CARING AND CURING artis Nov 2004 AL REPORT ANNUAL REPORT 2004 www.novartis.com ANNU 10 000-liter extraction vessel, Novartis pharmaceutical production; Basel, Switzerland azil á, Br ortaleza, Cear en's Hospital Albert Sabin; F Back cover: Children's Hospital Albert Sabin; Fortaleza, Ceará, Brazil Childr OUR MISSION We want to discover, develop and successfully market innovative products to cure diseases, to ease suffering and to enhance the quality of life. We also want to provide a shareholder return that reflects outstanding performance and to adequately reward those who invest ideas and work in our company. GROUP OVERVIEW 2 Financial Highlights 3 News in 2004 5 Letter from Daniel Vasella 10 Divisions and Business Units Pharmaceuticals 40 Consumer Health 50 Corporate Citizenship 52 Commitment to Patients 66 Commitment to Our People 72 Commitment to Health, Safety and Environment 79 Commitment to Business Conduct 85 Corporate Governance Commitment to Corporate Governance 104 Board of Directors 110 Executive Committee 112 Business Unit Heads FINANCIAL OVERVIEW 115 Financial Report 194 Key Dates for 2005 195 Contact Addresses Front cover: Shanghai Children's Medical Center, Shanghai Second Medical University; Shanghai, China NOVARTIS GROUP 1 FINANCIAL HIGHLIGHTS Keyfigures Net sales, operating income and net income (in USD millions unless indicated otherwise) (in USD millions) 30 000 2004 2003 Net sales 28 247 24 864 25 000 Operating income 6539 5 889 Net income 5767 5 016 20 000 Return on sales (%) 23.1 23.7 15 000 Research and development 4207 3 756 Research and development 10 000 as % of net sales 14.9 15.1 Free cash flow 3359 3 628 5000 Number of employees 81 392 78 541 0 2000 2001 2002 2003 2004 Net sales * Operating income * Net income * in 2000 excluding discontinued Agribusiness Division Shareinformation Earnings per share (USD) and pay-out ratio (%) USD 2.4 % 2004 2003 Return on average equity (%)* 18.0 17.1 2.0 40 Earnings per share (USD)* 2.36 2.03 Operating cash flow per share (USD) 2.75 2.69 1.6 32 ADS price at end of year (USD) 50.54 45.89 1.2 24 Share price at end of year (CHF) 57.30 56.15 Pay-out ratio based on outstanding 0.8 16 shares (%) 39 39 0.4 8 * Average number of shares outstanding in 2004: 2 447 954 717 (2003: 2 473 522 565) 00 2000 2001 2002 2003 2004 Earnings per share in USD Dividend pay-out ratio in % of net income Net sales by division 2004 2003 Operating income by division 2004 2003 Pharmaceuticals Pharmaceuticals 65% 64% 82% 77% Consumer Health Consumer Health 35% 36% 18% 23% 2 NOVARTIS GROUP NEWS IN 2004 GROUP PERFORMANCE Novartis delivers record net sales and net income. Group net sales grow 14% (+9% in local currencies) and net income 15%, driven by strong organic growth at both Pharmaceuticals and Consumer Health. PHARMACEUTICALS Double-digit net sales growth continues to outpace the market. Further market share gains registered in key countries. Operating income expands faster than net sales due to strong organic growth and productivity improvements. CONSUMER HEALTH Net sales advance 10% (+5% in local currencies), driven by focus on strategic brands and new product launches, particularly at OTC and CIBA Vision. Sandoz performance adversely affected by comparison with strong 2003, and by price competition. PIPELINE Novartis leads pharmaceutical industry with 13 regulatory approvals in US since 2000. Seven approvals in major markets in 2004. Industry-leading pipeline with 75 projects in clinical development, of which 52 in Phase II, Phase III or in registration. RESEARCH Novartis Institutes of BioMedical Research double scientific staff at Cambridge headquarters, with emphasis on biology of diseases with high unmet medical need, and strong commitment to external collaboration and strategic partnerships. CORPORATE CITIZENSHIP In 2004, Novartis is able to contribute USD 570 million to patients in need through access to medicine programs. DIVIDEND A dividend increase to CHF 1.05 per share (+5%) will be proposed to shareholders, reflecting the strong organic net sales growth and improved profitability. NOVARTIS GROUP 3 artis Animal Health; Shanghai, China 4 NOVARTIS GROUP Nov LETTER FROM DANIEL VASELLA Daniel Vasella, M.D. Dear Shareholder: I am pleased to report strong business performance in our ninth business year, which ended with yet another record result and market share gains. Let me summarize the key 2004 figures: • Group net sales increased 14% (9% in local currencies) to USD 28.2 billion – Pharmaceuticals net sales rose 15% (10% in local currencies) – Consumer Health net sales gained 10% (5% in local currencies) • Group operating income advanced to USD 6.5 billion (+11%), • Net income growth of 15% to USD 5.8 billion • Earnings per share USD 2.36 (+16%) Innovation and a focus on patients, core elements of our strategy, resulted in another record performance These record results reflect our emphasis on sustainable, organic growth, a product of our consistent