20-F 1 a2217883z20-f.htm 20-F

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Table of Contents

As filed with the Securities and Exchange Commission on January 29, 2014


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, 2013

OR

o

 

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

OR

o

 

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

Commission file number 1-15024

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

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

Switzerland
(Jurisdiction of incorporation or organization)

Lichtstrasse 35
4056 Basel, Switzerland

(Address of principal executive offices)

Felix R. Ehrat
Group General Counsel
Novartis AG
CH-4056 Basel
Switzerland
Tel.: 011-41-61-324-1111
Fax: 011-41-61-324-7826
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

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

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:

2,426,084,308 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


*
Not for trading but only in connection with the registration of American Depositary Shares representing such ordinary shares.

   


Table of Contents


TABLE OF CONTENTS

  INTRODUCTION AND USE OF CERTAIN TERMS     4  

 

FORWARD-LOOKING STATEMENTS

 

 

4

 

 

PART I

 

 

6

 

 

 

 

Item

 

1.

 

Identity of Directors, Senior Management and Advisers

 

 

6

 

 

 

 

Item

 

2.

 

Offer Statistics and Expected Timetable

 

 

6

 

 

 

 

Item

 

3.

 

Key Information

 

 

6

 
          3.A   Selected Financial Data     6  
          3.B   Capitalization and Indebtedness     8  
          3.C   Reasons for the offer and use of proceeds     8  
          3.D   Risk Factors     8  

 

 

 

Item

 

4.

 

Information on the Company

 

 

24

 
          4.A   History and Development of Novartis     24  
          4.B   Business Overview     27  
              Pharmaceuticals     29  
              Alcon     69  
              Sandoz     78  
              Vaccines and Diagnostics     87  
              Consumer Health     93  
          4.C   Organizational Structure     97  
          4.D   Property, Plants and Equipment     97  

 

 

 

Item

 

4A.

 

Unresolved Staff Comments

 

 

106

 

 

 

 

Item

 

5.

 

Operating and Financial Review and Prospects

 

 

106

 
          5.A   Operating Results     106  
        5.B   Liquidity and Capital Resources     183  
        5.C   Research & Development, Patents and Licenses     194  
        5.D   Trend Information     195  
        5.E   Off-Balance Sheet Arrangements     195  
        5.F   Tabular Disclosure of Contractual Obligations     195  

 


 

Item

 

6.

 

Directors, Senior Management and Employees

 

 

196

 
        6.A   Directors and Senior Management     196  
        6.B   Compensation     206  
        6.C   Board Practices     246  
        6.D   Employees     272  
        6.E   Share Ownership     273  

 


 

Item

 

7.

 

Major Shareholders and Related Party Transactions

 

 

274

 
        7.A   Major Shareholders     274  
        7.B   Related Party Transactions     275  
        7.C   Interests of Experts and Counsel     275  

 


 

Item

 

8.

 

Financial Information

 

 

276

 
        8.A   Consolidated Statements and Other Financial Information     276  
        8.B   Significant Changes     277  

 


 

Item

 

9.

 

The Offer and Listing

 

 

277

 
        9.A   Offer and Listing Details     277  

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          9.B   Plan of Distribution     279  
          9.C   Markets     279  
          9.D   Selling Shareholders     279  
          9.E   Dilution     279  
          9.F   Expenses of the Issue     279  

 

 

 

Item

 

10.

 

Additional Information

 

 

279

 
          10.A   Share Capital     279  
          10.B   Memorandum and Articles of Association     279  
          10.C   Material Contracts     284  
          10.D   Exchange Controls     284  
        10.E   Taxation     284  
          10.F   Dividends and Paying Agents     289  
          10.G   Statement by Experts     289  
          10.H   Documents on Display     289  
          10.I   Subsidiary Information     290  

 

 

 

Item

 

11.

 

Quantitative and Qualitative Disclosures about Market Risk

 

 

290

 

 

 

 

Item

 

12.

 

Description of Securities Other than Equity Securities

 

 

290

 
          12.A   Debt Securities     290  
          12.B   Warrants and Rights     290  
          12.C   Other Securities     290  
          12.D   American Depositary Shares     291  

 

PART II

 

 

293

 

 

 

 

Item

 

13.

 

Defaults, Dividend Arrearages and Delinquencies

 

 

293

 

 

 

 

Item

 

14.

 

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

 

 

293

 

 

 

 

Item

 

15.

 

Controls and Procedures

 

 

293

 

 

 

 

Item

 

16A.

 

Audit Committee Financial Expert

 

 

293

 

 

 

 

Item

 

16B.

 

Code of Ethics

 

 

294

 

 

 

 

Item

 

16C.

 

Principal Accountant Fees and Services

 

 

294

 

 

 

 

Item

 

16D.

 

Exemptions from the Listing Standards for Audit Committees

 

 

294

 

 

 

 

Item

 

16E.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

 

294

 

 

 

 

Item

 

16F.

 

Change in Registrant's Certifying Accountant

 

 

295

 

 

 

 

Item

 

16G.

 

Corporate Governance

 

 

295

 

 

 

 

Item

 

16H.

 

Mine Safety Disclosure

 

 

295

 

 

PART III

 

 

296

 

 


 

Item

 

17.

 

Financial Statements

 

 

296

 

 


 

Item

 

18.

 

Financial Statements

 

 

296

 

 

 

 

Item

 

19.

 

Exhibits

 

 

297

 

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INTRODUCTION AND USE OF CERTAIN TERMS

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

        Unless the context requires otherwise, the words "we," "our," "us," "Novartis," "Group," "Company," and similar words or phrases in this Form 20-F refer to Novartis AG and its consolidated affiliates. However, each Group company is legally separate from all other Group companies and manages its business independently through its respective board of directors or other top local management body. No Group company operates the business of another Group company. Each executive identified in this Form 20-F reports directly to other executives of the Group company which employs the executive, or to that Group company's board of directors.

        In this Form 20-F, references to "US dollars" or "$" are to the lawful currency of the United States of America, and references to "CHF" are to Swiss francs; references to the "United States" or to "US" are to the United States of America, references to the "European Union" or to "EU" are to the European Union and its 28 member states, and references to "Americas" are to North, Central (including the Caribbean) and South America, unless the context otherwise requires; references to "associates" are to employees of our affiliates; references to the "FDA" are to the US Food and Drug Administration, references to "EMA" are to the European Medicines Agency, an agency of the EU, and references to the "CHMP" are to the EMA's Committee for Medicinal Products for Human Use; references to "ADR" or "ADRs" are to Novartis American Depositary Receipts, and references to "ADS" or "ADSs" are to Novartis American Depositary Shares; references to the "NYSE" are to the New York Stock Exchange, and references to the "SIX" are to the SIX Swiss Exchange.

        All product names appearing in italics are trademarks owned by or licensed to Group companies. Product names identified by a "®" or a "™" are trademarks that are not owned by or licensed to Group companies.




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. Other written materials filed with or furnished to the US Securities and Exchange Commission (SEC) by Novartis, as well as other written and oral statements made to the public, may also contain forward-looking statements. Forward-looking statements can be identified by words such as "potential," "expected," "will," "planned," "pipeline," "outlook," or similar terms, or by express or implied discussions regarding potential new products, potential new indications for existing products, or regarding potential future revenues from any such products; potential shareholder returns or credit ratings, the potential outcome of the share buyback being initiated; or regarding potential future sales or earnings of the Novartis Group or any of its divisions; or by discussions of strategy, plans, expectations or intentions. You should not place undue reliance on these statements.

        Such forward-looking statements are based on the current beliefs and expectations of management regarding future events, and are subject to significant known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those set forth in the forward-looking statements. There can be no guarantee that any new products will be approved for sale in any market, or that any new indications will be approved for any existing products in any market, or that any approvals which are obtained will be obtained at any particular time, or that any such products will achieve any particular revenue levels. Nor can there be any guarantee that shareholders will achieve any particular level of shareholder returns or

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regarding the potential outcome of the share buyback being initiated. Neither can there be any guarantee that the Group, or any of its divisions, will be commercially successful in the future, or achieve any particular credit rating.

        In particular, management's expectations could be affected by, among other things:

    unexpected regulatory actions or delays or government regulation generally;

    the potential that the strategic benefits, synergies or opportunities expected from the divestment of our former blood transfusion diagnostics unit may not be realized or may take longer to realize than expected;

    the inherent uncertainties involved in predicting shareholder returns or credit ratings;

    the uncertainties inherent in research and development, including unexpected clinical trial results and additional analysis of existing clinical data;

    Novartis' ability to obtain or maintain proprietary intellectual property protection, including the ultimate extent of the impact on Novartis of the loss of patent protection and exclusivity on key products which commenced in prior years and will continue this year;

    unexpected manufacturing and quality issues, including the final resolution of the Warning Letters previously issued to us with respect to Sandoz and Consumer Health manufacturing facilities;

    global trends toward health care cost containment, including ongoing pricing pressures;

    uncertainties regarding actual or potential legal proceedings, including, among others, actual or potential product liability litigation, litigation and investigations regarding sales and marketing practices, government investigations and intellectual property disputes;

    general economic and industry conditions;

    uncertainties regarding the effects of the persistently weak global economic and financial environment, including the financial troubles in certain Eurozone countries;

    uncertainties regarding future global exchange rates; uncertainties regarding future demand for our products.

        Some of these factors are discussed in more detail in this Form 20-F, 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 Form 20-F as of the date of its filing. We do not intend, and do not assume any obligation, to update any information or forward-looking statements set out in this Form 20-F as a result of new information, future events or otherwise.

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PART I

Item 1.    Identity of Directors, Senior Management and Advisers

        Not applicable.

Item 2.    Offer Statistics and Expected Timetable

        Not applicable.

Item 3.    Key Information


3.A Selected Financial Data

        The selected financial information set out below has been extracted from our consolidated financial statements prepared in accordance with IFRS as issued by the IASB. Our consolidated financial statements for the years ended December 31, 2013, 2012 and 2011 are included in "Item 18. Financial Statements" in this Form 20-F.

        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.

 
  Year Ended December 31,  
 
  2013   Restated
2012(3)
  Restated
2011(3)
  2010   2009  
 
  ($ millions, except per share information)
 

INCOME STATEMENT DATA

                               

Net sales

    57,920     56,673     58,566     50,624     44,267  
                       

Operating income

    10,910     11,193     10,780     11,526     9,982  

Income from associated companies

    600     552     528     804     293  

Interest expense

    (683 )   (724 )   (751 )   (692 )   (551 )

Other financial (expense) and income

    (92 )   (96 )   (2 )   64     198  
                       

Income before taxes

    10,735     10,925     10,555     11,702     9,922  

Taxes

    (1,443 )   (1,542 )   (1,483 )   (1,733 )   (1,468 )
                       

Net income

    9,292     9,383     9,072     9,969     8,454  
                       
                       

Attributable to:

                               

Shareholders of Novartis AG

    9,175     9,270     8,940     9,794     8,400  

Non-controlling interests

    117     113     132     175     54  

Basic earnings per share ($)

   
3.76
   
3.83
   
3.75
   
4.28
   
3.70
 

Diluted earnings per share ($)

   
3.70
   
3.79
   
3.70
   
4.26
   
3.69
 

Cash dividends(1)

    6,100     6,030     5,368     4,486     3,941  

Cash dividends per share in CHF(2)

    2.45     2.30     2.25     2.20     2.10  

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

(2)
Cash dividends per share represent dividends proposed that relate to earnings of the current year. Dividends for 2013 will be proposed to the Annual General Meeting on February 25, 2014 for approval.

(3)
2012 and 2011 restated to reflect the adoption of revised IAS19 on Employee Benefits (for additional information, see "Item 18, Financial Statements—Note 30").

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  Year Ended December 31,  
 
  2013(1)   Restated
2012(2)
  Restated
2011(2)
  Restated
2010(2)
  2009  
 
  ($ millions)
 

BALANCE SHEET DATA

                               

Cash, cash equivalents and marketable securities & derivative financial instruments

    9,222     8,119     5,075     8,134     17,449  

Inventories

    7,267     6,744     5,930     6,093     5,830  

Other current assets

    14,053     13,141     13,079     12,458     10,412  

Non-current assets

    95,712     96,187     93,384     96,620     61,814  
                       

Total assets

    126,254     124,191     117,468     123,305     95,505  
                       
                       

Trade accounts payable

    6,148     5,593     4,989     4,788     4,012  

Other current liabilities

    20,220     18,458     18,159     19,870     15,458  

Non-current liabilities

    25,414     30,877     28,331     28,856     18,573  
                       

Total liabilities

    51,782     54,928     51,479     53,514     38,043  
                       

Issued share capital and reserves attributable to shareholders of Novartis AG

    74,343     69,137     65,893     63,218     57,387  

Non-controlling interests

    129     126     96     6,573     75  
                       

Total equity

    74,472     69,263     65,989     69,791     57,462  
                       

Total liabilities and equity

    126,254     124,191     117,468     123,305     95,505  
                       
                       

Net assets

    74,472     69,263     65,989     69,791     57,462  

Outstanding share capital

    912     909     895     832     825  

Total outstanding shares (millions)

    2,426     2,421     2,407     2,289     2,274  

(1)
Assets and liabilities of the disposal group are included in the lines "Other current assets" and "Other current liabilities" respectively (for additional information, see "Item 18, Financial Statements—Note 2").

(2)
2012, 2011 and 2010 restated to reflect the adoption of revised IAS19 on Employee Benefits (for additional information, see "Item 18, Financial Statements—Note 30").


Cash Dividends per Share

        Cash dividends are translated into US dollars at the Bloomberg 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 ADRs.

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

2009

  March 2010     2.10     1.95  

2010

  March 2011     2.20     2.37  

2011

  March 2012     2.25     2.48  

2012

  March 2013     2.30     2.44  

2013(1)

  March 2014     2.45     2.75 (2)

(1)
Dividend to be proposed at the Annual General Meeting on February 25, 2014 and to be distributed March 4, 2014

(2)
Translated into US dollars at the 2013 Bloomberg Market System December 31, 2013 rate of $1.124 to the Swiss franc. This translation is an example only, and should not be construed as a representation that the Swiss franc amount represents, or has been or could be converted into US dollars at that or any other rate.

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Exchange Rates

        The following table shows, for the years and dates indicated, certain information concerning the rate of exchange of US dollar per Swiss franc based on exchange rate information found on Bloomberg Market System. The exchange rate in effect on January 22, 2014, as found on Bloomberg Market System, was CHF 1.00 = $1.10.

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

2009

    0.97     0.92     0.84     1.00  

2010

    1.06     0.96     0.86     1.07  

2011

    1.06     1.13     1.06     1.25  

2012

    1.09     1.07     1.02     1.12  

2013

    1.12     1.08     1.05     1.12  

Month

   
 
   
 
   
 
   
 
 

August 2013

                1.07     1.09  

September 2013

                1.06     1.10  

October 2013

                1.09     1.12  

November 2013

                1.08     1.10  

December 2013

                1.10     1.13  

January 2014 (through January 22, 2014)

                1.10     1.12  

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


3.B    Capitalization and Indebtedness

        Not applicable.


3.C    Reasons for the offer and use of proceeds

        Not applicable.


3.D    Risk Factors

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


Risks Facing Our Business

Our products face important patent expirations and significant competition.

        The products of our Pharmaceuticals and Alcon Divisions, as well as key products from our other divisions, are generally protected by patent rights, which are intended to provide us with exclusive rights to market the patented products. However, those patent rights are of varying strengths and durations. Loss of market exclusivity for one or more important products have had, and can be expected to continue to have a material adverse effect on our results of operations.

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        The introduction of generic competition for a patented medicine typically results in a significant and rapid reduction in net sales and net income for the patented product because generic manufacturers typically offer their unpatented versions at sharply lower prices. Such competition can result from the regular expiration of the term of the patent. Such competition can also result from the entry of generic versions of another medicine in the same therapeutic class as one of our drugs, or in another competing therapeutic class, or from the compulsory licensing of our drugs by governments, or from a general weakening of intellectual property laws in certain countries around the world. In addition, generic manufacturers frequently take an aggressive approach to challenging patents, conducting so-called "launches at risk" of products that are still under legal challenge for patent infringement, before final resolution of legal proceedings.

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

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

    The patent on valsartan, the active ingredient of Diovan/Co-Diovan/Diovan HCT (high blood pressure), which was long our best-selling product, expired in the major countries of the EU in November 2011, and generic competitors have launched there. In addition, patent protection expired in the US in September 2012, and generic versions of Diovan HCT have launched in the US. Generic versions of Diovan monotherapy have not yet launched in the US but could potentially launch at any time. In addition, patent protection for Diovan expired in Japan in 2013, and will expire in 2016 for Co-Diovan (including patent term extensions). The active ingredient valsartan is also used in the single-pill combination therapies Exforge and Exforge HCT (high blood pressure). While market exclusivities for Exforge/Exforge HCT will remain in the EU and Japan due to regulatory exclusivities and to a valsartan patent extension for Exforge in Japan until 2015, there is a risk that generic manufacturers may circumvent regulatory exclusivity and gain approval of a combination valsartan-amlodipine product in Europe. In the US, under a license agreement with a generics manufacturer, Exforge is expected to face generic competition beginning in October 2014.

    The patent on zoledronic acid, the active ingredient in Zometa (cancer), as well as in Reclast/Aclasta (osteoporosis), expired in 2013 in the US and in other major markets, and generic versions of these products have launched.

    Patent protection for octreotide acetate, the active ingredient of Sandostatin, has expired. Generic versions of Sandostatin SC are available in the US and elsewhere. Patents protecting the Sandostatin LAR formulation, the long-acting version of Sandostatin which represents a majority of our Sandostatin sales, expired in 2010 in key markets outside the US, and will expire in 2014 and beyond in the US.

    Patent protection on rivastigmine, the active ingredient in Exelon, expired in 2011 and 2012 and Exelon capsules are subject to generic competition, including in the US and all of Europe. We hold certain formulation patents with respect to Exelon Patch, which makes up a substantial portion of our Exelon sales. These patents have been challenged. Generic patches were launched in Germany and certain other EU countries in 2013.

    The patent on the active ingredient in Gleevec/Glivec (cancer) will expire in 2015 in the US, in 2016 in the major EU countries and in September 2014 for the main indications in Japan. However, the product is protected by additional patents claiming innovative features of Gleevec/Glivec. Generic versions of Gleevec/Glivec have already been launched in Turkey, Brazil, Canada, China, India, Russia and for a minor indication in Japan.

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

        In 2014, the impact of generic competition on our net sales is expected to be as much as $3.0 billion. Because we typically have substantially reduced marketing and research and development expenses related to a product in its final year of exclusivity, it is expected that the loss of patent protection will have an impact on our operating income which can be expected to correspond to a significant portion of the product's lost sales. The magnitude of such an impact could depend on a number of factors, including: the time of year at which such exclusivity would be lost; the ease or difficulty of manufacturing a competitor product and obtaining regulatory approval to market it; the number of generic competitor products approved, and whether, in the US, a single competitor is granted an exclusive marketing period; and the geographies in which generic competitor products are approved, including the strength of the market for generic pharmaceutical products in such geographies and the comparative profitability of branded pharmaceutical products in such geographies.

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

        Similarly, all of our businesses are faced with intense competition from new products and technological advances from competitors. Physicians, patients and third-party payers may choose our competitors' products instead of ours if they perceive them to be safer, more effective, easier to administer, less expensive or more cost-effective.

        Products that compete with ours, including products competing against some of our best-selling products, are launched from time to time. We cannot predict with accuracy the timing of the introduction of such competitive products or their possible effect on our sales. However, products significantly competitive to our major products Lucentis and Gilenya have recently been launched. Such products, and other competitive products, could adversely affect the revenues from our products and our results of operations.

Our research and development efforts may not succeed in bringing new products to market, or to do so cost-efficiently enough, or in a manner sufficient to grow our business and replace lost revenues and income.

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

        Using the products of our Pharmaceuticals Division as an example, the research and development process for a new product can take up to 15 years, or even longer, from discovery to commercial product launch—and with a limited available patent life, the longer it takes to develop a product, the less time there will be for us to recoup our development costs. New products need not only undergo intensive preclinical and clinical testing, but also must be approved by means of highly complex, lengthy and

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expensive approval processes which can vary from country to country. During each stage, there is a substantial risk that we will encounter serious obstacles which will further delay us and add substantial expense, that we will only develop a product with limited potential for commercial success, or that we will be forced to abandon a product in which we have invested substantial amounts of time and money. These risks may include: failure of the product candidate in preclinical studies; difficulty enrolling patients in clinical trials or delays or clinical trial holds at clinical trial sites; delays in completing formulation and other testing and work necessary to support an application for regulatory approval; adverse reactions to the product candidate or indications or other safety concerns; insufficient clinical trial data to support the safety or efficacy of the product candidate; an inability to manufacture sufficient quantities of the product candidate for development or commercialization activities in a timely and cost-effective manner; and failure to obtain, or delays in obtaining, the required regulatory approvals for the product candidate or the facilities in which it is manufactured. In addition, FDA and other governmental health authorities have recently intensified their scrutiny of pharmaceutical companies' clinical development activities, both with respect to compliance with regulations related to the conduct of clinical trials, and with respect to their interpretations of the clinical trial requirements necessary to support a product submission. This has added to the obstacles and costs we face in bringing new products to market.

        Our other divisions face similar challenges in developing new products and bringing them to market. Alcon's Ophthalmic Pharmaceuticals products, Vaccines and Diagnostics' Vaccine products, and the products of our Animal Health Division all must be developed and approved in accordance with essentially the same processes as faced by our Pharmaceuticals Division. Nearly all of our other products face similarly difficult development and approval processes. At Alcon, management has announced significant investments in research and development to develop new eye care products to replace sales that may be lost to generic competition and to grow its business. Vaccines and Diagnostics has, and continues to expend considerable time and resources to fully develop and bring to market new vaccines, including Bexsero, to combat serogroup B meningococcal disease. Our Animal Health Division seeks to bring new products to market from time to time. If these efforts do not bear significant fruit, they could have a material adverse effect on the medium to long-term success of these divisions, and of the Group as a whole.

        In addition, our Sandoz Division has made, and expects to continue to make, significant investments in the development of differentiated, "difficult-to-make" generic products, including biotechnology-based, "biologic" medicines intended for sale as bioequivalent or "biosimilar" generic versions of currently-marketed biotechnology products. While the development of such products can be significantly less costly and complex than the development of the equivalent originator medicines, it can often be significantly more costly and complex than for non-differentiated generic products. In addition, to date, many countries do not yet have a fully-developed legislative or regulatory pathway which would permit biosimilars to be brought to market or sold in a manner in which the biosimilar product would be readily substitutable for the originator product. Significant difficulties in the development of differentiated products, further delays in the development of such regulatory pathways, or any significant impediments that may ultimately be built into such pathways, could put at risk the significant investments that Sandoz has made, and will continue to make, in the development of differentiated products in general, and in its biotechnology operations in particular, and could have a material adverse effect on the long-term success of the Sandoz Division and the Group as a whole.

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

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

        Following a series of widely publicized issues in recent years, health regulators are increasingly focusing on product safety. In addition, governmental authorities around the world have paid increased attention to the risk/benefit profile of pharmaceutical products with an increasing emphasis on product safety and on examining whether new products offer a significant benefit over older products in the same therapeutic class. These developments have led to requests for more clinical trial data, for the inclusion of a significantly higher number of patients in clinical trials, and for more detailed analyses of the trials. As a result, the already lengthy and expensive process of obtaining regulatory approvals for pharmaceutical products has become even more challenging.

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

        Like our industry peers, we have been required by health authorities to conduct additional clinical trials, and to submit additional analyses of our data in order to obtain product approvals or reimbursement by government or private payors. We have had REMS and other such requirements imposed as a condition of approval of our new drugs. Because these regulatory developments can increase the costs of, and cause delays in obtaining approvals, and create an increased risk that products either will not be approved, or will be removed from the market after previously having been approved, these regulatory developments could have a material adverse effect on our business, financial condition and results of operations.

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

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

        As a result of such measures, we faced downward pricing pressures on our patented and generic drugs in many countries in 2013. For example, during 2013, the UK's National Institute for Health and Clinical Excellence (NICE) recommended against the UK National Health Service funding the use of our products Jakavi (myelofibrosis) and Afinitor (advanced breast cancer indication). NICE did recommend the funding of the use of our products Xolair (allergic asthma), Lucentis (diabetic macular edema indication), and Jetrea (vitreomacular traction), but only after we offered significant price discounts. Similarly, a German agency, the Gemeinsamer Bundesausschuss (G-BA), is conducting an analysis of the

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benefits of drugs previously approved, and as part of that analysis refused to recommend the use of our product Galvus to treat type 2 diabetes. In China, the government has imposed significant price cuts on certain of our products. In the US, under the Affordable Care Act, there is a newly created entity, the Independent Payment Advisory Board, which has been granted unprecedented authority to implement broad actions to reduce future costs of the Medicare program. This could include required prescription drug discounts or rebates. In addition, as a result of the ongoing implementation of the Affordable Care Act, some patients may be required to switch from existing commercial health insurance policies to policies offered on the new healthcare exchanges. Should a significant number of patients switch to policies offered on the exchanges that offer lesser benefits than their prior policies, there could be an impact on the sales or pricing of our products.

        We expect these efforts to control costs to continue in 2014 as healthcare payors around the globe, including government-controlled health authorities, insurance companies and managed care organizations, step up initiatives to reduce the overall cost of healthcare, restrict access to higher-priced new medicines, increase the use of generics and impose overall price cuts. For more information on price controls and on our challenging business environment see "Item 4. Information on the Company—Item 4.B Business Overview—Pharmaceuticals—Price Controls."

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

        We are obligated to comply with the laws of all of the countries around the world in which we operate and sell products with respect to an extremely wide and growing range of activities, as well as with new requirements imposed on us from time to time as government and public expectations regarding acceptable corporate behavior change. For example, there are new laws in the US and in other countries around the world that will require us to be more transparent with respect to our interactions with healthcare professionals. To help us in our efforts to comply with the many requirements that impact us, we have a significant global compliance with law program in place, and we devote substantial time and resources to efforts to ensure that our business is conducted in a lawful and publicly acceptable manner. Nonetheless, despite our efforts, any failure to comply with law or with heightened public expectations could lead to substantial liabilities that may not be covered by insurance, or to other significant losses, and could affect our business and reputation.

