As filed with the Securities and Exchange Commission on January 26, 2021
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 20-F
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2020
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report............
For the transition period from _____ to _____
Commission file number 1-15024
Novartis AG
(Exact name of Registrant as specified in its charter)
NOVARTIS Inc.
(Translation of Registrant’s name into English)
Switzerland
(Jurisdiction of incorporation or organization)
Lichtstrasse 35
4056 Basel, Switzerland
4056 Basel, Switzerland
(Address of principal executive offices)
Shannon Thyme Klinger
Chief Legal Officer
Novartis AG
CH 4056 Basel
Switzerland
Tel.: +41-61-324-1111
Fax: +41-61-324-7826
Chief Legal Officer
Novartis AG
CH 4056 Basel
Switzerland
Tel.: +41-61-324-1111
Fax: +41-61-324-7826
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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American Depositary Shares
each representing 1 share |
NVS
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New York Stock Exchange
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Ordinary shares, nominal value CHF 0.50 per share*
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NOVN
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New York Stock Exchange*
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
2 256 822 048 ordinary shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o No x
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x
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Accelerated filer o
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Non-accelerated filer o
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Emerging growth company o
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If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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U.S. GAAP o
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International Financial Reporting Standards as issued by the International Accounting Standards Board x
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Other o
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If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
* Not for trading but only in connection with the registration of American Depositary Shares representing such ordinary shares.
Table of contents
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Introduction and use of certain terms
Novartis AG and its consolidated affiliates publish consolidated financial statements expressed in US dollars. Our consolidated financial statements responsive to Item 18 of this Annual Report on Form 20-F (Annual Report) are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). “Item 5. Operating and Financial Review and Prospects,” together with the sections on products in development and key development projects of our businesses (see “Item 4. Information on the Company—Item 4.B. Business overview”), constitute the Operating and Financial Review (“Lagebericht”), as defined by the Swiss Code of Obligations.
Unless the context requires otherwise, the words “we,” “our,” “us,” “Novartis,” “Group,” “Company,” and similar words or phrases in this Annual Report refer to Novartis AG and its consolidated affiliates. However, each Group company is legally separate from all other Group companies and manages its business independently through its respective board of directors or similar supervisory body or other top local management body, if applicable. Each executive identified in this Annual Report reports directly to other executives of the Group company that employs the executive, or to that Group company’s board of directors.
In this Annual Report, references to “US dollars,” “USD” or “$” are to the lawful currency of the United States of America, references to “CHF” are to Swiss francs, and references to “euro” or “EUR” are to the lawful currency of 27 member states participating in the European Union; references to the “United States” or to “US” are to the United States of America, references to the “European Union” or to “EU” are to the European Union and its 27 member states, references to “Latin America” are to Central and South America, including the Caribbean, and references to “Australasia” are to Australia, New Zealand, Melanesia, Micronesia and Polynesia, unless the context otherwise requires; references to the “EC” are to the European Commission; references to “associates” are to employees of our affiliates; references to the “SEC” are to the US Securities and Exchange Commission; references to the “FDA” are to the US Food and Drug Administration; references to the “EMA” are to the European Medicines Agency, an agency of the EU, and references to the “CHMP” are to the Committee for Medicinal Products for Human Use of the EMA; references to “ADR” or “ADRs” are to Novartis American Depositary Receipts, and references to “ADS” or “ADSs” are to Novartis American Depositary Shares; references to the “NYSE” are to the New York Stock Exchange, and references to “SIX” are to the SIX Swiss Exchange; references to “ECN” are to the Executive Committee of Novartis; references to “GSK” are to GlaxoSmithKline plc, references to “AAA” are to Advanced Accelerator Applications S.A., references to “Novartis Gene Therapies” are to Novartis Gene Therapies, Inc. (formerly AveXis), and references to “Endocyte” are to Endocyte, Inc.
All product names appearing in italics are trademarks owned by or licensed to Group companies. Product names identified by a “®” or a “™” are trademarks that are not owned by or licensed to Group companies and are the property of their respective owners.
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Forward-looking statements
This Annual Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the United States Private Securities Litigation Reform Act of 1995, as amended. Other written materials filed with or furnished to the SEC by Novartis, as well as other written and oral statements made to the public, may also contain forward-looking statements. Forward-looking statements can be identified by words such as “potential,” “expected,” “will,” “planned,” “pipeline,” “outlook,” “may,” “could,” “would,” “anticipate,” “seek,” or similar terms, or by express or implied discussions regarding potential new products, potential new indications for existing products, or regarding potential future revenues from any such products; or regarding the potential outcome, or financial or other impact on Novartis, of the acquisition of The Medicines Company, and other transactions described; or regarding the potential impact of share buybacks; or regarding potential future sales or earnings of the Group or any of its divisions or potential shareholder returns; or regarding potential future credit ratings of the Group; or by discussions of strategy, plans, expectations or intentions. Such forward-looking statements are based on the current beliefs and expectations of management regarding future events, and are subject to significant known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those set forth in the forward-looking statements. You should not place undue reliance on these statements.
In particular, our expectations could be affected by, among other things:
• Uncertainties regarding the success of key products and commercial priorities;
• Global trends toward healthcare cost-containment, including ongoing government, payer and general public pricing and reimbursement pressures and requirements for increased pricing transparency;
• Uncertainties in the research and development of new healthcare products, including clinical trial results and additional analysis of existing clinical data;
• Our ability to obtain or maintain proprietary intellectual property protection, including the ultimate extent of the impact on Novartis of the loss of patent protection and exclusivity on key products that commenced in prior years and is expected to continue this year;
• The potential that the strategic benefits, operational efficiencies or opportunities expected from our recent transactions or our organizational, structural and cultural transformations may not be realized or may take longer to realize than expected;
• Our performance on environmental, social and governance measures;
• Uncertainties in the development or adoption of potentially transformational technologies and business models;
• Uncertainties regarding potential significant breaches of information security or disruptions of our information technology systems;
• Our reliance on outsourcing key business functions to third parties;
• Our ability to attract, integrate and retain key personnel and qualified individuals;
• Uncertainties regarding actual or potential legal proceedings, including, among others, litigation and other legal disputes with respect to our recent transactions, product liability litigation, litigation and investigations regarding sales and marketing practices, intellectual property disputes and government investigations generally;
• Regulatory actions or delays or government regulation generally, including potential regulatory actions or delays with respect to the development of the products described in this Annual Report;
• Our ability to comply with data privacy laws and regulations, and uncertainties regarding potential significant breaches of data privacy;
• Safety, quality, data integrity or manufacturing issues;
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• General political, economic and business conditions, including the effects of and efforts to mitigate pandemic diseases such as COVID-19;
• The impact of pandemic diseases such as COVID-19 on enrollment in, initiation and completion of our clinical trials in the future, and research and development timelines;
• Uncertainties involved in predicting shareholder returns;
• Uncertainties regarding the effects of recent and anticipated future changes in tax laws and their application to us;
• Uncertainties regarding future global exchange rates; and
• Uncertainties regarding future demand for our products.
Some of these factors are discussed in more detail in this Annual Report, including under “Item 3. Key Information—Item 3.D. Risk factors,” “Item 4. Information on the Company,” and “Item 5. Operating and Financial Review and Prospects.” Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Annual Report as anticipated, believed, estimated or expected. We provide the information in this Annual Report as of the date of its filing. We do not intend, and do not assume any obligation, to update any information or forward-looking statements set out in this Annual Report as a result of new information, future events or otherwise.
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Part I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
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Item 2. Offer Statistics and Expected Timetable
Not applicable.
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Item 3. Key Information
3.A Selected financial data
The selected financial information set out below has been extracted from our consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standard Board (IASB). Our consolidated financial statements for the years ended December 31, 2020, 2019 and 2018, are included in “Item 18. Financial Statements” in this Form 20-F.
All financial data should be read in conjunction with “Item 5. Operating and Financial Review and Prospects.” All financial data presented in this Form 20-F are qualified in their entirety by reference to the consolidated financial statements and their notes.
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Cash dividends per share
Cash dividends are translated into US dollars at the Bloomberg Market System Rate on the payment date. Because we pay dividends in Swiss francs, exchange rate fluctuations will affect the US dollar amounts received by holders of ADRs.
3.B Capitalization and indebtedness
Not applicable.
3.C Reasons for the offer and use of proceeds
Not applicable.
