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Washington, D.C. 20549


PURSUANT TO RULE 13a-16 or 15d-16 OF

Report on Form 6-K dated February 7, 2003
(Commission File No. 1-15024)

Novartis AG
(Name of Registrant)

Lichtstrasse 35
4056 Basel
(Address of Principal Executive Offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F: ý        Form 40-F: o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes: o        No: ý

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes: o        No: ý

Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes: o        No: ý

Enclosures: Novartis AG Annual Report 2002 to Shareholders


Financial Highlights   2
News in 2002   3
Letter from Daniel Vasella   4
Amazing Patient Stories   7

Division and Product Review


Pharmaceuticals   11
Joining Forces in the Quest for Cures   21
Consumer Health   28

Corporate Citizenship


Animal Welfare   48
Health, Safety and Environment   50
Human Resources   60

Corporate Governance


Corporate Governance   67
Board of Directors   83
Executive Committee   88
Business Unit Heads   91

Financial Report


Operating and Financial Review   93
Equity Strategy and Share Information   113
Group Consolidated Financial Statements and Notes   120
Group subsidiaries and associated companies   164
Reconciliation to US GAAP   171
Financial Statements of Novartis AG   186

Due Dates for Reporting and Contacts




Financial Highlights

logo   logo






Excluding discontinued Novartis Agribusiness
Before acquisition of product and marketing rights and Roche Holding AG voting shares

Key ratios



Return on sales (%)   24.3   23.0
Return on average equity (%)   17.9   17.8
Group research and development as % of sales   13.4   13.2
Debt/equity ratio   0.20:1   0.21:1
Current ratio   2.5:1   2.4:1

Share information



Average number of shares outstanding   2 515 311 685   2 571 673 365
Earnings per share (CHF)   2.91   2.73
Operating cash flow per share (CHF)   3.24   2.85
Dividend per share(3) (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

2002: Proposal to the shareholders' meeting

logo   logo   logo


News in 2002


Letter from Daniel Vasella

Dear Shareowner

In these times of economic uncertainty and volatility, it gives me pleasure to present another year of record results and consistent growth—the sixth year since Novartis was formed from the merger of Ciba and Sandoz in 1996.

Let me summarize the key achievements which contributed to our success in 2002:

These good results are the fruits of a shared focus on clear, unchanged strategic goals and of the positive attitude and high level of commitment of our associates. I would like to take this opportunity to express my sincere thanks to all those who contributed to this year's success.

Similarly, in the year ahead we will continue pursuing a strategy oriented towards sustainable growth. Strategic focus, the capacity for innovation, successful marketing and enhanced productivity remain key success factors. In addition to the quality of our staff and products, the size and strength of our pharmaceutical business, particularly in the US market, is of crucial importance. The focus on these priorities led, among other criteria, to the decision last year to divest our Health & Functional Food operations. Part of this business, as mentioned above, has been sold to Associated British Foods, and the remainder will be disposed of once an attractive bid is received. At the same time, we have further strengthened our Generics business, which also achieved dynamic organic growth, by acquiring the Slovenian company Lek. The latter's strong position in Central and Eastern Europe and its attractive product portfolio will enable the Generics Business Unit—to be rebranded under the established Sandoz name—to become a global market leader. Given the growing numbers of elderly patients requiring healthcare services and drugs, the role of low-cost generics will become even more important


in future. The savings achieved as a result can then be used to finance innovative new drugs with improved efficacy and safety profiles benefitting the patient.

Innovation and new products will thus remain our company's lifeblood. For this reason, we have decided to set up a new research headquarters in Cambridge, Massachusetts, under the direction of our new Global Head of Research, Professor Mark Fishman. As President of the new institute, Professor Fishman plans to incorporate new insights from the fields of genetics and molecular biology into our research in a systematic manner and to draw on the rich pool of young scientists from the local network of universities and hospitals in and around Boston. This research initiative will involve substantial levels of investment, which will have an appreciable impact in the coming year. However, in view of our strategy of innovation and our long-term growth aspirations, we believe that these investments are justified and that they will result in important new medicines for patients in the years ahead.

In 2002, we further expanded our share in various segments of the US market and successfully launched two new drugs. After a regulatory setback in 2001, Zelnorm/Zelmac was approved earlier than expected by the FDA for patients with constipation-related irritable bowel syndrome and is now available in many countries. Elidel, a non-steroid cream for the treatment of atopic dermatitis, became the leading product in its segment only a few months after its introduction. The antihypertensives Diovan and Lotrel and the anticancer agents Zometa and Gleevec/Glivec continue to grow dynamically. Gleevec/Glivec, our breakthrough drug, received approval as first-line therapy for chronic myeloid leukemia (CML) in several markets, enabling patients to receive treatment immediately upon the diagnosis of their disease, improving their chances of survival and providing new hope for patients and families.

However, as expenditures on sales and marketing remain at a high level, it is not surprising that cost pressures will persist into the future. As far as possible, these will be counteracted through productivity programs, since it is rarely possible to increase prices. On the contrary, governments and insurers are constantly calling for price reductions and discounts. At the same time, certain developing countries and groups of activists are seeking to systematically undermine intellectual property rights. If the World Trade Organization were to yield rashly to this pressure, the long-term result would be a continuous decline in investments in R&D, as there would be little prospect of achieving a reasonable return for our shareholders. Our position is one of unequivocal support for patents that are strong but apply only for a limited period. At the same time, we advocate that these patents should not be applicable for the 49 poorest countries with regard to life-saving drugs used to treat diseases such as AIDS, malaria and tuberculosis. We also continue to support the World Health Organization (WHO) by donating drugs for leprosy and tuberculosis and by supplying our innovative antimalarial agent Coartem at cost. It should be mentioned, too, that our new institute, The Novartis Institute for Tropical Diseases, dedicated to research on tropical diseases, will be opening in Singapore early in 2003. While we are aware that a lack of medicines is only one of the problems afflicting many developing countries, we trust that our efforts can make a substantial contribution to improving healthcare in these regions. In industrialized nations, we have also launched a number of programs for the benefit of uninsured and needy patients (for a summary, see p. 37).

Unfortunately, the past year will also be remembered as one of corporate scandals, challenging the credibility and integrity of many executives. Novartis did constantly strengthen its Corporate Governance in the past and will comply with new Swiss and foreign legislation and regulations but more importantly aspire to match the absolute highest standards. This commitment to progressive corporate governance structure and processes will lead to an increase in the responsibilities and tasks of the Board of Directors and its committees—especially in the case of the Audit and Compliance Committee.


This Annual Report fully responds to the widespread calls for greater transparency. It should enable you to form a realistic assessment of your company's current financial position and future growth prospects. This is the last Annual Report in which our results will be reported in Swiss francs. Because an ever-increasing proportion of our revenues are generated in the dollar zone, we have decided to present our future financial reporting in the US currency. This will also facilitate fairer comparisons with our—predominantly American—competitors, and I trust that these comparisons will further our recognition as a leading global pharmaceutical company dedicated to the discovery of innovative medicines for patients.

To you, our shareowners, I wish to express my gratitude for your loyalty and confidence.



Daniel Vasella, MD
Chairman and CEO


Amazing Patient Stories
by Lisa Melton, PhD

Patients' Perspectives: Barbara Howell

Barbara should have died a long time ago. In 1998, the 53-year-old businesswoman from San Diego was lying immobile in a hospital bed, her bones packed with tumors—too many to even count. She was suffering from breast cancer that had spread to the bones. Her arms, legs, spine and skull were obliterated by cancer cells and the bone was crumbling. "I had tumors everywhere," she recalls. "My condition was so serious that my husband contacted our son asking him to come home because he may not have another chance." But drugs saved Barbara's life. "Something incredible happened, I started getting better. I wouldn't believe this story if somebody told me, except that I lived through it," she says.

Barbara's first brush with cancer came as a young woman. At 36, she had a breast tumor removed and for more than a decade she was healthy, until new problems erupted. "It started with an ache, and from one moment to the next I could not pick up my arm, it just hung there," says Barbara. Within two days, she could no longer eat, walk or even sit up in bed. The cancer had spread to her bones and the pain was excruciating. "I only had a wafer-thin strip of bone left in my arm, my legs were also a mess and a tumor on my skull grew so fast you could actually watch it getting bigger." Barbara had emergency surgery to place rods in both her legs. Another grueling operation was planned to strengthen her spine with "chicken wire" because doctors feared it would buckle under the weight of her head.

Fortunately, Barbara never had to face such an ordeal. The drugs alone did the trick. In a double-pronged strategy, Barbara took Aredia (pamidronate sodium), a Novartis drug, to prevent her bones from breaking, and tamoxifen (from another company) to stop the cancer cells from growing. Within three months Barbara's recovery was spectacular. "To everyone's amazement, the bone grew back. The doctor had tears in his eyes. He admitted he had never seen anything like it before," she says. Today, she is back at work, walks three miles a day, enjoys hiking on weekends with her husband and tackles comfortably two flights of steps at home. "I'm doing much better than they ever imagined I would," she exults. "My life expectancy at the time was six months, and here I am, five years later."

Yet nobody can predict how long Barbara's health will hold out. To improve her chances of a sustained recovery, she recently changed her bone medication to Novartis' newly released Zometa. The prospects are good. Zometa belongs to a family of drugs, the biphosphonates, that have long been used to prevent bone complications in cancer patients. But Zometa (zoledronic acid) is much more potent than any compound that has gone before. By developing a different molecule, Novartis' team of chemists produced a medication that offers a 6% lower risk of developing bone complications in some cancers than Aredia.

Even in healthy people, bone is constantly breaking down and being rebuilt. Zometa interferes with this natural cycle by stopping osteoclasts, the cells engaged in demolishing bone, allowing bone density to increase. Bone complications in cancer patients are very common. In fact, bone metastases occur in 65 to 75% of all advanced breast and prostate cancer patients and in up to 40% of all lung cancer patients. Since each year, worldwide, 1.2 million women are diagnosed with breast cancer alone, this new treatment has the potential to help millions of cancer patients suffering from debilitating and painful bone complications.

Patients' Perspectives: Gerd Goldhammer

Three years ago, Gerd, a fleet manager from Eisleben, Germany, was shocked to discover that his constant abdominal cramps were caused by a large tumor. "I had never been ill in my entire life," says the 60-year-old man, who found the diagnosis hard to believe. But the tumor was as big as a fist and surgeons removed it, together with 35 cm of intestine. Unfortunately, 18 months later, the tumors returned, this time in the membrane that envelops the abdomen, the peritoneum. His prospects were bleak. Gerd was suffering from a lethal form of gastrointestinal cancer called gastrointestinal stromal


tumor (GIST) that resists every form of therapy. Further surgery was planned to eradicate the new tumor, and Gerd had no option but to brave it.

Just then his luck changed. One of his doctors heard of Gleevec/Glivec (imatinib mesylate), a new cancer treatment by Novartis which was achieving some spectacular successes. The drug was being tested in a clinical trial in Berlin, and without hesitation Gerd packed his bags and drove 300 km to the hospital. Once there, instead of surgery, he was asked to take four capsules of Gleevec/Glivec a day. To his delight the tumor began to shrink, and he now hopes that his next scan will show it has become even smaller.

Gerd's recovery is nothing short of miraculous. Today he works full-time, feels fit, and the pains that once plagued him never returned. "I am so happy about the tablets that helped me avoid further surgery. Now my wife, daughter and I, are a happy family again," he enthuses.

And Gerd is not alone. Gleevec/Glivec has brought thousands of people back from the brink of death. "Gleevec/Glivec is a groundbreaking drug," enthuses Peter Reichardt, MD, the oncologist at the Virchow Clinics, Berlin, who conducted the trial and witnessed Gerd's response. "GIST patients went from having nothing to having an extremely active treatment. We see tumors melt away in only two or three months." In 70% of GIST patients the tumors shrivel, eventually to nothing. And although GIST is considered a rare form of cancer, with approximately 12 000 new cases worldwide each year, the impact is enormous. "Before, when we had a sarcoma patient, we always hoped it would not be GIST," Peter Reichardt, MD, admits. "Now we carefully re-examine the histology just to check whether it might be GIST because we can now offer an extremely active treatment. Things have changed a lot."

Novartis' breakthrough drug is at the cutting-edge of cancer treatment. Gleevec/Glivec is one of the first drugs to inhibit the growth of malignant cells while having a limited effect on healthy tissue, usually without the distressing hair loss, sickness and weakened immune system that accompany conventional cancer therapies.

Gleevec/Glivec was originally developed to treat a rare type of blood cancer called chronic myeloid leukemia (CML). Although the treatment was designed to be specific for CML, researchers soon realized that Gleevec/Glivec could also target tumor cells in GIST patients, and they are studying it as a potential treatment for other forms of cancer. In all, hundreds of thousands of lives could be transformed by this revolutionary drug.

Patients' Perspectives: Laura Brizar

Laura was only a baby when she joined the clinical trial for Elidel (pimecrolimus). "I could see how much she was suffering. She looked exhausted, she barely slept," recalls Diamant Thaci, MD. The seven-month-old child from a small town in central Germany was ill, not with a life-threatening disease, but with eczema. Yet her young life was in shambles. "The skin on her face, neck and behind her knees was red, dry and itchy. Despite putting gloves on her little hands, Laura could not stop scratching so her skin was broken and weepy. It looked awful. On the street, strangers would ask me what was wrong with her." Laura's mother rejected reverting to corticosteroids, the only previously effective treatment, because they can cause skin thinning, especially of the face, with prolonged use. None of the other treatments helped and Laura's mother was in despair.

Their visit to Dr. Thaci changed all that. The senior dermatologist at the Dermatological University Clinic in Frankfurt am Main, Germany, enrolled Laura in a clinical trial for the Novartis drug Elidel. "We used this wonder cream," says Laura's mother, "and after two weeks her condition had noticeably improved. After a month her skin had made a remarkable recovery. By her first birthday you could hardly see any marks at all." Dr. Thaci who has followed Laura's progress, is equally elated. "We were the last resort for the mother and the child. Every time the child came through the door, I was curious: had the situation improved? It was a joy to witness what happened," he says.

Elidel is derived from a natural substance produced by a fungus, Streptomyces hygroscopicus. It was discovered by scientists at the Novartis Research Institute in Vienna who were looking for a medicine that would prevent T-cells from churning out chemicals known as cytokines that trigger skin inflammation. Elidel reduces the severity of eczema by an average of 64% compared to a 12% reduction in patients using a control cream. More than 4 000 patients have now been treated with


Elidel in clinical trials and the most frequently observed side effect is a mild feeling of warmth when the cream is applied. As eczema typically begins in childhood and commonly occurs on the face, no doubt physicians will welcome a non-steroid cream that can be used on any skin.

Making a Real Difference

New medicines such as Gleevec/Glivec, Elidel and Zometa, are making a real difference in the lives of millions of families living with disease. These outstanding medicines have provided the impetus for Novartis to make a huge and exciting investment into research and development. In 2003, a new institute for research, based in Cambridge, Massachusetts, will open under the name of the Novartis Institutes for Biomedical Research, Inc. (NIBRI). The aim is to strengthen Novartis' position as a leader in pharmaceutical innovation.

Researchers in laboratories across Europe, the US and Japan will be looking towards Cambridge to follow the leadership of top scientist Professor Mark Fishman who will be heading the global research effort of Novartis, at the new Cambridge site.

Professor Fishman is a physician, a Harvard medical school professor, and was chief of cardiology at Massachusetts General Hospital. He was responsible for transforming research in his field by introducing the zebra fish as a model organism for understanding new genes and pathways in cardiovascular disease. He has every intention of applying the same up-beat, revolutionary strategies to drug discovery (see interview, page 10).

"Our establishment, NIBRI in Cambridge, in the midst of one of the world's most impressive pools of scientific talent, outstanding academic institutions, and large patient populations, will help us to attract the best researchers," says Daniel Vasella, MD, Chairman and CEO of Novartis AG. The new research facility will open in March 2003 with an initial 28 000 m2 of lab space which will accommodate 400 scientists. In April 2004, Novartis will take over an additional 56 000 m2 of laboratories in a renovated building which abuts the MIT campus. When the institute is fully staffed, it is expected that almost 1 000 Novartis scientists will be working in Cambridge, complementing the 1 500 scientists who are now located in Basel. With an initial investment of USD 250 million, the focus will be on the discovery of new drugs for oncology, diabetes, cardiovascular and infectious diseases, as well as for fundamental molecular and genetic studies that bring about a quantum leap in the pace and predictability of drug discovery.

To Professor Fishman, a key to success is to forge close partnerships between the institute, academia and the biotech community. For this, Cambridge provides the perfect environment. "The institute had to be strategically situated in an area where the best academic institutions and hospitals with large patient networks are located," he says.

Inspired by Success

While NIBRI gears up to open its doors, Barbara plans to attend her son's wedding and PhD graduation in a year's time, and Gerd's life is back to normal. Laura's mother is grateful that her toddler can finally sleep comfortably.

For a pharmaceutical company, it is being able to have an impact on people's lives through its discoveries that provides the impetus to produce more and better medicines. "One of the most motivating things that happens to us as scientists is to hear people's amazing stories," enthuses Alex Matter, MD, Global Head of Translational Research at Novartis. "People whose lives have improved are our best advocates."


Interview with Prof. Mark Fishman, MD

Is drug discovery in need of a radical shake up?

There remain many illnesses without effective therapy. As we unravel the genome and learn how to put function to the genes, we will generate a foundation for mechanistic explanation of disease and acquire many new potential targets for medicines. To give you an idea of how early we are in the process, all medicines from all companies today hit only about 120 targets. Since there are in the order of 30 000 genes and 200 000 proteins, many of which could be involved in illness, clearly we are missing great opportunities for discovery. The trick will be to decipher which genes are critical. This will be a long-term project, in part because different patients with the same illness may actually have different underlying causes because of genetic predisposition. In the future, medicines may well be directed by the patient's genetic make-up and more attuned to patient-specific mechanisms of disease. For this reason Novartis has elected to ensure that we engage in activities at the frontier, in order to be prepared for this sea-change.

Will the newly sequenced human genome feature heavily in the new institute's agenda?

Currently the genome is pretty much a list of genes by sequence. To increase the pace and predictability of discovery of new drugs we need to unravel the function of these genes. Of course, this is a mammoth task, with implications for all of science and medicine, and we cannot, and should not, go it alone. To do so, we need to form ventures and partnerships with our colleagues in academia and in biotech.

Will the marriage of pharma and academia pan out, or is it just pie in the sky?

The two already are engaged. Over the last years it has become clear that many academics would dearly like to make medicines, in some cases as a vindication for their fundamental work. The support from academia for the opening of NIBRI in Cambridge has been uniformly positive and strong precisely because many desire such involvement. There are real issues, of course, around intellectual property, for example, but in many cases we can break through these barriers by common sense and asking where lies the real value. It will benefit no one if the walls get higher and barriers more impregnable, least of all our patients who have the right to full benefit of the fundamental discoveries now coming forth at an ever-increasing pace.

What is your biggest challenge?

To assemble a system that delivers medicines continuously, keeping an eye on the horizon for the sweeping changes while, in a practical way, using each day's knowledge to generate drugs. Science is a moving target, and no assumptions today can be confidently predicted to hold in 5 years … except that most of today's predictions will be wrong.

Are some traditional research methods flawed?

One major assumption that clearly needs to be challenged is that two patients with apparently the same disease, by today's definition—be it diabetes, heart failure, or leukemia—have the same cause for that disease, and therefore will benefit equally from the same drugs. We therefore will need better to attune drugs to individuals, in order to increase efficacy and decrease toxicity. In addition, we can utilize new model organisms in the discovery process. Much is shared, in terms of essential molecular pathways, the biological building blocks. For example, one pathway essential to making the fruitfly wing, when perturbed in humans, causes cancer. On the flip side, we need to recognize that in many ways man is different, and so need to examine how to change these model systems to make them better predictors of the human response to drugs.

What does the new Novartis Institutes for Biomedical Research Inc. (NIBRI) offer ordinary citizens?

The mission is to discover medicines at an increasing pace and with even greater specificity, to better treat those now suffering disease, and to improve the process so effectively over the coming years that our children look back with disbelief, surprised that such diseases ever were untreatable.



The Novartis Pharmaceuticals Division is a world leader in the discovery, development, manufacture and marketing of prescription medicines. Our goal is to provide a broad portfolio of innovative, effective and safe products and services to patients through healthcare professionals around the world. This goal is supported by a dedicated organization operating in more than 140 countries through approximately 80 affiliates.

CHF millions

CHF millions

in CHF %

Sales   21 002   20 181   4
Operating income   6 022   5 677   6
Research and development   3 580   3 447   4
Research and development as % of sales   17   17    
Free cash flow(1)   6 919   6 663   4
Net operating assets   11 287   13 144   -14
Investments in tangible fixed assets   785   617   27

Before acquisition of product and marketing rights



  % change

Number of employees   44 110   41 256   7


Top ten products

sales in
CHF millions

in local
currencies %

Diovan/Co-Diovan   2 580   49
Neoral/Sandimmun   1 607   -5
Lamisil (group)   1 355   4
Lotrel   1 011   35
Gleevec/Glivec   953   303
Sandostatin (group)   943   23
Voltaren (group)   925   -3
Lescol   896   18
Zometa   758   NA
Cibacen/Lotensin/Cibadrex   714   9

NA—Not applicable as insignificant prior year sales

GRAPHIC: Pharm. rejuvenation


Key Marketed Products

Therapeutic area
  Generic name

Cardiovascular,   Cibacen/Lotensin   benazepril   Hypertension, heart failure   Coated tablet
metabolism and
  Co-Diovan(1)   valsartan + HCT   Hypertension, congestive
heart failure
  Film-coated tablet
    Diovan   valsartan   Hypertension, heart failure   Capsule
    Lescol   fluvastatin   Cholesterol-lowering agent   Capsule
    Lotrel   benazepril & amlodipine   Hypertension   Capsule
    Starlix   nateglinide   Type-2 diabetes   Tablet
    Zelnorm/Zelmac   tegaserod/tegaserod maleate   Symptomatic treatment of irritable bowel syndrome   Tablet

Oncology and hematology   Aredia   pamidronate   Bone complications associated with cancer   Intravenous infusion
    Femara   letrozole   Advanced breast cancer   Coated tablet
    Gleevec/Glivec   imatinib mesylate   Chronic myeloid leukemia   Tablet
    Sandostatin LAR   octreotide   Acromegaly, carcinoid syndrome   Ampoule i.m.
    Zometa   zoledronic acid   Hypercalcemia of malignancy   Infusion

Central nervous system   Comtan
  Parkinson's disease
Alzheimer's disease
  Film-coated tablet
    Leponex/Clozaril   clozapine   Antipsychotic agent for treatment-resistant schizophrenia(4)   Tablet, ampoule i.m.
    Tegretol   carbamazepine   Epilepsy, acute and bipolar affective disorders   Tablet, chewable tablets, syrup, suppository
    Trileptal   oxcarbazepine   Epilepsy, seizures   Tablet, oral suspension

Transplantation   Neoral/Sandimmun   cyclosporine   Prophylaxis of organ rejection following kidney, liver and heart allogenic organ transplantation(2)   Soft gelatin capsule, oral solution, intravenous infusion
    Simulect   basiliximab   Prophylaxis of acute organ rejection in de novo renal transplantation   Intravenous infusion or injection

Dermatology   Elidel   pimecrolimus cream   Atopic dermatitis   1% cream
    Famvir   famciclovir   Acute herpes zoster   Tablet
    Lamisil   terbinafine   Fungal infections   Tablet, cream, DermGel solution, spray

Respiratory   Foradil   formoterol   Asthma, COPD   Inhalation capsule (aerosol)

Rheuma, bone and
hormone replacement
  Estalis(3)   estradiol norethisterone   Estrogen deficiency due to menopause and preventing osteoporosis   Patch
therapy   Estraderm TTS/MX   estradiol   Estrogen deficiency due to menopause   Patch
    Miacalcic   salmon calcitonin   Osteoporosis, regulator of mineral homeostasis and skeletal metabolism, Paget's disease of bone, neurodystrophic disorders   Nasal spray, ampoules
    Voltaren   diclofenac   Inflammatory forms of rheumatism, pain management   Enteric coated tablet, drop, ampoule, suppositories, gel

Ophthalmics   Rescula
Wet form of age-related macular degeneration
  Eye drop
Intravenous infusion

Co-Diovan/Diovan HCT in the USA
In the US, Neoral approved for severe psoriasis and rheumatoid arthritis
Vivelle, Vivelledot
Also approved for suicide prevention in the US


Compounds in development

The Novartis pipeline holds a broad stream of promising future products, with 52 projects in Phase II and beyond as of December 2002, including both new molecular entities and additional indications or formulations for marketed products.


Molecular chemical entity.

Generic name

Designation assigned to compound.


A disease or condition for which a particular drug is believed to be an appropriate therapy.

Phase II

Clinical trials in patients to determine dose ranging, safety and efficacy.

Phase III

Large clinical trials to determine definitive safety and efficacy in patients.


In registration.


Therapeutic area
  Generic name

Cardiovascular and metabolism   SPP100   aliskiren   Hypertension
    LAF237     Type-II diabetes
    Diovan   valsartan   Congestive heart failure
        valsartan   Post- and pre-myocardial infarction
    Navigator*     Progression to type-II diabetes
    Sandostatin LAR   octreotide acetate   Diabetic retinopathy, other indications
    Lotrel 10-20     Hypertension
    Lotrel 10-40     Hypertension
    NKS104   pitavastatin   Dyslipidemia
    Lescol (LIPS)   fluvastatin sodium   Secondary prevention of cardiac events

Oncology   Femara   letrozole   Breast cancer (adjuvant therapy)
    ICL670     Chronic iron overload
    Gleevec/Glivec   imatinib mesylate   Solid tumors
    OctreoTher   edotreotide   Somatostatin receptor positive tumors
    EPO906     Solid tumors
    PTK787   vatalanib   Solid tumors
    PKC412   midostaurin   Acute myeloid leukemia
    SOM230     Acromegaly, GEP neuroendocrine tumors

Central nervous system   Ritalin LA   methylphenidate   Attention deficit disorders
    Clozaril   clozapine   Suicide prevention
    ELC200   entacapone/levodopa/carbidopa   Parkinson's disease
    ILO522   iloperidone   Schizophrenia
    Exelon   rivastigmine   Non-Alzheimer's dementia
    Exelon TDS   rivastigmine   Alzheimer's disease
    Trileptal   oxcarbazepine   Neuropathic pain
    TCH346     Parkinson's disease, ALS(1)
    AMP397     Epilepsy

Transplantation, immunology   FTY720     Transplantation
    Certican   everolimus   Transplantation
    Myfortic (ERL080)   mycophenolate sodium   Transplantation

Dermatology   Elidel (ASM981)   pimecrolimus   Inflammatory skin diseases
        pimecrolimus   Inflammatory skin diseases
    Lamisil   terbinafine   Tinea capitis

Respiratory   Foradil   formoterol   Multi dose dry powder inhaler for asthma
    QAB149     Asthma/COPD(2)
    Xolair   omalizumab   Asthma/prevention of SAR(3)
    Elidel (ASM981)   pimecrolimus   Asthma

Arthritis, bone, anti-infectives, and gastrointestinal diseases   Prexige   lumiracoxib   Rheumatoid arthritis, osteoarthritis, pain
    Zelnorm/Zelmac   tegaserod   Irritable bowel syndrome
        tegaserod   Functional dyspepsia
        tegaserod   Gastroesophagel reflux disease
        tegaserod   Chronic constipation
    ZOL446   zoledronate   Post-menopausal osteoporosis
        zoledronate   Paget's disease
        zoledronate   Rheumatoid arthritis
    RAD001   everolimus   Rheumatoid arthritis
    AAE581     Osteoporosis
    SMC021   calcitonin   Osteoporosis

Ophthalmics   Visudyne   verteporfin   AMD(4) (occult)
        verteporfin   AMD(4) (classic)
        verteporfin   AMD(4) (minimally classic)
    Rescula   unoprostone isopropyl   Glaucoma

Navigator trial examining combination therapy of Starlix and Diovan.
Amyotrophic lateral sclerosis
Chronic obstructive pulmonary disease
Seasonal allergic rhinitis
Age-related macular degeneration


Mechanism of action
  Filing dates
  Phase I
  Phase II
  Phase III

Renin inhibitor   Oral   2005  
Dipeptidylpeptidase (DPP-IV) inhibitor   Oral   2005  
Angiotensin-II receptor blocker   Oral   Filed (UK, France)  
Angiotensin-II receptor blocker   Oral   2004  
    Oral   >2005  
Growth hormone + IGF-1 inhibitor   Intramuscular   2004  
    Oral   Filed (US)  
    Oral   Filed (US)  
HMG CoA reductase inhibitor   Oral   2005 (EU)  
HMG CoA reductase inhibitor   Oral   Filed  

Non-steroidal aromatase inhibitor   Oral   2005  
Iron chelator   Oral   2004  
Tyrosine kinase inhibitor   Oral   tbd  
Radiation therapy   Intravenous   2004  
Microtubule depolymerization inhibitor   Intravenous   2004  
Tyrosine kinase inhibitor   Oral   2005  
Protein kinase inhibition   Oral   >2005  
Binds to somatostatin (sst)1/2/3/5 and inhibitor of hormones   Intravenous   >2005  

Dopamine transport blocker   Oral   Filed (EU)  
Dopamine receptor blocker   Oral   Filed (EU)  
Catecol-O-methyltransferase (COMT) inhibition   Oral   Filed  
Mixed 5HT2A/D2 antagonist   Oral   tbd  
Cholinesterase inhibitor   Oral   >2005  
Cholinesterase inhibitor   Transdermal   >2005  
Voltage dependant sodium currents blocker   Oral   2004  
Neuronal GAPDH dependent programmed cell death inhibition   Oral   2005  
AMPA receptor antagonist   Oral   >2005  

Immunosuppression   Oral   2005  
Growth-factor-induced cell proliferation inhibition   Oral   Filed  
Inhibition of inosine monophosphate dehydrogenase enzyme   Oral   Filed (EU)  

T-cell and mast cell inhibitor   Oral   2005  
T-cell and mast cell inhibitor   Ointment   2004  
Fungal squalene epoxidase inhibitor   Oral   2004  

Long-acting beta-2 agonist   Dry powder for inhalation   Filed  
Long-acting beta-2 agonist   Inhalation   >2005  
Anti-IgE monoclonal antibody   Subcutaneous   Filed (US)  
T-cell and mast cell inhibitor   Oral   >2005  

Cyclo-oxygenase-2 inhibitor   Oral   Filed  
5HT4-receptor agonist   Oral   2004 (EU)  
5HT4-receptor agonist   Oral   2004  
5HT4-receptor agonist   Oral   2005  
5HT4-receptor agonist   Oral   2003  
Bisphosphonate: osteoclast inhibitor   Intravenous   >2005  
Bisphosphonate: osteoclast inhibitor   Intravenous   2005  
Bisphosphonate: osteoclast inhibitor   Intravenous   >2005  
Growth-factor-induced cell proliferation inhibition   Oral   >2005  
Cathepsin K Inhibitor   Oral   >2005  
Regulator of calcium homeostasis   Oral   >2005  

Photosensitizer for photodynamic therapy   Intravenous   2005  
Photosensitizer for photodynamic therapy   Intravenous   Filed (Japan)  
Photosensitizer for photodynamic therapy   Intravenous   >2005  
Facilitates aqueous outflow   Topical   Filed (EU)  


The Novartis Pharmaceuticals Division achieved double-digit sales growth throughout 2002, to post full-year sales of CHF 21.0 billion, an increase of 13% in local currencies or 4% in Swiss francs. By comparison, the world pharmaceutical market grew around 8% over the same period.

The strong performance was driven by increased market share in all of the Division's major markets. The Cardiovascular and Oncology franchises sustained dynamic momentum, widely exceeding overall growth in their respective market segments. For the second consecutive year, Novartis was among the most successful companies in the industry regarding FDA approvals. 2002 saw the successful US and European launches of Elidel, an innovative non-steroidal cream for treating eczema, and Zelnorm/Zelmac, a treatment for constipation-prone irritable bowel syndrome (IBS) in women. Zometa gained US and EU approvals for treating bone metastases in a broad range of cancers. Diovan, our flagship drug for lowering blood pressure, won approval in the US for treatment of heart failure in patients intolerant of ACE inhibitors, making it the first and only drug in its class to be approved by the FDA for this application.

Based on impressive results in a clinical study of patients with early stage chronic myeloid leukemia (CML), Gleevec/Glivec received approval as first line therapy in the US and, early in 2003, in the EU. The FDA also approved Gleevec as the first drug for the treatment of GIST, a rare type of stomach tumor, in patients for whom surgery is not an option.

The new products and additional indications for recently launched products contributed to further rejuvenation of the portfolio. As a result, the proportion of sales generated by patented products rose 6 percentage points to 61%.

Marketing & Distribution investments increased to drive the US and EU launches of Elidel and Zelnorm. Implementation of the new research strategy and the establishment of the new Boston facility to power future innovation led to a 4% increase in Research & Development investments, which were maintained at 17% of sales.

Regionally, sales in the US, the biggest single market, rose 12% to CHF 8.9 billion. The US now accounts for 42% of Pharmaceuticals' sales, up nine percentage points over the past five years. Elidel became America's number-one branded product in treatment of atopic dermatitis, or eczema, with more than double the share of new prescriptions of its closest rival. Furthermore, the US field force considerably improved its rankings in the Scott-Levine surveys, a highly regarded independent annual measure of customer satisfaction.

Double-digit sales growth was achieved in all major regions, with Latin America (17%) and Japan (15%) leading the way, despite government mandated price decreases. In Europe, strong performances in Spain and France offset the effects of pricing pressures in several countries, mandatory generic substitution in Germany, and the effects of parallel imports both in Germany and the UK.

Business Unit Product Reviews

Primary Care

Primary Care continued to surpass industry growth, as 2002 sales climbed 13% in local currencies. Primary Care includes a wide range of products for the treatment of cardiovascular diseases, central nervous system disorders and dermatological conditions (including fungal infections, eczema, psoriasis and genital herpes).

In 2002, Diovan/Co-Diovan (valsartan/valsartan+ HCT) extended its category leadership in the US and became Novartis' best selling product ever, with sales growing 49% in local currencies. Backed by the Val-Heft study data showing improved survival in certain patient treatment groups and reduced hospitalization and cost-effectiveness benefits, Diovan became the first and only drug of its kind to gain an approval for heart failure patients. To complement the broad choice and flexibility for patients and


physicians, a new strength of Co-Diovan (Diovan combined with a diuretic) was launched under the name of Diovan HCT in the US.

Lotrel (benazepril+amlodipine), another Novartis flagship antihypertensive, increased sales by 35%, supported by new data showing that patients switched from Norvasc® (a Pfizer product) experienced better blood pressure control with less edema. A new dosage strength was launched in mid-year in the US and others were filed in December for FDA approval.

Lescol (fluvastatin), a lipid-lowering drug (statin) grew strongly (18%), reflecting its positive risk/benefit profile and convenient extended-release formulation.

The Lescol Intervention Prevention Study (LIPS) published last year was the first prospective study to evaluate the effects of a statin exclusively in patients who have undergone percutaneous coronary intervention (PCI) procedures such as angioplasty. These patients are at a high risk of a second major adverse cardiac event.

The LIPS findings showed that Lescol 80 mg significantly reduced major adverse cardiac events by 22%, even in patients with normal cholesterol levels. Moreover benefits of Lescol were even more profound in high-risk patients with diabetes and multi-vessel disease. Novartis has filed regulatory applications for the additional indication of secondary prevention of cardiovascular events in patients who have undergone PCI procedures. If approved, Lescol could help the 1.8 million patients worldwide who undergo angioplasty procedures annually.

Lamisil (terbinafine), used in the treatment of fungal infections of the nails, extended its share of US prescriptions to more than 80% and achieved a 4% increase in a declining market.

Elidel (pimecrolimus) was launched in 13 countries, including the US. Sales reached CHF 148 million, and within just six months this highly effective, non-steroid cream became the number-one branded treatment for eczema in the US.

