20-F 1 a2222787z20-f.htm 20-F

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

Table of Contents

As filed with the Securities and Exchange Commission on January 27, 2015


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, 2014

OR

o

 

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

OR

o

 

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

Commission file number 1-15024

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

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

Switzerland
(Jurisdiction of incorporation or organization)

Lichtstrasse 35
4056 Basel, Switzerland

(Address of principal executive offices)

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

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

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

New York Stock Exchange, Inc.*

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

None

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

None

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

2,398,626,257 shares

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

Yes ý    No o

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

Yes o    No ý

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

Yes ý    No o

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

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

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

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

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

Item 17 o        Item 18 o

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

Yes o    No ý


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

   


Table of Contents


TABLE OF CONTENTS

  INTRODUCTION AND USE OF CERTAIN TERMS     4  

 

FORWARD-LOOKING STATEMENTS

 

 

4

 

 

PART I

 

 

6

 

 

 

 

Item

 

1.

 

Identity of Directors, Senior Management and Advisers

 

 

6

 

 

 

 

Item

 

2.

 

Offer Statistics and Expected Timetable

 

 

6

 

 

 

 

Item

 

3.

 

Key Information

 

 

6

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

 

 

 

Item

 

4.

 

Information on the Company

 

 

24

 
          4.A   History and Development of Novartis     24  
          4.B   Business Overview     27  
              Pharmaceuticals     31  
              Alcon     73  
              Sandoz     82  
              Vaccines     91  
              Consumer Health     98  
          4.C   Organizational Structure     102  
          4.D   Property, Plants and Equipment     102  

 

 

 

Item

 

4A.

 

Unresolved Staff Comments

 

 

107

 

 

 

 

Item

 

5.

 

Operating and Financial Review and Prospects

 

 

107

 
          5.A   Operating Results     107  
          5.B   Liquidity and Capital Resources     188  
          5.C   Research & Development, Patents and Licenses     201  
          5.D   Trend Information     202  
          5.E   Off-Balance Sheet Arrangements     202  
          5.F   Tabular Disclosure of Contractual Obligations     202  

 

 

 

Item

 

6.

 

Directors, Senior Management and Employees

 

 

203

 
          6.A   Directors and Senior Management     203  
        6.B   Compensation     213  
          6.C   Board Practices     261  
          6.D   Employees     292  
          6.E   Share Ownership     292  

 

 

 

Item

 

7.

 

Major Shareholders and Related Party Transactions

 

 

293

 
          7.A   Major Shareholders     293  
          7.B   Related Party Transactions     295  
          7.C   Interests of Experts and Counsel     295  

 

 

 

Item

 

8.

 

Financial Information

 

 

296

 
          8.A   Consolidated Statements and Other Financial Information     296  
          8.B   Significant Changes     297  

 

 

 

Item

 

9.

 

The Offer and Listing

 

 

297

 
          9.A   Offer and Listing Details     297  

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          9.B   Plan of Distribution     298  
          9.C   Markets     299  
          9.D   Selling Shareholders     299  
          9.E   Dilution     299  
          9.F   Expenses of the Issue     299  

 

 

 

Item

 

10.

 

Additional Information

 

 

299

 
          10.A   Share Capital     299  
          10.B   Memorandum and Articles of Association     299  
          10.C   Material Contracts     304  
          10.D   Exchange Controls     305  
        10.E   Taxation     305  
          10.F   Dividends and Paying Agents     310  
          10.G   Statement by Experts     310  
          10.H   Documents on Display     311  
          10.I   Subsidiary Information     311  

 

 

 

Item

 

11.

 

Quantitative and Qualitative Disclosures about Market Risk

 

 

311

 

 

 

 

Item

 

12.

 

Description of Securities Other than Equity Securities

 

 

311

 
          12.A   Debt Securities     311  
          12.B   Warrants and Rights     311  
          12.C   Other Securities     311  
          12.D   American Depositary Shares     312  

 

PART II

 

 

314

 

 

 

 

Item

 

13.

 

Defaults, Dividend Arrearages and Delinquencies

 

 

314

 

 

 

 

Item

 

14.

 

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

 

 

314

 

 

 

 

Item

 

15.

 

Controls and Procedures

 

 

314

 

 

 

 

Item

 

16A.

 

Audit Committee Financial Expert

 

 

314

 

 

 

 

Item

 

16B.

 

Code of Ethics

 

 

315

 

 

 

 

Item

 

16C.

 

Principal Accountant Fees and Services

 

 

315

 

 

 

 

Item

 

16D.

 

Exemptions from the Listing Standards for Audit Committees

 

 

315

 

 

 

 

Item

 

16E.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

 

316

 

 

 

 

Item

 

16F.

 

Change in Registrant's Certifying Accountant

 

 

316

 

 

 

 

Item

 

16G.

 

Corporate Governance

 

 

316

 

 

 

 

Item

 

16H.

 

Mine Safety Disclosure

 

 

316

 

 

PART III

 

 

317

 

 


 

Item

 

17.

 

Financial Statements

 

 

317

 

 


 

Item

 

18.

 

Financial Statements

 

 

317

 

 

 

 

Item

 

19.

 

Exhibits

 

 

318

 

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INTRODUCTION AND USE OF CERTAIN TERMS

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

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

        In this Form 20-F, references to "US dollars" or "$" are to the lawful currency of the United States of America, and references to "CHF" are to Swiss francs; references to the "United States" or to "US" are to the United States of America, references to the "European Union" or to "EU" are to the European Union and its 28 member states, references to "Latin America" are to Central and South America, including the Caribbean, and references to "Australasia" are to Australia, New Zealand, Melanesia, Micronesia and Polynesia, unless the context otherwise requires; references to "associates" are to employees of our affiliates; references to the "FDA" are to the US Food and Drug Administration, references to "EMA" are to the European Medicines Agency, an agency of the EU, and references to the "CHMP" are to the Committee for Medicinal Products for Human Use of the EMA; references to "ADR" or "ADRs" are to Novartis American Depositary Receipts, and references to "ADS" or "ADSs" are to Novartis American Depositary Shares; references to the "NYSE" are to the New York Stock Exchange, and references to the "SIX" are to the SIX Swiss Exchange; references to "GSK" are to GlaxoSmithKline plc, references to "Lilly" are to Eli Lilly and Company, and references to "CSL" are to CSL Limited.

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




FORWARD-LOOKING STATEMENTS

        This Form 20-F contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Other written materials filed with or furnished to the US Securities and Exchange Commission (SEC) by Novartis, as well as other written and oral statements made to the public, may also contain forward-looking statements. Forward-looking statements can be identified by words such as "potential," "expected," "will," "planned," "pipeline," "outlook," or similar terms, or by express or implied discussions regarding potential new products, potential new indications for existing products, or regarding potential future revenues from any such products; potential shareholder returns or credit ratings; or regarding the potential completion of the announced transactions with GSK and CSL, or regarding potential future sales or earnings of any of the businesses involved in the transactions with GSK, Lilly or CSL, or regarding any potential strategic benefits, synergies or opportunities as a result of these transactions; or regarding potential future sales or earnings of the Novartis Group or any of its divisions; or by discussions of strategy, plans, expectations or intentions. You should not place undue reliance on these statements.

        Such forward-looking statements are based on the current beliefs and expectations of management regarding future events, and are subject to significant known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect,

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actual results may vary materially from those set forth in the forward-looking statements. There can be no guarantee that any new products will be approved for sale in any market, or that any new indications will be approved for any existing products in any market, or that any approvals which are obtained will be obtained at any particular time, or that any such products will achieve any particular revenue levels. Nor can there be any guarantee that the announced transactions with GSK and CSL will be completed in the expected form or within the expected time frame or at all. Neither can there be any guarantee that Novartis will be able to realize any of the potential strategic benefits, synergies or opportunities as a result of the transactions with GSK, Lilly or CSL. Neither can there be any guarantee that Novartis or any of the businesses involved in the transactions will achieve any particular financial results in the future. Nor can there be any guarantee that shareholders will achieve any particular level of shareholder returns. Neither can there be any guarantee that the Group, or any of its divisions, will be commercially successful in the future, or achieve any particular credit rating.

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

    unexpected regulatory actions or delays or government regulation generally, including an unexpected failure to obtain necessary government approvals for the transactions, or unexpected delays in obtaining such approvals;

    the potential that the strategic benefits, synergies or opportunities expected from the announced transactions, including the divestment of our former Animal Health Division to Lilly, may not be realized or may take longer to realize than expected;

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

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

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

    unexpected manufacturing or quality issues;

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

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

    general economic and industry conditions, including uncertainties regarding the effects of the persistently weak economic and financial environment in many countries;

    uncertainties regarding future global exchange rates, including as a result of recent changes in monetary policy by the Swiss National Bank;

    uncertainties regarding future demand for our products;

    uncertainties involved in the development of new healthcare products; and

    uncertainties regarding potential significant breaches of data security or disruptions of our information technology systems.

        Some of these factors are discussed in more detail in this Form 20-F, including under "Item 3. Key Information—3.D. Risk factors," "Item 4. Information on the Company," and "Item 5. Operating and Financial Review and Prospects." Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Form 20-F as anticipated, believed, estimated or expected. We provide the information in this Form 20-F as of the date of its filing. We do not intend, and do not assume any obligation, to update any information or forward-looking statements set out in this Form 20-F as a result of new information, future events or otherwise.

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PART I

Item 1.    Identity of Directors, Senior Management and Advisers

        Not applicable.

Item 2.    Offer Statistics and Expected Timetable

        Not applicable.

Item 3.    Key Information

3.A Selected Financial Data

        The selected financial information set out below has been extracted from our consolidated financial statements prepared in accordance with IFRS as issued by the IASB. Our consolidated financial statements for the years ended December 31, 2014, 2013 and 2012 are included in "Item 18. Financial Statements" in this Form 20-F.

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

 
  Year Ended December 31,  
 
  2014   2013   2012   2011   2010  
 
  ($ millions, except per share information)
 

INCOME STATEMENT DATA

                               

Group net sales

    57,996     57,920     56,673     58,566     50,624  

Net sales from continuing operations

    52,419     52,090     51,330     52,195     43,539  

Operating income from continuing operations

    11,089     10,983     11,507     10,293     10,153  

Income from associated companies

    1,918     599     549     526     798  

Interest expense

    (704 )   (683 )   (724 )   (751 )   (692 )

Other financial (expense)/income

    (31 )   (92 )   (96 )   (2 )   64  

Income before taxes from continuing operations

    12,272     10,807     11,236     10,066     10,323  

Taxes

    (1,545 )   (1,498 )   (1,706 )   (1,381 )   (1,266 )

Net income from continuing operations

    10,727     9,309     9,530     8,685     9,057  

Net (loss)/income from discontinuing operations

    (447 )   (17 )   (147 )   387     912  

Group net income

    10,280     9,292     9,383     9,072     9,969  

Attributable to:

                               

Shareholders of Novartis AG

    10,210     9,175     9,270     8,940     9,794  

Non-controlling interests

    70     117     113     132     175  

Basic earnings per share ($)

   
 
   
 
   
 
   
 
   
 
 

Continuing operations

    4.39     3.76     3.89     3.59     3.88  

Discontinuing operations

    (0.18 )   0.00     (0.06 )   0.16     0.40  

Total

    4.21     3.76     3.83     3.75     4.28  

Diluted earnings per share ($)

   
 
   
 
   
 
   
 
   
 
 

Continuing operations

    4.31     3.70     3.85     3.54     3.86  

Discontinuing operations

    (0.18 )   0.00     (0.06 )   0.16     0.40  

Total

    4.13     3.70     3.79     3.70     4.26  

Cash dividends(1)

    6,810     6,100     6,030     5,368     4,486  

Cash dividends per share in CHF(2)

    2.60     2.45     2.30     2.25     2.20  

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

(2)
Cash dividends per share represent dividends proposed that relate to earnings of the current year. Dividends for 2014 will be proposed to the Annual General Meeting on February 27, 2015 for approval.

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  Year Ended December 31,  
 
  2014   2013   2012   2011   2010  
 
  ($ millions)
 

BALANCE SHEET DATA

                               

Cash, cash equivalents and marketable securities & derivative financial instruments

    13,862     9,222     8,119     5,075     8,134  

Inventories

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

Other current assets

    10,805     13,294     13,141     13,079     12,458  

Non-current assets

    87,826     95,712     96,187     93,384     96,620  

Assets related to discontinuing operations

    6,801     759                    

Total assets

    125,387     126,254     124,191     117,468     123,305  

Trade accounts payable

    5,419     6,148     5,593     4,989     4,788  

Other current liabilities

    19,136     20,170     18,458     18,159     19,870  

Non-current liabilities

    27,570     25,414     30,877     28,331     28,856  

Liabilities related to discontinuing operations

    2,418     50                    

Total liabilities

    54,543     51,782     54,928     51,479     53,514  

Issued share capital and reserves attributable to shareholders of Novartis AG

    70,766     74,343     69,137     65,893     63,218  

Non-controlling interests

    78     129     126     96     6,573  

Total equity

    70,844     74,472     69,263     65,989     69,791  

Total liabilities and equity

    125,387     126,254     124,191     117,468     123,305  

Net assets

    70,844     74,472     69,263     65,989     69,791  

Outstanding share capital

    898     912     909     895     832  

Total outstanding shares (millions)

    2,399     2,426     2,421     2,407     2,289  

Cash Dividends per Share

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

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

2010

  March 2011     2.20     2.37  

2011

  March 2012     2.25     2.48  

2012

  March 2013     2.30     2.44  

2013

  March 2014     2.45     2.76  

2014(1)

  March 2015     2.60     2.63 (2)

(1)
Dividend to be proposed at the Annual General Meeting on February 27, 2015 and to be distributed March 5, 2015

(2)
Translated into US dollars at the 2014 Bloomberg Market System December 31, 2014 rate of $1.010 to the Swiss franc. This translation is an example only, and should not be construed as a representation that the Swiss franc amount represents, or has been or could be converted into US dollars at that or any other rate.

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Exchange Rates

        The following table shows, for the years and dates indicated, certain information concerning the rate of exchange of US dollar per Swiss franc based on exchange rate information found on Bloomberg Market System. The exchange rate in effect on January 21, 2015, as found on Bloomberg Market System, was CHF 1.00 = $1.14.

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

2010

    1.06     0.96     0.86     1.07  

2011

    1.06     1.13     1.06     1.25  

2012

    1.09     1.07     1.02     1.12  

2013

    1.12     1.08     1.05     1.12  

2014

    1.01     1.09     1.01     1.13  

Month

   
 
   
 
   
 
   
 
 

August 2014

                1.09     1.11  

September 2014

                1.05     1.09  

October 2014

                1.03     1.06  

November 2014

                1.03     1.04  

December 2014

                1.01     1.04  

January 2015 (through January 21, 2015)

                0.98     1.16  

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

3.B    Capitalization and Indebtedness

        Not applicable.

3.C    Reasons for the offer and use of proceeds

        Not applicable.

3.D    Risk Factors

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

Risks Facing Our Business

Our products face important patent expirations and significant competition.

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

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

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

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

    The patent on imatinib, the active ingredient in our best-selling product Gleevec/Glivec (cancer), will expire in July 2015 in the US, in 2016 in the major European countries and expired in 2014 for the main indications in Japan. Additional patents claiming innovative features of Gleevec/Glivec have been challenged in the US. A settlement with one of these generic manufacturers will allow that generic manufacturer to enter the US market on February 1, 2016. Generic versions of Gleevec/Glivec have already launched in a number of countries around the world.

    The patent on valsartan, the active ingredient in Diovan/Co-Diovan/Diovan HCT (high blood pressure), which had long been our best-selling product, has expired in the US, EU and Japan, and generic competitors have launched there. Patent protection for Co-Diovan will expire in Japan in 2016. The active ingredient valsartan is also used in the single-pill combination therapies Exforge/Exforge HCT (high blood pressure). While separate patents exist in the EU to protect this combination product, they have been challenged. Market exclusivities for Exforge/Exforge HCT will remain in the EU due to regulatory exclusivities. However, there is a risk that generic manufacturers may circumvent regulatory exclusivity and gain approval of a combination valsartan-amlodipine product. In the US, Exforge already faces generic competition despite the existence of separate patents covering the product.

    Patent protection for octreotide acetate, the active ingredient in Sandostatin, has expired. Generic versions of Sandostatin SC are available in the US and elsewhere. A series of US patents protect Sandostatin LAR, the long-acting version of Sandostatin which represents a majority of our Sandostatin US sales. Some of these US patents have already expired, and the last of these US patents is expected to expire in 2017. Patents protecting the Sandostatin LAR formulation in key markets outside the US have expired.

    Patent protection on rivastigmine, the active ingredient in Exelon, has expired and Exelon capsules are subject to generic competition in major markets, including the US and all of Europe. We hold additional patents with respect to Exelon Patch, which makes up a substantial portion of our Exelon sales, but these have been challenged. Generic versions of Exelon Patch are on the market in several European countries.

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

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        In 2015, the impact of generic competition on our net sales is expected to be approximately $2.5 billion. Because we typically have substantially reduced marketing and research and development expenses related to a product in its final year of exclusivity, it is expected that the loss of patent protection will have an impact on our operating income which can be expected to correspond to a significant portion of the product's lost sales. The magnitude of such an impact could depend on a number of factors, including the time of year at which such exclusivity would be lost; the ease or difficulty of manufacturing a competitor product and obtaining regulatory approval to market it; the number of generic competitor products approved, including whether, in the US, a single competitor is granted an exclusive marketing period, and whether an authorized generic is launched; and the geographies in which generic competitor products are approved, including the strength of the market for generic pharmaceutical products in such geographies and the comparative profitability of branded pharmaceutical products in such geographies.

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

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

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

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

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

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

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risks may include: failure of the product candidate in preclinical studies; difficulty enrolling patients in clinical trials or delays or clinical trial holds at clinical trial sites; delays in completing formulation and other testing and work necessary to support an application for regulatory approval; adverse reactions to the product candidate or other safety concerns; insufficient clinical trial data to support the safety or efficacy of the product candidate; an inability to manufacture sufficient quantities of the product candidate for development or commercialization activities in a timely and cost-effective manner; and failure to obtain, or delays in obtaining, the required regulatory approvals for the product candidate or the facilities in which it is manufactured.

        In addition, following a series of widely publicized issues, health regulators have increased their focus on product safety. Governmental authorities and payors around the world have also paid increased attention to whether new products offer a significant benefit over other products in the same therapeutic class. These developments have led to requests for more clinical trial data, for the inclusion of a significantly higher number of patients in clinical trials, and for more detailed analyses of the trials. As a result, the already lengthy and expensive process of obtaining regulatory approvals and reimbursement for pharmaceutical products has become even more challenging.

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

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

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

        If we are unable to cost-effectively maintain an adequate flow of successful new products and new indications for existing products sufficient to cover our substantial research and development costs and the decline in sales of older products that either become subject to generic competition, or are displaced by

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competing products or therapies, this could have a material adverse effect on our business, financial condition or results of operations. For a description of the approval processes which must be followed to market our products, see the sections headed "Regulation" included in the descriptions of our five operating divisions under "Item 4. Information on the Company—Item 4.B Business Overview."

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

        The growth of overall healthcare costs as a percentage of gross domestic product in many countries means that governments and payors are under intense pressure to control healthcare spending even more tightly. These pressures are particularly strong given the persistently weak economic and financial environment in many countries and the increasing demand for healthcare resulting from the aging of the global population and the prevalence of behaviors that increase the risk of obesity and other chronic diseases. In addition, in certain countries, patients, healthcare providers and the media are increasingly raising questions about healthcare pricing issues. As a result, our businesses and the healthcare industry in general are operating in an ever more challenging environment with very significant pricing pressures. These ongoing pressures affect all of our divisions that rely on reimbursement—including Pharmaceuticals, Alcon, Sandoz and Vaccines. They involve a number of cost-containment measures, such as government-imposed industry-wide price reductions, mandatory pricing systems, reference pricing systems, payors limiting access to treatments based on cost-benefit analyses, an increase in imports of drugs from lower-cost countries to higher-cost countries, shifting of the payment burden to patients through higher co-payments, limiting physicians' ability to choose among competing medicines, mandatory substitution of generic drugs for the patented equivalent, and growing pressure on physicians to reduce the prescribing of patented prescription medicines.

        As a result of such measures, we faced downward pricing pressures on our patented and generic drugs in many countries in 2014. For example, during 2013, a German agency, the Gemeinsamer Bundesausschuss (G-BA), initiated an analysis of the benefits of drugs approved prior to 2011. As part of that analysis the G-BA concluded that our type 2 diabetes medicines Galvus and Eucreas did not provide an added benefit over certain other medicines indicated for the treatment of that disease. As a result, we were unable to reach agreement with the head organization of the German statutory health insurance funds, GKV-Spitzenverband, on an acceptable price for Galvus and Eucreas, and, in 2014, we stopped distribution of these products in Germany.

        We expect these pressures to continue in 2015 as healthcare payors around the globe, including government-controlled health authorities, insurance companies and managed care organizations, step up initiatives to reduce the overall cost of healthcare, restrict access to higher-priced new medicines, increase the use of generics and impose overall price cuts. For more information on price controls and on our challenging business environment see "Item 4. Information on the Company—Item 4.B Business Overview—Pharmaceuticals—Price Controls."

