Caring and Curing Annual Report 2002 Novartis www.novartis.com Annual Report 2002 …molecules for medicines… Martin Klumpp, PhD, Lukas Leder, PhD, and Aline Tirat, Novartis Lead Discovery Center, Basel, Switzerland ...writing in sand... Sarvodaya Pre-School, Paluchera, Sri Lanka Contents Financial Highlights2 News in 20023 Letter from Daniel Vasella5 Amazing Patient Stories9 Division and Product Review Pharmaceuticals14 Joining Forces in the Quest for Cures22 Consumer Health29 Corporate Citizenship37 Animal Welfare46 Health, Safety and Environment49 Human Resources60 Corporate Governance Corporate Governance67 Board of Directors79 Executive Committee82 Business Unit Heads84 Financial Report Operating and Financial Review87 Equity Strategy and Share Information98 Group Consolidated Financial Statements and Notes104 Principal Companies138 Reconciliation to US GAAP140 Financial Statements of Novartis AG151 Due Dates for Reporting and Contacts157 Front cover: Svenja, a young eczema patient during an examination at the Center for Dermatology, University of Frankfurt am Main, Germany. Back cover: Svenja with her brother, Jan Patrick in the pediatric ward. Novartis Group 1 Financial Highlights Sales CHF millions Free cash flow2 CHF millions 2002 32 412 2002 4 463 2001 31 643 2001 4 073 20001 29 112 20001 3 254 Operating income CHF millions Research and development CHF millions 2002 7 887 2002 4 339 2001 7 277 2001 4 189 20001 6 727 20001 4 011 Net income CHF millions Employees at year end 2002 7 313 2002 72 877 2001 7 024 2001 71 116 20001 6 511 20001 67 653 1 Excluding discontinued Novartis Agribusiness 2 Before acquisition of product and marketing rights and Roche Holding AG voting shares Key ratios Share information 2002 2001 2002 2001 Return on sales (%) 24.3 23.0 Average number Return on average equity (%) 17.9 17.8 of shares outstanding 2 515 311 685 2 571 673 365 Group research and development as % of sales 13.4 13.2 Earnings per share (CHF) 2.91 2.73 Debt/equity ratio 0.20:1 0.21:1 Operating cash flow per share (CHF) 3.24 2.85 Current ratio 2.5:1 2.4:1 Dividend per share3 (CHF) 0.95 0.90 Pay-out ratio based on outstanding shares (%) 33 33 Share price at end of year (CHF) 50.45 60.00 3 2002: Proposal to the shareholders’ meeting Sales by division Operating income by division Sales by region 65% Pharmaceuticals 78% Pharmaceuticals 43% USA 35% Consumer Health 22% Consumer Health 7% Canada and Latin America 33% Europe 17% Africa/Asia/Australia 2 Novartis Group News in 2002 • Strong volume growth in Pharmaceuticals and Generics: Group sales up 11% in local currencies (+2% in CHF) • Pharmaceuticals steadily gaining market share in all major markets, with sales growth of 13% in local currencies (+4% in CHF), driven by the Cardiovascular and Oncology franchises • Registration dossiers for 18 new drugs, indications and formulations were submitted •Group operating income climbs 8%, spurred by strong top line growth and enhanced productivity • Net income up 4%, due to strong operating performance and an attractive level of financial income amid adverse market conditions • Earnings per share rise 7%, supported by share buy-back program • Based on solid performance, a dividend increase of 6% to CHF 0.95 per share will be proposed to shareholders Novartis Group 3 …searching for clues… Mekala Siriwardina, Microscopist, Malaria ward, Polonnaruwa General Hospital, Sri Lanka Letter from Daniel Vasella Daniel Vasella, MD, Chairman and CEO Dear Shareowner In these times of economic uncertainty and volatility, it sale of Ovaltine/Ovomaltine, Caotina and Lacovo to gives me pleasure to present another year of record Associated British Foods. results and consistent growth – the sixth year since • Our Generics business was strengthened by the Novartis was formed from the merger of Ciba and acquisition of the Slovenian generics company Lek. Sandoz in 1996. • Net financial income reached CHF 949 million despite the difficult stock market conditions. Let me summarize the key achievements which con- • Our financial investment in Roche was increased to tributed to our success in 2002: 32.7% of the voting shares. •We expanded our programs designed to facilitate the • Double-digit growth was achieved in group sales, which supply of drugs to indigent patients suffering from totaled CHF 32.4 billion (+11% in local currencies). leprosy, malaria, tuberculosis and chronic myeloid • Operating income was up 8% to CHF 7.9 billion, net leukemia (CML). income rose 4% to CHF 7.3 billion, and earnings per share increased by 7% to CHF 2.91. These good results are the fruits of a shared focus on • Gains in market share were achieved by virtually all clear, unchanged strategic goals and of the positive atti- of our business franchises. tude and high level of commitment of our associates. I • 11 approvals were obtained for new pharmaceutical would like to take this opportunity to express my sin- products, indications and formulations in major mar- cere thanks to all those who contributed to this year’s kets around the world, marking another industry-leading