the terms and conditions in the individual government agencies, states, plans and customer agreements (which may be subject to challenge or change in interpretative guid- ance by government authorities and customers), his- torical experience, product sales and growth rate, pop- ulation growth, product pricing including inflation impacts, the mix of contracts and products, the level of inventory in the distribution channel, regulations, contracts, channels and payers, as appropriate to the individual rebate and discount arrangements. These rebate provisions are adjusted based on established processes and experiences, for example from filing data with individual government agencies, states, and plans. There is often a time lag between recording of revenue deductions and the final accounting for them. • 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. The provision represents estimates of the related obligations, requiring the use of judgment when estimating the effect of these revenue deduc- tions. 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. F-10 Notes to the Novartis consolidated financial statements In cases where historical experience and clinical data are not sufficient for a reliable estimation of the out- come, revenue recognition is deferred until the uncer- tainty is resolved, until such history is available or the period when the refund right has expired. The provi- sions for revenue deductions under the innovative pay-for-performance agreements are adjusted period- ically based on established processes and actual expe- rience, including the products actual outcomes achieved compared with the anticipated predefined 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. • 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. The provision represents estimates of the related obligations, requiring the use of judgment when estimating the effect of these revenue deductions. In doing so, the estimated rate of return is applied, deter- mined on the basis of historical experience of customer returns and considering any other relevant factors. This is applied to the amounts invoiced, also considering the amount of returned products to be destroyed ver- sus 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 esti- mating sales returns, revenue is only recorded when there is evidence of consumption or when the right of return has expired. The provisions for sales returns are adjusted periodically based on established processes and actual experience, 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, 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, and is recog- nized 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 Company considers that regulatory and other uncertainties inherent in the development of new products preclude the capitalization of internal develop- ment 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, Switzerland 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. F-11 Notes to the Novartis consolidated financial statements 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 based on Novartis internal perfor- mance metrics and 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 companies over the vesting period and require plan participants to provide services during this period The expense is recognized in the consolidated income state- ment on a straight-line basis over the vesting period, and is determined based on a bifurcation into the compo- nents based on the performance criteria related to Novartis internal performance metrics and TSR. The number of equity instruments that finally vest is deter- mined at the vesting date. The following paragraphs pro- vide an overview of the accounting policies for the deter- mination of the components of the PSU share-based compensation plan expense. The portion of the PSUs expense that is subject to performance criteria based on Novartis internal perfor- mance metrics over the vesting period is determined based on assumptions concerning the expected perfor- mance against the internal performance metrics through- out the vesting period. The assumptions are based on the Company’s targets for those performance metrics, and the expected forfeitures due to plan participants not meeting their service conditions. The assumptions are periodically adjusted over the vesting period. For this portion of the PSUs expense, 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 vest- ing period, the expense during the entire vesting period represents the amount that will finally vest. The portion of the PSUs expense that is subject to performance criteria based on Novartis TSR relative to a specific peer group of companies over the vesting period is determined based on the total fair value of the grant over the vesting period. IFRS Accounting Stan- dards require 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 deter- mined the fair value of these PSUs at the date of grant using a Monte Carlo simulation model. For this portion of the PSU expense, adjustments to expense recognized in the consolidated income statement are only made if a plan participant does not fulfill the service conditions. Measuring the fair values of PSUs granted that include TSR performance criteria requires the use of estimates. 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. 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 Company applies the IFRS Accounting Standards exception to not recognize or disclose information about deferred tax assets and deferred tax liabilities related to countries that have enacted tax legislation that comply with the Organization for Economic Cooperation and Develop- ment (OECD) Pillar Two income taxes. 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 F-12 Notes to the Novartis consolidated financial statements of the asset to be recovered. In evaluating our ability to recover our deferred tax assets in the jurisdiction from 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 Company operates, which are subject to interpreta- tions 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 Accounting Standards, amendments and interpretations in 2023 No new IFRS Accounting Standards were adopted by the Company in 2023. In addition, new IFRS Accounting Standards amendments or interpretations that became effective in 2023 did not have a material impact on the Company’s consolidated financial statements. Based on the Company’s assessment, there are no IFRS Accounting Standards, amendments or interpretations not yet effective in 2023 that would be expected to have a material impact on the Company’s consolidated financial statements. Impact of new IFRS Accounting Standards, amendments and interpretations in 2022 No new IFRS Accounting Standards were adopted by the Company in 2022. In addition, new IFRS Accounting Standards amendments or interpretations that became effective in 2022 did not have a material impact on the Company’s consolidated financial statements. Based on the Company’s assessment, there were no IFRS Accounting Standards, amendments or interpreta- tions not yet effective in 2022 that would have been expected to have a material impact on the Company’s consolidated financial statements. Impact of adopting significant new IFRS Accounting Standards in 2021 The following new IFRS Accounting Standard was 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 Company’s financial instruments and risk man- agement strategies did not have a material impact on the Company’s consolidated financial statements. F-13 Notes to the Novartis consolidated financial statements 2. Significant transactions The Company 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 2023 Completion of the spin-off of the Sandoz business through a dividend in kind distribution to Novartis AG shareholders On July 18, 2023, Novartis announced that its Board of Directors had unanimously endorsed the proposed sep- aration of the Sandoz business to create an independent company by way of a spin-off and to seek shareholder approval for the spin-off of the Sandoz business into a separately traded standalone company, following the complete structural separation of the Sandoz business into a standalone company (the Sandoz business or Sandoz Group AG) and subject to the satisfaction of cer- tain conditions and Novartis AG shareholders’ approval. At the EGM held on September 15, 2023, Novartis AG shareholders approved a special distribution by way of a dividend in kind to effect the spin-off of Sandoz Group AG, subject to the completion of certain conditions prec- edent to the distribution. Upon shareholder approval, the Sandoz business was reported as discontinued opera- tions and the distribution liability was recognized at its fair value, which exceeded the carrying value of the Sandoz business net assets. The conditions precedent to the spin-off were met and on October 3, 2023 the spin-off of the Sandoz busi- ness was effected by way of a distribution of a dividend in kind of Sandoz Group AG shares to Novartis AG share- holders and American Depositary Receipt (ADR) hold- ers (the Distribution). Through the Distribution, each Novartis AG shareholder received 1 Sandoz Group AG share for every 5 Novartis AG shares and each Novartis ADR holder received 1 Sandoz ADR for every 5 Novartis ADR that they held at the close of business on October 3, 2023. As of October 4, 2023, the shares of Sandoz Group AG have been listed on the SIX Swiss Exchange (SIX) under the stock symbol “SDZ”. On September 18, 2023, the Sandoz business entered into financing arrangements with a group of banks under which on September 28, 2023, it borrowed a total amount of USD 3.3 billion. These borrowings consisted of a bridge loan in EUR (EUR 2.4 billion) and term loans in EUR (EUR 0.2 billion) and USD (USD 0.5 billion). In addi- tion, the Sandoz business borrowed approximately USD 0.4 billion under a number of local bilateral facilities in different countries. This resulted in a total gross debt of USD 3.7 billion. These outstanding borrowings of the Sandoz business legal entities were recognized in the September 30, 2023 consolidated balance sheet within Liabilities related to discontinued operations and within financing activities cash flows from discontinued oper- ations. Prior to the Distribution on October 3, 2023, Sandoz business legal entities paid approximately USD 3.3 billion in cash to Novartis and its affiliates through a series of intercompany transactions. At the Distribution date on October 3, 2023, the div- idend in kind distribution liability to effect the Distribu- tion (spin-off) of the Sandoz business amounted to USD 14.0 billion, measured by reference to the October 4, 2023 opening Sandoz Group AG share price and apply- ing a control premium. The dividend in kind distribution liability was recorded as a reduction to equity (retained earnings) and remained in excess of the then carrying value of the Sandoz business net assets, which amounted to USD 8.6 billion (see Note 31). Certain consolidated foundations own Novartis AG dividend-bearing shares that restricts their availability for use by Novartis. These Novartis AG shares are accounted for as treasury shares. Through the Distribu- tion, these foundations received Sandoz Group AG shares representing an approximate 4.31% equity inter- est in Sandoz Group AG. Upon the loss of control of Sandoz Group AG through the Distribution on October 3, 2023, the financial investment in Sandoz Group AG was recognized at its initial fair value based on the open- ing traded share price of Sandoz Group AG on October 4, 2023 (a Level 1 hierarchy valuation). At initial recogni- tion, on October 4, 2023, the Sandoz Group AG finan- cial investment had a fair value of USD 0.5 billion, and was reported in the fourth quarter of 2023 on the con- solidated balance sheet as a financial asset. Manage- ment has designated this investment at fair value through other comprehensive income. The total non-taxable, non-cash gain recognized at the Distribution date of the spin-off of the Sandoz busi- ness amounted to USD 5.9 billion, which consists of: (USD millions) Net assets derecognized 1 Derecognition of distribution liability Oct 3, 2023 – 8 647 13 962 Difference between net assets and distribution liability 5 315 Recognition of Sandoz Group AG shares obtained through consolidated foundations Currency translation gains recycled into the consolidated income statement Transaction costs and other items recognized in the consolidated income statement Gain on distribution of Sandoz Group AG to Novartis AG shareholders 1 See Note 31 for additional information. 492 357 – 304 5 860 For additional disclosures on discontinued operations, refer to Note 31. Acquisition of DTx Pharma Inc. In the second quarter of 2023, Novartis entered into an agreement to acquire all outstanding shares of DTx Pharma Inc. (DTx), a San-Diego, California US based, pre-clinical stage biotechnology company focused on leveraging its proprietary FALCON platform to develop siRNA therapies for neuroscience indications. DTx’s lead program, DTx-1252 targets the root cause of CMT1A— the overexpression of PMP22, a protein that causes the myelin sheath that supports and insulates nerves in the peripheral nervous system to function abnormally. The F-14 Notes to the Novartis consolidated financial statements transaction also includes two additional pre-clinical pro- grams for other neuroscience indications. The transac- tion closed on July 14, 2023. The purchase price consisted of a cash payment of USD 0.6 billion and potential additional milestones of up to USD 0.5 billion, which the DTx shareholders are eligi- ble to receive upon the achievement of specified mile- stones. The fair value of the total purchase consideration was USD 0.6 billion. The amount consisted of a cash payment of USD 0.6 billion and the fair value of contingent con- sideration of USD 30 million, which DTx shareholders are eligible to receive upon the achievement of specified milestones. The purchase price allocation resulted in net identifiable assets of USD 0.4 billion, consisting primar- ily of IPR&D intangible assets of USD 0.4 billion, cash of USD 0.1 billion and net deferred tax liabilities of USD 0.1 billion. Goodwill amounted to USD 0.2 billion. The results of operations since the date of acquisi- tion were not material. Acquisition of Chinook Therapeutics On June 12, 2023, Novartis entered into an agreement to acquire all outstanding shares of Chinook Therapeu- tics, Inc. (Chinook Therapeutics), a Seattle, Washington based clinical stage biopharmaceutical company with two late-stage medicines in development for rare, severe chronic kidney diseases. The acquisition closed on August 11, 2023. The purchase price consisted of a cash payment of USD 3.2 billion and potential additional payments of up to USD 0.3 billion, which Chinook Therapeutics share- holders are eligible to receive upon the achievement of specified milestones. The fair value of the total purchase consideration was USD 3.3 billion. The amount consisted of an upfront cash payment of USD 3.2 billion and the fair value of contin- gent consideration of USD 0.1 billion, which Chinook Therapeutics shareholders are eligible to receive upon achievement of specified milestones. The purchase price allocation resulted in net identifiable assets of USD 2.4 billion, consisting primarily of IPR&D intangible assets of USD 2.5 billion, net deferred tax liabilities of USD 0.4 bil- lion and other net assets of USD 0.3 billion, including cash of USD 0.1 billion. Goodwill amounted to USD 0.9 billion. The results of operations since the date of acquisi- tion were not material. Significant transactions in 2022 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 the 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 the achievement of specified milestones. The purchase price allocation resulted in net identifiable assets of USD 0.9 billion, con- sisting primarily of IPR&D 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 2022 results of operations since the date of acquisition were not material. Significant transactions in 2021 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. F-15 Notes to the Novartis consolidated financial statements 3. Operating segment Prior to the September 15, 2023, shareholders’ approval of the spin-off of the Sandoz business (refer to Note 1 and Note 2 for additional information), the businesses of Novartis were divided operationally on a worldwide basis into two identified reporting segments: Innovative Medicines Division and the Sandoz Division. In addition, we separately reported Corporate activities. Following the September 15, 2023, shareholders’ approval of the spin-off of the Sandoz business (see Note 1 and Note 2), the Company reported its consolidated financial statements for the current and prior years as “continuing operations” and “discontinued operations” (see Note 1). Continuing operations include the retained business activities of Novartis, comprising the innovative medicines business (previously the Innovative Medicines Division) and the continuing corporate activities. Discontinued operations include the Sandoz generic pharmaceuticals and biosimilars business (the Sandoz Division) and certain corporate activities attributable to Sandoz’s business, as well as certain expenses related to the spin-off. Included in 2023 is also the IFRS Account- ing Standards non-cash, non-taxable net gain on the Dis- tribution of Sandoz Group AG to Novartis AG sharehold- ers. For further details and disclosures on discontinued operations, refer to Note 1, Note 2 and Note 31. Effective January 1, 2023, the Sandoz business bio-technology manufacturing services to other compa- nies’ activities and the Coartem brand were transferred to the Novartis continuing operations. The financial infor- mation of the Novartis continuing operations and discon- tinued operations were accordingly adapted in 2023 and prior years, in compliance with IFRS Accounting Standards. This restatement had no impact on the reported financial results and consolidated balance sheet of the total Company. The Company’s continuing operations is engaged in the research, development, manufacturing, distribution, and commercialization and sale of innovative medicines, with a focus on the core therapeutic areas: cardiovas- cular, renal and metabolic; immunology; neuroscience; oncology; and established brands. Following the spin-off of the Sandoz business, on October 3, 2023, Novartis operates as a single global operating segment innovative medicines company that is engaged in the research, development, manufactur- ing, distribution and commercialization and sale of innovative medicines. The Company’s research, devel- opment manufacturing and supply of products and func- tional activities are managed globally on a vertically inte- grated basis. Commercial efforts that coordinate marketing, sales and distribution of these products are organized by geographic region, therapeutic area and established brands. The Executive Committee of Novartis (ECN), chaired by the CEO, is the governance body responsible for allo- cating resources and assessing the business perfor- mance of the operating segment of the Company on a global basis and is the chief operating decision-maker (CODM) for the Company. The determination of a single operating segment is consistent with the financial information regularly reviewed by the CODM for purposes of assessing per- formance and allocating resources. See Note 4 for revenues and geographic information disclosures. 4. Revenues and geographic information Net sales information Net sales from continuing operations comprise the following: (USD millions) Net sales to third parties from continuing operations Sales to discontinued operations Net sales from continuing operations 2023 2022 2021 44 635 41 385 41 976 805 821 805 45 440 42 206 42 781 F-16 Notes to the Novartis consolidated financial statements Geographic information The following table shows countries that accounted for more than 5% of net sales from continuing operations or more than 5% of total of selected non-current assets, for the years ended December 31, 2023, 2022 and 2021, and for selected non-current assets for the years ended December 31, 2023 and 2022: (USD millions) Country Switzerland United States Germany China Japan France Other Total Net sales from continuing operations1 Total of selected non-current assets2 2023 % 2022 % 2021 % 2023 % 2022 1 308 17 959 3 367 3 267 1 924 1 749 15 866 45 440 3 1 036 2 926 2 19 396 40 15 935 38 14 923 35 34 059 7 7 4 4 3 101 2 948 1 883 1 754 7 7 4 4 3 595 2 849 2 259 1 955 8 7 5 5 88 547 120 3 085 35 15 549 38 16 274 38 4 269 32 55 1 5 7 23 708 35 353 2 229 599 165 3 188 8 241 100 42 206 100 42 781 100 61 564 100 73 483 100 % 32 48 3 1 4 12 1 Net sales from continuing operations 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 Net sales from continuing operations by region1 The following table shows net sales from continuing operations by region for the years ended December 31, 2023, 2022 and 2021: US Europe Asia/Africa/Australasia Canada and Latin America Total Of which in established markets Of which in emerging growth markets 2023 USD m 2022 USD m Change (2022 to 2023) USD % Change (2021 to 2022) USD % 2021 USD m 17 959 15 935 13 14 923 14 997 14 371 9 308 3 176 8 978 2 922 45 440 42 206 33 725 31 386 11 715 10 820 4 4 9 8 7 8 15 721 9 355 2 782 42 781 32 183 10 598 7 – 9 – 4 5 – 1 – 2 2 1 Net sales from continuing operations 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. Novartis definition of Western Europe includes Austria, Belgium, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Malta, The Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Information about major customers The Company’s largest, second-largest and third-largest customers account for approximately 15%, 13% and 8% of net sales from third parties from continuing operations, respectively (2022: 16%, 12% and 8%, respectively; 2021: 14%, 13% and 7%, respectively). The highest amounts of trade receivables outstanding were for these same three customers and amounted to approximately 17%, 13% and 8%, respectively, of the trade receivables at December 31, 2023 (2022: 16%, 14% and 7%, respectively). F-17 Notes to the Novartis consolidated financial statements Net sales from continuing operations by core therapeutic area and established brands Change (2022 to 2023) USD m 1 USD % 2022 Change (2021 to 2021 2022) USD m 1 USD % 2023 USD m 1 475 1 874 – 21 2 160 – 13 1 314 1 238 6 1 413 – 12 925 2 013 – 54 2 787 – 28 713 692 613 561 408 743 – 4 901 – 18 859 – 19 1 092 – 21 652 – 6 773 – 16 745 – 25 1 024 – 27 512 – 20 938 – 45 Exforge Group Galvus Group Diovan Group Gleevec/Glivec Afinitor/Votubia Contract manufacturing 3 1 490 1 200 24 1 083 11 Other 3 5 427 6 113 – 11 7 091 – 14 Total established brands 3 Total net sales from continuing operations 13 618 15 949 – 15 19 262 – 17 45 440 42 206 8 42 781 – 1 1 Reclassified to conform with the 2023 organizational structure. 2 Net sales from continuing operations reflect Xolair sales for all indications. 