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

        We are obligated to comply with the laws of all of the countries around the world in which we operate and sell products with respect to an extremely wide and growing range of activities, as well as with new requirements imposed on us from time to time as government and public expectations regarding acceptable corporate behavior change. For example, there are new laws in the US and in other countries around the world that require us to be more transparent with respect to our interactions with healthcare professionals. To help us in our efforts to comply with the many requirements that impact us, we have a significant global ethics and compliance program in place, and we devote substantial time and resources to efforts to ensure that our business is conducted in a lawful and publicly acceptable manner. Nonetheless, despite our efforts, any failure to comply with law or with heightened public expectations could lead to

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substantial liabilities that may not be covered by insurance, or to other significant losses, and could affect our business and reputation.

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

        In addition, governments and regulatory authorities around the world have been stepping up their compliance and law enforcement activities in recent years in key areas, including sales and marketing practices, corruption, trade restrictions, embargo legislation, insider trading, antitrust, and data privacy, and are increasingly challenging practices previously considered to be legal. Responding to such investigations is costly, and requires an increasing amount of management's time and attention. In addition, such investigations may affect our reputation, create a risk of potential exclusion from government reimbursement programs in the US and other countries, and may lead to litigation and monetary penalties. These factors have contributed to decisions by us and other companies in our industry, when deemed in their interest, to enter into settlement agreements with governmental authorities around the world prior to any formal decision by the authorities. These settlements have involved and may continue to involve large cash payments, including the potential repayment of amounts allegedly obtained improperly, and other penalties, including treble damages. In addition, settlements of healthcare fraud cases in the US and other countries sometimes require companies to enter into corporate integrity or similar agreements, which are intended to regulate company behavior for a period of years. Our affiliate Novartis Pharmaceuticals Corporation is a party to such an agreement, which is scheduled to expire in 2015. Also, matters underlying governmental investigations and settlements may be the subject of separate private litigation.

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

        Our businesses are currently subject to a number of these cases and governmental investigations, as well as information requests by regulatory authorities. For more detail regarding specific legal matters currently pending against us and provisions for such matters, see "Item 18. Financial Statements—Note 20." See also "—Our reliance on outsourcing and third parties for the performance of key business functions heightens the risks faced by our businesses" below. Adverse judgments or settlements in any of the significant investigations or cases against us could have a material adverse effect on our business, financial condition and results of operations.

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

        The manufacture of our products is heavily regulated by governmental health authorities around the world, including the FDA. Whether our products are manufactured at our own dedicated manufacturing facilities or by third parties, we must ensure that all manufacturing processes comply with current Good Manufacturing Practices (cGMP) and other applicable regulations, as well as with our own high quality

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standards. In recent years, health authorities have intensified their scrutiny of manufacturers' compliance with such requirements, and are increasingly challenging practices that were previously considered acceptable. If we or our third-party suppliers fail to comply fully with these requirements and the health authorities' expectations, then we could be required to shut down our production facilities or production lines, or could be prevented from importing our products from one country to another. This could lead to product shortages, or to our being entirely unable to supply products to patients for an extended period of time. And such shortages or shut downs have led to and could continue to lead to significant losses of sales revenue and to potential third-party litigation. In addition, health authorities have in some cases imposed significant penalties for such failures to comply with cGMP. A failure to comply fully with cGMP could also lead to a delay in the approval of new products to be manufactured at the impacted site.

        Like our competitors, we have faced significant manufacturing issues in recent years. As a result of such issues, we were unable to supply certain products to the market for significant periods of time, and suffered significant losses in sales and market share. These supply issues have required us to outsource the production of certain key products that were previously manufactured in our own production facilities, which may limit the potential profitability of such products. In addition, to meet health authority and our own high quality standards, we have expended considerable resources to upgrade and remediate issues at our sites.

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

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

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

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

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

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The persistently weak global economic and financial environment in many countries and increasing political and social instability may have a material adverse effect on our results.

        Many of the world's largest economies and financial institutions continue to be impacted by a weak ongoing global economic and financial environment, with some continuing to face financial difficulty, liquidity problems and limited availability of credit. It is uncertain how long these effects will last, or whether economic and financial trends will worsen or improve. In addition, these issues may be further impacted by the unsettled political conditions currently existing in the US, Europe and other places. Such uncertain times may have a material adverse effect on our revenues, results of operations, financial condition and, if circumstances worsen, our ability to raise capital at reasonable rates. For example, persistent financial weakness in certain countries in Europe has increased pressures on those countries, and on payors in those countries, to force healthcare companies to decrease the prices at which we may sell them our products. See also "Item 4. Information on the Company—Item 4.B Business Overview—Pharmaceuticals—Price Controls." Concerns continue that payors in some countries, including Greece, Italy, Portugal and Spain, may not be able to pay us in a timely manner. Certain other countries, such as Venezuela have taken steps to introduce exchange controls and limit companies from distributing retained earnings or paying intercompany payables due from those countries. See also, "Item 5. Operating and Financial Review and Prospects—Item 5.B Liquidity and Capital Resources," "Item 18. Financial Statements—Notes 15 and 29."

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

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

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

        At the same time, significant changes and volatility in the financial markets, in the consumer and business environment, in the competitive landscape and in the global political and security landscape make it increasingly difficult for us to predict our revenues and earnings into the future. As a result, any

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revenue or earnings guidance or outlook which we have given or might give may be overtaken by events, or may otherwise turn out to be inaccurate. Though we endeavor to give reasonable estimates of future revenues and earnings at the time we give such guidance, based on then-current knowledge and conditions, there is a significant risk that such guidance or outlook will turn out to be, or to have been, incorrect.

        In addition, increasing political and social instability around the world, including political instability and military action involving Russia, Ukraine and parts of the Middle East, the impacts of the Ebola crisis in western Africa, increased political and religious radicalism in many places, and increasing social unrest, including anti-immigrant activities in many countries may lead to significant business disruptions or other adverse business conditions. Similarly, increased scrutiny of corporate taxes and executive pay may lead to significant business disruptions or other adverse business conditions, and may interfere with our ability to attract and retain qualified personnel. See "—An inability to attract and retain qualified personnel could adversely affect our business" below.

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

        Changes in exchange rates between the US dollar, our reporting currency, and other currencies can result in significant increases or decreases in our reported sales, costs and earnings as expressed in US dollars, and in the reported value of our assets, liabilities and cash flows. This in turn may significantly affect the comparability of period-to-period results of operations. In 2014, the US dollar significantly increased in value against most currencies. In particular, the average value of the Japanese yen and emerging market currencies (especially the ruble) decreased in 2014 against the US dollar. However, in January 2015, following an announcement by the Swiss National Bank that it was discontinuing its minimum exchange rate with the euro, the value of the Swiss franc increased substantially. Because a significant portion of our earnings and expenditures are in currencies other than the US dollar, including expenditures in Swiss francs that are significantly higher than our revenues in Swiss francs, such exchange rate volatility can have a significant impact on the reported value of our net sales, earnings, assets and liabilities, and the timing and extent of such volatility can be difficult to predict.

        In addition, there is a risk that certain countries could take other steps which could significantly impact the value of their currencies. Such steps could include "quantitative easing" measures, potential withdrawals by countries from common currencies or the setting of exchange controls, as Venezuela did. Should such steps significantly change the value of a country's currency, then this could impact the value in US dollars of our sales and earnings in such countries, as well as the currency translation adjustments included in our consolidated equity. For more information on the effects of currency fluctuations on our consolidated financial statements and on how we manage currency risk, see "Item 5. Operating and Financial Review and Prospects—Item 5.B Liquidity and Capital Resources—Effects of Currency Fluctuations" "Item 11. Quantitative and Qualitative Disclosures about Market Risk", and "Item 18. Financial Statements—Note 29."

We may not successfully achieve our goals in strategic transactions or reorganizations, including the portfolio transformation transactions and the formation of Novartis Business Services.

        As part of our strategy, from time to time we evaluate and pursue potential strategic business acquisitions and divestitures to expand or complement our existing businesses, or to enable us to focus more sharply on our strategic businesses. We cannot ensure that suitable acquisition candidates will be identified. Acquisition activities can be thwarted by overtures from competitors for the targeted assets, potentially increasing prices demanded by sellers, governmental regulation (including market concentration limitations) and replacement product developments in our industry. Once an acquisition is agreed upon with a third party, we may not be able to complete the acquisition in the expected form or within the expected time frame, or at all, due to a failure to obtain required regulatory approvals or a failure to achieve contractual or other required closing conditions. Further, after an acquisition, efforts to integrate the business may not meet expectations, or may otherwise not be successful, as a result of

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corporate cultural differences, difficulties in retention of key personnel, customers and suppliers, coordination with other products and processes, or other reasons. Also, acquisitions and divestments could divert management's attention from our existing businesses, and could result in the existing businesses failing to achieve expected results, or in liabilities being incurred that were not known at the time of acquisition, or the creation of tax or accounting issues. Similarly, we cannot ensure that suitable buyers will be identified for businesses or other assets that we might want to divest. Neither can we ensure that we will correctly select businesses or assets as candidates for divestiture, that we will be able to successfully complete any agreed upon divestments, or that any expected strategic benefits, synergies or opportunities will arise as a result of any divestiture.

        On April 22, 2014, we announced that we had reached definitive agreements with GSK and Lilly on a set of transactions intended to transform our portfolio of businesses. In a series of inter-conditional transactions with GSK, Novartis agreed to: (1) acquire GSK oncology products and certain related assets, and was granted a right of first negotiation over the co-development or commercialization of GSK's current and future oncology R&D pipeline, excluding oncology vaccines; (2) create a joint venture with GSK in consumer healthcare, in which Novartis would own 36.5%; and (3) divest its Vaccines Division (excluding the influenza vaccines business) to GSK. In addition, Novartis agreed to divest its Animal Health Division to Lilly. Subsequently, on October 26, 2014, we announced that we had entered into a definitive agreement to divest our influenza vaccines business to CSL.

        The transaction with Lilly closed on January 1, 2015. All of the remaining transactions are subject to closing conditions, including regulatory approvals. In addition, the transactions with GSK are inter-conditional. The transactions with GSK are expected to close in the first half of 2015 and the transaction with CSL is expected to close in the second half of 2015.

        Because of the need for external approvals and certain other contingencies, the proposed transactions may not be completed in the expected form or within the expected time frame, or at all. If the transactions are completed, then certain milestone and royalty payments may be owed if certain conditions are met. But because of the uncertainties involved, we cannot ensure that any such payments will be made either by us or to us. In addition, in agreeing to these transactions, we expected to achieve certain strategic benefits, synergies and opportunities, including certain financial results, but such expected benefits may never be fully realized or may take longer to realize than expected. With respect to the acquisition of the GSK oncology products and related assets, we cannot be certain that the GSK business will be successfully integrated with ours and that key personnel will be retained. Disruption from these transactions may make it more difficult to maintain relationships with customers, employees or suppliers. Lastly, extensive preparations are needed to complete these transactions, as well as the integration and de-integration of the respective businesses, requiring substantial attention from our management. This diversion of management's attention away from our continuing businesses could result in the continuing businesses failing to achieve expected financial or other results, or in liabilities being incurred that were not known at the time of the transactions, or the creation of tax or accounting issues.

        In addition, in April 2014, we announced the creation of a shared services organization, Novartis Business Services (NBS), which became effective on July 1, 2014. NBS consolidated a number of business support services previously spread across divisions, including Information Technology, Financial Reporting and Accounting Operations, Real Estate & Facility Services, Procurement, Payroll and Personnel Administration and the Pharmaceuticals Global Business Services. This reorganization was designed to improve profitability and free up resources that could be reinvested in growth and innovation, and to allow our divisions to focus more on customer-facing activities. But the expected benefits of this reorganization may never be fully realized or may take longer to realize than expected. There can be no certainty that the numerous business functions involved will be successfully integrated into a single organization and that key personnel will be retained. Disruption from the reorganization may make it more difficult to maintain relationships with customers, employees or suppliers.

        Both with respect to the transactions and reorganizations previously announced, and to potential future transactions and reorganizations, if we fail to timely recognize or address these risks, or to devote

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adequate resources to them, we may fail to achieve our strategic objectives, including our growth strategy, or otherwise may not realize the intended benefits of the acquisition, divestiture or reorganization.

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

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

        We regularly review our long-lived intangible and tangible assets, including identifiable intangible assets, investments in associated companies and goodwill, for impairment. Goodwill, acquired research and development, and acquired development projects not yet ready for use are subject to impairment review at least annually. Other long-lived assets are reviewed for impairment when there is an indication that an impairment may have occurred. Impairment testing under IFRS may lead to impairment charges in the future. Any significant impairment charges could have a material adverse effect on our results of operations and financial condition. In 2014, for example, we recorded intangible asset and goodwill impairment charges of $752 million. Of this, $334 million was recorded on the announcement of the sale of our influenza vaccines business to CSL. For a detailed discussion of how we determine whether an impairment has occurred, what factors could result in an impairment and the increasing impact of impairment charges on our results of operations, see "Item 5. Operating and Financial Review and Prospects—Item 5.A Operating Results—Critical Accounting Policies and Estimates—Impairment of Goodwill, Intangible Assets and Property, Plant and Equipment" and "Item 18. Financial Statements—Notes 1 and 11."

Our indebtedness could adversely affect our operations.

        As of December 31, 2014 we had $13.8 billion of non-current financial debt and $6.6 billion of current financial debt. Our current and long-term debt requires us to dedicate a portion of our cash flow to service interest and principal payments and may limit our ability to engage in other transactions and otherwise may place us at a competitive disadvantage relative to our competitors that have less debt. We may have difficulty refinancing our existing debt or incurring new debt on terms that we would consider to be commercially reasonable, if at all.

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

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

        In particular, in many countries, including many developing markets, we rely heavily on third party distributors and other agents for the marketing and distribution of our products. Many of these third parties do not have internal compliance resources comparable to those within our organization. Some of these countries are plagued by corruption. If our efforts to screen our third party agents and detect cases of potential misconduct fail, we could be held responsible for the noncompliance of these third parties

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with applicable laws and regulations, which may have a material adverse effect on our reputation and on our business, financial condition or results of operations.

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

        At a time of slowing growth in sales of healthcare products in industrialized countries, many emerging markets have experienced proportionately higher sales growth and an increasing contribution to the industry's global performance. In 2014, we generated $15.3 billion, or approximately 26% (2013: 26%) of our net sales from Emerging Growth Markets—which comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand—as compared with $42.7 billion, or approximately 74% (2013: 74%) of our net sales, in the Established Markets. However, combined net sales in the Emerging Growth Markets grew 11% in constant currencies in 2014, compared to 1% sales growth in constant currencies in the Established Markets during the same period. As a result of this trend, we have been taking steps to increase our activities in the Emerging Growth Markets, and have been making significant investments in our businesses in those countries.

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

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

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

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

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

        Our Sandoz Division achieves significant revenue opportunities when it secures and maintains exclusivity periods granted for generic products in certain markets—particularly the 180-day exclusivity period granted in the US by the Hatch-Waxman Act for first-to-file generics—and when it is able to develop differentiated products with few, if any, generic competitors. Failure to obtain and maintain these market opportunities could have an adverse effect on the success of Sandoz. In addition, the division faces

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intense competition from companies that market patented pharmaceutical products, which sometimes take aggressive steps to prevent or delay the introduction of generic medicines, to limit the availability of exclusivity periods or to reduce their value, and from other generic pharmaceuticals companies, which aggressively compete for exclusivity periods and for market share of generic products that may be identical to certain of our generic products. These activities may increase the costs and risks associated with our efforts to introduce generic products and may delay or entirely prevent their introduction. See also "—Our research and development efforts may not succeed in bringing new products to market, or may fail to do so cost-efficiently enough, or in a manner sufficient to grow our business and replace lost revenues and income" above, with regard to the risks involved in our efforts to develop differentiated generic products.

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

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

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

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

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

        Our industry continues to be challenged by the vulnerability of distribution channels to illegal counterfeiting and the presence of counterfeit products in a growing number of markets and over the Internet. Counterfeit products are frequently unsafe or ineffective, and can potentially be life-threatening. To distributors and patients, counterfeit products may be visually indistinguishable from the authentic version. Reports of adverse reactions to counterfeit drugs or increased levels of counterfeiting could

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materially affect patient confidence in the authentic product, and harm the business of companies such as ours or lead to litigation. Additionally, it is possible that adverse events caused by unsafe counterfeit products would mistakenly be attributed to the authentic product. If a product of ours was the subject of counterfeits, we could incur substantial reputational and financial harm.

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

        Increasingly, a significant portion of our global sales are made to a relatively small number of US drug wholesalers, retail chains and other purchasing organizations. For example, our three most important customers globally are all in the US, and accounted for approximately 15%, 13% and 6%, respectively, of Group net sales in 2014. The largest trade receivables outstanding were for these three customers, amounting to 11%, 8% and 4%, respectively, of the Group's trade receivables at December 31, 2014. The trend has been toward further consolidation among distributors and retailers, both in the US and internationally. As a result, our customers are gaining additional purchasing leverage, which increases the pricing pressures facing our businesses. Moreover, we are exposed to a concentration of credit risk as a result of this concentration among our customers. If one or more of our major customers experienced financial difficulties, the effect on us would be substantially greater than in the past. This could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

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

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

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

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

        Our business is heavily dependent on critical, complex and interdependent information technology systems, including Internet-based systems, to support business processes as well as internal and external communications. The size and complexity of these systems make them potentially vulnerable to breakdown, malicious intrusion, malware and other cyber-attacks. While we have invested heavily in the protection of our data and information technology, we may not be able to prevent breakdowns or breaches in our systems that could adversely affect our business.

        Any such events could negatively impact important business processes such as the conduct of scientific research and clinical trials, the submission of the results of such efforts to health authorities in support of requests for product approvals, the functioning of our manufacturing and supply chain processes, our compliance with legal obligations and other key business activities. In addition, such potential information technology issues could lead to the loss of important information such as trade secrets or other intellectual property, or personal information (including sensitive personal information) of our employees, clinical trial patients, vendors, customers, collaborators and others, or could expose such important information to unauthorized persons. We also manufacture and sell a number of devices that make significant use of information technology, including our Alcon surgical equipment. Malfunctions in such technology could lead to a risk of harm to patients.

        Any such breaches of data security or information technology disruptions could have a material adverse effect on our business, financial condition and results of operations.

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

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

Environmental liabilities may adversely impact our results of operations.

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

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Earthquakes and other natural disasters could adversely affect our business.

        In recent years, extreme weather events and changing weather patterns such as storms, flooding, drought, and temperature changes, appear to have become more common. We operate in countries around the world. As a result, we are potentially exposed to varying natural disaster risks like hurricanes, tornadoes or floods. As a result of these and other potential impacts of climate change on the environment, we could experience business interruptions, destruction of facilities and loss of life, all of which could have a material adverse effect on our business, financial condition and results of operations could be put at risk.

        Our corporate headquarters, the headquarters of our Pharmaceuticals Division, and certain of our major Pharmaceuticals Division production and research facilities are located near earthquake fault lines in Basel, Switzerland. In addition, other major facilities of several divisions are located near major earthquake fault lines in various locations around the world. In the event of a major earthquake, we could experience business interruptions, destruction of facilities and loss of life, all of which could have a material adverse effect on our business, financial condition and results of operations. See also "—The manufacture of our products is highly regulated and complex, and may result in a variety of issues that could lead to extended supply disruptions and significant liability," above.

Risks Related To Our ADRs

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

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

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

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

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Item 4.    Information on the Company

4.A History and Development of Novartis

Novartis AG

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

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

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

Important Corporate Developments 2012-2014

 
   
2014    

October

 

Novartis announces a definitive agreement with CSL of Australia to divest its influenza vaccines business for $275 million.

 

 

Novartis announces changes to the Novartis Executive Committee. Three members of the Executive Committee of Novartis, George Gunn, Brian MacNamara and Andrin Oswald, would leave the Company following the completion of the relevant portfolio transactions announced in April 2014, and expected to close in the first half of 2015.

 

 

Novartis announces that it has entered into a collaboration with Bristol-Myers Squibb Company to evaluate three molecularly targeted compounds in combination with Bristol-Myers Squibb's investigational PD-1 immune checkpoint inhibitor, Opdivo® (nivolumab), in Phase I/II trials of patients with non-small cell lung cancer.

August

 

Novartis appoints a Chief Ethics, Compliance and Policy Officer reporting directly to the CEO.

July

 

Novartis announces that its Alcon Division has entered into an agreement with a division of Google Inc., to in-license its "smart lens" technology for all ocular medical uses.

June

 

Novartis announces that the FDA licensed its manufacturing facility in Holly Springs, North Carolina for the commercial production of cell-culture influenza vaccines, with the capacity to significantly increase production in the event of an influenza pandemic.

May

 

Novartis enters into a licensing and commercialization agreement with Ophthotech Corporation for the exclusive rights to market Fovista (OAP030, anti-PDGF aptamer) outside the US.

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April   Novartis announces a set of definitive inter-conditional agreements with GSK. Under these agreements, Novartis would acquire GSK oncology products and certain related assets, would be granted a right of first negotiation over the co-development or commercialization of GSK's current and future oncology R&D pipeline (excluding oncology vaccines) and would divest the Vaccines Division (excluding its influenza vaccines business) to GSK. The two companies would also create a joint venture in consumer healthcare, of which Novartis would own 36.5%.

 

 

Novartis also announces a definitive agreement with Lilly to divest the Company's Animal Health Division. This divestment was completed on January 1, 2015.

 

 

Novartis announces the creation of a shared services organization, Novartis Business Services (NBS). NBS consolidates a number of business support services previously spread across divisions, including Information Technology, Financial Reporting and Accounting Operations, Real Estate & Facility Services, Procurement, Payroll and Personnel Administration and the Pharmaceuticals Global Business Services. This reorganization was designed to improve profitability and free up resources that could be reinvested in growth and innovation, and to allow our divisions to focus more on customer-facing activities. NBS became effective on July 1, 2014.

