SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
Report on Form 6-K dated February 6, 2004
(Commission File No. 1-15024)
Novartis AG
(Name of Registrant)
Lichtstrasse 35
4056 Basel
Switzerland
(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F: ý Form 40-F: o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes: o No: ý
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes: o No: ý
Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes: o No: ý
Enclosures:
Novartis AG Annual Report 2003 to Shareholders
Overview | ||
Financial Highlights | 2 | |
News in 2003 | 3 | |
Letter from Daniel Vasella |
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The New Number Five in Pharmaceuticals | 4 | |
Division and Business Units |
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Pharmaceuticals | 7 | |
Giving Thalassemia Patients a Choice Discovering Pharmaceuticals Reliably and Predictably The Long Road to Blood-Pressure Control Treating Breast Cancer Will Never Be the Same EpilepsyPutting Children First A New Frontier in the Fight Against Severe Allergic Asthma Two Decades of Leadership in Transplantation Hearing the Patient, Healing the PatientIrritable Bowel Syndrome The Right Note: Saving a Singer's Sight |
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Consumer Health | 35 | |
SandozBuilding a World Leader in Generics OTCThe Value of Global Brands Animal HealthUp and Running, Despite Arthritis Medical NutritionA New Relevance for Cancer Patients Infant & BabyAlerting Parents to the Dangers of Childhood Obesity CIBA VisionInnovation in Focus |
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Corporate Citizenship |
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Active Societal Engagement | 49 | |
Health, Safety and Environment |
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Turning Strong Commitment Into Firm Actions | 61 | |
Human Resources |
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Fulfilling Career Aims | 74 | |
Corporate Governance Section |
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Corporate Governance | 83 | |
Board of Directors | 103 | |
Executive Committee | 110 | |
Business Unit Heads | 114 | |
Financial Report |
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Operating and Financial Review | 116 | |
Equity Strategy and Share Information | 135 | |
Group Consolidated Financial Statements and Notes | 145 | |
Principal Companies | 190 | |
Reconciliation to US GAAP | 196 | |
Financial Statements of Novartis AG | 213 | |
Due Dates for Reporting in 2004 |
219 |
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Contacts |
220 |
1
Key ratios
|
2003 |
2002 |
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---|---|---|---|---|
Return on sales (%) | 23.7 | 24.4 | ||
Return on average equity (%) | 17.1 | 17.7 | ||
Group research and development as % of sales | 15.1 | 13.6 | ||
Debt/equity ratio | 0.20:1 | 0.20:1 | ||
Current ratio | 2.4:1 | 2.5:1 | ||
Share information
|
2003 |
2002 |
||
---|---|---|---|---|
Average number of shares outstanding | 2 473 522 565 | 2 515 311 685 | ||
Earnings per share (USD) | 2.03 | 1.88 | ||
Operating cash flow per share (USD) | 2.68 | 2.08 | ||
American Depositary Share (ADS) price at end of year (USD) | 45.89 | 36.73 | ||
Share price at end of year (CHF) | 56.15 | 50.45 | ||
Dividend per share(1) (CHF) | 1.00 | 0.95 | ||
Pay-out ratio based on outstanding shares (%) | 39 | 36 | ||
2
|
|
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---|---|---|
Group sales | Strong volume growth in Pharmaceuticals and Sandoz: Group sales up 19% in USD (+11% in local currencies); Novartis is one of the fastest growing top-ten pharmaceutical companies | |
Pharmaceuticals |
Pharmaceuticals steadily gaining market share in all major markets, with sales growth of 18% in USD, driven by the Cardiovascular and Oncology franchises |
|
Consumer Health |
Consumer Health ongoing sales up 24% driven by 60% sales growth at Sandoz |
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New drugs |
With seven major approvals and 79 projects in clinical development and registration Novartis has one of the leading pipelines in the industry |
|
Operating income |
Double-digit (16%) rise in full-year operating income is driven by volume expansion, product mix enhancements and productivity gains |
|
Net income |
Net income is up 6% to a new record level of USD 5.0 billion, lifting earnings per share by 8% |
|
Dividend |
Based on solid performance, a dividend increase of 5% to CHF 1.00 per share will be proposed to shareholders |
3
Dear Shareowner
It gives me great pleasure to be able to present record results again. Today, Novartis is one of the fastest growing global pharmaceutical companies. Thus, we have overtaken competitors and are now in fifth position in the Global Pharmaceuticals sector. At the same time, we have gained market segment share in all of our other businesses. Let me summarize the key results in 2003:
We attribute our success to our clear focus on sustainable growth, our corresponding, consistently innovation-oriented strategy, and the capabilities and commitment of our associates. Accordingly, we see our investments in Research and Development as being of primary importance. Last year we increased our investment in Research and Development by 32%. In Pharmaceuticals alone, we invested morethan USD 3 billion in 2003 to discover and develop innovative medicines, and to improve treatments for patients. The first phase in the buildup of our new research center in Cambridge, Massachusetts was successfully completed. Nearly 400 scientists are already working in the new laboratories. In 2004, we will continue the expansion. This demands continued over-proportional investments that will yield mid- to long-term returns.
Our development pipeline is among the best in the world, based on quality and productivity. Most promising are our novel compounds for patients with diabetes, hypertension, cancer and osteoporosis, and for transplantation medicine which will, if successful, significantly improve treatments and thus have an attractive commercial potential.
In 2003, we received first major market approvals for Certican and Myfortic for use in transplantation medicine, Stalevo for the treatment of Parkinson's disease and Xolair for allergic asthma therapy in the US. Furthermore, Prexige, a new treatment for pain and osteoarthritis, was approved in the UK. Its approval in the US is as yet uncertain, pending results of additional trials.
4
To complement our own research activities, we have established several new collaborations with universities and biotechnology companies. The acquisition of 51% of the capital stock of Idenix Pharmaceuticals Inc., a biotechnology company based in Boston, Massachusetts, offers us rapid entry into anti-viral research, and access to development compounds for the treatment of hepatitis B and C. Additionally, we acquired the commercial rights for Lucentis outside the US, Canada and Mexico. In combination with our product Visudyne, this drug may improve the treatment options in age-related macular degeneration, a frequent cause of blindness in adults. We also obtained rights to a promising cancer drug, Gimatecan, from Sigma Tau and the drug Enablex/Emselex for the treatment of urinary incontinence from Pfizer.
Our market position improved in most countries, most notably in the US. This we achieved thanks to the success of our blood pressure-regulating medicines Diovan and Lotrel; our cancer drugs Gleevec/Glivec and Zometa; Elidel, our eczema treatment; as well as to the attractive sales of Zelnorm/Zelmac, our irritable bowel treatment, to name just some of our most important products.
The dynamic growth of our Generics business is primarily based on the success of AmoxC, loratadine and omeprazole in the US market. The development of activities at Lek, a generics company we acquired in 2002, also exceeded expectations.
In light of the increasing age of our society, and the associated rise in healthcare expenditure, generics will play an even more important role as a cost effective therapeutic option. These cost savings can and should be used to provide patients with innovative, patent-protected medicines that have improved efficacy and safety profiles.
Unavoidably, governments, insurers and employers will continue to put pressure on the price of pharmaceuticals, despite the fact that the overall cost of drug therapies amounts to less than 20% of all healthcare-related costs in most countries. Also, medicines not only extend patients' life expectancy, but also improve their quality of life and reduce their lost working hours and absence from work due to illness.
Increasingly, health is regarded as a fundamental right. The introduction of prescription drug coverage into the US Medicare insurance system for senior citizens must also be seen from this perspective.
The enlargement of the EU from 15 to 25 member states will not only improve the standard of living in the new member states, but also lead to demands for better health-related products and services. A similar trend can be observed in countries with rapidly growing Gross National Product (GNP), such as China and India. In each of these countries, the new middle class already comprises more than 150 million people.
A fundamentally different situation prevails in the poorest countries, for example in parts of Africa, where HIV/AIDS, malaria, tuberculosis and various other infectious diseases kill millions of people every year. The pharmaceutical industry is neither the cause of this plight, nor can it prevent it on its own. Nevertheless, the pharmaceutical industry is able and ready to make a valuable contribution. Accordingly, at the World Trade Organization (WTO) negotiations in Cancun, the industry did not insist on patent rights for essential medicines in the poorest countries. Novartis, however, has gone even further. Thanks to our good results last year we were able to provide, at no charge, all the drugs used by the World Health Organization (WHO) for the treatment of leprosy patients worldwide. Furthermore, we are providing the WHO with our new malaria drug Coartem at cost. Recently, we additionally committed to supply medicines for the treatment of 500 000 tuberculosis patients over the next five years, free of charge.
5
We continue our endeavors to fulfill every regulation, no matter how work-intensive or formalistic it may be. In 2004 we will comply with every part of the Sarbanes-Oxley Act, including Section 404, thus fulfilling every demand made by US authorities. Despite all internal and external controls, and our declared intention and related efforts to comply with all laws and regulations, it is unlikelygiven our 78 000 associatesthat we will be successful everywhere at all times. But at a minimum, the transparency of our report will enable you, our shareowners, to assess the current situation, risks and opportunities of your company. I can assure you that the Board of Directors and I are fulfilling our leadership and controlling responsibilities to the best of our knowledge and abilities.
At the next Annual General Shareholder Meeting, Heini Lippuner and Walter Frehner will retire from the Board. After last year's meeting, you, the shareholders, have already prepared the succession. Professor Srikant Datar is professor of accounting at Harvard Business School, and Dr.-Ing. Wendelin Wiedeking is Chairman of the Executive Board at Porsche AG.
Here, I also wish to express my deep regrets regarding the death of our honorary Chairman, Dr. Louis von Planta, who played a decisive role in the founding of our company.
Finally, I would like to take this opportunity to thank everyone who contributed to last year's good resultsespecially all our associates. And I wish to thank you, as shareowners of Novartis, for your loyalty and confidence.
Daniel
Vasella, MD
Chairman and CEO
6
|
2003 USD millions |
2002 USD millions |
Change in USD % |
|||
---|---|---|---|---|---|---|
Sales | 16 020 | 13 528 | 18 | |||
Operating income | 4 423 | 3 891 | 14 | |||
Research and development | 3 079 | 2 355 | 31 | |||
Research and development as % of sales | 19.1 | % | 17.3 | % | ||
Free cash flow | 4 690 | 4 418 | 6 | |||
Net operating assets | 8 969 | 8 041 | 12 | |||
Investments in tangible fixed assets | 771 | 505 | 53 | |||
Sales by region
2003 |
2002 |
% change |
||||
---|---|---|---|---|---|---|
Number of employees | 44 640 | 44 110 | 1 | |||
7
Top ten products |
2003 sales in USD millions |
Change in USD % |
Change in local currencies % |
|||
---|---|---|---|---|---|---|
Diovan/Co-Diovan | 2 425 | 46 | 38 | |||
Gleevec/Glivec | 1 128 | 84 | 68 | |||
Neoral/Sandimmun | 1 020 | -2 | -10 | |||
Lamisil (group) | 978 | 12 | 5 | |||
Zometa | 892 | 83 | 74 | |||
Lotrel | 777 | 20 | 20 | |||
Lescol | 734 | 27 | 18 | |||
Sandostatin (group) | 695 | 15 | 7 | |||
Voltaren (group) | 599 | 1 | -6 | |||
Cibacen/Lotensin/Cibadrex | 433 | -6 | -9 | |||
The Novartis Pharmaceuticals Division is a world leader in the discovery, development, manufacture and marketing of prescription medicines. Our goal is to provide a broad portfolio of innovative, effective and safe products and services to patients through healthcare professionals around the world. This goal is supported by a dedicated organization operating in more than 140 countries.
8
The Novartis pipeline holds a broad stream of promising future products, with 64 projects in Phase II and beyond as of December 2003, including both new molecular entities and additional indications or formulations for marketed products.
Compound
Molecular entity.
Generic name
Designation assigned to compound.
Indication
A disease or condition for which a particular drug is believed to be an appropriate therapy.
Phase II
Clinical trials in patients to determine dose ranging, safety and efficacy.
Phase III
Large clinical trials to determine definitive safety and efficacy in patients.
Filed
In registration.
9
Therapeutic area |
Project/compound |
Generic name |
Indication |
|||
---|---|---|---|---|---|---|
Cardiovascular and metabolism | Diovan | valsartan | Congestive heart failure | |||
Diovan VALIANT | valsartan | Post-myocardial infarction | ||||
Lotrel 10-40, 5-40 | benazepril, amlodipine | Hypertension | ||||
Diovan VALUE | valsartan | High risk hypertension | ||||
Navigator* | valsartan, nateglinide | Progression to type-II diabetes | ||||
Sandostatin LAR | octreotide acetate | Diabetic retinopathy, other indications | ||||
Lotrel ACCOMPLISH | benazepril, amlodipine | High risk hypertension | ||||
SPP100 | aliskiren | Hypertension | ||||
LAF237 | | Type-II diabetes | ||||
NKS104 | pitavastatin | Dyslipidemia | ||||
Oncology | Zometa | zoledronic acid | Hypercalcemia of malignancy (HCM) | |||
Femara | letrozole | Breast cancer (extended adjuvant therapy) | ||||
Femara | letrozole | Breast cancer (early adjuvant therapy) | ||||
ICL670 | | Chronic iron overload | ||||
PTK787 | vatalanib | Solid tumors | ||||
Gleevec/Glivec | imatinib mesylate | Solid tumors | ||||
OctreoTher | edotreotide | Somatostatin receptor positive tumors | ||||
EPO906 | | Solid tumors | ||||
PKC412 | midostaurin | Acute myeloid leukemia | ||||
SOM230 | | Acromegaly, GEP neuroendocrine tumors | ||||
LBQ707 | gimatecan | Solid tumors | ||||
RAD001 | everolimus | Solid tumors | ||||
Nervous system | Focalin LA | dexmethylphenidate | Attention deficit disorders | |||
ILO522 | iloperidone | Schizophrenia | ||||
Exelon | rivastigmine | Non-Alzheimer's dementia | ||||
Exelon TDS | rivastigmine | Alzheimer's disease | ||||
Trileptal | oxcarbazepine | Neuropathic pain | ||||
TCH346 | | Parkinson's disease | ||||
TCH346 | | ALS(1) | ||||
AMP397 | | Epilepsy | ||||
SAB378 | | Chronic pain | ||||
LIC477 | licarbazepine | Bipolar disorder | ||||
FTY720 | | Multiple sclerosis | ||||
Transplantation, immunology | Certican | everolimus | Transplantation | |||
Myfortic | mycophenolate sodium | Transplantation | ||||
FTY720 | | Transplantation | ||||
Dermatology | Lamisil | terbinafine | Tinea capitis | |||
Lamisil | terbinafine | New Oral Formulation (NOF) onychomycosis | ||||
ASM981 | pimecrolimus | Inflammatory skin diseases | ||||
Elidel (ASM981) | pimecrolimus | Inflammatory skin diseases | ||||
Respiratory | Foradil | formoterol | Multi dose dry powder inhaler for asthma | |||
Xolair | omalizumab | Asthma | ||||
QAB149 | | Asthma/COPD(2) | ||||
ASM981 | pimecrolimus | Asthma | ||||
Arthritis, bone, gastrointestinal diseases, HRT and urinary incontinence | Zelnorm/Zelmac | tegaserod | Chronic constipation | |||
Enablex/Emselex | darifenacin | Overactive bladder | ||||
Prexige | lumiracoxib | Osteoarthritis, rheumatoid arthritis, pain | ||||
Zelnorm/Zelmac | tegaserod | Irritable bowel syndrome | ||||
ZOL446 | zoledronic acid | Post-menopausal osteoporosis | ||||
ZOL446 | zoledronic acid | Paget's disease | ||||
Zelnorm/Zelmac | tegaserod | Functional dyspepsia | ||||
Zelnorm/Zelmac | tegaserod | Gastroesophageal reflux disease | ||||
ZOL446 | zoledronic acid | Rheumatoid arthritis | ||||
RAD001 | everolimus | Rheumatoid arthritis | ||||
AAE581 | | Osteoporosis | ||||
SMC021 | calcitonin | Osteoporosis | ||||
RGN303 | | Rheumatoid arthritis | ||||
Ophthalmics | Visudyne | verteporfin | AMD(3) (occult) | |||
Visudyne | verteporfin | AMD(3) (minimally classic) | ||||
Lucentis | ranibizumab | AMD | ||||
Elidel | pimecrolimus | Ophtha indications | ||||
PIR335 | pirenzapine | Myopia | ||||
Infectious diseases | LDT600 | telbivudine | Hepatitis B | |||
LDC300 | valtorcitabine | Hepatitis B | ||||
10
Mechanism of action |
Formulation |
Planned filing dates |
Phase I |
Phase II |
Phase III |
Filed |
||||||
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Angiotensin-II receptor blocker | Oral | Filed (EU) | ||||||||||
Angiotensin-II receptor blocker | Oral | Filed | ||||||||||
ACE inhibitor/calcium channel blocker | Oral | Filed (US) | ||||||||||
Angiotensin-II receptor blocker | Oral | 2004 | ||||||||||
| Oral | >2006 | ||||||||||
Growth hormone + IGF-1 inhibitor | Intramuscular | 2005 | ||||||||||
ACE inhibitor/calcium channel blocker | Oral | >2006 | ||||||||||
Renin inhibitor | Oral | 2005 | ||||||||||
Dipeptidylpeptidase (DPP-4) inhibitor | Oral | 2006 | ||||||||||
HMG CoA reductase inhibitor | Oral | >2006 | ||||||||||
Bisphosphonate, osteoclast inhibitor | Intravenous | Filed (Japan) | ||||||||||
Non-steroidal aromatase inhibitor | Oral | 2004 | ||||||||||
Non-steroidal aromatase inhibitor | Oral | 2005 | ||||||||||
Iron chelator | Oral | 2005 | ||||||||||
Tyrosine kinase inhibitor | Oral | 2005 | ||||||||||
Tyrosine kinase inhibitor | Oral | tbd | ||||||||||
Radiation therapy | Intravenous | tbd | ||||||||||
Microtubule depolymerization inhibitor | Intravenous | >2006 | ||||||||||
Protein kinase inhibitor | Oral | 2006 | ||||||||||
Somatostatin (sst)1/2/3/5 binder Int and hormone inhibitor | ravenous | 2005 | ||||||||||
Topoisomerase-I inhibitor | Oral | >2006 | ||||||||||
Growth-factor-induced cell proliferation inhibitor | Oral | 2006 | ||||||||||
Dopamine transport blocker | Oral | 2004 | ||||||||||
Mixed 5HT2A/D2 antagonist | Oral | tbd | ||||||||||
Cholinesterase inhibitor | Oral | tbd | ||||||||||
Cholinesterase inhibitor | Transdermal | 2006 | ||||||||||
Voltage dependent sodium current blocker | Oral | tbd | ||||||||||
Neuronal GAPDH dep. programmed cell death inhibition | Oral | >2006 | ||||||||||
Neuronal GAPDH dep. programmed cell death inhibition | Oral | >2006 | ||||||||||
AMPA receptor antagonist | Oral | >2006 | ||||||||||
Cannabinoid-1 receptor agonist | Oral | >2006 | ||||||||||
Voltage dependent sodium current blocker | Oral | >2006 | ||||||||||
Sphingosine-1-phosphate receptor agonist | Oral | >2006 | ||||||||||
Growth-factor-induced cell proliferation inhibitor | Oral | Filed (US) | ||||||||||
Inosine monophosphate dehydrogenase inhibitor | Oral | Filed | ||||||||||
Sphingosine-1-phosphate receptor agonist | Oral | 2005 | ||||||||||
Fungal squalene epoxidase inhibitor | Oral | tbd | ||||||||||
Fungal squalene epoxidase inhibitor | Oral | 2004 | ||||||||||
T-cell and mast cell inhibitor | Oral | tbd | ||||||||||
T-cell and mast cell inhibitor | Ointment | 2006 | ||||||||||
Long-acting beta-2 agonist | Dry powder for inhalation | Filed | ||||||||||
Anti-IgE monoclonal antibody | Subcutaneous | 2004 (EU) | ||||||||||
Long-acting beta-2 agonist | Inhalation | >2006 | ||||||||||
T-cell and mast cell inhibitor | Oral | tbd | ||||||||||
5HT4-receptor agonist | Oral | Filed (US) | ||||||||||
M3 antagonist | Oral | Filed | ||||||||||
Cyclo-oxygenase-2 inhibitor | Oral | 2005 (US) | ||||||||||
5HT4-receptor agonist | Oral | 2004 (EU) | ||||||||||
Bisphosphonate: osteoclast inhibitor | Intravenous | >2006 | ||||||||||
Bisphosphonate: osteoclast inhibitor | Intravenous | 2004 | ||||||||||
5HT4-receptor agonist | Oral | 2005 | ||||||||||
5HT4-receptor agonist | Oral | 2006 | ||||||||||
Bisphosphonate: osteoclast inhibitor | Intravenous | >2006 | ||||||||||
Growth-factor-induced cell proliferation inhibitor | Oral | >2006 | ||||||||||
Cathepsin K inhibitor | Oral | >2006 | ||||||||||
Regulator of calcium homeostasis | Oral | >2006 | ||||||||||
IL-1 alpha and IL-1 beta inhibitor | Intravenous | >2006 | ||||||||||
Photosensitizer for photodynamic therapy | Intravenous | 2006 (US) | ||||||||||
Photosensitizer for photodynamic therapy | Intravenous | >2006 | ||||||||||
VEGF blocker | Intra-vitreal | 2006 | ||||||||||
T-cell and mast cell inhibitor | Eye drops | >2006 | ||||||||||
Selective MI-muscarine antagonist | Ocular | tbd | ||||||||||
Viral polymerase inhibitor | Oral | 2005 | ||||||||||
Viral polymerase inhibitor | Oral | 2006 | ||||||||||
11
Giving Thalassemia Patients a Choice
Mario Rossi* is a 27-year old computer consultant who lives in Torino, Italy. His job forces Mario to travel often and he recently moved out of the family home, into an apartment of his own.
That independence was hard-won. Because Mario suffers from beta-thalassemia, an inherited genetic defect that damages red blood cells in his body, he needs a blood transfusion every month to survive. Yet repeated transfusions have a serious side-effecta potentially fatal build-up of iron in the body. To control that iron overload, Mario took a Novartis drug called Desferal for most of his life.
Launched more than 40 years ago Desferal remains the gold standard of iron chelationremoving excess iron and extending the lives of tens of thousands of thalassemia patients from Torino to Tehran. The treatment is cumbersome, however, and many patients aren't able to adhere to the lifelong regimen of painful infusions via a portable pump for up to 12 hours a day, five to seven days per week.
Novartis scientists have spent decades and tens of millions of dollars to develop a more convenient alternative. Success finally seems to be in sight. A new iron chelator which can be taken as a dispersible tablet has reached the final, pivotal phase of clinical testing. If ongoing trials are successful for the new medicine, still known only by its research number ICL670, regulatory applications could be submitted as early as next year, followed by launches in major markets during 2006.
Mario has been taking ICL670 since September 2001, when he joined an early clinical study being conducted at the Thalassemia Center at Ospedale Regina Margherita in Torino.
"It's completely changed my life," he says.
The daily drill of Desferal therapy made it impossible for Mario to travel as he does todayor to even consider moving from home where his parents played a crucial role in his care.
"It's very difficult to sleep with an infusion line attached to a Desferal pump," he says. And there were frustrating occasions when he'd wake and realize that after mixing the Desferal solution and finishing elaborate preparations with the infusion line the preceding evening, he'd forgotten to switch on the pump, losing a treatment cycle.
"If I had to go back to Desferal, I'm not sure I could manage," Mario says, with a grimace.
A Distant Dream
Dr. Antonio Piga, Professor of Medicine at the Department of Pediatric Hematology, University of Torino, has watched Mario and hundreds of other patients struggle with Desferal treatment. Part of the problem is that the benefits of therapy don't show immediately. Damage from iron overload to organs such as the liver or heart takes up to 15 years to become apparentbut by the time symptoms appear, the consequences are virtually impossible to reverse. To address the crucial, mental dimension of treatment compliance, Dr. Piga added a psychologist to his staff a few years ago.
In all, Dr. Piga has 45 patients currently participating in ICL670 trials. "Every patient and family who has experience with Desferal dreams of an oral iron chelator," he says. Yet joining a trial wasn't an easy decision since most of Dr. Piga's patients were well-controlled on Desferal. Mario, for example, pondered for three weeks before finally deciding to switch to ICL670.
12
Until recently, it looked like patients might never have a choice. Desferal was derived from a natural substance originally discovered in an iron-eating bacterium called Streptomyces pilosus. But the hunt for a replacement floundered as scientists repeatedly encountered obstacles in their attempts to develop a safe and effective oral iron chelatoror even a more convenient version of Desferal.
Then, in the mid-1990s, as most major pharmaceutical companies continued to ignore the iron-chelation field, Novartis researchers made one final push. Applying cutting edge "molecular modeling" tools in the lab, researchers synthesized hundreds of molecules before finally choosing a single candidate compound, ICL670, to enter clinical testing. Dr. Rene Lattmann, a Basel-based chemist, was named a Novartis Leading Scientist last year in recognition of his role in the synthesis of ICL670.
The new medicine seemed full of promise. Two molecules of ICL670 folded snugly around each iron molecule in the body, dispatching it for excretion. Along with once-daily dosing, and high affinity and selectivity for iron, ICL670 was far more potent than Desferal, yet seemed free of the toxicity that had derailed so many predecessors.
Clinical testing had barely begun when the project hit an unexpected complication: the December 1996 merger of Ciba-Geigy AG and Sandoz AG that created Novartis in its current form.
The new company couldn't afford to develop all the drugs inherited from its predecessorsso management weeded out the weakest prospects from the combined development pipeline. ICL670 faced tough scrutiny: previous failures had bred skepticism about oral iron chelators. With a potential market of roughly 85 000 patients worldwide, the drug had modest commercial potential; and that limited pool of patients also made recruitment for clinical trials unusually expensive and time-consuming.
ICL670 was briefly designated a candidate for out-licensingbut Novartis management agreed to complete a clinical trial already underway before making a final decision. That study delivered a crucial proof-of-conceptcareful measurements showed that more iron came out of human patients treated with ICL670 than went in through diet. The net reduction of iron more than compensated for the effect of blood transfusions.
"All of a sudden we were back in business," recalls Hanspeter Nick, a chemist who had joined the iron chelator program in 1990.
Fast Track
By May 2002, ICL670 had become a "key project"the designation reserved for the most promising drugs in development at Novartis. That same year, ICL670 was granted orphan-drug status in both the US and Europe. (Orphan-drug legislation provides incentives to develop medicines for rare neglected diseases.) Last year, the US Food and Drug Administration (FDA) added "fast track" statusconfirming that ICL670 targeted a major unmet medical need and raising prospects of an expedited, six-month regulatory review.
The phase III trial now underway is the biggest study yet of an iron chelator. The study is designed to assess safety and efficacy of ICL670 compared with Desferal in a head-to-head comparsion involving roughly 500 beta-thalassemia patients from 12 countries.
A parallel trial is testing the efficacy of ICL670 in Desferal-intolerant patients who developed iron overload as a result of transfusions treating a variety of anemias, including myelodysplastic syndrome or MDS, a form of leukemia. While iron chelation has focused traditionally on the tight-knit thalassemia community in countries ringing the Mediterranean Sea and stretching eastward into India and China, transfusion-related iron overload is recognized as a truly global disorder.
13
At the 2003 biennial conference of the Thalassemia International Federation (TIF) in Palermo, Italy, Daniele Alberti, the Clinical Program Leader for ICL670, informed patients and physicians that results from initial clinical studies of ICL670 showed that the drug appeared to have a favorable safety profile and comparable efficacy to Desferal in reducing liver-iron concentrations over a one-year treatment period. "Many of the objectives of the development program already have been attained, others are near completion," Dr. Alberti said.
He cautioned, however, that it's still too early to assume the pivotal phase III trial will be successful. "It's a terrific opportunity but still a challenging one," Dr. Alberti said.
14
Novartis Institutes for BioMedical Research
The Novartis Institutes for BioMedical Research (NIBR) encompass the global research activities of Novartis. Primary NIBR sites include Basel, Switzerland; Horsham, UK; Vienna, Austria; Tsukuba, Japan; and the new global headquarters in Cambridge, Massachusetts, US.
Under the leadership of Mark C. Fishman, President of the Institutes, the goal of NIBR is to discover new medicines reliably and predictably. To attain this goal, our work must be at the frontier of science and medicine, combining modern biology, chemistry, clinical pathophysiology and genomics. There is no simple method to harvest the estimated 30 000 different human genes in a way that leads directly to drug discovery. NIBR scientists, however, are dedicated to using the tools at our disposal today to discover medicines, while at the same time developing new approaches for future pharmaceutical discovery.
Within NIBR, some groups of scientists specialize in disease areas, while others focus on "Platforms"fundamental scientific disciplines that apply across a broad spectrum of diseases. Whether their research is dedicated to specific diseases or to fundamental scientific tools, NIBR scientists work closely with each other. They also work together with colleagues in Development to ensure that discoveries are translated effectively into safe medicines. This emphasis on cross-functionality means that NIBR scientists are involved from the identification of a potential drug target, through testing in the clinic, all the way to the market.
Our prime resource is talent. NIBR leaders have come from within Novartis, from other pharmaceutical companies, from biotech and from academia. The unique mixture of talents and experience is rejuvenating and synergistic, both at the bench and in the clinic.
The interface between NIBR and external academic colleagues is being expanded and is proving beneficial to both parties. Continued outreach to small biotech companies is opening new horizons and possibilities. The NIBR culture of creativity thrives on this sense of openness, entrepreneurial spirit, and scientific rigor.
In 2003, the new Cambridge headquarters was integrated into the global research effort. The first new laboratory building was completed and brought onlineand now it is the center of research activity in Oncology, Diabetes, Cardiovascular Diseases and Infectious Diseases. In addition, scientists dedicated to Platforms are in placeworking on genomic approaches, high-throughput technologies and novel chemistry tools.
In 2004 it is expected that our second research laboratory building will be completed and the number of research scientists in Cambridge will double. More importantly, as the number and quality of research scientists increase, and we continue to tap into scientific expertise worldwide, we believe it holds great promise for significant new discoveries that may potentially lead to the medicines of the future.
NIBR: A Global Organization
The new Institutes are designed to function globally, says John Hastewell, Head of NIBR's Program Office. "I believe that the advantages of global talent far outweigh the inconvenience of inter-site communication," he adds. Some groups are localized, such as the Respiratory Disease Area in Horsham. Many of their programs utilize the expertise of other NIBR groups elsewhere in the world, including Transplantation in Basel and Molecular Pathways in Cambridge. Some groups, such as Oncology, are split between two sites.
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Science by its nature transcends traditional boundaries so that discoveries in one area often have an even more powerful impact on another. It is crucial to keep groups apprised of discoveries made by NIBR colleagues worldwide.
New technologies adopted by NIBR have led to advances in the invention and utilization of toolsmaking it possible to visualize the structure of a drug target, according to Rene Amstutz, Head of Discovery Technologies. These tools, from nuclear magnetic resonance and x-rays, to a novel fluorescence-based technology to view individual molecules, allow us to "rationally" design a drug to fit the target, he adds.
Advanced computing, known as "grid" computing, permits the intensive mathematical calculations needed for this purpose. NIBR scientists have linked together hundreds of our computers to create a supercomputer capable of those calculations.
The Institutes also have an outstanding archive of natural products, traditionally a source of novel compounds that have been successfully developed into major medicines. The most rapid high-throughput technologiesoften redesigned by NIBR scientistshave been brought to bear to examine "combinatorial" chemical libraries containing millions of compounds, in search of "hits" that start the process of drug design.
Major Unmet Medical Need
Novartis scientists have had great success in designing drug candidates for cancers where the cause of the disease is known. Gleevec/Glivec is targeted at the abnormal Abl protein in chronic myeloid leukemia, says Alexander Kamb, Head of the Oncology Disease Area. Many cancers, however, result from more complex mechanisms; for example, many solid tumors result from the activation or repression of several genes. Using the new genomic techniques, NIBR scientists probe for the weak points in such cancers and attempt to design the best drugs or combinations of drugs to attack those weaknesses.
Several recent breakthrough discoveries have shown that the aggregation of abnormal proteins in neural tissue is an underlying cause of neurodegenerative diseases like Alzheimer's disease, Parkinson's disease, amyotrophic lateral sclerosis, and Huntington's disease, among others. These findings open new opportunities to identify novel therapeutic approaches according to Graeme Bilbe, Head of Neuroscience Disease Area. Therapies could halt or delay disease progression based on a molecular understanding.
In addition, new imaging techniques allow NIBR researchers to examine the living brain. For example, scientists are developing a molecular probe, a so-called bio-marker, that may help to image Alzheimer's disease plaques in the brain earlier than is possible today.
Interesting New Leads
"Historically, most chemistry was 'hand-crafted' one compound at a time," says Scott Biller, Head of Global Discovery Chemistry. Today, using sophisticated techniques such as combinatorial chemistry together with cutting edge automation, chemists can synthesize hundreds or even thousands of biologically interesting molecules simultaneously.
"The libraries now being made are the best I've seen in my years in pharmaceutical chemistry," he adds. "We are doing an excellent job at true structure-based drug design."
NIBR chemists are exploiting the x-ray crystal structures of complexes of proprietary moleculeswith the target proteinto design novel and superior drug candidates. "We have also implemented small fragment-based screening by nuclear resonance spectroscopy and x-ray crystallography, and have already found interesting new leads that we plan to optimize into drug molecules," Dr. Biller says.
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"NIBR is a real chance to build a new vision on top of the successful and solid foundation that Novartis already has. Frankly, this is the most significant medicinal chemistry opportunity in the world."
Corporate Research
The mission of Corporate Research is to leverage the specific scientific expertise of its three member institutes to address unmet medical needs, with a particular focus on the developing world and neglected diseases.
Corporate Research at Novartis comprises three independent institutes with a total staff of more than 750 scientists. The institutes are: The Genomics Institute of the Novartis Research Foundation (GNF), based in La Jolla, California; The Novartis Institute for Tropical Diseases (NITD) in Singapore; and The Friedrich Miescher Institute (FMI), based in Basel, Switzerland.
GNF, formed in 1999, has a staff of 400 scientists who focus on development of advanced technologies in fields ranging from cellular genomics and proteomics, to combinatorial chemistry and structural biology. The Institute has also begun putting those new technologies to work in its own drug discovery programswhere its scientists increasingly work in collaboration with counterparts at NIBR.
For example, GNF has developed cutting edge systems to screen proteases that complement the protease research platform established by NIBR at its main European research hub in Basel. Proteases are cellular enzymes that represent important targets for new drugs in diseases from HIV/AIDS and oncology to neurodegeneration and dengue fever. Research in dengue fever is conducted in collaboration with the NITD.
Growing Interaction
Underscoring growing interaction among Group research units, NIBR and GNF formed a joint research committee last year. GNF will host its first portfolio review this year, with external experts assessing the potential of candidate compounds identified by the Institute. Corporate Research will hold its first global science meeting in Cambridge, Massachusetts, US this year, which also will be attended by many NIBR scientists.
NITD is a joint development funded by Novartis and the Singapore Economic Development Board (EDB). The Institute and its 70 scientists will move to permanent labs in the Biopolis science park in Singapore, this year.
At least initially, NITD will focus on research in dengue fever and tuberculosis, two of the most threatening tropical diseases worldwide. Though the center only opened last year, two drug-discovery projects have already progressed to the stage of lead optimization, or chemical fine-tuning of potential candidate compounds. NITD will host its second scientific review this yearconducted by the review board which includes Nobel laureates Rolf Zinkernagel, a member of the Novartis Board of Directors, and Sydney Brenner.
NITD's mission also includes graduate and post-graduate training programs open to scientists from developing countries. At full capacity, the training programs are expected to accommodate roughly 30 students. Parallel with its drug discovery programs, the Institute is tapping regional acumen about its two target diseases. In 2003, NITD formed a "Dengue Consortium" bringing together six partners, including the Genomics Institute of Singapore and other academic groups, that will cooperate on research in dengue fever. NITD also arranged a conference with clinicians and epidemiologists from Singapore to assess whether compounds and treatment models under consideration are appropriate for use under the conditions that prevail in healthcare systems of poor countries. A similar meeting will be held in Cambodia, in 2004.
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At Basel-based FMI, the main areas of scientific focus range from epigenetics and growth control, to neurobiology. Fundamental biomedical research conducted at FMI has generated a number of potentially interesting drug targets. One particular strength is the area of kinaseswhere work by FMI scientists has led to candidate compounds in both cancer and infectious diseases. FMI also trains young scientists and has been a prime recruiting ground for Novartismore than 50 scientists have moved from the Institute to the company's labs.
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The Long Road to Blood-Pressure Control
The perils of high blood pressure have been known for decades but awareness still hasn't translated into effective control for the majority of the 58 million Americansand 1 billion people worldwidewho suffer from hypertension.
Last year, in the Seventh Report of its Joint National Committee on Prevention, Detection, Evaluation and Treatment of High Blood Pressure (JNC7), the US National Institutes of Health (NIH) reiterated the risks: "The higher the blood pressure, the greater the chance of heart attack, heart failure, stroke and kidney disease." Yet only 54% of US patients with hypertension receive treatmentand only 28% have adequately controlled blood pressure, according to a review of clinical practice published in the New England Journal of Medicine.
Some groupssuch as African Americans and older womenare particularly vulnerable. According to the American Heart Association, the rate of heart disease is 1.5 times higher among black Americans than among whites. The corresponding rates of fatal stroke and end-stage kidney disease are 1.8 and 4.2 times higher respectively.
Novartis is committed to protecting and improving the lives of all people with cardiovascular disease. That commitment is underscored by one of the pharmaceutical industry's biggest clinical-trial programs where Diovan and Lotrel, two of the fastest growing antihypertensives in the US, are being tested in potential new applications in tens of thousands of patients.
The rise of Diovan to its current position as the number one angiotensin-II receptor blocker (ARB) globally has been buoyed by a bold clinical program designed to involve 50 000 patients.
The "megatrial" program has delivered positive outcomes in the first two trials and continues to investigate further potential new applications across the cardiovascular continuum, from pre-diabetes to heart failure.
Meanwhile, the Lotrel clinical-trial program includes more than 25 000 patients. Lotrela fixed-dose combination of amlodipine besylate and the angiotensin-converting enzyme (ACE) inhibitor benazeprilhas been on the US market since 1995. Clinical trials have demonstrated that the dual mechanism provides synergistic effects on blood-pressure lowering and reduction of hemodynamic side effects, such as edema.
Combination treatments like Lotrel are becoming increasingly common and the JNC7 guidelines issued last year emphasize that "most patients with hypertension will require two or more antihypertensive medications to achieve goal blood pressure."
Such guidelines are important for physicians. But large clinical trials still provide the crucial data on which physicians rely to make patient decisions, says Dr. Kenneth Jamerson, Professor of Medicine at the University of Michigan Medical Center and a key figure in both the Diovan and Lotrel megatrial programs.
"What clinicians and academics really respect is a study that asks a question we don't know the answer to right off the bat," Dr. Jamerson adds. "If a company really wants to know the maximum potential of a medicine, it has to be tested to the limits, even though pushing to the limits doesn't always guarantee dramatic successes."
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"Gradations of Good"
The initial Diovan megatrial was the groundbreaking Val-HeFT study of more than 5 000 heart failure patients from 16 countries. Val-HeFT has led to approval of Diovan for treatment of heart failure in patients intolerant of ACE inhibitors in the US and more than 40 other countries.
Late in 2003, researchers reported the results of VALIANT, the biggest long-term study to date in people who have survived a heart attack. VALIANT demonstrated that Diovan has all the established, lifesaving benefits of captopril, the ACE inhibitor also known by its brand name Capoten®. In a head-to-head comparison in nearly 15 000 patients at the highest risk of death following a heart attack, Diovan was at least as effective as captopril in reducing cardiac events following a heart attack, including repeat heart attacks, and hospitalizations for heart failure.
Heart attack remains one of the world's deadliest conditions. Every year 600 000 people from EU countries, and 1.1 million Americans, suffer a heart attack.
About half of these victims die. In addition, all the survivors have permanently damaged hearts and a greatly increased risk of repeat attacks, heart failure or other deadly complications. As a result of the VALIANT data, Novartis has filed a supplementary application seeking regulatory approval of Diovan to treat patients following a heart attack.
Results from the next major Diovan study, VALUE, are expected this year. VALUE is a head-to-head comparison of Diovan and amlodipine, a calcium channel blocker marketed under the brand name Norvasc®, in more than 15 000 hypertensive patients with at least one additional risk factor for cardiovascular events.
Capoten® and Norvasc® are registered tradenames of Bristol-Myers Squibb and Pfizer respectively.
Head-to-head comparisons with established drugs are particularly challenging because of what Dr. Jamerson calls "gradations of good." Success requires increased efficacy, or a relative risk reduction, of at least 15% above what a successful drug like captopril already offers patients.
Still, in a crowded market like hypertension, the cumulative effect of megatrials is essential to distinguish Diovan from rivals. "There are only a few ARBs that have end-point data and they get the lion's share of the market," Dr. Jamerson says.
When VALUE began in 1997, researchers set their sights on solving a vexing medical mystery. Epidemiological studies of cardiovascular disease clearly show that as blood pressure increases, there is a corresponding rise in the risk of both stroke and heart attack. Yet while antihypertensive treatment led to a reduced risk of stroke, trials weren't able to prove a similar benefit against heart attacks. "There was always this gapand the real unmet need in the cardiovascular arena at that time was the lack of benefit from antihypertensive drugs on heart-related outcomes," Dr. Jamerson recalls.
There were tantalizing hints that ARBsand potentially Diovanmight reduce blood pressure in a way that provided that elusive, beneficial effect against heart attacks. "Seeing if Diovan could outperform amlodipine, which was perceived to be the best treatment option, was definitely on the edge for the time," says Dr. Jamerson, who has acted as national coordinator for more than 200 US medical centers participating in VALUE.
The same scientific riddle caught the attention of major research organizations such as the NIH, and a succession of studies during the past seven years has compared effects of various antihypertensive drugs. So far no antihypertensive class has significantly outperformed the others in terms of a benefit on heart-related outcomesbut until VALUE, ARBs had not been given a definitive trial.
"VALUE is positioned to be the pivotal study that could settle the debate about drug-specific mechanisms," Dr. Jamerson predicts.
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A Higher Road
With the Lotrel clinical program, Novartis is pushing the limits of combination therapy. ACCOMPLISHa five-year study that began during 2003 and will involve more than 12 000 patientsis the first head-to-head comparison of fixed-dose combination antihypertensives. It pits Lotrel against the combination of a diuretic plus ACE inhibitor, generally regarded as the current gold standard of therapy and recommended in the JNC7 guidelines.
Dr. Jamerson, who is also the lead investigator of ACCOMPLISH, insists there's scant clinical data to demonstrate superiority of the diuretic/ACE inhibitor combination. "ACCOMPLISH is the next generation in trialsthe right study that asks the right question at the right time," he says. "If there is no one magic bullet and you end up needing a combination to achieve blood-pressure control, physicians want to know what that combination should be."
ACCOMPLISH is also breaking new ground by including an usually high (40%) proportion of African American patients among participants. This trial design ensures sufficient statistical power to determine if either combination shows a particular benefit among the black populationa key clinical question considering the elevated rates of hypertension and cardiovascular mortality among blacks. Last year the International Society on Hypertension in Blacks urged more aggressive treatment of high blood pressure among African-Americans and predicted that most "would likely require combination antihypertensive therapy to reach appropriate blood pressure goals."
Ironically, there isn't much data to support that recommendation because few compounds are tested specifically among minorities. According to the Association of Black Cardiologists, "the need for increased enrollment of minorities in clinical trials is particularly acute in development of new treatments for cardiovascular disease."
Dr. Jamersonhimself an African Americansays that with ACCOMPLISH Novartis "is really extending the limits in industry-sponsored trials." Government-sponsored studies in the US require broad participation from ethnic or gender groups that have a disproportionate burden of the disease of interest, he says, but company-sponsored trials are exempt from that rule.
"Novartis has adopted a higher roadby looking at the ethnic diversity of the country in which it markets the product," Dr. Jamerson adds.
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Treating Breast Cancer Will Never Be the Same
Labor Day is the last big summer holiday in the United States and Greg Burke, Global Head of Oncology Development at Novartis, was relaxing at his home in New Jersey when his cell phone rang.
The caller was Dr. Paul Goss, Director of Breast Cancer Research at Princess Margaret Hospital in Toronto, Canada and international chair of a major study involving Femara, a treatment for breast cancer developed by Novartis.
Dr. Goss had spectacular news. His Femara study, known as MA-17, had reached its objectives more than two years ahead of schedule. The trial's Data Safety and Monitoring Committee had recommended that the trial be modified immediatelyso that nearly 2 600 trial participants who were receiving a placebo, or sugar pill, could be given a chance to "cross over" to treatment with Femara.
That phone conversation set off an intense chain of events that culminated a month later with publication of the MA-17 results in the prestigious New England Journal of Medicine (NEJM). A simultaneous press briefing in Toronto, headed by Dr. Goss and fellow investigators, ensured that the study made headlines around the world. Treatment of breast cancer will never be the same.
MA-17 focused on treatment of postmenopausal survivors of hormone-receptor-positive breast cancer, an estimated 250 000 women in North America alone. These women normally undergo surgery, followed by chemotherapy, which attacks tumor cells the surgeon may have missed or ones which have spread to distant parts of the body. Then comes "adjuvant" treatment with tamoxifen, a drug which dramatically improves a woman's odds of remaining cancer-free.
Tamoxifen treatment is only considered beneficial for five years, however, leaving women who complete those five years uncertain about what to do next.
"When you get the initial diagnosis, it's scary facing your mortality. Then, coming to the end of tamoxifen, it's frightening again," says Kathy Anderson, a Canadian elementary-school principal who took part in MA-17. "These results send a message of hopeI'd hope that all women would have a chance at this standard of care."
Model for Megatrials
In MA-17, treatment with Femaraafter completion of the standard tamoxifen regimenreduced the risk of recurrence by 43%, compared to women who received no further treatment. Along with a reduction in recurrence of breast cancer in the previously affected breast, women taking Femara also had reductions in the number of new cancers in their opposite breastand the spread of cancer outside the breast. And Femara was generally well-tolerated, with side effects similar to those experienced by women undergoing menopause.
Dr. Goss calls MA-17 one of the most important breast-cancer studies of the past 20 years. "The reason it's so important is that it was a comparison against nothing," he adds. "It was like adding something that never had been tried before but turned out to have a massive effect. So that on top of chemotherapy and tamoxifen, women could add Femara and get another whole chunk of insurance against recurrence of breast cancer."
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Novartis scientists were equally jubilant. "We always thought that Femara was going to work in the extended-adjuvant setting but these trials usually take a long time to get results. To see such a positive outcome all of a sudden was incredibly exciting," says Dr. Diane Young, Head of Global Clinical Development at Novartis Oncology. "It's extremely rare in an industry research career to be involved in something that's hailed as a change in medical practice," Dr. Young adds. "What's really amazing is that this comes so soon after another totally novel breakthrough from Novartis Oncologythe development of Gleevec/Glivec that revolutionized treatment of chronic myeloid leukemia."
While breast-cancer patients and their physicians are the big winners from MA-17, the study also offers a model for conducting cancer megatrialswhere close cooperation between a pharmaceutical company and independent research groups can lend further weight to trial results and their rapid adoption in clinical practice.
MA-17 was designed mainly by Dr. Goss, but treatment of the study's 5 187 participants was conducted at dozens of centers linked in an unprecedented, trans-Atlantic network of cooperative clinicaltrial groups from Canada, the US, and Europe.
"Cooperation is essential to get these very large trials done," Dr. Young says. "The cooperative groups are used to working together, and they have established, standard procedures in place that make it possible to accomplish great things quickly."
Involving physicians at the community level boosts patient recruitmentand also spreads first-hand knowledge about cutting edge medicines and novel clinical approaches beyond the rarified circles of key opinion leaders at renowned teaching hospitals. "The structure of these groups couldn't be better for penetration of a new therapy. Along with key opinion leaders from all over the world, you've got hundreds of community physicians who are local experts on MA-17, feeling part of it and wanting to share the results with colleagues," Dr. Goss muses.
Estrogen Deprivation
Femara belongs to a class of drugs known as aromatase inhibitors, which work by blocking aromatase, the enzyme primarily responsible for synthesis of estrogen in the body. Estrogen is the major growth factor in hormone-receptor-positive tumors, which account for about two-thirds of all breast cancer cases. Estrogen deprivation is the main therapeutic approach.
Tamoxifen, by contrast, inhibits stimulation of tumor growth by preventing the binding of estrogens to estrogen receptors in cancer cells. Studies show that tamoxifen treatment reduces the risk of breast-cancer recurrence by nearly 50% and the risk of death by 26%. But after five years of treatment, tumors tend to become resistant to tamoxifen and the drug's therapeutic benefits are gradually outweighed by side effects.
The ability of aromatase inhibitors to reduce estrogen levels by up to 95%and starve hormone-receptor-positive tumorsmarked them as competitors to tamoxifen as the gold standard of care. But proving that potential has required a marathon of giant clinical trials.
In the time-honored calendar of drug development, an anticancer agent must first prove its mettle against the most advanced tumors. Femara won approval for treatment of advanced breast cancer in the UK in 1996, in the US a year later, and today it is available in more than 75 countries. Three years ago, Femara proved to be more effective than tamoxifen in a head-to-head trial involving more than 900 postmenopausal women with advanced breast cancer. Patients taking Femara had a significantly longer time to disease-progression, and higher response rates, than women receiving tamoxifen.
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Adjuvant therapy loomed as an even bigger prize and in 1998, Novartis opened a head-to-head comparison of Femara against tamoxifen in the early adjuvant treatment of postmenopausal, breast-cancer survivors. Known as BIG 1-98, the trial involves more than 8 000 patients and is being conducted by the Breast International Group, a network of cooperative clinical groups from Europe, Canada and Australasia. The study compares the efficacy of Femara and tamoxifen in adjuvant therapy for five years after primary treatmentas well as sequential variations of Femara and tamoxifen during the treatment period.
Traveling the World
MA-17 also started in 1998. Dr. Goss was convinced that the uncertainty facing breast-cancer survivors after five years of tamoxifen treatmentso-called extended adjuvant treatmentrepresented an urgent medical question. However, the study was originally designed to test vorazole, an aromatase inhibitor being developed by Johnson & Johnson.
"I spent a year traveling around the world, presenting the idea to cooperative groups in Europe and North America and getting buy-in for the trial," Dr. Goss recalls with a sigh. But two weeks before the first patient was due to be enrolled, Johnson & Johnson abruptly halted development of vorazole and bailed out of MA-17.
Scrambling to find a new industry sponsor and salvage the study, Dr. Goss called Novartis. Despite the short notice, ongoing summer vacations in Europe and skepticism from some scientists that Femara could achieve the ambitious goals set for MA-17, Novartis agreed to join the study.
It was a bold step. After all, tamoxifen generally is credited with saving more lives than any other anticancer medicineand had also demonstrated a sustained, carryover effect for several years following cessation of the initial five years of adjuvant therapy. Underscoring that point in an editorial accompanying the NEJM's publication of MA-17 results, Dr. John Bryant and Dr. Norman Wolmark recall: "It was anticipated that the initial effect of (Femara) therapy would be moderate, with increased benefits becoming evident only with longer follow-up."
So when MA-17's Data Safety and Monitoring Committee began a scheduled interim analysis in late August, nobody was prepared for the bombshell the Committee delivered.
"We simply found what we were looking for sooner than expected," Dr. Goss says. "The study had set out to discover if [Femara] could reduce disease occurrence by 22%. When we knew it could, by 43%, we said "Good enough, that's it. The study is over. Femara worksfabulously well."
The next step was to comply with the committee's order to unblind the study as promptly as possible. The trial's executive committee, representing the cooperative groups, agreed unanimously that the trial should end ahead of schedule.
Dr. Goss then contacted the NEJM to see if the study was considered to be important enough to receive an expedited review. When the journal agreed, the Data Safety and Monitoring Committee consented to a delay of roughly three weeks, during which the paper was written and peer reviewed. At the same time, press releases were prepared and coordinated among study co-sponsors: Cancer Institute of Canada, the US National Cancer Institute and the European Organization for Research and Treatment of Cancer (EORTC).
Making a Difference for Patients
Though no one seriously questioned the ethical obligation to give MA-17 placebo participants the right to "cross over" as soon as the superior efficacy of Femara was clear, the premature modification left some key questions unanswered. Novartis and the cooperative groups are moving to address many of those loose ends.
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Perhaps most importantly, Novartis plans to submit applications to regulatory agencies during the first half of 2004 seeking the additional indication of "extended adjuvant" therapy for Femara. Since Femara is already on the market, physicians can prescribe the drug for medically appropriate usesbut without formal regulatory approval, insurers and governments might balk at reimbursing the cost of the treatment.
While MA-17 ended early, patients will continue to receive treatment for the full five years promised when they joined the study. Long-term safety of extended adjuvant treatment with Femara will be followed closely. Meanwhile, Novartis and the cooperative groups are discussing a possible extension of MA-17 to evaluate Femara treatment for a further five years, and to attempt to establish the optimal duration of treatment and assess long-term side effects.
"There's no doubt that it's an important question," Dr. Goss says. "There's nothing from the MA-17 result to suggest that Femara therapy shouldn't be chronic."
Separately, Novartis is exploring use of Femara in combination treatments. One important side effect of Femara treatment observed during MA-17 was a potentially increased risk of osteoporosis and resulting fractures. Studies in Europe and the US are testing whether a combination of Femara and Zometa can mitigate the potential risk to bone safety in adjuvant treatment. Zometa is a bisphosphonate, used to treat bone-related cancer complications and it is also under development as a treatment for osteoporosis.
In yet another study, Femara is being combined with Certican, an immunosuppressant drug already approved in transplantation. There is preliminary evidence that Certican could block a signaling pathway that plays an important part in stimulating breast cancer, in a manner similar to the role of estrogen in hormone-receptor-positive tumors.
"These combinations of Femara with other agents reflect the breadth of our oncology portfolioand how it fits together to create unique opportunities to make a difference for cancer patients," Dr. Young says. "There's a lot of thinking and talking today about how to answer remaining questions that need to be answered, and the studies that need to be done. I expect Novartis to remain fully involved in these conversations."
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Trileptal: Putting Children First
Last year Trileptal became the first anti-epileptic medicine in 25 years to win approval from the US Food and Drug Administration for use as monotherapy in children as young as four years of age.
The approval reflected an ambitious global clinical program that aims to extend the benefits of Trileptal therapy to very young children, a group with a major unmet medical need. The drug is already available in more than 70 countriesbut pediatric age limits approved by regulators vary widely.
Prior to the FDA's new age limit, Trileptal monotherapy in the US was limited to adults. In the EU, however, Trileptal was approved five years ago as the first approved monotherapy for epileptic children from age six. In Australia and countries of Latin America, Trileptal is either approved for all patients without an age limit, or to treat children as young as two.
An estimated 50 million people worldwide suffer from epilepsy. Up to 5% of the world's population may report a seizure at some point in their livesbut the very young are particularly vulnerable. Incidence is high in children up to the age of 10but also common in infants below one year of age. In these youngest patients, seizures often signal serious disease which, without effective treatment, can lead to permanent disability.
The pediatric clinical program now underway with Trileptal involves roughly 300 patients. More than 50 of these patients are infants less than one year of age, the youngest only one month. While eight new anti-epileptic drugs have been launched during the past decade, only a handful have been tested in children, mainly as adjunctive therapy. Physicians welcome more studies in childreneven expert epileptologists readily acknowledge they need all the help they can get.
Professor Christian Elger, Head of the Department of Epileptology at the University of Bonn, personally sees more than 1 000 patients annually, and supervises cases of thousands more treated each year in his hospital. "Even with all that experience, you simply can't foresee how a drug will work in epilepsy patientsespecially young children," Dr. Elger says. "If a new drug comes on the market, it can work perfectly for the first 10 patientsbut then be ineffective for the next patient who has exactly the same symptoms as the others. Everything exactly the samebut the drug doesn't work. You can't understand it."
Trileptal is widely used in pediatric cases, partly as a result of demonstrated efficacy and safetybut also the availability of a pediatric oral-suspension formulation. "When we look at how to take care of these kids, especially the youngest less than a year old, not only do you need to pick the right drug but it needs to have a formulation which can be used. A suspension formulation is very important," says Dr. Tracy Glauser, a specialist in pediatric epilepsy at the Children's Hospital Medical Center, Cincinnati, Ohio, US.
One of the trials now in progress explores the effect of Trileptal on cognition, a key question since children with epilepsy also have a high incidence of other neurological problems and learning disorders. The European Agency for the Evaluation of Medicinal Products, or EMEA, Europe's main regulatory agency, asked Novartis to conduct the cognition study when it approved Trileptal in 1999.
More than 110 patients, with a minimum age of six years, are being treated for six months with either Trileptal, or two older-generation, standard anti-epileptic drugs. After six months' treatment patients will be evaluated with a neuropsychological test batteryon criteria ranging from attention and reaction-time, to decision-making and memory. "This will give us important information about the effect of Trileptal on cognitive functionwhich may have an impact on behavior and any psychiatric problems these kids may have," Dr. Glauser says.
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Novartis is also conducting two trials requested by the FDA to document the safety, efficacy and pharmacokinetic characteristics of Trileptal in children and infants as young as one month in both the drug's approved indications, monotherapy and adjunctive treatment. The trials are complex and challenging, requiring hospitalization of a child for extended video-electroencephalographic (EEG) monitoring.
The monotherapy trial involves 80 patientsranging in age from one month to sixteen yearswho will receive different doses of Trileptal. After treatment for five days, each patient will undergo video-EEG monitoring for up to 72-hours, to assess effects of the different doses on seizure frequency.
The adjunctive-therapy study investigates the effect of adding different doses of Trileptal to combinations of up to two other anti-epileptic drugs during 30 days of treatment. Patients will undergo continuous video-EEG monitoring both before and at the end of the trial treatment period to assess the reduction in seizure frequency from baseline.
Successful completion of these trials would lead to a six-month extension of market exclusivity for Trileptal in the US. Data from these three studies will be submitted to regulatory agencies worldwide in an attempt to further reduce current age limitsor revise prescribing guidance to include safety and dosing information for very young children.
"There haven't been many studies done in very young kids because they're so hard to do," Dr. Glauser says. "If these trials succeed, it would set a standard which other companies will be expected to match."
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A New Frontier for Fighting Severe Allergic Asthma
The approval of Xolair in the US in June 2003 brought a breath of hope to many patients like 15-year old Jeremy Holliman. He has lived under constant threat from allergic asthma since suffering his first attack at the age of six months. Medical science seemed powerless to relieve the condition that disrupted his schooling, sports and social activities, and periodically led to severe exacerbations that left him fighting for life in a hospital emergency room.
For Jeremy and his family, the breakthrough came with his enrollment in a clinical trial for Xolair, a biological therapy unique in targeting a root cause of allergic asthma and other allergic diseases. It took more than 15 years for scientists at Novartis, and our collaborators Genentech and Tanox, to develop a molecule that is effective against an antibody called IgE. This produces the inflammatory symptoms of allergic asthma in individuals such as Jeremy, who are "atopic" or sensitive to a range of normally harmless substances.
The result was Xolair, now approved in the US for treating moderate-to-severe allergic asthma in adolescents and adults whose condition is inadequately controlled by inhaled corticosteroids.
For Jeremy, life was transformed: "It was great...I could play with my friends; I could go swimming for extended periods of time, even run around at school during Physical Education. I just want to thank the doctors so much, because without them I would never have found Xolair."
In time, the benefits could be even more widely felt because Xolair offers the potential to address a number of other allergic conditions. For example, a clinical trial is planned to evaluate the effectiveness of Xolair in treating severe and potentially fatal reactions in people who are allergic to peanuts.
Growing Relief
Another Novartis therapy, Elidel, has brought relief to a growing number of patients who suffer from a different, but still highly distressing, form of allergic disorderthe inflammatory skin disease known as atopic eczema. During 2003 Novartis stepped up its program to make Elidel cream as widely available as possible. The therapy has now been approved in 69 countries and introduced in almost 40 countries.
There was a special significance to the launch in Austria in March 2003, since Elidel was in a sense coming home. The product was developed by Professor Dr. Anton Stütz and his team at the Novartis Research Institute in Vienna, the company's centre of excellence for discovering treatments and cures for skin diseases and allergic disorders.
Their mission was to tackle the misery of atopic eczema, vividly described by one Austrian mother on a Novartis-sponsored patient website: "From the age of two months, my son Stefan suffered quite severely from eczema. There wasn't a single clear spot on his whole body," she says. "We tried pretty well everything: diets, ointments, and so on, and I became desperate because the sleepless nights took their toll on the whole family. But Stefan is the sunshine of my life, although he suffered so much."
The mainstay of therapy since the 1950s had been corticosteroids, whose use was limited by side-effect concerns. The pioneering research in Vienna produced a cream that was steroid-free, but also highly effective in relieving the itching and redness of atopic eczema, and in preventing the severe outbreaks known as flares. Elidel is generally licensed for use in adultsand children from the age of twowith mild-to-moderate atopic eczema. In some countries outside the US, Elidel has received approval for treatment of infants as young as three months.
