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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

As filed with the Securities and Exchange Commission on January 25, 2012

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549



FORM 20-F


o

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2011

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-15024

NOVARTIS AG
(Exact name of Registrant as specified in its charter)

NOVARTIS Inc.
(Translation of Registrant's name into English)

Switzerland
(Jurisdiction of incorporation or organization)

Lichtstrasse 35
4056 Basel, Switzerland

(Address of principal executive offices)

Felix R. Ehrat
Group General Counsel
Novartis AG
CH-4056 Basel
Switzerland
011-41-61-696-9511
felix.ehrat@novartis.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered pursuant to Section 12(b) of the Act:

Title of class
 
Name of each exchange on which registered
American Depositary Shares
each representing 1 share,
nominal value CHF 0.50 per share,
and shares
  New York Stock Exchange, Inc.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report:

2,406,693,857 shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ý    No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o    No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer ý                        Accelerated filer o                        Non-accelerated filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 
   
   
o U.S. GAAP   ý International Financial Reporting Standards as issued by the International Accounting Standards Board   o Other

If "Other" has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o    Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No ý


Table of Contents


TABLE OF CONTENTS

  INTRODUCTION AND USE OF CERTAIN TERMS     1  

 

FORWARD LOOKING STATEMENTS

 

 

1

 

 

PART I

 

 

3

 

 

 

 

Item

 

1.

 

Identity of Directors, Senior Management and Advisers

 

 

3

 

 

 

 

Item

 

2.

 

Offer Statistics and Expected Timetable

 

 

3

 

 

 

 

Item

 

3.

 

Key Information

 

 

3

 
          3.A   Selected Financial Data     3  
          3.B   Capitalization and Indebtedness     6  
          3.C   Reasons for the offer and use of proceeds     6  
          3.D   Risk Factors     6  

 

 

 

Item

 

4.

 

Information on the Company

 

 

17

 
          4.A   History and Development of Novartis     17  
          4.B   Business Overview     20  
              Pharmaceuticals     22  
              Alcon     54  
              Sandoz     62  
              Vaccines and Diagnostics     68  
              Consumer Health     75  
          4.C   Organizational Structure     78  
          4.D   Property, Plants and Equipment     78  

 

 

 

Item

 

4A.

 

Unresolved Staff Comments

 

 

85

 

 

 

 

Item

 

5.

 

Operating and Financial Review and Prospects

 

 

85

 
          5.A   Operating Results     85  
          5.B   Liquidity and Capital Resources     159  
          5.C   Research & Development, Patents and Licenses     164  
          5.D   Trend Information     165  
          5.E   Off-Balance Sheet Arrangements     165  
          5.F   Aggregate Contractual Obligations     165  

 

 

 

Item

 

6.

 

Directors, Senior Management and Employees

 

 

166

 
          6.A   Directors and Senior Management     166  
        6.B   Compensation     174  
          6.C   Board Practices     199  
          6.D   Employees     219  
          6.E   Share Ownership     219  

 

 

 

Item

 

7.

 

Major Shareholders and Related Party Transactions

 

 

220

 
          7.A   Major Shareholders     220  
          7.B   Related Party Transactions     221  
          7.C   Interests of Experts and Counsel     222  

 

 

 

Item

 

8.

 

Financial Information

 

 

222

 
          8.A   Consolidated Statements and Other Financial Information     222  
          8.B   Significant Changes     222  

 

 

 

Item

 

9.

 

The Offer and Listing

 

 

223

 
          9.A   Listing Details     223  
          9.B   Plan of Distribution     224  
          9.C   Market     224  
          9.D   Selling Shareholders     224  
          9.E   Dilution     224  
          9.F   Expenses of the Issue     224  

 

 

 

Item

 

10.

 

Additional Information

 

 

224

 
          10.A   Share Capital     224  
          10.B   Memorandum and Articles of Association     224  
          10.C   Material Contracts     228  

Table of Contents

          10.D   Exchange Controls     228  
        10.E   Taxation     228  
          10.F   Dividends and Paying Agents     233  
          10.G   Statement by Experts     233  
          10.H   Documents on Display     233  
          10.I   Subsidiary Information     233  

 

 

 

Item

 

11.

 

Quantitative and Qualitative Disclosures about Non-Product-Related Market Risk

 

 

234

 

 

 

 

Item

 

12.

 

Description of Securities other than Equity Securities

 

 

238

 
          12.A   Debt Securities     238  
          12.B   Warrants and Rights     238  
          12.C   Other Securities     238  
          12.D   American Depositary Shares     239  

 

PART II

 

 

240

 

 

 

 

Item

 

13.

 

Defaults, Dividend Arrearages and Delinquencies

 

 

240

 

 

 

 

Item

 

14.

 

Material Modifications to the Rights of Security Holders and Use of Proceeds

 

 

240

 

 

 

 

Item

 

15.

 

Controls and Procedures

 

 

240

 

 

 

 

Item

 

16A.

 

Audit Committee Financial Expert

 

 

240

 

 

 

 

Item

 

16B.

 

Code of Ethics

 

 

240

 

 

 

 

Item

 

16C.

 

Principal Accountant Fees and Services

 

 

241

 

 

 

 

Item

 

16D.

 

Exemptions from the Listing Standards for Audit Committees

 

 

242

 

 

 

 

Item

 

16E.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

 

242

 

 

 

 

Item

 

16F.

 

Change in Registrant's Certifying Accountant

 

 

242

 

 

 

 

Item

 

16G.

 

Corporate Governance

 

 

243

 

 

PART III

 

 

244

 

 

 

 

Item

 

17.

 

Financial Statements

 

 

244

 

 

 

 

Item

 

18.

 

Financial Statements

 

 

244

 

 

 

 

Item

 

19.

 

Exhibits

 

 

245

 

Table of Contents


INTRODUCTION

        Novartis AG and its consolidated affiliates (Novartis or the Group) publish consolidated financial statements expressed in US dollars. Our consolidated financial statements found in Item 18 of this annual report on Form 20-F (Form 20-F) are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).




USE OF CERTAIN TERMS

        In this Form 20-F, references to "US dollars," "$" or "$" are to the lawful currency of the United States of America, and references to "CHF" are to Swiss francs; references to the "United States" or to "US" are to the United States of America, references to the European Union (EU) are to the European Union and its 27 member states and references to "Americas" are to North, Central (including the Caribbean) and South America, unless the context otherwise requires; references to "associates" are to employees of our affiliates; references to the "FDA" are to the US Food and Drug Administration, references to "EMA" are to the European Medicines Agency, an agency of the EU, and references to the CHMP are to the EMA's Committee for Medicinal Products for Human Use; references to "ADS" or "ADSs" are to Novartis American Depositary Shares, and references to "ADR" or "ADRs" are to Novartis American Depositary Receipts; references to the NYSE are to the New York Stock Exchange, and references to the SIX are to the SIX Swiss Exchange. All product names appearing in italics are trademarks owned by or licensed to Group companies. Product names identified by a "®" or a "™" are trademarks that are not owned by or licensed to Group companies. You will find the words "we," "our," "us" and similar words or phrases in this Form 20-F. We use those words to comply with the requirement of the US Securities and Exchange Commission to use "plain English" in public documents like this Form 20-F. For the sake of clarification, each Group company is legally separate from all other Group companies and manages its business independently through its respective board of directors or other top local management body. No Group company operates the business of another Group company nor is any Group company the agent of any other Group company. Each executive identified in this Form 20-F reports directly to other executives of the Group company which employs the executive, or to that Group company's board of directors.




FORWARD LOOKING STATEMENTS

        This Form 20-F contains certain "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which can be identified by terminology such as "planned," "expected," "will," "potential," "pipeline," "outlook," or similar expressions, or by express or implied discussions regarding potential new products, potential new indications for existing products, or regarding potential future revenues from any such products; or regarding potential future sales or earnings of the Novartis Group or any of its divisions; or by discussions of strategy, plans, expectations or intentions. You should not place undue reliance on these statements. Such forward-looking statements reflect the current views of the Group regarding future events, and involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. There can be no guarantee that any new products will be approved for sale in any market, or that any new indications will be approved for any existing products in any market, or that any approvals which are obtained will be obtained at any particular time, or that any such products will achieve any particular revenue levels. Nor can there be any guarantee that the Group, or any of its divisions, will achieve any particular financial results. In particular, management's expectations could be affected by, among other things, unexpected regulatory actions or delays or government regulation generally, including the potential outcomes of our ongoing discussions with health authorities concerning Rasilez/Tekturna as a result of the ALTITUDE study, and including the outcome of health authority reviews of the benefits and risks of Gilenya; unexpected clinical trial results, including additional analyses of existing clinical data or unexpected new clinical data, including any potential new analyses of the ALTITUDE study which may occur; the Group's ability to obtain or maintain patent or other proprietary intellectual property protection, including the ultimate extent of the impact on the Group of the loss of patent protection on key products which commenced last year and will continue this year; unexpected product manufacturing issues, including the potential outcomes of the Warning Letter issued to us with respect to three Sandoz manufacturing facilities, and the potential outcome of the shutdown of the OTC manufacturing facility at Lincoln, Nebraska; government, industry, and general public pricing pressures; uncertainties regarding actual or potential legal proceedings, including, among others, actual or potential product liability litigation, litigation regarding sales and marketing practices, shareholder litigation, government investigations and intellectual property disputes; competition in general; uncertainties regarding the

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after-effects of the recent global financial and economic crisis; uncertainties regarding future global exchange rates and uncertainties regarding future demand for our products; uncertainties involved in the development of new healthcare products; the impact that the foregoing factors could have on the values attributed to the Group's assets and liabilities as recorded in the Group's consolidated balance sheet. Some of these factors are discussed in more detail herein, including under "Item 3. Key Information—3.D. Risk factors," "Item 4. Information on the Company," and "Item 5. Operating and Financial Review and Prospects." Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Form 20-F as anticipated, believed, estimated or expected. We provide the information in this 20-F as of the date of its filing. We do not intend, and do not assume any obligation, to update any information or forward looking statements set out in this Form 20-F as a result of new information, future events or otherwise.

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PART I

Item 1.    Identity of Directors, Senior Management and Advisers

        Not applicable.

Item 2.    Offer Statistics and Expected Timetable

        Not applicable.

Item 3.    Key Information


3.A    Selected Financial Data

        The selected financial information set out below has been extracted from our consolidated financial statements prepared in accordance with IFRS as issued by the IASB. Our consolidated financial statements for the years ended December 31, 2011, 2010 and 2009 are included in "Item 18. Financial Statements" in this Form 20-F.

        The results of our Medical Nutrition and Gerber Business Units are shown as discontinued operations for all periods presented, following their divestment in 2007.

        All financial data should be read in conjunction with "Item 5. Operating and Financial Review and Prospects". All financial data presented in this Form 20-F are qualified in their entirety by reference to the consolidated financial statements and their notes.

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  Year Ended December 31,  
 
  2011   2010   2009   2008   2007  
 
  ($ millions, except per share information)
 

INCOME STATEMENT DATA

                               

Net sales from continuing operations

    58,566     50,624     44,267     41,459     38,072  
                       

Operating income from continuing operations

    10,998     11,526     9,982     8,964     6,781  

Income from associated companies

    528     804     293     441     412  

Interest expense

    (751 )   (692 )   (551 )   (290 )   (237 )

Financial income/(expense)

    (2 )   64     198     384     531  
                       

Income before taxes from continuing operations

    10,773     11,702     9,922     9,499     7,487  

Taxes

    (1,528 )   (1,733 )   (1,468 )   (1,336 )   (947 )
                       

Net income from continuing operations

    9,245     9,969     8,454     8,163     6,540  

Net income from discontinued operations

                      70     5,428  
                       

Group net income

    9,245     9,969     8,454     8,233     11,968  
                       

Attributable to:

                               
 

Shareholders of Novartis AG

    9,113     9,794     8,400     8,195     11,946  
 

Non-controlling interests

    132     175     54     38     22  

Operating income from discontinued operations (including divestment gains)

                      70     6,152  

Basic earnings per share ($):

                               

—Continuing operations

    3.83     4.28     3.70     3.59     2.81  

—Discontinued operations

                      0.03     2.34  

—Total

    3.83     4.28     3.70     3.62     5.15  

Diluted earnings per share ($):

                               

—Continuing operations

    3.78     4.26     3.69     3.56     2.80  

—Discontinued operations

                      0.03     2.33  

—Total

    3.78     4.26     3.69     3.59     5.13  

Cash dividends(1)

    5,368     4,486     3,941     3,345     2,598  

Cash dividends per share in CHF(2)

    2.25     2.20     2.10     2.00     1.60  

(1)
Cash dividends represent cash payments in the applicable year that generally relate to earnings of the previous year.

(2)
Cash dividends per share represent dividends proposed that relate to earnings of the current year. Dividends for 2011 will be proposed to the Annual General Meeting on February 23, 2012 for approval.

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  Year Ended December 31,  
 
  2011   2010   2009   2008   2007  
 
  ($ millions)
 

BALANCE SHEET DATA

                               

Cash, cash equivalents and marketable securities & derivative financial instruments

    5,075     8,134     17,449     6,117     13,201  

Inventories

    5,930     6,093     5,830     5,792     5,455  

Other current assets

    13,079     12,458     10,412     8,972     8,774  

Non-current assets

    93,412     96,633     61,814     57,418     48,022  
                       

Total assets

    117,496     123,318     95,505     78,299     75,452  
                       

Trade accounts payable

    4,989     4,788     4,012     3,395     3,018  

Other current liabilities

    18,159     19,870     15,458     13,109     13,623  

Non-current liabilities

    28,408     28,891     18,573     11,358     9,415  
                       

Total liabilities

    51,556     53,549     38,043     27,862     26,056  
                       

Issued share capital and reserves attributable to shareholders of Novartis AG

    65,844     63,196     57,387     50,288     49,223  

Non-controlling interests

    96     6,573     75     149     173  
                       

Total equity

    65,940     69,769     57,462     50,437     49,396  
                       

Total liabilities and equity

    117,496     123,318     95,505     78,299     75,452  
                       

Net assets

    65,940     69,769     57,462     50,437     49,396  

Outstanding share capital

    895     832     825     820     815  

Total outstanding shares (millions)

    2,407     2,289     2,274     2,265     2,264  


Cash Dividends per Share

        Cash dividends are translated into US dollars at the Reuters Market System Rate on the payment date. Because we pay dividends in Swiss francs, exchange rate fluctuations will affect the US dollar amounts received by holders of ADSs.

Year Earned
  Month and
Year Paid
  Total Dividend
per share
  Total Dividend
per share
 
 
   
  (CHF)
  ($)
 

2007

  February 2008     1.60     1.53  

2008

  February 2009     2.00     1.72  

2009

  March 2010     2.10     1.95  

2010

  March 2011     2.20     2.37  

2011(1)

  March 2012     2.25     2.39 (2)

(1)
Dividend to be proposed at the Annual General Meeting on February 23, 2012 and to be distributed March 1, 2012.

(2)
Translated into US dollars at the 2011 Reuters Market System period end rate of $1.06 to the Swiss franc. This translation is an example only, and should not be construed as a representation that the Swiss franc amount represents, or has been or could be converted into US dollars at that or any other rate.

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Exchange Rates

        The following table shows, for the years and dates indicated, certain information concerning the rate of exchange of US dollar per Swiss franc based on exchange rate information found on Reuters Market System. The exchange rate in effect on January 19, 2012, as found on Reuters Market System, was CHF 1.00 = $1.07.

Year ended December 31,
($ per CHF)
  Period End   Average(1)   Low   High  

2007

    0.88     0.83     0.80     0.91  

2008

    0.94     0.93     0.82     1.02  

2009

    0.97     0.92     0.84     1.00  

2010

    1.06     0.96     0.86     1.07  

2011

    1.06     1.13     1.06     1.25  

Month
                         

August 2011

                1.22     1.37  

September 2011

                1.10     1.27  

October 2011

                1.08     1.16  

November 2011

                1.08     1.13  

December 2011

                1.05     1.10  

January 2012(2)

                1.05     1.07  

(1)
Represents the average of the exchange rates on the last day of each full month during the year.

(2)
Through January 19, 2012.


3.B    Capitalization and Indebtedness

        Not applicable.


3.C    Reasons for the offer and use of proceeds

        Not applicable.


3.D    Risk Factors

        Our businesses face significant risks and uncertainties. You should carefully consider all of the information set forth in this annual report on Form 20-F and in other documents we file with or furnish to the SEC, including the following risk factors, before deciding to invest in any Novartis securities. Our business as well as our financial condition or results of operations could be materially adversely affected by any of these risks, as well as other risks and uncertainties not currently known to us or not currently deemed to be material.


Risks Facing Our Business

Our patented pharmaceuticals businesses, and other key products, face, and will continue to face, important patent expirations and aggressive generic competition.

        The products of our Pharmaceuticals and Alcon Divisions, as well as key products from our other divisions, are generally protected by patent rights, which are intended to provide us with exclusive rights to market the patented products. However, those patent rights are of varying strengths and durations. Loss of market exclusivity for one or more important products—including the loss of exclusivity on Diovan, our best-selling product, which began in the EU in 2011, and will continue in the US in 2012 and in Japan in 2013—will have a material adverse effect on our results of operations.

        The introduction of generic competition for a patented medicine typically results in a significant and rapid reduction in net sales for the patented product because generic manufacturers typically offer their unpatented versions at sharply lower prices. Such competition can result from the regular expiration of the term of the patent. Such competition can also result from the entry of generic versions of another medicine in the same therapeutic

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class as one of our drugs, or in another competing therapeutic class. In addition, generic manufacturers frequently take an aggressive approach to challenging patents, conducting so-called "launches at risk" of products that are still under legal challenge for patent infringement, before final resolution of legal proceedings.

        We also rely in all aspects of our businesses on unpatented proprietary technology, know-how, trade secrets and other confidential information, which we seek to protect through various measures including confidentiality agreements with licensees, employees, third-party collaborators, or consultants who may have access to such information. If these agreements are breached, our contractual remedies may not be adequate to cover any losses.

        Some of our best-selling products have begun to face significant competition due to the end of market exclusivity resulting from the expiry of patent protection.

        For more information on the patent status of our Pharmaceuticals Division's products see "Item 4. Information on the Company—Item 4.B Business Overview—Pharmaceuticals—Intellectual Property" and "Item 18. Financial Statements—note 20".

        Clearly, with respect to major products for which the patent terms are expiring, the loss of exclusivity of these products will have a material adverse effect on our business, financial condition and results of operations. In addition, should we unexpectedly lose exclusivity on additional products due to patent litigation or other reasons, this will also have a material adverse effect on our business, financial condition and results of operations, both due to the loss of revenue, and the difficulties in planning for such losses.

Our research and development efforts may not succeed in bringing high-potential products to market, or to do so cost-efficiently enough, or in sufficient numbers.

        Our ability to continue to grow our business and to replace sales lost due to the end of market exclusivity depends upon the success of our research and development activities in identifying, and successfully and cost-effectively developing high-potential breakthrough products that address unmet medical needs, are accepted by patients and physicians, and are reimbursed by payors. To accomplish this, we commit substantial effort, funds and other resources across all our divisions to research and development, both through our own dedicated resources and through various collaborations with third parties. Developing new healthcare products and bringing them to market, however, is a highly costly, lengthy and uncertain process. In spite of our significant investments, there can be no guarantee that our research and development activities will produce a sufficient number of commercially viable new products.

        Using the products of our largest division as an example, the research and development process for a new pharmaceutical product can take up to 15 years, or even longer, from discovery to commercial product launch—and with a limited available patent life the longer it takes to develop a product, the less time there will be for us to recoup our development costs. New products need not only undergo intensive preclinical and clinical testing, but also must be approved by means of highly complex, lengthy and expensive approval processes which can vary from country to country. During each stage, there is a substantial risk that we will encounter serious obstacles which will further delay us and add substantial expense, or that we will not achieve our goals and, accordingly, may be forced to abandon a product in which we have invested substantial amounts of time and money. Reasons for delays may include: failure of the product candidate in preclinical studies; difficulty enrolling patients in clinical

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trials or delays or clinical trial holds at clinical trial sites; delays in completing formulation and other testing and work necessary to support an application for regulatory approval; adverse reactions to the product candidate or indications of other safety concerns; insufficient clinical trial data to support the safety or efficacy of the product candidate; our inability to manufacture sufficient quantities of the product candidate for development or commercialization activities in a timely and cost-efficient manner; and failure to obtain, or delays in obtaining, the required regulatory approvals for the product candidate or the facilities in which it is manufactured. In addition, FDA and other governmental health authorities have recently begun to intensify their scrutiny of pharmaceutical companies' compliance with regulations related to the development of new products, thus adding to the obstacles and costs we face in bringing new products to market.

        Our Vaccines and Diagnostics and Alcon Divisions face challenges similar to those faced by our Pharmaceuticals Division in developing and bringing to market new products. At Alcon, management has announced plans to make significant investments in research and development in the coming years to develop new eyecare products. Vaccines and Diagnostics has, and continues to expend considerable time and resources to fully develop and bring to market two vaccines, Menveo and Bexsero, to combat different strains of meningococcal disease in patients of a wide range of age groups. These products are the primary products in the Vaccines and Diagnostics Division's pipeline. If these efforts by our Alcon and Vaccines and Diagnostics Divisions do not bear significant fruit, they could have a material adverse effect on the medium to long-term success of the divisions, and of the Group as a whole.

        In addition, our Sandoz Division has made, and expects to continue to make, significant investments in the development of biotechnology-based, "biologic" medicines intended for sale as bioequivalent or "biosimilar" generic versions of currently-marketed biotechnology products. While the development of such products can be somewhat less costly and complex than the development of originator biologic medicines, to date many countries do not yet have an established legislative or regulatory pathway which would permit such products to be sold in a manner in which the biosimilar product would be readily substitutable for the originator product. Significant delays in the development of such pathways, or significant impediments that may ultimately be built into such pathways, could diminish the value of the investments that Sandoz has made, and will continue to make, in its biotechnology operations, and could have a material adverse effect on the long-term success of the Group as a whole.

        If we are unable to cost-effectively maintain an adequate flow of successful new products and new indications for existing products sufficient to cover our substantial research and development costs and to replace sales lost as older products are lost to generic competition (including the significant number of important products which have begun, and will continue to face generic competition in the near future), or are displaced by competing products or therapies, this could have a material adverse effect on our business, financial condition or results of operations. For a description of the approval processes which must be followed to market our products, see the sections headed "Regulation" included in the descriptions of our four operating divisions under "Item 4. Information on the Company—Item 4.B Business Overview."

Increasing regulatory scrutiny of drug safety and efficacy has and is likely to continue to adversely affect us.

        Following several widely publicized issues in recent years, health regulators are increasingly focusing on product safety. Recently, the Obama Administration has publicly emphasized the importance of enforcing US drug safety regulations. In addition, authorities have paid increased attention to the risk/benefit profile of pharmaceutical products with an increasing emphasis on product safety and the value-added of products. These developments have led to requests for more clinical trial data, for the inclusion of a significantly higher number of patients in clinical trials, and for more detailed analyses of the trials. As a result, the already lengthy and expensive process of obtaining regulatory approvals for pharmaceutical products has become even more challenging.

        In addition, for the same reason, the post-approval regulatory burden has been increasing. Approved drugs have increasingly been subject to requirements such as risk evaluation and mitigation strategies (REMS), Risk Management Plans, comparative effectiveness studies, Health Technology Assessments and requirements to conduct post-approval Phase IV clinical trials to gather far more detailed safety and other data on products. These requirements have the effect of making the maintenance of regulatory approvals and achieving reimbursement for our products increasingly expensive, and further heightening the risk of recalls, product withdrawals, or loss of market share.

        Like our industry peers, we have been required by health authorities to conduct additional clinical trials, and to submit additional analyses of our data in order to obtain product approvals. We have had REMS and other such requirements imposed as a condition of approval of our new drugs. By increasing the costs of, and causing

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delays in obtaining approvals—and creating a risk that safe and efficacious products will not be approved, or will be removed from the market after previously having been approved—these regulatory developments have had, and likely will continue to have, a material adverse effect on our business, financial condition and results of operations.

Our business is increasingly affected by pressures on pricing for our products.

        The growth of overall healthcare costs as a percentage of gross domestic product in many countries means that governments and payors are under intense pressure to control spending even more tightly. These pressures are particularly strong given the lingering effects of the recent global economic and financial crisis, including the ongoing debt crisis in certain countries in Europe, and the risk of a similar crisis in the US. As a result, our businesses and the healthcare industry in general are operating in an ever more challenging environment with very significant pricing pressures. These ongoing pressures affect all of our businesses that rely on reimbursement—including Pharmaceuticals, Alcon, Sandoz and Vaccines and Diagnostics—and involve government-imposed industry-wide price reductions, mandatory pricing systems, reference pricing initiatives, an increase in imports of drugs from lower-cost countries to higher-cost countries, shifting of the payment burden to patients through higher co-payments, limiting physicians' ability to choose among competing medicines, mandatory substitution of generic drugs for the patented equivalent, payors limiting access to innovative medicines on their own cost-benefit analyses, and growing pressure on physicians to reduce the prescribing of patented prescription medicines. Such initiatives include the 2010 enactment of healthcare reform in the US, its implementation, and ongoing efforts by the US Government to find additional savings from government healthcare programs.

        As a result of such measures, we faced downward pricing pressures on our patented and generic drugs in many countries in 2011. For example, in April, Italy introduced temporary price cuts with the aim of saving $834 million by the end of 2011, and Germany increased their mandatory rebates from 6 to 10%. Other European countries exerting price pressure include France and Portugal. In the United States, an uncertain economy and regulatory reform continued to weigh on the industry. In addition, during 2011, the UK's National Institute for Health and Clinical Excellence (NICE) declined on cost-effectiveness grounds to recommend UK National Health Service funding of use of our product Afinitor for advanced renal cell carcinoma, and the use of our product Lucentis to treat diabetic macular edema, and issued negative draft guidance in relation to the use of our product Gilenya and of our product Lucentis to treat macular edema caused by retinal vein occlusion, despite the products having been approved by the relevant health authorities for each of the indications.

        We expect these efforts to control costs to continue in 2012 as healthcare payors around the globe—in particular government-controlled health authorities, insurance companies and managed care organizations—step up initiatives to reduce the overall cost of healthcare, restrict access to higher-priced new medicines, increase the use of generics and impose overall price cuts. For more information on price controls and on our challenging business environment see "Item 4. Information on the Company—Item 4.B Business Overview—Pharmaceuticals—Price Controls."

Failure to comply with law, and resulting legal proceedings may have a significant negative effect on our results of operations.

        We are obligated to comply with the laws of the approximately 140 countries in which we operate, covering an extremely wide range of activities. To that end, we have a significant global compliance with law program in place. Nonetheless, despite our efforts, any failure to comply with law could lead to substantial liabilities that may not be covered by insurance, and could affect our business and reputation.

        In particular, in recent years, there has been a trend of increasing litigation and government investigations against companies operating in the industries of which we are a part, both in the US and in an increasing number of countries around the world. A number of our subsidiaries are, and will likely continue to be, subject to various legal proceedings that arise from time to time, including proceedings regarding product liability, commercial disputes, employment and wrongful discharge, antitrust, securities, sales and marketing practices, health and safety, environmental, tax, privacy, and intellectual property matters. Such proceedings are inherently unpredictable, and large judgments sometimes occur. As a consequence, we may in the future incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations or cash flows.

        In addition, governments and regulatory authorities around the world have been stepping up their compliance and law enforcement activities in recent years in key areas, including corruption, marketing practices, insider trading, antitrust and trade restrictions. Responding to such investigations is costly, and a significant

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diversion of management's attention from our business. In addition, such investigations may affect our reputation and create a risk of potential exclusion from government reimbursement programs in the US and other countries. These factors have contributed to decisions by us and other companies in our industry to enter into settlement agreements with governmental authorities around the world. Those settlements have involved and may continue to involve large cash payments, including the potential repayment of amounts allegedly obtained improperly and penalties up to treble damages. In addition, settlements of healthcare fraud cases often require companies to enter into a corporate integrity agreement, which is intended to regulate company behavior for a period of years. Also, matters underlying governmental investigations and settlements may be the subject of separate private litigation.

        Our businesses have been subject, from time to time, to governmental investigations and information requests by regulatory authorities. In 2010 our US affiliate Novartis Pharmaceuticals Corporation (NPC) settled parallel civil and criminal investigations by the US government into allegations of potential inappropriate marketing and promotion of six Novartis drugs. As part of the settlement, NPC agreed to plead guilty to one misdemeanor, and to resolve civil charges against it, agreeing to pay a total of $422.5 million, and to enter into a five-year Corporate Integrity Agreement.

        At the same time, our Sandoz Division may, from time to time, seek approval to market a generic version of a product before the expiration of patents claimed by the marketer of the patented product. We do this in cases where we believe that the relevant patents are invalid, unenforceable, or would not be infringed by our generic product. As a result, affiliates of our Sandoz Division frequently face patent litigation, and in certain circumstances, we may elect to market a generic product even though patent infringement actions are still pending. Should we elect to proceed in this manner and conduct a "launch at risk," we could face substantial damages if the final court decision is adverse to us.

        Adverse judgments or settlements in any of these cases could have a material adverse effect on our business, financial condition and results of operations.

        For more detail regarding specific legal matters currently pending against us and provisions for such matters, see "Item 18. Financial Statements—note 20." See also "—Our reliance on third parties for the performance of key business functions heightens the risks faced by our businesses" below.

The manufacture of our products is highly regulated and complex, and may result in a variety of issues that could lead to extended supply disruptions and significant liability.

        The products we market and sell are either manufactured at our own dedicated manufacturing facilities or by third parties. In either case, we must ensure that all manufacturing processes comply with current Good Manufacturing Practices (cGMP) and other applicable regulations, as well as with our own high quality standards. The manufacture of our products is heavily regulated by governmental health authorities around the world, including the FDA, and such health authorities continue to intensify their scrutiny of manufacturers' compliance with such requirements. If we or our third-party suppliers fail to comply fully with these requirements then there could be a regulatorily-required shutdown of production facilities or production lines, which in turn could lead to product shortages, or to our being entirely unable to supply product to patients for an extended duration. This, in turn, could lead to a significant loss of sales revenue and potential third-party litigation. In addition, health authorities have begun to impose significant penalties for such failures to comply with cGMP. A failure to comply fully with cGMP could also lead to a delay in the approval of new products to be manufactured at the impacted site.

        Like our competitors, we have faced, and continue to face, significant manufacturing issues. For example, in November 2011, we received a Warning Letter from the FDA with respect to three of our Sandoz Division's facilities—in Broomfield, Colorado, Wilson, North Carolina, and Boucherville, Canada—which remains unresolved. The Warning Letter raised concerns regarding these facilities' compliance with FDA cGMP regulations. It states that until the FDA confirms that the deficiencies have been corrected, the FDA can recommend disapproval of any pending applications or supplements listing Novartis affiliates as a drug manufacturer. In addition, FDA may refuse requests to issue export certificates to our Sandoz US affiliate, or import certificates to our Sandoz Canada affiliates. The letter further states that other federal agencies may take the Warning Letter into account when considering the award of contracts. Sandoz is collaborating with the FDA to promptly correct all concerns raised in the Warning Letter, and to ensure that our products are safe and effective and meet highest quality standards. However, if we fail to fully resolve the issues raised in the Warning Letter then we could be subject to legal action without further notice including, without limitation, seizure and injunction.

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        Similarly, in December 2011, we voluntarily suspended operations and shipments from the OTC Division facility located at Lincoln, Nebraska. This action was taken to accelerate maintenance and other improvement activities at the site. Subsequently, in January 2012, we voluntarily recalled certain OTC Division products, as well as an Animal Health Division product that were produced at the Lincoln facility. We plan to gradually resume operations at the Lincoln site following implementation of planned improvements and in agreement with the FDA. However, as of the date of this Form 20-F, it is not possible to determine when the plant will resume full operations. The Lincoln facility produces a variety of products with annual sales value of less than 2% of Novartis Group sales. Should we fail to complete the planned improvements at the site in agreement with the FDA in a timely manner, then we may suffer a significant loss in sales.

        In addition, we currently have several other Group Company manufacturing sites which are being upgraded to address advances in technology, improve quality, and assure consistency of product supply, in accordance with commitments to FDA. Ultimately, there can be no guarantee of the outcome of these matters. Nor can there be any guarantee that we will not face similar such issues in the future, or that we will successfully manage such issues when they arise.

        In addition to regulatory requirements, many of our products involve technically complex manufacturing processes or require a supply of highly specialized raw materials. For some products and raw materials, we may also rely on a single source of supply. In particular, an increasing portion of our portfolio, including products from our Pharmaceuticals, Alcon, Vaccines and Diagnostics, and Sandoz Divisions, are "biologic" products. Unlike traditional "small-molecule" drugs, biologic drugs or other biologic-based products cannot be manufactured synthetically, but typically must be produced from living plant or animal micro-organisms. As a result, the production of biologic-based products which meet all regulatory requirements is especially complex. Even slight deviations at any point in the production process may lead to batch failures or recalls. In addition, because the production process is based on living micro-organisms, the process could be affected by contaminants which could impact those micro-organisms. As a result, the inherent fragility of certain of our raw material supplies and production processes may cause the production of one or more of our products to be disrupted, potentially for extended periods of time.

        Also as part of the Group's portfolio of products, we have a number of sterile products, including oncology products, which are considered to be technically complex to manufacture, and require strict environmental controls. Any change in the environment may impact production schedules and inadvertently affect supply until remediated. For example, drug shortages were reported for a limited period of time this year for influvite, which is produced at the Sandoz, Boucherville, Canada site.

        Finally, in addition to potential liability for government penalties, because our products are intended to promote the health of patients, for some of our products, any supply disruption or other production issue could subject us to lawsuits or to allegations that the public health, or the health of individuals, has been endangered.

        In sum, a disruption in the supply of certain key products—whether as a result of a failure to comply with applicable regulations, the fragility of the production process, or our failure to accurately predict demand—could have a material adverse effect on our business, financial condition or results of operations.

The continuing global economic and financial crisis may have a material adverse effect on our results.

        Many of the world's largest economies and financial institutions continue to be impacted by the ongoing global economic and financial crisis, with some continuing to face financial difficulty, a decline in asset prices, liquidity problems and limited availability of credit. It is uncertain how long these effects will last, or whether economic and financial trends will worsen or improve. Such uncertain economic times may have a material adverse effect on our revenues, results of operations, financial condition and ability to raise capital. For example, the ongoing debt crisis in certain countries in Europe has increased pressures on those countries, and on payors in those countries to force healthcare companies to decrease the prices at which we may sell them our products. The debt crisis has also given rise to concerns that some countries may not be able to pay us for our products at all. This situation could deteriorate as a result of potential developments in countries of key concern such as Greece, which is facing possible default of its sovereign debt obligations, as well as Spain and Italy, the sovereign debt obligations of which were recently downgraded.

        Current economic conditions may adversely affect the ability of our distributors, customers, suppliers and service providers to obtain the liquidity required to pay for our products, or otherwise to buy necessary inventory or raw materials, and to perform their obligations under agreements with us, which could disrupt our operations, and negatively impact our business and cash flow. Although we attempt to monitor these third parties' financial condition and their liquidity, our ability to do so is limited, and some of them may become unable to pay their

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bills in a timely manner, or may even become insolvent, which could negatively impact our business and results of operations. These risks may be elevated with respect to our interactions with third parties with substantial operations in countries where current economic conditions are the most severe, particularly where such third parties are themselves exposed to sovereign risk from business interactions directly with fiscally-challenged government payers. See also "—Our reliance on third parties for the performance of key business functions heightens the risks faced by our businesses" below.

        In addition, the varying effects of difficult economic times on the economies and currencies of different countries has impacted, and may continue to unpredictably impact, the conversion of our operating results into US dollars, our reporting currency. This is particularly so given recent financial troubles in the US and in many European economies, investor concerns about the future of the Euro, and the flight of investor capital to the perceived safety of the Swiss franc. The financial and debt crises may also cause the value of our investments in our pension plans to decrease, potentially requiring us to increase our funding of those pension plans. In addition, the financial crisis may also result in a lower return on our financial investments, and a lower value on some of our assets. Alternately, the financial crisis may lead to inflation, which could lead to higher interest rates, which would increase our costs of raising capital. See also "—If any of numerous key assumptions and estimates in calculating our pension plan obligations turn out to be different from our actual experience, we may be required to increase substantially our contributions to pension plans as well as our pension-related costs in the future" below, and "—Foreign exchange fluctuations may adversely affect our earnings and the value of some of our assets" below.

        To the extent that the economic and financial crisis is directly affecting consumers, some of our businesses, including the elective surgical business of our Alcon Division and our OTC and Animal Health Divisions, may be particularly sensitive to declines in consumer spending. In addition, our Pharmaceuticals, Vaccines and Diagnostics, and Sandoz Divisions, and the remaining businesses of our Alcon Division, may not be immune to consumer cutbacks, particularly given the increasing requirements in certain countries that patients pay a larger contribution toward their own healthcare costs. As a result, there is a risk that consumers may cut back on prescription drugs and vaccines, as well as consumer health products, to help cope with rising costs and difficult economic times.

        At the same time, significant changes and volatility in the financial markets, in the consumer and business environment, in the competitive landscape and in the global political and security landscape make it increasingly difficult for us to predict our revenues and earnings into the future. As a result, any revenue or earnings guidance or outlook which we have given or might give may be overtaken by events, or may otherwise turn out to be inaccurate. Though we endeavor to give reasonable estimates of future revenues and earnings at the time we give such guidance, based on current conditions, there is a significant risk that such guidance or outlook will turn out to be, or to have been, incorrect.

Foreign exchange fluctuations may adversely affect our earnings and the value of some of our assets.

        In the past year, the US dollar, our reporting currency, has suffered significant decreases in value against other world currencies. Because a significant portion of our earnings and expenditures are in currencies other than the US dollar, these decreases have had a significant impact on our reported net sales and earnings. In 2011, 36% of our net sales were made in US dollars, 27% in euros, 9% in Japanese yen, 2% in Swiss francs and 26% in other currencies. During the same period, 38% of our expenses arose in US dollars, 25% in euros, 14% in Swiss francs, 4% in Japanese yen and 19% in other currencies. As has happened in the recent past, changes in exchange rates between the US dollar and other currencies can result in increases or decreases in our sales, costs and earnings. Fluctuations in exchange rates between the US dollar and other currencies may also affect the reported value of our assets measured in US dollars and the components of shareholders' equity. For more information on the effects of currency fluctuations on our consolidated financial statements and on how we manage currency risk, see "Item 5.A Operating Results—Effects of Currency Fluctuations" and "Item 11. Quantitative and Qualitative Disclosures about Non-Product-Related Market Risk." See also "—The continuing economic and financial crisis may have a material adverse effect on our results" above.

We may not successfully complete and integrate strategic acquisitions to expand or complement our business.

        As part of our growth strategy, we evaluate and pursue strategic business acquisitions to expand or complement our business. Such ventures may bring new products, increased market share or new customers to our prominent position in the healthcare industry. We cannot ensure that suitable acquisition candidates will be identified. Acquisition activities can be thwarted by overtures from competitors for the targeted candidates, governmental regulation (including market concentration limitations) and replacement product developments in

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our industry. Further, after an acquisition, successful integration of the venture can be complicated by corporate cultural differences, difficulties in retention of key personnel, customers and suppliers, and coordination with other products and processes. Also, acquisitions could divert management's attention from our existing business and could result in liabilities being incurred that were not known at the time of acquisition or the creation of tax or accounting issues. If we fail to timely recognize or address these matters or to devote adequate resources to them, we may fail to achieve our growth strategy or otherwise not realize the intended benefits of any acquisition.

An increasing amount of intangible assets and goodwill on our books may lead to significant impairment charges in the future.

        The amount of goodwill and other intangible assets on our consolidated balance sheet has increased significantly in recent years, primarily due to acquisitions. As a result, impairment testing could lead to material impairment charges in the future.

        We regularly review our long-lived intangible and tangible assets, including identifiable intangible assets, investments in associated companies and goodwill, for impairment. Goodwill, acquired research and development, and acquired development projects not yet ready for use are subject to impairment review at least annually. Other long-lived assets are reviewed for impairment when there is an indication that an impairment may have occurred. Impairment testing under IFRS may lead to impairment charges in the future. Any significant impairment charges could have a material adverse effect on our results of operations. In 2011, for example, we recorded intangible asset impairment charges of $619 million. Of these charges, $552 million arose in the Pharmaceuticals Division, principally due to the expected reduction in demand for Tekturna/Rasilez (aliskiren), and discontinuation of the PRT128 (elinogrel), SMC021 (oral calcitonin), PTK796 (omadacycline) and AGO178 (agomelatine) development programs. $67 million of impairment charges arose in all other divisions. For a detailed discussion of how we determine whether an impairment has occurred, what factors could result in an impairment and the increasing impact of impairment charges on our results of operations, see "Item 5. Operating and Financial Review and Prospects—Item 5.A Operating Results—Critical Accounting Policies and Estimates—Impairment of Long-Lived Intangible and Tangible Assets" and "Item 18. Financial Statements—note 11."

Our indebtedness could adversely affect our operations.

        As of December 31, 2011 we had $13.8 billion of non-current financial debt and $6.4 billion of current financial debt. Our current and future debt requires us to dedicate a portion of our cash flow to service interest and principal payments and may limit our ability to engage in other transactions and otherwise places us at a competitive disadvantage to our competitors that have less debt. We may have difficulty refinancing our existing debt or incurring new debt on terms that we would consider to be commercially reasonable, if at all.

Our reliance on third parties for the performance of key business functions heightens the risks faced by our businesses.

        We invest a significant amount of effort and resources into outsourcing and offshoring certain key business functions with third parties, including research and development collaborations, manufacturing operations, warehousing, distribution activities, certain finance functions, marketing activities, data management and others. We do not control the third parties to whom we outsource these functions, but we depend on them to achieve results which may be significant to us. If these third parties fail to meet our expectations, we may lose our investment in the collaborations and fail to receive the expected benefits. In addition, should any of these third parties fail to comply with the law in the course of their performance of services for us, there is a risk that we could be held responsible for such violations of law, as well. Any such failures by third parties could have a material adverse effect on our business, financial condition or results of operations.

        In particular, in many countries, including many less-developed markets, we rely heavily on third party distributors and other agents for the marketing and distribution of our products. Many of these third parties do not have internal compliance resources comparable to those within our organization. Some of these countries are plagued by corruption. If our efforts to screen our third party agents and detect cases of potential misconduct fail, we could be held responsible for the noncompliance of these third parties with applicable laws and regulations, which may have a material adverse effect on our reputation and our business, financial condition or results of operations.

We may not be able to realize the expected benefits of our significant investments in emerging growth markets.

        At a time of slowing growth in sales of pharmaceuticals in industrialized countries, many emerging markets have experienced comparatively strong economies, leading to proportionately higher growth and an increasing

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contribution to the industry's global performance. In 2011, we generated $5.8 billion, or approximately 10% (2010: 10%) of net sales from our six priority emerging markets—Brazil, China, India, Russia, South Korea and Turkey—as compared with $37 billion, or approximately 63% (2010: 64%) of our net sales, in the world's seven largest developed markets. However, combined net sales in the six priority emerging markets grew 17% in constant currency in 2011, compared to 11% sales growth in constant currency in the seven largest developed markets during the same period. As a result of this trend, we have been taking steps to increase our presence in these priority emerging markets and in other emerging markets. For example, in June 2011, we began construction on a new state-of-the-art manufacturing plant for pharmaceutical and generic medicines in St. Petersburg, Russia. This investment is part of a greater commitment to local infrastructure and collaborative healthcare initiatives planned in Russia over a five-year period. In China, by 2014 we will expand the number of our research and development associates nearly ten-fold, bringing the total to 1,200 across all divisions.

        There is no guarantee that our efforts to expand our sales in these countries will succeed, or that these countries will continue to experience growth rates in excess of the world's largest markets. Some emerging countries may be especially vulnerable to the after-effects of the recent global financial crisis, or may have very limited resources to spend on healthcare. See "—The continuing economic and financial crisis may have a material adverse effect on our results" above. Many of these countries have a relatively limited number of persons with the skills and training suitable for employment at an enterprise such as ours. See "—An inability to attract and retain qualified personnel could adversely affect our business" below. In many emerging countries, we may be required to rely on third-party agents, which may put us at risk of liability. See "—Legal proceedings may have a significant negative effect on our results of operations" above. In addition, many of these countries have currencies that fluctuate substantially. If currencies devalue and we cannot offset the devaluations with price increases, our products may become less profitable.

        For all these reasons, our sales to emerging growth markets carry significant risks. A failure to continue to expand our business in emerging growth markets could have a material adverse effect on our business, financial condition or results of operations.

Failure to obtain marketing exclusivity periods for new generic products, or to develop differentiated products, as well as intense competition from patented pharmaceuticals companies, may have an adverse effect on the success of our Sandoz Division.

        Our Sandoz Division achieves significant revenue opportunities when it secures and maintains exclusivity periods granted for generic products in certain markets—particularly the 180-day exclusivity period granted in the US by the Hatch-Waxman Act—and when it is able to develop differentiated products with few, if any, generic competitors. Failure to obtain and maintain these market opportunities could have an adverse effect on the success of Sandoz. In addition, the division faces intense competition from patented pharmaceuticals companies, which commonly take aggressive steps to limit the availability of exclusivity periods or to reduce their value. These activities may increase the costs and risks associated with our efforts to introduce generic products and may delay or entirely prevent their introduction.

If any of numerous key assumptions and estimates in calculating our pension plan obligations turn out to be different from our actual experience, we may be required to increase substantially our contributions to pension plans as well as our pension-related costs in the future.

        We sponsor pension and other post-employment benefit plans in various forms. These plans cover a significant portion of our current and former associates. We are required to make significant assumptions and estimates about future events in calculating the present value of expected future expense and liability related to these plans. These include assumptions about discount rates we apply to estimated future liabilities, expected returns on plan assets and rates of future compensation increases. In addition, our actuarial consultants provide our management with historical statistical information such as withdrawal and mortality rates in connection with these estimates. Assumptions and estimates used by Novartis may differ materially from the actual results we experience due to changing market and economic conditions (including the effects of the ongoing global economic and debt crisis, which, to date, have resulted in extremely low interest rates), higher or lower withdrawal rates, or longer or shorter life spans of participants, among other variables. For example, a decrease in the discount rate we apply in determining the present value of expected future obligations of one-half of one percent would have increased our year-end defined benefit obligation by $1.3 billion. Any differences between our assumptions and estimates and our actual experience could have a material effect on our results of operations and financial condition. For more information on obligations under retirement and other post-employment benefit plans and underlying actuarial assumptions, see "Item 5. Operating and Financial Review and Prospects—Item 5.A Operating Results—Critical Accounting Policies and Estimates—Retirement and other

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post-employment plans" and "Item 18. Financial Statements—note 25". See also "—The continuing economic and financial crisis may have a material adverse effect on our results" above.

Changes in tax laws or their application could adversely affect our results of operations.

        The integrated nature of our worldwide operations enables us to reduce the effective tax rate on our earnings because a portion of our earnings are taxed at more favorable rates in some jurisdictions. Changes in tax laws or their application with respect to matters such as transfer pricing, intercompany dividends and cross-border transactions, controlled corporations, and limitations on tax relief allowed on the interest on intercompany debt, could increase our effective tax rate and adversely affect our financial results.

Our OTC Division faces adverse impacts from increased competition, as well as potential questions of safety and efficacy.

        Our OTC Division sells over-the-counter medicines, many of which contain ingredients also sold by competitors in the OTC industry. Particularly in the US, our branded OTC products compete against "store brand" products that are made with the same active ingredients as ours. These products do not carry our trusted brand names, but they also do not carry the burden of the expensive advertising and marketing that helped to establish demand for the product. As a result, the store brand products may be sold at lower prices. In recent years, consumers have increasingly begun to purchase store brand OTC products instead of branded products. In addition, in recent years, significant questions have arisen regarding the safety, efficacy and potential for misuse of certain products sold by our OTC Division and its competitors. As a result, health authorities around the world have begun to re-evaluate some important over-the-counter products, leading to restrictions on the sale of some of them and even the banning of certain products. For example, in 2010, the FDA undertook a review of one cough medicine ingredient to consider whether over-the-counter sales of the ingredient remained appropriate. While FDA has not, to date, changed the ingredient's status, further regulatory or legislative action may follow, and litigation has often followed actions such as these, particularly in the US. Additional actions and litigation regarding OTC products are possible in the future. These trends have had, and may continue to have, a significant adverse effect on the success of our OTC Division. See also "—The continuing economic and financial crisis may have a material adverse effect on our results" above.

Ongoing consolidation among our distributors may increase both the purchasing leverage of key customers and the concentration of credit risk.

        Increasingly, a significant portion of our global sales are made to a relatively small number of US drug wholesalers, retail chains and other purchasing organizations. For example, our three most important customers globally are all in the US, and accounted for approximately 9%, 7% and 7%, respectively, of Group net sales in 2011. The largest trade receivables outstanding were for these three customers, amounting to 10%, 6% and 6%, respectively, of the Group's trade receivables at December 31, 2011. The trend has been toward further consolidation among our distributors, especially in the US. As a result, our distributors are gaining additional purchasing leverage, which increases the pricing pressures facing our businesses. Moreover, we are exposed to a concentration of credit risk as a result of this concentration among our customers. If one or more of our major customers experienced financial difficulties, the effect on us would be substantially greater than in the past. This could have a material adverse effect on our business, financial condition and results of operations.

An inability to attract and retain qualified personnel could adversely affect our business.

        We highly depend upon skilled personnel in key parts of our organization, and we invest heavily in recruiting and training qualified individuals. The loss of the service of key members of our organization—particularly senior members of our scientific and management teams—could delay or prevent the achievement of major business objectives. In addition, the success of our research and development activities is particularly dependent on our ability to attract and retain sufficient numbers of high-quality researchers and development specialists.

        Future economic growth will demand more talented associates and leaders, yet the market for talent will become increasingly competitive. Shifting demographic trends will result in fewer students, fewer graduates and fewer people entering the workforce in the Western world in the next 10 years. The supply of talent for key functional and leadership positions is decreasing, and a talent gap is clearly visible for some professions and geographies—engineers in Germany, for example. Recruitment is increasingly regional or global in specialized fields such as clinical development, biosciences, chemistry and information technology.

        Emerging markets are expected to be a driving force in global growth, but in countries like Russia and China there is a limited pool of executives with the training and international experience needed to work successfully in

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a global organization like Novartis. Moreover, younger generations around the world have changing expectations toward careers, engagement and the integration of work in their overall lifestyles. Geographic mobility is expected to decrease, and talent in emerging countries anticipate ample career opportunities closer to home than in the past.

        We face intense competition for an increasingly limited pool of qualified individuals from numerous pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions. As a result, we may be unable to attract and retain qualified individuals in sufficient numbers, which would have an adverse effect on our business, financial condition and results of operations.

Environmental liabilities may adversely impact our results of operations.

        The environmental laws of various jurisdictions impose actual and potential obligations on us to remediate contaminated sites. While we have set aside substantial provisions for worldwide environmental liabilities, there is no guarantee that additional costs will not be incurred beyond the amounts for which we have provided in the Group consolidated financial statements. If we are required to further increase our provisions for environmental liabilities in the future, or if we fail to properly manage environmental risks, this could have a material adverse effect on our business, financial condition and results of operations. For more detail regarding environmental matters, see "Item 4.D Property, Plants and Equipment—Environmental Matters" and "Item 18. Financial Statements—note 20."

Significant disruptions of information technology systems or breaches of data security could adversely affect our business.

        Our business is increasingly dependent on critical, complex and interdependent information technology systems, including Internet-based systems, to support business processes as well as internal and external communications. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and computer viruses, which may result in the impairment of production and key business processes.

        In addition, our systems are potentially vulnerable to data security breaches—whether by employees or others—which may expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personal information (including sensitive personal information) of our employees, clinical trial patients, customers and others.

        Such disruptions and breaches of security could have a material adverse effect on our business, financial condition and results of operations.

Increasing use of social media and mobile technologies could give rise to liability or breaches of data security.

        Novartis and our associates are increasingly relying on social media tools and mobile technologies as a means of communications. To the extent that we seek as a company to use these tools as a means to communicate about our products or about the diseases our products are intended to treat, there are significant uncertainties as to either the rules that apply to such communications, or as to the interpretations that health authorities will apply to the rules that exist. As a result, despite our efforts to comply with applicable rules, there is a significant risk that our use of social media and mobile technologies for such purposes may cause us to nonetheless be found in violation of them. In addition, because of the universal availability of social media tools and mobile technologies, our associates may use them in ways that may not be sanctioned by the company, and which may give rise to liability, or which could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personal information (including sensitive personal information) of our employees, clinical trial patients, customers and others. In either case, such uses of social media and mobile technologies could have a material adverse effect on our business, financial condition and results of operations.

Earthquakes could adversely affect our business.

        Our corporate headquarters, the headquarters of our Pharmaceuticals and Animal Health Divisions, and certain of our major Pharmaceuticals Division production and research facilities are located near earthquake fault lines in Basel, Switzerland. In addition, other major facilities of our Pharmaceuticals, Alcon, and Vaccines and Diagnostics Divisions are located near major earthquake fault lines in various locations around the world. In the event of a major earthquake, we could experience business interruptions, destruction of facilities and loss of life, all of which could have a material adverse effect on our business, financial condition and results of operations.

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Risks Related To Our ADSs

The price of our ADSs and the US dollar value of any dividends may be negatively affected by fluctuations in the US dollar/Swiss franc exchange rate.

        Our American Depositary Shares (ADSs) trade on the New York Stock Exchange (NYSE) in US dollars. Since the shares underlying the ADSs are listed in Switzerland on the SIX Swiss Exchange (SIX) and trade in Swiss francs, the value of the ADSs may be affected by fluctuations in the US dollar/Swiss franc exchange rate. In addition, since any dividends that we may declare will be denominated in Swiss francs, exchange rate fluctuations will affect the US dollar equivalent of dividends received by holders of ADSs. If the value of the Swiss franc decreases against the US dollar, the price at which our ADSs trade may—and the value of the US dollar equivalent of any dividend will—decrease accordingly.

Holders of ADSs may not be able to exercise preemptive rights attached to shares underlying ADSs.

        Under Swiss law, shareholders have preemptive rights to subscribe for cash for issuances of new shares on a pro rata basis. Shareholders may waive their preemptive rights in respect of any offering at a general meeting of shareholders. Preemptive rights, if not previously waived, are transferable during the subscription period relating to a particular offering of shares and may be quoted on the SIX. US holders of ADSs may not be able to exercise the preemptive rights attached to the shares underlying their ADSs unless a registration statement under the US Securities Act of 1933 is effective with respect to such rights and the related shares, or an exemption from this registration requirement is available. In deciding whether to file such a registration statement, we would evaluate the related costs and potential liabilities, as well as the benefits of enabling the exercise by ADS holders of the preemptive rights associated with the shares underlying their ADSs. We cannot guarantee that a registration statement would be filed, or, if filed, that it would be declared effective. If preemptive rights could not be exercised by an ADS holder, JPMorgan Chase Bank, N.A., as depositary, would, if possible, sell the holder's preemptive rights and distribute the net proceeds of the sale to the holder. If the depositary determines, in its discretion, that the rights could not be sold, the depositary might allow such rights to lapse. In either case, the interest of ADS holders in Novartis would be diluted and, if the depositary allowed rights to lapse, holders of ADSs would not realize any value from the granting of preemptive rights.

Item 4.    Information on the Company


4.A    History and Development of Novartis

Novartis AG

        Novartis AG was incorporated on February 29, 1996 under the laws of Switzerland as a stock corporation (Aktiengesellschaft) with an indefinite duration. On December 20, 1996, our predecessor companies, Ciba-Geigy and Sandoz, merged into this new entity, creating Novartis. We are domiciled in and governed by the laws of Switzerland. Our registered office is located at the following address:

        The Novartis Group is a multinational group of companies specializing in the research, development, manufacturing and marketing of a broad range of healthcare products led by innovative pharmaceuticals. Novartis AG, our Swiss holding company, owns, directly or indirectly, 100% of most significant operating companies. For a list of our significant operating subsidiaries, see "Item 18. Financial Statements—note 31."

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Important Corporate Developments 2009-2011

2011    

December

 

Following the seventh interim review of data from the ALTITUDE study with Tekturna/Rasilez (aliskiren), Novartis decided to terminate the trial based on the recommendation of the independent Data Monitoring Committee (DMC) overseeing the study. The DMC concluded that patients were unlikely to benefit from treatment on top of standard anti-hypertensive medicines, and identified higher adverse events in patients receiving Tekturna/Rasilez in addition to standard of care in the trial. Novartis has written to healthcare professionals worldwide recommending that hypertensive patients with diabetes should not be treated with Tekturna/Rasilez, or combination products containing aliskiren, if they are also receiving an angiotensin-converting enzyme (ACE) inhibitors or an angiotensin receptor blocker (ARB). As an additional precautionary measure, Novartis has ceased promotion of Tekturna/Rasilez-based products for use in combination with an ACE or ARB. A reassessment of the future sales potential of Tekturna/Rasilez in light of the ALTITUDE results has led to an exceptional charge of approximately $900 million (of which approximately $800 million are non cash) to be recognized in the fourth quarter of 2011. The charge comprises impairments to intangible and manufacturing assets and excess inventory together with trial wind down and other exit costs. The accounting charge is triggered by lower sales expectations and does not seek to anticipate the results of our ongoing discussions with health authorities concerning Tekturna/Rasilez.

 

 

We voluntarily suspended operations and shipments from the OTC Division facility located at Lincoln, Nebraska. This action was taken to accelerate maintenance and other improvement activities at the site. Subsequently, in January 2012, we voluntarily recalled certain OTC Division products, as well as an Animal Health Division product that were produced at the Lincoln facility. We took a charge of $115 million related to the temporary suspension of production at the facility.

 

 

Novartis discontinues development of PRT128 for acute coronary syndrome and chronic coronary heart disease, and SMC021 for osteoporosis and osteoarthritis, resulting in intangible asset and other impairment charges of approximately $160 million.

October

 

Novartis discontinues development of AGO178 for major depressive disorder, resulting in an intangible asset impairment charge of $87 million.

April

 

Following the acquisition of the remaining non-controlling interest in Alcon, Inc., on April 8, an Extraordinary General Meeting of Novartis shareholders approved the merger of Alcon, Inc. into Novartis, creating the global leader in eye care. As a result, the Alcon Division became the newest division in our strategically diversified healthcare portfolio. In order to complete the transaction, the Extraordinary General Meeting authorized the Board of Directors of Novartis to issue 108 million new shares which, together with 57 million shares held in treasury, were used to fund part of the merger consideration.

 

 

Novartis sells global rights to Elidel®, a medicine to treat atopic dermatitis, for $420 million to Meda.

March

 

Novartis completes acquisition of majority stake in Zhejiang Tianyuan vaccines company in China. The total amount paid for the 85% interest was $194 million, excluding $39 million of cash acquired.

January

 

Novartis announces agreement to acquire Genoptix, Inc. in an all cash tender offer. The acquisition, which was completed in March, of 100% of the shares of Genoptix totaled $458 million, excluding the $24 million of cash acquired. Genoptix laboratory service offerings are expected to provide a strategic fit with the portfolio of our Molecular Diagnostics unit and to complement our internal capabilities aimed at improving health outcomes by advancing individualized treatment programs.

2010

 

 

December

 

Novartis announces $500 million investment over the next five years in healthcare in Russia, including for the construction of a new Novartis manufacturing plant in St. Petersburg, and the expansion of research and development collaborations and public health alliances. Construction of the manufacturing plant began in June 2011.

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    Novartis announces that it has entered into a definitive agreement with Alcon to merge Alcon into Novartis, subject to certain approvals and conditions, which when completed would cause Alcon to be 100% owned by Novartis and enable Alcon to become a new division of Novartis focused on eye care. Novartis also announced the reactivation of its share buyback program.

November

 

Novartis discontinues development of ASA404 for non-small cell lung cancer, resulting in an intangible asset impairment charge of approximately $120 million.

October

 

Novartis discontinues development of two investigational compounds: albinterferon alfa-2b for hepatitis C and Mycograb for invasive candidiasis, resulting in impairment and other charges of approx $584 million.

September

 

Novartis Pharmaceuticals Corporation (NPC), a US subsidiary of Novartis AG, agrees to settle civil and criminal investigations by the US Government regarding Trileptal and five other products. As part of the settlement, NPC agreed to plead guilty to one misdemeanor, and to pay criminal fines and civil penalties totaling $422.5 million. NPC also entered into a five-year Corporate Integrity Agreement, which will require it to implement additional compliance-related measures.

 

 

Novartis sells US rights to the overactive bladder treatment Enablex® to Warner Chilcott for $400 million in cash.

August

 

Novartis completes 77% majority ownership of Alcon adding new growth platform in eye care to its leading healthcare portfolio.

July

 

NPC agrees to settle gender discrimination claims associated with class action brought on behalf of female members of sales force for payment of $152.5 million to eligible class members, and commitment to implement comprehensive programs designed to ensure that all members of its sales force are treated fairly. The court approved the settlement in November.

April

 

Sandoz announces the acquisition of Oriel Therapeutics. The sale closed in June, gaining rights to a portfolio of respiratory products targeting asthma and COPD.

March

 

Novartis successfully completes a $5.0 billion bond market transaction in three tranches.

February

 

Novartis gains exclusive rights to DEB025, an antiviral agent in Phase IIb development as potential first-in-class hepatitis C therapy.

January

 

Novartis announces its intention to gain full ownership of Alcon by first completing the April 2008 agreement with Nestlé S.A. to acquire a 77% majority stake in Alcon, and subsequently entering into an all-share direct merger with Alcon for the remaining 23% minority stake.


2009


 


 

December

 

Novartis enters into an agreement to acquire Corthera Inc. for $120 million plus potential milestone payments related to the successful development and commercialization of relaxin, a potential treatment for acute decompensated heart failure. The acquisition was completed in February 2010.

 

 

Novartis licenses to Prometheus Laboratories the rights to sell Proleukin in the US, commencing in February 2010. Novartis retains the right to sell Proleukin outside of the US.

November

 

Novartis announces $1 billion investment over the next five years to significantly expand the China Novartis Institutes for BioMedical Research so that it would become the largest pharmaceutical research and development institute in China, and the third largest Novartis research institute worldwide.

 

 

Novartis enters into agreement to acquire 85% stake in Chinese vaccines company Zhejiang Tianyuan Bio-Pharmaceutical Co., Ltd., which offers marketed vaccine products in China and research and development projects focused on viral and bacterial diseases, for $125 million.

 

 

Novartis opens large-scale flu cell culture vaccine and adjuvant manufacturing facility in Holly Springs, North Carolina, in partnership with US Department of Health and Human Services, Biomedical Research and Development Authority.

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    Novartis announces agreement to obtain rights outside the US to INC424, a promising Janus kinase inhibitor in Phase III development as well as worldwide rights to potential c-Met inhibitor compound, from Incyte Corporation for a combined upfront payment of $150 million as well as an immediate $60 million milestone payment and rights to potential future milestone payments and royalties based on future sales.

October

 

Novartis gains exclusive worldwide rights to PTK796, a potential first-in-class IV and oral broad-spectrum antibiotic in Phase III development, from Paratek Pharmaceuticals for upfront payment and eligibility for future milestone payments as well as royalties based on future sales.

 

 

Novartis enters into agreement for exclusive US and Canadian rights to Fanapt, an FDA-approved oral therapy for schizophrenia, with Vanda Pharmaceuticals Inc. for an upfront payment of $200 million, eligibility for additional milestone payments and sales royalties.

June

 

Novartis completes an open offer to acquire an additional stake in its majority-owned Indian subsidiary, Novartis India Ltd., increasing its holding to nearly 76.4% from the previous level of 50.9%. The transaction represented a total value of approximately $80 million.

 

 

Novartis successfully launches a EUR 1.5 billion notes issue.

May

 

Novartis signs definitive agreement to acquire for EUR 925 million ($1.3 billion) the specialty generic injectables business of EBEWE Pharma, providing Sandoz—the Group's generics division—an opportunity to create a global platform for growth while improving access for patients to many generic oncology medicines. The transaction closed in September.

February

 

Novartis gains worldwide rights to elinogrel (PRT128), a Phase II anti-clotting compound with potential to reduce risk of heart attack and stroke, from Portola Pharmaceuticals Inc. for an upfront payment of $75 million and rights to future milestone payments and royalties based on future sales.

 

 

Novartis successfully completes a $5.0 billion debt offering in the US.

        For information on our principal expenditures on property, plants and equipment, see "Item 4. Information on the Company—4.D Property, Plants & Equipment." For information on our significant investments in research and development, see the sections headed "Research and Development" included in the descriptions of our four operating divisions under "Item 4. Information on the Company—4.B Business Overview."


4.B    Business Overview

OVERVIEW

        Novartis provides healthcare solutions that address the evolving needs of patients and societies worldwide. Our broad portfolio includes innovative medicines, eye care, cost-saving generic pharmaceuticals, preventive vaccines and diagnostic tools, over-the-counter and animal health products. Novartis is the only company to have leadership positions in each of these areas.

        The Group's wholly-owned businesses is made up of six global operating divisions and reports its results in five segments:

        Our strategy is to strengthen our healthcare portfolio through sustained investments in innovation, as well as through targeted acquisitions.

        Novartis achieved net sales of $58.6 billion in 2011, while net income amounted to $9.2 billion. We invested $9.6 billion ($9.1 billion excluding impairment and amortization charges) in Research & Development in 2011.

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        Headquartered in Basel, Switzerland, our Group companies employed approximately 124,000 full-time equivalent associates as of December 31, 2011, and have operations in approximately 140 countries around the world.


Pharmaceuticals Division

        Our Pharmaceuticals Division researches, develops, manufactures, distributes and sells patented prescription medicines in the following therapeutic areas (reorganized as of January 1, 2012): Oncology; Primary Care, consisting of Primary Care medicines and Established Medicines; and Specialty Care, consisting of Ophthalmology, Neuroscience, Integrated Hospital Care, and Critical Care medicines. In 2011, the Pharmaceuticals Division accounted for $32.5 billion, or 56%, of Group net sales, and for $8.3 billion, or 71%, of Group operating income (excluding Corporate income and expense, net).


Alcon Division

        Our Alcon Division discovers, develops, manufactures, distributes and sells eye care products. Alcon is the global leader in eye care with product offerings in Surgical, Ophthalmic Pharmaceuticals and Vision Care. In Surgical, Alcon develops, manufactures, distributes and sells ophthalmic surgical equipment, instruments, disposable products and intraocular lenses. In Pharmaceutical, Alcon discovers, develops, manufactures, distributes and sells medicines to treat chronic and acute diseases of the eye, as well as over-the-counter medicines for the eye. In Vision Care, Alcon develops, manufactures, distributes and sells contact lenses and lens care products. In 2011, Alcon accounted for $10.0 billion, or 17%, of Group net sales, and for $1.5 billion, or 13%, of Group operating income (excluding Corporate income and expense, net).


Sandoz Division

        Our Sandoz Division is a leading global generic pharmaceuticals company that develops, manufactures, distributes and sells prescription medicines, as well as pharmaceutical and biotechnological active substances, which are not protected by valid and enforceable third-party patents. The Sandoz Division has activities in Retail Generics, Anti-Infectives, and Biopharmaceuticals & Oncology Injectables. In Retail Generics, Sandoz develops, manufactures and markets active ingredients and finished dosage forms of pharmaceuticals, as well as supplying active ingredients to third parties. In Anti-Infectives, Sandoz develops and manufactures active pharmaceutical ingredients and intermediates—mainly antibiotics—for internal use by Retail Generics and for sale to third-party customers. In Biopharmaceuticals, Sandoz develops, manufactures and markets protein- or other biotechnology-based products (known as biosimilars or follow-on biologics) and sells biotech manufacturing services to other companies. In Oncology Injectables, Sandoz develops, manufactures and markets primarily cytotoxic products for the hospital market. In 2011, Sandoz accounted for $9.5 billion, or 16%, of Group net sales, and for $1.4 billion, or 12%, of Group operating income (excluding Corporate income and expense, net).


Vaccines and Diagnostics Division

        Our Vaccines and Diagnostics Division researches, develops, manufactures, distributes and sells preventive vaccines and diagnostic tools. Novartis Vaccines is a leading global developer and manufacturer of human vaccines. Novartis Diagnostics is a blood testing and molecular diagnostics business dedicated to preventing the spread of infectious diseases through novel blood-screening tools that protect the world's blood supply. In 2011, the Vaccines and Diagnostics Division accounted for $2.0 billion, or 3%, of Group net sales, and an operating loss of $249 million.


Consumer Health

        Consumer Health consists of two Divisions: OTC (over-the-counter medicines) and Animal Health. Each has its own research, development, manufacturing, distribution and selling capabilities. However, neither is material enough to the Group to be separately disclosed as a segment. OTC offers readily available consumer medicine. Animal Health provides veterinary products for farm and companion animals. In 2011, Consumer Health accounted for $4.6 billion, or 8%, of Group net sales, and for $727 billion, or 6%, of Group operating income (excluding Corporate income and expense, net).

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PHARMACEUTICALS

Overview

        Our Pharmaceuticals Division is a world leader in offering innovation-driven, patent-protected medicines to patients and physicians.

        The Pharmaceuticals Division researches, develops, manufactures, distributes and sells patented pharmaceuticals in the following therapeutic areas:

        The Pharmaceuticals Division is organized into global business franchises responsible for the commercialization of various products as well as Novartis Oncology, a business unit responsible for the global development and commercialization of oncology products; and Novartis Molecular Diagnostics, a business responsible for the development and commercialization of diagnostic tests and services related to our pharmaceuticals portfolio and therapeutic areas.

        Prior to January 1, 2012, the therapeutic areas of the Pharmaceuticals Division were divided into the following franchises: Cardiovascular and Metabolism, Oncology (including Hematology), Neuroscience and Ophthalmics, Respiratory, Integrated Hospital Care, and Other additional products. The tables, product descriptions and other information set forth below in this Item 4.B reflect the new organization which took effect as of January 1, 2012. However, we continue to provide certain historical information elsewhere in this 20-F, including certain sales data, organized by the prior therapeutic areas.

        The Pharmaceuticals Division is the largest contributor among the six divisions of Novartis and reported consolidated net sales of $32.5 billion in 2011, which represented 56% of the Group's net sales.

        The division is made up of approximately 80 affiliated companies which together employed 60,527 full-time equivalent associates as of December 31, 2011, and sell products in approximately 140 countries. The product portfolio of the Pharmaceuticals Division includes more than 40 key marketed products, many of which are leaders in their respective therapeutic areas. In addition, the division's portfolio of development projects includes 130 potential new products, and new indications or new formulations for existing products in various stages of clinical development.


Pharmaceuticals Division Products

        The following table and summaries describe certain key marketed products, including recently launched products, in our Pharmaceuticals Division. While we intend to sell our marketed products throughout the world, not all products and indications are currently available in every country. Compounds and new indications in development are subject to required regulatory approvals and, in certain instances, contractual limitations. These compounds and indications are in various stages of development throughout the world. It may not be possible to obtain regulatory approval for any or all of the new compounds and new indications referred to in this Form 20-F in every country, or at all. In addition, for some of our products, we are required to conduct post-approval studies (Phase IV) to evaluate long-term effects or to gather information on the use of the products under special conditions. See "—Regulation" for further information on the approval process. Certain of the products listed below have lost patent protection or are otherwise subject to generic competition. Others are subject to patent challenges by potential generic competitors. See below and "—Intellectual Property" for further information on the patent status of our Pharmaceuticals Division's products.

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Key Marketed Products

 
Therapeutic area
  Product   Common name   Indication(1)   Formulation
Oncology   Afinitor/Votubia   everolimus   Advanced renal cell carcinoma after failure of treatment with VEGF-targeted therapy
Advanced pancreatic neuroendocrine tumors
SEGA associated with tuberous sclerosis
  Tablet
     
    Exjade   deferasirox   Chronic iron overload due to blood transfusions   Dispersible tablet for oral suspension
     
    Femara   letrozole   Hormone receptor positive early breast cancer in postmenopausal women following surgery (upfront adjuvant therapy)
Early breast cancer in post-menopausal women following standard tamoxifen therapy (extended adjuvant therapy)
Advanced breast cancer in post-menopausal women (both as first- and second-line therapies)
  Tablet
     
    Gleevec/
Glivec
  imatinib mesylate/imatinib   Certain forms of chronic myeloid leukemia
Certain forms of gastrointestinal stromal tumors
Certain forms of acute lymphoblastic leukemia
Dermatofibrosarcoma protuberans
Hypereosinophilic syndrome
Aggressive systemic mastocytosis
Myelodysplastic/myeloproliferative diseases
  Tablet
     
    Sandostatin
LAR &
Sandostatin
SC
  octreotide acetate for injectable suspension & octreotide acetate   Acromegaly
Symptom control for certain forms of neuroendocrine tumors
Delay of tumor progression in patients with midgut tumors
  Vial
Ampoule/pre-filled syringe
     
    Tasigna   nilotinib   Certain forms of chronic myeloid leukemia in patients resistant or intolerant to prior treatment including Gleevec/Glivec
First line CML
  Capsule
     
    Zometa   zoledronic acid   Skeletal-related events from bone metastases (cancer that has spread to the bones) hypercalcemia of malignancy   Vial
Ready-to-use
 

(1)   Indications vary by country.

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Therapeutic area
  Product   Common name   Indication(1)   Formulation
Primary Care                
  Primary Care   Amturnide   aliskiren, amlodipine besylate and hydrochlorothiazide   Hypertension   Tablet
     
    Arcapta Neohaler/Onbrez Breezhaler   indacaterol   Chronic obstructive pulmonary disease   Neohaler/Breezhaler inhaler (powder in hard capsules for inhalation)
     
    Diovan   valsartan   Hypertension
Heart failure
Post-myocardial infarction
  Capsule
Tablet
Oral Solution
     
    Diovan HCT/
Co-Diovan
  valsartan and hydrochlorothiazide   Hypertension   Tablet
     
    Eucreas   vildagliptin and metformin   Type 2 diabetes   Tablet
     
    Exforge   valsartan and amlodipine besylate   Hypertension   Tablet
     
    Exforge HCT   valsartan, amlodipine besylate and hydrochlorothiazide   Hypertension   Tablet
     
    Galvus   vildagliptin   Type 2 diabetes   Tablet
     
    Tekturna/Rasilez   aliskiren   Hypertension   Tablet
     
    Tekturna HCT/Rasilez HCT   aliskiren and hydrochlorothiazide   Hypertension   Tablet
     
    Tekamlo/Rasilamlo   aliskiren and amlodipine besylate   Hypertension   Tablet
     
    Valturna   aliskiren and valsartan   Hypertension   Tablet
 

(1)   Indications vary by country.

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Therapeutic area
  Product   Common name   Indication(1)   Formulation
  Established Medicines   Clozaril/
Leponex
  clozapine   Treatment-resistant schizophrenia
Prevention and treatment of recurrent suicidal behavior in patients with schizophrenia and psychotic disorders
  Tablet
     
    Coartem/
Riamet
  artemether and lumefantrine   Plasmodium falciparum malaria or mixed infections that include Plasmodium falciparum
Standby emergency malaria treatment
  Tablet
Dispersible tablet for oral suspension
     
    Famvir   famciclovir   Acute herpes zoster including ophthalmic herpes zoster and decreased duration of post herpetic neuralgia
Acute treatment of first episode and recurrent genital herpes infections, and for the suppression of recurrent genital herpes
Treatment of recurrent herpes labialis (cold sores)
Indicated in immuno- compromised patients with herpes zoster or herpes simplex infections
  Tablet
     
    Focalin & Focalin XR   dexmethylphenidate HCl & dexmethylphenidate extended release   Attention deficit hyperactivity disorder   Tablet
Capsule
     
    Foradil   formoterol   Asthma
Chronic obstructive pulmonary disease
  Aerolizer (capsules)
Aerosol
     
    Lamisil   terbinafine   Fungal infection of the skin and nails caused by dermatophyte fungi Tinea capitis
Fungal infections of the skin for the treatment of tinea corporis, tinea cruris, tinea pedis and yeast infections of the skin caused by the genus Candida (e.g. Candida albicans)
  Tablet
Cream
DermGel
Solution
Spray
     
    Lescol/
Lescol XL
  fluvastatin sodium   Hypercholesterolemia and mixed dyslipidemia in adults
Secondary prevention of major adverse cardiac events
Slowing the progression of atherosclerosis
Heterozygous familial hypercholesterolemia in children and adolescents
  Capsule
Tablet
     
    Lotensin/
Cibacen
  benazepril hydrochloride   Hypertension
Adjunct therapy in congestive heart failure
Progressive chronic renal insufficiency
  Tablet
     
    Lotensin
HCT/
Cibadrex
  benazepril hydrochloride and hydrochlorothiazide   Hypertension   Tablet
     
    Miacalcin/
Miacalcic
  salmon calcitonin   Osteoporosis
Bone pain associated with osteolysis and/or osteopenia
Paget's disease
Neurodystrophic disorders (synonymous with algodystrophy or Sudeck's disease)
Hypercalcemia
  Nasal spray
Ampoule & multi-dose
Vial for injection or infusion
     
    Reclast/
Aclasta
  zoledronic acid/zoledronic acid 5 mg   Treatment of osteoporosis in postmenopausal women to reduce the incidence of hip, vertebral and non-vertebral fractures, and to increase bone mineral density
Prevention of clinical fractures after hip fracture in men and women
Treatment of osteoporosis in men
Treatment and prevention of glucocorticoid-induced osteoporosis
Prevention of postmenopausal osteoporosis
Treatment of Paget's disease of the bone
  Intravenous infusion
 

(1)   Indications vary by country.

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Therapeutic area
  Product   Common name   Indication(1)   Formulation
    Ritalin & Ritalin LA   methylphenidate HCl & methylphenidate HCl modified release   Attention deficit hyperactivity disorder and narcolepsy
Attention deficit hyperactivity disorder
  Tablet
     
    Tegretol   carbamazepine   Epilepsy
Pain associated with trigeminal neuralgia
Acute mania and bipolar affective disorders
  Tablet
Chewable tablet
Oral suspension
Suppository
     
    Trileptal   oxcarbazepine   Epilepsy   Tablet
Oral suspension
     
    Vivelle Dot/
Estradot
  estradiol hemihydrate   Estrogen replacement therapy for the treatment of the symptoms of menopause
Prevention of postmenopausal osteoporosis
  Transdermal patch
     
    Voltaren/Cataflam   diclofenac sodium/potassium/resinate/free acid   Inflammatory and degenerative forms of rheumatism
Post-traumatic and post-operative pain, inflammation and swelling
Painful and/or inflammatory conditions such as migraine, ear, nose and throat, or dysmenorrhoea
  Tablet
Capsule
Oral drop
Ampoule for injection
Suppository
Gel
Powder for oral solution
Transdermal patch
 

(1)   Indications vary by country.

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Therapeutic area
  Product   Common name   Indication(1)   Formulation
Specialty Care                
  Opthalmology   Lucentis   ranibizumab   Wet age-related macular degeneration
Visual impairment due to diabetic macular edema
Visual impairment due to macular edema secondary to retinal vein occlusion
  Intravitreal injection
 
  Neuroscience   Comtan   entacapone   Parkinson's disease   Tablet
     
    Exelon & Exelon Patch   rivastigmine tartrate & rivastigmine transdermal system   Mild-to-moderate Alzheimer's disease dementia
Dementia associated with Parkinson's disease
  Capsule
Oral solution
Transdermal patch
     
    Extavia   interferon beta-1b   Relapsing remitting and/or relapsing forms of multiple sclerosis (MS) in adult patients   Subcutaneous injection
     
    Fanapt   iloperidone   Schizophrenia   Tablet
     
    Gilenya   fingolimod   Relapsing forms of multiple sclerosis   Capsule
     
    Stalevo   carbidopa, levodopa and entacapone   Parkinson's disease patients who experience end-of-dose motor (or movement) fluctuations   Tablet
 
  Integrated Hospital Care   Cubicin   daptomycin   Complicated skin and soft tissue infections (cSSTI)
Right-sided endocarditis (RIE) due to Staphylococcus aureus
Staphylococcus aureus bacteremia when associated with RIE or cSSTI
  Powder for solution, injection or infusion
     
    Ilaris   canakinumab   Cryopyrin-associated periodic syndrome (CAPS)   Lyophilized powder for reconstitution for subcutaneous injection
     
    Myfortic   mycophenolic acid/mycophenolate sodium, USP   Prevention of graft rejection following kidney transplantation   Tablet
     
    Neoral/Sandimmune   cyclosporine, USP Modified   Prevention of rejection following certain organ transplantation
Non-transplantation autoimmune conditions such as severe psoriasis and severe rheumatoid arthritis
  Capsule
Oral solution
     
    Simulect   basiliximab   Prevention of acute organ rejection in de novo renal transplantation   Vial for injection or infusion
     
    Tyzeka/Sebivo   telbivudine   Chronic hepatitis B   Tablet
Oral solution
     
    Zortress/Certican   everolimus   Prevention of organ rejection (heart and kidney)   Tablet
Dispersible tablet for oral suspension
 
  Critical Care   Tobi/Tobi Podhaler   tobramycin   Pseudomonas aeruginosa infection in cystic fibrosis   Nebulizer solution/Inhalation powder
     
    Xolair   omalizumab   Allergic asthma   Lyophilized powder for reconstitution and liquid formulation in pre-filled syringes as subcutaneous injection
 

(1)   Indications vary by country.


Selected Leading Products

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Primary Care

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Specialty Care

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Compounds in Development

        The traditional model of development comprises three phases, which are defined as follows:

        Novartis, while essentially using the same model as a platform, has tailored the process to be simpler, more flexible and efficient. Our development paradigm consists of two parts: Exploratory and Confirmatory development. Exploratory development consists of clinical "proof of concept" (PoC) studies which are small clinical trials (typically 5-15 patients) that combine elements of traditional Phase I/II testing. These customized trials are designed to give early insights into issues such as safety, efficacy and toxicity for a drug in a given indication. Once a positive proof of concept has been established, the drug moves to the Confirmatory development stage. Confirmatory development has elements of traditional Phase II/III testing and includes trials aimed at confirming the safety and efficacy of the drug in the given indication leading up to submission of a dossier to health authorities for approval. Like traditional Phase III testing, this stage can also include trials which compare the drug to the current standard of care for the disease, in order to evaluate the drug's overall risk/benefit profile.

        The following table and paragraph summaries provide an overview of the key projects currently in the Confirmatory development stage within our Pharmaceuticals Division, including projects seeking to develop potential uses of new molecular entities, as well as potential additional indications or new formulations for already marketed products.

        A reference to a project being in registration means that it has been submitted to a health authority for marketing approval.


Selected Development Projects

 
Project/
Product
  Common name   Mechanism
of action
  Potential indication/
Disease area
  Therapeutic
area
  Formulation/
Route of
administration
  Year Project
Entered
Current
Development
Phase
  Planned filing
dates/Current
phase
ACZ885   canakinumab   Anti IL-1b monoclonal antibody   Gouty arthritis   Integrated Hospital Care   Subcutaneous injection   EU: 2010
US: 2011
  EU (registration)
US (registration/
             
            Systemic onset juvenile idiopathic arthritis   Integrated Hospital Care       2009   2012/III
             
            Diabetes mellitus   Critical Care       2009   ³ 2016/II
             
            Secondary prevention of cardiovascular events   Critical Care       2011   ³ 2016/III
 

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Project/
Product
  Common name   Mechanism
of action
  Potential indication/
Disease area
  Therapeutic
area
  Formulation/
Route of
administration
  Year Project
Entered
Current
Development
Phase
  Planned filing
dates/Current
phase
AEB071   sotrastaurin   Protein kinase C inhibitor   Prevention of organ rejection after transplantation—kidney and liver   Integrated Hospital Care   Oral   2006   ³ 2016/II
             
            Psoriasis   Integrated Hospital Care       2009   ³ 2016/II
 
AFQ056   mavoglurant   Metabotropic glutamate receptor 5 antagonist   Fragile X syndrome   Neuroscience   Oral   2010   2013/II
             
            L-dopa induced dyskinesia in Parkinson's disease           2006   2014/II
 
AIN457   secukinumab   Anti IL-17 monoclonal antibody   Psoriasis   Integrated Hospital Care   Lyophilized powder in vial;
Intravenous infusion, subcutaneous injection
  2011   2013/III
             
            Arthritidies (Rheumatoid arthritis, Ankylosing Spondylitis, Psoriatic Arthritis)           2011   2013/III
             
            Multiple sclerosis   Neuroscience       2009   ³2016/II
 
ATI355   TBD   Anti NOGO-A mAb   Spinal cord injury   Neuroscience   Intrathecal spinal injection   2006   ³2016/I
 
AUY922   TBD   ATP-competitive nongeldanamycin inhibitor of HSP90   Solid tumors   Oncology   Intravenous   2010   ³2016/II
 
BAF312   TBD   Sphingosine-1-
phosphate (S1P) receptor modulator
  Multiple sclerosis   Neuroscience   Tablet   2009   ³2016/II
 
BCT197   TBD   Anti-inflammatory agent   Chronic obstructive pulmonary disease   Primary Care   Oral   2011   ³2016/II
 
BEZ235   TBD   P13K/mTOR inhibitor   Solid tumors   Oncology   Oral   2011   2014/II
 
BGS649   TBD   Aromatase inhibitor   Obese hypogonadotropic hypogonadism   Critical care   Oral   2010   ³2016/II
 
BKM120   TBD   P13K inhibitor   Endometrial cancer   Oncology   Oral   2011   2014/II
 
CAD106   TBD   Beta-amyloid-protein immunotherapy   Alzheimer's disease   Neuroscience   Subcutaneous,
intramuscular injection
  2008   ³2016/II
 
DEB025   alisporivir   Cyclophilin inhibitor   Chronic hepatitis C   Integrated Hospital Care   Oral   2011   2013/III
 
Exjade   deferasirox   Iron chelator   Non-transfusion dependent thalassemia   Oncology   Oral   2011   EU (registration)
US (registration)
 
Gilenya   fingolimod   Sphingosine-1-
phosphate (S1P) receptor modulator
  Chronic inflammatory demyelinating poly-radiculoneuropathy   Neuroscience   Oral   2012   2014/II
 
HCD122   TBD   Anti-CD40 monoclonal antibody   Hematological tumors   Oncology   Intravenous   2011   2016/II
 
INC424   ruxolitinib   Janus kinase (JAK) inhibitor   Myelofibrosis   Oncology   Oral   2011   EU (registration)
             
            Polycythemia vera           2010   2014/III (outside US)
 
LBH589   panobinostat   Histone deactelylase inhibitor   Relapsed or relapsed-and-refractory Multiple Myeloma   Oncology   Oral   2009   2013/III
             
            Hematological cancers           2009   ³ 2016/II
 
LCI699   TBD   Aldosterone synthase inhibitor   Solid tumors   Oncology   Oral   2011   ³ 2016/II
 

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Project/
Product
  Common name   Mechanism
of action
  Potential indication/
Disease area
  Therapeutic
area
  Formulation/
Route of
administration
  Year Project
Entered
Current
Development
Phase
  Planned filing
dates/Current
phase
LCQ908   TBD   Diacylglycerol acyl transferase-1 inhibitor   Metabolic diseases   Critical Care   Tablet   2010   2014/II
 
LCZ696   TBD   Angiotensin receptor- Neprilysin Inhibitor   Heart failure   Critical Care   Oral   2009   2014/III
             
            Hypertension   Primary Care       2007   2014/II
 
LDE225   TBD   Oral smoothed inhibitor   Gorlin Syndrome Advanced basal cell carcinoma   Oncology   Oral   2011   2014/II
 
LFF571   TBD   Bacterial elongation factor Tu (EFTu) inhibitor   Clostridium difficile infection   Integrated Hospital Care   Oral   2010   ³2016/II
 
LGT209   TBD   Lipid modulator   Hypercholesterolemia   Critical Care   Oral   2011   ³2016/II
 
Lucentis   ranibizumab   Anti-VEGF monoclonal antibody fragment   Pathological myopia   Ophthalmology   Intravitreal injection   2010   2012/III
             
        Choroidal neovascularization and Macular edema   Ophthalmology           2010   ³2016/II
 
MEK162   TBD   MEK inhibitor   Solid tumors   Oncology   Oral   2011   ³2016/II
 
NIC002   TBD   Nicotine Qbeta therapeutic vaccine   Smoking cessation   Primary Care   Injection   2008   ³ 2016/II
 
NVA237   glycopyrronium bromide   Long-acting muscarinic antagonist   Chronic obstructive pulmonary disease   Primary Care   Inhalation   EU: 2011   EU (registration)
US (TBD)
 
PKC412   midostaurin   Signal transduction inhibitor   Aggressive systemic mastocytosis   Oncology   Oral   2005   2013/II
             
            Acute myeloid leukemia           2008   2014/III
 
QAW039   TBD   Anti-inflammatory agent   Asthma   Primary Care   Oral   2010   ³2016/II
 
QMF149   indacaterol and mometasone furoate   Long-acting beta2- agonist and inhaled corticosteroid   Chronic obstructive pulmonary disease   Primary Care   Inhalation   2007   2015/II
             
            Asthma           2007   2015/II
 
QTI571   imatinib mesylate   Protein tyrosine kinase inhibitor   Pulmonary arterial hypertension   Critical Care   Oral   2009   2012/III
 
QVA149   indacaterol and glycopyrronium bromide   Long-acting beta2- agonist and long-acting muscarinic antagonist   Chronic obstructive pulmonary disease   Primary Care   Inhalation   2010   2012/III
 
RAD001 (Afinitor)   everolimus   mTOR inhibitor   Tuberous sclerosis complex- Angiomyolipoma   Oncology   Tablet   2011   US (registration)
EU (registration)
             
            Advanced ER+HER2- breast cancer           2011   US (registration)
EU (registration)
             
            Breast cancer HER2-over-expressing, 1st line           2009   2013/III
             
            Breast HER2-over-
expressing 2nd/3rd line
          2009   2013/III
             
            Hepatocellular carcinoma           2010   2013/III
             
            Lymphoma           2009   2015/III
 
RLX030   TBD   Vascular modulator   Acute heart failure   Critical Care   Intravenous infusion   2009   2013/III
 

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Project/
Product
  Common name   Mechanism
of action
  Potential indication/
Disease area
  Therapeutic
area
  Formulation/
Route of
administration
  Year Project
Entered
Current
Development
Phase
  Planned filing
dates/Current
phase
SOM230   pasireotide   Somatostatin analogue   Cushing's disease   Oncology   Immediate release: subcutaneous injection   EU:2010
US:2011
  EU (registration),
US (2012/III)
             
            Acromagaly       Long-acting release: monthly intramuscular injection   2008   2012/III
             
            Carcinoid syndrome       Long-acting release: monthly intramuscular injection   2008   2013/III
 
Tasigna   nilotinib   Signal transduction inhibitor   metastatic melanoma with c-KIT mutation   Oncology   Capsule   2011   2014/II
 
Tobi Podhaler   tobramycin inhalation powder   Aminoglycoside antibiotic   Pseudomonas aeruginosa infection in cystic fibrosis patients   Critical Care   Dry powder inhalation   EU: 2011
US: 2010
  EU (approved)
US (2012/III)
 
Tekturna ATMOSPHERE   aliskiren   Direct renin inhibitor   Reduction of CV death/hospitalizations in chronic heart failure   Critical Care   Tablet   2009   2014/III
 
TKI258   dovitinib lactate   VEGFR1-3, FGFR 1-3, PDGFR angiogenesis inhibitor   Renal cell carcinoma   Oncology   Oral   2011   2013/III
             
            Solid tumors           2009   ³2016/II
 
Xolair   omalizumab   Anti-IgE monoclonal antibody   Chronic idiopathic urticaria   Critical Care   Lyophilized powder for reconstitution as subcutaneous injection   2011   2013/III
 
Zortress/Certican   everolimus   mTOR inhibitor   Prevention of organ rejection—liver   Integrated Hospital Care   Oral   EU: 2011
US: 2011
  EU (registration)
US (registration)
 

Key Compounds in Development (select products in Phases II, III and Registration)

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Projects Added To And Subtracted From The Development Table Since 2010

 
Project/Product
  Potential indication/
Disease area
  Change   Reason
AGO178   Major depressive disorder   Terminated   Clinical results did not meet required standards
 
AIN457   Non-infectious uveitis   Transferred to Alcon Division   Project was transferred to Alcon Division together with other Novartis Ophthalmics assets after our merger with Alcon, Inc.
 
AUY922   Solid tumors   Project Added   Entered confirmatory development
 
BGS649   Refractory endometriosis   Terminated   Clinical results did not meet required standards
 
Elidel®   Atopic dermatitis in infants   Divested   Novartis sold global rights to third party
 
Gilenya   Multiple sclerosis   Commercialized   Received formal approval in EU and Japan in 2011
 
Joicela   Osteoarthritis   Terminated   Novartis withdrew its European application for Joicela (lumiraxcoxib) in combination with a genetic biomarker test. The decision was based on the inability to provide additional requested data within the timeframe of the current procedure. We remain committed to personalized medicines and biomarker testing programs. Currently lumiracoxib is not under review by any health authorities and there are no plans to submit in the near term.
 
LBH589   Hodgkin's Lymphoma   Terminated   Received Refusal to File letter from FDA
 
LGT209   Hypercholesterolemia   Project added   Entered confirmatory development
 
Lucentis   Retinal vein occlusion   Commercialized   Received marketing approval in EU in 2011
 
PRT128   Chronic coronary heart disease   Terminated   Clinical results did not meet required standards
 
PTK796   Acute bacterial skin and skin structure infections, community-acquired bacterial pneumonia   Terminated   Regulatory approval timing became uncertain. Collaboration terminated; all rights returned to Paratek.
 
QAB149 (Arcapta Neohaler/Onbrez Breezhaler)   Chronic obstructive pulmonary disease   Commercialized   Received marketing approval in US and Japan
 
QAW039   Asthma   Project added   Entered confirmatory development
 
RAF265   Solid tumors   Project added   Entered confirmatory development
 
RAD001 (Afinitor)   Tuberous sclerosis complex- subependymal giant cell astrocytoma   Commercialized   Received marketing approval in EU
 
RAD001 (Afinitor)   Neuroendocrine tumors   Commercialized   Received marketing approval in US and EU
 
RAD001 (Afinitor)   Advanced gastric cancer   Terminated   Clinical results did not meet required standards
 
Tasigna   First line metastatic gastrointestinal stromal tumors   Terminated   Clinical results did not meet required standards
 
Tekamlo/Rasilamlo single pill combination   Hypertension   Commercialized   Received marketing approval in EU
 

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Project/Product
  Potential indication/
Disease area
  Change   Reason
Tekturna/Rasilez single-pill combination (three active ingredients)   Hypertension   Commercialized   Received marketing approval in EU
 


Principal Markets

        The Pharmaceuticals Division has a commercial presence in approximately 140 countries worldwide, but net sales are generally concentrated in the US, Europe and Japan, which together accounted for 78.4% of 2011 of the division's net sales. At the same time, sales from fast growing "emerging growth markets" have become increasingly important to us. See "Item 5. Operating and Financial Review and Prospects—5.A Operating Results—Factors Affecting Results of Operations—Fundamental Drivers Remain Strong—Growth of Emerging Markets." The following table sets forth certain data relating to our principal markets in the Pharmaceuticals Division.

Pharmaceuticals
  2011 Net sales to
third parties
 
 
  $ millions
  %
 

United States

    9,973     30.7  

Americas (except the United States)

    3,012     9.3  

Europe

    11,595     35.7  

Japan

    3,909     12.0  

Rest of the World

    4,019     12.3  
           

Total

    32,508     100  
           

        Many of our Pharmaceuticals Division's products are used for chronic conditions that require patients to consume the product over long periods of time, from months to years. Net sales of the vast majority of our products are not subject to material changes in seasonal demand.


Production

        The primary goal of our manufacturing and supply chain management program is to ensure the uninterrupted, timely and cost-effective supply of products that meet all product specifications. We manufacture our products at 6 bulk chemical and 13 pharmaceutical production facilities as well as three biotechnology sites. Bulk chemical production involves the manufacture of therapeutically active compounds, mainly by chemical synthesis or by biological processes such as fermentation. Pharmaceutical production involves the manufacture of "galenical" forms of pharmaceutical products such as tablets, capsules, liquids, ampoules, vials and creams. Major bulk chemical sites are located in Schweizerhalle, Switzerland; Grimsby, UK; Ringaskiddy, Ireland and Changshu, China. Significant pharmaceutical production facilities are located in Stein, Switzerland; Wehr, Germany; Singapore; Torre, Italy; Barbera, Spain; Suffern, New York; Sasayama, Japan and in various other locations. Our three biotechnology plants are in Huningue, France; Basel, Switzerland and Vacaville, California.

        During clinical trials, which can last several years, the manufacturing process for a particular product is rationalized and refined. By the time clinical trials are completed and products are launched, the manufacturing processes have been extensively tested and are considered stable. However, improvements to these manufacturing processes may continue over time.

        Raw materials for the manufacturing process are either produced in-house or purchased from a number of third-party suppliers. Where possible, our policy is to maintain multiple supply sources so that the business is not dependent on a single or limited number of suppliers. However, our ability to do so may at times be limited by regulatory or other requirements. We monitor market developments that could have an adverse effect on the

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supply of essential materials. Our suppliers of raw materials are required to comply with Novartis quality standards.

        The manufacture of our products is heavily regulated by governmental health authorities around the world, including the FDA In addition to regulatory requirements, many of our products involve technically complex manufacturing processes or require a supply of highly specialized raw materials. For some products and raw materials, we may also rely on a single source of supply.

        We have implemented a global manufacturing strategy to maximize business continuity in case of such events or other unforeseen catastrophic events. However, there can be no guarantee that we will be able to successfully manage such issues when they arise.


Marketing and Sales

        The Pharmaceuticals Division serves customers with approximately 3,600 field force representatives in the US (including supervisors), and an additional 18,937 in the rest of the world, as of December 31, 2011. These trained representatives, where permitted by law, present the therapeutic risks and benefits of our products to physicians, pharmacists, hospitals, insurance groups and managed care organizations. We are seeing the increasing influence of customer groups beyond the prescribers, and Novartis is responding by adapting our business practices. In addition, in January 2012, we announced that our US affiliate, Novartis Pharmaceuticals Corporation, planned to restructure its business to strengthen its competitive position in light of the impending loss in the US of our patent on Diovan, and the expected impact on worldwide sales of Tekturna/Rasilez after the ALTITUDE study termination. This restructuring is expected to result in a reduction of approximately 1,630 field force positions in the US in 2012, along with an additional 330 US headquarters positions.

        Although specific distribution patterns vary by country, Novartis generally sells its prescription drugs primarily to wholesale and retail drug distributors, hospitals, clinics, government agencies and managed healthcare providers.

        In the US, certain products can be advertised by way of television, newspaper and magazine advertising. Novartis also pursues co-promotion/co-marketing opportunities as well as licensing and distribution agreements with other companies when legally permitted as well as economically attractive.

        The marketplace for healthcare is evolving with the consumer becoming a more influential stakeholder in their healthcare decisions and looking for solutions to meet their changing needs. Where permitted by law, Novartis is seeking to tap into the power of the patient, delivering innovative solutions to drive loyalty and engagement.


Competition

        The global pharmaceutical market is highly competitive, and we compete against other major international corporations with substantial financial and other resources, which sell patented prescription pharmaceutical products. Competition within the industry is intense and extends across a wide range of commercial activities, including pricing, product characteristics, customer service, sales and marketing, and research and development.

        As is the case with other pharmaceutical companies selling patented pharmaceuticals, Novartis faces ever-increasing challenges from companies selling generic forms of our products following the expiry of patent protection, or of products which compete with our products. Generic companies may also gain entry to the market through successfully challenging our patents, but we vigorously use legally permissible remedies to defend our patent rights from generic challenges. In addition, we also face competition from over-the-counter (OTC) products that do not require a prescription from a physician. See also "—Regulation—Price Controls", below.

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Research and Development

        We are among the leaders in the pharmaceuticals industry in terms of research and development investment. Our Pharmaceuticals Division invested the following amounts in research and development:

 
  2011   2010(1)   2009(1)  
 
  $ billion   $ billion,
excluding
impairment
and
amortization
charges
  $ billion   $ billion,
excluding
impairment
and
amortization
charges
  $ billion   $ billion,
excluding
impairment
and
amortization
charges
 

Research and Exploratory Development

    2.7     2.6     2.4     2.3     2.2     2.1  

Confirmatory Development

    4.5     4.3     4.9     4.0     3.8     3.8  
                           

Total

    7.2     6.9     7.3     6.3     6.0     5.9  
                           

(1)
Restated to account for the transfer of Corporate Research to the Pharmaceuticals Division

        The $7.2 billion (6.9 billion excluding impairment and amortization charges) that the Pharmaceuticals Division invested in research and development in 2011 represented 22.1% (21.1% excluding impairment and amortization charges) of the division's total net sales. The Pharmaceuticals Division currently has 130 projects in clinical development.

        Innovation is critical to long-term success in the pharmaceutical industry. In 2010, the industry's average spend of pharmaceutical companies on research and development activities was 15% of net sales, but that number is declining as some companies increasingly opt to outsource research and development, in-license products and establish option- or risk-sharing deals with other companies. On the development side, many companies are entrusting the conduct of clinical trials to contract research organizations in an effort to cut costs. At Novartis, we have historically made the discovery and development of innovative medicines that address unmet patient needs a priority, and plan to continue to do so. Our Pharmaceuticals Division research and development investment—in excess of 20% of the division's net sales in both 2011 and 2010—reflects this.

        Research and Exploratory Development grew at constant currencies by $109 million (4.6%) in 2011 over 2010. The additional cost reflects our investment in scientific talent. At period rates, the currency impact added an additional $200 million, bringing total growth to $309 million (13%), increasing the amount invested in Research and Exploratory Development from $2.4 to $2.7 billion.

        Confirmatory Development expenditure in 2011 decreased by 7% to $4.5 billion. This included $0.3 billion in impairments of intangible assets primarily related to the discontinuation of PTK796, PRT128, and AGO178. In 2010, impairments of intangible assets were $0.9 billion. Excluding impairments, Confirmatory Development expenditure increased 7% to $4.3 billion in 2011 and represented 13.1% of net sales in 2011 compared to 13.2% in 2010.

        The discovery and development of a new drug is a lengthy process, usually requiring 10 to 15 years from the initial research to bringing a drug to market, including six to eight years from Phase I clinical trials to market. At each of these steps, there is a substantial risk that a compound will not meet the requirements to progress further. In such an event, we may be required to abandon a compound in which we have made a substantial investment.

        We manage our research and development expenditures across our entire portfolio in accordance with our internal priorities. We make decisions about whether or not to proceed with development projects on a project-by-project basis. These decisions are based on the project's potential to meet a significant unmet medical need or to improve patient outcomes, the strength of the science underlying the project, and the potential of the project (subject to the risks inherent in pharmaceutical development) to generate significant positive financial results for the Company. Once a management decision has been made to proceed with the development of a particular molecule, the level of research and development investment required will be driven by many factors including the medical indications for which it is being developed; the number of indications being pursued; whether the molecule is of a chemical or biological nature; the stage of development; and the level of evidence necessary to demonstrate clinical efficacy and safety.

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Research program

        Our Research program is responsible for the discovery of new medicines. In 2003, we established the Novartis Institutes for BioMedical Research (NIBR).

        At NIBR's headquarters in Cambridge, Massachusetts, more than 1,850 scientists and associates conduct research into disease areas such as cardiovascular and metabolism disease, infectious disease, oncology, muscle disorders and ophthalmology. An additional 4,500 scientists and technology experts conduct research in Switzerland, UK, Italy, Singapore, China and four other US sites. Research is conducted at these sites in the areas of neuroscience, autoimmune disease, oncology, cardiovascular disease, gastrointestinal disease and respiratory disease. Research platforms such as the Center for Proteomic Chemistry are headquartered in the NIBR site in Basel, Switzerland. In addition, The Novartis Institute for Tropical Diseases, Novartis Vaccines for Global Health, the Frederich Miescher Institute, and the Genomics Institute of the Novartis Research Foundation, focus on basic genetic and genomic research as well as research into diseases of the developing world such as malaria, tuberculosis, dengue and typhoid fever.

        In June 2011, the ophthalmology disease research group at our Alcon Division joined NIBR's ophthalmology research group. Research continues to focus on the discovery and development of chemical and biological compounds for treating diseases of the eye, with a particular focus on diseases such as glaucoma and macular degeneration.

        In April 2011, we announced that the gastrointestinal research teams based in Horsham, UK would be co-located with teams in Basel and Cambridge. In October 2011, we announced proposals that would impact our Basel-based associates working in Neuroscience, pre-clinical safety respiratory, kinase, translational medicine and siRNA research. Both announcements are part of our ongoing effort to co-locate teams, pursue new scientific directions and take advantage of outsourcing opportunities.

        In October 2010, we announced that we would invest $600 million over the next five years to build new laboratory and office space in Cambridge on an area of land close to our research facilities on Massachusetts Avenue.

        Our principal goal is to discover new medicines for diseases with high unmet medical need. To do this we focus our work in areas where we have sufficient scientific understanding and believe we have the potential to dramatically change the practice of medicine. This requires the hiring and retention of the best talent, a focus on fundamental disease mechanisms that are relevant across different disease areas, continuous improvement in technologies for drug discovery and potential therapies, close alliance with clinical colleagues, and the establishment of appropriate external complementary alliances.

        All drug candidates are taken to the clinic via "proof-of-concept" trials to enable rapid testing of the fundamental efficacy of the drug while collecting basic information on pharmacokinetics, safety and tolerability, and adhering to the guidance for early clinical testing set forth by health authorities.

Development program

        The focus of our Development program is to determine whether new drugs are safe and effective in humans. As previously described (see "—Compounds in Development"), we view the development process as generally consisting of an Exploratory phase where a "proof of concept" is established, and a Confirmatory phase where this concept is confirmed in large numbers of patients. Within this paradigm, clinical trials of drug candidates generally proceed through the traditional three phases: I, II and III. In Phase I clinical trials, a drug is usually tested with about 5 to 15 patients. The tests study the drug's safety profile, including the safe dosage range. The studies also determine how a drug is absorbed, distributed, metabolized and excreted, and the duration of its action. In Phase II clinical trials, the drug is tested in controlled studies of approximately 100 to 300 volunteer patients to assess the drug's effectiveness and safety, and to establish a proper dose. In Phase III clinical trials, the drug is further tested on larger numbers of volunteer patients in clinics and hospitals. In each of these phases, physicians monitor volunteer patients closely to assess the drug's safety and efficacy. The vast amount of data that must be collected and evaluated makes clinical testing the most time-consuming and expensive part of new drug development. The next stage in the drug development process is to seek registration for the new drug. See "—Regulation."

        At each of these phases of clinical development, our activities are managed by our Innovation Management Board (IMB). The IMB is responsible for oversight over all major aspects of our development portfolio. In particular, the IMB is responsible for the endorsement of proposals to commence the first clinical trials of a development compound, and of major project phase transitions and milestones following a positive Proof of Concept outcome, including transitions to full development and the decision to submit a drug to health

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authorities. The IMB is also responsible for project discontinuations, for the endorsement of overall development strategy and the endorsement of development project priorities. The IMB is chaired by the Head of Development of our Pharmaceuticals Division and has representatives from Novartis senior management, as well as experts from a variety of fields among its core members and extended membership.

Novartis Molecular Diagnostics

        Recent advances in biology and bioinformatics have led to a much deeper understanding of the genetic underpinnings of disease and drug targets. Novartis Molecular Diagnostics (MDx), an integrated unit within our Pharmaceuticals Division, is working to capitalize on these scientific advances to develop innovative diagnostic tests which potentially could improve physicians' ability to optimize patient outcomes and to administer the right treatment to the right patient at the right time.

        At its core, Novartis MDx is rooted in our leadership in drug discovery and development, and advancing "personalized medicine" is a key component of our overall strategy. Working closely with, and building on the strong science of NIBR and our Pharmaceuticals Division, MDx works to bring the full power of our internal capabilities and resources to bear in an effort to develop and commercialize important new diagnostic tests to support our development products and disease areas. Additionally, MDx strategically works with external collaborators to leverage technologies and capabilities that fit our diagnostic requirements.

        In early 2011, Novartis MDx expanded its offerings through the acquisition of Genoptix Medical Laboratory, located in Carlsbad, California. With this new asset, Novartis MDx provides comprehensive laboratory services to community-based hematologists and oncologists. Our aim is to improve health outcomes for patients by advancing the ability of physicians to define and monitor individualized treatment programs.

        Novartis MDx remains committed to addressing unmet medical need regardless of market size. We continue to build our broad suite of diagnostic tools and services to improve patient outcomes. We have developed a robust and expanding portfolio of molecular diagnostic programs and aim for multiple launches over the next few years to expand on the current offerings provided through Genoptix.

Alliances and acquisitions

        Our Pharmaceuticals Division enters into business development agreements with other pharmaceutical and biotechnology companies and with academic institutions in order to develop new products and access new markets. We license products that complement our current product line and are appropriate to our business strategy. Therapeutic area strategies have been established to focus on alliances and acquisition activities for key disease areas/indications that are expected to be growth drivers in the future. We review products and compounds we are considering licensing using the same criteria as we use for our own internally discovered drugs.


Regulation

        The international pharmaceutical industry is highly regulated. Regulatory authorities around the world administer numerous laws and regulations regarding the testing, approval, manufacturing, importing, labeling and marketing of drugs, and also review the safety and efficacy of pharmaceutical products. In particular, extensive controls exist on the non-clinical and clinical development of pharmaceutical products. These regulatory requirements, and the implementation of them by local health authorities around the globe, are a major factor in determining whether a substance can be developed into a marketable product, and the amount of time and expense associated with that development.

        Health authorities, including those in the US, EU, Switzerland and Japan, have high standards of technical evaluation. The introduction of new pharmaceutical products generally entails a lengthy approval process. Of particular importance is the requirement in all major countries that products be authorized or registered prior to marketing, and that such authorization or registration be subsequently maintained. In recent years, the registration process has required increased testing and documentation for clearance of new drugs, with a corresponding increase in the expense of product introduction.