February

 

Novartis announces the acquisition of CoStim Pharmaceuticals Inc., a Cambridge, Massachusetts-based, privately held biotechnology company focused on cancer immunotherapy. The acquisition brings to Novartis late discovery stage immunotherapy programs directed to several targets, including PD-1.

 

 

Novartis appoints a Global Head, Corporate Responsibility reporting directly to the CEO.

January

 

Novartis implements several changes to its governance structure. These include elimination of the Chairman's Committee of the Novartis AG Board of Directors; transfer of operational responsibilities that previously rested with the Chairman or the Chairman's Committee, such as approval authority for management compensation, to the CEO or the Executive Committee; and establishment of the Research and Development Committee of the Novartis AG Board of Directors to oversee Novartis research and development strategy and advise the Board on scientific trends and activities.

2013

 

 

November

 

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

 

 

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

 

 

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

September

 

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

August

 

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

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

 

 

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

April

 

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

February

 

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

January

 

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

2012

 

 

September

 

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

August

 

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

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

March

 

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

January

 

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

 

 

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

        For information on our principal expenditures on property, plants and equipment, see "Item 4. Information on the Company—4.D Property, Plants and Equipment." For information on our significant investments in research and development, see the sections headed "Research and Development" included in the descriptions of our operating divisions under "Item 4. Information on the Company—4.B Business Overview." For information on other principal capital expenditures and divestitures, see "Item 5. Operating and Financial Review and Prospects—Item 5.A Operating Results—Factors Affecting Comparability of the Year-On-Year Results of Operations—Recent Significant Transactions." For more information on the proposed transactions with GSK, the proposed transaction with CSL, or the completed transaction with Lilly, see "Item 4.B Business Overview—Overview" and "Item 10.C Material Contracts."

4.B Business Overview

OVERVIEW

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

        On April 22, 2014, Novartis announced that it had reached definitive agreements with GSK and Lilly on a set of transactions intended to transform our portfolio of businesses.

        In inter-conditional transactions with GSK, Novartis agreed to: (1) acquire GSK oncology products and certain related assets, and was granted a right of first negotiation over the co-development or commercialization of GSK's current and future oncology R&D pipeline, excluding oncology vaccines; (2) create a joint venture with GSK in consumer healthcare by combining the Novartis OTC Division with the GSK consumer healthcare business, of which Novartis would own 36.5% and would have four of eleven seats on the joint venture's Board; and (3) divest the Vaccines Division (excluding the influenza vaccines business) to GSK. In addition, Novartis agreed to divest the Animal Health Division to Lilly. The divestment of our Animal Health Division to Lilly was completed on January 1, 2015.

        On October 26, 2014, Novartis announced that it had reached a definitive agreement with CSL of Australia to divest its influenza vaccines business for $275 million.

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        The transactions with GSK and CSL are subject to closing conditions and regulatory approvals. The transactions with GSK are expected to close in the first half of 2015, and the transaction with CSL is expected to close in the second half of 2015.

        The Group's wholly-owned businesses are organized into five global operating divisions, and we report our results in the following five segments. In addition, we separately report Corporate activities. Following the announcement of the transactions with GSK and Lilly, in order to comply with IFRS, Novartis has separated the Group's reported financial data for the current and prior year into "continuing" operations and "discontinuing" operations:

Continuing Operations:

    Pharmaceuticals: Innovative patent-protected prescription medicines

    Alcon: Surgical, ophthalmic pharmaceutical and vision care products

    Sandoz: Generic pharmaceuticals

    Corporate activities

Discontinuing Operations:

    Vaccines: Preventive human vaccines and the blood transfusion diagnostics unit, which was divested on January 9, 2014

    Consumer Health: OTC (over-the-counter medicines) (following the January 1, 2015 completion of the divestment of our Animal Health Division to Lilly, the Consumer Health segment now consists only of the OTC Division)

    Corporate: certain transactional and other expenses related to the portfolio transformation

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

        We separately report the financial results of our Corporate activities as part of our Continuing Operations. Income and expenses relating to Corporate include the costs of the Group headquarters and those of corporate coordination functions in major countries. In addition, Corporate includes other items of income and expense which are not attributable to specific segments such as certain expenses related to post-employment benefits, environmental remediation liabilities, charitable activities, donations and sponsorships.

        Our divisions are supported by Novartis Business Services and the Novartis Institutes for BioMedical Research.

    Novartis Business Services (NBS) was launched in July 2014 with the transfer of over 7,000 associates, and organizational structures are being implemented to start operations in January 2015 as a shared services organization. NBS is designed to enhance profitability by harmonizing high-quality services at better price across the Group and Divisions. It covers approximately $6 billion in expenses, and synergies generated by the organization are expected to improve margin over time.

    The Novartis Institutes for BioMedical Research (NIBR) was created in 2003, and is headquartered in Cambridge, Massachusetts. More than 5,900 scientists and associates at NIBR conduct research into various disease areas at sites located in the US, Switzerland, UK, Italy, Singapore and China. For more information about NIBR, see "—Pharmaceuticals—Research and Development—Research program," below.

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        Novartis achieved net sales of $58.0 billion in 2014, while net income amounted to $10.3 billion. Research & Development expenditure in 2014 amounted to $9.9 billion ($9.6 billion excluding impairment and amortization charges). Of the Group's total net sales, $15.3 billion, or 26%, came from Emerging Growth Markets, and $42.7 billion, or 74%, came from Established Markets. Emerging Growth Markets comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand.

        Headquartered in Basel, Switzerland, our Group companies employed 133,413 full-time equivalent associates as of December 31, 2014. Our products are available in approximately 180 countries around the world.

Continuing Operations:

Pharmaceuticals Division

        Pharmaceuticals researches, develops, manufactures, distributes and sells patented prescription medicines and is organized in the following franchises: Oncology, Cardio-metabolic, Immunology and Dermatology, Retina, Respiratory, Neuroscience and Established Medicines. In 2014, our Pharmaceuticals Division also created a unit focused on the development and commercialization of Cell and Gene Therapies.

        The preceding list reflects a new composition of therapeutic areas implemented within our Pharmaceuticals Division in the fourth quarter of 2014. The tables and product descriptions set forth below in "—Pharmaceuticals," already reflect this new organizational structure. However, other sections of this Form 20-F still reflect the prior therapeutic areas. This includes the discussions and certain historical information provided in "Item 5. Operating and Financial Review and Prospects." and "Item 18. Financial Statements."

        On April 22, 2014, we announced that we have agreed to acquire GSK oncology products and certain related assets for an aggregate cash consideration of $16 billion. Up to $1.5 billion of this cash consideration is contingent on certain development milestones. In addition, under the terms of the agreement we were granted a right of first negotiation over the co-development or commercialization of GSK's current and future oncology R&D pipeline, excluding oncology vaccines. The right of first negotiation is for a period of twelve and one half years from the acquisition closing date. We expect this transaction to close during the first half of 2015. This transaction is inter-conditional with the other announced transactions with GSK described under "—Vaccines Division" and "—Consumer Health."

        In 2014, the Pharmaceuticals Division accounted for $31.8 billion, or 55%, of Group net sales, and for $8.5 billion, or 77%, of Group operating income (excluding Corporate income and expense, net).

Alcon Division

        Our Alcon Division researches, develops, manufactures, distributes and sells eye care products and technologies to serve the full life cycle of eye care needs. Alcon offers a broad range of products to treat many eye diseases and conditions, and is organized into three franchises: Surgical, Ophthalmic Pharmaceuticals and Vision Care. The Surgical portfolio includes technologies and devices for cataract, retinal, glaucoma and refractive surgery, as well as intraocular lenses to treat cataracts and refractive errors, like presbyopia and astigmatism. Alcon also provides viscoelastics, surgical solutions, surgical packs, and other disposable products for cataract and vitreoretinal surgery. In Ophthalmic Pharmaceuticals, the portfolio includes treatment options for elevated intraocular pressure caused by glaucoma, anti-infectives to aid in the treatment of bacterial infections and bacterial conjunctivitis, and ophthalmic solutions to treat inflammation and pain associated with ocular surgery, as well as an intravitreal injection for vitreomacular traction including macular hole. The Ophthalmic Pharmaceuticals portfolio also includes eye and nasal allergy treatments, as well as over-the-counter dry eye relief and ocular vitamins. The Vision Care portfolio comprises daily disposable, monthly replacement, and color-

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enhancing contact lenses, as well as a complete line of contact lens care products including multi-purpose and hydrogen-peroxide based solutions, rewetting drops and daily protein removers.

        In 2014, Alcon accounted for $10.8 billion, or 19%, of Group net sales, and for $1.6 billion, or 14%, of Group operating income (excluding Corporate income and expense, net).

Sandoz Division

        Our Sandoz Division focuses primarily on developing, manufacturing, distributing and selling prescription medicines that are not protected by valid and enforceable third-party patents, and pharmaceutical and biotechnological active substances. Sandoz is organized globally in three franchises: Retail Generics, Anti-Infectives, and Biopharmaceuticals & Oncology Injectables. In Retail Generics, Sandoz develops, manufactures and markets active ingredients and finished dosage forms of pharmaceuticals to third parties. Retail Generics includes the areas of Dermatology, Respiratory and Ophthalmics, as well as the specialty areas of cardiovascular, metabolism, central nervous system, pain, gastrointestinal, and hormonal therapies. In Anti-Infectives, Sandoz supplies generic antibiotics to a broad range of customers, as well as active pharmaceutical ingredients and intermediates to the pharmaceutical industry worldwide. In Biopharmaceuticals, Sandoz develops, manufactures and markets protein- or other biotechnology-based products (known as biosimilars or follow-on biologics) and provides biotechnology manufacturing services to other companies, and in Oncology Injectables, Sandoz develops, manufactures and markets cytotoxic products for the hospital market.

        In 2014, Sandoz accounted for $9.6 billion, or 16%, of Group net sales, and for $1.1 billion, or 10%, of Group operating income (excluding Corporate income and expense, net).

Discontinuing Operations:

Vaccines Division

        Our Vaccines Division researches, develops, manufactures, distributes and sells human vaccines worldwide. As previously announced, we have agreed to divest our Vaccines Division (excluding its influenza vaccines business) to GSK for up to $7.1 billion, consisting of $5.25 billion upfront and up to $1.8 billion in milestones, plus royalties. We expect that this transaction will close in the first half of 2015. This transaction is inter-conditional with the other announced transactions with GSK described under "—Pharmaceuticals Division" and "—Consumer Health." In October 2014, we announced that we had reached a definitive agreement with CSL to divest our Vaccines Division's influenza vaccines business for $275 million. We expect that this transaction will close in the second half of 2015. Prior to the January 9, 2014, completion of the divestment of our blood transfusion diagnostics unit to Grifols S.A. for approximately $1.7 billion in cash, the division was known as Vaccines and Diagnostics. Diagnostics researched, developed, distributed and sold blood testing products.

        In 2014, the Vaccines Division accounted for $1.5 billion, or 3%, of Group net sales, and an operating loss of $0.6 billion.

Consumer Health

        Following the January 1, 2015 completion of the divestment of our Animal Health Division to Lilly for approximately $5.4 billion, Consumer Health now consists of our OTC (Over-the-Counter) Division. Prior to the divestment of Animal Health to Lilly, each of OTC and Animal Health had its own research, development, manufacturing, distribution and selling capabilities, but neither was material enough to the Group to be separately disclosed as a segment. OTC offers readily available consumer medicines. Prior to its divestment, Animal Health provided veterinary products for farm and companion animals. As previously announced, we have agreed with GSK to create a joint venture in consumer health by combining our OTC Division with the GSK consumer healthcare business, of which we would own 36.5% and would have four of eleven seats on the joint venture's Board. We will also have customary minority

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rights and exit rights under a pre-defined, market-based pricing mechanism. We expect that this transaction will close in the first half of 2015. This transaction is inter-conditional with the other announced transactions with GSK described under "—Pharmaceuticals Division" and "—Vaccines Division."

        In 2014, Consumer Health accounted for $4.3 billion, or 7%, of Group net sales, and for $0.5 billion, or 4%, of Group operating income (excluding Corporate income and expense, net).

PHARMACEUTICALS

Overview

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

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

    Oncology

    Cardio-Metabolic

    Immunology and Dermatology

    Retina

    Respiratory

    Neuroscience

    Established Medicines

        The Pharmaceuticals Division is organized into global business franchises responsible for the commercialization of various products. The preceding list reflects the new composition of therapeutic areas within our Pharmaceuticals Division following recent changes as part of a larger transformation of organizational structures. The following tables and product descriptions reflect this new organizational structure. Other sections of this Form 20-F, however, still reflect the prior composition of therapeutic areas. This includes the discussions and certain historical information provided in "Item 5. Operating and Financial Review and Prospects" and "Item 18. Financial Statements." In 2014, our Pharmaceuticals Division also created a unit focused on the development and commercialization of Cell and Gene Therapies.

        On April 22, 2014, Novartis announced that it had reached definitive agreements with GSK on a set of inter-conditional transactions that, if completed, would impact our Pharmaceuticals Division. As part of these transactions, we have agreed to acquire GSK oncology products and certain related assets for an aggregate cash consideration of $16 billion. Up to $1.5 billion of this cash consideration is contingent on certain development milestones. In addition, under the terms of the agreement we were granted a right of first negotiation over the co-development or commercialization of GSK's current and future oncology R&D pipeline, excluding oncology vaccines. The right of first negotiation is for a period of twelve and one half years from the acquisition closing date. We expect these transactions to close during the first half of 2015. The proposed transactions with GSK are subject to closing conditions and regulatory approvals.

        The Pharmaceuticals Division is the largest contributor among the divisions of Novartis and reported consolidated net sales of $31.8 billion in 2014, which represented 55% of the Group's net sales.

        The division is made up of approximately 80 affiliated companies which together employed 59,079 full-time equivalent associates as of December 31, 2014 (including NIBR), and sell products in approximately 155 countries. The product portfolio of the Pharmaceuticals Division includes more than 50

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key marketed products, many of which are leaders in their respective therapeutic areas. In addition, the division's portfolio of development projects includes 134 potential new products and new indications or new formulations for existing products in various stages of clinical development.

Pharmaceuticals Division Products

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

Selected Marketed Products

 
Business
franchise
  Product   Common name   Indications (vary by country and/or formulation)   Formulation   Patents and Exclusivity

Oncology

  Afinitor and Afinitor Disperz/ Votubia   everolimus   Advanced renal cell carcinoma after failure of treatment with VEGF-targeted therapy
Advanced pancreatic neuroendocrine tumors
SEGA associated with tuberous sclerosis
Renal angiomyolipoma associated with tuberous sclerosis
Advanced breast cancer in post-menopausal HR+/HER2– women in combination with exemestane, after failure of anastrozole or letrozole
  Tablet
Dispersible tablets for oral suspension
  US 2020*
EU 2018-19
Japan 2018
     

  Exjade   deferasirox   Chronic iron overload due to blood transfusions and non-transfusion dependent thalassemia   Dispersible tablet for oral suspension   US 2019*
EU 2021
Japan 2021
     
*
See "—Intellectual Property" for further information on the patent and exclusivity status of these products.

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Business
franchise
  Product   Common name   Indications (vary by country and/or formulation)   Formulation   Patents and Exclusivity
    Femara   letrozole   Hormone receptor-positive early breast cancer in postmenopausal women following surgery (upfront adjuvant therapy)
Early breast cancer in post-menopausal women following standard tamoxifen therapy (extended adjuvant therapy)
Advanced breast cancer in post-menopausal women (both as first- and second-line therapies)
  Tablet   US Expired*
EU Expired
Japan RDP 2015
     

  Gleevec/Glivec   imatinib mesylate / imatinib   Certain forms of Ph+ chronic myeloid leukemia
Certain forms of KIT+ gastrointestinal stromal tumors
Certain forms of acute lymphoblastic leukemia
Dermatofibrosarcoma protuberans
Hypereosinophilic syndrome
Aggressive systemic mastocytosis
Myelodysplastic/myeloproliferative diseases
  Tablet Capsules   US July 2015* (including pediatric extension)
EU (major countries) 2016
Japan expired for the main indications
     

  Jakavi   ruxolitnib   Disease-related splenomegaly or symptoms in adult patients with primary myelofibrosis (also known as chronic idiopathic myelofibrosis), post-polycythemia vera myelofibrosis or post-essential thrombocythemia myelofibrosis   Tablet   EU 2027*
Japan 2027
     

  Sandostatin LAR and Sandostatin SC   octreotide acetate   Acromegaly
Symptom control for certain forms of neuroendocrine tumors
Delay of tumor progression in patients with midgut tumors
  Vial
Ampoule/pre-filled syringe
  US 2017*
EU expired
Japan expired
     

  Signifor and Signifor LAR   pasireotide   Cushing's disease
Acromegaly
  Solution for subcutaneous injection in Ampoule
Powder and solvent for suspension for IM injection
  US 2026
EU 2026
Japan 2026
     

  Tasigna   nilotinib   Certain forms of chronic myeloid leukemia in patients resistant or intolerant to prior treatment including Gleevec/Glivec
First line chronic myeloid leukemia
  Capsule   US 2023
EU 2023
Japan 2024
     
*
See "—Intellectual Property" for further information on the patent and exclusivity status of these products.

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Business
franchise
  Product   Common name   Indications (vary by country and/or formulation)   Formulation   Patents and Exclusivity
    Zometa   zoledronic acid   Skeletal-related events from bone metastases (cancer that has spread to the bones)
Hypercalcemia of malignancy
  Vial/4mg
Ready-to-use
  Active ingredient expired
     

  Zykadia   ceritinib   Anaplastic lymphoma kinase-positive (ALK+) metastatic non-small cell lung cancer (NSCLC)   Capsules   US 2030
EU 2027
Japan 2027
     

Cardio-Metabolic

  Galvus and Eucreas   Galvus: vildagliptin
Eucreas: vildagliptin and metformin
  Type 2 diabetes   Tablet   US not launched
EU 2022*
Japan 2024
Metformin active ingredient expired
     

Immunology and Dermatology

  Cosentyx   secukinumab   Moderate-to-severe plaque psoriasis in adult patients who are candidates for systemic therapy or phototherapy Moderate-to-severe plaque psoriasis in adults who are candidates for systemic therapy
Psoriasis vulgaris and psoriatic arthritis in adults who are not adequately responding to systemic therapies (except for biologics)
  Lyophilized pre-filled syringe;
Auto-injector
  US 2028*
EU 2030
Japan 2029
     

  Ilaris   canakinumab   Cryopyrin-associated periodic syndromes Systemic juvenile idiopathic arthritis
Gouty arthritis (EU)
  Lyophilized powder for reconstitution for subcutaneous injection   US 2024
EU 2024 (2025 provided pediatric extension granted)
Japan 2024 (for CAPS)
     

  Myfortic   mycophenolic acid (as mycophenolate sodium)   Prophylaxis of organ rejection in patients receiving allogeneic renal transplants   Gastro-resistant tablet   Active ingredient
expired*
     

  Neoral and Sandimmune   cyclosporine, USP Modified   Prevention of rejection following certain organ transplantation
Non-transplantation autoimmune conditions such as severe psoriasis and severe rheumatoid arthritis
  Capsule
Oral solution
Intravenous (
Sandimmune)
  Active ingredient expired
     

  Simulect   basiliximab   Prevention of acute organ rejection in de novo renal transplantation   Vial for injection or infusion   US 2020
EU Expired
Japan Expired
     

  Xolair   omalizumab   Chronic Spontaneous Urticaria (CSU)/ Chronic idiopathic Urticaria
See also, "Respiratory"
  Lyophilized powder in vial and liquid formulation in pre-filled syringes   US 2018*
EU 2017
Japan 2017
     

  Zortress/Certican   everolimus   Prevention of organ rejection (heart, liver and kidney)   Tablet
Dispersible tablet
  US 2020*
EU 2018-19
Japan 2018
     
*
See "—Intellectual Property" for further information on the patent and exclusivity status of these products.

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Business
franchise
  Product   Common name   Indications (vary by country and/or formulation)   Formulation   Patents and Exclusivity

Retina

  Lucentis   ranibizumab   Wet age-related macular degeneration
Visual impairment due to diabetic macular edema
Visual impairment due to macular edema secondary to retinal vein occlusion
Visual impairment due to choroidal neovascularization secondary to pathologic myopia
  Intravitreal injection   EU January 2022*
Japan 2020
     

Respiratory

  Arcapta Neohaler/ Onbrez Breezhaler   indacaterol   Chronic obstructive pulmonary disease   Inhalation powder hard capsules   US 2025*
EU 2024
Japan 2025
     

  Seebri Breezhaler   glycopyrronium bromide   Chronic obstructive pulmonary disease   Inhalation powder hard capsules   Active ingredient: Expired*
Formulations and uses:
US 2025
EU 2025
Japan 2025
RDP:
US 2018
EU 2022
Japan 2020
     

  TOBI and TOBI Podhaler   tobramycin   Pseudomonas aeruginosa infection in cystic fibrosis   Nebulizer solution (TOBI),
Inhalation powder (
TOBI Podhaler)
  Active ingredient:
Expired*
Commercial product:
US RDP for
TOBI Podhaler 2016
EU orphan exclusivity for
TOBI Podhaler until 2023
     

  Ultibro Breezhaler   indacaterol / glycopyrronium bromide   Chronic obstructive pulmonary disease   Inhalation powder hard capsules   US 2025*
EU 2024
     

  Xolair   omalizumab   Severe allergic asthma
See also, "Immunology and Dermatology"
  Lyophilized powder in vial and liquid formulation in pre-filled syringes   US 2018
EU 2017
Japan 2017
     

Neuroscience

  Comtan   entacapone   Parkinson's disease patients who experience end-of-dose motor (or movement) fluctuations   Tablet   Active ingredient: Expired
Japan RDP 2017
     

  Exelon   Rivastigmine   Mild-to-moderate Alzheimer's disease dementia
Severe Alzheimer's disease dementia
Dementia associated with Parkinson's disease
  Capsule
Oral solution
Transdermal patch
  Active Ingredient:
Expired*
US: Data Protection until Aug 2015 for 15cm2 patch
Formulation:
US 2019
EU 2019
Japan 2023 (patent plus patent term extension)
Japan: RDP May 2019
     
*
See "—Intellectual Property" for further information on the patent and exclusivity status of these products.