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

        In addition, governments and regulatory authorities around the world have been stepping up their compliance and law enforcement activities in recent years in key areas, including marketing practices, corruption, trade restrictions, embargo legislation, insider trading, antitrust, and data privacy, and are increasingly challenging practices previously considered to be legal. Responding to such investigations is costly, and requires an increasing amount of management's time and attention. In addition, such investigations may affect our reputation, create a risk of potential exclusion from government reimbursement programs in the US and other countries, and may lead to litigation. These factors have contributed to decisions by us and other companies in our industry, when deemed in their interest, to enter into settlement agreements with governmental authorities around the world prior to any formal decision by the authorities. These settlements have involved and may continue to involve large cash

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payments, including the potential repayment of amounts allegedly obtained improperly, and other penalties, including treble damages. In addition, settlements of healthcare fraud cases often require companies to enter into corporate integrity agreements, which are intended to regulate company behavior for a period of years. Our affiliate Novartis Pharmaceuticals Corporation is a party to such an agreement, which will not expire until 2015. Also, matters underlying governmental investigations and settlements may be the subject of separate private litigation.

        Our businesses are currently subject to a number of these governmental investigations and information requests by regulatory authorities. See "Item 18. Financial Statements—Note 20."

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

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

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

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

        The products we market and sell are either manufactured at our own dedicated manufacturing facilities or by third parties. In either case, we must ensure that all manufacturing processes comply with current Good Manufacturing Practices (cGMP) and other applicable regulations, as well as with our own high quality standards. The manufacture of our products is heavily regulated by governmental health authorities around the world, including the FDA. In recent years, such health authorities have intensified their scrutiny of manufacturers' compliance with such requirements, and are increasingly challenging practices that were previously considered acceptable. If we or our third-party suppliers fail to comply fully with these requirements and the health authorities' expectations, then we could be required to shut down our production facilities or production lines. This could lead to product shortages, or to our being entirely unable to supply products to patients for an extended period of time. And such shortages or shut downs have led to and could continue to lead to significant losses of sales revenue and to potential third-party litigation. In addition, health authorities have in some cases imposed significant penalties for such failures to comply with cGMP. A failure to comply fully with cGMP could also lead to a delay in the approval of new products to be manufactured at the impacted site.

        Like our competitors, we have faced, and continue to face, significant manufacturing issues. For example, in November 2011, we received a Warning Letter from the FDA with respect to three of our Sandoz Division's facilities—in Broomfield, Colorado, Wilson, North Carolina, and Boucherville, Canada. The Warning Letter raised concerns regarding these facilities' compliance with FDA cGMP regulations. It stated that until the FDA confirms that the deficiencies have been corrected, the FDA can recommend that any pending applications or supplements listing Novartis affiliates as a drug manufacturer not be approved. In addition, FDA may refuse requests to issue export certificates to our Sandoz US affiliate, or import certificates to our Sandoz Canada affiliates. The letter further states that other federal agencies may take the Warning Letter into account when considering the award of contracts. In addition, in May 2013 we received a Warning Letter from the FDA concerning the oncology injectables manufacturing

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facility in Unterach, Austria. The letter contained two observations which followed an agency inspection at the site in October 2012, and are related to historical visual inspection practices for products manufactured at the site. In the fourth quarter of 2012, the FDA formally notified Sandoz that the compliance status of its Broomfield, Colorado site has been upgraded. In January 2014, the FDA formally notified Sandoz that the compliance status of its Boucherville, Canada site was upgraded. Work continues on closing out committed actions across the sites.

        Separately, in December 2011, we suspended operations and shipments from the OTC Division facility located at Lincoln, Nebraska, which also produces certain products for our Animal Health Division. This action was taken to accelerate maintenance and other improvement activities at the site. Subsequently, in 2012 and 2013, we recalled certain OTC Division products that were produced at the Lincoln facility. We have made progress in the remediation of quality issues at Lincoln, and the FDA closed out its October 2013 inspection of the site with zero Form 483 observations. However, we have also outsourced the production of certain Lincoln products, and have discontinued others. As of the date of this Form 20-F, it is not possible to determine when the plant will resume full operations.

        In December 2012, our Alcon Division received an FDA Warning Letter following an inspection at the LenSx laser manufacturing site in Aliso Viejo, California. Alcon responded in writing to the FDA, and in February 2013, FDA responded to Alcon acknowledging that the corrective actions described in Alcon's written response appear to address the items identified in the Warning Letter. The FDA will verify these corrective actions during its next scheduled inspection of the site. The items noted in the Warning Letter do not affect the safety or effectiveness of the LenSx laser, or impact Alcon's ability to sell the product.

        As a result of such manufacturing issues, we were unable to supply certain products to the market for significant periods of time, and so have suffered and may continue to suffer significant losses in sales and market share. These supply issues have required us to outsource the production of certain key products that were previously manufactured in our own production facilities, which may limit the potential profitability of such products. In addition, to meet health authority and our own high quality standards, we have expended considerable resources to upgrade and remediate issues at our sites. Should we fail to complete the planned improvements at the sites in a timely manner, including those done in agreement with the FDA, then we may suffer significant additional losses in sales and drainage of resources, and we could be subject to legal action without further notice including, without limitation, seizure and injunction.

        In addition, to meet increasing health authority expectations, we are devoting substantial time and resources to improve quality and assure consistency of product supply at our other manufacturing sites around the world. Ultimately, there can be no guarantee of the outcome of any of these efforts. Nor can there be any guarantee that we will not face similar issues in the future, or that we will successfully manage such issues when they arise.

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

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        Also as part of the Group's portfolio of products, we have a number of sterile products, including oncology products, which are considered to be technically complex to manufacture, and require strict environmental controls. Because the production process for such products is so complex and sensitive, the chance of production failures and lengthy supply interruptions is increased.

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

        In sum, a disruption in the supply of certain key products—whether as a result of a failure to comply with applicable regulations or health authority expectations, the fragility of the production process, natural or man-made disasters at one of our facilities or at a critical supplier or vendor, or our failure to accurately predict demand—could have a material adverse effect on our business, financial condition or results of operations. See also "—Earthquakes and other natural disasters could adversely affect our business," below.

The persistently weak global economic and financial environment may have a material adverse effect on our results.

        Many of the world's largest economies and financial institutions continue to be impacted by a weak ongoing global economic and financial environment, with some continuing to face financial difficulty, liquidity problems and limited availability of credit. It is uncertain how long these effects will last, or whether economic and financial trends will worsen or improve. In addition, these issues may be further impacted by the unsettled political conditions currently existing in the US, Europe and other places. Such uncertain times may have a material adverse effect on our revenues, results of operations, financial condition and, if circumstances worsen, our ability to raise capital at reasonable rates. For example, persistent financial weakness in certain countries in Europe has increased pressures on those countries, and on payors in those countries to force healthcare companies to decrease the prices at which we may sell them our products. See also "Item 4. Information on the Company—Item 4.B Business Overview—Pharmaceuticals—Price Controls." Concerns continue that some countries, including Greece, Italy, Portugal and Spain, may not be able to pay us in a timely manner. Certain other countries, such as Venezuela have taken steps to introduce exchange controls and limit companies from distributing retained earnings or paying intercompany payables due from those countries.

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

        In addition, the varying effects of difficult economic times on the economies, currencies and financial markets of different countries has impacted, and may continue to unpredictably impact, the conversion of our operating results into our reporting currency, the US dollar, as well as the value of our investments in our pension plans. See "—Foreign exchange fluctuations may adversely affect our earnings and the value of some of our assets," below, and "—If any of numerous key assumptions and estimates in calculating our pension plan obligations turn out to be different from our actual experience, we may be required to increase substantially our contributions to pension plans as well as our pension-related costs in the

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future," below. In addition, the financial situation may also result in a lower return on our financial investments, and a lower value on some of our assets. Alternately, inflation could accelerate, which could lead to higher interest rates, which would increase our costs of raising capital.

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

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

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

        In the past year, the US dollar, our reporting currency, has significantly increased in value against certain other world currencies. However, in prior years, the US dollar suffered significant decreases in value. In addition, in recent years, unresolved fiscal issues in the US and in many European economies, and investor concerns about the future of the Euro, have led to the flight of investor capital to the perceived safety of the Swiss franc, causing the Swiss franc to rise significantly in value. Because a significant portion of our earnings and expenditures are in currencies other than the US dollar, including expenditures in Swiss francs which are significantly higher than our revenues in Swiss francs, this volatility can have a significant and often unpredictable impact on our reported net sales and earnings. As has happened in the recent past, changes in exchange rates between the US dollar and other currencies can result in increases or decreases in our reported sales, costs and earnings as expressed in US dollars. 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. In addition, there is a risk that certain countries could devalue their currency. If this occurs then it could impact the effective prices we would be able to charge for our products and also have an adverse impact on both our consolidated income statement and currency translation adjustments included in our consolidated 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. Operating and Financial Review and Prospects—Item 5.A Operating Results—Effects of Currency Fluctuations," "Item 5.A Operating Results—Currency Impact on Key Figures," "Item 5.B Liquidity and Capital Resources," "Item 11. Quantitative and Qualitative Disclosures about Market Risk", and "Item 18. Financial Statements—Note 29."

We may not successfully achieve our goals in strategic acquisitions or divestments of businesses.

        As part of our growth strategy, we evaluate and pursue potential strategic business acquisitions and divestitures to expand or complement our existing businesses, or to enable us to focus more sharply on our strategic businesses. We cannot ensure that suitable acquisition candidates will be identified. Acquisition activities can be thwarted by overtures from competitors for the targeted candidates, potentially increasing prices demanded by sellers, governmental regulation (including market concentration limitations) and replacement product developments in our industry. Further, after an acquisition, successful integration of

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the venture can be complicated by corporate cultural differences, difficulties in retention of key personnel, customers and suppliers, and coordination with other products and processes. Also, acquisitions could divert management's attention from our existing business, and could result in liabilities being incurred that were not known at the time of acquisition or the creation of tax or accounting issues. Similarly, we cannot ensure that suitable buyers will be identified for businesses that we wish to divest. Neither can we ensure that we will correctly select businesses as candidates for divestiture, or that any expected strategic benefits, synergies or opportunities will arise as a result of any divestiture. If we fail to timely recognize or address these matters or to devote adequate resources to them, we may fail to achieve our growth strategy or otherwise not realize the intended benefits of any acquisition or divestiture.

Intangible assets and goodwill on our books may lead to significant impairment charges in the future.

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

        We regularly review our long-lived intangible and tangible assets, including identifiable intangible assets, investments in associated companies and goodwill, for impairment. Goodwill, acquired research and development, and acquired development projects not yet ready for use are subject to impairment review at least annually. Other long-lived assets are reviewed for impairment when there is an indication that an impairment may have occurred. Impairment testing under IFRS may lead to impairment charges in the future. Any significant impairment charges could have a material adverse effect on our results of operations and financial condition. In 2013, for example, we recorded intangible asset impairment charges of $116 million. Of this, $57 million relates to the Alcon Division, and $59 million to all other divisions. For a detailed discussion of how we determine whether an impairment has occurred, what factors could result in an impairment and the increasing impact of impairment charges on our results of operations, see "Item 5. Operating and Financial Review and Prospects—Item 5.A Operating Results—Critical Accounting Policies and Estimates—Impairment of Long-Lived Intangible and Tangible Assets" and "Item 18. Financial Statements—Notes 1 and 11."

Our indebtedness could adversely affect our operations.

        As of December 31, 2013 we had $11.2 billion of non-current financial debt and $6.8 billion of current financial debt. Our current and long-term debt requires us to dedicate a portion of our cash flow to service interest and principal payments and may limit our ability to engage in other transactions and otherwise may place us at a competitive disadvantage relative to our competitors that have less debt. We may have difficulty refinancing our existing debt or incurring new debt on terms that we would consider to be commercially reasonable, if at all.

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

        We invest a significant amount of effort and resources into outsourcing and offshoring certain key business functions with third parties, including research and development collaborations, manufacturing operations, warehousing, distribution activities, certain finance functions, marketing activities, data management and others. Our reliance on outsourcing and third parties for certain functions, such as the research and development or manufacturing of products, may limit the potential profitability of such products. In addition, despite contractual relationships with the third parties to whom we outsource these functions, we cannot ultimately control how they perform their contracts. Nonetheless, we depend on these third parties to achieve results which may be significant to us. If the third parties fail to meet their obligations or to comply with the law, we may lose our investment in the collaborations and fail to receive the expected benefits. In addition, should any of these third parties fail to comply with the law in the course of their performance of services for us, there is a risk that we could be held responsible for such

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violations of law, as well. Any such failures by third parties could have a material adverse effect on our business, financial condition or results of operations.

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

We may not be able to realize the expected benefits of our significant investments in Emerging Growth Markets.

        At a time of slowing growth in sales of healthcare products in industrialized countries, many emerging markets have experienced proportionately higher sales growth and an increasing contribution to the industry's global performance. In 2013, we generated $14.7 billion, or approximately 25% (2012: 24%) of net sales from Emerging Growth Markets—which comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand—as compared with $43.2 billion, or approximately 75% (2012: 76%) of our net sales, in the Established Markets. However, combined net sales in the Emerging Growth Markets grew 10% in constant currency in 2013, compared to 2% sales growth in constant currency in the Established Markets during the same period. As a result of this trend, we have been taking steps to increase our presence in the Emerging Growth Markets.

        There is no guarantee that our efforts to expand our sales in these countries will succeed, or that these countries will continue to experience growth rates in excess of the world's largest markets. Some Emerging Growth Market countries may be especially vulnerable to the effects of the persistently weak global financial environment, may have very limited resources to spend on healthcare or are more susceptible to political and social instability. See "—The persistently weak global economic and financial environment may have a material adverse effect on our results" above. Many of these countries are subject to increasing political and social pressures, including from a growing middle class seeking increased access to healthcare. Such pressures on local government may in turn result in an increased focus by the governments on our pricing.

        These countries also may have a relatively limited number of persons with the skills and training suitable for employment at an enterprise such as ours. See "—An inability to attract and retain qualified personnel could adversely affect our business" below. In some Emerging Growth Market countries, a culture of compliance with law may not be as fully developed as in the Established Markets—China's investigations of the activities of multinational healthcare companies have been well publicized—or we may be required to rely on third-party agents, in either case putting us at risk of liability. See "—Failure to comply with law, and resulting investigations and legal proceedings may have a significant negative effect on our results of operations," and "—Our reliance on outsourcing and third parties for the performance of key business functions heightens the risks faced by our businesses," above.

        In addition, many of these countries have currencies that may fluctuate substantially. If these currencies devalue significantly against the US dollar, and we cannot offset the devaluations with price increases, then our products may become less profitable, or may otherwise impact our reported financial results. See "Foreign exchange fluctuations may adversely affect our earnings and the value of some of our assets," above.

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

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

        Our Sandoz Division achieves significant revenue opportunities when it secures and maintains exclusivity periods granted for generic products in certain markets—particularly the 180-day exclusivity period granted in the US by the Hatch-Waxman Act—and when it is able to develop differentiated products with few, if any, generic competitors. Failure to obtain and maintain these market opportunities could have an adverse effect on the success of Sandoz. In addition, the division faces intense competition from patented pharmaceuticals companies, which commonly take aggressive steps to limit the availability of exclusivity periods or to reduce their value, and from other generic pharmaceuticals companies, which aggressively compete for exclusivity periods and for market share of generic products that may be identical to certain of our generic products. These activities may increase the costs and risks associated with our efforts to introduce generic products and may delay or entirely prevent their introduction. See also "—Our research and development efforts may not succeed in bringing new products to market, or to do so cost-efficiently enough, or in a manner sufficient to grow our business and replaced lost revenues and income" above, with regard to the risks involved in our efforts to develop differentiated generic products.

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

        We sponsor pension and other post-employment benefit plans in various forms. These plans cover a significant portion of our current and former associates. We are required to make significant assumptions and estimates about future events in calculating the present value of expected future expense and liability related to these plans. These include assumptions about discount rates we apply to estimated future liabilities and rates of future compensation increases. In addition, our actuarial consultants provide our management with historical statistical information such as withdrawal and mortality rates in connection with these estimates. Assumptions and estimates used by Novartis may differ materially from the actual results we experience due to changing market and economic conditions (including the effects of the persistently weak global financial environment, which, to date, have resulted in extremely low interest rates in many countries), higher or lower withdrawal rates, or longer or shorter life spans of participants, among other variables. For example, a decrease in the interest rate we apply in determining the present value of expected future defined benefit obligations of one-quarter of one percent would have increased our year-end defined benefit pension obligation for plans in Switzerland, US, UK, Germany and Japan, which represent about 95% of the Group total defined benefit pension obligation, by $0.8 billion. Any differences between our assumptions and estimates and our actual experience could have a material effect on our results of operations and financial condition. Further, additional employer contributions might be required if the funding level determined based on local rules falls below a pre-determined level. For more information on obligations under retirement and other post-employment benefit plans and underlying actuarial assumptions, see "Item 5. Operating and Financial Review and Prospects—Item 5.A Operating Results—Critical Accounting Policies and Estimates—Retirement and other post-employment benefit plans" and "Item 18. Financial Statements—Note 25". See also "—The persistently weak global economic and financial environment may have a material adverse effect on our results" above.

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

        The integrated nature of our worldwide operations enables us to achieve an attractive effective tax rate on our earnings because a portion of our earnings are earned in jurisdictions which tax profits at more favorable rates. Changes in tax laws or in the laws' application, including with respect to tax base or rate, transfer pricing, intercompany dividends and cross-border transactions, controlled corporations, and limitations on tax relief allowed on the interest on intercompany debt, could increase our effective tax rate and adversely affect our financial results.

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Counterfeit versions of our products could harm our patients and reputation.

        Our industry continues to be challenged by the vulnerability of distribution channels to illegal counterfeiting and the presence of counterfeit products in a growing number of markets and over the Internet. Counterfeit products are frequently unsafe or ineffective, and can potentially be life-threatening. To distributors and patients, counterfeit products may be visually indistinguishable from the authentic version. Reports of adverse reactions to counterfeit drugs or increased levels of counterfeiting could materially affect patient confidence in the authentic product, and harm the business of companies such as ours. Additionally, it is possible that adverse events caused by unsafe counterfeit products would mistakenly be attributed to the authentic product. If a product of ours was the subject of counterfeits, we could incur substantial reputational and financial harm in the longer term.

Ongoing consolidation among our distributors and retailers is increasing both the purchasing leverage of key customers and the concentration of credit risk.

        Increasingly, a significant portion of our global sales are made to a relatively small number of US drug wholesalers, retail chains and other purchasing organizations. For example, our three most important customers globally are all in the US, and accounted for approximately 10%, 9% and 7%, respectively, of Group net sales in 2013. The largest trade receivables outstanding were for these three customers, amounting to 9%, 7% and 5%, respectively, of the Group's trade receivables at December 31, 2013. The trend has been toward further consolidation among distributors and retailers, both in the US and internationally. As a result, our customers are gaining additional purchasing leverage, which increases the pricing pressures facing our businesses. Moreover, we are exposed to a concentration of credit risk as a result of this concentration among our customers. If one or more of our major customers experienced financial difficulties, the effect on us would be substantially greater than in the past. This could have a material adverse effect on our business, financial condition and results of operations.

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

        We highly depend upon skilled personnel in key parts of our organization, and we invest heavily in recruiting, training and retaining qualified individuals. The loss of the service of key members of our organization—including senior members of our scientific and management teams, high-quality researchers and development specialists, and skilled personnel in emerging markets—could delay or prevent the achievement of major business objectives.

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

        Emerging markets are expected to be a driving force in global growth, but in countries like Russia and China there is a limited pool of executives with the training and international experience needed to work successfully in a global organization like Novartis. Moreover, younger generations around the world have changing expectations toward careers, engagement and the integration of work in their overall lifestyles. Geographic mobility is expected to decrease, and talented individuals in emerging countries anticipate ample career opportunities closer to home than in the past.

        In addition, our ability to hire qualified personnel also depends on the flexibility to reward superior performance and to pay competitive compensation. Laws and regulations on executive compensation, including legislation in our home country, Switzerland, may restrict our ability to attract, motivate and retain the required level of qualified personnel.

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

Environmental liabilities may adversely impact our results of operations.

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

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

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

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

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

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

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

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Earthquakes and other natural disasters could adversely affect our business.

        In recent years, extreme weather events and changing weather patterns such as storms, flooding, drought, and temperature changes, appear to have become more common. We operate in countries around the world. As a result, we are potentially exposed to varying natural disaster risks like hurricanes, tornadoes or floods. As a result of these and other potential impacts of climate change on the environment, 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 could be put at risk.

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


Risks Related To Our ADRs

The price of our ADRs 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) each representing one Novartis share and evidenced by American Depositary Receipts (ADRs) trade on the NYSE in US dollars. Since the shares underlying the ADRs are listed in Switzerland on the SIX Swiss Exchange (SIX) and trade in Swiss francs, the value of the ADRs may be affected by fluctuations in the US dollar/Swiss franc exchange rate. In addition, since 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 ADRs. If the value of the Swiss franc decreases against the US dollar, the price at which our ADRs trade may—and the value of the US dollar equivalent of any dividend will—decrease accordingly.

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

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

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Item 4.    Information on the Company


4.A History and Development of Novartis

Novartis AG

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

        Novartis is a multinational group of companies specializing in the research, development, manufacturing and marketing of a broad range of healthcare products led by innovative pharmaceuticals. Novartis AG, our Swiss holding company, owns, directly or indirectly, all of our significant operating companies. For a list of our significant operating subsidiaries, see "Item 18. Financial Statements—Note 32."


Important Corporate Developments 2011-2013

2013    

November

 

Novartis announces a $5.0 billion share buyback. The buyback begins on the date of the announcement and will be executed over two years on the second trading line.

 

 

Novartis announces a definitive agreement to divest its blood transfusion diagnostics unit to Grifols S.A. of Spain, for $1.7 billion. This transaction was completed in January 2014.

 

 

Novartis announces that it will co-locate certain scientific resources in order to improve the efficiency and effectiveness of its global research organization. Changes include establishing a respiratory research group in Cambridge, Massachusetts, a proposal to close the Horsham, UK, research site, a plan to exit from the Vienna, Austria research site, consolidation of the US-based component of oncology research from Emeryville, California to Cambridge, Massachusetts, closure of the biotherapeutics development unit in La Jolla, California, and a plan to exit research in topical applications for dermatology.

September

 

Novartis announces that it has entered into an exclusive global licensing and research collaboration agreement with Regenerex LLC, a biopharmaceutical company based in Louisville, Kentucky, for use of the company's novel Facilitating Cell Therapy (FCRx) platform.

August

 

Joerg Reinhardt, Ph.D., assumes role of Chairman of the Board of Directors of Novartis AG on August 1.

July

 

The Novartis Board of Directors announces a final agreement with its former Chairman, Dr. Daniel Vasella. From the date of the Annual General Meeting held on February 22, 2013, until October 31, 2013, Dr. Vasella was to provide certain transitional services, including select Board mandates with subsidiaries of Novartis and support of the ad-interim Chairman and the new Chairman. For his transitional services during such period, Dr. Vasella would receive cash of CHF 2.7 million, and 31,724 unrestricted shares as of October 31, 2013 (the market value of the shares as of the date of the announcement was approximately CHF 2.2 million). In addition, from November 1, 2013, to December 31, 2016, Dr Vasella will receive a minimum of $250,000 per annum in exchange for making himself available to Novartis, at Novartis' request and discretion, to provide specific consulting services, such as the coaching of high-potential associates of Novartis and speeches at key Novartis events at a daily fee rate of $25,000, which will be offset against the $250,000 minimum annual payment. During November and December 2013, Dr. Vasella did not provide any coaching to associates and did not receive any compensation for this period.

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    Novartis announces that it has entered into a development and licensing agreement with Biological E Limited (BioE), a biopharmaceutical company based in India, for two vaccines to protect against typhoid and paratyphoid fevers. The agreement advances the Novartis goal to deliver accessible and affordable vaccines that address unmet medical need in endemic regions.

April

 

Novartis and Malaria No More, a leading global charity determined to end malaria deaths, announce that they are joining forces on the Power of One campaign to help close the treatment gap and accelerate progress in the fight against malaria. Over the next three years, Novartis will support the campaign financially and also donate up to three million full courses of its pediatric antimalarial drug to match the treatments donated by the public, doubling the impact of these donations.

February

 

Novartis announces that the Novartis AG Board of Directors and Dr. Vasella agreed to cancel his non-competition agreement and all related conditional compensation. The agreement was to take effect after Dr. Vasella stepped down as Chairman of the Board at the Novartis Annual General Meeting on February 22, 2013.

January

 

Novartis announces that, at his own wish, Novartis AG Chairman of the Board of Directors Dr. Daniel Vasella will not stand for re-election as a member of the Board of Directors at the Annual General Meeting to be held on February 22, 2013. The Board of Directors proposed the election of, among others, Joerg Reinhardt, Ph.D., as a member of the Board for a term of office beginning on August 1, 2013, and ending on the day of the Annual General Meeting in 2016. The Board announced its intention to elect Joerg Reinhardt as Chairman of the Board of Directors as from August 1, 2013. The Board of Directors further announced its intention to elect its current Vice-Chairman, Ulrich Lehner, Ph.D., as Chairman of the Board of Directors for the period from February 22, 2013, until the new Chairman took office.

2012

 

 

September

 

Novartis successfully completes a $2.0 billion bond offering in two tranches.