        To register a pharmaceutical product, a registration dossier containing evidence establishing the quality, safety and efficacy of the product must be submitted to regulatory authorities. Generally, a therapeutic product must be registered in each country in which it will be sold. In every country, the submission of an application to a regulatory authority does not guarantee that approval to market the product will be granted. Although the criteria for the registration of therapeutic drugs are similar in most countries, the formal structure of the necessary registration documents and the specific requirements, including risk tolerance, of the local health authorities varies significantly from country to country. It is possible that a drug can be registered and marketed in one

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country while the registration authority in another country may, prior to registration, request additional information from the pharmaceutical company or even reject the product. It is also possible that a drug may be approved for different indications in different countries.

        The registration process generally takes between six months and several years, depending on the country, the quality of the data submitted, the efficiency of the registration authority's procedures and the nature of the product. Many countries provide for accelerated processing of registration applications for innovative products of particular therapeutic interest. In recent years, intensive efforts have been made among the US, the EU and Japan to harmonize registration requirements in order to achieve shorter development and registration times for medical products. However, the requirement in many countries to negotiate selling prices or reimbursement levels with government regulators can substantially extend the time until a product may finally be launched to the market.

        The following provides a summary of the regulatory processes in the principal markets served by Pharmaceuticals Division affiliates:

United States

        In the US, applications for drug registration are submitted to and reviewed by the FDA. The FDA regulates the testing, manufacturing, labeling and approval for marketing of pharmaceutical products intended for commercialization in the US. The FDA continues to monitor the safety of pharmaceutical products after they have been approved for marketing in the US market. The pharmaceutical development and registration process is typically intensive, lengthy and rigorous. When a pharmaceutical company has gathered data which it believes sufficiently demonstrates a drug's quality, safety and efficacy, then the company may file a New Drug Application (NDA) or biologics license application (BLA), as applicable, for the drug. The NDA or BLA must contain all the scientific information that has been gathered about the drug and typically includes information regarding the clinical experiences of patients tested in the drug's clinical trials. A Supplemental New Drug Application (sNDA) or BLA amendment must be filed for new indications for a previously approved drug.

        Once an NDA or BLA is submitted, the FDA assigns reviewers from its biopharmaceutics, chemistry, clinical microbiology, pharmacology/toxicology, and statistics staff. After a complete review, these content experts then provide written evaluations of the NDA or BLA. These recommendations are consolidated and are used by the Senior FDA staff in its final evaluation of the NDA/BLA. Based on that final evaluation, FDA then provides to the NDA or BLA's sponsor an approval, or a "complete response" letter if the NDA or BLA application is not approved. If not approved, the letter will state the specific deficiencies in the NDA or BLA which need to be addressed. The sponsor must then submit an adequate response to the deficiencies in order to restart the review procedure.

        Once the FDA has approved an NDA or BLA or sNDA or BLA amendment, the company can make the new drug available for physicians to prescribe. The drug owner must submit periodic reports to the FDA, including any cases of adverse reactions. For some medications, the FDA requires additional post-approval studies (Phase IV) to evaluate long-term effects or to gather information on the use of the product under special conditions.

        Throughout the life cycle of a product, the FDA also requires compliance with standards relating to good laboratory, clinical, manufacturing and promotional practices.

European Union

        In the EU, there are three main procedures for application for authorization to market pharmaceutical products in the EU Member States, the Centralized Procedure, the Mutual Recognition Procedure and the Decentralized Procedure. It is also possible to obtain a national authorization for products intended for commercialization in a single EU member state only, or for additional indications for licensed products.

        Under the Centralized Procedure, applications are made to the European Medicines Agency (EMA) for an authorization which is valid for the European Community. The Centralized Procedure is mandatory for all biotechnology products and for new chemical entities in cancer, neurodegenerative disorders, diabetes and AIDS, autoimmune diseases or other immune dysfunctions and optional for other new chemical entities or innovative medicinal products or in the interest of public health. When a pharmaceutical company has gathered data which it believes sufficiently demonstrates a drug's quality, safety and efficacy, then the company may submit an application to the EMA. The EMA then receives and validates the application, and appoints a Rapporteur and Co-Rapporteur to review it. The entire review cycle must be completed within 210 days, although there is a "clock stop" at day 120, to allow the company to respond to questions set forth in the Rapporteur and Co-Rapporteur's

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Assessment Report. When the company's complete response is received by the EMA, the clock restarts on day 121. If there are further aspects of the dossier requiring clarification, the EMA will then request an Oral Explanation on day 180, in which the sponsor must appear before the EMA's Scientific Committee (the CHMP) to provide the requested additional information. On day 210, the CHMP will then take a vote to recommend the approval or non-approval of the application. The final decision under this Centralized Procedure is an EU Community decision which is applicable to all Member States. This decision occurs on average 60 days after a positive CHMP recommendation.

        Under the Mutual Recognition Procedure (MRP), the company first obtains a marketing authorization from a single EU member state, called the Reference Member State (RMS). In the Decentralized Procedure (DCP) the application is done simultaneously in selected or all Member States if a medicinal product has not yet been authorized in a Member State. During the DCP, the RMS drafts an Assessment Report within 120 days. Within an additional 90 days the Concerned Member States (CMS) review the application and can issue objections or requests for additional information. On Day 90, each CMS must be assured that the product is safe and effective, and that it will cause no risks to the public health. Once an agreement has been reached, each Member State grants national marketing authorizations for the product.

        After the Marketing Authorizations have been granted, the company must submit periodic safety reports to the EMA (if approval was granted under the Centralized Procedure) or to the National Health Authorities (if approval was granted under the DCP or the MRP). In addition, several Pharmacovigilance measures must be implemented and monitored including Adverse Event collection, evaluation and expedited reporting and implementation as well as up-date of Risk Management Plans.

        European Marketing Authorizations have an initial duration of five years. After this time, the Marketing Authorization may be renewed by the competent authority on the basis of re-evaluation of the risk/benefit balance. Once renewed the Marketing Authorization is valid for an unlimited period. Any Marketing Authorization which is not followed within three years of its granting by the actual placing on the market of the corresponding medicinal product shall cease to be valid.

Japan

        In Japan, applications for new products are made through the Pharmaceutical and Medical Devices Agency (PMDA). Once an NDA is submitted, a review team is formed consisting of specialized officials of the PMDA, including chemistry/manufacturing, non-clinical, clinical and biostatistics. While a team evaluation is carried out, a data reliability survey and Good Clinical Practice inspection are carried out by the Office of Conformity Audit of the PMDA. Team evaluation results are passed to the PMDA's external experts who then report back to the PMDA. After a further team evaluation, a report is provided to the Ministry of Health, Labor and Welfare (MHLW), which makes a final determination for approval and refers this to the Council on Drugs and Foods Sanitation which then advises the MHLW on final approvability. Marketing and distribution approvals require a review to determine whether or not the product in the application is suitable as a drug to be manufactured and distributed by a person who has obtained a manufacturing and distribution business license for the type of drug concerned and confirmation that the product has been manufactured in a plant compliant with Good Manufacturing Practices.

        Once the MHLW has approved the application, the company can make the new drug available for physicians to prescribe. After that, the MHLW has listed its national health insurance price within 60 days (or 90 days) from the approval, and physicians can obtain reimbursement. For some medications, the MHLW requires additional post-approval studies (Phase IV) to evaluate safety, effects and/or to gather information on the use of the product under special conditions. The MHLW also requires the drug's sponsor to submit periodic safety update reports. Within three months from the specified re-examination period, which is designated at the time of the approval of the application for the new product, the company must submit a re-examination application to enable the drug's safety and efficacy to be reassessed against approved labeling by the PMDA.


Price Controls

        In most of the markets where we operate, the prices of pharmaceutical products are subject to both direct and indirect price controls and to drug reimbursement programs with varying price control mechanisms. Due to increasing political pressure and governmental budget constraints, we expect these mechanisms to remain in place—and to perhaps even be strengthened—and to have a negative influence on the prices we are able to charge for our products.

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Intellectual Property

        We attach great importance to patents, trademarks, copyrights and know-how, including research data, in order to protect our investment in research and development, manufacturing and marketing. It is our policy to

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seek the broadest protection available under applicable laws for significant product developments in all major markets. Among other things, patents may cover the products themselves, including the product's active ingredient and its formulation. Patents may cover processes for manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the products. Patents may also cover particular uses of a product, such as its use to treat a particular disease, or its dosage regimen. In addition, patents may cover assays or tests for certain diseases or biomarkers, which will improve patient outcomes when administered certain drugs, as well as assays, research tools and other techniques used to identify new drugs. The protection offered by such patents extends for varying periods depending on the grant and duration of patents in the various countries or region. The protection afforded, which may vary from country to country, depends upon the type of patent and its scope of coverage.

        In addition to patent protection, various countries offer data or marketing exclusivities for a proscribed period of time. Data exclusivity may be available which would preclude a potential competitor from filing a regulatory application for a set period of time that relies on the sponsor's clinical trial data, or the regulatory authority from approving the application. The data exclusivity period can vary depending upon the type of data included in the sponsor's application. When it is available, market exclusivity, unlike data exclusivity, precludes a competitor from obtaining FDA approval for a product even if a competitor's application relies on its own data.

        Patents.    In the United States, a patent issued for an application filed today will receive a term of 20 years from the application filing date, subject to potential adjustments for Patent Office delay. A US pharmaceutical patent which claims a product, method of treatment using a product, or method of manufacturing a product, may be eligible for an extension of the patent term based on the time the FDA took to approve the product. This type of extension may only extend the patent term for a maximum of 5 years, and may not extend the patent term beyond 14 years from regulatory approval. Only one patent may be extended for any product based on FDA delay.

        In practice, however, it is not uncommon for significantly more than the 5 year maximum patent extension period to pass between the time that a patent application is filed for a product and the time that the product is approved by the FDA. As a result, it is rarely the case that, at the time a product is approved by FDA, it will have the full 20 years of remaining patent life. Rather, in our experience, it is not uncommon that, at the date of approval, a product will have from 13 to 16 years of patent life remaining, including all extensions available at that time.

        Data and Market Exclusivity.    In addition to patent exclusivities, the FDA may provide data or market exclusivity for a new chemical entity or an "orphan drug," each of which run in parallel to any patent protection. Data exclusivity prevents a potential generic competitor from relying on clinical trial data which were generated by the sponsor when establishing the safety and efficacy of its competing product. Market exclusivity prohibits any marketing of the same drug for the same indication.

        Patents.    Patent applications in Europe may be filed in the European Patent Office (EPO) or in a particular country in Europe. The EPO system permits a single application to be granted for the whole of the EU, plus other non-EU countries, such as Switzerland and Turkey. A patent granted by the EPO or a European country office will expire no later than 21 years from the earliest patent application on which the patent is based.

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Pharmaceutical patents can also be granted a further period of exclusivity under the Supplementary Protection Certificate (SPC) system. SPCs are designed to compensate the owner of the patent for the time it took to receive marketing authorization by the European Health Authorities. An SPC may be granted to provide, in combination with the patent, up to 15 years of exclusivity from the date of the first European marketing authorization. But the SPC cannot last longer than 5 years. The SPC duration can additionally be extended by a further 6 months if the product is the subject of an agreed pediatric investigation plan. The post-grant phase of patents, including the SPC system, is currently administered on a country-by-country basis under national laws which, while differing, are intended to, but do not always, have the same effect.

        As in the US, in practice, however, it is not uncommon for the granting of an SPC to not fully compensate the owner of a patent for the time it took to receive marketing authorization by the European Health Authorities. Rather, since it can often take from 5 to 10 years to obtain a granted patent in Europe after the filing of the application, and since it can commonly take longer than this to obtain a marketing authorization for a pharmaceutical product in Europe, it is not uncommon that a pharmaceutical product, at the date of approval, will have a patent lifetime of 10 to 15 years, including all extensions available at that time.

        Data and Market Exclusivity.    In addition to patent exclusivity, the EU also provides a system of regulatory data exclusivity for authorized human medicines, which runs in parallel to any patent protection. The system for drugs being approved today is usually referred to as "8+2+1" because it provides: an initial period of 8 years of data exclusivity, during which a competitor cannot rely on the relevant data; a further period of 2 years of market exclusivity, during which the data can be used to support applications for marketing authorization, but the competitive product cannot be launched; and a possible 1 year extension of the market exclusivity period if, during the initial 8 year data exclusivity period, the sponsor registered a new therapeutic indication with "significant clinical benefit." This system applies both to national and centralized authorizations. Since it has been in force only since late 2005, the first 8 year period of data exclusivity has not yet expired, and many medicines are instead covered by the previous system in which EU member states provided either 6 or 10 years of data exclusivity.

        The EU also has an orphan drug system for medicines similar to the US system. If a medicine is designated as an orphan drug, then it benefits from 10 years of market exclusivity after it is authorized, during which time a similar medicine for the same indication will not receive marketing authorization.

        In Japan, a patent can be issued for active pharmaceutical ingredients. Although methods of treatment, such as dosage and administration, are not patentable in Japan, pharmaceutical compositions for a specific dosage or administration method are patentable. Processes to make a pharmaceutical composition are also patentable. The patent term granted is generally 20 years from the filing date of the patent application on which the patent is based. It can be extended up to 5 years under the Japanese Patent Act to compensate for erosion against patent term caused by the time needed to obtain marketing authorization from the MHLW. Typically, it takes approximately 7 to 8 years to obtain marketing authorization in Japan. A patent application on a pharmaceutical substance is usually filed shortly before or at the time when clinical testing begins. Regarding compound patents, it commonly takes approximately 4 to 5 years or more from the patent application filing date to the date that the patent is ultimately granted. As a result, it is not uncommon for the effective term of patent protection for an active pharmaceutical ingredient in Japan to be approximately 20 to 21 years, if duly extended.

        The following is a summary of the patent expiration dates for certain key products of our Pharmaceuticals Division:

Oncology

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Primary Care

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Specialty Care

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Compounds in Development

        We file patent applications on our Compounds in Development during the course of the development process. The length of the term of any patents on our Compounds in Development cannot be known with certainty until after a compound is approved for marketing by a health authority. This is so because patent applications for many of the compounds will be pending during the course of the development process, but not yet granted. In addition, while certain patents may be applied for early in the development process, such as for the compound itself, it is not uncommon for additional patent applications to be applied for throughout the development process, such as for formulations, or additional uses. Further, in certain countries, data exclusivity and other regulatory exclusivity periods may be available, and may impact the period during which we would have the exclusive right to sell a product. These exclusivity periods generally run from the date the products are approved, and so their expiration dates cannot be known with certainty until the product approval dates are known. Finally, in the US and other countries, pharmaceutical products are eligible for a patent term extension for patent periods lost during product development and regulatory review. The law recognizes that product development and review by the FDA and other health authorities can take an extended period, and permits an extension of the patent term for a period related to the time taken for the conduct of clinical trials and for the health authority's review. However, the length of this extension and the patents to which it applies cannot be known in advance, but can only determined after the product is approved.

        Subject to these uncertainties, we provide the following information regarding our Compounds in Phase III Clinical Development, if any, which have been submitted for registration to the FDA or the EU's EMA:

The loss of patent protection can have a significant adverse impact on our Pharmaceuticals Division. There is also a risk that some countries, particularly countries in the developing world, may seek to impose limitations on the

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availability of patent protection for pharmaceutical products, or on the extent to which such protections may be enforced. In addition, even though we may own or license patents protecting our products, and conduct pre-launch freedom-to-operate analyses, a third party may nevertheless claim that one of our products infringes an unlicensed third-party patent. In addition, despite data exclusivity, a competitor could opt to incur the costs of conducting its own clinical trials and preparing its own regulatory application, and avoid data exclusivity altogether. As a result, there can be no assurance that our efforts to protect our intellectual property will be effective, or that we will be able to avoid substantial adverse effects from the loss of patent protection in the future.


ALCON

        Our Alcon Division is a leader in the research, development, manufacturing and marketing of eye care products worldwide. As of December 31, 2011, the Alcon Division employed 22,987 full-time equivalent associates worldwide in 75 countries. In 2011, the Alcon Division had consolidated net sales of $10.0 billion representing 17% of total Group net sales.

        Alcon is a global leader in eye care and with the April 2011 completion of the merger of Alcon into Novartis, eye care is now our fifth growth platform alongside innovative pharmaceuticals, generics, vaccines and diagnostics, and consumer health. The merger united the strengths of Alcon, CIBA Vision and Novartis Ophthalmics into one eye care business. See "Item 5. Operating and Financial Review and Prospects—Item 5.A Operating Results—Acquisitions, Divestments and Other Significant Transactions—Acquisitions in 2011—Corporate—Alcon, Inc." Our Alcon Division offers an extensive breadth of products serving the full lifecycle of patient needs across eye diseases, vision conditions and refractive errors and is our second largest Division based on sales.

        To meet the needs of ophthalmologists, surgeons, optometrists, opticians and physician specialists, Alcon operates with three businesses: Surgical, Ophthalmic Pharmaceuticals and Vision Care. Alcon sells products in 180 markets, and runs operations in 75 countries. Each business operates with specialized sales forces and marketing support.

        Alcon's dedication to research and development is important to our growth plans. Our Alcon Division has nearly 2,000 people dedicated to research and development. In addition, our Alcon Division will work together with the Novartis Institutes for BioMedical Research (NIBR), our global pharmaceutical research organization. This collaboration is expected to allow our Alcon Division to leverage the resources of NIBR in an effort to discover expanded ophthalmic research targets and to develop chemical and biologic compounds for the potential development in diseases of the eye, with a particular focus on diseases such as glaucoma and macular degeneration.


Alcon Division Products

Surgical

        Our Alcon Division's Surgical business is the market leader in global ophthalmic surgical product revenues, according to Market Scope, offering ophthalmic surgical equipment, instruments, disposable products and intraocular lenses for surgical procedures that address cataracts, vitreoretinal conditions, glaucoma and refractive errors.

        Alcon's Surgical portfolio includes the Infiniti vision system for cataract procedures, the Constellation vision system for retinal operations, and the AcrySof family of intraocular lenses (IOLs), including the AcrySof IQ, AcrySof IQ ReSTOR, AcrySof IQ Toric and AcrySof IQ ReSTOR Toric IOLs. In 2011, our Alcon Division launched the LenSx femtosecond laser, an emerging technology in cataract surgery which increases the precision and reproductibility for corneal incisions, capsulorhexis and lens fragmentation steps of the procedure. In addition, Alcon provides advanced viscoelastics, surgical solutions, surgical packs and other disposable products for cataract and vitreoretinal surgery.

Ophthalmic Pharmaceuticals

        Our Alcon Division's Ophthalmic Pharmaceuticals business combines Alcon's broad range of pharmaceuticals with selected ophthalmic products (excluding Lucentis) previously marketed by the Novartis Pharmaceuticals Division. The products treat chronic and acute diseases of the eye including glaucoma and allergies as well as anti-infective/anti-inflammatory and dry eye treatments. Our Alcon Division's Ophthalmic Pharmaceuticals business also oversees the line of professionally driven over-the-counter brands in artificial tears

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and ocular vitamins. Product highlights within our Alcon Division's Ophthalmic Pharmaceuticals portfolio include Travatan Z solution and DuoTrav solution for the treatment of elevated intraocular pressure associated with glaucoma; Vigamox solution for bacterial conjunctivitis; Pataday solution for ocular itching associated with allergic conjunctivitis; and Nevanac suspension for eye inflammation following cataract surgery.

        In April 2011, Alcon's portfolio of generic ophthalmic medicines sold through its Falcon business unit primarily in the US, was integrated into our Sandoz Division. Alcon will continue to manufacture the Falcon generics products and supply them to Sandoz. See "—Sandoz."

Vision Care

        Our Vision Care business combines the portfolio of contact lenses and lens care products formerly sold by our former CIBA Vision Business Unit, with Alcon's contact lens care solution portfolio. This includes Alcon's Opti-Free line of multi-purpose disinfecting solutions, and CIBA Vision's Clear Care and AOSept Plus hydrogen peroxide lens care solutions, as well as CIBA Vision's broad portfolio of silicone hydrogel, daily disposables and color contact lenses, offered respectively within the Air Optix, Dailies and Freshlook brands. Through the integration of CIBA Vision products, Alcon is now one of the largest manufacturers across contact lenses and lens care products.


Recently Launched Products

        Alcon launched a number of significant products in 2011, including:

Key Marketed Alcon Products

        The following tables set forth certain key marketed products in our Alcon Division. While we intend to sell our marketed products throughout the world, not all products and indications are currently available in every country.

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Surgical

        Alcon's Surgical portfolio includes cataract, vitreoretinal, refractive error and glaucoma equipment and devices. In 2011, Alcon achieved the number one selling position globally in intraocular lenses, cataract and vitreoretinal equipment and the number two selling position globally in refractive error equipment, according to Market Scope.

 
   

Cataract

  Infiniti vision system with the OZil torsional hand piece for cataract procedures
Acrysof family of intraocular lenses includes but is not limited to: Acrysof IQ ReSTOR, Acrysof IQ Toric and Acrysof IQ ReSTOR Toric advanced technology intraocular lenses that correct cataracts with presbyopia and/or astigmatism.
LenSx Laser used for specific steps in the cataract surgical procedure

Vitroretinal

 

Constellation vision system for vitreoretinal operations
Constellation Ultravit vitrectomy probe
Vitrectomy Probes in 23G, 25+
Purepoint Laser System
Grieshaber surgical instruments
Edgeplus Blade Trocar Cannula System

Refractive

 

Allegretto Wave Eye-Q Excimer Laser for LASIK vision correction
Wavelight FS200 laser for LASIK vision correction
Wavelight EX500 laser for LASIK vision correction
Acrysof Cachet phakic intraocular lens that corrects moderate to high myopia

Glaucoma

 

EX-PRESS Glaucoma Filtration Device

        In addition, Alcon provides advanced viscoelastics, surgical solutions, surgical packs and other disposable products for cataract and vitreoretinal surgery.

Ophthalmic Pharmaceuticals

        Alcon is number one in dollar market share globally with its allergy and ocular fluoroquinolone anti-infective products and the number two position globally for glaucoma treatments, according to IMS Health. In addition, Alcon offers the number one selling portfolio to treat ear infections, led by Ciprodex. Otic Suspension, according to IMS Health.

 
   

Glaucoma

  Travatan and Travatan Z Ophthalmic Solutions to lower intraocular pressure
Azopt Ophthalmic Suspension to lower intraocular pressure
Duotrav Ophthalmic Solution to lower intraocular pressure
(outside US markets)
Azarga Ophthalmic Suspension to lower intraocular pressure
(outside US markets)

Anti-Infectives

 

Vigamox and Moxeza Ophthalmic Solution for treatment of bacterial conjunctivitis

Anti-Inflammation

 

Nevanac Ophthalmic Suspension to treat pain following cataract surgery
Durezol Emulsion to treat pain and inflammation associated with eye surgery
TobraDex and TobraDex ST Ophthalmic Suspensions, combination anti-infective/anti-inflammatory products that target ocular conditions for which a corticosteroid is indicated and a bacterial infection or risk of bacterial infection exists

Dry Eye

 

The Systane family of over-the-counter dry eye products:
Systane Balance Lubricant Eye Drops
Systane Ultra Lubricant Eye Drops
Systane Lubricant Eye Drops
Systane Gel Drops

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Allergy

 

Patanol and Pataday Ophthalmic Solutions for itching associated with allergic conjunctivitis
Patanase nasal spray for seasonal nasal allergy symptoms

Ear Infections

 

Ciprodex* Otic Suspension to treat middle and outer ear infections

Ocular Nutrition

 

ICaps eye vitamin dietary supplements provide essential dietary ingredients to support eye health


*
CiproDex® is a registered trademark of Bayer, AG.

        The addition of the Novartis ophthalmics product line, with the exception of Lucentis, further enhanced Alcon's Ophthalmic Pharmaceuticals product offerings. The Novartis ophthalmics brands transferred to Alcon, effective July 1, 2011 (not all products and indications are currently available in every country and are subject to local regulatory requirements and timing—from a segment reporting perspective these products have been retroactively restated to the Alcon segment from January 1, 2009) were:

 
   

Glaucoma

  Nyogel reduction of intraocular pressure

Anti-Infection

 

Okacin ophthalmic solution for treatment of bacterial conjunctivitis
(Turkey only)

Anti-Inflammation

 

Voltaren Ophtha Treatment of postoperative inflammation after cataract surgery, temporary relief of pain and photophobia after refractive surgery

Dry Eye

 

Lubricants for eye dryness, discomfort or ocular fatigue:
Genteal
Viscotears
Oculotect (outside US markets)
Hypotears

Ocular Allergy

 

Zaditor Antihistamine Eye Drops for temporary relief of itchy eyes associated with eye allergies (over-the-counter in the US)
Zaditen Ophtha an H1-antagonist to fight allergic conjunctivitis
Livostin an H1-antagonist to fight allergic conjunctivitis (Canada only)

Other Products

 

Lid-Care lid cleansing solution
Vitalux nutrient supplements help patients with age-related macular degeneration maintain their vision (outside US markets)
Antikatarata supplementary treatment of lens opacities (Russia only)

Vision Care

        Through the integration of CIBA Vision products, Alcon is now one of the largest manufacturers of contact lenses and lens care products (not all products and indications are currently available in every country and are subject to local regulatory requirements and timing).

 
   

Contact Lenses

  Air Optix family of silicone hydrogel contact lenses
Dailies family of daily disposable contact lenses
FreshLook family of color contact lenses

Contact Lens Care

 

Opti-Free EverMoist MPDS (Opti-Free PureMoist in US)
Opti-Free RepleniSH Multi-Purpose Disinfecting Solution (MPDS)
Opti-Free Express MPDS
Clear Care Cleaning and Disinfecting Solution (AOSept Plus outside of North America)

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Alcon Products in Development

Franchise
  Project/Compound   Condition   Planned filing dates   Current phase
Surgical   AcrySof IQ ReSTOR IOL (new design)   Cataract   US 2013
EU 2012
Jpn 2013
  Advanced development

 

 

AcrySof IQ ReSTOR Toric IOL (new design)

 

Cataract

 

US 2014
EU 2012
Jpn 2014

 

Advanced development

 

 

Next generation Phaco system

 

Cataract

 

US 2012
EU 2013
Jpn 2013

 

Advanced development

 

 

AcrySof IQ ReSTOR Toric IOL

 

Cataract

 

US 2013
Jpn 2014

 

Advanced development

 

 

AcrySof IQ ReSTOR Toric IOL diopter range expansion

 

Cataract

 

US 2013
Jpn 2014

 

Advanced development

 

 

AcrySof IQ Toric IOL low diopter range expansion

 

Cataract

 

US 2013
Jpn 2014

 

Advanced development

 

 

AcrySof Cachet
angle-supported phakic lens

 

Refractive

 

US 2012(1)
Jpn 2013

 

Advanced development

 

 

Infiniti system upgrade

 

Cataract

 

US Filed
Jpn 2012

 

Filed
Advanced development

 

 

Allegretto EX-500 laser, new indication

 

Refractive

 

US 2013

 

Advanced development

Ophthalmic Pharmaceuticals

 

Azarga solution

 

Glaucoma

 

Jpn 2012

 

Phase III

 

 

New Combination

 

Glaucoma

 

US 2012
EU 2013

 

Phase III

 

 

Travoprost, new formulation

 

Glaucoma

 

US 2013
EU 2013
Jpn 2013

 

Phase III

 

 

Nepafenac, new formulation

 

Anti-inflammatory

 

U.S 2011
EU 2012

 

Filed
Phase III

 

 

Nepafenac, new
indication

 

Anti-inflammatory

 

EU 2011

 

Filed

 

 

Durezol emulsion, new indication

 

Anti-inflammatory

 

US 2011

 

Filed

 

 

AL-2354A

 

Dry eye

 

US 2012

 

Phase III

 

 

AL-43546

 

Dry eye

 

Jpn 2014

 

Phase III

 

 

Olopatadine, new formulation

 

Ocular allergy

 

US 2014 or later
EU 2014 or later

 

Phase III

 

 

Cilodex
AL-60371

 

Otic infections
Otic infections

 

EU 2011
US 2013

 

Filed
Phase III

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Franchise
  Project/Compound   Condition   Planned filing dates   Current phase
Vision Care   Dailies Total 1 lens   Contact lens   US 2011
Jpn 2012
  Filed
Advanced development

 

 

New Color Lens Design

 

Contact lens

 

EU 2011
Jpn 2011

 

Advanced development

 

 

New Toric Lens Design

 

Contact lens

 

US 2012
E.U 2012
Jpn 2014

 

Advanced development

 

 

New Multi-focal Design

 

Contact lens

 

US 2013
EU 2013
Jpn 2013

 

Advanced development

 

 

New Color Lens Design

 

Contact lens

 

US 2012
EU 2012

 

Advanced development

 

 

New lens solution

 

Lens solution

 

US 2013
EU 2013
Jpn 2014

 

Advanced development

 

 

Lens comfort drop

 

Lens solution

 

US 2012
EU 2012

 

Advanced development

(1)
This application was withdrawn in 2011 per FDA recommendation and will be re-filed in 2013 with complete 5-year data.


Principal Markets

        The principal markets for our Alcon Division include the US, Americas (except the US) and Europe. The following table sets forth the aggregate 2011 net sales of the Alcon Division by region:

Alcon Division
  2011 Net Sales to
third parties
 
 
  $ millions
  %
 

United States

    3,810     38.3  

Americas (except the United States)

    1,106     11.1  

Europe

    2,835     28.4  

Rest of the World

    2,207     22.2  
           

Total

    9,958     100  
           

        Sales of certain eye care Ophthalmic Pharmaceuticals products, including allergies, anti-inflammatory and dry eye, are subject to seasonal variation. Sales of the majority of our other products are not subject to material changes in seasonal demand.


Research and Development

        In 2011, the Alcon Division invested $892 million ($869 million excluding amortization and impairment charges) in research and development, which amounted to 9% of the Division's net sales. The Alcon Division invested $352 million ($351 million excluding amortization and impairment charges) in research and development in 2010.

        The Alcon Division has approximately 2,000 associates dedicated to research and development, working to address diseases and conditions that affect vision, such as cataracts, glaucoma, retina diseases, dry eye, infection, ocular allergies and refractive error. Our Alcon Division plans to invest more than $5 billion over the next five years to drive research and new product development in eye care. Alcon's pipeline strategy is built around a

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proof-of-concept qualification process, which quickly identifies opportunities that have the best chance for technical success and advances those projects, while terminating others with a low probability of success.

        The Novartis Institutes for BioMedical Research (NIBR) is the Novartis global pharmaceutical research organization that works to discover innovative medicines that treat disease and improve human health. See "—Pharmaceuticals—Research and Development." For Alcon's pharmaceutical business, NIBR will engage in research activities in an effort to discover expanded ophthalmic research targets and to develop chemical and biologic compounds for the potential development in diseases of the eye, with a particular focus on diseases such as glaucoma and macular degeneration.

        Research and development activities for Alcon's surgical business are focused on expanding intraocular lens capabilities to improve refractive outcomes and developing instruments for cataract, vitreoretinal and corneal refractive surgeries. The Vision Care business benefits from the addition of CIBA Vision's contact lenses and lens care products to Alcon's existing lens care portfolio. Research and development activities for the combined business focuses on new lens materials, coatings and designs to improve patient comfort, and on lens care solutions that provide the safety, disinfecting and cleaning power needed to help maintain ocular health.


Production

        We manufacture our Alcon Division's pharmaceutical and certain contact lens care products at seven facilities in the United States, Belgium, France, Spain, Brazil and Mexico. Additionally, Alcon recently completed construction on its new pharmaceutical plant in Singapore, which is targeted to start up in mid-2012. Our Alcon Division's surgical equipment and other surgical medical devices are manufactured at ten facilities in the United States, Belgium, Switzerland, Ireland, Germany and Israel. Our Alcon Division's contact lens and certain lens care production facilities are also in the US, Canada, Germany, Singapore, Malaysia and Indonesia.

        The goal of our supply chain strategy is to efficiently produce and distribute high quality products. The manufacture of our products is heavily regulated by governmental health authorities around the world, including the FDA. In addition to regulatory requirements, many of our products involve technically complex manufacturing processes or require a supply of highly specialized raw materials. For some products and raw materials, we may also rely on a single source of supply.

        We have implemented a global manufacturing strategy to maximize business continuity in case of such events or other unforeseen catastrophic events. However, there can be no guarantee that we will be able to successfully manage such issues when they arise.

        The manufacture of our products is heavily regulated by governmental health authorities around the world, including the FDA. Like our competitors, our Alcon Division has faced manufacturing issues, and has received Warning Letters relating to such manufacturing issues.

        For example, in late December 2010, CIBA Vision was issued a Warning Letter from the FDA regarding its Cidra, Puerto Rico manufacturing facility dedicated to producing CIBA Vision specialty soft contact lenses. CIBA Vision responded to the FDA concerns which were related to the need for additional documentation to support compliance in the areas of validation, corrective and preventative actions. In the second quarter of 2011, CIBA Vision discontinued its specialty soft contact lenses and closed its manufacturing facility in Cidra, Puerto Rico.


Marketing and Sales

        Our Alcon Division conducts sales and marketing activities around the world in 75 countries organized under five operating regions (US, Europe/Middle East/Africa, Latin America/Caribbean/Canada, Asia and Japan). The global sales force is organized around the Surgical, Ophthalmic Pharmaceuticals and Vision Care businesses.

        Most of our global Alcon marketing efforts are supported by advertising in trade publications and by marketing and sales representatives attending regional and national medical conferences. Marketing efforts are reinforced by targeted and timely promotional materials and direct mail to eye care practitioners in the office, hospital or surgery center setting. Technical service after the sale is provided and an integrated customer relationship management system is in place in many markets. Where applicable in our Pharmaceutical and Vision Care business, direct-to-consumer marketing campaigns are executed to promote selected products.

        While our Alcon Division markets all of its products by calling on medical professionals, direct customers and distribution methods differ across business lines. Although physicians write prescriptions, distributors, wholesalers, hospitals, government agencies and large retailers are the main direct customers for Alcon

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ophthalmic pharmaceutical products. Alcon surgical products are sold directly to hospitals and ambulatory surgical centers, although Alcon sells through distributors in certain markets outside the US. In most countries, contact lenses are available only by prescription. Our contact lenses can be purchased from eye care professionals, optical chains and large retailers, subject to country regulation. Lens care products can be found in major drugstores, food, mass merchandising and optical retail chains globally, subject to country regulations. In addition, mail order and Internet sales of contact lenses are becoming increasingly important channels in major markets worldwide.

        As a result of the changes in healthcare economics, managed care organizations have become the largest group of payors for healthcare services in the US. In an effort to control prescription drug costs, almost all managed care organizations use a formulary that lists specific drugs that can be prescribed and/or the amount of reimbursement for each drug. We have a dedicated managed care sales team that actively seeks to optimize formulary positions for our products.


Competition

        The eye care industry is highly competitive and subject to rapid technological change and evolving industry requirements and standards. Companies within this industry compete on technological leadership and innovation, quality and efficacy of their products, relationships with eye care professionals and healthcare providers, breadth and depth of product offering and pricing. The presence of these factors varies across our Alcon Division's product offerings, which provides a broad line of proprietary eye care products and competes in all major product categories in the eye care market, with the exception of eyeglasses.

        Even if our principal competitors generally do not have a comparable range of products, they can, and often do, form strategic alliances and enter into co-marketing agreements to achieve comparable coverage of the ophthalmic market. Particularly in the US, our branded OTC products compete against "store brand" products that are made with similar active ingredients as Alcon's. These products do not carry our Alcon Division's trusted brand names, but they also do not carry the burden of the expensive advertising and marketing which helped to establish a demand for the product. As a result, the store brands may be sold at lower prices. In recent years, consumers have increasingly begun to purchase store brand OTC products instead of branded products.


Regulation

        Our Ophthalmic Pharmaceuticals products are subject to the same regulatory procedures as are the products of our Pharmaceuticals Division. See "—Pharmaceuticals—Regulation."

        Our Surgical and Vision Care products are regulated as medical devices in the US and the EU. These jurisdictions each have risk-based classification systems that determine the type of information which must be provided to the local regulators in order to obtain the right to market a product. In the US, safety and effectiveness information for Class II and III devices must be reviewed by the FDA. There are two review procedures: a Pre-Market Approval (PMA) and a Pre-Market Notification (510(k)) submission. Under a PMA, the manufacturer must submit to the FDA supporting evidence sufficient to prove the safety and effectiveness of the device. The FDA review of a PMA usually takes 180 days from the date of filing of the application. Under Pre-Market Notification (510(k)), the manufacturer submits notification to the FDA that it intends to commence marketing the product, with data that establishes the product as substantially equivalent to another product already on the market. The FDA usually determines whether the device is substantially equivalent within 90 days.

        In the EU, the CE marking is required for all medical devices sold. By affixing the CE marking, the manufacturer certifies that a product is in compliance with provisions of the EU's Medical Device Directive. Most such products are subject to a self-certification process by the manufacturer, which requires the manufacturer to confirm that the product performs to appropriate standards. This allows the manufacturer to issue a Declaration of Conformity and to notify competent authorities in the EU that the manufacturer intends to market the product. In order to comply with European regulations, our Alcon Division maintains a full Quality Assurance system and is subject to routine auditing by a certified third party (a "notified body") to ensure that this quality system is in compliance with the requirements of the EU's Medical Device Directive as well as the requirements of the ISO quality systems' standard ISO 13485.


Intellectual Property

        We attach great importance to patents, trademarks, copyrights and know-how in order to protect our investment in research and development, manufacturing and marketing. It is our policy to seek the broadest possible protection for significant product developments in all major markets. Among other things, patents may cover the products themselves, including the product's active substance and its formulation. Patents may also cover the processes for manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the products. Patents may also cover particular uses of a product, such as its use to treat a particular disease, or its dosage regimen.

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        The protection offered by such patents extends for varying periods depending on the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage. We monitor our competitors and vigorously challenge infringements of our intellectual property.

        Worldwide, all of our major products are sold under trademarks that we consider in the aggregate to be important to our businesses as a whole. We consider trademark protection to be particularly important in the protection of our investment in the sales and marketing of our Surgical, Pharmaceutical and Vision Care businesses. The scope and duration of trademark protection varies widely throughout the world. In some countries, trademark protection continues only as long as the mark is used. Other countries require registration of trademarks and the payment of registration fees. Trademark registrations are generally for fixed, but renewable, terms.

        We rely on copyright protection in various jurisdictions to protect the exclusivity of the code for the software used in our surgical equipment. The scope of copyright protection for computer software varies throughout the world, although it is generally for a fixed term which begins on the date of copyright registration.


SANDOZ

        Our Sandoz Division is a world leader in developing, manufacturing and marketing generic pharmaceutical products, follow-on biopharmaceutical products and drug substances that are not protected by valid and enforceable third-party patents. As of December 31, 2011, affiliates of the Sandoz Division employed 24,377 full-time equivalent associates worldwide in approximately 130 countries. In 2011, the Sandoz Division achieved consolidated net sales of $9.5 billion, representing 16.2% of the Group's total net sales.

        The Sandoz Division is active in Retail Generics, Anti-Infectives, and Biopharmaceuticals & Oncology Injectables (the latter following the acquisition of EBEWE Pharma, completed in September 2009). In Retail Generics, we develop, manufacture and market active ingredients and finished dosage forms of pharmaceuticals, as well as supplying active ingredients to third parties. In Anti-Infectives, we develop and manufacture active pharmaceutical ingredients and intermediates—mainly antibiotics—for use by Retail Generics and for sale to third-party customers. In Biopharmaceuticals, we develop, manufacture and market protein- or other biotechnology-based products (known as biosimilars or follow-on biologics) and sell biotech manufacturing services to other companies, while in Oncology Injectables we develop, manufacture and market primarily cytotoxic products for the hospital market.

        According to IMS Health, Sandoz is the No. 2 company in worldwide generic sales. Also according to IMS Health, Sandoz Biopharmaceuticals is a leader in biosimilars, with three marketed medicines accounting for approximately half of the total biosimilar market segment in the combined markets of North America, Europe, Japan and Australia. In addition, it has a pipeline of eight to ten biosimilar molecules including biosimilar rituximab (Rituxan®/Mabthera®) and other monoclonal antibodies at various stages of development. The acquisition of EBEWE Pharma in 2009 and the launch of generic enoxaparin sodium (Lovenox®) in the US in 2010 have also helped Sandoz to achieve a global leadership position in generic injectables, based on IMS Health figures. In addition, Sandoz remains one of the leading manufacturers of antibiotics worldwide.

        Sandoz has three strategic priorities: to be first-to-market as originators' substance patents expire or become unenforceable, to be cost competitive by leveraging economies of scale in development and production, and to differentiate Sandoz based on its extensive global reach and advanced technical expertise in the development, manufacturing and marketing of differentiated generics and biosimilars.

        Following the July 2010 launch of Sandoz' generic enoxaparin (Lovenox)—the largest-ever launch in the US of a generic hospital medication—Retail Generics recorded more than $1 billion net sales in its first 12 months on the market. In September, Amphastar Pharmaceuticals announced FDA approval for its generic enoxaparin product. But in October 2011, Sandoz and its collaboration partner Momenta Pharmaceuticals obtained a preliminary injunction preventing Amphastar from launching its product. Growth in the US, the single largest market for Sandoz, was also driven by the late 2010 launch of Sandoz's gemcitabine (Gemzar®) authorized generic, as well as 2011 launches including generic docetaxel (Taxotere®), higher-strength generic amlodipine-benazepril (Lotrel), generic meropenem (Merem®) injection, and the formation of a women's health portfolio with generic Seasonale®, Nordette®, Yaz® and Yasmin®. The inclusion of Alcon's Falcon generics business in the US also added $293 million, contributing 3.4% to global Sandoz sales growth in 2011. Key product launches in various European countries included generic docetaxel, generic anastrazole (Arimidex®), and valsartan/covalsartan (an early entry generic version of Novartis Pharmaceuticals' Diovan/Co-Diovan). Anti-Infectives

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experienced continued volume growth, with key products globally including amoxicillin/clavulanic acid, ceftriaxone, azithromycin and cefdinir.

        In Biopharmaceuticals, Sandoz continued to roll out important follow-on products and to drive its contract manufacturing base business. Recombinant growth hormone Omnitrope, which was first launched in the EU and US in 2006 and 2007 respectively, received FDA approval for additional indications, and was launched in 2011 in countries including Mexico and Brazil. The recent rollout of high-dosage oncology formulations continued to drive growth of anemia medicine Binocrit in several European countries, complementing the base nephrology business. Neutropenia medication Zarzio, which was approved EU-wide in 2009, continued to grow rapidly, and overtook reference product Neupogen® in countries including Sweden and the UK. The Sandoz biosimilar development pipeline also made substantial progress in 2011, which saw the start of two Phase III clinical trial programs for rituximab and for biosimilar filgrastim—Neupogen®—in the US.

        In May 2011, Sandoz combined its existing Biopharmaceuticals and Oncology Injectables businesses into a single operational business, to optimize customer relationships and further simplify internal processes in the oncology sector. The Oncology Injectables business, which was formed by the 2009 acquisition of Austrian-based oncology injectables specialist EBEWE Pharma, is now fully organized on a global basis and offers customers a broad differentiated portfolio of more than 25 marketed products plus a strong pipeline for future growth.

        In April 2010, Sandoz announced a definitive agreement to acquire Oriel Therapeutics, a privately held US pharmaceuticals company. The deal was finalized in June 2010, and Oriel has been integrated as a separate development unit within Sandoz. Oriel focuses on developing respiratory products with known pathways as generic alternatives to patented drugs for asthma and chronic obstructive pulmonary disease (COPD). Regulatory approvals of these medicines would enable Sandoz to increase access to affordable, high-quality therapeutic alternatives for these increasingly prevalent medicines. The acquisition also offers Sandoz access to Oriel's novel FreePath™ drug delivery technology, as well as its proprietary Solis™ disposable dry powder inhaler.


Recently Launched Products

        Sandoz launched a number of important products in 2011, including:

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Key Marketed Products

        The following tables describe key marketed products for Sandoz (availability varies by market):

Retail Generics

Product
  Originator Drug   Description

Enoxaparin sodium injection

  Lovenox®   Anti-coagulant

Amoxicillin/clavulanic acid

  Augmentin®   Anti-infective

Omeprazole

  Prilosec®   Ulcer and heartburn treatment

Lansoprazole

  Prevacid®   Proton pump inhibitor

Acetylstein

  Fluimicil®   Respiratory system

Fentanyl

  Duragesic®   Analgesic

Tacrolimus

  Prograf®   Transplantation

Gemcitabine

  Gemzar®   Cytotoxic

Simvastatin

  Zocor®   Cholestorol lowering treatment

Linex (lactobacillus)

  n/a   Dietary supplement

Anti-Infectives

Active Ingredients
  Description

Oral and sterile penicillins

  Anti-infectives

Oral and sterile cefalosporins

  Anti-infectives

Clavulanic acid and mixtures with clavulanic acid

  ß-lactam inhibitors

Classical and semisynthetic erythromycins

  Anti-infectives

Tiamuline

  Anti-infectives

Lovastatin, Simvastatin, Pravastatin

  Statins

Vancomycin

  Anti-infectives

Thyroxine

  Hormones

 

Intermediates
  Description

Various cephalosporin intermediates

  Anti-infectives

Erythromycin base

  Anti-infectives

Various crude compounds produced by fermentation

  Cyclosporine, ascomysine, rapamycine,
mycophenolic acid, etc.

Biopharmaceuticals

Product
  Originator Drug   Description

Omnitrope

  Somatropin®   Recombinant human growth hormone

Binocrit and Epoetin alfa Hexal

  Eprex®/Erypo®   Recombinant protein used for anemia

Zarzio and Filgrastim Hexal

  Neupogen®   Recombinant protein used in oncology

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Oncology Injectables

Product
  Originator Drug   Description

Carboplatin

  Paraplatin®   Ovarian, lung, head-neck and cervix
cancer

Epirubicin

  Farmorubicin®   Breast, lung, ovarian, gastric and
bladder cancer, and others

Gemcitabine

  Gemzar®   Bladder, pancreas, lung, ovarian, and
breast cancer

Methotrexate

  Folex®, Rheumatrex®   Arthritis; breast, lung, cervix and
ovarian cancer, and others

Oxaliplatin

  Eloxatin®   Colorectal and colon cancer

Paclitaxel

  Taxol®   Breast, lung and ovarian cancer,
Kaposi sarcoma

Docetaxel

  Taxotere®   Breast, ovarian and non-small cell
lung cancer


Principal Markets

        The two largest generics markets in the world—the US and Europe—are the principal markets for Sandoz, although we are active in more than 130 countries. This table sets forth aggregate 2011 net sales by region:

Sandoz
  2011 Net Sales to
third parties
 
 
  $ millions
  %
 

United States

    3,300     34.8  

Americas (except the United States)

    664     7.0  

Europe

    4,445     46.9  

Rest of the World

    1,064     11.3  
           

Total

    9,473     100  
           

        Many Sandoz products are used for chronic conditions that require patients to consume the product over long periods of time, from months to years. Sales of our anti-infective products are subject to seasonal variation. Sales of the vast majority of our other products are not subject to material changes in seasonal demand.


Production

        We manufacture our Sandoz products at more than 30 production facilities around the world. Among these, our principal production facilities are located in Barleben, Germany; Kundl and Unterach, Austria; Menges and Ljubljana, Slovenia; Broomfield, Colorado; Wilson, North Carolina; Stryków, Poland; Kalwe and Mahad, India; Boucherville, Canada; Cambé and Taboão, Brazil; Gebze and Syntex, Turkey. In December 2010, Novartis announced the signing of a Memorandum of Understanding, confirming its intention to build a new, full-scale pharmaceutical manufacturing plant in St. Petersburg, Russia. Construction began in 2011 and the plant is expected to produce approximately 1.5 billion units per year (oral solid dosage forms), of which the majority is anticipated to be generic products. Total Novartis Group investment in the plant is expected to be approximately $140 million.

        Active pharmaceutical ingredients are manufactured in our own facilities or purchased from third-party suppliers. We maintain state-of-the-art and cost-competitive processes within our own production network. Those processes include fermentation, chemical syntheses and precipitation processes, such as sterile processing. Many follow-on biologics are manufactured using recombinant DNA derived technology by which a gene is introduced into a host cell, which then produces the human protein. This manufacturing process requires sophisticated technical expertise. We are constantly working to improve current and to develop new manufacturing processes.

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        Where possible, our policy is to maintain multiple supply sources so that the business is not dependent on a single or limited number of suppliers, and competitive material sourcing can be assured. However, our ability to do so may at times be limited by regulatory or other requirements. We monitor market developments that could have an adverse effect on the supply of essential active pharmaceutical ingredients. All active pharmaceutical ingredients we purchase must comply with high quality standards.

        We obtain agricultural, chemical and other raw materials from suppliers around the world. The raw materials we purchase are generally subject to market price fluctuations. We seek to avoid these fluctuations, where possible, through the use of long-term supply contracts. We also proactively monitor markets and developments that could have an adverse effect on the supply of essential materials. All raw materials we purchase must comply with our quality standards.

        The goal of our supply chain strategy is to produce and distribute high-quality products efficiently. The manufacture of our products is heavily regulated by governmental health authorities around the world, including the FDA. In addition to regulatory requirements, many of our products involve technically complex manufacturing processes or require a supply of highly specialized raw materials. For some products and raw materials, we may also rely on a single source of supply.

        In November 2011, we received a Warning Letter from the FDA with respect to three of our Sandoz Division's facilities—in Broomfield, Colorado, Wilson, North Carolina, and Boucherville, Canada—which remains unresolved. The letter followed inspections at all three sites in the course of 2011, and raised concerns regarding these facilities' compliance with FDA cGMP regulations. The FDA observations in the letter related primarily to general documentation, validation and investigation practices. It states that until the FDA confirms that the deficiencies have been corrected, the FDA can recommend disapproval of any pending applications or supplements listing Novartis affiliates as a drug manufacturer. In addition, FDA may refuse requests to issue export certificates to our Sandoz US affiliate, or import certificates to our Sandoz Canada affiliates. The letter further states that other federal agencies may take the Warning Letter into account when considering the award of contracts. Sandoz is collaborating with the FDA to promptly correct all concerns raised in the Warning Letter, and to ensure that our products are safe and effective and meet highest quality standards. However, if we fail to fully resolve the issues raised in the Warning Letter then we could be subject to legal action without further notice including, without limitation, seizure and injunction.

        We have implemented a global manufacturing strategy to maximize business continuity in case of business interruptions or other unforeseen catastrophic events. However, there can be no guarantee that we will be able to successfully manage such issues when they arise.


Marketing and Sales

        The Retail Generics business of Sandoz sells a broad portfolio of generic pharmaceutical products to wholesalers, pharmacies, hospitals and other healthcare outlets. Sandoz adapts its marketing and sales approach to local decision making processes, depending on the structure of the market in each country.

        In response to rising healthcare costs, many governments and private medical care providers, such as health maintenance organizations, have instituted reimbursement schemes that favor the substitution of generic products for bioequivalent patented pharmaceutical products. In the US, statutes have been enacted by virtually all states that permit or require pharmacists to substitute a less expensive generic product for the brand-name version of a drug that has been prescribed to a patient. Generic use is growing in Europe, but penetration rates in many EU countries are below those in the US because reimbursement practices do not create efficient incentives for substitution. Legislative or regulatory changes can have a significant impact on our business in a country. In Germany, for example, the generic market is in transition as healthcare reforms increasingly shift decision making from physicians to insurance funds. A new German Pharmaceutical Law (AMNOG), introduced in January 2011, has driven implementation of the "single-molecule" tender contract system by promoting automatic substitution at pharmacy level.

        Our Anti-Infectives business supplies Retail Generics and the pharmaceutical industry worldwide with active pharmaceutical ingredients and intermediates, mainly in the field of antibiotics.

        Our Biopharmaceuticals business operates in an emerging business environment. Regulatory pathways for approving biosimilar products are either relatively new or still in development, and policies have not yet been fully defined or implemented for the automatic substitution and reimbursement of biosimilars in many markets, including the US. As a result, in many of these markets, including the US, our biosimilar products are marketed as branded competitors to the originator products.

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        Our Oncology Injectables business supplies hospitals worldwide primarily with cytotoxic products for use in oncology treatment.


Competition

        The market for generic products is characterized by increasing demand for high-quality pharmaceuticals that can be marketed at lower costs due to comparatively minimal initial research and development investments. Increasing pressure on healthcare expenditures and numerous patent and data exclusivity period expirations have created a favorable market environment for the generics industry. This positive market trend, however, brings increased competition among the companies selling generic pharmaceutical products, leading to ongoing price pressure on generic pharmaceuticals.

        In addition, research-based pharmaceutical companies have responded to increased competition from generic products by licensing their patented products to generic companies (the so-called "authorized generic"). By doing so, research-based pharmaceutical companies participate in the conversion of their patented product once generic conversion begins. Consequently, generic companies that were not in a position to compete on a specific product may enter the generic market using the innovator's product. In the US, the authorized generic is not subject to the US Hatch-Waxman Act rules regarding exclusivity (See "—Regulation"). The company that launches an authorized generic typically launches its product at the same time as the generic exclusivity holder. This tends to reduce the value of the exclusivity for the company that invested in creating the first generic. Furthermore, certain research-based companies continually seek new ways to protect their market franchise and to decrease the impact of generic competition. For example, some research-based pharmaceutical companies have reacted to generic competition by decreasing the prices of their patented product, thus possibly limiting the profit that the generic companies can earn on the competing generic product.


Development and Registration

        Before a generic pharmaceutical may be marketed, intensive technical as well as clinical development work must be performed to demonstrate, in bio-availability studies, the bio-equivalency of the generic product to the reference product. Nevertheless, research and development costs associated with generic pharmaceuticals generally are much lower than those of the originator pharmaceuticals, as no clinical trials on dose finding and efficacy must be performed by the generic company. As a result, pharmaceutical products for which the patent and data exclusivity period has expired can be offered for sale at prices often much lower than those of products protected by patents and data exclusivity, which must recoup substantial basic research and development costs through higher prices over the life of the product's patent and data exclusivity period.

        For follow-on biologic products, the regulatory pathways for approving such products are still in development, or pending final implementation, in many countries outside Europe. However, at least for certain biopharmaceutical products, a certain number of carefully targeted clinical trials in patients to determine safety and efficacy do appear to be required. Sandoz has successfully registered and launched the first biosimilar (or biosimilar type) product in Europe, the US, Canada, Japan, Taiwan, Australia and several Latin American countries, as well as two further products in Europe.

        Currently, the affiliates of the Sandoz Division employ more than 2,800 Development and Registration staff who explore alternative routes for the manufacture of known compounds and develop innovative dosage forms of well-established medicines. These associates are based worldwide, including major facilities in Holzkirchen and Rudolstadt, Germany; Kundl, Schaftenau and Unterach, Austria; Menges and Ljubljana, Slovenia; Kalwe, India; Boucherville, Canada; Broomfield, Colorado and East Hanover, New Jersey (transferred from Wilson, NC, and formally opened in June 2010). In 2011, Sandoz invested $640 million ($618 million excluding impairment and amortization and impairment charges) in product development, which amounted to 6.8% of the division's net sales. Sandoz invested $658 million ($636 million excluding impairment and amortization charges) and $613 million ($603 million excluding impairment and amortization charges) in 2010 and 2009 respectively.


Regulation

        The Hatch-Waxman Act in the US (and similar legislation in the EU and in other countries) eliminated the requirement that generic pharmaceutical manufacturers repeat the extensive clinical trials required for originator products, so long as the generic version could be shown in bioavailability studies to be of identical quality and purity, and to be therapeutically equivalent to the reference product.

        In the US, the decision whether a generic pharmaceutical is bioequivalent to the original patented product is made by the FDA based on an Abbreviated New Drug Application (ANDA) filed by the generic product's

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manufacturer. The process typically takes nearly two years from the filing of the ANDA until FDA approval. However, delays can occur if issues arise regarding the interpretation of bioequivalence study data, labeling requirements for the generic product, or qualifying the supply of active ingredients. In addition, the Hatch-Waxman Act requires a generic manufacturer to certify in certain situations that the generic product does not infringe on any current applicable patents on the product held by the innovator, or to certify that such patents are invalid or the product is non-infringing. This certification often results in a patent infringement lawsuit being brought by the patent holder against the generic company. In the event of such a lawsuit, the Hatch-Waxman Act imposes an automatic 30-month delay in the approval of the generic product in order to allow the parties to resolve the intellectual property issues. For generic applicants who are the first to file their ANDA containing a certification claiming non-infringement or patent invalidity, the Hatch- Waxman Act provides those applicants with 180 days of marketing exclusivity to recoup the expense of challenging the innovator patents. However, generic applicants must launch their products within certain time frames or risk losing the marketing exclusivity that they had gained by being a first-to-file applicant.

        In the EU, decisions on the granting of a marketing authorization are made either by the EMA under the Centralized Procedure, or by a single Member State under the national or decentralized procedure. See "—Pharmaceuticals—Regulation—European Union." Companies may submit Abridged Applications for approval of a generic medicinal product based upon its "essential similarity" to a medicinal product authorized and marketed in the EU following the expiration of the product's data exclusivity period. In such cases, the generic company is able to submit its Abridged Application based on the data submitted by the medicine's innovator, without the need to conduct extensive Phase III clinical trials of its own. For all products that received a marketing authorization in the EU after late 2005, the Abridged Application can be submitted throughout the EU. However, the data submitted by the innovator in support of its application for a marketing authorization for the reference product will be protected for ten years after the first grant of marketing authorization in all Member States, and can be extended for an additional year if a further innovative indication has been authorized for that product, based on pre-clinical and clinical trials filed by the innovator that show a significant clinical benefit in comparison to the existing therapies.


Intellectual Property

        Wherever possible, our generic products are protected by our own patents. Among other things, patents may cover the products themselves, including the product's active substance and its formulation. Patents may also cover the processes for manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the products. Patents also may cover particular uses of a product, such as its use to treat a particular disease or its dosage regimen. It is our policy to seek the broadest possible protection for significant product developments in all major markets.

        We take all reasonable steps to ensure that our generic products do not infringe valid intellectual property rights held by others. Nevertheless, originating companies commonly assert patent and other intellectual property rights in an effort to delay or prevent the launch of competing generic products. As a result, we can become involved in significant litigation regarding our generic products. If we are unsuccessful in defending these suits, we could be subject to injunctions preventing us from selling our generic products, or to damages, which may be substantial.


VACCINES AND DIAGNOSTICS

        Our Vaccines and Diagnostics Division is a leader in the research, development, manufacturing and marketing of vaccines and diagnostic tools used worldwide. As of December 31, 2011, the Vaccines and Diagnostics Division employed 6,122 full-time equivalent associates worldwide in 30 countries. In 2011, the Vaccines and Diagnostics Division had consolidated net sales of $2.0 billion representing 3.4% of total Group net sales.

        Novartis Vaccines' products include influenza, meningococcal, pediatric, adult and travel vaccines. Novartis Diagnostics is dedicated to preventing the spread of infectious diseases through the development and marketing of nucleic acid technology blood-screening products, and is also creating innovative diagnostics to detect, prevent, and predict disease and improve medical outcomes.

        The current product portfolio of our Vaccines and Diagnostics Division includes more than 20 marketed products. In addition, the division's portfolio of development projects includes more than 15 potential new products in various stages of clinical development.

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        Influenza vaccines are a core franchise of the Division. Today we are among the world's largest producers of influenza vaccines. Influenza vaccination is one of the most effective public health interventions, sparing millions of people from complications, including death, from this infectious disease.

        Young children and older adults are among the most vulnerable to the disease. Fluad, our adjuvanted seasonal influenza vaccine, has been used for more than a decade to enhance the immune response in older adults, helping to overcome their naturally occurring immune vulnerability and enabling effective protection against influenza. In October 2011, The New England Journal of Medicine published Phase III clinical trial data showing that Fluad had superior clinical efficacy to conventional non-adjuvanted vaccines against all circulating strains of influenza in children aged 6 months to 6 years and demonstrated a safety profile comparable to conventional non-adjuvanted influenza vaccines.

        In 2011, we were the first vaccine manufacturer to deliver its seasonal influenza vaccine to the US, and shipped over 30 million doses to US customers for the 2011/2012 season. Early delivery meant that healthcare professionals would have the ability to provide the earliest possible protection against influenza.

        Novartis remains dedicated to working with the World Health Organization and other stakeholders to support global pandemic preparedness, including affordable and equitable access to pandemic vaccines for developing countries.

        The Novartis meningococcal franchise is expected to be a cornerstone of future growth for the division. Meningococcal disease causes approximately 50,000 deaths a year globally. Because almost all cases of infection are caused by five serogroups—A, B, C, W-135 and Y—and the distribution of strains varies greatly over time and location, we are working to deliver vaccines with broad coverage and the potential to protect all age groups at risk.

        Menveo (MenACWY-CRM), a quadrivalent conjugate vaccine for the prevention of the A, C, Y and W-135 strains of meningococcal meningitis, was approved in 2010 in the US for use in individuals 11-55 years old and in the EU for individuals 11 years and up. Our Menveo development program is underway to expand the age range for which Menveo is indicated to cover persons from age 2 months in the US and EU. In June 2011, the FDA accepted for review a supplemental Biologics License Application to expand the Menveo indication to include infants and toddlers from 2 months of age.

        Bexsero, the Novartis investigational multicomponent meningococcal serogroup B vaccine (4CMenB), has shown the potential to be the first vaccine to provide broad coverage against meningococcal B disease. In June 2011, We released new data from a pivotal Phase III clinical study in more than 1,800 infants which showed that Bexsero induced a robust immune response against meningococcal serogroup B when given alone or when co-administered with other routine vaccines. These data are included in the comprehensive clinical program with Bexsero in more than 8,000 infants, toddlers, adolescents and adults which served as the basis of the registration file submitted to the EMA in December 2010. Bexsero has also been submitted for approval to health authorities in Canada, Brazil and Australia.

        Novartis Vaccines continued to expand geographically through the completion of the acquisition of an 85% stake in the vaccines company Zhejiang Tianyuan Bio-Pharmaceutical Co., Ltd., announced in March. Zhejiang Tianyuan offers marketed vaccine products in China. The division also achieved significant milestones in Brazil, building on its 2009 agreement with the Fundação Ezequiel Dias in Brazil for meningitis C vaccine technology transfer. This agreement has helped the vaccine be made available to all children in the country under two as part of a national immunization program which began in 2010.

        The Diagnostics business maintains its market leadership in blood safety. Our Procleix portfolio of highly sensitive nucleic acid-based tests and automation platforms, developed in collaboration with Gen-Probe, Inc. are used in markets around the world to screen donated blood for HIV-1, Hepatitis types B and C, and West Nile Virus.

        In 2011, we initiated US FDA review of Procleix Ultrio Plus Assay, our most sensitive 3-in-1 assay for single-test detection of HIV-1, Hepatitis B, and Hepatits C viruses in donated blood. We continue to expand our line of nucleic acid testing products in global markets through a combination of regulatory approvals and ongoing investment in new assays and next-generation automation platforms. Our pipeline includes the Procleix Panther® system and Procleix Elite 4-in-1 assay for HIV-1, HIV-2, Hepatitis B, and Hepatitis C virus in a single test, as well as a duplex Parvo B-19 virus and Hepatitis A virus intended to support in-process testing for plasma fractionators. The use of our products is growing in new markets. In 2011, blood banks in China, Indonesia, and Mexico, and other parts of the world adopted our fully integrated and automated platforms.

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Vaccines and Diagnostics Division Products

        The summary and the tables that follow describe key marketed products and potential products in development in our Vaccines and Diagnostics Division. Subject to required regulatory approvals and, in certain instances, contractual limitations, we intend to sell our marketed products throughout the world. However, our Vaccines and Diagnostics Division products are not currently available in every country. Regarding our products in development, these products and indications are in various stages of development throughout the world. For some products, the development process is ahead in the US; for others, development in one or more other countries or regions is ahead of that in the US. Due to the uncertainties associated with the development process, and due to regulatory restrictions in some countries, it may not be possible to obtain regulatory approval for any or all of the new products referred to in this Form 20-F. See "—Regulation" for further information on the approval process.

Key Marketed Vaccine Products

Product
  Indication

Influenza Vaccines

   

Agrippal

 

A surface antigen, inactivated, seasonal influenza vaccine for adults and children above six months of age.

Fluad

 

A surface antigen, inactivated, seasonal influenza vaccine containing the proprietary MF59 adjuvant for the elderly

Fluvirin

 

A surface antigen, inactivated, seasonal influenza vaccine for adults and children four years of age and up

Optaflu

 

Cell culture-based, surface antigen, inactivated, influenza vaccine for adults 18 years of age and up

Meningococcal Vaccines

   

Menjugate

 

Meningococcal C vaccine for children 2 months of age and up

Menveo

 

Meningococcal A, C, W-135 and Y vaccine for children, adolescents and adults between 2 and 55 years of age (11+ in the EU)

Travel Vaccines

   

Encepur Children
Encepur Adults

 

Tick-borne encephalitis vaccine for children 1-11 years of age and for adults 12+ years of age

Ixiaro(1)

 

Prophylactic vaccine against Japanese encephalitis virus

Rabipur/Rabavert

 

Vaccine for rabies, which can be used before or after exposure (typically animal bites)

Pediatric Vaccines

   

Polioral

 

Live, attenuated, oral poliomyelitis vaccine (Sabin) containing attenuated poliomyelitis virus types 1, 2 and 3 from birth

Quinvaxem(2)

 

Fully liquid pentavalent vaccine combining antigens for protection against five childhood diseases: diphtheria, tetanus, pertussis (whooping cough), hepatitis B and Haemophilus influenzae type b for children above 6 weeks of age


(1)
In collaboration with Intercell.

(2)
In collaboration with Crucell.

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Vaccine Key Products in Development

Therapeutic Area
  Project/Compound   Potential Indication/
Disease Area
  Planned filing dates/
Current phase
Influenza   Optaflu   Cell culture-based surface antigen, inactivated, seasonal influenza vaccine   EU registered;
US Phase III
    Fluad   A surface antigen, inactivated, seasonal influenza vaccine containing the proprietary MF59 adjuvant in development for adults 65+ years of age in the US, and for children up to 8 years of age in the EU   EU filed (pediatric)
US Phase III (elderly)
    AgriFlu pediatric   A surface antigen inactivated seasonal influenza vaccine in development for children 6 months—18 years of age in the US   Registered, US Phase III
    Aflunov   A (H5N1) influenza vaccine containing the proprietary MF59 adjuvant for pre-pandemic use in subjects 18 years of age and up   US Phase II
    H5N1 FCC   Cell-culture-based A (H5N1) influenza vaccine for pre-pandemic use (age range to be defined) for the US   Phase II
Meningococcal   Menveo   Quadrivalent meningococcal vaccine for strains A, C, Y and W-135 for infants, adolescents and adults   Registered (children, adolescents & adults) (US & EU)
US filed/EU Phase III (infants)
    Bexsero   Multicomponent meningococcal serogroup B vaccine for infants, adolescents and adults   EU, Canada and Brazil submitted,
US Phase II
    MenABCWY   Meningococcal vaccine for strains A, B, C, Y and W-135   Phase II
P aeruginosa       Prophylactic vaccine for P aeruginosa infections(1)   Phase II
HIV(1)       Prophylactic HIV vaccine   Phase I
GBS       Prophylactic Group B Streptococcus (GBS) vaccine   Phase II
CMV(2)       Prophylactic vaccine for cytomegalovirus   Phase I
S Pneumoniae       Prophylactic vaccine for streptococcus pneumoniae   Phase I
C. Difficile(3)       Prophylactic vaccines for C. Difficile   Phase I

(1)
In collaboration with National Institutes of Health.

(2)
In collaboration with AlphaVax.

(3)
In collaboration with Intercell.

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Key Marketed Diagnostics Products

Product
  Product Description
Procleix System   Semi automated modular instrument solution supporting duplex and Ultrio NAT assays

Procleix Tigris® System

 

Fully integrated and automated instrument solution for NAT blood screening

Procleix SP System

 

Fully automated liquid-handling instrument for pooling and creation of archive plates

Procleix Duplex Assay

 

NAT assay to detect HIV-1, HCV in donated blood through a single test

Procleix WNV Assay

 

First NAT assay approved by the FDA to detect West Nile virus in donated blood

Procleix Ultrio Assay

 

First NAT assay to detect HIV-1, HCV and HBV in donated blood through a single test

Procleix Ultrio Plus Assay

 

Our most sensitive NAT assay to detect HIV-1, HCV and HBV in donated blood through a single test

Diagnostics Key Products in Development

Therapeutic Area
  Product   Product Description   Planned filing dates/
Current phase
Blood Screening   Parvo/HAV test   NAT test designed to detect Hepatitis A virus and Parvo B19 virus   Development

 

 

Dengue test

 

NAT test designed to detect the Dengue virus

 

Discovery

 

 

Procleix Panther System
Procleix Xpress System
Procleix NAT Manager Software

 

Fully automated NAT blood screening instrument

Automated weight-free pooling and archiving solution

Procleix data and information management system

 

Development

Development

Development

Infectious Disease

 

 

 

Accurate and early pathogen detection

 

Discovery

Predictive Health

 

Maternal/Fetal Screening

 

Tests to replace invasive pre-natal diagnostics

 

Discovery

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Principal Markets

        The principal markets for our Vaccines and Diagnostics Division include the US and Europe. The following table sets forth the aggregate 2011 net sales of the Vaccines and Diagnostics Division by region:

Vaccines and Diagnostics
  2011 Net Sales to
third parties
 
 
  $ millions
  %
 

United States

    737     36.9  

Americas (except the United States)

    218     10.9  

Europe

    668     33.5  

Rest of the World

    373     18.7  
           

Total

    1,996     100  
           

        Sales of certain vaccines, including influenza and tick borne encephalitis vaccines, are subject to seasonal variation. Sales of the majority of our other products are not subject to material changes in seasonal demand.


Research and Development

        In 2011, the Vaccines and Diagnostics Division invested $523 million ($495 million excluding amortization and impairment charges) in research and development, which amounted to 26% of the division's net sales. In 2010 and 2009 the Vaccines and Diagnostics Division invested $523 million ($506 million excluding amortization and impairment charges) and $508 million ($465 million excluding amortization and impairment charges) in research and development, respectively.

        While research and development costs for vaccines traditionally have not been as high as for pharmaceuticals, a robust clinical program including Phase I to Phase III must be performed by the manufacturer to obtain a license for commercialization. See "—Pharmaceuticals—Compounds in Development" and "—Pharmaceuticals—Research and Development." Similarly, our NAT blood screening research and development efforts, which we perform in collaboration with Gen-Probe, Inc., as well as our other diagnostic research and development efforts, require extensive and expensive research and testing of potential products. At each step, there is a substantial risk that we will not achieve our goals. In such an event, we may decide or be required to abandon a product or program in which we have made a substantial investment.


Production

        We manufacture our vaccines products at six facilities in Europe, the US and Asia. Our principal production facilities are located in Liverpool, UK; Marburg, Germany; Siena and Rosia, Italy, Ankleshwar, India, and Holly Springs, North Carolina. We continue to invest and upgrade our existing sites to ensure that previously initiated remediation efforts are completed and meet quality standards. In addition, certain conjugation and chemistry activities for vaccines are performed at our Emeryville, California site. At our Emeryville site we manufacture antigens and associated conjugates as both intermediates, and in final kits for diagnostics and blood donation screening around the world. We are the world leader in GMP production of HCV antigens used for blood donation screening. Companies in these markets, including our long-standing collaboration partners Ortho Clinical Diagnostics purchase these products which we manufactured for use in their blood testing assays. Our NAT products for blood screening are manufactured by Gen-Probe, Inc., with sales, marketing, and distribution by Novartis Diagnostics.

        Each year new seasonal influenza vaccines need to be produced in order to help induce protection against the current circulating strains of the virus, which can change from year to year. Global surveillance of influenza viruses is conducted throughout the year by the World Health Organization (WHO) Influenza Surveillance Network, which provides information on currently circulating strains and identifies the appropriate strains to be included in next season's influenza vaccine. Each year, the EMA and the US Centers for Disease Control then confirm the vaccine composition for the coming season for the northern hemisphere and the Australian Therapeutic Goods Administration for the southern hemisphere. There can be no guarantee that the division will succeed in producing and having approved an updated flu vaccine within the timeframes necessary to commercialize the vaccine for the applicable flu season.

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        The goal of our supply chain strategy is to produce and distribute high quality products efficiently. The manufacture of our products is heavily regulated by governmental health authorities around the world, including the FDA. In addition to regulatory requirements, many of our products involve technically complex manufacturing processes or require a supply of highly specialized raw materials. For some products and raw materials, we may also rely on a single source of supply.

        We have implemented a global manufacturing strategy to maximize business continuity in case of such events or other unforeseen catastrophic events. However, there can be no guarantee that we will be able to successfully manage such issues when they arise.


Marketing and Sales

        Our main Vaccines marketing and sales organizations are based in Switzerland, Germany, UK, Italy and the US. We are also seeking to expand operations in India, Europe and Latin America. In March, we completed the previously-announced acquisition of an 85% stake in the Chinese vaccines company Zhejiang Tianyuan Bio-Pharmaceutical Co., Ltd.

        In the US, we market influenza, meningoccocal, Japanese Encephalitis and rabies vaccines through a network of wholesalers and distributors as well as direct to key customers. Direct sales efforts are focused on public health and distributor channels, and on non-traditional channels, such as employers, chain drug headquarters and service providers.

        The Diagnostics marketing and sales efforts are primarily focused on blood banks, with some marketing efforts focused on the development of new clinical diagnostics. With about 40% of the 90 million blood donations made worldwide each year not being tested with nucleic acid screening, the company will continue to focus on increasing its adoption in emerging markets of the world.


Competition

        The global market for products of the type sold by our Vaccines and Diagnostics Division is highly competitive, and we compete against other major international corporations with substantial financial and other resources. Competition within the industry is intense and extends across a wide range of commercial activities, including pricing, product characteristics, customer service, sales and marketing, and research and development.

        There is no guarantee that any product, even with patent protection, will remain successful if another company develops a new product offering significant improvements over existing products.


Regulation

        Our vaccines products are subject to essentially the same regulatory procedures as are the products of our Pharmaceuticals Division. See "—Pharmaceuticals—Regulation." In the US, a company seeking approval of a vaccine submits a Biologics License Application (BLA) for the vaccine, rather than an NDA. Subsequently, the BLA follows substantially the same path for approval as does an NDA. In addition, annual license applications for seasonal flu vaccines must be submitted every year.

        Our diagnostics products are regulated as medical devices in the US and the EU. See "—Alcon—Regulation." However, in the US, for specific diagnostics products that are sold into blood banks, or sold for diagnosis of HIV-1 infection, applications are submitted for review by the FDA's Center for Biologics Evaluation and Research (CBER). Under such review, the product is considered a biologic until such time as approval is received, at which time the product becomes a medical device. For products used specifically for screening of blood donors, or biologic reagents sold for further manufacturing use, the medical device is subject to Licensure by CBER. The submission for this purpose follows the same requirements as Vaccines; a Biologic License Application is submitted to CBER. CBER usually takes 240 days to review a BLA. In the EU, Diagnostics products are specifically covered by the EU In Vitro Diagnostic (IVD) Directive. Under that Directive, certain products are subject to review and prior approval by a "notified body." Others are subject to the manufacturer self-certification process.


Intellectual Property

        We attach great importance to patents, trademarks, and know-how in order to protect our investment in research and development, manufacturing and marketing. It is our policy to seek the broadest possible protection for significant product developments in all major markets. Among other things, patents may cover the products themselves, including the product's active substance and its formulation. Patents may also cover the processes for

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manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the products. Patents may also cover particular uses of a product, such as its use to treat a particular disease, or its dosage regimen.

        The protection offered by such patents extends for varying periods depending on the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage. We monitor our competitors and vigorously challenge infringements of our intellectual property.


CONSUMER HEALTH

        Consumer Health is a world leader in the research, development, manufacturing and marketing of a wide range of competitively differentiated products that restore, maintain or improve the health and well-being of consumers, as well as pets and livestock. The business of Consumer Health is conducted by a number of affiliated companies throughout the world. Consumer Health consists of the following two divisions:

        Each division has its own research, development, manufacturing, distribution and selling capabilities. However, neither division is material enough to the Group to be separately disclosed as a segment. As of December 31, 2011, the affiliates of Consumer Health employed 8,290 full-time equivalent associates worldwide. In 2011, the affiliates of Consumer Health achieved consolidated net sales of $4.6 billion, which represented 7.9% of the Group's total net sales.

        The divisions of Consumer Health place considerable emphasis on the development of strong, consumer-oriented and trustworthy brands. To deliver accelerated sales growth and to achieve leadership positions in the fields in which we compete, the divisions of Consumer Health seek to give voice to the consumer and to determine the needs and desires of consumers.

        In the dynamic world of consumer healthcare, consumers are becoming more knowledgeable about health and the benefits of self-medication. The success of each division depends upon its ability to anticipate and meet the needs of consumers and health professionals worldwide.

        The following is a description of the two Consumer Health divisions:

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Principal Markets

        The principal markets for Consumer Health are the US and Europe. The following table sets forth the aggregate 2011 net sales of Consumer Health by region:

Consumer Health
  2011 Net Sales to
third parties
 
 
  $ millions
  %
 

United States

    1,405     30.3  

Americas (except the United States)

    480     10.4  

Europe

    1,964     42.4  

Rest of the World

    782     16.9  
           

Total net sales

    4,631     100  
           

        Sales of our OTC Division are marked by a high degree of seasonality, with our cough, cold and allergy brands significantly affected by the timing and severity of the annual cold and flu and allergy seasons. Sales of our Animal Health Division's livestock segment can also fluctuate seasonally, and can be significantly affected by climatic and economic conditions, or by changing health or reproduction rates of animal populations. Sales of most of our other products are not subject to material changes in seasonal demand.


Production

        OTC: Products for our OTC Division are produced by the division's own plants, strategic third-party suppliers and other Novartis Group plants (which are predominantly owned and operated by the Pharmaceuticals Division). The primary OTC plants are located in Lincoln, Nebraska; Nyon, Switzerland; Humacao, Puerto Rico; and Jamshoro, Pakistan.

        Animal Health: Approximately 80% of our production volume is manufactured by third parties and Novartis affiliates in other divisions. Animal Health has production facilities of its own located around the world, with main sites in Wusi Farm, China; Dundee and Braintree, UK; Larchwood, Iowa; Charlottetown, Canada; and Huningue, France.

        While production practices may vary from division to division, we generally obtain our raw materials, intermediates and active ingredients from suppliers around the world. The raw materials, intermediates and active ingredients we purchase are generally subject to market price fluctuations. We seek to avoid these fluctuations, where possible, through the use of long-term supply contracts. We also proactively monitor markets and developments that could have an adverse effect on the supply of essential materials. All raw materials we purchase must comply with our quality standards.

        The goal of our supply chain strategy is to produce and distribute high quality products efficiently. The manufacture of our products is heavily regulated by governmental health authorities around the world, including the FDA. In addition to regulatory requirements, many of our products involve technically complex manufacturing processes or require a supply of highly specialized raw materials. For some products and raw materials, we may also rely on a single source of supply.

        In December 2011, we voluntarily suspended operations and shipments from the OTC Division facility located at Lincoln, Nebraska. This action was taken to accelerate maintenance and other improvement activities at the site. Subsequently, in January 2012, we voluntarily recalled certain OTC Division products, as well as an Animal Health Division product that were produced at the Lincoln facility. We plan to gradually resume operations at the Lincoln site following implementation of planned improvements and in agreement with the FDA. However, as of the date of this Form 20-F, it is not possible to determine when the plant will resume full operations. The Lincoln facility produces a variety of products with annual sales value of less than 2% of Novartis Group sales. Should we fail to complete the planned improvements at the site in agreement with FDA in a timely manner, then we may suffer a significant loss in sales.

        We have implemented a global manufacturing strategy to maximize business continuity in case of business interruptions or other unforeseen catastrophic events. However, there can be no guarantee that we will be able to successfully manage such issues when they arise.

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Marketing and Sales

        OTC: OTC aims to be a leading global participant in fulfilling the needs of patients and consumers for self-medication healthcare. Strong, leading brands and products, innovation led by a worldwide research and development organization, and in-house marketing and sales organizations are key strengths in pursuing this objective. We engage in general public relations activities, including media advertisements, brand websites and other direct advertisements of brands, to the extent permitted by law in each country. We distribute our products through various channels such as pharmacies, food, drug and mass retail outlets.

        Animal Health: Animal Health's products are mostly prescription-only treatments for both farm and companion animals. The major distribution channel is veterinarians, either directly or through wholesalers of veterinary products. Primary marketing efforts are targeted at veterinarians using such marketing tools as targeted personal selling, printed materials, direct mail, advertisements, articles in the veterinary specialty press, and conferences and educational events for veterinarians. In addition, we engage in general public relations activities and media advertising, including brand websites and other direct advertisements of brands, to the extent permitted by law in each country.


Competition

        The global market for products of the type sold by Consumer Health is highly competitive, and we compete against other major international corporations with substantial financial and other resources. Competition within the industry is intense and extends across a wide range of commercial activities, including pricing, product characteristics, customer service, sales and marketing, and research and development. Particularly in the US, our branded OTC products compete against "store brand" products that are made with the same active ingredients as ours. These products do not carry our trusted brand names, but they also do not carry the burden of the expensive advertising and marketing which helped to establish a demand for the product. As a result, the store brands may be sold at lower prices. In recent years, consumers have increasingly begun to purchase store brand OTC products instead of branded products.


Research and Development

        OTC: At OTC, the focus of research and development activities is primarily on analgesics, cough/cold/respiratory and digestive health treatments. OTC also works closely with the Pharmaceuticals Division to evaluate appropriate products that can be switched from prescription to OTC status. The development of line extensions to leverage brand equities is also of high importance. These extensions can take many forms including new flavors, new galenical forms and more consumer-friendly packaging.

        Animal Health: Novartis Animal Health has dedicated research and development facilities in Switzerland, North America and Australia. The main focus for research is identification of potential new parasiticides and therapeutics in key areas of internal medicine. In addition, in the US and Canada, we devote resources to the quest for new vaccines for farm animals and cultivated fish. Also, our researchers exploit synergy with other Novartis businesses and collaborate with external partners to develop veterinary therapeutics and vaccines. Drug delivery projects, some in collaboration with external partners, concentrate on key treatment areas and aim to improve efficacy and ease of use.

        In 2011, Consumer Health invested $296 million ($292 million excluding amortization and impairment charges) in research and development, which amounted to 6.4% of the division's net sales. Consumer Health invested $261 million ($261 million excluding amortization and impairment charges) and $252 million ($252 million excluding amortization and impairment charges) in research and development in 2010 and 2009 respectively.


Regulation

        OTC: For OTC products, the primary regulatory process for bringing a product to market consists of preparing and filing a detailed dossier with the appropriate national or international registration authority and obtaining approval of the applicable health authority. See "—Pharmaceuticals—Regulation." In the US, in addition to the NDA process, which also is used to approve prescription pharmaceutical products, an OTC product may be sold if the FDA has determined that the product's active ingredient is generally recognized as safe and effective. FDA makes this determination through a regulatory process known as the OTC Drug Review. In the OTC Drug Review, the FDA has established, in a series of monographs, the conditions under which particular active ingredients may be recognized as safe and effective for OTC use. Pharmaceutical companies can market products containing these active ingredients without the necessity of filing an NDA and going through its formal

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approval process, so long as the company complies with the terms of the published monograph. These processes do not apply outside the US. Outside the US, countries have their own regulatory processes for approving or allowing the sale of pharmaceutical products, including prescription, OTC, and switching from prescription to OTC status. These processes vary from country to country.

        Animal Health: The registration procedures for animal medicines are similar to those for human medicines. An animal drug application for product registration must be accompanied by extensive data on target animal and user safety, environmental fate and toxicology, efficacy in laboratory and clinical studies, information on manufacturing, quality control and labeling as well as on residues and food safety if applied to food-producing animals. In the US, animal health products are generally regulated by the FDA's Center for Veterinary Medicine. Certain product categories are regulated by the Environmental Protection Agency, and vaccines are under the control of the US Department of Agriculture. In the EU, veterinary medicinal products need marketing authorization from the competent authority of a member-state (national authorization) or from the EU Commission (community authorization) following either the Centralized Procedure, Mutual Recognition Procedure or the Decentralized Procedure. See "—Pharmaceuticals—Regulation."


Intellectual Property

        Our Consumer Health divisions are strongly brand-oriented. As a result, we consider our trademarks to be of utmost value. Enforceable trademarks protect most of our brands in the majority of the markets where these brands are sold, and we vigorously protect these trademarks from infringement. Our most important trademarks are used in a number of countries. Local variations of these international trademarks are employed where legal or linguistic considerations require the use of an alternative.

        Wherever possible our products are protected by patents. Among other things, patents may cover the products themselves, including the product's active substance and its formulation. Patents may also cover the processes for manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the products. Patents may also cover particular uses of a product, such as its use to treat a particular disease, or its dosage regimen. It is our policy to seek the broadest possible protection for significant product developments in all major markets.

        Our Consumer Health divisions also sell products which are not currently covered by patents. Some of these products have never been patent-protected and others have lost protection due to patent expiry.


4.C    Organizational Structure

        See "Item 4. Information on the Company—4.A History and Development of Novartis," and "Item 4. Information on the Company—4.B Business Overview—Overview."


4.D    Property, Plants and Equipment

        Our principal executive offices are located in Basel, Switzerland. Our divisions and business units operate through a number of affiliates having offices, research facilities and production sites throughout the world.

        We generally own our facilities. However, some sites are leased under long-term leases. Some of our principal facilities are subject to mortgages and other security interests granted to secure indebtedness to certain financial institutions. We believe that our production plants and research facilities are well maintained and generally adequate to meet our needs for the foreseeable future.

        The following table sets forth our major production and research facilities.

Location/Division or Business Unit
  Size of Site (in square meters)
  Major Activity
 
Major Production facilities:        
 
Pharmaceuticals        

Ringaskiddy, Ireland

 

60,000

 

Drug substances, intermediates
 
Grimsby, UK   64,000   Drug substances, intermediates
 

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Location/Division or Business Unit
  Size of Site (in square meters)
  Major Activity
 
Stein, Switzerland   130,000   Steriles, ampules, vials, tablets, capsules, transdermals
 
Basel, Switzerland—Klybeck   11,000   Drug substances, intermediates
 
Basel, Switzerland—Schweizerhalle   26,000   Drug substances, intermediates
 
Basel, Switzerland—St. Johann   28,000   Drug substances, intermediates, biopharmaceutical drug substance
 
Torre, Italy   52,000   Tablets, drug substance intermediates
 
Changshu, China   56,000   Drug substances, intermediates
 
Vacaville, California   7,400   biopharmaceutical drug substances
 
Suffern, NY   48,000   Tablets, capsules, transdermals, vials
 
Kurtkoy, Turkey   52,000   Tablets, capsules, effervescents
 
Horsham, UK   17,000   Tablets, capsules
 
Sasayama, Japan   26,000   Tablets, capsules, dry syrups, suppositories, creams, powders
 
Huningue, France   44,000   Suppositories, liquids, solutions, suspensions, biopharmaceutical drug substances
 
Cairo, Egypt   47,000   Tablets, creams, liquids, steriles
 
Singapore   29,000   Bulk tablets
 
Wehr, Germany   24,000   Tablets, creams, ointments
 
Barbera, Spain   24,000   Tablets, capsules
 
Resende, Brazil   16,000   Drug substances, intermediates
 
Chang Ping, China   17,000   Tablets, capsules, gel
 
Alcon        

Fort Worth, TX

 

219,000 (production and R&D)

 

Pharmaceutical
 
Puurs, Belgium   55,000   Pharmaceutical, Surgical, Vision Care
 
Singapore   50,000 (production and R&D)   Pharmaceutical, Vision Care
 
Duluth, GA   44,000 (production and R&D)   Vision Care
 
Grosswallstadt, Germany   40,000 (production and R&D)   Vision Care
 
Houston, Texas   36,325   Surgical
 

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Location/Division or Business Unit
  Size of Site (in square meters)
  Major Activity
 
Johor, Malaysia   35,000   Vision Care
 
Pulau Batam, Indonesia   27,000   Vision Care
 
Des Plaines, IL   27,000   Vision Care
 
Huntington, West Virginia   24,600   Surgical
 
Irvine, California   19,500 (production and R&D)   Surgical
 
Sinking Spring, Pennsylvania   18,000   Surgical
 
Mississauga, Canada   15,000   Vision Care
 
Kaysersberg, France   14,800   Pharmaceutical, Vision Care
 
Cork, Ireland   13,650   Surgical
 
Sao Paulo, Brazil   8,360   Pharmaceutical, Vision Care
 
Erlangen, Germany   6,600 (production and R&D)   Surgical
 
Aliso Viejo, California   5,200   Surgical
 
Schaffhausen, Switzerland   4,100 (production and R&D)   Surgical
 
Mexico City, Mexico   2,900   Pharmaceutical, Vision Care
 
Pressath, Germany   2,600 (production and R&D)   Surgical
 
Neve Llan, Israel   1,000   Surgical
 
Sandoz        

Taboão da Serra, Brazil

 

501,000

 

Capsules, tablets, syrups, suspensions, drop solutions
 
Kundl and Schaftenau, Austria   449,000
(production and R&D facilities)
  Biotech products, intermediates, active drug substances, final steps (finished pharmaceuticals)
 
Menges, Slovenia   131,000
(production and R&D facilities)
  Biotech products and active drug substances
 
Barleben, Germany   95,000   Broad range of finished dosage forms
 
Ljubljana, Slovenia   83,000
(production and R&D facilities)
  Broad range of finished dosage forms
 
Broomfield, CO   60,000   Broad range of finished dosage forms
 
Kalwe, India   47,000   Broad range of finished dosage forms
 
Mahad, India   43,000   Active drug substances
 
Gebze, Turkey   42,000   Broad range of finished dosage forms
 
Cambé, Brazil   32,000   Broad range of finished dosage forms
 
Wilson, NC   31,000   Broad range of finished dosage forms
 
Rudolstadt, Germany   37,000
(production and R&D facilities)
  Inhalation technology, ophthalmics and nasal products
 

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Location/Division or Business Unit
  Size of Site (in square meters)
  Major Activity
 
Stryków, Poland   20,000   Broad range of finished dosage forms
 
Kolshet, India   20,000
(production and R&D facilities)
  Generic pharmaceuticals
 
Boucherville, Canada   14,000
(production and R&D facilities)
  Injectable products
 
Holzkirchen, Germany   17,000 (production and R&D facilities)   Oral dispersible films, transdermal delivery systems, reservoir and matrix patches
 
Unterach, Austria   15,000 (production and R&D facilities)   Oncology injectables
 
Vaccines and Diagnostics        

Holly Springs, NC

 

50,000 (production facilities)

 

Vaccines and adjuvant
 
Emeryville, CA   99,000
(production and R&D facilities; includes Pharmaceuticals facilities)
  Vaccines and blood testing
 
Siena/Rosia, Italy   99,000
(production and R&D facilities)
  Vaccines
 
Liverpool, UK   38,000   Vaccines
 
Marburg, Germany   86,000
(production and R&D facilities)
  Vaccines and adjuvant
 
Ankleshwar, India   11,000   Vaccines
 
Consumer Health        
 
OTC

 

 

 

 

Lincoln, NE

 

48,000
(production and R&D facilities)

 

Tablets, liquids, creams, ointments, capsules, patches, powders
 
Nyon, Switzerland   15,000
(production and R&D facilities)
  Liquids, creams, aerosols
 
Humacao, Puerto Rico   13,000   Tablets, capsules, medicated chocolates, softgels and medicated dissolving strips
 
Jamshoro, Pakistan   24,000   Tablets, liquids, creams
 
  Animal Health        

Wusi Farm, China

 

39,000

 

Insecticides, antibacterials, acaricides, powders
 
Larchwood, IA   13,000
(production and R&D facilities)
  Veterinary immunologicals
 
Dundee, UK   11,000   Liquids
 
Braintree, UK   6,000   Veterinary immunologicals
 
Huningue, France   5,000   Formulation and packaging of tablets, creams, ointments, suspensions and liquids
 
Charlottetown, Canada   5,000   Veterinary immunologicals for aquaculture
 

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Location/Division or Business Unit
  Size of Site (in square meters)
  Major Activity
 
Major Research and Development Facilities:        
 
Pharmaceuticals        

East Hanover, NJ

 

177,000

 

General pharmaceutical products
 
Basel, Switzerland—St. Johann   150,000   General pharmaceutical products
 
Basel, Switzerland—Klybeck   140,000   General pharmaceutical products
 
Cambridge, MA   116,000   General pharmaceutical products
 
Horsham, UK   38,000   Respiratory and nervous system diseases
 
Emeryville, CA   (included in Vaccines and Diagnostics facilities)   Oncology
 
Shanghai, China   5,000   Oncology
 
Alcon        

Fort Worth, TX

 

219,000 (production and R&D)

 

Pharmaceutical
 
Singapore   50,000 (production and R&D)   Pharmaceutical, Vision Care
 
Duluth, GA   44,000 (production and R&D)   Vision Care
 
Barcelona, Spain   41,250   Pharmaceutical, Vision Care
 
Grosswallstadt, Germany   40,000 (production and R&D)   Vision Care
 
Irvine, California   19,500 (production and R&D)   Surgical
 
Erlangen, Germany   6,600 (production and R&D)   Surgical
 
Schaffhausen, Switzerland   4,100 (production and R&D)   Surgical
 
Pressath, Germany   2,600 (production and R&D)   Surgical
 
Sandoz        

Kundl and Schaftenau, Austria

 

449,000
(production and R&D facilities)

 

Biotech processes, pharmaceutical technologies
 
Menges, Slovenia   131,000
(production and R&D facilities)
  Biotech products and active drug substances
 
Ljubljana, Slovenia   83,000
(production and R&D facilities)
  Broad range of oral sterile finished dosage forms and new delivery systems
 
East Hanover, NJ   6,000   Broad range of finished dosage forms
 
Rudolstadt, Germany   37,000 (production and R&D facilities)   Finished dosage forms for inhalation and ophthalmics
 
Holzkirchen, Germany   17,000 (production and R&D facilities)   Broad range of dosage forms, including implants and transdermal therapeutic systems
 
Boucherville, Canada   14,000
(production and R&D facilities)
  Injectable and ophthalmic products
 

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Location/Division or Business Unit
  Size of Site (in square meters)
  Major Activity
 
Kolshet, India   20,000
(production and R&D facilities)
  Generic pharmaceuticals
 
Unterach, Austria   15,000 (production and R&D facilities)   Oncology injectables
 
Vaccines and Diagnostics        

Emeryville, CA

 

99,000
(production and R&D facilities; includes Pharmaceuticals facilities)

 

Vaccines and blood testing
 
Siena/Rosia, Italy   97,000
(production and R&D facilities)
  Vaccines
 
Marburg, Germany   45,000
(production and R&D facilities)
  Vaccines
 
Cambridge, MA   9,000   Vaccines
 
Consumer Health        
 
OTC

 

 

 

 

Lincoln, NE

 

48,000
(production and R&D facilities)

 

Tablets, capsules, liquids, ointments, creams and high-potent compounds, powders
 
Nyon, Switzerland   15,000
(production and R&D facilities)
  Over-the-counter medicine products
 
Thane, India   2,000
(R&D facilities)
  Tablets, capsules, powders, creams, ointments, oral liquids, multiparticulates
 
  Animal Health        

St. Aubin, Switzerland

 

26,000

 

Parasiticides, therapeutics for companion and farm animals
 
Larchwood, IA   13,000
(production and R&D facilities)
  Veterinary vaccines
 
Yarrandoo, Australia   3,000   Animal Health products
 
Victoria, Canada   3,000   Aquaculture vaccines
 
Basel, Switzerland   2,000   Animal Health products
 

        In the fourth quarter of 2010, we announced a Group-wide review of our manufacturing footprint. Over the coming years, we aim to optimize the network by creating Manufacturing Centers of Excellence to best support the global operations of the Group across divisions. In addition, we aim to optimize our cost structure across divisions and enhance utilization rates at strategic sites to 80 percent of capacity. As part of this initiative, in the fourth quarter of 2010 and during 2011, the following changes were announced:

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As a result of these activities, we have recorded charges related to exits and inventory write-offs of $269 million in 2011, and $332 million cumulatively since the program began in the fourth quarter of 2010.

        Substantial progress has been made in the long-term redevelopment of our St. Johann headquarters site in Basel, Switzerland. This project, called "Campus," was started in 2001 with the aim of transforming the site into a center of knowledge with a primary emphasis on international corporate functions and research activities. At that time, changes needed to be made to the Campus, since the site had originally been designed primarily for pharmaceuticals production, but Research and Development had come to account for a greater proportion of our activities at the site. Through December 31, 2011, the total amount paid and committed to be paid on the Campus Project was $2.1 billion. We expect that, through 2015, we will spend more than $2.5 billion on the Campus and to transfer production facilities from the Campus to other sites in the Basel region. We intend to fund these expenditures from internally developed resources.

        In 2007, NIBR opened a start-up facility for our new R&D center in Shanghai, China (CNIBR). In 2008, we broke ground on Phase 1 of a new facility that was originally to be home to approximately 400 R&D scientists and approximately 400 other Pharmaceuticals Division personnel. In 2009, we announced that we would expand the scope of the site and invest $1 billion over the next five years to increase the size of our operations in Shanghai. Based on a re-evaluation of the site conducted in 2010, the current Phase 1 has been extended by two buildings to fulfill the requirements for the cross-divisional Shanghai campus to house 800 offices and 400 laboratory work places. Through December 31, 2011, the total amount paid and committed to be paid on the CNIBR Project is $181 million.

        In October 2010, we announced that we would invest $600 million over the next five years to build new laboratory and office space for NIBR in Cambridge, Massachusetts on an area of land close to the existing NIBR research facilities on Massachusetts Avenue. In 2011 we finalized design plans for the new buildings, received necessary zoning changes from the city of Cambridge and began preparing the site for construction.

        In late 2010, we commenced a construction project on the campus of Novartis Pharmaceuticals Corporation (NPC) in East Hanover, New Jersey. This project is expected to continue through 2013. It involves construction of three new office buildings, a parking garage, and upgrades to the site entrances. The purpose of the project is to consolidate NPC personnel on one site to drive innovation, collaboration and productivity. The consolidation will also to achieve long-term cost savings resulting from the elimination of off-campus leases. We expect that through 2013 we will spend more than $545 million to complete the construction and consolidate operations onto the campus. As of December 31, 2011, the total amount paid and committed to be paid on this project was $190 million.

        In June 2008, the Vaccines and Diagnostics Division broke ground on a new rabies and tick-borne encephalitis manufacturing facility in Marburg, Germany which is expected to require a total investment of approximately $330 million. Construction is complete and the facility is in the process of executing the necessary validation activities. Regulatory approvals for products are planned for 2012 and 2013. As of December 31, 2011, the total amount paid and committed to be paid on this project was $275 million.

        In November 2009, the Vaccines and Diagnostics Division opened the division's new cell culture-based influenza vaccine manufacturing site in Holly Springs, North Carolina. As of December 31, 2011, the total amount spent on the project was $463 million, net of grants reimbursed by the US government. The total investment in this new facility is expected to be least $900 million, partly supported by grants from the US government and prior investments in flu cell culture technologies at the Novartis Vaccines site in Marburg, Germany.

        In December 2010, Novartis announced the signing of a Memorandum of Understanding, confirming its intention to build a new full-scale pharmaceutical manufacturing plant in St. Petersburg, Russia. In June 2011 we announced the commencement of construction. The plant is expected to produce approximately 1.5 billion units per year (oral solid dosage forms), of which the majority is anticipated to be generic products. Total Novartis Group investment in the plant is expected to be approximately $140 million.

        In 2011, our Alcon Division completed the construction of a new manufacturing and R&D plant in Singapore for the pharmaceutical business. The capital cost of the facility was $134 million and the plant is scheduled to produce saleable product after regulatory approval in 2012.

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        The Vaccines and Diagnostics Division has commenced a project for a new vaccine manufacturing facility in Recife, Brazil. The manufacturing plant is part of Novartis Vaccines' strategy to enter the Brazilian market, and is aligned with the government's goal to become self-sufficient in vaccine production. Our total investment in the facility is expected to be approximately $300 million. The technical start up of the facility is planned for approximately 2015.


Environmental Matters

        We integrate core values of environmental protection into our business strategy to add value to the business, manage risk and enhance our reputation.

        We are subject to laws and regulations concerning the environment, safety matters, regulation of chemicals and product safety in the countries where we manufacture and sell our products or otherwise operate our business. These requirements include regulation of the handling, manufacture, transportation, use and disposal of materials, including the discharge of pollutants into the environment. In the normal course of our business, we are exposed to risks relating to possible releases of hazardous substances into the environment which could cause environmental or property damage or personal injuries, and which could require remediation of contaminated soil and groundwater. Under certain laws, we may be required to remediate contamination at third party sites, or at certain of our properties regardless of whether the contamination was caused by us, or by previous occupants of the property.

        See also "Item 3. Key Information—Risk Factors—Environmental liabilities may impact our results of operations" and "Item 18. Financial Statements—note 20."

Item 4A.    Unresolved Staff Comments

Item 5.    Operating and Financial Review and Prospects


5.A    Operating Results

        This operating and financial review should be read together with the Group's consolidated financial statements in this Annual Report, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board.


OVERVIEW

        Novartis provides healthcare solutions that address the evolving needs of patients and societies worldwide. Our focused, diversified portfolio of businesses is made up of six global operating divisions and reports its results in five segments:

        The Group established its newest and second largest division, Alcon, after securing 100% ownership of Alcon, Inc., on April 8, 2011. The new division includes the CIBA Vision contact lens and lens care business and selected ophthalmic medicines from the Pharmaceuticals Division and is a world leader in eye care, offering the widest spectrum of innovative surgical, pharmaceutical and vision care products to address the world's eye care needs.

        Novartis has leadership positions in each of the five businesses, giving us the capacity to address customer and patient needs across segments of the healthcare marketplace. We believe that our ability to innovate in all these segments will allow us to tailor our portfolio in response to market opportunities and will enable Novartis to continue as an industry leader.

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        Headquartered in Basel, Switzerland, the Novartis Group companies employed approximately 124,000 full-time equivalent associates as of December 31, 2011, with operations in more than 140 countries around the world.


FACTORS AFFECTING RESULTS OF OPERATIONS

        A number of key factors influence the Group's results of operations and the development of our businesses.

        The fundamentals of the healthcare industry remain robust due to long-term demographic and socioeconomic trends worldwide, which are increasing the demand for and use of medicines and other healthcare products. Consistent investments in innovation and advancing technologies are also supporting the development of new medicines to better treat many diseases.

        At the same time, other factors have created a business environment that has significant risks, such as the growing burden of healthcare costs in many countries, which has led governments and payors to focus on controlling spending ever more tightly, and more stringent regulatory demands, which have made securing approvals for new drugs increasingly costly and difficult and increased the risk of disruptions in our supply chain.

        We believe that Novartis is strategically well-positioned to operate successfully in this evolving landscape. We expect that our broad, focused portfolio, our capacity to innovate resulting in a rich pipeline of potential new medicines that address unmet medical needs, and our established presence across regions should enable us to adapt to the evolving healthcare marketplace.


Transformational Changes Fueling Demand

        Long-term trends in the composition and behavior of the worldwide population are fueling demand for and access to healthcare, while scientific advances continue to open new frontiers in patient treatment, creating major opportunities for improved care. These trends are expected to sustain steady growth in the healthcare market overall in the coming years and to drive accelerating growth in key segments.

Aging Global Population and Shifting Demographics

        Scientific advances in treating diseases and increased access to healthcare worldwide have enabled people across the globe to enjoy longer and healthier lives. The rise in life expectancy is coincident with a decline in birth rates, increasing the proportion of the elderly around the world. Over the next decade, there is expected to be a 75% increase in the number of people over the age of 60. In the developed world, by 2040 there are predicted to be twice as many people over the age of 60 as there will be under 15; in the United States, the number of people over the age of 60 will more than double by 2050. The proportion of the elderly is growing even faster in the developing world. For example, according to the United Nations, in China the ratio of people over 60 to the rest of the population is projected to rise by more than 15% annually until 2040. As the global population ages, there will continue to be an accelerating need for treatments for the diseases and conditions that disproportionately afflict the elderly.

        One area where this unmet medical need is particularly evident is eye care. The aging of the world's population is linked to an increase in eye diseases, with several hundred million people living with blindness or serious vision impairment around the world. With the addition of Alcon, we have the resources and expertise to help meet these needs, with the goal of reducing preventable blindness and treating diseases and disorders of the eye.

        Another major trend in worldwide health is an increase in rates of obesity. In fact, there are now more obese people in the world than there are malnourished people, and the World Health Organization (WHO) currently ranks obesity as the world's largest public health problem. Global obesity rates have doubled since 1980; one in three adults worldwide are overweight and one in nine are obese, according to a 2011 study in the British medical journal The Lancet. Once considered a problem only in wealthy countries, due to economic growth and shifting nutritional habits, the prevalence of people who are overweight or obese is significantly increasing in low- and middle-income countries as well, according to the WHO. The problem is only predicted to grow worse: by 2030, the majority of the world's population will be overweight or obese, according to a study conducted by Tulane University in the United States. Obesity and inactive lifestyles are important risk factors for diabetes, cardiovascular conditions and other serious diseases, including cancer. The WHO estimates that globally 44% of the diabetes burden, 23% of the incidence of ischemic heart disease and up to 41% of certain cancer burdens are attributable to obesity.

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        Increased rates of obesity, as well as habits such as cigarette smoking, have contributed to a worldwide rise in the prevalence of chronic diseases—including cardiovascular disease, diabetes, glaucoma and chronic respiratory diseases. Chronic diseases now account for 60% of deaths around the world. Chronic obstructive pulmonary disease (COPD) alone affects more than 200 million people worldwide, and is projected to become the world's third leading cause of death by the end of this decade. Our Pharmaceuticals and Sandoz Divisions offer several products to help address the needs of patients with COPD and other chronic diseases, and we will continue to make significant investments in new treatments to address this growing health threat.

Global Rise in Healthcare Spending

        Across the world, healthcare spending is increasing. Factors driving this increase include aging populations, the rising incidence of chronic diseases and technological and medical advances that make it possible to treat more diseases—and patients—than ever before. Healthcare spending among members of the Organization for Economic Cooperation and Development (OECD) and emerging markets of China, Russia, Brazil and India is expected to rise from $5.3 trillion in 2010 to $7.9 trillion in 2020, an increase of approximately 50%, according to research from auditing and advisory firm PricewaterhouseCoopers (PwC). The United States remain the biggest spender by far, with expenditure on health as a percentage of gross domestic product (GDP) expected to rise to approximately 20% by 2020, up from 17.6% in 2010, according to economists in the Office of the Actuary at the Centers for Medicare and Medicaid Services. Other industrialized nations are also devoting ever greater resources to healthcare. PwC estimates that average healthcare spending as a percentage of GDP among OECD countries will increase to 14.4% by 2020 from under 10% the previous decade.

        At the same time, newly industrialized markets are demanding more and better healthcare. Fueled by strong economic growth and increased commitment from governments to expand access, healthcare spending in emerging markets is set to increase substantially in the years ahead. China's plans to offer universal healthcare coverage by 2020, for instance, is expected to translate into a 20% to 25% annual increase in government healthcare spending throughout the coming decade. Other markets are also investing more resources in the health of their citizens. The Russian government recently pledged $3.9 billion in federal funding to modernize its medical and pharmaceutical industries, and Pharmexpert, a leading Russian market research firm, forecasts that if current trends continue, the Russian pharmaceutical market will exceed $60 billion by the end of the decade.

        Given these trends, IMS Health, a leading provider of industry data, estimates that over the next five years emerging markets will nearly double their spending on medicines from 2010 levels to as much as $315 billion. China, for instance, has now become the world's third largest prescription drug market behind the United States and Japan, according to IMS.

        At a time of slowing pharmaceutical sales in many industrialized countries, this expansion in many emerging markets has led to higher sales growth rates and an increasing contribution to the industry's global performance. The recent government investments in healthcare in key emerging markets can be expected to increase the healthcare industry's opportunities in such markets. As a result, we expect that in the long term, success in our industry will increasingly depend on the ability to meet not only the needs of patients in developed markets, but also those of patients in emerging markets. With our diversified portfolio spanning patented pharmaceuticals, generics and over-the-counter medicines, we are well-positioned to capture the opportunities of the expanding global healthcare market.

        Reflecting the Novartis commitment to improving patient health worldwide and accelerating growth in global markets, we have made a number of strategic investments in fast-growing emerging markets. In June 2011, we began construction on a new state-of-the-art manufacturing plant for pharmaceutical and generic medicines in St. Petersburg, Russia. This investment is part of a greater commitment to local infrastructure and collaborative healthcare initiatives planned in Russia over a five-year period. In China, we will expand the number of our research and development associates nearly ten-fold by 2014, bringing the total to 1,200 across all divisions.

Scientific Advances Opening New Opportunities for Targeted Therapies

        Ongoing developments in technology and advances in scientific understanding, particularly around the human genome, are laying the foundation for the creation of new treatments for medical conditions for which current treatment options are inadequate or non-existent. Further, we are gaining a greater capability to identify the specific biological factors, called "biomarkers," that indicate whether or not a given drug will be effective for a particular patient. It is estimated that up to 95% of the variability in drug response may be due to genetic differences. Effectively pairing treatments and genetic biomarkers has tremendous potential both in terms of patient health and healthcare savings.

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        The science of biomarkers is just one element of a new healthcare paradigm known as "personalized medicine." By delivering the right medicine to the right patient at the right time, this more targeted approach has the potential to significantly improve the response rates and outcomes of patients. Personalized medicine is expected to be a major growth driver for the industry, with the market expected to quadruple in size over the next five years, expanding to approximately $160 billion.

        At Novartis, our research and development strategy is based on innovative science guided by patient needs. We employ state-of-the-art technology in order to achieve an understanding of the underlying mechanism of disease, and then use this understanding as the basis for the development of targeted therapies, a number of which have already been brought to market. Consistent with our science-focused strategy, Novartis has established a Molecular Diagnostics unit within our Pharmaceuticals Division to support our efforts to develop and commercialize personalized medicines. Additionally, in the Alcon Division, we are combining Novartis research operations with Alcon's expertise in development to provide a new innovation engine for the Group. Alcon scientists can now leverage the resources and capabilities of the Novartis Institutes for BioMedical Research, our global pharmaceutical research organization, to accelerate product innovation for the eye.