success. achievement. • 18 registration dossiers for new drugs and indications Similarly, in the year ahead we will continue pursuing a were submitted for regulatory approval. strategy oriented towards sustainable growth. Strategic • In the US, pharmaceutical sales grew by 12%, making focus, the capacity for innovation, successful marketing Novartis one of the fastest-growing major pharmaceu- and enhanced productivity remain key success factors. tical companies. Altogether, the US market accounted In addition to the quality of our staff and products, the for 42% of our global pharmaceutical business sales. size and strength of our pharmaceutical business, par- • Our oncology (+28%) and cardiovascular (+40%) busi- ticularly in the US market, is of crucial importance. The nesses were successfully expanded, with significant reju- focus on these priorities led, among other criteria, to venation of our product portfolio. the decision last year to divest our Health &Functional • The Consumer Health Division was refocused, with Food operations. Part of this business, as mentioned the establishment of global business units and the above, has been sold to Associated British Foods, and Novartis Group 5 the remainder will be disposed of once an attractive bid are justified and that they will result in important new is received. At the same time, we have further strength- medicines for patients in the years ahead. ened our Generics business, which also achieved dynamic organic growth, by acquiring the Slovenian In 2002, we further expanded our share in various seg- company Lek. The latter’s strong position in Central ments of the US market and successfully launched and Eastern Europe and its attractive product portfolio two new drugs. After a regulatory setback in 2001, will enable the Generics Business Unit – to be rebrand- Zelnorm/Zelmac was approved earlier than expected by ed under the established Sandoz name – to become a the FDA for patients with constipation-related irritable global market leader. Given the growing numbers of bowel syndrome and is now available in many coun- elderly patients requiring healthcare services and tries. Elidel, a non-steroid cream for the treatment drugs, the role of low-cost generics will become even of atopic dermatitis, became the leading product in more important in future. The savings achieved as a its segment only a few months after its introduction. result can then be used to finance innovative new The antihypertensives Diovan and Lotrel and the drugs with improved efficacy and safety profiles bene- anticancer agents Zometa and Gleevec/Glivec continue fitting the patient. to grow dynamically. Gleevec/Glivec, our breakthrough drug, received approval as first-line therapy for chronic Innovation and new products will thus remain our com- myeloid leukemia (CML) in several markets, enabling pany’s lifeblood. For this reason, we have decided to set patients to receive treatment immediately upon the up a new research headquarters in Cambridge, diagnosis of their disease, improving their chances of Massachusetts, under the direction of our new Global survival and providing new hope for patients and families. Head of Research, Professor Mark Fishman. As President of the new institute, Professor Fishman plans However, as expenditures on sales and marketing remain to incorporate new insights from the fields of genetics at a high level, it is not surprising that cost pressures and molecular biology into our research in a systemat- will persist into the future. As far as possible, these will ic manner and to draw on the rich pool of young sci- be counteracted through productivity programs, since entists from the local network of universities and hospi- it is rarely possible to increase prices. On the contrary, tals in and around Boston. This research initiative will governments and insurers are constantly calling for involve substantial levels of investment, which will have price reductions and discounts. At the same time, certain an appreciable impact in the coming year. However, in developing countries and groups of activists are seek- view of our strategy of innovation and our long-term ing to systematically undermine intellectual property growth aspirations, we believe that these investments rights. If the World Trade Organization were to yield 6 Novartis Group rashly to this pressure, the long-term result would be a progressive corporate governance structure and continuous decline in investments in R&D, as there processes will lead to an increase in the responsibilities would be little prospect of achieving a reasonable and tasks of the Board of Directors and its return for our shareholders. Our position is one of committees – especially in the case of the Audit and unequivocal support for patents that are strong but Compliance Committee. apply only for a limited period. At the same time, we advocate that these patents should not be applicable This Annual Report fully responds to the widespread for the 49 poorest countries with regard to life-saving calls for greater transparency.