20-F 1 a2182117z20-f.htm 20-F
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As filed with the Securities and Exchange Commission on January 28, 2008



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, 2007
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)

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

Thomas Werlen
Group General Counsel
Novartis AG
CH-4056 Basel
Switzerland
011-41-61-324-2745
thomas.werlen@novartis.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 
   
Title of class
American Depositary Shares
each representing 1 share,
nominal value CHF 0.50 per share,
and shares
  Name of each exchange on which registered
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:

2,264,453,332 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

INTRODUCTION AND USE OF CERTAIN TERMS   1

FORWARD-LOOKING STATEMENTS

 

1

PART I

 

2

 

 

Item 

1.

 

Identity of Directors, Senior Management and Advisers

 

2

 

 

Item 

2.

 

Offer Statistics and Expected Timetable

 

2

 

 

Item 

3.

 

Key Information

 

2
      3.A   Selected Financial Data   2
      3.B   Capitalization and Indebtedness   5
      3.C   Reasons for the offer and use of proceeds   6
      3.D   Risk Factors   6

 

 

Item 

4.

 

Information on the Company

 

14
      4.A   History and Development of Novartis   14
      4.B   Business Overview   16
          Pharmaceuticals   18
          Vaccines and Diagnostics   42
          Sandoz   50
          Consumer Health   56
      4.C   Organizational Structure   61
      4.D   Property, Plants and Equipment   61

 

 

Item 

4A.

 

Unresolved Staff Comments

 

68

 

 

Item 

5.

 

Operating and Financial Review and Prospects

 

68
      5.A   Operating Results   68
      5.B   Liquidity and Capital Resources   119
      5.C   Research & Development, Patents and Licenses   123
      5.D   Trend Information   123
      5.E   Off-Balance Sheet Arrangements   123
      5.F   Aggregate Contractual Obligations   123

 

 

Item 

6.

 

Directors, Senior Management and Employees

 

124
      6.A   Directors and Senior Management   124
      6.B   Compensation   131
      6.C   Board Practices   150
      6.D   Employees   162
      6.E   Share Ownership   163

 

 

Item 

7.

 

Major Shareholders and Related Party Transactions

 

164
      7.A   Major Shareholders   164
      7.B   Related Party Transactions   165
      7.C   Interests of Experts and Counsel   165

 

 

Item 

8.

 

Financial Information

 

166
      8.A   Consolidated Statements and Other Financial Information   166
      8.B   Significant Changes   166

 

 

Item 

9.

 

The Offer and Listing

 

166
      9.A   Listing Details   166
      9.B   Plan of Distribution   167
      9.C   Market   168
      9.D   Selling Shareholders   168
      9.E   Dilution   168
      9.F   Expenses of the Issue   168


 

 

Item 

10.

 

Additional Information

 

168
      10.A   Share capital   168
      10.B   Memorandum and Articles of Association   168
      10.C   Material contracts   172
      10.D   Exchange controls   173
      10.E   Taxation   173
      10.F   Dividends and paying agents   178
      10.G   Statement by experts   178
      10.H   Documents on display   178
      10.I   Subsidiary Information   179

 

 

Item 

11.

 

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

 

179
    Item  12.   Description of Securities other than Equity Securities   184

PART II

 

185

 

 

Item 

13.

 

Defaults, Dividend Arrearages and Delinquencies

 

185

 

 

Item 

14.

 

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

 

185

 

 

Item 

15.

 

Controls and Procedures

 

185

 

 

Item 

16A.

 

Audit Committee Financial Expert

 

185

 

 

Item 

16B.

 

Code of Ethics

 

186

 

 

Item 

16C.

 

Principal Accountant Fees and Services

 

186

 

 

Item 

16D.

 

Exemptions from the Listing Standards for Audit Committees

 

187

 

 

Item 

16E.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

188

PART III

 

189

 

 

Item 

17.

 

Financial Statements

 

189

 

 

Item 

18.

 

Financial Statements

 

189

 

 

Item 

19.

 

Exhibits

 

190


INTRODUCTION AND USE OF CERTAIN TERMS

        Novartis AG and our 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 those for the year ended December 31, 2007 and are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). In this Form 20-F, references to "US dollars", "USD" or "$" are to the lawful currency of the United States of America; and references to "CHF" are to Swiss francs.


        In this Form 20-F, references to the "United States" or to "US" are to the United States of America, references to "Europe" are to all European countries (including Turkey, Russia and the Ukraine), references to the European Union (EU) are to the European Union and its 25 member states and references to "Americas" are to North, Central (including the Caribbean) and South America, unless the context otherwise requires; references to "Novartis" or the "Group" are to Novartis AG and its consolidated subsidiaries; references to "associates" are to employees of our affiliates; references to the "FDA" are to the US Food and Drug Administration. All product names appearing in italics are trademarks licensed to or owned by Group companies. Product names identified by a "®" or a "™" are trademarks that are not licensed to or owned by the Group. 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 operating company in the Group is legally separate from all other companies in the Group 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 company by whom the executive is employed, or to that 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 the use of forward-looking terminology such as "will" or "expected", 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 potential future sales or earnings of the Novartis Group or any of its divisions or business units; or by discussions of strategy, plans, expectations or intentions. Such forward-looking statements reflect the current views of the Company 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 existing products in any market, or that such products will achieve any particular revenue levels. Nor can there be any guarantee that the Novartis Group, or any of its divisions or business units, will achieve any particular financial results. In particular, management's expectations could be affected by, among other things, uncertainties involved in the development of new pharmaceutical products; unexpected clinical trial results, including additional analysis of existing clinical data or unexpected new clinical data; unexpected regulatory actions or delays or government regulation generally; the Group's ability to obtain or maintain patent or other proprietary intellectual property protection, including the uncertainties involved in the US litigation process; competition in general; government, industry, and general public pricing and other political pressures. 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.

1



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, 2007, 2006 and 2005 are included in "Item 18. Financial Statements" in this Form 20-F.

        The results of our Medical Nutrition Business Unit and Gerber Business Unit are shown as discontinued operations for all periods presented, following their divestment in 2007. See "Item 5. Operating and Financial Review and Prospects—5.A Operating Results—Factors Affecting Comparability of Year-on-Year Results of Operations" and "Item 18. Financial Statements—note 2" and "—note 23.2" for more detailed discussion.

        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.

2


 
  Year Ended December 31,
 
 
  2007
  2006
  2005
  2004(1)
  2003(1)
 
 
  ($ millions, except per share information)

 
INCOME STATEMENT DATA                      
Net sales from continuing operations   38,072   34,393   29,446   25,685   22,688  
   
 
 
 
 
 
Operating income from continuing operations   6,781   7,642   6,507   5,835   5,297  
Income/(loss) from associated companies   412   264   193   68   (279 )
Financial income   531   354   461   486   621  
Interest expense   (237 ) (266 ) (294 ) (261 ) (243 )
   
 
 
 
 
 
Income before taxes from continuing operations   7,487   7,994   6,867   6,128   5,396  
Taxes   (947 ) (1,169 ) (986 ) (962 ) (847 )
   
 
 
 
 
 
Net income from continuing operations   6,540   6,825   5,881   5,166   4,549  
Net income from discontinued operations   5,428   377   260   214   238  
   
 
 
 
 
 
Group net income   11,968   7,202   6,141   5,380   4,787  
   
 
 
 
 
 
Attributable to:                      
  Shareholders of Novartis AG   11,946   7,175   6,130   5,365   4,743  
  Minority interests   22   27   11   15   44  

Operating income from discontinued operations (including divestment gains)

 

6,152

 

532

 

398

 

317

 

338

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 
Continuing operations earnings per share in $   2.81   2.90   2.52   2.19   1.89  
Discontinued operations earnings per share in $   2.34   0.16   0.11   0.09   0.10  
Total earnings per share in $   5.15   3.06   2.63   2.28   1.99  
Diluted earnings per share:                      
Continuing operations diluted earnings per share in $   2.80   2.88   2.51   2.18   1.87  
Discontinued operations diluted earnings per share in $   2.33   0.16   0.11   0.09   0.10  
Total diluted earnings per share in $   5.13   3.04   2.62   2.27   1.97  

Cash dividends(2)

 

2,598

 

2,049

 

2,107

 

1,896

 

1,659

 
Cash dividends per share in CHF(3)   1.60   1.35   1.15   1.05   1.00  

Operating income from continuing operations earnings per share:

 

 

 

 

 

 

 

 

 

 

 
Basic earnings per share in $   2.93   3.26   2.79   2.48   2.23  
Diluted earnings per share in $   2.91   3.24   2.78   2.46   2.20  

     
(1)
We adopted a number of new International Financial Reporting Standards from January 1, 2005, not all of which required retrospective application. Data for 2004 and 2003 is therefore not comparable with 2007, 2006 and 2005.

(2)
Cash dividends represent cash payments in the applicable year that generally relate to earnings of the previous year.

(3)
Cash dividends per share represent dividends proposed that relate to earnings of the current year. Dividends for 2007 will be proposed to the Annual General Meeting on February 26, 2008 for approval.

3


 
  Year Ended December 31,
 
  2007
  2006
  2005
  2004
  2003
 
  ($ millions)

BALANCE SHEET DATA                    
Cash, cash equivalents and marketable securities & derivative financial instruments   13,201   7,955   10,933   13,892   12,621
Inventories   5,455   4,498   3,725   3,558   3,346
Other current assets   8,774   8,215   6,785   6,470   5,677
Non-current assets   48,022   46,604   36,289   28,568   26,734
Assets held for sale related to discontinued operations       736            
   
 
 
 
 
Total assets   75,452   68,008   57,732   52,488   48,378
   
 
 
 
 
Trade accounts payable   3,018   2,487   1,961   2,020   1,665
Other current liabilities   13,623   13,540   13,367   9,829   8,254
Non-current liabilities   9,415   10,480   9,240   9,324   9,416
Liabilities related to discontinued operations       207            
   
 
 
 
 
Total liabilities   26,056   26,714   24,568   21,173   19,335
   
 
 
 
 
Issued share capital and reserves attributable to shareholders of Novartis AG   49,223   41,111   32,990   31,177   28,953
Minority interests   173   183   174   138   90
   
 
 
 
 
Total equity   49,396   41,294   33,164   31,315   29,043
   
 
 
 
 
Total liabilities and equity   75,452   68,008   57,732   52,488   48,378
   
 
 
 
 
Net assets   49,396   41,294   33,164   31,315   29,043
Outstanding share capital   815   850   848   849   862

4


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 ADS
 
 
   
  (CHF)

  ($)

 
2003   February 2004   1.00   0.80  
2004   March 2005   1.05   0.93  
2005   February 2006   1.15   0.87  
2006   March 2007   1.35   1.11  
2007(1)   February 2008   1.60   1.41 (2)


(1)

Dividend to be proposed at the Annual General Meeting on February 26, 2008 and distributed February 29, 2008.
(2) Translated into US dollars at the year end rate of $0.88 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.

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 23, 2008, as found on Reuters Market System, was CHF 1.00 = $0.92.

Year ended December 31,
($ per CHF)

  Period End
  Average(1)
  Low
  High
2003   0.80   0.75   0.70   0.81
2004   0.88   0.81   0.76   0.88
2005   0.76   0.80   0.75   0.88
2006   0.82   0.80   0.76   0.84
2007   0.88   0.83   0.80   0.91

Month end,

 

 

 

 
August 2007           0.82   0.84
September 2007           0.82   0.86
October 2007           0.84   0.86
November 2007           0.86   0.91
December 2007           0.86   0.89
January 2008(2)           0.89   0.92

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

(2)

Through January 23, 2008.

3.B  Capitalization and Indebtedness

        Not applicable.

5


3.C  Reasons for the offer and use of proceeds

        Not applicable.

3.D  Risk Factors

        Our business faces significant risks and uncertainties. You should carefully consider all of the information set forth in this annual report on Form 20-F and in our other filings with the SEC before deciding to invest in any Novartis securities, including the following risk factors. Our business, 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 which we currently deem immaterial.

Risks Facing Our Business

Our Pharmaceuticals Division is confronted by a record level of industry patent expirations and increasingly aggressive generic competition.

        Our Pharmaceuticals Division's products are generally protected by patent rights which are intended to provide us with exclusive marketing rights in various countries. However, those patent rights are of varying strengths and durations. Loss of market exclusivity for one or more important products—either due to patent expiration, generic challenges or other reasons—could have a material adverse effect on our results of operations. This is because the introduction of a generic version of the same or a similar medicine typically results in a significant and sharp reduction in net sales for the relevant product, given that generic manufacturers typically offer their versions of the same medicine at sharply lower prices. The pharmaceuticals industry is confronted by a continuing high level of patent expirations, with products representing approximately $20 billion in combined annual sales facing patent expiry in 2008, similar to levels seen in 2006 and 2007, according to IMS Health. In addition, some generic manufacturers are increasingly conducting so-called "launches at risk" of products that are still under legal challenge for patent infringement and before final resolution of legal proceedings.

        In 2007, sales of four Novartis pharmaceutical products—Lotrel (high blood pressure), Lamisil (fungal infections), Trileptal (epilepsy) and Famvir (viral infections)—were negatively affected by the start of generic competition in the US, which in some cases was unexpected. These four products had combined 2006 annual net sales of approximately $2.6 billion in the US. As a result of generic competition, combined net sales for these products declined 38% to $1.6 billion in 2007, and are expected to decline significantly further in 2008. The sharp and significant reduction in net sales of these products had an adverse effect on the results of operations of our Pharmaceuticals Division in 2007. Generic versions for Lamisil and Trileptal were launched following the expiry of patents, while US generic competition for Lotrel and Famvir was the result of "launches at risk" by other generics manufacturers.

        Other products of our Pharmaceuticals Division that are the subject of ongoing US patent litigation include Femara (breast cancer), Lescol (high cholesterol), Focalin/Ritalin LA (ADHD) and Comtan/Stalevo (Parkinson's disease). The loss of exclusivity of some of these products could have a significant adverse effect on the results of operations of our Pharmaceuticals Division. In addition, Neoral (transplantation) and Voltaren (pain), which are still among our top ten-selling products and had combined net sales of $1.7 billion in 2007, have already encountered generic competition in many markets, which may cause sales from these products to decline significantly in the future. A number of other top-selling products, including Diovan (high blood pressure) as well as the Gleevec/Glivec and Zometa (both for cancers), could also potentially face generic competition in the coming four to seven years in various markets, particularly the US and Europe, either due to potential patent challenges or the regular expiration of patents. Diovan, Gleevec/Glivec and Zometa had combined net sales of $9.4 billion in 2007, and the loss of exclusivity of any one of these three products could have a material adverse effect on our business, financial condition and results of operations.

6


Our business is increasingly affected by pressures on drug pricing.

        The growing burden of healthcare costs as a percentage of gross domestic product in many countries means that governments and payors are under intense pressure to control costs even more tightly. As a result, our businesses and the healthcare industry in general are operating in an ever more challenging environment and are significantly affected by ongoing pricing pressures. These pricing pressures include government-imposed industry-wide price reductions, mandatory reference prices, an increase in parallel imports, the shifting of the payment burden to patients through higher co-payments, limiting access to formularies, mandatory substitution of generic drugs and growing pressure on physicians to reduce the prescribing of patented prescription medicines. We expect these efforts to continue 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 to patients, restrict access to higher priced new medicines, increase the use of generics and impose overall price cuts. These initiatives do not only affect the results of our Pharmaceuticals Division, but also have an increasing impact on the prices which we are able to charge for the generic drugs marketed by our Sandoz Division. This is particularly true in Europe and especially Germany, our second largest market for generic products, where various measures have been introduced to require generic manufacturers to lower their prices. A combination of aggressive efforts by our distributors to increase their profit margins on generics products that are considered commodities and expected new government regulations, however, have also placed increasing downward pressure on our prices in the US. We expect that these and other challenges will continue to put pressure on our revenues, and therefore could have a material adverse effect on our business, financial condition and results of operations.

        For more information on the pricing controls and on our challenging business environment see "Item 4.B Business Overview—Pharmaceuticals—Price Controls" and "Item 5.A Operating Results—Factors affecting results of operations—Increasing pressure on drug pricing and access to medicines".

Increasing regulatory scrutiny of drug safety and efficacy may have a negative effect on our results of operations.

        We must comply with a broad range of regulatory requirements for the development, manufacture, marketing, labeling, distribution and pricing of our products. These requirements do not only affect our development costs, but also the time required to reach the market and the uncertainty of successfully doing so. Stricter regulatory requirements also heighten the risk of withdrawal of existing products by regulators on the basis of post-approval concerns over product safety, which would reduce revenues and can result in product recalls and product liability lawsuits. In addition, we may voluntarily cease marketing a product or face declining sales based on concerns about efficacy or safety, whether or not scientifically justified, even in the absence of regulatory action. The development of the post-approval adverse event profile for a product or the relevant product class may have a material adverse effect on the marketing and sale of the relevant product. For more detail on the governmental regulations that affect our business see the sections headed "Regulation" included in the descriptions of our four operating divisions under "Item 4.B Business Overview".

        Following widely publicized product recalls such as Merck & Co., Inc.'s recall of its pain medicine Vioxx® in 2004, health regulators are increasingly focusing on product safety and efficacy as well as on the risk/benefit profile of developmental drugs. This has led to requests for more clinical trial data with a significantly higher number of patients and for more detailed analysis. As a result, obtaining regulatory approvals has become more challenging for pharmaceutical companies. In addition, maintaining regulatory approvals has become increasingly expensive since companies are being required to gather far more detailed safety and other clinical data on products after approval.

        We have suffered setbacks in gaining regulatory approvals for new products as well as being able to keep products on the market, primarily in the Pharmaceuticals Division. For example, in March 2007, Galvus (diabetes) received a so-called "approvable" letter from the FDA requiring Novartis to conduct major additional clinical trials before US regulatory approval. However, we subsequently received

7



approval in the EU in September 2007. In March 2007, we also suspended the marketing and sales of Zelnorm (irritable bowel syndrome) in the US and several other countries in response to a request from the FDA to do so pending further discussions of the product's risks and benefits. As a result of these suspensions, net sales of Zelnorm fell 84% in 2007 as compared to 2006, and are expected to fall significantly further in 2008. Separately, in the second half of 2007, Prexige (osteoarthritic pain) was withdrawn from the market in Australia as well as in some countries of the EU based on postmarketing reports of serious liver side-effects allegedly associated with long-term uses of higher doses, including the deaths of two patients in Australia.

        Any additional delays in the regulatory approval process for new products or adverse regulatory developments with regard to significant existing products could have a material adverse effect on our business, financial condition and results of operations.

Legal proceedings may have a significant impact on our results of operations.

        In recent years, the industries that make up our business have become important targets of litigation around the world, especially in the US. A number of our subsidiaries are, and will likely continue to be, subject to various legal proceedings that arise from time to time, including product liability, commercial, employment and wrongful discharge, securities, environmental and tax litigations and claims, government investigations and intellectual property disputes. As a result, we may become subject to substantial liabilities that may not be covered by insurance. Litigation is inherently unpredictable and excessive verdicts 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, our Pharmaceuticals Division frequently defends its patents against challenges by our competitors. Should we fail to successfully defend our patents, we will be faced with generic competition for the relevant products, and the resulting loss of revenue.

        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 one of our competitors for the relevant 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, we 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.

        The CIBA Vision Business Unit of our Consumer Health Division also has been required to defend its patents against frequent challenges by its competitors. Adverse judgments or settlements in any of these cases could have a material adverse effect on our business, financial condition and results of operations.

        Governments and regulatory authorities have in recent years been stepping up their compliance with law enforcement activities in key areas, including corruption, marketing practices, antitrust and trade restrictions. Our businesses have from time to time been subject to such governmental investigations and information requests by regulatory authorities like the recent unannounced inspection of the Sandoz companies in Holzkirchen, Germany, by European Commission officials. While the outcome of government and regulatory authorities investigations are unpredictable they are costly, divert management from our business and may affect our reputation.

        For more detail regarding specific legal matters currently pending against us, see "Item 18. Financial Statements—note 19" and "Item 4. Information on the Company—4.B Business Overview—Pharmaceuticals—Intellectual Property."

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Our research and development efforts may not succeed.

        Our ability to continue to grow our business and to replace any lost sales due to the loss of exclusivity for our products—either due to patent expiration, generic challenges, competition from new branded products or changes in regulatory status—depends upon the ability of our research and development activities to identify and develop high-potential breakthrough products that address unmet needs, are accepted by patients and physicians, and are reimbursed by payors. To accomplish this, we commit substantial effort, funds and other resources to research and development, both through our own dedicated resources, and through various collaborations with third parties. Developing new pharmaceutical products and bringing them to market, however, is a costly, lengthy and uncertain process and there can be no guarantee that our research and development activities will produce a sufficient number of commercially viable new products, in spite of these significant investments.

        The pharmaceuticals industry has been suffering a dearth of new drugs gaining regulatory approvals in recent years. For example, the FDA approved only 18 entirely new drugs (new molecular entities) in 2007, the lowest single-year total since 1983, when there were 14 new approvals. This decline in research productivity comes at a time when the world-wide pharmaceuticals industry is estimated to be spending more than $40 billion each year on research and development activities.

        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. New products do not only need to undergo intensive pre-clinical and clinical testing, but also to pass a highly complex, lengthy and expensive approval process. During each stage of the process, there is a substantial risk that we will encounter serious obstacles or will not achieve our goals and accordingly we may abandon a product in which we have invested substantial amounts of time and money. We are therefore taking steps to accelerate research and development activities throughout the Group and to find ways to lower attrition rates among pipeline products in the final states before approval. For example, a reorganization of the Pharmaceuticals Development organization began in 2007 with the aim of strengthening project focus, integrating decision making at the therapeutic franchise level and simplifying development decision-making structures. Should these efforts fail to achieve the desired results or should we be unable to maintain a continuous flow of successful new products and successful new indications or brand extensions for existing products sufficient to cover our substantial research and development costs and to replace sales that are lost as older products approach the end of their commercial life cycles or are displaced by competing products or therapies, this could have a material adverse effect on our business, financial condition or results of operations.

        In addition, we invest a significant amount of effort and financial resources into research and development collaborations with third parties which we do not control. Many of these third parties may be small companies which may not have the same organizational resources and development expertise as Novartis. Should these third parties fail to meet our expectations, we may lose our investment in these collaborations or fail to receive the expected benefits, which could have a material adverse effect on our business, financial condition or results of operations.

Reduced availability of exclusivity periods may have an adverse effect on the success of our Sandoz Division.

        A significant source of revenue for our Sandoz Division are exclusivity periods granted in certain markets—particularly the 180-day exclusivity period granted in the US by the Hatch-Waxman Act. However, a number of factors have had the effect of limiting the availability of those exclusivity periods or of decreasing their value, including a variety of aggressive steps taken by branded pharmaceuticals companies to counter the growth of generics, increased competition among generics companies to achieve these periods of exclusivity as well as regulatory changes that create the risk of potential forfeiture of exclusivity periods in the US.

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We may not be able to realize the expected benefits from our ongoing productivity initiatives.

        In December 2007, we launched a new strategic initiative called "Forward" to enhance productivity by simplifying organizational structures, accelerating and decentralizing decision-making and redesigning the way we operate. Through this initiative, we aim to reduce our cost-base by approximately $1.6 billion by 2010 compared to 2007 levels. Our ability to achieve these expected cost-savings, however, depends on a number of factors beyond our control and our inability to successfully complete "Forward" and other ongoing productivity initiatives could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to realize the expected benefits from our significant investments in biologics.

        We believe that recent advances in technologies, particularly those within the last decade that have advanced the analysis of human genome data, could have a fundamental effect on product development, and in turn on our results of operations. We are therefore making major investments in those technologies and are devoting significant resources to building our position in biologic therapies, which now represent approximately 25% of our pre-clinical research portfolio. For our efforts in this area to be successful, we need to ensure a speedy expansion of our capabilities, expertise and skills in the development, manufacturing and marketing of biological therapies. This, however, poses a number of significant challenges, including intense competition for qualified individuals. See also "—An inability to attract and retain qualified personnel could adversely affect our business" below.

        In the second half of 2007, we formed our new Novartis Biologics Unit. To complement these internal research and development activities, we have also made significant investments in licensing agreements with specialized biotechnology companies. At the same time, our Sandoz Division is taking steps to expand its expertise in the area of biosimilars (generic versions of biological therapies) and is actively working with regulators to establish appropriate rules for the approval of these types of generic products.

        There can be no guarantee that our efforts in the biologics area will be successful or that we will be able to realize the expected benefits from our significant investment in this area. A failure to build and expand our position in biologics or to achieve the expected benefits from our significant investments in this area could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to realize the expected benefits from our significant marketing efforts and may fail to develop appropriate marketing models or correctly anticipate changes in our product portfolio.

        The time between the launch of innovative "first-in-class" treatments and "me-too" or generic versions has shortened significantly in recent years, which is putting increasing pressure on our Pharmaceuticals Division to maximize revenue from a new product quickly following its launch, in order to be able to recover its significant research and development costs. A strong marketing message and rapid penetration of potential markets in different geographic territories are vital if a product is to attain peak sales as quickly as possible before the loss of patent protection or the entry of significant competitor products. As a consequence, we are required to invest significant resources into our marketing and sales efforts and we also continually evaluate the appropriateness of our marketing models, explore more efficient ways to support new product launches and adjust the composition of our sales force in response to changes in our product portfolio. Should those efforts prove unsuccessful or should we fail to correctly anticipate changes to our product portfolio, for example, as a result of the unexpected loss of exclusivity for existing products or delays in the launch of new products, this could have a material adverse effect on our business, financial condition and results of operations.

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A failure to develop differentiated vaccines and to bring key products to market in time for the relevant disease season could have an adverse effect on the success of our Vaccines and Diagnostics Division.

        The demand for some types of vaccines marketed by our Vaccines and Diagnostics Division, such as influenza vaccines, is seasonal, while the demand for other vaccines, such as pediatric combination vaccines, depends on birth rates in developed countries. Some vaccines, particularly seasonal influenza vaccines that make an important contribution to the division's net sales and profits, are considered to be commodities, meaning that there are few therapeutic differences among vaccines offered by competitors. The ability to develop differentiated, effective and safe vaccines, to gain approval for inclusion in national immunization recommendation lists, and to consistently produce and deliver high-quality vaccines in time for the relevant disease season are critical to the success of our Vaccines and Diagnostics Division.

The manufacture of our products is technically highly complex and we may face supply disruptions.

        The products we market, distribute and sell are either manufactured at our own dedicated manufacturing facilities or through toll manufacturing or other supply arrangements with third parties. In either case, we need to ensure that the manufacturing process complies with applicable regulations and manufacturing practices as well as our own high quality standards. Many of our products, however, are the result of technically complex manufacturing processes or require a supply of highly specialized raw materials. For some of our products and certain key raw materials, we may also rely on a single source of supply. As a result of these factors, the production of one or more of our products may be disrupted from time to time. Both our Vaccines and Diagnostics Division and our Ciba Vision Business Unit, for example, have experienced significant production shutdowns in the recent past. We may also not be able to rapidly alter production volumes to respond to changes in demand for particular products. A disruption in the supply of certain key products or our failure to accurately predict the demand for those products could have a material adverse effect on our business, financial condition or results of operations. In addition, because our products are intended to promote the health of patients, any supply disruption could lead to allegations that the public health, or the health of individuals, has been endangered and could subject us to lawsuits.

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

        We regularly review our long-lived assets, including identifiable intangible assets 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. The amount of goodwill and other intangible assets on our consolidated balance sheet has increased significantly in recent years, primarily as a result of our recent acquisitions. Impairment testing under IFRS may lead to further impairment charges in the future. Any significant impairment charges could have a material adverse effect on our results of operations. For a detailed discussion of how we determine whether an impairment has occurred, what factors could result in an impairment and on the increasing impact of impairment charges on our results of operations see "Item 5.A Operating Results—Critical Accounting Policies and Estimates—Impairment of Long-Lived Assets" and "Item 18. Financial Statements—note 9".

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

        Increasingly, significant portions of our sales, particularly in the US, are made to a relatively small number of US drug wholesalers, retail chains, and other purchasing organizations. For example, our three most important customers, all from the US, accounted for approximately 9%, 8% and 6%, respectively, of Group net sales from continuing operations in 2007 and there has been a trend toward further consolidation among our distributors, especially in the US. As a result, our distributors are gaining additional purchasing leverage over us, which increases the pricing pressures facing our businesses.

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Moreover, we are exposed to a concentration of credit risk as a result of this concentration among our customers. Should one or more of our major customers experience financial difficulties, the effect on us would be substantially greater than would have been the case in the past. The increased purchasing power of these customers also increases the risk that we may not be able to effectively enforce the high standards which we expect of our distributors and customers. Each of these factors 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—may delay or prevent the achievement of major business objectives. In addition, the success of our research and development activities—especially in the area of biologics—is particularly dependent on our ability to attract and retain sufficient numbers of high quality researchers and development specialists. We face intense competition for 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. In 2007, we increased our provisions for worldwide environmental liabilities by $614 million following the completion of internal and external reviews. $590 million of this increase was attributable to a Corporate charge primarily related to formerly-owned businesses including the Novartis-related share of potential remediation costs for landfills in the Basel region (including Switzerland, France and Germany). We have also been identified as a potentially responsible party under the US Comprehensive Environmental Response Compensation and Liability Act in respect to certain sites. Given the inherent difficulties in estimating liabilities in environmental matters, it cannot be guaranteed that additional costs will not be incurred beyond the amounts we have provided for in the Group consolidated financial statements. Should we be required to further increase our provisions for environmental liabilities in the future or 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 19."