3 Effective January 1, 2023, the discontinued operations Sandoz business transferred to Novartis continuing operations its bio-technology manufacturing services to other companies’ activities (included in Contract manufacturing) and the Coartem brand (included in Other). The financial information of the Novartis continuing operations and discontinued operations were adapted accordingly in 2022 and 2021, in compliance with IFRS Accounting Standards. See Note 3 for additional information. Change (2022 to 2023) USD m 1 USD % 2022 Change (2021 to 2021 2022) USD m 1 USD % 2023 USD m Cardiovascular, renal and metabolic Established brands Entresto Leqvio Other 6 035 4 644 30 3 548 355 112 217 1 nm 12 1 31 nm nm Lucentis Sandostatin Gilenya Total cardiovascular, renal and metabolic 6 391 4 756 34 3 561 34 Immunology Cosentyx Xolair 2 Ilaris Other 4 980 4 788 1 463 1 365 4 7 4 718 1 1 428 – 4 1 355 1 133 20 1 059 1 nm 1 7 0 1 Total immunology 7 798 7 287 7 7 206 Neuroscience Kesimpta Zolgensma Mayzent Aimovig Other 2 171 1 092 99 372 194 1 214 1 370 – 11 1 351 392 266 357 218 1 10 22 nm 281 215 1 1 27 1 0 Total neuroscience 4 043 3 038 33 2 220 37 Oncology nm = not meaningful Promacta/Revolade 2 269 2 088 9 2 016 Kisqali 2 080 1 231 69 937 Tafinlar + Mekinist 1 922 1 770 9 1 693 4 31 5 – 7 – 2 nm – 1 – 9 13 nm 18 48 0 6 Tasigna Jakavi Pluvicto Lutathera Kymriah Piqray/Vijoice Scemblix Votrient Adakveo Tabrecta Other 1 848 1 923 – 4 2 060 1 720 1 561 10 1 595 980 605 508 505 413 390 195 154 1 271 471 536 373 149 262 28 – 5 35 177 475 587 329 7 474 – 18 577 – 18 194 133 2 1 16 nm 164 90 2 Total oncology 13 590 11 176 22 10 532 Total promoted brands 31 822 26 257 21 23 519 12 F-18 Notes to the Novartis consolidated financial statements Net sales from continuing operations of the top 20 brands in 2023 Brands Entresto Brand classification by therapeutic area or established brands Cardiovascular, renal and metabolic Cosentyx Immunology Promacta/Revolade Oncology Kesimpta Neuroscience Kisqali Oncology Tafinlar + Mekinist Oncology Tasigna Jakavi Oncology Oncology Lucentis 1 Established brands Xolair 2 Immunology Ilaris Immunology Sandostatin Established brands Zolgensma Neuroscience Pluvicto Gilenya 1 Exforge Group Galvus Group Diovan Group Lutathera Oncology Established brands Established brands Established brands Established brands Oncology Gleevec/Glivec Established brands Top 20 brands total Rest of portfolio Total net sales from continuing operations Key indications Chronic heart failure, hypertension Psoriasis (PsO), ankylosing spondylitis (AS), psoriatic arthritis (PsA), non-radiographic axial spondyloarthritis (nr-axSPA), hidradenitis suppurativa (HS) Immune thrombocytopenia (ITP), severe aplastic anemia (SAA) Relapsing-remitting multiple sclerosis (RRMS) HR+/HER2- metastatic breast cancer BRAF V600+ metastatic adjuvant melanoma, advanced non-small cell lung cancer (NSCLC), tumor agnostic with BRAF mutation indication Chronic myeloid leukemia (CML) Myelofibrosis (MF), polycytomia vera (PV), graft-versus-host disease (GvHD) Age-related macular degeneration (AMD), diabetic macular edema (DME), retinal vein occlusion (RVO) Severe allergic asthma (SAA), chronic spontaneous urticaria (CSU), nasal polyps Auto-inflammatory (CAPS, TRAPS, HIDS/MKD, FMF, SJIA, AOSD, gout) Carcinoid tumors, acromegaly Spinal muscular atrophy (SMA) PSMA-positive mCRPC patients post-ARPI, post-Taxane Relapsing multiple sclerosis (RMS) Hypertension Type 2 diabetes Hypertension GEP-NETs gastroenteropancreatic neuroendocrine tumors Chronic myeloid leukemia (CML), gastrointestinal stromal tumors (GIST) US USD m Rest of world USD m Total USD m 3 067 2 968 6 035 2 636 2 344 4 980 1 205 1 064 2 269 1 528 643 2 171 1 032 1 048 2 080 791 1 131 1 922 884 964 1 848 1 720 1 720 1 475 1 475 1 463 1 463 686 669 1 355 829 485 1 314 372 842 1 214 921 59 980 359 566 925 13 52 427 700 692 561 178 713 692 613 605 150 411 561 14 952 19 983 34 935 3 007 7 498 10 505 17 959 27 481 45 440 1 In the first quarter of 2023 Lucentis was reclassified from other promoted brands to established brands and Gilenya was reclassified from neuroscience to established brands. 2 Net sales from continuing operations reflect Xolair sales for all indications. F-19 Notes to the Novartis consolidated financial statements Net sales from continuing operations of the top 20 brands in 2022 Brands Cosentyx Entresto Brand classification by therapeutic area or established brands 1 Immunology Key indications Psoriasis (PsO), ankylosing spondylitis (AS), psoriatic arthritis (PsA), non-radiographic axial spondyloarthritis (nr-axSPA) Cardiovascular, renal and metabolic Chronic heart failure, hypertension Promacta/Revolade Oncology Immune thrombocytopenia (ITP), severe aplastic anemia (SAA) Established brands Relapsing multiple sclerosis (RMS) Gilenya 2 Tasigna Lucentis 2 Oncology Established brands 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) 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) Tafinlar + Mekinist Oncology Jakavi Oncology Ilaris Immunology Kesimpta Neuroscience Galvus Group Gleevec/Glivec Established brands Established brands Exforge Group Diovan Group Kymriah Established brands Established brands Oncology Afinitor/Votubia Established brands Top 20 products total Rest of portfolio 4 Total net sales from continuing operations 4 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 1 153 860 877 1 046 1 874 2 013 1 923 1 874 678 1 092 1 770 1 561 1 561 800 472 438 759 1 238 1 231 570 563 1 133 921 171 1 092 205 14 55 196 859 540 729 597 340 859 745 743 652 536 171 341 512 12 753 19 384 32 137 3 182 6 887 10 069 15 935 26 271 42 206 Zolgensma Xolair 3 Sandostatin Kisqali Neuroscience Immunology Spinal muscular atrophy (SMA) 434 936 Severe allergic asthma (SAA), chronic spontaneous urticaria (CSU), nasal polyps 1 365 1 370 1 365 Established brands Carcinoid tumors, acromegaly Oncology 1 Brand classifications have been changed to conform with the 2023 brand classifications. 2 In the first quarter of 2023 Lucentis was reclassified from other promoted brands to established brands and Gilenya was reclassified from neuroscience to established brands. 3 Net sales from continuing operations reflect Xolair sales for all indications. 4 Effective January 1, 2023, the discontinued operations Sandoz business bio-technology manufacturing services to other companies’ activities and the Coartem brand were transferred to the Novartis continuing operations. The financial information of the Novartis continuing operations and discontinued operations were adapted accordingly in 2022, in compliance with IFRS Accounting Standards. See Note 3 for additional information. F-20 Key indications Psoriasis (PsO), ankylosing spondylitis (AS), psoriatic arthritis (PsA), non-radiographic axial spondyloarthritis (nr-axSPA) Chronic heart failure US USD m Rest of world USD m Total USD m 2 883 1 835 4 718 1 712 1 836 3 548 Relapsing multiple sclerosis (RMS) 1 427 1 360 Notes to the Novartis consolidated financial statements Net sales from continuing operations of the top 20 brands in 2021 Brands Cosentyx Entresto Gilenya 2 Lucentis 2 Tasigna Promacta/Revolade Brand classification by therapeutic area or established brands 1 Immunology Cardiovascular, renal and metabolic Established brands Established brands Oncology Oncology Tafinlar + Mekinist Oncology Jakavi Xolair 3 Oncology Immunology Sandostatin Established brands Zolgensma Neuroscience 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 Carcinoid tumors, acromegaly Spinal muscular atrophy (SMA) Galvus Group Established brands Type 2 diabetes Ilaris Immunology Gleevec/Glivec Established brands Afinitor/Votubia Established brands Kisqali Oncology Exforge Group Diovan Group Kymriah Established brands Established brands Oncology Ultibro Group Established brands Top 20 products total Rest of portfolio 4 Total net sales from continuing operations 4 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) Chronic obstructive pulmonary disease (COPD) 2 160 882 947 1 178 1 069 2 787 2 160 2 060 2 016 606 1 087 1 693 1 595 1 595 1 428 1 428 843 570 1 413 469 882 1 351 1 092 501 558 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 3 235 6 882 10 117 14 923 27 858 42 781 1 Brand classifications have been changed to conform with the 2023 brand classifications. 2 In the first quarter of 2023 Lucentis was reclassified from other promoted brands to established brands and Gilenya was reclassified from neuroscience to established brands. 3 Net sales from continuing operations reflect Xolair sales for all indications. 4 Effective January 1, 2023, the discontinued operations Sandoz business bio-technology manufacturing services to other companies’ activities and the Coartem brand were transferred to the Novartis continuing operations. The financial information of the Novartis continuing operations and discontinued operations were adapted accordingly in 2021, in compliance with IFRS Accounting Standards. See Note 3 for additional information. F-21 Notes to the Novartis consolidated financial statements Other revenues (USD millions) Profit-sharing income Royalty income Milestone income Other 1 Total other revenues 2023 941 87 45 147 2022 921 35 145 154 2021 873 85 127 108 1 220 1 255 1 193 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. 5. Associated companies Net income statement effect Other comprehensive income effect 1 Total comprehensive income effect (USD millions) 2023 2022 2021 2023 2022 2021 2023 2022 2021 Roche Holding AG, Switzerland 15 341 Others Associated companies – 13 – 13 – 11 – 4 – 11 15 337 46 46 15 387 – 13 – 13 – 11 – 4 – 11 15 383 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 2023 and 2022. 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. For more information, see Note 2. 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 Company’s share of Roche’s net income. Any differ- ences between these estimates and actual results were adjusted in the Company’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 2023 and 2022 Company’s consolidated financial statements. The consolidated income statement effects from applying Novartis accounting principles for this invest- ment in 2021 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 USD 10 million Gain on divestment of the investment in Roche 1 Net income effect 2021 815 40 – 70 14 556 15 341 1 The gain on divestment of the investment in Roche includes the recycling of currency translation effects (see Note 9.1) and other comprehensive income effects totaling USD 3.2 billion. F-22 Notes to the Novartis consolidated financial statements 6. Interest expense and other financial income and expense Interest expense Other financial income and expense (USD millions) Interest expense 2023 – 730 Interest expense on lease liabilities – 62 2022 – 642 – 57 2021 (USD millions) – 633 Interest income – 59 Other financial income Expense arising from discounting long-term liabilities and capitalized borrowing costs Total interest expense from continuing operations – 63 – 101 – 95 – 855 – 800 – 787 Monetary loss from hyperinflation accounting Financial expense Currency result, net Total other financial income and expense from continuing operations 2023 627 21 – 194 – 18 – 214 2022 377 19 – 137 – 33 – 184 2021 70 12 – 48 – 41 – 69 222 42 – 76 7. Income taxes Income before taxes (USD millions) Switzerland 1 Foreign 2 2023 9 719 – 596 2022 2021 5 751 21 830 1 426 2 700 Income before taxes from continuing operations 9 123 7 177 24 530 1 The 2021 income before taxes from continuing operations in Switzerland includes a USD 14.6 billion non-taxable gain on the divestment of the Company’s investment in Roche Holding AG (see Note 2 and Note 5). 2 The 2023 foreign income before taxes from continuing operations is impacted by non-recurring events, including impairment charges on intangible assets other than goodwill. Current and deferred income tax expense The significant components of the provision for income taxes from continuing operations are as follows: 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 Company’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 Company’s overall applicable tax rate and the effective tax rate are shown in the following table: (As a percentage) Applicable tax rate 2023 2022 2021 15.0 15.3 14.2 Effect of disallowed expenditures 1.4 2.6 1.0 Effect of income taxed at reduced rates – 0.6 – 0.4 – 0.1 Effect of income not subject to tax 1 – 2.5 – 0.1 – 7.9 Effect of tax credits and allowances – 3.9 – 4.1 – 1.5 Effect of release of contingent consideration liability – 0.3 – 0.5 – 0.1 (USD millions) Switzerland Foreign 2023 – 1 136 2022 – 598 – 1 290 – 1 155 2021 – 949 – 973 Current income tax expense – 2 426 – 1 753 – 1 922 Effect of tax rate change on current and deferred tax assets and liabilities Effect of derecognition and reversals of derecognition of deferred tax assets – 1.6 0.0 0.0 0.9 1.3 0.0 Switzerland Foreign Deferred tax income Income tax expense from continuing operations 355 – 131 1 520 1 875 756 625 39 258 297 Effect of write-down of investments in subsidiaries Effect of prior-year items – 3.0 0.0 0.0 – 0.3 – 551 – 1 128 – 1 625 Effect of changes in uncertain tax positions Effect of other items Effective tax rate from continuing operations 0.1 0.5 1.7 0.2 – 0.1 6.0 15.7 6.6 0.0 0.1 1.0 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 1 2021 includes the effect of income not subject to tax (– 7.7%) arising from the non-taxable gain on the divestment of our investment in Roche. See Notes 2 and 5 for further details. The effective tax rate of Novartis fluctuates primarily as a result of, among other factors, changes in pre-tax F-23 Notes to the Novartis consolidated financial statements income between countries with varying statutory tax rates and the effects of disallowed expenditures, income not subject to tax, tax credits and allowances, tax rate changes on current and deferred tax assets and liabili- ties, write-down of investments in subsidiaries, and changes in uncertain tax positions. The table above pro- vides the details of the significant items that impact the comparability of the effective tax rate between years. In December 2021, the OECD issued model rules for a new global minimum tax framework (Pillar Two). Novartis is within the scope of the OECD Pillar Two model rules. A number of governments in countries in which Novartis operates are in the process of enacting or have enacted tax legislation to comply with Pillar Two. Of the major countries in which we operate, only the enactment of Pillar Two tax legislation in Switzerland is expected to have an impact to our income tax provision as from 2024. In December 2023, Switzerland decided to partially implement Pillar Two, whereby effective from January 1, 2024, a 15% minimum taxation will be assessed on Pillar Two qualifying profits earned by companies domiciled in Switzerland (Qualified Domestic Minimum Top-Up Tax). This Qualified Domestic Minimum Top-Up Tax will not be applied to the Pillar Two qualifying profits earned by a company’s affiliates domiciled in tax jurisdictions outside of Switzerland. The timing of implementation and the specific provisions of any further Pillar Two tax reg- ulations in Switzerland remains subject to further assess- ments at both the Federal and Cantonal levels. The Com- pany estimates that the impact of these changes to tax legislation in the respective countries that have (substan- tively) enacted Pillar Two tax legislation in 2023 would not be material to our consolidated financial position, income statement and cash flows. 8. Earnings per share Net income attributable to shareholders of Novartis AG (USD millions) - Continuing operations - Discontinued operations Net income attributable to shareholders of Novartis AG (USD millions) Number of shares (in millions) 2023 2022 2021 8 568 6 282 6 049 22 908 906 1 113 14 850 6 955 24 021 Weighted average number of shares outstanding used in basic earnings per share 2 077 2 181 2 243 Adjustment for vesting of restricted shares, restricted share units and dilutive shares from options 15 16 17 Weighted average number of shares in diluted earnings per share 2 092 2 197 2 260 Basic earnings per share (USD) - Continuing operations - Discontinued operations Total basic earnings per share (USD) Diluted earnings per share (USD) - Continuing operations - Discontinued operations Total diluted earnings per share (USD) 4.13 3.02 7.15 4.10 3.00 7.10 2.77 0.42 3.19 2.76 0.41 3.17 10.22 0.49 10.71 10.14 0.49 10.63 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 Com- pany 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 in 2022 and 2021 the conversion of all potentially dilutive shares arising from options on Novartis shares that have been issued. At December 31, 2023, there were no options on Novartis shares issued or outstanding. No options were excluded from the calculation of diluted EPS in 2022 or 2021, as all options were dilutive in both years. F-24 Notes to the Novartis consolidated financial statements 9. Changes in consolidated statements of comprehensive income The consolidated statements of comprehensive income include the Company’s net income for the year as well as all other valuation adjustments recorded in the Company’s consolidated balance sheet, which under IFRS Account- ing Standards are not recorded in the consolidated income statement. These include fair value adjustments on finan- cial instruments, actuarial gains or losses on defined ben- efit pension plans, and currency translation effects, all 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, 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 Value adjustments at December 31, 2021 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 194 194 216 216 194 216 1 808 1 808 1 1 809 9.1 – 4 757 – 4 757 194 1 808 – 4 541 – 2 539 – 5 – 4 – 4 762 – 2 543 – 164 – 62 188 – 382 – 3 – 164 – 65 – 164 – 65 – 3 968 – 407 – 4 187 – 33 – 4 220 – 382 91 91 – 382 91 – 104 – 104 1 – 103 9.1 – 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 Fair value adjustments on equity securities net of taxes of USD -6 million 1 Net investment hedge, net of taxes of USD 19 million Defined benefit plans, net of taxes of USD 16 million Currency translation effects, net of taxes of USD -6 million Total value adjustments in 2023 Fair value adjustments on equity securities sold, reclassified to retained earnings net of taxes of USD -7 million Value adjustments related to divestments, net of taxes of USD -4 million 37 37 – 50 – 50 – 160 9.1 37 – 160 1 373 1 323 1 2 27 – 160 1 373 1 200 1 29 37 – 50 – 160 1 375 1 202 1 29 2 2 Value adjustments at December 31, 2023 – 158 – 4 171 563 – 3 766 – 36 – 3 802 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-25 Notes to the Novartis consolidated financial statements 9.1) In 2023, net cumulative currency translation gains of USD 358 million were recycled through the income state- ment, consisting of USD 357 million as a result of the spin-off of the Sandoz business through a dividend in kind distribution to Novartis AG shareholders (see Note 2), and of USD 1 million as a result of the divestment of subsidiaries. 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 state- ment as a result of the divestment of the investment in Roche. See Notes 2 and 5. 10. Property, plant and equipment The following table summarizes the movements of property, plant and equipment during 2023: (USD millions) At January 1, 2023 Cost Land Buildings Construction in progress Machinery and other equipment Total 451 11 396 1 184 11 842 24 873 Accumulated depreciation and impairment – 9 – 5 903 – 27 – 8 170 – 14 109 Net book value At January 1, 2023 Costs and accumulated depreciation/impairments on assets related to discontinued operations 1 Impact of acquisitions of businesses Reclassifications Additions Disposals and derecognitions Depreciation charge Impairment charge Reversal of impairment charge Currency translation effects At December 31, 2023 At December 31, 2023 Cost 442 5 493 1 157 3 672 10 764 442 5 493 1 157 3 672 10 764 – 54 – 422 – 280 – 588 – 1 344 12 197 85 – 261 – 343 – 36 9 162 1 – 420 734 – 20 – 10 44 5 223 245 – 63 – 573 – 57 4 146 18 1 065 – 360 – 916 – 106 16 377 1 – 16 – 3 3 25 398 4 896 1 206 3 014 9 514 403 10 147 1 213 9 630 21 393 Accumulated depreciation and impairment – 5 – 5 251 – 7 – 6 616 – 11 879 Net book value 398 4 896 1 206 3 014 9 514 Commitments for purchases of property, plant and equipment Capitalized borrowing costs 744 3 1 Represents the cost of assets and accumulated depreciation/impairments at January 1, 2023, related to the Sandoz business reported as discontinued operations, and the net transfers between discontinued and continuing operations from January 1, 2023 to October 3, 2023. Note 31 provides disclosure of discontinued operations additions, depreciation charge, impairment charge and reversals of impairment change. F-26 Notes to the Novartis consolidated financial statements 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 1 Disposals and derecognitions Depreciation charge 2 Impairment charge 2 Reversal of impairment charge 2 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 1 Additions in continuing operations were USD 930 million. Note 31 provides disclosure of discontinued operations additions. 2 Note 31 provides disclosure of discontinued operations depreciation charge, impairment charge and reversals of impairment charge. 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. 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. 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. The related depreciation expense is included in the costs of the functions using the asset. The following table shows the property, plant and equipment depreciation charge, impairment charge and reversals of impairment charge for continuing operations for the years ended December 31, 2023, 2022 and 20211: The following table shows the estimated useful life (USD millions) by major categories for property, plant and equipment: Buildings Machinery and other equipment Machinery and equipment Furniture and vehicles Computer hardware Useful life 20 to 40 years 7 to 20 years 5 to 10 years 3 to 7 years Depreciation charge Impairment charge Impairment reversals 2023 – 916 – 106 16 2022 2021 – 967 – 1 005 – 411 – 316 4 44 1 Note 31 provides disclosure of discontinued operations depreciation charge, impairment charge and reversals of impairment charge. F-27 Notes to the Novartis consolidated financial statements 11. Right-of-use assets and lease liabilities The Company 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 Company recognizes the lease payments as an operating expense on a straight-line basis over the term of the lease. The Company allocates the consideration in the lease con- tract to the lease and non-lease components on the basis of the relative standalone price of each component. 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 depreciated on a straight-line basis from the commencement date of the lease over the shorter of the useful life of the right-of-use asset or the end of the lease term. Right-of-use assets are assessed for impairment whenever there is an indication that the balance sheet carrying amount may not be recoverable using cash flow projections for the useful life. The following table summarizes the movements of the right-of-use assets: (USD millions) Right-of-use assets at January 1 Costs and accumulated depreciation/impairments on assets related to discontinued operations 1 Impact of acquisitions of businesses Additions 2 Depreciation charge Impairment charge 3 Lease contract terminations 4 Currency translation effects Total right-of-use assets at December 31 2023 1 431 – 117 16 421 2022 1 561 12 247 – 259 – 300 – 4 – 93 15 – 3 – 34 – 52 1 410 1 431 1 Represents the cost of assets and accumulated depreciation/impairments at January 1, 2023, related to the Sandoz business reported as discontinued operations, and the net transfers between discontinued and continuing operations from January 1, 2023 to October 3, 2023. Note 31 provides disclosure of discontinued operations additions, depreciation charge, impairment charge and reversals of impairment change. 2 Additions in continuing operations were USD 216 million in 2022. 3 Impairment charge in continuing operations was USD 3 million in 2022 and nil in 2021. 