Exelon (rivastigmine) for the treatment of Alzheimer's disease posted strong sales growth of 26%, lifted by the European approval of a labeling expansion to include the product's unique property of inhibiting two enzymes believed to be related to the cause Alzheimer's disease.

During 2002, European regulatory officials approved the additional labeling of Exelon as an inhibitor of both acetylcholinesterase (AChE) and butyrylcholinesterase (BuChE). Recent research suggests that BuChE may play an increasingly important role in regulating brain acetyl-choline levels as Alzheimer's disease progresses and that the dual inhibitory action of Exelon may provide additional treatment benefits for patients with the disorder. This makes Exelon unique in its class as the other cholinesterase inhibitors commonly used to treat Alzheimer's disease, such as donepezil and galantamine, inhibit only AChE.

Trileptal (oxcarbazepine), used in the treatment of epilepsy, continued to post substantial sales growth (91%), supported by increased use as a monotherapy and by launches in Canada and Australia.

Zelnorm/Zelmac (tegaserod/tegaserod maleate), a drug for constipation-related irritable bowel syndrome in women, gained approval in the US in September, and sales reached CHF 70 million.


Novartis Oncology continued to outperform industry growth rates, gaining further market share and posting strong sales growth of 28% in local currencies. Novartis is now the fastest growing of the world's top five oncology companies.

Gleevec/Glivec (imatinib mesylate), our breakthrough treatment for chronic myeloid leukemia and gastrointestinal stromal tumors, continued to bring benefits to thousands of patients in more than 80 countries. Sales exceeded CHF 950 million, making it Novartis' fifth biggest product. Gleevec/Glivec was


awarded the prestigious international Prix Galien and is currently under investigation for additional uses in more than 100 clinical trials.

Zometa (zoledronic acid) gained approvals for use in bone metastases in a broad range of cancers and posted sales of CHF 758 million, making it the world's most prescribed intravenous bisphosphonate for bone metas-tases. More potent and convenient than its predecessor, Aredia, it is approaching or has exceeded the previous sales level of Aredia in many markets.

Sandostatin (octreotide), used in the treatment of acromegaly and carcinoid syndrome, continued to post substantial double-digit growth, with sales up 23%.

Femara (letrozole), an oral aromatase inhibitor for first-line therapy of advanced breast cancer in postmenopausal women, posted a 37% rise in sales. Having demonstrated superiority to the previous standard therapy, tamoxifen, Femara is rapidly growing in the US in the first-line metastatic cancer setting.


Ophthalmics continued to surpass industry growth, as 2002 sales climbed 7% in local currencies, driven by Visudyne.

Visudyne (verteporfin), the innovative treatment in macular degeneration (dry), achieved sales growth of 27%, and has now been approved in more than 65 countries for its main indication and in more than 45, including the EU, US and Canada, for additional indications.


Neoral/Sandimmun (cyclosporine) remains a cornerstone of immunosuppression and continues to compete strongly against branded and generic competition, owing to a reluctance among physicians to switch patients who are stable and doing well on it.

Simulect (basiliximab), designed to prevent early rejection and optimize clinical outcomes, posted a 21% rise in sales following its successful launch in Japan and continued market segment share gains from established competitor brands in most regions.

Myfortic (mycophenolate sodium), gained first approval in Switzerland, Brazil, India and Australia for preventing organ rejection in kidney transplantation, while Certican (everolimus), a novel drug that targets primary therapy of chronic rejection, was submitted for approval in the EU and US.

Mature Products

This business unit attempts to enhance the value of brands at late stages of their product cycles. Often its brands have lost patent protection and face strong generic competition. By pioneering low-cost marketing activities, ranging from e-marketing to extensive use of external field forces, Mature Products maximizes cash generation while at the same time ensuring a sharper strategic focus on older products than they would receive as part of growth businesses such as Primary Care, Oncology or Ophthalmics.

Of the mature brands, the anti-inflammatory Voltaren continued to compete well against generics and the COX-2 inhibitor class of drugs, while the antihypertensive Cibacen/Cibadrex (Lotensin/Lotensin HTC in US) delivered a 9% increase in sales, mainly as a result of renewed external field-force support in the US.

Business Development and Licensing

During 2002, Novartis acquired rights to develop and commercialize several early-stage compounds targetting major diseases. Novartis and Dainippon Pharmaceutical Co. reached a license agreement for


AC-5216, a pre-clinical compound for treatment of anxiety. The transaction gave Novartis exclusive worldwide rights outside Japan and certain Asian countries. AC-5216 is a so-called mitochondrial benzodiazepine receptor ligand, a novel class of compounds which has demonstrated a rapid onset of action.

Under an agreement with Tanabe Seiyaku Co., Novartis received a license to develop and market any of Tanabe's LFA-1 antagonists in the US, Europe and many other countries. The LFA-1 antagonists block a key cell-adhesion molecule expressed on the surface of white blood cells and may have therapeutic potential in the treatment of autoimmune disorders such as rheumatoid arthritis and psoriasis, as well as prevention of graft rejection in organ transplants.

Novartis also reached an agreement with India's Torrent Pharmaceuticals Ltd. regarding global rights to an early-stage development compound known as an "AGE-breaker,"under investigation for potential use in the treatment of heart disease.

Several promising compounds already in clinical testing are expected to reach key milestones during 2003.

FTY720, a novel selective immunosuppressant, is being evaluated for prevention of acute rejection and graft loss in kidney transplant patients. Currently in Phase II, it has been shown to protect the transplanted organ against T-cells without changing the host's ability to respond to antigens.

ICL670, an oral iron chelating compound for the treatment of iron overload in transfusion-dependent anemias, will begin Phase III trials early in 2003. With once-daily administration, ICL670 is expected to eventually replace the currently available treatment, Desferal.

PTK787, an angiogenesis inhibitor which works through the VEGF pathway to block blood vessels that supply tumors, is expected to begin Phase III testing early this year. PTK787 could be the first oral drug of its kind to reach the market.

AAG561 could be the first in class among the corti-cotropin-releasing factor 1 antagonists, a novel concept in the treatrment of depression and anxiety which encompasses huge patient populations. Phase II trials are expected to start during 2003.

AAE581, an innovative inhibitor of the cathepsin K enzyme which degrades bone matrix, is also scheduled to begin Phase II this year. Inhibition of cathepsin K in osteoclasts leads to reduced collagen breakdown and decreased bone resorption.

SAB378, a cannabinoid (CB1) agonist, represents a novel concept in treating pain which, on the basis of preclinical results, could be more potent than major current treatments. Results of proof of efficacy studies are expected during 2003.


Joining Forces in the Quest for Cures by Stephen Moore

Novartis works closely with many of the world's leading clinicians to develop innovative approaches to intractable diseases and satisfy unmet medical needs.

These partnerships can stretch over many years—sometimes even decades. But breakthroughs in the US for two Novartis drugs last year show that rewards can be worth the wait.

In July the US Food and Drug Administration (FDA) approved Zelnorm, an exciting new treatment for the constipation-predominant form of irritable bowel syndrome or IBS in women. So far, Novartis is one of the few pharmaceutical companies willing to tackle IBS, a debilitating disorder affecting millions of people around the world but one that is difficult to define and diagnose.

Pioneering research by academic allies and development of tools to refine diagnosis of IBS speeded the development of Zelnorm/Zelmac. In addition, bold endorsements of the drug's potential by outside experts helped rescue Zelnorm/Zelmac during early stages of development when its future was in doubt.

Another Novartis product that notched a major regulatory breakthrough last year was Clozaril, a well-known drug used to treat schizophrenia patients who fail to respond to two standard antipsychotic therapies. Shortly before Christmas, the FDA approved Clozaril for the treatment of recurrent suicidal behavior in patients with schizophrenia or schizoaffective disorder. It was the first time that any medication had won FDA approval for use in treating suicidal behavior.

Suicide is a silent epidemic that takes a daunting toll among people with schizophrenia. Roughly 10% of schizophrenia patients die as a result of suicide and about 40% attempt suicide at some point during the course of their disease.

Herbert Meltzer, MD, the Bixler Professor of Psychiatry at Vanderbilt University School of Medicine and a longtime Novartis advisor, was one of the first clinicians to recognize and demonstrate the potential of Clozaril to reduce suicidal behavior. Over the past four years, Dr. Meltzer was the driving force behind the International Suicide Prevention Trial, or InterSePT, a landmark study which provided compelling evidence for the FDA's approval of the additional Clozaril indication.

"Novartis took quite a risk in doing the study and the potential benefits may be life-saving," Dr. Meltzer says. "It's almost like a fairy tale."


"A Truly Historic Step."

The InterSePT trial epitomizes the long-term commitment Novartis makes to core therapeutic areas such as schizophrenia and other mental disorders, cardiovascular disease or cancer. In recent years, research and development spending has been focused increasingly on these core areas, which are considered to have superior growth prospects. Sometimes, however, the interests of patients or the company's medical pedigree outweigh commercial considerations.

When InterSePT was initially proposed, Clozaril was already poised to lose patent protection in most major markets. Novartis officials agreed to invest millions of dollars in the study—knowing that even if it was a success, any potential financial benefit would be shared with producers of generic versions of clozapine, the generic name for Clozaril.

Ironically, the FDA approved the first generic version of clozapine in November 1997—the same day Novartis Chairman and CEO Daniel Vasella, MD, had invited dozens of international investigators associated with InterSePT to a kick-off meeting in the Swiss Alps. "We were all crestfallen," Dr. Meltzer recalls. "I was absolutely convinced that it would be the end of the study."

Dr. Vasella never wavered. "We felt a responsibility to physicians and patients to see if Clozaril really could reduce suicidal behavior," he says. "Nobody else was going to finance any new study—generics were riding on our back."

That decision was even more remarkable because the pharmaceutical industry had traditionally avoided the treatment of suicide—and systematically excluded suicidal patients from clinical trials for fear of potential legal liabilities if patients took their own lives while receiving an experimental therapy.

In a letter to Dr. Vasella last year, Richard Nakamura, Acting Director of the National Institute of Mental Health, "strongly commended Novartis and investigators associated with the InterSePT study" for efforts which, he said, could "lead to a new phase in suicide prevention research." Dr. Nakamura added he was "very much aware of the many methodological and legal challenges that have served as barriers to the development of clinical trials focused on reducing suicidality. For industry to take the lead in seeking an indication for suicide risk reduction is "... a truly historic step."

A More General Phenomenon

Helping such patients was a distant dream back in the 1980s when Dr. Meltzer made his initial observations about the benefit Clozaril seemed to provide by reducing suicidal thoughts and behavior. A pair of patients stand out in his memory: one woman who had made multiple suicide attempts and was tormented by hallucinations directing her to try again, and another woman who had made repeated suicide attempts prior to trying Clozaril. It quelled their symptoms so effectively, Dr. Meltzer says, "it made me wonder if this was a more general phenomenon."

The question took more than a decade to answer. The delay stemmed from the turbulent history of Clozaril as a drug associated with serious adverse events as well as major benefits. As the first in a new class of "atypical" antipsychotics, Clozaril had such positive effects on cognition that it enabled many patients to leave institutionalized care and hold a job or return to school. Moreover, Clozaril was apparently not associated with many vexing side effects associated with earlier "neuroleptic" schizophrenia treatments—from muscle spasms, tremors and erratic body contortions, to facial tics and involuntary movements of the neck and tongue.

However, Clozaril posed other safety concerns in a small proportion of patients. The biggest worry was agranulocytosis, a blood disorder where sudden declines of white blood cells could leave patients vulnerable to infections. Physicians weren't able to predict which patients were likely to develop agranulocytosis, and in 1975, after eight Finnish patients taking Clozaril developed agranulocytosis and died, the drug was pulled from markets worldwide.


Once a medicine is withdrawn for safety reasons it rarely returns—but, once again, Clozaril proved an exception. Physicians and patients who couldn't find an effective replacement prodded regulatory authorities to allow Clozaril back on the market and the drug made a stunning comeback during the late 1980s and early 1990s, including first-ever approvals in the US, the UK and certain other countries.

Still, because of lingering safety concerns, regulators restricted use of Clozaril to patients who had failed to respond to other treatments. Even those patients had to take extra precautions—including mandatory weekly blood tests. The "no blood, no drug" policy was designed to catch adverse reactions early enough to head off severe cases of agranulocytosis.

Clozaril vs. Zyprexa®

In the meantime, Dr. Meltzer had tested his initial hypothesis about a possible positive effect on suicidal behavior by treating dozens of patients with Clozaril. In 1995, he and research assistant Ghadeer Okayli published a landmark paper showing that Clozaril actually did decrease suicidal ideation in patients. A similar positive effect was later reported by other researchers—which set the stage for InterSePT.

Criteria for enrollment included previous suicide attempts or severe suicidal ideation shortly before admission to the study. For ethical reasons, investigators felt that such severely ill schizophrenia patients couldn't be deprived of medication by assignment to a "placebo" arm receiving inactive sugar pills as treatment. So InterSePT was designed as a head-to-head test of two active comparator drugs—Clozaril against Zyprexa®, another "atypical" antipsychotic from Eli Lilly & Co. Besides being one of the most widely used treatments for schizophrenia, Zyprexa® had shown some hints of efficacy in reducing suicidal behavior.

In all, 980 patients began the two-year InterSePT study; 490 participants were treated with Clozaril and the remaining 490 patients with Zyprexa®. Results were unequivocal: compared to Zyprexa®, Clozaril reduced the risk of significant suicide attempts, and hospitalizations to prevent suicide by 26%.

During the study and one-month safety follow-up period, 10 participants committed suicide—six of them patients who had received Clozaril and the remaining four Zyprexa®. For such a high-risk population, says Dr. John Kane, MD, Chairman of the Department of Psychiatry at Long Island Jewish Medical Center and head of the InterSePT study's steering committee, the number of suicides was extremely low and the difference in completed suicides between Clozaril and Zyprexa® wasn't statistically significant. It should be noted that death was not an endpoint in the InterSePT study because, in order to demonstrate a reduction in suicide, over 20 000 patients would have had to have been enrolled.

Although there were no cases of agranulocytosis during interSePT, the adverse event profile was generally consistent with the market experience of Clozaril. But in calculations assuming the historical incidence of serious side effects such as agranulocytosis or myocarditis, the risk-benefit ratio suggested by InterSePT was striking. For every 1 000 patients treated for two years with Clozaril, about 4.5 patients would experience a serious side effect (agranulocytosis or myocarditis) while 77 patients would be prevented from a suicide attempt or hospitalization to prevent suicide.

The impressive percentage of patients who completed the trial—and the unexpected low number of deaths—underscored the quality of care provided by investigators despite challenging circumstances. At a meeting with an FDA Advisory Committee late last year, Dr. Kane noted that suicidal behavior is the most frequent source of litigation against psychiatrists.

"Many of us are extremely uncomfortable treating a few individuals at this high a risk—knowing that in schizophrenia, suicide attempts can be very unpredictable and very lethal," he added. "There's anxiety on the part of clinicians to make sure they get it right—above and beyond anything to do with the research."


"Every Clinician's Nightmare"

The upbeat news from InterSePT comes amid mounting concern about suicide. Healthcare authorities ranging from the US Surgeon General and Britain's Ministry of Health to the Geneva-based World Health Organization (WHO) have launched anti-suicide campaigns in recent years.

The Surgeon General's office observes that about 30 000 Americans take their own life every year, more than the annual number of homicides across the US. The WHO estimates that more than 800 000 people worldwide commit suicide. At least 80% of those victims suffer from a mental disorder or substance abuse, WHO officials note.

Meanwhile, about 500 000 people in America per year require emergency room treatment as a result of attempted suicide. On top of thousands of dollars in direct hospital bills, an unsuccessful attempt can lead to physical impairment—from gunshot wounds to overdoses that cause permanent organ damage.

With FDA approval of the new Clozaril indication, patients will be the big winners. Dr. Kane predicts that several hundred thousand patients (of the estimated 2 million Americans living with schizophrenia) "would be candidates for any treatment that might help reduce the risk of suicide."

"A patient who has psychosis and also has made suicidal acts in the past is every clinician's nightmare," says Delbert Robinson, MD, a research psychiatrist at Hillside Hospital in New York and an investigator who treated patients during InterSePT. "They're the ones you worry about at night."

They're also the patients InterSePT aimed for—and the ones Clozaril can do most to help. Dr. Ranga Krishnan, MD, a Professor of Psychiatry at Duke University and chairman of the InterSePT suicide monitoring board, looked behind dry statistics to give a fuller description of the kind of patients which InterSePT attracted during his presentation to the FDA Advisory Panel meeting.

"These individuals were very, very ill," Dr. Krishnan said. Prior to enrollment or during the study, he said that there were incidences of patients jumping off bridges, trying to hang themselves or taking overdoses—all of which underscored the lack of support systems as well as chronicity of illness of participants. "The stories were striking," he said.

While formal FDA approval will make physicians more comfortable in prescribing Clozaril for the new indication, additional support may come from guidelines covering the treatment of prevention of suicide which the American Psychiatric Association is considering.

Still, Dr. Meltzer cautions that uptake of InterSePT findings into clinical practice probably will be relatively slow. "Within six to 18 months, there should be a clear signal of the use of Clozaril for this purpose," he says.

But he expects InterSePT to spur research in related mental disorders, such as psychotic depression and bipolar disease, where suicide is even more of a problem than in schizophrenia.

Zelnorm/Zelmac: The Road to Relief

In June 1995, a group of US gastroenterologists journeyed to Jackson Hole, Wyoming, to discuss a promising new medicine from Sandoz, a predecessor company to Novartis, against irritable bowel syndrome, or IBS.

The hand-picked group functioned as a scientific sounding board to Dr. Vasella, who at that time was still a pharmaceutical-division executive. He was irked by sluggish progress of the experimental IBS compound known by its generic name tegaserod but not yet its ultimate brand names Zelnorm in the US and Zelmac everywhere else. He recalled too well from his clinical experience the suffering of patients with severe IBS.


"Nobody was interested in pushing it—apart from a team of preclinical scientists," Dr. Vasella recalls. "I needed to build credibility for the project—and have key people inside the company hear from outside experts that this was exciting.'

He got the endorsement he was after. One participant at the Jackson Hole meeting—Dr. Chung Owyang, MD, of the University of Michigan Medical School—recalls that the experts "argued for a whole afternoon" and finally agreed "that tegaserod looked very positive based on what we knew about the properties of the compound." However the group also warned that development wouldn't be easy.

Their prediction was on target—and the road to approval has been a memorable one. "Zelnorm was in the coffin several times—but we always managed to pull it out at the last minute," Dr. Vasella says with a wry smile.

As occurs so often in pioneering research, Zelnorm/ Zelmac found its way from the laboratory to pharmacy shelves because a handful of people were convinced that the new medicine offered patients real benefits. The strength of their conviction sustained the Zelnorm/ Zelmac development team through years of shoestring budgets and a brutal pruning of research projects.

Yet, because Novartis lacked first-hand experience in IBS, it continued to rely heavily on contributions from these advisors and other outside experts. That cooperation is set to continue as Novartis steps up an education and awareness drive aimed to broaden understanding of IBS beyond the ranks of specialists.

"Treating IBS has been a frustrating experience both for patients and from our side because we haven't had anything really effective to offer them," Dr. Owyang says. "Now we need to educate primary care physicians that IBS isn't a single disease entity and that they need to identify subgroups of patients that will best respond to a specific drug. That education has to be done at a grassroots level."

Little Compassion

The biggest obstacle to the development of Zelnorm/ Zelmac was the nature of IBS itself. Characterized by chronic, episodic abdominal pain and discomfort, bloating and altered bowel function (constipation and/or diarrhea), the disorder lacked well-accepted diagnostic criteria. IBS also has no clear biological disease marker or structural abnormality that easily identifies affected individuals. And although IBS is a chronic condition, the symptoms wax and wane, presenting a potential pitfall to researchers attempting to design clinical trials testing the safety and efficacy of new treatments.

One of the most common gastrointestinal (GI) disorders, IBS is estimated to affect up to one in five Americans. It occurs in both men and women; however, the prevalence appears to be greater in women. The condition is a leading cause of workplace absenteeism, second only to the common cold, and accounts for approximately 12% of all visits to primary care physicians and 28% of visits to gastroenterologists.

Though many people with IBS are ashamed to discuss their condition, the disorder has a significant impact on their daily lives. "There is little compassion when it comes to understanding IBS and its impact," Nancy Norton, founder and president of the International Foundation for Functional Gastrointestinal Disorders, told an FDA advisory panel three years ago.

"The feelings of fullness and bloating, the pressure that begins in your rib cage, the distension in your stomach, the ache through your midsection and the cramping in your abdomen that causes people with IBS to double over in pain can be debilitating," she added. "Many sufferers are afraid just to eat in a restaurant or go to a movie, for fear that their condition could flare at any time."

The medical community has recognized that therapies traditionally used to treat the abdominal pain/discomfort, bloating and constipation of IBS have been generally ineffective and poorly tolerated. At the June 2000 meeting at which an FDA advisory panel reviewed Zelnorm, Dr. Arnold Wald, MD, of


the University of Pittsburgh Medical Center, listed multiple medications, from tricyclic antidepressants and anticholinergic agents, to bulking agents and laxatives, which physicians traditionally have prescribed to treat IBS. "There are no supporting data that suggest efficacy for any one of these agents, or a combination," Dr. Wald said.

Secrets of Serotonin

First synthesized in 1989, Zelnorm/Zelmac was designed to stimulate activity of a serotonin receptor subtype called 5-HT4. Serotonin is a chemical messenger also found in the brain where it is believed to affect moods—but 95% of serotonin in the body is localized in the GI tract, where it regulates motility and influences the perception of pain and discomfort.

Zelnorm/Zelmac is the first agent in a new class of drugs called serotonin-4 receptor agonists (5-HT4 agonist). By activating 5-HT4 receptors, Zelnorm/Zelmac stimulates the peristaltic reflex and normalizes impaired motility in the GI tract. Based on this effect, it was identified early as a potential treatment not only for IBS but also for a range of GI problems, such as chronic constipation and functional dyspepsia.

The development program for Zelnorm/Zelmacwas officially started in 1991 and within months survived its first close call when Sandoz, Novartis' predecessor, overhauled research programs and narrowed its focus to fewer disease areas. As a result, all but the most promising in-house research in GI diseases was halted; development of Zelnorm/Zelmac was allowed to continue with limited resources.

Personal sacrifices made by the drug's few champions helped keep the development program moving. Hans-Juergen Pfannkuche, MD, a pharmacologist who was one of the earliest members of the development team, moved on to respiratory research when the GI research program was halted, but he continued to work on Zelnorm/Zelmac part time. "Zelnorm was showing so much potential, I maintained research on it on top of regular business—it became a sort of hobby," he says. Other researchers divided their time between Zelnorm/Zelmac and day jobs in the dermatology, transplantation and cardiovascular disease areas.

The outlook for Zelnorm/Zelmac brightened following Dr. Vasella's conference in Jackson Hole. Members of his sounding board offered to help Dr. Pfannkuche and improve understanding of Zelnorm/Zelmac by testing the drug in their own labs using their own models.

Another key breakthrough about the same time was improved design of clinical trials made possible by new diagnostic tools. Earlier trials, which produced inconclusive results, had involved patients with a wide range of IBS symptoms. Research advances showed that IBS actually comprised a heterogenous group of patients—and that to be effective, clinical trials would have to match new drugs more selectively with subgroups of patients most likely to respond.

The scientific tools needed for more selective diagnosis became available when a group of experts issued guidelines called the "Rome Criteria" in 1994. The Rome Criteria, which are modelled on the so-called DSM classification system created for psychiatric disorders, were updated in 1999, and a third revision is currently underway and expected to be completed by 2006, according to Douglas A. Drossman, MD, co-director of the Center for Functional GI and Motility Disorders at the University of North Carolina and initiator of the Rome guideline program.

"By giving physicians a means with which to make the diagnosis, the Rome guidelines have helped to standardize and, in many ways, to legitimize the field of IBS," Dr. Drossman says. "And by making IBS easier to understand and diagnose, the Rome Criteria make pharmaceutical products more acceptable because the physicians know what they are dealing with."

"Functional GI disorders may not have a structural basis that's easily identified," Dr. Drossman says. "But they're real, just like migraine headaches or problems of that sort."


Not Over Yet

Before putting the new diagnostic tools to work, the Zelnorm/Zelmac development team had to surmount several additional pitfalls. When the Phase II trial program was completed in February 1996, Sandoz research management put the project on hold due to resource limitations. Later, when Ciba and Sandoz slashed the number of drugs in their combined research and development pipelines as a result of their merger, Zelnorm/Zelmac once again seemed in jeopardy. Although the project ultimately was continued, funding for Phase III trials remained tight.

Nevertheless, by the time those Phase III trials neared completion in 1999, Zelnorm/Zelmac had enough support at Novartis to become a "heavyweight project," a designation given to the most promising drugs in the pipeline. The budget was increased and preparations began to test safety and efficacy in additional GI disorders, including chronic constipation and functional dyspepsia. Clinical testing in these new GI disorders continues today.

The FDA approval of Zelnorm/Zelmac is based on clinical trials that show the drug provides relief of abdominal pain and discomfort, bloating and constipation in women with IBS. In three multicenter, double-blind placebo-controlled studies, 2 470 women with at least a three-month history of IBS symptoms prior to the study baseline period that included abdominal pain, bloating and constipation, received either Zelnorm 6mg/b.i.d. or placebo.

Each week, participants rated their response to the "Subject's Global Assessment of Relief," a measurement tool that takes into account overall well-being, symptoms of abdominal pain and discomfort, and altered bowel function. Based on this assessment, more patients on Zelnorm/Zelmac experienced relief than patients on placebo. In addition, it was shown to provide relief of the individual symptoms of abdominal pain/discomfort, bloating, and constipation.

Initially, Zelnorm/Zelmac was designated a priority review product by the FDA. After reviewing the application, the FDA requested additional data, and the Novartis US affiliate company worked closely with the FDA to provide the necessary data and finally bring the product to approval.

Approvals have been received in more than 25 other countries, where the drug is marketed under the brand name Zelmac.

After devoting more than a decade to the compound, Dr. Pfannkuche is eager to tackle unanswered questions about the drug. One key project will study genetic patterns among patients in hopes of identifying sub-groups more likely to respond to treatment with Zelnorm/Zelmac. After coming so far, he says, "we haven't seen the end of the story yet."


Consumer Health

Shaping Consumer Health

Creating, developing, manufacturing and marketing a wide range of competitively differentiated products that restore, maintain or improve the health and well-being of our customers. Creating strong, consumer-oriented and trustworthy brands. This best describes the focus of our reshaped Consumer Health Division, which since July 2002 includes our Generics, OTC self-medication, Animal Health, Medical Nutrition (including our Nutrition et Santé franchise), Infant & Baby, and our CIBA Vision business units. Each business unit has a leading market position in growth-orientated healthcare segments beyond our core pharmaceuticals business—thereby also providing essential, high quality health-related products.

In the dynamic world of consumer healthcare—the growth of which is driven variously by "mega trends" such as aging population, scientific advances, broadening healthcare knowledge and overall economic momentum—the success of each Business Unit depends upon its ability to anticipate and meet the needs of consumers and health professionals worldwide.

Consumer Health Division Overview

In late 2002, the Business Unit Heads launched a number of shared business initiatives, which will extend throughout 2003 and from which we expect considerable synergies. After the sale of the Food & Beverages business to Associated British Foods plc., the remaining Health Food & Slimming and Sports Nutrition businesses have been reorganized as a stand-alone unit, Nutrition & Santé, which for external reporting purposes will be consolidated into our Medical Nutrition business.

CHF millions

CHF millions

in CHF %

Sales   11 410   11 462   0
Operating income   1 684   1 513   11
Research and development   587   541   9
Research and development as % of sales   5   5    
Free cash flow   1 354   940   44
Net operating assets   8 133   8 032   1
Investments in tangible fixed assets   561   510   10



  change %

Number of employees   27 552   28 848   -5

Sales by business unit

sales in
CHF millions

in local
currencies %

Generics   2 809   25
OTC   2 359   -1
Animal Health   971   10
Medical Nutrition(1)   1 109   4
Infant & Baby   2 075   3
CIBA Vision   1 762   6
Divested Health & Functional Food activities   325    

Total   11 410   7

Including Nutrition & Santé




Key Marketed Products

Business unit

Generics   The Generics Business Unit markets a wide range of products in categories such as antibiotics, cardiovascular and central nervous system drugs, alimentary tract and hormonal preparations

Voltaren Emulgel
Lamisil AT Cream
  Smoking cessation
Topical muscle pain
Athlete's foot
Nasal decongestant
Pediatric cough and cold
  NeoCitran, TheraFlu
Ex-Lax, Benefiber
Denavir, Vectavir
  Cold and flu remedies

Wound healing
Anti gas
Cold sore

Animal Health                

Farm animals

Vaccines and


Tiamutin, Econor



Betamax, Excis

  Treatment of heart failure in dogs
and chronic renal insufficiency in cats
Control of fleas on cats and dogs

Treatment of bacterial infections
in pigs and poultry
Season-long prevention of blowfly
strikes in sheep
Treatment and control of liver
flukes in cattle and sheep
Prevention of BVD in cattle
Treatment and control of salmon lice
Prevention of respiratory diseases
in cattle
Treatment and control of fungal
infections in fish and fish eggs




Birnagen Forte,

  Prevention of heartworm and
intestinal worms in dogs
Prevention of heartworm and intestinal
worms and control of fleas in dogs
Treatment and control of liver fluke
and gastrointestinal worms
in cattle and sheep

Treatment of blowfly infestation
in sheep
Prevention of IPN in farmed
Prevention of footrot and liver
abscess control in cattle
Prevention of enteric disease
in cattle

Medical Nutrition                

  Standard tube feed range
Immunonutrition brand

Medical devices
  Disease specific tube feed range
Standard and disease specific oral

Infant & Baby                
    Gerber Infant
and Baby Foods
Gerber Graduates

Tender Harvest
  A selection of over 190 foods for
different stages of infancy
A wide variety of foods
for toddlers
Organic baby foods
  Gerber Wellness

Gerber Care
  Skincare, diaper rash, tooth and gum
care, infant drops and oral rehydration
Bottle feeding, breastfeeding, pacifiers,
playthings, etc.

CIBA Vision                
Contact lenses

Lens care

Surgical products
Focus DAILIES Toric


AOSept ClearCare/
AOSept Plus
(Square Round Edge)
  Daily disposable contact lens
Daily disposable lens to correct
Daily disposable lens to correct
Continuous wear lens for up to 30
nights and days

One-step hydrogen peroxide system
Enhanced formulation of AOSept

Pre-folded intraocular lens to restore
vision in people with cataracts
Foldable posterior chamber phakic
refractive lens
Focus 1-2 Week

Focus Progressives
Focus Monthly
Focus Toric

SOLO-care Plus

PRL (Phakic
Refractive Lens)
  Opaque lens that blends three
colors for more natural appearance
For replacement every one to two
Multi-focal lens to correct presbyopia
For replacement on a monthly basis
Monthly replacement lens to correct
Ten-minute multipurpose solution
Enhanced formulation of SOLO-care

Foldable anterior chamber phakic
refractive lens designed to float on
a patient's natural lens and to self-
center behind the iris


Novartis Generics—a Global Supplier to be Reckoned With

Generics continued to outperform industry growth rates with 2002 sales, rising 25% in local currencies (15% in CHF) to CHF 2.8 billion. Novartis Generics focuses on off-patent medicines, so-called generic versions, that are pharmaceutically equivalent to the original branded drug, but can be provided to the customer without the high costs of initial research and development. Retail pharmaceuticals (finished dosage forms) manufactured by Novartis Generics are sold to pharmacies, hospitals and other healthcare providers, while the industrial business produces bulk ingredients and intermediates, both for supply to our retail business, as well as for sale to third parties.

In 2002, Generics extended its core competence further beyond the manufacturing and sale of anti-infectives, looking for additional hard-to-make active substances, while simultaneously expanding many of its production facilities. Our new Biopharmaceuticals franchise provides high-tech compounds such as human proteins. Such "endogenous modulators" can exert a powerful therapeutic effect even at very low doses and are manufactured almost exclusively using gene technology and modern biotechnological methods. Building on its strengths, the fast development and industrial production of complex biotech compounds, Novartis Generics is in a position to manufacture these modern, mostly recombinant products reliably and at optimal quality. Parallel to the new organizational structure into three business franchises, Generics moved its headquarters to Vienna, Austria.

Sales were driven by the strong performance of Geneva Pharmaceuticals in the US, the launch of amoxicillin clavulanate potassium in July, as well as strong sales of finished dosage forms such as fluoxetine and omeprazole. Double digit growth rates were achieved in a number of key European countries (UK, France, Italy, Netherlands and Belgium), strongly supported by the launches of omeprazole and fluoxetine.

The growing demand for high quality and attractively priced medications, as well as patent expiries of major products in the years ahead, present substantial opportunities for our Generics business. The acquisition of Lek d.d. in the fourth quarter of 2002, a leading regional pharmaceutical player with strong positions in the growing markets of Central and South Eastern Europe, provides considerable new expansion opportunities for current Novartis products. In addition to complementary market coverage, the combined businesses have a broad product range covering various therapeutic areas such as anti-infectives, cardiovascular and gastrointestinal tract medicines, as well as combined strengths in the production of active ingredients. Equally, access to the powerful Novartis marketing and sales organization to distribute Lek products in the US and EU presents further growth potential. Thus in 2003, the strongly reinforced Novartis Generics organization will have a formidable presence in the major generics markets.

With new momentum derived from the successful launch of the Biopharmaceuticals franchise, the acquisition of Lek and the ongoing modernization of our generics production facilities we expect further growth of our Generics Business Unit above the markets. Furthermore, we expect substantial synergies and new impetus from our new initiative to consolidate our various Generics operations under one brand: the well-established name of Sandoz.


Based in Ljubljana, Slovenia, Lek is an international group of generics companies and ranks among the leading pharmaceutical businesses in Eastern Europe, while having a broader international presence in several specific product lines. Lek is active in pharmaceuticals and veterinary products. In pharmaceuticals, it has a wide-ranging product portfolio, with substantial expertise in many domains such as cardiovascular and gastrointestinal tract products. The Lek Group employs about 2 580 people in Slovenia and 1 325 abroad. It achieved total sales of SIT 78.5 billion (CHF 544 million), operating income of SIT 9.6 billion (CHF 67 million) and net income of SIT 8.2 billion (CHF 57 million) in 2001.
For further information please consult http://www.Lek.si


OTC—Focusing on Core Brands

In 2002, Over-the-Counter (OTC) Business Unit sales declined 1% in local currencies (-7% in CHF) to CHF 2.4 billion due to the discontinuation of several businesses. Excluding these, on a comparable basis, OTC outperformed its industry with a 3% sales growth. The OTC Business Unit manufactures and sells products for the treatment and prevention of a broad range of medical conditions and ailments to enhance people's overall health and well being.

The OTC business is ranked as the number six global self-medication business with strong positions in Europe (number 2) and North America (number 7), as well as having a growing presence in Latin America.

Novartis has leading brand positions in a number of important and growing category segments, most notably in topical analgesics, athlete's foot and nasal decongestants.

In 2002, OTC had a number of significant achievements following a renewed focus on core brands, innovation led by consumer insight and the successful implementation of our Rx to OTC switch global roll-out program.

Lamisil, the one-week treatment for athlete's foot, added 32% to sales in Western Europe, resulting in a global sales increase of 10% versus 2001.

Voltaren Emulgel, a topical analgesic for muscle pain and the largest OTC brand in the portfolio, reported a solid 5% sales uplift driven by further Rx to OTC switch roll-outs and product innovation. This brand has developed into the number one worldwide in its category.

Otrivin nasal decongestant benefited from the introduction of new moisturizing and allergy formulations which supported the outstanding 11% rise in sales.

Nicotinell/Habitrol, the smoking cessation franchise, grew sales 31% in 2002 driven by the introduction of consumer preferred chewing gums and major private label gains in North America and Asia.

A large proportion of the Novartis OTC portfolio is targeted at the seasonal cough and cold market. The 2002 season was mild in comparison to previous years and impacting total OTC sales performance, which would otherwise have been even better.