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3.D Risk factors
Our businesses face significant risks and uncertainties. You should carefully consider all of the information set forth in this Annual Report and in other documents we file with or furnish to the SEC, including the following risk factors, before deciding to invest in or to maintain an investment in any Novartis securities. Our business, as well as our reputation, financial condition, results of operations, and share price, could be materially adversely affected by any of these risks, as well as other risks and uncertainties not currently known to us or not currently considered material.
Strategic risks
Key products and commercial priorities
Risk description
Failure to deliver key commercial priorities and successfully launch new products
Context and potential impact
Our ability to maintain and grow our business and to replace revenue and income lost to generic, biosimilar and other competition depends heavily on the commercial success of our new or existing key products. The commercial success of these products could be impacted at any time by a number of factors, including pressure from new or existing competitive products, changes in the prescribing habits of healthcare professionals, unexpected side effects or safety signals, supply chain issues or other product shortages, pricing pressure, regulatory proceedings, changes in labeling, loss of intellectual property protection, and global pandemics. In addition, our revenue and margins could be significantly impacted by the timing and rate of commercial acceptance of new products.
We face competition from scientific advances and other company’s new products. Healthcare professionals, patients and payers may choose competitor products instead of ours for various reasons, including if they perceive them to be better in terms of efficacy, safety, cost, convenience or other reasons. The commercial success of our key products and launches in the face of increasing competition and pressures on pricing requires significant attention and management focus. Such competitive products could significantly affect the revenue from our products and our results of operations. This impact could also be compounded to the extent such competition results in us making significant additional investments in research and development, marketing or sales.
Pricing, reimbursement and access
Risk description
Pricing and reimbursement pressure, including access to healthcare
Context and potential impact
Our businesses experience significant pressures on the pricing of our products and on our ability to obtain and maintain satisfactory rates of reimbursement for our products by governments, insurers and other payers. These pressures have many sources, including growth of healthcare costs as a percentage of gross domestic product; funding restrictions and policy changes; management of the COVID-19 pandemic and its impact on healthcare spending; and public controversies, political debate, investigations and legal proceedings regarding pharmaceutical pricing. Pressures on pricing may negatively impact, in parallel, both our product pricing and our market access.
In addition, we face numerous cost-containment measures imposed by governments and other payers, including government-imposed industrywide price reductions, mandatory pricing systems, reference pricing systems, payers limiting access to treatments based on cost-benefit analyses, imports of drugs from lower-cost countries to higher-cost countries, shifting of the payment burden to patients through higher co-payments and co-pay accumulator programs, limiting physicians’ ability to choose among competing medicines, mandatory substitution of generic drugs for the patented equivalent, pressure on physicians to reduce the prescribing of patented prescription medicines, increasing pressure on intellectual property protections, and growing requirements for increased transparency on pricing. For more information on price controls, see “Item 4. Information on the Company—Item 4.B Business overview—Innovative Medicines—Price controls.”
These challenges are expected to continue to increase in 2021 and beyond as healthcare investment into the management of the COVID-19 pandemic continues; political pressures mount; and healthcare payers around the globe, including government-controlled health authorities, insurance companies and managed care organizations, step up initiatives to reduce the overall cost of healthcare, restrict access to higher-priced new medicines, increase the use of generics, and impose overall price cuts. These factors may materially affect our ability to achieve value-based prices and maintain an acceptable return on our investments in the research and development of our products, and may impact our ability to research and develop new products.
In addition, our Sandoz Division has faced and may in the future face strong competition from other generic and biosimilar pharmaceutical companies, which aggressively compete for market share, including through significant price competition. Such competitive actions may increase the costs and risks associated with our efforts to introduce and market generic and biosimilar products, may delay the introduction or marketing of such products, and may further limit the prices at which we are able to sell these products. In particular, in the US in past years, industrywide price competition among generic pharmaceutical companies and consolidation of buyers caused significant declines in sales and profits of Sandoz.
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Research and development
Risk description
Failure or delay in the research and development of new products or new indications for existing products
Context and potential impact
We engage in extensive and costly research and development activities, both through our own internal resources and through collaborations with third parties, in an effort to identify and develop new products and new indications for existing products that address unmet and changing medical needs and are commercially successful. Our ability to grow our business; to replace sales lost due to branded competition, entry of generics, or other reasons; and to bring to market products that take advantage of new and potentially disruptive technologies, including cell, gene and radioligand therapies, depends in significant part upon the success of these efforts.
Research and development of new products of our Innovative Medicines Division, including the research and development of our cell and gene therapies, is a costly, lengthy and uncertain process. Because intellectual property protections are limited in scope and duration, the longer it takes to develop a product, the less time there may be for us to recoup our research and development costs before loss of exclusivity. Failure can occur at any point in the process, including in later stages after substantial investment. In spite of such substantial investment, there can be no guarantee that our research and development activities will produce commercially successful new products that will enable us to replace revenue and income lost to competition and to grow our business. See also “Item 4. Information on the Company—Item 4.B Business overview—Innovative Medicines—Research and development” with regards to the research and development efforts of our Innovative Medicines Division.
New products must undergo intensive preclinical and clinical testing, and must be approved by means of highly complex, lengthy and expensive approval processes that can vary from country to country. Further, regulatory authorities continue to establish new and increasingly rigorous and time-consuming requirements for approval and reimbursement of new products and new indications. Similarly, the post-approval regulatory burden has also increased. These requirements make the maintenance of regulatory approvals for our products increasingly expensive, and further heighten the risk of recalls, product withdrawals, loss of market share, and loss of revenue and profitability. The clinical testing, regulatory processes and post-approval activities described above become more difficult during pandemics, such as the COVID-19 pandemic. This is primarily due to challenges related to recruiting, enrolling and treating patients in clinical trials. In addition, travel restrictions resulting from pandemics make it more difficult for regulatory authorities to inspect sites. For a further description of the research and development and approval processes for the products of our Innovative Medicines Division, see the sections headed “Research and development” and “Regulation” included in the description of our Innovative Medicines Division under “Item 4. Information on the Company—Item 4.B Business overview—Innovative Medicines.”
Our Sandoz Division has made, and expects to continue to make, significant investments in the development of biotechnology-based, “biologic” medicines intended for sale as bioequivalent or “biosimilar” versions of currently marketed biotechnology products. While the development of such products typically is significantly less costly and complex than the development of the equivalent originator medicines, it is nonetheless significantly more costly and complex than that for typical small-molecule generic products. See also “Item 4. Information on the Company—Item 4.B Business overview—Sandoz—Development and registration” with regards to the research and development efforts of our Sandoz Division. In addition, many countries do not yet have fully developed legislative or regulatory pathways to facilitate the development of biosimilars and permit their sale in a manner in which they are readily substitutable alternatives to the originator product. Further delays or difficulties in the development or marketing of biosimilars could put at risk the significant investments that Sandoz has made, and will continue to make, in its Biopharmaceuticals business. Failure to successfully develop and market biosimilars could have a material adverse effect on the success of the Sandoz Division and the Group as a whole. For more information about the approval processes that must be followed to market Sandoz Division products, see “Item 4. Information on the Company—Item 4.B Business overview—Sandoz—Regulation.”
Further, our research and development activities must be conducted in an ethical and compliant manner. Among other things, we are concerned with patient safety, data privacy, Current Good Clinical Practices (cGCP) requirements, data integrity, the fair treatment of patients, and animal welfare. Should we fail to properly manage such issues, we risk injury to third parties, damage to our reputation, negative financial consequences as a result of potential claims for damages, sanctions and fines, and the potential that investments in research and development activities could have no benefit to the Group. Research to find new targets for drug discovery and the therapeutic agents to treat unmet medical needs is made more difficult during pandemics, such as the COVID-19 pandemic. This is primarily due to safety-related restrictions on the ability of laboratory scientists to work in research laboratories, and impacts our ability to collaborate with academic and commercial research organizations facing similar challenges and restrictions.
Intellectual property
Risk description
Expiry, assertion or loss of intellectual property protection
Context and potential impact
Many products of our Innovative Medicines Division are protected by intellectual property rights, which may provide us with exclusive rights to market those products for a limited time and enable us to sustainably finance our research and development. However, the strength and duration of those rights can vary significantly from
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product to product and country to country, and they may be successfully challenged by third parties or governmental authorities.
Loss of intellectual property protection and the introduction of generic or biosimilar competition for a patented branded medicine typically result in a significant and rapid reduction in net sales and operating income for the branded product, because generic or biosimilar manufacturers typically offer their versions at sharply lower prices. Such competition can occur after successful challenges to intellectual property rights or the regular expiration of the patent term or other intellectual property rights. Such competition can also result from the entry of generic or biosimilar versions of another medicine in the same therapeutic class as one of our drugs or in a competing therapeutic class, from a Declaration of Public Interest or the compulsory licensing of our drugs by governments, or from a general weakening of intellectual property and governing laws in certain countries around the world. In addition, generic or biosimilar manufacturers may sometimes conduct so-called “launches at risk” of products that are still under legal challenge for infringement, or whose patents are still under legal challenge for validity, before final resolution of legal proceedings.