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

        A significant portion of our earnings and expenditures are in currencies other than US dollars, our reporting currency. In 2007, 39% of our net sales from continuing operations were made in US dollars, 30% in euro, 6% in Japanese yen, 2% in Swiss francs and 23% in other currencies. During the same period, 36% of our expenses from continuing operations arose in US dollars, 28% in euro, 14% in Swiss francs, 5% in Japanese yen and 17% in other currencies. Changes in exchange rates between the US dollar and other currencies can result in increases or decreases in our 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."

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Earthquakes could adversely affect our business.

        Our corporate headquarters, the headquarters of our Pharmaceuticals and Consumer Health Divisions, and certain of our major Pharmaceuticals Division production facilities are located near earthquake fault lines in Basel, Switzerland. In addition, other major facilities of our Pharmaceuticals, Vaccines and Diagnostics, Sandoz and Consumer Health 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.

We may be held responsible for the potential misconduct by our third party agents, particularly in developing countries.

        We have operations in approximately 140 countries around the world. In many of these countries, particularly in 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 are small and do not have internal compliance resources that are comparable to those within our own organization. In many emerging growth markets, the local legal systems have also undergone dramatic changes in recent years. In many cases, specific regulations on the marketing and sale of pharmaceutical products either do not exist or the interpretation and safeguards of the new regulatory systems are still being developed, which may result in legal uncertainty and in existing laws and regulations being applied inconsistently. In addition, many of these countries are also plagued by widespread corruption. Should our efforts in screening our third party agents and in detecting cases of potential misconduct fail, we could be held responsible for the non-compliance by these third parties with applicable laws and regulations, which may have a negative effect on our reputation and our business.

Significant disruptions of information technology systems could adversely affect our business.

        Our business is increasingly dependent on information technology systems, including Internet-based systems, to support business processes as well as internal and external communications. Any significant breakdown, invasion, destruction or interruption of these systems, whether due to computer viruses or other outside incursions, may result in the loss of data and/or impairment of production and business processes which could materially and adversely affect our business.

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 in US dollars. Since the shares underlying the ADSs are listed in Switzerland on the SWX Swiss Exchange (SWX) and trade on the European trading platform virt-x Exchange Limited (virt-x) 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 ADS trade 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 SWX. US holders of ADSs may not be able to exercise the preemptive rights attached to the shares underlying their ADSs

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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 the registration requirements thereunder 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 the holders of ADSs of the preemptive rights associated with the shares underlying their ADSs. We cannot guarantee that any 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 such holder's preemptive rights and distribute the net proceeds of the sale to the holder. If the depositary determines, in its discretion, that such 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 allows 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:

    Novartis AG
    Lichtstrasse 35
    CH-4056 Basel, Switzerland
    Telephone: 011-41-61-324-1111
    Web: www.novartis.com

        The Novartis Group is a multinational group of companies specializing in the research, development, manufacturing and marketing of innovative healthcare products. Novartis AG, our Swiss holding company, owns, directly or indirectly, 100% of all significant operating companies. For a list of our significant operating subsidiaries, see "Item 18. Financial Statements—note 32".

Important Corporate Developments 2005-2007

        The following table provides an overview over certain important developments between 2005 and 2007:

2007

April   Novartis announces a definitive agreement to divest Gerber to Nestlé for $5.5 billion, the final step in a divestment program to focus the Group's strategy on healthcare with pharmaceuticals at the core.

July

 

Novartis completes the sale of its Medical Nutrition Business Unit to Nestlé for $2.5 billion, which had been announced in December 2006.
Novartis enhances vaccines pipeline by gaining access to Intercell's key technologies and vaccines programs through an expanded strategic alliance.
Novartis completes its fourth share repurchase program initiated in August 2004. A total of 47,575,000 Novartis shares were repurchased for CHF 3 billion.

September

 

Novartis completes the sale of its Gerber Business Unit to Nestlé for $5.5 billion.

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Novartis and Bayer Schering Pharma AG (Bayer Schering) receive regulatory approval to complete an agreement related to various rights for the multiple sclerosis treatment Betaseron®. Novartis received a one-time payment of approximately $200 million, principally for manufacturing facilities transferred to Bayer Schering and received rights to market its own version of Betaseron® starting in 2009.

October

 

Novartis Biologics is established as a focused unit to accelerate and optimize research and development into innovative biologic medicines, which make up 25% of the Novartis pre-clinical product pipeline.

November

 

Novartis completes its fifth share repurchase program initiated in July 2007. A total of 63,173,000 Novartis shares were repurchased for CHF 4 billion.

December

 

Novartis announces a new strategic initiative called "Forward" to enhance productivity by simplifying organizational structures, accelerating and decentralizing decision-making and redesigning the way we operate. Through this initiative we aim to reduce our cost-base by approximately $1.6 billion by 2010 compared to 2007 levels. The initiative resulted in a restructuring charge of $444 million.


2006


 


 

February

 

Novartis completes the sale of its Nutrition & Santé business to ABN AMRO Capital France for $211 million. The transaction was announced in November 2005.

April

 

Novartis completes the acquisition of all of the remaining shares of Chiron Corporation it did not already own for approximately $5.7 billion. A new division called Vaccines and Diagnostics is created to incorporate activities in human vaccines and molecular diagnostics, while the pharmaceutical activities of Chiron are integrated into the Pharmaceuticals Division.

September

 

Novartis acquires 100% of NeuTec Pharma plc, a UK biopharmaceuticals company specializing in hospital anti-infectives, for $606 million.

October

 

Novartis agrees to acquire the Japanese animal health business of Sankyo Lifetech Co., Ltd. The transaction closes at the end of March 2007.

November

 

Novartis announces plans for a new strategic biomedical research and development center in Shanghai. This site will become an integral part of the Group's global research and development network.

2005

 

 

January

 

The exclusive marketing rights to the antihypertension medicines
Cibacen and Cibadrex in most European markets are granted to the Swedish specialty pharmaceuticals company Meda AB in exchange for a cash payment of $135 million.

February

 

Novartis announces the acquisition of two leading generic drug companies, privately-held Hexal AG of Germany and the US quoted company Eon Labs, Inc., and their integration into its Sandoz Division. The two companies are acquired for approximately $8 billion in all-cash transactions that bring together three premier generics companies. The acquisition of Hexal is completed in June, while the purchase of 100% of Eon Labs is completed in July.

March

 

A new CHF 4.0 billion share repurchase program, the fifth at Novartis since 1999, is approved by shareholders at the Annual General Meeting (AGM).

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July

 

An agreement is signed for Novartis to acquire the rights to a portfolio of over-the-counter (OTC) products, led by the pain medicine Excedrin, from Bristol-Myers Squibb Company for approximately $660 million in cash, significantly strengthening the company's OTC business in the US market. The principal North American business is consolidated as of September 1.

        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 relevant sections on research and development for each 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 with a broad portfolio that includes innovative medicines, preventive vaccines and diagnostic tools, generic pharmaceuticals and consumer health products. Novartis is the only company to have leadership positions in each of these areas. The Group's businesses are divided on a worldwide basis into the following four operating divisions:

    Pharmaceuticals (brand-name patented pharmaceuticals)

    Vaccines and Diagnostics (human vaccines and molecular diagnostics)

    Sandoz (generic pharmaceuticals)

    Consumer Health (over-the-counter medicines (OTC), animal health medicines, and contact lenses and lens-care products)

        Novartis completed the divestment of its remaining non-healthcare businesses in 2007 with the sale of its Medical Nutrition (effective July 1) and Gerber (effective September 1) Business Units, which were previously included in the Consumer Health Division. These businesses were sold in separate transactions to Nestlé S.A.

        Novartis achieved total Group net sales of $39.8 billion in 2007, while net income amounted to $12.0 billion. These results include contributions from Medical Nutrition and Gerber before their divestments in 2007 and the after-tax divestment gain of $5.2 billion. For the Group's continuing operations, which are now solely focused on healthcare, net sales amounted to $38.1 billion in 2007. We invested approximately $6.4 billion in research & development in 2007.

        Headquartered in Basel, Switzerland, we employed approximately 98,200 full-time equivalent associates as of December 31, 2007 and have operations in approximately 140 countries around the world.

Pharmaceuticals Division

        Our Pharmaceuticals Division researches, develops, manufactures, distributes, and sells branded pharmaceuticals in the following therapeutic areas: Cardiovascular and Metabolism; Oncology and Hematology; Neuroscience and Ophthalmics; Respiratory; Immunology and Infectious Diseases; and Other. The Pharmaceuticals Division is organized into global business franchises responsible for the marketing of various products as well as a business unit called Novartis Oncology responsible for the global development and marketing of oncology products. The Pharmaceuticals Division is the most important division of Novartis, accounting in 2007 for $24 billion, or 63%, of Group net sales from continuing operations, and for $6.1 billion, or 90%, of Group operating income from continuing operations excluding Corporate income and expense.

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Vaccines and Diagnostics Division

        Our Vaccines and Diagnostics Division is focused on the development of preventive vaccine treatments and diagnostic tools. It was formed in April 2006 following the acquisition of the remaining stake in Chiron Corporation not already held by Novartis. The division has two activities: Novartis Vaccines and Chiron. Novartis Vaccines is the world's fifth-largest vaccines manufacturer and the second-largest supplier of influenza vaccines in the US. Key products also include meningococcal, pediatric and travel vaccines. Chiron is a blood testing and molecular diagnostics activity dedicated to preventing the spread of infectious diseases through the development of novel blood-screening tools that protect the world's blood supply. In 2007, the Vaccines and Diagnostics Division accounted for $1.5 billion, or 4% of Group net sales from continuing operations, and provided for $72 million, or 1% of the Group's operating income from continuing operations excluding Corporate income and expense.

Sandoz Division

        Our Sandoz Division is a leading global generic pharmaceuticals company that develops, produces and markets drugs along with pharmaceutical and biotechnological active substances. Through Sandoz, Novartis is the only major pharmaceutical company to have leadership positions in both patented prescription drugs as well as generic pharmaceuticals. The Sandoz Division has activities in Retail Generics, Anti-Infectives and Biopharmaceuticals. In Retail Generics, we develop and manufacture active ingredients and finished dosage forms of pharmaceuticals no longer protected by patents, as well as supplying active ingredients to third parties. In Anti-Infectives, we develop and manufacture off-patent active pharmaceutical ingredients and intermediates—mainly antibiotics—for use by Retail Generics and for sale to third-party customers. In Biopharmaceuticals, we develop and manufacture protein- or biotechnology-based products no longer protected by patents (known as biosimilars or follow-on biologics) and provides biotech manufacturing to other companies on a contract basis. Sandoz offers some 950 compounds in more than 5,000 forms in 130 countries. The most important product groups include antibiotics, treatments for central nervous system disorders, gastrointestinal medicines, cardiovascular treatments and hormone therapies. Sandoz is the Group's second-largest division, both in terms of its contribution to the Group's net sales and operating income from continuing operations. In 2007, Sandoz accounted for $7.2 billion, or 19%, of Group net sales from continuing operations, and for $1 billion, or 15%, of Group operating income from continuing operations excluding Corporate income and expense.

Consumer Health Division

        Our Consumer Health Division consists of three business units: OTC (over-the-counter medicines), Animal Health and CIBA Vision. Each has manufacturing, distribution and selling capabilities. However, none are material enough to the Group to be separately disclosed as a segment. OTC offers over-the-counter self medications. Animal Health provides veterinary products for farm and companion animals. CIBA Vision markets contact lenses and lens care products. The Medical Nutrition and Gerber Business Units, which were previously included in the Consumer Health Division, were divested during 2007. The results of these business units have been reclassified and disclosed in this Form 20-F as discontinued operations in all periods. The Medical Nutrition Business Unit offered health and medical nutrition products and Gerber offered food and other products and services designed to serve the particular needs of babies and infants. In 2007, the Consumer Health Division (excluding discontinued operations) was the Group's third-largest division, both in terms of Group net sales and operating income from continuing operations, and accounted for $5.4 billion, or 14%, of Group net sales from continuing operations, and for $812 million, or 12%, of Group operating income from continuing operations excluding Corporate income and expense.

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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 branded pharmaceuticals in the following therapeutic areas:

    Cardiovascular and Metabolism

    Oncology and Hematology

    Neuroscience and Ophthalmics

    Respiratory

    Immunology and Infectious Diseases

    Other

        The preceding list reflects the new composition of the therapeutic areas within our Pharmaceuticals division following recent changes as part of a larger transformation of organizational structures. The Cardiovascular and Metabolism, Oncology and Hematology, and Respiratory franchises have not been affected by these changes. However, three therapeutic areas—Neuroscience and Ophthalmics; Immunology and Infectious Diseases and Other—have been newly created to replace various former therapeutic areas. The following tables and product descriptions already reflect this new organizational structure. Other sections of this Form 20-F, however, still reflect the prior therapeutic areas. This includes the discussions and certain historical information provided in "Item 5. Operating and Financial Review and Prospects." and "Item 18. Financial Statements."

        The Pharmaceuticals Division is organized into global business franchises responsible for the marketing of various products as well as a business unit called Novartis Oncology responsible for the global development and marketing of oncology products. The Oncology Business Unit is not required to be separately disclosed as a segment in our consolidated financial statements, since it shares common long-term economic perspectives, customers, research, development, production, distribution and regulatory environments with the remainder of the Pharmaceuticals Division. The Pharmaceuticals Division is the most important division of Novartis and reported consolidated net sales of $24 billion in 2007, which represented 63% of the Group's net sales from continuing operations.

        The division is made up of approximately 80 affiliated companies which together employed 54,613 associates as of December 31, 2007, and sell products in approximately 140 countries. The product portfolio of the Pharmaceuticals Division includes more than 45 key marketed products, many of which are leaders in their respective therapeutic areas. In addition, the division's portfolio of development projects includes 140 potential new products, new indications or new formulations for existing products in various stages of clinical development.

Pharmaceutical Division Products

        The following table and summaries describe certain key marketed products and recently launched products in our Pharmaceuticals Division. We normally intend to sell all of our marketed products throughout the world. However, not all products and indications are currently available in every country. Compounds and new indications in development are, unless otherwise indicated, subject to required regulatory approvals and, in certain instances, contractual limitations. These compounds and indications are in various stages of development throughout the world. For some compounds, 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

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new compounds and new indications referred to in this Form 20-F. 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 product under special conditions. See "—Regulation" for further information on the approval process.

Key Marketed Products


Therapeutic
area

  Compound

  Generic name

  Indication

  Formulation

Cardiovascular and Metabolism   Diovan   valsartan   Hypertension
Heart failure
Post-myocardial infarction
  Capsule
Tablet
   
    Diovan HCT/
Co-Diovan
  valsartan and hydrochlorothiazide   Hypertension   Tablet
   
    Exforge   valsartan and amlodipine besylate   Hypertension   Tablet
   
    Lescol/
Lescol XL
  fluvastatin sodium   Primary hypercholesterolemia and mixed dyslipidemia
Secondary prevention of adverse cardiac events after coronary transcatheter therapy slowing the progression of atherosclerosis
  Capsule
Tablet
   
    Lotensin/
Cibacen
  benazepril hydrochloride   Hypertension   Tablet
   
    Lotensin
HCT/
Cibadrex
  benazepril hydrochloride and hydrochlorothiazide   Hypertension
Adjunct therapy in heart failure
Progressive chronic renal insufficiency
  Tablet
   
    Lotrel   amlodipine besylate and benazepril hydrochloride   Hypertension   Capsule
   
    Starlix   nateglinide   Type 2 diabetes   Tablet
   
    Tekturna/Rasilez   aliskiren   Hypertension   Tablet

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Oncology and Hematology   Exjade   deferasirox   Chronic iron overload due to blood transfusions   Dispersible tablet for oral suspension
   
    Femara   letrozole tablets/letrozole   Advanced breast cancer in post-menopausal women
Early breast cancer in post-menopausal women following standard tamoxifen therapy (extended adjuvant therapy)
Early breast cancer in post-menopausal women directly after surgery (initial adjuvant therapy)
  Tablet
   
    Gleevec/
Glivec
  imatinib mesylate/imatinib   Certain forms of chronic myeloid leukemia
Certain forms of gastrointestinal stromal tumor
Certain forms of acute lymphoblastic leukemia
Dermatofibrosarcoma protuberans
Hypereosinophilic syndrome
Aggressive systemic mastocytosis
Myelodysplastic/myeloproliferative diseases
  Tablet
   
    Proleukin   aldesleukin   Metastatic renal cell carcinoma
Metastatic melanoma
  Lyophilized powder for IV infusion reconstitution and dilution
   
    Sandostatin
LAR
 &
Sandostatin
SC
  octreotide acetate for injectable suspension & octreotide acetate   Acromegaly
Symptoms associated with certain gastroenteropancreatic neuroendocrine tumors (carcinoid and VIPomas)
  Vial
Ampoule/pre-filled syringe
   
    Zometa   zoledronic acid for injection/zoledronic acid 4 mg   Treatment of patients with multiple myeloma and patients with documented bone metastases from solid tumors
Hypercalcemia of malignancy
  Intravenous infusion
   
    Tasigna   nilotinib   Certain forms of chronic myeloid leukemia in patients with resistance or intolerance to existing therapies   Capsule

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Neuroscience and Ophthalmics   Clozaril/
Leponex
  clozapine   Treatment-resistant schizophrenia
Prevention and treatment of recurrent suicidal behavior in patients with schizophrenia and schizoaffective disorder
  Tablet
   
    Comtan   entacapone   Parkinson's disease   Tablet
   
    Exelon   rivastigmine tartrate   Alzheimer's disease
Dementia associated with Parkinson's disease
  Capsule
Oral solution
   
    Exelon Patch   rivastigmine transdermal system & rivastigmine transdermal patch   Alzheimer's disease
Dementia associated with Parkinson's disease
  Transdermal patch
   
    Focalin & Focalin XR   dexmethylphenidate HCl & dexmethylphenidate modified release   Attention deficit hyperactivity disorder   Tablet
Capsule
   
    Ritalin & Ritalin LA   methylphenidate HCl & methylphenidate HCl modified release   Attention deficit hyperactivity disorder and narcolepsy
Attention deficit hyperactivity disorder
  Tablet
Capsule
   
    Lucentis   ranibizumab   Wet age-related macular degeneration   Intravitreal injection
   
    Stalevo   carbidopa, levodopa and entacapone   Parkinson's disease   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
   
    Visudyne   verteporfin   Wet age-related macular degeneration
Pathological myopia
Ocular histoplasmosis
  Vial, intravenous infusion activated by non-thermal laser light
   
    Zaditor/
Zaditen
  ketotifen   Allergic conjunctivitis   Eye drops

Respiratory   Foradil   formoterol   Asthma
Chronic obstructive
pulmonary disease
  Aerolizer (capsules)
Aerosol
Certihaler
   
    TOBI   tobramycin   Pseudomonas aeruginosa infection in cystic fibrosis   Inhalation solution
   
    Xolair   omalizumab   Allergic asthma   Lyophilized powder for reconstitution as subcutaneous injection

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Immunology and Infectious Diseases   Certican   everolimus   Prevention of organ rejection (heart and kidney)   Tablet
Dispersible tablet for oral suspension
   
    Coartem/
Riamet
  artemether and lumefantrine   Plasmodium falciparum malaria or mixed infections that include Plasmodium falciparum
Standby emergency malaria treatment
  Tablet
   
    Combipatch/
Estalis
  estradiol hemihydrate and norethisterone acetate   Treatment of symptoms of estrogen deficiency in postmenopausal women
Prevention of osteoporosis in postmenopausal women
  Transdermal patch
   
    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 intravenous infusion
   
    Elidel   pimecrolimus cream   Atopic dermatitis (eczema)   Cream
   
    Estraderm
TTS/
Estraderm
MX
  estradiol hemihydrate   Treatment of signs and symptoms of estrogen deficiency
Prevention of accelerated postmenopausal bone loss
  Transdermal patch
   
    Estragest
TTS
  estradiol hemihydrate and norethisterone acetate   Treatment of symptoms of estrogen deficiency in postmenopausal women
Prevention of postmenopausal osteoporosis
  Transdermal patch
   
    Famvir   famciclovir   Acute herpes zoster
Recurrent genital herpes in immunocompetent patients
Recurrent herpes labialis in immunocompetent patients
Suppression of recurrent genital herpes in immunocompetent patients
Recurrent mucocutaneous herpes simplex infections in HIV-infected patients
  Tablet
   
    Lamisil   terbinafine   Fungal infections of the skin and nails   Tablet
Cream
DermGel
Solution
Spray
   

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    Miacalcin/
Miacalcic
  salmon calcitonin   Osteoporosis
Bone pain associated with osteolysis and/or osteopenia
Paget's disease
Neurosdystrophic disorders (synonymous with algodystrophy or Sudeck's disease)
Hypercalcemia
  Nasal spray
Ampoule
Vial for injection or infusion
   
    myfortic   mycophenolic acid/mycophenolate sodium, USP   Prevention of graft rejection following kidney transplantation   Tablet
   
    Neoral   cyclosporine, USP MODIFIED   Prevention of rejection following organ and bone marrow transplantation
Non-transplantation autoimmune conditions such as severe psoriasis, nephrotic syndrome, severe rheumatoid arthritis, atopic dermatitis or endogenous uveitis
  Capsule
Oral solution
   
    Prexige   lumiracoxib   Osteoarthritis
Acute pain
Acute gout
Primary dysmenorrhea
  Tablet
   
    Reclast/Aclasta   zoledronic acid/zoledronic acid 5 mg   Treatment of osteoporosis in Postmenopausal women
Paget's disease of the bone
  Intravenous infusion
   
    Simulect   basiliximab   Prevention of acute organ rejection in de novo renal transplantation   Vial for injection or infusion
   
    Tyzeka/Sebivo   telbivudine   Chronic hepatitis B   Tablet
   
    Vivelle Dot/
Estradot
  estradiol hemihydrate   Estrogen replacement therapy
Prevention of postmenopausal osteoporosis
  Transdermal patch
   
    Voltaren/Cataflam   diclofenac sodium/potassium   Inflammatory forms of rheumatism
Pain management
  Tablet
Capsule
Drop
Ampoule
Suppository
Gel
Powder in sachet
Transdermal patch

Other   Enablex/Emselex   darifenacin   Overactive bladder   Tablet
   
    Zelnorm/
Zelmac
  tegaserod maleate/tegaserod   Irritable bowel syndrome with constipation
Chronic idiopathic constipation
  Tablet

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      Diovan (valsartan) and Diovan HCT/Co-Diovan (valsartan and hydrochlorothiazide) are the world's No. 1 selling branded high blood pressure medicines (IMS data). Diovan is the only agent in its class approved to treat all of the following: high blood pressure, high-risk heart attack survivors and patients with heart failure. First launched in 1996, Diovan is available in more than 100 countries for treating high blood pressure, in more than 90 countries for heart failure, and in more than 70 countries for heart attack survivors. The FDA recently approved Diovan for the treatment of hypertension in children, ages 6 to 16. The FDA also granted pediatric exclusivity to Diovan, providing it with an additional six months of marketing exclusivity beyond the valsartan patent expiration in March 2012. Diovan and Starlix (nateglinide) are in development for prevention of new-onset type 2 diabetes and cardiovascular disease in patients with impaired glucose tolerance.

      Gleevec/Glivec (imatinib mesylate/imatinib) is a signal transduction inhibitor approved to treat certain forms of chronic myeloid leukemia (CML) and gastrointestinal stromal tumors (GIST). First launched in 2001, Gleevec/Glivec is available in more than 80 countries. Gleevec/Glivec is indicated for the treatment of newly diagnosed adult and pediatric patients with a form of CML. Gleevec/Glivec is approved in the US and EU to treat Philadelphia chromosome positive (Ph+) acute lymphoblastic leukemia (ALL), a rapidly progressive form of leukemia; dermatofibrosarcoma protuberans, a rare solid tumor; hypereosinophilic syndrome and myelodysplastic/myeloproliferative diseases; and other rare blood disorders. In the US, Gleevec/Glivec is also approved for aggressive systemic mastocytosis. In 2007, Gleevec/Glivec was approved in Japan as a treatment for Ph+ ALL. In 2007, a randomized, placebo-controlled Phase III trial of Gleevec/Glivec as adjuvant therapy following surgical removal of local GIST was stopped when the interim analysis showed significant advantage for those patients receiving Gleevec/Glivec. Global regulatory submissions for the indication are expected in 2008. Development of Gleevec/Glivec for use in an aggressive brain tumor known as glioblastoma multiforme was halted in 2007 after study results showed no improvement in progression-free survival. The Glivec International Patient Assistance Program is now available in 80 countries and has provided treatment at no charge to more than 26,000 patients worldwide who otherwise would not have access to this innovative therapy.

      Zometa (zoledronic acid for injection/zoledronic acid 4 mg) is a treatment for certain cancers that have spread to the bones. First approved in the US in 2001 Zometa is available in more than 80 countries. Zometa is approved for the treatment of patients with multiple myeloma and patients with documented bone metastasis from solid tumors, including prostate, breast and lung. Zometa is also approved in most key markets for the treatment of hypercalcemia of malignancy (tumor-induced excessive levels of calcium). In December 2007, the FDA granted Zometa an additional six months of marketing exclusivity until 2013 following the completion of pediatric studies.

      Sandostatin LAR/Sandostatin SC (octreotide acetate for injectable suspension/octreotide acetate) is used for the treatment of patients with acromegaly, a chronic disease in adults caused by over-secretion of pituitary growth hormone. This product is also indicated for the treatment of certain symptoms associated with carcinoid tumors and other types of gastrointestinal neuroendocrine and pancreatic tumors. Sandostatin was first launched in 1988 and is approved in more than 85 countries Sandostatin SC faces generic competition in the US. However, patent protection continues in major markets for Sandostatin LAR. A new long-acting and monthly-administered competitor product, indicated for acromegaly, was launched in the US in late 2007. This competitor product may slow future growth of Sandostatin LAR in the US.

      Neoral (cyclosporine, USP Modified) is an immunosuppressant to prevent organ rejection following a kidney, liver or heart transplant. This micro-emulsion formulation of cyclosporine is also indicated for treating selected autoimmune disorders such as psoriasis and rheumatoid arthritis. First launched in 1995, Neoral is marketed in approximately 100 countries. Despite

24


        our patent protection for Neoral, generic companies have launched competing products in the US, some European countries and elsewhere, and this competition is expected to continue. See "—Intellectual Property" for further information.

      Femara (letrozole tablets/letrozole) is a once-daily oral aromatase inhibitor for the treatment of early stage or advanced breast cancer in post-menopausal women. Femara was first launched in 1996 and is currently available in more than 90 countries. Femara is approved in the US, EU and other countries as adjuvant therapy for postmenopausal women with hormone-receptor positive early breast cancer. Femara is also approved in the US, EU and other countries as extended adjuvant therapy for early breast cancer in post-menopausal women who are within 3 months of completing five years of adjuvant tamoxifen therapy. Femara is also approved globally as first-line treatment for post-menopausal women with hormone receptor positive locally advanced or metastatic breast cancer, and as treatment for advanced breast cancer in post-menopausal women with disease progression following anti-estrogen therapy. In some countries, Femara is approved as neo-adjuvant (pre-operative) therapy for early stage breast cancer. In Japan, Femara is approved for the treatment of all hormone receptor positive, post-menopausal breast cancer. A global registration dossier based on the switch data from the BIG 1-98 study is expected to be submitted in 2009.

      Lotrel (amlodipine besylate and benazepril hydrochloride) is a fixed combination high blood pressure treatment consisting of the angiotensin-converting enzyme (ACE) inhibitor benazepril, used in Lotensin/Cibacen, and the leading calcium channel blocker (CCB) amlodipine. Launched in 1995 and only available in the US, Lotrel received generic competition in May 2007, as a result of a "launch at risk" of a generic product by Teva Pharmaceuticals, despite a valid US patent until 2017. Our Sandoz Division has also launched an authorized generic version of this high blood pressure medicine. A trial date has not been set for the ongoing lawsuit against Teva, which risks potentially significant damages if Novartis prevails. Lotrel is further being evaluated in a patient outcome trial to establish whether it is more effective than an ACE inhibitor plus diuretic in reducing cardiovascular morbidity and mortality in high-risk patients.

      Trileptal (oxcarbazepine) is an anti-epileptic drug for the treatment of partial seizures as adjunctive or monotherapy in both adults and children aged four years and above. In the US, Trileptal has also been approved for the treatment of partial seizures as adjunctive therapy in children aged two and above. Trileptal acts by stabilizing neuronal functions, thereby controlling and limiting the spread of seizures. It was first approved in Denmark in 1990, in the rest of the EU in 1999, and in the US in 2000 and is available in 60 countries. Our competitors launched generic versions of Trileptal in the US and certain European countries during 2007.

      Voltaren/Cataflam (diclofenac sodium/potassium) is a leading non-steroidal anti-inflammatory drug (NSAID) for the treatment of inflammatory forms of rheumatism, as well as pain and inflammation. Voltaren/Cataflam was first launched in 1973 and is available in nearly every country of the world. This product, which has been experiencing generic competition for many years, has a wide variety of dosage forms marketed by the Pharmaceuticals Division. In addition, in certain countries, our Consumer Health Division's OTC Business Unit markets a topical therapy Voltaren Emulgel, and a transdermal patch for the treatment of inflammation of muscles and joints and for certain localized forms of rheumatism.