August

 

Novartis and the University of Pennsylvania (Penn) form a broad-based Research & Development alliance to advance novel T-cell immunotherapies to treat cancer. Novartis and Penn enter into a multi-year collaboration to study chimeric antigen receptor (CAR) technology for the treatment of cancer. The parties establish a joint Center for Advanced Cellular Therapies at Penn to develop and manufacture CARs. Novartis licenses worldwide rights to the first CAR investigational therapy, CART-19, from Penn, and obtains worldwide commercial rights to products from the collaboration. Novartis will provide an up-front payment to Penn, research funding, funding for the establishment of the CACT and milestone payments for the achievement of certain clinical, regulatory and commercial milestones and royalty payments.

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May   Sandoz announces an agreement to acquire Fougera Pharmaceuticals, based in Melville, New York, for $1.525 billion, to make Sandoz the number one generic dermatology medicines company globally and in the US, and to strengthen Sandoz's differentiated products strategy. The acquisition was completed in July 2012.

March

 

Alcon gains exclusive rights outside the US to ocriplasmin, a potential first pharmacological treatment for vitreomacular adhesion. Alcon pays ThromboGenics an upfront payment of EUR 75 million, with potential additional payments based on milestones, and on royalties on sales.

January

 

Novartis extends its commitment to help achieve the final elimination of leprosy. Our new five-year commitment includes a donation of treatments worth an estimated $22.5 million, and is expected to reach an estimated 850,000 patients. Novartis will also intensify efforts to build a multi-stakeholder initiative in a final push against leprosy. We have a long history in fighting leprosy, donating medicines and developing programs to support patients, valued at more than $100 million since 1986.

 

 

Novartis announces the restructuring of its US Pharmaceuticals business to strengthen its competitive position in light of the loss of patent protection for Diovan and the expected impact on the worldwide sales of Tekturna/Rasilez after the termination of the ALTITUDE study. The restructuring of the US General Medicines business results in a reduction of 1,960 positions and leads to an exceptional charge of $160 million in the first quarter of 2012 and to expected annual savings of approximately $450 million by 2013.

2011

 

 

December

 

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

 

 

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

 

 

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

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

April

 

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

 

 

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

March

 

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

January

 

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

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


4.B Business Overview

OVERVIEW

        Novartis provides healthcare solutions that address the evolving needs of patients and societies worldwide. Our broad portfolio includes innovative medicines, eye care, cost-saving generic pharmaceuticals, preventive vaccines and diagnostic tools, over-the-counter and animal health products.

        The Group's wholly-owned businesses are organized into six global operating divisions, and we report our results in the following five segments:

    Pharmaceuticals: Innovative patent-protected prescription medicines

    Alcon: Surgical, ophthalmic pharmaceutical and vision care products

    Sandoz: Generic pharmaceuticals

    Vaccines and Diagnostics: Preventive human vaccines and blood testing diagnostics (following the January 9, 2014 completion of the divestment of our blood transfusion diagnostics unit to Grifols S.A., the division now consists only of Vaccines)

    Consumer Health: OTC (over-the-counter medicines) and Animal Health

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        Novartis is the only healthcare company globally with leading positions in each of these areas. To maintain our competitive positioning across these growing segments of the healthcare industry, we place a strong focus on innovating to meet the evolving needs of patients around the world, growing our presence in new and emerging markets, and enhancing our productivity to invest for the future and increase returns to shareholders.

        Novartis achieved net sales of $57.9 billion in 2013, while net income amounted to $9.3 billion. Research & Development expenditure in 2013 amounted to $9.9 billion ($9.7 billion excluding impairment and amortization charges). Of the Group's total net sales, $14.7 billion, or 25%, came from Emerging Growth Markets, and $43.2 billion, or 75%, came from Established Markets. Emerging Growth Markets (EGMs) comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand.

        Headquartered in Basel, Switzerland, our Group companies employed approximately 135,696 full-time equivalent associates as of December 31, 2013, and sell products in approximately 155 countries around the world.


Pharmaceuticals Division

        Pharmaceuticals researches, develops, manufactures, distributes and sells patented prescription medicines and is organized in the following business franchises: Primary Care, consisting of Primary Care medicines and Established Medicines; and Specialty Care, consisting of Ophthalmology, Neuroscience, Integrated Hospital Care, and Critical Care medicines. Novartis Oncology is organized as a business unit, responsible for the global development and marketing of oncology products. In 2013, the Pharmaceuticals Division accounted for $32.2 billion, or 56%, of Group net sales, and for $9.4 billion, or 80%, of Group operating income (excluding Corporate income and expense, net).


Alcon Division

        Our Alcon Division researches, develops, manufactures, distributes and sells eye care products and technologies to serve the full life cycle of eye care needs. Alcon offers a broad range of products to treat many eye diseases and conditions, and is organized into three businesses: Surgical, Ophthalmic Pharmaceuticals and Vision Care. The Surgical portfolio includes technologies and devices for cataract, retinal, glaucoma and refractive surgery, as well as intraocular lenses to treat cataracts and refractive errors, like presbyopia and astigmatism. Alcon also provides viscoelastics, surgical solutions, surgical packs, and other disposable products for cataract and vitreoretinal surgery. In Ophthalmic Pharmaceuticals, the portfolio includes treatment options for elevated intraocular pressure caused by glaucoma, anti-infectives to aid in the treatment of bacterial infections and bacterial conjunctivitis, and ophthalmic solutions to treat inflammation and pain associated with ocular surgery, as well as an intravitreal injection for vitreomacular traction including macular hole. The pharmaceutical product portfolio also includes eye and nasal allergy treatments, as well as over-the-counter dry eye relief and ocular vitamins. The Vision Care portfolio comprises daily disposable, monthly replacement, and color-enhancing contact lenses, as well as a complete line of contact lens care products including multi-purpose and hydrogen-peroxide based solutions, rewetting drops and daily protein removers. In 2013, Alcon accounted for $10.5 billion, or 18%, of Group net sales, and for $1.2 billion, or 11%, of Group operating income (excluding Corporate income and expense, net).


Sandoz Division

        Our Sandoz Division develops, manufactures, distributes and sells prescription medicines, as well as pharmaceutical and biotechnological active substances, which are not protected by valid and enforceable third-party patents. Sandoz has activities in Retail Generics, Anti-Infectives and Biopharmaceuticals & Oncology Injectables. In Retail Generics, Sandoz develops, manufactures and markets active ingredients and finished dosage forms of pharmaceuticals to third parties. Retail Generics includes the specialty areas

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of Dermatology, Respiratory and Ophthalmics. In Anti-Infectives, Sandoz manufactures active pharmaceutical ingredients and intermediates—mainly antibiotics—for internal use by Retail Generics and for sale to third-party customers. In Biopharmaceuticals, Sandoz develops, manufactures and markets protein- or other biotechnology-based products (known as biosimilars or follow-on biologics) and provides biotechnology manufacturing services to other companies, and in Oncology Injectables, Sandoz develops, manufactures and markets cytotoxic products for the hospital market. In 2013, Sandoz accounted for $9.2 billion, or 16%, of Group net sales, and for $1.0 billion, or 9%, of Group operating income (excluding Corporate income and expense, net).


Vaccines and Diagnostics Division

        Our Vaccines and Diagnostics Division consists of two activities: Vaccines and Diagnostics. Following the January 9, 2014, completion of the divestment of our blood transfusion diagnostics unit to Grifols S.A., the Division now consists only of Vaccines. Vaccines researches, develops, manufactures, distributes and sells human vaccines worldwide. Diagnostics researched, developed, distributed and sold blood testing and molecular diagnostics products. In 2013, the Vaccines and Diagnostics Division accounted for $2.0 billion, or 3%, of Group net sales.


Consumer Health

        Consumer Health consists of two Divisions: Over-the-Counter (OTC) and Animal Health. Each has its own research, development, manufacturing, distribution and selling capabilities, but neither is material enough to the Group to be separately disclosed as a segment. OTC offers readily available consumer medicine, and Animal Health provides veterinary products for farm and companion animals. In 2013, Consumer Health accounted for $4.1 billion, or 7%, of Group net sales, and for $0.2 billion, or 1%, of Group operating income (excluding Corporate income and expense, net).


PHARMACEUTICALS

Overview

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

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

    Oncology

    Primary Care

    Primary Care Medicines

    Established Medicines

    Specialty Care

    Ophthalmology

    Neuroscience

    Integrated Hospital Care

    Critical Care

        The Pharmaceuticals Division is organized into global business franchises responsible for the commercialization of various products as well as Novartis Oncology, a business unit responsible for the global development and commercialization of oncology products.

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        The Pharmaceuticals Division is the largest contributor among the six divisions of Novartis and reported consolidated net sales of $32.2 billion in 2013, which represented 56% of the Group's net sales.

        The division is made up of approximately 80 affiliated companies which together employed 65,262 full-time equivalent associates as of December 31, 2013, and sell products in approximately 155 countries. The product portfolio of the Pharmaceuticals Division includes more than 50 key marketed products, many of which are leaders in their respective therapeutic areas. In addition, the division's portfolio of development projects includes 144 potential new products and new indications or new formulations for existing products in various stages of clinical development.


Pharmaceuticals Division Products

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

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Key Marketed Products

 
Business franchise
  Product   Common name   Indication(1)   Formulation
Oncology   Afinitor/Votubia   everolimus   Advanced renal cell carcinoma after failure of treatment with VEGF-targeted therapy
Advanced pancreatic neuroendocrine tumors
SEGA associated with tuberous sclerosis
Renal angiomyolipoma associated with tuberous sclerosis
Advanced breast cancer in post-menopausal HR+/HER2- women in combination with exemestane, after failure of anastrozole or letrozole
  Tablet
Dispersible tablets for oral suspension
     
    Exjade   deferasirox   Chronic iron overload due to blood transfusions and non-transfusion dependent thalassemia   Dispersible tablet for oral suspension
     
    Femara   letrozole   Hormone receptor positive early breast cancer in postmenopausal women following surgery (upfront adjuvant therapy)
Early breast cancer in post-menopausal women following standard tamoxifen therapy (extended adjuvant therapy)
Advanced breast cancer in post-menopausal women (both as first- and second-line therapies)
  Tablet
     
    Gleevec/
Glivec
  imatinib mesylate/imatinib   Certain forms of Ph+ chronic myeloid leukemia
Certain forms of KIT+ gastrointestinal stromal tumors
Certain forms of acute lymphoblastic leukemia
Dermatofibrosarcoma protuberans
Hypereosinophilic syndrome
Aggressive systemic mastocytosis
Myelodysplastic/myeloproliferative diseases
  Tablet
Capsules
     
    Jakavi   ruxolitnib   Disease-related splenomegaly or symptoms in adult patients with primary myelofibrosis (also known as chronic idiopathic myelofibrosis), post-polycythemia vera myelofibrosis or post-essential thrombocythemia myelofibrosis   Tablet
     
    Sandostatin
LAR &
Sandostatin
SC
  octreotide acetate for injectable suspension & octreotide acetate   Acromegaly
Symptom control for certain forms of neuroendocrine tumors
Delay of tumor progression in patients with midgut tumors
  Vial
Ampoule/pre-filled syringe
     
    Signifor   pasireotide   Cushing's disease   Ampoule/syringe
     
    Tasigna   nilotinib   Certain forms of chronic myeloid leukemia in patients resistant or intolerant to prior treatment including Gleevec/Glivec
First line chronic myeloid leukemia
  Capsule
     
    Zometa   zoledronic acid   Skeletal-related events from bone metastases (cancer that has spread to the bones)
Hypercalcemia of malignancy
  Vial
Ready-to-use
 

(1)   Indications vary by country.

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Business franchise
  Product   Common name   Indication(1)   Formulation
Primary Care                

Primary Care Medicines

  Amturnide   aliskiren, amlodipine besylate and hydrochlorothiazide   Hypertension   Tablet
     

  Arcapta Neohaler/ Onbrez Breezhaler   indacaterol   Chronic obstructive pulmonary disease   Inhalation powder hard capsules
     
    Diovan   valsartan   Hypertension
Heart failure
Post-myocardial infarction
  Tablets/capsules/oral solution
     
    Diovan HCT/
Co-Diovan
  valsartan and hydrochlorothiazide   Hypertension   Tablet
     
    Eucreas   vildagliptin and metformin   Type 2 diabetes   Tablet
     
    Exforge   valsartan and amlodipine besylate   Hypertension   Tablet
     
    Exforge HCT   valsartan, amlodipine besylate and hydrochlorothiazide   Hypertension   Tablet
     
    Galvus   vildagliptin   Type 2 diabetes   Tablet
     
    Seebri Breezhaler   glycopyrronium bromide   Chronic obstructive pulmonary disease   Inhalation powder hard capsules
     
    Tekamlo/Rasilamlo   aliskiren and amlodipine besylate   Hypertension   Tablet
     
    Tekturna/Rasilez   aliskiren   Hypertension   Tablet
     
    Tekturna HCT/Rasilez HCT   aliskiren and hydrochlorothiazide   Hypertension   Tablet
     
    Ultibro Breezhaler   indacaterol / glycopyrronium bromide   Chronic obstructive pulmonary disease   Inhalation powder hard capsules
     
    Xolair   omalizumab   Severe allergic asthma   Lyophilized powder for reconstitution and liquid formulation in pre-filled syringes as subcutaneous injection
     

Established Medicines

  Cibacen   benazepril hydrochloride   Hypertension
Adjunct therapy in congestive heart failure
Progressive chronic renal insufficiency
  Tablet
     
    Clozaril/
Leponex
  clozapine   Treatment-resistant schizophrenia
Prevention and treatment of recurrent suicidal behavior in patients with schizophrenia and psychotic disorders
  Tablet
     
    Coartem/
Riamet
  artemether and lumefantrine   Plasmodium falciparum malaria or mixed infections that include Plasmodium falciparum
Standby emergency malaria treatment
  Tablet
Dispersible tablet for oral suspension
     
    Focalin & Focalin XR   dexmethylphenidate HCl & dexmethylphenidate extended release   Attention deficit hyperactivity disorder   Tablet
Capsule
     
    Foradil   formoterol   Asthma
Chronic obstructive pulmonary disease
  Aerolizer (capsules)
Aerosol
     
    Lamisil   terbinafine (terbinafine hydrochloride)   Fungal infection of the skin and nails caused by dermatophyte fungi Tinea capitis
Fungal infections of the skin for the treatment of tinea corporis, tinea cruris, tinea pedis and yeast infections of the skin caused by the genus
Candida
Onychomycosis of the toenail or fingernail due to dermatophytes
  Tablet
Cream
DermGel
Solution
Spray
 

(1)   Indications vary by country.

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Business franchise
  Product   Common name   Indication(1)   Formulation
    Lescol/
Lescol XL
  fluvastatin sodium   Hypercholesterolemia and mixed dyslipidemia in adults
Secondary prevention of major adverse cardiac events
Slowing the progression of atherosclerosis
Heterozygous familial hypercholesterolemia in children and adolescents
  Capsule
Tablet
     
    Reclast/
Aclasta
  zoledronic acid 5 mg   Treatment of osteoporosis in postmenopausal women
Treatment of osteoporosis in men
Treatment and prevention of glucocorticoid-induced osteoporosis
Prevention of postmenopausal osteoporosis
Treatment of Paget's disease of the bone
  Intravenous infusion
     
    Ritalin   methylphenidate HCl   Attention deficit hyperactivity disorder and narcolepsy   Tablet
     
    Ritalin LA   methylphenidate HCl modified release   Attention deficit hyperactivity disorder   Capsule
     
    Tegretol   carbamazepine   Epilepsy
Pain associated with trigeminal neuralgia
Acute mania and bipolar affective disorders
  Tablet
Chewable tablet
Oral suspension
Suppository
     
    Trileptal   oxcarbazepine   Epilepsy   Tablet
Oral suspension
     
    Vivelle-Dot/
Estradot
  estradiol hemihydrate   Estrogen replacement therapy for the treatment of the symptoms of natural or surgically induced menopause
Prevention of postmenopausal osteoporosis
  Transdermal patch
     
    Voltaren/Cataflam   diclofenac sodium/potassium/resinate/free acid   Inflammatory and degenerative forms of rheumatism
Post-traumatic and post-operative pain, inflammation and swelling
Painful and/or inflammatory conditions such as migraine, ear, nose and throat, or dysmenorrhoea
  Tablet
Capsule
Oral drop
Ampoule for injection
Suppository
Gel
Powder for oral solution
Transdermal patch
 

(1)   Indications vary by country.

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Business franchise
  Product   Common name   Indication(1)   Formulation
Specialty Care                

Ophthalmology

  Lucentis   ranibizumab   Wet age-related macular degeneration
Visual impairment due to diabetic macular edema
Visual impairment due to macular edema secondary to retinal vein occlusion
Visual impairment due to choroidal neovascularization secondary to pathologic myopia
  Intravitreal injection
     

Neuroscience

  Comtan   entacapone   Parkinson's disease patients who experience end-of-dose motor (or movement) fluctuations   Tablet
     
    Exelon & Exelon Patch   rivastigmine tartrate & rivastigmine transdermal system   Mild-to-moderate Alzheimer's disease dementia
Severe Alzheimer's disease dementia
Dementia associated with Parkinson's disease
  Capsule
Oral solution
Transdermal patch
     
    Extavia   interferon beta-1b   Relapsing remitting and/or relapsing forms of multiple sclerosis in adult patients   Subcutaneous injection
     
    Fanapt   iloperidone   Schizophrenia   Tablet
     
    Gilenya   fingolimod   Relapsing forms of multiple sclerosis   Capsule
     
    Stalevo   carbidopa, levodopa and entacapone   Parkinson's disease patients who experience end-of-dose motor (or movement) fluctuations   Tablet
     

Integrated Hospital Care

  Cubicin   daptomycin   Complicated skin and skin structure infections caused by Gram-positive susceptible isolates
Staphylococcus aureus bloodstream infections (bacteremia), including those with right-sided infective endocarditis, caused by susceptible isolates
  Powder for solution, injection or infusion
     
    Ilaris   canakinumab   Cryopyrin-associated periodic syndrome
Systemic juvenile idiopathic arthritis
  Lyophilized powder for reconstitution for subcutaneous injection
     
    Myfortic   mycophenolic acid (as mycophenolate sodium)   Prophylaxis of organ rejection in patients receiving allogeneic renal transplants   Gastro-resistant tablet
     
    Neoral/Sandimmune   cyclosporine, USP Modified   Prevention of rejection following certain organ transplantation
Non-transplantation autoimmune conditions such as severe psoriasis and severe rheumatoid arthritis
  Capsule
Oral solution
Intravenous (Sandimmune)
     
    Simulect   basiliximab   Prevention of acute organ rejection in de novo renal transplantation   Vial for injection or infusion
     
    Tyzeka/Sebivo   telbivudine   Chronic hepatitis B   Tablet
Oral solution
     
    Zortress/Certican   everolimus   Prevention of organ rejection (heart, liver and kidney)   Tablet
Dispersible tablet
     

Critical Care

  TOBI/TOBI Podhaler   tobramycin   Pseudomonas aeruginosa infection in cystic fibrosis   Nebulizer solution/Inhalation powder
 

(1)   Indications vary by country and/or formulation.

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Selected Leading Products

    Oncology

    Gleevec/Glivec (imatinib mesylate/imatinib mesylate) is a kinase inhibitor approved to treat patients with metastatic and/or unresectable KIT+ gastrointestinal stromal tumors (GIST), as an adjuvant treatment for certain adult patients following resection of KIT+ GIST, and as a targeted therapy for Philadelphia chromosome-positive chronic myeloid leukemia (Ph+ CML). First launched in 2001, Gleevec/Glivec is available in more than 120 countries. Gleevec/Glivec is also approved in the US, EU and Japan to treat Philadelphia chromosome-positive acute lymphoblastic leukemia, a rapidly progressive form of leukemia. Gleevec/Glivec is also approved in the US and EU to treat dermatofibrosarcoma protuberans, a rare solid tumor; hypereosinophilic syndrome; myelodysplastic/myeloproliferative diseases and other rare blood disorders. In the US, Gleevec is also approved for aggressive systemic mastocytosis. Gleevec/Glivec has received approvals in 68 countries as a post-surgery (adjuvant setting) therapy for certain adult patients with KIT+ GIST. Following approval by the FDA in January 2013, the EMA approved Gleevec/Glivec in July 2013 for pediatric patients with newly diagnosed Ph+ acute lymphoblastic leukemia in combination with chemotherapy.

    Sandostatin SC/Sandostatin LAR (octreotide acetate/octreotide acetate for injectable suspension) is indicated for the treatment of patients with acromegaly, a chronic disease caused by over-secretion of pituitary growth hormone in adults. Sandostatin is also indicated for the treatment of patients with certain symptoms associated with carcinoid tumors and other types of gastrointestinal and pancreatic neuroendocrine tumors. Additionally, Sandostatin LAR is approved in 44 countries for the delay of tumor progression in patients with midgut carcinoid tumors. A total of 40 countries have also approved a new presentation of Sandostatin LAR, which includes a new diluent, safety needle and vial adapter improving the mixing and administration, with additional filings underway. Sandostatin was first launched in 1988 and is approved in more than 100 countries. Patent protection for the active ingredient of Sandostatin has expired. Generic versions of Sandostatin SC are available in the US and elsewhere. Patents protecting the Sandostatin LAR formulation, the long-acting version of Sandostatin which represents a majority of our Sandostatin sales, expire in 2014 and beyond in the US, but expired in July 2010 in key markets outside the US.

    Afinitor/Votubia (everolimus), is an oral inhibitor of the mTOR pathway. Afinitor is approved in more than 100 countries and regions including the US, EU member states and Japan for advanced renal cell carcinoma following vascular endothelial growth factor-targeted therapy. Afinitor is also approved in nearly 50 countries, including the US, EU and Japan for the treatment of advanced pancreatic neuroendocrine tumors. In addition, Afinitor is approved in more than 75 countries for advanced hormone receptor-positive, HER2-negative breast cancer (advanced HR+/HER2- breast cancer). Everolimus is also approved in more than 40 countries including in the US as Afinitor and in the EU as Votubia to treat patients with subependymal giant cell astrocytoma (SEGA) associated with tuberous sclerosis complex (TSC) and for the treatment of adult patients with renal angiomyolipomas and TSC who do not require immediate surgery. The dispersible formulation of the product is now approved in the TSC-SEGA population in the EU. Everolimus, the active ingredient in Afinitor, is also available under the trade names Zortress/Certican for use in transplantation, and is exclusively licensed to Abbott and sublicensed to Boston Scientific for use in drug-eluting stents.

    Exjade (deferasirox) is an oral iron chelator approved for the treatment of chronic iron overload due to blood transfusions in patients two years of age and older. Patients with congenital and acquired chronic anemia, such as thalassemia, sickle cell disease and myelodysplastic syndromes, require transfusions, which puts them at risk of iron overload. Exjade was first approved in 2005 and is now approved in more than 100 countries, including the US, EU member states and Japan. Exjade is also approved in more than 50 countries, including the US and EU member states, for the treatment of chronic iron overload in patients 10 years of age and older with non-transfusion-dependent thalassemia.

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    Tasigna (nilotinib) is a signal transduction inhibitor of the BCR-ABL tyrosine kinase. Since its launch in 2007, Tasigna has been approved in more than 110 countries to treat patients with Ph+ CML in the chronic and/or accelerated phase who are resistant or intolerant to existing treatment, including Gleevec/Glivec. It is also approved in more than 85 markets, including the US, EU member states, Switzerland and Japan, to treat newly diagnosed patients in the chronic phase. Results from the global, randomized Phase III trial called ENESTnd (Evaluating Nilotinib Efficacy and Safety in Clinical Trials of Newly Diagnosed Ph+ CML Patients), a head-to-head comparison against Gleevec/Glivec, showed that Tasigna produced faster and deeper responses than Gleevec/Glivec in adult patients with newly diagnosed Ph+ CML. The ENESTnd five-year follow-up continued to demonstrate higher rates of early and deeper sustained molecular response, including a reduced risk of progression in patients treated with Tasigna compared to Gleevec/Glivec. Data also indicated a trend for higher overall survival and event-free survival in patients treated with Tasigna compared to Gleevec/Glivec. In addition, ENESTcmr is the first randomized trial in patients with Ph+ CML to investigate the impact of switching adult patients with residual molecular disease to Tasigna after a minimum of two years on treatment with Gleevec/Glivec. Three-year results from the ENESTcmr trial showed that switching to Tasigna led to deeper molecular responses in these patients, further reducing their disease burden.

    Zometa (zoledronic acid for injection/zoledronic acid 4 mg) is a leading treatment to reduce or delay skeletal-related events, including pathologic fracture, spinal cord compression, and/or requirement of radiation therapy or surgery to bone, in patients with bone metastases (cancer that has spread to the bones) from solid tumors and multiple myeloma. First approved in the US in 2001 for the treatment of hypercalcemia of malignancy (tumor-induced excessive levels of calcium), Zometa is approved in more than 100 countries for this indication as well as for the treatment of patients with multiple myeloma and patients with bone metastasis from solid malignancies, including prostate, breast and lung cancer. Zoledronic acid, the active ingredient in Zometa, is also available under the trade names Reclast/Aclasta for use in non-oncology indications. Zometa is facing generic competition following patent expirations in 2013 on its active ingredient, zoledronic acid, in the US and other major markets. See "—Intellectual Property" below for further information on the patent status of Zometa.

    Femara (letrozole) is a once-daily oral aromatase inhibitor for the treatment of early stage or advanced breast cancer in postmenopausal women. Femara was first launched in 1996 and is currently available in more than 90 countries. Femara is approved in the US, EU member states and other countries in the adjuvant, extended adjuvant and neoadjuvant settings for early stage breast cancer. Femara is also approved in the US and other countries as adjuvant therapy for locally advanced breast cancer and for advanced breast cancer following anti-estrogen therapy. Femara is approved as neo-adjuvant (pre-operative) therapy for early stage breast cancer in a limited number of countries. In Japan, Femara is approved for the treatment of all hormone receptor-positive breast cancer in postmenopausal women. Femara has faced generic competition since 2011 when the patent on its active ingredient, letrozole, expired in the US and major countries in Europe. See "—Intellectual Property" below for further information on the patent status of Femara.

