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CONTENTS



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 or 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934

Report on Form 6-K dated February 22, 2002

Novartis AG

(Name of Registrant)

Lichtstrasse 35
4056 Basel
Switzerland

(Address of Principle 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 /x/        Form 40-F / /

        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 / /        No /x/

Enclosure: Novartis Annual Report 2001





SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    Novartis AG

Date: February 22, 2002

 

By:

 

/s/  
RAYMOND BREU      
    Name: Raymund Breu
Title: Chief Financial Officer

NOVARTIS LOGO    

Annual Report 2001

 

Caring and Curing


CONTENTS

News in 2001
Financial highlights Novartis Group
Financial highlights Sectors
Letter from Daniel Vasella
And then there was Gleevec...

SECTOR AND PRODUCT REVIEW
Pharmaceuticals
Generics
Consumer Health
CIBA Vision
Animal Health

CORPORATE CITIZENSHIP

HEALTH, SAFETY AND ENVIRONMENT

HUMAN RESOURCES

CORPORATE GOVERNANCE
Corporate Governance
Board of Directors

FINANCIAL REPORT
Operating and financial review
Equity strategy and share information
Group consolidated financial statements and notes
Principal companies
Reconciliation to US GAAP
Financial statements of Novartis AG

DUE DATES FOR REPORTING AND CONTACTS

www.novartis.com/annualreport2001



NEWS IN 2001


1


Financial Highlights1

         LOGO

Key ratios

 
  2001

  2000

Return on sales (%)   21.9   22.4
Return on average equity (%)   17.8   17.6
Group research and development as (%) of sales   13.1   13.8
Debt/equity ratio   0.18:1   0.16:1
Current ratio   2.4:1   2.8:1

Share information1

 
  2001

  2000

Average number of shares outstanding   2 571 673 365   2 613 547 597
Earnings per share from continuing activities (CHF)   2.73   2.49
Operating cash flow per share (CHF)   2.85   2.91
Dividend per share2 (CHF)   0.90   0.85
Pay-out ratio based on outstanding shares (%)   33   30
Share price at end of year (CHF)   60.00   71.63

1
Adjusted for 40 to 1 share split on May 7, 2001

2
2001: Proposal to the shareholders' meeting

2


Pharmaceuticals

        Committed to improving health and quality of life by focusing on the discovery, development, manufacture and marketing of innovative prescription medications.

 
   
  20011

  20001

  1999

Sales   CHF m   20 181   18 150   15 275
Operating income   CHF m   5 677   5 401   4 676
Research and development   CHF m   3 447   3 311   2 848
Free cash flow2   CHF m   6 663   6 372   4 631
Net operating assets   CHF m   13 144   12 410   10 690
Number of employees       41 256   38 397   35 721

1
Including Ophthalmics transferred from CIBA Vision

2
Before acquisition of product and marketing rights

Generics

        Provides high-quality, off-patent pharmaceutical products and substances at competitive prices.

 
   
  2001

  2000

  1999

Sales   CHF m   2 433   1 973   1 823
Operating income   CHF m   281   242   347
Research and development   CHF m   169   170   126
Free cash flow   CHF m   46   152   176
Net operating assets   CHF m   2 622   1 939   1 891
Number of employees       7 230   5 712   5 451

Consumer Health

        Dedicated to maintaining and improving the health and well-being of consumers and patients—at home or in hospitals—by fulfilling their nutritional and self-medication needs.

 
   
  2001

  2000

  1999

Sales   CHF m   6 675   6 514   5 570
Operating income   CHF m   920   869   807
Research and development   CHF m   181   186   167
Free cash flow   CHF m   640   506   569
Net operating assets   CHF m   2 528   2 284   2 098
Number of employees       12 824   12 949   12 254

3


CIBA Vision

        Works to improve, protect and preserve the eyesight of people around the world by providing the best products and services for vision correction and ocular health.

 
   
  20013

  20003

  1999

Sales   CHF m   1 787   1 392   1 632
Operating income   CHF m   174   100   250
Research and development   CHF m   98   67   144
Free cash flow   CHF m   59   105   160
Net operating assets   CHF m   2 310   2 345   792
Number of employees       6 797   7 644   6 041

3
Excluding Ophthalmics transferred to Pharmaceuticals

Animal Health

        Focuses on the well-being of companion animals and on the health and productivity of farm animals.

 
   
  2001

  2000

  1999

Sales   CHF m   962   1 083   927
Operating income   CHF m   138   179   216
Research and development   CHF m   93   88   65
Free cash flow   CHF m   195   173   146
Net operating assets   CHF m   572   644   461
Number of employees       1 997   1 975   1 499

4


Letter from Daniel Vasella

Dear Shareowner

        In 2001, our strategy of focusing on healthcare and, in particular, on the pharmaceuticals business and the US market proved successful. Group sales, net income and free cash flow all reached record levels, adjusting for the spin-off of our agribusiness operations. I would like to summarize the key points as follows:

        Despite the difficult economic climate and the delays in getting approval for two of our new products, we managed to achieve good overall results. I would like to take this opportunity to thank all of our associates, whose commitment and pursuit of common goals worldwide have made these considerable achievements possible.

        However, looking back at the year that has passed, I find it impossible to restrict my comments just to our company's performance; I have to mention the events of September 11, which shook the world. The attacks—which brought death, suffering, mourning and war in their wake—revealed not only the ruthlessness and fanaticism of the perpetrators, but also the vulnerability of the civilian

5



population and the determination of the USA and its allies to fight against terrorism. We do not know how many years this conflict will last, nor what proportions it might assume.

        After a decade that saw the rise of free-market principles and growing globalization, there are now increasing calls for the state to exert a greater regulatory influence. It is impossible to ignore the voices demanding that support be given to the disadvantaged, especially in developing countries. Materialism and military-technological power in some countries contrast with the mass adherence to religious—often fanatical—beliefs that are apparent in other regions of the world. Fanaticism of this kind often lifts its followers above economic and technological disadvantages, deprivation and envy by purporting to offer eternal truths and the prospect of rewards in Paradise. For some, it legitimizes behavior that violates the fundamental values of human society.

        People in industrialized nations also have a yearning for purpose, permanent values, and spirituality, especially when faced with human tragedies, such as the one we experienced in Switzerland, when 14 people were murdered in the Parliament building in the town of Zug.

        Amid all this, questions are being raised about the role within society of companies such as Novartis. Our justification and purpose are derived from the nature of the products that we discover, develop, manufacture and sell. These are designed to prevent or cure disease, limit its course, or at least alleviate human suffering and improve patients' quality of life. Provided that our products can offer an advantage over those of other companies, they will be in demand and customers will be prepared to pay a price that more than covers our costs (including capital investments). This enables us not only to generate profits for our shareowners, but also to reward our staff and pay our taxes.

        As a global company, we are increasingly being called upon to assume additional responsibilities: new moral demands are being issued and ethical standards set. These tenets mandate that cheaper medicines be made available, particularly for the elderly and for patients in developing countries. There is growing pressure to develop new drugs for diseases such as malaria and tuberculosis, which receive scant attention due to lack of economic incentive, since many patients with these diseases cannot afford the healthcare and medicines they require. Some people argue that, in view of the needs of developing countries, intellectual property rights should be discarded and cheap generics substituted for innovative patented products in these markets, or that state intervention—e.g. in the form of price reductions—should be permitted.

        Given the scale of these problems, the private sector—and the pharmaceutical industry in particular—is not in a position to resolve them single-handedly. Instead, the responsibility for addressing these issues lies primarily with each nation, its institutions and, ultimately, its citizens.

        As a company, we are able and willing to make a contribution. Thanks to the success of our business in 2001, it was possible for us once again to support needy and financially disadvantaged patients and to launch new initiatives for their benefit. We are also systematically assuring our worldwide compliance with the commitments we undertook in signing Kofi Annan's Global Compact on human rights, labor rights, and environmental protection.

        Over the past decades, the pharmaceutical industry has provided an ever increasing contribution to the health and well-being of countless patients. Infectious diseases can be treated with antibiotics, certain types of cancer can be cured, people with mental illnesses can be reintegrated into society, and great strides have been made in cardiovascular medicine. But this has only been possible because pharmaceutical and biotechnology companies have operated professionally and have been successful and prosperous. But the balance is fragile. Drug discovery and development is a lengthy process, and 12-15 years normally elapse before a new drug can be marketed. The failure rate—and hence the risk—is high: only 1 in 10 000 substances becomes a marketable product. Commercialization demands major investments to ensure adequate and rapid market penetration. If there is no prospect of an appropriate return—which cannot be guaranteed in the absence of patent protection and fair pricing—

6


companies can neither invest in the future (i.e. in the research and development of new medicines) nor recruit or train talented researchers. Ultimately, the implications for society as a whole would be devastating.

        In most markets, the pharmaceutical industry operates in a heavily regulated environment, with the government determining which drugs are approved and frequently, how much they should cost. This means that authorities have a special responsibility to make decisions that balance short-term budgetary constraints, the health of the population and the interests of long-term innovation.

        Despite the vigorous debate and necessary adjustments, we should not forget that liberalization and globalization stimulated a robust 10-year economic growth in many countries, from which poorer nations also benefited. I am confident that society and its decision-makers will continue to include the principles that facilitated this development in their decisions.

        I would like again to thank you, our shareowners, for your loyalty and confidence.

/s/ Daniel Vasella

Sincerely,
Daniel Vasella, MD
Chairman and CEO

7




AND THEN THERE WAS GLEEVEC *...


* Gleevec in the USA and Glivec in the rest of the world

By Dr. Lisa Melton, Science Writer in-residence at the Novartis Foundation, London

        Charles Schiffer, MD, has encountered just about every manifestation of cancer in 30 years as a cancer researcher and as a Professor of Medicine and Oncology at the Karmanos Cancer Institute, Wayne State University School of Medicine in Detroit. Many times he has seen the oncological community embark on clinical adventures with promising new "wonder drugs", only to discover shrinking response rates and new side-effects as the use of the new drug expanded.

        So, Dr. Schiffer was cautiously optimistic at best when he started his first patients on Gleevec. But it soon became apparent that this new drug was like none other before it. "In the beginning, my colleagues and I would sometimes catch ourselves smiling. We saw our patients' diseases and their symptoms melt away in front of our eyes. It was amazing."

        Gleevec, a product of the research program at Novartis Oncology, was taking the oncologists' establishment by storm. Physicians who witnessed what this tiny orange capsule also known by the unprepossessing name of STI571, or imatinib mesylate, could do admitted it was like nothing they had experienced before. The mood was euphoric. "In medicine, there's nothing that's more fun than to see terribly ill patients rapidly getting much, much better," says Dr. Schiffer, recalling his experience during that initial stage.

        Since then, thousands of patients with chronic myeloid leukemia or CML have responded to the treatment and some have gone into remission. CML is a cancer in which white blood cells multiply out of control. If left untreated, it is usually lethal, although at the start of the disease people hardly feel ill at all. Symptoms are tiredness or discomfort in the abdomen. This chronic phase can last five to seven years before the disease takes a turn for the worse.

EFFICACY DATA

        What Gleevec achieves (based on results from phase II clinical trials)

RATING OF THE THERAPEUTIC POTENTIAL OF GLEEVEC

        Once patients reach the so-called 'blast crisis' phase, the numbers of white blood cells are hundreds of times the numbers found in healthy people. At this stage, the disease becomes life-threatening and most patients do not survive longer than 6 months. The only cure for CML is a bone marrow transplant, but the procedure involves radiation and chemotherapy and there is always a

8



chance that the transplant might fail. As a result, mortality is staggeringly high —as many as 40 per cent of people may die within weeks of the procedure. With Gleevec, there is no surgical risk and the response rates are impressive.

        Symptoms in some patients virtually disappear, especially if treatment begins during the less deadly chronic phase.

        But Dr. Schiffer warns that it is still too early to say whether Gleevec is a long-term cure for CML. The drug simply has not been around for long enough. There is also a chance that patients may have to continue taking the drug for the rest of their lives, possibly combined with other therapies, to avoid the leukemic cells from bouncing back. And unfortunately, Gleevec does not work its magic on every CML patient, because some can become resistant to the drug and relapse.

In the firing line

        Despite these caveats, Gleevec is still a breakthrough—not only has it given scores of patients the chance to live a longer and better life but it heralds a new era in cancer therapy. "For me, Gleevec is like the first penicillin," says Prof. Alois Gratwohl, head hematologist at the Kantonsspital in Basel, Switzerland. Gleevec represents a completely new strategy—it is the first medicine in the world to have been tailor-made for a specific pathogenic molecule.

        Gleevec blocks a protein which acts as a messenger signalling cancer cells to multiply. This targeted approach is a completely new way of treating cancer because while the drug homes in on leukaemia cells the body's healthy cells are left untouched. This attack on cancer cells is a far cry from the strategy of traditional treatments like chemotherapy that blast cancer cells but also affect healthy cells, often leaving patients with debilitating side-effects. As Gleevec fires predominantly at cancer cells, the drug is generally well tolerated and only a few patients experience mild to moderate side-effects.

        Serendipity played no part in this therapeutic coup. Gleevec is the result of more than 30 years of cellular research in CML coupled with the foresight and creative thinking of scientists at Novartis Oncology led by Dr. Alex Matter, Head of Oncology Research. The quest to understand what goes awry in CML began in the 1960s, when scientists identified an unusual chromosome in patients' cells which they named 'the Philadelphia chromosome' after the city in which it was discovered. It was the first instance of defective genetic material being identified as a cause of cancer.

        The Philadelphia chromosome turns white blood cells cancerous because two chunks of genetic material from two different chromosomes swap places and one crucial gene ends up in the wrong place. This genetic abnormality in the Philadelphia chromosome creates an enzyme known as Bcr-Abl that is unique to CML. The Bcr-Abl enzyme belongs to a family of molecules known as tyrosine kinases that normally act as 'on-off' switches in cell signaling. But in CML, this kinase is jammed in the 'on' position, triggering white blood cells to multiply too fast and too soon. The consequence is an overproduction of immature leukemic cells—the symptom that characterises leukemia.

        The decision to try to disrupt this enzyme gone awry was visionary thinking. In the 1980s Novartis started a research program to investigate medicines which might selectively inhibit the Bcr-Abl kinase. Almost a decade later, scientists had identified one promising compound, but its effect was disappointingly weak. It took two more years of painstaking experimentation to tweak this promising molecule into a potent and specific inhibitor for the Bcr-Abl kinase. By April 1999, Gleevec was being given to 31 patients who had failed every other treatment in a clinical trial. Soon after, the news of the results was spreading like wildfire amongst oncologists and patients alike.

Difficult decisions

        A diagnosis of leukemia is a terrible blow for patients, and oncologists are also painfully aware of the tough choices that people with CML will have to face regarding therapy. "We tell patients that we

9



have two different bits of news," explains Prof. Gratwohl. "We have to tell them that it is a bad disease with the likelihood of a fatal outcome. But at the same time that it is one of the leukemias where there are several treatment options. We might combine them, or use one after the other, but we tell them that there is hope."

        Yet none of the traditional therapies are ideal. Chemotherapy with hydroxyurea is a relatively crude weapon to fight leukemia. It will keep white blood counts under control but does not eliminate cancer cells, so life expectancy is low at 3 to 5 years. The standard option today is alpha interferon (IFN) which, if taken from the beginning, can extend life expectancy for a minority of patients for up to 10 years. But IFN has debilitating side-effects such as fever, pain, and mental disturbances such as depression and fatigue. Patients feel wiped out, they eventually abandon their jobs and their quality of life plummets.

        Most physicians would agree that the best option is a bone marrow transplant because, if successful, it rids the body of the disease completely. Yet transplants pose the biggest conflict because the risk of immediate death is very high. Patients, and understandably so, find it hard to gamble their life on such a risky therapy.

        And now there is Gleevec. "Every patient comes to the clinic knowing about Gleevec, so it becomes a prominent part of the discussion. You clearly have a new option for therapy which is considerably less toxic than interferon," says Dr. Schiffer who acknowledges that for some patients Gleevec is a life transforming drug. "It is a magic drug and in some patients it does produce unbelievable responses rapidly and with no toxicity. Staggering. But all that said, we don't know what the long term results are going to be like." Yet Dr. Schiffer admits it is hard to temper patients' enthusiasm for a drug that has, so far, shown such tremendous potential. All it takes is to down a few pills every day for symptoms to vanish. For many CML patients Gleevec is hope where none existed before.

Reproduced with Permission of The American Society of Hematology Slide Baknk, (3rd edition)

A race against time

        Patients' clamor for Gleevec began in spring 1999, as soon as the results of the first tests on CML patients spread. Thanks to the Internet they were aware of the drug from its early stages of development, and support groups and sites dedicated to CML rapidly disseminated the news. And the news was indeed remarkable: the new drug worked in every patient. In all 31 participants who had taken part in the Phase I trial, the number of leukemic cells in the blood dropped, known in medical parlance as a 'complete hematologic response', and one third had a 'complete cytogenetic response' which means that the Philadelphia chromosome disappeared. The Philadelphia chromosome is present in all CML patients so it is taken as a marker of the disease.

        Patients were betting their lives on getting the pills before it was too late and, through letters and petitions to Novartis, expressed their desire to get access to Gleevec. Faced with this extraordinary situation, the Group's management took a momentous decision: to make this drug available in ample supply and without delay.

        To push the drug forward into industrial-scale production was a significant business risk. It would call for some up-front expenditure before knowing the results of larger clinical trials. Millions of dollars would have to be pumped in and resources siphoned off from other projects to produce a drug that, if effective, would only treat a relatively small patient population. About 4 500 people are diagnosed with CML each year, so Gleevec was no blockbuster drug. But although the commercial potential was by no means clear, Novartis chose to put patients' needs first and speed became the priority.

        Sensing that lives were at stake, the development and production teams at Novartis invested their personal time to scale up manufacturing, working evenings, weekends and sacrificing vacations. At the same time, clinical trials around the world were expedited allowing many more patients to participate

10



and have access to the drug. Fortunately the impressive remission rates from the small initial tests on CML patients were borne out in the larger Phase II and III trials, which encompassed several thousand participants.

        In February 2001, a new drug application (NDA) was filed, only 32 months after the first dose in humans, more than halving the typical drug development time of 6 years. Because of its lifesaving potential, the Federal Drug Administration (FDA) granted Gleevec a priority review and on May 10, the announcement of its approval was made, drawing a huge amount of public attention. Novartis had succeeded in bringing Gleevec to patients in record time: for most drugs, FDA approval normally takes a year. For Gleevec the verdict was reached after only 72 days. Novartis is deeply grateful to the American Department of Health and Human Services and to the FDA for making this the fastest drug approval ever.

CHART

        The clinical trials phase for Gleevec was only half as long as the normal drug development process. Gleevec was approved in a third of the time of the normal NDA approval process.

The Gleevec era

        But now that Gleevec was commercially available, what would happen to those who could not possibly afford it? The world-wide price was set at USD 2 200 a month, a fair price, but one that many people would find insurmountable. Because Gleevec is a unique and lifesaving drug it was paramount that it should reach everyone who needed it, and Novartis responded by organizing a patient assistance program in the USA and many other parts of the world.

        The idea was to assess the financial resources of each patient so everyone would pay according to their means -the worse off would get the drug for very little money or nothing at all. Novartis selected the following criteria: anyone earning less than USD 43 000 a year received the drug free; those earning between USD 43 000 and USD 100 000 a year would pay no more than 20 percent of their income for the drug, and those earning above USD 100 000 would pay the full price. Parents with children would benefit from further exemptions.

        The program was a resounding success. "Novartis should be commended for the decisions they made as to the distribution for disadvantaged people or those with poor insurance coverage," says Dr. Schiffer.

        And people like Frank Maliszewski are eager to express their gratitude: "I have been taking Gleevec for my leukemia and have had great results. It has made such an improvement in my life. I want to express my appreciation to Novartis for providing me Gleevec through the Patient Assistance Program and giving me my life back."

        Now the hope is that Gleevec might benefit patients with other types of cancer, including solid tumors. The outlook is promising. Scientists from the Novartis Oncology team have seen that Gleevec

11



can inhibit another enzyme, the 'kit' kinase, that gives rise to a relatively rare but fatal form of cancer known as gastro intestinal stromal tumors or GIST. These are solid tumors that invade the digestive system, and for those diagnosed the prospect is bleak since the cancer is often inoperable and there is no known treatment.

        With Gleevec, the GIST tumors virtually disappear in some patients. Impressive responses were recorded in a small trial with 147 patients with metastatic malignant GIST. The response was rapid and dramatic, with the tumors shrinking within weeks in 72 percent of patients.

        But beyond the success story of these little orange pills, Gleevec represents new hope for all cancer treatment. It is a revolutionary new paradigm in drug discovery. "The fact that Gleevec was designed to target a specific molecule in CML is proven hope that for other cancers, other drugs might come," enthuses Prof. Gratwohl. For the moment, Novartis can take pride in the fact that the Gleevec approach has given thousands of people a new lease of life.

Think what's possible.

        "One minute I was looking at death. The next, I was looking at my whole life in front of me."—Suzan M.

        Suzan had been fighting a losing battle against cancer for three long years. By January 2000, she was too sick to continue her studies. She was losing weight, her hair, and at times, her will to live. But today Suzan feels better than ever. And as a result of her experience, she's now pursuing a new degree, and a new career, in molecular biology. Novartis is proud to be the innovative force that's bringing new optimism and hope to patients and their families. No one can promise what the future holds for cancer patients, but today Suzan is winning the fight against her particular form of cancer, enjoying a good quality of life and realizing her dreams.

12



PHARMACEUTICALS

 
  2001
CHF
millions

  2000
CHF
millions

  Change in
CHF %

  Change in local
currencies %

Sales   20 181   18 150   11   15
Operating Income   5 677   5 401   5    
Research and development   3 447   3 311   4    
Research and development as % of sales   17   18        
Free cash flow1   6 663   6 372   5    
Net operating assets   13 144   12 410   6    
Investments in tangible fixed assets   617   534   16    
Number of employees   41 256   38 397   7    

1
Before acquisition of product and marketing rights

        Novartis Pharmaceuticals is a world leader in the discovery, development, manufacture and marketing of prescription medicines. The goal of Novartis Pharmaceuticals 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, global organization, operating in more than 140 countries through approximately 80 affiliates.

Performance review

        Pharmaceuticals achieved sales of CHF 20 181 million in 2001, with year-on-year global sales up 15% in local currencies (+11% in Swiss francs). This excellent performance was a result of dynamic sales in the USA (+ 24%), which accounts for 43% turnover and strong sales increases by the Primary Care, Oncology and Ophthalmics business units.

        For the second consecutive year, Novartis obtained a higher number of US approvals for new molecular entities than any competitor.

        Glivec/Gleevec—the innovative breakthrough treatment for CML (chronic myeloid leukemia)—won US regulatory approval in record time. The US FDA also cleared Zometa for hypercalcemia of malignancy, Elidel for eczema and Foradil for both asthma and chronic obstructive pulmonary disease (COPD).

Top ten products

 
  2001
sales in
CHF millions

  Change
in local
currencies %

Diovan/Co-Diovan   1 880   58
Sandimmun/Neoral   1 829   -7
Cibacen (group)   1 518   22
  of which Lotrel   813   48
Lamisil (group)   1 405   19
Aredia   1 270   15
Voltaren (group)   1 066   -8
Sandostatin (group)   816   26
Lescol   814   17
Miacalcic   707   0
Tegretol   683   1

13


Product review

Primary Care

        Primary Care includes a wide range of products for the treatment of cardiovascular diseases, central nervous system diseases and dermatological conditions (including fungal infections, psoriasis and genital herpes).

        Novartis expanded its cardiovascular franchise as Diovan/ Co-Diovan and Lotrel continued to be the fastest growing of the top ten branded anti-hypertensives in the USA. Diovan/Co-Diovan became our best-selling product as worldwide sales rose 58% in local currencies. In the USA sales increased 47% as Diovan/Co-Diovan passed Cozaar®/Hyzaar® by Merck to capture the leading share of new prescriptions among angiotensin II receptor blockers or ARBs. In addition Diovan/Co-Diovan was the first ARB to receive an approvable letter from the US FDA for the additional indication of heart failure, the fastest growing cardiovascular disease worldwide.