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According to Professor Klaus Wolff, MD, Head of the University Dermatology Department at the General Hospital of Vienna, Elidel enabled a new strategy to be adopted for treating the disease. "Until now, effective therapy could be initiated only when the disease was at an advanced stage because the risk of side effects was too high," Dr. Wolff says. "Now, at the first sign of itch and reddened skin, an effective medication can be used that prevents flare progression and can help avoid the need for corticosteroid creams."
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Neoral and Beyond
In 2004, Novartis is celebrating two decades of leadership in transplantation.
Since the 1984 launch of cyclosporine, a pioneering medicine which revolutionized transplantation, the company has continued to discover and develop new treatments and to improve administration of lifesaving therapies to patients. Today Novartis has one of the pharmaceutical industry's largest portfolios of transplant treatments, and one of the biggest research budgets in the field. About 120 scientists work on solutions to unmet medical needs in transplantation, such as chronic rejection and vasculopathies.
"We believe that long-term demand for transplant drugs will remain attractive," says Tony Rosenberg, Head of the Novartis Transplantation and Immunology Business Unit. "Broadening our portfolio to rejuvenate our franchise will enable Novartis to maintain a solid leadership position in this area."
Neoral, a micro emulsion formulation of cyclosporine remains a cornerstone of immunosuppression therapy. Physicians today usually blend drug "cocktails"with cyclosporine or another primary immunosuppressant as the base ingredient, combined with other medicines like Simulect, Certican and Myforticto meet the needs of individual patients.
Certican and Myfortic, two new medicines from Novartis in early stages of their global roll out, are extending physicians' options for individualized therapy with the goal of improving quality of life for patients. The development pipeline includes other promising Novartis compounds with potential applications in kidney, heart, liver and lung transplants.
Immunosuppressants prevent rejection by blunting the immune system's response to the presence of a transplanted organ. Therapy must continue for the duration of a transplant recipient's lifeand with organ survival now measured in decades, there is increasing emphasis by physicians on side effects that influence a patient's quality of life.
For example, a study presented last year at the International Liver Transplant Society showed that Neoral was associated with significantly fewer cases of new-onset diabetes than the rival immunosuppressant Prograf® in a randomized, multi-center study involving nearly 500 patients. New-onset diabetes after transplantation increases the risk of organ failure. Last year, a group of leading transplantation experts from Europe and North America published the first consensus guidelines on management of new-onset diabetes after transplantationrecommending careful monitoring of the choice of immunosuppressant.
A Relentlessly Progressive Complication
Myfortic belongs to the mycophenolic-acid (MPA) class of immunosuppressants which is widely used in combination with Neoral. The advanced enteric-coated formulation of Myfortic has the potential to reduce gastrointestinal side effects seen with other MPA formulations, which can lead to dose reduction or discontinuation of therapy.
Certican is a novel, proliferation-signal inhibitor which was extensively tested in a clinical trial program involving more than 3 000 renal and heart transplant patients. In those studies, Certican demonstrated an ability to target primary causes of "chronic rejection," one of the most pressing, unmet medical needs in transplantation.
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Chronic rejection occurs gradually in the years following a transplantappearing eventually in the form of occlusion and narrowing of the arteries in a transplanted heart, and fibrosis, or scarring, in microscopic blood vessels in the kidney. This thickening of arteriesor vasculopathyis a relentlessly progressive complication which occurs in about half of heart-transplant patients in the first several years after surgery.
A study involving more than 630 patients at 52 medical centers in the Americas and Europe which was published in the New England Journal of Medicine last year, showed that Certican was more effective than current treatment with azathiaprine in reducing indicators of the development of cardiac vasculopathy 12 months after transplantation. An accompanying NEJM editorial by Dr. Robin Avery, MD, called the study "unique among large randomized studies in showing the effect of a particular immunosuppressive regimen on the development of allograft vasculopathy." If these differences persist in subsequent years, Dr. Avery added, "this effect of Certican could translate into a substantial long-term benefit for patients who received the drug."
Certican has completed the EU's mutual recognition procedure in 15 countries which are expected to issue marketing authorization in 2004. Myfortic is currently undergoing the EU's mutual recognition procedure. Regulatory applications for both Myfortic and Certican are pending with the US Food and Drug Administration.
Although Myfortic and Certican represent significant treatment advances, a new Novartis drug still known only by its research number FTY720 could be an even bigger breakthrough. FTY720, currently in phase III clinical development, is a new and unique immunomodulator that may significantly improve transplant therapy. The drug is the first sphingosine-1-phosphate receptor (SIPR) agonistand protects transplanted organs from immune-system attack by reducing the re-circulation of white blood cells which remain sequestered in lymph nodes.
By contrast to classical immunosuppressive agents that, in effect, shut down a patient's immune system, studies have shown that immunity to some infections remains intact during treatment with FTY720, without jeopardizing the transplanted organ. Moreover, pre-clinical results indicate that FTY720 works synergistically with both Neoral and Certicanand that the addition of FTY720 at clinically relevant doses doesn't result in increased side effects. Combination therapy may allow dose reductions of Neoral and Certican, and thus improve tolerability of the immunosuppressive regimen.
Transplantation remains an attractive long-term growth segment where Novartis is strategically placed to provide a product portfolio covering all therapeutic classes and addressing unmet medical needswhile also allowing physicians to tailor therapy to individual patient needs. Simulect, Neoral, Certican, Myfortic and FTY720 all have therapeutic advantages that will ensure that Novartis remains a key player in transplantation.
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Hearing the Patient, Healing the Patient
Novartis is always mindful of the burden diseases place on families because it allows us to speak the patient's language. By properly addressing patients' concerns and priorities regarding treatments, Novartis was able to educate a patient population of millions about a disease category no one was talking aboutirritable bowel syndrome (IBS).
The challenges in developing and marketing Zelmac/Zelnorm, our treatment for IBS have been considerable. Market research conducted in 2002 and 2003 showed consumer awareness of IBS was surprisingly lowespecially when one considers that IBS affects up to one in five Americans, costs the US healthcare system billions annually and is second only to the common cold as a cause of workplace absenteeism. This research also unearthed a deeper problem: due to extreme embarrassment about their symptoms, or a genuine lack of awareness, IBS sufferers were shying away from visiting their doctors or talking about their symptoms.
Difficulties marketing to the IBS population were apparent as early as March 1999, when initial patient insight studies revealed that doctors and patients weren't speaking the same language. While physicians tended to focus on the bowel symptoms of IBS with constipation (IBS-C), patients were troubled by abdominal pain and bloating as well.
"These insights helped Novartis reshape the IBS market place, expand patient diagnosis potential, and fundamentally position the brand on a broader platform as the leading agent for the multiple symptoms of IBS-C," says Kurt Graves, Chief Marketing Officer at the Novartis Pharmaceuticals Division. "We realized that we could not just rely on good scientific data, thinking that is enough. The most important part of consumer marketing is understanding the customer's mindset. You've got to invest to get that."
The investment paid off. The marketing platform ("ABCs of IBS") emphasized a key learning from the insight studiesalmost all patients have three major symptoms, not just IBS with constipation.
The challenge was to establish the patient/physician dialogue. These efforts commenced with the launch of Talk IBS, a national public awareness campaign designed in the US to teach consumers about the symptoms and management of IBS. Novartis enlisted the help of actress Lynda Carter and the Society for Women's Health Research to help bring the story of IBS into the hearts and minds of Americans. Ms. Carter was able to bring her own personal experience with IBS to the table. Her mother suffered with the multiple symptoms of IBS for more than 30 years.
Lynda Carter and the Talk IBS campaign spread unbranded IBS awareness to audiences across the US, reaching 99 of the top 100 markets and a potential audience of 158 million people. Further IBS awareness tracking research found that over the course of the campaign, US awareness of IBS had increased from 14% to 32%. The Talk IBS campaign messages were clear: "You are not alone. Help for IBS is available. Visit your doctor."
Consider the case of Gloria Swanson, who suffered for 15 years before getting a correct diagnosis of IBS-C. On several occasions the physical pain, gas and bloating landed her in emergency rooms where she was either given a nurse-administered enema or told to go home and drink half a bottle of laxative. Any relief was always shortlived with symptoms returning in a few days.
Gloria frequently missed work when her pain and bloating was so bad she was unable to sit on a bus, or at her desk, for extended periods of time. The harsh laxatives she took to try to alleviate the pain often forced her to take an additional day off to manage the resulting diarrhea. Even her honeymoon in Paris was affected by IBS as Gloria chose to take shortcuts back to the hotel instead of going sightseeing with her husband.
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Gloria is now taking Zelnorm and is happy that understanding of her IBSC has come a long way from the days when doctors were telling patients to take a cigarette and magazine to the bathroom and just sit. Gloria also says that her doctor has a lot of confidence in Zelnorm based on the information that he received from the Novartis sales force, and the successful experiences that she shared with him.
The close of 2003 also saw exciting results for the brand. With the launch of the US Direct-to-Consumer (DTC) advertising campaign in July, Zelnorm sales have exceeded USD 100 million for the year and will soon reach one million prescriptions.
Novartis also filed for a Supplemental New Drug Application (sNDA) for Zelmac/Zelnorm for the treatment of chronic constipation in the US, Mexico and other countries, with global approvals expected during 2004.
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The Right Note: How Visudyne Saved a Singer's Sight
When near-vision in Jacques Spoerry's left eye began to deteriorate in 1996, alarm bells sounded for the retired pediatrician. As a student during the 1950s he had lost much of the sight in his right eye to choroiditis. If his left eye went bad as well, he would descend into near blindness.
Failing vision also threatened one of Mr. Spoerry's favorite hobbiessinging with a local choir in Neuchâtel, the city in western Switzerland where he has lived for nearly 40 years. "Along with my medical practice and gardening, music has been one of my greatest interests," he says.
For help in reading music, Mr. Spoerry began using a large magnifying glassbut it proved so cumbersome that he turned to local ophthalmologists for help. Eventually, he was referred to a hospital in Lausanne where physicians confirmed diagnosis of neovascular, or "wet", age-related macular-degeneration, (AMD).
A degenerative condition characterized by growth of new blood vessels into the retina, wet AMD leads to rapid and severe vision loss in roughly 500 000 new patients each year. It is the most common cause of blindness for people over 50 in western nations.
Things began looking up for Mr. Spoerry when the physicians in Lausanne suggested that he join a clinical study of Visudyne, a therapy from Novartis. Visudyne is a photodynamic therapy, which combines an intravenous injection and laser therapy to destroy the abnormal blood vessels that cause AMD, without harming surrounding healthy tissue. During the first half of 1997, Mr. Spoerry received three sessions of Visudyne treatment with exceptional resultshis vision actually improved and he happily discarded the magnifying glass.
His vision has remained stable, according to semi-annual checkups during the five years since his last Visudyne treatment. "More people need to know about this therapy," Mr. Spoerry says. Like many physicians, he urges patients who notice signs of failing vision to seek help quickly. In severe cases AMD can cause major vision loss within a few months. There's no time to lose, he adds, "and no reason to miss out on the benefits of Visudyne therapy."
Demographic trends suggest that the prevalence of AMD and other "back of the eye" disorders will increase as the "Baby Boom" generation ages and approaches retirement.
Eyeing future expansion, the Ophthalmics Business Unit strengthened its new drug pipeline last year by obtaining marketing rights outside North America to Lucentis, a promising treatment for wet AMD being developed by Genentech.
Lucentis is a humanized, therapeutic-antibody fragment which blocks new blood vessel growth by inhibiting vascular endothelial growth factor, or VEGF, a protein that plays a critical role in formation of new vessels. In addition to the use of Lucentis as monotherapy, the drug may have potential as a combination therapy together with Visudyne.
During 2003, the Ophthalmics Unit narrowed its strategic focus, and concentrated marketing resources to core brands with high growth potential, by pruning about 50 brands, or roughly one-fourth of the overall portfolio. Heading into 2004, these moves leave the Ophthalmics Business Unit with two strong branchesthe AMD franchise with Visudyne and Lucentis, and Core Brands.
The Unit also integrated its operations more closely with the Pharmaceuticals Division by moving global headquarters from Buelach, Switzerland to Baseland its US head office from Duluth, Georgia to New Jersey, close to the head office of the US Pharmaceuticals Division in East Hanover, New Jersey.
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In October, Visudyne was approved by regulatory authorities in Japan for treatment of all types of lesions associated with wet AMD. The laser also used in treatment was approved separately in early December. Work toward reimbursement is continuing and the Ophthalmic unit plans to launch Visudyne in Japan in 2004.
In 2003 we:
Shaping Consumer Health
The Consumer Health Division focuses on creating, developing, manufacturing and marketing a wide range of competitively differentiated products that restore, maintain or improve the health and well being of our consumers. The Division, which includes our Sandoz generics, OTC self-medication, Animal Health, Medical Nutrition (including our Nutrition & Santé franchise), Infant & Baby, and CIBA Vision business units, places considerable emphasis on the development of strong, consumer oriented and trustworthy brands. Each business unit has a leading market position in growth oriented healthcare segments beyond our core pharmaceuticals business, providing essential, high quality health-related products.
In the dynamic world of consumer healthcare, aging populations are increasingly affluent and knowledgeable about their health, and the benefits of self-medication. The success of each business unit depends upon its ability to anticipate and meet the needs of consumers and health professionals worldwide.
Our mission at Novartis Consumer Health is to give a voice to the consumer in everything we do, in order to deliver accelerated sales growth and leadership positions.
|
2003 USD millions |
2002(1) USD millions |
Change in USD % |
|||
---|---|---|---|---|---|---|
Sales | 8 844 | 7 140 | 24 | |||
Operating income | 1 320 | 946 | 40 | |||
Research and development | 529 | 378 | 40 | |||
Research and development as % of sales | 6 | % | 5 | % | ||
Free Cash Flow | 1 034 | 882 | 17 | |||
Net operating assets | 6 727 | 5 794 | 16 | |||
Investments in tangible fixed assets | 530 | 361 | 47 | |||
2003 |
2002 |
% change |
||||
---|---|---|---|---|---|---|
Number of employees | 32 464 | 27 552 | 18 | |||
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Sales by business unit |
2003 sales in USD millions |
Change in USD (%) |
Change in local currencies (%) |
|||
---|---|---|---|---|---|---|
Sandoz | 2 906 | 60 | 47 | |||
OTC | 1 772 | 17 | 7 | |||
Animal Health | 682 | 9 | 3 | |||
Medical Nutrition | 815 | 15 | 3 | |||
Infant & Baby | 1 361 | 2 | 3 | |||
CIBA Vision | 1 308 | 15 | 7 | |||
Total | 8 844 | 24 | 16 | |||
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Outpacing our Rivals
Our generics business unit, now unified under the Sandoz brand, has become a world leader in its industry by combining organic growth and strategic acquisitionsa strategy that continued to pay dividends last year.
Lek, the Slovenian generics company acquired by Novartis in 2002, provided one of the highlights of 2003 with its US launch of omeprazole, a cost-effective generic alternative to the antiulcer treatment Losec/Prilosec®. It was the world's biggest-selling prescription medicine during the late 1990s until patent protection expired. Lek had already marketed omeprazole successfully in Slovenia and certain other European markets where the drug no longer had patent coverage.
Another new Sandoz product launched last year is loratadine, a generic version of the blockbuster antihistamine Claritin® used to treat allergy.
Sales in 2003 were also fueled by buoyant demand for Amoxicillin Clavulanate Potassium (AmoxC), the generic version of the antibiotic Augmentin®. AmoxC was launched in July 2002, but Sandoz remained the sole supplier of a cost-effective generic alternative for several months following a US court ruling invalidating certain Augmentin® patents challenged by Sandoz.
Investing for Global Cost Leadership
While Sandoz already markets more than 400 generic products, a steady stream of new products is crucial to success. The next few years are expected to spur rapid growth in the global generics market, where annual sales have reached USD 60 billion. Blockbuster medicines representing combined annual sales of USD 20 billion will lose patent protection between 2004 and 2006, offering lucrative targets for generic manufacturers.
Worldwide sales in the generics retail market are projected to climb at an average annual rate of 10% between 2003 and 2008, slightly higher than the 8.4% growth projected for patent-protected prescription drugs during the same period. To make the most of that opportunity, Sandoz already has applications pending with US regulators, seeking authorization to launch more than 40 new generic products once patents expire on the original branded medicines.
Speed of development is crucial to success in generics. Underscoring its global reach, Sandoz has one of the industry's biggest development programs, with teams of scientists now based in India and Slovenia, as well as the US and Austria.
Vertical integration at Sandoz also provides valuable synergies and a nimble production network that speeds the flow of new products to market. Sandoz is a major producer of bulk active pharmaceutical ingredients, including anti-infectives, where it ranks as world leader in bulk amoxicillin penicillins as well as the cephalosporin 7-ACA business.
As the generics industry becomes increasingly global, cost leadership is essential for success. Sandoz has invested about USD 100 million in recent years to upgrade its plants in Austria and Slovenia, and new factories are also under construction in India and Poland.
Protecting First Mover Advantage
In the fiercely competitive US market, prices of original, patent-protected medicines can fall significantly following the introduction of generic competition. This is partly the result of a complex system of legislative incentives to encourage the development of cost-effective generic products. However legislation leads to frequent legal disputes.
AmoxC is an example of how battles in court usually precede battles in the market. The key US patents on Augmentin® were due to expire in 2002, but GlaxoSmithKline PLC (GSK), which discovered and developed the antibiotic, claimed that additional patents provided another round of coverage lasting until 2018.
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Sandoz challenged the patents extending beyond 2002, and in May 2002 the US District Court for the Eastern District of Virginia agreed and invalidated them. Sandoz launched AmoxC two months later, and this confident move was vindicated when, late last year, the Court of Appeals for the Federal Circuit affirmed the earlier District Court ruling.
"Being first or second to launch is crucial in the US," says Dr. Harald Summer, Project Manager for AmoxC at Sandoz. "Sales crumble very rapidly if several generic players are on the market and experience has shown that if you are third to launch, you are almost too late."
Lek was also forced into the courts to defend its procedure for the synthesis of omeprazole, which the Slovenian company began developing in 1997. Shortly before Christmas last year, the Board of Appeal of the European Patent Office upheld the validity of Lek's European patent, which protects the manufacturing procedure for synthesis of omeprazole. In all, Lek holds five patents covering the process in the US as well as Europe.
Global Network, Global Success: Rebranding Generics
In January 2003, the industry experience, production skills, and product portfolios of our 14 individual generics companies were merged to create a unified world-class entity. The generics unit was relaunched under the well known name Sandoz, previously used by one of the predecessor companies that merged to create Novartis in its present form. The Sandoz name stands for quality and reliability of supply.
The clear objective: to better take advantage of synergies in production (the importance of global production networks for multinational companies cannot be overestimated), supply chain management, sourcing, and drug development and registration. We are also aiming to consolidate our overall leadership position by joining forces and speaking with one unique and strong voice.
The re-branding process will be completed in 2005, except for the integration of Lek, which will remain a separate Slovenia-based brand for the time being.
With global headquarters in Vienna, at the crossroads of Eastern and Western European cultures, Sandoz is well positioned as a global industry leader in the generics business. Sandoz is looking to attract talent and, local expertise from diverse markets. Harnessing diversity is a key to market penetration, and at the new headquarters in Vienna, 15 nations are already represented among the associates, whose numbers will increase further in 2004.
As well as consolidating our existing position, we are continually looking to increase our global market segment share, and have recently broadened our operations through several strategic site acquisitions.
Antibiotics remain an important priority. The Amifarma S.L. plant in Palafolls, Spain, which we acquired in December 2003, offers us an opportunity to strengthen our leading position in the sterile penicillins segment. Providing freeze-drying technology and expanding production capacity of sterile antibiotics, the plant is an ideal complement to our existing center of excellence for oral semi-synthetic penicillins in Spain, the state-of-the-art Les Franqueses site.
Sandoz also plans to leverage its global influence in industrial antibiotics by moving further downstream, into the development of finished, retail antibiotics.
Furthermore, Sandoz intends to build on its competitive advantages in the development and production of highly promising Biopharmaceuticals.
Sandoz continues to be driven by proven marketing expertise and strategic acuity, but the global leadership role will be strengthened through the increased efficiency which comes from centralizing under the Sandoz brand.
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The Value of Global Brands
All over the world, rather than turn to a doctor, people increasingly prefer to find their own solutions to their most common medical conditions. There are many reasons for this. They include pressure on government health funding, higher individual expectations for personal well being, a rising confidence in self-care, and increasing availability of prescription products in OTC formats. Nowadays people are looking for innovative, effective and accessible OTC medicines with which to enhance their overall health and well being, and they are finding the medicines they want in a widening range of outlets.
Elke Winter lives in Munich, Germany and works in marketing. Her rewarding but physically demanding job involves traveling the world organizing seminars and trade shows from Asia to the US. But Elke has a history of back trouble, and nearly four years ago was diagnosed with a slipped disc. The orthopedic clinicians decided not to operate, but put Elke into a clinic for treatment.
After this she felt much better, but continued to suffer back pain from time to time. She tried a Novartis OTC product that she had heard about, Voltaren Emulgel, and now continues to use it regularly. "If I feel the pain coming on and I apply Voltaren Emulgel, I only have to wrap myself up in a blanket and I feel better," says Elke. This is progress indeed. As Elke, a keen sportswoman added: "During the times when I was badly in pain I really considered quitting my job. Now I am back doing everything again. And when I need to lift something heavy, there is always someone there to help!"
Building a Bigger Picture from Smaller Pieces
Similar stories reach us from people all over the world, describing the many small but significant ways in which Novartis OTC products are improving the quality of life of many of our consumers.
When one consumer called us up asking if he could make a commercial for Lamisil, we were obviously a little surprised, and asked him why. He explained that he had reached the age of seventy, and had suffered from athlete's foot since he was a boy. "I have tried several products, but to no avail," he told us. "But then, my son told me to try Lamisil. I did, and it worked. Now I am really happy about that, I feel like a million dollars. I just want to let the world know how great it is by doing a TV commercial for you!" Lamisil is the only treatment for athlete's foot which is approved by the US Food and Drug Administration (FDA) for a seven-day treatment, while competitive products usually require multiple applications per day for several weeks.
Milagros German is a beauty queen in the Dominican Republic. She is something of a national celebrity. In a recent interview she was asked to name the ten most important things she carries in her handbag. Included on her list among the indispensable cosmetics was a Novartis OTC product, Otrivin, a nasal decongestant.
Global success with global brands means enhancing our customers' lives. Our brands bring relief from the symptoms of the most common ailments almost everywhere, every day. By focusing on the strongest brands and creating global consistency for them, Novartis is building on its marketing strengths and improving both patient benefit delivery and profits.
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Novartis OTC Medicines
The Novartis OTC Business Unit manufactures and distributes products for the treatment and prevention of common medical conditions and ailments, to enhance people's overall health and well being. Treatments are marketed in key product categories: cough, cold and allergy; gastrointestinal; dermatological; analgesics; vitamins, minerals and supplements; venous disorder; and smoking cessation. Overall performance in 2003 saw successes for five global brands. Lamisil, the one week treatment for athlete's foot posted strong sales growth of 16%. Voltaren Emulgel the topical analagesic for muscle pain, strengthened its number one position within the category. Nicotinell/Habitrol our smoking cessation franchise, increased sales by 49% over 2002 Otrivin, the nasal decongestant is close to market segment leadership on a global basis. Building on the long tradition and significant equity of the Sandoz name, the Business Unit is committed to driving Sandoz Calcium to a USD 200 million brand.
Going Global with Five Brands
Given their success it is not surprising that Voltaren, Lamisil, Nicotinell/Habitrol, Sandoz Calcium and Otrivin have been selected to become the first "official" global brands. Each will benefit from increased spending in research and development (R&D), increased advertising and promotion, and the commitment of a Global Brand Team (GBT) to drive their success. Our goal is to achieve continuous and sustained combined growth of 10% for these five brands. Mike Prebenda explains what sets them apart from the other 155 brands in the Novartis OTC portfolio.
"A global brand is one that has a solid presence in two or more of the four regions around the world, and possesses strong growth and profit potential."
Beyond a global presence, the brands were evaluated on other criteria including profitability, potential for growth and a significant competitive advantage or opportunity. Strong brands, science-based products and in-house marketing and sales organizations are the key strengths that continue to drive the Business Unit forward towards the leadership objective.
Driving Brand Awareness
The growing number of distribution channels is a key feature of the OTC landscape, bringing many brand-building benefits. As well as distributing through pharmacies, our brands are available through food, drug and other massretail outlets. For example, the launch of the first WalMart "Health Screening" initiative occurred in September, in the US. Nearly 3 000 WalMart stores provided free glucose and bloodpressure screenings to 122 000 consumers, driving awareness and trial of Novartis OTC (Benefiber, Maalox, Lamisil) and Pharmaceuticals (Diovan) brands.
Two further important strategic factors are in place to secure the global foothold. The first is the proven ability to switch products from prescription to OTC, and the second is the globalization of R&D, both factors which increase efficiency dramatically.
Globalization of Research and Development
A new product development and commercialization process has been implemented in 2003, which will drive innovation in a more effective and efficient manner. A new structure provides the flexibility to closely align people and skills with projects, and to facilitate the development of technology platforms, skills, knowledge sharing and individual development across the globe. The primary OTC R&D facility is based in Switzerland, where it can operate closely with the Pharmaceuticals Division. Currently OTC R&D employs 200 associates worldwide, with local country organizations mainly managing compliance, regulatory needs and medical affairs.
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For Novartis OTC the vision is global, and the emphasis now is on results. Global brands will have a more consistent look and feel, and a more focused delivery in the market place. With participation from everyone on the new multifunctional teams, time will be gained between concept and product launch. And now within the GBTs, success is being defined as one major idea with high consumer impact for each brand in each year.
Up and Running, Despite Arthritis
Six-year old Sasha's favorite game is chasing her playmates George and Eek around their one-acre field in Alton, New Hampshire, US. Her second favorite is dragging Jill DeCubellis for three miles around the local woods. If this all sounds a little energetic for someone aged six, that's because Sasha is a ninety-pound rottweiler and George and Eek are cats, the companion animals who share Jill's life.
A year ago Sasha started to drag her left hind leg, so Jill took her to the local veterinarian. There things took an unexpected turn for the worse. Sasha jumped up on the exam table, couldn't make it and slipped off, injuring her knee. "She was limping badly," DeCubellis said.
A Stark Diagnosis
Sasha had arthritis in her left hip, and a newly acquired torn ligament. The veterinarian recommended surgery at the Angell Memorial Hospital in Boston, where Sasha was prescribed Deramaxx, a new arthritis drug made specifically for dogs, by Novartis Animal Health US. Within days Sasha was limping less. Soon she was running again.
Like Sasha, our pets are living longer, and consequently suffer many of the same health problems that humans do. Until recently little attention was paid to why oncelively dogs gradually turn into couch potatoes. According to Dr. Brian Beale, veterinary surgeon and canine arthritis expert at Gulf Coast Veterinary Specialists, Houston, US: "Many dog owners don't realize their pets are suffering. They often think their dogs are just getting old. Or they don't connect subtle changes in behavior to the pain of arthritis." One in five adult dogs suffers from osteoarthritis, and untreated pain can stress a pet and impair natural bodily functions.
Once a human medication makes the news, veterinarians know their clients will soon expect the same benefits for their pets. "Novartis is raising the bar to meet those expectations," says Elaine May, Senior Product Manager, Deramaxx. The breakthrough drug was launched in 2003 in chewable tablet form, and is the first and only drug that controls canine pain in a way similar to the Cox2 class of non-steroidal anti-inflammatories (NSAIDS) that has revolutionized the treatment of human arthritis.
"Deramaxx makes it easier for dogs to move more freely, and be more active," says Dr. Darryl Millis, Associate Professor of Orthopedic Surgery at the University of Tennessee College of Veterinary Medicine.
Jill DeCubellis certainly agrees. Sasha has gone back to teasing George and Eek, and is straining at the leash once more, urging Jill to go further and faster on their daily walks. "It was a tough few months for Sasha," admits DeCubellis, "but her quality of life is such that she doesn't know she's sick and that's all that matters to me."
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Saving, Prolonging, and Improving Animal Lives
The Animal Health Business Unit is dedicated to maintaining and improving the health and welfare of both pets and farm animals. The Business Unit is active in three areas. Pet, Farm Animal and Aqua-Health. We research, develop and commercialize leading animal treatments that meet the needs of pet owners, farmers and veterinarians, and in general, the products are available by prescription. For the Animal Health Business Unit the story continues to be one of successful new product launches, and of growth through innovation and geographical expansion.
In companion animal health, the Deramaxx launch quickly achieved a 21% market segment share in the US. But around the world and in other categories Novartis products have clearly led through innovation. Canine atopic dermatitis is prevalent in about 10% of dogs. Being an allergy, it is a lifelong condition, but Atopica, launched in 2003, relieves the symptoms without the side effects of steroids. Fortekor prolongs the active life of cats and dogs suffering chronic renal failure or heart disease. In the EU, Milbemax intestinal parasite control, with variants for both cats and dogs, achieved outstanding success. On the farm, Agita is an effective new product for the control of disease-carrying flies. Vetrazine, which controls blowfly strikes in sheep, reached its 25th anniversary, now followed by Click, providing season-long protection.
Future growth lies in continuing innovation fueled by responsiveness to consumers' needs. Ask Jill and Sasha!
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A New Relevance for Cancer Patients
Nutrition makes a difference to people fighting cancer. Those who keep their weight stable are known to have a better outlook, yet as the disease and the treatments take their toll, even favorite foods prove unappetizing, and the scales tend to plunge. Even a minor drop in weight can lower a person's chance of survival.
Some facts about nutrition and cancer:
A specialized nutritional formula developed by Novartis Medical Nutrition is now available to address this malnutrition problem. Resource Support helps cancer patients gain weight, build muscle and strengthen their immune systems.
Since its launch in 2003, the response to Resource Support has been tremendous. "My husband was put on Resource Support by his doctor, and in two weeks he has made such progress that I can hardly put it into words. He is eating again and even has energy to take short walks," is just one comment received by the US sales team.
In response to a questionnaire, another person told how Resource Support helped her mother who was bedbound, weak and not eating due to cancer. "She started on three servings of Resource Support a day, with amazing results. When she walked into the clinic for her next visit, the oncologist and the nurses couldn't get over the difference," she related.
Resource Support is a high-calorie formula with a unique blend of nutrients designed to boost the immune system and help rebuild muscle. Proteins and specific essential amino acids, vitamin E and omega-3 polyunsat urated fatty acids act in concert to promote weight gain, while improving patients' tolerance to cancer treatment such as radiotherapy and chemotherapy. The outcome is what patients value most highly: being physically and emotionally prepared to fight the disease.
Fit for Surgery
Surgery and trauma often plunge the body into a state of immune-suppression, exposing patients to a greater risk of infection. "Despite significant advances in surgery, post-operative complications, particularly infections, remain common, adding to the length of hospital stay, healthcare costs and potential mortality," says Mr. Alistair Windsor, Consultant Surgeon, St Mark's Hospital, Harrow, UK. For this reason the surgical community is increasingly taking notice of the benefits of nutritional products containing specific substrates.
IMPACT, an immune-enhancing formula developed by the Medical Nutrition Bussines Unit originally for the critically ill, has been at the forefront of this interest. IMPACT has also been widely investigated with surgical patients. Further research has extended its use before surgery, thereby providing a boost to the immune system to counter the slump that follows the operation.
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"The major cost of surgical complications, particularly infectious complications, is due to prolonged hospital stays," said Dr. Luca Gianotti, Department of Surgery, University of Milano-Bicocca, Monza, Italy at the 2003 annual meeting of the Surgical Infection Society Europe. "The benefit of immunonutrition [IMPACT] is mainly in reducing the rate of infectious complications. The cost of providing a pre-operative immune-enhancing diet was more than offset by the reduced length of stay." Dr. Gianotti's research findings showed that immunonutrition reduced hospital stays following GI cancer surgery by nearly two-and-one-half days, from 14 to 11.6. The findings also showed a halving of postoperative infections from 30% to 14%, as a result of the new diet.
By being "fit for surgery" with appropriate nutrition, patients can look forward to returning home sooner.
Going Global
As nutrition gains recognition in medical practice, Novartis has remained one step ahead and expanded the medical nutrition business in a big way. In December 2003, Novartis announced its intention to acquire the brands, trademarks, patents and intellectual property assets of Mead Johnson & Company's global adult medical nutrition business. Mead Johnson & Company, a subsidiary of Bristol-Myers Squibb Company, is a leader in sales and marketing of adult medical nutrition products.
Successful completion of the transaction will offer Novartis Medical Nutrition a strong presence in the fastgrowing US retail channel for medical nutrition products, expand its existing institutional medical nutrition business and enhance its access to the Japanese market.
"The acquisition of Mead Johnson & Company's adult medical nutrition business reconfirms our commitment to delivering high quality products that help people maintain good health, recover from illnesses more quickly, and build the strength and vitality to combat disease," says Michel Gardet, Global Head of Novartis Medical Nutrition. "Enhancing our medical nutrition portfolio will allow us to better serve the needs of the growing outpatient and aging populations."
Headquartered in Evansville, Indiana, US, Mead Johnson & Company will continue to manufacture and supply the majority of the acquired products for Novartis on an ongoing basis. Sales of the products in the process of being acquired exceeded USD 220 million in 2002.
Expansion is not entirely new to the medical nutrition unit. In June 2003, its range of products received a boost with the acquisition of Semper Clinical Nutrition, a business with whom Novartis has enjoyed a successful alliance since 2001. Semper is the second largest medical nutrition business in the European Nordic region with sales of approximately USD 10 million.
With expansion comes reorganization and, as from August 2003, the Medical Nutrition Business Unit has further globalized its activities and functions. One way to accelerate the time to market of its new product innovations is by spreading the R&D for both the existing product portfolio and the growing number of disease-specific products strategically across continents. The leading unit for R&D is now in Minneapolis, and is charged with research and product development, while the Clinical Sciences group responsible for driving pre-clinical and clinical studies continues to be based at the Business Unit's global headquarters in Nyon, Switzerland.
The Unit's aim is to become a leader in disease-specific nutrition in selected areas including oncology, digestive health, diabetes and wound care, while continuing as market leader for nutritional solutions in the management of dysphagia and the critically ill. This is being achieved by identifying market requirements and developing innovative products that meet the different needs of patients and healthcare professionals. It is undoubtedly a tall order, but one that the medical nutrition business is set to deliver.
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Healthy Eating Starts Early
Gerber's landmark Feeding Infants and Toddlers Study (FITS), the results of which were published in 2003, during its 75th anniversary year, provides hard evidence of a serious nutrition problem among the youngest segment of the US population. According to the study, large numbers of infants and toddlers are already showing signs of the same unhealthy diet followed by many adults. FITS revealed that on any given day, 25 to 30% of children between 7 and 24 months eat no fruit, and 20 to 25% do not eat vegetables. French fries are the most commonly consumed "vegetable" for children of 19 to 24 months.
Commissioned by Gerber, FITS is the largest survey ever of eating habits and nutrient intakes of American children from 4 to 24 months. The two-year study of over 3 000 children is also the first of this magnitude to apply the Institute of Medicine's new Dietary Reference Intake standards to this age group.
As an accomplished dietitian and Gerber's Director of Nutrition Sciences and regulatory affairs, Dr. Kathleen Reidy was not overly surprised by the FITS results. However, that did not make the recent findings any less urgent for Dr. Reidy and others who are concerned about the growing epidemic of childhood obesity.
"Since we unveiled FITS at an American Dietetic Association conference in October 2003, the interest from health professionals and the media worldwide has been beyond our expectations," explains Dr. Reidy. "We have a tremendous opportunity here to alert the public that lifelong eating habits start at an early age, and that it's critical to teach our children healthy eating habits right from the start."
Dr. Reidy praises the extreme dedication and quick action of FITS Project Leader, Dr. Paula Zeiger and other Gerber associates in spreading the word. Actions range from a high-profile conference in Washington, D.C. to a series of ten comprehensive research papers published in a special supplement to the Journal of the American Dietetic Association in January 2004.
The FITS findings received wide media coverage in North America with features in over 100 major market newspapers, and placements in national magazines and broadcast outlets. Word spread like wildfire around the world, further fueled by hundreds of websites.
Reducing Childhood Obesity
While it is too early to evaluate the full impact of the Gerber study, Dr. Reidy is confident that nutrition education initiatives that provide parents with concrete and actionable advice can make an important difference in children's lives. She recalls one young mother who, after hearing the study results, told her: "I didn't feed my baby a vegetable yesterday...I think I'll do that today."
But Gerber's achievements in 2003 were not confined to the publication of the FITS results, and building further on its long-standing reputation of commitment to babies and their families, the company successfully continued the development of its Start Healthy campaign. This education and research initiative aims to reduce childhood obesity, and has been supported by Tommy G. Thompson, Secretary of the US Department of Health and Human Services. During 2003, the campaign was launched in Mexico and Puerto Rico, where Gerber built on existing partnerships with pediatric associations and government organizations. In Israel, a Start Healthy magazine was launched and circulated among health professionals and consumers.
Marketing Initiatives in 2003
Furthering its position as an innovative industry leader, Gerber converted from glass to plastic packaging for fruits, resulting in an outstanding performance of Gerber Products in the US.
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Consumer and customer satisfaction were, as always, top priorities. The company earned the highest industry rating for consumer satisfaction from Planet Feedback, a web-based survey organization, in recognition of the 24/7, one-on-one assistance offered by the Gerber Parent Resource Center. But perhaps the most impressive accolade came from the original Gerber Baby herself, Ann Turner Cook, whose childhood image has been used to represent Gerber from the start, and with whom the company worked closely during its 75th anniversary year. Ms. Cook, now a grandmother and mystery writer said: "I'm delighted to be associated with a company that has done so much for childrenand continues to do so."
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Innovation in Focus
Discovering Focus NIGHT & DAY continuous-wear lenses can be quite enlightening. At CIBA Vision we know this from the many testimonial emails we receive via our web-site.(1) For one correspondent, using Focus NIGHT & DAY continuous-wear lenses for up to thirty nights and days was just such an experience. "Before, I couldn't get out of bed in the morning without first putting on my glasses," the email enthuses. "Now when I wake up in the morning and look out of the window, I can see!"
For the many people with impaired eyesight, a dream has come true. They no longer worry about the inconvenience of wearing glasses. For anyone who does not need glasses this must seem like a big deal about nothing, but for those who wear them regularly, it is almost a miracle.
Focus NIGHT & DAY contact lenses are the result of dedication to research and development (R&D) at CIBA Vision. A continuous flow of innovative advances in contact lens and lens care products is brought from the labs to the consumer. And once on the market, work does not stop. One of the latest achievements is US FDA approval of Focus NIGHT & DAY for therapeutic use as a bandage lens. Other achievements in 2003 include the launch of a number of new product additions to the CIBA Vision range of leading brands of cosmetic and color lenses. FreshLook Dimensions, the new generation of enhancing color contact lenses designed specifically for light eyes, was launched in June in the US, as well as two new FreshLook ColorBlends colors, Pure Hazel and True Sapphire. These provide a more intense eye color change than other FreshLook ColorBlends colors.
Customer comfort plays an important role in new lens care product developments. SOLO-care AQUA is the latest generation of no-rub multipurpose lens care solution and was introduced in Europe in 2003. Its HydroLock formulation includes Provitamin B5, which is also used in hair care and wound healing products to lock in moisture. In addition, every bottle of SOLO-care AQUA comes with a specially designed MicroBlock antibacterial lens case that kills bacteria and other microorganisms on contact and resists the growth of new bacteria.
AOSEPT saw a number of new developments, with Clear Care (in Europe: AOSEPT Plus) receiving FDA approval for several new applications, becoming the fastest growing contact lens solution in the US.
The driving force behind the flow of innovations is the team at CIBA Vision. Lynn Winterton is one example. A Distinguished Research Fellow and a member of the CIBA Vision Lens R&D team, he was honored with the Novartis Leading Scientist Award in 2003. This award recognizes Novartis R&D scientists worldwide for creative and innovative achievements. Lynn, who has been with CIBA Vision for almost twenty years, was recognized for his key role in the development of plasma surface coatings for Focus NIGHT & DAY. Over the course of his career, Lynn has been named as an inventor on nineteen US patents and has another twenty-six patent applications pending. "I was so surprised and honored to receive the award, which I consider to be an award for CIBA Vision as a whole," Lynn said. "Nothing I've accomplished has been without the help of countless other people, so I feel very blessed to be working with such amazing people here at CIBA Vision. I am proud that our innovation was recognized."
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CIBA Vision associates always go the extra mile in their support of people affected by bad eyesight. They and the company contribute regularly to vision-related community organizations including The Guide Dog Foundation for the Blind, The Center for the Visually Impaired, Prevent Blindness, and Project Read, a program which provides recordings for the blind and dyslexic. Associates at CIBA Vision share in one mission: "better eyes for a better life"for our delighted email correspondents and for millions of others around the globe.
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Rolling Back Malaria
During the rainy season of 19992000, South Africa was racked by a major malaria epidemic. KwaZulu-Natal province, home to 9.4 million predominantly poor people, had been left virtually defenseless against malaria because the main weapons had stopped working. Malaria parasites had developed resistance to the antimalarial medicines on which the province traditionally relied. Studies showed that sulfadoxine pyrimethamine or SP, first-line therapy for more than a decade, was curing only one in every ten patients. Moreover, the epidemic was being spread by a lethal species of mosquitoAnopheles Funestuswhich had not been seen in KwaZulu-Natal for more than 50 years. The invading mosquitoes were resistant to the insecticides which the province had adopted a few years earlier.
To handle the flood of malaria patients at Ndumo, a small clinic near the border with Swaziland, South Africa's defense forces erected a tent clinic staffed by army nurses. From there the most serious cases were despatched to Mosvold hospital, over thirty miles away. Mosvold serves 100 000 people scattered across 1 000 square miles, and was reeling under the burden of 500 malaria patients a day. This was double the normal out-patient caseload for all diseases combined.
At the peak of the epidemic, about half of Mosvold's 250 beds were filled by malaria patients. Sharing beds was common and dozens of patients took refuge on the floor of the hospital's physiotherapy center.
"We had patients spread all over the place, day and night; mothers with small children, people lying unconscious, having convulsions or vomiting," says Dolly Makhunga, a veteran outpatient nurse at Mosvold, shaking her head at the memory.
"It was a crisis and we had to do something urgently," recalls Professor Ronald Green-Thompson, Head of KwaZulu-Natal's Department of Health.
A Bold Strategy
The prescription was a bold strategy in a seemingly hopeless situation. Professor Green-Thompson replaced the ineffective antimalarial drugs he and his team had been using with Coartem, a promising new medicine from Novartis. Coartem is a fixed combination that includes lumefantrine and artemether, a chemical derivative of artemisinin, a plant extract used for centuries in traditional Chinese medicine to treat malaria.
Artemisinin derivatives remain the most potent killers of malaria parasites yet discovered. In clinical studies, Coartem demonstrated cure rates above 95 percent, even in areas of multi-drug resistance. Though Coartem had not been widely tested in sub-Saharan Africa, South Africa's Medical Control Council completed a rapid regulatory review of the medicine during 2000, enabling KwaZulu-Natal to launch the drug as first-line antimalarial therapy in January 2001.
Harried doctors and nurses at the epicenter of the epidemic feared the worst. "We didn't know if this was going to work or not. The cat had got so much out of the bag, it didn't seem that even an effective new drug was going to work miracles," recalls Dr. Hervey Vaughan Williams, Medical Manager at Mosvold Hospital.
Yet against all odds, the switch in therapy plus the resumption of spraying with DDT managed to quell KwaZulu-Natal's malaria outbreak faster than almost anyone believed possible. Hospital admissions thinned and during the following two years, both the total number of malaria cases and associated deaths reported in the province shrank by more than 90 percentfrom 42 284 cases and 342 deaths in 2000, to 2 345 cases and 16 deaths in 2002.
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A Beacon of Hope
Success in rolling back malaria has made KwaZulu-Natal a beacon of hope at a critical point in the battle against a disease that causes an estimated 350 million infections and more than one million deaths worldwide every year.
Dr. Richard Feachem, Executive Director of the Global Fund to Fight AIDS, Tuberculosis and Malaria, warns that malaria has become more difficult to control over the past two decades, as drug-resistant forms of the disease have spread across tropical Africa and even reappeared in some regions where it had been virtually eradicated.
"Paradoxically," Dr. Feachem adds, "effective tools are now available to control malaria and to reduce dramatically malaria-related mortality among vulnerable groups such as children under five and pregnant women. It's not that we can't do it," he says. "We're just not doing it."
However, "doing it" requires political will in the form of well managed malaria control programs in countries where the disease is endemic. It also requires ample donor funding, such as the multi-million dollar grants now beginning to flow from the Global Fund, to pay for effective malaria treatment and prevention programs. They cover everything from drugs and rapid diagnostic tests to insecticide-treated bednets.
In a financial lifeline to developing countries, Novartis and the World Health Organization (WHO) are making Coartem available at cost under a unique public-private partnership. Moreover, Novartis and Medicines for Malaria Venture, a not-for-profit health organization, are jointly developing a pediatric formulation of Coartem which will be easier for children to take and could make treatment more effective by improving compliance.
The WHO now recommends that countries adopt artemisinin-based combination therapies (ACT), such as Coartem, "when there is strong evidence that existing conventional medicines are no longer working."
Several countries in sub-Saharan Africa are following that advice. Zambia revised its national malaria-control policy during 2002, adopting Coartem as first-line treatment. Other countries, from Mozambique and Burundi to Swaziland and Sudan, have added ACT options to their national malaria policies, or are considering use of Coartem in emergency settings, such as refugee camps, where drug-resistant malaria is often rife.
In addition to the agonizing death toll, malaria costs sub-Saharan Africa an estimated USD 12 billion a year in lost economic growth. Preliminary health-economic analysis of the KwaZulu-Natal data suggests that while Coartem therapy is more expensive than the older treatments (USD 2.40 per adult treatment course at the preferential WHO price for Coartem, versus 1020 cents for sulfadoxine pyrimethamine (SP) or chloroquine), total treatment costs with Coartem are significantly lower, due to the dramatic reductions in the overall number of patients needing treatment and in the number of complications requiring hospitalization.
"The Coartem approach has clearly been cost effective. Even if the unit costs are more, total costs are less," Professor Green-Thompson explains. "But the ultimate equation is not in currencies but in human lives."
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Corporate Citizenship at Novartis
Novartis tirelessly aspires to responsible and conscientious global citizenship based on trust, transparency and accountability. This involves active societal engagement in areas where we have expertise and know-how to contribute, helping proactively where help is most needed, and establishing and implementing transparent ethical standards, policies and processes across all of our activities. Novartis applies all of its ethical standards globally and often exceeds the provisions of national standards and legal regulations.
Our primary and most important mission is to discover, develop, sustainably produce, and distribute high quality medicines, addressing unmet medical needs. We want to provide affordable, and thus accessible, well established treatment options to the best of our abilities and as far as our resources permit, for as many people as possible. By pursuing these goals we can best provide value to our customers and to society as a whole.
Our second mission is to try to help on a case by case basis where there is immediate need with products, funds, and other supportive measures. This encompasses free or subsidized treatment programs in developing countries, discounts and support programs for people without adequate medical insurance or other means in industrialized countries, as well as ad hoc donations addressing special needs such as leprosy, tuberculosis and disaster relief in various parts of the world (see table on page 52).
Thirdly, we have established a comprehensive set of policies and guidelines defining all important areas of Corporate Citizenship. This includes our Policy on Corporate Citizenship based on the obligations we endorsed by signing the United Nations Global Compact, our Code of Conduct, and our five Corporate Citizenship Guidelines. These Guidelines address: Management of Corporate Citizenship, Fair Working Conditions, Business Ethics, Human Rights, and Third-Party Management (see detailed sections and the table on page 57-58). Each of these policies and guidelines has been, or is currently being rolled out, supported by training and test programs.
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Novartis Access to Medicine Projects 2003
Project |
Objective |
Target Region |
2003 market price USD millions |
2002 market price USD millions |
New patients reached in 2003 |
Patients reached since launch |
||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Malaria/WHO | Providing Coartem at cost for public sector use | Africa, Asia, Latin America | 4 | 1 | 460 000 | (1) | 650 000 | |||||
Leprosy | Eliminate leprosy by 2005 by providing free MDT-treatment(2) through WHO | Global | 4 | (3) | 7 | 600 000 | 2 500 000 | |||||
Tuberculosis | 100 000 FDCs (Fixed Dose Combinations) donated annually for five years | Tanzania | 0 | | Initiated Dec. 2003 |
| ||||||
Novartis Institute for Tropical Diseases (NITD), Singapore | Discover novel treatments and prevention methods for major tropical diseases and make available without profit(4) | Developing world | 10 | 10 | | | ||||||
Novartis Foundation for Sustainable Development (NFSD) | Work at policy and field level to improve access to healthcare for the world's poorest people. Supports programs which deliver a range of services such as psycho-social support for AIDS orphans, and rural health insurance. | Developing countries | 7 | 7 | n/a | n/a | ||||||
Patient Assistance Programs (PAP); excl. Gleevec/Glivec | Assistance to patients experiencing financial hardship, with no third-party insurance coverage for their medicines | US | 128 | 81 | 140 000 | 340 000 | ||||||
Gleevec US PAP | Within Novartis capabilities, continue to ensure access for patients who cannot afford the drug in the US | US | 78 | 52 | 1 600 | 5 200 | ||||||
Glivec Global PAP | Within Novartis capabilities, continue to ensure access for patients who cannot afford the drug in the rest of the world | Global | 60 | 29 | 1 900 | 2 900 | ||||||
Together Rx/Novartis Care Card | Prescription savings program for elderly low income Medicare recipients without other insurance | US | 60 | 30 | 1 200 000 enrolled |
230 000 used Novartis drugs | ||||||
Emergency Relief | Support of major humanitarian organizations (emergency medical needs) | Global | 19 | 15 | 325 000 | 1 300 000 | ||||||
Blindness | Donated intraocular lenses to NGOs for cataract surgery for patients with inadequate means | Developing countries | 1 | 1 | 34 500 | 65 000 | ||||||
Health Alliances | No longer classified as access-related in 2003 | Global | 0 | 22 | n/a | n/a | ||||||
Total | Worldwide | 371 | 255 | |||||||||
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Half a Million Tuberculosis Treatments Free
In 2002 more than 1.6 million people worldwide died of tuberculosis, making this disease the third biggest threat to human life, exceeded only by HIV and ischemic heart disease. In Africa, all attempts in recent years to control tuberculosis have been severely impaired by limited access to effective treatment. Now, with the help of a Novartis donation, half a million of the world's poorest tuberculosis patients are to receive the best available treatment, as recommended by the WHO. Under an agreement signed on December 19, 2003, by the WHO and Novartis, the drugs will be provided over a five-year period to countries scaling up tuberculosis control, with support from the Global Fund to Fight AIDS, Tuberculosis and Malaria.
The tuberculosis medication provided through this program consists of four different drugs (rifampicin, isoniazid, ethambutol, and pyrazinamide) in one tablet, in a fixed-dose combination for the first two months of treatment, and two drugs (rifampicin and isoniazid) in one tablet for the four-month continuation phase. This offers significant advantages over single drug regimens. Patients take just two or three tablets each day in the intensive phase of treatment rather than the 12 to 14 needed before, greatly improving the likelihood of compliance. The fixed-dose combination also lowers the risk of drug resistance and prescription errors as well as reducing the necessary duration of therapy from eight to six months. Novartis will provide the fixed-dose combination tablets in blister packs within specially designed patient kits. Blister packs protect the drugs from heat, moisture and insects, and improve patient compliance while the kits help to simplify logistics.
This donation brings together key players involved in tuberculosis control measures and programs. Health ministries provide political commitment and appropriate health policies; the WHO and the Global Tuberculosis Drug Facility contribute technical support at a country level; the Global Fund and other donors make resources available to enhance tuberculosis control efforts; and Novartis produces and provides the necessary high quality medicines.
Novartis Human Rights Guideline Established
Globally operating companies can and should play a considerable role in promoting human rights in many parts of the world. Sustainable economic activity contributes towards providing environmental and industrial climates in which human rights can more easily flourish. Furthermore, in countries where the government is unwilling or unable to uphold its human rights responsibilities, global companies can choose to adhere to international rather than local standards thereby setting powerful examples. No reasonable person would dispute that corporate activities must be managed in a manner that upholds the rights of employees and recognizes the circumstances of the cultures of the local communities in which they operate. The issue at stake is to define the reasonable boundaries of the human rights responsibilities of business enterprises. It is relatively easy to determine where they begin. A company should adopt explicit corporate guidelines on human rights and establish procedures to ensure that all business activities are examined and monitored in respect to their alignment with human rights concepts. This Novartis has done.
In November 2003, we published new Corporate Citizenship Guidelines with regard to human rights. The purpose of these Guidelines is to define our commitment to "support and respect the protection of internationally proclaimed human rights."
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Obligations in the Context of Civil and Political Human Rights
The civil and political rights of the Universal Declaration of Human Rights (UDHR) are, above all, essential responsibilities of states and their institutions. But the preamble of the UDHR stipulates that "every individual and every organ of society" should respect and promote these rights. Novartis perceives itself as an "organ of society" and therefore accepts, to varying degrees, human rights related responsibilities. The prime responsibility for Novartis is to ensure that its corporate activities do not contribute directly or indirectly to civil and political human rights abuses, and that the company, under no circumstances, will knowingly benefit from such abuses.
Obligations in the Context of Economic, Social and Cultural Human Rights
The respect and promotion of economic, social and cultural rights is an essential part of the duties of states and regulatory authorities. Compared with civil and political rights, which aim to prevent state interference with individual freedoms, these positive rights are more difficult to enforce, as their implementation requires the material support of responsible stakeholders.
Today, many rights contained in the UDHR are not enjoyed by a large number of poor people. The lives of more than 1.2 billion people living in absolute poverty are characterized by the sad fact that their right to adequate food, clothing, and housing as well as their right to the highest attainable standard of physical and mental health remain unfulfilled.
The sheer scale of today's global poverty problems makes it obvious that private companies can only contribute towards the support and respect of economic, social, and cultural rights in the context of their normal business activities. Economic and social rights such as the right to work (Article 23 of the UDHR), the right to a standard of living adequate for the health and well being of a human and his or her family, including a right to medical care (Article 25), and the right to education (Article 26) cannot be progressively implemented without good governance, effective public services, and appropriate allocation of resources.
Novartis, however, contributes towards the fulfillment of economic, social and cultural rights by manufacturing pharmaceuticals and other products and by selling these in the market place. Novartis, like other responsible corporations, creates jobs and thus livelihoods for many people, compensates associates fairly and pays social security contributions. It buys goods, pays market prices for these and, last but not least, contributes to the financing of the community by paying taxes. However, in addition, Novartis offers voluntary benefits to employees within the framework of its Corporate Citizenship Policy, provides financial support for foundations, makes donations and contributes to the fulfillment of economic, social and cultural rights in other ways on a case-by-case basis.
Code of Conduct
The Novartis Code of Conduct is an integral part of our Corporate Citizenship effort. It contains the key rights and duties (especially personal obligations) of all associates, including their right to air grievances or complain of violations of the Code of Conduct, the Policy on Corporate Citizenship or about financial matters through the Complaints Organizations and ultimately to the Audit and Compliance Committee of the Board (the "whistleblower" provisions). The state of compliance with the Code of Conduct is annually reported on by the Group Compliance Officer to this Committee.
Cases handled by the Compliance Organization in 2003 include instances where marketing practices may not have met our stringent standards, allegations in South America of anti-trust law violations and unfair trade practices, alleged failures to comply with local law, and possible conflicts of interests.
As might be expected, a number of employment related cases and complaints relating to discrimination, harassment and unfair behavior were reported.
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All issues raised are under investigation. Disciplinary action will be taken where necessary and remedial actions, including improved training, will be implemented where required.
Training tools for the Code of Conduct are used world-wide to facilitate a consistent approach. The Pharmaceuticals Division has already trained more than 60% of its associates worldwide regarding legal requirements and ethical standards, and the Consumer Health Division has started a similar program, with a rollout in Switzerland as the first step. The US organizations have developed a comprehensive web-based training regimen. This comprises 12 training modules on Code of Conduct related subjects which were implemented in 2003.
Periodic and case by case reporting on Code of Conduct topics has also been improved. Tools are now in place enabling Novartis to measure and evaluate its performance systematically vis-a-vis ethical conduct expectations. We intend to develop and adapt these tools as required by the changing environment in which we operate.
This year, our annual Compliance Survey was sent to 2 600 associates in the US and to 16 000 associates in the rest of the world. In this survey we ask our associates to provide their opinion and information about compliance with the Code of Conduct and the Corporate Citizenship Policy. In addition, we specifically remind them of the existence of the Code's complaints procedure (the right and duty of every associate to complain about violations of the Code of Conduct and of the Corporate Citizenship Policy). As intended, this reminder has triggered an additional number of complaints about possible code violations which are now being followed up.
Audit activities have been strengthened, too. There is now a standard auditing tool for compliance with the Code of Conduct that is being used in all regular internal audits, as well as for self-audits by local operating companies. Special audit procedures will be expanded next year to include the Corporate Citizenship Policy.
As a result of changes in US legislation, in 2003 we adopted an improved "whistleblower" procedure regarding complaints concerning financial matters, and an additional Ethics Code. The complaints procedure ensures that everybody can ask questions or complain about financial matters involving our businesses, even to the Audit and Compliance Committee. Our Ethics Code imposes additional ethical obligations on all our employees.
During 2004, we will focus our training, education and controls on:
New Marketing Code
In 2003, our Pharmaceuticals Division implemented its own marketing code to ensure consistently high ethical standards in promotional practices throughout the world. The code supplements national and international legislation, as well as industry codes. Its ten main principles, which are also being applied in the Consumer Health Division, will be complemented by business specific provisions in all of its business units in the course of 2004. Our US marketing standards are even higher.
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In order to secure adherence to this code, marketing, sales and management personnel are being trained in workshops with the help of presentations and case studies. Moreover, a self-assessment tool has been launched and a compliance organization established throughout the Pharmaceuticals Division. In 2003, various on-site audits were conducted in countries including Russia, the UK and Canada. Violations of the code in 2003 resulted in the dismissal of several associates. For 2004, further training and on-site audits are scheduled, as well as a revision of the code based on our experiences in 2003.
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Results of our Corporate Citizenship Related Projects in 2003 and Targets for 2004
|
Steps planned for 2003 |
Results 2003 |
Targets 2004 |
|||
---|---|---|---|---|---|---|
Access to medicine | Strengthen priority programs such as Coartem/malaria program. | Progress made in malaria program with the WHO; substantially increased financial engagement in key markets. | Develop pediatric form of Coartem (with MMV),(1) complete treatment guidelines, improve distribution to rural patients. | |||
Novartis Institute for Tropical Diseases (NITD) in Singapore: complete staffing. Become operational, establish networks and collaboration partners, initiate first research project. |
Staffing on track, research projects initiated, first international conferences staged, external scientific reviews held. |
Operational in new facilities, student training program commenced, second International Symposium in July 2004. |
||||
Policy framework | Add fifth guideline that addresses relationship with third parties: application of Corporate Citizenship standards to suppliers, contractors, consultants, etc. | Corporate Citizenship Guideline 5: Third-Party Management approved, implementation process started. | Focus on implementation and integration into the corporate culture; coaching of local management; internal audit of compliance. | |||
Third-Party Management | Expand existing HSE Third-Party Management Guideline to include all aspects of Corporate Citizenship. | Corporate Citizenship Guideline 5: Third Party Management approved, implementation process started. | Inform all suppliers of our commitment and expectations; categorize suppliers; send questionnaire to key suppliers; pilot Corporate Citizenship supplier audits. | |||
Respect for human rights | Articulate comprehensive position covering the current human rights issues affecting the industry. | Corporate Citizenship Guideline 4 on Human Rights approved, public symposium organized. | Regional human rights workshops for managers. | |||
Code of Conduct | Develop training tool. | Developed global e-learning tool; 60% of all Pharmaceuticals associates have already participated successfully. | Expand e-learning to employees of Consumer Health. | |||
Accountability of Management (integration in operational processes) | Execute complete Corporate Citizenship management cycle including objective setting, performance measurement and year-end incentives. | Review meetings with all global Business Units, two meetings of the steering committee. All country heads and many managers have individual targets to meet. | As in 2003. Additionally, implement Guidelines 4 and 5, and close identified gaps. | |||
Working conditions | Strengthen programs to ensure fair-living wage, diversity and adequate dialogue with all employees. | Project with BSR;(2) diversity programs in all bigger organizations; meetings with over 80% of all employees. | Close identified gaps, establish binding process for fixing local-basic-need wages. | |||
Fair-marketing practices | Implement detailed standards and procedures in markets around the world. | Pharmaceuticals marketing code established. Global training program started. | Follow-up training and audits in Pharmaceuticals, full rollout of modified code in Consumer Health. | |||
Bioethics | Adopt revised ethical framework for biomedical research due to revision of Helsinki Declaration. | Policy on Communication and Publication of Clinical Research Results updated to reflect revisions. Internal process established. | Review positions on biodiversity, animal welfare and stem cells. | |||
57
Involvement of employees | Roll out information program on Corporate Citizenship to all employees by mid-2003; communicate Corporate Citizenship concept to external stakeholders. | Face-to-face meetings on Corporate Citizenship with over 80% of all employees achieved by the end of 2003. | Workshops as follow-up with remaining employees and all new employees. | |||
Stakeholder engagement | Deepen relationships with leading academic institutions, NGOs and think tanks. | Many projects/contacts established (e.g. Harvard Business School, BSR, MMV, financial markets, conferences). | Develop further platforms to intensify cooperation and joint projects with NGOs. | |||
Transparent reporting | Continue to improve data quality and transparency for the Annual Report 2003. Adapt Corporate Citizenship reporting on the website to GRI(3) format. | Data quality of internal reporting improved, through clearer data definitions. | Make data available in GRI format.(4) | |||
External assurance | Institutionalize independent Corporate Citizenship assurance process. | Corporate Citizenship assurance process established. | Consolidate Corporate Citizenship assurance process. | |||
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Benchmarking shows that Novartis is consistently rated by financial analysts to be among the leading companies for sustainability performance. Novartis is not included in one index, the FTSE4Good. This index strongly penalizes producers of baby food at present. However, the criteria applied are currently under review. We are proud to include the Gerber baby-food business among our many strong brands.