4 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. The following table shows the right-of-use assets carrying value at December 31, 2023 and 2022, and the continu- ing operations depreciation charge for years 2023, 2022 and 2021, by underlying class of asset1: December 31, December 31, Depreciation Depreciation Depreciation charge 2021 2022 carrying value carrying value charge 2022 charge 2023 2023 483 749 112 505 745 117 12 156 80 16 162 82 11 174 89 66 64 11 7 5 1 410 1 431 259 267 279 (USD millions) Land Buildings Vehicles Machinery and equipment, and other assets Total right-of-use assets 1 Note 31 provides disclosure of discontinued operations depreciation charge. F-28 Notes to the Novartis consolidated financial statements The following table shows the lease liabilities by maturity at December 31, 2023 and 2022: (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 2022 2022 2023 2023 230 203 170 149 113 963 1 828 – 230 1 598 284 248 211 184 142 2 173 3 242 – 284 2 958 89 251 190 167 137 122 922 1 789 – 251 1 538 297 232 201 172 154 2 149 3 205 – 297 2 908 83 At December 31, 2023, and December 31, 2022, there were no material future cash outflows, including exten- sion options, excluded from the measurement of lease liabilities. The Company’s most material lease with a lease term extension, representing a lease liability value of USD 0.7 billion (2022: USD 0.7 billion), has a deter- mined lease term end date of 2071 (2022: 2071). Non-en- forceable extension options of up to 10 years have not been included within the measurement of this lease lia- bility, and do not have a material impact to the carrying value of the lease for both 2023 and 2022. Should the landlord agree to a lease extension, rent will be refer- enced to the market rates as at the commencement of the extension period. In 2023, the Company completed two sale and lease- back transactions for certain property, plant and equip- ment as part of the Company’s strategy. The transac- tions resulted in net cash inflows of USD 273 million (2022: USD 49 million) and the recognition of USD 146 million of lease liabilities(2022: USD 23 million), and USD 109 million of right-of-use assets (2022: USD 13 million). The right-of-use assets value reflects the proportion of the property, plant and equipment retained. Extension options have been included where management believe that such options will be exercised. The liabilities reflect the net present value of future lease payments. The net gain on the sale and leaseback transactions amounted to USD 18 million (2022: USD 17 million). There were no significant sale and leaseback transactions in 2021. The following table provides additional disclosures related to continuing operations right-of-use assets and lease liabilities for 2023, 2022 and 2021: (USD millions) 2023 Interest expense on lease liabilities 1 62 Expense on short-term leases Expense on low-value leases 5 6 2022 57 3 6 2021 59 6 7 Total cash outflows for leases 321 319 339 Thereof: Cash outflows for short-term leases and low-value leases 2 Payments of interest 3 11 52 Payments of lease liabilities 4 258 9 48 262 13 48 278 1 The weighted average interest rate is 3.5% (2022: 3.3%, 2021: 3.2%). Interest on lease liabilities as at December 31, 2023, is estimated to be USD 54 million for 2024 and USD 1.4 billion thereafter. 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 Company is committed to at December 31, 2023, 2022 and 2021, is similar to the portfolio of short-term leases the Company entered into during 2023, 2022 and 2021. 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. The net investment held and income from subleasing right-of-use assets were not significant for 2023, 2022, and 2021. Income from leasing Novartis property, plant and equipment to third parties for 2023, 2022 and 2021 was not significant. 12. Goodwill and intangible assets other than goodwill Novartis has the following classes of available for use intangible assets other than goodwill: Currently mar- keted products and Other intangible assets. Currently marketed products represent the compos- ite value of acquired intellectual property (IP), patents, distribution rights and product trade names. Other intangible assets include capitalized internally developed and acquired computer software and tech- nologies, which represent identified and separable acquired know- how used in research, development, and production. F-29 Notes to the Novartis consolidated financial statements The following table summarizes the movements of goodwill and intangible assets other than goodwill in 2023: Goodwill Intangible assets other than goodwill (USD millions) At January 1, 2023 Cost Accumulated amortization and impairment Net book value At January 1, 2023 Costs and accumulated amortization/impairments on assets related to discontinued operations 1 Impact of acquisitions of businesses Reclassifications Additions Disposals and derecognitions 2 Amortization charge Impairment charge Currency translation effects At December 31, 2023 At December 31, 2023 Cost Accumulated amortization and impairment Net book value In-process Currently research and marketed products Total development Other intangible assets Total 29 596 7 092 58 249 4 343 69 684 – 295 – 2 671 – 32 736 – 2 633 – 38 040 29 301 4 421 25 513 1 710 31 644 29 301 4 421 25 513 1 710 31 644 – 7 445 – 235 – 1 026 – 199 – 1 460 1 094 2 931 – 235 770 15 2 946 23 290 212 516 1 576 – 1 842 – 3 – 1 845 – 3 319 – 641 – 3 960 – 2 544 – 310 – 194 – 3 048 391 221 688 117 1 026 23 341 5 329 20 017 1 533 26 879 23 391 7 822 46 909 3 588 58 319 – 50 – 2 493 – 26 892 – 2 055 – 31 440 23 341 5 329 20 017 1 533 26 879 1 Represents the cost of assets and accumulated depreciation/impairments at January 1, 2023, related to the Sandoz business reported as discontinued operations, and the net transfers between discontinued and continuing operations from January 1, 2023 to October 3, 2023. Note 31 provides disclosure of discontinued operations additions, depreciation charge, impairment charge and reversals of impairment change. 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. Disposals include the divested currently marketed product Xiidra. The following table summarizes the movements of goodwill and intangible assets other than goodwill in 2022: Goodwill Intangible assets other than goodwill (USD millions) At January 1, 2022 Cost Accumulated amortization and impairment Net book value At January 1, 2022 Impact of acquisitions of businesses Reclassifications 1 Additions 2 Disposals and derecognitions 3 Amortization charge 4 Impairment charge 4 Currency translation effects At December 31, 2022 At December 31, 2022 Cost Accumulated amortization and impairment Net book value In-process Currently research and marketed products Total development Other intangible assets Total 29 900 8 013 56 213 3 985 68 211 – 305 – 2 514 – 29 107 – 2 408 – 34 029 29 595 5 499 27 106 1 577 34 182 29 595 5 499 27 106 1 577 34 182 161 1 209 – 1 429 1 403 330 – 95 1 175 – 3 26 588 – 2 – 28 1 209 2 093 – 100 – 3 603 – 379 – 3 982 – 427 – 917 – 176 – 322 – 243 – 87 – 1 326 – 13 – 432 29 301 4 421 25 513 1 710 31 644 29 596 7 092 58 249 4 343 69 684 – 295 – 2 671 – 32 736 – 2 633 – 38 040 29 301 4 421 25 513 1 710 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 Additions in continuing operations were USD 1 930 million. Note 31 provides disclosure of discontinued operations additions. 3 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 4 Note 31 provides disclosure of discontinued operations amortization charge and impairment charge. F-30 Notes to the Novartis consolidated financial statements As at December 31, 2023, the most significant intangi- ble assets within currently marketed products category are Leqvio (acquisition of The Medicines Company) and Zolgensma (acquisition of Avexis Inc.). As at December 31, 2023, the carrying value and remaining amortization period for Leqvio is USD 6.8 billion and 12 years, respec- tively (2022: USD 7.4 billion and 13 years, respectively), and for Zolgensma USD 5.2 billion and 7 years, respec- tively (2022: USD 5.9 billion and 8 years, respectively). The following table shows the estimated useful life by category for intangible assets available for use and the line in the consolidated income statement in which the amortization and any potential impairment charge is recognized: Useful life Income statement line for amortization and impairment charges Currently marketed products 5 to 20 years “Cost of goods sold” Other (including software and technologies) 3 to 15 years In the relevant functional expense, and for technologies in “Cost of goods sold” or “Research and Development” Any impairment charge for IPR&D is recorded in the con- solidated income statement under “Research and devel- opment.” The Company has no indefinite useful life intangible asset other than goodwill. The Company’s cash-generating units to which good- will is allocated is at the level of the operating segment, which is comprised of a group of smaller cash-generat- ing units. The valuation method of the recoverable amount of the operating segment to which goodwill is allocated is based on the fair value less costs of disposal. Any impairment charges are recorded under “Other expense” in the consolidated income statement. The following assumptions were used in the goodwill impairment testing calculation: (As a percentage) Terminal growth rate Discount rate (post-tax) 1.3 8.0 The discount rates consider the Company’s weighted average cost of capital, adjusted to approximate the weighted average cost of capital of a comparable mar- ket 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. Accounting policies—Goodwill and intangible assets other than goodwill” provides additional disclo- sures on how the Company performs goodwill and intan- gible asset impairment testing. The following table shows the intangible asset amorti- zation charge and impairment charges for continuing operations for the years ended December 31, 2023, 2022 and 20211: (USD millions) 2023 2022 2021 Amortization charge – 3 960 – 3 760 – 3 665 Impairment charge 2 – 3 048 – 1 301 – 376 1 Note 31 provides disclosure of discontinued operations amortization charge and impairment charge. 2 2023 impairment charge includes the write-down of IPR&D on the cessation of clinical development programs, including PPY988 (USD 1.0 billion), which was acquired with the 2022 acquisition of Gyroscope Therapeutics Holdings plc (see Note 2), VDT482 (USD 0.4 billion), and MBG453 (USD 0.3 billion), and the clinical research program NIZ985 (USD 0.3 billion); as well as the write-down of a currently marketed product by USD 0.3 billion to reflect the reduction in its recoverable amount. 2022 intangible asset impairment charges include the write-down of IPR&D on the cessation of clinical development programs, including UNR844 (USD 0.6 billion). 2021 intangible asset impairment charges includes the write down of IPR&D on the cessation of clinical development programs, including GTX312 (USD 0.2 billion). In 2023, 2022 and 2021, there were no reversals of impairment charges on intangible assets. F-31 Notes to the Novartis consolidated financial statements 13. 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, 2023 158 1 726 739 2 214 425 2 789 8 051 Gross deferred tax liabilities at January 1, 2023 – 343 – 4 785 – 420 – 138 – 1 312 – 6 998 Net deferred tax balance at January 1, 2023 – 185 – 3 059 319 2 076 425 1 477 1 053 At January 1, 2023 – 185 – 3 059 Net deferred tax balance related to discontinued operations 1 60 120 Credited/(charged) to income – 13 1 344 Credited/(charged) to other comprehensive income Impact of acquisitions of businesses Other movements – 3 – 2 – 50 – 530 85 13 – 28 2 076 – 311 386 319 – 36 32 16 425 – 13 173 111 17 1 477 1 053 – 233 – 413 – 47 – 34 – 19 – 30 1 875 – 21 – 440 7 Net deferred tax balance at December 31, 2023 – 193 – 2 040 344 2 123 713 1 114 2 061 Gross deferred tax assets at December 31, 2023 117 2 188 764 2 200 713 2 206 8 188 Gross deferred tax liabilities at December 31, 2023 – 310 – 4 228 – 420 – 77 – 1 092 – 6 127 Net deferred tax balance at December 31, 2023 – 193 – 2 040 344 2 123 713 1 114 2 061 After offsetting the following amount of deferred tax assets and liabilities within the same tax jurisdiction, the balance amounts to: Deferred tax assets at December 31, 2023 Deferred tax liabilities at December 31, 2023 Net deferred tax balance at December 31, 2023 3 879 4 309 – 2 248 2 061 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 2 Charged to equity – 256 – 3 397 435 2 125 374 1 392 69 628 – 5 – 43 5 Credited/(charged) to other comprehensive income 2 – 2 – 104 Impact of acquisitions of businesses – 300 Other movements 2 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 1 Represents the net deferred tax balance at January 1, 2023, related to the Sandoz business reported as discontinued operations. Notes 1, 2 and 31 provide disclosures related to discontinued operations. 2 In 2022 the total related to continuing operations for the charge to income was USD 625 million, for the charge to other comprehensive income was USD – 20 million and for the charge to other movements was USD 8 million. F-32 Notes to the Novartis 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 Company has the ability to control any future reversal and the unremitted earnings are retained in the foreign subsidiaries for reinvestment. The total unremitted earnings retained for reinvestment in the Company’s foreign subsidiaries that would be subject to withholding tax or other taxes if remitted to the Com- pany were estimated to be approximately USD 34 billion in 2023, (2022: USD 32 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 More than five years Not subject to expiry Unrecognized Recognized 2023 total 23 12 67 22 1 569 2 891 687 44 15 79 569 580 2 975 2 258 67 27 146 591 2 149 5 866 2 945 Total 5 271 6 520 11 791 (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) 2023 2022 2021 Tax losses carried forward that expired 8 6 18 Deferred tax assets related to carry-forwards of taxable losses and tax credits of relevant Company entities are recognized to the extent that it is considered probable that future taxable profits will be available in the respec- tive tax jurisdictions against which such losses and cred- its can be utilized. 14. Financial and other non-current assets Financial assets Other non-current assets (USD millions) Equity securities Debt securities Fund investments 2023 2022 (USD millions) 1 403 1 145 Deferred compensation plans 29 190 37 Prepaid post-employment benefit plans 1 281 Other non-current assets 2023 439 545 215 2022 419 491 200 Total financial investments 1 622 1 463 Total other non-current assets 1 199 1 110 Long-term receivables from finance subleases Other long-term receivables Contingent consideration receivables 1 104 214 553 Long-term loans, advances and security deposits 114 59 197 607 85 Total financial assets 2 607 2 411 1 Note 30 provides additional disclosures related to contingent consideration. 1 Note 26 provides additional disclosures related to post-employment benefits. F-33 Notes to the Novartis consolidated financial statements 15. Inventories (USD millions) Raw material, consumables Work in progress Finished products Total inventories 2023 963 3 502 1 448 5 913 2022 934 3 673 2 568 7 175 The following table shows the amount of inventory rec- ognized as an expense in “Cost of goods sold” in the consolidated income statements from continuing oper- ations: (USD billions) Cost of goods sold 2023 – 5.8 2022 – 5.2 2021 – 5.4 The following table shows the recognized amount of inventory provision and reversals of inventory provision recorded in the consolidated income statements from continuing operations: (USD millions) Inventory provisions 2023 – 467 Reversals of inventory provisions 111 2022 – 373 121 2021 – 283 97 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. 16. Trade receivables (USD millions) Total gross trade receivables Provisions for doubtful trade receivables Total trade receivables 2023 7 158 – 51 2022 8 128 – 62 7 107 8 066 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 2023 6 791 146 66 64 38 53 2022 7 664 190 110 62 23 79 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 trade receivables, and may require the Company to re-evaluate the expected credit loss amount of these trade receivables in future periods. At December 31, 2023, amounts past due for more than one year are not significant in elevated credit risk countries. Total trade receivables include amounts denomi- nated in the following major currencies: Provisions for doubtful trade receivables – 51 – 62 (USD millions) Total trade receivables 7 107 8 066 US dollar (USD) 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. In particu- lar, we 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 Euro (EUR) Japanese yen (JPY) Russian ruble (RUB) Chinese yuan (CNY) British pound (GBP) Brazilian real (BRL) Australian dollar (AUD) Swiss franc (CHF) Canadian dollar (CAD) Other currencies Total trade receivables 2023 3 520 1 138 2022 3 709 1 426 288 240 231 146 130 96 84 75 177 430 155 176 145 137 108 151 1 159 7 107 1 452 8 066 F-34 Notes to the Novartis consolidated financial statements 17. 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 2023 111 2022 111 9 569 355 11 089 204 1 035 11 413 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 at December 31, 2023, and 2022. 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 18. 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 30 provides additional disclosures related to contingent consideration. 2023 3 207 10 186 13 393 2022 2 877 4 640 7 517 2023 462 64 764 65 1 252 2 607 2022 509 50 911 43 958 2 471 19. Equity The following table shows the movement in the share capital: (USD millions) Share capital 1 Treasury shares Outstanding share capital Jan 1, 2021 Movement in year Dec 31, 2021 Movement in year Dec 31, 2022 Movement in year Dec 31, 2023 913 – 53 860 – 12 5 – 7 901 – 48 853 – 11 – 44 – 55 890 – 92 798 – 65 51 – 14 825 – 41 784 1 At December 31, 2023, the Novartis AG share capital consists of registered shares with a nominal value of CHF 0.49 each. Prior to the 2023 capital decrease (see Note 19.3), Novartis AG share capital at December 31, 2022 and 2021 consists of registered shares with a nominal value of CHF 0.50 each. No authorized and conditional capital exists. F-35 Notes to the Novartis consolidated financial statements The following table shows the movement in the shares: 2023 2022 2021 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 2 403.7 – 284.1 2 119.6 2 434.4 – 199.5 2 234.9 2 467.0 – 210.2 2 256.8 Shares canceled for capital reduction 2 Shares acquired to be canceled 3 Other share purchases 4 Exercise of options and employee transactions 5 19.9 Equity-based compensation 5 Shares delivered to Alcon employees Shares delivered to Sandoz employees – 126.2 126.2 – 30.7 30.7 – 32.6 32.6 – 87.5 – 87.5 – 1.6 – 1.6 2.8 10.4 2.8 10.4 0.3 0.3 – 126.2 – 126.2 – 1.4 – 1.4 – 30.7 – 30.7 – 1.5 – 1.5 1.9 10.4 1.9 10.4 0.0 0.0 0.6 9.6 0.1 0.6 9.6 0.1 Total movements – 126.2 50.6 – 75.6 – 30.7 – 84.6 – 115.3 – 32.6 10.7 – 21.9 Balance at end of year 2 277.5 – 233.5 2 044.0 2 403.7 – 284.1 2 119.6 2 434.4 – 199.5 2 234.9 1 Approximately 93.8 million treasury shares (2022: 99.0 million; 2021: 102.5 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 19.1) 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) 2023 3.20 2022 3.10 2021 3.00 7.3 7.5 7.4 19.2) 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. Trea- sury shares are deducted from consolidated equity at their nominal per share value. Differences between the nominal amount and the transaction price on purchases or sales of treasury shares with third parties, or the value of services received for the shares allocated to employ- ees as part of share-based compensation arrangements, are recorded in “Retained earnings” in the consolidated statement of changes in equity. The following table summarizes the treasury shares movements: Shares acquired to be canceled 1 Other share purchases 2 Purchase of treasury shares 2023 2022 2021 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) – 87.5 – 8 369 – 126.2 – 10 787 – 30.7 – 2 775 – 1.6 – 148 – 1.4 – 123 – 1.5 – 145 – 89.1 – 8 517 – 127.6 – 10 910 – 32.2 – 2 920 Exercise of options and employee transactions 3 19.9 Equity-based compensation 4 Shares delivered to Alcon employees Shares delivered to Sandoz employees Total 2.8 10.4 146 904 0.3 30 1.9 10.4 0.0 88 854 5 0.6 9.6 0.1 39 745 17 – 75.6 – 7 437 – 115.3 – 9 963 – 21.9 – 2 119 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. F-36 Notes to the Novartis consolidated financial statements 19.3) In 2023, in connection with the Distribution (spin- off) of Sandoz business, Novartis AG shareholders approved at the EGM held on September 15, 2023, a decrease in Novartis AG share capital in the amount of CHF 22.8 million (USD 17.1 million). The capital decrease resulted in a reduction of the nominal value of the Novartis AG shares by CHF 0.01 from CHF 0.50 per share to CHF 0.49 per share. 19.4) 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, December 2022, and May 2023, and concluded in June 2023. Novartis was able to cancel this arrangement at any time but could have been subject to a 90-day waiting period. As of December 31, 2022, these waiting period conditions were not applicable and as a result, there was no require- ment to record a liability under this arrangement as of December 31, 2022. The liability under this arrangement amounted to USD 2.8 billion as at December 31, 2021. In June 2023, Novartis entered into an irrevocable, non-discretionary arrangement with a bank to repur- chase 11.7 million Novartis shares on the second trading line, which concluded in July 2023. In July 2023, Novartis entered into a new irrevocable, non-discretionary arrangement with a bank to repur- chase Novartis shares on the second trading line under its new up-to USD 15.0 billion share buyback. Novartis is able to cancel this arrangement but may be subject to a 90-day waiting period under certain conditions. As of December 31, 2023, these waiting period conditions were not applicable and as a result, there was no require- ment to record a liability under this arrangement as of December 31, 2023. 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 trad- ing plan commitment was fully executed and expired in June 2021, and as a consequence, there was 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. This trading plan commitment was fully executed and expired in March 2021, and as a consequence, there was no liability related to this plan recognized as of December 31, 2021. 19.5) 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. 19.6) 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. 19.7) Other movements include, for subsidiaries in hyper- inflationary economies, the impact of the application of IAS 29 “Financial reporting in Hyperinflation Economies”. See Note 30 for additional disclosures. 19.8) Transaction costs in 2023 of USD 214 million, net of tax of USD 29 million, that are directly attributable to the Distribution (spin-off) of Sandoz business to Novartis AG shareholders and that would otherwise have been avoided, are recorded as a deduction from equity (retained earnings). See Note 1. In 2021, transaction costs that were directly attribut- able to the distribution (spin-off) of Alcon Inc. to Novartis AG shareholders and that would otherwise have been avoided, were recorded to equity. 19.9) At December 31, 2022, the market maker held 3 million (2021: 3 million) written call options, originally issued as part of the share-based compensation for employees, that have not yet been exercised. The weighted average exercise price of these options at December 31, 2022, was USD 66.07 (2021: USD 61.45), and they had contractual lives of 10 years, with remain- ing lives less than one year (2021: two years). In the first quarter of 2023, the market maker exercised 3 million written call options and as a result there are no written call options outstanding at December 31, 2023. F-37 Notes to the Novartis consolidated financial statements 20. 