Novartis Animal Health

Animal Health outperformed the market with a 10% local currency sales growth (+1% in CHF), increasing sales to CHF 971 million. Our Animal Health business focuses on the well being of companion animals and on the health and productivity of farm animals. Our product range provides solutions for the treatment and prevention of various widespread animal diseases and parasite infestations. The majority of these products are available by prescription through veterinarians.

Animal Health sales outpaced a slowly growing and highly competitive market. Given this challenging environment, new product introductions are the main growth drivers. In the companion animal market, we entered two new indication areas, pain and allergy, introducing several new key brands in 2002:


In the Farm Animal franchise, Animal Health achieved double-digit growth primarily by moving into the dynamically expanding vaccines business and the growing sales of therapeutic antimicrobials. We also introduced our new product for a season-long protection of sheep against blowfly strikes, Clik, in Europe.

The major pleuromutilin brands, Tiamutin (tiamulin) and Econor (valnemulin), contributed significantly to the strong growth of the Farm Animal franchise. Indicated for the treatment of microbial infections in pig and poultry, they are based on a highly effective class of drugs exclusively used in animals.

In January 2002, Novartis acquired Grand Laboratories Inc. and ImmTech Biologics Inc., two US companies specialized in the development, manufacture and marketing of vaccines for cattle and pigs. The acquisitions provided Animal Health with an immediate entry into the world's largest farm animal vaccine market, the USA. The two acquisitions are part of the strategic expansion into the vaccine market that Animal Health has pursued to broaden its business base in recent years.

Medical Nutrition—Focusing on Health Benefits

Medical Nutrition including Nutrition & Santé posted sales growth of 4% (-1% in CHF) with sales of CHF 1.1 billion for its ongoing activities. Novartis Medical Nutrition is a leader in its market and offers a complete range of enteral and oral nutrition products and devices tailored to the varying needs of patients and healthcare professionals.

Following the Consumer Health Division strategy of reshaping its product mix to focus on the growth-oriented healthcare businesses in which it has strong competitive advantages, the business unit successfully divested its Food & Beverage business in November 2002 when Ovaltine/Ovomaltine, Caotina and Lacovo were sold to Associated British Foods plc. This divestment provides our former brands with the opportunity to enjoy accelerated growth in a strategically better matched company.

At the same time it allows us to focus on our core market, increasing awareness among healthcare specialists of the importance of optimum nutrition, especially post-operatively and in long-term care for elderly patients. 2002 saw strong performance of Isosource and Novasource, enteral nutrition products containing specific blends of essential minerals and nutrients, as well as additional sales impetus coming from Resource, a range of specific medical food formulations, which continued to benefit from the expansion of the homecare channel.

Medical Nutrition will continue to build its business by further leveraging efficient management of outpatients via the home care channel and strengthen its focus on disease-and-age-specific platforms. One example of this target-specific approach is the increasingly recognized importance of immunonutrition. There is now considerable evidence suggesting that adapting and improving the nutrition status of patients in hospital can speed up recovery, help prevent future health problems and reduce healthcare costs. For critically ill patients, disease-specific nutritional support includes the administration of specific nutrients known to have immune-modulating qualities, thus often improving clinical outcomes. Impact is an immune-supportive enteral nutrition formula containing a unique combination of ingredients demonstrated to boost the immune system response. Perioperative use of Impact provides optimal support of surgical patients with improved outcomes.

Similarly, clinical and health economic studies have shown improved outcomes with the use of our medical nutrition products. Patients in specific disease states, including oncology, diabetes, digestive health and wound care, can have more cost effective and improved health outcomes (i.e. fewer complications, shorter hospital stays) through the supportive care that nutritional products provide to standard treatment regimen. These beneficial clinical effects of nutrition will help support total disease management of patients in the years to come.

Our reorganized Nutrition & Santé business, with its headquarters in Revel, France, has strong brands in the area of Health Food & Slimming including Céréal, Gerblé, Gerlinéa, Modifast, Dietisa, Pesoforma,


Lecinova and Milical, and, in the area of Sports Nutrition, brands include Isostar, Powerplay and Mineralplus. The management team, under its new CEO Alain Chatillon, will be empowered to reorganize and develop the business to increase competitiveness and profitability—providing a consistent approach across geographies and improving focus and efficiency. Nutrition & Santé will continue to build value with its assets and will succeed in the marketplace.

Infant & Baby

Infant & Baby 2002 sales rose 3% in local currencies (-7% in CHF) to CHF 2.1 billion. The major contributor was the US Gerber business, spurred by innovations in the Juice, Graduates, and Tender Harvest lines. The conversion of the juices and purees range into plastic packaging, and the successful launch of Lil' Entrées, a new line of wholesome ready-to-serve meals, were the main drivers of this growth. In the rapidly growing toddlers segment, which offers products for two to three year-olds, revenues were up 5%.

The Baby Care Franchise achieved record market share at year end despite intense competition, with innovations in spill-proof cups. The Gerber Wellness franchise posted outstanding sales growth of 7% with the relaunch of its infant skin care line.

For 75 years, the Gerber Products Company has been committed to helping parents raise happy, healthy babies. Through extensive research aimed at understanding and improving infant and toddler nutrition and development Gerber is the leading baby food brand in the USA with more than 200 food products.

In 2002, we increased our market share. The major contributor to the Infant & Baby Business Unit's solid performance was the USA, spurred by overall innovations and especially the introduction of our new microwavable ready-to-serve meals in trays. These Lil' Entrées are specially designed convenient and nutritious meals for toddlers "on the go" with their families.

During the past year, US media has been reporting on the "epidemic" of childhood obesity. Recognizing its role as a leader in infant nutrition and using its 75 years of baby food experience, Gerber launched a consumer education campaign to help combat this national health problem. The campaign called "Start Healthy" aims to enhance awareness among parents and health professionals of the importance of a healthy nutritional diet early in a child's life to avoid serious health consequences such as obesity during adulthood.

"Start Healthy" began on August 19, 2002, with an advertisement in TIME Magazine, propagating the message that "now is the time to teach your baby good eating habits for life." So far, the "Start Healthy" campaign has reached 500 000 consumers and medical professionals via a new brochure, which offers tips and data on appropriate nutrition for infants and toddlers. In October, Gerber and the prestigious American Dietetic Association (ADA) announced that they would collaborate under the "Start Healthy" umbrella to develop a broad consumer education campaign in 2003. As a first step, the ADA and Gerber have invited nationally renowned experts to join a nutrition panel, which will develop dietary guidelines for children 6 to 24 months of age.

The public reaction to the "Start Healthy" initiative has been extremely positive, beginning with consumer response to the TIME Magazine advertisement. Both consumers and professionals have demonstrated interest and support in direct contacts with Gerber through its call-in center and professional resource line. US Secretary of Health and Human Services Tommy Thompson endorses the campaign and participated with Gerber and the ADA in a "Start Healthy" media briefing.

The Wall Street Journal and other US national media have covered Gerber's nutrition initiative, and media interest continues with more than 20 million media impressions recorded in just three months.

During 2003, "Start Healthy" will add a grassroots campaign and disseminate important information from Gerber-sponsored research on the topic of infant and toddler nutrition to professionals and parents.


CIBA Vision—Visualizing the Future

CIBA Vision continued to grow with a 6% sales growth in local currencies (-1% in CHF), achieving CHF 1.8 billion in sales. CIBA Vision is a global leader in the research, development and manufacturing of optical and ophthalmic products, including contact lenses, lens care and ophthalmic surgical products.

Focus DAILIES, our one-day disposable contact lenses, and Focus NIGHT & DAY, our lenses for up to 30 days and nights continuous wear, continue to lead the contact lens industry in the daily disposable and continuous wear categories, respectively.

The tremendous success of Focus DAILIES worldwide has led to the introduction of line extensions including Focus DAILIES Progressives for correction of presbyopia and, the latest innovation, Focus DAILIES Toric, daily disposable lenses for correction of astigmatism. Astigmatism is a common vision condition, which is caused when the front surface of the eye is not perfectly spherical, making vision correction a challenge.

Substantial new opportunities emerged in 2002 for our Focus NIGHT & DAY lenses, boosted by legal proceedings against Bausch & Lomb which led to the withdrawal of the only other continuous wear product on the US market.

In the cosmetic contact lens category, the FreshLook line was expanded with FreshLook Radiance lenses, four new lenses that follow the latest trends in cosmetics by adding shimmer and shine to illuminate light or dark natural eye colors.

Important innovations in lens care include advanced solutions, such as AOSept Clear Care/AOSept Plus, representing a new category in lens care with the proven effectiveness of peroxide, but without the added preservatives found in many all-in-one solutions, as well as AQuify, used for dry eyes and as a lens drop, and FreshLook Care, developed to provide best possible disinfection of color or cosmetic contact lenses.

CIBA Vision is also working on novel approaches in ophthalmic surgery and has acquired the rights in the US and Canada for the Ex-PRESS mini glaucoma shunt, a unique, minimally invasive approach for the surgical treatment of glaucoma. Also recently introduced in Europe is an entirely new product for cataract surgery called VisThesia, a combination of viscoelastic to replace eye fluid during surgery and anesthetic for pain. Products under development include a sub-epithelial separator, a medical device that may substantially improve the outcome of laser surgery, and scleral expansion implants, which have shown promising initial results in the treatment of presbyopia, as well as in the treatment of ocular hypertension and primary open angle glaucoma.


Corporate Citizenship

Making Things Happen

In our previous Corporate Citizenship reporting we focused extensively on explaining the reasons for our social, humanitarian and ecological commitment and describing the processes we initiated to fulfil our pledges. These mainly revolved around ascertaining our performance in the relevant areas, developing policies and guidelines, and defining targets. We also reported on our many implementation programs and awareness campaigns aimed at incorporating our Corporate Citizenship principles into our business activities. At the time we had few tangible results to show for all our new endeavors.

This year, based on the feedback we have received from stakeholders, we have tried to focus more on describing the tangible results of our activities and on discussing both our successes and shortcomings. We believe that this new reporting attitude reflects a new level of corporate maturity.

To us, Corporate Citizenship builds on three pillars: active engagement in society in areas were we are competent; helping where we can and where help is needed most; establishing and implementing transparent, ethical corporate standards and policies.

Humanitarian Focus

Access to Medicine: Leprosy in Sri Lanka

Since 2000, the Novartis Foundation for Sustainable Development continues to pursue an active agenda in dispelling the stigma of leprosy and improving patients' access to treatment. Novartis and its Foundation provide free leprosy treatment through the World Health Organization (WHO) in order to help eliminate leprosy as a public health problem.

Less than a generation ago the implications of contracting leprosy in Sri Lanka were disastrous. The population believed that leprosy was highly contagious and incurable. Sufferers became the victims of both ignorance and the disease. Unable to work, often shunned by family, neighbors and friends, lepers were outcast and left to suffer disability, deformity and the ignominy of the leper colony. Sri Lanka is one of the countries in which Novartis has been supporting the local Health Ministry and the WHO in fighting leprosy and providing reliable and sustainable services which are integrated into the General Health Service. Results have been astonishing. The disease now has a prevalence rate of less than 1 in 10 000. More importantly, ignorance has been conquered, too.

Priyantha and Nihal are two brothers from Polonnaruwa, a rural district of Sri Lanka. About a year ago, Nihal noticed a strange patch on the skin of his right leg with no sensation. He didn't pay much attention to it until he noticed a similar patch on his elder brother's chest. "We just took it lightly and even teased each other by scratching each other's patches."

Their mother walked in one evening and saw what was going on. She looked at their skin and was alerted at once. She had seen a TV advertisement in which people were told to get such patches checked by a doctor, and sent Nihal to the hospital at Polonnaruwa the next day while his brother was at work.

"The doctor at the hospital told me that what I have is leprosy. He filled out a form and told me that I have to take the treatment for six months. He also gave me a booklet with a picture of a bride on the cover and instructed me to read it very carefully and conscientiously."

Nihal collected his medicine, was shown how to take the pills, given the first dose and asked to come back for the next packet in one months' time. But he did better than that. The very next day he returned with his elder brother and a friend who had similar skin patches. Both were promptly diagnosed and also given medication and booklets. Sri Lanka's health authorities were able to provide the drugs free of charge due to the support of the WHO and of Novartis. "Our parents would have had to spend a lot of money to have us treated. That could have affected our entire families."


The boys completed the treatment, and the episode is already pretty much forgotten. For the younger generation leprosy no longer holds any fear.

But Nihal and Priyantha were conscious of the very different outcome this story might have had only a few years ago. "They sent people with this disease to the jungle in the good old days," Nihal smiles wryly.

The program in Sri Lanka is considered a best-practice example as it shows ways for public authorities and private enterprises to combine their knowledge and credibility in an effective manner.

Novartis Access to Medicine Projects

  CHF millions/year

  2000   Asia, Africa, Latin America   10-15   Provide free treatment to leprosy patients in cooperation with WHO   22 million blister packs shipped since 2000 (CHF 40 million)

(at cost)
  2002   Asia, Africa, Latin America   0.3
(in 2002

Through cooperation with WHO, reach as many patients as possible   Procurement process established, only few actual shipments in 2002

Gleevec/Glivec patient assistance programs (discount)   2001   Global   110   Nobody is denied access for economic reasons   3 100 cancer patients (CML, GIST)

Other patient assistance programs (discount)   1996   USA   110   Product discounts to low income patients   Over 30 different products provided to 130 000 patients without insurance coverage

Together Rx Card/CareCard
  2001   USA   40   For low income elderly without insurance   75 000 members used card, 500 000 members

Emergency relief
  1996   Global   20   Support major humanitarian organizations (emergency medical needs)   Ongoing commitment

Novartis Institute for Tropical Diseases Singapore (TB/Dengue)   2001   Asia, Africa, Latin America   13   Long-term commitment to advance medical research for the developing world   Recruiting, opened

Tuberculosis (donation)   2003   Africa   2   Provide 100 000 treatments per year for 5 years   To be signed early 2003

Access program for employees (HIV/malaria/TB)   2002   Developing countries   1   Covers employees and their families   Partly implemented

Treating blindness (donation)   2001   Developing countries   1   Provide > 11 000 intraocular lenses   Project ongoing

Novartis Foundation for Sustainable Development (programs)   1979   Asia, Africa, Latin America   10   Work at the policy and local level to improve the quality of life of the world's poorest people   Ongoing external commitment and internal expertise in Corporate Citizenship

Health Alliances   1996   USA   30   Development of relationships with organizations to reach patients   Ongoing


Fighting Malaria

Large parts of the world continue to be ravaged by malaria. A joint public/private partnership between Novartis and the World Health Organization (WHO) has been established to provide Coartem, an innovative malaria drug developed by Novartis together with Chinese scientists, at cost to patients in developing countries.

The project with the WHO started slower than anticipated. Unfortunately, very little Coartem has actually been distributed to patients so far, due to inadequate medical support infrastructure or the inability of governments to redirect funds for malaria-related projects.

In 2002, the WHO published the procurement process for governments of developing countries for Coartem. It was also decided to develop a pediatric formulation of the drug in cooperation with Medicines for Malaria Venture.

The Novartis Pharmaceuticals Division this year integrated tropical medicines into its Primary Care Business Unit. One of the problems we are facing in several developing countries is that there are many older and cheaper medicines available as alternatives to Coartem, and they are increasingly facing resistance problems which reduce their efficacy.

Tuberculosis (TB) and Dengue Fever

TB and Dengue fever are two tropical diseases that do not attract sufficient research funding in our market-driven world. The Novartis Institute for Tropical Diseases (NITD) in Singapore, established in 2001, was created to address such situations. Its costs of CHF 180 million for the next 10 years are being funded by Novartis in cooperation with the Singapore Development Board.

In 2002, we began with the recruitment process. So far, we have received more than 1 000 local job applications for the six positions advertised. The new institute will employ 60-70 professionals, 14 of whom will be principal scientists and a part of an international tropical disease research network. Two laboratories housed in temporary accommodation will become operational in early 2003. The permanent facility "Biopolis" is expected to be ready in early 2004.

On January 22, 2003, NITD staged its inaugural symposium in Singapore in combination with a high caliber path-finding workshop, "New Avenues," bringing together Nobel laureates such as Rolf Zinkernagel and some of the world's most promising pioneering scientists in their disease areas. Paul Herrling, President of the NITD, watched over the 60 participants engaging in a compelling, cutting-edge debate that will give some decisive impulses towards areas where our research can provide maximum benefit.


The populations of Nepal, Tibet, Bhutan and Northern India show high rates of blindness caused by cataracts. Affiliates of CIBA Vision, a Novartis Business Unit, have donated 11 000 intraocular lenses to the Himalayan Cataract Project. The initiative teaches physicians in these countries to perform extracapsular cataract surgeries with intraocular lens implantation. With the lenses donated by CIBA Vision, the operations can be performed at no cost to the patients.

Patient Assistance Programs and CareCard/Together Rx Card

In 2002, the Novartis Foundation for Sustainable Development supported the creation of a locally managed micro-health care insurance in the rural Municipality of Cinzana, in the African nation Mali. The objectives are to protect people living in poverty against high financial costs due to health problems, and to improve their access to basic healthcare services.

The problem of affordability also effects population segments of industrialized countries. In the USA, for instance, approximately 40 million people are without health insurance. Among elderly people with Medicare coverage, about 14 million people are without insurance for prescription drugs. Legislative


efforts are under way to include a prescription drug benefit in Medicare, but Congress hasn't agreed on a solution to date. Recognizing the gap in insurance coverage, Novartis developed the CareCard, introduced in 2001, which provides substantial discounts to Medicare patients whose drug purchases are not reimbursed.

In 2002, Novartis continued to develop the concept. In cooperation with other leading pharmaceutical companies, we issued the Together Rx Card which provides discounts on a broader range of pharmaceuticals from many manufacturers. The total volume of discounts provided by Novartis under the Together Rx Card program amounted to about CHF 40 million in 2002.

The introduction of Gleevec/Glivec, our innovative cancer drug, raised another issue related to affordability. Gleevec/Glivec is a life-saving drug for a form of leukemia and for a form of gastrointestinal tumor.

The number of patients is relatively small and the price of the drug is very high. In countries which do not provide comprehensive insurance coverage for their population, some patients are faced with the stark choice of spending their entire annual income to pay for the drug or accept the prospect of death. We cannot accept this. In response, Novartis has established patient assistance programs to provide coverage in situations where patients simply cannot afford the drug. Novartis' patient assistance programs for Gleevec/Glivec supplied patients with medicines that would have cost about CHF 110 million at the prevailing market price.

It is the responsibility of governments to provide access to drugs, but in this particular situation and others, we felt that we could not let patients suffer for government's inability to act.

Marketing Practices by Business

booking rules

gifts policy


Pharmaceuticals   99%   84%   96%
Generics   95%   85%   93%
OTC   95%   91%   86%
Animal Health   97%   82%   85%
Medical Nutrition   100%   100%   92%
Infant & Baby   95%   82%   82%
CIBA Vision   97%   88%   88%

Group overall   97%   86%   90%

Marketing Practices by Region

booking rules

gifts policy


USA   100%   100%   90%
Canada and Latin America   98%   81%   84%
Europe   97%   90%   96%
Africa/Asia/Australia   96%   84%   87%

Group overall   97%   86%   90%

Access to Treatment Program for Employees

In our companies operating in developing countries with insufficient health insurance, Novartis launched an internal program providing for prevention, diagnosis, treatment and counseling to all


employees and their immediate families for HIV/AIDS, TB and malaria. In 2002, implementation started and once fully realized, this program will provide coverage to about 14 000 employees and their immediate families.

Societal Focus

Three years ago, Novartis was one of the first corporations to commit itself to the Global Compact, a remarkable initiative sponsored by United Nations Secretary General Kofi Annan. It is based on a very simple notion: whether or not required by law, corporations should enforce basic human rights and accepted labor and environmental standards in all their business activities to counterbalance possible negative effects of globalization.

At Novartis, Corporate Citizenship is firmly anchored at the Board level. The Audit and Compliance Committee of the Board of Directors oversees the implementation of Corporate Citizenship as part of the commitment to the Global Compact. Our Corporate Citizenship Policy laid down the principles of how we conduct our business. These were then further refined into guidelines addressing key aspects:

•    Management of Corporate Citizenship

This guideline defines responsibilities, management process and mechanisms for conflict resolution and complaints ("whistle-blowing"). It is very important that discrepancies between financial performance objectives and Corporate Citizenship goals are openly discussed. It is also essential that employees are able to raise issues with senior management without fear of reprisal.

•    Fair Working Conditions

This guideline focuses on the well-being of our employees. It explains our policies on paying a living wage, maintaining reasonable working hours, avoiding forced and child labor, prohibiting discrimination and respecting our employees' freedom of association.

•    Bribery, Gifts and Entertainment

This guideline deals with business ethics. Specifically, it defines a minimum standard of fair marketing practices that we enforce in markets around the world. Marketing practices vary from country to country. In the USA, for instance, the industry has articulated a strict code of behavior, whereas in other countries the rules of fair marketing are less precisely defined. This guideline prohibits bribery and excessive marketing expenses. To enforce this, it makes sure that no payments can take place off the record. It also mandates that gifts and entertainment for physicians should not be lavish and should primarily have an educational content or a strong focus on patients.

Working Conditions by Business

  Meetings with production staff

  Meetings with

procedure in place

Pharmaceuticals   39%   75%   59%
Generics   35%   75%   43%
OTCs   34%   68%   55%
Animal Healths   35%   68%   65%
Medical Nutritions   23%   69%   31%
Infant & Babys   41%   68%   47%
CIBA Visions   41%   79%   68%

Group overalls   37%   72%   56%


Working Conditions by Region

  Meetings with production staff

  Meetings with

in place

USA   50%   80%   100%
Canada and Latin America   40%   70%   49%
Europe   32%   78%   51%
Africa/Asia/Australia   39%   66%   62%

Group overall   37%   72%   56%

•    Human Rights and Engagement in Society

This guideline addresses the difficulties of dealing with governments and officials who may be violating human rights in some countries. This guideline makes it our policy to provide support for and to protect internationally accepted human rights. The guideline also instructs our local managers to take an active interest in the affairs of the country and to maintain a good dialogue with the relevant stakeholders.

A fifth guideline on how to engage contractors, suppliers and other third parties in line with our Corporate Citizenship principles will be finalized in the course of 2003.


In 2002, we launched a comprehensive training program to ensure that everyone in the Novartis Group is made familiar with the principles and rules of Corporate Citizenship. We expect to reach most employees by mid-year of 2003. Starting with senior management, we are gradually involving employees at all levels. About 1 000 executives have already participated in an educational workshop. The Corporate Citizenship Policy and the accompanying operational guidelines have been received by about 91% of the entire management population of 11 000.

All the units in all the countries in which we operate participated in a structured annual Corporate Citizenship reporting process for the first time in 2002. Almost 300 units were asked to report data on a variety of parameters. More than 90% of all reporting units supplied the necessary figures and analyses (see tables). Although there is no accounting standard established for Corporate Citizenship and the data quality is not yet beyond all doubt, the survey gives an overview of our global status and clear indications of possible issues.


Corporate Citizenship—Goals and Results

  Our focus in 2002
  Results we achieved in 2002
  Steps planned for 2003

Policy framework   Translate Corporate Citizenship Policy into practical guidelines and management standards.   Published four guidelines on the management of Corporate Citizenship: fair working conditions; bribery, gifts and entertainment; human rights and engagement in society.   Add fifth guideline that addresses relationship with third parties: application of Corporate Citizenship standards to suppliers, contractors, consultants, etc.

Access to medicine   Define key problem areas where Novartis can contribute (leprosy, malaria, tuberculosis and neglected tropical diseases). Gain practical experience on access issues in the industrialized world with introduction of Gleevec/Glivec.   Initiated a number of innovative programs to improve access to medicine (see list on page 38).   Strengthen priority programs such as the Coartem/malaria program.

Complete staffing of the Novartis Institute for Tropical Diseases in Singapore.

Working conditions   Ensure compliance with the words and spirit of the Global Compact as reflected in Novartis Corporate Citizenship guidelines.   Defined key employment standards worldwide in guideline on fair working conditions.

Determined that Group companies are paying fair living wages worldwide with some open questions.
  Strengthen programs to ensure fair living wage, diversity and adequate dialogue with all employees.

Fair marketing practices   Eliminate marketing practices that could potentially lead to distortions in the decision-making processes of public and private health providers, including physicians.   Defined key behavioral standards in guideline on bribes, gifts & entertainment.

Assessed status of compliance with guideline through country-level reviews.

In the USA, adopted new marketing standards issued by the industry association.
  Implement detailed standards and procedures in markets around the world.

Respect for human rights   Ensure that Novartis behaves in full compliance with accepted human rights standards.   Verified that there are no incidents of child labor in Novartis organization.

Established that Novartis is not involved with any known human rights violations.
  Articulate comprehensive position covering the current human rights issues affecting the industry.

Bioethics   Define clear positions on ethically complex issues in research and development.   Developed policy on human stem cell research and related issues.

Established independent ethics committee to monitor compliance with policy on human stem cells.

Updated guidelines on animal rights.
  Adopt revised ethical framework for biomedical research
(revision of Helsinki Declaration).


Corporate Citizenship—Goals and Results

  Our focus in 2002
  Results we achieved in 2002
  Steps planned for 2003

Stakeholder engagement   Seek an active dialogue with key stakeholders and their representatives.   Met with leading NGOs to review positions and policy options on key health care issues.

Participated in stakeholder event at Johannesburg Summit.

Organized conferences on health issues in close cooperation with leading academic institutions.
  Deepen relationships with leading academic institutions, NGOs and think tanks.

Accountability of management   Make managers at all levels accountable for complying with Corporate Citizenship standards.   Defined responsibilities and incorporated them into annual goal-setting process for 2003.

Conducted assessment of issues existing at country level with local managers worldwide, involving about 260 business units in 70 countries.
  Execute complete Corporate Citizenship management cycle including objective setting, performance measurement and year-end incentives.

Involvement of employees   Involve management and employees; convince them that Corporate Citizenship is an integral part of the Novartis business strategy.   Conducted meetings with 1 000 executives.

Developed information materials (videos, presentations, web-based information) and various internal publications.
  Train all employees by end of first half of 2003.

Communicate Corporate Citizenship concept to external stakeholders.

Transparent reporting   Create annual reporting process to measure progress on Corporate Citizenship; give external audiences first hand insight into how Novartis goes about implementing Corporate Citizenship.   Included Corporate Citizenship section in Annual Report 2001.

Reported on progress of implementation and findings of country-level review process.
  Continue to improve data quality and transparency for the Annual Report 2003.

Adapt Corporate Citizenship reporting on the website to GRI format (Global Reporting Initiative).

External assurance   Involve independent third party to ensure that internal reporting on Corporate Citizenship is done correctly.   Conducted independent review of Corporate Citizenship management process (see report on page 65).   Institutionalize independent assurance process.


Regional Corporate Citizenship Status


North America   • Programs against discrimination
• Code of Conduct online training
• Expense policy and gifts policy
  • Incomplete energy conservation programs
• Control checks inconsistent across North America
• Gender distribution in top management

Europe   • Complaints procedure institutionalized everywhere by
    June 2003
• Regular employee communication throughout
• No HSE fines in last 12 months
  • No program against discrimination in several countries
• Gender distribution in top management in several countries

Asia Pacific   • Same pay for same work policy throughout
• Account book controls everywhere except 1 country
• No HSE related fines in last 12 months
  • HSE non-compliance in some cases
• No gifts policy in some countries
• Gender distribution in top management in several countries

Latin America   • Programs against discrimination in most countries
• 30% women in management and 44% of associates in region
    are women
• Regular meetings with associates' representatives in most
  • No program against discrimination in 3 countries
• No gifts policy in 3 countries
• No complaints procedures in several countries

Code of Conduct

Novartis adopted its first global Code of Conduct in 1999. In order to reflect the signing of the Global Compact in 2000, an amendment became necessary. The revised version of our Code of Conduct was distributed in 2001 to all Novartis Group company employees worldwide and translated into local languages.

Compliance with our Code of Conduct, which is a part of the employment terms of all Novartis employees is closely monitored. For this we have established a worldwide network of over 45 Compliance Officers who advise on compliance problems, deal with complaints and handle any arising issues. Their reports are consolidated by the Group Compliance Officer into a yearly Compliance Report addressed to the Audit and Compliance Committee of the Board.

Issues and Problems

As might be expected for a Group with more than 70 000 associates, Novartis had its share of issues and problems to deal with in 2002. Reported cases related particularly to discrimination and harassment, conflicts of interest, inappropriate marketing practices and some inappropriate payments. Sanctions resulting from such infringements included 18 dismissals.

Code of Conduct Survey Results

This annual survey, conducted this year with more than 3 500 associates, provided additional insight into the acceptance of the Code. The results show that there is a high awareness of the Code. More than 80% of the respondents felt adequately or very familiar with the contents of the document. More than half, however, felt that they lacked sufficient training regarding the detailed implementation in their daily work of the principles laid out in the Code.


The key findings of both the compliance reports and the surveys are that the Code is very well accepted and its principles are considered as the appropriate way to behave and to conduct business.


Reports and comments range from "established and absolutely uncontested" in a Scandinavian country to "an excellent initiative since the government has just launched a mega action against corruption" in an African country. All in all, Novartis is essentially compliant with the Code, but it will require constant management attention in all critical fields and countries to maintain this status.

In 2003, we will focus on the needs for action shown in the surveys and in the reports. New training tools will be created and training programs for associates have already been launched. Professional training of the members of the compliance organization will be intensified. The main challenge will be to continue creating an open climate of discussion and reporting, thereby ensuring that problems and cases can be discussed and reported without fear of retaliation. Another planned activity relates to the complaints procedure, the right of all associates to complain to the Compliance Organization about violations of the Code of Conduct. Experience has shown that the awareness of the existence of such procedures diminishes over time and suitable activities will be taken to ensure that associates are regulary reminded of its existence.

The above data and assessments are analyzed by Group management as part of the established Corporate Citizenship management process. This includes assigning responsibilities, setting targets and measuring progress. Of course it may be embarrassing for some organizational units to report on negative findings or statistics. For this reason we believe that our respondents should be commended for their openness and courage. As for those who may have preferred to look the other way, we will strongly encourage them to follow these examples. Living up to the standards of Corporate Citizenship will certainly require a sustained internal learning process, a culture of open debate and constant management attention.


The Novartis Foundation for Sustainable Development

For more than 20 years a leading private-sector think tank on international development and humanitarian issues, the Foundation also runs a variety of programs to promote social development and improve the health of poor people in developing countries. The Foundation is a registered non-profit organization, and its work is fully financed by the Novartis Group. The Foundation carries out development work independently from the business activities of the company.


Today more than 1.5 billion people are living in absolute poverty, and between 13 and 18 million people—mostly children—die every year from the effects of hunger, poverty and preventable diseases. At the same time, the social gap is widening, not only between industrialized and developing countries, but also within countries themselves. The simultaneous existence of two worlds—one affluent and the other afflicted by poverty and disease is not only unacceptable from a moral point of view, but is also politically explosive.

Novartis believes that by bringing together competence, resources and personal commitment, a significant contribution can be made to addressing the immense problems of poverty, disease, and underdevelopment. Top management at Novartis remains convinced that companies can play a useful role in these fields. The Novartis Foundation is one expression of the company's commitment to global development and peace.


The Foundation strives to contribute to a sustainable improvement of basic living conditions of the poorest people in developing countries and focuses on health and social development problems. Actual project and program work include:

The Foundation also aims to help in the formulation and shaping of development policies in order to reduce poverty and social inequalities. This is done through a synergistic approach of research, information and advice on development policy and practical development work. A large number of publications have been produced in the course of our research work.


The Novartis Foundation holds regular discussion meetings, symposia, workshops, seminars, lectures and talks on development issues that are of general interest. The events include an annual international symposium (www.novartisfoundation.com/symposium) and "Basel Food for Thought" (www.baslerdenkan-stoesse.ch), at which well-known personalities discuss issues of current concern.

Advisory Work

The Novartis Foundation for Sustainable Development is a member of the advisory boards of several governmental and international institutions as well as nongovernmental organizations (e.g. UNDP, Swiss Agency for Development and Cooperation, and the World Bank).


Contact Addresses:    


Novartis Foundation for Sustainable Development
Post Box
CH-4002 Basel, Switzerland
Tel. +41 (0)61 697 72 00
Fax +41 (0)61 697 71 04
E-mail: novartis.foundation@group.novartis.com

Other Novartis Foundations

Novartis US Foundation   Its purpose is to support efforts among communities, businesses and nonprofit organizations on a range of social, health and education issues related to healthcare.

Novartis Foundation France   The Novartis Foundation France provides persons with difficulties due to age, illness, handicap or family environment with personal and social support.

Novartis Foundation Japan   The Novartis Foundation Japan contributes to the improvement of welfare, by aiding and promoting creative research and pursuing international exchange.

Foundation for Health, Innovation and Society (Spain)
  The foundation promotes the study, investigation, formation, and analysis of health in its ethical, biological, psychological, sociological and economical dimensions.

Novartis Venture Fund
  The Novartis Venture Fund supports new business projects that show exemplary enterpreneurial spirit in future-oriented health science areas.

The Novartis Foundation (UK)
  The Novartis Foundation (UK) is a scientific and educational charity, intended to promote scientific excellence.

Novartis Fondation for Gerontology
  The Novartis Foundation for Gerontology aims to support healthy aging through Internet-based education.


Animal Welfare

If Patient Safety is Non-Negotiable Then Some Animal Testing is Essential.

Ask anyone in the street about animal testing for pharmaceutical research. The replies will range from full support to the active disapproval of interest groups. There is a commonly held image of a lonely animal cowering at the back of a small cage suffering the side effects of a hundred drug experiments.

Animals continue to play an essential role in the development of the drugs that bring hope to many patients around the world. The ethical balance between the dignity of the animal and the need for medical progress, however, is very fine indeed. Nowadays research animals are well taken care of, and a great deal of attention is paid to improving their quality of life.

Is there really still no alternative to animal testing? Although much development can be done in vitro, the efficacy of a treatment will eventually have to be studied in the body of an animal because it represents more than the complex sum of all the various single tests. It is necessary to satisfy international conventions and health authority regulators that a drug is both effective and safe for human use.

There has been an extraordinary decline in the numbers of animals used in the pharmaceutical industry. For Novartis Switzerland, this means a reduction by 85% in the number of animals used between 1980 and 1997, and by a further 8% between 1998 and 2001. This decline is due to better testing methodologies and the use of alternative organisms. Nevertheless, given that some animal testing will continue to be inevitable, a transparent and open approach is required from pharmaceutical companies to answer some of the charges leveled by public concern.

This openness will demonstrate that a further reduction of testing is not possible, and that the highest standards of animal welfare and good scientific and ethical practice are being enforced. This is the case, for example, at the new Novartis Institutes for Biomedical Research Inc. at Cambridge, Massachusetts. A 24-hour, 365-day open-door policy to state animal welfare officers is being put in place, which is in accordance with our Novartis policy and has been in practice in Switzerland for many years. The idea is to create an open environment in which to develop animal welfare expertise.

Evolution of Facilities

Animal welfare has certainly developed over the past 30 years. In the 1970's, laboratory monkeys were housed individually in small single cages. These Rhesus monkeys were considered to be aggressive, territorial and prone to shows of strength. Separation was thought to be essential. Then an experiment in pairing resulted in a successful partnership, and two cages were joined to create a shared home. From that moment on, things changed and subsequent pairings led to the evolution of the facilities. Now, at Novartis, the housing groups span different generations, which has undoubtedly added to their stability and contentment. Leading off their rooms, each group has an open area with perches so that the vertical space can be explored, and windows to create extra interest.

Preference tests have been conducted to establish a favorite diet, and rice, beans and peanuts are strewn around the open enclosures to encourage foraging.

In a more natural social setting, the emerging hierarchies sometimes create intra-group aggression. Environmental enhancements have included physical obstacles, which allow the animals a safe retreat when needed.


Minimizing Stress

The essential concern now is to improve the animals' psychological well-being. Of course this benefits the animals themselves, and it also improves the quality of our scientific results by decreasing levels of stress. Animals now have care givers with whom they develop long-term relationships. For example, care givers reassure the animals when routine blood tests are being made and reward them with a treat afterwards. All necessary measures for sedation, analgesia and anesthesia are used to ensure minimum discomfort, distress or pain levels for the animals on every occasion. These measures are used to a level that a modern hospital patient might expect.