    Jakavi (ruxolitinib) is an oral inhibitor of the JAK 1 and JAK 2 tyrosine kinases. It is the first JAK inhibitor indicated for the treatment of disease-related splenomegaly or symptoms in adult patients with primary myelofibrosis, post-polycythemia vera myelofibrosis or post-essential thromboycythemia myelfibrosis. Jakavi is currently approved in more than 50 countries, including the member states of the EU. In three-year follow-up data from the COMFORT-I and COMFORT-II Phase III studies in myelofibrosis, Jakavi treatment reduced the risk of death and resulted in sustained reductions in spleen size—a hallmark of myelofibrosis—while also improving quality of life. In three-year follow-up of the COMFORT-II study, patients treated with Jakavi demonstrated an overall survival advantage compared to patients receiving conventional therapy with a 52% reduction in risk of death observed in the Jakavi arm compared with conventional therapy. Novartis licensed ruxolitinib from Incyte Corporation for development and commercialization outside the US.

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Primary Care

    Primary Care Medicines

    Diovan (valsartan), together with Diovan HCT/Co-Diovan (valsartan and hydrochlorothiazide), is the top-selling branded anti-hypertensive medication worldwide (IMS October 2013; 59 countries audited). Diovan is the only agent in its class approved to treat all of the following: high blood pressure (including children 6 to 18 years), high-risk heart attack survivors and patients with heart failure. First launched in 1996, Diovan is available in more than 120 countries for treating high blood pressure, in more than 90 countries for heart failure, and in more than 70 countries for heart attack survivors. First launched in 1997, Diovan HCT/Co-Diovan is approved in over 100 countries worldwide. In July 2008, the FDA approved Diovan HCT for the first-line treatment of hypertension in patients unlikely to achieve blood pressure control on a single agent. In 2009, Co-Diovan was approved for treatment of high blood pressure in Japan. In September 2010, all EU member states locally approved Diovan for use in children aged 6 to 18 years. In 2012, the Japanese Ministry of Health, Labor and Welfare (MHLW) approved Diovan for the treatment of pediatric hypertension in children age 6 years or older. This approval marks the first time an angiotensin II receptor blocker (ARB) has been approved for the treatment of pediatric hypertension in children age 6 years or older in Japan. In the EU, Diovan and Co-Diovan have faced generic competition since 2011, following expiration of the patent on valsartan. In the US, the valsartan patent expired in September 2012 and Diovan HCT has faced generic competition since then. Generic versions of Diovan monotherapy have not yet launched in the US but could potentially launch at any time. Patent protection for Diovan expired in Japan in 2013 and will expire in 2016 for Co-Diovan (including patent term extensions). Patent litigations are ongoing against generic manufacturers in Europe and Asia. See "—Intellectual Property" below for further information on the patent status of Diovan.

    Exforge (valsartan and amlodipine besylate) is a single-pill combination of the ARB Diovan and the calcium channel blocker amlodipine besylate. First approved for the treatment of high blood pressure in Switzerland in 2006, and in the US and EU in 2007, it is now available in more than 100 countries. In 2008, the FDA approved Exforge for the first-line treatment of hypertension in patients likely to need multiple drugs to achieve their blood pressure goals. In January 2010, Exforge was approved in Japan and also launched in China. Exforge HCT (valsartan, amlodipine besylate and hydrochlorothiazide) is a single pill combining three widely prescribed high blood pressure treatments: an ARB (valsartan), calcium channel blocker (amlodipine) and a diuretic (hydrochlorothiazide). Exforge HCT was approved in the EU and the US in 2009, and is now available in more than 60 countries.

    Galvus (vildagliptin), an oral DPP-4 inhibitor, and Eucreas, a single-pill combination of vildagliptin and metformin, are indicated for the treatment of type 2 diabetes. The products were first approved in 2008. Galvus is currently approved in more than 100 countries, including EU member states, Japan and countries in Latin America and Asia-Pacific. Eucreas was the first single pill combining a DPP-4 inhibitor and metformin that was approved in Europe and is currently approved in more than 100 countries. In 2012, Galvus received EU approval for expanded use as a second-line monotherapy for type 2 diabetes patients who cannot take metformin. In addition, in 2012, the European Commission approved the use of Galvus and Eucreas in combination with other diabetes treatments. The first new approval was for the use of vildagliptin in combination with insulin, with or without metformin, for patients with type 2 diabetes when diet, exercise and a stable dose of insulin do not result in glycemic control. The second approval was for the use of vildagliptin in triple combination with metformin and a sulphonylurea for the treatment of type 2 diabetes when diet and exercise plus dual therapy with these two agents do not provide adequate glycemic control.

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    Xolair (omalizumab) is the only humanized monoclonal antibody approved for the treatment of moderate to severe persistent allergic asthma in the US in adolescents (aged 12 and above) and adults. Xolair is approved in more than 90 countries, including the US since 2003 and the EU since 2005. It is approved for severe persistent allergic asthma in the EU in children (aged six and above), adolescents, and adults. A liquid formulation of Xolair in pre-filled syringes has been launched in most European countries. In Japan, Xolair was approved in January 2009 for the treatment of severe persistent allergic asthma in adults (aged 15 and older) and was approved in August 2013 in pediatric patients aged 6 years or older for the same indication. Novartis licensed Xolair from Genentech/Roche. We co-promote Xolair with Genentech/Roche in the US and share a portion of operating income, but we do not record any US sales. Novartis records all sales of Xolair outside the US. See "Item 18. Financial Statements—Note 27" for further information.

    Arcapta Neohaler/Onbrez Breezhaler (indacaterol) is a once-daily long-acting beta2-adrenergic agonist (LABA) administered in a single-dose dry powder inhaler indicated for maintenance bronchodilator treatment of airflow obstruction in adult patients with chronic obstructive pulmonary disease (COPD). Once-daily Onbrez Breezhaler was first approved in the EU in November 2009 at two dose strengths, 150 mcg and 300 mcg. It is now approved in over 100 countries worldwide. In July 2011, the FDA approved a 75 mcg once-daily dose of indacaterol under its US trade name, Arcapta Neohaler, and Japanese regulatory authorities approved Onbrez Inhalation Capsules in a 150 mcg once-daily dose. In 2012, Onbrez Breezhaler 150 mcg was also approved in China. It was the first inhaled COPD product available to patients to be delivered via the low resistance Breezhaler inhalation device.

    Tekturna/Rasilez (aliskiren) is a treatment for high blood pressure, and the first and only approved direct renin inhibitor. Tekturna/Rasilez was approved in the US and EU in 2007, and is now approved in more than 90 countries. The product is known as Tekturna in the US and Rasilez in the rest of the world. There are various Tekturna/Rasilez single-pill combination products approved in various countries, including Tekturna/Rasilez combined with the diuretic hydrochlorothiazide, sold as Tekturna HCT in the US and Rasilez HCT in the EU, and Tekturna/Rasilez combined with the calcium channel blocker amlodipine, which is sold as Tekamlo in the US and Rasilamlo in the EU. A triple combination of these drugs is available in the US, as well, combining aliskiren, amlodipine and hydrochlorothiazide under the brand name Amturnide. Following the December 2011 termination of the ALTITUDE study, which was investigating Tekturna/Rasilez in a high-risk population of patients with type 2 diabetes and renal impairment, the Tekturna/Rasilez product information was updated in 2012 in the EU, US, Japan and other countries to include a contraindication against the combined use of aliskiren with an ACE inhibitor or an ARB in patients with diabetes, and a contraindication/warning against the combined use of aliskiren with an ACE inhibitor or an ARB in patients with renal impairment. In addition, in 2012, Novartis voluntarily ceased marketing Valturna, a single pill combination containing aliskiren and the ARB valsartan.

    Seebri Breezhaler (glycopyrronium bromide), a once-daily long-acting muscarinic antagonist (LAMA), received its first regulatory approvals in September 2012. Seebri Breezhaler 44 mcg inhalation powder, hard capsules received approval in the EU as a maintenance bronchodilator treatment to relieve symptoms for adult patients with COPD, and in Japan the MHLW approved Seebri (glycopyrronium) Inhalation Capsules 50 mcg administered through the Breezhaler device as an inhaled maintenance bronchodilator treatment for the relief of various symptoms due to airway obstructive disease in COPD (chronic bronchitis, emphysema). It is now approved in more than 50 countries worldwide. Seebri Breezhaler is the second inhaled COPD product available to patients to be delivered via the Breezhaler inhalation device. Glycopyrronium bromide was exclusively licensed to Novartis in April 2005 by Vectura and its co-development partner Sosei.

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    Ultibro Breezhaler (indacaterol/glycopyrronium bromide) is a once-daily fixed-dose combination of the LABA indacaterol and the LAMA glycopyrronium bromide. Ultibro Breezhaler (indacaterol 85 mcg / glycopyrronium 43 mcg), inhalation powder, hard capsules was approved in the EU in September 2013 as a maintenance bronchodilator treatment to relieve symptoms in adult patients with COPD, and in Japan the MHLW approved Ultibro Inhalation Capsules (glycopyrronium 50 mcg/indacaterol 110 mcg), delivered through the Breezhaler inhalation device, for relief of various symptoms due to airway obstruction in COPD (chronic bronchitis, emphysema). Ultibro Breezhaler is the third inhaled COPD product available to patients to be delivered via the Breezhaler inhalation device. Glycopyrronium bromide was exclusively licensed to Novartis in April 2005 by Vectura and its co-development partner Sosei.

    Established Medicines

    Voltaren/Cataflam (diclofenac sodium/potassium/resinate/free acid) is a leading non-steroidal anti-inflammatory drug (NSAID) for the relief of symptoms in rheumatic diseases such as rheumatoid arthritis and osteoarthritis, and for various other inflammatory and pain conditions. Voltaren/Cataflam was first launched in 1973 and is available in more than 140 countries. This product, which is subject to generic competition, is marketed by the Pharmaceuticals Division in a wide variety of dosage forms, including tablets, drops, suppositories, ampoules and topical therapy. In addition, in various countries, our Sandoz Division markets generic versions of the product, our Alcon Division markets Voltaren for ophthalmic indications, and our OTC Division markets low-dose oral forms and the topical therapy of Voltaren as over-the-counter products.

    Ritalin, Ritalin LA, Focalin and Focalin XR (methylphenidate HCl, methylphenidate HCl extended release, dexmethylphenidate HCl and dexmethylphenidate HCl extended release) are indicated for the treatment of attention deficit hyperactivity disorder (ADHD) in children and Focalin XR is additionally indicated for adults. Ritalin and Ritalin LA are also indicated for narcolepsy. Ritalin was first marketed during the 1950s and is available in over 70 countries. Ritalin LA is available in over 30 countries. Focalin comprises the active d-isomer of methylphenidate and therefore requires half the dose of Ritalin. Focalin XR is approved in Switzerland. Focalin and Focalin XR are available in the US. Ritalin immediate-release has generic competition in most countries. Some strengths of Ritalin and Focalin are subject to generic competition in the US. See "—Intellectual Property" below for further information on the patent status of these products.

    Reclast/Aclasta (zoledronic acid 5 mg) is the first and only once-yearly bisphosphonate infusion for the treatment of different forms of osteoporosis, and for the treatment of Paget's disease of the bone in men and women. Sold as Reclast in the US and Aclasta in the rest of the world, the product is approved in more than 100 countries including the US, EU member states and Canada, and is the only bisphosphonate approved to reduce the incidence of fractures at all three key fracture sites (hip, spine and non-spine) in the treatment of postmenopausal osteoporosis. The Reclast/Aclasta label was expanded in the EU and US to include the reduction in the incidence of clinical fractures after a low trauma hip fracture. The EU has also approved Aclasta for the treatment of osteoporosis in men at increased risk of fracture and for the treatment of osteoporosis associated with long-term systemic glucocorticoid therapy in post-menopausal women. Reclast is also approved in the US as a treatment to increase bone mass in men with osteoporosis, the prevention and treatment of glucocorticoid-induced osteoporosis in men and women, as well as for the prevention of osteoporosis in postmenopausal women. Zoledronic acid, the active ingredient in Reclast/Aclasta, is also approved in a number of countries in a different dosage under the trade name Zometa for certain oncology indications. Reclast/Aclasta is facing generic competition following patent expirations in 2013 on its active ingredient, zoledronic acid, in the US and other major markets. See "—Intellectual Property" below for further information on the patent status of Reclast/Aclasta.

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Specialty Care

    Ophthalmology

    Lucentis (ranibizumab) is a recombinant humanized high affinity antibody fragment that binds to vascular endothelial growth factors (VEGF). It is the only anti-VEGF therapy licensed in many countries for four ocular indications: wet age-related macular degeneration (wet AMD), visual impairment due to diabetic macular edema (DME), visual impairment due to macular edema secondary to retinal vein occlusion (RVO), and visual impairment due to choroidal neovascularization secondary to pathologic myopia (myopic CNV). Lucentis is approved in more than 100 countries to treat patients with wet AMD, for the treatment of visual impairment due to DME and macular edema secondary to RVO. Also, Lucentis is licensed in more than 40 countries for the treatment of visual impairment due to myopic CNV. Since its launch in 2007, there are more than 2.2 million patient-treatment years of exposure for Lucentis. We licensed Lucentis from Genentech for development and commercialization outside of the US. See "Item 18. Financial Statements—Note 27" for further information.

    Neuroscience

    Gilenya (fingolimod) is the first oral therapy approved to treat relapsing forms of multiple sclerosis (MS) and the first in a new class of compounds called sphingosine 1-phosphate receptor modulators. In the US, Gilenya is indicated for relapsing forms of MS. In the EU, Gilenya is indicated for adult patients with highly active relapsing-remitting MS defined as either high disease activity despite treatment with beta interferon, or rapidly evolving severe relapsing-remitting MS. Experience with Gilenya has shown that it improves all four measures of efficacy in MS: annualized relapse rate, physical disability, MRI activity and brain volume loss. Gilenya is the only oral disease modifying therapy with proven superior relapse reduction against an active comparator and provides early and long-term reduction in the rate of brain volume loss. As of December 2013, more than 84,500 patients have been treated in clinical trials and in a post-marketing setting and there are currently more than 118,000 patient years of exposure. Gilenya is currently approved in over 75 countries around the world. Gilenya is licensed from Mitsubishi Tanabe Pharma Corporation.

    Exelon (rivastigmine tartrate) and Exelon Patch (rivastigmine transdermal system) are cholinesterase inhibitors indicated for the treatment of Alzheimer's disease (AD) dementia and Parkinson's disease (PD) dementia. They are the oral and transdermal formulations, respectively, of the cholinesterase inhibitor rivastigmine. Exelon capsules have been available since 1997 to treat mild to moderate AD dementia and are approved in more than 90 countries. In 2006, Exelon became the only cholinesterase inhibitor to be approved for mild to moderate PD dementia in addition to AD in both the US and EU. Exelon Patch was approved in 2007 in the US and EU and has been approved for the treatment of mild-to-moderate AD in more than 85 countries, including more than 20 countries where it is also approved for Parkinson's disease dementia. The once-daily Exelon Patch has shown comparable efficacy and superior tolerability to the highest recommended doses of Exelon capsules, with significant improvement in cognition and overall functioning compared to placebo. In June 2013, the FDA expanded the approved indication for Exelon Patch to also include the treatment of patients with severe Alzheimer's disease. In January 2013, European Marketing Authorization was obtained for the higher dose in mild-to-moderate AD. Exelon capsules are now subject to generic competition in several markets, including the US and the EU. See "—Intellectual Property" below for further information on the patent status of these products.

    Comtan (entacapone) and Stalevo (carbidopa, levodopa and entacapone) are indicated for the treatment of patients with Parkinson's disease who experience end of dose motor (or movement) fluctuations, known as "wearing off". Comtan was approved in Europe in 1998 and in the US in 1999 while Stalevo was approved in the US and EU in 2003. Both products are marketed in more than 50 countries by Novartis under a licensing agreement with Orion Corporation. Stalevo has recently been approved in China and has been submitted for approval in Japan.

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    Integrated Hospital Care

    Neoral (cyclosporine, USP Modified) is an immunosuppressant to prevent organ rejection following a kidney, liver, or heart transplant. Neoral is also approved for use in lung transplant in many countries outside of the US. 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 more than 90 countries. This product is subject to generic competition.

    Myfortic (enteric-coated formulation of mycophenolate sodium) is approved in more than 90 countries for the prevention of acute rejection of kidney allografts, and is indicated in combination with cyclosporine and corticosteroids. Myfortic was first approved in the US in 2004 and in the EU in 2003. See "—Intellectual Property" below for further information on the patent status of Myfortic.

    Zortress/Certican (everolimus) is an oral inhibitor of the mTOR pathway, indicated to prevent organ rejection following solid organ transplantation. Zortress/Certican has been extensively studied as an immunosuppressant agent in solid organ transplantation with more than 10,000 transplant recipients enrolled in Novartis-sponsored clinical trials worldwide. Under the trade name Certican, it is approved in more than 90 countries to prevent organ rejection for renal and heart transplant patients, and in addition, in more than 50 countries worldwide to prevent organ rejection for liver transplant patients. In the US, under the trade name Zortress, the drug is approved for the prophylaxis of organ rejection in adult patients at low-moderate immunologic risk receiving a kidney transplant as well as for the prophylaxis of allograft rejection in adult liver transplant recipients. Everolimus is also available from Novartis in different dosage strengths and for different uses in non-transplant patient populations under the brand names Afinitor and Votubia. It is also exclusively licensed to Abbott and sublicensed to Boston Scientific for use in drug-eluting stents.

    Ilaris (canakinumab) is a fully human monoclonal antibody that selectively binds and neutralizes interleukin-1b (IL-1b), a pro-inflammatory cytokine. Since 2009, Ilaris has been approved in over 60 countries for the treatment of children and adults suffering from cryopyrin associated periodic syndrome, a group of rare disorders characterized by chronic recurrent fever, urticaria, occasional arthritis, deafness, and potentially life-threatening amyloidosis. In 2013, Ilaris was approved in the EU for the treatment of acute gouty arthritis in patients who cannot be managed with standard of care, and in the US, EU and other countries for the treatment of systematic juvenile ideopathic arthritis.

    Critical Care

    TOBI Podhaler (tobramycin inhalation powder) is an inhaled dry powder formulation of the antibiotic tobramycin, delivered using a simple and portable patient-friendly device that reduces administration time by 72% relative to TOBI (tobramycin nebulizer solution), with comparable efficacy and safety. TOBI Podhaler was approved by the US FDA in March 2013 and has been approved in the EU since July 2011. It is indicated for the management of cystic fibrosis patients aged six years and older with Pseudomonas aeruginosa infection in their lungs, whose lung function is within a certain range.


Compounds in Development

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

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

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    Phase II:    Clinical studies that are performed with patients who have the target disease, with the aim of continuing the Phase I safety assessment in a larger group, assessing the efficacy of the drug in the patient population, and determining the appropriate doses for further evaluation.

    Phase III:    Large-scale clinical studies with several hundred to several thousand patients, which are conducted to establish the safety and efficacy of the drug-specific indications for regulatory approval. Phase III trials may also be used to compare a new drug against a current standard of care to evaluate the overall benefit-risk relationship of the new medicine.

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

        The following table and paragraph summaries provide an overview of the key projects currently in the Confirmatory development stage within our Pharmaceuticals Division, including projects seeking to develop potential uses of new molecular entities, as well as potential additional indications or new formulations for already marketed products. The year that each project entered the current phase of development disclosed below reflects the year in which the decision to enter the phase was made. This may be different from the year in which the first patient received the first treatment in the related clinical trial. A reference to a project being in registration means that it has been submitted to a health authority for marketing approval.


Selected Development Projects

 
Project/Product
  Common name   Mechanism of action   Potential indication/
Disease area
  Business franchise   Formulation/
Route of
administration
  Year Project
Entered
Current
Development
Phase
  Planned filing
dates/Current
phase

ACZ885

  canakinumab   Anti IL-1b monoclonal antibody   Gouty arthritis   Integrated Hospital Care   Subcutaneous injection   EU: 2013
US: 2011
  EU (approved)
US (Phase III)
             

          Hereditary periodic fevers   Integrated Hospital Care       2013   2016/III
             

          Secondary prevention of cardiovascular events   Critical Care       2011   2017/III
 

AFQ056

  mavoglurant   Metabotropic glutamate receptor 5 antagonist   Fragile X syndrome   Neuroscience   Oral   2010   2015/III
 

AIN457

  secukinumab   Anti IL-17 monoclonal antibody   Psoriasis   Integrated Hospital Care   Lyophilized powder in vial;
Intravenous infusion, subcutaneous injection
  2013   US/EU (registration)
             

          Psoriatic arthritis   Integrated Hospital Care       2011   2014/III
             

          Rheumatoid arthritis   Integrated Hospital Care       2011   2015/III
             

          Ankylosing spondylitis   Integrated Hospital Care       2011   2015/III
             

          Uveitis   Ophthalmology       2009   2017/II
 

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Project/Product
  Common name   Mechanism of action   Potential indication/
Disease area
  Business franchise   Formulation/
Route of
administration
  Year Project
Entered
Current
Development
Phase
  Planned filing
dates/Current
phase

AUY922

  luminespib   ATP-competitive non-geldanamycin inhibitor of HSP90   Solid tumors   Oncology   Intravenous   2009   ³2018/II
 

BAF312

  siponimod   Sphingosine-1-
phosphate receptor modulator
  Secondary progressive multiple sclerosis   Neuroscience   Tablet   2012   ³2018/III
 

BCT197

  TBD   Anti-inflammatory agent   Chronic obstructive pulmonary disease   Primary Care   Oral   2011   ³2018/II
 

BGJ398

  TBD   Pan-FGF receptor kinase inhibitor   Solid tumors   Oncology   Oral   2012   ³2018/II
 

BGS649

  TBD   Aromatase inhibitor   Obese hypogonadotropic hypogonadism   Critical Care   Oral   2010   ³2018/II
 

BKM120

  buparlisib   P13K inhibitor   Breast cancer   Oncology   Oral   2011   2015/III
             

          Solid tumors           2011   ³2018/I
 

BYL719

  TBD   P13K inhibitor   Solid tumors   Oncology   Tablet   2010   ³2018/I
 

BYM338

  bimagrumab   Inhibitor of activin receptor Type II   Sporadic inclusion body myositis   Integrated Hospital Care   Intravenous infusion   2013   2016/III
             

          Hip fracture           2013   ³2018/II
 

CAD106

  TBD   Beta-amyloid-protein therapy   Alzheimer's disease   Neuroscience   Subcutaneous, intramuscular injection   2008   ³2018/II
 

CTL019

  TBD   CD19-targeted chimeric antigen receptor T-cell immunotherapy   Leukemia   Oncology   Intravenous   2012   2016/II
 

DEB025

  alisporivir   Cyclophilin inhibitor   Chronic hepatitis C   Integrated Hospital Care   Oral   2011   2017/II
 

Gilenya

  fingolimod   Sphingosine-1-
phosphate receptor modulator
  Primary progressive multiple sclerosis   Neuroscience   Oral   2008   2015/III
             

          Chronic inflammatory demyelinating polyradiculoneuropathy           2012   2016/III
 

HSC835

  TBD   Stem cell regeneration   Stem cell transplantation   Integrated Hospital Care   Infusion   2012   ³2018/II
 

Jakavi

  ruxolitinib   Janus kinase inhibitor   Polycythemia vera   Oncology   Oral   2010   2014/III
 

KAE609

  TBD   PfATP4 inhibitor   Malaria   Established Medicines   Oral   2012   2017/II
 

LBH589

  panobinostat   Histone deactelylase inhibitor   Relapsed or relapsed-and-refractory multiple myeloma   Oncology   Oral   2009   2014/III
             

          Hematological cancers           2009   ³2018/II
 

LCI699

  TBD   Aldosterone synthase inhibitor   Cushing's disease   Oncology   Oral   2011   2017/II
 

LCQ908

  pradigastat   Diacylglycerol acyl transferase-1 inhibitor   Familial chylomicronemia syndrome   Critical Care   Tablet   2012   2014/III
 

LCZ696

  TBD   Angiotensin receptor neprilysin inhibitor   Hypertension   Primary Care   Oral   2012   2014/III
             

          Chronic heart failure with reduced ejection fraction   Critical Care       2009   2014/III
             

          Chronic heart failure with preserved ejection fraction   Critical Care       2013   ³2018/II
 

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Project/Product
  Common name   Mechanism of action   Potential indication/
Disease area
  Business franchise   Formulation/
Route of
administration
  Year Project
Entered
Current
Development
Phase
  Planned filing
dates/Current
phase

LDE225

  sonidegib   Smoothened receptor/ hedgehog signaling inhibitor   Advanced basal cell carcinoma   Oncology   Oral   2011   2014/II
             

          Solid tumors           2011   ³2018/I
             

          Medulloblastoma           2013   ³2018/III
 

LDK378

  ceritinib   ALK inhibitor   ALK+ advanced non-small cell lung cancer (post chemotherapy and post crizotinib)   Oncology   Oral   2012   2014/II
             

          ALK+ advanced non-small cell lung cancer (chemotherapy naïve, crizotinib naïve)           2013   2016/III
 

LEE011

  TBD   CDK4/6 Inhibitor   Breast cancer   Oncology   Oral   2013   2016/III
             

          Solid tumors           2011   ³2018/I
 

LFF571

  TBD   Bacterial elongation factor Tu inhibitor   Clostridium difficile infection   Integrated Hospital Care   Oral   2010   ³2018/II
 

LGX818

  encorafenib   RAF inhibitor   BRAF mutant melanoma   Oncology   Oral   2012   2016/III
             

          Solid tumors           2012   ³2018/II
 

LIK066

  TBD   SGLT 1 / 2 inhibitor   Type 2 diabetes   Primary care   Oral   2011   ³2018/II
 

LJM716

  TBD   HER3 inhibitor   Solid tumors   Oncology   Intravenous   2012   ³2018/I
 

Lucentis

  ranibizumab   Anti-VEGF monoclonal antibody fragment   Choroidal neovascularization and macular edema   Ophthalmology   Intravitreal injection   2013   2016/III
 

