0 1 0 2 T R O P E R L A U N N ANNUAL REPORT 2010 A ANNUAL REPORT 2010 N O VA R T I S G R O U P A N N UA L R E P O R T 2 0 1 0 OUR MISSION We want to discover, develop and successfully market innovative products to prevent and cure diseases, to ease suffering and to enhance the quality of life. We also want to provide a shareholder return that refl ects outstanding performance and to adequately reward those who invest ideas and work in our company. 4 | GROUP REVIEW 19 | HEALTHCARE PORTFOLIO 57 | CORPORATE CITIZENSHIP 85 | CORPORATE GOVERNANCE 111 | COMPENSATION REPORT 131 | FINANCIAL REPORT 1 2 NO VA R T I S G R O U P A NN U A L R E P O R T 2 0 1 0 CONTENTS GROUP REVIEW Financial Highlights 4 News in 2010 5 Letter from Daniel Vasella 7 Interview with Joseph Jimenez 15 HEALTHCARE PORTFOLIO Contents 19 Pharmaceuticals 23 Novartis Institutes for BioMedical Research 35 Vaccines and Diagnostics 39 Sandoz 45 Consumer Health 51 CORPORATE CITIZENSHIP Contents 57 Commitment to Patients 61 Commitment to People and Communities 67 Commitment to the Environment 73 Commitment to Ethical Business Conduct 78 Independent Assurance Report 83 CORPORATE GOVERNANCE Contents 85 Our Board of Directors 90 Our Management 101 COMPENSATION REPORT Contents 111 Compensation Report 112 NOVARTIS GROUP FINANCIAL REPORT Contents 131 Operating and Financial Review 134 Equity Strategy 177 Novartis Group Consolidated Financial Statements 180 Financial Statements of Novartis AG 252 Annual Report Photography 268 Key Dates 2011, Contact Information 270 and Forward-Looking Statements 4 | GROUP REVIEW 19 | HEALTHCARE PORTFOLIO 57 | CORPORATE CITIZENSHIP 85 | CORPORATE GOVERNANCE 111 | COMPENSATION REPORT 131 | FINANCIAL REPORT 3 GROUP REVIEW Novartis provides healthcare solutions that address the evolving needs of patients and societies worldwide. We offer a portfolio focused on broad areas of healthcare to best meet these needs: innovative prescription medicines, cost-saving generic pharmaceuticals, preventive vaccines and diagnostic tools, and consumer health products. FINANCIAL HIGHLIGHTS KEY FIGURES NET SALES, OPERATING INCOME, NET INCOME, CORE OPERATING (In USD millions, unless indicated otherwise) INCOME AND CORE NET INCOME 4 (Index: 2005 = 100%) 2010 2009 200 Net sales 50 624 44 267 Operating income 11 526 9 982 175 Return on net sales (%) 22.8 22.5 Net income 9 969 8 454 150 Basic earnings per share 1 (USD) 4.28 3.70 Core 2 125 Operating income 14 006 11 437 Return on core net sales (%) 27.7 25.8 100 Net income 12 029 10 267 2005 2006 2007 2008 2009 2010 Basic earnings per share 1 (USD) 5.15 4.50 Research & Development 8 080 7 287 Net sales As a % of net sales 16.0 16.5 Operating income Number of associates (FTE) 3 119 418 99 834 Net income Return on average equity (%) 15.7 15.7 Core operating income Free cash flow 7 860 5 505 Core net income SHARE INFORMATION 2010 NET SALES BY REGION (% and in USD millions) 2010 2009 Share price at year-end (CHF) 54.95 56.50 United States 31 15 863 ADS price at year-end (USD) 58.95 54.43 Europe 37 18 558 Dividend 5 (CHF) 2.20 2.10 Pay-out ratio 6 55 53 Asia/Africa/Australasia 18 9 416 Canada and Latin America 9 4 361 Alcon, Inc. 7 5 2 426 Total 50 624 1 2010 average number of shares outstanding: 2 285.7 million (2009: 2 267.9 million) 4 To ease comparability, all figures in this chart for the years 2005 to 2007 exclude the Consumer 2 Core results for operating income, net income, earnings per share (EPS) and R&D eliminate the Health Divison Nutrition operations divested in 2007 impact of acquisition-related factors and other significant exceptional items. These adjustments 5 Dividend payment for 2010: proposal to 2011 Annual General Meeting are explained in detail starting on page 143. 6 Pay-out ratio is calculated based on net income attributable to shareholders of Novartis AG 3 Full-time equivalent positions at year-end, including 16 700 Alcon associates in 2010 7 Regional data for Alcon, Inc. is not available 4 NO VA R T I S G R O U P A NN U A L R E P O R T 2 0 1 0 NEWS IN 2010 PERFORMANCE Recently launched products drive strong top-line growth across broad healthcare portfolio. Net sales rise 14% (+14% in constant currencies) to USD 50.6 billion driven by strong growth in all businesses, including USD 2.4 billion from consolidation of Alcon. Operating income advances 15% to USD 11.5 billion on business expansion and productivity improvements. Core operating income rises 22% to USD 14.0 billion. Net income up 18% and core net income up 17% to USD 10.0 billion and USD 12.0 billion, respectively. PRODUCTS Products launched since 2007 account for 21% of net sales, as more than 