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 during the year 2023 2.6% (2022: 2.3%) 2023 2022 20 585 22 341 42 144 20 627 22 485 – 2 191 – 2 241 18 436 20 244 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 Company is in compliance with these covenants. The percentage of fixed-rate financial debt to total financial debt was 84% as at December 31, 2023, and 86% as at December 31, 2022. The average interest rate on total financial debt in 2023 was 2.9% (2022: 2.4%). Note 30 contains a maturity table of the Company’s future contractual interest payments commitments. The following table provides a breakdown of straight bonds: Notional amount Currency (millions) Issuance year Maturity year Issuer 2022 (USD Issue price millions) millions) 2023 (USD Coupon 3.700% 3.400% 4.400% USD USD USD 1.625% EUR 0.250% 0.625% 1.050% 3.000% 4.000% 0.125% 0.625% CHF CHF CHF USD USD EUR EUR 500 2 150 1 850 600 500 550 325 1 750 1 250 1 250 500 3.100% USD 1 000 1.125% 0.500% 1.375% 1.700% 1.750% 2.000% 2.200% 2.750% EUR EUR EUR EUR USD USD USD USD 600 750 750 750 1 000 1 250 1 500 1 250 0.000% 1 EUR 1 850 Total straight bonds 2012 2014 2014 2014 2015 2015 2015 2015 2015 2016 2016 2017 2017 2018 2018 2018 2020 2020 2020 2020 2020 2042 Novartis Capital Corporation, New York, United States 98.325% 491 490 2024 Novartis Capital Corporation, New York, United States 99.287% 2 150 2 147 2044 Novartis Capital Corporation, New York, United States 99.196% 1 828 1 827 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% 663 595 654 387 638 541 595 352 2025 Novartis Capital Corporation, New York, United States 99.010% 1 745 1 742 2045 Novartis Capital Corporation, New York, United States 98.029% 1 222 1 221 2023 Novartis Finance S.A., Luxembourg, Luxembourg 2028 Novartis Finance S.A., Luxembourg, Luxembourg 99.127% 98.480% 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% 1 330 549 995 662 828 823 999 528 994 638 798 797 792 998 2027 Novartis Capital Corporation, New York, United States 99.909% 1 247 1 246 2030 Novartis Capital Corporation, New York, United States 99.869% 1 495 1 494 2050 Novartis Capital Corporation, New York, United States 97.712% 1 216 1 215 2028 Novartis Finance S.A., Luxembourg, Luxembourg 99.354% 2 036 1 958 20 585 22 341 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, 2023, there is no indication that these 2025 Patient Access Targets will not be met. F-38 Notes to the Novartis consolidated financial statements 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) 2023 Balance sheet 2023 Fair values 2022 Balance sheet 2022 Fair values Straight bonds 20 585 19 194 22 341 20 277 Others Total 42 42 144 144 20 627 19 236 22 485 20 421 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) 2023 2024 2025 2026 2027 2028 After 2028 Total Breakdown by currency: (USD millions) US dollar (USD) Euro (EUR) Japanese yen (JPY) Swiss franc (CHF) Others Total 2023 2 191 3 338 663 2 906 2 585 8 944 2022 2 241 2 147 3 281 638 2 909 2 485 8 784 20 627 22 485 2023 2022 13 388 13 376 5 563 7 478 76 1 635 1 488 41 67 20 627 22 485 21. 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 2023 2022 1 815 1 723 546 369 518 82 389 804 554 362 535 154 704 874 Total provisions and other non-current liabilities 4 523 4 906 1 Note 26 provides additional disclosures related to post-employment benefits. 2 Note 30 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 additional amounts, if any, would not be material to the Company’s finan- cial condition but could be material to the results of operations or cash flows in a given period. F-39 Notes to the Novartis consolidated financial statements Environmental remediation provisions The following table shows the movements in the envi- ronmental liability provisions: (USD millions) January 1 Provisions related to discontinued operations 1 Cash payments 2 Releases of provisions 3 Additions to provisions 4 Currency translation effects December 31 Less current provision Non-current environmental remediation provisions at December 31 2023 588 – 53 – 4 – 54 14 47 538 – 20 2022 616 2021 809 – 6 – 18 6 – 10 588 – 53 – 169 – 105 105 – 24 616 – 49 518 535 567 1 Represents the environmental remediation provision at January 1, 2023, related to the Sandoz business reported as discontinued operations. Notes 1, 2 and 31 provide disclosures related to discontinued operations. 2 Cash payments from continuing operations were USD 5 million in 2022, and USD 169 million in 2021. 3 Releases of provisions credited to the consolidated income statement from continuing operations were USD 18 million in 2022, and USD 105 million in 2021. 4 Additions to provisions charged to the consolidated income statement from continuing operations were USD 6 million in 2022, and USD 105 million in 2021. 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 num- ber of other PRPs at each site as well as the identity and financial position of such parties in light of the joint and several nature of the liability. The expected timing of the related cash outflows as of December 31, 2023, is currently projected as follows: (USD millions) Due within two years Due later than two years, but within five years Due later than five years, but within 10 years Due after 10 years Total environmental remediation provisions Expected cash outflows 82 158 217 81 538 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 Company’s current best estimate of the total financial effect for the matters described below and for other less significant matters. 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 Company 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. It is therefore, not practicable to provide information about the potential financial impact of these matters. In addition, in some of 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 Company 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 Com- pany has not made any provisions since it cannot cur- rently estimate either a potential outcome or the amount of any potential losses. For these reasons, among oth- ers, the Company 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 potential financial impact of those cases. There might also be cases for which the Company was able to make a reliable estimate of the possible loss or the range of possible loss, but the Company believes that publication of such information on a case-by-case basis would seriously prejudice the Company’s position in ongoing legal proceedings or in any related settlement discussions. 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 29 contains additional information on contin- gent liabilities. F-40 Notes to the Novartis consolidated financial statements 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 2023. 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. Lucentis/Avastin® matters In 2019, the French Competition Authority (FCA) issued a Statement of Objections against Novartis entities, alleging anti-competitive practices on the French mar- ket for anti-vascular endothelial growth factor treat- ments for wet age-related macular degeneration from 2008 to 2013. In 2020, the FCA issued a decision find- ing that the Novartis entities had infringed competition law by abusing a dominant position and imposing a fine equivalent to approximately USD 452 million. Novartis paid the fine, again subject to recoupment, and appealed the FCA’s decision. In February 2023, the Paris Court of Appeal (Court) overturned the FCA’s decision which trig- gered the reimbursement of the originally paid fine (recorded as “Other income” in the Company’s consoli- dated income statement), and, in March 2023, the FCA appealed the Court’s decision. Novartis is the subject of similar investigations and proceedings involving the competition authority in Greece and is currently in an appeal process in Turkey. Novartis continues to vigorously contest all claims in both countries. Novartis is also challenging policies and reg- ulations allowing off-label/unlicensed use and reim- bursement for economic reasons in Turkey. Greece investigation The Greek authorities are investigating legacy allega- tions of potentially inappropriate economic benefits to healthcare providers (HCPs), government officials and others in Greece. These authorities include the Greek Coordinating Body for Inspection and Control, and the Greek Body of Prosecution of Financial Crime (SDOE), from which the Company received a summons in 2018 and 2020. Novartis has cooperated in these investiga- tions. In 2021, SDOE imposed on Novartis Hellas a fine equivalent to approximately USD 1.2 million; Novartis Hel- las appealed the fine and, in September 2023, the Court overturned the decision and fine. The Greek State filed an appeal. In 2022, the Greek State served a civil law- suit on Novartis Hellas, seeking approximately USD 225 million for moral damages allegedly arising from the con- duct that was the subject of the Company’s 2020 settlement with the US Department of Justice (DOJ) regarding allegations of inappropriate economic bene- fits in Greece that was disclosed 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 U.S. District Court (USDC) for the District of Colum- bia 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 regard- ing NPC’s contract pharmacy policy to the Office of Inspector General of the US Department of Health and Human Services, which could result in the imposition of civil monetary penalties on NPC. The USDC issued a decision rejecting HRSA’s interpretation of the 340B statute, vacating the violation notification and remand- ing the matter to HRSA. HRSA appealed, and the United States Court of Appeals for the DC Circuit heard argu- ment on the case in 2022. In addition, in 2021 and 2023, two medical centers filed Administrative Dispute Reso- lution (ADR) proceedings against NPC, seeking the return of alleged overcharges resulting from NPC’s con- tract pharmacy policy. NPC has moved to dismiss these proceedings pending resolution of the HRSA litigation. Also in 2021, NPC received a civil investigative subpoena from the Office of the Attorney General of the State of Vermont (Vermont AG) requesting the production of doc- uments and information concerning NPC’s participation in the 340B Drug Pricing Program in Vermont. NPC responded by providing documents and information to the Vermont AG. Swiss and EU investigation In September 2022, the Swiss Competition Commission (COMCO) initiated an investigation of the acquisition of certain patents by Novartis 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 cooperating with the authorities and will vigorously contest any allegations. Inflation Reduction Act (IRA) litigation In 2023, following the U.S. government’s selection of Entresto for the first round of the IRA’s “Medicare Drug Price Negotiation Program,” NPC filed a complaint in the USDC for the District of New Jersey on the grounds that those drug price-setting provisions are unconstitutional under the First, Fifth and Eighth Amendments to the U.S. Constitution. Product liability litigation Tasigna NPC is a defendant in more than 400 US product liabil- ity actions involving Tasigna, alleging that the product F-41 Notes to the Novartis consolidated financial statements 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 Exforge – Concluded matter Since 2018, Novartis companies as well as other phar- maceutical companies were sued by various direct and indirect purchasers of Exforge in multiple US individual and putative class action complaints. They claimed that Novartis made a reverse payment in the form of an agree- ment not to launch an authorized generic, alleging viola- tions of federal antitrust law and state antitrust, con- sumer protection and common laws, and sought damages as well as injunctive relief. The cases were consolidated in the S.D.N.Y. In 2022, Novartis agreed to pay USD 245 million to resolve these cases, and this resolution was completed in 2023. Lucentis/Avastin® (Italian and Belgian Competition Authorities) – Concluded matter 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 the decision. In 2023, the final appeal by Novartis was denied, and the ICA decision is now final. In 2014 and 2015, following the ICA’s fine, the Italian Min- istry of Health and the Lombardia region sent letters with payment requests for a total equivalent of approximately USD 1.3 billion in damages from Novartis and Roche enti- ties based on these allegations, and several additional Italian regions and hospitals subsequently sent letters in 2019 claiming damages for an aggregate amount of approximately USD 330 million. None of these claims have been asserted in legal proceedings. A similar mat- ter involving the competition authority in Belgium is con- cluded. 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 provide inappropriate economic benefits to 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 2023, the Supreme Court dismissed the appeal. This matter is now concluded. U.S. Government Foreign Corrupt Practices Act (FCPA) investigations – Concluded matter As previously disclosed in Note 20 to the Consolidated Financial Statements in our 2020 Annual Report, Novartis reached settlements with the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC) that resolved all FCPA investigations into histori- cal conduct by Novartis and its subsidiaries. To resolve the DOJ investigation, Novartis Hellas S.A.C.I. entered into a deferred prosecution agreement (DPA) with the DOJ. To resolve the SEC investigation, Novartis AG reached an agreement that resulted in an Order issued by the SEC. The DPA and the Order each contained cer- tain reporting and compliance obligations for a three- year term, which ended on June 26, 2023. On Decem- ber 21, 2023 the court formally dismissed the Information filed against Novartis Hellas S.A.C.I at the request of the DOJ. This matter is now concluded. Summary of product liability, governmental investigations and other legal matters provision movements (USD millions) January 1 Provisions related to discontinued operations 1 2023 702 – 97 2022 397 2021 487 Impact of acquisitions of businesses 4 Cash payments 2 Releases of provisions 3 Additions to provisions 4 Currency translation effects December 31 Less current portion Non-current product liabilities, governmental investigations and other legal matters provisions at December 31 – 448 – 219 170 16 124 – 42 – 105 – 292 – 52 466 – 8 702 – 548 – 44 251 – 5 397 – 56 82 154 341 1 Represents the provisions for product liability, governmental investigations and other legal matters at January 1, 2023, related to the Sandoz business reported as discontinued operations. Notes 1, 2 and 31 provide disclosures related to discontinued operations. 2 Cash payments from continuing operations were USD 67 million in 2022, and USD 64 million in 2021. 3 Releases of provisions credited to the consolidated income statement from continuing operations were USD 38 million in 2022, and USD 18 million in 2021. 4 Additions to provisions charged to the consolidated income statement from continuing operations were USD 435 million in 2022, and USD 190 million in 2021. 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-42 Notes to the Novartis consolidated financial statements Discontinued operations On October 4, 2023, the separation and spin-off of the Sandoz business was completed (Note 2). Pursuant to the Separation and Distribution Agreement that Novartis and Sandoz entered into in connection with that sepa- ration and spin-off, Sandoz and Novartis agreed, subject to certain limitations, exclusions and conditions, that Sandoz would retain or assume (as applicable) liabilities, including pending and future claims that relate to the spun-off Sandoz business (whether arising prior to, at or after the date of execution of the Separation and Distri- bution Agreement). Additionally, pursuant to the Sepa- ration and Distribution Agreement, Sandoz agreed to indemnify Novartis and each of its directors, officers, managers, members, agents and employees against lia- bilities incurred in connection with the spun-off Sandoz business. 22. Current financial debt and derivative financial instruments (USD millions) Bank and other financial debt 1 Commercial paper Current portion of non-current financial debt Derivative financial instruments 2023 624 3 269 2 191 91 2022 863 2 772 2 241 55 Total current financial debt and derivative financial instruments 6 175 5 931 1 Weighted average interest rate during the year 2023 13.2% (2022: 9.7%) 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 30. 23. 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 Other payables 2023 516 703 1 026 844 116 6 315 2 330 20 98 42 322 14 820 2022 836 1 131 1 059 767 116 6 732 2 321 53 123 548 235 131 743 Total provisions and other current liabilities 13 166 14 795 1 Note 21 provides additional disclosures related to legal provisions. 2 Note 30 provides additional disclosures related to contingent consideration. Provisions are based upon management’s best estimate and adjusted for actual experience. Such adjustments to historic estimates have not been material. F-43 Notes to the Novartis 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 Provisions related to discontinued operations 1 Effect of currency translation, business combinations Payments/utilizations 2 Adjustments of prior years charged to income statement 3 Current year income statement charge 4 Change in provisions offset against gross trade receivables 5 December 31 2023 2022 6 732 6 481 2021 6 256 – 1 415 68 – 210 – 218 – 16 703 – 22 261 – 19 838 – 206 – 322 – 245 17 798 23 072 20 413 41 – 28 113 6 315 6 732 6 481 1 Represents the provision for deductions from revenue at January 1, 2023, related to the Sandoz business reported as discontinued operations. Notes 1, 2 and 31 provide disclosures related to discontinued operations. 2 Payments/utilizations from continuing operations were USD 14 691 million in 2022 and USD 12 473 million in 2021. 3 Adjustments of prior years charged to income statement from continuing operations were USD 218 million in 2022, and USD 251 million in 2021. 4 Current year income statement charge from continuing operations were USD 15 231 million in 2022 and USD 13 084 million in 2021. 5 Change in provisions offset against gross trade receivables from continuing operations were USD 2 million in 2022 and USD – 44 million in 2021. The provisions for deductions from revenue include spe- cific healthcare plans and program rebates as well as non-healthcare plans and program-related rebates, returns and other deductions. The provisions for deduc- tions from revenue are adjusted to reflect experience and to reflect actual amounts as rebates, refunds, dis- counts and returns are processed. The provision rep- resents 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 Provisions related to discontinued operations 1 Additions to provisions 2 Cash payments 3 Releases of provisions 4 Transfers 5 Currency translation effects December 31 2023 1 131 – 51 658 – 816 – 193 – 57 31 703 2022 345 2021 459 1 368 – 468 – 42 – 53 – 19 1 131 328 – 344 – 54 – 27 – 17 345 1 Represents the restructuring provisions at January 1, 2023, related to the Sandoz business reported as discontinued operations. Notes 1, 2 and 31 provide disclosures related to discontinued operations. 2 Additions to provisions charged to the consolidated income statement from continuing operations were USD 1.3 billion in 2022 and USD 266 million in 2021. 3 Cash-payments from continuing operations were USD 421 million in 2022 and USD 259 million in 2021. 4 Releases of provisions credited to the consolidated income statement from continuing operations were USD 33 million in 2022 and USD 29 million in 2021. 5 Transfers from continuing operations were USD 53 million in 2022 and USD 24 million in 2021. 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. In 2023, additions to provisions of USD 658 million were mainly related to the continuation of the initiative announced in April 2022 to implement a new streamlined organizational model designed to support innovation, growth and productivity. 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 2021 restructuring initiatives. In 2021, additions to provisions of USD 328 million were mainly related to the following reorganizations: • The commencement of a plan to restructure the field force and supporting functions in response to changes in the Company’s go-to-market structure with increased utilization of digital technology. • Company-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. F-44 Notes to the Novartis consolidated financial statements 24. Details to the consolidated statements of cash flows 24.1) Non-cash items and other adjustments from continuing operations 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 1 Includes fair value changes 2 2021 included the gain of USD 14.6 billion recognized from the divestment of the Company’s investment in Roche (see Notes 2 and 5). 2023 2022 2021 1 006 1 374 1 277 263 270 279 7 008 5 061 4 041 106 61 260 1 318 – 180 – 308 – 38 806 – 646 700 865 13 551 633 43 791 11 – 15 337 1 128 1 625 758 – 32 863 10 369 10 631 – 6 430 In 2023, other than through business combinations, there were no additions to intangible assets with deferred payments (2022: USD 635 million, 2021: nil). In 2023, there were USD 421 million (2022: USD 216 million, 2021: USD 295 million) additions to right-of-use assets recognized. F-45 Notes to the Novartis consolidated financial statements 24.2) Total amount of income taxes paid In 2023, the total amount of income taxes paid by con- tinuing operations was USD 2 787 million and by discon- tinued operations was USD 162 million, which was included within “Net cash flows from operating activities from discontinued operations.” In 2023, the total amount of income taxes paid by the Company was USD 2 949 million. In 2022, the total amount of income taxes paid by continuing operations was USD 1 702 million and by dis- continued operations was USD 273 million, which was included within “Net cash flows from operating activities from discontinued operations.” In 2022, the total amount of income taxes paid by the Company was USD 1 975 million. In 2021, the total amount of income taxes paid by continuing operations was USD 1 856 million and by dis- continued operations was USD 486 million, which was included within “Net cash flows from operating activities from discontinued operations.” In 2021, the total amount of income taxes paid by the Company was USD 2 342 million. 24.3) Cash flows from changes in working capital and other operating items included in the net cash flows from operating activities from continuing operations (USD millions) Increase in inventories Increase in trade receivables Increase/(decrease) in trade payables Change in other current and non-current assets Change in other current liabilities Total 2023 – 546 – 1 504 479 – 125 1 327 – 369 2022 – 560 – 397 – 181 – 84 426 – 796 2021 – 102 – 352 – 111 – 179 671 – 73 24.4) 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 Company’s investment in Roche (see Notes 2 and 5). 