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Business
franchise
  Product   Common name   Indications (vary by country and/or formulation)   Formulation   Patents and Exclusivity
    Extavia   interferon beta-1b   Relapsing remitting and/or relapsing forms of multiple sclerosis in adult patients   Subcutaneous injection   Active ingredient expired
     

  Gilenya   fingolimod   Relapsing forms of multiple sclerosis   Capsule   Active ingredient (including 5 year patent term extensions):
US 2019*
EU 2018
Japan 2018
RDP:
EU 2021
Japan 2021
     

  Stalevo   carbidopa, levodopa and entacapone   Parkinson's disease patients who experience end-of-dose motor (or movement) fluctuations   Tablet   Active ingredients: Expired*
Combination patent:
US 2020
EU 2020
Japan 2020
     

Established Medicines

  Amturnide   aliskiren, amlodipine besylate and hydrochlorothiazide   Hypertension   Tablet   US 2018 (not including pediatric extension)
EU 2020 (not including pediatric extension)
Japan 2020
     

  Cibacen   benazepril hydrochloride   Hypertension
Adjunct therapy in congestive heart failure
Progressive chronic renal insufficiency
  Tablet   No protection
     

  Clozaril/Leponex   clozapine   Treatment-resistant schizophrenia
Prevention and treatment of recurrent suicidal behavior in patients with schizophrenia and psychotic disorders
  Tablet   No protection
     

  Coartem/Riamet   artemether and lumefantrine   Plasmodium falciparum malaria or mixed infections that include Plasmodium falciparum
Standby emergency malaria treatment
  Tablet
Dispersible tablet for oral suspension
  Active ingredients: Expired
US combination patent 2015
     

  Cubicin   daptomycin   Complicated skin and skin structure infections caused by Gram-positive susceptible isolates
Staphylococcus aureus bloodstream infections (bacteremia), including those with right-sided infective endocarditis, caused by susceptible isolates
  Powder for solution for injection or infusion   EU RDP 2016*
     
*
See "—Intellectual Property" for further information on the patent and exclusivity status of these products.

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Business
franchise
  Product   Common name   Indications (vary by country and/or formulation)   Formulation   Patents and Exclusivity
    Diovan   valsartan   Hypertension
Heart failure
Post-myocardial infarction
  Tablets
Capsules
Oral solution
  Active ingredient expired*
     

  Diovan HCT and Co-Diovan   valsartan and hydrochlorothiazide   Hypertension   Tablet   US expired*
EU expired
Japan 2016 (
Co-Diovan)
     

  Exforge and Exforge HCT   valsartan and amlodipine besylate   Hypertension   Tablet   US expired*
EU expired
Japan 2015 (
Exforge only)
EU RDP 2017
     

  Focalin and Focalin XR   dexmethylphenidate HCl and dexmethylphenidate extended release   Attention deficit hyperactivity disorder   Tablet
Capsule
  Active ingredient:
Expired
Formulation:
US 2018*
     

  Foradil   formoterol   Asthma
Chronic obstructive pulmonary disease
  Aerolizer (capsules)
Aerosol
  No protection
     

  Lamisil   terbinafine (terbinafine hydrochloride)   Fungal infection of the skin and nails caused by dermatophyte fungi Tinea capitis
Fungal infections of the skin for the treatment of tinea corporis, tinea cruris, tinea pedis and yeast infections of the skin caused by the genus
Candida
Onychomycosis of the toenail or fingernail due to dermatophytes
  Tablet
Cream
DermGel
Solution
Spray
  Active ingredients expired
     

  Lescol and Lescol XL   fluvastatin sodium   Hypercholesterolemia and mixed dyslipidemia in adults
Secondary prevention of major adverse cardiac events
Slowing the progression of atherosclerosis
Heterozygous familial hypercholesterolemia in children and adolescents
  Capsule (Lescol)
Tablet (
Lescol XL)
  Active ingredient expired
     

  Reclast/Aclasta   zoledronic acid 5 mg   Treatment of osteoporosis in postmenopausal women
Treatment of osteoporosis in men
Treatment and prevention of glucocorticoid-induced osteoporosis
Prevention of postmenopausal osteoporosis
Treatment of Paget's disease of the bone
  Intravenous—solution for infusion   Active ingredient: Expired
Dosage regime: EU 2021
     

  Ritalin   methylphenidate HCl   Attention deficit hyperactivity disorder and narcolepsy   Tablet   Active ingredient
expired*
     
*
See "—Intellectual Property" for further information on the patent and exclusivity status of these products.

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Business
franchise
  Product   Common name   Indications (vary by country and/or formulation)   Formulation   Patents and Exclusivity
    Ritalin LA   methylphenidate HCl modified release   Attention deficit hyperactivity disorder   Capsule   Active ingredient expired*
     

  Tegretol   carbamazepine   Epilepsy
Pain associated with trigeminal neuralgia
Acute mania and bipolar affective disorders
Alcohol withdrawal syndrome
Painful diabetic neuropathy
Diabetes insipidus centralis
Polyuria and polydipsia of neurohormonal origin
  Tablet
Chewable tablet
Oral suspension
Suppository
  Active ingredient expired
     

  Tekamlo and Rasilamlo   aliskiren and amlodipine besylate   Hypertension   Tablet   US 2018 (not including pediatric extension)
EU 2020 (not including pediatric extension)
Japan 2020
     

  Tekturna/Rasilez   aliskiren   Hypertension   Tablet   US 2018 (not including pediatric extension)
EU 2020 (not including pediatric extension)
Japan 2020
     

  Tekturna HCT/ Rasilez HCT   aliskiren and hydrochlorothiazide   Hypertension   Tablet   US 2018 (not including pediatric extension)
EU 2020 (not including pediatric extension)
Japan 2020
     

  Trileptal   oxcarbazepine   Epilepsy   Tablet
Oral suspension
  Active ingredient expired
Oral formulation US 2020
     

  Tyzeka/Sebivo   telbivudine   Chronic hepatitis B   Tablet
Oral solution
  US expired
EU RDP 2017
     

  Vivelle-Dot/ Estradot   estradiol hemihydrate   Estrogen replacement therapy for the treatment of the symptoms of natural or surgically induced menopause
Prevention of postmenopausal osteoporosis
  Transdermal patch   Active ingredient expired
     
*
See "—Intellectual Property" for further information on the patent and exclusivity status of these products.

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Business
franchise
  Product   Common name   Indications (vary by country and/or formulation)   Formulation   Patents and Exclusivity
    Voltaren/Cataflam   diclofenac sodium/potassium/resinate/free acid   Inflammatory and degenerative forms of rheumatism
Post traumatic and post-operative pain, inflammation and swelling
Painful and/or inflammatory conditions in gynecology
Other painful and/or inflammatory conditions such as renal and biliary colic, migraine attacks and as adjuvant in severe ear, nose and throat infections
  Tablet
Capsule
Oral drops / oral suspension
Ampoule for injection
Suppository
Gel
Powder for oral solution
Transdermal patch
  Active ingredient expired
 
*
See "—Intellectual Property" for further information on the patent and exclusivity status of these products.

Key Marketed Products

    Oncology

    Gleevec/Glivec (imatinib mesylate/imatinib) is a kinase inhibitor approved to treat patients with metastatic and/or unresectable KIT (CD117) positive (KIT+) gastrointestinal stromal tumors (GIST), as an adjuvant treatment for certain adult patients following resection of KIT+ GIST, and as a targeted therapy for Philadelphia chromosome-positive (Ph+) chronic myeloid leukemia (CML). First launched in 2001, Gleevec/Glivec is available in more than 120 countries. Gleevec/Glivec is also approved in the US, EU and Japan to treat Ph+ acute lymphoblastic leukemia, a rapidly progressive form of leukemia. Gleevec/Glivec is also approved in the US and EU to treat dermatofibrosarcoma protuberans, a rare solid tumor; hypereosinophilic syndrome; myelodysplastic/myeloproliferative diseases and other rare blood disorders. In the US, Gleevec is also approved for aggressive systemic mastocytosis. Gleevec/Glivec has received approvals in 68 countries as a post-surgery (adjuvant setting) therapy for certain adult patients with KIT+ GIST. Following approval by the FDA in January 2013, the EMA approved Gleevec/Glivec in July 2013 for pediatric patients with newly diagnosed Ph+ acute lymphoblastic leukemia in combination with chemotherapy.

    Sandostatin SC and Sandostatin LAR (octreotide acetate/octreotide acetate for injectable suspension) is a somatostatin analogue indicated for the treatment of patients with acromegaly, a chronic disease caused by over-secretion of pituitary growth hormone in adults. Sandostatin is also indicated for the treatment of patients with certain symptoms associated with carcinoid tumors and other types of gastrointestinal and pancreatic neuroendocrine tumors. Additionally, Sandostatin LAR is approved in 50 countries for treatment of patients with advanced neuroendocrine tumors of the midgut or unknown primary tumor location. A total of 58 countries have also approved a new presentation of Sandostatin LAR, which includes a new diluent, safety needle and vial adapter, with additional filings underway. Sandostatin was first launched in 1988 and is approved in more than 100 countries.

    Afinitor and Afinitor Disperz/Votubia (everolimus) is an oral inhibitor of the mTOR pathway. Afinitor is approved in more than 100 countries including the US, EU member states and Japan for advanced renal cell carcinoma following vascular endothelial growth factor-targeted therapy. Afinitor is also approved in more than 85 countries, including the US, EU and Japan for the treatment of advanced pancreatic neuroendocrine tumors. In addition, Afinitor is approved in more than 90 countries for advanced hormone receptor-positive, HER2-negative breast cancer

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    (advanced HR+/HER2– breast cancer). Everolimus is also approved in more than 80 countries including in the US as Afinitor and in the EU as Votubia to treat patients with subependymal giant cell astrocytoma (SEGA) associated with tuberous sclerosis complex (TSC) and in more than 70 countries for the treatment of adult patients with renal angiomyolipomas and TSC who do not require immediate surgery. The dispersible tablet for oral suspension formulation of the product is now approved in the TSC-SEGA population in the US and EU. Everolimus, the active ingredient in Afinitor, is also available under the trade names Zortress/Certican for use in transplantation in the US and EU, respectively, and is exclusively licensed to Abbott and sublicensed to Boston Scientific for use in drug-eluting stents.

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

    Exjade (deferasirox) is an oral iron chelator approved for the treatment of chronic iron overload due to blood transfusions in patients two years of age and older. Patients with congenital and acquired chronic anemia, such as thalassemia, sickle cell disease and myelodysplastic syndromes, require transfusions, which puts them at risk of iron overload. Exjade was first approved in 2005 and is now approved in more than 100 countries, including the US, EU member states and Japan. Exjade is also approved in more than 70 countries, including the US and EU member states, for the treatment of chronic iron overload in patients 10 years of age and older with non-transfusion-dependent thalassemia. Regulatory applications have been submitted in the US, Canada and other countries for a new film-coated tablet formulation.

    Femara (letrozole) is a once-daily oral aromatase inhibitor for the treatment of early stage or advanced breast cancer in postmenopausal women. Femara was first launched in 1996 and is currently available in more than 90 countries. Femara is approved in the US, EU member states and other countries in the adjuvant, extended adjuvant and neo-adjuvant (pre-operative) settings for early stage breast cancer. Femara is also approved in the US and other countries as adjuvant therapy for locally advanced breast cancer and for advanced breast cancer following anti-estrogen therapy. Femara is approved as neo-adjuvant therapy for early stage breast cancer in a limited number of countries. In Japan, Femara is approved for the treatment of all hormone receptor-positive breast cancer in postmenopausal women.

    Jakavi (ruxolitinib) is an oral inhibitor of the JAK1 and JAK2 tyrosine kinases. It is the first JAK inhibitor indicated for the treatment of disease-related splenomegaly or symptoms in adult patients with primary myelofibrosis, post-polycythemia vera myelofibrosis or post-essential thrombocythemia myelofibrosis. Jakavi is currently approved in more than 65 countries, including EU member states, Japan, Canada, Australia, Mexico and Argentina. In three-year follow-up data

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    from the COMFORT-I and COMFORT-II Phase III studies in myelofibrosis, Jakavi treatment reduced the risk of death and resulted in sustained reductions in spleen size—increased spleen size being a hallmark of myelofibrosis—while also improving quality of life. In three-year follow-up of the COMFORT-II study, patients treated with Jakavi demonstrated an overall survival advantage compared to patients receiving conventional therapy with a 52% reduction in risk of death observed in the Jakavi arm compared with conventional therapy. Regulatory applications have been submitted in the EU, Switzerland and Japan for Jakavi in polycythemia vera, and in January 2015 the CHMP adopted a positive opinion for Jakavi for the treatment of adult patients with polycythemia vera who are resistant to or intolerant of hydroxyurea. Novartis licensed ruxolitinib from Incyte Corporation for development and commercialization outside the US. Ruxolitinib, marketed in the US as Jakafi® by Incyte Corporation, was approved by the FDA in December 2014 for the treatment of patients with polycythemia vera who have had an inadequate response to or are intolerant of hydroxyurea. Jakafi® is also approved by the FDA for treatment of patients with intermediate or high-risk myelofibrosis, including primary myelofibrosis, post-polycythemia vera myelofibrosis and post-essential thrombocythemia myelofibrosis.

    Zometa (zoledronic acid for injection/zoledronic acid 4 mg) is a leading treatment to reduce or delay skeletal-related events, including pathologic fracture, spinal cord compression, and/or requirement of radiation therapy or surgery to bone, in patients with bone metastases (cancer that has spread to the bones) from solid tumors and multiple myeloma. First approved in the US in 2001 for the treatment of hypercalcemia of malignancy (tumor-induced excessive levels of calcium), Zometa is approved in more than 100 countries for this indication as well as for the treatment of patients with multiple myeloma and patients with bone metastasis from solid malignancies, including prostate, breast and lung cancer. Zoledronic acid, the active ingredient in Zometa, is also available under the trade names Reclast/Aclasta for use in non-oncology indications. Reclast/Aclasta, first approved in the EU in 2005, is now approved in 107 countries for the treatment of osteoporosis in postmenopausal women, osteoporosis in men, Paget's disease of bone and prevention of clinical fractures after hip fracture and for the treatment and prevention of glucocorticoid-induced osteoporosis.

    Zykadia (ceritinib) is an oral, selective inhibitor of ALK, an important therapeutic target in lung cancer. In April 2014, Zykadia was granted accelerated approval by the FDA for the treatment of patients with anaplastic lymphoma kinase-positive (ALK+) metastatic non-small cell lung cancer (NSCLC) who have progressed on or are intolerant to crizotinib. Zykadia is one of the first medicines to be approved following FDA Breakthrough Therapy designation, which was received in March 2013 due to the significant results observed in the clinical trials and the serious and life-threatening nature of ALK+ NSCLC in patients progressing on or intolerant to crizotinib who have no other treatment option. Additional regulatory submissions for Zykadia in ALK+ NSCLC are underway worldwide, with an application currently filed in the EU and several countries within North America, South America, Central America and Asia.

    Signifor (pasireotide) is a somatostatin analogue approved in more than 65 countries, including countries of the EU, Switzerland and the US, for the treatment of adults with Cushing's disease for whom pituitary surgery is not an option or has not been curative. In addition, in November 2014, the EMA approved Signifor in a new long-acting release formulation for once-monthly intramuscular injection to treat adult patients with acromegaly for whom surgery is not an option or has not been curative and who are inadequately controlled on treatment with a first-generation somatostatin analogue, following a positive opinion from the CHMP in September 2014. In December 2014, the FDA approved Signifor LAR (long-acting release) for injectable suspension, for intramuscular use, for the treatment of patients with acromegaly who have had inadequate response to surgery and/or for whom surgery is not an option.

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    Cardio-Metabolic

    Galvus (vildagliptin), an oral DPP-4 inhibitor, and Eucreas, a single-pill combination of vildagliptin and metformin, are indicated for the treatment of type 2 diabetes. The products were first approved in 2007. Galvus is currently approved in more than 120 countries, including EU member states, Japan and countries in Latin America and Asia-Pacific. Eucreas was the first single pill combining a DPP-4 inhibitor and metformin that was approved in Europe and under the trade name Galvus Met is currently approved in more than 100 countries. In 2012, Galvus received EU approval for expanded use as a second-line monotherapy for type 2 diabetes patients who cannot take metformin. In addition, in 2012, the European Commission approved the use of Galvus and Eucreas in combination with other diabetes treatments. The first new approval was for the use of vildagliptin in combination with insulin, with or without metformin, for patients with type 2 diabetes when diet, exercise and a stable dose of insulin do not result in glycemic control. The second approval was for the use of vildagliptin in triple combination with metformin and a sulphonylurea for the treatment of type 2 diabetes when diet and exercise plus dual therapy with these two agents do not provide adequate glycemic control. In 2013, a German agency, the Gemeinsamer Bundesausschuss (G-BA), initiated an analysis of the benefits of drugs approved prior to 2011. As part of that analysis the G-BA concluded that Galvus and Eucreas did not provide an added benefit over certain other medicines indicated for the treatment of that disease. As a result, we were unable to reach agreement with the head organization of the German statutory health insurance funds, GKV-Spitzenverband, on an acceptable price for Galvus and Eucreas, and in 2014 we stopped distribution of these products in Germany.

    Immunology and Dermatology

    Neoral (cyclosporine, USP Modified) is an immunosuppressant to prevent organ rejection following a kidney, liver, or heart transplant. Neoral is also approved for use in lung transplant in many countries outside of the US. This micro-emulsion formulation of cyclosporine is also indicated for treating selected autoimmune disorders such as psoriasis and rheumatoid arthritis. First launched in 1995, Neoral is marketed in more than 90 countries.

    Myfortic (enteric-coated formulation of mycophenolate sodium) is approved in more than 90 countries for the prevention of acute rejection of kidney allografts, and is indicated in combination with cyclosporine and corticosteroids. Myfortic was first approved in the US in 2004 and in the EU in 2003.

    Zortress/Certican (everolimus) is an oral inhibitor of the mTOR pathway, indicated to prevent organ rejection following solid organ transplantation. Zortress/Certican has been extensively studied as an immunosuppressant agent in solid organ transplantation with more than 10,000 transplant recipients enrolled in Novartis-sponsored clinical trials worldwide. Under the trade name Certican, it is approved in more than 90 countries to prevent organ rejection for renal and heart transplant patients, and in addition, in more than 70 countries worldwide to prevent organ rejection for liver transplant patients. In the US, under the trade name Zortress, the drug is approved for the prophylaxis of organ rejection in adult patients at low-moderate immunologic risk receiving a kidney transplant as well as for the prophylaxis of allograft rejection in adult liver transplant recipients. Everolimus is also available from Novartis in different dosage strengths and for different uses in non-transplant patient populations under the brand names Afinitor, Afinitor Disperz and Votubia. Everolimus is also exclusively licensed to Abbott and sublicensed to Boston Scientific for use in drug-eluting stents.

    Ilaris (canakinumab) is a human monoclonal antibody that selectively binds and neutralizes interleukin-1b (IL-1b), a pro-inflammatory cytokine. Since 2009, Ilaris has been approved in over 60 countries for the treatment of children and adults suffering from cryopyrin-associated periodic syndromes, a group of rare disorders characterized by chronic recurrent fever, urticaria, occasional

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    arthritis, deafness, and potentially life-threatening amyloidosis. In 2013, Ilaris was approved in the EU for the treatment of acute gouty arthritis in patients who cannot be managed with standard of care, and in the US, EU and other countries for the treatment of systemic juvenile idiopathic arthritis. Ilaris is also being developed for hereditary periodic fever syndromes.

    Xolair (omalizumab) is currently approved in the EU, Switzerland and 35 other countries as a treatment for chronic spontaneous urticaria (CSU)/chronic idiopathic urticaria (CIU) including approvals in Europe as add-on therapy for the treatment of CSU in adult and adolescent (12 years and above) patients with inadequate response to H1 antihistamine treatment, and, in the US, for the treatment of adults and adolescents (12 years of age and above) with CIU who remain symptomatic despite H1 antihistamine treatment. See also, Xolair in "Respiratory" below. Novartis licensed Xolair from Genentech/Roche. We co-promote Xolair with Genentech/Roche in the US and share a portion of operating income, but we do not record any US sales. Novartis records all sales of Xolair outside the US. See "Item 18. Financial Statements—Note 27" for further information.

