20-F 1 a2126544z20-f.htm 20-F
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As filed with the Securities and Exchange Commission on January 30, 2004



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, 2003
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-15024

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

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

Switzerland
(Jurisdiction of incorporation or organization)

Lichtstrasse 35
4056 Basel, Switzerland
(Address of principal executive offices)

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

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

Securities registered 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:

2,467,768,660 shares

        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, as amended, 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 Not Applicable

Indicate by check mark which financial statement item the Registrant has elected to follow:

Item 17 o Item 18 ý





TABLE OF CONTENTS

INTRODUCTION AND USE OF CERTAIN TERMS   1

FORWARD-LOOKING STATEMENTS

 

1

PART I

 

2

 

Item 1.

 

 

Identity of Directors, Senior Management and Advisers

 

2

 

Item 2.

 

 

Offer Statistics and Expected Timetable

 

2

 

Item 3.

 

 

Key Information

 

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

 

Item 4.

 

 

Information on the Company

 

11
  4. A   History and Development of Novartis   11
  4. B   Business Overview   14
  4. C   Organizational Structure   73
  4. D   Property, Plants and Equipment   74

 

Item 5.

 

 

Operating and Financial Review and Prospects

 

79
  5. A   Operating Results   79
  5. B   Liquidity and Capital Resources   105
  5. C   Research & Development, Patents and Licenses   109
  5. D   Trend Information   109
  5. E   Off-Balance Sheet Arrangements   109
  5. F   Aggregate Contractual Obligations   109

 

Item 6.

 

 

Directors, Senior Management and Employees

 

110
  6. A   Directors and Senior Management   110
  6. B   Compensation   120
  6. C   Board Practices   129
  6. D   Employees   133
  6. E   Share Ownership   133

 

Item 7.

 

 

Major Shareholders and Related Party Transactions

 

135
  7. A   Major Shareholders   135
  7. B   Related Party Transactions   136
  7. C   Interests of Experts and Counsel   136

 

Item 8.

 

 

Financial Information

 

137
  8. A   Consolidated Statements and Other Financial Information   137
  8. B   Significant Changes   138

 

Item 9.

 

 

The Offer and Listing

 

139
  9. A   Listing Details   139
  9. B   Plan of Distribution   141
  9. C   Market   141
  9. D   Selling Shareholders   141
  9. E   Dilution   141
  9. F   Expenses of the Issue   141

 

Item 10.

 

 

Additional Information

 

141
  10. A   Share capital   141
  10. B   Memorandum and Articles of Association   141

  10. C   Material contracts   145
  10. D   Exchange controls   145
  10. E   Taxation   145
  10. F   Dividends and paying agents   150
  10. G   Statement by experts   150
  10. H   Documents on display   150
  10. I   Subsidiary Information   150

 

Item 11.

 

 

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

 

150

 

Item 12.

 

 

Description of Securities other than Equity Securities

 

155

PART II

 

155

 

Item 13.

 

 

Defaults, Dividend Arrearages and Delinquencies

 

155

 

Item 14.

 

 

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

 

155

 

Item 15.

 

 

Controls and Procedures

 

155

 

Item 16.

 

 

[Reserved]

 

155

 

Item 16 

A

 

Audit Committee Financial Expert

 

155

 

Item 16 

B

 

Code of Ethics

 

155

 

Item 16 

C

 

Principal Accountant Fees and Services

 

155

PART III

 

157

 

Item 17.

 

 

Financial Statements

 

157

 

Item 18.

 

 

Financial Statements

 

157

 

Item 19.

 

 

Exhibits

 

158


INTRODUCTION AND USE OF CERTAIN TERMS

        Novartis AG and our consolidated affiliates ("Novartis" or the "Group") publish consolidated financial statements expressed in US dollars. Our consolidated financial statements found in Item 18 of this annual report on Form 20-F ("Form 20-F") are those for the year ended December 31, 2003. In this Form 20-F, references to "US dollars", "US$" or "$" are to the lawful currency of the United States of America; and references to "CHF" are to Swiss francs.


        In this Form 20-F, references to the "United States" or to "US" are to the United States of America, references to "Europe" are to all European countries (including Turkey, Russia and the Ukraine), references to the European Union ("EU") are to each of the 15 member-states of the EU and references to "Americas" are to North, Central (including the Caribbean) and South America, unless the context otherwise requires; references to "Novartis" or the "Group" are to Novartis AG and its consolidated affiliates; references to "associates" are to employees of our affiliates; references to the "FDA" are to the US Food and Drug Administration. All product names appearing in italics are trademarks of Group companies. Product names identified by a "®" or a "™" are trademarks of other companies. You will find the words "we," "our," "us" and similar words or phrases in this Form 20-F. We use those words to comply with the requirement of the US Securities and Exchange Commission to use "plain English" in public documents like this Form 20-F. For the sake of clarification, each operating company in the Group is legally separate from all other companies in the Group and manages its business independently through its respective board of directors or other top local management body. No Group company operates the business of another Group company nor is any Group company the agent of any other Group company. Each executive identified in this Form 20-F reports directly to other executives of the company by whom the executive is employed, or to that company's board of directors.


        We furnish to holders of our registered shares ("shares") annual reports that include a description of operations and annual audited consolidated financial statements prepared in accordance with International Financial Reporting Standards ("IFRS"). IFRS differs in certain significant respects from Generally Accepted Accounting Principles in the United States ("US GAAP"). See "Item 18. Financial Statements—note 32" for a description of the significant differences between IFRS and US GAAP. The financial statements included in the annual reports are examined and reported upon by our independent auditors. We make available to our shareholders, on our web page, quarterly interim press releases that include unaudited interim consolidated financial information prepared in conformity with IFRS with a reconciliation to US GAAP.


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, relating to our business and the industries in which we operate. Certain forward-looking statements can be identified by the use of forward-looking terminology such as "believe," "expect," "may," "are expected to," "will," "will continue," "should," "would be," "seek" or "anticipate" or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Such statements include descriptions of our investment and research and development programs and anticipated expenditures in connection therewith, and descriptions of new products we expect to introduce and anticipated customer demand for such products. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performances or achievements that may be expressed or implied by such forward-looking statements. Some of these factors are discussed in more detail herein, including under "Item 3. Key Information—3.D. Risk factors," "Item 4. Information on the Company," and "Item 5. Operating and Financial Review and Prospects." Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Form 20-F as anticipated, believed, estimated or expected. We do not intend, and do not assume any obligation, to update any information or forward-looking statements set out in this Form 20-F.

1



PART I

Item 1.    Identity of Directors, Senior Management and Advisers

        Not applicable.


Item 2.    Offer Statistics and Expected Timetable

        Not applicable.


Item 3.    Key Information

3.A  Selected Financial Data

        The selected financial information set out below has been extracted from our consolidated financial statements. Our consolidated financial statements ("consolidated financial statements") for the years ended December 31, 2003, 2002 and 2001 are included elsewhere in this Form 20-F. All financial data should be read in conjunction with "Item 5. Operating and Financial Review and Prospects" and our consolidated financial statements and accompanying notes which are included elsewhere in this Form 20-F. All financial data presented in this Form 20-F are qualified in their entirety by reference to the consolidated financial statements and such notes. We began presenting our results in US dollars effective as of January 1, 2003, and we have restated financial information for prior years into US dollars for comparison purposes.

        The consolidated financial statements used to create the selected consolidated financial data set forth below were prepared in accordance with IFRS. IFRS differs in certain respects from US GAAP. For a discussion of the significant differences between IFRS and US GAAP, see "Item 18. Financial Statements—note 32."

2


 
  Year Ended December 31,
 
 
  2003
  2002
  2001
  2000
  2000(1)
  1999
  1999(1)
 
 
  ($ millions, except per share information)

 
INCOME STATEMENT DATA                              
Amounts in accordance with IFRS:                              
Net sales   24,864   20,877   18,762   20,997   16,986   21,496   16,778  
   
 
 
 
 
 
 
 
Operating income   5,889   5,092   4,325   4,684   4,000   4,868   4,437  
Result from associated companies   (200 ) (7 ) 83   58   57   255   250  
Net financial income   379   613   284   187   261   531   662  
   
 
 
 
 
 
 
 
Income before taxes and minority interests   6,068   5,698   4,692   4,929   4,318   5,654   5,349  
Taxes   (1,008 ) (959 ) (844 ) (1,082 ) (895 ) (1,235 ) (1,135 )
Minority interests   (44 ) (14 ) (12 ) (25 ) (15 ) (18 ) (13 )
   
 
 
 
 
 
 
 
Net income   5,016   4,725   3,836   3,822   3,408   4,401   4,201  
   
 
 
 
 
 
 
 
Basic earnings per share in $(2)   2.03   1.88   1.49   1.46   1.30   1.66   1.58  
Diluted earnings per share in $(2)   2.00   1.84   1.49   1.46   1.30   1.66   1.58  
Cash dividends(3)   1,724   1,367   1,268   1,259       1,215      
Cash dividends per share in CHF(4)   1.00   0.95   0.90   0.85       0.80      
Operating income from continuing operations per share:                              
  basic earnings per share in $(2)   2.38   2.02   1.68   1.79   1.53   1.83   1.67  
  diluted earnings per share in $(2)   2.35   1.98   1.68   1.79   1.53   1.83   1.67  

(1)
Financial data presented on a continuing basis, excluding the results of the Agribusiness Division, which was spun-off in 2000.

(2)
Basic and Diluted earnings and cash dividends per share have been adjusted to reflect a forty-for-one share split effective May 7, 2001. The years 2000 and 1999 have been adjusted to take this split into account, in order to provide per share information on a consistent basis.

(3)
Cash dividends represent cash payments in the applicable year that generally relate to earnings of the previous year.

(4)
Cash dividends per share represent dividends proposed that relate to earnings of the current year. Dividends for 2003 will be proposed to the Annual General Meeting on February 24, 2004 for approval.

3


 
  Year Ended December 31,
 
  2003
  2002
  2001
  2000
  1999
 
  ($ millions, except per share data)

BALANCE SHEET DATA                    
Amounts in accordance with IFRS:                    
Cash, cash equivalents and current marketable securities   13,259   12,542   13,193   12,659   10,250
Inventories   3,346   2,963   2,449   2,515   4,323
Other current assets   5,668   5,310   4,712   4,923   7,196
Long-term assets   27,044   24,210   19,408   15,410   19,365
   
 
 
 
 
Total assets   49,317   45,025   39,762   35,507   41,134
   
 
 
 
 
Trade accounts payable   1,665   1,266   1,077   971   1,237
Other current liabilities   7,655   7,006   7,378   6,131   9,694
Long-term liabilities and minority interests   9,568   8,484   6,146   5,914   6,841
Total equity   30,429   28,269   25,161   22,491   23,362
   
 
 
 
 
Total liabilities and equity   49,317   45,025   39,762   35,507   41,134
   
 
 
 
 
Net assets   30,449   28,355   25,223   22,538   23,501
Outstanding share capital   896   898   925   946   953

Amounts in accordance with US GAAP:

 

 

 

 

 

 

 

 
Income statement data                    
Net income   3,788   3,829   2,419   3,794   3,615
Basic earnings per share(1)   1.59   1.58   0.98   1.51   1.40
Diluted earnings per share(1)   1.57   1.55   0.98   1.50   1.40

Balance sheet data

 

 

 

 

 

 

 

 

 

 
Total equity   34,878   33,225   30,208   29,840   31,748
Total assets   54,048   50,361   45,105   43,976   50,067

(1)
Earnings per share have been adjusted to reflect a forty-for-one share split effective May 7, 2001. 2000 and 1999 figures have been adjusted to take this split into account, in order to provide earnings per share information on a consistent basis.

Cash Dividends per Share

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

Year Earned

  Month and
Year Paid

  Total Dividend(2)
per share

  Total Dividend(4)
per ADS

 
   
  (CHF)

  ($)

1999   April 2000   0.80   0.41
2000   April 2001   0.85   0.43
2001   March 2002   0.90   0.54
2002   March 2003   0.95   0.68
2003(1)(3)   February 2004   1.00   0.80

(1) If the Swiss franc amount for 2003 is translated into US dollars at the rate of CHF 1.25 to the dollar, the Total Dividend per share and Total Dividend per ADS in US dollars would be $0.80. Such translation should not be construed as representations that the Swiss franc amount represent, or have been or could be converted into, US dollars at that or any other rate.
(2) 1999 and 2000 figures have been adjusted for a forty-for-one share split and share-to-ADS ratio change on May 7, 2001.
(3) Dividend to be proposed at the Annual General Meeting on February 24, 2004.
(4) 1999 figures have been adjusted for a two-for-one split for the ADSs on May 11, 2000.

4


Exchange Rates

        The following table shows, for the years and dates indicated, certain information concerning the rate of exchange of Swiss francs per US dollar based on exchange rate information found on Reuters Market System. The exchange rate in effect on January 27, 2004, as found on Reuters Market System, was CHF 1.26 = $1.00.

Year ended December 31,

  Period End
  Average(1)
  High
  Low
1999   1.59   1.51   1.60   1.36
2000   1.64   1.69   1.83   1.55
2001   1.68   1.69   1.82   1.58
2002   1.40   1.55   1.72   1.39
2003   1.25   1.34   1.42   1.24
Month end,
       
August 2003   1.42   1.34
September 2003   1.42   1.32
October 2003   1.34   1.31
November 2003   1.38   1.30
December 2003   1.30   1.24
January 2004(2)   1.27   1.22

(1) Represents the average of the exchange rates on the last day of each full month during the year.
(2) The high and low US dollar/Swiss Franc exchange rate is current as of January 27, 2004.

3.B  Capitalization and Indebtedness

        Not applicable.

3.C  Reasons for the offer and use of proceeds

        Not applicable.

3.D  Risk factors

        You should carefully consider all of the information set forth in this Form 20-F and the following risk factors which we face and which are faced by our industry. The risks below are not the only ones we face. Additional risks not currently known to us or that we presently deem immaterial may also impair our business operations. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. This Form 20-F also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere. See "Forward-Looking Statements" on page 1.

We face intense competition from new products.

        Our products face intense competition from competitors' products. This competition may increase as new products enter the market. In such an event, our competitors' products may be safer or more effective or more effectively marketed and sold than our products. If we fail to maintain our competitive position, this could have a material adverse effect on our business and results of operations.

5


Our research and development efforts may not succeed.

        In order to remain competitive, we must continue to launch new and better products each year. To accomplish this, we commit substantial effort, funds and other resources to research and development, both through our own dedicated resources, and on various collaborations with third parties. Our ongoing investments in new product launches and research and development for future products could produce higher costs without a proportional increase in revenues.

        In the pharmaceutical business, the research and development process can take up to 12 years, or even longer, from discovery to commercial product launch. This process is conducted in various stages. During each stage there is a substantial risk that we will not achieve our goals and accordingly we may abandon a product in which we have invested substantial amounts. If we fail to continue developing commercially successful new products, or successful new indications or brand extensions for existing products, this could have a material adverse effect on our business and results of operations.

        Our dependence on research and development makes it highly important that we recruit and retain high quality researchers and development specialists. We commit substantial efforts and funds to this purpose. Should we fail in our efforts, this could have a material adverse effect on our business and results of operations.

We face intense competition from lower-cost generic products.

        Our Pharmaceuticals Division also faces increasing competition from lower-cost generic products after patents on our products expire. Loss of patent protection typically leads to a rapid loss of sales for that product and could affect future results. Patent protection is no longer available in major markets for the active ingredients used in a number of our Pharmaceuticals Division's leading products.

    Neoral.    Patent protection exists for the Neoral micro-emulsion formulation and other cyclosporin formulations through 2009 and beyond in major markets. Despite this protection, generic cyclosporin products competing with Neoral have entered the transplantation market segment in the US, Germany, Japan and elsewhere. We have filed patent infringement actions against manufacturers of these generic products. However, despite a finding of infringement and an award of damages against one of these manufacturers in the US, we have so far not succeeded in obtaining an injunction, or a final judgment of damages, against any of the manufacturers we have sued.

    Sandostatin.    Basic patent protection for Sandostatin SC has expired in the US, Japan, Germany and the UK, and it will expire in 2006 in France and 2007 in Italy. However, patent protection extending to 2010 (and 2013 and beyond in the US) continues in major markets for Sandostatin LAR, which represents a significant and growing proportion of our octreotide sales.

    Lotrel/Cibacen/Lotensin/Cibadrex.    The basic benazepril substance patent protection for Cibacen/Lotensin/Cibadrex expired in Japan in 2002 and will expire in the US in February 2004, and in 2004-08 in major markets in the EU. However, Lotrel, which is a combination of benazepril and amlodipine besylate, is patented in the US until 2017. Dr. Reddy's Laboratories has challenged this patent, as well as other patents related to Lotrel, in a lawsuit filed in December 2003. Dr. Reddy's is seeking marketing approval for a different benazepril combination, using amlodipine maleate, rather than amlodipine besylate. Because of this difference, the Dr. Reddy's product, if brought to market, would not be automatically substitutable in the US for Lotrel. Nonetheless, we will take all appropriate measures to enforce our patent rights.

    Lamisil.    The active ingredient in Lamisil is covered generically by a patent family which will expire in July 2004 in the US, and which has expired in other major countries. Another patent family covers the active ingredient specifically and expires in the US in 2006, and 2004-07 in Japan and major EU countries. The specific US patent is being challenged by Dr. Reddy Laboratories in the US.

6


    Miacalcin/Miacalcic.    The specific Novartis formulation of this product is covered by patents which will expire in the US in 2015. However, patents on the Novartis formulation expired in a number of other major countries in 2003, and will expire in Italy in 2006. Apotex has applied to the FDA for the right to sell a generic version of Miacalcin, using the Novartis formulation. We have sued Apotex for infringement. Another company has applied to the FDA for the right to sell a generic version of Miacalcin based on a different formulation. We have not sued this company.

    Voltaren.    Voltaren is off-patent. As a result, revenue from Voltaren has declined, and may decline significantly further over the next few years.

Government regulation may adversely affect our business.

        Like our competitors, we are subject to strict government controls on the development, manufacture, marketing, labeling, distribution and pricing of our products. We must obtain and maintain regulatory approval for our pharmaceutical and many of our other products from regulatory agencies in order to sell our products in a particular jurisdiction.

        Risks regarding the development of new products.    Our research and development activities are heavily regulated. If we fail to comply fully with applicable regulations, then there could be a delay in the submission or approval of potential new products for marketing approval. In addition, the submission of an application to a regulatory authority does not guarantee that a license to market the product will be granted. Each authority may impose its own requirements and delay or refuse to grant approval, even when a product has already been approved in another country. In our principal markets, the approval process for a new product is complex, lengthy and expensive. The time taken to obtain approval varies by country but generally takes from six months to several years from the date of application. This registration process increases the cost to us of developing new products and increases the risk that we will not succeed in selling them successfully.

        Risks regarding the manufacture of our products.    The manufacture of our products is heavily regulated by governmental authorities around the world, including the FDA. If we or our third party suppliers fail to comply fully with such regulations then there could be a government-enforced shutdown of production facilities, which in turn could lead to product shortages. A failure to comply fully with such regulations could also lead to a delay in the approval of new products.

        Risks regarding the marketing of our products.    The marketing of our products is also heavily regulated by governments throughout the world. In many countries, particularly those in Europe, we are prohibited from marketing our products directly to consumers. In the US, some direct-to-consumer marketing practices are permitted, but the scope of allowable marketing practices is still significantly limited. Most countries also place restrictions on the manner and scope of permissible marketing to physicians and other health professionals. The effect of such regulations may be to limit the amount of revenue which we may be able to derive from a particular product. In addition, if we fail to comply fully with such regulations then civil or criminal actions could be brought against us.

        Risks regarding the pricing of our products.    In addition to normal price competition in the marketplace, the prices of our pharmaceutical products are restricted by price controls imposed by governments and health care providers in most countries. Price controls operate differently in different countries and can cause wide variations in prices between markets. Currency fluctuations can aggravate these differences. The existence of price controls can limit the revenues we earn from our products and may have an adverse effect on our business and results of operations.

    United States.    In the US, ongoing political debates over prescription drug pricing and recent Medicare reform legislation could increase pricing pressures. In particular, recent Medicare reform legislation could ultimately enable the US government to use its enormous purchasing power to demand discounts from pharmaceutical companies. It is not yet possible to predict with certainty the extent to which this recently-enacted legislation will affect our business and results of operations.

7


    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.

    Japan.    In Japan, the government generally introduces price cut rounds every other year, during which the government mandates price decreases for specific products.

    Regulations favoring generics.    In response to rising healthcare costs, many governments and private medical care providers, such as Health Maintenance Organizations (HMOs), have instituted reimbursement schemes that favor the substitution of generic pharmaceuticals for more expensive brand-name pharmaceuticals. In the US, generic substitution statutes have been enacted by virtually all states and permit or require the dispensing pharmacist to substitute a less expensive generic drug instead of an original branded drug.

    Cross-Border Sales.    Price controls in one country can also have an impact in other countries as a result of cross-border sales. In the EU, products which we have sold to customers in countries with stringent price controls can legally be re-sold to customers in other EU countries with less stringent price controls, at a lower price than the price at which the product is otherwise available in the importing country. This risk could increase in 2004, when 10 additional nations join the EU. 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 to the US are currently illegal. However, there are ongoing political efforts to change the legal status of such imports.

        As a result, we expect that pressures on pricing and operating results will continue and may increase.

        Risks regarding the safety and efficacy of our products.    Regulatory agencies may at any time reassess the safety and efficacy of our products based on new scientific knowledge or other factors. Such reassessments could result in the amendment or withdrawal of existing approvals to market our products, which in turn would result in a loss of revenue, and could serve as an inducement to bring lawsuits against us.

        Other regulatory risks.    Changes in worldwide intellectual property protections and remedies, trade regulations and procedures, as well as unstable governments and legal systems, intergovernmental disputes and possible nationalization could also materially adversely affect our business or results of operations.

We operate in highly competitive and rapidly consolidating industries.

        We operate in highly competitive and rapidly consolidating industries. Our principal competitors are major international corporations with substantial resources for research and development, production and marketing. Our competitors are consolidating, and the strength of combined companies could affect our competitive position in all of our business areas.

Product liability claims could adversely affect our business and results of operations.

        Product liability claims are potentially a significant commercial risk for us. Substantial damage awards have been made in some jurisdictions against companies such as ours based upon claims for injuries allegedly caused by the use of their products. We are involved in a number of product liability cases claiming damages as a result of the use of our products. While we hold insurance for product liability in reasonable and prudent amounts, it is possible that not all risks may be covered by such insurance. Product liability insurance is becoming more difficult to obtain and more expensive when it is available. We believe, but do not know with certainty, that any reasonably foreseeable unaccrued costs and liabilities associated with the risks of product liability claims will either be covered by insurance, or will otherwise be in amounts which will not have a material adverse effect on our consolidated financial condition, but could be material to our results of operations in a given period.

8



Patent claims by third parties could adversely affect our business and results of operations.

        We take all reasonable steps to ensure that our products do not infringe valid third-party intellectual property rights. Nevertheless, third parties may assert claims against us for infringement. This risk is particularly strong with respect to Sandoz, our generics Business Unit. Companies which originate branded pharmaceutical products commonly assert patent and other intellectual property rights against competitors. As a result, we can become involved in extensive litigation regarding our products. If we are unsuccessful in defending ourselves against these suits, we could be subject to injunctions preventing us from selling our products, or to damages, which may be substantial. Either event could have a material adverse effect on our consolidated financial position, results of operations or liquidity. Regarding our Sandoz Business Unit, see "Item 4. Information on the Company—4.B. Business Overview—Sandoz—Intellectual Property."

Our business will continue to expose us to risks of environmental liabilities.

        In our product development programs and manufacturing processes, it is sometimes necessary for us to use hazardous materials, chemicals, viruses and toxic compounds. These programs and processes expose us to risks of accidental contamination, events of noncompliance with environmental laws and regulatory enforcement, personal injury, property damage and claims resulting from these events. If an accident occurred, or if we discover contamination caused by prior operations, we could be liable for cleanup obligations, damages or fines, which could have an adverse effect on our business and results of operations.

        The environmental laws of many jurisdictions impose actual and potential obligations on us to remediate contaminated sites. These obligations may relate to sites:

    that we acquire, own or operate;

    that we formerly owned or operated; or

    where waste from our operations was disposed.

        These environmental remediation obligations could significantly reduce our operating results. In particular, our accruals for these obligations may be insufficient if the assumptions underlying the accruals—including our assumptions regarding the portion of the waste at a site for which we are responsible—prove incorrect, or if we are held responsible for additional contamination.

        Stricter environmental, safety and health laws and enforcement policies could result in substantial costs and liabilities to us, and could subject our handling, manufacture, use, reuse or disposal of substances or pollutants to more rigorous scrutiny than is currently the case. Consequently, compliance with these laws could result in significant capital expenditures as well as other costs and liabilities, thereby harming our business and operating results.

The manufacture of our products is technically highly complex, and a supply interruption or delay could adversely affect our business and results of operation.

        The products we market, distribute and sell are either manufactured at our own dedicated manufacturing facilities, or through toll manufacturing arrangements or supply agreements with third parties. Since many of our products are the result of technically complex manufacturing processes, and are sometimes dependent on highly specialized raw materials, we can provide no assurances that supply sources will not be interrupted from time to time. In addition, for these same reasons, the volume of production of any product cannot be rapidly altered. As a result, if we should fail to accurately predict market demand for any of our products then we may not be able to produce enough of the product to meet that demand, or may produce too much of the product, either of which could affect our business and operating results.

9



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

        Through December 31, 2002, we prepared our consolidated financial statements in Swiss francs. Since January 1, 2003, we have prepared our consolidated financial statements in US dollars and have also restated consolidated financial information for prior years into US dollars. In either case, a significant portion of our earnings and expenditures are in currencies other than our reporting currency. In 2003, 43% of our sales were made in US dollars, 26% in Euro, 8% in Japanese yen, 4% in Swiss francs and 19% in other currencies. In 2003, 41% of our costs were generated in US dollars, 23% in Euro, 17% in Swiss francs, 4% in Japanese yen and 15% in other currencies. Changes in exchange rates between the US dollar and other currencies can result in increases or decreases in our costs and earnings. Fluctuations in exchange rates between the US dollar and other currencies may also affect the reported value of our assets measured and the components of shareholders' equity. We seek to minimize our currency exposure by engaging in hedging transactions where we deem it appropriate. To mitigate some of these risks, we have hedged certain foreign currency positions for 2004. We cannot predict, however, all changes in currency and interest rates, inflation or other factors, which could affect our international businesses.

Decreases in financial income could affect our earnings.

        In recent years, we have earned an attractive level of financial income, net, in a difficult investment environment, due to effective currency management and investment strategies. Given the volatile nature of investment markets, there can be no guarantee that such gains will be repeated in the future, or that we can avoid suffering losses from our management of our financial assets.

Changes in accounting rules could affect our reported results.

        The International Accounting Standards Board is in the process of a critical examination of current International Financial Reporting Standards with a view to increasing international harmonization of accounting rules. This process of amendment and convergence of worldwide accounting rules could result in significant amendments to the existing rules within the next two years in such areas as the timing of recognition of sales and other revenues arising from collaborative agreements with Marketing and Sales partners, accounting for share-based compensation, goodwill and intangibles, employee benefit plans, marketable securities and derivative financial instruments and classification of balance sheet positions as debt or equity. It is not possible to predict the impact on our reported results of any such rule changes which may be made in the future, or whether such rule changes would be retrospective, potentially requiring us to restate past reported results.

Changes in tax laws could adversely affect our earnings.

        Changes in the tax laws of Switzerland, the US, or other countries in which we do significant business, as well as changes in our effective tax rate for the fiscal year caused by other factors, could affect our net income. During 2003, no major tax legislation was enacted that would materially impact our net income. It is not possible to predict the impact on our results of any tax legislation which may be enacted in the future.

Changes in global economic conditions could affect our business and results of operations.

        Our future results could be affected by changes in the global economy. In the recent past, terrorist attacks have had an impact on global economic conditions. Any additional terrorist attacks which may occur in the future, and any related military activity around the world, could have a similar impact, which could affect our business and results of operations.

Public pressure on the pharmaceuticals industry could affect our business and results of operations.

        There is considerable public sentiment against the pharmaceuticals industry, and the industry is under the close scrutiny of the public and the media. In addition there is significant pressure on our industry from certain disadvantaged nations to make our products available to their people at drastically

10



lower costs. Any increase in such negative public sentiment or increase in public scrutiny or pressure from such disadvantaged nations could lead, among other things, to changes in legislation, to changes in the demand for our products, additional pricing pressures with respect to our products, or increased efforts to undercut intellectual property protections. Such changes could affect our business and results of operations.


Item 4. Information on the Company

4.A  History and Development of Novartis

        Novartis AG, headquartered in Basel, Switzerland, is a public company incorporated under the laws of Switzerland with an indefinite duration. We were created as a result of the merger of Sandoz AG and CIBA-Geigy AG in December 1996. Prior to the merger, Sandoz AG and CIBA-Geigy AG were each global participants in the pharmaceutical and agrochemical industries. In November 2000, we spun off our Crop Protection and Seeds businesses and merged them with AstraZeneca's Zeneca Agrochemicals to create Syngenta AG, a public company. We are domiciled in and are governed by the laws of Switzerland.

        Our Group companies employ approximately 78,500 associates worldwide and operate in over 140 countries. Our registered shares are listed in Switzerland on the SWX Swiss Exchange ("SWX") and traded on the European trading platform virt-x, and our American Depositary Shares are listed on the New York Stock Exchange ("NYSE"). Our shares are also traded on International Retail Service (IRS) at the London Stock Exchange. Our registered office is located at Lichtstrasse 35, 4056 Basel, Switzerland and our telephone number is 011-41-61-324-1111. We maintain an Internet website at http://www.novartis.com. In the US, Corporation Service Company (2711 Centerville Road, Suite 400, Wilmington, Delaware 19808, telephone: 1-800-927-9800) acts as our agent solely for the purpose of accepting service of process in respect of registration statements on Forms F-3 under the US Securities Act of 1933, as amended.

Major transactions in 2003, 2002 and 2001

        On December 16, 2003, we announced that our Medical Nutrition Business Unit had entered into an agreement with Bristol-Myers Squibb Company to acquire the global adult medical nutrition business of the Bristol-Myers subsidiary Mead Johnson & Company, for $385 million in cash. This agreement is currently subject to regulatory review. See "Item 4. Information on the Company—4.B Business Overview—Medical Nutrition."

        On May 8, 2003, our Pharmaceuticals Division acquired a majority ownership interest in Idenix Pharmaceuticals, Inc., for an initial payment of $255 million in cash, with up to an additional $357 million in future contingent payments to the selling stockholders if Idenix achieves certain future targets. We also obtained an option to license future products from Idenix. In each case, we may pay additional amounts to Idenix in the event the applicable drug achieves certain future targets. See "Item 4. Information on the Company—4.B Business Overview—Pharmaceuticals—Infectious Diseases—Compounds in Development."

        On April 23, 2003, our Pharmaceuticals Division acquired from Pfizer Inc. an anti-incontinence product called Enablex in certain countries and Emselex in other countries. We will pay up to $225 million for the rights to this product. Part of that amount is contingent on the approval of the new drug in the US and in the EU. See "Item 4. Information on the Company—4.B Business Overview—Pharmaceuticals—Arthritis/Bone/Hormone Replacement Therapy/Gastrointestinal Diseases/Urinary Incontinence—Compounds in Development."

        On February 11, 2003, we sold the US rights to market the tension headache products Fioricet and Fiorinal to Watson Pharmaceuticals, Inc. for $178 million.

11



        On November 29, 2002, our Sandoz Business Unit acquired more than 99% of Lek Pharmaceuticals d.d., the Slovenian generics company, for $0.9 billion in cash. In 2003, we delisted Lek from the Ljubljana Stock Exchange and acquired its remaining outstanding shares. See "Item 4. Information on the Company—4.B. Business Overview—Sandoz."

        On November 29, 2002, our Consumer Health Division divested its Food & Beverage business to Associated British Foods plc, of the United Kingdom, for $270 million in cash. See "Item 4. Information on the Company—4.B. Business Overview—Medical Nutrition." After the sale of the Food & Beverages business to Associated British Foods plc., the remaining Health Food & Slimming and Sports Nutrition businesses were reorganized as a stand-alone unit, Nutrition & Santé, which for external reporting purposes have been consolidated into our Medical Nutrition Business Unit.

        In January 2002, our Animal Health Business Unit acquired two US farm animal vaccine companies, Grand Laboratories Inc., of Iowa, and ImmTech Biologies Inc., of Kansas, for a combined minimum purchase price of $99 million, of which $78 million was settled in Novartis American Depositary Shares. The final price may increase depending on whether certain future sales and other targets are met. See "Item 4. Information on the Company—4.B. Business Overview—Animal Health."

        On May 5, 2001 we announced the acquisition of 32 million bearer shares of Roche Holding AG, representing 20% of the voting shares of that company for approximately $3.1 billion. These shares were purchased as a package from BZ Gruppe Holding AG and are intended as a financial investment of a potentially strategic nature. At December 31, 2001 we held 21.3% of the voting shares of Roche Holding AG, which represented an approximate 4% interest in the total Roche equity. During 2002, we increased our investment in Roche by $1.8 billion by acquiring a further 11.4% of the company's voting shares. At December 31, 2002, we owned 32.7% of Roche's voting shares, which represented approximately 6.2% of Roche Holding AG's total shares and equity securities. During 2003, we further increased our investment in Roche by $120 million by acquiring an additional 0.6% of the company's voting shares. At December 31, 2003, we owned just under one-third of Roche's voting shares, which represents approximately 6.3% of Roche Holding AG's total shares and equity securities.

        For a description of our principal capital expenditures and divestitures, see "Item 5. Operating and Financial Review and Prospects—5.B. Liquidity and Capital Resources."

General Corporate Initiatives

        We have undertaken a number of initiatives designed to make our management of the Group more transparent to investors and advance our corporate citizenship ideals.

        In 2003:

    We were one of seven companies to launch the Business Leaders Initiative on Human Rights. This initiative seeks to better define the role of business in human rights, and to break down some of the barriers that have kept many responsible companies from realizing their role in supporting universal human rights. By participating in this initiative, we are working to strengthen human rights within the business sector through our own operations and by supporting the work of others.

    We launched an international malaria education program, "Coartem and Malaria," developed in collaboration with the World Health Organization (WHO) in support of the effort to Roll Back Malaria. This program is intended to educate malaria victims in developing countries as to how to treat themselves with our malaria drug Coartem. This education program supports our novel product packaging, which has been specially designed to improve patient compliance in developing countries, optimizing drug response and cure rates. The innovative packaging incorporates a series of simple visual images that depict correct use of the six-dose regimen for infants, children and adults.

    We confirmed our support for the Universal Declaration of Human Rights and announced new corporate human rights guidelines to meet our public commitments under the UN Global Compact. The new guidelines define human rights as an integral part of our policy on corporate

12


      citizenship, and define specific principles related to equal opportunity and non-discriminatory treatment, rights of personal security and employee rights. They also set forth positions regarding respect for national sovereignty, respect for local communities and indigenous peoples, and the protection of intellectual property and technology transfer.

    Our Infant & Baby Business Unit completed and shared the results of the Feeding Infants and Toddlers Study (FITS), a dietary intake survey of the eating habits and nutrient intakes of a cross-sectional, random sample of more than 3,000 US children ranging from 4 to 24 months of age. Our affiliate Gerber Products Company commissioned the survey in response to the growing obesity epidemic in the US, in order to better understand eating habits early in life when they are being formed. FITS is the largest scientific study of its kind ever conducted and fills a critical gap in knowledge. The findings, which have been published, will inform and provide insights to help health professionals develop more effective educational messages. Effective educational efforts that help parents and caregivers teach healthy eating habits early in life can help prevent obesity and chronic diseases in our next generation.

        In 2002:

    We became the first major pharmaceuticals company to create internal ethical guidelines regarding the use of human stem cells in research, and we established a six-member Ethics Committee, chaired by a Professor of Ethics from the Swiss Federal Institute of Technology, to monitor global compliance with these guidelines.

    We introduced three changes to our Articles of Incorporation intended to enhance shareholders' rights: The deadline for submitting agenda items prior to a General Meeting of the shareholders was reduced from 60 to 45 days; shareholders were given the option of conducting electronic voting during the General Meeting; and Directors' terms of office were reduced from four to three years.

    We issued Guidelines to our associates to assist them in integrating our Corporate Citizenship Policy into their daily activities.

    In the US, together with other leading pharmaceutical companies, we issued the Together Rx Card which provides discounts on a broad range of pharmaceuticals from many manufacturers. The total volume of discounts provided by us under the Together Rx Card program amounted to about CHF 40 million (then worth about $26 million) in 2002. In 2003, the program's total enrollment exceeded the one million mark.

        In 2001:

    We created a Board-level committee to develop and implement sound corporate governance principles.

    We gave the Board's Audit and Compliance Committee additional responsibility to monitor our compliance with law and policy.

    We instituted a new Policy of Corporate Citizenship which sets the framework for our commitment to making corporate citizenship an integral aspect of our business.

    We created a patient assistance program to help people with limited financial means to afford Gleevec/Glivec, our innovative oncology medication.

    In collaboration with the WHO, we announced a plan to stem the spread of malaria in Africa and other endemic regions in the developing world. As part of a world-wide initiative entitled "Roll Back Malaria," we are providing specially designed packs of Coartem, our novel malaria treatment, for distribution through WHO at cost.

    We established the Novartis Institute for Tropical Diseases in Singapore to target tropical diseases, including Dengue fever, and infections like tuberculosis.

13


    In the US, we instituted the Novartis CareCard program to assist low income elderly to obtain the Novartis medications they need at significant discounts.

    We split our shares 40 for 1 so that there is now a 1:1 share-to-ADS ratio.

        As part of our commitment to focus not just on our business, but on the business of being a responsible member of the global community, we have continued initiatives like the Novartis Community Partnership Day where all our employees around the world are encouraged, for one day each year, to give time back to the communities in which we operate.

4.B  Business Overview

General

        We are a world leader both in sales and in innovation in our core businesses: pharmaceuticals and consumer health, which includes generics, OTC self-medication, animal health, medical nutrition, infant and baby foods and products, and eyecare products. We aim to hold a leadership position in all of these businesses. We are committed to improving health and well-being through innovative products and services. The name "Novartis" is derived from the Latin novae artes, meaning "new skills," which reflects our focus on research and development.

Product Areas and Geographic Markets

        We are organized into two Divisions: Pharmaceuticals and Consumer Health. In 2002, the Consumer Health Division was reorganized to include our Sandoz generics, OTC self-medication, Animal Health, Medical Nutrition (including our Nutrition & Santé unit), Infant & Baby and CIBA Vision Business Units. The following tables set forth the Group's sales and operating income by Division or Business Unit for the years ended December 31, 2003, 2002 and 2001. Our Pharmaceuticals Division is further divided into Business Units. However, because the Pharmaceuticals Business Units have common long-term economic perspectives, common customers, common research, development, production and distribution practices, and a common regulatory environment, their financial data are not required to be separately disclosed.

14


 
  Year Ended December 31,
 
 
  2003
  2002
  2001
 
 
  (in $ millions)

 
Sales to third parties              
Pharmaceuticals   16,020   13,528   11,965  
   
 
 
 
  Sandoz   2,906   1,817   1,444  
  OTC   1,772   1,521   1,507  
  Animal Health   682   623   570  
  Medical Nutrition   815   711   661  
  Infant & Baby   1,361   1,333   1,319  
  CIBA Vision   1,308   1,135   1,059  
   
 
 
 
Consumer Health—ongoing   8,844   7,140   6,560  
Divested Health & Functional Food activities       209   237  
   
 
 
 
Consumer Health   8,844   7,349   6,797  
   
 
 
 
Group sales   24,864   20,877   18,762  
   
 
 
 

Operating income

 

 

 

 

 

 

 
Pharmaceuticals   4,423   3,891   3,377  
   
 
 
 
  Sandoz   473   265   166  
  OTC   309   240   268  
  Animal Health   88   92   82  
  Medical Nutrition   82   4   51  
  Infant & Baby   254   227   230  
  CIBA Vision   153   118   102  
  Divisional Management   (39 )        
   
 
 
 
Consumer Health—ongoing   1,320   946   899  
Divested Health & Functional Food activities       140   (4 )
   
 
 
 
Consumer Health   1,320   1,086   895  
Corporate and other income/expense   146   115   53  
   
 
 
 
Group operating income   5,889   5,092   4,325  
   
 
 
 

15


        The table below sets forth a regional breakdown of certain data for the years ended December 31, 2003, 2002 and 2001.

 
  Americas
  Europe
  Asia/Africa/Australia
 
  2003
  2002
  2001
  2003
  2002
  2001
  2003
  2002
  2001
 
  (in $ millions, except numbers of employees)

Sales   12,036   10,558   9,666   8,788   6,832   5,992   4,040   3,487   3,104
Operating income   897   958   1,327   4,505   3,825   2,663   487   309   335
Number of employees (at December 31)   28,608   28,328   27,303   37,510   32,595   31,386   12,423   11,954   12,427
Investment in tangible fixed assets   427   537   429   846   498   332   56   33   40
Depreciation of tangible fixed assets   220   198   184   480   355   333   37   39   40
Net operating assets   5,984   6,312   6,084   16,271   14,086   10,168   975   965   945

   
PHARMACEUTICALS

        The business of our Pharmaceuticals Division is conducted by approximately 80 affiliated companies in more than 140 countries. We are a world leader in the discovery, development, manufacture and marketing of prescription medicines. Our goal is to provide a broad portfolio of effective and safe products to patients through healthcare professionals around the world. As of December 31, 2003, the affiliated companies of our Pharmaceuticals Division employed 44,640 associates worldwide. In 2003, the affiliates of our Pharmaceuticals Division achieved consolidated sales of $16.0 billion, which represented 64% of the Group's total sales.