We also rely in all aspects of our businesses on unpatented proprietary technology, know-how, trade secrets and other confidential information, which we seek to protect through various measures, including confidentiality agreements with licensees, employees, third-party collaborators, and consultants who may have access to such information. If these agreements are breached or our other protective measures should fail, then our contractual or other remedies may not be adequate to cover our losses.
We may also be subject to assertions of intellectual property rights against our innovative medicines by third parties. If successful, these actions may involve payment of damages, for example for patent infringement, and may also involve injunctive relief requiring removal of a product from the market (or removing a therapeutic indication from the product’s approved labeling) for some period of time or throughout the life of the asserted intellectual property right. These damages or an injunction may have a material impact on our operating income and net sales.
In any given year, we may experience a potentially significant impact on our net sales from products that have already lost intellectual property protections, as well as products that may lose protection during the year. Because we may have substantially reduced marketing and research and development expenses related to products that are in their final years of exclusivity, the initial loss of protection for a product during a given year could also have an impact on our operating income for that year in an amount corresponding to a significant portion of the product’s lost sales. The magnitude of the impact of generic or biosimilar competition on our income could depend on a number of factors, including, with respect to income in a given year, the time of year at which the generic or biosimilar competitor is launched; the ease or difficulty of manufacturing a competitor product and obtaining regulatory approval to market it; the number of generic or biosimilar competitor products approved, including whether, in the US, a single competitor is granted an exclusive marketing period; whether an authorized generic is launched; the geographies in which generic or biosimilar competitor products are approved, including the strength of the market for generic or biosimilar pharmaceutical products in such geographies, and the comparative profitability of branded pharmaceutical products in such geographies; and our ability to successfully develop and launch profitable new products to replace the income lost to generic or biosimilar competition. For more information on the patent and generic competition status of our Innovative Medicines Division products, see “Item 4. Information on the Company—Item 4.B Business overview—Innovative Medicines—Intellectual property.”
Alliances, acquisitions and divestments
Risk description
Failure to identify external business opportunities or realize the expected benefits from our strategic acquisitions or divestments
Context and potential impact
As part of our strategy, from time to time we acquire and divest products or entire businesses, and enter into strategic alliances and collaborations. For example, in 2020 we completed the acquisitions of The Medicines Company and the Japanese operations and associated assets of Aspen Global Incorporated. This strategy depends in part on our ability to identity strategic external business opportunities and to move forward with such opportunities on acceptable terms.
Once a strategic transaction is agreed upon with a third party, we may not be able to complete the transaction in a timely manner or at all, nor can we be sure that pre-transaction due diligence will identify all possible issues that might arise during and after the transaction. Our efforts on such transactions can also divert management’s attention from our existing businesses.
Further, after an acquisition, efforts to develop and market acquired products, to integrate the acquired business or to achieve expected synergies may fail or may not fully meet expectations, as a result of difficulties in retaining key personnel, customers and suppliers; failure to obtain marketing approval or reimbursement within expected time frames or at all; differences in corporate culture, standards, controls, processes and policies; or other factors. Acquisitions can also result in liabilities being incurred that were not known at the time of acquisition, or the creation of tax or accounting issues. Acquired businesses are not always in full compliance with legal, regulatory or Novartis standards, including, for example, Current Good Manufacturing Practices (cGMP) or cGCP standards, which can be costly and time-consuming to remedy. Also, our strategic alliances and collaborations with third parties may not achieve their intended goals and objectives within expected time frames, or at all.
Similarly, we cannot ensure that we will be able to successfully divest or spin off businesses or other assets that we have identified for this purpose, or that any completed divestment or spin-off will achieve the expected strategic benefits, operational efficiencies or opportuni-
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ties, or that the divestment or spin-off will ultimately maximize shareholder value.
Environmental, social and governance matters
Risk description
Unsuccessful management of environmental, social and governance matters
Context and potential impact
Increasingly, in addition to financial results, companies are being judged by performance on a variety of environmental, social and governance (ESG) matters, which can contribute to the long-term sustainability of companies’ performance. An inability to successfully perform on ESG matters can result in negative impacts to our reputation, recruitment, retention, operations, financial results, and the price of our shares.
A variety of organizations measure the performance of companies on ESG topics, and the results of these assessments are widely publicized. In addition, investment in funds that specialize in companies that perform well in such assessments are increasingly popular, and major institutional investors have publicly emphasized the importance of such ESG measures in making their investment decisions. Topics taken into account in such assessments include, among others, the unintentional costs or benefits of our actions on third parties not involved in such actions, which may impact society and the environment, such as with respect to climate change, the degradation of biodiversity, and inequality in society. In particular, the resulting costs of such actions may in the long-term impact our operations and ability to achieve our strategic goals, ultimately resulting in broader negative impacts on the value of Novartis. Therefore, the role of our Board of Directors and executive officers in supervising various sustainability issues is becoming increasingly important. In addition to the topics typically considered in such assessments in the healthcare industry, the public’s ability to access our medicines is particularly important. If our advocacy and lobbying efforts are not aligned with our publicly stated ESG targets, our performance on ESG assessments may be negatively impacted.
We actively manage a broad range of such ESG matters, taking into consideration their expected impact on the sustainability of our business over time, and the potential impact of our business on society and the environment. However, in light of investors’ increasing focus on ESG matters and rapidly changing views on acceptable levels of action across a range of topics, there can be no certainty that we will manage such issues successfully, or that we will successfully meet society’s or investors’ expectations as to our proper role.
Organizational, structural and cultural transformations
Risk description
Failure to successfully achieve our organizational, structural and cultural transformations
Context and potential impact
From time to time we reassess our business organization to ensure we have the optimal structure with which to execute our strategy. This resulted in our decision to centralize and optimize our manufacturing and business services organizations, which is currently being effected through a series of complex initiatives. For example, our Novartis Technical Operations organizational unit is currently undergoing a transformation to change its operating model by building two global operations centers that will allow our manufacturing sites to focus on their core activity, which is the manufacture of our medicines. This structural transformation is expected to be completed over the next 24 months, and a failure to complete this transformation in the expected time frame, or at all, could negatively impact our operations. We are also undertaking a cultural transformation to an “inspired, curious and unbossed” organization, which is a core organizational imperative. Inability to successfully implement this cultural change may result in cynicism and disengagement of our associates, as well as impede our ability to retain key talent in strategically important areas.
These organizational changes are being implemented in parallel and have interdependencies that could negatively impact each other and their timing of implementation. The overall extent and pace of organizational change, and the additional workload and complexity for our employees in some areas, could trigger uncertainty, stress and fatigue among employees, potentially resulting in instability within the organization that may lead to failure in delivering the desired organizational changes. As a result, the expected benefits of these organizational changes may never be fully realized or may take longer to realize than expected.
Digitalization and emerging business models
Risk description
Missed opportunities in digitalization and emerging business models
Context and potential impact
Rapid progress in medical and digital technologies and in the development of new business models is substantially transforming our industry and is creating new businesses and new opportunities for improving patient care and increasing revenue and profit, while sometimes quickly rendering established businesses uncompetitive or obsolete. Such transformations, both positive and negative, may impact our businesses. For example, numerous technology companies are seeking to enter the healthcare field, which generates opportunities for partnerships and alliances for us that may accelerate innovation and complement our current capabilities, although we also may be impacted by potential innovative technological advances among our existing competitors, through partnerships and alliances with technology companies or otherwise.
To take advantage of these opportunities, we are implementing a digital transformation strategy, with the goal of becoming an industry leader in leveraging advanced analytics and digital technologies. We expect to invest substantial resources into efforts to improve the way we use data in drug discovery and development; to improve the ways we engage with patients, doctors and other stakeholders; and to automate business processes. Our success in these efforts will depend on many
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factors, including data quality, technology architecture, entering into successful partnerships and alliances with technology companies, a cultural change among our employees, attracting and retaining employees with appropriate skills and mindsets, and successfully innovating across a variety of technology fields. The COVID-19 pandemic has accelerated our digital transformation, including in the ways we engage and interact with our stakeholders, bring our products to market, and meet the needs of patients. These initiatives include the development and implementation of personalized engagement models enabled by digital technologies, the demand for which has increased in response to the COVID-19 pandemic. Our digital transformation efforts have started to gain significant traction, but we do not yet know whether they will be sustainable as they are scaled and made a part of our normal business operations. There is also no guarantee that these efforts will succeed, that we will successfully implement our digital transformation strategy, or that we will be able to do so within our budget or in the expected time frame.