        Lotrel, the fixed combination of Cibacen and a leading calcium antagonist, grew by 48%.

        Lescol, a lipid-lowering drug (statin) which offers a favorable efficacy/safety profile, grew by 17% in local currencies.

        Lamisil (+19%) is used in the treatment of fungal infections of the skin, nails and scalp. Lamisil continued to gain ground in the market mainly due to its ability to kill the fungus, rather than simply prevent further fungal growth.

        In the area of central nervous system drugs, Exelon (+104%), a treatment for mild to moderate Alzheimer's disease, has continued to grow dynamically, having been approved in all major markets.

        Trileptal (+87%), an anti-epileptic for the treatment of partial seizures as adjunctive or monotherapy in adults, or as adjunctive therapy in children, showed strong growth.

14


Oncology

        Novartis Oncology outperformed the market in 2001. In this increasingly important specialty segment, Novartis markets a number of products for use in various cancer settings. Glivec/Gleevec, our breakthrough treatment for CML, achieved sales of CHF 257 million in less than 8 months on the market. Regulatory applications were filed in the USA and Europe for the additional indication of GIST (gastrointestinal stromal tumor).

        Oncology sales growth in 2001 was supported by Sandostatin (+26%), Aredia (+15%), and Femara (+72%). Sandostatin is a synthetic octapeptide derivative of the hormone somatostatin indicated for the treatment of pancreatic and gastrointestinal endocrine tumors, acromegaly, and AIDS-related diarrehea. Aredia is a therapy for tumor-induced hypercalcemia, osteolysis from multiple myeloma, and bone metastases from breast cancer. Zometa, a more potent bisphosphonate than Aredia, has recently been launched in key markets in its first indication "hypercalcemia of malignancy". Zometa is in the registration phase for the treatment of bone metastases in a broad range of tumors.

        Femara, an oral aromatase inhibitor for the treatment of advanced breast cancer in women with natural or artificially induced post-menopausal status, recently received approval for first-line therapy in most key markets, based upon its superior efficacy over the most widely used previous standard therapy, tamoxifen.

15



KEY MARKETED PRODUCTS

Therapeutic area

  Project/Compound

  Generic name

  Indication

  Formulation

Cardiovascular,
metabolism and endocrinology
  Cibacen
Co-Diovan
Diovan
Lescol
Lotrel
Starlix
Zelmac
  benazepril
valsartan + HCTZ
valsartan
fluvastatin
benazepril & amlodipine
nateglinide
tegaserod/tegaserod
maleate
  Hypertension
Hypertension
Hypertension
Cholesteriol-lowering agent
Hypertension
Type-2 diabetes
Symptomatic treatment of
Irritable Bowel Syndrome
  Coated tablet
Film coated tablet
Capsule
Capsule
Capsule
Tablet
Tablet
   
 
 
 
Oncology and
hematology
  Aredia
Femara
Glivec/Gleevec
Sandostatin LAR
Zometa
  pamidronate
letrozole
imatinib
octreotide
zoledronic acid
  Conditions associated with cancer
Advanced breast cancer
Chronic Myeloid Leukemia
Acromegaly, cancer
hypercalcemia of malignancy
  Intravenous infusion
Coated tablet
Tablet
Intramuscular
infusion
   
 
 
 
Central nervous
system
  Comtan
Exelon
Leponex/Clorazil

Tegretol

Trileptal
  entacapone
rivastigmine
clozapine

carbamazepine

oxcarbazepine
  Parkinson's disease
Alzheimer's disease
Antipsychotic agent for treatment resistant schizophrenia
Epilepsy, acute and bipolar affective disorders
Epilepsy
  Film-coated tablet
Capsule
Tablet, ampoule

Tablet, chewable tablets, syrup, suppository
Tablet, oral suspension
   
 
 
 
Transplantation   Neoral/Sandimmun


Simulect
  cyclosporine


basiliximab
  Prevention of graft rejection following organ and
bone marrow transplantation.
Acute organ rejection in de novo renal transplantation
  Soft gelatin capsule, oral solution, intravenous
infusion
intravenous infusion or injection
   
 
 
 
Dermatology   Elidel
Famvir
Lamisil
  pimecrolimus cream
famciclovir
terbinafine
  eczema
Acute herpes zoster
Fungal infections of the skin and nails
  1% cream
Tablet
Tablet, cream,
DermGel, solution, spray
   
 
 
 
Respiratory   Foradil   formoterol   Asthma, COPD   Inhalation capsule (aerosol)
   
 
 
 
Rheuma, bone
and hormone
replacement
therapy
  Estalis

Estraderm TTS/MX

Miacalcic


Voltaren
  estradiol norethisterone

estradiol

salmon calcitonin


diclofenac
  Menopausal symptoms and osteoporosis
Estrogen deficiency due to menopause
Osteoporosis, regulator of mineral homeostasis
and skeletal metabolism
Inflammatory forms of rheumatism, pain management
  Patch

Patch

Nasal spray


Enteric coated tablet, drop, ampoule
   
 
 
 
Ophthalmics   Rescula
Visudyne
  unoprostone
verteporfin
  Glaucoma
Wet form of age-related macular degeneration
  Eye drop
Intravenous infusion

Ophthalmics

        Visudyne (+127%) continued its dynamic growth and reached sales of CHF 377 million. The product is indicated for the treatment of the wet form of age-related macular degeneration and received approval for additional indications during 2001 in Europe and USA.

Transplantation

        Sales of Sandimmun/Neoral, the cornerstone of immunosuppression, decreased by 7%, mainly due to increased generic competition in the USA (-20%). Neoral sales in Japan grew by 4%, helping to offset part of the generic impact.

16



        The increased use of Simulect, a complement to Neoral designed to prevent early rejection and to optimize clinical outcomes, resulted in a 24% rise in sales.

Mature products

        Voltaren (-8%), a non-steroidal anti-inflammatory agent, continued to face competition from the new generation COX-2 inhibitors as well as generics in the USA. Overall, the rate of sales decline continued to be modest.

Recently launched products and new drug candidates

        Foradil (+21%), a long-acting bronchodilator, was approved and launched for treatment of asthma in the USA in 2001 and received approval for the additional indication of COPD. Foradil is distinguished by its rapid onset of action and long-lasting effect from a single dose (12 hours).

        Starlix was launched in 2001 and belongs to a new class of drugs for the treatment of patients with type-II diabetes, also known as adult-onset diabetes, which affects approximately 6% of the population in the developed world.

        Zelmac/Zelnorm is a 5-HT4 partial agonist developed to treat irritable bowel syndrome, relieving symptoms such as abdominal pain, altered bowel movements and possibly bloating. The drug has now been approved in 18 countries including Mexico, Venezuela, Argentina, Colombia, the Czech Republic, Switzerland and Australia. In the USA, following a non-approvable decision, discussions with the FDA are ongoing. In the EU, details on new trials are being reviewed.

        Elidel Cream (ASM981) is a cytokine inhibitor for the treatment of atopic dermatitis. Being a non-steroid, it belongs to a new class of agents—the ascomycin macrolactams—which appear to be suitable for both short- and long-term treatment. Elidel is one of the first new treatments for eczema since topical corticosteroids were introduced almost 50 years ago. With regulatory reviews in progress elsewhere, Elidel gained marketing approval in the USA for mild to moderate atopic dermatitis in patients aged 2 years and older. An oral form also is in development.

        COX189, a new drug candidate, is a highly selective and potent inhibitor of the COX-2 enzyme. The compound is in Phase III clinical trials. Target indications include osteoarthritis, rheumatoid arthritis and pain.

        Xolair (omalizumab), another new drug candidate, is an anti-IgE monoclonal antibody intended for the treatment of allergic disease, irrespective of allergen, by normalizing serum IgE. The drug is being developed in partnership with Genentech and Tanox for the treatment of allergic asthma and seasonal allergic rhinitis. In July 2001, the FDA requested additional pre-clinical and clinical data analyses for Xolair, as well as pharmacokinetic information. Novartis will provide additional data to the authorities and a resubmission between late 2002 and early 2003 is anticipated.

17



Compounds in development

        The Novartis pipeline represents a broad stream of promising future products, with 50 projects in Phase II and beyond as of December 2001, including both new molecular entities and additional indications or formulations for marketed products.

Compound

        Molecular chemical entity.

Generic name

        Designations assigned to compounds.

Indication

        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.

Filed

        In registration.


*
Outlicensed to Speedel, call-back option for Novartis.
**
Navigator trial examining combination therapy of Starlix and Diovan.

18


Therapeutic area

  Project/Compound

  Generic name

  Indication

Cardiovascular, metabolism and endocrinology   SPP100*     Hypertension
    LAF237     Type-II diabetes
    Zelmac   tegaserod   Functional dyspepsia
Gastroesophagel reflux disease
Chronic constipation
Irritable bowel syndrome
    Diovan   valsartan   Congestive heart failure
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
    Starlix/Metformin     Type-II diabetes
Oncology   Zometa   zoledronate   Bone metastasis treatment
Bone metastases prevention
    Femara   letrozole   Breast cancer (adjuvant therapy)
    ICL670     Chronic iron overload
    Glivec   imatinib mesylate   GIST (gastrointestinal stromal tumors)
Solid tumors
    OctreoTher     Somatostatin receptor positive tumors
    EPO906     Solid tumors
    PTK787     Solid tumors
    PKI166     Solid tumors
Central nervous system   Ritalin LA   methylphenidate   Attention deficit disorders
    Clozaril (InterSePT)   clozapine   Suicide prevention
    Iloperidone   iloperidone   Schizophrenia
    Exelon   rivastigmine   Non-Alzheimer's dementia
    Exelon TDS   rivastigmine   Alzheimer's disease
    Trileptal   oxcarbazepine   Neuropathic pain
    TCH346     Parkinson's disease, ALS1
    AMP397     Epilepsy
Transplantation, immunology   FTY720     Transplantation
    Certican   everolimus   Transplantation
    Myfortic (ERL080)   mycophenolate sodium   Transplantation
Dermatology   Elidel (ASM981)   pimecrolimus   Inflammatory skin diseases Inflammatory skin diseases
    Lamisil   terbinafine   Tinea capitis
Respiratory   DNK333     Rhinitis, asthma, COPD2
    Foradil   formoterol   Multi dose dry powder inhaler in asthma "on demand" use (prn)
    Xolair   omalizumab   Asthma/prevention of SAR3
Rheuma, bone and hormone replacement therapy   Zoledronate   zoledronate   Post-menopausal osteoporosis Paget's disease
    COX189     Rheumatoid arthritis, osteoarthritis, pain
Ophthalmics   Visudyne   verteporfin   AMD4 (occult)
AMD4 (classic)
AMD4 (minimally classic)
    Rescula   unoprostone isopropyl   Glaucoma
    PKC412     Diabetic macular edema

1
Amyotrophic lateral sclerosis
2
Chronic obstructive pulmonary disease
3
Seasonal allergic rhinitis
4
Age-related macular degeneration

19


Mechanism of action

  Formulation

  Estimated
filing dates

  Phase I

  Phase II

  Phase III

  Filed

Renin inhibitor   oral   2004   *   **        
Dipeptidylpeptidase (DPP-IV) inhibitor   oral   2004   *   **        
5HT4-receptor agonist   oral   2003   *   **        
    oral   2005   *   **        
    oral   2003   *   **   ***    
    oral   2003   *   **   ***    
Angiotensin-II receptor blocker   oral   filed   *   **   ***   ****
    oral   2004   *   **   ***    
    oral   >2005   *   **   ***    
Growth hormone + IGF-1 inhibitor   intramuscular   2004   *   **   ***    
    oral   (USA)   *   **   ***   ****
    oral   2002 (USA)   *   **   ***    
    oral   2005 (EU)   *   **        
    oral   2004   *   **        
Bisphosphonate: osteoclast inhibitor   intravenous   filed   *   **   ***   ****
    intravenous   2005   *   **   ***    
Nonsteroidal aromatase inhibitor   oral   2005   *   **   ***    
Iron chelator   oral   2004   *   **        
Tyrosine kinase inhibitor   oral   filed   *   **   ***   ****
    oral   tbd   *   **        
Radiation therapy   intravenous   2004   *   **        
Microtubule depolymerization inhibitor   intravenous   2004   *   **        
Tyrosine kinase inhibitor   oral   2004   *   **        
Tyrosine kinase inhibitor   oral   2004   *   **        
Dopamine-transport blocker   oral   filed   *   **   ***   ****
Dopamine receptor blocker   oral   2002   *   **   ***    
Mixed 5HT2A/D2 antagonist   oral   2003   *   **   ***    
Cholinesterase inhibitor   oral   >2005   *   **   ***    
    transdermal   2004   *   **        
Voltage dependant sodium currents blocker   oral   2004   *   **        
    oral   >2005   *   **        
    oral   >2005   *   **        
Immunosuppression   oral   2005   *   **        
Growth-factor-induced cell proliferation inhibition   oral   2002   *   **   ***    
Inhibition of inosine monophosphate dehydrogenase enzyme   oral   2002 (USA)   *   **   ***   ****
T cell and mast cell inhibitor   oral   2005   *   **        
    topical (cream)   (EU 2001)   *   **   ***   ****
Fungal squalene epoxidase inhibitor   oral   2004   *   **   ***    
Dual NK1/NK2 antagonist   oral   >2005   *   **        
Long-acting beta-2 agonist   dry powder for inhalation   2003
>2005
  *
*
  **
**
  ***
***
   
Anti-IgE monoclonal antibody   subcutaneous   filed   *   **   ***   ****
Bisphosphonate: osteoclast inhibitor   intravenous   >2005   *   **   ***    
    intravenous   2005   *   **        
Cyclo-oxygenase-2 inhibitor   oral   2002   *   **   ***    
Photosensitizer for photodynamic therapy   intravenous   2004   *   **   ***    
        2002 (Japan)
>2005
  *
*
  **
**
  ***    
Facilitates aqueous outflow   topical   (EU 2001)   *   **   ***   ****
Protein kinase C inhibitor   oral   >2005   *   **        

20


Research and Development

        In 2001, Novartis Pharmaceuticals invested CHF 3 447 million in research and development, which represents 17% of total Pharmaceuticals sales. There are currently 66 projects in clinical development, with 16 in Phase I, 22 in Phase II and 28 in Phase III/registration.

        The completion of the human genome sequencing project and advances in technologies and computing are changing the way we discover new drugs. Functional genomics at Novartis Pharmaceuticals aims at focusing our discovery efforts on drug targets which are disease-relevant and offer potential for new medicines which prevent or slow the progression of the disease, rather than just treating symptoms. Our genomics research groups are located in Basel, Switzerland, and New Jersey, USA, with further support from the Novartis Foundation for Functional Genomics in California, USA.

        Novartis forms strategic alliances and collaborations with other partners in the industry or with academic institutions in order to develop new products, acquire platform technologies and to access new markets. A Disease Area Strategy is in place that focuses on alliances and acquisition activities for key disease areas/indications that are expected to be growth drivers for Novartis in the future. Products and compounds we review for in-licensing are selected and evaluated by the same criteria as our in-house discoveries. Novartis Pharmaceuticals is also working to become the "Alliance Partner of Choice" within the Pharmaceutical industry.

Outlook

        The majority of our key marketed pharmaceutical products are in their growth phase and are expected to gain further share in their market segments. In 2002 Novartis will launch Elidel (eczema) in the USA and in Europe subsequent to approval.

        Novartis will roll out Foradil (asthma) in COPD, its second indication, in the USA. Glivec/Gleevec will be launched for CML in Japan and major European countries. The approval process for GIST is in progress. We anticipate the approval of Zometa in its second indication (bone metastasis) both in the USA and Europe.

        In the second half of the year we expect to submit approval applications for COX189, a second generation COX-2 inhibitor for the treatment of pain and arthritis, in the USA and with European authorities. Overall, 28 projects are currently in late-stage clinical development or registration.

        As a result of the success of our products in the market and product launches, pharmaceutical sales are expected to increase in the high single-digit to low double-digit range in 2002. The Pharmaceuticals operating margin is expected to be maintained at the previous year's level, barring any unforeseen changes in our business.

21



DEDICATED TO SERVICE

By Stephen Moore, Head Novartis Pharma Communications, formerly Wall Street Journal, Europe.

        The rise of Diovan to US market leadership last year among angiotensin II receptor blockers, or ARBs, wouldn't have been possible without dedicated Novartis sales representatives like Doug Rutz, Barbara Munch and Merina Wijaya.

        Diovan sales in the USA surged 47% to CHF943 million, fueling 24% overall US sales growth and market share gains for Novartis in the world's biggest, fastest-growing and most profitable market. Doug, Barbara and Merina helped make their team from New Jersey South district one of the top Diovan sales units in the country.

        That success builds on a bold marketing strategy and a painstaking program of clinical testing. To uncover the full potential of Diovan, Novartis is conducting studies involving more than 35 000 patients.

        One such study called Val-HeFT—the largest ever done in heart failure—led to an "approvable" letter from the USA Food and Drug Administration last year for Diovan for treatment of heart failure in patients not on an ACE inhibitor. If approved, Diovan would be the only ARB indicated in the USA for treatment of heart failure, the fastest- growing cardiovascular disease in the world.

        "Our approach to expanding the ARB market demonstrated a leadership role—nobody else had done that," says Paulo Costa, president and chief executive of Novartis Pharmaceuticals Corporation.

        Still, our key growth drivers in the USA which include Lotrel, Exelon and Lamisil in addition to Diovan wouldn't have been able to gain market position in their respective segments without a dedicated and professional sales organization. The US field force has expanded briskly in the past few years, to 5 500 representatives by the end of last year from 2 815 representatives three years earlier. Quality also has risen rapidly—judging from improved rankings for our sales force in independent customer satisfaction surveys.

        New sales representatives spend about seven weeks of their first 14 months with the company in training. More than half of that training period is devoted to scientific and medical subjects, including stints at world-renowned medical centers such as Cleveland Clinic and Duke University Medical School.

        The commitment to training is not limited to Diovan. Programs are tailored to the specific needs of field forces in respective disease areas. For example, new representatives joining our Oncology business unit complete a one-week "preceptorship" at M.D. Anderson Cancer Center in Houston, Texas. At this famous clinic, courses are custom-designed for Novartis staff and representatives gain additional insights into cancer therapy by accompanying physicians as they treat patients during daily rounds.

        Meanwhile, refresher courses keep experienced sales staff abreast of the latest medical advances. Last year, sales directors responsible for our anti-asthma treatment Foradil attended a two-day course on pulmonary disease organized by Mt. Sinai School of Medicine in New York. This year, all members of the US sales force will be re-certified under a program of tests about the top two products each representative details.

        For all our progess so far, says Greg Schofield, senior vice president for USA sales, "the goal remains to make Novartis best in class. Nobody is outworking us today and if we can channel all that energy and point our field force in the right direction, they'll do things they didn't know they were capable of."

        Exactly how far that potential could reach is exemplified by the New Jersey South Diovan team where District Manager Doug Rutz has built a winning combination of youth and experience. A 34-year old New Jersey native who has spent his entire career with Novartis, Doug was initially hired as a

22



computer engineer but returned to night school and earned an MBA to finally realize his dream of moving into sales.

        "As long as I've been here, people have been excited about the chance of coming out into the field," he says. "It's the best part of the company."

        There's certainly plenty of independence. Most representatives work out of offices in their homes—while Novartis supplies essential tools ranging from a car and laptop computer to printer and office supplies. District managers spend several days a week riding with their teams to help polish sales skills. Careful coaching and supervision also enables representatives to convey valuable information and provide outstanding service to customers.

        The compensation system for representatives is based partly on the market share of Novartis products he or she promotes in the district—with equal weighting given to increases in market shares. "Financially, we got a boost with the inception of an incentive share option plan that motivates and rewards high performers to be at the top of their game," Doug says. "That's important—but the key to retention is liking the people you work with and the team. We're competitive."

        The New Jersey South district stretches from rolling farmlands and working-class neighborhoods of Trenton, to affluent suburbs of Princeton, dotted with prestigious hospitals and medical centers. Barbara Munch expects to put nearly 40000 miles on her Dodge Caravan this year, covering a far-flung network of physicians.

        A 23-year company veteran and winner of a coveted Cornerstone Club award for perennial top performance, she has maintained her own high sales standards while assisting Doug with coaching new arrivals. A lot has changed since 1978, Barbara says with a shy smile. Today women comprise about half of the US field force of Novartis but Barbara was the only woman in her district when she joined.

        "Back then, physicians would sit down with you for 10 to 15 minutes, as long as you were willing to wait," she recalls. Today competition is tougher but knowledge about products and disease—along with a commitment to serving physicians and patients—remains the secret of success.

        "We need the science to come up with new products, further research for existing products and also the field force to get all this information to physicians and help patients," Barbara says. "That's the bottom line."

        Merina Wijaya's first exposure to Novartis came as a competitor. She was impressed enough to leave her former employer—a major US drug company—when a job offer came from Novartis last summer.

        "There was a passion you could see that comes with working for Novartis," she says. "The pipeline is definitely what drew me here. We're not just jumping on the bandwagon—we're being innovators and offering different ways of going against a disease."

        The daughter of a psychiatrist and a nurse, Merina had medicine in her blood. After studying at Vassar, she earned a Masters degree in social work at the University of Pennsylvania, learning her way around the American healthcare system with internships ranging from adoption and child protection agencies to mental hospitals.

        "Being a pharmaceutical representative is a melding of humanity and hard core science," she says. "It was the perfect job for me."

        That feeling was reinforced during a training program at Duke Medical School packed with anatomy, physiology and pharmacology courses—as well as seminars with cardiologists and endocrinologists. Case reviews where representatives were asked to propose therapy after being briefed on a patients' condition and previous medication "taught me to always keep the patient central," Merina says.

23



        "This is a business and as sales people we're expected to do well," Merina says. "But what drives me to get up every morning is the thought of keeping the patient central and realizing that there's a plethora of information out there waiting to be tapped."


GENERICS

 
  2001 CHF millions

  2000
CHF millions

  Change in CHF %

  Change in local currencies %

Sales   2 433   1 973   23   26
Operating income   281   242   16    
Research and development   169   170   -1    
Research and development as % of sales   7   9        
Free cash flow   46   152   -70    
Net operating assets   2 622   1 939   35    
Investments in tangible fixed assets   209   241   -13    
Number of employees   7 230   5 712   27    

Novartis Generics provides off-patent pharmaceutical products and substances and operates worldwide in two principal product segments: finished dosage forms ("Generics pharmaceuticals business") and active pharmaceutical ingredients and their intermediates ("Industrial business"). In the Generics pharmaceuticals business, finished dosage forms are sold to pharmacies, hospitals and other healthcare outlets, while in the Industrial business, active ingredients and their intermediates for pharmaceutical and biotechnological substances are sold to industrial customers.

Performance in 2001

        Generics sales were up 26% in local currencies and 23% in Swiss francs, lifted by new product launches and more significantly by recent strategic acquisitions in the USA, Argentina, the UK, France, Italy and Germany. Particularly the USA benefited from recent restructuring efforts and the launch of the generic form of Prozac® (fluoxetine), for which Geneva Pharmaceuticals (our retail generics business in the US market) benefitted from a 6-month exclusivity to sell the 10mg capsule formulation. The Industrial business reported continued sales growth driven by increases in both penicillins and macrolide antibiotics, and a solid performance in cephalosporins.

        Novartis Generics is a global business and intends to continue to expand its efforts globally in all major generics markets particularly the USA.

Product review

        Approximately two thirds of the sales of Novartis Generics are derived from the Generics pharmaceuticals business and approximately one third of sales are derived from the Industrial business. Key product areas are antibiotics such as pencillins, cephalosporins, macrolides and medicines for the treatment of tuberculosis, central nervous system drugs, cardiovascular system drugs, alimentary tract preparations and hormonal tract preparations.