        Our product portfolio includes a wide range of products in eight major disease areas: (i) cardiovascular/metabolism/endocrinology; (ii) oncology/hematology; (iii) neuroscience; (iv) transplantation/immunology; (v) respiratory/dermatology; (vi) arthritis/bone/hormone replacement therapy/gastrointestinal/urinary incontinence, (vii) infectious diseases, (viii) ophthalmics. Our Pharmaceuticals Division is organized into five Business Units: Primary Care, Oncology, Transplantation, Ophthalmics and Mature Products. The Business Units coordinate the worldwide research, distribution, marketing and sales of the products assigned to each. Because the Business Units of the Pharmaceuticals Division have common long-term economic perspectives, common customers, common research, development, production and distribution practices, and a common regulatory environment, their financial data are not required to be separately disclosed. On January 1, 2001, Pharmaceuticals Division took over responsibility for operating the ophthalmic pharmaceutical business previously managed by the CIBA Vision Business Unit of our Consumer Health Division.

        The current product portfolio includes more than 40 key marketed products. In addition, the Development portfolio includes more than 75 projects—involving potential new products and potential additional indications or formulations for existing products—in various stages of development. See "—Research and Development." Our pre-clinical portfolio—compounds which have not yet entered into Phase I of development—consists of more than 45 projects.

16


Key Marketed Products

        The following table describes the key marketed products of our Pharmaceuticals Division, in alphabetical order, by therapeutic area. Not all products are registered in all markets for all of the indications described below.


Therapeutic
area

  Compound

  Generic name

  Indication

  Formulation

Cardiovascular,
metabolism and
  Lotensin/
Cibacen
  benazepril hydrochloride   Hypertension   Coated tablet
endocrinology  
    Lotensin   benazepril hydrochloride &   Hypertension   Coated tablet
    HCT/Cibadrex   hydrochlorothiazide   Adjunct therapy in heart
failure
Progressive chronic renal
insufficiency
   
   
    Co-Diovan/
Diovan HCT
  valsartan &
hydrochlorothiazide
  Hypertension   Film-coated tablet
   
    Diovan   valsartan   Hypertension
Congestive Heart Failure
  Capsule, film-
coated tablet
   
    Lescol/
Lescol XL
  fluvastatin sodium   Primary
hypercholesterolemia and
mixed dyslipidemia
Secondary prevention of
coronary events
Slowing the progression of
atherosclerosis
Increase of high-density
lipoprotein cholesterol
(HDL-C)
  Capsule, tablet
   
    Lotrel   amlodipine besylate &
benazepril
hydrochloride
  Hypertension   Capsule
   
    Starlix   nateglinide   Type-II diabetes   Tablet

Oncology and
hematology
  Femara   letrozole   Advanced post-menopausal
breast cancer
  Coated tablet
   
    Gleevec/Glivec   imatinib mesylate
/imatinib
  Chronic myeloid leukemia
Gastrointestinal stromal
tumors
  Tablet (US), capsule
(EU, Japan)
   
    Sandostatin LAR/
Sandostatin SC
  octreotide acetate for
injectable suspension
octreotide acetate
  Acromegaly
Symptoms associated with
functional gastroenteropancreatic
endocrine tumors,
complication following
pancreatic surgery
  Vial, ampoule/pre-
filled syringe
   
    Zometa   zoledronic acid   Hypercalcemia of
malignancy
Prevention of
skeletal-related events in
patients with bone
Metastases from solid
tumors
  Liquid Concentrate,
vial

17


Neuroscience   Comtan   entacapone   Parkinson's disease   Coated tablet
   
    Exelon   rivastigmine tartrate   Alzheimer's disease   Capsule, oral solution
   
    Focalin   dexmethylphenidate HCl   Attention-deficit
hyperactivity disorder
  Tablet
   
    Clozaril/Leponex   clozapine   Treatment-resistant
schizophrenia
Prevention and treatment of
recurrent suicidal
behavior in patients with
schizophrenia and
schizoaffective disorder
  Tablet
   
    Ritalin/
Ritalin LA
  methylphenidate HCl   Attention-deficit
hyperactivity disorder
  Tablet, capsule
   
    Stalevo   carbidopa, levodopa &
entacapone
  Parkinson's disease   Coated tablet
   
    Tegretol   carbamazepine   Epilepsy
Acute and bipolar affective
disorders
Treatment of pain
associated with
trigeminal neuralgia
  Tablet, chewable
tablet, syrup,
suppository
   
    Trileptal   oxcarbazepine   Epilepsy, including pediatric
monotherapy
  Tablet, oral
suspension

Transplantation and   Certican   everolimus   Prevention of organ rejection   Tablet, tablet for oral suspension
immunology  
    myfortic   mycophenolate sodium   Prevention of graft
rejection following kidney transplantation
  Tablet
   
    Neoral   cyclosporine, USP
modified
  Prevention of graft
rejection following organ
and bone marrow
transplantation
Severe psoriasis
Rheumatoid arthritis
  Capsule, oral solution
   
    Sandimmune   cyclosporine, USP   Prevention of graft
rejection following organ
and bone marrow
transplantation
  Capsule, oral
solution, concentrate
for intravenous
infusion
   
    Simulect   basiliximab   Acute organ rejection in de
novo renal
transplantation
Atopic dermatitis (eczema)
Uveitis
Nephrotic syndrome
  Vial

18


Respiratory   Elidel   pimecrolimus cream   Atopic dermatitis (eczema)   Cream
and  
dermatology   Foradil   formoterol   Asthma
Chronic obstructive
pulmonary disease
  Aeroliser
(capsules) &
aerosol
   
    Lamisil   terbinafine   Fungal infections of the
skin and nails
  Tablet, cream,
DermGel, solution,
spray
   
    Xolair   omalizumab   Allergic asthma   Subcutaneous
injection

Arthritis,
bone, hormone
replacement
therapy,
gastrointestinal
diseases and
  Combipatch/Estalis   estradiol norethisterone acetate   Symptoms of estrogen
deficiency in
post-menopausal
women
Post-menopausal
osteoporosis
  Patch
urinary  
incontinence   Estraderm/   estradiol   Symptoms of estrogen   Patch
    Estraderm MX       deficiency in
post-menopausal
women
Post-menopausal
osteoporosis
   
   
    Estragest
TTS
  estradiol norethisterone acetate   Symptoms of estrogen
deficiency in
post-menopausal
women
Post-menopausal
osteoporosis
  Patch
   
    Miacalcin/Miacalcic   salmon calcitonin   Osteoporosis
Paget's disease
Hypercalcemia
  Nasal spray,
ampoule, vial
   
    Vivelle-Dot/Estradot   estradiol   Symptoms of estrogen
deficiency in
post-menopausal
women
Post-menopausal
osteoporosis
  Patch
   
    Voltaren   diclofenac   Inflammatory forms of
rheumatism
Pain management
  Coated tablet,
drop, ampoule,
suppository, gel
   
    Zelnorm/Zelmac   tegaserod maleate/ tegaserod   Irritable bowel
syndrome with
constipation
  Tablet

19


Infectious
diseases
  Famvir   famciclovir   Acute herpes zoster
Recurrent genital
herpes in
immunocompetent
patients
Recurrent
mucocutaneous
herpes simplex
infections in HIV-
infected patients
  Tablet
   
    Coartem/Riamet   artemether & lumefantrine   Treatment of
Plasmodium
falciparum malaria
or mixed infections
that include
Plasmodium
falciparum
Standby emergency
malaria
treatment
  Tablet

Ophthalmics   Dry Eye products   hydroxypropylmethylcellulose
povidone
carbomer
  Dry eye   Eye drops, gel
   
    Visudyne   verteporfin   Wet form of
age-related macular
degeneration
(AMD)
  Vial, activated by
laser light
   
    Zaditor/Zaditen   ketotifen   Allergic conjunctivitis   Eye drops

        Not all products are registered in all markets for all of the indications described above.

20


Compounds in Development

        The following table describes our most important compounds and new indications for our existing products presently under development. "Filed" means that product registration documents have been filed with the FDA, with regulatory authorities in the EU (by either the centralized or mutual recognition procedure), and/or with national health authorities in Europe, but not necessarily in all jurisdictions.


Therapeutic
area

  Compound

  Generic name

  Indication

  Estimated Filing
Date/Current
Phase(1)

Cardiovascular,
metabolism and
endicrinology
  Lotrel   amlodipine
besylate/benazepril
hydrochloride
  Hypertension (5-40 and
10-40)
  US Filed
           
            High risk hypertension
(ACCOMPLISH)
  ³2007/III
   
    Diovan   valsartan   Congestive heart failure   US Approved,
EU Filed
           
            Post-myocardial infarction
(VALIANT)
  US/EU Filed
           
            High risk hypertension
(VALUE)
  2005/III
   
    Sandostatin LAR   octreotide acetate   Diabetic retinopathy, other indications   2005/III
   
    Starlix/Diovan   nateglinide & valsartan   Prevention of onset of
Type-II diabetes/cardiovascular
morbidity & mortality
  >2005/III
   
    LAF237   To be determined
("TBD")
  Type-II diabetes   2006/II
   
    NKS104   pitavastatin   Dyslipidemia   ³2007/II
   
    SPP100   aliskiren   Hypertension   2005/II

21


Oncology and hematology   Zometa   zoledronic acid   Hypercalcemia of
malignancy
  Japan Filed
   
    Femara   letrozole   Breast cancer
(extended adjuvant
therapy)
  2004/III
           
            Breast cancer (early
adjuvant therapy)
  2005/III
   
    ICL670   TBD   Chronic iron overload   2005/III
   
    PTK787   vatalanib   Solid tumors   2005/III
   
    EPO906   epothillone B   Solid tumors   ³2007/II
   
    OctreoTher   edotreotide   Somatostatin receptor
positive tumors
  TBD/II
   
    PKC412   midostaurin   Acute myeloid
leukemia
  2006/II
   
    SOM230   TBD   Acromegaly/GEP
neuroendocrine
tumors
  >2005/II
   
    Gleevec/Glivec   imatinib mesylate/
imatinib
  Solid tumors   TBD/II
   
    LBQ707   gimatecan   Solid tumors   ³2007/II
   
    RAD001   everolimus   Solid tumors   ³2007/II
   
    LAQ824   TBD   Solid & liquid tumors   ³2007/I
   
    XAA296   TBD   Solid tumors   ³2007/I
   
    LBH589   TBD   Solid & liquid tumors   ³2007/I
   
    AEE788   TBD   Solid tumors   ³2007/I
   
    ABJ879   TBD   Solid tumors   ³2007/I

22


Neuroscience   Focalin LA   methylphenidate   Attention deficit
hyperactivity disorder
  2004/III
   
    Exelon Transdermal   rivastigmine tartrate   Alzheimer's disease   >2006/III
   
    Trileptal NP   oxcarbazepine   Neuropathic pain   TBD/III
   
    Exelon   rivastigmine tartrate   Non-Alzheimer's
dementia
  TBD/III
   
    ILO522   iloperidone   Schizophrenia   TBD/III
   
    AMP397   TBD   Epilepsy   >2007/II
   
    SAB378   TBD   Chronic pain   ³2007/II
   
    LIC477   licarbazepine   Bipolar disorder   ³2007/II
   
    TCH346   TBD   Parkinson's disease,   ³2007/II
           
            Amyotrophic lateral
sclerosis
  ³2007/II
   
    FTY720   TBD   Multiple sclerosis   ³2007/II
   
    AEP924   TBD   Depression   ³2007/I
   
    AAG561   TBD   Anxiety/depression   >2005/I
   
    XBD173   TBD   Anxiety   ³2007/I

23


Transplantation
and immunology
  Certican   everolimus   Prevention of organ
rejection
  EU approved/US Filed
   
    myfortic   mycophenolate soldium   Prevention of organ
rejection
  US/EU Filed
   
    FTY720   TBD   Transplantation   2005/III

Respiratory and
dermatology
  Foradil   formoterol   Multi-dose dry powder
inhaler in asthma
  US/EU Filed
   
    Xolair   omalizumab   Allergic asthma   US approved/EU
2004/III
   
    Lamisil   terbinafine   New oral formulation   2004/III
           
            Tinea capitis   TBD/III
   
    Elidel Ointment   pimecrolimus   Inflammatory skin
diseases
  2006/II
   
    ASM981   pimecrolimus oral   Inflammatory skin
diseases
  TBD/II
   
    QAB149   TBD   Asthma, chronic
obstructive pulmonary
disease
  ³2007/II
   
    ASM981   pimecrolimus   Asthma   TBD/II
   
    ACZ885   TBD   Asthma   ³2007/I
   
    VAG624   TBD   Acne   ³2007/I
   
    Foradil/mometasone   formoterol/mometasone   Asthma, chronic
obstructive
pulmonary disease
  ³2007/I

24


Arthritis, bone,
hormone
replacement therapy,
gastrointestinal diseases and urinary incontinence
  Prexige   lumiracoxib   Osteoarthritis,
rheumatoid arthritis,
chronic pain, primary
dysmenorrhea
  UK approved/US TBD/III
            New formulations (oral
suspension;
parenteral)
  TBD/I
   
    Enablex/Emselex   darifenacin   Overactive bladder   US/EU Filed
   
    Zelnorm/Zelmac   tegaserod
maleate/tegaserod
  Irritable bowel
syndrome
  US Approved,
EU 2004/III

 

 

 

 

 

 

Chronic constipation

 

US Filed

 

 

 

 

 

 

Functional dyspepsia

 

2005/II
            Gastroesophageal
reflux disease
  2006/II
   
    Zoledronic acid
(ZOL446)
  zoledronate acid   Paget's disease   2004/III
            Post-menopausal
osteoporosis
  ³2007/III

 

 

 

 

 

 

Rheumatoid arthritis

 

³2007/II
   
    AAE581   TBD   Osteoporosis   ³2007/II
   
    RGN303   TBD   Rheumatoid arthritis   ³2007/II
   
    RAD001   everolimus   Rheumatoid arthritis   ³2007/II
   
    SMC021   calcitonin   Osteoporosis   TBD/II
   
    ABN912   TBD   Rheumatoid arthritis   ³2007/I
   
    AKU517   TBD   Gastroesophageal reflux
disease
  ³2007/I

25


Infectious diseases   LDT600   telbivudine   Hepatitis B   2005/III
   
    LDC300   valtorcitabine   Hepatitis B   2006/II
   
    LBM415   TBD   Anti-bacterial   ³2007/I

Ophthalmics   Visudyne   verteporfin   Age-related macular
degeneration (occult)
  2006/III

 

 

 

 

 

 

Age-related macular
degeneration
(minimally classic)

 

³2007/III
   
    Lucentis™   ranibizumab   AMD   ³2007III
   
    PIR335   pirenzepine   Myopia   ³2007/II
   
    Elidel   pimecrolimus   Dry Eye   ³2007/II

(1)
Phase I: Clinical trials in healthy volunteers to determine safety and tolerability. Phase II: Clinical trials in patients to determine dose ranging, safety and efficacy. Phase III: Large clinical trials to determine definitive safety and efficacy in patients.

        The tables shown above and the summary that follows describe each of our Pharmaceuticals Division's eight key therapeutic areas. Unless otherwise indicated, and subject to required regulatory approvals and, in certain instances, contractual limitations, our intention is to sell the key marketed products throughout the world. These same compounds are in various stages of development throughout the world. For some compounds, the development process is ahead in the US, for other compounds, development is behind in the US. Due to the uncertainties associated with the development process, and due to regulatory restrictions in some countries, including the US, it may not be possible to obtain registration of compounds in development for any or all of the indications referred to in this Form 20-F.

Cardiovascular/Metabolism/Endocrinology

        Our Pharmaceuticals Division markets a wide range of products for the treatment of cardiovascular disease, including products for the treatment of hypertension, hyperlipidemia, angina pectoris and heart failure. Ongoing research is focused on the development of innovative new agents to treat metabolic disorders, such as Type-II diabetes, which are associated with serious cardiovascular events, including peripheral vascular disease, diabetic retinopathy, nephropathy, stroke and myocardial infarction.

Key Marketed Products

    Lotensin/Cibacen (benazepril hydrochloride) and Lotensin HCT/Cibadrex (benazepril hydrochloride & hydrochlorothiazide) are ACE-inhibitors indicated for the treatment of hypertension. In addition, Lotensin/Cibacen is registered as adjunct therapy in heart failure and for treatment of Progressive Chronic Renal Insufficiency in certain countries.

    Diovan (valsartan) and Co-Diovan/Diovan HCT (valsartan & hydrochlorothiazide) are pioneering entrants in the angiotensin II receptor blockers (ARBs) class of antihypertensive agents. The ARBs have proven to be a key growth class of drugs within the antihypertensive market. The fixed combination product, Co-Diovan, provides additional antihypertensive efficacy for patients who require a greater reduction in blood pressure than can be achieved with monotherapy. In the US, Diovan is approved to treat congestive heart failure in patients who are intolerant of angiotensin-converting-enzyme (ACE) inhibitors. Diovan is the first ARB to obtain an indication beyond hypertension.

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    Lescol/Lescol XL (fluvastatin sodium) is a lipid-lowering agent for the treatment of primary hypercholesterolemia and mixed dyslipidemia, secondary prevention of coronary events, slowing the progression of atherosclerosis, and increasing high-density lipoprotein cholesterol (HDL-C). Lescol XL 80 mg is an extended-release line extension of the Lescol 20 and 40 mg immediate-release capsules. Lescol XL effectively treats the entire lipid profile—LDL, HDL and triglycerides. Lescol XL was successfully introduced in major markets during the years 2000-02.

    Lotrel (benazepril-amlodipine) is a fixed combination of the ACE-inhibitor benazepril and a leading calcium antagonist (amlodipine). It is marketed only in the US.

    Starlix (nateglinide) is a pioneering member of a class of drugs for the treatment of patients with Type-II diabetes, also known as adult-onset diabetes. The drug aims to restore the early phase of insulin release which helps control blood glucose levels at mealtime. We licensed the compound from Ajinomoto, and own marketing rights for the drug worldwide, except for Japan and several other Asian markets. A fixed combination product of Starlix and rosiglitazone was approved by FDA in 2003.

    Compounds in Development

    Diovan (valsartan) has been approved for congestive heart failure in the US and filed for this indication in the EU. Diovan is the first ARB to have demonstrated positive clinical benefits in heart failure in a large scale trial. The product has been filed for post-myocardial infarction, and is in further development for high-risk hypertension (Phase III) and prevention of diabetes and cardiovascular disease in patients with impaired glucose tolerance (IGT). Diovan is currently being investigated alone and in combination with Starlix (nateglinide). In the NAVIGATOR (Nateglinide and Valsartan in Impaired Glucose Tolerance and Outcomes Research) trial, initiated in November 2001, 9,179 patients aged 50 years or older have been recruited for treatment with Diovan and/or Starlix to examine the effect on progression from IGT to Type-II diabetes after 3 years, as well as on cardiovascular morbidity and mortality in this high-risk patient population. Results on the cardiovascular endpoint are expected to be available in 2007/08.

    Lotrel (amlodipine besylate & benazepril hydrochloride) has two new dosages for hypertension (Lotrel 5-40 and Lotrel 10-40). A product registration file for these additional dosages has been submitted to the FDA in the US, which issued an approvable letter. We expect to launch these new dosages in the second half of 2004. In addition, in the ACCOMPLISH trial, which began in October 2003, more than 12,000 patients are being treated with Lotrel or with benazepril hydrochloride and hydrochlorothiazide, to investigate cardiovascular morbidity and mortality in patients with high risk hypertension.

    Sandostatin LAR (octreotide acetate) is in development for diabetic retinopathy (Phase III). This condition affects approximately 15% of patients with diabetes and is one of the leading causes of blindness in people of working age. Currently there are no effective drugs available to treat diabetic retinopathy.

    Starlix (nateglinide) is currently being investigated in combination with Diovan. See discussion above.

    LAF237 is a DPP4 inhibitor in Phase II development for the treatment of Type-II diabetes. Blocking the action of the enzyme DPP4 has been shown to improve glycemic control by increasing GLP-1 levels (a peptide that augments glucose-induced insulin secretion and also affects other aspects of glycemic control). Phase I studies have shown that once-a-day dosing maintains DPP-IV activity below the levels believed to be needed to increase GLP-1 activity sufficiently for a therapeutic effect. Phase IIB studies have shown that LAF237 is efficacious both as monotherapy and in combination with metformin, as well as showing a good safety and tolerability profile.

27


    NKS104 (pitavastatin) is a lipid-lowering agent, in development for the treatment of dyslipidemia. We have European marketing rights to pitavastatin under a license from Kowa. Clinical trials to date have shown that NKS104 lowers LDL cholesterol and triglycerides while increasing HDL cholesterol levels. The compound is in Phase II.

    SPP100 (aliskiren) is an orally effective renin inhibitor being developed for the treatment of hypertension and other cardiovascular indications. Blood pressure lowering effects have been demonstrated in Phase II trials, with no significant adverse events observed. The compound was out-licensed to Speedel, but we exercised an option to license the product back in June 2002. As a result, we have global rights to develop and commercialize this compound.

Oncology and Hematology

        The Oncology and Hematology disease area is a rapidly growing and increasingly important specialty segment. We market products for the treatment of a number of different cancers and for cancer complications, including advanced malignancies involving bone. Research and development in this disease area is aimed at the discovery and development of innovative approaches to the treatment of cancer, focusing in particular on the major forms of solid tumors (breast, prostate, lung, colorectal and ovarian cancer), which account for approximately 50% of all deaths from cancer. In addition, compounds are being developed for the treatment of other forms of oncologic and hematologic conditions.

    Key Marketed Products

    Femara (letrozole) is an oral aromatase inhibitor for first-line treatment of postmenopausal women with hormone receptor positive or hormone receptor unknown locally advanced or metastatic breast cancer. It is also approved for the treatment of advanced breast cancer in postmenopausal women with disease progression following antiestrogen therapy, and as neo-adjuvant (pre-operative) therapy. Femara is currently available in more than 75 countries worldwide.

    Gleevec/Glivec (imatinib mesylate/imatinib) is a signal transduction inhibitor, which in 2003 gained approval in Japan for the treatment of certain forms of gastrointestinal stromal tumors (GIST). It received approval for this indication in the US and EU in 2002. This is the second form of cancer which this drug has been approved to treat. Gleevec/Glivec was originally approved in 2001 for the treatment of patients with chronic myeloid leukemia (CML) in the blast crisis, accelerated phase or in chronic phase after failure of interferon-alpha therapy. The CML indication was expanded by the FDA (in December 2002) and the EU (in January 2003) to permit Gleevec/Glivec to be used to treat newly diagnosed patients with CML.

    Sandostatin SC/Sandostatin LAR (octreotide acetate) is a synthetic octapeptide derivative of the hormone somatostatin indicated for the treatment of pancreatic and gastrointestinal endocrine tumors, acromegaly, and acute variceal bleeding. Sandostatin SC is subject to near-term patent expirations. However, patent protection continues in major markets for Sandostatin LAR, which represents a significant and growing proportion of our octreotide sales. See "—Intellectual Property." Sandostatin LAR is a long-acting release formulation (once every 28 days) approved for the control of symptoms such as the severe diarrhea and flushing associated with metastatic carcinoid tumors, and the severe diarrhea associated with vasoactive intestinal polypeptide secreting tumors. It also is indicated for the treatment of acromegaly.

    Zometa (zoledronic acid) is a potent third-generation bisphosphonate to treat hypercalcemia of malignancy, as well as to prevent skeletal-related events in patients with bone metasteses from solid tumors. It is administered as an infusion of 4 mg over 15 minutes. In 2002, Zometa received approval in most key markets for prevention of skeletal related events in patients with advanced malignancies involving bone. These tumor types include prostate cancer, breast cancer, lung cancer, and multiple myeloma.

28


    Compounds in Development

    Zometa (zoledrenic acid) is the subject of a product registration filing which has been submitted to the regulatory authorities in Japan for the treatment of hypercalcemia of malignancy, an indication approved in the US and EU in 2001. The prevention of bone metasteses project has been terminated.

    Femara (letrozole) is in Phase III development for extended adjuvant therapy in the treatment of breast cancer. Interim results from the first study to explore post-tamoxifen use of Femara in postmenopausal women with early breast cancer showed reduced risk of recurrence (43%) and significantly improved disease-free survival. We expect to file the results of this study with regulatory authorities in 2004. A second phase III study testing early adjuvant use of Femara is ongoing and results are expected by late 2004 and are expected to be filed in early 2005.

    ICL670 is an iron chelator currently in Phase III clinical development. It was designed to enhance patient acceptance of chelation treatment. Iron accumulation resulting from red blood cell lysis can lead to organ damage and, ultimately, death. ICL670 has been shown preclinically and clinically to efficiently induce iron excretion. Bioavailability has been demonstrated orally. Recently published clinical data (American Society of Hematology 2002) demonstrate the clinical effectiveness of ICL670 in achieving negative iron balance. The goal is to make iron chelation therapy more practical for patients with chronic iron overload.

    PTK787 (vatalanib) is a new molecular entity with a novel mechanism of action, which inhibits tumor growth and the development of metastases through inhibition of tumor vascularization. It is expected to be clinically effective as an oral anti-angiogenic agent, in particular in combination with standard therapies against a broad range of tumor types. No significant toxicities are expected at efficacious doses that would preclude chronic administration. PTK787 is in Phase III development, and has shown no significant toxicity to date. The compound is being developed in collaboration with Schering AG of Germany.

    EPO906 (epothilone B), a novel tubulin polymerizing compound, is a cytotoxic with a similar mechanism of action as Taxol® (paclitaxel). The taxane segment is the largest cytotoxic market segment in oncology. Preclinically, epothilone B has shown more potency than paclitaxel and more activity in paclitaxel resistant tumors. Responses have been observed in Phase I in several solid tumors and it is now in Phase II clinical development. Dose limiting toxicity is diarrhea. Significant myelosuppression has not been reported to date.

    OctreoTher (edetreotide) is a peptide hormone analogue that carries a radioactive element specific to somatostatin receptor positive malignant cells and is in phase II trials for the treatment of solid tumors.

    PKC412 (midostaurin) is a protein kinase inhibitor (FLT3 inhibitor) which is in development for the treatment of acute myeloid leukemia. Pilot studies have shown biological activity in more than 70% of patients with FLT3 mutations who were treated with PKC412 as a single agent therapy. PKC412 is currently in Phase II. New clinical studies will investigate PKC412 in combination with chemotherapy to determine if responses of longer duration can be achieved.

    SOM230 is a somatostatin analog with a higher receptor affinity to sst 1, 2, 3 and 5 than currently marketed products. In addition, compared to currently available somatostatin analogs, the SOM230 in vitro and in vivo data indicates a more effective and selective inhibition of GH secretion, and thus a unique hormone inhibitory profile. It provides longer lasting IGF-1 suppression across species and a longer half life of (t1/2) 23 hours. SOM230 Phase II trials in acromegaly, Cushing's disease and GEP tumors were initiated in 2002.

    Gleevec/Glivec (imatinib mesylate/imatinib) is being studied as a potential treatment of solid tumors primarily as part of a combination therapy. Preclinical data has shown that Gleevec/Glivec enhances the effect of chemotherapy in animal models. Phase II trials are in progress in the

29


      following cancers: hormone refractory prostate cancer, Kit positive Acute Myeloid Leukemia, Glioblastoma Multiforme and refractory metastatic gastrointestinal stromal tumors.

    LBQ707 (gimatecan) has been licensed-in from Sigma-Tau. This is a novel oral topoisomerase I inhibitor which is a second generation camptothecin derivative. Preclinical data have shown greater potency than topotecan or irinotecan and activity in cell lines resistant to topotecan and irinotecan. Confirmed partial responses have been seen in phase I studies in non-small cell lung cancer, breast cancer and colorectal cancer. It is now in phase II development for the treatment of solid tumors.

    RAD001 (everolimus) is an mTOR pathway inhibitor and is in Phase II development for the treatment of solid tumors. RAD001 is an orally available rapamycin derivative. Experiments have shown it to possess antiproliferative properties in a wide range of tumor models through its inhibition of the mTOR protein kinase. This makes it an attractive candidate for a broad range of cancer indications both as a single agent, and as part of combination therapies.

    LAQ824 is a histone deacetylase inhibitor in Phase I development for the treatment of solid tumors.

    XAA296 is a microtubule stabilizer in Phase I development for the treatment of solid tumors.

    LBH589 is a histone deacetylase inhibitor in Phase I development for the treatment of solid tumors.

    AEE788 is a dual Erb-B and VEGF receptor inhibitor in phase I development for the treatment of solid tumors.

    ABJ879 is a microtubule stabilizer in Phase I development for the treatment of solid tumors.

Neuroscience

        Our Pharmaceuticals Division markets a broad range of products for neurological diseases, including agents to treat patients with schizophrenia, epilepsy, Parkinson's disease, Alzheimer's disease, and attention-deficit hyperactivity disorder (ADHD). Ongoing research to extend the current product portfolio in this disease area includes projects in psychiatric disease (psychoses, depression, and anxiety), neurological disorders (epilepsy, Parkinson's disease, and Alzheimer's disease) and chronic pain.

    Recently Launched Products

    Stalevo (carbidopa, levodopa & entacapone) treats Parkinson's disease by both enhancing the recognized "gold standard" levodopa through combination with both carbidopa and entacapone, and by aiding patient compliance through simplified dosing. Stalevo is licensed from Orion Pharma. Orion retains exclusive rights to market Stalevo in certain European countries.

    Key Marketed Products

    Comtan (entacapone) treats Parkinson's disease by enhancing the action of levodopa, the standard therapy for Parkinson's disease. The compound is licensed from Orion Pharma. Orion retains exclusive rights to market Comtan under a different brand name in certain European countries.

    Exelon (rivastigmine tartrate) is a therapy for the treatment of patients with mild to moderate Alzheimer's disease. Exelon has been approved in all major markets, including the US and the 15 member-states of the EU.

    Focalin (dexmethylphenidate HCl) is the single isomer version of methylphenidate and is approved in the US for the treatment of ADHD. This compound is licensed from Celgene Corporation.

30


    Clozaril/Leponex (clozapine) is a neuroleptic agent used in treatment-resistant schizophrenia and the prevention of suicidal behavior in patients with schizoaffective disorders. It is experiencing competition from generic competitors in many markets, including the US.

    Ritalin LA (methylphenidate HCl) has been approved in a number of countries throughout the world (including the US), for the treatment of ADHD, and further approvals are expected. Ritalin LA is a once-daily formulation of Ritalin (methylphenidate HCl) which eliminates the need for a mid-day dose during school. Ritalin LA uses SODAS™ technology, a proprietary drug delivery technology under a license from Elan.

    Tegretol (carbamazepine) has long been a mainstay for the treatment of epileptic seizures. It is also indicated for the treatment of pain associated with trigeminal neuralgia and, in certain countries, for the treatment of acute and bipolar affective disorders.

    Trileptal (oxcarbazepine) is an anti-epileptic drug for the treatment of partial seizures as adjunctive or monotherapy in both adults and children (over 4 years of age).

    Compounds in Development

    Focalin LA (dexmethylphenidate HCl) is the single isomer version of methylphenidate. A long-acting formulation is in Phase III development for the treatment of ADHD. This compound is licensed from Celgene. Focalin LA uses SODAS™ technology, a proprietary drug delivery technology under a license from Elan.

    Exelon (rivastigmine tartrate) is in development for additional indications and formulations. Exelon is being investigated in Phase III trials for the treatment of non-Alzheimer's dementia. A transdermal formulation, Exelon TDS, is in Phase III development for Alzheimer's disease, and is aimed at increasing compliance and the tolerability of the therapy.

    Trileptal NP (oxcarbazepine) is in Phase III development for the treatment of neuropathic pain.

    ILO522 (iloperidone) is a mixed serotonin/dopamine antagonist for the treatment of schizophrenia and other related psychotic disorders. Iloperidone is licensed from Titan Pharmaceuticals, and is currently in Phase III.

    AMP397 is an AMPA receptor antagonist in Phase II development for the treatment of epilepsy.

    SAB378 is a cannabinoid-(CB)-1 receptor agonist in phase II development for the treatment of chronic pain

    LIC477 (licarbazepine) is a sodium channel blocker. Phase III trials of LIC477 are expected to start in 2004 for the treatment of acute manic episodes of bipolar I disorders.

    TCH346 is in Phase II development and is targeted as first line intervention for neurodegenerative diseases such as Parkinson's disease, and amyotrophic lateral sclerosis, where it functions to provide neuroprotection and thereby delays further progression of these diseases.

    FTY720, the first lymphocyte homing agent, is a totally new and unique therapeutic agent. In addition to clinical trials in transplantation, FTY720 is also in phase II development for the treatment of multiple sclerosis. FTY720 is licensed from Mitsubishi.

    AEP924 is a somatostatin (sst)3 receptor antagonist in phase I trials for the treatment of depression.

    AAG561 is in Phase I development, and could be the first in class among the corticotrophin-releasing factor 1 antagonists, a novel concept in the treatment of depression and anxiety. Phase II trials are expected to start during 2004.

31


    XBD173 is a mitochondrial benzodiazepine ligand in phase I trials for the treatment of anxiety. XBD173 is licensed from Dainippon.

Transplantation/Immunology

        With a strong commitment to research and a 20-year history of commercialization, we are acknowledged as a leader in transplantation.

    Recently Launched Products

    Certican (everolimus) is a novel proliferation inhibitor with immunosuppressant properties that targets primary causes of allograft dysfunction (also known as chronic rejection) of a transplanted organ, including acute rejection and vascular remodeling. Certican has completed the EU mutual recognition procedure (MRP) as adjunctive therapy for use in combination with Neoral and corticosteroids, and is therefore being finalized for commercial use in the 15 nations of the EU for the prevention of organ rejection in kidney and heart transplantation. Product registration files for Certican have been submitted to regulatory authorities in the US, and an approvable letter was received from the FDA.

    myfortic (mycophenolate sodium) is an advanced, enteric-coated formulation of mycophenolate sodium designed to reduce mycophenolic acid (MPA)-related gastrointestinal (GI) adverse events by delaying the release of MPA. This could lead to fewer GI adverse events and therefore may reduce the need for dose modifications. myfortic is an adjunctive therapy which has been studied for use in combination with Neoral and corticosteroids to prevent rejection episodes in patients with kidney transplants. myfortic has been approved in 36 countries, and is marketed in Switzerland, Australia, India, Brazil and a number of other Latin American countries. myfortic has been filed with the FDA, and the MRP is ongoing in Europe.

    Key marketed products:

    Sandimmun (cyclosporine, USP) was introduced in 1982 for the prevention of organ rejection among patients with solid organ transplants and, in some countries, bone marrow transplantation.

    Neoral (cyclosporine, USP modified) builds on the established clinical utility of Sandimmune to provide primary immunosuppression in organ transplant patients. Neoral is also approved for the treatment of severe psoriasis and severe rheumatoid arthritis. Neoral is formulated as a microemulsion, thereby providing improved absorption and less variability in dosing in comparison to the original Sandimmune product, which is a macroemulsion formulation. Despite our patent protection for Neoral, generic companies have launched competing products in the US, Europe and elsewhere, and will continue to compete vigorously. See "—Intellectual Property."

    Simulect (basiliximab) is a chimeric monoclonal antibody that suppresses interleukin-driven proliferation of T-cells. Simulect is used for induction therapy, and is designed to complement Neoral or other primary immunosuppressants in preventing acute rejection episodes in kidney transplantation.

    Compounds in Development

    FTY720, the first agent in a new class of drugs called Sphingosine 1-Phosphate Receptor (S1P-R) agonists. It is designed to prevent rejection by redirecting lymphocytes away from the transplant graft, preventing lymphocytes from damaging the graft, while maintaining the response of lymphocytes against infective agents. It is being developed for use in combination with Neoral or Certican in kidney transplantation and is currently in phase III clinical trials. FTY720 is licensed from Mitsubishi.

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Respiratory/Dermatology

        Our Dermatology portfolio covers a broad range of indications, with marketed products for the treatment of atopic dermatitis (eczema), fungal infections and asthma. In addition, ongoing research and development is aimed at developing new compounds and extending the clinical utility of existing compounds in the areas of allergic and inflammatory skin disease, such as contact eczema and psoriasis. There is considerable demand for new dermatology treatments in these areas where current therapies are handicapped by limited efficacy or unacceptable side effects. We are committed to expanding our product range in the important Respiratory disease area. A discovery and development program is aimed at providing improved therapeutic options in the treatment of asthma and chronic obstructive pulmonary disease (COPD), which includes chronic bronchitis and emphysema. In addition, ongoing research is focused on extending the clinical use of Xolair in areas such as food allergy and seasonal and perennial allergic rhinitis.

    Recently Launched Products

    Xolair (omalizumab) is a novel anti-IgE monoclonal antibody developed to treat allergic disease, irrespective of allergen, by normalizing serum IgE. Xolair is the first of a new class of asthma treatments designed to inactivate a critical pathway in allergic disease (IgE). It is the most significant advance in asthma treatment in the past 15 years and is the only asthma treatment dosed every 2 or 4 weeks. The drug was approved by the FDA in June 2003 and has been launched in the US in collaboration with Genentech for the treatment of moderate to severe allergic asthma. It is also approved in Australia for the same indication and was launched there in September 2003. Novartis, Genentech and Tanox are parties to an agreement for the joint development of anti-IgE monoclonal antibodies.

    Elidel (pimecrolimus cream) is a selective inflammatory cytokine inhibitor used in the treatment of atopic dermatitis (eczema). The compound is a member of a new class of agents—the ascomycin macrolactams. Elidel is the only non-steroid treatment for atopic dermatitis clinically proven to prevent flare progression and improve disease control versus conventional practice with topical steroids. Its non-steroid safety profile makes Elidel suitable for all body areas for both children and adults. Elidel is now approved in 66 countries globally including the US and EU. It has so far been launched in 48 countries, including the US and many major EU countries.

    Key Marketed Products

    Lamisil (terbinafine) is used in the treatment of fungal infections of the nails. Lamisil treats the fungus (fungicidal in vitro), rather than simply preventing further fungal growth. "Over-the-counter" formulations indicated primarily for athletes foot are marketed by our OTC Business Unit in many markets, including the US.

    Foradil (formoterol) is a long-acting bronchodialator indicated for the treatment of asthma and COPD, which has been approved and launched in the US in 2001. During the fourth quarter of 2002, we licensed the exclusive US distribution and marketing rights of Foradil to Schering-Plough. We continue to market and distribute Foradil outside the US, where the brand has achieved broad acceptance among specialists and general practitioners. The long-acting bronchodilator is a relatively new addition to the range of treatments for asthma, and is distinguished by its rapid onset of action (one to three minutes) and long-lasting effect from a single dose (12 hours). Foradil is currently marketed principally in Europe in a single-dose dry powder inhaler (the Aerolizer), and in certain markets as a pressurized metered dose inhaler. Foradil is licensed from Yamanouchi.

    Compounds in Development

    Foradil (formoterol), licensed from Yamanouchi, has received an approvable letter from the FDA for the Certihaler, a novel, breath-activated multi-dose dry powder inhaler technology which was

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      developed by, and will be manufactured by SkyePharma, and which will give patients confirmation that the full dose of Foradil medication has been taken. We licensed the exclusive US distribution and marketing rights to this product to Schering Plough. Product registration files for the Foradil Certihaler have also been filed with regulatory authorities in Europe. We have also entered into a co-development agreement with Schering Plough to develop a fixed dose combination product of Foradil with mometasone. A prior agreement with Ivax to market Foradil with Ivax's Airmax device has been discontinued.

    Xolair (omalizumab) is the subject of ongoing additional phase III trials in Europe in severe asthma patients. We expect to refile our product registration file with the EMEA in 2004.

    Lamisil (terbinafine) is in Phase III development for a new dosing regimen and for tinea capitis. A new oral formulation (NOF) is also in phase III clinical trials for the treatment of onychomycosis.

    ASM981 (pimecrolimus, the active component of Elidel cream) oral and ointment formulations are also in Phase II development for inflammatory skin diseases. In addition, ASM981 oral is in Phase II development for the treatment of asthma.

    QAB149 is in Phase II development for the treatment of asthma and COPD. QAB149 is an inhaled long-acting selective B2-adrenoceptor agonist, with the potential to be the first truly once-daily administered compound from this class. The molecule is a single enantiomer, and is anticipated to have an improved side-effect profile compared to currently prescribed B2-adrenoceptor agonists. We recently entered into an agreement with Skye Pharma to develop QAB149 as monotherapy in the Certihaler multi-dose dry powder inhalation device.

    ACZ885 is an inhibitor of IL-1 mediated eosinophillia and lung macrophage accumulation and is in phase I development for the treatment of asthma and chronic obstructive pulmonary disease.

    VAG624 is a steroid sulphatase inhibitor in phase I development for the treatment of acne.

Arthritis/Bone/Hormone Replacement Therapy/Gastrointestinal Diseases/Urinary Incontinence

        We are a leader in the areas of rheumatology, bone metabolism disorders and hormone replacement therapy with products intended to treat rheumatoid arthritis, osteoarthritis, osteoporosis and early menopausal symptoms, such as hot flashes, and to prevent the long-term complications of these conditions. The bone and rheumatology research and development pipeline includes new compounds for the treatment of rheumatoid arthritis and osteoarthritis, including the "IL-1 trap" which we licensed from Regeneron in 2003, as well as potential products for the treatment of bone metabolism disorders, such as osteoporosis.

        Research and development in hormone replacement therapy (HRT) is primarily focused on improving the delivery of therapy and minimizing the hormonal dose via transdermal patch technology. After a Europe-wide analysis of the risk-benefit profile of HRTs, in December 2003, European health authorities placed an "Urgent Safety Restriction" on the use of HRTs for the prevention of osteoporosis. As a result, the osteoporosis indication of our products Estalis, Estraderm TTS, Estraderm MX, Estradot and Estragest in the EU will be limited to second line therapy for prevention of osteoporosis in postmenopausal women at high risk of future fractures who are intolerant of, or contraindicated for, other medicinal products approved for the prevention of osteoporosis. This decision does not limit sales of the listed products for other indications, and does not apply to our Miacalcic product.