    Cosentyx (secukinumab) is a fully human IgG1 monoclonal antibody that selectively binds to and neutralizes interleukin 17A (IL-17A), a key pro-inflammatory cytokine. In December 2014, Cosentyx was approved in Japan for the treatment of both psoriasis vulgaris and psoriatic arthritis in adults who are not adequately responding to systemic therapies (except for biologics). This approval marked the first country approval for Cosentyx in the world and made it the first IL-17A inhibitor to receive regulatory approval in either of these indications in Japan. In January 2015, Cosentyx was approved in the EU as a first-line systemic treatment of moderate-to-severe plaque psoriasis in adults who are candidates for systemic therapy, and in the US for the treatment of moderate-to-severe plaque psoriasis in adult patients who are candidates for systemic therapy or phototherapy. Cosentyx is also being developed for psoriatic arthritis and ankylosing spondylitis.

    Retina

    Lucentis (ranibizumab) is a recombinant humanized high affinity antibody fragment that binds to vascular endothelial growth factors (VEGF). It is the only anti-VEGF therapy licensed in many countries for four ocular indications: wet age-related macular degeneration (wet AMD), visual impairment due to diabetic macular edema (DME), visual impairment due to macular edema secondary to branch and central retinal vein occlusion (BRVO and CRVO), and visual impairment due to choroidal neovascularization secondary to pathologic myopia (myopic CNV). Lucentis is approved in more than 100 countries to treat patients with wet AMD, for the treatment of visual impairment due to DME and macular edema secondary to RVO. Also, Lucentis is licensed in more than 70 countries for the treatment of visual impairment due to myopic CNV. Since its launch in 2007, there are more than 2.8 million patient-treatment years of exposure for Lucentis. We licensed Lucentis from Genentech for development and commercialization outside of the US. See "Item 18. Financial Statements—Note 27" for further information.

    Respiratory

    Xolair (omalizumab) is the only humanized monoclonal antibody approved for the treatment of moderate to severe persistent allergic asthma in the US in adolescents (aged 12 and above) and adults. Xolair is approved in more than 90 countries, including the US since 2003 and the EU since 2005. It is approved for severe persistent allergic asthma in the EU in children (aged six and above), adolescents, and adults. A liquid formulation of Xolair in pre-filled syringes has been launched in most European countries. In Japan, Xolair was approved in January 2009 for the treatment of severe persistent allergic asthma in adults (aged 15 and older) and was approved in August 2013 in pediatric patients aged 6 years or older for the same indication. See also, Xolair in "Immunology and Dermatology" above.

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    TOBI Podhaler (tobramycin inhalation powder) is an inhaled dry powder formulation of the antibiotic tobramycin, delivered using a simple and portable patient-friendly device that reduces administration time by 72% relative to TOBI (tobramycin nebulizer solution), with comparable efficacy and safety. TOBI Podhaler was approved by the FDA in March 2013 and has been approved in the EU since July 2011. It is approved in over 60 countries. It is indicated for the management of cystic fibrosis patients aged six years and older with Pseudomonas aeruginosa infection in their lungs, whose lung function is within a certain range.

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

    Seebri Breezhaler (glycopyrronium bromide), a once-daily inhaled long-acting muscarinic antagonist (LAMA), received its first regulatory approvals in September 2012. Seebri Breezhaler 44 mcg inhalation powder, hard capsules received approval in the EU as a maintenance bronchodilator treatment to relieve symptoms for adult patients with COPD, and in Japan the MHLW approved Seebri (glycopyrronium) Inhalation Capsules 50 mcg administered through the Breezhaler device as an inhaled maintenance bronchodilator treatment for the relief of various symptoms due to airway obstructive disease in COPD (chronic bronchitis, emphysema). It is now approved in more than 80 countries worldwide outside the US. Seebri Breezhaler is the second inhaled COPD product available to patients to be delivered via the Breezhaler inhalation device. Glycopyrronium bromide was exclusively licensed to Novartis in April 2005 by Vectura and its co-development partner Sosei.

    Ultibro Breezhaler (indacaterol/glycopyrronium bromide) is a once-daily inhaled fixed-dose combination of the LABA indacaterol and the LAMA glycopyrronium bromide. Ultibro Breezhaler (indacaterol 85 mcg/glycopyrronium 43 mcg), inhalation powder, hard capsules was approved in the EU in September 2013 as a maintenance bronchodilator treatment to relieve symptoms in adult patients with COPD, and in Japan the MHLW approved Ultibro Inhalation Capsules (glycopyrronium 50 mcg/indacaterol 110 mcg), delivered through the Breezhaler inhalation device, for relief of various symptoms due to airway obstruction in COPD (chronic bronchitis, emphysema). Ultibro Breezhaler is the third inhaled COPD product available to patients to be delivered via the Breezhaler inhalation device. It is approved in over 50 countries outside the US and launched in over 25 countries (including the UK, Germany, Japan and Canada). Glycopyrronium bromide was exclusively licensed to Novartis in April 2005 by Vectura and its co-development partner Sosei.

    Neuroscience

    Gilenya (fingolimod) is the first oral therapy approved to treat relapsing-remitting multiple sclerosis (RRMS) and the first in a new class of compounds called sphingosine 1-phosphate receptor modulators. In the US, Gilenya is indicated for relapsing forms of MS. In the EU, Gilenya is indicated for adult patients with high disease activity despite treatment with at least one disease modifying agent, or rapidly evolving severe relapsing-remitting MS. Gilenya is the only oral disease-modifying therapy (DMT) to impact the course of RRMS with high efficacy across four key measures of disease activity: relapses, MRI lesions, brain shrinkage (brain volume loss) and disability progression. As of November 2014, more than 114,000 patients have been treated in clinical trials and in a post-marketing setting and there are currently more than 195,000 patient

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    years of exposure. Gilenya is currently approved in over 80 countries around the world. Gilenya is licensed from Mitsubishi Tanabe Pharma Corporation.

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

    Comtan (entacapone) and Stalevo (carbidopa, levodopa and entacapone) are indicated for the treatment of patients with Parkinson's disease who experience end of dose motor (or movement) fluctuations, known as "wearing off". Comtan was approved in Europe in 1998 and in the US in 1999 while Stalevo was approved in the US and EU in 2003. Both products are marketed in more than 50 countries by Novartis under a licensing agreement with Orion Corporation. Stalevo was approved in China in August 2012 and was approved in Japan in July 2014.

    Established Medicines

    Diovan (valsartan), together with Diovan HCT/Co-Diovan (valsartan and hydrochlorothiazide), is an angiotensin II receptor blocker (ARB) and is one of the top-selling branded anti-hypertensive medications worldwide (IMS MAT September 2014; 57 countries audited). Diovan is the only agent in its class approved to treat all of the following: high blood pressure (including children 6 to 18 years), high-risk heart attack survivors and patients with heart failure. First launched in 1996, Diovan is available in more than 120 countries for treating high blood pressure, in more than 90 countries for heart failure, and in more than 70 countries for heart attack survivors. First launched in 1997, Diovan HCT/Co-Diovan is approved in over 100 countries worldwide. In July 2008, the FDA approved Diovan HCT for the first-line treatment of hypertension in patients unlikely to achieve blood pressure control on a single agent. In 2009, Co-Diovan was approved for treatment of high blood pressure in Japan. In September 2010, all EU member states locally approved Diovan for use in children aged 6 to 18 years. In 2012, the Japanese MHLW approved Diovan for the treatment of pediatric hypertension in children age 6 years or older. This approval marks the first time an ARB has been approved for the treatment of pediatric hypertension in children age 6 years or older in Japan. Diovan is subject to generic competition in the US, EU and Japan. Diovan HCT/Co-Diovan is subject to generic competition in the US and EU.

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

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

    Ritalin, Ritalin LA, Focalin and Focalin XR (methylphenidate HCl, methylphenidate HCl extended release, dexmethylphenidate HCl and dexmethylphenidate HCl extended release) are indicated for the treatment of attention deficit hyperactivity disorder (ADHD) in children. Ritalin LA and Focalin XR are additionally indicated for ADHD in adults. Ritalin is also indicated for narcolepsy. Ritalin was first marketed during the 1950s and is available in over 70 countries. Ritalin LA is available in over 30 countries. Focalin comprises the active d-isomer of methylphenidate and therefore requires half the dose of Ritalin. Focalin and Focalin XR are available in the US.

    Tegretol (carbamazepine) is indicated for epilepsy (partial seizures, generalized tonic clonic and mixed forms of seizures), acute mania and maintenance treatment of bipolar disorders, alcohol withdrawal syndrome, trigeminal neuralgia, glossopharyngeal neuralgia, painful diabetic neuropathy, diabetes insipidus centralis and polyuria and polydipsia of neurohormonal origin. It is available in 129 countries. Generics represent approximately 50% of the carbamazepine market.

Compounds in Development

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

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

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

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

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

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

Selected Development Projects

 
Project/Product
  Common name   Mechanism of action   Potential indication/
Disease area
  Business
franchise
  Formulation/
Route of
administration
  Year Project
Entered
Current
Development
Phase
  Planned filing
dates/Current
phase
ACZ885   canakinumab   Anti-interleukin-1b monoclonal antibody   Hereditary periodic fevers   Immunology and Dermatology   Subcutaneous injection   2013   2016/III
             
            Secondary prevention of cardiovascular events   Cardio-Metabolic       2011   2017/III
 
Afinitor/Votubia (RAD001)   everolimus   mTOR inhibitor   Non-functioning GI and lung neuroendocrine tumors   Oncology   Oral   2012   2015/III
             
            Tuberous sclerosis complex seizures           2013   2016/III
             
            Diffuse large B-cell lymphoma           2009   2018/III
 
BAF312   siponimod   Sphingosine-1-phosphate receptor modulator   Secondary progressive multiple sclerosis   Neuroscience   Oral   2012   ³2019/III
 
BCT197   TBD   Anti-inflammatory agent   Chronic obstructive pulmonary disease   Respiratory   Oral   2011   ³2019/II
 
BGJ398   TBD   Pan-FGF receptor kinase inhibitor   Solid tumors   Oncology   Oral   2012   ³2019/II
 
BGS649   TBD   Aromatase inhibitor   Obese hypogonadotropic hypogonadism   Cardio-Metabolic   Oral   2010   ³2019/II
 
BKM120   buparlisib   PI3K inhibitor   Metastatic breast cancer, hormone receptor-positive, aromatase inhibitor resistant, mTOR inhibitor naïve   Oncology   Oral   2011   2015/III
             
            Metastatic breast cancer, hormone receptor-positive, aromatase inhibitor and mTOR inhibitor resistant           2011   2016/III
             
            Solid tumors           2011   ³2019/I
 
BYL719   alpelisib   PI3K inhibitor   Solid tumors   Oncology   Oral   2010   ³2019/I
 
BYM338   bimagrumab   Inhibitor of activin receptor Type II   Sporadic inclusion body myositis   Neuroscience   Intravenous infusion   2013   2016/III
             
            Hip fracture   Neuroscience       2013   ³2019/II
             
            Sarcopenia   Neuroscience       2014   ³2019/II
 
CAD106   TBD   Beta-amyloid-protein therapy   Alzheimer's disease   Neuroscience   Intramuscular injection   2008   ³2019/II
 
CJM112   TBD   Anti-interleukin-17 monoclonal antibody   Immune disorders   Neuroscience   Subcutaneous injection   2013   ³2019/I
 

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Project/Product
  Common name   Mechanism of action   Potential indication/
Disease area
  Business
franchise
  Formulation/
Route of
administration
  Year Project
Entered
Current
Development
Phase
  Planned filing
dates/Current
phase
Cosentyx (AIN457)   secukinumab   Anti-interleukin-17 monoclonal antibody   Psoriatic arthritis   Immunology and Dermatology   Subcutaneous injection   2011   2015/III
             
            Ankylosing spondylitis           2011   2015/III
 
CTL019   tisagenlecleucel-T   CD19-targeted chimeric antigen receptor T-cell immunotherapy   Adult and pediatric acute lymphoblastic leukemia   Cell and Gene Therapies Unit   Intravenous   2012   2016/II
             
            Diffuse large B-cell lymphoma           2014   2017/II
 
EGF816   TBD   Epidermal growth factor receptor   Solid tumors   Oncology   Oral   2014   ³2019/I/II
 
Exjade film-coated tablet (FCT)   deferasirox   Iron chelator   Iron overload   Oncology   Oral film-coated tablet   2014   US (registration)
 
FCR001   TBD   Inducing stable donor chimerism and immunological tolerance   Renal transplant   Cell and Gene Therapies Unit   Infusion   2009   ³2019/II
 
Gilenya   fingolimod   Sphingosine-1-phosphate receptor modulator   Chronic inflammatory demyelinating polyradiculoneuropathy   Neuroscience   Oral   2012   2017/III
 
HSC835   TBD   Stem cell regeneration   Stem cell transplantation   Cell and Gene Therapies Unit   Infusion   2012   ³2019/II
 
INC280   capmatinib   cMET inhibitor   Non-small cell lung cancer   Oncology   Oral   2013   2018/II
 
Jakavi   ruxolitinib   Janus kinase inhibitor   Polycythemia vera   Oncology   Oral   2014   EU (registration)
 
KAE609   cipargamin   PfATP4 inhibitor   Malaria   Established Medicines   Oral   2012   2017/II
 
KAF156   TBD   TBD   Malaria   Established Medicines   Oral   2013   ³2019/II
 
LBH589   panobinostat   pan-deacetylase inhibitor (pan-DACi)   Relapsed or relapsed-and-refractory multiple myeloma   Oncology   Oral   2014   US/EU (registration)
 
LCI699   osilodrostat   Aldosterone synthase inhibitor   Cushing's disease   Oncology   Oral   2011   2017/III
 
LCQ908   pradigastat   Diacylglycerol acyl transferase-1 inhibitor   Familial chylomicronemia syndrome   Cardio-Metabolic   Oral   2012   2015/III
 
LCZ696   valsartan and sacubitril (as sodium salt complex)   Angiotensin receptor/neprilysin inhibitor   Chronic heart failure with reduced ejection fraction   Cardio-Metabolic   Oral   2014   US/EU (registration)
             
            Chronic heart failure with preserved ejection fraction           2013   ³2019/III
 
LDE225   sonidegib   Smoothened receptor/ hedgehog signaling inhibitor   Advanced basal cell carcinoma   Immunology and Dermatology   Oral   2014   US/EU (registration)
 

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Project/Product
  Common name   Mechanism of action   Potential indication/
Disease area
  Business
franchise
  Formulation/
Route of
administration
  Year Project
Entered
Current
Development
Phase
  Planned filing
dates/Current
phase
LEE011   ribociclib   CDK4/6 Inhibitor   Hormone receptor-positive, HER2 negative advanced breast cancer (postmenopausal women)   Oncology   Oral   2013   2016/III
             
            Hormone receptor-positive, HER2 negative advanced breast cancer (premenopausal women)           2014   2018/III
             
            Solid tumors           2011   2018/I
 
LGX818(1)   encorafenib   RAF inhibitor   Solid tumors   Oncology   Oral   2012   ³2019/II
 
LIK066   TBD   SGLT 1 / 2 inhibitor   Type 2 diabetes   Cardio-Metabolic   Oral   2011   ³2019/II
 
LJM716   TBD   HER3 inhibitor   Solid tumors   Oncology   Intravenous   2012   ³2019/I
 
Lucentis   ranibizumab   Anti-VEGF monoclonal antibody fragment   Choroidal neovascularization and macular edema secondary to conditions other than age-related macular degeneration, diabetic macular edema, retinal vein occlusion and pathologic myopia   Retina   Intravitreal injection   2013   2016/III
             
            Retinopathy of Prematurity (ROP)           2014   2018/III
 
MEK162(2)   binimetinib   MEK inhibitor   NRAS mutant melanoma   Oncology   Oral   2013   2016/III
             
            Low-grade serous ovarian cancer           2013   2016/III
             
            Solid tumors           2011   ³2019/II
 
MEK162(2) and LGX818(1)   binimetinib and encorafenib   MEK inhibitor and RAF inhibitor   BRAF mutant melanoma   Oncology   Oral   2013   2016/III
 
OAP030 (Fovista)   TBD   Aptamer anti-platelet-derived growth factor (PDGF)   Wet age-related macular degeneration   Retina   Solution   2013   2016/III
 
PKC412   midostaurin   Signal transduction inhibitor   Acute myeloid leukemia   Oncology   Oral   2008   2015/III
             
            Aggressive systemic mastocytosis           2008   2015/II
 
QAW039   fevipiprant   CRTH2 antagonist   Asthma   Respiratory   Oral   2010   ³2019/II
             
            Atopic dermatitis   Immunology and Dermatology       2013   ³2019/II
 
QAX576   TBD   Anti-interleukin-13 monoclonal antibody   Allergic diseases   Immunology and Dermatology; Respiratory   Subcutaneous injection   2013   ³2019/II
 
QGE031   TBD   High affinity anti-IgE monoclonal antibody   Asthma   Respiratory   Subcutaneous injection   2012   ³ 2019/II
 
RLX030   serelaxin   Recombinant form of human relaxin-2 hormone   Acute heart failure   Cardio-Metabolic   Intravenous infusion   2009   2016/III
 
Seebri (NVA237)   glycopyrronium bromide   Long-acting muscarinic antagonist   Chronic obstructive pulmonary disease   Respiratory   Inhalation   EU: 2012
US: 2014
  EU (approved)
US (registration)(3)
 
Signifor LAR (SOM230)   pasireotide   Somatostatin analogue   Cushing's disease   Oncology   Long-acting release/Intramuscular injection   2011   2016/III
 

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Project/Product
  Common name   Mechanism of action   Potential indication/
Disease area
  Business
franchise
  Formulation/
Route of
administration
  Year Project
Entered
Current
Development
Phase
  Planned filing
dates/Current
phase
Tasigna   nilotinib   BCR-ABL inhibitor   Chronic myeloid leukemia treatment-free remission   Oncology   Oral   2012   2016/II
 
Tekturna   aliskiren   Direct renin inhibitor   Reduction of cardiovascular death/hospitalizations in chronic heart failure   Established Medicines   Oral   2009   2016/III
 
Ultibro (QVA149)   indacaterol and glycopyrronium bromide   Long-acting beta2-adrenergic agonist and long-acting muscarinic antagonist   Chronic obstructive pulmonary disease   Respiratory   Inhalation   EU: 2013
US: 2014
  EU (approved)
US (registration)(3)
 
Zykadia (LDK378)   ceritinib   ALK inhibitor   ALK+ advanced non-small cell lung cancer (post chemotherapy and post crizotinib)   Oncology   Oral   US: 2014
EU: 2014
  US (approved)
EU (registration)
             
            ALK+ advanced non-small cell lung cancer (chemotherapy naïve, crizotinib naïve)           2013   2017/III
 
(1)
Conditional on completion of the previously announced transactions with GSK and receipt of regulatory approvals, we have agreed to divest LGX818 to Array BioPharma Inc.

(2)
Conditional on completion of the previously announced transactions with GSK and receipt of regulatory approvals, we have agreed to return our rights in MEK162 to Array BioPharma Inc.

(3)
Submission pending acceptance by FDA.

Key Development Projects

    ACZ885 (canakinumab) was approved in the EU in March 2013 for the treatment of acute attacks in gouty arthritis as Ilaris. In 2013 Ilaris was also approved for the treatment of systemic juvenile idiopathic arthritis in the US, EU and other countries. Based on Phase II data of ACZ885 in TNF-receptor associated periodic syndrome and Familial Mediterranean Fever showing substantial symptom relief in these two rare periodic fever syndromes, a Phase III study was initiated in June 2014. The goal of this pivotal confirmatory study is to demonstrate efficacy and safety in TNF-receptor associated periodic syndrome, colchicine resistant Familial Mediterranean Fever and Hyper-IgD syndrome. This approach has been agreed with FDA and CHMP. ACZ885 is also being investigated in the pivotal Phase III CANTOS study to determine whether ACZ885 can reduce the risk of recurrent cardiovascular events (cardiovascular death, non-fatal myocardial infarction, non-fatal stroke) in post-myocardial infarction patients with elevated inflammatory burden versus placebo when administered quarterly in addition to standard of care.

    Afinitor and Afinitor Disperz/Votubia (RAD001, everolimus) is an oral inhibitor of the mTOR pathway. Phase III studies are underway in patients with advanced breast cancer, diffuse large B-cell lymphoma and non-functioning GI/Lung NET. The EXIST-3 (EXamining everolimus In a Study of TSC) clinical trial is underway to evaluate the efficacy and safety of everolimus in patients with TSC who have refractory partial-onset seizures (uncontrollable seizures localized to a specific area of the brain). Results from the Phase III BOLERO-1 (Breast cancer trials of OraL EveROlimus-1) trial of everolimus in combination with trastuzumab and paclitaxel as a first-line treatment in women with human epidermal growth factor receptor-2 positive (HER2+) advanced breast cancer did not meet the threshold of statistical significance for both primary objectives of the study, progression-free survival among patients with HER2+ advanced breast cancer or the sub-population of women with hormone-receptor negative, HER2+ advanced breast cancer.

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    BAF312 (siponimod) is an oral, second-generation sphingosine 1-phosphate receptor modulator in Phase III development for secondary progressive multiple sclerosis. BAF312 binds selectively to the sphingosine 1-phosphate receptor subtypes 1 and 5, distributes effectively to the brain where it may modulate central S1P1,5 receptors to impact central nervous system inflammation and repair mechanisms. The results from the BOLD study, an adaptive dose-ranging Phase II study, were published in Lancet Neurology in 2013. These results showed that compared to placebo, BAF312 reduced brain MRI lesions by up to 80% in relapsing-remitting multiple sclerosis and relapses were infrequent and significantly reduced. BAF312 entered Phase III development in secondary progressive multiple sclerosis in 2012.