      Lescol (fluvastatin sodium) is a lipid-lowering drug used to reduce cholesterol. Lescol is indicated as an adjunct to diet for the treatment of hypercholesterolemia and mixed dyslipidemia, and to slow the progression of coronary atherosclerosis in patients with coronary heart disease. Lescol was first launched in 1994 and is available in more than 65 countries.

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      Lamisil (terbinafine) is a treatment for fungal nail infection (onychomycosis). In some countries, Lamisil is also approved for athlete's foot (tinea pedis) and fungal infection of the scalp (tinea capitis). Lamisil was first launched in 1991 and is available in more than 90 countries. In 2007 sales in the US and France were affected by the entry of generic competition, already present in some other European countries and in Japan. Our Consumer Health Division's OTC Business Unit markets over-the-counter formulations of Lamisil for use in treating athlete's foot in many markets, including the US. Lamisil is in Phase III development for the treatment of onychomycosis in a topical formulation (nail solution) with US filing expected in late 2008.

      Exelon (rivastigmine) has been available since 1997 to treat mild to moderate Alzheimer's disease (AD) in more than 70 countries. In 2006, Exelon became the only cholinesterase inhibitor to be approved for mild to moderate Parkinson's disease dementia (PDD) in addition to AD in both the US and EU. Exelon Patch (rivastigmine transdermal system/rivastigmine transdermal patch), the first and only transdermal patch approved for the treatment of mild to moderate Alzheimer's disease dementia, was approved in 2007 in the US and EU. The once-daily Exelon Patch has shown comparable efficacy to the highest recommended doses of Exelon capsules, with significant improvement in cognition and overall functioning compared to placebo. The patch has demonstrated significantly improved gastrointestinal tolerability as compared with the oral capsule. In the US, the patch is marketed as Exelon Patch (rivastigmine transdermal system) and is also indicated for the treatment of mild to moderate PDD.

      Famvir (famciclovir) is an anti-viral agent for the treatment of recurrent genital herpes, recurrent herpes labialis (cold sores) and shingles (herpes zoster). Other indications include the treatment of recurrent mucocutaneous herpes simplex infections in HIV-infected patients. Famvir was first launched in 1994 and is available in more than 70 countries. Famvir received generic competition in the U.S. in September 2007. See "—Intellectual Property" for further information.

      Xolair (omalizumab) is the first humanized monoclonal antibody approved for the treatment of moderate to severe allergic asthma in adolescents (age 12 and above) and adults. It was approved in the US in 2003 and in the EU in 2005, and is now available in 54 countries. In 2007, a boxed warning was added to the US label with updated information on the risk and management of anaphylaxis. Xolair is being jointly developed with Genentech, Inc., and is co-promoted in the US by Novartis Pharmaceuticals Corporation and Genentech. Xolair is being developed for the treatment of asthma in children. In addition, a liquid formulation is in Phase III development, with submission in Europe planned for 2008.

Recently Launched Products

      Exforge (valsartan and amlodipine besylate) is the first combination of the two best-selling anti-hypertensives in their respective classes: angiotensin receptor blocker Diovan and calcium channel blocker amlodipine. Exforge was approved in 2007 for the treatment of high blood pressure in the US and EU.

      Exjade (deferasirox) is a breakthrough oral iron chelator that enables patients to be continuously protected from the life-threatening consequences of chronic iron overload. Exjade is the first once-daily oral iron chelator approved to remove excess iron caused by blood transfusions in patients who have a wide range of underlying anemias. Patients with congenital and acquired chronic anemias such as thalassemia, sickle cell disease and myelodysplastic syndromes require transfusion as support for their anemia. Exjade was first approved in 2005 and is now approved in more than 85 countries including the US and EU. Exjade is being studied in patients with non-transfusional-related iron overload. A Phase I/II safety and efficacy study is enrolling patients with the first data expected in 2008.

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      Lucentis (ranibizumab) is a recombinant humanized high affinity antibody fragment that binds to vascular endothelial growth factors. Lucentis is the first approved drug for wet age-related macular degeneration (AMD) that has been shown in Phase III studies to improve vision and vision-related quality of life. Lucentis was approved in the US in June 2006 and in the EU in January 2007. It is developed in collaboration with Genentech, which holds the rights to market the product in the US. Lucentis is in Phase II development for the treatment of diabetic macular edema and is expected to enter Phase III development in 2008.

      Reclast/Aclasta (zoledronic acid 5 mg) is the first approved once-yearly infusion for the treatment of women with postmenopausal osteoporosis. Reclast/Aclasta is approved in more than 40 countries including the US, EU and Canada, and is the only osteoporosis treatment approved to reduce the incidence of fractures at key osteoporotic fracture sites (hip, spine and non-spine). Reclast/Aclasta was first approved in 2005 for the treatment of Paget's disease of the bone and is also approved in more than 60 countries for this indication. Reclast/Aclasta has been submitted in the US and EU for the prevention of clinical fractures after acute hip fracture. Phase III data submitted to the FDA suggests that once-yearly Reclast/Aclasta significantly reduced the risk of new clinical fractures in patients after acute hip fracture. Reclast/Aclasta is also in Phase III development for the prevention of osteoporosis in postmenopausal women, treatment of osteoporosis in men, and prevention and treatment of glucocorticoid-induced osteoporosis in men and women.

      Tasigna (nilotinib), is a signal transduction inhibitor with high affinity and specificity to attach itself to Bcr-Abl. In 2007, Tasigna was approved in the US, EU and Switzerland to treat a form of chronic myeloid leukemia (CML) in chronic and accelerated phase patients resistant or intolerant to existing treatment including Gleevec/Glivec. Tasigna is now approved in 38 countries. Tasigna was also submitted for regulatory review in Japan in the second quarter of 2007. Phase III trials are in progress in newly diagnosed chronic phase CML (CML-CP) as well as in patients in CML-CP with a suboptimal cytogenetic response on Gleevec/Glivec therapy. Tasigna is also being studied as a potential treatment for gastrointestinal stromal tumor (GIST), and a Phase III trial is ongoing in GIST patients having failed both Gleevec/Glivec and sunitinib.

      Tekturna/Rasilez (aliskiren) is the first and only approved direct renin inhibitor. In 2007 it was approved in more than 40 countries including the US and EU for treating high blood pressure. Approvals in several other countries are pending. Known as Tekturna in the US and Rasilez in the rest of the world, the product was discovered by Novartis and developed in collaboration with Speedel Pharma AG. A morbidity and mortality study (ALTITUDE) exploring the benefits of Tekturna/Rasilez on both renal and cardiovascular outcomes in high risk patients with type 2 diabetes is in Phase III development. Various Tekturna/Rasilez fixed dose combination products are being investigated. The first fixed dose combination, Tekturna/Rasilez with hydrochlorothiazide, was approved in the US in January 2008, and is currently under review in the EU. Additional filings of other fixed dose combination products are planned for 2008-2010.

Suspended or Withdrawn Products

      Zelnorm/Zelmac (tegaserod maleate/tegaserod) is a partial serotonin-4 receptor agonist for the treatment of women between 18-65 with irritable bowel syndrome with constipation and men and women with chronic idiopathic constipation. It was first launched in 2001. Marketing and sales were suspended in the US in March 2007 based on a review of cardiovascular safety data. Zelnorm/Zelmac has been withdrawn or sales suspended in most countries where the product was approved, but remains available in a few countries. An emergency access program and a treatment IND program have been established in the US to provide Zelnorm to specific

27


        patients. We are in discussion with health authorities to determine the best way to make Zelnorm/Zelmac available for appropriate patients.

      Prexige (lumiracoxib) is an oral COX-2 inhibitor for osteoarthritis, acute pain, acute gout and primary dysmenorrhea. It was first approved in 2003 and had been approved in approximately 50 countries including the EU, Brazil and Mexico. During 2007, Prexige was withdrawn from the market in the EU, Canada. Australia and some other countries, based on post-marketing reports of serious liver side effects, including the deaths of two patients, allegedly associated with long-term use of higher doses of Prexige. In September, we received a "not approvable" letter from the US FDA for the 100 mg once-daily dose in osteoarthritis. We are currently in discussions with the FDA to seek a path forward.

Compounds in Development

        The following table and summaries describe certain key compounds and new indications for existing products currently in "Confirmatory" development within our Pharmaceuticals Division. Confirmatory refers to compounds that have established a clinical "proof-of-concept" (PoC) and are in trials to confirm safety and efficacy in patients. The PoC paradigm combines elements of traditional Phase I/II testing and is customized for the individual compound and clinical indications. The Confirmatory phase has components of traditional Phases II/III and includes the pivotal trials leading up to submission of a dossier to health authorities for approval. The traditional phases of development (I,II, and III) are defined as follows:

      Phase I: First clinical trial of a new compound, generally performed in a small number of healthy human volunteers, to assess clinical safety, tolerability as well as metabolic and pharmacologic properties.

      Phase II: Clinical studies that test the safety and efficacy of the compound in patients with the targeted disease, with the goal of determining the appropriate doses for further testing and evaluating study design as well as identifying common side effects and risks.

      Phase III: Large scale clinical studies with several hundred to several thousand patients to establish safety and effectiveness for regulatory approval for indicated uses and to evaluate the overall benefit risk relationship.


Therapeutic area

  Project/
Compound

  Generic name

  Potential indication/
Disease area

  Mechanism of action

  Formulation

  Planned filing dates/Current phase

Cardiovascular and Metabolism   Galvus   vildagliptin   Type 2 diabetes   Dipeptidyl-peptidase 4(DPP-4) inhibitor   Oral   US (registration)
EU (approved)
   
    Galvus fixed-dose combination (Eucreas in EU)   vildagliptin & metformin   Type 2 diabetes   Dipeptidyl-peptidase 4(DPP-4) inhibitor & insulin sensitizer   Oral   US (registration)
EU (approved)
   
    Tekturna / Rasilez fixed-dose combinations   aliskiren and hydrochlorothiazide   Hypertension   Direct renin inhibitor and diuretic   Oral   US (approved) EU (registration)
       
        aliskiren and valsartan       Direct renin inhibitor and angiotensin II receptor antagonist       2008/III
       
        other       other       2009/III
   

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    Lotrel   amlodipine besylate and benazepril hydrochloride   High-risk hypertension (ACCOMPLISH)   Calcium channel blocker (CCB) and angiotensin-converting enzyme (ACE) inhibitor   Capsule   2009/III
   
    Diovan and Starlix (free combination)   valsartan and nateglinide   Prevention of new onset type 2 diabetes, cardiovascular morbidity and mortality (NAVIGATOR)   ARB and insulin secretagogue   Oral   2010/III
   
    Tekturna ALTITUDE   aliskiren   Type 2 diabetes   Renin inhibitor   Tablet   ³2011/III
   
    LCZ696   TBD   Hypertension   ARB/ NEP inhibitor   Oral   ³2011/II

Oncology and Hematology   Gleevec / Glivec   imatinib mesylate / imatinib   Gastrointestinal stromal tumor (GIST)   Signal transduction inhibitor   Tablet   2008/III
           
            Chronic Myeloid Leukemia (CML) 800mg dose           2008/III
   
    RAD001   everolimus   Advanced renal cell carcinoma (RCC)   mTOR inhibitor   Tablet   2008/III
           
            Neuroendocrine tumors (NET)           2008/III
           
            Advanced secretory carcinoid tumors           TBD/III
           
            Pancreatic islet tumors (PICT)           TBD/III
           
            Solid tumors           TBD/II
   
    Femara   letrozole tablets / letrozole   Switch therapy after 2-3 years of tamoxifen for breast cancer in postmenopausal women   Aromatase inhibitor   Tablet   2009/III
   
    Tasigna   nilotinib   Gastrointestinal stromal tumor (GIST) in patients having failed both Gleevec/Glivec and sunitinib   Signal transduction inhibitor   Capsule   2009/III
           
            Chronic phase CML with suboptimal response to prior therapy           2010/III
           
            Newly diagnosed
chronic myeloid leukemia (CML)
          2010/III
   
    SOM230   pasireotide   Cushing's disease   Somatostatin analogue   Subcutaneous injection   2009/III
           
            Acromegaly           2011/III
           
            Refractory / resistant carcinoid syndrome           2010/II
   
    EPO906   patupilone   Ovarian cancer   Microtubule stabilizer   Intravenous   2010/III
   
    LBH589   panobinostat   Cutaneous T-cell lymphoma   Deacetylase (DAC) inhibitor   Oral   2009/II
           
            Hematological and solid tumors       Oral and
Intravenous
  TBD/I
   
    PKC412   midostaurin   Acute myeloid leukemia   Multi-targeted kinase inhibitor   Oral   2011/II
   

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    ASA404   TBD   Non-small cell lung cancer   Vascular disrupting agent   Intravenous   2011/II
   
    LBQ707   gimatecan   Solid tumors   Topoisomerase-I inhibitor   Oral   TBD/II

Neuroscience and Ophthalmics   Stalevo   carbidopa, levodopa and entacapone   Parkinson's disease   COMT inhibition   Tablet   US (approved)
EU (registration)
   
    NVF233   interferon beta-1b   Multiple sclerosis   Interferon beta-1b   Injection   EU (registration)
US (2008/III)
   
    AGO178   agomelatine   Major depressive disorder   MT1 and MT2 receptor agonist and 5-HT2c antagonist   Oral   2008/III
   
    FTY720   fingolimod   Multiple sclerosis   Sphingosine-1-phosphate (S1P) receptor modulator   Oral   2009/III
   
    Lucentis   ranibizumab   Diabetic macular edema   VEGF blocker   Intravitreal injection   2010/II

Respiratory   Xolair   omalizumab   Allergic asthma   Anti-IgE monoclonal antibody   Lyophilized powder for reconstitution as subcutaneous injection   Japan (registration)
           
            Allergic asthma in patients aged 6-11 years           2008/III
           
            Allergic asthma       Liquid formulation for subcutaneous injection   2008/III
   
    QAB149   indacaterol   Chronic obstructive pulmonary disease   Long-acting beta-2 agonist   Inhalation   2008/III
   
    MFF258   formoterol and mometasone furoate   Asthma   Long-acting beta-2 agonist and corticosteroid   Inhalation   2009/III
           
            Chronic obstructive pulmonary disease           2009/III
   
    TBM100   tobramycin   Pseudomonas aeruginosa infection in cystic fibrosis patients   Aminoglycoside antibiotic   Inhalation   2009/III
   
    QMF149   indacaterol and mometasone furoate   Chronic obstructive pulmonary disease   Long-acting beta-2 agonist and inhaled corticosteroid   Inhalation   2010/II
           
            Asthma           ³2011/II
   
    NIC002   TBD   Smoking cessation   Nicotine Qbeta therapeutic vaccine   Injection   ³2011/II
   
    NVA237   glycopyrronium bromide   Chronic obstructive pulmonary disease   Long-acting anti-muscarinic   Inhalation   ³2011/II
   
    QAT370   TBD   Chronic obstructive pulmonary disease   Long-acting anti-muscarinic   Inhalation   ³2011/II
   

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    QVA149   indacaterol and glycopyrronium bromide   Chronic obstructive pulmonary disease   Long-acting beta-2 agonist and long-acting anti-muscarinic   Inhalation   ³2011/II
   
    QAE397   TBD   Asthma   Long-acting corticosteroid   Inhalation   TBD/II

Immunology and Infectious Diseases   Reclast / Aclasta   zoledronic acid 5 mg   Clinical fracture prevention after hip fracture   Bisphosphonate, osteoclast inhibitor   Intravenous infusion   US & EU (registration)
           
            Male osteoporosis           2008/III
           
            Glucocorticoid-induced osteoporosis           2008/III
           
            Post-menopausal osteoporosis prevention           2008/III
   
    Prexige   lumiracoxib   Osteoarthritis   Cyclo-oxygenase-2(COX-2) inhibitor   Tablet   US (registration)
   
    Certican   everolimus   Prevention of organ rejection—heart and kidney liver)   Growth-factor-induced cell proliferation inhibitor   Oral   US (registration)
           
            Prevention of organ rejection—liver           2010/III
   
    Lamisil   terbinafine   Onychomycosis   Fungal squalene epoxidase inhibitor   Nail solution   2008/III
   
    ABF656   albumin interferon alfa-2b   Chronic hepatitis C   Longer-acting alpha interferon   Injection   2009/III
   
    ACZ885   TBD   Muckle Wells Syndrome   Anti IL-1b monoclonal antibody   Injection   2009/III
           
            Systemic onset juvenile idiopathic arthritis           ³2011/II
           
            Rheumatoid arthritis           ³2011/II
   
    Mycograb   efungumab   Invasive candida   Antibody fragment vs. fungal HSP90   Intravenous infusion   2009/III
   
    TFP561   tifacogin   Severe community acquired pneumonia   Recombinant tissue factor pathway inhibitor   Intravenous infusion   2009/III
   
    SMC021   salmon calcitonin   Osteoarthritis   Regulator of calcium homeostasis   Oral   ³2011/III
           
            Osteoporosis   Inhibition of osteoclast activity       ³2011/III
   
    Elidel   pimecrolimus   Atopic dermatitis in infants   T-cell and mast cell inhibitor   Cream   TBD/III
   
    AEB071   TBD   Prevention of organ rejection—kidney   Protein kinase C inhibitor   Oral   2010/II
   
    SBR759   TBD   Hyperphosphatemia   Selective binding of phosphate (Fe(III) containing polymer)   Oral   2010/II
   
    Aurograb   TBD   Serious staphylococcal infections   Antibody fragment   Intravenous infusion   ³2011/II

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Key Compounds in Development (Phase III and Registration)

    ABF656 (albumin interferon alfa-2b) is a novel long-acting interferon in Phase III development for the treatment of chronic hepatitis C in combination with Ribavirin. ABF656 was licensed from, and is being co-developed with, Human Genome Sciences Inc. We have co-promotion rights in the US and exclusive promotion and marketing rights in the rest of the world.

    ACZ885 is a human monoclonal antibody providing potent and selective blockade of interleukin-1b (IL-1b), a cytokine linked to inflammation, thus targeting IL-1b driven diseases. ACZ885 is currently in Phase III development for Muckle Wells Syndrome (MWS), a rare disorder characterized by chronic recurrent urticaria, occasional arthritis, deafness, and other general signs of inflammation. A Phase I/II clinical study in MWS patients has shown immediate and long lasting clinical remission for patients treated with ACZ885. ACZ885 is also being developed for the treatment of systemic onset juvenile idiopathic arthritis and adult rheumatoid arthritis.

    AGO178 (agomelatine) is an MT1/MT2 receptor agonist and 5-HT2c antagonist for the treatment of major depressive disorder, a condition estimated to affect one in 10 adults in the US alone. AGO178 represents a novel, synergistic mechanism providing demonstrated efficacy and the potential for a more favorable adverse event profile compared with current therapies. AGO178 was licensed from Servier in 2006 and we acquired the exclusive rights to develop and market AGO178 in the US and several other countries. Phase III trials are ongoing in the US.

    EPO906 (patupilone) is a novel microtubule stabilizer that has shown broad anti-cancer activity pre-clinically including anti-vascular and anti-metastatic activity. Clinical activity as a single agent has been demonstrated in multiple solid tumors including indications where taxanes are not traditionally active (e.g., CRC, brain metastases). The global development program for patupilone includes a Phase III study in resistant/refractory ovarian cancer, and Phase II studies in brain metastases from lung cancer and breast cancer, hormone refractory prostate cancer and in GI malignancies.

    FTY720 (fingolimod), a sphingosine-1-phosphate receptor modulator, has the potential to become the first oral disease-modifying treatment for patients with relapsing multiple sclerosis (MS), a disabling neurological condition estimated to affect more than 2.5 million people worldwide. Phase II data show a profound reduction in relapses and inflammatory disease activity as seen by magnetic resonance imaging (MRI), an effect that was maintained for two years. The Phase III registration program is currently ongoing. FTY720 was licensed from Mitsubishi Pharmaceuticals Corporation.

    Galvus (vildagliptin) is a new oral treatment for type 2 diabetes. In September 2007, Galvus received approval in the EU. Then, in November 2007, European health authorities announced their support for changes we proposed to prescribing information that would reduce the recommended daily doses from 100 mg once-daily to 50 mg once-daily or 50 mg twice-daily in combination with various other oral anti-diabetes medicines. We expect Galvus to be available in Europe starting in the first half of 2008. EU approval has also been received for Eucreas, a single-tablet combination of Galvus with the oral anti-diabetes medicine metformin. Like Galvus, Eucreas will also have amendments to its labeling before launch. In the US, we are continuing discussions with the FDA on steps needed for approval after having received an "approvable letter" in February 2007 that included a request for additional clinical trial data. A resubmission for US regulatory approval is not expected before 2010. The FDA also issued an "approvable letter" for the oral tablet combining Galvus with metformin pending approval of Galvus monotherapy.

    MFF258 (formoterol and mometasone furoate) is currently in development for the treatment of asthma and chronic obstructive pulmonary disease (COPD). MFF258 combines the long-acting beta-2 agonist Foradil (formoterol fumarate) with mometasone in a metered dose inhaler device. We are co-developing this combination product with Schering-Plough.

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    Mycograb (efungumab) is an antibody fragment used in combination with antifungal agents for treatment of invasive Candida infections. Mycograb was acquired as part of our 2006 acquisition of NeuTec Pharma. In 2007, the Committee for Medicinal Products for Human Use (CHMP) upheld its negative opinion from 2006 on the Mycograb submission by NeuTec, citing issues concerning the manufacturing process. We continue to work with European regulators to address these concerns and an EU resubmission is planned for 2009.

    NVF233 is a Novartis-branded version of interferon beta-1b, an injectable therapy for multiple sclerosis (MS). Subject to regulatory approvals, we will introduce our own version of interferon beta-1b, a product currently marketed by Bayer Schering under the brand name Betaseron®. Bayer Schering will supply the product to us under a contract manufacturing arrangement. The NVF233 registration dossier was filed in the EU in 2007 and will likely be filed in the U.S. in early 2008. Pending health authority approval, NVF233 will represent the first entry of Novartis in MS.

    QAB149 (indacaterol) is a once-daily beta-2 agonist that offers sustained 24-hour bronchodilation with fast onset of action for the treatment of chronic obstructive pulmonary disease (COPD). Results from Phase II studies demonstrated good tolerability and a favorable safety profile. Phase III studies with QAB149 in a single-dose dry powder device began in late 2006. In addition, Novartis and Schering-Plough are jointly developing QMF149, a once-daily fixed dose combination of QAB149 and Schering-Plough's inhaled corticosteroid mometasone (the active ingredient in Asmanex®). QMF149 is currently in Phase II development.

    RAD001 (everolimus), a once-daily oral inhibitor of the mTOR pathway that has demonstrated broad clinical activity in multiple tumors, is in development for the treatment of advanced renal cell carcinoma (RCC) and neuroendocrine tumors (NET). RAD001 acts by directly inhibiting tumor cell growth and metabolism as well as the formation of new blood vessels (angiogenesis). Proof of concept as a single agent has been demonstrated in Phase II with tumor shrinkage or prolonged stable disease in NET, RCC, lymphoma, breast cancer, and tuberous sclerosis complex. Data from an uncontrolled Phase II study in pancreatic islet cell tumors (PICT) will be filed for registration in the US, and data from a Phase III trial in RCC will be filed in the US and EU. Additional Phase III studies are enrolling patients with advanced secretory carcinoid tumors and PICT. RAD001 is currently in Phase II development to further explore activity in other solid tumors.

    SMC021 (salmon calcitonin) is an oral formulation using the eligen® technology from Emisphere, a novel concept in oral peptide delivery. It is currently in Phase III development for the treatment of osteoporosis and osteoarthritis.

    SOM230 (pasireotide) is a somatostatin analogue in development for Cushing's disease, acromegaly and carcinoid syndrome that is refractory/resistant to Sandostatin. Data from Phase II studies show significant hormone reductions in Cushing's disease and acromegaly patients, and achievement of partial or complete symptom control in patients with refractory/resistant carcinoid syndrome. The Phase III Cushing's disease study is currently enrolling patients, while the acromegaly registration study and the carcinoid studies will begin enrollment in early 2008.

    TBM100, also referred to as Tobramycin Powder for Inhalation (TIP), is a new tobramycin formulation currently in Phase III development for the treatment of Pseudomonas aeruginosa bacterial infections in cystic fibrosis (CF). TIP is expected to provide more rapid and convenient administration of drug, reducing the treatment burden for CF patients. TIP was acquired as a part of the acquisition of Chiron Corporation Inc. in April 2006.

    TFP561 (tifacogin) is a recombinant tissue factor pathway inhibitor in Phase III development as an adjunct therapy for the treatment of severe community-acquired pneumonia. Tifacogin was acquired as a part of the acquisition of Chiron Corporation Inc. in April 2006.

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Terminated Projects

    ANA975 for hepatitis C

    ASM981 (pimecrolimus) eye drops for dry eye

    LBM642 (cevoglitazar) for dyslipidemia and diabetes

    LDC300 (valtorcitabine) for hepatitis B

    LIC477 for bipolar disorder

    NMC283 (valopicitabine) for hepatitis C

    OPC759 (rebamipide) eye drops for dry eye

    PTK787 (vatalanib) for metastatic colorectal cancer and other solid tumors, and for wet age-related macular degeneration

    Gleevec/Glivec (imatinib mesylate/imatinib) for glioblastoma multiforme

    Proleukin (aldesleukin) for Non-Hodgkin's lymphoma

    Zelnorm/Zelmac (tegaserod maleate/tegaserod) for functional dyspepsia and opioid induced constipation

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 82% of 2007 net sales. The following table sets forth certain data relating to our principal markets in the Pharmaceuticals Division.

Pharmaceuticals

   
  Net Sales 2007
 
  ($ millions)

  (%)

United States   8,748   37
Americas (except the United States)   2,102   9
Europe   8,731   36
Japan   2,210   9
Rest of the World   2,234   9
   
 
Total   24,025   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. To achieve this objective, we manufacture our products at five bulk chemical and 15 pharmaceutical production facilities as well as two biotechnology sites. Bulk chemical production involves the manufacture of therapeutically active compounds, mainly by chemical synthesis or by a biological process 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 Basel, Switzerland; Grimsby, UK; and Ringaskiddy, Ireland. Significant pharmaceutical production facilities are located in Stein, Switzerland; Wehr, Germany; Torre, Italy;

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Barbera, Spain; Suffern, New York; Sasayama, Japan and in various other locations in Europe, including France, the UK and Turkey. Our two biotechnology plants are in France and the United States.

        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 throughout a product's life cycle.

        While we have not experienced material supply interruptions in the past, there can be no assurance that supply will not be interrupted in the future as a result of unforeseen circumstances. The manufacture of our products is heavily regulated, making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a recall or a government-enforced shutdown of production facilities, which in turn could lead to product shortages. We have implemented a global manufacturing strategy to maximize business continuity.

        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 requirements. We monitor market developments that could have an adverse effect on the supply of essential materials. All raw materials we purchase must comply with our quality standards.

Marketing and Sales

        The Pharmaceuticals Division serves customers with approximately 6,400 field force representatives in the US (including supervisors), and an additional 15,100 in the rest of the world. These trained representatives, where permitted by law, present the economic and therapeutic benefits of our products to physicians, pharmacists, hospitals, insurance groups and managed care organizations. The number for the US already reflects a reduction in the US sales force by approximately 430 Novartis and 430 third-party representatives.

        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 are 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 economically attractive.

Competition

        The global pharmaceutical market is highly competitive and we compete against other major international corporations with substantial financial and other resources, which sell branded 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 an increasing challenge from companies selling generic forms of our products following the expiry of patent protection. Generic companies may also gain entry to the market through successfully challenging our patents, but we vigorously defend our intellectual property rights from generic challenges that infringe upon our patents and trademarks. Some generics manufacturers, however, are increasingly conducting so-called "launches at risk" of products that are still under legal challenge for patent infringement and before final resolution of legal proceedings. In addition, we also face competition from over-the-counter (OTC) products that do not require a prescription from a physician.

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

Research and Development

        We are among the leaders in the pharmaceuticals industry in terms of research and development investment. In 2007, we invested approximately $5.1 billion in Pharmaceuticals Division research and development, which represented 21.2% of the division's total net sales. Our Pharmaceuticals Division invested $4.3 billion and $4.0 billion on research and development in 2006 and 2005 respectively. There are currently 140 projects in clinical development.

        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.

Research program

        The discovery of new drugs is the responsibility of our Research program. In 2003, we established the Novartis Institutes for BioMedical Research (NIBR). NIBR is headquartered in Cambridge, Massachusetts with over 90,000 square meters of space housing over 1,400 associates and scientists. Disease-area research groups in Cambridge include cardiovascular disease, diabetes and metabolism, infectious disease, oncology and ophthalmology. The Cambridge-based discovery research platforms include Developmental and Molecular Pathways, NIBR Biologics Center and Global Discovery Chemistry. Outside of the Cambridge site, an additional 2,300 scientists and technology experts conduct research in Switzerland, the UK, China and two other US sites. The sites in Austria and Japan will be closed in 2008. Research is conducted in the areas of neuroscience, autoimmune disease, oncology, cardiovascular disease, gastrointestinal disease and respiratory disease at these sites. In addition, research platforms such as the Center for Proteomic Chemistry are headquartered in the NIBR site in Basel.