        Our Pharmaceuticals Division has entered the gastroenterology market with the launch of Zelnorm/Zelmac for irritable bowel syndrome with constipation. In addition, we recently submitted data to FDA seeking approval for the use of Zelnorm/Zelmac to treat chronic constipation. We intend to further strengthen our GI franchise with development efforts regarding the use of Zelnorm/Zelmac to treat upper gastrointestinal disorders such as dyspepsia, gastroesophageal reflux disease (GERD) and other conditions. We also recently entered into a collaboration with Sankyo to co-develop a promising acid pump antagonist, which has just entered Phase I clinical development. The gastrointestinal disease area is

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an increasingly important segment due to the high level of as-yet unmet patient needs. Research and development in this disease area is aimed at the discovery and development of innovative approaches to the treatment of upper and lower gastrointestinal disorders.

        We have expanded this area of products with the acquisition of Enablex/Emselex (darifenacin), a compound in very late stage of clinical development, intended for the treatment of overactive bladder (urinary incontinence). We recently received an approvable letter from the FDA for it and expect to bring it to market in 2004.

    Key Marketed Products

    Combipatch/Estalis (estradiol & norethindrone acetate transdermal system) is a combination estrogen/progestin treatment for symptoms of estrogen deficiency in post-menopausal women, and the prevention of post-menopausal osteoporosis. The product offers a convenient treatment in a single patch for patients with an intact uterus. Combipatch is not approved in the US for the prevention of post-menopausal osteoporosis. This product is sublicensed from Aventis for sale in countries outside the US and Japan under the brand name Estalis. In the US, the product is licensed by Noven Pharmaceuticals to Vivelle Ventures, which is a joint venture between Noven and our US affiliate, for sale under the brand name Combipatch.

    Estraderm and Estraderm MX (estradiol transdermal system) are estrogen-only treatments for symptoms of estrogen deficiency in post-menopausal women, and prevention of post-menopausal osteoporosis. These are earlier generations of transdermal patches.

    Estragest TTS (estradiol & norethindrone acetate transdermal system) is a low-dose combination estrogen/progestin treatment for symptoms of estrogen deficiency in post-menopausal women, and prevention of post-menopausal osteoporosis. Estragest TTS is an earlier generation of transdermal patches. Estragest TTS offers a high amenorrhea rate in a single patch for patients with an intact uterus. This product is not approved in the US.

    Miacalcin/Miacalcic (salmon calcitonin) is a treatment for post-menopausal osteoporosis in females greater than five years post-menopause with low bone mass relative to healthy pre-menopausal females. The drug is available in an injectable form and a nasal spray. In the US, the nasal spray is indicated for osteoporosis. In the US, the injectable product is indicated for osteoporosis as well as the treatment of symptomatic Paget's disease of bone and for the treatment of hypercalcemia.

    Vivelle-Dot/Estradot (estradiol transdermal system), licensed from Noven Pharmaceuticals is an estrogen-only treatment for symptoms of estrogen deficiency in post-menopausal women, and prevention of post-menopausal osteoporosis. Vivelle-Dot/Estradot is the smallest estrogen patch available and offers a thin, flexible and discreet hormone therapy. The lowest dose of Vivelle-Dot/Estradot (0.025 mg/d) is approved for the prevention of post-menopausal osteoporosis.

    Voltaren (diclofenac) is a non-steroidal anti-inflammatory drug (NSAID) for the treatment of inflammatory and degenerative forms of rheumatism (articular and non-articular), post-operative and post-traumatic pain and acute attacks of gout and migraines. This product faces generic competition. An "over-the-counter" formulation of the topical form of this product is marketed by our OTC Business Unit in several markets under the name Voltaren Emulgel, for the treatment of inflammation of tendons, ligaments, muscles and joints, and for localized forms of soft-tissue and degenerative rheumatism.

    Zelnorm/Zelmac (tegaserod maleate/tegaserod) is a 5-HT4 partial agonist developed to address the need for a safe and effective treatment of irritable bowel syndrome with constipation, relieving such symptoms as abdominal discomfort/pain, bloating and constipation. Zelnorm/Zelmac has been approved for marketing in over 50 nations including the US, China, Switzerland, Brazil, Mexico, Australia, and Canada. The product has been launched in over 30 countries. In certain countries, including the US, Zelnorm/Zelmac is approved for the treatment of women only.

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    Compounds in Development

    Prexige (lumiracoxib) is a non-steroidal anti-inflammatory drug (NSAID) that selectively inhibits the COX-2 enzyme. In 2002, we submitted product registration files for Prexige to the FDA, the UK Medicines and Healthcare Products Regulatory Agency (MHRA), and several other health authorities for the indications of osteoarthritis, rheumatoid arthritis and acute pain, including primary dysmenorrhea. Prexige received its first regulatory approval in Mexico in March 2003 for all indications, followed by several approvals in Latin America. Approval of the osteoarthritis and acute pain indications was obtained from the UK MHRA in September 2003. We received a non-approvable letter from the FDA in September 2003, requesting the submission of the final report of the ongoing TARGET study as well as additional clinical data for the indications of osteoarthritis and acute pain. TARGET, a large outcome study, investigated the long-term gastrointestinal benefits and cardiovascular safety of Prexige, with and without low dose aspirin. The study has just been completed, and results of this study are expected in the third quarter of 2004. For rheumatoid arthritis, we withdrew our initial application for this indication in the US and did not receive an approval in the UK. However, we have recently completed an additional pivotal trial for this indication. New formulations (an oral suspension and a parenteral) of Prexige are in Phase I development.

    Enablex/Emselex (darifenacin) is an M3-selective receptor antagonist (M3SRA). It is the first in a new class of compounds for the treatment of overactive bladder. It was acquired from Pfizer in April 2003. Product registration files for Enablex have been filed with both the FDA and European Health Authorities. We received an approvable letter from the FDA in October 2003 and are planning to launch the drug in 2004 after completing the additional clinical work requested.

    Zelnorm/Zelmac (tegaserod maleate/tegaserod), a 5-HT4 partial agonist, was approved by the FDA for women suffering from irritable bowel syndrome with constipation in July 2002. In Europe, discussions with the European Medical Evaluations Agency resulted in initiation of a registration trial to examine the effectiveness of tegaserod in episodic treatment. Completion of this trial is expected in 2004. Phase III trials in chronic constipation have been completed with positive results which were submitted to the FDA in October 2003. Zelnorm/Zelmac is under development in dyspepsia (Phase II) and GERD, (Phase II). We are also exploring the use of Zelnorm/Zelmac as a treatment for diabetic gastropathy.

    Zoledronic acid (ZOL446—zoledronate acid) is a bisphosponate being developed for postmenopausal osteoporosis and Paget's disease. A Phase II trial in post-menopausal osteoporosis patients has demonstrated that zoledronic acid, administered as a once per year infusion, induces a sustained reduction in bone resorption and significant increases in bone mineral density at different skeletal sites. Phase III trials in post-menopausal osteoporosis and Paget's disease are currently in progress. Phase II trials in rheumatoid arthritis are in progress. We market zoledronic acid for oncologic indications under the brand name Zometa.

    AAE581 is being developed for the treatment of osteoporosis and is in Phase II. AAE581 is a specific inhibitor of osteoclast-derived cathepsin K, leading to reduced collagen breakdown and osteoclast-mediated bone resorption. The compound represents a novel mode of action and has been shown to effectively suppress biological markers of bone turnover up to 28 days in healthy volunteers and up to 3 months in healthy post-menopausal women, compared to placebo.

    RGN303 is a protein construct blocking the activity of Interleukin-1 (an "IL-1 trap"). We recently licensed this compound from Regeneron. Blocking IL-1 is a proven therapeutic approach in rheumatoid arthritis, and IL-1 represents an important target for pharmaceutical development in other inflammatory conditions. Currently RGN303 is in Phase II development for the treatment of rheumatoid arthritis.

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    RAD001 (everolimus) is being developed for the treatment of rheumatoid arthritis and is in Phase II. RAD001 is an inhibitor of T-cell proliferation. See "—Oncology and Hematology—Compounds in Development."

    SMC021 (calcitonin) is a regulator of calcium homeostasis and is in Phase II development for the treatment of osteoporosis. SMC021 is an oral formulation of salmon calcitonin. Calcitonin, a peptide, inhibits bone resorption by acting on specific receptors on osteoclasts. In addition, salmon calcitonin has been shown to have analgesic properties. Injectable and nasal spray calcitonins are currently on the market. SMC021 is a novel concept in oral peptide delivery.

    ABN912 is a human monoclonal antibody against the monocyte chemoattractant protein-1 (MCP-1) and is currently in Phase I development for the treatment of rheumatoid arthritis.

    AKU517 is a reversible acid pump antagonist developed in collaboration with Sankyo for the treatment of GERD. It is currently in Phase I. If successful, the new class of drugs may offer therapeutic advantages over existing proton pump inhibitor therapies.

Infectious Diseases

        Our Infectious Disease portfolio consists of three main areas: anti-virals, anti-bacterials, and tropical medicine. We market Famvir for herpes and Coartem for malaria. Ongoing research and development efforts are focused on new specific anti-virals against Hepatitis B and C, as well as on novel antibiotics for respiratory tract infections. We established Infectious Diseases as a separate franchise following our May 2003 purchase of a majority interest in Idenix Pharmaceuticals. As a result of that transaction, we obtained certain rights to market Idenix products, as well as options to license additional Idenix products in the future.

    Key Marketed Products

    Coartem/Riamet (artemether & lumefantrine) is used in the treatment of uncomplicated Plasmodium falciparum malaria and mixed infections including Plasmodium falciparum for adults and children. Coartem is also used as standby emergency treatment for malaria. Coartem is the first fixed-dose Artemisinin Combination Therapy (ACT) of artemether and lumefantrine. It is being provided at cost by Novartis to the WHO and distributed through the WHO as part of the Roll Back Malaria initiative. Coartem was added to the WHO List of Essential Medicines due to its effectiveness, particularly in areas of widespread drug resistance. This product is also marketed as Riamet in certain countries.

    Famvir (famciclovir) is used in the treatment of acute herpes zoster, recurrent genital herpes in immunocompetent patients, and recurrent mucocutaneous herpes simplex infections in HIV-infected patients.

    Compounds in Development

    LDT600 (telbivudine) and LDC300 (valtorcitabine) are currently in development for the treatment of Hepatitis B. We licensed the right to jointly develop these compounds with Idenix. We have also licensed the right to co-market these compounds with Idenix in the US, UK, France, Germany, Italy and Spain, and to market these compounds on our own in the rest of the world. These compounds are currently in phase III and phase II, respectively. In addition to the Hepatitis B license, Idenix also granted us an option to jointly develop Idenix's Hepatitis C drug candidate, NMC283, currently in phase I clinical trials, as well as all other subsequently developed Idenix drug candidates, upon completion of phase II clinical trials.

    LBM415 is a new mode of action antibiotic (peptide deformylase inhibitor) currently in phase I development for respiratory tract infections.

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Ophthalmics

        We develop and market products for the treatment of a number of different ophthalmic diseases. Research and development in this disease area is aimed at the discovery and development of innovative approaches to the treatment of glaucoma, age-related macular degeneration (AMD), eye inflammation, ocular allergies and other diseases and disorders of the eye. Our aim is to focus our ophthalmics portfolio on "Back of the Eye" diseases and on "Dry Eye." Both areas are characterized by high growth and significant unmet medical needs. The "Back of the Eye" encompasses several disease areas, such as wet and dry AMD, diabetic retinopathy, retinitis pigmentosa, glaucoma (neuroprotection) and myopia. The immediate focus within "Back of the Eye" will be wet AMD where our ophthalmics business has built a leadership position with its flagship product Visudyne. In addition, with our recent license of Lucentis™, we have secured access to a next generation treatment for AMD.

    Key Marketed Products

    Our Dry Eye products include a number of eye drops and gels indicated for the treatment of dry eye symptoms. GenTeal (hydroxypropylmethylcellulose), Oculotect (povidone) and Viscotears (carbomer) are examples of our dry eye products. These products provide relief through a tailored lubricating tear film, the composition and viscosity of which is adapted to the individual patients' needs. These products are available in more than 45 countries, including the US, EU and Japan.

    Visudyne (verteporfin) is a light activated drug which is used in a two-step procedure that can be performed in a doctor's office. First, the drug is injected intravenously into the patient's arm. A non-thermal laser light is then shone into the patient's eye to activate the drug. Visudyne is commercially available in over 75 countries for the treatment of predominantly classic subfoveal choroidal neovascularization (CNV) caused by age-related macular degeneration. It is also approved in over 35 countries for the treatment of occult subfoveal CNV secondary to AMD (including the EU, where it gained approval in 2002). In addition, it is also approved in over 45 countries, including the EU, US and Canada, for the treatment of subfoveal CNV due to pathologic myopia (severe near-sightedness). Most recently approval was also gained in Japan for all subfoveal CNV secondary to AMD. Further geographic expansion is planned for regions including China. Visudyne is licensed from QLT.

    Zaditor/Zaditen (ketotifen) is an eye drop which provides fast relief of symptoms in patients suffering from ocular allergy. Zaditen works through multiple mechanisms of action to provide relief within minutes and a duration of action of up to 12 hours. Zaditen provides rapid relief and long lasting control of allergy symptoms with a twice daily dosing regimen. Zaditen is approved in more than 30 countries, including the US (where it is marketed as Zaditor) and the EU.

    Compounds in Development

    Visudyne (verteporfin) is in development for additional indications. Phase III trials are ongoing in occult AMD and for minimally classic AMD.

    Lucentis™ (ranibizumab) is a recombinant humanized high affinity antibody fragment that binds to VEGF. It is designed to penetrate the retina to decrease permeability and inhibit the formation of choroidal neovascularization, which leads to blindness in AMD patients. It is currently in phase III development for the treatment of AMD. We have licensed the right to develop and market Lucentis™ outside of North America from Genentech.

    PIR335 (pirenzepine) ophthalmic gel is a formulation of a relatively selective M1-muscarinic antagonist. PIR335 has been used in Europe for at least 20 years. It is in phase II development for the treatment of juvenile onset of myopia.

    Elidel (pimecrolimus), our Dermatology product, is also currently in phase II development for the treatment of dry eye.

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    AFU057A was terminated.

    ABJ409A was terminated.

Principal Markets

        The world market for our Pharmaceuticals Division is concentrated in the US, Europe and Japan. The following table sets forth certain data relating to our principal markets.

Pharmaceuticals

  Sales 2003
 
  ($ millions)

  (%)

United States   6,584   41
Americas (except the United States)   1,049   6
Europe   5,374   34
Japan   1,800   11
Rest of the World   1,213   8
   
 
Total   16,020   100
   
 

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

Production

        The key goal in our manufacturing and supply chain management program is to ensure the uninterrupted, timely and cost-effective supply of products that meet all product specifications. In order to achieve this objective, we manufacture our products at 7 bulk chemical and 17 secondary production facilities. Bulk chemical production involves the manufacture of therapeutically active compounds, mainly by chemical synthesis or by a biological process such as fermentation. Secondary production involves the manufacture of "galenical" forms of drug products such as tablets, capsules, liquids, ampoules, vials and creams. Major bulk chemical sites are located in Basel, Switzerland; Grimsby, UK; and Ringaskiddy, Ireland. Significant secondary production facilities are located in Stein, Switzerland; Wehr, Germany; Torre, Italy; Barbera, Spain; Suffern, New York; in Sasayama, Japan and in various other locations in Europe, including France, the UK and Turkey.

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

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

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

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essential materials. All raw materials we purchase must comply with our quality standards. Overall, prices are not volatile for materially significant raw materials.

Marketing and Sales

        We have invested significant resources in our Marketing and Sales organizations to achieve a competitive presence in all of the main pharmaceutical markets worldwide. In particular, Pharmaceuticals Division affiliates have a strong presence in the US and the EU.

        We sell our products to wholesale and retail drug distributors, hospitals, clinics, government agencies and managed care providers. In each market, to the extent permitted by law, we deploy sales representatives to market our products and supporting medical staff to provide medical information to prescribers and healthcare purchasers. As of December 31, 2003, Pharmaceuticals Division affiliates had nearly 6,000 medical representatives in our US field forces (including contract field forces), and more than 11,000 medical representatives in the rest of the world. Our sales and marketing reach is further extended through various agreements with promotion and marketing partners, licensees, associates and distributors.

Competition

        Other companies selling branded prescription pharmaceutical products include Abbott, AstraZeneca, Aventis, Bristol-Myers Squibb, Eli Lilly, GlaxoSmithKline, Johnson & Johnson, Merck, Pfizer, Schering-Plough and Wyeth. Competition within the pharmaceutical 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.

        In addition to the other pharmaceutical companies selling patented pharmaceuticals under trademarked brand names, our Pharmaceuticals Division faces an increasing challenge from companies selling generic forms of our products following the expiry of patent protection. In response to generic challenges that infringe upon our patents and trademarks, we vigorously defend our intellectual property rights. Where we have made meaningful improvements to existing products, we seek to extend the product range with patent-protected value-added line extensions. We also seek to use marketing efforts to increase brand awareness and loyalty toward our products. Ultimately, there is no guarantee that any product, even with patent protection, will remain successful if another company develops a new product offering significant improvements over existing therapies.

Research and Development

        We are among the leaders in the pharmaceuticals industry in terms of research and development investment. In 2003, we invested approximately $3.1 billion in Pharmaceuticals Division research and development, which represents 19.1% of the Division's total sales. Our Pharmaceuticals Division invested $2.4 billion and $2.0 billion on research and development in 2002 and 2001 respectively. There are currently more than 75 projects in clinical development. Products expected to be launched in 2004 from our efforts include Certican, myfortic and Enablex, as well as new indications or formulations for Diovan, Lotrel, Zometa, Zelnorm/Zelmac and Foradil.

        We have long term research commitments totaling $1.4 billion as of December 31, 2003, including $0.7 billion in milestone payments. We intend to fund these expenditures from internally developed resources.

        The discovery and development of a new drug is a lengthy process, usually requiring 10 to 12 years from the initial research to bringing a drug to market, including six to eight years from Phase I clinical trials to market. At each of these steps, there is a substantial risk that we will not achieve our goals. In such an event, we may be required to abandon a product in which we have made a substantial investment.

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Research program

        The discovery of new drugs is the responsibility of our Research program. This is a complex and challenging process which is split into different phases. These phases provide tools that allow our Research team to manage and benchmark their activities. Milestones are established for each phase of the evaluation process. Candidates only advance to the next stage if defined sets of criteria are met. The primary goal of our Research program is to determine that a compound is ready for Proof of Concept in humans. In order to determine whether a compound may be tested in humans, we must invest significant resources in preclinical activities to satisfy safety requirements, including toxicology studies. Only those compounds that pass this more comprehensive series of preclinical testing (on average, about one in ten candidates) advance to the development stage of a drug's life-cycle. See "—Clinical development program."

        In 2003, we established the Novartis Institutes for BioMedical Research (NIBR), headquartered in Cambridge, Massachusetts, with affiliates worldwide. NIBR is redefining drug discovery in the era which began with the completion of the human genome sequence. Our strategies at NIBR include integrating previously segregated disciplines, fostering interaction among scientists, both within and outside of Novartis and investing and advancing new discovery approaches. Our goal is to produce more relevant, predictable drug discovery and new and better medicines for patients worldwide.

        When completed in 2004, our Cambridge facility will contain a total of 67,500 square meters of laboratory and office space, housing over 800 scientists and technology experts, and approximately 1,000 employees in total.

        All of our discovery research groups, including Functional Genomics, the Lead Discovery Center, Central Technologies and Informatics and Knowledge Management, are based at our Cambridge headquarters. Translational Research/Development, which is focused on cardiovascular disease, diabetes, infectious disease and oncology is also conducted primarily in Cambridge.

        Outside of the Cambridge site, an additional 2,000 scientists and technology experts conduct research in Switzerland, Austria, the UK, Japan and various other US sites. Research is conducted in the areas of Neuroscience, Dermatology, Transplantation, Arthritis, Ophthalmology and Respiratory Disease at these sites.

Clinical development program

        The testing of new drugs in humans, to determine whether they are safe and effective, is the focus of our Development program. Clinical trials of drug candidates generally proceed through three phases. In Phase I clinical trials, a drug is usually tested with about 20 to 80 normal, healthy volunteers. The tests study the drug's safety profile, including the safe dosage range. The studies also determine how a drug is absorbed, distributed, metabolized and excreted, and the duration of its action. In Phase II clinical trials, the drug is tested in controlled studies of approximately 100 to 300 volunteer patients (i.e., persons with the targeted disease) to assess the drug's effectiveness and safety, and to establish a proper dose. In Phase III clinical trials, the drug is further tested on larger numbers of volunteer patients (in some cases more than 15,000 patients in total) in clinics and hospitals. In each of these phases, physicians monitor volunteer patients closely to determine the drug's efficacy and to identify possible adverse reactions. The vast amount of data that must be collected and evaluated makes clinical testing the most time-consuming and expensive part of new drug development. The next stage in the drug development process is to seek registration for the new drug. See "—Regulation."

Initiatives to optimize the discovery and development process

        We are working to be more efficient in selecting candidate drugs for development. For example, we are now better able to select the best compounds for development by having senior management focus on development projects at an early stage. Where possible we run early proof of concept studies in patients which include biomarkers for potential efficacy and which enable us to make an earlier evaluation of the

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probability that the compound could be successfully developed into a marketable product. Under another initiative, special teams work to develop late stage products more quickly. The goal is to improve the likelihood of therapeutic and commercial success, which should reduce development costs and decrease time to market. In several other initiatives we are improving electronic management of the clinical trial processes, including data capture and transfer, as well as electronic storage and archiving of study data and documents. Most recently we have initiated electronic submissions to health authorities, vastly reducing the quantity of paper documents which need to be submitted and also enabling faster and more efficient review of data by health authorities. Overall, these initiatives have reduced clinical trial outsourcing, have improved data quality and speed of clinical trial reporting, substantially reduced the time between initial research and the introduction of the drug to market, and have provided us with considerable cost savings.

Alliances and acquisitions

        Our Pharmaceuticals Division forms alliances with other industry players or academic institutions in order to develop new products, acquire platform technologies and access new markets. We license products which complement our current product line and that 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 for in-licensing using the same criteria as we use for our own internally discovered drugs.

Regulation

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

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

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

        The registration process generally takes between six months and several years, depending on the country, the quality of the data submitted, the efficiency of the registration authority's procedures and the nature of the product. Many countries provide for accelerated processing of registration applications for innovative products of particular therapeutic interest. In recent years, intensive efforts have been made among the US, the EU and Japan to harmonize registration requirements in order to achieve shorter development and registration times for medical products. However, the requirement in many countries to

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negotiate selling prices or reimbursement levels with government regulators can substantially extend the time until final marketing approval is granted.

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

United States

        In the US, applications for drug registration are submitted to and reviewed by the FDA. The FDA regulates the testing, approval, manufacturing, importing, labeling and marketing of pharmaceutical products intended for commercialization in the US. The FDA also monitors all pharmaceutical products currently on the US market. The pharmaceutical development and registration process is typically intensive, lengthy and rigorous. When a pharmaceutical company has gathered data which it believes sufficiently demonstrates a drug's quality, safety and efficacy, then the company may file a New Drug Application ("NDA") for the drug. The NDA must contain all the scientific information that has been gathered about the drug and typically includes information regarding the clinical experiences of all patients tested in the drug's clinical trials. A supplemental new drug application ("sNDA") must be filed for a line extension of, or new indications for, a previously registered drug.

        Once an NDA is submitted, the FDA assigns reviewers from the fields of biopharmaceuticals, chemistry, medicine, microbiology, pharmacology/toxicology, statistics and labeling. After a complete review, these experts then provide written evaluations of the NDA, including a recommendation. These recommendations are consolidated and are used by the FDA in its evaluation of the NDA. Based on that evaluation, FDA then provides to the NDA's sponsor an approval, or an approvable, or non-approvable letter. The approvable and non-approvable letters will state the specific deficiencies in the NDA which need to be addressed. The sponsor must then submit complete responses to the deficiencies in order to restart the review procedure.

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

European Union

        In the EU, there are two main procedures for application for authorization to market pharmaceutical products in all of the EU Member States, the Centralized Procedure and the Mutual Recognition Procedure. It is also possible to obtain a national authorization for products intended for commercialization in a single EU member-state only, or for line extensions to existing national product licenses.

        Under the Centralized Procedure, applications are made to the European Medical Evaluations Agency (EMEA) for an authorization which is valid across all EU member states. The Centralized Procedure is mandatory for all biotechnology products and optional for other new chemical compounds or innovative medicinal products. When a pharmaceutical company has gathered data which it believes sufficiently demonstrates a drug's quality, safety and efficacy, then the company may submit an application to the EMEA. The EMEA then receives and validates the application, and appoints a Rapporteur and Co-Rapporteur to review it. The entire review cycle must be completed within 210 days, although there is a "clock stop" at day 120, to allow the company to respond to questions set forth in the Rapporteur/Co-Rapporteur's Assessment Report. When the company's complete response is received by the EMEA, the clock restarts on day 121. If there are further aspects of the dossier requiring clarification, the EMEA will then request an Oral Explanation on day 180, in which the sponsor must appear before the EMEA's Scientific Committee (the CPMP) to provide the requested additional information. On day 210, the

43



CPMP 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 90 days after a positive CPMP recommendation.

        Under the Mutual Recognition Procedure (MRP), the company first obtains a marketing authorization by a single EU member-state. Subsequently, the company may seek mutual recognition of this first authorization from some or all of the remaining EU Member-States. Then, within 90 days of this initial decision, each Member State reviews the application and can issue objections or requests for additional information. On Day 90, each Member State must be assured that the product is safe and effective, and that it will cause no risks to the public health. Once agreement has been reached, each Member State grants separate marketing authorizations for the product.

        After the Marketing Authorizations have been granted, the company must submit periodic safety reports to the EMEA (Centralized Procedure) or to the National Health Authorities (MRP). These Marketing Authorizations must be renewed on a 5 year basis.

Japan

        In Japan, applications for new products are made through the Pharmaceutical and Medical Devices Evaluation Center (PMDEC). After a data reliability survey and a Good Clinical Practice inspection are carried out by the Organization for Pharmaceutical Safety and Research, a team evaluation is passed to the Central Pharmaceuticals Affairs Council (CPAC), whose special members, committees and executive committees provide a report back to the PMDEC. 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 CPAC which then advises the MHLW on final approvability. Drug manufacturing or import license approval is issued by the local prefecture government. Once the MHLW has approved the application, the company can make the new drug available for physicians to prescribe. 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 Sponsor to submit safety reports.

Price Controls

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

        In the US, debate over the reform of the healthcare system has resulted in an increased focus on pricing. Although there are currently no government price controls over private sector purchases in the US, federal legislation requires pharmaceutical manufacturers to pay prescribed rebates on certain drugs to enable them to be eligible for reimbursement under some government healthcare programs. In the absence of government pricing regulations, managed care has become a potent force in the US market place that increases downward pressure on the prices of pharmaceutical products. In addition, the recently enacted Medicare reform legislation, which creates a prescription drug benefit for Medicare patients, could influence prices. The legislation could ultimately enable the US government to use its enormous purchasing power to demand additional discounts from pharmaceutical companies. At the same time, this legislation could increase the volume of pharmaceutical drug purchases, perhaps offsetting, at least in part, potential additional price discounts. It is too soon to predict the full impact of this new legislation with certainty. Another potential influence on pricing in the US is the ongoing efforts by consumers and others to obtain our products from distributors in Canada, which has relatively stringent price controls. Such imports from Canada to the US are currently illegal. However, there are ongoing political efforts to change the legal status of such imports.

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        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. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert commercial pressure on pricing within a country. The expected EU enlargement (with 10 countries expected to join the EU in 2004) will probably complicate the environment and have some influence on prices in the region and parallel trade.

        In Japan, the MHLW reviews the prices of individual pharmaceutical products every two years. In the past, these reviews have resulted in price reductions. The Japanese government is currently undertaking a healthcare reform initiative, and the pharmaceutical pricing system is one of the issues being reviewed. In particular, the government is reviewing the pricing of older products, including the biannual reduction of reimbursement prices adjusted for actual discounts given. The government has abandoned the previously proposed reference price system. These efforts on the part of the government may well lead to substantial reforms of the Japanese healthcare system in the near future. Such reforms likely would include additional price control mechanisms, and would place additional pressure on the prices charged for pharmaceutical products.

Intellectual Property

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

        The protection offered by such patents extends for varying periods depending on the 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.

        In general, published pharmaceutical industry benchmarks show that we are at a comparatively low risk of loss of significant amounts of revenue due to patent expirations. As examples, we have basic patent protection (including extensions) on valsartan (the active ingredient used in our best-selling product Diovan) until 2012 in the US, until 2011 in the major countries of the EU, and until 2013 in Japan. We have basic patent protection (including extensions) on imatinib (the active ingredient used in our leading product Gleevec/Glivec) until 2013 (with an extension until 2015 applied for), until 2016 in the major EU countries, and until 2013 in Japan.

        However, patent protection is no longer available in several major markets for the active substances used in a number of our Pharmaceuticals Division's leading products:

    Neoral.    Patent protection exists for the Neoral micro-emulsion formulation and other cyclosporin formulations through 2009 and beyond in major markets. Despite this protection, generic cyclosporin products competing with Neoral have entered the transplantation market segment in the US, Germany, Japan and elsewhere. We have filed patent infringement actions against manufacturers of these generic products. However, despite a finding of infringement and an award of damages against one of these manufacturers in the US, we have so far not succeeded in obtaining an injunction, or a final judgment of damages against any of the manufacturers we have sued.

    Sandostatin.    Basic patent protection for Sandostatin SC has expired in the US, Japan, Germany and the UK, and it will expire in 2006 in France and 2007 in Italy. However, patent protection

45


      extending to 2010 (and 2013 and beyond in the US) continues in major markets for Sandostatin LAR, which represents a significant and growing proportion of our octreotide sales.

    Lotrel/Cibacen/Lotensin/Cibadrex.    The basic benazepril substance patent protection for Cibacen/Lotensin/Cibadrex expired in Japan in 2002 and will expire in the US in February 2004, and in 2004-08 in major markets in the EU. However, Lotrel,which is a combination of benazepril with amlodipine, is patented in the US until 2017. Dr. Reddy's Laboratories has challenged this patent, as well as other patents related to Lotrel, in a lawsuit filed in December 2003. Dr. Reddy's is seeking marketing approval for a different benazepril combination, using amlodipine maleate, rather than amlodipine besylate. Because of this difference, the Dr. Reddy's product, if brought to market, would not be automatically substitutable in the US for Lotrel. Nonetheless, we will take all appropriate measures to enforce our patent rights.

    Lamisil.    The active ingredient in Lamisil is specifically disclosed and covered in a patent family which will expire in 2006 in the US, and in 2004-07 in Japan and in major EU countries. The specific US patent is being challenged by Dr. Reddy Laboratories. The active ingredient in Lamisil is also covered (but not specifically disclosed) in the general scope of a US patent expiring in July 2004. That patent is directed to a broad chemical class of antifungal compounds.

    Miacalcin/Miacalcic.    The specific Novartis formulation of this product is covered by patents which will expire in the US in 2015. However, patents on the Novartis formulation have expired in a number of major countries in 2003, and will expire in Italy in 2006. Apotex has applied to the FDA for the right to sell a generic version of Miacalcin, using the Novartis formulation. We have sued Apotex for infringement. Another company has applied to the FDA for the right to sell a generic version of Miacalcin based on a different formulation. We have not sued this company.

    Voltaren.    Voltaren is off-patent. As a result, revenue from Voltaren has declined and may decline significantly further over the next few years.

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

CONSUMER HEALTH

        The business of our Consumer Health Division is conducted by a number of affiliated companies throughout the world. The Consumer Health Division consists of the following Business Units: Sandoz generics, OTC self-medication, Animal Health, Medical Nutrition (including our Nutrition & Santé unit), Infant & Baby, and CIBA Vision. Each Business Unit is a world leader in the research, development, manufacturing and marketing of high quality health-related products. As of December 31, 2003, the affiliates of the Consumer Health Division employed 32,464 associates worldwide. In 2003, the affiliates of the Consumer Health Division achieved consolidated sales of $8.8 billion, which represented 36% of the Group's total sales.

SANDOZ

        Our Sandoz generics Business Unit is a world leader in the development, manufacture and marketing of pharmaceutical products and substances which are no longer protected by patents. The business of our Sandoz generics Business Unit is conducted by a number of affiliated companies in more than 120 countries. As of December 31, 2003, our Sandoz generics Business Unit employed 12,918 associates worldwide. In 2003, the affiliates of Sandoz generics achieved consolidated sales of $2.9 billion, which represented 12% of the Group's total sales.

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        In May 2003, we united 14 of our generics company brands under the single global umbrella name Sandoz, to strengthen recognition and leverage share of voice in the highly competitive marketplace for generics products. This initiative capitalizes on the strong reputation of the Sandoz name, which has a high level of awareness and trust among physicians, pharmacists and patients.

        The Sandoz Business Unit competes in three principal product segments: finished dosage forms (the Generic Pharmaceuticals Business), active pharmaceutical ingredients and their intermediates (the Industrial Business) and biopharmaceuticals (the Biopharmaceuticals Business). In the Generics Pharmaceuticals Business, we develop and manufacture drugs that are no longer protected by patents into finished dosage forms, and we sell them to pharmacies, hospitals and other healthcare outlets around the world. In the Industrial Business, we manufacture active ingredients for pharmaceutical and biotechnological substances, and their intermediates, and sell them to customers who use them to manufacture finished goods. In developing our new Biopharmaceuticals Business, we are seeking to leverage our technology and expertise to develop, manufacture and market high-quality biopharmaceutical products, such as protein hormones and other human proteins, to be sold as generic substitutes for branded biopharmaceutical products after their patents have expired. Sandoz is also an important manufacturer of biopharmaceuticals for a number of third parties.

        Approximately 79% of our Sandoz sales are derived from our Generic Pharmaceuticals Business, approximately 19% of sales are derived from our Industrial Business and approximately 2% are attributable to the Biopharmaceuticals Business.

        In 2003, Sandoz sales grew by approximately 47% in local currencies. The business year was characterized by strongly developing US sales, the integration of Lek Pharmaceuticals d.d., a Slovenian pharmaceutical company which we had acquired at the end of 2002, and the successful launch of new products, including the US launch of omeprazole (a generic version of the ulcer and heartburn treatment Prilosec®).

        In the US, our Sandoz sales increased by 56% mainly driven by the strong sales of amoxicillin/potassium clavulanate (a generic version of the antibiotic Augmentin®) and loratadine (a generic version of the allergy treatment Claritin®).

        In Germany, the second most important market for our Sandoz products, the introduction of new regulations intended to increase competition and our ongoing efforts to restructure our German operations reduced profitability growth at our affiliate there. In key European markets we achieved double-digit sales growth. These markets included the UK, France, Italy, the Netherlands, Spain and Austria.

        With the acquisition of Lek, Sandoz is now a major supplier of generic pharmaceutical products in Central and Eastern Europe and in the former Soviet Union. Lek manages a wide ranging business portfolio, with anti-infectives, cardiovascular and gastrointestinal tract products. For the time being, Lek products will continue to be sold throughout the world under that well-regarded name.

        In 2003, our Industrial Business achieved improved performance in active ingredients (penicillins, cephalosporin and intermediates) as a result of increased penicillin productivity. This led to increased sales volumes, a shift to high-value compounds for cephalosporin antibiotics and additional long-term contracts with major pharmaceutical and biotech companies.

        In 2003, our Biopharmaceuticals Business continued to work on the development of biologic products which are comparable to biotech originator products, leveraging 20 years of biotech expertise. In building a portfolio of these products Sandoz is at the forefront of this new class of biotech products.

Recently Launched Products

        The following is a summary of the most important products launched by Sandoz in 2003.

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    Omeprazole (a generic version of Prilosec®, an ulcer and heartburn treatment) was launched in the US in August 2003. In Europe, omeprazole was launched in Denmark, Sweden and Finland in April 2003.

    Fosinopril (a generic version of Monopril®, an ACE Inhibitor) was launched in the US in December 2003.

    Simvastatin (a generic version of Zocor®, a cholesterol and triglyceride reducer) was launched in Germany, the UK and the Netherlands in May 2003.

    Fluconazole (a generic version of Diflucan®, an antifungal treatment) was launched in the Netherlands in March 2003.

    Norfloxacin (a generic version of Noroxin®, an antibiotic) was launched in Italy in August and in France in October 2003.

    Citalopram (a generic version of Celexa®/Cipramil®, an antidepressant and mood stabilizer) was launched in Austria in April 2003, and in Scandinavia and the Netherlands in January 2003.

    Lisinopril (a generic version of Zestril®, an ACE inhibitor) was launched in Sweden in August 2003.

    Amoxicillin/clavulanic acid (a generic version of the antibiotic Augmentin®) was launched in the Slovakian Republic in January and the Russian Federation in June 2003 by Lek.

    Clarithromycin (a generic version of Klacid®) was launched in Poland in June 2003 by Lek.

Key Marketed Products

        The following table describes the key marketed products for our Sandoz generics Business Unit. Not all products are available in all markets.

Product

  Description
   
Generic Pharmaceuticals Business        

Product

 

Originator Drug

 

Description

Amoxicillin/clavulanic acid

 

Augmentin®

 

anti-infective
Omeprazole   Prilosec®   ulcer and heartburn treatment
Citalopram   Celexa®   anti-depressant
loratadine   Claritin®   antihistamine
Atenolol   Tenoric®   anti-hypertension
Penicillin       anti-infective
Lisinopril   Prinivil®   ACE inhibitor
Ranitidine   Zantac®   anti-ulcerant
Metformin   Glucophage®   anti-diabetic
Terazosin   Hytrin®   anti-hypertension and
benign prostatic hyperplasia
Enalapril   Lexxel®   ACE inhibitor
Simvastatin   Zocor®   cholesterol and trigyceride reducer

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Industrial Business

Active Ingredient

  Description
Penicillin V (Phenoxymethylpenicillin): various forms   Anti-infectives
Penicillin G (Benzylpenicillin): various salts   Anti-infectives
Semisynthetic Penicillins, various active ingredients   Anti-infectives
Cephalosporins: various active ingredients   Anti-infectives
ß-Lactamase Inhibitor and Blends: clavulanic acid, various forms   Anti-infectives
Macrolides, various active ingredients   Anti-infectives
ß-Lactam Intermediates for penicillins, cefalosporin, makrolides   Anti-infectives
Pankreatin, Heparin, Thyronine   Enzymes
Thyroxine   Hormones

   
Principal Markets

        The principal markets of our Sandoz generics Business Unit are the two largest generics markets in the world: the US and Europe. The following table sets forth the aggregate 2003 sales of Sandoz by region:

Sandoz

  Sales 2003
 
  ($ millions)

  (%)

United States   1,098   38
Americas (except the United States)   150   5
Europe   1,266   44
Rest of the World   392   13
   
 
Total   2,906   100
   
 

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

Production

        We manufacture our Sandoz products at more than 20 production facilities around the world. Among these, our principal production facilities are located in Kundl and Schaftenau, Austria; Menges and Ljubljana, Slovenia; Broomfield, Colorado; Stryków, Poland and Kalwe, India. While we have not experienced material supply interruptions in the past, there can be no assurance that supply will not be interrupted in the future as a result of unforeseen circumstances. The manufacture of our products is heavily regulated, making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a recall or a government-enforced shutdown of production facilities, which in turn could lead to product shortages.

        We obtain agricultural raw materials such as flours and sugars from multiple suppliers based in both the US and the EU. We obtain chemicals and other raw materials from suppliers around the world. The raw materials we purchase are generally subject to market price fluctuations. We seek to avoid these fluctuations, where possible, through the use of long-term supply contracts. In addition, several of our Sandoz generics affiliates use e-procurement systems to further strengthen their purchasing productivity.

        We produce biotech substances like enzymes for detergents, and many of the active pharmaceutical ingredients, like penicillins, using modern bio-technological methods. These methods include fermentation processes, chemical syntheses and physical production methods, such as sterile precipitation. We are constantly working to develop other new manufacturing processes.

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Marketing and Sales

        In our Generics Pharmaceuticals Business, we have a broad portfolio of off-patent drugs that we sell to pharmacies, hospitals, and other healthcare outlets. Depending on the structure of the local market, customers are serviced either by the field service team of the local Sandoz affiliate or by established partners or joint venture associates.

        In our Industrial Business, we sell active pharmaceutical ingredients and biotech substances to manufacturers in the pharmaceutical industry.

        In response to rising healthcare costs, many governments and private medical care providers, such as health maintenance organizations (HMOs), have instituted reimbursement schemes that favor the substitution of generic pharmaceuticals for more expensive brand-name pharmaceuticals. In the US, generic substitution statutes have been enacted by virtually all states and permit or require the dispensing pharmacist to substitute a less expensive generic drug for the brand-name version of the drug. In Europe, the use of generic drugs is growing. But in some EU countries, reimbursement practices do not create an efficient incentive for generic substitution. As a result, generic penetration rates in many European countries are still below those reached in the US.

Competition

        Other companies selling finished dosage form generic pharmaceutical products are Alpharma, Barr, Dr. Reddy's, Hexal, Ivax, Merck Generics, Mylan, Ranbaxy, Ratiopharm, Stada, Teva, and Watson.

        Other companies selling active pharmaceutical ingredients & intermediates are Antibioticos, Dr. Reddy's, DSM-Anti-Infectives, Ranbaxy and Teva, as well as certain East Asian manufacturers.

        The market for generic products is characterized by increasing demand for high-quality pharmaceuticals which can be produced at lower costs due to minimized initial research and development investments. Increasing pressure on healthcare expenditures and numerous patent expirations have created a favorable market environment for the generics industry. This positive market trend, however, brings increased competition within the generics industry, leading to ongoing price pressure on generic pharmaceuticals.