The Novartis Foundation for Sustainable Development (NFSD)
Multinational companies operating throughout the world need to recognize the wider social, economic and environmental impact of their activities. This knowledge and understanding requires companies to be active and not reactive, for example, in health matters. Companies should as much as possible be part of the solution to a problem rather than purely observing it and being perceived as part of the problem.
The NFSD has been a leading private-sector organization for international development for 25 years and is committed to innovative, performance-related development cooperation. The Foundation is funded by the Novartis Group but works independently of the economic interests of the Group.
The Foundation aims to improve the quality of life for poor people in developing countries by improving access to healthcare through innovative development projects, think tank efforts and dialogue facilitation.
Foundation Activities
The activities of the NFSD are based on four cornerstones:
Project Examples
The Foundation concentrates its financial and human resources on pilot projects within a manageable frame-work, where innovative solutions to health-access problems can be elaborated and where it can make a significant contribution. Examples include:
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www.novartisfoundation.com
Other Novartis Foundations
Novartis US Foundation | Its purpose is to support efforts among communities, businesses and non-profit organizations on a range of social, health and education issues related to healthcare. | |
Novartis Foundation France | The Novartis Foundation France provides persons with difficulties due to age, illness, handicap or family environment with personal and social support. | |
Novartis Foundation Japan | The Novartis Foundation Japan contributes to the improvement of welfare, by aiding and promoting creative research and pursuing international exchange. | |
Foundation for Health, Innovation and Society (Spain) www.fundsis.org |
The Foundation promotes the study, investigation, analysis and improvement of health in its ethical, biological, psychological, sociological and economic dimensions. | |
Novartis Venture Fund www.venturefund.novartis.com |
The Novartis Venture Fund was founded six years ago with the mission to foster entrepreneurship and create new jobs, particularly for Novartis employees affected by the merger. It supports new business projects that show exemplary entrepreneurial spirit in future-oriented health science areas. | |
The Novartis Foundation (UK) www.novartisfound.org.uk |
The Novartis Foundation (UK) is a scientific and educational charity, intended to promote scientific excellence. | |
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Health, Safety and Environment
This section summarizes the Group's Health, Safety and Environmental (HSE) performance in 2003. Our HSE targets focused once again on reducing the number of accidents, lowering energy use/CO2 emission, safely disposing of the hazardous waste we produce, and successfully integrating recently acquired partners and newly founded organizations. This report describes the most important measures undertaken to fulfill our ambitious targets, and discusses our achievements as well as areas in which we intend to improve. The full Novartis HSE report is available on our website at www.novartis.com/hse. There you will also find additional information on all the issues mentioned in this report.
Strong Commitment
Protection of the environment has a high priority in all our activities. We strive to make efficient use of natural resources and minimize the environmental impact of our activities and products.
Between 2001 and 2003, we set ourselves the target of reducing our direct CO2 emission by 3% (based on 2000 emission levels). As can be seen in our report on Air Emission (see page 66) we achieved a reduction of 2.8%, in spite of a 4.8% growth in production. The reduction was facilitated by a move to more energy-efficient facilities, and has resulted in a CO2 emission level, relative to sales, that is well below the industry average.
In light of these achievements and with the goal of further improvement, we have proposed individual energy-efficiency targets for the Pharmaceuticals and the Consumer Health Divisions for 2004-2006. We will continue to report our absolute CO2 emission and will also include indirect emission (e.g. from electricity and purchased energy).
Our focus on energy efficiency as opposed to absolute CO2 emission better reflects our commitment to the sustainable use of natural resources(1). Energy-efficiency improvement targets for each Business Unit will be 2% per year, based on their most representative denominator (e.g. sales, production, employees). Moreover, each Business Unit must report energy-saving projects that amount to a total reduction of 1% of the previous year's energy consumption.
Enough Water for a Small City
When Sandoz, our generic pharmaceuticals Business Unit, originally acquired the Roferm S.p.A. plant at Rovereto in Italy in 1995, there was considerable room for improvement both economically and environmentally. Following the acquisition, the product portfolio was adapted to the needs of Sandoz and focused on the production of antibiotics. Investments worth approximately USD 170 million were also made in new technologies and equipment, together with logistical and environmental improvements.
In 2002, Rovereto achieved a reduction of more than 50% in halogenated VOC emission by cryocondensation, a major first step towards an HSE performance that is in-line with the highest environmental standards. During 2003, further progress was made through energy conservation and groundwater saving initiatives.
To reduce energy consumption, two new air compressors were fitted with heat recovery exchangers. The compression heat generated (2x360 kW) is now recovered and used to preheat the feed water for the plant's steam generators. This process has increased efficiency, reduced CO2 emission by approximately 800 tonnes per year, and provided a cost saving of around USD 90 000 per year.
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Rovereto's reduction of approximately 40% in its groundwater consumption during 2003 is an equally important achievement. Cooling water at the plant was previously used only once, before being discharged into the River Adige. Thanks to the investment in new technology, a recycling system has been installed that allows the water to be reused for cooling condensers and solvent recovery processes. The new system has resulted in an overall saving in groundwater consumption of around 510 m3/h, equal to the hourly water consumption of an Italian city of 50 000 inhabitants.
Now Rovereto is looking to go further and formalize its commitment to environmental management by applying for ISO 14001 and OHSAS 18001 certification in 2004.(2) Kurt Gstrein, Head of HSE, Sandoz is delighted with what has been achieved at the plant: "Rovereto's success shows how HSE management can combine with top-level engineering at acquired sites to bring about exceptional improvements in HSE performance. It is an excellent model for the integration of new partners in the future".
Successfully Protecting our Personnel
At the end of 1997, Novartis took full ownership of the Queretaro baby-food site in Mexico, a plant that had a high rate of accidents attributable to a lack of safety awareness.
Operations management invested significantly in personal-protection equipment, fire-fighting systems, alarms, sprinklers, and noise-reduction measures. Employee training was also increased, and the Corporate HSE Guidelines as well as national/international standards were instituted together with a safety-improvement plan.
These actions brought swift and sustainable results, and the Lost-Time Accident Rate (LTAR) has fallen from 1.25 in 1998, to an impressive 0.15 in 2003: proof of just how effective good HSE management can be.
Building a New Culture
The Des Plaines Illinois, US, site which manufactures the complete FreshLook contact lens product range was acquired by Ciba Vision in 2000. One of the major challenges since the acquisition of Wesley Jessen Corporation has been the adoption of Novartis/CIBA Vision HSE guidelines at this site. Over the last three years, thanks to the outstanding commitment of all site employees, considerable progress has been made.
HSE awareness has been raised using a variety of methods. These, combined with direct senior-management involvement in follow-up investigations of serious incidents and improved case management by site health services, have led to real improvements in on-site safety. Since 2002 the number of accidents needing first aid treatment has decreased by 38%. Accidents leading to an absence of more than one day have fallen by 78% and the number of accidents resulting in impairment of an individual's working capacity has been reduced by 46%. Over the last three years, costs associated with accident related absences have decreased by 75%.
The responsible HSE Officer, Shankar Sarkar, is enthusiastic about the site's success: "Our achievements, especially in accident prevention, have turned Des Plaines from a problem site into a role model that others can emulate."
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Remediation
Since our past operations may have led to the contamination of soil and/or groundwater, we have set aside financial reserves of USD 179 million for estimated potential-environmental liabilities. In and around Basel, the local chemical and pharmaceutical industries (including predecessor companies of Novartis) have established an organization to seek timely solutions to the possible consequences of past disposal practices at a number of landfills. The objective of this organization is to eliminate acute and long-term risks through pragmatic, eco-efficient measures that are developed in cooperation with the authorities, and are based on professional studies and assessment. During 2003, progress was made in the assessment of seven landfill sites in the Basel region, two of which may soon be excluded by the authorities from further investigation. We expect the authorities to take decisions on remediation for the five remaining sites in 2005 or 2006.
63
Division/Business Unit Objectives and Achievements 2003-2004
|
Targets 2003 |
Results 2003 |
New targets 2004 |
|||
---|---|---|---|---|---|---|
Pharmaceuticals | ||||||
Overall Lost-Time Accident Rate (LTAR) 0.5 | LTAR 0.64 Positive trend emerging | LTAR 0.5 | ||||
Prevention of drug substance release into aquatic environments from manufacturing sites |
The presence of drug substances in wastewater was reduced by 49% |
Further efforts towards the prevention of drug substance release into aquatic environments from manufacturing sites |
||||
Continued implementation of HSE management procedures in line with International standards |
ISO 14001 certification of four additional strategic pharmaceutical manufacturing sites, one of which also achieved OHSAS 18001 |
Implementation of HSE management systems at manufacturing sites comparable with ISO 14001/OHSAS 18001 standards |
||||
Integration of Business Continuity Management (BCM) in Development and Technical Operations departments and in Pharmaceuticals business units |
Reduction of key business continuity risks in Development and Technical Operations departments, and Pharmaceuticals business units |
Assessment of business continuity risks for main Pharmaceuticals head offices and business units |
||||
3% reduction in CO2 emission (based on data from 2000) |
14.5% reduction achieved, primarily through a move to more energy-efficient facilities |
Improvement of energy efficiencyby 2% |
||||
Promote health of employees by improving ergonomics of workplaces at head offices and in Development |
||||||
Novartis Institutes for BioMedical Research (NIBR) | ||||||
LTAR 0.5 | LTAR 0.70 | LTAR 0.5 | ||||
Research-specific risk portfolio developed |
Development of a handling-classification scheme for research compounds |
|||||
Continued BCM implementation aligned with Pharmaceuticals' schedule |
Vulnerability assessments of disease areas 73% complete |
Develop inventory key business processes and complete two BCM plans |
||||
Improve energy efficiency by 2%; Establish energy teams at each site; Identify and implement fast action projects for energy savings to achieve targets |
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|
Targets 2003 |
Results 2003 |
New targets 2004 |
|||
---|---|---|---|---|---|---|
Consumer Health | ||||||
Sandoz | ||||||
LTAR <0.8 LT | AR 0.67 (0.99 including Lek) | LTAR <= 1.0 | ||||
70 000 GJ reduction in energy consumption at Kundl, Austria resulting in a 1.6% reduction in overall Group CO2 emission (based on data from 2000) |
Target exceeded through recent projects in Kundl, Austria with energy reduction of 68 000 GJ (compressor project), 50 000 GJ (yield improvement), 70 000 GJ (municipal heating) |
Improvement of energy efficiency by 2% |
||||
50% staged reduction in halogenated VOC emission at the Turbhe site in India by 2004 |
Target exceeded with a 70% reduction in halogenated VOC emission at Turbhe |
|||||
The successful integration of Lek, Slovenia |
Lek successfully integrated; HSE organization, risk portfolio and reporting established |
Further improvements in Lek HSE performance |
||||
Pilot implementation of BCM |
BCM pilot project successfully conducted; In addition joint BCM approach with IT establishing disaster-recovery plan for Kundl site |
Definition of scope and objectives; Organization and inventory of key business processes; Continuation of BCM implementation for defined key business processes |
||||
Over-the-Counter (OTC) | ||||||
LTAR 0.45 | LTAR 0.39 | LTAR 0.45 | ||||
Ongoing reduction in energy consumption relative to production at defined sites |
Economically viable energy-conservation programs implemented at major sites; Target of 2% reduction not achieved in 2003 on top of previous reductions |
Improvement of energy efficiency by 2% |
||||
Continuation of audit reviews of third-party contractors |
Risk portfolios for third-party contractors completed; HSE auditing of major third party contractors; including them in the BCM target; and committing them to the Corporate Citizenship initiative |
Continuation of audit reviews with four or five selected third-party manufacturers |
||||
Pilot implementation of BCM |
BCM pilot project implemented; Tools developed for the global roll out |
Establishment of BCM plans for remaining main brands; completion of BCM studies of potential issues according to the strategic risk portfolio |
65
|
Targets 2003 |
Results 2003 |
New targets 2004 |
|||
---|---|---|---|---|---|---|
Animal Health | ||||||
LTAR < 0.5 | LTAR 0.53 (0.72 including NAVI) | LTAR < 0.5 | ||||
Evaluation and improvement of third-party contractors' risk portfolios |
Risk control improved for several third-party contractors with high impact; Four out of five of all third party contractors audited |
Completion of third-party contractor audits |
||||
Pilot implementation of BCM |
Pilot BCM study conducted according to schedule |
Complete study of manufacturing and supply chain processes for five active ingredients and products; Investigate vulnerabilities at head offices |
||||
Initiation of a project for the reduction of energy consumption and SO2/CO2emission at Wusi Farm, China |
Measures successfully implemented; Results to be published in 2004 |
Improvement of energy efficiency by 2% |
||||
Medical Nutrition | ||||||
LTAR 1.0 | LTAR 0.04 | LTAR < 0.6 | ||||
Ongoing reduction in energy consumption relative to production at defined sites |
Both Osthofen, Germany and Minneapolis, US achieved a 2% reduction in energy consumption |
Improvement of energy efficiency by 2% (or 4% over 2 years) |
||||
Continuation of audit reviews of third-party contractors |
Six contract manufacturers inspected by HSE and Quality Assurance teams |
Continuation of four additional audit reviews for third-party contractors |
||||
Pilot implementation of BCM |
Pilot Business Continuity Study conducted, addressing all key business processes at the Osthofen site |
Address major risks and develop a business-resumption plan for the Osthofen site. Carry out full-process inventory and originate business-resumption plan for Minneapolis site |
66
|
Targets 2003 |
Results 2003 |
New targets 2004 |
|||
---|---|---|---|---|---|---|
Infant & Baby | ||||||
LTAR 0.45 | LTAR 0.26 | LTAR <= 0.33 | ||||
Ongoing reduction in energy consumption relative to production at defined sites |
Target 2% reduction in energy consumption partly met; Ft. Smith, US exceeded the target |
Improvement of energy efficiency by 2% (or 6% over 3 years) |
||||
Continuation of audit reviews of third-party contractors |
Five audits of third-party contractors completed in China |
Two further audit reviews of third-party contractors, combining HSE and Corporate Citizenship issues |
||||
Pilot implementation of BCM |
Pilot BCM study of Fremont, US Customer Service Center completed in full, including business-resumption plan |
Continuation of BCM implementation for selected processes |
||||
CIBA Vision | ||||||
LTAR 0.6, by a reduction of 10% at every site | LTAR 0.42 | LTAR 0.5 | ||||
Continuation of water conservation activities |
Outstanding achievements in water conservation: water recycling rate currently exceeding water consumption rate |
Ongoing water conservation activities; Strengthening of leadership position in the field of water recycling |
||||
Establishment of energy-efficiency-improvement targets at major sites |
Energy-conservation concepts elaborated; quantitative improvements achieved overall, mainly through energy-reduction projects in Sydney, Australia; Atlanta, US; and Mississauga, Canada |
Improvement of energy efficiency by 2% |
||||
Conducting of three additional risk analyses and the establishment of an action plan at each site |
Risk analysis of top three processes conducted at all sites |
Recompilation of risk portfolio |
||||
Pilot implementation of BCM |
Pilot study of Batam logistics conducted and joint study with IT disaster-recovery unit in Atlanta initiated |
Continuation of BCM implementation for defined key business processes |
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Abbreviations
BCM | Business Continuity Management | KPI | Key Performance Indicator | |||
CO2 | Carbon dioxide | LTAR | Lost-Time Accident Rate (measured as accidents per 200000 hours worked) | |||
GJ | Giga Joule | NAVI | Novartis Animal Vaccines Inc. | |||
GRI | Global Reporting Initiative | OHSAS | Occupational Health & Safety Management System | |||
HSE | Health, Safety and Environment | SO2 | Sulphur dioxide | |||
ISO | International Organization for Standardization | VOC | Volatile organic compound | |||
IT | Information Technology |
68
HSE Management Procedures and Organization
Our HSE organization is focused on establishing systematic risk assessments, preventive measures and regular reviews including audits regarding the health, safety and environment performance at all our sites. It is crucial that such processes are in place throughout the organization to ensure that we continously improve HSE performance and successfully integrate new acquired sites.
Integrating our New Partner
Following our acquisition of the Slovenian-based generics company Lek in 2002, a key priority was to align standards, harmonize the HSE organizations, and synchronize the various environmental reporting processes.
Lek has the potential to significantly influence the overall Sandoz HSE data, and we were keen to preserve uniformly high standards. New HSE performance targets were set almost immediately, and thanks to the hard work, cooperation and initiative of our new colleagues at Lek, we achieved an important first step in 2003: a full report of HSE data for their 28 sites, which is contained in the HSE Data 2003 Overview Table on page 72.
The Environmentally Friendly Site
In 2002, our US pharmaceutical research was consolidated in the new Novartis Institutes for BioMedical Research Inc. (NIBRI) in Cambridge, Massachusetts, US. The first new lab complex at 100 Technology Square opened in March 2003.
NIBRI is a cause for celebration not just within the research community, but also among those who have an eye on the future of our environment. The new building has been equipped using energy- efficient technologies and environmentally friendly finishes that incorporate recycled, recyclable or sustainable elements. It has been decorated using materials produced with minimum impact on the environment, and easily dismantled office partitions and modular workstations permit reconfiguration with minimal waste.
The Headquarters of NIBRI, at 200 Massachusetts Avenue are scheduled to open in April 2004, and the formerly disused building is currently undergoing an unusual transformationfrom candy factory to state-of-the-art research facility.
Initiating a Cultural Shift
Certification according to ISO 14001 and/or OHSAS 18001 is an independent acknowledgement of the fact that sites are committed to implementing sound HSE management procedures, and continually strive to improve performance. While certification is a desirable objective in itself, on site, the work involved in achieving it has had a positive impact on attitudes to HSE.
The Pharmaceuticals site at Torre Annunziata in Italy has recently attained ISO certification, and Giorgio Lazza, Head of Pharmaceutical Manufacturing Italy, believes that this has made a significant difference: "During the certification process we underwent a major shift from simply observing existing procedures to an attitude of continuous improvement."
Pharmaceuticals aims to ensure that all its manufacturing sites conform to ISO 14001/OHSAS 18001 standards. Torre Annunziata (Italy), Huningue (France), Stein (Switzerland) and Taboão da Serra (Brazil) all received ISO 14001 certification in 2003. A complete list of sites with ISO 14001 certification can be found on the Internet at: www.novartis.com/hse
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HSE Risk Performance Management 2003
Our two most important tools for HSE risk-performance management are our HSE risk portfolios and our HSE audits.
The risk portfolios are based on a bottom-up approach. Since 1997, our sites have been elaborating their local risk portfolios. These are consolidated at Business Unit and Division level, and finally at Group level in the Corporate HSE Risk Portfolio. This is regularly presented to, and discussed with, the Executive Committee of Novartis (ECN). In June 2003, 66 risks warranting priority action were reported. As a result of actions taken, eight priority risks from the previous risk portfolio have been declassified. Action plans for all remaining priority-listed risks have been developed and are currently being implemented. The next comprehensive risk review at Group level is scheduled for the second quarter of 2004.
As well as a control function, HSE audits serve to provide consultancy and support to our sites. During 2003, twelve corporate HSE audits and twelve Division/Business Unit HSE audits were carried out. Action programs based on the audits were defined by the sites and controlled by the Division/Business Unit; the Business Units have now completed between 85% and 100% of all necessary follow-up actions based on audits conducted.
HSE Performance and Data Management
Globally, we now have over 400 dedicated HSE specialists at our sites who are continually analyzing our risk portfolio and driving the resulting action plans forward. Together with Group senior management, they have defined key performance indicators (KPIs) for our HSE related objectives. The KPIs are based on the data input of 150 sites managed by Novartis Group companies in 2003. These include all sites with significant impact on the Group's overall HSE-related performance (i.e. all production, formulation and R&D sites). Forty-one sites reported for the first time in 2003, the majority of which originated from the Lek acquisition. Ten sites, mainly impacting our Health and Functional Food business, were sold or closed.
HSE data are collected and reviewed on a quarterly basis. The emission and resource data published in this report, and on our website, are actual data for the period from January through September 2003 and estimates for the last quarter, which will be updated in the first quarter of 2004. Significant deviations will be reported on our website and in the 2004 Annual Report. The accident and financial data are actual data from January through December 2003.
The emission and resource data contained in the Annual Report 2002 were based on actual data for January to September and an estimate for the last quarter. The estimates have since been updated, and in two areas there were major deviations from the figures published last year. Waste rose significantly due to the demolition of a large pharmaceutical building in Basel, as well as a significant amount of non-reported compostable waste in the Infant & Baby Business Unit. Halogenated VOC emission was underestimated at one of our sites in India. The HSE investments and expenses of the previous years were converted from CHF into USD at a fixed rate. To allow comparisons of the 2003 data, the figures reported in previous years have been adjusted to include only data of sites still operated by Novartis. We have corrected this data in the HSE Data 2003 Overview Table in this report (p. 72).
The reporting and management processes as well as HSE data are part of the Corporate Citizenship assurance process. This is described in the assurance report (p. 8182). In gathering these data, we take account of the impact of activities on our premises, together with major flows of material across our boundaries. We do not currently measure third-party impact from the manufacture of purchased goods, energy production or transportation.
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Due to the many intangibles in healthcare value assessment of pharmaceutical products and the regulatory impact on many aspects of a pharmaceutical product's life cycle, we have not implemented a systematic, life-cycle-assessment management process for Novartis.
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2003 Data
Divisional split based on 2003
|
|
|
|
|
Consumer Health |
Novartis Group(6) |
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Pharmaceuticals |
NIBR |
Sandoz(4) |
OTC |
Animal Health(5) |
Medical Nutrition |
Infant & Baby |
CIBA Vision |
% Change |
|
|
|
|
||||||||||||||||||||||||||||||
|
2003 |
2002 |
2003 |
2002 |
2003 |
2002 |
2003 |
2002 |
2003 |
2002 |
2003 |
2002 |
2003 |
2002 |
2003 |
2002 |
2003/2002 |
2003 |
2002 |
2001 |
2000 |
||||||||||||||||||||||
Employees | |||||||||||||||||||||||||||||||||||||||||||
HSE Personnel [number of employees working at least 50% for HSE] | 202 | 201 | 2.0 | 1.0 | 111 | 76.9 | 2.3 | 2.0 | 25.3 | 23.5 | 4.0 | 5.75 | 40.0 | 41.0 | 25.2 | 24.1 | 6 | 414 | 389 | 449 | 396 | ||||||||||||||||||||||
Finance | |||||||||||||||||||||||||||||||||||||||||||
HSE investments [USD millions] | 76.9 | 26.3 | 0.90 | 0.14 | 6.77 | 8.00 | 0.35 | 0.28 | 0.58 | 0.46 | 0.83 | 0.60 | 0.21 | 1.44 | 0.57 | 0.57 | 128 | 87.7 | 38.5 | 31.5 | 36.3 | ||||||||||||||||||||||
HSE expenses [USD millions] | 95.7 | 99.9 | 4.98 | 6.11 | 43.8 | 29.5 | 1.34 | 4.03 | 2.13 | 2.75 | 2.01 | 1.68 | 1.27 | 4.99 | 6.65 | 7.80 | 3 | 164 | 159 | 155 | 158 | ||||||||||||||||||||||
Production | |||||||||||||||||||||||||||||||||||||||||||
Total production [1000 t = metric tons] | 25.4 | 26.3 | | | 109 | 101 | 15.8 | 20.2 | 3.05 | 3.25 | 120 | 111 | 327 | 323 | 14.6 | 17.8 | 2 | 643 | 630 | 573 | 590 | ||||||||||||||||||||||
Resources | |||||||||||||||||||||||||||||||||||||||||||
Water consumption [million cubic meters] | 17.5 | 18.2 | 0.71 | 0.74 | 71.8 | 62.8 | 0.49 | 0.39 | 0.82 | 0.46 | 0.72 | 0.88 | 4.45 | 4.48 | 0.64 | 0.73 | 9 | 97.2 | 88.8 | 86.7 | 84.9 | ||||||||||||||||||||||
Energy consumption [million GJ] | 5.13 | 6.00 | 0.52 | 0.45 | 6.27 | 5.10 | 0.32 | 0.31 | 0.18 | 0.14 | 0.26 | 0.31 | 2.07 | 2.17 | 0.75 | 0.83 | 1 | 15.6 | 15.4 | 14.5 | 13.8 | ||||||||||||||||||||||
Health/safety | |||||||||||||||||||||||||||||||||||||||||||
Lost-time accident rate [accidents per 200 000 hours worked] | 0.64 | 0.72 | 0.70 | 0.55 | 0.99 | 0.92 | 0.39 | 0.67 | 0.72 | 0.57 | 0.04 | 1.19 | 0.26 | 0.34 | 0.42 | 0.69 | -15 | 0.60 | 0.71 | 0.71 | 0.88 | ||||||||||||||||||||||
Lost work day rate [lost days per 200 000 hours worked] | 12.3 | 15.4 | 4.94 | 2.12 | 16.5 | 7.50 | 4.57 | 14.7 | 2.77 | 7.60 | 0.39 | 7.72 | 8.44 | 8.95 | 11.7 | 10.7 | -17 | 11.0 | 13.2 | 11.1 | 13.6 | ||||||||||||||||||||||
Water emissions(1) | |||||||||||||||||||||||||||||||||||||||||||
Effluent discharge [million cubic meters] | 3.69 | 4.07 | 0.18 | 0.19 | 16.6 | 11.7 | 0.13 | 0.24 | 0.60 | 0.11 | 0.59 | 0.78 | 3.18 | 3.32 | 0.61 | 0.68 | 21 | 25.7 | 21.2 | 20.4 | 19.2 | ||||||||||||||||||||||
Suspended solids[t] | 204 | 247 | 5.40 | 7.50 | 187 | 184 | 11.4 | 10.7 | 3.36 | 6.81 | | 2.30 | 45.3 | 19.1 | 6.89 | 4.09 | -4 | 487 | 508 | 609 | 592 | ||||||||||||||||||||||
Chemical oxygen demand COD [1000 t] | 0.43 | 0.42 | | | 3.66 | 3.06 | 0.06 | 0.05 | 0.01 | 0.01 | 0.00 | 0.03 | 0.09 | 0.06 | 0.14 | 0.09 | 19 | 4.55 | 3.83 | 3.96 | 3.82 | ||||||||||||||||||||||
Nitrogen [t] | 86.3 | 122 | | | 550 | 303 | 1.84 | 1.22 | 0.00 | 0.00 | | 0.17 | 5.21 | 5.80 | | 0.24 | 49 | 644 | 432 | 401 | 504 | ||||||||||||||||||||||
Phosphate [t] | 21.1 | 54.8 | | | 17.2 | 18.4 | 4.11 | 0.32 | 0.00 | 0.00 | | | 12.0 | 8.41 | 2.61 | 2.84 | -33 | 57.0 | 84.7 | 61.3 | 96.9 | ||||||||||||||||||||||
Soluble salts [1000 t] | 7.69 | 11.1 | | | 14.9 | 12.1 | 0.50 | 0.37 | 0.00 | 0.00 | | 0.00 | 0.01 | 0.02 | 0.15 | 0.30 | -2 | 23.4 | 23.9 | 20.2 | 20.8 | ||||||||||||||||||||||
Sum of heavy metals [t] | 0.06 | 0.18 | | | 0.15 | 0.00 | | | | | | | | | | | 16 | 0.21 | 0.18 | 0.46 | 0.32 | ||||||||||||||||||||||
Air emissions | |||||||||||||||||||||||||||||||||||||||||||
Carbon dioxide[t](2) | 170 | 212 | 4.63 | 1.09 | 157 | 119 | 10.8 | 10.8 | 6.05 | 4.97 | 7.47 | 13.6 | 95.6 | 89.0 | 12.7 | 6.93 | 2 | 469 | 462 | 435 | 440 | ||||||||||||||||||||||
Sulphur dioxide[t](2) | 33.6 | 41.0 | 0.21 | 0.01 | 150 | 121 | 0.20 | 0.08 | 32.3 | 35.3 | 0.11 | 0.30 | 3.92 | 3.70 | 0.52 | 0.32 | 9 | 222 | 203 | 393 | 273 | ||||||||||||||||||||||
Nitrogen oxide[t](2) | 171 | 197 | 3.17 | 0.59 | 107 | 95.4 | 9.32 | 7.95 | 7.66 | 7.11 | 5.17 | 9.57 | 76.1 | 71.4 | 8.87 | 5.81 | -2 | 392 | 398 | 384 | 388 | ||||||||||||||||||||||
Particulates [t]2 | 8.66 | 10.8 | 0.14 | 0.01 | 6.08 | 3.65 | 0.52 | 0.46 | 5.65 | 6.12 | 0.29 | 0.53 | 15.8 | 15.1 | 0.44 | 0.16 | 2 | 37.7 | 37.0 | 35.9 | 62.4 | ||||||||||||||||||||||
Hydrochloric acid [t] | 0.41 | 1.84 | | | 2.18 | 3.08 | 0.00 | 0.00 | 0.01 | 0.01 | 0.00 | | | 0.00 | | | -37 | 3.10 | 4.93 | 4.39 | 4.87 | ||||||||||||||||||||||
Ammonia [t] | 0.01 | 0.01 | | | 0.08 | 0.00 | 0.01 | 0.01 | 0.02 | 0.02 | 0.00 | | 0.47 | 0.47 | | | 15 | 0.58 | 0.50 | 0.50 | 1.12 | ||||||||||||||||||||||
Volatile organic compounds (VOC) halogenated [t] | 13.1 | 21.8 | | | 326 | 382 | 0.02 | 0.02 | | 17.2 | 0.00 | | | | 18.8 | | -13 | 367 | 421 | 759 | 436 | ||||||||||||||||||||||
Volatile organic compounds (VOC) non-halogenated [t] | 270 | 227 | | | 1200 | 1050 | 18.7 | 17.2 | 5.63 | 0.90 | 0.00 | | 0.23 | 0.43 | 23.3 | 18.8 | 16 | 1530 | 1320 | 1110 | 849 | ||||||||||||||||||||||
Waste(3) [1000 t] | |||||||||||||||||||||||||||||||||||||||||||
Non-hazardous waste generated | 79.8 | 51.6 | 1.34 | 1.63 | 14.1 | 12.4 | 2.83 | 3.68 | 0.73 | 0.76 | 4.30 | 6.99 | 80.0 | 66.8 | 5.49 | 6.14 | 25 | 194 | 155 | 131 | 135 | ||||||||||||||||||||||
Recycled | 64.9 | 10.5 | 0.66 | 0.47 | 7.27 | 6.16 | 1.18 | 1.40 | 0.16 | 0.18 | 3.32 | 5.66 | 70.8 | 38.4 | 1.75 | 1.61 | 125 | 154 | 68.5 | 90.9 | 70.5 | ||||||||||||||||||||||
Treated | 4.91 | 34.9 | 0.57 | 1.07 | 0.63 | 0.67 | 1.25 | 1.53 | 0.08 | 0.04 | 0.99 | 1.30 | 0.09 | 0.05 | 0.07 | 0.45 | (78) | 8.68 | 40.0 | 11.6 | 11.5 | ||||||||||||||||||||||
Disposed of | 10.1 | 6.24 | 0.10 | 0.11 | 5.79 | 5.53 | 0.91 | 0.94 | 0.70 | 0.54 | | 0.03 | 10.5 | 28.1 | 3.47 | 4.07 | -30 | 32.6 | 46.4 | 25.4 | 54.1 | ||||||||||||||||||||||
Hazardous waste generated | 55.3 | 53.1 | 0.41 | 0.27 | 39.1 | 17.9 | 0.17 | 0.27 | 0.61 | 0.52 | 0.03 | 0.09 | 0.02 | 0.03 | 0.21 | 0.21 | 33 | 96.0 | 72.3 | 62.3 | 51.2 | ||||||||||||||||||||||
Recycled | 12.8 | 12.2 | 0.01 | 0.00 | 10.4 | 5.35 | 0.00 | 0.00 | 0.00 | 0.01 | 0.00 | 0.01 | 0.01 | 0.01 | 0.01 | 0.00 | 32 | 23.3 | 17.6 | 18.2 | 13.1 | ||||||||||||||||||||||
Treated | 39.2 | 38.0 | 0.41 | 0.27 | 26.3 | 10.3 | 0.25 | 0.27 | 0.60 | 0.50 | 0.02 | 0.08 | 0.03 | 0.03 | 0.20 | 0.19 | 35 | 67.0 | 49.7 | 40.3 | 35.3 | ||||||||||||||||||||||
thereof incinerated | 38.3 | 36.7 | 0.40 | 0.26 | 24.7 | 8.43 | 0.25 | 0.27 | 0.59 | 0.50 | 0.00 | 0.00 | 0.02 | 0.03 | 0.16 | 0.15 | 39 | 64.4 | 46.3 | 37.3 | 31.5 | ||||||||||||||||||||||
Landfill | 3.13 | 2.59 | 0.01 | 0.00 | 2.46 | 2.06 | 0.00 | 0.00 | 0.00 | 0.01 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 25 | 5.82 | 4.66 | 3.51 | 2.86 | ||||||||||||||||||||||
Other disposal | 0.00 | 0.01 | 0.00 | 0.00 | 0.18 | 0.14 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.01 | 0.01 | 0.00 | 16 | 0.19 | 0.16 | 0.07 | 0.10 | ||||||||||||||||||||||
Intermediate storage | 0.22 | 0.29 | 0.00 | 0.00 | | | 0.00 | | 0.00 | 0.00 | | | 0.00 | 0.00 | | | (26) | 0.22 | 0.30 | 0.28 | 0.22 | ||||||||||||||||||||||
Table shows absolute values with three significant digits, 0.00 signifies values below 0.005 not applicable.
Fines and compliance
In 2003, four fines, three in the US/Canada and one in Latin America, which resulted in fines of less than USD 25 000 in total, were reported as well as seven cases of non-compliance with government HSE regulations. Additionally, two spills occurred which were reported to all relevant authorities and dealt with appropriately.
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Global Reporting Initiative (GRI)
Initiated in 1997, the GRI's aim is the development of globally applicable guidelines for reporting on sustainable management. In 2004, we will provide a report in the GRI format on the Internet, which will include our HSE performance data.
Air Emission
Our three-year CO2 emission-reduction target was a 3% absolute reduction (based on 2000 emission levels) by 2003. To evaluate the reduction fairly, we have compared the sites that existed from 2000 to 2003. From the 2003 figures we subtracted the impact of sites that were newly acquired, and that of sites that have been sold or divested since 2000. The resulting, absolute CO2-emission reduction is 2.8%.
Without the integration of the 28 Lek sites, we would have achieved a CO2 emission reduction of 5% compared with 2002. However, taking into account these new sites, emission increased by 2%.
Our SO2 emission levels have fallen by 20% compared with levels in 2000. Nevertheless, compared with 2002, SO2 emission increased by 9% due to the start-up of production at an Indian site using heavy oil. We will be switching to another fuel source over the coming year.
At other sites we have invested in new equipment to reduce SO2 emission. At Wusi Farm in China, the plant management allocated USD 225 000 to the replacement of two charcoal boilers dating from 1994. The boilers, which generated steam for active ingredient production, solid formulation and product packing, originally produced 18% of Novartis Group's SO2 emission with an energy consumption of only around 0.3% of the Group's total. The installation of the new oil-fired boilers was completed in October 2003, and will lead to a massive reduction in SO2 emission during 2004.
Halogenated VOC emission is down by 13% due to process improvements at the Sandoz production facilities at Turbhe, India (see also: www.novartis.com), as well as process modifications at the Pharmaceuticals production facility in Grimsby, UK.
Non-halogenated VOC emission has risen by 16%. This is largely a result of the fact that non-halogenated VOC emission has been used to replace halogenated VOC emission, which has a higher environmental impact.
Waste
Hazardous waste has risen by 33% due to changes in the Pharmaceuticals and Sandoz production mix and an increase in production. Lek management has already demonstrated its commitment to waste reduction. The Menges site in Slovenia achieved a significant decrease in hazardous waste through the installation of a new column to distill used methanol. There is sufficient capacity to reduce hazardous waste solvents by 30 m3 per month.
Non-hazardous waste has risen by 25% overall, partly due to the demolition of a pharmaceutical building in Basel, and partly due to production increases in the Infant & Baby Business Unit.
Our waste reduction strategy is to first prevent, then to reduce, recycle or safely dispose of waste, in that order.
Resource Consumption: Energy and Water
Novartis overall energy usage increased by approximately 1%, mainly due to the integration of Lek, without which we would have seen a decrease of 3%. You can read about several of our energy saving projects on our website at www.novartis.com/hse.
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Water consumption increased by 9% due to the integration of Lek and a new Animal Health facility.
Accidents
This year we further reduced the LTAR to 0.6 (LTAR 0.7 in 2002) through increased training and a large number of awareness campaigns, as well as technical improvements.
However, our ambitious target of 0.5 for 2006 will be challenging, since further reductions can only be achieved by implementing measures to improve behavioral safety. We are currently exploring the options open to us in this area.
We sincerely regret the occurrence of five fatalities this year. One of our sales representatives died in a car accident in Poland while traveling to a customer meeting. Another sales representative died in a car accident in Italy on his way home. The three remaining fatalities were not work-related but occurred during working hours on Novartis premises. We would like to extend our sincerest sympathy to the families and friends of the deceased.
Employees by Region and Business at December 31, 2003
|
USA |
Canada and Latin America |
Europe |
Africa/Asia/ Australia |
Total |
|||||
---|---|---|---|---|---|---|---|---|---|---|
Pharmaceuticals (excluding Research) | 10 654 | 4 326 | 19 312 | 7 665 | 41 957 | |||||
Pharmaceuticals Research | 602 | 0 | 2 011 | 70 | 2 683 | |||||
Sandoz | 1 133 | 748 | 8 793 | 2 244 | 12 918 | |||||
OTC | 875 | 297 | 1 937 | 811 | 3 920 | |||||
Animal Health | 504 | 282 | 844 | 563 | 2 193 | |||||
Medical Nutrition | 789 | 40 | 1 833 | 187 | 2 849 | |||||
Infant & Baby | 2 234 | 1 947 | 605 | 43 | 4 829 | |||||
CIBA Vision | 2 492 | 1 099 | 1 369 | 757 | 5 717 | |||||
Corporate | 551 | 35 | 806 | 83 | 1 475 | |||||
Total | 19 834 | 8 774 | 37 510 | 12 423 | 78 541 | |||||
Fulfilling Career Aims
The open-plan office on the seventh floor of the IK@N (Informatics and Knowledge Management) building in Cambridge, US is a busy place. According to Dmitri Mikhailov: "People have this positive energy here because we're building a new site from the bottom up. That's what makes it exciting." Dmitri joined the Novartis Institutes for BioMedical Research, Inc. (NIBRI),(1) the new US research headquarters, eight months ago. He is currently a member of the advanced computing group and is also responsible for the local high performance computing infrastructure. With a PhD in biophysics, specializing in computational structural biology and bioinformatics, he is ideally suited to this new environment that is leading the industry in its approach to advancing drug discovery by leveraging IT.
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The work involved in building up the new site is demanding: "One of the things I found since joining NIBRI is that I have to wear multiple hats. My background is scientific but there has also been a lot of coordination and project management, so it was a steep learning curve for me. I work on a number of projects at the same time. This month, one of the things I'm doing is getting desktop PCs in the US linked up to the PC grid." In a ground-breaking project for the pharmaceutical industry, IK@N has already linked desktop PCs together, initially in Basel, in order to harness their surplus power for use in power-intensive computer simulation and modeling for drug discovery.
"One of the reasons I joined Novartis was to work more closely with scientists. I have a personal interest in life sciences and the projects here are very interdisciplinary. My experience is valued and my background allows me to give good feedback to scientists on how we can approach things.
"I see it as a very entrepreneurial place backed by a large organization. On a daily level it feels like I'm working in a small biotech where everyone knows everyone else and what they're working on, but on the other hand there is access to vast amounts of information and resources.
"When I first arrived, I was really impressed with how the company functioned globally from the IT perspective. You can just pick up your laptop computer and take it with you to another office and it looks and works the same way, even if the office is on the other side of the worldjust amazing. We have great technology here.
"When I look out of the window, I see the whole of Cambridge laid out in front of me. And on a good day I can just make out the Harvard campus. That's something else I appreciateour proximity to renowned universities like Harvard, MIT and Whitehead Institute. We have the chance to go to scientific seminars organized both by Novartis and external organizations, so it's a good opportunity to keep abreast of what's happening in science."
2003 Personnel Costs by Function and Region
|
Research USD millions |
Devlopment USD millions |
Production & supply USD millions |
Marketing & Sales USD millions |
General & Administration USD millions |
Total USD millions |
||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
USA | 167 | 374 | 387 | 1 180 | 316 | 2 424 | ||||||
Canada and Latin America | 1 | 16 | 75 | 186 | 57 | 335 | ||||||
Europe | 230 | 417 | 761 | 954 | 640 | 3 002 | ||||||
Africa/Asia/Australia | 10 | 57 | 42 | 322 | 60 | 491 | ||||||
Total | 408 | 864 | 1 265 | 2 642 | 1 073 | 6 252 | ||||||
Global Talent Management
We are a growing company and, for our continuing success, depend on a steady flow of top talent. As a performance-driven company, our associates must be highly qualified and motivated. Our efforts in Human Resources are directed towards recognizing and responding to our associates' needs. We have defined a broadly based range of programs instrumental in attracting, retaining and developing associates, to help them fulfill their career goals and potential.
Attracting Top Talent
A key component for any company is the ability to attract talent, the search for which has become increasingly competitive. For top performers, the opportunity to grow and manage their career is an attractive proposition. In 2003, we have undertaken a number of new programs and initiatives that strengthen our ability to attract candidates.
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To reach potential associates in a more targeted and cost-effective way, we have broadened our range of recruiting channels to include niche job-boards on the Internet. Employee-referral programs have also been particularly successful. In the US in 2003, approximately 60% of new recruits in the sales organization came via referrals from associates. In order to streamline executive searches, we have also reviewed and reduced the total number of search companies used, by 80%, to a small group that provides consistent quality. And when the global recruitment portal goes online later this year, all recruitment advertisements and information about working at Novartis will become available from a single source.
A coordinated approach to recruitment leads to a single profile, recognized by potential candidates around the world. In January 2003, we launched a global recruitment-brand that presents a consistent and distinctive identity in all our recruitment advertising on a global basis. By taking a unified approach to recruitment branding that embodies the opportunities to grow and develop offered by the company, we aim to position Novartis as an employer of choice.
In response to the growing wish among associates to have more say in managing their own careers, we are providing new associates with a structured set of tools and information that will give them more control over developing their future. The Pathways program uses defined competency profiles and sets clear performance-expectations within a consistent framework for individual development. This program builds a foundation of confidence for associates that they will be supported in developing their skill sets throughout their careers.
Our track record for innovation and our commitment to research has also drawn significant attention from the scientific community over the previous 12 months. Our global research headquarters in Cambridge, US, the Novartis Institutes for BioMedical Research (NIBR),(2) which opened in 2002, has already established a reputation for cutting-edge science and reflects well on the entire organization.
Employees by Function and Region
|
Research |
Development |
Production & Supply |
Marketing & Sales |
General & Administration |
Total |
||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
USA | 1 089 | 2 374 | 5 013 | 9 292 | 2 066 | 19 834 | ||||||
Canada and Latin America | 9 | 293 | 2 937 | 4 620 | 915 | 8 774 | ||||||
Europe | 2 352 | 4 552 | 12 404 | 13 161 | 5 041 | 37 510 | ||||||
Africa/Asia/Australia | 127 | 778 | 2 307 | 7 943 | 1 268 | 12 423 | ||||||
Total | 3 577 | 7 997 | 22 661 | 35 016 | 9 290 | 78 541 | ||||||
Retaining Associates
A large part of our lives is spent at work and many factors beyond job responsibilities determine whether associates will commit themselves to the company. We undertake many individual and ongoing activities and programs to cultivate a sense of belonging and contributing to the company, from which loyalty to, and pride in the company can grow.
Joining a new organization is typically marked by an initial sense of disorientation. The new Global Orientation program, known as GO!, was introduced in 2003 to provide new associates with the necessary support, tools, resources and an interactive platform to help them start contributing productively from the first day. The six-month program has been launched in more than ten countries and in ten languages to date. It is structured to accompany associates through orientation with their job, team, department, the business and the organization as a whole.
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2003 Leadership Survey Results(1)
To monitor overall satisfaction and the organizational climate, we run regular surveys at regional, country and divisional level. Recent results indicate that our performance management system and leadership development initiatives have been well-received and that our objectives and strategy are clear. Our leadership style is seen as having become more participative, persuasive and motivating, bringing with it a higher perceived competitiveness of associates, product quality and product development. A sense of pride in working at Novartis is a strong and constant element that runs through all the survey results. In addition to surveys we have also introduced other innovative techniques for stimulating feedback and focusing on issues. In more than 80 meetings worldwide, each with between 50 and 100 participants, the Open Space meeting technique has shown how effectively associates can cooperate to raise and define issues as well as propose approaches for their resolution within a very limited period of time.
External evaluation in 2003 also confirms that we are on the right path. Novartis Finland, Italy, Mexico and Spain were among the companies singled out as having created a great workplace environment by the research and management consultancy the Great Place to Work® Institute. The annual survey assesses the quality of the working environment based on factors that include mutual trust between employees and management, team spirit and the pride each employee feels in belonging to the company. Novartis was also highlighted by Science magazine as one of only two European companies that made it into the top ten in their annual survey of the best biotech and pharma employers. Criteria used in the survey included quality of research, financial strength and vision for the future. Novartis was placed in eighth position. In the annual survey carried out by Working Mother magazine, Novartis Pharmaceuticals in the US was included in its "100 Best Companies for Working Mothers". Among the criteria Working Mother focused on were how well companies provide their employees with specific benefits like flexible schedules and leave for new parents, as well as programs for women's advancement.
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Female Employees by Business
|
Female employees % |
Female management % |
||
---|---|---|---|---|
Pharmaceuticals | 44 | 30 | ||
Research | 41 | 25 | ||
Sandoz | 41 | 20 | ||
OTC | 50 | 30 | ||
Animal Health | 43 | 44 | ||
Medical Nutrition | 48 | 23 | ||
Infant & Baby | 41 | 31 | ||
CIBA Vision | 64 | 28 | ||
Corporate | 58 | 19 | ||
Group overall | 46 | 29 | ||
Female Employees by Region
|
Female employees % |
Female management % |
||
---|---|---|---|---|
USA | 48 | 35 | ||
Canada and Latin America | 42 | 36 | ||
Europe | 46 | 28 | ||
Africa/Asia/Australia | 43 | 19 | ||
Group overall | 46 | 29 | ||
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Local Community Involvement
As part of our commitment to local community and to promote involvement with associates' families, a Family Day was held in Basel and in New Jersey in 2003. In Basel, the Family Day was held in June and more than 18 000 people registered to participate, but fine weather, live music, guided tours and other events attracted many more on the day. More than 14 000 associates around the world also took the opportunity to "give something back" to their local community by taking part in our annual Community Partnership Day.
Developing Potential
We seek out and cultivate talent in order to ensure our ongoing performance and future success. Through our corporate learning institution we take a structured approach to identifying promising individuals. We have developed a portfolio of learning programs geared to developing strong functional skills and equipping managers for future leadership.
In November 2003, our corporate learning institution was accredited by the European Foundation for Management Development (EFMD). Novartis is the first pharmaceutical company to receive EFMD accreditation and was awarded the quality label because it has demonstrated that it meets international standards in the provision of learning programs for senior managers.
During 2003 more than 550 managers went through the annual Organization and Talent Review (OTR) process. OTR is a key development tool in identifying leadership potential. Following career discussions with associates, management teams assess performance and potential, succession, and development opportunities, such as moving talent into critical job openings or recommending learning programs. In 2004, the process will be expanded to more levels within the organization in order to identify and tap leadership potential at an earlier stage. Diversity will play an increasingly important role, to provide better identification of women candidates for key openings.
Corporate Learning
By the end of this year, our Corporate Learning Institution will have executed more than 160 courses and improved the leadership skills of approximately 4 000 associates worldwide. Learning is carried out in groups as a classroom experience or individually and is backed by e-learning for intensive preparation and follow up. Our three-part leadership program is taught by a world-class faculty from Harvard Business School, INSEAD and Stanford University as well as internal senior management speakers.
Seen as a strategic business initiative, Leading at the Frontline is our largest program and is taught in five languages. It targets newly entering or promoted managers from all Business Units and provides formal leadership training that is directly linked to the participants' business activities. Aimed at managers of managers, the Role of the Leader, launched in 2003, focuses on the flawless execution of our business strategy through outstanding leadership skills. Also launched in 2003 was the Business Leadership Program at the Harvard Business School for our most senior managers. Our leaders must be long term visionary thinkers who are able to develop operational processes and drive performance in line with our longer term strategy. This course helps managers better understand the global challenges facing the healthcare industry and evaluate alternative strategies to improve performance.
Individual development was further supported in 2003 with the introduction of two programs. More than 90 senior managers took part in the Accelerated Development Program which defines a detailed development plan to accelerate the participant's ability to take on increasingly challenging roles. The Senior Leaders Mentoring Program demonstrates the commitment of senior leaders to building future leadership. By dedicating their personal time, senior leaders support top performers in the creation of a personal development plan and the presentation of a new business idea.
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Excellence in Marketing
Marketing is critical to our continuing success, particularly in preparing new launches, building up blockbusters and maintaining high market shares. Marketing Excellence Generation 2 (MEX-G2), launched in 2003, builds on the framework of the successful Marketing Excellence program that was designed to develop top-level marketing skills and strong global brands as well as an enthusiastic and competitive spirit. MEX-G2 further focuses on enhancing the ability of managers to generate big ideas and execute them flawlessly at the same time as driving an externally focused and constructively aggressive competitive approach. In its first year MEX-G2 attracted 141 participants.
Senior level non-marketing managers, primarily in research and development have also been targeted in a management program aimed at developing a strong marketing mindset. The Marketing Awareness Program focuses on the creation and delivery of customer value across the brand life-cycle. It builds understanding of customer orientation and marketing in order to foster cross-functional teamwork while building successful products.
Outlook 2004
In order to compete optimally in the market place as an attractive employer, and as a productive, innovative and progressive company, we are focusing on increasing the diversity of our workforce. Diversity includes ethnicity, gender, culture, age and experience, as well as thinking and working style. We are approaching this undertaking on a global basis with the aim of building an inclusive, high-performance environment that values and leverages differences.
We receive many thousands of applications every month and try to respond to each of them. To improve our application processing ability, this year we are introducing a global application tracking system. The system will enable efficient electronic management of individual applications using an online database that is globally accessible.
We will continue to foster innovation throughout the company by living and building a performance driven culture and support it by seeking out and developing individual contributors that show high potential.
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Assurance Report on the Novartis Group Corporate Citizenship Reporting
To the Audit and Compliance Committee of Novartis AG:
We have performed review procedures on the management and reporting processes for Corporate Citizenship ("CC") and Health, Safety and Environment ("HSE") for the year ended December 31, 2003. We have also performed review procedures on the HSE key figures "Health, Safety and Environment 2003 Data" on pages 64 and 65 and the CC key figures "Employees by Region and Business" found on page 69 and "Female Employees by Business" and "Female Employees by Region" which are found on page 72 of the Novartis Annual Report (the "Report") for the year ended December 31, 2003. Novartis management is responsible for the Report and for the development and maintenance of the internal reporting processes, data and key figures for CC and HSE. Our responsibility is to report on the internal reporting processes, data, and key figures for CC and HSE based on our review procedures.
The scope of our review procedures was to:
Our review procedures included:
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There are no generally accepted international standards for the preparation or assurance of corporate sustainability or corporate citizenship reports. We have therefore based our approach on emerging best practice and the underlying principles within the Proposed International Standards on Assurance Engagements (ISAE) 2000, issued March 2003, and standards promulgated by the Swiss profession. We planned and performed our assurance procedures to obtain a reasonable basis for our conclusions. However, we have not performed an audit according to International Standards on Auditing. Accordingly, we do not express such an opinion.
Our statement should be read in conjunction with the section "HSE Performance and Data Management" on page 63 of the Report which defines the scope of the reporting, the inherent limitations of accuracy and completeness for the HSE information, and the fact that CC management process is in its second year of operation.
Based on our review procedures we conclude that:
From our work, we have provided the following recommendations to the management, which have been agreed:
PricewaterhouseCoopers AG | ||
Dr. Thomas Scheiwiller Basel, January 20, 2004 |
Thomas Frei |
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Corporate Governance
Novartis is fully committed to good corporate governance. Novartis' principles and rules on corporate governance are laid down in the Articles of Incorporation, the Regulations of the Board and the Charters of the Board Committees. The Board's Corporate Governance Committee reviews these principles and rules regularly in the light of prevailing best practices and forwards suggestions for improvement to the full Board for approval.
Group Structure and Shareholders
Novartis AG, a holding company organized under Swiss law, owns directly or indirectly all companies worldwide belonging to the Novartis Group.
The Novartis Group is divided operationally into two divisions: Pharmaceuticals and Consumer Health. The Pharmaceuticals Division is organized into five Business Units: Primary Care, Oncology, Transplantation, Mature Products and Ophthalmics. The six Business Units of the Consumer Health Division are: Sandoz, Over-the-Counter self-medication (OTC), Animal Health, Medical Nutrition, Infant & Baby and CIBA Vision. The business operations of the Business Units are conducted through local Novartis Group companies. The most important Novartis subsidiaries and associated companies are listed in Note 31 to the Group's consolidated financial statements.
There are three Novartis subsidiaries whose shares are traded on public stock exchanges. These are Novartis India Limited, Novartis Pharma S.A.E. (an Egyptian company), and Novartis Pharma (Pakistan) Limited. 49% of the shares of Novartis India Limited are registered for trading and less than 5% of the other two companies are registered for trading. In comparison with the Group structure and in relation to the size of the business of each of these three companies, none are considered significant to the Group as a whole.
Each of these companies is majority owned, indirectly, by Novartis AG.
Additionally, Novartis holds significant investments in two large publicly listed companies:
Further information on the size of each shareholding and the method of consolidation are given in Note 10 to the Novartis Group's consolidated financial statement.
Both Roche and Chiron are associated companies but are independently governed, managed and operated.
The other significant Group subsidiaries and associated companies as shown in Note 31 to the Novartis Group's financial statement are not publicly traded. In December 2002, Novartis AG acquired through a wholly-owned subsidiary in a public tender offer 99.07% of Lek d.d., Ljubljana, Slovenia, a company which at that time was publicly listed on the stock exchange in Ljubljana. In 2003 Novartis AG acquired the remaining 0.93% of the outstanding shares and delisted the shares of Lek d.d. from the Ljubljana stock exchange.
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The largest registered Novartis shareholders are the Novartis Foundation for Employee Participation, registered in Basel, Switzerland (holding 3.3% of the share capital) and Emasan AG, registered in Basel, Switzerland (holding 3.1%). No other shareholder is registered as owner of more than 2% of the issued share capital and there are no cross-holdings equal to or higher than this amount.
Novartis AG has not concluded any shareholders' agreement or other agreement regarding voting or holding of its shares.
Capital Structure
The share capital of Novartis AG is CHF 1 400 735 000, fully paid-in and divided into 2 801 470 000 registered shares of CHF 0.50 nominal value each. Novartis AG has neither authorized nor conditional capital. All shares have equal voting rights. Novartis has not issued participation certificates or non-voting equity securities (Genussscheine). After the repurchase program announced in 2001 was completed with a corresponding capital reduction approved by the General Meeting in 2002, Novartis announced on July 22, 2002, a further share repurchase program up to a total amount of CHF 4 billion using a second trading line on the SWX Swiss Exchange. At the Annual General Meeting on March 4, 2003 a resolution was passed to reduce the capital from CHF 1 412 075 000 to CHF 1 400 735 000 and to cancel the corresponding number of shares repurchased under the program. The repurchase program continued through 2003 and the Board will propose reducing Novartis AG's share capital by amounts corresponding to the nominal value of repurchased shares in 2003 (24 260 000 shares in 2003) at the forthcoming Annual General Meeting. Further information on the development of the share capital structure of Novartis AG during the last 2 years is presented in tabular form in Note 5 to the financial statements of Novartis AG.
Convertible Bonds and Options
Novartis had no convertible bonds outstanding in 2003. In December 2001, Novartis sold a total of 55 million nine- and ten-year call options (Low Exercise Price Options, "LEPOs") and 55 million nine- and ten-year put options on Novartis shares to a third party. On June 26, 2003 Novartis redeemed these equity instruments.
Information about Novartis share options granted for executive and employee compensation is contained in the section on Compensation below and in Note 26 to the Group's consolidated financial statements.
Shareholders' Rights
Each registered share entitles the holder to one vote at the General Meeting. There are no preferential voting shares. Shareholders also have the right to receive dividends, appoint a proxy, convene a General Meeting, place items on the agenda of a General Meeting and hold such other rights as defined in the Swiss Code of Obligations (SCO).
One or more shareholders whose combined shareholdings represent an aggregate nominal value of at least CHF 1 000 000 may demand that an item be included in the agenda of a General Meeting. Such a demand must be made in writing at the latest 45 days before the meeting and shall specify the items and the proposal of such a shareholder.
Legitimization as Shareholder
Persons enrolled in the Novartis share register may exercise the membership rights of registered shares. Registration requires a declaration that the shareholder has acquired the shares in his own name and for his own account.
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According to the Articles of Incorporation, no shareholder shall be registered to vote more than 2% of the issued share capital unless the Board has upon request granted an exemption. So far, such a request has never been denied. The Board may register nominees with the right to vote up to 0.5% of the issued share capital, and in excess of that limit if such nominees disclose particulars of the beneficial owners of these shares.
Groupings formed to circumvent this limitation are treated as one single person or nominee.
The statutory voting restrictions can be cancelled with a two-thirds majority of the shares represented at the General Meeting.
Resolutions and Elections at General Meetings
Shareholders registered at least 20 days prior to the General Meeting may vote their shares at the meeting.
Resolutions of the shareholders at General Meetings are approved with a simple majority of the shares represented at the meeting, except in the following matters which by law (SCO, Art. 704) and our Articles of Incorporation require the approval of two-thirds of all represented shares:
The Company has not adopted any decisions that differ from the rules applicable to it under the Swiss Stock Exchange Act (no opting-up or opting-out).
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The Board of Directors
Members of the Board of Directors(1)
|
Age |
Director since |
Term Expires |
|||
---|---|---|---|---|---|---|
Dr. h.c. Daniel Vasella, MD | 50 | 1996 | 2004 | |||
Prof. Helmut Sihler, JD, PhD | 73 | 1996 | 2004 | |||
Hans-Joerg Rudloff | 63 | 1996 | 2004 | |||
Dr. h.c. Birgit Breuel | 66 | 1996 | 2005 | |||
Prof. Peter Burckhardt, MD | 65 | 1996 | 2005 | |||
Prof. Srikant Datar, PhD | 50 | 2003 | 2006 | |||
Walter G. Frehner | 70 | 1996 | 2004 | |||
William W. George | 61 | 1999 | 2006 | |||
Alexandre F. Jetzer | 62 | 1996 | 2005 | |||
Pierre Landolt | 56 | 1996 | 2005 | |||
Prof. Ulrich Lehner, PhD | 57 | 2002 | 2005 | |||
Heini Lippuner | 70 | 1996 | 2004 | |||
Dr.-Ing. Wendelin Wiedeking | 51 | 2003 | 2006 | |||
Prof. Rolf M. Zinkernagel, MD | 59 | 1999 | 2006 | |||
The average tenure of our Directors is six years and their average age is 61 years. Dr. Daniel Vasella is the only Executive Director. Alexandre F. Jetzer was a member of the Executive Committee until 1999 and supports Novartis' Government Relations under a consultancy agreement. On the basis of the independence criteria listed in the appendix to the Regulations of the Board and Committee Charters effective as of April 15, 2003 the Board has decided that with the exception of Dr. Daniel Vasella and Alexandre F. Jetzer, all Directors are independent and have no material dealings with Novartis AG or other companies of the Novartis Group outside their role as a Director(2). No Director sits on the board of directors of other listed companies with which any Novartis Group company conducts a material amount of business.
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For the last seven years, Novartis has engaged the Harvard Business School (HBS), the employer of Prof. Srikant Datar, PhD, to train Novartis executives in financial and business matters. The compensation paid by Novartis for these programs is not material in comparison with the total revenues of Harvard Business School and, therefore, does not constitute a "material dealing" as defined under US Securities law or the Listing Standards of the New York Stock Exchange (NYSE). Prof. S. Datar was the person at HBS responsible for managing these Novartis programs. Prior to his nomination as Director, Prof. S. Datar relinquished his management responsibilities for these programs and since his nomination as Director has not been separately compensated. Therefore, under the definitions of Director independence in place at the time of his election as a Director, Prof. S. Datar was deemed by the Board to be an Independent Director. New NYSE rules published in 2003 and which will become effective in November 2004 provide for a three-year look-back period on compensation other than Board fees paid by an issuer to its directors. Under this new rule and its extended look-back period, as of November 2004 Prof. S. Datar, due to his professional engagement for Novartis AG prior to his nomination as Director, would not be considered "independent." As a consequence, and to avoid any doubt, in December 2003 Prof. S. Datar stepped down from the Audit and Compliance Committee which requires that all members are independent.