MEK162

  binimetinib   MEK inhibitor   NRAS mutant melanoma   Oncology   Oral   2013   2015/III
             

          Solid tumors           2011   ³2018/II
             

          Low-grade serous ovarian cancer           2013   2016/III
 

MEK162 +
LGX818

  binimetinib and encorafenib   MEK inhibitor + RAF inhibitor   BRAF mutant melanoma   Oncology   Oral   2013   2016/III
 

NVA237
(
Seebri)

  glycopyrronium bromide   Long-acting muscarinic antagonist   Chronic obstructive pulmonary disease   Primary Care   Inhalation   2012   EU (approved)
US (2014/III)
             

          Asthma   Primary Care       2013   2016/III
 

PKC412

  midostaurin   Signal transduction inhibitor   Aggressive systemic mastocytosis   Oncology   Oral   2008   2015/II
             

          Acute myeloid leukemia           2008   2015/III
 

QAW039

  TBD   Anti-inflammatory agent   Asthma   Primary Care   Oral   2010   ³2018/II
 

QAX576

  TBD   Anti-IL-13 monoclonal antibody   Allergic diseases   Primary Care / Integrated Hospital Care   Subcutaneous injection   2013   ³2018/II
 

QGE031

  TBD   High affinity anti-IgE monoclonal antibody   Allergic diseases   Primary Care   Subcutaneous injection   2012   ³ 2018/II
 

QVA149 (Ultibro)

  indacaterol and glycopyrronium bromide   Long-acting beta2-adrenergic agonist and long-acting muscarinic antagonist   Chronic obstructive pulmonary disease   Primary Care   Inhalation   EU: 2013
US: 2012
  EU (approved)
US (2014/III)
 

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Project/Product
  Common name   Mechanism of action   Potential indication/
Disease area
  Business franchise   Formulation/
Route of
administration
  Year Project
Entered
Current
Development
Phase
  Planned filing
dates/Current
phase

RAD001 (Afinitor/
Votubia)

  everolimus   mTOR inhibitor   HER2+ breast cancer, 1st line   Oncology   Tablet   2009   2014/III
             

          HER2+ breast cancer, 2nd/3rd line           2009   2014/III
             

          Tuberous sclerosis complex seizures           2013   2015/III
             

          Non-functioning GI and lung neuroendocrine tumors           2012   2015/III
             

          Diffuse large B-cell lymphoma           2009   2017/III
 

RLX030

  serelaxin   Recombinant form of human relaxin-2 hormone   Acute heart failure   Critical Care   Intravenous infusion   EU: 2012
US: 2013
  EU (registration)
US (registration)
 

SOM230
(
Signifor LAR)

  pasireotide   Somatostatin analogue   Acromegaly   Oncology   Long-acting release: monthly intramuscular injection   2013   US/EU (registration)
             

          Cushing's disease           2011   2015/III
 

Tasigna

  nilotinib   Signal transduction inhibitor   CML treatment-free remission   Oncology   Oral   2012   2016/II
 

Tekturna

  aliskiren   Direct renin inhibitor   Reduction of CV death/hospitalizations in chronic heart failure   Critical Care   Tablet   2009   2016/III
 

TKI258

  dovitinib lactate   VEGFR 1-3, FGFR 1-3, PDGFR and RTK angiogenesis inhibitor   Solid tumors   Oncology   Oral   2011   2017/II
 

Xolair

  omalizumab   Anti-IgE monoclonal antibody   Chronic idiopathic urticaria/ Chronic spontaneous urticaria   Integrated Hospital Care   Subcutaneous injection   2013   US/EU (registration)
 

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

    ACZ885 (canakinumab) was approved in the EU in March 2013 for the treatment of acute attacks in gouty arthritis (GA) as Ilaris. In the US, ACZ885 was filed for the treatment of GA in February 2011, and received a Complete Response letter in August 2011 with a request by the Agency for additional clinical data to evaluate the benefit risk profile in refractory patients. We continue to work with the FDA to determine the next steps for ACZ885 in this indication. In 2013 Ilaris was also approved for the treatment of systemic juvenile idiopathic arthritis in the US, EU and other countries. Phase II data of ACZ885 in TNF-receptor associated periodic syndrome and Familial Mediterranean Fever showed substantial symptom relief in these two rare periodic fever syndromes. ACZ885 is also being investigated in the pivotal Phase III CANTOS study to determine whether ACZ885 can reduce the risk of recurrent cardiovascular events (cardiovascular death, non-fatal myocardial infarction, non-fatal stroke) in post-myocardial infarction patients with elevated inflammatory burden versus placebo when administered quarterly in addition to standard of care.

    AFQ056 (mavoglurant) is a metabotropic glutamate receptor 5 (mGluR5) antagonist in development for Fragile X syndrome. Phase IIb/III studies in adult and adolescent patients with Fragile X syndrome started in the fourth quarter of 2010 and the second quarter of 2011 respectively. Fragile X syndrome is the most frequent inherited form of mental retardation. AFQ056 aims to improve the associated behavioral symptoms.

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    AIN457 (secukinumab) is a fully human IgG1 monoclonal antibody that selectively binds to and neutralizes interleukin 17A (IL-17A), a key pro-inflammatory cytokine. Proof of concept and Phase II studies in moderate-to-severe plaque psoriasis and arthritic conditions (psoriatic arthritis, ankylosing spondylitis and rheumatoid arthritis) have suggested that AIN457 may potentially provide a new mechanism of action for the successful treatment of immune-mediated diseases. Phase III results for AIN457 in moderate-to-severe plaque psoriasis were presented for the first time in October 2013. Results from the head-to-head Phase III FIXTURE study showed AIN457 was significantly superior to Enbrel® (etanercept), a current standard-of-care anti-TNF medication approved to treat moderate-to-severe plaque psoriasis. FIXTURE forms part of the robust AIN457 Phase III clinical trial program in moderate-to-severe plaque psoriasis that involved more than 3,300 patients in over 35 countries worldwide. Regulatory submissions for AIN457 in moderate-to-severe plaque psoriasis were completed for the US and EU in October 2013. Phase III results from two additional Phase III studies in moderate-to-severe plaque psoriasis are planned to be presented in 2014, and for arthritic conditions in 2014 and beyond.

    BAF312 (siponimod) is an oral, second-generation sphingosine 1-phosphate receptor modulator in Phase III development for secondary progressive multiple sclerosis. BAF312 binds selectively to the sphingosine 1-phosphate receptor subtypes 1 and 5, distributes effectively to the brain and has a relatively fast washout. The results from the BOLD study, an adaptive dose-ranging Phase II study, were published in Lancet Neurology 2013. These results showed that compared to placebo, BAF312 reduced brain MRI lesions by up to 80% in relapsing-remitting multiple sclerosis and relapses were infrequent and significantly reduced. BAF312 entered Phase III development in secondary progressive multiple sclerosis in 2012.

    BKM120 (buparlisib) is an oral selective pan-PI3k inhibitor. The PI3K/AKT/mTOR pathway is an important intracellular signaling network that regulates cellular metabolism, proliferation and survival. Abnormal activation of the PI3K/AKT/mTOR pathway has been identified as an important step in the initiation and maintenance of tumors and a key regulator of angiogenesis and upregulated metabolic activities in tumor cells. BKM120 has shown significant cell growth inhibition and induction of apoptosis in a variety of tumor cell lines as well as in animal models. BKM120 is currently being investigated in clinical trials in advanced solid tumors in combination with other agents, including two phase III trials in hormone receptor positive advanced breast cancer.

    BYM338 (bimagrumab) is a novel, fully human monoclonal antibody under development to treat sporadic inclusion body myositis (sIBM). In August 2013, FDA granted Breakthrough Therapy designation to BYM338 for sIBM. A Phase II/III study of bimagrumab in patients with sIBM was initiated in September 2013. BYM338 binds with high affinity to type II activin receptors, preventing natural ligands, including myostatin and activin, from binding. BYM338 stimulates muscle growth by blocking signaling from these inhibitory molecules. In addition to sIBM, BYM338 is in clinical development for multiple pathological muscle loss and weakness and muscle-wasting conditions, including recovery from hip fracture. BYM338 was developed by Novartis, in collaboration with MorphoSys.

    CTL019 is an investigational therapy that uses chimeric antigen receptors (CARs) to fight cancer. CARs are engineered proteins that transform a patient's own T cells into antigen-specific cells which seek out target proteins present on a patient's cancerous tumor. When these cells are re-introduced into the patient's blood, they demonstrate the potential to bind to the cancer cells and destroy them. CTL019 targets a protein called CD19 that is associated with a number of B-cell malignancies. On-going Phase I/II studies being conducted by the University of Pennsylvania are investigating the activity and safety of CTL019 in patients with resistant or refractory CD19+ hematologic malignancies, specifically pediatric and adult acute lymphoblastic leukemia and chronic lymphocytic leukemia.

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    DEB025 (alisporivir) is an oral non-immunosuppressive cyclophilin inhibitor with potent antiviral activity. Cyclophilins are host proteins that are essential for hepatitis C virus (HCV) replication. Key attributes of alisporivir are pan-genotypic activity including unique potency against HCV Genotype 3, high barrier to resistance, in vitro synergy with several classes of Direct Acting Antivirals (DAAs), and activity against DAA-resistant variants. The program was put on partial clinical hold in 2012 due to a small number of cases of pancreatitis reported in clinical trial patients being treated with DEB025 in combination with peginterferon alpha (IFN) and ribavirin (RBV), including one fatal case. After addressing all questions from health authorities, the DEB025 clinical development has now resumed as an IFN-free program in the US and outside the US. In these Phase II clinical trials we are investigating treatment with DEB025 plus RBV alone and in combination with DAAs. These interferon-free regimens focus initially on patients with HCV Genotype 3, who are believed to have the greatest unmet medical need.

    Gilenya (fingolimod) is a sphingosine 1-phosphate receptor modulator approved for the treatment for relapsing forms of MS. INFORMS, a Phase III study of Gilenya in primary progressive MS is ongoing and a submission for this indication to health authorities is anticipated in 2015. A Phase III study of Gilenya in patients with chronic inflammatory demyelinating polyradiculoneuropathy was initiated in 2012. Submissions to health authorities in this indication are anticipated to be made in 2016.

    Jakavi (ruxolitinib) is an oral inhibitor of the JAK 1 and JAK 2 tyrosine kinases in development for use in patients with polycythemia vera. The pivotal Phase III RESPONSE study of ruxolitinib in patients with polycythemia vera who are resistant to or intolerant of hydroxyurea is fully enrolled. This trial is managed by Incyte in the US and by Novartis outside the US. Data are expected to be presented at medical congresses and filed with health authorities in 2014.

    LBH589 (panobinostat) is a highly potent pan deacetylase inhibitor targeting the epigenetic regulation of multiple oncogenic pathways, with development focused on hematological diseases. The Phase III trial of LBH589, in combination with bortezomib and dexamethasone, met the primary endpoint of significantly extending progression-free survival in patients with relapsed or relapsed and refractory multiple myeloma when compared to bortezomib plus dexamethasone alone. We anticipate that full results will be presented and discussed with regulatory authorities worldwide in 2014.

    LCQ908 (pradigastat) is a diacylglycerol acyltransferase-1 (DGAT-1) inhibitor. DGAT-1 catalyzes the final committed step in triglyceride synthesis and is believed to play a key role in whole body energy homeostasis. Inhibition of DGAT-1 represents a novel approach to treat metabolic disease and LCQ908 is currently in Phase III development for the treatment of an orphan disease called familial chylomicronemia syndrome.

    LCZ696 is a first-in-class angiotensin receptor neprilysin inhibitor in development for the treatment of chronic heart failure and hypertension. LCZ696 simultaneously inhibits neprilysin and the renin angiotensin aldosterone system. One large, global Phase III study (PARADIGM-HF) is underway to assess the efficacy and safety of LCZ696 in chronic heart failure with reduced ejection fraction. PARADIGM-HF enrollment was completed in November 2012. Results from the Phase II PARAMOUNT study, which were reported in 2012, showed that LCZ696 is the first therapy to demonstrate efficacy based on biomarkers, and reduce left atrial size, in patients with heart failure with preserved ejection fraction. In 2012, LCZ696 entered Phase III development for the treatment of hypertension. All Phase III trials required for filing were completed in 2013, including the pivotal Phase III A1306 study designed to assess the efficacy and safety of LCZ696 versus the angiotensin receptor blocker olmesartan in patients with systolic hypertension. The completed Phase III trials demonstrated the efficacy and safety of LCZ696 in reducing blood pressure and will be submitted for peer review publication in 2014. In addition, we anticipate that the first worldwide filing for hypertension will be made in Japan in 2014.

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    LDE225 (sonidegib) is a selective smoothened inhibitor in clinical development for various cancers. LDE225 binds to smoothened receptor inhibitors and prevents abnormal activation of the Hedgehog pathway, which is associated with uncontrolled cellular growth and proliferation. LDE225 is currently in development for advanced basal cell carcinoma and medulloblastoma and in multiple hematologic and solid tumor trials.

    LDK378 (ceritinib) is a potent and highly selective oral anaplastic lymphoma kinase (ALK) inhibitor that is in development for anaplastic lymphoma kinase positive (ALK+) cancers. Early clinical studies of LDK378 showed a preliminary clinical response in ALK+ non-small lung cancer (NSCLC), including patients previously treated with crizotinib as well as crizotinib-naïve patients. In 2013, LDK378 received Breakthrough Therapy designation from the FDA for the treatment of patients with ALK+ metastatic NSCLC who had progressed during treatment with, or were intolerant to, crizotinib. In early 2014, we expect to file an application with the FDA for approval of LDK378 in this patient population based on the early clinical studies. A Phase III study in this population is also ongoing with an anticipated filing date of 2015. Additionally, Phase III studies to explore the role of LDK378 in patients who have not previously been treated with crizotinib are currently underway.

    LEE011 is an orally bioavailable, highly selective small molecule inhibitor of cyclin dependent kinase (CDK) 4 and 6. LEE011 may be able to stop the proliferation of growth factors in tumors where the CDK4/6 pathway has been activated and unchecked cell proliferation has occurred. The compound is in a Phase III registration study in combination with letrozole in metastatic breast cancer. LEE011 is also in Phase I and II investigation, with a number of ongoing studies in adult and pediatric solid tumors.

    Lucentis (ranibizumab) is an anti-VEGF monoclonal antibody fragment in Phase III development for the treatment of visual impairment due to choroidal neovascularization and macular edema secondary to conditions other than age-related macular degeneration, diabetic macular edema, retinal vein occlusion and pathologic myopia. Filings are expected in 2016.

    NVA237 (glycopyrronium bromide) is an inhaled LAMA undergoing clinical trials in asthma. A regulatory filing in the US for a COPD indication is expected in the fourth quarter of 2014.

    PKC412 (midostaurin) is an oral, multi-targeted, kinase inhibitor in Phase III development for treatment of patients with FLT-3 mutated acute myeloid leukemia (AML) and in Phase II development for aggressive systemic mastocytosis (ASM). Filings are expected for newly diagnosed, FLT3-mutated AML and for ASM by 2015.

    QGE031 is an investigational humanized anti-Immunoglobulin E (IgE) monoclonal antibody in development for the treatment of IgE-driven allergic diseases. QGE031 is licensed worldwide to Novartis by Genentech/Roche. Phase II ascending dose studies investigating the pharmacokinetics, pharmacodynamics and tolerability of QGE031 administered intravenously and subcutaneously have been completed.

    QVA149 (indacaterol/glycopyrronium bromide) is a fixed-dose combination of the inhaled LABA indacaterol and the LAMA glycopyrronium bromide. A regulatory filing for a COPD indication is expected in the US in the fourth quarter of 2014.

    RAD001 (Afinitor/Votubia, everolimus) is an oral inhibitor of the mTOR pathway. Phase III studies are underway in patients with advanced breast cancer, lymphoma and non-functioning GI/Lung, NET. The EXIST-3 (EXamining everolimus In a Study of TSC) clinical trial is underway to examine the efficacy and safety of everolimus in patients with TSC who have refractory partial-onset seizures (uncontrollable seizures localized to a specific area of the brain). Also in 2013, results from the Phase III EVOLVE study showed that everolimus did not extend overall survival compared to placebo in patients with locally advanced or metastatic hepatocellular carcinoma after progression on or intolerance to sorafenib. No further studies are planned in this indication.

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    RLX030 (serelaxin), the first in a new class of medicines, is a recombinant form of the human hormone relaxin-2, and is believed to act through multiple mechanisms on the heart, kidneys and blood vessels. Results from the Phase III RELAX-AHF study show that RLX030 improved symptoms and reduced mortality in patients with acute heart failure (AHF). Data from the study were presented at the American Heart Association congress in November 2012 and published simultaneously in The Lancet showing that RLX030 significantly reduced dyspnea (or shortness of breath), the most common symptom of AHF, which was the primary objective of the study based on pre-specified protocol criteria. In addition, RLX030 was associated with reductions in worsening of heart failure and all-cause mortality (a safety endpoint) and in deaths due to cardiovascular causes (an additional pre-specified exploratory endpoint) at the end of six months. Based on the findings of the RELAX-AHF study, we submitted to the EU in December 2012 and the US in May 2013. In June 2013, RLX030 received Breakthrough Therapy designation from the FDA for AHF. In September 2013, a second phase III study, RELAX-AHF-2, began enrolling patients. The goal of this study is to replicate the key findings of RELAX-AHF, and it will assess cardiovascular mortality as the primary endpoint. In January 2014, we announced that we would submit a revised filing package, including new data analyses, for re-examination for conditional approval of RLX030 in AHF by the CHMP following the issuance of a negative opinion on approval. We anticipate that a revised opinion could be granted in the second quarter of 2014.

    SOM230 (Signifor LAR, pasireotide) is a somatostatin analogue in development as a long-acting release formulation for patients with acromegaly, a chronic hormonal disorder that occurs when excess growth hormone is produced. In the third quarter of 2013, the first interpretable results of the Phase III PAOLA study showed that a significantly greater proportion of patients with inadequately controlled acromegaly treated with the long-acting release form of SOM230 saw a reduction of two key hormone levels used to measure disease at 24 weeks versus continued treatment with the long acting release form of octreotide, or lanreotide Autogel, meeting the primary endpoint. Regulatory action is anticipated in 2014 based on submissions that will include the results of this study and the results of a pivotal study in acromegaly patients without prior medical therapy that was published earlier. A Phase III study of SOM230 is also underway in patients with Cushing's disease.

    Tasigna (nilotinib) is a signal transduction inhibitor of the BCR-ABL tyrosine kinase. Novartis has initiated a global clinical trial program to evaluate the potential for PH+ CML patients to maintain deep molecular response after stopping nilotinib, including four company-sponsored studies and four investigator-initiated studies. This research is underway in more than 100 trial sites in 40 countries. In 2013, clinical data in metastatic melanoma with c-KIT mutation did not demonstrate clinical benefit when compared with the standard of care. No further studies are planned in this indication.

    TKI258 (dovitinib) is a multi-targeted kinase inhibitor of FGFR, VEGFR and PDGFR. Results of a Phase III trial evaluating TKI258 in renal cell carcinoma showed the drug did not meet its primary endpoint of superior progression-free survival compared to sorafenib in patients with metastatic renal cell carcinoma after failure with prior therapies. The development of TKI258 continues with ongoing clinical studies for solid tumors.

    Xolair (omalizumab) is a humanized monoclonal antibody approved for the treatment of persistent allergic asthma. Novartis and Genentech/Roche commenced development of omalizumab in a new indication, chronic spontaneous urticaria (CSU). CSU is also known as chronic idiopathic urticaria (CIU) in the US, and is a persistent, debilitating form of hives and chronic itch with limited approved treatment options. Phase III studies began in 2011 and results from the three pivotal registration studies involving nearly 1,000 patients were presented in 2013. Regulatory submissions for this indication were completed in the EU, US and Switzerland in the third quarter of 2013. In January 2014, the CHMP granted a positive opinion for the use of Xolair as an add-on therapy for CSU in adult and adolescent patients 12 years and older with inadequate response to H1 antihistamines. The opinion was based on positive results from the three pivotal registration studies.

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Projects Added To And Subtracted From The Development Table Since 2012

 
Project/Product
  Potential indication/
Disease area
  Change   Reason
ACZ885   Systemic juvenile idiopathic arthritis   Commercialized   Received marketing approval in EU and US
     
    Diabetes mellitus   Terminated   Phase II results suggest there is unlikely to be a clinical benefit
     
    Hereditary periodic fevers   Added   Entered confirmatory development
 
AFQ056   L-dopa induced dyskinesia in Parkinson's disease   Terminated   Clinical results did not show sufficient therapeutic benefit over standard of care
 
AIN457   Uveitis   Added   Entered confirmatory development
     
    Multiple sclerosis   Terminated   Discontinued development in multiple sclerosis
 
ATI355   Spinal cord injury   Removed from table   Project is in exploratory development
 
BAF312   Multiple sclerosis   Now disclosed as secondary progressive multiple sclerosis    
 
BEZ235   Solid tumors   Terminated   Discontinued development in oncology indications
 
BGJ398   Solid tumors   Added   Entered confirmatory development
 
BYM338   Hip fracture   Added   Entered confirmatory development
 
Exjade   Non-transfusion dependent thalassemia   Commercialized   Received marketing approval in EU and US
 
Gilenya   Primary progressive multiple sclerosis   Added   Specific indication for primary progressive multiple sclerosis defined in 2013
 

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Project/Product
  Potential indication/
Disease area
  Change   Reason
HSC835   Stem cell transplantation   Added   Entered confirmatory development
 
LCZ696   Chronic heart failure   Split indication   Indication now specified as chronic heart failure with reduced ejection fraction and chronic heart failure with preserved ejection fraction
 
LDE225   Medulloblastoma   Added   Entered confirmatory development
 
LDK378   Non-small cell lung cancer   Now disclosed as ALK+ advanced non-small cell lung cancer (post chemotherapy and post crizotinib) and ALK+ advanced non-small cell lung cancer (chemotherapy naïve, crizotinib naïve)    
 
LGX818   Melanoma   Now disclosed as BRAF mutant melanoma    
     
    Solid tumors   Added   Entered confirmatory development
 
LEE011   Breast cancer   Added   Entered confirmatory development
     
    Solid tumors   Added   Entered confirmatory development
 
LJM716   Solid tumors   Added   Entered confirmatory development
 
Lucentis   Choroidal neovascularization secondary to pathological myopia   Commercialized   Received marketing approval in EU
 

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Project/Product
  Potential indication/
Disease area
  Change   Reason
MEK162   Melanoma   Now disclosed as NRAS mutant melanoma    
     
    Solid tumors   Added   Entered confirmatory development
     
    Low-grade serous ovarian cancer   Added   Entered confirmatory development
 
MEK162 + LGX818   BRAF mutant melanoma   Added   Entered confirmatory development
 
NVA237 (Seebri)   Asthma   Added   Entered confirmatory development
 
QAX576   Allergic diseases   Added   Entered confirmatory development
 
QMF149   Chronic obstructive pulmonary disease   Terminated   Discontinued for business reasons
     
    Asthma   Terminated   Discontinued for business reasons
 
RAD001 (Afinitor/Votubia)   Breast cancer HER2-over-expressing, 1st line   Now disclosed as HER2+ breast cancer, 1st line    
     
    Breast cancer HER2-over-expressing 2nd/3rd line   Now disclosed as HER2+ breast cancer, 2nd/3rd line    
     
    Hepatocellular carcinoma   Terminated   Did not meet endpoint
     
    Tuberous sclerosis complex seizures   Added   Entered confirmatory development
 
Tasigna   Metastatic melanoma with c-KIT mutation   Terminated   Did not demonstrate clinical benefit against standard of care
     
    CML treatment-free remission   Added   Entered confirmatory studies
 
TKI258   Renal cell carcinoma   Terminated   Trial did not meet primary endpoint
 
TOBI Podhaler   Pseudomonas aeruginosa infection in cystic fibrosis patients   Commercialized   Received marketing approval in EU and US
 

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Project/Product
  Potential indication/
Disease area
  Change   Reason
Zortress/Certican   Prevention of organ rejection—liver   Commercialized   Received marketing approval in EU and US
 


Principal Markets

        The Pharmaceuticals Division sells products in approximately 155 countries worldwide, but net sales are generally concentrated in the US, Europe and Japan, which together accounted for 76% of the division's 2013 net sales. At the same time, sales from expanding "emerging growth markets" have become increasingly important to us. See "Item 5. Operating and Financial Review and Prospects—5.A Operating Results—Factors Affecting Results of Operations—Fundamental Drivers Remain Strong—Growth of Emerging Markets." The following table sets forth the aggregate 2013 net sales of the Pharmaceuticals Division by region:

 
  2013 Net sales to
third parties
 
Pharmaceuticals
   
   
 
 
  $ millions
  %
 

United States

    10,256     32  

Americas (except the United States)

    3,018     9  

Europe

    10,993     34  

Rest of the World

    7,947     25  
           

Total

    32,214     100  
           
           

 


 

$ millions

 

%


 

Established Markets*

    24,493     76  

Emerging Growth Markets*

    7,721     24  
           

Total

    32,214     100  
           
           

*
Emerging Growth Markets comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand.

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


Production

        The primary goal of our manufacturing and supply chain management program is to ensure the uninterrupted, timely and cost-effective supply of products that meet all product specifications. We manufacture our products at five bulk chemical and 15 pharmaceutical production facilities as well as three biotechnology sites. Bulk chemical production involves the manufacture of therapeutically active compounds, mainly by chemical synthesis or by biological processes such as fermentation. Pharmaceutical production involves the manufacture of "galenical" forms of pharmaceutical products such as tablets, capsules, liquids, ampoules, vials and creams. Major bulk chemical sites are located in Schweizerhalle, Switzerland; Grimsby, UK; Ringaskiddy, Ireland and Changshu, China. Significant pharmaceutical

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production facilities are located in Stein, Switzerland; Wehr, Germany; Singapore; Torre, Italy; Barbera, Spain; Suffern, New York; Sasayama, Japan and in various other locations. We have biotechnology plants located in Huningue, France; Basel, Switzerland and Vacaville, California. A fourth biotechnology plant is under development in Morris Plains, New Jersey to manufacture personalized medicine. In January 2014, we announced the closing of the production facility located in Suffern, New York.