Research and Development

        Before a generic drug may be marketed, intensive development work must be performed in order to demonstrate the bioequivalency of the generic drug to the original branded drug. Nevertheless, research and development costs associated with generic drugs are much lower than those of their original counterparts. As a result, off-patent drugs can be offered for sale at prices much lower than those of patented drugs, which must recoup substantial basic research and development costs through higher prices over the life of the product's patent.

        Currently, the affiliates of our Sandoz generics Business Unit employ about 750 researchers and developers who explore alternative routes for the manufacture of known compounds and who aim to develop innovative forms of generic drugs. These associates are based worldwide, including facilities in Kundl and Schaftenau, Austria; Menges and Ljubljana, Slovenia; Kolshet, India and Dayton, New Jersey.

        In 2003, our Sandoz generics Business Unit invested $263 million in research and development, which amounted to 9.1% of sales. We have long-term research commitments totaling $13 million in the aggregate as of December 31, 2003. We intend to fund these expenditures from internally generated resources.

Regulation

        The Waxman-Hatch Act in the US (and similar legislation in the EU and in other countries) eliminated any requirement that generic drug manufacturers repeat the extensive clinical trials which are

50



required for originator drugs, so long as the generic version could be shown to be of identical quality and purity, and to be biologically equivalent to the original branded drug.

        In the US, the decision whether a generic drug is bioequivalent to the original branded drug is made by the FDA based on an Abbreviated New Drug Application (ANDA) filed by the generic drug's manufacturer. The process typically takes approximately eighteen months from the filing of the ANDA until FDA approval. However, delays can occur if issues arise regarding the interpretation of bioequivalence study data, labeling requirements for the generic product, or qualifying the supply of active ingredients. In addition, the Waxman-Hatch Act requires a generic manufacturer to certify in certain situations that the generic drug does not infringe any current applicable patents on the drug held by the innovator, or to certify that such patents are invalid. This certification often results in a patent infringement lawsuit being brought by the innovator against the generic company. In the event of such a lawsuit, the Waxman-Hatch Act imposes an automatic 30-month delay in the approval of the generic drug in order to allow the parties to resolve the intellectual property issues.

        In the EU, decisions on bioequivalence can be made by the EMEA under the Centralized Procedure, or by a single member state, after which the MRP may be followed. See "Pharmaceuticals—Regulation—European Union." Companies may submit Abridged Applications for approval of a generic pharmaceutical product, based upon its "essential similarity" to a medicinal product authorized and marketed in the EU for not less than ten years.

Intellectual Property

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

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

        In one significant example, we were involved in a series of lawsuits brought by GlaxoSmithKline (GSK) regarding amoxicillin/potassium clavulanate, our generic version of GSK's Augmentin®. We launched the first generic version of this GSK product in the US in July 2002, following favorable decisions by the United States District Court for the Eastern District of Virginia invalidating seven patents alleged by GSK to cover its Augmentin® product. In November 2003, the District Court's decision was affirmed on appeal by the US Court of Appeals for the Federal Circuit.

        GSK had also initiated actions against us in state court in Colorado and before the US International Trade Commission, alleging that the potassium clavulanate used in manufacturing our product is produced using a trade secret allegedly stolen from GSK. In July 2003, we reached an agreement with GSK on this issue. Under the terms of the agreement, GSK will receive single-digit percentage royalties on US sales of generic versions of Augmentin® sold by us for the four-year period from July 2002 through June 2006.

        We are currently involved in litigation in a number of countries with affiliates of AstraZeneca regarding omeprazole, our generic version of AstraZeneca's Priolosec®. We launched omeprazole in the US in August 2003. These cases are generally in their early stages. We believe that we will be successful in these lawsuits. However, should AstraZeneca succeed in any or all of the lawsuits, then AstraZeneca will

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likely seek to recover from us its lost profits for sales it would have made had our product not been on the market.

OTC

        Our Over-the-Counter (OTC) self medication Business Unit is a world leader in the research, development, manufacturing and marketing of products for the treatment and prevention of common medical conditions and ailments, to enhance people's overall health and well being. The business of our OTC Business Unit is conducted by a number of affiliated companies in more than 50 countries. As of December 31, 2003, the affiliates of our OTC Business Unit employed 3,920 associates worldwide. In 2003, the affiliates of our OTC Business Unit achieved consolidated sales of $1.8 billion in sales, which represented 7% of the Group's total sales.

Key Marketed Products

        The OTC Business Unit's main product categories are cough, cold and allergy treatments, gastrointestinal treatments, dermatological treatments, analgesics, vitamins, minerals and supplements, venous disorder treatments and smoking cessation treatment. The major OTC brands are:

Key brands

  Market/segment
Nicotinell/Habitrol   Smoking cessation
Voltaren Emulgel   Topical muscle pain
Sandoz   Minerals
LamisilAT Cream   Athlete's foot treatment
Otrivin   Nasal decongestant
Triaminic   Pediatric cough & cold
NeoCitran/TheraFlu   Cold remedies and flu
Maalox   Antacid
Ex-Lax   Laxative
Gas-X   Anti gas
Benefiber/NovaFibra   Fiber supplements
Fenistil   Wound healing

        In 2003, the OTC Business Unit had a number of key brand and marketing achievements:

    Lamisil, the one week treatment for athlete's foot, had strong sales growth of 17%, led by Latin America (+70%) and Asia (+33%).

    Voltaren Emulgel, a topical analgesic for muscle pain and the largest OTC brand in our portfolio, strengthened its number 1 global position in sales within the topical analgesics category by growing 11% and achieving a nearly 24% share of the category's sales in the countries where the product is available, according to the most recent available data.

    Nicotinell/Habitrol, our smoking cessation franchise, increased sales by 35% over 2002 driven by the successful roll-out of consumer-preferred chewing gum products and by private label gains in Europe and Asia.

    We launched several innovative new products or formulations, including Voltaren Patches in certain countries in Western Europe. The introduction of this new form contributed to the strong Voltaren performance.

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    We acquired the Tenalf and Alvium brands in Mexico, further strengthening OTC's position in the Mexican cough, cold and allergy segment. Novartis OTC began selling these brands in July 2003.

    OTC launched a private label loratadine product in the US market, through close collaboration with our Sandoz generics Business Unit. The launch, which began in February 2003, posted dynamic sales through the Hatch-Waxman exclusivity period.

Principal Markets

        In 2003, OTC realized the majority of its sales in its two principal markets: the US and Europe, including Eastern Europe. In 2002, the OTC Business Unit and Kao Corporation agreed to end their joint venture to market OTC products in Japan. However, OTC remains committed to expanding its presence in the Japanese market. The following table sets out our 2003 sales by geographic region.

OTC

  Sales 2003
 
  ($ millions)

  (%)

United States   531   30
Americas (except the United States)   170   10
Europe   890   50
Rest of World   181   10
   
 
Total   1,772   100
   
 

        The OTC business is marked by a high degree of seasonality, with our cough, cold and allergy brands—including Triaminic, NeoCitran/Theraflu and Tavist—heavily influenced by the timing and severity of the annual cold and flu season and allergy seasons.

Production

        Our OTC Business Unit has a manufacturing and supply infrastructure comprised of the Business Unit's own plants, strategic third parties and other Novartis Group plants (which are predominantly owned and operated by the Pharmaceuticals Division). The primary OTC plants are located in Lincoln, Nebraska; Nyon, Switzerland and Humacao, Puerto Rico.

        The goal of our supply chain strategy is to produce and distribute high quality products in an efficient manner. Our balance of internal, external and Group sites provides flexibility and predictable sources of supply in the event of capacity constraints or other potential disruptions to supply. The manufacture of our products is heavily regulated, making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a recall or a government-enforced shutdown of production facilities, which in turn could lead to product shortages. While we have not experienced material supply interruptions in the past, there can be no assurance that supply will not be interrupted in the future as a result of unforeseen circumstances.

        Raw materials for the manufacturing process are purchased from a number of our affiliates and third party suppliers. For the most part, the products and services we procure are not proprietary and are available from a number of suppliers. We often "single-source" supplies, but we have a policy of having at least a second approved and validated supplier registered for most key materials so that substitution is possible. Where practical and beneficial, we have long-term contracts in place on key production inputs. We also proactively monitor markets and developments that could have an adverse effect on the supply of essential materials.

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Marketing and Sales

        We aim to be a leading global participant in fulfilling the needs of patients and consumers for self-medication healthcare. Strong brands, science-based products and in-house marketing and sales organizations are key strengths in pursuing this objective. We distribute our products through various channels, such as pharmacies, food, drug and mass retail outlets.

Competition

        The fundamental trends driving the growth of our OTC business are increasing pressures on government health funding, changing consumer attitudes towards personal well being, the rise of a self-care mentality among consumers and successful switches of prescription products to OTC status. Other companies selling over-the-counter pharmaceutical products include major international corporations with substantial financial and other resources, such as Aventis, Bayer, GlaxoSmithKline, Johnson & Johnson, Roche, Pfizer, Procter & Gamble and Wyeth.

Research and Development

        In OTC, the focus of research and development activities is primarily on dermatology, analgesics, cough, cold, allergy, gastrointestinal, minerals, and cardiovascular risk reduction (through smoking cessation programs). OTC also works closely with the Pharmaceuticals Division to evaluate appropriate products that can be switched from prescription to OTC status. The development of line extensions to leverage brand equities is also of high importance. These extensions can take many forms including new flavors, new galenical forms and more consumer-friendly packaging.

        The OTC business employs close to 200 associates in Research and Development with the primary facility located in Nyon, Switzerland. Local country Research and Development organizations largely manage compliance, regulatory needs and medical affairs. In 2003, the OTC Business Unit spent $75 million in Research and Development, representing approximately 4.2% of net sales.

Regulation

        For OTC products, the regulatory process for bringing a product to market consists of preparing and filing a detailed dossier with the appropriate national or international registration authority and obtaining approval in the US or registration in the EU and the rest of the world. See "Pharmaceuticals—Regulation."

        In the US, in addition to the NDA process which is also used to approve prescription pharmaceutical products, an OTC product may be sold if the FDA has determined that the product's active ingredient is generally recognized as safe and effective. FDA makes this determination through a regulatory process known as the OTC Review. In the OTC Review, the FDA establishes, in a series of monographs, the conditions under which particular active ingredients may be recognized as safe and effective for OTC use. Pharmaceutical companies can market products containing these active ingredients without the necessity of filing an NDA and going through its formal approval process, so long as the company complies with the terms of the published monograph.

        Most countries also have a regulatory process for switching a particular pharmaceutical product from prescription to OTC status. These processes vary from country to country.

Intellectual Property

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

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

ANIMAL HEALTH

        Our Animal Health Business Unit is a world leader in the research, development, manufacturing and marketing of products and services to save, prolong and improve animal lives. The business of our Animal Health Business Unit is conducted by a number of affiliated companies in 39 countries. As of December 31, 2003, the affiliates of Animal Health employed 2,193 associates worldwide. In 2003, the affiliates of Animal Health achieved consolidated sales of $682 million, which represented 3% of the Group's total sales.

        Animal Health researches, develops, manufactures and markets a wide range of products for both companion and farm animals including farmed fish. In 2003, the companion animal segment accounted for 52% of our total Animal Health sales and the farm animal business, including Vaccines and Aqua Health, accounted for 48%. Our Animal Health products include parasiticides, antimicrobials, vaccines and veterinary pharmaceuticals. Our Animal Health business has a dedicated research and development team, which benefits from synergies with other Novartis businesses, most notably, research in the Pharmaceuticals Division.

        We acquired Grand Laboratories Inc. and ImmTech Biologics Inc. in the US in January 2002 for a combined minimum purchase price of $99 million. The final price may increase depending on whether certain future sales and other targets are met. These businesses specialize in the development, manufacture and marketing of vaccine products for cattle and pigs. Through these acquisitions we increased the share of vaccines to 8% of the Business Unit's total sales in 2003, strengthened our position in the vaccines market and established our presence in the US farm animal segment.

        2003 was characterized by an expansion of our product range, with new products contributing 6% to total annual sales. This range rejuvenation included new product introductions, geographical extensions, new indications for existing products, and the phase out of non-strategic brands. In parallel, our investments in Marketing & Sales and Research & Development were increased over 2002 to exploit the existing portfolio.

        In July 2003, we announced a new organizational structure for our Animal Health Business Unit. We have divided our Animal Health business geographically into four Regions—North America, Latin America, Europe and Asia Pacific—and have moved operational responsibilities from our head office to offices in each of these regions, in order to be closer to our markets.

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Recently Launched Products

Product

  Description
  Registration/Launch Status
Companion and Farm Animals        

Agita

 

Farm fly control

 

Launched in 14 countries in Europe, Asia Pacific and Latin America

Atopica

 

Treatment of atopic dermatitis in dogs

 

launched in the US, UK and Italy and registered in the other EU countries

Deramaxx

 

First COX-2 inhibitor approved for pain control in dogs

 

Approval of chronic pain control claim was received in the US in February 2003 with launch in the same month

Fortekor

 

Congestive Heart Failure in dogs, Chronic Renal Insufficiency in cats

 

New product form palatable to cats introduced in UK and Switzerland

Milbemax

 

Intestinal worm control in dogs and cats

 

Geographical expansion to 11 additional countries, primarily in Europe

Sentinel Spectrum

 

Prevention of heartworm and control of intestinal worms and fleas

 

Launched in Australia


Vaccines and Aqua Health


 


 


 


 

Coxabic

 

Coccidia vaccine in poultry breeders

 

Launched in South Africa

Vaccine line extension in US

 

Cattle, pig and equine vaccines

 

5 new products and 2 new indications were launched in the US

Vaccine line extension in Aqua Health

 

Vaccines for salmon and trout

 

3 vaccines launched in Chile, 1 in Canada and 5 in Europe

Vaccines geographical expansion

 

Pig vaccines against respiratory and enteric diseases

 

Existing vaccine range was introduced in Brazil and Southeast Asia countries

Pyceze

 

Control of fungal infections in fish and fish eggs

 

Pyceze, the only authorized treatment to replace products now banned, was introduced in 3 EU countries and Chile

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Key Marketed Products

Products

  Description
Companion Animals    

Deramaxx

 

Control of osteoarthritis pain, postoperative orthopedic pain and inflammation in dogs

Fortekor

 

Treatment of congestive heart failure in dogs and chronic renal insufficiency in cats

Interceptor

 

Prevention of heartworm and intestinal worms

Milbemax

 

Control of intestinal worms in cats and dogs

Program

 

Control of fleas in dogs and cats

Sentinel

 

Prevention of heartworm and control of fleas and intestinal worms in dogs

Farm Animals

 

 

Clik/Vetrazin

 

Prevention of blowfly strikes in sheep

Endex

 

Treatment and control of liver fluke and gastro-intestinal worms in cattle and sheep

Fasinex

 

Treatment and control of liver flukes in cattle and sheep

Tiamutin, Econor

 

Treatment of bacterial infections in pigs and poultry

Vaccines and Aqua Health

 

 

Betamax, Excis

 

Treatment and control of salmon lice

Birnagen Forte, Furogen

 

Prevention of infectious pancreatic necrosis in farmed salmon

Bovidec

 

Prevention of bovine viral diarrhea in cattle

Fusogard

 

Prevention of foot rot and liver abscess control in cattle

Pyceze

 

Treatment and control of fungal infections in fish and fish eggs

Scourbos, Somnustar

 

Prevention of enteric disease in cattle

Virashield

 

Prevention of respiratory disease in cattle

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Principal Markets

        Products for companion animals are sold predominantly in North America, the EU, Australia and Japan. In most other countries, sales of farm animal products dominate. The following table sets out 2003 total sales of our Animal Health products by region:

Animal Health

  Sales 2003
 
  ($ millions)

  (%)

United States   255   38
Americas (except the United States)   83   12
Europe   219   32
Rest of the World   125   18
   
 
Total   682   100
   
 

        Pharmaceutical and biological product sales in all of our main Animal Health businesses (aqua, farm and companion animals) fluctuate seasonally, and can be significantly affected by climatic and economic conditions, and by changing health or reproduction rates of animal populations.

Production

        Approximately 80% of our production volume is manufactured by third parties, including Novartis affiliates in other Business Units. Animal Health has production facilities of its own located around the world, with main sites in WUSI-Farm, China; Dundee, Scotland and Braintree (UK); Larchwood, Iowa and Huningue, France.

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

        We obtain our raw materials from sources around the world. We depend to a large extent on suppliers for the raw materials, intermediates and active ingredients. We make use of long term supply agreements to limit the volatility of prices charged to us for raw materials.

Marketing and Sales

        Our products are predominantly prescription-only treatments for animals. The major distribution channels are veterinarians and wholesalers of veterinary products. Primary marketing efforts are targeted at veterinarians using such marketing tools as printed materials, direct mail, advertisements and articles in the veterinary special press, our participation at conferences for veterinarians and the organization of special educational events, focusing primarily on new treatment areas. In addition, we engage in general public relations activities, including media advertisements and other direct advertisements of brands, to the extent permitted by law in each country.

Competition

        Other companies selling veterinary pharmaceutical products for companion and farm animals are Bayer, Elanco, Fort Dodge (Wyeth), Intervet (Akzo Nobel), Merial, Pfizer, and Schering-Plough. Most of these companies offer a broad range of products for both companion and farm animals, and their marketing efforts are at a comparable level to ours.

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Research and Development

        Novartis Animal Health has dedicated research facilities in Switzerland and Australia for antiparasitics. In the US, UK and Canada, we focus on the development of new vaccines for farm animals and farmed fish. In 2003, we stepped up our investment into development projects, devoting $73 million to research and development. This amount represented 10.7% of total sales.

        In these efforts, we use high-capacity, in-vitro micro-screening to assess a large number of natural products and synthetic chemicals for bioactivity. Our researchers exploit synergies with other Novartis businesses and also collaborate with external partners to develop veterinary treatments. Drug delivery projects, some in collaboration with external partners, concentrate on our key treatment areas and aim to improve efficacy and ease of use.

        We have long-term research commitments totaling $5 million in the aggregate as of December 31, 2003. We intend to fund these expenditures from internally generated resources.

Regulation

        The registration procedures for animal medicines are similar to those for human medicines. An animal drug application for product registration must be accompanied by extensive data on residue and food safety, target animal safety, environmental effects, efficacy in laboratory and clinical studies as well as information on manufacturing, quality control and labeling.

        In the US, animal health products are generally regulated by the FDA's Center for Veterinary Medicine. Certain product categories are regulated by the Environmental Protection Agency (EPA), and vaccines are under the control of the US Department of Agriculture (USDA).

        In the EU, veterinary medicinal products need marketing authorization from the competent authority of a member-state (national authorization) or through a community procedure, which is either the Centralized Procedure or the MRP. See "Pharmaceuticals—Regulation."

        In Japan, veterinary medicinal products are approved by the Ministry of Agriculture Fisheries and Food (MAFF). The application, including supplementary local trial data, is reviewed by the MAFF and a General Investigation Committee, a Special Investigation Committee and a Permanent Investigational Committee before authorization is granted.

Intellectual Property

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

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

MEDICAL NUTRITION

        Our Medical Nutrition Business Unit is a world leader in the research, development, manufacturing and marketing of enteral and oral nutrition products and devices tailored to the varying needs of patients and healthcare professionals. The business of our Medical Nutrition Business Unit is conducted by a number of affiliated companies in 28 countries. As of December 31, 2003, the affiliates of Medical

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Nutrition (including Nutrition & Santé) employed 2,849 associates worldwide. In 2003, Medical Nutrition (including Nutrition & Santé) posted $815 million in sales, representing 3% of the Group's total sales.

        Medical Nutrition is dedicated to maintaining and improving the health and well being of consumers and patients—at home or in health care delivery settings (hospitals, nursing homes and home health care)—by fulfilling their nutritional needs. In partnership with health care professionals, Medical Nutrition offers the highest quality medical nutrition products, devices and services ranging from standard to disease-specific products that improve health and quality of life for all age groups—from pediatrics to geriatrics. This broad range of supplements, tube feedings and food provides essential nutrients for good nutrition when illness or disabilities limit a person's ability to eat a balanced diet.

        In November 2002, we divested our Food & Beverage business, including Ovaltine®/Ovomaltine®, Caotina® and Lacovo®, to Associated British Foods plc for $270 million. The transaction is in furtherance of our strategy of focusing on healthcare and our core pharmaceuticals business. Our remaining Health Food & Slimming and Sports Nutrition businesses have been reorganized into a stand-alone unit called Nutrition & Santé. For reporting purposes, this unit's results have been included in the results of the Medical Nutrition Business Unit. We have announced our intention to sell Nutrition & Santé once an attractive bid is received.

        In June 2003, we acquired Semper Clinical Nutrition, the second largest medical nutrition business in the Scandinavian region. Semper Clinical Nutrition is part of Semper AB, a subsidiary of Arla Foods amba, headquartered in Vidy, Denmark.

        In July 2003, we secured exclusive global rights for a novel ingredient to treat patients with severe diarrhea. This product was licensed-in from AS Faktor AB, a subsidiary of Lantmannen, Sweden's largest agricultural cooperative.

        In December 2003, we announced that our Medical Nutrition Business Unit had entered into an agreement with Bristol-Myers Squibb Company to acquire the global adult medical nutrition business of the Bristol-Myers subsidiary Mead Johnson & Company for $385 million in cash. This agreement is currently subject to regulatory review. Successful completion of the transaction would offer our Medical Nutrition Business Unit a strong presence in the fast-growing US retail channel for medical nutrition products, would expand its existing institutional medical nutrition business and would enhance its access to the Japanese market. The acquisition would also allow the Business Unit to further leverage its disease-specific brands consistent with its overall growth strategy.

        In the US, our Business Unit's affiliate is the subject of an investigation by the US Department of Justice regarding certain marketing and pricing practices, including whether certain federal criminal statutes have been violated. See "Item 8. Financial Information—8.A Consolidated Statements and Other Financial Information—8.A.7 Legal Proceedings."

Key Marketed Products

        Medical Nutrition.    Our Medical Nutrition Business Unit covers the full spectrum of disease and age specific nutrition. Depending on their condition, patients need specific nutritional support to protect and

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accelerate their recovery from a disease or surgery. From our comprehensive range of innovative and trusted products for Medical Nutrition, we have created five strong and recognizable global brands.

Key brands

  Market/segment
Resource   Range of standard and disease-specific oral nutritional supplements

Isosource

 

A complete range of tube and sip feeds, providing for normal nutritional requirements

Novasource

 

Range of nutritional tube and sip feeds for specialty or disease specific needs

Impact

 

Range of standard and disease-specific oral nutritional supplements

Compat

 

Range of standard and specialty devices to deliver tube feeds to the gastrointestinal tract of patients

Optifast

 

Range of weight management products

        The Medical Nutrition Business Unit will continue to focus on a disease-specific approach while leveraging its global brands, especially in the Acute and Home Care market segments.

        During September 2003, we introduced Resource Support, a specialized nutritional product with a unique blend of key nutrients designed to help cancer patients gain weight in the form of muscle tissue and to enhance their immune function.

        During 2003, the Medical Nutrition Business Unit strengthened its partnership in the US with the Walgreens chain of drug stores to better capture the outpatient market. Under this partnership, Walgreens promotes our Medical Nutrition products through its promotional and advertising activities. Outpatient customers are able to purchase our Medical Nutrition products on-line through the Walgreens Medical Nutrition Center, located at the www.resource.walgreens.com website or through a toll-free telephone number, for delivery through Walgreens' order fulfillment system.

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        Nutrition & Santé.    The stand-alone unit Nutrition & Santé has the following brands:

Key brands

  Market/segment
Health Food & Slimming brands:

Céréal

 

A broad range of natural and dietetic foods for health conscious consumers

Gerblé

 

A broad range of health food products, many made with wheat germ, which deliver functional benefits

Gerlinéa

 

An affordable slimming product range, targeting consumers who wish to remain slim while eating as normally as possible, rather than consumers with a medical weight issue

Modifast

 

Slimming products with added vitamins, minerals and proteins

Dietisa

 

A product portfolio range including medicinal plants, health foods, dietary supplements and cosmetics, sold mostly in Spain and Portugal

Pesoforma

 

Similar product range as
Gerlinéa focusing on the Italian market

Lecinova

 

Food supplement sold in Italy

Milical

 

Meal substitutes range with very low calorie diet and vitamins, minerals & supplements

Sports Nutrition brands:

Isostar

 

Marketed with a niche, scientific strategy to appeal primarily to professional and performance-driven athletes

Powerplay

 

Products targeted to bodybuilders, available only in Switzerland, Germany and Austria

Mineralplus

 

A recovery powder targeted at athletes who participate in endurance sports, available only in Germany and Austria

Principal Markets

        In 2003, our Medical Nutrition Business Unit (including Nutrition & Santé) realized the majority of its sales in its two principal markets: the US and the EU. The following table sets out our 2003 sales by geographic region. The figures include the sales of Nutrition & Santé.

Medical Nutrition

  Sales 2003
 
  ($ millions)

  (%)

United States   256   31
Americas (except the United States)   24   3
Europe   501   62
Rest of World   34   4
   
 
Total   815   100
   
 

        Our products are not subject to seasonality of demand.

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Production

        Our Medical Nutrition Business Unit has a manufacturing and supply infrastructure comprised of the Business Unit's own plants as well as strategic third party suppliers and other Novartis Group plants. The most significant of the dedicated Medical Nutrition plants are located in Minneapolis, Minnesota and Osthofen, Germany.

        The goal of our supply chain strategy is to produce high quality products in an efficient manner. The balance of internal, external and Group sites provides flexibility and predictable sources of supply in the event of capacity constraints or other potential disruptions to ongoing supply.

        Raw materials for the manufacturing process are purchased from a number of our affiliates and third party suppliers. For the most part, the products and services we procure are not proprietary and are available from a number of suppliers. Where practical and beneficial, we have long-term contracts in place on key production inputs. We also proactively monitor markets and developments that could have an adverse effect on the supply of essential materials. The manufacture of many of our products is regulated, making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a government-enforced shutdown of production facilities, which in turn could lead to product shortages. While we have not experienced material supply interruptions in the past, there can be no assurance that supply will not be interrupted in the future as a result of unforeseen circumstances.

Marketing and Sales

        The majority of the Medical Nutrition Business Unit's sales (excluding Nutrition & Santé) are to health institutions, such as hospitals, nursing homes, home healthcare providers and group purchasing organizations. In addition, in the US, outpatient consumers can purchase our products directly through our Walgreens partnership, by means of a toll-free telephone call or the Internet.

Competition

        Novartis Medical Nutrition (excluding Nutrition & Santé) is the second largest medical nutrition company in the world in terms of sales, with strong positions in the US (second largest) and in Europe (fourth largest). Other companies selling medical nutrition products are Abbott Ross, Fresenius, Mead Johnson, Nestlé and Numico.

Research and Development

        The Medical Nutrition research and development function is responsible for generating new products and therapies based on the needs of the market. Concepts are developed into prototypes using new and existing ingredients, processes, and packaging. Prototypes are scaled from bench top to pilot plant to production scale. Product attributes are validated through clinical trials under the direction of our Research and Development team, in order to determine whether the product is safe and well-tolerated. Label claims, label designs, and regulatory compliance issues are also addressed. On-going product quality is monitored and improved through specification development, testing, and corrective and preventative action.

        In 2003, we invested $15 million in research and development, which amounted to 1.8% of sales.

        In July 2003, we announced the globalization of the Medical Nutrition Research and Development function in order to enhance the speed, quality and time to market of our new product innovations across all regions, for both our existing mature product portfolio and our growing disease specific products. Our global headquarters has been moved to the US in order to take advantage of the clinical and scientific resources available there, and to help further strengthen our collaboration with the Pharmaceuticals Division.

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Regulation

        Foodstuffs are highly regulated in order to protect the public health. The following areas are generally subject to international and national food regulations: development, manufacturing, packaging, quality (food standards, ingredients), safety, labeling and advertising of foods. In the US, the Medical Nutrition Business Unit's products are covered by FDA regulations covering medical foods, dietary supplements and medical devices.

Intellectual Property

        Our Medical Nutrition businesses are brand-oriented and, therefore, we consider our trademarks to be of utmost value. Trademarks protect most of our brands in the majority of the markets where these brands are sold, and we vigorously protect these trademarks from infringement. Our most important trademarks are used in a number of countries. Local variations of these international trademarks are employed where legal or linguistic considerations require the use of an alternative.

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

INFANT & BABY

        Our Infant & Baby Business Unit is a world leader in the research, development, manufacturing and marketing of foods and products for babies. The business of our Infant & Baby Business Unit is conducted by a number of affiliated companies in more than 50 countries. As of December 31, 2003, the affiliates of Infant & Baby employed 4,829 associates worldwide. In 2003, the affiliates of Infant & Baby achieved consolidated sales of $1.4 billion, which represented 6% of the Group's total sales.

        Our Infant & Baby Business Unit is best known for its Gerber products which are marketed in the US and in certain other countries. The major contributor to the continued solid performance of the Business Unit is the Gerber business in the US, spurred by innovations in the Juice, Graduates and Tender Harvest lines. An outstanding success has been Lil' Entrees, a new line of microwavable convenience meals in trays, and the first phase of converting the core pureed products from glass to plastic. The Business Unit's results are especially strong given that baby products industry sales have been negatively impacted by the ongoing decline in the US birth rate.

        Besides nutrition products, the Business Unit offers a wide variety of other products for infants and toddlers, including a baby care line (featuring nursing and feeding aids), wellness products (such as lotions and washes), and life insurance.

Key Marketed Products

        Globally, our Infant & Baby Business Unit offers more than 200 food products. From Gerber 1st FOODS to Graduates, the company's product line covers each phase of child development with diverse flavors and textures. Gerber baby and toddler foods include Cereals, 1st FOODS, 2nd FOODS, 3rd FOODS, Tender Harvest (organic food), Finger Foods, Fruit and Vegetable Juices and Gerber Graduates Toddler Food. Gerber's nutrition business began in 1928, in Fremont, Michigan and marked its 75th anniversary in 2003. Gerber began its baby care line in 1960 and now markets more than 350 Gerber and NUK® branded products. Bottles, teethers, pacifiers, breastfeeding accessories and spill-proof cups are just a few of the products now being distributed to babies and parents around the world.

        Continuing its commitment to baby care, Gerber introduced a complete line of skincare and healthcare products in 1999, all designed to help parents raise happy, healthy babies. The skincare products include a full line of washes, lotions and tear-free shampoos with the Gerber SkinNutrients unique blend of seven vitamins and natural ingredients. The healthcare line includes Pediatric Electrolyte Solution, Tooth & Gum Cleanser, Diaper Rash Ointment, Gas Relief Drops and Vitamin Drops.

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        Since 1967, our affiliate Gerber Life Insurance Company, has been marketing life insurance protection directly to the consumer. Currently, Gerber Life's Grow Up policy is the leading juvenile whole life insurance product distributed in the US and Canada.

        In addition, we have licensed the Gerber trademark to an unaffiliated company, Gerber Childrenswear, Inc., which sells bibs, apparel, shoes and similar products carrying the trademark. Gerber Childrenswear, Inc. pays royalties to our affiliate, Gerber Products Company, for the use of the trademark.

        The major brands and product groups in Infant & Baby are:

Key Brands

  Product groups
  Main markets
Gerber, Graduates, Lil' Entrees,
Tender Harvest, Yukery, 1st FOODS,
2nd FOODS, 3rd FOODS
  Baby food   US, Latin America, Europe, Asia

Argos, Fiona, Gerber, Lillo by Gerber, Ninet,
NUK®

 

Baby Care

 

US, Canada, Asia, Latin America

Argos, Capent, Gerber, Ninet

 

Baby Wellness

 

US, Latin America

Gerber
Life

 

Insurance

 

US

Recently Launched Products

        In the US, Gerber continued to build on its position as a leader in infant feeding and care with a number of innovations in 2003. In response to consumers' need for convenience, Gerber launched single-serve plastic packages, ideal for out-of-home feeding. Gerber now offers all juices and top selling fruit purees in single-serve plastic containers. The number of different products packaged in plastic will continue to expand in 2004. In addition, in 2003, the Gerber Wellness product line was launched in Canada, and in Korea through a direct marketing company. In Latin America, jarred nutrition products fortified with vitamins and minerals were introduced along with dinners containing Omega 3 and Omega 6 fatty acids. Also, new cereals featuring milk and fruit were brought to market in Brazil and Mexico.

        Within the Gerber Care/Wellness business, a number of innovative new products were launched at the end of 2002. The new spill-proof Insulated Cool Cup helps beverages to retain their desired temperature longer. Also, two new cups were launched that help during key development transitions. The first helps babies transition from the bottle to spill-proof cups. The second will later help them transition from the spill-proof cups to adult cups. For breast feeding mothers, a line of breast therapy items was introduced in December 2002, which includes soothers, warm-cool packs and moistening sticks.

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Principal Markets

        In 2003, the Infant & Baby Business Unit realized the majority of its sales in its two principal markets: the US and Latin America. The following table sets out our 2003 sales by geographic region.

Infant & Baby

  Sales 2003
 
  ($ millions)

  (%)

North America   1,106   81
Latin America   195   15
Europe/Middle East/Africa   42   3
Asia   18   1
   
 
Total   1,361   100
   
 

        Infant & Baby retail sales are not significantly affected by seasonal variations.

Production

        Key factors in Infant & Baby's successful supply chain strategy include a high efficiency, low cost structure and the mitigation of risks through multiple production sources. Regional sites serve specific markets but are also capable of providing support as needed to other regions in the event of supply disruption. Gerber operates production facilities in North America, South America and Eastern Europe for nutrition and care products. Major production sites are in Fremont, Michigan; Fort Smith, Arkansas; Reedsburg, Wisconsin; Querétaro, Mexico and Rzeszow, Poland.

        The manufacture of most of our products is heavily regulated, making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a government-enforced shutdown of production facilities, which in turn could lead to product shortages. While we have not experienced material supply interruptions in the past, there can be no assurance that supply will not be interrupted in the future as a result of unforeseen circumstances. The Baby Care and Wellness franchises tend to utilize suppliers from a wider geographic area.

        We often "single-source" supplies, but we have a policy of having at least a second approved and validated supplier registered for most key materials so that substitution is possible. Where practical and beneficial, we have long-term contracts in place on key production inputs. We also proactively monitor markets and developments that could have an adverse effect on the supply of essential materials.

        Raw materials for the manufacturing process are purchased from a number of third party suppliers. For the most part, raw materials for our nutrition products are sourced from within the country of use. Our growers and suppliers are well versed in our strict agricultural requirements and generally have long term relationships with us. We are subject to adverse weather and growing conditions, but mitigate this as much as possible with alternative geographic sourcing areas.

Marketing and Sales

        The mission for the Infant and Baby Business Unit is to leverage our brand leadership of trust in helping parents nurture happy, healthy babies into the leading infant and baby brand around the world. In 2003, Gerber continued converting glass jars to plastic containers for its nutrition products. This major innovation is a result of consumer data which clearly indicates the preference for plastic as a better fit for today's active parents and families. Strong brands, product development based on sound nutrition principles, and in-house marketing and sales organizations are some of our key strengths. Gerber products are distributed through food, drug and mass merchandiser retail outlets.

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Competition

        Other companies selling infant and baby foods are Del Monte and Beechnut in the US, Nestlé and Heinz in Latin America, Nutricia in Eastern Europe and other regional businesses elsewhere. Other companies selling baby care and wellness products are Johnson & Johnson, Playtex and Avent in the US. There are other companies selling these products located in Latin America and Asia. Another company selling juvenile life insurance policies in the US is Globe Life and Accident Insurance Co., an affiliate of Torchmark Corporation.

Research and Development

        The Infant & Baby Business Unit has a Research and Development department which uses a multi-faceted approach to deliver consumer innovation by developing new processes, products and packaging for the nutrition, Baby Care and Wellness franchises. Internally developed new processes include NatureLock, a patented cooking process for jarred fruits and vegetables. New products include Lil' Entrees, our nutritious, portable meals for toddlers. Packaging innovations include aseptic plastic packaging, which provide additional convenience for consumers.

        In addition, Gerber Research and Development oversees research regarding the needs of infants and their development. For example, Gerber's Feeding Infants and Toddlers Study (FITS) analyzed the feeding habits and nutrient intake of a cross-sectional, random sample of more than 3,000 US children ranging from 4 to 24 months of age. The results of this Study were published in January 2004, in a special supplement of the Journal of the American Dietetic Association. Gerber commissioned the survey in response to the growing obesity epidemic in the US, in order to better understand eating habits early in life when they are being formed. FITS is the largest scientific study of its kind ever conducted and fills a critical gap in knowledge. The findings will inform and provide insights to help health professionals develop more effective educational messages. Effective educational efforts that help parents and caregivers teach healthy eating habits early in life can help prevent obesity and chronic diseases in our next generation.

        In 2003, the Infant & Baby Business Unit invested approximately $28 million in research and development, representing 2.1% of Infant & Baby sales.

Regulation

        Foodstuffs are highly regulated in order to protect the public health. The following areas are generally subject to international and national food regulations: development, manufacturing, packaging, quality (food standards, ingredients), safety, labeling and advertising of foods. Infant foods are regulated by various governmental agencies on a country-by-country basis. There is no global harmony of requirements and regulations. Many countries require food products to be registered in order to document the safety and nutrition of imported food products. Gerber food products are specifically designed to meet the nutritional needs of infants and toddlers in the regions where they are sold and to meet or exceed requirements of the local regulatory agencies. These nutritional need standards are determined based on independent, peer-reviewed research, or by studies sanctioned by authorities such as the US Department of Health and Human Services.

        In the US, agencies such as the FDA, the USDA, the EPA and the Consumer Product Safety Commission are responsible for providing safety specifications and otherwise regulating our products and ingredients. The FDA and USDA have issued regulations and standards regarding the use of specific ingredients in certain types of food products, including which ingredients are allowed, and at what level, as well as ingredients that may be required in certain products. In addition, these agencies regulate food product labeling and the claims which can be made regarding food products. Globally, safety of ingredients and products are guided by recommendations from the Codex Alimentarius, a section of the WHO.

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Intellectual Property

        Our Infant & Baby Business Unit is brand-oriented, with the Gerber baby trademark among the most recognized in the world. Therefore, we consider this trademark, as well as others within Infant & Baby, to be of utmost value. Trademarks protect most of our brands in the majority of the markets where these brands are sold, and we vigorously protect these trademarks from infringement. Our most important trademarks are used in a number of countries. Local variations of these international trademarks are employed where legal or linguistic considerations require the use of an alternative.

        Wherever possible our products are protected by patents. Patents may cover products, product formulations, designs, processes, intermediate products or product uses. It is our policy to seek the broadest possible protection for significant product developments in all major markets.

CIBA VISION

        CIBA Vision is a world leader in the research, development, manufacturing and marketing of eye care products, specifically soft contact lenses, lens care products, and ophthalmic products. The business of our CIBA Vision Business Unit is conducted by a number of affiliated companies in more than 70 countries. As of December 31, 2003, the affiliates of CIBA Vision employed 5,717 associates worldwide. In 2003, the affiliates of CIBA Vision achieved consolidated sales of $1.3 billion, representing 5% of the Group's total sales.

        In August 2003, CIBA Vision announced its intent to pursue strategic alternatives for its ophthalmic surgical business, including the potential sale of that unit. Agreements have since been reached with certain third parties to sell them certain assets of the surgical business.

        On January 1, 2001, CIBA Vision's Ophthalmic Pharmaceuticals business became part of our Pharmaceuticals Division in a reorganization.

Recently Launched Products

    Focus NIGHT & DAY continuous wear lenses for up to 30 nights and days, received FDA approval for therapeutic use as a bandage lens in May 2003.

    We launched a number of new product additions around the world to our leading brands of cosmetic and color contact lenses. Those products include the June 2003 US launch of FreshLook Dimensions, the new generation of enhancing color contact lenses designed specifically for light eyes, as well as two new FreshLook ColorBlends colors.

    SOLO-care AQUA, the latest generation of no-rub multipurpose lens care solution, was introduced in Europe in 2003. Every bottle of SOLO-care AQUA is sold with a MicroBlock anti-bacterial lens case that kills bacteria and other microorganisms on contact and also resists the growth of new bacteria on the lens case.

    In August 2003, AOSEPT Clear Care (sold as AOSEPT Plus in Europe) and SOLO-care PLUS lens care solutions received FDA approval for a specific indication for use with silicone hydrogel lenses. Clear Care is the first peroxide-based solution to be approved with this indication in the US.

    AOSEPT Clear Care was approved by Health Canada for 7-day storage of contact lenses in July 2003. Previously, lenses were only approved for storage in Clear Care for 24 hours after disinfection. Clear Care had previously been approved for 7-day storage by the FDA in December 2002.

    AOSEPT Clear Care was approved by the FDA for use with gas permeable (GP) lenses in April 2003.

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    AQuify, an innovative lens drop that replicates the behavior of natural tears to provide long-lasting comfort for contact lens wearers, was launched in North America in September 2003. It had previously been launched in Europe in October 2002.