Animals spend only a small percentage of their lives in tests. They are specifically bred for research purposes and trained normally. Before tests begin they are well cared for and kept in good health. Dogs for example are left with their mothers for six weeks and are then trained with their siblings. They are kept together, which they evidently continue to enjoy later on.


Drugs Against Frightening Diseases

Progress down the road of discovery is becoming faster and faster. Forty years ago the idea of organ transplantation seemed extraordinary. Today Novartis is the world-leading supplier of the drugs that enable transplantation to save, extend or improve thousands of lives across the continents every week. In cancer, heart disease, immunology and many other fields, Novartis is developing products to improve quality of life for patients and their families. With every successful product launch, every "miracle drug," expectations are being raised about the ability of medicines to achieve the unachievable. We are looking for new drugs to beat the most frightening diseases we know. A large proportion of this work is simply not possible without the help of animals. Novartis is committed to a reduction in the number of animal tests carried out, and to improvements in animal welfare where reduction is not possible.

Ask anyone on the street for his or her opinion of modern animal testing. Ask the same person for an opinion about advances in medical science... especially if they have some recent, first-hand experience.


Health, Safety and Environment

This section summarizes the Group's Health, Safety and Environmental (HSE) performance in 2002. The full Novartis HSE report is provided on our web site at www.novartis.com/annualreport2002. That site also has additional detailed information on all the issues and items mentioned in this Annual Report.

HSE and Corporate Citizenship

The health and safety of our employees, neighbors, customers, consumers and all others affected by our business activities, as well as the protection of the environment, have priority in all our activities.

In 2002, our corporate HSE targets were again focused on the reduction of accidents and energy use (CO2 emissions) safe disposal of hazardous waste and ensuring safe disposal of hazardous waste and ensuring the safety of landfills historically linked to our predecessor companies. This report summarizes the most important measures undertaken to fulfil our ambitious corporate targets, and discusses our achievements, as well as areas in which we can improve.

Measures for Safety

In 1992, HSE personnel at the CIBA Vision production facility in Sendai, Japan, embarked on a structured long-term plan to improve safety standards for the 16-year-old site. A decade later, what started out with low profile repairs and a seemingly unspectacular awareness campaign added on for good measure has turned into a notable success story. The Sendai site has achieved 10 years without a lost-time accident, a milestone in occupational accident prevention. The success formula: a modest but relentless program of steady and very tangible improvements to the 1000 m2 site and to many production processes, combined with comprehensive clarification of all HSE-related responsibilities.

Initially, reviews of the site infrastructure and machinery led to various noteworthy changes: the surfaces of passageways and corridors were leveled and inconspicuous obstacles and protrusions removed. The installation of heavy goods elevators and various machines helped to reduce the physical burden on the staff. Next, automatic over-heating prevention systems were introduced, while glass vessels for chemical reactions disappeared to be replaced by stronger metal versions. Then, step by step, all the moving parts of machines were systematically covered with protective shielding, and remote-controlled systems and robots were brought in to take over laser-marking and various cutting processes. The installation of an automated conveyer system and a new safety control system marked the latest improvement to the site's infrastructure.

Simultaneously, the staff at Sendai undertook a number of environmental safety measures, such as the introduction of oxygen alarm systems in inert gas treating rooms, regular checks of solvent vapor concentrations in operation rooms, and the development of a closed automated system for the solvent-washing process for lenses and a non-solvent washing method for the parts.

None of these measures would have achieved the desired result without rigorous reassignment of process and unit responsibilities. And, last but not least, the Sendai safety program was accompanied by regular communication activities, keeping the organization sensitive to quality controls and safety-enhancing endeavors and reinforcing awareness of the system of checks and controls.


No Longer Learning the Hard Way

Over the past 10 years, Biochemie S.A., Spain, one of our Generics business subsidiaries, has been reporting unduly high accident figures between two and three (measured as accidents per


200 000 hours worked, or lost-time accident rate (LTAR)). Although slight improvements regarding the LTARs were achieved in some years, the goal of 1.0, and more recently 0.8, was still not reached. To improve the situation, two years ago Biochemie S.A. started a new process safety and risk management program, designed to complement all previously initiated activities. The main focus of the campaign was on generating basic awareness for safety issues. Employee inspections and regular on-site communications with the workers are an essential feature of the safety program. These communications include regular Monday morning safety meetings with management, department-wide meetings on safety issues across the company and posters to remind employees of specific issues on location.

So far, a record figure of over 380 days without a lost-time accident has been reached.

While we are aware that achieving this success included an element of luck, it is very clear that the safety awareness programs in Spain and Japan have had considerable impact and that they inspire others to follow suit.


Awards to Other Novartis Sites for Safety Achievements

Awarded site/country

Novartis Grimsby Ltd., UK   One of only 18 sites to be presented with the UK Chemical Industries Association (CIA) Diamond Award at a ceremony in London last July. The award, which recognizes sustained excellent performance in occupational safety goes to sites which achieve the annual CIA safety award for 10 consecutive years (lost time accident frequency rate less than 0.25 per 100 000 hours worked).   •  Management support and commitment
•  Positive safety culture
•  Robust standards and procedures
•  Inspection and monitoring
•  Training
•  Visible performance indicators
•  Promotion, reward and recognition
•  Accident/incident reporting and

Novartis Infant & Baby
Cartago, Costa Rica
  Premio Global Preventico 2002 Savings of USD 9000 per year in insurance rates.   •  Quality System certified as ISO 9002
•  Annual HSE training course for all
•  Internal audits conducted at least once
    per year

Gerber, Ft. Smith, USA   "1 Million Hours Worked Award" from Arkansas Dept. of Labor, Arkansas Worker Comp Commission and the Arkansas Insurance Department.   •  Improved monthly safety training
•  Increased focus on "the shop floor" by
    management and HSE teams
•  Management of injured employees


Helping Our Neighbors with the Heating

The largest antibiotics manufacturing facility of our Generics affiliate, Biochemie GmbH, in Kundl, Austria reports energy savings of 43000 Giga Joules (GJ) in 2002. This was achieved by installing a three-step heat recovery system in the plant, at a cost of Euro 600 000. Benefits of this investment will become even more apparent by 2005 when the effective annual energy reduction is expected to reach 72 000-100 000 GJ/year. This corresponds to 3 900-5 420 tonnes of per year, which is 5.6-7.7% of the site's CO2 emission. In addition, heat generated as a by-product of antibiotic production has been used very effectively for years in Kundl to cover local heating needs.

More Energy Efficient Ampoules and Vials

Energy consumption in one area of our pharmaceutical manufacturing site in Stein, Switzerland, was reduced by 600 GJ/year by utilizing the heat created during production of sterile vials for room heating. And because conventional "clean rooms" for sterile manufacturing need high volumes of climatized air, equipment was installed to create separate air compartments, thereby greatly reducing the amount of conditioned air required.

The result: an additional 55% reduction in energy consumption. The new manufacturing process uses only 38% of energy consumed by conventional techniques.

Corporate and Division/Business Units Goals for 2002-2003

  Targets 2002
  Results 2002
  New targets 2003


    Overall lost-time accident rate (LTAR) 0.5   Not yet achieved; LTAR 0.65, but positive trend emerging   Ongoing; LTAR 0.5



Prevent drug substance releases in manufacturing processes


Extensive review of all manufacturing processes has led to a revision of several important production procedures


Ongoing task; plus additional focus on releases into aquatic environment



Implement HSE management system in line with international standards


On-track: ISO 14001 or EMAS certification renewal at:
Barbara (Spain),
Wehr (Germany),
Ringaskiddy (Ireland),
and first part certification audit according to OHSAS 18001 in Barbara (Spain)


Ongoing task
            Business Continuity Management (BCM) integration in Development, technical operations and BUs


  Targets 2002
  Results 2002
  New targets 2003

Consumer Health            

Generics   LTAR < 0.9   LTAR 0.90   LTAR < 0.8



Project in Kundl to reduce Group CO2 emissions by 1.6% (based on 2001)


(please refer to story on page 50)


Further reduction of energy consumption in Kundl by 70 000 GJ



50% reduction of halogenated VOC solvent emissions in Europe


50% in absolute values


Staged 50% reduction of hal. VOC emissions in Turbhe, India, by 2004







Successful integration of Lek, Slovenia; i.e. achieve HSE standards applied to our other Generics businesses by 2005

OTC, Medical   LTAR 0.7   Achieved LTAR 0.61   LTAR (OTC + I&B) 0.45
LTAR (MN) 1.0
Infant & Baby   Energy reduction relative to production   Achieved at 4 sites   Ongoing; 5 additional sites identified for energy reduction



Improve risk portfolio of third party contractors


Third party contractor risk portfolios completed and HSE/quality pre-assessment in progress


Complete 4-6 audits of third party contractors
            Pilot implementation of BCM and a global roll out

  LTAR < 0.5   Not yet achieved; LTAR = 0.56, but positive trend emerging   Ongoing; LTAR < 0.5



Evaluate and improve third party contractors' risk portfolios


Risk control improved for several third party contractors with high impact


Continue to improve risk control of third party contractors





Guidelines for third party manufacturers established regarding safe handling and processing of solids and agreed by them


            Implement BCM and the manufacturing & supply chain of five active ingredients







Energy, SO2 and CO2 reduction at Wusi Farm, China


  Targets 2002
  Results 2002
  New targets 2003

CIBA Vision   LTAR < 0.7 plus reduction of 10% at every site   Achieved LTAR 0.67   LTAR 0.6



Continue water conservation program


Water conservation successfully continued


Expand water conservation program



Study potential CO2/energy reduction


Done but no major opportunities found


Energy efficiency improvement target to be established



Review risk analysis at all sites


Risk analysis of top 3 processes conducted at all site


Conduct 3 additional risk analyses & establish plan for remainder at each site


    Implementation of risk reduction measures   Long term risk reduction plans developed by Divisions and Business Units   Further risk and liability reduction by implementing BCM methodology and product benefit/risk assessments at group level



Global HSE standards for suppliers based on our Corporate Citizenship Policy


Recommendation of criteria has been promulgated and widely accepted


Elaborate guideline for third party management based on our Corporate Citizenship initiative



Systematic training approach in HSE


"Virtual HSE University" launched


Institutionalize "Virtual HSE University"



Define KPIs for HSE


HSE-training compliance and audit follow-up rates defined; financial KPI for HSE not yet defined due to methodological difficulties


Defining and implementing KPI for HSE based on GRI



Review Group waste disposal practices to eliminate the risk of environmental damage from waste disposal


The review revealed no major problems in our waste disposal practices


Specific weak points regarding waste disposal will be followed up in 2003 on a site basis



Continue to achieve long-term corporate targets (LTAR, CO2 reduction and reputation rating)


LTAR and long-term CO2 target on track, good reputation ratings achieved


Achieve long-term HSE goals for 2003: 0.5 LTAR, 3% reduction of CO2
(based on 2000)



BCM   Business Continuity Management   KPI   Key Performance Indicator
BU   Business Unit   LTAR   Lost-time accident rate
CO2   Carbon dioxide   MN   Medical Nutrition Business Unit
Div   Division   NEM   Novartis Emergency Management
EMAS   Eco-Management and Audit Scheme   NO2   Nitrous dioxide
EMS   Environmental Management System   NOx   Nitrous oxides
GJ   Giga Joule   OHSAS   Occupational Health & Safety Administration System
GRI   Global Reporting Initiative   OTC   Over-the-Counter Business Unit
hal   Halogenated   SO2   Sulphur dioxide
HSE   Health, Safety and Environment   SOx   Sulphur oxides
I&B   Infant & Baby Business Unit   VOC   Volatile organic compound
ISO   International Organization for Standardization        


Because past operations may have led to the contamination of soil and groundwater, Novartis has established financial reserves of CHF 229 million for estimated environmental liabilities. In and around Basel, the local chemical industry (including predecessor companies of Novartis) established an organization to proactively look for timely solutions for the possible consequences of past disposal practices at a number of landfills. The objective of this organization is to eliminate acute and long-term risks through eco-efficient, pragmatic measures utilizing state-of-the-art technology, which are developed in cooperation with the authorities, and are based on professional studies and assessment. In 2002, risk assessments for several landfills in France and Switzerland were conducted.

HSE Management System and Organization

Since the merger creating Novartis in 1996, we have focused on integrating our HSE procedures into all business processes. The Corporate HSE organization (8 people), together with Division and Business Unit HSE personnel (15 people), have focused their efforts on the following areas, each of which is an integral part of our Corporate Citizenship commitments.

Third Party Management

We are aware of our dependence on the cooperation of our third party contractors and manufacturers in guaranteeing the integrity of Novartis standards (Corporate Citizenship Policy, Corporate HSE Guidelines) and on the traceability of components and ingredients. Our target for 2003 is to elaborate and implement a guideline for third party management in the context of Corporate Citizenship in order to complete third party contractor risk assessment and risk portfolio analyses, and to define and take necessary follow-up actions.

Business Continuity Management (BCM)

Novartis is aware that we are facing a variety of risks at the strategic and operational level regarding possible unavailability of the key resources necessary to support essential business processes. Each risk needs to be assessed for likelihood of occurrence and business impact. Since 2001, Novartis Pharmaceuticals has been working to implement a structured, systematic process to pro-actively manage all significant business risks by taking preventive measures. The process is completed once we have designed strategies to be followed in case a risk event does occur, which will ensure timely business resumption. The BCM also helps us to maintain our high standards in Novartis Emergency


Management (NEM). In 2003 and coming years we will expand the systematic approach to all organizational units.

HSE Risk Performance Management

Since 1997, Novartis sites have been managing their local risk portfolios, and since 1998 we have consolidated the locally produced data at Group level, thus compiling our Corporate risk portfolio. This is regularly presented to and discussed with the Executive Committee (ECN) and the Board of Directors.

In May 2002, 74 risks warranting priority action plans were reported to the ECN. These primarily included risks associated with potential fires, the destruction of research data and/or infrastructure, as well as dust explosions and earthquakes, for example. Most risks attributable to tank storage and toxic gases are no longer included due to the many risk-diminishing safety improvements we have made in recent years. Only liquid ammonia in cooling units retained a priority risk rating and measures to change this are well underway. In May 2002, 18 of the 74 identified priority risks were removed from the list as a result of the actions taken to correct them. Action plans for all remaining priority listed risks have been developed and are currently being implemented. The next comprehensive risk review at Group level is scheduled for the second quarter of 2003.


HSE Performance and Data Management

Globally, we now have over 400(1) dedicated HSE Specialists at our sites who are constantly analyzing our risk portfolio and driving the resulting action plans forward. Together with Senior Management and their local organizations they have defined key performance indicators (KPIs) for Novartis' HSE-related objectives. The KPIs are based on the data input of 117 sites managed by Novartis Group companies in 2002. These include all sites that significantly impact the Group's overall HSE related performance (i.e. all production, formulation and R&D sites). Five newly-acquired sites were integrated in 2002, primarily into CIBA Vision, while four sites were sold or closed, mainly impacting OTC, Medical Nutrition and Infant & Baby.

HSE data is collected and reviewed on a quarterly basis. The published HSE data in this report and on our website contain actual data for the period from January through September 2002 and estimates for the last quarter. The accident and financial data are actual data from January through December 2002. These 2002 figures will be updated with actual data in the first quarter of 2003. Significant deviations will be reported on our website and in next year's Annual Report. The data collection process and performance system is part of the Corporate Citizenship assurance process, which is described in the assurance report contained in this Annual Report.


In gathering this data, we take into account impacts originating inside the fences of our sites together with major material flows across these boundaries. We currently do not measure impacts from the manufacture of purchased goods, energy and transportation by third parties.

In 2002 we paid CHF 20000 in HSE-related fines and we had 9 cases of non-compliance with HSE regulations.

Novartis is conducting life cycle assessments (LCA) of selected products and services on a case-by-case basis. Due to the many intangibles in health value assessment of pharmaceutical products and the regulatory impact on many aspects of a pharmaceutical's life cycle, Novartis has not implemented a systematic LCA-management system.

Compared to 2001, security staff are no longer included


Air Emissions



2002 Data
Divisional split based on 2002.


  Consumer Health Division
  Novartis Group(4)
  OTC, Medical Nutrition, Infant & Baby
  CIBA Vision
  Animal Health
  % change














HSE Personnel [number of employees working at least 50% for HSE]   207   230   116   169   76   67   25   15   23   21   -11   447   502   445

HSE investments [CHF millions]   35.8   23.6   4.10   9.50   10.7   8.80   1.67   4.25   0.60   0.40   -5   53.0   55.6   55.1
HSE expenses [CHF millions]   145   143   16.8   21.50   39.8   37.7   10.6   7.20   3.70   3.80   1   216   213   244

Total production [1000 t = metric tons]   27.2   27.7   515   535   99.8   86.8   17.8   17.5   3.22   3.97   -2   663   671   692

Water consumption [million cubic meters]   19.1   19.4   7.28   9.57   62.7   59.7   0.74   0.64   0.46   0.41   1   90.3   89.8   88.0
Energy consumption [million GJ]   6.72   5.99   2.93   3.41   5.03   4.79   0.82   0.61   0.14   0.12   5   15.6   14.9   14.4

Lost time accident rate [accidents per 200 000 hours worked]   0.65   0.68   0.61   0.81   0.90   0.88   0.67   0.59   0.56   0.67   -5   0.68   0.72   0.93
Lost work day rate [lost days per 200 000 hours worked]   13.6   12.3   11.7   13.1   7.65   11.6   10.3   8.75   7.50   6.26   4   12.3   11.8   14.4

Water emissions(1)                                                        
Effluent discharge [million cubic meters]   4.36   4.32   4.02   4.87   11.6   11.2   0.71   0.53   0.11   0.11   -1   20.8   21.0   19.6
Suspended solids [t]   277   263   60.3   127   200   223   3.93   3.40   6.81   10.3   -13   548   627   609
Chemical oxygen demand COD [1000 t]   0.44   0.47   0.26   0.84   3.74   2.86   0.04   0.04   0.00   0.01   6   4.50   4.22   4.11
Nitrogen [t]   125   91.3   8.00   10.0   303   301   0.24   0.48   0.00       8   435   403   505
Phosphate [t]   60.9   31.9   8.87   6.14   18.4   22.5   0.72   0.80   0.00       45   88.7   61.4   97.0
Soluble salts [1000 t]   11.5   8.40   0.39   0.07   12.1   11.7   23.0   0.07   0.00       19   24.0   20.2   20.8
Sum of heavy metals [t]   0.19   0.46               0.00       0.00           -58   0.19   0.46   0.32

Air emissions                                                        
Carbon dioxide [1000 t](2)   214   188   116   148   114   107   6.78   4.65   4.97   4.36   1   455   452 (5) 469
Sulphur dioxide [t](2)   42.2   75.9   37.0   115   79.8   165   0.34   0.42   35.3   31.5   -50   195   388 (5) 328
Nitrogen oxide [t](2)   199   190   88.9   116   91.9   85.5   5.71   7.13   7.11   5.78   -3   393   405 (5) 415
Particulates [t](2)   12.7   10.4   17.1   19.6   1.84   3.02   0.16   0.47   6.12   4.68   -1   37.9   38.1 (5) 65.9
Hydrochloric acid [t]   1.85   1.81   0.00   0.00   3.37   2.57       0.00   0.01   0.01   19   5.23   4.39   4.87
Ammonia [t]   0.01   0.00   0.48   0.48   0.00   0.00       0.00   0.02   0.02   2   0.51   0.50   1.12
Volatile organic compounds (VOC) halogenated [t]   17.9   25.2   0.02   0.02   320   614       23.3   17.2   19.0   -48   355   682   436
Volatile organic compounds (VOC) non-halogenated [t]   493   387   18.0   23.1   688   575   18.8   0.58   0.90   5.58   23   1 220   991   849

Waste(3) [1000 t]                                                        
Non-hazardous waste generated [t]   53.4   24.9   91.1   158   13.6   11.5   6.05   4.92   0.76   0.76   -17   165   200 (5) 197
  Recycled [t]   11.5   11.4   54.1   133   6.73   8.91   1.59   0.51   0.18   0.23   -52   73.9   154 (5) 127
  Treated [t]   36.0   7.86   2.92   3.16   1.37   0.48   0.45   0.51   0.04   0.03   239   40.8   12.0 (5) 11.8
  Disposed of [t]   5.92   5.55   28.9   15.3   5.51   2.13   4.01   3.03   0.54   0.46   69   44.9   26.5 (5) 55.3
Hazardous waste generated [t]   54.2   46.0   0.38   0.30   17.5   15.5   0.20   0.13   0.52   0.49   17   72.8   62.4 (5) 51.2
  Recycled [t]   12.6   12.0   0.01   0.02   5.31   6.11   0.00   0.00   0.01   0.05   -1   18.0   18.2 (5) 13.2
  Treated [t]   38.5   31.9   0.35   0.24   10.0   7.66   0.19   0.10   0.50   0.44   23   49.5   40.3 (5) 35.4
  thereof incinerated [t]   37.2   30.2   0.27   0.21   8.38   6.35   0.15   0.10   0.50   0.43   25   46.5   37.3 (5) 31.5
  Landfill [t]   2.84   1.85       0.01   2.06   1.66       0.00           39   4.91   3.52 (5) 2.86
  Other disposal [t]   0.01   0.05       0.02   0.14   0.00       0.00           88   0.15   0.08 (5) 0.11
Intermediate storage [t]   0.25   0.26   0.00   0.00       0.00       0.00   0.00   0.01   -11   0.25   0.28 (5) 0.22

Table shows absolute values with three significant digits; 0.00 signifies values below 0.005. Where no figures have been quoted, no data is available.

To waste water treatment plant excluding cooling water
Calculated based on energy breakdown
Difference between generated and handled waste due to treatment of waste in the current year stored in previous years
Including Group functions
Restatement of 2001 estimates of emissions from boilers and waste to actual figures


Resource Consumption: Energy and Water


With a lost-time accident rate of 0.68 in 2002, we have a fair chance of achieving our ambitious LTAR target of 0.5 in 2003. We sincerely regret the occurrence of a fatality, the result of an automobile accident. Our sympathies go to family and friends of the deceased.

External Ratings

Leading sustainability analysts rate Novartis consistently among the leading companies in sustainability performance:

Ratings have consistently improved over the last 5 years. The observed positive five year tendency is certainly reassuring but there is as yet a lot to be done.

Dow Jones Sustainability Index (DJSI) and Dow Jones STOXX Sustainability Indexes (DJSI STOXX) stated:

"Novartis AG has an overall sustainability performance that positions it amongst the sustainability leaders of its industry. This is supported by Novartis' high level of engagement across all three corporate sustainability dimensions. Novartis' management capabilities in the economic dimension are among the best in the industry. This is underlined by a particularly strong performance in Corporate Governance and risk and crisis management systems. In the environmental dimension, Novartis scored significantly above the industry average with a clear out-performance in environmental management systems. Moreover, Novartis performed among the best, in the social dimension, particularly in management attention to human resources and public reporting."


Human Resources

Employees by Region and Business at December 31, 2002


  Canada and
Latin America




Pharmaceuticals   11 148   4 332   21 153   7 477   44 110
Generics   907   721   4 355   1 949   7 932
OTC   876   245   1 845   831   3 797
Animal Health   524   284   849   561   2 218
Medical Nutrition                    
(including Nutrition & Santé)   729   64   1 724   184   2 701
Infant & Baby   2 263   1 991   610   37   4 901
CIBA Vision   2 482   1 314   1 341   866   6 003
Corporate   414   34   718   49   1 215

Total   19 343   8 985   32 595   11 954   72 877

Global Talent Management

Over the past few years we have focused on creating a performance-driven culture. We have strengthened our talent pool in every area—managerial, commercial and research and development. We now have strong learning curricula in place, in partnership with the world's finest business schools, including Harvard, Stanford, INSEAD and IMD. In 2002 over 3000 of our managers worldwide benefited from a Novartis-specific training or development program.

The Novartis Institutes for Biomedical Research, Inc. (NIBRI) in Cambridge, Massachusetts, is fast becoming a magnet for competitive scientific knowledge. It has already attracted some outstanding research talent, despite the fact that it is not scheduled to be fully operational for another year. At that point Prof. Mark Fishman, Head of Pharmaceuticals Research, will be leading a team of almost one thousand research scientists.

Talent Takes Center Stage

Sixteen high-performing associates were enlisted from across the organization in November 2001 to form a Talent Management Task Force. Their mission was to brainstorm ways to attract, develop, assess, deploy and retain talent. The ideas were presented at a Group Leadership Meeting, the forum where Chairman and CEO Daniel Vasella, MD, invites his senior leaders to review past performance and to discuss future objectives every year.

As a result of this process, three priorities emerged:

Better Training, Sharper Tools

In 2002, as this new talent management strategy was implemented, visible progress was made throughout the organization. An accelerated development program to fast-track high potential talent


was piloted, and proved so successful that it is now being rolled out. In addition, under the global talent management strategy the existing organization and talent review process has been further strengthened and extended to cover all managerial levels globally. It provides a common methodology to enable our business leaders to identify the capabilities of their organizations and develop their talent bases. The implementation of this process has been enhanced for managers with the provision of a more comprehensive toolkit and supported with better training. The issue of matching best talent with critical jobs has also been included with the introduction of our Talking Talent meetings. Skills and potential can be identified and calibrated here to ensure that we remain agile in the marketplace by growing our own leaders.

2002 Personnel Costs by Function and Region

CHF millions

  Research and

  Production and

  Marketing and

  General and


USA   671   506   1 695   378   3 250
Canada and Latin America   21   117   273   83   494
Europe   739   864   1 173   768   3 544
Africa/Asia/Australia   86   65   445   87   683

Total   1 517   1 552   3 586   1 316   7 971

A priority of the global talent management strategy is establishing common global leadership standards and communicating them throughout the organization. These standards have already strengthened our ability to upgrade the quality of our selection and assessment, and have resulted in improvements to the execution of our learning curricula in line with new strategy challenges.

Learning for Results

The overall objective of the Novartis learning program is learning for results. We believe that identifying and developing talent is one of our most important priorities: better managers inspire and produce superior results. Improving performance through management development and learning is an essential component of our long-term strategy.

Novartis Learning responds to the needs of our businesses with learning programs that focus on key commercial issues and performance improvement. A member of the Novartis senior leadership team sponsors each of our programs.

Learning programs helped managers translate strategy into action by emphasizing leadership as a core competence. Our Leading at the Frontline program enhanced the leadership skills of more than 1 500 managers worldwide, showing them how to achieve better results by improving the performance of their people. This program has enhanced our managers' ability to lead their associates, capitalize on the diverse talents of their teams, and create an environment that fosters innovation, cooperation and open communication.

Our Clinical Development and Medical Affairs function (CD&MA) regularly reviews our current programs to ensure continual up-grading and improvement of the learning environment. eLearning was identified as an essential component in a well-blended approach to training and learning. This has allowed for the tailoring of specific courses to meet individual associates' needs. Virtual classroom technology, self-pacing eLearning modules and recorded professional interviews with experts and academics are utilized independently, as well as in conjunction with traditional courses. Our blended approach has led to a more consistant global delivery of knowledge and to much more timely provision of required training events. The variety and scope of training courses increased as the cost for training-related travel expenses fell.


Our current technology-based programs, such as eLearning SOPs, virtual classroom training for global projects, CD&MA management systems and various application trainings will be extended and improved throughout the year.

Employees by Function and Region (2002 averages)

  Research and

  Production and

  Marketing and

  General and


USA   3 214   5 097   9 062   1 558   18 931
Canada and Latin America   298   3 667   4 671   1 131   9 767
Europe   6 320   10 467   11 487   4 306   32 580
Africa/Asia/Australia   821   2 906   7 873   1 144   12 744

Total   10 653   22 137   33 093   8 139   74 022

Business Finance Skills

The Harvard Business School business finance program is another example of the high-level training approach adopted by Novartis Learning. This course was designed specifically for managers outside the finance function. The program was customized for Novartis through the development of a number of Novartis-specific case studies. We invited Novartis managers to share their expertise, and worked closely with members of the Harvard faculty to tailor their instruction to Novartis. This program has achieved its goal of ensuring that managers understand the financial impact of their decisions and the role they play in creating long-term, sustainable growth in value for Novartis.

Project Leadership Ability

The Novartis Learning activities in 2002 also helped to build up project leadership skills. A strong project leadership ability is critical in keeping Novartis at the forefront of the fast-paced, highly competitive healthcare industry. The project management curriculum offered more than 600 Novartis managers the unique opportunity to enhance their capability in managing very demanding and complex projects, especially within Research and Development.

Gender Diversity and Work-Life Balance

Women now account for 45% of our total employees. In many of our affiliates, including Novartis Pharma in Canada, Germany and Poland, more than 50% of our associates are women. In the US company, now more than 35% of the management are female. Many of them have to achieve the difficult balance between work and family. This balancing act is also increasingly becoming an issue for many of our male associates. Our programs, working infrastructure, internal policies and guidelines make us one of the recognized industry leaders in this field.

In the US, for the fourth straight year, Working Mother Magazine has named our US Pharmaceuticals affiliate, Novartis Pharmaceuticals Corporation, among the Best 100 Companies for Working Mothers. The judges at Working Mother were especially impressed with our support for flexible work styles throughout Novartis. This recognition has come to be seen as the gold standard for assessing work-life practices in corporate America.

In many communities we are known as an advanced, flexible and exemplary employer with regard to work/family issues. This doesn't mean that we can't improve. We regularly survey our associates, and despite an overall satisfactory picture, work-life balance does still appear to be a problem affecting about 25% of senior managers.


Female Employees by Business

employees %

management %

Pharmaceuticals   45   28
Generics   42   17
OTC   51   33
Animal Health   42   29
Medical Nutrition   41   28
Infant & Baby   44   30
CIBA Vision   47   32
Corporate   57   19

Group overall   45   27

Female Employees by Region

employees %

management %

USA   49   36
Canada and Latin America   47   33
Europe   45   27
Africa/Asia/Australia   36   17

Group overall   45   27

Novartis accepts this challenge and is now piloting an approach that can be used on a case-by-case basis to assess its broader suitability.

Excellence in Research

One of the key developments in drawing top scientific talent to Novartis has been the new Novartis Institutes for Biomedical Research Inc. (NIBRI) in Cambridge, Massachusetts. Designed to be the Novartis "US brain trust, it is fast becoming a magnet, inexorably drawing in world-class talent. By 2004, NIBRI will be fully staffed with nearly one thousand top research scientists.

Prof. Mark Fishman, the new Head of Pharmaceuticals Research is himself a focal point, and obviously such a major enterprise is creating something of a stir among the scientific community. Despite the fact that there is strong competition in the marketplace, his vision together with the resources of Novartis and our results-oriented culture, are together attracting ambitious research scientists with the ability to succeed. A clear measure of the importance of this project can be seen in the fact that over 60% of the Novartis scientific researchers based in New Jersey have requested to make the move to Cambridge.

On December 11, 2002, Prof. Fishman conferred the fifth annual Novartis Distinguished Scientist (NDS) and Novartis Leading Scientist (NLS) Awards in Basel. NDS Awards were won this year by Dr. André Cordier for his work in the field of genomics and toxicoge-nomics, and by Dr. John R. Fozard, for his work with antiasthmatic agents. The work of the two researchers is highly regarded by the scientific community, both within Novartis and externally. In addition to the right to call themselves Novartis Distinguished Scientists, this year's two winners of the coveted NDS Award will each receive CHF 40 000. The twelve winners of the NLS award will each receive CHF 25 000.


Global Recruitment

As part of our global talent management strategy, an employer value proposition has been developed. This is being introduced as a part of our new global recruitment strategy, and will define the benefits of becoming an associate at Novartis.

We extend a welcome to our new associates from Slovenia based Lek d.d., the largest Generics business in Eastern Europe, which we have recently acquired. We look forward to developing existing opportunities in this new market, as well as seeking out new ones. We also take this opportunity to wish every success to former associates with our Food and Beverage business, which has been sold to Associated British Foods plc.

Human Resources Key Indicators of Lek




Employees   3 687   72 877  
In home country   65 % 14 %
Gender distribution (female)   54 % 45 %
Working in R & D   12 % 14 %
Working in production   46 % 30 %
Working in marketing   26 % 45 %
Personnel cost in % of sales   21   25  
Sales per employee (CHF millions)   0.17   0.44  


Corporate Citizenship data of Lek are not included in the reported Novartis data.

Looking to the Future

This year, we will continue building on the quality execution of our talent management strategy in all functions and businesses. Our focus over the next few years will be on building and improving succession candidates for key jobs and continuing to implement world-class learning and development programs to allow all of our associates to maintain and upgrade their skills and knowledge.

To accomplish all this, we have implemented Pathways for Talent Management. This framework not only helps associates to better understand the various initiatives available, but also makes clear the links between the various programs.

Naturally, we continue to make rigorous assessment of the people we select for leadership roles. The global methodology of the organization and talent review process, the internet-based support tools and the added dimension of the Talking Talent meetings will ensure that we can recognize and grow our own talent from within, into a measurable, visible and sustainable competitive advantage.

In April 2003, Novartis will again be organizing a Community Partnership Day, as in previous years, this time under its new umbrella theme, "Caring Across Generations." To commemorate the merger of our predecessor companies, this day is dedicated to making our presence felt in the communities in which our associates live and work.


Assurance Report on the Novartis Group Corporate Citizenship Reporting


To the Audit and Compliance Committee of Novartis AG:

We have performed review procedures on the management and reporting processes for Corporate Citizenship (CC); Health, Safety and Environment (HSE); and Human Resources (HR) for the year ended December 31, 2002. We have also performed review procedures on the HSE key figures "Health, Safety and Environment Data 2002" on pages 56 and 57 and on the HR key figures "Employees by Region and Business" found on page 60; and "Female Employees by Business" and "Female Employees by Region" which are found on page 63 of the Novartis Annual Report (the Report) for the year ended December 31, 2002. Novartis management is responsible for the Report and for the development and maintenance of the internal reporting processes, data and key figures for CC, HSE and HR. Our responsibility is to report on the internal reporting processes, data, and key figures for CC, HSE and HR based on our review procedures.

The scope of our review procedures was to:

Our review procedures included:

There are no generally accepted international standards for the preparation or assurance of corporate sustainability or corporate citizenship reports. In the absence of such standards, we based our approach on best practices including emerging, but not yet established, standards such as the Global Reporting Initiative (GRI) and the European Federation of Accountants' (FEE) Discussion Paper "Providing Assurance on Sustainability Reports," as well as on the underlying principles within standards


promulgated by the Swiss profession and International Standards on Auditing. We therefore planned and performed our procedures to obtain a reasonable basis for our conclusions. However, we have not performed an audit. Accordingly, we do not express such an opinion.

Our statement should be read in conjunction with the sections "Implementation" on page 41 and "HSE Performance and Data Management" on page 54 of the Report which define the scope of the reporting, the inherent limitations of accuracy and completeness for the CC information, and the fact that the CC management process is in its first year of operation.

Based on our review procedures, nothing has come to our attention to cause us to believe that:

From our work, we have provided the following recommendations to the management, which have been agreed:

PricewaterhouseCoopers AG    



Dr. Thomas Scheiwiller
Basel, January 21, 2003
  Thomas Frei


Corporate Governance at Novartis

Novartis is fully committed to good corporate governance. Our principles and rules on corporate governance are laid down in the Articles of Incorporation, the Regulations of the Board and the Charters of the Board Committees.(1) The Board's Corporate Governance Committee reviews these principles and rules regularly in the light of prevailing best practices and forwards suggestions for improvement to the full Board for approval.

In 2002, Novartis shareholders' rights were reinforced by three changes to the Articles of Incorporation: reduction of the deadline for submitting agenda items prior to a General Meeting from 60 to 45 days introduction of the option of conducting electronic voting during the General Meeting; and reduction in the Directors' terms of office from four to three years.

This report conforms with the new Directive on Information Relating to Corporate Governance published by the SWX Swiss Exchange on July 1, 2002.(2)

Group Structure and Shareholders

Novartis AG, a holding company organized under Swiss law, owns directly or indirectly all Novartis companies worldwide.