Generics pharmaceuticals business

        Our Generics pharmaceuticals business benefited from many product launches and continued favorable sales development of the new generic version of the combination of amoxicillin and clavulanic acid. In the most important finished dosage forms market, the USA, double digit sales growth was achieved. The good performance is attributable to the integration of the former unbranded generics business of Apothecon (acquired in 2000), strong volume growth and successful launches of important finished dosage forms of pharmaceuticals such as the antidepressant medication, fluoxetine. In Europe, Germany remained the most important generics market. Due to changes in legislation the

24



pharmaceutical markets in France and Italy were opened for generic medicines. Through the acquisition (from BASF) of Laboratoires GNR-Pharma, France, and GNR Spa, Italy, Novartis Generics managed to capitalize successfully on the legislative changes favoring generic products in these new markets.

Industrial business

        Our Industrial business (active pharmaceutical ingredients and biotech substances) experienced stable prices on a moderate level for bulk antibiotics. Sales growth was achieved by increased volumes and a shift to higher value products. In 2001, Biochemie started the manufacture of enzymatically produced 7-ACA at its affiliated plant in Frankfurt, Germany as a complement to the manufacture of this product at its Austrian plant using chemical methods. Biochemie is the world leader in the production of this key intermediate for cefalos-porin antibiotics. At its affiliated plant in Les Franqueses, Spain, Biochemie started the manufacture of the active ingredients for semisynthetic macrolides. This extension is a major step in our strategy to diversify our anti-infectives portfolio and to become a leading player in this market segment.

Research and Development

        There is intensive development work required in order to demonstrate the bioequivalency of a generic drug to the original drug. Nevertheless, research and development costs associated with generic drugs are much lower than those of their original counterparts, and, therefore, patent-free drugs can be offered for sale at prices much lower than those of patented drugs, which must recoup substantial basic research and development costs via high prices over the life of the products' patent.

        In Vienna, Austria, Novartis Generics opened a new research center staffed with 50 scientists where new active substances are to be developed for use as antibiotics.

25



Recently launched products:

Geneva Pharmaceuticals, USA   10mg capsule formulation of fluoxetine, an essential treatment for depression

Biochemie (a world leader in antibiotics and bulk pharmaceuticals)

 

An antibiotic combination of Amoxicillin/Clavulanic Acid under the brand names
Curam and Clavamox for the treatment of bacterial infections

Azupharma, Germany

 

Roxythromycin AZU, Felodipin AZU for heart desease, Loratadin for allergies and the antibiotic, Ciprofloxacin AZU.

Outlook

        Novartis Generics will continue to focus on the important generics markets and on integrating newly acquired businesses. Sales growth is expected to be in line with the market. For the Industrial business, it is expected that new production units will reach full capacity.

26


CONSUMER HEALTH

 
  2001
CHF Millions

  2000
CHF Millions

  Change in
CHF %

  Change in Local
Currencies %

Sales   6 675   6 514   2   4
Operating income   920   869   6    
Research and development   181   186   -3    
Research and development as % of sales   3   3        
Free cash flow   640   506   26    
Net operating assets   2 528   2 284   11    
Investments in tangible fixed assets   129   122   6    
Number of employees   12 824   12 949   -1    

        Novartis Consumer Health, through its three business units "Over-the-Counter" (OTC) self-medication, Health and Functional Nutrition and Medical Nutrition, develops, manufactures and markets a wide range of health and medical nutrition products and a portfolio of self-medication brands.

Performance review

        Consumer Health sales increased by 2% in Swiss francs or 4% in local currencies, to CHF 6 675 million in 2001 from CHF 6 514 million in 2000. In the USA sales reached CHF 3 283 million (49% of total) reflecting a 4% increase in local currencies despite the economic slowdown.

        In OTC, the key brands Lamisil Cream (antifungal), Nicotinell/Habitrol (smoking cessation) and Voltaren Emulgel(topical pain relief) drove sales with double digit growth rates.

        Health and Functional Nutrition sales were up 3% in local currencies (+ 2% in Swiss francs). Gerber reached a new record market segment share in the USA baby/toddler food segment, while Gerber Care and Gerber Wellness products continued to make progress in a competitive marketplace.

        Medical Nutrition sales (+ 11% in local currencies, + 9% in Swiss francs) achieved particularly strong performance in Europe, where the focus on disease-and age-specific products allowed market share gains under the Impact and Novasource trademarks.

Product review

        Our OTC business provides products for the treatment and prevention of common medical conditions and ailments to enhance people's overall health and well being. The company is ranked as a global top 5 self-medication business with strong positions in Europe and North America. The main product categories are cough, cold and allergy treatments, gastrointestinal treatments, dermatological treatments, analgesics, vitamins, minerals and supplements, venous disorder treatments and smoking cessation treatment.

        Life-cycle management has become an important tool to the Novartis Consumer Health sector following the transfer of two key brands from Novartis Pharmaceuticals: Voltaren Emulgel and Lamisil Cream. In the USA, LamisilAT Cream rapidly built a strong OTC market share following its switch from prescription only to OTC status by providing consumers with a new standard in efficacy for the common problem of athlete's foot. Voltaren Emulgel, a topical analgesic for muscular pain, has also enjoyed significant growth when it switched to OTC from prescription only status.

27



        In 2001, Novartis Consumer Health introduced new improved formulations for Maalox liquid antacid in the USA and Quick Dissolves chewable tablets for the Sandoz mineral line in Europe.

        The Health and Functional Nutrition business encompasses foods designed to serve the particular nutritional needs of target groups including adults, the elderly, infants and athletes. Products include baby foods, consumer products such as sports drinks, slimming aids and functional health foods. Growth in 2001 was driven by refocusing advertising and promotion investments and through innovative programs in the core business with Ovaltine/Ovomaltine, Isostar, Céreal/ Gerblé and Gerlinea.

        In Health Food, the focus will continue to be on the high growth categories of Sports Nutrition and Slimming, driven by Isostar and through an improved range of slimming products offering more complete meal replacement.

        Gerber continued to build on its position as a leader in infant feeding and care, with a number of innovations in 2001. Within the Gerber Care/Wellness line, new hypoallergenic products such as foaming shampoo, baby mousse, moisturizers (face and body) were launched.

        Our Medical Nutrition business focuses on the nutritional needs of people with serious conditions as well as hospitalised or convalescing patients. Our product portfolio ranges from enteral tube feeds and devices to oral supplements. 45% of 2001 incremental revenues have been generated by products launched in 2001, principally with gastro-intestinal and diabetes indications, under the brands Resource, Isosource and Novasource.

Research and Development

        Currently, Novartis Consumer Health has a large number of research and development projects in progress. While the majority of these are in the OTC business unit, there is also significant activity

28



within the Medical Nutrition and Health and Functional Nutrition business units. Our nutrition and OTC research and development activities mutually benefit from joint efforts and share clinical trial, regulatory, preclini-cal and pharmaceutical development expertise. Novartis Consumer Health is also working closely with Novartis Pharmaceuticals to evaluate appropriate products that can be switched from prescription to OTC status.

Outlook

        Despite the slow-down in global consumer-markets, the successful switches of Lamisil (athlete's foot) and Voltaren Emulgel (pain) from Novartis Pharmaceuticals should drive above-industry sales growth. Furthermore it is our intention to strengthen our number1 position in the European OTC market. Gerber, our successful Infant & Baby food brand, is expected to further expand into new market segments with Gerber Wellness and Gerber Baby care. In the successful Medical Nutrition business, we anticipate continued above-market growth through disease-specific, high-value products.


CIBA VISION

 
  2001
CHF Millions

  2000
CHF Millions

  Change in
CHF %

  Change in Local
Currencies %

Sales   1 787   1 392   28   33
Operating income   174   100   74    
Research and development   98   67   46    
Research and development as % of sales   5   5        
Free cash flow   59   105   -44    
Net operating assets   2 310   2 345   -1    
Investments in tangible fixed assets   153   120   28    
Number of employees   6 797   7 644   -11    

        With products sold in more than 70 countries, CIBA Vision is a world leader in the research, development and manufacturing of eye care products, namely soft contact lenses, lens care products, and ophthalmic surgical products.

Performance review

        Sales increased by 28% in Swiss francs, or 33% in local currencies, to CHF 1 787 million in 2001, from CHF 1 392 million in 2000. Excluding the impact of the Wesley Jessen acquisition, sales increased by 5% in local currencies.

Product review

        Strong sales growth was generated by the lens business, particularly with the new generation Focus contact lenses, which includes Focus DAILIES, the daily disposable lenses. FDA approval was received for Focus NIGHT & DAY, the first high-oxygen extended wear contact lens that can be worn for up to 30 days and nights of continuous wear. The product was launched in the USA in November 2001. Also in 2001, CIBA Vision launched Focus DAILIES Progressives in the USA and Canada. It is the first daily disposable contact lens in the world to correct presbyopia.

        The acquisition of Wesley Jessen in October 2000 has brought CIBA Vision a range of products that complement our existing brands as well as technology expertise, particularly in the area of specialty lenses.

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The Focus family of contact lenses

Lens   Function
Focus Toric   Corrects astigmatism
Focus Monthly   Replaced monthly
Focus 1-2 Week   Replaced every one to two weeks
Focus 1-2 Week SoftColors   Replaced every one to two weeks; enhances the color of light eyes
Focus DAILIES   One-day disposable
Focus Progressives   Corrects presbyopia
Focus NIGHT&DAY   Extended wear for up to 30 days and nights continuous wear
Focus DAILIES Progressives   One day disposable to correct presbyopia

        Sales of lens care products continued to suffer in an overall declining market. AOSept Clear Care, an enhanced formulation of our leading hydrogen peroxide disinfectant, was launched in the USA in June 2001. It is the first one-bottle, no rub lens care solution with no added preservatives in the USA. SOLO-care Plus, an enhanced formulation of our one-bottle lens disinfection system, received the CE mark in April 2001. The product offers a one-bottle, no rub, no rinse cleaning and disinfection system.

        CIBA Vision introduced in 2001 a new version of our MemoryLens, the only pre-rolled intraocular lens in the world. The new tight roll of the CV232 uses the same pre-folded MemoryLens technology, but allows surgeons to insert the lens through an even smaller incision than before. It is used to restore vision in patients with cataracts.

30



        Having received the CE Mark for the Phakic Refractive Lense (PRL), clinical trials are going on for registration in the USA. PRL is the first and only foldable posterior chamber phakic refractive lens designed to float on a patient's natural lens and to self-center behind the iris. Vivarte, the first and only foldable anterior chamber phakic refractive lens, will be launched in Europe in 2002.

Research and Development

        CIBA Vision intends to expand its product portfolio through both its own dedicated research and development resources as well as the acquisition of new and innovative technologies. Product development is focussed on contact lenses as well as ophthalmic surgical products and involves the creation and development of entirely new product offerings in these markets, as well as line extensions of current products. The acquisition of Wesley Jessen VisionCare, Inc. in 2000 included several exciting technologies and CIBA Vision anticipates incorporating these technologies into other contact lens products in its pipeline.

Outlook

        Sales growth is expected to continue to be driven by the highly successful Focus range of contact lenses including Focus DAILIES and Focus NIGHT & DAY. Increased competition and price pressure is anticipated for high volume and frequent replacement lenses. As a result of the shift in consumer preferences from conventional lenses to disposable lenses, lens care products are expected to continue to decline. CIBA Vision expects to maintain its market position in this segment through recently launched enhancements to its popular products including AOSept Plus/AOSept Clear Care and SOLO-Care Plus. Despite a significant increase in R&D investments, operating income is expected to increase.


ANIMAL HEALTH

 
  2001
CHF Millions

  2000
CHF Millions

  Change in
CHF %

  Change in Local
Currencies %

Sales   962   1 083   -11   -7
Operating income   138   179   -23    
Research and development   93   88   6    
Research and development as % of sales   10   8        
Free cash flow   195   173   13    
Net operating assets   572   644   -11    
Investments in tangible fixed assets   19   20   -1    
Number of employees   1 997   1 975   1    

        Novartis Animal Health enhances and extends the life of companion animals and improves the health and productivity of farm animals.

Performance review

        Sales declined by 11% in Swiss francs, or 7% in local currencies, to CHF 962 million in 2001 from CHF 1 083 million 2000 due to the economic slowdown and substantial inventory reductions at US companion animal veterinary clinics. The foot-and-mouth disease crisis in Europe had a negative effect on the farm animal business. Sales were lifted by the strongly growing vaccine and aquaculture businesses as well as by Tiamutin for respiratory and gastroenteric diseases in pigs. Fortekor, the heart failure treatment for dogs, again showed double digit growth boosted by the additional indication for chronic renal insufficiency in cats.

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Product review

        Pets are an important part of everyday life for millions of families around the world. The products of Animal Health help to protect them from parasites such as fleas and worms, assisting them to enjoy longer and disease-free lives. Interceptor prevents heartworm disease, controls hookworm, and removes and controls roundworm and whipworm in dogs, all in a single monthly tablet. Sentinel combines the benefits of Interceptor with prevention of flea infestation. Capstar is a recently launched fast acting flea contol product and the perfect partner for Program, a once-a-month oral medication which breaks the life cycle of the flea at the early egg stage. Fortekor treats heart failure in indogs and has also been proven as an effective and safe treatment for chronic renal insufficiency in cats.

Farm animal products

        Sickness and disease can be devastating to a livestock population and, in turn, to farm productivity. Novartis Animal Health develops products to control the parasites that attack farm animals, the diseases that infect them, and the insect pests that invade their environment. Key products include Tiamutin and Econor to treat bacterial infections in pigs and poultry and a range of parasiticide products such as Vetrazin against blowfly in sheep, Acatak to control ticks on cattle as well as Fasinex and Endex against liver fluke and gastrointestinal worms in cattle and sheep. The product portfolio is completed by products like Esb3 and Cosumix against poultry diseases, Neporex and Larvadex as part of the fly control range against disease transmitters as well as a range of vaccines for farm animals and farmed fish.

32


Recently launched products:

Companion animal products
   
Capstar   Fast-acting oral flea control for dogs and cats
Program Plus   Flea and intestinal worm prevention for dogs and cats
Fortekor   Claim extension for chronic renal insufficiency in cats
Farm animal products
   
Fasimec   Parasite control for cattle
Clik   All-season protection against blowflies in sheep
Endex   Parasite control for farm animals

Research and Development

        Animal Health research and development activities focus on parasiticide control for companion and farm animals. We also develop veterinary pharmaceuticals for pets in new indication areas as well as vaccines for farm animals and farmed fish. Based on high-capacity, ex-vivo microscreens, high-throughput screening focuses on assessing a high number of natural products and synthetic chemicals. Our researchers collaborate with external partners to develop veterinary treatments. Drug delivery projects, also in collaboration with external partners, concentrate on the identification and development of suitable sustained release and palatable formulations for use in parasite control.

Outlook

        The animal health market is expected to show limited growth and continued competitive pressures particularly in the flea and heartworm market for companion animals. However, new product launches and label expansions for new indications alongside the contribution by the recently acquired vaccine businesses are expected to improve sales.

33



CORPORATE CITIZENSHIP AT NOVARTIS

A Cure for Malaria

        Malaria is one of the world's biggest killers. Every year, it claims more than a million lives—mostly children. Millions more are incapacitated. The damage to productivity in many affected regions is tremendous. Malaria is treatable, but unfortunately for those affected it is a "poor person's" disease that does not attract anywhere near the same commercial attention as cancer or AIDS. Malaria sufferers live in remote areas where poor infrastructure and inadequate healthcare undermine treatment efforts. Even where malaria drugs are available, they may not be effective due to local resistance patterns or multiple reinfections, or they may not reach those afflicted at prices they can afford.

        Novartis manufactures one of the world's most effective malaria treatments. Coartem is an innovative combination of a traditional Chinese plant-based remedy and a synthetic substance called lumefantrine. In tests, Coartem has shown a remarkable efficacy of over 95 percent so far, without yet inducing clinical resistance. In 2001, Novartis entered into a partnership with the World Health Organization (WHO) to stem the spread of malaria in Africa and other parts of the world where the disease is endemic. To ensure maximum reach of the program, Novartis agreed to supply Coartem at cost; the WHO undertook to distribute Coartem through its extensive support networks in severely malaria-struck regions.

        This is no ordinary drug venture. For example, the program requires specific packaging and easy-to-understand pictorial instructions for illiterate patients. The packs are also designed to encourage compliance. The distinctiveness of the design, along with the WHO's direct involvement, makes it difficult for profiteering intermediaries to divert the treatment packs from their rightful destination to black markets elsewhere.

        "We are so thankful," says Thomas Maluleke, who lives with his family near the gate of the Kruger National Park in South Africa. Within a period of a several days in December 2001, first his 10-year-old daughter and then 6-year-old twin daughters became infected with malaria. Next came his wife, and then Thomas himself.

        Unlike too many of their neighbors and relatives, they survived. Fortunately, Kruger National Park doctors are particularily aware of the disease and so were able to diagnose malaria quickly and commence with Coartem treatment. All five family members responded favourably and experienced no side effects.

        "Miraculously, four days later, my wife and I were both back at work and our children were playing again, thanks to Coartem."

        Pictoral instructions of Coartem packaging to ensure proper usage.

Moreover, the WHO's involvement eliminates red tape which might otherwise add greatly to the complexity and cost of drug distribution. Our experience in fighting malaria is providing valuable knowledge for future projects and broadens our understanding of the epidemiological and social context of the disease.

        Over the years, the impact of the malaria program could well be enormous. In fact, our Coartem may help to save more lives than most other medicines do. Yet malaria is just one of the forgotten illnesses we are targeting. We are also determined to help patients with other neglected diseases, because we believe that by doing so we can help alleviate some of the most deplorable humanitarian problems in developing countries.

34



Mature and Responsible Citizenship

        The desire to be a responsible and positive force in the global community lies at the heart of our concept of corporate citizenship. Our definition is simple. As a corporation, we want to act the same way that a mature, responsible and conscientious citizen would act in the community.

        Our understanding of the company's role in society has evolved over the past few years. Traditionally, we have paid close attention to matters of health, safety and the environment. A dedicated corporate function, strengthened by experts in each business sector and at each production site, supports line management in achieving a leadership position in this field.

        In recent years, we expanded the focus to include sustainability, which is based on the notion of a triple bottom line; we want to operate in a manner that is sustainable in terms of environmental impact, economic viability and its effect on society.

        Addressing the societal dimension, we decided to subject our business ethics to a rigorous standard. Two years ago, we established our Code of Conduct, which stipulates the principles under which we conduct our business worldwide. Incentives and a communications and training program were created to foster a supportive corporate culture, and compliance officers were appointed in each business and at the corporate level to guide the company's behavior around the world.

        In 2000, we commited to the Global Compact, an initiative sponsored by United Nations Secretary General Kofi Annan, which specifies nine principles regarding human rights, respect for employees and environmental protection.

        In 2001, these and other efforts culminated in our Policy on Corporate Citizenship. By specifying our ideas in a formal policy, we completed the framework that guides our actions.

The Agenda

        In practice, corporate citizenship is an ambitious task that encompasses our entire organization. Addressing our role in society, we identify five broad areas of commitment.

35


        Access and Affordability

        We are deeply concerned about the pernicious effects of hunger, poverty, inadequate infrastructure and poor political governance in many parts of the world today.

        In our Policy on Corporate Citizenship, we have made the commitment to support efforts to improve access to medicines. In addition to malaria, we are fighting leprosy in close cooperation with the WHO by donating all necessary drugs worldwide free of charge. A new Novartis research institute for tropical diseases in Singapore will conduct research into treatments for tuberculosis and dengue fever. Through these and other programs, Novartis has committed several hundred million Swiss francs over the coming years to combat diseases that affect the populations of the poorest countries in our global community.

        Affordability and access to treatment are important issues in the industrialized world as well. Novartis recognizes that not all people can afford the type of medical care that others may take for granted. In a number of situations, Novartis takes active steps to alleviate the burden of those who could least afford to pay for treatment. For instance, patient assistance programs have been introduced for Glivec/Gleevec, our highly innovative leukemia drug.

        As life expectancy grows and the number of elderly citizens increases, demand for innovative and affordable healthcare is growing rapidly. In the United States, we recently announced the introduction of the Novartis Care Card, a discount program for elderly patients with low incomes and inadequate insurance coverage.

Corporate Citizenship as an Integral Aspect of Business

        Corporate citizenship is an integral aspect of Novartis business strategy. In the global health community, each party is called upon to contribute its unique knowledge, experience and values. We are part of this community, and we recognize the need to engage in a dialogue about the values that guide us.

        Historically, there have been two approaches to providing healthcare: the charitable approach that acknowledges a moral duty to help those in need, and the commercial approach that views medicine as a precious good. Today the pharmaceutical industry stands at the intersection of these two traditions. Its power to innovate is a function of free enterprise, but the value it creates is frequently delivered through the structures of the public sector. In practical terms, this means that Novartis must operate simultaneously and successfully in two worlds: in the global market economy and in the political context of national healthcare systems.

        The modern pharmaceutical industry is an innovation engine of great sophistication. In practice, the development of medicines is defined by lengthy investment cycles and a high degree of complexity. By investing primarily in knowledge, we create valuable products. For a knowledge business, the recognition of intellectual property rights is critical. A sound, reliable legal framework with good protection of intellectual property rights helps to protect the industry's investment in research and development. In recent years, however, the politics surrounding intellectual property rights have introduced a new level of entrepreneurial risk.

36



        Corporate citizenship is a strategy to manage risk and explore new opportunities. It reduces the uncertainty that our shareholders face by defining our company's relationship with patients, employees, communities, and society at large. We cannot seek to eliminate all risk or to maximize returns beyond measure; we aim for a balance. Adequate returns on investment, which compensate our investors, are the foundation for future innovation. Investors must be rewarded for the risks they take. To think otherwise would be perilous for a business enterprise.

        But it's not just a matter of economics. The customers and the workforce of Novartis care deeply about how the company conducts its affairs around the world. People come to work at Novartis not only because they want to make a living, but also because they want to make a difference by contributing to the well-being of other people.

        The advances in medical science in the last decade have been astounding, and our industry has helped to improve the quality of life for broad segments of the world's population. Our employees and customers—and all our partners in the fight for better health—expect us to continue to deliver on the promise of innovation while living by a set of principles that define our role as a citizen of the world community.

Next steps

        Of course, good intentions and a clear strategy are only a first step. Novartis is integrating the principles of good corporate citizenship into its daily operations, which is ultimately a matter of reshaping the corporate culture.

        We have begun to build awareness and secure the commitment of all Novartis employees. Practical standards are being developed for each policy principle, and these standards will form the basis for management processes and incentive systems. We will use independent verification, and there will be mechanisms to monitor progress and reconcile conflicting priorities. Third party suppliers and contractors will be encouraged to comply as well. Responsibility for all of this lies with business line managers, guided by a steering committee and a dedicated project organization at the corporate level. At the same time, the concept of corporate governance has been expanded to ensure accountability for corporate citizenship through clear structures and responsibilities.

        In its wider sense, corporate governance reaches beyond the board and shareholders to address the relationship between the company and society at large—including government, regulators, communities and non-government organizations. Key elements of this relationship will be transparency and accountability. We will report on our progress on an annual basis. The next update* is scheduled for April 2002.

        Corporate citizenship at Novartis is a work in progress. A number of important objectives have been accomplished, yet there is still a long way to go.

        Standards and practices vary from country to country. There may be limits to what can be measured and managed. Still, we are committed to a policy of prudent and controllable, but also consequent, implementation. Our task is ambitious, but we have a solid foundation to build on.


*Corporate Citizenship at Novartis

WHAT IT ALL MEANS TO ME…

How Novartis employees perceive the company's commitment to its societal responsibilities

Janitha Muthuthamby
Laboratory Technician, Oncology
"It makes me very happy to hear what we are doing for leprosy patients. People in Europe don't know much about that terrible problem."