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

        Over the past five years, the output from NIBR has grown progressively. The portfolio of pre-clinical and early clinical New Molecular Entities has increased over 50% in the last three years. Antibodies and protein therapeutics have grown to constitute 25% of NIBR's pre-clinical portfolio. A new Biologics Unit has been established especially to generate therapeutic antibodies and to shepherd them through appropriate pre-clinical and clinical testing.

        All drug candidates now are taken to the clinic via "proof-of-concept" trials to enable rapid testing of the fundamental efficacy of the drug while collecting the basic information on pharmacokinetics, safety and tolerability, and adhering to the guidance for early clinical testing set forth by health authorities. The new PoC paradigm combines elements of traditional Phase I and Phase II testing and is customized for the individual compound and clinical indications.

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

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"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 20 to 80 normal, healthy volunteers. 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 (i.e. people with the targeted disease) 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 some cases more than 15,000 patients in total) 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."

Initiatives to optimize the research and development processes

        We are constantly working to be more efficient in selecting and developing candidate drugs. "Proof of concept" trials, biomarkers, modeling and simulation, as well as adaptive designs are used to improve decision-making and trial design. We also continue to leverage information technology to support development activities (e.g. improving electronic management of the clinical trial processes, including data capture and transfer, as well as electronic storage and archiving of study data and documents). The goal is to improve the likelihood of therapeutic and commercial success, which should reduce development costs and decrease time to market.

Alliances and acquisitions

        Our Pharmaceuticals Division forms alliances with other pharmaceutical and biotechnology companies and with academic institutions in order to develop new products, acquire platform technologies 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. Further controls exist on the non-clinical and clinical development of pharmaceutical products. These regulatory requirements 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.

        World regulatory authorities, especially those in the US, Switzerland, the EU 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

37



countries, the formal structure of the necessary registration documents varies significantly from country to country. It is possible that a drug can be registered and marketed in one country while the registration authority in a neighboring 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 final marketing approval is granted.

        The following provides a summary of the regulatory process 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) for the drug. The NDA must contain all the scientific information that has been gathered about the drug and typically includes information regarding the clinical experiences of all patients tested in the drug's clinical trials. A Supplemental New Drug Application (sNDA) must be filed for a line extension of, or new indications for, a previously registered drug. Throughout the life cycle of a product, the FDA also requires compliance with standards relating to good laboratory, clinical and manufacturing practices.

        Once an NDA 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. These recommendations are consolidated and are used by the Senior FDA staff in its final evaluation of the NDA. Based on that final evaluation, FDA then provides to the NDA's sponsor an approval, or an approvable, or non-approvable letter. If not approved, the approvable and non-approvable letters will state the specific deficiencies in the NDA which need to be addressed. The sponsor must then submit complete responses to the deficiencies in order to restart the review procedure.

        Once the FDA has approved an NDA or sNDA, 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.

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 line extensions to existing national product licenses.

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        Under the Centralized Procedure, applications are made to the European Medicines Agency (EMEA) 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, and optional for other new chemical entities or innovative medicinal products. 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 EMEA. The EMEA 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/Co-Rapporteur's Assessment Report. When the company's complete response is received by the EMEA, the clock restarts on day 121. If there are further aspects of the dossier requiring clarification, the EMEA will then request an Oral Explanation on day 180, in which the sponsor must appear before the EMEA'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. In the decentralized procedure the application is done simultaneously in selected or all Member States. Subsequently, the company may seek mutual recognition of this first authorization/assessment from some or all of the remaining EU Member States. Then, within 90 days of this initial decision, each Member State reviews the application and can issue objections or requests for additional information. On Day 90, each Member State must be assured that the product is safe and effective, and that it will cause no risks to the public health. Once agreement has been reached, each Member State grants national marketing authorization for the product.

        After the Marketing Authorizations have been granted, the company must submit periodic safety reports to the EMEA (Centralized Procedure) or to the National Health Authorities (MRP). These Marketing Authorizations must be renewed every five years.

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.

    Direct efforts to control prices.

    United States.    In the US, as a result of the recent Democratic takeover of both houses of Congress and potential additional Democratic victories in the November 2008 elections, there is a significant risk that the Medicare reform legislation which went into effect in January 2006 will be amended to enable the US government to use its enormous purchasing power to demand additional discounts from pharmaceutical companies.

    Europe.    In Europe, our operations are subject to significant price and marketing regulations. Many governments are introducing healthcare reforms in a further attempt to curb increasing healthcare costs. In the EU, governments influence the price of pharmaceutical products through their control of national healthcare systems that fund a large part of the cost of such products to consumers. The downward pressure on healthcare costs in general in the EU, particularly with regard to prescription drugs, has become very intense. Increasingly high barriers are being erected against the entry of new products. In addition, prices for marketed

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      products are referenced within Member States and across Member State borders, including new EU Member States.

    Regulations favoring generics.    In response to rising healthcare costs, many governments and private medical care providers, such as Health Maintenance Organizations (HMOs), have instituted reimbursement schemes that favor the substitution of generic pharmaceuticals for more expensive brand-name pharmaceuticals. In the US, generic substitution statutes have been enacted by virtually all states and permit or require the dispensing pharmacist to substitute a less expensive generic drug instead of an original branded drug. Other countries have similar laws. We expect that the pressure for generic substitution will continue to increase as a result of the implementation of the Medicare prescription drug benefit which took effect in 2006.

    Cross-Border Sales.    Price controls in one country can also have an impact in other countries as a result of cross-border sales. In the EU, products which we have sold to customers in countries with stringent price controls can legally be re-sold to customers in other EU countries with less stringent price controls, at a lower price than the price at which the product is otherwise available in the importing country. In North America, products which we have sold to customers in Canada, which has relatively stringent price controls, are sometimes re-sold into the US, again at a lower price than the price at which the product is otherwise sold in the US. Such imports from Canada and other countries into the US are currently illegal. However, there are ongoing political efforts at the federal, state and local levels to change the legal status of such imports, and we expect those pressures to intensify as a result of the Democratic takeover of Congress.

        We expect that pressures on pricing will continue worldwide, and may increase. Because of these pressures, there can be no certainty that in every instance we will be able to charge prices for a product that, in a particular country or in the aggregate, enable us to earn an adequate return on our investment in that product.

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 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 grant, duration and enforceability of patents in the various countries. The protection afforded, which may vary from country to country, depends upon the type of patent and its scope of coverage. We monitor our competitors worldwide and vigorously defend against infringements of our intellectual property.

        We have basic patent protection (including extensions) on valsartan (the active ingredient used in our best-selling product Diovan) until 2012 in the US, until 2011 in the major countries of the EU, and until 2013 in Japan. We have basic patent protection (including extensions) on imatinib (the active ingredient used in our leading product Gleevec/Glivec) until July 2015 in the US (also including pediatric extension), until 2016 in the major EU countries, and until 2014 in Japan.

        However, patent protection for the active substances used in a number of our Pharmaceuticals Division's leading products has been challenged or has expired in several major markets:

    Diovan/Co-Diovan/Diovan HCT.    The active ingredient Valsartan compound patent expires 2012 in the US, and 2011-13 in other markets. Patent litigation challenging the validity of the US compound patent has been withdrawn immediately after a court action. In the US additional patents covering the marketed formulation have been challenged.

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    Lotrel is protected by a combination patent in the US until 2017. Patent protection for the active ingredients of Lotrel, benazepril hydrochloride and amlodipine besylate, has expired in the US. Patent litigation challenging the validity of the combination patent is ongoing in the US. A generic version of Lotrel has been launched at risk by a generic manufacturer.

    Lamisil.    Basic patent protection for the active ingredient of Lamisil has expired worldwide. Generic versions of Lamisil have been marketed in the US and elsewhere.

    Neoral.    Basic patent protection for Neoral has expired worldwide. Patent litigation challenging the Neoral micro-emulsion formulation patent and other patents, due to expire 2009 and beyond in major markets, is ongoing. Generic cyclosporin products competing with Neoral have entered the market in the US, Germany, Japan, Canada and elsewhere.

    Sandostatin.    Basic patent protection for the active ingredient of Sandostatin SC has expired. Generic versions of Sandostatin SC have been approved in the US and elsewhere. Patents protecting the Sandostatin LAR formulation, the long-acting version of Sandostatin which represents a majority of our sales, expire 2010, 2013 and beyond in the US.

    Trileptal.    Patent protection for Trileptal's active ingredient has expired. A patent has been granted in the US directed to a method of treating seizures with our marketed formulations of Trileptal, expiring 2018. In Europe, the corresponding granted patent is currently being opposed. Patent litigation was brought against generic manufacturers that have filed applications to market a generic versions of Trileptal in the US and challenge the validity of Trileptal patents. Several generic manufacturers have entered the market.

    Femara.    The active ingredient in Femara is covered by a compound patent expiring 2011 in the US. Patent litigation against a generic manufacturer who challenged this patent is ongoing in the US.

    Voltaren.    Patent protection for Voltaren in many key markets around the world has expired. Although net sales for Voltaren increased in 2007, revenue from this product may decline significantly in the future as a result of ongoing generic competition.

    Exelon.    The active ingredient in Exelon is covered by a compound patent granted to Proterra and licensed to Novartis, expiring 2012 in the US and 2011-13 in other major markets. Novartis holds an isomer patent on Exelon which expires in 2012-14. Generic manufacturers filed applications to market a generic version of Exelon capsules in the US, challenging validity of our patents. Together with Proterra we have sued all parties for patent infringement. These lawsuits have been settled.

    Visudyne.    Basic patent protection for the active ingredient in Visudyne expires in 2011 in the US and in 2014 in other major markets. An academic institution has obtained granted patents for a method of use involving photodynamic therapy and filed a patent infringement suit against us and our licensor, QLT Phototherapeutics. The infringement suit has been settled in 2007.

    Miacalcin/Miacalcic.    The specific Novartis formulation of Miacalcin is covered by patents which will expire in the US in 2015 and have expired in most other countries. Patent litigation against a generic manufacturer who filed an application to sell generic Miacalcin in the US is ongoing. Other generic manufacturers have filed at the FDA applications to market generic versions of Miacalcin in the US based on a different formulation. We have not sued these companies. Another company's recombinant salmon calcitonin product is approved in the US, but would not be automatically substitutable in the US for Miacalcin.

    Foradil.    Patent protection for Foradil's active ingredient has expired. As a result, revenue from Foradil has declined, and may decline significantly further in the future.

    Focalin.    The specific formulation of Focalin XR is covered by patents granted to Celgene and Elan, and licensed to Novartis, and would expire 2015 - 2018 in the US and in other markets.

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      Patent litigation against a generic manufacturer who challenged the validity of these patents is ongoing in the US.

    Famvir.    The active ingredient in Famvir is covered by a compound patent which expires in 2010 in the US, in 2008 in most of Europe and 2006 in Canada. Other method of use patents expire in 2014 and 2015. Patent litigation against a generic manufacturer who challenged validity of these patents is ongoing in the US. In 2007, the generic manufacturer launched generic Famvir at risk.

    Ritalin LA.    Compound patent protection for the active ingredient of Ritalin LA has expired. The specific formulation of Ritalin LA is covered by patents granted to Celgene and Elan and licensed to Novartis, expiring as late as 2018 in the US. Patent litigation against a generic manufacturer who challenged validity of these patents is ongoing in the US.

    Gleevec/Glivec.    The active ingredient in Gleevec/Glivec is not covered by any compound patents in Turkey. Novartis defends the brand by enforcing secondary patents against a local company that obtained generic marketing authorization for generic Gleevec/Glivec in Turkey in 2007. A preliminary injunction has been obtained.

    Lescol.    The basic compound patents expires August 2008 in most European countries and October 2011 in US with pediatric exclusivity until April 2012. Generic manufacturers have filed for generic marketing authorization challenging validity of formulation patents for Lescol XL (expiry 2011/2020) in the US. The compound patent is not challenged. In Europe several generic manufacturers have challenged validity of formulation patents expiring in 2012 and 2017.

    Comtan.    The active ingredient in Comtan is covered by a compound patent that Novartis licensed from Orion, and which expires in the US in 2013 and in Europe in 2012. Other patents, such as a polymorph patent are also granted. Patent litigation against a generic manufacturer who has challenged validity of these patents in the US has been initiated by Orion for infringement of the compound patent.

    Stalevo.    The active ingredient in Stalevo is covered by the Comtan basic compound patent which expires in the US in 2013 and in Europe in 2012. Stalevo is protected by additional patents expiring as late as 2020. Patent litigation against a generic manufacturer who has challenged validity of the formulation patents in the US has been initiated by Orion. The basic compound patent is not challenged.

        The loss of patent protection can have a significant adverse impact on our Pharmaceuticals Division. We work to offset these negative effects by developing and patenting inventions that result in process and product enhancements and by positioning many of our products in specific market niches. However, there can be no assurance that these strategies will be effective in the future to extend competitive advantage, or that we will be able to avoid substantial adverse effects from future patent expirations.

VACCINES AND DIAGNOSTICS

        Our Vaccines and Diagnostics Division is a leader in the research, development, manufacturing and marketing of vaccines and blood tests and instruments worldwide. As of December 31, 2007, the Vaccines and Diagnostics Division employed 4,810 associates worldwide in 16 countries. In 2007, the Vaccines and Diagnostics Division had consolidated net sales of $1.5 billion representing 4% of total Group net sales from continuing operations.

        The Novartis Vaccines and Diagnostics Division is the world's fifth-largest vaccines manufacturer and the second-largest supplier of influenza vaccines in the United States, as reported at the National Influenza Vaccination Summit, April 20, 2007 by the American Medical Association and the Centers for Disease Control and Prevention. Our vaccine products include influenza, meningococcal, pediatric, adult and travel vaccines. Our blood testing business is dedicated to preventing the spread of infectious diseases through the development of novel blood-screening tools.

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        The current product portfolio of our Vaccines and Diagnostics Division includes more than 20 marketed products, many of which are their respective market leaders. In addition, the division's portfolio of development projects includes 9 potential new products and new indications or formulations for existing products in various stages of clinical development.

        In 2007, the Vaccines and Diagnostics Division returned to full scale seasonal influenza vaccine production and received one-time government contracts for stockpiling of H5N1 pre-pandemic vaccines. The division also expanded its line of nucleic acid testing products in Europe and rolled-out new tests for the West Nile Virus. Manufacturing and production continues to be important to the success of the division, and the new cell culture-based influenza vaccines manufacturing plant in Holly Springs, North Carolina is under construction.

        In mid-2007, we entered into a new strategic alliance with Intercell AG, an Austrian biotechnology company focused on novel vaccines for the prevention and treatment of infectious diseases. During this alliance, Intercell will be responsible for the development of new vaccines candidates through Phase II, after which we will have an option to partner with Intercell and assume the further development as well as manufacturing and commercialization of the selected vaccine.

        Our diagnostics collaboration continues with Gen-Probe Inc. This arrangement relates to the development and commercialization of nucleic acid testing products under the PROCLEIX brand name to screen donated blood, plasma, organs and tissue for viral infection.

        Our Vaccines and Diagnostics Division was formed as a new strategic growth platform following our 2006 acquisition of the remaining 56% stake in Chiron Corporation which we did not already hold.

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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, not all products are 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   Indication
Agrippal   A purified surface antigen influenza vaccine for adults and children above six months of age
Begrivac   A preservative free influenza vaccine for adults and children above six months of age
Fluad   A purified surface antigen influenza vaccine containing the proprietary MF59 adjuvant for the elderly
Fluvirin   A purified surface antigen influenza vaccine for adults and children above four years of age
Optaflu   Cell culture-based influenza vaccine for adults above 18 years of age
Meningococcal Vaccines   Indication
Menjugate   Meningococcal C vaccine for children above 2 months of age
MeNZB   Geography-specific Meningococcal B Vaccine available in New Zealand for infants and children up to 18 years of age
Travel Vaccines   Indication
Encepur Children
Encepur Adults
  Tick-borne encephalitis vaccine for children 1-11 years of age and for adults 12+ years of age
Rabipur/RabAvert   Vaccine for rabies, which can be used before or after exposure (typically animal bites)
Pediatric Vaccines   Indication
Polioral   Live, attenuated, oral poliomyelitis vaccine (Sabin) containing attenuated poliomyelitis virus types 1, 2 and 3 from birth
Quinvaxem   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

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Other Marketed Vaccine Products

        The Vaccines and Diagnostics Division also markets additional products in travel vaccines (e.g., Typhoral L, HAVpur), pediatric vaccines (e.g., IPV-Virelon, TD-Virelon, Dif-Tet-All, Vaxem Hib) and adult vaccines (e.g., Tetanol, Td-Virelon).

Vaccine Products in Development

Therapeutic Area

  Project/Compound
  Potential Indication/Disease Area
  Planned filing dates/
Current phase

Influenza   Optaflu   Cell culture-based trivalent seasonal influenza vaccine   EU registered;
US > 2008/Phase II
    Agrippal   Egg-based trivalent seasonal influenza vaccine   EU registered;
US 2008/Phase III
    Focetria   H5N1 influenza vaccine to be used in a pandemic. Approved in the EU, but an update to the file will be required at the time of a pandemic   EU approved in May 2007; annual update pending a pandemic
    Aflunov   H5N1 influenza vaccine to be used before a pandemic occurs   EU submitted; US Phase III
Meningitis   Menveo   Quadrivalent meningitis vaccine for strains A, C, Y and W-135 for infants, adolescents and adults   2008 (adolescents & adults)/Phase III; 2009 (infants)/Phase III
    MenB   Recombinant meningitis B vaccine for infants, adolescents and adults   >2009/Phase II
JEV   Ixiaro   Prophylactic vaccine against Japanese encephalitis virus (JEV)   Submitted for registration in December 2007 (US & EU)
HCV       Therapeutic Hepatitis C virus (HCV) vaccine   Phase I
        Prophylactic HCV vaccine   Phase I
HIV       Prophylactic HIV vaccine   Phase I
GBS       Prophylactic Group B Streptococcus (GBS) vaccine   Phase I

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Key Marketed Diagnostics Products

Therapeutic Area

  Project/Compound
  Potential Indication/Disease Area
  Status
Blood Testing   PROCLEIX eSAS System   Semi automated modular instrument solution supporting Duplex and Ultrio NAT assays   •  EU approved (CE marked)
•  US approved
    PROCLEIX TIGRIS System   Fully automated instrument solution supporting Ultrio NAT assays   •  EU approved (CE marked)
•  US approved (FDA BLA approval for TESTs supported)
    PROCLEIX Duplex Assay   NAT assay designed to detect HIV-1, HCV through a single test   •  US approved
•  EU approved (CE marked)
    PROCLEIX WNV Assay   First NAT assay approved by the FDA to detect West Nile virus.   •  US approved
•  EU approved (CE marked)
    PROCLEIX ULTRIO Assay   NAT assay designed to detect HIV-1, HCV and HBV through single testing process   •  EU approved (CE marked) on eSAS and Tigris
•  US approved (without the HBV claim) on eSAS and Tigris
•  HBV claim in the US (on eSAS and Tigris): anticipated in 2009

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Diagnostic Products in Development

Therapeutic Area

  Project/Compound
  Potential Indication/Disease Area
  Planned filing dates/
Current phase

Blood Testing   PROCLEIX ULTRIO + Assay   NAT assay designed to detect HIV-1, HCV and HBV through single testing process with a higher sensitive to HBV   2009 (eSAS and Tigris)/ Phase III
    Parvo test   NAT test designed to detect the Parvo B19 virus   Discovery
    Dengue test   NAT test designed to detect the Dengue virus   Discovery
Clinical Diagnostics   Mis-folded protein assay   Novel technology to detect abnormal protein particles that cause several neurodegenerative diseases such as Diabetes, Alzheimer's, Parkinson's in patients   Discovery
Molecular Diagnostics   Novachip   Multi-analyte detection proprietary platform which enables the diagnostics of complex diseases by providing multi-parameter array technology and multiple-analyte applications   Pre-clinical
    CRM   Markers for diagnostic and early detection of allograft rejection and dysfunction based on gene expression profiling   Pre-clinical
    ACZ   Molecular test that can predict Rheumatoid Arthritis patients' response to Novartis' ACZ885   Pre-clinical

Principal Markets

        The principal markets for our Vaccines and Diagnostics Division include the US and Europe. Sales to countries in which the Vaccines and Diagnostics Division does not have affiliated offices are recognised by the organizations where production originated. Sales of certain vaccines, including influenza and tick borne encephalitis vaccines, are subject to seasonal variation.

Vaccines and Diagnostics

  Net Sales 2007
 
  ($ millions)

  (%)

United States   602   41
Europe   647   45
Rest of the World   203   14
   
 
Total   1,452   100
   
 

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Research and Development

        In 2007, the Vaccines and Diagnostics Division invested $295 million in research and development ($148 million in 2006), which amounted to 20.3% of the division's net sales.

        While research and development costs for vaccines traditionally were not 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. At each of these steps, there is a substantial risk that we will not achieve our goals. In such an event, we may be required to abandon a product in which we have made a substantial investment.

Production

        We manufacture our vaccines products at four facilities in Europe and Asia. Our principal production facilities are located in Liverpool, UK; Marburg, Germany; Siena and Rosia, Italy; and Ankleshwar, India. We continue to invest and upgrade these 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. The division's predecessor, Chiron, experienced supply interruptions in the past, and there can be no assurance that supply will not be interrupted again in the future as a result of unforeseen events. The manufacture of our products is heavily regulated which means that supply can never be an absolute certainty. If we or our suppliers fail to comply fully with such regulations then there could be a recall or government-enforced shutdown of production facilities which in turn could lead to product shortages.

        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 requirements. We monitor market developments that could have an adverse effect on the supply of essential materials. All raw materials we purchase must comply with our quality standards.

        Each year new influenza vaccines need to be produced in order to confer effective 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 us with information on currently circulating strains and identifies the appropriate strains to be included in next season's influenza vaccine. Each year, the European Medicines Agency 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.

Marketing and Sales

        Our main Vaccines marketing and sales organizations are based in Germany, UK, Italy and the US. We are also expanding operations in China and India, as well as in various other European countries. In the US, we market influenza 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, distributor channels, and non-traditional channels, e.g., employers, chain drug headquarters and service providers.

        The Diagnostics marketing and sales efforts are focused exclusively on blood banks. With roughly half of worldwide blood donations not being subjected to updated viral nucleic acid screening, the company will focus on increasing the practice of viral nucleic acid screening using its proprietary systems in emerging areas of the world.

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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, new registrations for seasonal flu vaccines must be validated and submitted every year, based on the influenza strains provided by WHO and the Centers for Disease Control and Prevention needed for the growth of the vaccine.

        Diagnostics 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 has 180 days to review a PMA. 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 has 90 days to review and clear a 510(k) submission. 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 CBER branch of FDA. 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 (as opposed to "approval" by the CBER division). The submission for this purpose follows the same requirements as Vaccines; a Biologic License Application is submitted to CBER. CBER has 240 days to review a BLA.

        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. Within the IVD Directive for use in the EU, products listed into Annex II, List A or B are subject to review and prior approval by a Notified Body. All other products not listed in this Annex are subject to Self-Certification by the manufacturer, a process that requires confirmation of performance to appropriate standards resulting in a Declaration of Conformity and notification to appropriate Competent Authorities in the EU indicating intent to market the product. For this purpose, Novartis Vaccines & Diagnostics maintains a full Quality Assurance system and is subject to routine auditing by a certified third party (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, 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

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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.

        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.

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 no longer protected by patents. As of December 31, 2007, affiliates of the Sandoz Division employed 23,087 associates worldwide in more than 110 countries. In 2007, our Sandoz Division achieved consolidated net sales of $7.2 billion, 19% of the Group's total net sales.

        The Sandoz Division has activities in Retail Generics, Anti-Infectives and Biopharmaceuticals. In Retail Generics, we develop and manufacture active ingredients and finished dosage forms of pharmaceuticals no longer protected by patents, as well as supplying active ingredients to third parties. In Anti-Infectives, we develop and manufacture off-patent active pharmaceutical ingredients and intermediates—mainly antibiotics—for use by Retail Generics and for sale to third-party customers. In Biopharmaceuticals, we develop and manufacture protein- or biotechnology-based products no longer protected by patents (known as biosimilars or follow-on biologics) and provide biotech manufacturing to other companies on a cooperative or contract basis.

        The worldwide market for generic pharmaceutical products has been growing more than 10% annually and is expected by industry analysts to continue on that path at least through 2011, fueled by the health needs of an aging population, opportunities created through patent expirations, and pressures to contain healthcare costs. According to IMS Health, Sandoz is the No. 2 company in worldwide generic sales and is positioned as a global leader in Retail Generics. Sandoz Biopharmaceuticals has emerged as a leader in biosimilars, with two marketed products and several in development. In addition, Sandoz remains one of the top manufacturers of antibiotics in Europe.

        The strategic priorities of Sandoz are to be first-to-market with our products as originators' patents expire, to be cost competitive by leveraging our economies of scale in development and production and to differentiate Sandoz by using our advanced technical expertise to develop difficult-to-make generics.

        In 2007, Retail Generics benefited from product launches in difficult-to-make products and authorized generics, including a generic version of the Novartis Pharmaceutical Division's blood pressure product Lotrel. Anti-Infectives had strong volume growth and favorable pricing for active ingredients, offset partially by currency losses on sales denominated in US dollars but manufactured in Europe. Biopharmaceuticals grew as Sandoz launched two important follow-on products and continued to expand contract manufacturing. Our recombinant human growth hormone Omnitrope was introduced in the US and major European markets in 2007, the first follow-on for this product to receive US and European Union approvals. In Germany, we launched Epoetin alfa Hexal in October 2007 and Binocrit in November 2007 after these biosimilars received marketing approval from the European Commission.

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        In 2006, a Sandoz affiliate signed a binding Memorandum of Understanding regarding an exclusive collaboration with Momenta Pharmaceuticals, Inc., a biotechnology company specializing in the characterization and engineering of complex pharmaceuticals, to develop complex generics and follow-on biotechnology pharmaceuticals. As part of the arrangement, we purchased approximately 4.7 million shares of Momenta common stock for an aggregate price of $75 million. In June 2007, the Memorandum of Understanding was replaced by a definite Collaboration and License Agreement. Sandoz and Momenta intend to jointly develop, manufacture and commercialize four drug candidates, sharing profits from the sales under separate arrangements for each project. The companies also have agreed on a right of first negotiation for certain other projects concerning complex generic and follow-on product candidates for inclusion in the collaboration.

        In 2005, we acquired two leading generic pharmaceutical companies—Hexal AG and Eon Labs, Inc. Integration of these businesses has added significantly to the global presence of Sandoz, combining our expertise in Retail Generics and Anti-Infectives with Hexal's leadership in Germany and track record of successful product development and Eon Labs' strong position in the US for "difficult-to-make" generics. The two companies were acquired for approximately $8 billion in all-cash transactions.

Recently Launched Products

        Sandoz launched a number of important products in 2007, including:

      Omnitrope, a follow-on version of version of the recombinant human growth hormone Somatropin, was launched in the US, Italy, Spain, and France. Omnitrope liquid was also launched in the UK and Germany.

      Fenofibrate, a cholesterol reducing product, was launched in Canada.

      Oxycodon HCT, an opioid analgesic commonly used for the treatment of pain in cancer patients, was launched in Germany.

      Cefdinir capsules and oral suspension, a generic version of the anti-infective Omnicef®, was launched in the US.

      Finasteride, an antiandrogen used as a treatment in benign prostatic hyperplasia and prostate cancer, was launched in Germany.

      Amlodipine besylate/Benazepril, a generic version of our Pharmaceuticals Division's hypertension product Lotrel, was launched in the US.

      Ipratropium Bromide & Albuterol Sulfate Inhalation Solution, a generic version of Duoneb®, for the management of chronic obstructive pulmonary disease and asthma, was launched in the US.

      Metoprolol Succinate Extended Release Tablets USP, a generic version of the beta-blocker Toprol-XL® to treat angina, heart failure, and high blood pressure, was launched in the US.

      Leuprorelin Implant, for the treatment of hormone-responsive cancers such as prostate cancer or breast cancer, was launched in Germany.

      Fentanyl Matrix, a generic version of the Duragesic® transdermal patch pain-killer, was launched in the UK.

      Epoetin alfa Hexal and Binocrit, follow-on versions of the recombinant human protein Eprex® /Erypo® for the treatment of anemia, was launched in Germany.

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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
Fentanyl   Duragesic®   Analgesic
Omeprazole   Prilosec®   Ulcer and heartburn treatment
Amoxicillin/clavulanic acid   Augmentin®   Anti-infective
Metoprolol   Lopressor®   Anti-hypertension
Simvastatin   Zocor®   Cholesterol lowering treatment
Amlodipine/Benazepril   Lotrel®   Hypertension
Ondansetron   Zofran®   Alimentary tract and metabolism
Azithromycin   Zithromax®   Anti-infective
Acetylcysteine   Fluimucil®   Respiratory System
Amlodipine   Norvasc®   Cardiovascular System

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
Epoetin alfa Hexal and Binocrit   Eprex®/Erypo®   Recombinant protein used for anemia

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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 110 countries. This table sets forth aggregate 2007 net sales by region:

Sandoz

  Net Sales 2007
 
  ($ millions)

  (%)

United States   1,959   27
Americas (except the United States)   462   6
Europe   4,058   57
Rest of the World   690   10
   
 
Total   7,169   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 38 production facilities around the world. Among these, our principal production facilities are located in Barleben, Germany; Kundl, Austria; Menges and Ljubljana, Slovenia; Broomfield, Colorado; Wilson, North Carolina; Stryków, Poland; Kalwe and Mahad, India; Buenos Aires, Argentina; Boucherville, Canada; Cambé and Taboão, Brazil; Gebze and Syntex, Turkey. In 2007, we restructured our worldwide production network with the sale of our facility in Hvidovre, Denmark, and the acquisition of production sites in Gebze, Turkey, Zhongshan, China, and Jakarta, Indonesia. Although no longer part of our production capacity, we intend to retain a close relationship with the Radebeul, Germany site, which will remain one of our key suppliers.