The specific term of office for a Director is determined by the General Meeting on the occasion of his or her election. Each year approximately one-third of all Directors are elected or re-elected. In principle, a Director is to retire after 12 years of service or the reaching of 70 years of age. Nonetheless, the shareholders may re-elect such Directors for additional terms of office. Dr. Daniel Vasella has been elected by the Board as its Chairman and also to serve as Chief Executive Officer. It is the view of the Board that this dual role ensures effective leadership and excellent communication between the shareholders, the Board and Management. The Board has appointed Prof. Helmut Sihler, JD, PhD, as Lead Director, whose responsibility it is to ensure an orderly process in evaluating the performance of the Chairman and CEO and to chair the Board's private sessions (i.e. the meetings of the non-executive Directors). In case of a crisis, he would assume leadership of the Independent Directors.
The Board appointed Prof. Helmut Sihler and Hans-Joerg Rudloff as its Vice Chairmen.
Role and Functioning of the Board
The Board holds the ultimate decision-making authority of Novartis AG for all matters except those reserved by law (SCO, Art. 698) to the shareholders.
Decisions are taken by the Board as a whole, with the support of its four Committees described below (Chairman's Committee, Compensation Committee, Audit and Compliance Committee and Corporate Governance Committee). The primary functions of the Board are:
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The Board has not concluded any contracts with third parties for the management of the Company but has delegated to the Executive Committee the coordination of day-to-day business operations of Group companies. The Executive Committee is headed by the Chief Executive Officer. The internal organizational structure and the definition of the areas of responsibility of the Board and the Executive Committee are set forth in the Board Regulations. The agenda for Board meetings is set by the Chairman. A Director may request that an item be included on the agenda. Board Members are provided with adequate materials to prepare for the items on the agenda in advance of Board meetings.
The Board recognizes the importance of being fully informed on material matters involving the Group and ensures that it has sufficient information to make appropriate decisions through several means:
During 2003, the Board met seven times. Detailed information on each Director's attendance at full Board and Board Committee meetings is provided in the table below.
Once yearly, the Board reviews the performance of the Chairman and CEO and approves the objectives for the following year. The Board of Directors also performs a self-evaluation once a year.
The non-executive, Independent Directors met twice during 2003 in separate sessions chaired by the Lead Director.
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Board Committees
Detailed information on attendance at full Board and Board Committee meetings is as follows:
|
Full Board |
Chairman's Committee |
Compensation Committee |
Audit and Compliance Committee |
Corporate Governance Committee |
|
|||||
---|---|---|---|---|---|---|---|---|---|---|---|
Number of meetings in 2003 | 7 | 8 | 3 | 8 | 2 | ||||||
Dr. h.c. Daniel Vasella, MD | 7 | (1) | 8 | (1) | |||||||
Prof. Helmut Sihler, JD, PhD | 7 | 8 | 3 | (1) | 8 | (1) | 2 | ||||
Hans-Joerg Rudloff | 7 | 8 | 3 | 2 | |||||||
Dr. h.c. Birgit Breuel | 7 | 7 | |||||||||
Prof. Peter Burckhardt, MD | 7 | ||||||||||
Prof. Srikant Datar, PhD(2) | 5 | 5 | |||||||||
Walter G. Frehner | 7 | 7 | |||||||||
William W. George | 7 | 8 | 3 | 2 | (1) | ||||||
Alexandre F. Jetzer | 7 | ||||||||||
Pierre Landolt | 7 | ||||||||||
Prof. Ulrich Lehner, PhD | 7 | 7 | |||||||||
Heini Lippuner | 7 | 8 | |||||||||
Dr.-Ing. Wendelin Wiedeking(2) | 4 | ||||||||||
Prof. Rolf M. Zinkernagel, MD | 7 | 2 | |||||||||
Role and Functioning of the Board Committees
Each Board Committee has a written Charter outlining its duties and responsibilities and a chair elected by the Board. The Board Committees meet regularly and consider meeting agendas determined by the Chair. Board Committee members are provided with adequate materials to prepare for the items on the agenda in advance of meetings.
The Chairman's Committee
The Chairman's Committee consists of the Chairman and Chief Executive Officer, the two Vice Chairmen, one of whom is the Lead Director, and such other members as are elected by the Board from time to time. In 2003, the Committee met eight times.
The Chairman's Committee reviews selected matters falling within the authority of the Board before the latter takes decisions on such matters and, in urgent cases, can take preliminary and necessary actions on behalf of the Board. The Chairman's Committee also interfaces with the Executive Committee, specifically deciding on financial investments and other matters delegated to the Committee by the Board of Directors.
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The Compensation Committee
The Compensation Committee is composed of three independent Directors. In 2003, it convened three times. The Compensation Committee reviews the compensation policies and programs of the Group, including share option programs and other incentive-based compensation before the full Board makes final decisions. It is responsible for reviewing and approving the compensation paid to members of the Executive Committee and other selected key executives, and for reviewing the performance of the Chairman and Chief Executive Officer. The Compensation Committee seeks outside expert advice from time to time to support its decisions and recommendations.
The Audit and Compliance Committee
The Audit and Compliance Committee is composed of four members and in 2003 met eight times. The Board has determined that all the members of the Committee are independent, as defined by the rules of the New York Stock Exchange as well as by the independence criteria of Novartis (see appendix to the Regulations of the Board and Committee Charters), and that its chair, Prof. Helmut Sihler, JD, PhD is adequately qualified in financial management matters. The Audit and Compliance Committee has determined that Prof. Ulrich Lehner, PhD, is independent and possesses the required accounting and financial management expertise required under the rules of the NYSE. Therefore the Board of Directors has appointed him as the Audit and Compliance Committee's Financial Expert. Prof. S. Datar also was designated as a Financial Expert until he voluntarily stepped down from the Committee in December 2003. The Board has also reassured itself that other members of the Committee have sufficient experience and ability in finance and matters of compliance to enable them to adequately discharge their responsibilities.
The Committee's main duties are:
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The Corporate Governance Committee
The Corporate Governance Committee is composed of four independent Directors and met twice in 2003. The Corporate Governance Committee develops corporate governance principles and recommends these to the Board for approval. Its duties include the regular review of the Articles of Incorporation with a view to reinforcing shareholder rights and of the composition and size of the Board and its committees. The Corporate Governance Committee conducts an annual evaluation of the Board as a whole and gives guidance to the Directors on how to avoid potential conflicts of interests.
Further Corporate Governance Matters
Applicable Corporate Governance Standards
The standards on corporate governance implemented and applied at Novartis fully comply with the Directive on Information Relating to Corporate Governance published on July 1, 2002 by the SWX Swiss Exchange. Novartis is also in compliance with the corporate governance standards of the NYSE and applicable US law with two exceptions where Novartis continues to apply Swiss (home country) practices: (i) Swiss Law requires that the external auditors of Novartis be appointed by the General Assembly and not by the Audit and Compliance Committee and (ii) equity compensation plans are not voted at the General Meeting but are decided on by the Executive Committee or the respective committee of the local Novartis Group company. All such plans are established within the policies and programs approved by the Compensation Committee.
Documentation
The following documents describe the Corporate Governance Standards applied by Novartis and are available on the Novartis website: http://www.novartis.com/investors/en/governance.shtml or can be ordered in print from the Corporate Secretary Ingrid Duplain, JD.
Compensation
Non-Executive Directors' Compensation
The Compensation Committee advises the Board of Directors on the compensation of non-executive Directors. Non-executive Directors receive an annual retainer in an amount that varies with the Board and Committee responsibilities of the Director. Directors are eligible to participate in certain of the equity programs which we offer to senior management and selected employees. Directors receive no additional fees for attending meetings. Directors can choose to receive the annual retainer in cash, shares, or a combination thereof. As of January 1, 2003, we no longer offer share options to Directors, or grant shares to Directors in acknowledgement of business performance. Directors are reimbursed for travel and other necessary business expenses incurred in the performance of their services.
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2003 Directors' Compensation
|
Annual Cash Compensation (USD)(1) |
Shares (number) |
||
---|---|---|---|---|
Dr. h.c. Daniel Vasella, MD Chairman's Committee (Chair) |
(please refer to the table on page 97) | |||
Prof. Helmut Sihler, JD, PhD Vice Chairman, Lead Director Chairman's Committee (Member) Compensation Committee (Chair) Audit and Compliance Committee (Chair) Corporate Governance Committee (Member) |
727 566 | | ||
Hans-Joerg Rudloff Vice Chairman Chairman's Committee (Member) Compensation Committee (Member) Corporate Governance Committee (Member) |
18 795 | 11 874 | ||
Dr. h.c. Birgit Breuel Audit and Compliance Committee (Member) |
336 402 | | ||
Prof. Peter Burckhardt, MD | 99 145 | 4 391 | ||
Prof. Srikant Datar, PhD(2) Audit and Compliance Committee (Member) |
199 634 | 3 302 | ||
Walter G. Frehner Audit and Compliance Committee (Member) |
336 402 | | ||
William W. George Chairman's Committee (Member) Compensation Committee (Member) Corporate Governance Committee (Chair) |
246 060 | 4 069 | ||
Alexandre F. Jetzer(3) | 8 673 | 6 756 | ||
Pierre Landolt | 79 707 | 4 965 | ||
Prof. Ulrich Lehner, PhD Audit and Compliance Committee (Member) |
338 073 | | ||
Heini Lippuner Chairman's Committee (Member) |
375 519 | | ||
Dr.-Ing. Wendelin Wiedeking(4) | 167 498 | 2 534 | ||
Prof. Rolf M. Zinkernagel, MD(5) Corporate Governance Committee (Member) |
210 647 | 7 738 | ||
Total | 3 144 121 | 45 629 | ||
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Ownership of Novartis Shares and Share Options by the Non-Executive Directors
In December 2003 the Board of Directors adopted a share ownership guideline, under which non-executive Directors are required to own at least 5 000 Novartis shares within three years after joining the Board. The total number of Novartis shares owned as of December 31, 2003 by the non-executive Directors and persons closely linked to them was 297 040. "Persons closely linked to them" are (i) their spouse, (ii) their children below age 18, (iii) any legal entities that they own or otherwise control, or (iv) any legal or natural person who is acting as their fiduciary. No non-executive Director owned 1% or more of our outstanding shares. As of December 31, 2003, the individual ownership of Novartis shares by the non-executive Directors (including persons closely linked to them) was as follows:
Beneficial Owner |
|
Number of Shares Owned Directly or Indirectly |
||
---|---|---|---|---|
Dr. h.c. Daniel Vasella, MD | (please refer to the table on page 98) | |||
Prof. Dr. Helmut Sihler | 34 304 | |||
Hans-Joerg Rudloff | 97 954 | |||
Dr. h.c. Birgit Breuel | 4 160 | |||
Prof. Dr. Peter Burckhardt | 10 972 | |||
Prof. Srikant Datar, PhD | 3 302 | |||
Walter G. Frehner | 13 420 | |||
William W. George | 35 000 | |||
Alexandre F. Jetzer | 54 876 | |||
Pierre Landolt | 200 | |||
Prof. Dr. Ulrich Lehner | 120 | |||
Heini Lippuner | 26 060 | |||
Dr.-Ing. Wendelin Wiedeking | 3 534 | |||
Prof. Dr. Rolf M. Zinkernagel | 13 138 | |||
Total | 297 040 | |||
As of the same date, the non-executive Directors held a total of 365 421 Novartis share options. The number of share options granted and exercise prices have been adjusted to reflect the share split of 1:40 in 2001. Broken down by grant year since 1999 the number of options held are:
Grant Year |
Options Held (number) |
Conversion Rate |
Exercise Price (CHF) |
Term Life (years) |
||||
---|---|---|---|---|---|---|---|---|
2002 | 125 541 | 1:1 | 62.0 | 9 | ||||
2001 | 90 480 | 1:1 | 70.0 | 9 | ||||
10 000 | 1:1 | 62.6 | 10 | |||||
2000 | 92 200 | 1:1 | 51.3 | 9 | ||||
1999 | 17 200 | 1:1 | 68.4 | 9 | ||||
Compensation for Former Directors and Executives
In 2003, a total amount of USD 140 824 was paid to four former members of the Board and USD 2 350 630 to three former Executives.
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Report of the Compensation Committee
Executive Compensation Policy
Novartis' compensation programs are designed to attract, retain and motivate the high caliber executives, managers and associates who are critical to the success of the corporation. Globalization of labor markets for specialists and executives has led to a rapid convergence between US and European principles of compensation and a stronger focus on long-term, equity based forms of programs. Overall, the intention of the programs is to provide compensation opportunities that:
Total individual compensation at target performance level is aimed at the median of comparable companies of our industries. Annual cash and equity incentive awards are based on both overall Group or affiliate company and individual performance. Long-term incentive awards include share options and other forms of equity participation. Executive compensation programs strongly encourage significant levels of share ownership and put a high portion of total compensation at risk, subject to individual and company performance and the appreciation of Novartis shareholder value. In addition, to further strengthen the Company's ownership philosophy, the Board of Directors established in 2003 share ownership guidelines under which the Executives are required to own a multiple of their base salary in Novartis shares.
Compensation Programs Descriptions
The total compensation package for each executive consists of the three basic components discussed in more detail below. Target salary and incentive levels are set at the median of the peer group, based on available public data and the analysis of external compensation advisors. Actual compensation levels of individuals may in some instances surpass the median of the market, reflecting superior results. The Compensation Committee believes that this position is consistent with the performance of the Group and its evaluation of the external market.
Salaries: The 2003 salaries of the Executive Committee members are shown in the "Salary" column of the 2003 Summary Compensation Table on p. 112.
Annual Incentive Awards: Under the terms of the Novartis Annual Incentive Plan, awards are made each year based on the achievement of predetermined Group and individual performance objectives. Below a threshold level of performance, no awards may be granted under the plan.
Long-Term Incentive Compensation: Long-term incentive compensation, in the form of share options, performance-contingent shares, and restricted shares, comprises a major portion of the total compensation package for executives. In any given year, an executive may be offered share options, performance-contingent shares, and/or restricted shares. Long-term incentives are targeted at the median of the competitive market, with above-average and superior performance resulting in long-term compensation above the targeted amounts. Below a threshold level of performance, no awards may be granted under the plan. Share options are also granted to selected employees.
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Share Options
Under the Novartis Share Option Plan, Directors (through 2002), executives and other selected employees of Group companies (collectively, the "Participants") may be granted options to purchase Novartis shares. These options are granted both in recognition of past performance and as an incentive for future contributions by the Participants. They allow the Participants to benefit as the price of the shares increases over time, and so provide a long-term incentive for improvements in our profitability and success. If a Participant voluntarily leaves Novartis, options not yet vested generally forfeit. The options under the Novartis Share Option Plan have an exercise period of seven years, which begins after the lapse of a two-year vesting period, and an exchange ratio of 1:1.
Introduced in 2001, the Novartis US American Depositary Shares (ADS) Incentive Plan grants options to US-based Directors (through 2002), officers and other selected employees thus replacing a Share Appreciation Rights Plan. Its terms and conditions are substantially equivalent to the Novartis Share Option Plan.
In order to further align the Novartis Share Option Plan and the US ADS Incentive Plan, as of 2004, (a) the vesting period for the Novartis Share Option Plan has been changed to a three-year vesting period, and (b) Novartis will introduce tradable stock options in ADS in the US.
Share Plans: We offer to certain executives a Long-Term Performance Plan, a Leveraged Share Savings Plan and a Restricted Share Plan. These plans are designed to foster long-term commitment of eligible employees by aligning their incentives with our performance.
Under the Long-Term Performance Plan, participants are awarded the right to earn Novartis shares. Actual payouts, if any, are determined with the help of a formula which measures, among other things, our performance using economic value added relative to predetermined strategic plan targets over a three-year period. Additional functional objectives may be considered in the evaluation of performance. If performance is below the threshold level of the predetermined targets, then no shares will be earned. To the extent the Group's performance exceeds the threshold performance level, participants are eligible to receive an increasing amount of Novartis shares, up to the maximum cap. Payout of shares is conditioned on the participant remaining in the employ of a Novartis affiliate at the time of payout.
There are two separate Leveraged Share Savings Plans.
Participants can choose to receive part or all of their Annual Incentive Award in shares. Shares awarded under this plan are blocked for five years after the grant date. After expiration of the blocking period, the respective shares are matched with an equal number of shares.
In 2001 the Board approved a new employee share ownership plan under which Swiss-based employees receive part of their income up to a specified amount in Novartis shares. After the expiration of a blocking period of three years the award is matched with half a share for each share held.
Generally, no matching shares will be granted if an employee voluntarily leaves Novartis prior to expiration of the blocking period.
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Under the Restricted Share Plan, employees may be granted restricted share awards either as a result of a general grant or as a result of an award based on having met certain performance criteria. Shares granted under this Plan generally have a five-year vesting period. If a participant voluntarily leaves Novartis, shares not vested generally forfeit.
Employee Benefits: Employee benefits offered to executives are designed to be competitive and to provide a safety-net against the financial catastrophes that can result from disability or death, and to provide a reasonable level of retirement income based on years of service with Novartis.
Evaluation of the Executive Committee Members' Performance
The Compensation Committee and the Board of Directors meet without the Chairman and CEO to evaluate his performance, and with the Chairman and CEO to evaluate the performance of other Executive Committee members. The bonuses and long-term incentives for 2002 and the base salaries for 2003 were discussed and approved at the meetings of the Compensation Committee held in January 2003. The decisions on compensation of Executive Committee members were mainly based on individual performance evaluations and also take into account current market conditions. In 2003, the Compensation Committee considered management's achievement of short and long-term goals, including revenue growth, economic value creation (operating and net income, earnings per share and economic value added) and ongoing efforts to optimize organizational effectiveness and productivity. The Compensation Committee also takes into consideration management's responses to the changes in the global marketplace and the strategic position of the Group. The performance measures were weighted subjectively by each member of the Compensation Committee.
Summary
The Compensation Committee believes that the compensation practices and compensation philosophy of Novartis align executive and shareholder interests. We believe that the actions taken over the past year have allowed the Company to attract, retain and motivate the key talent Novartis needs to continue to compete and provide a strong return to shareholders.
The Compensation Committee of the Board of Directors
Prof. Helmut Sihler, JD, PhD (Chairman)
Hans-Joerg Rudloff
William W. George
Executive Compensation
In 2003, there were 20 Executive Committee members, Permanent Attendees to the Executive Committee and Business Unit Heads ("Executives"), including those who retired or terminated their employment in 2003. In total, the Executives received USD 10 781 000 in salaries and USD 4 025 000 in cash bonuses. The number of share options granted was 3 252 937 and the number of shares granted was 487 853. An additional USD 1 089 000 was set aside for their pension, retirement and similar benefits. Compensation represents all payments made in 2003; however, cash bonuses and long-term compensation are based on 2002 business performance. The following summary compensation table provides details on the 2003 compensation of the Executive Committee members.
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2003 Summary Compensation Table
|
Annual Compensation |
Long-Term Compensation |
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name and Principal Position |
Salary (USD) |
Cash Bonus (USD) |
Restricted Share Awards (number)(1) |
Unrestricted Share Awards (number)(2) |
Share Options (number)(3) |
All Other Compensation (USD)(4) |
Total Compensation (USD)(5) |
|||||||
Dr. h.c. Daniel Vasella, MD(6) Chairman & CEO |
2 228 463 | | 122 825 | 122 826 | 1 399 254 | 122 298 | 14 431 040 | |||||||
Urs Baerlocher, JD(6) Head of Legal & General Affairs |
545 973 | | 30 389 | 10 134 | 153 918 | 122 083 | 2 053 948 | |||||||
Raymund Breu, PhD(6) Chief Financial Officer |
699 490 | | 23 030 | 13 818 | 419 777 | 117 804 | 3 104 301 | |||||||
Paul Choffat, JD(6) Head of Consumer Health |
557 116 | 250 702 | 6 909 | 11 516 | 125 933 | 120 515 | 1 995 627 | |||||||
Thomas Ebeling(6) Head of Pharmaceuticals |
742 821 | 854 244 | 10 000 | 15 354 | 429 105 | 521 015 | 4 538 453 | |||||||
Prof. Mark C. Fishman Head of Pharmaceuticals Research |
850 000 | | 5 745 | 6 023 | 133 648 | 34 781 | 2 374 579 | |||||||
Norman C. Walker(6),(7) Head of Human Resources |
297 128 | 311 985 | | 9 213 | 70 523 | 101 252 | 1 303 421 | |||||||
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Distribution of Share Options Granted to Employees
Under the Novartis Share Option Plan and the Novartis US ADS Incentive Plan described above, a total number of 29.8 million share options with an exchange ratio of 1:1 were granted to 8 028 Participants in 2003. 11% of the overall number of share options were granted to the Executives.
As of December 31, 2003, a total number of 61.6 million share options were outstanding, providing the right to an equal number of shares, which corresponds to 2.2% of the nominal outstanding share capital of Novartis AG.
Ownership of Novartis Shares and Share Options by the Executives
The total number of Novartis shares owned as of December 31, 2003 by the Executives and persons closely linked to them was 940 117. "Persons closely linked to them" are (i) their spouse, (ii) their children below the age of 18, (iii) any legal entities that they own or otherwise control, and (iv) any legal or natural person who is acting as their fiduciary. No Executive owned 1% or more of our outstanding shares.
As of December 31, 2003, the individual ownership of Novartis shares of the Executive Committee members (including persons closely linked to them) was as follows:
Beneficial Owner |
Number of shares owned Directly or Indirectly |
|
---|---|---|
Dr. h.c. Daniel Vasella, MD | 401 469 | |
Urs Baerlocher, JD | 129 536 | |
Raymund Breu, PhD | 189 496 | |
Paul Choffat, JD | 7 659 | |
Thomas Ebeling | 54 522 | |
Prof. Mark C. Fishman | 5 745 | |
Total | 788 427 | |
As of December 31, 2003, the 20 Executives held a total of 6 361 294 Novartis share options. The number of share options and exercise price were adjusted to reflect the share split of 1:40 in 2001. Broken down by grant year since 1999, the number of share options held are:
Grant Year |
Options Held (number)(1) |
Conversion Rate |
Exercise Price (CHF) |
Term Life (years) |
||||
---|---|---|---|---|---|---|---|---|
2003 | 3 182 414 | 1:1 | 49.0 | 9 | ||||
2002 | 2 124 250 | 1:1 | 62.0 | 9 | ||||
2001 | 490 070 | 1:1 | 70.0 | 9 | ||||
2000 | 430 200 | 1:1 | 51.3 | 9 | ||||
1999 | 101 000 | 1:1 | 68.4 | 9 | ||||
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Swiss Employee Benefit Plans
|
Years of Service |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Base Salary (CHF) |
15 |
20 |
25 |
30 |
35 |
40 |
||||||
100 000 | 17 076 | 22 764 | 28 464 | 34 152 | 39 840 | 45 528 | ||||||
140 000 | 26 076 | 34 764 | 43 464 | 52 152 | 60 840 | 69 528 | ||||||
180 000 | 35 076 | 46 764 | 58 464 | 70 152 | 81 840 | 93 528 | ||||||
220 000 | 44 076 | 58 764 | 73 464 | 88 152 | 102 840 | 117 528 | ||||||
over 220 000 | 44 076 | 58 764 | 73 464 | 88 152 | 102 840 | 117 528 | ||||||
The Swiss Pension Fund is a defined benefit fund that provides retirement benefits and risk insurance (covering death or disability). The Swiss Pension Fund is funded by contributions from Group companies and the insured employees. The Swiss Pension Fund insures remuneration up to a maximum of CHF 220 000 per year. The maximum retirement pension is 60% of the insured remuneration after 40 years of contribution. The table above shows the annual pension benefit by Base Salary and Years of Service. In 2003 Novartis contributed CHF 11 700 for each of the Swiss-based Executive Committee members.
The Swiss Management Pension Fund is a defined contribution plan and provides retirement benefits and risk insurance (covering death or disability) for components of remuneration not covered by the Swiss Pension Fund. Employees exceeding the maximum insurable remuneration of the Swiss Pension Fund are eligible for the Swiss Management Pension Fund. The benefits under the Swiss Management Pension Fund are granted in addition to those of the Swiss Pension Fund. The Swiss Management Pension Fund is funded through contributions by Novartis and the employee.
US Based Employee Pension Plan
The Pension Plan for US based employees of Novartis Corporation (Pension Plan) is a funded, tax-qualified, noncontributory defined-benefit pension plan that covers certain employees of Novartis Corporation and its United States affiliates, including Prof. Mark C. Fishman. The Pension Plan provides for different pension formulas depending on which Novartis company is the employer of a particular employee. The pension formula in which Prof. Mark C. Fishman participates under the Pension Plan is a pension equity (PEP) formula. Benefits under the PEP formula are based upon an employee's highest average earnings for a five calendar-year period during the last ten calendar years of service with Novartis and the employee's accumulated PEP credits (expressed as a percentage of final average earnings, and ranging from 2% to 13% for each year of service based on the employee's attained age in a particular year), and are payable after retirement in the form of an annuity or a lump sum. The amount of annual earnings covered by the Pension Plan is generally equal to the employee's base salary and annual bonus. The amount of annual earnings that may be considered in calculating benefits under the Pension Plan is limited by law. For 2003, the annual limitation was USD 200 000.
Novartis Corporation and its United States affiliates also maintain various unfunded supplemental pension plans that each provide its employees with an amount substantially equal to the difference between the amount that would have been payable under the Pension Plan in the absence of legislation limiting pension benefits and the annual earnings that may be considered in calculating pension benefits under tax-qualified pension plans, and the amount actually payable under the Pension Plan.
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Personal Loans, Change of Control and Severance Agreements
Under the provisions of the US Sarbanes-Oxley Act, enacted in July 2002, no new loans may be given to Executives. Loans granted prior to the act were repaid during 2003. As of December 31, 2003 no loans were outstanding. Under a change of control provision, four executives have provisions whereby their normal contractual severance of 36 months is extended by 24 months during the 12 months following a change of control. One executive has a provision whereby the normal contractual severance of 12 months is extended by 12 months during the 12 months following a change of control. Between January 1, 2003 and December 31, 2003, three Executives left the company; under the terms of the agreements with these Executives, USD 1 795 000 were paid as severance.
Performance Graph
This graph compares our total shareholder returns, the Morgan Stanley World Pharmaceuticals Index (MSWPI), and the Swiss Market Index (SMI). The graph assumes CHF 100 invested at Novartis per share closing price on December 31, 1995, in Novartis shares and each of the indices.
|
Dec 95 |
Dec 96 |
Dec 97 |
Dec 98 |
Dec 99 |
Dec 00 |
Dec 01 |
Dec 02 |
Dec 02 |
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Novartis | 100 | 147 | 244 | 281 | 247 | 317 | 269 | 230 | 260 | |||||||||
MSWPI | 100 | 142 | 221 | 292 | 302 | 380 | 334 | 229 | 237 | |||||||||
SMI | 100 | 122 | 197 | 228 | 245 | 268 | 215 | 158 | 191 | |||||||||
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Report of the Audit and Compliance Committee
The Audit and Compliance Committee has reviewed the Group's financial reporting process on behalf of the Board of Directors. Management is responsible for creating the financial statements and managing the reporting process, including the system of internal controls by which those statements are created.
For each quarterly and annual financial release, management's Disclosure Committee reviews the release for accuracy and completeness of the release's disclosures. The decisions taken by the Disclosure Committee are reviewed with the Audit and Compliance Committee before publication of the financial release.
The internal audit function, which reports to the Chairman and works closely with the Audit and Compliance Committee, reviews the effectiveness, efficiency and appropriateness of the internal control systems, particularly regarding the protection of assets, the completeness and accuracy of operational and financial information (with emphasis on internal reporting) and the adherence to Novartis Group guidelines.
The independent auditors, PricewaterhouseCoopers AG (PwC), are responsible for expressing an opinion on the conformity of the audited financial statements with international financial reporting standards and compliance with Swiss law. The Audit and Compliance Committee is responsible for overseeing the conduct of these activities by the Group's management and the independent auditors. On behalf of the Board of Directors, the Audit and Compliance Committee nominates the independent auditor for election at the Shareholders' Meeting.
During 2003, the Audit and Compliance Committee held eight meetings. PwC attended all meetings of the Audit and Compliance Committee and all matters of importance were discussed. PwC also attended one meeting of the Board of Directors of the Group. PwC also provided to the Audit and Compliance Committee the written disclosures required by US Independence Standards Board Standard No. 1 (Communications with Audit Committees), and the Committee and the independent auditors have discussed the auditors' independence from the Group and its management, including the matters in those written disclosures.
Based upon the reviews and discussions with management and the independent auditors referred to above, the Audit and Compliance Committee recommended to the Board of Directors, and the Board approved, inclusion of the audited financial statements in the Group's Annual Report for the year ended December 31, 2003.
Duration of the Mandate and Terms of Office of the Independent Auditors
PwC assumed the existing auditing mandate for Novartis in 1996. The head auditors responsible for the mandate, Mr. James Kaiser and Mr. Daniel Suter, began serving in their roles in 2002 and 2003, respectively.
Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors
The Audit and Compliance Committee's policy is to pre-approve all audit and non-audit services provided by PwC. These services may include audit services, audit-related services, tax services and other services, as described below.
Pre-approval is detailed as to the particular service or categories of services, and is subject to a specific budget.
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Additional services may be pre-approved on an individual basis. PwC and management report to the Audit and Compliance Committee regarding the extent of services provided in accordance with this pre-approval and the fees for the services performed to date on a quarterly basis. The Audit and Compliance Committee may also pre-approve services on a case-by-case basis.
Independent Auditor Fees
The following fees were charged for professional services rendered by PwC for the 12-month period ended December 31:
(USD thousands) |
2003 |
2002 |
||
---|---|---|---|---|
Audit Services | 13 360 | 10 821 | ||
Audit Related Services(1) | 6 323 | 1 140 | ||
Tax Services | 2 235 | 6 828 | ||
Other Services | 2 742 | 1 916 | ||
Continuing Services | 24 660 | 20 705 | ||
Services divested to IBM/Mellon(2) | 23 230 | |||
Total | 24 660 | 43 935 | ||
Audit Services are defined as the standard audit work that needs to be performed each year in order to issue an opinion on the consolidated financial statements of the Group and to issue reports on the local statutory financial statements. It also includes services that can only be provided by the Group auditor such as auditing of non-recurring transactions and application of new accounting policies, audits of significant and newly implemented system controls, pre-issuance reviews of quarterly financial results, consents and comfort letters and any other audit services required for US Securities and Exchange Commission or other regulatory filings.
Audit Related Services include those other assurance services provided by auditors but not restricted to those that can only be provided by the auditor signing the audit report. They comprise amounts for services such as acquisition due diligence, audits of pension and benefit plans, contractual audits of third party arrangements, assurance services on corporate citizenship reporting, and consultation regarding new accounting pronouncements.
Tax Services represent tax compliance and other services and expatriate and executive tax return services.
Other Services consist of actuarial services for pension and employee benefit plans. As required by the Sarbanes-Oxley Act, PwC can no longer provide certain of these services after May 2004. The total of audit related, tax and other services was USD 11 300 000 for 2003 and USD 33 114 000 for 2002.
Prof.
Helmut Sihler, JD, PhD
January 20, 2004
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Dr. h.c. Daniel Vasella, MD
Chairman and CEO,
Swiss, age 50
Prof. Helmut Sihler, JD, PhD
Vice Chairman and Lead Director,
Austrian, age 73
Hans-Joerg Rudloff
Vice Chairman,
German, age 63
Dr. h.c. Birgit Breuel
German, age 66
Prof. Peter Burckhardt, MD
Swiss, age 65
Prof. Srikant Datar, PhD
Indian, age 50
Walter G. Frehner
Swiss, age 70
William W. George
American, age 61
Alexandre F. Jetzer
Swiss, age 62
Pierre Landolt
Swiss, age 56
Prof. Ulrich Lehner, PhD
German, age 57
Heini Lippuner
Swiss, age 70
Dr.-Ing. Wendelin Wiedeking
German, age 51
Prof. Rolf M. Zinkernagel, MD
Swiss, age 59
Honorary Chairmen
Alex Krauer, PhD
Marc Moret, PhD
Dr. h.c. Louis von Planta, JD(1)
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Corporate Secretary
Ingrid Duplain, JD
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Dr. h.c. Daniel Vasella, MD Swiss, age 50
Daniel Vasella graduated with a MD from the University of Bern in 1979. After holding a number of medical positions in Switzerland, he joined Sandoz Pharmaceuticals Corporation in the USA in 1988. From 1993 to 1995, Daniel Vasella advanced from Head of Corporate Marketing and Senior Vice President and Head of Worldwide Development to Chief Operating Officer of Sandoz Pharma Ltd. In 1995 and 1996, Daniel Vasella was a member of the Sandoz Group Executive Committee and Chief Executive Officer of Sandoz Pharma Ltd. After the merger that created Novartis in 1996, Daniel Vasella served as President and Chairman of the Executive Committee. In 1999, he additionally was appointed Chairman of the Board of Directors. Daniel Vasella is also a member of the Board of Directors of Pepsico, Inc., United States. In addition, he is a member of the International Board of Governors of the Peres Center for Peace in Israel and a member of several industry associations and educational institutions, including the International Business Leaders Advisory Council for the Mayor of Shanghai. In 2002, Dr. Vasella was awarded an honorary doctorate by the University of Basel.
Prof. Helmut Sihler, JD, PhD Austrian, age 73
Helmut Sihler studied philology and law in Graz, Austria and Burlington, Vermont (US) and graduated with a PhD in philology and a JD. In 1957, he joined Henkel KGaA, Germany, initially holding several positions in the marketing department for consumer goods. From 1980 to 1992, Helmut Sihler was Chairman of the Central Board of Management of Henkel KGaA. In the years 1988 and 1989, Helmut Sihler was President of the Association of the German Chemical Industry. In 1983, Helmut Sihler was elected to the Board of Ciba-Geigy AG and became a Director and Vice Chairman of Novartis after its creation in 1996. Since 1999, Helmut Sihler has acted as Novartis AG's Lead Director. In the same year, he became a member of the newly formed Chairman's Committee and the Compensation Committee; he also acts as Chairman of the Audit and Compliance Committee and has been a member of the Corporate Governance Committee since 2001. Helmut Sihler was ad interim CEO of Deutsche Telekom AG, Germany, from July to November 2002, and he is Chairman of the Supervisory Board of Porsche AG, Germany.
Hans-Joerg Rudloff German, age 63
Hans-Joerg Rudloff studied economics at the University of Bern and graduated in 1965. He joined Credit Suisse in Geneva and moved to New York in 1968 to join the investment banking firm of Kidder Peabody Inc. He was in charge of the Swiss operation and was elected Chairman of Kidder Peabody International and a member of the Board of Kidder Peabody Inc. in 1978. In 1980 he joined Credit Suisse First Boston and was elected Vice Chairman in 1983 and Chairman and CEO in 1989. From 1986 to 1990 Hans-Joerg Rudloff was also a member of the Executive Board of Credit Suisse in Zurich in charge of all securities and capital market departments. In 1990 he became a member of the Executive Board of CS First Boston and a member of the CS Holding Board. From 1994 to 1998 Hans-Joerg Rudloff was Chairman of MC-BBL in Luxembourg and joined Barclays Capital in 1998 where he is presently Chairman of the Executive Committee. In 1994, Hans-Joerg Rudloff was elected to the Board of Directors of Sandoz AG and served as its Vice Chairman from 1995 to 1996, a position that he has also held for Novartis AG since its formation in 1996. In 1999, he became a member of the Chairman's Committee and the Compensation Committee and since 2002 he has been a member of the Corporate Governance Committee. Hans-Joerg Rudloff also serves on a number of boards of other companies, including the Boards of Directors of the TBG Group (Thyssen-Bornemisza Group), Monaco, Marcuard S.A., Geneva, and RBC, Russia, the Advisory Board of Landeskreditbank Baden-Württemberg, Germany, and EnBW (Energie Baden-Württemberg), Germany. He is also on the Advisory Board of the MBA program of the University of Bern, Switzerland.
105
Dr. h.c. Birgit Breuel German, age 66
Birgit Breuel studied politics at the Universities of Hamburg, Oxford and Geneva. She was Minister of Economy and Transport (1978-1986) and Minister of Finance (1986-1990) of the Land Niedersachsen (Lower Saxony), the second largest state of Germany. In 1990, Birgit Breuel was elected to the Executive Board of the Treuhandanstalt, which was responsible for the privatization of the former East Germany's economy; in 1991, she also became the President of the Treuhandanstalt. From 1995 to 2000, she acted as the General Commissioner and CEO of the world exhibition EXPO 2000 in Hannover, Germany. In 1994, Birgit Breuel was elected to the Board of Directors of Ciba-Geigy AG and has served as a Director of Novartis AG since its formation in 1996. In 1999, she became a member of the Audit and Compliance Committee. Birgit Breuel is also a member of the Supervisory Board of Gruner+Jahr AG, Hamburg, Germany.
Prof. Peter Burckhardt, MD Swiss, age 65
After studying in Basel and Hamburg, Peter Burckhardt graduated with a MD from the University of Basel in 1965. He trained from 1966 to 1978 in internal medicine and endocrinology, mainly at the University Hospital of Lausanne, Switzerland, and the Massachusetts General Hospital, Boston US. Peter Burckhardt was nominated Chief of Clinical Endocrinology in 1978, and full Professor of Internal Medicine and Chairman of the Department of Internal Medicine at the University Hospital of Lausanne in 1982. Since 1992, he has been the Head of the Medical Service at the same University. Since 1982 Peter Burckhardt has been the Chairman of the Novartis- (formerly Sandoz-) Foundation for Biomedical Research in Switzerland, and was elected in 1996 to the Board of Directors of the newly formed Novartis AG. In addition to his activities as a clinician and academic teacher, Peter Burckhardt is conducting clinical research, mainly in bone diseases and calcium metabolism. He has authored more than 300 scientific publications and is an editorial board member of several international scientific journals. He is treasurer of the International Foundation of Osteoporosis, and is a former president of the Swiss Internist's Society and member of the Appeal Committee of the Swiss Office for Drug Control. Peter Burckhardt was board member of numerous scientific societies including the Swiss Societies of Nutrition, Clinical Chemistry, Endocrinology, Bone and Mineral Research, and the Committee for Endocrinology of the European Community. Since 1990, he has been the organizer and chairman of the International Symposia on Nutrition and Osteoporosis.
Prof. Srikant Datar, PhD Indian, age 50
In 1973 Professor Srikant Datar graduated with distinction in mathematics and economics at the University of Bombay. After his studies he worked as Accountant, Planner as well as Visiting Professor and Professor at the Universities of Carnegie Mellon, Stanford and Harvard in the US. He is a Chartered Accountant and holds two masters degrees and a PhD from Stanford University. Srikant Datar holds the Arthur Lowes Dickinson Professorship at Harvard University. He is currently the Senior Associate Dean for Executive Education at the Harvard Business School. His research interests are in the areas of cost management, measurement of productivity, new product development, time-based competition, incentives and performance evaluation. He is the author of many scientific publications and has received several academic awards and honors. Srikant Datar has advised and worked with numerous renowned firms such as Du Pont, General Motors and Mellon Bank in research, development and training. He is also a member of the Board of Voyan Technology Inc., Santa Clara, California, and of Harvard Business School Interactive, Boston, Massachusetts.
106
Walter G. Frehner Swiss, age 70
After completing commercial school and an apprenticeship at the Bernese Cantonal Bank in Interlaken, Walter G. Frehner broadened his experience both in Switzerland and abroad. In 1958 he joined Swiss Bank Corporation (now UBS) where he held a number of increasingly senior positions. He was appointed General Manager and member of the Executive Board in 1978, President of the Executive Board (CEO) in 1987 and Chairman of the Board of Directors in 1993 from which position he retired in 1996. Walter G. Frehner has been a member of the Board of Directors of Ciba-Geigy AG since 1994 and of Novartis AG since the merger in 1996. In 2001, he became a member of the Audit and Compliance Committee. He is also a member of the Board of Directors of Bâloise Holding AG, Basel, Switzerland, where he is also the Vice Chairman.
William W. George American, age 61
William W. George received his BSIE from Georgia Institute of Technology in 1964 and his MBA from Harvard University in 1966. From 1966 to 1969, he worked in the US Department of Defense as special assistant to the Secretary of the Navy and as assistant to the Comptroller. After having served as President of Litton Microwave Cooking Products, William W. George held a series of executive positions with Honeywell from 1978 to 1989. Thereafter he served as President and Chief Operating Officer of Medtronic, Inc. in Minneapolis, and, from 1991 to 2001, as its Chief Executive Officer. From 1996 to 2002, he was Medtronic's Chairman. In 1999, William W. George was elected as a member of the Board of Directors of Novartis AG. In 2001, he became a member of the Chairman's Committee and the Chairman of the Corporate Governance Committee. William W. George is a member of the Boards of Directors of Goldman Sachs and Target Corporation (formerly Dayton Hudson). He is Senior Lecturer at Harvard Business School, having served as Executive-in-Residence at Yale School of Management and Professor of Leadership and Governance at IMD International in Lausanne, Switzerland. In addition, he is a member of the Board of Directors of Harvard Business School, National Association of Corporate Directors, Carnegie Endowment for International Peace and Minneapolis Institute of Arts.
Alexandre F. Jetzer Swiss, age 62
Alexandre F. Jetzer studied law and economics at the University of Neuchâtel, Switzerland and is a licensed attorney. After more than ten years as General Secretary of the Swiss Federation of Commerce and Industry (Vorort), Alexandre F. Jetzer joined Sandoz in 1980. In 1981 he became Member of its Group Executive Committee in the capacity of Chief Financial Officer (CFO) and, as of 1990, as Head of Management Resources and International Coordination. From 1995 to 1996, he was Vice Chairman and Chief Executive Officer of Sandoz Pharmaceuticals Corporation in East Hanover, New Jersey (US). From the time of the merger in 1996 until 1999, he was a member of the Novartis Executive Committee and Head of International Coordination, Legal & Taxes. Alexandre F. Jetzer has served as a Director of Novartis AG since its formation in 1996. He is also a member of the Board of Directors of Clariden Bank, Zurich, Switzerland.
107
Pierre Landolt Swiss, age 56
Pierre Landolt graduated with a Bachelor of Law degree from the University of Paris-Assas. From 1974 to 1976, he worked for Sandoz Brazil. In 1977, he acquired an agricultural estate in Brazil, cultivating organic tropical fruit as well as producing dairy products. In 1989, he founded a firm for irrigation systems. In the same year, he became the main associate and director of a bank in São Paulo. Since 1997 Pierre Landolt has been Associate and Chairman of Axial Par Ltda, São Paulo, a company investing in sustainability. In 2000, he was co-founder of Eco Carbone LLC, Delaware, US, a company focused on the development of carbon sequestration processes in Europe, Africa and South America. In 1986, Pierre Landolt was elected as a member of the Board of Directors of Sandoz AG and he has served as a Director of Novartis AG since its formation in 1996. Pierre Landolt is the President of the Sandoz Family Foundation, Glaris, Switzerland, and the Chairman of the Board of Directors of Landolt Kapital SA, Pully, Switzerland, and of Emasan AG, Basel, Switzerland. He is also a member of the Board of Directors of Syngenta AG, and of the Syngenta Foundation for Sustainable Agriculture, both in Basel, Switzerland. In addition, he serves as Chairman of the Board of Directors of Curacao International Trust Company, Curacao, Netherlands Antilles, Vaucher Manufacture Fleurier SA., Fleurier, Switzerland (Chairman), and as Vice Chairman of the Boards of Directors of Parmigiani, Mesure et Art du Temps S.A., Fleurier, Switzerland, and the Fondation du Montreux Jazz Festival, Montreux, Switzerland.
Prof. Ulrich Lehner, PhD German, age 57
Ulrich Lehner studied business administration and mechanical engineering in Darmstadt, Germany. After completing his studies in 1972, he was a teaching and research assistant at the Institute for Business Administration at the Darmstadt Technical University. He earned a Doctorate in Economics in 1975. From 1975 to 1981, Ulrich Lehner was an auditor with Deutsche Treuhand-Gesellschaft AG in Düsseldorf. In 1981, he joined Henkel KGaA as Head of Domestic Affairs in the Central Accounting/Tax Department. After heading the Controlling Department of Fried. Krupp GmbH in Essen, Germany, from 1983 to 1986, he returned to Henkel KGaA as Finance Director. From 1991 to 1993, Ulrich Lehner headed the then-formed Management Holding, Henkel Asia-Pacific Ltd., in Hong Kong. From 1994 to 1995, he served Henkel KGaA, Düsseldorf, as Corporate Vice President of the Finance and Controlling Department, and, from 1995 to 2000, as Executive Vice President, Finance/Logistics. He was appointed Deputy President in 1999 and President and CEO of Henkel KGaA in 2000. Ulrich Lehner was elected to the Board of Directors of Novartis AG in 2002. He is a member of the Audit and Compliance Committee. He also serves as a member of the Board of Directors of Dresdner Bank, Luxembourg, Luxembourg, of Ecolab Inc., St. Paul, USA, and E.ON AG, Düsseldorf, Germany. In addition, he is a member of the Advisory Board of Dr. August Oetker KG, Bielefeld, Germany, and of Krombacher Brauerei, Krombach, Germany. He is an Honorary Professor at the University of Münster, Germany.
108
Heini Lippuner Swiss, age 70
After completing his commercial studies in St. Gallen, Switzerland, Heini Lippuner began his career with Geigy Ltd in the Dyestuffs Division. Following a number of foreign assignments, he headed the Dyestuffs and Chemicals Division in Germany from 1968 to 1972. He served as a member of the worldwide Dyestuffs and Chemicals Division's management committee of Ciba-Geigy Ltd from 1973 to 1982, and became the Head of this Division in 1982. In 1986, Heini Lippuner became a member of the Executive Committee of the Ciba-Geigy Group and took over as its Chairman and Chief Operating Officer in 1988. In 1996, he stepped down from this position and was elected to the Board of Directors of the newly created Novartis AG. Since 1999, he has also been a member of the Chairman's Committee. Heini Lippuner is also member of the Board of Directors of Buehler AG, Uzwil, Switzerland, and of Asset Link AG, Reinach BL, Switzerland. In addition, he is Chairman of the Foundation Board of the International Institute for Management Development (IMD) in Lausanne, Switzerland.
Dr.-Ing. Wendelin Wiedeking German, age 51
Born in Ahlen, Germany, Wendelin Wiedeking studied mechanical engineering and worked as a scientific assistant in the Machine Tool Laboratory of the Rhine-Westphalian College of Advanced Technology in Aachen. His professional career began in 1983 as Director's Assistant in the Production and Materials Management area of Dr.-Ing. h.c. F. Porsche AG in Stuttgart-Zuffenhausen. In 1988 he moved to the Glyco Metall-Werke KG in Wiesbaden as Division Manager, where he advanced by 1990 to the position of Chief Executive and Chairman of the Board of Management of Glyco AG. In 1991 he returned to Porsche AG as Production Director. A year later, the Supervisory Board appointed him spokesman of the Executive Board (CEO), and in 1993 its Chairman. He is also a member of the Board of Directors of Deutsche Telekom AG, Germany, and of Eagle Picher Incorporated, Phoenix, Arizona.
Prof. Rolf M. Zinkernagel, MD Swiss, age 59
Rolf M. Zinkernagel graduated from the University of Basel with a MD in 1970. Since 1992 he has been Professor and Director of the Institute of Experimental Immunology at the University of Zurich. Rolf M. Zinkernagel has received many awards and prizes for his work and contribution to science, the most prestigious being the Nobel Prize for Medicine which he was awarded in 1996. In 1999, Rolf M. Zinkernagel was elected to the Board of Directors of Novartis AG. He has been a member of the Corporate Governance Committee since 2001. He is a member of the Swiss Society of Allergy and Immunology, the American Associations of Immunologists and of Pathologists, the ENI European Network of Immunological Institutions, the International Society for Antiviral Research, and a member of the Executive Board of the International Union of Immunological Societies (IUIS). Rolf M. Zinkernagel was a member of the Board of Directors of Cytos Biotechnology AG, Schlieren/Zurich, Switzerland until April 2003. He is also a member of the Scientific Advisory Boards of: The Lombard Odier, Darier Hentsch & Cie Bank, Geneva, Switzerland; BT & T, Jersey; Bio-Alliance AG, Frankfurt, Germany; Aravis General Partner Ltd., Cayman Islands; Cytos Biotechnology AG, Schlieren/Zurich, Switzerland; Bioxell, Milano, Italy; Esbatech, Zurich, Switzerland; Novimmune, Geneva, Switzerland, and Mann-Kind, Sylmar CA, US Rolf M. Zinkernagel is also a Science Consultant to: GenPat77, Berlin/Munich, Germany; Aponetics AG, Witterswil, Switzerland; Solis Therapeutics, Palo Alto, US, and Ganymed, Mainz, Germany.
109
Dr. h.c. Daniel Vasella, MD
Chair since 1996;
Swiss, age 50
Urs Baerlocher, JD
Head of Legal and General Affairs;
Member since 1999;
Swiss, age 61
Raymund Breu, PhD
Chief Financial Officer;
Member since 1996;
Swiss, age 58
Paul Choffat, JD
Head of Consumer Health;
Member since 2002;
Swiss, age 54
Thomas Ebeling
Head of Pharmaceuticals
Member since 1998;
German, age 44
Prof. Mark C. Fishman, MD
Head of Pharmaceuticals Research;
Member since 2002;
American, age 53
Permanent Attendees to the Executive Committee
Juergen Brokatzky-Geiger PhD
Head of Human Resources;
German, age 51
Steven Kelmar
Head of Public Affairs and Communications;
American, age 50
Secretary to the Executive Committee
Max Kaufmann, PhD
110
Dr. h.c. Daniel Vasella, MD Swiss, age 50
Daniel Vasella graduated with a MD from the University of Bern in 1979. After holding a number of medical positions in Switzerland, he joined Sandoz Pharmaceuticals Corporation in the US in 1988. From 1993 to 1995, Daniel Vasella advanced from Head of Corporate Marketing and Senior Vice President and Head of Worldwide Development to Chief Operating Officer of Sandoz Pharma Ltd. In 1995 and 1996, Daniel Vasella was a member of the Sandoz Group Executive Committee and Chief Executive Officer of Sandoz Pharma Ltd. After the merger that created Novartis in 1996, Daniel Vasella served as President and Chief Executive Officer. In 1999, he additionally was appointed Chairman of the Board of Directors. Daniel Vasella is also a member of the Board of Directors of Pepsico, Inc., United State. In addition, he is a member of the International Board of Governors of the Peres Center for Peace in Israel and a member of several industry associations and educational institutions, including the International Business Leaders Advisory Council for the Mayor of Shanghai. In 2002, Dr. Vasella was awarded an honorary doctorate by the University of Basel.
Urs Baerlocher, JD Swiss, age 61
Urs Baerlocher earned his JD at the University of Basel and was admitted to the bar in 1970. After having worked as a tax lawyer, he joined Sandoz in 1973, and held a number of key positions including Head of Strategic Planning and Head of Group Reporting. In 1987, he was made a member of the Sandoz Executive Board, responsible i.a. for Strategic Planning, HR, Legal, Taxes, Patents and Trademarks. In 1990, he became CEO of the Sandoz Nutrition Division and then, in 1993, CEO of Sandoz Pharma. In 1995, Urs Baerlocher assumed the position of Chairman of the Board of Sandoz Deutschland GmbH (Germany) and Biochemie GmbH (Austria). After the formation of Novartis in 1996 he served as Head of International Coordination, Legal, Tax, Insurance, before his responsibilities were widened to include Corporate Intellectual Property, Corporate Health, Safety & Environment and Corporate Security.
Raymund Breu, PhD Swiss, age 58
Raymund Breu graduated from the Swiss Federal Institute of Technology (ETH) in Zurich, Switzerland, with a PhD in mathematics. In 1975, he joined the Treasury Department of the Sandoz Group, and, in 1982, became the Head of Finance for the Sandoz affiliates in the UK. In 1985, he was appointed Chief Financial Officer of Sandoz Corporation in New York, where he was responsible for all Sandoz Finance activities in the US. In 1990, he became Group Treasurer of Sandoz Ltd., Basel, Switzerland, and, in 1993, Head of Group Finance and Member of the Sandoz Executive Board. Following the formation of Novartis in 1996, he assumed his current position as Chief Financial Officer and member of the Group Executive Committee. Raymund Breu is also a member of the Board of Directors of Swiss Re, Chiron (USA) and of the SWX Swiss Exchange and of its admission panel and its takeover commission.
111
Paul Choffat, JD Swiss, age 54
Paul Choffat holds a JD from the University of Lausanne, Switzerland, and an MBA from the International Institute for Management Development in Lausanne. He started his professional career with Nestlé in Zurich, Switzerland, and London, UK. From 1981 to 1985, he was a project manager at McKinsey & Company in Zurich. Between 1987 and 1994, he held a number of leading positions at Landis & Gyr in Zug, Switzerland, where he became a member of the Executive Board and Head of the Communications Division. In 1994, he moved to Von Roll in Gerlafingen, Switzerland, as CEO. Paul Choffat joined Sandoz in 1995 as Head of Management Resources and International Coordination. He subsequently became a member of the Executive Board and was responsible for Group Planning and Organization. During the Novartis merger he headed the integration office. In 1996, he returned to line management as CEO of Fotolabo SA, Montpreveyres-sur-Lausanne, Switzerland, where he remained for three years before becoming an entrepreneur and private investor in 1999. He rejoined Novartis in January 2002 as Head of Novartis Consumer Health and member of the Group Executive Committee.
Thomas Ebeling German, age 44
Thomas Ebeling graduated from the University of Hamburg with a degree in psychology. From 1987 to 1991, he held several positions of increasing responsibility at Reemstma Germany. In 1991, he joined Pepsi-Cola Germany as Marketing Director. He became Marketing Director for Germany and Austria in 1993 and was National Sales and Franchise Director for Pepsi's retail and on-premise sales from 1994. He then served as General Manager of Pepsi-Cola Germany. In 1997, Thomas Ebeling joined Novartis as General Manager of Novartis Nutrition for Germany and Austria. After having served as CEO of Novartis Nutrition, he became CEO of Novartis Consumer Health worldwide, and then Chief Operating Officer of Novartis Pharmaceuticals, before attaining his present position in 2000.
Prof. Mark C. Fishman, MD American, age 53
Mark C. Fishman is a graduate of Yale College and Harvard Medical School. He completed his Internal Medicine residency, Chief residency, and Cardiology training at the Massachusetts General Hospital. He serves on several editorial boards and has worked with national policy and scientific committees including those of the National Institute of Health (NIH) and Wellcome Trust. He has been honored with many awards and distinguished lectureships and is a Fellow of the American Academy of Arts and Sciences. Before joining Novartis, Mark C. Fishman was Professor of Medicine at Harvard Medical School and Chief of Cardiology and Director of the Cardiovascular Research Center at the Massachusetts General Hospital in Boston.
Juergen Brokatzky-Geiger, PhD German, age 51
Juergen Brokatzky-Geiger graduated with a PhD in Chemistry from the University of Freiburg, Germany, in 1982. He joined Ciba-Geigy in 1983 as a Laboratory Head in the Pharmaceutical Division. After a job rotation in Summit, NJ, from 1987 to 1988 he held a number of positions of increasing responsibility, including Group Leader of Processes in R&D, Head of Processes in R&D and Head of Process Development and Pilot Plant Operations. During the merger of Ciba-Geigy and Sandoz in 1996, Juergen Brokatzky-Geiger was appointed Integration Officer of Technical Operations. Thereafter, he became the Head of Chemical and Analytical Development and, from 1999 until August 2003, he served as the Global Head of Technical R&D. Juergen Brokatzky-Geiger was appointed to his present position as Head of Human Resources on September 1, 2003.
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Steven Kelmar American, age 50
Steven Kelmar graduated with a Bachelor of Arts in Public Administration and Economics from Pennsylvania State University and spent 14 years (1979-1993) in public service in several executive positions. He was Chief of Staff to two Members of the US Congress and also worked in several legislative capacities for Members of the US Senate and the House of Representatives before his appointment by President Bush in 1990 to the position of Assistant Secretary for Legislation in the US Department of Health and Human Services. In this capacity, he served as one of the federal government's chief policy makers during a time of major national re-examination of healthcare delivery systems. He managed the activities of the federal government's largest legislative policy offices and served as one of the principal members of the department's budget council which sets priorities for various federal agencies such as: HCFA, FDA, Social Security and the Public Health Service. In 1993, he joined Strategic Management Association of Alexandria Viginia, a firm specializing in healthcare consulting, where he was Vice President, Governmental Affairs. In 1997, he moved to Medtronic Inc., to become Senior Vice President of External Relations, overseeing Corporate Public Relations, Internal Communications, Branding, Government Affairs, the Corporate Coverage and Reimbursement Group, the Corporate E-business Center and the Medtronic Foundation. His External Relations responsibility also included all of Medronic's specific strategic planning initiatives. In February 2003, Steven Kelmar joined Novartis as Head of Public Affairs and Communications.
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Name, nationality and age |
Head of Business Unit |
Active for Novartis since |
Significant positions previously held |
Education |
||||
---|---|---|---|---|---|---|---|---|
David Epstein, BSc, MBA American, 42 |
Oncology (since 2000) | 1989 | Chief Operating Officer and member of the Executive Committee of Novartis Pharmaceuticals Corporation USA | Bachelor of Science, Pharmacy (Rutgers University) and MBA (Columbia University) | ||||
Anthony Rosenberg BSc, MSc British, 50 |
Transplantation and Immunology (since 2001) | 1980 | Various leading positions with Sandoz UK and Novartis Group | Bachelor of Science (University of Leicester) and Master of Science (University of London) | ||||
Flemming Ørnskov Danish, 45 |
Ophthalmics (since 2003)(1) | 2001 | Head of Cardiovascular Products Group, Novartis Pharmaceuticals Corporation USA | MD (University of Copenhagen), MBA(Insead), MPH (Harvard University) | ||||
Peter Hewes BA Econ. British, 56 |
Mature Products (since 2000) | 1976 | Regional European Head of Novartis Pharma; Country Head of Sandoz Portugal | Bachelor of Arts, Economics (University of Reading, UK) | ||||
Christian Seiwald MBA Austrian, 48 |
Generics (since 2001) |
1982 | Country Head of Novartis Austria; Head of Novartis Austria Pharma Operations | Graduate in Economics (Innsbruck University, Austria) | ||||
Michel Orsinger(2) MBA Swiss, 46 |
OTC (since 2002) |
1993 | Senior Vice President Europe, Middle East and Africa for Novartis' Nutrition and OTC Business Unit; General Manager Sandoz Nutrition Unit Switzerland | Graduate of Business School (St. Gallen, Switzerland) | ||||
Kurt T. Schmidt(3) BSc, MBA American, 46 |
Animal Health (since 2002) |
2002 | General Manager Food for Kraft Foods Germany; Marketing Director Wrigley Company for German-speaking Europe, Eastern Europe and the Middle East | Bachelor of Science (United States Naval Academy, Annapolis) and MBA (University of Chicago) | ||||
Michel Gardet MA Business French, 46 |
Medical Nutrition (since 2002) |
1991 | General Manager of Novartis Consumer Health Iberia; Head of Health and Functional Nutrition Novartis | Graduate of the Ecole Supérieure de Commerce Paris | ||||
Frank Palantoni(4) American, 46 |
Infant & Baby (since 2002) |
1998 | President and CEO of Gerber US Marketing; positions with Procter & Gamble, Nabisco and Groupe Danone | Bachelor of Science (Tufts BSc, MBA (since 2002) management University) and MBA (Columbia University) | ||||
Joseph T. Mallof BSc, MBA American, 52 |
CIBA Vision (since 2002) |
2002 | Regional President of S.C. Johnson & Son for the Americas Asia Pacific; General Manager of Procter & Gamble in Japan and the Philippines | Bachelor of Science (Purdue University) and MBA (University of Chicago) | ||||
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Further Information on Corporate Governance
The list below contains references to additional information on the corporate governance of Novartis.