37



John Manser
Group Treasurer
"Companies which do not behave in an ethical and humanitarian way are certainly not a good long term investment."

Zariana Nikolova
Clinical Researcher
"First as a medic I am glad of the involvement of Novartis in such humanitarian programs and secondly as a person coming from a poor country I am proud that Novartis is doing so much for the developing countries."

Albert Kim
Business Planning & Analysis
"We have to look around. We cannot focus purely on ourselves and on delivering shareholder value.

Reputation is also an asset."

Claudia Betschart
Laboratory Scientist
"I could see myself actively supporting our projects in developing countries, where we help local institutes and talented local people to work on their local diseases."

Chris Kaplan
Head Therapeutic Franchise Cardiovascular
"Our customers recognize our humanitarian efforts and they actually feel good about prescribing our products."

Corporate Citizenship Projects Regarding Access to Healthcare

Malaria     Innovative cooperation with the WHO; delivery at cost; integrated success-monitoring

TB, dengue fever

 


 

Center for research into neglected tropical diseases in cooperation with Government of Singapore

Leprosy

 


 

Donation of medicines in cooperation with the WHO; fieldwork, health and rural development projects

Cancer

 


 

Glivec/Gleevec Patient Assistance Program
      Femara Patient Assistance Program

Affordability

 


 

Drug discount program (Novartis
Care Card) for low-income elderly patients in the USA without adequate insurance coverage

Employee access

 


 

Prevention, diagnosis, treatment for employee families (including AIDS, TB and malaria) in developing countries

Community Involvement

 


 

Community Partnership Day with worldwide participation of employees (14 000 employees in 43 countries)

38


HEALTH, SAFETY AND ENVIRONMENT

Health, Safety and Environment (HSE)

        Health, Safety and Environment have been and are the cornerstones of our Corporate Citizenship approach. The new Policy on Corporate Citizenship has emerged from the HSE Policy. With this, the Novartis approach to HSE continues to be based on the following pillars:

        HSE Organization:    Management of HSE is a line responsibility. A member of the Executive Committee is ultimately responsible for all aspects of HSE and chairs the HSE Corporate Steering Committee, which sets policies and standards Group-wide. The Corporate HSE organization oversees and reviews implementation and performance across the Group. Sectors are responsible for implementation. At site level, where our activities have the most direct impact, HSE Officers give professional support.

        HSE Management Cycle:    The HSE management cycle starts every year with an assessment of the HSE situation in each Sector. This is done based on the HSE performance data of the previous year. Risk portfolios are established every year at site level and are consolidated into Sector and then a Group Risk Portfolio. In addition, the results of all audits performed in the previous year are used as input. The process culminates in a formal "HSE Sector Review" between the Executive Committee member responsible for HSE and each Sector Head. Based on this review, targets for the following year are agreed upon as the basis for action plans and projects. Actual achievements against these targets are reviewed at the next year's HSE Sector Review. From 2002 onwards it is planned to expand the HSE Sector Review into a Corporate Citizenship Review, including HSE.

        Similarly the HSE situation is also assessed at corporate level, and corporate HSE goals are set for Novartis.

Update on Corporate Goals for 2001

        A strategic risk review has been undertaken with the result that our efforts are intensified in the areas of business interruption, HSE performance of third parties and regular, systematic assessments of benefits and risks of our products beyond the stingent regulatory requirements.

        In addition, we have analyzed emissions in comparison to legal requirements, relative impact, state-of-the-art technology and those of competitors. We concluded that in many areas we are already at an excellent level. However, we also noted that we need to reduce emissions of halogenated solvents. Water consumption and generation of hazardous and non-hazardous waste must be reviewed to ascertain the reasons for not comparing favorably with the industry average and then develop action plans where appropriate.

        We exceeded the first corporate target for CO2 of a 1% absolute reduction of emission. This was down 7% as compared to the year 2000. We also reduced accident frequency by 22% and thus made progress towards the corporate three-year goal of 0.5 - 0.7 accidents per 200 000 hours worked in 2003. The third long-term objective is "reputation" as measured by a composite of leading external and sustainability indexes. The inclusion of Novartis at fourth place in the Dow Jones Sustainability Index represents considerable success towards the goal of becoming a leading company in our sector on HSE and sustainability.

        For our HSE balanced score card, we have instituted key performance indicators on the "audit implementation score", the "line management satisfaction score" (with HSE), and the "HSE employee satisfaction score", and we have established a first baseline. We continue to work to update our financial key performance indicators.

39



        In support of the Global Compact commitment we have developed our Corporate Guideline on Transportation, which includes requirements regarding third parties used for transport by Novartis. This Guideline will be supplemented with additional Guidance Notes in 2002.

        Corporate Citizenship has been given a prominent place on the Novartis Internet and Intranet websites.

Corporate Goals for 2002

Biosafety Program

        The Novartis biosafety program provides standards, tools and practices to manage potential risks to human and animal health and the environment that may be incurred in our biotechnology activities. Our Corporate Guideline on Biosafety sets up risk management and safety measures based on internationally established and acknowledged standards. All units that handle biological materials must meet or exceed these standards. Before undertaking any biotechnology project, a thorough risk analysis is initiated: all agents used are classified according to international categories, and labs are equipped with the appropriate safety features and practices. Special biosafety audits are conducted regularly on sites with biological activities.

Remediation

        Because past operations may have led to the contamination of soil and/or groundwater, Novartis has established financial reserves of CHF 228 million to take responsibility for its estimated environmental liabilities. In the area of Basel, the local chemical industry (including predecessor companies of Novartis) has established an organization to proactively find timely solutions for the possible consequences of past disposal practices at a number of landfills. The aim is to eliminate acute and long-term risk through measures that are eco-efficient, pragmatic and utilize current state-of-the-art technology, based on professional assessment in cooperation with the authorities.

HSE Performance Data System Boundaries

        The system boundaries are defined as the physical boundaries of the Group's sites. Impacts originating inside the fences of these sites are reported together with major material flows across these boundaries. Current system boundaries do not measure impacts from the manufacture of purchased goods, energy and transportation. In order to understand the scope of these unmeasured impacts, we estimated additional CO2, NOx and SO2 emissions stemming from external electricity production. Taking these estimates into account increases our CO2 emissions by 150%, our NOx emissions by 350% and our SO2 emissions by 900%. Rough energy-use estimates for other activities beyond our system

40



boundaries were as follows: transportation of goods: + 6%; office buildings with unreported energy use: + 3%; business travel by air: <+1%; sales force travel: +3%; commuting: approximately +2% (of all total reported energy consumption). We do not yet systematically measure the environmental impact of products throughout their life cycle.

        2001 data was collected from 116 sites owned and managed by Novartis, representing all sites with major HSE impacts and which represent all production, formulation and R&D sites, and include 3 new site acquisitions reporting for the first time (2 of which contributed to significantly higher emissions). The most significant change in the system boundaries is due to the demerger of the site service operations of the Basel sites (the now independent operations serve Novartis and the other global companies operating on these sites). As a result, more energy generation is outside the system boundaries, as is waste incineration.

Update on Sector Goals for 2002

Sector

   
Targets 2001

   
Results 2001

   
New Targets

Pharmaceuticals   Lost-time accident rate 0.51   Improved, but not yet not achieved: 0.681   Lost-time accident rate 0.51
    Prevent drug substance releases from manufacturing   Releases of relevant substances into wastewater effluent assessed, prevention actions initiated, 80% of drug substances evaluated   Ongoing
    Implement HSE management system consistent with international standards   Certification of Barbera (Spain), renewal of Wehr (Germany), and Ringaskiddy (Ireland)   Ongoing

Generics

 


Lost-time accident rate below 1.01

 


achieved: 0.881

 


Reduction of LTAR to <0,91 by 2002, 0,71 by 2004
    Improve worldwide risk portfolio and environmental data reporting   All HSE officers trained, awareness discussions with CEOs and production managers      
    Implementation of systems to define quantitative energy targets till end of 2002   Systematic energy measuringequipment in companies requiring 80% of energy   Energy reducing projects in Kundl by the end of 2002 equivalent to 1.6% of Group emission(2000)
    No increase in halogenated solvents emission, despite production increases   Achieved (excluding sites acquired during 2001)   50% reduction of halogenated solvent emissions in Europe (12% globally) by 2003 - based on European values 2000
Consumer Health   Lost-time accident rate 1.01   Achieved: 0.811   Lost-time accident rate 0.71
    Establish HSE Management Systems for improved compliance   No fines resulting from adverse regulatory actions.      
    Reduce energy use by 2%   - 7%, partly due to lower production   Further energy reduction relative to production
    Implement 3rd party HSE management system   Developed 3rd party contractors risk portfolio   Improve risk portfolio of 3rd party contractors

CIBA Vision

 


Lost-time accident rate below 0.91

 


Achieved: 0.591

 


Lost-time accident rate below 0.751 and a reduction of 10% on every site
    Achieve 64% effluent water recycling at Atlanta production site   Achieved through recycling and optimization   Continue water conservation
    Global new employee HSE orientation program   Program approved, implemented and ongoing   Study potential CO2/energy reductions for 2003
                Review risk analysis at all sites
Animal Health   Lost-time accident rate: <0.51   Not yet achieved: 0.671   Lost-time accident rate below 0.51
    In-depth assessment of 3rd party manufacturers   All assessed according to Sector Guidance Note   Evaluate and improve 3rd party contractors risk portfolio
    Integration of newly acquired sites into Novartis HSE culture   Performance management, risk portfolios and emergency management integrated      

1 accidents per 200 000 hours worked

41


 
  Pharmaceuticals
  Generics
  Consumer Health
  CIBA Vision
  Animal Health
   
   
  2001 vs

  Novartis* (continuing activities)
 
  2001

  2000

  2001

  2000

  2001

  2000

  2001

  2000

  2001

  2000

  2001

  2000

  2000(%)

  1999

  1998

  1997

FINANCIAL PERFORMANCE                                                                
Sales [CHF millions]   20 181   18 150   2 433   1 973   6 675   6 514   1 787   1 392   962   1 083   32 038   29 112   10 % 25 409   24 224   23 746
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EMPLOYEES                                                                
Employees [year end]   41 256   38 397   7 230   5 712   12 824   12 949   6 797   7 644   1 997   1 975   71 116   67 653   5 % 64 493   65 727   69 209
HSE Personnel   325   333   189   116   151   242   35   64   24   28   728   783   -7 % 773   841   838
incl. security guards   119   141   19   53   63   92   27   45   3   3   231   334   -31 % 308   348   364
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FINANCE                                                                
HSE investments [CHF millions]   30.9   19.7   11.5   16.2   5.96   14.6   4.25   3.73   1.70   0.91   55.6   55.1   1 % 49.9   83.4   62.7
HSE expenses [CHF millions]   204   150   33.9   32.8   19.7   30.5   2.25   6.16   2.14   4.45   274   224   22 % 160   135   213
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PRODUCTION                                                                
Total production [1000 t=metric tons]   29.4   26.6   86.8   80.7   535   566   18.0   14.5   3.97   3.90   674   692   -3 % 673   626   543
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RESOURCES                                                                
Water consumption [million cubic meters]   19.4   19.8   59.7   57.4   9.57   9.94   0.64   0.64   0.41   0.27   89.8   88.0   2 % 87.4   77.2   72.6
Energy consumption [million GJ]   5.88   5.97   4.77   4.49   3.41   3.38   0.61   0.48   0.12   0.11   14.8   14.4   3 % 15.1   14.4   12.9
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HEALTH/SAFETY                                                                
Lost-time accident rate [accidents per 200 000 hours worked]   0.68   0.83   0.88   1.33   0.81   1.31   0.59   0.49   0.67   0.73   0.72   0.93   -22 % 1.07   1.32   1.63
Lost work day rate [lost days per 200 000 hours worked]   12.3   13.5   11.6   13.4   13.1   23.6   8.80   5.51   6.26   6.43   11.8   14.4   -18 % 15.7   17.0   21.7
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WATER EMISSIONS1                                                                
Effluent discharge [million cubic meters]   0.43   0.42   1.12   1.00   0.49   0.48   0.05   0.05   0.01   0.01   2.10   1.96   7 % 2.08   2.14   2.02
Suspended solids [t]   263   206   223   252   127   145   3.40   2.25   10.3   3.96   627   609   3 % 669   1 064   1 212
Chemical oxygen demand COD [t]   466   667   2 860   2 410   841   967   43.9   57.2   10.8   13.9   4 220   4 110   3 % 4 410   4 710   5 010
Total nitrogen [t]   91.3   74.1   301   166   10.0   264   0.48   0.32       403   505   -20 % 433   650   748
Phosphate [t]   31.9   13.6   22.5   59.5   6.14   18.9   0.80   4.57       61.4   97.0   -37 % 172   128   117
Soluble salts [t]   8 380   9 510   11 700   10 600   65.5   519   68.9   95.2       20 200   20 800   -3 % 22 500   24 800   24 700
Sum of heavy metals [t]   0.46   0.32   <0.01       <0.01   <0.01   <0.01       0.46   0.32   43 % 0.25   1.27   0.87
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AIR EMISSIONS                                                                
Carbon dioxide [1000 t]2   178   185   106   117   148   155   5.00   6.00   4.00   6.00   441   469   -6 % 578   636   507
Sulfur dioxide [t]2   75.9   85.9   165   50.3   115   180   0.42   0.21   31.5   10.8   388   328   18 % 406   623   376
Nitrogen oxide [t]2   184   188   85.5   94.9   116   119   7.13   4.66   5.78   8.34   399   415   -4 % 493   572   485
Particulates [t]2   10.1   12.0   3.02   15.9   19.5   37.3   0.47   0.29   4.68   0.38   37.9   65.9   -42 % 40.5   54.9   36.5
Hydrochloric acid [t]   1.81   1.63   2.57   3.23   <0.01   <0.01   <0.01   <0.01   0.01   0.01   4.39   4.87   -10 % 5.42   5.05   4.64
Ammonia [t]   <0.01   0.63   <0.01   <0.01   0.48   0.48   <0.01   <0.01   0.02   0.02   0.50   1.12   -56 % 9.64   10.3   5.21
Volatile organic compunds (VOC) nonhalogenated [t]   25.2   34.2   614   387   0.02   0.02   23.3   0.00   19.0   15.0   682   436   56 % 398   339   471
Volatile organic compunds (VOC) halogenated [t]   387   342   575   475   23.1   26.2   0.58   1.43   5.58   4.58   991   849   17 % 844   1 066   1 090
Chlorofluorocarbons (CFC-11 equivalents) [t]   n.a.   0.91   n.a.   0.56   n.a.   0.05   n.a.   0.01   n.a.   0.04   n.a.   1.57   n.a.   2.49   1.06   0.60
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WASTE3 (1000 t)                                                                
Nonhazardous waste generated   23.2   24.1   11.5   7.94   158   160   4.92   4.22   0.76   0.74   198   197   1 % 215   208   173
Recycled   11.0   10.3   8.91   5.80   133   109   0.51   1.30   0.23   0.18   153   127   21 % 134   141   122
Treated   6.67   7.98   0.48   0.54   3.16   2.65   0.51   0.58   0.03   0.07   10.8   11.8   -8 % 11.2   12.5   10.1
Disposed of   5.55   6.17   2.13   1.63   15.3   44.8   3.03   2.34   0.46   0.45   26.5   55.3   -52 % 67.1   53.0   44.2
Hazardous waste generated   37.8   39.1   15.5   11.1   0.28   0.37   0.13   0.09   0.49   0.52   54.1   51.2   6 % 41.6   64.0   57.3
Recycled   8.53   9.42   6.11   3.60   0.02   0.03   <0.01   <0.01   0.05   0.10   14.7   13.2   12 % 9.63   15.5   8.32
Treated   27.1   28.2   7.66   6.39   0.24   0.33   0.10   0.08   0.44   0.42   35.5   35.4   0 % 28.0   41.9   34.5
Incinerated   25.6   26.6   6.35   4.23   0.21   0.24   0.10   0.08   0.43   0.40   32.6   31.5   4 % 25.5   37.8  
Landfill   1.85   1.29   1.66   2.28   0.01             3.52   2.86   23 % 3.52   4.97   7.15
Other disposal   0.05   0.09   <0.01     <0.01     <0.01         0.08   0.11   -27 % 0.22   1.39   1.30
Intermediate storage   0.26   0.18   <0.01   0.04   <0.01   <0.01       0.01   <0.01   0.28   0.22   30 % 0.14   0.10   6.45
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1
WWTP excluding cooling water

2
calculated based on energy breakdown

3
Difference between generated and handled waste comes from storing waste in previous years and treating it in current year

*
Including corporate functions
Sector split based on 2001 organizational structure and not comparable with 2000 reporting due to spin-off of Novartis Services 2000 data has been quoted reflecting the current organizational structure. Previous years are not restated.

42


HSE data analysis

Resource consumption: energy and water

Air emissions

Methodology and data collection

        doCOUNT HSE (for documentation and acCOUNTing) is a software tool we developed for collecting, documenting and analyzing HSE data for the Group. At the central level, doCOUNT HSE collects site data and serves as a management tool for compiling reports, identifying areas for improvement and benchmarking. At the site level, doCOUNT is increasingly being used as a management tool.

        In order to publish our HSE data in the Annual Report 2001, we have adjusted the collection process. Data was collected in December, and published here are the actual data January through November 2001, plus an estimate for December 2001 based on actual data of December 2000 corrected by the estimated impacts of any changes in production volume/mix, system boundaries or energy mix, etc. In future some data will be collected more frequently (monthly, quarterly or biannually, depending on the data and activity of the individual sites). Not only do we expect this to increase data quality, but it also allows for early corrective action if unfavorable trends evolve.

        We continue to take measures to further improve the overall data quality, including training at site and regional meetings, on the Intranet, through telephone consultations and conferences. We also provide feedback to the site on trends and consolidated data, assessments of new data, and we ensure that site management certifies the accuracy of the final data. These measures to increase data quality

43



will improve our trend analysis to account for annual fluctuations of 1 - 2 percent (currently considered not significant within current system boundaries).

Waste

Safety/Health

Environmental impact data

        Our emissions cause different environmental impacts depending on the quality and specific effect of the emitted substance. We quantify these impacts using a scientific method, Eco-indicator 95 (www.pre.nl). This enables us to understand the relative importance of Novartis impacts and to set priorities for improvement. Currently, we assess impacts only from within our system boundaries.

        All major environmental impacts were reduced again in 2001. However, the contribution to summer smog increased significantly due to the 2 recently acquired sites with signifiant contributions to SO2 and halogenated solvent emissions. The positive trend without these new sites is shown as well.

44


        Greenhouse Effect (global warming)—Occurs when heat by the sun is trapped in the earth's atmosphere by "greenhouse gases" such as CO2, methanes, chlorofluorocarbons (CFCs and H-CFCs) and nitrous oxide.

        Summer Smog—Caused by the reaction of sunlight with solvents and NOX, from industrial and non-industrial sources.

        Winter Smog—Caused by SO2 and particulates.

        Acidification—Generation of acids in the atmosphere caused by the NOX and SO2 emissions from burning fossil fuels. Acids are either deposited directly onto the earth's surface or fall as acid rain.

        Eutrophication—Overfertilization of aquatic ecosystems caused by nitrate and phosphate run-offs. NOX air emissions are also a contributor.

        Heavy Metals—Poisonous to human beings and ecosystems.

        

This graph shows the HSE performance of Novartis in comparison to other pharmaceutical companies (based on 2000 data). Points outside the central circle indicate performance worse than average. Data are normalized with sales.

Benchmarking

        Although there is no universal reporting standard for benchmarking and much depends on the criteria used, benchmarking nevertheless provides information about our performance, particularly if it is conducted among companies whose activities are similar to ours. This is the second year that performance-benchmarking data is published, and we expanded the data base to include all available published HSE data from 20 pharmaceutical and consumer health companies. Data were normalized with sales (lost-time accident data are normalized with the number of employees). A margin of error exists based on data quality and interpretation. Furthermore, many factors irrelevant to actual environmental performance affect the comparison (product mix, backward integration, outsourcing of production and infrastructure activities).

        As the chart shows, the areas where we perform under industry average are water consumption (due to large amounts of water used in fermentation processes), non-hazardous waste (largely due to fruit/vegetable waste from our Consumer Health business), hazardous waste and halogenated solvent emissions which originate from manufacturing of pharmaceutical products. Areas where we perform on par with industry average are energy consumption and lost-time accident rates. Areas where we perform above industry average are emissions of CO2, SO2 and NOX (due to our almost complete conversion to natural gas and some external energy generation), non halo-genated solvents and CFC emissions. Hazardous waste generated and halogenated solvent emissions are targets of specific action programs in 2002 in the sites concerned.

45


Statement of the Verifiers on the Novartis HSE Reporting 2001

Arthur D. Little

        Novartis International AG has commissioned Arthur D. Little International, Inc, to verify the sections of the 2001 Novartis Annual Report addressing Health, Safety and Environment.

Scope and process of the verification

        The objective was to verify how complete, accurate and clear reporting on the HSE impacts of Novartis business operations is. In the evaluation, both the data quality and the suitability of the process for generating the information was considered. Basis of the verification was information collected in interviews with Corporate and with Sector HSE functions. An analysis of the underlying data collection as designed by Novartis and of its implementation, an analysis of the data contained in the Report, visits to two sites and telephone interviews with four further sites were also conducted.

Summary

        The information gathered in the verification process indicates that the 2001 Annual Report contains a fair summary of relevant HSE impacts at Novartis' own sites. Both the reporting and management of these impacts has improved relative to 2000.

        As in past HSE reports, the HSE impacts in the product life cycle that are generated outside of Novartis' sites still are neither covered nor managed in the same quality as internal processes. This challenging task needs to be addressed also in view of the commitments in the Policy on Corporate Citizenship.

Changes relative to the 2000 Report

        The integration of business, societal and HSE reporting in one document is a powerful step to communicate Corporate Citizenship performance as an integral part of all activities. The integration of these reports into the Annual Report makes it even more important to limit information to aggregated but relevant key factors. Good examples are given such as the benchmarking of Novartis performance against other pharmaceutical companies. Sufficient internet links to more detailed information are missing.

        The data quality regarding HSE impacts of sites has improved, due to increased management attention and the implementation of processes to ensure correct data quality. Continuous improvements on the reporting system should increase the data quality further.

        The clarity of the HSE goals set and of performance against these have also improved. The rigor with which these HSE impacts are managed appears higher and closer to the ambitions stated. The HSE objectives for 2002 are more often quantitative and sector-wide than the objectives for 2001. This makes HSE goals and performance more transparent in external reporting.

Specific impact areas

        An example of the omission of relevant life cycle impact is the CO2 emission since it addresses only the emissions from energy generated by Novartis. To ensure that CO2 emissions from energy consumed from external suppliers is also addressed we propose to redefine the CO2 target accordingly.

        Improvement of supplier and third party manufacturing HSE performance has become a focus for Novartis, but is not yet addressed by all sectors at the same level.

HSE-Management

        In the area of product-related HSE impacts and the tie-in with business objectives, stated principles remain ahead of practice. Examples for the HSE impact of product use are given but have not been consistently addressed across the board.

        In the area of HSE management at site-level, the ambition stated in the report has become more consistent with verification results. The ongoing implementation of HSE related management systems at the sites will further improve this consistency.

/s/ DR. ARND HARDTKE
  /s/ DR. HARTMUT FISCHER
Dr. Arnd Hardtke   Dr. Hartmut Fischer

January 31, 2002

 

 

46



HUMAN RESOURCES

Human Resources

        The new Policy on Corporate Citizenship expands the focus of quantitative reporting beyond Health, Safety and Environment to include the societal aspects of the impact of Novartis on the communities in which we operate. As we state in the policy, Novartis employees are key to our success. Moreover, they are our most important links to society.