13 major pharma- ceutical regulatory approvals in 2010 in the US, Europe and Japan continue to rejuvenate the portfolio. Approvals include Gilenya (multiple sclerosis) in the US, new indications for Lucentis (treatment of diabetic macular edema) in the EU and also for Tasigna (newly diagnosed CML) in the US, EU and Japan. Other key approvals include new vaccine Menveo (meningococcal disease) in the US and EU as well as US approval for generic enoxaparin. PIPELINE Industry-leading pharmaceutical pipeline with 147 projects in development and 16 major submissions in 2010 in the US, EU and Japan including ACZ885 in gout in the EU, Lucentis in retinal vein occlusion in the EU, SOM230 in Cushing’s disease in the EU, and Afi nitor in advanced neuroendocrine tumors in the EU and the US. Early pipeline in Vaccines progresses rapidly as Bexsero, a breakthrough meningococcal B vaccine, is fi led for EU approval. RESEARCH Signifi cant investment focusing on areas of greatest patient need and high scientifi c promise at the Novartis Institutes for BioMedical Research aims to discover novel therapies. Biologics account for an increasing proportion of the exploratory pipeline. PORTFOLIO Strengthening our focused portfolio, Novartis completes the purchase from Nestlé S.A. of majority control of Alcon, Inc., the world’s leading eye care company and reaches merger agreement with Alcon, Inc., to acquire all outstanding publicly held shares. Sandoz acquires Oriel Therapeutics, gaining rights to a portfolio of generic respiratory products and in Vaccines and Diagnostics the acquisition of a majority holding in Zhejiang Tianyuan nears completion. CORPORATE CITIZENSHIP Engaging with society to improve healthcare is integral to how Novartis operates. Access- to-medicine programs for those in need reach 85 million patients in 2010 and, together with our R&D institutes for diseases in developing countries, totaled USD 1.5 billion or 3% of net sales. DIVIDEND 14th consecutive dividend increase with 5% raise proposed for 2010 to CHF 2.20 per share (2009: CHF 2.10 per share), a dividend yield of 4.0%. LEADERSHIP Group leadership strengthened as Joseph Jimenez is promoted to CEO with Daniel Vasella continuing as Chairman of the Board of Directors. David Epstein replaces Mr. Jimenez as Division Head, Pharmaceuticals, and Jonathan Symonds succeeds Raymund Breu as Chief Financial Offi cer. 4 | GROUP REVIEW 19 | HEALTHCARE PORTFOLIO 57 | CORPORATE CITIZENSHIP 85 | CORPORATE GOVERNANCE 111 | COMPENSATION REPORT 131 | FINANCIAL REPORT 5 Financial Highlights News in 2010 6 NO VA R T I S G R O U P A NN U A L R E P O R T 2 0 1 0 DEAR SHAREHOLDER Let me summarize the results achieved in the last year: – Net sales grew 14% (+14% in constant currencies) to USD 50.6 billion. I am pleased to report record results for 2010, both in sales and in profits. – Operating income rose by 15% (+17% in constant currencies) to USD 11.5 billion. The past year was shaped by repercussions from the global financial crisis and consid- – Net income climbed 18% (+20% in con- erable currency turbulence. Despite these stant currencies) to USD 10.0 billion, faster difficult conditions, Novartis was very than operating income. successful. Our well-balanced business portfolio and long-term strategy focused – Free cash flow before dividends reached on innovation once more have proved to USD 12.3 billion. be robust and appropriate for the future. Daniel Vasella, M.D. The ability to repeatedly launch new and – Alcon was fully consolidated from better products, and thus establish market August 25 when we completed the pur- positions, is decisive for the sustainability chase of an additional 52% stake in the of our success. We demonstrated both of eye care leader. From that date, Alcon these core competencies last year. New net sales totaled USD 2.4 billion; oper- and recently launched products were a key ating income amounted to USD 323 mil- growth driver in 2010 and hold more prom- lion; and core operating income was ise for the future. Joe Jimenez, our new USD 852 million. CEO since February 2010, has successfully continued this strategy and launched new The PharmaceuticalS DiviSion (USD 30.6 initiatives to improve productivity. His billion, +6% in constant currencies) nomination has proven to be right both achieved strong volume growth of eight in terms of timing and in terms of the divi- percentage points. Sales of recently sion of labor between the Chairman and launched products were USD 6.6 billion the CEO. accounting for 21% of the division’s sales, a significant increase from 16% the pre- In addition, since August 2010, Novartis vious year.