Key Marketed Products

        The table below sets out the key marketed products in each of CIBA Vision's two principal product segments:

Main Products

  Description
Contact Lenses    

Focus DAILIES

 

One-day disposable

Focus DAILIES
Progressives

 

One-day disposable to correct presbyopia

Focus DAILIES
Toric

 

One-day disposable to correct astigmatism

Focus NIGHT&DAY

 

Extended wear for up to 30 days and nights continuous wear

Focus Progressives

 

Corrects presbyopia

Focus Toric

 

Corrects astigmatism

Focus
Monthly

 

Replaced monthly

Focus
1-2 Week

 

Replaced every one to two weeks

Focus
1-2 Week SoftColors

 

Replaced every one to two weeks; enhances the color of light eyes

DuraSoft 3 Colors

 

Conventional cosmetic tinted lenses

FreshLook Colorblends

 

Opaque lenses that blend three colors on one lens creating a more natural looking cosmetic tinted lens for dark or light eyes

FreshLook Colors

 

Disposable lenses for eye color change

FreshLook Dimensions

 

Lenses which enhance the color and appearance of light eyes

FreshLook Radiance

 

Lenses for people with light or dark eyes that provide illuminating effects which vary based on a person's natural eye color, skin tone and hair color

WildEyes

 

Novelty lenses

Illusions Opaque

 

Conventional lenses for changing the color of dark eyes

Cibasoft

 

Conventional lenses with handling tint

Cibasoft Softcolors

 

Conventional lenses for enhancing the color of light eyes

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Lens Care Products


 


 

AOSept Clear Care/AOSept PLUS

 

An enhanced formulation of our leading
AOSept hydrogen peroxide disinfectant; the first one-bottle, no-rub lens care solution with no added preservatives in the US

SOLO-care AQUA

 

Latest generation one-bottle lens care solution formulated with ProVitamin B5 to promote moisture. Package includes
MicroBlock anti-bacterial contact lens case

SOLO-care Plus

 

An enhanced formulation of our
SOLO-care one-bottle lens disinfection system; offers a one-bottle, no-rub, no-rinse cleaning and disinfection system

BLUE Sept/BLUE Vision

 

One-step hydrogen peroxide lens disinfection system; features blue color indicator

QuickCARE/InstaCARE

 

Five-minute disinfectant system

Pure Eyes

 

Two-bottle hydrogen peroxide system

AQuify

 

Lens drop that replicates natural tears

Focus Lens Drops

 

Lens drop for lubricating contact lenses

Principal Markets

        Our principal markets, in terms of 2003 sales, were North America (US and Canada), Europe and Japan. Sales are not subject to seasonality. The following table sets forth 2003 sales for CIBA Vision by region:

CIBA Vision

  Sales 2003
 
  ($ millions)

  (%)

United States   461   35
Americas (except the United States)   75   6
Europe   497   38
Japan   192   15
Rest of the World   83   6
   
 
Total   1,308   100
   
 

Production

        CIBA Vision has major production facilities in Pulau Batam, Indonesia; Duluth, Georgia; Des Plaines, Illinois; Grosswallstadt, Germany; Cidra, Puerto Rico and Toronto, Canada. The manufacture of our products is heavily regulated, making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a government-enforced shutdown of production facilities, which in turn could lead to product shortages. While we have not experienced material supply interruptions in the past, there can be no assurance that supply will not be interrupted in the future as a result of unforeseen circumstances.

        We purchase basic chemical commodity raw materials for our lens products from industrial vendors. These raw materials are then reformulated into the monomers and polymers required to produce contact

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lenses. Polymer chemistry is one of the innovative elements in our contact lens products. The technology to produce the polymers and monomers is stable and well-defined.

        We enter into long-term supply contracts (generally over one to two years) with industrial raw material vendors, which limits volatility. In addition, most raw materials are basic chemical commodities and multiple suppliers are available. Certain lens products use proprietary chemicals that are produced specifically for us and sold exclusively to us. We also use a custom- designed process to synthesize macromonomers, a key raw material needed in contact lens production, which are produced by a contract vendor for a negotiated price.

Marketing and Sales

        Contact lenses are considered medical devices by regulatory authorities and, therefore, are available only with a prescription from an eye-care professional in most countries. CIBA Vision lenses can be purchased from independent eye care professionals and optical chains. CIBA Vision's lens care products can be found in major drug, food and mass merchandising retail chains in the United States, Europe, Japan and elsewhere. In addition, mail order and Internet sales are becoming increasingly important channels in major markets worldwide.

        Eye care professionals are CIBA Vision's primary marketing focus. In addition, we have direct-to-consumer initiatives including free trials and coupons.

Competition

Contact Lenses

        Growth in the contact lenses market is driven primarily by an increased demand for lenses and an increasingly varied product mix. As consumers move toward frequent replacement lenses, including one-day disposable lenses, demand for lenses is increasing. Additionally, the customer base is expanding with the development of new contact lens options, such as daily disposable, 30-night continuous wear, toric lenses for astigmatic patients and lenses to correct presbyopia, a condition prevalent among the "Baby Boom" generation. We are well-positioned in the contact lens market as the second-leading player on the basis of market share. CIBA Vision now has the broadest product portfolio of any competitor in the industry. Our colored lens technology also creates a strong combination with our other products that should prove attractive to women and teenagers, in particular. Other companies selling contact lenses are Bausch & Lomb and Johnson & Johnson.

Lens Care

        We expect to increase our presence in the one-bottle market segment with our SOLO-care brand lens care products and to maintain a leading position in the peroxide category with AOSept Clear Care lens care, which is required by wearers of frequent replacement and conventional contact lenses. The peroxide category is a mature market segment and the products will continue to face competitive pressure due to the increasing preference for daily disposable and continuous wear lenses, which require little or no lens care. CIBA Vision is a global leader in the peroxide lens care category with AOSept and AOSEPT Clear Care. Other companies selling lens care products are Alcon, Advanced Medical Optics and Bausch & Lomb.

Ophthalmic Surgical

        The Ophthalmic Surgical market includes intraocular lenses and phaco equipment for cataracts, laser vision correction, surgical devices, surgical adjuncts and vitreo-retinal products. We have announced our intent to pursue strategic alternatives for our ophthalmic surgical business, including the potential sale of that unit. Agreements have since been reached with certain third parties to sell them certain assets of the surgical business. Other companies selling ophthalmic surgical products are Alcon, Advanced Medical Optics, Bausch & Lomb, Pharmacia and Staar Surgical.

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Research and Development

        The research results of other Novartis affiliates provide CIBA Vision with new chemical compounds for future products and access to developments in biotechnology. These resources are complemented by CIBA Vision's internal research and development capabilities, licensing agreements and joint research and development partnerships with third parties (companies, individuals and universities).

        CIBA Vision is continually working to expand its product portfolio through our own dedicated research and development resources as well as through the acquisition of new and innovative technologies. Product development involves the creation of entirely new product offerings as well as line extensions of current products.

        For contact lenses our key focus is in three areas: daily disposable contact lenses, silicon hydrogel lenses for continuous or daily wear and an ongoing expansion of our cosmetic and color lenses. In lens care, our development efforts focus on making our lens care solutions more convenient to use, while ensuring that the solutions provide the safety and cleaning power needed to help maintain healthy eyes.

        We invested $74 million in research and development of eye care products in 2003, representing 6% of the Business Unit's sales.

Regulation

        Contact lenses, surgical devices and lens care products are regulated as medical devices in the US, the EU and Japan. 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, all devices must receive pre-market approval by the FDA. There are two review procedures to gain this pre-market approval: a pre-market application (PMA) and a 510(k) submission. Under a PMA, the manufacturer must submit to the FDA supporting evidence sufficient to prove the safety and effectiveness of the device. The FDA has 180 days to review a PMA. Certain products, however, may qualify for a submission authorized by Section 510(k) of the US Food, Drug and Cosmetic Act. Under this procedure, the manufacturer gives the FDA a pre-market notification that it intends to commence marketing the product, and that it has established that the product is substantially equivalent to another product already on the market. The FDA has 90 days to review a 510(k) submission. In the US, no 30-day extended-wear lenses had previously existed on the market, so we were required to proceed under the PMA procedure. Lens care products generally qualify for 510(k) submission. Ophthalmic surgical devices fall into both PMA or 510(k) categories depending on the availability of data from previously approved devices.

        In the EU, the "CE" mark is required for all medical devices sold. CIBA Vision affiliates hold a CE mark for the classes of vision care medical devices that they sell. The CE mark allows CIBA Vision to market products upon signing a declaration of conformity with the EU's Medical Device Directive requirements, which CIBA Vision affiliates do for each product sold. In addition, medical device sales in the EU require auditing by a certified third party (a "Notified Body") to ensure that the manufacturer's quality systems are in compliance with the requirements of the ISO 9000 standards. CIBA Vision has two Notified Bodies which routinely audit the company's quality systems.

        In Japan, contact lenses are categorized as medical devices and are subject to an approval process similar to that in the US. Although there has been an improvement in the willingness to accept foreign data and a movement toward harmonization of requirements, in order to enter the Japanese market, local clinical trials often are required and local protocols must then be observed. Lens care products for soft lenses take several years to gain approval due to the extensive amount of data and clinical testing required. Surgical devices are also categorized by risk level and a lengthy testing, review and approval process is required. Saline solutions for hard lenses are unregulated.

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Intellectual Property

        Our CIBA Vision business is brand-oriented and, therefore, we consider our trademarks to be of utmost value. Trademarks protect most of our brands in the majority of the markets where these brands are sold, and we vigorously protect these trademarks from infringement. Our most important trademarks are used in a number of countries. Local variations of these international trademarks are employed where legal or linguistic considerations require the use of an alternative.

        Wherever possible our products are protected by patents. Among other things, patents may cover the products themselves, including contact lenses, polymers and formulations. Patents may also cover the processes and devices for manufacturing a product. Patents may also cover particular uses of a product. It is our policy to seek the broadest possible protection for significant product developments in all major markets.

        We are involved in extensive patent litigation against Bausch & Lomb (B&L) and Johnson & Johnson (J&J) regarding silicone hydrogel long-term wear contact lenses. In February 2003, the US Court of Appeals for the Federal Circuit upheld the US District Court's prior ruling that B&L's PureVision™ contact lenses infringe our "Harvey" patent. As a result, B&L cannot resume manufacture or sale of its PureVision™ contact lenses within the US at least until 2005, when the Harvey patent expires.

        We have also brought suit against B&L in the US for infringement of our "Nicolson" patents. If we are successful in this action, PureVision™ lenses will remain off the US market until at least 2014.

        We have also brought a suit against B&L in Ireland, Germany and Australia. The Australian case was tried in October, but no ruling has yet been entered. A German court ruled that PureVision™ infringed the Nicolson patent, and sales of PureVision™ were halted in Germany early in 2003. However, the European Patent Office (EPO) issued an invalidity ruling in October 2003, which stayed the German injunction pending appeal of the EPO ruling.

        B&L has brought a countersuit against us for alleged infringement by NIGHT & DAY of US patents held by them.

        J&J filed a suit against us in September 2003, in both the US and Australia, seeking a declaration that their planned launch of a silicone hydrogel lens product does not infringe the Nicolson patents or that the patents are invalid. J&J also claimed our silicone hydrogel product, Focus NIGHT & DAY, infringes a J&J packaging patent.

4.C  Organizational Structure

        The Novartis Group is a multinational group of companies specializing in research, development, manufacture, marketing and sales of innovative healthcare products. Novartis AG, our Swiss holding company, owns, directly or indirectly, 100% of all significant operating companies. For a list of our subsidiaries, see note 31 to the consolidated financial statements.

        The Group is divided operationally into two Divisions: Pharmaceuticals and Consumer Health. Our Pharmaceuticals Division is organized into five Business Units: Primary Care, Oncology, Transplantation, Ophthalmics and Mature Products. The six Business Units of the Consumer Health Division are: Sandoz generics, OTC self-medication, Animal Health, Medical Nutrition, Infant & Baby and CIBA Vision. The Business Units coordinate the worldwide research, distribution, marketing and sales of the products assigned to each. Because the Business Units of the Pharmaceuticals Division have common long-term economic perspectives, common customers, common research, development, production and distribution practices, and a common regulatory environment, their financial data is not required to be separately disclosed.

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4.D  Property, Plants and Equipment

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

        It is our policy to own our facilities. A few sites (mainly in the US) are leased under long-term leases. Some of our principal facilities are subject to mortgages and other security interests granted to secure indebtedness to certain financial institutions. As of December 31, 2003, the total amount of indebtedness secured by these facilities was not material to the Group. We believe that our production plants and research facilities are well maintained and generally adequate to meet our needs for the foreseeable future.

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

Location/Division or Business Unit

  Size of Site

  Major Activity


Major Production facilities:        

Pharmaceuticals        

Taboão da Serra, Brazil

 

539,000 square meters

 

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

Ringaskiddy, Ireland   532,000 square meters   Drug substances, intermediates

Basel, Switzerland—Klybeck   254,000 square meters   Drug substances, intermediates

Basel, Switzerland—St. Johann   219,000 square meters   Drug substances, intermediates, biotechnology

Basel, Switzerland—Schweizerhalle   237,000 square meters   Drug substances, intermediates

Stein, Switzerland   460,000 square meters   Steriles, tablets, capsules, transdermals

Grimsby, UK   929,000 square meters   Drug substances, intermediates

Suffern, NY   656,000 square meters   Tablets, capsules, transdermals

Horsham, UK   112,000 square meters   Tablets, capsules

Wehr, Germany   165,000 square meters   Tablets, creams, ointments

Torre, Italy   210,000 square meters   Tablets, biotechnology

Barbera, Spain   51,000 square meters   Tablets, capsules

Huningue, France   250,000 square meters (includes Animal Health facilities)   Suppositories, liquids, solutions, suspensions, biotechnology

Sasayama, Japan   104,000 square meters   Capsules, tablets, syrups, suppositories, creams, drop solutions, powders

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Sandoz        

Kundl and Schaftenau, Austria

 

320,000 square meters (production and R&D facilities)

 

Biotech products, intermediates, active drug substances, final steps (finished pharmaceuticals)

Menges, Slovenia   131,000 square meters (production and R&D facilities)   Biotech products and active drug substances

Ljubljana, Slovenia   83,000 square meters (production and R&D facilities)   Broad range of finished dosage forms

Broomfield, CO   60,000 square meters   Broad range of finished dosage forms

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

Kalwe, India   10,000 square meters   Broad range of finished dosage forms

OTC    

Lincoln, NE

 

44,870 square meters

 

Liquids, creams and tablets

Nyon, Switzerland   14,700 square meters (production and R&D facilities)   Liquids and creams

Humacao, Puerto Rico   8,000 square meters   Sugar coated tablets, small chocolate tablets, packaging of softgels

Animal Health        

WUSI-Farm, China

 

42,000 square meters

 

Insecticides, antibacterials, acaricides, powders

Dundee, UK   34,000 square meters   Packaging, formulation liquids, solids, creams, sterile filling

Larchwood, IA   29,700 square meters (production and R&D facilities)   Veterinary immunologicals

Braintree, UK   10,000 square meters   Veterinary immunologicals

Huningue, France   6,000 square meters   Formulation and packaging of tablets, creams, ointments, suspensions and liquids

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Medical Nutrition        

Minneapolis, MN

 

33,500 square meters (production and R&D facilities)

 

Medical nutrition products

Osthofen, Germany   17,000 square meters (production and R&D facilities)   Medical nutrition and Nutrition & Santé products

Infant & Baby        

Fremont, MI

 

107,000 square meters (production and R&D facilities)

 

Gerber jarred baby food, fruit and vegetable juices, dry boxed cereal

Fort Smith, AR   80,451 square meters   Gerber jarred baby food, dry cereal

Querétaro, Mexico   205,000 square meters   Gerber jarred baby food, fruit and vegetable juices, dry canned and bagged cereal

Reedsburg, WI   30,000 square meters   Baby Care products; spill-proof cups, bottles, nipples, breast pads, pacifiers, overcaps

Rzeszow, Poland   45,000 square meters   Gerber baby food, fruit juice

CIBA Vision        

Pulau Batam, Indonesia

 

19,000 square meters

 

Contact lenses

Duluth, GA   28,000 square meters   Contact lenses

Des Plaines, IL   27,400 square meters   Freshlook product line

Grosswallstadt, Germany   19,000 square meters   Contact lenses

Cidra, Puerto Rico   6,100 square meters   Contact lenses

Toronto, Canada   14,500 square meters   Lens care products

Major Research and Development facilities:        

Pharmaceuticals        

East Hanover, NJ

 

177,398 square meters

 

General pharmaceutical products

Cambridge, MA   22,500 square meters   General pharmaceutical products (as of March 1, 2003)

Basel, Switzerland—Klybeck   140,000 square meters   General pharmaceutical products

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Basel, Switzerland—St. Johann   150,000 square meters   General pharmaceutical products

Vienna, Austria   39,000 square meters   Dermatology

Tsukuba, Japan   20,600 square meters   General pharmaceutical products

Horsham and London, UK   37,700 square meters   Respiratory and nervous system diseases

Sandoz        

Kundl and Schaftenau, Austria

 

320,000 square meters total area (production and R&D facilities)

 

Biotech processes, innovations in antibiotic technologies

Menges, Slovenia   131,000 square meters (production and R&D facilities)   Biotech products and active drug substances

Ljubljana, Slovenia   83,000 square meters (production and R&D facilities)   Broad range of finished dosage forms

Kolshet, India   5,000 square meters   Generic pharmaceuticals

Dayton, NJ   29,000 square meters   Generic pharmaceuticals

OTC

Lincoln, NE

 

44,870 square meters

 

Liquids, creams and tablets

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

Animal Health        

St. Aubin, Switzerland

 

26,000 square meters

 

Parasiticides

Larchwood, IA   29,700 square meters (production and R&D facilities)   Veterinary immunologicals development

Yarandoo, Australia   3,250 square meters   Animal Health products

Medical Nutrition        

Minneapolis, MN

 

33,500 square meters (production and R&D facilities)

 

Medical nutrition products

Osthofen, Germany   17,000 square meters (production and R&D facilities)   Medical nutrition and Nutrition & Santé products

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Infant & Baby        

Fremont, MI

 

107,000 square meters (production and R&D facilities)

 

Baby food products

CIBA Vision        

Duluth, GA

 

9,000 square meters

 

Vision-related medical devices

        In 2003, we continued our creation and expansion of the Novartis Institutes for BioMedical Research, Inc. (NIBRI) facility in Cambridge, Massachusetts. As of December 31, 2003, this new research facility provided 22,500 square meters of laboratory and office space for more than 350 scientists and technology experts. When completed in 2004, we expect to provide a total of 67,500 square meters of laboratory and office space for over 800 scientists and technology experts. To date, we have invested approximately $238 million in this new facility.

        On December 11, 2003, our Sandoz generics Business Unit announced that it had acquired the production plant of Amifarma S.L. in Palafolls, Spain. The plant manufactures sterile, injectable bulk antibiotics.

Environmental Matters

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

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

        We believe that we are in substantial compliance with environmental, health and safety requirements applicable to us. We are committed to providing safe and environmentally sound workplaces that will not adversely affect the health or environment of employees or the communities in which we operate. We believe that we have obtained all material environmental permits required for the operation of our facilities as well as all material authorizations required for the products produced by us. We believe that we are not currently subject to liabilities for non-compliance with applicable environmental, health and safety laws that would materially and adversely affect our business, financial condition or results of operations. However, there is a risk that legislation enacted in the future could create liabilities for past activities undertaken in compliance with then-current laws and regulations or that there is environmental or other damage of which we are not aware.

        In recent years, the operations of all companies have become subject to increasingly stringent legislation and regulation related to occupational safety and health, product registration and environmental protection. Such legislation and regulations are complex and constantly changing, and there can be no assurance that future changes in laws or regulations would not require us to install additional controls for certain of our emission sources, to undertake changes in our manufacturing

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processes or to remediate soil or groundwater contamination at facilities where such clean-up is not currently required. Some of our facilities are over 50 years old, and there may be soil and groundwater contamination at such facilities. However, based on current information, we do not believe that expenditures related to such possible contamination, beyond those already accrued, will be significant.

        Our expenditures related to capital investments for environmental, health and safety compliance measures were approximately $88 million in 2003 ($12 million for environment), $39 million in 2002 ($7 million for environment), and $32 million in 2001 ($7 million for environment). While we cannot predict with certainty our aggregate capital environmental investments in 2004, based on current information and existing assets, we estimate that such aggregate expenditures will be comparable to the 2003 figure.

        It is difficult to estimate the future costs of environmental protection and remediation because of many uncertainties, including uncertainties about the state of laws, regulations and information related to individual locations and sites. However, given our experience to date regarding environmental matters and the facts currently known, we believe that compliance with existing and known national and local environmental laws and regulations will not have a material effect on our financial condition, but could be material to our results of operations in a given period.


Item 5.    Operating and Financial Review and Prospects

5.A  Operating Results

        The following operating and financial review and prospects should be read in conjunction with our consolidated financial statements included in this Form 20-F. The consolidated financial statements and the financial information discussed below have been prepared in accordance with IFRS. Please see "Item 18. Financial Statements—note 32" for a discussion of the significant differences between IFRS and US GAAP.

Overview

        We are a world leader both in sales and in innovation in our continuing core businesses: pharmaceuticals and consumer health, which includes generics, OTC self-medication, animal health, medical nutrition, infant and baby foods and products, and eyecare products, with global sales of $24.9 billion in 2003. We aim to hold a leadership position in all of our businesses.

        Novartis AG was formed in 1996 out of a merger of two global participants in the pharmaceutical and agrochemical industries, Sandoz AG and CIBA-Geigy AG. Accounting for the merger under IFRS was based on a uniting of interests and therefore did not result in any goodwill nor in any goodwill amortization. Under US GAAP, the merger is accounted for as a purchase of CIBA-Geigy AG by Sandoz AG. For a discussion of the significant differences between IFRS and US GAAP purchase accounting, see "Item 18. Financial Statements—note 32." In November 2000, we spun off our Crop Protection and Seeds businesses and merged them with AstraZeneca's Zeneca Agrochemicals to create Syngenta AG, a public company.

Factors affecting results

        The global healthcare market is growing rapidly due to, among other reasons, the aging population in developed countries, unmet needs in many therapeutic areas (such as cancer and cardiovascular disease), the adoption of more industrialized lifestyles in emerging economies, and increased consumer demand fueled by broad and rapid access to information. At the same time, the healthcare industry is under increasing pressure to reduce prices as payers in the public and private sectors seek to curb rising healthcare costs.

        Our revenues are directly related to our ability to identify high potential products while they are still in development and to bring them to market quickly and effectively. Efficient and productive research and development is crucial in this environment as we, like our competitors, search for efficacious and

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cost-efficient pharmaceutical solutions to health problems. The necessity for adequate resources to access the full range of new technologies has been one reason for industry consolidation, and the increase in collaboration between leading companies and niche players at the forefront of their particular technology areas. The growth in new technology, particularly genomics, will almost certainly have a fundamental impact on the pharmaceutical industry as a whole, and upon our future development.

        In addition, competitive conditions have intensified as a result of regulation, price reductions, reference prices, higher patient co-payments and increased pressure on physicians to limit prescribing. Pressure on our Pharmaceutical division and other pharmaceutical companies to lower prices is expected to increase primarily as a result of government initiatives to reduce patient reimbursement, restrict prescribing levels, increase the use of generics and impose overall price cuts. The introduction of technologically innovative products and devices by competitors and growing product distribution anomalies, mainly in the EU, pose additional challenges.

        Exchange rate exposure also affects our results as we have both sales and costs in many currencies other than the US dollar. This gives rise to both transaction exposure in subsidiary financial statements due to foreign currency denominated transactions and to translation exposure from converting foreign and domestic subsidiary results and balance sheets into our US dollar consolidated financial statements. Our results have not been significantly affected by inflation. See "Exchange Rate Exposure and Risk Management" below.

Critical Accounting Policies

        Our principal accounting policies are set out in note 1 of our consolidated financial statements and conform with IFRS. Significant judgments and estimates are used in preparation of the consolidated financial statements which, to the extent that actual outcomes and results may differ from these assumptions and estimates, could affect the accounting in at least the following areas:

    Long-lived assets, including identifiable intangibles and goodwill, are regularly reviewed for impairment whenever events or changes in circumstance indicate that the balance sheet carrying amount of the asset may not be recoverable. In order to assess if there is any impairment, estimates are made of the future cash flows expected to result from the use of the asset and its eventual disposition. If the balance sheet carrying amount of the asset is more than the greater of its value in use to us or its anticipated net selling price, an impairment loss for the difference is recognized. Actual outcomes could vary significantly from such estimates of discounted future cash flow. Factors such as changes in the planned use of buildings, machinery or equipment, or closing of facilities or lower than anticipated sales for products with capitalized rights could result in shortened useful lives or impairment.

    We have extensive investments in marketable securities and have significant derivative financial instrument positions which are mainly, but not exclusively, held for hedging underlying positions. Under current IFRS accounting rules unrealized gains and losses on marketable securities and cash flow-related derivative financial instruments that qualify for hedge accounting are recorded in separate components of equity and not in the income statement. Our management regularly reviews such positions to determine the extent to which unrealized losses are temporary. Depending on the stock market and other factors at the time of this review it may be necessary to recognize an impairment by transferring these losses out of the equity component into our income statement.

    We have investments in associated companies (defined generally as investments of between 20% and 50% of a company's voting shares) that are accounted for by using the equity method. Due to the various estimates that have been made in applying the equity method, the amounts recorded in the consolidated financial statements in respect of such companies including Roche Holding AG and Chiron Corporation may require adjustments in the following year as more financial and other information becomes publicly available.

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    We sponsor pension and other retirement plans in various forms covering employees who meet eligibility requirements. These plans cover the majority of our employees. Several statistical and other factors which attempt to anticipate future events are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases, as determined by our management within certain guidelines. In addition, our actuarial consultants also use statistical information such as withdrawal and mortality rates to estimate these factors. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of pension income or expense recorded in future years.

    We have provisions for environmental remediation costs. The material components of the environmental provisions consist of costs to fully clean and refurbish contaminated sites and to treat and contain contamination at sites where the environmental exposure is less severe. Future remediation expenses are affected by a number of uncertainties which include, but are not limited to, the method and extent of remediation, the percentage of waste material attributable to us at the remediation sites relative to that attributable to other parties, and the financial capabilities of the other potentially responsible parties.

    We believe that our total reserves for environmental matters are adequate based upon currently available information however, given the inherent difficulties in estimating liabilities in this area, it cannot be guaranteed that additional costs will not be incurred beyond the amounts accrued. The effect of resolution of environmental matters on results of operations cannot be predicted due to uncertainty concerning both the amount and the timing of future expenditures and the results of future operations. Our management believes that such additional amounts, if any, would not be material to our financial condition but could be material to our results of operations in a given period.

    A number of our subsidiaries are the subject of litigation arising out of the normal conduct of their business. As a result, claims could be made against them which might not be covered by existing provisions or by insurance. Our management believes that the outcomes of such actions, if any, would not be material to our financial condition but could be material to our results for operations in a given period.

    In 2003, according to IFRS we continued to amortize goodwill even though for US GAAP purposes we ceased to amortize goodwill in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142 Goodwill and Other Intangible Assets. SFAS 142 requires us to perform an annual review of our US GAAP goodwill for impairment. Based on this annual review, we recognize impairment losses if necessary. In particular, just under US GAAP, we have goodwill relating to Gerber Products with a carrying amount of $2.9 billion at December 31, 2003. As required, we performed our annual impairment test of goodwill in 2003, which did not require us to record an impairment charge. The process of evaluating goodwill involves making adjustments and estimates relating to the projection and discounting of future cash flows. This evaluation is sensitive to changes in the discount rate. An increase to discount rates is likely to result in a significant impairment charge under US GAAP.

        The International Accounting Standards Board is entering a period of critically examining current International Financial Reporting Standards with a view to increasing international harmonization of accounting rules. This process of amendment and convergence of worldwide accounting rules could result in significant amendments to the existing rules within the next two years in such areas as the timing of recognition of sales and other revenues arising from collaborative agreements with Marketing and Sales partners, accounting for share based compensation, goodwill and intangibles, employee benefit plans, marketable securities and derivative financial instruments and classification of balance sheet positions as debt or equity.

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Results of Operations

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

 
  2003
  2002
  2001
 
 
  ($ millions)

  ($ millions)

  ($ millions)

 
Sales to third parties              
Pharmaceuticals   16,020   13,528   11,965  
   
 
 
 
  Sandoz   2,906   1,817   1,444  
  OTC   1,772   1,521   1,507  
  Animal Health   682   623   570  
  Medical Nutrition   815   711   661  
  Infant & Baby   1,361   1,333   1,319  
  CIBA Vision   1,308   1,135   1,059  
   
 
 
 
Consumer Health—ongoing   8,844   7,140   6,560  
Divested Health & Functional Food activities       209   237  
   
 
 
 
Consumer Health   8,844   7,349   6,797  
   
 
 
 
Group sales   24,864   20,877   18,762  
   
 
 
 

Sales

 

24,864

 

20,877

 

18,762

 
Cost of Goods Sold(1)   (5,894 ) (4,994 ) (4,744 )
Marketing & Sales(1)   (7,854 ) (6,737 ) (6,060 )
Research & Development(1)   (3,756 ) (2,843 ) (2,528 )
General & Administration(1)   (1,471 ) (1,211 ) (1,105 )
   
 
 
 
Group Operating income   5,889   5,092   4,325  
   
 
 
 
Operating income by Division/Business Unit              
Pharmaceuticals   4,423   3,891   3,377  
   
 
 
 
  Sandoz   473   265   166  
  OTC   309   240   268  
  Animal Health   88   92   82  
  Medical Nutrition   82   4   51  
  Infant & Baby   254   227   230  
  CIBA Vision   153   118   102  
  Divisional Management   (39 )        
   
 
 
 
Consumer Health—ongoing   1,320   946   899  
Divested Health & Functional Food activities       140   (4 )
   
 
 
 
Consumer Health   1,320   1,086   895  
   
 
 
 
Corporate and other income/expense   146   115   53  
   
 
 
 
Operating income   5,889   5,092   4,325  
Result from associated companies   (200 ) (7 ) 83  
Financial income, net   379   613   284  
Taxes   (1,008 ) (959 ) (844 )
Minority interests   (44 ) (14 ) (12 )
   
 
 
 
Net income   5,016   4,725   3,836  
   
 
 
 

(1)
2002 and 2001 figures have been restated to reflect a change in classification of certain expenses from Marketing & Sales to Cost of Goods Sold, Research & Development and General & Administration expenses.

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2003 Compared to 2002

        The following compares our results in the year ended December 31, 2003 to those of the year ended December 31, 2002. Our analysis is divided as follows:

    1.
    Overview

    2.
    Sales by Division and Business Unit

    3.
    Operating Expenses

    4.
    Operating Income by Division and Business Unit

    5.
    Net Income

1. Overview

        In US dollars, our sales in 2003 increased by 19% over 2002 to $24.9 billion (+11% in local currencies); operating income grew by 16% to $5.9 billion; net income increased by 6% to $5.0 billion; and cash flow from operating activities increased by 27% to $6.7 billion.

        Our Pharmaceuticals Division accounted for 64% of our total sales and our Consumer Health Division accounted for 36%. The two Divisions generated 77% and 23% of divisional operating income, respectively.

        Geographically, 45% of our sales were generated in the North American Free Trade Association (NAFTA) region (41% in the USA), 35% in Europe and 20% in the rest of the world.

        Sales growth was driven by a volume increase of 8%. All Business Units except Sandoz and CIBA Vision benefited from small price increases which in total amounted to 1%. The sales increase due to acquisitions was 2%. The sales performance in US dollars benefitted from a 8% positive currency effect as the US dollar weakened on average 16% against the Swiss franc, 8% against the yen and 20% against the euro.

        Our operating margin in 2003 was 23.7% of sales, a decrease of 0.7 percentage points over the 24.4% of sales of the previous year. As a percentage of sales, productivity gains and improvements in the product mix led to a 0.2 percentage point reduction in the Cost of Goods Sold, while Marketing & Sales expenses decreased by 0.7 percentage points, although still increasing by 17% over 2002, to support product launches and key growth drivers. Research & Development investments were increased by 32% mainly due to increased development expenses, especially connected with milestone payments on in-licensed compounds, and due to the Pharmaceuticals Division research strategy of establishing a new facility in Cambridge, US. General & Administration expenses grew by 21%, 2% more than sales due to several factors including the write-down of certain investments in biotechnology companies, exchange rate movements and royalty payments.

        As a result of all these factors, operating income increased 16% in US dollars to $5.9 billion.

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2. Sales by Division and Business Unit

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

 
  Year ended December 31,
   
   
 
  Change in $
  Change in local
currencies

 
  2003
  2002
 
  ($ millions)

  ($ millions)

  (%)

  (%)

Sales                
Pharmaceuticals   16,020   13,528   18   11
   
 
 
 
  Sandoz   2,906   1,817   60   47
  OTC   1,772   1,521   17   7
  Animal Health   682   623   9   3
  Medical Nutrition   815   711   15   3
  Infant & Baby   1,361   1,333   2   3
  CIBA Vision   1,308   1,135   15   7
   
 
 
 
Consumer Health—ongoing   8,844   7,140   24   16
Divested Health & Functional Food activities       209        
   
 
 
 
Consumer Health   8,844   7,349   20   12
   
 
 
 
Total   24,864   20,877   19   11
   
 
 
 

Pharmaceuticals Division

        Our core Pharmaceuticals business sustained above market sales growth throughout the year to deliver an 18% rise in sales (11% in local currencies). We moved up to the number five position in the global healthcare ranking (based on November 2003 IMS data) as we captured further segment share in the key US market (sales: +15% in US dollars), in Japan (sales: +23%; +14% in local currencies), the second largest single market, as well as in Europe (sales: +25%; +6% in local currencies). Based on latest available data (IMS), our overall share of the global healthcare market has risen to 4.4%.

        Our cardiovascular (+36%; +29% in local currencies) and oncology franchises (+36%; +26% in local currencies) continued to be the main drivers, led in particular by the flagship brands Diovan, Lotrel, Lescol, Gleevec/Glivec, Zometa and Femara.

        Newly launched products made further in-roads; Zelnorm/Zelmac generated revenues of $165 million, with US total and new prescriptions growing 32% in the fourth quarter. Meanwhile, sales of Elidel reached $235 million, as the product extended its position as the number-one branded eczema treatment worldwide.

Primary Care

    Diovan (+46%; +38% in local currencies; US: +42%) became in 2003 the world's leading angiotensin receptor blocker (ARB) and has continued to capture further market share from its competitors. With the heart failure indication now approved in more than 40 markets, the flagship brand continued to outpace its fast-growing ARB market segment, with year-to-date sales in the US surpassing the $1 billion mark by December.

    The fourth quarter was marked by the publication of the VALIANT mega-trial at the American Heart Association Scientific Session. The results showed that Diovan reduces the risk of death by 25% in post-myocardial infarction patients. A supplemental new drug application based on these results has already been filed in the US.

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    Diovan HCT (valsartan + hydrochorothiazide) became the second most prescribed product in the combination ARB segment (mono and combination therapy) in the US. This rapid growth was powered by the roll-out of new dosage forms, the heart failure indication and new treatment guidelines. In Germany, the flagship brand secured the number-one rank, buoyed by the success of Co-Diovan 160/12.5 mg.

    Lotrel (US: +20%), the leading combination treatment for hypertension, posted strong full-year prescription growth while fourth-quarter sales were spurred by a disease awareness campaign launched in August. Overall, the brand steadily gained market segment share as a result of new Joint National Committee on Prevention, Detection, Evaluation, and Treatment of High Blood Pressure (JNC7) guidelines recommending more aggressive treatment; a new focus on patients who are not controlled by ACE inhibitors and calcium channel blockers; and the successful launch of the new dosage strength, which add efficacy and dosing flexibility.

    Lescol (+27%; +18% in local currencies; US: +19%; cholesterol reduction) continued strong sales growth driven by proven benefits in high-risk patients, the successful rollout of the XL (extended release) formulation in France, Italy and Spain and the launch of the secondary prevention indication in the US.

    Trileptal (+42%; +39% in local currencies; US: +43%; epilepsy) clearly outpaced its market. In August, the FDA granted approval for the use of Trileptal as monotherapy in children. Trileptal is now indicated for the treatment of partial seizures as a monotherapy and adjunctive therapy in adults and children of 4 years and upwards.

    Elidel (+147%; +144% in local currencies; US: +125%; non-steroid eczema treatment) achieved full year sales of $235 million, generated predominantly in the US. In less than two years since its first launch, Elidel is the number-one branded prescription treatment for eczema and is now available in more than 38 markets.

    Zelnorm/Zelmac (irritable bowel syndrome with constipation) revenues reached $165 million (US: $132 million) reflecting the product's therapeutic benefits and the increase in disease awareness. Total US prescriptions as well as new prescriptions recently increased more than 32%. Zelnorm/Zelmac has now been launched in 39 countries and was filed, in the fourth quarter, for the new indication of chronic constipation in the US.

Oncology

    Gleevec/Glivec (+84%; +68% in local currencies; US: +41%), for chronic myeloid leukemia (CML) and gastro-intestinal stromal tumors (GIST), continued to grow dynamically, boosted by its use as first-line therapy and its approval for GIST in the US, Europe and Japan. The number of patients enrolled in the Gleevec/Glivec Patient Assistance Program rose to more than 8,000 worldwide, providing treatment to many needy patients who otherwise would not have access.

    Zometa (+83%; +74% in local currencies; US: +59%), the most prescribed intravenous bisphosphonate for bone metastases, continued to post dynamic growth and is on track for additional sales volume growth in 2004. Several launches in Europe fueled additional growth, as did the continued expanded use into a number of tumor types including lung, prostate, multiple myeloma, and breast.

    Sandostatin (+14%; +7% in local currencies; US: +13%; acromegaly and carcinoid syndrome) sales continued to grow, driven by US sales.

    Femara (first-line therapy for advanced breast cancer in postmenopausal women) achieved a 30% rise (+18% in local currencies; US: + 22%) in sales supported by its strong profile and the landmark results of the MA-17 study published in the fourth quarter. These showed a 43% reduction in the risk of cancer recurrence, in addition to significantly improved disease-free

85


      survival in postmenopausal women with early breast cancer, who had completed five years of tamoxifen therapy.

Ophthalmics

    Visudyne (+24%; +16% in local currencies; US: +8%; treatment in age-related macular degeneration) continued to post overall growth, benefiting from increased market penetration and strong sales in Europe, Latin America and the Asia Pacific regions.

Transplantation

    Neoral/Sandimmun (immunosuppression) sales declined only modestly (-10% in local currencies) despite the use of lower dosing regimen in the US, in addition to generic competition and compulsory price-cuts in Germany and Italy. Sales momentum was sustained in Japan even though reimbursement was reduced by the authorities.

    Myfortic, the new enteric-coated formulation of mycophenolate sodium used to prevent organ rejection, gained approval in 27 countries by the end of 2003.

Mature Products

    Voltaren (+1%; -6% in local currencies; US: -33%; anti-inflammatory) continued to compete well against the COX-2 inhibitor class of drugs as well as generics.

    Cibacen/Lotensin/Cibadrex (-6%; -9% in local currencies; US:-9%; antihypertensive) was granted a pediatric exclusivity (Lotensin) in July 2003 by the FDA in the US.

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Top 20 Pharmaceutical Products—2003

 
   
   
   
   
   
   
  % change
 
Brands

  Therapeutic Area
  United
States

  % change
in $

  Rest of
the World

  % change
in local
currencies

  Total
  in $
  in local
currencies

 
 
   
  ($ millions)

   
  ($ millions)

   
  ($ millions)

   
   
 
Diovan/Co-Diovan   Hypertension   1,107   42   1,318   34   2,425   46   38  
Gleevec/Glivec   Chronic myeloid leukemia/Gastro-intestinal stromal tumors   299   41   829   82   1,128   84   68  
Neoral/Sandimmun   Transplantation   216   (21 ) 804   (6 ) 1,020   (2 ) (10 )
Lamisil (group)   Fungal infections   428   2   550   9   978   12   5  
Zometa   Cancer complications   574   59   318   118   892   83   74  
Lotrel   Hypertension   777   20           777   20   20  
Lescol   Cholesterol reduction   309   19   425   18   734   27   18  
Sandostatin (group)   Acromegaly   318   13   377   2   695   14   7  
Voltaren (group)   Inflammation/pain   8   (33 ) 591   (5 ) 599   1   (6 )
Cibacen/Lotensin/Cibadrex   Hypertension   306   (9 ) 127   (8 ) 433   (6 ) (9 )

 
Top ten products       4,342   21   5,339   20   9,681   28   20  
Trileptal   Epilepsy   305   43   92   27   397   42   39  
Miacalcic   Osteoporosis   239       150   (14 ) 389   (1 ) (6 )
Tegretol
(incl. CR/XR)
  Epilepsy   122   1   262   (1 ) 384   5      
Exelon   Alzheimer's disease   181   8   186   19   367   21   13  
Visudyne   Wet form of age-related macular degeneration   181   8   176   27   357   24   16  
Leponex/Clozaril   Schizophrenia   86   (28 ) 223   (2 ) 309   (4 ) (12 )
Foradil   Asthma   9   (61 ) 280   2   289   10   (4 )
Elidel   Eczema   205   125   30   575   235       144  
Famvir(1)   Viral infections   146   (7 ) 87   19   233   5      
HRT Range   Hormone replacement   125   (9 ) 106   (24 ) 231   (11 ) (16 )

 
Top twenty products       5,941   18   6,931   16   12,872   22   17  
Rest of portfolio       643   (9 ) 2,505   (9 ) 3,148   5   (9 )

 
Total       6,584   15   9,436   8   16,020   18   11  

 

(1)
2002 restated because of transfer to other Business Units.

Consumer Health Division

        Sales in our Consumer Health Division's ongoing businesses grew a substantial 24% (+16% in local currencies) driven mainly by the Sandoz generics Business Unit, and fueled by above-market sales growth throughout the other businesses, of which OTC, Medical Nutrition and CIBA Vision all delivered double-digit sales increases in US dollars.

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Sandoz

        Sales at Sandoz rose 60% (+47% in local currencies) to $2.9 billion, driven by the US Generic Pharmaceuticals Business and the Lek acquisition, which contributed 38 percentage points to sales growth. The US sales increased by 56% fuelled by the strong sales of AmoxC (the generic version of Augmentin®) and by the successful roll-out of prescription loratadine (a generic version of the allergy treatment Claritin®). Further impetus was added through the roll-out of citalopram in the UK (a generic version of the anti-depressant Celexa®) and of omeprazole in the US (a generic version of the ulcer and heartburn treatment Prilosec®).

        The Industrial Business posted a sales increase of 12% in US dollars and a 6% decrease in local currencies. Sandoz also continued its efforts to develop its new Biopharmaceuticals Business, focused on the manufacture of active ingredients, mostly modern recombinant products.

OTC (over-the-counter self medication)

        In 2003, OTC sales rose 17% (7% in local currencies) to $1.8 billion, led by Nicotinell/Habitrol (smoking cessation), Lamisil (topical antifungal), and by Ex-Lax/Benefiber (laxative) with US private-label loratadine also contributing to overall sales growth.