The Novartis Group is divided operationally into two divisions: Pharmaceuticals and Consumer Health. The Pharmaceuticals Division is organized into five business units: Primary Care, Oncology, Transplantation, Mature Products and Ophthalmics. The six business units of the Consumer Health Division are: Generics, Over-the-Counter self medication (OTC), Animal Health, Medical Nutrition, Infant & Baby and CIBA Vision. Due to the fact that the Pharmaceuticals business units have common long-term economic perspectives, customers, research, development, production, distribution and regulatory environment, their financial data are not required to be separately disclosed. The business operations of the business units are conducted through local Novartis Group companies. The most important Novartis subsidiaries and associated companies are listed in Note 30 to the Group's consolidated financial statements.

The largest registered Novartis shareholders are the Novartis Foundation for Employee Participation (holding 3.3% of the share capital) and Emasan AG (3.1%). No other shareholder is registered as owner of more than 2% of the issued share capital and there are no cross-holdings equal to or higher than this amount.

Capital Structure

The share capital of Novartis AG is CHF 1 412 075 000, fully paid-in and divided into 2 824 150 000 registered shares of CHF 0.50 nominal value each. Novartis AG has neither authorized nor conditional capital.

In 2001, the Novartis shares were split at a ratio of 1:40. In 2002, as a result of a successfully completed share repurchase program, the share capital was reduced from CHF 1 442 602 340 to CHF 1 412 075 000 pursuant to a resolution passed at the Annual General Meeting on March 21, 2002. No other changes in share capital have occurred since January 1, 2000. On July 22, 2002, Novartis announced a new share repurchase program up to a total amount of CHF 4 billion via a second

These documents are available upon request to the Corporate Secretary, Ingrid Duplain, JD. They can also be accessed at http://www.novartis.com/investors/en/governance.shtml

Where an item listed in the SWX Directive is not addressed in this report, the item is either inapplicable to, or immaterial for, Novartis.


trading line. The Board will propose reducing Novartis AG's share capital by amounts corresponding to the nominal value of repurchased shares at the forthcoming Annual General Meetings.

Convertible Bonds and Options

Affiliates of Novartis AG had two convertible bond issues that were converted into shares in 2002 and are more particularly described in Note 18 to the Group's consolidated financial statements. In December 2001, Novartis sold a total of 55 million nine- and ten-year call options (Low Exercise Price Options, "LEPOs") and 55 million nine- and ten-year put options on Novartis shares to a third party. For further details concerning these options, please see Note 24 to the Group's consolidated financial statements. Information about Novartis share options granted for executive and employee compensation is contained in the section on Compensation further below and in Note 26 to the Group's consolidated financial statements.

Shareholders' Rights

Each registered share entitles the holder to one vote at the General Meeting. There are no preferential voting shares. Shareholders also have the right to receive dividends, appoint a proxy, convene a General Meeting, place items on the agenda of a General Meeting and hold such other rights as defined in the Swiss Code of Obligations (SCO).

Legitimization as Shareholder

Persons enrolled in the Novartis share register may exercise the membership rights of registered shares. Registration requires a declaration that the shareholder has acquired the shares in his own name and for his own account.

According to the Articles of Incorporation, no shareholder shall be registered to vote more than 2% of the issued share capital unless the Board has upon request granted an exemption. So far, such a request has never been denied. The Board may register nominees with the right to vote up to 0.5% of the issued share capital, and in excess of that limit if such nominees disclose particulars of the beneficial owners of these shares.

Groupings formed to circumvent this limitation are treated as one single person or nominee.

The statutory voting restrictions can be cancelled with a two-thirds majority of the shares represented at the General Meeting.

Resolutions and Elections at General Meetings

Shareholders registered at least 20 days prior to the General Meeting may vote their shares at the meeting.

At last year's General Meeting the newly introduced option of electronic voting was adopted for all resolutions undertaken.

Resolutions of the shareholders at General Meetings are approved with a simple majority of the shares represented at the meeting, except in the following matters which by law (SCO, Art. 704) and our Articles of Incorporation require the approval of two-thirds of all represented shares:


The Board of Directors

Members of the Board of Directors(1)




Daniel Vasella, MD   49   1996   2004
Prof. Helmut Sihler, JD, PhD   72   1996   2004
Hans-Jörg Rudloff   62   1996   2004
Dr. h.c. Birgit Breuel   65   1996   2005
Prof. Peter Burckhardt, MD   64   1996   2005
Walter G. Frehner   69   1996   2004
William W. George   60   1999   2003
Alexandre F. Jetzer   61   1996   2005
Pierre Landolt   55   1996   2005
Prof. Ulrich Lehner, PhD   56   2002   2005
Heini Lippuner   69   1996   2004
Prof. Rolf M. Zinkernagel, MD   58   1999   2003

The average tenure of our Directors is five years and their average age is 62 years. Daniel Vasella, MD, is the only executive Director. Alexandre F. Jetzer was a member of the Executive Committee until 1999 and supports Novartis' Government Relations under a consultancy agreement. With the exception of Daniel Vasella, MD, and Alexandre Jetzer, all Directors are independent and have no material dealings with Novartis AG or other companies of the Novartis Group outside their role as a Director(2). No Director sits on the board of directors of other listed companies with which any Novartis Group company conducts a material amount of business.

The specific term of office for a Director is determined by the General Meeting on the occasion of his or her election. Each year approximately one third of all Directors are elected or re-elected.

In principle, a director is to retire after 12 years of service or the reaching of 70 years of age. Nonetheless, the shareholders may re-elect such Directors for additional terms of office.

Daniel Vasella, MD, has been elected by the Board as its Chairman and also to serve as Chief Executive Officer. It is the view of the Board that this dual role ensures effective leadership and excellent communication between the shareholders, the Board and Management.

The Board has appointed Prof. Helmut Sihler, JD, PhD, as Lead Director, whose responsibility it is to ensure an orderly process in evaluating the performance of the Chairman and CEO and to chair the Board's private sessions (i.e. the meetings of the non-executive Directors). In case of a crisis, he would assume leadership of the independent Directors.

The Board appointed Prof. Helmut Sihler, JD, PhD, and Hans-Jörg Rudloff as its Vice Chairmen.

See also the biographical information on pages 83-87; Hans-Ulrich Doerig, PhD, stepped down from the Board at the 2002 Annual General Meeting.

In his capacity as a Director, Prof. Zinkernagel, MD, represents the Board of Directors' interests on the Scientific Advisory Boards of the Genomics Institute of the Novartis Research Foundation (GNF) and the Novartis Institute for Tropical Diseases (NITD).


Role and Functioning of the Board

The Board holds the ultimate decision-making authority of Novartis AG for all matters except those reserved by law (SCO, Art. 698) to the shareholders.

Decisions are taken by the Board as a whole, with the support of its four Committees described below (Chairman's Committee, Compensation Committee, Audit and Compliance Committee and Corporate Governance Committee). The primary functions of the Board are:

The Board has delegated to the Executive Committee the coordination of day-to-day business operations of Group companies. The Executive Committee is headed by the Chief Executive Officer. The internal organizational structure and the definition of the areas of responsibility of the Board and the Executive Committee are set forth in the Board Regulations.(1)

The agenda for Board meetings is set by the Chairman. A Director may request that an item be included on the agenda. Board Members are provided with adequate materials to prepare for the items on the agenda in advance of Board meetings.

The Board recognizes the importance of being fully informed on material matters involving the Group and ensures that it has sufficient information to make appropriate decisions through several means:

During 2002, the Board met seven times. Detailed information on each Director's attendance at full Board and Board Committee meetings is provided in the table below.

Once yearly, the Board reviews the performance of the Chairman and CEO and approves the objectives for the following year. The Board of Directors also performs a self-evaluation once a year.

This document is available upon request to the Corporate Secretary, Ingrid Duplain, JD. It can also be accessed at http://www.novartis.com/investors/en/governance.shtml


Board Committees

Detailed information on attendance at full Board and Board Committee meetings is as follows:




  Audit and



Number of meetings in 2002   7   9   3   4   2  

Daniel Vasella, MD   7 (1) 9 (1)            

Prof. Helmut Sihler, JD, PhD   6   8   3 (1) 4 (1) 2  

Hans-Jörg Rudloff   6   8   3       1  

Dr. h.c. Birgit Breuel   7           4      

Prof. Peter Burckhardt, MD   7                  

H.-U. Doerig, PhD(2)   1           1      

Walter G. Frehner   7           4      

William W. George   7   9   3       2 (1)

Alexandre F. Jetzer   7                  

Pierre Landolt   7                  

Prof. Ulrich Lehner, PhD(3)   5           3 (4)    

Heini Lippuner   7   9              

Prof. Rolf M. Zinkernagel, MD   7               2  

Until March 21, 2002
Since March 21, 2002
Since August 20, 2002

Role and Functioning of the Board Committees

Each Board Committee has a written Charter outlining its duties and responsibilities and a chair elected by the Board. The Board Committees meet regularly and consider meeting agendas determined by the chair. Board Committee members are provided with adequate materials to prepare for the items on the agenda in advance of Board meetings.

The Chairman's Committee

The Chairman's Committee consists of the Chairman and Chief Executive Officer, the two Vice Chairmen, one of whom is the Lead Director, and such other members as are elected by the Board from time to time. In 2002, the Committee met nine times.

The Chairman's Committee comments on all matters falling within the authority of the Board before the latter takes decisions on such matters and, in urgent cases, can take any preliminary and necessary action on behalf of the Board. The Chairman's Committee also interfaces with the Executive Committee, specifically approving personnel appointments and financial measures which exceed the authority of the Executive Committee but which do not require approval by the full Board.

The Compensation Committee

The Compensation Committee is composed of three independent Directors. In 2002, it convened three times. The Compensation Committee reviews and approves the compensation policies and programs,


including share option programs and other incentive-based compensation. It is responsible for reviewing and approving the compensation paid to members of the Executive Committee and other selected key executives, and for reviewing the performance of the Chairman and Chief Executive Officer. The Compensation Committee seeks outside expert advice from time to time to support its decisions and recommendations.

The Audit and Compliance Committee

The Audit and Compliance Committee is composed of four members and in 2002 met four times. The Board has determined that all the members of the Committee are independent, as defined by the rules of the New York Stock Exchange, and that its chair, Prof. Sihler, JD, PhD, is adequately qualified in financial management matters. The Board has also reassured itself that other members of the Committee have sufficient experience and ability in finance and matters of compliance to enable them to adequately discharge their responsibilities.

The Committee's main duties are:

The Corporate Governance Committee

The Corporate Governance Committee is composed of four independent Directors and met twice in 2002. The Corporate Governance Committee develops corporate governance principles and recommends these to the Board for approval. Its duties include the regular review of the Articles of Incorporation with a view to reinforcing shareholder rights and of the composition and size of the Board and its committees. The Corporate Governance Committee conducts an annual evaluation of the Board as a whole and gives guidance to the Directors on how to avoid potential conflicts of interests.



Non-Executive Directors' Compensation

The Compensation Committee advises the Board of Directors on the compensation of non-executive Directors. Non-executive Directors receive an annual retainer in an amount that varies with the Board and Committee responsibilities of the Director. Directors are eligible to participate in certain of the equity programs which we offer to senior management and selected employees. Directors receive no additional fees for attending meetings or acting as committee chairs. Directors can choose to receive the annual retainer in cash, shares or share options or a combination thereof. In addition, subject to the business performance of the Group, the Directors may receive a share grant. In 2002, 3 000 shares were granted to each Director in acknowledgement of 2001 business performance. Directors are reimbursed for travel and other necessary business expenses incurred in the performance of their services.

2002 Directors' Compensation

  Annual Cash



Daniel Vasella, MD
Chairman's Committee (Chair)
  (please refer to the table on page 78)

Prof. Helmut Sihler, JD, PhD
Vice Chairman, Lead Director
Chairman's Committee (Member)
Compensation Committee (Chair)
Audit and Compliance Committee (Chair)
Corporate Governance Committee (Member)
  230 179   7 544   17 276

Hans-Jörg Rudloff
Vice Chairman
Chairman's Committee (Member)
Compensation Committee (Member)
Corporate Governance Committee (Member)
  24 686   3 000   24 570

Dr. h.c. Birgit Breuel
Audit and Compliance Committee (Member)
  219 940   3 000  

Prof. Peter Burckhardt, MD   95 656   4 212  

Hans-Ulrich Doerig, PhD(1)
Audit and Compliance Committee (Member)
  11 832   3 000  

Walter G. Frehner
Audit and Compliance Committee (Member)
  78 546   3 000   10 750

William W. George
Chairman's Committee (Member)
Compensation Committee (Member)
Corporate Governance Committee (Chair)
  87 500   3 000   23 035

Alexandre F. Jetzer   12 312   3 000   9 214

Pierre Landolt   55 550   3 000   6 911

Prof. Ulrich Lehner, PhD(2)
Audit and Compliance Committee (Member)
  391 371    


  Annual Cash



Heini Lippuner
Chairman's Committee (Member)
  18 310   3 000   18 428

Prof. Rolf M. Zinkernagel, MD
Corporate Governance Committee (Member)
  267 832 (3) 3 000   15 357

Total   1 493 714   38 756   125 541

Hans-Ulrich Doerig, PhD, who is Vice Chairman of the Executive Board and Group Chief Risk Officer of Credit Suisse Group, stepped down from the Board of Novartis AG at the 2002 Annual General Meeting in line with our commitment to good corporate governance principles and to avoid any question of possible conflicts of interest. (Daniel Vasella, MD, is a member of the Board of Directors of Credit Suisse Group.)
Prof. Ulrich Lehner, PhD, CEO of Henkel AG, was elected as a new Board Member at the 2002 Annual General Meeting.
Includes CHF 250 000 for acting as the Board's delegate in the scientific advisory boards of the Genomics Institute of the Novartis Research Foundation (GNF) and the Novartis Institute for Tropical Diseases (NITD).

Ownership of Novartis Shares and Share Options by the Non-Executive Directors

The total number of Novartis shares owned as of December 31, 2002 by the non-executive Directors and persons closely linked to them was 252 016. "Persons closely linked to them" are (i) their spouse, (ii) their children below age 18, (iii) any legal entities that they own or otherwise control, or (iv) any legal or natural person who is acting as their fiduciary. No non-executive Director owned 1% or more of our outstanding shares.

As of December 31, 2002, the individual ownership of Novartis shares by the non-executive Directors (including persons closely linked to them) was as follows:

Beneficial Owner

  Number of Shares
Owned Directly
or Indirectly

Daniel Vasella, MD   (please refer to the table on page 78)
Prof. Helmut Sihler, JD, PhD       34 304
Hans-Jörg Rudloff       86 080
Dr. h.c. Birgit Breuel       4 160
Prof. Peter Burckhardt, MD       16 732
Walter G. Frehner       13 220
William W. George       19 720
Alexandre F. Jetzer       46 120
Pierre Landolt       100
Prof. Ulrich Lehner, PhD       120
Heini Lippuner       26 060
Prof. Rolf M. Zinkernagel, MD       5 400

Total       252 016


As of the same date, the non-executive Directors held a total of 331 901 Novartis share options. The number of share options, and exercise price have been adjusted to reflect the share split of 1:40 in 2001. Broken down by grant year the number of options held are:

Grant Year

Held (number)

  Exercise Price

  Term Life

2002   125 541   62.0   9
2001   90 480   70.0   9
2000   78 680   51.3   9
1999   17 200   68.4   9
1998   20 000   42.8   9

Compensation for Former Directors and Executives

In 2002, a total amount of CHF 180 000 was paid to three former members of the Board and CHF 2 186 507 to two former members of the Executive.

Report of the Compensation Committee

Executive Compensation Policy

Novartis' compensation programs are designed to attract, retain and motivate the high caliber of executives, managers and associates who are critical to the success of the corporation. Globalization of labor markets for specialists and executives has led to a rapid convergence between US and European principles of compensation and a stronger focus on long-term, equity based forms of programs.

Overall, the intention of the programs is to provide compensation opportunities that:

Total individual compensation at target performance level is aimed at the median of comparable companies of our industries. Annual cash and equity incentive awards are based on both overall Group or affiliate company and individual performance. Long-term incentive awards include share options and other forms of equity participation.

Executive compensation programs strongly encourage significant levels of share ownership and put a high portion of total compensation at risk, subject to individual and company performance and the appreciation of Novartis shareholder value.

The Compensation Committee believes that the existing compensation programs have achieved the desired effects.

Compensation Programs Descriptions

The total compensation package for each executive consists of the three basic components discussed in more detail below. Target salary and incentive levels are set at the median of the peer group, based on available public data and the analysis of external compensation advisors. Actual compensation levels of individuals may in some instances surpass the median of the market, reflecting superior results. The Compensation Committee believes that this position is consistent with the performance of the Group and its evaluation of the external market.


Salaries:    The 2002 salaries of the Swiss-based Executive Committee members are shown in the "Salary" column of the Summary Table—2002 Compensation.

Annual Incentive Awards:    Under the terms of the Novartis Annual Incentive Plan, awards are made each year based on the achievement of predetermined Group and individual performance objectives. Below a threshold level of performance, no awards may be granted under the plan.

Long-Term Incentive Compensation:    Long-term incentive compensation, in the form of share options, performance-contingent shares, and restricted shares, comprises a major portion of the total compensation package for executives. In any given year, an executive may be offered share options, performance-contingent shares, and/or restricted shares. Long-term incentives are targeted at the median of the competitive market, with above-average and superior performance resulting in long-term compensation above the targeted amounts. Below a threshold level of performance, no awards may be granted under the plan. Share options are also granted to selected employees.

Share Options

Novartis Share Option Plan

Under the Novartis Share Option Plan, directors, executives and other selected employees of Group companies (collectively, the "Participants") may be granted options to purchase Novartis shares. These options are granted both in recognition of past performance and as an incentive for future contributions by the Participants. They allow the Participants to benefit as the price of the shares increases over time, and so provide a long-term incentive for improvements in our profitability and success. If a Participant voluntarily leaves Novartis, options not yet vested will generally be forfeited. The options under the Novartis Share Option Plan have an exercise period of seven years, which begins after the lapse of a two-year vesting period.

Novartis US ADS Incentive Plan for US-based employees

Introduced in 2001, the Novartis US ADS Incentive Plan grants options to US-based Directors, officers and other selected employees thus replacing a Share Appreciation Rights Plan. Its terms and conditions are substantially equivalent to the Novartis Share Options Plan.

Share Plans:    We offer to certain Directors and executives a Long-Term Performance Plan, a Leveraged Share Savings Plan and a Restricted Share Plan. These plans are designed to foster long-term commitment of eligible employees by aligning their incentives to our performance.

Long-Term Performance Plan

Under the Long-Term Performance Plan, participants are awarded the right to earn Novartis shares. Actual payouts, if any, are determined with the help of a formula, which measures, among other things, our performance using economic value added relative to predetermined strategic plan targets over a three-year period. Additional functional objectives may be considered in the evaluation of performance. If performance is below the threshold level of the pre-determined targets, then no shares will be earned. To the extent the Group's performance exceeds the threshold performance level, an increasing amount of Novartis shares, up to the maximum cap, will be earned.

Leveraged Share Savings Plan

There are two separate Leveraged Share Savings Plans:

Participants can choose to receive part or all of their Annual Incentive Award in shares. Shares awarded under this plan are blocked for five years after the grant date. After expiration of the blocking period, the respective shares are matched with an equal number of shares.


In 2001 the Board approved a new employee share ownership plan under which Swiss-based employees receive part of their income up to a specified amount in Novartis shares. After the expiration of a blocking period of three years the award is matched with half a share for each share held.

Restricted Share Plan

Under the Restricted Share Plan, employees may be granted restricted share awards either as a result of a general grant or as a result of an award based on having met certain performance criteria. Shares granted under this Plan generally have a five-year vesting period. Restricted Shares carry a high risk of ownership for Swiss-based employees as the tax liability in Switzerland is based on the initial price of the share instead of a later, potentially lower, price at vesting date.

Employee Benefits:    Employee benefits offered to executives are designed to be competitive and to provide a safety-net against the financial catastrophes that can result from disability or death, and to provide a reasonable level of retirement income based on years of service with Novartis.

Evaluation of the Executive Committee Members' Performance

The Compensation Committee meets without the Chairman and CEO to evaluate his performance, and with the Chairman and CEO to evaluate the performance of other Executive Committee members. The bonuses and long-term incentives for 2001 and the base salaries for 2002 were discussed and approved at the meetings of the Compensation Committee held in January and February 2002.

The decisions on compensation of Executive Committee members were mainly based on individual performance evaluations taking into account current market conditions. In 2002, the Compensation Committee considered management's achievement of short and long-term goals, including revenue growth, economic value creation (operating and net income, earnings per share and economic value added) and ongoing efforts to optimize organizational effectiveness and productivity. The Compensation Committee also takes into consideration management's responses to the changes in the global marketplace and the strategic position of the Group. The performance measures were weighted subjectively by each member of the Compensation Committee.

The Compensation Committee of the Board of Directors:

Prof. Helmut Sihler, JD, PhD (Chairman)
Hans-Jörg Rudloff
William W. George

Executive Compensation

In 2002, there were 20 Executive Committee members and Business Unit Heads ("Executives"), including those who retired or terminated their employment in 2002. In total, the Executives received CHF 13 293 000 in base salaries and CHF 5 063 000 in cash bonuses. The number of share options granted was 2 255 723 and the number of shares granted 317 736. An additional CHF 2 896 000 was set aside for their pension, retirement and similar benefits. Compensation represents all payments made in 2002; however, cash bonuses and long-term compensation are based on 2001 business performance. The following summary compensation table provides details on the 2002 compensation of the Swiss-based Executive Committee members.


Summary Table—2002 Compensation

  Annual Compensation
  Long-Term Compensation
Name and Principal Position



Share Awards

Share Awards


  All Other


Daniel Vasella, MD
Chairman & CEO
  2 916 667       121 164   71 753   921 376   156 000   20 158 777

Urs Bärlocher, JD
Head Legal & General Affairs
  660 000       13 328   6 625   101 352   156 000   2 437 088

Raymund Breu, PhD
Chief Financial Officer
  900 000       18 175   8 973   276 413   156 000   4 534 588

Paul Choffat, JD
Head Consumer Health
  750 000                   156 000   906 000

Thomas Ebeling
Head Pharmaceuticals
  1 000 000   1 100 000   6 452   10 313   270 271   556 000   6 077 087

Norman C. Walker
Head Corporate HR
  600 000       8 240   5 858   43 858   153 759   1 804 234

The Restricted Share Awards include the shares granted under the Leveraged Share Savings Plan.
The Unrestricted Share Awards include the shares granted under the Long-Term Performance Plan.
The share options granted provide the right to purchase one share per option. The closing price at grant date was CHF 61.90 per share, the exercise price CHF 62.00 per share. The options have a cliff-vesting period of two years after the date of grant and will expire on March 7, 2011. These tradable share options have a tax value of CHF 9.19 per option, calculated based on the Black-Scholes Method.
Amounts include among others, payments made to the Management Pension Fund, a defined contribution plan.
The total compensation amounts have been calculated using the taxable value of the shares and share options granted.


Under the Novartis Share Option Plan and the Novartis US ADS Incentive Plan described above, a total number of 20 967 700 share options were granted to 6 741 participants. Eleven percent of the overall number of share options were granted to Executives.

Ownership of Novartis Shares and Share Options by the Executives

The total number of Novartis shares owned as of December 31, 2002 by the Executives and persons closely linked to them was 836 106. "Persons closely linked to them" are (i) their spouse, (ii) their


children below the age of 18, (iii) any legal entities that they own or otherwise control, and (iv) any legal or natural person who is acting as their fiduciary. No Executive owned 1% or more of our outstanding shares.

As of December 31, 2002, the Executives held a total of 3 646 543 Novartis share options. The number of share options and exercise price were adjusted to reflect the share split of 1:40 in 2001. Broken down by grant year, the number of share options held are:

Grant Year

Held (number)(1)

  Exercise Price

  Term Life

2002   2 255 723   62.0   9

2001   703 340   70.0   9

2000   461 040   51.3   9

1999   115 400   68.4   9

1998   111 040   42.8   9

The number of share options held includes share options granted under the Novartis Share Option Plan and the US ADS Incentive Plan.

As of December 31, 2002, the individual ownership of Novartis shares of the Swiss-based Executive Committee members (including persons closely linked to them) was as follows:

Beneficial Owner

  Number of
shares owned
directly or indirectly

Daniel Vasella, MD   316 997

Urs Bärlocher, JD   135 373

Raymund Breu, PhD   174 048

Paul Choffat, JD   750

Thomas Ebeling   44 522

Norman Walker   30 178

Total   701 868

Swiss Employee Benefit Plans

Swiss Pension Fund

The Swiss Pension Fund is a defined benefit fund that provides retirement benefits and risk insurance (covering death or disability). The Swiss Pension Fund is funded by contributions from Group companies and the insured employees. The Swiss Pension Fund insures remuneration up to a maximum of CHF 220 000 per year. The maximum retirement pension is 60% of the insured remuneration after 40 years of contribution. The table below shows the annual pension benefit by Base Salary and Years of


Service. In 2002 Novartis contributed CHF 9 316 for each of the Swiss-based Executive Committee members.

  Years of Service
Base Salary (CHF)







100 000   16 938   22 584   28 230   33 876   39 522   45 168

140 000   25 938   34 584   43 230   51 876   60 522   69 168

180 000   34 938   46 584   58 230   69 876   81 522   93 168

220 000   43 938   58 584   73 230   87 876   102 522   117 168

over 220 000   43 938   58 584   73 230   87 876   102 522   117 168

Swiss Management Pension Fund

The Swiss Management Pension Fund is a defined contribution plan and provides retirement benefits and risk insurance (covering death or disability) for components of remuneration not covered by the Swiss Pension Fund. Employees exceeding the maximum insurable remuneration of the Swiss Pension Fund are eligible for the Swiss Management Pension Fund. The benefits under the Swiss Management Pension Fund are granted in addition to those of the Swiss Pension Fund. The Swiss Management Pension Fund is funded through contributions by Novartis and the employee.

Personal Loans, Consulting, Change of Control and Severance Agreements

Under the provisions of the US Sarbanes-Oxley Act, enacted in July 2002, no new loans may be given to Executives. Prior to the Act, loans were granted to two Executives totaling CHF 2 060 000. The loans are interest bearing at market rates and are repayable by October 2005.

Under a change of control provision, four executives have provisions whereby their normal contractual severance of 36 months is extended by 24 months during the 12 months following a change of control.

Between January 1, 2002 and December 31, 2002, three Executives left the company. Under the terms of the agreements with these Executives, CHF 1 287 500 have been paid as severance.


Performance Graph

This graph compares our total shareholder returns, the Morgan Stanley World Pharmaceuticals Index (MSWPI), and the Swiss Market Index (SMI). The graph assumes CHF 100 invested at Novartis per share closing price on December 31, 1995, in Novartis shares and each of the indices.










Novartis   100   147   244   281   247   317   269   230

MSWPI   100   142   221   292   302   380   334   229

SMI   100   122   197   228   245   268   215   158

Report of the Audit and Compliance Committee

The Audit and Compliance Committee has reviewed the Group's financial reporting process on behalf of the Board of Directors. Management is responsible for creating the financial statements and managing the reporting process, including the system of internal controls by which those statements are created.

The internal audit function, which reports to the Chairman and to the Audit and Compliance Committee, reviews the effectiveness, efficiency and appropriateness of the internal control systems, particularly regarding the protection of assets, the completeness and accuracy of operational and financial information (with emphasis on internal reporting) and the adherence to Novartis Group guidelines.

The independent auditors, PricewaterhouseCoopers AG, are responsible for expressing an opinion on the conformity of the audited financial statements with international accounting standards and compliance with Swiss law. The Audit and Compliance Committee is responsible for overseeing the conduct of these activities by the Group's management and the independent auditors.

The Audit and Compliance Committee has discussed with the independent auditors all matters of importance. The independent auditors provided to the Audit and Compliance Committee the written disclosures required by US Independent Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Committee and the independent auditors have discussed the auditors' independence from the Group and its management, including the matters in those written disclosures.

In reliance on the reviews and discussions with management and the independent auditors referred to above, the Audit and Compliance Committee recommended to the Board of Directors, and the Board approved, the inclusion of the audited financial statements in the Group's Annual Report for the year ended December 31, 2002.


Duration of the Mandate and Terms of Office of the Head Auditors

PricewaterhouseCoopers (PwC) assumed the existing auditing mandate for Novartis in 1996. The head auditors responsible for the mandate, Mr. Stephan Bachmann and Mr. James Kaiser, began serving in their roles in 1996 and 2002, respectively.

Audit Fees

The following fees were charged for professional services rendered by PricewaterhouseCoopers for the 12-month period ended December 31:



  (CHF thousands)

Audit Services   16 773   19 066
Audit Related Services   1 767   3 487
Tax Services   10 583   13 417
Other Services   2 970   2 926

Continuing Services   32 093   38 896
Services divested to IBM/Mellon(1)   36 007   36 748

Total   68 100   75 644

These cover management and human resources consulting services which during 2002 were transfered to IBM and Mellon Financial Services respectively. The amounts shown comprise the fees charged by PwC until the date of the transfer.

Audit Services are defined as the standard audit work that needs to be performed each year in order to issue an opinion on the consolidated financial statements of the Group and to issue reports on the local statutory financial statements. It also includes services that can only be provided by the Group auditor and includes audit of non-recurring transactions and implementation of new or revised accounting policies, internal control review of systems, consents and comfort letters and any other audit services required for US Securities and Exchange Commission filings.

Audit Related Services include those other services provided by auditors but not restricted to those that can only be provided by the auditor signing the audit report. They comprise amounts for services such as acquisition due diligence as well as audit of pension and benefit plans.

Tax Services represent tax compliance and other services and expatriate and executive tax return services.

Other Services consist of actuarial services for pension and employee benefit plans.

Management Consulting Services

At the Annual General Meeting on March 21, 2002, Novartis announced its intention to source management consulting services from providers other than PricewaterhouseCoopers to avoid potential conflicts of interest. To accelerate the achievement of this objective, Novartis issued a temporary stop on the commissioning of PricewaterhouseCoopers for new consulting and outsourcing services. In September 2002, PricewaterhouseCoopers sold its management consulting service group to IBM.


Prof. Helmut Sihler, JD, PhD
January 21, 2003


Board of Directors

Daniel Vasella, MD
Chairman and CEO,
Swiss, age 49

Prof. Helmut Sihler, JD, PhD
Vice Chairman and
Lead Director,
Austrian, age 72

Hans-Jörg Rudloff
Vice Chairman,
German, age 62

Dr. h.c. Birgit Breuel
German, age 65

Prof. Peter Burckhardt, MD
Swiss, age 64

Walter G. Frehner
Swiss, age 69

William W. George
American, age 60

Alexandre F. Jetzer
Swiss, age 61

Pierre Landolt
Swiss, age 55

Prof. Ulrich Lehner, PhD
German, age 56

Heini Lippuner
Swiss, age 69

Prof. Rolf M. Zinkernagel, MD
Swiss, age 58

Honorary Chairmen

Alex Krauer, PhD
Marc Moret, PhD
Dr. h.c. Louis von Planta, JD

Corporate Secretary

Ingrid Duplain, JD


Dr. h.c. Daniel Vasella, MD    Swiss, age 49

Daniel Vasella graduated with a MD from the University of Bern in 1979. After holding a number of medical positions in Switzerland, he joined Sandoz Pharmaceuticals Corporation in the USA in 1988. From 1993 to 1995, Daniel Vasella advanced from Head of Corporate Marketing and Senior Vice President and Head of Worldwide Development to Chief Operating Officer of Sandoz Pharma Ltd. In 1995 and 1996, Daniel Vasella was a member of the Sandoz Group Executive Committee and the Chief Executive Officer of Sandoz Pharma Ltd. After the merger that created Novartis in 1996, Daniel Vasella served as President and Chairman of the Executive Committee. In 1999, he additionally was appointed Chairman of the Board of Directors. Daniel Vasella is also a member of the Board of Directors of Pepsico, Inc., United States, the Board of Directors of Credit Suisse Group, Switzerland, and the Supervisory Board of Siemens AG, Germany. In addition, he is a member of the International Board of Governors of the Peres Center for Peace in Israel and a member of several industry associations and educational institutions, including the International Business Leaders Advisory Council for the Mayor of Shanghai, where he serves as Chairman. In 2002, Daniel Vasella was awarded an honorary doctorate by the University of Basel.

Prof. Helmut Sihler, JD, PhD    Austrian, age 72

Helmut Sihler studied philology and law in Graz, Austria and Burlington, Vermont (USA) and graduated with a PhD in philology and law. In 1957, he joined Henkel KGaA, Germany, initially holding several positions in the marketing department for consumer goods. From 1980 to 1992, Helmut Sihler was Chairman of the Central Board of Management of Henkel KGaA. In the years 1988 and 1989, Helmut Sihler was President of the Association of the German Chemical Industry. In 1983, Helmut Sihler was elected to the Board of Ciba-Geigy AG and became a Director and Vice-Chairman of Novartis after its creation in 1996. Since 1999, Helmut Sihler has acted as Novartis AG's Lead Director. In the same year, he became a member of the newly formed Chairman's Committee and the Compensation Committee; he also acts as Chairman of the Audit and Compliance Committee and has been a member of the Corporate Governance Committee since 2001. Helmut Sihler was ad interim CEO of Deutsche Telekom AG, Germany, from July to November 2002, and he is Chairman of the Supervisory Board of Porsche AG, Germany.

Hans-Jörg Rudloff    German, age 62

Hans-Jörg Rudloff studied economics at the Universities of Bern and Grenoble and graduated in 1965. He joined Credit Suisse in Geneva and moved to New York in 1968 to join the investment banking firm of Kidder Peabody International. He was in charge of the Swiss operation and was elected Chairman and a member of the Board of Kidder Peabody International in 1978. In 1980 he joined Credit Suisse First Boston and was elected Vice-Chairman in 1983 and Chairman and CEO in 1989. From 1986 to 1990 Hans-Jörg Rudloff was also a member of the Executive Board of Credit Suisse in Zurich in charge of all securities and capital market departments. In 1990 he became a member of the Executive Board of CS First Boston and a member of the CS Holding Board. From 1994 to 1998 Hans-Jörg Rudloff was Chairman of MC-BBL in Luxembourg and joined Barclays Capital in 1998 where he is presently Chairman of the Executive Committee. In 1994, Hans-Jörg Rudloff was elected to the Board of Directors of Sandoz AG and served as its Vice-Chairman from 1995 to 1996, a position that he has also held for Novartis AG since its formation in 1996. In 1999, he became a member of the Chairman's Committee and the Compensation Committee and since 2001 he has been a member of the Corporate Governance Committee. Hans-Jörg Rudloff also serves on a number of boards of other companies, including the Boards of Directors of the TBG Group (Thyssen-Bornemisza Group), Monaco, Marcuard S.A., Geneva, and RBC, Russia, the Advisory Board of Landeskreditbank Baden-Württemberg, Germany, and the Beirat of EnBW (Energie Baden-Württemberg), Germany. He is also on the Advisory Board of the MBA program of the University of Bern, Switzerland.


Dr. h.c. Birgit Breuel    German, age 65

Birgit Breuel studied politics at the Universities of Hamburg, Oxford and Geneva. She was Minister of Economy and Transport (1978-86) and Minister of Finance (1986-90) of the Land Niedersachsen (Lower Saxony), the second largest state of Germany. In 1990, Birgit Breuel was elected to the Executive Board of the Treuhandanstalt, which was responsible for the privatization of the former East Germany's economy; in 1991, she also became the President of the Treuhandanstalt. From 1995 to 2000, she acted as the General Commissioner and CEO of the world exhibition EXPO 2000 in Hannover, Germany. In 1994, Birgit Breuel was elected to the Board of Directors of Ciba-Geigy AG and has served as a Director of Novartis AG since its formation in 1996. In 1999, she became a member of the Audit and Compliance Committee. Birgit Breuel is also a member of the Supervisory Board of Gruner+Jahr AG, Hamburg, Germany.