innovation strategy and the skills and commitment of over 81 000 associates worldwide. The Pharmaceuticals division, again led by our can- cer and cardiovascular franchises, posted a double-digit rise in sales, with market share expanding globally. These successes were realized in a challenging health-care mar- ket characterized by cost-containment measures in many parts of the world. NOVARTIS GROUP 5 LETTER FROM DANIEL VASELLA In 2004, we increased overall R&D investments by Among these are: 12% to USD 4.2 billion • LAF237, the first of a new class of “incretin enhancers,” Our pharmaceutical research and development (R&D) oral antidiabetic agents that indirectly increase the blood expenditure ranked as one of the highest in the industry, glucose regulating hormone GLP-1. Phase III trial data relative to sales (18.8%), with outlays of USD 3.5 billion. for LAF237 are expected during the latter part of 2005. This investment allowed us to complete construction of new laboratories, and hire more than 800 scientists at our • SPP100 is the first in a new antihypertensive class new research headquarters in Cambridge, MA. New or called “renin inhibitors.” Elevated renin levels increase enhanced platforms in biology and chemistry, paired with the risk of myocardial infarction and renal damage. So, scientific leadership, not only fortified fundamental and SPP100 has the potential for improved end-organ pro- applied research but also improved the compound selec- tection. Phase III data are expected in 3Q 2005. tion process, speeding up pipeline throughput. The Novartis Institutes for BioMedical Research • FTY720, an immunomodulator with a novel mechanism (NIBR) continue to focus their efforts on tractable biolog- of action, has recently completed Phase II studies as an ical targets and selected disease areas with high unmet oral treatment for multiple sclerosis, showing a reduc- medical needs, striving to bring novel medicines rapidly to tion of brain lesions and a significantly reduced relapse patients. To achieve this objective, we are intensifying our rate for MS patients treated. efforts to elucidate the function of specific human genes identified by the Human Genome Project. While structur- • PTK787 is an anticancer drug that inhibits all known al blueprints for these genes are now available, in most angiogenesis factors involved in cancer. Submission for cases the genes’ primary role in the body and their poten- US regulatory approval is planned for the second half of tial involvement in disease remain unknown. “Functional- 2005. izing” the genome is a vast undertaking – one beyond the means and resources of any single company. According- • AMN107 is our new, most selective BCR-ABL inhibitor, ly, we have forged dozens of collaborations, completing a potentially more effective follow-up compound for our 48 alliances with industry and 100 with academia. revolutionary medicine Gleevec/Glivec.Phase II studies will begin in the first half of 2005. Pipeline of new drugs is one of the industry’s strongest Promising new compounds bring hope to patients Our pharmaceutical development pipeline is one of the As a physician, I often witnessed the hope that R&D best with 75 compounds, 52 of which are in advanced brought to patients, especially in life-threatening situa- development or registration. Over the past few years, tions. New treatments that can reduce suffering and high Novartis has maintained its leading position in R&D pro- health-care costs are needed for the more than 10 million ductivity. Novartis has received 13 US approvals since people diagnosed with cancer annually, and for those suf- 2000, the highest figure of any Top Ten global pharma- fering from incapacitating Alzheimer’s dementia, diabetes ceutical company. Of particular importance are first- and cardiovascular disease, all on the rise. in-class compounds and, currently, 7 of our 10 highly It is a fact that a good profit outlook is a precondition innovative compounds in mid-to-late-stage development for any industrial R&D activities. In turn intellectual prop- belong to this group. erty protection is the only way to ensure the open sharing of research findings without fear of copying, and to be cer- tain that there is a potential to earn an adequate return from successful projects. Therefore strong intellectual 6 NOVARTIS GROUP property rights are a foundation for sustained innovation A medicine-based business portfolio and allow us to continue to invest in R&D despite long lead As a company, we want to discover, develop and market times of 12–15 years. In this context I welcome the deci- medicines that are best suited for specific conditions. This sion by India to introduce patent protection in 2005, includes innovative prescription medicines, which some- which, I believe will accelerate development of an innova- times are breakthroughs and have the power to change tive domestic Indian pharmaceutical industry and encour- the way medicine is practiced.