        One of our primary objectives has been to create an organization that is focused, capable and motivated to deliver sustainable business results and one that is recognized as being a responsible member of the global community. Over the last few years we have seen a substantial increase in our total employee population (especially in marketing and sales). Simultaneously, we have sharpened our focus on promoting gender diversity as well as significantly strengthening our talent pipeline.

        The attached table shows that the number of our associates has grown by 5% since 2000. A big proportion of this increase has been due to the strengthening of our sales force in key markets such as the USA and Europe. In the USA the number of sales employees has risen by 15%.

2001 average number of employees by sector

Pharmaceuticals   40 035
Generics   6 798
Consumer Health   12 968
CIBA Vision   7 469
Animal Health   2 045
Corporate   1 005
   
Total   70 320
   

2001 average number of emloyees by function and region

(Full time equivalents)

  Research &
Development

  Production &
Supply

  Marketing &
Distribution

  General &
Administration

  Total

Europe   5 804   9 875   10 531   4 734   30 944
The Americas   3 043   9 081   11 750   3 083   26 957
Asia/Africa/Australia   741   3 502   7 146   1 030   12 419
   
 
 
 
 
Total   9 588   22 458   29 427   8 847   70 320
   
 
 
 
 

2001 personnel costs by function and region

(CHF millions)

  Research &
Development

  Production &
Supply

  Marketing &
Distribution

  General &
Administration

  Total

Europe   694   795   1 032   606   3 127
The Americas   602   699   1 694   532   3 527
Asia/Africa/Australia   88   74   453   89   704
   
 
 
 
 
Total   1 384   1 568   3 179   1 227   7 358
   
 
 
 
 

47


        In 2001 we initiated a program to gather globally the demographic data necessary to establish benchmarks relating to the objectives of our Policy on Corporate Citizenship and our UN Global Compact commitment. This new global database includes aspects regarding diversity, social benefits, work-life balance and minimum and local living wage levels. The data compiled so far represents approximately half of Novartis associates world wide and is as yet insufficient to analyse and report the picture in full. Unfortunately, some aspects such as diversity and living wages could not be monitored world-wide, except in markets where this is a legal requirement. Consequently, clear guidelines and standards are now being established and external local support is being sought to solve local problems.

        Based on the data available we have initiated various programs to build on gender diversity at all levels in the company. The percentage of women in management is currently estimated to be about 30%, which is a reasonable baseline, but there is ample room for improvement. We have initated programs in several of our countries to increase the number of women holding managerial positions.

Strengthening our Talent Pipeline

        Our talent pipeline has been a key area of focus for us. We have established a strong pay for performance culture and have made significant progress on attracting, developing, growing and energizing our talent at Novartis.

        Our Performance Management System not only helps us motivate and reward associates for achieving business results but also incentivizes them to demonstrate behavior that helps sustain these excellent results in the long run. We believe this system is an extremely transparent and effective tool that helps managers and employees measure and improve individual and organizational performance.

        To strengthen the alignment between shareholder and employee interests we have implemented share option programs for key associates and share ownership programs for associates in Switzerland, the USA and the UK. More countries will adopt similar programs in 2002.

        Through implementation of a global process, Organization & Talent Review (OTR), we have significantly improved our ability to identify and develop top talent. This process helps our business leaders review the capability of their organizations and to proactively identify and address key issues. We now post internal job opportunities on our new Global Job Posting System to promote transparency and communicate opportunities to our associates on a worldwide basis.

        Learning has been another key area of focus in 2001. Through partnership with leading institutes such as Harvard Business School, we offer customized learning programs for our associates. In addition, we have invested in developing a multi-phase program to support our first line managers build their leadership and managerial capabilities. We are also leveraging intranet technology to spread knowledge through the company quickly and effectively.

48


        To support our business expansion we have attracted many talented people from some of the leading companies across the world. We are now focused on retaining and developing our core talent. It also remains our endeavour to build on our preferred employer status in the "talent marketplace", with Novartis branded as an exciting place to work where employees can realize their professional aspirations.

        Today, we can confidently say that our organisation is more customer focused, more innovative and much more performance driven than ever before. We regularly conduct employee surveys to ascertain motivational levels and job satisfaction ratings. For example, a global leadership survey sent to 250 top executives showed that, compared to external benchmarks, Novartis leadership is more positive about innovation and operating efficiency (e.g. in establishing a climate where the traditional way of doing things is regularly reviewed and challenged). The survey also identified big improvements, since 1999, in areas such as "market competitiveness" and "leadership". The biggest challenges (both in relation to

49



the external norm and the 1999 results) were identified as being "achieving a sustainable balance between work and private life" and "identifying and alleviating stress related reduced effectiveness". First steps to address these challenges have been implemented: Training programs for 2002 include workshops on time management, work-life balance and positive stress management.

Our Humanitarian and Ecological Commitment

        Novartis has not identified any major compliance problems within the Group under the standards outlined in the UN Global Compact. Human rights is a new area that Novartis is addressing actively. Thus the focus will be on awareness building and fostering human rights, in the markets where we operate. Novartis can and wants to be part of the solution, fully in the spirit of the UN Global Compact. Regarding our commitments, the following areas have been identified as requiring particular attention: Operations of business partners and suppliers, access to treatment, the commitment to diversity and living wages. Internal processes have been initiated to implement these Policy commitments into business practise.

Code of Conduct

        In 2001, the Novartis Code of Conduct, first established in 1999, was amended and distributed to all associates worldwide to reflect our commitment to the UN Global Compact and the new Policy on Corporate Citizenship. In addition, special programs addressing legal compliance in specific areas (Antitrust and Insider Trading) were launched. Audits relating to compliance with the Code were conducted, both in industrialized and in developing countries.


GOVERNANCE OF THE COMPANY

        Novartis is fully committed to good corporate governance. In the year 2001 a number of changes have been introduced in the interest of transparency and accountability to our shareholders. The Novartis principles and rules on corporate governance are laid down in the Company's Articles of Incorporation, the Regulations Governing Internal Organization and the Charters of the Board Committees1. They are reviewed by the Corporate Governance Committee from time to time with suggestions for amendment forwarded to the Board for decision.


1
These documents are available upon request to the Corporate Secretary, Dr. Ingrid Duplain.

Role of the Board of Directors and of the Board Committees

        The Board of Directors (the "Board") is elected by the shareholders and holds the ultimate decision-making authority of the Company, except for those matters reserved by law or by the Company's Articles of Incorporation to the shareholders.

        Decisions are taken by the Board as a whole. To assist the Board in carrying out its duties four committees have been created: the Chairman's Committee, the Compensation Committee, the Audit and Compliance Committee and the Corporate Governance Committee (the "Board Committees").

        The Board has delegated the conduct of the day-to-day business operations to the Novartis Executive Committee, which is headed by the Chief Executive Officer.

Functioning of the Board

        The primary functions of the Board, as defined in the Swiss Code of Obligations and in the Company's Articles of Incorporation, are

50


        The agenda for Board meetings is set by the Chairman and Chief Executive Officer. Any member of the Board (the "Directors") may request in writing that an item be included on the agenda.

        The Directors receive in advance of Board meetings materials allowing them to prepare for the handling of the items on the agenda.

        The Board recognises the importance of being fully informed on material matters involving the Company and its business. Therefore, the Directors are required to hold discussions with officers of the Company, to review materials provided to them, to visit offices and plants and to participate in no less than a majority of the meetings of the Board and its committees.

        The Chairman and Chief Executive Officer recommends members of senior management who, at the invitation of the Board, attend Board meetings to report on areas of the business within their responsibility, thereby ensuring that the Board has sufficient information to make appropriate decisions.

        The Board reviews once a year the performance of the Chairman and Chief Executive Officer. The Board also meets in Executive Session from time to time to consider other matters of importance to the business of the Company.

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 are charged with making full reports and recommendations to the Board at its regular meetings.

        The meeting agendas of the Board Committees are determined by their chair.

        The Board Committee members receive in advance of committee meetings materials allowing them to prepare for the handling of the items on the agenda.

Board and Board Committee Membership

        The Board is comprised of 12 persons. The average age of the Directors is 61 and the average tenure is nearly 4.5 years. The Chairman and Chief Executive Officer is the only executive Director.

51



Messrs. Lippuner and Jetzer were members of the Executive Committee until 1996 and 1999, respectively.

Name

  Age
  Director
since

  Term of
Expiration

Daniel Vasella, MD   48   1996   2004
Prof. Helmut Sihler   71   1996   2004
Hans-Jörg Rudloff   61   1996   2004
Birgit Breuel   64   1996   2005
Prof. Peter Burckhardt, MD   62   1996   2002
Hans-Ulrich Doerig   61   1996   2002
Walter G. Frehner   68   1996   2004
William W. George   59   1999   2003
Alexandre F. Jetzer   60   1996   2005
Pierre Landolt   54   1996   2002
Heini Lippuner   68   1996   2002
Prof. Rolf M. Zinkernagel, MD   57   1999   2003

        Daniel Vasella has been elected by the Board as its Chairman and also to serve Novartis as Chief Executive Officer. The Board has appointed Prof. Helmut Sihler as Vice Chairman and Lead Director. Hans-Jörg Rudloff has been elected Vice Chairman.

        During 2001, the Board met five times. All of our Directors attended 90 percent or more of the regularly scheduled and special meetings of the Board and Board Committees on which they served in 2001.

        The table below shows the membership of each Board Committee. All Board Committees are comprised of non-executive Directors only with the exception of the Chairman's Committee.

Name

  Chairman's
Committee

  Compensation
Committee

  Audit and
Compliance
Committee

  Corporate
Governance
Committee

 
Daniel Vasella, MD   x *            
Prof. Helmut Sihler   x   x * x * x  
Hans-Jörg Rudloff   x   x       x  
Birgit Breuel           x      
Prof. Peter Burckhardt, MD                  
Hans-Ulrich Doerig           x      
Walter G. Frehner           x      
William W. George   x   x       x *
Alexandre F. Jetzer                  
Pierre Landolt                  
Heini Lippuner   x              
Prof. Rolf M. Zinkernagel, MD               x  

*    Chair

The Chairman's Committee

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

52



        The Chairman's Committee deals with all matters delegated to it according to its Charter. It prepares the agenda for meetings of the Board and can take any preliminary and required action on behalf of the Board. The Chairman's Committee also interfaces with the Executive Committee of Novartis, 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 to five independent Directors.

        The Compensation Committee reviews and approves the Company's 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 from time to time seeks outside expert advice to support recommendations and decisions.

Audit and Compliance Committee

        The Audit and Compliance Committee consists of three to five members. The Board has determined that all of the members of the Committee are independent, as defined by the rules of the New York Stock Exchange. Members of the Committee shall have sufficient financial and compliance experience and ability to enable them to discharge their responsibilities as members.

        The Committee's main duties are:

53


Corporate Governance Committee

        The Corporate Governance Committee consists of three to five independent Directors.

        The Committee's main duties are:

Share and Option Ownership

        The non-executive directors as a group, based on information available to us, as of December 31, 2001 held 428 620 Novartis shares and 6 256 share options each on 40 registered Novartis shares.

        Novartis senior management as a group, based on information available to us, as of December 31, 2001 held 412 350 Novartis shares and 25 023 share options each on 40 registered Novartis shares and 132 397 options on Novartis ADSs.

Compensation

Compensation of non-executive Directors

        Non-executive Directors of Novartis received an aggregate amount of compensation in 2001 of CHF 2.8 million. Each Director could elect payment in cash, shares, options, or a combination thereof. In addition, they received an aggregate amount of 22 000 shares with a value of CHF 1.5 million.

        Directors are also reimbursed for travel and other related expenses associated with the performance of their duties.

54



Conflicts of Interests

        No Director benefits materially from any contract between a member of the Novartis Group and a third party.

General Compensation Policy

        The compensation programs of the Group are designed to attract, develop, retain and motivate the high calibre of executives, managers and associates that are critical to the long-term success of the business. Compensation at Novartis is composed of a base salary that is targeted at a median of comparable companies in the industry, annual cash incentive awards that are based on company and individual performance, and long-term incentive awards that are comprised of share options and other forms of equity participation. Increasingly, we are relying on senior management compensation programs that strongly encourage significant levels of share ownership and put a high proportion of total compensation at risk, subject to individual and Group performance and the appreciation of our shareholder value.

Equity Compensation Plans

        Novartis offers Directors, executive officers and other selected employees of Novartis equity compensation plans which include, depending on the plan, share options, share appreciation rights and share grants.

Compensation of Management

        The aggregate amount of compensation expensed in 2001 by Novartis in respect of the Executive Committee members and other senior management for services in all capacities, as well as senior managers who retired during 2001, was CHF 11.4 million, of which CHF 9.2 million was salaries and CHF 2.2 million was for cash bonuses. In addition, an aggregate amount of 340 700 shares with an aggregate value of CHF 23.4 million was granted to this group under the various share grant programs. CHF 2.6 million was set aside for pension, retirement and similar benefits. In 2001 senior management members were granted a total of 13 047 share options each on 40 Novartis registered shares with an exercise price of CHF 70 per share or CHF 2 800 per option and 132 397 options on Novartis ADSs with an exercise price of USD 42 per option.

        The following is the listing of senior management as of December 31, 2001:

Name

  Age
  Title
  Since
Daniel Vasella, MD*   48   Chief Executive Officer   1996
Raymund Breu*   56   Chief Financial Officer   1996
Thomas Ebeling*   42   Chief Executive Officer—Pharmaceuticals   2000
Al Piergallini*   55   Chief Executive Officer—Consumer Health   1999
Norman Walker*   49   Head of Human Resources   1998
Urs Barlocher*   59   Head of Legal and General Affairs   1999
Gilbert Wenzel*   45   Head of Strategic Planning and Business Development   2000
Glen Bradley   59   Chief Executive Officer—CIBA Vision   1990
Hans-Beat Gürtler   53   Chief Executive Officer—Animal Health   1996
Christian Seiwald   46   Chief Executive Officer—Generics   2001


*    member of the Executive Committee

55


Report of the Audit and Compliance Committee

        The Audit and Compliance Committee reviews the Group's financial reporting process on behalf of the Board of Directors. Management is responsible for the financial statements and the reporting process, including the system of internal controls. The independent auditors, PricewaterhouseCoopers AG, are responsible for expressing an opinion on the conformity of those audited financial statements. 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 matters required to be discussed. In addition, 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, 2001.

Audit Fees

        The Group paid PricewaterhouseCoopers approximately CHF 11.5 million for professional services rendered in connection with the audits of the Group's annual financial statements.

Financial Information Systems Design and Implementation Fees

        The Group did not retain PricewaterhouseCoopers for professional services rendered in connection with financial information systems design and implementation.

All Other Fees

        The Group paid PricewaterhouseCoopers approximately CHF 58.3 million for all other professional services rendered including management consulting services, tax services, human resource consulting services, accounting and due diligence services, and other accounting and auditing services.

/s/ Dr. Helmut Sihler
Prof. Dr. Helmut Sihler

January 30, 2002

56


Dr. Daniel Vasella1

        Swiss, age 48

        Chairman and CEO

        Daniel Vasella is Chairman and Chief Executive Officer (CEO) of Novartis AG. He was appointed Chairman in April 1999, having served as President and Head of the Executive Committee since the merger that created Novartis in 1996.

        Daniel Vasella is also a member of the Board of Directors of the Credit Suisse Group, the Supervisory Board of Siemens AG, and the Chairman's Council of Daimler Chrysler.

        Before the Novartis merger, Daniel Vasella, a medical doctor, was Chief Executive Officer of Sandoz Pharma Ltd. and a member of the Sandoz Group Executive Committee. From 1988 to 1992 he was with Sandoz Pharmaceuticals Corporation in the USA, prior to which he held a number of medical positions in Switzerland.

Walter G. Frehner3

        Swiss, age 68

        Walter Frehner was a member of the Board of Ciba-Geigy AG from 1994 to 1996. He has been a member of the Board of Novartis since the company's creation through the merger of Ciba-Geigy and Sandoz in 1996. In 2001 he became a member of the Audit and Compliance Committee.

        In 1996 he retired from his position of Chairman of the Board of Directors of Swiss Bank Corporation (now UBS). Walter Frehner is also a board member of Schindler and Bâloise Insurance.

Prof. Dr. Helmut Sihler1,2,3,4

        Austrian, age 71

        Vice Chairman and Lead Director

        In 1983, Helmut Sihler was elected to the Board of Ciba-Geigy AG. He became a member of the Board of Novartis when the company was created by the merger of Ciba-Geigy and Sandoz in 1996. Since the Annual General Meeting in April 1999 he has acted as Lead Director and, in May 1999, 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 newly formed Corporate Governance Committee since 2001.

        Helmut Sihler is also Chairman of Porsche AG, Stuttgart.

        He studied philology and law at Graz, Austria, and Burlington, VT, USA.


1
Member of the Chairman's Committee

2
Member of the Compensation Committee

3
Member of the Audit and Compliance Committee

4
Member of the Corporate Governance Committee

57


William W. George1,2,4

        American, age 59

        William W. George was elected as a member of the Board of Novartis AG in 1999. In 2001 he became a member of the Chairman's Committee as well as chairman of the newly formed Corporate Governance Committee.

        He received a BSIE from Georgia Tech in 1964 and an MBA from Harvard University in 1966.

        William W. George is Chairman of the Board of Medtronic, Inc., the world's leading medical technology company and Visiting Professor of Management at Ecole Polytechnic Federale Lausanne and at the International Institute of Management Development.

Hans-Jörg Rudloff1,2,4

        German, age 61

        Vice Chairman

        Hans-Jörg Rudloff was elected to the Board of Sandoz AG in 1994. He has served as Vice Chairman of the Board of Novartis since the company's creation in 1996. In May 1999 he became a member of the newly formed Chairman's Committee and the Compensation Committee and since 2001 he is a member of the newly formed Corporate Governance Committee.

        Hans-Jörg Rudloff also serves on the boards of TBG Group (Thyssen-Bornemisza Group), the Advisory Board of Landeskreditbank Baden-Wurttemberg, the Beirat of EnBW (Energie Baden-Wurttemberg) among others. Hans-Jörg Rudloff studied economics at the Universities of Berne and Grenoble. He served as Chairman and CEO of Credit Suisse First Boston and was a member of the Executive Board of Credit Suisse. He has been Chairman of the Executive Committee of Barclays Capital since 1998.

Alexandre F. Jetzer

        Swiss, age 60

        Alexandre Jetzer has been serving as a member of the Board of Directors since 1996. He was a member of the Executive Committee Novartis AG until 1999. Before the Novartis merger Alexandre Jetzer had been a member of the Sandoz Group Executive Committee since 1981.

        Mr. Jetzer is also on the Board of Directors of Bank Clariden, Zurich.

        He holds Master Degrees in law and in economics from the University of Neuchâtel and is licensed as an attorney-at-law.

Dr. h.c. Birgit Breuel3

        German, age 64

        From 1994 to 1996 Bigit Breuel was a member of the Board of Ciba-Geigy AG. She has been a member of the Board of Novartis since the company's creation through the merger of Ciba-Geigy and Sandoz in 1996.

        In May 1999 she became a member of the Audit and Compliance Committee of Novartis AG.

        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 Lower Saxony in Germany. In 1990, Birgit Breuel was elected to the executive board of the Treuhandanstalt whose president she became in 1991. From 1995 to 2000, she acted as the general commissioner and CEO of the world exhibition EXPO 2000 in Hannover, Germany.

58


Pierre Landolt

        Swiss, age 54

        Since 1986, Pierre Landolt has been a Board member of Sandoz and, following the merger with Ciba-Geigy in 1996, of Novartis AG. He is also a Board member of Syngenta AG and of the Syngenta Foundation for Sustainable Agriculture.

        Pierre Landolt studied law at the University of Paris-Assas. Since 1997 he has been Associate and Chairman of Axial Par Ltda, Sao Paulo, a company investing in sustainability. In 2000 he was co-founder of Eco Carbone LLC, a company focused on the development of carbon sequestration processes in Europe, Africa and South America.

Prof. Dr. Peter Burckhardt

        Swiss, age 63

        Peter Burckhardt was elected to the Board of Novartis AG in 1996.

        He studied medicine at Basel and Hamburg universities, was trained in internal medicine and endocrinology in Lausanne and Boston, USA, and became full professor in internal medicine and chairman of the Department of Internal Medicine at the University Hospital of Lausanne in 1982. He was president of the Swiss Internists' Society, is a member of the boards of several national and international scientific societies, associations and institutions. He is Chairman of the National Societies of the International Foundation of Osteoporosis. He is an international expert in nutrition and bone diseases.

Heini Lippuner1

        Swiss, age 68

        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. He stepped down in 1996 and was elected to the Board of the newly created Novartis. Since May 1999 he has also been a member of the Chairman's Committee.

        Heini Lippuner is also a board member of Bühler AG and serves on a number of advisory boards.

Dr. Hans-Ulrich Doerig3

        Swiss, age 61

        Hans-Ulrich Doerig was elected to the Board of Novartis AG in 1996. In May 1999 he became a member of the Audit and Compliance Committee of the Board.

        He studied at the St. Gallen Graduate School (HSG). Hans-Ulrich Doerig is Vice Chairman of the Executive Board and Group Chief Risk Officer of Credit Suisse Group. He also serves as Board Member of Zurich University.

        He has published various articles and books on finance.

59


Prof. Dr. Rolf M. Zinkernagel4

        Swiss, age 57

        Rolf Zinkernagel was elected to the Board of Novartis AG in 1999. Since 2001 he has been member of the newly formed Corporate Governance Committee of the Board.

        He studied medicine at Basel University. Since 1992 he has been Professor and Director of the Institute for Experimental Immunology, University of Zurich.

        Prof. 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.

Honorary Chairmen

Dr. Alex Krauer
Dr. Marc Moret
Dr. Louis von Planta

Corporate Secretary

Dr. Ingrid Duplain

60



OPERATING AND FINANCIAL REVIEW

Key financial developments


 
  2001
CHF millions

  2000
CHF millions

  %
Change

Sales from continuing activities   32 038   29 112   10
   
 
 
Operating income from continuing activities   7 277   6 727   8
   
 
 
Net income from continuing activities   7 024   6 511   8
   
 
 
Change in net liquidity   -183   1 783  
Equity at year-end   42 245   36 862   15
Earnings per share on continuing activities (CHF)   2.73   2.49   10
Dividends per share (CHF)   0.90   0.85   6

        The 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 33 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 coming under pricing pressures as costs come under closer scrutiny by payers, both public and private.

        Novartis Group revenues are directly related to its ability to identify high performing products while they are still in development and to market them quickly and effectively. Research and development takes on crucial importance in this environment as Novartis, like its competitors, searches for efficacious and cost-efficient pharmaceutical solutions to health problems. The necessity for broad-based resources adequate to access the full range of new platform technologies has been among the reasons for the consolidation across the industry, and has also spawned the growing number of collaborative relationships 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.

61



        The competitive conditions in the pharmaceutical industry 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. In the future, pressure on the Novartis Pharmaceuticals sector and other pharmaceutical companies to lower prices is expected to increase. The pressure on prices is influenced primarily by the following factors: government actions that reduce patient reimbursement, restrict physicians' prescribing levels, increase the use of generic products and impose overall mandatory price cuts; the introduction of new, technologically innovative products and devices by competitors; and growing parallel imports, mainly in the EU.

        Exchange rate exposure also affects the Group's results as Novartis has both sales and cost exposure in many currencies other than the Swiss franc. This gives rise to both transaction and translation exposure when results and foreign subsidiary balance sheets are translated into the Group's Swiss franc consolidated financial statements. Inflation has not had a significant effect on the Group's results.