New Technologies Changing the Delivery of Healthcare

        New and innovative technologies have the potential to transform the delivery of healthcare and the relationships between patients, providers and payors. The spread of broadband networks coupled with the ability to embed wireless sensors in an array of devices and everyday materials is beginning to increase the use of telemedicine, or remote patient monitoring. Advances in imaging and diagnostic technologies are paving the way for new forms of preventive medicine, while the growth of electronic medical records promises to improve patient care and medical research.

        Novartis is investigating new ways to use technology to improve patient outcomes beyond traditional research and development. We are actively exploring telehealth technology, which allows remote monitoring of key health indicators and patient compliance. Such technologies could both reduce healthcare costs and improve patient outcomes by allowing healthcare professionals to assess treatments and identify problems remotely and in real time.

        We are also embracing new technologies and information channels to better engage with our stakeholders, from patients to physicians to payors and retailers. For example, Novartis Vaccines and Diagnostics developed VaxTrak, an iPhone application that allows families to better track and plan their children's vaccinations. The application also uses GPS technology to locate nearby retail clinics offering and administering flu vaccines.


Increasingly Challenging Business environment

        Medical and technological innovation, coupled with the increasing demand for healthcare worldwide, offers healthcare companies opportunities for growth and, more importantly, the chance to improve patient outcomes. However, the operating environment for healthcare companies has become increasingly challenging. The ongoing effects of the global financial crisis, combined with rising demands on healthcare systems, have led to a renewed focus on cost containment by governments and payors across the globe. Research and development of new products has been made more complicated and costly due to high levels of regulatory and safety scrutiny. In addition, the industry faces the continued expiration of patents and the growing market prominence of generic products, which, while offering an opportunity to our Sandoz Division, represents a significant challenge to our Pharmaceuticals and Alcon Divisions.

Greater Pressure to Contain Healthcare Spending

        The ongoing financial crisis and its resultant drag on economic growth continue to impact the debt burden of many economies, most notably in Europe, where Greece is facing possible default of its sovereign debt obligations, and countries such as Spain and Italy have had their sovereign debt obligations downgraded. With budgets under pressure and a shaky global economy, stringent cost-containment measures have been implemented in countries around the world.

        Given the growth of overall healthcare costs as a percentage of GDP in many countries, some governments and payors have introduced price reductions and/or rebate increases for patented and generic medicines, as well as other healthcare products and services. Other initiatives to contain healthcare costs include mandatory pricing systems, reference pricing initiatives, an increase in imports of drugs from lower-cost countries to higher-cost countries, shifting of the payment burden to patients through higher co-payments, limiting physicians' ability to

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choose among competing medicines, mandatory substitution of generic drugs, and growing pressure on physicians to reduce the prescribing of patented prescription medicines.

        These ongoing pressures affect all of our businesses that rely on reimbursement, including Pharmaceuticals, Alcon, Sandoz, and Vaccines and Diagnostics. To mitigate these pressures, which we expect to continue in 2012, we have strengthened dialogue with health authorities and payors to develop innovative pricing models that allow us to provide treatment options that result in better outcomes for patients. For example, in the UK, Novartis offers dose-capping arrangements for Lucentis for patients with wet age-related macular degeneration, whereby up to 14 injections per patient and per eye are paid by the UK National Health Service (NHS), with Novartis reimbursing NHS for the cost of additional vials the patients may need. Novartis offers similar dose-capping arrangements for Lucentis in many other countries.

        Where we have unique, often critical medications, Novartis is committed to providing access for patients most in need through access-to-medicines programs. These programs provide assistance to those experiencing financial hardship or living in the developing world who would otherwise not be able to receive treatment.

Patent Expirations, Generic Competition Pressure the Industry

        The pharmaceutical industry faces an unprecedented number of patent expirations in the coming years, a primary factor cited by experts as limiting industry growth. For the industry as a whole, the introduction of new products is not expected to generate the same magnitude of industry sales as the products losing market exclusivity.

        The ability to successfully secure and defend intellectual property rights is particularly relevant with regard to the Pharmaceuticals and Alcon Divisions, as well as key products of our other divisions. The loss of exclusivity for one or more important products—due to patent expiration, generic challenges, competition from new patented products, or changes in regulatory status—will have a material negative impact on the Group's results of operations. Novartis takes legally permissible steps to defend its intellectual property rights, including initiating patent infringement lawsuits against generic drug manufacturers.

        Some of our best-selling products have begun to face significant competition due to the end of market exclusivity resulting from the expiry of patent protection.

        We aim to replace revenue lost from such products with revenue from our recently launched products (products launched since 2007 comprised 25% of our sales in 2011) and we believe that these products have the potential for significant additional sales. Nevertheless, the loss of sales from key products remains a major challenge to our business.

Increasing regulatory, safety hurdles

        Our ability to continue to grow our business and replace sales lost due to the end of market exclusivity in the mid- to long-term depends upon the success of our research and development activities in identifying and developing breakthrough products that address unmet needs, are accepted by regulators, patients and physicians, and are reimbursed by payors. Developing new pharmaceutical, biologic, medical device and vaccine products and bringing them to market, however, is a costly, lengthy and uncertain process. In an effort to ensure product safety,

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authorities are placing greater emphasis on the risk/benefit profile of healthcare products, with particular attention to the value-add and differentiation of products. This focus has led to requests for more clinical trial data, the inclusion of a significantly higher number of patients in clinical trials and more detailed analysis of the trials. As a result, the process of obtaining regulatory approvals for products has become even more arduous.

        The post-approval regulatory burden on healthcare companies has also been growing. Increasingly, approved drugs have been subject to requirements such as Risk Evaluation and Mitigation Strategies (REMS), Risk Management Plans, comparative effectiveness studies, Health Technology Assessments and requirements to conduct post-approval Phase IV clinical trials to gather detailed safety and other data on products. These requirements make the maintenance of regulatory approvals and achievement of reimbursement for our products increasingly expensive and further heighten the risk of recalls, product withdrawals, or loss of market share. Going forward, we expect that there will be even greater regulatory attention to minimizing risk and maximizing benefit on the level of the individual patient.

        While Novartis continues to be one of the industry leaders in approvals, similar to our industry peers we have been required by health authorities to conduct additional clinical trials and to submit additional analyses of our data in order to obtain product approvals. We have also had REMS and other such requirements imposed as a condition of approval of our new drugs. These factors have increased our costs and caused delays in obtaining approvals of new products, and have created a risk that safe and effective products will not be approved or will be removed from the market after having been approved. For example, in late December, following the seventh interim review of data from the ALTITUDE study with Tekturna/Rasilez (aliskiren), Novartis announced that the trial was halted on the recommendation of the independent Data Monitoring Committee (DMC) overseeing the study. The DMC concluded that patients were unlikely to benefit from treatment on top of standard anti-hypertensive medicines, and identified higher adverse events in patients receiving Tekturna/Rasilez in addition to standard of care as part of the trial. Following discussions with health authorities, Novartis wrote to healthcare professionals worldwide recommending that hypertensive patients with diabetes should not be treated with Tekturna/Rasilez, or combination products containing aliskiren, if they are also receiving an angiotensin-converting enzyme (ACE) inhibitor or angiotensin receptor blocker (ARB). As an additional precautionary measure, Novartis ceased promotion of Tekturna/Rasilez-based products for use in combination with an ACE inhibitor or ARB.

        Novartis aims to counter such challenges through our focus on innovation and our emphasis on understanding disease pathways, which we believe will enable us to continue to bring differentiated new medicines to the market that effectively address patients' unmet medical needs. Alcon, for example, is the market leader in ophthalmic surgical products, and its line of AcrySof intraocular lenses has revolutionized cataract treatment, with over 40 million lenses implanted worldwide. Similarly, in the development of Bexsero, our vaccine candidate against the B serogroup of meningococcal disease (MenB, the most common cause of bacterial meningitis), Novartis Vaccines has pioneered a new approach called "reverse vaccinology." This approach involves decoding the genetic makeup of MenB and selecting those proteins that are most likely to be broadly-effective vaccine candidates. While Bexsero is still under regulatory review, it could potentially provide a solution to a major public health concern for which there is no effective routine vaccine.

Risk of Liability and Supply Disruption from Manufacturing Issues

        The manufacture of our products is heavily regulated by governmental health authorities around the world, and such health authorities continue to intensify their scrutiny of manufacturers' compliance. If we or our third-party suppliers fail to comply with their requirements, then we could be faced with product shortages or an inability to supply product to patients, resulting in a loss of revenue and potential third-party litigation. In addition, health authorities have begun to impose significant penalties for failures to comply with current Good Manufacturing Practices regulations (cGMP), and have the power to delay the approval of new products to be manufactured at the impacted site.

        Like our competitors, we have faced, and continue to face, significant manufacturing issues. For example, in November 2011, we received a Warning Letter from the FDA with respect to three of our Sandoz facilities: Broomfield, Colorado; Wilson, North Carolina; and Boucherville, Canada. The Warning Letter raised concerns regarding compliance with FDA cGMP regulations at these facilities, and stated that until the FDA confirms that the situation has been rectified, it may recommend disapproval of any pending applications or supplements listing Novartis affiliates as a drug manufacturer. Novartis is collaborating with the FDA to promptly correct all concerns raised in the Warning Letter, and to ensure that our products are safe, effective and meet the highest quality standard for the patients who rely on them. However, if we are unable to fully resolve the issues raised in the Warning Letter, then we could be subject to legal action without further notice.

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        Additionally, in December 2011, Novartis Consumer Health voluntarily suspended operations at its US manufacturing facility in Lincoln, Nebraska, and subsequently recalled certain products. As of the date of this report, it is not possible to determine when the plant will resume full operations. The Lincoln facility produces a variety of products with annual sales value of less than 2% of Novartis Group sales. Should we fail to complete the planned improvements at the site in agreement with the FDA in a timely manner, then we may suffer a significant loss in sales. While this action was taken as a precautionary measure, it reinforced our commitment to a single high quality standard for the entire Novartis Group, and we are making the necessary investments to implement this standard across the network. However, ultimately, there can be no guarantee of the outcome of these matters. Nor can there be any guarantee that we will not face similar issues in the future, or that we will successfully resolve such issues when they arise.

        In addition to regulatory requirements, many of our products involve technically complex manufacturing processes or require a supply of highly specialized raw materials. For some products and raw materials, we may also rely on a single source of supply. In particular, an increasing portion of our portfolio, including products from our Pharmaceuticals, Alcon, Vaccines and Diagnostics, and Sandoz Divisions, are "biologic" products. Unlike traditional "small-molecule" drugs, biologic drugs or other biologic-based products cannot be manufactured synthetically, but typically must be produced from living plant or animal micro-organisms. As a result, the production of biologic-based products that meet all regulatory requirements is especially complex. Even slight deviations at any point in the production process may lead to batch failures or recalls. In addition, because the production process is based on living micro-organisms, the process could be affected by contaminants, which could impact those micro-organisms. As a result, the inherent fragility of certain of our raw material supplies and production processes may cause the production of one or more of our products to be disrupted, potentially for extended periods of time.

        Also as part of the Group's portfolio of products, we have a number of sterile products, including oncology products, which are considered to be technically complex to manufacture and require strict environmental controls. Any change in the environment may impact production schedules and inadvertently affect supply until remediated.

Potential Liability Arising from Legal Proceedings

        In recent years, there has been a trend of increasing litigation against the industries of which we are a part, especially in the United States. A number of our subsidiaries are, and will likely continue to be, subject to various legal proceedings that arise from time to time. As a result, we may become subject to substantial liabilities that may not be covered by insurance. Litigation is inherently unpredictable, and large verdicts can occur. As a consequence, we may in the future incur judgments or enter into settlements of claims that may have a material adverse effect on our results of operations or cash flows.

        In recent years, governments and regulatory authorities have been stepping up their compliance and law enforcement activities in key areas, including marketing practices, antitrust, trade sanctions and corruption. Our businesses have been subject to significant civil litigation as well as governmental investigations and information requests by regulatory authorities.

        For example, in 2010 our US affiliate Novartis Pharmaceuticals Corporation (NPC) settled parallel civil and criminal investigations by the US government into allegations of potential inappropriate marketing and promotion of six Novartis drugs. As part of the settlement, NPC agreed to plead guilty to one misdemeanor, and to resolve civil charges against it, agreed to pay a total of $422.5 million and enter into a five-year Corporate Integrity Agreement.

        At the same time, our Sandoz Division may, from time to time, seek approval to market a generic version of a product before the expiration of patents claimed by the marketer of the patented product. We do this in cases where we believe that the relevant patents are invalid, unenforceable, or would not be infringed by our generic product. As a result, affiliates of our Sandoz Division frequently face patent litigation, and in certain circumstances, we may elect to market a generic product even though patent infringement actions are still pending. Should we elect to proceed in this manner and conduct a "launch at risk," we could face substantial damages if the final court decision is adverse to us.

        Adverse judgments or settlements in any of these cases could have a material adverse effect on our business, financial condition and results of operations. See note 20 to our consolidated financial statements for further information on legal proceedings. At the same time, we have in place, and always seek to strengthen a significant compliance with law program. As part of our broad commitment to compliance, we are implementing a revised Code of Conduct, containing our fundamental principles and rules concerning ethical business conduct.

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The Global Economic Crisis Threatens our Results

        Many of the world's largest economies and financial institutions continue to be impacted by the ongoing global economic and financial crisis, with some continuing to face financial difficulty, a decline in asset prices, liquidity problems and limited availability of credit. It is uncertain how long these effects will last, or whether economic and financial trends will worsen or improve. Such uncertain economic times may have a material adverse effect on our revenues, results of operations, financial condition and ability to raise capital. For example, the ongoing debt crisis in certain countries in Europe has increased pressures on those countries, and on payors in those countries to force healthcare companies to decrease the prices at which we may sell them our products. The debt crisis has also given rise to concerns that some countries may not be able to pay us for our products at all. This situation could deteriorate as a result of potential developments in countries of key concern such as Greece, which is facing possible default of its sovereign debt obligations, as well as Spain and Italy, the sovereign debt obligations of which were recently downgraded.

        Current economic conditions may adversely affect the ability of our distributors, customers, suppliers and service providers to obtain the liquidity required to pay for our products, or otherwise to buy necessary inventory or raw materials, and to perform their obligations under agreements with us, which could disrupt our operations, and negatively impact our business and cash flow. Although we attempt to monitor these third parties' financial condition and their liquidity, our ability to do so is limited, and some of them may become unable to pay their bills in a timely manner, or may even become insolvent, which could negatively impact our business and results of operations. These risks may be elevated with respect to our interactions with third parties with substantial operations in countries where current economic conditions are the most severe, particularly where such third parties are themselves exposed to sovereign risk from business interactions directly with fiscally-challenged government payers.

        In addition, the varying effects of difficult economic times on the economies and currencies of different countries has impacted, and may continue to unpredictably impact, the conversion of our operating results into US dollars, our reporting currency. This is particularly so given recent financial troubles in the US and in many European economies, investor concerns about the future of the Euro, and the flight of investor capital to the perceived safety of the Swiss franc.


Novartis Strategies for Sustainable Growth

        The cornerstone of Novartis strategy is our diversified healthcare portfolio across high-growth segments of the healthcare industry and geographies. Novartis is the only healthcare company with leading positions in pharmaceuticals, eye care, generics, vaccines and diagnostics, over-the-counter medicines and animal health.

        We believe that the diversity of our business and product portfolio allows us to capture opportunities across the global healthcare market, while balancing our risk and exposure to macroeconomic effects. We expect our broad portfolio will help us maintain growth despite the loss of revenues due to patent expiration.


Our Priorities: Innovation, Growth and Productivity

        Novartis is committed to becoming the most successful and respected healthcare company in the world. To achieve this, we base our operations on three strategic priorities: leading innovation through new research methods and new collaborations with industry stakeholders to better address customer and patient needs; accelerating growth by responding to key market opportunities and delivering new treatments quickly and efficiently to customers and patients; and improving productivity by streamlining our organization in order to improve profitability and free up resources for new research and development investments. We believe that by focusing on these principles we can enhance our capabilities in meeting the world's healthcare needs and continue to drive value for our shareholders.

Extending Our Lead in Innovation

        Our commitment to scientific innovation underpins all our strategic principles. Sustaining innovation and R&D productivity across our businesses requires substantial investment and commitment, and we plan to continue to invest at the high end of the industry average. In 2011, we invested more than 20% of Pharmaceuticals Division sales. Our research approach, which focuses on understanding diseases and their molecular pathways, has fundamentally changed how we do business. Researching these pathways allows us to establish "proof of concept" via small clinical studies, sometimes in rare diseases, early in the research and development process. In some of those cases, regulatory approval may be achieved relatively quickly because of the urgent unmet need of patients with such rare diseases. While growth is supported by the initial launch of the

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given compound in the targeted population, we are sometimes also able to conduct parallel development into other potential treatment applications, which may have much larger patient populations.

        For example, Afinitor, our kidney cancer treatment, received approval from the FDA and EMA in 2011 for the treatment of advanced pancreatic neuroendocrine tumors. The active ingredient in Afinitor, everolimus, was also approved as Votubia in the EU for the treatment of subependymal giant cell astrocytoma associated with tuberous sclerosis complex for which surgery is not a treatment option. Late-stage studies also showed that Afinitor, in combination with exemestane, significantly lengthens the amount of time women with advanced breast cancer live without the disease progressing.

        Our track record of bringing new medicines to the market continues to be among the best in the industry. In 2011, our Pharmaceuticals Division secured approval for 15 new products and important indication extensions in the US, EU and Japan.

        We believe that our focus on innovation will enable us to continue to produce breakthroughs that address unmet patient need and further grow our business.

Accelerating Growth Across Our Five Platforms

        Novartis aims to drive growth in two key ways: via the introduction of innovative new products as described above, and through expansion of our business in fast-growing emerging markets.

        Innovative products from across our portfolio are making a major contribution to the Group's overall growth, with recently launched products growing 38% in 2011 versus the previous year (excluding A(H1N1) including Alcon on a pro forma basis in 2010), now representing 25% of total sales. In the Pharmaceuticals Division, recently launched products include: Gilenya, the first oral multiple sclerosis treatment; Lucentis, our treatment for wet age-related macular degeneration, which is being expanded to new indications; our kidney cancer treatment Afinitor, which has been granted additional indications; and Galvus, our oral medication for treatment of type-2 diabetes.

        The addition of Alcon, our newest and second largest division, brings more new products to our portfolio, such as advanced technology intraocular lenses used in cataract surgery. In Sandoz, strong growth of biosimilars, the generic versions of biologic drugs, and generic injectables, such as the blood-thinning medication enoxaparin, are also helping to transform the growth prospects of the Group. In Vaccines and Diagnostics, our meningococcal disease franchise is also growing strongly, driven by the increase of Menveo market share in the United States and the growth of our meningitis C vaccine in emerging markets.

        Given the current cost pressures in the market for prescription medicines, we believe there is ample scope to expand our Sandoz Division, as well as our Consumer Health businesses. We have refocused the portfolio of Consumer Health, which comprises OTC and Animal Health, on core priority brands, a strategy that has enabled Consumer Health to post 3% sales growth in constant currencies in 2011.

        The prosperity of the developing world is expected to increase in the coming years, driving growth in our industry. It is estimated that by 2030 emerging markets will account for about 60% of global GDP. This economic growth is greatly expanding access to healthcare in these geographies. Consistent with our long-term growth strategy, we continue to build our presence in high-growth markets around the world, particularly in our top six emerging markets, comprising Brazil, China, India, Russia, South Korea and Turkey. Long-term investments in these areas are crucial to winning market share and being well-positioned to capture the opportunities that expected growth in these markets will offer.

        Many of these emerging markets have little, if any, distinction between pharmaceutical, OTC and generic products. Given the Novartis Group's portfolio, we believe that we have an advantage in such markets, since we offer a broad spectrum of medicines to treat a range of diseases. To take full advantage of the growth opportunities in emerging markets, we have launched many market-tailored initiatives. In China, we plan to continue to expand our commercial infrastructure and capabilities, while also pursuing targeted licensing, acquisition and alliance opportunities. In Brazil, we are leveraging our broad portfolio in order to gain scale to compete with consolidating retail channels and provide key accounts with the full range of Novartis offerings. In India, we are leveraging the capabilities of Pharmaceuticals, Sandoz, and Vaccines and Diagnostics to gain critical mass, and investing in localized products and commercial infrastructure. In Russia, we are building alliances with government, regions and local companies and strengthening key account management to expand our reach.

        As a result of such initiatives, in 2011 Novartis generated $5.8 billion, or approximately 10% of net sales, from the Group's top six emerging markets. However, combined net sales in the top six emerging markets grew at

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the more rapid pace of 17% in constant currencies in 2011, compared to 11% constant currency growth achieved in the seven largest developed markets. Hence, emerging markets are making increasingly significant contributions to our results, a trend we expect to continue, as we plan to continue investing in these markets.

Driving Productivity

        Novartis integrates efforts toward greater productivity and increased efficiency into all our operations, constantly seeking ways to simplify and streamline processes and to reduce costs to improve margins. We are committed to freeing up resources that can be devoted to customer and growth initiatives, research and development of new offerings for patients with unmet needs, and shareholder returns. There are four key areas where we target productivity improvements across our businesses: our manufacturing footprint, Procurement, General & Administration expenses and Marketing & Sales spend.

        In 2010, we initiated a Group-wide program to review our manufacturing footprint, which continued to progress in 2011. The program has two aims: first, to optimize the network by creating Manufacturing Centers of Excellence to best support the global operations of the Group across divisions, and second, to optimize the cost structure across divisions and enhance utilization rates at strategic sites to 80% of capacity. To these ends, we announced the exit or partial exit of 14 sites since the program started in 2010, thereby reducing excess capacity and enabling the shift of strategic production to technology competence centers.

        Additional efficiencies are expected through Marketing & Sales spend, as Novartis continues to reallocate resources geographically and simplify prevailing processes. As a percentage of sales, Marketing & Sales spend has decreased from 26.3% in 2010 to 25.7% in 2011, down 3.5 percentage points since 2007.

        In addition, we made Procurement a major source of savings by leveraging our scale, implementing global category management and creating country Centers of Excellence in key markets, which generated annual savings in 2011 of approximately $1.3 billion.

        Novartis also continuously looks for ways to simplify its structures, especially with regard to General & Administration expenses. The streamlining of core processes across the Group and the implementation of core service centers for functions such as Human Resources and Finance will further provide leverage and resources for reinvestment.


Novartis Businesses Face Opportunities and Challenges

        Novartis believes that its portfolio of healthcare businesses gives us a strong position to meet many of the needs of customers and patients in today's healthcare marketplace, which is expected to grow 5.5% (CAGR) between 2011 and 2016. In the view of Novartis, sustained growth in the healthcare industry requires the capacity to adapt to changing and expanding markets worldwide, to collaborate with industry stakeholders, and to deliver new treatments based on new medical advancements that improve patient health. We believe that Novartis has both the scope and innovative capacity to succeed in all these areas. For example, we have a highly competitive and robust pipeline with more than 130 projects in clinical development, including 66 new molecular entities. We have also achieved a strong level of launch excellence, with recently launched products growing 38% (excluding A(H1N1) including Alcon on a pro forma basis in 2010), over the previous year.

        Novartis maintains a leadership position in developing and delivering prescription medicines (Pharmaceuticals, which represents 56% of net sales in 2011), innovative eye care products (Alcon, 17%), complex, differentiated generics and biosimilars (Sandoz, 16%), preventative vaccines and diagnostic tools (Vaccines and Diagnostics, 3%), and market-leading over-the-counter offerings and medicines for animals (Consumer Health, 8%). According to IMS, these sectors are expected to grow between 2% per year (Pharmaceuticals) and 8% per year (Vaccines) from 2011 to 2016. Additionally, we have positioned ourselves to capture significant marketplace opportunities across geographies, with 37% of 2011 net sales in Europe, 33% in the US, 21% in Asia, Africa and Australasia, and 9% in Canada and Latin America, helping to mitigate the impact of currency fluctuations. Consequently, Novartis is not dependent for growth on any one product, region, or market. Our growth is sustained by our strong position in diverse market segments, with a focus on the areas of greatest customer and patient need.

        While Sandoz can benefit from government pressure on prices, the healthcare landscape continues to offer growth opportunities for patented pharmaceuticals as well. We believe that the Novartis portfolio will allow us to continue to grow and to improve healthcare outcomes for patients across treatment categories all over the world.

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Pharmaceuticals: Filling unmet need through differentiated drugs

        Novartis has developed innovative medicines for the treatment of cancer, cardiovascular disease, and neurological conditions, among others. Yet urgent patient needs remain, as many diseases and conditions lack effective treatments or any treatment at all. This is why we continue to focus our research on areas of high unmet medical need and where the fundamental science is well understood. Our dedicated Molecular Diagnostics unit seeks to improve the efficacy of our medicines by identifying biomarkers in patient groups that respond to the new medicines. This is intended to enable us to focus our research on smaller, narrowly defined groups of patients. Such patient segmentation is intended to assist us in accelerating the development of therapies that have the potential to be more targeted and effective with better patient outcome and fewer side effects.

        Furthering our commitment to individualized treatment, we acquired United States-based oncology laboratory Genoptix, which diagnoses bone, blood and lymph cancers and disorders for hematologists and oncologists. The acquisition enhances the Group's tools and services that aim to improve health outcomes by advancing the ability to define and monitor individualized treatment programs. The business provides a strategic fit with our current portfolio of companion diagnostic programs within the Novartis Molecular Diagnostics unit.

        Underpinning our Pharmaceuticals Division's growth is our ability to rejuvenate our portfolio through innovative new products. This is expected to allow us to sustain growth even in the face of factors such as patent loss, increased generics competition and government pricing caps. Although hypertension medication Diovan and breast cancer treatment Femara lost patent protection in several core markets in 2011, losses are expected to be offset in the years ahead by sales growth from recently launched products, including Lucentis, Tasigna, Galvus, Gilenya, Afinitor, Xolair and Onbrez Breezhaler. In 2011, recently launched products (those launched since 2007) accounted for 28% of net sales, compared to 22% in 2010. We expect these products, as well as new products anticipated to be launched over the next five years, to generate an increasing proportion of our sales.

        Our Pharmaceuticals pipeline is one of the most productive in the industry—with higher success rates at every stage of development, preclinical through registration, than our competitors—which we expect to compensate for the anticipated loss of revenues from patent expirations. For example, our investigational compound INC424 has shown significant potential in treating patients with myelofibrosis, a life-threatening blood cancer, in Phase III trials. Another Phase III study showed that 45% of children with active systemic juvenile idiopathic arthritis were able to substantially reduce their use of steroids following treatment with ACZ885, and were nearly three times less likely to suffer a new flare versus placebo. We plan to continue to invest in R&D at the high end of the industry average to sustain our industry-leading investment in R&D, which we believe will allow us to discover and develop new targeted therapies like these to better meet the needs of patients worldwide.

Alcon: The world leader in eye care

        As the global population continues to age, healthcare demands in eye care are expected to accelerate. For example, it is estimated that by 2020, 60 million people will have open-angle glaucoma and 2.5 billion will be affected by myopia (nearsightedness) globally. As a result, eye care has been one of the fastest growing therapeutic areas in the healthcare industry.

        Novartis has long held an established position in the eye care segment through CIBA Vision and our Novartis Ophthalmics portfolio. In 2011, we secured 100% ownership of Alcon, Inc., the world's largest eye care company, and merged it into Novartis. The merger with Alcon gives us an even larger footprint in the attractive, high-growth sector of eye care.

        By combining our complementary businesses, Novartis and Alcon are better able to address patient need and create value for shareholders. The new Alcon Division now holds competitive positions in highly complementary product areas, spanning surgical equipment and technology, prescription medicines, contact lenses and lens care products. The world leader in ophthalmic surgery, Alcon offers advanced surgical technology such as intraocular lenses that simultaneously correct for presbyopia, which affects all cataract patients, and astigmatism, which affects about one-third of these patients.

        We have also strengthened our innovation capabilities, with Alcon scientists working alongside Novartis associates at NIBR to discover expanded ophthalmic research targets and develop chemical and biologic compounds for diseases of the eye, with a particular focus on diseases such as glaucoma and macular degeneration.

        We believe the integration of Alcon into the broader Group will also enable us to realize annual cost synergies of $350 million by 2013.

Sandoz: Creating Affordable, Effective Alternatives to Complex Drugs

        By 2016, patented pharmaceuticals with global annual sales totaling around $200 billion are expected to lose their patent protection and face potential competition from generic alternatives, according to the research firm EvaluatePharma. In addition, governments and healthcare providers worldwide are increasingly transitioning to generic medicines as an alternative to patented prescription products in order to contain overall healthcare spending.

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        There is a particular demand for generic alternatives to complex patented treatments, as these treatments are often among the most costly. This demand has made the market for differentiated, "difficult-to-make" generics one of the fastest growing and most attractive segments of the generics industry. Sandoz has established itself as a leader in developing differentiated products, including inhalers, oncology injectables, patches, and biosimilars, generic versions of biologic drugs. The significant technological capabilities and expertise required make the development of such treatments difficult for most companies. However, Sandoz has been effective in leveraging the innovative and technological capabilities and commercial scope of the entire Novartis Group in order to overcome these hurdles. In 2011, Sandoz achieved blockbuster success with generic enoxaparin based on a strong first-to-market launch in 2010, underscoring our leadership in differentiated products.

        Sandoz has also had success in creating highly complex biosimilars, achieving global sales of $261 million in 2011, an increase of 37% in constant currencies over the previous year. Sandoz is also the first and only company with more than one biosimilar on the market in Europe and achieved the first-ever biosimilar approvals in the US, Japan and Canada. With patents expected to expire over the next four years on biologics with global sales of $64 billion, our leading position in biosimilars gives us an advantage within the competitive generics industry. Moreover, our strong biosimilars pipeline, with more than eight molecules in development and two projects in Phase III as of the end of 2011, gives us an opportunity to remain at the forefront of this key sector, driving continued growth and making healthcare more affordable for patients.

        We also plan to continue to expand our generics success in emerging markets and accelerating growth in mature markets such as the United States. With the full integration of Alcon into the Novartis Group, the Sandoz US portfolio has been broadened with the ophthalmic and optic products of Falcon Pharmaceuticals, Ltd., Alcon's US generics business. The addition of this new portfolio has made Sandoz the largest manufacturer and marketer of generic ophthalmic and optic products in the US.

Vaccines and diagnostics: Preventing disease

        As global healthcare costs rise and chronic diseases become a greater burden in emerging markets, the prevention of disease has taken on new urgency. Governments and payors are increasingly recognizing the essential roles of vaccines and blood screening in prevention, and in generally maintaining worldwide health.

        The vaccines market continues to expand, with expected growth of approximately 8-10% annually for the next five years. We are focused on developing safe and effective methods to better prevent various forms of the flu as well as other major causes of human illness. Novartis Vaccines research is leading advances in the way vaccines are made so that we can bring patients novel offerings to effectively prevent devastating infectious diseases. Our meningococcal disease franchise is growing strongly, driven by the increase of Menveo market share in the United States and the growth of our meningitis C vaccine, Menjugate, in emerging markets. Menveo sales achieved $142 million in 2011, and we continue to expand this franchise. In June, the FDA accepted our application to expand the Menveo indication to include infants and toddlers as young as two months, supported by clinical data from more than 6 000 children worldwide between the ages of 2 and 23 months. If approved, Menveo would be the first quadrivalent meningococcal conjugate vaccine to provide protection in the first year of life, when the majority of infections occur. Meanwhile, our vaccine candidate against the B serogroup of meningococcal disease, Bexsero, is nearing the completion of the regulatory review process in Europe, Canada and other regions with high disease incidence.

        We have successfully incorporated cutting-edge technologies into our Vaccines and Diagnostics research practices, including the use of genomics and reverse vaccinology. These processes were essential, for instance, in the development of our response to the A(H1N1) pandemic flu in 2009, and in our development of Bexsero. Work is ongoing on vaccine candidates in our earlier development pipeline, including, for example, vaccines against Group B streptococcus, staph aureaus and pseudomonas aeruginosa.

        In 2011 we completed our acquisition of majority control of Zhejiang Tianyuan, a Chinese vaccines manufacturer, facilitating greater access to China as part of our strategy to strengthen our presence in key emerging markets and provide vaccines for patients with critical unmet needs.

Consumer Health: Offering self-medication options to patients and veterinary medicines for animals

        Accelerated healthcare spending is leading governments, payors and other healthcare providers to seek ways to reduce overall healthcare costs. In many cases, over-the-counter (OTC) medicines represent a cheaper, effective alternative to prescription options. In addition, wider availability of health information via the Internet, which empowers patients to play a greater role in their own healthcare, can lead them to choose OTC offerings in treating or preventing illness. Our continued focus on priority brands within OTC delivered strong results, with

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several of those brands growing at a double-digit rate over the prior year, offsetting the negative impact of expired distribution contracts and divested brands. However, at the end of 2011, OTC experienced net sales decline due to a temporary suspension of operations and voluntary product recall at one of the US manufacturing sites. We are focused on driving growth by increasing the scale of business in top markets and expanding our portfolio in core disease areas, such as gastrointestinal and pain relief. OTC sales in the top six emerging markets also grew at a double-digit rate in 2011, led by Russia, Brazil and China, where the division launched Lamisil to compete in the growing anti-fungal market.

        Another way we can maximize our return on investment in research into new medicines is by leveraging that investment by extending our work in Animal Health, potentially generating incremental sales on the dollars invested in R&D. In many cases, our Pharmaceuticals Division's medicines, in adjusted doses and dosage forms, have applications for pets and farm animals. In fact, about a third of the Animal Health R&D portfolio consists of projects from the human health pipeline. We have been able to leverage synergies across R&D and manufacturing to make Animal Health an important second stream of growth for our new and existing treatments. We continue to sustain Animal Health's leading position in specialty segments, with strong performance of the pig therapeutic Denagard in the United States, China and Brazil. In Europe, Milbemax remained the number one de-wormer for cats and dogs, with the new chewy formulation accelerating growth. Key emerging markets continue to contribute strong double-digit growth to our Animal Health business globally.


CORE RESULTS AS DEFINED BY NOVARTIS

        The Group's core results—including core operating income, core net income and core earnings per share—exclude the amortization of intangible assets, impairment charges, expenses relating to the integration of acquisitions as well as other items that are, or are expected to accumulate within the year to be, over a $25 million threshold that management deems exceptional.

        Novartis believes that investor understanding of the Group's performance is enhanced by disclosing core measures of performance because, since they exclude these exceptional items which can vary significantly from year to year, the core measures enable better comparison across years. For this same reason, Novartis uses these core measures in addition to IFRS and other measures as important factors in assessing the Group's performance.

        The following are examples of how these core measures are utilized:

        Despite the use of these measures by management in setting goals and measuring the Group's performance, these are non-IFRS measures that have no standardized meaning prescribed by IFRS. As a result, such measures have limits in their usefulness to investors.

        Because of their non-standardized definitions, the core measures (unlike IFRS measures) may not be comparable to the calculation of similar measures of other companies. These core measures are presented solely to permit investors to more fully understand how the Group's management assesses underlying performance. These core measures are not, and should not be viewed as, a substitute for IFRS measures.

        As an internal measure of Group performance, these core measures have limitations, and the performance management process is not solely restricted to these metrics. A limitation of the core measures is that they provide a view of the Group's operations without including all events during a period, such as the effects of an acquisition or amortization of purchased intangible assets.

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        The following tables reconcile IFRS results to core results:


2011, 2010 AND 2009 RECONCILIATION OF IFRS RESULTS TO CORE RESULTS—GROUP

2011
  IFRS
results
  Amortization
of intangible
assets(1)
  Impairments(2)   Acquisition-
related
divestment
gains,
restructuring
and
integration
charges(3)
  Exceptional
items(4)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross profit

    40,392     2,918     278     5     246     43,839  
                           

Operating income

    10,998     3,028     1,224     148     511     15,909  
                           

Income before taxes

    10,773     3,238     1,224     148     552     15,935  
                               

Taxes

    (1,528 )                           (2,445 )(5)
                                   

Net income

    9,245                             13,490  
                                   

Basic earnings per share ($)(6)

    3.83                             5.57  
                                   

The following are adjustments to arrive at core gross profit

                                     

Net sales

    58,566                       117     58,683  

Cost of Goods Sold

    (18,983 )   2,918     278     5     129     (15,653 )
                           

The following are adjustments to arrive at core operating income

                                     

Marketing & Sales

    (15,079 )                     2     (15,077 )

Research & Development

    (9,583 )   93     341           (90 )   (9,239 )

General & Administration

    (2,970 )   13                       (2,957 )

Other income

    1,354           (3 )   (102 )   (806 )   443  

Other expense

    (3,116 )   4     608     245     1,159     (1,100 )
                           

The following are adjustments to arrive at core income before taxes

                                     

Income from associated companies

    528     210                 41     779  
                               

(1)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms; General & Administration includes the recurring amortization of intangible assets; Other expense includes amortization of intangible assets; Income from associated companies includes the recurring amortization of the purchase price allocation related to intangible assets included in the Novartis equity-method accounting for Roche of $162 million and $48 million for the Novartis share of the estimated Roche core items.

(2)
Impairments: Cost of Goods Sold includes impairment charges related to Tekturna/Rasilez, Consumer Health in the US, and other intangible assets; Research & Development includes impairment charges principally for PTK796, AGO178, PRT128, SMC021 and In Process Research & Development; Other income includes an impairment reversal; Other expense includes impairments of $314 million related to Tekturna/Rasilez, $47 million related to SMC021, $17 million related to the Group-wide rationalization of manufacturing sites, and amounts for financial assets.

(3)
Acquisition-related divestment gains, restructuring and integration charges: Cost of Goods Sold includes an acquisition related inventory step-up adjustment; Other income includes a gain from product sales required by regulators to approve the Alcon merger; Other expense relates primarily to Alcon integration costs.

(4)
Exceptional items: Net sales to third parties includes a returns provision related to Tekturna/Rasilez and a recall provision related to over-the-counter products; Cost of Goods Sold and Marketing & Sales include charges related to Consumer Health in the US; Cost of Goods Sold, Research & Development, Other income and Other expense include restructuring charges related to the Group-wide rationalization of manufacturing sites; Cost of Goods Sold and Other expense include Swiss restructuring charges of $254 million; Research & Development includes a reduction to a contingent consideration liability related to a business combination of $106 million in Sandoz; Other income and expense include a net $183 million gain from the Jump litigation settlement and a $100 million settlement gain, a $85 million insurance settlement gain, product divestment gains of $378 million, charges of $284 million related to legal settlements, $161 million for IT and finance restructuring projects, an amount of $295 million related to Tekturna/Rasilez, an amount of $13 million related to SMC021, and other restructuring charges; Income from associated companies reflects a charge of $41 million for the Novartis share of Roche's restructuring.

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(5)
Taxes on the adjustments between IFRS and core results take into account, for each individual item included in the adjustment, the tax rate that is applicable to the item in the jurisdiction where the adjustment arises. Generally, this results in amortization and impairment of intangible assets and acquisition-related restructuring and integration items having a full tax impact. There is usually a tax impact on exceptional items although this is not the case for items arising from criminal settlements in certain jurisdictions. Adjustments related to income from associated companies are recorded net of any related tax effect. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments of $5.2 billion to arrive at the core results before tax amounts to $917 million. This results in the average tax rate on the adjustments being 17.8%.

(6)
Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.

2010
  IFRS
results
  Amortization
of intangible
assets(1)
  Impairments(2)   Acquisition-
related
divestment
gains,
restructuring
and
integration
charges(3)
  Exceptional
items(4)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross profit

    37,073     1,061     (90 )   471     2     38,517  
                           

Operating income

    11,526     1,135     981     600     (236 )   14,006  
                           

Income before taxes

    11,702     1,560     981     280     (104 )   14,419  
                               

Taxes(5)

    (1,733 )                           (2,390 )
                                   

Net income

    9,969                             12,029  
                                   

Basic earnings per share ($)(6)

    4.28                             5.15  
                                   

The following are adjustments to arrive at core gross profit

                                     

Cost of Goods Sold

    (14,488 )   1,061     (90 )   471     2     (13,044 )
                           

The following are adjustments to arrive at core operating income

                                     

Marketing & Sales

    (13,316 )   1                       (13,315 )

Research & Development

    (9,070 )   69     903           18     (8,080 )

General & Administration

    (2,481 )   4                       (2,477 )

Other income

    1,234           (10 )         (739 )   485  

Other expense

    (1,914 )         178     129     483     (1,124 )
                           

The following are adjustments to arrive at core income before taxes

                                     

Income from associated companies

    804     425           (320 )   132     1,041  
                             

(1)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Marketing & Sales includes the recurring amortization of intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms; General & Administration includes the recurring amortization of intangible assets; Income from associated companies includes the recurring amortization of the purchase price allocation related to intangible assets, primarily for the Roche and Alcon investments.

(2)
Impairments: Cost of Goods Sold includes impairment charges for acquired rights to in-market products and production-related impairment charges, including an additional reversal of $100 million in Pharmaceuticals for an impairment charge taken in 2007 for Famvir; Research & Development includes write-offs related to in-process Research & Development, mainly charges totalling $856 million for the discontinuation of Mycograb, albinterferon alfa-2b, PTZ601 and ASA404 development projects; Other income includes the reversal of impairments, primarily for property, plant & equipment; Other expense includes impairments, primarily for financial assets, thereof $45 million in Pharmaceuticals, $98 million in Vaccines and Diagnostics and $20 million in Corporate as well as $14 million in Vaccines and Diagnostics for property, plant & equipment.

(3)
Acquisition-related restructuring and integration items: Cost of Goods Sold includes mainly charges of $467 million related to the required inventory step-up to estimated fair value in Alcon; Other expense includes charges in Corporate of $99 million related to the acquisition of Alcon and $30 million recorded in Alcon related to the change of majority ownership of Alcon; Income from associated companies includes a $378 million revaluation gain on the initial 25% interest in Alcon, a $43 million charge for the recycling of losses accumulated in comprehensive income related to Alcon since its inclusion as an associated company in 2008, and a $15 million charge for the change of majority ownership.

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(4)
Exceptional items: Cost of Goods Sold includes charges related to inventory write-off in Vaccines and Diagnostics due to a restructuring program; Research & Development includes an expense of $18 million for termination of a co-development contract in Sandoz; Other income includes a divestment gain of $392 million for the divestment of Enablex in Pharmaceuticals, proceeds of $42 million from a legal settlement in Pharmaceuticals with Teva regarding Famvir, a divestment gain of $33 million for Tofranil in Pharmaceuticals and a Swiss pension curtailment gain of $265 million in Corporate; Other expense includes mainly a $152.5 million provision for a gender discrimination case in the US in Pharmaceuticals, charges of $203 million for restructuring programs in Pharmaceuticals, Vaccines and Diagnostics, and Sandoz, a $25.5 million provision in connection with a government investigation in the US in Pharmaceuticals, $45 million for a legal settlement in Vaccines and Diagnostics, and a $38 million charge for a legal settlement in Sandoz; Income from associated companies reflects an additional charge of $43 million for the Novartis share of Roche's restructuring charges for Genentech taken in the second half of 2009 but recorded by Novartis in 2010 as well as an estimated charge of $89 million for the Novartis share of Roche's restructuring that was announced in late 2010.

(5)
Taxes on the adjustments between IFRS and core results take into account, for each individual item included in the adjustment, the tax rate that is applicable to the item in the jurisdiction where the adjustment arises. Generally, this results in amortization and impairment of intangible assets and acquisition-related restructuring and integration items having a full tax impact. There is usually a tax impact on exceptional items although this is not the case for items arising from criminal settlements in certain jurisdictions. Adjustments related to income from associated companies are recorded net of any related tax effect. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments of $2.7 billion to arrive at the core results before tax amounts to $657 million. This results in the average tax rate on the adjustments being 24.2%.

(6)
Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.

2009
  IFRS
results
  Amortization
of intangible
assets(1)
  Impairments(2)   Acquisition-
related
restructuring
and
integration
items(3)
  Exceptional
items(4)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross profit

    32,924     938     (69 )   18     (28 )   33,783  
                           

Operating income

    9,982     1,025     75     18     337     11,437  
                           

Income before taxes

    9,922     1,594     167     18     434     12,135  
                               

Taxes

    (1,468 )                           (1,868 )(5)
                                   

Net income

    8,454                             10,267  
                                   

Basic earnings per share ($)(6)

    3.70                             4.50  
                                   

The following are adjustments to arrive at core gross profit

                                     

Other revenues

    836                       (28 )   808  

Cost of Goods Sold

    (12,179 )   938     (69 )   18           (11,292 )
                           

The following are adjustments to arrive at core operating income

                                     

Research & Development

    (7,469 )   87     95                 (7,287 )

Other income

    782                       (65 )   717  

Other expense

    (1,924 )         49           430     (1,445 )
                             

The following are adjustments to arrive at core income before taxes

                                     

Income from associated companies

    293     569     92           97     1,051  
                             

(1)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; R&D includes the recurring amortization of acquired rights for technology platforms; Income from associated companies includes the amortization of the purchase price allocation related to intangible assets, primarily for the Roche and Alcon investments.

(2)
Impairments: Cost of Goods Sold includes impairment charges for acquired rights to in-market products and production-related impairment charges, including a partial reversal of $100 million in Pharmaceuticals for an impairment taken in 2007 for Famvir; R&D includes write-offs related to in-process R&D; Other expense includes impairments, primarily for financial assets; Income from associated companies reflects the $92 million impairment charge taken for an Alcon pharmaceuticals development project.

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(3)
Acquisition-related restructuring and integration items: Cost of Goods Sold includes charges of $18 million related to the EBEWE Pharma specialty generics business acquisition.

(4)
Exceptional items: Other revenues reflects a $28 million gain from a settlement of Vaccines and Diagnostics; Other income reflects divestment gains in Pharmaceuticals; Other expense includes an increase of $345 million in legal provisions principally for the Trileptal and TOBI US government investigations; Income from associated companies reflects a $97 million one-time charge for the Novartis share of Roche's restructuring charges for Genentech.

(5)
Taxes on the adjustments between IFRS and core results take into account, for each individual item included in the adjustment, the tax rate that is applicable to the item in the jurisdiction where the adjustment arises. Generally, this results in amortization and impairment of intangible assets and acquisition-related restructuring and integration items having a full tax impact. There is usually a tax impact on exceptional items although this is not the case for items arising from criminal settlements in certain jurisdictions. Adjustments related to income from associated companies are recorded net of any related tax effect. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments of $2.2 billion to arrive at the core results before tax amounts to $400 million. This results in the average tax rate on the adjustments being 18.1%.

(6)
Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.


2011, 2010 AND 2009 RECONCILIATION OF IFRS RESULTS TO CORE RESULTS—PHARMACEUTICALS

2011
  IFRS
results
  Amortization
of intangible
assets(1)
  Impairments(2)   Acquisition-
related
divestment
gains,
restructuring
and
integration
charges(3)
  Exceptional
items(4)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross profit

    26,632     369     249           115     27,365  
                           

Operating income

    8,296     423     985     (81 )   417     10,040  
                           

The following are adjustments to arrive at core gross profit

                                     

Net sales to third parties

    32,508                       44     32,552  

Cost of Goods Sold

    (6,573 )   369     249           71     (5,884 )
                             

The following are adjustments to arrive at core operating income

                                     

Research & Development

    (7,232 )   54     303           15     (6,860 )

Other income

    697           (3 )   (81 )   (436 )   177  

Other expense

    (1,825 )         436           723     (666 )
                           

(1)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms.

(2)
Impairments: Cost of Goods Sold includes impairments primarily related to Tekturna/Rasilez; Research & Development includes impairment charges principally for PTK796, AGO178, PRT128 and SMC021; Other income includes an impairment reversal; Other expense includes impairments of $314 million related to Tekturna/Rasilez and $47 million related to SMC021, for financial assets, and related to the Group-wide rationalization of manufacturing sites.

(3)
Acquisition-related divestment gains, restructuring and integration charges: Other income includes a gain from a product sale required by regulators to approve the Alcon merger.

(4)
Exceptional items: Net sales to third parties includes a returns provision related to Tekturna/Rasilez; Cost of Goods Sold, Research & Development and Other expense include restructuring charges related to the Group-wide rationalization of manufacturing sites; Cost of Goods Sold and Other expense include Swiss restructuring charges totalling $249 million; Other income includes a net product divestment gain of $334 million and a settlement income of $100 million and items related to the Group-wide rationalization of manufacturing sites; Other expense also includes an amount for a legal settlement of $80 million, an amount of $295 million related to Tekturna/Rasilez, an amount of $13 million related to SMC021, and other restructuring charges.

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2010(1)
  IFRS
results
  Amortization
of intangible
assets(2)
  Impairments(3)   Exceptional
items(4)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross profit

   
25,613
   
421
   
(100

)
       
25,934
 
                         

Operating income

    8,471     457     833     (175 )   9,586  
                       

The following are adjustments to arrive at core gross profit

                               

Cost of Goods Sold

    (5,272 )   421     (100 )         (4,951 )
                         

The following are adjustments to arrive at core operating income

                               

Research & Development

    (7,276 )   36     896           (6,344 )

Other income

    687           (8 )   (474 )   205  

Other expense

    (971 )         45     299     (627 )
                       

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

(2)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms.

(3)
Impairments: Cost of Goods Sold includes impairment charges for acquired rights to in-market products and other production-related impairment charges, including an additional reversal of $100 million for an impairment charge taken in 2007 for Famvir; Research & Development includes write-offs related to in-process Research & Development, mainly a total of $704 million charge for the discontinuation of Mycograb ($356 million), albinterferon alfa-2b ($228 million) and ASA404 ($120 million) development projects and a net pre-tax impairment charge of $152 million ($250 million related to the value of the intangible asset offset by a release of a $98 million liability related to the estimated value of a contingent milestone consideration) for termination of the PTZ601 development project; Other income includes the reversal of impairments, primarily for property, plant & equipment; Other expense includes impairments, primarily for financial assets.

(4)
Exceptional items: Other income includes a divestment gain of $392 million for the divestment of Enablex, proceeds of $42 million from a legal settlement with Teva regarding Famvir and a divestment gain of $33 million for Tofranil; Other expense includes a $152.5 million provision for a gender discrimination case in the US, a $111 million charge for restructuring in the US as well as a $25.5 million provision in connection with a government investigation in the US.

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2009(1)
  IFRS
results
  Amortization
of intangible
assets(2)
  Impairments(3)   Exceptional
items(4)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross profit

   
23,975
   
322
   
(92

)
       
24,205
 
                         

Operating income

    8,072     369     30     280     8,751  
                       

The following are adjustments to arrive at core gross profit

                               

Cost of Goods Sold

    (4,864 )   322     (92 )         (4,634 )
                         

The following are adjustments to arrive at core operating income

                               

Research & Development

    (6,037 )   47     81           (5,909 )

Other income

    414                 (65 )   349  

Other expense

    (1,078 )         41     345     (692 )
                       

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

(2)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms.

(3)
Impairments: Cost of Goods Sold includes impairment charges for acquired rights to in-market products and production-related impairment charges, including a partial reversal of $100 million for an impairment taken in 2007 for Famvir; Research & Development includes write-offs related to in-process Research & Development; Other expense includes impairments, primarily for financial assets.

(4)
Exceptional items: Other income reflects divestment gains; Other expense includes $345 million for legal provisions, litigations and exceptional settlements principally for the Trileptal US government investigation.

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2011, 2010 AND 2009 RECONCILIATION OF IFRS RESULTS TO CORE RESULTS—ALCON

2011
  IFRS
results
  Amortization
of intangible
assets(1)
  Impairments(2)   Acquisition-
related
divestment
gains,
restructuring
and
integration
charges(3)
  Exceptional
items(4)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross profit

   
5,457
   
1,912
               
20
   
7,389
 
                               

Operating income

    1,472     1,928     29     212     (149 )   3,492  
                           

The following are adjustments to arrive at core gross profit

                                     

Cost of Goods Sold

    (4,566 )   1,912                 20     (2,634 )
                               

The following are adjustments to arrive at core operating income

                                     

Research & Development

    (892 )   3     20                 (869 )

General & Administration

    (509 )   13                       (496 )

Other income

    262                 (21 )   (229 )   12  

Other expense

    (309 )         9     233     60     (7 )
                           

(1)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms; General & Administration includes the recurring amortization of intangible assets.

(2)
Impairments: Research & Development includes an In Process Research & Development impairment charge; Other expense includes impairment charges primarily related to the Group-wide rationalization of manufacturing sites.

(3)
Acquisition-related divestment gains, restructuring and integration charges: Other income includes a gain from a product sale required by regulators to approve the Alcon merger; Other expense includes a loss from an Alcon merger-related divestment and Alcon integration costs.

(4)
Exceptional items: Cost of Goods Sold and Other expense include restructuring charges related to the Group-wide rationalization of manufacturing sites; Cost of Goods Sold includes a reduction to a contingent consideration provision related to a business combination; Other income and expense includes a net $183 million gain from the Jump litigation settlement.

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2010(1)(2)
  IFRS
results
  Amortization
of intangible
assets(3)
  Acquisition-
related
divestment
gains,
restructuring
and
integration
charges(4)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
 

Gross profit

    2,734     60     459     3,253  
                   

Operating income

    796     65     489     1,350  
                   

The following are adjustments to arrive at core gross profit

                         

Cost of Goods Sold

    (1,760 )   60     459     (1,241 )
                   

The following are adjustments to arrive at core operating income

                         

Research & Development

    (352 )   1           (351 )

General & Administration

    (255 )   4           (251 )

Other expense

    (39 )         30     (9 )
                   

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

(2)
Consolidated results of Alcon, Inc., only included for the period from acquiring control on August 25, 2010 to December 31, 2010. Activities transferred from Pharmaceuticals and CIBA Vision transferred from Consumer Health included for the full year.

(3)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms; General & Administration includes the recurring amortization of intangible assets.

(4)
Acquisition-related restructuring and integration items: Cost of Goods Sold relates to the required inventory step-up to estimated fair value; Other expense includes charges of $30 million related to the change of majority ownership.

2009(1)(2)
  IFRS
results
  Amortization
of intangible
assets(3)
  Core
results
 
 
  $ m
  $ m
  $ m
 

Gross profit

   
1,337
   
30
   
1,367
 
               

Operating income

    473     31     504  
               

The following are adjustments to arrive at core gross profit

                   

Cost of Goods Sold

    (669 )   30     (639 )
               

The following are adjustments to arrive at core operating income

                   

Research & Development

    (94 )   1     (93 )
               

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

(2)
Consolidated results of Alcon, Inc., are not included in 2009. Activities transferred from Pharmaceuticals and CIBA Vision transferred from Consumer Health are included for the full year.

(3)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms.

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2011, 2010 AND 2009 RECONCILIATION OF IFRS RESULTS TO CORE RESULTS—SANDOZ

2011
  IFRS
results
  Amortization
of intangible
assets(1)
  Impairments(2)   Exceptional
items(3)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross profit

   
4,356
   
368
   
18
   
4
   
4,746
 
                       

Operating income

    1,422     383     26     90     1,921  
                       

The following are adjustments to arrive at core gross profit

                               

Cost of Goods Sold

    (5,445 )   368     18     4     (5,055 )
                       

The following are adjustments to arrive at core operating income

                               

Research & Development

    (640 )   15     7     (106 )   (724 )

Other income

    88                 (12 )   76  

Other expense

    (422 )         1     204     (217 )
                       

(1)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms.

(2)
Impairments: Cost of Goods Sold and Research & Development include an impairment charge of intangible assets; Other expense include an impairment charge.

(3)
Exceptional items: Cost of Goods Sold and Other income include restructuring charges, respectively release, related to the Group-wide rationalization of manufacturing sites; Research & Development includes a reduction to a contingent consideration liability related to a business combination; Other income includes the release of a restructuring provision in Germany; Other expense includes a charge related to US litigations.

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Table of Contents

2010(1)
  IFRS
results
  Amortization
of intangible
assets(2)
  Impairments(3)   Acquisition-
related
divestment
gains,
restructuring
and
integration
charges(4)
  Exceptional
items(5)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross profit

   
3,997
   
278
   
4
   
12
         
4,291
 
                             

Operating income

    1,321     293     11     12     105     1,742  
                           

The following are adjustments to arrive at core gross profit

                                     

Cost of Goods Sold

    (4,878 )   278     4     12           (4,584 )
                             

The following are adjustments to arrive at core operating income

                                     

Research & Development

    (658 )   15     7           18     (618 )

Other income

    77           (1 )               76  

Other expense

    (295 )         1           87     (207 )
                             

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

(2)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms.

(3)
Impairments: Cost of Goods Sold includes impairment charges for acquired rights to in-market products and other production-related impairment charges; Research & Development includes write-offs related to in-process Research & Development; Other income includes impairment reversals, primarily for property, plant & equipment; Other expense includes impairments, primarily for property, plant & equipment.

(4)
Acquisition-related restructuring and integration items: Cost of Goods Sold includes charges of $4 million related to business acquisitions and $8 million related to a required inventory step-up to estimated fair value related to the Falcon unit.

(5)
Exceptional items: Research & Development includes an expense for termination of a co-development contract; Other expense includes a $49 million charge for a restructuring program in Germany and a $38 million charge for a legal settlement in the US.

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Table of Contents

2009
  IFRS
results
  Amortization
of intangible
assets(1)
  Impairments(2)   Acquisition-
related
divestment
gains,
restructuring
and
integration
charges(3)
  Exceptional
items(4)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross profit

    3,566     246     10     18           3,840  
                             

Operating income

    1,071     260     6     18     40     1,395  
                           

The following are adjustments to arrive at core gross profit

                                     

Cost of Goods Sold

    (4,201 )   246     10     18           (3,927 )
                           

The following are adjustments to arrive at core operating income

                                     

Research & Development

    (613 )   14     (4 )               (603 )

Other expense

    (272 )                     40     (232 )
                             

(1)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms.

(2)
Impairments: Cost of Goods Sold includes impairment charges for acquired rights to in-market products and production-related impairment charges; Research & Development includes write-offs related to in-process Research & Development.

(3)
Acquisition-related restructuring and integration items: Cost of Goods Sold includes charges of $18 million related to the EBEWE Pharma specialty generics business acquisition.

(4)
Exceptional items: Other expense includes a $40 million one-time charge in Sandoz for German commercial operations restructuring.

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Table of Contents


2011, 2010 AND 2009 RECONCILIATION OF IFRS RESULTS TO CORE RESULTS—VACCINES AND DIAGNOSTICS

2011
  IFRS
results
  Amortization
of intangible
assets(1)
  Impairments(2)   Acquisition-
related
divestment
gains,
restructuring
and
integration
charges(3)
  Exceptional
items(4)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross profit

   
954
   
211
         
5
   
2
   
1,172
 
                           

Operating income

    (249 )   231     145     5     3     135  
                           

The following are adjustments to arrive at core gross profit

                                     

Cost of Goods Sold

    (1,410 )   211           5     2     (1,192 )
                             

The following are adjustments to arrive at core operating income

                                     

Research & Development

    (523 )   20     8           1     (494 )

Other expense

    (185 )         137                 (48 )
                             

(1)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms.

(2)
Impairments: Research & Development includes an In Process Research & Development impairment charge; Other expense includes an impairment charge of a financial asset.

(3)
Acquisition-related divestment gains, restructuring and integration charges: Cost of Goods Sold includes an acquisition related inventory step-up adjustment.

(4)
Exceptional items: Cost of Goods Sold and Research & Development adjustments represent restructuring charges related to the Group-wide rationalization of manufacturing sites.

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Table of Contents

2010
  IFRS
results
  Amortization
of intangible
assets(1)
  Impairments(2)   Exceptional
items(3)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross profit

   
1,860
   
242
         
2
   
2,104
 
                           

Operating income

    612     259     112     83     1,066  
                       

The following are adjustments to arrive at core gross profit

                               

Cost of Goods Sold

    (1,551 )   242           2     (1,307 )

The following are adjustments to arrive at core operating income

                               

Research & Development

    (523 )   17                 (506 )

Other expense

    (273 )         112     81     (80 )
                       

(1)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms.

(2)
Impairments: Other expense relates to a charge of $98 million for an impairment of a financial asset and a charge of $14 million for impairments for property, plant & equipment due to a restructuring program in the UK.

(3)
Exceptional items: Cost of Goods Sold includes charges related to inventory write-off due to a restructuring program; Other expense relates to a $45 million expense for a legal settlement and to a $36 million expense for a restructuring program in the UK.

2009
  IFRS
results
  Amortization
of intangible
assets(1)
  Impairments(2)   Exceptional
items(3)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m $ m
 

Gross profit

   
1,445
   
287
         
(28

)
 
1,704
 
                           

Operating income

    372     312     18     17     719  
                       

The following are adjustments to arrive at core gross profit

                               

Other revenues

    390                 (28 )   362  

Cost of Goods Sold

    (1,415 )   287                 (1,128 )
                         

The following are adjustments to arrive at core operating income

                               

Research & Development

    (508 )   25     18           (465 )

Other expense

    (119 )               45     (74 )
                       

(1)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms.

(2)
Impairments: Research & Development includes write-offs related to in-process Research & Development.

(3)
Exceptional items: Other revenues reflects a $28 million gain from a settlement; Other expense includes $45 million for legal provisions, litigations and exceptional settlements.

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2011, 2010 AND 2009 RECONCILIATION OF IFRS RESULTS TO CORE RESULTS—CONSUMER HEALTH

2011
  IFRS
results
  Amortization
of intangible
assets(1)
  Impairments(2)   Exceptional
items(3)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross profit

   
2,935
   
58
   
11
   
105
   
3,109
 
                       

Operating income

    727     59     16     71     873  
                       

The following are adjustments to arrive at core gross profit

                               

Net sales to third parties

    4,631                 73     4,704  

Cost of Goods Sold

    (1,735 )   58     11     32     (1,634 )
                       

The following are adjustments to arrive at core operating income

                               

Marketing & Sales

    (1,674 )               2     (1,672 )

Research & Development

    (296 )   1     3           (292 )

Other income

    91                 (44 )   47  

Other expense

    (38 )         2     8     (28 )
                       

(1)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms.

(2)
Impairments: Cost of Goods Sold includes an impairment charge related to Consumer Health in the US; Research & Development and Other expense include impairment charges.

(3)
Exceptional items: Net sales to third parties includes an over-the-counter products recall provision; Cost of Goods Sold and Marketing & Sales include charges related to Consumer Health in the US; Other income includes a product divestment gain; Other expense includes charges related to the Group-wide rationalization of manufacturing sites and other restructuring charges.

2010(1)
  IFRS
results
  Amortization
of intangible
assets(2)
  Impairments(3)   Core
results
 
 
  $ m
  $ m
  $ m
  $ m
 

Gross profit

   
2,871
   
60
   
6
   
2,937
 
                   

Operating income

    778     61     6     845  
                   

The following are adjustments to arrive at core gross profit

                         

Cost of Goods Sold

    (1,560 )   60     6     (1,494 )
                   

The following are adjustments to arrive at core operating income

                         

Marketing & Sales

    (1,569 )   1           (1,568 )
                     

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

(2)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Marketing & Sales includes the recurring amortization of intangible assets.

(3)
Impairments: Cost of Goods Sold includes impairment charges for acquired rights to in-market products and other production-related impairment charges.

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Table of Contents

2009(1)
  IFRS
results
  Amortization
of intangible
assets(2)
  Impairments(3)   Core
results
 
 
  $ m
  $ m
  $ m
  $ m
 

Gross profit

    2,627     53     13     2,693  
                   

Operating income

    683     53     18     754  
                   

The following are adjustments to arrive at core gross profit

                         

Cost of Goods Sold

    (1,533 )   53     13     (1,467 )
                   

The following are adjustments to arrive at core operating income

                         

Other expense

    (56 )         5     (51 )
                     

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

(2)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets.

(3)
Impairments: Cost of Goods Sold includes impairment charges for acquired rights to in-market products and production-related impairment charges; Other expense includes impairments, primarily for property, plant and equipment.

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2011 AND 2010(1) RECONCILIATION OF SEGMENT OPERATING INCOME TO CORE OPERATING INCOME

 
  Pharmaceuticals   Alcon   Sandoz   Vaccines and Diagnostics   Consumer Health   Corporate   Total  
 
  2011   2010   2011   2010(2)   2011   2010   2011   2010   2011   2010   2011   2010   2011   2010  
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Operating income

   
8,296
   
8,471
   
1,472
   
796
   
1,422
   
1,321
   
(249

)
 
612
   
727
   
778
   
(670

)
 
(452

)
 
10,998
   
11,526
 
                                                           

Amortization of intangible assets

   
423
   
457
   
1,928
   
65
   
383
   
293
   
231
   
259
   
59
   
61
   
4
         
3,028
   
1,135
 
                                                             

Impairments

                                                                                     
 

Intangible assets

    552     796     20           25     11     8           14     6                 619     813  
 

Property, plant & equipment—manufacturing sites(3)

    12           5                             14                             17     14  
 

Other property, plant & equipment

    391     (4 )               1           2           2                       396     (4 )
 

Financial assets

    30     41     4                       135     98                 23     19     192     158  
                                                             

Total impairment charges

    985     833     29           26     11     145     112     16     6     23     19     1,224     981  
                                                             

Acquisition-related items

                                                                                     
 

Gains

    (81 )         (21 )                                                         (102 )      
 

Expenses

                233     489           12     5                       12     99     250     600  
                                                                     

Total acquisition related items, net

    (81 )         212     489           12     5                       12     99     148     600  
                                                                     

Exceptional items

                                                                                     
 

Exceptional divestment gains

    (334 )   (425 )                                       (44 )                     (378 )   (425 )
 

Swiss restructuring expenses(3)

    249                                               5                       254        
 

Restructuring expenses—non-Swiss manufacturing sites(3)

    90     11     52           3           3     38     4                       152     49  
 

Other restructuring expenses

    81     100                 (11 )   49                 (1 )                     69     149  

Legal-related items

                                                                                     
 

Income

    (100 )   (42 )   (229 )                                                         (329 )   (42 )
 

Expense

    80     181     45           204     56           45                             329     282  

Swiss pension curtailment gain

                                                                      (265 )         (265 )

Other exceptional income

                (17 )         (106 )                                 (85 )         (208 )      

Other exceptional expense

    351                                               107           164     16     622     16  
                                                               

Total exceptional items

    417     (175 )   (149 )         90     105     3     83     71           79     (249 )   511     (236 )
                                                           

Total adjustments

    1,744     1,115     2,020     554     499     421     384     454     146     67     118     (131 )   4,911     2,480  
                                                           

Core operating income

    10,040     9,586     3,492     1,350     1,921     1,742     135     1,066     873     845     (552 )   (583 )   15,909     14,006  
                                                           

Core return on net sales

    30.9 %   31.6 %   35.1 %   30.4 %   20.3 %   20.3 %   6.8 %   36.5 %   18.9 %   19.4 %               27.2 %   27.7 %

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

(2)
Consolidated results of Alcon, Inc., only included for the period from acquiring control on August 25, 2010 to December 31, 2010. Ophthalmic activities transferred from Pharmaceuticals and CIBA Vision transferred from Consumer Health included for the full year.

(3)
Related to the Group-wide rationalization of manufacturing sites (Swiss portion amounts to approximately $100 million).

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2010(1) AND 2009 RECONCILIATION OF SEGMENT OPERATING INCOME TO CORE OPERATING INCOME

 
  Pharmaceuticals   Alcon   Sandoz   Vaccines and Diagnostics   Consumer Health   Corporate   Total  
 
  2010   2009   2010(2)   2009(2)   2010   2009   2010   2009   2010   2009   2010   2009   2010   2009  
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Operating income

   
8,471
   
8,072
   
796
   
473
   
1,321
   
1,071
   
612
   
372
   
778
   
683
   
(452

)
 
(689

)
 
11,526
   
9,982
 
                                                           

Amortization of intangible assets

    457     369     65     31     293     260     259     312     61     53                 1,135     1,025  
                                                               

Impairments

                                                                                     
 

Intangible assets

    796     (11 )               11     6           18     6     13                 813     26  
 

Property, plant & equipment—manufacturing sites(3)

                                        14                                   14        
 

Other property, plant & equipment

    (4 )   4                                               5                 (4 )   9  
 

Financial assets

    41     37                             98                       19     3     158     40  
                                                               

Total impairments

    833     30                 11     6     112     18     6     18     19     3     981     75  
                                                               

Acquisition-related items

                                                                                     
 

Gains

                                                                                     
 

Expenses

                489           12     18                             99           600     18  
                                                                           

Total acquisition related items, net

                489           12     18                             99           600     18  
                                                                           

Exceptional items

                                                                                     
 

Exceptional divestment gains

    (425 )   (65 )                                                               (425 )   (65 )
 

Restructuring expenses—non-Swiss manufacturing sites(3)

    11                                   38                                   49        
 

Other restructuring expenses

    100                       49     40                                         149     40  

Legal-related items

                                                                                     
 

Income

    (42 )                                       (28 )                           (42 )   (28 )
 

Expense

    181     345                 56           45     45                             282     390  

Swiss pension curtailment gain

                                                                (265 )         (265 )      

Other exceptional expense

                                                                16           16        
                                                                       

Total exceptional items

    (175 )   280                 105     40     83     17                 (249 )         (236 )   337  
                                                           

Total adjustments

    1,115     679     554     31     421     324     454     347     67     71     (131 )   3     2,480     1,455  
                                                           

Core operating income

    9,586     8,751     1,350     504     1,742     1,395     1,066     719     845     754     (583 )   (686 )   14,006     11,437  
                                                           

Core return on net sales

    31.6 %   30.9 %   30.4 %   25.6 %   20.3 %   18.6 %   36.5 %   29.7 %   19.4 %   18.4 %               27.7 %   25.8 %

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

(2)
Consolidated results of Alcon, Inc., only included for the period from acquiring control on August 25, 2010 to December 31, 2010. Ophthalmic activities transferred from Pharmaceuticals and CIBA Vision transferred from Consumer Health included for all of 2010 and 2009.

(3)
Related to the Group-wide rationalization of manufacturing sites.

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ALCON SEGMENT RECONCILIATION FROM 2010 RESTATED TO PRO FORMA DATA

        On August 25, 2010 Novartis acquired a majority interest in Alcon, Inc. and its results have been included in the consolidated IFRS results of the Novartis Group and the Alcon segment since then (for additional information, see "Item 18, Financial Statements—note 2").

        Novartis believes that the presentation of pro forma information will assist investors in their understanding of the combined companies' operating performance by setting a base for comparison with the 2011 consolidated results of Alcon. Without these pro forma results, the Alcon 2010 restated results through August 25, 2010 would consist only of the results from CIBA Vision and those Pharmaceuticals ophthalmics products which were transferred to Alcon. As a result, it is considered a comparison between the 2011 Alcon results and the 2010 restated results would not be meaningful.

        Therefore Novartis prepared pro forma information assuming the Alcon acquisition was completed on January 1, 2010. The pro forma information does not purport to present what the actual results of operations would have been had the transaction actually occurred on the date indicated.

        The pro forma information includes the full 2010 consolidated income statement data for Alcon, Inc. from January 1, 2010 and adjusts for the impact of divestments required by regulators to approve the Alcon acquisition as well as for exceptional costs related to the acquisition of majority ownership of Alcon.

        The following tables reconcile IFRS to pro forma core results for Alcon:

 
  2010
Restated
  Consolidated
results of
Alcon, Inc.,
from
January 1,
2010 to
August 25,
2010(1)
  2010
Pro forma
 
 
  $ millions
  $ millions
  $ millions
 

Net sales to third parties

    4,446     4,585     9,031  

Sales to other segments

    14           14  
               

Net sales of segments

    4,460     4,585     9,045  

Other revenues

    34     5     39  

Cost of Goods Sold

    (1,760 )   (2,442 )   (4,202 )
               

Gross profit

    2,734     2,148     4,882  

Marketing & Sales

    (1,299 )   (1,060 )   (2,359 )

Research & Development

    (352 )   (478 )   (830 )

General & Administration

    (255 )   (255 )   (510 )

Other income

    7           7  

Other expense

    (39 )   30     (9 )
               

Operating income

    796     385     1,181  
               

as % of net sales

    17.9 %   8.4 %   13.1 %

Core adjustments

                   

Cost of Goods Sold

    519     1,379     1,898  

Research & Development

    1     3     4  

General & Administration

    4     8     12  

Other expense

    30     (30 )      
               

Core Operating income

    1,350     1,745     3,095  
               

as % of net sales

    30.4 %   38.1 %   34.3 %

(1)
This assumes that the acquisition of Alcon, Inc. had occured on January 1, 2010. It therefore also reflects $1.4 billion of additional amortization of intangible assets arising from the purchase price allocation and excludes $145 million of change of control and acquisition related costs.

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RECONCILIATION OF ALCON 2010 PRO FORMA RESTATED OPERATING INCOME TO THAT FILED WITH AMENDMENT NO. 3 TO FORM F-4, FILED WITH THE US SEC ON FEBRUARY 24, 2011

 
  2010  
 
  $ millions
 

Alcon operating income as reported in IFRS by Novartis (August 25, 2010–December 31, 2010)

          323  

Alcon income statement under IFRS as adopted by Novartis (January 1, 2010–December 31, 2010)

    2,501        

Purchase price allocation and other pro forma adjustments (including elimination of double-counting of Alcon for August 25, 2010–December 31, 2010)

    (2,016 )      
             

Alcon, Inc. pro forma operating income as reported in Form F-4 on February 24, 2011

          485  

Acquisition costs recorded in Corporate and therefore not to be taken into account in Alcon operating income

          (99 )

Falcon operating income transferred to Sandoz

    (43 )      

CIBA Vision operating income transferred from Consumer Health

    383        

Ophthalmics products related operating income transferred to Alcon

    132        
             

Segments transfers

          472  
             

Alcon pro forma restated operating income for 2010

          1,181  
             


2011 AND 2010 RECONCILIATION OF IFRS RESULTS TO CORE RESULTS—ALCON PRO FORMA

2011
  IFRS
results
  Amortization
of intangible
assets(1)
  Impairments(2)   Acquisition-
related
divestment
gains,
restructuring
and
integration
charges(3)
  Exceptional
items(4)
  Core
results
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross profit

   
5,453
   
1,912
               
20
   
7,385
 
                               

Operating income

    1,461     1,928     29     221     (149 )   3,490  
                           

The following are adjustments to arrive at core gross profit

                                     

Cost of Goods Sold

    (4,561 )   1,912                 20     (2,629 )
                               

The following are adjustments to arrive at core operating income

                                     

Research & Development

    (892 )   3     20                 (869 )

General & Administration

    (509 )   13                       (496 )

Other income

    241                       (229 )   12  

Other expense

    (296 )         9     221     60     (6 )
                           

(1)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms; General & Administration includes the recurring amortization of intangible assets.

(2)
Impairments: Research & Development includes an In Process Research & Development impairment charge; Other expense includes impairment charges primarily related to the Group-wide rationalization of manufacturing sites.

(3)
Acquisition-related divestment gains, restructuring and integration charges: Other expense relates to Alcon integration costs.

(4)
Exceptional items: Cost of Goods Sold and Other expense include restructuring charges related to the Group-wide rationalization of manufacturing sites; Cost of Goods Sold includes a reduction to a contingent consideration provision related to a business combination; Other income and expense includes a net $183 million gain from the Jump litigation settlement.

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2010
  IFRS
results
  Amortization
of intangible
assets(2)
  Core
results
 
 
  $ m
  $ m
  $ m
 

Gross profit

    4,882     1,898     6,780  
               

Operating income

    1,181     1,914     3,095  
               

The following are adjustments to arrive at core gross profit

                   

Cost of Goods Sold

    (4,202 )   1,898     (2,304 )
               

The following are adjustments to arrive at core operating income

                   

Research & Development

    (830 )   4     (826 )

General & Administration

    (510 )   12     (498 )
               

(1)
On a pro forma basis, see "Item 5. Operating and Financial Review and Prospects—Item 5A. Operating Results—Core Results as defined by Novartis."

(2)
Amortization of intangible assets: Cost of Goods Sold includes recurring amortization of acquired rights to in-market products and other production-related intangible assets; Research & Development includes the recurring amortization of acquired rights for technology platforms; General & Administration includes the recurring amortization of intangible assets.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Our principal accounting policies are set out in note 1 to the Group's consolidated financial statements and are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Given the uncertainties inherent in our business activities, we must make certain estimates and assumptions that require difficult, subjective and complex judgments. Because of uncertainties inherent in such judgments, actual outcomes and results may differ from our assumptions and estimates which could materially affect the Group's consolidated financial statements. Application of the following accounting policies requires certain assumptions and estimates that have the potential for the most significant impact on our consolidated financial statements.


Revenue

        We recognize product sales when there is persuasive evidence that a sales arrangement exists, title and risk and rewards for the products are transferred to the customer, the price is determinable, and collectability is reasonably assured. Where contracts contain customer acceptance provisions we recognize sales upon the satisfaction of acceptance criteria.

        At the time of recognizing revenue, we also record estimates for a variety of sales deductions, including rebates, discounts, refunds, incentives and product returns. Sales deductions are reported as a reduction of revenue.


Deductions from Revenues

        As is typical in the pharmaceuticals industry, our gross sales are subject to various deductions that are composed primarily of rebates and discounts to retail customers, government agencies, wholesalers, health insurance companies and managed healthcare organizations. These deductions represent estimates of the related obligations, requiring the use of judgment when estimating the effect of these sales deductions on gross sales for a reporting period. These adjustments are deducted from gross sales to arrive at net sales.

        The following summarizes the nature of some of these deductions and how the deduction is estimated. After recording these, net sales represent our best estimate of the cash that we expect to ultimately collect. The US market has the most complex arrangements related to revenue deductions.


US specific healthcare plans and program rebates

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Non-US specific healthcare plans and program rebates


Non-healthcare plans and program rebates, returns and other deductions

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        The following table shows the worldwide extent of our revenue deductions provisions and related payment experiences:


Provisions for revenue deductions

 
   
  Effect of
currency
translation
and business
combinations
   
  Income statement charge   Change in
provisions
offset against
gross trade
receivables
   
 
 
  Revenue
deductions
provisions at
January 1
   
  Revenue
deductions
provisions at
December 31
 
 
  Payments/
utilizations
  Adjustments
of prior
years
  Current
year
 
 
  $ millions
  $ millions
  $ millions
  $ millions
  $ millions
  $ millions
  $ millions
 

2011

                                           

US specific healthcare plans and program rebates

    1,162           (2,860 )   (19 )   3,157           1,440  

Non-US specific healthcare plans and program rebates

    575     (24 )   (1,043 )   (23 )   1,281           766  

Non-healthcare plans and program related rebates, returns and other deductions

    1,360     (68 )   (6,846 )   (7 )   7,324     (227 )   1,536  
                               

Total 2011

    3,097     (92 )   (10,749 )   (49 )   11,762     (227 )   3,742  
                               

2010

                                           

US specific healthcare plans and program rebates

    755     226     (1,949 )   (8 )   2,138           1,162  

Non-US specific healthcare plans and program rebates

    455     (34 )   (444 )   (9 )   607           575  

Non-healthcare plans and program related rebates, returns and other deductions

    884     163     (5,779 )   (32 )   6,056     68     1,360  
                               

Total 2010

    2,094     355     (8,172 )   (49 )   8,801     68     3,097  
                               

2009

                                           

US specific healthcare plans and program rebates

    632           (1,425 )   (13 )   1,561           755  

Non-US specific healthcare plans and program rebates

    333     10     (282 )   3     391           455  

Non-healthcare plans and program related rebates, returns and other deductions

    700     77     (3,875 )   5     4,298     (321 )   884  
                               

Total 2009

    1,665     87     (5,582 )   (5 )   6,250     (321 )   2,094  
                               

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        The table below shows the gross to net sales reconciliation for our Pharmaceuticals division:


Gross to net sales reconciliation

 
  Income statement charge    
   
 
 
  Charged through
revenue deduction
provisions
  Charged directly
without being
recorded in
revenue deduction
provisions
  Total   In % of
gross sales
 
 
  $ millions
  $ millions
  $ millions
  %
 

2011

                         

Pharmaceuticals gross sales subject to deductions

                40,004     100.0  
                       

US specific healthcare plans and program rebates

    (2,424 )         (2,424 )   (6.0 )

Non-US specific healthcare plans and program rebates

    (801 )   (408 )   (1,209 )   (3.0 )

Non-healthcare plans and program related rebates, returns and other deductions

    (1,631 )   (2,232 )   (3,863 )   (9.7 )
                   

Total Pharmaceuticals gross to net sales adjustments

    (4,856 )   (2,640 )   (7,496 )   (18.7 )
                   

Pharmaceuticals net sales 2011

                32,508     81.3  
                       

2010

                         

Pharmaceuticals gross sales subject to deductions

                36,400     100.0  
                       

US specific healthcare plans and program rebates

    (2,029 )         (2,029 )   (5.6 )

Non-US specific healthcare plans and program rebates

    (298 )   (263 )   (561 )   (1.5 )

Non-healthcare plans and program related rebates, returns and other deductions

    (1,585 )   (1,919 )   (3,504 )   (9.6 )
                   

Total Pharmaceuticals gross to net sales adjustments

    (3,912 )   (2,182 )   (6,094 )   (16.7 )
                   

Pharmaceuticals net sales 2010

                30,306     83.3  
                       

2009

                         

Pharmaceuticals gross sales subject to deductions

                33,010     100.0  
                       

US specific healthcare plans and program rebates

    (1,516 )         (1,516 )   (4.5 )

Non-US specific healthcare plans and program rebates

    (199 )   (193 )   (392 )   (1.2 )

Non-healthcare plans and program related rebates, returns and other deductions

    (1,220 )   (1,595 )   (2,815 )   (8.6 )
                   

Total Pharmaceuticals gross to net sales adjustments

    (2,935 )   (1,788 )   (4,723 )   (14.3 )
                   

Pharmaceuticals net sales 2009

                28,287     85.7  
                       

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Acquisition accounting

        The Group's consolidated financial statements reflect an acquired business from the date the acquisition has been completed. We account for acquired businesses resulting in majority ownership using the acquisition method of accounting, which requires the acquired assets and assumed liabilities to be recorded as of the acquisition date at their respective fair values. Any excess of the purchase consideration over the Group's share of the estimated fair values of acquired net identified assets is recorded as goodwill in the balance sheet and denominated in the functional currency of the related acquisition. Goodwill is allocated to an appropriate cash-generating unit, which is defined as the smallest group of assets that generates independent cash inflows that support the goodwill.

        In-Process Research & Development (IPR&D) is valued as part of the acquisition accounting. Payments for other separately acquired assets in development, such as those related to initial and milestone payments for licensed or acquired compounds, are capitalized as IPR&D intangible assets if they are deemed to enhance our intellectual property. This occurs even if uncertainties continue to exist as to whether the R&D projects will ultimately be successful in producing a commercial product. Estimating the fair value assigned to each class of acquired assets and assumed liabilities is based on expectations and assumptions, from the perspective of a market participant, that have been deemed reasonable by management.

        Contingent considerations to former owners agreed in a business combination, e.g., in the form of milestone payments upon the achievement of certain development stages or sales targets as well as royalties, are recognized as liabilities at fair value as of the acquisition date. Any subsequent changes in amounts recorded as a liability are recognized in the consolidated income statement.


Impairment of long-lived intangible and tangible assets

        We review long-lived intangible and tangible assets for impairment whenever events or changes in circumstance indicate that the asset's balance sheet carrying amount may not be recoverable.

        An asset, as defined, is generally considered impaired when its carrying amount exceeds its estimated recoverable amount. The recoverable amount is measured as the higher of: (a) an asset or related cash-generating unit's fair value less costs to sell and (b) its value in use. Fair value reflects the Group's estimates of assumptions that market participants would use when pricing the asset. In contrast the value in use concept reflects the Group's estimates based on its expected use of the asset, including the effects of factors that may be specific to the Group and not applicable to entities in general. Value in use, and fair value, are measured principally on the basis of discounted cash flow analysis using management's best estimate of the range of economic conditions that are expected to exist over the remaining useful life of the asset. Also value in use measurements specifically exclude consideration of any estimated future net cash flows that might be expected to arise from future restructuring or from improving or enhancing the asset's performance.

        The net present values involve highly sensitive estimates and assumptions including consideration of factors such as the following:

        Factors that could result in shortened useful lives or impairments include:

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        Goodwill and the Alcon brand name have an indefinite useful life and impairment testing is done at least annually. Any impairment charge is recorded in the consolidated income statement under "Other expense". We consider that the Alcon brand name has an indefinite life as Alcon has a history of strong revenue and cash flow performance, and we have the intent and ability to support the brand with market-place spending for the foreseeable future. IPR&D is also assessed for impairment at least on an annual basis, with any impairment charge recorded in the consolidated income statement under "Research & Development". Once a project included in IPR&D has been successfully developed and is available for use, it is amortized over its useful life in the consolidated income statement under "Cost of Goods Sold", where related impairment charges, if any, are also recorded.

        We have adopted a uniform method for assessing goodwill and indefinite-life intangible assets for impairment and any other intangible asset indicated as being possibly impaired. Generally, for intangible assets we use cash flow projections for the whole useful life of these assets, and for goodwill and the Alcon brand name, we utilize cash flow projections for a five-year period based on management forecasts, with a terminal value based on sales projections usually in line with or lower than inflation rates for later periods. Probability-weighted scenarios are typically used.

        Discount rates used in these scenarios are based on the Group's weighted average cost of capital as an approximation of the weighted average cost of capital of a comparable market participant, which are adjusted for specific country and currency risks associated with cash flow projections.

        Due to the above factors, actual cash flows and values could vary significantly from forecasted future cash flows and related values derived using discounting techniques.

        The recoverable amount of a cash-generating unit and related goodwill is usually based on the higher of "fair value less costs of sale" or on the "value in use" derived from applying discounted future cash flows based on the key assumptions in the following table:

 
  Pharmaceuticals   Alcon   Sandoz   Vaccines and
Diagnostics %
  Consumer
Health
 
 
  %
  %
  %
  %
  %
 

Sales growth rate assumptions after forecast period

    0.4     3     0 to 2     0.5     0 to 2  

Discount rate (post-tax)

    7     7     7     7     7  

        In 2011, intangible asset impairment charges of $627 million were recorded. $552 million of these arose in the Pharmaceuticals Division, principally due to the expected reduction in demand for Tekturna/Rasilez (aliskiren) and discontinuation of PRT128 (elinogrel), SMC021 (oral calcitonin), PTK796 (omadacycline) and AGO178 (agomelatine) development programs. $75 million of impairment charges arose in all other Divisions.

        In 2010, Novartis recorded impairment charges totaling approximately $1.0 billion. These related to impairment charges of $356 million for Mycograb, $250 million for PTZ601, $228 million for albinterferon alfa-2b and $120 million for ASA404 as Novartis decided to discontinue the related development projects. Additionally, $40 million were recorded for various other impairment charges in the Pharmaceuticals Division. Novartis also recorded various impairment charges of $24 million in Sandoz and Consumer Health.

        Reversal of prior year impairment charges amounted to $8 million (2010: $107 million).

        The amount of goodwill and other intangible assets on our consolidated balance sheet has increased significantly in recent years, primarily due to acquisitions. Although no significant additional impairments are currently anticipated, impairment testing could lead to material impairment charges in the future. For more information, see note 11 to the Group's consolidated financial statements.

        Additionally, impairment charges for property, plant and equipment during 2011 amounted to $413 million (2010: $10 million) of which $403 million was in Pharmaceuticals primarily related to the expected reduction in demand for Tekturna/Rasilez and the discontinuation of the SMC021 development program.

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Investments in associated companies

        We use the equity method to account for investments in associated companies (generally defined as investments in companies that correspond to holdings of between 20% and 50% of a company's voting shares or over which we otherwise have significant influence).

        Various estimates are used in applying the equity method, so subsequent adjustments may be required once an associated company publishes financial results or makes public other information. This applies in particular to our investment in Roche Holding AG.

        We consider investments in associated companies for impairment testing whenever a company's quoted share price has fallen to a fair value below our per-share carrying value. For unquoted investments in associated companies, the latest available financial information is used to assess whether impairment testing is necessary. Where there is an indication that separately identified assets of the associated company, other than implicit goodwill, might be impaired an impairment test is performed. Any impairment charge is recorded in the consolidated income statement under "Income from associated companies".


Retirement and other post-employment benefit plans

        We sponsor pension and other post-employment benefit plans in various forms that cover a significant portion of our current and former associates. For post-employment plans with defined benefit obligations, we are required to make significant assumptions and estimates about future events in calculating the expense and the present value of the liability related to these plans. These include assumptions about the discount rates we apply to estimate future liabilities, expected returns on plan assets and rates of future compensation increases. In addition, our actuarial consultants provide our management with historical statistical information such as withdrawal and mortality rates in connection with these estimates.

        Assumptions and estimates used by the Group may differ materially from the actual results we experience due to changing market and economic conditions, higher or lower withdrawal rates, or longer/shorter life spans of participants among other factors. For example, a decrease in the discount rate we apply in determining the present value of the obligations of one-half of one percent would have increased our year-end defined benefit obligation by approximately $1.3 billion. If the 2011 discount rate had been one-half of one percentage point lower than actually assumed, interest expense would have decreased by approximately $60 million, and if the same decrease was also assumed for the return on assets, it would have decreased by approximately $100 million. We record differences between assumed and actual income and expense as "Actuarial gains/losses" in the consolidated statement of comprehensive income. These differences could have a material effect on our total equity. For more information on obligations under retirement and other post-employment benefit plans and underlying actuarial assumptions, see note 25 to the Group's consolidated financial statements.


Derivative financial instruments and related cash flow hedging

        Derivative financial instruments are initially recognized in the balance sheet at fair value and subsequently re-measured to their current fair value. Any gain or loss on the hedging instrument relating to the effective portion of changes in the fair value of derivatives in cash flow hedges are recognized in the consolidated statement of comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated 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 the consolidated statement of comprehensive income at that time is immediately recognized in the consolidated income statement. Management assesses the probability of the forecasted transaction occurring when determining whether the impact of a cash flow hedge can be deferred in the consolidated statement of comprehensive income. Amounts are only deferred when management judges the forecasted transaction to be probable.


Equity-based compensation

        The fair value of Novartis shares, restricted shares, restricted share units (RSU) and American Depositary Shares (ADS) and related options granted to associates as compensation is recognized as an expense over the related vesting or service period adjusted to reflect actual and expected vesting levels. The charge for equity-based compensation is included in the personnel expenses which are allocated to functional costs and credited to consolidated equity for equity-settled amounts or to other current liabilities for cash-settled amounts. An option's fair value at grant date is calculated using the trinomial valuation method. Accurately measuring the value of

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share options is difficult and requires an estimate of factors used in the valuation model. These key factors involve uncertain future events, such as expected dividend yield and expected share price volatility. Expected volatilities are based on those implied from listed warrants on Novartis shares, and—to the extent that equivalent options are not available—a future extrapolation based on historical volatility. Novartis shares, restricted shares, RSUs and ADSs are valued using the market value on the grant date. For detailed information on the Group's equity-based compensation plans and underlying assumptions for valuation of share options granted in 2011, see note 26 to the Group's consolidated financial statements.


Contingencies

        A number of our subsidiaries are involved in various government investigations and legal proceedings (intellectual property, product liability, commercial, employment and wrongful discharge, environmental claims, etc.) arising out of the normal conduct of their businesses. For more information, see note 20 to the Group's consolidated financial statements.

        We record accruals for contingencies when it is probable that a liability has been incurred and the amount can be reliably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a significant portion of the overall accrual is actuarially determined based on factors such as past experience, amount and number of claims reported, and estimates of claims incurred but not yet reported. We provide for individually significant cases when probable and the amount can be reliably estimated. Legal defense costs are accrued when they are expected to be incurred and the amount can be reliably estimated.

        In some instances, the inherent uncertainty of litigation, the resources required to defend against governmental actions, the potential impact on our reputation, and the potential for exclusion from US federal and other government reimbursement programs have contributed to decisions by companies in our industry to enter into settlement agreements with governmental authorities. These settlements have had in the past, and may continue in the future, to involve large cash payments, including potential repayment of amounts that were allegedly improperly obtained and penalties of up to treble damages. In addition, matters underlying governmental investigations and settlements may be the subject of separate private litigation.

        Provisions are recorded for environmental remediation costs when expenditure on remedial work is probable and the cost can be reliably estimated. Remediation costs are provided for under "Current liabilities" and "Non-current liabilities" in the Group's consolidated balance sheet. They are estimated by calculating the present value of expected costs. Provisions relating to estimated future expenditure for liabilities do not usually reflect any insurance or other claims or recoveries, since these are only recognized when the amount is reasonably estimable and collection is virtually certain.


Research & Development

        Internal Research & Development (R&D) costs are fully charged to the consolidated income statement in the period in which they are incurred. We consider that regulatory and other uncertainties inherent in the development of new products preclude the capitalization of internal development expenses as an intangible asset until marketing approval from the regulatory authority is obtained in a relevant major market, such as for the US, the EU, Switzerland or Japan.

        Payments made to third parties in compensation for subcontracted R&D that is deemed not to enhance our intellectual property, such as to contract research and development organizations, are expensed as internal R&D expenses in the period in which they are incurred. Such payments are only capitalized if they meet the criteria for recognition as an internally generated intangible asset, usually when marketing approval has been achieved from a regulatory authority in a major market.

        Payments made to third parties in order to in-license or acquire intellectual property rights, compounds and products (In-Process Research & Development assets, "IPR&D"), including initial upfront and subsequent milestone payments, are capitalized as are payments for other assets, such as technologies to be used in R&D activities. If additional payments are made to the originator company to continue to perform R&D activities, an evaluation is made as to the nature of the payments. Such additional payments will be expensed if such additional payments are deemed to be compensation for subcontracted R&D services not resulting in an additional transfer of intellectual property rights to Novartis. By contrast, such additional payments will be capitalized if these additional payments are deemed to be compensation for the transfer to Novartis of additional intellectual property developed at the risk of the originator company. Subsequent internal R&D costs in relation to IPR&D and other assets are expensed since the technical feasibility of the internal R&D activity can only be

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demonstrated by the receipt of marketing approval for a related product from a regulatory authority in a major market.

        Costs for post-approval studies performed to support the continued registration of a marketed product are recognized as marketing expenses. Costs for activities that are required by regulatory authorities as a condition for obtaining marketing approval are charged as development expenses as they are incurred, in cases where it is anticipated that the related product will be sold over a longer period than the activities required to be performed to obtain the marketing approval. In the rare cases where costs related to the conditional approval need to be incurred over a period beyond that of the anticipated product sales, then the expected costs of these activities will be expensed over the shorter period of the anticipated product sales.

        IPR&D assets are amortized in the consolidated income statement over their useful life once the related project has been successfully developed and regulatory approval for a product launch has been obtained. Other acquired technologies are amortized over their estimated useful lives.


Taxes

        We prepare and file our tax returns based on an interpretation of tax laws and regulations and record estimates based on these judgments and interpretations. Our tax returns are subject to examination by the competent taxing authorities, which may result in an assessment being made requiring payments of additional tax, interest or penalties. Inherent uncertainties exist in our estimates of our tax positions. We believe that our estimated amounts for current and deferred tax assets or liabilities, including any amounts related to any uncertain tax positions, are appropriate based on currently known facts and circumstances.


New Accounting Pronouncements

        Based on a Novartis analysis, the following new or amended IFRS standards will be of significance to the Group, but have not yet been adopted.

        In 2009, 2010 and 2011, sections of IFRS 9 Financial Instruments were issued. This standard will ultimately substantially change the classification and measurement of financial instruments, hedging requirements, impairments of financial instruments and the recognition of certain fair value changes in the consolidated financial statements. Currently, only new requirements on the classification and measurement for financial assets and financial liabilities have been issued. The mandatory effective date for requirements issued as part of IFRS 9 will be on or after January 1, 2015. Early application of the requirements is permitted.

        In 2011, IAS 19 revised on Employee Benefits was issued, for adoption by January 1, 2013. The principal impact for Novartis will be that the concepts of expected return on assets and interest expense on the defined benefit obligation as separate components of defined benefit cost will be replaced by a concept that interest will be calculated on the net of the defined benefit obligation and funded post-employment obligation assets using an interest rate reflecting market yields of high quality corporate bonds in a deep market. If this concept had been adopted by Novartis in 2011, it is estimated that operating income would have been lower by approximately $260 million. As required by the standard, Novartis will retrospectively adopt the standard on January 1, 2013.

        Two other new standards were also issued in 2011, IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements which are potentially important for Novartis. Under IFRS 10, Novartis will need to consolidate an investee based on control, i.e. when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. IFRS 11 will require that Novartis classifies joint arrangements as either joint operations, where assets, liabilities, revenues and expenses are accounted for proportionally in accordance with the agreement, or as joint ventures, which are accounted for under the equity method. These new standards become effective on January 1, 2013.

        The following IFRSs and amendments are not yet effective and are not early adopted by the Group.

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        Although Novartis is still completing its evaluation of these new standards, apart from where indicated, Novartis does not currently consider that the other new standards will have a significant impact on the Group's consolidated financial statements.


FACTORS AFFECTING COMPARABILITY OF YEAR-ON-YEAR RESULTS OF OPERATIONS

Recent Acquisitions and Divestments

        The comparability of the year-on-year results of our operations for the total Group can be significantly affected by acquisitions and divestments. For more detail how these actions have affected our results, see "Significant Transactions" below.


Significant Transactions

Alcon majority control in 2010; full ownership and merger in 2011

        On August 25, 2010 Novartis completed the acquisition of a further 52% interest in Alcon, Inc. (Alcon) following the January 4, 2010 announcement that Novartis had exercised its call option to acquire Nestlé's remaining 52% Alcon interest for approximately $28.3 billion or $180 per share. This increased the interest in Alcon to a 77% controlling interest as Novartis had already acquired an initial 25% Alcon interest from Nestlé for $10.4 billion or $143 per share in July 2008. The overall purchase price for the 77% interest in Alcon of $38.7 billion included certain adjustments for Alcon dividends and interest due.

        On December 14, 2010 Novartis entered into a definitive agreement to merge Alcon into Novartis in consideration for Novartis shares and a Contingent Value Amount. The acquisition of the remaining outstanding non-controlling interests in Alcon were separate transactions following the previous acquisition of majority ownership in Alcon by Novartis on August 25, 2010. On April 8, 2011 a Novartis Extraordinary General Meeting approved the merger with Alcon, Inc. creating the Alcon Division which became the fifth reported segment in Novartis' strategically diversified healthcare portfolio. The Extraordinary General Meeting also authorized the issuance of 108 million new shares.

        Alcon shareholders received 2.9228 Novartis shares (which included a dividend adjustment) and $8.20 in cash for each share of Alcon, resulting in a total consideration of $168.00 per share.

        Following the change in majority control of Alcon on August 25, 2010, it was required for Novartis to reassess the fair value of the initial 25% non-controlling interest in Alcon it acquired from Nestlé in 2008. As the estimated fair value of the initial non-controlling interest exceeded the recorded book value of the initial non-controlling interest, Novartis recorded a revaluation gain. After adjusting for accumulated losses recorded in the Group's consolidated statement of comprehensive income since the initial 25% interest in Alcon was acquired in July 2008, a net amount of $335 million was recorded as a gain under "Income from Associated Companies".

        After the acquisition of majority ownership in Alcon, Inc. on August 25, 2010, Alcon contributed net sales of $2.4 billion and operating income of $323 million to the consolidated income statement in 2010.

        During 2011, prior to the merger of Alcon, Inc. into Novartis AG on April 8, 4.8% of the non-controlling interests in Alcon, Inc. were acquired for $2.4 billion.

        Completion of the acquisition of the outstanding 18.6% interest in Alcon on April 8, 2011 and subsequent merger, resulted in the issuance of Novartis shares with a fair value of $9.2 billion and a contingent value payment of $0.5 billion.

        The final purchase price allocation was completed in 2011 and resulted in a fair value of net identifiable assets of $27.0 billion and goodwill of $18.0 billion. Also, the excess of the value exchanged for these 2011 transactions over the recorded value of the non-controlling interest together with merger related transaction costs resulted in a reduction in equity of $5.7 billion.

        For more detail on accounting for these transactions, see "Item 18, Financial Statements—note 1, 2 and 24".

Other Acquisitions in 2011

Pharmaceuticals—Acquisition of Genoptix, Inc.

        On March 7, 2011 Novartis completed the acquisition of Genoptix, Inc., a specialized laboratory providing personalized diagnostic services to community-based hematologists and oncologists. Genoptix employed

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approximately 500 people and became part of the Novartis Molecular Diagnostics unit within the Pharmaceuticals Division.

        The acquisition in cash of 100% of the shares of Genoptix totaled $458 million, excluding the $24 million of cash acquired. The final purchase price allocation resulted in net identified assets of $237 million and goodwill of $221 million. Results of operations since the acquisition date were not material.

Vaccines and Diagnostics—Acquisition of Zhejiang Tianyuan

        On March 22, 2011 Novartis completed the acquisition in cash of an 85% stake in the Chinese vaccines company, Zhejiang Tianyuan Bio-Pharmaceutical Co. Ltd. The acquisition provides Novartis with an expanded presence in the Chinese vaccines market and is expected to facilitate the introduction of additional Novartis vaccines into China. The total amount paid for the 85% interest was $194 million, excluding $39 million of cash acquired. The final purchase price allocation resulted in net identified assets of $131 million and goodwill of $82 million. Non-controlling interests have increased by $19 million from this transaction. Results of operations since the acquisition date were not material.

Other significant transactions in 2011

Pharmaceuticals—Divestment of Elidel®

        On May 11, 2011 Novartis completed the divestment of Elidel® Cream 1% to Meda Pharma Sarl and Novartis received an upfront payment of $420 million and recognized a gain of $324 million in "Other Income".

Acquisitions in 2010

Pharmaceuticals—Acquisition of Corthera

        On February 3, 2010 Novartis completed the 100% acquisition (announced on December 23, 2009) of the privately held US-based Corthera Inc., gaining worldwide rights to relaxin for the treatment of acute decompensated heart failure and assumed full responsibility for development and commercialization for a total purchase consideration of $327 million. This amount consists of an initial cash payment of $120 million and $207 million of deferred contingent consideration. The deferred contingent consideration is the net present value of the additional milestone payments due to Corthera's previous shareholders which they are eligible to receive contingent upon the achievement of specified development and commercialization milestones. The final purchase price allocation resulted in net identified assets of $309 million and goodwill of $18 million. Results of operations since the acquisition date were not material.

Sandoz—Acquisition of Oriel Therapeutics

        On June 1, Sandoz completed the 100% acquisition of the privately held US-based Oriel Therapeutics Inc., to broaden its portfolio of projects in the field of respiratory drugs for a total purchase consideration of $332 million. This amount consists of an initial cash payment of $74 million and $258 million of deferred contingent consideration. Oriel's previous shareholders are eligible to receive milestone payments, which are contingent upon the company achieving future development steps, regulatory approvals and market launches, and sales royalties. The total $258 million of deferred contingent consideration represents the net present value of expected milestone and royalty payments. The final purchase price allocation, including the valuation of the contingent payment elements of the purchase price, resulted in net identified assets of $281 million and goodwill of $51 million. Results of operations since the acquisition date were not material. During 2011, $106 million of contingent consideration has been released to the consolidated income statement as it is remote that the related contingent event will occur.

Other Significant Transactions in 2010

Pharmaceuticals—Divestment of Enablex®

        On October 18, 2010 Novartis finalized the sale of the US rights for Enablex® (darifenacin) to Warner Chilcott Plc for $400 million and recongized a gain of $392 million.

Corporate—Issuance of bond in US dollars

        On March 9, 2010 Novartis issued a three-tranche bond totaling $5.0 billion registered with the US Securities and Exchange Commission as part of a shelf registration statement filed by Novartis in 2008. A 1.9% three-year

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tranche totaling $2.0 billion, a 2.9% five-year tranche totaling $2.0 billion and a 4.4% 10-year tranche totaling $1.0 billion were issued by the Group's US entity, Novartis Capital Corp. All tranches are unconditionally guaranteed by Novartis AG.

Corporate—Change of pension plan in Switzerland

        On April 23, 2010 the Board of Trustees of the Novartis Swiss Pension Fund agreed to amend the conditions and insured benefits of the current Swiss pension plan with effect from January 1, 2011. These amendments do not have an impact on existing pensions in payment or on plan members born before January 1, 1956. Under the previous rules, benefits from the plan are primarily linked to the level of salary in the years prior to retirement while under the new rules benefits are also partially linked to the level of contributions made by the members during their active service period up to their retirement. This has led to changes in the amounts that need to be included in the Group's consolidated financial statements prepared using IFRS in respect of the Swiss Pension Fund.

        As part of this change, Novartis, supported by the Swiss Pension Fund, will make transitional payments, which vary according to the member's age and years of service. As a result, it is estimated that additional payments will be made over a ten-year period of up to approximately $481 million (CHF 453 million) depending on whether or not all current members affected by the change remain in the plan over this ten-year period.

        The accounting consequence of this change in the Swiss pension plan rules results in the Group's consolidated financial statements prepared under IFRS reflecting a net pre-tax curtailment gain of $265 million (CHF 283 million) in 2010. This calculation only takes into account the discounted value of transition payments of $202 million (CHF 219 million) attributed to already completed years of service of the affected plan members as calculated in accordance with IFRS requirements. It does not take into account any amount for transitional payments related to their future years of service.

Acquisitions in 2009

Sandoz—Acquisition of EBEWE Pharma

        On May 20, Novartis announced a definitive agreement for Sandoz to acquire the specialty generic injectables business of EBEWE Pharma for EUR 925 million ($1.3 billion) in cash, to be adjusted for any cash or debt assumed at closing. This transaction was completed on September 22, 2009. The first payment of EUR 600 million ($0.9 billion) was made in 2009, with the balance to be paid in 2010. Based on a final purchase price allocation, EBEWE's identified net assets were $0.7 billion, which resulted in goodwill of $0.5 billion in 2009. Results of operations from this acquisition, which were not material in 2009, were included from the completion date of this transaction.

Vaccines and Diagnostics—Agreement to acquire Zhejiang Tianyuan

        On November 4, Novartis announced a definitive agreement to acquire an 85% stake in the Chinese vaccines company Zhejiang Tianyuan Bio-Pharmaceutical Co., Ltd. as part of a strategic initiative to build a vaccines industry leader in China and expand the Group's limited presence in this fast-growing market segment. China is the world's third-largest vaccines market, with annual industry sales of more than $1 billion and expectations for sustained double-digit growth given the government's commitment to improve access to quality healthcare. Terms call for Novartis to purchase an 85% majority interest for approximately $125 million in cash. The transaction was completed in 2011.

Other Significant Transactions in 2009

Corporate—Issuance of bond in US dollars

        On February 5, Novartis issued a two-tranche bond totaling $5.0 billion registered with the US Securities and Exchange Commission as part of a shelf registration statement filed by Novartis in 2008. A 4.125% five-year tranche totaling $2.0 billion was issued by the Group's US entity, Novartis Capital Corp., while a 5.125% 10-year tranche totaling $3.0 billion was issued by the Group's Bermuda unit, Novartis Securities Investment Ltd. Both tranches are unconditionally guaranteed by Novartis AG.

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Corporate—Issuance of bond in euros

        On June 2, Novartis issued a EUR 1.5 billion bond (approximately $2.1 billion) with a coupon of 4.25% under its EUR 15 billion Euro Medium Term Note Programme. The seven-year bond, issued by Novartis Finance S.A., Luxembourg, has a maturity date of June 15, 2016, and is guaranteed by Novartis AG.

Corporate—Tender offer for additional interest in Novartis India Ltd.

        On June 8, Novartis completed a tender offer to acquire additional shares from public shareholders and increased its stake in the majority-owned Indian subsidiary, Novartis India Ltd., to 76.4% from 50.9% for approximately INR 3.8 billion ($80 million). Almost all large institutional investors and quasi-institutional shareholders participated in the offer. This transaction resulted in $57 million of goodwill.

Pharmaceuticals—Loss of majority control of Idenix

        On August 5, Novartis did not participate in an underwritten public offering by Idenix Pharmaceuticals, which reduced the Group's stake to 47% from the pre-offering level of 53%. As a result of this offering, Novartis no longer controls this company, so Idenix was deconsolidated with effect from September 1, 2009. Idenix has been accounted for on an equity basis since this date, which had no material impact on the Group's consolidated income statement.


SEGMENT REPORTING

        The businesses of Novartis are divided on a worldwide basis into five reporting segments (Pharmaceuticals, Alcon, Sandoz, Vaccines and Diagnostics and Consumer Health) and Corporate activities. Following the acquisition of all of Alcon, Inc., and merger into Novartis AG on April 8, 2011 a new segment allocation was introduced. As a result, the Alcon Division includes CIBA Vision and certain Pharmaceuticals Division ophthalmology products. Falcon, the US generics business of Alcon, Inc. was transferred to the Sandoz Division. Certain residual operational costs incurred from Alcon by the now disbanded Consumer Health Divisional headquarters were transferred to Corporate and Corporate R&D was transferred to the Pharmaceuticals Division. All segment results for 2010 and 2011 are presented using this new allocation. Except for Consumer Health, these segments reflect the Group's internal management structure. These segments are managed separately because they each manufacture, distribute and sell distinct products which require differing marketing strategies. In the case of Consumer Health, the segment comprises two divisions which are also managed separately, however, neither of these two divisions is material enough to the Group to be separately disclosed as a segment.

        Inter-segmental sales are made at amounts considered to approximate arm's-length transactions. Currently, we principally evaluate segment performance and allocate resources based on operating income, cash flow and cash flow return on invested capital (CFROI).

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        The following shows an overview of the impact of the restatement on the segmentation structure. Unless otherwise stated this has been used for all years presented in this Annual Report.