At the same time, other technology companies with specialized expertise or business models and substantial resources are entering the healthcare field, from research and development to pharmaceutical distribution and delivery of care. These new entrants could disrupt our relationships with patients, healthcare professionals, customers, distributors and suppliers, with unknown potential consequences for us. Such new competitors may impact our share of the healthcare value chain, or successfully develop products or technologies that could make our products or business models uncompetitive or obsolete. The risks described above may result in our business being supplanted in whole or in part by new competitors with disruptive new technologies or business models.
Operational risks
Cybersecurity and IT systems
Risk description
Cybersecurity breaches and catastrophic loss of IT systems
Context and potential impact
We are heavily dependent on critical, complex and interdependent information technology (IT) systems, including internet-based systems to support our business processes. We also have outsourced significant parts of our IT infrastructure to third-party providers, and we currently use these providers to perform business-critical IT services for us. We are therefore vulnerable to cybersecurity attacks and incidents on such networks and systems, whether our own or those of the third-party providers we contract, and we have experienced and may in the future experience such cybersecurity threats and attacks. Cybersecurity threats and attacks take many forms, and the size, age and complexity of our IT systems make them potentially vulnerable to external and internal security threats; outages; malicious intrusions and attacks; cybercrimes, including state-sponsored cybercrimes; malware; misplaced or lost data; programming or human errors; or other similar events. In the context of the COVID-19 pandemic, the risk of such threats and attacks has increased, as virtual and remote working has become more widely used, and sensitive data is accessed by employees working in less secure, home-based environments. In addition, due to our reliance on third-party providers, we have experienced and may in the future experience interruptions, delays or outages in IT service availability due to a variety of factors outside of our control, including technical failures, natural disasters, fraud, or security attacks experienced by or caused by the third-party provider. Interruptions in the service provided by these third parties could affect our ability to perform critical tasks.
A significant information security or other event, such as a disruption or loss of availability of one or more of our IT systems, whether managed by us or a third-party service provider, has previously and could in the future negatively impact important business processes, such as the conduct of scientific research and clinical trials, the submission of data and information to health authorities, our manufacturing and supply chain processes, our shipments to customers, our compliance with legal obligations, and communication between employees and with third parties. IT issues have previously and could in the future also lead to the compromise of trade secrets or other intellectual property that could be sold and used by competitors to accelerate the development or manufacturing of competing products; to the compromise of personal financial and health information; and to the compromise of IT security data such as usernames, passwords and encryption keys, as well as security strategies and information about network infrastructure, which could allow unauthorized parties to gain access to additional systems or data. In addition, malfunctions in software or medical devices that make significant use of IT could lead to a risk of direct harm to patients.
Although we have experienced some of the events described above, to date they have not had a material impact on our operations. Nonetheless, the occurrence of any of the events described above in the future could disrupt our business operations and result in enforcement actions or liability, including potential government fines and penalties, claims for damages, and shareholder litigation or allegations that the public health, or the health of individuals, has been harmed.
Any significant events of this type could require us to expend significant resources beyond those we already invest to remediate any damage, to further modify or enhance our protective measures, and to enable the continuity of our business.
Third-party management
Risk description
Failure to maintain adequate governance and oversight over third-party relationships, and failure of third parties to meet their contractual, regulatory or other obligations
Context and potential impact
We outsource the performance of certain key business functions to third parties, and invest a significant amount of effort and resources into doing so, including to manage and oversee such third parties. Such outsourced
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functions include research and development collaborations, manufacturing operations, warehousing and distribution activities, certain finance functions, sales and marketing activities, data management and others. Some of these third parties, particularly those in developing countries, do not have internal compliance systems comparable to those within our organization.
Our reliance on outsourcing and third parties for the research and development, sales or manufacturing of our products poses certain risks, including misappropriation of our intellectual property, failure of the third party to comply with regulatory and quality assurance requirements, unexpected supply disruptions, breach of the research and development or manufacturing agreement by the third party, and the unexpected termination or nonrenewal of the agreement by the third party.
In addition, governments and the public expect companies like Novartis to take responsibility for and report on compliance with various human rights, responsible sourcing and environmental practices, as well as other actions of their third-party contractors around the world.
Ultimately, if third parties fail to meet their obligations to us, we may lose our investment in the collaborations or fail to receive the expected benefits of our agreements with such third parties. In addition, should any of these third parties fail to comply with the law or our standards, or should they otherwise act inappropriately in the course of their performance of services for us, there is a risk that we could be held responsible for their acts, that our reputation may suffer, and that penalties may be imposed upon us.
Manufacturing and product quality
Risk description
Inability to ensure proper controls in product development and product manufacturing, and failure to comply with applicable regulations and standards
Context and potential impact
The development and manufacture of our products is complex and heavily regulated by governmental health authorities around the world. Whether or not our products and the related raw materials are developed and manufactured at our own manufacturing sites or by third parties, we must ensure that all development and manufacturing processes comply with regulatory requirements as well as our own quality standards. Failure to comply with regulatory requirements has resulted in, and may in the future result in, warning letters, suspension of manufacturing, seizure of products, injunctions, product recalls, failure to secure product approvals, or debarment.
In recent years, global health authorities have substantially intensified their scrutiny of manufacturers’ compliance with regulatory requirements. Any significant failure by us or our third-party suppliers to comply with regulatory requirements, or with health authorities’ expectations, may create the need to suspend clinical trials, shut down production facilities or production lines, and recall commercial products. A failure to fully comply with regulatory requirements could also lead to a delay in the approval of new products, an inability to ship or import our products, and significant penalties and reputational harm.
Talent management
Risk description
Inability to attract, integrate and retain key personnel and qualified individuals
Context and potential impact
We rely on a diverse, capable workforce across our businesses and functions. Novartis invests in attracting, recruiting, developing and retaining highly skilled individuals to achieve our business objectives. The loss of key personnel – including senior members of our scientific and management teams, high-quality researchers and development specialists, and skilled personnel in key markets – could delay or prevent the achievement of our major business objectives.
Our future growth will demand that we retain talented associates and leaders while also recruiting new talent who bring new skills and perspectives. The market for skilled labor has become increasingly competitive. We are experiencing challenges in attracting skilled talent in several areas, including in our Oncology business unit and for our chimeric antigen receptor T-cell (CAR-T) therapies, gene therapies and radioligand therapy products. The supply of new talent is especially limited in many of the geographies that are expected to be sources of growth for Novartis, including Emerging Growth Markets such as China, where there is a limited pool of executives and functional experts with the experience needed to work successfully in a global organization like Novartis. The geographic mobility of talent worldwide is decreasing, with ample career opportunities available closer to home to talented individuals in developed and developing countries. This decrease in mobility may be worsened by anti-immigrant sentiments in many countries, and laws discouraging immigration.
The constraints associated with lockdowns and social distancing during the COVID-19 pandemic complicated and initially slowed our talent acquisition activities. The necessity to adopt remote working across a portion of the workforce has accelerated our transition toward a new working model, in which a number of our associates have the flexibility to determine where, when and how they work. Our transition toward a more flexible working model accelerated our efforts to expand our sources to recruit talent from an increasingly global pool. We aspire to become less inhibited by job location requirements or candidate mobility preferences when searching for the highest caliber talent to fill openings. However, these efforts may not achieve the intended results in any particular time frame, or at all, or may have unanticipated negative consequences, including possible negative impacts on company culture and productivity. In addition, in many of the specialized fields from which we draw talent, such as clinical development, biosciences, chemistry, drug manufacturing and IT, and in many senior leadership positions, high demand will continue to limit the pool of external talent and increase the risk of turnover.
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Legal and compliance
Risk description
Challenges in keeping up with legal and regulatory requirements, and evolving societal expectations
Context and potential impact
We are obligated to comply with the laws of all of the countries in which we operate and sell products with respect to an extremely wide and growing range of activities. Such legal requirements are extensive and complex.