CHART

CHART

Results of operations from continuing activities

        To facilitate comparison of the financial results, the following table shows selected income statement data of the Group on a continuing activities basis (excluding the Agribusiness sector divested

62



in November 2000 and taking into account an allocation of non-operating items such as financial expense and tax charges to the discontinued activities):

 
  Year ended
Dec 31, 2001
CHF millions

  Year ended
Dec 31, 2000
CHF millions

  Change
in %

Sales from continuing activities   32 038   29 112   10
Cost of goods sold   -7 886   -7 316   8
Marketing and distribution   -11 098   -9 556   16
Research and development   -4 189   -4 011   4
Administration and general overheads   -1 588   -1 502   6
   
 
 
Operating income from continuing activities   7 277   6 727   8
Income from associated companies   139   97   43
Financial income, net   1 067   1 216   -12
   
 
 
Income before taxes and minority interests   8 483   8 040   6
Taxes   -1 440   -1 504   -4
   
 
 
Income before minority interests   7 043   6 536   8
Minority interests   -19   -25   -24
   
 
 
Net income from continuing activities   7 024   6 511   8
   
 
 

        In Swiss francs, Group sales in 2001 increased by 10% over 2000 to CHF 32.0 billion (14% in local currencies); operating income grew by 8% to CHF 7.3 billion; net income also increased by 8% to CHF 7.0 billion and free cash flow (excluding acquisitions of subsidiaries, 21.3% of the voting shares of Roche Holding AG and marketing and product rights) by 25% in Swiss francs to CHF 4.1 billion.

        47% of sales were generated in the NAFTA region (43% in the USA), 32% in Europe and 21% in the rest of the world.

        Growth from continuing activities was driven by a volume increase of 8%. All sectors except Generics benefited from price increases which in total amounted to 2%. The sales increase due to acquiring new products and subsidiaries was 4%. The sales performance in Swiss francs suffered from a 4% unfavorable currency effect as the Swiss franc rose against the yen by an average of 12% and against the Euro by 3%.

        Overall, Pharmaceuticals accounted for 63% of Group's total turnover. Within the remaining businesses Generics contributed 7% of the total Group sales, Consumer Health 21%, CIBA Vision 6% and Animal Health 3%.

        The operating margin from continuing activities in 2001 was 22.7% of sales, a decrease of 0.4 percentage points compared with 2000 (23.1%). Although cost of goods sold (+8%) and research and development expenses (+4%) increased at a lower rate than sales, marketing and distribution expenses (+16%) increased significantly more than sales. Overall, marketing and distribution expenses reached 35% of sales (2000: 33% of sales) due to investments associated with sales force enhancements and new product launches, particularly in Pharmaceuticals. Research and development expenses as a percentage of sales fell slightly over the year from 13.8% in 2000 to 13.1% on account of the strong sales growth.

63



Sales

 
  Year ended
Dec 31, 2001
CHF millions

  Year ended
Dec 31, 2000
CHF millions

  Change in
CHF %

  Change in
local
currencies %

Sales                
Pharmaceuticals   20 181   18 150 1 11   15
Generics   2 433   1 973 1 23   26
Consumer Health   6 675   6 514 1 2   4
CIBA Vision   1 787   1 392 1 28   33
Animal Health   962   1 083 1 -11   -7
   
 
 
 
Sales from continuing activities   32 038   29 112 1 10   14
Sales from discontinued Agribusiness activities2     6 693 1      
   
 
 
 
Group sales   32 038   35 805 1      
   
 
 
 

1
Restated to reflect the transfer as of January 1, 2001 of the Ophthalmics business from CIBA Vision to the Pharmaceutical sector and the switch of certain products between sectors.

2
Agribusiness: Crop Protection and Seeds businesses spun-off on November 6, 2000.

        Pharmaceuticals:    Sales increased by 11% in Swiss francs or by 15% in local currencies to CHF 20 181 million in 2001 from CHF 18 150 million in 2000. In the USA, where 43% of turnover was generated, sales increased substantially by 24% reaching CHF 8 636 million. This performance was driven by numerous product launches, particularly in the USA, most notably Glivec/ Gleevec (chronic myeloid leukemia) with sales of CHF 257 million in less than 8 months. As a result oncology sales expanded by 28% in local currencies. The impact of acquisitions, principally Famvir (antivirals) acquired late in 2000, contributed 2% to sales growth. Continued marketing focus on key products such as Diovan/Co-Diovan (hypertension), Lotrel (hypertension), Lamisil (fungal infections) and Exelon (Alzheimer's) was also a major factor in the sales growth.

        Diovan/Co-Diovan    (hypertension) surpassed Sandimmun/ Neoral (transplantation) as the leading product with CHF 1 880 million in sales (+58% in local currencies). Diovan, an angiotensin-2 receptor blocker, took the leadership position in new prescriptions from Cozaar® (the competitor product by Merck) in the USA. It is the only drug of its class to have shown a benefit in heart failure, for which it received an approvable letter from the US FDA for this indication. Lotrel (hypertension) another key product in the cardiovascular therapeutic area continued to expand its segment share in new prescriptions to 22% and achieved sales of CHF 813 million, an increase of 48% in local currencies. Lotrel sales were also the key driver behind the performance of the Cibacen group which achieved total sales of CHF 1 518 million, an increase over last year of 22% in local currencies. The decline through generic erosion or new competition continued to be limited for both Sandimmun/Neoral (-7% in local currencies) and Voltaren (-8% in local currencies). Sandimmun/Neoral achieved sales of CHF 1 829 million and Voltaren of CHF 1 066 million. Aredia (bone metastasis) expanded beyond last year's sales and reached CHF 1 270 million, although the first competing generic products entered the market at the beginning of December. The follow-on product Zometa received approval during 2001 both in Europe and in the USA for its first indication, hypercalcemia of malignancy. Approval for bone metastasis, its second indication, is pending in both the USA and Europe. Combined Aredia/Zometa sales are expected to decline slightly in 2002 as Zometa will not yet fully compensate for the anticipated decline in Aredia sales. Overall, the top ten products reached CHF 11 988 million reflecting an increase of 13% in local currencies and the top 20 products expanded sales by 19% to CHF 15 596 million.

64



Top twenty Pharmaceutical Products - 2001

 
   
   
   
   
   
   
  % Change
 
   
   
  % Change
in Local
Currencies

  Rest of
World
CHF Millions

  % Change
in Local
Currencies

   
Brands

  Therapeutic Area

  USA
CHF Millions

  Total
CHF Millions

  in CHF

  in Local
Currencies

Diovan/Co-Diovan   Hypertension   943   47   937   70   1 880   53   58
Sandimmun/Neoral   Transplantation   525   -20   1 304   -2   1 829   -11   -7
Cibacen/Lotensin
(of which Lotrel)
  Hypertension   1 309
(813
  28
48
  209
  -7
  1 518
813
  21
47
1
22
48)
Lamisil (group)   Fungal infections   730   22   675   16   1 405   15 1 19
Aredia (group)   Cancer complications   835   17   435   12   1 270   13   15
Voltaren   Inflammation/pain   24   -51   1 042   -7   1 066   -15 1 -8
Sandostatin (group)   Acromegaly   343   38   473   20   816   23   26
Lescol   Cholesterol reduction   388   15   426   18   814   12   17
Miacalcic   Osteoporosis   443   -6   264   10   707   -2   0
Tegretol   Epilepsy   263   9   420   -4   683   -3   1
   
 
 
 
 
 
 
 
Top ten products       5 803   17   6 185   10   11 988   9   13
Leponex/Clozaril   Schizophrenia   229   -16   310   5   539   -8   -5
Estraderm (group)   Hormone replacement   221   30   263   -7   484   5   6
Exelon   Alzheimer's disease   219   158   184   65   403   100   104
Foradil   Asthma   17     373   16   390   18   21
Visudyne   Wet form of age-related macular degeneration   238   114   139   154   377   123   127
Famvir (group)   Antivirals   244   NA   79   NA   323   NA   NA
Nitroderm TTS   Heart disease   3   -55   317   -3   320   -11   -4
Zaditen   Asthma, allergy       265   -6   265   -16   -6
Glivec/Gleevec   Chronic myeloid leukemia   176   NA   81   NA   257   NA   NA
Trileptal   Epilepsy   170   129   80   36   250   84   87
   
 
 
 
 
 
 
 
Top twenty total       7 320   29   8 276   12   15 596   15   19
Rest of portfolio       1 316   4   3 269   4   4 585   -1   4
       
 
 
 
 
 
 
Total       8 636   24   11 545   10   20 181   11   15
       
 
 
 
 
 
 

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

1
Restated—based on 2000 sales after switches to other sectors.

        Generics:    Sales increased by 23% in Swiss francs or by 26% in local currencies to CHF 2 433 million from CHF 1973 million in 2000. Strategic acquisitions completed in early 2001 in the USA, Argentina, the UK and Germany account for 20 percentage points of this increase. In the USA (32% of sales), sales increased by 39% in local currencies (4% excluding acquisitions) as a result of reorganization initiatives, the successful integration of the Apothecon acquisition and the launch of generic Prozac® (fluoxetine), for which the sector's US subsidiary, Geneva Pharmaceuticals holds 6-month exclusivity rights to commercialize the 10 mg capsule formulation.

        The Generics Pharmaceuticals Business (for finished pharmaceutical products) achieved a sales increase of 39% due to acquisitions, product launches and the global roll-out of the generic version of the combination of amoxicillin and clavulanic acid.

65



        The Industrial Business (active pharmaceutical ingredients and biotech substances) grew by 6% as a result of focussed efforts in high quality intermediates and the expansion of the biotechnology business.

        Consumer Health:    Sales increased by 2% in Swiss francs or 4% in local currencies, to CHF 6 675 million in 2001 from CHF 6 514 million in 2000. In the USA sales reached CHF 3 283 million (49% of total) reflecting an increase of 4% in local currencies despite the economic slowdown.

        Sales of over-the-counter medicines (OTC) rose 5% in local currencies (+2% in Swiss francs) driven by the key brands Nicotinell/Habitrol (smoking cessation), Voltaren Emulgel (topical pain relief) and Lamisil Cream (antifungal).

        Medical Nutrition sales increased by 11% in local currencies (+9% in Swiss francs) driven by growth in the Home Care market and the strong performance in Europe and a strong second half in the USA.

66


Operating and Financial Review

        Health and Functional Nutrition sales were up 3% in local currencies (+2% in Swiss francs), as solid sales from France and the UK offset a decline in the juice business in Poland. In addition, Gerber reached a new record market share with 75.9% in the US baby/toddler food segment, while Gerber Care and Gerber Wellness products continued to make progress in a competitive marketplace.

        CIBA Vision:    Sales increased by 28% in Swiss francs, or 33% in local currencies, to CHF 1 787 million in 2001 from CHF 1 392 million in 2000. Excluding the impact of the Wesley Jessen acquisition, sales increased by 5% in local currencies. The innovative Focus range of lenses led by Focus Dailies and Focus Night & Day, and the acquired FreshLook brand of cosmetic lenses were drivers of sales growth. Focus Night & Day also became the first high-oxygen extended wear contact lens for up to 30 nights of continuous wear to receive US FDA approval. Innovative product launches including Aosept Plus/Aosept Clear Care and Solo-care Plus, as well as upcoming specialty lens product developments, are aimed at addressing the overall declining lens care and specialty lens markets.

        Animal Health:    Sales fell by 11% in Swiss francs, or 7% in local currencies, to CHF 962 million in 2001 from CHF 1 083 million in 2000, as the companion animal market in the USA suffered from inventory reductions at the veterinary clinic level and competitive pressures in the flea product market continued. The farm animal business saw a flat performance as the impact of the foot-and-mouth disease crisis in Europe was felt. The acquired vaccine and aquaculture businesses grew sales, but the size of the businesses is at present too small to offset these events.

        Discontinued Agribusiness sector:    Agribusiness was only included in the 2000 Group figures up to its spin-off on November 6, 2000.

Operating income

 
  Year ended Dec. 31, 2001 CHF millions

  % of sales

  Year ended Dec 31, 2000 CHF millions

  % of sales

  Change %

Pharmaceuticals   5 677   28.1   5 401 1 29.8   5
Generics   281   11.5   242 1 12.3   16
Consumer Health   920   13.8   869 1 13.3   6
CIBA Vision   174   9.7   100 1 7.2   74
Animal Health   138   14.3   179   16.5   -23
Corporate and other income/expense   87       -64        
Operating income from continuing activities   7 277   22.7   6 727   23.1   8
Discontinued Agribusiness activities2         1 156        
   
 
 
 
 
Group operating income   7 277       7 883        
   
 
 
 
 

1
Restated to reflect the transfer as of January 1, 2001 of the Ophthalmics business from CIBA Vision to the Pharmaceutical sector and the switch of certain products between sectors.

2
Agribusiness: Crop Protection and Seeds businesses spun-off on November 6, 2000.

67


Operating income from continuing activities

        The operating margin on continuing activities was 22.7% of sales, a decrease of 0.4 percentage points compared with 2000 (23.1%).

        Pharmaceuticals:    Operating income increased 5% to CHF 5 677 million from CHF 5 401 million in 2000. The operating margin fell by 1.7 percentage points to 28.1% primarily due to a 24% increase in marketing and distribution expenses which now represent almost 36% of sales compared to 32% in 2000 as field force and promotion activities were increased due to new product launches. The operating income also includes a charge of CHF 216 million for impairment of pitavastatin marketing rights which were written down from their initial value of CHF 722 million. Research and development expenses fell slightly to 17% of sales compared to 18% in 2000 even though the amount increased by 4% in Swiss franc terms. Further productivity improvements were achieved reducing the cost of goods sold as a percentage of sales.

        Generics:    Generics had an operating income of CHF 281 million, an increase of 16% compared with CHF 242 million in the prior year. The operating margin declined from 12.3% to 11.5% due to several factors. These included integration costs associated with completing several acquisitions during the year; increased price pressure especially in the USA; costs related to legal actions in the USA and finally stepping up investments in marketing.

        Consumer Health:    Operating income increased by 6% from CHF 869 million in 2000 to CHF 920 million. Operating margins rose from 13.3% to 13.8% even though a CHF 21 million restructuring charge was incurred due to closure of a UK production site. Furthermore, marketing and distribution expenses as a percentage of sales decreased slightly. Research and development expense remained at 3% of sales with cost of goods sold remaining stable in percentage of sales terms.

        CIBA Vision:    Operating income increased by 74% from CHF 100 million in 2000 to CHF 174 million in 2001 and operating margin increased from 7.2% in 2000 to 9.7% in 2001. The 2001 operating income includes the impact of the Wesley Jessen business on revenue and costs for the full twelve months of 2001 compared to only three months in 2000. On a comparable basis excluding exceptional integration costs related to the acquisition of Wesley Jessen of CHF 34 million (2000: CHF 110 million) operating income decreased slightly by 1% from CHF 210 million in 2000 to CHF 208 million in 2001 and the operating margin declined from 15.1% in 2000 to 11.6% in 2001 principally on account of goodwill charges.

        Animal Health:    Operating income fell by 23% from CHF 179 million in 2000 to CHF 138 million principally due to the significantly reduced level of sales particularly in the companion animal business. The operating margin also declined from 16.5% in 2000 to 14.3% in 2001 principally due to a decline in US sales in the higher margin companion animal business.

68



        Corporate and Other Income/Expense:    Corporate and other income/expense include the costs of corporate and country management offset by employee benefit, share and share option plan charges levied on the operating companies and credited to corporate other income. In 2001, Corporate and other income/ expense achieved a net income of CHF 87 million compared with a net expense of CHF 64 million in 2000 principally due to higher share and share option charges to sector companies.

Expenses

 
  Year ended Dec 31, 2001 CHF millions

  Year ended Dec 31, 2000 CHF millions

  Change %

Sales from continuing activities   32 038   29 112   10
Cost of goods sold   -7 886   -7 316   8
Marketing and distribution   -11 098   -9 556   16
Research and development   -4 189   -4 011   4
Administration and general overheads   -1 588   -1 502   6
   
 
 
Operating income from continuing activities   7 277   6 727   8
   
 
 

Cost of goods sold

        Cost of goods sold for continuing activities decreased as a percentage of sales from 25.1% in 2000 to 24.6% in 2001. This was mainly due to continued improvements in productivity and product mix in Pharmaceuticals.

Marketing and distribution

        Marketing and distribution expenses for continuing activities as a percentage of sales increased from 32.8% in 2000 to 34.6% in 2001 as significant investments were made in the Pharmaceutical sector field force and promotional activities to support key new products.

Research and development

        Research and development expenses for continuing activities as a percentage of sales were 13.1% in 2001 compared with 13.8% in 2000. This is principally due to the slight fall in research and development as a percentage of sales in the Pharmaceuticals sector.

Administration and general overheads

        Costs to implement state-of-the-art information technology systems in Pharmaceuticals and other sectors have led to an increase in administration and general overheads by 5.7%. As a percentage of sales from continuing activities however, there was a fall in administration and general overheads to 5.0% in 2001 from 5.2% in 2000.

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Net income from continuing activities

 
  Year ended Dec 31, 2001 CHF millions

  Year ended Dec 31, 2000 CHF millions

  Change %

Operating income from continuing activities   7 277   6 727   8
Income from associated companies   139   97   43
Financial income, net   1 067   1 216   -12
   
 
 
Income before taxes and minority interests   8 483   8 040   6
Taxes   -1 440   -1 504   -4
   
 
 
Income before minority interests   7 043   6 536   8
Minority interests   -19   -25   -24
   
 
 
Net income from continuing activities   7 024   6 511   8
   
 
 

Income from associated companies

        Income from 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 was mainly derived in 2001 from the Group's stakes in Roche Holding AG and Chiron Corporation. The Group's interest in 21.3% of Roche voting shares, which represents a 4% interest in the total Roche equity, was acquired in the first half of 2001. 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 39 million. The Group's 41.9% interest in Chiron contributed pre-tax income of CHF 185 million (2000: CHF 97 million). The Group's share of the net income of both Roche and Chiron is based upon analysts' estimates for the full year 2001. Any differences between these estimates and actual results will be adjusted in 2002. In 2001, the Group's income statement includes five quarters results for Chiron as an estimate has been made for Chiron's fourth quarter results. Up to 2000, Chiron was included with a three month lag as only the four quarters through to September 30 were consolidated.

Financial income, net

        The Group has realized a financial income, net of CHF 1 067 million in 2001 despite difficult market conditions through successful management of liquid funds and a gain from the sale of US dollar denominated bonds. Net financial income from continuing activities is CHF 149 million lower than the CHF 1 216 million of the prior year. 2000 excludes CHF 125 million of interest expense allocated to the discontinued Agribusiness activity, as it related to the debt that was transferred on spin-off.

        Interest income from investments fell from CHF 1 052 million in 2000 to CHF 639 million in 2001 due to lower interest rates and less liquidity, whereas interest expense fell slightly from CHF 385 million in 2000 (excluding CHF 125 million allocated to Agribusiness) to CHF 367 million in 2001.

        Increased capital gains realized through sale of US dollar bonds and from other sources contributed an additional CHF 359 million to the financial result. The net result from financial derivative transactions (mainly options and forward contracts) improved by CHF 405 million largely related to the management of liquid funds. The Group does not write uncovered options, so a large part of the net derivative expense is compensated by gains on the underlying assets.

        The currency result on exposures held by subsidiaries changed from a gain of CHF 329 million in 2000 to a loss of CHF 118 million in 2001. The major currency losses during 2001 arose from the Turkish and Brazilian devaluations.

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Taxes

        Despite increased profits, the tax charge of CHF 1 440 million fell by 4% compared to the 2000 taxes on continuing activities of CHF 1 504 million (excluding CHF 316 million allocated to the discontinued Agribusiness activities). Taxes on continuing activities as a percentage of income before tax were reduced to 17.0% compared with 18.7% in 2000. This is due to a change in the geographic mix of taxable income.

Net income

        Net income from continuing activities as a percentage of total sales reduced slightly from 22.4% in 2000 to 21.9% in 2001. This decrease was principally due to margin declines in some of the businesses and lower financial income.

        Return on average equity fell from 19.5% in 2000 to 17.8% in 2001, owing to the increase in average equity during 2001 due to the increase in retained earnings, the impact of the adoption of IAS 39 and from raising CHF 4 billion of new equity through option instruments.

Results for the total Group

        The following table shows selected income statement data of the total Group in 2001 and 2000 including the 2000 discontinued Agribusiness sector. It is these 2000 figures which are included in the attached audited consolidated financial statements:

 
  Year ended Dec 31, 2001 CHF millions

  Year ended Dec 31, 2000 CHF millions

  Change %

Sales   32 038   35 805   -11
   
 
 
Operating income   7 277   7 883   -8
   
 
 
Net income   7 024   7 210   -3
   
 
 

Condensed consolidated balance sheets

 
  Dec 31, 2001 CHF millions

  Dec 31, 2000 CHF millions

  Change CHF millions

Total long-term assets (excluding marketable securities)   32 585   25 257   7 328
Cash, short-term deposits and marketable securities   21 844   20 523   1 321
Other current assets   12 356   12 416   -60
   
 
 
Total assets   66 785   58 196   8 589
   
 
 
Total equity   42 245   36 862   5 383
Financial debts   7 566   6 062   1 504
Other liabilities and minority interests   16 974   15 272   1 702
   
 
 
Total equity and liabilities   66 785   58 196   8 589
   
 
 

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        Total long-term assets increased by CHF 7.3 billion principally due to the CHF 5.2 billion strategic investment in 21.3% of Roche Holding AG's voting shares and the acquisition of certain marketing and product rights.

        Total equity increased by CHF 5.4 billion. CHF 4.0 billion was on account of innovative equity instruments with the issue of call options (Low Exercise Price Options—LEPOs) and put options on Novartis shares. CHF 1.0 billion of the balance relates to the adoption of IAS 39 concerning the recognition and measurement of financial instruments which requires that unrealized fair value adjustments are recorded in equity. The net income of the year of CHF 7.0 billion increased Group equity, however, this is offset by reductions due to CHF 2.2 billion of dividend payments, CHF 3.9 billion of purchases of treasury shares under the share buy-back program and negative translation effects of CHF 0.6 billion.

        Total financial debts increased by CHF 1.5 billion on account of the issue of a EUR 0.9 billion straight bond due 2006. As a result of this the year-end debt/equity ratio increased slightly from 0.16:1 in 2000 to 0.18:1 in 2001.

        Novartis has long-term financial debt principally in the form of bonds. At December 31, 2001 it had CHF 1 182 million in convertible bonds outstanding, compared with CHF 1 110 million at December 31, 2000. It also had CHF 2 325 million in straight bonds at December 31, 2001 compared with CHF 961 million at December 31, 2000. For details on the maturity profile of debt, currency and interest rate structure, see note 18 to the consolidated financial statements. 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.

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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.

 
  Year ended Dec 31, 2001 CHF millions

  Year ended Dec 31, 2000 CHF millions

Cash flow from continuing operating activities   7 342   6 175
Cash flow from continuing investing activities   -4 675   -50
Cash flow from financing activities   -354   -4 755
Net cash flow from discontinued operating and investing Agribusiness activities     1 271
Translation effect on cash and cash equivalents   31   -119
   
 
Change in cash and cash equivalents   2 344   2 522
Change in short- and long-term marketable securities   -1 023   -4 600
Change in short- and long-term financial debt   -1 504   3 861
   
 
Change in net liquidity   -183   1 783
Net liquidity at January 1   14 461   12 678
   
 
Net liquidity at December 31   14 278   14 461
   
 

        The primary source of liquidity is cash generated from operations. Cash flow from continuing operations increased to CHF 7 342 million in 2001 from CHF 6 175 million in 2000. Of the CHF 1 167 million increase in 2001, CHF 637 million is attributable to reduced funding of working capital.

        Cash outflow due to investing activities increased to CHF 4 675 million in 2001 from CHF 50 million in 2000. The CHF 4 625 million increase in 2001 primarily resulted from the CHF 5 177 million spent on acquiring the strategic interest in Roche Holding AG.

        Cash outflow due to financing activities fell to CHF 354 million in 2001 from CHF 4 755 million in 2000 thanks mainly to the proceeds from the issue of equity option instruments and from the straight bond.

        Overall net liquidity (cash, cash equivalents and marketable securities less financial debt) at December 31, 2001 compared to December 31, 2000 fell slightly by CHF 183 million to CHF 14 278 million.