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

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

        The manufacture of our products is complex and heavily regulated by governmental health authorities, which means that supply is never guaranteed. If we or our third party suppliers fail to comply with applicable regulations then there could be a product recall or other shutdown or disruption of our production activities. We have implemented a global manufacturing strategy to maximize business continuity in case of such events or other unforeseen catastrophic events. However, there can be no guarantee that we will be able to successfully manage such issues when they arise.


Marketing and Sales

        The Pharmaceuticals Division serves customers with 2,439 field force representatives in the US, and an additional 21,129 in the rest of the world, as of December 31, 2013, including supervisors and administrative personnel. These trained representatives, where permitted by law, present the therapeutic risks and benefits of our products to physicians, pharmacists, hospitals, insurance groups and managed care organizations. We are seeing the increasing influence of customer groups beyond the prescribers, and Novartis is responding by adapting our business practices.

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

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

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


Competition

        The global pharmaceutical market is highly competitive, and we compete against other major international corporations which sell patented prescription pharmaceutical products, and which have 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.

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        In addition, as is the case with other pharmaceutical companies selling patented pharmaceuticals, Novartis faces ever-increasing challenges from companies selling products which compete with our products, including competing patented products and 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 use legally permissible measures to defend our patent rights. We also face competition from over-the-counter (OTC) products that do not require a prescription from a physician. See also "—Regulation—Price Controls", below.


Research and Development

        We are a leader in the pharmaceuticals industry in terms of research and development, including the level of our investment. Our Pharmaceuticals Division invested the following in research and development over the last three years:

 
  2013   2012   2011  
 
  $ millions   Core R&D(1)
$ millions
  $ millions   Core R&D(1)
$ millions
  $ millions   Core R&D(1)
$ millions
 

Research and Exploratory Development

    2,664     2,611     2,584     2,530     2,676     2,625  

Confirmatory Development

    4,578     4,550     4,334     4,167     4,556     4,235  
                           

Total

    7,242     7,161     6,918     6,697     7,232     6,860  
                           
                           

(1)
Core excludes impairments, amortization and certain exceptional items

        Our Pharmaceuticals Division expensed $7.2 billion (on a core basis $7.2 billion) in research and development in 2013. This represented 22% (on a core basis 22%) of the division's total net sales.

        Research and Exploratory Development expenditure was $2.7 billion in 2013, practically unchanged from the Research and Exploratory Development expenditure of $2.6 billion in 2012 and the 2011 amount of $2.7 billion.

        Confirmatory Development expenditures in 2013 increased by 6% to $4.6 billion as compared against 2012. This included $29 million in impairments of intangible assets in 2013 (2012: $0.1 billion). On a core basis, Confirmatory Development expenditures increased to $4.6 billion in 2013 and represented 14% of our Pharmaceuticals Division's net sales.

        Confirmatory Development expenditures in 2012 decreased by 5% to $4.3 billion as compared against 2011. This included $0.1 billion in impairments of intangible assets in 2012 (2011: $0.3 billion). On a core basis, Confirmatory Development expenditure in 2012 remained essentially unchanged against 2011, at $4.2 billion, and represented 13% of Pharmaceuticals Division net sales as in the prior year.

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

        We manage our research and development expenditures across our entire portfolio in accordance with our strategic priorities. We make decisions about whether or not to proceed with development projects on a project-by-project basis. These decisions are based on the project's potential to meet a

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significant unmet medical need or to improve patient outcomes, the strength of the science underlying the project, and the potential of the project (subject to the risks inherent in pharmaceutical development) to generate significant positive financial results for the Company. Once a management decision has been made to proceed with the development of a particular molecule, the level of research and development investment required will be driven by many factors, including the medical indications for which it is being developed, the number of indications being pursued, whether the molecule is of a chemical or biological nature, the stage of development, and the level of evidence necessary to demonstrate clinical efficacy and safety.

Research program

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

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

        In 2003, we established the Novartis Institutes for BioMedical Research (NIBR). At NIBR's headquarters in Cambridge, Massachusetts, more than 1,600 scientists and associates conduct research into disease areas such as cardiovascular and metabolism disease, neurodegenerative diseases, oncology, muscle disorders and ophthalmology. An additional 5,000 scientists and technology experts conduct research in Switzerland, UK, Italy, Singapore, China and three other US sites. Research is conducted at these sites in the areas of neuroscience, autoimmune disease, oncology, cardiovascular disease, gastrointestinal disease and respiratory disease. Research platforms such as the Center for Proteomic Chemistry are headquartered in the NIBR site in Basel, Switzerland. In addition, The Novartis Institute for Tropical Diseases, Novartis Vaccines for Global Health, the Friedrich Miescher Institute, and the Genomics Institute of the Novartis Research Foundation, focus on basic genetic and genomic research as well as research into diseases of the developing world such as malaria, dengue and typhoid fever.

        In August 2012, Novartis and the University of Pennsylvania (Penn) announced an exclusive global research and development collaboration to develop and commercialize targeted chimeric antigen receptor (CAR) immunotherapies for the treatment of cancers. The research component of this collaboration focuses on accelerating the discovery and development of additional therapies using CAR immunotherapy. In addition, NIBR and Penn will build the Center for Advanced Cellular Therapies at Penn (CACT) on the Penn campus in Philadelphia. The CACT is planned to be a first of its kind research and development center established specifically to develop and manufacture adoptive T cell immunotherapies under the research collaboration guided by scientists and clinicians from NIBR and Penn. Construction of the CACT is expected to be completed in 2015.

        In April 2013, we announced that ophthalmic pharmaceuticals research would be consolidated in Cambridge, Massachusetts. Previously this research was conducted at two sites—on the Alcon campus in Fort Worth, Texas, and in Cambridge, Massachusetts. This consolidation is part of our ongoing effort to co-locate teams and pursue new scientific directions.

        In August 2013, we announced that we will build a neuroscience research team in Cambridge. This new group will focus on using stem cell models, human genetics, and other fields to discover new medicines for psychiatric and neurodegenerative diseases.

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        In November 2013, we took action to co-locate scientific resources in order to improve the efficiency and effectiveness of our global research organization. We announced that we will establish a respiratory research group at our site in Cambridge, Massachusetts, and a proposal to close the Horsham, UK research site, as well as a plan to exit research in topical applications for dermatology and exit from the Vienna, Austria research site. These proposals are subject to consultation with local works councils in the UK and Austria. In addition we announced the consolidation of US-based oncology research from Emeryville, California to Cambridge, Massachusetts and the closing of the biotherapeutics development unit in La Jolla, California. If the proposals in the UK and Austria are confirmed, approximately 500 associates will be impacted globally. The final number is subject to employee consultation processes in the UK and Austria. One hundred seventy-five new positions will be opened in Cambridge to support oncology research and the new respiratory research group. The net impact of these and other changes is therefore expected to be approximately 325 positions.

Development program

        The focus of our Development program is to determine the safety and efficacy of a potential new medicine in humans. As previously described (see "—Compounds in Development"), we view the development process as generally consisting of an Exploratory phase where "proof of concept" is established, and a Confirmatory phase where this concept is confirmed in large numbers of patients.

        Within this paradigm, clinical trials of drug candidates generally proceed through the traditional three phases: I, II and III. In Phase I clinical trials, a drug is usually tested with about 5 to 15 patients. The tests study the drug's safety profile, including the safe dosage range. The studies also determine how a drug is absorbed, distributed, metabolized and excreted, and the duration of its action. In Phase II clinical trials, the drug is tested in controlled studies of approximately 100 to 300 volunteer patients to assess the drug's efficacy and safety, and to establish the appropriate therapeutic dose. In Phase III clinical trials, the drug is further tested in larger numbers of volunteer patients in clinics and hospitals. In each of these phases, physicians monitor volunteer patients closely to assess the potential new drug's safety and efficacy. The vast amount of data that must be collected and evaluated makes clinical testing the most time-consuming and expensive part of new drug development. The next stage in the drug development process is to seek registration for the new drug. See "—Regulation."

        At each of these phases of clinical development, our activities are managed by our Innovation Management Board (IMB). The IMB is responsible for oversight over all major aspects of our development portfolio. In particular, the IMB is responsible for the endorsement of proposals to commence the first clinical trials of a development compound, and of major project phase transitions and milestones following a positive proof of concept outcome, including transitions to full development and the decision to submit a regulatory application to the health authorities. The IMB is also responsible for project discontinuations, for the endorsement of overall development strategy and the endorsement of development project priorities. The IMB is chaired by the Head of Development of our Pharmaceuticals Division and has representatives from Novartis senior management, as well as experts from a variety of fields among its core members and extended membership.

Genoptix Medical Laboratory

        Genoptix Medical Laboratory is a part of our Pharmaceuticals Division and provides comprehensive diagnostic laboratory services to community-based hematologists and oncologists, and to hospitals throughout the US. Genoptix focuses its testing primarily on cancers of the blood and bone marrow, such as leukemia, as well as other solid tumor cancers.

        Recent advances in biology and bioinformatics have led to a much deeper understanding of the genetic underpinnings of disease and drug targets, and Genoptix is working to make use of these scientific advances. Using cutting-edge technologies such as Next Generation Sequencing, Genoptix has developed a robust and expanding portfolio of molecular diagnostic programs that complement our pharmaceutical

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products. It is our goal to bring a number of new products to the market over the next few years, focusing on the combination of diagnostics and pharmaceuticals.

        In addition, as the number of our compounds in development increases, streamlined and centralized management of our assays is vital to the success of our development activities. As a result, we have expanded our Clinical Trial Assay (CTA) capabilities through the creation of the CTA Center of Excellence within Genoptix. This expansion seeks to take advantage of the existing internal capability of Genoptix, and to expand the business potential of Genoptix as an end-to-end solution for the management of CTAs across programs. In addition, we have formed a new sales team within Genoptix which focuses its efforts on selling molecular tests for monitoring treatment of patients with chronic myeloid leukemia.

Alliances and acquisitions

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


Regulation

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

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

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

        The registration process generally takes between six months and several years, depending on the country, the quality of the data submitted, the efficiency of the registration authority's procedures and the nature of the product. Many countries provide for accelerated processing of registration applications for

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innovative products of particular therapeutic interest. In recent years, intensive efforts have been made among the US, the EU and Japan to harmonize registration requirements in order to achieve shorter development and registration times for medical products. However, the requirement in many countries to negotiate selling prices or reimbursement levels with government regulators can substantially extend the time until a product may finally be launched to the market.

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

United States

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

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

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

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

European Union

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

        Under the Centralized Procedure, applications are made to the EMA for an authorization which is valid for the European Community. The Centralized Procedure is mandatory for all biotechnology products and for new chemical entities in cancer, neurodegenerative disorders, diabetes and AIDS, autoimmune diseases or other immune dysfunctions and optional for other new chemical entities or innovative medicinal products or in the interest of public health. When a pharmaceutical company has gathered data which it believes sufficiently demonstrates a drug's quality, safety and efficacy, then the

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company may submit an application to the EMA. The EMA then receives and validates the application, and appoints a Rapporteur and Co-Rapporteur to review it. The entire review cycle must be completed within 210 days, although there is a "clock stop" at day 120, to allow the company to respond to questions set forth in the Rapporteur and Co-Rapporteur's Assessment Report. When the company's complete response is received by the EMA, the clock restarts on day 121. If there are further aspects of the dossier requiring clarification, the EMA will then request an Oral Explanation on day 180, in which the sponsor must appear before the CHMP to provide the requested additional information. On day 210, the CHMP will then take a vote to recommend the approval or non-approval of the application. The final decision under this Centralized Procedure is an EU Community decision which is applicable to all Member States. This decision occurs on average 60 days after a positive CHMP recommendation.

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

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

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

Japan

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

        Once the MHLW has approved the application, the company can make the new drug available for physicians to prescribe. After that, the MHLW lists its national health insurance price within 60 days (or 90 days) from the approval, and physicians can obtain reimbursement. For some medications, the MHLW requires additional post-approval studies (Phase IV) to evaluate safety, effects and/or to gather information on the use of the product under special conditions. The MHLW also requires the drug's

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sponsor to submit periodic safety update reports. Within three months from the specified re-examination period, which is designated at the time of the approval of the application for the new product, the company must submit a re-examination application to enable the drug's safety and efficacy to be reassessed against approved labeling by the PMDA.


Price Controls

        In most of the markets where we operate, the prices of pharmaceutical products are subject to both direct and indirect price controls and to drug reimbursement programs with varying price control mechanisms. Due to increasing political pressure and governmental budget constraints, we expect these mechanisms to continue to remain robust—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 Patient Protection and Affordable Care Act (ACA) and the recurring focus on deficit reduction, there is a significant risk of continued actions to control prices. Specifically, one proposal that has been repeatedly advanced would impose a government-mandated pricing formula on both patented and generic medications provided through the Medicare prescription drug benefit (Medicare Part D). In addition, the ACA mandated the creation of a new entity, the Independent Payment Advisory Board, which has been granted unprecedented authority to implement broad actions to reduce future costs of the Medicare program. This could include required prescription drug discounts or rebates, which could limit net prices for our products. There is a risk that government officials will continue to search for ways to reduce or control prices.

    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, and payors are limiting access to innovative medicines based on cost-benefit analyses. In addition, prices for marketed products are referenced within Member States and across Member State borders, including new EU Member States.

    Japan.  In Japan, the government generally introduces price cuts every other year, and the government additionally mandates price decreases for specific products. In 2013, the National Health Insurance price calculation method for new products and the price revision rule for existing products are being reviewed, and the resulting new drug tariffs will be effective beginning April 2014. The Japanese government is currently undertaking a healthcare reform initiative with a goal of sustaining the universal coverage of the National Health Insurance program, and is addressing the efficient use of drugs, including promotion of generic use. Meanwhile, the government tentatively initiated a premium system which basically maintains the price of patented drugs for unmet medical needs in order to promote innovative new drug creation and the solution of the unapproved indication issue. The continuance of this system will be reviewed as a part of price reforms in 2014.

    Rest of World.  Many other countries around the world are also taking steps to rein in prescription drug prices. As an example, China, one of our most important emerging growth markets, has ordered price cuts on drugs four times since 2011, including 2013 price cuts of up to 20%.

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    Regulations favoring generics. 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 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 patented drug. Other countries have similar laws, including numerous European countries. We expect that the pressure for generic substitution will continue to increase.

    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 in some instances 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.

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

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

    United States

        Patents. In the US, a patent issued for an application filed today will receive a term of 20 years from the application filing date, subject to potential adjustments for Patent Office delay. A US pharmaceutical patent which claims a product, method of treatment using a product, or method of manufacturing a product, may be eligible for an extension of the patent term based on the time the FDA took to approve the product. This type of extension may only extend the patent term for a maximum of 5 years, and may

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not extend the patent term beyond 14 years from regulatory approval. Only one patent may be extended for any product based on FDA delay.

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

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

    A new small-molecule active pharmaceutical ingredient shall have 5 years of data exclusivity, during which time a competitor generally may not submit an application to the FDA based on a sponsor's clinical data.

    Orphan drug exclusivity provides 7 years of market exclusivity for drugs designated by the FDA as "orphan drugs," meaning drugs that treat rare diseases, as designated by the FDA. During this period, a potential competitor may not market the same drug for the same indication even if the competitor's application does not rely on data from the sponsor.

    A new biologic active pharmaceutical ingredient shall have 12 years of market exclusivity, during which time a competitor may not market the same drug for the same indication.

    The FDA may also request that a sponsor conduct pediatric studies, and in exchange will grant an additional 6-month period of market exclusivity, if the FDA accepts the data, the sponsor makes a timely application for approval for pediatric treatment, and the sponsor has either a patent-based or regulatory-based exclusivity period for the product which can be extended.

    European Community

        Patents. Patent applications in Europe may be filed in the European Patent Office (EPO) or in a particular country in Europe. The EPO system permits a single application to be granted for the whole of the EU, plus other non-EU countries, such as Switzerland and Turkey. A patent granted by the EPO or a European country office will expire no later than 21 years from the earliest patent application on which the patent is based. Pharmaceutical patents can also be granted a further period of exclusivity under the Supplementary Protection Certificate (SPC) system. SPCs are designed to compensate the owner of the patent for the time it took to receive marketing authorization by the European Health Authorities. An SPC may be granted to provide, in combination with the patent, up to 15 years of exclusivity from the date of the first European marketing authorization. But the SPC cannot last longer than 5 years. The SPC duration can additionally be extended by a further 6 months if the product is the subject of an agreed pediatric investigation plan. The post-grant phase of patents, including the SPC system, is currently administered on a country-by-country basis under national laws which, while differing, are intended to, but do not always, have the same effect.

        As in the US, in practice, it is not uncommon for the granting of an SPC to not fully compensate the owner of a patent for the time it took to receive marketing authorization by the European health authorities. Rather, since it can often take from 5 to 10 years to obtain a granted patent in Europe after the filing of the application, and since it can commonly take longer than this to obtain a marketing authorization for a pharmaceutical product in Europe, it is not uncommon that a pharmaceutical product,

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at the date of approval, will have a patent lifetime of 10 to 15 years, including all extensions available at that time.

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

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

    Japan

        In Japan, a patent can be issued for active pharmaceutical ingredients. Although methods of treatment, such as dosage and administration, are not patentable in Japan, pharmaceutical compositions for a specific dosage or administration method are patentable. Processes to make a pharmaceutical composition are also patentable. The patent term granted is generally 20 years from the filing date of the patent application on which the patent is based. It can be extended up to 5 years under the Japanese Patent Act to compensate for erosion against the patent term caused by the time needed to obtain marketing authorization from the MHLW. Typically, it takes approximately 7 to 8 years to obtain marketing authorization in Japan. A patent application on a pharmaceutical substance is usually filed shortly before or at the time when clinical testing begins. Regarding compound patents, it commonly takes approximately 4 to 5 years or more from the patent application filing date to the date that the patent is ultimately granted. As a result, it is not uncommon for the effective term of patent protection for an active pharmaceutical ingredient in Japan to be approximately 10 to 15 years, if duly extended.

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

Oncology

    Gleevec/Glivec.  We have patent protection on imatinib, the active ingredient used in our leading product Gleevec/Glivec, until July 2015 in the US (including pediatric extension), until 2016 in the major European countries and until September 2014 for the main indications in Japan. Additional patents were granted in more than 40 countries, including the US, Japan, France, Germany, UK, Italy and Spain, claiming innovative features of Gleevec/Glivec, including crystal form (expiry 2018), tablet formulation (expiry 2023) and process (expiry 2023). Patent protection on the crystal form of imatinib has been challenged in the US, but no challenge has been made to the compound patent in the US. Gleevec/Glivec currently faces generic competition in a number of countries including Brazil, Canada, China, India, Russia, Turkey and for a minor indication in Japan. Litigation is on-going in Canada, Portugal, UK, South Korea and Mexico.

    Sandostatin.  Patent protection for the active ingredient of Sandostatin has expired. Generic versions of Sandostatin SC are available in the US and elsewhere. Patents protecting the Sandostatin LAR formulation, the long-acting version of Sandostatin which represents a majority of our Sandostatin sales, expire in 2014 and beyond in the US, but expired in July 2010 in key markets outside the US.

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    Afinitor/Votubia and Zortress/Certican.  Patent protection for everolimus, the active ingredient in these products, and licensed to Abbott and sublicensed to Boston Scientific for use in drug-eluting stents, is expected to expire in 2020 in the US and in 2018-2019 in Europe and other major countries.

    Exjade.  Patent protection for the active ingredient in Exjade will expire in 2019 in the US and in 2021 in other markets. In the US and Canada, generic companies have challenged the compound patent. In the US, an automatic stay preventing the FDA from approving a generic version of Exjade will expire in August 2014. Novartis has begun patent litigation against this generic company in the US, with a trial scheduled for January 2014. It is possible that the generic company may launch its generic version of Exjade after the automatic stay expires, or if we lose our patent litigation suit against it.

    Tasigna.  Patent protection for the active ingredient in Tasigna will expire in 2023 in the US and other major markets.

    Zometa and Reclast/Aclasta.  Patent protection on zoledronic acid, the active ingredient in these products, expired in 2012 in a limited number of smaller markets, and in 2013 in the US and in other major markets. In the US, generic versions of Zometa and Reclast are available. In Europe, generic versions of Zometa are launched and generic Aclasta is available in some countries. Additional patents claiming certain innovative forms or uses of these products, in particular Reclast/Aclasta, have been granted in some countries including the US and Europe. Patent litigations are ongoing in the US, Europe and elsewhere.

    Femara.  Patent protection for the active ingredient in Femara expired in the US, in major European markets, and in Japan. Data exclusivity in Japan expires in 2014. Generic versions of Femara are available now in all major markets with the exception of Japan.

    Jakavi.  Basic compound patent protection (including SPC) for ruxolitinib, the active ingredient in Jakavi, expires in 2027 in Europe. Novartis licensed ruxolitinib from Incyte Corporation for development and commercialization outside the US.

Primary Care

    Primary Care Medicines

    Diovan/Co-Diovan/Diovan HCT.  Patent protection on valsartan, the active ingredient used in our long-time best-selling products Diovan and Co-Diovan/Diovan HCT, expired in the major countries of Europe in 2011 and in September 2012 in the US. As a result, Diovan and Co-Diovan/Diovan HCT face generic competition in those countries. With respect to the US, generic versions of Diovan HCT launched in 2012. Generic versions of Diovan monotherapy have not yet launched in the US but could potentially launch at any time. Patent protection expired in Japan in 2013 for Diovan and will expire in 2016 for Co-Diovan (including patent term extensions). Patent litigations are ongoing against generic manufacturers in Europe and Asia.

    Exforge/Exforge HCT.  Exforge is a single-pill combination of amlodipine besylate and valsartan. Exforge HCT is the single-pill combination that also includes hydrochlorothiazide. The valsartan patents expired in many countries in 2011 and 2012 (see above), and will expire in 2015 in Japan, as a result of an extension granted in Japan for the Exforge product only. The patent on amlodipine besylate has expired. The patent covering the Exforge product (the combination of amlodipine besylate and valsartan) will expire in 2019 in the US and 2021 (including term extension) in Europe and has been challenged in both the US and Europe. In the US, under a license agreement with a generics manufacturer, the product is expected to face generic competition prior to patent expiry. We have regulatory exclusivity for the data generated for Exforge in Europe until 2017 and in Japan until 2014. Generic manufacturers may attempt to circumvent this regulatory exclusivity and seek

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      to gain approval of a combination valsartan-amlodipine product in Europe before 2017. The patent covering the Exforge HCT product (the combination of amlodipine besylate, hydrochlorothiazide and valsartan) will expire in 2023 and has been challenged in the US.

    Galvus and Eucreas.  Patent protection for vildagliptin, the active ingredient of Galvus, and the patented active ingredient in Eucreas, is estimated to expire, with extensions, in 2019 to 2024.

    Xolair.  Patent protection for the active ingredient in Xolair will expire in 2018 in the US, in 2017 in Europe and in Japan (if the patent term extension pending there is granted), and expired in 2012 in Canada and Hong Kong. No biosimilar competitors have launched to date.

    Arcapta/Onbrez.  Patent protection for the active ingredient of Onbrez (Arcapta in the US) is expected to expire in 2025 in the US (including patent term extension), in 2024 in Europe, and in 2020 in various other markets.

    Tekturna/Rasilez and combination products.  Patent protection for aliskiren, the active ingredient of Tekturna/Rasilez, and various single-pill combination products, will expire in 2018 in the US (not including pediatric extension) and between 2015 and 2020 in other markets.

    Seebri.  There is no patent protection on glycopyrronium bromide, the active ingredient in Seebri. A number of patents covering the formulations, commercial product and uses of this product expire by 2025. In addition, Seebri is entitled to regulatory exclusivity for the data generated for approval until 2022 in Europe, and until 2020 in Japan.

    Ultibro.  Ultibro is a product which combines indacaterol, the active ingredient in Arcapta/Onbrez, with glycopyrronium bromide, the active ingredient in Seebri. Patent protection for indacaterol is expected to expire in 2025 in the US (including patent term extension), in 2024 in Europe (including patent term extensions), in 2025 in Japan and in 2020 in various other markets. There is no compound patent protection on glycopyrronium, but there are patents and patent applications for the dry powder formulation technology that apply to both glycopyrronium and fixed-dose combination indacaterol/glycopyrronium products. In addition, there are patents and patent applications for the combination of indacaterol and glycopyrronium that are due to expire in 2025 (excluding extensions in some countries).

    Established Medicines

    Voltaren/Cataflam.  Patent protection for the active ingredient in Voltaren has expired worldwide.

    Ritalin LA/Focalin XR.  There is no patent protection for the active ingredient in Ritalin or Focalin. A number of patents covering the formulation will expire in 2015 and 2019. Several generic manufacturers have filed applications to market generic versions of Ritalin LA and Focalin XR in the US. Litigation against several generic manufacturers was initiated in the US. These patent litigations have been settled.

Specialty Care

    Ophthalmology

    Lucentis.  Patent protection for the active ingredient in Lucentis expires in 2018-22 in Europe and Japan. Novartis licensed Lucentis from Genentech for development and commercialization outside the US.

    Neuroscience

    Gilenya.  Patent protection for fingolimod, the active ingredient in Gilenya (licensed from Mitsubishi Tanabe Pharma Corporation), is expected to expire in 2019 in the US (including a

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      5-year patent term extension), and in 2018 in Europe and Japan (including a 5-year patent term extension). In Europe and Japan, we have regulatory exclusivity for the data generated for approval of Gilenya until 2021, which could possibly be extended by one year in Europe. A patent for the commercial formulation of Gilenya has been granted in most major markets (including Australia and Russia, where there is no compound patent). This patent will expire in 2024 in most countries, including Europe and Japan, and in 2026 in the US.