Segment
  Newly included   Newly excluded

Pharmaceuticals

  Corporate R&D   Certain ophthalmic products

Alcon

 
CIBA Vision, certain ophthalmic products
 
Falcon

Sandoz

 
Falcon
   

Consumer Health

     
CIBA Vision; disbanded Consumer Health divisional management costs

Corporate

 
Disbanded Consumer Health divisional management costs
 
Corporate R&D

        A summary of the above restatements on 2010 sales, operating income and core operating income is as follows:

Segment
  Net sales   Operating
income
  Core
operating
income
 
 
  $ millions
  $ millions
  $ millions
 

Pharmaceuticals

    (252 )   (327 )   (323 )

Alcon

    2,020     473     498  

Sandoz

    74     49     57  

Consumer Health

    (1,842 )   (375 )   (408 )

Corporate

          180     176  
               

Total

    0     0     0  
               


Pharmaceuticals

        Pharmaceuticals researches, develops, manufactures, distributes, and sells patented prescription medicines in the following therapeutic areas: Cardiovascular and Metabolism; Oncology; Neuroscience and Ophthalmics; Respiratory; Integrated Hospital Care; and additional products. Pharmaceuticals is organized into global business franchises responsible for the development and marketing of various products as well as a business unit, called Novartis Oncology, responsible for the global development and marketing of oncology products. The Novartis Oncology Business Unit is not required to be disclosed separately as a segment since it shares common long-term economic perspectives, customers, research, development, production, distribution and regulatory factors with the rest of the division.

        Pharmaceuticals is the largest contributor among the segments, accounting in 2011 for $32.5 billion, or 56%, of net sales and for $8.3 billion, or 71%, of operating income (excluding Corporate Income & Expense, net).


Alcon

        Alcon discovers, develops, manufactures, distributes and sells eye care products. Alcon is the global leader in eye care with product offerings in Surgical, Ophthalmic Pharmaceuticals and Vision Care. In Surgical, Alcon develops, manufactures, distributes and sells ophthalmic surgical equipment, instruments, disposable products

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and intraocular lenses. In Ophthalmic Pharmaceuticals, Alcon discovers, develops, manufactures, distributes and sells medicines to treat chronic and acute diseases of the eye, as well as over-the-counter medicines for the eye. In Vision Care, Alcon develops, manufactures, distributes and sells contact lenses and lens care products.

        In 2011, Alcon accounted for $10.0 billion, or 17%, of Group net sales, and for $1.5 billion, or 13%, of Group operating income (excluding Corporate income and expense, net).

        In addition to the restated segmentation structure, the Alcon segment is also discussed on a pro forma basis. This is necessary since the restated 2010 segmentation only includes the consolidated results of Alcon, Inc. from the date of acquisition of majority control on August 25, 2010. In order to provide a meaningful description of the results of this segment in 2011 compared to 2010, the pro forma results of Alcon, Inc. from January 1, 2010 to August 25, 2010 have been included. The pro forma results of the Alcon segment therefore have been prepared assuming that the acquisition of Alcon, Inc., had occurred as of January 1, 2010 and that the purchase price allocation had been performed as of this date. As a result, the pro forma results include the full year charge for additional amortization of the acquired intangible assets and the impact of other revaluations of assets and liabilities. Exceptional items included in the results for 2010 resulting from the change of control on August 25, 2010 such as change of control and other exceptional costs as well as the impact of revaluing the inventory and charging this to the post August 25, 2010 consolidated income statement have also been excluded. Also excluded is the impact of any divestments in 2010 and 2011 required by regulators to approve the merger.

        The additional impact on the 2010 and 2011 restated Alcon segment results from incorporating the pro forma adjustments can be summarized as follows:

 
  Net sales   Operating
income
  Core
operating
income
 
 
  $ millions
  $ millions
  $ millions
 

2010

                   

Alcon restated

    4,446     796     1,350  

Pro forma adjustments

    4,585     385     1,745  
               

Alcon pro forma

    9,031     1,181     3,095  
               

2011

                   

Alcon restated

    9,958     1,472     3,492  

Pro forma adjustments

    (9 )   (11 )   (2 )
               

Alcon pro forma

    9,949     1,461     3,490  
               


Sandoz

        Sandoz is a leading global generic pharmaceuticals company that develops, manufactures, distributes and sells prescription medicines, as well as pharmaceutical and biotechnological active substances, which are not protected by valid and enforceable third-party patents. Sandoz has activities in Retail Generics, Anti-Infectives, Biopharmaceuticals and Oncology Injectables. In Retail Generics, Sandoz develops, manufactures and markets active ingredients and finished dosage forms of pharmaceuticals, as well as supplying active ingredients to third parties. In Anti-Infectives, Sandoz develops and manufactures active pharmaceutical ingredients and intermediates—mainly antibiotics—for internal use by Retail Generics and for sale to third-party customers. In Biopharmaceuticals, Sandoz develops manufactures and markets protein- or other biotechnology-based products (known as biosimilars or follow-on biologics) and sells biotech manufacturing services to other companies. In Oncology Injectables, Sandoz develops, manufactures and markets cytotoxic products for the hospital market.

        In 2011, Sandoz accounted for $9.5 billion, or 16%, of net sales and for $1.4 billion, or 12% of operating income (excluding Corporate Income & Expense, net).


Vaccines and Diagnostics

        Vaccines and Diagnostics researches, develops, manufactures, distributes and sells preventive vaccines and diagnostic tools. Novartis Vaccines is a leading global developer and manufacturer of human vaccines.

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        Novartis Diagnostics is a blood testing and molecular diagnostics business dedicated to preventing the spread of infectious diseases through novel blood-screening tools that protect the world's blood supply.

        In 2011, Vaccines and Diagnostics accounted for $2.0 billion, or 3%, of net sales and an operating loss of $249 million, or 2%, of operating income (excluding Corporate Income & Expense, net).


Consumer Health

        Consumer Health now consists of two divisions: OTC (over-the-counter medicines) and Animal Health. Each has its own research, development, manufacturing, distribution and selling capabilities. However, neither is material enough to the Group to be separately disclosed as a segment. OTC offers readily available consumer medicine and Animal Health provides veterinary products for farm and companion animals.

        In 2011, Consumer Health accounted for $4.6 billion, or 8%, of net sales and for $727 million, or 6% of operating income (excluding Corporate Income & Expense, net).


Corporate

        Income and expenses relating to Corporate include the costs of our headquarters and corporate coordination functions in major countries. In addition, Corporate includes certain items of income and expense that are not attributable to specific divisions, including global IT infrastructure.


EFFECTS OF CURRENCY FLUCTUATIONS

        We transact our business in many currencies other than the US dollar, our reporting currency.

        The following provides an overview of net sales and expenses for 2011 and 2010 for currencies most important to the Group:

Currency
   
  2011   2010   2009  
 
   
  %
  %
  %
 

US dollar ($)

  Net sales     36     36     35  

  Operating expenses     38     36     33  

Euro (EUR)

 
Net sales
   
27
   
28
   
31
 

  Operating expenses     25     26     31  

Swiss franc (CHF)

 
Net sales
   
2
   
2
   
3
 

  Operating expenses     14     13     12  

Japanese yen (JPY)

 
Net sales
   
9
   
8
   
8
 

  Operating expenses     4     4     4  

Other currencies

 
Net sales
   
26
   
26
   
23
 

  Operating expenses     19     21     20  

        We prepare our consolidated financial statements in US dollars. As a result, fluctuations in the exchange rates between the US dollar and other currencies can have a significant effect on both the Group's results of operations as well as on the reported value of our assets, liabilities, revenue and expenses as measured in US dollars. This in turn may significantly affect reported earnings (both positively and negatively) and the comparability of period-to-period results of operations.

        For purposes of our consolidated balance sheets, we translate assets and liabilities denominated in other currencies into US dollars at the prevailing market exchange rates as of the relevant balance sheet date. As a result, even if the amounts or values of these items remain unchanged in the respective local currency, changes in exchange rates have an impact on the amounts or values of these items in our consolidated financial statements. For purposes of the Group's consolidated income and cash flow statements, revenue, expense and cash flow items in local currencies are translated into US dollars at average exchange rates prevailing during the relevant period.

        We seek to manage currency exposure by engaging in hedging transactions where management deems appropriate. For 2011, we entered into various contracts that change in value with movements in foreign exchange

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rates in order to preserve the value of assets, commitments and expected transactions. We also use forward contracts and foreign currency options to hedge expected net revenues in foreign currencies. For more information on how these transactions affect our consolidated financial statements and on how foreign exchange rate exposure is managed, see notes 1, 5 and 16 to the Group's consolidated financial statements.

        The average value of the US dollar in 2011 decreased against the EUR, CHF and JPY. The following table sets forth the foreign exchange rates of the US dollar against these currencies, used for foreign currency translation when preparing the Group's consolidated financial statements:

 
  Average for
year
   
   
   
   
 
   
  Year end    
 
  Change
in %
  Change
in %
$ per unit
  2011   2010   2011   2010

EUR

    1.392     1.327     5%     1.294     1.324   (2)%

CHF

    1.130     0.961     18%     1.064     1.063   0%

JPY (100)

    1.255     1.141     10%     1.289     1.227   5%

 

 
  Average for
year
   
   
   
   
 
   
  Year end    
 
  Change
in %
  Change
in %
$ per unit
  2010   2009   2010   2009

EUR

    1.327     1.393   (5)%     1.324     1.436   (8)%

CHF

    0.961     0.923   4%     1.063     0.965   10%

JPY (100)

    1.141     1.070   7%     1.227     1.086   13%

        The following table provides a summary of the currency impact on key Group figures due to their conversion into $, the Group's reporting currency, of the financial data from entities reporting in non-US dollars. Constant currency (cc) calculations apply the exchange rates of the prior year to the current year financial data for entities reporting in non-US dollars.


CURRENCY IMPACT ON KEY FIGURES

 
  Change in
constant
currencies
%
2011
  Change in
$ %
2011
  Percentage
point
currency
impact
2011
  Change in
constant
currencies
%
2010
  Change in
$ %
2010
  Percentage
point
currency
impact
2010
 

Net sales

    12     16     4     14     14      

Operating income

    1     (5 )   (6 )   17     15     (2 )

Net income

    (2 )   (7 )   (5 )   20     18     (2 )

Core operating income

    16     14     (2 )   24     22     (2 )

Core net income

    15     12     (3 )   18     17     (1 )

        For additional information on the effects of currency fluctuations, see "Item 11. Quantitative and Qualitative Disclosures about Non-Product-Related Market Risk".

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RESULTS OF OPERATIONS

2011 Compared to 2010

Key Figures

 
  Year ended
December 31,
2011
  Year ended
December 31,
2010
  Change
in $
  Change in
constant
currencies
 
 
  $ millions
  $ millions
  %
  %
 

Net sales

    58,566     50,624     16     12  

Other revenues

    809     937     (14 )   (15 )

Cost of Goods Sold

    (18,983 )   (14,488 )   31     25  
                   

Gross profit

    40,392     37,073     9     7  

Marketing & Sales

    (15,079 )   (13,316 )   13     9  

Research & Development

    (9,583 )   (9,070 )   6     (2 )

General & Administration

    (2,970 )   (2,481 )   20     12  

Other income

    1,354     1,234     10     (4 )

Other expense

    (3,116 )   (1,914 )   63     48  
                   

Operating income

    10,998     11,526     (5 )   1  

Income from associated companies

    528     804     (34 )   (34 )

Interest expense

    (751 )   (692 )   9     5  

Other financial income and expense

    (2 )   64     (103 )   (140 )
                   

Income before taxes

    10,773     11,702     (8 )   (2 )

Taxes

    (1,528 )   (1,733 )   (12 )   (6 )
                   

Group net income

    9,245     9,969     (7 )   (2 )
                   

Attributable to:

                         

Shareholders of Novartis AG

    9,113     9,794     (7 )   (1 )

Non-controlling interests

    132     175     (25 )   (25 )

Basic earnings per share

   
3.83
   
4.28
   
(11

)
 
(5

)


Core Key Figures

 
  Year ended
December 31,
2011
  Year ended
December 31,
2010
  Change
in $
  Change in
constant
currencies
 
 
  $ millions
  $ millions
  %
  %
 

Core operating income

    15,909     14,006     14     16  

Core net income

    13,490     12,029     12     15  

Core basic earnings per share

    5.57     5.15     8     11  

        The Group's core results—including core operating income, core net income and core earnings per share—exclude the amortization of intangible assets, impairment charges, expenses relating to the integration of acquisitions as well as other items that are, or are expected to accumulate within the year to be, over a $25 million threshold that management deems exceptional.


Overview—Results of operations

        Net sales rose 16% (+12% cc) to $58.6 billion in 2011, with a positive currency impact of 4% arising from the weakness of the US dollar against most major currencies during much of 2011. Recently launched products sales grew 38% (in $, excluding the A(H1N1) pandemic flu vaccine including Alcon on a pro forma basis for 2010) over 2010 to $14.4 billion. These products contributed 25% of Group net sales, up from 19% in 2010.

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        Operating income was down 5% (+1% cc) to $11.0 billion. The weakness of the US dollar, combined with the strong Swiss franc, resulted in a negative currency impact of 6 percentage points. Cost of Goods Sold rose by 31% (25% cc) to $19.0 billion in 2011, increasing by 3.8 percentage points to 32.4% of net sales. This led to a reduction in the gross margin by 4.2% to 69.0%. Marketing & Sales rose 13% (9% cc) to $15.1 billion, improving 0.6 percentage points to 25.7% of net sales, as productivity improvements and changes in the portfolio mix were partly offset by investments in new launch products. Research & Development expenses increased by 6% (–2% cc) in 2011 to $9.6 billion. This included $341 million in impairments of intangible assets. General & Administration expenses increased 20% (12% cc) to $3.0 billion. Other income was up 10% (–4% cc) to $1.4 billion and largely consists of gains from product disposals, legal settlements and certain items of net periodic pension cost. Other expense was up 63% (48% cc) to $3.1 billion and includes impairment of financial assets as well as property plant and equipment, litigation settlement costs, restructuring and related charges and acquisition related integration expenses.

        Core operating income, which excludes exceptional items and amortization of intangible assets, was up 14% (16% cc) to $15.9 billion. Core operating income margin in constant currencies increased by 1.1 percentage points. However, this improvement was more than offset by a negative currency impact of 1.6 percentage points, resulting in a net decrease in core operating income margin of 0.5 percentage points to 27.2% of net sales. Total net exceptional income and expense adjusted in core results in the various line items in 2011 amounted to $1.9 billion expense compared to $1.3 billion in the prior year. It comprised charges of $2.9 billion (2010: $2.1 billion) partly offset by exceptional income of $1.0 billion (2010: $732 million). Exceptional charges included: Tekturna/Rasilez ($903 million); $348 million related to the discontinuation of the PRT128 (elinogrel), SMC021 (oral calcitonin), AGO178 (agomelatine), and PTK796 (omadacycline) development programs; a charge of $115 million related to the temporary suspension of production at one of our US Consumer Health sites; other intangible asset impairment charges of $71 million principally relating to development projects; financial asset impairment charges of $192 million; integration charges of $250 million (mainly for Alcon); and restructuring and related costs of $492 million. Exceptional income includes divestment proceeds ($480 million) and a $106 million reduction of a contingent consideration obligation in Sandoz. In 2011, amortization of intangible assets amounted to $3.0 billion compared to $1.1 billion in 2010 as a result of a full year of incorporating Alcon.

        Net income decreased 7% (–2% cc) to $9.2 billion, more than the decline in operating income as a result of lower associated company income, higher financing costs following the Alcon acquisition, partly offset by a lower tax rate (14.2% compared to 14.8%). EPS declined 11% (–5% cc), more than the decline in net income, mainly as a result of the increase in issued shares following the Alcon merger, partially offset by a lower impact from non-controlling interests.

        Core net income grew 12% (+15% cc) to $13.5 billion broadly in line with core operating income. Core EPS was up by 8% (+11% cc): a lower rate than net income as a result of a higher number of outstanding shares in 2011.

        The average number of shares outstanding in 2011 rose 4% to 2,382 million from 2,286 million in the year ago, while a total of 2,407 million shares were outstanding at December 31, 2011.

        Free cash flow reached $12.5 billion (2010: $12.3 billion), an increase of 1% over the previous year. Free cash flow in 2010 included substantial cash flows from sales of A(H1N1) amounting to $1.8 billion.


Net sales

 
  Year ended
December 31,
2011
  Year ended
December 31,
2010(1)
  Change
in $
  Change in
constant
currencies
 
 
  $ millions
  $ millions
  %
  %
 

Pharmaceuticals

    32,508     30,306     7     4  

Alcon

    9,958     4,446     124     118  

Sandoz

    9,473     8,592     10     7  

Vaccines and Diagnostics

    1,996     2,918     (32 )   (34 )

Consumer Health

    4,631     4,362     6     3  
                   

Net sales

    58,566     50,624     16     12  
                   

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

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        Pharmaceuticals net sales grew 7% (+4% cc) to $32.5 billion, and Alcon net sales of $10.0 billion rose 10% (+7% cc) on a pro forma basis. Sandoz net sales also grew 10% (+7% cc) to $9.5 billion. Vaccines and Diagnostics net sales were down 32% (–34% cc) to $2.0 billion, mainly due to $1.3 billion of A(H1N1) pandemic flu vaccine sales in 2010. Net sales of the two Consumer Health businesses together grew 6% (+3% cc) to $4.6 billion.

Pharmaceuticals

        Net sales expanded 7% (+4% cc) to $32.5 billion in 2011 driven by 9 percentage points of increased volume, partly offset by a negative pricing impact of 1 percentage point and the combined impact of generic entries and product divestments of an additional 4 percentage points. Recently launched products contributed $9.2 billion of net sales, growing 35% in constant currencies over the previous year. These products now represent 28% of division sales compared to 22% in 2010.

        Europe remained the largest region ($11.6 billion, +2% cc) for Pharmaceuticals, particularly benefiting from recently launched products, which generated 35% of net sales, more than offsetting health care cost-containment measures and generic erosion. The US ($10.0 billion, 0% cc) contributed 31% of net sales for the division. Japan's performance ($3.9 billion, +7% cc) improved versus the prior year due to new launches. Latin America and Canada ($3.0 billion, +10% cc) achieved strong growth rates. The top six emerging markets ($3.2 billion, +7% cc) were led by double-digit growth from China and India.


Top 20 Pharmaceuticals Division Product Net Sales—2011

Brands
   
  United
States
  Change
in constant
currencies
  Rest of
world
  Change
in constant
currencies
  Total   Change
in $
  Change
in constant
currencies
 
 
   
  $m
  %
  $ m
  %
  $ m
  %
  %
 

Diovan/Co-Diovan

  Hypertension     2,333     (7 )   3,332     (11 )   5,665     (6 )   (9 )

Gleevec/Glivec

  Chronic myeloid leukemia     1,459     14     3,200     2     4,659     9     5  

Lucentis

  Age-related macular degeneration                 2,050     26     2,050     34     26  

Zometa

  Cancer complications     642     (11 )   845     0     1,487     (2 )   (5 )

Sandostatin

  Acromegaly     574     12     869     7     1,443     12     9  

Exforge

  Hypertension     325     14     884     36     1,209     34     30  

Exelon/Exelon Patch

  Alzheimer's disease     375     (1 )   692     7     1,067     6     4  

Femara

  Breast cancer     219     (66 )   692     (11 )   911     (34 )   (37 )

Neoral/Sandimmun

  Transplantation     71     (13 )   832     (1 )   903     4     (2 )

Exjade

  Iron chelator     259     (2 )   591     13     850     12     8  
                                   

Top ten products total

        6,257     (7 )   13,987     3     20,244     3     0  

Voltaren (excl. OTC)

 

Inflammation/pain

   
4
   
0
   
790
   
1
   
794
   
0
   
2
 

Tasigna

  Chronic myeloid leukemia     255     90     461     66     716     79     74  

Galvus

  Diabetes                 677     66     677     73     66  

Comtan/Stalevo

  Parkinson's disease     214     (7 )   400     3     614     2     (1 )

Reclast/Aclasta

  Osteoporosis     386     (2 )   227     18     613     6     5  

Tekturna/Rasilez

  Hypertension     216     4     341     41     557     27     24  

Ritalin/Focalin

  Attention Deficit/Hyperactive Disorder     398     17     152     14     550     19     17  

Myfortic

  Transplantation     200     23     318     11     518     17     15  

Gilenya

  Relapsing Multiple Sclerosis     383     nm     111     nm     494     nm     nm  

Xolair

  Asthma     15     (38 )   463     35     478     30     29  
                                   

Top 20 products total

        8,328     2     17,927     8     26,255     9     6  

Rest of portfolio

        1,645     (9 )   4,608     (1 )   6,253     0     (4 )
                                   

Total Division sales

        9,973     0     22,535     6     32,508     7     4  
                                   

nm—not
meaninful 

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Pharmaceuticals Division Product Highlights—Selected Leading Products

        Net sales growth data below refer to 2011 worldwide performance. Growth rates are not provided for some recently launched products since they are not meaningful.

Cardiovascular and Metabolism

        Diovan Group (–6% to $5.7 billion, –9% cc) worldwide sales declined due to loss of exclusivity in the EU. Diovan Group remains the top-selling anti-hypertensive medication worldwide, with 13.27% of the global hypertension market.

        Exforge Group (+34% to $1.2 billion, +30% cc), showed strong worldwide growth fueled by continued prescription demand in the EU, US and other key regions, as well as ongoing Exforge HCT launches in Europe, Asia and Latin America. Exforge, a single-pill combination of Diovan and the calcium channel blocker amlodipine, has delivered excellent growth globally and is now available in over 80 countries. Exforge HCT, Exforge with a diuretic (hydrochlorothiazide) in a single pill, is now available for patients in over 40 countries with additional launches expected in 2012.

        Tekturna/Rasilez (+27% to $557 million, +24% cc), the first in a class of medicines known as direct renin inhibitors to treat high blood pressure, has been growing consistently since its launch in 2007. However, in late December, following the seventh interim review of data from the ALTITUDE study with Tekturna/Rasilez, Novartis announced that the trial was halted on the recommendation of the independent Data Monitoring Committee (DMC) overseeing the study. The DMC concluded that patients were unlikely to benefit from treatment on top of standard anti-hypertensive medicines, and identified higher adverse events in patients receiving Tekturna/Rasilez in addition to standard of care as part of the trial. Novartis has written to healthcare professionals worldwide recommending that hypertensive patients with diabetes should not be treated with Tekturna/Rasilez, or combination products containing aliskiren (the active ingredient in Tekturna/Rasilez), if they are also receiving an angiotensin-converting enzyme (ACE) inhibitor or angiotensin receptor blocker (ARB). As an additional precautionary measure, Novartis has ceased promotion of Tekturna/Rasilez-based products for use in combination with an ACE inhibitor or ARB. In 2011, single-pill combinations Rasilamlo, a dual combination of aliskiren and amlodipine, and Rasitrio, a triple combination of aliskiren, amlodipine and hydrochlorothiazide, were approved in the EU. These single-pill combinations were also launched in the US in 2011 under the brand names Tekamlo and Amturnide, respectively.

        Galvus/Eucreas (+73% to $677 million, +66% cc), which includes oral treatments with vildagliptin for type 2 diabetes, has shown strong growth in Japan and many European, Latin American and Asian Pacific markets since launch in 2007. The single-pill combination Eucreas/GalvusMet (vildagliptin and metformin) accounted for the majority of sales, with the expanded use of Galvus in elderly patients over 75 years old in the EU also fueling growth in 2011. Additional EU approvals for use in moderate or severe renally impaired type 2 diabetes patients are expected to drive growth in 2012. Vildagliptin is now approved in more than 90 countries with an additional launch expected in China in 2012.

Oncology

        Gleevec/Glivec (+9% to $4.7 billion, +5% cc), a targeted therapy for some forms of chronic myeloid leukemia (CML) and gastrointestinal stromal tumors (GIST), maintained solid growth based on its leadership position in treating these cancers. New clinical data showing significant survival benefits for adult patients with resected KIT+ GIST who received adjuvant (post-surgery) treatment with Gleevec/Glivec (imatinib) for three years compared to one year following surgery served as the basis for worldwide regulatory filings to update the label. Gleevec/Glivec was approved in 2008 for use in certain adjuvant (post-surgery) KIT+ GIST patients and is now approved in more than 60 countries for this indication.

        Tasigna (+79% to $716 million, +74% cc), has shown rapid growth as a next-generation targeted therapy for newly diagnosed Ph+ CML patients following approvals in more than 50 markets globally including the US, EU, Japan and Switzerland, with additional submissions pending worldwide. Tasigna market share continues to rise in Ph+ CML in the second-line indication with approvals in over 95 countries.

        Zometa (–2% to $1.5 billion, –5% cc) is an intravenous bisphosphonate therapy for patients with certain types of cancer that has spread to the bones. Zoledronic acid, the active ingredient in Zometa (4 mg), is also available under the trade names Reclast/Aclasta (5 mg) for use in non-oncology indications with different dosing. Zometa is facing new competition from denosumab, a product of Amgen.

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        Femara (–34% to $911 million, –37% cc), a treatment for early stage and advanced breast cancer in postmenopausal women, experienced a decline in sales due to multiple generic entries in the US, Europe and other key markets.

        Sandostatin (+12% to $1.4 billion, +9% cc) benefited from the increasing use of Sandostatin LAR in treating symptoms of patients with neuroendocrine tumors as well as approvals in 25 countries for the delay of tumor progression in patients with midgut carcinoid tumors. It is currently under review in more than 20 additional countries for this indication.

        Exjade (+12% to $850 million, +8% cc) continued to expand with strong growth based on new patients and expanded access led by Asia and Europe. Exjade is currently approved in more than 100 countries as the only once-daily oral therapy for transfusional iron overload. Filings for a potential new indication in the treatment of non-transfusion-dependent thalassemia were submitted in the US and EU.

        Afinitor/Votubia (+82% to $443 million, +77% cc) is an oral inhibitor of the mTOR pathway used across multiple diseases. Afinitor continues to achieve strong growth in key markets as the only approved treatment for patients with advanced renal cell carcinoma following VEGF-targeted therapy. Afinitor expanded its indications with approvals in the US, EU and Japan for the treatment of advanced pancreatic neuroendocrine tumors. Everolimus, the active ingredient in Afinitor, is also approved in the US as Afinitor and in the EU as Votubia for the treatment of subependymal giant cell astryocytomas associated with tuberous sclerosis complex (TSC). A Phase III study of everolimus in patients with non-cancerous kidney tumors, or angiomyolipomas, associated with TSC formed the basis of regulatory filings currently underway for this potential indication. In addition, results of another Phase III study, which showed Afinitor plus exemestane met the primary endpoint of progression-free survival versus exemestane alone in postmenopausal women with ER+HER2- advanced breast cancer, are supporting worldwide regulatory filings for this potential indication. Everolimus is also available under the trade names Zortress/Certican for use in other non-oncology indications and is exclusively licensed to Abbott and sublicensed to Boston Scientific for use in drug-eluting stents.

Neuroscience and Ophthalmics

        Lucentis (+34% to $2.0 billion, +26% cc) is a biotechnology eye therapy now approved in more than 100 countries for the treatment of wet age-related macular degeneration, and in more than 50 countries for the treatment of visual impairment due to diabetic macular edema. Lucentis was approved in June 2011 in Europe for visual impairment due to macular edema secondary to branch- and central-retinal vein occlusion, and is now approved for this indication in more than 50 countries, including China. Genentech/Roche holds the US rights to this medicine.

        Exelon/Exelon Patch (+6% to $1.1 billion, +4% cc) is a therapy for mild to moderate forms of Alzheimer's disease dementia as well as dementia linked with Parkinson's disease. The majority of sales are for Exelon Patch, the novel skin patch launched in 2007 which is now available in more than 80 countries worldwide for Alzheimer's disease dementia, including more than 20 countries where it is also approved for dementia associated with Parkinson's disease.

        Extavia (+24% to $154 million, +19% cc), available in the US and more than 35 other countries for relapsing forms of multiple sclerosis (MS), marked the entry of Novartis into the field of MS. Extavia is the Novartis-patented version of Betaferon®/Betaseron®.

        Gilenya ($494 million) is approved in more than 55 countries and showed continued rapid growth as a once-daily, oral disease-modifying treatment for relapsing remitting and/or relapsing forms of MS in adult patients. Gilenya was approved in the EU in March 2011 as a disease modifying therapy in patients with highly active relapsing-remitting multiple sclerosis (RRMS) despite treatment with beta interferon, or in patients with rapidly evolving severe RRMS. Novartis also received approval for Gilenya in September 2011 in Japan for the prevention of relapse and delay of progression of physical disability in adults with MS. It is licensed from Mitsubishi Tanabe Pharma Corporation.

Respiratory

        Xolair (+30% to $478 million, +29% cc, ex-US), a biotechnology drug approved for severe persistent allergic asthma in Europe and moderate to severe persistent allergic asthma in the US, gained blockbuster status when annual global sales (including US sales recorded by Genentech/Roche) reached $1 billion in November 2011. Xolair is now approved in 90 countries and has shown strong growth during 2011 in Europe, major Latin American markets and Japan. A Phase III trial is progressing to support registration in China. Launches are continuing across Europe for Xolair Liquid, a new formulation in pre-filled syringes that enables easier administration than the original lyophilized formulation. Phase III studies are also being conducted in an

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additional potential indication, chronic idiopathic urticaria. Novartis co-promotes Xolair with Genentech/Roche in the US and shares a portion of operating income, but does not record any US sales. Novartis has the sole rights to market Xolair outside the US.

        Onbrez Breezhaler/Arcapta Neohaler ($103 million) has shown strong sales growth since its approval in the EU in November 2009 as a once-daily long-acting beta2-agonist (LABA) for the maintenance bronchodilator treatment of airflow obstruction in adult patients with chronic obstructive pulmonary disease (COPD). Onbrez Breezhaler (indacaterol, formerly QAB149) is now approved in more than 80 countries, including the US (under the trade name Arcapta Neohaler) as of July 2011 and Japan (under the trade name Onbrez Inhalation Capsules), where it has been co-promoted with Eisai Co. Ltd. since December 2011. Results of two Phase III studies announced in February 2011 showed that patients treated with once-daily Onbrez Breezhaler in conjunction with once-daily tiotropium 18 mcg experienced a significantly greater improvement in lung function than those treated with tiotropium alone, adding to the growing body of evidence supporting the use of Onbrez Breezhaler as an effective treatment for COPD. Sales in Germany were negatively impacted in the fourth quarter of 2011 following a reference pricing review in which the reimbursed price of Onbrez Breezhaler was reduced below that of generic LABAs. Novartis has maintained prices for Onbrez Breezhaler in Germany, since it offers additional benefits over existing LABAs as described in the EU-approved label. An additional co-payment for Onbrez Breezhaler is now required for many patients in Germany.

        TOBI Podhaler ($296 million, including TOBI nebulizer solution) was approved in the EU in July 2011 as a suppressive therapy for chronic Pseudomonas aeruginosa lung infections in patients with cystic fibrosis (CF) aged six years and older. TOBI Podhaler (tobramycin inhalation powder) is a dry powder formulation of the antibiotic tobramycin, developed using novel PulmoSphere technology. This means that instead of using a nebulizer, treatment can be delivered using a more convenient, patient-friendly device that reduces administration time by 72% relative to TOBI (nebulizer solution), with comparable efficacy. TOBI Podhaler is designed to help CF patients, who are often young, to comply with treatment and lead more independent lives.

Integrated Hospital Care

        Zortress/Certican (+30% to $187 million, +25% cc) is a transplantation medicine indicated to prevent organ rejection in adult kidney and heart transplant patients. It generated solid growth based on its availability in more than 85 countries, including the US, where it was launched in April 2010 for adult kidney transplantation under the brand name Zortress. This medicine, which has the same active ingredient as Afinitor (everolimus), has demonstrated immunosuppressive efficacy and a well characterized side-effect profile.

        Ilaris (+85% to $48 million, +82% cc) is a fully human monoclonal antibody that selectively binds and neutralizes interleukin-1ß (IL-1ß), a proinflammatory cytokine. Since 2009, Ilaris has been approved in over 50 countries for the treatment of children and adults suffering from cryopyrin-associated periodic syndrome (CAPS), a group of rare auto-inflammatory disorders characterized by chronic recurrent fever, urticaria, occasional arthritis, deafness and potentially life threatening amyloidosis. Novartis has filed for regulatory approval of Ilaris in the EU and the US for the treatment of acute attacks in gouty arthritis based on data from two Phase III registration studies that met their primary endpoints. In August 2011, Novartis received a Complete Response letter from the FDA requesting additional information, including clinical data to evaluate the benefit risk profile in refractory gouty arthritis patients. Novartis is currently working with the FDA to determine next steps for ACZ885 in gouty arthritis. Novartis is also pursuing other diseases in which IL-1ß may play a prominent role, such as systemic juvenile idiopathic arthritis, secondary prevention of cardiovascular events and diabetes. Select subsets of patients with these diseases would be eligible for treatment with Ilaris, if approved.

        Neoral/Sandimmun (+4% to $903 million, –2% cc), for organ transplantation and autoimmune diseases, has experienced only modestly declining sales despite ongoing generic competition in recent years due to its pharmacokinetic profile, reliability and use in treating a life-threatening condition.

        Myfortic (+17% to $518 million, +15% cc), a transplantation medicine, is approved in more than 90 countries for the prevention of acute rejection of kidney allografts and is indicated in combination with cyclosporine and corticosteroids. Myfortic was first approved in the US in 2004 and in the EU in 2003.

Other

        Reclast/Aclasta (+6% to $613 million, +5% cc), a once-yearly infusion therapy for osteoporosis, continues to expand on increasing patient access to infusion centers and a broad range of use in patients with various types of this debilitating bone disease. Approvals have been received in over 100 countries for up to six indications, including the treatment of osteoporosis in men and postmenopausal women. Six year data from a pivotal fracture trial reinforced the long-term efficacy and safety profile of Reclast/Aclasta. Zoledronic acid, the active ingredient

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in Reclast/Aclasta, is also available in a number of countries in a different dosage for use in oncology indications under the trade name Zometa.

        Voltaren (0% at $794 million, +2% cc, excluding OTC sales), a treatment for various inflammation and pain conditions, no longer has patent protection in key markets around the world, but has continued to generate growth in regions such as Latin America, the Middle East, Africa and Asia based on long-term trust in the brand.

        Ritalin/Focalin (+19% to $550 million, +17% cc), for treatment of Attention Deficit/Hyperactivity Disorder (ADHD), has benefited from the use of long-acting Ritalin LA and Focalin XR patent-protected formulations that involve methylphenidate, the active ingredient in Ritalin faces generic competition in many countries.

Alcon

        Net sales in 2011 of Alcon increased by 124% to $10.0 billion on a restated basis. Since however the 2010 base only includes the net sales of Alcon, Inc. from August 25, 2010, as indicated above, a comparison on a 2010 pro forma basis is more meaningful.

        Net sales of $10.0 billion rose 10% (+7% cc) on a pro forma basis, driven by strong global Ophthalmic Pharmaceuticals product growth of 12% (+10% cc), Surgical products growth of 11% (+8% cc), and by the top six emerging markets, which grew 26% (+22% cc) over 2010.

        Alcon division pro forma net sales by product category:

 
  Year ended
December 31,
2011
  Year ended
December 31,
2010
  Change
in $
  Constant
currencies
change
 
 
  $ m
  $ m
  %
  %
 

Surgical

                         

Cataract products

    2,858     2,668     7     4  

of which Cataract IOLs

    1,276     1,207     6     3  

Vitreoretinal products

    529     424     25     21  

Refractive/Other

    200     129     55     51  
                   

Total

    3,587     3,221     11     8  
                   

Ophthalmic Pharmaceuticals

                         

Glaucoma

    1,287     1,136     13     10  

Allergy/Otic/Nasal

    884     813     9     7  

Infection/inflammation

    967     839     15     14  

Dry Eye/Other

    810     727     11     10  
                   

Total

    3,948     3,515     12     10  
                   

Vision Care

                         

Contact lenses

    1,701     1,579     8     3  

Solutions/Other

    713     716           (4 )
                   

Total

    2,414     2,295     5     1  
                   

Total net sales

    9,949     9,031     10     7  
                   

Alcon Division Franchise Highlights

        Net sales growth data below refer to 2011 worldwide performance on a pro forma basis.

Surgical

        In 2011, global Surgical net sales were $3.6 billion, an increase of 11% (+8% cc) over the previous year. Emerging markets grew strongly, while intraocular lens unit sales (IOL) in the US showed slower growth versus 2010. Global sales of advanced technology intraocular lenses rose 16% (+15% cc), mostly due to strong sales of the AcrySof IQ Toric and AcrySof IQ ReSTOR+3.0 intraocular lenses. The successful launch of the LenSx femtosecond refractive cataract laser, with over 500 surgeons now trained to use this cutting-edge technology, expands the cataract surgical market opportunities for Alcon. The Constellation vitreoretinal surgical system

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contributed to robust sales growth within the vitreoretinal category. Strong growth in the refractive segment was driven both by sales of equipment and increased market share in the US.

Ophthalmic Pharmaceuticals

        Global net sales of Ophthalmic Pharmaceuticals products increased 12% (+10% cc) to $3.9 billion in 2011. Glaucoma product sales rose 13% (+10% cc), with growth driven by non-US combination products DuoTrav and Azarga, with a combined growth of 41% (+34% cc). Infection/inflammation product sales advanced 15% (+14% cc) led by strong growth of Nevanac ophthalmic suspension, as well as solid performance of Durezol ophthalmic suspension. Allergy, otic, and nasal products showed solid growth, led by the Patanol/Pataday franchise. Dry eye products Systane and Systane Balance were the key contributors to growth in that product segment.

Vision Care

        Global net sales of Vision Care products rose 5% (+1% cc) in 2011 to $2.4 billion. Contact lens growth was driven by the continued strong performance of Air Optix, which leads the marketplace in the multifocal segment and achieved 18% (cc) growth over the previous year, and by strong Dailies growth in the US. Sales of contact lenses were impacted by the discontinuation of the Specialty contact lens business as well as slower market growth in European countries. Contact lens solutions sales were led by strong growth of the Clear Care hydrogen peroxide solution, offset by weakness in the category for multi-purpose product sales.

Sandoz

        Sandoz achieved strong sales growth in 2011 (+10% to $9.5 billion, +7% cc) versus prior year driven by significant growth in US retail generics and biosimilars (+22% cc), with sales of over $1 billion for enoxaparin. Strong performances in Canada (+13% cc), Western Europe (+13% cc), Latin America (+12% cc), Asia (+12% cc) and Central and Eastern Europe (+6% cc) also contributed to growth in 2011. Germany retail generics and biosimilars declined (-13% cc) in a market that is estimated to have contracted 17% in net terms due to the impact of statutory health insurance tenders and new lower reference prices. Biosimilars grew 37% in constant currencies to $261 million globally. Sales volume expanded 14 percentage points due to new product launches, and Falcon (transferred from Alcon) contributed 2 additional percentage points of growth, more than compensating price erosion of 9 percentage points.

Vaccines and Diagnostics

        Net sales declined 32% to $2.0 billion in 2011 (–34% cc) compared to $2.9 billion in 2010. The primary driver of the net sales variance against the prior year was $1.3 billion of A(H1N1) pandemic flu vaccine sales in 2010 not repeated in 2011.

        Excluding the impact of A(H1N1) pandemic flu vaccines sales in 2010, net sales growth was 22% in constant currencies, driven by growth across all strategic franchises, with a particularly strong contribution from our meningococcal disease franchise.

        The growth of our meningococcal disease franchise was underpinned by Menveo, which continues to gain market share both in the US and worldwide, with net sales of $142 million in 2011.

Consumer Health

        Consumer Health (comprising OTC and Animal Health) delivered combined 2011 net sales of $4.6 billion producing growth of 6% (+3% cc).

        OTC delivered low-single-digit growth driven by emerging markets and priority brands. In nine out of the top ten countries for OTC, volume growth outpaced the market. Cough and cold brands, including Theraflu, grew strongly behind sustained investment and a stronger season in several markets compared to 2010. Voltaren continued to grow through the use of innovative commercial models and a focus on marketing fundamentals, while Prevacid24HR benefitted from normalized stock movements compared to 2010. In the US, Excedrin sales declined in the fourth quarter due to the temporary suspension of operations and voluntary product recall at OTC's Lincoln, Nebraska, USA site. Expired distribution contracts and divested brands also negatively impacted net sales growth versus the prior year.

        Animal Health contributed mid-single-digit net sales growth over the previous year, driven by Germany, Japan, Australia and emerging markets. CliK and Vetrazin retained their leadership positions in the sheep market in Australia and the UK. Milbemax delivered double-digit growth as the number one cat and dog de-wormer in Europe, while Onsior gained market share across key European markets and Japan. In the swine business,

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Denagard continued to drive strong double-digit growth led by the US. Total US sales were flat despite the negative impact of a competitor entry in the heartworm and flea categories.

Operating income by segments

 
  Year ended
December 31,
2011
  % of
net sales
  Year ended
December 31,
2010(1)
  % of
net sales
  Change
in $
  Change in
constant
currencies
 
 
  $ m
   
  $ m
   
  %
  %
 

Pharmaceuticals

    8,296     25.5     8,471     28.0     (2 )   4  

Alcon

    1,472     14.8     796     17.9     85     67  

Sandoz

    1,422     15.0     1,321     15.4     8     10  

Vaccines and Diagnostics

    (249 )   (12.5 )   612     21.0     (141 )   (131 )

Consumer Health

    727     15.7     778     17.8     (7 )   4  

Corporate income & expenses, net

    (670 )         (452 )                  
                           

Operating income

    10,998     18.8     11,526     22.8     (5 )   1  
                           

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

Core Operating income by segments

 
  Year ended
December 31,
2011
  % of
net sales
  Year ended
December 31,
2010(1)
  % of
net sales
  Change
in $
  Change in
constant
currencies
 
 
  $ m
  %
  $ m
  %
  %
  %
 

Pharmaceuticals

    10,040     30.9     9,586     31.6     5     8  

Alcon

    3,492     35.1     1,350     30.4     159     146  

Sandoz

    1,921     20.3     1,742     20.3     10     11  

Vaccines and Diagnostics

    135     6.8     1,066     36.5     (87 )   (85 )

Consumer Health

    873     18.9     845     19.4     3     12  

Corporate income & expenses, net

    (552 )         (583 )                  
                           

Core operating income

    15,909     27.2     14,006     27.7     14     16  
                           

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

Pharmaceuticals

        Operating income decreased 2% (+4% cc) in 2011 to $8.3 billion. Exceptional items including amortization amounted to a net $1.7 billion expense compared to $1.1 billion expense in 2010. Exceptional items include Tekturna/Rasilez charges of $903 million, restructuring charges of $420 million and other intangible asset impairments of $302 million (mainly AGO178, PTK796, PRT128 and SMC021). These were partly offset by higher prior-year impairment charges, and divestment income from Elidel® ($324 million) and from ophthalmic pharmaceutical products related to the Alcon acquisition ($81 million).

        Core operating income in 2011 grew 5% (+8% cc) to $10.0 billion. In constant currencies, core operating income margin increased by 1.4 percentage points due to continuing productivity efforts. However, this improvement was more than offset by a negative currency impact of 2.1 percentage points, resulting in a net decrease in core operating income margin of 0.7 percentage points to 30.9% of net sales. The underlying gross margin decreased by 0.6 percentage points (cc) mainly driven by increased royalties. Functional costs—which include General & Administration, Marketing & Sales and R&D expenses—improved by 2.0 percentage points, driven by productivity gains in Marketing & Sales and R&D despite significant investments in new product launches. Other Income & Expense, net, remained flat in constant currencies.

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Alcon

        In 2011, Alcon operating income increased 85% to $1.5 billion on a restated basis. Since however the 2010 base only includes Alcon, Inc. from August 25, 2010, as indicated above, a comparison on a 2010 pro forma basis is more meaningful.

        Operating income in 2011 of $1.5 billion rose 24% (+14% cc) on a pro forma basis. Operating income was impacted by the inclusion of exceptional income from a litigation settlement ($183 million), amortization of intangible assets ($1.9 billion), integration costs ($221 million), and the impact of manufacturing optimization ($57 million).

        Core operating income in 2011 of $3.5 billion increased by 13% (+9% cc) on a pro forma basis. Core operating income margin in constant currencies increased by 0.7 percentage points on a pro forma basis. In addition, there was a positive currency impact of 0.1 percentage points, resulting in a net increase in core operating income margin of 0.8 percentage points to 35.1% of net sales.

Sandoz

        Operating income grew 8% (+10% cc) over the prior year to $1.4 billion. The operating income margin improved by 0.5 percentage points in constant currencies, more than offset by a negative currency impact of 0.9 percentage points, resulting in a net decrease of 0.4 percentage points to 15.0% of net sales. The constant currency margin improvement was the result of productivity improvements, the addition of the Falcon business and income from reduction of a contingent consideration obligation, partly offset by charges and provisions for legal cases in the US ($204 million) as well as price erosion.

        In 2011, core operating income rose 10% (+11% cc) to $1.9 billion, as declining prices were more than offset by additional sales volume, new product launches and productivity improvements in all areas. Core operating income margin in constant currencies increased by 0.8 percentage points to 21.2% of net sales. Currency had a negative impact, resulting in a 20.3% core operating income margin.

Vaccines and Diagnostics

        Operating loss was $249 million for 2011 compared to an operating income of $612 million in 2010, due in large part to the operating income associated with A(H1N1) pandemic flu vaccine sales from the prior year not repeated in 2011.

        Excluding the impact of A(H1N1), profitability improved, despite continued investment in our pipeline and meningococcal disease franchise, driven by solid underlying sales growth. 2011 included impairments of $143 million related to financial and intangible assets compared to $98 million in 2010; 2010 also included charges related to a legal settlement of $45 million and restructuring charges of $52 million.

        Core operating income for the year was $135 million compared to $1.1 billion for 2010. Excluding the impact of A(H1N1), core operating income also improved over 2010.

Consumer Health

        Operating income for 2011 decreased 7% to $727 million (but increased 4% cc), with operating income margin in constant currencies increasing by 0.2 percentage points, more than offset by a negative currency impact of 2.3 percentage points, resulting in an operating income margin of 15.7% of net sales.

        Core operating income in 2011 increased by 3% (+12% cc) to $873 million. Core operating income excludes the $115 million exceptional charge related to the product recall. Core operating income margin in constant currencies increased by 1.8 percentage points. This result demonstrates strong operating leverage with core operating income growing significantly ahead of net sales. $73 million of the product recall exceptional charge relates to sales returns. As no corresponding adjustment was made at the net sales level, it had a beneficial impact of 0.4 percentage points on the core operating income margin. Currency negatively impacted core operating income margin by 2.3 percentage points, resulting in a net core operating income margin decrease of 0.5 percentage points to 18.9% of net sales.

        Gross margin improved slightly by 0.1 percentage points (cc) driven by productivity gains that were partially offset by product mix. Marketing & Sales expenses decreased by 0.7 percentage points (cc) versus prior year driven by efficiency improvements in OTC partially offset by increased investment in the Animal Health business. R&D expenses decreased by 0.1 percentage points (cc) from productivity measures that more then offset continued investment in innovation. General & Administrative expenses decreased by 0.2 percentage points (cc) due to strong cost control. Other Income and Expense, net, improved by 0.3 percentage points (cc) largely driven by income from smaller product divestments.

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Corporate Income & Expense, Net

        Corporate income & expense, net, includes the costs of Group headquarters. These net expenses of $670 million in 2011 were 48% higher than in 2010 primarily due to an exceptional pension curtailment gain of $265 million in the prior year.


Non-Operating Income and Expense

 
  Year ended
December 31,
2011
  Year ended
December 31,
2010
  Change
in $
  Change in
constant
currencies
 
 
  $ m
  $ m
  %
  %
 

Operating income

    10,998     11,526     (5 )   1  

Income from associated companies

    528     804     (34 )   (34 )

Interest expense

    (751 )   (692 )   9     5  

Other financial income and expense

    (2 )   64     (103 )   (140 )
                   

Income before taxes

    10,773     11,702     (8 )   (2 )

Taxes

    (1,528 )   (1,733 )   (12 )   (6 )
                   

Group net income

    9,245     9,969     (7 )   (2 )
                   

Attributable to:

                         

Shareholders of Novartis AG

    9,113     9,794     (7 )   (1 )

Non-controlling interests

    132     175     (25 )   (25 )

Basic EPS ($)

   
3.83
   
4.28
   
(11

)
 
(5

)


Core Non-Operating Income and Expense

 
  Year ended
December 31,
2011
  Year ended
December 31,
2010
  Change
in $
  Change in
constant
currencies
 
 
  $ m
  $ m
  %
  %
 

Core operating income

    15,909     14,006     14     16  

Income from associated companies

    779     1,041     (25 )   (28 )

Interest expense

    (751 )   (692 )   9     5  

Other financial income and expense

    (2 )   64     (103 )   (140 )
                   

Core income before taxes

    15,935     14,419     11     13  

Taxes

    (2,445 )   (2,390 )   2     5  
                   

Core net income

    13,490     12,029     12     15  
                   

Attributable to:

                         

Shareholders of Novartis AG

    13,273     11,767     13     16  

Non-controlling interests

    217     262     (17 )   (17 )

Core basic EPS ($)

   
5.57
   
5.15
   
8
   
11
 

Income from Associated Companies

        Associated companies are accounted for using the equity method generally when Novartis holds between 20% and 50% of the voting shares of these companies, or where Novartis has otherwise significant influence over them. Income from associated companies is mainly derived from the Group's investments in Roche Holding AG and, prior to August 25, 2010, Alcon.

        The income from associated companies fell from $804 million in 2010 to $528 million in 2011, as since August 25, 2010 Alcon, Inc. is fully consolidated and no longer accounted for as an associated company.

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        The following is a summary of the individual components included in the income from associated companies:

 
  2011   2010  
 
  $ m
  $ m
 

Share of estimated Roche reported net income

    702     648  

Restructuring impact (2011 includes $41 million from 2010; 2010 includes $43 million from 2009)

    (41 )   (132 )

Amortization of intangible assets

    (162 )   (136 )
           

Net income effect from Roche

    499     380  
           

Share of Alcon net income

          385  

Catch-up for actual Alcon previous year net income

          2  

Revaluation of initial 25% interest to fair value

          378  

Recycling of losses accumulated in comprehensive income from July 7, 2008 to August 25, 2010

          (43 )

Amortization of intangible assets

          (289 )
             

Net income effect from Alcon (in 2010 up to August 25, 2010)

          433  
             

Net income from other associated companies

    29     (9 )
           

Income from associated companies

    528     804  
           

        The Group's 33.3% interest in Roche's voting shares, which represents a 6.3% interest in Roche's total equity, generated income of $499 million in 2011, up from $380 million in 2010. The 2011 contribution reflects an estimated $702 million share of Roche's net income in 2011. This contribution, however, was reduced by $162 million for the amortization of intangible assets arising from the allocation of the purchase price paid by Novartis for this investment to Roche's intangible assets and an exceptional charge of $41 million taken in 2011 as part of Roche's restructuring charges.

        The 2010 result from Alcon includes the net income up to August 25, 2010 of $385 million and a positive prior-year adjustment of $2 million which were reduced by $289 million for the amortization of intangible assets.

        Adjusting for the exceptional items in both years, core income from associated companies decreased 25% to $779 million.

        A survey of analyst estimates is used to estimate the Group's share of net income in Roche. Any differences between these estimates and actual results will be adjusted in the 2012 consolidated financial statements.

Interest Expense and other financial income/expense

        In 2011, interest expense increased by 9% from $692 million to $751 million. Other financial income/expense was a net expense of $2 million, down from a net income of $64 million in the prior year mainly due to lower earnings from investments as a result of the decreased average liquidity. The currency result remained stable.

Taxes

        Tax expenses in 2011 were $1.5 billion, a 12% (6% cc) decrease from 2010. The tax rate (taxes as a percentage of income before taxes) decreased to 14.2% in 2011 from 14.8% in 2010 mainly due to the favorable impact of the Alcon, Inc. merger and as a result the ability to undertake a related tax structure reorganization. For the same reason the core tax rate (taxes as percentage of core income before taxes) decreased to 15.3% in 2011 from 16.6% in 2010. The effective tax rate is different to the expected tax rate due to various adjustments made to the IFRS results to arrive at taxable income. For further information on the main elements contributing to the difference, see "—Core Results as Defined by Novartis" and "Item 18. Financial Statements—note 6".


2010 Compared to 2009

        The businesses of Novartis are divided operationally on a worldwide basis into five reporting segments: Pharmaceuticals, Alcon, Sandoz, Vaccines and Diagnostics and Consumer Health and Corporate activities. Following the full acquisition of Alcon, Inc., on April 8, 2011 a new divisional segment allocation was introduced. As a result, Alcon includes CIBA Vision and certain Pharmaceuticals ophthalmology products. Falcon, the US generics business of Alcon, Inc. was transferred to Sandoz. Certain residual operational costs incurred for the

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Consumer Health Division headquarters were transferred to Corporate and Corporate R&D was transferred to Pharmaceuticals.

        A restatement of the previously reported 2010 and 2009 segment results has been prepared, as required by IFRS, consistent with the new divisional segment allocation introduced in 2011.


Key Figures

 
  Year ended
December 31,
2010
  Year ended
December 31,
2009
  Change
in $
  Change in
constant
currencies
 
 
  $ m
  $ m
  %
  %
 

Net sales

    50,624     44,267     14     14  

Other revenues

    937     836     12     11  

Cost of Goods Sold

    (14,488 )   (12,179 )   19     19  
                   

Gross profit

    37,073     32,924     13     12  

Marketing & Sales

    (13,316 )   (12,050 )   11     10  

Research & Development

    (9,070 )   (7,469 )   21     20  

General & Administration

    (2,481 )   (2,281 )   9     7  

Other income

    1,234     782     58     56  

Other expense

    (1,914 )   (1,924 )   (1 )   (1 )
                   

Operating income

    11,526     9,982     15     17  

Income from associated companies

    804     293     174     173  

Interest expense

    (692 )   (551 )   26     25  

Other financial income and expense

    64     198     (68 )   (68 )
                   

Income before taxes

    11,702     9,922     18     19  

Taxes

    (1,733 )   (1,468 )   18     18  
                   

Group net income

    9,969     8,454     18     20  
                   

Attributable to:

                         

Shareholders of Novartis AG

    9,794     8,400     17     18  

Non-controlling interests

    175     54     224     226  

Basic earnings per share

   
4.28
   
3.70
   
16
   
17
 


Core Key Figures

 
  Year ended
December 31,
2010
  Year ended
December 31,
2009
  Change
in $
  Change in
constant
currencies
 
 
  $ m
  $ m
  %
  %
 

Core gross profit

    38,517     33,783     14     14  

Marketing & Sales

    (13,315 )   (12,050 )   10     10  

Research & Development

    (8,080 )   (7,287 )   11     9  

General & Administration

    (2,477 )   (2,281 )   9     7  

Other income

    485     717     (32 )   (32 )

Other expense

    (1,124 )   (1,445 )   (22 )   (22 )
                   

Core operating income

    14,006     11,437     22     24  
                   

Core net income

    12,029     10,267     17     18  

Core basic earnings per share

    5.15     4.50     14     15  

        The Group's core results—including core operating income, core net income and core earnings per share—exclude the amortization of intangible assets, impairment charges, expenses relating to the integration of acquisitions as well as other items that are, or are expected to accumulate within the year to be, over a $25 million threshold that management deems exceptional.

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Overview—Results Operations

        Strong growth in all businesses including the consolidation of Alcon, Inc. (Alcon) drove the Group's healthcare portfolio in 2010 to another year of record results.

        Net sales rose 14% (+14% cc) to $50.6 billion driven by strong growth in all businesses, including $2.4 billion from the consolidation of Alcon. Recently launched products provided $10.4 billion of net sales in the 2010 period (excluding Alcon), representing 21% of net sales compared to 16% in the 2009 period. Pharmaceuticals sales expanded 7% (+7% cc) to $30.3 billion driven by 8 percentage points of volume expansion. Recently launched products contributed 21% of Pharmaceuticals sales, up from 16% in 2009. Sandoz achieved double-digit sales growth in 2010 ($8.6 billion, +15%, +16% cc) supported by strong growth in US retail generics and biosimilars (+46% cc) and emerging markets such as Middle East, Turkey and Africa (+22% cc). Vaccines and Diagnostics grew to $2.9 billion (+25% cc), including $1.3 billion of A (H1N1) pandemic flu vaccines. Excluding A (H1N1) pandemic flu vaccines, the business grew 16%. Consumer Health grew 6% (+6% cc) to $4.4 billion, with both business units delivering solid growth in their respective markets.

        Operating income rose 15% (+17% cc) to $11.5 billion on the volume- driven sales expansion. Unfavorable currency movements negatively impacted operating income by two percentage points. Operating income margin improved 0.3 percentage points to 22.8% of net sales. Exceptional items arising in the year totaled a net $1.3 billion, comprising: impairments ($1.0 billion), legal settlements ($240 million), restructuring costs ($198 million), and Alcon-related costs ($596 million), partially offset by divestment and pension curtailment gains ($690 million).

        Core operating income rose 22% (+24% cc) to $14.0 billion, and the core operating income margin rose 1.9 percentage points to 27.7% of net sales. Included in the core operating margin improvement of 1.9 percentage points were a benefit from Alcon of 0.4 percentage points and higher A (H1N1) pandemic flu vaccine sales of 0.5 percentage points, resulting in the increase in the underlying margin of 1.0 percentage points.

        Net income advanced 18% to $10.0 billion ahead of operating income growth due to higher income from associated companies (+173% cc), offset by higher financial expenses from the Alcon financing. Earnings per share (EPS) rose 16% (+17% cc) to $4.28 from $3.70 in the 2009 period. Core net income grew 17% (+18% cc) to $12.0 billion, while core EPS was up 14% (+15% cc) to $5.15 from $4.50 in the year-ago period.


Net sales

 
  Year ended
December 31,
2010(1)
  Year ended
December 31,
2009(1)
  Change
in $
  Change in
constant
currencies
 
 
  $ m
  $ m
  %
  %
 

Pharmaceuticals

    30,306     28,287     7     7  

Alcon

    4,446     1,965     126     125  

Sandoz

    8,592     7,493     15     16  

Vaccines and Diagnostics

    2,918     2,424     20     25  

Consumer Health

    4,362     4,098     6     6  
                   

Net sales

    50,624     44,267     14     14  
                   

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

Pharmaceuticals

        Net sales expanded 7% (+7% cc) to $30.3 billion driven by 9 percentage points of volume expansion, partly offset by a negative pricing impact of 2 percentage points. Recently launched products provided $6.6 billion of net sales in the 2010 period, representing 21% of net sales compared to 16% in the 2009 period.

        Europe remained the largest region ($10.8 billion, +7% cc) particularly benefiting from recently launched products generating 28% of its net sales. The US ($10.0 billion, +5% cc), as well as Latin America and Canada ($2.8 billion, +14% cc), maintained solid growth rates. Japan's performance ($3.3 billion, 0% cc) was flat versus the prior year due to the biannual price cuts and angiotensin receptor blockers (ARB) market slowdown. The top six emerging markets ($2.9 billion, +8% cc) were led by double-digit growth from India, Russia, South Korea and China, partly offset by the impact of cost-containment measures in Turkey.

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Top 20 Pharmaceuticals Division Product Net Sales—2010

Brands
  Therapeutic area   United
States
  Change
in constant
currencies
  Rest of
world
  Change
in constant
currencies
  Total   Change
in $
  Change
in constant
currencies
 
 
   
  $ m
  %
  $ m
  %
  $ m
  %
  %
 

Diovan/Co—Diovan

  Hypertension     2,520     1     3,533     (1 )   6,053     1     0  

Gleevec/Glivec

  Chronic myeloid leukemia     1,285     18     2,980     3     4,265     8     7  

Lucentis

  Age-related macular degeneration                 1,533     24     1,533     24     24  

Zometa

  Cancer complications     721     0     790     4     1,511     3     2  

Femara

  Breast cancer     650     14     726     5     1,376     9     9  

Sandostatin

  Acromegaly     511     12     780     11     1,291     12     11  

Exelon/Exelon Patch

  Alzheimer's disease     379     5     624     6     1,003     5     6  

Exforge

  Hypertension     284     24     620     41     904     35     35  

Neoral/Sandimmun

  Transplantation     82     (9 )   789     (6 )   871     (5 )   (7 )

Voltaren (excl. OTC)

  Inflammation/pain           nm     791     0     791     (1 )   (1 )
                                   

Top ten products total

        6,432     7     13,166     5     19,598     6     6  

Exjade

 

Iron chelator

   
264
   
7
   
498
   
22
   
762
   
17
   
16
 

Comtan/Stalevo

  Parkinson's disease     231     6     369     8     600     8     8  

Reclast/Aclasta

  Osteoporosis     393     20     186     29     579     23     23  

Ritalin/Focalin

  Attention Deficit/Hyperactivity Disorder     339     (1 )   125     15     464     3     3  

Myfortic

  Transplantation     163     21     281     25     444     26     23  

Tekturna/Rasilez

  Hypertension     207     29     231     83     438     51     53  

Lescol

  Cholesterol reduction     97     (20 )   339     (25 )   436     (23 )   (24 )

Tasigna

  Chronic myeloid leukemia     134     116     265     78     399     88     89  

Galvus

  Diabetes                 391     122     391     117     122  

Xolair

  Asthma     24     (73 )   345     44     369     9     12  
                                   

Top 20 products total

        8,284     7     16,196     9     24,480     9     8  

Rest of portfolio

        1,715     (4 )   4,111     1     5,826     0     (1 )
                                   

Total Division sales

        9,999     5     20,307     7     30,306     7     7  
                                   

nm = not meaningful

Pharmaceuticals Division product highlights—Selected leading products

        Notes: Net sales growth data refer to 2010 worldwide performance in constant currencies. Growth rates are not provided for some recently launched products since they are not meaningful.

Cardiovascular and Metabolism

        Diovan ($6.1 billion, 0% cc) maintained sales in 2010 based on its status as the only medicine in the angiotensin receptor blocker (ARB) class approved to treat high blood pressure, high risk heart attack survivors and heart failure. Japan, which accounts for 20% of annual sales contracted slightly due to biannual price cuts, while sales also declined modestly in Europe, where the entry of generic versions of losartan, another medicine in the ARB segment, occurred in early 2010. In the US (+1%), Diovan increased its leadership of the ARB segment despite the overall shrinking of the patented anti-hypertension market due to increasing use of generic medicines in other anti-hypertensive classes.

        Exforge ($904 million, +35% cc), a single-pill combination of the angiotensin receptor blocker Diovan (valsartan) and the calcium channel blocker amlodipine, has delivered above-market growth and set new standards for high blood pressure combination therapies since its launch in 2007. Exforge gained approval in Japan in January 2010. Exforge HCT, which adds a diuretic (hydrochlorothiazide), was launched in the US in 2009 and in Europe and Latin America in 2010 as a single-pill therapy with three medicines.

        Tekturna/Rasilez ($438 million, +53% cc), the first in a new class of medicines known as direct renin inhibitors to treat high blood pressure, has been growing consistently since its launch in 2007. Valturna—a single-pill combination with Diovan (valsartan)—was launched in the US in late 2009, joining the group of single-pill combinations that involve aliskiren, the active ingredient in Tekturna/ Rasilez. Tekamlo, a single-pill combination of aliskiren and amlodipine was approved in the US in August, 2010. Amturnide, a triple combination with amlodipine and a diuretic was approved in the US in December 2010. EU reviews for the

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double combination of aliskiren and amlodipine as well as the triple combination incorporating a diuretic are ongoing in the EU. The EU application for Rasival, a combination of valsartan and aliskiren was withdrawn in September 2010.

        Galvus/Eucreas ($391 million, +122% cc), oral treatments for type 2 diabetes, more than doubled sales in 2010 due to strong growth in many European, Latin American and Asia-Pacific markets since its launch in 2007. Galvus and Eucreas, a single-pill combination of Galvus with metformin that accounts for the majority of sales, have attained the highest sales in the DPP-4 market segment in some countries. Galvus was approved in Japan in January, 2010, under brand name Equa, and in November Novartis K.K. signed an agreement to co-promote the product in Japan with Sanofi-Aventis K.K.

Oncology

        Gleevec/Glivec ($4.3 billion, +7% cc), a targeted therapy for some forms of chronic myeloid leukemia (CML) and gastrointestinal stromal tumors (GIST), maintained solid growth based on its leadership position in treating these cancers backed by new clinical data and regulatory approvals. Gleevec/Glivec was approved in 2009 was for use in adjuvant (post-surgery) GIST patients, which is now approved in 57 countries.

        Tasigna ($399 million, +89% cc), has shown rapid growth as a next-generation targeted therapy for newly diagnosed CML patients following approvals in several key markets for this indication including the US, EU, Japan and Switzerland. Tasigna also gained increased share in imatinib resistant/intolerant patients. Trials are underway examining the use of Tasigna in CML with suboptimal response to Glivec, as well as a Phase III trial in patients with GIST.

        Zometa ($1.5 billion, +2% cc), an intravenous bisphosphonate therapy for patients with certain types of cancer that has spread to the bones, is growing due to improved compliance and use in existing indications. Regulatory submissions in the US and EU for use of Zometa as an adjuvant therapy in pre- and post-menopausal women with breast cancer were withdrawn in Q4 2010 after the AZURE trial did not meet its primary endpoint in the overall population. However, in a pre-defined subgroup of women with well-established menopause, an improvement in disease-free survival was shown in the Zometa arm. Novartis will discuss future regulatory plans with health authorities based on these data. Zoledronic acid, the active ingredient in Zometa (4 mg), is also available under the trade names Reclast/Aclasta (5 mg) for use in non-oncology indications with different dosing. Zometa is facing new competition from denosumab, a product of Amgen.

        Femara ($1.4 billion, +9% cc), a treatment for early stage or advanced breast cancer in postmenopausal women, achieved strong sustained growth in key markets. We anticipate new generic competition in the US in the first half of 2011 and later in the year in Europe's major markets thus significantly reducing future sales.

        Sandostatin ($1.3 billion, +11% cc) benefited from the increasing use of Sandostatin LAR in treating symptoms of patients with neuroendocrine tumors (NET).

        Exjade ($762 million, +16% cc), continued to expand with strong growth based on new patients, expanded access and increased dosing in the US and key markets around the world. Exjade is currently approved in more than 100 countries, including China since June 2010, as the only once-daily oral therapy for transfusional iron overload.

        Afinitor ($243 million), an oral inhibitor of the mTOR pathway used across multiple diseases, expanded its indications in the US with an accelerated FDA approval for the treatment of patients with subependymal giant cell astrocytomas (SEGA), a benign brain tumor associated with tuberous sclerosis requiring therapeutic intervention but who are not candidates for curative surgical resection. The effectiveness of Afinitor is based on a 28-patient Phase II study. A Phase III study has completed enrollment to further explore the clinical benefits of Afinitor for patients with SEGA associated with tuberous sclerosis. Regulatory submissions have been filed in the EU for this indication under the trade name Votubia. Afinitor is also an approved treatment for advanced renal cell carcinoma (kidney cancer) following VEGF-targeted therapy. The FDA granted Afinitor priority review status for the treatment of advanced neuroendocrine tumors (NET) and a decision is expected in 2011. Worldwide submissions for the treatment of patients with advanced NET are underway. Everolimus, the active ingredient in Afinitor, is also available under the trade names Zortress/Certican for use in non-oncology indications. Everolimus is exclusively licensed to Abbott and sublicensed to Boston Scientific for use in drug-eluting stents.

Neuroscience and Ophtalmics

        Lucentis ($1.5 billion, +24% cc), a biotechnology eye therapy now approved in more than 85 countries, delivered sustained growth particularly in France, the United Kingdom, Canada and Japan. Lucentis is the only

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treatment proven to maintain and improve vision in patients with "wet" age-related macular degeneration, a leading cause of blindness in people over age 50. Lucentis was approved in January 2011 in Europe for the treatment of visual impairment due to diabetic macular edema (DME), an eye condition related to long-standing diabetes that may lead to blindness. In Q4 2010 Novartis filed an application in the EU for the treatment of visual impairment due to macular edema secondary to branch/central retinal vein occlusion. Genentech holds the US rights to this medicine.

        Exelon/Exelon Patch ($1.0 billion, +6% cc), a therapy for mild to moderate forms of Alzheimer's disease dementia as well as dementia linked with Parkinson's disease, achieved blockbuster status in 2010. The majority of sales are for Exelon Patch, the novel skin patch launched in 2007, now available in more than 75 countries worldwide for Alzheimer's disease dementia, including more than 20 countries where it is also approved for dementia associated with Parkinson's disease.

        Extavia ($124 million), for relapsing forms of multiple sclerosis (MS), was launched in 2009 in the US and more than 30 other countries, marked the entry of Novartis into the field of MS. Extavia is the Novartis-patented version of Betaferon®/Betaseron®.

        Gilenya ($15 million) has launched as a first-line treatment for relapsing forms of MS in the US and for relapsing-remitting MS in Russia. It was also approved as a first-line treatment for relapsing forms of MS in Australia, Switzerland and the United Arab Emirates. Gilenya is currently under regulatory review in the EU, where it was filed in December 2009, and with health authorities worldwide, including Canada, Turkey and Brazil. Initial sales uptake in the US is in line with expectations with sales of $13 million since its launch in October 2010.

        Comtan/Stalevo ($600 million, +8% cc), a treatment for Parkinson's disease, has grown mainly due to growing prescriber familiarity and continued geographical expansion of Stalevo, an enhanced levodopa therapy.

Respiratory

        Xolair ($369 million, +12% cc, Novartis sales), a biotechnology drug for moderate to severe persistent allergic asthma in the US and severe persistent allergic asthma in Europe, maintained solid growth due to its global presence and approvals in more than 85 countries. A Phase III trial is progressing to support registration in China. Xolair Liquid, a new formulation in pre-filled syringes to enable easier administration than with the conventional lyophilized formulation, is expected to be launched in Europe in 2011. Novartis co-promotes Xolair with Genentech in the US and shares a portion of operating income.

        Onbrez Breezhaler (QAB149, indacaterol) ($33 million) has demonstrated strong sales growth since its approval in the EU in November 2009 as a once-daily long-acting beta-2 agonist (LABA) for adults with chronic obstructive pulmonary disease (COPD). Onbrez Breezhaler is now approved in more than 40 countries and is available in 13 European markets, with further launches planned during 2011. In November 2010, Novartis announced results of the blinded Phase III INTENSITY study showing that Onbrez Breezhaler 150 mcg is as effective as tiotropium in improving lung function in patients with COPD, while providing greater clinical benefits in terms of reduced breathlessness, lower use of rescue medication and improved health status. The application for US approval (under the brand-name Arcapta Neohaler) is expected to be reviewed by an FDA Advisory Committee in March 2011.

Integrated Hospital Care

        Reclast/Aclasta ($579 million, +23% cc), a once-yearly infusion therapy for osteoporosis, continues to expand on increasing patient access to infusion centers and a broad range of use in patients with various types of this debilitating bone disease. Approvals have been received in over 90 countries for up to six indications, including the treatment of osteoporosis in men and postmenopausal women. Six-year data from a pivotal fracture trial reinforced the long-term efficacy and safety profile of Reclast/Aclasta. Zoledronic acid, the active ingredient in Reclast/Aclasta, is also available in a number of countries in a different dosage for use in oncology indications under the trade name Zometa.

        Zortress/Certican ($144 million, +25% cc), a transplantation medicine, generated solid growth based on its availability in more than 80 countries to prevent organ rejection in adult kidney and heart transplantation, including the US, where its was launched in April 2010 for adult kidney transplantation under the brand name Zortress. This medicine, which has the same active ingredient as Afinitor (everolimus), has been shown to have good immunosuppressive efficacy and a manageable side-effect profile.

        Ilaris ($26 million) is a fully human monoclonal antibody that selectively binds and neutralizes interleukin-1ß (IL-1ß), a pro-inflammatory cytokine. Since 2009, Ilaris has been approved in over 40 countries for

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the treatment of children aged four years and older and adults suffering from cryopyrin-associated periodic syndrome (CAPS), a group of rare auto-inflammatory disorders that affect approximately one out of one million people. Novartis has filed for European regulatory approval of Ilaris for the treatment of gouty arthritis attacks based on data from two Phase III registration studies that met their primary endpoints. US submission is on track for the first quarter of 2011. Novartis is also pursuing other diseases in which IL-1ß is believed to play an important role, such as systemic juvenile idiopathic arthritis (SJIA) and cardiovascular indications. Select subsets of patients with these diseases would be eligible for treatment with Ilaris, if approved.

        Neoral/Sandimmun ($871 million, -7% cc), for organ transplantation, has experienced modestly declining sales despite ongoing generic competition in recent years based on its pharmacokinetic profile, reliability and use in treating a life-threatening condition.

        Myfortic ($444 million, +23% cc), a transplantation medicine, is approved in more than 90 countries for the prevention of acute rejection of kidney allografts and is indicated in combination with cyclosporine and corticosteroids. Myfortic was first approved in the US in 2004 and in the EU in 2003.

Other

        Voltaren ($791 million, -1% cc, excluding OTC sales), a treatment for various inflammation and pain conditions, no longer has patent protection in key markets around the world, but has continued to generate growth in regions such as Latin America, the Middle East, Africa and Asia based on long-term trust in the brand.

        Lescol ($436 million, -24% cc), a statin drug used to reduce cholesterol, has experienced declining sales in the US following the 2007 launch of a generic version of simvastatin, another medicine in this class. Europe and other regions also have been hurt by the entry of generic versions of rival drugs in this class. Loss of exclusivity and launch of generics in Europe and Japan have negatively impacted performance. Key emerging markets, including China are showing growth.

        Ritalin/Focalin ($464 million, +3% cc), for treatment of Attention Deficit/Hyperactivity Disorder (ADHD), has benefited from use of the long-acting Ritalin LA and Focalin XR patent-protected formulations that involve methylphenidate, the active ingredient in Ritalin that has faced generic competition for some time in many countries.

Alcon

        Alcon's sales consolidated into Novartis Group results since August 25, 2010 totaled $2.4 billion. US sales of $1.0 billion accounted for 42% of total net sales, while non-US sales of $1.4 billion were 58% of total net sales. Sales in emerging markets continued to be strong, as they contributed $0.5 billion or 20% of total net sales. Pharmaceutical sales were $1.0 billion, Surgical sales were $1.1 billion and Consumer sales were $0.3 billion. Key product contributors to sales were the TRAVATAN® and Azopt® families of glaucoma products, Vigamox® for eye infections, Patanol® for eye allergies, AcrySof® intraocular lenses for cataract patients and OPTI-FREE®, EXPRESS®, and Replenish® contact lens disinfecting solutions.

        CIBA Vision (+6% cc) continues to show robust growth in the growing contact lens and lens care markets on the strength of Air Optix across all regions. Air Optix Aqua Multifocal lens continues to grow after becoming the number one lens for presbyopic users in April 2010, less than 12 months after its launch. Launches of FreshLook Illuminate in Asia and Japan contributed to 2010 growth, and ClearCare, CIBA Vision's leading peroxide-based lens disinfectant solution, experienced its third year of double-digit growth as users continue to migrate to its clinically proven one-bottle regimen.

Vaccines and Diagnostics

        Net sales were $2.9 billion for 2010 (+25% cc) compared to $2.4 billion in 2009. Deliveries for supply contracts with governments around the world for A (H1N1) pandemic flu vaccines and adjuvants generated net sales of $1.3 billion, significantly driving the sales increase compared to 2009. Excluding the A (H1N1) pandemic flu, the business experienced strong growth (+16% cc) driven by the strong seasonal flu season, expansion of the vaccines business in emerging markets and launch of Menveo.

Sandoz

        Sandoz achieved double-digit sales growth in 2010 ($8.6 billion, +15%, +16% cc) versus 2009 driven by strong growth in US retail generics and biosimilars (+46% cc) and emerging markets. Volume expanded 22 percentage points due to new product launches, the inclusion of EBEWE Pharma's specialty generics business

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(contributing 4 percentage points) and continued strong results from biosimilars which together more than compensated for price erosion of 7 percentage points. German retail generics and biosimilars declined by $100 million (-6% cc), as the market was impacted by numerous healthcare reforms.

        US sales growth in 2010 was driven by successful execution of new product launches including enoxaparin ($462 million), tacrolimus ($184 million), losartan ($145 million), lansoprazole ($123 million) and gemcitabine ($58 million). Sandoz's enoxaparin exclusivity in the US could change at any time, whereas lansoprazole ODT and gemcitabine will face increased competition in the US in April and May 2011, respectively.

        Biosimilar sales expanded rapidly (+63% cc) to $185 million.

Consumer Health

        Sales grew 6% (+6% cc) to $4.4 billion and all Consumer Health businesses delivered growth ahead of their respective markets for 2010.

        All regions contributed to sales growth in OTC (+5% cc), supported by double- digit growth of the key brands Voltaren, Nicotinell and Excedrin. Pantoloc Control was successfully launched in 14 European markets in 2010 and will continue to support growth in the gastrointestinal franchise. Retail sales of Prevacid24HR have driven the Novartis OTC business in the US to be the fastest growing in its peer group, while Excedrin established itself as a top four brand in its category and as the second fastest growing brand among its competitors.

        Animal Health growth (+7% cc) was led mainly by the strong performance of Interceptor and Sentinel in the US and Milbemax in Europe, as well as by the robust growth of cattle vaccines in the US livestock market. Overall, the cattle and sheep brands in key markets, including the US and Australia, and the companion animal parasiticides fueled the high-single-digit business growth in 2010.


Operating Income by Segments

 
  Year ended
December 31,
2010(1)
  % of
net sales
  Year ended
December 31,
2009(1)
  % of
net sales
  Change
in $
  Change in
constant
currencies
 
 
  $ m
  %
  $ m
  %
  %
  %
 

Pharmaceuticals

    8,471     28.0     8,072     28.5     5     6  

Alcon

    796     17.9     473     24.1     68     70  

Sandoz

    1,321     15.4     1,071     14.3     23     22  

Vaccines and Diagnostics

    612     21.0     372     15.3     65     87  

Consumer Health

    778     17.8     683     16.7     14     18  

Corporate income & expenses, net

    (452 )         (689 )                  
                           

Operating income

    11,526     22.8     9,982     22.5     15     17  
                           

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

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Core Operating Income by Segments

 
  Year ended
December 31,
2010(1)
  % of
net sales
  Year ended
December 31,
2009(1)
  % of
net sales
  Change   Change in
constant
currencies
 
 
  $ m
  %
  $ m
  %
  %
  %
 

Pharmaceuticals

    9,586     31.6     8,751     30.9     10     10  

Alcon

    1,350     30.4     504     25.6     168     170  

Sandoz

    1,742     20.3     1,395     18.6     25     25  

Vaccines and Diagnostics

    1,066     36.5     719     29.7     48     58  

Consumer Health

    845     19.4     754     18.4     12     15  

Corporate income & expenses, net

    (583 )         (686 )                  
                           

Core operating income

    14,006     27.7     11,437     25.8     22     24  
                           

(1)
Restated to reflect new divisional segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".

Pharmaceuticals

        Operating income grew 5% (+6% cc) to $8.5 billion. The operating income margin of 28.0% of net sales was mainly impacted by R&D impairments of $896 million, litigation charges of $181 million and restructuring expenses of $111 million, partly offset by divestment income of $425 million and the Famvir settlement with Teva.

        Core operating income grew 10% (+10% cc) ahead of sales to $9.6 billion. The core operating income margin of 31.6% of net sales improved 0.7 percentage points. Cost of Goods Sold remained broadly stable, while total functional costs improved as a percentage of net sales due to continuing productivity initiatives. Other Income and Expense increased as a percentage of sales mainly due to higher pre-launch inventory provisions.

Alcon

        Alcon has contributed $796 million to Novartis operating income since its consolidation from August 25, 2010 including CIBA Vision and ophthalmics products.

        This amount includes an additional charge of $467 million relating to the estimated fair value revaluation of inventory as of the change in majority ownership date; $32 million for amortization of intangible assets; and $30 million of costs resulting from the change in majority ownership.

        Excluding these items, core operating income totaled $1.3 billion.

Vaccines and Diagnostics

        Operating income in the period was $612 million compared to $372 million in the year-ago period, driven substantially by increased contributions from A (H1N1) pandemic flu vaccines.

        We continued to invest heavily in development of our late stage pipeline and increased marketing resources to successfully launch Menveo globally. 2010 operating income was additionally impacted by a $98 million impairment charge related to a financial asset, $52 million in restructuring charges related to consolidation of our manufacturing facilities and a $45 million legal settlement expense.

        Despite heavy investment in R&D and marketing and sales, core operating income increased by 48% (+58% cc) to $1.1 billion, after adjusting for the impairment and restructuring charges and legal settlement above as well as the amortization of intangible assets.

Sandoz

        Operating income grew 23% (+22% cc) versus 2009 to $1.3 billion. The operating income margin increased 1.1 percentage points to 15.4% of net sales, an all-time high for Sandoz. The operating income margin was negatively impacted by acquisition-related charges for the integration of EBEWE Pharma, one-time charges for

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the termination of a co-development agreement, provisions for legal settlements and higher levels of restructuring charges than 2009, totaling 0.6 percentage points of net sales.

        Core operating income rose 25% (+25% cc) to $1.7 billion, as the core operating income margin improved by 1.7 percentage points to 20.3% of net sales. There were lower sales to other divisions and other revenues and higher Cost of Goods Sold. These impacts were more than offset by a number of positive factors, including: Marketing & Sales costs, which were lower as a percentage of sales due to productivity improvements partly offset by investments in growth areas; R&D costs, which decreased as a percentage of sales as reduced investments in standard generics and productivity savings funded increasing investment in the development of differentiated generics; General & Administration costs, which decreased as a percentage of sales due to ongoing cost reduction measures; and Other Income and Expense, which were positive due to lower legal fees.

Consumer Health

        Operating income rose 14% (+18% cc) to $778 million, with the operating income margin improving over 2009 by 1.1 percentage points, to 17.8% of net sales for 2010.

        Excluding the impact of currency movements, the division showed strong operating leverage by growing operating income 18% in constant currencies, at three times the rate of sales growth.

        Core operating income rose 12% (+15% cc) to $845 million, with strong operating leverage, driving the core operating income margin up 1.0 percentage points to 19.4% of net sales versus 2009. Gross margin improvements, productivity gains, and income from an OTC US non-core brand divestment have been the key growth drivers, partially offset by higher investments in Marketing & Sales to support new product launches and geographic expansion.

Corporate Income & Expense, Net

        Corporate income & expense includes the costs of Group headquarters and costs for corporate research. These net expenses of $452 million are 34% less than the prior year primarily due to the impact of an exceptional pension curtailment gain of $265 million arising from changing the conditions of the Swiss pension plan offset by $99 million of stamp duty and transaction expenses related to the acquisition of the additional 52% interest in Alcon.

Other Revenues and Operating Expenses

 
  Year ended
December 31,
2010
  Year ended
December 31,
2009
  Change
in $
  Change in
constant
currencies
 
 
  $ m
  $ m
  %
  %
 

Gross margin

    37,073     32,924     13     12  

Marketing & Sales

    (13,316 )   (12,050 )   11     10  

Research & Development

    (9,070 )   (7,469 )   21     20  

General & Administration

    (2,481 )   (2,281 )   9     7  

Other income

    1,234     782     58     56  

Other expense

    (1,914 )   (1,924 )   (1 )   (1 )
                   

Operating income

    11,526     9,982     15     17  
                   

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Core Revenues and Operating Expenses

 
  Year ended
December 31,
2010
  Year ended
December 31,
2009
  Change
in $
  Change in
constant
currencies
 
 
  $ m
  $ m
  %
  %
 

Core gross profit

    38,517     33,783     14     14  

Marketing & Sales

    (13,315 )   (12,050 )   10     10  

Research & Development

    (8,080 )   (7,287 )   11     9  

General & Administration

    (2,477 )   (2,281 )   9     7  

Other income

    485     717     (32 )   (32 )

Other expense

    (1,124 )   (1,445 )   (22 )   (22 )
                   

Core operating income

    14,006     11,437     22     24  
                   

Core net income

    12,029     10,267     17     18  

Core basic earnings per share

    5.15     4.50     14     15  

Marketing & Sales

        Marketing & Sales rose 11% (+10% cc) to $13.3 billion, improving 0.9 percentage points to 26.3% of net sales, as productivity improvements across the Group and changes in the portfolio mix (consolidation of Alcon) were offset slightly by investments in new launch products. Excluding Alcon, Marketing and Sales rose 6% to $12.7 billion. For core results, Marketing & Sales rose 10% (+10% cc) to $13.3 billion.

Research & Development

        Research & Development expenses increased significantly, by 21% (+20% cc) in 2010, to $9.1 billion. This included $0.9 billion in impairments of intangible assets related to acquired in-process R&D mainly due to the discontinuation of Mycograb, albinterferon alfa-2b, PTZ601 and ASA404. Excluding these and certain other costs, core R&D investment increased 11% (+9% cc) to $8.1 billion and represented 16.0% of net sales in 2010 compared to 16.5% in 2009.

General & Administration

        General & Administration expenses increased at a slower pace than sales, up 9% (+7% cc) to $2.5 billion in 2010 from the benefits of productivity gains and good cost management across all divisions, with core results showing the same trends.

Other Income and other Expense

        Other income, which largely consists of gains from the disposal of intangible assets and property, plant & equipment, rose by $452 million to $1.2 billion in 2010. For core results, other income excludes $739 million in exceptional gains (e.g. $392 million for the divestment of Enablex and a Swiss pension fund curtailment gain of $265 million) and fell by 32% (-32% cc) compared to 2009 to $485 million, since the prior year only excluded $65 million of divestment gains. Other expense, which largely consists of litigation settlement costs, impairment of financial assets and pension expenses, were flat at $1.9 billion in 2010. For core results, which eliminate exceptional charges exceeding a $25 million threshold, other expense was down 22% (-22% cc) on a comparable basis to $1.1 billion in 2010.

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Non-operating Income & Expense

 
  Year ended
December 31,
2010
  Year ended
December 31,
2009
  Change
in $
  Change in
constant
currencies
 
 
  $ m
  $ m
  %
  %
 

Operating income

    11,526     9,982     15     17  

Income from associated companies

    804     293     174     173  

Interest expense

    (692 )   (551 )   26     25  

Other financial income

    64     198     (68 )   (68 )
                   

Income before taxes

    11,702     9,922     18     19  

Taxes

    (1,733 )   (1,468 )   18     18  
                   

Group net income

    9,969     8,454     18     20  
                   

Attributable to:

                         

Shareholders of Novartis AG

    9,794     8,400     17     18  

Non-controlling interests

    175     54     224     226  

Basic EPS ($)

   
4.28
   
3.70
   
16
   
17
 


Core Non-operating Income & Expense

 
  Year ended
December 31,
2010
  Year ended
December 31,
2009
  Change
in $
  Change in
constant
currencies
 
 
  $ m
  $ m
  %
  %
 

Core operating income

    14,006     11,437     22     24  

Income from associated companies

    1,041     1,051     (1 )   (3 )

Interest expense

    (692 )   (551 )   26     25  

Other financial income

    64     198     (68 )   (68 )
                   

Core income before taxes

    14,419     12,135     19     20  

Taxes

    (2,390 )   (1,868 )   28     28  
                   

Core net income

    12,029     10,267     17     18  
                   

Attributable to:

                         

Shareholders of Novartis AG

    11,767     10,213     15     16  

Non-controlling interests

    262     54     385     388  

Core basic EPS ($)

   
5.15
   
4.50
   
14
   
15
 

Income from Associated Companies

        Associated companies are accounted for using the equity method when Novartis holds between 20% and 50% of the voting shares of these companies, or where Novartis has otherwise significant influence over them. Income from associated companies is mainly derived from the Group's investments in Roche Holding AG and, prior to August 25, 2010, Alcon, Inc. (Alcon).

        The income from associated companies for 2010 increased from $293 million to $804 million. The increase is attributable to higher contributions from the Alcon and Roche investments due to exceptional charges incurred in the prior year period as well as the net revaluation gain of $335 million on the initial 25% Alcon interest acquired on July 7, 2008.

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        The following is a summary of the individual components included in the income from associated companies:

 
  2010   2009  
 
  $ m
  $ m
 

Share of estimated Roche reported net income

    648     593  

Catch-up for actual Roche previous year net income

          (40 )

Restructuring impact (2010 includes $43 million from 2009)

    (132 )   (97 )

Amortization of intangible assets

    (136 )   (135 )
           

Net income effect from Roche

    380     321  
           

Share of Alcon net income

    385     493  

Catch-up for actual Alcon previous year net income

    2     5  

Revaluation of initial 25% interest to fair value

    378        

Recycling of losses accumulated in comprehensive income from July 7, 2008 to August 25, 2010

    (43 )      

Intangible asset impairment charge

          (92 )

Amortization of intangible assets

    (289 )   (434 )
           

Net income effect from Alcon (in 2010 up to August 25, 2010)

    433     (28 )
           

Net income from other associated companies

    (9 )      
           

Income from associated companies

    804     293  
           

        The Group's 33.3% interest in Roche's voting shares, which represents a 6.3% interest in Roche's total equity, generated income of $380 million in 2010, up from $321 million in 2009. The 2010 contribution reflects an estimated $648 million share of Roche's net income in 2010. This contribution, however, was reduced by $136 million for the amortization of intangible assets arising from the allocation of the purchase price paid by Novartis for this investment to Roche's intangible assets and an exceptional charge of $132 million taken in 2010 as part of Roche's restructuring charges.

        Alcon accounted for as an associated company until August 25, 2010 and thereafter fully consolidated, contributed $433 million compared to a loss of $28 million in the prior year period. Included in this total is a net revaluation gain of $335 million to the fair value of the initial 25% Alcon, Inc interest acquired on July 7, 2008, required as a result of acquiring majority control on August 25, 2010. The 2010 result includes the actual net income up to August 25, 2010 of $385 million from Alcon and a positive prior-year adjustment of $2 million which were reduced by $289 million for the amortization of intangible assets and other charges.

        Adjusting for the exceptional items in both years, core income from associated companies decreased 1% (-3% cc) to $1.0 billion.

        A survey of analyst estimates is used to estimate the Group's share of net income in Roche. Any differences between these estimates and actual results will be adjusted in the 2011 financial statements.

Interest Expense and Other Financial Income

        Interest expense increased by 26% (25% cc) to $692 million in 2010 as a result of the issuance of US dollar bonds in February 2009 and March 2010, a euro bond in June 2009 and the increase of short-term debts through the commercial paper program. Other financial income decreased by 68% (-68% cc) to $64 million in 2010. In order to accommodate the payment for the Alcon acquisition financial investments were kept short-term which resulted in lower yields.

Taxes

        Tax expenses in 2010 were $1.7 billion, a 18% (+18% cc) increase from 2009. The tax rate (taxes as a percentage of pre-tax income) remained at the 2009 rate of 14.8%. The effective tax rate is different than the expected tax rate due to various adjustments made to the IFRS results to arrive at taxable income. For further information on the main elements contributing to the difference, see "—Core Results as Defined by Novartis" and "Item 18. Financial Statements—note 6".

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        Excluding the impact of consolidating Alcon, the Group's full year tax rate would have been 16.3%, which is higher than 2009 as it reflects the impact of sales from A (H1N1) pandemic flu vaccines and other sales being recorded in higher tax jurisdictions.

        Taxes on the adjustments between IFRS and core results take into account, for each individual item included in the adjustment, the tax rate that is applicable to the item in the jurisdiction where the adjustment arises. Generally this results in amortization of intangible assets and acquisition-related restructuring and integration items having a full tax impact. Tax impacts on impairment charges can only be taken into account if the changes in value in the underlying asset are tax deductible in the respective jurisdiction where the asset is recorded. There is usually a tax impact on exceptional items although this is not the case for items arising from criminal settlements in certain jurisdictions. Adjustments related to income from associated companies are recorded net of any related tax effect. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments of $2.7 billion to arrive at the core results before tax, amounts to $657 million. This results in the average tax rate on the adjustments being 24.2%.

Net Income

        Net income rose 18% (+18% cc) to $10.0 billion in 2010. Core net income was up 17% (+18% cc) to $12.0 billion.

Basic Earnings per Share

        Basic earnings per share were $4.28, up 16% (+17% cc) from $3.70 in 2009, but less than the net income increase due to higher income attributable to non-controlling interests. Core earnings per share grew 14% (+15% cc) to $5.15 in 2010 from $4.50 in 2009.


5.B Liquidity and Capital Resources

Cash Flow

        The following table sets forth certain information about the Group's cash flow and net debt/liquidity.

 
  2011   2010   2009  
 
  $ m
  $ m
  $ m
 

Cash flows from operating activities

    14,309     14,067     12,191  

Cash flows used in investing activities

    (792 )   (15,756 )   (14,219 )

Cash flows used in/from financing activities

    (15,024 )   4,116     2,809  

Currency translation effect on cash and cash equivalents

    (103 )   (2 )   75  
               

Net change in cash and cash equivalents

    (1,610 )   2,425     856  

Change in marketable securities

    (1,449 )   (11,740 )   10,476  

Change in current and non-current financial debts

    2,758     (8,999 )   (6,624 )
               

Change in net (debt)/liquidity

    (301 )   (18,314 )   4,708  

Net (debt)/liquidity at January 1

    (14,853 )   3,461     (1,247 )
               

Net (debt)/liquidity at December 31

    (15,154 )   (14,853 )   3,461  
               

        The analysis of our cash flow is divided as follows:

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1. Cash Flows From Operating Activities

        Cash flow from operating activities was $14.3 billion in 2011, a 2% increase from 14.1 billion in 2010 which included $1.8 billion of cash collections for A (H1N1) pandemic flu vaccines. The additional cash flow of $0.2 billion generated by strong increase in operating income after adjustments for non-cash items was partially mitigated by working capital requirements to fund business expansion.

        In 2010, cash flow from operating activities was $14.1 billion, a 15% increase from $12.2 billion in 2009. The additional cash flow of $1.9 billion generated by the strong business expansion and lower working capital requirements was partially offset by higher taxes and payments in connection with the resolution of certain legal matters

        In 2009, our primary source of liquidity was cash generated from our operations. The cash flow from operating activities rose 25% to $12.2 billion and reflected $1.3 billion lower working capital requirements compared to 2008.

2. Cash Flows Used in Investing Activities

        The net cash outflow used for investing activities in 2011 amounted to $0.8 billion, $15.0 billion below the prior-year amount. The cash used for investments in property, plant & equipment of $2.2 billion and for intangible and financial assets of $0.4 billion as well as for acquisitions of businesses of $0.6 billion, mainly Genoptix Inc., were partially compensated by net inflows from the sale of marketable securities of $1.6 billion and proceeds from the sales of various assets of $0.8 billion, mainly Elidel® marketing rights.

        In 2010, the net cash outflow used for investing activities amounted to $15.8 billion, $1.5 billion above the prior-year amount. The cash used for acquisitions was $26.7 billion. This amount is comprised of $26.1 billion (net of $2.2 billion cash acquired) for the purchase of the additional 52% investment in Alcon and of $0.5 billion for the acquisition of Corthera and Oriel as well as for deferred payments related to the EBEWE acquisition. The net cash used for investments in property, plant & equipment, intangible and other assets amounted to $1.7 billion. These outflows were partially offset by the net proceeds of marketable securities of $12.6 billon.

        In 2009, cash outflows from investing activities rose 37% to $14.2 billion and included $10.5 billion in marketable securities investments net financed with proceeds from bond offerings as well as $0.9 billion for the acquisition of the EBEWE Pharma generics business in Sandoz and $1.9 billion for capital expenditures.

3. Cash Flows Used in/From Financing Activities

        Net cash used for financing activities was $15.0 billion in 2011 compared to a net cash inflow of $4.1 billion from financing activities in 2010. It was comprised of outflows of $5.4 billion for the dividend payment, of a net $3.5 billion for treasury share repurchases, $3.2 billion for the acquisition of the Alcon non-controlling interests and net $2.8 billion for the repayment of financial debts and $0.1 billion other financing items.

        In 2010, net cash provided by financing activities increased by $1.3 billion to $4.1 billion compared to $2.8 billion in 2009. The $8.3 billion proceeds from the bonds and commercial paper programs as well as other net inflows totaling $0.3 billion were partially offset by the payment of the 2009 dividend of $4.5 billion in 2010.

        In 2009, cash inflows from financing activities were a net $2.8 billion, as proceeds from bond issues totaling $7.1 billion were partially reduced by the dividend payment for 2008 of $3.9 billion and other items totaling $0.4 billion.

4. Net Debt/Liquidity

        Overall liquidity at the end of 2011 amounted to $5.1 billion compared to $8.1 billion at the end of 2010 and consists of $3.7 billion cash and cash equivalents and of $1.4 billion marketable securities and derivative financial instruments. In 2010, liquidity included cash and cash equivalents of $5.3 billion and marketable securities and financial derivatives of $2.8 billion.

        At December 31, 2010 overall liquidity amounted to $8.1 billion compared to $17.4 billion at the end of 2009. Taking into account additional debt raised in 2010, the Group had net debt of $14.9 billion at the end of 2010 compared to net liquidity of $3.5 billion at the end of 2009.

        At December 31, 2009 overall liquidity amounted to $17.4 billion compared to $6.1 billion at the end of 2008. Taking into account additional debt raised in 2009 through bond issues, the Group had net debt of $1.2 billion at the end of 2008 compared to net liquidity of $3.5 billion at the end of 2009.

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        Net debt/liquidity constitutes a non-IFRS financial measure, which means that it should not be interpreted as a measure determined under International Financial Reporting Standards (IFRS). Net debt/liquidity is presented as additional information as it is a useful indicator of the Group's ability to meet financial commitments and to invest in new strategic opportunities, including strengthening its balance sheet.

        We use marketable securities and derivative financial instruments to manage the volatility of our exposures to market risk in interest rates and liquid investments. Our objective is to reduce, where appropriate, fluctuations in earnings and cash flows. We manage these risks by selling existing assets or entering into transactions and future transactions (in the case of anticipatory hedges) which we expect we will have in the future, based on past experience. We therefore expect that any loss in value for those securities or derivative financial instruments generally would be offset by increases in the value of those hedged transactions.

        We use the US dollar as our reporting currency and we are therefore exposed to foreign exchange movements, primarily in European, Japanese and other Asian and Latin American currencies. Consequently, we enter into various contracts which change in value as foreign exchange rates change, to preserve the value of assets, commitments and anticipated transactions. We also use forward contracts and foreign currency option contracts to hedge certain anticipated net revenues in foreign currencies, see "Item 11, Quantitative and Qualitative Disclosures About Non-Product-Related Market Risk," for additional information.

5. Free Cash Flow

        Novartis defines free cash flow as cash flow from operating activities less purchase or sale of property, plant & equipment, intangible, non-current and financial assets. Cash effects realized in connection with the acquisition or divestment of subsidiaries, associated companies and non-controlling interests are excluded from free cash flow. The following is a summary of the Group's free cash flow:

 
  2011   2010   2009  
 
  $ m
  $ m
  $ m
 

Cash flows from operating activities

    14,309     14,067     12,191  

Purchase of property, plant & equipment

    (2,167 )   (1,678 )   (1,887 )

Purchase of intangible assets

    (220 )   (554 )   (846 )

Purchase of financial assets

    (139 )   (124 )   (215 )

Purchase of non-current non-financial assets

    (48 )   (15 )   (23 )

Proceeds from sales of property, plant & equipment

    61     36     48  

Proceeds from sales of intangible assets

    643     545     51  

Proceeds from sales of financial assets

    59     66     124  

Proceeds from sales of non-current non-financial assets

    5     3     3  
               

Group free cash flow

    12,503     12,346     9,446  
               

        Free cash flow for 2011 was $12.5 billion, which represents an increase of 1% or $0.2 billion compared to 2010. Main contributors were Pharmaceuticals with $10.8 billion followed by Alcon with $3.5 billion while other divisions contributed in total $2.1 billion. Corporate had a free cash outflow of $3.9 billion mainly on account of interest and tax payments. Free cash flow of $12.5 billion was deployed for dividend payments of $ 5.4 billion and share repurchases of $ 5.9 billion (including $ 2.4 billion repurchased indirectly via Alcon, Inc. to reduce the dilutive impact of the subsequent merger of Alcon, Inc. into Novartis AG). In total, dividends and share repurchases utilized 90% of the Group's 2011 free cash flow.

        The free cash flow for 2010 was $12.3 billion, which represents an increase of 30.7% over 2009. The strong business expansion, lower working capital requirements, higher proceeds from the disposal of intangible assets as well as lower capital spending contributed to the growth of the free cash flow. Net investments in property, plant & equipment in 2010 were $1.6 billion, or 3.2% of net sales, down from 4.2% of net sales in 2009. Free cash flow in 2010 was mainly attributable to the Pharmaceuticals Division which contributed $10.7 billion to the Group total.

        Our 2009 Group free cash flow from continuing operations rose 23.5% to $9.4 billion, reflecting the strong focus on business performance and control of fixed and working capital. This rise relates mainly to the solid business expansion, reduced tax payments, lower working capital requirements and a reduction of investments in property, plant & equipment. This was partially offset by increased payments for intangible assets, lower proceeds

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from assets disposals and higher net financial payments. Capital expenditure for continuing operations on property, plant & equipment in 2009 were $1.9 billion, or 4.3% of net sales, down from 5.1% of net sales in 2008.

        Free cash flow is presented as additional information because Novartis considers it is a useful indicator of the Group's ability to operate without relying on additional borrowing or the use of existing cash. Free cash flow is a measure of the net cash generated that is available for debt repayment and investment in strategic opportunities. The Group uses free cash flow as a performance measure when making internal comparisons of the results of divisions. Free cash flow constitutes a non-IFRS financial measure, which means that it should not be interpreted as a measure determined under IFRS. Free cash flow is not intended to be a substitute measure for cash flow from operating activities (as determined under IFRS).


Capital Resources

Funding of the Alcon transaction—2010

        On August 25, 2010, Novartis completed the acquisition of a further 52% interest in Alcon, Inc. following on from the January 4, 2010 announcement that Novartis had exercised its call option to acquire Nestlé's remaining 52% Alcon interest for approximately $28.3 billion or $180 per share. This increased the interest in Alcon to a 77% controlling interest as Novartis had already acquired an initial 25% Alcon interest from Nestlé for $10.4 billion or $143 per share in July 2008.

        On December 14, 2010, Novartis entered into a definitive agreement to merge Alcon into Novartis for Novartis shares and a Contingent Value Amount (CVA). Under the terms of the agreement, the merger consideration will include up to 2.8 Novartis shares and a CVA to be settled in cash that will in aggregate equal $168 per share. If the value of 2.8 Novartis shares is more than $168 the number of Novartis shares will be reduced accordingly. The total merger consideration for the non-controlling interest will be $12.9 billion, comprising of up to 215 million Novartis shares and a potential CVA to be settled in cash.

        The overall purchase price of $38.7 billion includes certain adjustments for Alcon dividends and interest due. Sources of financing for the 77% ownership, including the initial 25% stake purchased in mid-2008, were $17.0 billion of available cash, and $13.5 billion from bonds raised in March 2010 as well as in 2008 and 2009. In addition, during 2010, we raised funds of $8.2 billion through our commercial paper program, which was used for general corporate purposes of the Novartis Group, as well as for intercompany financing purposes in connection with the acquisition of the 52% interest in Alcon.

Funding of the Alcon transaction—2011

        During 2011, prior to the merger of Alcon, Inc. into Novartis AG on April 8, 4.8% of the non-controlling interests in Alcon, Inc. were acquired for $2.4 billion.

        Completion of the acquisition of the outstanding 18.6% interest in Alcon on April 8, 2011 and subsequent merger, resulted in the issuance of Novartis shares with a fair value of $9.2 billion and a contingent value payment of $0.5 billion.

        The final purchase price allocation was completed in 2011 and resulted in a fair value of net identifiable assets of $27.0 billion and goodwill of $18.0 billion. Also, the excess of the value exchanged for these 2011 transactions over the recorded value of the non-controlling interest together with merger related transaction costs resulted in a reduction in equity of $5.7 billion.

        For additional information, see "Item 18, Financial Statements—note 1, 2 and 24".

Share Repurchase Programs

        In 2011, Novartis has carried out the share repurchases committed to at the time of the Alcon merger announcement. These share repurchases amounted to $5.3 billion including the purchases of $2.4 billion of Alcon shares, a contingent value payment of $0.5 billion and repurchases of $2.4 billion of Novartis shares (39.4 million shares). All of these Novartis shares were repurchased on the second trading line during the first six months of 2011. In addition, in the second half of 2011, Novartis repurchased $1.1 billion (20.4 million shares) of own shares on the first trading line. These shares will be kept as treasury shares to mostly cover future employee participation programs.

        No shares were cancelled in 2011 as none had been repurchased in the 12 months to December 2010.

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        Novartis will propose to shareholders at the Annual General Meeting in February 2012 to cancel all shares repurchased on the second trading line during 2011. If approved, a total of 39.4 million shares, which corresponds to 1.4% of the registered Novartis share capital, will be cancelled, and the share capital will be reduced accordingly.

Treasury shares

        At December 31, 2011, our holding of treasury shares amounted to 338.9 million shares or 12% of the total number of issued shares. Approximately 181 million treasury shares are held in entities that limit their availability for use.

        At December 31, 2010, our holding of treasury shares amounted to 348.2 million shares or 13% of the total number of issued shares. Approximately 181 million treasury shares are held in entities that limit their availability for use. At December 31, 2009, our holding of treasury shares amounted to 363.3 million shares or 14% of the total number of issued shares.

Bonds

        In 2011 no bonds were issued or repaid.

        On March 9, 2010, Novartis issued a three-tranche bond totaling $5.0 billion registered with the US Securities and Exchange Commission as part of a shelf registration statement filed by Novartis in 2008. A 1.9% three-year tranche totaling $2.0 billion, a 2.9% five-year tranche totaling $2.0 billion and a 4.4% 10-year tranche totaling $1.0 billion were issued by the Group's US entity, Novartis Capital Corp. All tranches are unconditionally guaranteed by Novartis AG.

        On February 5, 2009, Novartis issued a two-tranche bond totaling $5.0 billion registered with the US Securities and Exchange Commission as part of a shelf registration statement filed by Novartis in 2008. A 4.125% five-year tranche totaling $2.0 billion was issued by the Group's US entity, Novartis Capital Corp., while a 5.125% 10-year tranche totaling $3.0 billion was issued by the Group's Bermuda unit, Novartis Securities Investment Ltd. Both tranches are unconditionally guaranteed by Novartis AG.

        On June 2, 2009, Novartis issued a 4.25% bond, due in 2016 of EUR 1.5 billion (approximately $2.1 billion) under its EUR 15 billion Euro Medium Term Note Programme. The seven-year bond, issued by Novartis Finance S.A., Luxembourg, is guaranteed by Novartis AG.

Direct Share Purchase Plans

        Novartis has been offering US investors since 2001 an ADS Direct Share Purchase Plan that provides investors an easy and inexpensive way of directly purchasing Novartis shares and of reinvesting dividends. This plan holds Novartis ADSs that are listed on the New York Stock Exchange under the trading symbol NVS. At the end of 2011, the ADS Direct Plan had 1,122 participants.

        Starting in September 2004, Novartis began offering a Direct Share Purchase Program to investors residing in Switzerland, Liechtenstein, France and the United Kingdom, which was the first of its kind in Europe. This plan offers an easy and inexpensive way for investors to directly purchase Novartis registered shares and for them to be held at no cost in a deposit account with SIX SAG AG. At the end of 2011, a total of 9,403 shareholders were enrolled in this program.


Liquidity/Short-term Funding—2011 and 2010

        We continuously track our liquidity position and asset/liability profile. This involves modeling cash flow maturity profiles based on both historical experiences and contractual expectations to project our liquidity requirements. We seek to preserve prudent liquidity and funding capabilities.

        We are not aware of significant demands to change our level of liquidity needed to support normal business activity. We intend to use part of our free cash flow to reduce our financial debt.

        We make use of various borrowing facilities provided by several financial institutions. We also successfully issued various bonds in 2010. In addition, we raised funds through our commercial paper program. We have no commitments from repurchase or securities lending transactions. The principal reason for the increase in average current financial debt in 2011 compared to 2010 is the increase in commercial paper during 2011, which was used for general corporate purposes of the Novartis Group, as well as for financing purposes in connection with the acquisition of the remaining Alcon, Inc. non-controlling interests in 2011.

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        An overview of the movements in our current financial debt and related interest rates is set forth below:

 
  December 31   Average
interest rate
at year end(1)
  Average
balance
during the
year
  Average
interest rate
during the
year(1)
  Maximum
balance
during the
year(2)
 
 
  $ m
  %
  $ m
  %
  $ m
 

2011

                               

Interest bearing accounts of associates

    1,357     1.36     1,463     1.25     1,626  

Other bank and financial debt

    2,053     3.38     3,784     1.83     7,749  

Commercial paper

    2,156     0.55     5,597     0.21     8,673  

Current portion of non-current financial debt

    778     na     479     na     911  

Fair value of derivative financial instruments

    30     na     97     na     184  
                           

Total current financial debt

    6,374           11,420           19,143  
                           

2010

                               

Interest bearing accounts of associates

    1,321     1.15     1,239     1.23     1,321  

Other bank and financial debt

    2,195     2.37     2,297     2.26     2,692  

Commercial paper

    4,969     0.20     3,603     0.28     8,719  

Current portion of non-current financial debt

    98     na     47     na     98  

Fair value of derivative financial instruments

    44     na     106     na     201  
                           

Total current financial debt

    8,627           7,292           12,631  
                           

(1)
2010 interest is calculated based on the average balances for a quarter and 2011 interest is calculated based on the average balances for a month

(2)
For 2010 maximum amount at end of any quarter in each category and for 2011 maximum amount at end of any month in each category

na—not
applicable or available 

        Interest bearing accounts of associates relate to employee deposits in CHF from the compensation of associates employed by Swiss entities (actual interest rate: 1.25%). Other bank and financial debt refer to usual lending and overdraft facilities.


5.C Research & Development, Patents and Licenses

        Our R&D spending totaled $9.6 billion, $9.1 billion and $7.5 billion ($9.2 billion, $8.1 billion and $7.3 billion excluding impairments and amortization charges) for the years 2011, 2010 and 2009, respectively. Each of our divisions has its own R&D and patents policies. Our divisions have numerous products in various stages of development. For further information on these policies and these products in development, see "Item 4. Information on the Company—4.B Business Overview."

        As described in the "Risk Factors" section and elsewhere in this Form 20-F, our drug development efforts are subject to the risks and uncertainties inherent in any new drug development program. Due to the risks and uncertainties involved in progressing through pre-clinical development and clinical trials, and the time and cost involved in obtaining regulatory approvals, among other factors, we cannot reasonably estimate the timing, completion dates, and costs, or range of costs, of our drug development program, or of the development of any particular development compound, see "Item 3. Key Information—3.D Risk Factors." In addition, for a description of the research and development process for the development of new drugs and our other products, and the regulatory process for their approval, see "Item 4. Information on the Company—4.B Business Overview."