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

    BYM338 (bimagrumab) is a novel, fully human monoclonal antibody under development to treat sporadic inclusion body myositis (sIBM). In August 2013, FDA granted Breakthrough Therapy designation to BYM338 for sIBM. A Phase II/III study of bimagrumab in patients with sIBM was initiated in September 2013. This study showed that in sIBM patients, a single dose of bimagrumab improved muscle volume in eight weeks (muscle volume for right leg increased 6.5% compared to placebo) and muscle function by 16 weeks. BYM338 binds with high affinity to type II activin receptors, preventing natural ligands, including myostatin and activin, from binding. BYM338 stimulates muscle growth by blocking signaling from these inhibitory molecules. In addition to sIBM, BYM338 is in clinical development for multiple pathological muscle loss and weakness and muscle-wasting conditions, including recovery from hip fracture. BYM338 was developed by Novartis, in collaboration with MorphoSys.

    Cosentyx (AIN457, secukinumab) is a fully human IgG1 monoclonal antibody that selectively binds to and neutralizes IL-17A, a key pro-inflammatory cytokine. In September 2014 Novartis announced that two Phase III studies in psoriatic arthritis (FUTURE 1 and FUTURE 2) met primary and key secondary endpoints showing superiority to placebo. FUTURE 1 and FUTURE 2 enrolled a combined total of more than 1,000 patients.

    CTL019 (tisagenlecleucel-T) is an investigational therapy that uses chimeric antigen receptors (CARs) to fight cancer. CARs are engineered proteins that transform a patient's own T cells into antigen-specific cells which seek out target proteins present on a patient's cancerous tumor. When these cells are re-introduced into the patient's blood, they demonstrate the potential to bind to the cancer cells and destroy them. CTL019 targets a protein called CD19 that is associated with a number of B-cell malignancies. On-going Phase I and II studies being conducted by the University of Pennsylvania are investigating the activity and safety of CTL019 in patients with resistant or refractory CD19+ hematologic malignancies, specifically acute lymphoblastic leukemia, chronic lymphocytic leukemia and non-Hodgkin lymphoma. In one long-term pediatric study, results showed that 36 of 39 patients with relapsed/refractory acute lymphoblastic leukemia (r/r ALL), or 92%, experienced complete remissions with CTL019. Sustained remissions were achieved up to one year or more with six-month event-free survival of 70% and overall survival of 75%, in most cases without further therapy. All pediatric patients who responded to the therapy experienced a cytokine release syndrome, while their reprogrammed T-cells were expanding. Additional abstracts

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    evaluated the efficacy and safety of CTL019 in the treatment of B-cell cancers including r/r ALL, chronic lymphocytic leukemia, and B-cell non-Hodgkin lymphoma.

    Gilenya (fingolimod) is a sphingosine 1-phosphate receptor modulator approved for the treatment for relapsing remitting MS. A Phase III study of Gilenya in patients with chronic inflammatory demyelinating polyradiculoneuropathy was initiated in 2012. Submissions to health authorities in this indication are anticipated to be made in 2017. Results from INFORMS, the Phase III study of Gilenya in primary progressive MS did not show a significant difference between fingolimod and placebo on a combination of disability measures.

    Jakavi (ruxolitinib) is an oral inhibitor of the JAK1 and JAK2 tyrosine kinases in development for use in patients with polycythemia vera. The pivotal Phase III RESPONSE study of ruxolitinib in patients with polycythemia vera who are resistant to or intolerant of hydroxyurea was presented at a major US medical congress in 2014. In the study, ruxolitinib significantly improved hematocrit control without the need for phlebotomy and reduced spleen size in patients with polycythemia vera who are resistant to or intolerant of hydroxyurea. These data form the basis for worldwide regulatory filings for ruxolitinib in polycythemia vera. An update involving more than 1,000 patients from the Phase IIIb JUMP study, the largest clinical trial of myelofibrosis patients treated with ruxolitinib to date, was presented at a major US medical congress in 2014. Findings of this ongoing expanded access study support the safety profile and efficacy benefit of ruxolitinib, as measured in primary and secondary endpoints respectively. In the study, 69% of patients treated with ruxolitinib achieved a greater than or equal to 50% reduction in spleen length from baseline at any time and had a clinically meaningful improvement in myelofibrosis symptom score, important treatment goals for patients with myelofibrosis.

    LBH589 (panobinostat) is a potent pan-deacetylase inhibitor under FDA review for the treatment of patients with relapsed or relapsed and refractory multiple myeloma. In November, the FDA extended its review period by up to three months for the NDA of LBH589 in combination with bortezomib and dexamethasone for patients with previously treated multiple myeloma. The extension followed an FDA Oncologic Drugs Advisory Committee (ODAC) meeting in November, at which ODAC voted against recommending LBH589 for this indication. Results from the PANORAMA-1 (PANobinostat ORAl in Multiple MyelomA) Phase III trial, which were presented at a major US medical congress, showed a 37% improvement in progression-free survival when using panobinostat in combination with bortezomib and dexamethasone compared to treatment with the same regimen with placebo in patients with relapsed or relapsed and refractory multiple myeloma. Worldwide regulatory filings are underway, including filings in the EU in May and in Japan, with orphan drug status, in September.

    LCQ908 (pradigastat) is a diacylglycerol acyltransferase-1 (DGAT-1) inhibitor that blocks the final step of triglyceride synthesis in the small intestine, slowing and decreasing absorption of dietary fat. LCQ908 is currently in Phase III development for familial chylomicronemia syndrome, a rare genetic disease in which individuals lack an enzyme that clears triglycerides from the blood. The loss of this enzyme activity leads to very high triglycerides, which can lead to recurrent episodes of a potentially life-threatening condition called pancreatitis.

    LCZ696 (valsartan and sacubitril, as sodium salt complex) is a first-in-class angiotensin receptor/neprilysin inhibitor in development for the treatment of chronic heart failure. LCZ696 acts to enhance the protective neurohormonal systems of the heart (neprilysin system) while simultaneously suppressing the harmful system (the renin-angiotensin-aldosterone system, or RAAS). In March 2014 the Phase III PARADIGM-HF study of LCZ696 in patients with chronic heart failure with reduced ejection fraction was stopped early when it was confirmed that those given LCZ696 were significantly less likely to die from cardiovascular causes then those given enalapril. Results presented at a major European medical congress in August 2014 showed LCZ696 reduced the risk of death from cardiovascular causes by 20%, reduced heart failure hospitalizations

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    by 21% and the risk of all-cause mortality by 16%. Overall there was a 20% risk reduction on the primary endpoint, a composite measure of cardiovascular death or heart failure hospitalization. Based on these findings, regulatory applications have been submitted in both the EU and US for LCZ696 as a treatment for patients with heart failure with reduced ejection fraction. PARAGON-HF, a Phase III trial of LCZ696 in patients with chronic heart failure with preserved ejection fraction is underway.

    LDE225 (sonidegib) is a selective smoothened inhibitor in clinical development for advanced basal cell carcinoma. LDE225 binds to smoothened receptors and prevents abnormal activation of the Hedgehog pathway, which is associated with uncontrolled cellular growth and proliferation. LDE225 was submitted in the EU in the second quarter of 2014 and in the US in the third quarter of 2014.

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

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

    OAP030 (Fovista) is an oligo-nucleotide aptamer that inhibits the action of platelet-derived growth factor (PDGF), and has the potential to enhance the symptomatic treatment effect of anti-VEGFs to induce lesion regression, which may result in vision gains, reduce vision loss and potentially modify the disease in the longer term. The OAP030 Phase III program consists of three clinical trials to evaluate the safety and efficacy of OAP030 in combination with anti-VEGF drugs for the treatment of wet age-related macular degeneration (AMD). Initial top-line data from the OAP030 Phase III clinical program are expected to be available in 2016.

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

    RLX030 (serelaxin), the first in a new class of medicines, is a recombinant form of the human hormone relaxin-2, and is believed to act through multiple mechanisms on the heart, kidneys and blood vessels. Results from the Phase III RELAX-AHF study show that RLX030 improved symptoms and reduced mortality in patients with acute heart failure (AHF). Data from the study were presented at the American Heart Association congress in November 2012 and published simultaneously in The Lancet showing that RLX030 significantly reduced dyspnea (or shortness of breath), the most common symptom of AHF, which was the primary objective of the study based on pre-specified protocol criteria. In addition, RLX030 was associated with reductions in worsening of heart failure and all-cause mortality (a safety endpoint) and in deaths due to cardiovascular causes (an additional pre-specified exploratory endpoint) at the end of six months. In 2014, the FDA and CHMP each decided that further data would be required in order for marketing authorizations to be granted. A second Phase III study, RELAX-AHF-2, is underway and aims to replicate the key findings of RELAX-AHF, with cardiovascular mortality as the primary endpoint. RLX030 received regulatory approval from the Ministry of Health in Russia in 2014 and is launched there under the trade name Reasanz.

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    Seebri (NVA237, glycopyrronium bromide) is an inhaled long-acting muscarinic antagonist. In January 2015, Novartis announced positive top-line results from the pivotal Phase III clinical trial programs for NVA237 to support an NDA submission to FDA for the long-term maintenance treatment of chronic obstructive pulmonary disease (COPD). The results from the Phase III GEM clinical trial program in moderate-to-severe COPD patients met their primary and secondary endpoints.

    Signifor LAR (SOM230, pasireotide) is a somatostatin analogue in development as a long-acting release formulation for patients with Cushing's disease, with a Phase III study underway.

    Tasigna (nilotinib) is a selective tyrosine-kinase inhibitor that inhibits the BCR-ABL protein produced by the Philadelphia chromosome, which is found in most people who have chronic myeloid leukemia (CML). Novartis has initiated a global clinical trial program to evaluate the potential for Philadelphia chromosome positive (Ph+) CML patients to maintain deep molecular response after stopping nilotinib. ENESTfreedom, ENESTop, ENESTgoal, and ENESTpath will evaluate the feasibility of stopping treatment, and achieving successful treatment free remission in patients with Ph+ CML in the chronic phase and deep molecular response on nilotinib. ENESTfreedom and ENESTop are pivotal trials and have completed enrollment. Six-year results from the ongoing randomized Phase III ENESTnd study demonstrate that Tasigna is superior to Gleevec/Glivec at achieving higher rates of early, deep and sustained molecular responses in newly-diagnosed patients with Philadelphia chromosome-positive chronic myeloid leukemia.

    Ultibro (QVA149, indacaterol and glycopyrronium bromide) is an inhaled fixed-dose combination of the long-acting beta2-adrenergic agonist indacaterol and the long-acting muscarinic antagonist glycopyrronium bromide. In January 2015, Novartis announced positive top-line results from the pivotal Phase III clinical trial programs for QVA149 to support an NDA submission to the FDA for the long-term maintenance treatment of COPD. The results from the Phase III EXPEDITION clinical trial program in moderate-to-severe COPD patients met their primary and secondary endpoints.

    Zykadia (LDK378, ceritinib) is a potent and highly selective oral anaplastic lymphoma kinase (ALK) inhibitor that is in development for ALK positive (ALK+) cancers. Several major studies evaluating treatment with ceritinib are being conducted in more than 300 study centers across more than 30 countries. Two Phase II single-arm clinical trials in previously treated and treatment-naïve ALK+ non-small cell lung cancer (NSCLC) patients are fully enrolled and ongoing. In addition, two Phase III clinical trials comparing ceritinib with chemotherapy in treatment-naïve and in previously-treated NSCLC patients are ongoing and actively recruiting patients worldwide.

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Projects Added To And Subtracted From The Development Table Since 2013

 
Project/Product
  Potential indication/
Disease area
  Change   Reason
ACZ885   Gouty arthritis   Commercialized (EU)
Terminated (US)
  US development discontinued
 
Afinitor/Votubia (RAD001)   HER2+ breast cancer, 1st line   Terminated   Development discontinued
     
    HER2+ breast cancer, 2nd/3rd line   Terminated   Development discontinued
 
AFQ056   Fragile X syndrome   Terminated   Development discontinued
 
Cosentyx (AIN457)   Psoriasis   Commercialized    
     
    Rheumatoid arthritis   Terminated   Development discontinued
     
    Uveitis   Terminated   Development discontinued
 
AUY922   Solid tumors   Terminated   Development discontinued
 
BKM120   Breast cancer   Now disclosed as metastatic breast cancer, hormone receptor-positive, aromatase inhibitor resistant, mTOR inhibitor naïve; and metastatic breast cancer, hormone receptor-positive, aromatase inhibitor and mTOR inhibitor resistant    
 
BYM338   Sarcopenia   Added   Entered Confirmatory Development
 
CJM112   Immune disorders   Added   Entered Confirmatory Development
 
CTL019   Leukemia   Now disclosed as adult and pediatric acute lymphoblastic leukemia    
     
    Diffuse large B-cell lymphoma   Added   Entered Confirmatory Development
 
DEB025   Chronic hepatitis C   Removed   Hepatitis C virus strategy review
 

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Project/Product
  Potential indication/
Disease area
  Change   Reason
EGF816   Solid tumors   Added   Entered Confirmatory Development
 
Exjade film-coated tablet   Iron overload   Added   In registration in US
 
FCR001   Renal transplant   Added   Entered Confirmatory Development
 
Gilenya   Primary progressive multiple sclerosis   Terminated   Development discontinued
 
INC280   Non-small cell lung cancer   Added   Entered Confirmatory Development
 
KAF156   Malaria   Added   Entered Confirmatory Development
 
LBH589   Hematological cancers   Terminated   Development discontinued
 
LCZ696   Hypertension   Removed   Activities for submission on hold
 
LDE225   Medulloblastoma   Removed   No filing planned
     
    Solid tumors   Removed   No filing planned
 
LEE011   Breast cancer   Now disclosed as hormone receptor-positive, HER2 negative advanced breast cancer (postmenopausal women) and hormone receptor-positive, HER2 negative advanced breast cancer (premenopausal women)    
 
LFF571   Clostridium difficile infection   Terminated   Development discontinued
 
LGX818   BRAF mutant melanoma   Terminated   Development discontinued in BRAF mutant melanoma as a single agent
 

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Project/Product
  Potential indication/
Disease area
  Change   Reason
Lucentis   Choroidal neovascularization and macular edema   Now disclosed as choroidal neovascularization and macular edema secondary to conditions other than age-related macular degeneration, diabetic macular edema, retinal vein occlusion and pathologic myopia    
     
    Retinopathy of Prematurity (ROP)   Added   Entered Confirmatory Development
 
OAP030 (Fovista)   Wet age-related macular degeneration   Added   Entered confirmatory development; licensing and commercialization agreement with Ophthotech signed May 2014
 
QAW039   Atopic dermatitis   Added   Entered Confirmatory Development
 
QGE031   Allergic diseases   Now disclosed as asthma    
 
Seebri (NVA237)   Asthma   Terminated   Development discontinued
 
Signifor LAR (SOM230)   Acromegaly   Commercialized    
 
TKI258   Solid tumors   Terminated   Development discontinued
 
Xolair   Chronic idiopathic urticaria/ Chronic spontaneous urticaria   Commercialized    
 

Principal Markets

        The Pharmaceuticals Division sells products in approximately 155 countries worldwide. Net sales are generally concentrated in the US, Europe and Japan, which together accounted for 75% of the division's 2014 net sales. However, sales from expanding "emerging growth markets" have become increasingly important to us. See "Item 5. Operating and Financial Review and Prospects—5.A Operating Results—Factors Affecting Results of Operations—Transformational Changes Fueling Demand—Global Rise in

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Healthcare Spending." The following table sets forth the aggregate 2014 net sales of the Pharmaceuticals Division by region:

 
  2014 Net sales
to
third parties
 
Pharmaceuticals
   
   
 
 
  $ millions
  %
 

Europe

    11,245     35  

United States

    9,772     31  

Asia, Africa, Australasia

    7,655     24  

Canada and Latin America

    3,119     10  

Total

    31,791     100  

 


 

$ millions

 

%

 

Established Markets*

    23,653     74  

Emerging Growth Markets*

    8,138     26  

Total

    31,791     100  

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

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

Production

        The primary goal of our manufacturing and supply chain management program is to ensure the uninterrupted, timely and cost-effective supply of products that meet all product specifications. We manufacture our products at five bulk chemical and 14 pharmaceutical production facilities as well as one biotechnology site. Bulk chemical production involves the manufacture of therapeutically active compounds, mainly by chemical synthesis or by biological processes such as fermentation. Pharmaceutical production involves the manufacture of "galenical" forms of pharmaceutical products such as tablets, capsules, liquids, ampoules, vials and creams. Major bulk chemical sites are located in Schweizerhalle, Switzerland; Grimsby, UK; Ringaskiddy, Ireland and Changshu, China. Significant pharmaceutical production facilities are located in Stein, Switzerland; Wehr, Germany; Singapore; Torre, Italy; Barbera, Spain; Suffern, New York; Sasayama, Japan and in various other locations. We have a biotechnology plant located in Huningue, France, and another biotechnology plant is under development in Morris Plains, New Jersey to manufacture personalized medicine. Our biotechnology site in Basel, Switzerland was closed in 2014, and our biotechnology site in Vacaville, California was transferred to Novartis Animal Health in October 2014. In January 2014, we announced the closing of the production facility located in Suffern, New York. In addition, in 2014 we announced the planned divestment of our pharmaceutical manufacturing site in Taboão da Serra, Brazil.

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

        Raw materials for the manufacturing process are either produced in-house or purchased from a number of third party suppliers. Where possible, we maintain multiple supply sources so that the business

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is not dependent on a single or limited number of suppliers. However, our ability to do so may at times be limited by regulatory or other requirements. We monitor market developments that could have an adverse effect on the supply of essential materials. Our suppliers of raw materials are required to comply with Novartis quality standards.

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

Marketing and Sales

        The Pharmaceuticals Division serves customers with 1,940 field force representatives in the US, and an additional 20,643 in the rest of the world, as of December 31, 2014, including supervisors and administrative personnel. These trained representatives, where permitted by law, present the therapeutic risks and benefits of our products to physicians, pharmacists, hospitals, insurance groups and managed care organizations. We are seeing the increasing influence of customer groups beyond the prescribers, and Novartis is responding by adapting our business practices.

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

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

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

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

Competition

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

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

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Research and Development

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

 
  2014   2013   2012  
 
  $ millions   Core R&D(1)
$ millions
  $ millions   Core R&D(1)
$ millions
  $ millions   Core R&D(1)
$ millions
 

Research and Exploratory Development

    2,724     2,654     2,664     2,611     2,584     2,530  

Confirmatory Development

    4,607     4,343     4,578     4,550     4,334     4,167  

Total

    7,331     6,997     7,242     7,161     6,918     6,697  

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

        Our Pharmaceuticals Division expensed $7.3 billion (on a core basis $7.0 billion) in research and development in 2014. This represented 23% (on a core basis 22%) of the division's total net sales.

        Research and Exploratory Development expenditure was $2.7 billion in 2014, in line with the Research and Exploratory Development expenditure of $2.7 billion in 2013 and the 2012 amount of $2.6 billion.

        Confirmatory Development expenditures in 2014 were $4.6 billion, in line with 2013. This included $289 million in impairments of intangible assets in 2014 (2013: $29 million). On a core basis, Confirmatory Development expenditures decreased to $4.3 billion in 2014 and represented 14% of our Pharmaceuticals Division's net sales.

        Confirmatory Development expenditures in 2013 increased by 6% to $4.6 billion as compared against 2012. This included $29 million in impairments of intangible assets in 2013 (2012: $0.1 billion). On a core basis, Confirmatory Development expenditures increased to $4.6 billion in 2013 (2012: $4.2 billion) and represented 14% of our Pharmaceuticals Division's net sales.

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

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

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Research program

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

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

        In 2003, we established the Novartis Institutes for BioMedical Research (NIBR). At NIBR's headquarters in Cambridge, Massachusetts, more than 1,900 scientists, physicians and business professionals contribute to research into disease areas such as cardiovascular and metabolism disease, neuroscience, oncology, muscle disorders and ophthalmology. Additionally, more than 4,300 scientists, physicians and business professionals contribute to research in Switzerland, Italy, Singapore, China and three other US sites. Research is conducted at these sites in areas including neuroscience, autoimmune diseases, oncology, cardiovascular and metabolism diseases, and gastrointestinal diseases. Research platforms such as the Center for Proteomic Chemistry are headquartered at the NIBR site in Basel, Switzerland. In addition, the Novartis Institute for Tropical Diseases, Novartis Vaccines for Global Health, the Friedrich Miescher Institute, and the Genomics Institute of the Novartis Research Foundation, focus on basic genetic and genomic research as well as research into diseases of the developing world such as malaria, dengue and African sleeping sickness.

        In August 2012, Novartis and the University of Pennsylvania (Penn) announced an exclusive global research and development collaboration to develop and commercialize targeted chimeric antigen receptor (CAR) immunotherapies for the treatment of cancers. The research component of this collaboration focuses on accelerating the discovery and development of additional therapies using CAR immunotherapy. In September, as part of its alliance with Novartis, Penn announced plans for the construction of a Center for Advanced Cellular Therapeutics (CACT) on the Penn Medical School campus in Philadelphia. The CACT is planned to be a first of its kind research and development center established specifically to develop and manufacture adoptive T cell immunotherapies under the research collaboration guided by scientists and clinicians from NIBR and Penn. Construction of the CACT is expected to be completed in 2016.