        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 will produce the human protein. This manufacturing process requires sophisticated technical expertise. We are constantly working to improve current and develop new manufacturing processes.

        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 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 raw materials from multiple suppliers based in the EU. We obtain chemicals 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.

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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. Depending on the structure of the market in each country, Sandoz adapts our marketing and sales approach to local decision making processes.

        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 branded pharmaceutical products. In the US, generic substitution statutes have been enacted by virtually all states and permit or require the dispensing pharmacist to substitute a less expensive generic product for the brand-name version of the product. 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 shift decision making from physicians to insurance funds.

        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 follow-on biologics are either new or still in development, and policies have not yet been defined for the substitutability and reimbursement of biosimilars in many markets, including the US.

Competition

        The market for generic products is characterized by increasing demand for high-quality pharmaceuticals that can be produced at lower costs due to minimized 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 the increased competition from generic products by licensing their branded products to generic companies (the so-called "authorized generic"). By doing so, research-based pharmaceutical companies participate in the conversion of their branded product, once generic conversion begins. Consequently, generic companies that were not in a position to compete on a specific product are allowed to 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 enters the market 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, recently some research-based pharmaceutical companies have reacted to generic competition by decreasing the prices of their branded product, thus seeking to limit the profit which the generic companies can earn on the competing generic product.

Development and Registration

        Before a generic pharmaceutical may be marketed, intensive technical and clinical development work must be performed in order 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 are much lower than those of the established counterparts, as no Phase I to Phase III clinical trials must be performed by the generic competitor. As a result, pharmaceutical products for which the patent and data exclusivity period has expired can be offered for sale at prices much lower than those

54



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 protein products, in many countries, the regulatory pathways for approving such products are still in development. However, at least for certain biopharmaceutical products, Phase I to Phase III clinical trials do appear to be required. Nonetheless, Sandoz has successfully registered and launched the first biosimilar product in Europe and the US, as well as a second product in Europe.

        Currently, the affiliates of the Sandoz Division employ more than 1,000 Development and Registration staff who explore alternative routes for the manufacture of known compounds and who develop innovative dosage forms of generic medicines. These associates are based worldwide, including major facilities in Holzkirchen and Rudolstadt, Germany; Kundl and Schaftenau, Austria; Menges and Ljubljana, Slovenia; Kolshet, India; Boucherville, Canada; Wilson, North Carolina; Cambé, Brazil and Buenos Aires, Argentina.

        In 2007, Sandoz invested $563 million in product development ($477 million in 2006, $434 million in 2005), which amounted to 8% of the division's net sales.

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 that are required for originator products, so long as the generic version could be shown in bio-availability studies to be of identical quality and purity, and to be biologically equivalent to the reference product.

        In the US, the decision whether a generic pharmaceutical is bioequivalent to the original branded product is made by the FDA based on an Abbreviated New Drug Application (ANDA) filed by the generic product's manufacturer. The process typically takes approximately eighteen months 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, amendments to the Hatch-Waxman Act may affect the availability of generic marketing exclusivity in the future. The amendments now require generic applicants to launch their products within certain time frames or risk losing the marketing exclusivity that they had gained through being a first-to-file applicant.

        In the EU, decisions on the granting of a marketing authorization are made either by the EMEA under the Centralized Procedure, or by a single Member State under 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 patent. Previously, after a period of six to ten years (depending on the Member State) after the product received a marketing authorization in the EU, the generic company was able to submit its Abridged Application in reliance upon the data submitted by the medicine's innovator, without the necessity of conducting extensive Phase III clinical trials of its own. According to recent legislation, 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

55



authorization for the reference product will now 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. Because this recent legislation extended the ten-year protection period throughout the EU and offered the opportunity for an extension of the existing data protection period, it is possible that future launches of generic products will be delayed in certain EU countries.

Intellectual Property

        Wherever possible our 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 extensive 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.

CONSUMER HEALTH

        Our Consumer Health Division 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. The business of Consumer Health is conducted by a number of affiliated companies throughout the world. Created in January 2002, the Consumer Health Division's continuing operations consists of the following three business units:

    Over-the-Counter (OTC)

    Animal Health

    CIBA Vision

        As of December 31, 2007, the affiliates of our Consumer Health Division continuing operations employed 13,956 associates worldwide. In 2007, the affiliates of our Consumer Health Division achieved consolidated net sales from continuing operations of $5.4 billion, which represented 14% of the Group's total net sales from continuing operations.

        Our Consumer Health Division places 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, our Consumer Health Division seeks 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 business unit depends upon its ability to anticipate and meet the needs of consumers and health professionals worldwide.

        The Medical Nutrition and Gerber Business Units were previously included in the Consumer Health Division, but have been classified as discontinued operations in all periods in the Group's consolidated financial statements, as a consequence of the divestment of these business units. On September 1, 2007, Novartis completed the sale of the Gerber Business Unit to Nestlé S.A., Switzerland for $5.5 billion. On July 1, 2007, Novartis completed the sale of the remainder of the Medical Nutrition Business Unit to

56



Nestlé S.A., Switzerland for $2.5 billion. On February 17, 2006, Novartis completed the sale of Nutrition & Santé for $211 million to ABN AMRO Capital France, resulting in a pre-tax divestment gain of $129 million.

        The following is a description of the three Consumer Health Division Business Units:

    OTC is a world leader in offering products for the treatment and prevention of common medical conditions and ailments, to enhance people's overall health and well-being. The business of OTC is conducted by a number of affiliated companies in more than 45 countries with 4,700 associates as of December 31, 2007. The OTC business focuses on a group of strategic global brands in leading product categories that include cough, cold and allergy treatments (Triaminic and NeoCitran/TheraFlu), headache relief (Excedrin), pain relief (Voltaren), gastrointestinal treatments (Benefiber/NovaFibra and Ex-Lax), dermatological treatments (Lamisilat), anti-gas treatments (Gas-X), vitamin supplements (sold by OTC under the Sandoz brand name) and smoking cessation treatments (Nictonell/Habitrol). In August 2005, we significantly strengthened our OTC business in the US by acquiring the OTC business of Bristol-Myers Squibb, including Excedrin. In addition, in December 2005, we signed an agreement with TAP Pharmaceutical Products to acquire the right to develop an OTC version of the prescription drug Prevacid®, one of the leading medicines for acid reflux disease and heartburn.

    Animal Health offers products and services to save, prolong and improve animal lives, focusing on both companion and farm animals (including farmed fish). The business of Animal Health is conducted by affiliated companies in 38 countries with 2,733 associates as of December 31, 2007. Animal Health has a dedicated research and development team, which benefits from synergies with other Novartis businesses, most notably research in the Pharmaceuticals Division. Key products for companion animals include Atopica (atopic dermatitis management), Deramaxx (pain relief) and Sentinel/Milbemax/Interceptor (intestinal and heart worm control), while leading farm animal products include the farm fly control product Agita and the therapeutic anti-infective Tiamutin/Denagard, an effective broad-spectrum antimicrobial used to treat and control bacteria in swine. Acquaculture products include vaccines and treatments mainly used in salmon farming. In March 2007, we completed the acquisition of the Japanese animal health business of Sankyo Lifetech Co., Ltd., expanding our presence in Japan, particularly in the rapidly-growing companion animal segment. In October 2005, Animal Health acquired the North American rights to the Denagard (tiamulin) franchise from Boehringer Ingelheim Vetmedica, Inc. Novartis previously had the rights to market this compound in all key swine markets outside North America.

    CIBA Vision is a global leader in the research, development, and manufacturing of contact lenses and lens care products. The business of CIBA Vision is conducted by affiliated companies in nearly 40 countries with 6,498 associates as of December 31, 2007. CIBA Vision is committed to the research and development of innovative products, processes and systems. R&D efforts have produced lenses such as O2OPTIX/AIR OPTIX and NIGHT & DAY, both of which have high-oxygen transmissibility, and Focus DAILIES daily disposable lenses. CIBA Vision is also the world's leading provider of cosmetic contact lenses to change and enhance eye color through products such as FreshLook lenses. In lens care, CIBA Vision has developed many innovative products, particularly multi-purpose solutions in one bottle such as AQuify/SOLO-care AQUA and the Clear Care/AOSEPT Plus peroxide system.

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Principal Markets

        The principal markets for the Consumer Health Division are the US and Europe. The following table sets forth the aggregate 2007 net sales of the Consumer Health Division by region:

Consumer Health

  Net Sales 2007
 
  ($ millions)

  (%)

United States   1,765   25
Americas (except the United States)   475   7
Europe   2,439   34
Rest of the World   747   10
   
 
Net sales from continuing operations   5,426   76
Net sales from discontinued operations   1,728   24
   
 
Total net sales   7,154   100
   
 

        Sales of our OTC Business Unit 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 Business Unit also fluctuate seasonally, and can be significantly affected by climatic and economic conditions, and 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: Our OTC Business Unit has a manufacturing and supply infrastructure made up of the business unit'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; and Humacao, Puerto Rico.

        Animal Health: Approximately 80% of our production volume is manufactured by third parties and Novartis affiliates in other divisions or business units. 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; and Huningue, France.

        CIBA Vision: CIBA Vision has major production facilities in Batam, Indonesia; Duluth, Georgia; Des Plaines, Illinois; Grosswallstadt, Germany; Cidra, Puerto Rico; Singapore; Johor, Malaysia; and Mississauga, Canada.

        The goal of our supply chain strategy is to produce and distribute high quality products efficiently. The manufacture of our products is heavily regulated, making supply never an absolute certainty. If we, or our third party suppliers, fail to comply fully with such regulations, then there could be a government-enforced shutdown of production facilities, which in turn could lead to product shortages. Some of our production facilities are unionized, including some CIBA Vision facilities. CIBA Vision has experienced significant supply interruptions in the past and there can be no assurance that CIBA Vision's supply—or the supply of the OTC or Animal Health—will not be interrupted again in the future as a result of unforeseen circumstances.

        While production practices may vary from business unit to business unit, we generally obtain our raw materials from sources around the world. We depend to a large extent on suppliers for the raw materials, intermediates and active ingredients. To limit the volatility of prices charged to us for raw materials, where practical and beneficial, we make use of long-term supply agreements. We also proactively monitor markets and developments that could have an adverse effect on the supply of essential materials.

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        In 2007, we announced that, as part of a new productivity initiative called "Forward," some Consumer Health Division product supply chains will be restructured to optimize capacity utilization.

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, science-based products 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, including media advertisements, brand websites and other direct advertisements of brands, to the extent permitted by law in each country.

        CIBA Vision: In most countries, contact lenses are available only by prescription. CIBA Vision lenses can be purchased from eye care professionals and optical chains subject to country regulation. CIBA Vision's lens care products can be found in major drug, food, mass merchandising and optical retail chains in the United States, Europe, Japan and elsewhere subject to country regulations. In addition, mail order and Internet sales of contact lenses are becoming increasingly important channels in major markets worldwide.

Competition

        The global market for products of the type sold by our Consumer Health 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.

Research and Development

        OTC: In OTC, the focus of research and development activities is primarily on dermatology, analgesics, cough, cold, allergy, gastrointestinal, minerals, and cardiovascular risk reduction (through smoking cessation programs). 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. In addition, in the US and Canada, we devote resources to the quest for new vaccines for farm animals and farmed fish. In addition, our researchers exploit synergy with other Novartis businesses and also collaborate with external partners to develop veterinary therapeutics. Drug delivery projects, some in collaboration with external partners, concentrate on our key treatment areas and aim to improve efficacy and ease of use.

        CIBA Vision: CIBA Vision invests substantially in internal research and development operations, which yield new chemistries, lens designs and surfaces, and processing technologies. These resources are complemented by licensing agreements and joint research and development partnerships with third parties. For contact lenses our key focus is in three areas: daily disposable lenses, silicone hydrogel lenses

59



and cosmetic lenses. In lens care, our development efforts focus on making our lens care solutions more convenient to use, especially with the latest generation of breathable, high-oxygen transmissible contact lenses, while ensuring that the solutions provide the safety, disinfecting and cleaning power needed to help maintain ocular health.

        In 2007, the Consumer Health Division continuing operations invested $301 million in research and development ($260 million in 2006, $242 million in 2005), which amounted to 5.5% of the division's net sales from continuing operations.

Regulation

        OTC: For OTC products, the 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 in the US or registration in the EU and the rest of the world. See "Pharmaceuticals—Regulation." In the US, in addition to the NDA process which is also 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 Review. In the OTC Review, the FDA establishes, 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 approval process, so long as the company complies with the terms of the published monograph. Most countries also have a regulatory process for switching a particular pharmaceutical product 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 (EPA), and vaccines are under the control of the US Department of Agriculture (USDA). 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 new Decentralized Procedure. See "Pharmaceuticals—Regulation."

        CIBA Vision: Contact lenses and lens care products are regulated as medical devices in the US, the EU and the majority of other regulated countries. In the US, extended wear contact lenses are considered Class III devices, for which a PMA application is submitted to FDA. Daily wear lenses and lens care products are considered Class II devices for which the manufacturer must submit a Premarket Notification 510(k) application. See "Vaccines & Diagnostics—Regulation."

Intellectual Property

        Our Consumer Health businesses are brand-oriented and, therefore, 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

60



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 businesses 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.

        In addition, see "Item 18. Financial Statements—note 19" for a description of patent litigation involving the CIBA Vision Business Unit of our Consumer Health Division.

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, a few 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.

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        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        

Suffern, NY

 

656,000

 

Tablets, capsules, transdermals, vials, suppositories

Ringaskiddy, Ireland   532,000   Drug substances, intermediates

Grimsby, UK   450,000   Drug substances, intermediates

Stein, Switzerland   358,000   Steriles, ampules, vials, tablets, capsules, transdermals

Basel, Switzerland—Klybeck   235,000   Drug substances, intermediates

Basel, Switzerland—Schweizerhalle   230,000   Drug substances, intermediates

Basel, Switzerland—St. Johann   225,000   Drug substances, intermediates, biotechnology

Torre, Italy   210,000   Tablets, biotechnology

Horsham, UK   112,000   Tablets, capsules

Kurtkoy, Turkey   109,000   Tablets, capsules, effervescents

Sasayama, Japan   104,000   Tablets, capsules, dry syrups, suppositories, creams, powders

Huningue, France   97,000
(includes Animal Health facilities)
  Suppositories, liquids, solutions, suspensions, biotechnology

Singapore   80,000   Bulk tablets

Wehr, Germany   58,000   Tablets, creams, ointments

Barbera, Spain   51,000   Tablets, capsules

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Vaccines and Diagnostics        

Emeryville, CA

 

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

 

Biopharmaceuticals, vaccines and blood testing

Liverpool, UK   62,000   Influenza vaccines

Ankleshwar, India   11,000   Vaccines

Marburg, Germany   45,000
(production and R&D facilities)
  Vaccines

Siena/Rosia, Italy   97,000
(production and R&D facilities)
  Vaccines

Sandoz        

Taboão da Serra, Brazil

 

501,000

 

Capsules, tablets, syrups, suppositories, suspensions, creams, drop solutions, powders

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   29,000   Broad range of finished dosage forms

Stryków, Poland   20,000   Broad range of finished dosage forms

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Boucherville, Canada   11,000
(production and R&D facilities)
  Injectable products

Rudolstadt, Germany   11,000
(production and R&D facilities)
  Inhalation technology, ophthalmics and nasal products

Consumer Health        
 
OTC

 

 

 

 

Lincoln, NE

 

45,000
(production and R&D facilities)

 

Tablets, liquids and creams

Nyon, Switzerland   15,000
(production and R&D facilities)
  Liquids and creams

Humacao, Puerto Rico   8,000   Tablets and secondary product packaging

  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   Packaging, formulation of liquids, solids, creams, sterile filling

Braintree, UK   6,000   Veterinary immunologicals

Huningue, France   5,000   Formulation and packaging of tablets, creams, ointments, suspensions and liquids

  CIBA Vision        

Johor, Malaysia

 

35,000

 

Contact lenses

Duluth, GA   34,000   Contact lenses

Pulau Batam, Indonesia   27,000   Contact lenses

Des Plaines, IL   27,000   Contact lenses

Grosswallstadt, Germany   23,000   Contact lenses

Singapore   19,000   Contact lenses

Cidra, Puerto Rico   6,000   Contact lenses

Toronto, Canada   15,000   Lens care products

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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   88,000   General pharmaceutical products

Vienna, Austria   39,000   Dermatology

Horsham, UK   38,000   Respiratory and nervous system diseases

Tsukuba, Japan   21,000   General pharmaceutical products

Emeryville, CA   (included in Vaccines and Diagnostics facilities)   Oncology

Shanghai, China   5,000   Oncology

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

Sandoz        

Kundl and Schaftenau, Austria

 

449,000
(production and R&D facilities)

 

Biotech processes, innovations in antibiotic 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 finished dosage forms and new delivery systems

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Wilson, NC   31,000
(production and R&D facilities)
  Broad range of finished dosage forms

Holzkirchen, Germany   17,000   Broad range of innovative dosage forms, including implants and transdermal therapeutic systems

Boucherville, Canada   11,000
(production and R&D facilities)
  Injectable products

Rudolstadt, Germany   11,000
(production and R&D facilities)
  Inhalation technology, ophthalmics and nasal products

Kolshet, India   9,000   Generic pharmaceuticals

Consumer Health        
 
OTC

 

 

 

 

Lincoln, NE

 

44,870
(production and R&D facilities)

 

Tablets, liquids and creams

Nyon, Switzerland   14,700
(production and R&D facilities)
  Over-the-counter medicine products

Thane, India   2,000
(R&D facilities)
  Tablets, capsules, powders,creams, ointments, oral liquids

  Animal Health        

St. Aubin, Switzerland

 

26,000

 

Parasiticides

Larchwood, IA   13,000
(production and R&D facilities)
  Veterinary immunologicals development

Yarrandoo, Australia   3,000   Animal Health products

Basel, Switzerland   2,000   Animal Health products

  CIBA Vision        

Duluth, GA

 

13,000

 

Vision-related medical devices

Grossostheim, Germany   4,000   Vision-related medical devices

        Progress is being 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. Research and Development now accounts for a greater proportion of our activities at the site,

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and changes need to be made to the Campus, since the site had been designed primarily for pharmaceuticals production. To date, the total amount paid and committed to be paid on the Campus Project is $1 billion. We expect that, through 2011, we will spend more than $1.8 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.

        Work was completed in 2007 on the first phase expansion of the Pharmaceuticals Division's US headquarters in East Hanover, New Jersey creating an additional 900 work stations on its campus. Further Campus development plans are on hold while other alternatives are being considered regarding future expansion of the site. Total campus capital spending in 2007 reached $98 million with an additional $40 million planned for 2008.

        In 2007, our Pharmaceuticals Division opened a new pharmaceuticals manufacturing facility in Singapore. The plant will manufacture solid dosage forms (tablets) of existing and new Novartis products, such as Diovan and Tekturna. It is expected to be fully operational in 2009, and to employ around 160 employees. When fully operational, our investment in this facility is expected to total approximately $180 million. In addition, in 2007, we announced plans to invest in a new large-scale cell culture plant in Singapore. We expect to invest approximately $700 million over 5 years, from 2008 to 2012, when the new plant would become operational, subject to regulatory approvals.

        In 2007, our Pharmaceuticals Division invested approximately $153 million at its production facility in Grimsby, UK, and an additional $123 million at its production facility in Basel—Schweizerhalle, Switzerland, on a capacity increase to support the production of Tekturna/Rasilez at these two facilities.

        In April 2007, NIBR opened a start-up facility for our new R&D center in Shanghai, China. This 5,000 square meter laboratory is home to approximately 150 Research and Development scientists. In 2008, we expect to break ground on a 40,000 square meter facility that will be home to approximately 400 R&D scientists. An initial investment of $100 million is planned for the construction of the two facilities.

        Work has commenced on our Vaccines and Diagnostics Division's cell culture-based manufacturing site in Holly Springs, North Carolina. To date, the total amount paid on the project is $96 million. The total investment in this new facility is expected to be around $600 million.

        In 2007, the CIBA Vision Business Unit of our Consumer Health Division opened a new manufacturing facility in Johor, Malaysia. The site will produce one of CIBA Vision's most technologically advanced high-oxygen transmissible products, AIR OPTIX/O2OPTIX breathable contact lenses. Our investment in this facility totaled approximately $131 million.

        In 2007, we announced that, as part of a new productivity initiative called "Forward," some Consumer Health Division product supply chains will be restructured to optimize capacity utilization, and NIBR's research activities at its Vienna, Austria and Tsukuba, Japan facilities will be phased out during the course of 2008, and those facilities will be closed.

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 certain of our properties regardless of whether the contamination was caused by us, or by previous occupants of the property.

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        See also "Item 3. Key Information—Risk Factors—Environmental liabilities may impact our results of operations" and "Item 18. Financial Statements—note 19."


Item 4A.    Unresolved Staff Comments

         Not applicable


Item 5.    Operating and Financial Review and Prospects

5.A  Operating Results

        The following operating and financial review and prospectus should be read in conjunction with the consolidated financial statements in this Form 20-F. The consolidated financial statements and the financial information discussed below have been prepared in accordance with IFRS as issued by the IASB. Following a unanimous vote by the SEC to amend the relevant rules in November 2007, we are no longer required to provide a reconciliation to US Generally Accepted Accounting Principles.

OVERVIEW

        We provide healthcare solutions that address the evolving needs of patients and societies worldwide with a broad portfolio that includes innovative medicines, off-patent generic pharmaceuticals, preventive vaccines and diagnostic tools, as well as targeted consumer products. We are the only company to have leadership positions in each of these areas.

        Our businesses are divided on a worldwide basis into the following four operating divisions:

    Pharmaceuticals (brand-name patented pharmaceuticals)

    Vaccines and Diagnostics (human vaccines and molecular diagnostics)

    Sandoz (generic pharmaceuticals)

    Consumer Health (over-the-counter medicines (OTC), animal health medicines and contact lenses and lens care products)

        The final divestments of non-healthcare businesses were completed in 2007 with the sale of the Medical Nutrition Business Unit (effective July 1) and the Gerber Business Unit (effective September 1). Both were previously included in the Consumer Health Division, but have now been classified as discontinued operations. These businesses were sold in separate transactions to Nestlé S.A., resulting in a combined after-tax net gain of $5.2 billion.

        In 2007, we achieved Group net sales of $39.8 billion, an increase of 8% (+3% in local currencies (lc)), while net income advanced 66% to $12.0 billion. These results include contributions from Medical Nutrition and Gerber before their divestment in 2007 and the after-tax divestment gain of $5.2 billion.

        Continuing operations, which are now solely focused on healthcare, net sales rose 11% (+6% lc) to $38.1 billion in 2007 thanks to strong contributions particularly from Sandoz and Vaccines and Diagnostics.

        Operating income from continuing operations declined by 11% to $6.8 billion as it was effected by lost contributions in Pharmaceuticals following the entry of generic competition and the suspension of Zelnorm in the US as well as by a number of significant charges including impairment of intangible assets; a restructuring provision of $444 million related to a new productivity initiative called "Forward" and a $590 million increase in Corporate environmental provisions, which includes the related share of any potential remediation costs for historical landfills in the Basel region. Excluding the "Forward"

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restructuring and Corporate environmental liability charges, operating income from continuing operations rose 2%.

        Net income from continuing operations fell 4% to $6.5 billion from $6.8 billion in 2006, and included higher contributions of income from associated companies, improved financial income and a lower effective tax rate compared to 2006.

        Headquartered in Basel, Switzerland, we employed approximately 98,000 full-time equivalent positions as of December 31, 2007 and have operations in approximately 140 countries around the world.

FACTORS AFFECTING RESULTS OF OPERATIONS

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

        The overall global healthcare market is predicted to continue growing due to a combination of demographic and socio-economic factors. The aging of the world's population as well as more sedentary lifestyles and poor nutritional habits, both in industrialized countries as well as emerging markets, are leading to a rising incidence of chronic diseases and prompting greater use of medicines. At the same time, new medicines are gaining approvals to better treat many diseases as a result of technological advances and consistent investments in innovation.

        The growing burden of healthcare costs as a percentage of Gross Domestic Product in many countries, however, means that governments and payors are under intense pressure to control costs even more tightly. As a result, the healthcare industry is operating in an ever more challenging environment, one marked by government-controlled authorities and managed care providers, particularly in the United States, that are taking aggressive actions to cut costs and restrict access to higher priced new medicines. Some generic drug manufacturers, meanwhile, have also become more aggressive in challenging intellectual property rights for patented medicines. At the same time, investments needed for the research and development (R&D) of new medicines have risen dramatically, in part because of increasing scrutiny of drug safety and efficacy.

        In response to this dynamically changing environment, we have built up our presence in businesses that go beyond the traditional focus on patent-protected medicines to include preventive vaccines and diagnostics, generic pharmaceuticals and targeted consumer health products. We have invested heavily in all of these businesses—through initiatives intended to drive organic growth as well as acquisitions—and will continue to do so in the future.

        We believe this diversified portfolio, focused on healthcare, best addresses the needs of patients and customers, providing a range of products that offer important treatment benefits for many diseases while also helping to reduce overall healthcare costs. A large and growing number of patients, physicians and payors worldwide can benefit from the broad range of products offered by Novartis. These include new and better medicines with improved efficacy and safety (Pharmaceuticals), preventive vaccines and diagnostic tools (Vaccines and Diagnostics,) off-patent generic pharmaceuticals (Sandoz) and readily available products to support day-to-day health (Consumer Health).

        This portfolio also helps us to mitigate the negative impact of increasing challenges in the area of patent-protected medicines and offers attractive opportunities to benefit from expected faster growth in other healthcare areas, particularly in human vaccines and generics.

Fundamental Drivers Remain Strong

        The global healthcare market is predicted to continue growing based on many factors, including demographic changes and other socio-economic developments. As a result, we expect our businesses to keep expanding in the coming years, both in the established markets of the United States, Western Europe and Japan as well as in priority emerging markets.

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Aging population with increasing healthcare needs

        The elderly represent a rapidly growing proportion of the world's population as a result of increasing life expectancy and reduced birth rates. Indeed, it is estimated that for every five years since 1965, roughly one additional year has been added to life expectancy at birth in developed countries. This dramatic demographic change is expected to have a major impact on the industry since healthcare expenditures rise with age. The number of people age 65 and older more than tripled to a record 420 million worldwide in 2000 from only 130 million in 1950, according to a study in 2001 by the US Census Bureau and the National Institute on Aging. This study further predicted that one in five people in the US will be 65 or older by 2030, and that this proportion will be even higher in other developed countries such as Italy and Japan. This trend may also become significant in many emerging markets, with some countries in Southeast Asia expected to witness the most dramatic changes in the composition of their populations.

        We have a significant number of products in our portfolio that may be of particular use to the elderly, in particular for cardiovascular disease as well as other often age-related conditions that include breast cancer, Alzheimer's disease, osteoporosis, age-related blindness and seasonal influenza.

Growing importance of emerging markets

        At a time of slowing growth in sales of pharmaceuticals in industrialized countries, the strong economic expansion in many emerging markets is leading to higher proportional growth and provides an increasing contribution to the industry's global performance. According to IMS Health, a leading provider of industry information, the global pharmaceuticals market (both patent-protected and generic pharmaceuticals) is expected to grow at a slower pace in 2008 of approximately 5-6%, compared to 6-7% in 2007, resulting in industry sales of $735-$745 billion. Key factors cited for the slowdown are tougher regulations and cost-control measures as well as the pending expiry of patent protection for many of the industry's top-selling branded drugs.

        For the first time, the seven largest markets—the US, Japan and the top five European countries—are expected in 2008 to contribute only about half of the industry's incremental annual sales growth, which is based on expectations for sharply lower sales growth in countries including the US (4-5%) and Japan (1-2%). Indeed, IMS estimated that about two-thirds of prescriptions dispensed in the US in 2008 will be generics, up from 50% in 2003.

        At the same time, the seven leading emerging markets—Brazil, China, India, Mexico, Russia, South Korea and Turkey—are expected to generate combined annual sales growth of 12-13% in 2008 totalling approximately $90 billion, but provide approximately one-fourth of the industry's sales growth. Improving economies and greater spending on healthcare are considered the key factors.

        We have been taking steps to increase our presence in these priority emerging markets, and also in other emerging markets. For example, we announced in 2007 the creation of a new cross-divisional operation to accelerate growth in small emerging markets, expanding the presence of all Novartis products in regions that include Northern and Sub-Saharan Africa, Central Asia and parts of Southeast Asia.