The laws and regulations relevant to the healthcare industry and applicable to us are broad in scope and are subject to change and evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our business practices. For example, we have been, are currently and may in the future be subject to various significant legal proceedings, such as private party litigation, government investigations and law enforcement actions worldwide. These types of matters may take various forms based upon evolving government enforcement and private party litigation priorities, and could include matters pertaining to pricing; bribery and corruption; trade regulation and embargo legislation; product liability; commercial disputes; employment and wrongful discharge; antitrust; securities; government benefit programs; reimbursement; rebates; healthcare fraud; sales and marketing practices; insider trading; occupational health and safety; environmental regulations; tax; cybersecurity; data privacy; regulatory interactions; and intellectual property. Such activities can involve criminal proceedings, and can retroactively challenge practices previously considered to be legal.
There is also a risk that governance for our medical and patient support activities, and our interactions with governments, public officials/institutions, healthcare professionals, healthcare organizations and patient organizations may be inadequate or fail, or that we may undertake activities based on improper or inadequate scientific justification.
Our Sandoz Division may from time to time seek approval to market a generic version of a product before the expiration of patents claimed by the marketer of the patented product. We do this in cases where we believe the relevant patents are invalid or unenforceable, or would not be infringed by our generic product. As a result, affiliates of our Sandoz Division frequently face patent litigation, and in certain circumstances, we may make the business decision to market a generic product even though patent infringement actions are still pending. Should we elect to do so and conduct a so-called “launch at risk,” we could face substantial damages if the final court decision is adverse to us.
Legal proceedings and investigations are inherently unpredictable, and large judgments sometimes occur. As a consequence, we may in the future incur judgments that could involve large payments, including the potential repayment of amounts allegedly obtained improperly, and other penalties, including treble damages. In addition, such legal proceedings and investigations, even if meritless, may affect our reputation, may create a risk of potential exclusion from government reimbursement programs in the US and other countries, and may lead to civil litigation. As a result, having taken into account all relevant factors, we have in the past and may again in the future enter into major settlements of such claims without bringing them to final legal adjudication by courts or other such bodies, despite having potentially significant defenses against them, in order to limit the risks they pose to our business and reputation. Such settlements may require us to pay significant sums of money and to enter into corporate integrity or similar agreements, which are intended to regulate company behavior for extended periods.
For information on significant legal matters pending against us, see “Item 18. Financial Statements—Note 22. Provisions and other non-current liabilities” and “Item 18. Financial Statements—Note 28. Commitments and contingencies.”
New requirements may also be imposed on us as a result of changing government and societal expectations regarding the healthcare industry, and acceptable corporate behavior generally. For example, we are faced with laws and regulations requiring changes in how we do business, including with respect to disclosures concerning our interactions with healthcare professionals, healthcare organizations and patient organizations. These laws and regulations include requirements that we disclose payments or other transfers of value made to healthcare professionals and organizations, as well as information relating to the costs and prices for our products, which represent evolving standards of acceptable corporate behavior. These requirements may incur significant costs, including substantial time and additional resources, that are necessary to bring our interactions with healthcare professionals and organizations into compliance with these evolving standards.
In addition to legal and regulatory requirements, as a company we aim to meet the evolving societal expectations of the public and our investors regarding ethical behavior and the increasing importance placed on ESG matters.
To help us in our efforts to comply with the many requirements that impact us, we have a significant global ethics and compliance program in place, and we devote substantial time and resources to efforts to ensure that our business is conducted in a lawful and publicly acceptable manner. Despite our efforts, an actual or alleged failure to comply with law or with heightened public expectations could lead to substantial liabilities that may not be covered by insurance, or to other significant losses.
Data privacy
Risk description
Noncompliance with personal data protection laws and regulations
Context and potential impact
We operate in an environment that relies on the collection, processing, analysis and interpretation of large sets of patients’ and other individuals’ personal information, including via social media and mobile technologies. Also, the operation of our business requires data to flow freely across borders of numerous countries in which there are
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different, and potentially conflicting, frequently changing data privacy laws in effect. For example, the EU General Data Protection Regulation (GDPR), which took effect in May 2018; the California Consumer Privacy Act, which took effect in January 2020; and Brazil’s General Personal Data Protection Law, which entered into force in September 2020, impose stringent requirements on how we and third parties with whom we contract collect, share, export or otherwise process personal information, and provide for significant penalties for noncompliance. Further examples of countries with data-specific requirements governing where data is stored and whether it can be transferred outside the country are Russia and China. Breaches of our systems or those of our third-party contractors, or other failures to protect the data we collect from misuse or breach by third parties, could expose such personal information to unauthorized persons.
Any event involving the substantial loss of personal information, use of personal information without a legal basis, or other privacy violations could give rise to significant liability, reputational harm, damaged relationships with business partners, and potentially substantial monetary penalties under laws enacted or being enacted around the world. Such events could also lead to restrictions on our ability to use personal information and/or transfer personal information across country borders. In addition, there is a trend of increasing divergence of data privacy legal frameworks, not only across these frameworks but also within individual legal frameworks themselves. This divergence may constrain the implementation of global business processes and may lead to different approaches on the use of health data for scientific research, which may have a negative impact on our business and operations.
Supply chain
Risk description
Inability to maintain continuity of product supply
Context and potential impact
Many of our products are produced using technically complex manufacturing processes and require a supply of highly specialized raw materials. For some of our products and raw materials, we may rely on a single source of supply. In addition, we manufacture and sell a number of sterile products, biologic products, and products involving advanced therapy platforms, such as CAR-T therapies, gene therapies and radioligand therapy products, all of which are particularly complex and involve highly specialized manufacturing technologies. Because the production process for some of our products is complex, there is a risk of production failures, which may result in supply interruptions or product recalls due to defective product being distributed to the market.
In addition, due to the inherent complexities of our production processes, we are required to plan our production activities well in advance. If we suffer from third-party raw material shortages, underestimate market demand for a product, or fail to accurately predict when a new product will be approved for sale, then we may not be able to produce sufficient product to meet demand. These issues could be made worse during a pandemic like the COVID-19 pandemic, and can lead to (i) a sudden increase in demand for selected medicinal products, resulting in the short-term unavailability of raw material; (ii) logistical and supply challenges that may lead to our inability to ship products from one place to another due to restrictions imposed as a result of a pandemic, which can impact transportation and warehousing costs; or (iii) our inability to properly operate a production site due to restrictions imposed as the result of a pandemic.
Our or our third-party suppliers’ inability to manage such issues could lead to shutdowns, to product shortages, or to our being entirely unable to supply products to patients for an extended period of time. Further, because our products are intended to promote the health of patients, such shortages or shutdowns could endanger our reputation and have led to, and could continue to lead to, significant losses of sales revenue, potential litigation or allegations that the public health, or the health of individuals, has been harmed.
Falsified medicines
Risk description
Impact on patient safety and reputational and financial harm to Novartis and our products
Context and potential impact
We continue to be challenged by the vulnerability of distribution channels to falsified medicines, which include counterfeit, stolen, tampered and illegally diverted medicines under the definition of the World Health Organization. The COVID-19 pandemic has substantially increased the presence of falsified medicines in the markets affected and on the internet. Falsified medicines pose patient safety risks and can be seriously harmful or life-threatening. Reports of adverse events related to falsified medicines and increased levels of falsified medicines in the healthcare system affect patient confidence in our genuine medicines and in healthcare systems in general. These events could also cause us substantial reputational and financial harm, and potentially lead to litigation if the adverse event from the falsified medicine is mistakenly attributed to the genuine one. Stolen or illegally diverted medicines, which are then not properly stored and are later sold through unauthorized channels, could adversely impact patient safety, our reputation and our business. Further, there is a direct financial loss when, for example, falsified medicines replace sales of genuine medicines, or genuine medicines are recalled following discovery of falsified products.
Emerging risks
Geo-political and socio-economic threats
Risk description
Negative impact of geo- and socio-political threats and economic instability
Context and potential impact
Unpredictable political conditions currently exist in various parts of the world, including a backlash in certain areas against free trade; anti-immigrant sentiment;
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anti-corporatist sentiment; social unrest; fears of terrorism; risk of direct conflicts between nations; a global pandemic; and economic downturn.
The imposition of tariffs, including those imposed by the US and China, and the possibility of additional tariffs or other trade restrictions relating to trade between the US and other countries, could have a material negative impact on our business. Given that the status of trade negotiations remains subject to change, we cannot be certain of the nature or extent of the potential impact on our business. For example, if tariffs on pharmaceutical products or active pharmaceutical ingredients (APIs) were increased, this could impact the profitability of our products and disrupt our supply chain. Increasing opposition to free trade may increase the risks we face in our efforts to improve and harmonize standards in regulation and intellectual property.