24.5) 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 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 from/(used for) divestments of businesses, net 1 Cash flows used for acquisitions and divestments of businesses, net Note 2023 2022 25 – 3 699 – 1 077 26 146 – 34 21 224 0 2021 – 320 42 18 1 – 3 561 – 832 – 259 3 – 8 54 – 3 558 – 840 – 205 1 In 2023, USD 3 million represented net cash inflows from divestments in previous years. In 2022, USD 8 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 12 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 139 million, comprised of non-current assets of USD 127 million, current assets of USD 70 million, including USD 62 million cash and cash equivalents and of non-current and current liabilities of USD 58 million. The deferred sale price receivable and other adjustments amounted to USD 19 million. In 2021, USD 54 million included net cash inflows from divestments in previous years. Notes 2 and 25 provide further information regarding acquisitions and divestments of businesses. All acquisitions were for cash. F-46 Notes to the Novartis consolidated financial statements 24.6) Reconciliation of liabilities arising from financing activities Payments of lease liabilities 5 – 258 – 295 (USD millions) January 1 Financial debts, derivative financial instruments and lease liabilities related to discontinued operations 1 Increase in non-current financial debts 2 Repayments of the current portion of non-current financial debts 3 – 2 223 Change in current financial debts 4 546 Interest payments for amounts included in lease liabilities classified as cash flows from operating activities 6 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 December 31 Non-current 7 Current 7 – 2 17 276 24 520 18 436 6 084 2023 2022 2021 Financial debts Derivative financial instruments Lease liabilities Financial Derivative financial debts instruments Lease liabilities Financial Derivative financial debts instruments Lease liabilities 26 120 55 1 789 29 129 68 1 896 35 850 194 2 005 – 214 – 1 – 98 16 – 2 575 295 16 – 2 162 – 3 524 – 52 349 51 28 37 – 51 222 12 60 1 1 29 – 13 22 19 – 767 – 55 – 1 082 91 1 828 26 120 55 1 789 29 129 1 598 20 244 1 538 22 902 – 316 – 52 253 – 125 62 – 1 68 – 56 1 896 1 621 91 230 5 876 55 251 6 227 68 275 1 Represents the financial debts, derivative financial instruments and lease liabilities at January 1, 2023 related to the Sandoz business reported as discontinued operations. Notes 1, 2 and 31 provide disclosures related to discontinued operations. 2 Increases in non-current financial debts included in the consolidated statements of cash flows from continuing operations were nil in 2022 and 2021. 3 Repayments of the current portion of non-current financial debts were only recorded in the consolidated statements of cash flows from continuing operations. 4 Changes in current financial debts included in the consolidated statements of cash flows from continuing operations were USD 252 million in 2022 (2021: USD 3 547 million) which included net cash outflows from interest-bearing accounts of employees payable on demand amounting to USD 1.7 billion. 5 Payments of lease liabilities included in the consolidated statements of cash flows from continuing operations were USD 262 million in 2022 (2021: USD 278 million). 6 Interest payments for amounts included in lease liabilities classified as cash flows from operating activities within the consolidated statements of cash flows from continuing operations were USD 48 million in 2022 (2021: USD 48 million). 7 Note 11 provides additional disclosures related to lease liabilities, Note 20 provides additional disclosures related to non-current financial debt, and Note 22 provides additional disclosures related to current financial debt and derivative financial instruments. F-47 Notes to the Novartis consolidated financial statements 25. 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 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 1 2023 2022 2021 18 16 13 12 2 931 1 209 15 34 164 183 226 56 5 89 – 474 – 300 – 51 – 231 2 831 – 226 – 12 – 67 1 005 – 89 1 094 3 699 161 1 077 292 262 98 28 1 10 – 74 – 1 – 4 612 – 10 – 105 238 735 1 In 2023 and 2022 all net assets recognized relate to business combinations of continuing operations. In 2021, net assets recognized as a result of acquisitions of businesses from continuing operations were USD 320 million. Note 2 details significant acquisitions of businesses by continuing operations, specifically the acquisition of DTx Pharma and Chinook Therapeutics in 2023, and of Gyro- scope in 2022. Note 31 details significant acquisitions by discontinued operations, specifically the cephalosporin antibiotics business from GSK by Sandoz in 2021. The goodwill arising out of these acquisitions is attributable to the synergies, the accounting for deferred tax liabili- ties on the acquired assets and the assembled work- force. In 2023, no goodwill (2022: nil; 2021: USD 107 mil- lion) is tax deductible. 26. Post-employment benefits for employees Defined benefit plans In addition to the legally required social security schemes, the Company 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 Company. For certain Com- pany entities, however, no independent plan assets exist for the pension and other post-employment benefit obli- gations of employees. In these cases, the related unfunded liability is included in the balance sheet. The defined benefit obligations (DBOs) of all major pension and other post-employment benefit plans are reap- praised annually by independent actuaries using the pro- jected unit credit method. 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 96% of the Company’s total DBO for pension plans. Details of the plans in the two most significant countries, Switzerland and the United States, which rep- resent 84% of the Company’s total DBO for post-em- ployment benefit plans, are provided below. Swiss-based pension plans represent the most sig- nificant portion of the Company’s total DBO and plan assets. For the active insured members the benefits are linked to contributions paid into the plan, interest cred- its 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 F-48 Notes to the Novartis consolidated financial statements active insured employees. The boards of trustees are responsible for the plan design and asset investment strategy. Furthermore, in certain countries, employees are cov- ered under other post-employment benefit plans and post-retirement medical plans. The United States pension plans represent the sec- ond-largest component of the Company’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. 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 Company 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, 2023 and 2022: Pension plans Other post-employment benefit plans (USD millions) Benefit obligation at January 1 Benefit obligations related to discontinued operations 1 Current service cost Interest cost Past service costs and settlements Administrative expenses Remeasurement gains arising from changes in financial assumptions 2 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 Plan assets related to discontinued operations 1 Interest income Return on plan assets excluding interest income Currency translation effects Novartis contributions Contributions of employees Settlements Benefit payments Effect of acquisitions, divestments or transfers Fair value of plan assets at December 31 Funded status 2022 560 12 17 1 – 94 – 28 – 2 – 44 422 73 2 – 12 2023 2022 17 533 23 583 – 529 260 504 28 25 348 249 – 40 23 1 350 – 5 046 – 303 23 – 53 199 1 304 – 650 2023 422 – 26 9 22 13 – 14 44 4 – 1 384 – 1 253 – 34 174 52 174 – 1 19 037 17 533 18 945 22 420 – 386 514 175 220 – 2 500 1 524 – 539 408 174 – 35 424 174 – 1 440 60 2 10 33 41 – 1 384 – 1 253 – 34 – 44 – 1 19 934 18 945 71 60 897 1 412 – 369 – 362 Limitation on recognition of fund surplus at January 1 – 2 644 – 62 Limitation on recognition of fund surplus at January 1, related to discontinued operations Change in limitation on recognition of fund surplus Currency translation effects Interest income on limitation of fund surplus Limitation on recognition of fund surplus at December 31 3 6 740 – 2 504 – 209 – 60 – 76 – 2 – 2 167 – 2 644 Net liability in the balance sheet at December 31 – 1 270 – 1 232 – 369 – 362 1 Represents the benefit obligation, respectively the plan assets at January 1, 2023, related to the Sandoz business reported as discontinued operations. Notes 1, 2 and 31 provide disclosures related to discontinued operations. 2 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. 3 The most significant pension plans where the asset ceiling was required to be applied were in Switzerland and amounted to USD 2 112 million (2022: USD 2 587 million). F-49 Notes to the Novartis consolidated financial statements The reconciliation of the net liability from January 1 to December 31 is as follows: (USD millions) Net liability at January 1 Less: net liability related to discontinued operations 1 Current service cost Net interest expense Administrative expenses Past service costs and settlements Remeasurements Currency translation effects Novartis 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 2023 2022 – 1 232 – 1 225 149 – 260 – 348 – 50 – 25 – 63 – 31 – 23 39 – 895 2 400 11 408 – 53 740 35 424 1 – 2 504 2023 – 362 26 – 9 – 20 – 33 – 4 33 2022 – 487 – 12 – 15 – 1 110 2 41 – 1 270 – 1 232 – 369 – 362 545 491 – 1 815 – 1 723 – 369 – 362 1 Represents the net liability at January 1, 2023, related to the Sandoz business reported as discontinued operations. Notes 1, 2 and 31 provide disclosures related to discontinued operations 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 13 453 2 574 3 010 19 037 11 824 2 746 2 963 17 533 2023 2022 Thereof unfunded By type of member Active Deferred pensioners Pensioners 538 390 928 556 363 919 5 557 389 770 847 912 6 793 4 799 1 682 431 830 931 861 6 161 1 691 7 896 1 415 1 251 10 562 7 025 1 485 1 171 9 681 Fair value of plan assets at December 31 15 892 1 835 2 207 19 934 14 701 1 978 2 266 18 945 Funded status 2 439 – 739 – 803 897 2 877 – 768 – 697 1 412 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 356 285 30 1 325 71 2023 Rest of the world 84 84 10 0 74 0 United States 346 286 30 8 308 60 2022 Rest of the world 76 76 18 0 58 0 Total 440 369 40 1 399 71 Total 422 362 48 8 366 60 Funded status – 285 – 84 – 369 – 286 – 76 – 362 F-50 Notes to the Novartis 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 2023 2022 2021 2023 2022 2021 2.2% 0.3% 3.0% 1.3% 22 24 3.0% 0.4% 2.9% 2.2% 22 24 0.9% 0.5% 2.7% 0.5% 22 24 5.5% 6.3% 3.3% 21 23 21 23 21 23 Changes in the aforementioned actuarial assumptions can result in significant volatility in the accounting for the Company’s pension plans in the consolidated financial statements. This can result in substantial changes in the Company’s other comprehensive income, long-term lia- bilities 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 Company’s actuaries use mortality tables that take into account historic patterns and expected changes, such as further increases in longevity. In 2023 the mortality assumptions used for the pen- sion plans in Switzerland were based on BVG 2020 tables with future improvements based on the Continu- ous Mortality Investigation (‘CMI’) model (2022: based on the BVG generational model). For the pension and postretirement medical benefit plans in the US, the Soci- ety of Actuaries Pri-2012 mortality tables with genera- tional 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-51 Change in 2023 year-end defined benefit pension obligation Change in 2022 year-end defined benefit pension obligation – 528 – 466 557 644 366 – 61 43 – 42 41 – 42 491 535 316 – 63 38 – 37 37 – 37 Notes to the Novartis consolidated financial statements The healthcare cost trend rate assumptions used for other post- employment benefits are as follows: The weighted average duration of the defined benefit pension obligation is 12.3 years (2022: 11.8 years). 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 2023 2022 2021 6.3% 6.5% 6.0% 4.5% 4.5% 4.5% 2031 2031 2028 The following table shows the weighted average plan asset allocation of funded defined benefit pension plans at December 31, 2023 and 2022: Pension plans The Company’s ordinary contribution to the various pension plans is based on the rules of each plan. Addi- tional contributions are made whenever this is required by statute or law (i.e., usually when statutory funding lev- els fall below predetermined thresholds). The only sig- nificant plan that requires additional funding is in Ger- many. The expected future cash flows over the upcoming 10 years in respect of pension and other post-employ- ment benefit plans at December 31, 2023, were as fol- lows: (as a percentage) Equity securities Debt securities Real estate Alternative investments Cash and other investments Total Long-term Long-term target minimum maximum target 15 20 5 0 0 40 60 30 20 15 (USD millions) Pension plans Company contributions 2023 2022 2024 (estimated) 25 34 19 17 5 24 31 21 18 6 100 100 Expected future benefit payments 2024 2025 2026 2027 2028 2029–2033 388 1 434 1 317 1 186 1 159 1 132 5 316 Other post- employment benefit plans 39 40 40 40 39 38 175 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 Company and its employees, is sufficient to maintain reasonable control over the various funding risks of the plans. Based upon local requirement, the market and economic environments, actual asset allo- cations may be permitted to deviate from policy targets. The asset allocation currently includes investments in shares of Novartis AG as per the below table: Investment in shares of Novartis AG Number of shares (in millions) Market value (in USD billions) December 31, December 31, 2022 2023 2.3 0.2 2.3 0.2 Defined contribution plans In many subsidiaries, employees are covered by defined contribution plans. Contributions charged to the consol- idated income statement for continuing operations for the defined contribution plans were: (USD millions) 2023 2022 2021 Contributions for defined contribution plans continuing operations 477 483 484 The Company’s total personnel costs for continuing operations amounted to USD 12.7 billion in 2023 (2022: USD 13.1 billion). F-52 Notes to the Novartis consolidated financial statements 27. Equity-based participation plans for employees The equity-based compensation expense from continu- ing operations related to all equity-based participation plans and the liabilities arising from equity-based pay- ment transactions were as follows: eligible to participate in the ESPP commencing in 2024, according to a multi-year phased implementation plan. The shares are not subject to a vesting period. (USD millions) 2023 2022 2021 Expense related to equity-based participation plans 1 142 982 Liabilities arising from equity-based payment transactions 322 235 910 253 Equity-based participation plans can be separated into the following plans: Annual Incentive The Annual Incentive for the Novartis Company 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 a select portion of Novartis management leadership team, the Annual Incentive is paid 70% in cash and 30% in RSs or RSUs. Both the ECN and a select portion of Novartis manage- ment leadership team can opt to invest up to the maxi- mum 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 performance 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 the expira- tion of a three-year holding period for Novartis shares invested under the ESOP, participants 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 Com- pany CEO, the other Executive Committee members and a select portion of Novartis management leadership team 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 (ESPP). The ESPP enables employees to voluntarily purchase Novartis AG shares through payroll deductions at a discounted price. While the ESPP is global in scope, the first phase covers employees in North America (the US, Puerto Rico and Canada). Other countries employees will become 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 eligible employ- ees of selected Company units a four-year, staggered vesting period. No awards are granted for performance ratings below a certain threshold. Executive Committee members and a select portion of Novartis management leadership team 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. All tradable share options expired on their 10th anni- versary from the grant date, which was in January 2023. Each tradable share option entitled the holder to pur- chase after vesting (and before the 10th anniversary from the grant date) one Novartis share at a stated exercise price that equals the closing market price of the under- lying share at the grant date. As the exercise price did not reflect the decrease in the Novartis share due to the Alcon spin, one-fifth of an Alcon share was also 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. 2023 2022 Weighted average exercise Options (millions) price Options (USD) (millions) Weighted average exercise price (USD) Options outstanding at January 1 0.5 66.0 1.7 63.6 Sold or exercised – 0.5 66.0 – 1.2 62.6 Outstanding at December 31 Exercisable at December 31 0.0 0.0 0.5 0.5 66.0 66.0 All share options were granted at an exercise price that was equal to the closing market price of the Company’s shares at the grant date. The weighted average share price at the dates of sale or exercise was USD 92.61. F-53 Notes to the Novartis consolidated financial statements Options under Novartis equity plan “Select” for North America The following table shows the activity associated with the ADR options during the period: 2023 2022 Weighted average ADR exercise options (millions) price options (USD) (millions) Weighted average ADR exercise price (USD) Options outstanding at January 1 1.1 66.1 4.0 64.4 Sold or exercised – 1.1 66.1 – 2.9 63.7 Outstanding at December 31 Exercisable at December 31 0.0 0.0 1.1 1.1 66.1 66.1 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 share price at the dates of sale or exercise was USD 91.68. Long-Term Performance Plan The Long-Term Performance Plan (LTPP) is an equity plan for the ECN, a select portion of Novartis management leadership team and employees of Company 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. The performance criteria for the ECN are based on both Novartis internal perfor- mance 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. Only ECN members, as from per- formance cycle 2023, are subject to the TSR perfor- mance metric under the LTPP. 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. 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 2023, 2022 and 2021. In addition, in 2023, 2022 and 2021, Board members received unrestricted shares as part of their regular com- pensation. F-54 Notes to the Novartis consolidated financial statements Summary of share grants The table below provides a summary of share grants (shares, RSs, RSUs and PSUs) for all plans. At the Sandoz Distribution date, all RSU and PSU holders, who were not entitled to the dividend in kind in the form of Sandoz Group AG shares received keep whole awards in Novartis AG shares to compensate for the loss of the Sandoz value from their Novartis AG shares. These keep whole awards were accounted for as a modification, which did not signifi- cantly change the fair value of the original grant. The change in fair value was measured by comparing the fair value of the grant before the spin against the fair value of the grant plus keep whole award right after spin. 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 2023 2022 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 0.3 0.1 0.4 1.0 0.9 4.5 1.9 0.6 1.8 74.2 92.3 71.3 92.3 96.2 73.9 73.3 92.3 80.6 0.6 75.9 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 F-55 Notes to the Novartis consolidated financial statements 28. 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 5). 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 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, 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. Furthermore, Novartis has several patent license, supply and distribution agreements with Roche. Novartis Pension Fund In 2018, a Company subsidiary provided an uncommit- ted 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 As at December 31, 2023, there were 11 Executive Com- mittee members (“Executive Officers”). During 2023, 1 Executive Officer stepped down. As at December 31, 2021, there were 12 Executive Officers. During 2021, 3 Executive Officers stepped down. As at December 31, 2022, there were 11 Executive Officers. During 2022, 5 Executive Officers stepped down. The total compensation for Executive Committee members and the 14 Non-Executive Directors (15 in 2022 and 14 in 2021) using the Company’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 2023 18.0 2.1 62.2 82.3 2022 25.0 2.8 42.6 70.4 2021 20.3 2.5 37.3 60.1 2023 4.9 2022 2021 4.6 4.7 5.0 9.9 4.8 9.4 5.2 9.9 2023 22.9 2.1 67.2 92.2 2022 29.6 2.8 47.4 79.8 2021 25.0 2.5 42.5 70.0 During 2023, there was an increase in the IFRS Account- ing Standards compensation expense for Executive Offi- cers compared to 2022, primarily driven by higher equity-based compensation, mainly due to higher real- ized and expected payouts on the achievement of the defined performance criteria, partly offset by lower cash F-56 Notes to the Novartis consolidated financial statements and other compensation, due to lower accelerated expenses from stepped down Executive Officers com- pared to 2022. During 2022, there was an increase in the IFRS Accounting Standards compensation expense for Exec- utive Officers compared to 2021, driven by accelerated expenses (cash and other compensation and equi- ty-based compensation) required under IFRS Account- ing Standards 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. During 2021, the IFRS Accounting Standards com- pensation expense decreased due to one role less at the ECN, and lower cash and equity compensation attribut- able to former ECN members, partially offset by the net increase of the IFRS Accounting Standards compensa- tion 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 Company. Transactions with a former member of the Board of Directors 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. 29. Commitments and contingent liabilities Research and development commitments The Company 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 that are specified in the agreements. As of December 31, 2023, the amount and estimated timing of the Company’s commitments to make payments under those agreements, which are shown without risk adjustment and on an undiscounted basis, were as fol- lows: (USD millions) 2024 2025 2026 2027 2028 Thereafter Total 2023 202 269 493 316 597 4 206 6 083 Other commitments The Company has entered into various purchase com- mitments for services and materials as well as for equip- ment in the ordinary course of business. These commit- ments are generally entered into at current market prices and reflect normal business operations. For the disclo- sure of property, plant and equipment purchase commit- ments, see Note 10. The Company routinely acquires businesses and interests in intellectual property focused on key disease areas and indications that the Company expects to be growth drivers in the future. The Company has commitments through to the date the consolidated financial statements were approved for publication (see Note 32), totaling USD 3.8 billion (of which USD 3.4 bil- lion may become payable in 2024) related to the acqui- sition of businesses and interests in intellectual property, the majority of which is subject to the satisfaction of con- ditions precedent in the arrangements. Guarantees issued The Company has issued guarantees to third parties in the ordinary course of business, mostly for tax, customs or other governmental agencies. Commitments for capital calls Contingent liabilities The Company holds investments in funds in which it has committed to invest further upon future capital calls. As at December 31, 2023, the total uncalled capital com- mitments for the Company’s investments in funds amounts to USD 80 million. Note 30 contains further information on the Company’s investments in funds. Novartis companies have to observe the laws, govern- ment 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 F-57 Notes to the Novartis consolidated financial statements proceedings pertaining to: pricing; bribery and corrup- tion; trade regulation and embargo legislation; product liability; commercial disputes; employment and wrongful discharge; antitrust and competition; securities; govern- ment benefit programs; reimbursement; rebates; health- care fraud; sales and marketing practices; insider trad- ing; occupational health and safety; environmental regulations; tax; cyber and data security; use of technol- ogies, including AI; data privacy; regulatory interactions; disclosure compliance; and intellectual property. As a result, the Company may become subject to substantial liabilities that may not be covered by insurance and that could affect our business, financial position and reputa- tion. 