    Exelon.  Patent protection for rivastigmine, the active ingredient in Exelon, granted to Proterra and licensed to Novartis, expired in August 2012 in the US and in 2011 in most other major markets. Exelon capsules are now subject to generic competition in major markets, including the US and all of Europe. We hold a patent on a specific isomeric form of the active ingredient used in Exelon that expires in 2014 in the US. Exelon Patch is covered by a formulation patent expiring in 2019 in major markets. In June 2013, the European Patent Office granted a patent (expiring in 2026) covering a dosage regimen of Exelon Patch. Since April 2011, four generic manufacturers have filed applications to market generic versions of the Exelon Patch in the US, and challenged the patents covering the Exelon Patch. We filed infringement lawsuits against all of these manufacturers. In 2012, we became aware that generic rivastigmine patches were being developed and manufactured in South Korea for markets including Europe. We have filed an infringement lawsuit under our South Korean patents. In 2013, generic patches manufactured in South Korea and Germany were launched in Germany, followed by certain other European countries. We are taking steps to enforce the European dosage regimen patent against the manufacturers and distributors of those patches.

    Comtan.  Patent protection for entacapone, the active ingredient in Comtan, licensed from Orion, has expired in Europe and the US and generic versions of Comtan are available.

    Stalevo.  Patent protection for entacapone, one of the active ingredients in Stalevo, has expired in Europe and the US (see above). Stalevo is protected by additional patents expiring up to 2020. Patent litigation by Orion in the US against generic manufacturers settled and generic versions of Stalevo were launched in the US. Novartis was not a party to the US litigation.

    Integrated Hospital Care

    Neoral/Sandimmune.  Patent protection for the cyclosporine ingredient of Neoral/Sandimmune has expired worldwide.

    Myfortic.  There is no patent protection for the active ingredient in Myfortic. Patents covering the formulation will expire in 2017. In the US, four patent litigations have been settled and a generic version of Myfortic is currently available. Generic manufacturers are seeking approval for generic versions of Myfortic in some European countries.

    Ilaris.  Patent protection for the active ingredient in Ilaris is expected to expire in 2024 in the US and in Europe.

    Critical Care

    TOBI Podhaler.  There is no patent protection for the active ingredient, tobramycin. Patents covering the commercial product will expire from 2018 to 2022 in the US and Europe. Additional patent applications are also pending with respect to the commercial product in the US and Europe. If the last-filed of these applications were granted, then that patent would expire in 2025. In addition, in Europe, the product is entitled to orphan drug status until 2021 for the current approved indication.

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Compounds in Development

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

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

    AIN457. Patent protection for secukinumab, an anti-IL-17 monoclonal antibody, is expected to expire in 2028 in the US and 2030 in Europe.

    RLX030. Patent protection for the serelaxin molecule (human relaxin-2) has expired and the patents covering the formulation and process will expire shortly after the product's projected launch date. A patent covering the method of using serelaxin to treat acute heart failure has been granted in the US and expires in 2029. This use patent is now under examination worldwide in markets that permit use patents. Serelaxin is entitled to post-approval regulatory exclusivity for 12 years in the US, 11 years in Europe and 8 years in Japan.

    SOM230: Patent protection for pasireotide, including patent term extensions, is expected to expire in the US and Europe in 2026.

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

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ALCON

        Our Alcon Division is a leader in the research, development, manufacturing and marketing of eye care products worldwide. As of December 31, 2013, the Alcon Division employed 25,494 full-time equivalent associates worldwide in 75 countries. In 2013, the Alcon Division had consolidated net sales of $10.5 billion representing 18% of total Group net sales.

        Alcon is a global leader in eye care and offers an extensive breadth of products serving the full lifecycle of patient needs across eye diseases, vision conditions and refractive errors, and is our second largest Division based on sales. To meet the needs of ophthalmologists, surgeons, optometrists, opticians and physician specialists, Alcon operates with three businesses: Surgical, Ophthalmic Pharmaceuticals and Vision Care. Alcon sells products in 180 markets, and runs operations in 75 countries. Each business operates with specialized sales forces and marketing support.

        Alcon's dedication to research and development is important to our growth plans. As part of our efforts, the Alcon Division works together with the Novartis Institutes for BioMedical Research (NIBR), our global pharmaceutical research organization. This collaboration allows our Alcon Division to leverage the resources of NIBR in an effort to discover and expand ophthalmic pharmaceutical research targets and to develop chemical and biologic compounds for the potential development in diseases of the eye, with a particular focus on diseases such as glaucoma and macular degeneration.

        In March 2012, Alcon gained exclusive rights from ThromboGenics to commercialize Jetrea (ocriplasmin) intravitreal injection outside the US. Jetrea is the first pharmacological treatment for vitreomacular traction, including macular hole, in Europe. Jetrea was approved for sale in the EU in 2013.

        In July 2012, Alcon acquired Endure Medical Systems. The acquisition enabled Alcon to enter into the ophthalmic microscopy field through the addition of the LuxOR microscope, which has applications for both cataract, as well as vitreoretinal surgeries. Products were introduced globally in 2013.

        To further improve surgical planning and refractive patient outcomes in cataract surgery, Alcon acquired the ophthalmic division of SensoMotoric Instruments in November 2012, providing Alcon with leading ocular surgical guidance technology. Alcon also agreed to acquire, from Jack Holladay, MD, and software developer Athanassios Kontos, the rights to certain surgical guidance and planning software used in cataract procedures.

        The merger of Alcon into Novartis was completed in April 2011. The merger united the strengths of Alcon, CIBA Vision and Novartis Ophthalmics into one eye care business. See "Item 5. Operating and Financial Review and Prospects—Item 5.A Operating Results—Factors Affecting Comparability of Year-On-Year Results of Operations—Recent Significant Transactions—Acquisitions in 2011—Alcon full ownership and merger in 2011." At that time, Alcon's portfolio of generic ophthalmic medicines sold through its Falcon business unit primarily in the US, was integrated into our Sandoz Division. Alcon has continued to manufacture the Falcon generics products and supply them to Sandoz. See "—Sandoz."


Alcon Division Products

Surgical

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

        Alcon's Surgical portfolio includes the Infiniti vision system to perform cataract surgeries, the Constellation vision system for retinal operations, and the Wavelight refractive suite for refractive procedures. Alcon also offers the AcrySof family of intraocular lenses (IOLs) to treat cataracts, including the AcrySof IQ, AcrySof IQ ReSTOR, AcrySof IQ Toric and AcrySof IQ ReSTOR Toric IOLs. In addition,

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Alcon provides advanced viscoelastics, surgical solutions, surgical packs and other disposable products for cataract and vitreoretinal surgery. The portfolio also includes the Cataract Refractive Suite, a suite of equipment to help plan and perform some of the most challenging steps of cataract surgery with automation and precision. It is comprised of the Verion image guided system, an ocular surgical planning, imaging and guidance technology; the Centurion vision system phacoemulsification technology platform; the LuxOR LX3 surgical microscope for greater visualization during surgery; as well as the LenSx laser, a femtosecond laser for increased precision and reproducibility for the corneal incision, capsulorhexis and lens fragmentation steps of the procedure.

Ophthalmic Pharmaceuticals

        Our Alcon Division's Ophthalmic Pharmaceuticals business combined Alcon's broad range of pharmaceuticals with selected ophthalmic products (excluding Lucentis) previously marketed by the Novartis Pharmaceuticals Division. The products treat chronic and acute conditions of the eye including glaucoma, elevated intraocular pressure (associated with glaucoma), eye infection and inflammation, eye allergies, and dry eye. Our Alcon Division's Ophthalmic Pharmaceuticals business also oversees the line of professionally driven over-the-counter brands that include artificial tears and ocular vitamins. Product highlights within the Alcon Division's Ophthalmic Pharmaceuticals portfolio include Jetrea intravitreal injection for treating vitreomacular traction, including macular hole; Ilevro ophthalmic suspension for the treatment of pain and inflammation associated with cataract surgery; Simbrinza suspension to lower intraocular pressure as a fixed-dose combination; Travatan Z ophthalmic solution and DuoTrav ophthalmic solution for the treatment of elevated intraocular pressure associated with glaucoma; Vigamox ophthalmic solution for bacterial conjunctivitis; Pataday ophthalmic solution for ocular itching associated with allergic conjunctivitis; Nevanac ophthalmic suspension for eye pain and inflammation following cataract surgery, and to reduce the risk of macular edema associated with cataract surgery in diabetic patients; and the Systane family of over-the-counter products for dry eye relief.

Vision Care

        Our Alcon Division's Vision Care business combined the portfolio of contact lenses and lens care products that had been sold by our former CIBA Vision Business Unit, with Alcon's contact lens care solution portfolio. Our contact lens care solutions business includes the Opti-Free line of multi-purpose disinfecting solutions, as well as the Clear Care and AOSept Plus hydrogen peroxide lens care solutions. Alcon also offers a broad portfolio of silicone hydrogel, daily disposables and color contact lenses, including our Air Optix, Dailies and Freshlook brands. Our Dailies business now includes Dailies Total1 lenses, a first-of-its-kind water gradient contact lens. Through the integration of CIBA Vision products, Alcon is now one of the largest manufacturers of contact lenses and lens care products.


New Products

        Alcon launched a number of significant products in 2013, and also received a number of key approvals, including:

    AcrySof IQ ReSTOR Multifocal Toric IOL—advanced technology intraocular lenses to correct cataracts, as well as refractive errors like astigmatism for improved near and intermediate vision, launched in China.

    Cataract Refractive Suite—suite of tools for use during cataract surgery launched in the US and EU.

    Centurion vision system—Alcon's next-generation phacoemulsification system for use during cataract surgery launched in the US and EU.

    Air Optix Colors lenses—silicone hydrogel, color cosmetic contact lenses received EMA approval for natural eye color enhancement.

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    Dailies Aqua Comfort Plus Toric lenses—silicone hydrogel, daily disposable contact lenses for improving refractive errors, such as astigmatism, received FDA approval.

    Dailies Illuminate lenses—color contact lenses introduced a new color, Light Brown, in Japan.

    Dailies Total1 lenses—daily disposable, water gradient contact lenses launched in the US, Switzerland, Canada, UK, Spain and Portugal, while also receiving approval in China.

    Azorga (Brinzolamide 10mg/ml+timolol 5mg/ml) suspension—received approval in Japan for the treatment of elevated intraocular pressure associated with glaucoma or ocular hypertension.

    Ilevro (nepafenac ophthalmic suspension), 0.3%—launched in the US, received EMA approval and launched in Europe, and received Health Canada approval for the once-daily treatment of pain and inflammation associated with cataract surgery.

    Jetrea (ocriplasmin) intravitreal injection—the first pharmacological treatment for vitreomacular traction, including macular hole, received EMA approval and launched in Germany, Benelux the Nordics, and the UK in the private market. The product also launched in Canada after receiving a Notice of Compliance and approval from Health Canada.

    Simbrinza (brinzolamide, 1.0%/Brimonidine tartrate 0.2%) suspension—received FDA approval and launched in the US for treatment of elevated intraocular pressure associated with glaucoma.

Key Marketed Products

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

Surgical

Cataract

  Acrysof family of intraocular lenses includes but is not limited to: Acrysof IQ ReSTOR, Acrysof IQ Toric and Acrysof IQ ReSTOR Toric advanced technology intraocular lenses that correct cataracts with presbyopia and/or astigmatism
Cataract Refractive Suite designed to streamline the cataract surgical procedure through surgical planning and execution
Centurion vision system intelligent phacoemulsification technology platform with cataract removal capabilities
Infiniti vision system with the OZil torsional hand piece for cataract procedures
LenSx laser used for specific steps in the cataract surgical procedure
LuxOR microscope used for ophthalmic surgical procedures

Vitreoretinal

 

Constellation vision system for vitreoretinal operations
Constellation Ultravit vitrectomy probe
Vitrectomy Probes in 23G,
25+
Purepoint laser system
Grieshaber surgical instruments
Edgeplus blade trocar cannula system

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Refractive

 

Allegretto Wave Eye-Q excimer laser for LASIK vision correction
Wavelight FS200 laser for specific steps in LASIK surgical procedures
Wavelight EX500 laser for LASIK vision correction
Acrysof Cachet phakic intraocular lens that corrects moderate to high myopia

Glaucoma

 

EX-PRESS glaucoma filtration device

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

Ophthalmic Pharmaceuticals

Glaucoma

  Simbrinza suspension to lower intraocular pressure without a beta blocker
Travatan and Travatan Z ophthalmic solutions to lower intraocular pressure
Azopt ophthalmic suspension to lower intraocular pressure
DuoTrav ophthalmic solution to lower intraocular pressure
(outside US markets)
Azarga/Azorga ophthalmic suspension to lower intraocular pressure
(outside US markets)
Nyogel eye gel for reduction of intraocular pressure

Anti-Infectives

 

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

Anti-Inflammation

 

Ilevro suspension to treat pain and inflammation following cataract surgery
Nevanac ophthalmic suspension to treat pain and inflammation following cataract surgery, and to reduce the risk of macular edema associated with cataract surgery in diabetic patients
Durezol emulsion to treat pain and inflammation associated with eye surgery, and to treat anterior uveitis
TobraDex and TobraDex ST ophthalmic suspensions, combination anti-infective/anti-inflammatory products
Voltaren Ophtha treatment of postoperative inflammation after cataract surgery, temporary relief of pain and photophobia after refractive surgery

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Dry Eye

 

The Systane family of over-the-counter dry eye products:
Systane Balance lubricant eye drops
Systane Ultra lubricant eye drops
Systane lubricant eye drops
Systane gel drops
Systane lid wipes
Lubricants for eye dryness, discomfort or ocular fatigue:
GenTeal eye drops
Viscotears liquid gel
Oculotect eye drops (outside US markets)
Hypotears lubricant eye drops

Allergy

 

Patanol and Pataday ophthalmic solutions for ocular itching associated with allergic conjunctivitis
Patanase nasal spray for seasonal nasal allergy symptoms
Zaditor antihistamine eye drops for temporary relief of itchy eyes associated with eye allergies (over-the-counter in the US)
Zaditen Ophtha an H1-antagonist to fight allergic conjunctivitis
Livostin an H1-antagonist to fight allergic conjunctivitis (Canada only)

Ear Infections

 

Ciprodex®* Otic suspension to treat middle and outer ear infections

Ocular Nutrition

 

ICaps eye vitamin dietary supplements provide essential dietary ingredients to support eye health
Vitalux nutrient supplements help patients with age-related macular degeneration maintain their vision (outside US markets)

Other Products

 

Antikatarata supplementary treatment of lens opacities (Russia only)

Retinal

 

Jetrea (ocriplasmin) intravitreal injection for the treatment of vitreomacular traction, including macular hole


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

Vision Care

Contact Lenses

  Air Optix family of silicone hydrogel contact lenses
Dailies family of daily disposable contact lenses (including Dailies Total1)
FreshLook family of color contact lenses

Contact Lens Care

 

Opti-Free PureMoist MPDS
Opti-Free RepleniSH MPDS
Opti-Free Express MPDS
Clear Care cleaning and disinfecting solution (AOSept Plus outside of North America)

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Selected Development Projects

Surgical

Project/Product
  Mechanism of
action
  Potential indication   Planned submission
date/Current Phase
AcrySof IQ ReSTOR 2.5D   Multifocal aspheric intraocular lens   Presbyopia and cataractous lens replacement   Submitted US
AcrySof IQ ReSTOR Toric 2.5D   Multifocal, aspheric and cylinder correcting intraocular lens   Presbyopia and cataractous lens replacement with astigmatism correction   2014 US/Advanced development
AcrySof IQ ReSTOR Toric 3.0D   Multifocal, aspheric and cylinder correcting intraocular lens   Presbyopia and cataractous lens replacement with astigmatism correction   Submitted US
Allegretto EX-500 laser   Refractive correction   Photorefractive keratotomy   2014 US/Advanced development
LuxOR microscope   Visualization   Cataract surgery   2014/Advanced development

Ophthalmic Pharmaceuticals

Project/Product
  Mechanism of
action
  Potential indication   Route of
Administration
  Planned submission
date/Current Phase
EXE844   Anti-infective   Otitis externa   Topical   2014/III
EXE844b   Anti-infective   Otic infections   Topical   2015/II
EXZ829 (olopatadine hydrochloride)   Antihistamine and mast cell stabilization   Allergic conjunctivitis   Topical   2014/III
GLT137 (travoprost)   Prostaglandin analogue   Glaucoma/ocular hypertension   Topical   Submitted
Ilevro suspension (nepafenac)   Anti-
inflammatory
  Macular edema   Topical   2015/III
LFG316   Complement inhibition   Geographic atrophy   Intravitreal   ³ 2017/II
RTH258   Anti-VEGF   Wet macular degeneration   Intravitreal   ³ 2016/II
Simbrinza suspension (brinzolamide/brimonidine tartrate)   Carbonic anhydrase inhibitor/alpha agonist   Glaucoma/ocular hypertension   Topical   Submitted EU

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Vision Care

Project/Product
  Mechanism of
action
  Potential indication   Planned submission
date/Current Phase
Air Optix Aqua Colors   Spherical correction with color enhancement   Contact lens wear   Submitted US
CLM041   Presbyopia correcting contact lens   Presbyopia correction   Submitted
LCE293   Disinfection and cleaning   Contact lens care   ³ 2014/Advanced development


Principal Markets

        The principal markets for our Alcon Division include the US, Americas (except the US), Japan and Europe. The following table sets forth the aggregate 2013 net sales of the Alcon Division by region:

Alcon Division
  2013 Net Sales to
third parties
 
 
  $ millions
  %
 

United States

    4,179     40  

Americas (except the United States)

    1,108     10  

Europe

    2,831     27  

Rest of the World

    2,378     23  
           

Total

    10,496     100  
           
           

 


 

$ millions

 

%

 

Established Markets*

    7,918     75  

Emerging Growth Markets*

    2,578     25  
           

Total

    10,496     100  
           
           

*
Emerging Growth Markets comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand.

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


Research and Development

        In 2013, the Alcon Division expensed $1.0 billion (on a core basis $0.9 billion) in research and development, which amounted to 10% of the Division's net sales. The Alcon Division expensed $1.0 billion (on a core basis $1.0 billion) and $0.9 billion (on a core basis $0.9 billion) in research and development in 2012 and 2011, respectively.

        The Alcon Division has more than 2,000 associates dedicated to research and development, working to address diseases and conditions that affect vision, such as cataracts, glaucoma, retina diseases, dry eye, infection, ocular allergies and refractive error. Our Alcon Division invests $1 billion annually to drive research and new product development in eye care. Alcon's pipeline strategy is built around a proof-of-concept qualification process, which quickly identifies opportunities that have the best chance for technical success and advances those projects, while terminating others with a low probability of success.

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

        Research and development activities for Alcon's surgical business are focused on expanding intraocular lens capabilities to improve refractive outcomes and on developing instruments for cataract, vitreoretinal and corneal refractive surgeries. The focus for the Vision Care business is on the research and development of new lens materials, coatings and designs to improve patient comfort, and on lens care solutions that provide the safety, disinfecting and cleaning power needed to help maintain ocular health.


Production

        We manufacture our Alcon Division's pharmaceutical products at nine facilities in the United States, Belgium, France, Spain, Brazil, Mexico, Canada and Singapore. Our Alcon Division's surgical equipment and other surgical medical devices are manufactured at twelve facilities in the United States, Belgium, Switzerland, Ireland, Germany and Israel. Our Alcon Division's contact lens and certain lens care production facilities are in the US, Canada, Germany, Singapore, Malaysia and Indonesia.

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

        The manufacture of our products is complex and heavily regulated, which means that supply is never guaranteed. Like our competitors, our Alcon Division has faced manufacturing issues and has received Warning Letters relating to such manufacturing issues. In particular, in December 2012, Alcon received an FDA Warning Letter following an inspection at the LenSx laser manufacturing site in Aliso Viejo, California. Alcon responded in writing to the FDA, and in February 2013, FDA responded to Alcon acknowledging that the corrective actions described in Alcon's written response appear to address the items identified in the Warning Letter. The FDA will verify these corrective actions during its next scheduled inspection of the site. The items noted in the Warning Letter do not affect the safety or effectiveness of the LenSx laser, or impact Alcon's ability to sell the product. If we or our third-party suppliers fail to comply fully with regulations then there could be a product recall or other shutdown or disruption of our production activities. We have implemented a global manufacturing strategy to maximize business continuity in case of such events or other unforeseen catastrophic events. However, there can be no guarantee that we will be able to successfully manage such issues when they arise.


Marketing and Sales

        Our Alcon Division conducts sales and marketing activities around the world organized under five operating regions (US and Canada, Europe/Middle East/Africa, Latin America/Caribbean, Asia and Japan). The Alcon Division's global commercial capability is organized around sales and marketing organizations dedicated to the Surgical, Ophthalmic Pharmaceuticals and Vision Care businesses.

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

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applicable in our Ophthalmic Pharmaceuticals and Vision Care businesses, direct-to-consumer marketing campaigns are executed to promote selected products.

        While our Alcon Division markets all of its products by calling on medical professionals, direct customers and distribution methods differ across business lines. Although physicians write prescriptions, distributors, wholesalers, hospitals, government agencies and large retailers are the main direct customers for Alcon ophthalmic pharmaceutical products. Alcon surgical products are sold directly to hospitals and ambulatory surgical centers, although Alcon sells through distributors in certain markets outside the US. In most countries, contact lenses are available only by prescription. Our contact lenses can be purchased from eye care professionals, optical chains and large retailers, subject to country regulation. Lens care products can be found in major drugstores, food, mass merchandising and optical retail chains globally, subject to country regulations. In addition, mail order and Internet sales of contact lenses are becoming increasingly important channels in major markets worldwide.

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


Competition

        The eye care industry is highly competitive and subject to rapid technological change and evolving industry requirements and standards. Our Alcon Division typically competes with different companies across its three respective businesses—Ophthalmic Pharmaceuticals, Surgical and Vision Care. Companies within this industry compete on technological leadership and innovation, quality and efficacy of their products, relationships with eye care professionals and healthcare providers, breadth and depth of product offering and pricing. The presence of these factors varies across our Alcon Division's product offerings, which provides a broad line of proprietary eye care products and competes in all major product categories in the eye care market, with the exception of eyeglasses. Our principal competitors also sometimes form strategic alliances and enter into co-marketing agreements in an effort to better compete with us.


Regulation

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

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

        In the EU, the CE marking is required for all medical devices sold. By affixing the CE marking, the manufacturer certifies that a product is in compliance with provisions of the EU's Medical Device Directive. Most such products are subject to a self-certification process by the manufacturer, which requires the manufacturer to confirm that the product performs to appropriate standards. This allows the manufacturer to issue a Declaration of Conformity and to notify competent authorities in the EU that the

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manufacturer intends to market the product. In order to comply with European regulations, our Alcon Division maintains a full Quality Assurance system and is subject to routine auditing by a certified third party (a "notified body") to ensure that this quality system is in compliance with the requirements of the EU's Medical Device Directive as well as the requirements of the ISO quality systems' standard ISO 13485.


Intellectual Property

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

        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. See generally "—Pharmaceuticals—Intellectual Property."

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

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


SANDOZ

        Our Sandoz Division is a leader in developing, manufacturing and marketing generic pharmaceutical products, follow-on biopharmaceutical products and drug substances that are not protected by valid and enforceable third-party patents. As of December 31, 2013, affiliates of the Sandoz Division employed 26,905 full-time equivalent associates worldwide, and sells products in more than 140 countries. In 2013, the Sandoz Division achieved consolidated net sales of $9.2 billion, representing 16% of the Group's total net sales.

        The Sandoz Division develops, manufactures, distributes and sells prescription medicines, as well as pharmaceutical and biotechnological active substances, which are not protected by valid and enforceable third-party patents. Sandoz has activities in Retail Generics, Anti-Infectives and Biopharmaceuticals & Oncology Injectables. In Retail Generics, Sandoz develops, manufactures and markets active ingredients and finished dosage forms of pharmaceuticals to third parties. Retail Generics includes the specialty areas of Dermatology, Respiratory and Ophthalmics. In Anti-Infectives, Sandoz manufactures active pharmaceutical ingredients and intermediates—mainly antibiotics—for internal use by Retail Generics and for sale to third-party customers. In Biopharmaceuticals, Sandoz develops, manufactures and markets protein- or other biotechnology-based products (known as biosimilars or follow-on biologics) and provides biotechnology manufacturing services to other companies, and in Oncology Injectables, Sandoz develops, manufactures and markets cytotoxic products for the hospital market.

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

        According to IMS Health, Sandoz is the second-largest company in worldwide generic sales and is the global leader in biosimilars, with three marketed medicines accounting for over half of all biosimilars in the combined regions of North America, Europe, Japan and Australia. In addition, we have a pipeline of several biosimilar molecules including biosimilar rituximab (sold by Roche under the brand names Rituxan®/MabThera®) and biosimilar etanercept (sold by Amgen and Pfizer under the brand name Enbrel®).

        In 2013, Sandoz launched 31 new products in the US—twice as many as in 2012—including first-to-market launches of candesartan cilexetil tablets (AstraZeneca's Atacand®) and metronidazole 1% topical gel (Galderma Labs' Metrogel®) as well as authorized generics of Merck's temozolomide (Temodar®) and Celgene's azacitidine (Vidaza®).

        Key product launches in various European countries include montelukast (Merck's Singulair®), sildenafil (Pfizer's Viagra®), memantine (Lundbeck's Ebixa®/Merz Pharmaceuticals' Axura®), escitalopram (Lundbeck's Cipralex®), methylphenidate (Janssen-Cilag's Concerta®), mometasone (Merck's Nasonex®), and diclofenac (an authorized generic version of our Pharmaceuticals Division's Voltaren).