Animal Health

        Sales were up 9% in US dollars or 3% in local currencies to $682 million.

        Sales at the companion animal franchise grew in double-digits, driven in particular by strong market share gains of the new brands Deramaxx (pain and inflammation control associated with osteoarthritis in dogs) and Milbemax (intestinal worm control in dogs and cats). Fortekor (heart/kidney disease), strengthened by a novel palatable formulation for cats, complemented results again with a sales increase well above market growth.

        In the farm-animal franchise Agita, the innovative farm fly control product consistently added to sales, while the therapeutic anti-infectives business contended with increased generic competition especially in the pig market.

Medical Nutrition

        Sales reached $815 million, up 15% in US dollars (and +3% in local currencies).

        Double digit growth in Europe lifted Medical Nutrition sales, which were driven by the strong performance of Enteral Nutrition (Isosource and Novasource) and additional sales impetus from the Medical Food franchise (Resource). In Nutrition & Santé, sales growth from the core brands offset the impact of distributor changes in China and Italy, while Sports Nutrition sales were lifted by the introduction of Isostar "Fast Hydration".

Infant & Baby

        Sales grew 2% (3% in local currencies) outpacing industry growth and leading to overall sales of $1.4 billion. The major contributor was Gerber in the US, spurred by innovations in the Juice, Graduates, and Tender Harvest lines and the success of the Lil' Entrees line of microwavable convenience trays targeted at the toddler segment.

CIBA Vision

        Sales grew 15% in US dollars terms and rose 7% in local currencies to $1.3 billion, driven by the growth of Focus DAILIES and Focus NIGHT & DAY lenses which allowed the company to maintain leadership of the daily disposables and continuous wear categories. Focus DAILIES Toric, the world's first and only daily disposable lens for astigmatism correction, was launched also in the US and Japan following

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last year's introduction in Europe. FreshLook colored lenses remained the leading brand in the cosmetic lens segment, supported by the launch of FreshLook Radiance and FreshLook Dimensions. More emphasis was put on direct to consumer advertising with new successful TV and print campaigns for Focus NIGHT & DAY and FreshLook.

        Despite competing in a shrinking market, sales of lens care products were flat versus the prior year, supported by the launch of AOSEPT ClearCare in US and SOLO-Care AQUA in selective European countries. Sales of FreshLook Care in Japan continued to grow.

        The ophthalmic surgical business contributed growing sales during the year. In August 2003, CIBA Vision announced its intention to pursue strategic alternatives for this business, including its potential sale. Agreements have since been reached with certain third parties to sell to them certain assets of the surgical business.

3. Operating Expenses

        We changed our 2002 income statement classification by transferring $336 million from Marketing & Sales to other expense categories (Cost of Goods Sold ($86 million) relating to certain finished goods, warehousing and distribution expenses; Research & Development expenses ($55 million) relating to certain Phase IV clinical trials performed after launch of a new product; General & Administration expenses ($195 million) relating to certain third party royalty expenses on in-licensed products). The following table sets forth our operating expenses.

 
  Year ended December 31,
   
 
  Change in $
 
  2003
  2002
 
  ($ millions)

  ($ millions)

  (%)

Sales   24,864   20,877   19
Cost of Goods Sold   (5,894 ) (4,994 ) 18
Marketing & Sales   (7,854 ) (6,737 ) 17
Research & Development   (3,756 ) (2,843 ) 32
General & Administration   (1,471 ) (1,211 ) 21
   
 
 
Operating income   5,889   5,092   16
   
 
 

Cost of Goods Sold

        Cost of Goods Sold decreased as a percentage of sales from 23.9% in 2002 to 23.7% in 2003. This was mainly due to continued improvements in productivity and a favorable product mix in our Pharmaceuticals Division.

Marketing & Sales

        Marketing & Sales expenses as a percentage of sales decreased by 0.7% over 2002 to 31.6% of sales.

Research & Development

        Research & Development expenses increased 32% owing to in-licensing deals in our Pharmaceuticals Division and the build-up of the Cambridge research facility. As a percentage of sales, Research & Development was 15.1% (2002: 13.6%).

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General & Administration

        General & Administration expenses increased to 5.9% of sales in 2003 from 5.8% in 2002 owing to several factors including the impairment of tangible and intangible assets of $136 million and write-down of certain financial investments, including biotechnology ventures, of $80 million, exchange rate movements and royalty payments. Conversely General & Administration expenses were reduced by the release of $90 million of legal provisions (at Corporate and Sandoz level) as a result of a litigation settlement with GlaxoSmithKline.

4. Operating Income by Division and Business Unit

        Operating income rose 16% to $5.9 billion in 2003 compared to 2002 and the operating margin decreased 0.7 percentage points to 23.7% (2002: 24.4%). The following table sets forth selected operating income data for each of the periods indicated.

 
  Year ended December 31,
   
 
 
  Change in $
 
 
  2003
  2002
 
 
  ($ millions)

  ($ millions)

  (%)

 
Pharmaceuticals   4,423   3,891   14  
   
 
 
 
  Sandoz   473   265   78  
  OTC   309   240   29  
  Animal Health   88   92   (4 )
  Medical Nutrition   82   4      
  Infant & Baby   254   227   12  
  CIBA Vision   153   118   30  
  Divisional Management   (39 )        
   
 
 
 
Consumer Health—ongoing   1,320   946   40  
Divested Health & Functional Food activities       140      
   
 
 
 
Consumer Health   1,320   1,086   22  
Corporate and other income/expense   146   115   27  
   
 
 
 
Total   5,889   5,092   16  
   
 
 
 

Pharmaceuticals Division

        Earnings growth accelerated in the year as sales continued to expand strongly. The Cost of Goods Sold, as well as investments in Marketing & Sales slightly reduced as a percentage of Division's sales compared to the prior year, Research & Development increased significantly as considerable payments related to development milestones and attractive in-licensing deals were completed. Product-mix changes and productivity gains in the Cost of Goods Sold continued to drive gross profit improvements. Research & Development expenses reached 19.1% of Divisional sales (reflecting the sustained high-level investment in the new Cambridge facilities and in-licensing opportunities). General & Administration expenses grew from 5.9% to 6.0% of Divisional sales owing to several factors including the write-down of certain financial investments in biotechnology ventures, exchange rate movements, royalty payments and increased product liability insurance costs. This was partially offset by one time gains on the sale of non-core products, primarily the Fioricet and Fiorinal lines for $178 million.

        During 2003, our Pharmaceuticals Division completed a number of transactions to strengthen its product portfolio. In April, we acquired the urinary incontinence treatment Enablex (darifenacin) from Pfizer for a total of up to $225 million, part of which is still conditional on certain marketing approvals in

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the US and EU. In 2003, we also acquired the rights to the IL1-trap compound from Regeneron and the rights to develop and market Lucentis™ outside North America from Genentech. These transactions resulted in $151 million of milestone payments. In May, we acquired 51% of the capital stock of Idenix Pharmaceuticals Inc. of Cambridge, Massachusetts, for an initial payment of $255 million.

Consumer Health Division

        Operating income from the ongoing business of our Consumer Health Division rose 40% in the year, outpacing sales and driven in particular by Sandoz (+78%), where volume expansions and productivity gains, more than offset increased investments in Marketing & Sales and Research & Development. Apart from Sandoz, CIBA Vision (+30%), Medical Nutrition and OTC (+29%), all achieved considerable increases in operating income, the latter benefiting from the exceptional contribution of loratadine.

        Overall, in Consumer Health continued productivity gains, lower costs of certain raw materials and product-mix improvements contributed to a reduction in the Cost of Goods Sold as a percentage of sales. Marketing & Sales investments were maintained at a high level in order to drive recently launched products and to support key brands, however the increase was less than sales growth. On the other hand, Research & Development investments increased overproportionally, which was mainly due to the expansion of internal Research & Development capabilities at Sandoz, licensing agreements and other initiatives to accelerate innovation. General & Administration expenses increased mainly on account of the impairment of intangible assets of $72 million relating to Azupharma, Germany. The total increase was, however, less than sales owing to the release of $49 million of provisions following the successful conclusion of a litigation with GlaxoSmithKline. With almost all Business Units achieving margin improvements, the Division's ongoing profit margin improved 1.7 percentage points to 14.9%.

Sandoz

        Operating income increased significantly by 78% over 2002, fueled by sales growth especially related to the acquistion of Lek, productivity gains and a stronger focus on higher margin products and favorable product mix. Research & Development investments increased 90% to $263 million due to product developments and the funding of Research & Development in the US. Total General & Administration expenses benefitted from a release of $49 million of litigation provisions following the successful conclusion of negotiations with GlaxoSmithKline. The operating margin rose 1.7 percentage points to 16.3%.

OTC (over-the-counter self medication)

        Operating income increased 29% over the year to $309 million, as a result of sales growth led by Nicotinell/Habitrol and the launch of private label loratadine in the US and the non-recurrence of exit costs from a Japanese joint venture. The operating margin increased 1.6 percentage points to 17.4%.

Animal Health

        2003 operating income fell 4% to $88 million, leading to an operating margin of 12.9% (2002: 14.8%). Operating costs increased due to Marketing & Sales investments focused on recently launched products and due to additional Research & Development on essential project studies.

Medical Nutrition

        Operating income increased to $82 million as a result of productivity gains, lower raw material costs and product mix improvements resulting from more focus on disease specific segments. The operating margin increased to 10.1% from 0.6% in 2002 or from 4.5% when $28 million of exceptional items related to restructuring the Business Unit and other one time items are excluded from the 2002 operating income.

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Infant & Baby

        2003 operating income rose 12% to $254 million. Operating margin increased to 18.7% from 17.0% in 2002 when there were $27 million of impairment charges.

CIBA Vision

        Operating income reached $153 million, an increase of 30% over the year. This operational result was achieved due to the margin on the additional sales and reduction in structural costs, partially offset by increased investment in advertising and promotion activities and a $22 million charge for asset impairments. Operating margin increased to 11.7% in 2003 compared with 10.4% in 2002.

Divested Health & Functional Food activities

        The 2002 operating income of $140 million includes a divestment gain of $132 million after related restructuring charges arising on the divestment of our former Food & Beverage business. In addition there was a net $8 million operating income from these activities after taking into account $18 million of goodwill impairment charges.

Corporate and Other Income/Expense

        Net corporate income totaled $146 million, $31 million more than in the prior year. Higher income from charging share and share option plan costs to the operations and the settlement of a litigation for $41 million less than the provision, more than offset increased investments in corporate research, the negative currency translation effects on non-US dollar costs, and lower pension income.

5. Net income

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

 
  Year ended December 31,
   
 
 
  Change in $
 
 
  2003
  2002
 
 
  ($ millions)

  ($ millions)

  (%)

 
Operating income   5,889   5,092   16  
Results from associated companies   (200 ) (7 )    
Financial income, net   379   613   (38 )
   
 
 
 
Income before taxes and minority interests   6,068   5,698   6  
Taxes   (1,008 ) (959 ) 5  
   
 
 
 
Income before minority interests   5,060   4,739   7  
Minority interests   (44 ) (14 )    
   
 
 
 
Net income   5,016   4,725   6  
   
 
 
 

Results from associated companies

        Associated companies are accounted for using the equity method where we generally own between 20% and 50% of the voting shares of such companies. Income from associated companies is mainly derived from our investments in Roche Holding AG and Chiron Corporation.

        Our 42% interest in Chiron contributed pre-tax income of $134 million (2002: $107 million). Our 33.3% (just under one third; 2002: 32.7%) interest in Roche voting shares, which represents a 6.3% (2002: 6.2%) interest in the total Roche equity instruments generated a pre-tax loss of $354 million (2002:

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$116 million loss), $269 million of which was due to our share in Roche's unexpected loss of CHF 4.0 billion in 2002, booked only in 2003. The remainder represents an estimate of our share ($185 million) in Roche's 2003 pre-tax income. This share of pre-tax income is reduced by a $270 million goodwill and intangible depreciation charge arising from allocating the purchase price to tangible and intangible assets and goodwill.

        Our share of the net income of both Roche and Chiron is based upon analysts' estimates. Any differences between these estimates and actual results will be adjusted in 2004. In total, associated companies resulted in an overall expense of $200 million in 2003 (2002: $7 million).

Financial income, net

        Amid persistently challenging equity market conditions, lower interest rates and a lower level average net liquidity than in the prior year, net financial income declined 38% or $234 million.

Taxes

        Despite increased profits, the tax charge of $1,008 million increased only $49 million over the prior year. Our effective tax rate (taxes as a percentage of income before tax) was 16.6% in 2003 compared to 16.8% in 2002.

        Our expected tax rate (weighted average tax rate based on the result before tax of each subsidiary) was 14.8% in 2003 compared to 15.3% in 2002. Our effective tax rate is different from the expected tax rate due to the income statement effects of equity accounting for associated companies of 1.9% (2002: 0.3%) and various permanent tax adjustments to expenditures and income. For details of the main elements contributing to the difference, see note 6 to the consolidated financial statements.

Net income

        Net income as a percentage of total sales decreased from 22.6% in 2002 to 20.2% in 2003 principally due to lower financial income and the negative impact of the results of associated companies.

        Return on average equity decreased from 17.7% in 2002 to 17.1% in 2003.

2002 Compared to 2001

        The following compares our results in the year ended December 31, 2002 to those of the year ended December 31, 2001. Our analysis is divided into the following sections:

    1.
    Overview

    2.
    Sales by Division and Business Unit

    3.
    Operating Expenses

    4.
    Operating Income by Division and Business Unit

    5.
    Net Income

1. Overview

        In US dollars, our sales in 2002 increased by 11% over 2001 to $20.9 billion (+11% in local currencies); operating income grew by 17.7% to $5 billion and net income increased by 23% to $4.7 billion.

        Our Pharmaceuticals Division accounted for 65% of the Group's total sales and our Consumer Health Division accounted for 35%. The two Divisions generated 76% and 21% of our total operating income, respectively. In 2002, our Consumer Health Division was reorganized to include our Sandoz,

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OTC self-medication, Animal Health, Medical Nutrition (including our Nutrition & Santé unit), Infant & Baby, and our CIBA Vision Business Units.

        Geographically, 47% of sales were generated in the NAFTA region (43% in the USA), 33% in Europe and 20% in the rest of the world.

        Sales growth was driven by a volume increase of 10%. All Business Units except Sandoz and CIBA Vision benefited from small price increases which in total amounted to 1%. The sales increase due to acquisitions was negligible.

        Our operating margin in 2002 was 24.4% of sales, an increase of 1.3% percentage points over the 23.1% of sales of the previous year. Cost of Goods Sold increased by 5%, while Marketing and Sales expenses increased by 11%.

        Research and Development investments were increased 12% mainly due to the new Pharmaceuticals Division research strategy and the establishment of our new facility in Cambridge, Massachusetts.

        As a result of all these factors, operating income increased over proportionally, climbing 18% in US dollars to $5 billion.

2. Sales by Division and Business Unit

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

 
  Year ended December 31,
   
   
 
 
  2002
  2001
  Change in $
  Change in local
currencies

 
 
  ($ millions)

  ($ millions)

  (%)

  (%)

 
Sales                  
Pharmaceuticals   13,528   11,965   13   13  
   
 
 
 
 
  Sandoz   1,817   1,444   26   25  
  OTC   1,521   1,507   1   (1 )
  Animal Health   623   570   9   10  
  Medical Nutrition   711   661   8   4  
  Infant & Baby   1,333   1,319   1   3  
  CIBA Vision   1,135   1,059   7   6  
   
 
 
 
 
Consumer Health—ongoing   7,140   6,560   9   6  
Divested Health & Functional Food activities   209   237          
   
 
 
 
 
Consumer Health   7,349   6,797   8   7  
   
 
 
 
 
Total   20,877   18,762   11   11  
   
 
 
 
 

Pharmaceuticals Division

        Sales increased 13% in US dollars and in local currencies from $12.0 billion in 2001 to $13.5 billion in 2002, driven in particular by the cardiovascular and oncology businesses, where Diovan, Lotrel, Lescol, Gleevec/Glivec, Zometa and Sandostatin were the main growth drivers. The introduction of new products, such as Elidel, Zometa and Zelnorm/Zelmac, together with the addition of new strengths and new indications to existing brands all contributed to lifting sales.

        Double-digit sales growth in local currencies was achieved in all regions, including Japan despite government mandated price decreases. In Europe, strong performances in Spain and France offset the effects of pricing pressures in several countries, mandatory generic substitution in Germany, and the effects of parallel imports.

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        Diovan (hypertension) posted sales of $1.7 billion, making it our best selling product ever. Extending its leadership of the angiotensin-2 receptor blocker category in the US, it became the first and only drug of its kind to receive approval there for treatment in heart failure patients. To add further choice and flexibility, a new higher dose (160/25) formulation of Co-Diovan was launched in the US. Our second flagship anti-hypertensive, Lotrel, generated sales of $650 million, lifted by the July launch of a new formulation (10 mg amlodipine + 20 mg benazepril HCl).

        The third main pillar of the cardiovascular franchise, Lescol (cholesterol reduction), posted sales of $577 million. The brand's strong growth in Europe and other regions has been driven by its particularly favorable risk/benefit profile and convenient XL extended-release formulation.

        In Oncology, Gleevec/Glivec gained approval in the US, the EU and Japan for first-line use in treating certain forms of chronic myeloid leukemia (CML). It also received approval early in the year for use in gastrointestinal stromal tumors (GIST). Exceeding expectations, Gleevec/Glivec sales reached $614 million, making it our fifth biggest-selling product. Another leading Oncology brand, Sandostatin, continued to post substantial double-digit growth, with sales reaching $607 million, despite the launch of generic competitors in Europe. Zometa (bone metastases and complications of a broad range of cancers) achieved sales of $488 million. Zometa is the more potent and convenient successor to Aredia,which is facing patent expiry. The new drug gained EU and US approvals for a broader range of cancer settings, and is approaching or has exceeded the previous sales level of Aredia in many markets.

        In Transplantation, the Neoral franchise was underpinned by market share gains in Japan and yielded sales of $1 billion. It continues to compete strongly against branded and generic competition owing to a reluctance among physicians to switch patients who are stable and doing well on Neoral.

        The Mature Products business continued to report only a modest decline in sales on a comparable basis as a result of focused investments on selected key products and markets. Of the leading brands, the anti-inflammatory Voltaren continued to compete well against generics and the COX-2 inhibitor class of drugs and achieved sales of $596 million.

        Overall, the Pharmaceuticals Division's top ten products generated $7.6 billion, reflecting an increase of 32% in local currencies, while the top twenty products expanded sales by 17% in local currencies to $10.5 billion. Unless otherwise indicated, all percentages set forth in the following section refer to local currencies.

Primary Care

        Primary Care sales grew 13% in local currencies (+14% in US dollar) primarily due to strong sales growth of Diovan and the other key products discussed below.

    Diovan (+49% US: +40%; hypertension) became our best selling product ever, further extending its category leadership in the US to more than 35% of total angiotensin II receptor blocker prescriptions. Backed by the Val-Heft study data showing improved survival, reduced hospitalization and cost effectiveness benefits, Diovan became the first and only drug of its kind to receive approval for treatment in heart failure patients. To complement the broad choice and flexibility for patients and physicians, a new higher dose (160/25) formulation of Co-Diovan was launched in the US.

    Lotrel (+35% US: +35%; hypertension), also extended its share of new prescriptions. A new formulation (10 mg amlodipine +20 mg benazepril HCl) was launched in July and has been well received by physicians and patients, reflecting the fact that 90% of Lotrel patients achieve their blood pressure goal with the additional benefits of an ACE inhibitor.

    Lescol (+18%, US: +13%; cholesterol reduction) sales grew strongly in Europe and in other regions, reflecting the drug's particularly favorable risk/benefit profile and convenient XL extended-release formulation. Following the publication of data showing that Lescol reduced the

95


      risk of serious cardiac events after surgery to unblock coronary arteries, a new indication in angioplasty patients was filed in August for regulatory approval in the US.

    Lamisil (+4%, US: -3%; fungal infections) sales picked up towards the end of the year mainly in the US. While the onychomycosis market segment has been declining, Lamisil has extended its commanding share of both total and new prescriptions in the US to more than 80% in 2002.

    Elidel (eczema) was launched in 13 countries, including the US, and completed the mutual recognition procedure in Europe. Sales in 2002 reached $95 million. Within just six months, this highly effective, non-steroid cream has become the number one branded topical treatment for eczema in the US, where it has captured over 8% of new prescriptions. In Denmark, the first country in Europe where it has been launched, Elidel captured a 9% share of its segment within 10 weeks of launch.

    Exelon (+26%, US: +28%; Alzheimer's disease) posted good sales growth and captured a further share both of new and total prescriptions in the US. New marketing initiatives are under way to counter increased competition in its fast-growing segment. Studies revealed that Exelon inhibits an additional enzyme (butyrylcholinesterase) that contributes to neurological dysfunction in Alzheimer's disease. As a result, an expanded labeling was approved in Europe to include the product's unique dual inhibition properties.

    Zelnorm/Zelmac (irritable bowel syndrome with constipation) has now gained approval in 28 countries including the US where it was launched in September. With progress being made on reimbursement, 2002 sales totaled $45 million.

Oncology

        Our Oncology business unit gained further market share and posted strong sales growth of 28% in local currencies (+30% in US dollar).

    Gleevec/Glivec, for treating certain forms of chronic myeloid leukemia (CML) and gastrointestinal stromal tumors (GIST), continued to bring benefits to thousands of patients in more than 80 countries. Exceeding expectations, 2002 sales reached $614 million, making it our fifth biggest selling product. Gleevec/Glivec obtained approval as first-line treatment in the US, EU and Switzerland, and major progress was achieved on reimbursement, especially in the UK, Australia and New Zealand.

    Zometa (complications of a broad range of cancers), launched in 2002, achieved sales of $488 million, making it the world's fastest growing bisphosphonate used for bone metastases. More potent and convenient than Aredia, Zometa has gained EU and US approvals for a broader range of cancer settings, and is approaching or has exceeded the previous sales level of Aredia in many markets.

    Aredia (bone metastases; -64%; US: -84%) sales reflect the successful launch and superiority of Zometa and the anticipated competition from multiple generic entrants in several markets.

    Sandostatin continued to post substantial double-digit growth, with sales up 23% (US: +39%) to $607 million despite the launch of generic competitors in Europe. Growth was driven by sustained market penetration of the convenient, long-acting, once-a-month "LAR" formulation.

    Femara, the first-line therapy for advanced breast cancer in postmenopausal women, posted a 37% (US: +55%) rise in sales to $175 million. Femara is the US leader in the first-line metastatic breast cancer setting.

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Ophthalmics

        Ophthalmics' sales rose 7% in local currencies (+8% in US dollar), driven by Visudyne.

    Visudyne (+27%; US: +19%; treatment in macular degeneration) posted sales of $287 million, and has been approved in more than 65 countries for its main indication and in more than 45, including the EU, US and Canada, for additional indications.

Transplantation

        Sales decreased 4% in local currencies (-4% in $) as a result of branded and generic competition to the Neoral franchise. Their impact however continues to be limited by the importance physicians attach to avoiding fluctuations in drug concentrations in patients who are stable and doing well on Neoral.

    Neoral/Sandimmun, sales (-5%; US: -12%) were underpinned by market share gains in Japan, which partly offset price pressures and branded competition in other regions.

    Simulect, the induction immunosuppressant designed to complement Neoral, posted a 21% rise in sales (US: +4%) following its successful launch in Japan and continued market segment share gains from established competitor brands in most regions.

    myfortic, a new formulation for preventing organ rejection in kidney transplantation, gained first approvals in Switzerland, Brazil, India and Australia, while Certican, a novel drug intended for use in combination with Neoral and corticosteroids to prevent rejection episodes in patients with kidney transplants, was submitted for approval in the EU and US.

Mature Products

        The mature brands reported a 10% sales rise in local currencies (8% in US dollar) due to a switch of products into this Business Unit and as a result of focused investments on selected key products and markets.

    Voltaren (-3%, US: -18%; anti-inflammatory) continued to compete well against generics and the COX-2 inhibitor class of drugs.

    Cibacen/Lotensin/Cibadrex (antihypertensive) continued to deliver positive results as sales climbed 9% (US: +14%) mainly as a result of renewed external field-force support in the US.

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Top 20 Pharmaceutical Products—2002

 
   
   
   
   
   
   
  % change
 
Brands

  Therapeutic Area
  United
States

  % change
in $

  Rest of
the World

  % change
in local
currencies

  Total
  in $
  in local
currencies

 
 
   
  ($ millions)

   
  ($ millions)

   
  ($ millions)

   
   
 
Diovan/Co-Diovan   Hypertension   780   40   882   58   1,662   49   49  
Neoral/Sandimmun   Transplantation   274   (12 ) 762   (2 ) 1,036   (5 ) (5 )
Lamisil (group)   Fungal infections   420   (3 ) 453   12   873   5   4  
Lotrel   Hypertension   650   35   0       650   35   35  
Gleevec/Glivec   Chronic myeloid leukemia   212   103   402   741   614   304   303  
Sandostatin (group)   Acromegaly   282   39   325   12   607   25   23  
Voltaren (group)   Inflammation/pain   12   (18 ) 584   (3 ) 596   (6 ) (3 )
Lescol   Cholesterol reduction   260   13   317   23   577   19   18  
Zometa   Cancer complications   362   NA   126   NA   488   NA   NA  
Cibacen/Lotensin/Cibadrex   Hypertension   336   14   123   (4 ) 459   10   9  

 
Top ten products       3,588   35   3,974   28   7,562   32   32  
Miacalcic   Osteoporosis   239   (9 ) 155   (4 ) 394   (6 ) (7 )
Tegretol (incl. CR/XR)   Epilepsy   121   (22 ) 243   1   364   (10 ) (8 )
Leponex/Clozaril   Schizophrenia   120   (12 ) 203   8   323   1   0  
Exelon   Alzheimer's disease   167   28   137   24   304   27   26  
Visudyne   Wet form of age-related macular degeneration   168   19   119   40   287   28   27  
HRT Range   Hormone replacement   138   5   123   (10 ) 261   (2 ) (3 )
Trileptal   Epilepsy   213   111   66   49   279   89   91  
Aredia   Cancer complications   81   (84 ) 194   (27 ) 275   (63 ) (64 )
Foradil   Asthma   23   136   239   4   262   13   10  
Famvir   Viral infections   157   17   64   7   221   15   14  

 
Top twenty products       5,015   15   5,517   19   10,532   18   17  
Rest of portfolio       719   (6 ) 2,277   0   2,996   (1 ) (1 )

 
Total       5,734   12   7,794   13   13,528   13   13  

 
NA
Not applicable as no or insignificant prior year sales.

Consumer Health Division

        Sales of our Consumer Health Division increased in local currencies by 7%, and increased in US dollars terms from $6.8 billion in 2001 to $7.3 billion in 2002. The following are specific comments on the results of the Business Units within the Consumer Health Division:

Sandoz

        Sales rose 26% in US dollars or 25% in local currencies to $1.8 billion, led by the US and Europe, the launch of new products, and expansion into new markets.

        The Generic Pharmaceuticals Business with finished forms lifted sales by 35% in local currencies, driven by the US performance and new launches, in particular the US launch of amoxicillin/potassium clavulanate, Geneva's generic form of the anti-infective Augmentin®. The introduction of other products, including mefloquine (malaria), nabumetone (inflammation), metformin (diabetes), fluoxetine (depression), lisinopril and lisinopril HCTZ (hypertension) also fuelled growth.

        Sales in Europe grew dynamically, particularly in France, Italy and the Netherlands, due to several launches including the ulcer treatment omeprazole.

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        The Industrial Business franchise posted an increase of 9% in US dollars and a 3% increase in local currencies. A new Biopharmaceuticals Business franchise was added, focused on the manufacture of active ingredients, mostly modern recombinant products.

        In November, our Business Unit successfully completed its friendly take-over bid for Lek Pharmaceuticals d.d., Slovenia's leading drug-maker. The $0.9 billion acquisition opens up a leading position for our Sandoz business in Central and Eastern Europe, and in the countries of the former Soviet Union. No sales were recorded from this acquisition in 2002 due to the fact that the acquisition closed late in the year (resulting in immaterial post-closing sales) and the fact that we were still in the process of integrating Lek into our reporting systems.

OTC (over-the-counter self medication)

        Sales were 1% off their 2001 level in US dollars or down 1% in local currencies. Excluding terminated, acquired, in-licensed and transferred businesses, the underlying sales growth was 3% in local currencies, driven by the key brands Lamisil (antifungal), Voltaren Emulgel (analgesic), Otrivin (nasal decongestant) and Nicotinell/Habitrol (smoking cessation). These products compensated for the weak cough and cold season in the US earlier in 2002 and a drop in Calcium Sandoz sales resulting from reimbursement issues in Europe and Mexico.

Animal Health

        Sales were up 9% in US dollars or 10% in local currencies to $623 million, driven by double-digit growth in Latin America and the US, where the vaccine businesses acquired in January were the main contributors. Overall, acquisitions contributed approximately 6 percentage points to local currencies sales growth.

        The companion animal franchise was driven by strong sales of Interceptor (worm treatment) and Fortekor (cardio-renal drug), complemented by a number of new launches in key markets, including Atopica, for atopic dermatitis in dogs, and Deramaxx, the first COX-2 product for pain control in dogs, and Milbemax, for intestinal parasites in cats and dogs.

        Sales in the farm animal franchise were driven by the therapeutic anti-infectives, the strong performance in Latin America, and the recovery in the UK from the foot and mouth epidemic of 2001.

        The acquisition of Grand Laboratories and ImmTech in the US boosted the vaccines and aquahealth franchise, which delivered a strong rise in sales and represented 8% of Animal Health's revenues in 2002.

Medical Nutrition

        Combined sales reached $711 million, up 8% in US dollars and 4% in local currencies. Double digit growth in Europe lifted Medical Nutrition sales, which were driven by the strong performance of Enteral Nutrition (Isosource and Novasource) and additional sales impetus from the Medical Food franchise (Resource).

        In Nutrition & Santé, sales growth from the core-brands offset the impact of distributor changes in China and Italy, while Sports Nutrition sales were lifted by the introduction of Isostar "Fast Hydration".

        Within Medical Nutrition the Health Food & Slimming and Sports Nutrition businesses were regrouped as of January 1, 2003 into the new Nutrition & Santé stand-alone unit to optimize its business potential and to prepare for future divestment.

Infant & Baby

        Sales rose by 1% in US dollars terms and in local currencies by 3%, which was above the industry average, to $1.3 billion. The major contributor was Gerber in the US, spurred by innovations in the Juice,

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Graduates, and Tender Harvest lines and the outstanding success of Lil' Entrees, a new line of microwavable convenience trays targeted at the toddler segment. Gerber's revenues from this segment increased 5%.

        Despite the Baby Care business competing against private label entries it achieved a record market share in this segment and the Gerber Wellness line of skincare and healthcare products achieved a 8% rise in sales helped by the successful re-launch of its infant skin care line.

CIBA Vision

        Sales increased 7% in US dollars terms and rose 6% in local currencies to $1.1 billion, driven by the high-volume lens franchise, which outpaced the market. Strong selling brands included Focus DAILIES, Focus NIGHT & DAY, and FreshLook colored lenses, supported by the launch of the FreshLook Radiance line in several markets including the US, which launched in December. Focus DAILIES Toric, the world's first and only daily disposable lens for astigmatism correction, was launched in Europe and was in the process of being introduced in the US.

        The lens-care franchise continued to compete in a shrinking market mainly in the US. Sales declined, but were underpinned by increases in certain countries and the roll-out of FreshLook Care in Japan.

        The ophthalmic surgical business was lifted by several innovative products including VisThesia, a combination viscoelastic gel and anesthetic, which may help shorten cataract surgeries, Vivarte PRESBYOPIC phakic refractive lens; and an improved convenient injector system for the PRL phakic refractive lens.

Divested Health & Functional Food activities

        We divested our Food & Beverage business, including the Ovaltine®, Caotina® and Lacovo® brands, at the end of November 2002 to Associated British Foods for $270 million. 2002 sales from this divested business, up until the divestment, amounted to $209 million (2001: $237 million).

3. Operating Expenses

        We changed our 2002 and 2001 income statement classification by transferring $366 million (2001: $286 million) from Marketing & Sales to other expense categories (Cost of Goods Sold of $86 million (2001: $81 million) relating to certain finished goods, warehousing and distribution expenses; Research & Development expenses of $55 million (2001: $43 million) relating to certain Phase IV clinical trials performed after launch of a new product; General & Administration expenses of $195 million (2001: $162 million) relating to certain third party royalty expenses on in-licensed products). The following table sets forth our operating expenses for each of the periods indicated.

 
  Year ended December 31,
   
 
  Change in $
 
  2002
  2001
 
  ($ millions)

  ($ millions)

  (%)

Sales   20,877   18,762   11
Cost of Goods Sold   (4,994 ) (4,744 ) 5
Marketing & Sales   (6,737 ) (6,060 ) 11
Research & Development   (2,843 ) (2,528 ) 12
General & Administration   (1,211 ) (1,105 ) 10
   
 
 
Operating income   5,092   4,325   18
   
 
 

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Cost of Goods Sold

        Cost of Goods Sold decreased as a percentage of sales from 25.3% in 2001 to 23.9% in 2002. This was mainly due to continued improvements in productivity and a favorable product mix in Pharmaceuticals.

Marketing & Sales

        Marketing & Sales expenses as a percentage of sales remained at 32.3% of sales as slightly higher investments in the Pharmaceuticals Division field force and promotional activities were offset by reductions in the Consumer Health Division.

Research & Development

        Research & Development expenses as a percentage of sales were 13.6% in 2002, a small increase over the 2001 level of 13.5%.

General & Administration

        Cost containment, especially in Pharmaceuticals, and the recording of $172 million of hedging gains, resulted in a negligible increase in General & Administration expenses. As a percentage of sales, General & Administration overheads fell to 5.8% in 2002 from 5.9% in 2001.

4. Operating Income by Division and Business Unit

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

 
  Year ended December 31,
   
 
 
  Change in $
 
 
  2002
  2001
 
 
  ($ millions)

  ($ millions)

  (%)

 
Pharmaceuticals   3,891   3,377   15  
   
 
 
 
  Sandoz   265   166   60  
  OTC   240   268   (10 )
  Animal Health   92   82   12  
  Medical Nutrition   4   51   (92 )
  Infant & Baby   227   230   (1 )
  CIBA Vision   118   102   16  
   
 
 
 
Consumer Health—ongoing   946   899   5  
Divested Health & Functional Food activities   140   (4 )    
   
 
 
 
Consumer Health   1,086   895   21  
Corporate and other income/expense   115   53   117  
   
 
 
 
Total   5,092   4,325   18  
   
 
 
 

        Our operating income increased by 18% from $4.3 billion in 2001 to $5.1 billion in 2002. Our operating margin was 24.4% of sales, an increase of 1.3 percentage points compared with 2001 (23.1%).

Pharmaceuticals Division

        Our Pharmaceuticals Division's operating income rose 15% to $3.9 billion in 2002 with the Division's operating margin improving by 0.6 percentage points over the year to 28.8%. As a percentage of sales, the

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Cost of Goods Sold improved 1.0 percentage points due to product mix changes and productivity gains. Marketing & Sales investments increased slightly as a percentage of sales to drive the launches of Elidel and Zelnorm/Zelmac.

        Implementation of the new research strategy and the establishment of the new Cambridge research facility led to a 13% increase in research & development investments, which remained at 17% of sales.

        Included in General & Administration expenses were currency hedging gains of $172 million which were offset by $202 million of impairment charges against the goodwill of the Division's biotechnology investments (Genetic Therapy Inc., Systemix Inc., and Imutran Ltd. acquisitions from 1995 and 1996) due to the aforementioned change in research and development strategy, and a $52 million additional impairment charge against the pitavastatin marketing rights acquired in 2001. These impairment charges have been determined based on discounted cash flow models of the expected future sales arising from these activities.

Consumer Health Division

        Our Consumer Health Division's operating income increased by 21% over the year from $0.9 billion in 2001 to $1.1 billion in 2002. The Division's ongoing operating income, excluding the impact of the divested Health & Functional Food activities, increased by 5% to $0.9 billion. As explained below, increases in the operating income of Sandoz, Animal Health and CIBA Vision Business Units were offset by falls in the Division's other Business Units.

Sandoz

        Operating income increased significantly by 60% over 2001, fuelled by top-line growth, productivity gains and a stronger focus on higher margin products. Although regional sales forces were expanded and new markets entered, Marketing & Sales expenses were reduced as a percentage of sales.

        Research & Development investments increased 39% to $139 million due to product developments and the funding of the new Sandoz R&D center in Vienna.

        The positive trend of sales and functional costs, and the non-recurrence of acquisition-related costs last year, lifted the operating margin 3 percentage points to 14.6%. We did not record any contribution to operating income from the completed Lek acquisition.

OTC (over-the-counter self medication)

        Operating income dropped 10% over the year to $240 million, as a result of lower sales volumes and increased General & Administration expenses due primarily to the Divisional reorganization announced in February and exit costs from a Japanese joint venture. These were partially offset by reduced Marketing & Sales expenses. The operating margin fell 2 percentage points to 15.8%.

Animal Health

        2002 operating income increased 12% to $92 million, leading to an operating margin of 14.8% (2001: 14.4%). Apart from acquisition-related charges, operating costs were reduced significantly as Marketing & Sales investments were focused on key new launches, while Research & Development investments were maintained as a percentage of sales.

Medical Nutrition

        Operating income fell 92% to $4 million as a result of restructuring provisions of $28 million and a one-time provision for potential additional value-added tax charges in Germany. As a result, the operating margin fell to 0.6% from 7.7% in 2001. Excluding the exceptional items of $28 million operating income would have been $32 million and would have produced an operating margin of 4.5%.

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Infant & Baby

        2002 operating income fell 1% to $227 million. Operating income was affected by one-off goodwill impairment charges of $27 million primarily related to the Hiborn acquisition in Brazil of 1998. As a result, the operating margin fell to 17.0% from 17.4% in 2001. Excluding this impairment of $27 million, the operating margin would have been 19.0%.

CIBA Vision

        Operating income reached $118 million. Investments in Marketing & Sales were increased to power new launches and advertising campaigns. Research & Development investments slightly increased as the Business Unit focused on the development of new products and lens production technology. Operating margin increased slightly to 10.4% in 2002 compared with 9.6% in 2001.

Divested Health & Functional Food activities

        The operating income of $140 million includes the divestment gain of $132 million, after related restructuring charges arising on the divestment of the Health & Functional Food business, and the normal operating income from these activities offset by $18 million of goodwill impairment charges in connection with this divestment.

Corporate and Other Income/Expense

        This includes the costs of corporate management, income resulting from charging share and share option plan costs to the operating companies, and pension income. Net corporate income increased from $53 million in 2001 to $115 million in 2002.

5. Net income

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

 
  Year ended December 31,
   
 
  Change in $
 
  2002
  2001
 
  ($ millions)

  ($ millions)

  (%)

Operating income   5,092   4,325   18
Result from associated companies   (7 ) 83    
Financial income, net   613   284   116
   
 
 
Income before taxes and minority interests   5,698   4,692   21
Taxes   (959 ) (844 ) 14
   
 
 
Income before minority interests   4,739   3,848   23
Minority interests   (14 ) (12 ) 17
   
 
 
Net income   4,725   3,836   23
   
 
 

Result from associated companies

        Associated companies are accounted for using the equity method generally where we own between 20% and 50% of the voting shares of such companies. The result from associated companies is mainly derived from our investments in Roche Holding AG and Chiron Corporation.

        As of December 31, 2002, we had a 32.7% (2001: 21.3%) interest in Roche voting shares, which represented a 6.2% (2001: 4.0%) interest in the total Roche equity. The income statement effect after

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taking into account the required charges due to additional depreciation and amortization arising from allocating the purchase price to tangible and intangible assets and goodwill, resulted in a pre-tax loss of $116 million (2001: $23 million loss).

        Our 42.0% interest in Chiron contributed pre-tax income of $107 million (2001: $110 million). Our share of the net income of both Roche and Chiron were based upon analysts' estimates for the full year 2002. Any differences between these estimates and actual results were adjusted in 2003. In 2001, our income statement includes five quarters of results for Chiron, including an estimate of Chiron's fourth quarter results.

Financial income, net

        A net financial income of $613 million (2001: $284 million), was generated in a difficult environment due to good currency management and equity strategies. Gross financial income of $738 million (including net income on options and forward contracts and after deducting other financial expense) was $159 million higher than in 2001.

        Additionally, interest expense was $194 million (2001: $218 million) and net currency gains were $69 million (up $146 million from 2001). The net currency gain was due to currency gains mainly from Japanese yen positions.

Taxes

        Despite increased profits, the tax charge of $959 million increased only $115 million over the year. Taxes as a percentage of income before tax were 16.8% in 2002 compared to 18.0% in 2001.

Net income

        Net income as a percentage of total sales increased, from 20.4% in 2001 to 22.6% in 2002.

Exchange Rate Exposure and Risk Management

        We transact business in many currencies other than the US dollars. On average in 2003, the US dollar was weaker against the Swiss franc, Japanese yen, euro and British pound than in 2002.

        As a result of our foreign currency exposure, exchange rate fluctuations have a significant impact in the form of both translation risk and transaction risk on our income statement. Translation risk is the risk that our consolidated financial statements for a particular period or as of a certain date may be affected by changes in the prevailing rates of the various currencies of the reporting subsidiaries against the US dollars. Transaction risk is the risk that the value of transactions executed in currencies other than the subsidiary's measurement currency may vary according to currency fluctuations.

        In 2003, 43% of sales were generated in US dollars, 26% in euro, 4% in Swiss francs, 8% in Japanese yen and 19% in other currencies. In 2002, 43% of our sales were generated in US dollars, 25% in euro, 5% in Swiss francs, 8% in Japanese yen and 19% in other currencies. In 2001, 45% of our sales were generated in US dollars, 23% in euro, 5% in Swiss francs, 8% in Japanese yen and 19% in other currencies.