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. Consequently, we may in the future incur judgments that could involve large payments, including the potential repayment of amounts allegedly obtained improperly, and other pen- alties, including treble damages, any of which could have a material adverse effect on our results of operations or cash flow. Governments and regulatory authorities around the world have been stepping up their compliance and law enforcement activities in recent years in key areas, including marketing practices, pricing, corruption, trade restrictions, embargo legislation, insider trading, anti- trust, cyber security and data privacy. Furthermore, when a government or regulatory authority undertakes an investigation, 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 affiliate Novartis Corporation is party to such an agreement, which will expire in 2025. In addition, matters underlying governmental investigations and settlements may be the subject of separate private litigation. 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 21 contains additional information on these mat- ters. A number of Novartis 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 Company’s financial position but could be material to the results of operations or cash flow in a given period. The Company’s potential environmental remediation liability is assessed based on a risk assessment and investigation of the various sites identified by the Com- pany as at risk for environmental remediation exposure. The Company’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 percentage of material attributable to the Company at the remediation sites relative to that attributable to other parties, and the financial capabili- ties of the other potentially responsible parties. Note 21 contains additional information on environ- mental liabilities. F-58 Notes to the Novartis consolidated financial statements 30. Financial instruments – additional disclosures The following tables show the carrying values of finan- cial instruments by measurement category as at Decem- ber 31, 2023 and 2022. Except for straight bonds (see Note 20), the carrying values are equal to, or a reason- able approximation of, the fair values. 2023 (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 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 17 17 16 18 14 14 14 14 13 343 50 569 7 107 1 127 432 124 1 086 29 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 1 317 190 101 355 618 17 14/18 22 578 1 289 1 582 22 22 20 20 22 11 624 3 269 20 585 42 4 926 29 446 491 91 582 1 828 1 828 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 21/23) and other financial liabilities Derivative financial instruments Lease liabilities Total financial liabilities F-59 Notes to the Novartis consolidated financial statements 2022 (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 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 21/23) and other financial liabilities Derivative financial instruments Lease liabilities Total financial liabilities 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 17 17 16 18 17 14 14 14 14 17 14 22 22 20 20 22 11 7 517 11 089 8 066 958 341 9 828 37 317 281 129 204 650 27 971 874 1 581 863 2 772 22 341 144 5 146 31 266 1 067 55 1 122 1 789 1 789 Derivative financial instruments The following tables show the contract or underlying principal amounts and fair values of derivative financial instruments analyzed by type of contracts as at Decem- ber 31, 2023 and 2022. 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 as at December 31, 2023 and 2022. (USD millions) Forward foreign exchange rate contracts Commodity purchase contracts Options on equity securities Contract or underlying principal amounts 2023 2022 11 944 7 907 76 97 39 Positive fair values Negative fair values 2023 335 20 2022 189 15 2023 – 91 2022 – 41 – 14 Total derivative financial instruments included in marketable securities and in current financial debts 12 020 8 043 355 204 – 91 – 55 The following table shows a breakdown by currency of the contract or underlying principal amounts of derivative financial instruments as at December 31, 2023 and 2022: (USD millions) Forward foreign exchange rate contracts Commodity purchase contracts Total derivative financial instruments EUR 2023 USD Other Total 1 629 8 980 1 335 11 944 61 15 76 1 690 8 995 1 335 12 020 F-60 Notes to the Novartis consolidated financial statements (USD millions) Forward foreign exchange rate contracts Commodity purchase contracts 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 Derivative financial instruments effective for hedge accounting purposes At the end of 2023 and 2022, there were no open hedg- ing instruments for anticipated transactions. Fair value by hierarchy As required by the IFRS Accounting Standards, financial assets and liabilities recorded at fair value in the consol- idated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. There are three hierarchical lev- els, based on increasing subjectivity associated with the inputs to derive fair valuation for these assets and liabil- ities, which are as follows: The assets carried at Level 1 fair value are equity and debt securities 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 Cash and cash equivalents Debt securities 1 Total cash and cash equivalents at fair value Marketable securities Derivative financial instruments Total marketable securities and derivative financial instruments at fair value Fund investments and equity securities current 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 Other financial liabilities current Derivative financial instruments Total current financial liabilities at fair values Non-current contingent consideration liabilities Total non-current financial liabilities at fair value 1 Includes short-term highly rated government-backed debt securities, with an original maturity of three months or less 2023 Level 1 Level 2 Level 3 Total 50 50 94 796 7 50 50 355 355 125 65 1 432 190 553 355 355 20 31 65 616 183 553 803 20 1 352 2 175 101 101 – 91 – 91 – 14 – 88 – 102 – 389 – 389 – 14 – 88 – 91 – 193 – 389 – 389 F-61 Notes to the Novartis consolidated financial statements (USD millions) Financial assets Marketable securities and derivative financial instruments 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 Contingent consideration liabilities Derivative financial instruments Total current financial liabilities at fair value Non-current contingent consideration liabilities Other financial liabilities Total non-current financial liabilities at fair value 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 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: (USD millions) January 1 Impact from discontinued operations 1 Fair value gains and other adjustments, including from divestments recognized in the consolidated income statement Fair value losses (including impairments and amortizations) and other adjustments recognized in the consolidated income statement Fair value adjustments recognized in the consolidated statement of comprehensive income, including currency translation effects Purchases Cash receipts and payments Disposals Reclassification December 31 2023 Associated companies at fair value through Fund profit and loss investments Debt and Contingent Contingent equity consideration consideration liabilities securities receivables Other financial liabilities 129 261 699 650 – 835 – 232 101 4 1 11 48 552 – 28 – 48 – 63 – 31 – 65 – 9 3 14 – 47 2 9 – 6 – 9 101 184 71 82 – 80 – 73 647 – 32 – 180 20 36 – 49 153 618 – 403 – 88 Total of fair value gains and losses recognized in the consolidated income statement for assets and liabilities held at December 31, 2023 – 24 – 47 – 52 17 487 – 9 1 Represents the carrying values associated with Level 3 financial instruments at January 1, 2023, related to the Sandoz business reported as discontinued operations. Notes 1, 2 and 31 provide disclosures related to discontinued operations. F-62 Notes to the Novartis consolidated financial statements (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 2022 Associated companies at fair value through Fund profit and loss investments Debt and Contingent Contingent equity consideration consideration liabilities securities receivables Other financial liabilities 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 During 2023, there were three individually immaterial transfers of equity securities from Level 3 to Level 1 for USD 63 million (2022: USD 44 million), due to the Initial Public Offering of the invested company or lift of certain restrictions. 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 145 million and USD 39 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 consideration payables and contingent consideration receivables, this would change the amounts recorded in the 2023 consolidated income statement by USD 57 mil- lion and USD 53 million, respectively. Equity securities measured at fair value through other comprehensive income Equity securities held as strategic investments, typically held outside the Novartis Venture Fund, are generally designated at date of acquisition as financial assets val- ued at fair value through other comprehensive income with no subsequent recycling through profit and loss. Except for the investment in Sandoz Group AG with a fair value of USD 595 million as at December 31, 2023, these are made up of individually non-significant invest- ments. As at December 31, 2023, the Company holds 61 non-listed equity securities (December 31, 2022: 65) and 28 listed equity securities (December 31, 2022: 46) in this category with the following fair values: (USD millions) Listed equity securities Non-listed equity securities Total equity securities 2023 861 349 1 210 2022 438 390 828 During 2023 and 2022, dividends received from these equity securities were insignificant. In 2023, equity secu- rities that were no longer considered strategic, with a fair value of USD 279 million (2022: USD 4 million), were sold, and the USD 1 million gain on disposal (2022: USD 4 million loss) was transferred from other comprehensive income to retained earnings (see Note 9). F-63 Notes to the Novartis 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 Company actively monitors and seeks to reduce, where it deems it appropriate to do so, fluctuations in these exposures. It is the Company’s policy and practice to enter into a variety of derivative financial instruments to manage the volatility of these exposures. It does not enter into any financial transactions containing a risk that cannot be quantified at the time the transaction is concluded. In addition, it does not sell short assets it does not have, or does not know it will have, in the future. The Company 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 Company uses the US dollar as its reporting cur- rency. As a result, the Company 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 currencies can have a significant effect on both the Com- pany’s results of operations, including reported sales and earnings, as well as on the reported value of our assets, liabilities and cash flows. This, in turn, may significantly affect the 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 are recorded in “Other finan- cial income and expense” and are presented in Note 6. The Company 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 Company 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, 2023, long-term financial debt with a carrying amount of EUR 1.8 billion (USD 2.0 billion; December 31, 2022: USD 2.0 billion), has been designated as a hedge instrument. During 2023, USD 50 million of net of taxes unrealized losses (2022: USD 91 million income) was recognized in other comprehensive income and accumulated in currency translation effects in relation with this net investment hedge. The hedge remained effective since inception, and no amount was recognized in the consolidated income statement in 2022 and 2021. In 2023, USD 8 mil- lion of accumulated net investment hedge reserve was recognized in the consolidated income statement at the time of the Sandoz spin off. Commodity price risk The Company has only a very limited exposure to price risk related to anticipated purchases of certain commod- ities used as raw materials by the Company’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 Company’s risk man- agement tolerance levels. Accordingly, the Company does not enter into significant commodity futures, for- ward or option contracts to manage fluctuations in prices of anticipated purchases. Interest rate risk The Company 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 Company 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 Company owns, and put options are written on equities that the Company 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 Company periodically assesses coun- try and customer credit risk, assigns individual credit lim- its, and takes actions to mitigate credit risk where appropriate (for example payment guarantees, credit insurance and factoring). F-64 Notes to the Novartis consolidated financial statements The provisions for expected credit losses for cus- tomers are based on a forward-looking expected credit loss, which includes possible default events on the trade receivables over the entire holding period of the trade receivables. In measuring the expected credit losses, trade receiv- ables are grouped based on shared credit risk charac- teristics (such as private versus public receivables) and days past due. In determining the expected credit loss rates, the Company considers current and forward-look- ing macroeconomic factors that may affect the ability of customers to settle the receivables, and historical loss rates for each category of customers. The Company’s largest customer accounted for approximately 15% of net sales to third parties, and the second largest and third largest customers accounted for 13% and 8% of net sales to third parties, respectively (2022: 16%, 12% and 8%, respectively; 2021: 14%, 13% and 7%, respectively). The highest amounts of trade receivables outstand- ing were for these same three customers and amounted to 17%, 13% and 8%, respectively, of the Company’s trade receivables as at December 31, 2023 (2022: 16%, 14% and 7%, respectively). There is no other significant con- centration of customer credit risk. Counterparty risk Counterparty risk encompasses issuer risk on marketable securities and money market instruments; credit risk on cash, time deposits and derivatives; as well as settlement risk for different instruments. Issuer risk is reduced by only buying securities that are at least A- rated. Counterparty credit risk and settlement risk are reduced by a policy of entering into transactions with counterparties (banks or financial institutions) that feature a strong credit rating. Exposure to these risks is closely monitored 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 repurchasing agreements are contracted, and Novartis has entered into credit support agreements with various banks for derivative transactions. To further reduce the settlement risk, the Company has implemented a multi-currency payment system, Continu- ous Linked Settlement (CLS), which provides multilateral netting (payment-versus-payment settlement) of cash flows from foreign exchange transactions. The Company’s cash and cash equivalents are held with major regulated financial institutions, the three larg- est of which hold approximately 8.3%, 7.5% and 7.4%, respectively (2022: 13.2%, 9.2% and 6.8%, respectively). The Company does not expect any losses from non-performance 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 Company could not be able to settle or meet its obligations asso- ciated with financial liabilities that are settled by deliver- ing cash or another financial asset. Treasury is respon- sible 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 Com- pany in the form of cash dividends, loans or advances, but these restrictions do not have an impact on the abil- ity of the Company to meet its cash obligations. Management monitors the Company’s net debt or liquidity position through rolling forecasts on the basis of expected cash flows. Novartis has two US commercial paper programs under which it can issue up to USD 9.0 billion in the aggregate of unsecured commercial paper notes. Novartis also has 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 3.3 billion under these three programs were outstanding as per December 31, 2023 (2022: USD 2.8 billion). Novartis further has a committed credit facility of USD 6.0 billion. This credit facility is provided by a syndicate of banks and is intended to be used as a backstop for the US com- mercial paper programs. The facility matures in Septem- ber 2025 and was undrawn as at December 31, 2023, and December 31, 2022. F-65 Notes to the Novartis consolidated financial statements The following table sets forth how management monitors net debt or liquidity based on details of the remaining contractual maturities of selected financial assets and liabilities as at December 31, 2023, and December 31, 2022: 2023 (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 12 516 41 24 7 641 7 677 310 5 752 6 578 1 42 Due after five years Total 111 20 569 111 355 13 393 131 14 428 – 9 492 – 8 944 – 18 436 – 9 522 – 9 050 – 18 572 – 9 492 – 8 944 – 18 436 – 3 328 – 372 – 2 384 – 3 328 – 372 – 2 384 – 43 – 39 – 9 – 3 371 – 411 – 2 393 – 6 084 – 6 084 – 91 – 6 175 Net debt 4 306 6 167 – 2 351 – 9 492 – 8 813 – 10 183 (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 2022 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 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 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-66 Notes to the Novartis consolidated financial statements The Company’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 2023 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 – 4 329 – 6 604 – 556 – 11 489 Potential inflows in various currencies – from financial derivative assets 4 311 6 841 623 11 775 (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 three months one year 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 Other contractual liabilities that are not part of management’s monitoring of the net debt or liquidity consist of the following items: 2023 (USD millions) Contractual interest on non-current financial debt, including current portion Lease liabilities 1 Trade payables Contingent consideration liabilities 1 Note 11 provides additional disclosures related to lease liabilities. (USD millions) Contractual interest on non-current financial debt, including current portion Lease liabilities 1 Trade payables Contingent consideration liabilities 1 Note 11 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 – 65 – 4 793 – 372 – 1 258 – 3 376 – 5 070 – 165 – 133 – 14 – 635 – 963 – 1 828 – 4 926 – 205 – 184 – 403 2022 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 – 64 – 71 – 5 020 – 16 – 412 – 1 432 – 3 624 – 5 532 – 180 – 126 – 115 – 616 – 922 – 1 789 – 5 146 – 437 – 267 – 835 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 at December 31, 2023, 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 Company uses sensitivity analysis disclosures to provide quantitative information about market risks to which it is exposed. The sensitivity analysis disclosures are in line with the Company’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 exposures. They consider aggregated risk exposures arising from the most significant risk factors (currency risk, interest rate risk and equity price risk) and include F-67 Notes to the Novartis consolidated financial statements all financial assets and financial liabilities as set forth in the table on page F-59. The disclosures below illustrate the potential impact on the Company’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 Company uses the US dollar as its reporting cur- rency. As a result, the Company 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 at December 31, 2023 and 2022 would have affected the measurement of finan- cial instruments denominated in these foreign curren- cies. This analysis assumes that all other variables, in particular interest rates, remain constant. A hypothetical 5% increase or decrease in the foreign currency exchange rates against the US dollar would have impacted the Company’s consolidated income statement as presented below: (USD millions) 2023 2022 5% increase in foreign currency exchange rates against USD 5% decrease in foreign currency exchange rates against USD 3 – 3 – 6 7 As of December 31, 2023, the Company designated EUR 1.8 billion (December 31, 2022: 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 Company’s consolidated equity as presented below: (USD millions) 2023 2022 5% increase in foreign currency exchange rates against USD 97 93 5% decrease in foreign currency exchange rates against USD – 102 – 98 Interest rate sensitivity Our portfolio of fixed-income instruments as at Decem- ber 31, 2023, 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 2023 and 2022, a hypothet- ical 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 nor in a significant increase (decrease) of cash flows attributable to such 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 1.8 billion as at December 31, 2023 (December 31, 2022: USD 1.6 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 Company’s consolidated income statement as presented below: (USD millions) 15% increase in equity prices 15% decrease in equity prices 2023 91 – 91 2022 109 – 109 A hypothetical increase or decrease of 15% in the risk factors would have impacted the Company’s consoli- dated equity as presented below: (USD millions) 15% increase in equity prices 2023 182 2022 124 15% decrease in equity prices – 182 – 124 F-68 Notes to the Novartis consolidated financial statements 31. Discontinued operations Discontinued operations include the operational results from the Sandoz generic pharmaceuticals and biosimi- lars division and certain corporate activities attributable to the Sandoz business, as well as certain other expenses related to the spin-off. Included in 2023 is also the IFRS Accounting Standards non-cash, non-taxable net gain on the distribution of Sandoz Group AG to Novartis AG shareholders (refer to Notes 1 and 2 for further details). The Sandoz business operates in the off-patent medicines segment and specializes in the development, manufacturing, and marketing of generic pharmaceuticals and biosimilars. The Sandoz business is organized glob- ally into two franchises: Generics and Biosimilars. Net income from discontinued operations (USD millions) Net sales to third parties from discontinued operations Sales to continuing segments Net sales from discontinued operations Other revenues Cost of goods sold Gross profit from discontinued operations Selling, general and administration Research and development Other income Other expense Operating income from discontinued operations Income from associated companies Interest expense Other financial income and expense Income before taxes from discontinued operations Income taxes 2 Net income from discontinued operations before gain on distribution of Sandoz Group AG to Novartis AG shareholders Gain on distribution of Sandoz Group AG to Novartis AG shareholders 3 Net income from discontinued operations 2023 1 2022 7 128 9 160 300 212 7 428 9 372 19 28 2021 9 650 184 9 834 58 – 4 044 – 4 937 – 5 121 3 403 4 463 4 771 – 1 728 – 2 060 – 2 059 – 671 – 824 56 – 795 265 2 – 33 – 20 214 208 422 5 860 6 282 109 – 437 1 251 2 – 37 – 22 1 194 – 288 – 899 232 – 412 1 633 2 – 24 – 4 1 607 – 494 906 1 113 906 1 113 1 The net income from discontinued operations for 2023 is for the period from January 1, 2023, to the October 3, 2023, Distribution date. 2 The tax rate in 2023 was impacted by non-recurring items such as tax benefits arising from intercompany transactions to effect the spin-off of the Sandoz business, net decreases in uncertain tax positions of the Sandoz business and the favorable settlement of a tax matter related to the Alcon business, which was spun-off in 2019. Excluding these impacts, the tax rate would have been 31.2% in 2023, compared to 24.1% and 30.7% in 2022 and 2021, respectively. The tax rate in 2023 is higher than 2022 primarily due to a change in profit mix between years. 