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5.D Trend Information

        On January 13, 2012, Novartis announced a plan to restructure Novartis Pharmaceuticals (NPC) in the US. This will result in the reduction of approximately 1,960 positions and result in an exceptional charge of approximately $160 million to be recorded in the first quarter of 2012.

        In addition, please see "—5.A Operating Results—Factors Affecting Results of Operations" and "Item 4, Information on the Company—4.B Business Overview" for trend information.


5.E Off-Balance Sheet Arrangements

        We have no unconsolidated special purpose financing or partnership entities or other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that is material to investors, see also "Item 18. Financial Statements—note 28" and matters described in "Item 5.F Aggregate Contractual Obligations".


5.F Aggregate Contractual Obligations

        We have long-term research agreements with various institutions which require us to fund various research projects in the future. As of December 31, 2011, the aggregate total amount of payments, including potential milestones, which may be required under these agreements, was $3.0 billion. We expect to fund these long-term research agreements with internally generated resources.

        As of December 31, 2011, our total financial debt was $20.2 billion, as compared with $23.0 billion as of December 31, 2010, and $14.0 billion as of December 31, 2009. Total financial debt in 2011 decreased compared to 2010 by $2.8 billion despite the funding of acquisitions and share repurchases. The increase from 2009 to 2010 of $9.0 billion was principally due to the issuance of new bonds and commercial papers.

        We have $13.5 billion of bonds and Medium Term Notes and other long-term financial loans of $1.1 billion outstanding at December 31, 2011. We had $13.5 billion and $8.6 billion of bonds and Medium Term Notes outstanding at December 31, 2010 and at December 31, 2009, respectively. We had $1.0 billion and $0.1 billion of other long-term financial loans outstanding at December 31, 2010 and at December 31, 2009, respectively. For details on the maturity profile of debt, currency and interest rate structure, see "Item 18. Financial Statements—note 19".

        As of December 31, 2011, we had current debt (excluding the current portion of non-current debt) of $5.6 billion as compared with $8.5 billion as of December 31, 2010, and $5.3 billion as of December 31, 2009. This current debt consists mainly of $3.4 billion (2010: $3.5 billion; 2009: $3.3 billion) in other bank and financial debt, including interest bearing employee accounts; $2.2 billion (2010: $5.0 billion; 2009: $1.9 billion) of commercial paper, and $30 million (2010: $44 million; 2009: $ 0.1 billion) of other current debt. For further details see "Item 18. Financial Statements—note 21".

        Our net debt increased to $15.2 billion at the end of 2011 from net debt of $14.9 billion at the end of 2010. This represents a net increase of $0.3 billion since December 31, 2010. The peak Novartis net debt amount of $22.7 billion was reached at the beginning of the second quarter of 2011. This has been repaid to the extent of $7.5 billion by the year end. At the end of 2009 our net liquidity amounted to $3.5 billion.

        Moody's rates Novartis at December 31, 2011 as Aa2 for long-term maturities and P-1 for short-term maturities and Standard & Poor's had a rating of AA- and A-1+, for long-term and short-term maturities, respectively. Fitch has a long-term rating of AA and a short-term rating of F1+.

        We are in compliance with all covenants or other requirements set forth in our financing agreements. We do not have any rating downgrade triggers that would accelerate maturity of our debt. For details of the maturity profile of debt, currency and interest rate structure, see "Item 18. Financial Statements—note 19".

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        The following table summarizes our contractual obligations and other commercial commitments at December 31, 2011 and the effect such obligations and commitments are expected to have on our liquidity and cash flow in future periods:

 
  Payments due by period  
 
  Total   Less than
1 year
  2-3 years   4-5 years   After
5 years
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Non-current financial debt

    14,633     778     4,818     5,056     3,981  

Operating leases

    3,036     355     445     233     2,003  

Unfunded pensions and other post-retirement obligations

    1,808     85     173     186     1,364  

Research & Development

                               

—Unconditional commitments

    343     105     126     81     31  

—Potential milestone commitments

    2,653     282     665     560     1,146  

Purchase commitments

                               

—Property, plant & equipment

    583     493     75     13     2  
                       

Total contractual cash obligations

    23,056     2,098     6,302     6,129     8,527  
                       

        We expect to fund the R&D and purchase commitments with internally generated resources.

        For other contingencies, see "Item 4. Information on the Company—4.D Property, Plants and Equipment—Environmental Matters", "Item 8. Financial Information—8.A Consolidated Statements and Other Financial Information" and "Item 18. Financial Statements—note 20".

Item 6.    Directors, Senior Management and Employees

Item 6.A    Directors and Senior Management

Board of Directors

Daniel Vasella, M.D.

        Function at Novartis AG Daniel Vasella, M.D., is Chairman of the Board of Directors for Novartis AG. He served as Chief Executive Officer (CEO) and executive member of the Board of Directors for 14 years following the merger that created Novartis in 1996. Dr. Vasella was appointed Chairman in April 1999.

        Other activities Dr. Vasella is a member of the board of directors of PepsiCo, Inc. He is also a member of the International Board of Governors of the Peres Center for Peace in Israel, the International Business Leaders Advisory Council for the Mayor of Shanghai, the Global Health Program Advisory Panel of the Bill & Melinda Gates Foundation, and is a foreign honorary member of the American Academy of Arts and Sciences. He is also a member of the Board of Trustees of the Carnegie Endowment for International Peace. In addition, Dr. Vasella serves as a member of several industry associations and educational institutions.

        Professional background Before the Novartis merger, Dr. Vasella was CEO of Sandoz Pharma Ltd. and a member of the Sandoz Group Executive Committee. From 1988 to 1992, he was with Sandoz Pharmaceuticals Corporation in the United States, prior to which he held a number of medical positions in Switzerland. He graduated with an M.D. from the University of Bern in Switzerland and completed executive training at the Harvard Business School in the United States. He was also awarded an honorary doctorate by the University of Basel.

        Key knowledge/experience Leadership, Biomedical Science and Global Marketing experience —former CEO of Novartis; advisory panel member for international health and development foundation. Industry experience—board member for global consumer goods company.

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Ulrich Lehner, Ph.D.

        Function at Novartis AG Ulrich Lehner, Ph.D., has been a member of the Board of Directors since 2002. He qualifies as an independent Non-Executive Director. He serves as Vice Chairman and Chairman of the Corporate Governance and Nomination Committee. He is also a member of the Audit and Compliance Committee, the Risk Committee, the Chairman's Committee, and the Compensation Committee. The Board of Directors has appointed him as Audit Committee Financial Expert.

        Other activities Mr. Lehner is member of the shareholders' committee of Henkel AG & Co. KGaA, Chairman of the Supervisory Board of Deutsche Telekom AG, and serves as a member of the supervisory boards of E.ON AG, ThyssenKrupp AG, Porsche Automobil Holding SE and Henkel Management AG, all in Germany. He is also a member of the shareholders' committee of Dr. August Oetker KG and Krombacher Brauerei, both in Germany.

        Professional background Mr. Lehner graduated in business administration and mechanical engineering from the Darmstadt University of Technology, Germany, in 1975. From 1975 to 1981, he was an auditor with KPMG Deutsche Treuhand-Gesellschaft AG in Duesseldorf. In 1981, he joined Henkel KGaA. After heading the Controlling Department of Fried. Krupp GmbH in Germany from 1983 to 1986, Mr. Lehner returned to Henkel as Finance Director. From 1991 to 1994, he headed Henkel Asia-Pacific Ltd. in Hong Kong, and from 1995 to 2000, he served as Executive Vice President, Finance/Logistics, of Henkel KGaA. From 2000 to 2008, Mr. Lehner served as Chairman of the Management Board of Henkel KGaA.

        Key knowledge/experience Leadership and Global experience—chairman of supervisory board of global telecommunication company; former chairman of the management board of global consumer goods company. Industry experience—member of supervisory boards of global energy, automotive and manufacturing technology companies.

William Brody, M.D., Ph.D.

        Function at Novartis AG William Brody, M.D., Ph.D., has been a member of the Board of Directors since 2009. He qualifies as an independent Non-Executive Director. He is a member of the Compensation Committee.

        Other activities Dr. Brody is President of the Salk Institute for Biological Studies, La Jolla, Calif., United States. He is also a member of the boards of directors of the US-based International Business Machines Corp. and Kool Smiles Inc., and the mutual funds boards of T. Rowe Price. He is a member of numerous professional associations, and also serves on the advisory boards of various government and nonprofit organizations.

        Professional background Dr. Brody earned his bachelor's and master's degrees in electrical engineering from the Massachusetts Institute of Technology before completing his M.D. and Ph.D. at Stanford University. Following training in cardiovascular surgery and radiology he held various academic positions, including Professor for Radiology and Electrical Engineering at Stanford University and Director of the Department of Radiology at The Johns Hopkins University. From 1996 to 2009, he was president of The Johns Hopkins University, and since 2009, president of the Salk Institute for Biological Studies in the United States. He is a member of the US National Academy of Engineering and the Institute of Medicine.

        Key knowledge/experience Leadership, Biomedical Science, Healthcare and Education experience —president of leading US scientific research institution; former president of leading US university. Global, Engineering and Technology experience—former board member of global technology company.

Srikant Datar, Ph.D.

        Function at Novartis AG Srikant Datar, Ph.D., has been a member of the Board of Directors since 2003. He qualifies as an independent Non-Executive Director. He is Chairman of the Audit and Compliance Committee, and a member of the Chairman's Committee, the Risk Committee and the Compensation Committee. The Board of Directors has appointed him as Audit Committee Financial Expert.

        Other activities Mr. Datar is Arthur Lowes Dickinson Professor at the Graduate School of Business Administration at Harvard University. He is also a member of the board of directors of ICF International Inc. and of Stryker Corp., both in the United States, and of KPIT Cummins Infosystems Ltd., India.

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        Professional background Mr. Datar graduated with distinction in mathematics and economics from the University of Bombay, India, in 1973. He is a Chartered Accountant, and holds two master's degrees and a Ph.D. from Stanford University. Mr. Datar has worked as an accountant and planner in industry, and as a professor at Carnegie Mellon University, Stanford University and Harvard University all in the United States. 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. Mr. Datar has advised and worked with numerous companies in research, development and training.

        Key knowledge/experience Leadership and Education experience—former senior associate dean and current professor of leading US university. Global and Industry experience—board member of global professional services firm; board member of global leading medical technology company; board member of Indian high-technology company.

Ann Fudge

        Function at Novartis AG Ann Fudge has been a member of the Board of Directors since 2008. She qualifies as an independent Non-Executive Director. She is a member of the Corporate Governance and Nomination Committee, and the Risk Committee.

        Other activities Ms. Fudge serves on the board of directors of General Electric Co., on the board of directors of Unilever, UK/Netherlands and on the board of directors of Infosys, India. She is a trustee of the New York-based Rockefeller Foundation and the Atlanta-based Morehouse College, and is chairman of the US Programs Advisory Panel of the Bill & Melinda Gates Foundation. Ms. Fudge is further a member of the Harvard University Corporation Committee on Finance. She also is on the board of the Council on Foreign Relations.

        Professional background Ms. Fudge received her bachelor's degree from Simmons College and her MBA from Harvard University Graduate School of Business in the United States. She is former chairman and CEO of Young & Rubicam Brands. Before that, she served as president of the Beverages, Desserts and Post Division of Kraft Foods Inc.

        Key knowledge/experience Leadership and Marketing experience—former chairman and CEO of global marketing communications company; former president of leading consumer products business unit. Global and Industry experience—board member of global technology company and global consumer goods company.

Pierre Landolt, Ph.D.

        Function at Novartis AG Pierre Landolt has been a member of the Board of Directors since 1996. He qualifies as an independent Non-Executive Director. He is a member of the Corporate Governance and Nomination Committee.

        Other activities Mr. Landolt is currently chairman of the Sandoz Family Foundation and oversees the development of the foundation in several investment fields. He is a member of the board of directors of Syngenta AG. He is a partner with unlimited liabilities of the Swiss private bank Landolt & Cie. In Brazil, Mr. Landolt serves as president of the Instituto Fazenda Tamanduá, the Instituto Estrela de Fomento ao Microcrédito, AxialPar Ltda. and Moco Agropecuaria Ltda. In Switzerland, he is chairman of Emasan AG and Vaucher Manufacture Fleurier SA, vice chairman of Parmigiani Fleurier SA, and is on the board of the Syngenta Foundation for Sustainable Agriculture. He is a member of the board of EcoCarbone SA, France, and Swiss Amazentis SA. He is also vice chairman of the Montreux Jazz Festival Foundation.

        Professional background Mr. Landolt graduated with a bachelor's degree in law from the University of Paris-Assas. From 1974 to 1976, he worked for Sandoz Brazil SA. In 1977, he acquired an agricultural estate in the semi-arid Northeast Region of Brazil and, over several years, converted it into a model farm in organic and biodynamic production. Since 1997, Mr. Landolt has been associate and chairman of AxialPar Ltda., Brazil, an investment company focused on sustainable development. In 2000, he co-founded EcoCarbone SA, France, a company active in the design and development of carbon-sequestration processes. In 2007, he co-founded Amazentis SA, Switzerland, a startup company active in the convergence space of medication and nutrition.

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        Key knowledge/experience Banking and Industry experience; International and Emerging Market experience——partner of private bank; chairman and vice chairman of luxury goods companies. Leadership and Global experience—President of large family investment holding; board member of global agribusiness company; board member of sustainable agriculture foundation.

Enrico Vanni, Ph.D.

        Function at Novartis AG Enrico Vanni, Ph.D., has been a member of the Board of Directors since 2011. He qualifies as an independent Non-Executive Director. He is a member of the Audit and Compliance Committee, and the Compensation Committee.

        Other activities Since his retirement as director of McKinsey & Company in 2007, Mr. Vanni has been an independent consultant. He is currently a member of several boards of directors in industries from healthcare to private banking, for nonlisted companies including Eclosion2, Denzler & Partners SA and Banque Privée BCP (Suisse) SA.

        Professional background Mr. Vanni holds an engineering degree in chemistry from the Federal Polytechnic School of Lausanne, Switzerland, a Ph.D. in chemistry from the University of Lausanne, as well as a Master of Business Administration from INSEAD in Fontainebleau, France. He began his career as a research engineer at International Business Machines Corp. in California, and joined McKinsey & Company in Zurich, Switzerland, in 1980. He managed the Geneva office for McKinsey from 1988 to 2004, and consulted for companies in the pharmaceutical, consumer and finance sectors. He led the company's European pharmaceutical practice and served as member of the Partner review committee of the firm prior to his retirement in 2007. As an independent consultant, Mr. Vanni has continued to support leaders of pharmaceutical and biotechnology companies on core strategic challenges facing the healthcare industry.

        Key knowledge/experience, Global industry experience—senior consultant of global pharmaceutical/biotech companies, consumer goods and financial institutions. Science experience—research engineer in technology company and management of projects in global pharmaceutical R&D. Leadership experience—office management of global consultant company and leadership of its European pharmaceutical practice.

Andreas von Planta, Ph.D.

        Function at Novartis AG Andreas von Planta, Ph.D., has been a member of the Board of Directors since 2006. He qualifies as an independent Non-Executive Director. He is Chairman of the Risk Committee, and a member of the Audit and Compliance Committee, as well as the Corporate Governance and Nomination Committee.

        Other activities Mr. von Planta is chairman of the Schweizerische National-Versicherungs-Gesellschaft AG and a board member of Holcim Ltd., both in Switzerland. He is also a board member of various Swiss subsidiaries of foreign companies and other nonlisted Swiss companies. He is a member of the Board of Editors of the Swiss Review of Business Law and is a former chairman of the Geneva Association of Business Law. Mr. von Planta is chairman of the regulatory board of the SIX Swiss Exchange AG.

        Professional background Mr. von Planta holds lic. iur. and Ph.D. degrees from the University of Basel, Switzerland, and an LL.M. from Columbia University School of Law, New York, United States. He passed his bar examinations in Basel in 1982. Since 1983 he has lived in Geneva and worked for the law firm Lenz & Staehelin, where he became a partner in 1988. His areas of specialization include corporate law, corporate governance, corporate finance, company reorganizations, and mergers and acquisitions.

        Key knowledge/experience Leadership and Global experience—chairman of insurance company; board member of global construction materials manufacturer. Industry experience—partner of leading Swiss law firm.

Dr. Ing. Wendelin Wiedeking

        Function at Novartis AG Dr. Ing. Wendelin Wiedeking has been a member of the Board of Directors since 2003. He qualifies as an independent Non-Executive Director. He is a member of the Audit and Compliance Committee, and the Risk Committee.

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        Other activities Mr. Wiedeking was chairman of the executive board of Porsche Automobil Holding SE and of Dr. Ing. h.c. F. Porsche AG, both in Germany, until July 2009. Since then he has been an entrepreneur.

        Professional background Mr. Wiedeking graduated in mechanical engineering in 1978 and worked as a scientific assistant in the machine tool laboratory of the Rhine-Westphalian College of Advanced Technology in Germany. His professional career began in 1983 in Germany 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 Glyco Metall-Werke KG in Wiesbaden as Division Manager, where he advanced by 1990 to the position of Chief Executive Officer and Chairman of the Board of Management of Glyco AG. In 1991, he returned to Dr. Ing. h.c. F. Porsche AG as production director. A year later, the supervisory board appointed him spokesman of the executive board (CEO), then chairman in 1993.

        Key knowledge/experience Leadership, Global and Industry experience—former chairman and CEO of global automotive company. Engineering and Technology experience—former chairman and CEO of manufacturing supply company.

Marjorie Mun Tak Yang

        Function at Novartis AG Marjorie Mun Tak Yang has been a member of the Board of Directors since 2008. She qualifies as an independent Non-Executive Director. She is Chairman of the Compensation Committee.

        Other activities Ms. Yang is Chairman of the Esquel Group, Hong Kong, China. She is a member of the Executive Council of the Hong Kong Special Administrative Region. In China, she is a member of the National Committee of the Chinese People's Political Consultative Conference. She currently serves on the boards of Swire Pacific Ltd., and The Hong Kong and Shanghai Banking Corp. Ltd. in Hong Kong, and on the boards of a number of nonlisted companies. In January 2010 she was appointed as Chairman of the Council of the Hong Kong Polytechnic University. She also serves on the advisory boards of Harvard Business School, and Tsinghua School of Economics and Management. From 2001 to 2011, Ms. Yang was a member of the MIT Corp.

        Professional background Ms. Yang graduated with a bachelor's degree in mathematics from Massachusetts Institute of Technology and holds a master's degree from Harvard Business School, both in the United States. From 1976 to 1978, she was an associate in Corporate Finance, Mergers and Acquisitions, with the First Boston Corporation in New York, United States. In 1979, she returned to Hong Kong and became a founding member of Esquel Group. She was appointed chairman of the Group in 1995.

        Key knowledge/experience Leadership, Global and Industry experience—chairman of global textile manufacturing company. Education and Science experience—trustee of leading US research university; leadership roles at multiple universities.

Rolf M. Zinkernagel, M.D.

        Function at Novartis AG Rolf M. Zinkernagel, M.D., has been a member of the Board of Directors since 1999. He qualifies as an independent Non-Executive Director. He is a member of the Corporate Governance and Nomination Committee.

        Other activities Dr. Zinkernagel was Vice President of the International Union of Immunological Societies until 2010. He is a member of the scientific advisory boards of Bio-Alliance AG, Germany; Aravis General Partner Ltd., Cayman Islands and Switzerland; Telormedix, Switzerland; X-Biotech, Canada; Novimmune, Switzerland; Cancevir, Switzerland; Nuvo Research Inc., Canada; ImVision, Germany; MannKind, United States; and Biomedical Sciences International Advisory Council, Singapore. Dr. Zinkernagel is also a science consultant to Chilka Ltd., Cayman Islands; Ganymed, Germany; and Zhen-Ao Group, China. He is a member of the scientific advisory panel of Swiss Re, Switzerland.

        Professional background Dr. Zinkernagel graduated from the University of Basel, Switzerland, with an M.D. in 1970. From 1992 to 2008, he was a professor and director of the Institute of Experimental Immunology at the University of Zurich, and after retirement in 2008 continues to be active at the University of Zurich. Dr. Zinkernagel has received many awards and prizes for his work and contribution to science, notably the Nobel Prize in medicine, which he was awarded in 1996.

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        Key knowledge/experience Biomedical Science and Education experience—former professor and director at leading Swiss university. Leadership and Global experience member of scientific advisory boards of numerous global biotech companies; member of major international research councils.

        From left to right: Juergen Brokatzky-Geiger, Naomi Kelman, Joseph Jimenez, Andrin Oswald, Mark C. Fishman, Felix R. Ehrat, George Gunn, Jonathan Symonds, Kevin Buehler, Jeff George, David Epstein.


Members of the Executive Committee

Joseph Jimenez

        Joseph Jimenez has been Chief Executive Officer (CEO) of Novartis since 2010. Mr. Jimenez is responsible for leading the company's diversified healthcare portfolio of leading businesses in innovative pharmaceuticals, eye care, generics, vaccines and diagnostics, OTC and animal health. Previously Mr. Jimenez served as Division Head, Novartis Pharmaceuticals. He led the transformation of the pharmaceutical portfolio to balance mass market and specialty products, and significantly increased the percentage of sales from newly launched products. Mr. Jimenez also worked to realign the division's commercial approach to focus on the individual needs of customers, and incorporated more technological tools to better connect with patients and customers. Mr. Jimenez joined Novartis in April 2007 as Division Head, Novartis Consumer Health. Previously, he served as president and CEO of the North America business for the H.J. Heinz Co., and as president and CEO of Heinz in Europe from 2002 to 2006. Prior to joining Novartis, he was a nonexecutive director of AstraZeneca PLC, United Kingdom, from 2002 to 2007. He was also an advisor for the private equity organization Blackstone Group in the United States. Mr. Jimenez is a member of the board of directors of Colgate-Palmolive Co. He graduated in 1982 with a bachelor's degree from Stanford University and in 1984 with a Master of Business Administration from the University of California, Berkeley.

Juergen Brokatzky-Geiger, Ph.D.

        Juergen Brokatzky-Geiger, Ph.D., has been Head of Human Resources of Novartis since 2003. He is a member of the Executive Committee of Novartis. Mr. Brokatzky-Geiger joined Ciba-Geigy Ltd. in 1983 as a laboratory head in the Pharmaceuticals Division in Switzerland. After a job rotation in the United States, he held positions of increasing responsibility in Research and Development (R&D), including Group Leader of Process R&D, Head of Process R&D, and Head of Process Development and Pilot Plant Operations. During the merger of Ciba-Geigy and Sandoz in 1996, Mr. Brokatzky-Geiger was appointed Integration Officer of Technical Operations. He later became the Head of Chemical and Analytical Development, and served as the Global Head of Technical R&D from 1999 to 2003. Mr. Brokatzky-Geiger is a member of the board of Bachem AG. Mr. Brokatzky-Geiger graduated with a Ph.D. in chemistry from the University of Freiburg, Germany, in 1982.

Kevin Buehler

        Kevin Buehler has been Division Head, Alcon, since April 2011. He is a member of the Executive Committee of Novartis. Mr. Buehler was president and chief executive officer of Alcon Inc. from 2009 to 2011. He began his career with Alcon in 1984 as a regional sales manager in the Consumer Products Division, and held positions of increasing responsibility before being named director of sales and marketing. In 1996, he became director of Alcon's US Managed Care and Falcon Generic Pharmaceutical groups, and became vice president in 1998. The following year he returned to the US Consumer Products Division as vice president and general manager. Mr. Buehler moved to the International Division in 2002 as vice president and regional manager, Latin America and Caribbean. He was later named area vice president, Latin America, Canada, Australia and Far East. Mr. Buehler also served as senior vice president, global markets, and chief marketing officer. Prior to joining Alcon, he worked for The Gillette Co. and Snyder Drug Stores. Mr. Buehler holds a Bachelor of Science degree from Carroll University in Waukesha, Wis., in the United States, with concentrations in business administration and political science. He completed the Harvard Program for Management Development in 1993.

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Felix R. Ehrat, Ph.D.

        Felix R. Ehrat, Ph.D., has been Group General Counsel and a permanent attendee of the Executive Committee of Novartis since October 2011. As of January 1, 2012, he is a full member of the Executive Committee. Mr. Ehrat is a leading practitioner of corporate, banking, and mergers and acquisitions law, as well as an expert in corporate governance and arbitration. He started his career as an associate with Baer & Karrer Ltd. in Zurich in 1987, became partner in 1992, and advanced to senior partner (2003 to 2011) and executive chairman of the board (2007 to 2011) of the firm. Mr. Ehrat is chairman of Globalance Bank AG in Switzerland, and a member of the board of Liechtensteinische Landesbank AG in Liechtenstein. Previously, Mr. Ehrat was chairman of Banca del Gottardo, and a board member of Julius Baer Holding AG, Austriamicrosystems AG, Charles Voegele Holding AG, and Carlo Gavazzi Holding AG. Mr. Ehrat was admitted to the Zurich bar in 1985 and received his doctorate of law from the University of Zurich in 1990. In 1986, he completed an LL.M. at McGeorge School of Law in the United States. His past memberships and positions include: the International Bar Association, where he was co-chair of the Committee on Corporate and M&A Law from 2007 to 2008; Association Internationale des Jeunes Avocats, where he was president from 1998 to 1999; and the Swiss Arbitration Association, the Zurich Bar Association, and the Swiss Bar Association.

David Epstein

        David Epstein has been Division Head, Novartis Pharmaceuticals, since 2010. He also is responsible for Group Emerging Markets, a group of selected countries with integrated divisional businesses. He is a member of the Executive Committee of Novartis. Prior to his current appointment, Mr. Epstein served as Head of Novartis Oncology for nearly 10 years. In addition, Mr. Epstein led the Molecular Diagnostics Unit since its creation in 2008. Before joining Novartis, Mr. Epstein was an associate in the strategy practice of the consulting firm Booz Allen Hamilton Inc. in the United States. Mr. Epstein joined Sandoz, a predecessor company of Novartis, in 1989, and held various leadership positions of increasing responsibility for the company, including Chief Operating Officer of Novartis Pharmaceuticals Corporation in the United States and Head of Novartis Specialty Medicines. Mr. Epstein graduated with a bachelor's degree in pharmacy from Rutgers University College of Pharmacy in 1984, and with a Master of Business Administration in finance and marketing from New York's Columbia University Graduate School of Business in 1987.

Mark C. Fishman, M.D.

        Mark C. Fishman, M.D., has been President of the Novartis Institutes for BioMedical Research (NIBR) since 2002. He is a member of the Executive Committee of Novartis. Before joining Novartis in 2002, Dr. Fishman was chief of cardiology and director of the Cardiovascular Research Center at Massachusetts General Hospital, and was professor of medicine at Harvard Medical School, both in the United States. Dr. Fishman completed his internal medicine residency, chief residency and cardiology training at Massachusetts General Hospital. Dr. Fishman graduated with a bachelor's degree from Yale College in 1972 and an M.D. from Harvard Medical School in 1976. He has been honored with many awards and distinguished lectureships, and is a member of the Institute of Medicine of the National Academies and a Fellow of the American Academy of Arts and Sciences, both in the United States.

Jeff George

        Jeff George has been Division Head, Sandoz, since 2008. He is a member of the Executive Committee of Novartis. Mr. George joined the Vaccines and Diagnostics Division of Novartis in 2007 as Head of Commercial Operations for Western and Eastern Europe. He then advanced to Head of Emerging Markets for the Middle East, Africa, Southeast Asia and CIS at Novartis Pharmaceuticals. Before joining Novartis, Mr. George was a Senior Director of Strategy and Business Development at Gap Inc., San Francisco, United States. From 2001 to 2004, he was an Engagement Manager with McKinsey & Company, also in San Francisco. Mr. George received a Master of Business Administration from Harvard University in 2001. He graduated in 1999 with a master's degree from The Johns Hopkins University's School of Advanced International Studies, where he studied international

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economics and emerging markets political economy. In 1996, he received his bachelor's degree in international relations from Carleton College in Northfield, Minn., in the United States.

George Gunn, MRCVS

        George Gunn has been Division Head, Novartis Animal Health, and Head, Corporate Responsibility, since March 2011. He is a member of the Executive Committee of Novartis. Before joining Novartis, Mr. Gunn was president of Pharmacia Animal Health, based in the United States. Previously, he spent more than 15 years in positions of increasing responsibility in healthcare companies. He worked as a veterinary surgeon for nine years before joining the industry. Mr. Gunn joined Novartis in 2003 as Head of Novartis Animal Health, North America. In January 2004, he assumed his position as Head of the Animal Health Business Unit. In addition to this role, he was Division Head, Novartis Consumer Health, from 2008 to 2011. Mr. Gunn graduated with a bachelor of veterinary medicine and surgery degree from the Royal (Dick) School of Veterinary Studies in the United Kingdom in 1973. He graduated with a diploma in veterinary state medicine from the same school in 1978. In 2008, he received an honorary doctorate in veterinary medicine and surgery from the University of Edinburgh.

Naomi Kelman

        Naomi Kelman has been Division Head, Novartis OTC and a permanent attendee of the Executive Committee of Novartis since March 2011. As of January 1, 2012, she is a full member of the Executive Committee. Before joining Novartis, Ms. Kelman was president of LifeScan North America, part of the Johnson & Johnson Diabetes Care Franchise. Ms. Kelman joined Johnson & Johnson in 2000, and held several leadership roles within the Consumer as well as the Medical Device and Diagnostic sectors. She also was president of Johnson & Johnson Vision Care for the Americas. Prior to joining Johnson & Johnson, Ms. Kelman held positions of increasing responsibility at Bristol-Myers Squibb Co. in the Clairol Division, and oversaw expansion of some of the company's biggest consumer brands into the Europe, Middle East and Africa regions. Ms. Kelman also was managing director of the Matrix Essentials business for Europe and then vice president of marketing for the worldwide Matrix Essentials business. Prior to her time at Bristol-Myers Squibb, she worked in Finance at American Express Co. Ms. Kelman received both her bachelor's and Master of Business Administration degrees from Cornell University in the United States.

Andrin Oswald, M.D.

        Andrin Oswald, M.D., has been Division Head, Novartis Vaccines and Diagnostics, since 2008. He is a member of the Executive Committee of Novartis. Previously, Dr. Oswald was Chief Executive Officer (CEO) of Speedel Holding AG and Global Head of Pharmaceutical Development Franchises in the Novartis Pharmaceuticals Division, both in Switzerland. Dr. Oswald joined Novartis in 2005 as Assistant to the Chairman and CEO. Before his appointment as Head of Development Franchises, he served as Head of the Country Pharmaceuticals Organization (CPO) and Country President for Novartis in South Korea. Dr. Oswald joined Novartis from McKinsey & Company, Switzerland, where he was an associate principal. Between 2002 and 2003, he was a delegate of the International Committee of the Red Cross (ICRC) to Nepal. He holds a doctorate in medicine from the University of Geneva.

Jonathan Symonds

        Jonathan Symonds has been Chief Financial Officer (CFO) of Novartis since 2010. He is a member of the Executive Committee of Novartis. Before joining Novartis in 2009, Mr. Symonds was partner and managing director of Goldman Sachs Group Inc. in the United Kingdom. He also has eight years of experience as CFO of AstraZeneca PLC, and previously held positions as Group Finance Director at Zeneca and partner at KPMG. From 2004 to 2007, Mr. Symonds was a director of Diageo PLC and chairman of the audit committee. Other previous roles include director and audit committee chairman of Qinetiq PLC, chairman of the 100 Group of Finance Directors, joint chairman of the Business Tax Forum, board member of the Accounting Standards Board, and founder of the Oxford University Centre for Business Taxation Research, all in the United Kingdom. Mr. Symonds graduated with a first class degree in business finance from the University of Hertfordshire, United Kingdom, in 1980, and became a Fellow of Chartered Accountants in 1982. He is a Commander of the British Empire (CBE).

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6.B    Compensation

2011 COMPENSATION REPORT

        We seek to constantly innovate, to discover and develop important new medicines and vaccines, and to market them successfully to our customers. We abide by regulatory and legal requirements and operate in an ethical and transparent manner. The health benefits we offer to our consumers are our primary concern, and we put their health and safety ahead of any financial considerations. These values are embedded in the way we hire, train and compensate our employees throughout Novartis. Our compensation programs reinforce employee performance that is consistent with our purpose and aspirations and discourage behavior that is inconsistent with our values and expectations.

        We consider excellent performance central to the way we do business. Best-in-class innovation helps patients and creates sustainable returns and long-term value, which in turn allow us to adequately reward our employees and shareholders, and pay taxes. Our compensation system incentivizes our organization to thrive and perform in the short and long-term without taking imprudent or unreasonable risks. Yet, the business environment ahead of us will become even more challenging. The healthcare industry is currently facing a number of critical challenges, such as the uncertainties surrounding the global debt crisis, recent substantial regulatory changes and price cuts. Simultaneously, global competition in the healthcare industry and the pressure for realizing efficiencies are increasing even further.

        We are convinced that the best answer to these challenges is to focus on our primary purpose and core values and to invest to continuously deliver innovative or best price solutions for patients and customers. This also requires an increasing attention to our business efficiency and cost effectiveness. A compensation system that allows Novartis to attract the best-in-class talent and motivates associates to perform to their full potential is critical for sustainable value creation, ethical business behavior and appropriate risk taking. It also aligns the interests of our employees with those of our shareholders and stakeholders.

        We intend to keep our compensation system at a state-of-the-art level and to maintain a dialogue with our stakeholders. As a result, we regularly review our compensation system, taking into account the interests and feedback of our stakeholders. This entails trade-offs, as frequent changes of the compensation system create confusion internally and externally. In our experience it takes 3 to 5 years until a large organization as ours fully understands and aligns behind a new approach.

        At the 2011 Annual General Meeting, Novartis shareholders were invited to express their views on our compensation system through a consultative vote (a so-called "say on pay" vote). A majority of Novartis shareholders supported our current compensation system. We also had an opportunity to collect valuable remarks and comments in relation to our compensation system. In addition, management met with our stakeholders to engage in a fruitful dialogue after the 2011 Annual General Meeting.

        On the basis of the preparatory work done by the Compensation Committee and the Corporate Governance and Nomination Committee, the Board of Directors noted and thoroughly analyzed the comments made by our shareholders in relation to the 2010 Compensation Report, with a view to identifying potential enhancements to the design, operation and disclosure of our compensation system. As a result, we have decided to further promote the long-term orientation, transparency and governance of our compensation system by taking the following steps:

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        The Board of Directors believes that the compensation system is appropriate for Novartis given the Company's objectives. Moreover, the Compensation Committee confirms that Novartis compensation plans for all associates (including for the Chief Executive Officer and Executive Committee members) are aligned with the healthcare industry practice.

The Members of the Compensation Committee

        For further information on the Compensation Committee organization and responsibilities, see Corporate Governance Report—Our Board of Directors—Role of the Board of Directors and the Board Committees—The Compensation Committee.


COMPENSATION OF THE BOARD OF DIRECTORS

Philosophy for the Board of Directors compensation

        Today, the members of boards of directors of global companies face increasing responsibilities and have to deal with issues that require ever higher levels of expertise and engagement. As a global healthcare company, Novartis has appointed members of the Board of Directors who bring these required skills. Novartis has set the compensation for the members of the Board of Directors at a level that allows for the attraction and retention of high-caliber members. The members of its Board of Directors do not receive variable compensation, underscoring their focus on long-term corporate strategy, supervision and governance.

Compensation Structure
  Board
compensation

Fixed compensation

  Yes

Variable compensation

  No


Compensation of the Members of the Board of Directors

        The Board of Directors determines the compensation of its members each year, based on a proposal by the Compensation Committee.

        The compensation of the Chairman is based on a contract, which provides for Dr. Daniel Vasella a fixed remuneration of CHF 12.2 million, indexed to the average compensation increase for associates based in Switzerland. One third of his total compensation is paid out in monthly cash installments; the remaining two-thirds are in the form of unrestricted Novartis shares that are granted to him each year at the closing market price of the underlying share at the end of the day at grant date, in 2011 on January 19, 2011. Following his term as Chairman, Dr. Vasella agreed to continue to make available his know-how to Novartis and to refrain from activities that compete with any business of Novartis for a multi-year period. Dr. Vasella will receive fair market compensation in return for his services and for complying with the restriction not to compete. Dr. Vasella carries forward tradable options, shares and benefits (including pension) as a result of his 14-year tenure as CEO of Novartis. In his current capacity he receives no variable compensation, tradable options or equity other than the shares that are part of his retainer as Chairman.

        The other members of the Board of Directors receive an annual fixed Board membership fee and additional fees for committee chairmanships, committee memberships, and other functions to compensate for their increased responsibilities and engagements. They do not receive additional fees for attending meetings. With the exception of the Chairman, the members of the Board of Directors can choose to receive their fees in cash, shares, or a combination of both and they receive neither share options nor pension benefits.

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        The fee rates for Board membership and functional roles of other members of the Board of Directors are as follows:


Board Member Annual Fee Rates (Excl. Chairman)

 
  Annual fee
(CHF)
 

Board membership

    350,000  

Vice Chairman

    350,000  

Board Committee chairmanship

    10,000  

Chairman's Committee membership

    150,000  

Audit and Compliance Committee membership

    100,000  

Risk Committee membership

    50,000  

Compensation Committee membership

    50,000  

Corporate Governance and Nomination Committee membership

    50,000  

Delegated board membership(1)

    125,000  

(1)
The Board of Directors has delegated Rolf M. Zinkernagel to the Scientific Advisory Board of the Novartis Institute for Tropical Diseases (NITD). The Board of Directors has delegated both Rolf M. Zinkernagel and William Brody to the Board of Directors of the Genomics Institute of the Novartis Research Foundation (GNF).


Benchmark

        The level of pay for the members of the Board of Directors is set based on benchmarks that include the remuneration of members of board of directors of comparable healthcare companies (see also "—Compensation of Executives and Other Associates—Competitive Positioning," below) and selected leading Swiss companies (i.e. UBS, Nestlé and Credit Suisse).

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Board Member Compensation in 2011(1)

 
  Board
member-
ship
  Vice
Chairman
  Chairman's
Committee
  Audit and
Compliance
Committee
  Risk
Committee
  Compensa-
tion
Committee
  Corporate
Governance
and
Nomination
Committee
  Delegated
board
membership
  Annual
cash
compensa-
tion
(CHF)
(A)
  Shares
(Market
value)
(CHF)(2)
(B)
  Shares
(Number)
  Shares
(Tax
value)(3)
  Other
(CHF)
(C)
  Total
(CHF)
(A)+(B)+(C)
 

Daniel Vasella

    Chair           Chair     (4)   (4)   (4)   (4)         4,060,004     8,786,735 (5)   160,635 (5)   4,906,425 (5)   654,207 (6)   13,500,946 (8)

Ulrich Lehner

                            Chair           1,110,000                 62,650 (7)   1,172,650  

William Brody(9)

                                              229,688     295,325     5,399     295,325         525,013  

Srikant Datar

                  Chair                         550,250     159,779     2,921     159,779         710,029  

Ann Fudge

                                              450,000                     450,000  

Pierre Landolt(10

                                                106,000     294,013     5,375     294,013     24,177 (7)   424,190  

Enrico Vanni

                                              425,000     75,048     1,372     75,048     29,404 (7)   529,452 (8)

Andreas von Planta

                        Chair                     448,000     112,026     2,048     83,712     32,685 (7)   592,711  

Wendelin Wiedeking

                                              132,500     367,529     6,719     367,529     30,965 (7)   530,994  

Marjorie M.T. Yang

                                Chair                 410,000                 24,719 (7)   434,719  

Rolf M. Zinkernagel(11)

                                                  650,000     11,883     650,000     34,381 (7)   684,381  
                                                                           

Total(12)

                                                    7,921,442     10,740,454     196,352     6,831,831     893,188     19,555,084  
                                                                           

(1)
Does not include reimbursement for travel and other necessary business expenses incurred in the performance of their services as these are not compensation.

(2)
The value of the shares reflected in this column has been calculated based on market value of the shares at grant date. All shares were granted as per January 19, 2011 against the prevailing share price of CHF 54.70.

(3)
A Board member who is tax resident in Switzerland can voluntarily choose to block the shares. In 2011 Daniel Vasella blocked his shares for ten years and Andreas von Planta for five years. The value of the shares reflected in this column has been calculated using the tax value methodology described under—2011 Compensation of the Executive Committee Members—Compensation in 2011—Valuation Principles.

(4)
Daniel Vasella attended the meetings of these Committees as a guest without voting rights.

(5)
Includes 12,188 shares paid in 2011 related to the grant of 2010.

(6)
Includes social security costs due by the individual and paid by the company, pension and life insurance.

(7)
Includes social security costs due by the individual and paid by the company.

(8)
Does not include Board member compensation granted by Alcon, Inc. until April 8, 2011.

(9)
The Board of Directors has delegated William Brody to the Board of Directors of the Genomics Institute of the Novartis Research Foundation (GNF).

(10)
According to Pierre Landolt, the Sandoz Family Foundation is the economic beneficiary of the compensation.

(11)
The Board of Directors has delegated Rolf M. Zinkernagel to the Scientific Advisory Board of the Novartis Institute for Tropical Diseases (NITD) and to the Board of Directors of the Genomics Institute of the Novartis Research Foundation (GNF).

(12)
Alexandre F. Jetzer-Chung and Hans-Jörg Rudloff were members of the Board of Directors until February 22, 2011. Their compensation was reported in the 2010 Annual Report.

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Shares and share Options owned by members of the board of directors

        Shareholders want Board members to align their interests with the rest of the shareholders. Among other requirements, the members of the Board of Directors are thus required to own at least 5000 Novartis shares within three years after joining the Board of Directors. As of December 31, 2011, all members of the Board of Directors who have served at least three years on the Board of Directors have complied with the share ownership guidelines.

        The last year in which Novartis granted share options to non-executive members of the Board of Directors was 2002. The total number of vested and unvested Novartis shares and share options owned by members of the Board of Directors and "persons closely linked"(1) to them as of January 19, 2012, is shown in the following tables.

        As of January 19, 2012, none of the members of the Board of Directors together with "persons closely linked"* to them owned 1% or more of the outstanding shares of Novartis, either directly or through share options.


*
"Persons closely linked" are (i) their spouse, (ii) their children below age 18, (iii) any legal entities that they own or otherwise control, and (iv) any legal or natural person who is acting as their fiduciary.


Shares Owned by Board Members

 
  Number
of shares(1, 2)
 

Daniel Vasella

    3,306,730  

Ulrich Lehner

    22,193  

William Brody

    10,532  

Srikant Datar

    20,263  

Ann Fudge

    7,008  

Pierre Landolt(3)

    40,442  

Enrico Vanni

    4,839  

Andreas von Planta

    111,628  

Wendelin Wiedeking

    40,901  

Marjorie M.T. Yang

    18,000  

Rolf M. Zinkernagel

    34,683  
       

Total(4)

    3,617,219  
       

(1)
Includes holdings of "persons closely linked" to Board members (see definition under—Share and Share Options by Members of the Board of Directors).

(2)
Each share provides entitlement to one vote.

(3)
According to Pierre Landolt, the Sandoz Family Foundation is the economic beneficiary of all shares.

(4)
Alexandre F. Jetzer-Chung and Hans-Jörg Rudloff were members of the Board of Directors until February 22, 2011. Their holdings were reported in the 2010 Annual Report.

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Share Options Owned by Board Members

 
  Number of
share options(1)
 

Daniel Vasella

    2,433,290 (2)

Ulrich Lehner

       

William Brody

       

Srikant Datar

       

Ann Fudge

       

Pierre Landolt

       

Enrico Vanni

       

Andreas von Planta

       

Wendelin Wiedeking

       

Marjorie M.T. Yang

       

Rolf M. Zinkernagel

       
       

Total(3)

    2,433,290  
       

(1)
Includes holdings of "persons closely linked" to Board members (see definition under—Share Ownership—Ownership Guidelines). The last year in which Novartis granted share options to non-executive Board members was in 2002. All these options have expired in 2011.

(2)
Includes options awarded during Daniel Vasella's tenure as Chairman and CEO.

(3)
Alexandre F. Jetzer-Chung and Hans-Jörg Rudloff were members of the Board of Directors until February 22, 2011. Their holdings were reported in the 2010 Annual Report.


Loans and other payments to members of the Board of Directors

Loans to members of the Board of Directors

        No loans were granted to current or former members of the Board of Directors during 2011. No such loans were outstanding as of December 31, 2011.

Other payments to members of the Board of Directors

        During 2011, no payments (or waivers of claims) other than those set out in the Board Member Compensation table (see "—Compensation of the Board of Directors—Board Member Compensation in 2011," above) were made to current members of the Board of Directors or to "persons closely linked" to them (see definition under "—Compensation of the Board of Directors—Shares and Share Options Owned by Members of the Board of Directors," above).

Payments to former members of the Board of Directors

        During 2011, no payments (or waivers of claims) were made to former Board members or to "persons closely linked" to them (see definition under "Compensation of the Board of Directors—Shares and Share Options Owned by Members of the Board of Directors"), except for an amount of CHF 62,346 that was paid to the Honorary Chairman and for social security arrears of CHF 1,129 that were paid in favor of a former member of the Board of Directors.


COMPENSATION OF EXECUTIVES AND OTHER ASSOCIATES

Philosophy, goals and compensation principles

Philosophy and Goals

        Since Novartis was created, management has forged a distinctive culture and inspired all associates with the shared aspiration of being one of the world's most respected healthcare companies. In order to realize this vision, Novartis must attract and retain the best-in-class talents worldwide and reward associates according to their performance.

        Our compensation system aims to foster personal accountability based on clear individual and organizational objectives, and also underlines the importance of competence and integrity as drivers of sustainable business success. Consequently, compensation includes, in addition to a fixed base compensation and benefits, a significant

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variable compensation element. The size of the variable compensation element is based on Group or divisional results and on individual performance against a written set of objectives. Moreover, to further align our compensation programs with the interests of shareholders, a large proportion of variable compensation for executives is paid in the form of equity—Novartis shares (or similar equity instruments) or share options with a three-year vesting period.

        The core principles of our compensation policy and people development have resulted in both sustained performance and superior leadership. Novartis has reported record net sales and net income—and raised the annual dividend payout to shareholders—for 15 consecutive years.

Compensation principles

        The compensation system for Novartis associates is based on the following five principles:

GRAPHIC

Principle I: Pay for Performance

        Compensation of executives and associates is strongly linked to achievements of business and individual performance objectives. The objectives are set at ambitious levels each year to motivate a high degree of business performance with emphasis on short- and long-term quantifiable objectives. Appropriate objective setting, combined with proper incentive plan design and a balance between annual and long-term variable compensation, allows our leaders and associates to focus on shaping the future, rather than simply maximizing short-term profits.

Principle II: Competitive Compensation

        Compensation opportunities at competitive levels are essential to attract and retain talented and diverse associates. Our target compensation levels reflect total compensation for comparable positions at relevant benchmark companies.

Principle III: Balanced Rewards to Create Sustainable Value

        Shareholders expect their investment to deliver sustainable returns while ensuring that risks are appropriately managed. Novartis incentives underpin the long-term strategic planning that is essential to address the challenges of innovation and the long development and commercialization cycles that characterize our industry. We believe that the way in which we motivate and reward our associates encourages performance, loyalty and entrepreneurship, and creates sustainable value which is in the long-term interest of our shareholders, employees and communities.

Principle IV: Business Ethics

        At Novartis, all associates are expected to achieve their business results through ethical practices, reflected also in our Code of Conduct. To ensure that these requirements are complied with, Novartis has implemented a number of safeguards, such as a stringent risk management policy and clawback provisions, for most compensation plans and for the majority of associates.

Principle V: Equity Ownership

        Investors expect the leaders of the companies they invest in to act like owners. In the Board of Directors' view, that alignment works best when key executives have meaningful multiples of their base compensation invested in the equity of their company. Novartis grants equity compensation, which for the most senior executives represents a substantial portion of total compensation. Under this principle, Novartis sets share ownership guidelines for a number of key executives of the Group.


Performance Evaluation system

        To foster a high performance culture, Novartis applies a uniform People Performance Management process worldwide, based on quantitative and qualitative criteria, including Novartis Values and Behaviors. Novartis associates, including the CEO and Executive Committee members, are subject to a three-tier formal process:

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GRAPHIC

Objective Setting

Objective setting for the CEO

        At the beginning of a business year, the Chairman meets with the CEO to discuss his objectives for the coming year following a balanced scorecard approach. The Board of Directors reviews and approves these objectives and ensures that they are in line with the Group's goals of fostering sustainable performance, balancing short- and long-term goals, and not rewarding inappropriate or excessive risk taking at the expense of the Group's health.

        The financial criteria for short-term performance appraisal of the CEO typically include growth objectives for net sales, operating income, net income, free cash-flow and earnings per share. For long-term performance appraisal, the financial criterion is the Novartis Economic Value Added (NVA). The NVA measures group profits taking into account the cost of capital or, more simply, the value created in excess of the required return of the company's investors (i.e. the shareholders and debt holders) (see also Note 26 to the Group's audited consolidated financial statements for information regarding the NVA).

Objective setting for members of the Executive Committee and associates

        At the beginning of each performance year, the CEO and each of the executives directly reporting to him determine together the business objectives and respective metrics applicable to each of the divisional and global functional leaders. In the same manner, each line manager and each associate directly reporting to her or him set the objective and metrics applicable to the next-level associate. As a principle, all written objectives are reviewed by two hierarchical levels, including the direct and the indirect supervisors.

        The business objectives are measured against key performance metrics, while the individual performance is derived from the business objectives established at the Group, division, function, country or business area levels.


BUSINESS PERFORMANCE METRICS

GRAPHIC

        These financial and operational metrics have been selected because they define in a balanced way how successful we are in meeting our strategic objectives and creating sustainable value to our shareholders.

        Depending on functional responsibility, non-financial objectives typically include research and development performance; product launches; successful implementation of growth and productivity initiatives; process improvements; leadership and people management and successful acquisitions, disposals and licensing transactions.

        Objectives are set each year at ambitious levels to motivate a high degree of business performance appropriately balancing the short- and long-term objectives.

        Decisions and actions leading to results must be consistent with Novartis Values and Behaviors, which describe the desired conduct of associates and set boundaries and guidelines as an important building block for the culture of our Group. The Novartis Values and Behaviors provide a focus on quality, commitment, candor, compassion, loyalty and integrity.

        Novartis does not disclose specific business objectives for the upcoming year because they often constitute business secrets, the disclosure of which would signal areas of strategic focus and impair the Group's ability to leverage these areas for competitive advantage. For example, disclosure of our cash-flow objectives would provide insight into timing of large capital investments or acquisitions. In addition, knowledge of the objectives could be used by competitors to recruit key executives from Novartis. Disclosing specific objectives and metrics would also

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give our competitors insight into key market dynamics and areas that could be used against Novartis competitively by industry consultants or competitors targeting existing customers.

Performance Evaluation

        Our performance management system and "pay for performance" principle have spurred a culture of meritocracy at Novartis. We believe that pay for performance is only sustainable when fair performance evaluation procedures ensuring integrity and fairness are in place. Performance evaluation is conducted at all levels of the organization.

        The people performance management evaluation process consists of two reviews per year—a mid-year and a year-end review. During such formal meetings, associates and managers evaluate performance against the objectives set at the beginning of the year. In assessing performance, managers focus on results-oriented measures, as well as on how results were achieved. The "four eyes" rule ensures that associates' annual objectives and performance evaluations are reviewed separately by two levels of supervisors.

Process for performance evaluation of the CEO

        At the end of a business year, the CEO prepares and presents to the Chairman and the Board of Directors a self-appraisal assessing actual results against the previously agreed-upon objectives, taking into account the audited financial results as well as Novartis Values and Behaviors. Subsequently, the Board of Directors discusses the self-appraisal without the CEO being present. It evaluates the extent to which targeted objectives have been achieved and, to the extent possible, compares these results with peer industry companies, taking into account general economic and financial criteria and industry developments. The Board of Directors later shares its appraisal with the CEO.

Process for performance evaluation of members of the Executive Committee

        In January, the Board of Directors meets with the CEO to review and discuss the performance and objectives of the Executive Committee members for the previous year, taking into account the financial results, the level of achievement of financial and non-financial objectives, as well as Novartis Values and Behaviors and the general economic and business environment. In addition to the year-end review, the mid-year performance of the CEO is reviewed by the Chairman while the results of the other Executive Committee members are evaluated by the CEO and then discussed with the Chairman.

Talent Review

        Our People Performance Management evaluation process is complemented with an annual Organization and Talent Review in which organizational needs and career aspirations of associates are discussed. The review includes the assessment of strengths, weaknesses and potential for growth. The Organization and Talent Review has become an integral tool for top management in succession planning, and the scope of the program has steadily expanded from a few dozen executives a decade ago to almost 25,000 prospective leaders today.

        Because performance appraisals impact significant elements of reward, we ensure each year that there is consistency of performance ratings across the entire Group.

Compensation Determination

Compensation determination for the CEO

        Based on the performance evaluation appraisal made by the Board of Directors, the Compensation Committee decides at its January meeting on the CEO's total compensation and the target compensation for the coming year without the presence of the CEO. In reaching its decision, the Compensation Committee takes into account other relevant factors, including available benchmark information and the advice of the Compensation Committee advisor.

Compensation determination for the Executive Committee members

        In the presence of the CEO and based on his recommendations, the Compensation Committee decides on the variable compensation for the other Executive Committee members and other selected key executives for the previous year. At the same meeting, the Compensation Committee decides on the target compensation for these executives for the coming year.

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Compensation determination for other associates

        Based on the year-end performance rating, line managers and next-level line managers determine the incentive awards for each associate under review, as well as the target compensation for the coming year. The Compensation Committee determines the grants for all equity compensation plans in aggregate.


Elements of our Compensation Programs

        The primary elements of our compensation system are:


COMPENSATION ELEMENTS

GRAPHIC


Annual Base Compensation (Salary)

        The level of base compensation reflects each associate's key areas of responsibilities, job characteristics, seniority, experience and skill sets. It is paid in cash, typically monthly, and is set according to local practice, designed to provide our associates with fixed compensation to ensure a reasonable standard of living relative to that offered by our peer companies.

        In general, base compensation is reviewed annually to ensure that competitive pay is maintained.


Variable Compensation

        The goal of variable compensation is to reward Novartis associates according to their performance and in a manner consistent with the "pay for performance" principle.

        At lower levels, variable compensation is paid in cash, while at managerial levels, variable compensation is generally composed of annual cash incentive and an equity based long-term incentive. Novartis believes that variable compensation should specifically emphasize long-term incentives to align the interests of our associates with those of long-term shareholders. This also reflects the crucial importance of innovation and the long product development and commercialization cycles that characterize our industry. The amount of variable compensation is based on results and calculated as a percentage (0-200%) of target variable compensation.


VARIABLE COMPENSATION

GRAPHIC

Annual Incentive

        The annual incentive ensures that the associates focus on individual objectives and objectives defined by the business over a single financial year. These objectives include objectives as market share, innovation, and people management, which also positively influence the long-term performance. It rewards performance in the last 12 months in relation to these objectives and reinforces the "pay for performance" principle.

        In principle, the annual incentive is paid in cash and is capped at 200% of target. However, a number of associates in certain countries and certain key executives worldwide are encouraged to invest their annual

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incentive in a share savings plan. Under the share savings plan, they will receive their annual incentive awards fully or partially in Novartis shares in lieu of cash. As a reward for their participation in the share savings plan, Novartis matches their investments in shares after a holding period of three or five years. As a rule, no shares are matched under these plans if an associate leaves Novartis prior to the expiration of the holding period for reasons other than retirement, disability or death. Thus, through the participation in the share savings plan our associates are incentivized to remain with Novartis in the long-term, while sharing in the future financial success of Novartis and further aligning with the long-term interests of our shareholders.

        Novartis currently has three share savings plans:

        Employee Share Ownership Plan (ESOP):    In Switzerland, the ESOP is available to about 12,688 associates. Participants within this plan may choose to receive the incentive (i) 100% in shares, (ii) 50% in shares and 50% in cash or (iii) 100% in cash. After expiration of a three-year holding period of Novartis shares invested under the ESOP, each participant will receive one free matching share for every two Novartis shares invested. A total of 5,050 associates chose to receive shares under the ESOP for their performance in 2011.

        United Kingdom Plan:    In the United Kingdom, 2,790 associates can invest up to 5% of their monthly salary in shares (up to a maximum of GBP 125) and also may be invited to invest all or part of their net annual incentive in shares. Two invested shares are matched with one share with a holding period of three years. During 2011, about 1,870 associates elected to participate in this plan.

        Leveraged Share Savings Plan (LSSP):    Worldwide 30 key executives were invited to participate in a leveraged share savings plan based on their performance in 2011. Instead of cash, their annual incentive was awarded in shares and subject to a holding period of five years. At the end of the holding period, Novartis will match the invested shares at a ratio of 1-to-1 (i.e. one share awarded for each invested share).

        Associates may only participate in only one of these plans in any given year.

Equity based incentives

        The long-term incentive is designed to focus on our objective of long-term sustainable shareholder value creation and to support our "pay for performance" principle by using equity based compensation with a three year vesting period.

        These long-term incentives awarded by Novartis aim at retaining our key talents, encouraging the realization of multi-year business objectives and aligning our associates with our shareholders' interests by tying the value realized to the change in the share price at vesting.

        The equity based long-term incentive is subject to the achievement of predetermined performance objectives either at grant or at vesting.

        Novartis offers two long-term incentive plans, the Equity Plan "Select" based on yearly results with a vesting period of three years and the Long-Term Performance Plan based on the average results of a three-year period.

        In exceptional cases, Novartis may also grant special share awards.

Equity Plan "Select"

        The Equity Plan "Select" is a global equity incentive plan under which all associates, including Executive Committee members, may annually be eligible for a grant, which is capped at 200% of target. The Equity Plan "Select" allows its participants to choose the form of their equity compensation in restricted shares (or, in some jurisdictions, RSUs(1)), tradable share options, or a combination of both, with a vesting period of three years.


(1)
In some jurisdictions, RSUs are granted rather than shares. Each RSU is equivalent in value to one Novartis share and is converted into one share at the vesting date. RSUs do not carry any dividend or voting rights, except for USA where employees receive a dividend equivalent during the vesting period for 2009 and 2010 grants. Each restricted share is entitled to voting rights and payment of dividends during the vesting period.

        Tradable share options expire on their 10th anniversary from grant date. Each tradable share option granted to associates entitles the holder to purchase after vesting (and before the 10th anniversary from grant date) one Novartis share at a stated exercise price that equals the closing market price of the underlying share at the grant date January 19, 2012.

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        The terms of the tradable share options granted since 2008 are shown in the table below.


Terms of Share Options

Grant year
  Exercise price
(CHF/USD)
  Vesting (years)
(CH/other countries)
  Term
(years)
 

2012

    54.20/58.33     3/3     10  

2011

    54.70/57.07     2/3     10  

2010

    55.85/53.70     2/3     10  

2009

    53.65/46.42     2/3     10  

2008

    64.05/57.96     2/3     10  

        If a participant leaves Novartis for reasons other than retirement, disability or death, unvested shares, RSUs and share options are forfeited, unless determined otherwise by the Compensation Committee (for example, in connection with a reorganization or divestment). In Switzerland, the participants in this plan can choose between restricted shares or RSUs and tradable share options, or a combination of both.

        A total of 12,768 participants received 1.0 million restricted shares, 6.5 million RSUs and 23.9 million tradable share options under the Novartis Equity Plan "Select" for their performance in 2011, representing a participation rate of about 10% of all full-time-equivalent associates worldwide.

        As of December 31, 2011, 94 million tradable share options granted to associates were outstanding, covered by an equal number of shares and corresponding to 3.9% of the total number of outstanding Novartis shares.

        Approximately 5% of the total equity value awarded under the Equity Plan "Select" was granted to the members of the Executive Committee.


2011 EQUITY VALUE AWARDED UNDER THE EQUITY PLAN "SELECT"

GRAPHIC

Long-Term Performance Plan

        The Long-Term Performance Plan (LTPP) is an equity plan for key executives designed to foster long-term commitment by aligning the incentives of key executives to the performance of Novartis. The LTPP is offered to selected executives, who are in key positions and have a significant impact on the long-term success of Novartis. It is capped at 200% of target. For members of the Executive Committee, LTPP represents between 20% and 45% of their total variable compensation at target. The rewards are based on pre-determined rolling three year global performance objectives focused on the Novartis Economic Value Added (NVA) measured annually. The NVA is calculated based on Group operating income adjusted for interest, taxes and cost of capital charge. The performance realization of a plan cycle is obtained right after the end of the third plan year by adding together the annual NVA realizations of all plan years of the plan cycle. The performance ratio for a plan cycle is obtained by dividing the performance realization for the plan cycle with the performance target for the plan cycle, expressing the result as a percentage. The LTPP only allows a payout if the actual NVA exceeds predetermined target thresholds.

        To support the alignment of our Executive Committee members' interests with those of the Group and our shareholders, the Long-Term Performance Plan represents a substantial and increasing fraction of Executive

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Committee members' variable compensation targets relative to incentives based on performance during a single year.

        On January 19, 2012, 138 key executives were awarded 464,230 shares under the Long-Term Performance Plan, based on NVA achievement that exceeded our target performance for the performance period 2009 to 2011.


Long-Term Performance Plan Participants History

Grant year =
Target setting
  Performance
period
  Award year =
Payout in shares
  Plan participants
(number of key
executives)
 

2012

    2012-2014     2015     139  

2011

    2011-2013     2014     139  

2010

    2010-2012     2013     142  

2009

    2009-2011     2012     138  

2008

    2008-2010     2011     117  

Variable Compensation Target and Award Calculation Formula

Annual incentive and Equity Plan "Select"

        Under these plans, Novartis defines a target incentive as a percent of base compensation for each participating associate at the beginning of each performance period—traditionally the start of a calendar year. Depending on the role and the level of responsibility of the associates, target incentive percentages may reach up to 60% of base compensation for the annual incentive and 200% for the Equity Plan "Select".

        The amount of the incentive under both the annual incentive and the Equity Plan "Select" is determined on the basis of business and individual performance. No awards are granted for performance ratings below a certain threshold.

        The Award Calculation Formula under both the annual incentive and the Equity Plan "Select" is the following:


ANNUAL INCENTIVE AND EQUITY PLAN "SELECT" CALCULATION FORMULA

GRAPHIC

        The business and the individual performance multipliers have thus an equivalent weighting in the formula. The business performance multiplier is based on the performance of the Group or business area and may range from zero to 1.5.

        The individual performance multiplier is based on achievement of individually set financial and non-financial objectives as well as meeting key behavioral standards, the Novartis Values and Behaviors. It may range from zero to 1.5. For the purpose of calculating the individual performance multiplier, the individually set financial and non-financial objectives and the Novartis Values and Behaviors have an equivalent weighting.

        The business performance multiplier, combined with the individual performance multiplier, is subject to a cap at 200% of the target incentive.

        This broad range of incentive percentages and multipliers allows for meaningful differentiation on a "pay for performance" basis.

        For those who have chosen to receive their annual incentive under the ESOPs or LSSP plans, as well as for those receiving awards under the Equity Plan "Select" the number of shares awarded is determined by dividing the actual incentive amount by the closing price of the shares on the grant date. In North America, if associates

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choose to receive part or all of their grant under the Equity Plan "Select" in tradable share options on American Depositary Shares (ADSs), the resulting number of tradable share options is determined by dividing the respective incentive amount by a value that equals 95% of the value of the options on ADSs as determined in accordance with International Financial Reporting Standards (IFRS). For associates in other countries, the divisor equals 90% of the IFRS value of options on shares.

        Typically, the annual incentive is paid out in February following the realization of the yearly objectives.

        The three-year vesting of the Equity Plan "Select" is contingent on continued employment with Novartis.

Long-Term Performance Plan

        In the case of the LTPP, the performance objective (NVA) is determined over a three-year period commencing on January 1 of each grant year.

        At the beginning of the performance period, plan participants are allocated RSUs, which will be converted into Novartis shares after the performance period.


LONG-TERM PERFORMANCE PLAN PERIOD

GRAPHIC

        At the end of the three-year performance period, the Compensation Committee adjusts the number of RSUs earned based on actual performance. RSUs are converted into unrestricted Novartis shares without an additional vesting period. In the United States, awards may also be delivered in cash under the US deferred compensation plan.


LONG-TERM PERFORMANCE PLAN LAYOUT

GRAPHIC

        Depending on the role and the level of responsibility of the associates, the target incentive percentages may reach up to 175% of base compensation for LTPP. For outstanding NVA performance, the adjustment can go up to a maximum of 200% of the target incentive. No incentive is awarded if actual NVA performance fails to meet a predetermined threshold (or if the participant leaves Novartis during the performance period for reasons other than retirement, disability or death).

Special Share Awards

        Selected associates may exceptionally receive special awards of restricted shares or RSUs. These Special Share Awards provide an opportunity to reward outstanding achievements or exceptional performance and aim at retaining key contributors. They are based on a formal internal selection process, in which the individual performance of each candidate is thoroughly assessed at several management levels. In addition, Special Share Awards may also be granted to attract special expertise and new talents into the organization. These grants are consistent with the Novartis philosophy to attract, retain and motivate best-in-class talents around the world.

        Restricted special awards generally have a five-year vesting period. If an associate leaves Novartis for reasons other than retirement, disability or death, unvested shares or RSUs are generally forfeited. Worldwide 597 associates at different levels in the organization were awarded a total of 1.5 million shares or RSUs in 2011.

Source of Awarded Shares

        Novartis uses shares repurchased in the market to fulfill obligations to deliver shares as required by the variable compensation plans and special share awards, thus avoiding any dilution of shareholders.

        Novartis does not have any approved conditional capital to obtain shares for delivery of our share awards.

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Benefits

        The primary purpose of pension and healthcare plans is to establish a level of security for associates and their dependents with respect to age, health, disability and death. The level of pension and healthcare benefits provided to associates is country-specific and influenced by local market practice and regulations, and is reviewed regularly.

        The Group has a policy to change from defined-benefit pension plans (DB) to defined contribution-pension plans (DC). All the major plans have now been aligned with our benefits strategy with the exception of the Alcon DBs, for which Novartis has established a global timeline for their conversion into DCs.

        Novartis may provide other benefits in a specific country according to local market practice and regulations, including length-of service awards and perquisites. Associates who have been transferred on an international assignment can also receive benefits in line with Novartis policies.


Executive Compensation Summary

 
   
   
   
   
  Performance metrics    
 
  Compensation
plan
  Performance
period
  Method of
payment
   
  Number of
participants
Compensation
element
  Main drivers   At award   At vesting

Base compensation

  Base salary     Cash   Position, experience, sustained performance       All associates

Variable compensation

                           
 

Annual incentive

  Cash or shares (ESOP, ESOP UK, LSSP)(1)   12 months(1)   Cash and/or shares   Financial measures such as net sales, operating income, free cash flow, market share, innovation and ongoing efforts to optimize organizational effectiveness and productivity   Achievement of individual, business and financial annual objectives or achievement of milestones in individual objectives or long-term strategic plans, Novartis Values and Behaviors     15,508
 

Long-term incentive

 

Equity Plan "Select"

 

from 3 to 10 years(2)

 

Restricted shares or RSUs

 

Financial measures such as net sales, operating income, free cash flow, market share, innovation and ongoing efforts to optimize organizational effectiveness and productivity

 

Achievement of individual, business and financial annual objectives or achievement of milestones in individual objectives or long-term strategic plans, Novartis Values and Behaviors

 

Share price

 

12,768

 

Long-Term Performance Plan

 

3 years

 

Shares

 

Achievement of long-term profit, measured through Novartis Economic Value Added (NVA) targets at Group level

 

 

Novartis Value Added

 

138

 

Special Share Awards

 

5 years

 

Restricted shares or RSUs

 

Rewarding particular achievements or exceptional performance

 

Selective assessment

 

Share price

 

597

Benefits

             

Position, experience, age, sustained performance

 

 

   

(1)
If the associate invests the annual incentive into a shares savings plan, the vesting/holding period will be three years (ESOP) or five years (LSSP).

(2)
Three years for restricted share and/or RSUs. Ten years for tradable options.


Competitive Positioning

        It is critical for Novartis to have competitive compensation plans at a global level. According to Novartis compensation philosophy, an associate who achieves his or her performance objectives is thus generally awarded compensation comparable to the median level of compensation provided by relevant benchmark companies. In case of over- or under-performance, the actual total compensation delivered is adjusted accordingly and may significantly differ from the benchmark median. To encourage and reward sustained superior performance, total compensation may, in case of exceptional performance, reach levels comparable to top-quartile levels of compensation offered by the relevant benchmark companies.

        Novartis participates in several compensation benchmarking surveys that provide details on levels of salary, target and actual annual incentives and long-term incentives, the relative mix of short- and long-term incentives, and the mix of cash- and share-based compensation. For Executive Committee positions and for specific

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pharmaceutical positions, the benchmark group of industry competitors for our 2011 benchmark survey consisted of the following companies, which are all operating on a global level within the healthcare industry and having relevant business models, similar size, international needs, or similar talent skill sets:


BENCHMARK GROUP COMPANIES

GRAPHIC

Benchmark criteria
  Novartis   Healthcare
Peers
Median
 

Revenue(1)

    50,624     40,249  

Market Cap(1)

    133,731     74,145  

Net income(1)

    9,969     5,070  

Profit Margin

    19.7 %   12.6 %

Employees

    119,418     90,000  

(1)
In USD million

Source:
Equilar 

        For benchmarking other positions we include companies outside our industry, with stature, size, scope and complexity that approximate our own to recognize the fact that competition for senior executive talent is not limited to the healthcare industry.

        The geographic scope of the benchmark companies depends on the nature of the positions. As a principle, global benchmarks are considered for the most senior executive positions, while regional and/or local benchmarks are applied in other situations. The compensation benchmarking surveys, which analyze factors such as recent market trends and best practices, are conducted by well-established global compensation consultancy firms. These surveys are checked and supplemented by input from the Compensation Committee's independent advisor. According to such surveys, projected 2012 merit salary increases for executives will be relatively modest, but will mainly depend on the demand for talents. Although target annual incentives and long-term incentives as a percentage of salary are expected to be relatively flat versus the previous year, the actual incentive or grants will be based on the achieved performance.


Safeguards

        We believe that incentivizing our associates encourages performance, loyalty and entrepreneurship, and creates sustainable value that is in the interest of Novartis and our shareholders. However, shareholders also expect that risks are appropriately managed. At Novartis, appropriate objective setting combined with proper incentive-plan design and rigorous safeguard measures allow our leaders and associates to focus on long-term value creation.

Risk Management

        The goal of our compensation system is to encourage high performance and entrepreneurship, but not to reward inappropriate or excessive risk taking or short-term profit maximization at the expense of the long-term health of Novartis. The following characteristics of our compensation system foster a culture of entrepreneurial risk management:

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Compensation governance

Legal Framework

        The Swiss Code of Obligations as well as the Corporate Governance Guidelines of the SIX Swiss Exchange require listed companies to disclose certain information about the compensation of members of the Board of Directors and Executive Committee members, their equity participation in the Group as well as loans made to them. This Annual Report fulfills that requirement. In addition, our Annual Report is in line with the principles of the Swiss Code of Best Practice for Corporate Governance of the Swiss Business Federation (economiesuisse).

Decision-making authorities

        Authority for decisions related to compensation are governed by the Articles of Incorporation, the Board Regulations and the Compensation Committee Charter, which are published on the Novartis website: www.novartis.com/corporate-governance. The main responsibilities of the Compensation Committee are shown under "Corporate Governance Report—Our Board of Directors—Role of the Board of Directors and the Board Committees".

        The Compensation Committee serves as the supervisory and governing body for compensation policies and plans within Novartis and has overall responsibility for determining, reviewing and proposing compensation policies and plans for approval by the Board of Directors in line with the Compensation Committee Charter. The main discussion points and conclusions of each meeting of the Compensation Committee are summarized in a brief report to the next meeting of the full Board.

        The Compensation Committee carefully analyzes and discusses on an ongoing basis (but at least annually) the trends and developments in the field of compensation and corporate governance as well as all compensation plans and levels with guidance from outside experts and consultants. The goal is to strengthen the interrelation between the compensation plans and the Group's performance. It also reviews the compensation system to ensure that it does not encourage inappropriate or excessive risk taking and instead encourages behaviors that support sustainable value creation.

        The Compensation Committee is composed exclusively of members of the Board of Directors who meet the independence criteria set forth in our Board Regulations. Currently, the Compensation Committee has the following five members: Marjorie M.T. Yang (chair), William Brody, Srikant Datar, Ulrich Lehner and Enrico Vanni.

        In 2011, the Compensation Committee held five meetings.

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Compensation Authorization Levels

Decision on
  Recommendation   Authority

Compensation of Board members

 

Compensation Committee

  Board of Directors

Compensation of the Chief Executive Officer

 

Chairman of the Board

  Compensation Committee

Compensation of the other Executive Committee members and other selected key executives

 

Chief Executive Officer

  Compensation Committee

Special Share Awards

 

Chairman of the Board or Chief Executive Officer

  Compensation Committee

        The General Meeting holds a consultative vote on the Compensation System of Novartis. This vote takes place before every significant change to the Compensation System, but at least every third Annual General Meeting.

Role of the compensation committee Independent advisors

        The advisor to the Compensation Committee is independent of management and does not perform any other consulting work for Novartis. The key task of the advisor is to assist the Compensation Committee in ensuring that the Novartis compensation policies and plans are competitive, correspond to market practice, and are in line with our compensation principles.

        The Compensation Committee enters into a consulting agreement with its independent advisor on an annual basis. In determining whether or not to renew the engagement with the advisor, the Compensation Committee evaluates the quality of the consulting service and the benefits of rotating advisors. In addition, the Compensation Committee assesses on an annual basis the projected scope of work for the coming year. The Compensation Committee used Pearl Meyer & Partners LLC as its independent external compensation advisor and decided that after several years of service a new advisor should be hired. The Compensation Committee designated a new advisor, Frederic W. Cook & Co, Inc., in October 2011.

        The Compensation Committee determined that the advisor is free of any relationship that would impair professional judgment and advice to the Compensation Committee, and has never been hired for work by the management of Novartis.

Clawback

        Any incentive compensation paid to certain key executives, including Executive Committee members, is subject to "clawback". This means that Novartis may choose not to pay future incentive compensation or seek to recover incentive compensation where the payout has been proven to conflict with internal management standards (including company policies and Novartis Values and Behaviors), accounting procedures or a violation of law.


Share ownership requirements

        In line with our share ownership principle, key executives are required to own at least a certain multiple of their annual base salary in Novartis shares or share options. The CEO is required to own Novartis equity worth 5 times, the other Executive Committee members 3 times, and other key executives, 1 to 2 times (position-specific) their respective base compensation within three years of hire or promotion. In the event of a substantial drop in the share price, the Board of Directors may, at its discretion, extend that time period.

CEO

  5 × base salary

Executive Committee members

  3 × base salary

Selected key executives

  1 × or 2 × base salary

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        In determining equity amounts against the share ownership requirement includes vested and unvested shares or ADSs acquired under the Novartis compensation plans, as well as RSUs thereof, with the exception of unvested matching RSUs from leveraged share savings plans and unvested RSUs from the Long-Term Performance Plan. In addition, it includes other shares as well as vested options on Novartis shares or ADSs that are owned directly or indirectly by "persons closely linked"(1).


(1)
"Persons closely linked" are (i) their spouse, (ii) their children below age 18, (iii) any legal entities that they own or otherwise control, and (iv) any legal or natural person who is acting as their fiduciary.

        The Compensation Committee reviews compliance with the share ownership guideline on an annual basis.


2011 COMPENSATION OF THE MEMBERS OF THE EXECUTIVE COMMITTEE

Performance in 2011

        At its meeting on January 19, 2012, the Compensation Committee decided on the amounts of variable compensation for 2011 for the CEO and Executive Committee members by applying the principles described previously in this Compensation Report. The specific compensation decisions made for the CEO and Executive Committee members reflect their achievements against the financial and non-financial performance objectives established for them at the beginning of the year. The achievements were assessed from both a quantitative and a qualitative perspective, with the Compensation Committee using its judgment, where appropriate, in concert with a review of metrics. In line with our compensation philosophy and performance principles, the actual payout of the variable compensation reflects the key individual achievements and the actual business performance of the organization taking into account the various following accomplishments and events, which occurred in 2011:

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Compensation in 2011

        The compensation table on the following page discloses the compensation earned by the CEO and Executive Committee members for performance in 2011. The following paragraphs describe the principles underlying the data in the table.

Alignment of Reporting and Performance

        The compensation table synchronizes the reporting of annual compensation with the performance in the given year, i.e., all amounts awarded for performance in 2011, including the future ESOP/LSSP match, are disclosed in full.

Disclosure Structure

        The compensation table shows the compensation granted to the CEO and each Executive Committee member for performance in 2011 for all compensation elements—base compensation, variable compensation and benefits—as previously described.

        The column "Future ESOP/LSSP match" reflects shares to be awarded in the future if the Executive Committee member remains with Novartis for at least three or five years, respectively.

Valuation Principles

        In order to allow a comparison with other companies, the Compensation Committee decided to disclose shares, restricted shares, RSUs and ADS at their market value on the date of grant. Market value is the current quoted share price at which a director or an associate is granted a share, a restricted share or a restricted stock unit at grant date. The market value of share options is calculated by using an option pricing valuation model as per grant date.

        As shares, RSUs and share options under the variable compensation plans are generally granted with a vesting(1) period, and associates in Switzerland (including Executive Committee members) may block(2) shares received under any variable compensation plan for up to 10 years, equity based compensation is also provided at tax value in accordance with Novartis past disclosure practice. According to the Swiss Federal Tax Administration and as the Compensation Committee also firmly believes, such restrictions affect the value of shares, RSUs and share options negatively. In its "Kreisschreiben Nr. 5", the Swiss Tax Administration provides for a methodology pursuant to which unvested or blocked shares or share options shall be valued with a discount for each year they are unvested or blocked. In addition, for the valuation of share options, the Swiss Tax Authorities apply—in a standing practice for Novartis (since 1997)—an option valuation model based on Black-Scholes.

        See also Note 27 to the Group's consolidated financial statements for information on executive officer and non-executive director compensation in accordance with IFRS.


(1)
Vesting refers to the waiting period under a share-based incentive plan that must expire before the associate becomes irrevocably entitled to the shares, RSUs or share options involved. The associate cannot sell or exercise unvested share, RSUs or share options. If an associate leaves Novartis prior to the expiration of the vesting period for reasons other than retirement, disability or death, the associate will generally forfeit rights to such shares, RSUs or share options.

(2)
Blocking refers to the ability of associates in Switzerland to opt for an extended trading restriction period of up to 10 years from the award date (including vesting). Novartis encourages associates to block their shares because doing so aligns the associates' interests with those of shareholders.

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Executive Committee Member Compensation for Performance Year 2011 (Market value)(1)

 
   
  Base
compensation
  Variable compensation   Benefits   Total    
  Total
compensation
 
 
   
   
  Short-term incentive
plans
   
   
   
   
   
   
   
   
   
 
 
   
   
  Long-term incentive plans    
   
   
   
   
   
 
 
   
   
   
   
   
   
  Future
ESOP/
LSSP
match(10)
  Including
future ESOP/
LSSP
match(11),(12)
 
 
   
   
   
   
  Equity Plan "Select"   Long-Term
Performance
Plan
  Special
share
awards
  Pension
benefits
  Other
benefits
   
 
 
  Currency   Cash
(Amount)
  Cash
(Amount)
  Shares
(Market
value)(2)
  Shares
(Market
value)(3)
  Options
(Market
value)(4)
  Shares
(Market
value)(5)
  Shares
(Market
value)(6)
  (Amount)(7)   (Amount)(8)   (Amount)(9)   Shares
(Market
value)
  (Amount)  

Joseph Jimenez (Chief Executive Officer)

  CHF     1,916,667     704,000     1,056,033     6,160,047         4,550,524         172,193     106,889     14,666,353     1,056,033     15,722,386  

Juergen Brokatzky-Geiger

  CHF     696,670         616,037     1,232,020         582,379         150,268     26,117     3,303,491     616,037     3,919,528  

Kevin Buehler (since April 8, 2011)(13)

  USD     803,611     618,799     1,078,872     2,716,195         1,312,775         229,624     45,974     6,805,850     1,078,872     7,884,722  

David Epstein

  USD     933,333     402,630     583,475     2,794,007         1,293,468         279,409     115,086     6,401,408     583,475     6,984,883  

Mark C. Fishman

  USD     986,333     13,997     951,304     3,861,038         1,347,831         252,712     122,315     7,535,530     951,304     8,486,834  

Jeff George

  CHF     733,334     365,650     365,687     1,462,533         443,410     940,000     105,934     48,053     4,464,601     182,871     4,647,472  

George Gunn

  CHF     845,836     663,000         1,105,030         930,397         98,584     9,992     3,652,839         3,652,839  

Andrin Oswald

  CHF     733,334     682,500         1,365,027         443,410     940,000     118,403     57,507     4,340,181         4,340,181  

Jonathan Symonds

  CHF     890,000         792,025     1,980,034         766,171         196,350         4,624,580     792,025     5,416,605  

Thomas Werlen (until September 30, 2011)(14)

  CHF     560,001         412,516                     99,836     1,598,454     2,670,807         2,670,807  

Naomi Kelman (as from March 2, 2011)(15)

  USD     497,826     262,500         525,028         81,720     4,773,120     18,466     638,443     6,797,103         6,797,103  

Felix R. Ehrat (as from October 1, 2011)(16)

  CHF     175,000         130,405     260,810         76,639         36,296     4,352     683,502     130,405     813,907  
                                                       

Total(17)

  CHF     9,401,376     3,563,757     5,685,668     22,323,260         11,364,429     6,104,000     1,668,316     2,667,132     62,777,939     5,090,336     67,868,275  
                                                       

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(1)
Does not include reimbursement for travel and other necessary business expenses incurred in the performance of their services as these are not considered compensation.

(2)
Participants elected to invest some or all of the value of their annual incentive in the five-year Leveraged Share Savings Plan (LSSP) or the three-year Swiss Employee Share Ownership Plan (ESOP) rather than to receive cash.

(3)
Novartis shares granted under the Novartis Equity Plan "Select" have a three-year vesting period.

(4)
Novartis share options granted under the Novartis Equity Plan "Select" are tradable. Share options granted outside North America will expire on January 19, 2022, have a three-year vesting period and have an exercise price of CHF 54.20 per share (the closing price of Novartis shares on the grant date of January 19, 2012). Based on the option pricing valuation model as per grant date, the value of the share options granted outside North America used in this table was CHF 4.30. Share options on ADSs granted to participants in North America will expire on January 19, 2022, have a three-year vesting period and an exercise price of $58.33 per ADS (the closing price of Novartis ADSs on the grant date of January 19, 2012). Based on the option pricing valuation model as per grant date, the value of the share options on ADSs granted to participants in North America used in this table was $4.14.

(5)
Awarded based on the achievement of Novartis Economic Value Added (NVA) objectives over the performance period ended December 31, 2011.

(6)
The special share awards consist of RSUs to Jeff George and to Andrin Oswald awarded on September 1, 2011, against the closing share price of that day (CHF 47.00). These RSUs have a five year vesting period. The special share awards also consist of a special award of 88 000 shares granted to Naomi Kelman to compensate her loss of equity from her former employer. This grant was awarded on April 1, 2011 at the price of $54.24 with staggered vesting over seven years.

(7)
Service costs of pension and post-retirement healthcare benefits accumulated in 2011.

(8)
Includes perquisites and other compensation paid during 2011. Does not include cost allowances and tax-equalization payments regarding the international assignment of David Epstein, Jeff George and Andrin Oswald. Does not include an annual pension in payment for Kevin Buehler as a result of a change of control clause ($346 362 being the time pro-rated amount for the period from April 8, 2011 to December 31, 2011).

(9)
The value of all equity grants included in this table has been calculated based on market value.

(10)
Reflects shares to be awarded in the future under the share saving plans, either the three-year Swiss Employee Share Ownership Plan (ESOP) or the five-year Leveraged Share Savings Plan (LSSP). Participants will receive additional shares ("matching shares") after the expiration of either the three- or five-year vesting period.

(11)
The values of the shares, RSUs and share options reflected in this table have been calculated based on market value. The closing share price on the grant date January 19, 2012 was CHF 54.20 per Novartis share and $58.33 per ADS.

(12)
All amounts are gross amounts (i.e., before deduction of social security and income tax due by the executives). The employer social security contribution is not included.

(13)
Excludes the annual incentive and an equity grant that were awarded to K. Buehler prior to April 8, 2011 and which relate to past performance.

(14)
Thomas Werlen stepped down from the Executive Committee as per September 30, 2011 and decided to leave Novartis on January 31, 2012. The base compensation and benefits information in the table reflects his pro rata compensation over the period from January 1, 2011 to September 30, 2011 (i.e. the period during which he was member of the Executive Committee). The other compensation ("Other benefits") includes the contractual salary payments from October 1, 2011 to January 31, 2012 and the pension benefits costs over this period. The other compensation ("Other benefits") does not include, however, the fair market compensation for refraining to compete with any business of Novartis over an agreed period after leaving the Company. Mr. Werlen will receive fair market compensation in return for complying with the restriction not to compete.

(15)
The table reflects the compensation as Permanent Attendee to the Executive Committee from date of hiring (March 2, 2011) until December 31, 2011.

(16)
The table reflects the compensation as Permanent Attendee to the Executive Committee from hire date (October 1, 2011) until December 31, 2011.

(17)
Amounts in USD for Kevin Buehler, David Epstein, Mark C. Fishman and Naomi Kelman were converted at a rate of CHF 1.00 = $1.130, which is the same average exchange rate used in the Group's consolidated financial statements.

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Executive Committee Member—Equity Awards for Performance Year 2011 (number of equity instruments and tax value)

 
   
  Variable compensation    
   
 
 
   
  Short-term incentive plans   Long-term incentive plans    
   
 
 
   
   
   
  Equity Plan "Select"   Long-Term Performance Plan   Special share awards   Future ESOP/LSSP match  
 
  Currency   Shares
(Number)
  Shares
(Tax
value)(2)(3)
  Shares
(Number)
  Shares
(Tax
value)(2)(4)
  Options
(Number)
  Options
(Tax
value)(2)
  Shares
(Number)
  Shares
(Tax
value)(2)(5)
  Shares
(Number)
  Shares
(Tax
value)(2)(6)
  Shares
(Number)
  Shares
(Tax
value)(2)(7)
 

Joseph Jimenez (Chief Executive Officer)

  CHF     19,484     789,131     113,654     5,172,099             83,958     4,550,524             19,484     789,131  

Juergen Brokatzky-Geiger

  CHF     11,366     460,340     22,731     1,034,429             10,745     582,379             11,366     460,340  

Kevin Buehler (since April 8, 2011)

  USD     18,496     806,207     46,566     2,280,588             22,506     1,312,788             18,496     806,207  

David Epstein

  USD     10,003     436,008     47,900     2,345,904             22,175     1,293,468             10,003     436,008  

Mark C. Fishman

  USD     16,309     710,871     66,193     3,241,804             23,107     1,347,831             16,309     710,871  

Jeff George

  CHF     6,747     307,038     26,984     1,227,972             8,181     443,410     20,000     702,424     3,374     153,542  

George Gunn

  CHF             20,388     927,805             17,166     930,397                  

Andrin Oswald

  CHF             25,185     639,979             8,181     443,410     20,000     702,424          

Jonathan Symonds

  CHF     14,613     591,848     36,532     1,662,477             14,136     572,529             14,613     496,924  

Thomas Werlen (until September 30, 2011)

  CHF     7,611     346,357                                          

Naomi Kelman (as from March 2, 2011)(1)

  USD             9,001     440,824             1,401     81,720     88,000     4,004,689          

Felix R. Ehrat (as from October 1, 2011)(1)

  CHF     2,406     97,447     4,812     218,982             1,414     57,269             2,406     81,818  
                                                       

Total(8)

  CHF     107,035     4,320,556     419,946     18,236,947             212,970     11,151,429     128,000     4,948,821     96,051     3,710,150  
                                                       

(1)
The table reflects the compensation as Permanent Attendee to the Executive Committee from date of hiring until December 31, 2011.

(2)
Values of shares and RSUs granted are discounted by 6% per year depending on the length of the combined vesting and blocking period. For example, the value of a share award subject to a three-year vesting/blocking period calculated in accordance with the methodology described in the Kreisschreiben Nr. 5 equals 83.962% of its market value at the grant date. The value of a share award with a combined vesting/blocking period of ten years equals 55.839% of its market value at the grant date. The closing share price on the grant date (January 19, 2012) was CHF 54.20 per Novartis share and $58.33 per ADS. The values of share options granted are reported based on the valuation principles contained in a tax ruling from the Swiss tax authorities, reflecting the principles as disclosed in the aforementioned Kreisschreiben Nr. 5. According to this methodology, tradable share options under the Equity Plan "Select" with a vesting period of three years have a value of CHF 0.40 per option at grant.

(3)
These shares have a five-year vesting period under LSSP and a three-year vesting period under ESOP.

(4)
Andrin Oswald has voluntarily blocked these RSUs for ten years in addition to the three-year vesting period.

(5)
Jonathan Symonds and Felix R. Ehrat have voluntarily blocked these shares for five years.

(6)
The special RSU awards granted to Jeff George and Andrin Oswald have a five-year vesting period. The special share award granted to Naomi Kelman has a staggered vesting of up to seven years.

(7)
Jonathan Symonds and Felix R. Ehrat have voluntarily blocked these LSSP matching share units for eight years including the five-year vesting period.

(8)
Amounts in USD for Kevin Buehler, David Epstein, Mark C. Fishman and Naomi Kelman were converted at a rate of CHF 1.00 = $1.130, which is the same average exchange rate used in the Group's consolidated financial statements.

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        As the table below shows, most executive compensation is variable and awarded in the form of restricted equity. This ensures alignment with the interests of Novartis and its shareholders.


Executive Committee Member Actual Compensation Mix in 2011—Base and Variable Compensation(1)

 
   
  Variable  
 
  Base
salary
  Annual
Incentive(2)
  Long Term
Incentive(3)
 

Joseph Jimenez

    13.3 %   12.2 %   74.4 %

Juergen Brokatzky-Geiger

    22.3 %   19.7 %   58.0 %

Kevin Buehler

    12.3 %   26.0 %   61.7 %

David Epstein

    15.5 %   16.4 %   68.0 %

Mark C. Fishman

    13.8 %   13.5 %   72.7 %

Jeff George

    17.0 %   17.0 %   66.0 %

George Gunn

    23.9 %   18.7 %   57.4 %

Andrin Oswald

    17.6 %   16.4 %   66.0 %

Jonathan Symonds

    20.1 %   17.9 %   62.0 %

Naomi Kelman (as from March 2, 2011)(4)

    8.1 %   4.3 %   87.6 %(5)

Felix R. Ehrat (as from October 1, 2011)(4)

    27.2 %   20.3 %   52.5 %
               

Total(6)

    15.4 %   15.4 %   69.2 %
               

(1)
Excludes pension, other benefits and future ESOP/LSSP match.

(2)
Excludes future ESOP/LSSP match.

(3)
Long Term Incentive includes Select, LTPP grants and Special Share Awards.

(4)
Permanent Attendee to the Executive Committee.

(5)
Includes the special award of 88 000 shares granted to Naomi Kelman to compensate her loss of equity from her former employer.

(6)
Excludes Thomas Werlen who stepped down from the Executive Committee as per September 30, 2011.


EXECUTIVE COMMITTEE ACTUAL COMPENSATION MIX IN 2011—
BASE AND VARIABLE COMPENSATION

LOGO


Shares and Share Options Owned by members of the Executive Committee

        The following tables show the total number of vested and unvested Novartis shares (including share units but excluding unvested matching share units from leveraged share savings plans and unvested target units from the Long-Term Performance Plan) and the total number of share options owned by Executive Committee members as of January 19, 2012.

        As of January 19, 2012, none of the Executive Committee members together with "persons closely linked" to them (see definition under "Share Ownership—Ownership Guidelines") owned 1% or more of the outstanding shares of Novartis, either directly or through share options.

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        As of December 31, 2011, all Executive Committee members who have served at least three years on the Executive Committee have met or exceeded their personal Novartis ownership requirements.


Shares Owned by Executive Committee Members

 
  Number of
shares(1)
 

Joseph Jimenez

    461,487  

Juergen Brokatzky-Geiger

    232,858  

Kevin Buehler (as from April 8, 2011)

    445,287 (2)

David Epstein

    279,395  

Mark C. Fishman

    435,071  

Jeff George

    109,525  

George Gunn

    251,459  

Andrin Oswald

    135,713  

Jonathan Symonds

    144,829  

Naomi Kelman (as from March 2, 2011)(3)

    97,906  

Felix R. Ehrat (as from October 1, 2011)(3)

    9,132  
       

Total(4)

    2,602,662  
       

(1)
Includes holdings of "persons closely linked" to members of the Executive Committee (see definition under—Share and Share Options by Members of the Board of Directors).

(2)
Excludes performance share units from former Alcon equity plans to vest after January 19, 2012.

(3)
Permanent attendee to the Executive Committee.

(4)
Excludes Thomas Werlen who stepped down from the Executive Committee as per September 30, 2011.


Share Options Owned by Executive Committee Members

 
  Number of share options(1)  
 
  2012   2011   2010   2009   2008   Other   Total  

Joseph Jimenez

                      552,076     157,266           709,342  

Juergen Brokatzky-Geiger

                      75,705     109,016     146,436     331,157  

Kevin Buehler (as from April 8, 2011)

                                  782,485 (2)   782,485  

David Epstein

                                  267,777     267,777  

Mark C. Fishman

                            184,870     587,149     772,019  

Jeff George

          141,396                       114,979     256,375  

George Gunn

                                  94,371     94,371  

Andrin Oswald

                                  5,633     5,633  

Jonathan Symonds

                                  54,348     54,348  

Naomi Kelman (as from March 2, 2011)(3)

                                           

Felix R. Ehrat (as from October 1, 2011)(3)

                                           
                               

Total(4)

        141,396         627,781     451,152     2,053,178     3,273,507  
                               

(1)
Share options disclosed for a specific year were granted in that year under the Novartis Equity Plan "Select." The column "Other" refers to share options granted in 2007 or earlier, to share options granted to these executives while they were not Executive Committee members, and to share options bought on the market by the Executive Committee members or "persons closely linked" to them (see definition under—Share and Share Options Owned by Members of the Board of Directors).

(2)
Consists of non tradable options and share settled appreciation rights resulting from conversion of Alcon equity into Novartis equity.

(3)
Permanent Attendee to the Executive Committee.

(4)
Excludes Thomas Werlen who stepped down from the Executive Committee as per September 30, 2011.

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Loans and other payments

Loans to Executive Committee members

        No loans were granted to current or former Executive Committee members during 2011. No such loans were outstanding as of December 31, 2011.

Other payments to Executive Committee members

        During 2011, no payments (or waivers of claims) other than those set out in the Executive Committee Member Compensation table were made to current Executive Committee members or to "persons closely linked" to them (see definition under "Compensation of the Board of Directors—Shares and Share Options Owned by Members of the Board of Directors").

Payments to former Executive Committee members

        During 2011, no payments (or waivers of claims) were made to former Executive Committee members or to "persons closely linked" to them (see definition under "Compensation of the Board of Directors—Shares and Share Options Owned by Members of the Board of Directors"), except for an amount of CHF 25,596, which was paid to a former member of the Executive Committee as deferred compensation.


6.C    Board Practices

        Novartis strives to create sustainable value. Our corporate governance framework is designed to support this. While it complies with all applicable laws and implements best corporate governance standards, it is tailor-made for Novartis.


Introduction

        The corporate governance framework of Novartis reflects a system of checks and balances between the powers of the shareholders, the Board of Directors and the management with the goal to safeguard the interests of Novartis and its shareholders while creating sustainable value.

        Since the creation of Novartis in 1996, the Board of Directors has continuously improved the corporate governance framework of Novartis by proactively implementing emerging best corporate governance standards long before these were embedded in the Swiss Code of Best Practice for Corporate Governance ("the Swiss Code") or in the law.

        In 1999, Novartis established the new position of Lead Director as a check and balance following the election of Chief Executive Officer Daniel Vasella, M.D., to the additional post of Chairman. Moreover, three new Board committees—the Compensation Committee, the Audit and Compliance Committee and the Corporate Governance and Nomination Committee—were created, composed exclusively of independent Board members.

        In 2002, five years before legislation came into force in 2007, requiring companies to disclose the total compensation of their executive management group as well as the highest compensation attributed to a member of the executive management, Novartis had already implemented even more rigorous disclosure standards by reporting the individual annual compensation of all members of the Executive Committee.

        In 2004, two years earlier than required for non-US corporations, Novartis complied with the challenging certification requirements under the US Sarbanes-Oxley Act, in particular Section 404 of this Act.

        In 2009, the Board of Directors established a new Risk Committee that oversees the Group's enterprise risk management, strengthening the Board of Directors' supervisory function over management in this critical area. While fostering a culture of risk-adjusted decision making, the Risk Committee ensures that reasonable risk-taking and innovation are not constrained.

        In 2010, the Chairman and CEO functions were separated. In addition several emerging best corporate governance standards were proactively implemented, including the introduction of a "say-on-pay" shareholder vote, making changes to our executive compensation system to further strengthen the alignment of incentives with the long-term success of Novartis and a number of new disclosures, including on qualifications of Board members.

        In 2011, the first "say-on-pay" vote was held, where the shareholders endorsed the compensation system of Novartis.

        Novartis evaluates emerging best governance standards and adopts those that are found to be appropriate for Novartis. These standards are then tailored to Novartis, its business, management, stakeholders and

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shareholders with a view to create a corporate governance regime that supports the creation of sustainable value. This cannot be achieved by implementing corporate governance standards "as is" ("one size fits all approach") and becomes impossible if corporate governance standards (embedded in corporate governance codes) are converted into binding, "one size fits all" rules as is currently contemplated in Switzerland.

        In Switzerland, Parliament considers introducing binding, "one size fits all" rules such as a binding shareholder vote on executive compensation and a ban on sign-on bonuses. Such rules would eliminate the flexibility of issuers to adapt corporate governance recommendations to the specific circumstances and needs of each individual company. Moreover, if such rules were introduced, Switzerland would get a corporate governance regime that would be substantially more restrictive than that of other countries. Such binding corporate governance rules are not needed. The "market" (corporate governance rating agencies, proxy voting agencies, institutional investors, Stock Exchanges) already plays a very effective role in deciding whether a given explanation is sufficient and plausible or not.

        We note however an encouraging development in that regulators start to acknowledge and seem to become willing to regulate many corporate governance issues that have been highlighted by issuers for a long time but did not make it "on the corporate governance agenda" yet: In 2010, the US Securities Exchange Commission in its "Concept Release on the U.S. Proxy System" and, in 2011, the European Commission in its green paper entitled "The EU Corporate Governance Framework" have noted a number of such issues, including deficiencies in the proxy system, potential conflicts of interest and a lack of accuracy and transparency of proxy advisory firms, and what the European Commission called "inappropriate short-termism among investors." On that last point, we note that the UK government commissioned a review ("The Kay Review") on whether the time horizons of investors match those of their principals and whether equity markets and government policies promote long-term horizons of institutional shareholders and fund managers and sufficiently encourage boards to have a long-term horizon.

        At the heart of good corporate governance lies a strong Board of Directors, which represents the interests of the shareholders and other stakeholders, and the professionalism and integrity of management, creating the foundation for sustainable value. While the size, composition and structure of the Board of Directors are easy to describe and can be easily checked from the outside, it is difficult to demonstrate that the core processes, like information flow and decision making, are state-of-the-art. It is even more difficult, if not impossible, to describe the prevailing board culture, although the latter is essential for its effective function. Novartis aims to foster an atmosphere in which Board members can pose challenging questions, voice dissenting views and secure access to independent information through extensive contacts with senior Novartis executives—inside and outside the boardroom. Diversity of a Board of Directors is a critical success factor for its work. The Novartis Board of Directors today is diverse in terms of background, interests and skills.


Our Corporate Governance Framework

Laws and Regulations

        Novartis is subject to the laws of Switzerland, in particular Swiss company and securities laws, and to the securities laws of the United States as applicable to foreign private issuers of securities.

        In addition, Novartis is subject to the rules of the Swiss Stock Exchange (SIX Swiss Exchange), including the Directive on Information relating to Corporate Governance.

        Novartis is also subject to the rules of the New York Stock Exchange (NYSE) as applicable to foreign private issuers of securities. The NYSE requires Novartis to describe any material ways in which its corporate governance differs from that of domestic US companies listed on the NYSE. Different from corporate governance rules applicable to domestic US companies listed on NYSE, shareholders of Novartis do not receive written reports from committees of the Board of Directors. Also, the external auditors are appointed by our shareholders at the Annual General Meeting, as opposed to being appointed by the Audit and Compliance Committee. In addition, while our shareholders cannot vote on all equity-compensation plans, they are entitled to hold a consultative vote on the compensation system of Novartis. The vote takes place before every significant change to the compensation system, but at least every third Annual General Meeting. Finally, our Board of Directors has set up a separate Risk Committee that is responsible for risk oversight, as opposed to delegating this responsibility to the Audit and Compliance Committee.

Swiss Code of Best Practice for Corporate Governance

        Novartis applies the Swiss Code of Best Practice for Corporate Governance.

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Novartis Corporate Governance Standards

        Novartis has incorporated the corporate governance standards described above into the Articles of Incorporation and the Regulations of the Board of Directors, its Committees and the Executive Committee (www.novartis.com/corporate-governance).

        The Corporate Governance and Nomination Committee regularly reviews these standards and principles in the light of prevailing best practices and makes recommendations for improvements of the corporate governance framework of Novartis for consideration by the full Board of Directors.

        Additional corporate governance information can be found on the Novartis website: http://www.novartis.com/corporate-governance

        Printed copies of the Novartis Articles of Incorporation, Regulations of the Board and Charters of Board Committees can be obtained by writing to: Novartis AG, Attn: Corporate Secretary, Lichtstrasse 35, CH-4056 Basel, Switzerland.


Our Shareholders

Shares share capital of Novartis AG

        The share capital of Novartis AG is CHF 1,372,811,500, fully paid-in and divided into CHF 2,745,623,000 registered shares, each with a nominal value of CHF 0.50.

        Novartis has neither authorized nor conditional capital. There are no preferential voting shares; all shares have equal voting rights. No participation certificates, non-voting equity securities (Genussscheine) or profit-sharing certificates have been issued.

        Novartis shares are listed and traded on the SIX Swiss Exchange (Valor No. 001200526, ISIN CH0012005267, symbol: NOVN) as well as on the NYSE in the form of American Depositary Receipts (ADRs) representing Novartis American Depositary Shares (ADSs) (Valor No. 567514, ISIN US66987V1098, symbol: NVS).

        The holder of an ADS has the rights enumerated in the Deposit Agreement (such as the right to vote and to receive a dividend). The ADS depositary of Novartis, JPMorgan Chase Bank, New York, holding the Novartis shares underlying the ADSs, is registered as shareholder in the share register of Novartis. An ADS is not a Novartis share and an ADS holder is not a Novartis shareholder. ADS holders exercise their voting rights by instructing the depositary to exercise their voting rights. Each ADS represents one Novartis share.

Share repurchase programs

        Novartis began repurchasing its shares in 1999. Since then, five share repurchase programs have been completed with the repurchase of shares worth CHF 19 billion. Shares repurchased under the first program were not cancelled. However, shares repurchased under the other four programs were cancelled. At the Annual General Meeting in February 2008, shareholders authorized the Board of Directors to launch a sixth program to repurchase shares up to a maximum amount of CHF 10 billion via a second trading line on the SIX Swiss Exchange. In 2008, a total of six million shares were repurchased at an average price of CHF 49.42 per share and cancelled. The share repurchase program was suspended in April 2008 in favor of debt repayment. In December 2010, the Board of Directors announced the reactivation of the share repurchase program to minimize dilution to existing Novartis shareholders in connection with the proposed merger of Alcon, Inc. into Novartis. In 2010, no shares were repurchased under the share repurchase program. In 2011, 39,430,000 shares were repurchased under the share repurchase program.

Changes in share capital

        During the last three years there were the following changes to the share capital of Novartis:

        Novartis increased its share capital once: On April 8, 2011 for the purpose of completing the merger of Alcon, Inc. into Novartis AG, the share capital was increased by CHF 54 million, from CHF 1,318,811,500 to CHF 1,372,811,500, through the issuance of 108,000,000 fully paid-in registered shares with a nominal value of CHF 0.50 each.

        As part of a share repurchase program, Novartis reduced its share capital once: In 2009 the share capital was reduced by CHF 3 million, from CHF 1,321,811,500 to CHF 1,318,811,500.

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Capital Changes

 
  Number of shares   Amount of
capital
changed
in CHF
 
Year
  As of Jan 1   Shares   As of Dec 31  

2009

    2,643,623,000     (6,000,000 )   2,637,623,000     (3,000,000 )

2010

    2,637,623,000     0     2,637,623,000     0  

2011

    2,637,623,000     108,000,000     2,745,623,000 (1)   54,000,000  

(1)
Capital increase as set-out above

Convertible or Exchangeable Securities

        Novartis has not issued convertible or exchangeable bonds, warrants, options or other securities granting rights to Novartis shares, other than options granted to associates as an element of compensation.

Shareholdings

        Significant Shareholders

        According to the share register, as of December 31, 2011, the following registered shareholders (including nominees and the ADS depositary) held more than 2% of the total share capital of Novartis with the right to vote these shares:(1)


(1)
Excluding 5.76% of the share capital held by Novartis AG, together with Novartis affiliates, as treasury shares.

Shareholders: Novartis Foundation for Employee Participation, with its registered office in Basel, Switzerland, holding 4.1%, and Emasan AG, with its registered office in Basel, Switzerland, holding 3.2%;

Nominees: JPMorgan Chase Bank, New York, holding 10.9%, Nortrust Nominees, London, holding 3.2%, and Mellon Bank, Everett, Massachusetts, holding 3%; and

ADS depositary: JPMorgan Chase Bank, New York, holding 11%.

        According to a disclosure notification filed with Novartis AG and the SIX Swiss Exchange, Capital Group Companies, Inc., Los Angeles, USA, held between 3% and 5% of the share capital of Novartis AG as of December 31, 2011.

        Disclosure notifications pertaining to shareholdings in Novartis AG that were filed with Novartis AG and the SIX Swiss Exchange are published on the latter's electronic publication platform, and can be accessed via the database search page:

        http://www.six-exchange-regulation.com/obligations/disclosure/ major_shareholders_en.html

        Novartis has not entered into any agreement with any shareholder regarding the voting or holding of Novartis shares.

Cross Shareholdings

        Novartis has no cross shareholdings in excess of 5% of capital or voting rights with any other company.

Distribution of Novartis shares

        The information in the following tables relates only to registered shareholders and does not include holders of unregistered shares. Also, the information provided in the tables below cannot be assumed to be representative of the entire Novartis investor base since nominees and JPMorgan Chase Bank, as ADS depositary, are registered as shareholders for a large number of beneficial owners.

        As of December 31, 2011, Novartis had more than 164,000 registered shareholders.

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        The following table provides information about the distribution of registered shareholders by number of shares held:


Number of shares held

As of December 31, 2011
  Number of
registered
shareholders
  % of registered
share capital
 

1-100

    20,836     0.05  

101-1,000

    97,906     1.59  

1,001-10,000

    41,655     4.25  

10,001-100,000

    3,837     3.60  

100,001-1,000,000

    495     5.26  

1,000,001-5,000,000

    79     6.60  

5,000,001 or more(1)

    35     53.58  
           

Total registered shareholders/shares

    164,843     74.93  
             

Unregistered shares

          25.07  
             

Total

          100.00  
             

(1)
Including significant registered shareholders as listed above

        The following table provides information about distribution of registered shareholders by type:


Registered Shareholders by Type

As of December 31, 2011
  Shareholders
in %
  Shares
in %
 

Individual shareholders

    96.05     12.37  

Legal entities

    3.85     39.00  

Nominees, fiduciaries

    0.10     48.63  
           

Total

    100.00     100.00  
           

        The following table provides information about registered shareholders by country:


Registered Shareholders by Country

As of December 31, 2011
  Shareholders
in %
  Shares
in %
 

France

    2.86     1.32  

Germany

    4.34     3.47  

Switzerland(1)

    89.37     43.03  

United Kingdom

    0.51     3.07  

United States

    0.36     44.57  

Other countries

    2.56     4.54  
           

Total

    100.00     100.00  
           

(1)
Excluding 5.76% of the share capital held by Novartis AG, together with Novartis affiliates, as treasury shares

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Shareholder Rights

        Right to Vote ("one share, one vote")

        Each share registered with the right to vote entitles the holder to one vote at General Meetings.

        ADS holders may vote by instructing JPMorgan Chase Bank, the ADS depositary, to exercise the voting rights attached to the registered shares underlying the ADSs. JPMorgan Chase Bank exercises the voting rights for registered shares underlying ADSs for which no voting instructions have been given by providing a discretionary proxy to the independent proxy (unabhängiger Stimmrechtsvertreter) appointed by Novartis pursuant to Swiss law.

Resolutions and Elections at General Meetings

        The General Meeting passes resolutions and elections with the absolute majority of the votes represented at the meeting. However, under the Articles of Incorporation (www.novartis.com/corporate-governance) the approval of two-thirds of the votes represented at the meeting is required for:

        In addition, the law provides for a special quorum also for other re-solutions, such as, for example, for a merger or spin-off.

Other Shareholder Rights

        Shareholders representing at least 10% of the share capital may request that an extraordinary General Meeting of shareholders be convened. Shareholders representing shares with an aggregate nominal value of at least CHF 1 million may request that an item be included in the agenda of a General Meeting of shareholders. Such requests must be made in writing at least 45 days before the date of the General Meeting, specify the item to be included in the agenda and contain the proposal on which the shareholder requests a vote.

        Shareholders have the right to receive dividends, appoint another shareholder, the corporate proxy, the independent proxy or a custody proxy as proxy and hold such other rights as are granted under Swiss Law.