        Novartis has entered into long-term research agreements with various institutions to fund research projects in the future, totaling CHF 1 480 million in the aggregate at December 31, 2001. The Group expects to fund these long-term research agreements with internally generated resources.

        The Group uses marketable securities and derivative financial instruments to manage the volatility of its exposures to market risk in foreign exchange, interest rates and market value of liquid investments. The Group's objective is to reduce, where appropriate, fluctuations in earnings and cash flows. The Group sells existing assets or enters into financial operations in respect of future transactions (in the case of anticipatory hedges) it expects to have in the future, based on past experience. It therefore expects that any loss in value for these instruments generally would be offset by increases in the value of the hedged transactions.

        Novartis uses the Swiss franc as its reporting currency and is therefore exposed to foreign exchange movements in US dollar, European, Japanese and other Asian and Latin American currencies. Novartis enters into business transactions which are impacted by currency movements. As a result, various contracts are entered into to preserve the value of assets, commitments and anticipated transactions.

73



Forward contracts and foreign currency option contracts are used to hedge certain anticipated foreign currency revenues and the net investments in certain foreign subsidiaries.

Group free cash flow

        The following is a summary of free cash flow from continuing activities using the Group's definition, which excludes the cash received or paid on divestment or acquisition of subsidiaries and minority interests:

 
  2001
CHF millions

  2000
CHF millions

Cash flow from continuing operating activities   7 342   6 175
Purchase of tangible fixed assets   -1 351   -1 179
Purchase of intangible and financial assets   -7 552   -3 088
Sale of tangible, intangible and financial assets   1 825   749
Dividends paid to third parties   -2 194   -2 064
Acquisition of product and marketing rights   826   2 661
Acquisition of 21.3% of the voting shares of Roche Holding AG   5 177  
   
 
Free cash flow from continuing activities   4 073   3 254
  (excluding Roche stake, product and marketing rights acquisitions)        

        Free cash flow on a comparable basis, excluding the impact of the acquisition of the Roche stake and product and marketing rights, increased 25% from CHF 3.3 billion to CHF 4.1 billion.

        Group capital expenditure on tangible fixed assets for the 2001 financial year totaled CHF 1 351 million (4.2% of sales), compared to a comparable figure for the continuing activities of CHF 1 179 million (4.0% of sales) in 2000. This level of capital expenditure reflects the continuing investment in production and research and development facilities. The Group intends to maintain spending at 2001 levels in 2002 and to fund these expenditures with internally generated resources.

74



        Free cash flow of the sectors uses the same definition as that for the Group, however no dividends, tax or financial receipts or payments are included in the sector calculation.

                        Free cash flow

 
  2001 CHF millions

  2000 CHF millions

 
Pharmaceuticals (before acquisition of product and marketing rights)   6 663   6 372 1
Generics   46   152 1
Consumer Health   640   506 1
CIBA Vision   59   105 1
Animal Health   195   173  
   
 
 
Total continuing sectors   7 603   7 308  
Corporate and other (before acquisition of 21.3% of the voting shares of Roche Holding AG)   -3 530   -4 054  
   
 
 
Total continuing Group activities   4 073   3 254  
Discontinued activities     1 271  
   
 
 
Total Group   4 073   4 525  
   
 
 

1
Restated to reflect the transfer as of January 1, 2001 of the Ophthalmics business from CIBA Vision to the Pharmaceutical sector and the switch of certain products between sectors.

75


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 charges.

EBITDA

 
  EBITDA
2001
CHF Millions

  % of Sales

  EBITDA
2000
CHF Millions

  % of Sales

Pharmaceuticals   6 801   33.7   6 087 1 33.5
Generics   494   20.3   415 1 21.0
Consumer Health   1 074   16.1   1 008 1 15.5
CIBA Vision   372   20.8   218 1 15.7
Animal Health   167   17.4   203   18.7
   
 
 
 
Total continuing sectors   8 908   27.8   7 931   27.2
Corporate and other   116       -29    
Discontinued activities           1 486    
   
 
 
 
Total Group   9 024   28.2   9 388   26.2
   
 
 
 

1
Restated to reflect the transfer as of January 1, 2001 of the Ophthalmics business from CIBA Vision to the Pharmaceutical sector and the switch of certain products between sectors.

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.

 
  2001
CHF Millions

  2000
CHF Millions

Market capitalization   152 891   186 703
Minority interests   104   78
Financial debts   7 566   6 062
Less liquidity   -21 844   -20 523
   
 
Year end Enterprise value   138 717   172 320
   
 
Enterprise value/EBITDA1   15.4   21.8
   
 

1
Excluding Agribusiness in 2000

Value Added Statement

        47.2% of the revenue from sales was used for purchasing goods and services from our suppliers. 23.7% of sales was paid either directly or indirectly to the employees and 15.1% of sales was retained in the business for future expansion. Dividends paid to shareholders represented 6.8% of sales.

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Origin of value added

 
  2001
CHF Millions

  2001
% of Sales

  2000
% of Sales

Sales   32 038   100.0   100.0
Change in inventory and own manufactured items   -10    
   
 
 
    32 028   100.0   100.0

Services bought from third parties:

 

 

 

 

 

 
  Material costs   -6 377   -19.9   -16.4
  Other operating expenses   -8 753   -27.3   -34.3
   
 
 
Gross value added   16 898   52.8   49.3
Depreciation, amortization and impairments on tangible and intangible assets   -1 747   -5.5   -4.2
Financial income   3 412   10.6   7.7
   
 
 
Net value added (NVA)   18 563   57.9   52.8
   
 
 
        Distribution of net value added

PIE CHART


Equity strategy and share information

        At the 2001 Annual General Meeting the Novartis shareholders agreed a 40 to 1 share split which became effective on May 7, 2001. In exchange for each existing share in Novartis with a nominal value of CHF 20.00 per share every shareholder received 40 Novartis shares with a nominal value of CHF 0.50 per share. The share split now results in a 1:1 exchange ratio between the Novartis registered shares and its ADSs listed on the New York Stock Exchange.

Novartis shares outperformed SMI

        In 2001 the equity capital market came under enormous pressure and the Swiss Market Index (SMI) decreased 21% and the Morgan Stanley World Pharmaceutical Index decreased 15% over the year. In this difficult market environment the Novartis share price declined 16% from CHF 71.63 (adjusted for the 40 to 1 share split) at the beginning of the year to CHF 60.00 on December 31, 2001. The market capitalization of Novartis amounted to CHF 152.9 billion on December 31, 2001, compared to CHF 186.7 billion at the end of 2000.

Dividend continuously increased since 1996

        The Board is proposing to the Annual General Meeting to increase the dividend payment for 2001 to CHF 0.90 per share (2000: CHF 0.85). The dividends paid out on the outstanding shares will

77



amount to CHF 2 293 million (2000: CHF 2 194 million), resulting in a pay-out ratio of 33% (2000: 30% for the total Group or 34% on continuing activities). Based on the 2001 year-end share price of CHF 60.00, Novartis' dividend yield is 1.5% (2000: 1.2%). The dividend payment date for 2001 will be on March 26, 2002. With the exception of 265.5 million treasury shares, all issued shares are dividend bearing.

Second share repurchase program completed

        In February 2001, the Board of Directors of Novartis initiated a new share repurchase program for an amount of up to CHF 4 billion via a second trading line established on the SWX Swiss Exchange. Up to December 31, 2001 Novartis repurchased 59 million shares for a total of CHF 3.9 billion. A further 1.9 million shares have been purchased up to January 31, 2002 to complete this program. The average price for shares acquired under this program in 2001 was CHF 66. The Board will propose reducing the Group's share capital by an amount corresponding to the repurchased shares at the forthcoming Annual General Meeting in March 2002.

Information on Novartis shares

        You can find further information on the Internet at http://www.novartis.com/investors.

        Chart of Novartis 2001 share price movement

LINE CHART

Key Novartis share data1

Shares at December 31

 
  2001

  2000

Issued shares   2 885 204 680   2 885 204 680
Of which treasury shares        
Reserved to secure conversion rights on bonds and call options2   59 405 716   4 716 640
Not specifically reserved   277 618 704   273 812 440
   
 
Treasury shares   337 024 420   278 529 080
   
 
Outstanding shares at December 31   2 548 180 260   2 606 675 600
   
 
Average number of shares outstanding   2 571 673 365   2 613 547 597
   
 

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Per share information3 (CHF)

 
  2001

  2000

Earnings per share on continuing activities   2.73   2.49
Basic earnings per share   2.73   2.75
Diluted earnings per share   2.72   2.75
Operating cash flow   2.85   2.91
Year end equity   16.58   14.14
Dividend4   0.90   0.85

Key ratios—December 31

 
  2001

  2000

Price/earnings (based on continuing activities)   22.0   28.8
Price/earnings (based on basic EPS)   22.0   26.0
Enterprise value/EBITDA (continuing activities)   15.4   21.8
Dividend yield (%)   1.5   1.2

Key data on US American Depositary Receipts (ADR) program

 
  2001

  2000

Year-end ADS price (USD)   36.50   44.75
ADSs outstanding5   101 028 511   55 606 400

1
On March 22, 2001 Novartis AG's Annual General Meeting approved the division of each registered share of Novartis AG into 40 identical registered shares and thereby to change their nominal value from CHF 20.00 each to CHF 0.50 each. The figures for 2000 are adjusted accordingly.
2
4 503 754 shares for the USD 750 million 2.00% 1995/2002 and CHF 750 million 1.25% 1995/2002 convertible bonds of Novartis Capital Ltd., British Virgin Islands and 54 901 962 shares for the call options.
3
Calculated on average number of shares outstanding except year end equity.
4
2001: Proposal to shareholders' meeting.
5
The depositary, JP Morgan Chase Bank, holds one Novartis AG share for every American Depositary Share (ADS) issued.

Share price (CHF)

 
  2001

  2000

Year-end   60.00   71.63
Highest   74.15   73.75
Lowest   54.95   48.45
   
 
Year-end market capitalization (CHF millions)   152 891   186 703
   
 

Trading

        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.

79


Symbols

 
  virt-x
(Reuters/Bloomberg)

  SEAQ
(Bloomberg)

  NYSE
(Reuters/Bloomberg)

Shares   NOVZn.VX/NOVZN SW   NOVD LI  
ADSs       NVS

Widely dispersed shareholdings

        Novartis shares are widely held. As of December 31, 2001, Novartis had approximately 165 000 shareholders (2000: 160 000) registered in its share register. 78% of the shares are held by Swiss nationals (2000: 79%). Based on its share register Novartis believes that approximately 11% of its shares are held by approximately 1 800 registered holders in the USA (2000: 8% and 1 000 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, 2001

  % Holding of share capital
December 31, 2000

Emasan AG, Basel   3.8   3.8
Novartis Foundation for Employee Participation, Basel   3.5   3.2
Swiss Life Insurance and Pension Company, Zurich   1.0   2.1

Introduction of the Euro

        Novartis implemented dual currency reporting (legacy national currencies and Euro) on January 1, 2000 and has not experienced any operational or technological difficulties with regard to the introduction of the Euro.

        The Group believes that the introduction of the Euro in January 2002 will reduce its cost of bearing foreign currency exchange risk and will diminish uncertainties relating to currency fluctuations from export sales within the European Monetary Union. The foreign currency exposure from transactions in US dollar or Japanese yen or other currencies outside the European Monetary Union will not be changed by the introduction of the Euro.

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 currency impact of transactions executed in currencies other than the subsidiary currency may vary according to currency fluctuations.

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Quantitative and qualitative disclosures about market risk

 
  Local currencies %
  CHF %
 
  2001

  2000

  2001

  2000

Growth and currency contributions (continuing activities):
Sales   14   8   10   15
Operating income   9   2   8   6
Net income   8   5   8   8
 
  Sales %
  Costs %
 
  2001

  2000

  2001

  2000

Sales and operating costs by currencies:
USD   45   44   31   33
EUR   23   24   22   23
CHF   5   6   26   26
JPY   8   8   5   5
Other   19   18   16   13
 
  Liquid funds %
  Financial debt %
 
  2001

  2000

  2001

  2000

Liquid funds and financial debt by currencies:
USD   8   27   46   45
EUR   35   31   4   15
CHF   55   41   21   30
JPY       24   7
Other   2   1   5   3

        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. The total negative currency effect on continuing sales growth was 4% and the total negative impact on continuing operating income growth was 1%.

        On average in 2000, the Swiss franc was weaker against the US dollar, but strengthened against the currencies participating in the Euro. The total positive currency effect on continuing sales growth was 7% and the total positive impact on continuing operating income growth was 4%.

        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.

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        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 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 future, 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 has, 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, 2001 and 2000 or its results of operations for the years ended December 31, 2001 and 2000.

        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

82



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, 2001
CHF millions

  Dec 31, 2000
CHF millions

Instruments sensitive to foreign currency rates   226   34
Instruments sensitive to equity market movements   224   164
Instruments sensitive to interest rates   64   18
Total of all instruments   324   241

        The average, high, and low VAR amounts for 2001 are as follows:

 
  Average
CHF millions

  High
CHF millions

  Low
CHF milllions

Instruments sensitive to foreign currency rates   235   548   94
Instruments sensitive to equity market movements   396   642   224
Instruments sensitive to interest rates   39   71   23
Total of all instruments   515   817   266

        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 2001 and 2000, the worst case loss scenario was configured as follows:

 
  Dec 31, 2001
CHF millions

  Dec 31, 2000
CHF millions

Bond portfolio   895   96
Money market and linked financial instruments   457   760
Equities   817   1 539
Foreign exchange risks   151   449
   
 
Total   2 320   2 844
   
 

        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.

83


Five Year Summary of Financial Data 1997—2001

CHF millions unless indicated otherwise

   
  2001

  2000

  1999

  1998

  1997

Sales       32 038   35 805   32 465   31 702   31 180
Change relative to preceding year     % -10.5   10.3   2.4   1.7   -13.9
Pharmaceuticals       20 181   18 150   15 275   14 501   14 112
Change relative to preceding year     % 11.2   18.8   5.3   2.8   21.5
Generics       2 433   1 973   1 823   1 529   1 452
Change relative to preceding year     % 23.3   8.2   19.2   5.3   18.0
Consumer Health       6 675   6 514   5 752   5 788   5 866
Change relative to preceding year     % 2.5   13.2   -0.6   -1.3   -1.0
CIBA Vision       1 787   1 392   1 632   1 505   1 423
Change relative to preceding year     % 28.4   -14.8   8.4   5.8   18.0
Animal Health       962   1 083   927   901   893
Change relative to preceding year     % -11.2   16.8   2.9   0.9   6.2
Discontinued Agribusiness         6 693   7 056   7 478   7 434
   
 
 
 
 
 
Operating income       7 277   7 883   7 343   6 920   6 688
Change relative to preceding year     % -7.7   7.4   6.1   3.5   15.7
As a % of sales     % 22.7   22.0   22.6   21.8   21.4
As a % of average net operating assets     % 28.8   33.4   32.2   34.3   32.3
   
 
 
 
 
 
Net income       7 024   7 210   6 659   6 010   5 208
Change relative to preceding year     % -2.6   8.3   10.8   15.4   126.0
As a % of sales     % 21.9   20.1   20.5   19.0   16.7
As a % of average equity     % 17.8   19.5   19.4   20.7   20.7
   
 
 
 
 
 
Cash flow from operating activities       7 342   7 612   6 893   5 853   4 565
Change relative to preceding year     % -3.5   10.4   17.8   28.2   -3.7
As a % of sales     % 22.9   21.3   21.2   18.5   14.6
   
 
 
 
 
 
Free cash flow       4 073   4 525   3 525   2 623   1 224
Change relative to preceding year     % -10.0   28.4   34.4   114.3   -11.0
As a % of sales     % 12.7   12.6   10.9   8.3   3.9
   
 
 
 
 
 
Investment in tangible fixed assets       1 351   1 353   1 371   1 577   1 568
Change relative to preceding year     % -0.1   -1.3   -13.1   0.6   -16.5
As a % of sales     % 4.2   3.8   4.2   5.0   5.0
   
 
 
 
 
 
Depreciation of tangible fixed assets       939   1 189   1 261   1 161   1 140
As a % of sales     % 2.9   3.3   3.9   3.7   3.7
   
 
 
 
 
 
Research & development expenditure       4 189   4 657   4 246   3 906   3 739
As a % of sales     % 13.1   13.0   13.1   12.3   12.0
Pharmaceuticals R&D expenditure       3 447   3 311   2 848   2 609   2 629
As a % of Pharmaceuticals sales     % 17.1   18.2   18.6   18.0   18.6
   
 
 
 
 
 
Total assets       66 785   58 196   65 527   56 225   53 650
Liquidity       21 844   20 523   22 601   19 678   18 486
Equity       42 245   36 862   37 216   31 396   26 801
Dividends of Novartis AG1       2 358   2 361   2 223   2 014   1 736
Debt/equity ratio       0.18:1   0.16:1   0.27:1   0.28:1   0.41:1
Current ratio       2.4:1   2.8:1   2.0:1   2.0:1   2.0:1
   
 
 
 
 
 
Net operating assets       28 071   22 479   24 759   20 826   19 528
Change relative to preceding year     % 24.9   -9.2   18.9   6.6   -10.5
As a % of sales     % 87.6   62.8   76.3   65.7   62.6
   
 
 
 
 
 
Personnel costs       7 358   7 813   7 184   7 093   7 298
As a % of sales     % 23.0   21.8   22.1   22.4   23.4
   
 
 
 
 
 
Number of employees at year end   number   71 116   67 653   81 854   82 449   87 239
Sales per employee   CHF   455 603   431 219   393 711   369 337   350 905
   
 
 
 
 
 

1
2001: Proposal to the shareholders' meeting

84



NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Income Statements
(For the years ended December 31, 2001 and 2000)

 
  Notes

  2001
CHF millions

  2000
CHF millions

Sales   3/4   32 038   35 805
Cost of goods sold       -7 886   -10 242
       
 
Gross profit       24 152   25 563
Marketing & distribution       11 098   -10 945
Research & development   3   -4 189   -4 657
Administration & general overheads       -1 588   -2 078
       
 
Operating income   3/4   7 277   7 883
Income from associated companies   11   139   98
Financial income, net   5   1 067   1 091
       
 
Income before taxes and minority interests       8 483   9 072
Taxes   6   1 440   -1 820
       
 
Income before minority interests       7 043   7 252
Minority interests       -19   -42
       
 
NET INCOME       7 024   7 210
       
 

Earnings per share (CHF)

 

7

 

2.73

 

2.75
       
 
Diluted earnings per share (CHF)   7   2.72   2.75
       
 

The accompanying notes form an integral part of the consolidated financial statements.

85



Consolidated Balance Sheets
(At December 31, 2001 and 2000)

 
  Notes

  2001
CHF millions

  2000
CHF millions

ASSETS            
Long-term assets            
Tangible fixed assets   8   9 060   9 030
Intangible assets   9   6 548   5 830
Investments in associated companies   11   6 715   1 531
Deferred taxes   12   3 235   3 265
Other financial assets   13   7 027   5 601
       
 
Total long-term assets       32 585   25 257
       
 
Current assets            
Inventories   14   4 112   4 122
Trade accounts receivable   15   5 349   5 283
Other current assets   16   2 895   3 011
Marketable securities   10   10 697   11 720
Cash and cash equivalents       11 147   8 803
       
 
Total currents assets       34 200   32 939
       
 
TOTAL ASSETS       66 785   58 196
       
 

EQUITY AND LIABILITIES

 

 

 

 

 

 
Equity   17        
Share capital       1 443   1 443
Treasury shares       -169   -139
Reserves       40 971   35 558
       
 
Total equity       42 245   36 862
       
 
Minority interests       104   78
       
 
Liabilities            
Long-term liabilities            
Financial debts   18   2 492   2 283
Deferred taxes   12   3 885   3 488
Other long-term liabilities   19   3 830   3 845
       
 
  Total long-term liabilities       10 207   9 616
       
 
Short-term liabilities            
Trade accounts payable       1 809   1 591
Financial debts   21   5 074   3 779
Other short-term liabilities   22   7 346   6 270
       
 
  Total short-term liabilities       14 229   11 640
       
 
Total liabilities       24 436   21 256
       
 
TOTAL EQUITY AND LIABILITIES       66 785   58 196
       
 

The accompanying notes form an integral part of the consolidated financial statements.

86



Consolidated Cash Flow Statements
(For the years ended December 31, 2001 and 2000)

 
  Notes

  2001
CHF millions

  2000
CHF millions

Net income       7 024   7 210
Reversal of non-cash items            
  Minority interests       19   42
  Taxes       1 440   1 820
  Depreciation, amortization and impairments on            
    Tangible fixed assets       969   1 196
    Intangible assets       780   309
    Financial assets       31  
  Income from associated companies       -139   98
  Gains on disposal of tangible and intangible assets       -510   -1
  Net financial income       -1 067   -1 091
Interest and other financial receipts       779   1 944
Interest and other financial payments       -391   -1 211
Taxes paid       -1 377   -2 176
       
 
Cash flow before working capital and provision changes       7 558   7 944
Restructuring payments and other cash payments out of provisions       -421   -439
Change in net current assets and other operating cash flow items   23   205   107
       
 
Cash flow from operating activities       7 342   7 612
       
 
Investment in tangible fixed assets       -1 351   -1 353
Proceeds from disposals of tangible fixed assets       275   347
Purchase of intangible and financial assets       -7 552   -3 149
Proceeds from disposals of intangible and financial assets       1 550   471
Acquisition/divestment of subsidiaries   24   -169   -1 371
Acquisition of minorities       -1  
Proceeds from disposals of marketable securities       2 573   4 839
       
 
Cash flow used for investing activities       -4 675   -216
       
 
Acquisition of treasury shares       -3 848   -1 165
Proceeds from issue of options on Novartis shares       4 056  
Change in long-term financial debts       1 258   -124
Change in short-term financial debts       374   1 402
Dividends paid       -2 194   -2 064
       
 
Cash flow used for financing activities       -354   -4 755
       
 
Net effect of currency translation on cash and cash equivalents       31   -119
       
 
Net change in cash and cash equivalents       2 344   2 522
       
 
Cash and cash equivalents at the beginning of the year       8 803   6 281
       
 
Cash and cash equivalents at end of the year       11 147   8 803
       
 

The accompanying notes form an integral part of the consolidated financial statements.

87



Consolidated Statement of Changes in Equity
(For the years ended December 31, 2001 and 2000)

CHF millions

  Notes

  Share
premium

  Retained
earnings

  Cumulative
translation
difference

  Fair value of
deferred cash
flow hedges

  Total
reserves

  Share
capital

  Treasury
shares

  Total
equity

January 1, 2000       2 475   33 455   -27       35 903   1 443   -130   37 216
Dividends to third parties   25a       2 064           -2 064           -2 064
Transfer of share premium   25b   -2 186   2 186                        
Acquisition of treasury shares           -1 156           -1 156       -9   -1 165
Effect of Agribusiness spin-off   25c       -3 655   -109       -3 764           -3 764
Translation effects   25d           -571       -571           -571
Net income           7 210           7 210           7 210
       
 
 
 
 
 
 
 
December 31, 2000       289   35 976   -707     35 558   1 443   -139   36 862
Fair value adjustments on financial instruments   25e       1 054       -20   1 034           1 034
Dividends to third parties   25a       -2 194           -2 194           -2 194
Acquisition of treasury shares   25f       -3 825           -3 825       -30   -3 855
Issue of call options on Novartis shares   25g   3 102               3 102           3 102
Issue of put options on Novartis shares   25h   909               909           909
Translation effects   25d           637       -637           -637
Net income           7 024           7 024           7 024
       
 
 
 
 
 
 
 
December 31, 2001       4 300   38 035   -1 344   -20   40 971   1 443   -169   42 245
       
 
 
 
 
 
 
 

The accompanying notes form an integral part of the consolidated financial statements.

88


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 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.