        In 2003, 41% of operating costs were generated in US dollars, 23% in euro, 17% in Swiss francs, 4% in Japanese yen, and 15% in other currencies. In 2002, 41% of our operating costs were generated in US dollars, 22% in euro, 22% in Swiss francs, 4% in Japanese yen, and 11% in other currencies. In 2001, 41% of our operating costs were generated in US dollars, 22% in euro, 21% in Swiss francs, 4% in Japanese yen, and 12% in other currencies.

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New Accounting Pronouncements

        See note 32(k)(xii) and (xiii) to the consolidated financial statements for a discussion of the effect of new accounting standards.

US Dollar Reporting

        We changed the reporting currency of our consolidated financial statements from Swiss francs to US dollars on January 1, 2003. All prior year consolidated financial information has been restated into US dollars.

        The move to presenting our consolidated financial data in US dollars reflects the increasing importance of our sales in US dollars and makes our financial information more easily comparable with peer companies in the pharmaceutical industry.

5.B  Liquidity and Capital Resources

Cash Flow

        The following table sets forth certain information about our cash flow and net liquidity for each of the periods indicated.

 
  Year ended December 31,
 
 
  2003
  2002
  2001
 
 
  ($ millions)

  ($ millions)

  ($ millions)

 
Cash flow from operating activities   6,652   5,229   4,358  
Cash flow used for investing activities   (1,298 ) (2,865 ) (2,772 )
Cash flow used for financing activities   (5,764 ) (4,041 ) (162 )
Net effect of currency translation on cash and cash equivalents   258   836   (156 )
   
 
 
 
Change in cash and cash equivalents   (152 ) (841 ) 1,268  
Change in short- and long-term marketable securities   869   189   (733 )
Change in short- and long-term financial debts   (400 ) (402 ) (1,414 )
   
 
 
 
Change in net liquidity   317   (1,054 ) (879 )
Net liquidity at January 1   6,972   8,026   8,905  
   
 
 
 
Net liquidity at December 31   7,289   6,972   8,026  
   
 
 
 

        The analysis of our cashflow is divided as follows:

    1.
    Cash Flow from Operating Activities and Free Cash Flow

    2.
    Cash Flow from Investing Activities

    3.
    Cash Flow from Financing Activities

    4.
    Net Liquidity

1. Cash Flow From Operating Activities and Free Cash Flow

        In 2003, our primary source of liquidity was cash generated from our operations. The cash flow from operating activities increased by $1.4 billion (27%) from 2002 to $6.7 billion mainly as result of improved working capital management and higher net income. Depreciation, amortization and impairment charges

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increased from 2002 by $50 million to $1.4 billion. Current tax payments were $49 million higher than the prior year.

        In 2002, cash flow from operating activities increased over 2001 by $0.9 billion (20%) to $5.2 billion mainly as result of higher net income and increased non-cash expenses.

        Our free cash flow, excluding the impact of the acquisitions of the Roche stake and Lek, increased 20.6% from $2.5 billion in 2001 to $3.0 billion in 2002, and 23% from $3.0 billion in 2002 to $3.6 billion in 2003.

        Our capital expenditure on tangible fixed assets for 2003 totaled $1.3 billion (5.2% of sales), compared to $1.1 billion (5.3% of sales) in 2002 and $0.8 billion in 2001 (4.3% of sales).

        This level of capital expenditure reflects the continuing investment in Production as well as Research and Development facilities. We expect to maintain spending at approximately the 2003 percentage of sales levels in 2004 and to fund these expenditures with internally generated resources.

        We present Free Cash Flow as additional information as it is a useful indicator of our ability to operate without reliance on additional borrowing or usage of existing cash. Free Cash Flow is a measure of the net cash generated which is available for debt repayment and investment in strategic opportunities, including strengthening our balance sheet. We use Free Cash Flow in internal comparisons of our Divisions' and Business Units' results. Free Cash Flow of our Divisions and Business Units uses the same definition as that for our Group, however no dividends, tax or financial receipts or payments are included in the Division and Business Unit calculation. Free Cash Flow is not intended to be a substitute measure for cash flow from operating activities (as determined under IFRS or US GAAP).

        In 2001, we excluded the purchase of certain product and marketing rights from Free Cash Flow calculations since we considered these transactions to be non-recurring and strategic in nature.

        The following table details the components of these increases.

 
  Year ended December 31,
 
 
  2003
  2002
  2001
 
 
  ($ millions)

  ($ millions)

  ($ millions)

 
Cash flow from operating activities   6,652   5,229   4,358  
Purchase of tangible fixed assets   (1,329 ) (1,068 ) (801 )
Purchase of intangibles assets   (214 ) (90 ) (580 )
Purchase of financial assets   (816 ) (725 ) (828 )
Proceeds from sale of tangible, intangible and financial assets   1,059   979   1,082  
Dividends paid to third parties   (1,724 ) (1,367 ) (1,268 )
Acquisition of product and marketing rights           490  
   
 
 
 
Free cash flow   3,628   2,958   2,453  
   
 
 
 

2. Cash Flow From Investing Activities

        Our cash outflow due to investing activities was $1.3 billion. $0.4 billion was spent to increase the strategic investment in Roche and for the acquisition of Idenix. Our investment in tangible assets totaled $1.3 billion. The net proceeds from sales of marketable securities was $0.4 billion.

        Our net cash outflow from investing activities increased to $2.9 billion in 2002 from $2.8 million in 2001. In 2002, $2.7 billion was spent to increase the strategic investment in Roche and for the acquisition of Lek.

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3. Cash Flow From Financing Activities

        The cash flow used for financing activities was $5.8 billion. $0.3 billion was spent for the acquisition of treasury shares, $1.7 billion for dividend payments and $3.5 billion for the repayment of equity instruments.

        Our net cash outflow from financing activities increased from $0.2 billion in 2001 to $4.1 billion in 2002. The $3.9 billion increase in 2002 as compared to 2001 was mainly due to proceeds we received from the issuance of equity option instruments in 2001. In 2002, $3.3 billion was spent for the acquisition of treasury shares and $1.4 billion for dividend payments while the issue of EUR 1 billion bond and the conversions of the remaining two convertible bonds contributed to a net inflow of $0.6 billion.

        In 2003, we repaid $0.3 billion of our financial debts as compared to receipts of $0.6 billion in 2002 and $1.0 billion in 2001.

4. Net Liquidity

        Our overall liquidity (cash, cash equivalents and marketable securities including financial derivatives) amounted to $13.3 billion at December 31, 2003. Net liquidity (liquidity less financial debt) at year end was $7.3 billion, $0.3 billion more than the December 31, 2002 level, despite the cash outflow due to financing activities explained above.

        Our overall liquidity amounted to $12.5 billion at December 31, 2002, a reduction of $0.6 billion compared to 2001. Net liquidity (liquidity less financial debt) remained high at $7.0 billion despite a reduction of $1 billion from the December 31, 2001 level due to various financing activities.

        We present overall liquidity and net liquidity as additional information as they are useful indicators of our ability to meet our financial commitments and to invest in new strategic opportunities, including strengthening our balance sheet. These items should not be interpreted as measures determined under IFRS.

        We use marketable securities and derivative financial instruments to manage the volatility of our exposures to market risk in interest rates and liquid investments. Our objective is to reduce, where appropriate, fluctuations in earnings and cash flows. We manage these risks by selling existing assets or entering into transactions and future transactions (in the case of anticipatory hedges) which we expect we will have in the future, based on past experience. We therefore expect that any loss in value for those securities or derivative financial instruments generally would be offset by increases in the value of those hedged transactions.

        We use the US dollar as our reporting currency and are therefore exposed to foreign exchange movements primarily in European, Japanese and other Asian and Latin American currencies. We manage the risk associated with currency movements by entering into various contracts to preserve the value of assets, commitments and anticipated transactions. In particular, we enter into forward contracts and foreign currency option contracts to hedge certain anticipated foreign currency revenues in foreign subsidiaries. See "Item 11. Quantitative and Qualitative Disclosures About Market Risk," for additional information.

Share repurchase program

        On July 22, 2002, we initiated our third share buy-back program to repurchase shares on the SWX Swiss Exchange for up to a total of CHF 4 billion. During 2003, 24.3 million shares were repurchased via a second trading line for a total amount of $939 million (2002: 24.6 million shares for a total amount of $1.0 billion). In 2003, the Group's share capital was reduced by 22.7 million shares relating to shares bought on the second trading line in 2002. Proposals will be made at the forthcoming Annual General Meeting to be held on February 24, 2004 to reduce the share capital by a further 24.3 million shares relating to the shares bought on the second trading line in 2003, to initiate a fourth share repurchase program of up to CHF 3 billion, and to reduce our share capital by the amounts repurchased as a result of the fourth repurchase program in each year, starting in 2005.

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        During the year to December 31, 2003 an additional 17.1 million shares, net, were also sold on the first trading line for a total of $666 million (2002: 55.4 million shares, net were bought for $2.4 billion).

        In February 2001, our Board of Directors approved our second share repurchase program for an amount of up to CHF 4 billion by means of a second trading line established on the SWX Swiss Exchange. As of December 31, 2001, we had repurchased 59 million shares for a total of $2.6 billion. An additional 1.9 million shares were then purchased during January 2002 to complete this program. The average price for the shares we acquired under this program was CHF 66. On March 21, 2002 the Annual General Meeting cancelled 61.1 million shares with a nominal value of $22 million.

        On August 27, 1999, we announced our first share repurchase program, in which we would purchase our shares in the open market for an amount of up to CHF 4 billion. That repurchase program was completed in January 2001. The program was wholly financed with our surplus liquidity. The acquired shares were kept as treasury shares.

        At December 31, 2003, our holding of treasury shares (excluding the amount that we will propose to be cancelled at the February 2004 Annual General Meeting) amounted to 309 million shares or 11% of the total number of issued shares.

Other equity instruments

        During December 2001, through indirectly held affiliates, we sold a total of 55 million ten-year call options (Low Exercise Price Options—"LEPOs") on our shares, with an exercise price of CHF 0.01, for EUR 2.2 billion in proceeds (EUR 40 per LEPO). We accounted for the LEPOs as an increase in share premium at fair value less related issuance costs. Following changes in US GAAP and expected changes in IFRS, on June 26, 2003 we redeemed these equity instruments in advance of their exercise date.

        We had previously also sold a total of 55 million nine and ten-year put options on our shares to a third party with an exercise price of EUR 51 receiving EUR 0.6 billion in proceeds (EUR 11 per put option). We accounted for the option premium associated with the put options as an increase in share premium less related issuance costs. Following changes in US GAAP and expected changes in IFRS, on June 26, 2003 we redeemed these equity instruments in advance of their exercise date.

Convertible Bonds

        A 2% Convertible Bond was issued on October 6, 1995 by our affiliate, Sandoz Capital BVI Ltd. (now Novartis Capital Ltd., "Novartis Capital"). This Bond was guaranteed by Sandoz AG and due in 2002 in the amount of $750 million. The bonds were convertible into Novartis shares up to and including September 30, 2002. In 2002, except for Bonds with a value of $120,000, all of these Bonds were converted into 27,555,462 Novartis shares. The remaining $120,000 in Bonds were repaid.

        A 11/4% Convertible Bond was issued on October 23, 1995 by Novartis Capital. This Bond was guaranteed by Sandoz AG and due in 2002 in the amount of CHF 750 million. In 2002, all of these Bonds were converted into 766,200 Novartis shares and 19,155 shares of Syngenta AG.

Straight Bond

        On November 14, 2002, our affiliate, Novartis Securities Investment Ltd, Bermuda, issued a 3.75% bond, guaranteed by Novartis AG and due in 2007, in the amount of EUR 1 billion.

        On October 17, 2001, our affiliate, Novartis Securities Investment Ltd., Bermuda, issued a 4% bond, guaranteed by Novartis AG and due in 2006, in the amount of EUR 900 million.

ADS Direct Purchase Plan and Dividend Reinvestment Plan

        The Direct Purchase and Dividend Reinvestment Plan for our ADSs, which are listed on the New York Stock Exchange, is a no-fee plan open to new investors as well as existing ADS shareholders in the

108



US. This plan features no enrollment, purchase or dividend reinvestment fees. An initial investment of $500 is required, or the deposit of a minimum of 10 Novartis ADSs into a plan account. Transaction fees are applied when ADSs are sold. To date, there have been no new issuances of Novartis shares or ADSs under this plan and no effect on our share capital or balance sheet.

5.C  Research & Development, Patents and Licenses

        Our Research & Development spending totaled $3.8 billion, $2.8 billion and $2.5 billion for the years 2003, 2002 and 2001, respectively. Each of our Divisions and Business Units has its own Research & Development and patents policies. For a description of those research and development and patents policies, see "Item 4. Information on the Company—4.B Business Overview."

5.D  Trend Information

        Please see "—5.A Operating Results" and "Item 4. Information on the Company—4.B. Business Overview" for trend information.

5.E  Off-Balance Sheet Arrangements

        We have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations. See also note 27 of the consolidated financial statements.

5.F   Aggregate Contractual Obligations

        We have long-term research agreements with various institutions which require us to fund various research projects in the future. As of December 31, 2003, the aggregate total amount of payments, excluding potential milestones, which may be required under these agreements was $811 million. We expect to fund these long-term research agreements with internally generated resources.

        As of December 31, 2003, our total financial debt was $6.0 billion, as compared with $5.6 billion as of December 31, 2002, and $5.2 billion as of December 31, 2001. The increase from 2002 to 2003 is due to currency translation effect on our euro denominated bonds.

        The increase of $0.4 billion of debt at December 31, 2002 compared to December 31, 2001 was primarily due to the issue of a EUR 1.0 billion straight bond due 2007 partially offset by the conversion of $0.7 billion of convertible debt and reduction in short-term debt. Our year end debt/equity ratio remained stable at 0.20:1 in 2003 from 0.20:1 in 2002 and 0.21:1 in 2001.

        We had $3 billion in non-convertible bonds at December 31, 2003, up from $2.6 billion at December 31, 2002 and $1.4 billion as of December 31, 2001. The increase from 2002 to 2003 has been due to currency translation effect on our euro denominated bonds. The increase from 2001 to 2002 was primarily due to the issuance on November 14, 2002 by our Bermuda affiliate, Novartis Securities Investment Ltd, of EUR 1 billion of 3.75% guaranteed notes, due 2007, guaranteed by Novartis AG.

        For details on the maturity profile of debt, currency and interest rate structure, see note 18 to the consolidated financial statements.

        As of December 31, 2003, we had short-term debt (excluding the current portion of long-term debt) of $2.7 billion as compared with $2.7 billion as of December 31, 2002, and $2.9 billion as of December 31, 2001. This short-term debt consisted mainly of $0.6 billion (2002: $0.9 billion; 2001: $0.6 billion) in commercial paper; and other bank and financial debt, including interest bearing employee accounts, of $1.6 billion (2002: $1.5 billion; 2001: $1.7 billion).

        We are in compliance with all covenants or other requirements set forth in our financing agreements. We do not have any rating downgrade triggers that would accelerate maturity of our debt. For details of

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the maturity profile of debt, currency and interest rate structure, see note 18 to the consolidated financial statements. Our debt continues to be rated by Standard & Poor's and Moody's respectively as AAA and Aaa for long-term maturities and A1+ and P1 for short-term debt. We consider our working capital to be sufficient for our present requirements.

 
  Payments Due by Period
Contractual Obligations

  Total
  Less than
1 year

  1–3
years

  3–5
years

  After
5 years

 
  ($ millions)

  ($ millions)

  ($ millions)

  ($ millions)

  ($ millions)

Long-Term Debt   3,114   37   1,741   1,297   39
Operating Leases   928   211   291   156   270
Finance Leases   122   8   114        
Research & Development Commitments (excluding potential milestone payments)(1)   811   317   456   33   5
   
 
 
 
 
Total Contractual Cash Obligations   4,975   573   2,602   1,486   314
   
 
 
 
 

(1)
The possible impact of potential milestone payments are explained in the following section, "Contingencies".

Contingencies

        In connection with our original investment in Chiron, we agreed to:

    purchase up to $500 million of new Chiron equity at fair value, at Chiron's request (a "Put"). To date, Chiron has made no such request.

    guarantee up to $703 million of Chiron debt. We are not obligated to make any payments under this guarantee unless Chiron defaults on the debt. If Chiron uses this guarantee in excess of $403 million, then our Put obligation is reduced by the excess amount.

        The outstanding equity Put and guarantee expire no later than 2011.

        We have entered into long-term research agreements with various institutions. These agreements may require us to make up to $729 million in potential milestone and other contingent payments. Of this amount, we may be required to pay up to $553 million within the next 5 years.

        For other contingencies, see "Item 4. Information on the Company—4.D Property, Plants and Equipment—Environmental Matters" and "Item 8. Financial Information—8.A Consolidated Statements and Other Financial Information—8.A.7 Legal Proceedings."


Item 6.  Directors, Senior Management and Employees

6.A  Directors and Senior Management

        We are fully committed to good corporate governance. Our principles and rules on corporate governance are laid down in our Articles of Incorporation, the Regulations of the Board and the Charters of the Board Committees. The Board's Corporate Governance Committee reviews these principles and rules regularly in the light of prevailing best practices and forwards suggestions for improvement to the full Board for approval.

        Our Board of Directors is elected by our shareholders and holds the ultimate decision-making authority for Novartis AG, except for those matters reserved by law or by our Articles of Incorporation to the shareholders. The Board is comprised of 14 persons. The average age of our Directors is 61 and their

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average tenure is 6 years. Our Chairman and Chief Executive Officer, Daniel Vasella, MD, is our only executive Director. It is the view of the Board that this dual role ensures effective leadership and excellent communication between the shareholders, the Board and Management.

        Alexandre F. Jetzer was a member of the Executive Committee until 1999 and supports Novartis' Government Relations under a consultancy agreement. On the basis of the independence criteria listed in the appendix to the Regulations of the Board and Committee Charters effective as of April 15, 2003, the Board has decided that with the exception of Dr. Vasella, Mr. Jetzer and, as set forth below, Prof. Srikant Datar, PhD, all Directors are independent and have no material relationship with Novartis AG or other companies of the Group outside of their role as a Director. No Director sits on the board of directors of other listed companies with which any Group company conducts a material amount of business. Our independent Directors meet separately, without the presence of the Directors who are not independent, twice each year.

        We have for the last seven years, among other institutions, engaged Harvard Business School, the employer of Prof. Datar, to train our executives in financial and business matters. The compensation we paid for these programs is not material in comparison with the total revenues of Harvard Business School and, therefore, does not constitute a "material relationship." Before his nomination as a Director, Prof. Datar had given up management responsibilities for these programs. Since his nomination as Director in 2003, Prof. Datar has not been separately compensated for these programs. New rules which were published by the New York Stock Exchange (NYSE) in 2003, and which will become effective in November 2004, will require us to look back three years in order to determine whether a Director is independent. For this reason, when the new NYSE rule takes effect, Prof. Datar's professional engagement for Novartis AG prior to his nomination as Director will cause him to no longer be considered an "independent" Director as of that time. As a consequence, in December 2003, Prof. Datar stepped down from the Audit and Compliance Committee, which requires all members to be independent.

        In his capacity as a Director, Prof. Rolf M. Zinkernagel, MD, represents the Board of Directors' interests on the Scientific Advisory Boards of the Genomics Institute of the Novartis Research Foundation (GNF) and the Novartis Institute for Tropical Diseases (NITD).

        The primary functions of the Board, as defined in the Swiss Code of Obligations and in our Articles of Incorporation, are:

    strategic direction and management;

    accounting matters, financial control and financial planning;

    appointing and dismissing of members of the Executive Committee and other key executives;

    overall supervision of business operations; and

    setting out the motions to be presented to the General Meeting, including approval of financial statements.

        The agenda for Board meetings is set by the Chairman and Chief Executive Officer. Any member of the Board (the "Directors") may request in writing that an item be included on the agenda.

        The Directors receive materials in advance of Board meetings allowing them to prepare for the handling of the items on the agenda.

        The Board recognizes the importance of being fully informed on material matters involving the Group and our business. Therefore, the Directors are required to hold discussions with our management, to review materials provided to them, to visit offices and plants and to participate in no less than a majority of the meetings of the Board and its Committees.

        The Chairman and Chief Executive Officer recommends members of senior management who at the invitation of the Board, attend Board meetings to report on areas of the business within their responsibility, thereby ensuring that the Board has sufficient information to make appropriate decisions.

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        The Board reviews the performance of the Chairman and Chief Executive Officer once a year. The Board also meets in Executive Session from time to time to consider other matters of importance to our business.

        Dr. Vasella has been elected by the Board as our Chairman and also to serve Novartis AG as Chief Executive Officer. The Board has appointed Prof. Helmut Sihler, JD, PhD as Vice Chairman and Lead Director. Hans-Jörg Rudloff has been elected Vice Chairman.

        During 2003, the Board met 7 times. Detailed information on each Director's attendance at full Board and Board Committee meetings is provided in the table below:

 
  Full
Board

  Chairman's
Committee

  Compensation
Committee

  Audit and
Compliance
Committee

  Corporate
Governance
Committee

Number of meetings in 2003   7   8   3   8   2
Daniel Vasella, MD     7(1)     8(1)            
Prof. Helmut Sihler, JD, PhD   7   8     3(1)     8(1)   2
Hans-Jörg Rudloff   7   8   3       2
Dr. h.c. Birgit Breuel   7           7    
Prof. Peter Burckhardt, MD   7                
Prof. Srikant Datar, PhD.(2)   5           5    
Walter G. Frehner   7           7    
William W. George   7   8   3         2(1)
Alexandre F. Jetzer   7                
Pierre Landolt   7                
Prof. Ulrich Lehner, PhD   7           7    
Heini Lippuner   7   8            
Dr.-Ing. Wendelin Wiedeking(2)   4                
Prof. Rolf M. Zinkernagel, MD   7               2

(1)
Chair.

(2)
Since March 4, 2003.

Directors

        Dr. h.c. Daniel Vasella, MD (Age 50).    Chairman of the Board of Directors and Chairman of the Chairman's Committee (since 1999), Chief Executive Officer and Head of the Group Executive Committee (since 1996). His current term as Chairman expires in 2004. Daniel Vasella graduated with a MD from the University of Bern in 1979. After holding a number of medical positions in Switzerland, he joined Sandoz Pharmaceuticals Corporation in the US in 1988. From 1993 to 1995, Daniel Vasella advanced from Head of Corporate Marketing and Senior Vice President and Head of Worldwide Development to Chief Operating Officer of Sandoz Pharma Ltd. In 1995 and 1996, Daniel Vasella was a member of the Sandoz Group Executive Committee and Chief Executive Officer of Sandoz Pharma Ltd. After the merger that created Novartis in 1996, Daniel Vasella served as President and Chairman of the Executive Committee. In 1999, he additionally was appointed Chairman of the Board of Directors. Daniel Vasella is also a member of the Board of Directors of Pepsico, Inc., US. In addition, he is a member of the International Board of Governors of the Peres Center for Peace in Israel and a member of several industry associations and educational institutions, including the International Business Leaders Advisory Council for the Mayor of Shanghai. In 2002, Dr. Vasella was awarded an honorary doctorate by the University of Basel.

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        Prof. Helmut Sihler, JD, PhD (Age 73).    Vice Chairman of our Board (since 1996), Lead Director and a member of the Chairman's Committee and Compensation Committee (since 1999), and Chairman of the Audit and Compliance Committee and a member of the Corporate Governance Committee (since 2001). His current term expires in 2004. Helmut Sihler studied philology and law in Graz, Austria and Burlington, Vermont and graduated with a PhD in philology and a JD. In 1957, he joined Henkel KGaA, Germany, initially holding several positions in the marketing department for consumer goods. From 1980 to 1992, Helmut Sihler was Chairman of the Central Board of Management of Henkel KGaA. In the years 1988 and 1989, Helmut Sihler was President of the Association of the German Chemical Industry. In 1983, Helmut Sihler was elected to the Board of Ciba-Geigy AG and became a Director and Vice Chairman of Novartis after its creation in 1996. Since 1999, Helmut Sihler has acted as Novartis AG's Lead Director. In the same year, he became a member of the newly formed Chairman's Committee and the Compensation Committee; he also acts as Chairman of the Audit and Compliance Committee and has been a member of the Corporate Governance Committee since 2001. Helmut Sihler was ad interim CEO of Deutsche Telekom AG, Germany, from July to November 2002, and he is Chairman of the Supervisory Board of Porsche AG, Germany.

        Hans-Jörg Rudloff (Age 63).    Vice Chairman of our Board of Directors (since 1996), a member of the Chairman's Committee and Compensation Committee (since 1999), and a member of the Corporate Governance Committee (since 2001). His current term expires in 2004. Hans-Joerg Rudloff studied economics at the University of Bern and graduated in 1965. He joined Credit Suisse in Geneva and moved to New York in 1968 to join the investment banking firm of Kidder Peabody Inc. He was in charge of the Swiss operation and was elected Chairman of Kidder Peabody International and a member of the Board of Kidder Peabody Inc. in 1978. In 1980 he joined Credit Suisse First Boston and was elected Vice Chairman in 1983 and Chairman and CEO in 1989. From 1986 to 1990 Hans-Joerg Rudloff was also a member of the Executive Board of Credit Suisse in Zurich in charge of all securities and capital market departments. In 1990 he became a member of the Executive Board of CS First Boston and a member of the CS Holding Board. From 1994 to 1998 Hans-Joerg Rudloff was Chairman of MC-BBL in Luxembourg and joined Barclays Capital in 1998 where he is presently Chairman of the Executive Committee. In 1994, Hans-Joerg Rudloff was elected to the Board of Directors of Sandoz AG and served as its Vice Chairman from 1995 to 1996, a position that he has also held for Novartis AG since its formation in 1996. In 1999, he became a member of the Chairman's Committee and the Compensation Committee and since 2002 he has been a member of the Corporate Governance Committee. Hans-Joerg Rudloff also serves on a number of boards of other companies, including the Boards of Directors of the TBG Group (Thyssen-Bornemisza Group), Monaco, Marcuard S.A., Geneva, and RBC, Russia, the Advisory Board of Landeskreditbank Baden-Württemberg, Germany, and EnBW (Energie Baden-Württemberg), Germany. He is also on the Advisory Board of the MBA program of the University of Bern, Switzerland.

        Dr. h.c. Birgit Breuel (Age 66).    Director (since 1996), and a member of the Audit and Compliance Committee (since 1999). Her current term expires in 2005. Birgit Breuel studied politics at the Universities of Hamburg, Oxford and Geneva. She was Minister of Economy and Transport (1978-1986) and Minister of Finance (1986-1990) of the Land Niedersachsen (Lower Saxony), the second largest state of Germany. In 1990, Birgit Breuel was elected to the Executive Board of the Treuhandanstalt, which was responsible for the privatization of the former East Germany's economy; in 1991, she also became the President of the Treuhandanstalt. From 1995 to 2000, she acted as the General Commissioner and CEO of the world exhibition EXPO 2000 in Hannover, Germany. In 1994, Birgit Breuel was elected to the Board of Directors of Ciba-Geigy AG and has served as a Director of Novartis AG since its formation in 1996. In 1999, she became a member of the Audit and Compliance Committee. Birgit Breuel is also a member of the Supervisory Board of Gruner+Jahr AG, Hamburg, Germany.

        Prof. Peter Burckhardt, MD (Age 65).    Director (since 1996). His current term expires in 2005. After studying in Basel and Hamburg, Peter Burckhardt graduated with a MD from the University of Basel in 1965. He trained from 1966 to 1978 in internal medicine and endocrinology, mainly at the University Hospital of Lausanne, Switzerland, and the Massachusetts General Hospital, Boston. Peter Burckhardt was nominated Chief of Clinical Endocrinology in 1978, and full Professor of Internal Medicine and

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Chairman of the Department of Internal Medicine at the University Hospital of Lausanne in 1982. Since 1992, he has been the Head of the Medical Service at the same University. Since 1982 Peter Burckhardt has been the Chairman of the Novartis- (formerly Sandoz-) Foundation for Biomedical Research in Switzerland, and was elected in 1996 to the Board of Directors of the newly formed Novartis AG. In addition to his activities as a clinician and academic teacher, Peter Burckhardt is conducting clinical research, mainly in bone diseases and calcium metabolism. He has authored more than 300 scientific publications and is an editorial board member of several international scientific journals. He is treasurer of the International Foundation of Osteoporosis, and is a former president of the Swiss Internist's Society and member of the Appeal Committee of the Swiss Office for Drug Control. Peter Burckhardt was board member of numerous scientific societies including the Swiss Societies of Nutrition, Clinical Chemistry, Endocrinology, Bone and Mineral Research, and the Committee for Endocrinology of the European Community. Since 1990, he has been the organizer and chairman of the International Symposia on Nutrition and Osteoporosis.

        Prof. Srikant Datar, PhD (Age 50).    Director (since 2003), and a member of the Audit and Compliance Committee (during 2003). His current term expires in 2006. In 1973 Professor Srikant Datar graduated with distinction in mathematics and economics at the University of Bombay. After his studies he worked as Accountant, Planner as well as Visiting Professor and Professor at the Universities of Carnegie Mellon, Stanford and Harvard. He is a Chartered Accountant and holds two masters degrees and a PhD from Stanford University. Srikant Datar holds the Arthur Lowes Dickinson Professorship at Harvard University. He is currently the Senior Associate Dean for Executive Education at the Harvard Business School. His research interests are in the areas of cost management, measurement of productivity, new product development, time-based competition, incentives and performance evaluation. He is the author of many scientific publications and has received several academic awards and honors. Srikant Datar has advised and worked with numerous renowned firms such as Du Pont, General Motors and Mellon Bank in research, development and training. He is also a member of the Board of Voyan Technology Inc., Santa Clara, California, and of Harvard Business School Interactive, Boston, Massachusetts.

        Walter G. Frehner (Age 70).    Director (since 1996), and a member of the Audit and Compliance Committee (since 2001). His current term expires in 2004. After completing commercial school and an apprenticeship at the Bernese Cantonal Bank in Interlaken, Walter G. Frehner broadened his experience both in Switzerland and abroad. In 1958 he joined Swiss Bank Corporation (now UBS) where he held a number of increasingly senior positions. He was appointed General Manager and member of the Executive Board in 1978, President of the Executive Board (CEO) in 1987 and Chairman of the Board of Directors in 1993 from which position he retired in 1996. Walter G. Frehner has been a member of the Board of Directors of Ciba-Geigy AG since 1994 and of Novartis AG since the merger in 1996. In 2001, he became a member of the Audit and Compliance Committee. He is also a member of the Board of Directors of Bâloise Holding AG, Basel, Switzerland, where he is also the Vice Chairman.

        William W. George (Age 61).    Director (since May 1999), and a member of the Chairman's Committee and Chairman of the Corporate Governance Committee (since 2001). His current term expires in 2006. William W. George received his BSIE from Georgia Institute of Technology in 1964 and his MBA from Harvard University in 1966. From 1966 to 1969, he worked in the US Department of Defense as special assistant to the Secretary of the Navy and as assistant to the Comptroller. After having served as President of Litton Microwave Cooking Products, William W. George held a series of executive positions with Honeywell from 1978 to 1989. Thereafter he served as President and Chief Operating Officer of Medtronic, Inc. in Minneapolis, and, from 1991 to 2001, as its Chief Executive Officer. From 1996 to 2002, he was Medtronic's Chairman. In 1999, William W. George was elected as a member of the Board of Directors of Novartis AG. In 2001, he became a member of the Chairman's Committee and the Chairman of the Corporate Governance Committee. William W. George is a member of the Boards of Directors of Goldman Sachs and Target Corporation (formerly Dayton Hudson). He is Senior Lecturer at Harvard Business School, having served as Executive-in-Residence at Yale School of Management and Professor of Leadership and Governance at IMD International in Lausanne, Switzerland. In addition, he is a member

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of the Board of Directors of Harvard Business School, National Association of Corporate Directors, Carnegie Endowment for International Peace and Minneapolis Institute of Arts.

        Alexandre F. Jetzer (Age 62).    Director (since 1996). His current term expires in 2005. Alexandre F. Jetzer studied law and economics at the University of Neuchatel, Switzerland and is a licensed attorney. After more than ten years as General Secretary of the Swiss Federation of Commerce and Industry (Vorort), Alexandre F. Jetzer joined Sandoz in 1980. In 1981 he became Member of its Group Executive Committee in the capacity of Chief Financial Officer (CFO) and, as of 1990, as Head of Management Resources and International Coordination. From 1995 to 1996, he was Vice Chairman and Chief Executive Officer of Sandoz Pharmaceuticals Corporation in East Hanover, New Jersey. From the time of the merger in 1996 until 1999, he was a member of the Novartis Executive Committee and Head of International Coordination, Legal & Taxes. Alexandre F. Jetzer has served as a Director of Novartis AG since its formation in 1996. He is also a member of the Board of Directors of Clariden Bank, Zurich, Switzerland.

        Pierre Landolt (Age 56).    Director (since 1996). His current term expires in 2005. Pierre Landolt graduated with a Bachelor of Law degree from the University of Paris-Assas. From 1974 to 1976, he worked for Sandoz Brazil. In 1977, he acquired an agricultural estate in Brazil, cultivating organic tropical fruit as well as producing dairy products. In 1989, he founded a firm for irrigation systems. In the same year, he became the main associate and director of a bank in São Paulo. Since 1997 Pierre Landolt has been Associate and Chairman of Axial Par Ltda, São Paulo, a company investing in sustainability. In 2000, he was co-founder of Eco Carbone LLC, Delaware, US, a company focused on the development of carbon sequestration processes in Europe, Africa and South America. In 1986, Pierre Landolt was elected as a member of the Board of Directors of Sandoz AG and he has served as a Director of Novartis AG since its formation in 1996. Pierre Landolt is the President of the Sandoz Family Foundation, Glaris, Switzerland, and the Chairman of the Board of Directors of Landolt Kapital SA, Pully, Switzerland, and of Emasan AG, Basel, Switzerland. He is also a member of the Board of Directors of Syngenta AG, and of the Syngenta Foundation for Sustainable Agriculture, both in Basel, Switzerland. In addition, he serves as Chairman of the Board of Directors of Curacao International Trust Company, Curacao, Netherlands Antilles, Vaucher Manufacture Fleurier SA., Fleurier, Switzerland (Chairman), and as Vice Chairman of the Boards of Directors of Parmigiani, Mesure et Art du Temps S.A., Fleurier, Switzerland, and the Fondation du Montreux Jazz Festival, Montreux, Switzerland.

        Prof. Ulrich Lehner, PhD (Age 57).    Director and member of the Audit and Compliance Committee (since 2002). His current term expires in 2005. Ulrich Lehner studied business administration and mechanical engineering in Darmstadt, Germany. After completing his studies in 1972, he was a teaching and research assistant at the Institute for Business Administration at the Darmstadt Technical University. He earned a Doctorate in Economics in 1975. From 1975 to 1981, Ulrich Lehner was an auditor with Deutsche Treuhand-Gesellschaft AG in Düsseldorf. In 1981, he joined Henkel KGaA as Head of Domestic Affairs in the Central Accounting/Tax Department. After heading the Controlling Department of Fried. Krupp GmbH in Essen, Germany, from 1983 to 1986, he returned to Henkel KGaA as Finance Director. From 1991 to 1993, Ulrich Lehner headed the then-formed Management Holding, Henkel Asia-Pacific Ltd., in Hong Kong. From 1994 to 1995, he served Henkel KGaA, Düsseldorf, as Corporate Vice President of the Finance and Controlling Department, and, from 1995 to 2000, as Executive Vice President, Finance/Logistics. He was appointed Deputy President in 1999 and President and CEO of Henkel KGaA in 2000. Ulrich Lehner was elected to the Board of Directors of Novartis AG in 2002. He is a member of the Audit and Compliance Committee. He also serves as a member of the Board of Directors of Dresdner Bank, Luxembourg, Luxembourg, of Ecolab Inc., St. Paul, US, and E.ON AG, Düsseldorf, Germany. In addition, he is a member of the Advisory Board of Dr. August Oetker KG, Bielefeld, Germany, and of Krombacher Brauerei, Krombach, Germany. He is an Honorary Professor at the University of Münster, Germany.

        Heini Lippuner (Age 70).    Director (since 1996) and member of the Chairman's Committee (since 1999). His current term expires in 2005. After completing his commercial studies in St. Gallen,

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Switzerland, Heini Lippuner began his career with Geigy Ltd in the Dyestuffs Division. Following a number of foreign assignments, he headed the Dyestuffs and Chemicals Division in Germany from 1968 to 1972. He served as a member of the worldwide Dyestuffs and Chemicals Division's management committee of Ciba-Geigy Ltd from 1973 to 1982, and became the Head of this Division in 1982. In 1986, Heini Lippuner became a member of the Executive Committee of the Ciba-Geigy Group and took over as its Chairman and Chief Operating Officer in 1988. In 1996, he stepped down from this position and was elected to the Board of Directors of the newly created Novartis AG. Since 1999, he has also been a member of the Chairman's Committee. Heini Lippuner is also member of the Board of Directors of Buehler AG, Uzwil, Switzerland, and of Asset Link AG, Reinach BL, Switzerland. In addition, he is Chairman of the Foundation Board of the International Institute for Management Development (IMD) in Lausanne, Switzerland.

        Dr.-Ing. Wendelin Wiedeking (Age 51).    Director (since 2003). His current term expires in 2006. Born in Ahlen, Germany, Wendelin Wiedeking studied mechanical engineering and worked as a scientific assistant in the Machine Tool Laboratory of the Rhine-Westphalian College of Advanced Technology in Aachen. His professional career began in 1983 as Director's Assistant in the Production and Materials Management area of Dr.-Ing. h.c. F. Porsche AG in Stuttgart- Zuffenhausen. In 1988 he moved to the Glyco Metall-Werke KG in Wiesbaden as Division Manager, where he advanced by 1990 to the position of Chief Executive and Chairman of the Board of Management of Glyco AG. In 1991 he returned to Porsche AG as Production Director. A year later, the Supervisory Board appointed him spokesman of the Executive Board (CEO), and in 1993 its Chairman. He is also a member of the Board of Directors of Deutsche Telekom AG, Germany, and of Eagle Picher Incorporated, Phoenix, Arizona.

        Prof. Rolf M. Zinkernagel, MD (Age 59).    Director (since 1999) and member of the Corporate Governance Committee (since 2001). His current term expires in 2006. Rolf M. Zinkernagel graduated from the University of Basel with a MD in 1970. Since 1992 he has been Professor and Director of the Institute of Experimental Immunology at the University of Zurich. Rolf M. Zinkernagel has received many awards and prizes for his work and contribution to science, the most prestigious being the Nobel Prize for Medicine which he was awarded in 1996. In 1999, Rolf M. Zinkernagel was elected to the Board of Directors of Novartis AG. He has been a member of the Corporate Governance Committee since 2001. He is a member of the Swiss Society of Allergy and Immunology, the American Associations of Immunologists and of Pathologists, the ENI European Network of Immunological Institutions, the International Society for Antiviral Research, and a member of the Executive Board of the International Union of Immunological Societies (IUIS). Rolf M. Zinkernagel was a member of the Board of Directors of Cytos Biotechnology AG, Schlieren/ Zurich, Switzerland. He is also a member of the Scientific Advisory Boards of: The Lombard Odier, Darier Hentsch & Cie Bank, Geneva, Switzerland; BT & T, Jersey; Bio-Alliance AG, Frankfurt, Germany; Aravis General Partner Ltd., Cayman Islands; Cytos Biotechnology AG, Schlieren/Zurich, Switzerland until April 2003; Bioxell, Milano, Italy; Esbatech, Zurich, Switzerland; Novimmune, Geneva, Switzerland, and Mann-Kind, Sylmar CA, US Rolf M. Zinkernagel is also a Science Consultant to: GenPat77, Berlin/Munich, Germany; Aponetics AG, Witterswil, Switzerland; Solis Therapeutics, Palo Alto, US, and Ganymed, Mainz, Germany.

Executive Officers and Senior Management

        Dr. h.c. Daniel Vasella, MD (Age 50).    Chairman of the Board of Directors and Chairman of the Chairman's Committee (since 1999), Chief Executive Officer and Head of the Group Executive Committee (since 1996). See "—Directors."

        Urs Baerlocher, JD (Age 61).    Head of Legal and General Affairs and a member of the Group Executive Committee (since 1999). Urs Baerlocher earned his JD at the University of Basel and was admitted to the bar in 1970. After having worked as a tax lawyer, he joined Sandoz in 1973, and held a number of key positions including Head of Strategic Planning and Head of Group Reporting. In 1987, he was made a member of the Sandoz Executive Board, responsible i.a. for Strategic Planning, HR, Legal, Taxes, Patents and Trademarks. In 1990, he became CEO of the Sandoz Nutrition Division and then, in

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1993, CEO of Sandoz Pharma. In 1995, Urs Baerlocher assumed the position of Chairman of the Board of Sandoz Deutschland GmbH (Germany) and Biochemie GmbH (Austria). After the formation of Novartis in 1996 he served as Head of International Coordination, Legal, Tax, Insurance, before his responsibilities were widened to include Corporate Intellectual Property, Corporate Health, Safety & Environment and Corporate Security.

        Raymund Breu, PhD (Age 58).    Chief Financial Officer and a member of the Group Executive Committee (since 1996). Raymund Breu graduated from the Swiss Federal Institute of Technology (ETH) in Zurich, Switzerland, with a PhD in mathematics. In 1975, he joined the Treasury Department of the Sandoz Group, and, in 1982, became the Head of Finance for the Sandoz affiliates in the UK. In 1985, he was appointed Chief Financial Officer of Sandoz Corporation in New York, where he was responsible for all Sandoz Finance activities in the US. In 1990, he became Group Treasurer of Sandoz Ltd., Basel, Switzerland, and, in 1993, Head of Group Finance and Member of the Sandoz Executive Board. Following the formation of Novartis in 1996, he assumed his current position as Chief Financial Officer and member of the Group Executive Committee. Raymund Breu is also a member of the Board of Directors of Swiss Re, Chiron, US, and of the SWX Swiss Exchange and of its admission panel and its takeover commission.

