ANNUAL REPORT 2012 cONTENTs OUR missiON GROUP REviEW Financial Highlights 2 We want to discover, develop and News in 2012 3 successfully market innovative Letter from Daniel vasella 5 products to prevent and cure interview with Joseph Jimenez 11 diseases, to ease suffering and HEALTHcAREPORTFOLiO contents 17 to enhance the quality of life. Pharmaceuticals 21 Novartis institutes for Biomedical Research 33 We also want to provide a Alcon 37 shareholder return that reflects sandoz 47 outstanding performance and vaccines and Diagnostics 53 to adequately reward those consumer Health 59 who invest ideas and work in cORPORATE REsPONsiBiLiTy contents 65 our company. Expanding Access to Healthcare 67 Doing Business Responsibly 77 independent Assurance Report 85 cORPORATE GOvERNANcE contents 87 Our Board of Directors 96 Our management 110 cOmPENsATiON REPORT contents 121 compensation Report 122 NOvARTis GROUP FiNANciAL REPORT contents 147 Financial Highlights 2012 148 Key Financial Developments 149 Operating and Financial Review 150 shareinformation 168 summary of Key Financial Data 188 Novartis Group consolidated Financial statements 190 Financial statements of Novartis AG 258 Annual Report Photography and Films 278 Key Dates 2013, contact information 280 and Forward-Looking statements 1 GROUP REviEW Novartis provides healthcare solutions that address the evolving needs of patients and societies worldwide. Our portfolio focuses on broad areas of healthcare: pharmaceuticals, eye care, generics, vaccines, consumer-based OTc and animal health. FiNaNcial hiGhliGhts KEY FIGURES NET SALES, OPERATING INCOME, NET INCOME, CORE OPERATING (in USD millions, unless indicated otherwise) INCOME AND CORE NET INCOME (Index: 2008 = 100%) 2012 2011 160 Net sales 56 673 58 566 150 Operating income 11 511 10 998 Return on net sales (%) 20.3 18.8 140 Net income 9618 9245 130 Basic earnings per share 1 (USD) 3.93 3.83 Core operating income 2 15 160 15 909 120 Core return on net sales (%) 26.7 27.2 110 Core net income 2 12 811 13 490 100 Core earnings per share 1,2 (USD) 5.25 5.57 Core Research & Development 2 9116 9239 90 As a % of net sales 16.1 15.8 2008 2009 2010 2011 2012 Number of associates (FTE) 3 127 724 123 686 Group free cash flow 11 383 12 503 Net sales Core operating income Operating income Core net income Net income SHARE INFORMATION 2012 NET SALES BY REGION (% and in USD millions) 2012 2011 Share price at year end (CHF) 57.45 53.70 United States 33 18 592 ADS price at year end (USD) 63.30 57.17 Europe 35 19 708 Dividend 4 (CHF) 2.30 2.25 Payout ratio 5 65 66 Asia/Africa/Australasia 23 12 936 Canada and Latin America 9 5437 Total 56 673 1 2012 average number of shares outstanding: 2418.1 million (2011: 2382.5 million). 4 Dividend payment for 2012: proposal to 2013 Annual General Meeting. 2 Core results for operating income, net income, earnings per share (EPS) and R&D eliminate the 5 Payout ratio is calculated by converting into USD the proposed total gross dividend amount in impact of acquisition-related factors and other significant exceptional items. These adjustments CHF at the CHF-USD exchange rate of December 31, 2012 based on an estimated number of are explained in detail starting on page 182. shares outstanding on dividend payment date and dividing it by the USD consolidated net 3 Full-time equivalent positions at year end. income attributable to shareholders of Novartis AG based on the Novartis Group’s 2012 consolidated financial statements. 2 Novartis Group aNNual report 2012 News iN 2012 PERFORmANcE Net sales were UsD 56.7 billion, down 3% (unchanged in constant currencies, or cc) from the previous year. Operating income grew 5% (+8% cc) to UsD 11.5 billion. core operating income declined 5% (–2% cc) to UsD 15.2 billion. core operating income margin decreased by 0.5 percentage points to 26.7% of net sales. PRODUcTs Recently launched products accounted for UsD 16.3 billion or 29% of Group net sales, up from 25% in 2011. continuing to rejuvenate the portfolio, Pharmaceuticals achieved 11 major regulatory approvals for innovative medicines and new indications in the United states and the European Union. Key approvals included Afinitor in the United states and the European Union in advanced breast cancer, Jakavi in the European Union in myelofibrosis, and Seebri Breezhaler in the European Union for patients with chronic obstructive pulmonary disease (cOPD). Alcon also received FDA approval for Dailies Total1, the industry’s first water-gradient silicone hydrogel contact lens. in vaccines and Diagnostics, Flucelvax, the first cell-culture vaccine in the United states to help pro- tect against seasonal influenza, received FDA approval, and BexserO secured a positive cHmP opinion for use preventing meningococcal serogroup B infections in individuals 2 months of age and older. PiPELiNE Novartis has a leading new product pipeline with more than 200 projects in clinical development, including 138 in the Pharmaceuticals Division. in pipeline highlights, the first five studies in the QvA149 Phase iiiiGNiTE clinical trial program