Topic |
Location |
|
---|---|---|
Share Capital and Convertible Bonds | ||
Capital structure | Articles of Incorporation of Novartis AG (http://www.novartis.com/investors/en/governance.shtml) | |
Share capital movements | Notes 17 of the Group's consolidated financial statements | |
Shareholder rights | ||
Information on the Novartis share and on the shareholders' participation rights | Operating and Financial Review (see page 136-137) Articles of Incorporation of Novartis AG (http://www.novartis.com/investors/en/governance.shtml) Investors Relations Information: http://www.novartis.com/investors |
|
Board of Directors and Executive Committee | ||
Internal organization and allocation of responsibilities | Board Regulations and Board Committee Charters (http://www.novartis.com/investors/en/governance.shtml) |
|
CEO and Senior Financial Officers | ||
Novartis Code of Ethical Conduct | (http://www.novartis.com/investors/en/governance.shtml) | |
Further information | ||
Sources for further information and anticipated key reporting dates in 2004 | (http://www.novartis.com/investors/en/governance.shtml) | |
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Operating and Financial Review
Key financial developments in 2002
|
2003 USD millions |
2002 USD millions |
% Change |
|||
---|---|---|---|---|---|---|
Sales | 24 864 | 20 877 | 19 | |||
Operating income | 5 889 | 5 092 | 16 | |||
Net income | 5 016 | 4 725 | 6 | |||
Change in net liquidity | 317 | -1 054 | ||||
Equity at year-end | 30 429 | 28 269 | ||||
Earnings per share (USD) | 2.03 | 1.88 | 8 | |||
Dividends per share (CHF)(1) | 1.00 | 0.95 | 5 | |||
This operating and financial review should be read in conjunction with the consolidated financial statements. The consolidated financial statements and the financial information discussed below have been prepared in accordance with International Financial Reporting Standards (IFRS). Please see note 32 of the consolidated financial statements for a discussion of the significant differences between IFRS and US Generally Accepted Accounting Principles (US GAAP).
Factors affecting results
The global healthcare market is growing rapidly due to, among other reasons, the aging population in developed countries, unmet needs in many therapeutic areas (such as cancer and cardiovascular disease), the adoption of more industrialized lifestyles in emerging economies, and increased consumer demand fueled by broad and rapid access to information. At the same time, the healthcare industry is under increasing pressure to reduce prices as payors in the public and private sectors seek to curb rising healthcare costs.
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Novartis Group revenues are directly related to the Group's ability to identify high potential products while they are still in development and to bring them to market quickly and effectively. Efficient and productive research and development is crucial in this environment as Novartis, like its competitors, searches for efficacious and cost-efficient pharmaceutical solutions to health problems. The necessity for adequate resources to access the full range of new technologies has been one reason for industry consolidation, and the increase in collaborations between leading companies and niche players at the forefront of their particular technology areas. The growth in new technology, particularly genomics, will almost certainly have a fundamental impact on the pharmaceutical industry as a whole, and upon the Group's future development.
In addition, competitive conditions have intensified as a result of regulation, price reductions, reference prices, higher patient co-payments and increased pressure on physicians to limit prescribing. Pressure on the Novartis Pharmaceutical Division and other pharmaceutical companies to lower prices is expected to increase primarily as a result of government initiatives to reduce patient reimbursement; restrict prescribing levels; increase the use of generics and impose overall price cuts. The introduction of technologically innovative products and devices by competitors and growing product distribution anomalies, mainly in the EU, pose additional challenges. Exchange rate exposure also affects the Group's results as Novartis has both sales and costs in many currencies other than the US dollar. This gives rise to both transaction exposure in subsidiary financial statements due to foreign currency denominated transactions and translation exposure from converting foreign subsidiary results and balance sheets into the Group's US dollar consolidated financial statements. The Group's results have not been significantly affected by inflation.
Critical accounting policies
The Novartis Group's principal accounting policies are set out in note 1 of the Group's consolidated financial statements and conform with International Financial Reporting Standards (IFRS). Significant judgments and estimates are used in the preparation of the consolidated financial statements which, to the extent that actual outcomes and results may differ from these assumptions and estimates, could affect the accounting in the following areas described in this section.
Long-lived assets are regularly reviewed for impairment, including identifiable intangibles and goodwill, whenever events or changes in circumstance indicate that the balance sheet carrying amount of the asset may not be recoverable. In order to assess if there is any impairment, estimates are made of the future cash flows expected to result from the use of the asset and its eventual disposition. If the balance sheet carrying amount of the asset is more than the higher of its value in use to Novartis or its anticipated net selling price, an impairment loss for the difference is recognized. Actual outcomes could vary significantly from such estimates of discounted future cash flow. Factors such as changes in the planned use of buildings, machinery or equipment, or closing of facilities or lower than anticipated sales for products with capitalized rights could result in shortened useful lives or impairment.
The Novartis Group has extensive investments in marketable securities and has significant derivative financial instrument positions which are mainly, but not exclusively, held for hedging underlying positions. Under current IFRS accounting rules, unrealized gains and losses on marketable securities and cash flow related derivative financial instruments that qualify for hedge accounting are recorded in separate components of equity and not in the income statement. Group management regularly reviews such positions to determine the extent to which unrealized losses indicate the investment is impaired. Depending on the stock market and other factors at the time of this review it may be necessary to recognize an impairment by transferring these losses out of the equity component into the Group's income statement.
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Novartis has investments in associated companies (defined generally as investments of between 20% and 50% of a company's voting shares) that are accounted for by using the equity method. Due to the various estimates that have been made in applying the equity method, the amounts recorded in the consolidated financial statements in respect of Roche Holding AG and Chiron Corporation may require adjustments in the following year as more financial and other information becomes publicly available.
The Novartis Group sponsors pension and other retirement plans in various forms covering employees who meet eligibility requirements. These plans cover the majority of Group employees. Several statistical and other factors which attempt to anticipate future events are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases, as determined by Group management within certain guidelines. In addition, the Group's actuarial consultants also use statistical information such as withdrawal and mortality rates to estimate these factors. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of pension income or expense recorded in future years.
The Group has provisions for environmental remediation costs. The material components of the environmental provisions consist of costs to fully clean and refurbish contaminated sites and to treat and contain contamination at sites where the environmental exposure is less severe. Future remediation expenses are affected by a number of uncertainties which include, but are not limited to, the method and extent of remediation, the percentage of waste material attributable to Novartis at the remediation sites relative to that attributable to other parties, and the financial capabilities of the other potentially responsible parties.
Novartis believes that its total reserves for environmental matters are adequate based upon currently available information, however, given the inherent difficulties in estimating liabilities in this area, it cannot be guaranteed that additional costs will not be incurred beyond the amounts accrued. The effect of resolution of environmental matters on results of operations cannot be predicted due to uncertainty concerning both the amount and the timing of future expenditures and the results of future operations. Management believes that such additional amounts, if any, would not be material to the Novartis financial condition but could be material to the Novartis results of operations in a given period.
A number of Novartis Group subsidiaries are subject to litigation arising out of the normal conduct of their businesses, as a result of which claims could be made against them which might not be covered by existing provisions or by insurance. Group management believes that the outcomes of such actions if any, would not be material to the Novartis financial condition but could be material to the Novartis results of operations in a given period.
The International Accounting Standards Board is entering a period of critically examining current International Financial Reporting Standards with a view to increasing international harmonization of accounting rules. This process of amendment and convergence of worldwide accounting rules could result in significant amendments to the existing rules within the next two years in such areas as the timing of recognition of sales and other revenues arising from collaborative agreements with marketing and distribution partners, accounting for share based compensation, goodwill and intangibles, employee benefit plans, marketable securities and derivative financial instruments and classification of balance sheet positions as debt or equity.
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Results of operations
|
Year ended December 31, 2003 UDS millions |
Year ended December 31, 2002 USD millions |
Change in % |
|||
---|---|---|---|---|---|---|
Sales | 24 864 | 20 877 | 19 | |||
Cost of Goods Sold | -5 894 | -4 994 | 18 | |||
Marketing & Sales | -7 854 | -6 737 | 17 | |||
Research & Development | -3 756 | -2 843 | 32 | |||
General & Administration | -1 471 | -1 211 | 21 | |||
Operating income | 5 889 | 5 092 | 16 | |||
Result from associated companies | -200 | -7 | ||||
Financial income, net | 379 | 613 | -38 | |||
Income before minority interests | 6 068 | 5 698 | 6 | |||
Taxes | -1 008 | -959 | 5 | |||
Income before minority interests | 5 060 | 4 739 | 7 | |||
Minority interests | -44 | -14 | ||||
Net income | 5 016 | 4 725 | 6 | |||
In US dollars, Group sales in 2003 increased by 19% over 2002 to USD 24.9 billion (+11% in local currencies); operating income grew by 16% to USD 5.9 billion; net income increased by 6% to USD 5.0 billion; cash flow from operating activities increased 27% to USD 6.7 billion and free cash flow (excluding acquisition of subsidiaries and the voting shares of Roche Holding AG) rose by 23% in US dollars to USD 3.6 billion.
Pharmaceuticals accounted for 64% of the Group's total sales and Consumer Health 36%. The two divisions generated 77% and 23% of divisional operating income, respectively.
Geographically, 45% of sales were generated in the NAFTA region (41% in the USA), 35% in Europe and 20% in the rest of the world.
Sales growth was driven by a volume increase of 8%. All business units except Sandoz and CIBA Vision benefited from small price increases which in total amounted to 1%. The sales increase due to acquisitions was 2%. The sales performance in US dollars benefitted from a 8% positive currency effect as the US dollar weakened on average 16% against the Swiss franc, 8% against the yen and 20% against the Euro.
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The Group operating margin in 2003 was 23.7% of sales, a decrease of 0.7 percentage points over the 24.4% of sales of the previous year. As a percentage of sales, productivity gains and improvements in the product mix led to a 0.2 percentage point reduction in the cost of goods sold, while Marketing & Sales expenses decreased by 0.7 percentage point, although still increasing by 17% over 2002, to support product launches and key growth drivers. Research & Development investments were increased by 32% mainly due to increased development expenses, especially connected with milestone payments on in-licenced compounds, and due to the Pharmaceuticals Division research strategy of establishing a new facility in Cambridge, USA. General & Administration expenses grew by 21%, 2% more than sales, due to several factors including the write-down of certain investments in biotechnology companies, exchange rate movements and royalty payments. As a result of all these factors, operating income increased 16% in US dollars to USD 5.9 billion.
Sales
|
Year ended December 31, 2003 USD millions |
Year ended December 31, 2002 USD millions |
Change in USD % |
Change in local currencies % |
||||
---|---|---|---|---|---|---|---|---|
Pharmaceuticals | 16 020 | 13 528 | 18 | 11 | ||||
Sandoz | 2 906 | 1 817 | 60 | 47 | ||||
OTC | 1 772 | 1 521 | 17 | 7 | ||||
Animal Health | 682 | 623 | 9 | 3 | ||||
Medical Nutrition | 815 | 711 | 15 | 3 | ||||
Infant & Baby | 1 361 | 1 333 | 2 | 3 | ||||
CIBA Vision | 1 308 | 1 135 | 15 | 7 | ||||
Consumer Healthongoing | 8 844 | 7 140 | 24 | 16 | ||||
Divested Health & Functional | ||||||||
Food activities | 209 | |||||||
Consumer Health | 8 844 | 7 349 | 20 | 12 | ||||
Total | 24 864 | 20 877 | 19 | 11 | ||||
Pharmaceuticals Division
The core Pharmaceuticals business sustained above market sales growth throughout the year to deliver an 18% rise in sales (11% in local currencies). Novartis moved up to the number five position in the global healthcare ranking (based on November 2003 IMS data) as it captured further segment share in the key US market (sales: +15% in USD), Japan (sales: +23%: +14% in local currencies), the second largest single market, as well as in Europe (sales: +25%: 6% in local currencies). Based on latest available data (IMS), the company's overall share of the global healthcare market has risen to 4.4%.
The cardiovascular (+36%; +29% in local currencies) and oncology franchises (+36%; +26% in local currencies) continued to be the main drivers, led in particular by the flagship brands Diovan, Lotrel, Lescol, Gleevec/Glivec, Zometa and Femara.
Newly launched products made further in-roads: Zelnorm/Zelmac generated revenues of USD 165 million, with US total and new prescriptions growing 32% in the fourth quarter. Meanwhile, sales of Elidel reached USD 235 million, as the product extended its position as the number-one branded eczema treatment worldwide.
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Primary Care
Diovan (+46%; +38% in local currencies; US: +42%), became the world's leading angiotensin receptor blocker (ARB) in 2003 and has continued to capture further market share from its competitors. With the heart failure indication now approved in more than 40 markets, the flagship brand continued to outpace its fast-growing ARB market segment, with year-to-date sales in the US alone already surpassing the USD 1 billion mark by December.
The fourth quarter was marked by the publication of the VALIANT mega-trial at the American Heart Association Scientific Session. The results, which showed that Diovan reduces the risk of death by 25% in post-myocardial infarction patients, will help drive Diovan as the new gold standard in the treatment of hypertension. A supplemental new drug application based on these results has already been filed in the US.
Diovan HCT (valsartan + hydrochlorothiazide) became the second most prescribed product in the combination ARB segment (mono and combination therapy) in the US. This rapid growth was powered by the roll-out of new dosage forms, the heart failure indication and new treatment guidelines. In Germany, the flagship brand secured the number one rank, buoyed by the success of Co-Diovan 160/12.5 mg.
Lotrel (US: +20%), the leading combination treatment for hypertension, posted strong full-year prescription growth while fourth-quarter sales were spurred by a disease awareness campaign launched in August. Overall, the brand steadily gained market segment share as a result of: new guidelines recommending more aggressive treatment; a new focus on patients who are not controlled by ACE inhibitors and calcium channel blockers; and the successful launch of the new dosage strength, which add efficacy and dosing flexibility.
Lescol (+27%; +18% in local currencies; US: +19%; cholesterol reduction), continued strong sales growth driven by proven benefits in high-risk patients, the successful rollout of the XL (extended release) formulation in France, Italy and Spain and the launch of the secondary prevention indication in the US.
Trileptal (+42%; +39% in local currencies; US: +43%; epilepsy), clearly outpaced its market. In August, the FDA granted approval for the use of Trileptal as monotherapy in children, making it the only new anti-epileptic drug indicated for the treatment of partial seizures as a mono-therapy and adjunctive therapy in adults and children of 4 years and upwards.
Elidel (+147%; +144% in local currencies; US: +125%; non-steroid eczema treatment), achieved full year sales of USD 235 million, generated predominantly in the US. In less than two years since its first launch, Elidel is the clear number-one branded prescription treatment for eczema and is now available in more than 38 markets.
Zelnorm/Zelmac (irritable bowel syndrome with constipation) revenues reached USD 165 million (US: USD 132 million) reflecting the product's therapeutic benefits and the increase in disease awareness. Total US prescriptions as well as new prescriptions recently increased more than 32%. Zelnorm/Zelmac has now been launched in 39 countries and was filed, in the fourth quarter, for the new indication of chronic constipation in the US.
Oncology
Gleevec/Glivec (+84%; +68% in local currencies; US: +41%), for chronic myeloid leukemia (CML) and gastro-intestinal stromal tumors (GIST), continued to grow dynamically, boosted by its use as first-line therapy and its approval for GIST in the US, Europe and Japan. The number of patients on the Gleevec/Glivec Patient Assistance Program rose to more than 8 000 worldwide, providing treatment to many needy patients who otherwise would not have access.
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Zometa (+83%; +74% in local currencies; US: +59%), the most prescribed intravenous bisphosphonate for bone metastases, continued to post dynamic growth and is on track to become a blockbuster in 2004. Several launches in Europe fueled additional growth, as did the continued expanded use into a number of tumor types including lung, prostate, multiple myeloma, and breast.
Sandostatin (+14%; +7% in local currencies; US: +13%; acromegaly and carcinoid syndrome) sales continued to grow, driven by the US.
Femara (first-line therapy for advanced breast cancer in postmenopausal women) achieved a 30% rise (+18% in local currencies; US: +22%) in sales supported by its strong profile and the landmark results of the MA-17 study published in the fourth quarter. These showed a 43% reduction in the risk of cancer recurrence, in addition to significantly improved disease-free survival in postmenopausal women with early breast cancer who had completed five years of tamoxifen therapy.
Ophthalmics
Visudyne (+24%; +16% in local currencies; US: +8%; treatment in age-related macular degeneration) continued to post overall growth, benefiting from increased market penetration and strong sales in Europe, Latin America and the Asia Pacific regions.
Transplantation
Neoral/Sandimmun (immunosuppression) sales declined only modestly (-10% in local currency) despite the use of lower dosing regimens in the US, in addition to generic competition and compulsory price-cuts in Germany and Italy. Momentum was sustained in Japan even though reimbursement was reduced by the authorities.
Myfortic, the new enteric-coated formulation of mycophenolate sodium used to prevent organ rejection, gained approval in 27 countries by the year end.
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Top twenty Pharmaceuticals Division Products2003
Brands |
Therapeutic Area |
USA USD millions |
% change in local currencies |
Rest of world USD millions |
% change in local currencies |
Total USD millions |
% change in local currencies |
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Diovan/Co-Diovan | Hypertension | 1 107 | 42 | 1 318 | 34 | 2 425 | 38 | |||||||
Gleevec/Glivec | Chronic myeloid leukemia/Gastro-intestinal stromal tumors | 299 | 41 | 829 | 82 | 1 128 | 68 | |||||||
Neoral/Sandimmun | Transplantation | 216 | -21 | 804 | -6 | 1 020 | -10 | |||||||
Lamisil (group) | Fungal infections | 428 | 2 | 550 | 9 | 978 | 5 | |||||||
Zometa | Cancer complications | 574 | 59 | 318 | 118 | 892 | 74 | |||||||
Lotrel | Hypertension | 777 | 20 | 777 | 20 | |||||||||
Lescol | Cholesterol reduction | 309 | 19 | 425 | 18 | 734 | 18 | |||||||
Sandostatin (group) | Acromegaly | 318 | 13 | 377 | 2 | 695 | 7 | |||||||
Voltaren (group) | Inflammation/pain | 8 | -33 | 591 | -5 | 599 | -6 | |||||||
Cibacen/Lotensin/ | ||||||||||||||
Cibadrex | Hypertension | 306 | -9 | 127 | -8 | 433 | -9 | |||||||
Top ten products | 4 342 | 21 | 5 339 | 20 | 9 681 | 20 | ||||||||
Trileptal | Epilepsy | 305 | 43 | 92 | 27 | 397 | 39 | |||||||
Miacalcic | Osteoporosis | 239 | 150 | -14 | 389 | -6 | ||||||||
Tegretol (incl. CR/XR) | Epilepsy | 122 | 1 | 262 | -1 | 384 | ||||||||
Exelon | Alzheimer's disease | 181 | 8 | 186 | 19 | 367 | 13 | |||||||
Visudyne | Wet form of age-related macular degeneration | 181 | 8 | 176 | 27 | 357 | 16 | |||||||
Leponex/Clozaril | Schizophrenia | 86 | -28 | 223 | -2 | 309 | -12 | |||||||
Foradil | Asthma | 9 | -61 | 280 | 2 | 289 | -4 | |||||||
Elidel | Eczema | 205 | 125 | 30 | 575 | 235 | 144 | |||||||
Famvir1(1) | Viral infections | 146 | -7 | 87 | 19 | 233 | ||||||||
HRT Range | Hormone replacement | 125 | -9 | 106 | -24 | 231 | -16 | |||||||
Top twenty products | 5 941 | 18 | 6 931 | 16 | 12 872 | 17 | ||||||||
Rest of portfolio | 643 | -9 | 2 505 | -9 | 3 148 | -9 | ||||||||
Total | 6 584 | 15 | 9 436 | 8 | 16 020 | 11 | ||||||||
Consumer Health Division
Sales in Consumer Health's ongoing businesses grew a substantial 24% (+16% in local currencies) driven mainly by the generics Business Unit, Sandoz, and fueled by above-market sales growth throughout the other businesses, of which OTC, Medical Nutrition and CIBA Vision all delivered double-digit sales increases in USD.
Sandoz
Sales at Sandoz rose 60% (+47% in local currencies), driven by the US retail pharmaceuticals business and the Lek acquisition, which contributed 38 percentage points to sales growth. The US sales increased by 56% fuelled by the strong sales of AmoxC, the generic version of Augmentin®, and by the successful roll-out of prescription loratadine (a generic version of the allergy treatment Claritin®). Further impetus was added through the rollout of citalopram in the UK (a generic version of the antidepressant Celexa®) and of omeprazole in the US (a generic version of the ulcer drug Prilosec®).
123
The industrial generics franchise posted a sales increase of 12% in US dollars and a 6% decrease in local currencies. A new biopharmaceuticals franchise was added, focused on the manufacture of active ingredients, mostly modern recombinant products.
OTC (over-the-counter self medications)
In OTC sales rose 17% (+7% in local currencies), led by Nicotinell/Habitrol (smoking cessation), Lamisil (topical antifungal) and by Ex-Lax/Benefiber (laxative) with US private-label loratadine also contributing to overall sales growth.
Animal Health
Sales were up 9% in US dollars or 3% in local currencies to USD 682 million.
Sales at the companion-animal franchise grew in double-digits, driven in particular by strong market share gains of the new brands Deramaxx (pain and inflammation control associated with osteoarthritis in dogs) and Milbemax (intestinal worm control in dogs and cats). Fortekor (heart/kidney disease) strengthened by a novel palatable formulation for cats, complemented results again with a sales increase well above market growth.
In the farm-animal franchise Agita, the innovative farm fly control product consistently added to sales, while the therapeutic anti-infectives business contended with increased generic competition especially in the pig market.
Medical Nutrition
Sales reached USD 815 million, up 15% in US dollars and 3% in local currencies.
Double digit growth in Europe lifted Medical Nutrition sales, which were driven by the strong performance of Enteral Nutrition (Isosource and Novasource) and additional sales impetus from the Medical Food franchise (Resource). In Nutrition & Santé, sales growth from the core brands offset the impact of distributor changes in China and Italy, while Sports Nutrition sales were lifted by the introduction of Isostar "Fast Hydration".
On December 16, 2003 the Business Unit announced its intention to buy the medical nutrition assets of Mead Johnson & Company, a Bristol-Myers Squibb Company subsidiary, for USD 385 million in cash. Successful completion of the transaction will offer Novartis Medical Nutrition a strong presence in the fast-growing US retail channel for medical nutrition products, expand its existing institutional medical nutrition business and enhance its access to the Japanese market. The acquisition will allow the Business Unit to further leverage its disease-specific brands consistent with its overall growth strategy.
Infant & Baby
Sales grew 2% (3% in local currencies) outpacing the industry growth leading to overall sales of USD 1.4 billion. The major contributor was Gerber in the US, spurred by innovations in the Juice, Graduates, and Tender Harvest lines and the outstanding success of the Lil' Entrees line of microwavable convenience trays targeted at the toddler segment.
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CIBA Vision
Sales grew 15% in US dollars terms and rose 7% in local currencies to USD 1.3 billion, driven by the growth of Focus DAILIES and Focus NIGHT & DAY lenses which allowed the company to maintain leadership of the daily disposables and continuous wear categories. Focus DAILIES Toric, the world's first and only daily disposable lens for astigmatism correction, was launched also in the US and Japan following last year's introduction in Europe. FreshLook colored lenses remained the leading brand in the cosmetic lens segment, supported by the launch of FreshLook Radiance and FreshLook Dimensions. More emphasis was put on direct-to-consumer advertising with new successful TV and print campaigns for Focus NIGHT & DAY and FreshLook.
Despite competing in a shrinking market, sales of lens care products were flat versus the prior year, supported by the launch of AOSEPT ClearCare in US and SOLO-Care AQUA in selective European countries. Sales of FreshLook Care in Japan continued to grow.
The Ophthalmic surgical business contributed growing sales during the year. CIBA Vision is considering strategic alternatives for this business, including its potential sale.
Operating income
|
Year ended December 31, 2003 USD millions |
% of sales |
Year ended December 31, 2002 USD millions |
% of sales |
Change % |
|||||
---|---|---|---|---|---|---|---|---|---|---|
Pharmaceuticals | 4 423 | 27.6 | 3 891 | 28.8 | 14 | |||||
Sandoz | 473 | 16.3 | 265 | 14.6 | 78 | |||||
OTC | 309 | 17.4 | 240 | 15.8 | 29 | |||||
Animal Health | 88 | 12.9 | 92 | 14.8 | -4 | |||||
Medical Nutrition | 82 | 10.1 | 4 | 0.6 | ||||||
Infant & Baby | 254 | 18.7 | 227 | 17.0 | 12 | |||||
CIBA Vision | 153 | 11.7 | 118 | 10.4 | 30 | |||||
Divisional Management | -39 | |||||||||
Consumer Healthongoing | 1 320 | 14.9 | 946 | 13.2 | 40 | |||||
Divested Health & Functional Food activities | 140 | |||||||||
Consumer Health | 1 320 | 14.9 | 1 086 | 14.8 | 22 | |||||
Corporate income, net | 146 | 115 | 27 | |||||||
Total | 5 889 | 23.7 | 5 092 | 24.4 | 16 | |||||
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As planned, Research & Development expenses increased by a significant 32% to 15.1% of sales an increase of 1.5 percentage points of sales over the year. Thanks to continued productivity gains and product-mix improvements, the cost of goods sold and Marketing & Sales expenses grew slower than sales, offsetting an increase in General & Administration expenses, which grew owing to several factors including the impairment of tangible and intangible assets of USD 136 million and write-down of certain financial investments, including biotechnology ventures, of USD 80 million, exchange rate movements and royalty payments. Conversely General & Administration expenses were reduced by the release of USD 90 million of legal provisions as a result of a litigation settlement with GlaxoSmithKline. As a result, operating income rose 16% and the operating margin decreased 0.7 percentage points to 23.7% (2002: 24.4%).
Pharmaceuticals Division
Earnings growth accelerated in the year as sales continued to expand strongly. The cost of goods sold, as well as investments in Marketing & Sales slightly reduced as a percentage of the Division's sales compared to the prior year, Research & Development increased significantly as considerable payments related to development milestones and attractive in-licensing deals were completed. Product-mix changes and productivity gains in the cost of goods sold continued to drive gross profit improvements. Research & Development expenses reached 19.1% of Divisional sales (reflecting the sustained high-level investment in the new Cambridge facilities and in-licensing opportunities). General & Administration grew from 5.9% to 6.0% of Divisional sales owing to several factors including the write-down of certain financial investments in biotechnology ventures, exchange rate movements, royalty payments and increased product liability insurance costs. This was partially offset by one time gains on the sale of non-core products, primarily the Fioricet and Fiorinal lines for USD 178 million.
During 2003, the Pharmaceuticals Division completed a number of transactions to strengthen its product portfolio.
In April, the urinary incontinence treatment Enablex (darifenacin) was acquired from Pfizer for a total of up to USD 225 million, part of which is still conditional on certain marketing approvals in the US and EU. Also acquired during the year were the rights to the IL1-trap compound from Regeneron and rights to develop and market Lucentis outside North America was acquired from Genentech. These transactions resulted in USD 151 million of milestone payments. In May, 51% of the capital stock of Idenix Pharmaceuticals Inc., Cambridge, Massachusetts was acquired for an initial payment of USD 255 million.
Consumer Health Division
Operating income from the ongoing business of Consumer Health rose 40% in the year, outpacing sales and driven in particular by Sandoz (+78%), where volume expansions and productivity gains more than offset increased investments in Marketing & Sales and Research & Development. Apart from Sandoz, CIBA Vision (+30%), Medical Nutrition and OTC (+29%), all achieved considerable increases in operating income, the latter benefiting from the exceptional contribution of loratadine.
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Overall in Consumer Health, continued productivity gains, lower costs of certain raw materials, and product-mix improvements contributed to a reduction in the cost of goods sold as a percentage of sales. Marketing & Sales investments were maintained at a high level in order to drive recently launched products and to support key brands, however the increase was slower than sales growth. On the other hand, Research & Development investments increased overproportionally, which was mainly due to the expansion of internal Research & Development capabilities at Sandoz, licensing agreements and other initiatives to accelerate innovation. General & Administration costs increased mainly on account of the impairment of intangible assets of USD 72 million relating to Azupharma, Germany. The total increase was, however, slower than sales, owing to the release of USD 49 million of provisions following the successful conclusion of a litigation with GlaxoSmithKline. With almost all Business Units achieving margin improvements, the Division's ongoing profit margin improved 1.7 percentage points to 14.9%.
Sandoz
Operating income increased significantly by 78% over 2002, fueled by sales growth especially related to the acquisition of Lek, productivity gains and a stronger focus on higher margin products and favorable product mix. Research & Development investments increased 90% to USD 263 million due to product developments and the funding of Research & Development in the US. Total General & Administration expenses benefited from a release of USD 49 million of litigation provisions following the successful conclusion of negotiations with GlaxoSmithKline. The operating margin rose almost 1.7 percentage points to 16.3%.
OTC
Operating income increased 29% over the year to USD 309 million, as a result of top sales growth led by Nicotinell/Habitrol and the launch of loratadine private label in the US and the non-recurrence of exit costs from a Japanese joint venture. The operating margin increased 1.6 percentage points to 17.4%.
Animal Health
2003 operating income fell 4% to USD 88 million, leading to an operating margin of 12.9% (2002: 14.8%). Operating costs increased due to Marketing & Sales investments focused on recently launched products and due to additional Research & Development on essential project studies.
Medical Nutrition
Operating income increased to USD 82 million as a result of productivity gains, lower raw material costs and product mix improvements resulting from more focus on disease specific segments. The operating margin increased to 10.1% from 0.6% in 2002 or from 4.5% when USD 28 million of exceptional items related to restructuring the Business Unit and other one time items are excluded from the 2002 operating income.
Infant & Baby
2003 operating income rose 12% to USD 254 million. Operating margin increased to 18.7% from 17.0% in 2002, when there were USD 27 million of impairment charges.
127
CIBA Vision
Operating income reached USD 153 million, an increase of 30% over the year. This operational result was achieved due to the margin on the additional sales, reduction in structural costs, partially compensated by increased investment in advertising and promotion activities and a USD 22 million charge for asset impairments. Operating margin increased to 11.7% in 2003 compared with 10.4% in 2002.
Divested Health & Functional Food activities
The 2002 operating income of USD 140 million includes a divestment gain of USD 132 million, after related restructuring charges arising on the divestment of the Food & Beverage business. In addition there was a net USD 8 million operating income from these activities after taking into account USD 20 million of goodwill impairment charges.
Corporate Income/Expense, net
Net corporate income totaled USD 146 million, USD 31 million more than in the prior year. Higher income from charging share and share option plan costs to the operations and the settlement of a litigation for USD 41 million less than the provision more than offset increased investments in corporate research, the negative currency translation effects on non-US dollar costs, and lower pension income.
Operating expenses
|
Year ended December 31, 2003 USD millions |
Year ended December 31, 2002 USD millions |
Change % |
|||
---|---|---|---|---|---|---|
Sales | 24 864 | 20 877 | 19 | |||
Cost of Goods Sold | -5 894 | -4 994 | 18 | |||
Marketing & Sales | -7 854 | -6 737 | 17 | |||
Research & Development | -3 756 | -2 843 | 32 | |||
General & Administration | -1 471 | -1 211 | 21 | |||
Operating income | 5 889 | 5 092 | 16 | |||
Cost of Goods Sold
Cost of goods sold decreased as a percentage of sales from 23.9% in 2002 to 23.7% in 2003. This was mainly due to continued improvements in productivity and a favorable product mix in Pharmaceuticals.
Marketing & Sales
Marketing & Sales expenses as a percentage of sales decreased by 0.7% over 2002 to 31.6% of sales.
Research & Development
Research & Development expenses increased 32% owing to in-licencing deals in Pharmaceuticals and the build-up of the US research facility. As a percentage of sales Research & Development was 15.1% (2002: 13.6%).
General & Administration
General & Administration expenses increased to 5.9% of sales in 2003 from 5.8% in 2002 owing to several factors including the impairment of tangible and intangible assets of USD 136 million and write-down of certain financial investments, including biotechnology ventures, of USD 80 million, exchange rate movements and royalty payments. Conversely General & Administration expenses were reduced by the release of USD 90 million of legal provisions as a result of a litigation settlement with GlaxoSmithKline.
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Net Income
|
Year ended December 31, 2003 USD millions |
Year ended December 31, 2002 USD millions |
Change % |
|||
---|---|---|---|---|---|---|
Operating income | 5 889 | 5 092 | 16 | |||
Result from associated companies | -200 | -7 | ||||
Financial income, net | 379 | 613 | -38 | |||
Income before taxes and minority interests | 6 068 | 5 698 | 6 | |||
Taxes | -1 008 | -959 | 5 | |||
Income before minority interests | 5 060 | 4 739 | 7 | |||
Minority interests | -44 | -14 | ||||
Net income | 5 016 | 4 725 | 6 | |||
Result from associated companies
Associated companies are accounted for using the equity method where Novartis owns between 20% and 50% of the voting shares of such companies. Income from associated companies is mainly derived from the Group's investments in Roche Holding AG and Chiron Corporation.
The Group's 42% interest in Chiron contributed pre-tax income of USD 134 million (2002: USD 107 million). The Group's 33.3% (2002: 32.7%) interest in Roche voting shares, which represents a 6.3% (2002: 6.2%) interest in the total Roche equity instruments generated a pre-tax loss of USD 354 million (2002: USD 116 million loss), USD 269 million of which was due to Novartis' share in Roche's unexpected loss of CHF 4.0 billion in 2002, booked only in 2003. The remainder represents an estimate of Novartis' share (USD 185 million) in Roche's 2003 pre-tax income. This is reduced by a USD 270 million goodwill and intangible depreciation charge arising from allocating the purchase price to tangible and intangible assets and goodwill.
The Group's share of the net income of both Roche and Chiron is based upon analysts' estimates. Any differences between these estimates and actual results will be adjusted in 2004. In total, associated companies resulted in an overall expense of USD 200 million in 2003 (2002: USD 7 million).
Financial income, net
Amid persistently challenging market conditions, lower interest rates and a lower level of average net liquidity than in the prior year, net financial income declined 38% or USD 234 million.
Taxes
Despite increased profits, the tax charge of USD 1 008 million increased only USD 49 million over the year. The Group's effective tax rate (taxes as a percentage of income before tax) was 16.6% in 2003 compared to 16.8% in 2002.
The Group's expected tax rate (weighted average tax rate based on the result before tax of each subsidiary) was 14.8% in 2003 compared to 15.3% in 2002. The Group's effective tax rate is different to the expected tax rate due to the income statements effect of equity accounting for associated companies of 1.9% (2002: 0.3%) and various permanent tax adjustments to expenditures and income. For details of the main elements contributing to the difference, see note 6 to the consolidated financial statements.
129
Net income
Net income as a percentage of total sales decreased from 22.6% in 2002 to 20.2% in 2003 principally due to lower financial income and the negative impact of the result of associated companies.
Return on average equity decreased from 17.7% in 2002 to 17.1% in 2003.
Earnings per share
Earnings per share increased by 8%. This was more than the 6% increase in net income due to a lower average number of shares being outstanding during the year as a result of share buy-backs.
Condensed consolidated balance sheets
|
December 31, 2003 USD millions |
December 31, 2002 USD millions |
Change USD millions |
|||
---|---|---|---|---|---|---|
Total long-term assets | 27 044 | 24 210 | 2 834 | |||
Cash, short-term deposits and marketable securities | 13 259 | 12 542 | 717 | |||
Other current assets | 9 014 | 8 273 | 741 | |||
Total assets | 49 317 | 45 025 | 4 292 | |||
Total equity | 30 429 | 28 269 | 2 160 | |||
Financial debts | 5 970 | 5 570 | 400 | |||
Other liabilities and minority interests | 12 918 | 11 186 | 1 732 | |||
Total equity and liabilities | 49 317 | 45 025 | 4 292 | |||
Total long-term assets increased by USD 2.8 billion principally owing to translation effects. Following changes in US GAAP and expected changes in IFRS accounting rules, Novartis decided on June 26, 2003 to redeem, in advance, equity instruments (put and call options on Novartis shares) that were sold to Deutsche Bank in 2001. This resulted in an equity reduction of USD 3.5 billion.
The Group's equity increased USD 2.1 billion during 2003 to USD 30.4 billion at December 31, 2003, as a result of net income (USD 5.0 billion), translation gains (USD 2.4 billion), valuation differences on marketable securities and cash flow hedges and other items (USD 0.2 billion), offset by the repayment of equity instruments (USD 3.5 billion), the acquisition of treasury shares (USD 0.3 billion) and the dividend payment (USD 1.7 billion). Total financial debts increased by USD 0.4 billion. The valuation differences on available-for-sale marketable securities and deferred cash flow hedges increased from unrealized losses of USD 0.2 billion at December 31, 2002 to unrealized gains of USD 81 million at December 31, 2003. The year-end debt/equity ratio remained at the 2002 level of 0.20:1.
130
Novartis has long-term financial debt principally in the form of bonds. USD 3.0 billion of straight bonds were outstanding at December 31, 2003 compared with USD 2.6 billion at December 31, 2002.
For details on the maturity profile of debt, currency and interest rate structure, see note 18 to the consolidated financial statements.
The Novartis debt continues to be rated by Standard & Poor's and Moody's as AAA and Aaa for long-term maturities and A1+ and P1 for short-term debt respectively. The Group considers its working capital to be sufficient for its present requirements.
Liquidity and capital resources
The following table sets forth certain information about the Group's cash flow and net liquidity for each of the periods indicated.
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Cash flow from operating activities | 6 652 | 5 229 | ||
Cash flow used for investing activities | -1 298 | -2 865 | ||
Cash flow used for financing activities | -5 764 | -4 041 | ||
Translation effect on cash and cash equivalents | 258 | 836 | ||
Change in cash and cash equivalents | -152 | -841 | ||
Change in short- and long-term marketable securities | 869 | 189 | ||
Change in short- and long-term financial debt | -400 | -402 | ||
Change in net liquidity | 317 | -1 054 | ||
Net liquidity at January 1 | 6 972 | 8 026 | ||
Net liquidity at December 31 | 7 289 | 6 972 | ||
Cash flow from operating activities increased by USD 1.4 billion (27%) to USD 6.7 billion mainly as result of improved working capital management and higher net income. Depreciation, amortization and impairment charges increased by USD 50 million to USD 1.4 billion. Current tax payments were USD 49 million higher than prior year.
Cash outflow due to investing activities was USD 1.3 billion. USD 0.4 billion was spent to increase the strategic investment in Roche and for the acquisition of Idenix. The investment in tangible assets accounted for USD 1.3 billion. The net proceeds from sales of marketable securities was USD 0.4 billion.
The cash flow used for financing activities was USD 5.8 billion. USD 0.3 billion was spent on the acquisition of treasury shares, USD 1.7 billion on dividend payments and USD 3.5 billion on the repayment of equity instruments.
Overall liquidity (cash, cash equivalents and marketable securities including financial derivatives) amounted to USD 13.3 billion at December 31, 2003. Net liquidity (liquidity less financial debt) at year-end is USD 7.3 billion, USD 0.3 billion more than the December 31, 2002 level, despite the cash outflow due to the financing activities explained above.
131
Group free cash flow
The Group defines free cash flow as cash flow from operating activities less purchase/sale of tangible, intangible and financial assets and dividends paid. Cash effects on investment in/divestment of subsidiaries, associated companies and minority interests are excluded from free cash flow. The following is a summary of the Group's free cash flow:
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Cash flow from operating activities | 6 652 | 5 229 | ||
Purchase of tangible fixed assets | -1 329 | -1 068 | ||
Purchase of intangible assets | -214 | -90 | ||
Purchase of financial assets | -816 | -725 | ||
Proceeds from sale of tangible, intangible and financial assets | 1 059 | 979 | ||
Dividends paid to third parties | -1 724 | -1 367 | ||
Free cash flow | 3 628 | 2 958 | ||
The free cash flow increased 23% from USD 3.0 billion in 2002 to USD 3.6 billion in 2003.
Group capital expenditure on tangible fixed assets for the 2003 financial year totaled USD 1.3 billion (5.3% of sales), compared to USD 1.1 billion (5.1% of sales) in 2002. This level of capital expenditure reflects the continuing investment in Production as well as Research & Development facilities. The Group expects to maintain spending at approximately the 2003 percentage of sales in 2004 and to fund these expenditures with internally generated resources.
Free cash flow is presented as additional information as it is a useful indicator of the Group's ability to operate without reliance on additional borrowing or usage of existing cash. Free cash flow is a measure of the net cash generated which is available for debt repayment and investment in strategic opportunities.
The Group uses free cash flow as a performance measure when making internal comparisons of Divisions' and Business Units' results. Free cash flow of the Divisions and Business Units uses the same definition as that for the Group, however no dividends, tax or financial receipts or payments are included in the Division and Business Unit calculation.
Free cash flow
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Pharmaceuticals | 4 690 | 4 418 | ||
Sandoz | 146 | 252 | ||
OTC | 278 | 174 | ||
Animal Health | 91 | 97 | ||
Medical Nutrition(1) | 69 | 74 | ||
Infant & Baby | 210 | 144 | ||
CIBA Vision | 260 | 141 | ||
Consumer Health Division Management | -20 | |||
Corporate and other | -2 096 | -2 342 | ||
Total | 3 628 | 2 958 | ||
132
The following summarizes the Group's contractual obligations and other commercial commitments and the effect such obligations and commitments are expected to have on the Group's liquidity and cash flow in future periods.
|
Payments due by period |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Total USD millions |
Less than 1 year USD millions |
23 years USD millions |
45 years USD millions |
After 5 years USD millions |
|||||
Long-term debt | 3 236 | 45 | 1 855 | 1 297 | 39 | |||||
Operating leases | 928 | 211 | 291 | 156 | 270 | |||||
Research & Development commitments | 1 540 | 524 | 580 | 255 | 181 | |||||
Total contractual cash obligations | 5 704 | 780 | 2 726 | 1 708 | 490 | |||||
The Group expects to fund the operating leases and long-term Research & Development commitments with internally generated resources.
Special purpose entities
The Novartis Group has no unconsolidated special purpose financing or partnership entities. See also note 27 of the consolidated financial statements for a description of the unconsolidated share compensation foundation.
Earnings before interest, tax, depreciation and amortization (EBITDA)
The Group defines EBITDA as operating income before depreciation of tangible fixed assets and amortization of intangible assets, including goodwill, and any related impairment charges.
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Operating income | 5 889 | 5 092 | ||
Depreciation of tangible fixed assets | 737 | 592 | ||
Amortization of intangible assets | 410 | 355 | ||
Impairments of tangible and intangible assets | 136 | 348 | ||
Group EBITDA | 7 172 | 6 387 | ||
133
The breakdown of the Group EBITDA into Divisions/Business Units is as follows:
|
EBITDA 2003 USD millions |
% of sales |
EBITDA 2002 USD millions |
% of sales |
||||
---|---|---|---|---|---|---|---|---|
Pharmaceuticals | 5 072 | 31.7 | 4 705 | 34.8 | ||||
Sandoz | 787 | 27.1 | 413 | 22.7 | ||||
OTC | 350 | 19.8 | 273 | 17.9 | ||||
Animal Health | 117 | 17.2 | 117 | 18.8 | ||||
Medical Nutrition(1) | 104 | 12.8 | 187 | 20.3 | ||||
Infant & Baby | 307 | 22.6 | 303 | 22.7 | ||||
CIBA Vision | 297 | 22.7 | 243 | 21.4 | ||||
Consumer Health Division Management and other expenses | -39 | |||||||
Total Divisions/Business Units | 6 995 | 28.1 | 6 241 | 29.9 | ||||
Corporate and other | 177 | 146 | ||||||
Total Group | 7 172 | 28.8 | 6 387 | 30.6 | ||||
(1) 2002 includes divested activities. |
Enterprise value
Enterprise value represents the total amount that shareholders and debt holders have invested in Novartis, less the Group's liquidity. This is the base used by investors in Novartis to measure their EBITDA return.
|
December 31, 2003 USD millions |
December 31, 2002 USD millions |
||
---|---|---|---|---|
Market capitalization | 110 865 | 88 952 | ||
Minority interests | 90 | 66 | ||
Financial debts | 5 970 | 5 570 | ||
Less liquidity | -13 259 | -12 542 | ||
Enterprise value | 103 666 | 82 046 | ||
Enterprise value/EBITDA | 14.5 | 12.8 | ||
Value Added Statement
47.0% of the revenue from sales was used for purchasing goods and services from our suppliers. Of the Net Value Added of USD 13.7 billion, 47% was paid either directly or indirectly to the employees, 24% was retained in the business for future expansion and 17% was paid to public authorities and financial institutions. Dividends paid to the shareholders represented 12% of the Net Value Added.
134
Origin of value added
|
2003 USD millions |
2003 % of sales |
2002 % of sales |
|||
---|---|---|---|---|---|---|
Sales | 24 864 | 100 | 100 | |||
Change in inventory and own manufactured items | 384 | 1.5 | ||||
25 248 | 101.5 | 100 | ||||
Services bought from third parties: | ||||||
Material costs | -4 200 | -16.0 | -17.8 | |||
Other operating expenses | -7 497 | -30.1 | -26.5 | |||
Gross value added | 13 551 | 54.5 | 55.7 | |||
Depreciation, amortization and impairments on tangible and intangible assets | -1 283 | -5.1 | -6.2 | |||
Financial income | 1 473 | 5.9 | 10.3 | |||
Net Value Added (NVA) | 13 741 | 55.3 | 59.8 | |||
Equity strategy and share information
Novartis share price increases by 11% in 2003
In 2003 the equity capital market recovered after a difficult 2002. The Swiss Market Index (SMI) increased 19% with the Morgan Stanley World Pharmaceutical Index increasing 14% over the year. The Novartis share price evolved broadly in line with its pharmaceutical industry peers and increased 11% from CHF 50.45 at the beginning of the year to CHF 56.15 on December 31, 2003. The market capitalization of Novartis amounted to USD 111 billion on December 31, 2003, compared to USD 89 billion at the end of 2002.
Dividend continuously increased since 1996
The Board is proposing to the Annual General Meeting to increase the dividend payment for 2003 by 5% to CHF 1.00 per share (2002: CHF 0.95) This represents the seventh consecutive increase in the dividend per share since the formation of Novartis in late 1996. If the 2003 dividend proposal is approved by the shareholders, dividends paid out on the outstanding shares will amount to USD 2.0 billion (2002: USD 1.7 billion), resulting in a pay-out ratio of 39% (2002: 36%). Based on the 2003 year-end share price of CHF 56.15, the Novartis dividend yield is 1.8% (2002: 1.9%). The dividend payment date for 2003 will be on February 27, 2004. With the exception of 275 million treasury shares, all issued shares are dividend bearing.
Third share repurchase program initiated
On July 22, 2002, Novartis initiated its third share buy-back program to repurchase shares on the SWX Swiss Exchange for up to a total of CHF 4 billion. During 2003, 24.3 million shares were repurchased via a second trading line for a total amount of USD 939 million and 17.1 million shares, net, were sold on the first trading line for a total of USD 666 million. In 2003 the Group's share capital was reduced by 22.7 million shares relating to shares bought on the second trading line in 2002. A proposal will be made to the Annual General Meeting to reduce the share capital by a further 24.3 million shares relating to the shares bought on the second trading line in 2003.
135
US dollar reporting
The Group changed the reporting currency of its consolidated financial statements from Swiss francs to US dollars from January 1, 2003 and restated prior year consolidated financial information into US dollars. At the same time the 2002 income statement classification was changed by transferring USD 336 million from Marketing & Sales to other expense categories (Cost of Goods Sold (USD 86 million) relating to certain finished goods, warehousing and distribution expenses; Research & Development expenses (USD 55 million) relating to certain Phase IV clinical trials performed after launch of a new product; General & Administration expenses (USD 195 million) relating to certain third party royalty expenses on in-licensed products).
The move to presenting the consolidated financial data in US dollars reflects the increasing importance of the Novartis Group's sales in the US and makes the Group's financial information more easily comparable with peer companies in the pharmaceutical industry.
Information on Novartis shares
You can find further information on the Internet at http://www.novartis.com/investors.
Chart of Novartis 2003 share price movement
Key Novartis share data
|
2003 |
2002 |
||
---|---|---|---|---|
Issued shares | 2 801 470 000 | 2 824 150 000 | ||
Of which treasury shares | ||||
Reserved to secure conversion rights on bonds and call options | 54 901 962 | |||
Not specifically reserved | 333 701 340 | 294 277 419 | ||
Treasury shares | 333 701 340 | 349 179 381 | ||
Outstanding shares at December 31 | 2 467 768 660 | 2 474 970 619 | ||
Average number of shares outstanding | 2 473 522 565 | 2 515 311 685 | ||
136
Per share information(1)
(in USD except dividend which is in CHF)
|
2003 |
2002 |
||
---|---|---|---|---|
Basic earnings per share | 2.03 | 1.88 | ||
Diluted earnings per share | 2.00 | 1.84 | ||
Operating cash flow | 2.69 | 2.08 | ||
Year end equity | 12.33 | 11.42 | ||
Dividend(2) (CHF) | 1.00 | 0.95 | ||
Key ratiosDecember 31
|
2003 |
2002 |
||
---|---|---|---|---|
Price/earnings ratio(1) | 22.1 | 19.1 | ||
Enterprise value/EBITDA | 14.5 | 12.8 | ||
Dividend yield (%) | 1.8 | 1.9 | ||
Key data on ADSs issued under US American Depositary Receipts (ADR) program
|
2003 |
2002 |
||
---|---|---|---|---|
Year end ADS price (USD) | 45.89 | 36.73 | ||
ADSs outstanding(1) | 150 886 907 | 93 388 802 | ||
Share price (CHF)
|
2003 |
2002 |
||
---|---|---|---|---|
Year end | 56.15 | 50.45 | ||
Highest | 56.15 | 69.10 | ||
Lowest | 46.05 | 50.00 | ||
Year-end market capitalization (USD millions) | 110 865 | 88 952 | ||
Trading
The Novartis shares are listed in Switzerland, and traded on virt-x, an Exchange for pan-European blue chip shares. The ADSs (American Depositary Shares) are listed on the New York Stock Exchange. The shares are also traded on the International Retail Service (IRS), of the London Stock Exchange.
137
Symbols
|
virt-x (Reuters/Bloomberg) |
IRS (Bloomberg) |
NYSE (Reuters/Bloomberg) |
|||
---|---|---|---|---|---|---|
Shares | NOVN.VX/NOVN VX | NOV LN | ||||
ADSs | NVS | |||||
Widely dispersed shareholdings
Novartis shares are widely held. As of December 31, 2003, Novartis had approximately 174 000 shareholders (2002: 167 000) registered in its share register. Based on the Novartis AG share register approximately 62% (2002: 68%) of the Novartis AG shares which are registered by name are held in Switzerland and approximately 26% are held by approximately 1 100 holders in the USA (2002: 18% and 1 100 holders, respectively). 25% of the Novartis AG shares are not entered in the share register. Because certain of the shares are held by brokers or other nominees, the above numbers are not representative of the actual number of beneficial owners located in Switzerland or the US.
Limitation of registration, voting rights and major shareholders
No person or entity shall be registered with the right to vote for more than 2% of the share capital as set forth in the Commercial Register. The Board of Directors may allow exemptions from the limitation for registration in the share register.
Based upon information available to the Group, shareholders owning 2% or more of Novartis AG's capital at December 31 are listed in the table below:
|
% holding of share capital December 31, 2003 |
% holding of share capital December 31, 2002 |
||
---|---|---|---|---|
Novartis Foundation for Employee Participation, Basel | 3.3 | 3.3 | ||
Emasan AG, Basel | 3.1 | 3.1 | ||
Exchange rate exposure and risk management
Novartis transacts its business in many currencies other than the US dollar. As a result of the Group's foreign currency exposure, exchange rate fluctuations have a significant impact in the form of both translation risk and transaction risk on its income statement. Translation risk is the risk that the Group's consolidated financial statements for a particular period or as of a certain date may be affected by changes in the prevailing rates of the various currencies of the reporting subsidiaries against the US dollar. Transaction risk is the risk that the value of transactions executed in currencies other than the subsidiary's measurement currency may vary according to currency fluctuations.
138
Quantitative and qualitative disclosures about market risk
Growth and currency contributions
|
Local currencies % 2003 |
Local currencies % 2002 |
USD % 2003 |
USD % 2002 |
||||
---|---|---|---|---|---|---|---|---|
Sales | 11 | 11 | 19 | 11 | ||||
Operating income | 1 | 10 | 16 | 18 | ||||
Net income | -8 | 15 | 6 | 23 | ||||
Sales and operating costs by currencies
|
Sales % 2003 |
Sales % 2002 |
Costs % 2003 |
Costs % 2002(1) |
||||
---|---|---|---|---|---|---|---|---|
USD | 43 | 43 | 41 | 41 | ||||
EUR | 26 | 25 | 23 | 22 | ||||
CHF | 4 | 5 | 17 | 22 | ||||
JPY | 8 | 8 | 4 | 4 | ||||
Other | 19 | 19 | 15 | 11 | ||||
Liquid funds and financial debt by currencies
|
Liquid funds % 2003 |
Liquid funds % 2002 |
Financial debt % 2003 |
Financial debt % 2002 |
||||
---|---|---|---|---|---|---|---|---|
USD | 50 | 8 | 28 | 31 | ||||
EUR | 15 | 24 | 29 | 6 | ||||
CHF | 32 | 64 | 40 | 37 | ||||
JPY | 1 | 1 | 20 | |||||
Other | 2 | 3 | 3 | 6 | ||||
On average in 2003, the US dollar was weaker against the Swiss franc, Japanese yen, Euro and British pound than in 2002. The total positive currency effect on sales growth was 8% and the total positive impact on operating income growth was 15%.
139
Market risk: Novartis is exposed to market risk, primarily related to foreign exchange, interest rates and the market value of the investments of liquid funds. Management actively monitors these exposures. To manage the volatility relating to these exposures, the Group enters into a variety of derivative financial instruments. The Group's objective is to reduce, where it deems appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates, foreign currency rates and market rates of investments of liquid funds. It is the Group's policy and practice to use derivative financial instruments to manage exposures and to enhance the yield on the investment of liquid funds. It does not enter any financial transactions containing a risk that cannot be quantified at the time the transaction is concluded. The Group only sells existing assets or enters into transactions and future transactions (in the case of anticipatory hedges) which it confidently expects it will have in the future, based on past experience. In the case of liquid funds, the Group writes call options on assets it has or it writes put options on positions it wants to acquire and has the liquidity to acquire. The Group expects that any loss in value for these instruments generally would be offset by increases in the value of the underlying transactions.
Foreign exchange rates: The Group uses the US dollar as its presentation currency and is therefore exposed to foreign exchange movements, primarily in European, Japanese and other Asian and Latin American currencies. Consequently, it enters into various contracts which change in value as foreign exchange rates change, to preserve the value of assets, commitments and anticipated transactions. It uses forward contracts and foreign currency option contracts to hedge certain anticipated net revenues in foreign currencies.
Net investments in foreign countries are long-term investments. Their fair value changes through movements of the currency exchange rates. In the very long term, however, the difference in the inflation rate should match the exchange rate movement, so that the market value of the real assets abroad will compensate for the change due to currency movements. For this reason, the Group only hedges the net investments in foreign subsidiaries in exceptional cases.
Commodities: The Group has only a very limited exposure to price risk related to anticipated purchases of certain commodities used as raw materials by its 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 materiality levels. Accordingly, it does not enter into significant commodity futures, forward and option contracts to manage fluctuations in prices of anticipated purchases.
Interest rates: The Group manages its net exposure to interest rate risk through the proportion of fixed rate debt and variable rate debt in its total debt portfolio. To manage this mix, it may enter into interest rate swap agreements, in which it exchanges periodic payments based on a notional amount and agreed-upon fixed and variable interest rates.
Equity risk: The Group purchases equities as investments of its liquid funds. As a policy, it limits its holdings in an unrelated company to less than 5% of its liquid funds. Potential investments are thoroughly analyzed in respect to their past financial track record (mainly cash flow return on investment), their market potential, their management and their competitors. Call options are written on equities which the Group owns, and put options are written on equities which the Group wants to buy and for which cash has been reserved.
Management summary: Use of derivative financial instruments has not had a material impact on the Group's financial position at December 31, 2003 and 2002 or its results of operations for the years ended December 31, 2003 and 2002.
140
Value at risk: The Group uses a value at risk (VAR) computation to estimate the potential ten-day loss in the fair value of its interest rate sensitive financial instruments, the loss in pre-tax earnings of its foreign currency price-sensitive derivative financial instruments as well as the potential ten-day loss of its equity holdings. It uses a ten-day period because it is assumed that not all positions could be undone in a single day, given the size of the positions. The VAR computation includes the Group's debt, short-term and long-term investments, foreign currency forwards, swaps and options as well as anticipated transactions. Foreign currency trade payables and receivables as well as net investments in foreign subsidiaries are excluded from the computation.
The VAR estimates are made assuming normal market conditions, using a 95% confidence interval. The Group uses a "Delta Normal" model to determine the observed inter-relationships between movements in interest rates, stock markets and various currencies. These inter-relationships are determined by observing interest rate, stock market movements and forward currency rate movements over a 60-day period for the calculation of VAR amounts.
The estimated potential ten-day loss in fair value of the Group's interest rate sensitive instruments, primarily debt and investments of liquid funds under normal market conditions, the estimated potential ten-day loss in pre-tax earnings from foreign currency instruments under normal market conditions, and the estimated potential ten-day loss on its equity holdings, as calculated in the VAR model, follow:
|
December 31, 2003 USD millions |
December 31, 2002 USD millions |
||
---|---|---|---|---|
Instruments sensitive to foreign currency rates | 244 | 128 | ||
Instruments sensitive to equity market movements | 67 | 421 | ||
Instruments sensitive to interest rates | 112 | 94 | ||
All instruments | 356 | 509 | ||
The average, high, and low VAR amounts for 2003 are as follows:
|
Average USD millions |
High USD millions |
Low USD millions |
|||
---|---|---|---|---|---|---|
Instruments sensitive to foreign currency rates | 184 | 307 | 74 | |||
Instruments sensitive to equity market movements | 228 | 440 | 67 | |||
Instruments sensitive to interest rates | 100 | 118 | 83 | |||
All instruments | 404 | 489 | 302 | |||
The VAR computation is a risk analysis tool designed to statistically estimate the maximum probable ten-day loss from adverse movements in interest rates, foreign currency rates and equity prices under normal market conditions. The computation does not purport to represent actual losses in fair value on earnings to be incurred by the Group, nor does it consider the effect of favorable changes in market rates. The Group cannot predict actual future movements in such market rates and it does not claim that these VAR results are indicative of future movements in such market rates or to be representative of any actual impact that future changes in market rates may have on the Group's future results of operations or financial position.
141
In addition to these VAR analyses, the Group uses stress testing techniques which are aimed at reflecting a worst case scenario. For these calculations, the Group uses the worst movements during a period of six months over the past 20 years in each category. For 2003 and 2002, the worst case loss scenario was configured as follows:
|
December 31, 2003 USD millions |
December 31, 2002 USD millions |
||
---|---|---|---|---|
Bond portfolio | 200 | 831 | ||
Money market and linked financial instruments | 118 | 105 | ||
Equities | 287 | 767 | ||
Foreign exchange risks | 232 | 339 | ||
Total | 837 | 2 042 | ||
In the Group's risk analysis, it considered this worst case scenario acceptable inasmuch as it could reduce the income, but would not endanger the solvency and/or the investment grade credit standing of the Group. While it is highly unlikely that all worst case fluctuations would happen simultaneously, as shown in the model, the actual market can of course produce bigger movements in the future than it has historically. Additionally, in such a worst case environment, management actions could further mitigate the Group's exposure.
The major financial risks facing the Group are managed centrally by Group Treasury. Only residual risks and some currency risks are managed in the subsidiaries. The collective amount of the residual risks is however below 10% of the global risks.
Novartis has a written Treasury Policy, has implemented a strict segregation of front office and back office controls and the Group does regular reconciliations of its positions with its counterparties. In addition, internal and external audits of the Treasury function are performed at regular intervals.