        Juergen Brokatzky-Geiger, PhD (Age 51).    Head of Human Resources and Permanent Attendee to the Executive Committee. Juergen Brokatzky-Geiger graduated with a PhD in Chemistry from the University of Freiburg, Germany, in 1982. He joined Ciba-Geigy in 1983 as a Laboratory Head in the Pharmaceutical Division. After a job rotation in Summit, NJ, from 1987 to 1988 he held a number of positions of increasing responsibility, including Group Leader of Processes in R&D, Head of Processes in R&D and Head of Process Development and Pilot Plant Operations. During the merger of Ciba-Geigy and Sandoz in 1996, Juergen Brokatzky-Geiger was appointed Integration Officer of Technical Operations. Thereafter, he became the Head of Chemical and Analytical Development and, from 1999 until August 2003, he served as the Global Head of Technical R&D. Juergen Brokatzky-Geiger was appointed to his present position as Head of Human Resources on September 1, 2003.

        Paul Choffat, JD (Age 54).    Head of Novartis Consumer Health and member of the Group Executive Committee (since 2002). Paul Choffat holds a JD from the University of Lausanne, Switzerland, and an MBA from the International Institute for Management Development in Lausanne. He started his professional career with Nestlé in Zurich, Switzerland, and London, UK. From 1981 to 1985, he was a project manager at McKinsey & Company in Zurich. Between 1987 and 1994, he held a number of leading positions at Landis & Gyr in Zug, Switzerland, where he became a member of the Executive Board and Head of the Communications Division. In 1994, he moved to Von Roll in Gerlafingen, Switzerland, as CEO. Paul Choffat joined Sandoz in 1995 as Head of Management Resources and International Coordination. He subsequently became a member of the Executive Board and was responsible for Group Planning and Organization. During the Novartis merger he headed the integration office. In 1996, he returned to line management as CEO of Fotolabo SA, Montpreveyres-sur-Lausanne, Switzerland, where he remained for three years before becoming an entrepreneur and private investor in 1999. He rejoined Novartis in January 2002 as Head of Novartis Consumer Health and member of the Group Executive Committee.

        Thomas Ebeling (Age 44).    Head of Novartis Pharma (since 2000) and member of the Group Executive Committee (since 1998). Thomas Ebeling graduated from the University of Hamburg with a degree in psychology. From 1987 to 1991, he held several positions of increasing responsibility at Reemstma Germany. In 1991, he joined Pepsi-Cola Germany as Marketing Director. He became Marketing Director for Germany and Austria in 1993 and was National Sales and Franchise Director for Pepsi's retail and on-premise sales from 1994. He then served as General Manager of Pepsi-Cola Germany. In 1997, Thomas Ebeling joined Novartis as General Manager of Novartis Nutrition for Germany and Austria. After having served as CEO of Novartis Nutrition, he became CEO of Novartis Consumer Health worldwide, and then Chief Operating Officer of Novartis Pharmaceuticals, before attaining his present position in 2000.

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        Prof. Mark C. Fishman, MD (Age 53).    Head of Pharmaceuticals Research and a member of the Group Executive Committee (since 2002). Mark C. Fishman is a graduate of Yale College and Harvard Medical School. He completed his Internal Medicine residency, Chief residency, and Cardiology training at the Massachusetts General Hospital. He serves on several editorial boards and has worked with national policy and scientific committees including those of the National Institute of Health (NIH) and Wellcome Trust. He has been honored with many awards and distinguished lectureships and is a Fellow of the American Academy of Arts and Sciences. Before joining Novartis, Mark C. Fishman was Professor of Medicine at Harvard Medical School and Chief of Cardiology and Director of the Cardiovascular Research Center at the Massachusetts General Hospital in Boston.

        Steven Kelmar (Age 50).    Head of Public Affairs and Communications and Permanent Attendee to the Executive Committee. Steven Kelmar graduated with a Bachelor of Arts in Public Administration and Economics from Pennsylvania State University and spent 14 years (1979-1993) in public service in several executive positions. He was Chief of Staff to two Members of the US Congress and also worked in several legislative capacities for Members of the US Senate and the House of Representatives before his appointment by President Bush in 1990 to the position of Assistant Secretary for Legislation in the US Department of Health and Human Services. In this capacity, he served as one of the federal government's chief policy makers during a time of major national re-examination of healthcare delivery systems. He managed the activities of the federal government's largest legislative policy offices and served as one of the principal members of the department's budget council which sets priorities for various federal agencies such as: HCFA, FDA, Social Security and the Public Health Service. In 1993, he joined Strategic Management Association of Alexandria Viginia, a firm specializing in healthcare consulting, where he was Vice President, Governmental Affairs. In 1997, he moved to Medtronic Inc., to become Senior Vice President of External Relations, overseeing Corporate Public Relations, Internal Communications, Branding, Government Affairs, the Corporate Coverage and Reimbursement Group, the Corporate E-business Center and the Medtronic Foundation. His External Relations responsibility also included all of Medronic's specific strategic planning initiatives. In February 2003, Steven Kelmar joined Novartis as Head of Public Affairs and Communications.

        Norman C. Walker (Age 51).    Resigned as Head of Human Resources and a member of the Group Executive Committee during 2003, a position he had held since 1998.

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Business Unit(1) Heads

Name, nationality and age

  Head of
Business Unit

  Active for Novartis since
  Significant positions previously held
  Education
David Epstein, BSc, MBA
American, 42
  Oncology (since 2000)   1989   Chief Operating Officer and member of the Executive Committee of Novartis Pharmaceuticals Corporation (US)   Bachelor of Science, Pharmacy (Rutgers University) and MBA (Columbia University)

Anthony Rosenberg BSc, MSc
British, 50
  Transplantation and Immunology (since 2001)   1980   Various leading positions with Sandoz UK and Novartis Group   Bachelor of Science (University of Leicester) and Master of Science (University of London)

Flemming Ørnskov
Danish, 45
  Ophthalmics (since 2003)   2001   Head of Cardiovascular Products Group, Novartis Pharmaceuticals Corporation (US)   Bachelor of Medicine (University of Copenhagen, Denmark), MBA (INSEAD) and Master Public Health (Harvard University)

Peter Hewes BA Econ.
British, 56
  Mature Products (since 2000)   1976   Regional European Head of Novartis Pharma; Country Head of Sandoz Portugal   Bachelor of Arts, Economics (University of Reading, UK)

Christian Seiwald MBA
Austrian, 48
  Sandoz (since 2001)   1982   Country Head of Novartis Austria, Head of Novartis Austria Pharma Operations   MBA (Innsbruck University, Austria)

Larry Allgaier
BSc
American, 45
  OTC (since 2003)   2003   General Manager, North American Baby Care for Proctor & Gamble   Bachelor of Science, Chemical Engineering (Christian Brothers University, Tennessee)

George Gunn
MSc
British, 53
  Animal Health (since 2004)   2003   Head of Animal Health US and Region North America   Bachelor of Veterinary Medicine and Surgery (Royal School of Veterinary Studies/University of Edinburgh), MSc in Veterinary Medicine (University of Edinburgh)

Michel Gardet MA Business
French, 46
  Medical Nutrition (since 2002)   1991   General Manager of Novartis Consumer Health Iberia; Head of Health and Functional Nutrition Novartis   MA (Ecole Supérieure de Commerce de Paris)

Kurt T. Schmidt BSc, MBA
American, 46
  Infant & Baby (since 2004)   2002   Head of Animal Health Business Unit   Bachelor of Science (United States Naval Academy, Annapolis) and MBA (University of Chicago)

Joseph T. Mallof BSc, MBA
American, 52
  CIBA Vision (since 2002)   2002   Regional President of S.C. Johnson & Son for the Americas Asia Pacific; General Manager of Procter & Gamble in Japan and the Philippines   Bachelor of Science (Purdue University) and MBA (University of Chicago)

(1)
In 2003 or early in 2004, the following Executives retired from or terminated their employment with the Novartis Group: Norman Walker (Executive Committee Member), Luzi Von Bidder (Business Unit Head), Michel Orsinger (Business Unit Head) and Frank Palantoni (Business Unit Head). Kurt Schmidt, the former Business Unit Head of Animal Health took on the position of Business Unit Head of Infant & Baby.

        None of the above directors or senior management have any family relationship with any other director or member of our senior management. Executive officers are elected by the Board of the affiliate which employs them, typically for an indefinite term of office. They may be removed by the Board at any time. None of the above directors or senior management were appointed pursuant to an arrangement or understanding between such officer or director and any third party.

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6.B  Compensation

Non-Executive Directors Compensation

        The Compensation Committee of our Board of Directors advises the Board on the compensation of our non-executive Directors. Non-executive Directors receive an annual retainer in an amount that varies with the Board and Committee responsibilities of the Director. Directors are eligible to participate in certain of the equity programs which we offer to senior management and selected employees. Directors receive no additional fees for attending meetings. Directors can choose to receive the annual retainer in cash or shares, or in a combination of cash and shares. Since January 1, 2003, we no longer offer share options to Directors, or grant shares to Directors in acknowledgment of business performance. Directors are reimbursed for travel and other necessary business expenses incurred in the performance of their services.

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2003 Non-Executive Directors' Compensation

 
  Annual Cash
Compensation
($)(1)

  Shares
(number)

Dr. h.c. Daniel Vasella, MD
Chairman and CEO
Chairman's Committee (Chair)
  (please refer to the table on page 126)

Prof. Helmut Sihler, JD, PhD
Vice Chairman, Lead Director
Chairman's Committee (Member)
Compensation Committee (Chair)
Audit and Compliance Committee (Chair)
Corporate Governance Committee (Member)

 

727,566

 


Hans-Jörg Rudloff
Vice Chairman
Chairman's Committee (Member)
Compensation Committee (Member)
Corporate Governance Committee (Member)

 

18,795

 

11,874

Dr. h.c. Birgit Breuel
Audit and Compliance Committee (Member)

 

336,402

 


Prof. Peter Burckhardt, MD

 

99,145

 

4,391

Prof. Srikant Datar, PhD(2)
Audit and Compliance Committee (Member during 2003)

 

199,634

 

3,302

Walter G. Frehner
Audit and Compliance Committee (Member)

 

336,402

 


William W. George
Chairman's Committee (Member)
Compensation Committee (Member)
Corporate Governance Committee (Chair)

 

246,060

 

4,069

Alexandre F. Jetzer(3)

 

8,673

 

6,756

Pierre Landolt

 

79,707

 

4,965

Prof. Ulrich Lehner, PhD
Audit and Compliance Committee (Member)

 

338,073

 


Heini Lippuner
Chairman's Committee (Member)

 

375,519

 


Dr.-Ing. Wendelin Wiedeking(4)

 

167,498

 

2,534

Prof. Rolf M. Zinkernagel, MD(5)
Corporate Governance Committee (Member)

 

210,647

 

7,738
   
 
Total   3,144,121   45,629
   
 

(1)
Amounts have been converted from CHF to US Dollar using the 2003 average exchange rate of CHF 1.35/US Dollar.

(2)
Prof. Srikant Datar, PhD, Professor for Accounting and Senior Associate Dean of the Harvard Business School was elected to the Board at our Annual General Meeting on March 4, 2003. Prof. Datar stepped down from the Audit and Compliance Committee as of December 31, 2003.

(3)
In addition, Mr. Jetzer was paid $129,456 for other consulting services.

(4)
Dr.-Ing. Wendelin Wiedeking, CEO of Porsche AG was elected to the Board at our Annual General Meeting on March 4, 2003.

(5)
Includes $185,705 for acting as the Board's delegate in the scientific advisory boards of the Genomics Institute of the Novartis Research Foundation (GNF) and the Novartis Institute for Tropical Diseases (NITD).

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Ownership of Novartis Shares and Share Options by the Non-Executive Directors

        In December 2003, the Board of Directors adopted a share ownership guideline, under which non-executive Directors are required to own at least 5,000 Novartis shares within three years after joining the Board. The total number of Novartis shares owned as of December 31, 2003 by the non-executive Directors and persons closely linked to them was 297,040. The phrase "persons closely linked to them" means (i) their spouse, (ii) their children below age 18, (iii) any legal entities that they own or otherwise control, or (iv) any legal or natural person who is acting as their fiduciary. No non-executive Director owned 1% or more of our outstanding shares.

        As of December 31, 2003, the individual ownership of Novartis shares and options by the non-executive Directors (including persons closely linked to them) was as follows:

Beneficial Owner

  Number of shares
owned directly
or indirectly

Dr. h.c. Daniel Vasella, MD (please refer to the table on page 127)
Prof. Helmut Sihler, JD, PhD   34,304
Hans-Jörg Rudloff   97,954
Dr. h.c. Birgit Breuel   4,160
Prof. Peter Burckhardt, MD   10,972
Prof. Srikant Datar, PhD   3,302
Walter G. Frehner   13,420
William W. George   35,000
Alexandre F. Jetzer   54,876
Pierre Landolt(1)   200
Prof. Ulrich Lehner, PhD   120
Heini Lippuner   26,060
Dr.-Ing. Wendelin Wiedeking   3,534
Prof. Rolf M. Zinkernagel, MD   13,138
   
Total   297,040
   

(1)
Mr. Landolt is also the Chairman of the Board of Directors of Emasan AG. See "Item 7. Major Shareholders and Related Party Transactions—7.A Major Shareholders."

        As of the same date, the non-executive Directors held a total of 365,421 Novartis share options. The number of share options granted and the exercise prices have been adjusted to reflect the share split of 1:40 in 2001. Broken down by grant year the number of options held are:

Grant Year

  Options held
(number)

  Conversion
Rate

  Exercise
Price
(CHF)

  Term
life
(years)

2002   125,541   1:1   62.0   9
2001   90,480   1:1   70.0   9
2001   10,000   1:1   62.6   10
2000   92,200   1:1   51.3   9
1999   17,200   1:1   68.4   9

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Compensation for former Directors and Executives

        In 2003, a total amount of $140,824 was paid to four former members of the Board and $2,350,630 to three former Executives.

Report of the Compensation Committee

Executive Compensation Policy

        Our compensation programs are designed to attract, retain and motivate the high caliber executives, managers and associates who are critical to the success of the Group. Globalization of labor markets for specialists and executives has led to a rapid convergence between US and European principles of compensation and a stronger focus on long-term, equity based forms of programs.

        Overall, we intend that our programs provide compensation opportunities that:

    are comparable to those provided by a selected group of industry-specific competitors;

    support a performance-oriented culture that allows high performers to achieve superior rewards; and

    align executives, management and associates to create sustainable shareholder value.

        Total individual compensation at target performance level is aimed at the median of comparable companies of our industries. Annual cash and equity incentive awards are based on both overall Group or affiliate company and individual performance. Long-term incentive awards include share options and other forms of equity participation.

        Executive compensation programs strongly encourage significant levels of share ownership and put a high portion of total compensation at risk, subject to individual and company performance and the appreciation of Novartis shareholder value. In addition, to further strengthen our ownership philosophy, in 2003, the Board of Directors established share ownership guidelines under which the Executives are required to own a multiple of their base salary in our shares.

Compensation Programs Descriptions

Total Compensation

        The total compensation package for each of our executives consists of the three basic components discussed in more detail below. Target salary and incentive levels are set at the median of the peer group, based on available public data and the analysis of external compensation advisors. Actual compensation levels of individuals may in some instances surpass the median of the market, reflecting superior results. The Compensation Committee believes that this position is consistent with the performance of the Group and its evaluation of the external market.

Salaries

        The 2003 salaries of the Executive Committee members are shown in the "Salary" column of the 2003 Summary Compensation Table on page 126.

Annual Incentive Awards

        Under the terms of the Novartis Annual Incentive Plan, awards are made each year based on the achievement of predetermined Group and individual performance objectives. Below a threshold level of performance, no awards may be granted under the plan.

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Long-Term Incentive Compensation

        Long-term incentive compensation, in the form of share options, performance-contingent shares, and restricted shares, comprises a major portion of the total compensation package for executives. In any given year, an executive may be offered share options, performance-contingent shares, and/or restricted shares. Long-term incentives are targeted at the median of the competitive market, with above-average and superior performance resulting in long-term compensation above the targeted amounts. Below a threshold level of performance, no awards may be granted under the Plan. Share options are also granted to selected employees.

Share Options

    (a)
    Novartis Share Option Plan

        Under the Novartis Share Option Plan, Directors (through 2002), executives and other selected employees of Group companies may be granted options to purchase Novartis shares. These options are granted both in recognition of past performance and as an incentive for future contributions by plan participants. They allow participants to benefit as the price of the shares increases over time, and so provide a long-term incentive for improvements in our profitability and success. If a participant voluntarily leaves Novartis, options not yet vested will generally be forfeited. The options under the Novartis Share Option Plan have an exercise period of seven years, which begins after the lapse of a two-year vesting period, and have an exchange ratio of 1:1.

    (b)
    Novartis US ADS Incentive Plan for US-based employees

        Introduced in 2001, the Novartis US American Depositary Shares (ADS) Incentive Plan grants options to US-based Directors (through 2002), officers and other selected employees. This plan replaces a prior Share Appreciation Rights Plan. Its terms and conditions are substantially equivalent to the Novartis Share Option Plan.

        In order to further align the Novartis Share Option Plan and the US ADS Incentive Plan, as of 2004, the vesting period for the Novartis Share Option Plan has been changed to a three-year vesting period, and we will introduce tradable stock options in ADSs in the US.

Share Plans

        We offer to certain Directors and executives a Long-Term Performance Plan, a Leveraged Share Savings Plan and a Restricted Share Plan. These plans are designed to foster long-term commitment of eligible employees by aligning their incentives to our performance.

    (a)
    Long-Term Performance Plan

        Under the Long-Term Performance Plan, participants are awarded the right to earn Novartis shares. Actual payouts, if any, are determined with the help of a formula which measures, among other things, our performance using economic value added relative to pre-determined strategic plan targets over a three-year period. Additional functional objectives may be considered in the evaluation of performance. If performance is below the threshold level of the pre-determined targets, then no shares will be earned. To the extent the Group's performance exceeds the threshold performance level, participants are eligible to receive an increasing amount of Novartis shares, up to the maximum cap.

    (b)
    Leveraged Share Savings Plan

        There are two separate Leveraged Share Savings Plans:

        Participants can choose to receive part or all of their Annual Incentive Award in shares. Shares awarded under this plan are blocked for five years after the grant date. After expiration of the blocking period, the respective shares are matched with an equal number of shares.

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        In 2001 the Board approved a new employee share ownership plan under which Swiss based employees receive part of their income up to a specified amount in Novartis shares. After the expiration of a blocking period of three years the award is matched with half a share for each share held.

        Generally, no matching shares will be granted if an employee voluntarily leaves the Group prior to the expiration of the blocking period.

    (c)
    Restricted Share Plan

        Under the Restricted Share Plan employees may be granted restricted share awards either as a result of a general grant or as a result of an award based on having met certain performance criteria. Shares granted under this plan generally have a five-year vesting period. If a participant voluntarily leaves the Group, then the participant generally will forfeit shares which had not already vested.

Employee Benefits

        Employee benefits offered to executives are designed to be competitive and to provide a "safety-net" of protection against the financial catastrophes that can result from disability or death, and to provide a reasonable level of retirement income based on years of service with the Group.

Evaluation of the Executive Committee Members' Performance

        The Compensation Committee and the Board of Directors meet without the Chairman and CEO to evaluate his performance, and with the Chairman and CEO to evaluate the performance of other Executive Committee members. The bonuses and long-term incentives for 2002 and the base salaries for 2003 were discussed and approved at the meetings of the Compensation Committee held in January 2003.

        The decisions on compensation of Executive Committee members were mainly based on individual performance evaluations, and also took into account current market conditions. In 2003, the Compensation Committee considered management's achievement of short and long-term goals, including revenue growth, economic value creation (operating and net income, earnings per share and economic value added) and ongoing efforts to optimize organizational effectiveness and productivity. The Compensation Committee also takes into consideration management's responses to the changes in the global marketplace and the strategic position of the Group. The performance measures were weighted subjectively by each member of the Compensation Committee.

Summary

        The Compensation Committee believes that the compensation practices and compensation philosophy of Novartis align executive and shareholder interests. We believe that the actions taken over the past year have allowed the Group to attract, retain and motivate the key talent the Group needs to continue to compete and provide a strong return to shareholders.

The Compensation Committee of the Board of Directors

Prof. Helmut Sihler, JD, PhD (Chairman)
Hans-Jörg Rudloff
William W. George

Executive Compensation

        In 2003, there were a total of 20 Executive Committee members, Permanent Attendees to the Executive Committee and Business Unit Heads ("Executives"), including those who retired or terminated their employment in 2003. In total, we paid the Executives $10,781,000 in salaries and $4,025,000 in cash bonuses. We granted 3,252,937 share options and 487,853 shares to the Executives during 2003. We also set aside an additional $1,089,000 for the Executives' pension, retirement and similar benefits. The

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compensation amounts described in the paragraph represent all payments made to the Executives in 2003. However, the cash bonuses and long-term compensation paid to the Executives were based on 2002 business performance.

        The following summary compensation table provides details on the 2003 compensation of the Swiss-based Executive Committee members.

2003 Summary Compensation Table

 
  Annual Compensation
  Long-Term Compensation
   
 
  Restricted
Share
Awards
(number)(1)

  Unrestricted
Share
Awards
(number)(2)

   
   
   
Name and Principal
Position

  Salary
($)

  Cash
Bonus
($)

  Share
Options
(number)(3)

  All Other
Compensation
($)(4)

  Total
Compensation
($)(5)

Dr. h.c. Daniel Vasella, MD(6) Chairman & CEO   2,228,463     122,825   122,826   1,399,254   122,298   14,431,040
Urs Baerlocher, JD(6)
Head of Legal & General Affairs
  545,973     30,389   10,134   153,918   122,083   2,053,948
Raymund Breu, PhD(6)
Chief Financial Officer
  699,490     23,030   13,818   419,777   117,804   3,104,301
Paul Choffat, JD(6)
Head of Consumer Health
  557,116   250,702   6,909   11,516   125,933   120,515   1,995,627
Thomas Ebeling(6)
Head of Pharmaceuticals
  742,821   854,244   10,000   15,354   429,105   521,015   4,538,453
Prof. Mark C. Fishman
Head of Pharmaceuticals Research
  850,000     5,745   6,023   133,648   34,781   2,374,579
Norman C. Walker(6)(7)
Head of Human Resources
  297,128   311,985     9,213   70,523   101,252   1,303,421

(1)
The Restricted Share Awards include shares granted under the Leveraged Share Savings Plan.

(2)
The Unrestricted Share Awards include shares granted under the Long-Term Performance Plan.

(3)
The share options granted provide the right to purchase one share per option. Share options granted under the Novartis Share Option Plan have a closing price at grant of CHF 48.85 per share and an exercise price of CHF 49.00 per share. The options have a cliff-vesting period of two years after the date of grant and will expire on February 3, 2012. The tradable share options have a tax value of CHF 4.94 per option, calculated based on the Black-Scholes Method. Share options granted under the US ADS Incentive Plan have a closing price at grant and an exercise price of $36.31 per share. The options have a cliff-vesting period of three years after the date of grant and will expire on February 1, 2013. The non-tradable share options have a value of $7.95 per option, calculated based on the Black-Scholes Method.

(4)
Amounts include among others, payments made by Novartis to the Management Pension Fund, a defined contribution plan.

(5)
The total compensation amounts have been calculated using the taxable value or Black-Scholes Value of the shares and share options granted. All amounts have been converted into US dollars using 2003 average rates (CHF 1.35/US$).

(6)
Compensation is paid in CHF.

(7)
Norman C. Walker resigned his position as of August 31, 2003. Compensation shown includes payments made until then.

Distribution of Share Options Granted to Employees

        Under the Novartis Share Option Plan and the Novartis US ADS Incentive Plan described above, in 2003 we granted a total of 29.8 million share options, with an exchange ratio of 1:1, to 8,028 participants. 11% of the overall number of share options were granted to the Executives.

        As of December 31, 2003, a total of 61.6 million share and ADS options were outstanding, providing holders the right to an equal number of shares, which amount corresponds to 2.2% of our nominal outstanding share capital.

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Ownership of Novartis Shares and Share Options by the Executives

        The total number of Novartis shares owned as of December 31, 2003 by the Executives and persons closely linked to them was 940,117. The phrase "persons closely linked to them" means (i) their spouse, (ii) their children below age 18, (iii) any legal entities that they own or otherwise control, or (iv) any legal or natural person who is acting as their fiduciary. No Executive owned 1% or more of our outstanding shares.

        As of December 31, 2003, the individual ownership of Novartis shares by the Executive Committee members (including persons closely linked to them) was as follows:

Beneficial Owner

  Number of
shares owned
directly or
indirectly

Dr. h.c. Daniel Vasella, MD   401,469
Urs Bärlocher, JD   129,536
Raymund Breu, PhD   189,496
Paul Choffat, JD   7,659
Thomas Ebeling   54,522
Prof. Mark C. Fishman   5,745
   
Total   788,427
   

        As of December 31, 2003, the Executives held a total of 6,361,294 Novartis share options. The number of share options granted and the exercise prices were adjusted to reflect the share split of 1:40 in 2001. Broken down by grant year the number of options held are:

Grant Year

  Options
held
(number)(1)

  Conversion
Rate

  Exercise
Price
(CHF)

  Term
life
(years)

2003   3,182,414   1:1   49.0   9
2002   2,124,250   1:1   62.0   9
2001   490,070   1:1   70.0   9
2000   430,200   1:1   51.3   9
1999   101,000   1:1   68.4   9

(1)
The number of share options held includes share options granted under the Novartis Share Option Plan and the US ADS Incentive Plan.

Swiss Employee Benefit Plans

(a)   Swiss Pension Fund

        The Swiss Pension Fund is a defined benefit fund that provides retirement benefits and risk insurance (covering death or disability). The Swiss Pension Fund is funded by contributions from Group companies and the insured employees. The Swiss Pension Fund insures remuneration up to a maximum of CHF 220,000 per year. The maximum retirement pension is 60% of the insured remuneration after 40 years of contribution. The table below shows the annual pension benefit by Base Salary and Years of

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Service. In 2003 Novartis contributed CHF 11,700 for each of the Swiss-based Executive Committee members.

 
  Years of Service
Base Salary (CHF)

  15
  20
  25
  30
  35
  40
100,000   17,076   22,764   28,464   34,152   39,840   45,528
140,000   26,076   34,764   43,464   52,152   60,840   69,528
180,000   35,076   46,764   58,464   70,152   81,840   93,528
220,000   44,076   58,764   73,464   88,152   102,840   117,528
over 220,000   44,076   58,764   73,464   88,152   102,840   117,528

(b)   Swiss Management Pension Fund

        The Swiss Management Pension Fund is a defined contribution plan and provides retirement benefits and risk insurance (covering death or disability) for components of remuneration not covered by the Swiss Pension Fund. Employees exceeding the maximum insurable remuneration of the Swiss Pension Fund are eligible for the Swiss Management Pension Fund. The benefits under the Swiss Management Pension Fund are granted in addition to those of the Swiss Pension Fund. The Swiss Management Pension Fund is funded through contributions by Novartis and the employee.

US Based Employee Pension Plan

        The Pension Plan for US based employees of Novartis Corporation and its affiliates (Pension Plan) is a funded, tax-qualified non-contributory defined-benefit pension plan that covers certain of our US employees, including Prof. Mark C. Fishman. The Pension Plan provides for different pension formulas depending on which Novartis company is the employer of a particular employee. The pension formula in which Prof. Mark C. Fishman participates under the Pension Plan is a pension equity (PEP) formula. Benefits under the PEP formula are based upon an employee's highest average earnings for a five calendar-year period during the last ten calendar years of service with Novartis and the employee's accumulated PEP credits (expressed as a percentage of final average earnings, and ranging from 2% to 13% for each year of service based on the employee's attained age in a particular year), and are payable after retirement in the form of an annuity or a lump sum. The amount of annual earnings covered by the Pension Plan is generally equal to the employee's base salary and annual bonus. The amount of annual earnings that may be considered in calculating benefits under the Pension Plan is limited by law. For 2003, the annual limitation was $200,000.

        Novartis Corporation and its United States affiliates also maintain various unfunded supplemental pension plans that each provide its employees with an amount substantially equal to the difference between the amount that would have been payable under the Pension Plan in the absence of legislation limiting pension benefits and the annual earnings that may be considered in calculating pension benefits under tax-qualified pension plans, and the amount actually payable under the Pension Plan.

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Personal Loans, Change of Control and Severance Agreements

        Under the provisions of the US Sarbanes-Oxley Act, enacted in July 2002, no new loans may be given to our Directors or to the Executives. The two loans which had been granted to Executives prior to the Act, and which still were outstanding as of December 31, 2002, were repaid in 2003. As of December 31, 2003, no loans were outstanding to any of our Directors or executive officers.

        Four Executives, including Daniel Vasella, have contracts with us granting them 36 months severance pay in the event they are terminated under certain circumstances. In addition, if any of these Executives is terminated during the 12 months following a change of control of Novartis, then their 36-month severance rights are extended for an additional 24 months.

        One Executive has a contract with us granting him 12 months severance pay in the event he is terminated under certain circumstances, and an additional 12 months if his termination occurs during the 12 months following a change of control of Novartis.

        Between January 1, 2003 and December 31, 2003, three Executives left the company. Under the terms of the agreements with those Executives, $1,795,000 has been paid as severance.

6.C  Board Practices

        The table below shows the terms of office of our Board of Directors:

Name

  Start of Term
  End of Term
Daniel Vasella, MD (Chairman)   1996   2004
Prof. Helmut Sihler, JD, PhD (Vice Chairman and Lead Director)   1996   2004
Hans-Jörg Rudloff (Vice Chairman)   1996   2004
Dr. h.c. Birgit Breuel   1996   2005
Prof. Peter Burckhardt, MD   1996   2005
Prof. Srikant Datar, PhD   2003   2006
Walter G. Frehner   1996   2004
William W. George   1999   2006
Alexandre F. Jetzer   1996   2005
Pierre Landolt   1996   2005
Prof. Ulrich Lehner, PhD   2002   2005
Heini Lippuner   1996   2004
Dr.-Ing. Wendelin Wiedeking   2003   2006
Prof. Rolf M. Zinkernagel, MD   1999   2006

Board Committees

        Decisions are made by the Board of Directors as a whole. To assist the Board in carrying out its duties four committees have been created: the Chairman's Committee, the Compensation Committee, the Audit and Compliance Committee and the Corporate Governance Committee (the "Board Committees"). Each Board Committee has a written Charter outlining its duties and responsibilities. The Charters are available on our Internet website at http://www.novartis.com/investors/en/governance.shtml or can be ordered in print from the Corporate Secretary, Ingrid Duplain, JD. Each Committee has a chair elected by the Board. The Board Committees meet regularly and are charged with making full reports and recommendations to the Board at its regular meetings. The meeting agendas of the Board Committees are determined by their chairs. The Board Committee members receive in advance of Committee meetings materials allowing them to prepare for the handling of the items on the agenda.

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The Chairman's Committee

        The Chairman's Committee consists of the Chairman and Chief Executive Officer, the two Vice Chairmen, one of whom is the Lead Director, and such other members as are elected by the Board from time to time. The Chairman's Committee deals with all matters delegated to it according to its Charter. It prepares the agenda for meetings of the Board and can take any preliminary and required action on behalf of the Board. The Chairman's Committee also interfaces with the Executive Committee of Novartis, specifically approving personnel appointments and financial measures which exceed the authority of the Executive Committee but which do not require approval by the full Board.

        Current members of the Chairman's Committee are Dr. Daniel Vasella (Chairman), Prof. Dr. Helmut Sihler, Hans-Jörg Rudloff, William W. George and Heini Lippuner.

The Compensation Committee

        The Compensation Committee is composed of three to four independent Directors.

        The Compensation Committee reviews and approves our compensation policies and programs, including share option programs and other incentive-based compensation. It is responsible for reviewing and approving the compensation paid to members of the Executive Committee and other selected key executives, and for reviewing the performance of the Chairman and Chief Executive Officer. The Compensation Committee from time to time seeks outside expert advice to support recommendations and decisions.

        Current members of the Compensation Committee are Prof. Dr. Helmut Sihler (Chairman), Hans-Jörg Rudloff and William W. George.

The Audit and Compliance Committee

        The Audit and Compliance Committee consists of three to five Directors. The Board has determined that all the members of the Committee are independent, as defined by the rules of the New York Stock Exchange as well as by the independence criteria of Novartis (see appendix to the Regulations of the Board and Committee Charters), and that its chair, Prof. Sihler, JD, PhD, is adequately qualified in financial management matters. The Board has determined that Prof. Ulrich Lehner, PhD has the accounting and financial management expertise required under the rules of the NYSE and is a financial expert as defined by the US Securities and Exchange Commission. The Board has also assured itself that other members of the Committee have sufficient experience and ability in finance and matters of compliance to enable them to adequately discharge their responsibilities.

        The Committee's main duties are:

    To select, evaluate and propose to the Board the external auditors to be nominated for approval by the annual Shareholders' Meeting.

    To be directly responsible for the oversight and compensation of the external auditors (including the resolution of any disagreement between management and the external auditors regarding financial reporting).

    To approve (or not approve) on an individual basis audit related and other approvable services falling outside the pre-approved categories.

    To establish procedures for (a) the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and (b) the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters.

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    To review disclosures made by our principal executive officer and principal financial officer regarding compliance with their certification obligations, including our disclosure controls and procedures and internal control over financial reporting and evaluations thereof.

    To ensure that the lead audit partner of the external auditors and the audit partner responsible for reviewing the audit are rotated at least every five years and to issue policies for our hiring of employees or former employees of the external auditors who were engaged on our account.

    To conduct an annual self-evaluation of the Committee's own performance.

    To review annually the external audit scope, audit plans and relevant processes, the results of the external audit, and whether recommendations made have been implemented by our management.

    To discuss with the external auditors the results of the audit, any unusual items or disclosures contained in the audit, and the matters required by the American Institute of Certified Public Accountants' Statement on Auditing Standards No. 61, as amended by the American Institute of Certified Public Accountants' Statement on Auditing Standards No. 89 and No. 90.

    To review annually the internal audit scope, audit plans and relevant processes, the results of the internal audit, and whether recommendations made have been implemented by our management. The Committee must also periodically discuss the above matters with the external auditors.

    To review with external and internal auditors, and with our financial and accounting personnel, our accounting policies and financial controls.

    To review with management, internal auditors and external auditors any significant risks or exposures we may face, and to assess the steps management has taken to minimize such risks.

    To review and discuss with management and the external auditors the quarterly and annual financial statements and annual report to consider whether they conform to accepted accounting principles and with the standards we have set.

    To review the processes and procedures for management's monitoring of our compliance with laws and regulations, as well as major legislative and regulatory developments that may have a significant impact on us.

    To review compliance by our management with those of our policies designated by the Board from time to time, including the Code of Conduct, the Code of Ethics for the Chief Executive Officer and the Senior Financial Officers, and the Insider Trading Policy.

    To oversee our participation in the Global Compact.

        Current members of the Audit and Compliance Committee are Prof. Dr. Helmut Sihler (Chairman), Dr. h.c. Birgit Breuel, Walter G. Frehner and Dr. Ulrich Lehner. Prof. Srikant Datar, PhD was a member of the Audit and Compliance Committee during 2003, and had been determined by the Board to have the accounting and financial management expertise required under the rules of the NYSE and to be an additional financial expert, as defined by the US Securities and Exchange Commission. However, new NYSE rules which were published in 2003, and which will become effective in November 2004, will require us to look back three years in order to determine whether a Director is independent. For this reason, when the new NYSE rule takes effect, Prof. Datar's professional engagement for Novartis AG prior to his nomination as Director will cause him to no longer be considered "independent." As a consequence, in December 2003, Prof. Datar stepped down from the Audit and Compliance Committee, which requires all members to be independent.

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The Corporate Governance Committee

        The Corporate Governance Committee consists of three to five independent Directors. The Committee's main duties are:

    To develop principles of corporate governance and recommend them to the Board for its approval.

    To review at least annually the principles of corporate governance approved by the Board to ensure that they remain relevant and are being complied with.

    To review the composition and size of the Board in order to ensure the Board has the proper expertise and its membership consists of persons with sufficiently diverse backgrounds.

    To determine the criteria for selection of the Chairman and Chief Executive Officer, Directors and Board Committee members.

    To plan for continuity on the Board as existing Board members retire or rotate off the Board.

    To prepare and annually review succession plans for the Chairman and Chief Executive Officer in case of his resignation, retirement or death.

    To evaluate the performance of current Directors proposed for re-election, and recommend to the Board as to whether Directors should stand for re-election.

    To conduct an annual evaluation of the Board as a whole.

    With the Chairman and Chief Executive Officer, to periodically review the Board Regulations, the Charter and composition of each Board Committee and make recommendations to the Board for the creation of additional Board Committees or the change in mandate or dissolution of Board Committees.

    To ensure that each Board Committee is comprised of Directors suitable for the tasks of the Committee and that each Committee conducts the required number of meetings and makes sufficient reports to the Board on its activities and findings.

    To review directorships and consulting agreements of Board members for conflicts of interest.

    To annually submit to the full Board a proposal concerning the determination of the independence status of the Board members and the corresponding disclosure (as required by applicable laws, regulations and listing standards).

        Current members of the Corporate Governance Committee are William W. George (Chairman), Prof. Dr. Helmut Sihler, Hans-Jörg Rudloff and Prof. Dr. Rolf Zinkernagel, MD.

Directors Service Contracts

        We have no contracts with any of our non-Executive Directors which would provide for benefits upon termination of employment. Daniel Vasella, in his capacity as CEO, is entitled to receive benefits upon termination. See "Item 6. Directors, Senior Management and Employees—6.B Compensation—Swiss Employee Benefit Plans" and "Item 6. Directors, Senior Management and Employees—6.B Compensation—Personal Loans, Consulting, Change of Control and Severance Agreements."

Home Country Practices

        We are in compliance with the corporate governance standards of the New York Stock Exchange and applicable US law with two exceptions in which we continue to apply the practices of our home country, Switzerland.

    Swiss law requires that our external auditors be appointed by our shareholders at our Annual General Meeting, and not by the Audit and Compliance Committee.

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    Our equity compensation plans are not the subject of a shareholders vote at the Annual General Meeting. Instead, in accordance with Swiss company practices, such plans are decided upon by the management and Boards of Directors of our local affiliates. It is intended that all such plans be established within the policies and programs approved by the Compensation Committee of the Novartis AG Board of Directors.

6.D  Employees

        The table below sets forth the breakdown of the total year-end number of our full time equivalent employees by main category of activity and geographic area for the past three years.

For the year ended December 31, 2003
(full time equivalents)

  Research &
Development

  Production &
Supply

  Marketing &
Sales

  General &
Administration

  Total
USA   3,463   5,013   9,292   2,066   19,834
Canada and Latin America   302   2,937   4,620   915   8,774
Europe   6,904   12,404   13,161   5,041   37,510
Africa/Asia/Australia   905   2,307   7,943   1,268   12,423
   
 
 
 
 
Total   11,574   22,661   35,016   9,290   78,541
   
 
 
 
 
For the year ended December 31, 2002
(full time equivalents)

  Research &
Development

  Production &
Supply

  Marketing &
Sales

  General &
Administration

  Total
USA   3,214   5,097   9,062   1,971   19,344
Canada and Latin America   297   3,667   4,671   349   8,984
Europe   6,320   10,467   11,487   4,321   32,595
Africa/Asia/Australia   821   2,906   7,873   354   11,954
   
 
 
 
 
Total   10,652   22,137   33,093   6,995   72,877
   
 
 
 
 
For the year ended December 31, 2001
(full time equivalents)

  Research &
Development

  Production &
Supply

  Marketing &
Sales

  General &
Administration

  Total
USA   2,786   5,473   7,207   2,487   17,953
Canada and Latin America   257   3,608   4,543   942   9,350
Europe   5,804   9,875   10,532   5,175   31,386
Africa/Asia/Australia   741   3,502   7,146   1,038   12,427
   
 
 
 
 
Total   9,588   22,458   29,428   9,642   71,116
   
 
 
 
 

        A relatively small number of our employees are represented by unions. We have not experienced any material work stoppages in recent years, and we consider our employee relations to be good.

6.E  Share Ownership

        The aggregate amount of our shares owned by current non-executive Directors and Executives (including persons closely linked to them) as of December 31, 2003 was 1,237,157 shares, which amount is less than 1% of our outstanding shares. No individual non-executive Director or Executive owned 1% or more of our outstanding shares. However, our Director Pierre Landolt is also the Chairman of the Board of Directors of Emasan AG. See "Item 7. Major Shareholders and Related Party Transactions—7.A Major Shareholders."

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        The aggregate amount of Novartis share and ADS options, including other information regarding the options, held by current Directors and the Executives as of December 31, 2003 is set forth below:

Title of Options

  Amount of
shares called
for by the
options

  Exercise
Price(1)
(CHF)

  Purchase
Price
(if any)

  Expiration Date
  Total number
of options
held

Novas07 Options   1   42.80   0   January 15, 2007   53,360
Novas08 Options   1   68.40   0   January 16, 2008   118,200
Novas09 Options   1   51.33   0   March 10, 2009   522,400
Novas10 Options   1   70.00   0   March 7, 2010   481,960
Novas11 Options   1   62.00   0   March 7, 2011   1,772,103
Novas12 Options   1   49.00   0   February 3, 2012   2,710,864
                   
Total Novartis Share Options                   5,658,887
                   
Novartis ADS Options Cycle V   1   $41.97   0   March 7, 2011   98,590
Novartis ADS Options Cycle VI   1   $37.28   0   March 7, 2012   477,698
Novartis ADS Options Cycle VII   1   $36.31   0   February 4, 2013   471,550
Novartis ADS Options Others   1   $37.86   0   October 26, 2011   10,000
                   
Total Novartis ADS Options