Prof. Peter Burckhardt, MD    Swiss, age 64

After studying in Basel and Hamburg, Peter Burckhardt graduated with a MD from the University of Basel in 1965. He trained from 1966 to 1978 in internal medicine and endocrinology, mainly at the University Hospital of Lausanne, Switzerland, and the Massachusetts General Hospital, Boston USA, and was nominated Chief of Clinical Endocrinology in 1978, and full Professor of Internal Medicine and Chairman of the Department of Internal Medicine at the University Hospital of Lausanne in 1982. Since 1992, he has been the Head of the Medical Service at the same University. Since 1982 Peter Burckhardt has been the Chairman of the Novartis- (formerly Sandoz-) Foundation for Biomedical Research in Switzerland, and was elected in 1996 to the Board of Directors of the newly formed Novartis AG. Next to his activities as a clinician and academic teacher, Peter Burckhardt is conducting clinical research, mainly in bone diseases and calcium metabolism. He has authored more than 300 scientific publications and is an editorial board member of several international scientific journals. He is the Chairman of National Societies at the International Foundation of Osteoporosis, and is a former president of the Swiss Internist's Society and member of the Appeal Committee of the Swiss Office for Drug Control. Peter Burckhardt is a board member of numerous scientific societies including the Swiss Societies of Nutrition, Clinical Chemistry, Endocrinology, Bone and Mineral Research, the Committee for Endocrinology of the European Community, and since 1990, the organization of the International Symposia on Nutrition and Osteoporosis.

Walter G. Frehner    Swiss, age 69

After completing commercial school and an apprenticeship at the Bernese Cantonal Bank in Interlaken, Walter Frehner broadened his experience both in Switzerland and abroad. In 1958 he joined Swiss Bank Corporation (now UBS) where he held a number of increasingly senior positions. He was appointed General Manager and member of the Executive Board in 1978, President of the Executive Board (CEO) in 1987 and Chairman of the Board of Directors in 1993 from which position he retired in 1996. Walter Frehner has been a member of the Board of Directors of Ciba-Geigy AG since 1994 and of Novartis AG since the merger in 1996. In 2001, he became a member of the Audit and Compliance Committee. He is also a member of the Board of Directors of Schindler Holding AG, Ebikon, Switzerland, and of Bâloise Holding AG, Basel, Switzerland, where he is also the Vice Chairman.

William W. George    American, age 60

William W. George received his BSIE from Georgia Institute of Technology in 1964 and his MBA from Harvard University in 1966. From 1966 to 1969, he worked in the US Department of Defense as special assistant to the Secretary of the Navy and as assistant to the Comptroller. After having served as President of Litton Microwave Cooking Products, William W. George held a series of executive positions with Honeywell from 1978 to 1989. Thereafter he served as President and Chief Operating Officer of Medtronic, Inc. in Minneapolis, and, from 1991 to 2001, as its Chief Executive Officer. From 1996 to 2002, he was Medtronic's Chairman. In 1999, William W. George was elected as a member of the Board of Directors of Novartis AG. In 2001, he became a member of the Chairman's Committee and the


Chairman of the Corporate Governance Committee. William W. George is a member of the Boards of Directors of Goldman Sachs and Target Corporation (formerly Dayton Hudson). He is also a Visiting Professor of Management at Ecole Polytechnique Fédérale Lausanne and at the International Institute of Management Development. In addition, he is a member of the Board of Directors of Harvard Business School, American Red Cross, Carnegie Endowment for International Peace and Minneapolis Institute of Arts.

Alexandre F. Jetzer    Swiss, age 61

Alexandre Jetzer studied law and economics at the University of Neuchatel, Switzerland and is a licensed attorney. After more than ten years as General Secretary of the Swiss Federation of Commerce and Industry (Vorort), Alexandre Jetzer joined Sandoz in 1980. In 1981 he became Member of its Group Executive Committee in capacity of Chief Financial Officer (CFO) and, as of 1990, as Head of Management Resources and International Coordination. From 1995 to 1996, he was Vice Chairman and Chief Executive Officer of Sandoz Pharmaceuticals Corporation in East Hanover, New Jersey (USA). From the time of the merger in 1996 until 1999, he was a member of the Novartis Executive Committee and Head of International Coordination, Legal & Taxes. Alexandre Jetzer has served as a Director of Novartis AG since its formation in 1996. He isalso a member of the Board of Directors of Clariden Bank, Zurich, Switzerland.

Pierre Landolt    Swiss, age 55

Pierre Landolt graduated with a Bachelor of Law degree from the University of Sorbonne in Paris. From 1974 to 1976, he worked for Sandoz Brazil. In 1977, he acquired an agricultural estate in Brazil, cultivating organic tropical fruit as well as producing dairy products. In 1989, he founded a firm for irrigation systems. In the same year, he became the main associate and director of a bank in São Paulo. Since 1997 Pierre Landolt has been Associate and Chairman of Axial Par Ltda, São Paulo, a company investing in sustainability. In 2000, he was co-founder of Eco Carbone LLC, Delaware, USA, a company focused on the development of carbon sequestration processes in Europe, Africa and South America. In 1986, Pierre Landolt was elected as a member of the Board of Directors of Sandoz AG and he has served as a Director of Novartis AG since its formation in 1996. Pierre Landolt is the President of the Sandoz family foundation, Glaris, Switzerland, and the Chairman of the Board of Directors of Emasan AG, Basel, Switzerland. He is also a member of the Board of Directors of Syngenta AG, and of the Syngenta Foundation for Sustainable Agriculture, both in Basel, Switzerland. In addition, he serves as chairman of the Board of Directors of Curacao International Trust Company, Curacao, Netherlands Antilles, and as vice-chairman of the Boards of Directors of Sandoz FF Holding Bancaire et Financière S.A., Pully, Switzerland, Parmigiani, Mesure et Art du Temps S.A., Fleurier, Switzerland, and the Fondation du Montreux Jazz Festival, Montreux, Switzerland.

Prof. Ulrich Lehner, PhD    German, age 56

Ulrich Lehner studied business administration and mechanical engineering in Darmstadt, Germany. After completing his studies in 1972, he was a teaching and research assistant at the Institute for Business Administration at the Darmstadt Technical University. He earned a Doctorate in Economics in 1975. From 1975 to 1981, Ulrich Lehner was an auditor with Deutsche Treuhand-Gesellschaft AG in Düsseldorf. In 1981, he joined Henkel KGaA as Head of Domestic Affairs in the Central Accounting/Tax Department. After heading the Controlling Department of Fried. Krupp GmbH in Essen, Germany, from 1983 to 1986, he returned to Henkel as Finance Director. From 1991 to 1993, Ulrich Lehner headed the then-formed Management Holding, Henkel Asia-Pacific Ltd., in Hong Kong. From 1994 to 1995, he served Henkel KGaA, Düsseldorf, as Corporate Vice President of the Finance and Controlling Department, and, from 1995 to 2000, as Executive Vice President, Finance/Logistics. He was appointed Deputy President in 1999 and President and CEO of Henkel KGaA in 2000. Ulrich Lehner was elected to the Board of Directors of Novartis AG in 2002. He is also a member of the Audit and Compliance Committee. He also serves as a member of the Board of Directors of Dresdner Bank, Luxembourg, Luxembourg, and of


Ecolab Inc., St. Paul, USA. In addition, he is a member of the Advisory Board of Dr. August Oetker KG, Bielefeld, Germany, and of Krombacher Brauerei, Krombach, Germany. He is an Honorary Professor at the University of Münster, Germany.

Heini Lippuner    Swiss, age 69

After completing his commercial studies in St. Gallen, Switzerland, Heini Lippuner began his career with Geigy Ltd in the Dyestuffs Division. Following a number of foreign assignments, he headed the Dyestuffs and Chemicals Division in Germany from 1968 to 1972. He served as a member of the worldwide Dyestuffs and Chemicals Division's management committee of Ciba-Geigy Ltd from 1973 to 1982, and became the Head of this Division in 1982. In 1986, Heini Lippuner became a member of the Executive Committee of the Ciba-Geigy Group and took over as its Chairman and Chief Operating Officer in 1988. In 1996, he stepped down from this position and was elected to the Board of Directors of the newly created Novartis AG. Since 1999, he has also been a member of the Chairman's Committee. Heini Lippuner is also member of the Board of Directors of Bühler AG, Uzwil, Switzerland, and of Asset Link AG, Reinach BL, Switzerland. In addition, he is Chairman of the Foundation Board of the International Institute for Management Development (IMD) in Lausanne, Switzerland, and serves on the advisory boards of Credit Suisse Group, Zurich.

Prof. Rolf M. Zinkernagel, MD    Swiss, age 58

Rolf Zinkernagel graduated from the University of Basel with a MD in 1970. Since 1992 he has been Professor and Director of the Institute of Experimental Immunology at the University of Zurich. Rolf Zinkernagel has received many awards and prizes for his work and contribution to science, the most prestigious being the Nobel Prize for Medicine which he was awarded in 1996. In 1999, Rolf Zinkernagel was elected to the Board of Directors of Novartis AG. He has been a member of the Corporate Governance Committee since 2001. He is a member of the Swiss Society of Allergy and Immunology, the American Associations of Immunologists and of Pathologists, the ENI European Network of Immunological Institutions, the International Society for Antiviral Research, and a member of the Executive Board of the International Union of Immunological Societies (IUIS). Rolf Zinkernagel is a member of the Board of Directors of Cytos Biotechnology AG, Schlieren/Zurich, Switzerland. He is also a member of the Scientific Advisory Boards of: The Lombard Odier, Darier Hentsch & Cie Bank, Geneva, Switzerland; BT & T, Jersey; Bio-Alliance AG, Frankfurt, Germany; Aravis General Partner Ltd., Cayman Islands; Cytos Biotechnology AG, Schlieren/Zurich, Switzerland; Bioxell, Milano, Italy; Esbatech, Zurich, Switzerland; Novimmune, Geneva, Switzerland, and MannKind, Sylmar CA, USA Rolf Zinkernagel is also a Science Consultant to: GenPat77, Berlin/Munich, Germany; Aponetics AG, Witterswil, Switzerland; Solis Therapeutics, Palo Alto, USA, and Ganymed, Mainz, Germany.


Executive Committee

Daniel Vasella, MD
Chair since 1996;
Swiss, age 49

Urs Baerlocher, JD
Head of Legal and General Affairs;
Member since 1999;
Swiss, age 60

Raymund Breu, PhD
Chief Financial Officer;
Member since 1996;
Swiss, age 57

Paul Choffat, JD
Head of Consumer Health;
Member since 2002;
Swiss, age 53

Thomas Ebeling
Head of Pharmaceuticals since 2000;
Member since 1998;
German, age 43

Prof. Mark C. Fishman, MD
Head of Pharmaceuticals Research;
Member since 2002;
American, age 52

Norman C. Walker
Head of Corporate Human Resources;
Member since 1999;
British, age 50


Dr. h.c. Daniel Vasella, MD    Swiss, age 49

Daniel Vasella graduated with a MD from the University of Bern in 1979. After holding a number of medical positions in Switzerland, he joined Sandoz Pharmaceuticals Corporation in the USA in 1988. From 1993 to 1995, Daniel Vasella advanced from Head of Corporate Marketing and Senior Vice President and Head of Worldwide Development to Chief Operating Officer of Sandoz Pharma Ltd. In 1995 and 1996, Daniel Vasella was a member of the Sandoz Group Executive Committee and the Chief Executive Officer of Sandoz Pharma Ltd. After the merger that created Novartis in 1996, Daniel Vasella served as President and Chairman of the Executive Committee. In 1999, he additionally was appointed Chairman of the Board of Directors. Daniel Vasella is also a member of the Board of Directors of Pepsico, Inc., United States, the Board of Directors of Credit Suisse Group, Switzerland, and the Supervisory Board of Siemens AG, Germany. In addition, he is a member of the International Board of Governors of the Peres Center for Peace in Israel and a member of several industry associations and educational institutions, including the International Business Leaders Advisory Council for the Mayor of Shanghai, where he serves as Chairman. In 2002, Daniel Vasella was awarded an honorary doctorate by the University of Basel.

Urs Baerlocher, JD    Swiss, age 60

Urs Baerlocher earned his JD at the University of Basel and was admitted to the bar in 1970. After having worked as a tax lawyer, he joined Sandoz in 1973, and held a number of key positions including Head of Strategic Planning and Head of Group Reporting. In 1987, he was made a member of the Sandoz Executive Board, responsible i.a. for Strategic Planning, HR, Legal, Taxes, Patents and Trademarks. In 1990, he became CEO of the Sandoz Nutrition Division and then, in 1993, CEO of Sandoz Pharma. In 1995, Urs Baerlocher assumed the position of Chairman of the Board of Sandoz Deutschland GmbH (Germany) and Biochemie GmbH (Austria). After the formation of Novartis in 1996 he served as Head of International Coordination, Legal, Tax, Insurance, before his responsibilities were widened to include in addition i.a. Corporate Intellectual Property, Corporate Health, Safety & Environment, Corporate Affairs and Corporate Security.

Raymund Breu, PhD    Swiss, age 57

Raymund Breu graduated from the Swiss Federal Institute of Technology (ETH) in Zurich, Switzerland, with a PhD in mathematics. In 1975, he joined the Treasury Department of the Sandoz Group, and, in 1982, became the Head of Finance for the Sandoz affiliates in the UK. In 1985, he was appointed Chief Financial Officer of Sandoz Corporation in New York, where he was responsible for all Sandoz Finance activities in the US. In 1990, he became Group Treasurer of Sandoz Ltd., Basel, Switzerland, and, in 1993, Head of Group Finance and Member of the Sandoz Executive Board. Following the formation of Novartis in 1996, he assumed his current position as Chief Financial Officer and member of the Group Executive Committee. Raymund Breu is also a member of the Board of Directors of the SWX Swiss Exchange and of its admission panel and its takeover commission.

Paul Choffat, JD    Swiss, age 53

Paul Choffat holds a JD from the University of Lausanne, Switzerland, and an MBA from the International Institute for Management Development in Lausanne. He started his professional career with Nestlé in Zurich, Switzerland, and London, UK. From 1981 to 1985, he was a project manager at McKinsey & Company in Zurich. Between 1987 and 1994, he held a number of leading positions at Landis & Gyr in Zug, Switzerland, where he became a member of the Executive Board and Head of the Communications Division. In 1994, he moved to Von Roll in Gerlafingen, Switzerland, as CEO. Paul Choffat joined Sandoz in 1995 as Head of Management Resources and International Coordination. He subsequently became a member of the Executive Board and was responsible for Group Planning and Organization. During the Novartis merger he headed the integration office. In 1996, he returned to line management as CEO of Fotolabo SA, Montpreveyres-sur-Lausanne,


Switzerland, where he remained for three years before becoming an entrepreneur and private investor in 1999. He rejoined Novartis in 2002 as Head of Novartis Consumer Health and member of the Group Executive Committee.

Thomas Ebeling    German, age 43

Thomas Ebeling graduated from the University of Hamburg with a degree in psychology. From 1987 to 1991, he held several positions of increasing responsibility at Reemstma Germany. In 1991, he joined Pepsi-Cola Germany as Marketing Director. He became Marketing Director for Germany and Austria in 1993 and was National Sales and Franchise Director for Pepsi's retail and on-premise sales from 1994. He then served as General Manager of Pepsi-Cola Germany. In 1997, Thomas Ebeling joined Novartis as General Manager of Novartis Nutrition for Germany and Austria. After having served as CEO of Novartis' global nutrition operations, he became Head of Novartis Nutrition worldwide, then Head of Novartis Consumer Health worldwide, and then Chief Operating Officer of Novartis Pharmaceuticals, before attaining his present position.

Prof. Mark C. Fishman, MD    American, age 52

Mark Fishman is a graduate of Yale College and Harvard Medical School. He completed his Internal Medicine Residency, Chief Residency, and Cardiology training at the Massachusetts General Hospital. He serves on several editorial boards and has worked with national policy and scientific committees including those of the NIH and Welcome Trust. He has been honored with many awards and distinguished lectureships and is a Fellow of the American Academy of Arts and Sciences. Before joining Novartis, Mark Fishman was Professor of Medicine at Harvard Medical School and Chief of Cardiology and Director of the Cardiovascular Research Center at the Massachusetts General Hospital.

Norman C. Walker    British, age 50

Norman Walker earned a degree in Business Studies at the University of Brighton, UK, in 1975 and attended the Harvard International Senior Management Program in 1994. He started his professional career with Ford Motor Co in London in 1975. Over a period of 9 years he held a number of posts in human resources (HR) management before he joined GrandMet in London in 1984 where he assumed HR responsibilities in various of their business units. Norman Walker subsequently joined Kraft Foods in 1991 and held a number of leading HR positions in Germany, the United States and Switzerland. More specifically, he headed HR activities for commercial and manufacturing operations in 26 countries and maintained a dynamic HR effort there during a period of significant change, as the company acquired, merged and refocused its business portfolio. Norman Walker joined Novartis in the spring of 1998 in his current role.


Business Unit(1) Heads

Name, nationality and age

  Head of Business Unit
  Active for Novartis since
  Significant positions previously held

David Epstein,
American, 41
(since 2000)
  1989   Chief Operating Officer and member of the Executive Committee of Novartis Pharmaceuticals Corporation USA   Bachelor of Science, Pharmacy (Rutgers University) and MBA (Columbia University)

Anthony Rosenberg
BSc, MSc
British, 49
  Transplantation and Immunology
(since 2001)
  1980   Various leading positions with Sandoz UK and Novartis Group   Bachelor of Science (University of Leicester) and Master of Science (University of London)

Luzi von Bidder(2)
MA Econ.

Swiss, 49
(since 1986)
  1979   Region Head Europe for CIBA Vision   Graduate of Business School (St. Gallen, Switzerland)

Peter Hewes
BA Econ.

British, 55
  Mature Products
(since 2000)
  1976   Regional European Head of Novartis Pharma; Country Head of Sandoz Portugal   Bachelor of Arts, Economics (University of Reading, UK)

Christian Seiwald

Austrian, 47
(since 2001)
  1982   Country Head of Novartis Austria; Head of Novartis Austria Pharma Operations   Graduate in Economics (Innsbruck University, Austria)

Michel Orsinger

Swiss, 45
(since 2002)
  1993   Senior Vice-President Europe, Middle East and Africa for Novartis' Nutrition and OTC Business Unit; General Manager Sandoz Nutrition Unit Switzerland   Graduate of Business School
(St. Gallen, Switzerland)

Kurt T. Schmidt

American, 45
  Animal Health
(since 2002)
  2002   General Manager Food for Kraft Foods Germany; Marketing Director Wrigley Company for German-speaking Europe, Eastern Europe and the Middle East   Bachelor of Science (United States Naval Academy, Annapolis) and MBA (University of Chicago)

Frank Palantoni

American, 45
  Infant & Baby
(since 2002)
  1998   President and CEO of Gerber US Marketing; management positions with Procter & Gamble, Nabisco and Groupe Danone   Bachelor of Science (Tufts University) and MBA (Columbia University)

Michel Gardet
MA Business

French, 45
  Medical Nutrition
(since 2002)
  1991   General Manager of Novartis Consumer Health Iberia; Head of Health and Functional Nutrition Novartis   Graduate of the Ecole Supérieure de Commerce Paris

Joseph T. Mallof

American, 51
  CIBA Vision
(since 2002)
  2002   Regional President of S.C. Johnson & Son for the Americas Asia Pacific; General Manager of Procter & Gamble in Japan and the Philippines   Bachelor of Science (Purdue University) and MBA (University of Chicago)

In 2002, the following Executives retired from or terminated their employment with the Novartis Group: Gilbert Wenzel, PhD (Executive Committee Member), Glen Bradley, PhD (Business Unit Head) and Hans-Beat Guertler (Business Unit Head).
As of 2003: Flemming Ørnskov.


Further Information on Corporate Governance

The list below contains references to additional information on the Corporate Governance of Novartis.


Share Capital and Convertible Bonds    

Capital structure   Articles of Incorporation of Novartis AG (http://www.novartis.com/investors/en/governance.shtml)

Share capital movements   Notes 17 of the Group's consolidated financial statements

Convertible bonds   Notes 18 of the Group's consolidated financial statements

Shareholder rights


Information on the Novartis share and on the shareholders' participation rights   Operating and Financial Review (see page 113) Articles of Incorporation of Novartis AG (http://www.novartis.com/investors/en/governance.shtml)
Investors Relations Information: http://www.novartis.com/investors

Board of Directors and Executive Committee


Internal organization and allocation of responsibilities   Board Regulations and Board Committee Charters

Further information


Sources for further information and anticipated key reporting dates in 2003   (http://www.novartis.com/investors/en/governance.shtml)


Operating and Financial Review

Key financial developments in 2002

CHF millions

CHF millions


Sales   32 412   31 643   2

Operating income   7 887   7 277   8

Net income   7 313   7 024   4

Change in net liquidity   -3 689   -1 120    
Equity at year-end   39 682   42 245    
Earnings per share (CHF)   2.91   2.73   7
Dividends per share (CHF)   0.95   0.90   6

This operating and financial review should be read in conjunction with the consolidated financial statements. The consolidated financial statements and the financial information discussed below have been prepared in accordance with International Accounting Standards (IAS). For a discussion of the significant differences between IAS and US GAAP, see note 31 of the consolidated financial statements.

Factors affecting results

The global healthcare market is growing rapidly due to, among other reasons, the aging population in developed countries, unmet needs in many therapeutic areas (such as cancer and cardiovascular disease), the adoption of more industrialized lifestyles in emerging economies, and increased consumer demand fuelled by broad and rapid access to information. At the same time, the healthcare industry is under increasing pressure to reduce prices as payors in the public and private sectors seek to curb rising healthcare costs.


Novartis Group revenues are directly related to the Group's ability to identify high potential products while they are still in development and to bring them to market quickly and effectively. Efficient and productive research and development is crucial in this environment as Novartis, like its competitors, searches for efficacious and cost-efficient pharmaceutical solutions to health problems. The necessity for adequate resources to access the full range of new technologies has been one reason for industry consolidation, and the increase in collaborations between leading companies and niche players at the forefront of their particular technology areas. The growth in new technology, particularly genomics, will almost certainly have a fundamental impact on the pharmaceutical industry as a whole, and upon the Group's future development.

In addition, competitive conditions have intensified as a result of regulation, price reductions, reference prices, parallel imports, higher patient co-payments and increased pressure on physicians to limit prescribing. Pressure on Novartis and other pharmaceutical companies to lower prices is expected to increase primarily as a result of government initiatives to reduce patient reimbursement, restrict prescribing levels, increase the use of generics and impose overall price cuts. The introduction of technologically innovative products and devices by competitors and growing parallel imports, mainly in the EU, pose additional challenges.

Exchange rate exposure also affects the Group's results as Novartis has both sales and costs in many currencies other than the Swiss franc. This gives rise to both transaction exposure in subsidiary financial statements due to foreign currency denominated transactions and translation exposure from converting foreign subsidiary results and balance sheets into the Group's Swiss franc consolidated financial statements. The Group's results have not been significantly affected by inflation.


Critical accounting policies

The Novartis Group's principal accounting policies are set out in note 1 of the Group's consolidated financial statements and conform with International Accounting Standards (IAS). Significant judgments and estimates are used in preparation of the consolidated financial statements which, to the extent that actual outcomes and results may differ from these assumptions and estimates could affect the accounting in at least the following areas.

Long-lived assets are regularly reviewed for impairment, including identifiable intangibles and goodwill, whenever events or changes in circumstance indicate that the balance sheet carrying amount of the asset may not be recoverable. In order to assess if there is any impairment, estimates are made of the future cash flows expected to result from the use of the asset and its eventual disposition. If the balance sheet carrying amount of the asset is more than the higher of its value in use to Novartis or its net selling price, an impairment loss for the difference is recognized. Actual outcomes could vary significantly from such estimates of discounted future cash flow. Factors such as changes in the planned use of buildings, machinery or equipment, or closing of facilities or lower than anticipated sales for products with capitalized rights could result in shortened useful lives or impairment.

The Novartis Group has extensive investments in marketable securities and has significant derivative financial instrument positions which are mainly, but not exclusively, held for hedging underlying positions. Under current IAS accounting rules unrealized gains and losses on marketable securities and cash flow related derivative financial instruments that qualify for hedge accounting are recorded in


separate components of equity and not in the income statement. Group management regularly reviews such positions to determine the extent to which unrealized losses are temporary. Depending on the stock market and other factors at the time of this review it may be necessary to treat certain of the unrealized losses as permanent and transfer these losses out of the equity component into the Group's income statement.

Novartis has investments in associated companies (generally investments of between 20% and 50% of a company's voting shares) that are accounted for by using the equity method. Due to the various estimates that have been made in applying the equity method, the amounts recorded in the consolidated financial statements in respect of Roche Holding AG and Chiron Corporation may require adjustments in the following year as more financial and other information becomes publicly available.

The Novartis Group sponsors pension and other retirement plans in various forms covering employees who meet eligibility requirements. These plans cover the majority of Group employees. Several statistical and other factors which attempt to anticipate future events are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases, as determined by Group management within certain guidelines. In addition, the Group's actuarial consultants also use statistical information such as withdrawal and mortality rates to estimate these factors. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of pension income or expense recorded in future years.

The Group has provisions for environmental remediation costs. The material components of the environmental provisions consist of a risk assessment based on investigation of the various sites. Future remediation expenses are affected by a number of uncertainties which include, but are not limited to, the method and extent of remediation, the percentage of waste material attributable to Novartis at the remediation sites relative to that attributable to other parties, and the financial capabilities of the other potentially responsible parties. Group management believes that such costs will not materially affect the Group's consolidated financial position, results of operations or cash flow.

A number of Novartis Group subsidiaries are subject to litigation arising out of the normal conduct of their businesses, as a result of which claims could be made against them which might not be covered by existing provisions or by insurance. Group management believes that the outcomes of such actions will not materially affect the Group's consolidated financial position, results of operations or cash flow.

The International Accounting Standards Board is entering a period of critically examining current International Accounting Standards with a view to increasing international harmonization of accounting rules. This process of amendment and convergence of worldwide accounting rules could result in significant amendments to the existing rules within the next two years in such areas as the timing of recognition of sales and other revenues arising from collaborative agreements with marketing and distribution partners, accounting for share based compensation, goodwill and intangibles, employee benefit plans, marketable securities and derivative financial instruments and classification of balance sheet positions as debt or equity.


Results of operations

  Year ended
Dec 31, 2002
CHF millions

  Year ended
Dec 31, 2001
CHF millions

in %

Sales   32 412   31 643 (1) 2
Cost of goods sold   -7 618   -7 886   -3
Marketing and distribution   -10 987   -10 703 (1) 3
Research and development   -4 339   -4 189   4
Administration and general overheads   -1 581   -1 588   0

Operating income   7 887   7 277   8
Income from associated companies   -10   139    
Financial income, net   949   1 067   -11

Income before taxes and minority interests   8 826   8 483   4
Taxes   -1 490   -1 440   3

Income before minority interests   7 336   7 043   4
Minority interests   -23   -19   21

Net income   7 313   7 024   4

Restated to reflect a change in the classification of certain sales incentives and discounts to retailers: In 2001, sales have been reduced by a total of CHF 395 million with a corresponding reduction in Marketing & Distribution expenses.

In Swiss francs, Group sales in 2002 increased by 2% over 2001 to CHF 32.4 billion (+11% in local currencies); operating income grew by 8% to CHF 7.9 billion; net income also increased by 4% to CHF 7.3 billion and free cash flow (excluding acquisitions of subsidiaries and the voting shares of Roche Holding AG) rose by 10% in Swiss francs to CHF 4.5 billion.

Pharmaceuticals accounted for 65% of the Group's total sales and Consumer Health 35%. The two divisions generated 78% and 22% of divisional operating income, respectively.

Geographically, 47% of sales were generated in the NAFTA region (43% in the USA), 33% in Europe and 20% in the rest of the world.

Sales growth was driven by a volume increase of 10%. All business units except Generics and CIBA Vision benefited from small price increases which in total amounted to 1%. The sales increase due to acquisitions was negligible. The sales performance in Swiss francs suffered from a 9% negative currency effect as the Swiss franc rose on average 8% against the US dollar, 10% against the yen and 3% against the Euro.

The Group operating margin in 2002 was 24.3% of sales, an increase of 1.3% percentage points over the 23.0% of sales of the previous year. Productivity gains and improvements in the product mix lead to a 3% reduction in the cost of goods sold, while marketing and distribution expenses increased by 3%, slightly more than sales, to support product launches and key growth drivers. Research and development investments were increased 4% mainly due to the new Pharmaceuticals Division research strategy and the establishment of the new facility in Cambridge, USA. As a result of all these factors, operating income increased overproportionally, climbing 8% in Swiss francs to CHF 7.9 billion.



  Year ended
Dec 31, 2002
CHF millions

  Year ended
Dec 31, 2001
CHF millions

  Change in

  Change in
currencies %

Pharmaceuticals   21 002   20 181   4   13

Generics   2 809   2 433   15   25
OTC   2 359   2 538 (1) -7   -1
Animal Health   971   962   1   10
Medical Nutrition(2)   1 109   1 115 (1) -1   4
Infant & Baby   2 075   2 227 (1) -7   3
CIBA Vision   1 762   1 787   -1   6

Consumer Health—ongoing   11 085   11 062   0   6
Divested Health & Functional Food activities   325   400        

Consumer Health   11 410   11 462   0   7

Total   32 412   31 643   2   11

Restated to reflect a change in the classification of certain sales incentives and discounts to retailers: In 2001, sales have been reduced by a total of CHF 395 million (CHF 129 million, CHF 50 million and CHF 216 million for OTC, Medical Nutrition, and Infant & Baby, respectively) with a corresponding reduction in Marketing & Distribution expenses.
Including Nutrition & Santé

Pharmaceuticals Division

Sales increased 4% in Swiss francs or 13% in local currencies from CHF 20.2 billion in 2001 to CHF 21.0 billion in 2002, driven in particular by the cardiovascular and oncology businesses, where Diovan, Lotrel, Lescol, Gleevec/Glivec, Zometa and Sandostatin were the main growth drivers.

The introduction of new products, such as Elidel, Zometa and Zelnorm/Zelmac, together with the addition of new strengths and new indications to existing brands all contributed to lifting sales. Double-digit sales growth was achieved in all regions, including Japan despite government mandated price decreases. In Europe, strong performances in Spain and France offset the effects of pricing pressures in several countries, mandatory generic substitution in Germany and the effects of parallel imports.

Diovan (hypertension) posted sales of CHF 2.6 billion, making it Novartis' best selling product ever. Extending its leadership of the angiotensin-2 receptor blocker category in the US, it became the first and only drug of its kind to receive approval there for treatment in heart failure patients. To add further choice and flexibility, a new higher dose (160/25) formulation of Co-Diovan was launched in the US. Novartis' second flagship antihypertensive, Lotrel, generated sales of CHF 1.0 billion, lifted by the July launch of a new formulation (10 mg amlodipine + 20mg benazepril HCl). The third main pillar of the cardiovascular franchise, Lescol (cholesterol reduction) posted sales of CHF 896 million. The brand's strong growth in Europe and other regions has been driven by its particularly favorable risk/benefit profile and convenient XL extended-release formulation.


In Oncology, Gleevec/Glivec gained approval in the US, the EU and Japan for first-line use in treating certain forms of chronic myeloid leukemia (CML). It also received approval early in the year for use in gastrointestinal stromal tumors (GIST). Exceeding expectations, Gleevec/Glivec sales reached CHF 953 million, making it Novartis' number five product. Another leading Oncology brand, Sandostatin continued to post substantial double-digit growth, with sales reaching CHF 943 million, despite the launch of generic competitors in Europe. Zometa (bone metastases and complications of a broad range of cancers), achieved sales of CHF 758 million. Zometa is the more potent and convenient successor to Aredia, which is facing patent expiry. The new drug gained EU and US approvals for a broader range of cancer settings, and is approaching or has exceeded the previous sales level of Aredia in many markets.

In Transplantation, the Neoral franchise was underpinned by market share gains in Japan and yielded sales of CHF 1.6 billion. It continues to compete strongly against branded and generic competition owing to a reluctance among physicians to switch patients who are stable and doing well on Neoral.

The Mature Products business continued to report only a modest decline in sales on a comparable basis as a result of focused investments on selected key products and markets. Of the leading brands the anti-inflammatory Voltaren continued to compete well against generics and the COX-2 inhibitor class of drugs and achieved sales of CHF 925 million.

Overall, the Pharmaceutical Division's top ten products generated CHF 11.7 billion, reflecting an increase of 32% in local currencies, while the top twenty products expanded sales by 17% to CHF 16.4 billion.

Primary Care

Primary care sales grew 13% in local currencies (+5% in CHF) primarily due to strong sales growth of Diovan and the other key products discussed below.

Diovan (+49%, US: +40%; hypertension) became Novartis' best selling product ever, further extending its category leadership in the US to more than 35% of total prescriptions. Backed by the Val-Heft study data showing improved survival, reduced hospitalization and cost efficacy benefits, Diovan became the first and only drug of its kind to receive approval for treatment in heart failure patients. To complement the broad choice and flexibility for patients and physicians, a new higher dose (160/25) formulation of Co-Diovan was launched in the US.

Lotrel (35% US: +35%; hypertension), also extended its share of new prescriptions. A new formulation (10 mg amlodip-ine + 20 mg benazepril HCl) was launched in July and has been well received by physicians and patients, reflecting the fact that 90% of Lotrel patients achieve their blood pressure goal with the additional benefits of an ACE inhibitor.

Lescol (+18%, US: +13%; cholesterol reduction) sales grew strongly in Europe and in other regions, reflecting the drug's particularly favorable risk/benefit profile and convenient XL extended-release formulation. Following the publication of data showing that Lescol reduced the risk of serious cardiac events after surgery to unblock coronary arteries, a new indication in angioplasty patients was filed in August for regulatory approval in the US.

Lamisil (+4%, US: -3%; fungal infections) sales picked up towards the end of the year mainly in the US. Whilst the onychomycosis market segment has been declining, Lamisil has extended its commanding share of both total and new prescriptions in the US to more than 80%.

Elidel (eczema) was launched in 13 countries, including the US, and completed the mutual recognition procedure in Europe. Sales in 2002 reached CHF 148 million. Within just six months, this highly effective, non-steroid cream has become the number-one branded topical treatment for eczema in the


US, where it has captured over 8% of new prescriptions. In Denmark, the first country in Europe where it has been launched, Elidel captured a 9% share of its segment within 10 weeks of launch.

Exelon (+26%, US: +28%; Alzheimer's disease) posted good sales growth and captured a further share both of new and total prescriptions in the US. New marketing initiatives are under way to counter increased competition in its fast-growing segment. Studies revealed that Exelon inhibits an additional enzyme (butyrylcholinesterase) that contributes to neurological dysfunction in Alzheimer's disease. As a result, an expanded labeling was approved in Europe to include the product's unique dual inhibition properties.

Zelnorm/Zelmac (constipation prone irritable bowel syndrome) has now gained approval in 28 countries including the US where it was launched in September. With progress being made on reimbursement, 2002 sales totaled CHF 70 million.


Novartis Oncology gained further market share and posted strong sales growth of 28% in local currencies (+19% in CHF).

Gleevec/Glivec, for treating certain forms of chronic myeloid leukemia (CML) and gastrointestinal stromal tumors (GIST), continued to bring benefits to thousands of patients in more than 80 countries. Exceeding expectations, 2002 sales reached CHF 953 million, making it Novartis's fifth biggest product. Gleevec/Glivec obtained approval as first-line treatment in the US, EU and Switzerland, and major progress was achieved on reimbursement, especially in the UK, Australia and New Zealand.

Zometa (complications of a broad range of cancers), achieved sales of CHF 758 million, making it the world's fastest growing bisphosphonate used for bone metasteses. More potent and convenient than Aredia, Zometa has gained EU and US approvals for a broader range of cancer settings, and is approaching or has exceeded the previous sales level of Aredia in many markets.

Aredia (bone metastases; -64%; US: -84%) sales reflect the successful launch and superiority of Zometa and the anticipated competition from multiple generic entrants in several markets.

Sandostatin continued to post substantial double-digit growth, with sales up 23% (US: +39%) to CHF 943 million despite the launch of generic competitors in Europe. Growth was driven by sustained market penetration of the convenient, long-acting, once-a-month 'LAR' formulation.