Furthermore, significant conflicts continue in certain parts of the world. Collectively, such unstable conditions could, among other things, disturb the international flow of goods and increase the costs and difficulties of international transactions, which could significantly impact time to market and our ability to supply our products to patients in an undisrupted fashion, and further erode reimbursement levels for innovative therapies.
In addition, local economic conditions may adversely affect the ability of payers, as well as our distributors, customers, suppliers and service providers, to pay for our products, or otherwise to buy necessary inventory or raw materials, and to perform their obligations under agreements with us. Although we make efforts to monitor these third parties’ financial condition and their liquidity, our ability to do so is limited, and some of them may become unable to pay their bills in a timely manner, or may even become insolvent. These risks may be elevated with respect to our interactions with fiscally challenged government payers, or with third parties with substantial exposure to such payers.
Our business may be impacted by economic and financial conditions directly affecting consumers. Given that in many countries, patients directly pay a large portion of their own healthcare costs, there is a risk that consumers may cut back on prescription drugs due to financial constraints.
At the same time, significant changes and potential future volatility in the financial markets, in the consumer and business environment, in the competitive landscape, and in the global political and security landscape make it increasingly difficult for us to predict our revenues and earnings. As a result, any revenue or earnings guidance or outlook that we have given or might give may be overtaken by events, or may otherwise turn out to be inaccurate. Though we endeavor to give reasonable estimates of future revenues and earnings at the time we give such guidance, based on then-current knowledge and conditions, there is a risk that such guidance or outlook will turn out to be incorrect.
Financial market issues may also result in a lower return on our financial investments, and a lower value on some of our assets. Alternatively, inflation could accelerate, which could lead to higher interest rates, increasing our costs of raising capital. Uncertainties around future central bank and other economic policies in the US and EU, as well as high debt levels in certain other countries, could also impact world trade. Sudden increases in economic, currency or financial market volatility in different countries have also impacted, and may continue to unpredictably impact, our business or results of operations, including the conversion of our operating results into our reporting currency, the US dollar, as well as the value of our investments in our pension plans.
For a discussion of effect of price controls on our business, see “Item 4. Information on the Company—Item 4.B—Business overview—Innovative Medicines—Price controls.” See also “Item 5. Operating and Financial Review and Prospects—Item 5.B Liquidity and capital resources—Effects of currency fluctuations,” “Item 5. Operating and Financial Review and Prospects—Item 5.B Liquidity and capital resources—Condensed consolidated balance sheets,” “Item 18. Financial Statements—Note 15. Trade receivables” and “Item 18. Financial Statements—Note 29. Financial instruments—additional disclosures.”
Social media and digital engagement
Risk description
Inappropriate or illegal use of social media, interactive internet platforms or mobile applications
Context and potential impact
Our increasing use of social media, interactive internet platforms and other mobile applications (together, digital engagement platforms) carries risks related to potential violations of rules regulating the promotion of prescription medicines and the potential disclosure of confidential information, trade secrets, or loss of other intellectual property. As a result of the COVID-19 pandemic, the use and rate of adoption of digital engagement platforms is increasing and expanding into new uses that may have unforeseen impacts and consequences on our business.
There continue to be uncertainties as to the rules that apply to such communications and as to the interpretations that health authorities will apply in this context, and as a result, despite our efforts to comply with applicable rules, there is a risk that our use of digital engagement platforms may cause us to be found in violation of applicable regulations.
For example, patients may use digital engagement platforms to comment on the effectiveness of a product or to report an adverse event, which may result in a failure to follow applicable adverse event reporting obligations if such platforms are not properly monitored. In addition, our associates may use digital engagement platforms inappropriately, for example to discuss our products or confidential projects, which may lead to a disclosure of confidential information, trade secrets, or loss of other intellectual property, and may give rise to liability or incur other harm to our business. Further, large numbers of or highly visible negative posts or comments about us or our executives could damage our reputation.
Global ERP implementation
Risk description
Inability to implement and properly operate our new global enterprise resource planning (ERP) system
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Context and potential impact
We rely on various information and other business systems to leverage data in order to operate our complex global business. We are currently in the design and planning phase for the implementation of a new global ERP system that seeks to simplify, standardize and digitize processes in our commercial and finance functions as well as our Novartis Technical Operations unit to help ensure efficient and compliant business operations as well as the availability of high-quality data necessary to aid our decision-making. We expect the planning, design and build phase to continue through 2021, with the first implementations of our new ERP system expected to begin in the second half of 2022. We expect our new ERP system to be fully implemented by 2027, when our current system is no longer supported by the software provider. Implementing and operating a new ERP system involves certain risks, including a failure of the new system to operate as expected, a failure to properly integrate with other systems we use, potential loss of data or information, compliance issues, cost overruns and delays, and operational disruptions. Any disruptions or malfunctions of our new ERP system could cause critical information we use to be delayed, defective, corrupted, inadequate or inaccessible. In addition, if the design or implementation of our new ERP system is deficient, it could adversely affect our operations, and could negatively impact the effectiveness of our internal controls.
General risks
Indebtedness
Risk description
Our indebtedness could adversely affect our operations
Context and potential impact
As of December 31, 2020, we had USD 26.3 billion of non-current financial debt, and USD 9.8 billion of current financial debt. Our current and long-term debt requires us to dedicate a portion of our cash flow to service interest and principal payments and, if interest rates rise, this amount may increase. As a result, our existing debt may limit our ability to use our cash flow to fund capital expenditures, to engage in transactions, or to meet other capital needs, or otherwise may place us at a competitive disadvantage relative to competitors that have less debt. Our debt could also limit our flexibility to plan for and react to changes in our business or industry, and increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates or a downturn in our business or the economy. We may also have difficulty refinancing our existing debt or incurring new debt on terms that we would consider to be commercially reasonable, if at all.
Intangible assets and goodwill
Risk description
Intangible assets and goodwill resulting in significant impairment charges
Context and potential impact
We carry a significant amount of goodwill and other intangible assets on our consolidated balance sheet, primarily due to acquisitions, including, in particular, substantial goodwill and other intangible assets obtained through acquisitions, including most recently through our acquisitions of The Medicines Company, Xiidra, Endocyte, Novartis Gene Therapies (formerly AveXis), AAA, and certain oncology products from GSK. As a result, we may incur significant impairment charges in the future if the fair value of the intangible assets and the groupings of cash-generating units containing goodwill would be less than their carrying value on the Group’s consolidated balance sheet at any point in time.
We regularly review for impairment our long-lived intangible and tangible assets, including identifiable intangible assets, investments in associated companies, and goodwill. Any significant impairment charges could have a material adverse effect on our results of operations and financial condition. In 2020, for example, we recorded intangible asset impairment charges of USD 914 million.
For a detailed discussion of how we determine whether an impairment has occurred, what factors could result in an impairment, and the impact of impairment charges on our results of operations, see “Item 5. Operating and Financial Review and Prospects—Item 5.A Operating results—Critical accounting policies and estimates—Impairment of goodwill, intangible assets and property, plant and equipment,” “Item 18. Financial Statements—Note 1. Significant accounting policies” and “Item 18. Financial Statements—Note 11. Goodwill and intangible assets.”
Tax laws and developments
Risk description
Changes in tax laws or their application
Context and potential impact
Our multinational operations are taxed under the laws of the countries and other jurisdictions in which we operate. Changes in tax laws or in their application could lead to an increased risk of international tax disputes and an increase in our effective tax rate, which could adversely affect our financial results. The integrated nature of our worldwide operations can produce conflicting claims from revenue authorities in different countries as to the profits to be taxed in the individual countries, including potential disputes relating to the prices our subsidiaries charge one another for intercompany transactions, known as transfer pricing. The majority of the jurisdictions in which we operate have double tax treaties with other foreign jurisdictions, which provide a framework for mitigating the impact of double taxation on our revenues and capital gains. However, mechanisms developed to resolve such conflicting claims are largely untried and can be expected to be very lengthy. Accruals for tax contingencies are made based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the complexity of tax contingencies, the ultimate resolution of any tax matter may result in payments materially different from the amounts accrued.
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In 2019, the Organization for Economic Co-operation and Development (OECD) launched a new initiative on behalf of the G20 to minimize profit shifting by working toward a global tax framework that ensures that corporate income taxes are paid where consumption takes place and also introduces a global standard on minimum taxation combined with new tax dispute resolution processes. The respective principles are currently being evaluated.
The EU also adopted a new Directive on Administrative Cooperation (DAC6) in 2018, which seeks additional reporting since July 2020. Recently, the EU announced it will introduce new centralized taxation powers to address the financial impact of the COVID-19 pandemic. In addition, the European Commission continues to extend the application of its policies seeking to limit fiscal aid by member states to particular companies, and the related investigation of the member states’ practices regarding the issuance of rulings on tax matters relating to individual companies.