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

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

        In November 2013, we took action to co-locate scientific resources in order to improve the efficiency and effectiveness of our global research organization. We announced that we will establish a respiratory research group at our site in Cambridge, Massachusetts, and a proposal to close the Horsham, UK research site, as well as a plan to exit research in topical applications for dermatology and exit from the Vienna, Austria research site. After the consultation period with local works councils in the UK and Austria, these proposals were confirmed and both sites were closed in 2014. In addition, we announced the consolidation of US-based oncology research from Emeryville, California to Cambridge, Massachusetts and the closing of the biotherapeutics development unit in La Jolla, California.

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        In February 2014 we acquired CoStim Pharmaceuticals Inc., a Cambridge, Massachusetts-based, privately held biotechnology company focused on harnessing the immune system to eliminate immune-blocking signals from cancer. This acquisition enhanced our late discovery stage immunotherapy programs directed to several targets, including PD-1.

Development program

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

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

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

Cell and Gene Therapies Unit

        Novartis Pharmaceuticals has created a dedicated unit focused on the development and commercialization of Cell and Gene Therapies. The Cell and Gene Therapies Unit aims to develop a new approach to treating or potentially curing some patients suffering from a variety of life-threatening diseases, including blood-borne cancers, sickle cell disease, thalassemias and other diseases of the blood by replacing, repopulating or resetting the immune system. The unit will initially focus on novel cell therapies and cell-based gene therapies including: Chimeric Antigen Receptor Technology (CART) in immuno-oncotherapy with CTL019, Facilitated Cell Therapy Platform (FCRx) in renal transplantation with FCR001 and stem cell expansion and transplantation with HSC835.

Diagnostics

        Recent advances in biology and bioinformatics have led to a much deeper understanding of the underlying genetic drivers of disease and the molecular pathways cancer uses to progress. Novartis is developing new therapies that specifically target the mechanisms responsible for disease. To support these advances, Novartis is developing innovative diagnostic tests that could potentially improve physicians' ability to administer the appropriate treatment to those patients who have the greatest potential to benefit from them. Our Pharmaceuticals Division has two units that support our commitment to advancing precision medicine.

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    Companion Diagnostics

        Our Companion Diagnostics (CDx) function works as an integrated part of the drug development process. CDx brings internal capabilities and resources to bear in the development of new diagnostic tests to support our global program teams and efforts in various disease areas. Additionally, the CDx team forms strategic collaborations with third parties to secure access to technologies and capabilities that fit the requirements of our drug development programs. The CDx unit develops tests to meet high regulatory standards for the approval of companion diagnostics around the world.

    Genoptix Medical Laboratory

        In 2011, Novartis acquired Genoptix Medical Laboratory, located in Carlsbad, California. This organization provides comprehensive diagnostics and informatics services to community-based hematologists and oncologists in the US. As one of the largest hematopathology centers in the US, Genoptix offers comprehensive testing solutions in hematology and solid tumor molecular profiling. Their mission is to create value for the patient and the healthcare system by transforming diagnostic information into actionable clinical insights. Genoptix also provides services to support Novartis and third-party clinical trials.

Alliances and acquisitions

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

Regulation

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

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

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

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

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

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

United States

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

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

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

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

European Union

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

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        Under the Centralized Procedure, applications are made to the EMA for an authorization which is valid for the European Community. The Centralized Procedure is mandatory for all biotechnology products and for new chemical entities in cancer, neurodegenerative disorders, diabetes and AIDS, autoimmune diseases or other immune dysfunctions and optional for other new chemical entities or innovative medicinal products or in the interest of public health. When a pharmaceutical company has gathered data which it believes sufficiently demonstrates a drug's quality, safety and efficacy, then the company may submit an application to the EMA. The EMA then receives and validates the application, and appoints a Rapporteur and Co-Rapporteur to review it. The entire review cycle must be completed within 210 days, although there is a "clock stop" at day 120, to allow the company to respond to questions set forth in the Rapporteur and Co-Rapporteur's Assessment Report. When the company's complete response is received by the EMA, the clock restarts on day 121. If there are further aspects of the dossier requiring clarification, the EMA will then request an Oral Explanation on day 180, in which the sponsor must appear before the CHMP to provide the requested additional information. On day 210, the CHMP will then take a vote to recommend the approval or non-approval of the application. The final decision under this Centralized Procedure is an EU Community decision which is applicable to all Member States. This decision occurs on average 60 days after a positive CHMP recommendation.

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

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

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

Japan

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

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manufacturing and distribution business license for the type of drug concerned and confirmation that the product has been manufactured in a plant compliant with Good Manufacturing Practices.

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

Price Controls

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

    Direct efforts to control prices

            United States.     In the US, as a result of the Patient Protection and Affordable Care Act (ACA) and the recurring focus on deficit reduction, there is a significant risk of continued actions to control prices. Specifically, one proposal that has been repeatedly advanced would impose a government-mandated pricing formula on both patented and generic medications provided through the Medicare prescription drug benefit (Medicare Part D). In addition, the ACA mandated the creation of a new entity, the Independent Payment Advisory Board, which has been granted unprecedented authority to implement broad actions to reduce future costs of the Medicare program. This could include required prescription drug discounts or rebates, which could limit net prices for our products. There is a risk that government officials will continue to search for ways to reduce or control prices.

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

            Japan.     In Japan, the government generally introduces price cuts every other year, and the government additionally mandates price decreases for specific products. In 2014, the National Health Insurance price calculation method for new products and the price revision rule for existing products were reviewed, and the resulting new drug tariffs became effective beginning April 2014. The Japanese government is currently undertaking a healthcare reform initiative with a goal of sustaining the universal coverage of the National Health Insurance program, and is addressing the efficient use of drugs, including promotion of generic use. Meanwhile, the government tentatively initiated a premium system which basically maintains the price of patented drugs for unmet medical needs in order to promote innovative new drug creation and the solution of the unapproved indication issue. The continuance of this system will be reviewed as a part of price reforms in 2016.

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

    Regulations favoring generics

            In response to rising healthcare costs, many governments and private medical care providers, such as Health Maintenance Organizations, have instituted reimbursement schemes that favor the substitution of generic pharmaceuticals for more expensive brand-name pharmaceuticals. In the US, generic substitution statutes have been enacted by virtually all states and permit or require the dispensing pharmacist to substitute a less expensive generic drug instead of an original patented drug. Other countries have similar laws, including numerous European countries. We expect that the pressure for generic substitution will continue to increase.

    Cross-Border Sales

            Price controls in one country can also have an impact in other countries as a result of cross-border sales. In the EU, products which we have sold to customers in countries with stringent price controls can in some instances legally be re-sold to customers in other EU countries with less stringent price controls at a lower price than the price at which the product is otherwise available in the importing country. In North America, products which we have sold to customers in Canada, which has relatively stringent price controls, are sometimes re-sold into the US, again at a lower price than the price at which the product is otherwise sold in the US. Such imports from Canada and other countries into the US are currently illegal.

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

Intellectual Property

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

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

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United States

    Patents

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

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

    Data and Market Exclusivity

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

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

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

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

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

European Community

    Patents

        Patent applications in Europe may be filed in the European Patent Office (EPO) or in a particular country in Europe. The EPO system permits a single application to be granted for the whole of the EU, plus other non-EU countries, such as Switzerland and Turkey. A patent granted by the EPO or a European country office will expire no later than 21 years from the earliest patent application on which the patent is based. Pharmaceutical patents can also be granted a further period of exclusivity under the Supplementary Protection Certificate (SPC) system. SPCs are designed to compensate the owner of the patent for the time it took to receive marketing authorization by the European Health Authorities. An SPC may be granted to provide, in combination with the patent, up to 15 years of exclusivity from the date

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of the first European marketing authorization. But the SPC cannot last longer than 5 years. The SPC duration can additionally be extended by a further 6 months if the product is the subject of an agreed pediatric investigation plan. The post-grant phase of patents, including the SPC system, is currently administered on a country-by-country basis under national laws which, while differing, are intended to, but do not always, have the same effect.

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

    Data and Market Exclusivity

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

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

Japan

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

        The following are additional details regarding the patent expiration dates and exclusivity for certain key products of our Pharmaceuticals Division:

Oncology

    Gleevec/Glivec.  We have patent protection on imatinib, the active ingredient in Gleevec/Glivec, until July 2015 in the US and until 2016 in the major European countries. The patent on the active ingredient expired in 2014 for the main indications in Japan. Additional patents were granted in

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    more than 40 countries, including the US, Japan, France, Germany, UK, Italy and Spain, claiming innovative features of Gleevec/Glivec, including the crystal form (expiry 2018), tablet formulation (expiry 2023) and process (expiry 2023). Patent protection on the crystal form of imatinib was challenged in the US by generics manufacturers, but no challenge has been made to the compound patent in the US. In March 2014, litigation in the US against one such generic manufacturer was settled, which will allow that generic manufacturer to enter the US market on February 1, 2016. Gleevec/Glivec currently faces generic competition in a number of countries including Brazil, Canada, China, India, Russia, Turkey and for a minor indication in Japan. Litigation is also ongoing in Canada, Portugal, UK, South Korea and Mexico.

    Sandostatin.  Patent protection for octreotide acetate, the active ingredient in Sandostatin, has expired. Generic versions of Sandostatin SC are available in the US and elsewhere. A series of US patents protect Sandostatin LAR, the long acting version of Sandostatin which represents a majority of our Sandostatin US sales. Some of these US patents have already expired, and the last of these US patents is expected to expire in 2017. Patents protecting the Sandostatin LAR formulation in key markets outside the US have expired.

    Afinitor and Afinitor Disperz/Votubia and Zortress/Certican. Everolimus, the active ingredient in these products is also licensed to Abbott and sublicensed to Boston Scientific for use in drug-eluting stents. Patent protection on everolimus (including the compound patent) has been challenged in the US.

    Exjade.  In the US and Canada, generic companies have challenged the compound patent for the active ingredient in Exjade. In the US, an automatic stay preventing the FDA from approving a generic version of Exjade expired in August 2014. Novartis settled one action against a generic company in the US in March 2014. Another action against a different generic manufacturer remains pending, with the automatic stay in this case expiring in November 2016. It is possible that the generic company may launch its generic version of Exjade after the automatic stay expires, or if we lose our patent litigation suit against it.

    Femara.  Generic versions of Femara are available now in all major markets with the exception of Japan.

    Jakavi.  Novartis licensed ruxolitinib from Incyte Corporation for development and commercialization outside the US.

Cardio-Metabolic

    Galvus and Eucreas. Patent protection for vildagliptin, the active ingredient of Galvus, and the patented active ingredient in Eucreas, is estimated to expire, with extensions, in 2022 in Europe and 2024 in Japan.

Immunology and Dermatology

    Xolair.  Potential biosimilar competitors have initiated biosimilarity trials in China. No biosimilarity trials have been initiated in highly-regulated markets such as the US, Europe and Japan.

    Myfortic.  In the US, four patent litigations have been settled and a generic version of Myfortic is currently available. Generic manufacturers are seeking approval for generic versions of Myfortic in some European countries.

    Cosentyx.  Patent protection for the active ingredient in Cosentyx is expected to expire in 2028 in the US, 2030 in Europe and 2029 in Japan.

Retina

    Lucentis.  Novartis licensed Lucentis from Genentech for development and commercialization outside the US.

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Respiratory

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

    TOBI Podhaler.  There is no patent protection for the active ingredient, tobramycin. Patents covering the commercial product will expire from 2018 to 2022 in the US and Europe. Additional patent applications are also pending with respect to the commercial product in the US and Europe, potentially providing protection until 2025. In addition, in Europe, TOBI Podhaler is entitled to orphan drug status until 2023 for the current approved indication. Regulatory data protection in the US expires in 2016.

Neuroscience

    Gilenya.  Patent protection for fingolimod, the active ingredient in Gilenya (licensed from Mitsubishi Tanabe Pharma Corporation), is expected to expire in 2019 in the US (including a 5-year patent term extension), and in 2018 in Europe and Japan (including a 5-year patent term extension). In Europe and Japan, we have regulatory exclusivity for the data generated for approval of Gilenya until 2021, which could possibly be extended by one year in Europe. A patent for the commercial formulation of Gilenya has been granted in most major markets (including Australia and Russia, where there is no compound patent). This patent will expire in 2024 in most countries, including Europe and Japan, and in 2026 in the US. Patent protection on fingolimod (including on the compound patent) has been challenged in the US.

    Exelon.  Patent protection on rivastigmine, the active ingredient in Exelon, has expired and Exelon capsules are subject to generic competition in major markets, including the US and all of Europe. We hold additional patents with respect to Exelon Patch. Four generic manufacturers have filed applications to market generic versions of Exelon Patch in the US, and have challenged the patents covering the Exelon Patch. We have filed infringement lawsuits against all of these manufacturers. Generic versions of Exelon Patch are on the market in several European countries. We are taking steps to enforce patents and trademarks protecting Exelon Patch against the manufacturers and distributors of patches which have challenged our intellectual property rights.

    Stalevo.  Patent litigation by Orion in the US against generic manufacturers settled and generic versions of Stalevo were launched in the US. Novartis was not a party to the US litigation. Generic manufacturers are seeking approval for generic versions of Stalevo in some European countries, and have launched in Germany.

Established Medicines

    Cubicin.  RDP in the EU for Cubicin expires in 2016. However, generic competitors may only submit for EU approval after 2016, and it may take additional time to obtain marketing authorization.

    Diovan/Co-Diovan/Diovan HCT.  In the EU, Diovan and Co-Diovan have faced generic competition since 2011, following expiration of the patent on valsartan. In the US, the valsartan patent expired in September 2012 and Diovan HCT has faced generic competition since then. Generic versions of Diovan monotherapy were launched in the US in May 2014. Patent protection expired in Japan in 2013 for Diovan and will expire in 2016 for Co-Diovan (including patent term extensions).

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    Exforge/Exforge HCT.  Patents covering Exforge (the combination of amlodipine besylate and valsartan) will expire in 2019 in the US and 2021 (including patent term extension) in Europe, and have been challenged in both the US and Europe. Since 2014, the product has faced generic competition in the US. We have regulatory data protection for Exforge in Europe until 2017, however, generic manufacturers may attempt to circumvent this regulatory exclusivity and seek to gain approval of a combination valsartan-amlodipine product in Europe before 2017. The patent covering Exforge HCT (the combination of amlodipine besylate, hydrochlorothiazide and valsartan) will expire in 2023 and has been challenged in the US and Europe.

    Ritalin LA/Focalin XR.  Several generic manufacturers have filed applications to market generic versions of Ritalin LA and Focalin XR in the US. Litigation against several generic manufacturers was initiated in the US but has since been settled. Generic versions of certain strengths of Ritalin LA and Focalin XR are now available in the US.

Compounds in Development

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

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

    LBH589. Patent protection for panobinostat, a pan HDAC (histone deacetylase) inhibitor is expected to expire in 2026 in the US, Europe and Japan.

    LCZ696. Compound patent protection for the individual components, namely sacubitril and valsartan, has expired. Patents covering the combination of valsartan and sacubitril, as well as the LCZ696 salt complex, have been granted and expire in 2023 and 2026 (2027 in the US), respectively, without extensions. LCZ696 is entitled to post-approval regulatory exclusivity for five years in the US, 10 years in Europe and 8 years in Japan. We currently estimate that loss of exclusivity will occur in 2027 in the US, 2026 in the EU and 2030 in Japan.

    LDE225. Patent protection for sonidegib, a smoothened inhibitor of the Hedgehog pathway, is expected to expire in 2029 in the US and 2027 in Europe, excluding extensions.

    RLX030. Patent protection for the serelaxin molecule (human relaxin-2) has expired and the patents covering the formulation and process will expire prior to the product's projected launch date. A patent covering the method of using serelaxin to treat acute heart failure has been granted in the US and expires in 2029. This use patent is now under examination worldwide in markets that

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    permit use patents. Serelaxin is entitled to post-approval regulatory exclusivity for 12 years in the US, 11 years in Europe and eight years in Japan.

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

ALCON

        Our Alcon Division is a leader in the research, development, manufacturing and marketing of eye care products worldwide. As of December 31, 2014, the Alcon Division employed 23,900 full-time equivalent associates worldwide in 75 countries. In 2014, the Alcon Division had consolidated net sales of $10.8 billion representing 19% of total Group net sales.

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

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

        In July 2014, Alcon entered into an agreement with Google [x] to license its "smart lens" technology with the potential to address ocular conditions. In October 2014, Alcon acquired WaveTec Vision. The acquisition provided Alcon with the ORA System, the first commercialized intra-operative guidance system for cataract surgeons implanting intraocular lenses (IOLs). Alcon plans to integrate the ORA System into its existing Cataract Refractive Suite by Alcon.

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

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

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

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Alcon Division Products

Surgical

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

        Alcon's Surgical portfolio includes the Cataract Refractive Suite by Alcon, a suite of equipment to help plan and perform some of the most challenging steps of cataract surgery with automation and precision. It is comprised of the Centurion vision system phacoemulsification technology platform; the LenSx laser, a femtosecond laser for increased precision and reproducibility for the corneal incision, capsulorhexis and lens fragmentation steps of the procedure; the Verion image guided system, an ocular surgical planning, imaging and guidance technology; the ORA System, an intra-operative guidance system for IOL implantation during cataract surgery; and the LuxOR LX3 surgical microscope for greater visualization during surgery. The portfolio also includes the Infiniti vision system to perform cataract surgeries, which is the phacoemulsification platform introduced prior to the Centurion vision system, the Constellation vision system for retinal operations, and the WaveLight refractive suite for refractive procedures and Lasik treatments. Alcon also offers the AcrySof family of intraocular lenses (IOLs) to treat cataracts, including the AcrySof IQ, AcrySof IQ ReSTOR, AcrySof IQ Toric and AcrySof IQ ReSTOR Toric IOLs. In addition, Alcon provides advanced viscoelastics, surgical solutions, surgical packs and other disposable products for cataract and vitreoretinal surgery.

Ophthalmic Pharmaceuticals

        Our Alcon Division's Ophthalmic Pharmaceuticals franchise develops and markets a broad range of pharmaceuticals to treat chronic and acute conditions of the eye including glaucoma, elevated intraocular pressure (associated with glaucoma), eye infection and inflammation, eye allergies, dry eye and retinal diseases. Ophthalmic Pharmaceuticals also oversees the line of professionally driven over-the-counter brands that include artificial tears and ocular vitamins. Product highlights within the Ophthalmic Pharmaceuticals portfolio include Ilevro ophthalmic suspension for the treatment of pain and inflammation associated with cataract surgery; Simbrinza suspension to lower intraocular pressure as a fixed-dose combination; Travatan Z, Izba and DuoTrav, each ophthalmic solutions for the treatment of elevated intraocular pressure associated with open-angle glaucoma or ocular hypertension; Vigamox ophthalmic solution for bacterial conjunctivitis; Pataday ophthalmic solution for ocular itching associated with allergic conjunctivitis; Nevanac ophthalmic suspension for eye pain and inflammation following cataract surgery, and to reduce the risk of macular edema associated with cataract surgery in diabetic patients; the Systane family of over-the-counter products for dry eye relief; and Jetrea intravitreal injection for treating vitreomacular traction, including when associated with macular hole of diameter less than or equal to 400 microns.

Vision Care

        Our Alcon Division's Vision Care franchise develops and markets contact lenses and lens care products. Alcon's broad portfolio of silicone hydrogel, daily disposables and color contact lenses includes our Air Optix, Dailies and Freshlook brands. Our Dailies product line includes Dailies Total1 lenses, a first-of-its-kind water gradient contact lens. Our Air Optix product line now includes the new Air Optix Colors silicone hydrogel contact lenses. Our contact lens care solutions business includes the Opti-Free line of multi-purpose disinfecting solutions and drops, as well as the Clear Care and AOSept Plus hydrogen peroxide lens care solutions.

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New Products

        Alcon launched a number of significant products in 2014, and also received a number of key approvals, including:

    27+ vitrectomy packs for use during micro-incision vitrectomy surgery were launched globally.

    AcrySof ReSTOR 2.5D intraocular lens for distance vision correction during cataract surgery approved in Japan.

    AcrySof IQ ReSTOR Toric 3.0D intraocular lens: multifocal lens with astigmatism correction during cataract surgery approved in Japan.

    AOSept Plus/Clear Care Plus with HydraGlyde lens care solution was approved and launched in the EU.

    Air Optix Colors contact lenses: silicone hydrogel, color cosmetic monthly contact lenses received approval and was launched in the US and EU.

    Centurion vision system: phacoemulsification surgical platform for cataract surgery was approved in Japan.

    Dailies AquaComfort Plus toric lenses: daily disposable contact lenses for improving refractive errors, such as astigmatism, was launched in the US and select EU countries.

    Dailies AquaComfort Plus multifocal lenses: daily disposable contact lenses for improving refractive errors, such as presbyopia, was launched in the US and select EU countries.

    Dailies Total1 daily disposable, water gradient contact lenses launched in Australia, Hong Kong and Japan.

    DuoTrav (travoprost/timolol) solution was approved and launched in China for the treatment of elevated intraocular pressure associated with open-angle glaucoma or ocular hypertension.

    Finesse flex loop: new Grieshaber instrument was launched globally for use during vitreoretinal surgical procedures.

    Izba (travoprost 0.003%) solution received US and EU approvals for the treatment of elevated intraocular pressure associated with open-angle glaucoma or ocular hypertension, and was launched in Denmark, Sweden, Romania, Finland and Norway.

    LenSx Laser was approved in Japan for use during cataract surgery.

    LuxOR LX3 microscope system was approved in the US and EU for use during surgical procedures.

    Opti-Free Pro rewetting drops and lubricant eye drops received approval and was launched in select EU markets.