        In 2007, approximately 66% (2006: 69%) of our net sales from continuing operations were generated in the world's seven largest markets, while 9% (2006: 8%) of net sales came from the seven leading emerging markets listed above. However, combined net sales in these seven priority emerging markets grew 25% in 2007 compared to 6% in the seven largest markets. We expect emerging markets to make increasingly significant contributions to our future results of operations.

Lifestyle changes lead to higher prevalence of chronic illnesses

        Economic growth and food industry dynamics in both industrialized and emerging countries have led to changes in lifestyles, in particular to people becoming more sedentary and adopting poor dietary habits. These trends have led to a rapid rise in the incidence of chronic illnesses that include obesity, chronic

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cardiovascular disease, diabetes, cancer and lung diseases. We offer many products to help patients with these diseases and will continue to make significant investments into the research and development of new treatments.

Advances in science and technology drive the discovery of new medicines

        Ongoing technological discoveries and developments in the understanding of diseases are laying the foundation for improvements upon existing therapies as well as the creation of new treatments for medical conditions for which none currently exist or for which current treatment options are inadequate. R&D investments by the global pharmaceuticals industry have risen more than tenfold during the last 20 years, according to the US industry trade association PhRMA, leading to a significant increase in the number of drugs in recent years in development pipelines.

        Based on recent advances in technologies, particularly those within the last decade that have advanced the analysis of human genome data, the number of drugs in development is expected to rise further thanks to improving information about the role of specific genes and proteins in the human body. Like other research-based pharmaceutical companies, we are making major investments in these new technologies, which could have a fundamental effect on product development, and in turn could affect our results of operations.

Increasingly Challenging Business Environment

        While the overall healthcare market has grown steadily in recent years, the competitive operating environment is becoming more challenging as a result of several factors, such as increasing cost pressures, the threat of patent expirations for leading products as well as a period of relatively low R&D productivity and increasing scrutiny of drug safety by regulatory agencies. We believe we are well-positioned to address these challenges.

Record level of industry patent expirations and increasingly aggressive generic competition

        The pharmaceuticals industry is confronted by a continuing high level of patent expirations, with products representing approximately $20 billion in combined annual sales set to lose patent protection in 2008, similar to levels seen in 2006 and 2007, according to IMS Health.

        Given the continuous pressure of patent expirations, innovation is critical to the success of companies like ours. Sustainable growth can only be delivered by discovering and developing new products that address unmet needs, are accepted by patients and physicians, and are reimbursed by payors. The ability to gain regulatory approvals and successfully secure and defend intellectual property rights is particularly important for products in the Pharmaceuticals and Vaccines and Diagnostics Divisions. The loss of exclusivity for one or more important products—either due to patent expiration, generic challenges, competition from new branded products or changes in regulatory status—could have a material negative impact on our results of operations.

        Like other healthcare companies, we take active steps to defend our intellectual property rights, including by initiating patent infringement lawsuits against generic drug manufacturers and, to a lesser degree, against other research-based pharmaceutical companies. Some generics manufacturers, however, are increasingly conducting so-called "at risk" launches of products that are still under legal challenge for patent infringement and before final resolution of legal proceedings.

        In 2007, sales of four of our pharmaceutical products—Lotrel (high blood pressure), Lamisil (fungal infections), Trileptal (epilepsy) and Famvir (viral infections)—were negatively affected by the start of generic competition in the US, which in some cases was unexpected. These four products had combined 2006 annual net sales of approximately $2.6 billion in the US. As a result of generic competition, combined net sales in 2007 for these products declined 38% to $1.6 billion, and are expected to decline significantly further in 2008. The sharp and significant reduction in net sales of these products had an adverse effect on the 2007 results of operations of the Pharmaceuticals Division.

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        Other Novartis pharmaceutical products that are the subject of ongoing US patent litigation include Femara (breast cancer), Lescol (high cholesterol), Focalin/Ritalin LA (ADHD) and Comtan/Stalevo (Parkinson's disease). The loss of exclusivity of some of these products could have a significant adverse effect on the results of operations of the Pharmaceuticals Division. In addition, Neoral (transplantation) and Voltaren (pain), which are still among our top ten-selling products and had combined net sales of $1.7 billion in 2007, have already encountered generic competition in many markets, which may cause sales from these products to decline significantly in the future. A number of other top-selling products, including Diovan (high blood pressure) as well as Gleevec/Glivec and Zometa (both for cancers), could also potentially face generic competition in the coming years in various markets, particularly the US and Europe, either due to potential patent challenges or the regular expiration of patents. Diovan, Gleevec/Glivec and Zometa had combined net sales of $9.4 billion in 2007, and the loss of exclusivity of any one of these three products could have a significant adverse effect on our financial condition and results of operations.

Decline in R&D productivity and rising scrutiny of product safety

        Although advances continue to lead to breakthroughs in helping patients, the pharmaceuticals industry has been suffering from a dearth of new drugs gaining regulatory approvals in recent years. For example, the FDA approved only 18 entirely new drugs (new molecular entities) in 2007, the lowest single-year total since 1983, when there were 14 new approvals. This decline in productivity comes at a time when the worldwide pharmaceuticals industry is estimated to be spending more than $40 billion each year on R&D activities.

        Following widely publicized issues such as Merck & Co., Inc.'s recall of its pain medicine Vioxx® in 2004, healthcare regulators are increasingly focusing on product safety and efficacy as well as on the risk/benefit profile of developmental drugs. This has led to requests for more clinical trial data with a significantly higher number of patients and for more detailed analyses. As a result, obtaining regulatory approvals has become more challenging for pharmaceutical companies. In addition, maintaining regulatory approvals has become increasingly expensive since companies are being required to gather far more detailed safety and other clinical data on products after approval.

        As is the case with other industry competitors, we have suffered setbacks in gaining regulatory approvals for new products as well as being able to keep products on the market, primarily in the Pharmaceuticals Division. For example, in March 2007, Galvus (diabetes) received a so-called "approvable" letter from the FDA requiring us to conduct major additional clinical trials before US regulatory approval. However, we subsequently received approval in the European Union in September 2007. In March 2007, we also suspended the marketing and sales of Zelnorm (irritable bowel syndrome) in the US and several other countries in response to a request from the FDA and for further discussions of the product's risks and benefits. As a result of these suspensions, net sales of Zelnorm fell 84% to $88 million in 2007 as compared to 2006, and are expected to fall significantly further in 2008. A treatment access program was started in the US to continue providing Zelnorm to patients with inadequate alternatives. We continue to hold discussions with regulatory agencies and believe Zelnorm offers important benefits to appropriate patients. Separately, in the second half of 2007, Prexige (osteoarthritic pain) was withdrawn from the market in Australia as well as in some countries of the European Union based on post-marketing reports of serious liver side-effects allegedly associated with long-term uses of higher doses, including the deaths of two patients in Australia.

Increasing pressure on drug pricing and access to medicines

        Prices for healthcare products, primarily patented medicines, continue to be the subject of significant political debate in many industrialized and developing countries. These debates focus on the relative costs of medicines at a time of rapidly rising overall expenditures for healthcare. As a result, payors—primarily government-controlled agencies and US insurance companies and managed care organizations—are exerting pressure on healthcare companies to cut prices, urging physicians to use more generics and

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restricting access to new medicines. Patients are also being forced to pay a larger contribution toward healthcare costs, which has limited growth for patented pharmaceuticals in countries such as the US but at the same time time has led to growth in OTC (over-the-counter) and generics, areas where we are one of the world leaders.

Strong competition in other areas of our healthcare portfolio

        Other businesses within the Novartis portfolio outside of the Pharmaceuticals Division face their own challenges.

        While the anticipated strong growth outlook for the generics market and the pending loss of patent protection for several important industry products can create significant opportunities for the Sandoz Division, competition in this industry is very intense. Sandoz believes that it has certain competitive advantages based on its leadership positions in the world's top generics markets as well as in its track record in gaining regulatory approvals for "difficult-to-make" generics that utilize innovative product applications. However, many of the division's products are considered to be commodities with multiple sellers competing aggressively on price. In addition, pressure is increasing in some markets, particularly in Europe and the US, to further reduce generic prices. These pressures stem both from government regulations, and also from the division's various distributors that are aggressively seeking to increase their profit margins at the expense of generic pharmaceutical manufacturers. Finally, a significant source of revenue for generics companies are exclusivity periods granted in certain markets—particularly the 180-day exclusivity period granted to companies in the US by the Hatch-Waxman Act. However, a number of factors have had the effect of limiting the availability of these 180-day exclusivity periods or of decreasing their value, including a variety of aggressive steps taken by branded pharmaceuticals companies to counter the growth of generics, and increased competition among generics companies to achieve these periods of exclusivity. These pricing pressures, and these efforts by competitors of the Sandoz Division have had, and likely will continue to have, a negative influence on Sandoz's results of operations.

        In the Vaccines and Diagnostics Division, the demand for some types of vaccines is seasonal, such as for influenza vaccines, while the demand for others, such as pediatric combination vaccines, are dependent upon birth rates in developed countries. Some vaccines, particularly seasonal influenza vaccines that make an important contribution to the division's net sales and profits, are considered to be commodities, meaning that there are few therapeutic differences among vaccines offered by competitors. The ability to develop differentiated, effective and safe vaccines, to gain approval for inclusion in national immunization recommendation lists, and to consistently produce and deliver high-quality vaccines in time for the relevant disease season are critical to the success of the Vaccines and Diagnostics Division.

Strategies for Sustainable Growth

        We believe we have one of the best portfolios of businesses to address the demands of the dynamically changing healthcare environment. In going beyond the traditional focus on patent-protected pharmaceuticals, this diversified healthcare portfolio offers significant benefits to patients, physicians and payors, while also mitigating the negative impact of increasing industry challenges in the area of patent-protected pharmaceuticals and providing attractive opportunities to benefit from expected faster growth in areas such as vaccines, generics and consumer health.

        We have one of the industry's highest-rated product development portfolios, as demonstrated by the industry-leading 15 major US and European regulatory approvals in 2007, and are taking important steps to further strengthen our R&D capabilities. Efforts are also underway to find more efficient ways to support new product launches and to improve productivity.

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Strengthen strategic healthcare portfolio, particularly non-pharmaceutical businesses

        We expect each of our four divisions to play a significant role in the future success of the Group, providing opportunities for growth by offering a range of medicines and vaccines to patients, physicians and payors. We will continue to evaluate opportunities to improve the competitiveness of these businesses and to better position the Group for success. The strong performances of both the Vaccines and Diagnostics and Sandoz Divisions in 2007 reflect the positive impact of recent investments in these fast-growing businesses. The focused diversification that our four businesses offer also helps to balance industry risks such as those recently encountered in the Pharmaceuticals Division in the US that include increasing regulatory scrutiny of drug safety and efficacy as well as lost sales as a result of more aggressive and risk-taking generics manufacturers.

Innovative medicines

        The aim of the Pharmaceuticals Division is to provide patients and physicians with new and better medicines with improved efficacy and fewer side-effects. We rank as one of the top 10 companies based on sales of patent-protected medicines, with leading positions in cardiovascular and cancer treatments and an expanding presence in neuroscience. Viewed as having one of the most respected pipelines in the industry, we will continue to invest heavily in research and development—particularly in biologic therapies. We will also review ways to more efficiently support new product launches by utilizing new technologies and advanced marketing tools. We also consider ourselves to be a preferred partner for strategic alliances with biotechnology companies—both for development compounds as well as new technologies—and these collaborations will remain important to future business developments.

Prevention

        The Vaccines and Diagnostics Division was created in April 2006 following our acquisition of the remaining stake in Chiron Corporation not already held by us, providing access to the fast-growing human vaccines market. This division markets vaccines and diagnostic tools that protect against life-threatening diseases. We further strengthened this business in September 2007 by entering into a strategic alliance with Intercell, an Austrian biotechnology company focused on vaccines development.

Cost-saving alternatives

        Sandoz markets generic products that replace branded medicines after patent expiry and free up funds for healthcare payors to spend on innovative medicines. With the acquisition in 2005 of two leading generic pharmaceuticals companies (Hexal AG and Eon Labs, Inc.), Sandoz became the world's second-largest generics company, with strengths in difficult-to-make generics and innovative product applications, including device technologies. Given these capabilities, which provide access to higher-value areas of the generics market, we expect Sandoz to become an increasing contributor to our future results of operations.

Patient and consumer empowerment

        The Consumer Health Division—composed of the OTC, Animal Health and CIBA Vision Business Units—markets high quality consumer products. These businesses have gained market share in their respective segments through a focus on strategic brands, product innovation and expansion in emerging markets. While divesting non-core activities, we have strengthened the three remaining healthcare businesses in the Consumer Health Division. For example, OTC was strengthened by acquiring the rights in 2006 to various OTC products in North America from Bristol-Myers Squibb Co., and Animal Health was supported by acquiring Sankyo Lifetech's animal health business in Japan in 2007.

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Step up innovation

        Maintaining a competitive advantage in the healthcare industry requires significant investments in R&D. Our ability to continue to grow all of our businesses and replace lost sales due to the loss of exclusivity for important products—as a result of patent expiration, generic challenges, competition from new branded products or changes in regulatory status—depends upon the ability of our R&D activities to identify and develop high-potential breakthrough products and bring them quickly to the market.

        Like our competitors in the healthcare industry, we will continue making significant investments in drug discovery—particularly in biologic medicines and related technologies. Steps are also being taken to accelerate R&D activities throughout the Group and to find ways to lower attrition rates among pipeline products in the final stages before approval. For example, a reorganization of the Pharmaceuticals Development organization began in 2007 with the aim of strengthening project focus, integrating decision making at the therapeutic franchise level and simplifying development decision-making structures.

        We have also been building our position in biologics, consistently growing our capabilities and expertise in the R&D of all biologic therapies, which now represent 25% of the pre-clinical research portfolio. These types of treatments, often referred to as "large molecules," are made from living cells and stimulate a response against specific disease targets. They are often intended to treat diseases that have been more challenging to treat with "small molecule" approaches based on chemical substances. In the second half of 2007, we formed the new Novartis Biologics Unit, establishing a dedicated innovation unit, with a strong biotech culture in the areas of discovery and development unique to biologics, and with full access to the extensive Novartis discovery organization that generates many targets across multiple therapeutic areas.

        The quality of the current development pipeline reflects investments made in our own R&D activities, in many cases more than 10-20 years ago, as well as recent acquisitions and licensing collaborations. We have consistently had one of the highest R&D investment rates, as a percentage of net sales, in the industry, reflecting our commitment to bringing innovative and differentiated products to the market with novel therapeutic benefits.

        Up to one-third of annual Pharmaceuticals Division R&D expenditures are used to reach licensing agreements with other companies, particularly specialized biotechnology companies, to co-develop promising compounds. These collaborations enable us to capitalize on the potential of these compounds and to expand our development pipeline. To complement internal R&D activities, we (like other pharmaceutical companies) have entered into a significant number of alliances in recent years. From time to time, we also make equity investments in a licensing partner or fully acquire a company to gain access to novel compounds. The industry-wide decline in R&D productivity in recent years, however, has lead to an increasing competition for collaborations with specialized niche players at the forefront of their particular field. Funding requirements for R&D activities are likely to continue to grow in the future and may, at times, even grow at a faster rate than net sales. These investments, however, are critical for our continuing success. In 2007, we invested $6.4 billion in R&D activities throughout the Group, a 21% increase over 2006.

Maximize successful product launches

        Efforts are underway to find more efficient ways to support new product launches and improve profit margins. A strong marketing message and rapid penetration of potential markets in different geographic territories are vital if a product is to attain peak sales as quickly as possible before the loss of patent protection or the entry of significant competitor products. We continually evaluate the appropriateness of our marketing models in our divisions and adjust the composition of our sales forces. For example, during 2007, we reduced our US pharmaceuticals sales force by approximately 1,000 positions due to changes in the product portfolio.

        In the Pharmaceuticals Division, we obtained 15 major regulatory approvals in 2007 in the US and Europe for new pharmaceuticals and successfully launched a number of new and other recently approved

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products. These include regulatory approvals in 2007 for Exforge and Tekturna/Rasilez (high blood pressure), Exelon Patch (Alzheimer's disease), Lucentis (age-related blindness), Tasigna (cancer) and Aclasta/Reclast (osteoporosis) as well as the continued rollout of Exjade (iron overload) and Xolair (asthma).

Improve organizational efficiency

        We are constantly exploring ways to improve productivity. In particular, we are taking actions to improve our competitiveness in a fast-changing healthcare environment through a new initiative that will result in a streamlined organizational structure and change the way we operate. This initiative, called "Forward," is expected to generate significant cost savings and help prepare us for future growth. At the same time, we will continue investing in higher-value activities, particularly the R&D of new biological therapies and expansion in key emerging markets.

        As part of "Forward", we will streamline and simplify organizational structures at our global headquarters as well as in the Pharmaceuticals and Consumer Health Divisions. These initiatives will remove excess management layers, eliminate structural duplications and reduce the amount of resources required for general and administrative functions. The organization will further evaluate ways to optimize supply networks worldwide, and Group-wide initiatives are underway to standardize and streamline shared functions—such as procurement, information technology and financial transaction processing—to provide greater benefits in cost management and economies of scale. Some of these administrative activities are also being outsourced or transferred to lower-cost countries.

        Through these initiatives, which are designed to maximize the resources available to support ongoing profitable growth, we aim to reduce our cost-base by approximately $1.6 billion by 2010 compared to 2007 levels. As a result of the related measures, we recorded a pre-tax restructuring charge of $444 million in the fourth quarter of 2007. The various initiatives are being implemented primarily at the divisional level to ensure businesses can continue to meet the needs of customers as well as to ensure fair and respectful treatment of associates. We will consult with works councils and comply with local labor laws. The proposed initiatives are expected to lead to the elimination of approximately 2,500 full-time positions, which represents approximately 2.5% of our current worldwide workforce. We will try to minimize the number of affected associates through natural attrition, vacancy management and social programs.

Acquisitions, Divestments and Other Significant Transactions

        We have made several acquisitions and divestments in recent years that have had, and are expected to continue to have, a significant impact on our financial condition and results of operations, see "Item 18. Financial Statements—note 2".

        In 2007, we became focused solely on healthcare by divesting the remainder of our Medical Nutrition Business Unit (effective July 1) and the Gerber Business Unit (effective September 1).

        Contributions from strategic acqusitions had a significant impact on our results of operations. The remaining stake in Chiron Corporation was acquired as of April 2006 to create the new Vaccines and Diagnostics Division, while Sandoz strengthened its position as a world leader in generics through the mid-2005 acquisitions of Hexal AG and Eon Labs, Inc.

        As a result of these acquisitions and other strategic transactions, our results of operations are increasingly impacted by charges for the amortization of intangible assets as well as impairment charges and other one-time costs related to the integration of acquisitions.

        We continually evaluate potential opportunities for targeted acquisitions or other strategic transactions, including product licensing agreements, that would improve our competitive position and create value for our shareholders.

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Divestments/Discontinued Operations in 2007

        On September 1, 2007, we completed the divestment of the Gerber infant products Business Unit for approximately $5.5 billion to Nestlé S.A. A pre-tax divestment gain of $4.0 billion was recorded in the third quarter of 2007.

        On July 1, 2007, we completed the divestment of the remainder of the Medical Nutrition Business Unit for approximately $2.5 billion to Nestlé S.A. A pre-tax divestment gain of $1.8 billion was recorded in the third quarter of 2007.

        Both the Gerber and Medical Nutrition Business Units (including the Nutrition & Santé business) are reflected as discontinued operations in our consolidated financial statements. These businesses had combined 2007 net sales of $1.7 billion and operating income of $311 million before their divestment. In 2007, net income from discontinued operations, including the after-tax divestment gains, totaled $5.4 billion, compared to $377 million in 2006 and $260 million in 2005.

Significant Transactions in 2007

        On September 28, 2007, we entered into a strategic alliance with Intercell AG, an Austrian biotechnology company focused on vaccines development. As a consequence of the agreement, we paid $383 million (EUR 270 million) and recorded $207 million (EUR 146 million) of intangible assets and acquired an additional 4.8 million shares for $176 million (EUR 124 million), which increased our holding in Intercell to 15.9%.

        On September 14, 2007, we and Bayer Schering Pharma AG received regulatory approval to complete an agreement related to various rights for the multiple sclerosis treatment Betaseron® under an earlier agreement between Schering and Chiron Corporation, transferred to Novartis in April 2006. Under the new agreement, we received a one-time payment of approximately $200 million, principally for manufacturing facilities transferred to Bayer Schering, as well as receiving the rights to market our own branded version of Betaseron® starting in 2009 (pending regulatory approvals).

Acquisitions in 2006

        On April 20, 2006, we completed the acquisition of the remaining 56% of the shares of Chiron Corporation that we did not already own for approximately $5.7 billion. For the period from January 1, 2006 until completion of the acquisition, the 44% minority interest in Chiron held by us had been accounted for using the equity method. For the period after completion of the acquisition, Chiron has been fully consolidated with its identifiable assets and liabilities being revalued to their fair value at the date of acquisition. Following the acquisition, Chiron's vaccines and diagnostic activities are reported as a separate Division, called Vaccines and Diagnostics, and its pharmaceuticals activities are consolidated into the Pharmaceuticals Division's results.

        In 2006, we acquired 100% of NeuTec Pharma plc, a biopharmaceuticals company specializing in hospital anti-infectives, for $606 million. We have fully consolidated NeuTec's financial results, which have not included any sales, in our financial statements since July 14, 2006.

Divestments/Discontinued Operations in 2006

        During 2006, we announced plans to divest the components of our Medical Nutrition Business Unit, which was part of our Consumer Health Division. This Business Unit is disclosed as discontinued operations in all periods presented in our consolidated financial statements.

        On February 17, 2006, we completed the sale of Nutrition & Santé for $211 million to ABN AMRO Capital France, resulting in a pre-tax divestment gain of $129 million.

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Acquisitions in 2005

        On June 6, 2005, we completed the 100% acquisition of Hexal AG for $5.3 billion in cash, with the results consolidated into our Sandoz Division from that date.

        On July 20, 2005, we completed the acquisition of 100% of Eon Labs, inc. for $2.6 billion, with the results consolidated into our Sandoz Division from that date.

        On July 14, 2005, our OTC Business Unit announced the acquisition of the rights to produce and market a portfolio of over-the-counter brands from Bristol-Myers Squibb sold principally in the US for $660 million in cash. The closing date for the North American product portfolio was August 31, 2005; that for the South American portfolio, September 30, 2005 and for the Europe, Middle East and African portfolio, January 6, 2006 with the results consolidated into the OTC Business Unit of our Consumer Health Division from these dates.

EFFECTS OF CURRENCY FLUCTUATIONS

        We transact our business in many currencies other than the US dollar, our reporting currency. In 2007, 39% of net sales from continuing operations were made in US dollars, 30% in euros, 6% in Japanese yen, 2% in Swiss francs and 23% in other currencies. During the same period, 36% of our expenses from continuing operations arose in US dollars, 28% in euros, 14% in Swiss francs, 5% in Japanese yen and 17% in other currencies. As a result, our business is affected by fluctuations in the exchange rates among these different currencies.

        In 2006, 43% of our net sales from continuing operations were made in US dollar, 27% in euro, 7% in Japanese yen, 2% in Swiss franc and 21% in other currencies. During the same period, 38% of our expenses from continuing operations arose in US dollar, 25% in euro, 16% in Swiss franc, 5% in Japanese yen and 16% in other currencies.

        In 2005, 40% of our net sales from continuing operations were generated in US dollar, 28% in euro, 2% in Swiss franc, 8% in yen and 22% in other currencies. During the same period, 31% of our operating costs from continuing operations were generated in US dollar, 27% in euro, 18% in Swiss franc, 5% in yen, and 19% in other currencies.

        Because we prepare our financial statements in US dollars, fluctuations in the exchange rates between the US dollar and other currencies may have an effect both on our results of operations and on the reported value of our assets, liabilities, revenue and expenses as measured in US dollars, which 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 non-US dollar denominated assets and liabilities into US dollars at the exchange rates prevailing in the market as of the relevant balance sheet date. Consequently, even if the amounts or values of these items remain unchanged in the respective currency, changes in exchange rates have an impact on the amounts or values of such items in our consolidated financial statements. For purposes of the Group's consolidated income statements, non-US dollar revenue and expense items are translated into US dollars at average exchange rates prevailing during the relevant period.

        We seek to manage our currency exposure by engaging in hedging transactions where management deems it appropriate to do so. For 2007, we entered into various contracts that change in value as foreign exchange rates change 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 we manage our foreign exchange rate exposure, see also "Item 18. Financial Statements—note 1" and "—note 5" and "—note 15."

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        The average value of the US dollar as compared to other important currencies for Novartis, deteriorated significantly in 2007 as shown by the following table. The table sets forth the foreign exchange rates of the US dollar against the Swiss franc, euro and the Japanese yen, respectively, used for foreign currency translation when preparing the Group's consolidated financial statements.

 
  2007
  2006
  2005
$ per unit

  Average for year
  Year end
  Average for year
  Year end
  Average for year
  Year end
EUR   1.371   1.465   1.256   1.317   1.245   1.186
CHF   0.834   0.881   0.798   0.819   0.804   0.762
JPY (100)   0.850   0.884   0.860   0.841   0.910   0.851

        This decline in the value of the US dollar in 2007 compared to 2006 has had a significant positive effect on the Group's financial condition and results of operation as reported in US dollars in 2007, as shown by the following table:

Currency impact on key figures—Continuing Operations

 
  Local Currencies Change in % 2007
  Local Currencies Change in % 2006
  $ Change in % 2007
  $ Change in % 2006
Net sales   6   16   11   17
Operating income   (14 ) 18   (11 ) 17
Net income   (7 ) 17   (4 ) 16

        For additional information on the effects of currency fluctuations see "Item 11. Quantitative and Qualitative Disclosures about Non-Product-Related Market Risk."

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Our principal accounting policies are set out in "Item 18. Financial Statements—note 1" and are prepared in accordance with IFRS as issued by the IASB. As a result of uncertainties inherent in our business activities, we need to make certain estimates and assumptions that require we make difficult, subjective and complex judgments. Because of uncertainties inherent in such judgments, actual outcomes and results may differ from our assumptions and estimates. 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 fixed and determinable, and collectability is reasonably assured. At the time of the sale, we also record estimates for a variety of sales deductions, including rebates, discounts and incentives, and product returns. Sales deductions are reported as a reduction of revenue.

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Deductions from Revenues

        As is typical in the pharmaceutical industry, our gross sales are subject to various deductions, primarily composed 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. The US market has the most complex arrangements related to revenue deductions. Specific reference is therefore made to the US market and where applicable to the Pharmaceuticals Division's primary US operating unit, Novartis Pharmaceuticals Corporation (NPC). However, in a number of countries outside the US, including major European countries, we provide rebates to government entities. These rebates are often legislatively mandated.

    The US Medicaid program is a State government-administered program that uses State and federal funds to provide assistance to certain vulnerable and needy individuals and families. In 1990, the Medicaid Drug Rebate Program was established to reduce State and federal expenditures for prescription drugs. Under the rebate program, Novartis subsidiaries have signed agreements to provide a rebate on drugs paid for by a State. Provisions for estimating Medicaid rebates are calculated using a combination of historical experience, product and population growth, product price increases, the mix of contracts and specific terms in the individual State agreements. These provisions are adjusted based upon established processes and experiences from re-filing data with individual States. For Medicaid, calculating rebates involves interpretating relevant regulations, which are subject to challenge or change in interpretative guidance by government authorities.

    On January 1, 2006, an additional prescription drug benefit was added to the US Medicare program, which funds healthcare benefits to individuals over the age of 65. Individuals that previously had dual Medicaid/Medicare drug benefit eligibility had their Medicaid prescription drug coverage replaced on January 1, 2006, by the new Medicare Part D coverage, provided through private prescription drug plans. This change led to a significant shift of plan participants between programs in which the US subsidiaries participate. Provisions for estimating Medicare Part D rebates are calculated based on the terms of individual plan agreements, product sales and population growth, product, price increases and the mix of contracts.

    Since Medicaid and Medicare rebate claims are typically submitted to Novartis up to six months after the products are dispensed to patients, any rebate adjustments may involve revisions of provisions for several periods.

    Our subsidiaries in the US participate in industry and government sponsored programs designed to offer savings on prescription drugs to eligible patients. These savings vary based on a patient's current drug coverage and personal income level. Provisions for the subsidiaries' obligations under these programs are based on historical experience, trend analysis and current program terms. The introduction of Medicare Part D has reduced the materiality of these programs.

    Wholesaler chargebacks occur where our subsidiaries have arrangements with indirect customers in the US to sell products at prices that are lower than the list price charged to wholesalers. A wholesaler chargeback represents the difference between the invoice price to the wholesaler and the indirect customer's contract discount price. We account for vendor chargebacks by reducing accounts receivable by an amount equal to our estimate of chargebacks attributable to a sale. Provisions for estimated chargebacks are calculated using a combination of factors such as historical experience, product growth rates, payments, level of inventory in the distribution channel, the terms of individual agreements and our estimate of claims processing time lag. Wholesaler chargebacks are generally settled within one to three months of incurring the liability by reducing trade receivables.

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    We offer customer rebates to key managed healthcare plans, group purchasing organizations and other direct and indirect customers to sustain and increase the market share of our products. These rebate programs provide customers a rebate after they attain certain performance parameters relating to product purchases, formulary status or pre-established market share milestones relative to competitors. Since rebates are contractually agreed upon, rebates are estimated based on the terms of individual agreements, historical experience, expected mix of reimbursement programs and projected product growth rates. We adjust provisions related to customer rebates periodically to reflect actual experience.