Shareholder Registration

        No restrictions apply on the transferability of Novartis shares. However, only shareholders registered in the Novartis share register may exercise their voting rights. In order to be registered, a shareholder must declare that he or she acquired the shares in his or her own name and for his or her own account. The Articles of Incorporation provide that the Board of Directors may register nominees with the right to vote. For restrictions on registration of nominees, please see below.

        The Articles of Incorporation provide that no shareholder shall be registered with the right to vote for more than 2% of the registered share capital. The Board of Directors may, upon request, grant an exemption from this restriction. Exemptions are in force for the registered Significant Shareholders listed under—Our Shareholders—Shareholdings—Significant Shareholders. In 2011, no exemptions were requested.

        The same restrictions apply to holders of ADSs as those holding Novartis shares.

        Given that shareholder representation at General Meetings has traditionally been low in Switzerland, Novartis considers the restriction on registration necessary to prevent a minority shareholder from dominating a General Meeting.

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        The Articles of Incorporation provide that no nominee shall be registered with the right to vote for more than 0.5% of the registered share capital. The Board of Directors may, upon request, grant an exemption from this restriction if the nominee discloses the names, addresses and the number of shares of the persons for whose account it holds 0.5% or more of the registered share capital. Exemptions are in force for the nominees listed under—Our Shareholders—Shareholdings—Significant Shareholders.

        The same restrictions apply to holders of ADSs as those holding Novartis shares.

        The restrictions on registration contained in the Articles of Incorporation may only be removed by a resolution of the General Meeting of shareholders, with approval of at least two-thirds of the votes represented at the meeting.

        Shareholders, ADS holders or nominees that are linked to each other or act in concert to circumvent the restrictions on registration are treated as one person or nominee for the purposes of the restrictions on registration.

No restriction on trading of shares

        The registration of shareholders in the Novartis share register or in the ADS register kept by JPMorgan Chase Bank does not affect the tradability of Novartis shares or ADSs. No restrictions are imposed by Novartis or JPMorgan Chase Bank on the trading of registered Novartis shares or ADSs. Registered Novartis shareholders or ADS holders may, therefore, purchase or sell their Novartis shares or ADSs at any time, including prior to a General Meeting regardless of the record date. The record date serves only to determine the right to vote at a General Meeting of Novartis.

Change-of-control provisions

        No opting up, no opting out

        The Swiss Stock Exchange Act provides that anyone who, directly, indirectly or acting in concert with third parties, acquires equity securities exceeding 331/3% of the voting rights of a company—whether or not such rights are exercisable—is required to make an offer to acquire all listed equity securities of that company. A company may raise this threshold to 49% of the voting rights ("opting up") or may, under certain circumstances, waive the threshold ("opting out"). Novartis has not adopted any such measures.

Clauses on changes-of-control

        There are no change-of-control clauses benefiting Board members. With respect to members of the Executive Committee, see below under—Our Management—Contracts with Members of the Executive Committee.


Our Board of Directors

Composition of the Board of Directors and its Committees

         LOGO

Election and Term of Office

        All Board members are elected individually.

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        Board members are elected to terms of office of three years or less by shareholders at General Meetings. The terms of office among Board members are to be coordinated so that approximately one-third of all Board members are subject each year to re-election or election. Under Swiss law, a General Meeting of shareholders is entitled to remove any Board member at any time, regardless of his or her remaining term of office.

        The average tenure of Board members is eight years and the average age is 61. A Board member must retire after reaching age 70. Under special circumstances, shareholders may grant an exemption from this rule and re-elect a Board member for additional terms of office of no more than three years at a time.

Name
  Nationality   Year
of birth
  First
election
at AGM
  Last
election
at AGM
  End of
current
Term
 

Daniel Vasella, M.D. 

  CH     1953     1996     2010     2013  

Ulrich Lehner, Ph.D. 

  D     1946     2002     2011     2014  

William Brody, M.D., Ph.D. 

  US     1944     2009     2009     2012  

Srikant Datar, Ph.D. 

  US     1953     2003     2009     2012  

Ann Fudge

  US     1951     2008     2011     2014  

Pierre Landolt, Ph.D. 

  CH     1947     1996     2011     2014  

Enrico Vanni, Ph.D. 

  CH     1951     2011     2011     2014  

Andreas von Planta, Ph.D. 

  CH     1955     2006     2009     2012  

Dr. Ing. Wendelin Wiedeking

  D     1952     2003     2009     2012  

Marjorie M.T. Yang

  CHN     1952     2007     2010     2013  

Rolf M. Zinkernagel, M.D. 

  CH     1944     1999     2009     2012  

Board member Qualifications

        The Corporate Governance and Nomination Committee determines the criteria for the selection of the Board members and Board committee members. Factors considered include skills and knowledge, diversity of viewpoints, professional backgrounds and expertise, business and other experience relevant to the business of Novartis, the ability and willingness to commit adequate time and effort to Board and committee responsibilities, the extent to which personality, background, expertise, knowledge and experience will interact with other Board members to build an effective and complementary Board, and whether existing board memberships or other positions held by a candidate could lead to a conflict of interest.

        The biographies of the Board members set out the particular qualifications that led the Board of Directors to conclude that a Board member is qualified to serve on the Board of Directors, creating a Board that today is diverse in terms of background, qualifications, interests and skills. See "—6.A Directors and Senior Management—Board of Directors."

Role of the Board of Directors and the Board Committees

        The Board of Directors is responsible for the overall direction and supervision of the management and holds the ultimate decision-making authority for Novartis AG, except for those decisions reserved to the shareholders.

        The Board of Directors has delegated certain responsibilities to five committees: Chairman's Committee, Compensation Committee, Audit and Compliance Committee, Corporate Governance and Nomination

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Committee and Risk Committee as set out below (responsibilities described with the terms "overseeing" or "reviewing" are subject to final approval by the Board of Directors).

Responsibilities
  Membership
comprises
  Number of
meetings held
in 2011/
approximate average duration of each meeting Attendance
  Link
The Board of Directors         9/7    
The primary responsibilities of the Board of Directors include:
—Setting the strategic direction of the Group;
—Determining the organizational structure and governance of the Group;
—Appointing, overseeing and dismissing key executives and planning
their succession;
—Determining and overseeing the financial planning, accounting,
reporting and controlling;
—Approving the annual financial statements and the corresponding
financial results releases; and
—Approving major transactions and investments.
  Daniel Vasella(1)
Ulrich Lehner
William Brody
Srikant Datar
Ann Fudge
Pierre Landolt
Enrico Vanni(2)
Andreas von Planta
Wendelin Wiedeking
Marjorie M.T. Yang
Rolf M. Zinkernagel
    9
9
9
9
9
7
7
9
9
9
8
  Articles of Incorporation of
Novartis AG

Regulations of the Board
of Directors, its Committees
and the Executive Committee
of Novartis AG
(Board Regulations)

http://www.novartis.com/
corporate-governance

The Chairman's Committee

 

 

 

 

6/2

 

 
The primary responsibilities of this committee include:
—Commenting on significant matters before the Board of Directors makes a decision;
—Recommending key executive appointments to the Board of Directors;
—Dealing with Board matters arising in between Board meetings,
including the taking of required preliminary actions; and
—Approving transactions and investments as delegated by the
Board of Directors.
  Daniel Vasella(1)
Srikant Datar(2)
Ulrich Lehner
    6
5
6
  Charter of the Chairman's
Committee

http://www.novartis.com/
corporate-governance

207


Responsibilities
  Membership
comprises
  Number of
meetings held
in 2011/
approximate average duration of each meeting Attendance
  Link

The Audit and Compliance Committee

 

 

 

 

6/3

 

 
The primary responsibilities of this committee include:
—Overseeing the internal auditors;
—Supervising the external auditors and selecting and nominating
the external auditors for election by the meeting of the shareholders;
—Overseeing the accounting policies, financial controls and
compliance with accounting and internal control standards;
—Approving quarterly financial statements and financial results releases;
—Overseeing internal control and compliance processes and procedures;
and
—Overseeing compliance with laws and external and internal regulations.
The Audit and Compliance Committee has the authority
to retain external consultants and other advisors.
  Srikant Datar(1,3)
Ulrich Lehner(3)
Enrico Vanni(4)
Andreas von Planta
Wendelin Wiedeking
    6
6
3
6
6
  Charter of the Audit and
Compliance Committee

http://www.novartis.com/
corporate-governance

(1)
Chair

(2)
Since February 2011

(3)
Audit Committee Financial Expert as defined by the US Securities and Exchange Commission (SEC)

(4)
Since April 2011

208


Responsibilities
  Membership comprises   Number of meetings held in 2011/approximate average duration of each meeting Attendance   Link
The Risk Committee         4/2    
The primary responsibilities of this committee include:
—Ensuring that Novartis has implemented an appropriate and effective risk management system and process;
—Ensuring that all necessary steps are taken to foster a culture of risk-adjusted decision making without constraining reasonable
risk-taking and innovation;
—Approving guidelines and reviewing policies and processes; and
—Reviewing with management, internal auditors and external auditors
the identification, prioritization and management of the risks, the accountabilities and roles of the functions involved with risk management,
the risk portfolio and the related actions implemented by management.
The Risk Committee has the authority to retain external consultants and other advisors.
  Andreas von Planta(1)
Srikant Datar
Ann Fudge(2)
Ulrich Lehner
Wendelin Wiedeking
    4
4
3
4
4
  Charter of the Risk Committee

http://www. novartis.com/
corporate-governance

209


Responsibilities
  Membership comprises   Number of meetings held in 2011/approximate average duration of each meeting Attendance   Link

The Compensation Committee

 

 

 

 

5/1.5

 

 
The primary responsibilities of this committee include:
—Designing, reviewing and recommending to the Board compensation policies and programs;
—Advising the Board on the compensation of the Board members;
—Approving the employment terms of key executives;
—Deciding on the variable compensation of the Chief Executive Officer,
the members of the Executive Committee and other key executives for the past year; and
—Deciding on the base salary and the total target compensation
of the Chief Executive Officer, the members of the Executive Committee and other key executives for the coming year.
The Compensation Committee has the authority to retain external
consultants and other advisors.
  Marjorie M.T. Yang(1)
William Brody
Srikant Datar
Ulrich Lehner
Enrico Vanni(3)
    5
4
5
4
4
  Charter of the
Compensation Committee

http://www.novartis.com/
corporate-governance

210


Responsibilities
  Membership comprises   Number of meetings held in 2011/approximate average duration of each meeting Attendance   Link
The Corporate Governance and
Nomination Committee
        3/2    
The primary responsibilities of this committee include:
—Designing, reviewing and recommending to the Board corporate governance principles;
—Reviewing on a regular basis the Articles of Incorporation with a view to reinforcing shareholder rights;
—Reviewing on a regular basis the composition and size of the Board and its committees;
—Reviewing annually the independence status of each Board member;
—Reviewing directorships and agreements of board members for conflicts of interest and dealing with conflicts of interest;
—Identifying candidates for election as Board member;
—Assessing existing Board members and recommending to the Board whether they should stand for re-election;
—Preparing and reviewing the succession plan for the CEO; and
—Developing and reviewing an orientation program for new Board members and an ongoing education plan for existing Board members.
The Corporate Governance and Nomination Committee has the authority to retain external consultants and other advisors.
  Ulrich Lehner(1)
Ann Fudge
Pierre Landolt
Andreas von Planta
Rolf M. Zinkernagel
    3
3
2
3
3
  Charter of the Corporate
Governance and Nomination
Committee

http://www.novartis.com/
corporate-governance

(1)
Chair

(2)
Since February 2011

(3)
Since April 2011

The functioning of the Board of Directors

        The Novartis Board of Directors takes decisions as a whole, supported by its five Board committees (Chairman's Committee, Compensation Committee, Audit and Compliance Committee, Corporate Governance and Nomination Committee and Risk Committee). Each Board committee has a written charter outlining its duties and responsibilities and is led by a Chair elected by the Board of Directors.

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The Chairman

        The Chairman provides leadership to the Board of Directors in its governance role, oversees that the strategy agreed by the Board of Directors is implemented by the Chief Executive Officer and his reports, provides support and advice to the Chief Executive Officer, reviews the yearly objectives and prepares the performance evaluation of the Chief Executive Officer before approval by and feed-back session with the Board of Directors, works closely with the Chief Executive Officer in nominating and evaluating members and permanent attendees of the Executive Committee and in establishing succession plans for key management positions, represents Novartis with stakeholders and oversees Internal Audit.

Meetings of the Board of Directors

        The Board of Directors has meetings with the members of the Executive Committee, private meetings without members of the Executive Committee and meetings of only the independent Board members.

        Topics addressed in the meetings with the Executive Committee include strategy, business reviews and major projects, investments and transactions. Topics addressed in private meetings include performance evaluation of top management, succession planning and Board self-evaluation.

        As long as the Chairman is not independent, Dr. Ulrich Lehner, Vice-Chairman, chairs sessions of the independent Board members and leads the independent Board members in case of a crisis or matters requiring their separate consideration or decision. Moreover, every independent Board member may request separate meetings of the independent Board members if the need arises. Dr. Ulrich Lehner also leads the Board if the Chairman is incapacitated.

        In 2011, there were nine meetings of the Board of Directors and six meetings of the independent Board members.

Independence of Board Members

        The independence of Board members is a key corporate governance issue. Accordingly, Novartis established independence criteria that are intended to reflect international best-practice standards. These independence criteria (last revised on October 16, 2008) can be found on the Novartis website:

        The Corporate Governance and Nomination Committee annually submits to the Board of Directors a proposal concerning the determination of the independence of each Board member. For this assessment, the Committee considers all relevant facts and circumstances of which it is aware.

        In its meeting on December 14, 2011, the Board of Directors determined that all of its members, except for Dr. Vasella, were independent.

        Dr. Vasella, the Chairman, was until January 31, 2010 also the Chief Executive Officer. The Board of Directors has delegated Rolf M. Zinkernagel, M.D., to the Scientific Advisory Board of the Novartis Institute for Tropical Diseases (NITD), and both Dr. Zinkernagel, M.D. and William Brody, M.D. to the Board of Directors of the Genomics Institute of the Novartis Research Foundation (GNF). The Board of Directors concluded that these activities are supervisory and not consultatory in nature and do not affect Dr. Zinkernagel's or Dr. Brody's independence as a Board member.

Relationship of Non-Executive Board Members with Novartis

        With the exception of Dr. Vasella none of the Board members is or was a member of the management of Novartis AG or of any other Novartis Group company in the three financial years preceding 2011.

        There are no significant business relationships of any Board member with Novartis AG or with any other Novartis Group company.

Information and control systems of the Board of Directors vis-à-vis Management

Information on the management

        The Board of Directors ensures that it receives sufficient information from the Executive Committee to perform its supervisory duty and to make decisions that are reserved for the Board of Directors. The authority of the Board of Directors to determine the compensation of the members of the Executive Committee is an

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important element to ensure the alignment of Executive Committee members with the interests of Novartis and its shareholders.

        The Board of Directors obtains the information required to perform its duties through several means:

Board Committees

        Board committees regularly meet with management and, at times, outside consultants to review the business, better understand applicable laws and policies affecting the Group and support the Board of Directors and the management in meeting the requirements and expectations of stakeholders and shareholders.

        In particular, the Chief Financial Officer, the Group General Counsel and representatives of the external auditors are invited to meetings of the Audit and Compliance Committee. Furthermore, the Heads of Internal Audit, Financial Reporting and Accounting, Compliance, as well as the Business Practices Officers, report on a regular basis to the Audit and Compliance Committee.

        The Audit and Compliance Committee reviews financial reporting processes on behalf of the Board of Directors. For each quarterly and annual release of financial information, the Disclosure Review Committee reviews the release for accuracy and completeness of disclosures. The Disclosure Review Committee is chaired by the Chief Financial Officer and is attended by the Group General Counsel, the Heads of the Divisions, the Heads of Finance of the Divisions and the Heads of the following Corporate Functions: Treasury, Financial Reporting and Accounting, Internal Audit and Investor Relations. Decisions made by the Disclosure Review Committee are reviewed by the Audit and Compliance Committee before publication of the quarterly and annual release.

        The Risk Committee oversees the risk management system and processes, as well as reviews the risk portfolio of the Group to ensure appropriate and professional management of the risks. For this purpose the Corporate Risk Management function and the risk owners of the Divisions report on a regular basis to the Risk Committee. The Group General Counsel and the Head of Internal Audit are also invited to the meetings.

Novartis Management Information System

        Novartis produces comprehensive consolidated financial statements on a monthly basis. These are typically available within ten days of the end of the month and include the following:

        The above information is made available to the members of the Board on a monthly basis. An analysis of the key deviations from prior year or target is also provided.

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        The Board also receives on a quarterly basis an outlook of the full year results in accordance with IFRS and Core, together with related commentary prior to the release of the quarterly results.

        On an annual basis, in the fourth quarter of the year, the Board receives and approves the operating and financial targets for the following year.

        In the middle of the year, the Board also reviews and approves the Strategic Plan for the next five years and the consolidated income statement in $ in accordance with IFRS and Core contained in the Plan.

        The Board does not have direct access to Novartis' financial and management reporting systems but can at any time request more detailed financial information on any aspect that is presented to it.

Internal Audit

        The Internal Audit function carries out operational and system audits in accordance with an audit plan approved by the Audit and Compliance Committee; assists organizational units in the accomplishment of objectives by providing an independent approach to the evaluation, improvement and effectiveness of their internal control framework; prepares reports regarding the audits it has performed; and reports actual or suspected irregularities to the Audit and Compliance Committee and the Chairman. The Audit and Compliance Committee regularly reviews the scope of Internal Audit, the audit plans and the results of the internal audits.

Risk Management

        The Corporate Risk Management function reports to the independent Risk Committee of the Board of Directors. The Compensation Committee works closely with the Risk Committee to ensure that the compensation system does not lead to excessive risk-taking by management (for details see our Compensation Report).

        Organizational and process measures have been designed to identify and mitigate risks at an early stage. Organizationally, the individual divisions are responsible for risk and risk mitigation, with specialized corporate functions, such as Group Finance, Group Quality Operations, Corporate Health, Safety, Environment and Business Continuity, providing support and controlling the effectiveness of risk management by the Divisions in these respective areas.


Our Management

Composition of the Executive Committee

         LOGO

(1)
Permanent attendee until December 31, 2011, full member as per January 1, 2012.

Composition of the Executive Committee

        The Executive Committee is headed by the Chief Executive Officer. The members of the Executive Committee are appointed by the Board of Directors. The Chairman may appoint or remove non-voting Permanent Attendees to attend the meetings of the Executive Committee. As of December 31, 2011, there were 2 Permanent Attendees attending meetings of the Executive Committee.

        The organizational structure and the details of the responsibility of the Executive Committee are set forth in the Board Regulations (www.novartis.com/corporate-governance).

        The Board of Directors has not concluded any contracts with third parties to manage the business.

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Role and functioning of the Executive Committee

        The Board of Directors has delegated to the Executive Committee the coordination of the Group's day-to-day business operations. This includes:

the Chief Executive Officer

        In addition to other duties that may be assigned by the Board of Directors, the Chief Executive Officer, supported by the Executive Committee, is responsible overall for the management and performance of the business, leads the Executive Committee, builds and maintains an effective executive team and represents Novartis with major customers, financial analysts, investors and with the media.

Contracts with Members of the Executive Committee

        In accordance with good corporate governance, employment contracts with members of the Executive Committee do not contain unusually long notice periods, change-of-control clauses or severance payments.


The Independent External Auditors

Duration of the Mandate and Terms of Office

        Based on a recommendation by the Audit and Compliance Committee, the Board of Directors nominates an independent auditor for election at the Annual General Meeting. PricewaterhouseCoopers (PwC) assumed its existing auditing mandate for Novartis in 1996. Peter Kartscher, auditor in charge, and Michael P. Nelligan, global relationship partner, began serving in their respective roles in 2009. The Audit and Compliance Committee ensures that the auditor in charge is rotated at least every five years.

Information to the Board of Directors and the Audit and Compliance Committee

        The independent auditor, PwC, is responsible for opining on whether the audited consolidated financial statements comply with International Financial Reporting Standards (IFRS) and Swiss law and whether the separate parent company financial statements of Novartis AG comply with Swiss law. Additionally, PwC is responsible for opining on the effectiveness of internal control over financial reporting.

        The Audit and Compliance Committee, acting on behalf of the Board of Directors, is responsible for overseeing the activities of PwC. During 2011, the Audit and Compliance Committee held 6 meetings. At each of these meetings, PwC was invited to attend during the discussion of agenda items that dealt with accounting, financial reporting or auditing matters and any other matters relevant for their audit.

        On an annual basis, PwC provides to the Audit and Compliance Committee the written disclosures required by Rule 3526, "Communications with Audit Committees Concerning Independence," of the Public Company Accounting Oversight Board (PCAOB), and the Audit and Compliance Committee and PwC discuss PwC's independence from Novartis and Novartis' management.

        The Audit and Compliance Committee recommended to the Board of Directors, and the Board of Directors approved, inclusion of the audited financial statements in the Annual Report for the year ended December 31, 2011.

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        The Audit and Compliance Committee, on a regular basis, evaluates the performance of PwC and, once yearly, based on a performance evaluation, recommends to the Board of Directors whether PwC should be proposed to the Annual General Meeting for election. Also, once yearly, the auditor in charge and the global relationship partner report to the Board of Directors on the activities of PwC during the current year and on the audit plan for the coming year and answer any questions or concerns Board members might have on the performance of PwC, or on the work PwC has conducted or is planning to conduct.

        In order to assess the performance of PwC, the Audit and Compliance Committee requires a self-evaluation report from PwC, holds private meetings with the Chief Executive Officer, the Chief Financial Officer and with the Head of Internal Audit and, if necessary, obtains an independent external assessment. The Board of Directors also meets with the auditor in charge and the global relationship partner. Criteria applied for the performance assessment of PwC include technical and operational competence, independent and objective view, sufficient resources employed, focus on areas of significant risk to Novartis, willingness to probe and challenge, ability to provide effective, practical recommendations and open and effective communication and coordination with the Audit and Compliance Committee, the Internal Audit function and management.

Pre-approval of Audit and Non-Audit Services

        The Audit and Compliance Committee's pre-approval is required for all services provided by PwC. These services may include audit services, audit-related services, tax services and other services.

        Pre-approval is detailed as to the particular services or categories of services, and is subject to a specific budget. PwC and management report, on a quarterly basis, 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. The Audit and Compliance Committee may also pre-approve additional services on a case-by-case basis.

Auditing and Additional Fees

        PwC charged the following fees for professional services rendered for the 12-month periods ended December 31, 2011 and December 31, 2010:

 
  2011   2010  
 
  $ thousands
  $ thousands
 

Audit Services

    30,060     23,675  

Audit-Related Services

    2,480     2,140  

Tax Services

    1,550     1,485  

Other Services

    190     110  
           

Total

    34,280     27,410  
           

        Audit Services are defined as the standard audit work performed each year in order to issue opinions on the parent company and consolidated financial statements of the Group, to issue opinions relating to the effectiveness of the Group's internal controls over financial reporting, and to issue reports on local statutory financial statements. Also included are audit services that can only be provided by the Group auditor, such as auditing of non-recurring transactions and implementation of new accounting policies, audits of accounting infrastructure system controls, pre-issuance reviews of quarterly financial results, consents and comfort letters and any other audit services required for SEC or other regulatory filings.

        Audit-Related Services include those other assurance services provided by the independent auditor 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 and related audits, audits of pension and benefit plans, IT infrastructure control assessments, contractual audits of third-party arrangements, assurance services on corporate citizenship reporting and compliance with corporate integrity agreements, and consultation regarding new accounting pronouncements.

        Tax Services represent tax compliance, tax returns, assistance with historical tax matters and other tax-related services.

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        Other Services include training in the finance area, advice for process improvements, benchmarking studies, assessment of certain non-financial processes and license fees for use of accounting and other reporting guidance databases.


Further Information

The Group structure of Novartis

Novartis AG and Group Companies

        Under Swiss company law, Novartis AG is organized as a corporation which has issued shares of common stock to investors. The registered office of Novartis AG is Lichtstrasse 35, CH-4056 Basel, Switzerland.

        Business operations are conducted through Novartis Group companies. Novartis AG, a holding company, owns directly or indirectly all companies worldwide belonging to the Novartis Group. Except as described below, the shares of these companies are not publicly traded. The most important Novartis subsidiaries and associated companies are listed in Note 31 to the Group's consolidated financial statements.

Divisions

        The wholly-owned businesses of Novartis are divided on a worldwide basis into six operating divisions, Pharmaceuticals, Alcon (eye care), Sandoz (generics), Vaccines and Diagnostics, Over-the-Counter and Animal Health, and Corporate activities.

Majority holdings in publicly traded group companies

        76% of Novartis India Limited, with its registered office in Mumbai, India, and listed on the Bombay Stock Exchange (ISIN INE234A01025, symbol: HCBA). The total market value of the 24% free float of Novartis India Limited was $92.3 million at December 31, 2011, using the quoted market share price at the year end. Applying this share price to all the shares of the company the market capitalization of the whole company is $391.5 million.

Significant minority holdings in publicly traded companies

Information of our stakeholders

Introduction

        Novartis is committed to open and transparent communication with shareholders, financial analysts, customers, suppliers and other stakeholders. Novartis aims to disseminate material developments in its businesses in a broad and timely manner that complies with the rules of the SIX Swiss Exchange and the NYSE.

Communications

        Novartis publishes an Annual Report each year that provides information on the Group's results and operations. In addition to the Annual Report, Novartis prepares an annual report on Form 20-F that is filed with the SEC. Novartis discloses quarterly financial results in accordance with IFRS and issues press releases from time to time regarding developments in its businesses.

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        Novartis furnishes press releases relating to financial results and material events to the SEC via Form 6-K. An archive containing Annual Reports, annual reports on Form 20-F, and quarterly results releases, as well as related materials such as slide presentations and conference call webcasts, is on the Novartis Investor Relations website (www.novartis.com/investors). The archive is available on the Novartis website:

        Information contained in reports and releases issued by Novartis is only correct and accurate at the time of release. Novartis does not update past releases to reflect subsequent events and advises against relying on them for current information.

Investor Relations program

        An Investor Relations team manages the Group's interaction with the international financial community. Several events are held each year to provide institutional investors and analysts various opportunities to learn more about Novartis.

        Investor Relations is based at the Group's headquarters in Basel, Switzerland. A part of the team is located in New York to coordinate interaction with US investors. Information is available on the Novartis website: www.novartis.com/investors. Investors are also welcome to subscribe to a free e-mail service on this site.

WEBSITE INFORMATION

Topic
  Information
Share Capital   Articles of Incorporation of Novartis AG
http://www.novartis.com/corporate-governance
Novartis key share data
http://www.novartis.com/key-share-data

Shareholder Rights

 

Articles of Incorporation of Novartis AG
http://www.novartis.com/corporate-governance
Investor Relations information
http://www.novartis.com/investors

Board Regulations

 

Board Regulations
http://www.novartis.com/corporate-governance

Executive Committee

 

Executive Committee
http://www.novartis.com/executive-committee

Novartis Code for Senior Financial Officers

 

Novartis Code of Ethical Conduct for CEO and Senior Financial Officers
http://www.novartis.com/corporate-governance

Additional Information

 

Novartis Investor Relations
http://www.novartis.com/investors

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6.D    Employees

        The table below sets forth the breakdown of the total year-end number of our full time equivalent employees by main category of activity and geographic area for the past three years.

For the year ended
December 31, 2011
(full time equivalents)
  Research &
Development
  Production &
Supply
  Marketing &
Sales
  General &
Administration
  Total  

USA

    8,269     7,785     8,930     2,258     27,242  

Canada and Latin America

    537     2,713     5,541     1,146     9,937  

Europe

    11,203     20,384     19,532     6,434     57,553  

Asia/Africa/Australasia

    3,509     4,725     18,551     2,169     28,954  
                       

Total

    23,518     35,607     52,554     12,007     123,686  
                       

 

For the year ended
December 31, 2010
(full time equivalents)
  Research &
Development
  Production &
Supply
  Marketing &
Sales
  General &
Administration
  Total  

USA

    7,995     7,186     9,942     2,464     27,587  

Canada and Latin America

    555     2,660     5,435     1,064     9,714  

Europe

    11,009     19,601     19,477     6,103     56,190  

Asia/Africa/Australasia

    2,849     4,193     17,083     1,802     25,927  
                       

Total

    22,408     33,640     51,937     11,433     119,418  
                       

 

For the year ended
December 31, 2009
(full time equivalents)
  Research &
Development
  Production &
Supply
  Marketing &
Sales
  General &
Administration
  Total  

USA

    6,367     3,683     8,626     1,849     20,525  

Canada and Latin America

    556     2,365     4,644     912     8,477  

Europe

    10,433     17,226     16,946     5,389     49,994  

Asia/Africa/Australasia

    2,466     3,888     13,083     1,401     20,838  
                       

Total

    19,822     27,162     43,299     9,551       99,834  
                       

 

Movements in full time equivalents
  2011   2010  

Associates as of January 1

    119,418     99,834  

Separations

    (4,572 )   (3,467 )

Retirements

    (751 )   (757 )

Resignations

    (8,297 )   (7,309 )

External hirings

    17,049     14,402  

Impact of major business combinations

    839     16,715  
           

Total associates as of December 31

    123,686     119,418  
           

        A significant number of our associates are represented by unions or works councils. We have not experienced any material work stoppages in recent years, and we consider our employee relations to be good.


6.E    Share Ownership

        The aggregate amount of our shares owned by current non-executive Directors and the current members of our Executive Committee and Permanent Attendees (including persons closely linked to them) as of January 19, 2012 was 6,219,881 shares.

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        The aggregate amount of Novartis share and ADS options, including other information regarding the options, held by current non-executive Directors and the current members of our Executive Committee and Permanent Attendees as of January 19, 2012 is set forth below:

Title of Options
  Amount of
shares called
for by the
options
  Exercise
Price(1)
(CHF)
  Purchase
Price
(if any)
  Expiration Date   Total number
of options
held
 

Novas12 Options

    1     48.86     0     February 3, 2012     0  

Novas14 Options

    1     57.45     0     February 3, 2014     9,559  

Novas15 Options

    1     57.45     0     February 3, 2015     34,127  

Novas16 Options

    1     71.30     0     February 5, 2016     101,446  

Novas17 Options

    1     72.85     0     February 3, 2017     898,530  

Novas18 Options

    1     64.05     0     January 10, 2018     273,708  

Novas19 Options

    1     53.65     0     January 18, 2019     643,140  

Novas20 Options

    1     55.85     0     January 19, 2020     1,782,610  

Novas21 Options

    1     54.70     0     January 19, 2021     141,396  

Novas22 Options

    1     54.20     0     January 19, 2022     0  
                               

Total Novartis Share Options

                            3,884,516  
                               

Novartis ADS Options Cycle V

    1   $ 41.97     0     March 7, 2011     0  

Novartis ADS Options Cycle VI

    1   $ 37.28     0     March 7, 2012     0  

Novartis ADS Options Cycle VII

    1   $ 36.31     0     February 4, 2013     149,782  

Novartis ADS Options Cycle VIII

    1   $ 46.09     0     February 4, 2014     112,932  

Novartis ADS Options Cycle IX

    1   $ 47.84     0     February 4, 2015     151,659  

Novartis ADS Options Cycle X

    1   $ 54.70     0     February 5, 2016     124,876  

Novartis ADS Options Cycle XI

    1   $ 58.38     0     February 3, 2017     186,850  

Novartis ADS Options Cycle XII

    1   $ 57.96     0     January 10, 2018     184,870  

Novartis ADS Options Cycle XIII

    1   $ 46.42     0     January 18, 2019     128,827  

Novartis ADS Options Cycle XIV

    1   $ 53.70     0     January 19, 2020     0  

Novartis ADS Options Cycle XV

    1   $ 57.07     0     January 19, 2021     0  

Novartis ADS Options Cycle XVI

    1   $ 58.33     0     January 19, 2022     0  
                               

Total Novartis ADS Options

                            1,039,796  
                               

(1)
Exercise price indicated is per share, and denominated in Swiss francs except where indicated.

        In addition, one Executive Committee member, Kevin Buehler, owns 782,485 other options, consisting of non tradable options and share settled appreciation rights, resulting from the conversion of Alcon equity into Novartis equity.

        For more information on the Novartis shares and share options owned by individual members of our Executive Committee and by our current non-executive Directors, see "—Item 6.B Compensation—Ownership of Novartis Shares and Share Option by Executive Committee Members." and "—Item 6.B Compensation—Ownership of Novartis Shares and Share Option by Non-Executive Directors." For information on our equity-based compensation plans see "—Item 6.B Compensation—Compensation to Novartis Associates."

Item 7.    Major Shareholders and Related Party Transactions

7.A    Major Shareholders

        Based on our share register, we believe that we are not directly or indirectly owned or controlled by another corporation or government, or by any other natural or legal persons.

        According to the share register, on December 31, 2011, no person or entity was registered as the owner of more than 5% of our shares. As of that date, excluding 5.76% of our share capital held by Novartis AG, together with Novartis affiliates, as treasury shares, the following shareholders (including nominees and the ADS depositary) held more than 2% of the total share capital of Novartis with the right to vote these shares:

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        According to disclosure notifications filed with Novartis AG and SIX Swiss Exchange, Capital Group Companies, Inc., Los Angeles, California held between 3% and 5% of the share capital of Novartis AG as of December 31, 2011.

        As of December 31, 2011, no other shareholder was registered as owner of more than 2% of the registered share capital. Novartis has not entered into any agreement with any shareholder regarding the voting or holding of Novartis shares.

        According to the share register, on December 31, 2010, no person or entity was registered as the owner of more than 5% of our shares. As of that date, excluding 6.3% of our share capital held by Novartis AG, together with Novartis affiliates, as treasury shares, the following shareholders (including nominees and the ADS depositary) held more than 2% of the total share capital of Novartis with the right to vote these shares:

        According to disclosure notifications filed with Novartis AG and SIX Swiss Exchange, each of the following shareholders held between 3% and 5% of the share capital of Novartis AG as of December 31, 2010:

        As of December 31, 2009, the holdings of the shareholders listed above with a right to vote were as follows:


7.B    Related Party Transactions

        Genentech/Roche:    Novartis has two agreements with Genentech, Inc., USA, a subsidiary of Roche Holdings AG which is indirectly included in the consolidated financial statements using equity accounting since Novartis holds 33.3% of the outstanding voting shares of Roche.

        Lucentis.    We have licensed the exclusive rights to develop and market Lucentis outside the US for indications related to diseases of the eye. As part of this agreement, Novartis paid Genentech/Roche an initial milestone and shared the cost for the subsequent development by making additional milestone payments upon the achievement of certain clinical development points and product approval. Novartis also pays royalties on the net sales of Lucentis products outside the US. Lucentis sales of $2.0 billion (2010: $1.5 billion; 2009: $1.2 billion) have been recognized by Novartis.

        Xolair.    In February 2004, Novartis Pharma AG, Genentech, Inc., and Tanox, Inc., finalized a three-party collaboration to govern the development and commercialization of certain anti-IgE antibodies including Xolair and TNX-901. Under this agreement, all three parties co-developed Xolair. On August 2, 2007, Genentech, Inc. completed the acquisition of Tanox, Inc. and has taken over its rights and obligations. Novartis and Genentech/Roche are co-promoting Xolair in the US where Genentech/Roche records all sales.

        Novartis markets Xolair and records all sales and related costs outside the US, as well as co-promotion costs in the US. Genentech and Novartis share the resulting profits from sales in the US, Europe and other countries, according to agreed profit-sharing percentages. Novartis recognized total sales of Xolair of $478 million (2010: $369 million) including sales to Genentech/Roche for the US market.

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        The net expense for royalties, cost sharing and profit sharing arising out of the Lucentis and Xolair agreements with Genentech totaled $396 million (2010: $300 million; 2009: $200 million).

        Furthermore, Novartis has several patent license, supply and distribution agreements with Roche and several Novartis entities hold Roche bonds totaled $20 million (2010: $17 million; 2009: $1 billion).

        Idenix:    Novartis Pharma AG entered into a collaboration agreement with Idenix in May 2003 relating to the worldwide development and commercialization of drug candidates and purchased approximately 54% of the common stock of Idenix. As Novartis had the ability to exercise control, Idenix was fully consolidated. In August 2009, Novartis opted not to purchase shares that were issued pursuant to an underwritten offering and waived and amended certain rights under the development and commercialization agreement. As a result of this, the Novartis shareholding was diluted from the pre-offering level of 53% to 47% and since September 1, 2009 Idenix has been accounted for according to the equity method. Novartis has a license agreement with Idenix for Tyzeka/Sebivo and may pay additional license fees and development expenses for drug candidates that Novartis may elect to license from Idenix. The sales of Tyzeka/Sebivo totaled $114 million in 2011 ($95 million in 2010; 2009: $84 million).

        Executive Officer:    During 2009, an Executive Officer acquired real estate for CHF 3.7 million from a consolidated entity. The transaction price was based on independent external valuation reports.


7.C    Interests of Experts and Counsel

        Not applicable.

Item 8.    Financial Information

8.A    Consolidated Statements and Other Financial Information

        See "Item 18. Financial Statements."

Dividend policy

        Subject to the dividend policy described below, our Board of Directors expects to recommend the payment of a dividend in respect of each financial year. If approved by our shareholders at the relevant annual Shareholders' Meeting, the dividends will be payable shortly following such approval. Any shareholder who purchased our shares on or before the second trading day after the shareholders' meeting and holds the shares through that date shall be deemed to be entitled to receive the dividends approved at that meeting. Dividends are reflected in our financial statements in the year in which they are approved by our shareholders.

        Our Board's stated policy is that, over the long term, the size of the dividend should be geared to growth in our after-tax earnings. In December 2007, our Board established a policy of paying dividends, subject to shareholder approval, of between 35% and 60% of our net income from continuing operations. In July 2011, in order to retain a good balance between attractive shareholder returns, investment in the business and a sound capital structure, our Board amended this policy by eliminating the 60% payout ceiling. However, all future dividends paid by us will depend upon our financial condition at the time, the results of our operations and other factors.

        The Board will propose a dividend of CHF 2.25 per share to the shareholders for approval at the Annual General Meeting to be held on February 23, 2012. Because we pay dividends in Swiss francs, exchange rate fluctuations will affect the US dollar amounts received by holders of ADSs. For a summary of dividends we paid in the past five years, see "Item 3. Key Information—3.A Selected Financial Data—Cash Dividends per Share." See also "Item 3. Key Information—3.D Risk Factors—The price of our ADSs and the US dollar value of any dividends may be negatively affected by fluctuations in the US dollar/Swiss franc exchange rate."


8.B    Significant Changes

        None.

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Item 9.    The Offer and Listing

9.A Listing Details

        Our shares are listed in Switzerland on the SIX Swiss Exchange (SIX).

        American Depositary Shares, each representing one share, have been available in the US through an American Depositary Receipts (ADR) program since December 1996. This program was established pursuant to a Deposit Agreement which we entered into with JPMorgan Chase Bank N.A. as Depositary (Deposit Agreement). Our ADSs have been listed on the NYSE since May 2000, and are traded under the symbol "NVS."

        The table below sets forth, for the periods indicated, the high and low closing sales prices for our shares traded in Switzerland and for ADSs traded in US. The data below regarding our shares reflects price and volume information for trades completed by members of the SIX during the day as well as for inter-dealer trades completed off the SIX and certain inter-dealer trades completed during trading on the previous business day.

        The following share data was taken from SIX; the ADS data was taken from Bloomberg:

 
  Shares   ADSs  
 
  High   Low   High   Low  
 
  CHF per share
  $ per ADS
 

Annual information for the past five years

                         

2007

    74.65     57.55     59.70     51.60  

2008

    66.25     45.62     61.06     43.85  

2009

    56.90     39.64     56.16     33.96  

2010

    60.25     50.55     59.77     43.78  

2011

    55.80     39.99     64.52     51.65  

Quarterly information for the past two years

                         

2011

                         

First Quarter

    55.80     48.10     59.24     52.75  

Second Quarter

    55.00     48.62     64.52     54.23  

Third Quarter

    52.15     39.99     62.82     53.73  

Fourth Quarter

    53.70     47.80     58.86     51.65  

2010

                         

First Quarter

    60.25     53.50     55.52     51.91  

Second Quarter

    56.90     50.75     53.83     43.78  

Third Quarter

    56.90     50.55     58.09     47.85  

Fourth Quarter

    57.35     53.10     59.77     53.41  

Monthly information for most recent six months

                         

August 2011

    46.99     39.99     61.18     54.34  

September 2011

    50.80     44.45     58.57     53.73  

October 2011

    52.35     49.61     58.86     54.69  

November 2011

    50.70     47.80     56.62     51.65  

December 2011

    53.70     49.63     57.17     53.51  

January 2012 (through January 19)

    54.70     53.00     58.33     55.80  

        Fluctuations in the exchange rate between the Swiss franc and the US dollar will affect any comparisons of Swiss share prices and US ADS prices.

        The average daily volumes traded on the SIX (ON/OFF exchange) for the years 2011, 2010 and 2009 were 7,036,042, 6,216,952 and 7,110,909, respectively. These numbers are based on total annual turnover statistics supplied by the SIX via the Swiss Market Feed, which supplies such data to subscribers and to other information providers. The average daily volumes traded in the US for the years 2011, 2010 and 2009 were 3,492,488, 3,515,307 and 1,640,066, respectively.

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        The Depositary has informed us that as of January 19, 2012, there were 302,529,087 ADSs outstanding, each representing one Novartis share (approximately 11% of total Novartis shares issued). On January 19, 2012, the closing sales price per share on the SIX was CHF 54.20 and $58.33 per ADS on the NYSE.


9.B Plan of Distribution

        Not applicable.


9.C Market

        See "9.A Listing Details."


9.D Selling Shareholders

        Not applicable.


9.E Dilution

        Not applicable.


9.F Expenses of the Issue

        Not applicable.

Item 10.    Additional Information


10.A Share capital

        Not applicable.


10.B Memorandum and Articles of Association

        The following is a summary of certain provisions of our Articles of Incorporation (Articles), our Regulations of the Board of Directors (Board Regulations) and of Swiss law, particularly, the Swiss Code of Obligations (Swiss Code). This is not a summary of all the significant provisions of the Articles, the Board Regulations or of Swiss law. This summary is qualified in its entirety by reference to the Articles and the Board Regulations, which are an exhibit to this Form 20-F, and to Swiss law.


10.B.1 Company Purpose

        Novartis AG is registered in the commercial register of the Canton of Basel-Stadt, Switzerland, under number CH-270.3.002.061-2. Our business purpose, as stated in Article 2 of the Articles, is to hold interests in enterprises in the area of healthcare or nutrition. We may also hold interests in enterprises in the areas of biology, chemistry, physics, information technology or related areas. We may acquire, mortgage, liquidate or sell real estate and intellectual property rights in Switzerland or abroad. In pursuing our business purpose, we strive to create sustainable value.


10.B.2 Directors

        (a)   According to our Board Regulations, our Directors may not participate in deliberations or resolutions on matters which affect, or reasonably might affect, the Director's interests, or the interests of a person close to the Director. In addition, the Swiss Code sets forth that if, in connection with the conclusion of a contract, the Company is represented by the person with whom it is concluding the contract, such contract shall be in writing. Furthermore, the Swiss Code does require directors and members of senior management to safeguard the interests of the corporation and, in this connection, imposes a duty of care and a duty of loyalty on such persons. This rule is generally interpreted to mean that directors and members of senior management are disqualified from participating in decisions which affect them personally.

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        (b)   As with any Board resolution, Directors may not vote on their own compensation unless at least a majority of the Directors are present.

        (c)   The Articles and the Board Regulations contain no specific provision permitting or prohibiting Directors from borrowing from us. The Board of Directors may take decisions on all matters which by law or the Articles are not allocated to the General Meeting of Shareholders.

        (d)   Directors must retire after the end of their seventieth year of age, but the retirement does not become effective until the date of the next Ordinary General Meeting of Shareholders. The General Meeting of Shareholders may, under special circumstances, grant an exemption from this rule and may elect a Director for further terms of office of no more than three years at a time.

        (e)   Under the Articles, each of our Directors must also be a shareholder. Ownership of one share is sufficient to satisfy this requirement.


10.B.3 Shareholder Rights

        Because we have only one class of registered shares, the following information applies to all shareholders.

        (a)   The Swiss Code requires that at least 5% of our annual profit be retained as general reserves, so long as these reserves amount to less than 20% of our registered share capital. The law and the Articles permit us to accrue additional reserves.

        Under the Swiss Code, we may only pay dividends out of the balance sheet profit or out of reserves created for this purpose. In either event, under the Swiss Code, while the Board of Directors may propose that a dividend be paid, we may only pay dividends upon shareholders' approval at a General Meeting of Shareholders. Our auditors must confirm that the dividend proposal of our Board of Directors conforms with the Swiss Code and the Articles. Our Board of Directors intends to propose a dividend once each year. See "Item 3. Key Information—3.A. Selected Financial Data—Cash Dividends per Share."

        Dividends are usually due and payable shortly after the shareholders have passed a resolution approving the payment. Dividends which have not been claimed within five years after the due date revert to us, and are allocated to our general reserves. For information about deduction of the withholding tax from dividend payments, see "Item 10. Additional Information—10.E Taxation."

        (b)   Each share is entitled to one vote at a General Meeting of Shareholders. Voting rights may only be exercised for shares registered with the right to vote on the Record Date. In order to do so, the shareholder must file a share registration form with us, setting forth the shareholder's name, address and citizenship (or, in the case of a legal entity, its registered office). If the shareholder has not timely filed the form, then the shareholder may not vote at, or participate in, General Meetings of Shareholders.

        To vote its shares, the shareholder must also explicitly declare that it has acquired the shares in its own name and for its own account. If the shareholder refuses to make such a declaration, the shares may not be voted unless the Board of Directors recognizes such shareholder as nominee. The Board of Directors may grant such nominees the right to vote up to 0.5% of the registered share capital as set forth in the commercial register.

        Except as described below, no shareholder may be registered with the right to vote shares composing more than 2% of our registered share capital as set forth in the commercial register. If a shareholder holds more than 2% of Novartis' shares, that shareholder will be entitled to register the excess shares, but not to cast votes based upon them (registration without the right to vote).

        For purposes of the 2% rule for shareholders and the 0.5% rule for nominees, groups of companies and groups of shareholders acting in concert are considered to be one shareholder. The Board of Directors may, upon request, grant exemptions from both the 2% rule for shareholders and the 0.5% rule for nominees. The Board of Directors may delegate this power. To date, such a request has never been denied. Finally, the shareholders may cancel the registration restrictions upon a resolution carrying a two-thirds majority of the vote at a General Meeting of Shareholders.

        After hearing the registered shareholder or nominee, the Board of Directors may cancel, with retroactive effect as of the date of registration, the registration of the shareholders if the registration was effected based on false information.

        Shareholders' resolutions generally require the approval of a majority of the votes present at a General Meeting of Shareholders. As a result, abstentions have the effect of votes against the resolution. Shareholder

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resolutions requiring a vote by such "absolute majority" include (1) amendments to the Articles; (2) elections of directors and statutory auditors; (3) approval of the annual report and the annual accounts; (4) setting the annual dividend; (5) decisions to discharge directors and management from liability for matters disclosed to the General Meeting of Shareholders; and (6) the ordering of an independent investigation into specific matters proposed to the General Meeting of Shareholders.

        According to the Articles and Swiss law, the following types of shareholders' resolutions require the approval of a "supermajority" of at least two-thirds of the votes present at a General Meeting of Shareholders: (1) an alteration of our corporate purpose; (2) the creation of shares with increased voting powers; (3) an implementation of restrictions on the transfer of registered shares and the removal of such restrictions; (4) an authorized or conditional increase of the share capital; (5) an increase of the share capital by conversion of equity, by contribution in kind, or for the purpose of an acquisition of property or the grant of special rights; (6) a restriction or an elimination of shareholders' preemptive rights; (7) a change of our domicile; (8) our dissolution; or (9) any amendment to the Articles which would create or eliminate a supermajority requirement.

        The Directors' terms of office are coordinated so that in each year approximately one-third of all the Directors are subject to re-election or election. Cumulative voting of shares is not permitted under Swiss law.

        At General Meetings of Shareholders, shareholders can be represented by proxy. However, a proxy must either be the shareholder's legal representative, another shareholder with the right to vote, a proxy appointed by us, an independent representative nominated by us, or a depositary. Votes are taken either by a show of hands or by electronic voting, unless the General Meeting of Shareholders resolves to have a ballot or where a ballot is ordered by the chairman of the meeting.

        A holder of a Novartis American Depositary Receipt (ADR) has a paper receipt issued by our depositary JPMorgan Chase Bank, New York, and not by us. The ADR is vested with rights defined and enumerated in the Deposit Agreement (such as the rights to vote, to receive a dividend and to receive a share of Novartis in exchange for a certain number of ADRs). The enumeration of rights, including any limitations on those rights, is final. There are no other rights given to the ADR holders. Only the ADR depositary, holding our shares underlying the ADRs, is registered as shareholder in our share register. An ADR is not a Novartis share and an ADR holder is not a Novartis shareholder.

        The Deposit Agreement between our depositary, the ADR holder and us has granted the right to vote to the ADR holders. ADR holders may not attend Novartis General Meetings in person. ADR holders exercise their voting rights by instructing JPMorgan Chase Bank, our depositary, to exercise the voting rights attached to the registered shares underlying the ADRs. Each ADR represents one Novartis share. JPMorgan Chase Bank exercises the voting rights for registered shares underlying ADRs for which no voting instructions have been given by providing a discretionary proxy to the independent proxy appointed by Novartis pursuant to paragraph 13 of the Deposit Agreement governing ADRs. The same voting restrictions apply to ADR holders as to those holding Novartis shares (i.e. the right to vote up to 2% of the Novartis registered share capital—unless otherwise granted an exemption by the Board—and disclosure requirement for nominees).

        (c)   Shareholders have the right to allocate the profit shown on our balance sheet by vote taken at the General Meeting of Shareholders, subject to the legal requirements described in "Item 10.B.3(a) Shareholder Rights".

        (d)   Under the Swiss Code, any surplus arising out of a liquidation of our company (i.e., after the settlement of all claims of all creditors) would be distributed to the shareholders in proportion to the paid-in nominal value of their shares.

        (e)   The Swiss Code limits a corporation's ability to hold or repurchase its own shares. We and our subsidiaries may only repurchase shares if we have freely disposable equity, in the amount necessary for this purpose, available. The aggregate nominal value of all Novartis shares held by us and our subsidiaries may not exceed 10% of our registered share capital. However, it is accepted that a corporation may repurchase its own shares beyond the statutory limit of 10%, if the repurchased shares are clearly dedicated for cancellation and if the shareholders passed a respective resolution at a General Meeting of Shareholders. In addition, we are required to create a special reserve on our balance sheet in the amount of the purchase price of the acquired shares. Repurchased shares held by us or our subsidiaries do not carry any rights to vote at a General Meeting of Shareholders, but are entitled to the economic benefits generally connected with the shares. It should be noted that the definition of what constitutes subsidiaries, and therefore, treasury shares, for purposes of the above described reserves requirement and voting restrictions differs from the definition included in the consolidated financial statements. The definition in the consolidated financial statements requires consolidation for financial

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reporting purposes of special purpose entities, irrespective of their legal structure, in instances where we have the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities.

        Under the Swiss Code, we may not cancel treasury shares without the approval of a capital reduction by our shareholders.

        (f)    Not applicable.

        (g)   Since all of our issued and outstanding shares have been fully paid in, we can make no further capital calls on our shareholders.

        (h)   See Items "10.B.3(b) Shareholder Rights" and "10.B.7 Change in Control".


10.B.4 Changes To Shareholder Rights

        Under the Swiss Code, we may not issue new shares without the prior approval of a capital increase by our shareholders. If a capital increase is approved, then our shareholders would have certain preemptive rights to obtain newly issued shares in an amount proportional to the nominal value of the shares they already hold. These preemptive rights could be modified in certain limited circumstances with the approval of a resolution adopted at a General Meeting of Shareholders by a supermajority of votes. In addition, we may not create shares with increased voting powers or place restrictions on the transfer of registered shares without the approval of a resolution adopted at a General Meeting of Shareholders by a supermajority of votes. In addition, see Item 10.B.3(b) with regard to the Board of Directors' ability to cancel the registration of shares under limited circumstances.


10.B.5 Shareholder Meetings

        Under the Swiss Code and the Articles, we must hold an annual ordinary General Meeting of Shareholders within six months after the end of our financial year. General Meetings of Shareholders may be convened by the Board of Directors or, if necessary, by the statutory auditors. The Board of Directors is further required to convene an extraordinary General Meeting of Shareholders if so resolved by a General Meeting of Shareholders, or if so requested by shareholders holding an aggregate of at least 10% of the registered shares, specifying the items for the agenda and their proposals. Shareholders holding shares with a nominal value of at least CHF 1,000,000 (i.e., 2,000,000 Novartis shares) have the right to request that a specific proposal be put on the agenda and voted upon at the next General Meeting of Shareholders. A General Meeting of Shareholders is convened by publishing a notice in the official Swiss Commercial Gazette (Schweizerisches Handelsamtsblatt) at least 20 days prior to such meeting. Shareholders may also be informed by mail. There is no provision in the Swiss Code or our Articles requiring a quorum for the holding of a General Meeting of Shareholders. In addition see "Item 10.B.3(b) Shareholder Rights" regarding conditions for exercising a shareholder's right to vote at a General Meeting of Shareholders.


10.B.6 Limitations

        There are no limitations under the Swiss Code or our Articles on the right of non-Swiss residents or nationals to own or vote shares other than the restrictions applicable to all shareholders. But see "Item 10.B.3(b) Shareholder Rights" regarding conditions for exercising an ADR holder's right to vote at a shareholder meeting.


10.B.7 Change in Control

        The Articles and the Board Regulations contain no provision that would have an effect of delaying, deferring or preventing a change in control of Novartis and that would operate only with respect to a merger, acquisition or corporate restructuring involving us or any of our subsidiaries.

        According to the Swiss Merger Act, shareholders may pass a resolution to merge with another corporation at any time. Such a resolution would require the consent of at least two-thirds of all votes present at the necessary General Meeting of Shareholders.

        Under the Swiss Stock Exchange Act, shareholders and groups of shareholders acting in concert who acquire more than 331/3% of our shares would be under an obligation to make an offer to acquire all remaining Novartis shares.

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10.B.8 Disclosure of Shareholdings

        Under the Swiss Stock Exchange Act, holders of our voting shares are required to notify us and the SIX Swiss Exchange of the level of their holdings whenever such holdings reach or exceed, or in some cases, fall short of, certain thresholds—3%, 5%, 10%, 15%, 20%, 25%, 331/3%, 50% and 662/3%—of our registered share capital. Following receipt of such notification we are required to inform the public by publishing the information via the electronic publication platform operated by the competent Disclosure Office.

        An additional disclosure obligation exists under the Swiss Code which requires us to disclose, once a year in the notes to the financial statements published in our annual report, the identity of all of our shareholders (or related groups of shareholders) who have been granted exemption entitling them to vote more than 2% of our registered share capital, as described in "Item 10.B.3(b) Shareholder Rights".


10.B.9 Differences in the Law

        See the references to Swiss law throughout this "Item 10.B Memorandum and Articles of Association".


10.B.10 Changes in Capital

        The requirements of the Articles regarding changes in capital are not more stringent than the requirements of Swiss law.


10.C Material contracts

        In April 2008, we entered into an agreement with Nestlé S.A. of Switzerland under which we obtained the right to acquire majority ownership in Alcon Inc. (NYSE: ACL) in two steps. The first step was completed on July 7, 2008, when we acquired an initial 25% stake (74 million shares) from Nestlé for $10.4 billion in cash. This investment reflects a price of $140.68 per share (the initial transaction price of $143.18, later reduced to account for the dividend paid by Alcon in May 2008). In the second step, we had the right to acquire Nestlé's remaining 52% majority stake in Alcon between January 1, 2010 and July 31, 2011 for a fixed price of $181.00 per share, or approximately $28 billion. Novartis completed the second step, acquiring Nestlé's 52% stake, on August 25, 2010, for approximately $28.3 billion, or $180 per share.

        On December 14, 2010, we entered into a definitive agreement with Alcon to merge Alcon into Novartis. During the period from January to April 8, 2011, we acquired 4.8% of the shares in Alcon for $2.4 billion. On April 8, 2011, the Novartis Extraordinary General Meeting approved the merger with Alcon, Inc. creating the global leader in eye care. As a result, the new Alcon Division became the fifth growth platform in our strategically diversified healthcare portfolio. The Extraordinary General Meeting also authorized the issuance of 108 million new shares.

        Under the terms of the December 14, 2010 agreement, Alcon shareholders received 2.9228 Novartis shares (which amount included a dividend adjustment) and $8.20 in cash for each share of Alcon, resulting in a total consideration of $168.00 per share. The completion of the acquisition of the outstanding 18.6% non-controlling interest in Alcon on April 8 and the subsequent merger resulted in the issuance of Novartis shares with a fair value of $9.2 billion, and a contingent value payment of $0.5 billion.


10.D Exchange controls

        There are no Swiss governmental laws, decrees or regulations that restrict, in a manner material to Novartis, the export or import of capital, including any foreign exchange controls, or that affect the remittance of dividends or other payments to non-residents or non-citizens of Switzerland who hold Novartis' shares.


10.E Taxation

        The taxation discussion set forth below is intended only as a descriptive summary and does not purport to be a complete analysis or listing of all potential tax effects relevant to the ownership or disposition of our shares or ADSs. The statements of US and Swiss tax laws set forth below are based on the laws and regulations in force as of the date of this 20-F, including the current Convention Between the United States and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, entered into force on December 19, 1997 (the "Treaty"), and the US Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations,

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rulings, judicial decisions and administrative pronouncements, and may be subject to any changes in US and Swiss law, and in any double taxation convention or treaty between the United States and Switzerland occurring after that date, which changes may have retroactive effect.


Swiss Taxation

Swiss Residents

        Withholding Tax on Dividends and Distributions.    Dividends which we pay and similar cash or in-kind distributions which we may make to a holder of shares or ADSs (including distributions of liquidation proceeds in excess of the nominal value, stock dividends and, under certain circumstances, proceeds from repurchases of shares by us in excess of the nominal value) are generally subject to a Swiss federal withholding tax (the "Withholding Tax") at a current rate of 35%. Under certain circumstances distributions out of capital contribution reserves made by shareholders after December 31, 1996 are exempt from Withholding Tax. We are required to withhold this Withholding Tax from the gross distribution and to pay the Withholding Tax to the Swiss Federal Tax Administration. The Withholding Tax is refundable in full to Swiss residents who are the beneficial owners of the taxable distribution at the time it is resolved and duly report the gross distribution received on their personal tax return or in their financial statements for tax purposes, as the case may be.

        Income Tax on Dividends.    A Swiss resident who receives dividends and similar distributions (including stock dividends and liquidation surplus) on shares or ADSs is required to include such amounts in the shareholder's personal income tax return. However, distributions out of qualified capital contribution reserves are not subject to income tax. A corporate shareholder may claim substantial relief from taxation of dividends and similar distributions received if the shares held represent a fair market value of at least CHF 1 million.

        Capital Gains Tax upon Disposal of shares.    Under current Swiss tax law, the gain realized on shares held by a Swiss resident who holds shares or ADSs as part of his private property is generally not subject to any federal, cantonal or municipal income taxation on gains realized on the sale or other disposal of shares or ADSs. However, gains realized upon a repurchase of shares by us may be characterized as taxable dividend income if certain conditions are met. Book gains realized on shares or ADSs held by a Swiss corporate entity or by a Swiss resident individual as part of the shareholder's business property are, in general, included in the taxable income of such person. However, the Federal Law on the Direct Federal Tax of December 14, 1990 and several cantonal laws on direct cantonal taxes provide for exceptions for Swiss corporate entities holding more than 10% of our voting stock for more than one year.

Residents of Other Countries

        Recipients of dividends and similar distributions on the shares who are neither residents of Switzerland for tax purposes nor holding shares as part of a business conducted through a permanent establishment situated in Switzerland ("Non-resident Holders") are not subject to Swiss income taxes in respect of such distributions. Moreover, gains realized by such recipients upon the disposal of shares are not subject to Swiss income taxes.

        Non-resident Holders of shares are, however, subject to the Withholding Tax on dividends and similar distributions mentioned above and under certain circumstances to the Stamp Duty described below. Such Non-resident Holders may be entitled to a partial refund of the Withholding Tax if the country in which they reside has entered into a bilateral treaty for the avoidance of double taxation with Switzerland. Non-resident Holders should be aware that the procedures for claiming treaty refunds (and the time frame required for obtaining a refund) may differ from country to country. Non-resident Holders should consult their own tax advisors regarding receipt, ownership, purchase, sale or other dispositions of shares or ADSs and the procedures for claiming a refund of the Withholding Tax.

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        As of January 1, 2012, Switzerland has entered into bilateral treaties for the avoidance of double taxation with respect to income taxes with the following countries, whereby a part of the above-mentioned Withholding Tax may be refunded (subject to the limitations set forth in such treaties):

Albania
Algeria
Armenia
Australia
Austria
Azerbaijan
Bahrain
Bangladesh
Belarus
Belgium
Bulgaria
Canada
Chile
China
Colombia
Croatia
Czech Republic
Denmark
Ecuador
Egypt
Estonia
  Finland
France
Germany
Georgia
Ghana
Greece
Hungary
Iceland
India
Indonesia
Iran
Israel
Italy
Ivory Coast
Republic of Ireland
Jamaica
Japan
Kazakhstan
Republic of Korea
(South Korea)
  Kuwait
Kyrgyzstan
Latvia
Lithuania
Luxembourg
Macedonia
Malaysia
Mexico
Moldova
Mongolia
Morocco
Netherlands
New Zealand
Norway
Pakistan
Philippines
Poland
Portugal
Quatar
Romania
  Russia
Serbia and Montenegro
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Tajikistan
Thailand
Trinidad and Tobago
Tunisia
Ukraine
United Kingdom
United States of America
Uzbekistan
Venezuela
Vietnam

        Tax treaty negotiations are under way, or have been concluded, with Argentina (treaty not yet in force but provisionally applicable as from January 1, 2001), Brazil, Costa Rica, Hong Kong, Libya, Malta, North Korea, Oman, Peru, Saudi Arabia, Senegal, Syria, Turkey, United Arab Emirates, Uruguay and Zimbabwe.

        A Non-resident Holder of shares or ADSs will not be liable for any Swiss taxes other than the Withholding Tax described above and, if the transfer occurs through or with a Swiss bank or other Swiss securities dealer, the Stamp Duty described below. If, however, the shares or ADSs of Non-resident Holders can be attributed to a permanent establishment or a fixed place of business maintained by such person within Switzerland during the relevant tax year, the shares or ADSs may be subject to Swiss income taxes in respect of income and gains realized on the shares or ADSs and such person may qualify for a full refund of the Withholding Tax based on Swiss tax law.

        Residents of the United States.    A Non-resident Holder who is a resident of the United States for purposes of the Treaty is eligible for a reduced rate of tax on dividends equal to 15% of the dividend, provided that such holder (i) qualifies for benefits under the Treaty, (ii) holds, directly and indirectly, less than 10% of our voting stock, and (iii) does not conduct business through a permanent establishment or fixed base in Switzerland to which the shares or ADSs are attributable. Such an eligible holder must apply for a refund of the amount of the Withholding Tax in excess of the 15% Treaty rate. A Non-resident Holder who is a resident of the United States for purposes of the Treaty is eligible for a reduced rate of tax on dividends equal to 5% of the dividend, provided that such holder (i) is a company, (ii) qualifies for benefits under the Treaty, (iii) holds directly at least 10% of our voting stock, and (iv) does not conduct business through a permanent establishment or fixed place of business in Switzerland to which the shares or ADSs are attributable. Such an eligible holder must apply for a refund of the amount of the Withholding Tax in excess of the 5% Treaty rate. Claims for refunds must be filed on Swiss Tax Form 82 (82C for corporations; 82I for individuals; 82E for other entities), which may be obtained from any Swiss Consulate General in the United States or from the Federal Tax Administration of Switzerland at the address below, together with an instruction form. Four copies of the form must be duly completed, signed before a notary public of the United States, and sent to the Federal Tax Administration of Switzerland, Eigerstrasse 65, CH-3003 Berne, Switzerland. The form must be accompanied by suitable evidence of deduction of Swiss tax withheld at source, such as certificates of deduction, signed bank vouchers or credit slips. The form may be filed on or after July 1 or January 1 following the date the dividend was payable, but no later than December 31 of the third year following the calendar year in which the dividend became payable. For US resident holders of ADSs, JPMorgan

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Chase Bank, N.A., as Depositary, will comply with these Swiss procedures on behalf of the holders, and will remit the net amount to the holders.

        Stamp Duty upon Transfer of Securities.    The sale of shares, whether by Swiss residents or Non-resident Holders, may be subject to federal securities transfer Stamp Duty of 0.15%, calculated on the sale proceeds, if the sale occurs through or with a Swiss bank or other Swiss securities dealer, as defined in the Swiss Federal Stamp Duty Act. The Stamp Duty has to be paid by the securities dealer and may be charged to the parties in a taxable transaction who are not securities dealers. Stamp Duty may also be due if a sale of shares occurs with or through a non-Swiss bank or securities dealer, provided (i) such bank or dealer is a member of the SIX, and (ii) the sale takes place on the SIX. In addition to this Stamp Duty, the sale of shares by or through a member of the SIX may be subject to a minor stock exchange levy.


United States Federal Income Taxation

        The following is a general discussion of the material US federal income tax consequences of the ownership and disposition of our shares or ADSs that may be relevant to you if you are a US Holder (as defined below). Because this discussion does not consider any specific circumstances of any particular holder of our shares or ADSs, persons who are subject to US taxation are strongly urged to consult their own tax advisers as to the overall US federal, state and local tax consequences, as well as to the overall Swiss and other foreign tax consequences, of the ownership and disposition of our shares or ADSs. In particular, additional or different rules may apply to US expatriates, banks and other financial institutions, regulated investment companies, traders in securities who elect to apply a mark-to-market method of accounting, dealers in securities or currencies, tax-exempt entities, insurance companies, broker-dealers, investors liable for alternative minimum tax, investors that hold shares or ADSs as part of a straddle, hedging or conversion transaction, holders whose functional currency is not the US dollar, partnerships or other pass through entities, persons who acquired our shares pursuant to the exercise of employee stock options or otherwise as compensation and persons who hold directly, indirectly or by attribution, 10% or more of the voting power of our outstanding shares. This discussion generally applies only to US Holders who hold the shares or ADSs as a capital asset (generally, for investment purposes), and whose functional currency is the US dollar. Investors are urged to consult their own tax advisors concerning whether they are eligible for benefits under the Treaty.

        For purposes of this discussion, a "US Holder" is a beneficial owner of our shares or ADSs who is (i) an individual who is a citizen or resident of the United States for US federal income tax purposes, (ii) a corporation (or other entity taxable as a corporation for US federal income tax purposes) created or organized in or under the laws of the US or a state thereof or the District of Columbia, (iii) an estate the income of which is subject to US federal income taxation regardless of its source, or (iv) a trust (i) subject to the primary supervision of a US court and the control of one or more US persons or (ii) that has a valid election in place to be treated as a US person. If a partnership (or other entity treated as a partnership for US federal income tax purposes) holds shares or ADSs, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. Partners in a partnership that holds shares or ADSs are urged to consult their own tax advisor regarding the specific tax consequences of the owning and disposing of such shares or ADSs by the partnership.

        For US federal income tax purposes, a US Holder of ADSs generally will be treated as the beneficial owner of our shares represented by the ADSs. However, see the discussion below under "—Dividends" regarding certain statements made by the US Treasury concerning depositary arrangements.

        This discussion assumes that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.

        Dividends.    US Holders will be required to include in gross income, as an item of ordinary income, the full amount (including the amount of any Withholding Tax) of a dividend paid with respect to our shares or ADSs at the time that such dividend is received by the US Holder, in the case of shares, or by the Depository, in the case of ADSs. For this purpose, a "dividend" will include any distribution paid by us with respect to our shares or ADSs (other than certain pro rata distributions of our capital stock) paid out of our current or accumulated earnings and profits, as determined under US federal income tax principles. To the extent the amount of a distribution by us exceeds our current and accumulated earnings and profits, such excess will first be treated as a tax-free return of capital to the extent of a US Holder's tax basis in the shares or ADSs (with a corresponding reduction in such tax basis), and thereafter will be treated as capital gain, which will be long-term capital gain if the US Holder held our shares or ADSs for more than one year. Under the Code, dividend payments by us on the shares or ADSs are not eligible for the dividends received deduction generally allowed to corporate shareholders.

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        Dividend income in respect of our shares or ADSs will constitute income from sources outside the United States for US foreign tax credit purposes. Subject to the limitations and conditions provided in the Code, US Holders generally may claim as a credit against their US federal income tax liability, any Withholding Tax withheld from a dividend. The rules governing the foreign tax credit are complex. Each US Holder is urged to consult its own tax advisor concerning whether, and to what extent, a foreign tax credit will be available with respect to dividends received from us. Alternatively, a US Holder may claim the Withholding Tax as a deduction for the taxable year within which the Withholding Tax is paid or accrued, provided a deduction is claimed for all of the foreign income taxes the US Holder pays or accrues in the particular year. A deduction does not reduce US tax on a dollar-for-dollar basis like a tax credit. The deduction, however, is not subject to the limitations applicable to foreign tax credits.

        The US Treasury has expressed concern that parties to whom ADSs are released may be taking actions inconsistent with the claiming of foreign tax credits for US Holders of ADSs. Accordingly, the summary above of the creditability of the Withholding Tax could be affected by future actions that may be taken by the US Treasury.

        In general, a US Holder will be required to determine the amount of any dividend paid in Swiss francs, including the amount of any Withholding Tax imposed thereon, by translating the Swiss francs into US dollars at the spot rate on the date the dividend is actually or constructively received by a US Holder, in the case of shares, or by the Depositary, in the case of ADSs, regardless of whether the Swiss francs are in fact converted into US dollars. If a US Holder converts the Swiss francs so received into US dollars on the date of receipt, the US Holder generally should not recognize foreign currency gain or loss on such conversion. If a US Holder does not convert the Swiss francs so received into US dollars on the date of receipt, the US Holder will have a tax basis in the Swiss francs equal to the US dollar value on such date. Any foreign currency gain or loss that a US Holder recognizes on a subsequent conversion or other disposition of the Swiss francs generally will be treated as US source ordinary income or loss.

        For a non-corporate US Holder, the US dollar amount of any dividends paid to it prior to January 1, 2011 that constitute qualified dividend income generally will be taxable at a maximum rate of 15%, provided that the US Holder meets certain holding period and other requirements. We currently believe that dividends paid with respect to our shares and ADSs will constitute qualified dividend income for US federal income tax purposes. However, the US Treasury and the US Internal Revenue Service ("IRS") have announced their intention to promulgate rules pursuant to which US Holders of shares and ADSs, among others, will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends. US Holders of shares or ADSs are urged to consult their own tax advisors regarding the availability to them of the reduced dividend rate in light of their own particular situation and the computations of their foreign tax credit limitation with respect to any qualified dividends paid to them, as applicable.

        Sale or Other Taxable Disposition.    Upon a sale or other taxable disposition of shares or ADSs, US Holders generally will recognize capital gain or loss in an amount equal to the difference between the US dollar value of the amount realized on the disposition and the US Holder's tax basis (determined in US dollars) in the shares or ADSs. This capital gain or loss generally will be US source gain or loss and will be treated as long-term capital gain or loss if the holding period in the shares or ADSs exceeds one year. In the case of certain US Holders (including individuals), any long term capital gain generally will be subject to US federal income tax at preferential rates, which rates are currently scheduled to increase on January 1, 2011. The deductibility of capital losses is subject to significant limitations under the Code. Deposits or withdrawals of our shares by US Holders in exchanges for ADSs will not result in the realization of gain or loss for US federal income tax purposes.

        United States Information Reporting and Backup Withholding.    Dividend payments with respect to shares or ADSs and proceeds from the sale, exchange or other disposition of shares or ADSs received in the United States or through US-related financial intermediaries, may be subject to information reporting to the IRS and possible US backup withholding at a current rate of 28% (which rate is currently scheduled to increase on January 1, 2013). Certain exempt recipients (such as corporations) are not subject to these information reporting and backup withholding requirements. Backup withholding will not apply to a US Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from backup withholding. Any US Holders required to establish their exempt status generally must provide a properly-executed IRS Form W-9 (Request for Taxpayer Identification Number and Certification). Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a US Holder's US federal income tax liability, and a US Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information.

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10.F Dividends and paying agents

        Not applicable.


10.G Statement by experts

        Not applicable.


10.H Documents on display

        Any statement in this Form 20-F about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the Form 20-F the contract or document is deemed to modify the description contained in this Form 20-F. You must review the exhibits themselves for a complete description of the contract or document.

        You may review a copy of our filings with the SEC, as well as other information furnished to the SEC, including exhibits and schedules filed with it, at the SEC's public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains reports and other information regarding issuers that file electronically with the SEC. These SEC filings are also available to the public from commercial document retrieval services.

        We are required to file or furnish reports and other information with the SEC under the Securities Exchange Act of 1934 and regulations under that act. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the form and content of proxy statements and our officers, directors and principal shareholders are exempt from the reporting and short swing profit recovery provisions contained in Section 16 of the Exchange Act.


10.I Subsidiary Information

        Not applicable.

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Item 11.    Quantitative and Qualitative Disclosures about Non-Product-Related Market Risk

 
  Change in
constant
currencies
  Change
in $
  Percentage
point
currency
impact
 

2011(1)

                   

Currency impact:

                   

Net sales

    12 %   16 %   4  

Operating income

    1 %   -5 %   -6  

Net income

    -2 %   -7 %   -5  

Core operating income

    16 %   14 %   -2  

Core net income

    15 %   12 %   -3  

 

 
  Net sales   Operating
expenses
 

2011

             

Net sales and operating costs by currency:

             

$

    36 %   38 %

Euro

    27 %   25 %

CHF

    2 %   14 %

Yen

    9 %   4 %

Other

    26 %   19 %
           

    100 %   100 %
           

 

 
  Liquid
funds
  Financial
debt
 

2011

             

Liquid funds and financial debt by currency (as of December 31):

             

$

    60 %   56 %

Euro

    2 %   13 %

CHF

    33 %   15 %

Yen

    0 %   14 %

Other

    5 %   2 %
           

    100 %   100 %
           

 

 
  Change in
constant
currencies
  Change
in $
  Percentage
point
currency
impact
 

2010(1)

                   

Currency impact:

                   

Net sales

    14 %   14 %   0  

Operating income

    17 %   15 %   -2  

Net income

    20 %   18 %   -2  

Core operating income

    24 %   22 %   -2  

Core net income

    18 %   17 %   -1  

(1)
The impact of currency movements on operating income and net income and core operating income and core net income related to transactions of an entity conducted in a foreign currency other than the reporting currency of the entity, are excluded.

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  Net sales   Operating
expenses
 

2010

             

Net sales and operating costs by currency:

             

$

    36 %   36 %

Euro

    28 %   26 %

CHF

    2 %   13 %

Yen

    8 %   4 %

Other

    26 %   21 %
           

    100 %   100 %
           

 

 
  Liquid
funds
  Financial
debt
 

2010

             

Liquid funds and financial debt by currency (as of December 31):

             

$

    82 %   64 %

Euro

    3 %   13 %

CHF

    11 %   13 %

Yen

    0 %   8 %

Other

    4 %   2 %
           

    100 %   100 %
           


Market Risk

        We are exposed to market risk, primarily related to foreign currency exchange rates, interest rates and the market value of the investments of liquid funds. We actively monitor these exposures. To manage the volatility relating to these exposures, we enter into a variety of derivative financial instruments. Our 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 exchange rates and market rates of investments of liquid funds and of the currency exposure of certain net investments in foreign subsidiaries. It is our policy and practice to use derivative financial instruments to manage exposures and to enhance the yield on the investment of liquid funds. We do not enter any financial transactions containing a risk that cannot be quantified at the time the transaction is concluded. In addition, we do not sell short assets we do not have, or do not know we will have, in the future. We only sell existing assets or enter into transactions and future transactions (in the case of anticipatory hedges) which we confidently expect we will have in the future based on past experience. In the case of liquid funds, we write call options on assets we have or we write put options on positions we want to acquire and have the liquidity to acquire. We expect that any loss in value for these instruments generally would be offset by increases in the value of the underlying transactions.

        Foreign currency exchange rate risk:    We use the US dollar as our reporting currency. As a result, we are therefore exposed to foreign exchange movements, primarily in European, Japanese and other Asian and Latin American currencies. Consequently, we enter into various contracts that reflect the changes value of foreign currency exchange rates to preserve the value of assets, commitments and anticipated transactions. We also use forward contracts and foreign currency option contracts to hedge certain anticipated net revenues in foreign currencies.

        At December 31, 2011, we had long and short forward foreign exchange rate contracts and currency option contracts with corresponding values of $6.5 billion and $2.1 billion, respectively. At December 31, 2010, we had long and short forward foreign exchange rate contracts and currency option contracts with corresponding values of $4.8 billion and $4.0 billion, respectively.

        Net investments in subsidiaries in foreign countries are long-term investments. Their fair value changes through movements of the foreign currency exchange rates. In the very long term, however, the difference in the inflation rate should match the foreign currency exchange rate movement, so that the market value of the foreign

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non-monetary assets will compensate for the change due to foreign currency movements. For this reason, we only hedge the net investments in foreign subsidiaries in exceptional cases.

        Commodity price risk:    We have only a very limited exposure to price risk related to anticipated purchases of certain commodities used as raw materials by our 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 our risk management tolerance levels. Accordingly, we do not enter into significant commodity futures, forward and option contracts to manage fluctuations in prices of anticipated purchases.

        Interest rate risk:    We address our net exposure to interest rate risk mainly through the ratio of the fixed rate financial debt and variable rate financial debt ratio contained in our total financial debt portfolio. To manage this mix, we may enter into interest rate swap agreements, in which we exchange the periodic payments, based on a notional amount and agreed-upon fixed and variable interest rates.

        Equity risk:    We purchase equities as investments of our liquid funds. As a policy, we limit our holdings in an unrelated company to less than 5% of our liquid funds. Potential investments are thoroughly analyzed in respect to their past financial track record (mainly cash flow and return on investment), their market potential, their management and their competitors. Call options are written on equities that we own and put options are written on equities which we want to buy and for which cash has been reserved.

        Credit risk:    Credit risks arise from the possibility that customers may not be able to settle their obligations as agreed. To manage this risk we periodically assess the financial reliability of customers, taking into account their financial position, past experience and other factors. Individual risk limits are set accordingly.

        The largest customer accounts for approximately 9% of net sales and the second and third largest each accounts for 7% of net sales. No other customer accounts for 2% or more of our net sales.

        The highest amounts of trade receivables outstanding were for these three customers. They amounted to 10%, 6% and 6%, respectively, of our trade receivables at December 31, 2011. There is no other significant concentration of credit risk.

        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 reduced 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. We have policies that limit the amount of credit exposure to any financial institution. The limits are regularly assessed and determined based upon credit analysis including financial statement and capital adequacy ratio reviews. In addition, net settlement agreements are contracted with significant counterparties.

        Our cash and cash equivalents are held with major regulated financial institutions, the three largest ones hold 31.8%, 12.5% and 12.1%, respectively (2010: 14%, 9% and 8%, respectively).

        We do not expect any losses from non-performance by these counterparties and do not have any significant grouping of exposures to financial sector or country risk.

        Liquidity risk:    Liquidity risk is defined as the risk that we could not be able to settle or meet our obligations on time or at a reasonable price. Group Treasury is responsible for liquidity, funding as well as settlement management. In addition, liquidity and funding risks, related processes and policies are overseen by management. We manage our liquidity risk on a consolidated basis based on business needs, tax, capital or regulatory considerations, if applicable, through numerous sources of finance in order to maintain flexibility. Management monitors our net debt or liquidity position through rolling forecasts on the basis of expected cash flows.

        Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets remains tight for an extended period of time, and such conditions impact the collectability of our customer accounts receivable, or impact credit terms with our vendors, or disrupt the supply of raw materials and services.

        Capital risk management:    We strive to maintain strong debt ratings. In managing our capital, we focus on a sound debt/equity ratio. Credit agencies in 2011 maintained their ratings for Novartis. Moody's rated the Group as Aa2 for long-term maturities and P-1 for short-term maturities and Standard & Poor's had a rating of AA- for long-term and A-1+ for short-term maturities. Fitch had a long-term rating of AA and a short-term rating of F1+.

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        Our 2011 year-end debt/equity ratio decreased to 0.31:1 from 0.33:1 in 2010 principally due to less current financial debt outstanding under the commercial paper program. Our 2010 year-end debt/equity ratio increased to 0.33:1 from 0.24:1 in 2009 principally due to additional financing programs.

        Value at risk:    We use a value at risk (VAR) computation to estimate the potential ten-day loss in the fair value of our financial instruments.

        We use a ten-day period because of an assumption that not all positions could be undone in one day, given the size of the positions. The VAR computation includes our financial 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 included in the computation.

        The VAR estimates are made assuming normal market conditions, using a 95% confidence interval. We use 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 foreign currency rate movements over a sixty-day period for the calculation of VAR amounts.

        The estimated potential ten-day loss in pre-tax income from our foreign currency instruments, the estimated potential ten-day loss on our equity holdings and the estimated potential ten-day loss in fair value of our interest rate sensitive instruments (primarily financial debt and investments of liquid funds under normal market conditions) as calculated in the VAR model, are the following:

 
  At
December 31,
2011
  At
December 31,
2010
 
 
  $ millions
  $ millions
 

All financial instruments

    235     311  

Analyzed by components:

             

Instruments sensitive to foreign currency rates

    145     193  

Instruments sensitive to equity market movements

    56     27  

Instruments sensitive to interest rates

    102     219  

        The average, high, and low VAR amounts are as follows:

 
  Average   High   Low  
 
  $ millions
  $ millions
  $ millions
 

2011

                   

All financial instruments

    214     281     180  

Analyzed by components:

                   

Instruments sensitive to foreign currency rates

    98     219     50  

Instruments sensitive to equity market movements

    49     74     28  

Instruments sensitive to interest rates

    154     190     96  

 

 
  Average   High   Low  
 
  $ millions
  $ millions
  $ millions
 

2010

                   

All financial instruments

    267     319     139  

Analyzed by components:

                   

Instruments sensitive to foreign currency rates

    192     271     98  

Instruments sensitive to equity market movements

    49     76     27  

Instruments sensitive to interest rates

    164     219     70  

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        The VAR computation is a risk analysis tool designed to statistically estimate the maximum potential ten day loss from adverse movements in foreign currency rates, equity prices and interest rates under normal market conditions. The computation does not purport to represent actual losses in fair value on earnings to be incurred by us, nor does it consider the effect of favorable changes in market rates. We cannot predict actual future movements in such market rates and do not present these VAR results to be 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 our future results of operations or financial position.

        In addition to these VAR analyses, we use stress testing techniques which are aimed to reflect a worst case scenario. For these calculations, we use the worst movements during a period of six months over the past 20 years in each category. For 2011 and 2010, the worst case loss scenario was configured as follows:

 
  At
December 31,
2011
  At
December 31,
2010
 
 
  $ millions
  $ millions
 

All financial instruments

    406     406  

Analyzed by components:

             

Instruments sensitive to foreign currency rates

    328     286  

Instruments sensitive to equity market movements

    31     59  

Instruments sensitive to interest rates

    47     62  

        In our risk analysis, we consider this worst case scenario acceptable as it could reduce income, but would not endanger our solvency or our investment grade credit standing. 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 our exposure.

        The major financial risks facing the Group are managed centrally by Group Treasury. We have a written Treasury Policy and have implemented a strict segregation of front office and back office controls. The Group does regular reconciliations of its positions with its counterparties. In addition the Treasury function is included in Management's internal control assessment.

        For further information, see "Item 18. Financial Statements—note 16".

Item 12.    Description of Securities other than Equity Securities


12.A    Debt Securities

        Not applicable.


12.B    Warrants and Rights

        Not applicable.


12.C    Other Securities

        Not applicable.

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12.D    American Depositary Shares

Fees Payable By ADS Holders

        According to our Deposit Agreement with the ADS depositary, JPMorgan Chase Bank (JPMorgan), holders of our ADSs may have to pay to JPMorgan, either directly or indirectly, fees or charges up to the amounts set forth below:

Category
  Depositary actions   Associated Fee
Depositing or substituting underlying shares   Acceptance of shares surrendered, and issuance of ADSs in exchange, including surrenders and issuances in respect of:
—Share distributions
—Stock split
—Rights
—Merger
—Exchange of shares or any other transaction or event or other distribution affecting the ADSs or the deposited shares
  $5.00 for each 100 ADSs (or portion thereof) evidenced by the new ADSs delivered
Withdrawing underlying shares   Acceptance of ADSs surrendered for withdrawal of deposited shares   $5.00 for each 100 ADSs (or portion thereof) evidenced by the ADSs surrendered
Selling or exercising rights   Distribution or sale of shares, the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such shares   $5.00 for each 100 ADSs (or portion thereof)
Transferring, splitting or grouping receipts   Transfers, combining or grouping of depositary receipts   $2.50 per ADS
Expenses of the depositary   Expenses incurred on behalf of holders in connection with
—compliance with foreign exchange control regulations or any law or regulation relating to foreign investment
—the depositary's or its custodian's compliance with applicable law, rule or regulation.
—stock transfer or other taxes and other governmental charges
—cable, telex and facsimile transmission and delivery
—expenses of the depositary in connection with the conversion of foreign currency into US dollars (which are paid out of such foreign currency)
—any other charge payable by any of the depositary or its agents
  Expenses payable at the sole discretion of the Depositary by billing Holders or by deducting charges from one or more cash dividends or other cash distributions.
Advance tax relief   Tax relief/reclamation process for qualified holders.   A depositary service charge of $0.0035 per ADS

Fees Payable By The Depositary To The Issuer

        JPMorgan, as depositary, has agreed to reimburse Novartis $3.5 million per year for expenses directly related to our ADS program (the "Program") which were incurred during the year, including Program-related legal fees, expenses related to investor relations in the US, US investor presentations, ADS-related financial advertising and public relations, fees and expenses of JPMorgan as administrator of the ADS Direct Plan, reasonable accountants' fees in relation to our Form 20-F, maintenance and broker reimbursement expenses. Because our expenses related to these categories exceed $3.5 million (see, for example, the amount of our accountants' fees set forth at "Item 16C. Principal Accountant Fees and Services—Auditing and Additional Fees"), the $3.5 million cannot be deemed to have reimbursed us for any particular one or more of these expenses.

        JPMorgan has further agreed to waive an annual maintenance fee of $50,000 associated with the administration of the Program, and not to seek reimbursement of up to $50,000 of out-of-pocket expenses incurred annually in providing such administrative services. In addition, JPMorgan has agreed to pay for our annual NYSE listing fees incurred during the initial term of our agreement with JPMorgan.

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Part II

Item 13.    Defaults, Dividend Arrearages and Delinquencies

        None.

Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds

        None.

Item 15.    Controls and Procedures

        (a)   Novartis AG's chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Form 20-F, have concluded that, as of such date, our disclosure controls and procedures were effective.

        (b)    Report of Novartis Management on Internal Control Over Financial Reporting:    Novartis' Board of Directors and management of the Group are responsible for establishing and maintaining adequate internal control over financial reporting. The Novartis Group's internal control system was designed to provide reasonable assurance to the Novartis Group's management and Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of its published consolidated financial statements.

        All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        Novartis Group management assessed the effectiveness of the Group's internal control over financial reporting as of December 31, 2011. In making this assessment, it used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment management concluded that, as of December 31, 2011, Novartis Group's internal control over financial reporting is effective based on those criteria.

        PricewaterhouseCoopers AG, Switzerland (PwC), an independent registered public accounting firm, has issued an opinion on the effectiveness of the Group's internal control over financial reporting which is included under "Item 18. Financial Statements" on page F-2.

        (c)   See the report of PwC, an independent registered public accounting firm, included under "Item 18. Financial Statements" on page F-2.

        (d)   There were no changes to our internal control over financial reporting that occurred during the period covered by this Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 16A.    Audit Committee Financial Expert

        Our Audit and Compliance Committee has determined that Srikant Datar and Ulrich Lehner each possess specific accounting and financial management expertise and that each is an Audit Committee Financial Expert as defined by the US Securities and Exchange Commission (SEC). The Board of Directors has also determined that other members of the Audit and Compliance Committee have sufficient experience and ability in finance and compliance matters to enable them to adequately discharge their responsibilities.

Item 16B.    Code of Ethics

        In addition to our Code of Conduct, which is applicable to all of our associates, we have adopted a Code of Ethical Conduct that imposes additional obligations on our principal executive officer, principal financial officer, principal accounting officer, and persons performing similar functions. This document is accessible on our Internet website at

        http://www.novartis.com/investors/corporate-governance.shtml

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Item 16C.    Principal Accountant Fees and Services

Duration of the Mandate and Terms of Office of the Independent Auditors

        Based on a recommendation by the Audit and Compliance Committee, the Board nominates an independent auditor for election at the Annual General Meeting. PricewaterhouseCoopers (PwC) assumed its existing auditing mandate for Novartis in 1996. Peter Kartscher, auditor in charge, and Michael P. Nelligan, global relationship partner, began serving in their respective roles in 2009. The Audit and Compliance Committee ensures that the lead audit partners are rotated at least every five years.

Auditing and Additional Fees

        PwC charged the following fees for professional services rendered for the 12-month periods ended December 31, 2011 and December 31, 2010:

 
  2011   2010  
 
  $ thousands
  $ thousands
 

Audit Services

    30,060     23,675  

Audit-Related Services

    2,480     2,140  

Tax Services

    1,550     1,485  

Other Services

    190     110  
           

Total

    34,280     27,410  
           

        Audit Services are defined as the standard audit work performed each year in order to issue opinions on the consolidated financial statements of the Group, to issue opinions relating to the effectiveness of the Group's internal controls over financial reporting, and to issue reports on local statutory financial statements. Also included are audit services that can only be provided by the Group auditor, such as auditing of nonrecurring transactions and implementation of new accounting policies, audits of accounting infrastructure system controls, pre-issuance reviews of quarterly financial results, consents and comfort letters and any other audit services required for SEC or other regulatory filings.

        Audit-Related Services include those other assurance services provided by the independent auditor 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 and related audits, audits of pension and benefit plans, IT infrastructure control assessments, contractual audits of third-party arrangements, assurance services on corporate citizenship reporting, and consultation regarding new accounting pronouncements.

        Tax Services represent tax compliance, tax returns, assistance with historical tax matters and other tax-related services.

        Other Services include training in the finance area, benchmarking studies, assessment of certain non-financial processes and license fees for use of accounting and other reporting guidance databases.

        As the independent auditor, PwC is responsible for opining on whether the audited financial statements comply with International Financial Reporting Standards (IFRS) and Swiss law. Additionally, PwC is responsible for opining on the effectiveness of internal control over financial reporting.

        The Audit and Compliance Committee is responsible for overseeing the conduct of these activities by management and PwC. During 2011, the Audit and Compliance Committee held 6 meetings. At each of these meetings, PwC was invited to attend during the discussion of agenda items that dealt with accounting, financial reporting or auditing matters. PwC provided to the Audit and Compliance Committee the written disclosures required by Rule 3526, Communication with Audit Committees Concerning Independence, of the Public Company Accounting Oversight Board (PCAOB), and the Audit and Compliance Committee and PwC have discussed PwC's independence from Novartis and Novartis management.

        Based on the reviews and discussions with management and PwC referred to above, the Audit and Compliance Committee recommended to the Board, and the Board approved, inclusion of the audited financial statements in the Annual Report for the year ended December 31, 2011.

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Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors

        The Audit and Compliance Committee's pre-approval is required for 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 above. Pre-approval is detailed as to the particular service or categories of services, and is subject to a specific budget.

        PwC and management report, on a quarterly basis, 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. The Audit and Compliance Committee may also pre-approve additional services on a case-by-case basis.

Item 16D.    Exemptions from the Listing Standards for Audit Committees

        Not Applicable.

Item 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchaser

2011
  Total Number of
Shares Purchased(1)
(a)
  Average Price
Paid per Share
in $
(b)
  Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs(2)
(c)
  Maximum
Approximate
Value of Shares
that may yet be
purchased under
the Plans or
Programs in CHF
(d)
  Maximum
Approximate
Value of Shares
that may yet be
purchased under
the Plans or
Programs in $(3)
(e)
 
 
   
   
   
  (CHF millions)
  ($ millions)
 
Jan. 1-31     634,061     56.94           9,704     10,312  
Feb. 1-28     2,010,227     55.91     1,900,000     9,605     10,355  
Mar. 1-31     7,940,789     57.37     7,800,000     9,190     10,020  
Apr. 1-30     6,352,652     58.48     6,280,000     8,868     10,154  
May 1-31     18,588,530     61.21     18,350,000     7,888     9,243  
Jun. 1-30     5,201,573     61.89     5,100,000     7,621     9,152  
Jul. 1-31     92,086     61.56           7,621     9,511  
Aug. 1-31     3,639,511     55.89           7,621     9,332  
Sep. 1-30     4,895,478     55.27           7,621     8,448  
Oct. 1-31     3,708,974     57.41           7,621     8,776  
Nov. 1-30     8,268,987     54.50           7,621     8,249  
Dec. 1-31     642,679     55.96           7,621     8,109  
                           
Total     61,975,547     58.32     39,430,000              
                           

(1)
Column (a) shows shares we purchased as part of our sixth share purchase program plus the following types of share purchases outside of our publicly announced repurchase program: (1) shares which we purchased on the open market; and (2) shares which we purchased from Swiss employees who had obtained the shares through a Novartis Employee Ownership Plan. See "Item 6. Directors, Senior Management and Employees—6.B Compensation—Compensation for Novartis Associates."

(2)
Column (c) shows shares purchased as part of our sixth share repurchase program which was approved by the shareholders February 26, 2008 for an amount of up to CHF 10.0 billion. See "Item 5. Operating and Financial Review and Prospects—5.B Liquidity and Capital Resources—Share Repurchase Program."

(3)
Column (e) shows the Swiss franc amount from column (d) converted into US dollars as of the month-end, using the Swiss franc/US dollar exchange rate at the applicable month-end.

Item 16F.   Change in Registrant's Certifying Accountant

        Not applicable.

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Item 16G.    Corporate Governance

        Novartis ADSs are listed on the NYSE. Our corporate governance practices differ from those followed by domestic companies as required under the listing standards of the NYSE in that our shareholders do not receive written reports from committees of the Board of Directors. Also, our external auditors are appointed by our shareholders at the Annual General Meeting, as opposed to being appointed by the Audit and Compliance Committee. In addition, while our shareholders cannot vote on all equity compensation plans, they are entitled to hold a consultative vote on the compensation system of Novartis. The vote takes place before every significant change to the compensation system, but at least every third Annual General Meeting. Finally, our Board of Directors has set up a separate Risk Committee that is responsible for risk oversight, as opposed to delegating this responsibility to the Audit and Compliance Committee.

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Part III

Item 17.    Financial Statements

        See "Item 18. Financial Statements."

Item 18.    Financial Statements

        The following financial statements are filed as part of this annual report on Form 20-F.

 
  Page

Index to consolidated financial statements

  F-1

Report of PricewaterhouseCoopers AG

 
F-2

Consolidated income statements

 
F-4

Consolidated statements of comprehensive income

 
F-5

Consolidated statements of changes in equity

 
F-6

Consolidated balance sheets

 
F-7

Consolidated cash flow statements

 
F-8

Notes to the consolidated financial statements

 
F-9

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Item 19.    Exhibits

  1.1   Articles of Incorporation, as amended April 8, 2011 (English translation).

 

1.2

 

Regulations of the Board and Committee Charters of Novartis AG, as amended December 14, 2011.

 

2.1

 

Restricted Issuance Agreement dated as of January 11, 2002 among Novartis AG, J.P. Morgan Chase & Co., as depositary, and all holders from time to time of ADRs issued thereunder (incorporated by reference to Exhibit 4 to the Registration Statement on Form F-3, File No. 333-81862, as filed with the SEC on January 31, 2002).

 

2.2

 

Letter Agreement dated October 27, 2004 between Novartis AG and JPMorgan Chase Bank, as depositary (incorporated by reference to Exhibit 2.2 to the Form 20-F for the year ended December 31, 2004 as filed with the SEC on January 28, 2005).

 

2.3

 

Letter Agreement dated September 12, 2005 between Novartis AG and JPMorgan Chase Bank, as depositary (incorporated by reference to Exhibit 2.3 to the Form 20-F for the year ended December 31, 2005 as filed with the SEC on January 30, 2006).

 

2.4

 

Letter Agreement dated December 14, 2007 between Novartis AG and JPMorgan Chase Bank, as depositary (incorporated by reference to Exhibit 2.4 to the Form 20-F for the year ended December 31, 2007 as filed with the SEC on January 28, 2008).

 

4.1

 

Purchase and Option Agreement as of 6 April 2008 between Nestlé S.A. and Novartis AG concerning the sale and purchase of common shares of Alcon, Inc. owned by the seller (incorporated by reference to Exhibit 4.5 to the Form 20-F for the year ended December 31, 2008 as filed with the SEC on January 28, 2009).

 

4.2

 

Shareholders Agreement as of 6 April 2008 among Nestlé S.A. and Novartis AG concerning certain matters with respect to Alcon, Inc. and any common shares of the company with a par value of CHF 0.20 per share, whether or not issued (incorporated by reference to Exhibit 4.6 to the Form 20-F for the year ended December 31, 2008 as filed with the SEC on January 28, 2009).

 

4.3

 

Merger Agreement dated December 14, 2010, between Novartis AG and Alcon, Inc. (incorporated by reference to Annex A to the Registration Statement on Form F-4 as filed with the SEC on December 23, 2010).

 

6.1

 

For earnings per share calculation, see "Item 18. Financial Statements—note 7."

 

8.1

 

For a list of all of our principal Group subsidiaries and associated companies, see "Item 18. Financial Statements—note 31."

 

12.1

 

Certification of Joseph Jimenez, Chief Executive Officer of Novartis AG, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

12.2

 

Certification of Jonathan Symonds, Chief Financial Officer of Novartis AG, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

13.1

 

Certification of Joseph Jimenez, Chief Executive Officer of Novartis AG, pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

13.2

 

Certification of Jonathan Symonds, Chief Financial Officer of Novartis AG, pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

 

14.1

 

Consent of PricewaterhouseCoopers AG to the incorporation by reference of the audit report contained in this Form 20-F into Novartis AG's Registration Statement on Form F-3ASR filed on March 5, 2009 (File No. 333-157707), on Form F-3 filed on May 11, 2001 (File No. 333-60712), on Form F-3 filed on January 31, 2002 (File No. 333-81862), on Form F-4 filed on December 23, 2010 (File No. 333-171381), on Form S-8 filed on October 1, 2004 (File No. 333-119475), on Form S-8 filed on September 5, 2006 (File No. 333-137112), on Form S-8 filed on October 29, 2009 (File No. 333-162727) and on Form S-8 filed on January 18, 2011 (File No. 333-171739).

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SIGNATURES

        The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

    NOVARTIS AG

 

 

By:

 

/s/ JONATHAN SYMONDS

Name: Jonathan Symonds
Title:
Chief Financial Officer, Novartis Group

 

 

By:

 

/s/ FELIX R. EHRAT

Name: Felix R. Ehrat
Title:
General Counsel, Novartis Group

Date: January 25, 2012

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NOVARTIS GROUP

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
  Page

Index to consolidated financial statements

  F-1

Report of PricewaterhouseCoopers AG

 
F-2

Consolidated income statements

 
F-4

Consolidated statements of comprehensive income

 
F-5

Consolidated statements of changes in equity

 
F-6

Consolidated balance sheets

 
F-7

Consolidated cash flow statements

 
F-8

Notes to the consolidated financial statements

 
F-9

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Novartis AG, Basel

        We have completed integrated audits of Novartis AG and its consolidated subsidiaries (Novartis Group) consolidated financial statements and of Novartis Groups' internal control over financial reporting as of December 31, 2011. Our opinions, based on our integrated audits, are presented below.


Consolidated financial statements

        We have audited the accompanying consolidated financial statements of the Novartis Group as of December 31, 2011 and 2010, and for each of the three years in the period ended December 31, 2011 (comprising consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in equity, consolidated balance sheets, consolidated cash flow statements and notes) as set out on pages F-4 through F-95 in this Form 20-F.

        These consolidated financial statements are the responsibility of the Board of Directors and management. Our responsibility is to express an opinion on these consolidated financial statements based on our integrated audits.

        We conducted our audits in accordance with Swiss Auditing Standards, International Standards on Auditing and the standards of the Public Company Accounting Oversight Board of the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit of consolidated financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Novartis Group at December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.


Internal control over financial reporting

        We have also audited the effectiveness of the Novartis Group's internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Novartis' Board of Directors and management of the Group are responsible for maintaining effective internal control over financial reporting and management is responsible for the assessment of the effectiveness of internal control over financial reporting included in the accompanying "Report of Novartis Management on Internal Control Over Financial Reporting" appearing under Item 15(b). Our responsibility is to express an opinion on the Novartis Group's internal control over financial reporting based on our integrated audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board of the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also includes performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable

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assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Novartis Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the COSO.

PricewaterhouseCoopers AG

/s/ PETER M. KARTSCHER

Peter M. Kartscher
Audit expert
Auditor in charge
  /s/ MICHAEL P. NELLIGAN

Michael P. Nelligan
Global relationship partner

Basel, January 24, 2012

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NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED INCOME STATEMENTS

(for the years ended December 31, 2011, 2010 and 2009)

 
  Note   2011   2010   2009  
 
   
  $ m
  $ m
  $ m
 

Net sales

    3     58,566     50,624     44,267  

Other revenues

          809     937     836  

Cost of Goods Sold

          (18,983 )   (14,488 )   (12,179 )
                     

Gross profit

          40,392     37,073     32,924  

Marketing & Sales

          (15,079 )   (13,316 )   (12,050 )

Research & Development

          (9,583 )   (9,070 )   (7,469 )

General & Administration

          (2,970 )   (2,481 )   (2,281 )

Other income

          1,354     1,234     782  

Other expense

          (3,116 )   (1,914 )   (1,924 )
                     

Operating income

    3     10,998     11,526     9,982  

Income from associated companies

    4     528     804     293  

Interest expense

    5     (751 )   (692 )   (551 )

Other financial income and expense

    5     (2 )   64     198  
                     

Income before taxes

          10,773     11,702     9,922  

Taxes

    6     (1,528 )   (1,733 )   (1,468 )
                     

Net income

          9,245     9,969     8,454  
                     

Attributable to:

                         
 

Shareholders of Novartis AG

          9,113     9,794     8,400  
 

Non-controlling interests

          132     175     54  

Basic earnings per share ($)

   
7
   
3.83
   
4.28
   
3.70
 

Diluted earnings per share ($)

   
7
   
3.78
   
4.26
   
3.69
 

The accompanying notes form an integral part of the consolidated financial statements.

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NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(for the years ended December 31, 2011; 2010 and 2009)

 
  Note   2011   2010   2009  
 
   
  $ m
  $ m
  $ m
 

Net income from continuing operations

          9,245     9,969     8,454  

Fair value adjustments on financial instruments, net of taxes

    8.1     21     (33 )   93  

Actuarial (losses)/gains from defined benefit plans, net of taxes

    8.2     (1,421 )   (685 )   949  

Novartis share of equity recognized by associated companies, net of taxes

    8.3     1     (94 )   (43 )

Currency translation effects

          (559 )   554     789  
                     

Total comprehensive income

          7,287     9,711     10,242  
                     

Attributable to:

                         
 

Shareholders of Novartis AG

          7,171     9,524     10,180  
 

Non-controlling interests

          116     187     62  

The accompanying notes form an integral part of the consolidated financial statements.

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NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(for the years ended December 31, 2011, 2010 and 2009)

 
  Note   Share
capital
  Treasury
shares
  Share
premium
  Retained
earnings
  Total
value
adjustments
  Total
reserves
  Non-controlling
interests
  Total
equity
 
 
   
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Total equity at January 1, 2009

          959     (139 )   198     49,825     (555 )   49,468     149     50,437  
                                         

Net income

                            8,400           8,400     54     8,454  

Other comprehensive income

    8                       (43 )   1,823     1,780     8     1,788  

Total comprehensive income

                            8,357     1,823     10,180     62     10,242  
                                               

Dividends

    9.1                       (3,941 )         (3,941 )         (3,941 )

Sale of treasury shares, net

    9.2           1           224           224           225  

Reduction of share capital

    9.8     (2 )   2                                      

Equity-based compensation

    9.3           4           631           631           635  

Changes in non-controlling interests

    9.6                                         (136 )   (136 )
                                             

Total of other equity movements

          (2 )   7           (3,086 )         (3,086 )   (136 )   (3,217 )
                                         

Total equity at December 31, 2009

          957     (132 )   198     55,096     1,268     56,562     75     57,462  
                                         

Net income

                            9,794           9,794     175     9,969  

Other comprehensive income

    8                       (94 )   (176 )   (270 )   12     (258 )
                                               

Total comprehensive income

                            9,700     (176 )   9,524     187     9,711  
                                               

Dividends

    9.1                       (4,486 )         (4,486 )         (4,486 )

Sale of treasury shares, net

    9.2           4           338           338           342  

Equity-based compensation

    9.3           3           596           596           599  

Impact of change of ownership of Alcon, Inc. 

    9.4                       (74 )         (74 )         (74 )

Excess of consideration exchanged for acquiring non-controlling interest compared to the recorded amounts

    9.5                       (96 )         (96 )         (96 )

Changes in non-controlling interests

    9.6                                         6,311     6,311  
                                               

Total of other equity movements

                7           (3,722 )         (3,722 )   6,311     2,596  
                                         

Total equity at December 31, 2010

          957     (125 )   198     61,074     1,092     62,364     6,573     69,769  
                                         

Net income

                            9,113           9,113     132     9,245  

Other comprehensive income

    8                       1     (1,943 )   (1,942 )   (16 )   (1,958 )
                                               

Total comprehensive income

                            9,114     (1,943 )   7,171     116     7,287  
                                               

Dividends

    9.1                       (5,368 )         (5,368 )         (5,368 )

Purchase of treasury shares, net

    9.2           (31 )         (3,429 )         (3,429 )         (3,460 )

Equity-based compensation

    9.3           4           802           802           806  

Excess of consideration exchanged for acquiring non-controlling interest compared to the recorded amounts

    9.5                       (5,664 )         (5,664 )         (5,664 )

Changes in non-controlling interests

    9.6                                         (6,593 )   (6,593 )

Fair value of Novartis shares used to acquire outstanding non-controlling interests in Alcon, Inc. 

    9.7     59     31           9,073           9,073           9,163  
                                             

Total of other equity movements

          59     4           (4,586 )         (4,586 )   (6,593 )   (11,116 )
                                         

Total equity at December 31, 2011

          1,016     (121 )   198     65,602     (851 )   64,949     96     65,940  
                                         

The accompanying notes form an integral part of the consolidated financial statements.

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NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(at December 31, 2011 and 2010)

 
  Note   2011   2010  
 
   
  $ m
  $ m
 

Assets

                   

Non-current assets

                   

Property, plant & equipment

    10     15,627     15,840  

Goodwill

    11     29,943     29,692  

Intangible assets other than goodwill

    11     31,969     35,231  

Investments in associated companies

    4     8,622     8,385  

Deferred tax assets

    12     5,857     5,240  

Financial assets

    13     976     1,840  

Other non-current non-financial assets

          418     405  
                 

Total non-current assets

          93,412     96,633  
                 

Current assets

                   

Inventories

    14     5,930     6,093  

Trade receivables

    15     10,323     9,873  

Marketable securities and derivative financial instruments

    16     1,366     2,815  

Cash and cash equivalents

    16     3,709     5,319  

Other current assets

    17     2,756     2,585  
                 

Total current assets

          24,084     26,685  
                 

Total assets

          117,496     123,318  
                 

Equity and liabilities

                   

Equity

                   

Share capital

    18     1,016     957  

Treasury shares

    18     (121 )   (125 )

Reserves

          64,949     62,364  
                 

Issued share capital and reserves attributable to Novartis AG shareholders

          65,844     63,196  

Non-controlling interests

          96     6,573  
                 

Total equity

          65,940     69,769  
                 

Liabilities

                   

Non-current liabilities

                   

Financial debts

    19     13,855     14,360  

Deferred tax liabilities

    12     6,761     7,689  

Provisions and other non-current liabilities

    20     7,792     6,842  
                 

Total non-current liabilities

          28,408     28,891  
                 

Current liabilities

                   

Trade payables

          4,989     4,788  

Financial debts and derivative financial instruments

    21     6,374     8,627  

Current income tax liabilities

          1,706     1,710  

Provisions and other current liabilities

    22     10,079     9,533  
                 

Total current liabilities

          23,148     24,658  
                 

Total liabilities

          51,556     53,549  
                 

Total equity and liabilities

          117,496     123,318  
                 

The accompanying notes form an integral part of the consolidated financial statements.