In Switzerland, the Basel-Stadt Cantonal Tax Reform was approved by voters in February 2019, with parts retroactive from January 1, 2019. In May 2019, Swiss voters approved the Swiss Federal Tax Reform. With the enactment of this tax reform, new elements were introduced into law as of January 1, 2020.
Although we have taken steps to be in compliance with evolving initiatives like that of the OECD, the EU and of Switzerland, and will continue to do so, significant uncertainties remain as to the outcome of our efforts.
For more information, see “Item 18. Financial Statements—Note 12. Deferred tax assets and liabilities.”
Foreign currency exchange rates
Risk description
Negative effect on financial results due to foreign currency exchange rate fluctuations
Context and potential impact
Changes in exchange rates between the US dollar, our reporting currency, and other currencies can result in significant increases or decreases in our reported sales, costs and earnings as expressed in US dollars, and in the reported value of our assets, liabilities and cash flows.
In addition to ordinary market risk, there is a risk that countries could take affirmative steps that could significantly impact the value of their currencies. Such steps could include “quantitative easing” measures and potential withdrawals by countries from common currencies. In addition, countries facing local financial difficulties, including countries experiencing high inflation rates and highly indebted countries facing large capital outflows, may impose controls on the exchange of foreign currency. Currency exchange controls could limit our ability to distribute retained earnings from our local affiliates, or to pay intercompany payables due from those countries.
Despite measures undertaken to reduce or hedge against foreign currency exchange risks, because a significant portion of our earnings and expenditures are in currencies other than the US dollar, including expenditures in Swiss francs that are significantly higher than our revenue in Swiss francs, any such exchange rate volatility may negatively and materially impact our results of operations and financial condition, and may impact the reported value of our net sales, earnings, assets and liabilities. In addition, the timing and extent of such volatility can be difficult to predict. Further, depending on the movements of particular foreign exchange rates, we may be materially adversely affected at a time when the same currency movements are benefiting some of our competitors.
For more information on the effects of currency fluctuations on our consolidated financial statements and on how we manage currency risk, see “Item 5. Operating and Financial Review and Prospects—Item 5.B Liquidity and capital resources—Effects of currency fluctuations” and “Item 18. Financial Statements—Note 29. Financial instruments—additional disclosures.”
Key customers
Risk description
Ongoing consolidation among our distributors and retailers, and the concentration of credit risk
Context and potential impact
Increasingly, a significant portion of our global sales is made to a relatively small number of drug wholesalers, retail chains and other purchasing organizations. For example, our three most important customers globally accounted for approximately 17%, 11% and 6%, respectively, of net sales in 2020. The largest trade receivables outstanding were for these three customers, amounting to 14%, 12% and 6%, respectively, of the Group’s trade receivables at December 31, 2020. The trend has been toward further consolidation among distributors and retailers. As a result, we may be affected by fluctuations in the buying patterns of such customers. Furthermore, these customers are gaining additional purchasing leverage, increasing the pricing pressures facing our businesses. These pressures can particularly impact our Sandoz Division, the generic products of which can often be obtained from numerous competitors. Moreover, we are exposed to a concentration of credit risk as a result of this concentration among our customers. If one or more of our major customers experienced financial difficulties, the effect on us would be substantial, and could include a substantial loss of sales and an inability to collect amounts owed to us.
Environmental matters
Risk description
Impact of environmental liabilities
Context and potential impact
The environmental laws of various jurisdictions impose actual and potential obligations on us to investigate and remediate contaminated sites, including in connection with activities in the past by businesses that are no longer part of Novartis. In some cases, these remediation efforts may take many years. While we have set aside substantial provisions for known worldwide environmental liabilities that are probable and estimable, there is no guarantee that additional costs will not be incurred beyond the amounts for which we have provided in the
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Group consolidated financial statements. If environmental contamination related to our facilities or products adversely impacts third parties or if we fail to properly manage the safety of our facilities, including the safety of our associates and contractors, and the environmental risks, we may face substantial costs and other expenses, and be required to further increase our provisions for environmental liabilities.
See also “Item 4. Information on the Company—Item 4.D Property, plants and equipment” and “Item 18. Financial Statements—Note 20. Provisions and other non-current liabilities.”
Climate change
Risk description
Climate change and increased risk of major natural disasters
Context and potential impact
Novartis is exposed to both physical risks and transition risks (which include financial, credit rating and market-driven risks) associated with climate change, which could be either acute/short-term or chronic/long-term.
Extreme weather events and changing weather patterns have become more common. As a result, we are potentially exposed to increased extreme weather and associated risks such as hurricanes, tornadoes, droughts or floods, or other events that result from the impact of climate change on the environment, such as loss of biodiversity, sea level rise or wildfires.
For example, some of our production facilities that depend on the availability of significant water supplies are located in areas where water is increasingly scarce. Other facilities are located in places that, because of increasingly violent weather events, sea level rise, or both, are increasingly at risk of substantial flooding. In regions where this risk is present, it impacts not only our own operations but also our distributed supply chain. Such events could result in increased costs, business interruptions, destruction of facilities, and loss of life.
Climate change may trigger the adoption of new regulatory requirements across the globe. Such legislation could include increased requirements to invest in technology to reduce energy use, water use and greenhouse gas emissions, beyond what we expect to invest in our existing plans. In addition, legislation could include carbon pricing, climate risk disclosure mandates, and changes in zoning or building codes to increase climate resilience. The combined impact of these transition risks could increase our direct operating costs and result in the same impact across our supply chain.
In addition, our corporate headquarters, the headquarters of our Innovative Medicines and Sandoz Divisions, and certain of our major Innovative Medicines Division production and research facilities are located near earthquake fault lines in Basel, Switzerland. Other major facilities are located near major earthquake fault lines in various locations around the world. In the event of a major earthquake, we could experience business interruptions, destruction of facilities, and loss of life.
Pension plans
Risk description
Inaccuracies in the assumptions and estimates used to calculate our pension plan and other post-employment obligations
Context and potential impact
We sponsor pension and other post-employment benefit plans in various forms that cover a significant portion of our current and former associates. For post-employment plans with defined benefit obligations, we are required to make significant assumptions and estimates about future events in calculating the expense and the present value of the liability related to these plans. These include assumptions about the discount rates we apply to estimate future defined benefit obligations and net periodic pension expense, as well as rates of future pension increases. In addition, our actuarial consultants provide our management with historical statistical information, such as withdrawal and mortality rates in connection with these estimates.
Assumptions and estimates we use may differ materially from the actual results we experience due to changing market and economic conditions, higher or lower withdrawal rates, and longer or shorter life spans of participants, among other factors. Depending on events, such differences could have a material effect on our total equity and may require us to make additional contributions to our pension funds.
For more information on obligations under retirement and other post-employment benefit plans and underlying actuarial assumptions, see “Item 5. Operating and Financial Review and Prospects—Item 5.A Operating results—Critical accounting policies and estimates— Retirement and other post-employment benefit plans” and “Item 18. Financial Statements—Note 25. Post-employment benefits for associates.”
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Item 4. Information on the Company
4.A History and development of Novartis
Novartis AG
Novartis AG was incorporated on February 29, 1996, under the laws of Switzerland as a stock corporation (“Aktiengesellschaft”) with an indefinite duration. On December 20, 1996, our predecessor companies, Ciba-Geigy AG and Sandoz AG, merged into this new entity, creating Novartis. We are domiciled in and governed by the laws of Switzerland. Our registered office is located at the following address:
Novartis AG
Lichtstrasse 35
CH-4056 Basel, Switzerland
Telephone: +41-61-324-1111
Web: www.novartis.com
Novartis is a multinational group of companies specializing in the research, development, manufacturing and marketing of a broad range of innovative pharmaceuticals and cost-saving generic medicines. Novartis AG, our Swiss holding company, owns, directly or indirectly, all of our significant operating companies. For a list of our significant operating subsidiaries, see “Item 18. Financial Statements—Note 32. Principal Group subsidiaries and associated companies.”
For a description of important corporate developments since January 1, 2018, see “Item 18. Financial Statements—Note 2. Significant Transactions.”
The SEC maintains an internet site at http://www.sec.gov that contains reports, information statements, and other information regarding issuers that file electronically with the SEC.