    To evaluate the adequacy of provision balances, we use internal and external estimates of the level of inventory in the distribution channel, actual claims data received and the lag time for processing rebate claims. Management estimates the level of inventory of the relevant product held by retailers and in transit. External data sources include reports of wholesalers and third party market data purchased by Novartis.

    When we sell a product that the customer has a right to return, we record a provision for estimated sales returns, based on the historical rate of returns. Other factors are also considered, such as product recalls, expected changes in the marketplace and, in the US, introductions of generic products. In 2007, sales returns amounted to approximately 1% of gross product sales. Especially in the Vaccines and Diagnostics Division, when there is no historical rate of return experience, sales are only recorded based on evidence of consumption of the product.

    We adjust the shipping patterns of our pharmaceutical products to maintain customer inventories that are consistent with underlying patient demand. In the US we monitor inventory levels at wholesalers based on gross sales volume and prescription volumes obtained from third party data and information received from key wholesalers. Based on this information, we estimate that inventories of our pharmaceutical products on hand at wholesalers and other distribution channels in the US were approximately one month at December 31, 2007.

    NPC has entered into fee-for-service agreements with certain US pharmaceutical wholesalers. These agreements cover items such as product returns, timing of payment, processing of chargebacks, provision of inventory data and the quantity of inventory held by the wholesaler. These agreements provide a financial disincentive for wholesalers to purchase product quantities in excess of what is necessary to meet current demand.

    We offer cash discounts to customers in the US and other countries to encourage prompt payment. Cash discounts, which are typically 2% of gross sales in the US, are accrued at the time of invoicing and deducted from revenue.

    Following a decrease in the price of one of its products, we generally grant customers a "shelf-stock adjustment" relating to the customer's existing inventory of that product. Provisions for shelf-stock adjustments, which are primarily relevant within the Sandoz Division, are determined at the time of the price decline, or at the point of sale if a price decline is reasonably estimable, based on estimated inventory levels of the relevant product.

    Other sales discounts, such as consumer coupons and discount cards, are also offered. These discounts are recorded at the time of sale, or when the coupon is issued, and are estimated utilizing historical experience and the specific terms for each program.

    Discounts, rebates or other deductions shown on invoices to customers are generally deducted directly from gross sales without recording them in the revenue deduction provision.

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        The following tables show the worldwide extent of our revenue deductions, related payment experiences and provisions:

Provision for revenue deductions

 
   
   
   
   
    
 
 
 
Income Statement charge

   
   
 
  Provisions offset against gross trade accounts receivable at January 1, 2007
   
  Effect of currency translation and from discontinued operations
   
  Provisions offset against gross trade accounts receivable at December 31, 2007
   
2007

  Provisions at
January 1, 2007

  Payments/utilizations
  Adjustments of
prior years

  Current year
  Provisions at December 31, 2007
 
  ($ millions)

  ($ millions)

  ($ millions)

  ($ millions)

  ($ millions)

  ($ millions)

  ($ millions)

  ($ millions)

US Medicaid, Medicare and State program rebates & credits including prescription drug saving card rebates       538       780   (91 ) 823       490
US managed healthcare rebates       235       (477 ) (21 ) 460       197
Non-US healthcare plans & programs rebates       76   14   (133 ) 5   212       174
Chargebacks including hospital chargebacks   329       (16 ) (2,319 ) (5 ) 2,307   (296 )  
Direct customer discounts, cash discounts & other rebates   273   108   4   (1,243 ) (23 ) 1,376   (336 ) 159
Sales returns & other deductions       471   (30 ) (515 ) (20 ) 586       492
   
 
 
 
 
 
 
 
Total   602   1,428   (28 ) (5,467 ) (155 ) 5,764   (632 ) 1,512
   
 
 
 
 
 
 
 
 
   
   
   
   
    
 
 
 
Income Statement charge

   
   
 
  Provisions offset against gross trade accounts receivable at January 1, 2006
   
  Effect of currency translation and from discontinued operations
   
  Provisions offset against gross trade accounts receivable at December 31, 2006
   
2006

  Provisions at
January 1, 2006

  Payments/utilizations
  Adjustments of
prior years

  Current year
  Provisions at December 31, 2006
 
  ($ millions)

  ($ millions)

  ($ millions)

  ($ millions)

  ($ millions)

  ($ millions)

  ($ millions)

  ($ millions)

US Medicaid, Medicare and State program rebates & credits including prescription drug saving card rebates       497       (643 ) (35 ) 719       538
US managed healthcare rebates       256       (457 ) (5 ) 441       235
Non-US healthcare plans & programs rebates       35   6   (108 ) 2   141       76
Chargebacks including hospital chargebacks   379       7   (2,340 ) (3 ) 2,286   (329 )  
Direct customer discounts, cash discounts & other rebates   256   66   89   (989 ) (22 ) 981   (273 ) 108
Sales returns & other deductions       408   43   (579 ) (13 ) 612       471
   
 
 
 
 
 
 
 
Total   635   1,262   145   (5,116 ) (76 ) 5,180   (602 ) 1,428
   
 
 
 
 
 
 
 

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Gross to Net sales reconciliation

 
  Income Statement charge
   
   
 
 
  Charged through revenue deduction provisions 2007
  Charged directly without being recorded in revenue deduction provisions 2007
  Total 2007
  In % of 2007 gross sales
 
 
  ($ millions)

  ($ millions)

  ($ millions)

   
 
Gross sales subject to deductions from continuing operations           46,426   100.0  
Gross sales subject to deductions from discontinued operations           1,985      
           
     
Group gross sales subject to deductions           48,411      
US Medicaid, Medicare and State program rebates and credits, including prescriptions drug savings card   (731 ) (57 ) (788 ) (1.7 )
US managed healthcare rebates   (439 )     (439 ) (0.9 )
Non-US healthcare plans and program rebates   (217 ) (113 ) (330 ) (0.7 )
Chargebacks (including hospitals)   (2,247 ) (73 ) (2,320 ) (5.0 )
Direct customer discounts, cash discounts and other rebates   (1,330 ) (1,988 ) (3,318 ) (7.1 )
Sales returns and other deductions   (561 ) (598 ) (1,159 ) (2.5 )
   
 
 
 
 
Total gross to net sales adjustments from continuing operations   (5,525 ) (2,829 ) (8,354 ) (17.9 )
           
 
 
Net sales from continuing operations           38,072   82.1  
               
 
Total gross to net sales adjustments from discontinued operations   (84 ) (173 ) (257 )    
   
 
 
     
    (5,609 ) (3,002 ) (8,611 )    
   
 
 
     
Group net sales           39,800      
           
     

Acquisition accounting

        Our consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition. We account for the acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill in the balance sheet and is denominated in the local currency of the related acquisition. Goodwill is allocated to an appropriate cash-generating unit, which is the smallest group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets. This involves considerable management judgement.

        In-Process Research & Development (IPR&D) is valued as part of the process of allocating the purchase price of an acquisition. This amount needs to be recorded separately from goodwill, is allocated to cash-generating units and must be assessed for impairment on an annual basis.

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        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, even if uncertainties continue to exist as to whether the R&D projects will ultimately be successful in producing a saleable product.

        The numerous judgments made in estimating the fair value to be assigned to each class of assets acquired and liabilities assumed can materially affect the Group's results of operations.

        The valuations are based on information available at the acquisition date and are based on expectations and assumptions that have been deemed reasonable by management.

Impairment of long-lived assets

        We review long-lived assets, other than goodwill and IPR&D, for impairment, whenever events or changes in circumstance indicate that the balance sheet carrying amount of the asset may not be recoverable. In order to assess if there is an impairment, we estimate the future cash flows expected to result from the asset and its eventual disposal.

        We consider goodwill to have an indefinite life and it is subject to impairment testing at least annually. Any goodwill impairment charge is recorded in the income statement under other income and expense. IPR&D must also be assessed for impairment on an annual basis and any impairment charge is recorded in research & development expenses. Once a project included in IPR&D has been successfully developed and is available for use, it is amortized over its useful life under cost of goods sold, where any related impairment charge is also recorded.

        If the balance sheet carrying amount of the asset exceeds the higher of its value in use or our anticipated fair value less cost of sale, we will recognize an impairment loss for the difference. For intangible assets, including IPR&D or product and marketing rights, we typically use the discounted cash flow method. This method starts with a forecast of all expected future net cash flows. These cash flows, which reflect the risks and uncertainties associated with the assets, are discounted at an appropriate rate to net present value.

        The net present values involve highly sensitive estimates and assumptions specific to the nature of the Group's activities with regard to:

    The amount and timing of projected future cash flows;

    The discount rate selected;

    The outcome of R&D activities (compound efficacy, results of clinical trials, etc.);

    The amount and timing of projected costs to develop the IPR&D into commercially viable products;

    The probability of obtaining regulatory approval;

    Long-term sales forecasts for periods of up to 20 years;

    Sales erosion rates after the end of patent protection and timing of the entry of generic competition; and

    The behavior of competitors (launch of competing products, marketing initiatives, etc.).

        Factors that could result in shortened useful lives or impairments include:

    Lower than expected sales for acquired products or for sales associated with patents and trademarks;

    Lower than anticipated future sales resulting from acquired R&D;

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    The closing of facilities; and

    Changes in the planned use of property, plant or equipment.

        We have adopted a uniform method for assessing goodwill for impairment and any other intangible asset indicated as possibly impaired. If no cash flow projections for the whole useful life of an intangible asset are available, we utilize cash flow projections for the next five years based on management's range of forecasts, with a terminal value based on sales projections that are usually in line or lower than inflation for later periods. Typically three probability-weighted scenarios are used.

        The discount rates used are based on our weighted average cost of capital adjusted for specific country and currency risks associated with the cash flow projections. Since the cash flows also take into account tax expenses a post-tax discount rate is utilized.

        Due to the above factors, actual cash flows and values could vary significantly from the 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 cost of sale or on the value-in-use which is derived from applying discounted future cash flows using the key assumptions indicated below:

 
  Pharmaceuticals
  Vaccines and Diagnostics
  Sandoz
  Consumer Health
 
  (%)

  (%)

  (%)

  (%)

Sales growth rate assumptions after forecast period   3.0   2.5   0.0 to 7.0   (2.0) to 3.0
Discount rate   7.5   7.5   7.0 to 13.0   7.0 to 9.0

        In 2007, we recorded impairment charges of $482 million principally relating to an impairment of $320 million for Famvir product rights due to an earlier than anticipated challenge to our patent and subsequent loss of sales in the Pharmaceuticals Division. Additionally, we recorded various impairment charges of $126 million mainly for upfront and milestone payments in the Pharmaceuticals Division and $36 million for currently marketed products and other intangible assets in the Sandoz and Consumer Health Divisions. In 2006, we recorded impairment charges of $126 million principally relating to capitalized milestone payments in the Pharmaceuticals Division as well as marketed products in our Sandoz Division. In 2005, we recorded impairment charges of $401 million principally relating to the impairment of NKS 104 marketing rights in our Pharmaceuticals Division of $332 million and $37 million of IPR&D in our Sandoz Division.

        The amount of goodwill and other intangible assets on our consolidated balance sheet has increased significantly in recent years, primarily as a result of our recent acquisitions. Although we do not currently have an indication of any significant additional impairments, impairment testing could lead to material impairment charges in the future. For more information, see "Item 18. Financial Statements—note 9."

Investments in associated companies

        We use the equity method to account for investments in associated companies (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). Because we make various estimates in applying the equity method, we may need to make subsequent adjustments to the amounts recorded in our consolidated financial statements after more financial and other information becomes publicly available, for example in respect to our investment in Roche Holding AG.

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Retirement and other post-employment benefit plans

        We sponsor pension and other post-employment benefit plans in various forms. These plans cover a significant portion of our associates. We are required to make significant assumptions about future events in calculating the expense and liability related to these plans. These include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases. In addition, our actuarial consultants use statistical information such as withdrawal and mortality rates in connection with these estimates. Our assumptions and the assumptions used by our actuarial consultants may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. A decrease in the discount rate by 50 basis points would have increased the year-end defined benefit obligation by $1.1 billion. The pension expense would have been higher by $100 million if the prior year's discount rate and expected return on assets had each been 50 basis points lower than actually assumed. We record differences between assumed and actual income and expense as actuarial gains or losses in the Consolidated Statement of Recognized Income and Expense. These differences could have a material effect on our total equity. For more detail on our obligations under retirement and other post-employment benefit plans and the underlying actuarial assumptions, see "Item 18. Financial Statements—note 26."

Equity-based compensation

        The fair value of our shares, Novartis American Depositary Shares (ADSs) and related options granted to associates as compensation, is recognized as an expense over the related vesting or service period. The fair value of the options at the grant dates is calculated using the trinomial valuation method. Accurately measuring the value of our share options granted to associates is difficult and requires an estimate of factors that we input into the valuation model. The key factors involve an estimate of future uncertain events, the expected share price volatility and the expected dividend yield. Shares and ADSs are valued using the market value on the grant date. The amounts for shares and options are charged to income over the relevant vesting or service periods, adjusted to reflect actual and expected levels of vesting. The charge for equity-based compensation is included in the personnel expenses of the various subsidiaries where the associates are employed. For detailed information on Novartis' equity-based compensation plans and the assumptions underlying the valuation of share options granted to associates for 2007, see "Item 18. Financial Statements—note 27."

Contingencies and environmental liabilities

        A number of our entities are involved in various intellectual property, product liability, commercial, employment and wrongful discharge, environmental and tax litigations and claims, government investigations and other legal proceedings arising out of the normal conduct of their businesses, see "Item 18. Financial Statements—note 19."

        We record accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. We adjust these accruals periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and we consider such factors 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 reasonably estimable. We accrue legal defense costs expected to be incurred in connection with a loss contingency when probable and reasonably estimable.

        We record provisions for environmental remediation costs when expenditure on remedial work is probable and the cost can be reliably estimated. Remediation costs are provided for under non-current liabilities and are estimated by calculating the present value of the costs expected to be incurred. Provisions relating to estimated future expenditure for contingencies and environmental liabilities do not reflect any insurance or other claims or recoveries, as we only recognize insurance or other recoveries at such time the amount is reasonably estimable and collection is virtually certain.

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New Accounting Pronouncements

        The following new or amended IFRS standards or interpretations could have a significant impact on the Group's future financial reporting. The Group has early adopted IFRS 7 "Financial Instruments: Disclosures" and corresponding amendments to other standards already in 2006, however, the Group has not early adopted the following amendments to standards or new standards which need adoption by January 1, 2009 at the latest: IAS 1 "Presentation of Financial Statement", IAS 23 "Borrowing Costs" and IFRS 8 "Operating Segments". The Group is currently evaluating the potential impact, if any, that the adoption of these new or amended standards will have on the Group's consolidated financial statements; however, we believe they will not have a material impact. See "Item 18. Financial Statements—note 1".

SEGMENT REPORTING

        We are divided on a worldwide basis into four operating divisions (Pharmaceuticals, Vaccines and Diagnostics, Sandoz, Consumer Health) and Corporate activities. Our four operating divisions reflect our internal management structure. They are managed separately because they each manufacture, distribute and sell distinct products that require differing marketing strategies.

        Our inter-divisional sales are made at amounts considered to approximate arm's-length transactions. The accounting policies of the Divisions are the same as those of the Group. We principally evaluate Divisional performance and allocates resources based on their operating income.

Pharmaceuticals Division

        Our Pharmaceuticals Division researches, develops, manufactures, distributes, and sells branded pharmaceuticals in the following therapeutic areas: Cardiovascular & Metabolism; Oncology & Hematology; Neuroscience; Respiratory; Infectious diseases, Transplantation and Immunology; Ophthalmics, Dermatology, Gastrointestinal & Urinary; and Arthritis & Bone. Our Pharmaceuticals Division is organized into global business franchises responsible for the research, 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 Oncology Business Unit is not required to be separately disclosed as a segment since it shares common long-term economic perspectives, customers, research, development, production, distribution and regulatory environments with the rest of the Pharmaceuticals Division. Our Pharmaceuticals Division is the most important of our Divisions, accounting in 2007 for $24.0 billion, or 63%, of our net sales from continuing operations and for $6.1 billion, or 76%, of our operating income from continuing operations excluding Corporate income and expense.

Vaccines and Diagnostics Division

        Our Vaccines and Diagnostics Division is a recently-created division focused on the development of preventive vaccine treatments and diagnostic tools. It was formed in April 2006 following the acquisition of the remaining stake in Chiron Corporation not already held by Novartis. The division has two activities: Novartis Vaccines and Chiron. Novartis Vaccines is the world's fifth-largest vaccines manufacturer and the second-largest supplier of influenza vaccines in the US. Key products also include meningococcal, pediatric and travel vaccines. Chiron 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 2007, our Vaccines and Diagnostics Division accounted for $1.5 billion, or 4%, of our net sales from continuing operations and provided $72 million, or 1%, of our operating income from continuing operations excluding Corporate income and expense.

Sandoz Division

        Our Sandoz Division is a leading global generic pharmaceuticals company that develops, produces and markets drugs as well as pharmaceutical and biotechnological active substances. Through Sandoz, we

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are the only major pharmaceutical company to have leadership positions in both patented medicines as well as generic pharmaceuticals. Our Sandoz Division has activities in Retail Generics, Anti-Infectives and Biopharmaceuticals. In Retail Generics, Sandoz develops and manufactures active ingredients and finished dosage forms of medicines no longer covered by patents. Retail Generics also supplies certain active ingredients to third parties. In Anti-Infectives, Sandoz develops and manufactures off-patent active pharmaceutical ingredients and intermediates, mainly antibiotics, for internal use by Retail Generics and for sale to third-party customers. In Biopharmaceuticals, Sandoz develops and manufactures protein- or biotechnology-based products no longer protected by patents (known as biosimilars or follow-on biologics) and provides biotech manufacturing to other companies on a contract basis. Sandoz offers more than 950 compounds in over 5,000 dosage forms in more than 130 countries. Sandoz is our second-largest Division, both in terms of its contribution to our net sales and operating income from continuing operations. In 2007, Sandoz accounted for $7.2 billion, or 19% of our net sales from continuing operations and for $1.0 billion, or 13% of our operating income from continuing operations excluding Corporate income and expense.

Consumer Health Division

        Our Consumer Health Division consists of three Business Units: OTC (over-the-counter medicines), Animal Health and CIBA Vision. Each has its own manufacturing, distribution and selling capabilities. However, none are material enough to the Group to be separately disclosed as a segment. OTC offers over-the-counter self medications, Animal Health provides veterinary products for farm and companion animals and the CIBA Vision Business Unit markets contact lenses, lens care products and ophthalmic products.

        Our Medical Nutrition and Gerber Business Units, which were previously included in the Consumer Health Division, were divested during 2007. The results of these Business Units have been reclassified and disclosed as discontinued operations in all periods in our consolidated financial statements included in this Financial Report. For more detail, see "—Factors Affecting Results of Operations—Acquisitions, Divestments and Other Significant Transactions" and "Item 18. Financial statements—note 2" and "—note 23.2" above.

        In 2007, our Consumer Health Division (excluding discontinued operations) accounted for $5.4 billion, or 14% of our net sales from continuing operations and for $0.8 billion, or 10% of our operating income from continuing operations excluding Corporate income and expense.

Corporate

        Income and expenses relating to Corporate include the costs of our headquarters and those of our corporate coordination functions in major countries. In addition, Corporate includes certain items of income and expense that are not attributable to specific divisions.

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 was significantly affected by a number of significant acquisitions during 2007, 2006 and 2005. For more detail on these acquisitions and divestments and how they have affected our results, see "—Factors Affecting Results of Operations—Acquisitions, Divestments and Other Significant Transactions" above.

Divestment of Medical Nutrition Business Unit and Gerber Business Unit

        The results of our Medical Nutrition Business Unit and of our Gerber Business Unit in our Consumer Health Division are reported as discontinued operations for 2007, 2006 and 2005 in our consolidated financial statements. As a result, the divestment of these Business Units does not affect the

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comparability of year-on-year results of operations on a continuing operations basis, either for the Group or for the Consumer Health Division.

Currency Fluctuations

        The continuing decline in the value of the US dollar, the reporting currency of Novartis, compared to major currencies has had a significant positive effect on our results of operations in 2007 and therefore the comparability of our results of operations for 2007, 2006 and 2005. For more information, see "—Effects of Currency Fluctuations" above.

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RESULTS OF OPERATIONS

        The following table sets forth selected income statement data for each of the periods indicated.

 
  2007
  2006
  2005
 
 
  ($ millions)

  ($ millions)

  ($ millions)

 
Group net sales   39,800   37,020   32,212  
Group operating income and divestment gains(1)   12,933   8,174   6,905  

Net sales from continuing operations

 

 

 

 

 

 

 
Pharmaceuticals   24,025   22,576   20,262  
Vaccines and Diagnostics   1,452   956      
Sandoz   7,169   5,959   4,694  
Consumer Health   5,426   4,902   4,490  
   
 
 
 
Net sales from continuing operations   38,072   34,393   29,446  
Other revenues   875   712   307  
Cost of goods sold   (11,032 ) (9,411 ) (7,439 )
Marketing & sales   (11,126 ) (10,092 ) (9,019 )
Research & development   (6,430 ) (5,321 ) (4,797 )
General & administration   (2,133 ) (1,882 ) (1,614 )
Other income & expense   (1,445 ) (757 ) (377 )
   
 
 
 
Operating income from continuing operations(2)   6,781   7,642   6,507  
   
 
 
 

Operating income from continuing operations by Division

 

 

 

 

 

 

 
Pharmaceuticals   6,393   6,703   6,014  
Vaccines and Diagnostics   72   (26 )    
Sandoz   1,039   736   342  
Consumer Health   909   761   657  
Corporate income and expense, net   (1,632 ) (532 ) (506 )
   
 
 
 
Operating income from continuing operations(2)   6,781   7,642   6,507  
Income from associated companies   412   264   193  
Financial income   531   354   461  
Interest expense   (237 ) (266 ) (294 )
Taxes   (947 ) (1,169 ) (986 )
   
 
 
 
Net income from continuing operations   6,540   6,825   5,881  
Net income from discontinued operations   5,428   377   260  
   
 
 
 
Group net income   11,968   7,202   6,141  
   
 
 
 
Attributable to:              
  Shareholders of Novartis AG   11,946   7,175   6,130  
  Minority interests   22   27   11  

(1)
Group operating income and divestment gains includes charges for $590 million Corporate environmental provision increase in 2007 and a $444 million restructuring charge in 2007 for the "Forward" initiatives as well as pre-tax divestment gains of $5.8 billion from Medical Nutrition and Gerber.

(2)
Operating income includes charges for $590 million Corporate environmental provision increase in 2007 and a $444 million restructuring charge in 2007 for the "Forward" initiative.

Overview of Total Group

        We achieved record results for the total Group in 2007, with net sales rising 8% (+3% in local currencies) and net income advancing 66% to $12.0 billion. Sandoz and Vaccines and Diagnostics led the expansion with double-digit net sales growth and strong contributions to operating income, while Consumer Health provided additional support with a solid performance. The sales slowdown in

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Pharmaceuticals in 2007 reflected the negative impact of generic competition in the US for some products and the loss of Zelnorm.

        Included in total Group results for 2007 were contributions from Medical Nutrition (until June 30) and Gerber (until August 31) before divestment in separate transactions. These were the final divestments as part of the Group's strategy to focus solely on growth areas of healthcare with innovative medicines as well as generic pharmaceuticals, vaccines and diagnostics, and targeted consumer health products.

        The 2007 results further include significant charges of more than $1 billion for a Corporate environmental provision increase of $590 million, which includes the related share of any potential remediation costs which includes the historical landfills in the Basel region as well as restructuring charges for "Forward" of $444 million. This strategic initiative was launched in December 2007 to improve competitiveness and help us more rapidly meet the needs of patients and customers. This initiative, which is now underway and will be implemented in 2008 and 2009, will simplify organizational structures, accelerate and decentralize decision-making processes, redesign the way we operate and provide productivity gains. Pre-tax annual cost savings of approximately $1.6 billion are targeted in 2010.

        Our Group net sales increased 15% in 2006 to $37.0 billion compared to 2005. All divisions delivered strong performances due to a mixture of organic growth and contributions from acquisitions. Higher sales volumes added six percentage points to our Group net sales growth and acquisitions seven percentage points. Net price changes and currency translation had a positive impact of one percentage point each. In 2006 our Group net income rose 17% to $7.2 billion. Excluding the impact of Chiron acquisition-related costs of $451 million, Group net income would have increased 25%.

2007 Compared to 2006

        The following compares our results for the year ended December 31, 2007 to those for the year ended December 31, 2006. Our analysis is divided as follows:

    1.
    Overview of Continuing Operations

    2.
    Net Sales by Division

    3.
    Operating Income by Function

    4.
    Operating Income by Division

    5.
    Net Income

1. Overview of Continuing Operations

        The strong contributions from Sandoz and Vaccines and Diagnostics led the overall expansion in net sales from continuing operations, which rose 11% (+6% in local currencies, or lc) to $38.1 billion from $34.4 billion in 2006. Higher sales volumes accounted for five percentage points of the increase in net sales, while acquisitions contributed two percentage points and currencies provided five percentage points. However, net price decreases reduced net sales one percentage point.

        Sandoz led the Group with a dynamic performance as net sales advanced 20% (+13% lc) to $7.2 billion, providing an incremental contribution of more than $1 billion to annual net sales in 2007. The Vaccines and Diagnostics and Consumer Health Divisions also generated double-digit expansion in net sales. However, the Pharmaceuticals Division experienced a slowdown as net sales rose 6% (+2% lc) to $24.0 billion from $22.6 billion in 2006. Strong sales performances outside the United States and leading positions for many top ten products were impacted by the entry of generics in the US for four products—Lotrel, Lamisil, Trileptal and Famvir—and the suspension of Zelnorm.

        The US remained the single largest market for Novartis, representing 34% of net sales from continuing operations (39% in 2006) despite a Group-wide decline of 1.3% in US net sales to

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$13.1 billion. Europe increased its contribution to 42% of Group net sales from continuing operations (38% in 2006) and the rest of the world rose to 24% (23% in 2006).

        Operating income from continuing operations fell 11% to $6.8 billion, reflecting the lost contributions from the US pharmaceuticals business as well as significant charges in 2007, primarily the Corporate environmental provision increase of $590 million and the restructuring charge of $444 million for the "Forward" initiative to improve the Group's competitiveness. Excluding these two charges, which totaled approximately $1.0 billion, operating income rose 2%.

        Net income from continuing operations declined 4% to $6.5 billion. However, this was partially offset by higher contributions from associated companies and a decline in the tax rate to 13% compared to 15% in 2006, which was due to factors that included reduced profits in the US. Earnings per share from continuing operations were $2.81 in 2007, a decline of 3% from $2.90 in 2006.

2. Net Sales by Division

        The following table sets forth selected net sales data for each of the periods indicated.

 
  Year ended December 31,
   
   
 
   
  Change in local
currencies

 
  2007
  2006
  Change in $
 
  ($ millions)

  ($ millions)

  (%)

  (%)

Net sales:                
Pharmaceuticals   24,025   22,576   6   2
Vaccines and Diagnostics   1,452   956   52   47
Sandoz Division   7,169   5,959   20   13
Consumer Health   5,426   4,902   11   6
   
 
 
 
Net sales from continuing operations   38,072   34,393   11   6
Net sales from discontinued operations   1,728   2,627        
   
 
 
 
Group net sales   39,800   37,020   8   3
   
 
 
 

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        The following table sets forth the gross to net sales reconciliation for each of the periods indicated.

Gross to net sales reconciliation

 
  Total
2007

  In % of 2007
gross sales

  Total
2006

  In % of 2006
gross sales

 
 
  ($ millions)

   
  ($ millions)

   
 
Gross sales subject to deductions from continuing operations   46,426   100.0   41,751   100.0  
Gross sales subject to deductions from discontinued operations   1,985       3,094      
   
     
     
Group gross sales subject to deductions   48,411       44,845      
US Medicaid, Medicare and State program rebates and credits, including prescriptions drug savings card   (788 ) (1.7 ) (711 ) (1.7 )
US managed healthcare rebates   (439 ) (0.9 ) (436 ) (1.0 )
Non-US healthcare plans and program rebates   (330 ) (0.7 ) (226 ) (0.5 )
Chargebacks (including hospitals)   (2,320 ) (5.0 ) (2,329 ) (5.6 )
Direct customer discounts, cash discounts and other rebates   (3,318 ) (7.1 ) (2,759 ) (6.6 )
Sales returns and other deductions   (1,159 ) (2.5 ) (897 ) (2.1 )
   
 
 
 
 
Total gross to net sales adjustments from continuing operations   (8,354 ) (17.9 ) (7,358 ) (17.5 )
   
 
 
 
 
Net sales from continuing operations   38,072   82.1   34,393   82.5  
       
     
 
Total gross to net sales adjustments from discontinued operations   (257 )     (467 )    
   
     
     
    (8,611 )     (7,825 )    
   
     
     
Group net sales   39,800       37,020      
   
     
     

Pharmaceuticals Division

        Net sales rose 6% (+2% lc) to $24 billion in 2007 as many geographic regions—particularly Europe, Latin America and key emerging markets—expanded at double-digit rates. This more than offset a decline in the US, where net sales fell 8% to $8.7 billion following the suspension of Zelnorm as well as the entry of generic competition during the year for four products—Lotrel, Lamisil, Famvir and Trileptal. Price increase represented two percentage points of the Division's net sales growth, while currencies added four percentage points and acquisitions contributed one percentage point. Volume changes had a negative impact of one percentage point.