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NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED CASH FLOW STATEMENTS

(for the years ended December 31, 2011, 2010 and 2009)

 
  Note   2011   2010   2009  
 
   
  $ m
  $ m
  $ m
 

Net income

          9,245     9,969     8,454  

Reversal of non-cash items

    23.1     9,300     6,162     5,448  

Dividends from associated companies

          403     568     504  

Dividends received from marketable securities

          1     3     3  

Interest received

          66     170     106  

Interest paid

          (640 )   (525 )   (268 )

Other financial payments

          (47 )   (145 )   (386 )

Taxes paid

          (2,435 )   (2,616 )   (1,623 )
                     

Cash flows before working capital and provision changes

          15,893     13,586     12,238  

Restructuring payments and other cash payments from provisions

          (1,471 )   (1,281 )   (735 )

Change in net current assets and other operating cash flow items

    23.2     (113 )   1,762     688  
                     

Cash flows from operating activities

          14,309     14,067     12,191  
                     

Purchase of property, plant & equipment

          (2,167 )   (1,678 )   (1,887 )

Proceeds from sales of property, plant & equipment

          61     36     48  

Purchase of intangible assets

          (220 )   (554 )   (846 )

Proceeds from sales of intangible assets

          643     545     51  

Purchase of financial assets

          (139 )   (124 )   (215 )

Proceeds from sales of financial assets

          59     66     124  

Purchase of non-current non-financial assets

          (48 )   (15 )   (23 )

Proceeds from sales of non-current non-financial assets

          5     3     3  

Acquisitions of interests in associated companies

          (12 )            

Acquisitions and divestments of businesses

    23.3     (569 )   (26,666 )   (925 )

Acquisition of non-controlling interests

                      (81 )

Purchase of marketable securities

          (1,750 )   (40,569 )   (14,103 )

Proceeds from sales of marketable securities

          3,345     53,200     3,635  
                     

Cash flows used in investing activities

          (792 )   (15,756 )   (14,219 )
                     

Acquisition of treasury shares

          (3,628 )   (311 )   (461 )

Disposal of treasury shares

          159     711     685  

Increase in non-current financial debts

          281     5,674     7,052  

Repayment of non-current financial debts

          (28 )   (5 )   (22 )

Change in current financial debts

          (3,054 )   2,610     (491 )

Proceeds from issuance of share capital to third parties

          4     19     39  

Acquisition of Alcon non-controlling interests

          (3,187 )   (32 )      

Dividends paid to non-controlling interests and other financing cash flows

          (203 )   (64 )   (52 )

Dividends paid to shareholders of Novartis AG

          (5,368 )   (4,486 )   (3,941 )
                     

Cash flows used in/from financing activities

          (15,024 )   4,116     2,809  
                     

Net effect of currency translation on cash and cash equivalents

          (103 )   (2 )   75  
                     

Net change in cash and cash equivalents

          (1,610 )   2,425     856  

Cash and cash equivalents at January 1

          5,319     2,894     2,038  
                     

Cash and cash equivalents at December 31

          3,709     5,319     2,894  
                     

The accompanying notes form an integral part of the consolidated financial statements.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS

1.     Accounting Policies

        The Novartis Group (Group or Novartis) consolidated financial statements comply with the International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (IASB). They are prepared in accordance with the historical cost convention except for items that are required to be accounted for at fair value.

        The preparation of financial statements requires management to make estimates and other judgments that affect the reported amounts of assets and liabilities as well as the accounting and 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 consolidated financial statements include all companies that Novartis AG, Basel, Switzerland directly or indirectly controls (generally more than 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 their activities.

        Investments in associated companies (generally defined as investments in companies in which Novartis holds between 20% and 50% of voting shares or over which it otherwise has significant influence) and joint ventures are accounted for using the equity method. In these situations, the Group records its share of the estimated associated company's net income and equity. The share of results attributed to Novartis from these associated companies is included in the income statement line "Income from associated companies" and is calculated after the deduction of related taxes and non-controlling interests included in the financial results of the associated company.


Principles of Consolidation

        The Group's financial year end is December 31, and the annual closing date of the individual financial statements incorporated into the Group's consolidated financial statements is December 31.

        The acquisition method of accounting is used to account for business combinations by the Group in transactions where Novartis takes control of another entity, including consideration of IFRS 3 (revised) "Business Combinations" which was adopted with effect from January 1, 2010. The cost of an acquisition is measured as the fair value of the transferred assets as well as incurred or assumed liabilities at the date of acquisition. Up to December 31, 2009 contingent consideration would not have been generally recorded at the date of acquisition. From January 1, 2010 the fair value of any contingent consideration potentially due to former owners of the acquired business is also included in the cost of the acquisition. Costs directly attributable to an acquisition were capitalized up to December 31, 2009. Costs for acquisitions subsequent to January 1, 2010 are expensed. Identifiable acquired assets as well as assumed liabilities and contingent liabilities obtained in a business combination are measured initially at their fair values as of the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the consideration transferred to obtain a controlling interest and the fair value of any previous non-controlling interest in the acquiree, over the fair value of the Group's share of net identifiable assets in a business combination, is recorded as goodwill in the balance sheet and is denominated in the functional currency of the related acquisitions. Up to December 31, 2009, the excess of the cost of an acquisition over the Group's share of the fair value of acquired net identifiable assets related to acquiring an additional interest in an already controlled entity was also recorded as goodwill. From January 1, 2010 such amounts are recorded in consolidated equity. Up to December 31, 2009 any difference between the proceeds received from reducing the interest in a controlled entity compared to the share of the related net assets was recorded in the consolidated income statement. From January 1, 2010 such amounts are recorded in consolidated equity. Up to December 31, 2009, for an acquisition of an entity in stages, any revaluation of an initial non-controlling interest in an entity required as a result of obtaining control was recognized in a separate component of comprehensive income. From January 1, 2010 such amounts are recorded in the consolidated income statement. Also from January 1, 2010 Novartis has elected to value any remaining outstanding non-controlling interest in a controlled subsidiary only at its proportionate share of the fair value of the net identified assets.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.     Accounting Policies (Continued)


Companies acquired or disposed of during the year are included in the consolidated financial statements from the date of acquisition or until the date of disposal.

        Intercompany income and expenses, including unrealized profits from internal Novartis transactions and intercompany receivables and payables, are eliminated.


Foreign Currencies

        The consolidated financial statements of Novartis are presented in US dollars ($). The functional currency of certain Swiss and foreign finance companies used for preparing the consolidated financial statements is $ instead of the respective local currencies. This reflects the fact that the cash flows and transactions of these entities are primarily denominated in $. Generally, the respective local currency is used as the functional currency for other entities. In the respective entity financial statements, monetary assets and liabilities denominated in foreign currencies are translated at the prevailing exchange rate 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 entity's income statement.

        Income, expense and cash flows of the consolidated entities have been translated into $ using the average of monthly exchange rates during the year. Balance sheets are translated using year-end exchange rates. Translation differences arising from movements in exchange rates used to translate equity and long-term intercompany financing transactions relating to net investments in a foreign entity, retained earnings and other equity components and net income for the year are allocated directly to the cumulative translation effects included in the fair value adjustments in the consolidated statement of comprehensive income. Translation gains and losses accumulated in the consolidated statement of comprehensive income are included in the income statement when the foreign operation is completely or partially liquidated or is sold.


Impairment of long-lived intangible and tangible assets

        Novartis reviews long-lived intangible and tangible assets for impairment whenever events or changes in circumstance indicate that the asset's balance sheet carrying amount may not be recoverable.

        An asset, as defined, is generally considered impaired when its carrying amount exceeds its estimated recoverable amount. The recoverable amount is measured as the higher of: a) an asset or related cash-generating unit's fair value less costs to sell and b) its value in use. Fair value reflects the Group's estimates of assumptions that market participants would use when pricing the asset. In contrast the value in use concept reflects the Group's estimates based on its expected use of the asset, including the effects of factors that may be specific to the Group and not applicable to entities in general. Value in use, and fair value, are measured principally on the basis of discounted cash flow analysis using management's best estimate of the range of economic conditions that are expected to exist over the remaining useful life of the asset. Also value in use measurements specifically exclude consideration of any estimated future net cash flows that might be expected to arise from future restructuring or from improving or enhancing the asset's performance.

        The net present values involve highly sensitive estimates and assumptions including consideration of factors such as the following:

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.     Accounting Policies (Continued)

        Factors that could result in shortened useful lives or impairments include:

        Goodwill and the Alcon brand name have an indefinite useful life and impairment testing is done at least annually. Any impairment charge is recorded in the consolidated income statement under "Other expense". Novartis considers that the Alcon brand name has an indefinite life as Alcon has a history of strong revenue and cash flow performance, and Novartis has the intent and ability to support the brand with marketplace spending for the foreseeable future. IPR&D is also assessed for impairment at least on an annual basis, with any impairment charge recorded in the consolidated income statement under "Research & Development". Once a project included in IPR&D has been successfully developed and is available for use, it is amortized over its useful life in the consolidated income statement under "Cost of Goods Sold", where related impairment charges, if any, are also recorded.

        Novartis has adopted a uniform method for assessing goodwill and indefinite-life intangible assets for impairment and any other intangible asset indicated as being possibly impaired. Generally, for intangible assets Novartis uses cash flow projections for the whole useful life of these assets, and for goodwill and the Alcon brand name, Novartis utilizes cash flow projections for a five-year period based on management forecasts, with a terminal value based on sales projections usually in line with or lower than inflation rates for later periods. Probability-weighted scenarios are typically used.

        Discount rates used in these scenarios are based on the Group's weighted average cost of capital as an approximation of the weighted average cost of capital of a comparable market participant, which are adjusted for specific country and currency risks associated with cash flow projections.

        Due to the above factors, actual cash flows and values could vary significantly from forecasted future cash flows and related values derived using discounting techniques.


Property, Plant & Equipment

        Land is recorded at acquisition cost less accumulated impairment, if any. Prepayments for long-term leasehold land agreements are amortized over the life of the lease.

        Other items of property, plant & equipment are recorded at acquisition cost or production cost and are depreciated on a straight-line basis to the consolidated income statement over the following estimated useful lives:

Buildings

  20 to 40 years

Other property, plant & equipment:

   

—Machinery and equipment

  7 to 20 years

—Furniture and vehicles

  5 to 10 years

—Computer hardware

  3 to 7 years

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1.     Accounting Policies (Continued)

        Additional costs that enhance the future economic benefit of property, plant & equipment are capitalized. Government grants for construction activities and equipment are deducted from the carrying value of the assets. Borrowing costs associated with the construction of new property, plant and equipment projects are capitalized. Property, plant & equipment is reviewed for impairment whenever events or changes in circumstances indicate that the balance sheet carrying amount may not be recoverable.

        Property, plant & equipment that are financed by leases giving Novartis substantially all risks and rewards of ownership are capitalized at the lower of the fair value of the leased asset or the present value of minimum lease payments at the inception of the lease. These are depreciated in the same manner as other assets over the shorter of the lease term or their useful life. Leases in which a significant portion of the ownership risks and rewards are retained by the lessor are classified as operating leases. These are charged to the consolidated income statement over the life of the lease, generally, on a straight-line basis.


Intangible Assets

Goodwill

        The excess of the consideration transferred to obtain a controlling interest and the fair value of any previous non-controlling interest in the acquiree, over the fair value of the Group's share of net identifiable assets in a business combination, is recorded as goodwill in the balance sheet and is denominated in the functional currency of the related acquisition. Goodwill is allocated to an appropriate cash-generating unit which is defined as the smallest group of assets that generates independent cash inflows that support the goodwill. All goodwill is tested for impairment at least annually. In addition, goodwill is evaluated for impairment at each reporting date for each cash-generating unit with any resulting goodwill impairment charge recorded under "Other Expense" in the consolidated income statement.

        Goodwill is tested for possible impairment annually and whenever events or changes in circumstances indicate the value may not be fully recoverable. If the initial accounting for goodwill in the reporting period is only provisional, it is not tested for impairment unless an impairment indicator exists, and not included in the calculation of the net book values at risk from changes in the amount of discounted cash flows. An impairment is recognized when the consolidated balance sheet carrying amount is higher than the greater of "fair value less costs to sell" and "value in use."

Other Intangible Assets

        All identifiable intangible assets acquired in a business combination are recognized at their fair value. Furthermore, all acquired Research & Development assets, including upfront and milestone payments on licensed or acquired compounds, which are deemed to enhance the intellectual property of Novartis, are capitalized at cost as intangible assets, when it is probable that future economic benefits will arise, even though uncertainties exist as to whether the R&D projects will be ultimately successful in producing a commercial product.

        All Novartis intangible assets are allocated to cash-generating units. IPR&D and the Alcon brand name are the only classes of separately identified intangible assets that are not amortized. Both are tested for impairment on an annual basis or when facts and circumstances warrant an impairment test. Any impairment charge is recorded in the consolidated income statement under "Research & Development" for IPR&D and under "Other Expense" for the Alcon brand name. Once a project included in IPR&D has been successfully developed and is available for use, it is amortized over its useful life in the consolidated income statement under "Cost of Goods Sold," where any related impairment charges are also recorded. The Alcon brand name is considered to have an indefinite life as Alcon has a history of strong revenue and cash flow performance, and we have the intent and ability to support the brand with marketplace spending for the foreseeable future.

        Internally developed computer software is capitalized and once available for use amortized over its estimated useful life.

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1.     Accounting Policies (Continued)

        All other intangible assets are amortized over their estimated useful lives once they are available for use and tested for impairment whenever facts and circumstances indicate that their carrying value may not be recoverable. The useful lives assigned to acquired intangible assets are based on the period over which they are expected to generate economic benefits, commencing in the year in which they first generate sales or are used in development. Acquired intangible assets are amortized on a straight-line basis over the following periods:

Trademarks

  Over their estimated economic or legal life with a maximum of 20 years

Currently marketed products and marketing know-how

  5 to 25 years

Technology

  10 to 30 years

Software

  3 to 5 years

Others

  3 to 5 years

Alcon brand name

  Indefinite useful life, not amortized

        Amortization of trademarks, currently marketed products and marketing know-how is charged in the consolidated income statement to "Cost of Goods Sold" over their useful lives. Technology, which represents identified and separable acquired know-how used in the research, development and production process, is amortized in the consolidated income statement under "Cost of Goods Sold" or "Research & Development." Any impairment charges are recorded in the consolidated income statement in the same functional cost lines as the related amortization charges.


Financial Assets

        Investments in debt and equity securities are initially recorded at fair value on the trade date, and subsequently carried at fair value. The fair values of quoted investments are based on current market prices. If the market for a financial asset is not active or no market is available, fair values are established using valuation techniques. These include the use of data from the most recent arm's length relevant transactions, such as new financing rounds or partial disposals; reference to other instruments that are substantially the same; a discounted cash flow analysis; and other pricing models that make maximum use of observable market data. Loans are carried at amortized cost, less any allowances for uncollectable amounts. Exchange rate gains and losses and interest income using the effective interest rate method on loans are recorded in the consolidated income statement. All other changes in the fair value of financial assets are deferred as a fair value adjustment in the consolidated statement of comprehensive income and recognized in the income statement when the asset is sold. Any impairments in value below initial cost are immediately expensed in the consolidated income statement.


Associated companies

        Novartis uses the equity method to account for investments in associated companies (generally defined as investments in companies that correspond to holdings of between 20% and 50% of voting shares or over which Novartis otherwise has significant influence).

        Novartis considers investments in associated companies for impairment testing whenever there is a quoted share price and when this has a fair value less than the carrying value per share for the investment. For unquoted investments in associated companies recent financial information is taken into account to assess whether impairment testing is necessary. In a situation in which, based on the quoted share price, the fair value less cost to sell is considered to be below the carrying amount, the value in use is determined in order to test the investment for impairment. If the value in use is also below the carrying amount an impairment loss is recognized for the difference between carrying amount and the higher of "value in use" or "fair value less costs to sell". In addition, an impairment test for separately identified assets of the associated company other than its goodwill is performed whenever an indication for impairment exists. Any impairment charge is recorded in the income statement under "Income from associated companies".

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1.     Accounting Policies (Continued)


Derivative Financial Instruments and Hedging

        Derivative financial instruments are initially recognized in the balance sheet at fair value, and they are re-measured to their current fair value at the end of each subsequent reporting period.

        The method of recognizing the resulting gain or loss is dependent on whether a derivative contract is designed to hedge a specific risk and qualifies for hedge accounting. The purpose of hedge accounting is to match the impact of the hedged item and the hedging instrument in the consolidated income statement. The Group designates derivatives that 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 that are fair value hedges and that are highly effective are recognized in the consolidated income statement along with any changes in the fair value of the hedged asset or liability attributable to the hedged risk. Any gain or loss on the hedging instrument relating to the effective portion of changes in the fair value of derivatives in cash flow hedges are recognized in the consolidated statement of comprehensive income. Gains or losses relating to the ineffective portion are recognized immediately in the consolidated income statement. In determining whether the impact of a cash flow hedge can be deferred in the consolidated statement of comprehensive income, management assesses the probability of the forecasted transaction occurring. Amounts are only deferred when management judges the forecasted transaction to be highly probable.

        Hedges of net investments in foreign entities are accounted for similarly to cash flow hedges. All foreign exchange gains or losses arising on translation are included in cumulative translation effects and recognized in the consolidated statement of comprehensive income. Gains and losses accumulated in this statement are included in the consolidated income statement when the foreign operation is completely or partially liquidated or is sold.

        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 "other financial income and expense" in the consolidated income statement.


Inventories

        Purchased products are valued at acquisition cost while own-manufactured products are valued at manufacturing cost including related production expenses. In the consolidated balance sheet, inventory is valued at historical cost determined on a first-in first-out basis, and this value is used for the "Cost of Goods Sold" in the consolidated income statement. Provisions are made for inventories with a lower market value or which are slow-moving. If it becomes apparent that such inventory can be reused, provisions are reversed with inventory being revalued up to the lower of its net realizable value or original cost. Inventory produced ahead of regulatory approval is provided for with the provision being released on obtaining approval. Unsalable inventory is fully written off in "Cost of Goods Sold".


Trade Receivables

        Trade receivables are initially recognized at fair value representing the invoiced amounts, less adjustments for estimated revenue deductions such as rebates, chargebacks and cash discounts. Doubtful trade receivables provisions are established based upon the difference between the recognized value and the estimated net collectible amount with the estimated loss recognized in the consolidated income statement within "Marketing & Sales" expenses. When a trade receivable becomes uncollectible, it is written off against the doubtful trade receivables provisions.

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CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.     Accounting Policies (Continued)

Cash and Cash Equivalents

        Cash and cash equivalents include highly liquid investments with original maturities of three months or less which are readily convertible to known amounts of cash. Bank overdrafts are presented within other bank and financial debt within "Current financial debts" on the consolidated balance sheet.


Marketable Securities

        Marketable securities consist of equity and debt securities which are principally 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 their acquired fair value and subsequently carried at fair value. Exchange rate gains and losses and interest income using the effective interest rate method on debt securities are recorded in the consolidated income statement. All other changes in the fair value of unhedged securities are deferred as a fair value adjustment in the consolidated statement of comprehensive income and recognized in the consolidated income statement when the asset is sold or impaired. Where hedge accounting is applied, the change in fair value of effectively hedged securities is recorded in the consolidated income statement where it offsets the gains or losses of the hedging derivative.

        Unrealized losses on impaired marketable securities are included as a reduction of financial income in the consolidated income statement. A security is assessed for impairment when its market value at the balance sheet date is less than initial cost reduced by any previously recognized impairment.


Repurchase Agreements

        Underlying securities related to repurchase agreements are included within marketable securities. Repurchase financing agreements for securities sold but agreed to be repurchased are recognized gross and included in short-term financial debts. Income and expenses are recorded net in interest income within financial income.


Taxes

        Taxes on income are provided in the same periods as the revenues and expenses to which they relate. Deferred taxes are determined using the comprehensive liability method and are calculated on the temporary differences that arise between the tax base of an asset or liability and its carrying value in the subsidiary's balance sheet 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 subsidiaries' retained earnings are only taken into account where a dividend has been planned since generally the retained earnings are reinvested. Deferred tax assets or liabilities, measured at the tax rates that are expected to apply in the period of tax settlement or realization by the applicable entity, are included in the consolidated balance sheet as either a non-current asset or liability, with changes in the year recorded in the consolidated income statement in "Taxes" or in the consolidated statement of comprehensive income, if they relate to an item directly recorded in this statement. Deferred tax assets related to tax losses of relevant Group entities are recognized to the extent it is considered probable that future taxable profits will be available against which such losses can be utilized in the foreseeable future.

        The estimated amounts for current and deferred tax assets or liabilities, including any amounts related to any uncertain tax positions, are based on currently known facts and circumstances. Tax returns are based on an interpretation of tax laws and regulations and record estimates based on these judgments and interpretations. The tax returns are subject to examination by the competent taxing authorities, which may result in an assessment being made requiring payments of additional tax, interest or penalties. Inherent uncertainties exist in the estimates of the tax positions.

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CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.     Accounting Policies (Continued)


Defined Benefit Pension Plans, Other Post-Employment Benefits and Other Non-Current Benefits of Associates

Defined Benefit Pension Plans

        The liability in respect of defined benefit pension plans is the defined benefit obligation calculated annually by independent actuaries using the projected unit credit method. The defined benefit obligation is measured as the present value of the estimated future payments required to settle the obligation that is attributable to the service of associates in the current and prior periods. The service cost for such pension plans is included in the personnel expenses of the various functions where the associates are employed, while the expected return on assets and interest expense are recognized as "Other income" or "Other expense". Plan assets are recorded at their fair value. Unvested past service costs arising from amendments to pension plans are charged or credited on a straight-line basis to income over the associates' remaining vesting period. Vested past service costs, including such costs for retired associates are immediately recognized in the consolidated income statement. Gains or losses arising from plan curtailments or settlements are accounted for at the time they occur. Any net pension asset is limited to the present value of future economic benefits available to the Group in the form of refunds from the plan or expected reductions in future contributions to the plan.

        The effects of changes in actuarial assumptions and experience adjustments on the value of plan assets and liabilities of defined benefit plans are immediately recognized in the consolidated balance sheet with a corresponding movement in the consolidated statement of comprehensive income.

Other Post-Employment Benefits

        Certain subsidiaries provide healthcare and insurance benefits for a portion of their retired associates and their eligible dependents. The cost of these benefits is actuarially determined and accrued over the service lives of the related associates. Service costs are included in the personnel expenses of the various functions where the associates are located, while the expected return on assets and interest expense are recognized as "Other income" or "Other expense". The related obligation is recognized in non-current liabilities.

Other Non-Current Benefits of Associates

        Other non-current benefits of associates represent amounts due to associates under deferred compensation arrangements available in certain jurisdictions in which the Group conducts its operations. Benefit costs are recognized on an accrual basis in the personnel expenses of the various functions where the associates are located. The related obligation is recognized in other non-current liabilities.


Equity-Based Compensation

        The fair value of Novartis shares, restricted shares, restricted share units (RSU) and American Depositary Shares (ADS) and related options granted to associates as compensation is recognized as an expense over the related vesting or service period adjusted to reflect actual and expected vesting levels. The charge for equity-based compensation is included in the personnel expenses which are allocated to functional costs and credited to equity for equity-settled amounts or to other current liabilities for cash-settled amounts. An option's fair value at grant date is calculated using the trinomial valuation method. Accurately measuring the value of share options is difficult and requires an estimate of factors used in the valuation model. These key factors involve uncertain future events, such as expected dividend yield and expected share price volatility. Expected volatilities are based on those implied from listed warrants on Novartis shares, and—to the extent that equivalent options are not available—a future extrapolation based on historical volatility. Novartis shares, restricted shares, RSUs and ADSs are valued using the market value on the grant date.


Revenue Recognition

        Revenue is recognized when there is persuasive evidence that a sales arrangement exists, title and risks and rewards for the products are transferred to the customer, the price is determinable and collectability is reasonably assured. Where contracts contain customer acceptance provisions, sales are recognized upon the satisfaction of acceptance criteria. Revenue is recognized for products that are stockpiled at the request of the customer once

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1.     Accounting Policies (Continued)


the products have been inspected and accepted by the customer and there is no right of return or replenishment on product expiry, and cost of storage will be paid by the customer on normal commercial terms. Provisions for rebates and discounts granted to government agencies, wholesalers, retail pharmacies, managed care and other customers are recorded as a reduction of revenue at the time the related revenues are recorded or when the incentives are offered. They are calculated on the basis of historical experience and the specific terms in the individual agreements. Provisions for refunds granted to healthcare providers under innovative pay for performance agreements are recorded as a reduction of revenue at the time the related revenues are recorded. They are calculated on the basis of historical experience and clinical data for the product as well as the specific terms in the individual agreements. In cases where historical experience and clinical data are not sufficient for a reliable estimation of the outcome, revenue recognition is deferred until such history is available.

        Cash discounts are offered to customers to encourage prompt payment and are recorded as revenue deductions. Wholesaler shelf-inventory adjustments are granted to customers based on the existing inventory of a product at the time of decreases in the invoice or contract price of a product or at the point of sale if a price decline is reasonably estimable. Where there is an historical experience of Novartis agreeing to customer returns or Novartis can otherwise reasonably estimate expected future returns, Novartis records a provision for estimated sales returns. In doing so it applies the estimated rate of return, determined based on historical experience of customer returns or considering any other relevant factors, to the amounts invoiced also considering the amount of returned products to be destroyed versus products that can be placed back in inventory for resale. Where shipments are made on a re-sale or return basis, without sufficient historical experience for estimating sales returns, revenue is only recorded when there is evidence of consumption or when the right of return has expired. Provisions for revenue deductions are adjusted to actual amounts as rebates, discounts and returns are processed.


Research & Development

        Internal Research & Development (R&D) costs are fully charged to the consolidated income statement in the period in which they are incurred. The Group considers that regulatory and other uncertainties inherent in the development of new products preclude the capitalization of internal development expenses as an intangible asset until marketing approval from a regulatory authority is obtained in a major market such as for the US, the EU, Switzerland or Japan.

        Payments made to third parties in compensation for subcontracted R&D that is deemed not to enhance the intellectual property of Novartis such as contract research and development organizations are expensed as internal R&D expenses in the period in which they are incurred. Such payments are only capitalized if they meet the criteria for recognition of an internally generated intangible asset, usually when marketing approval has been achieved from a regulatory authority in a major market.

        Payments made to third parties in order to in-license or acquire intellectual property rights, compounds and products (In-Process Research & Development assets, "IPR&D"), including initial upfront and subsequent milestone payments, are capitalized as are payments for other assets, such as technologies to be used in R&D activities. If additional payments are made to the originator company to continue to perform R&D activities, an evaluation is made as to the nature of the payments. Such additional payments will be expensed if such additional payments are deemed to be compensation for subcontracted R&D services not resulting in an additional transfer of intellectual property rights to Novartis. By contrast, such additional payments will be capitalized if these additional payments are deemed to be compensation for the transfer to Novartis of additional intellectual property developed at the risk of the originator company. Subsequent internal R&D costs in relation to IPR&D and other assets are expensed since the technical feasibility of the internal R&D activity can only be demonstrated by the receipt of marketing approval for a related product from a regulatory authority in a major market.

        Costs for post-approval studies performed to support the continued registration of a marketed product are recognized as marketing expenses. Costs for activities that are required by regulatory authorities as a condition for obtaining marketing approval are charged as development expenses as they are incurred in cases where it is anticipated that the related product will be sold over a longer period than the activities required to be performed to obtain the marketing approval. In the rare cases where costs related to the conditional approval need to be

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CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.     Accounting Policies (Continued)


incurred over a period beyond that of the anticipated product sales, then the expected costs of these activities will be expensed over the shorter period of the anticipated product sales. As a result, all activities necessary as a condition to maintain a received approval, whether conditional or not, are expensed in the consolidated income statement.

        IPR&D assets are amortized in the consolidated income statement over their useful life once the related project has been successfully developed and regulatory approval for a product launch has been obtained. Other acquired technologies included in intangible assets are amortized in the consolidated income statement over their estimated useful lives.

        Laboratory buildings and equipment included in property, plant & equipment are depreciated in the consolidated income statement over their estimated useful lives.


Government Grants

        Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions.

        Government grants are deferred and recognized in the consolidated income statement over the period necessary to match them with the related costs which they are intended to compensate.

        Government grants relating to property, plant and equipment are deducted from the carrying value of assets and released to the consolidated income statement on a straight-line basis over the expected lives of the related assets.

        Government grants related to income are deducted in reporting the related expense.

Provisions

        Novartis records provisions when it is judged probable that a liability has been incurred and the amount can be reliably estimated. These provisions are adjusted periodically as assessments change or additional information becomes available.

        Cost of future expenditures do not usually reflect any insurance or other claims or recoveries, as Novartis only recognizes insurance or other recoveries at such time the amount is reliably estimable and collection is virtually certain.

Product Liabilities

        Provisions are made for present product liability obligations resulting from past sales including related legal and other fees and expenses. The provision is actuarially determined taking into consideration such factors as past experience, amount and number of claims reported and estimates of claims incurred but not yet reported. Individually significant cases are provided for when probable and reliably estimable.

Legal Liabilities

        Provisions are made for anticipated settlement costs where a reliable estimate can be made of the probable outcome of legal or other disputes against the Group. In addition, provisions are made for legal and other fees and expenses arising from claims affecting Novartis.

Environmental Liabilities

        Novartis is exposed to environmental liabilities relating to its past operations, principally in respect to remediation costs. Provisions for remediation costs are made when expenditure on remedial work is probable and the cost can be reliably estimated. These remediation costs are calculated as the present value of expected cash outflows including anticipated inflation, discounted at a rate based on the market yields for high quality corporate

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CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.     Accounting Policies (Continued)


bonds. The increase in provisions due to the passage of time and the effect of changes in the discount rates are included in Interest Expense.

Contingent consideration in a business combination

        Up to December 31, 2009 contingent consideration would not have been generally recorded at the date of acquisition. From January 1, 2010, contingent consideration potentially due to former owners as part of the consideration paid for a business combination is recognized as a liability at fair value as of the acquisition date. Any subsequent change in the fair value of the contingent consideration liability is recognized in the consolidated income statement.

Restructuring Charges

        Restructuring charges are accrued against operating income in the period in which management has committed to a plan and has raised the valid expectation of the plan's implementation by those affected and the amount can be reliably estimated. The Group recognizes the costs for terminating the employment contracts of associates when it is demonstrably committed to either terminating employment according to a detailed formal plan without possibility of withdrawal or when it is committed to providing termination benefits as a result of an offer made to encourage voluntary redundancy.

        Charges to increase restructuring provisions are included in "Other expense" in the consolidated income statement. Corresponding releases are recorded in "Other income".


Dividends

        Dividends are recorded in the Group's consolidated financial statements in the period in which they are approved by the Group's shareholders.


Treasury Shares

        Treasury shares are deducted from consolidated 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 consolidated retained earnings.


Reporting Segments

        Reporting segments are reported in a manner consistent with the internal reporting to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing the performance of the reporting segments, has been identified as being the Executive Committee.


Status of Adoption of Significant New or Amended IFRS Standards or Interpretations

        The following new or amended IFRS standards will, based on a Novartis analysis, be of significance to the Group, but have not yet been adopted.

        In 2009, 2010 and 2011, IFRS 9 Financial Instruments was issued which will substantially change the classification and measurement of financial instruments, hedging requirements and the recognition of certain fair value changes in the consolidated financial statements. Currently, only new requirements on the classification and measurement for financial assets and financial liabilities have been issued. The mandatory effective date for requirements issued as part of IFRS 9 will be on or after January 1, 2015. Early application of the requirements is permitted.

        In 2011, IAS 19 revised on Employee Benefits was issued, for adoption by January 1, 2013. The principal impact for Novartis will be that the concepts of expected return on plan assets and interest expense on the defined benefit obligation as separate components of defined benefit cost will be replaced by a concept that interest will be calculated on the net of the defined benefit obligation and funded post-employment obligation assets generally

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CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.     Accounting Policies (Continued)


using an interest rate reflecting market yields of high quality corporate bonds in deep markets. If this concept had been adopted by Novartis in 2011, it is estimated that operating income would have been lower by approximately $260 million. Novartis will retrospectively adopt the standard on January 1, 2013.

        Two other new standards were also issued in 2011, IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements which are potentially important for Novartis. Under IFRS 10, Novartis will need to consolidate an investee based on control, i.e. when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. IFRS 11 will require that Novartis classifies joint arrangements as either joint operations, where assets, liabilities, revenues and expenses are accounted for proportionally in accordance with the agreement, or as joint ventures, which are accounted for under the equity method. These new standards become effective on January 1, 2013.

        The following IFRSs and amendments are not yet effective and are not early adopted by the Group:

        Although Novartis is still completing its evaluation of these new standards, apart from where indicated, Novartis does not currently consider that the other new standards will have a significant impact.

2.     Significant Transactions, Business Combinations and Divestments

        The following acquisitions, divestments, business combinations and other significant transactions occurred during 2011, 2010 and 2009. See notes 3 and 24 for further details of the impact of these transactions on the consolidated financial statements.

Alcon majority control in 2010; full ownership and merger in 2011

        On August 25, 2010 Novartis completed the acquisition of a further 52% interest in Alcon, Inc. (Alcon) following on from the January 4, 2010 announcement that Novartis had exercised its call option to acquire Nestlé's remaining 52% Alcon interest for approximately $28.3 billion or $180 per share. The overall purchase price of $38.7 billion included certain adjustments for Alcon dividends and interest due. This increased the interest in Alcon to a 77% controlling interest as Novartis had already acquired an initial 25% Alcon interest from Nestlé for $10.4 billion or $143 per share in July 2008.

        On December 14, 2010 Novartis entered into a definitive agreement to merge Alcon into Novartis in consideration for Novartis shares and a Contingent Value Amount. The acquisition of the remaining outstanding non-controlling interests in Alcon were separate transactions following the previous acquisition of majority ownership in Alcon by Novartis in 2010.

        On April 8, 2011 a Novartis Extraordinary General Meeting approved the merger with Alcon, Inc. leading to the creation of the Alcon Division which became the fifth reported segment in Novartis' strategically diversified healthcare portfolio. The Extraordinary General Meeting also authorized the issuance of 108 million new shares. Alcon shareholders received 2.9228 Novartis shares (which included a dividend adjustment) and $8.20 in cash for each share of Alcon, resulting in a total consideration of $168.00 per share.

        For business combinations achieved in stages, IFRS requires that any previously held interest of an acquirer in an acquiree is adjusted to its fair value through the consolidated income statement as of the acquisition date. The agreement that Novartis entered into with Nestlé in 2008 specified an average price of up to $168 per share for all of the approximately 77% interest in Alcon held by Nestlé, including $143 per share for the initial 25% interest acquired by Novartis in 2008, and a maximum of $181 per share for the remaining 52%, including a premium for the change of majority ownership.

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CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.     Significant Transactions, Business Combinations and Divestments (Continued)

        Novartis reassessed the fair value of the initial 25% non-controlling interest in Alcon it acquired from Nestlé in 2008. In 2010, Novartis recognized a revaluation gain of $378 million on its initial 25% equity-method investment in Alcon upon acquiring a 52% controlling interest in the second-stage purchase from Nestlé on August 25, 2010. This gain was based on Novartis concluding that the fair value of that interest had a corresponding per-share value of $139. On this date the quoted marked price of Alcon on the NYSE was $160. Novartis measured this revaluation gain based on the estimated current fair value of its investment in Alcon, with the assistance of outside specialist investment bank advisors. This valuation demonstrated that, as at August 25, 2010, the quoted price for Alcon was affected by an anticipated premium on Novartis' eventual purchase of the 23% not owned at that time. Novartis concluded that this "premium" should not be included in the valuation of the previously held equity interest.

        This gain was reduced by $43 million of accumulated losses recorded in the consolidated statement of comprehensive income of Novartis since the July 2008 acquisition date of the initial interest. These accumulated losses were recorded under the equity accounting method, which requires such accumulated losses to be recycled into the consolidated income statement at the time of acquiring majority ownership. The net amount of $335 million was recorded as a gain under "Income from Associated Companies".

        At December 31, 2010 Novartis recorded the outstanding non-controlling interests in Alcon at their proportionate share of identifiable net assets which amounted to $6.3 billion. After the acquisition of majority ownership in Alcon, Inc. on August 25, 2010, Alcon contributed in 2010 net sales of $2.4 billion and operating income of $323 million to the 2010 consolidated income statement.

        During 2011, prior to the merger of Alcon, Inc. into Novartis AG on April 8, 4.8% of the non-controlling interests in Alcon, Inc. were acquired for $2.4 billion. Completion of the acquisition of the outstanding 18.6% on April 8, 2011 and subsequent merger, resulted in the issuance of Novartis shares with a fair value of $9.2 billion and a contingent value payment of $0.5 billion.

        The final purchase price allocation was completed in 2011 and resulted in a fair value of net identifiable assets of $27.0 billion and goodwill of $18.0 billion. The excess of the value exchanged for the non-controlling interests in 2011 over the recorded value of the non-controlling interest together with merger related transaction costs resulted in a reduction in equity of $5.7 billion.

Pharmaceuticals—Acquisition of Genoptix, Inc.

        On March 7, 2011 Novartis completed the acquisition of Genoptix, Inc., a specialized laboratory providing personalized diagnostic services to community-based hematologists and oncologists. Genoptix employed approximately 500 people and became part of the Novartis Molecular Diagnostics unit within the Pharmaceuticals Division.

        The acquisition in cash of 100% of the shares of Genoptix totaled $458 million, excluding the $24 million of cash acquired. The final purchase price allocation resulted in net identified assets of $237 million and goodwill of $221 million. Results of operations since the acquisition date were not material.

Vaccines and Diagnostics—Acquisition of Zhejiang Tianyuan

        On March 22, 2011 Novartis completed the acquisition in cash of an 85% stake in the Chinese vaccines company, Zhejiang Tianyuan Bio-Pharmaceutical Co. Ltd. The acquisition provides Novartis with an expanded presence in the Chinese vaccines market and is expected to facilitate the introduction of additional Novartis vaccines into China. The total amount paid for the 85% interest was $194 million, excluding $39 million of cash acquired. The final purchase price allocation resulted in net identified assets of $131 million and goodwill of $82 million. Non-controlling interests have increased by $19 million from this transaction. Results of operations since the acquisition date were not material.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.     Significant Transactions, Business Combinations and Divestments (Continued)

Pharmaceuticals—Divestment of Elidel®

        On May 11, 2011 Novartis completed the divestment of Elidel® Cream 1% to Meda Pharma Sarl and Novartis received an upfront payment of $420 million and recognized a gain of $324 million in "Other Income".

Other Significant Transactions in 2010

Pharmaceuticals—Acquisition of Corthera

        On February 3, 2010 Novartis completed the 100% acquisition (announced on December 23, 2009) of the privately held US-based Corthera Inc., gaining worldwide rights to relaxin for the treatment of acute decompensated heart failure and assumed full responsibility for development and commercialization for a total purchase consideration of $327 million. This amount consists of an initial cash payment of $120 million and $207 million of deferred contingent consideration. The deferred contingent consideration is the net present value of the additional milestone payments due to Corthera's previous shareholders which they are eligible to receive contingent upon the achievement of specified development and commercialization milestones. The final purchase price allocation resulted in net identified assets of $309 million and goodwill of $18 million. Results of operations since the acquisition date were not material.

Sandoz—Acquisition of Oriel Therapeutics

        On June 1, 2010 Sandoz completed the 100% acquisition of the privately held US-based Oriel Therapeutics Inc., to broaden its portfolio of projects in the field of respiratory drugs for a total purchase consideration of $332 million. This amount consists of an initial cash payment of $74 million and $258 million of deferred contingent consideration. Oriel's previous shareholders are eligible to receive milestone payments, which are contingent upon the company achieving future development steps, regulatory approvals and market launches, and sales royalties. The total $258 million of deferred contingent consideration represents the net present value of expected milestone and royalty payments. The final purchase price allocation, including the valuation of the contingent payment elements of the purchase price, resulted in net identified assets of $281 million and goodwill of $51 million. Results of operations since the acquisition date were not material. During 2011, $106 million of contingent consideration has been released to the consolidated income statement as it is remote that the related contingent event will occur.

Pharmaceuticals—Divestment of Enablex®

        On October 18, 2010 Novartis finalized the sale of the US rights for Enablex® (darifenacin) to Warner Chilcott Plc for $400 million and recognized a gain of $392 million.

Corporate—Issuance of bond in US dollars

        On March 9, 2010 Novartis issued a three-tranche bond totaling $5.0 billion registered with the US Securities and Exchange Commission as part of a shelf registration statement filed by Novartis in 2008. A 1.9% three-year tranche totaling $2.0 billion, a 2.9% five-year tranche totaling $2.0 billion and a 4.4% 10-year tranche totaling $1.0 billion were issued by the Group's US entity, Novartis Capital Corp. All tranches are unconditionally guaranteed by Novartis AG.

Corporate—Change of pension plan in Switzerland

        On April 23, 2010 the Board of Trustees of the Novartis Swiss Pension Fund agreed to amend the conditions and insured benefits of the current Swiss pension plan with effect from January 1, 2011. These amendments do not have an impact on existing pensions in payment or on plan members born before January 1, 1956. Under the previous rules, benefits from the plan are primarily linked to the level of salary in the years prior to retirement while under the new rules benefits are also partially linked to the level of contributions made by the members during their active service period up to their retirement. This has led to changes in the amounts that need to be included in the Group's consolidated financial statements prepared using IFRS in respect of the Swiss Pension Fund.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.     Significant Transactions, Business Combinations and Divestments (Continued)

        As part of this change, Novartis, supported by the Swiss Pension Fund, will make transitional payments, which vary according to the member's age and years of service. As a result, it is estimated that additional payments will be made over a ten-year period of up to approximately $481 million (CHF 453 million) depending on whether or not all current members affected by the change remain in the plan over this ten-year period.

        The accounting consequence of this change in the Swiss pension plan rules results in the Group's consolidated financial statements prepared under IFRS reflecting a net pre-tax curtailment gain of $265 million (CHF 283 million) in 2010. This calculation only takes into account the discounted value of transition payments of $202 million (CHF 219 million) attributed to already completed years of service of the affected plan members as calculated in accordance with IFRS requirements. It does not take into account any amount for transitional payments related to their future years of service.

Other Significant Transactions in 2009

Sandoz—Acquisition of EBEWE Pharma

        On May 20, 2009 Novartis announced a definitive agreement for Sandoz to acquire 100% of the specialty generic injectables business of EBEWE Pharma for EUR 925 million ($1.3 billion) in cash, to be adjusted for any cash or debt assumed at closing. This transaction was completed on September 22, 2009. The first payment of EUR 600 million ($0.9 billion) was made in 2009, with the balance paid in 2010. Based on a final purchase price allocation, EBEWE's identified net assets were $0.7 billion, which resulted in goodwill of $0.5 billion. Results of operations from this acquisition, which were not material in 2009, were included from the completion date of this transaction.

Vaccines and Diagnostics—Agreement to acquire Zhejiang Tianyuan

        On November 4, 2009 Novartis announced a definitive agreement to acquire an 85% stake in the Chinese vaccines company Zhejiang Tianyuan Bio-Pharmaceutical Co., Ltd. Terms call for Novartis to purchase an 85% majority interest for approximately $125 million in cash. The transaction was completed in 2011.

Corporate—Issuance of bond in US dollars

        On February 5, 2009 Novartis issued a two-tranche bond totaling $5.0 billion registered with the US Securities and Exchange Commission as part of a shelf registration statement filed by Novartis in 2008. A 4.125% five-year tranche totaling $2.0 billion was issued by the Group's US entity, Novartis Capital Corp., while a 5.125% 10-year tranche totaling $3.0 billion was issued by the Group's Bermuda unit, Novartis Securities Investment Ltd. Both tranches are unconditionally guaranteed by Novartis AG.

Corporate—Issuance of bond in euros

        On June 2, 2009 Novartis issued a EUR 1.5 billion bond (approximately $2.1 billion) with a coupon of 4.25% under its EUR 15 billion Euro Medium Term Note Programme. The seven-year bond, issued by Novartis Finance S.A., Luxembourg, has a maturity date of June 15, 2016, and is guaranteed by Novartis AG.

Corporate—Tender offer for additional interest in Novartis India Ltd.

        On June 8, 2009 Novartis completed a tender offer to acquire additional shares from public shareholders and increased its stake in the majority-owned Indian subsidiary, Novartis India Ltd., to 76.4% from 50.9% for approximately INR 3.8 billion ($80 million). Almost all large institutional investors and quasi-institutional shareholders participated in the offer. This transaction resulted in $57 million of goodwill.

Pharmaceuticals—Loss of majority control of Idenix

        On August 5, 2009 Novartis did not participate in an underwritten public offering by Idenix Pharmaceuticals, which reduced the Group's stake to 47% from the pre-offering level of 53%. As a result of this offering, Novartis no longer controls this company, so Idenix was deconsolidated with effect from September 1. Idenix has been

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.     Significant Transactions, Business Combinations and Divestments (Continued)


accounted for on an equity basis since this date, which had no material impact on the Group's consolidated income statement.

3.     Segmentation of Key Figures 2011, 2010 and 2009

Reporting Segments

        The businesses of Novartis are divided operationally on a worldwide basis into five reporting segments: Pharmaceuticals, Alcon, Sandoz, Vaccines and Diagnostics and Consumer Health and Corporate activities. Following the full acquisition of Alcon, Inc., on April 8, 2011 a new divisional segment allocation was introduced. As a result, the Alcon Division includes CIBA Vision and certain Pharmaceuticals Division ophthalmology products. Falcon, the US generics business of Alcon, Inc. was transferred to the Sandoz Division. Certain residual operational costs incurred for the Consumer Health Division headquarters were transferred to Corporate and Corporate R&D was transferred to the Pharmaceuticals Division. All segment results for all periods presented use this new allocation. Except for Consumer Health, these segments reflect the Group's internal management structures. These segments are managed separately, including the two divisions of the Consumer Health segment, because they manufacture, distribute, and sell distinct products which require differing marketing strategies. In the case of Consumer Health, the segment comprises two divisions which are also managed separately, however, neither of these two divisions is material enough to the Group to be disclosed separately as a segment. The reported segments are as follows:

        Pharmaceuticals researches, develops, manufactures, distributes and sells patented prescription medicines in the following therapeutic areas: Cardiovascular and Metabolism; Oncology; Neuroscience and Ophthalmics; Respiratory; Integrated Hospital Care; and additional products. Pharmaceuticals is organized into global business franchises responsible for the development and marketing of various products, as well as a business unit, called Novartis Oncology, responsible for the global development and marketing of oncology products. The Novartis Oncology Business Unit is not required to be disclosed separately as a segment since it shares common long-term economic perspectives, customers, research, development, production, distribution and regulatory factors with the rest of the division.

        Alcon discovers, develops, manufactures, distributes and sells eye care products. Alcon is the global leader in eye care with product offerings in Surgical, Ophthalmic Pharmaceuticals and Vision Care. In Surgical, Alcon develops, manufactures, distributes and sells ophthalmic surgical equipment, instruments, disposable products and intraocular lenses. In Ophthalmic Pharmaceuticals, Alcon discovers, develops, manufactures, distributes and sells medicines to treat chronic and acute diseases of the eye, as well as over-the-counter medicines for the eye. In Vision Care, Alcon develops, manufactures, distributes and sells contact lenses and lens care products.

        Sandoz develops, manufactures, distributes and sells prescription medicines, as well as pharmaceutical and biotechnological active substances, which are not protected by valid and enforceable third-party patents. Sandoz has activities in Retail Generics, Anti-Infectives, Biopharmaceuticals & Oncology Injectables. In Retail Generics, Sandoz develops, manufactures, distributes and markets active ingredients and finished dosage forms of pharmaceuticals, as well as supplying active ingredients to third parties. In Anti-Infectives, Sandoz develops and manufactures, distributes and sells active pharmaceutical ingredients and intermediates — mainly antibiotics — for internal use by Retail Generics and for sale to third-party customers. In Biopharmaceuticals, Sandoz develops, manufactures, distributes and markets protein- or other biotechnology-based products (known as biosimilars or follow-on biologics) and sells biotech manufacturing services to other companies. In Oncology Injectables, Sandoz develops, manufacturers, and markets cytotoxic products for the hospital market.

        Vaccines and Diagnostics consists of two activities: Vaccines and Diagnostics. Vaccines researches, develops, manufactures, distributes and sells human vaccines worldwide. Diagnostics researches, develops, distributes and sells blood testing and molecular diagnostics products.

        Consumer Health now consists of two divisions: OTC (over-the-counter medicines) and Animal Health. OTC offers readily available consumer medicine. Animal Health provides veterinary products for farm and companion animals.

F-24


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.     Segmentation of Key Figures 2011, 2010 and 2009 (Continued)

        The following shows an overview of the impact of the restatement on the segmentation structure. Unless otherwise stated this has been used for all years presented in this Form 20-F.

Segment
  Newly included   Newly excluded

Pharmaceuticals

  Corporate R&D   Certain ophthalmic products

Alcon

 
CIBA Vision, certain ophthalmic products
 
Falcon

Sandoz

 
Falcon
   

Consumer Health

     
CIBA Vision; disbanded Consumer Health divisional management costs

Corporate

 
Disbanded Consumer Health divisional management costs
 
Corporate R&D

        A summary of the above restatements on 2010 and 2009 net sales and operating income is as follows:

 
  2010   2009  
Segment
  Net sales   Operating
income
  Net sales   Operating
income
 
 
  $ m
  $ m
  $ m
  $ m
 

Pharmaceuticals

    (252 )   (327 )   (251 )   (320 )

Alcon

    2,020     473     1,965     473  

Sandoz

    74     49              

Consumer Health

    (1,842 )   (375 )   (1,714 )   (333 )

Corporate

          180           180  
                   

Total

    0     0     0     0  
                   

        Inter-segmental sales are made at amounts which are considered to approximate arm's length transactions. Where practicable, the same accounting policies are applied by the Group and the segments. Currently, the Executive Committee principally evaluates segmental performance and allocates resources among the segments based on their operating income, cash flow and cash flow return on invested capital (CFROI).

        Segment net operating assets consist primarily of property, plant & equipment, intangible assets, inventories and trade and other operating receivables less operating liabilities.


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 other items of income and expense which are not attributable to specific segments such as certain expenses related to post-employment benefits, environmental liabilities, charitable activities, donations and sponsorships. Usually, no allocation of Corporate items is made to the segments. Corporate assets and liabilities principally consist of net liquidity (cash and cash equivalents, marketable securities less financial debts), investments in associated companies and current and deferred taxes and non-segmental specific environmental and post-employment benefit liabilities.

F-25


Table of Contents

NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.     Segmentation(1) of Key Figures 2011 and 2010 (Continued)

 
  Pharmaceuticals   Alcon   Sandoz   Vaccines and
Diagnostics
  Consumer Health   Corporate
(including eliminations)
  Total Group  
In $ m
  2011   2010   2011   2010(2)   2011   2010   2011   2010   2011   2010   2011   2010   2011   2010  

Net sales to third parties

    32,508     30,306     9,958     4,446     9,473     8,592     1,996     2,918     4,631     4,362                 58,566     50,624  

Sales to other segments

    244     157     22     14     319     267     73     60     15     35     (673 )   (533 )            
                                                           

Net sales of segments

    32,752     30,463     9,980     4,460     9,792     8,859     2,069     2,978     4,646     4,397     (673 )   (533 )   58,566     50,624  

Other revenues

    453     422     43     34     9     16     295     433     24     34     (15 )   (2 )   809     937  

Cost of Goods Sold

    (6,573 )   (5,272 )   (4,566 )   (1,760 )   (5,445 )   (4,878 )   (1,410 )   (1,551 )   (1,735 )   (1,560 )   746     533     (18,983 )   (14,488 )
                                                           

Gross profit

    26,632     25,613     5,457     2,734     4,356     3,997     954     1,860     2,935     2,871     58     (2 )   40,392     37,073  

Marketing & Sales

    (8,929 )   (8,663 )   (2,537 )   (1,299 )   (1,591 )   (1,450 )   (363 )   (338 )   (1,674 )   (1,569 )   15     3     (15,079 )   (13,316 )

Research & Development

    (7,232 )   (7,276 )   (892 )   (352 )   (640 )   (658 )   (523 )   (523 )   (296 )   (261 )               (9,583 )   (9,070 )

General & Administration

    (1,047 )   (919 )   (509 )   (255 )   (369 )   (350 )   (150 )   (149 )   (291 )   (269 )   (604 )   (539 )   (2,970 )   (2,481 )

Other income

    697     687     262     7     88     77     18     35     91     38     198     390     1,354     1,234  

Other expense

    (1,825 )   (971 )   (309 )   (39 )   (422 )   (295 )   (185 )   (273 )   (38 )   (32 )   (337 )   (304 )   (3,116 )   (1,914 )
                                                           

Operating income

    8,296     8,471     1,472     796     1,422     1,321     (249 )   612     727     778     (670 )   (452 )   10,998     11,526  
                                                               

Income from associated companies

    (3 )   (16 )               4     3     2     7                 525     810     528     804  

Interest expense

                                                                            (751 )   (692 )

Other financial income and expense

                                                                            (2 )   64  
                                                                                   

Income before taxes

                                                                            10,773     11,702  

Taxes

                                                                            (1,528 )   (1,733 )
                                                                                   

Group net income

                                                                            9,245     9,969  
                                                                                   

Attributable to:

                                                                                     
 

Shareholders of Novartis AG

                                                                            9,113     9,794  
 

Non-controlling interests

                                                                            132     175  

Included in net income are:

                                                                                     
 

Interest income

                                                                            62     103  
 

Depreciation of property, plant & equipment

    (870 )   (726 )   (306 )   (127 )   (303 )   (285 )   (115 )   (100 )   (50 )   (46 )   (84 )   (79 )   (1,728 )   (1,363 )
 

Amortization of intangible assets

    (423 )   (457 )   (1,928 )   (65 )   (383 )   (293 )   (231 )   (259 )   (59 )   (61 )   (4 )         (3,028 )   (1,135 )
 

Impairment charges on property, plant & equipment

    (403 )   4     (5 )         (1 )         (2 )   (14 )   (2 )                     (413 )   (10 )
 

Impairment charges on intangible assets

    (552 )   (894 )   (20 )         (25 )   (11 )   (8 )         (14 )   (6 )               (619 )   (911 )
 

Impairment charges on financial assets

    (30 )   (41 )   (4 )                     (135 )   (98 )               (23 )   (19 )   (192 )   (158 )
 

Additions to restructuring provisions

    (265 )   (133 )   (74 )               (66 )         (62 )   (7 )                     (346 )   (261 )
 

Equity-based compensation of Novartis and Alcon equity plans

    (648 )   (559 )   (113 )   (30 )   (33 )   (23 )   (38 )   (34 )   (61 )   (53 )   (122 )   (142 )   (1,015 )   (841 )

Total assets

    24,111     24,681     46,065     47,775     17,965     18,552     5,764     5,631     2,684     2,708     20,907     23,971     117,496     123,318  
                                                           

Total liabilities

    (10,415 )   (9,469 )   (2,273 )   (1,522 )   (2,742 )   (2,976 )   (697 )   (827 )   (960 )   (879 )   (34,469 )   (37,876 )   (51,556 )   (53,549 )

Total equity

    13,696     15,212     43,792     46,253     15,223     15,576     5,067     4,804     1,724     1,829     (13,562 )   (13,905 )   65,940     69,769  
                                                           

Net debt

                                                                15,154     14,853     15,154     14,853  

Net operating assets

    13,696     15,212     43,792     46,253     15,223     15,576     5,067     4,804     1,724     1,829     1,592     948     81,094     84,622  
                                                           

Included in total assets and total liabilities are:

                                                                                     
 

Total property, plant & equipment

    8,071     8,360     2,056     2,060     2,824     2,925     1,535     1,453     431     415     710     627     15,627     15,840  
 

Additions to property, plant & equipment(3)

    1,041     777     354     193     335     307     192     159     74     64     190     153     2,186     1,653  
 

Total goodwill and intangible assets

    6,244     6,696     40,542     42,410     11,356     11,886     2,883     2,973     867     938     20     20     61,912     64,923  
 

Additions to goodwill and intangible assets(3)

    219     414     80     20     24     32     6     9     4     14     3     6     336     495  
 

Total investment in associated companies

    3     2     18     17     18     16     4     8                 8,579     8,342     8,622     8,385  
 

Additions to investment in associated companies

    5           3                                               24     23     32     23  
 

Cash, marketable securities and derivative financial instruments

                                                                5,075     8,134     5,075     8,134  
 

Financial debts and derivative financial instruments

                                                                20,229     22,987     20,229     22,987  
 

Current income tax and deferred tax liabilities

                                                                8,467     9,399     8,467     9,399  

(1)
All 2010 segment information has been restated to reflect new segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A, Operating Results—Segment Reporting".
(2)
Consolidated results of Alcon, Inc., only included for the period from acquiring control on August 25, 2010 to December 31, 2010. These results include CIBA Vision and certain ophthalmic products but exclude Falcon.
(3)
Excluding impact of business combination.

F-26


Table of Contents

3.     Segmentation(1) of Key Figures 2010 and 2009 (Continued)

 
  Pharmaceuticals   Alcon   Sandoz   Vaccines and
Diagnostics
  Consumer Health   Corporate
(including eliminations)
  Total Group  
In $ m
  2010   2009   2010(2)   2009(2)   2010   2009   2010   2009   2010   2009   2010   2009   2010   2009  

Net sales to third parties

    30,306     28,287     4,446     1,965     8,592     7,493     2,918     2,424     4,362     4,098                 50,624     44,267  

Sales to other Divisions

    157     175     14     14     267     264     60     46     35     30     (533 )   (529 )            
                                                           

Net sales of Divisions

    30,463     28,462     4,460     1,979     8,859     7,757     2,978     2,470     4,397     4,128     (533 )   (529 )   50,624     44,267  

Other revenues

    422     377     34     27     16     10     433     390     34     32     (2 )         937     836  

Cost of Goods Sold

    (5,272 )   (4,864 )   (1,760 )   (669 )   (4,878 )   (4,201 )   (1,551 )   (1,415 )   (1,560 )   (1,533 )   533     503     (14,488 )   (12,179 )
                                                           

Gross profit

    25,613     23,975     2,734     1,337     3,997     3,566     1,860     1,445     2,871     2,627     (2 )   (26 )   37,073     32,924  

Marketing & Sales

    (8,663 )   (8,332 )   (1,299 )   (657 )   (1,450 )   (1,330 )   (338 )   (297 )   (1,569 )   (1,434 )   3           (13,316 )   (12,050 )

Research & Development

    (7,276 )   (6,037 )   (352 )   (94 )   (658 )   (613 )   (523 )   (508 )   (261 )   (252 )         35     (9,070 )   (7,469 )

General & Administration

    (919 )   (870 )   (255 )   (104 )   (350 )   (385 )   (149 )   (176 )   (269 )   (255 )   (539 )   (491 )   (2,481 )   (2,281 )

Other income

    687     414     7     19     77     105     35     27     38     53     390     164     1,234     782  

Other expense

    (971 )   (1,078 )   (39 )   (28 )   (295 )   (272 )   (273 )   (119 )   (32 )   (56 )   (304 )   (371 )   (1,914 )   (1,924 )
                                                           

Operating income

    8,471     8,072     796     473     1,321     1,071     612     372     778     683     (452 )   (689 )   11,526     9,982  
                                                               

Income from associated companies

    (16 )   (14 )               3     7     7                       810     300     804     293  

Interest expense

                                                                            (692 )   (551 )

Other financial income and expense

                                                                            64     198  
                                                                                   

Income before taxes

                                                                            11,702     9,922  

Taxes

                                                                            (1,733 )   (1,468 )
                                                                                   

Group net income

                                                                            9,969     8,454  
                                                                                   

Attributable to:

                                                                                     
 

Shareholders of Novartis AG

                                                                            9,794     8,400  
 

Non-controlling interests

                                                                            175     54  

Included in net income are:

                                                                                     
 

Interest income

                                                                            103     156  
 

Depreciation of property, plant & equipment

    (726 )   (659 )   (127 )   (55 )   (285 )   (276 )   (100 )   (98 )   (46 )   (44 )   (79 )   (109 )   (1,363 )   (1,241 )
 

Amortization of intangible assets

    (457 )   (369 )   (65 )   (31 )   (293 )   (260 )   (259 )   (312 )   (61 )   (53 )               (1,135 )   (1,025 )
 

Impairment charges on property, plant & equipment

    4     (4 )                           (14 )               (5 )               (10 )   (9 )
 

Impairment charges on intangible assets

    (894 )   11                 (11 )   (6 )         (18 )   (6 )   (13 )               (911 )   (26 )
 

Impairment charges on financial assets

    (41 )   (37 )                           (98 )                     (19 )   (3 )   (158 )   (40 )
 

Additions to restructuring provisions

    (133 )   (19 )               (66 )   (40 )   (62 )                                 (261 )   (59 )
 

Equity-based compensation of Novartis equity plans

    (559 )   (535 )   (30 )   (10 )   (23 )   (28 )   (34 )   (30 )   (53 )   (43 )   (142 )   (131 )   (841 )   (777 )

Total assets

    24,681     24,013     47,775     1,754     18,552     17,685     5,631     6,704     2,708     2,754     23,971     42,595     123,318     95,505  
                                                           

Total liabilities

    (9,469 )   (9,494 )   (1,522 )   (416 )   (2,976 )   (2,534 )   (827 )   (1,121 )   (879 )   (924 )   (37,876 )   (23,554 )   (53,549 )   (38,043 )

Total equity

    15,212     14,519     46,253     1,338     15,576     15,151     4,804     5,583     1,829     1,830     (13,905 )   19,041     69,769     57,462  
                                                           

Net debt/(liquidity)

                                                                14,853     (3,461 )   14,853     (3,461 )

Net operating assets

    15,212     14,519     46,253     1,338     15,576     15,151     4,804     5,583     1,829     1,830     948     15,580     84,622     54,001  
                                                           

Included in total assets and total liabilities are:

                                                                                     
 

Total property, plant & equipment

    8,360     7,947     2,060     535     2,925     3,080     1,453     1,471     415     391     627     651     15,840     14,075  
 

Additions to property, plant & equipment(3)

    777     922     193     106     307     282     159     437     64     58     153     78     1,653     1,883  
 

Total goodwill and intangible assets

    6,696     6,930     42,410     559     11,886     10,683     2,973     3,163     938     1,018     20     17     64,923     22,370  
 

Additions to goodwill and intangible assets(3)

    414     809     20     57     32     35     9     12     14     44     6     10     495     967  
 

Total investment in associated companies

    2     19     17           16     18     8     2                 8,342     17,752     8,385     17,791  
 

Additions to investment in associated companies

          22                                                     23     29     23     51  
 

Cash, marketable securities and derivative financial instruments

                                                                8,134     17,449     8,134     17,449  
 

Financial debts and derivative financial instruments

                                                                22,987     13,988     22,987     13,988  
 

Current income tax and deferred tax liabilities

                                                                9,399     6,223     9,399     6,223  

(1)
All 2010 and 2009 segment information has been restated to reflect new segment allocation introduced during 2011. For additional information, see "Item 5. Operating and Financial Review and Prospects—Item 5.A Operating Results—Segment Reporting".
(2)
Consolidated results of Alcon, Inc., only included for the period from acquiring control on August 25, 2010 to December 31, 2010. These results include CIBA Vision and certain ophthalmic products but exclude Falcon.
(3)
Excluding impact of business combination.

F-27


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.     Segmentation of Key Figures 2011, 2010 and 2009 (Continued)

        The following countries accounted for more than 5% of at least one of the respective Group totals for the years ended December 31, 2011, 2010 and 2009:

 
  Net sales(1)   Total of selected non-current assets(2)  
Country
  2011   %   2010   %   2009   %   2011   %   2010   %   2009   %  
 
  $ m
   
  $ m
   
  $ m
   
  $ m
   
  $ m
   
  $ m
   
 

Switzerland

    726     1     608     1     604     2     38,827     45     40,246     45     23,341 (3)   43  

United States

    19,225     33     16,893     33     14,254     32     30,061     35     30,377     34     11,717     22  

Germany

    4,362     7     3,999     8     4,035     9     4,214     5     4,267     5     4,649     8  

Japan

    5,281     9     4,288     8     3,545     8     204           153           142        

France

    2,848     5     2,460     5     2,355     5     299           317           349     1  

Other

    26,124     45     22,376     45     19,474     44     12,556     15     13,788     16     14,038     26  
                                                   

Group

    58,566     100     50,624     100     44,267     100     86,161     100     89,148     100     54,236     100  
                                                   

Europe

   
21,507
   
37
   
19,169
   
38
   
18,362
   
42
   
51,101
   
59
   
53,461
   
60
   
37,772

(3)
 
70
 

Americas

    24,705     42     21,545     43     17,820     40     33,211     39     33,868     38     15,193     28  

Asia / Africa / Australasia

    12,354     21     9,910     19     8,085     18     1,849     2     1,819     2     1,271     2  
                                                   

Group

    58,566     100     50,624     100     44,267     100     86,161     100     89,148     100     54,236     100  
                                                   

(1)
Net sales from operations by location of third party customer

(2)
Total of property, plant and equipment, goodwill, intangible assets and investment in associated companies

(3)
Includes the investment in Alcon, Inc. accounted for using the equity method

        The Group's largest customer accounts for approximately 9% of net sales, and the second and third largest customer account for 7% each of net sales (2010: 8%, 8% and 7%; 2009: 8%, 7% and 6% respectively). No other customer accounts for 2% or more of net sales.

        The highest amounts of trade receivables outstanding were for these three customers. They amounted to 10%, 6% and 6% respectively, of the Group's trade receivables at December 31, 2011 (2010: 9%, 5% and 6%; 2009: 9%, 6% and 6% respectively).

F-28


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.     Segmentation of Key Figures 2011, 2010 and 2009 (Continued)


Pharmaceuticals division therapeutic area net sales

Therapeutic areas
  2011   2010   Change
(2010 to
2011)
  2009   Change
(2009 to
2010)
 
 
  $ m
  $ m
  $ %
  $ m
  $ %
 

Cardiovascular and Metabolism

                               

Hypertension medicines

                               

Diovan

    5,665     6,053     (6 )   6,013     1  

Exforge

    1,209     904     34     671     35  
                       

Subtotal Valsartan Group

    6,874     6,957     (1 )   6,684     4  

Tekturna/Rasilez

    557     438     27     290     51  
                       

Subtotal Hypertension

    7,431     7,395     0     6,974     6  

Galvus

    677     391     73     181     116  
                       

Total strategic franchise products

    8,108     7,786     4     7,155     9  

Established medicines

    1,027     1,369     (25 )   1,641     (17 )
                       

Total Cardiovascular and Metabolism products

    9,135     9,155     0     8,796     4  
                       

Oncology

                               

Gleevec/Glivec

    4,659     4,265     9     3,944     8  

Tasigna

    716     399     79     212     88  
                       

Subtotal Bcr-Abl franchise

    5,375     4,664     15     4,156     12  

Zometa

    1,487     1,511     (2 )   1,469     3  

Sandostatin

    1,443     1,291     12     1,155     12  

Femara

    911     1,376     (34 )   1,266     9  

Exjade

    850     762     12     652     17  

Afinitor

    443     243     82     70     nm  

Other

    163     181     (10 )   231     (22 )
                       

Total Oncology products

    10,672     10,028     6     8,999     11  
                       

Neuroscience and Ophthalmics

                               

Lucentis

    2,050     1,533     34     1,232     24  

Exelon/Exelon Patch

    1,067     1,003     6     954     5  

Comtan/Stalevo

    614     600     2     554     8  

Gilenya

    494     15     nm              

Extavia

    154     124     24     49     nm  

Other (including Fanapt)

    159     190     (16 )   208     (9 )
                       

Total strategic franchise products

    4,538     3,465     31     2,997     16  

Established medicines

    547     567     (4 )   575     (1 )
                       

Total Neuroscience and Ophthalmics products

    5,085     4,032     26     3,572     13  
                       


nm—not
meaningful

F-29


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.     Segmentation of Key Figures 2011, 2010 and 2009 (Continued)

Therapeutic areas
  2011   2010   Change
(2010 to
2011)
  2009   Change
(2009 to
2010)
 
 
  $ m
  $ m
  $ %
  $ m
  $ %
 

Respiratory

                               

Xolair

    478     369     30     338     9  

TOBI

    296     279     6     300     (7 )

Onbrez Breezhaler

    103     33     nm     1     nm  
                       

Total strategic franchise products

    877     681     29     639     7  

Established medicines

    172     174     (1 )   190     (8 )
                       

Total Respiratory products

    1,049     855     23     829     3  
                       

Integrated Hospital Care (IHC)*

                               

Neoral/Sandimmun

    903     871     4     919     (5 )

Myfortic

    518     444     17     353     26  

Zortress/Certican

    187     144     30     118     22  

Ilaris

    48     26     85     3     nm  

Other

    363     293     24     235     25  
                       

Total strategic franchise products

    2,019     1,778     14     1,628     9  

Established medicines

    1,453     1,469     (1 )   1,413     4  
                       

Total IHC products

    3,472     3,247     7     3,041     7  
                       

Additional products

                               

Voltaren (excl. OTC)

    794     791     0     797     (1 )

Ritalin/Focalin

    550     464     19     449     3  

Tegretol

    364     355     3     375     (5 )

Foradil

    312     353     (12 )   357     (1 )

Trileptal

    263     253     4     295     (14 )

Everolimus stent drug

    256     240     7     215     12  

Other

    556     533     4     562     (5 )
                       

Total additional products

    3,095     2,989     4     3,050     (2 )
                           

Total strategic franchise products

    26,214     23,738     10     21,418     11  

Total established medicines and additional products

    6,294     6,568     (4 )   6,869     (4 )
                       

Total Division net sales

    32,508     30,306     7     28,287     7  
                       


nm—not
meaningful

*
includes Transplantation

        The product portfolio of other segments is widely spread and none of the products or product ranges exceed 5% of the net sales of the Group in 2011, 2010 and 2009.

F-30


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4.     Associated Companies

        Novartis has the following significant investments in associated companies which are accounted for using the equity method:

 
  Balance sheet value   Net income statement effect  
 
  2011   2010   2011   2010   2009  
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Roche Holding AG, Switzerland

    8,362     8,173     499     380     321  

Alcon Inc., Switzerland

                      433     (28 )

Others

    260     212     29     (9 )      
                       

Total

    8,622     8,385     528     804     293  
                       

        The results of the Group's associated companies are adjusted to be in accordance with IFRS as applied by Novartis in cases where IFRS is not already used.

        Since up-to-date financial data are not available when Novartis produces its consolidated financial results, a survey of analyst estimates is used to estimate the Group's share of net income in Roche Holding. Any differences between these estimates and actual results are adjusted in the Group's 2012 consolidated financial statements when available.

        The following table shows summarized financial information of Roche for the year ended December 31, 2010 since 2011 data is not yet available:

 
  Asset   Liabilities   Revenue   Net income  
 
  billions
  billions
  billions
  billions
 

Roche (CHF)

    61.0     49.4     49.2     8.9  

Roche Holding AG

        The Group's holding in Roche voting shares was 33.3% at December 31, 2011 and 2010. This investment represents approximately 6.3% of Roche's total outstanding voting and non-voting equity instruments. The purchase price allocation was performed on the basis of publicly available information at the time of acquisition.

        The December 31, 2011 balance sheet value allocation is as follows:

 
  $ m  

Novartis share of Roche's estimated net assets

    2,828  

Novartis share of re-appraised intangible assets

    1,882  

Implicit Novartis goodwill

    3,030  
       

Current value of share in net identifiable assets and goodwill

    7,740  

Accumulated equity accounting adjustments and translation effects less dividends received

    622  
       

December 31, 2011 balance sheet value

    8,362  
       

F-31


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4.     Associated Companies (Continued)

        The identified intangible assets principally relate to the value of currently marketed products and are amortized on a straight-line basis over their estimated average useful life of 20 years.

        The income statement effects from applying Novartis accounting principles for this investment in 2011, 2010 and 2009 are as follows:

 
  2011   2010   2009  
 
  $ m
  $ m
  $ m
 

Novartis share of Roche's estimated current-year consolidated net income

    702     559     496  

Prior-year adjustment

    (41 )   (43 )   (40 )

Amortization of fair value adjustments relating to intangible assets, net of taxes of $47 million (2010: $41 million, 2009: $41 million)

    (162 )   (136 )   (135 )
               

Net income effect

    499     380     321  
               

        The publicly quoted market value of the Novartis interest in Roche (Reuters symbol: RO.S) at December 31, 2011, was $9.5 billion (2010: $8.2 billion).

Alcon, Inc.

        The Group's initial holding in Alcon voting shares was acquired on July 7, 2008. In 2010, the Group completed its purchase of an additional 52% of Alcon resulting in approximately 77% ownership. As from August 25, 2010 Alcon is fully consolidated and no longer accounted for as an associated company. The impact on the Group's consolidated income statement for the period from January 1, 2010 to August 25, 2010 and for the year ended December 31, 2009 is as follows:

 
  2010   2009  
 
  $ m
  $ m
 

Novartis share of Alcon's current-year consolidated net income

    385     493  

Prior-year adjustment

    2     5  

Revaluation of initial 25% interest to fair value

    378        

Recycling of losses accumulated in comprehensive income from July 7, 2008 to August 25, 2010

    (43 )      

Amortization of fair value adjustments relating to intangible assets, net of taxes of $61 million (2009: $115 million)

    (289 )   (526 )
           

Net income effect

    433     (28 )
           

F-32


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.     Interest Expense and Other financial income/expense

 
  2011   2010   2009  
 
  $ m
  $ m
  $ m
 

Interest expense

    (699 )   (615 )   (442 )

Expense due to discounting long-term liabilities

    (52 )   (77 )   (109 )
               

Total interest expense

    (751 )   (692 )   (551 )
               

Interest income

    62     103     156  
               

Dividend income

    1     3     3  

Net capital losses on available-for-sale securities

    (122 )         110  

Impairment of available-for-sale securities

    (3 )   (4 )   (20 )

Income on options and forward contracts

    192     66     97  

Expenses on options and forward contracts

    (67 )   (38 )   (85 )

Other financial expense

    (38 )   (39 )   (23 )

Currency result, net

    (27 )   (27 )   (40 )
               

Total other financial income/(expense)

    (2 )   64     198  
               

        During 2011, a significant portion of the income on options and forward contracts represented an economic hedge for the capital losses on available-for-sale securities. This could not be recognized as a hedge for accounting purposes.

6.     Taxes

Income before taxes

 
  2011   2010   2009  
 
  $ m
  $ m
  $ m
 

Switzerland

    2,993     4,679     4,281  

Foreign

    7,780     7,023     5,641  
               

Total income before taxes

    10,773     11,702     9,922  
               


Current and deferred income tax expense

 
  2011   2010   2009  
 
  $ m
  $ m
  $ m
 

Switzerland

    (488 )   (425 )   (413 )

Foreign

    (2,182 )   (1,749 )   (1,593 )
               

Total current income tax expense

    (2,670 )   (2,174 )   (2,006 )
               

Switzerland

    161     (94 )   188  

Foreign

    981     535     350  
               

Total deferred tax income

    1,142     441     538  
               

Total income tax expense

    (1,528 )   (1,733 )   (1,468 )
               

F-33


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.     Taxes (Continued)

Analysis of Tax Rate

        The main elements contributing to the difference between the Group's overall expected tax rate (which can change each year since it is calculated as the weighted average tax rate based on pre-tax income of each subsidiary) and the effective tax rate are:

 
  2011   2010   2009  
 
  %
  %
  %
 

Expected tax rate

    15.5     15.8     15.8  

Effect of disallowed expenditures

    2.5     3.0     3.0  

Effect of utilization of tax losses brought forward from prior periods

    (0.1 )   (0.1 )   (0.4 )

Effect of income taxed at reduced rates

                (0.1 )

Effect of tax credits and allowances

    (2.4 )   (2.1 )   (1.4 )

Effect of tax benefits expiring in 2017

    (0.7 )   (0.4 )      

Effect of write-down of investments in subsidiaries

    (0.5 )   (0.7 )   (1.7 )

Prior year and other items

    (0.1 )   (0.7 )   (0.4 )
               

Effective tax rate

    14.2     14.8     14.8  
               

        The utilization of tax-loss carry-forwards lowered the tax charge by $6 million, $17 million and $45 million in 2011, 2010 and 2009 respectively.

7.     Earnings per Share

        Basic earnings per share (EPS) is calculated by dividing net income attributable to shareholders of Novartis AG by the weighted average number of shares outstanding in a reporting period. This calculation excludes the average number of issued shares purchased by the Group and held as treasury shares.

 
  2011   2010   2009  

Basic earnings per share

                   

Weighted average number of shares outstanding (in millions)

    2,382     2,286     2,268  
               

Net income attributable to shareholders of Novartis AG ($ m)

    9,113     9,794     8,400  

Basic earnings per share ($)

    3.83     4.28     3.70  

        For diluted EPS, the weighted average number of shares outstanding is adjusted to assume the vesting of all restricted shares and the conversion of all potentially dilutive shares arising from options on Novartis shares that have been issued.

 
  2011   2010   2009  

Diluted earnings per share

                   

Weighted average number of shares outstanding (in millions)

    2,382     2,286     2,268  

Adjustment for vesting of restricted shares and dilutive shares from options (in millions)

    31     15     9  
               

Weighted average number of shares for diluted earnings per share (in millions)

    2,413     2,301     2,277  
               

Net income attributable to shareholders of Novartis AG ($ m)

   
9,113
   
9,794
   
8,400
 

Diluted earnings per share ($)

   
3.78
   
4.26
   
3.69
 

F-34


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.     Earnings per Share (Continued)

        Options equivalent to 78.0 million shares (2010: 82.9 million, 2009: 109.3 million) were excluded from the calculation of diluted EPS since they were not dilutive.

8.     Changes in Consolidated Statements of Comprehensive income

        The consolidated statements of comprehensive income includes the Group's net income for the year as well as all other valuation adjustments recorded in the Group's consolidated balance sheet but which under IFRS are not recorded in the consolidated income statement. These include fair value adjustments to financial instruments, actuarial losses or gains on defined benefit pension and other post-employment plans, revaluation of previously held equity interests (up to December 31, 2009 when the applicable standard changed) and currency translation effects, net of tax. These amounts are subject to significant volatility outside of the control of management due to such factors as share price, foreign currency and interest rate movements.

        The following table summarizes these value adjustments and currency translation effects attributable to Novartis shareholders:

 
  Fair value
adjustments
to marketable
securities
  Fair value
adjustments
of deferred
cash flow
hedges
  Actuarial
gains/losses
from
defined benefit
plans
  Revaluation
of
previously
held equity
interests
  Cumulative
currency
translation
effects
  Total
adjustments
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Fair value adjustments at January 1, 2009

    142     (227 )   (3,509 )   685     2,354     (555 )
                           

Fair value adjustments on financial instruments

    89     4                       93  

Net actuarial gains from defined benefit plans

                949                 949  

Currency translation effects

                            781     781  
                             

Total fair value adjustments in 2009

    89     4     949           781     1,823  
                           

Fair value adjustments at December 31, 2009

    231     (223 )   (2,560 )   685     3,135     1,268  
                           

Fair value adjustments on financial instruments

    (73 )   41                       (32 )

Net actuarial losses from defined benefit plans

                (678 )               (678 )

Currency translation effects

                            534     534  
                             

Total fair value adjustments in 2010

    (73 )   41     (678 )         534     (176 )
                           

Fair value adjustments at December 31, 2010

    158     (182 )   (3,238 )   685     3,669     1,092  
                           

Fair value adjustments on financial instruments

    (21 )   41                       20  

Net actuarial losses from defined benefit plans

                (1,429 )               (1,429 )

Currency translation effects

                            (534 )   (534 )
                             

Total fair value adjustments in 2011

    (21 )   41     (1,429 )         (534 )   (1,943 )
                           

Fair value adjustments at December 31, 2011

    137     (141 )   (4,667 )   685     3,135     (851 )
                           

F-35


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.     Changes in Consolidated Statements of Comprehensive income (Continued)

8.1)    The 2011, 2010 and 2009 changes in the fair value of financial instruments consist of the following:

 
  Fair value
adjustments to
marketable
securities
  Fair value
adjustments of
deferred cash
flow hedges
  Total  
 
  $ m
  $ m
  $ m
 

Fair value adjustments at January 1, 2011

    157     (182 )   (25 )
               

Changes in fair value:

                   

—Available-for-sale marketable securities

    (32 )         (32 )

—Available-for-sale financial investments

    (141 )         (141 )

—Associated companies' movements in comprehensive income

    (8 )         (8 )

Realized net gains transferred to the consolidated income statement:

                   

—Marketable securities sold

    (13 )         (13 )

—Other financial assets sold

    (13 )         (13 )

Amortized net losses on cash flow hedges transferred to the consolidated income statement

          44     44  

Impaired marketable securities and other financial assets transferred to the consolidated income statement

    192           192  

Deferred tax on above items

    (5 )   (3 )   (8 )
               

Fair value adjustments during the year

    (20 )   41     21  
               

Attributable to:

                   

Shareholders of Novartis AG

    (21 )   41     20  

Non-controlling interests

    1           1  
               

Fair value adjustments at December 31, 2011

    137     (141 )   (4 )
               

F-36


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.     Changes in Consolidated Statements of Comprehensive income (Continued)

 

 
  Fair value
adjustments to
marketable
securities
  Fair value
adjustments of
deferred cash
flow hedges
  Total  
 
  $ m
  $ m
  $ m
 

Fair value adjustments at January 1, 2010

    231     (223 )   8  
               

Changes in fair value:

                   

—Available-for-sale marketable securities

    19           19  

—Available-for-sale financial investments

    (226 )         (226 )

—Associated companies' movements in comprehensive income

    (5 )         (5 )

Realized net gains transferred to the consolidated income statement:

                   

—Marketable securities sold

    (39 )         (39 )

—Other financial assets sold

    (15 )         (15 )

Amortized net losses on cash flow hedges transferred to the consolidated income statement

          44     44  

Impaired marketable securities and other financial assets transferred to the consolidated income statement

    164           164  

Deferred tax on above items

    28     (3 )   25  
               

Fair value adjustments during the year

    (74 )   41     (33 )
               

Attributable to:

                   

Shareholders of Novartis AG

    (73 )   41     (32 )

Non-controlling interests

    (1 )         (1 )
               

Fair value adjustments at December 31, 2010

    157     (182 )   (25 )
               

F-37


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.     Changes in Consolidated Statements of Comprehensive income (Continued)

 

 
  Fair value
adjustments to
marketable
securities
  Fair value
adjustments of
deferred cash
flow hedges
  Total  
 
  $ m
  $ m
  $ m
 

Fair value adjustments at January 1, 2009

    142     (227 )   (85 )
               

Changes in fair value:

                   

—Available-for-sale marketable securities

    57           57  

—Other financial assets

    (8 )         (8 )

—Associated companies' movements in comprehensive income

    19           19  

Realized net gains transferred to the consolidated income statement:

                   

—Marketable securities sold

    (37 )         (37 )

—Derivative financial instruments

          (36 )   (36 )

—Other financial assets sold

    (8 )         (8 )

Amortized net losses on cash flow hedges transferred to the consolidated income statement

          36     36  

Impaired marketable securities and other financial assets

    71           71  

Deferred tax on above items

    (5 )   4     (1 )
               

Fair value adjustments during the year

    89     4     93  
               

Attributable to:

                   

Shareholders of Novartis AG

    89     4     93  
               

Fair value adjustments at December 31, 2009

    231     (223 )   8  
               

8.2)    Actuarial (losses)/gains from defined benefit plans arise from:

 
  2011   2010   2009  
 
  $ m
  $ m
  $ m
 

Defined benefit pension plans before tax

    (1,876 )   (832 )   1,256  

Other post-employment benefit plans before tax

    (55 )   (24 )   (19 )

Taxation on above items

    510     171     (288 )
               

Total after tax

    (1,421 )   (685 )   949  
               

Attributable to:

                   

Shareholders of Novartis AG

    (1,429 )   (678 )   949  

Non-controlling interests

    8     (7 )      

8.3)    The Group has investments in associated companies, principally Roche Holding AG. The Group's share in movements in these companies' other comprehensive income are recognized directly in the respective categories of the Novartis consolidated statement of comprehensive income, net of tax. The currency translation effects and fair value adjustments of associated companies are included in the corresponding Group amounts. All other movements in these companies' statements of comprehensive income are recognized directly in the consolidated statement of comprehensive income under "Novartis share of other items recorded in comprehensive income recognized by associated companies, net of taxes". These amounted to income of $1 million in 2011 (2010: loss of $94 million, 2009: loss of $43 million).

F-38


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.     Changes in Consolidated Statements of Comprehensive income (Continued)

        Alcon, Inc. was accounted for as an associated company until August 25, 2010, when Novartis acquired an approximate 77% majority ownership and, as a result, Alcon has been fully consolidated from that date. $43 million of losses accumulated in the consolidated statement of comprehensive income since accounting as an associated company using the equity method began in July 2008, have been recycled into the consolidated income statement as of the date of obtaining majority ownership.

9.     Changes in consolidated equity

9.1)    At the 2011 Annual General meeting, a dividend of CHF 2.20 per share was approved that amounted to $5.4 billion, and was paid in 2011 (2010: CHF 2.10 per share dividend payment that amounted to $4.5 billion, 2009: CHF 2.00 per share dividend payment that amounted to $3.9 billion). The amount available for distribution as a dividend to shareholders is based on the available distributable retained earnings of Novartis AG determined in accordance with the legal provisions of the Swiss Code of Obligation.

9.2)    In 2011 a total of 54.7 million shares net were purchased for $3.5 billion (2010: sale of 8.4 million for $342 million, 2009: sale of 1.0 million for $225 million), out of which 39.4 million shares were acquired under the share repurchase program.

9.3)    Equity-settled share-based compensation is expensed in the consolidated income statement in accordance with the vesting or service period of the share-based compensation plans. In 2011 7.2 million shares (2010: 6.7 million shares, 2009: 8.5 million shares) were transferred to associates as part of equity-based compensation. The value for the shares and options expensed in 2011, including associated tax, amounted to $806 million (2010: $599 million, 2009: $635 million) and is credited to consolidated equity.

9.4)    In 2010 a reduction in consolidated equity attributable to Novartis of $74 million arose from a dilution of the Novartis interest in Alcon, Inc. since obtaining majority control on August 25, 2010. This was due to an increase in Alcon's outstanding shares, principally due to the issuance of new shares and the use of Alcon treasury shares to satisfy conversion of Alcon's equity-based instruments held by associates.

9.5)    As required by IAS 27 the excess of the consideration exchanged by Novartis to acquire the additional non-controlling interests in Alcon, Inc. over the value of the related outstanding non-controlling interests of Alcon, Inc. is recognized against consolidated equity. In 2011 this led to a $5.7 billion reduction in equity (2010: $96 million, mainly due to the acquisition of additional shares in Alcon, Inc.). Also deducted are $59 million of merger related transaction costs.

9.6)    Changes in non-controlling interests are mainly due to the acquisition of the remaining non-controlling interests in Alcon, Inc. leading to a reduction of $6.6 billion (2010: increase of $6.3 billion due to full consolidation of Alcon, Inc. from August 25, 2010, 2009: decrease of $136 million).

9.7)    A total of 164.7 million Novartis shares with a fair value of $9.2 billion were exchanged on April 8, 2011 to obtain the outstanding non-controlling interest in Alcon, Inc. These shares consisted of 108 million newly issued shares and 56.7 million treasury shares.

9.8)    No shares were cancelled in 2011 and 2010. In 2009 a total of 6 million shares were cancelled.

F-39


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.   Property, plant & equipment movements

2011
  Land   Buildings   Construction
in progress
  Machinery
& other
equipment
  Total  
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Cost

                               

January 1

    827     10,674     2,327     15,129     28,957  

Acquisition and divestment of consolidated business

    12     20           9     41  

Reclassifications(1)

          888     (1,688 )   800        

Additions

    2     105     1,616     463     2,186  

Disposals and derecognitions(2)

    (3 )   (148 )   (21 )   (638 )   (810 )

Currency translation effects

    (7 )   (110 )   (70 )   (252 )   (439 )
                       

December 31

    831     11,429     2,164     15,511     29,935  
                       

Accumulated depreciation

                               

January 1

    (19 )   (4,318 )   (6 )   (8,774 )   (13,117 )

Depreciation on divested consolidated business

          3           6     9  

Reclassifications(1)

          (3 )         3        

Depreciation charge

    (3 )   (438 )         (1,287 )   (1,728 )

Depreciation on disposals and derecognitions(2)

          117           575     692  

Impairment charge

          (55 )   (4 )   (354 )   (413 )

Currency translation effects

          48           201     249  
                       

December 31

    (22 )   (4,646 )   (10 )   (9,630 )   (14,308 )
                       

Net book value at December 31

    809     6,783     2,154     5,881     15,627  
                       

Net book value of property, plant & equipment under finance lease contracts

                            4  
                               

Commitments for purchases of property, plant & equipment

                            583  
                               

(1)
Reclassifications between various asset categories due to completion of plant and other equipment under construction.

(2)
Derecognition of tangible assets which are no longer used and are not considered to have a significant disposal value or other alternative use.

        The Group was awarded government grants in the United States for the construction of a manufacturing facility to produce flu vaccines. The contracts included a maximum of $294 million cost reimbursement for construction activities and equipment, of which $223 million was received by December 31, 2011 (2010: $185 million). These grants were deducted in arriving at the carrying value of the assets since the receipt of the respective government grant is reasonably assured. There are no onerous contracts or unfulfilled conditions in connection with this grant.

        Borrowing costs on new additions to property, plant and equipment have been capitalized and amounted to $1 million in 2011 (2010: $1 million, 2009: $1 million).

F-40


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.   Property, plant & equipment movements (Continued)

        The impairment charge for property, plant and equipment in 2011 amounted to $413 million (2010: $10 million).

2010
  Land   Buildings   Construction
in progress
  Machinery
& other
equipment
  Total  
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Cost

                               

January 1

    709     9,380     2,176     13,635     25,900  

Impact of business combinations

    95     474     244     606     1,419  

Reclassifications(1)

    12     616     (1,407 )   779        

Additions

    3     62     1,260     328     1,653  

Disposals and derecognitions(2)

    (2 )   (49 )   (28 )   (295 )   (374 )

Currency translation effects

    10     191     82     76     359  
                       

December 31

    827     10,674     2,327     15,129     28,957  
                       

Accumulated depreciation

                               

January 1

    (13 )   (3,869 )   (8 )   (7,935 )   (11,825 )

Reclassifications(1)

          5           (5 )      

Depreciation charge

    (4 )   (343 )         (1,016 )   (1,363 )

Depreciation on disposals and derecognitions(2)

          29           264     293  

Impairment charge

          (3 )   2     (9 )   (10 )

Currency translation effects

    (2 )   (137 )         (73 )   (212 )
                       

December 31

    (19 )   (4,318 )   (6 )   (8,774 )   (13,117 )
                       

Net book value at December 31

    808     6,356     2,321     6,355     15,840  
                       

Net book value of property, plant & equipment under finance lease contracts

                            4  
                               

Commitments for purchases of property, plant & equipment

                            597  
                               

(1)
Reclassifications between various asset categories due to completion of plant and other equipment under construction.

(2)
Derecognition of tangible assets which are no longer used and are not considered to have a significant disposal value or other alternative use.

F-41


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.   Goodwill and intangible asset movements

2011
  Goodwill   Acquired
research &
development
  Alcon
brand name
  Technologies   Currently
marketed
products
  Marketing
know-how
  Other
intangible
assets
  Total of
intangible
assets other
than goodwill
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Cost

                                                 

January 1

    30,261     4,627     2,980     6,699     22,740     5,960     1,135     44,141  

Impact of business combinations

    303     7           3     101           1     112  

Reclassifications(1)

          (255 )               260           (5 )      

Additions(2)

    69     122                 43           102     267  

Disposals and derecognitions(3)

    (48 )   (1,420 )               (19 )         (4 )   (1,443 )

Currency translation effects

    (134 )   10           (21 )   (85 )         (7 )   (103 )
                                   

December 31

    30,451     3,091     2,980     6,681     23,040     5,960     1,222     42,974  
                                   

Accumulated amortization

                                                 

January 1

    (569 )   (1,565 )         (370 )   (6,254 )         (721 )   (8,910 )

Amortization charge

                      (589 )   (2,090 )   (238 )   (111 )   (3,028 )

Amortization on disposals and derecognitions(3)

    48     1,420                 19           4     1,443  

Impairment charge

          (338 )               (287 )         (2 )   (627 )

Reversal of impairment charge

                            8                 8  

Currency translation effects

    13     22           9     69           9     109  
                                     

December 31

    (508 )   (461 )         (950 )   (8,535 )   (238 )   (821 )   (11,005 )
                                   

Net book value at December 31

    29,943     2,630     2,980     5,731     14,505     5,722     401     31,969  
                                   

(1)
Reclassifications between various asset categories as a result of product launches of acquired In-Process Research & Development.

(2)
Additions to goodwill relates to finalization of Alcon Inc. acquisition accounting.

(3)
Derecognitions of intangible assets which are no longer used or being developed and are not considered to have a significant disposal value or other alternative use.

F-42


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.   Goodwill and intangible asset movements (Continued)

2010
  Goodwill   Acquired
research &
development
  Alcon
brand name
  Technologies   Currently
marketed
products
  Marketing
know-how
  Other
intangible
assets
  Total of
intangible
assets other
than goodwill
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Cost

                                                 

January 1

    12,624     3,216           1,271     11,737           954     17,178  

Impact of business combinations

    17,986     1,418     2,980     5,460     10,561     5,960     44     26,423  

Reclassifications(1)

          (474 )               474                    

Additions

          344                 62           89     495  

Disposals and derecognitions(2)

          (24 )               (184 )         (13 )   (221 )

Currency translation effects

    (349 )   147           (32 )   90           61     266  
                                   

December 31

    30,261     4,627     2,980     6,699     22,740     5,960     1,135     44,141  
                                   

Accumulated amortization

                                                 

January 1

    (585 )   (547 )         (273 )   (5,395 )         (632 )   (6,847 )

Reclassifications(1)

                      (16 )               16        

Amortization charge

                      (91 )   (970 )         (74 )   (1,135 )

Amortization on disposals and derecognitions(2)

          22                 95           12     129  

Impairment charge

          (991 )               (14 )         (13 )   (1,018 )

Reversal of impairment charge

          2                 105                 107  

Currency translation effects

    16     (51 )         10     (75 )         (30 )   (146 )
                                       

December 31

    (569 )   (1,565 )         (370 )   (6,254 )         (721 )   (8,910 )
                                   

Net book value at December 31

    29,692     3,062     2,980     6,329     16,486     5,960     414     35,231  
                                   

(1)
Reclassifications between various asset categories as a result of product launches of acquired In-Process Research & Development.

(2)
Derecognitions of intangible assets which are no longer used or being developed and are not considered to have a significant disposal value or other alternative use.


Segmentation of goodwill and intangible assets

        The net book values at December 31, 2011 of goodwill and intangible assets are allocated to the Group's segments as summarized below:

 
  Goodwill   Acquired
research &
development
  Alcon
brand name
  Technologies   Currently
marketed
products
  Marketing
know-how
  Other
intangible
assets
  Total of
intangible
assets other
than goodwill
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Pharmaceuticals

    3,077     1,309           2     1,639           217     3,167  

Alcon

    17,740     598     2,980     4,836     8,639     5,722     27     22,802  

Sandoz

    7,697     592           678     2,378           11     3,659  

Vaccines and Diagnostics

    1,197     128           215     1,210           133     1,686  

Consumer Health

    226                       639           2     641  

Corporate

    6     3                             11     14  
                                   

Total

    29,943     2,630     2,980     5,731     14,505     5,722     401     31,969  
                                   

Potential impairment charge, if any, if discounted cash flows fell by 5%

          3                 5                    

Potential impairment charge, if any, if discounted cash flows fell by 10%

          7                 21                    

F-43


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.   Goodwill and intangible asset movements (Continued)

        The recoverable amount of a cash-generating unit and related goodwill is based on the higher of "fair value less costs to sell" or "value in use". The following assumptions are used in the calculations:

 
  Pharmaceuticals   Alcon   Sandoz   Vaccines and
Diagnostics
  Consumer
Health
 
 
  %
  %
  %
  %
  %
 

Sales growth rate assumptions after forecast period

    0.4     3     0 to 2     0.5     0 to 2  

Discount rate (post-tax)

    7     7     7     7     7  

        In 2011, intangible asset impairment charges of $627 million were recorded. $552 million of these arose in the Pharmaceuticals Division, principally due to the expected reduction in demand for Tekturna/Rasilez (aliskiren) and discontinuation of PRT128 (elinogrel), SMC021 (oral calcitonin), PTK796 (omadacycline) and AGO178 (agomelatine) development programs. $75 million of impairment charges arose in all other Divisions.

        In 2010, Novartis recorded impairment charges totaling $1.0 billion. These relate to impairment charges of $356 million for Mycograb, $250 million for PTZ601, $228 million for albinterferon alfa-2b and $120 million for ASA404 as Novartis decided to discontinue the related development projects. Additonally, $40 million were recorded for various other impairment charges in the Pharmaceuticals Division. Novartis also recorded various impairment charges of $24 million in Sandoz and Consumer Health.

        In 2009, impairment charges of $132 million were recorded, mainly for terminated development projects or for where the anticipated cash flows from future sales no longer supported the carrying value of the intangible assets. These related to various impairment charges of $88 million, mainly for upfront and milestone payments in the Pharmaceuticals Division and $44 million in the Vaccines and Diagnostics, Sandoz and Consumer Health Divisions.

        Reversal of prior year impairment charges amounted to $8 million (2010: $107 million, 2009: $106 million).

F-44


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12.   Deferred tax assets and liabilities

 
  Property,
plant &
equipment
  Intangible
assets
  Pensions
and other
benefit
obligations
of associates
  Inventories   Tax loss
carryforwards
  Other
assets,
provisions
and
accruals
  Valuation
allowance
  Total  
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Gross deferred tax assets at January 1, 2011

    131     251     1,086     1,792     241     2,007     (19 )   5,489  

Gross deferred tax liabilities at January 1, 2011

    (951 )   (5,689 )   (409 )   (253 )   (10 )   (626 )         (7,938 )
                                   

Net deferred tax balance at January 1, 2011

    (820 )   (5,438 )   677     1,539     231     1,381     (19 )   (2,449 )
                                   

At January 1, 2011

    (820 )   (5,438 )   677     1,539     231     1,381     (19 )   (2,449 )

(Charged)/credited to income

    68     350     28     418     (28 )   322     (16 )   1,142  

(Charged)/credited to equity

                                  22           22  

(Charged)/credited to comprehensive income

                510                 (32 )         478  

Impact of business combinations

                                  (9 )         (9 )

Other movements

    (38 )   154     (12 )   (162 )   (15 )   (18 )   3     (88 )
                                   

Net deferred tax balance at December 31, 2011

    (790 )   (4,934 )   1,203     1,795     188     1,666     (32 )   (904 )
                                   

Gross deferred tax assets at December 31, 2011

    157     234     1,576     2,020     201     2,221     (32 )   6,377  

Gross deferred tax liabilities at December 31, 2011

    (947 )   (5,168 )   (373 )   (225 )   (13 )   (555 )         (7,281 )
                                   

Net deferred tax balance at December 31, 2011

    (790 )   (4,934 )   1,203     1,795     188     1,666     (32 )   (904 )
                                   

Deferred tax assets and liabilities after offsetting amounts of $520 millions recorded in companies within the same tax jurisdiction

                                                 

Deferred tax assets at December 31, 2011

                                              5,857  

Deferred tax liabilities at December 31, 2011

                                              (6,761 )
                                                 

Net deferred tax balance at December 31, 2011

                                              (904 )
                                                 

Gross deferred tax assets at January 1, 2010

    72     281     931     1,429     232     1,687     (17 )   4,615  

Gross deferred tax liabilities at January 1, 2010

    (829 )   (2,024 )   (526 )   (275 )         (753 )         (4,407 )
                                   

Net deferred tax balance at January 1, 2010

    (757 )   (1,743 )   405     1,154     232     934     (17 )   208  
                                   

At January 1, 2010

    (757 )   (1,743 )   405     1,154     232     934     (17 )   208  

(Charged)/credited to income

    (11 )   431     (127 )   165     (49 )   32           441  

(Charged)/credited to equity

                                  (4 )         (4 )

(Charged)/credited to comprehensive income

                171                 41           212  

Impact of business combinations

    (54 )   (4,163 )   203     237     60     357     (2 )   (3,362 )

Other movements

    2     37     25     (17 )   (12 )   21           56  
                                   

Net deferred tax balance at December 31, 2010

    (820 )   (5,438 )   677     1,539     231     1,381     (19 )   (2,449 )
                                   

Gross deferred tax assets at December 31, 2010

    131     251     1,086     1,792     241     2,007     (19 )   5,489  

Gross deferred tax liabilities at December 31, 2010

    (951 )   (5,689 )   (409 )   (253 )   (10 )   (626 )         (7,938 )
                                   

Net deferred tax balance at December 31, 2010

    (820 )   (5,438 )   677     1,539     231     1,381     (19 )   (2,449 )
                                               

Deferred tax assets and liabilities after offsetting amounts of $249 millions recorded in companies within the same tax jurisdiction

                                                 

Deferred tax assets at December 31, 2010

                                              5,240  

Deferred tax liabilities at December 31, 2010

                                              (7,689 )
                                                 

Net deferred tax balance at December 31, 2010

                                              (2,449 )
                                                 

        A reversal of valuation allowance could occur when circumstances make the realization of deferred taxes probable. This would result in a decrease in the Group's effective tax rate.

F-45


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12.   Deferred tax assets and liabilities (Continued)

        Deferred tax assets of $2.3 billion (2010: $2.3 billion) and deferred tax liabilities of $6.5 billion (2010: $7.1 billion) are expected to have an impact on current taxes payable after more than twelve months.

        At December 31, 2011, unremitted earnings of $51 billion (2010: $45 billion) have been retained by subsidiary companies for reinvestment. No provision is made for income taxes that would be payable upon the distribution of these earnings. If these earnings were remitted, an income tax charge could result based on the tax statutes currently in effect.

 
  2011   2010  
 
  $ m
  $ m
 

Temporary differences on which no deferred tax has been provided as they are permanent in nature related to:

             

– Investments in subsidiaries

    4,782     7,137  

– Goodwill from acquisitions

    (25,089 )   (24,711 )

        The gross value of tax-loss carry-forwards that have, or have not, been capitalized as deferred tax assets, with their expiry dates is as follows:

 
  Not capitalized   Capitalized   2011 total  
 
  $ m
  $ m
  $ m
 

One year

    81     2     83  

Two years

    171     4     175  

Three years

    175     38     213  

Four years

    72     29     101  

Five years

    63     100     163  

More than five years

    419     443     862  
               

Total

    981     616     1,597  
               

 

 
  Not capitalized   Capitalized   2010 total  
 
  $ m
  $ m
  $ m
 

One year

    155     1     156  

Two years

    67     4     71  

Three years

    159     8     167  

Four years

    159     18     177  

Five years

    58     158     216  

More than five years

    446     503     949  
               

Total

    1,044     692     1,736  
               

        Deferred tax assets related to taxable losses of relevant Group entities are recognized to the extent it is considered probable that future taxable profits will be available against which such losses can be utilized in the foreseeable future.

        In 2011, $155 million (2010: $11 million, 2009: $19 million) of tax-loss carry-forwards expired.

F-46


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13.   Financial assets

 
  2011   2010  
 
  $ m
  $ m
 

Financial investments, long-term loans and other investments

    938     857  

Loans to associated companies

          1  

Prepaid post-employment benefit plans

    38     982  
           

Total financial assets

    976     1,840  
           

        Available-for-sale financial investments at December 31, 2011, totaling $604 million (2010: $712 million) are valued at fair value, while long-term loans and other investments of $334 million (2010: $145 million) are valued at amortized cost or at cost.

        In 2011, impairments on available-for-sale financial investments amounted to $189 million (2010: $160 million, 2009: $51 million). In 2011 no reversal of impairments occurred (2010: $2 million). These amounts were recorded in the consolidated income statement under "Other expense" or "Other income" respectively.

14.   Inventories

 
  2011   2010  
 
  $ m
  $ m
 

Raw material, consumables

    930     931  

Finished products

    5,000     5,162  
           

Total inventories

    5,930     6,093  
           

        The following summarizes movements in inventory write-downs deducted from inventory categories. Reversals of inventory provisions mainly result from the reassessment of inventory values manufactured prior to regulatory approval but for which approval was subsequently received:

 
  2011   2010   2009  
 
  $ m
  $ m
  $ m
 

January 1

    (879 )   (653 )   (637 )

Impact of business combinations

          (101 )   (3 )

Inventory write-downs charged to the consolidated income statement

    (1,554 )   (1,106 )   (506 )

Utilization of inventory provisions

    921     593     298  

Reversal of inventory provisions

    738     396     230  

Currency translation effects

    33     (8 )   (35 )
               

December 31

    (741 )   (879 )   (653 )
               

F-47


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15.   Trade receivables

 
  2011   2010  
 
  $ m
  $ m
 

Total gross trade receivables

    10,542     10,094  

Provisions for doubtful trade receivables

    (219 )   (221 )
           

Total trade receivables, net

    10,323     9,873  
           

        The following table summarizes the movement in the provision for doubtful trade receivables:

 
  2011   2010   2009  
 
  $ m
  $ m
  $ m
 

January 1

    (221 )   (143 )   (182 )

Impact of business combinations

    (9 )   (56 )   (3 )

Provisions for doubtful trade receivables charged to the consolidated income statement

    (116 )   (76 )   (63 )

Utilization or reversal of provisions for doubtful trade receivables

    121     56     111  

Currency translation effects

    6     (2 )   (6 )
               

December 31

    (219 )   (221 )   (143 )
               

        The following sets forth details of the age of trade receivables that are not overdue as specified in the payment terms and conditions established with Novartis customers as well as an analysis of overdue amounts and related provisions for doubtful trade receivables:

 
  2011   2010  
 
  $ m
  $ m
 

Not overdue

    8,967     8,684  

Past due for not more than one month

    498     366  

Past due for more than one month but less than three months

    295     320  

Past due for more than three months but less than six months

    249     217  

Past due for more than six months but less than one year

    228     208  

Past due for more than one year

    305     299  

Provisions for doubtful trade receivables

    (219 )   (221 )
           

Total trade receivables, net

    10,323     9,873  
           

        Provisions for doubtful trade receivables are established based upon the difference between the receivable value and the estimated net collectible amount. Novartis establishes provisions for doubtful trade receivables based on historical loss experience. Significant financial difficulties of a customer, such as probability of bankruptcy or financial reorganization or default/delinquency in payments are considered indicators that recovery of trade receivables are doubtful.

        Trade receivable balances include sales to government-supported healthcare systems. Novartis continues to monitor sovereign debt issues and economic conditions in Greece, Italy, Spain, Portugal and other countries in Europe and evaluates accounts receivable in these countries for potential collection risks. Deteriorating credit

F-48


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15.   Trade receivables (Continued)


and economic conditions and other factors in these countries have resulted in, and may continue to result in an increase in the average length of time that it takes to collect these accounts receivable and may require Novartis to re-evaluate the collectability of these receivables in future periods.

        Novartis does not expect to write off trade receivable amounts that are not past due nor unprovided for. The Group holds security amounting to $36 million as collateral for certain trade receivables.

        Trade receivables include amounts denominated in the following major currencies:

Currency
  2011   2010  
 
  $ m
  $ m
 

CHF

    288     230  

EUR

    2,636     2,108  

GBP

    139     168  

JPY

    1,929     1,494  

$

    2,865     3,888  

Other

    2,466     1,985  
           

Total trade receivables, net

    10,323     9,873  
           

        During 2011, Novartis entered into several significant irrevocable factoring arrangements. As a result $538 million of trade receivables have been sold and derecognized.

16.   Cash, marketable securities and 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, 2011 and 2010. Contract or underlying principal amounts indicate the volume of business outstanding at the consolidated balance sheet date and do not represent amounts at risk. The fair values are determined by reference to market prices or standard pricing models that used observable market inputs at December 31, 2011 and 2010.


Derivative financial instruments

 
  Contract or
underlying
principal amount
  Positive fair values   Negative fair values  
 
  2011   2010   2011   2010   2011   2010  
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Currency related instruments

                                     

Forward foreign exchange rate contracts

    6,456     4,814     105     38     (12 )   (44 )

Over-the-Counter currency options

    2,102     4,000     13     3     (18 )      
                           

Total of currency related instruments

    8,558     8,814     118     41     (30 )   (44 )
                           

Interest rate related instruments

                                     

Interest rate swaps

          61           1              
                                   

Total of interest rate related instruments

          61           1              
                           

Total derivative financial instruments included in marketable securities and in current financial debts

    8,558     8,875     118     42     (30 )   (44 )
                           

F-49


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.   Cash, marketable securities and derivative financial instruments (Continued)

        The following table shows by currency contract or underlying principal amount the derivative financial instruments at December 31, 2011 and 2010:

December 31, 2011
  EUR   $   JPY   Other   Total  
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Currency related instruments

                               

Forward foreign exchange rate contracts

    3,706     1,746     255     749     6,456  

Over-the-Counter currency options

          2,000           102     2,102  
                       

Total of currency related instruments

    3,706     3,746     255     851     8,558  
                       

Total derivative financial instruments

    3,706     3,746     255     851     8,558  
                       

 

December 31, 2010
  EUR   $   JPY   Other   Total  
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Currency related instruments

                               

Forward foreign exchange rate contracts

    2,039     1,776     286     713     4,814  
                       

Over-the-Counter currency options

          4,000                 4,000  
                       

Total of currency related instruments

    2,039     5,776     286     713     8,814  
                       

Interest rate related instruments

                               

Interest rate swaps

                61           61  
                             

Total of interest rate related instruments

                61           61  
                       

Total derivative financial instruments

    2,039     5,776     347     713     8,875  
                       


Derivative financial instruments effective for hedge accounting purposes

        At the end of 2011 and 2010 there were no open hedging instruments for anticipated transactions.


Marketable securities, time deposits and derivative financial instruments

 
  2011   2010  
 
  $ m
  $ m
 

Available-for-sale marketable securities

             

Debt securities

    1,131     2,596  

Equity securities

    73     106  

Fund investments

    32     55  
           

Total available-for-sale marketable securities

    1,236     2,757  

Derivative financial instruments

    118     42  

Accrued interest on debt securities

    12     16  
           

Total marketable securities, time deposits and derivative financial instruments

    1,366     2,815  
           

        Debt securities and time deposits are denominated in $ except for debt securities of $694 million in CHF (2010: $580 million) and $26 million in EUR (2010: $176 million) respectively.

F-50


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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.   Cash, marketable securities and derivative financial instruments (Continued)


Fair value by hierarchy

        As required by IFRS, financial assets and liabilities recorded at fair value in the consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The IFRS hierarchical levels, based on an increasing amount of subjectivity associated with the inputs to derive fair valuation for these assets and liabilities, are as follows:

        Level 1 — Inputs are unadjusted and use quoted prices in active markets for identical assets or liabilities at the measurement date.

        The types of assets carried at level 1 fair value are equity and debt securities listed in active markets.

        Level 2 — Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. These inputs are derived principally from, or corroborated by, observable market data by correlation or other means at the measurement date and for the duration of the instruments' anticipated life.