142
Summary of Quarterly Financial Data for 2003 and 2002
USD millions unless indicated otherwise |
Q1 |
Q2 |
Q3 |
Q4 |
2003 |
Q1 |
Q2 |
Q3 |
Q4 |
2002 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Income Statement | |||||||||||||||||||||
Total sales | 5 721 | 6 203 | 6 210 | 6 730 | 24 864 | 4 742 | 5 193 | 5 373 | 5 569 | 20 877 | |||||||||||
Cost of Goods Sold | -1 363 | -1 423 | -1 500 | -1 608 | -5 894 | -1 199 | -1 229 | -1 306 | -1 260 | -4 994 | |||||||||||
Gross profit | 4 358 | 4 780 | 4 710 | 5 122 | 18 970 | 3 543 | 3 964 | 4 067 | 4 309 | 15 883 | |||||||||||
Marketing & Sales | -1 833 | -1 995 | -1 850 | -2 176 | -7 854 | -1 529 | -1 755 | -1 696 | -1 757 | -6 737 | |||||||||||
Research & Development | -843 | -943 | -878 | -1 092 | -3 756 | -631 | -672 | -730 | -810 | -2 843 | |||||||||||
General & Administration | -331 | -379 | -513 | -248 | -1 471 | -297 | -205 | -321 | -388 | -1 211 | |||||||||||
Operating income | 1 351 | 1 463 | 1 469 | 1 606 | 5 889 | 1 086 | 1 332 | 1 320 | 1 354 | 5 092 | |||||||||||
Result from associated companies | -246 | 9 | 25 | 12 | -200 | -9 | 15 | 11 | -24 | -7 | |||||||||||
Financial income, net | 180 | 119 | 96 | -16 | 379 | 225 | 190 | 112 | 86 | 613 | |||||||||||
Income before taxes and minority interests | 1 285 | 1 591 | 1 590 | 1 602 | 6 068 | 1 302 | 1 537 | 1 443 | 1 416 | 5 698 | |||||||||||
Taxes | -219 | -270 | -271 | -248 | -1 008 | -237 | -246 | -245 | -231 | -959 | |||||||||||
Minority interests | -3 | -5 | -42 | 6 | -44 | -1 | -5 | -10 | 2 | -14 | |||||||||||
Net income | 1 063 | 1 316 | 1 277 | 1 360 | 5 016 | 1 064 | 1 286 | 1 188 | 1 187 | 4 725 | |||||||||||
EPS (USD) | 0.43 | 0.53 | 0.52 | 0.55 | 2.03 | 0.42 | 0.50 | 0.48 | 0.48 | 1.88 | |||||||||||
Sales by Business Unit | |||||||||||||||||||||
Pharmaceuticals | 3 609 | 3 991 | 4 041 | 4 379 | 16 020 | 3 068 | 3 377 | 3 451 | 3 632 | 13 528 | |||||||||||
Sandoz | 761 | 702 | 675 | 768 | 2 906 | 385 | 399 | 496 | 537 | 1 817 | |||||||||||
OTC | 401 | 429 | 443 | 499 | 1 772 | 340 | 372 | 396 | 413 | 1 521 | |||||||||||
Animal Health | 157 | 182 | 163 | 180 | 682 | 150 | 163 | 157 | 153 | 623 | |||||||||||
Medical Nutrition | 190 | 211 | 206 | 208 | 815 | 163 | 189 | 185 | 174 | 711 | |||||||||||
Infant & Baby | 307 | 357 | 349 | 348 | 1 361 | 323 | 345 | 335 | 330 | 1 333 | |||||||||||
CIBA Vision | 296 | 331 | 333 | 348 | 1 308 | 255 | 295 | 297 | 288 | 1 135 | |||||||||||
Consumer Health (ongoing) | 2 112 | 2 212 | 2 169 | 2 351 | 8 844 | 1 616 | 1 763 | 1 866 | 1 895 | 7 140 | |||||||||||
Divested Health & Functional Food activities | 58 | 53 | 56 | 42 | 209 | ||||||||||||||||
Total sales | 5 721 | 6 203 | 6 210 | 6 730 | 24 864 | 4 742 | 5 193 | 5 373 | 5 569 | 20 877 | |||||||||||
Operating Income by Business Unit | |||||||||||||||||||||
Pharmaceuticals | 1 100 | 1 012 | 1 137 | 1 174 | 4 423 | 861 | 1 003 | 986 | 1 041 | 3 891 | |||||||||||
Sandoz | 112 | 145 | 94 | 122 | 473 | 55 | 58 | 75 | 77 | 265 | |||||||||||
OTC | 52 | 82 | 82 | 93 | 309 | 32 | 45 | 84 | 79 | 240 | |||||||||||
Animal Health | 23 | 17 | 21 | 27 | 88 | 25 | 29 | 23 | 15 | 92 | |||||||||||
Medical Nutrition | 20 | 16 | 18 | 28 | 82 | 6 | 10 | 3 | (15 | ) | 4 | ||||||||||
Infant & Baby | 45 | 73 | 70 | 66 | 254 | 59 | 61 | 63 | 44 | 227 | |||||||||||
CIBA Vision | 29 | 60 | 48 | 16 | 153 | 23 | 39 | 37 | 19 | 118 | |||||||||||
Divisional Management costs | -4 | -6 | -7 | -22 | -39 | ||||||||||||||||
Consumer Health (ongoing) | 277 | 387 | 326 | 330 | 1 320 | 200 | 242 | 285 | 219 | 946 | |||||||||||
Divested Health & Functional Food activities | 8 | 8 | 8 | 116 | 140 | ||||||||||||||||
Corporate income/expense, net | -26 | 64 | 6 | 102 | 146 | 17 | 79 | 41 | -22 | 115 | |||||||||||
Total operating income | 1 351 | 1 463 | 1 469 | 1 606 | 5 889 | 1 086 | 1 332 | 1 320 | 1 354 | 5 092 | |||||||||||
143
Summary of Financial Data 19972002 (since formation of Novartis)
USD millions unless indicated otherwise |
|
2003 |
2002 |
2001 |
2000 |
1999 |
1998 |
1997 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Novartis Group sales | 24 864 | 20 877 | 18 762 | 20 997 | 21 496 | 21 863 | 21 503 | |||||||||
Change relative to preceding year | % | 19.1 | 11.3 | -10.6 | -2.3 | -1.7 | 1.7 | |||||||||
Pharmaceuticals Division sales | 16 020 | 13 528 | 11 965 | 10 744 | 10 157 | 10 000 | 9 732 | |||||||||
Change relative to preceding year | % | 18.4 | 13.1 | 11.4 | 5.8 | 1.6 | 2.8 | |||||||||
Consumer Health Division sales | 8 844 | 7 349 | 6 797 | 6 242 | 6 621 | 6 706 | 6 644 | |||||||||
Change relative to preceding year | % | 20.3 | 8.1 | 8.9 | -5.7 | -1.3 | 0.9 | |||||||||
Novartis Group salescontinuing activities | 24 864 | 20 877 | 18 762 | 16 986 | 16 778 | 16 706 | 16 376 | |||||||||
Change relative to preceding year | % | 19.1 | 11.3 | 10.5 | 1.2 | 0.4 | 2.0 | |||||||||
Discontinued Agribusiness Division sales | 4 011 | 4 718 | 5 157 | 5 127 | ||||||||||||
Operating income | 5 889 | 5 092 | 4 325 | 4 684 | 4 868 | 4 772 | 4 612 | |||||||||
Change relative to preceding year | % | 15.6 | 17.7 | -7.7 | -3.8 | 2.0 | 3.5 | |||||||||
As a % of sales | % | 23.7 | 24.4 | 23.1 | 22.3 | 22.6 | 21.8 | 21.4 | ||||||||
As a % of average equity | % | 20.1 | 19.1 | 18.2 | 20.4 | 21.1 | 23.2 | 23.7 | ||||||||
As a % of average net operating assets | % | 26.4 | 26.4 | 28.1 | 32.1 | 31.8 | 33.5 | 31.0 | ||||||||
Operating income (excluding discontinued Agribusiness Division) | 5 889 | 5 092 | 4 325 | 4 000 | 4 437 | 4 036 | 3 688 | |||||||||
Change relative to preceding year | % | 15.7 | 17.7 | 8.1 | -9.8 | 9.9 | 9.4 | |||||||||
As a % of sales excluding discontinued Agribusiness Division | % | 23.7 | 24.4 | 23.1 | 23.5 | 26.4 | 24.2 | 22.5 | ||||||||
Net income (including discontinued Agribusiness Division) | 5 016 | 4 725 | 3 836 | 3 822 | 4 401 | 4 145 | 3 592 | |||||||||
Change relative to preceding year | % | 6.2 | 23.2 | 0.4 | -13.2 | 6.2 | 15.4 | |||||||||
As a % of sales | % | 20.2 | 22.6 | 20.4 | 18.2 | 20.5 | 19.0 | 16.7 | ||||||||
As a % of average equity | % | 17.1 | 17.7 | 16.1 | 16.7 | 19.1 | 20.2 | 18.5 | ||||||||
Dividends of Novartis AG(1) | 1 974 | 1 724 | 1 367 | 1 268 | 1 259 | 1 215 | 1 130 | |||||||||
Cash flow from operating activities | 6 652 | 5 229 | 4 358 | 4 538 | 4 597 | 4 037 | 3 148 | |||||||||
Change relative to preceding year | % | 27.2 | 20.0 | -4.0 | -1.3 | 13.9 | 28.2 | |||||||||
As a % of sales | % | 26.8 | 25.0 | 23.2 | 21.6 | 21.4 | 18.5 | 14.6 | ||||||||
Free cash flow | 3 628 | 2 958 | 2 453 | 2 678 | 2 350 | 1 809 | 844 | |||||||||
Change relative to preceding year | % | 22.7 | 20.6 | -8.4 | 13.9 | 29.9 | 114.3 | |||||||||
As a % of sales | % | 14.6 | 14.2 | 13.1 | 12.8 | 10.9 | 8.3 | 3.9 | ||||||||
Investment in tangible fixed assets | 1 329 | 1 068 | 801 | 803 | 914 | 1 143 | 1 074 | |||||||||
Change relative to preceding year | % | 24.4 | 33.3 | -0.2 | -12.1 | -20.1 | 6.4 | |||||||||
As a % of sales | % | 5.3 | 5.1 | 4.3 | 3.8 | 4.2 | 5.2 | 5.0 | ||||||||
Depreciation of tangible fixed assets | 737 | 592 | 557 | 706 | 842 | 801 | 786 | |||||||||
As a % of sales | % | 3.0 | 2.8 | 3.0 | 3.4 | 3.9 | 3.7 | 3.7 | ||||||||
Research & development expenditure | 3 756 | 2 843 | 2 528 | 2 764 | 2 829 | 2 694 | 2 579 | |||||||||
As a % of sales | % | 15.1 | 13.6 | 13.5 | 13.2 | 13.2 | 12.3 | 12.0 | ||||||||
Pharmaceuticals research & development expenditure | 3 079 | 2 355 | 2 088 | 1 963 | 1 895 | 1 799 | 1 813 | |||||||||
As a % of Pharmaceuticals Division total sales | % | 19.1 | 17.3 | 17.3 | 18.0 | 18.7 | 18.0 | 18.6 | ||||||||
Total assets | 49 317 | 45 025 | 39 763 | 35 507 | 41 134 | 40 743 | 36 747 | |||||||||
Liquidity | 13 259 | 12 542 | 13 194 | 12 659 | 14 187 | 14 259 | 12 662 | |||||||||
Equity | 30 429 | 28 269 | 25 161 | 22 492 | 23 363 | 22 751 | 18 357 | |||||||||
Debt/equity ratio | 0.20:1 | 0.20:1 | 0.21:1 | 0.16:1 | 0.27:1 | 0.28:1 | 0.41:1 | |||||||||
Current ratio | 2.4:1 | 2.5:1 | 2.4:1 | 2.8:1 | 2.0:1 | 2.0:1 | 2.0:1 | |||||||||
Net operating assets | 23 230 | 21 363 | 17 197 | 13 634 | 15 543 | 15 091 | 13 375 | |||||||||
Change relative to preceding year | % | 8.7 | 24.2 | 26.1 | -12.3 | 3.0 | 12.8 | |||||||||
As a % of sales | % | 93.4 | 102.3 | 91.7 | 64.9 | 72.3 | 69.0 | 62.2 | ||||||||
Personnel costs | 6 252 | 5 128 | 4 362 | 4 635 | 4 789 | 4 892 | 5 033 | |||||||||
As a % of sales | % | 25.1 | 24.6 | 23.2 | 22.1 | 22.3 | 22.4 | 23.4 | ||||||||
Number of employees at year end | number | 78 541 | 72 877 | 71 116 | 67 653 | 81 854 | 82 449 | 87 239 | ||||||||
Sales per employee (average) | USD | 318 041 | 282 041 | 266 809 | 252 879 | 260 684 | 254 715 | 242 003 | ||||||||
144
Novartis Group Consolidated Financial Statements
Consolidated Income Statements
for the years ended December 31, 2003 and 2002
|
Notes |
2003 USD millions |
2002 USD millions |
|||
---|---|---|---|---|---|---|
Sales | 3/4 | 24 864 | 20 877 | |||
Cost of Goods Sold | -5 894 | -4 994 | ||||
Gross profit | 18 970 | 15 883 | ||||
Marketing & Sales | -7 854 | -6 737 | ||||
Research & Development | 3 756 | -2 843 | ||||
General & Administration | -1 471 | -1 211 | ||||
Operating income | 3/4 | 5 889 | 5 092 | |||
Result from associated companies | 10 | -200 | -7 | |||
Financial income, net | 5 | 379 | 613 | |||
Income before taxes and minority interests | 6 068 | 5 698 | ||||
Taxes | 6 | -1 008 | -959 | |||
Income before minority interests | 5 060 | 4 739 | ||||
Minority interests | -44 | -14 | ||||
Net income | 5 016 | 4 725 | ||||
Earnings per share (USD | 7 | 2.03 | 1.88 | |||
Diluted earnings per share (USD | 7 | 2.00 | 1.84 | |||
The accompanying notes form an integral part of the consolidated financial statements.
145
Consolidated Balance Sheets
at December 31, 2003 and 2002
|
Notes |
2003 USD millions |
2002 USD millions |
|||
---|---|---|---|---|---|---|
Assets | ||||||
Long-term assets | ||||||
Tangible fixed assets | 8 | 7 597 | 6 321 | |||
Intangible assets | 9 | 4 708 | 4 395 | |||
Investments in associated companies | 10 | 6 848 | 6 483 | |||
Deferred taxes | 11 | 2 401 | 2 178 | |||
Financial and other assets | 12 | 5 490 | 4 833 | |||
Total long-term assets | 27 044 | 24 210 | ||||
Current assets | ||||||
Inventories | 13 | 3 346 | 2 963 | |||
Trade accounts receivable | 14 | 4 376 | 3 697 | |||
Other current assets | 15 | 1 292 | 1 613 | |||
Marketable securities & financial derivatives | 16 | 7 613 | 6 744 | |||
Cash and cash equivalents | 5 646 | 5 798 | ||||
Total current assets | 22 273 | 20 815 | ||||
Total assets | 49 317 | 45 025 | ||||
Equity and liabilities |
||||||
Equity | ||||||
Share capital | 17 | 1 017 | 1 025 | |||
Treasury shares | 17 | -121 | -127 | |||
Reserves | 29 533 | 27 371 | ||||
Total equity | 30 429 | 28 269 | ||||
Minority interests | 90 | 66 | ||||
Liabilities | ||||||
Long-term liabilities | ||||||
Financial debts | 18 | 3 191 | 2 729 | |||
Deferred taxes | 11 | 3 138 | 2 821 | |||
Provisions and other long-term liabilities | 19 | 3 149 | 2 868 | |||
Total long-term liabilities | 9 478 | 8 418 | ||||
Short-term liabilities | ||||||
Trade accounts payable | 1 665 | 1 266 | ||||
Financial debts | 20 | 2 779 | 2 841 | |||
Other short-term liabilities | 21 | 4 876 | 4 165 | |||
Total short-term liabilities | 9 320 | 8 272 | ||||
Total liabilities | 18 798 | 16 690 | ||||
Total equity, minority interests and liabilities | 49 317 | 45 025 | ||||
The accompanying notes form an integral part of the consolidated financial statements.
146
Consolidated Cash Flow Statements
for the years ended December 31, 2003 and 2002
|
Notes |
2003 USD millions |
2002 USD millions |
|||||
---|---|---|---|---|---|---|---|---|
Net income | 5 016 | 4 725 | ||||||
Reversal of non-cash items | ||||||||
Minority interests | 44 | 14 | ||||||
Taxes | 1 008 | 959 | ||||||
Depreciation, amortization and impairments on | ||||||||
Tangible fixed assets | 768 | 622 | ||||||
Intangible assets | 515 | 673 | ||||||
Financial assets | 103 | 41 | ||||||
Result from associated companies | 200 | 7 | ||||||
Divestment gains | -133 | |||||||
Gains on disposal of tangible and intangible assets | -325 | -260 | ||||||
Net financial income | 379 | 613 | ||||||
Dividends received | 12 | 14 | ||||||
Interest and other financial receipts | 501 | 435 | ||||||
Interest and other financial payments | -240 | -174 | ||||||
Receipts from associated companies | 62 | 44 | ||||||
Taxes paid | -842 | -769 | ||||||
Cash flow before working capital and provision changes | 6 443 | 5 585 | ||||||
Restructuring payments and other cash payments out of provisions | -248 | -204 | ||||||
Change in net current assets and other operating cash flow items | 22 | 457 | -152 | |||||
Cash flow from operating activities | 6 652 | 5 229 | ||||||
Investment in tangible fixed assets | -1 329 | -1 068 | ||||||
Proceeds from disposals of tangible fixed assets | 92 | 183 | ||||||
Purchase of intangible assets | -214 | -90 | ||||||
Proceeds from disposals of intangible assets | 335 | 214 | ||||||
Purchase of financial assets | -816 | -725 | ||||||
Proceeds from disposals of financial assets | 632 | 582 | ||||||
Acquisition of additional interests in associated companies | -120 | -1 846 | ||||||
Acquisition/divestment of subsidiaries | 23 | -272 | -542 | |||||
Acquisition of minorities | -10 | -2 | ||||||
Proceeds from disposals of marketable securities | 10 511 | 7 086 | ||||||
Payments for acquiring marketable securities | -10 107 | -6 657 | ||||||
Cash flow used for investing activities | -1 298 | -2 865 | ||||||
Acquisition of treasury shares | -273 | -3 228 | ||||||
Increase in long-term financial debts | 18 | 999 | ||||||
Repayment of long-term financial debts | -31 | -18 | ||||||
Repayment of put and call options on Novartis shares | -3 458 | |||||||
Change in short-term financial debts | -296 | -427 | ||||||
Dividends paid | -1 724 | -1 367 | ||||||
Cash flow used for financing activities | -5 764 | -4 041 | ||||||
Net effect of currency translation on cash and cash equivalents | 258 | 836 | ||||||
Net change in cash and cash equivalents | -152 | -841 | ||||||
Cash and cash equivalents at the beginning of the year | 5 798 | 6 639 | ||||||
Cash and cash equivalents at end of the year | 5 646 | 5 798 | ||||||
The accompanying notes form an integral part of the consolidated financial statements.
147
Consolidated Statement of Changes in Equity
for the years ended December 31, 2003 and 2002
|
Notes |
Share premium USD millions |
Retained earnings USD millions |
Fair value adjustments on marketable securities not recorded in net income USD millions |
Fair value of deferred cash flow hedges not recorded in net income USD millions |
Cumulative translation differences not recorded in net income USD millions |
Total reserves USD millions |
Share capital USD millions |
Treasury shares USD millions |
Total equity USD millions |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
January 1, 2002 | 2 565 | 25 642 | 656 | -10 | -4 617 | 24 236 | 1 047 | -122 | 25 161 | |||||||||||
Fair value adjustments on financial instruments | 24a | 98 | -955 | 123 | -734 | -734 | ||||||||||||||
Associated companies' equity movements | 24b | -74 | -30 | -104 | -104 | |||||||||||||||
Recycled goodwill | 24c | 25 | 25 | 25 | ||||||||||||||||
Translation effects | 3 791 | 3 791 | 3 791 | |||||||||||||||||
Net income | 4 725 | 4 725 | 4 725 | |||||||||||||||||
Total of components of comprehensive income | 4 774 | -955 | 123 | 3 761 | 7 703 | 7 703 | ||||||||||||||
Dividends | 24d | -1 367 | -1 367 | -1 367 | ||||||||||||||||
Acquisition of treasury shares | 24e | -3 201 | -3 201 | -27 | -3 228 | |||||||||||||||
Reduction in share capital | 24f | -22 | 22 | |||||||||||||||||
Total of other equity movements | -4 568 | -4 568 | -22 | -5 | -4 595 | |||||||||||||||
December 31, 2002 | 2 565 | 25 848 | -299 | 113 | -856 | 27 371 | 1 025 | -127 | 28 269 | |||||||||||
Fair value adjustments on financial instruments | 24a | 332 | -106 | 226 | 226 | |||||||||||||||
Associated companies' equity movements | 24b | -31 | 41 | 10 | 10 | |||||||||||||||
Translation effects | 2 363 | 2 363 | 2 363 | |||||||||||||||||
Net income | 5 016 | 5 016 | 5 016 | |||||||||||||||||
Total of components of comprehensive income | 4 985 | 373 | -106 | 2 363 | 7 615 | 7 615 | ||||||||||||||
Dividends | 24d | -1 724 | -1 724 | -1 724 | ||||||||||||||||
Acquisition of treasury shares | 24e | -271 | -271 | -2 | -273 | |||||||||||||||
Redemption of call options on Novartis shares | 24g | -1 848 | 92 | -435 | -2 191 | -2 191 | ||||||||||||||
Redemption of put options on Novartis shares | 24h | -541 | -603 | -123 | -1 267 | -1 267 | ||||||||||||||
Reduction in share capital | 24f | -8 | 8 | |||||||||||||||||
Total of other equity movements | -2 389 | -2 506 | -558 | -5 453 | -8 | 6 | -5 455 | |||||||||||||
December 31, 2003 | 176 | 28 327 | 74 | 7 | 949 | 29 533 | 1 017 | -121 | 30 429 | |||||||||||
The accompanying notes form an integral part of the consolidated financial statements.
148
Notes to the Novartis Group Consolidated Financial Statements
1. Accounting policies
The Novartis Group (Group or Novartis) consolidated financial statements are prepared in accordance with the historical cost convention except for the revaluation to market value of certain financial assets and liabilities and comply with the International Financial Reporting Standards (IFRS) formulated by the International Accounting Standards Board (IASB) and with International Accounting Standards (IAS) and interpretations formulated by its predecessor organization the International Accounting Standards Committee (IASC), as well as with the following significant accounting policies.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual outcomes could differ from those estimates.
Scope of consolidation: The financial statements include all companies which Novartis AG, Basel, directly or indirectly controls (generally over 50% of voting interest).
Special purpose entities, irrespective of their legal structure, are consolidated in instances where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. As permitted by IFRS, equity compensation and post-employment plans are not consolidated.
Investments in associated companies (defined generally as investments of between 20% and 50% in a company's voting shares) and joint ventures are accounted for by using the equity method with the Group recording its share of the associated company's net income and equity.
Principles of consolidation: The annual closing date of the individual financial statements is December 31. The financial statements of consolidated companies operating in highly inflationary economies are adjusted to eliminate the impact of high inflation.
The purchase method of accounting is used for acquired businesses. Companies acquired or disposed of during the year are included in the consolidated financial statements from the date of acquisition or up to the date of disposal.
The Group was formed on December 20, 1996 when all assets and liabilities of Sandoz AG and Ciba-Geigy AG were transferred by universal succession to Novartis AG. The uniting of interests method was used for this transaction. The merger was consummated before the effective date of Interpretation 9 of the Standing Interpretations Committee on accounting for business combinations; if it were undertaken today, the merger might require a different accounting treatment.
Intercompany income and expenses, including unrealized gross profits from internal Novartis transactions and intercompany receivables and payables have been eliminated.
Reclassification: Certain prior year balances have been reclassified to conform with the current year presentation.
Revenue and expense recognition: Sales are recognized when the significant risks and rewards of ownership of the assets have been transferred to a third party and are reported net of sales taxes and rebates. Provisions for rebates to customers are recognized in the same period that the related sales are recorded, based on the contract terms and historical experience. Expenses for research and service contracts in progress are recognized based on their percentage of completion.
149
Foreign currencies: The consolidated financial statements of Novartis are expressed in US dollars ("USD"). The Novartis Group began presenting its results in US dollars with effect from January 1, 2003 and has restated its 2002 results in US dollars for comparison purposes. With effect from July 1, 2003, the measurement currency of certain Swiss and foreign finance companies used for preparing the financial statements has been changed to US dollars from the respective local currency. This reflects changes in these entities' cash flows and transactions now being primarily denominated in US dollars. Generally, the local currency is used as the measurement currency for other entities.
In the respective entity financial statements, monetary assets and liabilities denominated in foreign currencies are translated at the rate prevailing at the balance sheet date. Transactions are recorded using the approximate exchange rate at the time of the transaction. All resulting foreign exchange transaction gains and losses are recognized in the subsidiary's income statement.
Income, expense and cash flows of the consolidated companies have been translated into US dollars using average exchange rates. The balance sheets are translated using the year end exchange rates. Translation differences arising from movements in the exchange rates used to translate equity and long-term intercompany financing transactions and net income are allocated to reserves.
Derivative financial instruments and hedging: Derivative financial instruments are initially recognized in the balance sheet at cost and subsequently remeasured to their fair value. The method of recognizing the resulting gain or loss is dependent on whether the derivative contract is designed to hedge a specific risk and qualifies for hedge accounting. On the date a derivative contract is entered into, the Group designates derivatives which qualify as hedges for accounting purposes as either a) a hedge of the fair value of a recognized asset or liability (fair value hedge), or b) a hedge of a forecasted transaction or firm commitment (cash flow hedge) or c) a hedge of a net investment in a foreign entity.
Changes in the fair value of derivatives which are fair value hedges and that are highly effective are recognized in the income statement, along with any changes in the fair value of the hedged asset or liability that is attributable to the hedged risk. Changes in the fair value of derivatives in cash flow hedges are recognized in equity. Where the forecasted transaction or firm commitment results in the recognition of an asset or liability, the gains and losses previously included in equity are included in the initial measurement of the asset or liability. Otherwise, amounts recorded in equity are transferred to the income statement and classified as revenue or expense in the same period in which the forecasted transaction affects the income statement.
Hedges of net investments in foreign entities are accounted for similarly to cash flow hedges. The Group hedges certain net investments in foreign entities with foreign currency borrowings. All foreign exchange gains or losses arising on translation are recognized in equity and included in cumulative translation differences.
Certain derivative instruments, while providing effective economic hedges under the Group's policies, do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for cash flow hedge accounting are recognized immediately in the income statement.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized in the income statement, when the committed or forecasted transaction is ultimately recognized in the income statement. However, if a forecasted or committed transaction is no longer expected to occur, the cumulative gain or loss that was recognized in equity is immediately transferred to the income statement.
150
The purpose of hedge accounting is to match the impact of the hedged item and the hedging instrument in the income statement. To qualify for hedge accounting, the hedging relationship must meet several strict conditions with respect to documentation, probability of occurrence, hedge effectiveness and reliability of measurement. At the inception of the transaction the Group documents the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as hedges to specific assets and liabilities or to specific firm commitments or forecasted transactions. The Group also documents its assessment, both at the hedge inception and on an ongoing basis, as to whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
Tangible fixed assets: Tangible fixed assets have been valued at cost of acquisition or production cost and are depreciated on a straight-line basis to the income statement, over the following estimated useful lives:
Buildings | 20 to 40 years | |
Machinery and equipment | 10 to 20 years | |
Furniture and vehicles | 5 to 10 years | |
Computer hardware | 3 to 7 years |
Land is valued at acquisition cost except if held under long-term lease arrangements, when it is amortized over the life of the lease. Land held under long-term lease agreements relates to upfront payments to lease land on which certain of the Group's buildings are located. Additional costs which extend the useful life of tangible fixed assets are capitalized. Financing costs associated with the construction of tangible fixed assets are not capitalized. Tangible fixed assets which are financed by leases giving Novartis substantially all the risks and rewards of ownership are capitalized at the lower of the fair value of leased property and the present value of minimum lease payments at the inception of the lease, and depreciated in the same manner as other tangible fixed assets over the shorter of the lease term or their useful life.
Intangible assets: Intangible assets are valued at cost and reviewed periodically for any diminution in value. Any resulting impairment loss is recorded in the income statement in General & Administration expenses. In the case of business combinations, the excess of the purchase price over the fair value of net identifiable assets acquired is recorded as goodwill in the balance sheet. Goodwill, which is denominated in the local currency of the related acquisition, is amortized to income through General & Administration expenses on a straight-line basis over the asset's useful life. The amortization period is determined at the time of the acquisition, based upon the particular circumstances, and ranges from 5 to 20 years. Goodwill relating to acquisitions arising prior to January 1, 1995 has been fully written off against retained earnings.
Management determines the estimated useful life of goodwill arising from an acquisition based on its evaluation of the respective company at the time of the acquisition, considering factors such as existing market share, potential sales growth and other factors inherent in the acquired company.
Other acquired intangible assets are written off on a straight-line basis over the following periods:
Trademarks | 10 to 15 years | |
Product and marketing rights | 5 to 20 years | |
Software | 3 years | |
Others | 3 to 5 years |
151
Trademarks are amortized on a straight-line basis over their estimated economic or legal life, whichever is shorter, while the practice of the Group has been to amortize product rights over estimated useful lives of 5 to 20 years. The useful lives assigned to acquired product rights are based on the maturity of the products and the estimated economic benefit that such product rights can provide. Marketing rights are amortized over their useful lives commencing in the year in which the rights first generate sales.
Long-lived tangible fixed assets and identifiable intangibles are reviewed for impairment whenever events or changes in circumstance indicate that the balance sheet carrying amount of the asset may not be recoverable. Goodwill is reviewed for impairment annually. When events or changes in circumstance indicate the asset may not be recoverable, the Group estimates its value in use based on the future cash flows expected to result from the use of the asset and its eventual disposition. If the balance sheet carrying amount of the asset is more than the higher of its value in use to Novartis or its anticipated net selling price, an impairment loss for the difference is recognized. For purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual outcomes could vary significantly from such estimates.
Financial assets: Minority investments other than associated companies and joint ventures are initially recorded at cost and subsequently carried at fair value and debt securities are carried at amortized cost. Exchange rate gains and losses on loans are recorded in the income statement. Originated loans are carried at amortized cost, less any allowances for uncollectable amounts. All other changes in the fair value of financial assets are deferred as a fair value adjustment to equity and recycled to the income statement when the asset is sold. Adjustments are made for other than temporary impairments in value.
Inventories: Purchased products are valued at acquisition cost while own-manufactured products are valued at manufacturing cost including related production expenses. In the balance sheet, inventory is primarily valued at standard cost, which approximates to historical cost determined on a first-in first-out basis, and this value is used for the cost of goods sold in the income statement. Provisions are made for inventories with a lower market value or which are slow-moving. Unsaleable inventory is fully written off.
Trade accounts receivable: The reported values represent the invoiced amounts, less adjustments for doubtful receivables.
Cash and cash equivalents: Cash and cash equivalents include highly liquid investments with original maturities of three months or less. This position is readily convertible to known amounts of cash.
Marketable securities: Marketable securities consist of equity and debt securities which are traded in liquid markets. The Group has classified all its marketable securities as available-for-sale, as they are not acquired to generate profit from short-term fluctuations in price. All purchases and sales of marketable securities are recognized on the trade date, which is the date that the Group commits to purchase or sell the asset. Marketable securities are initially recorded at cost and subsequently carried at fair value. Exchange rate gains and losses on bonds are recorded in the income statement. All other changes in the fair value of unhedged securities are deferred as a fair value adjustment in equity and recycled to the income statement when the asset is sold or impaired. The change in fair value of effectively hedged securities is recorded in the income statement where it offsets the gains or losses of the hedging derivative.
Unrealized losses on marketable securities are included in Financial income, net in the income statement when there is objective evidence that the marketable securities are impaired. The Group's policy is to recognize impairments on available-for-sale securities when their fair value is 50% less than cost for a sustained period of 6 months.
152
Repurchase agreements: The underlying securities are included within marketable securities. The repurchase agreements for the securities sold and agreed to be repurchased under the agreement are recognized gross and included in short-term financial debts. Income and expenses are recorded in interest income and expense, respectively.
Taxes: Taxes on income are accrued in the same periods as the revenues and expenses to which they relate. Deferred taxes have been calculated using the comprehensive liability method. They are calculated on the temporary differences that arise between the tax base of an asset or liability and its carrying value in the balance sheet of Group companies prepared for consolidation purposes, except for those temporary differences related to investments in subsidiaries and associated companies, where the timing of their reversal can be controlled and it is probable that the difference will not reverse in the foreseeable future. Furthermore, withholding or other taxes on eventual distribution of retained earnings of Group companies are only taken into account where a dividend has been planned since generally the retained earnings are reinvested. Deferred tax assets or liabilities, calculated using applicable subsidiary tax rates, are included in the consolidated balance sheet as either a long-term asset or liability, with changes in the year recorded in the income statement. Deferred tax assets are fully recognized and reduced by a valuation allowance only if it is probable that a benefit will not be realized in the future.
Pension plans, post-employment benefits, other long-term employee benefits and employee share participation plans:
a) Defined benefit pension plans
The liability in respect to defined benefit pension plans is in all material cases the defined benefit obligation calculated annually by independent actuaries using the projected unit credit method. The defined benefit obligation is measured at the present value of the estimated future cash flows. The charge for such pension plans, representing the net periodic pension cost less employee contributions, is included in the personnel expenses of the various functions where the employees are located. Plan assets are recorded at their fair values. Significant gains or losses arising from experience adjustments, changes in actuarial assumptions, and amendments to pension plans are charged or credited to income over the service lives of the related employees. Any pension asset recognized in 2002 and 2003 does not exceed the present value of any future economic benefits available in the form of refunds from the plan and/or expected reductions in future contributions to the plan from this asset.
b) Post-employment benefits other than pensions
Certain subsidiaries provide healthcare and insurance benefits for a portion of their retired employees and their eligible dependents. The cost of these benefits is actuarially determined and included in the related function expenses over the employees' working lives. The related liability is included in long-term liabilities.
c) Other long-term employee benefits
Other long-term employee benefits represent amounts due to employees under deferred compensation arrangements mandated by certain jurisdictions in which the Group conducts its operations. Benefits cost is recognized on an accrual basis in the personnel expenses of the various functions where the employees are located. The related obligation is accrued in other long-term liabilities.
d) Employee share participation plan
No compensation cost is recognized in these financial statements for options or shares granted to employees from employee share participation plans.
153
Research and development: Research and development expenses are fully charged to the income statement. The Group considers that regulatory and other uncertainties inherent in the development of its key new products preclude it from capitalizing development costs. Acquired projects which have achieved technical feasibility, usually signified by US Food & Drug Administration or comparable regulatory body approval, are capitalized because it is probable that the costs will give rise to future economic benefits. Laboratory buildings and equipment included in tangible fixed assets are depreciated over their estimated useful lives.
Government grants: Government grants are deferred and recognized in the income statement over the period necessary to match them with the related costs which they are intended to compensate for.
Restructuring charges: Restructuring charges are accrued against operating income in the period in which management has committed to a plan and it is probable a liability has been incurred and the amount can be reasonably estimated. Restructuring charges or releases are included in General & Administration expenses. Releases of accrued amounts are recognized in the period in which it is decided that the amounts will not be required.
Environmental liabilities: Novartis is exposed to environmental liabilities relating to its past operations, principally in respect to remediation costs. Provisions for non-recurring remediation costs are made when expenditure on remedial work is probable and the cost can be estimated. Cost of future expenditures do not reflect any claims or recoveries. The Group records recoveries at such time the amount is reasonably estimable and collection is probable. With regard to recurring remediation costs, the discounted amount of such annual costs for the next 30 years are calculated and recorded in long-term liabilities.
Dividends: Dividends are recorded in the Group's financial statements in the period in which they are approved by the Group's shareholders.
Treasury shares: Treasury shares are deducted from equity at their nominal value of CHF 0.50 per share. Differences between this amount and the amount paid for acquiring, or received for disposing of, treasury shares are recorded in retained earnings.
2. Changes in the scope of consolidation
The following significant changes were made during 2003 and 2002:
Acquisitions 2003
Pharmaceuticals: On May 8, 2003 51% of the capital stock of Idenix Pharmaceuticals Inc., Cambridge, Massachusetts was acquired for an initial payment of USD 255 million in cash to its existing shareholders. As part of the acquisition, Novartis agreed to pay additional amounts to the shareholders of Idenix Pharmaceuticals Inc. based on the achievement of clinical and regulatory milestones, marketing approvals and sales targets. The total additional value of these milestone payments is up to USD 357 million. Novartis cannot estimate when or if these additional milestone payments will be made. In total the Group owns 54% of the capital stock of this company. This company, which expands the Group's presence in the infectious disease therapeutic area, is included in the consolidated financial statements from May 2003. Since net liabilities were also assumed, total goodwill amounted to USD 297 million on this transaction which is being amortized over 15 years.
Corporate: In 2003 the Group increased its investment in Roche Holding AG to 33.3% at December 31, 2003 from 32.7% at December 31, 2002 by acquiring further voting shares for USD 120 million. At December 31, 2003 the Group's holding represents approximately 6.3% of Roche Holding AG's total shares and equity instruments.
154
Acquisitions 2002
Sandoz: On November 29, 2002 the Business Unit acquired 99% of Lek d.d., Ljubljana, Slovenia for USD 0.9 billion in cash. The acquisition was accounted for under the purchase method of accounting. A provisional balance sheet at December 31, 2002 was consolidated, however due to its immateriality, no post-acquisition income statement or cash flow was consolidated in 2002. During 2003 all the outstanding minority interests were acquired. In 2003, the initial assessment of goodwill resulting from the 2002 acquisition of Lek d.d., was finalized upon completion of a third-party valuation. As a result, the total goodwill initially recorded in 2002 of USD 535 million was reduced by USD 425 million through an allocation to the identifiable net assets acquired. The remaining goodwill balance of USD 110 million is being amortized on a straight-line basis over 20 years.
Animal Health: In January 2002, the Business Unit completed the acquisition of two US farm animal vaccine companies, Grand Laboratories Inc., Iowa and ImmTech Biologies Inc., Kansas. The combined purchase price is a minimum of USD 99 million of which USD 78 million was settled in Novartis American Depositary Shares. The final price may increase depending on whether certain future sales and other targets are met. The acquisition was accounted for under the purchase method of accounting and the related goodwill was USD 83 million which is being amortized on a straight-line basis over 15 years.
Corporate: During 2002 the Group increased its investment in Roche Holding AG by USD 1.8 billion by acquiring a further 11.4% of this company's voting shares. In total 32.7% of the Roche Holding AG voting shares were held at December 31, 2002 which represented approximately 6.2% of Roche Holding AG's total shares and equity securities.
Divestments 2002
Consumer Health Division: On November 29, 2002 the Division divested its Food & Beverage (F&B) business to Associated British Foods plc (ABF), London, Great Britain, for a total of USD 270 million in cash. ABF acquired the F&B business and brand ownership worldwide (including the brands Ovaltine/Ovomaltine, Caotina and Lacovo) with the exception of the USA and Puerto Rico. The 2002 sales and operating income recorded by Novartis up to the November 29, 2002 divestment date amounted to USD 209 million and USD 8 million, respectively. This transaction produced a divestment gain of USD 132 million which was recorded as a reduction to General & Administration expenses.
3. Division and Business Unit breakdown of key figures 2003 and 2002
Operating Divisions: Novartis is divided operationally on a worldwide basis into two Divisions, Pharmaceuticals and Consumer Health. These Divisions, which are based on internal management structures, are best described as follows:
The Pharmaceuticals Division researches, develops, manufactures, distributes, and sells branded pharmaceuticals in the following therapeutic areas: cardiovascular, oncology and hematology; metabolism and endocrinology; central nervous system; dermatology; ophthalmics; respiratory; rheumatology; bone and hormone replacement therapy, transplantation and infectious diseases. The Pharmaceuticals Division is organized into five Business Units: Primary Care, Oncology, Transplantation, Mature Products and Ophthalmics, which due to the fact that they have common long-term economic perspectives, customers, research, development, production, distribution and regulatory environments are not required to be separately disclosed as segments.
155
The Consumer Health Division consists of the following six Business Units:
The Sandoz Business Unit manufactures, distributes and sells generic pharmaceutical products and substances no longer subject to patent protection.
The Over-The-Counter (OTC) Business Unit manufactures, distributes and sells a variety of over-the-counter self medications.
The Animal Health Business Unit manufactures, distributes and sells veterinary products for farm and companion animals.
The Medical Nutrition Business Unit manufactures, distributes and sells health and medical nutrition products.
The Infant & Baby Business Unit manufactures, distributes and sells foods and other products and services designed to serve the particular needs of infants and babies.
The CIBA Vision Business Unit manufactures, distributes and sells contact lenses, lens care products, and ophthalmic surgical products.
Corporate: Income and expenses relating to Corporate include the costs of the Group headquarters and those of corporate coordination functions in major countries. In addition, Corporate includes certain items of income and expense which are not directly attributable to specific Divisions. Usually, no allocation of Corporate items is made to the Divisions although there are charges made by Corporate for share and share option programs and certain pension plans.
The Group's Divisions are businesses that offer different products. These Divisions are managed separately because they manufacture, distribute, and sell distinct products which require differing technologies and marketing strategies.
Revenues on inter-Divisional and inter-Business Unit sales are determined on an arm's length basis. The accounting policies of the Divisions and Business Units described above are the same as those described in the summary of accounting policies except that they receive a Corporate charge for share and share option programs which have no net cost in the Group's IFRS consolidated financial statements. The Group principally evaluates Divisional and Business Unit performance and allocates resources based on operating income.
Division and Business Unit net operating assets consist primarily of tangible fixed assets, intangible assets, inventories and receivables less operating liabilities. Corporate assets and liabilities principally consist of net liquidity (cash, cash equivalents, marketable securities less financial debts), investments in associated companies and deferred and current taxes.
156
Division and Business Unit breakdown of key figures 2003 and 2002
|
|
|
|
|
Consumer Health Division Business Units |
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Pharmaceuticals Division |
Consumer Health Division |
Sandoz |
OTC |
Animal Health |
Medical Nutrition |
|||||||||||||||||||
(in USD millions except employees) |
2003 |
2002 |
2003 |
2002 |
2003 |
2002 |
2003 |
2002 |
2003 |
2002 |
2003 |
2002 |
|||||||||||||
Sales to third parties | 16 020 | 13 528 | 8 844 | 7 349 | 2 906 | 1 817 | 1 772 | 1 521 | 682 | 623 | 815 | 711 | |||||||||||||
Sales to other Divisions/Business Units | 133 | 111 | 98 | 104 | 139 | 130 | 14 | 12 | 1 | 8 | |||||||||||||||
Sales of Divisions/Business Units | 16 153 | 13 639 | 8 942 | 7 453 | 3 045 | 1 947 | 1 786 | 1 533 | 682 | 623 | 816 | 719 | |||||||||||||
Cost of Goods Sold | -2 360 | -2 017 | -3 768 | -3 200 | |||||||||||||||||||||
Gross profit | 13 793 | 11 622 | 5 174 | 4 253 | |||||||||||||||||||||
Marketing & Sales | -5 322 | -4 574 | -2 532 | -2 163 | |||||||||||||||||||||
Research & Development | -3 079 | -2 355 | -529 | -378 | |||||||||||||||||||||
General & Administration | -969 | -802 | -793 | -626 | |||||||||||||||||||||
Operating income | 4 423 | 3 891 | 1 320 | 1 086 | 473 | 265 | 309 | 240 | 88 | 92 | 82 | 4 | |||||||||||||
Result from associated companies | 136 | 109 | 3 | 1 | 3 | 1 | |||||||||||||||||||
Financial income, net | |||||||||||||||||||||||||
Income before taxes and minority interests | |||||||||||||||||||||||||
Taxes | |||||||||||||||||||||||||
Income before minority interests | |||||||||||||||||||||||||
Minority interests | |||||||||||||||||||||||||
Net income | |||||||||||||||||||||||||
Included in operating income are: |
|||||||||||||||||||||||||
Depreciation of tangible fixed assets | -424 | -351 | -285 | -222 | -143 | -83 | -23 | -21 | -10 | -9 | -12 | -20 | |||||||||||||
Amortization of intangible assets | -187 | -184 | -220 | -165 | -99 | -51 | -18 | -12 | -19 | -16 | -6 | -5 | |||||||||||||
Impairment charges on tangible and intangible assets | -38 | -279 | -98 | -63 | -72 | -14 | -4 | ||||||||||||||||||
Restructuring charges | -58 | -10 | -28 | ||||||||||||||||||||||
Divestment gain on selling subsidiaries | 1 | 132 | |||||||||||||||||||||||
Royalties | |||||||||||||||||||||||||
income | 58 | 60 | 8 | 5 | 1 | 1 | 4 | 1 | |||||||||||||||||
expense | -256 | -197 | -20 | -14 | -8 | -1 | -6 | -3 | -1 | -1 | |||||||||||||||
Total assets | 13 836 | 11 942 | 9 689 | 8 419 | 4 321 | 3 329 | 1 032 | 902 | 660 | 603 | 468 | 385 | |||||||||||||
Liabilities | -4 867 | -3 901 | -2 962 | -2 625 | -950 | -781 | -434 | -331 | -154 | -139 | -211 | -243 | |||||||||||||
Total equity and minority interests | 8 969 | 8 041 | 6 727 | 5 794 | 3 371 | 2 548 | 598 | 571 | 506 | 464 | 257 | 142 | |||||||||||||
Less net liquidity | |||||||||||||||||||||||||
Net operating assets | 8 969 | 8 041 | 6 727 | 5 794 | 3 371 | 2 548 | 598 | 571 | 506 | 464 | 257 | 142 | |||||||||||||
Included in total assets are: | |||||||||||||||||||||||||
Total tangible fixed assets | 4 828 | 3 984 | 2 434 | 1 877 | 1 532 | 990 | 161 | 169 | 79 | 71 | 98 | 93 | |||||||||||||
Additions to tangible fixed assets | 771 | 505 | 530 | 361 | 388 | 214 | 20 | 24 | 13 | 10 | 11 | 29 | |||||||||||||
Additions to intangible assets | 359 | 2 | 186 | 684 | 82 | 558 | 19 | 25 | 2 | 96 | 33 | ||||||||||||||
Total investments in associated companies | 1 120 | 1 000 | 23 | 18 | 23 | 18 | |||||||||||||||||||
Employees at year end (unaudited) | 44 640 | 44 110 | 32 464 | 27 552 | 12 918 | 7 932 | 3 920 | 3 797 | 2 193 | 2 218 | 2 849 | 2 701 | |||||||||||||
157
Division and Business Unit breakdown of key figures 2003 and 2002
|
Consumer Health Division Business Units |
|
|
|
|
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Infant & Baby |
CIBA Vision |
Divested Health & Functional Food activities |
Divisional Management |
Division eliminations |
Corporate |
TOTAL |
||||||||||||||||||
(in USD millions except employees) |
2003 |
2002 |
2003 |
2002 |
2002 |
2003 |
2003 |
2002 |
2003 |
2002 |
2003 |
2002 |
|||||||||||||
Sales to third parties | 1 361 | 1 333 | 1 308 | 1 135 | 209 | 24 864 | 20 877 | ||||||||||||||||||
Sales to other Divisions/Business Units | 8 | 8 | -64 | -54 | -231 | -215 | |||||||||||||||||||
Sales of Divisions/Business Units | 1 361 | 1 333 | 1 316 | 1 143 | 209 | -64 | -54 | -231 | -215 | 24 864 | 20 877 | ||||||||||||||
Cost of Goods Sold | 54 | 54 | 234 | 223 | -5 894 | -4 994 | |||||||||||||||||||
Gross profit | -10 | 3 | 8 | 18 970 | 15 883 | ||||||||||||||||||||
Marketing & Sales | -7 854 | -6 737 | |||||||||||||||||||||||
Research & Development | -148 | -110 | -3 756 | -2 843 | |||||||||||||||||||||
General & Administration | 291 | 217 | -1 471 | -1 211 | |||||||||||||||||||||
Operating income | 254 | 227 | 153 | 118 | 140 | -29 | -10 | 146 | 115 | 5 889 | 5 092 | ||||||||||||||
Result from associated companies | -339 | -117 | -200 | -7 | |||||||||||||||||||||
Financial income, net | 379 | 613 | |||||||||||||||||||||||
Income before taxes and minority interests | 6 068 | 5 698 | |||||||||||||||||||||||
Taxes | -1 008 | -959 | |||||||||||||||||||||||
Income before minority interests | 5 060 | 4 739 | |||||||||||||||||||||||
Minority interests | -44 | -14 | |||||||||||||||||||||||
Net income | 5 016 | 4 725 | |||||||||||||||||||||||
Included in operating income are: |
|||||||||||||||||||||||||
Depreciation of tangible fixed assets | -30 | -24 | -67 | -65 | -28 | -19 | -737 | -592 | |||||||||||||||||
Amortization of intangible assets | -23 | -25 | -55 | -56 | -3 | -6 | -410 | -355 | |||||||||||||||||
Impairment charges on tangible and intangible assets | -27 | -22 | -4 | -18 | -6 | -136 | -348 | ||||||||||||||||||
Restructuring charges | -20 | -58 | |||||||||||||||||||||||
Divestment gain on selling subsidiaries | 132 | 133 | |||||||||||||||||||||||
Royalties | |||||||||||||||||||||||||
income | 3 | 3 | 66 | 65 | |||||||||||||||||||||
expense | -5 | -9 | -276 | -211 | |||||||||||||||||||||
Total assets | 1 684 | 1 620 | 1 573 | 1 626 | -49 | -46 | 25 792 | 24 664 | 49 317 | 45 025 | |||||||||||||||
Liabilities | -880 | -871 | -340 | -306 | -32 | 39 | 46 | -10 969 | -10 164 | -18 798 | -16 690 | ||||||||||||||
Total equity and minority interests | 804 | 749 | 1 233 | 1 320 | -32 | -10 | 14 823 | 14 500 | 30 519 | 28 335 | |||||||||||||||
Less net liquidity | -7 289 | -6 972 | -7 289 | -6 972 | |||||||||||||||||||||
Net operating assets | 804 | 749 | 1 233 | 1 320 | -32 | -10 | 7 534 | 7 528 | 23 230 | 21 363 | |||||||||||||||
Included in total assets are: | |||||||||||||||||||||||||
Total tangible fixed assets | 242 | 233 | 322 | 321 | 335 | 460 | 7 597 | 6 321 | |||||||||||||||||
Additions to tangible fixed assets | 29 | 44 | 69 | 40 | 28 | 202 | 1 329 | 1 068 | |||||||||||||||||
Additions to intangible assets | 39 | 11 | 5 | 18 | 545 | 704 | |||||||||||||||||||
Total investments in associated companies | 5 705 | 5 465 | 6 848 | 6 483 | |||||||||||||||||||||
Employees at year end (unaudited) | 4 829 | 4 901 | 5 717 | 6 003 | 38 | 1 437 | 1 215 | 78 541 | 72 877 | ||||||||||||||||
158
4. Regional breakdown of key figures 2003 and 2002
(in USD millions except employees) |
Europe |
The Americas |
Asia/Africa Australia |
Total |
||||
---|---|---|---|---|---|---|---|---|
2003 | ||||||||
Sales(1) | 8 788 | 12 036 | 4 040 | 24 864 | ||||
Operating income(2) | 4 505 | 897 | 487 | 5 889 | ||||
Depreciation of tangible fixed assets included in operating income | 480 | 220 | 37 | 737 | ||||
Net operating assets(3) | 16 271 | 5 984 | 975 | 23 230 | ||||
Additions to tangible fixed assets included in net operating assets | 846 | 427 | 56 | 1 329 | ||||
Additions to intangible assets | 120 | 424 | 1 | 545 | ||||
Personnel costs | 3 002 | 2 759 | 491 | 6 252 | ||||
Employees at year end(4) | 37 510 | 28 608 | 12 423 | 78 541 | ||||
|
Europe |
The Americas |
Asia/Africa Australia |
Total |
||||
---|---|---|---|---|---|---|---|---|
2002 | ||||||||
Sales(1) | 6 832 | 10 558 | 3 487 | 20 877 | ||||
Operating income(2) | 3 825 | 958 | 309 | 5 092 | ||||
Depreciation of tangible fixed assets included in operating income | 355 | 198 | 39 | 592 | ||||
Net operating assets(3) | 14 086 | 6 312 | 965 | 21 363 | ||||
Additions to tangible fixed assets included in net operating assets | 498 | 537 | 33 | 1 068 | ||||
Additions to intangible assets | 565 | 126 | 13 | 704 | ||||
Personnel costs | 2 279 | 2 408 | 441 | 5 128 | ||||
Employees at year end(4) | 32 595 | 28 328 | 11 954 | 72 877 | ||||
The following countries accounted for more than 5% of at least one of the respective Group totals as at, or for the years ended, December 31, 2003 and 2002:
|
Sales(1) |
Investment in tangible fixed assets |
Net operating assets(3) |
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Country |
2003 |
% |
2002 |
% |
2003 |
% |
2002 |
% |
2003 |
% |
2002 |
% |
||||||||||||
Switzerland | 319 | 1 | 317 | 2 | 177 | 13 | 124 | 12 | 10 631 | 46 | 9 238 | 43 | ||||||||||||
USA | 10 280 | 41 | 8 907 | 43 | 388 | 29 | 511 | 48 | 6 149 | 26 | 6 056 | 28 | ||||||||||||
Japan | 2 065 | 8 | 1 701 | 8 | 14 | 1 | 5 | 857 | 4 | 617 | 3 | |||||||||||||
Germany | 1 479 | 6 | 1 226 | 6 | 39 | 3 | 45 | 4 | 30 | 173 | 1 | |||||||||||||
France | 1 423 | 6 | 1 100 | 5 | 17 | 1 | 18 | 2 | 690 | 3 | 644 | 3 | ||||||||||||
UK | 789 | 3 | 680 | 3 | 194 | 15 | 79 | 7 | 1 008 | 4 | 863 | 4 | ||||||||||||
Austria | 252 | 1 | 212 | 1 | 170 | 13 | 131 | 12 | 946 | 4 | 613 | 3 | ||||||||||||
Other | 8 257 | 34 | 6 734 | 32 | 330 | 25 | 155 | 15 | 2 919 | 13 | 3 159 | 15 | ||||||||||||
Total Group | 24 864 | 100 | 20 877 | 100 | 1 329 | 100 | 1 068 | 100 | 23 230 | 100 | 21 363 | 100 | ||||||||||||
No single customer accounts for 10% or more of the Group's total sales.
159
5. Financial income, net
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Interest income | 323 | 416 | ||
Dividend income | 17 | 68 | ||
Capital gains | 11 | |||
Income on options and forward contracts | 1 113 | 1 659 | ||
Other financial income | 9 | 3 | ||
Financial income | 1 473 | 2 146 | ||
Interest expense | -243 | -194 | ||
Capital losses | -79 | |||
Impairment of marketable securities | -66 | |||
Expenses on options and forward contracts | -809 | -1 261 | ||
Other financial expense | -40 | -68 | ||
Financial expense | -1 158 | -1 602 | ||
Currency result, net | 64 | 69 | ||
Total financial income, net | 379 | 613 | ||
2003 interest income includes a total of USD 9 million (2002: USD 19 million) received from the foundations referred to in note 27, at commercial interest rates on the outstanding short-term debt.
6. Taxes
Income before taxes and minority interests:
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Switzerland | 2 809 | 2 491 | ||
Foreign | 3 259 | 3 207 | ||
Total income before taxes and minority interests | 6 068 | 5 698 | ||
Current and deferred income tax expense:
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Switzerland | -330 | -273 | ||
Foreign | -765 | -476 | ||
Total current income tax expense | -1 095 | -749 | ||
Switzerland | -9 | -46 | ||
Foreign | 177 | -152 | ||
Total deferred tax income/expense | 168 | -198 | ||
Share of tax of associated companies | -81 | -12 | ||
Total income tax expense | -1 008 | -959 | ||
160
The gross value of unused tax loss carryforwards which have, or have not, been capitalized as deferred tax assets, with their expiry dates is as follows:
|
not capitalized USD millions |
capitalized USD millions |
2003 USD millions |
|||
---|---|---|---|---|---|---|
One year | 8 | 17 | 25 | |||
Two years | 4 | 20 | 24 | |||
Three years | 9 | 42 | 51 | |||
Four years | 73 | 29 | 102 | |||
Five years | 45 | 7 | 52 | |||
More than five years | 881 | 109 | 990 | |||
Total | 1 020 | 224 | 1 244 | |||
|
not capitalized USD millions |
capitalized USD millions |
2002 USD millions |
|||
---|---|---|---|---|---|---|
One year | 15 | 16 | 31 | |||
Two years | 2 | 6 | 8 | |||
Three years | 6 | 6 | 12 | |||
Four years | 11 | 3 | 14 | |||
Five years | 149 | 49 | 198 | |||
More than five years | 660 | 226 | 886 | |||
Total | 843 | 306 | 1 149 | |||
Tax losses are capitalized if it is probable that future taxable profits will arise to utilize the losses.
USD 33 million of unused operating tax loss carryforwards expired during 2003 (2002: USD 2 million).
Analysis of tax rate: The main elements contributing to the difference between the Group's overall expected tax rate (the weighted average tax rate based on the income before tax of each subsidiary) and the effective tax rate are:
|
2003 % |
2002 % |
||
---|---|---|---|---|
Expected tax rate | 14.8 | 15.3 | ||
Effect of taxes of associated companies | 1.9 | 0.3 | ||
Effect of disallowed expenditures | 2.3 | 2.4 | ||
Effect of utilization of tax losses brought forward from prior periods | -0.6 | -0.5 | ||
Effect of income taxed at reduced rates | -2.0 | -1.3 | ||
Effect of tax credits and allowances | -1.4 | -1.0 | ||
Effect of write-off of deferred tax assets | 0.5 | 0.6 | ||
Prior year and other items | 1.1 | 1.0 | ||
Effective tax rate | 16.6 | 16.8 | ||
The utilization of tax loss carryforwards lowered the tax charge by USD 34 million and USD 26 million in 2003 and 2002, respectively.
161
7. Earnings per share (EPS)
Basic earnings per share is calculated by dividing the net income attributable to shareholders by the weighted average number of shares outstanding during the year, excluding from the issued shares the average number of shares purchased by the Group and held as treasury shares.
|
2003 |
2002 |
||
---|---|---|---|---|
Net income (USD millions) | 5 016 | 4 725 | ||
Weighted average number of shares outstanding | 2 473 522 565 | 2 515 311 685 | ||
Basic earnings per share (USD) | 2.03 | 1.88 | ||
For the diluted earnings per share the weighted average number of shares outstanding is adjusted to assume conversion of all potential dilutive shares. Until it matured in 2002, the Group's convertible debt represented a potential dilution in the earnings per share to the extent that it was not covered by a hedge with non-consolidated employee share participation and employee benefit foundations to deliver the required number of shares on conversion.
The diluted EPS calculation takes into account all potential dilutions to the earnings per share arising from the convertible debt and options on Novartis shares. Net income is adjusted to eliminate the applicable convertible debt interest expense less the tax effect. Share equivalents of 16.4 million (2002: 16.2 million) were excluded from the calculation of diluted earnings per share as they were anti-dilutive.
|
2003 |
2002 |
||
---|---|---|---|---|
Net income (USD millions) | 5 016 | 4 725 | ||
Elimination of interest expense on convertible debt (net of tax effect) | 2 | |||
Net income used to determine diluted earnings per share | 5 016 | 4 727 | ||
Weighted average number of shares outstanding | 2 473 522 565 | 2 515 311 685 | ||
Call options on Novartis shares | 27 446 092 | 54 891 036 | ||
Adjustment for dilutive share options | 4 346 940 | 2 264 236 | ||
Weighted average number of shares for diluted earnings per share | 2 505 315 597 | 2 572 466 957 | ||
Diluted earnings per share (USD) | 2.00 | 1.84 | ||
162
8. Tangible fixed asset movements
|
|
Land USD millions |
Buildings USD millions |
Machinery USD millions |
Plant under construction and other equipment USD millions |
2003 USD millions |
2002 USD millions |
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cost | ||||||||||||||
January 1 | 305 | 4 564 | 6 970 | 831 | 12 670 | 10 643 | ||||||||
Consolidation changes | 342 | |||||||||||||
Reclassifications(1) | 16 | -23 | -232 | 2 | -237 | |||||||||
Additions | 26 | 285 | 617 | 401 | 1 329 | 1 068 | ||||||||
Disposals | -12 | -65 | -200 | -7 | -284 | -520 | ||||||||
Translation effects | 32 | 486 | 754 | 143 | 1 415 | 1 137 | ||||||||
December 31 | 367 | 5 247 | 7 909 | 1 370 | 14 893 | 12 670 | ||||||||
Accumulated depreciation | ||||||||||||||
January 1 | -1 | -2 178 | -4 170 | -6 349 | -5 247 | |||||||||
Consolidation changes | -237 | |||||||||||||
Reclassifications(1) | 54 | 280 | 334 | |||||||||||
Depreciation charge | -172 | -565 | -737 | -592 | ||||||||||
Depreciation on disposals | 11 | 177 | 188 | 381 | ||||||||||
Impairment charge | -13 | -18 | -31 | -30 | ||||||||||
Translation effects | -246 | -455 | -701 | -624 | ||||||||||
December 31 | -1 | -2 544 | -4 751 | -7 296 | -6 349 | |||||||||
Net book valueDecember 31 | 366 | 2 703 | 3 158 | 1 370 | 7 597 | 6 321 | ||||||||
Insured valueDecember 31 | 17 439 | 15 337 | ||||||||||||
Net book value of tangible fixed assets under finance lease contracts | 135 | 151 | ||||||||||||
At December 31, 2003 commitments for purchases of tangible fixed assets totaled USD 123 million (2002: USD 69 million).
163
9. Intangible asset movements
|
Goodwill USD millions |
Product and marketing rights USD millions |
Trademarks USD millions |
Software USD millions |
Other intangibles USD millions |
2003 USD millions |
2002 USD millions |
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cost | ||||||||||||||
January 1 | 2 327 | 2 806 | 367 | 88 | 556 | 6 144 | 4 759 | |||||||
Consolidation changes | 354 | |||||||||||||
Reclassifications(1) | -425 | 400 | 7 | -3 | -21 | |||||||||
Additions | 303 | 75 | 67 | 25 | 75 | 545 | 704 | |||||||
Disposals | -254 | -13 | -1 | -6 | -42 | -316 | -28 | |||||||
Translation effects | 146 | 310 | 8 | 8 | 29 | 501 | 355 | |||||||
December 31 | 2 097 | 3 578 | 441 | 122 | 615 | 6 853 | 6 144 | |||||||
Accumulated amortization | ||||||||||||||
January 1 | -623 | -684 | -115 | -78 | -249 | -1 749 | -859 | |||||||
Consolidation changes | -139 | |||||||||||||
Reclassifications(1) | 2 | -4 | -6 | 6 | -2 | |||||||||
Amortization charge | -102 | -223 | -31 | -11 | -43 | -410 | -355 | |||||||
Disposals | 236 | 7 | 5 | 23 | 271 | 28 | ||||||||
Impairment charge | -85 | -3 | -17 | -105 | -318 | |||||||||
Translation effects | -48 | -78 | -3 | -6 | -15 | -150 | -106 | |||||||
December 31 | -620 | -981 | -153 | -96 | -295 | -2 145 | -1 749 | |||||||
Net book valueDecember 31 | 1 477 | 2 597 | 288 | 26 | 320 | 4 708 | 4 395 | |||||||
In 2003 impairment charges of USD 105 million were recorded, principally relating to the over valuation on an economic basis of the Sandoz activities in Germany; the divestment of Genetic Therapy Inc., US, a Pharmaceuticals Division research activity, to Cell Genesys Inc., US, and adjustments to CIBA Vision Business Unit intangibles.