        The Oncology franchise expanded at a strong double-digit rate, while the Cardiovascular franchise performed well and advanced 19% lc when excluding Lotrel. Many top ten products maintained their leading positions as Diovan reached annual net sales of $5.0 billion (+16% lc) for the first time, underpinning its status as the world's No. 1 branded high blood pressure medicine. The top-selling oncology medicine Gleevec/Glivec reinforced its leading position in helping patients with various often-fatal forms of cancer, with net sales of $3.1 billion (+14% lc), while the breast cancer medicine Femara was another key contributor with above-market growth and net sales of $937 million (+25% lc).

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        Several new medicines provided important contributions following recent regulatory approvals, including Exforge and Tekturna/Rasilez (high blood pressure), Lucentis (age-related blindness), Exjade (iron overload), Aclasta/Reclast (osteoporosis), Exelon Patch (Alzheimer's disease) and Xolair (asthma), expanded quickly and were rolled out into new markets. These new products provided combined annual net sales of $1.1 billion in 2007, including a significant contribution from Lucentis following its first European launch in January 2007.

        European net sales rose 19% (+9% lc) to $8.7 billion as we gained market share on strong performances in many markets, particularly France and Germany. Contributions from leading products such as Diovan, Gleevec/Glivec, Femara, Exjade, Xolair and Lucentis more than offset cost-containment measures and generic competition for some products. Latin America net sales expanded 23% (+17% lc) to $1.5 billion thanks mainly to Brazil, Mexico and Venezuela. In Japan, a continuing expansion of the country's hypertension market supported the 6% (+7% lc) increase in net sales to $2.2 billion, while key emerging markets generated net sales of $2.2 billion, an increase of 17% (+12% lc) from 2006.

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Pharmaceuticals Division key product highlights

        Note: All growth figures refer to 2007 worldwide sales growth in local currencies.

Top 20 Pharmaceutical Division Product Net Sales—2007

Brands

  Therapeutic Area
  United
States

  change
in local
currencies

  Rest of
the World

  change
in local
currencies

  Total
  change
in $

  change
in local
currencies

 
 
   
  ($ millions)

  (%)

  ($ millions)

  (%)

  ($ millions)

  (%)

  (%)

 
Diovan/Co-Diovan   Hypertension   2,194   18   2,818   14   5,012   19   16  
Gleevec/Glivec   Chronic myeloid leukemia   714   13   2,336   14   3,050   19   14  
Zometa   Cancer complications   649   (7 ) 648   3   1,297   1   (2 )
Sandostatin (incl. LAR)   Acromegaly   409   11   618   5   1,027   12   7  
Neoral/Sandimmun   Transplantation   108   (14 ) 836       944   3   (2 )
Femara   Breast cancer   411   22   526   28   937   30   25  
Lotrel   Hypertension   748   (45 )         748   (45 ) (45 )
Voltaren (group)   Inflammation/pain   9   13   738   3   747   8   3  
Trileptal   Epilepsy   500   (9 ) 192   4   692   (4 ) (6 )
Lescol   Cholesterol reduction   207   (19 ) 458   (8 ) 665   (8 ) (12 )

 
Top ten products       5,949   (4 ) 9,170   9   15,119   7   3  
Exelon   Alzheimer's disease   212   13   420   14   632   20   14  
Lamisil (group)   Fungal infections   266   (54 ) 329   (21 ) 595   (39 ) (40 )
Comtan/Stalevo Group   Parkinson's disease   178   13   242   23   420   24   18  
Tegretol (incl. CR/XR)   Epilepsy   123   2   290   1   413   6   1  
Lucentis   Age-related macular degeneration           393   NM   393   NM   NM  
Ritalin/Focalin (group)   Attention deficit/hyperactive disorder   299   13   76   9   375   14   12  
Foradil   Asthma   21   50   341   (1 ) 362   9   1  
Exjade (group)   Iron chelator   175   43   182   721   357   150   141  
Miacalcic   Osteoporosis   147   (26 ) 134   (11 ) 281   (17 ) (20 )
Tobramycin   Cystic fibrosis   174   47   99   60   273   54   51  

 
Top twenty products       7,544   (5 ) 11,676   13   19,220   9   5  
Rest of portfolio       1,204   (22 ) 3,601   1   4,805   (2 ) (6 )

 
Total       8,748   (8 ) 15,277   10   24,025   6   2  

 

NM - Not meaningful

        Diovan ($5.0 billion, +16% lc) reached another important milestone in 2007 as net sales reached $5 billion for the first time. Diovan has consistently grown thanks to new indications and clinical data underpinning its status as the world's No. 1 branded high blood pressure medicine. Many key countries, particularly the US, Japan and Germany, delivered double-digit growth. Diovan held a 40% share among angiotensin receptor blockers (ARBs), the fastest-growing segment of the US antihypertensive market. Co-Diovan/Diovan HCT, a single-tablet combination with a diuretic, was driven by growing use of multiple therapies.

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        Gleevec/Glivec ($3.1 billion, +14% lc), a therapy for certain forms of chronic myeloid leukemia (CML) and gastrointestinal stromal tumors (GIST), reinforced its leadership in helping patients with these and other often-fatal forms of cancer. New data from the landmark IRIS study in patients with newly diagnosed Philadelphia chromosome-positive CML (Ph+ CML) showed Gleevec/Glivec halted disease progression to more advanced stages completely in the sixth year of treatment and that 88% of Gleevec/Glivec patients in the trial were still alive. Gleevec/Glivec has also benefited from wider use in patients with GIST as well as in various rare diseases. Competition in the CML market in 2007 had little impact on underlying demand.

        Zometa ($1.3 billion, -2% lc), an intravenous bisphosphonate therapy for patients with cancer that has spread to the bones, delivered a steady performance amid signs that demand stabilized during 2007 in the US and Europe. Overall growth for this class of medicines has slowed with many patients receiving treatment less frequently and for a shorter course of therapy. However, this trend was balanced by increasing use in patients with lung cancer as well as rapid growth in Japan and markets outside the US and Europe. In December, the US Food and Drug Administration granted Zometa an additional six months of marketing exclusivity until 2013 following the completion of pediatric studies.

        Sandostatin ($1.0 billion, +7% lc), for acromegaly and various neuroendocrine and carcinoid tumors, reached annual net sales of $1 billion for the first time thanks to increasing use of the long-acting-release Sandostatin LAR version administered once a month that accounts for 85% of total net sales. The once-daily Sandostatin version faces generic competition.

        Neoral/Sandimmun ($944 million, -2% lc), for organ transplantation, has maintained generally stable worldwide net sales despite ongoing generic competition thanks to its pharmacokinetic profiles and reliability.

        Femara ($937 million, +25% lc), an oral treatment for women with hormone-sensitive breast cancer, delivered ongoing dynamic growth primarily from expanded use in patients immediately after surgery (early adjuvant) in the US and Europe as well as from the 2006 launch in Japan. Femara has outpaced competitors and gained market share in the aromatase inhibitor segment due to its unique benefits.

        Lotrel ($748 million, -45% lc, only in US) has been negatively affected since May 2007 following the "at risk" launch of a generic copy by Teva Pharmaceuticals despite a valid US patent until 2017. Sandoz also launched an authorized generic version of this high blood pressure medicine. A trial date has not been set for the ongoing lawsuit against Teva, which risks potentially significant damages if we prevail.

        Voltaren ($747 million, +3% lc), a therapy for inflammation and pain, showed steady growth, primarily in Latin America and Asia, based on long-term trust in the brand. Patent protection for Voltaren in many key markets around the world has expired.

        Trileptal ($692 million, -6% lc), a treatment for epilepsy seizures, generated growth until the expected entry of US generic competition in October 2007, which led to a sharp decline in US net sales in the fourth quarter of 2007.

        Lescol ($665 million, -12% lc), a statin drug used to reduce cholesterol, was primarily impacted by decisions to reduce reference prices in Europe, while the introduction of generic simvastatin and a highly competitive market for this class weighed on US net sales.

        Exelon ($632 million, +14% lc), for mild to moderate forms of Alzheimer's disease and dementia associated with Parkinson's disease, delivered solid growth. Several launches are underway for Exelon Patch in the US and Europe following regulatory approvals in 2007. This once-daily skin patch provides a novel treatment approach with a smooth and continuous delivery of Exelon to patients. Exelon Patch provides equivalent efficacy to the highest doses of capsules, but with three times fewer reports of nausea or vomiting.

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        Lamisil ($595 million, -40% lc), a therapy for fungal nail infections, fell sharply after the entry of US generic competition in July 2007. Basic patent protection for Lamisil's active ingredient has now expired worldwide, with generics already available in Europe and Japan.

        Lucentis ($393 million), for treatment of the eye disease "wet" age-related macular degeneration (AMD), experienced dynamic growth in Europe and other markets in its first year after EU approval in January 2007. Lucentis is the only treatment proven in clinical trials to maintain and improve vision in these patients with this form of AMD, which is the leading cause of blindness in people over age 50. Genentech holds the US rights.

        Exjade ($357 million, +141% lc) delivered strong growth based on its unique status as the first once-daily oral therapy for treating patients with iron overload associated with various blood disorders. Iron overload is a potentially fatal condition, and the previous standard of care was a cumbersome infusion via a pump for up to 12 hours per day. First launched in the US in November 2005 and in Europe starting in August 2006, Exjade is now approved in more than 85 countries. In 2007 Exjade was submitted in Japan, a year ahead of schedule. About half of patients being given Exjade are new to iron chelation.

        Xolair ($140 million, +30% lc), a biotechnology drug that offers a new approach for the treatment of moderate to severe allergic asthma, has benefited from rapid acceptance and is now available in 54 countries after EU approval in October 2005. Xolair is administered as an injection every two to four weeks and is proven to target a root cause of allergic asthma. We co-promote Xolair with Genentech in the US and share a portion of operating income. Genentech reported US net sales from Xolair of $472 million in 2007.

        Zelnorm/Zelmac ($88 million, -84% lc), for irritable bowel syndrome and chronic constipation, was suspended in the US in March 2007, and subsequently in several other countries, to comply with a request from the FDA to review cardiovascular safety data. A treatment access program was started in the US to provide Zelnorm to appropriate patients. We are continuing discussions with various health authorities.

        Prexige ($91 million), an oral COX-2 inhibitor for osteoarthritic pain, was withdrawn in the European Union and other countries in 2007. These actions were taken after the first withdrawal in August in Australia based on post-marketing reports of serious liver side-effects allegedly associated with long-term use of higher doses, including the deaths of two patients. In September, the FDA issued a "not approvable" letter for the 100 mg once-daily dose, which is the lowest available formulation. We believe Prexige, which is available in some countries, is a valuable therapy option for appropriate patients, particularly those at risk of serious gastrointestinal complications, and will continue discussions with health authorities.

        Exforge ($103 million), a single-tablet combination of two very successful high blood pressure medicines—the angiotensin receptor blocker Diovan and the calcium channel blocker amlodipine—delivered the strongest launch performance among any of our anti-hypertensive medicine thanks to rapid growth in the US and Europe following initial launches in 2007. Clinical data have shown nine of ten patients treated with Exforge reached treatment goals, confirming strong efficacy coupled with improved convenience.

        Aclasta/Reclast ($41 million) was launched in September 2007 in the US as a 15-minute, once-yearly infusion for women with postmenopausal osteoporosis, while initial launches were started in Europe in Germany and the UK after European Union approval in October 2007. The New England Journal of Medicine published in September the results of the first-ever clinical study involving more than 2,100 men and women with osteoporosis who had suffered a hip fracture, showing that Aclasta/Reclast reduces the risk of further fractures.

        Tekturna/Rasilez ($40 million), the first new type of high blood pressure medicine in more than a decade, has performed well in a highly competitive US marketplace following its approval and launch in March 2007. Launches are also underway after European approval in August 2007. Known as Tekturna in the US and as Rasilez in other markets, key drivers have been broad clinical data demonstrating efficacy in

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lowering blood pressure, its safety profile and rising reimbursement rates in US formulary plans. Initial results of trials related to the ASPIRE HIGHER program showed potential benefits of Tekturna/Rasilez in reducing a key biomarker of kidney disease (AVOID) and in reducing the severity of heart failure (ALOFT). Rasilez HCT, a single-tablet combination with a diuretic, was submitted for EU approval in late 2007, while US approval as Tekturna HCT is expected in early 2008. This medicine was discovered by Novartis and developed in collaboration with Speedel.

        Tasigna was launched during the fourth quarter of 2007 in the US and Europe following regulatory approvals as a new therapy for patients with a certain form of chronic myeloid leukemia (CML) who are resistant or intolerant to treatment with Gleevec/Glivec (imatinib). Tasigna is now approved in about 40 countries, and was also submitted for approval in Japan in June. Tasigna and Gleevec/Glivec both inhibit Bcr-Abl, the cause of Philadelphia chromosome-positive chronic myeloid leukemia (Ph+ CML). Tasigna was designed to be a more potent and selective inhibitor of Bcr-Abl and its mutations. Separate Phase III studies are underway comparing Tasigna and Gleevec/Glivec in newly diagnosed CML patients as well as those with sub-optimal responses to previous therapy. A registration study is also underway in patients with gastrointestinal stromal tumors (GIST) who are resistant or intolerant to prior treatment.

Pharmaceutical product developments

        We are recognized as having one of the most respected and promising R&D pipelines, which was reflected in 15 major regulatory approvals during 2007 in the US and European Union. We have 140 projects in clinical development, with several compounds having the potential to advance standards of care in a range of diseases with inadequate treatments.

2007 major US and European regulatory approvals

Product

  Active ingredient
  Indication
  Date approved

Aclasta/Reclast   zoledronic acid   Post-menopausal osteoporosis   US—Q3 2007
EU—Q4 2007
       
        Paget's disease of the bone   US—Q2 2007

Exforge   valsartan and amlodipine   High blood pressure   US—Q2 2007
EU—Q1 2007

Galvus   vildagliptin   Type 2 diabetes   EU—Q4 2007

Eucreas   vildagliptin and metformin   Type 2 diabetes single-tablet combination therapy   EU—Q4 2007

Exelon Patch   rivastigmine transdermal patch   Alzheimer's disease   US—Q3 2007
EU—Q3 2007

Lucentis   ranibizumab   Age-related macular degeneration (blindness)   EU—Q1 2007

Sebivo/Tyzeka   telbivudine   Hepatitis B   EU—Q2 2007

Tasigna   nilotinib   Chronic myeloid leukemia   US—Q4 2007
EU—Q4 2007

Tekturna/Rasilez   aliskiren   High blood pressure   US—Q1 2007
EU—Q3 2007

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        Galvus (vildagliptin), a new oral treatment for type 2 diabetes, is expected to be made available in Europe starting in the first half of 2008. European health authorities announced in November 2007 their support for changes proposed by Novartis to prescribing information that would reduce the recommended daily doses to 50 mg once-daily or 50 mg twice-daily in combination with various other oral anti-diabetes medicines. EU approval has also been received for Eucreas, a single-tablet combination of Galvus with the oral anti-diabetes medicine metformin, which will also have amendments to its labeling before launch. In the US, we are continuing discussions with the FDA on steps needed for approval after having received an "approvable letter" in February 2007 that included a request for additional clinical trial data.

Vaccines and Diagnostics Division

        Net sales rose 52% (+47% lc) thanks to an excellent performance driven by a rise in sales of TBE (tick-borne encephalitis), pediatric and seasonal influenza vaccines as well as NAT (nucleic acid test) blood testing products. On a comparable 2006 full-year basis, net sales were up 25% (including unaudited net sales from Chiron for four months in the year-ago period before the April 2006 acquisition).

Sandoz Division

        Net sales advanced 20% (+13% lc) thanks to dynamic growth in the US and strengthened positions in fast-growing markets, particularly in Eastern Europe. Sandoz provided an incremental contribution of more than $1 billion to annual net sales. Contributions from recently launched products, including "difficult-to-make" generics such as metoprolol succinate ER (Toprol-XL®) and cefdinir (Omnicef®), supported the 27% increase in US net sales, which also benefited from the launch of an authorized generic version of amlodipine/benazepril (Lotrel). Several other countries contributed to growth, led by Russia, France, Canada, Poland, Turkey, China and Brazil.

Consumer Health Division

        Strong performances from OTC and Animal Health Business Units underpinned the 11% (+6% lc) increase in net sales, driven by the increased focus on strategic brands, new product launches and expansion in emerging markets and Japan. CIBA Vision net sales were higher, supported by a resumption of contact lens and lens-care product deliveries in 2007 following shortages in 2006.

Discontinued Consumer Health Division operations

        Following recent divestments, the financial results of the Medical Nutrition (including Nutrition & Santé) and Gerber Business Units are reported as "Discontinued operations" in both 2007 and 2006. A combined total of $1.7 billion in net sales was recorded in 2007 prior to the divestments of Medical Nutrition (as of July 1, 2007) and Gerber (as of September 1, 2007).

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3. Operating Income by Function

 
  Year ended December 31,
   
 
 
  Change in $
 
 
  2007
  2006
 
 
  ($ millions)

  ($ millions)

  (%)

 
Net sales from continuing operations   38,072   34,393   11  
Other revenues   875   712   23  
Cost of goods sold   (11,032 ) (9,411 ) 17  
Marketing & sales   (11,126 ) (10,092 ) 10  
Research & development   (6,430 ) (5,321 ) 21  
General & administration   (2,133 ) (1,882 ) 13  
Other income & expense(1)   (411 ) (757 ) (45 )
   
 
 
 
Operating income from continuing operations excluding Corporate environmental charge and "Forward" restructuring charge   7,815   7,642   2  
Corporate environmental provision increase   (590 )        
"Forward" restructuring charge   (444 )        
   
 
 
 
Operating income from continuing operations   6,781   7,642   (11 )
Operating income from discontinued operations   6,152   532      
   
 
 
 
Group operating income   12,933   8,174   58  
   
 
 
 

(1)
Excludes respective component of the "Forward" restructuring charge in 2007 of $444 million (Pharmaceuticals: $307 million, Consumer Health: $97 million, Corporate $40 million) and Corporate environmental provision increase of $590 million

        We have presented Operating income from continuing operations excluding Corporate environmental charge and "Forward" restructuring charge as an additional disclosure because these items were material charges in the year that were of a significant and unusual nature, and the amounts are important to quantify for future comparison purposes. Consequently, management believes that it is important to users of our financial statements to highlight these adjustments.

Other revenues

        Other revenues rose 23% to $875 million mainly due to increased contributions of royalty income from the diagnostics business of the Vaccines and Diagnostics Division. Other revenues also include profit contributions relating to sales of the asthma medicine Xolair in the US, where it is co-marketed and co-developed in collaboration with Genentech.

Cost of goods sold

        Cost of goods sold rose 17% to $11.0 billion in 2007, rising to 29.0% as a percentage of net sales from continuing operations from 27.4% in 2006. Excluding an intangible asset impairment charge of $320 million in the Pharmaceuticals Division related to the start of US generic competition for Famvir, cost of goods sold rose 14%, which was slightly higher than the 11% increase in net sales from continuing operations.

Marketing & sales

        Marketing & sales expenses rose 10% to $11.1 billion, but remained essentially unchanged at 29.2% as a percentage of net sales from continuing operations.

Research & development

        Research & development expenses rose 21% to $6.4 billion, supporting significant investments in new product innovation throughout the Group. The Pharmaceuticals Division accounted for nearly 80% of the Group's investments in R&D activities. As a percentage of net sales from continuing operations, R&D investments rose to 16.9% from 15.5% in 2006.

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General & administration

        General & administration expenses climbed 13% to $2.1 billion in 2007, largely in line with the advance in net sales from continuing operations.

Other income & expense

        Excluding the Corporate environmental provision increase of $590 million and the "Forward" restructuring charge of $444 million (explained below), Other income & expense fell to a net expense of $411 million in 2007 from a net expense of $757 million in 2006. The reduced expenses include one-time gains of $278 million in the Pharmaceuticals Division from the sale of brands and equity investments and a launch provision reversal following the US and European regulatory approvals of Tekturna/Rasilez. Total other income and expense including the Corporate environmental provision increase and "Forward" restructuring charges increases to $1,445 million from $757 million.

Environmental Charge

        We increased our provisions for worldwide environmental liabilities by $614 million following internal and external reviews completed in 2007, of which $590 million was recorded as a Corporate charge. This provision includes the related share of any potential remediation costs for historical landfills in the Basel region (including Switzerland, France and Germany). Assessments for these landfills are being completed in coordination with various governments, which are responsible for the supervision and decision-making process for any remediation actions. A new Swiss foundation is being created to finance the Novartis-related share of the potential regional landfill remediation costs.

"Forward" Initiative Restructuring Charge

        To help us more rapidly meet the needs of patients and customers, the "Forward" initiative was launched in December 2007 to improve the Group's competitiveness. This initiative, which is now underway and will be implemented in 2008 and 2009, will simplify organizational structures, accelerate and decentralize decision-making processes, redesign the way we operate and provide productivity gains. Pre-tax annual cost savings of $1.6 billion are expected in 2010 enabling us to maximize resources available to support growth and customer-oriented activities. A pre-tax restructuring charge of $444 million was taken in the 2007 fourth quarter (Pharmaceuticals: $307 million, Consumer Health: $97 million, Corporate: $40 million). Approximately 2,500 full-time positions are expected to be reduced from among nearly 100,000 full-time positions currently within the Group. Many reductions will be handled through normal fluctuation in staffing levels as well as vacancy management and social programs. All reductions will be handled in a socially responsible manner with fair and respectful treatment of associates. We will consult with works councils and comply with local labor laws.

Discontinued Consumer Health Division operations

        We recorded a gain of $5.8 billion from the divestments of Medical Nutrition (July 2007) and Gerber (September 2007) in operating income from discontinued operations ($129 million divestment gain for Nutrition & Santé in 2006). The remainder of operating income from discontinued operations reflects contributions from these Business Units before their divestment.

4. Operating Income by Division

        Operating income from continuing operations fell 11% to $6.8 billion, reflecting the negative impact of significant charges in 2007 that included a $590 million Corporate expense to increase environmental provisions and a restructuring charge of $444 million for the "Forward" initiative to improve our competitiveness. Excluding these charges, which totaled approximately $1 billion, operating income from continuing operations rose 2% as contributions from the Sandoz, Vaccines and Diagnostics, and

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Consumer Health Divisions were partially offset by lower contributions from the US pharmaceuticals business.

 
  Year ended December 31,
   
 
Operating Income

   
 
  2007
  2006
  Change in $
 
 
  ($ millions)

  ($ millions)

  (%)

 
Pharmaceuticals   6,086   6,703   (9 )
Vaccines and Diagnostics   72   (26 )    
Sandoz Division   1,039   736   41  
Consumer Health   812   761   7  
Corporate income and expense, net   (1,228 ) (532 ) 131  
   
 
 
 
Operating income from continuing operations   6,781   7,642   (11 )
Operating income from discontinued operations   6,152   532      
   
 
 
 
Group operating income   12,933   8,174   58  
   
 
 
 
 
  Year ended December 31,
   
 
Operating Income excluding environmental provision
and "Forward" charges

   
 
  2007
  2006
  Change in $
 
 
  ($ millions)

  ($ millions)

  (%)

 
Pharmaceuticals(1)   6,393   6,703   (5 )
Vaccines and Diagnostics   72   (26 ) 377  
Sandoz Division   1,039   736   41  
Consumer Health(1)   909   761   19  
Corporate income and expense, net(1),(2)   (598 ) (532 ) 12  
   
 
 
 
Operating income from continuing operations excluding Corporate environmental charge and "Forward" restructuring charge   7,815   7,642   2  
Corporate environmental provision increase   (590 )        
"Forward" restructuring charge   (444 )        
   
 
 
 
Operating income from continuing operations   6,781   7,642   (11 )
Operating income from discontinued operations   6,152   532      
   
 
 
 
Group operating income   12,933   8,174   58  
   
 
 
 

(1)
Excludes respective component of the "Forward" restructuring charge in 2007 of $444 million (Pharmaceuticals: $307 million, Consumer Health: $97 million, Corporate $40 million)

(2)
Excludes Corporate environmental provision increase of $590 million

        We have presented Operating income from continuing operations excluding Corporate environmental charge and "Forward" restructuring charge as an additional disclosure because these items were material charges in the year that were of a significant and unusual nature, and the amounts are important to quantify for future comparison purposes. Consequently, management believes that it is important to users of our financial statements to highlight these adjustments.

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Pharmaceuticals Division

        Pharmaceuticals operating income fell 9% to $6.1 billion due to a number of factors that included lost operating income in the US due to the entry of generic competition for four products and the suspension of Zelnorm, major investments in late-stage development compounds, new product launches and restructuring charges. The operating margin declined to 25.3% of net sales (or to 26.6% of net sales excluding total restructuring charges of $307 million for "Forward" from 29.7% in 2006). Research & development investments rose 19% to $5.1 billion and represented 21% of net sales, mainly to support the rich late-stage pipeline that includes the projects FTY720, QAB149, MFF258, ACZ885, ABF656, RAD001 and Exforge. Marketing & sales expenses were up 9% to support many new product launches and rollouts, which was partly offset by productivity initiatives. Cost of goods sold was higher due mainly to a $320 million intangible asset impairment charge for Famvir product rights.

Vaccines and Diagnostics Division

        Vaccines and Diagnostics reported operating income of $72 million in 2007 compared to an operating loss of $26 million in 2006, which was mainly impacted by acquisition-related charges following the April 2006 purchase of the remaining shares of Chiron. The strong business performance in 2007 supported significant investments in R&D, particularly for late-stage trials involving meningococcal meningitis vaccine candidates and a new strategic alliance with Intercell.

Sandoz Division

        Sandoz operating income advanced significantly faster than net sales growth, rising 41% to $1.0 billion due to strong increases in sales volumes thanks to new product launches as well as efficiency improvements throughout the division. As a result, the operating margin in 2007 rose to 14.5% of net sales from 12.4% in 2006.

Consumer Health Division

        Consumer Health operating income rose 7% to $812 million for continuing operations thanks to strong performances of strategic brands in OTC and Animal Health as well as the resumption of contact lens and lens care product deliveries in CIBA Vision. These factors more than offset significant investments throughout the division in R&D and marketing initiatives to support new product launches and geographic expansion. Excluding the restructuring charge in 2007 for "Forward," operating income was up 19% and operating margin was 16.8% of net sales.

Corporate Income & Expense, net

        Net corporate expense totaled $1.2 billion, an increase from $532 million in 2006, primarily reflecting the exceptional increase of $590 million in environmental provisions as well as restructuring costs of $40 million for the "Forward" initiative in 2007.

Environmental Charge

        We increased our provisions for worldwide environmental liabilities by $614 million following internal and external reviews completed in 2007, of which $590 million was recorded as a Corporate charge. This provision includes the related share of any potential remediation costs for historical landfills in the Basel region (including Switzerland, France and Germany). Assessments for these landfills are being completed in coordination with various governments, which are responsible for the supervision and decision-making process for any remediation actions. A new Swiss foundation is being created to finance the Novartis-related share of the potential regional landfill remediation costs.

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"Forward" Initiative Restructuring Charge

        To help us more rapidly meet the needs of patients and customers, the "Forward" initiative was launched in December 2007 to improve the Group's competitiveness. This initiative, which is now underway and will be implemented in 2008 and 2009, will simplify organizational structures, accelerate and decentralize decision-making processes, redesign the way we operate and provide productivity gains. Pre-tax annual cost savings of $1.6 billion are expected in 2010 enabling us to maximize resources available to support growth and customer-oriented activities. A pre-tax restructuring charge of $444 million was taken in the 2007 fourth quarter (Pharmaceuticals: $307 million, Consumer Health: $97 million, Corporate: $40 million). Approximately 2,500 full-time positions are expected to be reduced from among nearly 100,000 full-time positions currently within the Group. Many reductions will be handled through normal fluctuation in staffing levels as well as vacancy management and social programs. All reductions will be handled in a socially responsible manner with fair and respectful treatment of associates. We will consult with works councils and comply with local labor laws.

Discontinued Consumer Health Division operations

        We recorded a gain of $5.8 billion from the divestments of Medical Nutrition (July 2007) and Gerber (September 2007) in operating income from discontinued operations ($129 million divestment gain for Nutrition & Santé in 2006). The remainder of operating income from discontinued operations reflects contributions from these Business Units before their divestment.

5. Net Income

        The following table sets forth selected income statement data for the periods indicated.

 
  Year ended December 31,
   
 
 
  2007
  2006
  Change in $
 
 
  ($ millions)

  ($ millions)

  (%)

 
Operating income from continuing operations   6,781   7,642   (11 )
Income from associated companies   412   264   56  
Financial income   531   354   50  
Interest expense   (237 ) (266 ) (11 )
   
 
 
 
Income before taxes from continuing operations   7,487   7,994   (6 )
Taxes   (947 ) (1,169 ) (19 )
   
 
 
 
Net income from continuing operations   6,540   6,825   (4 )
Net income from discontinued operations