        The assets generally included in this fair value hierarchy are time deposits, foreign exchange and interest rate derivatives and certain investment funds. Foreign exchange derivatives and interest rate derivatives are valued using corroborated market data. The liabilities generally included in this fair value hierarchy consist of foreign exchange derivatives and options on equity securities.

        Level 3 — Inputs that are unobservable for the asset or liability. These inputs reflect the Group's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation techniques and the risk inherent in the inputs to the models.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.   Cash, marketable securities and derivative financial instruments (Continued)

        The assets generally included in this fair value hierarchy are various investments in hedge funds and unquoted equity security investments of the Novartis Venture Funds investment activities. There were no liabilities carried at fair value in this category.

2011
  Level 1   Level 2   Level 3   Valued at
amortized cost
  Total  
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Available-for-sale marketable securities

                               

Debt securities

    1,103     28                 1,131  

Equity securities

    53           20           73  

Fund investments

                32           32  
                         

Total available-for-sale marketable securities

    1,156     28     52           1,236  

Derivative financial instruments

          118                 118  

Accrued interest on debt securities

                      12     12  
                       

Total marketable securities, time deposits and derivative financial instruments

    1,156     146     52     12     1,366  
                       

Financial investments and long-term loans

                               

Available-for-sale financial investments

    261           331           592  

Fund investments

                12           12  

Long-term loans and receivables, advances, security deposits

                      334     334  
                         

Total financial investments and long-term loans

    261           343     334     938  
                         

Financial liabilities

                               

Derivative financial instruments

          (30 )               (30 )
                             

Total financial liabilities at fair value

          (30 )               (30 )
                             

F-52


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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.   Cash, marketable securities and derivative financial instruments (Continued)

 

2010
  Level 1   Level 2   Level 3   Valued at
amortized cost
  Total  
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Available-for-sale marketable securities

                               

Debt securities

    1,285     1311                 2,596  

Equity securities

    86           20           106  

Fund investments

                55           55  
                             

Total available-for-sale marketable securities

    1,371     1311     75           2,757  

Derivative financial instruments

          42                 42  

Accrued interest on debt securities

                      16     16  
                       

Total marketable securities, time deposits and derivative financial instruments

    1,371     1,353     75     16     2,815  
                       

Financial investments and long-term loans

                               

Available-for-sale financial investments

    352           348           700  

Fund investments

                12           12  

Loans to associated companies

                      1     1  

Long-term loans and receivables, advances, security deposits

                      145     145  
                         

Total financial investments and long-term loans

    352           360     146     858  
                         

Financial liabilities

                               

Derivative financial instruments

          (44 )               (44 )
                             

Total financial liabilities at fair value

          (44 )               (44 )
                             

        The analysis above includes all financial instruments including those measured at amortized cost or at cost.

        The change in carrying values associated with level 3 financial instruments using significant unobservable inputs during the year ended December 31 are set forth below:

2011
  Equity
securities
  Fund
investments
  Available-
for-sale
financial
investments
  Total  
 
  $ m
  $ m
  $ m
  $ m
 

January 1

    20     67     348     435  

Gains recognized in the consolidated income statement

          1     23     24  

Impairments and amortizations

          (3 )   (24 )   (27 )

Gains (losses) recognized in the consolidated statement of comprehensive income

    1     2     (7 )   (4 )

Purchases

                74     74  

Redemptions

          (24 )         (24 )

Proceeds from sales

    (1 )         (82 )   (83 )

Currency translation effects

          1     (1 )      
                   

December 31

    20     44     331     395  
                   

Total of gains and impairments, net recognized in the consolidated income statement for assets held at December 31, 2011

          (2 )   (1 )   (3 )

F-53


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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.   Cash, marketable securities and derivative financial instruments (Continued)

 

2010
  Equity
securities
  Fund
investments
  Available-
for-sale
financial
investments
  Total  
 
  $ m
  $ m
  $ m
  $ m
 

January 1

    55     107     347     509  

Impact of business combinations

          6           6  

Gains recognized in the consolidated income statement

    1     7     4     12  

Impairments and amortizations

          (4 )   (42 )   (46 )

Losses recognized in the consolidated statement of comprehensive income

          (5 )         (5 )

Purchases

                70     70  

Redemptions

          (48 )         (48 )

Proceeds on sales

    (36 )         (36 )   (72 )

Currency translation effects

          4     5     9  
                   

December 31

    20     67     348     435  
                   

Total of gains and impairments, net recognized in the consolidated income statement for assets held at December 31, 2010

          3     (36 )   (33 )

        If the pricing parameters for the level 3 input were to change for equity securities and fund investments by 5% and for available-for-sale financial investments by 10% positively or negatively, respectively, this would change the amounts recorded in the consolidated statement of comprehensive income by $3 million or $33 million, respectively (2010: $4 million and $35 million).


Market risk

        Novartis is exposed to market risk, primarily related to foreign currency exchange rates, interest rates and the market value of the investments of liquid funds. The Group actively monitors 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 exchange rates and market rates of investments 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. It does not enter any financial transactions containing a risk that cannot be quantified at the time the transaction is concluded. In addition, it does not sell short assets it does not have, or does not know it will have, in the future. The Group only sells existing assets or enters into transactions and future transactions (in the case of anticipatory hedges) that it confidently expects it will have in the future, based on past experience. In the case of liquid funds, the Group writes call options on assets it has or 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 currency exchange rate risk

        The Group uses the $ as its reporting currency. As a result, the Group is exposed to foreign currency exchange movements, primarily in European, Japanese and other Asian and Latin American currencies. Consequently, it enters into various contracts that reflect the changes in the value of foreign currency exchange rates to preserve the value of assets, commitments and anticipated transactions. Novartis also uses forward contracts and foreign currency option contracts to hedge certain anticipated net revenues in foreign currencies.

        Net investments in subsidiaries in foreign countries are long-term investments. Their fair value changes through movements of foreign currency exchange rates. In the very long term, however, the difference in the

F-54


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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.   Cash, marketable securities and derivative financial instruments (Continued)


inflation rate should match the foreign currency exchange rate movement, so that the market value of the foreign non-monetary assets will compensate for the change due to foreign currency movements. For this reason, the Group only hedges the net investments in foreign subsidiaries in exceptional cases.


Commodity price risk

        The Group has only a very limited exposure to price risk related to anticipated purchases of certain commodities used as raw materials by the Group's businesses. A change in those prices may alter the gross margin of a specific business, but generally by not more than 10% of the margin and thus below the Group's risk management tolerance levels. Accordingly, the Group does not enter into significant commodity futures, forward and option contracts to manage fluctuations in prices of anticipated purchases.


Interest rate risk

        The Group addresses its net exposure to interest rate risk mainly through the ratio of its fixed rate financial debt to variable rate financial debt contained in its total financial debt portfolio. To manage this mix, Novartis may enter into interest rate swap agreements, in which it exchanges periodic payments based on a notional amount and agreed upon fixed and variable interest rates.


Equity risk

        The Group 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 and return on investment), their market potential, their management and their competitors. Call options are written on equities that the Group owns, and put options are written on equities which the Group wants to buy and for which cash has been reserved.


Credit risk

        Credit risks arise from the possibility that customers may not be able to settle their obligations as agreed. To manage this risk the Group periodically assesses the financial reliability of customers, taking into account their financial position, past experience and other factors. Individual risk limits are set accordingly.

        The largest customer accounts for approximately 9% of net sales and the second and third largest each accounts for 7% of net sales (2010: 8%, 8% and 7%, 2009: 8%, 7% and 6%, respectively). No other customer accounts for 2% or more of net sales.

        The highest amounts of trade receivables outstanding were for these three customers. They amounted to 10%, 6% and 6%, respectively, of the Group's trade receivables at December 31, 2011 (2010: 9%, 5% and 6%, 2009: 9%, 6% and 6%, respectively). There is no other significant concentration of credit risk.


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 reduced 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. Novartis has policies that limit the amount of credit exposure to any financial institution. The limits are regularly assessed and determined based upon credit analysis including financial statement and capital adequacy ratio reviews. In addition, net settlement agreements are contracted with significant counterparties.

        The Group's cash and cash equivalents are held with major regulated financial institutions, the three largest ones hold approximately 31.8%, 12.5% and 12.1%, respectively (2010: 14%, 9% and 8%, respectively).

        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.

F-55


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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.   Cash, marketable securities and derivative financial instruments (Continued)

Liquidity Risk

        Liquidity risk is defined as the risk that the Group could not be able to settle or meet its obligations on time or at a reasonable price. Group Treasury is responsible for liquidity, funding as well as settlement management. In addition, liquidity and funding risks, related processes and policies are overseen by management. Novartis manages its liquidity risk on a consolidated basis based on business needs, tax, capital or regulatory considerations, if applicable, through numerous sources of finance in order to maintain flexibility. Management monitors the Group's net debt or liquidity position through rolling forecasts on the basis of expected cash flows.

        Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets remains tight for an extended period of time, and such conditions impact the collectability of our customer accounts receivable, or impact credit terms with our vendors, or disrupt the supply of raw materials and services.

        The following table sets forth how management monitors net debt or liquidity based on details of the remaining contractual maturities of financial assets and liabilities excluding trade receivables and payables at December 31, 2011 and 2010:

December 31, 2011
  Due or
due
within
one
month
  Due later
than one
month
but less
than
three
months
  Due later
than three
months
but less
than one
year
  Due later
than one
year but
less
than five
years
  Due after
five years
  Total  
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Current assets

                                     

Marketable securities

                36     638     562     1,236  

Derivative financial instruments and accrued interest on derivative financial instruments

    61     15     54                 130  

Cash and cash equivalents

    3,709                             3,709  
                           

Total current financial assets

    3,770     15     90     638     562     5,075  
                           

Non-current liabilities

                                     

Financial debts

                      9,874     3,981     13,855  
                                 

Total non-current financial debt

                      9,874     3,981     13,855  
                                 

Current liabilities

                                     

Financial debts

    4,039     1,100     1,205                 6,344  

Derivative financial instruments

    7     7     16                 30  
                               

Total current financial debt

    4,046     1,107     1,221                 6,374  
                           

Net debt

    (276 )   (1,092 )   (1,131 )   (9,236 )   (3,419 )   (15,154 )
                           

F-56


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.   Cash, marketable securities and derivative financial instruments (Continued)

 

December 31, 2010
  Due or
due
within
one
month
  Due later
than one
month
but less
than
three
months
  Due later
than three
months
but less
than one
year
  Due later
than one
year but
less
than five
years
  Due after
five years
  Total  
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Current assets

                                     

Marketable securities

    1           593     1,441     722     2,757  

Derivative financial instruments and accrued interest on derivative financial instruments

    14     33     11                 58  

Cash and cash equivalents

    5,319                             5,319  
                           

Total current assets

    5,334     33     604     1,441     722     8,134  
                           

Non-current liabilities

                                     

Financial debts

                      8,399     5,961     14,360  
                                 

Total non-current liabilities

                      8,399     5,961     14,360  
                                 

Current liabilities

                                     

Financial debts

    5,480     2,093     1,010                 8,583  

Derivative financial instruments

    23     5     16                 44  
                               

Total current liabilities

    5,503     2,098     1,026                 8,627  
                           

Net debt

    (169 )   (2,065 )   (422 )   (6,958 )   (5,239 )   (14,853 )
                           

        The consolidated balance sheet amounts of financial liabilities included in the above analysis are not materially different to the contractual amounts due on maturity. The positive and negative fair values on derivative financial instruments represent the net contractual amounts to be exchanged at maturity.

        Cash and cash equivalents at December 31, 2011 totaled $3.7 billion (2010: $5.3 billion) and include current accounts of $1.9 billion (2010: $2.0 billion) and deposits and short-term investments with an initial maturity of less than three months and Euro-commercial papers of $1.8 billion (2010: $3.3 billion). This amount contains $74 million (2010: nil) which covers a guarantee and so it is restricted in use.

        The Group's contractual undiscounted potential cash flows from derivative financial instruments to be settled on a gross basis are as follows:

December 31, 2011
  Due or
due
within
one
month
  Due later
than one
month
but less
than
three
months
  Due later
than three
months
but less
than one
year
  Total  
 
  $ m
  $ m
  $ m
  $ m
 

Derivative financial instruments and accrued interest on derivative financial instruments

                         

Potential outflows in various currencies

    (4,315 )   (738 )   (1,208 )   (6,261 )

Potential inflows in various currencies

    4,366     738     1,241     6,345  

F-57


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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.   Cash, marketable securities and derivative financial instruments (Continued)

 

December 31, 2010
  Due or
due
within
one
month
  Due later
than one
month
but less
than
three
months
  Due later
than three
months
but less
than one
year
  Total  
 
  $ m
  $ m
  $ m
  $ m
 

Derivative financial instruments and accrued interest on derivative financial instruments

                         

Potential outflows in various currencies

    (1,842 )   (467 )   (935 )   (3,244 )

Potential inflows in various currencies

    1,830     485     928     3,243  

        Other contractual liabilities, which are not part of management's monitoring of the net debt or liquidity consist of the following items:

December 31, 2011
  Due later
than one
month
but less
than
three
months
  Due later
than three
months
but less
than one
year
  Due later
than one
year but
less
than five
years
  Due after
five years
  Total  
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Contractual interest on non-current liabilities

    (236 )   (247 )   (1,410 )   (637 )   (2,530 )

Trade payables

    (4,989 )                     (4,989 )

 

December 31, 2010
  Due later
than one
month
but less
than
three
months
  Due later
than three
months
but less
than one
year
  Due later
than one
year but
less
than five
years
  Due after
five years
  Total  
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Contractual interest on non-current liabilities

    (236 )   (261 )   (1,694 )   (835 )   (3,026 )

Trade payables

    (4,788 )                     (4,788 )


Capital risk management

        Novartis strives to maintain strong debt ratings. In managing its capital, Novartis focuses on a sound debt/equity ratio. Credit agencies in 2011 maintained their ratings for Novartis. Moody's rated the Group as Aa2 for long-term maturities and P-1 for short-term maturities and Standard & Poor's had a rating of AA- for long-term and A-1+ for short-term maturities. Fitch had a long-term rating of AA and a short-term rating of F1+.

        The 2011 year-end debt/equity ratio decreased to 0.31:1 from 0.33:1 in 2010 principally due to less current financial debt being outstanding under the commercial paper financing program.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.   Cash, marketable securities and derivative financial instruments (Continued)


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 financial instruments.

        A 10-day period is used because of an assumption that not all positions could be undone in one day given the size of the positions. The VAR computation includes the Group's financial 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 included in 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 foreign currency rate movements over a 60 day period for the calculation of VAR amounts.

        The estimated potential 10-day loss in pre-tax income from the Group's foreign currency instruments, the estimated potential 10-day loss of its equity holdings, and the estimated potential 10-day loss in fair value of its interest rate sensitive instruments (primarily financial debt and investments of liquid funds under normal market conditions) as calculated in the VAR model are the following:

 
  Dec 31, 2011   Dec 31, 2010  
 
  $ m
  $ m
 

All financial instruments

    235     311  

Analyzed by components:

             

Instruments sensitive to foreign currency exchange rates

    145     193  

Instruments sensitive to equity market movements

    56     27  

Instruments sensitive to interest rates

    102     219  

        The average, high, and low VAR amounts are as follows:

2011
  Average   High   Low  
 
  $ m
  $ m
  $ m
 

All financial instruments

    214     281     180  

Analyzed by components:

                   

Instruments sensitive to foreign currency exchange rates

    98     219     50  

Instruments sensitive to equity market movements

    49     74     28  

Instruments sensitive to interest rates

    154     190     96  

 

2010
  Average   High   Low  
 
  $ m
  $ m
  $ m
 

All financial instruments

    267     319     139  

Analyzed by components:

                   

Instruments sensitive to foreign currency exchange rates

    192     271     98  

Instruments sensitive to equity market movements

    49     76     27  

Instruments sensitive to interest rates

    164     219     70  

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.   Cash, marketable securities and derivative financial instruments (Continued)

        The VAR computation is a risk analysis tool designed to statistically estimate the maximum potential ten day loss from adverse movements in foreign currency exchange rates, equity prices and interest rates under normal market conditions. The computation does not purport to 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.

        In addition to these VAR analyses, the Group uses stress testing techniques that aim to reflect a worst case scenario on the financial assets monitored by Group Treasury. For these calculations, the Group uses the worst movements during a period of six months over the past 20 years in each category. For 2011 and 2010, the worst case loss scenario was configured as follows:

 
  Dec 31, 2011   Dec 31, 2010  
 
  $ m
  $ m
 

All financial instruments

    406     406  

Analyzed by components:

             

Instruments sensitive to foreign currency exchange rates

    328     286  

Instruments sensitive to equity market movements

    31     59  

Instruments sensitive to interest rates

    47     62  

        In the Group's risk analysis, Novartis considered this worst case scenario acceptable as it could reduce income, but would not endanger the solvency or 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.

17.   Other current assets

 
  2011   2010  
 
  $ m
  $ m
 

Withholding tax recoverable

    173     103  

Prepaid expenses—Third parties

    694     735  

                              —Associated companies

    12     7  

Other receivables—Third parties

    1,864     1,735  

                              —Associated companies

    13     5  
           

Total other current assets

    2,756     2,585  
           

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18.   Details of shares and share capital movements

 
  Number of shares(1)  
 
  Dec 31,
2009
  Movement
in year
  Dec 31,
2010
  Movement
in year
  Dec 31,
2011
 

Total Novartis shares

    2,637,623,000           2,637,623,000     108,000,000     2,745,623,000  

Total treasury shares

    (363,269,649 )   15,091,827     (348,177,822 )   9,248,679     (338,929,143 )
                       

Total outstanding shares

    2,274,353,351     15,091,827     2,289,445,178     117,248,679     2,406,693,857  
                       

 
  $ million   $ million   $ million   $ million   $ million  

Share capital

   
957
         
957
   
59
   
1,016
 

Treasury shares

    (132 )   7     (125 )   4     (121 )
                       

Outstanding share capital

    825     7     832     63     895  
                       

(1)
All shares are registered, authorized, issued and fully paid. All are voting shares and, except for 146 273 240 treasury shares at December 31, 2011 (2010: 159 381 837) are dividend bearing.

        In 2011 an amount of 54.7 million shares net were purchased (2010: sales of 8.4 million shares). Out of these, 39.4 million shares (2010: nil) were acquired under the 2nd line buy-back program with the intention of cancellation, 20.4 million shares (2010: 0.4 million shares) were purchased on the 1st trading line on the Swiss stock exchange with the intention of retaining in Group Treasury and 5.1 million shares (2010: 8.8 million shares) were sold. Further, 7.2 million shares (2010: 6.7 million shares) were transferred to associates as part of the equity-based compensation and 56.7 million shares were used for the acquisition of the outstanding Alcon, Inc non-controlling interests. Accordingly, the net reduction in treasury shares amounted to 9.2 million.

        Following the Extraordinary General Meeting of Novartis AG on April 8, 2011, 108 million new Novartis shares were issued and these, together with the 56.7 million treasury shares, were exchanged for the outstanding interests in Alcon, Inc., which was then merged into Novartis AG on the same day.

        At December 31, 2011 there are outstanding written call options on Novartis shares of 35 million originally issued as part of the share-based compensation of associates. The market maker has acquired these options but they have not yet been exercised. The weighted average exercise price of these options is $51.35 and they have contractual lives of up to 10 years.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19.   Non-current financial debts

 
  2011   2010  
 
  $ m
  $ m
 

Straight bonds

    13,483     13,512  

Liabilities to banks and other financial institutions(1)

    1,146     942  

Finance lease obligations

    4     4  
           

Total (including current portion of non-current financial debt)

    14,633     14,458  

Less current portion of non-current financial debt

    (778 )   (98 )
           

Total non-current financial debts

    13,855     14,360  
           

Straight bonds

             

3.625% CHF 800 million bond 2008/2015 of Novartis AG, Basel, Switzerland, issued at 100.35%

    844     842  

3.5% CHF 700 million bond 2008/2012 of Novartis Securities Investment Ltd., Hamilton, Bermuda, issued at 100.32%

    744     743  

5.125% $3,000 million bond 2009/2019 of Novartis Securities Investment Ltd., Hamilton, Bermuda, issued at 99.822%

    2,986     2,984  

4.125% $2,000 million bond 2009/2014 of Novartis Capital Corporation, New York, United States, issued at 99.897%

    1,996     1,994  

4.25% EUR 1,500 million bond 2009/2016 of Novartis Finance S.A., Luxembourg, Luxembourg, issued at 99.757%

    1,935     1,978  

1.9% $2,000 million bond 2010/2013 of Novartis Capital Corporation, New York, United States, issued at 99.867%

    1,998     1,996  

2.9% $2,000 million bond 2010/2015 of Novartis Capital Corporation, New York, United States, issued at 99.522%

    1,990     1,986  

4.4% $1,000 million bond 2010/2020 of Novartis Capital Corporation., New York, United States, issued at 99.237%

    990     989  
           

Total straight bonds

    13,483     13,512  
           

(1)
Average interest rate 0.9% (2010: 1.6%)


 
  2011   2010  
 
  $ m
  $ m
 

Breakdown by maturity

             
 

2011

          98  
 

2012

    778     785  
 

2013

    2,029     2,023  
 

2014

    2,789     2,750  
 

2015

    3,108     2,841  
 

2016

    1,948     1,983  
 

After 2016

    3,981     3,978  
           

Total

    14,633     14,458  
           

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19.   Non-current financial debts (Continued)

 

 
  2011   2010  

Breakdown by currency

             
 

$

    9,962     9,953  
 

EUR

    2,042     2,104  
 

JPY

    1,031     798  
 

CHF

    1,589     1,584  
 

Others

    9     19  
           

Total

    14,633     14,458  
           

 

Fair value comparison
  2011
Balance
sheet
  2011
Fair values
  2010
Balance
sheet
  2010
Fair values
 
 
  $ m
  $ m
  $ m
  $ m
 

Straight bonds

    13,483     14,794     13,512     14,350  

Others

    1,150     1,150     946     946  
                   

Total

    14,633     15,944     14,458     15,296  
                   

 

Collateralized non-current financial debt and pledged assets
  2011   2010  
 
  $ m
  $ m
 

Total amount of collateralized non-current financial debts

    7     30  

Total net book value of property, plant & equipment pledged as collateral for non-current financial debts

    100     108  

        The Group's collateralized non-current financial debt consists of loan facilities at usual market conditions.

        The percentage of fixed rate financial debt to total financial debt was 72% at December 31, 2011, and 63% at the end of 2010.

        Financial debts, including current financial debts, contain only general default covenants. The Group is in compliance with these covenants.

        The average interest rate on total financial debt in 2011 was 2.7% (2010: 3.1%, 2009: 3.6%).

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

20.   Provisions and other non-current liabilities

 
  2011   2010  
 
  $ m
  $ m
 

Accrued liability for employee benefits:

             

—Defined benefit pension plans

    2,991     2,317  

—Other long-term employee benefits and deferred compensation

    600     461  

—Other post-employment benefits

    1,098     1,057  

Environmental provisions

    1,059     1,066  

Provisions for product liabilities and other legal matters

    777     693  

Contingent consideration

    482     586  

Other non-current liabilities

    785     662  
           

Total

    7,792     6,842  
           


Product liability provisions

        For the Group's pharmaceutical products, sufficient product liability insurance is not available. In connection with potential product liability exposures for these products the Group establishes provisions for estimated obligations for claims and related legal defense costs. The provisions are based on management's judgment, advice from legal counsel and actuarially determined estimates. Actual liabilities, however, could substantially exceed the provisions that Novartis has put in place. Novartis believes that its insurance coverage and provisions are reasonable and its provisions are the best estimate in light of its business and the risk to which it is subject.

        The largest portion of product liability risk provisions has been determined taking into consideration factors such as past experience, number and amount of claims reported, estimates of claims incurred but not reported, the cost of defending claims and other assumptions. As actual experience becomes known the Group refines and adjusts its product liability estimates. If any of the assumptions used in these calculations turn out to be incorrect or require material adjustment, there could be a material difference between the amount of provisions that have been recorded and the actual liability. At December 31, 2011, the discount rates used to calculate the provision are based on government bond rates and vary by payment duration and geography (US and non-US) between 0.9% and 1.8% (2010: between 2.2% and 2.5%). The consolidated income statement effect of a 1% increase or decrease in the discount rate is $25 million (2010: $26 million) income and $26 million expense (2010: $28 million), respectively.


Environmental provisions

        The material components of the environmental provisions consist of costs to sufficiently clean and refurbish contaminated sites to the extent necessary and to treat and where necessary continue surveillance at sites where the environmental exposure is less significant. The provision recorded at December 31, 2011 totals $1.1 billion (2010: $1.1 billion) of which $59 million (2010: $60 million) is included in current liabilities. $861 million (2010: $875 million) is provided for remediation at third party sites and $257 million (2010: $251 million) for remediation at owned facilities.

        A substantial portion of the environmental provision relates to the remediation of Basel regional landfills in the adjacent border areas in Switzerland, Germany and France following the internal and external investigations completed during 2007 and the subsequent creation of an environmental remediation provision.

        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 of certain sites. Novartis actively participates in, or monitors, the clean-up activities at the sites in which it is a PRP. The provision 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.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

20.   Provisions and other non-current liabilities (Continued)

        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 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, the financial capabilities of the other potentially responsible parties and the timing of expected expenditures. Novartis believes that its total provisions for environmental matters are adequate based upon currently available information. However, given the inherent difficulties in estimating liabilities in this area, Novartis may incur additional costs beyond the amounts provided. Management believes that such additional amounts, if any, would not be material to the Group's financial condition but could be material to the results of operations or cash flows in a given period.

        The following table shows the movements in the environmental liability provisions during 2011, 2010 and 2009:

 
  2011   2010   2009  
 
  $ m
  $ m
  $ m
 

January 1

    1,126     1,010     966  

Cash payments

    (29 )   (20 )   (11 )

Releases

    (8 )   (2 )   (53 )

Interest expense arising from discounting provisions

    29     39     66  

Currency translation effects

          99     19  
               

December 31

    1,118     1,126     1,010  

Less current liability

    (59 )   (60 )   (58 )
               

Non-current environmental liability provisions at December 31

    1,059     1,066     952  
               

        The expected timing of the related cash outflows as of December 31, 2011 is currently projected as follows:

 
  Expected
cash
outflows
 
 
  $ m
 

Due within two years

    167  

Due later than two years, but less than five years

    330  

Due later than five years but less than ten years

    506  

Due after ten years

    115  
       

Total environmental liability provisions

    1,118  
       


Legal matters

        A number of Novartis subsidiaries are, and will likely continue to be, subject to various legal proceedings that arise from time to time, including proceedings regarding product liability, commercial disputes, employment and wrongful discharge, antitrust, securities, sales and marketing practices, health and safety, environmental, tax, privacy, and intellectual property matters. As a result, the Group may become subject to substantial liabilities that may not be covered by insurance and could affect our business and reputation. While Novartis does not believe that any of these legal proceedings will have a material adverse effect on its financial position, litigation is inherently unpredictable and large verdicts sometimes occur. As a consequence, Novartis may in the future incur

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CONSOLIDATED FINANCIAL STATEMENTS (Continued)

20.   Provisions and other non-current liabilities (Continued)


judgments or enter into settlements of claims that could have a material adverse effect on its results of operations or cash flows.

        Governments and regulatory authorities have been stepping up their compliance and law enforcement activities in recent years in key areas, including corruption, marketing practices, insider trading, antitrust and trade restrictions. Responding to such investigations is costly and a significant diversion of management's attention from our business. In addition, such investigations may affect our reputation and create a risk of potential exclusion from government reimbursement programs in the US and other countries. These factors have contributed to decisions by us and other companies in our industry to enter into settlement agreements with governmental authorities around the world. Those settlements have involved and may continue to involve large cash payments, including the potential repayment of amounts allegedly obtained improperly and penalties up to treble damages. In addition, settlements of healthcare fraud cases typically involve corporate integrity agreements which are intended to regulate company behavior for a period of years. Also, matters underlying governmental investigations and settlements may be the subject of separate private litigation.

        Below is a summary of significant legal proceedings to which Novartis or its subsidiaries are a party or were a party and which were concluded in 2011.


Governmental investigations

SDNY investigation

        In the fourth quarter of 2011, Novartis Pharmaceuticals Corporation (NPC) received a subpoena from the US Attorney's Office (USAO) for the Southern District of New York (SDNY) requesting the production of documents relating to marketing practices, including the remuneration of healthcare providers in connection with three NPC products (Lotrel, Starlix and Valturna). NPC is cooperating with the investigation which is civil and criminal in nature.


Alcon investigation

        In the third quarter of 2011, Alcon Laboratories Inc. (Alcon) received a subpoena from the US Department of Health & Human Services relating to an investigation into allegations of healthcare fraud. The subpoena requests the production of documents relating to marketing practices, including the remuneration of healthcare providers in connection with certain Alcon products (Vigamox, Nevanac, Omnipred, Econopred; surgical equipment). Alcon is cooperating with the investigation which is civil in nature.


WDNY investigation

        In 2010, NPC became aware of an investigation by the USAO for the Western District of New York (WDNY) into informed consent issues relating to clinical trials in China and into marketing practices, including the remuneration of healthcare providers in connection with a number of Novartis products. NPC is cooperating with the investigation which is civil in nature.


EC dawn raid at Sandoz France

        In 2009, the European Commission (EC), together with the French competition authority, searched the offices of Sandoz S.A.S. in France (Sandoz France), alleging that Sandoz France entered into anti-competitive price coordination practices with other generic pharmaceutical companies and via the French trade association for generic pharmaceutical companies. Sandoz France is cooperating with the EC and the French authorities. No follow-up requests have been received from the EC so far.


EC dawn raid at Sandoz Netherlands and Sandoz Germany

        In 2008, the EC conducted a dawn raid at Sandoz' offices in Holzkirchen, Germany, which was part of the EC sector inquiry. On July 6, 2010, the EC, together with the Dutch and German competition authorities, conducted a follow-up dawn raid at the Dutch and German offices of Sandoz. The EC's investigation focuses on

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CONSOLIDATED FINANCIAL STATEMENTS (Continued)

20.   Provisions and other non-current liabilities (Continued)


allegations that Sandoz and/or its affiliates may have engaged in anti-competitive practices with respect to Fentanyl or other products in coordination with other pharmaceutical companies since 2005. On October 7, 2011, the EC informed Sandoz that it will formally initiate proceedings removing the national competition authorities' competence to investigate this case. The EC's decision was made public in the fourth quarter of 2011. Sandoz is cooperating with the EC.


Product liability matters

Zometa/Aredia product liability litigation

        NPC together with other Novartis subsidiaries are defendants in more than 720 cases brought in US courts in which plaintiffs claim to have experienced osteonecrosis of the jaw after treatment with Zometa or Aredia, which are used to treat patients whose cancer has spread to the bones. There were four jury trials so far. The first trial began in Montana state court in October 2009 and resulted in a plaintiff's verdict which NPC appealed to the Montana Supreme Court. On December 30, 2010, the Montana Supreme Court affirmed the trial court's verdict. On March 30, 2011, NPC filed a petition for review with the US Supreme Court. On May 31, 2011, NPC was informed that the US Supreme Court decided not to take this case. The second trial took place in September and October 2010 in a New Jersey state court and resulted in a defense verdict in favor of NPC. This verdict is currently on appeal. The third trial took place in November 2010 in the US District Court for the Middle District of North Carolina and resulted in a plaintiffs' verdict. NPC filed an appeal against this verdict which is pending. The fourth trial took place in May 2011 in the US District Court for the Eastern District of New York and resulted in a defense verdict in favor of NPC. This verdict is also currently on appeal. Multiple trials are currently scheduled throughout the first half of 2012. The first trial of 2012 began in the US District Court for the Western District of Kentucky on January 9, 2012. The second trial began in the US District Court for the Eastern District of Missouri on January 23, 2012.

Hormone Replacement Therapy product liability litigation

        NPC and other Novartis subsidiaries are defendants, along with various other pharmaceutical companies, in more than 60 cases brought in US courts in which plaintiffs claim to have been injured by hormone replacement therapy products.

Elidel® product liability litigation

        NPC and other Novartis subsidiaries are defendants in more than 20 cases brought in US courts in which plaintiffs claim to have experienced injuries, mainly various types of cancer, after having been treated with Elidel® a medicine for atopic dermatitis.


Other matters

Average Wholesale Price litigation

        Claims have been brought against various pharmaceutical companies, including certain Sandoz entities and NPC, alleging that they fraudulently overstated the Average Wholesale Price (AWP) and "best price", respectively, which are, or have been, used by the US federal and state governments in the calculation of Medicare reimbursements and Medicaid rebates.

        In the third quarter of 2011, the US Department of Justice (DoJ) approved an agreement to settle the litigation brought by the State of Texas and the relator Ven-A-Care of the Florida Keys (VAC) as well as claims of the federal government relating to Texas against several Sandoz entities. The settlement amount of $66 million, which had already been fully provisioned during 2011, was paid in the third quarter of 2011 and the case has been dismissed.

        In the second quarter of 2011, Sandoz Inc. (Sandoz) reached an agreement in principle to settle with the relator VAC the pending AWP action brought on behalf of the US Government as well as the AWP cases brought by the States of California and Florida for a total amount of $150 million. On November 3, 2011, the written

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CONSOLIDATED FINANCIAL STATEMENTS (Continued)

20.   Provisions and other non-current liabilities (Continued)


settlement agreement was executed by all parties and the payment of the settlement amount, which had been fully provisioned for during 2011, was made in the fourth quarter of 2011.

        A bench trial against Sandoz in Mississippi chancery court ended on April 15, 2011. On September 2, 2011, the court rendered judgment in favor of Sandoz on the false claims provisions but against Sandoz on the other causes of action and awarded plaintiff a total of $38.2 million ($23.7 million in compensatory damages, $2.7 million in civil penalties and $11.8 million in punitive damages). On October 4, 2011, the court granted Sandoz' post-judgment motion to strike the punitive damage award. An evidentiary hearing will now take place in order to determine whether punitive damages are appropriate and, if so, in what amount punitive damages should be awarded.

        Further, Sandoz was a defendant in a trial in Alabama in 2009. The jury rendered a verdict against it and awarded compensatory damages of $28 million and punitive damages of $50 million. Sandoz appealed the verdict to the Supreme Court of Alabama in January 2010. A decision is still outstanding.

        A further trial involving Sandoz took place in Kentucky in June 2009. The jury rendered a verdict against Sandoz and imposed $16 million in compensatory damages, and the Court awarded $13.6 million in penalties, which were subsequently reduced to $11.2 million. Sandoz appealed this verdict in March 2010. A decision is still outstanding.

        On October 12, 2011, plaintiffs offered to settle the New York City, New York Counties, Erie, Oswego, Schenectady and Iowa cases for $25 million. Sandoz has agreed in principle and the terms of the settlement are currently being negotiated with plaintiffs. The settlement amount was fully provisioned for in the fourth quarter of 2011.

Wage and Hour litigation

        Certain pharmaceutical sales representatives filed suit in a state court in California and in the US District Court for the SDNY against NPC alleging that NPC violated wage and hour laws by misclassifying the pharmaceutical sales representatives as "exempt" employees, and by failing to pay overtime compensation. These actions are part of a number of lawsuits pending against pharmaceutical companies that challenge the industry's long-term practice of treating pharmaceutical sales representatives as salaried employees. After the California state court action had been removed to the US District Court for the Central District of California, these collective and class action lawsuits were consolidated in the US District Court for the SDNY for coordinated pre-trial proceedings. A class was certified. In January 2009, after the case had been bifurcated into a liability and a damages phase, the US District Court for the SDNY granted NPC's summary judgment motion holding that NPC's pharmaceutical sales representatives were not entitled to overtime pay under the federal Fair Labor Standards Act and corresponding state wage and hour laws. Plaintiffs appealed that judgment to the US Court of Appeals for the Second Circuit (Second Circuit). Amicus briefs supporting plaintiffs' position were filed by the National Employment Lawyers Association and by the US Department of Labor, and the US Chamber of Commerce filed a brief in support of NPC. On July 6, 2010, the Second Circuit vacated the judgment of the lower court. On October 4, 2010, NPC filed its petition for a writ of certiorari with the US Supreme Court. Amicus briefs in support of NPC's certiorari petition were filed on November 5, 2010, by the US Chamber of Commerce and Pharmaceutical Research and Manufacturers of America (PhRMA). On February 28, 2011, NPC was informed that the US Supreme Court decided not to take this case. The case has been remanded to the US District Court for the SDNY for pre-trial proceedings relating to damages. NPC has agreed with the plaintiffs to end the ongoing proceedings and provide a payment of up to $99 million for eligible class members. This settlement resolves the wage and hour claims brought in 2006, as well as additional wage and hour claims covering a more recent time period. The agreement is subject to certain conditions, including final court approval.

Lucentis patent litigation

        Novartis has been sued by and has sued MedImmune in several European countries, including the United Kingdom, Germany, Switzerland, France and the Netherlands. MedImmune alleges that the sale of Lucentis in these countries infringes its patents and its rights under its Supplementary Protection Certificates (SPC). In the

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CONSOLIDATED FINANCIAL STATEMENTS (Continued)

20.   Provisions and other non-current liabilities (Continued)


UK, a trial took place in May 2011. On July 5, 2011, the UK court issued its decision and held that Novartis did not infringe MedImmune's patents and that MedImmune's patents were invalid. MedImmune has filed an appeal against this decision. In Germany, the infringement trial took place on October 18, 2011. On November 10, 2011, the German court ruled that the import and sale of Lucentis infringes MedImmune's patent and rights under its SPC in Germany. This decision is being appealed.


Concluded legal matters

Trileptal/Five products investigation

        On September 30, 2010, NPC reached a global settlement in order to bring to a close the USAO for the Eastern District of Pennsylvania's (EDPA) investigations into marketing practices and payments made to healthcare providers in connection with Trileptal and in connection with five other products, i.e. Diovan, Exforge, Sandostatin, Tekturna and Zelnorm (Five Products). As part of the settlement, NPC agreed to plead guilty to one misdemeanor violation of misbranding under the US Food, Drug and Cosmetic Act and to pay a fine of $185 million for Trileptal. NPC also resolved civil allegations under the False Claims Act relating to Trileptal and the Five Products and agreed to pay $237.5 million. As the fine was formally imposed on NPC at the sentencing hearing in the US District Court for the EDPA on January 28, 2011, and payment of the total overall settlement amount of $422.5 million, which had been fully provisioned for in 2010, has been completed in the first quarter of 2011, these investigations are closed now.

Alcon minority shareholder litigation

        Beginning on January 7, 2010, shareholder class action complaints relating to the Alcon transactions announced on January 4, 2010, were filed against Novartis AG and others by minority shareholders of Alcon, Inc. These actions were filed in the US Federal District Courts for the SDNY, Eastern District of New York (EDNY) and the Northern District of Texas (NDTX) and in several Texas state courts. The case in the EDNY was voluntarily dismissed without prejudice by the plaintiffs on March 18, 2010. The case in the NDTX was transferred to the SDNY and formally consolidated with the actions pending there on June 25, 2010. In the SDNY, Novartis AG's motion to dismiss all cases pending there based on the doctrine of forum non conveniens (FNC) was granted on May 24, 2010, and the case was formally dismissed on July 2, 2010. On July 14, 2010, plaintiffs appealed this decision to the Second Circuit. On January 5, 2011, plaintiffs moved to dismiss this appeal. On January 6, 2011, the Second Circuit granted plaintiffs' motion and dismissed this appeal. The actions pending in Texas state courts were consolidated for pre-trial proceedings in a Multi District Litigation on April 16, 2010. Novartis AG's motion to dismiss the consolidated Texas state court actions based on FNC was filed on June 30, 2010. On November 17, 2010, Novartis AG's motion was granted and all Texas state court class actions were dismissed. On December 17, 2010, plaintiffs appealed this decision to the Texas Fifth District Court of Appeals. On March 21, 2011, upon a motion made by plaintiffs, the Texas Fifth District Court of Appeals dismissed the appeal. The dismissals of both the federal and Texas state class actions based on FNC are final after plaintiffs dismissed their appeals. The case, therefore, is concluded.

Zelnorm product liability litigation

        NPC together with other Novartis subsidiaries are currently defending against product liability lawsuits brought in US courts in which plaintiffs claim to have experienced cardiovascular injuries after having been treated with Zelnorm, a medicine for irritable bowel syndrome and chronic constipation. In the third quarter of 2011, NPC finalized the previously disclosed group settlement agreement with 122 plaintiffs. The finalization of this group settlement alongside other settlements and dismissals in the fourth quarter of 2011 brought the current caseload in the US down from 154 to 2 active cases.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

20.   Provisions and other non-current liabilities (Continued)

        The following table shows the movements in the legal and product liability provisions during 2011, 2010 and 2009:

 
  2011   2010   2009  
 
  $ m
  $ m
  $ m
 

January 1

    1,384     1,542     1,142  

Impact of business combinations

          15        

Cash payments

    (772 )   (669 )   (285 )

Releases of provisions

    (16 )   (53 )   (152 )

Additions to provisions

    584     541     833  

Currency translation effects

    2     8     4  
               

December 31

    1,182     1,384     1,542  

Less current liability

    (405 )   (691 )   (871 )
               

Non-current legal and product liability provisions at December 31

    777     693     671  
               

        Novartis believes that its total provisions for legal and product liability matters are adequate based upon currently available information. However, given the inherent difficulties in estimating liabilities, it cannot be guaranteed that additional costs will not be incurred beyond the amounts provided.

21.   Current financial debt

 
  2011   2010  
 
  $ m
  $ m
 

Interest bearing accounts of associates

    1,357     1,321  

Other bank and financial debt

    2,053     2,195  

Commercial paper

    2,156     4,969  

Current portion of non-current financial debt

    778     98  

Fair value of derivative financial instruments

    30     44  
           

Total current financial debt

    6,374     8,627  
           

        The consolidated balance sheet values of current financial debt, other than the current portion of non-current financial debt, approximate the estimated fair value due to the short-term nature of these instruments.

        The weighted average interest rate on the bank and other current financial debt (including employee deposits from the compensation of associates employed by Swiss entities) was 1.7% in 2011 and 2.0% in 2010.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22.   Provisions and other current liabilities

 
  2011   2010  
 
  $ m
  $ m
 

Taxes other than income taxes

    578     556  

Restructuring provisions

    349     241  

Accrued expenses for goods and services received but not invoiced

    678     731  

Provisions for royalties

    443     327  

Provisions for revenue deductions

    3,742     3,097  

Provisions for compensation and benefits including social security

    2,116     2,058  

Environmental liabilities

    59     60  

Deferred income relating to government grants

    70     79  

Provision for legal matters

    405     691  

Accrued share-based payments

    217     200  

Other payables

    1,422     1,493  
           

Total provisions and other current liabilities

    10,079     9,533  
           

        Provisions are based upon management's best estimate and adjusted for actual experience. Such adjustments to the historic estimates have not been material.

Provision for deductions from revenue

        Deductions from revenue are reported as a reduction of revenue. They include rebates, discounts, incentives to retail customers, government agencies, wholesalers, health insurance companies and managed care organizations. These deductions represent estimates of the related obligations, requiring the use of judgment when estimating the effect of these sales deductions. The following table shows the movement of the provision for deductions from revenue:

 
  2011   2010   2009  
 
  $ m
  $ m
  $ m
 

January 1

    3,097     2,094     1,665  

Impact of business combinations

          379        

Additions

    11,713     8,752     6,245  

Payments/utilizations

    (10,749 )   (8,172 )   (5,582 )

Changes in offset against gross trade receivables

    (227 )   68     (321 )

Currency translation effects

    (92 )   (24 )   87  
               

December 31

    3,742     3,097     2,094  
               

Restructuring provisions

        In 2011, there were additions to provisions of $151 million in the Pharmaceuticals Division in conjunction with the transfer, outsourcing, closure of selected research operations, as well as simplifying and streamlining of certain development and support functions. The charges comprised termination costs of associates of $139 million and other third party costs of $12 million. In total, approximately 1,000 associates were affected by this restructuring plan, though none of them had left the Group as of December 31, 2011. It is anticipated that most or all of these associates will leave the Group within the next twelve months.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22.   Provisions and other current liabilities (Continued)

        Also in 2011, additions to provisions were made in conjunction with the integration of Alcon. The charges comprised termination costs of associates of $47 million and other third party costs of $15 million. In total, approximately 300 associates were affected by the various restructuring plans. Approximately 100 associates had left the Group as of December 31, 2011. It is anticipated that the remainder of these associates will leave the Group within the next twelve months.

        The Group-wide review of its manufacturing sites led to additions in restructuring provisions of $79 million in 2011 related to the restructuring of the manufacturing and chemical operations, mainly in Switzerland, United Kingdom, US, Italy and Puerto Rico. The charges comprised termination costs of associates of $77 million and other third party costs of $2 million. As of December 31, 2011, 200 of the approximately 1,000 associates affected by the restructuring plans have left the Group and the remaining associates will leave the Group when their respective activity is transferred to other sites.

        Various Group initiatives to further simplify the organization led to restructuring charges of $54 million, mainly in Italy and Switzerland. The charges comprised termination costs of associates of $36 million and other third party costs of $18 million. In total, approximately 300 associates were affected by the various restructuring plans, of which 100 had left the Group as of December 31, 2011. It is anticipated that the remainder of these associates will leave the Group within the next twelve months.

        In 2010, additions to provisions of $89 million were incurred in conjunction with the adjustment of the field force structures to better support the portfolio of the primary care and neuroscience medicines business within the Pharmaceuticals Division in the United States. The charges comprised termination costs of associates of $78 million and other third party costs of $11 million. In total, approximately 1,400 associates were affected by the various restructuring plans, all of whom had left the Group as of December 31, 2011.

        Also in 2010, additions to provisions of $44 million were incurred in conjunction with the consolidation of regional units of the primary care medicines business and the integration of a research entity within the Pharmaceuticals Division in the United States. The charges comprised termination costs of associates of $44 million. In total, 383 associates were affected by the various restructuring plans, all of whom had left the Group as of December 31, 2010.

        Additions to provisions of $62 million were incurred in 2010 in conjunction with the restructuring of the technical and commercial operations of the Vaccines and Diagnostics Division in England, France, Germany, Italy and the United States. The charges comprised termination costs of associates of $46 million and other third party costs of $16 million. As of December 31, 2011, it is anticipated that all associates will have left the Group in the first quarter 2012.

        In 2010 and 2009, additions to provisions of $66 million and $40 million respectively were incurred in conjunction with the restructuring of the commercial operations of the Sandoz Division in Germany. The charges comprised termination costs of associates of $57 million and $37 million, respectively and other third party costs of $9 million and $3 million, respectively. As of December 31, 2011, it is anticipated that all associates will have left the Group in the first quarter 2012.

        Also in 2009, additions to provisions of $19 million were incurred in conjunction with the restructuring of the technical operations of the Pharmaceuticals Division in Switzerland. The charges comprised termination costs of associates of $19 million. In total, approximately 105 associates were affected by the various restructuring plans, all of whom have left the Group as of December 31, 2009.

        The releases to income in 2011, 2010 and 2009 of $37 million, $18 million and $42 million, respectively, were mainly due to settlement of liabilities at lower amounts than originally anticipated, which were principally due to

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22.   Provisions and other current liabilities (Continued)


provisions made in relation with prior years restructuring initiatives. Other third party costs are mainly associated with lease and other obligations due to the abandonment of certain facilities.

 
  Termination
costs of
associates
  Other third
party costs
  Total  
 
  $ m
  $ m
  $ m
 

January 1, 2009

    157     47     204  

Additions

    56     3     59  

Cash payments

    (114 )   (12 )   (126 )

Releases

    (10 )   (32 )   (42 )

Currency translation effects

    2           2  
               

December 31, 2009

    91     6     97  

Additions

    225     36     261  

Cash payments

    (81 )   (12 )   (93 )

Releases

    (9 )   (9 )   (18 )

Currency translation effects

    (5 )   (1 )   (6 )
               

December 31, 2010

    221     20     241  

Additions

    299     47     346  

Cash payments

    (189 )   (14 )   (203 )

Releases

    (33 )   (4 )   (37 )

Currency translation effects

    2           2  
               

December 31, 2011

    300     49     349  
               

23.   Details to the consolidated cash flow statements

23.1)    Reversal of non-cash items

 
  2011   2010   2009  
 
  $ m
  $ m
  $ m
 

Taxes

    1,528     1,733     1,468  

Depreciation, amortization and impairments on

                   
 

Property, plant & equipment

    2,141     1,373     1,250  
 

Intangible assets

    3,647     2,046     1,051  
 

Financial assets

    192     158     40  
 

Income from associated companies

    (528 )   (804 )   (293 )

Gains on disposal of property, plant & equipment, intangible, financial and other non-current assets, net

    (518 )   (429 )   (94 )

Equity-settled compensation expense

    790     655     642  

Change in provisions and other non-current liabilities

    1,295     802     1,031  

Net financial income

    753     628     353  
               

Total reversal of non-cash items

    9,300     6,162     5,448  
               

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

23.   Details to the consolidated cash flow statements (Continued)

23.2)    Cash flows from changes in working capital and other operating items included in operating cash flow

 
  2011   2010   2009  
 
  $ m
  $ m
  $ m
 

Change in inventories

    45     965     237  

Change in trade receivables

    (732 )   26     (934 )

Change in trade payables

    195     490     512  

Change in other net current assets and other operating cash flow items

    379     281     873  
               

Total

    (113 )   1,762     688  
               

23.3)    Cash flow arising from acquisitions and divestments of businesses

        The following is a summary of the cash flow impact of acquisitions and divestments of businesses:

 
  2011
Acquisitions
  2011
Divestments
  2010
Acquisitions
  2009
Acquisitions
  2009
Divestments
 
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Property, plant & equipment

    (66 )   16     (1,419 )   (64 )      

Currently marketed products

    (101 )         (10,561 )   (241 )      

Marketing know-how

                (5,960 )            

Alcon brand name

                (2,980 )            

Acquired research & development

    (7 )         (1,418 )   (161 )      

Technologies

    (3 )         (5,460 )   (427 )      

Software and other intangible assets

    (1 )         (44 )            

Financial and other assets including deferred tax assets

    (7 )         (904 )   (58 )      

Inventories

    (15 )   8     (1,112 )   (80 )      

Trade accounts receivables and other current assets

    (52 )   5     (1,696 )   (122 )      

Marketable securities and cash

    (186 )   1     (3,130 )   (55 )      

Long-term and short-term financial debts

                384     47        

Trade payables and other liabilities including deferred tax liabilities

    66     (7 )   6,626     467        
                         

Net identifiable assets acquired or divested

    (372 )   23     (27,674 )   (694 )      

Acquired/divested liquidity

    63     (1 )   2,176     55     (63 )

Non-controlling interest

    19           6,338              

Fair value of previously held equity interests

                10,320              
                       

Sub-total

    (290 )   22     (8,840 )   (639 )   (63 )

Goodwill

    (303 )         (17,986 )   (548 )      

Deferred consideration

    2           160     325        
                       

Net cash flow

    (591 )   22     (26,666 )   (862 )   (63 )
                       

        Note 2 provides further information regarding acquisitions and divestments of businesses. All acquisitions were for cash.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

24.   Acquisitions of businesses

Assets and liabilities arising from acquisitions

Fair value
  2011   2010  
 
  $ m
  $ m
 

Property, plant & equipment

    66     1,419  

Currently marketed products

    101     10,561  

Marketing know-how

          5,960  

Alcon brand name

          2,980  

Acquired research & development

    7     1,418  

Technologies

    3     5,460  

Software and other intangible assets

    1     44  

Financial and other assets including deferred tax assets

    7     904  

Inventories

    15     1,112  

Trade accounts receivable and other current assets (net of provisions for doubtful trade receivables of $56 m in 2010)

    52     1,696  

Marketable securities and cash

    186     3,130  

Long-term and short-term financial debts

          (384 )

Trade payables and other liabilities including deferred tax liabilities

    (66 )   (6,626 )
           

Net identifiable assets acquired

    372     27,674  

Acquired liquidity

    (63 )   (2,176 )

Non-controlling interest

    (19 )   (6,338 )

Goodwill

    303     17,986  
           

Net assets recognized as a result of business combinations

    593     37,146  
           

        Note 2 provides details on all the significant acquisition of businesses. The 2011 and 2010 goodwill arising out of the acquisitions reflects mainly the value of expected synergies, future products and the acquired assembled workforce.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

24.   Acquisitions of businesses (Continued)

        The following table provides a summary of the final acquisition accounting for Alcon, Inc. as at August 25, 2010:

 
  $ billions   $ billions  

Purchase price for acquiring initial 25% of Alcon

          10.4  

Purchase price for additional 52% of Alcon

          28.3  
             

Total purchase price

          38.7  

Equity adjustments since acquiring the initial 25% interest

          (0.4 )

Revaluation gain on initial 25% interest

          0.4  
             

Investment value on date of change of majority ownership

          38.7  

Net assets reported by Alcon (excluding its goodwill but including any US GAAP/IFRS differences)

    5.9        

Estimated fair value adjustments

             

—property, plant and equipment

    0.1        

—intangible assets

    24.5        

—inventory

    0.5        

—other liabilities

    (0.1 )      

—deferred tax liabilities

    (3.8 )      
             

Fair value of net assets acquired at December 31, 2010

          27.1  

Less value attributed to 23% non-controlling interest

          (6.3 )
             

Goodwill at December 31, 2010

          17.9  

Increase in goodwill due to reduction in fair value of net assets after final adjustment to acquisition accounting in 2011

          0.1  
             

Final goodwill at December 31, 2011

          18.0  
             

25.   Post-employment benefits of associates

Defined Benefit Plans

        Apart from the legally required social security schemes, the Group has numerous independent pension and other post-employment benefit plans. In most cases these plans are externally funded in vehicles which are legally separate from the Group. For certain Group companies, however, no independent plan assets exist for the pension and other long-term benefit obligations of associates. In these cases the related unfunded liability is included in the balance sheet.

        Defined benefit pension plans cover a significant number of the Group's associates. The defined benefit obligations and related plan assets of all major plans are reappraised annually by independent actuaries. Plan assets are recorded at fair value and their actual return in 2011 was a loss of $129 million (2010: gain of $614 million) for pension plans. The defined benefit obligation of unfunded pension plans was $938 million at December 31, 2011 (2010: $870 million), for unfunded other post-employment plans $870 million (2010: $907 million).

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

25.   Post-employment benefits of associates (Continued)

        The following table is a summary of the status of the main funded and unfunded pension and other post-employment benefit plans of associates at December 31, 2011 and 2010:

 
  Pension plans   Other
post-employment
benefit plans
 
 
  2011   2010   2011   2010  
 
  $ m
  $ m
  $ m
  $ m
 

Benefit obligation at January 1

    20,568     18,009     1,247     817  

Service cost

    423     350     60     58  

Interest cost

    732     667     60     45  

Actuarial losses

    822     668     37     29  

Plan amendments

    18     (290 )   (46 )      

Currency translation effects

    (92 )   1,193     (3 )   3  

Benefit payments

    (1,231 )   (1,078 )   (47 )   (57 )

Contributions of associates

    187     133     3     3  

Effect of acquisitions, divestments or transfers

    303     916     (70 )   349  
                   

Benefit obligation at December 31

    21,730     20,568     1,241     1,247  
                   

Fair value of plan assets at January 1

    19,265     17,611     228     8  

Expected return on plan assets

    909     778     15     5  

Actuarial (losses)/gains

    (1,038 )   (164 )   (18 )   5  

Currency translation effects

    (2 )   1,340              

Novartis Group contributions

    367     381     50     70  

Contributions of associates

    187     133     3     3  

Plan amendments

    (2 )   (21 )            

Benefit payments

    (1,231 )   (1,078 )   (47 )   (57 )

Effect of acquisitions, divestments or transfers

    371     285     (9 )   194  
                   

Fair value of plan assets at December 31

    18,826     19,265     222     228  
                   

Funded status

    (2,904 )   (1,303 )   (1,019 )   (1,019 )

Unrecognized past service cost

    2     3     (79 )   (38 )

Limitation on recognition of fund surplus

    (51 )   (35 )            
                   

Net liability in the balance sheet at December 31

    (2,953 )   (1,335 )   (1,098 )   (1,057 )
                   

Amounts recognized in the consolidated balance sheet

                         

Prepaid benefit cost

    38     982              

Accrued benefit liability

    (2,991 )   (2,317 )   (1,098 )   (1,057 )

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

25.   Post-employment benefits of associates (Continued)

        The net periodic benefit cost recorded in the consolidated income statement consists of the following components:

 
  Pension plans   Other
post-employment
benefit plans
 
 
  2011   2010   2009   2011   2010   2009  
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Components of net periodic benefit cost

                                     

Service cost

    423     350     411     60     58     48  

Interest cost

    732     667     705     60     45     41  

Expected return on plan assets

    (909 )   (778 )   (698 )   (15 )   (5 )      

Recognized past service cost

    3     2           (5 )   (5 )   (3 )

Curtailment and settlement losses/(gains)

    18     (270 )   (1 )               (19 )
                           

Net periodic benefit cost/(income)

    267     (29 )   417     100     93     67  
                           

        The following table shows the principal actuarial weighted average assumptions used for calculating defined benefit plans and other post-employment benefits of associates:

 
  Pension plans   Other post-employment
benefit plans
 
 
  2011   2010   2009   2011   2010   2009  
 
  %
  %
  %
  %
  %
  %
 

Weighted average assumptions used to determine benefit obligations at December 31

                                     

Discount rate

    3.2%     3.5%     3.9%     4.3%     5.3%     5.7%  

Expected rate of salary increase

    3.3%     3.5%     3.6%                    

Current average life expectancy for a 65-year-old male/female

    20/22 years     19/22 years     19/22 years     20/22 years     19/21 years     18/20 years  

Weighted average expected return on assets for the period

    4.6%     4.6%     4.6%                    

        The following table shows a five-year summary reflecting the funding of defined benefit pensions and the impact of historical deviations between expected and actual return on plan assets and experience adjustments on defined benefit pension obligations.

 
  2011   2010   2009   2008   2007  
 
  $ m
  $ m
  $ m
  $ m
  $ m
 

Plan assets

    18,826     19,265     17,611     16,065     18,355  

Defined benefit obligations

    (21,730 )   (20,568 )   (18,009 )   (17,643 )   (17,105 )
                       

(Deficit)/Surplus

    (2,904 )   (1,303 )   (398 )   (1,578 )   1,250  
                       

Differences between expected and actual return on plan assets

    (1,038 )   (164 )   981     (3,006 )   4  

Experience adjustments on defined benefit obligation

    18     26     12     (72 )   (279 )

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

25.   Post-employment benefits of associates (Continued)

        The following table shows the weighted average asset allocation of funded defined benefit pension plans at December 31, 2011 and 2010:

 
  Pension plans  
 
  Long-term
target
  2011   2010  
 
  %
  %
  %
 

Equity securities

    15-40     25     31  

Debt securities

    45-70     49     43  

Real estate

    0-15     13     12  

Cash and other investments

    0-15     13     14  
                 

Total

          100     100  
                 

        Strategic pension plan asset allocations are determined with the objective of achieving an investment return which, together with the contributions paid, is sufficient to maintain reasonable control over the various funding risks of the plans. Based upon the market and economic environments, actual asset allocations may periodically be permitted to deviate from policy targets. Expected return assumptions are reviewed periodically and are based on each plan's strategic asset mix. Factors considered in the estimate of the expected return are the risk free interest rate together with risk premiums on the assets of each pension plan.

        The expected future cash flows in respect of pension and other post-employment benefit plans at December 31, 2011 were as follows:

 
  Pension
plans
  Other
post-employment
benefit plans
 
 
  $ m
  $ m
 

Novartis Group contributions

             

2012 (estimated)

    455     40  
           

Expected future benefit payments

             

2012

    1,258     51  

2013

    1,264     53  

2014

    1,273     56  

2015

    1,285     59  

2016

    1,288     62  

2017-2021

    6,476     363  

        The healthcare cost trend rate assumptions for other post-employment benefits are as follows:

Healthcare cost trend rate assumptions used
  2011   2010   2009  

Healthcare cost trend rate assumed for next year

    7.7%     7.9%     8.5%  

Rate to which the cost trend rate is assumed to decline

    5.0%     5.0%     5.0%  

Year that the rate reaches the ultimate trend rate

    2020     2019     2020  

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

25.   Post-employment benefits of associates (Continued)

        A one percentage point change in the assumed healthcare cost trend rates compared to those used for 2011 would have had the following effects:

 
  1% point
increase
  1% point
decrease
 

Effects on total of service and interest cost components

    16     (13 )

Effect on post-employment benefit obligations

    196     (159 )

        The number of Novartis AG shares held by pension and similar benefit funds at December 31, 2011 was 19.8 million shares with a market value of $1.1 billion (2010: 19.8 million shares with a market value of $1.2 billion).


Defined Contribution Plans

        In many Group companies associates are covered by defined contribution plans and other long-term benefits. Contributions charged to the 2011 consolidated income statement for the defined contribution plans were $337 million (2010: $269 million, 2009: $195 million).

26. Equity-based participation plans of associates

        The expense recorded in the consolidated income statement spreads the cost of each grant equally over the vesting period. Assumptions are made concerning the forfeiture rate which is adjusted during the vesting period so that at the end of the vesting period there is only a charge for vested amounts. The expense related to all Novartis equity plans and Alcon, Inc., equity plans granted to associates prior to the merger in the 2011 consolidated income statement was $1 billion (2010: $841 million, 2009: $777 million) resulting in a total carrying amount for liabilities arising from share-based payment transactions of $217 million (2010: $200 million, 2009: $129 million).

        Equity-based participation plans can be separated into the following plans.


Novartis Equity Plan "Select"

        The equity plan "Select" is a global equity incentive plan under which all associates, including Executive Committee members, may annually be eligible for a grant, which is capped at 200% of target. The equity-based long-term incentive is subject to the achievement of predetermined business and individual performance objectives at grant. No awards are granted for performance ratings below a certain threshold.

        The Equity Plan "Select" allows its participants to choose the form of their equity compensation in restricted shares (or, in some jurisdictions, restricted share units (RSUs), tradable share options, or a combination of both, with a vesting period of three years.

        In some jurisdictions, RSUs are granted rather than shares. Each RSU is equivalent in value to one Novartis share and is converted into one share at the vesting date. RSUs do not carry any voting or dividend rights, except for the US where employees receive a dividend equivalent for the 2009 and 2010 grants during the vesting period. Each restricted share is entitled to voting rights and payment of dividends during the vesting period.

        Tradable share options expire on their 10th anniversary from grant date. Each tradable share option granted to associates entitles the holder to purchase after vesting (and before the 10th anniversary from grant date) one Novartis share at a stated exercise price that equals the closing market price of the underlying share at the grant date (January 19, 2011).

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

26. Equity-based participation plans of associates (Continued)

        If a participant leaves Novartis, for reasons other than retirement, disability or death, unvested shares, RSUs and share options are forfeited, unless determined otherwise by the Compensation Committee (for example, in connection with a reorganization or divestment).

Novartis Equity Plan "Select" outside North America

        Directors, executives and other selected associates of Group companies (collectively, the "Participants") may receive equity awards. The vesting period for the plan is three years except Switzerland which had until 2010 a vesting period of two years that will be increased to three years as of the 2011 performance onwards.

        The expense recorded in the 2011 consolidated income statement relating to both shares and share options under this plan amounted to $158 million (2010: $149 million, 2009: $151 million). Participants in this plan were granted a total of 2.2 million units at CHF 54.70 (2010: 2.3 million units at CHF 55.85).

        The following table shows the assumptions on which the valuation of share options granted during the period was based:

 
  Novartis Equity Plan
"Select" outside
North America
 
 
  2011   2010  

Valuation date

    January 19, 2011     January 19, 2010  

Expiration date

    January 19, 2021     January 17, 2020  

Closing share price on grant date

    CHF 54.70     CHF 55.85  

Exercise price

    CHF 54.70     CHF 55.85  

Implied bid volatility

    14.90%     16.00%  

Expected dividend yield

    4.82%     4.74%  

Interest rate

    2.06%     2.29%  

Market value of option at grant date

    CHF 5.06     CHF 6.13  

        The following table shows the activity associated with the share options during the period. The weighted average prices in the table below are translated from Swiss Francs into $ at historical rates for the granted, sold, and forfeited or expired figures. The year-end prices are translated using the corresponding year-end rates.

 
  2011   2010  
 
  Options   Weighted
average
exercise
price
  Options   Weighted
average
exercise
price
 
 
  (millions)
  ($)
  (millions)
  ($)
 

Options outstanding at January 1

    34.7     52.3     32.9     51.6  

Granted

    5.7     57.0     9.9     54.5  

Sold or exercised

    (3.9 )   46.4     (6.0 )   52.4  

Forfeited or expired

    (1.0 )   56.6     (2.1 )   51.4  
                   

Outstanding at December 31

    35.5     53.5     34.7     52.3  
                   

Exercisable at December 31

    22.2     52.4     18.2     53.6  
                   

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

26. Equity-based participation plans of associates (Continued)

        All share options were granted at an exercise price which was equal to the market price of the Group's shares at the grant date and between 2000 and 2003 was greater than the market price of the Group's shares at the grant date. The weighted average exercise price during the period the options were sold or exercised in 2011 was $46.4. The weighted average share price at the dates of exercise was $49.0.

        The following table summarizes information about share options outstanding at December 31, 2011:

 
  Options outstanding  
Range of exercise prices ($)
  Number
outstanding
  Average
remaining
contractual
life
  Weighted
average
exercise
price
 
 
  (millions)
  (years)
  ($)
 

30-34

    0.6     0.2     34.8  

35-39

                   

40-44

                   

45-49

    9.3     5.6     46.9  

50-54

    11.2     7.0     54.4  

55-59

    14.4     6.7     57.9  
               

Total

    35.5     6.4     53.5  
               

Novartis Equity Plan "Select" for North America

        The plan provides for equity awards to North American based Directors, executives and other selected associates. The terms and conditions of the Novartis Equity Plan "Select" for North America are substantially equivalent to the Novartis Equity Plan "Select" outside North America. Share options in this plan have only been tradable since 2004.

        The expense recorded in the 2011 consolidated income statement relating to both shares and share options under this plan amounted to $263 million (2010: $237 million, 2009: $237 million). Participants in this plan were granted a total of 4.1 million units at $57.07 (2010: 3.5 million units at $53.70).

        The following table shows the assumptions on which the valuation of share options granted during the period was based:

 
  Novartis Equity Plan
"Select" for North America
 
 
  2011   2010  

Valuation date

    January 19, 2011     January 19, 2010  

Expiration date

    January 19, 2021     January 17, 2020  

Closing ADS price on grant date

    $57.07     $53.70  

Exercise price

    $57.07     $53.70  

Implied bid volatility

    13.80%     14.60%  

Expected dividend yield

    4.83%     4.96%  

Interest rate

    3.50%     3.90%  

Market value of option at grant date

    $5.94     $6.47  

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

26. Equity-based participation plans of associates (Continued)

        The following table shows the activity associated with the options during the period:

 
  2011   2010  
 
  ADS options   Weighted
average
exercise
price
  ADS options   Weighted
average
exercise
price
 
 
  (millions)
  ($)
  (millions)
  ($)
 

Options outstanding at January 1

    60.0     51.1     59.3     50.2  

Granted

    11.8     57.1     15.7     53.7  

Sold or exercised

    (10.2 )   52.2     (10.3 )   49.5  

Forfeited or expired

    (3.1 )   51.6     (4.7 )   51.7  
                   

Outstanding at December 31

    58.5     52.1     60.0     51.1  
                   

Exercisable at December 31

    19.6     52.6     20.2     50.1  
                   

        All share options were granted at an exercise price which was equal to the market price of the American Depositary Shares (ADSs) at the grant date. The weighted average exercise price during the period the share options were sold or exercised in 2011 was $52.2. The weighted average share price at the dates of exercise was $59.4.

        The following table summarizes information about ADS options outstanding at December 31, 2011:

 
  ADS options outstanding  
Range of exercise prices ($)
  Number
outstanding
  Average
remaining
contractual
life
  Weighted
average
exercise
price
 
 
  (millions)
  (years)
  ($)
 

35-39

    2.5     0.9     36.5  

40-44

             

45-49

    19.1     6.2     46.6  

50-54

    15.4     7.4     53.9  

55-59

    21.5     7.3     57.6  
               

Total

    58.5     6.7     52.1  
               

Long-Term Performance Plan

        The Long-Term Performance Plan (LTPP) is an equity plan for key executives designed to foster long-term commitment by aligning the incentives of key executives to the performance of Novartis. The LTPP is offered to selected executives, who are in key positions and have a significant impact on the long-term success of Novartis and is capped at 200% of target. The rewards are based on pre-determined rolling three year global performance objectives focused on the Novartis Economic Value Added (NVA) measured annually. The NVA is calculated based on Group operating income adjusted for interest, taxes and cost of capital charge. The performance realization of a plan cycle is obtained right after the end of the third plan year by adding together the annual NVA realizations of all plan years of the plan cycle. The performance ratio for a plan cycle is obtained by dividing the

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

26. Equity-based participation plans of associates (Continued)


performance realization for the plan cycle with the performance target for the plan cycle, expressing the result as a percentage. The LTPP only allows a payout when the actual NVA exceeds predetermined target thresholds.

        At the beginning of the performance period, plan participants are allocated RSUs, which will be converted into Novartis shares after the performance period.

        At the end of the three-year performance period, the Compensation Committee adjusts the number of RSUs earned based on actual performance. RSUs are converted into unrestricted Novartis shares without an additional vesting period. In the United States, awards may also be delivered in cash under the US deferred compensation plan.

        The expense recorded in the 2011 income statement related to this plan amounted to $40 million (2010: $32 million, 2009: $35 million). On January 19, 2011 a total of 0.4 million performance share units (2010: 0.4 million performance share units) were granted to 127 key executives participating in this plan.

Special Share Awards

        Selected associates may exceptionally receive special awards of restricted shares or RSUs. These special Share Awards provide an opportunity to reward outstanding achievements or exceptional performance and aim at retaining key contributors. They are based on a formal internal selection process, in which the individual performance of each candidate is thoroughly assessed at several management levels. In addition, Special Share Awards may also be granted to attract special expertise and new talents into the organization. These grants are consistent with the Novartis' philosophy to attract, retain and motivate best in class talents around the world.

        Restricted special awards generally have a five-year vesting period. If an associate leaves Novartis for reasons other than retirement, disability or death, unvested shares or RSUs are generally forfeited. Worldwide 597 associates at different levels in the organization were awarded restricted shares in 2011. The expense recorded for such special share awards in the 2011 income statement amounted to $27 million (2010: $33 million, 2009: $18 million). During 2011, a total of 1.5 million restricted shares or RSUs (2010: 1.1 million restricted shares or RSUs) were granted to executives and selected associates.

Leveraged Share Savings Plans

        A number of associates in certain countries and certain key executives worldwide are encouraged to invest their Annual Incentive in a share savings plan, which is capped at 200% of target. Under the share savings plan, they will receive their annual incentive awards fully or partially in Novartis shares in lieu of cash. As a reward for their participation in the share savings plan, Novartis matches their investments in shares after a holding period of 3 or 5 years. As a rule, no shares are matched under these plans if an associate leaves Novartis prior to expiration of the holding period for reasons other than retirement, disability or death.

        Novartis currently has three share savings plans:

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

26.   Equity-based participation plans of associates (Continued)

        Associates may only participate in one of these plans in any given year.

        The expense recorded in the 2011 income statement related to these plans amounted to $429 million (2010: $366 million, 2009: $335 million). During 2011, a total of 5.4 million shares (2010: 5.8 million shares) were granted to participants of these plans.

Summary of non-vested share movements

        The table below provides a summary of non-vested share movements (restricted shares, RSUs and ADSs) for all plans:

 
  2011   2010  
 
  Number of
shares in
millions
  Fair value
in $ m
  Number of
shares in
millions
  Fair value
in $ m
 

Non-vested shares at January 1

    17.7     1,015.7     15.7     938.7  

Granted

    14.3     823.9     13.9     766.1  

Vested

    (10.0 )   (590.1 )   (10.3 )   (594.6 )

Forfeited

    (1.2 )   (69.4 )   (1.6 )   (94.5 )
                   

Non-vested shares at December 31

    20.8     1,180.1     17.7     1,015.7  
                   


Alcon, Inc., Equity Plans granted to associates prior to the merger

        The expense recorded in the 2011 consolidated income statement relating to equity-based compensation awards granted to Alcon, Inc., associates prior to the merger on April 8, 2011 amounted to $98 million (August 25 to December 31, 2010: $22 million). Participants in those plans were granted 1.9 million restricted share units (RSUs) during 2011 (from August 25 to December 31, 2010: 0.7 million converted Novartis RSUs).

Change of control provisions

        Upon the change of majority ownership in Alcon, Inc., from Nestlé to Novartis, Alcon equity-based compensation awards granted to associates prior to January 1, 2009 vested immediately. However, the vesting of similar awards granted after January 1, 2009 accelerates only if the respective participant's employment with Novartis subsidiaries is terminated without cause, or by the participant under certain circumstances, within six months preceding or during the two years following a change of control. At the completion of the merger of Alcon, Inc., into Novartis, all awards outstanding under the Alcon equity plans were converted to awards based upon Novartis shares as defined in the Merger Agreement.

Share options and share settled appreciation rights

        Share options entitle the recipient to purchase Novartis shares at the closing market price of the former Alcon, Inc., share on the day of grant divided by the conversion factor of 3.0727.

        Share-settled appreciation rights (SSAR) entitle the participant to receive, in the form of Novartis shares, the difference between the values of the former Alcon, Inc., share at the date of grant, converted into Novartis shares using the conversion factor of 3.0727, and the Novartis share price at the date of exercise. Share options and SSARs are exercisable upon satisfaction of the conditions set forth in the respective award agreement, generally three years following the date of grant.

        The compensation expense for equity awards was calculated on a straight-line basis over the three-year vesting period of the applicable equity awards, with acceleration of the expense for individuals meeting the requirements for retirement and under the change of control provisions, as described above. There were no grants of share options or SSARs under these plans in 2011 and 2010.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

26.   Equity-based participation plans of associates (Continued)

        The following table shows the activity associated with the converted Novartis share options and SSARs during 2011 and from August 25 to December 31, 2010:

 
  Number
of options
  Weighted
average
exercise
price
  Number of
SSARs
  Weighted
average
exercise
price
 
 
  (millions)
  ($)
  (millions)
  ($)
 

Outstanding at August 25, 2010

    13.6     22.3     14.7     37.5  

Sold or exercised

    (3.9 )   22.9     (3.0 )   42.8  
                   

Outstanding at December 31, 2010

    9.7     22.0     11.7     36.3  
                   

Exercisable at December 31, 2010

    9.1     21.6     6.2     43.3  
                   

Outstanding at January 1, 2011

    9.7     22.0     11.7     36.3  

Sold or exercised

    (5.2 )   20.7     (3.3 )   41.8  
                   

Outstanding at December 31, 2011

    4.5     23.5     8.4     34.2  
                   

Exercisable at December 31, 2011

    4.0     22.9     3.3     43.4  
                   

Restricted share units

        Restricted Share Units (RSUs) entitle the recipient to receive a specified number of Novartis shares on the date of vesting. RSUs will vest and become transferable upon satisfaction of the conditions set forth in the restricted share unit award agreements, generally three years following the grant date. Holders of RSUs have no voting rights and receive dividend equivalents prior to vesting.

        The fair value of each RSU was estimated at the closing market price on the day of grant. At the date of the merger on April 8, 2011, the awards were converted into Novartis RSUs at a conversion factor of 3.0727. The compensation expense is recognized over the required service period, generally three years following the day of grant.

        Until the merger on April 8, 2011, participants were granted 1.9 million converted Novartis RSUs (from August 25 to December 31, 2010: 0.7 million converted Novartis RSUs). The fair value of those instruments amounted to $108 million. At December 31, 2011, there were 5.0 million Novartis RSUs outstanding with a fair value of $261 million.

27.   Related parties

GENENTECH/ROCHE

        Novartis has two agreements with Genentech, Inc., USA, a subsidiary of Roche Holdings AG which is indirectly included in the consolidated financial statements using equity accounting since Novartis holds 33.3% of the outstanding voting shares of Roche.

LUCENTIS

        Novartis has licensed the exclusive rights to develop and market Lucentis outside the US for indications related to diseases of the eye. As part of this agreement, Novartis paid Genentech/Roche an initial milestone and shared the cost for the subsequent development by making additional milestone payments upon the achievement of certain clinical development points and product approval. Novartis also pays royalties on the net sales of Lucentis products outside the US. Lucentis sales of $2.0 billion (2010: $1.5 billion, 2009: $1.2 billion) have been recognized by Novartis.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

27.   Related parties (Continued)

XOLAIR

        In February 2004, Novartis Pharma AG, Genentech, Inc., and Tanox, Inc. finalized a three-party collaboration to govern the development and commercialization of certain anti-IgE antibodies including Xolair and TNX-901. Under this agreement, all three parties co-developed Xolair. On August 2, 2007, Genentech, Inc. completed the acquisition of Tanox, Inc. and has taken over its rights and obligations. Novartis and Genentech/Roche are co-promoting Xolair in the US where Genentech/Roche records all sales. Novartis records sales outside of the US.

        Novartis markets Xolair and records all sales and related costs in Europe as well as co-promotion costs in the US. Genentech/Roche and Novartis share the resulting profits from sales in the US, Europe and other countries, according to agreed profit-sharing percentages. Novartis recognized total sales of Xolair of $478 million (2010: $369 million, 2009: $338 million) including sales to Genentech/Roche for the US market.

        The net expense for royalties, cost sharing and profit sharing arising out of the Lucentis and Xolair agreements with Genentech/Roche totaled $396 million (2010: $300 million, 2009: $200 million).

        Furthermore, Novartis has several patent license, supply and distribution agreements with Roche and several Novartis entities hold Roche bonds totaling $20 million (2010: $17 million, 2009: $1 billion).


IDENIX

        Novartis Pharma AG entered into a collaboration agreement with Idenix in May 2003 relating to the worldwide development and commercialization of drug candidates and purchased approximately 54% of the common stock of Idenix. As Novartis had the ability to exercise control, Idenix was fully consolidated. In August 2009, Novartis opted not to purchase shares that were issued pursuant to an underwritten offering and waived and amended certain rights under the development and commercialization agreement. As a result of this, the Novartis shareholding was diluted from the pre-offering level of 53% to 47% and since September 1, 2009 Idenix has been accounted for according to the equity method. Novartis has a license agreement with Idenix for Tyzeka/Sebivo and may pay additional license fees and development expenses for drug candidates that Novartis may elect to license from Idenix. The sales of Tyzeka/Sebivo totaled $114 million in 2011 (2010: $95 million, 2009: $84 million).


Executive Officer and non-executive Director Compensation

        During 2011, there were 12 Executive Committee members and Permanent Attendees ("Executive Officers"), including those who stepped down (14 members in 2010 also including those who stepped down, 14 members in 2009).

        The total compensation for members of the Executive Committee and the 11 Non-Executive Directors (12 in 2010, 11 in 2009) using IFRS 2 rules for accounting for equity-based compensation was as follows:

 
  Executive Officers   Non-Executive Directors   Total  
 
  2011   2010   2009   2011   2010   2009   2011   2010   2009  
 
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
  $ m
 

Short-term benefits

    13.7     14.8     16.1     23.9     17.7     6.0     37.6     32.5     22.1  

Post-employment benefits

    1.9     1.3     1.8     0.2     0.2           2.1     1.5     1.8  

Termination benefits

    5.1     7.9                             5.1     7.9        

Equity-based compensation

    53.3     63.6     98.6     16.0                 69.3     63.6     98.6  
                                       

Total

    74.0     87.6     116.5     40.1     17.9     6.0     114.1     105.5     122.5  
                                       

        The annual incentive award, which is fully included in equity-based compensation even if eventually paid out in cash, is granted in January in the year following the reporting period.

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NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

27.   Related parties (Continued)

        The above table excludes amounts for any grants made to any of the current Executive Officers and non-Executive Directors by Alcon, Inc., prior to its merger into Novartis AG on April 8, 2011, since these were granted by this company's independent Compensation Committee.

        A non-executive director has options to acquire minor Group assets at fair market values.

        During 2009, an Executive Officer acquired real estate for CHF 3.7 million from a consolidated entity. The transaction price was based on independent external valuation reports.

28.   Commitments and contingencies

Leasing commitments

        The Group has entered into various fixed term operational leases, mainly for cars and real estate. As of December 31, 2011 the Group's commitments with respect to these leases were as follows:

 
  2011  
 
  $ m
 

2012

    355  

2013

    270  

2014

    175  

2015

    124  

2016

    109  

Thereafter

    2,003  
       

Total

    3,036  
       

Expense of current year

    412  
       

Research & Development Commitments

        The Group has entered into long-term research agreements with various institutions which provide for potential milestone payments and other payments by Novartis that may be capitalized. As of December 31, 2011 the Group's commitments to make payments under those agreements were as follows:

 
  Unconditional
commitments
2011
  Potential
milestone
payments
2011
  Total
2011
 
 
  $ m
  $ m
  $ m
 

2012

    105     282     387  

2013

    73     288     361  

2014

    53     377     430  

2015

    42     388     430  

2016

    39     172     211  

Thereafter

    31     1,146     1,177  
               

Total

    343     2,653     2,996  
               

F-88


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

28.   Commitments and contingencies (Continued)


Other Commitments

        The Novartis Group entered into various purchase commitments for services and materials as well as for equipment in the ordinary course of business. These commitments are generally entered into at current market prices and reflect normal business operations.


Contingencies

        Group companies have to observe the laws, government orders and regulations of the country in which they operate.

        The Group's potential environmental liability is assessed based on a risk assessment and 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.

        A number of Group companies are currently involved in administrative proceedings, litigations and investigations arising out of the normal conduct of their business. These litigations include certain legal and product liability claims. Whilst provisions have been made for probable losses that management deems to be reasonable or appropriate there are uncertainties connected with these estimates. Note 20 contains a more extensive discussion of these matters.

        In the opinion of management, however, the outcome of these actions will not materially affect the Group's financial position but could be material to the results of operations or cash flow in a given period.

29.   Principal currency translation rates

 
   
   
  2011   2010   2009  
 
   
   
  $
  $
  $
 

Year-end exchange rates used for consolidated balance sheets:

    1   CHF     1.064     1.063     0.965  

    1   EUR     1.294     1.324     1.436  

    1   GBP     1.543     1.552     1.591  

    100   JPY     1.289     1.227     1.086  

 

 
   
   
  2011   2010   2009  
 
   
   
  $
  $
  $
 

Average of monthly exchange rates during the year used for consolidated income, other comprehensive income and cash flow statements:

    1   CHF     1.130     0.961     0.923  

    1   EUR     1.392     1.327     1.393  

    1   GBP     1.603     1.546     1.564  

    100   JPY     1.255     1.141     1.070  

30.   Events subsequent to the December 31, 2011 Balance Sheet Date

        On January 24, 2012, the Novartis AG Board of Directors proposed the acceptance of the 2011 consolidated financial statements of the Novartis Group for the approval by the Annual General Meeting on February 23, 2012. Furthermore, on January 19, 2012, the Board proposed a dividend of CHF 2.25 per share to be approved at the Annual General Meeting on February 23, 2012. If approved, total dividend payments would amount to approximately $5.8 billion.

F-89


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

30.   Events subsequent to the December 31, 2011 Balance Sheet Date (Continued)

        On January 13, 2012, Novartis announced a plan to restructure Novartis Pharmaceuticals (NPC) in the US. This will result in the reduction of approximately 1,960 positions and result in an exceptional charge of approximately $160 million to be recorded in the first quarter of 2012.

31.   Principal Group subsidiaries and associated companies

As at December 31, 2011
  Share/paid-in
capital(1)
  Equity
interest %
  Activities

Argentina

                                 

Novartis Argentina S.A., Buenos Aires

    ARS     231.3 m     100       ‹*›       /*\

Alcon Laboratorios Argentina S.A., Buenos Aires

    ARS     83.9 m     100       ‹*›        

Sandoz S.A., Buenos Aires

    ARS     131.8 m     100       ‹*›   \*/    

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       ‹*›       /*\

Alcon Laboratories (Australia) Pty Ltd., Frenchs Forest

    AUD     2.6 m     100       ‹*›        

Sandoz Pty Ltd., North Ryde, NSW

    AUD     11.6 m     100       ‹*›        

Novartis Consumer Health Australasia Pty Ltd., Melbourne, Victoria

    AUD     7.6 m     100       ‹*›   \*/    

Novartis Animal Health Australasia Pty Ltd., North Ryde, NSW

    AUD     3.0 m     100       ‹*›       /*\

Austria

                                 

Novartis Austria GmbH, Vienna

    EUR     1.0 m     100   /*/            

Novartis Pharma GmbH, Vienna

    EUR     1.1 m     100       ‹*›        

Sandoz GmbH, Kundl

    EUR     32.7 m     100   /*/   ‹*›   \*/   /*\

EBEWE Pharma Ges.m.b.H Nfg., Unterach am Attersee

    EUR     1.0 m     100       ‹*›   \*/   /*\

Novartis Animal Health GmbH, Kundl

    EUR     37 000     100       ‹*›        

Bangladesh

                                 

Novartis (Bangladesh) Limited, Dhaka

    BDT     162.5 m     60       ‹*›   \*/    

Belgium

                                 

N.V. Novartis Pharma S.A., Vilvoorde

    EUR     7.1 m     100       ‹*›        

S.A. Alcon-Couvreur N.V., Puurs

    EUR     362.1 m     100       ‹*›   \*/    

N.V. CIBA Vision Benelux S.A., Mechelen

    EUR     62 000     100       ‹*›        

N.V. Sandoz S.A., Vilvoorde

    EUR     19.2 m     100       ‹*›        

N.V. Novartis Consumer Health S.A., Vilvoorde

    EUR     4.3 m     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     20 000     100   /*/   ‹*›   \*/   /*\

Trinity River International Investments (Bermuda), Ltd. Hamilton

  $       12 000     100   /*/            

Trinity River Insurance Co.Ltd., Hamilton

  $       370 000     100   /*/            

Brazil

                                 

Novartis Biociências S.A., São Paulo

    BRL     255.8 m     100       ‹*›   \*/    

Alcon Laboratorios do Brasil Ltda., São Paulo

    BRL     7.7 m     100       ‹*›   \*/    

Sandoz do Brasil Indústria Farmacêutica Ltda., Cambé

    BRL     190.0 m     100       ‹*›   \*/   /*\

Novartis Saúde Animal Ltda., São Paulo

    BRL     50.7 m     100       ‹*›   \*/    

Canada

                                 

Novartis Pharmaceuticals Canada Inc., Dorval/ Montreal

    CAD     0 (2)   100       ‹*›       /*\

Alcon Canada Inc., Mississauga, Ontario

    CAD     0 (2)   100       ‹*›        

CIBA Vision Canada Inc., Mississauga, Ontario

    CAD     1     100       ‹*›   \*/    

Sandoz Canada Inc., Boucherville, Quebec

    CAD     76.8 m     100       ‹*›   \*/   /*\

Novartis Consumer Health Canada Inc., Mississauga, Ontario

    CAD     2     100       ‹*›        

Novartis Animal Health Canada Inc., Charlottetown, Prince Edward Island

    CAD     2     100       ‹*›       /*\

Chile

                                 

Novartis Chile S.A., Santiago de Chile

    CLP     2.0 bn     100       ‹*›        

Alcon Laboratorios Chile Limitada, Santiago de Chile

    CLP     2.0 bn     100       ‹*›        

F-90


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

31.   Principal Group subsidiaries and associated companies (Continued)

As at December 31, 2011
  Share/paid-in
capital(1)
  Equity
interest %
  Activities

China

                                 

Beijing Novartis Pharma Co., Ltd., Beijing

  $       30.0 m     100       ‹*›   \*/    

Novartis Pharmaceuticals (HK) Limited, Hong Kong

    HKD     200     100       ‹*›        

China Novartis Institutes for BioMedical Research Co. Ltd., Shanghai

  $       108.0 m     100               /*\

Suzhou Novartis Pharma Technology Co. Ltd., Changshu

  $       97.4 m     100           \*/    

Shanghai Novartis Trading Ltd., Shanghai

  $       2.45 m     100       ‹*›        

Alcon (China) Ophthalmic Product Co., Ltd., Beijing

  $       2.2 m     100       ‹*›        

Sandoz (China) Pharmaceutical Co., Ltd., Zhongshan

  $       22.0 m     100       ‹*›   \*/    

Novartis Vaccines and Diagnostics (HK) Ltd., Hong Kong

    HKD     80.0 m     100       ‹*›   \*/    

Zhejiang Tianyuan Bio-Pharmaceutical Co., Ltd

    CNY     46.8 m     85       ‹*›   \*/    

Shanghai Novartis Animal Health Co., Ltd., Shanghai

    CHF     21.5 m     87       ‹*›   \*/    

Colombia

                                 

Novartis de Colombia S.A., Santafé de Bogotá

    COP     7.9 bn     100       ‹*›   \*/    

Laboratorios Alcon de Colombia S.A., Bogotá

    COP     20.9 m     100       ‹*›        

Croatia

                                 

Sandoz d.o.o., Zagreb

    HRK     25.6 m     100       ‹*›        

Czech Republic

                                 

Novartis s.r.o., Prague

    CZK     51.5 m     100       ‹*›        

Sandoz s.r.o., Prague

    CZK     44.7 m     100       ‹*›        

Denmark

                                 

Novartis Healthcare A/S, Copenhagen

    DKK     14.0 m     100       ‹*›        

Sandoz A/S, Copenhagen

    DKK     8.0 m     100       ‹*›        

Ecuador

                                 

Novartis Ecuador S.A., Quito

  $       4.0 m     100       ‹*›        

Egypt

                                 

Novartis Pharma S.A.E., Cairo

    EGP     33.8 m     99       ‹*›   \*/    

Finland

                                 

Novartis Finland Oy, Espoo

    EUR     459 000     100       ‹*›        

France

                                 

Novartis Groupe France S.A., Rueil-Malmaison

    EUR     103.0 m     100   /*/            

Novartis Pharma S.A.S., Rueil-Malmaison

    EUR     43.4 m     100       ‹*›   \*/   /*\

Laboratoires Alcon S.A., Rueil-Malmaison

    EUR     12.6 m     100       ‹*›   \*/    

CIBA Vision S.A.S., Blagnac

    EUR     1.8 m     100       ‹*›        

Sandoz S.A.S., Levallois-Perret

    EUR     5.0 m     100       ‹*›        

Novartis Vaccines and Diagnostics S.A.S., Suresnes

    EUR     1.5 m     100       ‹*›        

Novartis Santé Familiale S.A.S., Rueil-Malmaison

    EUR     21.9 m     100       ‹*›   \*/    

Novartis Santé Animale S.A.S., Rueil-Malmaison

    EUR     900 000     100       ‹*›   \*/    

Germany

                                 

Novartis Deutschland GmbH, Wehr

    EUR     155.5 m     100   /*/            

Novartis Pharma GmbH, Nuremberg

    EUR     25.6 m     100       ‹*›       /*\

Novartis Pharma Produktions GmbH, Wehr

    EUR     2.0 m     100           \*/    

Alcon Pharma GmbH, Freiburg

    EUR     511 292     100       ‹*›        

WaveLight GmbH, Erlangen

    EUR     6.6 m     100       ‹*›        

CIBA Vision GmbH, Grosswallstadt

    EUR     15.4 m     100       ‹*›   \*/   /*\

CIBA Vision Vertriebs GmbH, Grossostheim

    EUR     2.6 m     100       ‹*›        

Sandoz International GmbH, Holzkirchen

    EUR     100 000     100   /*/            

Sandoz Pharmaceuticals GmbH, Holzkirchen

    EUR     5.1 m     100       ‹*›        

Sandoz Industrial Products GmbH, Frankfurt a. M. 

    EUR     2.6 m     100       ‹*›   \*/    

1 A Pharma GmbH, Oberhaching

    EUR     26 000     100       ‹*›        

Salutas Pharma GmbH, Barleben

    EUR     42.1 m     100       ‹*›   \*/    

Hexal AG, Holzkirchen

    EUR     93.7 m     100   /*/   ‹*›   \*/   /*\

Novartis Vaccines and Diagnostics GmbH, Marburg

    EUR     5.0 m     100       ‹*›   \*/   /*\

Novartis Vaccines Vertriebs GmbH, Marburg

    EUR     25 564     100       ‹*›        

Novartis Consumer Health GmbH, Munich

    EUR     14.6 m     100       ‹*›   \*/   /*\

Novartis Tiergesundheit GmbH, Munich

    EUR     256 000     100       ‹*›        

LTS Lohmann Therapie-Systeme AG, Andernach

    EUR     31.2 m     43   /*/            

F-91


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

31.   Principal Group subsidiaries and associated companies (Continued)

As at December 31, 2011
  Share/paid-in
capital(1)
  Equity
interest %
  Activities

Gibraltar

                                 

Novista Insurance Limited, Gibraltar

    CHF     130.0 m     100   /*/            

Great Britain

                                 

Novartis UK Limited, Frimley/Camberley

    GBP     25.5 m     100   /*/            

Novartis Pharmaceuticals UK Limited, Frimley/Camberley

    GBP     5.4 m     100       ‹*›   \*/   /*\

Novartis Grimsby Limited, Frimley/Camberley

    GBP     230 m     100           \*/    

Alcon Laboratories (UK) Limited, Hemel Hempstead

    GBP     9.1 m     100       ‹*›        

CIBA Vision (UK) Limited, Southampton

    GBP     550 000     100       ‹*›        

Sandoz Limited, Bordon

    GBP     2.0 m     100       ‹*›        

Novartis Vaccines and Diagnostics Limited, Frimley/Camberley

    GBP     100     100       ‹*›   \*/    

Novartis Consumer Health UK Limited, Horsham

    GBP     25 000     100       ‹*›   \*/    

Novartis Animal Health UK Limited, Frimley/Camberley

    GBP     100 000     100       ‹*›       /*\

Greece

                                 

Novartis (Hellas) S.A.C.I., Metamorphosis/Athens

    EUR     14.6 m     100       ‹*›        

Alcon Laboratories Hellas Commercial & Industrial S.A., Maroussi/Athens

    EUR     4.7 m     100       ‹*›        

Hungary

                                 

Novartis Hungary Healthcare Limited Liability Company, Budapest

    HUF     545.6 m     100       ‹*›        

Sandoz Hungary Limited Liability Company, Budapest

    HUF     883.0 m     100       ‹*›        

India

                                 

Novartis India Limited, Mumbai

    INR     159.8 m     76       ‹*›   \*/    

Novartis Healthcare Private Limited, Mumbai

    INR     60.0 m     100               /*\

Alcon Laboratories (India) Private Limited, Bangalore

    INR     1.1 bn     100       ‹*›        

Sandoz Private Limited, Mumbai

    INR     32.0 m     100       ‹*›   \*/    

Indonesia

                                 

PT Novartis Indonesia, Jakarta

    IDR     7.7 bn     100       ‹*›   \*/    

PT CIBA Vision Batam, Batam

    IDR     11.9 bn     100           \*/    

Ireland

                                 

Novartis Ireland Limited, Dublin

    EUR     25 000     100       ‹*›        

Novartis Ringaskiddy Limited, Ringaskiddy, County Cork

    EUR     2.0 m     100           \*/    

Alcon Laboratories Ireland Limited, Cork

    EUR     541 251     100           \*/    

Italy

                                 

Novartis Farma S.p.A., Origgio

    EUR     18.2 m     100   /*/   ‹*›   \*/   /*\

Alcon Italia S.p.A., Milan

    EUR     1.3 m     100       ‹*›        

CIBA Vision S.r.l., Marcon

    EUR     2.4 m     100       ‹*›        

Sandoz S.p.A., Origgio

    EUR     679 900     100       ‹*›        

Sandoz Industrial Products S.p.A., Rovereto

    EUR     2.6 m     100           \*/    

Novartis Vaccines and Diagnostics S.r.l., Siena

    EUR     41.5 m     100       ‹*›   \*/   /*\

Novartis Consumer Health S.p.A., Origgio

    EUR     2.9 m     100       ‹*›        

Japan

                                 

Novartis Holding Japan K.K., Tokyo

    JPY     10.0 m     100   /*/            

Novartis Pharma K.K., Tokyo

    JPY     6.0 bn     100       ‹*›       /*\

Alcon Japan Ltd., Tokyo

    JPY     500.0 m     100       ‹*›        

CIBA Vision K.K., Tokyo

    JPY     100.0 m     100       ‹*›        

Sandoz K.K., Tokyo

    JPY     100.0 m     100       ‹*›   \*/   /*\

Novartis Animal Health K.K., Tokyo

    JPY     50.0 m     100       ‹*›       /*\

Luxembourg

                                 

Novartis Investments S.à r.l., Luxembourg-Ville

  $       2.6 bn     100   /*/            

Novartis Finance S.A., Luxembourg-Ville

  $       100 000     100   /*/            

Malaysia

                                 

Novartis Corporation (Malaysia) Sdn. Bhd., Kuala Lumpur

    MYR     3.3 m     100       ‹*›        

CIBA Vision Johor Sdn. Bhd., Gelang Patah

    MYR     5.0 m     100           \*/    

Mexico

                                 

Novartis Farmacéutica, S.A. de C.V., Mexico City

    MXN     205.0 m     100       ‹*›   \*/    

Alcon Laboratorios, S.A. de C.V., Mexico City

    MXN     5.9 m     100       ‹*›   \*/    

Sandoz S.A. de C.V., Mexico City

    MXN     468.2 m     100       ‹*›   \*/    

F-92


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

31.   Principal Group subsidiaries and associated companies (Continued)

As at December 31, 2011
  Share/paid-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       ‹*›        

Alcon Nederland B.V., Gorinchem

    EUR     18 151     100       ‹*›        

Sandoz B.V., Almere

    EUR     907 570     100       ‹*›   \*/    

Novartis Consumer Health B.V., Breda

    EUR     23 830     100       ‹*›   \*/    

New Zealand

                                 

Novartis New Zealand Ltd., Auckland

    NZD     820 000     100       ‹*›        

Norway

                                 

Novartis Norge AS, Oslo

    NOK     1.5 m     100       ‹*›        

Pakistan

                                 

Novartis Pharma (Pakistan) Limited, Karachi

    PKR     24.8 m     99       ‹*›   \*/    

Panama

                                 

Novartis Pharma (Logistics), Inc., Ciudad de Panama

  $       10 000     100       ‹*›        

Peru

                                 

Novartis Biosciences Peru S.A., Lima

    PEN     6.1 m     100       ‹*›        

Philippines

                                 

Novartis Healthcare Philippines, Inc., Makati/Manila

    PHP     298.8 m     100       ‹*›        

Poland

                                 

Novartis Poland Sp. z o.o., Warszawa

    PLN     44.2 m     100       ‹*›        

Alcon Polska Sp. z o.o., Warszawa

    PLN     750 000     100       ‹*›        

Sandoz Polska Sp. z o.o., Warszawa

    PLN     25.6 m     100       ‹*›        

Lek S.A., Strykow

    PLN     11.4 m     100       ‹*›   \*/    

Portugal

                                 

Novartis Portugal SGPS Lda., Sintra

    EUR     500 000     100   /*/            

Novartis Farma—Produtos Farmacêuticos S.A., Sintra

    EUR     2.4 m     100       ‹*›        

Alcon Portugal-Produtos e Equipamentos Oftalmologicos Lda., Paco d'Arcos

    EUR     4.1 m     100       ‹*›        

Sandoz Farmaceutica Lda., Sintra

    EUR     5.0 m     100       ‹*›        

Novartis Consumer Health—Produtos Farmacêuticos e Nutrição Lda., Lisbon

    EUR     100 000     100       ‹*›        

Puerto Rico

                                 

Ex-Lax, Inc., Humacao

  $       10 000     100           \*/    

Alcon (Puerto Rico) Inc., Catano

  $       100     100       ‹*›        

CIBA Vision Puerto Rico, Inc., Cidra

  $       1 000     100           \*/    

Romania

                                 

Sandoz S.R.L., Targu-Mures

    RON     105.2 m     100       ‹*›   \*/    

Russian Federation

                                 

Novartis Pharma LLC, Moscow

    RUR     20.0 m     100       ‹*›        

Alcon Farmacevtika LLC, Moscow

    RUR     44.1 m     100       ‹*›        

ZAO Sandoz, Moscow

    RUR     57.4 m     100       ‹*›        

Novartis Neva LLC, St. Petersburg

    RUR     250.0 m     100           \*/    

Novartis Consumer Health LLC, Moscow

    RUR     80.0 m     100       ‹*›        

Saudi Arabia

                                 

Saudi Pharmaceutical Distribution Co. Ltd., Riyadh

    SAR     26.8 m     75       ‹*›        

Singapore

                                 

Novartis (Singapore) Pte Ltd., Singapore

    SGD     100 000     100       ‹*›        

Novartis Singapore Pharmaceutical Manufacturing Pte Ltd., Singapore

    SGD     45.0 m     100           \*/    

Novartis Asia Pacific Pharmaceuticals Pte Ltd., Singapore

    SGD     1.0 m     100       ‹*›        

Novartis Institute for Tropical Diseases Pte Ltd., Singapore

    SGD     2 004     100               /*\

Alcon Singapore Manufacturing Pte Ltd., Singapore

    SGD     101 000     100           \*/    

CIBA Vision (Singapore) Pte Ltd., Singapore

    SGD     400 000     100       ‹*›        

CIBA Vision Asian Manufacturing and Logistics Pte Ltd., Singapore

    SGD     1.0 m     100           \*/    

F-93


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

31.   Principal Group subsidiaries and associated companies (Continued)

As at December 31, 2011
  Share/paid-in
capital(1)
  Equity
interest %
  Activities

Slovakia

                                 

Novartis Slovakia s.r.o., Bratislava

    EUR     2.0 m     100       ‹*›        

Slovenia

                                 

Lek Pharmaceuticals d.d., Ljubljana

    EUR     48.4 m     100   /*/   ‹*›   \*/   /*\

Sandoz Pharmaceuticals d.d., Ljubljana

    EUR     1.5 m     100       ‹*›        

South Africa

                                 

Novartis South Africa (Pty) Ltd., Kempton Park

    ZAR     86.3 m     100       ‹*›        

Alcon Laboratories (South Africa) (Pty) Ltd., Bryanston, Gauteng

    ZAR     201 820     100       ‹*›        

Sandoz South Africa (Pty) Ltd., Kempton Park

    ZAR     3.0 m     100       ‹*›   \*/    

South Korea

                                 

Novartis Korea Ltd., Seoul

    KRW     24.5 bn     99       ‹*›        

Alcon Korea Ltd., Seoul

    KRW     33.8 bn     100       ‹*›        

Spain

                                 

Novartis Farmacéutica, S.A., Barcelona

    EUR     63.0 m     100   /*/   ‹*›   \*/    

Alcon Cusi S.A., El Masnou

    EUR     11.6 m     100       ‹*›   \*/    

CIBA Vision, S.A., Barcelona

    EUR     1.4 m     100       ‹*›        

Sandoz Farmacéutica, S.A., Madrid

    EUR     270 450     100       ‹*›        

Sandoz Industrial Products, S.A., Les Franqueses del Vallés/Barcelona

    EUR     9.3 m     100       ‹*›   \*/   /*\

Bexal Farmacéutica, S.A., Madrid

    EUR     1.0 m     100       ‹*›        

Novartis Vaccines and Diagnostics, S.L., Barcelona

    EUR     675 450     100       ‹*›        

Novartis Consumer Health, S.A., Barcelona

    EUR     876 919     100       ‹*›        

Sweden

                                 

Novartis Sverige Participations AB, Täby/Stockholm

    SEK     1.0 m     100   /*/            

Novartis Sverige AB, Täby/Stockholm

    SEK     5.0 m     100       ‹*›        

Alcon Sverige AB, Bromma

    SEK     100 000     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 Research Foundation, Basel

    CHF     29.3 m     100   /*/            

Novartis Foundation for Management Development, Basel

    CHF     100 000     100   /*/            

Novartis Foundation for Employee Participation, Basel

    CHF     100 000     100   /*/            

Novartis Sanierungsstiftung, Basel

    CHF     2.0 m     100   /*/            

Novartis Pharma AG, Basel

    CHF     350.0 m     100   /*/   ‹*›   \*/   /*\

Novartis Pharma Services AG, Basel

    CHF     20.0 m     100       ‹*›        

Novartis Pharma Schweizerhalle AG, Muttenz

    CHF     18.9 m     100           \*/    

Novartis Pharma Stein AG, Stein

    CHF     251 000     100           \*/   /*\

Novartis Pharma Schweiz AG, Bern

    CHF     5.0 m     100       ‹*›       /*\

Alcon Switzerland SA, Hünenberg

    CHF     100 000     100       ‹*›        

Alcon Pharmaceuticals Ltd., Fribourg

    CHF     200 000     100   /*/   ‹*›        

ESBATech, an Alcon Biomedical Research Unit GmbH, Schlieren

    CHF     14.0 m     100               /*\

CIBA Vision AG, Embrach

    CHF     300 000     100   /*/   ‹*›        

Sandoz AG, Basel

    CHF     5.0 m     100   /*/   ‹*›       /*\

Sandoz Pharmaceuticals AG, Steinhausen

    CHF     100 000     100       ‹*›        

Novartis Vaccines and Diagnostics AG, Basel

    CHF     800 000     100   /*/           /*\

Novartis Vaccines and Diagnostics Services AG, Basel

    CHF     100 000     100   /*/       \*/    

Novartis Consumer Health S.A., Nyon

    CHF     30.0 m     100   /*/   ‹*›   \*/   /*\

Novartis Consumer Health Schweiz AG, Bern

    CHF     250 000     100       ‹*›        

Novartis Animal Health AG, Basel

    CHF     101 000     100   /*/   ‹*›   \*/   /*\

Novartis Centre de Recherche Santé Animale S.A., St. Aubin

    CHF     250 000     100               /*\

Roche Holding AG, Basel

    CHF     160.0 m     33/6 (3) /*/            

Taiwan

                                 

Novartis (Taiwan) Co., Ltd., Taipei

    TWD     170.0 m     100       ‹*›   \*/    

Thailand

                                 

Novartis (Thailand) Limited, Bangkok

    THB     230.0 m     100       ‹*›        

Alcon Laboratories (Thailand) Limited, Bangkok

    THB     2.1 m     100       ‹*›        

F-94


Table of Contents


NOTES TO THE NOVARTIS GROUP

CONSOLIDATED FINANCIAL STATEMENTS (Continued)

31.   Principal Group subsidiaries and associated companies (Continued)

As at December 31, 2011
  Share/paid-in
capital(1)
  Equity
interest %
  Activities

Turkey

                                 

Novartis Saglik, Gida ve Tarim Ürünleri Sanayi ve Ticaret A.S., Istanbul

    TRY     98.0 m     100       ‹*›   \*/    

Alcon Laboratuvarlari Ticaret A.S., Istanbul

    TRY     25.2 m     100       ‹*›        

Sandoz Ilaç Sanayi ve Ticaret A.S., Istanbul

    TRY     120.0 m     100       ‹*›   \*/    

USA

                                 

Novartis Corporation, East Hanover, NJ

  $       72.2 m     100   /*/            

Novartis Finance Corporation, New York, NY

  $       1.7 bn     100   /*/            

Novartis Capital Corporation, New York, NY

  $       1     100   /*/            

Novartis Pharmaceuticals Corporation, East Hanover, NJ

  $       5.2 m     100       ‹*›   \*/   /*\

Novartis Institutes for BioMedical Research, Inc., Cambridge, MA

  $       1     100               /*\

Novartis Institute for Functional Genomics, Inc., San Diego, CA

  $       21 000     100               /*\

Genoptix, Inc., Carlsbad, CA

  $       1     100       ‹*›       /*\

Alcon Laboratories, Inc., Wilmington, DE

  $       1 000     100   /*/   ‹*›   \*/    

Alcon Refractive Horizons, LLC, Wilmington, DE

  $       10     100           \*/    

Alcon Research, Ltd., Wilmington, DE

  $       10     100           \*/   /*\

Alcon LenSx, Inc., Wilmington, DE

  $       100     100           \*/    

CIBA Vision Corporation, Duluth, GA

  $       301.3 m     100   /*/   ‹*›   \*/   /*\

Sandoz Inc., Princeton, NJ

  $       25 000     100       ‹*›   \*/   /*\

Eon Labs, Inc., Princeton, NJ

  $       1     100       ‹*›   \*/    

Falcon Pharmaceuticals, Ltd., Wilmington, DE

  $       10     100       ‹*›        

Novartis Vaccines and Diagnostics, Inc., Cambridge, MA

  $       3     100   /*/   ‹*›   \*/   /*\

Novartis Consumer Health, Inc., Parsippany, NJ

  $       0 (2)   100       ‹*›   \*/   /*\

Novartis Animal Health US, Inc., Greensboro, NC

  $       100     100       ‹*›   \*/   /*\

Idenix Pharmaceuticals, Inc., Cambridge, MA

  $       72 863     31   /*/            

Venezuela

                                 

Novartis de Venezuela, S.A., Caracas

    VEF     1.4 m     100       ‹*›        

Alcon Pharmaceutical, C.A., Caracas

    VEF     5.5 m     100       ‹*›        

(1)
Share/paid-in capital may not reflect the taxable share/paid-in capital amount and does not include any paid-in surplus.

(2)
shares without par value

(3)
Approximately 33% of voting shares; approximately 6% of total net income and equity attributable to Novartis

m = million; bn = billion

        The following describe the various types of entities within the Group:


/*/
Holding/Finance: This entity is a holding company and/or performs finance functions for the Group.


‹*›
Sales: This entity performs sales and marketing activities for the Group.


\*/
Production: This entity performs manufacturing and/or production activities for the Group.


/*\
Research: This entity performs research and development activities for the Group.

        In addition, the Group is represented by subsidiaries, associated companies or joint ventures in the following countries: Algeria, Bosnia/Herzegovina, Bulgaria, Cayman Islands, Costa Rica, Dominican Republic, Guatemala, the former Yugoslav Republic of Macedonia, Morocco, Ukraine and Uruguay.

        Equity interest %—above 50% and up to 100% of the voting rights—fully consolidated

        —above 20% and up to 50% of the voting rights—investment in associated company—equity method accounting.

F-95