        In Biopharmaceuticals, Sandoz continued to strengthen its global leadership in biosimilars, and to drive its contract manufacturing base business. All three Sandoz biosimilar products continue to occupy the number one biosimilar position in terms of market share in their respective markets. According to IMS data, recombinant growth hormone Omnitrope was the fastest growing hGH treatment globally by volume. Omnitrope, which is now marketed in over 40 countries, was also among Sandoz's top three products in terms of sales. In 2013, Sandoz also introduced an innovative device that provides patients with a simple and secure way to inject Omnitrope. Anemia medicine Binocrit continued to demonstrate strong growth in several European countries as a short-acting erythropoietin stimulating agent (ESA). According to IMS, Sandoz G-CSF biosimilar, Zarzio, became the first biosimilar to overtake its reference product (Amgen's Neupogen®), as well as market leader (Chugai's Granocyte®), and is now the most prescribed daily G-CSF by volume in Europe and the number one daily G-CSF biosimilar globally.

        Sandoz made significant progress on its biosimilar pipeline in 2013, with the start of Phase III clinical trials for biosimilar etanercept (Amgen's Enbrel®) and biosimilar adalimumab (AbbVie's Humira®). Sandoz now has six molecules in Phase III trials, including a biosimilar version of the originator compound rituximab (Roche's Rituxan®/MabThera®), which is currently in a Phase III clinical trial for the treatment of follicular lymphoma, and a Phase II trial for rheumatoid arthritis. Some of the other molecules undergoing Phase III testing are biosimilar versions of pegfilgrastim (Amgen's Neulasta®), filgrastim for US registration (Amgen's Neupogen®) and epoetin alfa (Janssen's Procrit®).

        Sandoz received its first European approvals in Denmark in December 2013 and in other countries including Germany and Sweden in January 2014 for its AirFluSal Forspiro respiratory inhaler for asthma and chronic obstructive pulmonary disease patients, which offers the proven combination of salmeterol (a long-acting inhaled beta2-agonist) and fluticasone (an inhaled corticosteroid) in an innovative new inhalation device. The product's safety, efficacy and equivalence have been proven in multiple clinical trials. These approvals of AirFluSal Forspiro are a key element of Sandoz's strategy to introduce differentiated generic medicines.

        In 2013, Sandoz continued to accelerate its efforts to build a leading, sustainable and lasting presence across Sub-Saharan Africa, where it is already the number one provider of generics medicine across French West Africa. A strong product portfolio, including anti-infectives, tuberculosis treatments and maternal and child health products, support the objective to expand on the continent and address the

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needs of African patients. In 2013, Sandoz opened offices in Senegal (regional office for West Africa), Kenya, Ethiopia, Nigeria, Ghana, and Zambia. The Division also continued its ongoing work through several corporate responsibility projects, including efforts to develop "Health Shops" in Zambia in collaboration with the Zambian Ministry of Health to improve access to essential medicines in rural areas and a collaboration with Ethiopian authorities to set up a regional bioequivalence laboratory in Ethiopia. Sandoz is developing plans to expand its production capacity in Sub-Saharan Africa to address a growing demand for high-quality drugs.


New Products

        Sandoz launched a number of important products in various countries in 2013, including:

    Nystatin-Triamcin cream (Bristol Myers Squibb's Mycolog®-II)

    Montelukast (Merck's Singulair®)

    Candesartan cilexetil tablets (AstraZeneca's Atacand®)

    Sildenafil (Pfizer's Viagra®)

    Zoledronic acid (authorized generic version of our Pharmaceuticals Division's Zometa)

    Clindamycin in 5% dextrose (Pfizer's Cleocin Phosphate® in Dextrose 5%)

    Telmisartan (Boehringer Ingelheims Micardis®)

    Capecitabine (Roche's Xeloda®)

    Temozolomide (Merck's Temodar®)

    Methylphenidate (Janssen's Concerta®)

    Memantine (Lundbeck's Ebixa®/Merz Pharmaceuticals' Axura®)

    Pioglitazone/Metformin tablets (Takeda Pharmaceuticals' Actoplus Met®)

    Metronidazole 1% topical gel (Galderma Lab's Metrogel®)

    Azacitidine for injection (Celgene's Vidaza®)


Key Marketed Products

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

Retail Generics

Product
  Originator Drug   Description
Amoxicillin/clavulanic acid   Augmentin®   Anti-infective
Enoxaparin sodium injection   Lovenox®   Anti-coagulant
Acetylcysteine   Fluimicil®   Respiratory system
Fentanyl   Duragesic®   Analgesic
Omeprazole   Prilosec®   Ulcer and heartburn treatment
Linex (lactobacillus)   n/a   Dietary supplement
Tacrolimus   Prograf®   Transplantation
Sumatriptan   Imitrex®, Imigran®   Migraine headaches
Atorvastatin   Lipitor®   Blood cholesterol reduction
Diclofenac   Voltaren   Analgesic

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Anti-Infectives

Active Ingredients
  Description

Oral and sterile penicillins

  Anti-infectives

Oral and sterile cephalosporins

  Anti-infectives

Clavulanic acid and mixtures with clavulanic acid

  ß-lactam inhibitors

Classical and semisynthetic erythromycins

  Anti-infectives

 

Intermediates
  Description

Various cephalosporin intermediates

  Anti-infectives

Erythromycin base

  Anti-infectives

Various crude compounds produced by fermentation

  Cyclosporine, ascomysine, rapamycine, mycophenolic acid, etc.

Biopharmaceuticals

Product
  Originator Drug   Description
Omnitrope   Somatropin®   Recombinant human growth hormone
Binocrit and Epoetin alfa Hexal   Eprex®/Erypo®   Recombinant protein used for anemia
Zarzio and Filgrastim Hexal   Neupogen®   Recombinant protein used in oncology

Oncology Injectables

Product
  Originator Drug   Description
Leuprorelin   Lupron®, Eligard®   Prostate cancer
Docetaxel   Taxotere®   Breast, ovarian and non-small cell lung cancer
Methotrexate   Folex®, Rheumatrex®   Arthritis; breast, lung, cervix and ovarian cancer, and others
Azacitidine   Vidaza®   Bone marrow cancer, leukemia
Paclitaxel   Taxol®   Breast, lung and ovarian cancer, Kaposi sarcoma
Gemcitabine   Gemzar®   Bladder, pancreas, lung, ovarian, and breast cancer
Etoposide   Etopophos®, Vepesid®   Lung, ovarian, and testicular cancer
Oxaliplatin   Eloxatin®   Colorectal and colon cancer
Irinotecan   Camptosar®   Colon and Rectal cancer
Doxorubicin   Doxil®, Adriamycin®   Leukemia, breast, bone, lung and brain cancer, many types of carcinoma and soft tissue sarcomas

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Biosimilars in Phase III Development

        The following table describes Sandoz's biosimilar projects that are in Phase III development:

 
Project/product
  Common name   Mechanism of action   Potential indication/
indications
  Therapeutic
areas
  Route of
administration

EP2006

  filgrastim   Granulocyte colony-stimulating factor   Chemotherapy-induced neutropenia; mobilization of peripheral blood progenitor cells and others (same as originator)   Oncology   Subcutaneous and intravenous
 

GP2013

  rituximab   Anti-CD20 antibody   Non-Hodgkin lymphoma, chronic lymphocytic leukemia, rheumatoid arthritis, granulomatosis with polyangiitis (also known as Wegener's granulomatosis), and microscopic polyangiitis and others (same as originator)   Oncology and Immunology   Intravenous
 

GP2015

  etanercept   TNF-a inhibitor   Arthritidies (rheumatoid arthritis, ankylosing spondylitis, psoriatic arthritis), plaque psoriasis and others (same as originator)   Immunology   Subcutaneous
 

GP2017

  adalimumab   TNF-a inhibitor   Arthritidies (rheumatoid arthritis, ankylosing spondylitis, psoriatic arthritis), plaque psoriasis and others (same as originator)   Immunology   Subcutaneous
 

HX575*

  epoetin alfa   Erythropoiesis-stimulating agent   Chronic kidney disease, chemotherapy-induced anemia and others (same as originator)   Oncology and Nephrology   Subcutaneous and intravenous
 

HX575 s.c.**

  epoetin alfa   Erythropoiesis-stimulating agent   Chronic kidney disease   Oncology and Nephrology   Subcutaneous
 

LA-EP2006

  pegfilgrastim   Pegylated granulocyte colony-stimulating factor   Chemotherapy-induced neutropenia and others (same as originator)   Oncology   Subcutaneous
 
*
Planned submission for US.

**
Planned submission for EU (extension nephrology). Approved as Binocrit since 2007.

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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 Sandoz sells products in more than 140 countries. The following table sets forth the aggregate 2013 net sales of Sandoz by region:

Sandoz
  2013 Net Sales to
third parties
 
 
  $ millions
  %
 

United States

    2,821     31  

Americas (except the United States)

    603     7  

Europe

    4,596     50  

Rest of the World

    1,139     12  
           

Total

    9,159     100  
           
           

 


 

$ millions

 

%

 

Established Markets*

    6,625     72  

Emerging Growth Markets*

    2,534     28  
           

Total

    9,159     100  
           
           

*
Emerging Growth Markets comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand.

        Many Sandoz products are used for chronic conditions that require patients to consume the product over long 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

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

        We manufacture and package our Sandoz products at 45 manufacturing sites across 19 countries, supplying more than 140 countries globally. Among these, our principal production facilities are located in Barleben, Germany; Kundl and Unterach, Austria; Menges and Ljubljana, Slovenia; Broomfield, Colorado; Wilson, North Carolina; Stryków, Poland; Kalwe and Mahad, India; Boucherville, Canada; Cambé, Brazil; Gebze and Syntex, Turkey; and Hicksville and Melville, New York.

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

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However, our ability to do so may at times be limited by regulatory or other requirements. We monitor market developments that could have an adverse effect on the supply of essential active pharmaceutical ingredients. All active pharmaceutical ingredients we purchase must comply with high quality standards.

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

        In November 2011, we received a Warning Letter from the FDA with respect to three of our Sandoz Division's facilities—in Broomfield, Colorado; Wilson, North Carolina; and Boucherville, Canada. The letter followed inspections at all three sites in the course of 2011, and raised concerns regarding these facilities' compliance with FDA cGMP regulations. The FDA observations in the letter related primarily to general documentation, validation and investigation practices. It stated that until the FDA confirms that the deficiencies have been corrected, the FDA can recommend that any pending applications or supplements listing Novartis affiliates as a drug manufacturer not be approved. In addition, the FDA may refuse requests to issue export certificates to our Sandoz US affiliate, or import certificates to our Sandoz Canada affiliate. The letter further states that other federal agencies may take the Warning Letter into account when considering the award of contracts.

        In May 2013 we received a Warning Letter from the FDA concerning the oncology injectables manufacturing facility in Unterach, Austria. The letter contained two observations which followed an FDA inspection at the site in October 2012, and are related to historical visual inspection practices for products manufactured at the site.

        We are collaborating with the FDA to correct all concerns raised in the Warning Letters, and to ensure that our products are safe and effective and meet the highest quality standards. Inspections conducted in 2013 at all three North American facilities have confirmed our progress on the committed actions. During the fourth quarter of 2012, the FDA formally notified Sandoz that the compliance status for the Broomfield, Colorado site was upgraded. In January 2014, the FDA formally notified Sandoz that the compliance status for the Boucherville, Canada site was upgraded. Work continues on closing out committed actions across the sites.

        Our Sandoz Division has experienced significant 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 circumstances. The manufacture of our products is complex and heavily regulated, making supply never an absolute certainty. If we or our third-party suppliers fail to comply fully with regulations or other unforeseen challenges occur, then there could be a product recall or other shutdown or disruption of our production activities. We have implemented a global manufacturing strategy to maximize business continuity in case of business interruptions or other unforeseen catastrophic events. However, there can be no guarantee that we will be able to successfully manage such issues and maintain continuous supply if such issues arise.


Marketing and Sales

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

        In response to rising healthcare costs, many governments and private medical care providers, such as health maintenance organizations, have instituted reimbursement schemes that favor the substitution of bioequivalent generic products for patented pharmaceutical products. In the US, statutes have been enacted by virtually all states that permit or require pharmacists to substitute a less expensive generic product for the brand-name version of a drug that has been prescribed to a patient. Generic use is growing

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in Europe, but penetration rates in many EU countries (as a percentage of volume) remain well below those in the US. 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 and healthcare reforms have increasingly shifted 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 biosimilar products are either relatively new or still in development, and policies have not yet been fully defined or implemented for the automatic substitution and reimbursement of biosimilars in many markets, including the US. As a result, in many of these markets, including the US, our biosimilar products are marketed as branded competitors to the originator products.


Competition

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

        In addition, research-based pharmaceutical companies have responded to increased competition from generic products by licensing their patented products to generic companies (the so-called "authorized generic"). By doing so, research-based pharmaceutical companies participate in the conversion of their patented product once generic conversion begins. Consequently, generic companies that were not in a position to compete on a specific product may enter the generic market using the innovator's product. In the US, the authorized generic is not subject to the US Hatch-Waxman Act rules regarding exclusivity (see "—Regulation"). The company that launches an authorized generic typically launches its product at the same time as the generic exclusivity holder. While this may serve as a business opportunity to Sandoz when our Pharmaceuticals Division's products lose patent protection, this tends to reduce the value of the exclusivity for the company that invested in creating the first generic medicine to compete with the originator product. Furthermore, certain research-based companies continually seek new ways to protect their market franchise and to decrease the impact of generic competition. For example, some research-based pharmaceutical companies have reacted to generic competition by decreasing the prices of their patented product, or engaging in other tactics to preserve the sales of their branded products, thus potentially limiting the profit that the generic companies can earn on the competing generic product.


Development and Registration

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

        For biosimilar products, the regulatory pathways for approving such products are still in development, or pending final implementation, in many countries outside Europe. However, at least for certain

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biopharmaceutical products, a certain number of carefully targeted clinical trials in patients to determine safety and efficacy do appear to be required. Sandoz has successfully registered and launched the first biosimilar (or biosimilar type) product in Europe, the US, Canada, Japan, Taiwan, Australia and several Latin American countries, as well as two additional products in Europe.

        Currently, the affiliates of the Sandoz Division employ more than 2,600 Development and Registration staff who explore alternative routes for the manufacture of known compounds and develop innovative dosage forms of well-established medicines. These associates are based worldwide, including major facilities in Holzkirchen and Rudolstadt, Germany; Kundl, Schaftenau and Unterach, Austria; Ljubljana and Menges, Slovenia; Boucherville, Canada; and East Hanover, New Jersey. In 2013, Sandoz expensed $0.8 billion (on a core basis $0.8 billion) in product development, which amounted to 9% of the division's net sales. Sandoz expensed $0.7 billion (on a core basis $0.7 billion, as a result, in part, of a decrease of a contingent consideration liability related to a business combination) and $0.6 billion (on a core basis $0.7 billion) in 2012 and 2011 respectively.


Regulation

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

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

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

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Intellectual Property

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

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


VACCINES AND DIAGNOSTICS

        Vaccines and Diagnostics consists of two activities: Vaccines and Diagnostics. Following the January 9, 2014 completion of the divestment of our blood transfusion diagnostics unit to Grifols S.A., for approximately $1.7 billion in cash, the segment now consists only of Vaccines. Vaccines researches, develops, manufactures, distributes and sells human vaccines worldwide. Its products include meningococcal, influenza, pediatric, adult and travel vaccines. Diagnostics researched, developed, distributed and sold blood testing and molecular diagnostics products. As of December 31, 2013, the Vaccines and Diagnostics Division employed 6,997 full-time equivalent associates worldwide in 34 countries. In 2013, the Vaccines and Diagnostics Division had consolidated net sales of $2.0 billion representing 3% of total Group net sales.

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

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

        In January 2013, Bexsero, the Novartis Meningococcal Group B Vaccine (rDNA, component, adsorbed) received EU approval, following a positive opinion from the CHMP in November 2012. With this approval Bexsero became the first broad coverage vaccine to help prevent a leading cause of bacterial meningitis and septicemia in Europe. Global incidence of invasive meningococcal Group B disease (MenB) is estimated to be between 20,000 and 80,000 cases per year, with an approximate 10% fatality rate. In the UK, MenB is the cause of the majority (approximately 55%) of all bacterial meningitis and septicemia, and the cause of approximately 96% of such cases in infants. Bexsero received regulatory approval in Australia in August 2013 and has also been submitted for approval to health authorities in certain other countries. We are working with health authorities to provide access to Bexsero as soon as possible.

        In July 2013, the UK Joint Commission on Vaccination and Immunisation (JCVI) released its interim recommendation regarding Bexsero, which advised against the inclusion of Bexsero in the country's National Immunisation Programme (NIP) based on cost effectiveness concerns. After multiple stakeholder responses to the interim recommendation, the JCVI issued a statement in October 2013, confirming that it would conduct further analyses before making a final recommendation on the inclusion of Bexsero in the NIP.

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        Menveo (MenACWY-CRM), a quadrivalent conjugate vaccine for the prevention of invasive meningococcal disease caused by the A, C, Y and W-135 serogroups of the bacteria, was approved in 2010 in the US for use in individuals 11-55 years old and in the EU for individuals 11 years and older. In 2011, Menveo gained approval for use in individuals 2-10 years old in the US, and in 2012 gained approval in the EU for individuals 2 years and older. In 2013, the FDA expanded the approval of Menveo for the prevention of meningococcal disease in infants and toddlers from 2 months of age. With this expanded indication, pediatricians in the US can now offer a single vaccine to help protect infants as young as two months of age, children and adolescents against four of the five most common serogroups that cause meningococcal disease.

        Influenza vaccines are an important franchise of the division. Today, we are among the world's largest producers of influenza vaccines. Influenza vaccination is one of the most effective public health interventions, sparing millions of people from complications, including death, from this infectious disease. In September 2013, Novartis began shipping Flucelvax, the first cell-culture derived influenza vaccine approved in the US, to help protect adults 18 years and older against seasonal influenza, to retailers and physicians in the US. Cell-culture technology marks the most significant advance in influenza vaccine manufacturing in the US in more than 40 years, and is an alternative to traditional egg-based production. Flucelvax does not contain any preservatives, such as thimerosal, or antibiotics.

        In 2013, Novartis announced that it would deliver more than 30 million doses of its seasonal influenza vaccines Fluvirin and Flucelvax to US customers for the 2013/2014 season. These doses were shipped in time for the start of public vaccination programs. Early arrival of seasonal influenza vaccines ensures that healthcare professionals are equipped to provide the earliest possible vaccination against influenza.

        Young children and older adults are among the most vulnerable to influenza. Fluad, our adjuvanted seasonal influenza vaccine, has been approved for more than a decade in Europe to enhance the immune response in older adults, helping to overcome their naturally occurring immune vulnerability and enabling effective protection against influenza.

        Novartis has been awarded various contracts by the US Department of Health and Human Services (HHS) including a (pre)pandemic preparedness contract and an Advanced Development and Manufacturing (ADM) Center contract. Under the terms of the ADM contract, our production facility in Holly Springs, North Carolina will provide late-stage development and manufacturing expertise and capabilities to support HHS-driven projects, including development of new biodefense agents and rapid manufacturing response in the event of a public health emergency. The (pre)pandemic preparedness contract was used to support activities initiated by Novartis to develop a new vaccine for H7N9, a strain of avian influenza that emerged in China in early 2013. In addition, Novartis remains dedicated to working with the World Health Organization and other stakeholders to support global pandemic preparedness, including affordable and equitable access to pandemic vaccines for developing countries.

        In 2012, Novartis informed the WHO and other public health partners that it would cease oral polio vaccine (OPV) manufacturing by 2013. Novartis did continue to produce and deliver oral polio vaccines to UNICEF, PAHO and individual countries in 2013, and supply commitments for 2013 were fulfilled as contracted. Novartis has been proud to have provided a significant proportion of the global supply of OPV for more than 20 years and is a longtime supporter of the Global Polio Eradication Initiative. Novartis will continue to support efforts to eradicate polio and other key global immunization initiatives.

        In 2011, Novartis Vaccines completed the acquisition of an 85% stake in the vaccines company Zhejiang Tianyuan Bio-Pharmaceutical Co., Ltd. Zhejiang Tianyuan offers marketed vaccine products in China. We collaborate with Tianyuan on strengthening our existing product portfolio and expanding our innovation capabilities. This acquisition is also expected to facilitate the introduction of additional Novartis vaccines into China where there continues to be tens of thousands of new cases of vaccine-preventable diseases each year.

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Vaccines and Diagnostics Division Products

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

Vaccines Key Marketed Products

Product
  Indication
Influenza Vaccines    
Agrippal   A surface antigen, inactivated, seasonal influenza vaccine for adults and children above six months of age.
Fluad   A surface antigen, inactivated, seasonal influenza vaccine containing the proprietary MF59 adjuvant for the elderly
Fluvirin   A surface antigen, inactivated, seasonal influenza vaccine for adults and children four years of age and up
Optaflu (EU)   Cell culture-based, surface antigen, inactivated, influenza vaccine for adults 18 years of age and up
Flucelvax (US)   Cell culture-based surface antigen, inactivated, seasonal flu influenza vaccine indicated for those aged 18 years and older
Meningococcal Vaccines    
Bexsero   Meningococcal Group B Vaccine [rDNA component adsorbed]
Menjugate   Meningococcal C vaccine for children 2 months of age and up
Menveo   Meningococcal A, C, W-135 and Y vaccine for children, adolescents and adults between 2 months and 55 years of age
Travel Vaccines    
Encepur Children/Encepur Adults   Tick-borne encephalitis vaccine for children 1-11 years of age and for adults 12+ years of age
Ixiaro(1)   Prophylactic vaccine against Japanese encephalitis virus
Rabipur/Rabavert   Vaccine for rabies, which can be used before or after exposure (typically animal bites) in all age groups
Pediatric Vaccines    
Quinvaxem(2)   Fully liquid pentavalent vaccine combining antigens for protection against five childhood diseases: diphtheria, tetanus, pertussis (whooping cough), hepatitis B and Haemophilus influenzae type b for children above 6 weeks of age

(1)
In collaboration with Valneva.

(2)
In collaboration with Crucell.

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Vaccines Key Products in Development

Project/product
  Common name   Vaccine Type   Planned
submission
dates/Current
phase
Acellular Pertussis combination   Tdap vaccine   Pediatric   ³2015/I
Bexsero US   Meningococcal B vaccine   Meningitis   ³2015/II
C. difficile(1)   C. difficile vaccine   Hospital Infections   ³2015/I
Fluad US   Seasonal influenza vaccine   Seasonal Influenza   2014/III
Flucelvax pediatric US   Seasonal influenza vaccine   Seasonal Influenza   ³2015/III
Flucelvax QIV   Seasonal influenza vaccine   Seasonal Influenza   ³2015/III
Group B streptococcus   Group B streptococcus vaccine   Maternal   ³2015/II
H5N1 flu cell culture vaccine(2)   Pandemic influenza vaccine   Pandemic   ³2015/II
H7N9(2)   H7N9 vaccine   Pandemic Influenza   ³2015/Not applicable
Human immunodeficiency virus (HIV)(3)   HIV vaccine   HIV   ³2015/I
MenABCWY   Meningococcal A, B, C, W and Y vaccine   Meningitis   ³2015/II
Menjugate liquid   Meningococcal C vaccine   Meningitis   2013/Submission
P. aeruginosa(1)   P. aeruginosa vaccine   Hospital Infections   ³2015/II
Quadrivalent influenza vaccine— pediatric adjuvanted   Seasonal influenza vaccine   Seasonal Influenza   ³2015/III
S. aureus   S. aureus vaccine   Hospital Infections   ³2015/I

(1)
Collaboration with Valneva.

(2)
Collaboration with United States Department of Health and Human Services.

(3)
Collaboration with United States National Institutes of Health.

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Principal Markets

        The principal markets for our Vaccines and Diagnostics Division include the US and Europe. The following table sets forth the aggregate 2013 net sales of the Vaccines and Diagnostics Division by region:

Vaccines and Diagnostics
  2013 Net Sales to
third parties
 
 
  $ millions
  %
 

United States

    821     41  

Americas (except the United States)

    184     9  

Europe

    654     33  

Rest of the World

    328     17  
           

Total

    1,987     100  
           
           

 


 

$ millions

 

%

 

Established Markets*

    1,512     76  

Emerging Growth Markets*

    475     24  
           

Total

    1,987     100  
           
           

*
Emerging Growth Markets comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand.

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


Research and Development

        In 2013, the Vaccines and Diagnostics Division expensed $0.5 billion (on a core basis $0.5 billion) in research and development, which amounted to 24% of the division's net sales. The Vaccines and Diagnostics Division expensed $0.5 billion (on a core basis $0.4 billion) and $0.5 billion (on a core basis $0.5 billion) in research and development in 2012 and 2011 respectively.

        While research and development costs for vaccines traditionally have not been as high as for pharmaceuticals, a robust clinical program including Phase I to Phase III must be performed by the manufacturer to obtain a license for commercialization. See "—Pharmaceuticals—Compounds in Development" and "—Pharmaceuticals—Research and Development." At each step, there is a substantial risk that we will not achieve our goals. In such an event, we may decide or be required to abandon a product or program in which we have made a substantial investment.


Production

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

        We manufacture our vaccines products at facilities in Europe, the US and Asia. Our principal production facilities are located in Liverpool, UK; Marburg, Germany; Siena and Rosia, Italy;

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Ankleshwar, India; and Holly Springs, North Carolina. We continue to invest and upgrade our existing sites to ensure that previously initiated remediation efforts are completed and meet quality standards.

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

        The manufacture of our products is complex and heavily regulated, which means that supply is never guaranteed. Like our competitors, our Vaccines and Diagnostics Division has faced significant manufacturing issues. If we or our third-party suppliers fail to comply fully with regulations then there could be a product recall or other shutdown or disruption of our production activities. We have implemented a global manufacturing strategy to maximize business continuity in case of such events or other unforeseen catastrophic events. However, there can be no guarantee that we will be able to successfully manage such issues when they arise.


Marketing and Sales

        Our main Vaccines marketing and sales organizations are based in Switzerland, Germany, UK, Italy and the US. We are also seeking to expand operations in China, India, Europe and Latin America. In the US, we market influenza, meningococcal, Japanese encephalitis and rabies vaccines through a network of wholesalers and distributors as well as direct to key customers. Direct sales efforts are focused on public health and distributor channels, and on non-traditional channels, such as employers, chain drug headquarters and service pr