all met their primary endpoints and showed that QvA149 significantly improved lung function compared with other cOPD therapies. Results from a Phase iii study showed that investigational com- pound RLX030 reduces the mortality rate in patients with acute heart failure. Alcon has leveraged the capabilities of the Novartis institutes for Biomedical Research to gain access to a range of technologies and has prioritized glaucoma and macular degeneration in drug discovery efforts. sandoz initiated a Phase iii clinical trial for epoetin alfa in the United states, and continued to progress the follicular lymphoma Phase iii clinical trial forbiosimilar monoclonal antibody rituximab. Thevaccines and Diagnostics pipeline continues to focus on meningococcal disease and influenza. REsEARcH AND DEvELOPmENT Reflecting our commitment to innovation, we invested 21% of Pharmaceuticals net sales in R&D, focusing on the areas of greatest patient need and scientific promise. PORTFOLiO We continued to strengthen our broad, diversified healthcare portfolio with the acquisition of Fougera Pharmaceuticals inc. by our sandoz Division, making it the number one generic dermatology medicines company in the United states and globally. cORPORATE REsPONsiBiLiTy Engaging with society to improve access to healthcare is integral to the way Novartis oper- ates. in 2012, our contributions and programs in this area were valued at UsD 2 billion, providing medicine to more than 100 million patients, and health education, infrastructure development and other programs to another 7. 2 million people worldwide. DiviDEND We propose to deliver our 16th consecutive dividend increase, with a 2% raise proposed for 2012 to cHF 2.30 per share (2011: cHF 2.25 per share), a dividend yield of 4.0%. 2|Group review 17 |HEALTHcARE PORTFOLiO65|cORPORATEREsPONsiBiLiTy 87 | cORPORATEGOvERNANcE 121|cOmPENsATiON REPORT 147|FiNANciALREPORT 3 Financial Highlights | News in 2012 forced to deal with increased price pressure, the patent expiration for our successful heart drug Diovan, and persistent turbulence on financial and currency markets. moreover, quality problems at sandoz andconsumer Health led to production downtime, which also affected results. Despite these far-reaching events, Novartis was able to provide 1.2 billion patients world- wide with medical care in 2012 –exceeding the record-setting level of previous years – thanks to recently launched products and the further expansion in fast-growing markets. The Group’s net sales reached UsD 56.7 bil- Daniel vasella, m.D. lion (–3%, unchanged in constant curren- cies), while net income increased by 4% (7% in constant currencies) to UsD 9.6 billion. DEAR sHAREHOLDER The pharmaceuticals Division (UsD 32.2 bil- the economic and debt crisis has cast a lion, 2% in constant currencies) rejuvenated shadow over europe and the united states its product portfolio with the help of recently for more than four years, and it significantly launched products such as leukemia drug affected 2012, as well. Despite major con- Tasigna and ophthalmic medicine Lucentis, certed efforts, the end of this troubling which helped balance the Diovan patent loss. period is not yet in sight. moreover, groundbreaking therapies such as Gilenya and Afinitor – which in 2012 Even the regions and markets that have so posted revenue growth in constant curren- far escaped the crisis are now in danger of cies of 147% and 85%, respectively –are being affected by its socioeconomic side expected to generate sustainable growth in effects. Protectionist market interventions, the future. monetary expansionand over-regulation – all signs of reactive politics – are increasing alcon (UsD 10.2 billion, 5% in constant cur- and can lead to a deepening of structural rencies) was able to assert itself and with- deficits. Persistent weak growth is likely, stand the growing price pressure and com- despite low interest rates and monetary ex- petition from generics, due to product pansion. High levels of public debt make the launches and the successful integration of problem worse in many countries, and there ciBA vision. sandoz (UsD 8.7 billion, –4% in is no certainty as to whether pension funds constant currencies) succeeded in com- and social welfare institutions will be able to pensatingfor the competition-drivenprice meet their promises in the medium term. decline of enoxaparin, on the back of strong demand for biosimilars, growth in emerging despite this ominous backdrop, Novartis once markets, and the strategically significant again posted strong results in 2012. This is acquisition of Us dermatology drug maker all the more remarkable given that we were Fougera. 2|Group review 17 |HEALTHcARE PORTFOLiO65|cORPORATEREsPONsiBiLiTy 87 | cORPORATEGOvERNANcE 121|cOmPENsATiON REPORT 147|FiNANciALREPORT 5 Letter from Daniel vasella The performance of otcand animal health, research and development, distribution, which together make up consumer health and production allows us to benefit from the (UsD 3.7 billion, –16% in constant currencies), advantages of our Group structure.