Femara, the first-line therapy for advanced breast cancer in postmenopausal women, posted a 37% (US: +55%) rise in sales to CHF 271 million. Femara is the US leader in the first-line metastatic breast cancer setting.


Ophthalmics' sales rose 7% in local currencies (-1% in CHF), driven by Visudyne.

Visudyne (+27%; US: +19%; treatment in macular degeneration) posted sales of CHF 443 million, and has now been approved in more than 65 countries for its main indication and in more than 45, including the EU, US and Canada, for additional indications.


Sales decreased 4% in local currencies (-11% in CHF) as a result of branded and generic competition to the Neoral franchise. Their impact however continues to be limited by the importance physicians attach to avoiding fluctuations in drug concentrations in patients who are stable and doing well on Neoral.


Neoral/Sandimmun, sales (the cornerstone drug for immunosuppression), (-5%; US: -12%) were underpinned by market share gains in Japan, which partly offset price pressures and branded competition in other regions.

Simulect, the induction immunosuppressant designed to complement Neoral, posted a 21% rise in sales (US: +4%) following its successful launch in Japan and continued market segment share gains from established competitor brands in most regions.

Myfortic, a new formulation for preventing organ rejection in kidney transplantation, gained first approvals in Switzerland, Brazil, India and Australia while Certican, a novel drug that targets primary cancer of chronic rejection, was submitted for approval in the EU and US.

Mature Products

The mature brands reported a 10% sales rise in local currencies (no increase in CHF) due to a switch of products into this business unit and as a result of focused investments on selected key products and markets.

Voltaren (-3%, US: -18%; anti-inflammatory) continued to compete well against generics and the COX-2 inhibitor class of drugs.

Cibacen/Lotensin/Cibadrex (antihypertensive) continued to deliver positive results as sales climbed 9% (US: +14%) mainly as a result of renewed external field-force support in the US.


Top twenty Pharmaceuticals Division Products—2002

  % change
in local

  Rest of
CHF millions

  % change
in local

  % change

  Therapeutic Area

CHF millions

CHF millions

  in CHF

  in local

Diovan/Co-Diovan   Hypertension   1 212   40   1 368   58   2 580   37   49
Neoral/Sandimmun   Transplantation   426   -12   1 181   -2   1 607   -12   -5
Lamisil (group)   Fungal infections   653   -3   702   12   1 355   -4   4
Lotrel   Hypertension   1 011   35           1 011   24   35
Gleevec/Glivec   Chronic myeloid leukemia   330   103   623   741   953   271   303
Sandostatin (group)   Acromegaly   439   39   504   12   943   16   23
Voltaren (group)   Inflammation/pain   18   -18   907   -3   925   -13   -3
Lescol   Cholesterol reduction   405   13   491   23   896   10   18
Zometa   Cancer complications   562   NA   196   NA   758   NA   NA
Cibacen/Lotensin/Cibadrex   Hypertension   523   14   191   -4   714   1   9

Top ten products       5 579   35   6 163   28   11 742   22   32
Miacalcic   Osteoporosis   371   -9   241   -4   612   -13   -7
Tegretol (incl. CR/XR)   Epilepsy   189   -22   376   1   565   -17   -8
Leponex/Clozaril   Schizophrenia   186   -12   315   8   501   -7   0
Exelon   Alzheimer's disease   259   28   213   24   472   17   26
Visudyne   Wet form of age-related macular degeneration   259   19   184   40   443   18   27
HRT Range   Hormone replacement   215   5   222   -10   437   -10   -3
Trileptal   Epilepsy   331   111   102   49   433   73   91
Aredia   Cancer complications   125   -84   303   -27   428   -66   -64
Foradil   Asthma   36   136   371   4   407   4   10
Famvir   Viral infections   244   17   99   7   343   6   14

Top twenty products       7 794   15   8 589   19   16 383   9   17
Rest of portfolio       1 120   -6   3 499   0   4 619   -9   -1

Total       8 914   12   12 088   13   21 002   4   13

NA—Not applicable as no or insignificant prior year sales.


Consumer Health Division

Sales of the Consumer Health Division increased in local currencies by 7%, however, fell slightly in Swiss franc terms from CHF 11.5 billion in 2001 to CHF 11.4 billion in 2002. The following are specific comments on the results of the business units within the Consumer Health division:


Sales rose 15% in Swiss francs or 25% in local currencies to CHF 2.8 billion, led by the US and Europe, the launch of new products, and expansion into new markets.

The retail generics business with finished forms lifted sales by 35% in local currencies, driven by the US performance and new launches, in particular AmoxC in the US, Geneva's generic form of the anti-infective Augmentin®. The introduction of other products, including mefloquine (malaria), nabumetone (inflammation), metformin (diabetes), fluoxetine (depression), lisinopril and lisinopril HCTZ (hypertension) also fuelled growth. Sales in Europe grew dynamically, particularly in France, Italy and the Netherlands, due to several launches including the ulcer treatment omeprazole.

The industrial generics franchise posted an increase of 1% in Swiss francs and a 3% increase in local currencies. A new biopharmaceuticals franchise was added, focused on the manufacture of active ingredients, mostly modern recombinant products.

In November, the business unit successfully completed its friendly take-over bid for Lek Pharmaceuticals d.d., Slovenia's leading drug-maker. The CHF 1.3 billion acquisition opens up a leading position for Novartis Generics in Eastern Europe. No sales have been recorded from this acquisition in 2002 due to their negligible amount and the fact that Novartis is still in the process of integrating Lek into its reporting system.

OTC (over-the-counter medicines)

Sales were 7% off their 2001 level in Swiss francs or down 1% in local currencies. Excluding terminated, acquired, in-licensed and transferred businesses, the underlying sales growth was 3% in local currencies, driven by the key brands Lamisil (antifungal), Voltaren (analgesic), Otrivin (nasal decongestant) and Nicotinell/Habitrol (smoking cessation). These products compensated for the weak cough and cold season in the US earlier in 2002 and a drop in Calcium Sandoz sales resulting from reimbursement issues in Europe and Mexico.

Animal Health

Sales were up 1% in Swiss francs or 10% in local currencies to CHF 971 million, driven by double-digit growth in Latin America and the US, where the vaccine businesses acquired in January were the main contributors. Overall, acquisitions contributed approximately 6 percentage points to local currency sales growth. The companion animal franchise was driven by strong sales of Interceptor (worm treatment) and Fortekor (cardio-renal drug), complemented by a number of new launches in key markets, including Atopica, for atopic dermatitis in dogs, and Deramaxx, the first COX-2 product for pain control in dogs and Milbemax, for intestinal parasites in cats and dogs. Sales in the farm animal franchise were driven by the therapeutic anti-infectives, the strong performance in Latin America and the recovery in the UK from the foot and mouth epidemic of 2001. The acquisition of Grand Laboratories and ImmTech in the US boosted the vaccines and aquahealth franchise, which delivered a strong rise in sales and now represents 8% of Animal Health's revenues.

Medical Nutrition (including Nutrition & Santé)

Combined sales reached CHF 1.1 billion, down 1% in Swiss francs but up 4% in local currencies.


Double digit growth in Europe lifted Medical Nutrition sales, which were driven by the strong performance of Enteral Nutrition (Isosource and Novasource) and additional sales impetus from the Medical Food franchise (Resource). In Nutrition & Santé, sales growth from the core-brands offset the impact of distributor changes in China and Italy, while Sports Nutrition sales were lifted by the introduction of Isostar 'Fast Hydration'. Within Medical Nutrition the Health Food & Slimming and Sports Nutrition businesses are regrouped as of January 1, 2003 into the new Nutrition & Santé stand-alone unit to optimize its business potential and to prepare for future divestment.

Infant & Baby

Although sales fell 7% in Swiss franc terms, in local currencies they grew above the industry average (+3%) to CHF 2.1 billion. The major contributor was Gerber in the US, spurred by innovations in the Juice, Graduates, and Tender Harvest lines and the outstanding success of Lil' Entrees, a new line of microwavable convenience trays targeted at the toddler segment. Gerber's revenues from this segment increased 5%. Despite the Baby Care business competing against private label entries it achieved a record market share in this segment and the Gerber Wellness line of skincare and healthcare products achieved a 7% rise in sales helped by the successful re-launch of its infant skin care line.

CIBA Vision

Sales fell 1% in Swiss franc terms but rose 6% in local currencies to CHF 1.8 billion, driven by the high-volume lens franchise, which outpaced the market. Focus DAILIES and NIGHT & DAY lenses posted dynamic sales growth and maintained leadership of the daily disposables and continuous wear categories. FreshLook colored lenses led the growing cosmetic lens segment, supported by the launch of the FreshLook Radiance line in several markets including the US from December. Focus DAILIES Toric, the world's first and only daily disposable lens for astigmatism correction, was launched in Europe and is in the process of being introduced in the US.

The lens-care franchise continued to compete in a shrinking market mainly in the US. Sales declined, but were underpinned by increases in certain countries and the roll-out of FreshLook Care in Japan.

The ophthalmic surgical business was lifted by several innovative products including VisThesia, a combination viscoelastic gel and anesthetic, which may help shorten cataract surgeries, Vivarte PRESBYOPIC phakic refractive lens; and an improved convenient injector system for the PRL phakic refractive lens.

Divested Health & Functional Food activities

Sales of divested Health & Functional Food activities, principally the Food & Beverage business, including the Ovaltine, Caotina, Lacovobrands, which was divested at the end of November 2002 to Associated British Foods (ABF) for CHF 402 million, amounted to CHF 325 million (2001: CHF 400 million).


Operating income

  Year ended
Dec 31, 2002
CHF millions

of sales

  Year ended
Dec 31, 2001
CHF millions

of sales


Pharmaceuticals   6 022   28.7   5 677   28.1   6

Generics   406   14.5   281   11.5   44
OTC   374   15.9   452   17.8   -17
Animal Health   144   14.8   138   14.3   4
Medical Nutrition(1)   6   0.5   87   7.8   -93
Infant & Baby   355   17.1   388   17.4   -9
CIBA Vision   183   10.4   174   9.7   5

Consumer Health—ongoing   1 468   13.2   1 520   13.7   -3
Divested Health & Functional Food activities   216       -7        

Consumer Health   1 684   14.8   1 513   13.2   11

Corporate income, net   181       87       108

Total   7 887   24.3   7 277   23.0   8

Including Nutrition & Santé

Group operating income increased by 8% from CHF 7.3 billion in 2001 to CHF 7.9 billion in 2002.

The Group operating margin was 24.3% of sales, an increase of 1.3 percentage points compared with 2001 (23.0%).

Pharmaceuticals Division

Pharmaceuticals' operating income rose 6% to CHF 6.0 billion in 2002 with the division's operating margin improving by 0.6 percentage points over the year to 28.7%. As a percentage of sales, the cost of goods sold improved 1.2 percentage points due to product mix changes and productivity gains. Marketing & distribution investments increased slightly as a percentage of sales to drive the introduction of Elidel and the launch of Zelnorm in the US. Implementation of the new research strategy and the establishment of the new Boston facility led to a 4% increase in research & development investments, which remained at 17% of sales. Included in administration and general overheads were currency hedging gains of CHF 267 million which were offset by CHF 314 million of impairment charges against the goodwill of the division's biotechnology investments (Genetic Therapy Inc., Systemix Inc., and Imutran Ltd. acquisitions from 1995 and 1996) due to the aforementioned change in research and development strategy, and a CHF 80 million additional impairment charge against the pitavastatin marketing rights acquired in 2001. These impairment charges have been determined based on discounted cash flow models of the expected future sales arising from these activities.



Consumer Health Division

The division's operating income has increased by 11% over the year from CHF 1.5 billion in 2001 to CHF 1.7 billion in 2002. The division's ongoing operating income, excluding the impact of the divested Health & Functional Food activities, has fallen by 3% to CHF 1.47 billion. As explained below, increases in the operating income of Generics, Animal Health and CIBA Vision business units have been offset by falls in the division's other business units.


Operating income increased significantly by 44% over 2001, fuelled by top-line growth, productivity gains and a stronger focus on higher margin products. Although regional sales forces were expanded and new markets entered, marketing & distribution expenses were reduced as a percentage of sales. Research & development investments increased 27% to CHF 215 million due to product developments and the funding of the new R&D center in Vienna. The positive trend of sales and functional costs, and the non-recurrence of acquisition-related costs last year, lifted the operating margin 3 percentage points to 14.5%. There has been no contribution to operating income from the recently completed Lek acquisition.


Operating income dropped 17% over the year to CHF 374 million, as a result of lower sales volumes and increased general & administration expenses due primarily to the Divisional reorganization announced in February and exit costs from a Japanese joint venture. These were partially offset by reduced marketing & distribution expenses. The operating margin fell 1.9 percentage points to 15.9%.

Animal Health

2002 operating income increased 4% to CHF 144 million, leading to an operating margin of 14.8% (2001: 14.3%). Apart from acquisition-related charges, operating costs were reduced significantly as marketing & distribution investments were focused on key new launches, whilst research & development investments were maintained as a percentage of sales.

Medical Nutrition (including Nutrition & Santé)

Operating income fell 93% to CHF 6 million as a result of restructuring provisions of CHF 40 million and a one-time provision for potential additional value-added tax charges in Germany. As a result, the operating margin fell to 0.5% from 7.8% in 2001. Excluding the exceptional items of CHF 66 million operating income would have been CHF 72 million and have produced an operating margin of 6.5%.

Infant & Baby

2002 operating income fell 9% to CHF 355 million. Operating income was affected by one-off goodwill impairment charges of CHF 39 million primarily related to the Hiborn acquisition in Brazil of 1998. As a result, the operating margin fell to 17.1% from 17.4% in 2001. Excluding this impairment of CHF 39 million, the operating margin would have been 19.0%.

CIBA Vision

Operating income reached CHF 183 million. Investments in marketing & distribution were increased to power new launches and advertising campaigns. Research & development investments slightly increased as the business unit focused on the development of new products and lens production technology. Operating margin increased slightly to 10.4% in 2002 compared with 9.7% in 2001.


Divested Health & Functional Food activities

The operating income of CHF 216 million includes the divestment gain of CHF 205 million, after related restructuring charges arising on the divestment of the Food & Beverage business, and the normal operating income from these activities offset by CHF 28 million of goodwill impairment charges in connection with this divestment.

Corporate and Other Income/Expense

This includes the costs of corporate management, income resulting from charging share and share option plan costs to the operating companies, and pension income. Net corporate income increased from CHF 87 million in 2001 to CHF 181 million in 2002.

Operating expenses

  Year ended
Dec 31, 2002
CHF millions

  Year ended
Dec 31, 2001
CHF millions


Sales   32 412   31 643   2
Cost of goods sold   -7 618   -7 886   -3
Marketing & distribution   -10 987   -10 703   3
Research & development   -4 339   -4 189   4
Administration & general overheads   -1 581   -1 588   0

Operating income   7 887   7 277   8

Cost of goods sold

Cost of goods sold decreased as a percentage of sales from 24.9% in 2001 to 23.5% in 2002. This was mainly due to continued improvements in productivity and a favorable product mix in Pharmaceuticals.

Marketing & distribution

Marketing & distribution expenses as a percentage of sales increased by 0.1% over 2001 to 33.9% of sales as slightly higher investments in the Pharmaceutical division field force and promotional activities were offset by reductions in the Consumer Health division.

Research & development

Research & development expenses as a percentage of sales were 13.4% in 2002, a small increase over the 2001 level of 13.2%.

Administration & general overheads

Cost containment, especially in Pharmaceuticals, and the recording of CHF 267 million of hedging gains, resulted in a negligible increase in administration & general overheads. As a percentage of sales, administration & general overheads fell to 4.9% in 2002 from 5.0% in 2001.


Net income

  Year ended
Dec 31, 2002
CHF millions

  Year ended
Dec 31, 2001
CHF millions


Operating income   7 887   7 277   8
Income from associated companies   -10   139    
Financial income, net   949   1 067   -11

Income before taxes and minority interests   8 826   8 483   4
Taxes   -1 490   -1 440   3

Income before minority interests   7 336   7 043   4
Minority interests   -23   -19   21

Net income   7 313   7 024   4

Income from associated companies

Associated companies are accounted for using the equity method where Novartis owns between 20% and 50% of the voting shares of such companies. Income from associated companies is mainly derived from the Group's investments in Roche Holding AG and Chiron Corporation.

The Group has a 32.7% (2001: 21.3%) interest in Roche voting shares, which represents a 6.2% (2001:4.0%) interest in the total Roche equity. The income statement effect after taking into account the required charges due to additional depreciation and amortization arising from allocating the purchase price to tangible and intangible assets and goodwill, resulted in a pre-tax loss of CHF 180 million (2001: CHF 39 million loss).

The Group's 42.0% interest in Chiron contributed pre-tax income of CHF 167 million (2001: CHF 185 million).

The Group's share of the net income of both Roche and Chiron is based upon analysts' estimates for the full year 2002. Any differences between these estimates and actual results will be adjusted in 2003.

Financial income, net

A lower but still attractive level of net financial income, of CHF 949 million, (2001: CHF 1067 million), was generated in a difficult environment due to good currency management and equity strategies. Gross financial income of CHF 1 144 million (including net income on options and forward contracts and after deducting other financial expense) was CHF 408 million lower than in 2001 because the average level of liquidity has been lower and interest rates were also substantially lower in the current year. This was partially offset by lower interest expense of CHF 301 million (2001: CHF 367 million) and by net currency gains of CHF 106 million (up CHF 224 million from last year). The net currency gain was due to currency gains of CHF 380 million, mainly from US dollar and Japanese yen positions, partially offset by losses in emerging markets.


Despite increased profits, the tax charge of CHF 1.5 billion increased only CHF 50 million over the year. Taxes as a percentage of income before tax were 16.9% in 2002 compared to 17.0% in 2001.


Net income

Net income as a percentage of total sales increased, from 22.2% in 2001 to 22.6% in 2002. This was due to margin increases in the operating businesses offsetting lower financial income.

Return on average equity increased from 17.8% in 2001 to 17.9% in 2002, owing to higher net income and lower equity mainly as a result of the acquisition of treasury shares.

Earnings per share

Earnings per share increased by 7%. This was more than the 4% increase in net income due to a lower average number of shares being outstanding during the year as a result of share-buy backs.


Condensed consolidated balance sheets

  Dec 31, 2002
CHF millions

  Dec 31, 2001
CHF millions

CHF millions

Total long-term assets   33 984   32 585   1 399
Cash, short-term deposits and marketable securities   17 605   22 152 (1) -4 547
Other current assets   11 613   12 024 (1) -411

Total assets   63 202   66 761   -3 559

Total equity   39 682   42 245   -2 563
Financial debts   7 819   8 677 (1) -858
Other liabilities and minority interests   15 701   15 839 (1) -138

Total equity and liabilities   63 202   66 761   -3 559

Restated due to reclassification of the fair value of derivative financial instruments to financial assets and debt.

Total long-term assets increased by CHF 1.4 billion principally due to the CHF 2.4 billion increase in investments in associated companies as a result of increasing the Group's stake in Roche.

The Group's equity decreased CHF 2.6 billion during 2002 to CHF 39.7 billion at December 31, 2002, as net income (CHF 7.3 billion) only partially offset dividend payments (CHF 2.3 billion), the acquisition of treasury shares (CHF 4.8 billion), translation losses (CHF 1.5 billion) and a CHF 1.3 billion reduction in the fair value reserve for marketable securities and other equity movements. The valuation differences on available-for-sale marketable securities and deferred cash flow hedges fell from unrealized gains of CHF 1.0 billion at December 31, 2001 to unrealized losses of CHF 0.2 billion at December 31, 2002.

Total financial debts fell by CHF 0.9 billion on account of the conversion of CHF 1.2 billion of convertible debt and reduction in short-term debt partially offset by the issue of a EUR 1.0 billion straight bond due 2007. The year-end debt/equity ratio fell slightly from 0.21:1 in 2001 to 0.20:1 in 2002.

Novartis has long-term financial debt principally in the form of bonds. At December 31, 2002 all of the remaining convertible bonds issued by Novartis had been converted, compared with CHF 1.2 billion


being outstanding at December 31, 2001. Novartis also had outstanding CHF 3.6 billion in straight bonds at December 31, 2002 compared with CHF 2.3 billion at December 31, 2001. For details on the maturity profile of debt, currency and interest rate structure, see note 18 to the consolidated financial statements.

The Novartis debt continues to be rated by Standard & Poor's and Moody's as AAA and Aaa for long-term maturities and A1+ and P1 for short-term debt respectively. The Group considers its working capital to be sufficient for its present requirements.


Liquidity and capital resources

The following table sets forth certain information about the Group's cash flow and net liquidity for each of the periods indicated.

CHF millions

CHF millions

Cash flow from operating activities   8 162   7 342
Cash flow used for investing activities   -4 455   -4 675
Cash flow used for financing activities   -6 617   -354
Translation effect on cash and cash equivalents   -99   31

Change in cash and cash equivalents   -3 009   2 344
Change in short- and long-term marketable securities   -1 538   -940
Change in short- and long-term financial debt   858   -2 524

Change in net liquidity   -3 689   -1 120
Net liquidity at January 1   13 475   14 595

Net liquidity at December 31   9 786   13 475

The cash flow from operating activities increased by CHF 0.8 billion (11%) to CHF 8.2 billion mainly as result of higher net income and increased non-cash expenses. Depreciation, amortization and impairment charges increased by CHF 0.3 billion to CHF 2.1 billion. Current tax payments were CHF 181 million lower than prior year despite an increase of the total tax charge of CHF 50 million.

The cash outflow due to investing activities was CHF 4.5 billion, only marginally below last year. CHF 4.2 billion was spent to increase the strategic investment in Roche and for the acquisition of Lek. The net investment in tangible assets accounted for CHF 1.7 billion. The net proceeds from sale of marketable securities was CHF 0.7 billion.

The cash flow used for financing activities was CHF 6.6 billion. CHF 5.1 billion were spent for the acquisition of treasury shares and CHF 2.3 billion for dividend payments while the issue of a EUR 1 billion bond and the conversions of the remaining two convertible bonds contributed to a net inflow of CHF 0.8 billion.

Overall liquidity (cash, cash equivalents and marketable securities including financial derivatives) amounted to CHF 17.6 billion at December 31, 2002, a reduction of CHF 4.6 billion over the previous year-end balance. Net liquidity (liquidity less financial debt) remains high at CHF 9.8 billion despite a


reduction of CHF 3.7 billion from the December 31, 2001 level due to the various financing activities explained above.

Group free cash flow

The following is a summary of free cash flow using the Group's definition, which excludes the cash received or paid on divestment or acquisition of subsidiaries and minority interests:

CHF millions

CHF millions

Cash flow from operating activities   8 162   7 342
Purchase of tangible fixed assets   -1 661   -1 351
Purchase of intangible and financial assets   -4 137   -7 552
Sale of tangible, intangible and financial assets   1 525   1 825
Dividends paid to third parties   -2 294   -2 194
Acquisition of product and marketing rights       826
Acquisition of voting shares of Roche Holding AG   2 868   5 177

Free cash flow (excluding acquisitions of the Roche stake and product and marketing rights)   4 463   4 073

The free cash flow, excluding the impact of the acquisitions of the Roche stake, Lek and marketing and product rights, increased 9.6% from CHF 4.1 billion in 2001 to CHF 4.5 billion in 2002.

Group capital expenditure on tangible fixed assets for the 2002 financial year totaled 1.7 billion (5.1% of sales), compared to a comparable figure CHF 1.4 billion (4.3% of sales) in 2001. This level of capital expenditure reflects the continuing investment in production and research and development facilities. The Group intends to maintain spending at 2002 levels in 2003 and to fund these expenditures with internally generated resources.

Free cash flow of the divisions and business units uses the same definition as that for the Group, however no dividends, tax or financial receipts or payments are included in the division and business unit calculation.

Free cash flow

CHF millions

CHF millions

Pharmaceuticals (before acquisition of product and marketing rights)   6 919   6 663
Generics   389   46
OTC   256   393
Animal Health   151   195
Medical Nutrition(1)   116   77
Infant & Baby   223   170
CIBA Vision   219   59
Corporate and other (before acquisition of the voting shares of Roche Holding AG)   -3 810   -3 530

Total   4 463   4 073

Including Nutrition & Santé and divested activities.


The following summarizes the Group's contractual obligations and other commercial commitments, and the effect such obligations and commitments are expected to have on the Group's liquidity and cash flow in future periods.

  Payment due by period
CHF millions

  Less than
1 year
CHF millions

CHF millions

CHF millions

5 years
CHF millions

Long-term debt   3 987   156   912   2 874   45
Operating leases   1 313   259   355   207   492
Research & development commitments   941   368   357   136   80

Total contractual cash obligations   6 241   783   1 624   3 217   617

The Group expects to fund the operating leases and long-term research & development commitments with internally generated resources.

Special purpose entities

The Novartis Group has no unconsolidated special purpose financing or partnership entities. See also note 27 of the consolidated financial statements.

Earnings before interest, tax, depreciation and amortization (EBITDA)

The Group defines EBITDA as operating income before interest, tax, depreciation of tangible fixed assets and amortization of intangible assets and any related impairment charge.

CHF millions

CHF millions

Operating income   7 887   7 277
Depreciation on tangible fixed assets   921   939
Amortization on intangible assets   551   564
Impairments of tangible and intangible assets   540   246

Group EBITDA   9 899   9 026

The breakdown of the Group EBITDA into divisions/business units is as follows:

CHF millions

  % of sales

CHF millions

  % of sales

Pharmaceuticals   7 288   34.7   6 803   33.7
Generics   634   22.6   494   20.3
OTC   425   18.0   505   19.9
Animal Health   182   18.7   167   17.4
Medical Nutrition(1)   291   20.3   120   7.9
Infant & Baby   473   22.8   449   20.2
CIBA Vision   378   21.5   372   20.8

Total divisions/business units   9 671   29.8   8 910   28.2
Corporate and other   228       116    

Total Group   9 899   30.5   9 026   28.5

Including Nutrition & Santé and divested activities.



Enterprise value

This represents the total amount that shareholders and debt holders have invested in Novartis less the Group's liquidity. This is the base used by investors in Novartis to measure their EBITDA return.

CHF millions

CHF millions

Market capitalization   124 862   152 891
Minority interests   92   104
Financial debts   7 819   8 677
Less liquidity   -17 605   -22 152

Year end Enterprise value   115 168   139 520

Enterprise value/EBITDA   11.6   15.5

Value Added Statement

44.3% of the revenue from sales was used for purchasing goods and services from our suppliers. 24.3% of sales was paid either directly or indirectly to the employees and 15.5% of sales was retained in the business for future expansion. Dividends paid to shareholders represented 7.1% of sales.

Origin of value added

CHF millions

% of sales

% of sales

Sales   32 412   100.0   100.0
Change in inventory and own manufactured items   47        

    32 459   100.0   100.0
Services bought from third parties:            
  Material costs   -5 774   -17.8   -19.9
  Other operating expenses   -8 618   -26.5   -27.3

Gross value added   18 067   55.7   52.8
Depreciation, amortization and impairments on tangible and intangible assets   -2 012   -6.2   -5.5

Financial income   3 332   10.3   10.6

Net value added (NVA)   19 387   59.8   57.9


Equity strategy and share information

Novartis shares outperformed SMI

In 2002 the equity capital market came under enormous pressure and the Swiss Market Index (SMI) decreased 28% and the Morgan Stanley World Pharmaceutical Index decreased 20% over the year. In this difficult market environment the Novartis share price declined 16% from CHF 60.00 at the beginning of the year to CHF 50.45 on December 31, 2002. The market capitalization of Novartis amounted to CHF 124.9 billion on December 31, 2002, compared to CHF 152.9 billion at the end of 2001.

Dividend continuously increased since 1996

The Board is proposing to the Annual General Meeting to increase the dividend payment for 2002 by 6% to CHF 0.95 per share (2001: CHF 0.90). This represents the sixth consecutive increase in the dividend per share since the formation of Novartis in late 1996. If the 2002 dividend proposal is approved by the shareholders, dividends paid out on the outstanding shares will amount to CHF 2.4 billion (2001: CHF 2.3 billion), resulting in a pay-out ratio of 33% (2001: 33%). Based on the 2002 year-end share price of CHF 50.45, Novartis' dividend yield is 1.9% (2001: 1.5%). The dividend payment date for 2002 will be on March 7, 2003. With the exception of 277.1 million treasury shares, all issued shares are dividend bearing.

Third share repurchase program initiated

On July 22, 2002, Novartis initiated its third share buy-back program to repurchase shares on the SWX Swiss Exchange for up to a total of CHF 4 billion. During 2002, 24.6 million shares were repurchased via a second trading line for a total amount of CHF 1.5 billion. As with the Group's first use of the second trading line the Board will propose reducing the Group's share capital by 22.7 million shares corresponding to the shares repurchased but not yet cancelled at the forthcoming Annual General Meeting in March 2003. During the year to December 31, 2002, an additional 55.4 million shares, net were also repurchased on the first trading line for a total of CHF 3.6 billion.

US dollar reporting

The Group intends to change the reporting currency of its consolidated financial statements from Swiss francs to US dollars from January 1, 2003. The 2002 consolidated financial information will be restated into US dollars with this restatement being available prior to the release of the first quarter 2003 financial data.

The move to presenting the consolidated financial data in US dollars reflects the increasing importance of the Novartis Group's sales in US dollars and will make the financial information more easily comparable with peer companies in the pharmaceutical industry.

Information on Novartis shares

You can find further information on the Internet at http://www.novartis.com/investors.


Chart of Novartis 2002 share price movement


Key Novartis share data(1)



Issued shares   2 824 150 000   2 885 204 680
Of which treasury shares        
Reserved to secure conversion rights on bonds and call options   54 901 962   59 405 716
Not specifically reserved   294 277 419   277 618 704

Treasury shares   349 179 381   337 024 420

Outstanding shares at December 31   2 474 970 619   2 548 180 260

Average number of shares outstanding   2 515 311 685   2 571 673 365

Per share information(1) (CHF)



Basic earnings per share   2.91   2.73
Diluted earnings per share   2.84   2.72
Operating cash flow   3.24   2.85
Year end equity   16.03   16.58
Dividend(2)   0.95   0.90

Key ratios—December 31



Price/earnings ratio   17.3   22.0
Enterprise value/EBITDA   11.6   15.5
Dividend yield (%)   1.9   1.5

Key data on US American Depositary Receipts (ADR) program



Year-end ADS price (USD)   36.73   36.50
ADSs outstanding(3)   93 388 802   101 028 511

Calculated on average number of shares outstanding except year end
2002: Proposal to shareholders' meeting.
The depositary, JP Morgan Chase Bank, holds one Novartis AG share for every American Depositary Share (ADS) issued.


Share price (CHF)



Year-end   50.45   60.00
Highest   69.10   74.15
Lowest   49.20   54.95

Year-end market capitalization (CHF millions)   124 862   152 891


The shares are listed in Switzerland, and traded on virt-x, the European blue chip platform and the ADSs (American Depositary Shares) are listed on the New York Stock Exchange. The shares are also traded on the SEAQ International, London.





Shares   NOVZn.VX/NOVZN SW   NOVD LI    
ADSs           NVS

Widely dispersed shareholdings

Novartis shares are widely held. As of December 31, 2002, Novartis had approximately 167 000 shareholders (2001: 165 000) registered in its share register. 77% of the shares recorded in the share register are held by Swiss nationals (2001: 78%). Based on its share register Novartis believes that approximately 12% of its shares are held by approximately 1 100 registered holders in the USA (2001: 11% and 1 800 registered holders, respectively). Since certain of the shares are held by brokers and other nominees, the above numbers may not represent the actual number of shares which are beneficially held by US and Swiss persons.

Limitation of registration, voting rights and major shareholders

No person or entity shall be registered with the right to vote for more than 2% of the share capital as set forth in the Commercial Register. The Board of Directors may allow exemptions from the limitation for registration in the share register.

Based upon information available to the Group, shareholders owning 2% or more of Novartis AG's capital at December 31 are listed in the table below:

  % holding of share capital
December 31, 2002

  % holding of share cpaital
December 31, 2001

Emasan AG, Basel   3.1   3.8
Novartis Foundation for Employee Participation, Basel   3.3   3.5


Exchange rate exposure and risk management

Novartis transacts its business in many currencies other than the Swiss franc. As a result of the Group's foreign currency exposure, exchange rate fluctuations have a significant impact in the form of both translation risk and transaction risk on its income statement. Translation risk is the risk that the Group's consolidated financial statements for a particular period or as of a certain date may be affected by changes in the prevailing rates of the various currencies of the reporting subsidiaries against the Swiss franc. Transaction risk is the risk that the value of transactions executed in currencies other than the subsidiary's currency may vary according to currency fluctuations.

Quantitative and qualitative disclosures about market risk

currencies %

currencies %

  CHF %

  CHF %

Growth and currency contributions                
Sales   11   14   2   10
Operating income   10   9   8   8
Net income   4   8   4   8

  Sales %

  Sales %

  Costs %

  Costs %

Sales and operating costs by currencies                
USD   43   45   32   31
EUR   25   23   25   22
CHF   5   5   21   26
JPY   8   8   6   5
Other   19   19   16   16

funds %

funds %

debt %

debt %

Liquid funds and financial debt by currencies                
USD   8   8   31   46
EUR   24   35   6   4
CHF   64   55   37   21
JPY   1       20   24
Other   3   2   6   5

On average in 2002, the Swiss franc was stronger against the US dollar, Japanese yen, Euro and British pound than in 2001. The total negative currency effect on sales growth was 9% and the total negative impact on operating income growth was 2%.

On average in 2001, the Swiss franc was stronger against the Japanese yen, Euro and British pound, yet remained almost at the same level against the US dollar as in 2000. The total negative currency effect on sales growth was 4% and the total negative impact on operating income growth was 1%.

Market risk:    Novartis is exposed to market risk, primarily related to foreign exchange, interest rates and the market value of the investments of liquid funds. Management actively monitors these exposures. To manage the volatility relating to these exposures the Group enters into a variety of


derivative financial instruments. The Group's objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates, foreign currency rates and market rates of investments of liquid funds. It is the Group's policy and practice to use derivative financial instruments to manage exposures and to enhance the yield on the investment of liquid funds. It does not enter any financial transactions containing a risk that cannot be quantified at the time the transaction is concluded. The Group only sells existing assets or enters into transactions and future transactions (in the case of anticipatory hedges) which it confidently expects it will have in the future, based on past experience. In the case of liquid funds, the Group writes call options on assets it has or it writes put options on positions it wants to acquire and has the liquidity to acquire. The Group expects that any loss in value for these instruments generally would be offset by increases in the value of the underlying transactions.

Foreign exchange rates:    The Group uses the Swiss franc as its reporting currency and is therefore exposed to foreign exchange movements, primarily in US, European, Japanese and other Asian and Latin American currencies. Consequently, it enters into various contracts which change in value as foreign exchange rates change, to preserve the value of assets, commitments and anticipated transactions. It uses forward contracts and foreign currency option contracts to hedge certain anticipated net revenues in foreign currencies.

Net investments in foreign countries are long-term investments. Their fair value changes through movements of the currency exchange rates. In the very long term, however, the difference in the inflation rate should match the exchange rate movement, so that the market value of the real assets abroad will compensate for the change due to currency movements. For this reason, the Group only hedges the net investments in foreign subsidiaries in exceptional cases.

Commodities:    The Group has only a very limited exposure to price risk related to anticipated purchases of certain commodities used as raw materials by its businesses. A change in those prices may alter the gross margin of a specific business, but generally by not more than 10% of the margin and thus below materiality levels. Accordingly, it does not enter into significant commodity futures, forward and option contracts to manage fluctuations in prices of anticipated purchases.

Interest rates:    The Group manages its net exposure to interest rate risk through the proportion of fixed rate debt and variable rate debt in its total debt portfolio. To manage this mix, it may enter into interest rate swap agreements, in which it exchanges the periodic payments, based on a notional amount and agreed-upon fixed and variable interest rates.