3 See Note 2 for further details on the non-taxable, non-cash gain on distribution of Sandoz Group AG to Novartis AG shareholders. F-69 Notes to the Novartis consolidated financial statements time a price decline becomes effective. Revenue deduc- tion 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. Significant transactions in 2021 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 is eligible 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. 2023 1 2022 2 – 144 – 32 – 171 – 5 – 8 – 44 1 – 27 – 60 2 – 196 – 33 – 222 – 3 – 25 3 – 40 – 66 2021 1 – 203 – 39 – 238 – 68 – 27 59 – 62 – 69 Net assets derecognized The following table presents the Sandoz business net assets derecognized as at October 3, 2023 Distribution (spin-off) date: (USD millions) Property, plant and equipment Right-of-use assets Goodwill Intangible assets other than goodwill Deferred tax assets Financial assets, investments in associated companies and other non-current assets Inventories Trade receivables and other current assets Cash and cash equivalents Deferred tax liabilities Current and non-current lease liabilities Current and non-current financial debts Trade payables, provisions, current income tax liabilities and other liabilities Net assets derecognized Oct 3, 2023 1 447 133 7 424 1 481 624 142 2 565 2 935 686 – 270 – 139 – 3 691 – 4 690 8 647 Supplemental disclosures related to discontinued operations Revenue In addition to the elements of variable consideration listed in the revenue accounting policy described in Note 1, the Sandoz business grants shelf stock adjustments to customers to cover the inventory held by them at the Net income from discontinued operations Included in net income from discontinued operations are: (USD millions unless indicated otherwise) Interest income Depreciation of property, plant and equipment Depreciation of right-of-use assets Amortization of intangible assets Impairment charges on property, plant and equipment Impairment charges on right-of-use assets Impairment charges on intangible assets Impairment reversals of property, plant and equipment Additions to restructuring provisions Equity-based compensation expense related to Novartis equity-based participation plans 1 2023 amounts are for the period from January 1, 2023, to the October 3, 2023, Distribution date. In 2023, 2022 and 2021, there were no reversals of impairment charges on right-of-use assets or on intan- gible assets of discontinued operations. F-70 Notes to the Novartis consolidated financial statements Balance sheet The following table shows for discontinued operations the additions to property, plant and equipment, right-of-use assets and to goodwill and intangible assets: (USD millions) Additions to property, plant and equipment Additions to right-of-use assets Additions to goodwill and intangible assets 1 The additions for 2023 are for the period from January 1, 2023, to the October 3, 2023, Distribution date. 2023 1 245 66 221 2022 289 32 163 Net cash flows from financing activities from discontinued operations In 2023, the net cash inflows from financing activities from discontinued operations of USD 3.3 billion (2022: USD 119 million, 2021: USD 26 million) were mainly driven by USD 3.6 billion cash inflows from bank borrowings (including the USD 3.3 billion Sandoz business borrow- ings from a group of banks on September 28, 2023) in connection with the Distribution (spin-off) of the Sandoz business to Novartis AG shareholders, partly offset by transaction cost payments of USD 0.2 billion (2022: nil, 2021: nil) directly attributable to the Distribution (spin- off) of the Sandoz business (see Notes 1 and 2). For additional information related to the October 3, 2023 Distribution (spin-off) of the Sandoz business to Novartis AG shareholders, effected through a dividend in kind dis- tribution of Sandoz Group AG shares to Novartis AG shareholders and ADR holders, refer to Note 1 and Note 2. Financial debt The Sandoz business entered into financing agreements with a group of banks under which it borrowed on Sep- tember 28, 2023 a total amount of USD 3.3 billion. See Note 2 for further disclosures. Net cash flows used in investing activities from discontinued operations Net cash flows used in investing activities from discon- tinued operations include the investing activities of the Sandoz business. In 2023, other cash flows used in investing activities, net includes cash outflows of USD 22 million (2022: USD 39 million, 2021: USD 362 million, including the acquisition of GSK’s cephalosporin antibi- otics business) for the acquisitions and divestments of business, net. (USD millions) 2023 2022 2021 Payments out of provision for transaction cost attributable to the spin-off of the Sandoz business – 52 Derecognized cash and cash equivalents attributable to the spin-off of the Sandoz business – 686 Other cash flows used in investing activities, net Net cash flows used in investing activities from discontinued operations – 385 – 436 – 689 – 1 123 – 436 – 689 F-71 Notes to the Novartis consolidated financial statements 32. Events subsequent to the December 31, 2023, consolidated balance sheet date Dividend proposal for 2023 and approval of Novartis 2023 consolidated financial statements On January 30, 2024, the Novartis AG Board of Direc- tors proposed the acceptance of the 2023 consolidated financial statements of Novartis for approval by the Annual General Meeting on March 5, 2024. Furthermore, also on January 30, 2024, the Board proposed a divi- dend of CHF 3.30 per share to be approved at the Annual General Meeting on March 5, 2024. If approved, the total dividend payments would amount to approximately USD 8.0 billion (2022: USD 7.3 billion), using the CHF/USD December 31, 2023, exchange rate. F-72 Notes to the Novartis consolidated financial statements 33. Novartis principal 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 Accounting Stan- dards. It includes all subsidiaries, 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. Austria Novartis Holding GmbH, Vienna 35 000 Novartis Pharmaceutical Manufacturing GmbH, Langkampfen EUR 763 070 Novartis Pharma GmbH, Vienna EUR EUR 1.1 m 100% 100% 100% As at December 31, 2023 Argentina Novartis Argentina S.A., Buenos Aires Australia Novartis Australia Pty Ltd, Macquarie Park, NSW Novartis Pharmaceuticals Australia Pty Ltd, Macquarie Park, NSW Bangladesh Novartis (Bangladesh) Limited, Gazipur Belgium Novartis Pharma 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 Share capital Equity 1 interest As at December 31, 2023 Share capital Equity 1 interest ARS 906.1 m 100% AUD 2 100% AUD 3.8 m 100% BDT 162.5 m 60% EUR EUR 7.1 m 110.6 m 100% 100% Hungary Novartis Hungary Healthcare Limited Liability Company, Budapest India Novartis India Limited, Mumbai Novartis Healthcare Private Limited, Mumbai Indonesia PT. Novartis Indonesia, Jakarta Ireland Novartis Ireland Limited, Dublin Novartis Integrated Services Limited, Cork City Israel Novartis Israel Ltd., Tel Aviv Italy Novartis Farma S.p.A., Milan Advanced Accelerator Applications (Italy) S.r.l., Pozzilli 12 000 30 000 20 000 USD CHF CHF CHF USD 370 000 1.0 m 100% 100% 100% 100% 100% Japan Novartis Pharma K.K., Tokyo Ciba-Geigy Japan Limited, Tokyo Latvia Novartis Baltics SIA, Riga BRL 507.1 m 100% Luxembourg Novartis Investments S.à r.l., Luxembourg City 2 Novartis Finance S.A., Luxembourg City HUF 545.6 m 100% INR INR 123.5 m 70.68% 100% 60.0 m IDR 7.7 bn 100% EUR EUR 25 000 100 100% 100% ILS 1 000 100% EUR EUR 18.2 m 119 000 100% 99.23% JPY JPY 100.0 m 100.0 m 100% 100% EUR 3.0 m 100% USD USD 100 000 100.0 m 100% 100% Canada Novartis Pharmaceuticals Canada Inc., Montreal, Quebec CAD 420 717 100% 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 CLP 2.0 bn 100% USD HKD 30.0 m 200 100% 100% BioMedical Research Co., Ltd., Shanghai USD 320.0 m 100% Suzhou Novartis Technical Development Co., Ltd., Changshu Shanghai Novartis Trading Ltd., Shanghai Colombia Novartis de Colombia S.A., Santafé de Bogotá Czech Republic Novartis s.r.o., Prague Denmark Novartis Healthcare A/S, Copenhagen Dominican Republic Novartis Caribe, S.A., Santo Domingo Ecuador Novartis Ecuador S.A., Quito Egypt Novartis Pharma S.A.E., Cairo Finland Novartis Finland Oy, Espoo France Novartis Groupe France S.A.S., Rueil-Malmaison Novartis Pharma S.A.S., Rueil-Malmaison Advanced Accelerator Applications S.A., Rueil-Malmaison Advanced Accelerator Applications USD USD 12.0 m 3.2 m 100% 100% COP 7.9 bn 100% CZK 51.5 m 100% DKK 14.0 m 100% DOP 20.0 m 100% USD 4.0 m 100% EGP 2.1 bn 99.98% EUR 459 000 100% EUR EUR EUR 903.0 m 43.4 m 100% 100% 9.6 m 99.23% Molecular Imaging France, Saint-Genis-Pouilly EUR 7.5 m 99.23% Germany Novartis Business Services GmbH, Wehr Novartis Pharma GmbH, Nuremberg Novartis Pharma Produktions GmbH, Wehr Novartis Pharma Vertriebs GmbH, Nuremberg Greece Novartis (Hellas) S.A.C.I., Metamorphosis / Athens EUR EUR EUR EUR 25 000 25.6 m 2.0 m 25 000 100% 100% 100% 100% EUR 233.9 m 100% Malaysia Novartis Corporation (Malaysia) Sdn. Bhd., Petaling Jaya MYR 3.3 m 100% Mexico Novartis Farmacéutica, S.A. de C.V., Mexico City Morocco Novartis Pharma Maroc SA, Casablanca Netherlands Novartis Netherlands B.V., Amsterdam Novartis Pharma B.V., Amsterdam Aduro Netherlands Coöperatief U.A., Rosmalen 4 Aduro Biotech Holdings Europe B.V., Rosmalen IDB Holland BV, Baarle-Nassau New Zealand Novartis New Zealand Ltd, Auckland Norway Novartis Norge AS, Oslo Pakistan Novartis Pharma (Pakistan) Limited, Karachi Panama Novartis Pharma (Logistics), Inc., Panama City Philippines Novartis Healthcare Philippines, Inc., Makati City Poland Novartis Poland Sp. z o.o., Warsaw MXN 206.7 m 100% MAD 80.0 m 100% EUR EUR -- EUR EUR 1.4 m 4.5 m -- 46 216 18 000 100% 100% -- 100% 99.23% NZD 820 000 100% NOK 1.5 m 100% PKR 6.7 bn 99.99% USD 10 000 100% PHP 298.8 m 100% PLN 44.2 m 100% Portugal Novartis Portugal, S.G.P.S., Lda., Porto Salvo Novartis Farma – Produtos Farmacêuticos, S.A., Porto Salvo EUR 500 000 EUR 2.4 m 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 Saudi Arabia Novartis Saudi Company, Riyadh RON RON RUB RUB 3.0 m 119.5 m 100% 100% 20.0 m 500 m 100% 100% SAR 30.0 m 100% F-73 Notes to the Novartis consolidated financial statements As at December 31, 2023 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 Novartis farmacevtska proizvodnja d.o.o., Ljubljana South Africa Novartis 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 Abadia Retuerta S.A., Sardón de Duero / Valladolid 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 Share capital Equity 1 interest SGD 100 000 100% SGD 45.0 m 100% SGD 39.0 m 100% EUR 2.0 m 100% EUR 7 500 100% ZAR 86.3 m 100% KRW 24.5 bn 100% EUR 63.0 m 100% EUR EUR 22.6 m 99.23% 100% 6.0 m SEK 5.0 m 100% 10.0 m 100.2 m CHF CHF CHF 100 000 CHF 100 000 -- -- -- -- -- -- -- -- 100% 100% 100% 100% -- -- -- -- 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 Novartis Innovative Therapies AG, Risch Advanced Accelerator Applications International SA, Geneva CHF -- 1.0 m 350.0 m 20.0 m 18.9 m -- CHF CHF 100 000 CHF CHF CHF CHF 251 000 CHF 129 630 CHF CHF 100 000 -- 100% 100% 100% 100% 100% 100% 100% 20% 100% 9.3 m 99.23% 5.0 m Taiwan Novartis (Taiwan) Co., Ltd., Taipei Thailand Novartis (Thailand) Limited, Bangkok Turkey Novartis Saglik, Gida ve Tarim Ürünleri Sanayi ve Ticaret A.S., Istanbul TWD 170.0 m 100% THB 302.0 m 100% TRY 448.0 m 100% As at December 31, 2023 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 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 4 Novartis Institutes for BioMedical Research, Inc., Cambridge, MA Novartis Manufacturing LLC, East Hanover, NJ 4 Cadent Therapeutics, Inc., Cambridge, MA Endocyte, Inc., East Hanover, NJ Navigate BioPharma Services, Inc., Carlsbad, CA The Medicines Company, East Hanover, NJ DTX Pharma, Inc., San Diego, CA Chinook Therapeutics, Inc., Seattle, WA Chinook Therapeutics U.S., Inc., Seattle, WA Venezuela Novartis de Venezuela, S.A., Caracas Vietnam Novartis Vietnam Company Limited, Ho Chi Minh City Share capital Equity 1 interest AED 7.0 m 100% GBP GBP GBP GBP GBP GBP 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 1 492 100% 100% 100% 99.23% 100% 100% 72.2 m 1 000 1 1 -- 650 1 1 -- 1 -- 0.1 1 1 1 000 1 1 1 100% 100% 100% 100% -- 100% 99.23% 100% -- 100% -- 100% 100% 100% 100% 100% 100% 100% VES 0 100% VND 70 bn 100% In addition, the Company 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, Croatia, Ghana, Guatemala, Ivory Coast, Kenya, Kuwait, Nigeria, Peru, Senegal, Ukraine 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 4 Fully consolidated entity m = million; bn = billion F-74 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 Company), which com- prise the consolidated balance sheet as at December 31, 2023, the consolidated income statement, consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated state- ment of cash flows for the year then ended, and notes to the consolidated financial statements, including material accounting policy information. In our opinion, the consolidated financial statements (pages F-1 to F-74) give a true and fair view of the consoli- dated financial position of the Company as at December 31, 2023, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accor- dance with International Financial Reporting Standards (IFRS) Accounting Standards as issued by the International Accounting Standards Board (IASB) and comply with Swiss law. Basis for Opinion We conducted our audit in accordance with Swiss law, Inter- national Standards on Auditing (ISA) and Swiss Standards on Auditing (SA-CH). Our responsibilities under those pro- visions 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 Company in accordance with the provisions of Swiss law, together with the requirements of the Swiss audit pro- fession, as well as those of the International Ethics Stan- dards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Inde- pendence Standards) (IESBA Code), 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 • Assessment of the recoverable amount for the Leqvio intangible asset • Provisions for deductions from revenue related to US Man- aged Care, Medicare Part D and Medicaid rebate pro- grams • Valuation of the dividend in kind distribution liability to effect the spin-off of Sandoz Group AG Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the con- solidated 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 form- ing our opinion thereon, and we do not provide a separate opinion on these matters. Assessment of the recoverable amount for the Leqvio intangible asset Key Audit Matter As discussed in Note 1 to the consolidated financial state- ments, the Company 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 discussed in Note 12, the Company has intangible assets other than goodwill totaling USD 26 879 million as of December 31, 2023, of which USD 6.8 billion related to the currently mar- keted product Leqvio. We identified the assessment of the recoverable amount, specifically the sales forecasts, of the Leqvio intangible asset, as a key audit matter. Significant auditor judgment and specialist skills and knowledge were required to assess the sales forecasts assumptions due to the high degree of subjectivity and estimation uncertainty involved. These sales forecasts assumptions were a significant input in the determination of the recoverable amount of the Leqvio intan- gible asset. Our response The following are the primary procedures we performed to address this key audit matter: • We evaluated the design and tested the operating effec- tiveness of a certain internal control related to the Compa- ny’s intangible asset impairment process for Leqvio, includ- ing the development of the sales forecasts; • We evaluated the reasonableness of management’s sales forecasts for Leqvio by (1) comparing the sales forecasts assumptions to company-specific operational information and management’s communications to the Board of Direc- tors, (2) comparing the most recent sales performance to previous drug launches, and (3) comparing the sales fore- casts assumptions to available external market and indus- try data; • We involved professionals with specialized skills and knowledge, who assisted in evaluating the reasonable- ness and appropriateness of certain inputs to the sales forecasts (in particular, the epidemiological inputs); and • We assessed management’s ability to accurately forecast sales by comparing historical sales forecasts for Leqvio to actual results. For further information on the assessment of the recover- able amount for the Leqvio intangible asset refer to the following: Page F-6 (Note 1 Accounting policies), Page F-16 (Note 4 Rev- enues and geographic information) and Page F-29 (Note 12 Goodwill and intangible assets other than goodwill). F-75 Statutory Auditor’s Report Provisions for deductions from revenue related to 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 Company records provisions for estimated rebates as a deduction from revenue when the related rev- enue is recognized. Rebates involve the use of assumptions and judgements in the determination of the provision rates at the time revenues are recorded. Provision rates are influ- enced by the terms and conditions in the individual agree- ments, historical experience, product sales and growth rate, population growth, product pricing, the mix of contracts and products, the level of inventory in the distribution channel, regulations, contracts, and channels and payers. As dis- cussed in Note 23, provisions for deductions from revenue totaled USD 6 315 million as of December 31, 2023, a sig- nificant portion of which related to US Managed Care, Medi- care Part D and Medicaid rebate programs (hereafter “US rebates”). We identified the evaluation of the US rebates provisions as a key audit matter. The evaluation of the rebate provision rates required a high degree of subjective auditor judgment as it involved estimating the portion of the Com- pany’s consolidated revenue which will ultimately be sub- ject 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 effec- tiveness of certain internal controls over the Company’s US rebates process related to the development of the rebate provision rates; • We developed our own independent expectation of the US rebates provisions, by using internal and external infor- mation, including historical experience and trend analysis of actual rebate claims paid, and comparing it to manage- ment’s actual recorded balances; and • We assessed management’s ability to accurately estimate the US rebates provisions by comparing historically recorded provisions to the actual amount that was ulti- mately paid by the Company. For further information on provisions for deductions from revenue related to US Managed Care, Medicare Part D and Medicaid rebate programs refer to the following: Page F-6 (Note 1 Accounting policies), Page F-16 (Note 4 Revenue and geographic information), Page F-34 (Note 16 Trade receivables) and Page F-43 (Note 23 Provisions and other current liabilities). Valuation of the dividend in kind distribution liability to effect the spin-off of Sandoz Group AG Key Audit Matter As discussed in Notes 1 and 2 to the consolidated financial statements, the dividend-in-kind to effect the spin-off of Sandoz Group AG (the Sandoz business) required the Com- pany to recognize a distribution liability representing the fair value of the Sandoz business distributed of USD 13 962 mil- lion. The Company measured the distribution liability at the fair value of the Sandoz business net assets as a whole. Fair value was measured using the opening share price of Sandoz Group AG on the first day of trading its shares on the SIX Swiss Exchange and an estimated control premium. We identified the valuation of the dividend-in-kind dis- tribution liability, specifically the determination of a reason- able control premium, as a key audit matter. Significant audi- tor judgment and specialist skills and knowledge were required to assess the control premium, which was sensi- tive to variation, such that minor changes in the assumption can cause significant changes in the valuation of the divi- dend-in-kind distribution liability and therefore on the result- ing gain on distribution. Our response The following are the primary procedures we performed to address this key audit matter: • We evaluated the design and tested the operating effec- tiveness of certain internal controls related to the Com- pany’s valuation of the dividend-in-kind distribution liabil- ity, including controls relating to selecting the control premium estimate; and • We involved valuation professionals with specialized skills and knowledge, who assisted in developing an indepen- dent control premium range by utilizing the premiums paid in historic transactions to acquire controlling interests in comparable companies. For further information on the assessment of the valuation of the dividend in kind distribution liability refer to the following: Page F-6 (Note 1 Accounting policies) and Page F-14 (Note 2 Significant transactions). Other Information in the Annual Report The Board of Directors is responsible for the other informa- tion in the Annual Report. The other information comprises the information included in the annual report, but does not include the consolidated financial statements, the stand- alone financial statements of the company, the compensa- tion 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 conclusion thereon. In connection with our audit of the consolidated finan- cial statements, our responsibility is to read the other infor- mation in the Annual Report and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other informa- tion, 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 preparation of the consolidated financial statements that give a true and fair view in accordance with IFRS Accounting Standards and the provisions of Swiss law, and for such internal control as the F-76 Statutory Auditor’s Report 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 Compa- ny’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 Direc- tors either intends to liquidate the Company or to cease oper- ations, 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 opin- ion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law, ISA 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 these consolidated financial statements. As part of an audit in accordance with Swiss law, ISA and SA-CH, we exercise professional judgment and main- tain 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 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 override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appro- priate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Com- pany’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 Direc- tors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to con- tinue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the con- solidated financial statements or, if such disclosures 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. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the dis- closures, and whether the consolidated financial state- ments 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 Company to express an opinion on the consol- idated financial statements. We are responsible for the direction, supervision and performance of the Company audit. We remain solely responsible for our audit opinion. We communicate with the Board of Directors, primarily through the Audit and Compliance 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 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 applica- ble, actions taken to eliminate threats or safeguards applied. From the matters communicated with the Board of Directors and the Audit and Compliance Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report, unless law or 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 rea- sonably be expected to outweigh the public interest bene- fits of such communication. Report on Other Legal and Regulatory Requirements In accordance with Art. 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 the consolidated financial statements according to the instructions of the Board of Directors. We recommend that the consolidated financial statements submitted to you be approved. KPMG AG Heidi Broom-Hirst Richard Broadbelt Licensed Audit Expert Auditor in charge Basel, January 30, 2024 F-77 Financial statements of Novartis AG Financial statements of Novartis AG Income statements (For the years ended December 31, 2023 and 2022) (CHF millions) Income from investment in subsidiaries License income Other income Total income Amortization of goodwill 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 2023 2022 3 4 5 5 6 11 067 25 096 228 2 230 2 11 297 25 328 – 252 – 14 – 266 – 252 – 13 – 265 11 031 25 063 796 – 254 – 31 556 – 160 11 542 25 459 – 116 – 67 11 426 25 392 A-1 Financial statements of Novartis AG Balance sheets (At December 31, 2023 and 2022) (CHF millions) Assets Current assets Cash and cash equivalents Interest-bearing current receivables with direct and indirect subsidiaries Other current receivables with direct and indirect subsidiaries Total current assets Non-current assets Financial assets with direct and indirect subsidiaries Investments in direct and indirect subsidiaries Goodwill Total non-current assets Total assets Liabilities and equity Current liabilities Note 2023 2022 4 3 8 4 323 6 640 140 97 4 467 6 740 8 7 4 12 405 14 458 12 402 14 303 1 663 1 915 26 470 30 676 30 937 37 416 Interest-bearing current liabilities with direct and indirect subsidiaries 8 1 766 25 141 29 1 961 33 370 92 495 9 1 376 1 376 483 1 859 3 820 483 1 859 2 354 10 1 116 1 202 10 23 11 2 117 320 2 460 580 12 450 320 770 667 19 121 17 353 11 426 25 392 30 547 42 745 31 127 43 412 11 – 7 586 – 10 322 27 117 35 062 30 937 37 416 Other current liabilities with direct and indirect subsidiaries Other current liabilities with 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 Statutory capital reserves Other capital reserve Statutory earnings reserves Legal reserve for treasury shares General earnings reserve Total statutory 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 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 Accounting Standards. Novartis AG has therefore applied the exemption included in article 961d, paragraph 1 SCO, and has not prepared additional disclosures, a separate cash flow statement and a management report for SCO purposes. Declaration of full time equivalents (FTE) employees Novartis AG does not have employees. Significant transactions in 2023 The Novartis AG shareholders approved the spin-off of the Sandoz business at the Extraordinary General Meet- ing (EGM) held on September 15, 2023, subject to the completion of certain conditions precedent to the Dis- tribution. The conditions precedent to the spin-off were met, and on October 3, 2023, the spin-off of the Sandoz busi- ness was effected by way of a distribution of a dividend in kind of Sandoz Group AG shares to Novartis AG share- holders and American Depositary Receipt (ADR) hold- ers (“the Distribution”). Through the Distribution each Novartis AG share- holder received 1 Sandoz Group AG share for every 5 Novartis AG shares and each Novartis ADR holder received 1 Sandoz ADR for every 5 Novartis ADR that they held on October 3, 2023, close of business. As of October 4, 2023, the shares of Sandoz Group AG have been listed on the Swiss Exchange (SIX) under the stock symbol “SDZ”. At the date of the Distribution, the book value of Sandoz Group AG was CHF 4 769 million and consisted of investments in direct and indirect Sandoz subsidiar- ies (CHF 2 781 million) and cash (CHF 1 988 million). The Distribution was made at the book value of Sandoz Group AG and was recognized as a reduction to retained earn- ings (CHF 4 769 million). 2. Accounting policies Financial income and expenses Current assets and current liabilities denominated in foreign currencies are converted at year-end exchange rates. Realized exchange gains and losses, and all unreali zed exchange losses arising from these as well as those from business transactions, are recorded net as financial income or financial expenses. Derivative financial instruments Derivative financial instruments are used for hedging pur- poses. These instruments are valued at fair value. When different accounting policies apply for the hedged item and the derivative financial instrument, hedge accounting is applied through measuring the hedged item together with the derivative financial instrument. Financial assets Financial assets are valued at acquisition cost less adjustments for foreign currency losses and any other impairment of value. Investments Investments are initially recognized at cost. Investments in Novartis AG direct and indirect subsidiaries are assessed annually and, in case of an impairment, adjusted to their recoverable 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 matu- rity, the balance sheet amount will equal the amount that is due to be paid. Provisions Provisions are made to cover general business risks of Novartis AG and its direct and indirect subsidiaries. A-3 Notes to the financial statements of Novartis AG 3. Other income The French Competition Authority (FCA) conducted an investigation into Lucentis against several Novartis subsid- iaries. In 2020, Novartis AG was jointly held liable for a fine of EUR 308 million. As Lucentis is commercialized by Novartis subsidiaries, rather than by Novartis AG itself, Novartis AG was fully reimbursed by the operational sub- sidiary. In 2023, this decision was reformed and the fine of EUR 308 million (CHF 308 million) was reimbursed to Novartis AG. As a result, Novartis AG reimbursed the full amount to the operational subsidiary. These amounts are shown net in the income statement. 4. 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 2023 and 2022. 2023 2022 4 939 4 939 – 3 024 – 2 772 – 252 – 252 – 3 276 – 3 024 1 663 1 915 5. Financial income and expenses (CHF millions) Interest Foreign exchange Others Total 2023 2022 Income Expenses Income Expenses 796 – 204 – 49 – 1 525 31 – 160 796 – 254 556 – 160 6. Extraordinary expenses In 2023, extraordinary expenses are mainly related to prior years’ stamp duty costs that have been paid under res- ervation. A-4 Notes to the financial statements of Novartis AG 7. Investments in direct and indirect subsidiaries The principal direct and indirect subsidiaries and other holdings of Novartis AG are shown in Note 33 to Novartis AG consolidated financial statements prepared according to IFRS Accounting Standards. In 2023, various participations in Novartis AG direct and indirect subsidiaries, including Sandoz-related partic- ipations, were distributed by subsidiaries to Novartis AG, which in turn contributed these subsidiaries to Sandoz Group AG. The participation in Sandoz Group AG was distributed as a dividend in kind to the Novartis AG share- holders and American Depositary Receipt (ADR) holders on October 3, 2023. As of October 4, 2023, the shares of Sandoz Group AG have been listed on the SIX Swiss Exchange (SIX) under the stock symbol “SDZ” (see Note 1). 8. Interest-bearing current receivables and liabilities and financial assets with direct and indirect subsidiaries Interest-bearing current receivables and liabilities with Novartis AG direct and indirect subsidiaries contain intra- group arrangements under which the company grants or receives credits that are available on demand. Financial assets with Novartis AG direct and indirect subsidiaries include financing arrangements and loans with these to direct or indirect subsidiaries. 9. Interest-bearing non-current liabilities – 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 2028 Total 2022 CHF Issue price millions millions 2023 CHF 100.640% 100.502% 100.479% 500 551 325 500 551 325 1 376 1 376 2023 500 876 2022 500 876 1 376 1 376 Comparison of balance sheet and fair value (CHF millions) Straight bonds Total 2023 Balance sheet 2023 2022 Fair value Balance sheet 2022 Fair value 1 376 1 376 1 340 1 340 1 376 1 376 1 266 1 266 A-5 Notes to the financial statements of Novartis AG 10. Share capital January 1 2 403 721 252 1 201.9 2 434 420 920 Number of shares canceled/capital reduced during the period – 126 243 500 – 63.1 – 30 699 668 Nominal share capital reduction due to Sandoz spin-off – 22.8 2023 Number of shares Share capital CHF millions 2022 Number of shares Share capital CHF millions 1 217.2 – 15.3 December 31 2 277 477 752 1 116.0 2 403 721 252 1 201.9 Novartis AG share capital consisted of registered shares with a nominal value of CHF 0.49 each as at December 31, 2023, and CHF 0.50 each as at December 31, 2022. In 2023, in connection with the Distribution (spin-off) of the Sandoz business (see Note 1), Novartis AG share- holders approved a decrease of CHF 22.8 million in the share capital of Novartis AG at the EGM held on Septem- ber 15, 2023. The capital decrease resulted in a reduction on September 21, 2023, of the nominal value of the Novartis AG shares of CHF 0.01, from CHF 0.50 per share to CHF 0.49 per share. The total share capital decreased from CHF 1 201.9 million at December 31, 2022, to CHF 1 116.0 million at December 31, 2023, due to a share capital reduction as a result of the cancellation of 126.2 million repurchased shares with a nominal value of CHF 63.1 million and the reduction of the nominal value of Novartis AG shares by CHF 0.01 which amounted to CHF 22.8 million. The cancellation of the 126.2 million shares was approved at the Annual General Meeting on March 7, 2023, and became effective on March 7, 2023. During 2022, 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 repur- chased shares with a nominal value of CHF 15.3 million. The cancellation was approved at the Annual General Meet- ing on March 4, 2022, and became effective on May 11, 2022. 11. Treasury shares Treasury shares held by subsidiaries and foundations January 1 Number of shares held by foundations as at January 1 Number of shares purchased/sold; reserves transferred December 31 1 Excluding foundations 2023 2022 1 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 7 529 059 96 969 226 – 11 648 475 92 849 810 450 14 987 803 907 2 245 – 578 2 117 – 7 458 744 7 529 059 – 457 450 2023 2022 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 1 177 550 958 Number of shares purchased/canceled; reserves transferred – 38 696 245 10 322 – 2 736 82 007 126 95 543 832 December 31 138 854 713 7 586 177 550 958 2 537 7 785 10 322 A-6 Notes to the financial statements of Novartis AG 2023 2022 1 Number of shares Total treasury shares CHF millions Number of shares Total treasury shares CHF millions Total treasury shares January 1 Number of shares held by foundations as at January 1 185 080 017 96 969 226 10 772 96 994 929 3 444 2 245 Number of shares purchased/sold or canceled; reserves transferred – 50 344 720 – 3 314 88 085 088 December 31 1 Excluding foundations 231 704 523 9 703 185 080 017 7 328 10 772 Novartis AG has met the legal requirements for legal reserves under articles 659 et. seq. for the treasury shares. Treasury share purchases during 2023 totaled 89.1 million (2022: 127.7 million), with an average purchase price of CHF 86 (2022: CHF 82). No treasury shares were sold during 2023 and 2022. Share-based compensation trans- actions totaled 11.1 million shares (2022: 9.7 million shares). The number of treasury shares held by Novartis AG and its direct and indirect subsidiaries meet the definitions and requirements of article 659b SCO. As at December 31, 2023, treasury shares held by Novartis AG and its direct and indirect fully-owned subsidiaries totaled 231 704 523. It should be noted that within the Novartis AG consoli- dated financial statements prepared according to IFRS Accounting Standards, some Novartis entities are included in the consolidation scope. These Novartis entities are mainly foundations, 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 subsidiaries to include foundations of Novartis. This change was implemented as at January 1, 2023, and increased the Novartis AG reported number of treasury shares held by subsidiaries by 96 969 226 shares, to reflect the Novartis AG shares held by Novartis foundations. As of the entry into force of the revised Swiss corporate law on January 1, 2023, Novartis ordinary shares held by Swiss foundations controlled by Novartis no longer carry the right to vote and are therefore included as trea- sury shares for determining compliance with the legal requirements for legal reserves under articles 659 et. seq. for the treasury shares. For more information related to the amendment to SCO article 659b (see Note 12). 12. Free reserves (CHF millions) January 1 Reduction due to cancellation of treasury shares (2022: CHF 545 million of repurchased shares less their nominal value of CHF 15 million) 1 Transfer to legal reserve for treasury shares from foundations Transfer from legal reserve for treasury shares 2 December 31 1 Reduction due to cancellation of treasury shares in 2023 fully off-set with retained earnings 2 Transfer from legal reserve for treasury shares (including expired dividends and foundations) 2023 667 – 666 579 580 2022 739 – 530 458 667 With effective date of January 1, 2023, article 659b SCO was amended to change the definition of subsidiaries to include foundations of a company. This change was implemented as at January 1, 2023 and increased the amount of legal reserves by the cost basis of the treasury shares held by subsidiaries to the amount of CHF 2 245 million, for the 96 969 226 Novartis AG shares held by Novartis foundations, (from CHF 450 million to CHF 2 695 million), with a corresponding decrease in free reserves of CHF 666 million and retained earnings of CHF 1 579 million. A-7 Notes to the financial statements of Novartis AG 13. 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 33 791 million (2022: CHF 39 416 million) Other guarantees in favor of subsidiaries, associated companies and others – total maximum amount CHF 1 000 million (2022: CHF 1 737 million) Total contingent liabilities Dec 31, 2023 Dec 31, 2022 18 810 21 997 223 559 19 033 22 556 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 irrevocable, non-discretionary arrangement with a bank to repur- chase Novartis shares on the second trading line under its up-to USD 15.0 billion share buyback. The arrangement was updated in July 2022, December 2022 and May 2023, and concluded in June 2023. In June 2023, Novartis AG entered into an irrevocable, non-discretionary arrangement with a bank to repur- chase 11.7 million Novartis shares on the second trading line, which concluded in July 2023. In July 2023, Novartis AG entered into a new irrevocable, non-discretionary arrangement with a bank to repur- chase Novartis shares on the second trading line under its new up-to USD 15.0 billion share buyback. Novartis AG is able to cancel this arrangement but may be subject to a 90-day waiting period under certain conditions. As of December 31, 2023, these waiting period conditions were not applicable and as a result, there was no requirement to record a contingent liability under this arrangement as of December 31, 2023. 14. Registration, voting restrictions and major shareholders Novartis AG Articles of Incorporation state that no per- son 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, 2023, and were entitled to voting rights on all of their shares, excluding treasury shares held by Novartis AG or its fully owned subsidiaries (including Swiss foundations controlled by Novartis AG), were as follows: Furthermore, there were the following other significant share holders: % holding of % holding of share capital share capital Dec 31, 2023 Dec 31, 2022 Shareholders registered as nominees: 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 Chase Nominees Ltd., London 1 3.6 2.9 1.5 1.0 0.4 3.8 2.9 1.6 0.9 0.4 8.4 % holding of % holding of share capital share capital Dec 31, 2023 Dec 31, 2022 Shareholder acting as American Depositary Share (ADS) depositary: JPMorgan Chase Bank, N.A., New York 8.3 9.4 Shareholders registered for their own account: Emasan AG, Basel 1 UBS Fund Management (Switzerland) AG, Basel Credit Suisse Funds AG, Zurich 3.9 2.7 2.2 3.7 2.3 2.1 1 According to a disclosure notification filed with Novartis AG and the SIX Swiss Exchange, the beneficial owner of the shares registered for Emasan AG is Sandoz – Fondation de Famille, Liechtenstein. 1 Chase Nominees, Ltd. (Chase) has informed us that as of December 2023, it will no longer register any shareholding positions on its own behalf. Shares held by customers of Chase will be registered for such customer’s own account. The following shareholder was disclosed through a noti- fication filed with Novartis AG, but was not registered as of December 31, 2023, in the Novartis Share Register: • Norges Bank (Central Bank of Norway), Oslo, which held 2.4% (2022: 2.3%) 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, 2023, 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 15. Equity instrument disclosures for the Board of Directors and Executive Committee members The following table provides a summary of equity grants (shares, ADRs, restricted share units (RSUs) and perfor- mance share units (PSUs)) to the Board of Directors and the Executive Committee members for the years ended December 31, 2023 and 2022. Board of Directors members Shares and ADRs granted during the year Executive Committee members Shares and ADRs granted during the year 1 RSUs/PSUs granted during the year 1 Shares and ADRs granted under the Annual Incentive 2023 2022 Weighted average fair value Number at grant date in CHF granted Weighted average fair value Number at grant date in CHF granted 54 185 82.93 57 251 80.55 24 141 85.30 54 351 481 980 85.12 492 299 78.16 77.97 A-9 Appropriation of available earnings and reserves of Novartis AG Appropriation of available earnings and reserves of Novartis AG 1. Appropriation of available earnings of Novartis AG as per balance sheet and declaration of dividend (CHF) Available unappropriated earnings Balance brought forward before capital reduction Reduction due to cancellation of treasury shares1 2023 2022 34 123 671 700 19 318 747 323 – 10 233 254 934 – 1 966 414 116 Total available earnings available for special distribution of a dividend in kind 23 890 416 766 17 352 333 207 Special distribution by way of dividend in kind to effect the spin-off of Sandoz Group AG – 4 769 299 720 Net income of the year Total available earnings at the end of the year Transfer to legal reserves for treasury shares2 11 426 299 804 25 392 232 198 30 547 416 850 42 744 565 405 – 1 578 834 054 Total available earnings at the disposal of the Annual General Meeting 30 547 416 850 41 165 731 351 Appropriation proposed by the Board of Directors Payment of a gross dividend (before taxes and duties) of CHF 3.30 (2022: CHF 3.20) on 2 134 274 232 (2022: 2 205 489 460) dividend-bearing shares3 with a nominal value of CHF 0.49 each (2022: CHF 0.50) Total available earnings after appropriation Dividend waived for additional treasury shares held by the Company Balance to be carried forward – 7 043 104 966 – 7 057 566 272 23 504 311 884 34 108 165 079 23 504 311 884 34 123 671 700 15 506 621 1 Based on the Annual General Meeting resolution of March 7, 2023 and March 4, 2022 2 With effective date of January 1, 2023, article 659b SCO was amended to change the definition of subsidiaries to include foundations of a company. This amendment requires an additional allocation of legal reserve for treasury shares held by Novartis foundations as of January 1, 2023, resulting in a reduction in available earnings at the disposal of the Annual General Meeting 3 No dividend was declared on treasury shares held by Novartis AG or its direct or indirect fully owned subsidiaries (excluding foundations) If this proposal is approved, the dividend will be paid as from March 11, 2024. The last trading day with entitlement to receive the dividend is March 6, 2024. As from March 7, 2024, the shares will be traded ex-dividend. 2. Special distribution by way of a dividend in kind to effect the spin-off of Sandoz Group AG (CHF) Available retained earnings before special distribution Retained earnings available for special distribution of a dividend in kind Special distribution by way of a dividend in kind to effect the spin-off of Sandoz Group AG Appropriation from retained earnings1 Total distributable retained earnings after special distribution by way of dividend in kind to effect the spin-off of Sandoz Group AG Remaining retained earnings 1 Not exceeding the amounts approved by Novartis AG shareholders at the EGM held on September 15, 2023 (CHF) Other capital reserve before the reduction of par value of Novartis AG shares Other capital reserve Increase of other capital reserve due to the reduction of par value of Novartis AG shares1 Remaining other capital reserve 1 Based on the EGM resolution of September 15, 2023 A-10 2023 23 890 416 766 – 4 769 299 720 19 121 117 046 2023 22 774 778 22 774 778 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, 2023, 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 accompanying financial state- ments (A-1 to A-10) comply with Swiss law and the Com- pany’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 ful- filled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 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 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 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 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 prepa- ration of the financial statements that give a true and fair view in accordance with the accounting rules for banks, securities firms, financial groups and conglomerates, 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-11 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. • Evaluate the overall presentation, structure and con- tent of the financial statements, including the disclo- sures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the Board of Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any sig- nificant deficiencies in internal control that we identify during our audit. We also provide the Board of Directors or its relevant committee with a statement that we have complied with relevant ethical requirements regarding independence, and 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 and reserves of Novartis AG com- plies with Swiss law and the Company’s articles of incor- poration. We recommend that the financial statements submitted to you be approved. KPMG AG Richard Broadbelt Licensed Audit expert Auditor in Charge Basel, January 30, 2024 Norman Dittes Licensed Audit Expert A-12
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