        Changes in accounting policies:    IASB and IASC have issued a number of new standards in recent years. The significant new standard IAS 39 "Financial Instruments: Recognition and Measurement" was adopted by the Group from January 1, 2001. This involved the recording in the balance sheet of unrealized gains on available-for-sale marketable securities and derivative portfolios.

        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. All other minority investments are valued at their acquisition cost less any impairment in value.

        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 transaction was structured as a merger of equals based on an exchange of shares, providing former Sandoz AG shareholders with 55% and former Ciba-Geigy AG shareholders with 45% of the new company. 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, it 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 on delivery or on providing services to third parties 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.

89



        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.

        The Group accounts for foreign currency in accordance with IAS 21 (revised) and IAS 29.

        In the respective subsidiary 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:    The Group adopted IAS 39 - Financial Instruments: Recognition and Measurement from January 1, 2001. Under IAS 39 derivative financial instruments are initally 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 certain derivatives 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 (cash flow hedge) or firm commitment 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 under IAS 39 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

90



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.

        The Group's previous policy on accounting for derivative instruments not considered to be hedges was to value these at the lower of cost on inception and fair value on a portfolio basis. A net unrealized loss was included in the current year's result. A net unrealized gain was not recorded.

        The Group's previous policy on accounting for derivative financial instruments considered to be hedges was very similar to IAS 39 requirements although the conditions for hedge effectiveness were less strict.

        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.

        Long lived assets, including identifiable intangibles and goodwill, are reviewed for impairment whenever events or changes in circumstance indicate that the 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 the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of such expected discounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized for the amount by which the asset's net book value exceeds its fair market value. For purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. Fair value can be based on sales of similar assets, or other estimates of fair value such as discounting estimated future 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.

91



        Management determines the estimated useful life of goodwill based on its evaluation of the respective companies at the time of the acquisition, considering factors such as existing market share, potential sales growth and other factors inherent in the acquired companies.

        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 are first utilized.

        Financial assets:    Associated companies and joint ventures are accounted for by the equity method. Since January 1, 2001, 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.

        Under the Group's previous accounting policy, all minority investments were carried at their acquisition cost and loans at their nominal 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. Unsale-able 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. In anticipation of the introduction of IAS 39, since December 31, 2000, 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. Since January 1, 2001, 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.

92



        Unrealized losses on marketable securities which are considered to be other than temporary are included in financial income, net in the income statement.

        Under the Group's previous accounting policy, marketable securities were carried at the lower of cost or market and unrealized losses were included as financial income, net in the income statement.

        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.

        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.

        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 em-ployees' working lives. The related liability is included in long-term liabilities.

        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.

93


        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 remediation 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 and share split:    Treasury shares are deducted from equity at their nominal value of CHF 0.50 per share. Prior to the share split which became effective on May7, 2001, the nominal value was CHF 20.00 per share. Differences between this amount and the amount paid for acquiring, or received for disposing of, treasury shares are recorded in consolidated equity. Except where indicated, all share related data has been restated to reflect the effect of the share split.

2.    Changes in the scope of consolidation

        The following significant changes were made during 2001 and 2000:

        Acquisitions 2001    

        Generics:    In January, 2001, the sector acquired 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 sector acquired 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.

94



        In April, 2001, the sector 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 sector 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 the first half of 2001, the Group acquired 21.3% of the voting shares of Roche Holding AG for CHF 5.2 billion. This represents approximately 4% of the total shares and equity securities of Roche Holding AG and is accounted for using the equity method of accounting. The related goodwill was CHF 1 246 million which is being amortized on a straight-line basis over 20 years.

        Acquisitions 2000    

        Generics:    On April 10, 2000, the sector acquired 72% of Grandis Biotech GmbH, Freiburg, Germany for CHF 26 million in cash. The acquisition was accounted for under the purchase method of accounting and the related goodwill was CHF 32 million which is being amortized on a straight-line basis over 15 years.

        CIBA Vision:    On October 2, 2000 the sector acquired 100% of Wesley Jessen VisionCare Inc., Des Plaines, Illinois, USA for CHF 1.3 billion (USD 0.8 billion) in cash.

        The net assets acquired consisted of tangible fixed assets (CHF 177 million), inventories (CHF 182 million), trade accounts receivable (CHF 93 million), deferred tax assets (CHF 56 million), other assets (CHF 118 million), deferred tax liabilities (CHF 241 million), short term financial debts (CHF 155 million) and other liabilities (CHF 330 million). The acquisition was accounted for under the purchase method of accounting and the related goodwill and intangible assets were CHF 1.4 billion which are being amortized on a straight-line basis over 20 years.

        Animal Health:    In January 2000, Novartis Animal Health completed the 100% acquisition of Vericore Ltd., a UK-based company focussed on vaccines, parasiticides and other products for farm animals, pharmaceuticals for companion animals, and aquaculture. The acquisition price amounted to CHF 96 million and was paid in cash.

        In June 2000, Novartis Animal Health increased the 40% stake in the Canadian based aquaculture company Cobequid Life Sciences Inc., which had been obtained in the Vericore acquisition, to 100% for CHF 38 million in cash.

        These acquisitions were accounted for under the purchase method of accounting and the related goodwill was CHF 163 million which is being amortized on a straight-line basis over 15 years.

        Agribusiness sector: Novartis spun-off its Agribusiness sector on November 6, 2000 to its shareholders as part of the transactions necessary to form Syngenta AG. On the same day AstraZeneca Plc. also spun-off its Crop Protection activities which were then merged with Novartis Agribusiness. On spinoff, Novartis AG shareholders owned 61% of the new company and AstraZeneca shareholders 39%. Syngenta AG was listed on the Swiss, New York, London and Stockholm exchanges on November 13, 2000.

        The sales and operating income recorded by Novartis Agribusiness up to the spin-off date were CHF 6.7 billion and CHF 1.2 billion respectively. This transaction involved the Group transferring CHF

95



3.3 billion of debt to Syngenta. The Group's equity has been reduced by a net CHF 3.8 billion (after taking into account a receipt from Novartis shareholders of CHF 687 million in connection with this transaction) due to this spin-off to its shareholders. Novartis incurred costs in relation to this transaction of CHF 69 million.

3.    Sectorial breakdown of key figures 2001 and 2000

        Novartis is organized on a worldwide basis into five continuing operating sectors and Corporate activities. Agribusiness is presented as a discontinued sector. These sectors, which are based on internal management accounts, are as follows:

        Continuing sectors:    The Pharmaceuticals sector 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; transplantation.

        The Generics sector manufactures, distributes and sells off-patent pharmaceutical products and substances.

        The Consumer Health sector manufactures, distributes and sells health and medical nutrition products and a variety of over-the-counter (OTC) medicines.

        The CIBA Vision sector manufactures, distributes and sells contact lenses, lens care products, and ophthalmic surgical products.

        The Animal Health sector manufactures, distributes and sells veterinary products for farm and companion animals.

        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 sectors. Usually, no allocation of Corporate items is made to the continuing sectors although there are charges made by Corporate for share and share option programs and certain pension plans and in 2000 there was an allocation of CHF 60 million of Corporate overheads to the discontinued Agribusiness sector.

        Discontinued sector:    The Agribusiness sector principally manufactured, distributed and sold insecticides, herbicides and fungicides and sold seeds for growing corn, sugarbeet, oilseeds, vegetables and flowers.

        The Group's sectors are businesses that offer different products. These sectors are managed separately because they manufacture, distribute, and sell distinct products which require differing technologies and marketing strategies.

        Revenues on intersector sales are determined on an arm's length basis. The accounting policies of the sectors described above are the same as those described in the summary of accounting policies except that sectors 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 sector performance and allocates resources based on operating income.

        Net sector 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.

96



 
  Pharmaceuticals
  Generics
  Consumer Health
  CIBA Vision
  Animal Health
  Corporate
  Total Continuing Sectors
  Discontinued Agribusiness Sector
  Group
(In CHF Millions Except Employees)

  2001

  2000

  2001

  2000

  2001

  2000

  2001

  2000

  2001

  2000

  2001

  2000

  2001

  2000

  2001

  2000

  2001

  2000

Sales to third parties   20 181   18 150   2 433   1 973   6 675   6 514   1 787   1 392   962   1 083           32 038   29 112       6 693   32 038   35 805
Sales to other sectors   230   245   203   170   29   42   17   8   15       -494   -465                        
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of sectors   20 411   18 395   2 636   2 143   6 704   6 556   1 804   1 400   977   1 083   -494   -465   32 038   29 112       6 693   32 038   35 805
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Operating income

 

5 677

 

5 401

 

281

 

242

 

920

 

869

 

174

 

100

 

138

 

179

 

87

 

-64

 

7 277

 

6 727

 

 

 

1 156

 

7 277

 

7 883
Income from associated companies   190   104   2   1   -14   -7       -1           -39       139   97       1   139   98
Financial income, net                                                   1 067   1 216       -125   1 067   1 091
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes and minority interests                                                   8 483   8 040       1 032   8 483   9 072
Taxes                                                   -1 440   -1 504       -316   -1 440   -1 820
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before minority interests                                                   7 043   6 536       716   7 043   7 252
Minority interests                                                   -19   -25       -17   -19   -42
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income                                                   7 024   6 511       699   7 024   7 210
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in operating income are:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Research and development   -3 447   -3 311   -169   -170   -181   -186   -98   -67   -93   -88   -201   -189   -4 189   -4 011       -646   -4 189   -4 657
  Depreciation of tangible fixed assets   -578   -622   -126   -115   -105   -101   -96   -86   -14   -12   -20   -32   -939   -968       -221   -939   -1 189
  Amortization of intangible assets   -306   -62   -87   -58   -45   -38   -102   -32   -15   -12   -9   -3   -564   -205       -104   -564   -309
  Impairment charges on tangible and intangible assets   -242   -2           -4                               -246   -2       -5   -246   -7
  Restructuring charges       -42       -16   -21   -2       -41                   -21   -101           -21   -101
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets   18 631   16 887   3 362   2 575   4 686   4 426   2 909   3 169   735   842   36 462   30 297   66 785   58 196           66 785   58 196
Liabilities   -5 487   -4 477   -740   -636   -2 158   -2 142   -599   -824   -163   -198   -15 289   -12 979   -24 436   -21 256           -24 436   -21 256
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity and minority interests   13 144   12 410   2 622   1 939   2 528   2 284   2 310   2 345   572   644   21 173   17 318   42 349   36 940           42 349   36 940
Less net liquidity                                           -14 278   -14 461   -14 278   -14 461           -14 278   -14 461
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net operating assets   13 144   12 410   2 622   1 939   2 528   2 284   2 310   2 345   572   644   6 895   2 857   28 071   22 479           28 071   22 479
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in total assets are:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Total tangible fixed assets   5 897   5 770   1 081   974   893   880   579   648   73   72   537   686   9 060   9 030           9 060   9 030
  Additions to tangible fixed assets   617   534   209   241   129   122   153   120   19   20   224   142   1 351   1 179       174   1 351   1 353
  Total investments in associated companies   1 554   1 375   7   5       2       5           5 154   144   6 715   1 531           6 715   1 531
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employees at year end   41 256   38 397   7 230   5 712   12 824   12 949   6 797   7 644   1 997   1 975   1 012   976   71 116   67 653           71 116   67 653
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2000 sector reporting has been restated to reflect the transfer as of January 1, 2001 of the Ophthalmics business from CIBA Vision to the Pharmaceuticals sector and the switch of certain products between sectors.

97


4.    Regional breakdown of key figures 2001 and 2000
(in CHF millions except employees)

 
  Europe

  The Americas

  Asia/Africa
Australia

  Total

2001                
Sales1   10 158   16 640   5 240   32 028
Operating income2   4 555   2 158   564   7 277
   
 
 
 
Depreciation of tangible fixed assets included in operating income   561   311   67   939
   
 
 
 
Net operating assets3   15 759   10 590   1 722   28 071
   
 
 
 
Additions to tangible fixed assets included in net operating assets   560   723   68   1 351
   
 
 
 
Personnel costs   3 127   3 527   704   7 358
   
 
 
 
Employees at year end   31 386   27 303   12 427   71 116
   
 
 
 
 
  Europe

  The
Americas

  Asia/Africa
Australia

  Total

2000                
Sales1   11 729   17 761   6 315   35 805
   
 
 
 
Operating income2   4 469   2 474   940   7 883
   
 
 
 
Depreciation of tangible fixed assets included in operating income   715   388   86   1 189
   
 
 
 
Net operating assets3   11 176   9 774   1 529   22 479
   
 
 
 
Additions to tangible fixed assets included in net operating assets   790   475   88   1 353
   
 
 
 
Personnel costs   3 703   3 282   828   7 813
   
 
 
 
Employees at year end   28 815   27 063   11 775   67 653
   
 
 
 

        The following countries accounted for more than 5% of the respective Group totals as at, or for the years ended, December 31, 2001 and 2000:

 
   
   
   
  Sales1
   
  Investment in tangible fixed assets
   
   
  Net operating assets3
Country

  2001

  %

  2000

  %

  2001

  %

  2000

  %

  2001

  %

  2000

  %

Switzerland   499   2   624   2   160   12   270   20   10 548   37   3 782   17
USA   13 798   43   13 859   39   655   48   389   29   9 228   33   8 540   38
Japan   2 560   8   2 891   8   14   1   17   1   990   4   891   4
Germany   1 978   6   2 208   6   54   4   110   8   196   1   292   1
France   1 617   5   2 009   5   79   6   90   7   928   3   436   2
Austria   268   1   277   1   107   8   94   7   805   3   604   3
Other   11 318   35   13 937   39   282   21   383   28   5 376   19   7 934   35
   
 
 
 
 
 
 
 
 
 
 
 
Total Group   32 038   100   35 805   100   1 351   100   1 353   100   28 071   100   22 479   100
   
 
 
 
 
 
 
 
 
 
 
 

1
Sales by location of third party customer.

2
Operating income as recorded in the legal entities in the respective region.

98


3
Long-term and current assets (excluding marketable securities, cash and fixed-term deposits) less non-interest bearing liabilities.

        No single customer accounts for 10% or more of the Group's total sales.

5.    Financial income, net

 
  2001
CHF millions

  2000
CHF millions

Interest income   639   1 052
Dividend income   42   91
Capital gains   1 143   784
Income on options and forward contracts   1 588   804
Other financial income     5
   
 
Financial income   3 412   2 736
   
 
Interest expense   -367   -510
Expenses on options and forward contracts   -1 713   -1 334
Other financial expense   -147   -130
   
 
Financial expense   -2 227   -1 974
   
 
Currency result, net   -118   329
   
 
Total financial income, net   1 067   1 091
   
 

        2001 interest income includes a total of CHF 32 million (2000: CHF 14 million) received from the foundations referred to in note 28, at commercial interest rates on the outstanding short-term debt.

6.    Taxes

        Income before taxes and minority interests consists of the following:

 
  2001
CHF millions

  2000
CHF millions

Switzerland   3 372   2 482
Foreign   5 111   6 590
   
 
Total income before taxes and minority interests   8 483   9 072
   
 

99


        Current and deferred income tax expense consists of the following:

 
  2001
CHF millions

  2000
CHF millions

Switzerland   -271   -351
Foreign   -1 005   -1 571
   
 
Total current income tax expense   -1 276   -1 922
   
 
Switzerland   -281   -83
Foreign   175   185
   
 
Total deferred tax (expense)/income   -106   102
   
 
Share of tax of associated companies   -58  
   
 
Total income tax expense   -1 440   -1 820
   
 
Temporary differences on which no deferred tax has been provided as they are permanent in nature:        
– write-down of investments in subsidiaries   1 635   1 340
– goodwill from acquisitions   1 230   1 342

        The gross value of net operating loss carry forwards with their expiry dates is as follows:

 
  2001
CHF millions

  2000
CHF millions

one year   30   22
two years   26   74
three years   75   21
four years   36   51
five years   35   80
more than five years   565   587
   
 
Total   767   835
   
 

        Of these gross values CHF 535 million has been capitalized as a deferred tax asset (2000: CHF 411 million).

        Analysis of tax rate:    The main elements contributing to the difference between the Group's overall expected tax rate (the weighted average tax rate based on the result before tax of each subsidiary) and the effective tax rate are:

 
  2001
%

  2000
%

Expected tax rate   17.7   19.5
Effect of disallowed expenditures   3.1   1.5
Effect of utilization of tax losses brought forward from prior periods   -0.3   -0.3
Effect of income taxed at reduced rates   -1.6   -1.9
Prior year and other items   -1.9   1.3
   
 
Effective tax rate   17.0   20.1
   
 

        The utilization of tax loss carryforwards lowered the tax charge by CHF 22 million and CHF 26 million in 2001 and 2000, respectively.

100



7.    Earnings per share (EPS)

        Basic earnings per share is calculated by dividing the net income attributable to shareholders by the weighted average number of shares outstanding during the year, excluding from the issued shares the average number of shares purchased by the Group and held as treasury shares.

 
  2001

  2000

Net income attributable to shareholders (CHF millions)   7 024   7 210
   
 
Weighted average number of shares outstanding   2 571 673 365   2 613 547 597
   
 
Basic earnings per share (expressed in CHF)   2.73   2.75
   
 

        For the diluted earnings per share the weighted average number of shares outstanding is adjusted to assume conversion of all potential dilutive shares. The Group's convertible debt represents a potential dilution in the earnings per share to the extent that it is not covered by a hedge with non-consolidated employee share participation and employee benefit foundations to deliver the required number of shares on conversion.

        The diluted EPS calculation takes into account all potential dilutions to the earnings per share arising from the convertible debt and call options on Novartis shares. Net income is adjusted to eliminate the applicable convertible debt interest expense less the tax effect.

 
  2001

  2000

Net income attributable to shareholders (CHF millions)   7 024   7 210
Elimination of interest expense on convertible debt (net of tax effect)   3   2
   
 
Net income used to determine diluted earnings per share   7 027   7 212
   
 
Weighted average number of shares outstanding   2 571 673 365   2 613 547 597
Adjustment for assumed conversion of convertible debt   1 507 027   1 608 676
Call options on Novartis shares   4 574 401  
Adjustment for dilutive stock options   1 010 963   982 560
   
 
Weighted average number of shares for diluted earnings per share   2 578 765 756   2 616 138 833
   
 
Diluted earnings per share (expressed in CHF)   2.72   2.75
   
 

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8. Tangible fixed asset movements

 
  Land
CHF millions

  Buildings
CHF millions

  Machinery
CHF millions

  Plant under construction and other equipment CHF millions

  2001
CHF millions

  2000
CHF millions

Cost                        
January 1   385   6 346   9 645   1 175   17 551   23 013
Consolidation changes   3   -12   -46   8   -47   227
Additions   15   367   943   26   1 351   1 353
Disposals   -20   -168   -583   -18   -789   -1 352
Effect of Agribusiness spin-off                     -5 636
Translation effects   -6   -70   -79   -42   -197   -54
   
 
 
 
 
 
December 31   377   6 463   9 880   1 149   17 869   17 551
   
 
 
 
 
 
Accumulated depreciation                        
January 1       -3 072   -5 449       -8 521   -11 347
Consolidation changes       19   55       74   -26
Depreciation charge       -199   -740       -939   -1 189
Depreciation on disposals       90   396       486   900
Effect of Agribusiness spin-off                     3 145
Translation effects       77   44       121   3
   
 
 
 
 
 
December 31       -3 085   -5 694       -8 779   -8 514
   
 
 
 
 
 
Impairment charge   -1   -8   -21       -30   -7
   
 
 
 
 
 
Net book value—December 31   376   3 370   4 165   1 149   9 060   9 030
   
 
 
 
 
 
Insured value—December 31                   21 060   21 329
   
 
 
 
 
 
Net book value of tangible fixed assets under finance lease contracts                   13   17
   
 
 
 
 
 

At December 31, 2001 commitments for purchases of tangible fixed assets totaled CHF 309 million (2000: CHF 248 million).

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9. Intangible asset movements

 
  Goodwill CHF millions

  Product and marketing rights CHF millions

  Trademarks CHF millions

  Software CHF millions

  Other intangibles CHF millions

  2001 CHF millions

  2000 CHF millions

Cost                            
January 1   2 379   3 256   547   55   271   6 508   3 981
Additions   331   928   71   38   80   1 448   4 449
Disposals   -8   -5   -8   -6   -15   -42   -8
Effect of Agribusiness spin-off                         -1 910
Translation effects   34   43   4   -2   -3   76   -4
   
 
 
 
 
 
 
December 31   2 736   4 222   614   85   333   7 990   6 508
   
 
 
 
 
 
 
Accumulated amortization                            
January 1   -311   -91   -80   -41   -155   -678   -767
Amortization charge   -136   -252   -54   -27   -95   -564   -309
Disposals   1   1   3   4   20   29   8
Effect of Agribusiness spin-off                         402
Translation effects   4   -19   -1   2   1   -13   -12
   
 
 
 
 
 
 
December 31   -442   -361   -132   -62   -229   -1 226   -678
   
 
 
 
 
 
 
Impairment charge       -216               -216  
   
 
 
 
 
 
 
Net book value—December 31   2 294   3 645   482   23   104   6 548   5 830
   
 
 
 
 
 
 

Principal additions in 2001 are pitavastatin marketing rights (2000: Famvir) and in both years goodwill on acquisitions.

10. Marketable securities and derivative financial instruments

Market risk

        The Group is exposed to market risk, primarily related to foreign exchange, interest rates and market value of the investment 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 investment of liquid funds and of the currency exposure of certain net investments in foreign subsidiaries. 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. The Group does not enter any financial transaction containing a risk that cannot be quantified at the time the transaction is concluded; i.e. it does not sell short assets it does not have, or does not know it will have, in the future. The Group only sells existing assets or hedges transactions and future transactions (in the case of anticipatory hedges) it knows it will have in the future based on past experience. In the case of liquid

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funds it writes options on assets it has, or on positions it wants to acquire, and for which it has the required liquidity.

        The Group therefore expects that any loss in value for these instruments generally would be offset by increases in the value of the hedged transactions.

        a)    Foreign exchange rates: The Group uses the CHF as its reporting currency and is therefore exposed to foreign exchange movements, primarily in US, European, Japanese, 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. The Group uses forward contracts and foreign currency option contracts to hedge certain anticipated foreign currency revenues and the net investment in certain foreign subsidiaries.

        b)    Commodities: The Group has only a very limited exposure to price risk related to anticipated purchases of certain commodities used as raw materials by the Group's businesses. A change in those prices may alter the gross margin of a specific business, but generally by not more than 10% of that margin and is thus below materiality levels. Accordingly, the Group does not enter into commodity future, forward and option contracts to manage fluctuations in prices of anticipated purchases.

        c)    Interest rates: The Group manages its exposure to interest rate risk by changing the proportion of fixed rate debt and variable rate debt in its total debt portfolio. To manage this mix the Group 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.

        Use of the above-mentioned derivative financial instruments has not had a material impact on the Group's financial position at December 31, 2001 and 2000 or the Group's results of operations for the years ended December 31, 2001 and 2000.

Counterparty risk

        Counterparty risk encompasses issuer risk on marketable securities, settlement risk on derivative and money market contracts and credit risk on cash and time deposits. Issuer risk is minimized by only buying securities which are at least AA rated. Settlement and credit risk is reduced by the policy of entering into transactions with counterparties that are usually at least AA rated banks or financial institutions. Exposure to these risks is closely monitored and kept within predetermined parameters.

        The Group does not expect any losses from non-performance by these counterparties and does not have any significant grouping of exposures to financial sector or country risk.

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Derivative financial instruments

        The following tables show the contract or underlying principal amounts and fair values of derivative financial instruments analyzed by type of contract at December 31, 2001 and 2000. Contract or underlying principal amounts indicate the volume of business outstanding at the balance sheet date and do not represent amounts at risk. The fair values are determined by the markets or standard pricing models at December 31, 2001 and 2000.

 
  Contract or underlying principal amount
  Positive fair values
  Negative fair values
 
  2001
CHF millions

  2000
CHF millions

  2001
CHF millions

  2000
CHF millions