Equity risk:    The Group purchases equities as investments of its liquid funds. As a policy, it limits its holdings in an unrelated company to less than 5% of its liquid funds. Potential investments are thoroughly analyzed in respect to their past financial track record (mainly cash flow return on investment), their market potential, their management and their competitors. Call options are written on stocks which it owned, and put options are written on equities which it wants to buy and for which cash has been reserved.

Management summary:    Use of the above-mentioned derivative financial instruments has not had a material impact on the Group's financial position at December 31, 2002 and 2001 or its results of operations for the years ended December 31, 2002 and 2001.

Value at risk:    The Group uses a value at risk ("VAR") computation to estimate the potential ten-day loss in the fair value of its interest rate-sensitive financial instruments, the loss in pre-tax earnings of its foreign currency price-sensitive derivative financial instruments as well as the potential ten-day loss of its equity holdings. It uses a ten-day period because it is assumed that not all positions could be undone in a single day, given the size of the positions. The VAR computation includes its debt, short-term and long-term investments, foreign currency forwards, swaps and options and anticipated


transactions. Foreign currency trade payables and receivables and net investments in foreign subsidiaries are excluded from the computation.

The VAR estimates are made assuming normal market conditions, using a 95% confidence interval. The Group uses a "Delta Normal" model to determine the observed inter-relationships between movements in interest rates, stock markets and various currencies. These inter-relationships are determined by observing interest rate, stock market movements and forward currency rate movements over a 60-day period for the calculation of VAR amounts.

The estimated potential ten-day loss in fair value of the Group's interest rate-sensitive instruments, primarily debt and investments of liquid funds under normal market conditions, the estimated potential ten-day loss in pre-tax earnings from foreign currency instruments under normal market conditions, and the estimated potential ten-day loss on its equity holdings, as calculated in the VAR model, follow:

  Dec 31, 2002
CHF millions

  Dec 31, 2001
CHF millions

Instruments sensitive to foreign currency rates   180   226
Instruments sensitive to equity market movements   591   224
Instruments sensitive to interest rates   132   64
All instruments   714   324

The average, high, and low VAR amounts for 2002 are as follows:

CHF millions

CHF millions

CHF milllions

Instruments sensitive to foreign currency rates   178   281   120
Instruments sensitive to equity market movements   428   826   228
Instruments sensitive to interest rates   179   228   129
All instruments   580   999   403

The VAR computation is a risk analysis tool designed to statistically estimate the maximum probable ten-day loss from adverse movements in interest rates, foreign currency rates and equity prices under normal market conditions. The computation does not purport to represent actual losses in fair value or earnings to be incurred by the Group, nor does it consider the effect of favorable changes in market rates. The Group cannot predict actual future movements in such market rates and it does not present these VAR results to be indicative of future movements in such market rates or to be representative of any actual impact that future changes in market rates may have on its future results of operations or financial position.

In addition to these VAR analyses, the Group uses stress testing techniques. Such stress testing is aimed at reflecting a worst case scenario. For these calculations, it uses the worst movements during a period of six months over the past 20 years in each category. For 2002 and 2001, the worst case loss scenario was configured as follows:

  Dec 31, 2002
CHF millions

  Dec 31, 2001
CHF millions

Bond portfolio   1 167   895
Money market and linked financial instruments   148   457
Equities   1 077   817
Foreign exchange risks   475   151

Total   2 867   2 320

In the Group's risk analysis, it considered this worst case scenario acceptable inasmuch as it could reduce the income, but would not endanger the solvency and/or the investment grade credit standing of the Group. While it is highly unlikely that all worst case fluctuations would happen simultaneously, as shown in the model, the actual market can of course produce bigger movements in the future.

The major financial risks are managed centrally by Novartis Group Treasury. Only residual risks and some currency risks are managed in the subsidiaries. The collective amount of the residual risks is however below 10% of the global risks.

Novartis has a written Treasury Policy, has implemented a strict segregation of front office and back office controls and the Group does random checks of its positions with the counterparties. In addition, internal audits of the Treasury function are performed at regular intervals.


Summary of Financial Data 1997–2002 (since formation of Novartis)

CHF millions unless indicated otherwise







Novartis Group sales       32 412 (1) 31 643 (1) 35 395 (1) 32 282 (1) 31 702   31 180
Change relative to preceding year   %   2.4   -10.6   9.6   1.8   1.7   -13.9
Pharmaceuticals Division sales       21 002   20 181   18 150   15 275   14 501   14 112
Change relative to preceding year   %   4.1   11.2   18.8   5.3   2.8   21.5
Consumer Health Division sales       11 410 (1) 11 462 (1) 10 551 (1) 9 951 (1) 9 723   9 634
Change relative to preceding year   %   -0.4   8.6   6.0   2.3   0.9   4.7
Discontinued Agribusiness & Industry Division sales           6 693   7 056   7 478   7 434

Operating income       7 887   7 277   7 883   7 343   6 920   6 688

Change relative to preceding year   %   8.4   -7.7   7.4   6.1   3.5   15.7
As a % of sales   %   24.3   23.0   22.3   22.7   21.8   21.4
As a % of average equity   %   19.3   18.4   21.3   21.4   23.8   24.6
As a % of average net operating assets   %   26.8   28.3   33.4   32.2   34.3   32.2

Net income       7 313   7 024   7 210   6 659   6 010   5 208
Change relative to preceding year   %   4.1   -2.6   8.3   10.8   15.4   126.0
As a % of sales   %   22.6   22.2   20.4   20.6   19.0   16.7
As a % of average equity   %   17.9   17.8   19.5   19.4   20.7   20.7

Dividends of Novartis AG(2)       2 420   2 358   2 361   2 223   2 014   1 736

Cash flow from operating activities       8 162   7 342   7 612   6 893   5 853   4 565
Change relative to preceding year   %   11.2   -3.5   10.4   17.8   28.2   -3.7
As a % of sales   %   25.2   23.2   21.5   21.4   18.5   14.6

Free cash flow       4 463   4 073   4 525   3 525   2 623   1 224
Change relative to preceding year   %   9.6   -10.0   28.4   34.4   114.3   -11.0
As a % of sales   %   13.8   12.9   12.8   10.9   8.3   3.9

Investment in tangible fixed assets       1 661   1 351   1 353   1 371   1 577   1 568
Change relative to preceding year   %   22.9   -0.1   -1.3   -13.1   0.6   -16.5
As a % of sales   %   5.1   4.3   3.8   4.2   5.0   5.0

Depreciation of tangible fixed assets       921   939   1 189   1 261   1 161   1 140
As a % of sales   %   2.8   3.0   3.4   3.9   3.7   3.7

Research & development expenditure       4 339   4 189   4 657   4 246   3 906   3 739
As a % of sales   %   13.4   13.2   13.2   13.2   12.3   12.0

Pharmaceuticals research & development expenditure       3 580   3 447   3 311   2 848   2 609   2 629
As a % of Pharmaceuticals Division sales   %   17.0   17.1   18.2   18.6   18.0   18.6

Total assets       63 202   66 761   58 196   65 527   56 225   53 650
Liquidity       17 605   22 152   20 523   22 601   19 678   18 486
Equity       39 682   42 245   36 862   37 216   31 396   26 801
Debt/equity ratio       0.20:1   0.21:1   0.16:1   0.27:1   0.28:1   0.41:1
Current ratio       2.5:1   2.4:1   2.8:1   2.0:1   2.0:1   2.0:1

Net operating assets       29 988   28 874   22 479   24 759   20 826   19 528
Change relative to preceding year   %   3.9   28.4   -9.2   18.9   6.6   -10.5
As a % of sales   %   92.5   91.2   63.5   76.7   65.7   62.6

Personnel costs       7 971   7 358   7 813   7 184   7 093   7 298
As a % of sales   %   24.6   23.3   21.1   22.3   22.4   23.4

Number of employees at year end   number   72 877   71 116   67 653   81 854   82 449   87 239
Sales per employee   CHF   437 864   449 992   426 286   391 492   369 337   350 905

Restated due to deduction from sales of certain sales incentives and discounts to retailers instead of inclusion in Marketing & Distribution expenses.
2002: Proposal to the shareholders' meeting


Novartis Group Consolidated Financial Statements

Consolidated Income Statements
for the years ended December 31, 2002 and 2001


CHF millions

CHF millions


Sales   3/4   32 412   31 643 (1)
Cost of goods       -7 618   -7 886  

Gross profit       24 794   23 757  
Marketing & distribution       -10 987   -10 703 (1)
Research & development   3   -4 339   -4 189  
Administration & general overheads       -1 581   -1 588  

Operating income   3/4   7 887   7 277  
Income from associated companies   10   -10   139  
Financial income, net   5   949   1 067  

Income before taxes and minority interests       8 826   8 483  
Taxes   6   -1 490   -1 440  

Income before minority interests       7 336   7 043  
Minority interests       -23   -19  

Net income       7 313   7 024  


Earnings per share (CHF)   7   2.91   2.73  

Diluted earnings per share (CHF)   7   2.84   2.72  

Restated to reflect a change in classification of certain sales incentives and discounts to retailers. 2001 Sales and marketing & distribution expenses have both been reduced by CHF 395 million.

The accompanying notes form an integral part of the consolidated financial statements.


Consolidated Balance Sheets
at December 31, 2002 and 2001


CHF millions

CHF millions


Long-term assets              
Tangible fixed assets   8   8 873   9 060  
Intangible assets   9   6 170   6 548  
Investments in associated companies   10   9 100   6 715  
Deferred taxes   11   3 057   3 235  
Other financial assets   12   6 784   7 027  

Total long-term assets       33 984   32 585  

Current assets              
Inventories   13   4 159   4 112  
Trade accounts receivable   14   5 190   5 349  
Other current assets   15   2 264   2 563 (1)
Marketable securities & financial derivatives   16   9 467   11 005 (1)
Cash and cash equivalents       8 138   11 147  

Total current assets       29 218   34 176  

Total assets       63 202   66 761  


Equity and liabilities







Share capital   17   1 412   1 443  
Treasury shares   17   -175   -169  
Reserves       38 445   40 971  

Total equity       39 682   42 245  

Minority interests       92   104  

Long-term liabilities              
Financial debts   18   3 831   2 500  
Deferred taxes   11   3 959   3 885  
Provisions and other long-term liabilities   19   4 026   3 830  

Total long-term liabilities       11 816   10 215  

Short-term liabilities              
Trade accounts payable       1 778   1 809  
Financial debts   20   3 988   6 177 (1)
Other short-term liabilities   21   5 846   6 211 (1)

Total short-term liabilities       11 612   14 197  

Total liabilities       23 428   24 412  

Total equity and liabilities       63 202   66 761  

Restated due to reclassification of the fair value of derivative financial instruments from other current assets to marketable securities & financial derivatives and from other short-term liablilities to short-term financial debts.

The accompanying notes form an integral part of the consolidated financial statements.


Consolidated Cash Flow Statements
for the years ended December 31, 2002 and 2001


CHF millions

CHF millions

Net income       7 313   7 024
Reversal of non-cash items            
  Minority interests       23   19
  Taxes       1 490   1 440
  Depreciation, amortization and impairments on            
    Tangible fixed assets       966   969
    Intangible assets       1 046   780
    Financial assets       64   31
  Income from associated companies       10   -139
  Divestment gains       -206   -45
  Gains on disposal of tangible and intangible assets       -405   -465
  Net financial income       -949   -1 067
Dividends received       36   42
Interest and other financial receipts       676   737
Interest and other financial payments       -271   -391
Receipts from associated companies       55    
Taxes paid       -1 196   -1 377

Cash flow before working capital and provision changes       8 652   7 558
Restructuring payments and other cash payments out of provisions       -317   -421
Change in net current assets and other operating cash flow items   22   -173   205

Cash flow from operating activities       8 162   7 342

Investment in tangible fixed assets       -1 661   -1 351
Proceeds from disposals of tangible fixed assets       286   275
Purchase of intangible assets       -139   -978
Purchase of financial assets       -3 998   -6 574
Proceeds from disposals of intangible and financial assets       1 239   1 550
Acquisition/divestment of subsidiaries   23   -847   -169
Acquisition of minorities       -3   -1
Proceeds from disposals of marketable securities       11 004   8 196
Payments for acquiring marketable securities       -10 336   -5 623

Cash flow used for investing activities       -4 455   -4 675

Acquisition of treasury shares       -5 147   -3 848
Proceeds from issue of options on Novartis shares           4 056
Increase in long-term financial debts       1 551   1 384
Repayment of long-term financial debts       -28   -126
Change in short-term financial debts       -699   374
Dividends paid       -2 294   -2 194

Cash flow used for financing activities       -6 617   -354

Net effect of currency translation on cash and cash equivalents       -99   31

Net change in cash and cash equivalents       -3 009   2 344

Cash and cash equivalents at the beginning of the year       11 147   8 803

Cash and cash equivalents at end of the year       8 138   11 147

The accompanying notes form an integral part of the consolidated financial statements.


Consolidated Statement of Changes in Equity
for the years ended December 31, 2002 and 2001


  Share premium
CHF millions

  Retained earnings
CHF millions

  Fair value adjustments on marketable securities not recorded in net income
CHF millions

  Fair value of deferred cash flow hedges not recorded in net income
CHF millions

  Cumulative translation differences not recorded in net income
CHF millions

  Total reserves
CHF millions

  Share capital
CHF millions

  Treasury shares
CHF millions

  Total equity
CHF millions

January 1, 2001       289   35 976   1 943   103   -707   37 604   1 443   -139   38 908

Fair value adjustments on financial instruments   24a           -889   -123       -1 012           -1 012
Associated companies' equity movements   24b       -7               -7           -7
Translation effects   24c                   -637   -637           -637
Net income           7 024               7 024           7 024

Total of components of comprehensive income           7 017   -889   -123   -637   5 368           5 368

Dividends   24d       -2 194               -2 194           -2 194
Acquisition of treasury shares   24e       -3 818               -3 818       -30   -3 848
Issue of call options on Novartis shares   24f   3 102                   3 102           3 102
Issue of put options on Novartis shares   24g   909                   909           909

Total of other equity movements       4 011   -6 012               -2 001       -30   -2 031

December 31, 2001       4 300   36 981   1 054   -20   -1 344   40 971   1 443   -169   42 245

Fair value adjustments on financial instruments   24a       138   -1 467   201       -1 128           -1 128
Associated companies' equity movements   24b       -111           -35   -146           -146
Recycled goodwill   24h       41               41           41
Translation effects                       -1 501   -1 501           -1 501
Net income           7 313               7 313           7 313

Total of components of comprehensive income           7 381   -1 467   201   -1 536   4 579           4 579

Dividends   24d       -2 294               -2 294           -2 294
Acquisition of treasury shares   24e       -4 811               -4 811       -37   -4 848
Reduction in share capital   24i                           -31   31    

Total of other equity movements           -7 105               -7 105   -31   -6   -7 142

December 31, 2002       4 300   37 257   -413   181   -2 880   38 445   1 412   -175   39 682

The accompanying notes form an integral part of the consolidated financial statements.


Notes to the Novartis Group Consolidated Financial Statements

1.    Accounting policies

The Novartis Group ("Group" or "Novartis") consolidated financial statements are prepared in accordance with the historical cost convention and comply with the standards formulated by the International Accounting Standards Board (IASB) and its predecessor organization the International Accounting Standards Committee (IASC) and with the following significant accounting policies.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual outcomes could differ from those estimates.

Scope of consolidation:    The financial statements include all companies which Novartis AG, Basel, directly or indirectly controls (generally over 50% of voting interest).

Special purpose entities, irrespective of their legal structure, are consolidated in instances where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. As permitted by IAS, equity compensation and post-employment plans are not consolidated.

Investments in associated companies (generally investments of between 20% and 50% in a company's voting shares) and joint ventures are accounted for by using the equity method with the Group recording its share of the associated company's net income and equity.

Principles of consolidation:    The annual closing date of the individual financial statements is December 31. The financial statements of consolidated companies operating in highly inflationary economies are adjusted to eliminate the impact of high inflation.

The purchase method of accounting is used for acquired businesses. Companies acquired or disposed of during the year are included in the consolidated financial statements from the date of acquisition or up to the date of disposal.

The Group was formed on December 20, 1996 when all assets and liabilities of Sandoz AG and Ciba-Geigy AG were transferred by universal succession to Novartis AG. The uniting of interests method was used for this transaction. The merger was consummated before the effective date of Interpretation 9 of the Standing Interpretations Committee on accounting for business combinations; if it were undertaken today, the merger might require a different accounting treatment.

Significant intercompany income and expenses, including unrealized gross profits from internal Novartis transactions and intercompany receivables and payables have been eliminated.

Revenue and expense recognition:    Sales are recognized when the significant risks and rewards of ownership of the assets have been transferred to a third party and are reported net of sales taxes and rebates. Provisions for rebates to customers are recognized in the same period that the related sales are recorded, based on the contract terms. Expenses of research and service contracts in progress are recognized based on their percentage of completion. Sales have been restated for all periods presented to treat certain sales incentives and discounts to retailers as sales deductions instead of marketing and distribution expenses.

Foreign currencies:    The consolidated financial statements of Novartis are expressed in Swiss francs ("CHF" or "Swiss francs"). The local currency has primarily been used as the reporting currency throughout the world. In the respective entity financial statements, monetary assets and liabilities


denominated in foreign currencies are translated at the rate prevailing at the balance sheet date. Transactions are recorded using the approximate exchange rate at the time of the transaction. All resulting foreign exchange transaction gains and losses are recognized in the subsidiary's income statement.

Income, expense and cash flows of the consolidated companies have been translated into Swiss francs using average exchange rates. The balance sheets are translated using the year end exchange rates. Translation differences arising from movements in the exchange rates used to translate equity and long-term internal financing and net income are allocated to reserves.

Derivative financial instruments and hedging:    Derivative financial instruments are initially recognized in the balance sheet at cost and subsequently remeasured to their fair value. The method of recognizing the resulting gain or loss is dependent on whether the derivative contract is designed to hedge a specific risk and qualifies for hedge accounting. On the date a derivative contract is entered into, the Group designates derivatives which qualify as hedges for accounting purposes as either a) a hedge of the fair value of a recognized asset or liability (fair value hedge), or b) a hedge of a forecasted transaction or firm commitment (cash flow hedge) or c) a hedge of a net investment in a foreign entity.

Changes in the fair value of derivatives which are fair value hedges and that are highly effective are recognized in the income statement, along with any changes in the fair value of the hedged asset or liability that is attributable to the hedged risk. Changes in the fair value of derivatives in cash flow hedges are recognized in equity. Where the forecasted transaction or firm commitment results in the recognition of an asset or liability, the gains and losses previously included in equity are included in the initial measurement of the asset or liability. Otherwise, amounts recorded in equity are transferred to the income statement and classified as revenue or expense in the same period in which the forecasted transaction affects the income statement.

Hedges of net investments in foreign entities are accounted for similarly to cash flow hedges. The Group hedges certain net investments in foreign entities with foreign currency borrowings. All foreign exchange gains or losses arising on translation are recognized in equity and included in cumulative translation differences.

Certain derivative instruments, while providing effective economic hedges under the Group's policies, do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognized immediately in the income statement.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized in the income statement, when the committed or forecasted transaction is ultimately recognized in the income statement. However, if a forecasted or committed transaction is no longer expected to occur, the cumulative gain or loss that was recognized in equity is immediately transferred to the income statement.

The purpose of hedge accounting is to match the impact of the hedged item and the hedging instrument in the income statement. To qualify for hedge accounting, the hedging relationship must meet several strict conditions with respect to documentation, probability of occurrence, hedge effectiveness and reliability of measurement. At the inception of the transaction the Group documents the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions.

This process includes linking all derivatives designated as hedges to specific assets and liabilities or to specific firm commitments or forecasted transactions. The Group also documents its assessment, both at the hedge inception and on an ongoing basis, as to whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.


Tangible fixed assets:    Tangible fixed assets have been valued at cost of acquisition or production cost and depreciated on a straight-line basis to the income statement, over the following estimated useful lives:

Buildings   20 to 40 years
Machinery and equipment   10 to 20 years
Furniture and vehicles   5 to 10 years
Computer hardware   3 to 7 years

Land is valued at acquisition cost except if held under long-term lease arrangements, when it is amortized over the life of the lease. Land held under long-term lease agreements relates to upfront payments to lease land on which certain of the Group's buildings are located. Additional costs which extend the useful life of the tangible fixed assets are capitalized. Financing costs associated with the construction of tangible fixed assets are not capitalized. Tangible fixed assets which are financed by leases giving rights to use the assets as if owned are capitalized at their estimated cost at the inception of the lease, and depreciated in the same manner as other tangible fixed assets over the shorter of the lease term or their useful life.

Long-lived assets, including identifiable intangibles and goodwill, are reviewed for impairment whenever events or changes in circumstance indicate that the balance sheet carrying amount of the asset may not be recoverable. When such events or changes in circumstance indicate the asset may not be recoverable, the Group estimates its value in use based on the future cash flows expected to result from the use of the asset and its eventual disposition. If the balance sheet carrying amount of the asset is more than the higher of its value in use to Novartis or its net selling price, an impairment loss for the difference is recognized. For purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual outcomes could vary significantly from such estimates.

Intangible assets:    These are valued at their cost and reviewed periodically and adjusted for any diminution in value as noted in the preceding paragraph. Any resulting impairment loss is recorded in the income statement in general overheads. In the case of business combinations, the excess of the purchase price over the fair value of net identifiable assets acquired is recorded as goodwill in the balance sheet. Goodwill, which is denominated in the local currency of the related acquisition, is amortized to income through administration and general overheads on a straight-line basis over its useful life. The amortization period is determined at the time of the acquisition, based upon the particular circumstances, and ranges from 5 to 20 years. Goodwill relating to acquisitions arising prior to January 1, 1995 has been fully written off against reserves.

Management determines the estimated useful life of goodwill based on its evaluation of the respective company at the time of the acquisition, considering factors such as existing market share, potential sales growth and other factors inherent in the acquired company.

Other acquired intangible assets are written off on a straight-line basis over the following periods:

Trademarks   10 to 15 years
Product and marketing rights   5 to 20 years
Software   3 years
Others   3 to 5 years

Trademarks are amortized on a straight-line basis over their estimated economic or legal life, whichever is shorter, while the history of the Group has been to amortize product rights over estimated useful lives of 5 to 20 years. The useful lives assigned to acquired product rights are based on the maturity of


the products and the estimated economic benefit that such product rights can provide. Marketing rights are amortized over their useful lives commencing in the year in which the rights first generate sales.

Financial assets:    Associated companies and joint ventures are accounted for by the equity method. All other minority investments and loans are initially recorded at cost and subsequently carried at fair value. Exchange rate gains and losses on loans are recorded in the income statement. All other changes in the fair value of financial assets are deferred as a fair value adjustment in equity and recycled to the income statement when the asset is sold. Adjustments are made for other than temporary impairments in value.

Inventories:    Purchased products are valued at acquisition cost while own-manufactured products are valued at manufacturing cost including related production expenses. In the balance sheet inventory is primarily valued at standard cost, which approximates to historical cost determined on a first-in first-out basis, and this value is used for the cost of goods sold in the income statement. Provisions are made for inventories with a lower market value or which are slow-moving. Unsaleable inventory is fully written off.

Trade accounts receivable:    The reported values represent the invoiced amounts, less adjustments for doubtful receivables.

Cash and cash equivalents:    Cash and cash equivalents include highly liquid investments with original maturities of three months or less. This position is readily convertible to known amounts of cash.

Marketable securities:    Marketable securities consist of equity and debt securities which are traded in liquid markets. The Group has classified all its marketable securities as available-for-sale, as they are not acquired to generate profit from short-term fluctuations in price. All purchases and sales of marketable securities are recognized on the trade date, which is the date that the Group commits to purchase or sell the asset. Marketable securities are initially recorded at cost and subsequently carried at fair value. Exchange rate gains and losses on bonds are recorded in the income statement. All other changes in the fair value of unhedged securities are deferred as a fair value adjustment in equity and recycled to the income statement when the asset is sold or impaired. The change in fair value of effectively hedged securities is recorded in the income statement where it offsets the gains or losses of the hedging derivative.

Unrealized losses on marketable securities are included in financial income, net in the income statement when there is objective evidence that the marketable securities are impaired. The Group's policy is to recognize impairments on available-for-sale securities when their fair value is 50% less than cost for a sustained period of 6 months.

Repurchase agreements:    The underlying securities are included within marketable securities. The repurchase agreements for the securities sold and agreed to be repurchased under the agreement, are recognized gross and included in cash and cash equivalents and short-term financial debts. Income and expenses are recorded in interest income and expense, respectively.

Taxes:    Taxes on income are accrued in the same periods as the revenues and expenses to which they relate. Deferred taxes have been calculated using the comprehensive liability method. They are calculated on the temporary differences that arise between the tax base of an asset or liability and its carrying value in the balance sheet of Group companies prepared for consolidation purposes, except for those differences related to investments in subsidiaries where their reversal will not take place in the foreseeable future. Furthermore, withholding or other taxes on eventual distribution of retained earnings of Group companies are only taken into account where a dividend has been planned since generally the retained earnings are reinvested. Deferred tax assets or liabilities, calculated using applicable subsidiary tax rates, are included in the consolidated balance sheet as either a long-term asset or liability, with changes in the year recorded in the income statement. Deferred tax assets are fully recognized and reduced by a valuation allowance only if it is probable that a benefit will not be realized in the future.


Pension plans, post-employment benefits, other long-term employee benefits and employee share participation plans:

a) Defined benefit pension plans

The liability in respect to defined benefit pension plans is in all material cases the defined benefit obligation calculated annually by independent actuaries using the projected unit credit method. The defined benefit obligation is measured at the present value of the estimated future cash flows. The charge for such pension plans, representing the net periodic pension cost less employee contributions, is included in the personnel expenses of the various functions where the employees are located. Plan assets are recorded at their fair values. Significant gains or losses arising from experience adjustments, changes in actuarial assumptions, and amendments to pension plans are charged or credited to income over the service lives of the related employees.

b) Post-employment benefits other than pensions

Certain subsidiaries provide healthcare and insurance benefits for a portion of their retired employees and their eligible dependents. The cost of these benefits is actuarially determined and included in the related function expenses over the employees' working lives. The related liability is included in long-term liabilities.

c) Other long-term employee benefits

Other long-term employee benefits represent amounts due to employees under deferred compensation arrangements mandated by certain jurisdictions in which the Group conducts its operations. Benefits cost is recognized on an accrual basis in the personnel expenses of the various functions where the employees are located. The related obligation is accrued in other long-term liabilities.

d) Employee share participation plan

No compensation cost is recognized in these financial statements for options or shares granted to employees from employee share participation plans.

Research and development:    Research and development expenses are fully charged to the income statement. The Group considers that regulatory and other uncertainties inherent in the development of its key new products preclude it from capitalizing development costs. Acquired projects which have achieved technical feasibility, usually signified by US Food & Drug Administration or comparable regulatory body approval, are capitalized because it is probable that the costs will give rise to future economic benefits. Laboratory buildings and equipment included in tangible fixed assets are depreciated over their estimated useful lives.

Government grants:    Government grants are deferred and recognized in the income statement over the period necessary to match them with the related costs which they are intended to compensate for.

Restructuring charges:    Restructuring charges are accrued against operating income in the period in which management has committed to a plan and it is probable a liability has been incurred and the amount can be reasonably estimated. Restructuring charges or releases are included in general overheads. Releases of accrued amounts are recognized in the period in which it is decided that the amounts will not be required.

Environmental liabilities:    Novartis is exposed to environmental liabilities relating to its past operations, principally in respect to remediation costs. Provisions for non-recurring reme-diation costs are made when expenditure on remedial work is probable and the cost can be estimated. Cost of future expenditures do not reflect any claims or recoveries. The Group records recoveries at such time the amount is reasonably estimable and collection is probable. With regard to recurring remediation costs, the discounted amount of such annual costs for the next 30 years are calculated and recorded in long-term liabilities.


Dividends:    Dividends are recorded in the Group's financial statements in the period in which they are approved by the Group's shareholders.

Treasury shares:    Treasury shares are deducted from equity at their nominal value of CHF 0.50 per share. Differences between this amount and the amount paid for acquiring, or received for disposing of, treasury shares are recorded in consolidated equity.

2.    Changes in the scope of consolidation

The following significant changes were made during 2002 and 2001:

Acquisitions 2002

Generics:    On November 29, 2002 the business unit acquired 99% of Lek d.d., Ljubljana, Slovenia for CHF 1.3 billion in cash. Lek is an international group of generics companies and ranks among the leading pharmaceuticals businesses in the Eastern European region, while having a broader international presence in several specific product lines. Lek manages a wide-ranging business portfolio, with substantial expertise in anti-infectives, cardiovascular and gastrointestinal tract products. The Lek Group employs about 3900 people in various regions and achieved total sales of CHF 544 million, operating income of CHF 67 million and net income of CHF 57 million in 2001. The acquisition was accounted for under the purchase method of accounting. A provisional balance sheet at December 31, 2002 has been consolidated, however, due to its immateriality, no post-acquisition income statement or cash flow has been consolidated. The balance sheet may be subject to revision once the final accounting for this transaction has been determined during 2003. An initial assessment of goodwill was CHF 795 million which is being amortized on a straight-line basis over 20 years.

Animal Health:    In January 2002, the business unit completed the acquisition of two US farm animal vaccine companies, Grand Laboratories Inc., Iowa and ImmTech Biologies Inc., Kansas. The combined 2001 revenues were approximately CHF 55 million and the combined purchase price is a minimum of CHF 168 million of which CHF 133 million was settled in Novartis American Depositary Shares. The final price may increase depending on whether certain future sales and other targets are met. The acquisition was accounted for under the purchase method of accounting and the related goodwill was CHF 142 million which is being amortized on a straight-line basis over 15 years.

Corporate:    During 2002 the Group increased its investment in Roche Holding AG by CHF 2.9 billion by acquiring a further 11.4% of this company's voting shares. At December 31, 2002, Novartis owns 32.7% of the voting shares which represents approximately 6.2% of Roche Holding AG's total shares and equity securities.

Divestments 2002

Consumer Health Division:    On November 29, 2002 the division divested its Food & Beverage (F&B) business to Associated British Foods plc (ABF), London, Great Britain, for a total of CHF 402 million in cash. ABF acquired the F&B business and brand ownership worldwide (including the brands Ovaltine/ Ovomaltine, Caotina and Lacovo) with the exception of the USA and Puerto Rico. The 2002 sales and operating income recorded by Novartis up to the November 29, 2002 divestment date amounted to CHF 325 million and CHF 11 million, respectively. This transaction produced a divestment gain of CHF 205 million which was recorded as a reduction to administration and general overheads.


Acquisitions 2001

Generics:    In January, 2001, the business unit acquired 100% of the generic business line in the USA of Apothecon Inc., the generic arm of Bristol-Myers Squibb, for CHF 66 million in cash. No financial debts were acquired. The acquisition was accounted for under the purchase method of accounting and the related goodwill was CHF 51 million which is being amortized on a straight-line basis over 15 years.

In January, 2001, the business unit acquired 100% of the generic business in six European countries from BASF AG, Germany for CHF 119 million in cash and the assumption of CHF 53 million of debt. The acquisition was accounted for under the purchase method of accounting and the related goodwill was CHF 121 million which is being amortized on a straight-line basis over 20 years.

In April, 2001, the business unit acquired 100% of Labinca SA, Buenos Aires, Argentina for CHF 118 million in cash and the assumption of CHF 14 million of debt. The acquisition was accounted for under the purchase method of accounting and the related goodwill was CHF 95 million which is being amortized on a straight-line basis over 20 years.

In April, 2001, the business unit acquired 100% of Lagap Pharmaceuticals Ltd., UK, from Adcock Ingram Ltd. for CHF 32 million in cash and the assumption of CHF 33 million of debt. The acquisition was accounted for under the purchase method of accounting and the related goodwill was CHF 53 million which is being amortized on a straight-line basis over 20 years.

Corporate:    During 2001, the Group acquired 21.3% of the voting shares of Roche Holding AG for CHF 5.2 billion. This represents approximately 4.0% of the total shares and equity securities of Roche Holding AG and is accounted for using the equity method of accounting.

3.    Division and business unit breakdown of key figures 2002 and 2001

Operating Divisions:    Novartis is divided operationally on a worldwide basis into two divisions, Pharmaceuticals and Consumer Health. These divisions, which are based on internal management structures, are as follows:

The Pharmaceuticals division researches, develops, manufactures, distributes, and sells branded pharmaceuticals in the following therapeutic areas: cardiovascular, metabolism and endocrinology; central nervous system; dermatology; oncology and hematology; ophthalmics; respiratory; rheumatology; bone and hormone replacement therapy and transplantation. The Pharmaceuticals division is organized into five business units: Primary Care, Oncology, Transplantation, Mature Products and Ophthal-mics, which due to the fact that they have common long-term economic perspectives, customers, research, development, production, distribution and regulatory environments are not required to be separately disclosed as segments.

The Consumer Health division consists of the following six business units: The Generics business unit manufactures, distributes and sells off-patent pharmaceutical products and substances.

The Over-The-Counter (OTC) business unit manufactures, distributes and sells a variety of over-the-counter medicines.

The Animal Health business unit manufactures, distributes and sells veterinary products for farm and companion animals.

The Medical Nutrition business unit manufactures, distributes and sells health and medical nutrition products.

The Infant & Baby business unit manufactures, distributes and sells foods and other products and services designed to serve the particular needs of infants and babies.


The CIBA Vision business unit manufactures, distributes and sells contact lenses, lens care products, and ophthalmic surgical products.

The current business unit structure of the Consumer Health division was introduced during 2002 to reflect management and organizational changes. 2001 figures and presentation have been restated.

Corporate:    This includes the costs of the Group headquarters and those of corporate coordination functions in major countries. In addition, Corporate includes certain items of income and expense which are not directly attributable to specific divisions. Usually, no allocation of Corporate items is made to the divisions although there are charges made by Corporate for share and share option programs and certain pension plans.

The Group's divisions are businesses that offer different products. These divisions are managed separately because they manufacture, distribute, and sell distinct products which require differing technologies and marketing strategies.

Revenues on inter-divisional and inter-business unit sales are determined on an arm's length basis. The accounting policies of the divisions and business units described above are the same as those described in the summary of accounting policies except that they receive a Corporate charge for share and share option programs which have no net cost in the Group's IAS consolidated financial statements. The Group principally evaluates divisional and business unit performance and allocates resources based on operating income.

Division and business unit net operating assets consist primarily of tangible fixed assets, intangible assets, inventories and receivables less operating liabilities. Corporate assets and liabilities principally consist of net liquidity (cash, cash equivalents, marketable securities less financial debts), investments in associated companies and deferred and current taxes.


Division and business unit breakdown of key figures 2002 and 2001

  Consumer Health Division business units



Nutrition &

(in CHF millions except employees)













Sales to third parties   21 002   20 181   11 410   11 462     2 809   2 433   2 359   2 538   971   962   1 109   1 115
Sales to other divisions/business units   173   230   160   174   202   203   19   24   15   13   5    

Sales of divisions/business units   21 175   20 411   11 570   11 636   3 011   2 636   2 378   2 562   971   977   1 122   1 120

Operating income


6 022


5 677


1 684


1 513
















Income from associated companies   168   190   2   -12   2   2                       -14
Financial income, net                                                

Income before taxes and minority interests                                                

Income before minority interests                                                
Minority interests                                                

Net income                                                
Included in operating income are:
























  Research & development   -3 580   -3 447   -587   -541   -215   -169   -104   -104   -94   -93   -25   -33
  Depreciation of tangible fixed assets   -546   -578   -346   -341   -129   -126   -32   -33   -13   -14   -32   -31
  Amortization of intangible assets   -286   -306   -256   -249   -78   -87   -18   -18   -25   -15   -9   -8
  Impairment charges on tangible and intangible assets   -434   -242   -97   -4   -21       -1   -2               -1
  Restructuring charges           -84   -21           -14               -40   -21
  Divestment gain   1       205                                    

Total assets   16 763   18 631   11 818   11 662   4 673   3 362   1 266   1 386   846   735   541   612
Liabilities   -5 476   -5 487   -3 685   -3 630   -1 097   -740   -465   -518   -195   -163   -342   -204