In 2002, impairment charges were recorded of USD 318 million, of which USD 238 million was for goodwill mainly relating to the Pharmaceutical Division research and biotechnology activities of Genetic Therapy Inc., Systemix Inc., Imutran Ltd., due to changes in the research and development strategy and also relating to the Medical Nutrition and OTC Business Units. There was also an impairment charge of USD 52 million on the pitavastatin rights and USD 28 million of other impairments.
10. Investments in associated companies
Novartis has the following significant investments in associated companies which are accounted for by using the equity method:
|
Balance sheet value |
Pre-tax income statement effect |
||||||
---|---|---|---|---|---|---|---|---|
|
2003 USD millions |
2002 USD millions |
2003 USD millions |
2002 USD millions |
||||
Roche Holding AG, Switzerland | 5 662 | 5 462 | -354 | -116 | ||||
Chiron Corporation, USA | 1 118 | 996 | 134 | 107 | ||||
Others | 68 | 25 | 20 | 2 | ||||
Total | 6 848 | 6 483 | -200 | -7 | ||||
The accounting standards of the Group's associated companies are adjusted to IFRS in cases where IFRS is not already used.
164
Due to the various estimates that have been made in applying the equity method accounting treatment for Roche Holding AG ("Roche") and Chiron Corporation ("Chiron"), adjustments may be necessary in succeeding years as more financial and other information becomes publicly available.
Roche Holding AG: The Group's holding in Roche voting shares has been increased during 2003 from 32.7% at December 31, 2002 to 33.3% at December 31, 2003. This investment represents 6.3% of the total outstanding voting and non-voting equity instruments. In order to apply the equity method of accounting, independent appraisers have been used to estimate the fair value of Roche so as to determine the Novartis share of tangible and intangible assets and the amount of the residual goodwill at the time of acquisition. The purchase price allocations were made on publicly available information at the time of acquisition of the shares.
The purchase price allocation is as follows:
|
USD millions |
|
---|---|---|
Identified intangible assets | 3 776 | |
Other net assets | 58 | |
Residual goodwill | 2 733 | |
Total purchase price | 6 567 | |
Net income effect2003 | -398 | |
Other accumulated equity adjustments | -507 | |
December 31, balance sheet value | 5 662 | |
The purchase price allocated to inventory has been expensed, based on its expected usage. The identified intangible assets principally relate to the value of currently marketed products and are being amortized straight-line over their estimated average useful life of 20 years. The residual goodwill is also being amortized on a straight-line basis over 20 years.
The income statement effect for 2003 and 2002 is as follows:
|
2003 USD millions |
2002 USD millions |
|||
---|---|---|---|---|---|
Depreciation and amortization of fair value adjustments to | |||||
tangible and intangible assets | -143 | -129 | |||
goodwill | -127 | -91 | |||
Prior year adjustment | -269 | -17 | |||
Novartis share of estimated Roche current year consolidated pre-tax income | 185 | 121 | |||
Pre-tax income statement effect | -354 | -116 | |||
Deferred tax | -44 | 23 | |||
Net income effect | -398 | -93 | |||
The prior year adjustment in 2003 relates to the Novartis share of an unexpected Roche loss in 2002, announced by Roche after the publication of the Novartis 2002 Annual Report.
The market value of the Novartis interest in Roche at December 31, 2003 was USD 7.3 billion (Reuters symbol: RO.S).
165
Chiron Corporation: The recording of the results of the strategic interest in Chiron is based on the estimated Chiron equity at December 31 of each year. The amounts for Chiron incorporated into the Novartis consolidated financial statements take into account the effects stemming from differences in accounting policies between Novartis and Chiron (primarily Novartis' amortization over 10 years of in-process research and development arising on Chiron's acquisitions which are written off by Chiron in the year of acquisition). The effective shareholding of Novartis in Chiron was 42.3% at December 31, 2003 and had a market value of USD 4.5 billion (NASDAQ symbol: CHIR).
11. Deferred taxes
|
|
2003 USD millions |
2002 USD millions |
|||
---|---|---|---|---|---|---|
Assets associated with | employee benefit liabilities | 481 | 281 | |||
net operating loss carryforwards | 222 | 216 | ||||
inventories | 957 | 920 | ||||
intangible assets | 60 | 57 | ||||
other provisions and accruals | 867 | 849 | ||||
Less: valuation allowance | -186 | -145 | ||||
Deferred tax assets less valuation allowance | 2 401 | 2 178 | ||||
Liabilities associated with | tangible fixed asset depreciation | 644 | 567 | |||
prepaid pensions | 983 | 899 | ||||
other provisions and accruals | 1 306 | 1 150 | ||||
inventories | 205 | 205 | ||||
Total liabilities | 3 138 | 2 821 | ||||
Net deferred tax liability | 737 | 643 | ||||
A reversal of the valuation allowance could occur when circumstances make the realization of deferred tax assets probable. This would result in a decrease in the Group's effective tax rate.
At December 31, 2003 unremitted earnings of USD 27 billion (2002: USD 25 billion) have been retained by subsidiary companies for reinvestment. No provision is made for income taxes that would be payable upon the distribution of such earnings. If the earnings were remitted, an income tax charge could result based on the tax statutes currently in effect.
|
2003 USD millions |
2002 USD millions |
|||
---|---|---|---|---|---|
Temporary differences on which no deferred tax has been provided as they are permanent in nature: | |||||
write-down of investments in subsidiaries | 775 | 1 437 | |||
goodwill from acquisitions | 995 | 1 422 | |||
12. Financial and other assets
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Other investments and long-term loans | 1 514 | 1 306 | ||
Prepaid pension | 3 976 | 3 527 | ||
Total | 5 490 | 4 833 | ||
166
Other investments are valued at market value.
During 2003, USD 80 million (2002: USD 64 million) of unrealized losses on investments were considered to be other than temporary and were charged to the income statement.
13. Inventories
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Raw material, consumables | 531 | 498 | ||
Finished products | 2 815 | 2 465 | ||
Total inventories | 3 346 | 2 963 | ||
At December 31, 2003 and 2002, inventory write-downs of USD 238 million and USD 252 million respectively were deducted in arriving at the inventory values.
14. Trade accounts receivable
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Total | 4 603 | 3 915 | ||
Provision for doubtful receivables | -227 | -218 | ||
Total trade accounts receivable, net | 4 376 | 3 697 | ||
15. Other current assets
|
|
2003 USD millions |
2002 USD millions |
|||
---|---|---|---|---|---|---|
Withholding tax recoverable | 257 | 150 | ||||
Gerber Life insurance receivables | 149 | 207 | ||||
Prepaid expenses | third parties | 183 | 327 | |||
associated companies | 5 | 1 | ||||
Other receivables | third party | 688 | 921 | |||
associated companies | 10 | 7 | ||||
Total other current assets | 1 292 | 1 613 | ||||
167
16. Marketable securities and derivative financial instruments
Market risk
The Group is exposed to market risk, primarily related to foreign exchange, interest rates and market value of the investment of liquid funds. Management actively monitors these exposures. To manage the volatility relating to these exposures the Group enters into a variety of derivative financial instruments. The Group's objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates, foreign currency rates and market rates of investment of liquid funds and of the currency exposure of certain net investments in foreign subsidiaries. It is the Group's policy and practice to use derivative financial instruments to manage exposures and to enhance the yield on the investment of liquid funds. The Group does not enter any financial transaction containing a risk that cannot be quantified at the time the transaction is concluded; i.e. it does not sell short assets it does not have, or does not know it will have, in the future. The Group only sells existing assets or hedges transactions and future transactions (in the case of anticipatory hedges) it knows it will have in the future based on past experience. In the case of liquid funds it writes options on assets it has, or on positions it wants to acquire, and for which it has the required liquidity. The Group therefore expects that any loss in value for these instruments generally would be offset by increases in the value of the hedged transactions.
a) Foreign exchange rates: The Group uses the US dollar as its reporting currency and is therefore exposed to foreign exchange movements, primarily in European, Japanese, other Asian and Latin American currencies. Consequently, it enters into various contracts which change in value as foreign exchange rates change, to preserve the value of assets, commitments and anticipated transactions. The Group uses forward contracts and foreign currency option contracts to hedge certain anticipated foreign currency revenues and the net investment in certain foreign subsidiaries.
b) Commodities: The Group has only a very limited exposure to price risk related to anticipated purchases of certain commodities used as raw materials by the Group's businesses. A change in those prices may alter the gross margin of a specific business, but generally by not more than 10% of that margin and is thus within the Group's risk management tolerance level. Accordingly, the Group does not enter into commodity future, forward and option contracts to manage fluctuations in prices of anticipated purchases.
c) Interest rates: The Group manages its exposure to interest rate risk by changing the proportion of fixed rate debt and variable rate debt in its total debt portfolio. To manage this mix the Group may enter into interest rate swap agreements, in which it exchanges the periodic payments, based on a notional amount and agreed upon fixed and variable interest rates. Use of the above-mentioned derivative financial instruments has not had a material impact on the Group's financial position at December 31, 2003 and 2002 or the Group's results of operations for the years ended December 31, 2003 and 2002.
Counterparty risk
Counterparty risk encompasses issuer risk on marketable securities, settlement risk on derivative and money market contracts and credit risk on cash and time deposits. Issuer risk is minimized by only buying securities which are at least AA rated. Settlement and credit risk is reduced by the policy of entering into transactions with counterparties that are usually at least AA rated banks or financial institutions. Exposure to these risks is closely monitored and kept within predetermined parameters.
The Group 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.
168
Derivative financial instruments
The following tables show the contract or underlying principal amounts and fair values of derivative financial instruments analyzed by type of contract at December 31, 2003 and 2002. Contract or underlying principal amounts indicate the volume of business outstanding at the balance sheet date and do not represent amounts at risk. The fair values are determined by the markets or standard pricing models at December 31, 2003 and 2002.
|
Contract or underlying principal amount |
Positive fair values |
Negative fair values |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2003 USD millions |
2002 USD millions |
2003 USD millions |
2002 USD millions |
2003 USD millions |
2002 USD millions |
||||||
Currency related instruments | ||||||||||||
Forward foreign exchange rate contracts | 5 470 | 6 184 | 360 | 217 | -398 | -171 | ||||||
Over the counter currency options | 4 016 | 6 561 | 34 | 28 | -29 | -130 | ||||||
Cross currency swaps | 1 123 | 1 973 | 223 | 30 | ||||||||
Total of currency related instruments | 10 609 | 14 718 | 617 | 275 | -427 | -301 | ||||||
Interest rate related instruments | ||||||||||||
Interest rate swaps | 3 826 | 2 986 | 12 | 50 | -10 | -1 | ||||||
Forward rate agreements | 6 194 | 2 743 | 2 | -3 | -7 | |||||||
Interest rate options | 520 | 677 | 1 | -1 | -5 | |||||||
Total of interest rate related instruments | 10 540 | 6 406 | 14 | 51 | -14 | -13 | ||||||
Options on equity securities | 1 242 | 2 084 | 68 | 106 | -58 | -96 | ||||||
Total derivative financial instruments included in marketable securities and in short-term financial debt | 22 391 | 23 208 | 699 | 432 | -499 | -410 | ||||||
Currency related instruments included in other current assets and liabilities | ||||||||||||
Forward foreign exchange rate contracts | 1 946 | 2 399 | 23 | 141 | -34 | |||||||
Over the counter currency options | 2 | 1 192 | 7 | -1 | ||||||||
Total currency related instruments included in other current assets and liabilities | 1 948 | 3 591 | 23 | 148 | -34 | -1 | ||||||
Total derivative financial instruments | 24 339 | 26 799 | 722 | 580 | -533 | -411 | ||||||
169
The contract or underlying principal amount of derivative financial instruments at December 31, 2003 and 2002 are set forth by currency in the table below.
|
CHF USD millions |
EUR USD millions |
USD USD millions |
JPY USD millions |
Other currencies USD millions |
Total 2003 USD millions |
Total 2002 USD millions |
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Currency related instruments | ||||||||||||||
Forward foreign exchange rate contracts | 41 | 3 207 | 2 885 | 930 | 353 | 7 416 | 8 583 | |||||||
Over the counter currency options | 1 871 | 1 335 | 280 | 532 | 4 018 | 7 753 | ||||||||
Cross currency swaps | 1 123 | 1 123 | 1 973 | |||||||||||
Currency related derivatives | 41 | 6 201 | 4 220 | 1 210 | 885 | 12 557 | 18 309 | |||||||
Interest rate related instruments | ||||||||||||||
Interest rate swaps | 1 080 | 1 746 | 1 000 | 3 826 | 2 986 | |||||||||
Forward rate agreements | 2 994 | 3 200 | 6 194 | 2 743 | ||||||||||
Interest rate options | 120 | 400 | 520 | 677 | ||||||||||
Interest rate related derivatives | 1 200 | 4 740 | 4 600 | 10 540 | 6 406 | |||||||||
Options on equity securities | 411 | 639 | 144 | 48 | 1 242 | 2 084 | ||||||||
Total derivative financial instruments | 1 241 | 11 352 | 9 459 | 1 354 | 933 | 24 339 | 26 799 | |||||||
Derivative financial instruments effective for hedge accounting purposes
|
Contract or underlying principal amount |
Fair values |
||||||
---|---|---|---|---|---|---|---|---|
|
2003 USD millions |
2002 USD millions |
2003 USD millions |
2002 USD millions |
||||
Anticipated transaction cash flow hedges | ||||||||
Forward foreign exchange rate contracts | 3 167 | 2 982 | 25 | 159 | ||||
Over the counter currency options | 2 | 1 193 | 7 | |||||
Total of derivative financial instruments effective for hedge accounting purposes | 3 169 | 4 175 | 25 | 166 | ||||
All of the hedging instruments used for anticipated transactions mature within twelve months and were contracted with the intention of hedging anticipated transactions which are expected to occur in 2004.
170
Marketable securities, time deposits and derivative financial instruments
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Available-for-sale marketable securities | ||||
Equity securities | 1 277 | 1 256 | ||
Debt securities | 4 857 | 4 240 | ||
Total available-for-sale marketable securities | 6 134 | 5 496 | ||
Time deposits longer than 90 days | 651 | 767 | ||
Derivative financial instruments | 699 | 353 | ||
Accrued interest on derivative financial instruments | 42 | 38 | ||
Accrued interest on debt securities | 87 | 90 | ||
Total marketable securities, time deposits and derivative financial instruments | 7 613 | 6 744 | ||
During 2003, unrealized losses of USD 66 million on available-for-sale marketable securities were considered to be other than temporary and charged to the income statement (2002: nil).
17. Details of shares and share capital movements
|
Number of outstanding shares(1) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2001 |
Movement in year |
December 31, 2002 |
Movement in year |
December 31, 2003 |
|||||
Total Novartis shares | 2 885 204 680 | -61 054 680 | 2 824 150 000 | -22 680 000 | 2 801 470 000 | |||||
Treasury shares | ||||||||||
Shares reserved for convertible bonds | 4 503 754 | -4 503 754 | ||||||||
Shares reserved for call options | 54 901 962 | 54 901 962 | -54 901 962 | |||||||
Unreserved treasury shares | 277 618 704 | 16 658 715 | 294 277 419 | 39 423 921 | 333 701 340 | |||||
Total treasury shares | 337 024 420 | 12 154 961 | 349 179 381 | -15 478 041 | 333 701 340 | |||||
Total outstanding shares | 2 548 180 260 | -73 209 641 | 2 474 970 619 | -7 201 959 | 2 467 768 660 | |||||
|
USD millions |
USD millions |
USD millions |
USD millions |
USD millions |
|||||
---|---|---|---|---|---|---|---|---|---|---|
Share capital | 1 047 | -22 | 1 025 | -8 | 1 017 | |||||
Treasury shares | -122 | -5 | -127 | 6 | -121 | |||||
Outstanding share capital | 925 | -27 | 898 | -2 | 896 | |||||
171
18. Long-term financial debts
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Straight bonds | 2 972 | 2 577 | ||
Liabilities to banks and other financial institutions(1) | 142 | 119 | ||
Finance lease obligations | 122 | 144 | ||
Total (including current portion of long-term debt) | 3 236 | 2 840 | ||
Less current portion of long-term debt | -45 | -111 | ||
Total long-term debts | 3 191 | 2 729 | ||
Straight bonds | ||||||
USD | 6.625% Euro Medium Term Note 1995/2005 of Novartis Corporation, Florham Park, New Jersey, US | 300 | 300 | |||
USD | 6.625% Euro Medium Term Note 1995/2005 of Novartis Corporation, Florham Park, New Jersey, US | 250 | 250 | |||
USD | 9.0% bonds 2006 of Gerber Products Company, Fremont, Michigan, US | 35 | 36 | |||
EUR | EUR 900 million 4.0% bond 2001/2006 of Novartis Securities Investment Ltd., Hamilton, Bermuda(2) | 1 127 | 939 | |||
EUR | EUR 1 billion 3.75% bond 2002/2007 of Novartis Securities Investment Ltd., Hamilton, Bermuda | 1 260 | 1 052 | |||
Total straight bonds | 2 972 | 2 577 | ||||
|
|
2003 USD millions |
2002 USD millions |
|||
---|---|---|---|---|---|---|
Breakdown by maturity | 2003 | 111 | ||||
2004 | 45 | 35 | ||||
2005 | 677 | 615 | ||||
2006 | 1 178 | 986 | ||||
2007 | 1 274 | 1 061 | ||||
2008 | 23 | |||||
Thereafter | 39 | 32 | ||||
Total | 3 236 | 2 840 | ||||
Breakdown by currency | USD | 719 | 743 | |||
EUR | 1 382 | 97 | ||||
JPY | 1 052 | |||||
CHF | 1 127 | 939 | ||||
Others | 8 | 9 | ||||
Total | 3 236 | 2 840 | ||||
172
Fair value comparison |
2003 Balance sheet USD millions |
2003 Fair values USD millions |
2002 Balance sheet USD millions |
2002 Fair values USD millions |
||||
---|---|---|---|---|---|---|---|---|
Straight bonds | 2 972 | 3 057 | 2 577 | 2 672 | ||||
Others | 264 | 264 | 263 | 263 | ||||
Total | 3 236 | 3 321 | 2 840 | 2 935 | ||||
Collateralized long-term debts and pledged assets |
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Total amount of collateralized long-term financial debts | 50 | 67 | ||
Total net book value of tangible fixed assets pledged as collateral for long-term financial debts | 101 | 118 | ||
The percentage of fixed rate debt to total financial debt was 51% and 46% at December 31, 2003 and 2002, respectively.
The financial debts, including short-term financial debts, contain only general default covenants. The Group is in compliance with these covenants.
19. Provisions and other long-term liabilities
|
2003 USD millions |
2002 USD millions |
|||
---|---|---|---|---|---|
Employee benefits | |||||
unfunded defined benefit plans | 930 | 741 | |||
other long-term employee benefits and deferred compensation | 183 | 180 | |||
Other post-employment benefits | 460 | 421 | |||
Liabilities for insurance activities | 766 | 646 | |||
Environmental provisions | 177 | 161 | |||
Provision for legal and product liability settlements | 335 | 254 | |||
Deferred purchase consideration | 4 | 9 | |||
Restructuring provision | 3 | ||||
Other provisions | 294 | 453 | |||
Total | 3 149 | 2 868 | |||
a) Environmental matters:
Novartis has provisions in respect of environmental remediation costs in accordance with the accounting policy described in Note 1. The accrual recorded at December 31, 2003 consists of USD 84 million (2002: USD 82 million) provided for remediation at third party sites and USD 95 million (2002: USD 81 million) for remediation of owned facilities. In the US, 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 to certain sites. Novartis actively participates in, or monitors, the clean-up activities at the sites in which it is a PRP. The estimated reserve takes into consideration the number of other PRPs at each site and the identity and financial position of such parties in light of the joint and several nature of the liability.
173
The requirement in the future for Novartis ultimately to take action to correct the effects on the environment of prior disposal or release of chemical substances by Novartis or other parties, and its costs, pursuant to environmental laws and regulations, is inherently difficult to estimate. The material components of the environmental provisions consist of costs to fully clean and refurbish contaminated sites and to treat and contain contamination at sites where the environmental exposure is less severe. The Novartis future remediation expenses are affected by a number of uncertainties which include, but are not limited to, the method and extent of remediation, the percentage of material attributable to Novartis at the remediation sites relative to that attributable to other parties, and the financial capabilities of the other potentially responsible parties.
In connection with the 1997 spin-off of CIBA Specialty Chemicals AG ("CSC") from Novartis AG, a Novartis affiliate has agreed to reimburse CSC 50% of the costs: (i) associated with environmental liabilities arising in the US from the operations of the specialty chemicals business of the US affiliates of the former Ciba-Geigy AG, and (ii) which exceed reserves agreed between that affiliate and CSC. The reimbursement obligations are not subject to any time or amount limits but could terminate for certain liabilities in the US upon the occurrence of certain contingencies which include the merger of CSC or the sale of its assets.
Novartis believes that its total reserves for environmental matters are adequate based upon currently available information, however, given the inherent difficulties in estimating liabilities in this area, it cannot be guaranteed that additional costs will not be incurred beyond the amounts accrued. The effect of resolution of environmental matters on results of operations cannot be predicted due to uncertainty concerning both the amount and the timing of future expenditures and the results of future operations. Management believes that such additional amounts, if any, would not be material to the Group's financial condition but could be material to the results of operations in a given period.
The following table shows the movements in the environmental liability provisions during 2003 and 2002:
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
January 1 | 163 | 136 | ||
Cash payments | -4 | -2 | ||
Releases | -18 | -8 | ||
Additions | 25 | 16 | ||
Translation effect, net | 13 | 21 | ||
December 31 | 179 | 163 | ||
Less short-term liability | -2 | -2 | ||
Long-term liability at December 31 | 177 | 161 | ||
b) Legal and product liabilities:
A number of Group companies are the subject of litigation arising out of the normal conduct of their business, as a result of which claims could be made against them which, in whole or in part, might not be covered by insurance. In the opinion of Group management, however, the outcome of the actions if any, would not be material to the Novartis financial condition but could be material to the Novartis results of operations in a given period.
174
Augmentin® (amoxicillin/potassium clavulanate): A series of lawsuits by GlaxoSmithKline (GSK) against affiliates of Novartis regarding amoxicillin/potassium clavulanate, Novartis' generic version of GSK's Augmentin®, have been resolved in the Group's favor. The Group launched the first generic version of this GSK product in the US in July 2002, following favorable decisions by the United States District Court for the Eastern District of Virginia invalidating seven patents alleged by GSK to cover its Augmentin® product. GSK's appeal of the district court's decision was unsuccessful. Novartis has also resolved actions which GSK initiated against several of the Group's affiliates in state courts and before the US International Trade Commission alleging that the potassium clavulanate used in manufacturing the Group's product is produced using GSK trade secrets. In July 2003, an agreement was reached on this issue with GSK. Under the terms of the agreement, GSK will receive single-digit percentage royalties on US sales of generic versions of Augmentin® sold by Novartis or its affiliate companies for the four year period from July 2002 through June 2006.
Average Wholesale Price Litigation: Claims have been brought against various US pharmaceutical companies, including Novartis affiliates alleging that they have fraudulently overstated the Average Wholesale Price (AWP) and "best price", which is used by the US government to calculate Medicare and Medicaid reimbursements. Novartis affiliates have been named in a number of these cases. Novartis affiliates have also voluntarily participated in an ongoing Congressional inquiry on the subject of AWP and pharmaceutical pricing. Discovery is in process against certain defendants in these cases, but not yet against Group affiliates.
Pharmaceutical Antitrust Litigation: A Novartis affiliate along with numerous other prescription drug manufacturers, is a co-defendant in various actions brought by certain US retail pharmacies, alleging antitrust and pricing violations. Pretrial motion practice is underway. A trial is scheduled in one of these actions to commence in late 2004.
PPA: Novartis affiliates are parties to over 400 lawsuits in the US brought by people claiming to have been injured by products containing phenylpropanolamine (PPA) sold by certain of those affiliates. These cases are in various stages of litigation with Novartis having achieved victories in the first three claims to have gone to trial. However, other trials are currently ongoing, and more will follow. There can be no guarantee that the affiliates' initial successes will be repeated or sustained in the event of an appeal.
SMON (Subacute Myelo Optico Neuropathy): In 1996 an affiliate of Ciba-Geigy, one of the predecessor companies of Novartis, together with two other pharmaceutical companies, settled certain product liability issues related to sales of its product Clioquinol in Japan. Under the settlement, a Novartis affiliate is required to pay certain future health care costs of the claimants.
Terazosin: A Sandoz affiliate is a defendant in a number of lawsuits in the US claiming injuries and damages allegedly arising out of violation of antitrust laws in the settlement, by the affiliate and Abbott Pharmaceuticals, of a contentious patent litigation involving Abbott's Hytrin® and the Sandoz generic equivalent product. The affiliate has a judgment sharing agreement with Abbott that caps its liability. In addition, in one of the proceedings, the affiliate was successful in overturning on appeal a trial court decision that the settlement of the litigation was per se unlawful, and certifying a plaintiff's class. The case has been remanded to the trial court for further proceedings.
Novartis believes that its affiliates have meritorious defenses in these cases, and they are vigorously defending each of them.
From time to time, the Group's affiliates may be the subject of government investigations arising out of the normal conduct of their business. Consistent with the Novartis Code of Conduct and policies regarding compliance with law, it is the Group's policy to cooperate with such investigations.
175
US enteral pump market: A Novartis Medical Nutrition affiliate in the US is a subject of an investigation by the US Department of Justice regarding marketing and pricing practices in the US enteral pump market, including whether certain federal criminal statutes have been violated. Novartis is cooperating with that investigation.
Novartis maintains general liability insurance, including product liability insurance, covering claims on a worldwide basis. While claims could be made against the Group's affiliates which, in whole or in part, might not be covered by insurance, the Group believes that its insurance coverage limits and retention amounts are reasonable and prudent in light of its businesses and the risks to which the Group is subject.
The following table shows the movements in the legal and product liability provisions during 2003 and 2002:
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
January 1 | 420 | 316 | ||
Consolidation changes | 26 | |||
Cash payments | -152 | -60 | ||
Releases | -158 | -19 | ||
Additions | 317 | 160 | ||
Translation effect, net | 18 | 23 | ||
December 31 | 471 | 420 | ||
Less short-term liability | -136 | -166 | ||
Long-term liability at December 31 | 335 | 254 | ||
20. Short-term financial debts
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Interest bearing employee accounts | 926 | 816 | ||
Other bank and financial debt | 660 | 634 | ||
Commercial paper | 649 | 949 | ||
Current portion of long-term financial debt | 45 | 111 | ||
Fair value of derivative financial instruments | 499 | 331 | ||
Total | 2 779 | 2 841 | ||
The balance sheet values of short-term financial debt, other than the current portion of long-term financial debts, approximates to the estimated fair value due to the short-term nature of these instruments.
The weighted average interest rate on the bank and other financial debt including employee accounts was 3.1% and 3.5% in 2003 and 2002, respectively.
176
21. Other short-term liabilities
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Income and other taxes | 872 | 546 | ||
Restructuring liabilities | 43 | 98 | ||
Accrued expenses | 2 912 | 2 366 | ||
Potential claims from insurance activities | 149 | 206 | ||
Social security/pension funds | 80 | 70 | ||
Environmental liabilities | 2 | 2 | ||
Deferred income relating to government grants | 14 | 14 | ||
Goods returned and commission liabilities | 15 | 9 | ||
Legal and product liability settlements | 136 | 166 | ||
Other payables | 653 | 688 | ||
Total | 4 876 | 4 165 | ||
Restructuring charges: In October 2002, charges of USD 20 million were incurred in conjunction with the divestment of the Food & Beverage business to Associated British Foods plc (ABF). The charges comprised employee termination costs of USD 8 million and other third party costs of USD 12 million. 45 employees not transferred to ABF were identified in the original plan, all but 4 of whom have now left the Group. These 4 associates are fulfilling an interim service level agreement with the new owners and are expected to leave in 2005. All other significant actions associated with the restructuring plan are expected to be completed during 2004.
In December 2002, provision was made for charges of USD 28 million in conjunction with the plan to re-organize the Health Food and Slimming as well as Sports Nutrition businesses into a stand-alone unit called Nutrition & Santé. The charges comprised employee termination costs of USD 17 million and other third party costs of USD 11 million. 120 associates were identified in the original plan, of whom 25 remained employed by the Group as at December 31, 2003, but all of whom are expected to leave in 2004. All other actions of this plan will be completed in 2004.
In December 2002 charges of USD 10 million were incurred in conjunction with a plan to restructure the OTC business. The charges comprised employee termination costs of USD 9 million and other third party costs of USD 1 million. 90 associates were impacted by the restructuring, of whom 5 remain employed by the Group as at December 31, 2003, but all of whom are expected to leave in 2004. All other actions of this plan will also be completed in 2004.
In 2003 there were no significant restructuring charges.
The releases to income in 2003 and 2002 of USD 12 million and USD 23 million respectively, were mainly due to settlement of liabilities at lower amounts than originally anticipated.
Tangible fixed asset impairments are determined based on the review of the carrying values of tangible fixed assets. Write-downs are recorded for tangible fixed assets impaired or related to activities to be restructured, divested or abandoned. The provision is transferred to accumulated depreciation as the tangible fixed assets are restructured, divested or abandoned.
177
Other third party costs are mainly associated with lease and other obligations due to the abandonment of certain facilities.
|
Employee termination costs USD millions |
Tangible fixed asset impairments USD millions |
Other third party costs USD millions |
Total USD millions |
||||
---|---|---|---|---|---|---|---|---|
Balance at January 1, 2002 | 36 | 31 | 74 | 141 | ||||
Cash payments | -21 | -58 | -79 | |||||
Releases | -6 | -12 | -5 | -23 | ||||
Additions | 34 | 24 | 58 | |||||
Non-income tangible fixed asset write-offs | -4 | -4 | ||||||
Translation effect, net | 3 | 2 | 5 | |||||
Balance at December 31, 2002 | 46 | 15 | 37 | 98 | ||||
Cash payments | -27 | -16 | -43 | |||||
Releases | -1 | -2 | -9 | -12 | ||||
Balance at December 31, 2003 | 18 | 13 | 12 | 43 | ||||
22. Cash flows arising from changes in net current assets and other operating cash flow items
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Change in inventories | -78 | -275 | ||
Change in trade accounts receivable and other net current assets | 297 | 49 | ||
Change in trade accounts payable | 238 | 74 | ||
Total | 457 | -152 | ||
178
23. Cash flows arising from major acquisitions and divestments of subsidiaries
The following is a summary of the cash flow impact of the major divestments and acquisitions of subsidiaries:
|
2003 Acquisitions USD millions |
2002 Acquisitions USD millions |
2002 Divestments USD millions |
|||
---|---|---|---|---|---|---|
Tangible fixed assets | -1 | -165 | 61 | |||
Other identifiable long-term assets | -24 | -28 | 5 | |||
Inventories | -1 | -125 | 19 | |||
Trade accounts receivable and other current assets | -1 | -106 | 33 | |||
Marketable securities, cash and short-term deposits | -103 | 20 | ||||
Long-term and short-term debt to third parties | 5 | -21 | ||||
Trade accounts payable and other liabilities | 36 | 133 | 21 | |||
Net identifiable assets acquired/divested | 9 | -389 | 138 | |||
Less acquired/divested liquidity | 18 | 103 | -20 | |||
Sub-total | 27 | -286 | 118 | |||
Goodwill | -303 | -618 | ||||
Divestment gains | 133 | |||||
Amount settled in treasury shares | 78 | |||||
Translation effects | 4 | 33 | ||||
Net Cash Flow | -272 | -793 | 251 | |||
The significant changes in the companies that have been consolidated are described in note 2. All acquisitions were for cash, except in 2002 an amount equivalent to USD 78 million which was settled in Novartis ADSs.
179
24. Changes in consolidated equity
a) The 2003 and 2002 changes in the fair value of financial instruments not recorded in the income statement and transfers to the income statement consist of the following:
|
Fair value adjustments to marketable securities USD millions |
Fair value of deferred cash flow hedges USD millions |
Total USD millions |
||||
---|---|---|---|---|---|---|---|
Fair value adjustments at January 1, 2002 | 656 | -10 | 646 | ||||
Changes in fair value: | |||||||
available-for-sale marketable securities | -494 | -494 | |||||
cash flow hedges | 144 | 144 | |||||
other financial assets | -344 | -344 | |||||
Realized gains or losses transferred to the income statement: | |||||||
marketable securities sold | -174 | -174 | |||||
derivative financial instruments | -88 | -88 | |||||
other financial assets sold | -8 | -8 | |||||
Impaired other financial assets | 64 | 64 | |||||
Reclassification in equity(1) | -98 | 79 | -19 | ||||
Deferred tax on above | 99 | -12 | 87 | ||||
Fair value adjustments at December 31, 2002 | -299 | 113 | -186 | ||||
Changes in fair value: | |||||||
available-for-sale marketable securities | 146 | 146 | |||||
cash flow hedges | 26 | 26 | |||||
other financial assets | 21 | 21 | |||||
associated companies' equity movements | 41 | 41 | |||||
Realized gains or losses transferred to the income statement: | |||||||
marketable securities sold | 92 | 92 | |||||
derivative financial instruments | -165 | -165 | |||||
other financial assets sold | 1 | 1 | |||||
Impaired marketable securities and other financial assets | 146 | 146 | |||||
Deferred tax on above | -74 | 33 | -41 | ||||
Fair value adjustments at December 31, 2003 | 74 | 7 | 81 | ||||
b) The Group has investments in associated companies, principally Roche Holding AG and Chiron Corporation. The Group's share in associated companies' currency translation adjustments, unrealized fair value adjustments on marketable securities and hedging transactions are allocated directly to the appropriate component of the Group's consolidated statement of changes in equity.
c) Goodwill previously written-off against retained earnings, in accordance with IFRS in effect prior to 1995, has been transferred to the income statement as a reduction of a gain following the renegotiation in 2002 of the final purchase price of this 1994 transaction.
180
d) The Board of Directors proposes a dividend of CHF 1.00 per share for 2003 (2002: CHF 0.95 per share amounting to USD 1.7 billion which was paid in 2003) totaling USD 2.0 billion for all dividend bearing shares. The amount available for dividend distribution is based on the available distributable retained earnings of Novartis AG determined in accordance with the legal provisions of the Swiss Code of Obligations.
e) USD 939 million of shares were acquired during 2003 under the Group's third share buy-back program on the second trading line and USD 666 million of shares, net were sold on the first trading line. This resulted in a net reduction in Group consolidated equity of USD 273 million (2002: USD 3.2 billion).
f) Pursuant to a resolution approved at the March 22, 2003 Annual General Meeting, 22.7 million shares with a nominal value of USD 8 million were cancelled representing shares acquired in 2002 on the second trading line buy-back program (2002: 61.1 million shares were cancelled with a nominal value of USD 22 million).
g) During December 2001, Novartis sold a total of 55 million ten-year call options (Low Exercise Price Options"LEPOs") on Novartis shares, with an exercise price of CHF 0.01, to a third party. The Group received EUR 2.2 billion in proceeds (EUR 40 per LEPO). The Group accounted for the LEPOs as an increase in share premium at fair value less related issuance costs. Following changes in US GAAP and expected changes in IFRS rules, Novartis redeemed, in advance, these equity instruments on June 26, 2003.
h) During December 2001, Novartis sold a total of 55 million nine and ten-year put options on Novartis shares to a third party with an exercise price of EUR 51, the Group received EUR 0.6 billion in proceeds (EUR 11 per put option). The Group accounted for the option premium associated with the put options as an increase in share premium less related issuance costs. Following changes in US GAAP and expected changes in IFRS, Novartis redeemed, in advance, these equity instruments on June 26, 2003.
25. Employee benefits
a) Defined benefit plans: The Group has, apart from the legally required social security schemes, numerous independent pension plans. For certain Group companies, however, no independent assets exist for the pension and other long-term employee benefit obligations. In these cases the related liability is included in the balance sheet.
Defined benefit pension plans cover the majority of the Group's employees. The defined benefit obligations and related assets of all major plans are reappraised annually by independent actuaries. Plan assets are recorded at fair values. The following is a summary of the status of the main defined benefit plans at December 31, 2003 and 2002:
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Funded assets of independent defined benefit | 16 128 | 14 365 | ||
Defined benefit obligations of active and retired employees of funded plans | -13 112 | -11 320 | ||
Funded Status | 3 016 | 3 045 | ||
Defined benefit obligations of active and retired employees of unfunded plans | -753 | -525 | ||
Unrecognized past service costs | 6 | |||
Unrecognized actuarial losses, net of gains | 777 | 266 | ||
Net asset in balance sheet | 3 046 | 2 786 | ||
181
The net asset in the balance sheet consists of:
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Prepaid pension expense included in financial and other assets | 3 976 | 3 527 | ||
Accrued pension costs included in other long-term liabilities | -930 | -741 | ||
Total net asset | 3 046 | 2 786 | ||
The following are the principal actuarial assumptions, used for calculating the 2003 and 2002 income statement amounts and the above-stated December 31, 2003 and 2002 funded status of the main defined benefit plans:
|
Income statement |
Funded status |
||||||
---|---|---|---|---|---|---|---|---|
Weighted average % |
2003 % |
2002 % |
2003 % |
2002 % |
||||
Discount | 4.6 | 4.5 | 4.3 | 4.5 | ||||
Payroll indexation | 2.8 | 2.8 | 2.8 | 2.8 | ||||
Return on assets | 5.6 | 6.1 | 5.6 | 6.1 | ||||
In some Group companies employees are covered by defined contribution plans and other long-term employee benefits. The liability of the Group for these benefits is reported in other long-term employee benefits and deferred compensation and at December 31, 2003 amounts to USD 183 million (2002: USD 180 million). In 2003 contributions charged to the consolidated income statement for the defined contribution plans were USD 84 million (2002: USD 85 million).
The number of Novartis AG shares held by pension and similar benefit funds at December 31, 2003 was 31.5 million shares with a market value of USD 1.3 billion (2002: 31.5 million shares with a market value of USD 1.1 billion). These funds did not dispose of any Novartis AG shares during the year ended December 31, 2003 (2002: 2.5 million shares). The amount of dividends received on Novartis AG shares held as plan assets by these funds were USD 22 million for the year ended December 31, 2003 (2002: USD 22 million).
b) Defined benefit plan and other post-employment benefit scheme balance sheet and income statement details:
The Group's post-employment healthcare, insurance and other related post-employment benefits are not funded. The following is a summary of the balance sheet movements in relation to defined benefit plans and other post-employment benefits:
|
Defined benefit pension plans |
Other post-employment benefits |
||||||
---|---|---|---|---|---|---|---|---|
|
2003 USD millions |
2002 USD millions |
2003 USD millions |
2002 USD millions |
||||
Asset/(liability) at January 1 | 2 786 | 2 227 | -421 | -416 | ||||
Increase in prepaid pensions | 449 | 643 | ||||||
Increase in accrued liabilities | -189 | -84 | -39 | -5 | ||||
Asset/(liability) at December 31 | 3 046 | 2 786 | -460 | -421 | ||||
182
The amounts recognized in the income statement are as follows:
|
Defined benefit pension plans |
Other post-employment benefits |
||||||
---|---|---|---|---|---|---|---|---|
|
2003 USD millions |
2002 USD millions |
2003 USD millions |
2002 USD millions |
||||
Expected return on plan assets | 796 | 970 | ||||||
Employee contributions | 39 | 7 | ||||||
Current service cost | -285 | -277 | -19 | -14 | ||||
Interest cost | -559 | -552 | -40 | -36 | ||||
Past service costs | 27 | 4 | ||||||
Amortization of actuarial gains and losses | -72 | -9 | -8 | -4 | ||||
Income/(expense) | -54 | 139 | -63 | -54 | ||||
The actual return on plan assets for 2003 taking into account realized and unrealized capital gains and losses was a gain of USD 916 million (2002: USD 1 173 million loss).
The following are the principal actuarial assumptions used for calculating the other post-employment benefits:
|
2003 Weighted average % |
2002 Weighted average % |
||
---|---|---|---|---|
Discount rate | 6.3 | 6.8 | ||
Healthcare cost trend (initial) | 9.0 | 10.0 | ||
Healthcare cost trend (ultimate) | 4.8 | 4.8 | ||
183
26. Employee share participation plans
Employee and management share participation plans exist as follows:
a) Novartis Share Option Plan: Under the current plan, share options are granted annually as part of the remuneration of executives and other employees, as selected by the Board's Compensation Committee. These options are exercisable after two years and expire after nine years. Each option entitles the holder to acquire one Novartis AG share at a predetermined exercise price. In May 2001, the Novartis AG shares were split 40 to 1. Options granted prior to that date entitled the holder to acquire 40 Novartis AG shares per option. The figures in the tables below have been restated for grants before 2002 to reflect this change. The number of options granted depends on the performance of the individuals and the Business Unit in which they work. In order to further align the Novartis Share Option Plan and the US ADS Incentive Plan, as of 2004 the vesting period for the Novartis Share Option Plan has been increased to three years.
|
2003 |
2002 |
||||||
---|---|---|---|---|---|---|---|---|
|
Options (millions) |
Weighted average exercise price (USD) |
Options (millions) |
Weighted average exercise price (USD) |
||||
Options outstanding at January 1 | 11.5 | 43.6 | 7.2 | 35.4 | ||||
Granted | 9.8 | 39.0 | 5.6 | 44.3 | ||||
Exercised | -0.1 | 43.3 | -1.0 | 40.1 | ||||
Cancelled | -0.2 | 43.3 | -0.3 | 43.9 | ||||
Outstanding at December 31 | 21.0 | 44.3 | 11.5 | 43.6 | ||||
Exercisable at December 31 | 6.0 | 47.8 | 3.8 | 38.4 | ||||
Weighted average fair value of options granted during the year (USD) | 15 | 8 | ||||||
All options were granted at an exercise price which was greater than the market price of the Group's shares at the grant date.
The following table summarizes information about share options outstanding at December 31, 2003:
|
Options outstanding |
Options exercisable |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Range of exercise prices (USD) |
Number outstanding (millions) |
Average remaining contractual life (years) |
Weighted average exercise price (USD) |
Number exercisable (millions) |
Weighted average exercise price (USD) |
|||||
30-34 | 0.8 | 3.2 | 34.0 | 0.8 | 34.0 | |||||
35-39 | 9.8 | 8.0 | 39.1 | 0.1 | 38.8 | |||||
40-44 | 1.8 | 5.1 | 41.1 | 1.8 | 41.1 | |||||
45-49 | 5.3 | 7.1 | 49.6 | |||||||
50-54 | 0.9 | 4.2 | 54.7 | 0.9 | 54.7 | |||||
55-59 | 2.4 | 6.1 | 56.0 | 2.4 | 56.0 | |||||
Total | 21.0 | 7.0 | 44.3 | 6.0 | 47.8 | |||||
184
b) Novartis US ADS Incentive Plan: The US ADS Incentive Plan was introduced in 2001 and supplements the previous US Management ADS Appreciation Cash Plan. Under the US ADS Incentive Plan, options are granted annually on Novartis ADSs at a pre-determined exercise price as part of the remuneration of US-based executives and other selected employees. The number of options granted depends on the performance of the individuals and of the Division/Business Unit in which they work. Options are exercisable after three years and terminate after ten years. Under the previous US Management ADS Appreciation Cash Plan, Novartis US-based employees in the USA were entitled to cash compensation equivalent to the increase in the value of Novartis ADSs compared to the market price of the ADSs at the grant date.
|
2003 |
2002 |
||||||
---|---|---|---|---|---|---|---|---|
|
ADS options (millions) |
Weighted average exercise price (USD) |
ADS options (millions) |
Weighted average exercise price (USD) |
||||
Options outstanding at January 1 | 23.2 | 39.3 | 8.5 | 42.1 | ||||
Granted | 20.0 | 36.4 | 15.8 | 37.3 | ||||
Exercised | -0.1 | 41.8 | ||||||
Cancelled | -2.5 | 38.0 | -1.1 | 39.5 | ||||
Outstanding at December 31 | 40.6 | 37.7 | 23.2 | 38.8 | ||||
Exercisable at December 31 | 1.2 | 38.8 | 0.7 | 39.3 | ||||
Weighted average fair value of options granted during the year (USD) | 17 | 11 | ||||||
All ADS options were granted at an exercise price which was equal to, or greater than, the market price of the ADS at the grant date.
The following table summarizes information about ADS options outstanding at December 31, 2003:
|
ADS options outstanding |
ADS options exercisable |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Range of exercise prices (USD) |
Number outstanding (millions) |
Average remaining contractual life (years) |
Weighted average exercise price (USD) |
Number exercisable (millions) |
Weighted average exercise price (USD) |
|||||
31-35 | 0.1 | 6.5 | 34.0 | |||||||
36-40 | 33.3 | 8.2 | 36.7 | 0.8 | 37.1 | |||||
41-45 | 7.2 | 7.3 | 42.0 | 0.4 | 42.2 | |||||
40.6 | 8.0 | 37.7 | 1.2 | 38.8 | ||||||
c) Long-Term Performance Plan: This plan is offered to selected executives. Under the Long-Term Performance Plan, participants are awarded the right to earn Novartis AG shares. Actual payouts, if any, are dependent on achievements of long-term targets such as economic value added relative to pre-determined strategic plan targets over a three-year period. Additional functional objectives may be considered in the evaluation of performance. If performance is below the threshold level of the pre-determined targets, no shares will be earned. To accommodate the starting phase of the Plan, "bridging periods" of one year duration were introduced for the payouts in 2001, 2002 and 2003. During 2003 a total of 507 507 shares (2002: 232 548 shares) were granted to executives.
185
d) Leveraged Share Savings Plan: Participants under this plan can make an election to receive all or part of their annual incentive award in Novartis AG shares. Shares received under the plan are blocked for a five year period after the grant date. At the end of the blocking period, Novartis will match the respective shares on a one-for-one basis. During 2003, 279 619 shares (2002: 245 838 shares) were granted to participants.
e) New Swiss Employee Share Ownership Plan: A new Swiss Employee Share Ownership Plan (ESOP) was introduced as of January 1, 2002 to encourage employees in Switzerland to invest in Novartis. The new ESOP provides for the annual variable incentive to be delivered wholly in the form of Novartis AG shares at a fixed date at a fair market value at that date. Employees are free to sell 50% or 100% of these shares immediately. Shares received under the plan have a three year blocking period and are matched with one share for every two shares held at the end of the blocking period. In 2003 the Swiss employees received 3 942 687 shares for the first time under this scheme.
f) Old Swiss Employee Share Ownership Plan: In 1998, a Swiss Employee Share Ownership Plan was introduced for all employees of Swiss subsidiaries. This Plan entitled employees after one year of service to acquire 120 shares in Novartis AG every year at a price determined by the Board's Compensation Committee, which was CHF 12.50 per share in 2002. In 2002, 406 448 shares were distributed under this Plan. 2002 was the last year in which employees could purchase shares under this scheme. Employees who joined Novartis after January 1, 2002 only participate in the new ESOP.
g) Restricted Share Plan: Under the Restricted Share Plan, employees may be granted restricted share awards either as a result of a general grant or as a result of an award based on having met certain performance criteria. Shares granted under this Plan generally have a five-year vesting period. During 2003 a total of 233 510 shares (2002: 117 902 shares) were granted to executives and selected employees.
Movements in Novartis AG shares held by the Novartis Foundation for Employee Participation were as follows:
|
2003 Number of shares (000) |
2002 Number of shares (000) |
||
---|---|---|---|---|
January 1 | 95 072 | 101 312 | ||
Shares bought/sold | 1 163 | -5 238 | ||
Shares distributed to employees | -2 935 | -1 002 | ||
December 31 | 93 300 | 95 072 | ||
The market value of the Novartis AG shares held by the Foundation at December 31, 2003 was USD 4.2 billion (2002: USD 3.4 billion).
27. Related parties
The Novartis Group has formed certain foundations with the purposes of advancing employee welfare, employee share participation, research and charitable contributions. The charitable foundations foster health care and social development in rural countries. Each of these foundations is autonomous and its board is responsible for its respective administration in accordance with the foundation's purpose and applicable law.
186
The Novartis Foundation for Employee Participation has not been included in the consolidated financial statements prepared under IFRS as Interpretation No. 12 of the Standing Interpretations Committee exempts post-employment and equity compensation plans from its scope. The total assets of this Foundation as of December 31, 2003 included 93.3 million shares of Novartis AG with a market value of USD 4.2 billion. As of December 31, 2002, the assets included 95.1 million Novartis shares with a market value of USD 3.4 billion. This Foundation is consolidated under US GAAP and is included as a reconciling item in the US GAAP reconciliation.
In 2003, the Group granted short-term loans totaling USD 651 million to the above mentioned foundations and received short-term loans totaling USD 8 million from them. In 2002, the Group granted short-term loans totaling USD 623 million to the foundations, received short-term loans totaling USD 2 million from them.
In addition, there are approximately twenty other foundations that were established for charitable purposes that have not been consolidated as the Group does not receive a benefit therefrom. As of December 31, 2003 these foundations held approximately 6.1 million shares of Novartis, with a cost of approximately USD 32 million.
See notes 5, 25 and 26 to the consolidated financial statements for disclosure of other related party transactions and balances.
28. Commitments and contingencies
Spin-off of Novartis Agribusiness: All remaining significant matters in connection with the 1999 Master Agreement between Novartis AG and AstraZeneca Plc for the spin-off and merger of their respective agrochemical businesses into Syngenta AG have been completed during 2003.
Chiron Corporation: In connection with its original investment in Chiron, Novartis has agreed to:
purchase up to USD 500 million of new Chiron equity at fair value, at Chiron's request. To date, Chiron has made no such request.
guarantee up to USD 703 million of Chiron debt. Utilization of the guarantee in excess of USD 403 million reduces the equity put amount mentioned above. Novartis' obligation under the guarantee is only effective if Chiron defaults on the debt.
The outstanding equity put and guarantee expire no later than 2011.
Leasing commitments: |
|
2003 USD millions |
||
---|---|---|---|---|
Commitments arising from fixed-term operational leases in effect at December 31 are as follows: | ||||
2004 | 211 | |||
2005 | 172 | |||
2006 | 119 | |||
2007 | 87 | |||
2008 | 69 | |||
Thereafter | 270 | |||
Total | 928 | |||
Expense of current year | 232 | |||
187
Research & Development commitments: The Group has entered into long-term research agreements with various institutions, including USD 729 million of potential milestone payments. As of December 31, 2003 they are as follows:
|
2003 USD millions |
|
---|---|---|
2004 | 524 | |
2005 | 337 | |
2006 | 243 | |
2007 | 101 | |
2008 | 154 | |
Thereafter | 181 | |
Total | 1 540 | |
Contingencies: Group companies have to observe the laws, government orders and regulations of the country in which they operate. A number of them are currently involved in administrative proceedings arising out of the normal conduct of their business. In the opinion of Group management, however, the outcome of these actions will not materially affect the Group's financial position, result of operations or cash flow.
The material components of the Group's potential environmental liability consist of a risk assessment based on investigation of the various sites identified by the Group as at risk for environmental exposure. The Group's future remediation expenses are affected by a number of uncertainties. These uncertainties include, but are not limited to, the method and extent of remediation, the percentage of material attributable to the Group at the remediation sites relative to that attributable to other parties, and the financial capabilities of the other potentially responsible parties. The Group does not expect the resolution of such uncertainties to have a material effect on the consolidated financial statements.
29. Principal currency translation rates
|
|
|
2003 USD |
2002 USD |
||||
---|---|---|---|---|---|---|---|---|
Year end rates used for the consolidated balance sheets: | ||||||||
1 | CHF | 0.800 | 0.712 | |||||
1 | EUR | 1.247 | 1.038 | |||||
1 | GBP | 1.774 | 1.601 | |||||
100 | JPY | 0.935 | 0.834 | |||||
Average rates of the year used for the consolidated income and cash flow statements: |
||||||||
1 | CHF | 0.745 | 0.643 | |||||
1 | EUR | 1.131 | 0.946 | |||||
1 | GBP | 1.636 | 1.503 | |||||
100 | JPY | 0.867 | 0.802 | |||||
188
30. Events subsequent to the December 31, 2003 balance sheet date
On December 16, 2003, the Medical Nutrition business unit announced its intention to acquire the brands, trademarks, patents and intellectual property assets of Mead Johnson & Company's global adult medical nutrition business in a USD 385 million cash transaction. Mead Johnson & Company, a subsidiary of Bristol-Myers Squibb Company, is a leader in sales and marketing of adult medical nutrition products. Completion of this transaction is pending subject to finalization of regulatory review.
A US subsidiary, Idenix Inc., has filed with the US Securities & Exchange Commission (SEC) for an initial public offering of its shares on a US stock exchange. The exact timing and terms of the offering have still to be decided.
The 2003 consolidated financial statements of the Novartis Group were approved by the Novartis AG Board of Directors on January 20, 2004.