    Simbrinza (brinzolamide, 1.0%/brimonidine tartrate 0.2%) suspension received EU approval for the treatment of elevated intraocular pressure associated with glaucoma, was launched in the UK, Denmark and the Netherlands.

    Travatan (40µg/mL travoprost) eye drops solution, receives EU approval for the decrease in elevated intraocular pressure in pediatric patients, aged two months to less than 18 years, with ocular hypertension or pediatric glaucoma

    UltraVit 7500 vitrectomy probes was launched globally for the use during vitreoretinal surgical procedures.

    Verion surgical planning system was approved in Japan, and was launched in the US and EU for use during cataract surgery.

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Key Marketed Products

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

Surgical

Cataract

  AcrySof family of intraocular lenses includes but is not limited to: AcrySof IQ ReSTOR, AcrySof IQ Toric and AcrySof IQ ReSTOR Toric advanced technology intraocular lenses that correct cataracts and distance vision with presbyopia and/or astigmatism
Cataract Refractive Suite by Alcon designed to streamline the cataract surgical procedure through surgical planning and execution
Centurion vision system intelligent phacoemulsification technology platform with cataract removal capabilities
Infiniti vision system with the OZil torsional hand piece for cataract procedures
LenSx laser used for specific steps in the cataract surgical procedure
LuxOR microscope used for ophthalmic surgical procedures
ORA System intra-operative guidance system for intraocular lens implant during cataract surgery
Verion imaged-guided system for use during cataract surgery

Vitreoretinal

 

Constellation vision system for vitreoretinal operations
Ultravit vitrectomy probes
23+, 25+ and 27+ vitrectomy packs
Purepoint laser system and probes
Finesse flex loop
Grieshaber surgical instruments
Edgeplus blade trocar cannula system
Ispan gas, Perfluron, Silkon oil: Retina stabilizing adjuncts

Refractive

 

Allegretto Wave Eye-Q excimer laser for LASIK vision correction
WaveLight FS200 laser for specific steps in LASIK surgical procedures
WaveLight EX500 laser for LASIK vision correction

Glaucoma

 

Ex-press glaucoma filtration device

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

Ophthalmic Pharmaceuticals

Glaucoma

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

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Anti-Infectives

 

Vigamox and Moxeza ophthalmic solution for treatment of bacterial conjunctivitis

Anti-Inflammation

 

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

Dry Eye

 

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

Allergy

 

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

Ear Infections

 

Ciprodex* otic suspension to treat middle and outer ear infections

Ocular Nutrition

 

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

Retinal

 

Jetrea (ocriplasmin) intravitreal injection for the treatment of vitreomacular traction, including macular hole
Triesence suspension for visualization during vitrectomy


*
Ciprodex is a registered trademark of Bayer Intellectual Property GmbH.

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Vision Care

Contact Lenses

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

Contact Lens Care

 

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

Selected Development Projects

Surgical

Project/Product
  Mechanism of
action
  Potential indication   Planned submission
date/Current Phase
AcrySof IQ ReSTOR 2.5D IOL   Multifocal aspheric intraocular lens   Cataractous lens replacement with or without presbyopia   Submitted US
AcrySof IQ ReSTOR Toric 2.5D IOL   Multifocal, aspheric and cylinder correcting intraocular lens   Cataractous lens replacement with or without presbyopia, and with astigmatism   2015 US/Advanced development Submitted Japan
AcrySof IQ ReSTOR Toric 3.0D IOL   Multifocal, aspheric and cylinder correcting intraocular lens   Cataractous lens replacement with or without presbyopia, and with astigmatism   Submitted US
AcrySof IQ ReSTOR Toric 3.0D diopter range expansion IOL   Multifocal, aspheric and cylinder correcting intraocular lens   Cataractous lens replacement with or without presbyopia, and with astigmatism   2016 US and Japan/Advanced development

Ophthalmic Pharmaceuticals

Project/Product*
  Mechanism of
action
  Potential indication   Route of
Administration
  Planned submission
date/Current Phase
EXE844b (finafloxacin)   Anti-infective   Otitis media-tympanostomy tube surgery   Topical   2016 US/III
EXZ829 (olopatadine hydrochloride)   Antihistamine and mast cell stabilization   Allergic conjunctivitis   Topical   Submitted US
RTH258   Anti-VEGF single-chain antibody fragment   Wet age-related macular degeneration   Intravitreal injection   ³ 2017/III

*
EXE044 was approved by the FDA in 2014 as Xtoro (finafloxacin otic suspension, 0.3%). However, we do not plan to commercialize this product.

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Vision Care

Project/Product*
  Mechanism of
action
  Potential indication   Planned submission
date/Current Phase
AOSept Plus/Clear Care Plus with HydraGlyde   Disinfection and cleaning   Contact lens care   Submitted US
2016 Japan/
Advanced development

*
Development of CLM041 was discontinued in 2014. LCE293 is now disclosed as AOSept Plus/Clear Care Plus with HydraGlyde.

Principal Markets

        The principal markets for our Alcon Division include the US, Canada and Latin America, Japan and Europe. The following table sets forth the aggregate 2014 net sales of the Alcon Division by region:

Alcon Division
  2014 Net
Sales to
third parties
 
 
  $ millions
  %
 

Europe

    2,872     27  

United States

    4,349     40  

Asia, Africa, Australasia

    2,449     23  

Canada and Latin America

    1,157     10  

Total

    10,827     100  

 


 

$ millions

 

%

 

Established Markets*

    8,049     74  

Emerging Growth Markets*

    2,778     26  

Total

    10,827     100  

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

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

Research and Development

        In 2014, our Alcon Division expensed $0.9 billion (on a core basis $0.9 billion) in research and development, which amounted to 9% of the Division's net sales. The Alcon Division expensed $1.0 billion (on a core basis $0.9 billion) and $1.0 billion (on a core basis $1.0 billion) in research and development in 2013 and 2012, respectively.

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

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

        Research and development activities for Alcon's Surgical franchise are focused on expanding intraocular lens capabilities to improve refractive outcomes and on developing instruments for cataract, vitreoretinal and corneal refractive surgeries. The focus for the Vision Care franchise is on the research and development of new lens materials, coatings and designs to improve patient comfort, and on lens care solutions that provide the safety, disinfecting and cleaning power needed to help maintain ocular health. As announced in 2014, Alcon is also collaborating with Google [x], and has licensed its smart lens technology for ocular medical uses, including the potential to monitor glucose levels in diabetic patients and provide an accommodative contact lens/intraocular lens for patients living with presbyopia. The Ophthalmic Pharmaceuticals franchise is focused on the development of products for the treatment of retinal diseases, glaucoma (intraocular pressure lowering) and ocular allergy.

Production

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

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

        The manufacture of our products is complex and heavily regulated, which means that supply is never guaranteed. Like our competitors, our Alcon Division has faced manufacturing issues and has received Warning Letters relating to such manufacturing issues. In particular, in December 2012, Alcon received an FDA Warning Letter following an inspection at the LenSx laser manufacturing site in Aliso Viejo, California. Alcon responded in writing to the FDA, and in February 2013, FDA responded to Alcon acknowledging that the corrective actions described in Alcon's written response appear to address the items identified in the Warning Letter. The Warning Letter was lifted in May 2014 after all corrective actions were completed. The items noted in the Warning Letter did not affect the safety or effectiveness of the LenSx laser, or impact Alcon's ability to sell the product. If we or our third-party suppliers fail to comply fully with regulations then there could be a product recall or other shutdown or disruption of our production activities. We have implemented a global manufacturing strategy to maximize business continuity in case of such events or other unforeseen catastrophic events. However, there can be no guarantee that we will be able to successfully manage such issues when they arise.

Marketing and Sales

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

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

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

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

Competition

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

Regulation

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

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

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

Intellectual Property

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

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

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

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

SANDOZ

        Our Sandoz Division is a leader in developing, manufacturing and marketing generic pharmaceutical products, follow-on biopharmaceutical products known as biosimilars, and drug substances that are not protected by valid and enforceable third-party patents. As of December 31, 2014, affiliates of the Sandoz Division employed 26,423 full-time equivalent associates worldwide, and sold products in more than 160 countries. In 2014, the Sandoz Division achieved consolidated net sales of $9.6 billion, representing 16% of the Group's total net sales.

        Sandoz is organized globally in three franchises: Retail Generics, Anti-Infectives, and Biopharmaceuticals & Oncology Injectables. In Retail Generics, Sandoz develops, manufactures and markets active ingredients and finished dosage forms of pharmaceuticals to third parties. Retail Generics includes the specialty areas of Dermatology, Respiratory and Ophthalmics, as well as cardiovascular, metabolism, central nervous system, pain, gastrointestinal, and hormonal therapies.

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        In Anti-Infectives, Sandoz manufactures active pharmaceutical ingredients and intermediates—mainly antibiotics—for internal use by Retail Generics and for sale to third-party customers. In Biopharmaceuticals, Sandoz develops, manufactures and markets protein- or other biotechnology-based products (known as biosimilars or follow-on biologics) and provides biotechnology manufacturing services to other companies, and in Oncology Injectables, Sandoz develops, manufactures and markets cytotoxic products for the hospital market.

        Sandoz has three strategic priorities: to differentiate Sandoz based on its extensive global reach and advanced technical expertise in the development, manufacturing and marketing of differentiated generics, including medicines that are difficult to develop and manufacture, and biosimilars, to be first-to-market as originators' substance patents expire or become unenforceable, and to be cost competitive by leveraging economies of scale in production and development. Sandoz differentiated products are comprised of biosimilars and generic injectables, ophthalmics, dermatologics, and respiratory, as well as difficult-to-make oral solids (such as tacrolimus).

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

        In 2014, Sandoz launched 28 new products in the US including authorized generic versions of our Pharmaceuticals Division products Diovan (valsartan), Focalin XR (dexmethylphenidate ER) and TOBI (tobramycin inhalation solution, USP); as well as cyclophosphamide injection, USP; calcipotriene and betamethasone dipropionate ointment (Taclonex®, Leo Pharma); adapalene gel (Differin®, Galderma Laboratories); lansoprazole capsules, amoxicillin capsules, USP, and clarithromycin tablets, USP (PREVPAC®, Takeda Pharmaceuticals); the injectable decitabine (Dacogen®, Eisai), and Kerydin™ (tavaborole) topical solution, 5% after obtaining exclusive rights from Anacor Pharmaceuticals to commercialize it in the US through Sandoz's branded dermatology business, PharmaDerm. Furthermore, Sandoz reached an agreement with Upsher-Smith to obtain exclusive US distribution rights for its branded potassium chloride product line, Klor-Con®.

        Key product launches in various European countries include AirFluSal Forspiro, a respiratory product that offers the proven combination of salmeterol (a long-acting inhaled beta2-agonist) and fluticasone propionate (an inhaled corticosteroid) for asthma and chronic obstructive pulmonary disease patients in an innovative inhalation device, Vitaros (alprostadil), an innovative topical therapy for erectile dysfunction, escitalopram (Cipralex®, Lundbeck), and mometasone (the first generic version of Nasonex®, Merck Sharp & Dohme), which was launched in additional European countries in 2014 following launches in several European countries in 2013.

        In Biopharmaceuticals, Sandoz continued to strengthen its global leadership in biosimilars, and to drive its contract manufacturing base business. Sandoz biosimilars are sold in over 60 countries. In addition, all three Sandoz biosimilar products continue to occupy the number one biosimilar position in terms of market share in their respective markets. According to IMS data, Sandoz' recombinant growth hormone Omnitrope was the fastest growing hGH treatment globally by volume. Omnitrope, which is now marketed in over 40 countries, was also among Sandoz's top three products in terms of sales. In 2014, Sandoz continued to roll out SurePal, an innovative device that provides patients with a simple and secure way to inject Omnitrope.

        Anemia medicine Binocrit continued to demonstrate strong growth in several European countries as a short-acting erythropoietin stimulating agent (ESA). It is the leading biosimilar in its category by volume across Europe (short-acting only). Sandoz G-CSF biosimilar, Zarzio, continued to strengthen its leading

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position as the number one filgrastim product in Europe by volume, ahead of Amgen's Neupogen® and Chugai's Granocyte®.

        Sandoz continued to make significant progress on its biosimilar pipeline in 2014 and now has six molecules in Phase III clinical trials or registration. In 2014, Sandoz completed Phase III trials for biosimilar pegfilgrastim (Neulasta®, Amgen) for global registration, and completed patient enrollment in its Phase III clinical trial for biosimilar entanercept (Enbrel®, Amgen).

        In addition, in 2014, Sandoz made significant progress with respect to biosimilar filgrastim (Neupogen®, Amgen). Sandoz received marketing authorization for the product in Japan. In the US, Sandoz completed Phase III trials, and the FDA accepted Sandoz's BLA for filgrastim, which was filed under the biosimilar pathway of the BLA. Sandoz is the first company to announce it has filed for approval of a biologic under the biosimilars pathway created in the Biologics Price Competition and Innovation Act of 2009. Subsequently, in January 2015, the FDA Oncologic Drugs Advisory Committee recommended approval of Sandoz's filgrastim for use in all indications in the reference product's label.

        In December 2013, Sandoz received Danish marketing authorization for AirFluSal Forspiro. This was Sandoz's first European approval for this product and followed the completion of EU decentralized procedures (DCP) for eight EU countries. Since then, AirFluSal Forspiro has received marketing authorizations in a total of 15 European countries, as well as South Korea and Mexico, and been launched in four European countries and South Korea. These approvals and launches of AirFluSal Forspiro are a key element of Sandoz's strategy to introduce differentiated generic medicines and innovative products.

        In 2014, Sandoz continued to accelerate its efforts across Sub-Saharan Africa, supported by a strong product portfolio that comprises anti-infectives, tuberculosis treatments, maternal and child health products, and medicines to address non-communicable diseases. In 2014, Sandoz established branch offices in Cameroon, Kenya and Zambia.

New Products

        Sandoz launched a number of important products in various countries in 2014, including:

    Valsartan (Diovan)

    Cyclophosphamide injection, USP

    AirFluSal Forspiro

    Kerydin (tavaborole) topical solution, 5%

    Vitaros (alprostadil)

    Dexmethylphenidate ER (Focalin XR)

    Tobramycin inhalation solution, USP (TOBI)

    Calcipotriene and betamethasone dipropionate ointment, (Taclonex®, Leo Pharma)

    Adapalene gel (Differin®, Galderma Laboratories)

    Lansoprazole capsules, amoxicillin capsules, USP, and clarithromycin tablets, USP (PREVPAC®, Takeda Pharmaceuticals)

    Decitabine (Dacogen®, Eisai)

    Escitalopram (Cipralex®, Lundbeck)

    Mometasone (Nasonex®, Merck Sharp & Dohme)

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Key Marketed Products

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

Retail Generics

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

Anti-Infectives

Active Ingredients
  Description

Oral and sterile penicillins

  Anti-infectives

Oral and sterile cephalosporins

  Anti-infectives

Clavulanic acid and mixtures with clavulanic acid

  ß-lactam inhibitors

Classical and semisynthetic erythromycins

  Anti-infectives

 

Intermediates
  Description

Various cephalosporin intermediates

  Anti-infectives

Erythromycin base

  Anti-infectives

Various crude compounds produced by fermentation

  Cyclosporine, ascomysine, rapamycine, mycophenolic acid, etc.

Biopharmaceuticals

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

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Oncology Injectables

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

Biosimilars in Phase III Development and Registration

        The following table describes Sandoz's biosimilar projects that are in Phase III clinical trials and registration:

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

EP2006

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

GP2013

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

GP2015

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

GP2017

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

HX575*

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

HX575 s.c.**

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

LA-EP2006

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

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

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Principal Markets

        The two largest generics markets in the world—the US and Europe—are the principal markets for Sandoz, although Sandoz sells products in more than 160 countries. The following table sets forth the aggregate 2014 net sales of Sandoz by region:

Sandoz
  2014 Net Sales
to
third parties
 
 
  $ millions
  %
 

Europe

    4,573     48  

United States

    3,215     34  

Asia, Africa, Australasia

    1,168     12  

Canada and Latin America

    606     6  

Total

    9,562     100  

 


 

$ millions

 

%

 

Established Markets*

    7,035     74  

Emerging Growth Markets*

    2,527     26  

Total

    9,562     100  

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

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

Production

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

        We manufacture and package our Sandoz products at 45 manufacturing sites across 19 countries, supplying more than 160 countries globally. Among these, our most significant production facilities are located in Barleben and Rudolstadt, Germany; Kundl, Schaftenau and Unterach, Austria; Ljubljana, Slovenia; Stryków, Poland. We are implementing a global manufacturing strategy that focuses on building a high-quality manufacturing network that optimizes cost, service, technology and geography.

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

        Where possible, we maintain multiple supply sources so that the business is not dependent on a single or limited number of suppliers, and competitive material sourcing can be assured. However, our ability to

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

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

        In July 2014, the FDA confirmed that it had decided to close out the Warning Letter issued in November 2011 against three of Sandoz's North American facilities in Broomfield, Colorado; Wilson, North Carolina; and Boucherville, Canada. The Warning Letter, which followed inspections at all three sites in the course of 2011, had raised concerns regarding these facilities' compliance with FDA cGMP regulations. The FDA observations in the Warning Letter related primarily to general documentation, validation and investigation practices. Novartis took steps in collaboration with the FDA to correct the observations in the Warning Letter with respect to all three sites.

        In May 2013, we received a Warning Letter from the FDA concerning the oncology injectables manufacturing facility in Unterach, Austria. The letter contained two observations which followed an FDA inspection at the site in October 2012, and are related to historical visual inspection practices for products manufactured at the site. We are collaborating with the FDA to correct all concerns raised in the Warning Letter, and to ensure that our products are safe and effective and meet the highest quality standards. A follow-up inspection by the FDA in 2014 resulted in no observations.

        Our Sandoz Division has experienced significant supply interruptions in the past, and there can be no assurance that supply will not be interrupted again in the future as a result of unforeseen circumstances. The manufacture of our products is complex and heavily regulated, making supply never an absolute certainty. If we or our third-party suppliers fail to comply fully with regulations or other unforeseen challenges occur, then there could be a product recall or other shutdown or disruption of our production activities. We have implemented a global manufacturing strategy to maximize business continuity in case of business interruptions or other unforeseen catastrophic events. However, there can be no guarantee that we will be able to successfully manage such issues and maintain continuous supply if such issues arise.

Marketing and Sales

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

        In response to rising healthcare costs, many governments and private medical care providers, such as health maintenance organizations, have instituted reimbursement schemes that favor the substitution of bioequivalent generic products for patented pharmaceutical products. In the US, statutes have been enacted by virtually all states that permit or require pharmacists to substitute a less expensive generic product for the brand-name version of a drug that has been prescribed to a patient. Generic use is growing in Europe, but penetration rates in many EU countries (as a percentage of volume) remain well below those in the US. Legislative or regulatory changes can have a significant impact on our business in a country. In Germany, for example, the generic market is in transition and healthcare reforms have increasingly shifted decision making from physicians to insurance funds.

        Our Anti-Infectives franchise supplies generic antibiotics to a broad range of customers, as well as active pharmaceutical ingredients and intermediates to the pharmaceutical industry worldwide.

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

Competition

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

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

Development and Registration

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

        While generic pharmaceuticals are follow-on versions of chemically synthesized molecules, so-called "biosimilar" products contain a version of the active substance of an already approved original biological medicine. Due to the inherent variability of biologic products and their higher complexity, the development and the regulatory pathway of biosimilars differ significantly from that of generics.

        Development of a biosimilar product is much more technically challenging than the development of a generic pharmaceutical. Unlike generic pharmaceuticals, development of biosimilars requires clinical

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studies in patients. Biosimilars are engineered to match the reference product in quality, safety and efficacy. This is achieved by systematically defining the target of the reference product and then comparing the biosimilar to the reference product at various development stages to confirm biosimilarity and to establish that there are no clinically meaningful differences between the proposed biosimilar and the reference biologic. Because the purpose of a biosimilar clinical development program is to confirm biosimilarity and not establish efficacy and safety de novo, the clinical studies required are less than those required for an originator biologic, and no pre-clinical studies are required. Therefore, the cost of development for a biosimilar is usually less than that of an originator biologic.

        The regulatory pathways for approval of biosimilar products are being developed and established in many countries of the world. A regulatory framework for the approval of biosimilars has been established in the EU, Japan, Canada and US, while the WHO issued guidance. Sandoz has successfully registered and launched the first biosimilar (or biosimilar type) product in Europe, the US, Canada, Japan, Taiwan, Australia and many countries in Latin American and Asia. Sandoz has three approved biosimilar products in more than 60 countries of the world, and is the first company to file a Biologics License Application (BLA) for marketing approval of a biosimilar in the US.

        Currently, the affiliates of the Sandoz Division employ more than 2,700 Development and Registration staff who explore alternative routes for the manufacture of known compounds and develop innovative dosage forms of well-established medicines. These associates are based worldwide, including facilities in Holzkirchen and Rudolstadt, Germany; Kundl, Schaftenau and Unterach, Austria; Ljubljana and Mengeš, Slovenia; Boucherville, Canada; and East Hanover, New Jersey. In 2014, Sandoz expensed $0.8 billion (on a core basis $0.8 billion) in product development, which amounted to 8% of the division's net sales. Sandoz expensed $0.8 billion (on a core basis $0.8 billion) and $0.7 billion (on a core basis $0.7 billion, as a result, in part, of a decrease of a contingent consideration liability related to a business combination) in 2013 and 2012, respectively.

Regulation

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

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