189
31. Group subsidiaries and associated companies
As at December 31, 2003
|
Share/paid-in in capital(1) |
Equity interest % |
Activities |
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Argentina | ||||||||||||||
Novartis Argentina S.A., Buenos Aires | ARS 230.6 m | 100 | | D | ||||||||||
Australia | ||||||||||||||
Novartis Australia Pty Ltd., North Ryde, NSW | AUD 11.0 m | 100 | /*/ | |||||||||||
Novartis Pharmaceuticals Australia Pty Ltd., North Ryde, NSW | AUD 3.8 m | 100 | | /*\ | ||||||||||
Novartis Consumer Health Australasia Pty Ltd., Mulgrave, Victoria | AUD 7.6 m | 100 | | D | ||||||||||
Novartis Animal Health Australasia Pty Ltd., North Ryde, NSW | AUD 3.0 m | 100 | | /*\ | ||||||||||
Austria | ||||||||||||||
Novartis Pharma GmbH, Vienna | EUR 1.1 m | 100 | | |||||||||||
Novartis Forschungsinstitut GmbH, Vienna | EUR 10.9 m | 100 | /*\ | |||||||||||
Sandoz GmbH, Vienna | EUR 100 000 | 100 | /*/ | |||||||||||
Sandoz GmbH, Kundl | EUR 32.7 m | 100 | /*/ | | D | /*\ | ||||||||
Novartis Animal Health GmbH, Kundl | EUR 37 000 | 100 | | |||||||||||
Bangladesh | ||||||||||||||
Novartis (Bangladesh) Limited, Dhaka | BDT 162.5m | 60 | | D | ||||||||||
Belgium | ||||||||||||||
N.V. Novartis Management Services S.A., Vilvoorde | EUR 7.5 m | 100 | /*/ | |||||||||||
N.V. Novartis Pharma S.A., Vilvoorde | EUR 7.1 m | 100 | | |||||||||||
N.V. Novartis Consumer Health S.A., Bruxelles | EUR 4.8 m | 100 | | |||||||||||
N.V. CIBA Vision Benelux S.A., Mechelen | EUR 62 000 | 100 | | |||||||||||
Bermuda | ||||||||||||||
Triangle International Reinsurance Ltd., Hamilton | CHF 1.0 m | 100 | /*/ | |||||||||||
Novartis Securities Investment Ltd., Hamilton | CHF 30 000 | 100 | /*/ | |||||||||||
Novartis International Pharmaceutical Ltd., Hamilton | CHF 10.0 m | 100 | /*/ | | ||||||||||
Brazil | ||||||||||||||
Novartis Biociências S.A., São Paulo | BRL 158.1 m | 100 | | D | ||||||||||
Novartis Saúde Animal Ltda., São Paulo | BRL 19.9 m | 100 | | D | ||||||||||
Canada | ||||||||||||||
Novartis Pharmaceuticals Canada Inc., Dorval/Montreal | CAD 1.3 m | 100 | | /*\ | ||||||||||
Novartis Consumer Health Canada Inc., Mississauga, Ontario | CAD 2 | 100 | | |||||||||||
CIBA Vision Canada Inc., Mississauga, Ontario | CAD 1 | 100 | | D | ||||||||||
Chile | ||||||||||||||
Novartis Chile S.A., Santiago de Chile | CLP 2.0 bn | 100 | | |||||||||||
190
|
Share/paid-in in capital(1) |
Equity interest % |
Activities |
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
China | ||||||||||||||
Beijing Novartis Pharma Ltd., Beijing | CNY 111.3 m | 78 | | D | ||||||||||
Novartis Pharmaceuticals (HK) Limited, Hong Kong | HKD 200 | 100 | | |||||||||||
Colombia | ||||||||||||||
Novartis de Colombia S.A., Santafé de Bogotá | COP 20.9 bn | 100 | | D | ||||||||||
Croatia | ||||||||||||||
Lek Zagreb d.o.o., Zagreb | HRK 25.6 m | 100 | | D | ||||||||||
Czech Republic | ||||||||||||||
Novartis s.r.o., Prague | CZK 51.5 m | 100 | | |||||||||||
Denmark | ||||||||||||||
Novartis Healthcare A/S, Copenhagen | DKK 8.0 m | 100 | | |||||||||||
Ecuador | ||||||||||||||
Novartis Ecuador S.A., Quito | USD 209 193 | 100 | | |||||||||||
Egypt | ||||||||||||||
Novartis Pharma S.A.E., Cairo | EGP 33.8 m | 99 | D | |||||||||||
Novartis Egypt (Healthcare) S.A.E., Cairo | EGP 250 000 | 95 | | |||||||||||
Finland | ||||||||||||||
Novartis Finland Oy, Espoo | EUR 459 000 | 100 | | |||||||||||
France | ||||||||||||||
Novartis Groupe France S.A., Rueil-Malmaison | EUR 263.0 m | 100 | /*/ | |||||||||||
Novartis France S.A.S., Rueil-Malmaison | EUR 1.4 m | 100 | /*/ | |||||||||||
Novartis Pharma S.A.S., Rueil-Malmaison | EUR 43.4 m | 100 | | D | /*\ | |||||||||
Sandoz S.A.S., Levallois-Perret | EUR 2.6 m | 100 | | |||||||||||
Novartis Santé Familiale S.A.S., Rueil-Malmaison | EUR 21.9 m | 100 | | D | ||||||||||
Novartis Santé Animale S.A.S., Rueil-Malmaison | EUR 900 000 | 100 | | D | ||||||||||
Novartis Nutrition S.A.S., Revel | EUR 300 000 | 100 | | D | ||||||||||
Nutrition et Santé S.A.S., Revel | EUR 30.2 m | 100 | /*/ | | D | /*\ | ||||||||
CIBA Vision S.A.S., Blagnac | EUR 1.8 m | 100 | | |||||||||||
Germany | ||||||||||||||
Novartis Deutschland GmbH, Wehr | EUR 35.8 m | 100 | /*/ | |||||||||||
Novartis Pharma GmbH, Nuremberg | EUR 25.6 m | 100 | | D | /*\ | |||||||||
Sandoz Pharmaceuticals GmbH, Ismaning | EUR 5.1 m | 100 | | D | ||||||||||
Sandoz Industrial Products GmbH, Frankfurt a.M. | EUR 2.6 m | 100 | | D | ||||||||||
Novartis Consumer Health GmbH, Munich | EUR 14.6 m | 100 | | D | /*\ | |||||||||
Novartis Nutrition GmbH, Munich | EUR 23.5 m | 100 | | D | /*\ | |||||||||
CIBA Vision Vertriebs GmbH, Grossostheim | EUR 2.6 m | 100 | | |||||||||||
CIBA Vision GmbH, Grosswallstadt | EUR 15.4 m | 100 | | D | /*\ | |||||||||
Gibraltar | ||||||||||||||
Novista Insurance Limited, Gibraltar | CHF 130.0 m | 100 | /*/ | |||||||||||
191
|
Share/paid-in in capital(1) |
Equity interest % |
Activities |
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Great Britain | ||||||||||||||
Novartis UK Ltd., Farnborough | GBP 25.5 m | 100 | /*/ | |||||||||||
Novartis Pharmaceuticals UK Ltd., Frimley/Camberley | GBP 5.4 m | 100 | | D | /*\ | |||||||||
Novartis Grimsby Ltd., Farnborough | GBP 228.9 m | 100 | D | |||||||||||
Sandoz Ltd., Bordon | GBP 2.0 m | 100 | | |||||||||||
Novartis Consumer Health UK Ltd., Horsham | GBP 25 000 | 100 | | D | ||||||||||
Novartis Animal Health UK Ltd., Royston | GBP 100 000 | 100 | | /*\ | ||||||||||
Vericore Ltd., Royston | GBP 2 | 100 | | D | ||||||||||
CIBA Vision (UK) Ltd., Southampton | GBP 550 000 | 100 | | |||||||||||
Greece | ||||||||||||||
Novartis (Hellas) S.A.C.I., Athens | EUR 14.6 m | 100 | | |||||||||||
Hungary | ||||||||||||||
Novartis Hungary Healthcare Limited Liability Company, Budapest | HUF 545.6 m | 100 | | |||||||||||
India | ||||||||||||||
Novartis India Limited, Mumbai | INR 159.8 m | 51 | | D | ||||||||||
Sandoz Private Limited, Mumbai | INR 32.0 m | 100 | | D | ||||||||||
Indonesia | ||||||||||||||
PT Novartis Biochemie, Jakarta | IDR 7.7 bn | 69 | | D | ||||||||||
PT CIBA Vision Batam, Batam | IDR 11.9 bn | 100 | D | |||||||||||
Ireland | ||||||||||||||
Novartis Ireland Limited, Dublin | EUR 25 000 | 100 | | |||||||||||
Novartis Ringaskiddy Limited, Ringaskiddy, County Cork | EUR 2.0 m | 100 | D | |||||||||||
Italy | ||||||||||||||
Novartis Farma S.p.A., Origgio | EUR 18.2 m | 100 | /*/ | | D | /*\ | ||||||||
Sandoz Industrial Products S.p.A., Rovereto | EUR 2.6 m | 100 | D | |||||||||||
Novartis Consumer Health S.p.A., Origgio | EUR 2.9 m | 100 | | |||||||||||
CIBA Vision S.r.l., Marcon | EUR 2.4 m | 100 | | |||||||||||
Japan | ||||||||||||||
Novartis Pharma K.K., Tokyo | JPY 6.0 bn | 100 | | /*\ | ||||||||||
Ciba-Geigy Japan Limited, Tokyo | JPY 8.5 bn | 100 | D | |||||||||||
CIBA Vision K.K., Tokyo | JPY 495.0 m | 100 | | |||||||||||
Luxembourg | ||||||||||||||
Novartis Investments S.à r.l., Luxembourg | USD 2.6 bn | 100 | /*/ | |||||||||||
Malaysia | ||||||||||||||
Novartis Corporation (Malaysia) Sdn. Bhd., Kuala Lumpur | MYR 3.3 m | 70 | | |||||||||||
Mexico | ||||||||||||||
Novartis de México, S.A. de C.V., Mexico City | MXN 205.0 m | 100 | /*/ | |||||||||||
Novartis Farmacéutica, S.A. de C.V., Mexico City | MXN 80.7 m | 100 | | D | ||||||||||
Novartis Nutrition, S.A. de C.V., Mexico City | MXN 2.0 m | 100 | | |||||||||||
Productos Gerber, S.A. de C.V., Mexico City | MXN 12.5 m | 100 | | D | ||||||||||
192
|
Share/paid-in in capital(1) |
Equity interest % |
Activities |
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Netherlands | ||||||||||||||
Novartis Netherlands B.V., Arnhem | EUR 1.4 m | 100 | /*/ | |||||||||||
Novartis Pharma B.V., Arnhem | EUR 4.5 m | 100 | | |||||||||||
Sandoz B.V., Weesp | EUR 907 570 | 100 | | D | ||||||||||
Novartis Consumer Health B.V., Breda | EUR 23 830 | 100 | | D | ||||||||||
Netherlands Antilles | ||||||||||||||
Sandoz N.V., Curação | USD 6 000 | 100 | /*/ | | ||||||||||
Norway | ||||||||||||||
Novartis Norge AS, Oslo | NOK 1.5 m | 100 | | |||||||||||
Pakistan | ||||||||||||||
Novartis Pharma (Pakistan) Limited, Karachi | PKR 24.8 m | 98 | | D | ||||||||||
Panama | ||||||||||||||
Novartis Pharma (Logistics), Inc., Panama | USD 10 000 | 100 | | |||||||||||
Philippines | ||||||||||||||
Novartis Healthcare Philippines, Inc., Makati/Manila | PHP 298.8 m | 100 | | |||||||||||
Poland | ||||||||||||||
Novartis Poland Sp. z o.o., Warsaw | PLN 44.2 m | 100 | | |||||||||||
Lek Polska Sp. z o.o., Pruszkow | PLN 25.6 m | 100 | | |||||||||||
Alima-Gerber S.A., Warsaw | PLN 45.4 m | 100 | | D | ||||||||||
Portugal | ||||||||||||||
Novartis Portugal SGPS Lda., Sintra | EUR 500 000 | 100 | /*/ | |||||||||||
Novartis FarmaProdutos Farmacêuticos S.A., Sintra | EUR 2.4 m | 100 | | |||||||||||
Novartis Consumer HealthProdutos Farmacêuticos e Nutrição Lda., Lisbon | EUR 100 000 | 100 | | |||||||||||
Puerto Rico | ||||||||||||||
Gerber Products Company of Puerto Rico, Inc., Carolina | USD 1.0 m | 100 | | D | ||||||||||
CIBAVision Puerto Rico, Inc., Cidra | USD 14.0 m | 100 | D | |||||||||||
Russian Federation | ||||||||||||||
Novartis Pharma ZAO, Moscow | RUR 17.5 m | 100 | | |||||||||||
Singapore | ||||||||||||||
Novartis Institute for Tropical Diseases Pte Ltd., Singapore | SGD 2 004 | 100 | /*\ | |||||||||||
Slovenia | ||||||||||||||
Lek Pharmaceuticals d.d., Ljubljana | SIT 11.6 m | 100 | /*/ | | D | /*\ | ||||||||
South Africa | ||||||||||||||
Novartis South Africa (Pty) Ltd., Spartan/Johannesburg | ZAR 86.4 m | 100 | | D | ||||||||||
South Korea | ||||||||||||||
Novartis Korea Ltd., Seoul | KRW 24.5 bn | 99 | | D | ||||||||||
193
|
Share/paid-in in capital(1) |
Equity interest % |
Activities |
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Spain | ||||||||||||||
Novartis Farmacéutica, S.A., Barcelona | EUR 64.5 m | 100 | /*/ | | D | |||||||||
Sandoz Farmacéutica, S.A., Barcelona | EUR 270 450 | 100 | | D | /*\ | |||||||||
Sandoz Industrial Products, S.A., Les Franqueses del Vallés/Barcelona | EUR 9.3 m | 100 | | D | /*\ | |||||||||
Novartis Consumer Health, S.A., Barcelona | EUR 876 919 | 100 | | D | ||||||||||
CIBA Vision, S.A., Barcelona | EUR 1.4 m | 100 | | D | /*\ | |||||||||
Sweden | ||||||||||||||
Novartis SverigeParticipations AB,Täby/Stockholm | SEK 51.0 m | 100 | /*/ | |||||||||||
Novartis Sverige AB, Täby/Stockholm | SEK 5.0 m | 100 | | |||||||||||
CIBA Vision Nordic AB, Askim/Göteborg | SEK 2.5 m | 100 | | |||||||||||
Switzerland | ||||||||||||||
Novartis International AG, Basel | CHF 10.0 m | 100 | /*/ | |||||||||||
Novartis Holding AG, Basel | CHF 100.2 m | 100 | /*/ | |||||||||||
Novartis Securities AG, Basel | CHF 50.0 m | 100 | /*/ | |||||||||||
Novartis Research Foundation, Basel | CHF 29.3 m | 100 | /*\ | |||||||||||
Novartis Foundation for Management Dev., Basel | CHF 100 000 | 100 | /*/ | |||||||||||
Roche Holding AG, Basel | CHF 160.0 | 33 | /*/ | | D | /*\ | ||||||||
Novartis Pharma AG, Basel | CHF 350.0 m | 100 | /*/ | | D | /*\ | ||||||||
Novartis Pharma Services AG, Basel | CHF 50 000 | 100 | | |||||||||||
Novartis Pharma Schweizerhalle AG, Schweizerhalle | CHF 18.9 m | 100 | D | |||||||||||
Novartis Pharma Stein AG, Stein | CHF 251 000 | 100 | D | /*\ | ||||||||||
Novartis Pharma Schweiz AG, Bern | CHF 5.0 m | 100 | | |||||||||||
Novartis Ophthalmics AG, Hettlingen | CHF 200 000 | 100 | /*/ | | D | /*\ | ||||||||
Novartis Consumer Health S.A., Nyon | CHF 30.0 m | 100 | /*/ | | D | /*\ | ||||||||
Novartis Consumer Health Schweiz AG, Bern | CHF 250 000 | 100 | | |||||||||||
Novartis Animal Health AG, Basel | CHF 101 000 | 100 | /*/ | | D | /*\ | ||||||||
Novartis Centre de Recherche Santé Animale S.A., St.Aubin | CHF 250 000 | 100 | /*\ | |||||||||||
Novartis Nutrition AG, Bern | CHF 40.0 m | 100 | /*/ | |||||||||||
CIBA Vision AG, Embrach | CHF 300 000 | 100 | /*/ | | ||||||||||
Taiwan | ||||||||||||||
Novartis (Taiwan) Co., Ltd., Taipei | TWD 170.0 m | 100 | | D | ||||||||||
Thailand | ||||||||||||||
Novartis (Thailand) Limited, Bangkok | THB 230.0 m | 100 | | |||||||||||
Turkey | ||||||||||||||
Novartis Saglik, Gida ve Tarim Ürünleri Sanayi ve Ticaret A.S., Istanbul | TRL 49.1 tr | 100 | | D | ||||||||||
194
|
Share/paid-in in capital(1) |
Equity interest % |
Activities |
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
USA | ||||||||||||||
Novartis Corporation, Florham Park, NJ | USD 1.2 bn | 100 | /*/ | |||||||||||
Novartis Finance Corporation, New York, NY | USD 5.0 bn | 100 | /*/ | |||||||||||
Novartis Pharmaceuticals Corporation, East Hanover, NJ | USD 5.2 m | 100 | | D | /*\ | |||||||||
Novartis Ophthalmics, Inc., Duluth, GA | USD 350.0 m | 100 | | D | ||||||||||
Novartis Institutes for BioMedical Research, Inc., Cambridge, MA | USD 35.0 m | 100 | /*\ | |||||||||||
Novartis Institute for Functional Genomics, Inc., San Diego, CA | USD 175.4 m | 100 | /*\ | |||||||||||
Chiron Corporation, Emeryville, CA | USD 2.5 bn | 42 | /*/ | | D | /*\ | ||||||||
Idenix Pharmaceuticals, Inc., Cambridge, MA | USD 191.3 m | 54 | /*\ | |||||||||||
Sandoz Inc., Princeton, NJ | USD 35.5 m | 100 | | D | /*\ | |||||||||
Biochemie U.S., Inc., Broomfield, CO | USD 20.0 m | 100 | | |||||||||||
Lek Pharmaceuticals, Inc., Wilmington, NC | USD 200 000 | 100 | | |||||||||||
Novartis Consumer Health, Inc., Parsippany, NJ | USD 465.9 m | 100 | | D | /*\ | |||||||||
Novartis Animal Health US, Inc., Greensboro, NC | USD 25.0 m | 100 | | D | /*\ | |||||||||
Novartis Animal Vaccines, Inc., Overland Park, KS | USD 115.0 m | 100 | | D | /*\ | |||||||||
Novartis Nutrition Corporation, Minneapolis, MN | USD 68.8 m | 10 | | D | /*\ | |||||||||
Gerber Products Company, Fremont, MI | USD 614.9 m | 100 | /*/ | | D | /*\ | ||||||||
Gerber Life Insurance Company, White Plains, NY | USD 28.2 m | 100 | | |||||||||||
CIBA Vision Corporation, Duluth, GA | USD 368.4 m | 100 | /*/ | | D | /*\ | ||||||||
Venezuela | ||||||||||||||
Novartis de Venezuela S.A., Caracas | VEB 1.4 bn | 100 | | |||||||||||
In addition, the Group is represented by subsidiaries, associated companies or joint ventures in the following countries: Algeria, Costa Rica, Dominican Republic, Guatemala, the former Yugoslav Republic of Macedonia, Morocco, New Zealand, Nigeria, Peru, Romania, Serbia and Montenegro and Uruguay.
The following describe the various types of entities within the Group:
Equity interest % | above 50% and up to 100% of the voting rightsfully consolidated |
above 20% and up to 50% of the voting rightsinvestment in associated companyequity method accounting |
195
32. Significant Differences Between IFRS and United States Generally Accepted Accounting Principles (US GAAP)
The Group's consolidated financial statements have been prepared in accordance with IFRS, which as applied by the Group, differs in certain significant respects from US GAAP. The effects of the application of US GAAP to net income and equity are set out in the tables below:
|
Notes |
2003 USD millions |
2002 USD millions |
|||
---|---|---|---|---|---|---|
Net income under IFRS | 5 016 | 4 725 | ||||
US GAAP adjustments: | ||||||
Purchase accounting: Ciba-Geigy | a | -339 | -294 | |||
Purchase accounting: other acquisitions | b | -175 | -298 | |||
Purchase accounting: IFRS goodwill amortization | c | 172 | 140 | |||
Available-for-sale securities and derivative financial instruments | d | -240 | -273 | |||
Pension provisions | e | -18 | 27 | |||
Share-based compensation | f | -273 | -120 | |||
Consolidation of share-based employee compensation foundation | g | -3 | -20 | |||
Deferred taxes | h | -63 | -93 | |||
In-process research and development | i | -260 | -11 | |||
Other | j | -20 | -95 | |||
Deferred tax effect on US GAAP adjustments | -9 | 141 | ||||
Net income under US GAAP | 3 788 | 3 829 | ||||
Basic earnings per share under US GAAP (USD) | 1.59 | 1.58 | ||||
Diluted earnings per share under US GAAP (USD) | 1.57 | 1.55 | ||||
Notes |
December 31, 2003 USD millions |
December 31, 2002 USD millions |
||||
---|---|---|---|---|---|---|
Equity under IFRS | 30 429 | 28 269 | ||||
US GAAP adjustments: | ||||||
Purchase accounting: Ciba-Geigy | a | 3 131 | 3 113 | |||
Purchase accounting: other acquisitions | b | 2 808 | 3 011 | |||
Purchase accounting: IFRS goodwill amortization | c | 327 | 155 | |||
Pension provisions | e | 1 209 | 1 072 | |||
Share-based compensation | f | -96 | -156 | |||
Consolidation of share-based employee compensation foundation | g | -728 | -489 | |||
Deferred taxes | h | -609 | -547 | |||
In-process research and development | i | -1 338 | -984 | |||
Other | j | -93 | -34 | |||
Deferred tax effect on US GAAP adjustments | -162 | -185 | ||||
Equity under US GAAP | 34 878 | 33 225 | ||||
196
Components of equity in accordance with US GAAP
|
December 31, 2003 USD millions |
December 31, 2002 USD millions |
|||
---|---|---|---|---|---|
Share capital | 1 017 | 1 025 | |||
Treasury shares, at nominal value | -151 | -158 | |||
Share premium | 743 | 2 759 | |||
Retained earnings | 31 069 | 29 976 | |||
Accumulated other comprehensive income: | |||||
Currency translation adjustment | 1 940 | -237 | |||
Unrealized market value adjustment on available-for-sale securities, net of taxes of USD -62 million (2002: USD -6 million) | 275 | -253 | |||
Unrealized market value adjustment on cash-flow hedges, net of taxes of USD 7 million (2002: USD 30 million) | 7 | 113 | |||
Minimum pension liability, net of taxes of USD 15 million | -22 | ||||
December 31 | 34 878 | 33 225 | |||
Changes in US GAAP equity
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
January 1 | 33 225 | 30 208 | ||
Net unrealized market value adjustment | 381 | -502 | ||
Increase in share premium related to share-based compensation | 373 | 17 | ||
Minimum pension liability | -22 | |||
Associated companies' equity movement | 10 | -104 | ||
Foreign currency translation adjustment | 2 735 | 4 158 | ||
Net income for the year under US GAAP | 3 788 | 3 829 | ||
Dividends paid | -1 654 | -1 305 | ||
Acquisition of treasury shares | -500 | -3 076 | ||
Redemption of call and put options on Novartis shares | -3 458 | |||
December 31 | 34 878 | 33 225 | ||
197
Notes to the US GAAP Reconciliation
a) Purchase accounting: Ciba-Geigy: The accounting treatment for the 1996 merger of Sandoz and Ciba-Geigy under IFRS is different from the accounting treatment under US GAAP. For IFRS purposes the merger was accounted under the uniting of interests method, however, for US GAAP the merger did not meet all of the required conditions of Accounting Principles Board Opinion No. 16 for a pooling of interests and therefore is accounted for as a purchase under US GAAP. Under US GAAP, Sandoz would be deemed to be the acquirer with the assets and liabilities of Ciba-Geigy being recorded at their estimated fair values and the results of Ciba-Geigy being included from December 20, 1996. Under US GAAP, the cost of Ciba-Geigy to Sandoz was approximately USD 28.5 billion. All of the purchase price was allocated to identified tangible and intangible assets with a definite useful life. There was therefore no residual goodwill arising from accounting for this transaction.
The components of the equity and income statement adjustments related to the US GAAP purchase accounting adjustment for 2003 and 2002 are as follows:
|
2003 Components to reconcile |
|||||
---|---|---|---|---|---|---|
|
Net income USD millions |
Foreign currency translation adjustment USD millions |
Equity USD millions |
|||
Intangible assets related to marketed products | -478 | 472 | 4 121 | |||
Tangible fixed assets | 51 | -81 | -714 | |||
Inventory | 62 | 569 | ||||
Other identifiable intangibles | -25 | 9 | 73 | |||
Investments | 15 | 135 | ||||
Deferred taxes | 113 | -120 | -1 053 | |||
Total adjustment | -339 | 357 | 3 131 | |||
2002 Components to reconcile |
||||||
---|---|---|---|---|---|---|
|
Net income USD millions |
Foreign currency translation adjustment USD millions |
Equity USD millions |
|||
Intangible assets related to marketed products | -414 | 708 | 4 127 | |||
Tangible fixed assets | 44 | -115 | -684 | |||
Inventory | 83 | 507 | ||||
Other identifiable intangibles | -20 | 16 | 89 | |||
Investments | 20 | 120 | ||||
Deferred taxes | 96 | -179 | -1 046 | |||
Total adjustment | -294 | 533 | 3 113 | |||
The intangible assets related to marketed products and other identifiable intangibles are being amortized over 15 and 10 years, respectively.
198
b) Purchase accounting: other acquisitions: Prior to January 1, 1995, the Group wrote off all goodwill, being the difference between the purchase price and the aggregate fair value of tangible and intangible assets and liabilities acquired in a business combination, directly to equity, in accordance with IFRS existing at that time. The adoption of IAS 22 (revised 1993) required that goodwill is capitalized and amortized, however, did not require prior period restatement. The material component of goodwill recorded directly to equity, under IFRS prior to January 1, 1995, related to the acquisition of Gerber Products in 1994. The net book value of goodwill under US GAAP attributable to Gerber Products was USD 2 870 million as of December 31, 2003 and 2002.
In accordance with IAS 22, the difference between the purchase price and the aggregate fair value of tangible and intangible assets and liabilities acquired in a business combination is capitalized as goodwill and amortized over its useful life, not to exceed 20 years. Under US GAAP, the difference between the purchase price and fair value of net assets acquired as part of a pre-1995 business combination is also capitalized as goodwill. Effective January 1, 2002, the Group adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and other Intangible Assets. SFAS 142 requires that all goodwill and other intangible assets existing on implementation on January 1, 2002 are tested for impairment and thereafter are assessed for impairment on an annual basis. From January 1, 2002 goodwill and intangible assets deemed to have an indefinite useful life are no longer amortized on a regular basis. For the purpose of the reconciliation to US GAAP, goodwill was generally amortized through the income statement over an estimated useful life of 20 years up to December 31, 2001. Therefore, there is no amortization charge in 2003 and 2002 under US GAAP.
In 2003, as a result of adverse changes in the operating environment of certain businesses, or of the decision to divest certain products, in accordance with SFAS 142, non-cash charges of USD 119 million were recorded (2002: USD 229 million) for impairments of goodwill and divestments. Gerber goodwill was also reviewed for potential impairments in 2003 however, this did not result in the Group needing to record a charge. The process of evaluating goodwill involves making judgments and estimates relating to the projection and discounting of future cash flows. This evaluation is sensitive to changes in the discount rate. An increase to discount rates is likely to result in a significant impairment charge under US GAAP.
Also included are US GAAP adjustments to the equity method accounting results of Roche and Chiron totaling USD 56 million (2002: USD 69 million). The impact of the additional impairment charges and the Roche and Chiron adjustments resulted in a USD 175 million charge in 2003 (2002: USD 298 million).
Note k (xi) provides further disclosure regarding impairment under US GAAP.
c) Purchase accounting: IFRS goodwill amortization: As described above, as of January 1, 2002, goodwill is no longer amortized but only subject to impairment testing under US GAAP. The corresponding reversal of the regular goodwill amortization under IFRS resulted in an additional income in the US GAAP reconciliation of USD 172 million (2002: USD 140 million).
d) Available-for-sale marketable securities and derivative financial instruments: Under IFRS, fair value changes which relate to the underlying movement in exchange rates on available-for-sale debt securities have to be recognized in the income statement. Under US GAAP, SFAS 133 requires the entire movement in the fair value of the securities to be recognized in equity, including any part that relates to foreign exchange movements. This resulted in US GAAP income being reduced by USD 228 million (2002: USD 53 million income).
199
Prior to the adoption of IAS 39 from January 1, 2001 in the IFRS consolidated financial statements, investments were stated at the lower of cost or market value on an individual basis. This results in a different amount of unrealized gains or losses being recorded in the separate component of equity under US GAAP compared to IFRS and an additional expense under US GAAP on disposal of available-for-sale securities during 2003 and 2002. This resulted in an additional expense of USD 12 million (2002: USD 326 million).
The above differences result in an additional US GAAP expense of USD 240 million in 2003 (2002: USD 273 million).
e) Pension provisions: Under IFRS, pension costs and similar obligations are accounted for in accordance with IAS 19, Employee Benefits. For purposes of US GAAP, pension costs for defined benefit plans are accounted for in accordance with SFAS 87 Employers' Accounting for Pensions and the disclosure is presented in accordance with SFAS 132 Employers' Disclosures about Pensions and Other Post-retirement Benefits. The version of IAS 19 in force up to December 31, 1998 required that the discount rate used in the calculation of benefit plan obligations was of an average long-term nature, whereas US GAAP required that the discount rate is based on a rate, at which the obligations could be currently settled. From January 1, 1999, IFRS and US GAAP accounting rules in this area are essentially the same, however, adjustments arise when reconciling from IFRS to US GAAP due to the pre-1999 accounting rule differences.
The following is a reconciliation of the balance sheet and income statement amounts recognized for IFRS and US GAAP for both pension and post-employment benefit plans:
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Pension benefits: | ||||
Net asset recognized for IFRS | 3 046 | 2 786 | ||
Difference in unrecognized amounts | 1 314 | 1 196 | ||
Net asset recognized for US GAAP | 4 360 | 3 982 | ||
Net periodic (expense)/income recognized for IFRS | -54 | 139 | ||
Difference in amortization of actuarial amounts | -35 | 19 | ||
Net periodic pension benefit (expense)/income recognized for US GAAP | -89 | 158 | ||
Other post-employment benefits: |
||||
Liability recognized for IFRS | -460 | -421 | ||
Difference in unrecognized amounts | -105 | -124 | ||
Liability recognized for US GAAP | -565 | -545 | ||
Net periodic benefit expense recognized for IFRS | -63 | -54 | ||
Difference in amortization of actuarial amounts | 17 | 8 | ||
Net periodic post-employment benefit costs recognized for US GAAP | -46 | -46 | ||
Total US GAAP income statement difference on pensions and other post-employment benefits | -18 | 27 | ||
f) Share-based compensation: The Group does not account for share-based compensation, as it is not required under IFRS. Under US GAAP, the Group applies Accounting Principles Board Opinion No. 25 (APB 25) Accounting for Stock Issued to Employees and related interpretations in accounting for its plans. As described in Note 26, the Group has several plans that are subject to measurement under APB 25. These include the Long-Term Performance Plan, the Leveraged Share Savings Plan, the old and new Swiss Employee Share Ownership Plans, the Restricted Share Plan and the US Management ADS Appreciation Cash Plan.
200
Compensation expense recognized under the Long-Term Performance Plan was USD 29 million for the year ended December 31, 2003 (2002: USD 14 million).
The Leveraged Share Savings Plan is considered to be compensatory based on the fair value of the allocated Novartis AG shares. The shares are blocked for a five year period, at which time the bonus taken in shares are matched on a one-for-one basis. Compensation expense recognized under this plan was USD 16 million for 2003 (2002: USD 11 million).
The new Swiss Employee Share Ownership Plan (ESOP) is considered to be compensatory based on the fair value of Novartis AG shares at a fixed date. Compensation expense recognized under this plan was USD 176 million for the year ended December 31, 2003 (2002: USD 80 million).
The old Swiss ESOP was considered to be compensatory based on the amount of the discount allowed for employee share purchases. Compensation expense was recorded at the grant date and was calculated as the spread between the share price and the strike price on that date. During 2002, the Group sold 406 448 shares to employees, which has resulted in a compensation expense of USD 13 million. The discount to the Group's share price was recorded in share premium. The percentage discount to the Group's share price under this plan was 75% in 2002, which was the last year, in which employees could purchase shares under this scheme.
The Restricted Share Plan is considered to be compensatory based on the strike price for the underlying instruments, which is zero at the date of grant. Compensation expense is recorded at the grant date and is calculated as the number of instruments granted, multiplied by the share price on that date. Compensation expense recognized under this Plan was USD 5 million for the year ended December 31, 2003 (2002: USD 4 million).
The US Management ADS Appreciation Cash Plan is considered to be variable because the final benefit to employees depends on the Group's share price at the exercise date. Compensation expense is recorded at each balance sheet date by estimating the number of rights outstanding multiplied by the spread between the share price on the balance sheet date and the strike price. Compensation expense for this plan was USD 47 million for 2003 (2002: USD 2 million income). This plan was supplemented in 2001 by the US ADS Incentive Plan which grants options on Novartis ADSs. Disclosures relating to this Plan is included in note k (vii).
The total US GAAP expense of the above items is as follows:
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Long-Term Performance Plan | 29 | 14 | ||
Leveraged Share Savings Plan | 16 | 11 | ||
New Swiss ESOP Plan | 176 | 80 | ||
Old Swiss ESOP Plan | 13 | |||
Restricted Share Plan | 5 | 4 | ||
ADS Appreciation Cash Plan | 47 | -2 | ||
Total US GAAP additional compensation expense | 273 | 120 | ||
g) Consolidation of share-based compensation foundation: The Group has an employee share participation foundation that settles the
obligations of the Group's share-based compensation plans that is not required to be consolidated for IFRS. However, this foundation is consolidated under US GAAP.
The consolidation of this foundation reduces net income by USD 3 million (2002: USD 20 million) and US GAAP equity by USD 728 million (2002: USD 489 million).
201
h) Deferred taxes: Under IAS 12 (revised) and US GAAP, unrealized profits resulting from intercompany transactions are eliminated from the carrying amount of assets, such as inventory. In accordance with IAS 12 (revised) the Group calculates the tax effect with reference to the local tax rate of the company that holds the inventory (the buyer) at period-end. However, US GAAP requires that the tax effect is calculated with reference to the local tax rate in the seller's or manufacturer's jurisdiction.
i) In-process research and development (IPR&D): Under US GAAP, IPR&D is considered to be a separate asset that needs to be written-off immediately following the acquisition as the feasibility of the acquired research and development has not been fully tested and the technology has no alternative future use. IFRS does not consider that IPR&D is an intangible asset that can be separately recognized, accordingly it is recognized in goodwill.
During 2003, IPR&D has been identified for US GAAP purposes in connection with acquisitions, principally the acquisition of 51% of the shares of Idenix. All projects of Idenix are under research or development, therefore the full goodwill recorded under IFRS amounting to USD 297 million was considered as IPR&D under US GAAP.
IPR&D recognized on other acquisitions amounted to USD 39 million in 2003. During 2002, IPR&D arose on the acquisitions of a further 11.4% of the voting shares of Roche (USD 123 million), of 99% of the shares of Lek (USD 84 million), and of others (USD 17 million).
The income booked for the reversal of the amortization of IPR&D recorded under IFRS as a component of goodwill amortization amounted to USD 76 million (2002: USD 213 million). The total net IPR&D expense for 2003 was USD 260 million (2002: USD 11 million).
The impact of IPR&D reduced US GAAP equity by USD 1 338 million (2002: USD 984 million).
j) Other: There are also differences between IFRS and US GAAP in relation to (1) capitalized interest and capitalized software, (2) accretion on convertible debentures, (3) LIFO inventory and (4) minimum pension liability. None of these differences are individually significant and they are therefore shown as a combined total.
k) Additional US GAAP disclosures:
i) Financial assets and liabilities
Apart from the following exceptions, the US GAAP carrying value of financial assets and liabilities is equal to the IFRS carrying values.
ii) Cash, cash equivalents and time deposits
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Carrying value of cash and cash equivalents under IFRS | 5 646 | 5 798 | ||
Carrying values of time deposits under IFRS (note 16) | 651 | 767 | ||
Change due to consolidation of share-based compensation foundation under US GAAP | -650 | -622 | ||
Total under US GAAP | 5 647 | 5 943 | ||
202
iii) Marketable securities
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Carrying values of marketable securities under IFRS (note 16) | 6 134 | 5 496 | ||
Carrying values of other investments under IFRS | 1 076 | 896 | ||
Marketable securities in share-based compensation foundation consolidated under US GAAP | 16 | 129 | ||
Total under US GAAP | 7 226 | 6 521 | ||
The components of available-for-sale marketable securities under US GAAP at December 31, 2003 and 2002 are the following:
|
Cost USD millions |
Gross unrealized gains USD millions |
Gross unrealized losses USD millions |
Carrying value and estimated fair value USD millions |
||||
---|---|---|---|---|---|---|---|---|
As at December 31, 2003 | ||||||||
Available-for sale-securities: | ||||||||
Equity securities | 1 744 | 209 | -293 | 1 660 | ||||
Debt securities | 5 299 | 270 | -3 | 5 566 | ||||
Total | 7 043 | 479 | -296 | 7 226 | ||||
As at December 31, 2002 |
||||||||
Available-for-sale securities: | ||||||||
Equity securities | 2 022 | 212 | -571 | 1 663 | ||||
Debt securities | 4 797 | 91 | -30 | 4 858 | ||||
Total | 6 819 | 303 | -601 | 6 521 | ||||
Proceeds from sales of available-for-sale securities were USD 6 293 million and USD 6 086 million in 2003 and 2002 respectively. Gross realized gains were USD 199 million and USD 266 million on those sales in 2003 and 2002 respectively. Gross realized losses were USD 115 million and USD 648 million on those sales in 2003 and 2002 respectively. The cost used to determine the gain or loss on these sales was calculated using the weighted average method. As at December 31, 2003 USD 258 million of gross unrealized losses of equity securities existed for more than 12 months.
The maturities of the available-for-sale debt securities included above at December 31, 2003 are as follows:
|
2003 USD millions |
|
---|---|---|
Within one year | 34 | |
Over one year through five years | 4 447 | |
Over five years through ten years | 629 | |
Over ten years | 456 | |
Total | 5 566 | |
iv) Derivative financial instruments: In 2003 there were no gains and losses recognized in accordance with US GAAP on options settled in Novartis shares that require a net cash settlement (2002: USD 123 million of gains).
203
v) Non-derivative financial instruments: The US GAAP carrying values are equivalent to the IFRS carrying values for all non-derivative financial assets and liabilities. Non-derivative financial assets consist of cash and cash equivalents, time deposits, and marketable securities. Non-derivative liabilities consist of commercial paper, bank or other short-term financial debts, and long-term debt.
The carrying amount of cash and cash equivalents, time deposits, commercial paper, and bank and other short-term financial debts approximates their estimated fair values due to the short-term nature of these instruments. The fair values of marketable securities are estimated based on listed market prices or broker or dealer price quotes. The fair value of long-term debt is estimated based on the current quoted market rates available for debt with similar terms and maturities.
The estimated fair values of the long and short-term financial debt are provided in notes 18 and 20 to the IFRS consolidated financial statements.
vi) Earnings per share: As discussed in item (g) above, in the past, the Group established the Novartis Foundation for Employee Participation to assist the Group in meeting its obligations under various employee benefit plans and programs. This Foundation supports existing, previously approved employee benefit plans.
For US GAAP purposes, the Group consolidates this Foundation. The cost of Novartis AG shares held by the Foundation is shown as a reduction of shareholders' equity in the Group's US GAAP balance sheet.
Any dividend transactions between the Group and the Foundation are eliminated, and the difference between the fair value of the shares on the date of contribution to the Foundation and the fair values of the shares at December 31, is included in consolidated retained earnings. Shares held in the Foundation are not considered outstanding in the computation of US GAAP earnings per share. The consolidation of this entity had the following impact on basic and diluted earnings per share:
Basic earnings per share |
2003 |
2002 |
||
---|---|---|---|---|
Net income under US GAAP (USD millions) | 3 788 | 3 829 | ||
Weighted average number of shares in issue under IFRS | 2 473 522 565 | 2 515 311 685 | ||
Weighted average number of treasury shares due to consolidation of the employee share participation foundation under US GAAP | -93 430 809 | -97 164 490 | ||
Weighted average number of shares in issue under US GAAP | 2 380 091 756 | 2 418 147 195 | ||
Basic earnings per share under US GAAP (USD) | 1.59 | 1.58 | ||
Diluted earnings per share |
2003 |
2002 |
||
---|---|---|---|---|
Net income under USGAAP (USD millions) | 3 788 | 3 829 | ||
Elimination of interest expense on convertible debt (net of tax effect) | 3 | |||
Net income used to determine diluted earnings per share | 3 788 | 3 832 | ||
Weighted average number of shares in issue under IFRS | 2 473 522 565 | 2 515 311 685 | ||
Call options on Novartis shares | 27 446 092 | 54 891 036 | ||
Adjustment for other dilutive share options | 4 346 940 | 2 264 236 | ||
Weighted average number of treasury shares due to consolidation of the employee share participation foundation under US GAAP | -93 430 809 | -97 164 490 | ||
Weighted average number of shares for diluted earnings per share under US GAAP | 2 411 884 788 | 2 475 302 467 | ||
Diluted earnings per share under US GAAP (USD) | 1.57 | 1.55 | ||
204
vii) Pro forma earnings per share: Statement of Financial Accounting Standards No. 123 (SFAS 123) Accounting for Stock-Based Compensation established accounting and disclosure requirements using a fair-value based method of accounting for share-based employee compensation. Had the Group accounted for share options in accordance with SFAS 123, net income and earnings per share would have been the pro forma amounts indicated below:
|
2003 |
2002 |
|||
---|---|---|---|---|---|
Net income under US GAAP (USD millions): | |||||
As reported | 3 788 | 3 829 | |||
Stock-based employee compensation cost included in the determination of net income | 273 | 120 | |||
Stock-based employeee compensation cost that would have been included in the determination of net income if the fair value based method had been applied to all awards | -459 | -210 | |||
Pro forma | 3 602 | 3 739 | |||
Earnings per share (USD): | |||||
As reported: | |||||
Basic | 1.59 | 1.58 | |||
Diluted | 1.57 | 1.55 | |||
Pro forma: | |||||
Basic | 1.51 | 1.55 | |||
Diluted | 1.49 | 1.51 | |||
The weighted average assumptions used in determining the fair value of option grants were as follows:
|
2003 |
2002 |
|||
---|---|---|---|---|---|
Dividend yield | 1.8 | % | 1.8 | % | |
Expected volatility | 24.0 | % | 24.0 | % | |
Risk-free interest rate | 4.0 | % | 4.0 | % | |
Expected life | 9 yrs | 9 yrs | |||
These pro forma effects may not be representative of future amounts since the estimated fair value of share options on the date of grant is amortized to expense over the vesting period and additional options may be granted in future years.
viii) Deferred tax: The deferred tax asset less valuation allowance at December 31, 2003 and 2002 comprises USD 1 590 million and USD 1 074 million of current assets and USD 987 million and USD 630 million of non-current assets respectively. The deferred tax liability at December 31, 2003 and 2002 comprises USD 1 202 million and USD 954 million of current liabilities and USD 3 935 million and USD 3 208 million of non-current liabilities respectively.
205
(ix) Employee benefit plans: The disclosures required by US GAAP are different from those provided under IFRS. The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans.
|
Pension benefits |
Other post-employment benefits |
||||||
---|---|---|---|---|---|---|---|---|
|
2003 USD millions |
2002 USD millions |
2003 USD millions |
2002 USD millions |
||||
Plan assets at fair value January 1 | 14 365 | 13 914 | ||||||
Actual return on plan assets | 916 | -1 173 | ||||||
Foreign currency translation | 1 506 | 2 283 | ||||||
Employer contributions | 92 | 83 | ||||||
Employee contributions | 39 | 6 | ||||||
Plan amendments | 11 | |||||||
Benefit payments | -790 | -759 | ||||||
December 31 | 16 128 | 14 365 | ||||||
Benefit obligation | ||||||||
January 1 | 11 845 | 11 087 | 645 | 504 | ||||
Service cost | 285 | 277 | 19 | 14 | ||||
Interest cost | 559 | 552 | 40 | 36 | ||||
Actuarial (gain) loss | 695 | -1 108 | 85 | 131 | ||||
Plan amendments | 15 | 12 | -31 | -2 | ||||
Foreign currency translation | 1 256 | 1 784 | 2 | |||||
Benefit payments | -790 | -759 | -40 | -38 | ||||
December 31 | 13 865 | 11 845 | 720 | 645 | ||||
Funded status | 2 263 | 2 520 | -720 | -645 | ||||
Unrecognized actuarial (gain) loss | 2 146 | 1 462 | 204 | 100 | ||||
Unrecognised past service costs | -49 | -49 | ||||||
December 31Prepaid (accrued) benefit costs | 4 360 | 3 982 | -565 | -545 | ||||
Prepaid benefit costs | 5 333 | 4 704 | ||||||
Accrued benefit liability | -973 | -722 | -565 | -545 | ||||
December 31Net amount recognized in the balance sheet | 4 360 | 3 982 | -565 | -545 | ||||
Benefit expense | ||||||||
Service cost | 285 | 277 | 19 | 14 | ||||
Interest cost | 559 | 552 | 40 | 36 | ||||
Past service costs | 27 | 7 | ||||||
Expected return on plan assets | -796 | -970 | ||||||
Employee contributions | -39 | -7 | ||||||
Amortization of actuarial (gain) loss | 53 | -10 | -20 | -4 | ||||
Net periodic benefit (income)/expense | 89 | -158 | 46 | 46 | ||||
Weighted-average assumptions as at December 31 |
% |
% |
% |
% |
||||
Discount rate | 4.6 | 4.5 | 6.3 | 6.8 | ||||
Rate of payroll indexation | 2.8 | 2.8 | ||||||
Expected return on plan assets | 5.6 | 6.1 | ||||||
206
The assumed health care cost trend rate at December 31, 2003 was 9%, decreasing to 4.75% in 2012. The assumed health care cost trend rate at December 31, 2002 was 10%, decreasing to 4.75% in 2006 and thereafter. A one-percentage-point change in the assumed health care cost trend rates compared to those used for 2003 would have the following effects:
|
1% point increase USD millions |
1% point decrease USD millions |
||
---|---|---|---|---|
Effects on total of service and interest cost components | 9 | -7 | ||
Effect on post-employment benefit obligations | 81 | -68 | ||
On December 23, 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Post-retirement Benefits, an amendment of FASB Statements No. 87, 88 and 106, and a revision of FASB Statement No. 132. This requires the following additional information for the Swiss defined benefit plan:
Plan assets
Novartis Swiss defined benefit plan asset weighted-average allocations at December 31, 2003, and 2002 and 2004 target allocations by asset category are as follows:
Asset Category
|
|
Percentage of Plan Assets |
||||
---|---|---|---|---|---|---|
|
Target Allocation 2004 % |
|||||
|
2003 % |
2002 % |
||||
Equity securities | 25 | 15 | 27 | |||
Debtsecurities | 57 | 63 | 56 | |||
Real estate | 10 | 10 | 10 | |||
Cash and cash equivalents | 8 | 12 | 7 | |||
Total | 100 | 100 | 100 | |||
Long-term policy targets are set by the Novartis Investment Committee. Based upon current market and economic environments, actual asset allocation may periodically deviate from policy targets as determined by the Investment Committee.
207
Plan assets, benefit obligation and funded status of the Swiss defined benefit plan at December 31, 2003 and 2002
|
2003 USD millions |
2002 USD millions |
||
---|---|---|---|---|
Plan assets at fair value January 1 | 11 771 | 11 164 | ||
Actual return on plan assets | 571 | -986 | ||
Foreign currency translation | 1 451 | 2 190 | ||
Employee contributions | 29 | 2 | ||
Benefit payments | -604 | -599 | ||
December 31 | 13 218 | 11 771 | ||
Benefit obligation at January 1 | 8 569 | 8 173 | ||
Service cost | 137 | 139 | ||
Interest cost | 358 | 379 | ||
Actuarial (gain)/loss | 240 | -1 126 | ||
Foreign currency translation | 1 093 | 1 603 | ||
Benefit payments | -604 | -599 | ||
December 31 | 9 793 | 8 569 | ||
Funded Status | 3 425 | 3 202 | ||
Unrecognized actuarial (gain)/loss | 1 285 | 851 | ||
December 31Prepaid benefit recognized in the balance sheet | 4 710 | 4 053 | ||
Total accumulated benefit obligations | 8 248 | 7 302 | ||
Cash Flows
Novartis does not expect to contribute to its Swiss defined benefit plan in 2004 (nil in 2003 and 2002).
Estimated future benefit payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Year |
USD millions |
|
---|---|---|
2004 | 600 | |
2005 | 587 | |
2006 | 575 | |
2007 | 563 | |
2008 | 558 | |
20092013 | 2 738 | |
208
Assumptions
The following are the principal actuarial assumptions, used for calculating the 2003 and 2002 income statement amounts and the above stated December 31, 2003 and 2002 funded status of the Swiss defined benefit plans:
|
Income statement |
Funded status |
||||||
---|---|---|---|---|---|---|---|---|
Weighted average % |
2003 % |
2002 % |
2003 % |
2002 % |
||||
Discount rate | 4.00 | 4.00 | 3.75 | 4.00 | ||||
Payroll indexation | 2.50 | 2.50 | 2.50 | 2.50 | ||||
Return on assets | 5.00 | 5.50 | 5.00 | 5.50 | ||||
The overall expected long-term return on plan assets was determined based on outside published and internal capital market forecasts for each asset class. The measurement date used to determine pension benefit measurements for the Swiss defined benefit plan was December 31, 2003.
(x) Foreign currency translation: The Group has accounted for operations in highly inflationary economies in accordance with IAS 21 (revised) and IAS 29. The accounting under IAS 21 (revised) and IAS 29 complies with Item 18 of Form 20-F and is different from that required by US GAAP.
(xi) Adoption of SFAS 142: On January 1, 2002, the Group adopted the provisions of SFAS 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS 142, intangible assets with indefinite lives and goodwill are no longer amortized, but are subject to annual impairment tests. Separable intangible assets with definite lives continue to be amortized over their useful lives. Goodwill is the only intangible asset within the Group, which is not subject to amortization under US GAAP.
All goodwill components were tested for impairment during 2003. The fair values of the businesses were determined using the expected present values of future cash flows.
The Group estimates that the aggregate amortization expense for intangibles subject to amortization for each of the five succeeding financial years will not materially differ from the current aggregate amortization expense.
209
The changes in the carrying amount of goodwill for the years ended December 31, 2003 and 2002 are as follows:
|
Pharmaceuticals Division USD millions |
Consumer Health Division USD millions |
Corporate USD millions |
Total USD millions |
||||
---|---|---|---|---|---|---|---|---|
January 1, 2002 | 404 | 3 809 | 6 | 4 219 | ||||
Additions | 534 | 534 | ||||||
Impairment losses | -345 | -30 | -6 | -381 | ||||
Goodwill written off related to disposal of businesses | -40 | -40 | ||||||
Consolidation changes | -10 | 54 | 44 | |||||
Translation effects | 18 | 72 | 90 | |||||
December 31, 2002 | 67 | 4 399 | 4 466 | |||||
Additions | 7 | 7 | ||||||
Reclassification to separately identified intangible assets | -423 | -423 | ||||||
Impairment losses | -12 | -179 | -191 | |||||
Goodwill written off related to disposal of businesses | -35 | -5 | -40 | |||||
Translation effects | 2 | 116 | 118 | |||||
December 31, 2003 | 22 | 3 915 | 3 937 | |||||
(xii) Effect of New Accounting Pronouncements: International Financial Reporting Standards: In December 2003, the IASB released revised IAS 32, Financial Instruments: Disclosure and Presentation and IAS 39, Financial Instruments: Recognition and Measurement. These standards replace IAS 32 (revised 2000), and supersedes IAS 39 (revised 2000), and should be applied for annual periods beginning on or after January 1, 2005. The amendments are not expected to have a material impact on the Group's consolidated financial statements.
In December 2003, as a part of the IASB's project to improve International Accounting Standards, the IASB released revisions to the following standards that supersede the previously released versions of those standards: IAS 1, Presentation of Financial Statements; IAS 2, Inventories; IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors; IAS 10, Events after Balance Sheet Date; IAS 16, Property, Plant and Equipment; IAS 17, Leases; IAS 21, The Effects of Changes in Foreign Exchange Rates; IAS 24, Related Party Disclosures; IAS 27, Consolidated and Separate Financial Statements; IAS 28, Investments in Associates; IAS 31, Interests in Joint Ventures; IAS 33, Earnings per Share and IAS 40, Investment Property. The revised standards should be applied for annual periods beginning on or after January 1, 2005. The amendments are not expected to have a material impact on the Group's consolidated financial statements.
(xiii) Effect of New Accounting Pronouncements: US GAAP: In January 2003, the Emerging Issues Task Force (EITF) issued EITF 00-21, Accounting for Reserve Arrangements with Multiple Deliverables. EITF 00-21 addresses the issues of (1) how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and (2) how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. EITF 00-21 does not change otherwise applicable revenue recognition criteria. EITF 00-21 is effective for revenue arrangements entered into in financial periods beginning after June 15, 2003. EITF 00-21 had no impact on the Group's consolidated financial position or results of operations.
210
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (SFAS 149) Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under Accounting for Derivative Instruments and Hedging Activities (SFAS 133). The adoption of SFAS 149 did not have a material impact on the Group's consolidated results of operation or financial position.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The adoption of SFAS 150 did not have a material impact on the Group's consolidated results of operation or financial position.
In December 2003, the Medicare Prescription Drug, Improvements and Modernization Act of 2003 (the Medicare Act) was approved in the United States. The Medicare Act provides for two new prescription drug benefit features under Medicare. The Group provides post-retirement benefits to its United States employees, the benefits provided are impacted by the Medicare Act. SFAS 106, Employers' Accounting for Post-retirement Benefits Other Than Pensions, requires that enacted changes in the law that take effect in future periods and that will affect the future level of benefit coverage be considered in the current period measurements for benefits expected to be provided in those future periods. In response to the Medicare Act and the requirements of SFAS 106, the Financial Accounting Standards Board (FASB) released FASB Staff Position No. 106-1 Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-1).
FSP 106-1 provides a one-time election to defer accounting for the effects of the Medicare Act until further guidance on the accounting for the new Medicare features is released. The Group has elected to defer the accounting for the effects of the Medicare Act. Accordingly, the Group's consolidated financial statements and the accompanying notes as of and for the year ended December 31, 2003 do not reflect the effects of the Medicare Act. Further guidance, when issued, could require the Group to change previously reported information.
FIN 46 Consolidation of Variable Interest Entities is effective for Novartis starting January 1, 2004. The Group is in the process of assessing what impact this pronouncement will have on its consolidated financial statements when adopted. Based on a preliminary analysis of the impact of FIN 46, the Group has concluded the impact on the consolidated financial statements is not expected to be material.
211
Report of the Auditors on the Novartis Group Consolidated Financial Statements
To the General Meeting of Novartis AG, Basel
As auditors of the Group, we have audited the consolidated financial statements (balance sheet, income statement, cash flow statement, statement of changes in equity and notes) of the Novartis Group for the year ended December 31, 2003.
These consolidated financial statements are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence.
Our audit was conducted in accordance with auditing standards promulgated by the Swiss profession and with International Standards on Auditing, which require that an audit be planned and performed to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the consolidated financial statements. We have also assessed the accounting principles used, significant estimates made and the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position, the results of operations and the cash flows in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law.
We recommend that the consolidated financial statements submitted to you be approved.
PricewaterhouseCoopers AG
|
|
|
---|---|---|
J. G. Kaiser | D. Suter |
Basel, January 20, 2004
212
Financial Statements of Novartis AG
Income Statements
(for the years ended December 31, 2003 and 2002)
|
2003 CHF millions |
2002 CHF millions |
||
---|---|---|---|---|
Income | ||||
Income from financial assets | 3 038 | 5 779 | ||
Income from marketable securities, cash and short-term deposits | 457 | 261 | ||
Gain from divestment of subsidiaries | 103 | |||
Gain from disposal of intangible assets | 256 | 215 | ||
License fees from subsidiaries | 460 | 384 | ||
Other income | 44 | 28 | ||
Total income | 4 255 | 6 770 | ||
Expenses | ||||
Financial expenses | -132 | -94 | ||
Administrative expenses | -11 | -6 | ||
Changes to provisions and value of financial assets | -12 | -14 | ||
Other expenses | -50 | -16 | ||
Taxes | -110 | -62 | ||
Total expenses | -315 | -192 | ||
Net income | 3 940 | 6 578 | ||
Proposal for the Appropriation of Available Earnings
|
2003 CHF |
2002 CHF |
||
---|---|---|---|---|
Available unappropriated earnings | ||||
Balance brought forward | | | ||
Net income of the year | 3 939 921 749 | 6 577 671 070 | ||
Total available earnings | 3 939 921 749 | 6 577 671 070 | ||
Appropriation | ||||
Payment of a dividend of CHF 1.00 (2002: CHF 0.95) gross on 2 526 705 981 (2002: 2 547 080 981) dividend bearing shares with a nominal value of CHF 0.50 each |
-2 526 705 981 | -2 419 726 932 | ||
Transfer to free reserves | -1 413 215 768 | -4 157 944 138 | ||
Balance to be carried forward | | | ||
213
Balance Sheets (prior to profit appropriation)
(at December 31, 2003 and 2002)
|
Notes |
2003 CHF millions |
2002 CHF millions |
||||
---|---|---|---|---|---|---|---|
Assets | |||||||
Financial assets | 3 | 12 665 | 12 541 | ||||
Total long-term assets | 12 665 | 12 541 | |||||
Current assets | |||||||
Receivables from | |||||||
subsidiaries | 2 862 | 3 340 | |||||
others | 37 | 124 | |||||
Marketable securities | 4 | 1 977 | 2 269 | ||||
Cash and short-term deposits | 1 269 | 200 | |||||
Total current assets | 6 145 | 5 933 | |||||
Total assets | 18 810 | 18 474 | |||||
Equity and liabilities |
|||||||
Equity | |||||||
Total share capital | 5 | 1 401 | 1 412 | ||||
Reserves | |||||||
Legal reserves | 6 | ||||||
General reserve | 642 | 289 | |||||
Reserve for treasury shares | 9 483 | 9 321 | |||||
Free reserves | 7 | 2 603 | 34 | ||||
Total reserves | 12 728 | 9 644 | |||||
Unappropriated earnings | |||||||
Net income of the year | 3 940 | 6 578 | |||||
Total unappropriated earnings | 3 940 | 6 578 | |||||
Total equity | 18 069 | 17 634 | |||||
Liabilities | |||||||
Provisions | 572 | 709 | |||||
Accounts payable and accrued liabilities | |||||||
subsidiaries | 49 | 53 | |||||
others | 120 | 78 | |||||
Total liabilities | 741 | 840 | |||||
Total equity and liabilities | 18 810 | 18 474 | |||||
The notes form an integral part of these unconsolidated financial statements
214
Notes to the Financial Statements of Novartis AG
1. Introduction
The financial statements of Novartis AG comply with the requirements of the Swiss law for companies, the Code of Obligations (SCO).
2. Accounting policies
Exchange rate differences: Current assets denominated in foreign currencies are converted at year end exchange rates. Exchange differences arising from these as well as those from business transactions are recorded in the income statement.
Financial assets: These are valued at acquisition cost less adjustments for impairment of value.
Marketable securities: These are valued at the lower of cost and market value.
Provisions: Provisions are made to cover general business risks of the Group.
3. Financial assets
Included in financial assets are CHF 10 136 million (2002: CHF 10 009 million) of investments in subsidiaries and CHF 2 529 million (2002: CHF 2 532 million) of loans to subsidiaries and other related entities.
The principal direct and indirect subsidiaries and other holdings of Novartis AG are shown on pages 190195.
4. Marketable securities
Included in marketable securities are treasury shares with a net book value of CHF 1 974 million (2002: CHF 2 230 million) (see 5 and 6 below).
5. Share capital
|
Number of shares |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2001 |
Movement in year |
December 31, 2002 |
Movement in year |
December 31, 2003 |
|||||
Total Novartis AG shares | 2 885 204 680 | -61 054 680 | 2 824 150 000 | -22 680 000 | 2 801 470 000 | |||||
Treasury shares | ||||||||||
Treasury shares held by Novartis AG | 190 982 300 | -36 474 300 | 154 508 000 | -9 220 000 | 145 288 000 | |||||
Treasury shares held by subsidiaries | 72 631 680 | 49 929 339 | 122 561 019 | 6 915 000 | 129 476 019 | |||||
Total treasury shares | 263 613 980 | 13 455 039 | 277 069 019 | -2 305 000 | 274 764 019 | |||||
The Novartis AG share capital consists of registered shares with a nominal value of CHF 0.50 each.
215
The total share capital reduced from CHF 1 412.1 million at December 31, 2002 to CHF 1 400.7 million at December 31, 2003 due to a share capital reduction and subsequent cancellation of 22 680 000 shares with a nominal value of CHF 11 340 000 approved at the Annual General Meeting of March 4, 2003 which became effective on July 3, 2003. The total share capital reduced from CHF 1 442.6 million at December 31, 2001 to CHF 1 412.1 million at December 31, 2002 due to a share capital reduction and subsequent cancellation of 61 054 680 shares with a nominal value of CHF 30 527 340 approved at the Annual General Meeting of March 21, 2002 which became effective on July 8, 2002. Treasury share purchases totaled 31.2 million (2002: CHF 85.5 million) with an average purchase price per share of CHF 52 (2002: CHF 64) and treasury share sales totaled 10.8 million (2002: CHF 11.0 million) with an average sales price per share of CHF 53 (2002: CHF 54).
The number of treasury shares held by the Company and subsidiaries meet the definitions and requirements of Art. 659b SCO. The 274 764 019 treasury shares held at December 31, 2003 are non-dividend bearing.
Novartis Group's consolidated financial statements comply with IFRS SIC Interpretation No. 12. This requires consolidation of entities which do not qualify as subsidiaries in the sense of Article 659b SCO.
6. Legal reserve
General reserve
|
2003 CHF millions |
2002 CHF millions |
||
---|---|---|---|---|
January 1 | 289 | 289 | ||
Increase due to sale of treasury shares | 353 | |||
December 31 | 642 | 289 | ||
Reserve for treasury shares held by the Group
|
2003 CHF millions |
2002 CHF millions |
||
---|---|---|---|---|
January 1 | 9 321 | 8 568 | ||
Reduction due to cancellation of treasury shares (CHF 1 438 million, 2002: CHF 4 000 million, of repurchased shares less their nominal value of CHF 11 million, 2002: CHF 31 million) | -1 427 | -3 969 | ||
Transfer from free reserves | 1 589 | 4 722 | ||
December 31 | 9 483 | 9 321 | ||
The general reserve must be at least 20% of the share capital of Novartis AG as this is the minimum amount required by the SCO.
Novartis AG has met the legal requirements for legal reserves under Articles 659 et. seq. and 663b.10 SCO for treasury shares detailed in note 5.
216
7. Free reserves
|
2003 CHF millions |
2002 CHF millions |
||
---|---|---|---|---|
January 1 | 34 | 3 122 | ||
Transfer from unappropriated earnings | 4 158 | 1 634 | ||
Transfer to reserve for treasury shares | -1 589 | -4 722 | ||
December 31 | 2 603 | 34 | ||
8. Contingent liabilities
|
Outstanding liabilities December 31, 2003 CHF millions |
Outstanding liabilities December 31, 2002 CHF millions |
||
---|---|---|---|---|
Guarantees to cover capital and interest of bonds, commercial paper and the Euro medium-term note programtotal maximum amount CHF 7 602 million (2002: CHF 7 290 million) | 4 474 | 4 889 | ||
Guarantees in connection with options on Novartis AG shares(1) total maximum amount in 2002: CHF 4 239 million | 4 239 | |||
Guarantees in favor of group companies, associated companies and otherstotal maximum amount CHF 502 million (2002: CHF 622 million) | 298 | 331 | ||
Total | 4 772 | 9 459 | ||
9. Registration, voting restrictions and major shareholders
The Company's Articles of Incorporation state that no person or entity shall be registered with the right to vote for more than 2% of the share capital as set forth in the Commercial Register. In particular cases the Board of Directors may allow exemptions from the limitation for registration in the share register.
As far as can be ascertained from the information available, shareholders owning 2% or more of the Company's capital at December 31 are as follows:
|
% holding of share capital December 31, 2003 |
% holding of share capital December 31, 2002 |
||
---|---|---|---|---|
Novartis Foundation for Employee Participation, Basel | 3.3 | 3.3 | ||
Emasan AG, Basel | 3.1 | 3.1 | ||
217
Report of the Auditors on the Novartis AG Financial Statements
To the General Meeting of Novartis AG, Basel
As statutory auditors, we have audited the accounting records and the financial statements (balance sheet, income statement and notes) of Novartis AG, Basel, for the year ended December 31, 2003.
These financial statements are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence.
Our audit was conducted in accordance with auditing standards promulgated by the Swiss profession, which require that an audit be planned and performed to obtain reasonable assurance about whether the financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the financial statements. We have also assessed the accounting principles used, significant estimates made and the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the accounting records and financial statements and the proposed appropriation of available earnings comply with Swiss law and the Company's articles of incorporation. We recommend that the financial statements submitted to you be approved.
PricewaterhouseCoopers AG
|
|
|
---|---|---|
J. G. Kaiser | H. Plozza |
Basel, January 20, 2004
218
Anticipated key reporting dates
Annual General Meeting for the financial year 2003 | February 24, 2004 | |
First Quarter 2004 (sales and results) | April 22, 2004 | |
First Half 2004 (year to date and second quarter sales and results) | July 20, 2004 | |
Third Quarter 2004 (year to date and third quarter sales and results) | October 21, 2004 | |
Full Year 2004 (year to date and fourth quarter sales and results) | January 2005 | |
219
For further information regarding Novartis please contact:
Novartis International AG Novartis Communications CH-4002 Basel Switzerland |
||
Investor relations |
Annual Report production |
|
Karen Huebscher | Stephen Moore | |
Tel: +41 61 324 8433 | Tel: +41 61 324 8573 | |
Fax:+41 61 324 8444 | Fax:+41 61 321 0985 | |
For USA investors |
To order publications |
|
US investor relations | Novartis Communications | |
Tel: +1 212 307 1122 | Tel: +41 61 324 8000 | |
Fax:+1 212 830 2405 | Fax:+41 61 321 0985 | |
Share registry |
General information |
|
Kurt Hoein | Tel: +41 61 324 1111 | |
Tel: +41 61 324 4415 | Fax:+41 61 324 8001 | |
Fax:+41 61 324 3244 | ||
Media relations |
Novartis on the Internet |
|
Nehl Horton | http://www.novartis.com | |
Tel: +41 61 324 2200 | ||
Fax:+41 61 324 3300 | ||
Novartis Annual Report on the Internet http://www.novartis.com/annualreport2003 |
220
Equally, we would like to thank everyone who contributed to this report by sharing personal experience and knowledge with us.
Forward-Looking Statement Disclaimer
This Annual Report contains certain "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 of the United States. These forward looking statements relate to our business and the business segments in which we and our subsidiaries and interests operate. Many of these statements can be identified by the use of forward-looking terminology such as "believe", "expect", "may", "are expected to", "will", "will continue", "should", "would be", "seek" or "anticipate" or similar expressions, or by discussions of strategy, plans or intentions. These statements include descriptions of our investment and research and development programs, descriptions of new products we expect to introduce and anticipated customer demand for our products. The forward-looking statements made in this Annual Report reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performances or achievements that may be expressed or implied by these statements. Some of these factors include inability to discover and register new products, competition in general, loss of patent protection, price controls, product liability claims, exposure to environmental liabilities, interruption of supply and foreign exchange risks. For a more detailed description of the risks facing our Group, we encourage you to review the Form 20-F filed with the United States Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Annual Report as anticipated, believed, estimated or expected. We do not intend, and do not assume any obligation, to update any industry information or forward-looking statements set out in this Annual Report. All product names printed in italics in this Annual Report are trademarks of the Novartis Group.
® in combination with products in normal script indicate third party brands. The business policy of Novartis takes into account the OECD's Guidelines for Multinational Enterprises, with their recommendations on the disclosure of information.
Our Annual Report is originally published in English, with French and German versions available.
Published by Novartis International AG, Basel, Switzerland
© Novartis AG, 2004
221
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NOVARTIS AG | |||
Date: February 6, 2004 |
By: |
/s/ MALCOLM B. CHEETHAM |
|
Name: | Malcolm B. Cheetham | ||
Title: | Head Group Financial Reporting and Accounting |