4.B Business overview
Overview
Our purpose is to reimagine medicine to improve and extend people’s lives. We use innovative science and technology to address some of society’s most challenging healthcare issues. We discover and develop breakthrough treatments and find new ways to deliver them to as many people as possible. We also aim to reward those who invest their money, time and ideas in our company. Our vision is to be a trusted leader in changing the practice of medicine. Our strategy is to build a leading, focused medicines company powered by advanced therapy platforms and data science. As we implement our strategy, we have five priorities to shape our future and help us continue to create value for our company, our shareholders and society: unleash the power of our people, deliver transformative innovation, embrace operational excellence, go big on data and digital, and build trust with society.
In 2020, Novartis achieved net sales from continuing operations of USD 48.7 billion, while net income from continuing operations amounted to USD 8.1 billion, and total net income amounted to USD 8.1 billion. Headquartered in Basel, Switzerland, our Group companies employed approximately 106 000 full-time equivalent associates as of December 31, 2020. Our products are sold in approximately 155 countries around the world.
The Group comprises two global operating divisions:
• Innovative Medicines: innovative patent-protected prescription medicines
For a description of our Innovative Medicines Division, see “—Innovative Medicines—Overview” below.
• Sandoz: generic pharmaceuticals and biosimilars
For a description of our Sandoz Division, see “—Sandoz” below.
Our divisions are supported by the following organizational units: the Novartis Institutes for BioMedical Research (NIBR), Global Drug Development (GDD), Novartis Technical Operations (NTO) and Novartis Business Services (NBS). The financial results of these organizational units are included in the results of the divisions for which their work is performed. For more information about NIBR, see “—Innovative Medicines—Research and development—Research program” below. For more information about GDD, see “—Innovative Medicines—Research and development—Development program” below. For more information about NTO, see “—Item 4.D Property, plants and equipment.” For more information about NBS, see “Item 18. Financial Statements—Note 3. Segmentation of key figures 2020, 2019 and 2018.”
Corporate activities
We separately report the results of Corporate activities. The financial results of our Corporate activities include the costs of the Group headquarters and those of corporate coordination functions in major countries. In addi-
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tion, Corporate includes other items of income and expense that are not attributable to specific segments, such as certain revenues from intellectual property rights and certain expenses related to post-employment benefits, environmental remediation liabilities, charitable activities, donations and sponsorships.
Innovative Medicines
Overview
Our Innovative Medicines Division is a world leader in offering patent-protected medicines to patients and physicians. The Innovative Medicines Division researches, develops, manufactures, distributes and sells patented pharmaceuticals, and is composed of two global business units: Novartis Oncology and Novartis Pharmaceuticals.
The Novartis Oncology business unit is responsible for the commercialization of products in the areas of cancer and hematologic disorders. The Novartis Pharmaceuticals business unit is organized into the following global business franchises responsible for the commercialization of various products in their respective therapeutic areas: Immunology, Hepatology and Dermatology; Ophthalmology; Neuroscience; Cardiovascular, Renal and Metabolism; Respiratory; and Established Medicines.
The Innovative Medicines Division is the larger of our two divisions in terms of consolidated net sales. It reported consolidated net sales of USD 39.0 billion in 2020, which represented 80% of the Group’s net sales.
The product portfolio of the Innovative Medicines Division includes a significant number of key marketed products, many of which are among the leaders in their respective therapeutic areas.
Innovative Medicines Division products
The following summaries describe certain key marketed products in our Innovative Medicines Division, listed according to year-end net sales within each franchise. While we typically seek to sell our marketed products throughout the world, not all products and indications are available in every country. Therefore, the indications described in these summaries may vary by country. In addition, a product may be available under different brand names depending on country and indication. Some of the products described below have lost patent protection or are otherwise subject to generic competition. Others are subject to patent challenges by potential generic competitors. Please see “—Intellectual property” for general information on intellectual property and regulatory data protection, and for further information on the status of patents and exclusivity for Innovative Medicines Division products.
Key marketed products
Novartis Oncology business unit
Oncology
• Tasigna (nilotinib) is an oral tyrosine kinase inhibitor targeting the BCR-ABL protein. It is approved in the US, the EU and other countries to treat:
• Patients with Philadelphia chromosome-positive chronic myeloid leukemia (Ph+ CML) in the chronic and/or accelerated phase who are resistant or intolerant to existing treatment. Ph+ CML is a cancer that starts in the blood-forming cells of bone marrow
• Newly diagnosed adults and children with Ph+ CML in the chronic phase
• Promacta/Revolade (eltrombopag) is a once-daily oral thrombopoietin receptor agonist that works by stimulating bone marrow cells to produce platelets. It is approved in the US, the EU and other countries to treat:
• Immune thrombocytopenia (ITP) in patients who have had an insufficient response to or have failed previous therapies. ITP is a bleeding disorder caused by an unusually low number of platelets
• Thrombocytopenia in patients with chronic hepatitis C to allow them to initiate and maintain interferon-based therapy
• Patients with severe aplastic anemia (SAA). SAA is a condition in which the body does not produce enough blood cells
Promacta/Revolade is marketed under a research, development and license agreement between Novartis and RPI Finance Trust (dba Royalty Pharma), as assignee of Ligand Pharmaceuticals.
• Tafinlar + Mekinist (dabrafenib + trametinib) is an oral combination therapy. Tafinlar and Mekinist are kinase inhibitors of the BRAF and MEK1/2 proteins, respectively, approved in combination in the US, the EU and other countries to treat patients who have certain types of cancer with a change in the BRAF gene (called a BRAF V600 mutation), including:
• Adults with unresectable or metastatic melanoma with a BRAF V600 mutation. Melanoma is a form of skin cancer; unresectable melanoma cannot be removed with surgery, and metastatic melanoma has spread to other parts of the body. Tafinlar and Mekinist are also approved as single agents for this indication
• Adults with stage III melanoma with a BRAF V600 mutation as an adjuvant treatment (following surgery)
• Adults with advanced non-small cell lung cancer (NSCLC) with a BRAF V600 mutation. NSCLC is the most common type of lung cancer
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• Adults with locally advanced or metastatic anaplastic thyroid cancer with a BRAF V600 mutation and no satisfactory treatment options. Anaplastic thyroid cancer is a rare and aggressive form of thyroid cancer
Approved indications vary by country. Novartis has worldwide exclusive rights to develop, manufacture and commercialize trametinib granted by Japan Tobacco Inc.
• Sandostatin SC (octreotide acetate for injection) and Sandostatin LAR (octreotide acetate for injectable suspension) are somatostatin analogs approved in the US, the EU and other countries to treat:
• Adults with acromegaly that is inadequately controlled by surgery or radiotherapy. Acromegaly is a chronic disease caused by the oversecretion of growth hormone
• Patients with certain symptoms associated with carcinoid tumors and other types of functional gastrointestinal and pancreatic neuroendocrine tumors
Sandostatin LAR is also approved in the EU and other countries to treat patients with advanced neuroendocrine tumors of the midgut or of unknown primary tumor origin.
• Jakavi (ruxolitinib) is an oral inhibitor of the JAK1 and JAK2 tyrosine kinases. It is the first therapy approved in the EU and other countries to treat:
• Adults with myelofibrosis (MF), including primary myelofibrosis, post-polycythemia vera myelofibrosis and post-essential thrombocythemia myelofibrosis. MF is a rare blood cancer characterized by abnormal blood cell production and scarring in the bone marrow, which can lead to an enlarged spleen
• Adults with polycythemia vera (PV) who are resistant or intolerant to a medication called hydroxyurea. PV is a rare blood cancer in which the bone marrow produces too many red blood cells, resulting in serious problems like clots
Novartis licensed ruxolitinib from Incyte Corporation for development and commercialization in the indications of oncology, hematology and graft-versus-host disease outside the US. Incyte Corporation markets ruxolitinib as Jakafi® in the US.
• Gleevec/Glivec (imatinib mesylate/imatinib) is an oral tyrosine kinase inhibitor approved in the US, the EU and other countries to treat patients with certain types of cancer, including:
• Patients with Philadelphia chromosome-positive chronic myeloid leukemia (Ph+ CML) in the chronic, accelerated or blast crisis (acute) phase. Ph+ CML is a cancer that starts in the blood-forming cells of bone marrow
• Adults and children with Philadelphia chromosome-positive acute lymphoblastic leukemia (Ph+ ALL). Ph+ ALL is a rare subtype of the most common childhood cancer
• Adults with KIT (CD117)-positive gastrointestinal stromal tumors (GISTs). GISTs are tumors found in the digestive system
• Adults with advanced hypereosinophilic syndrome (HES) and/or chronic eosinophilic leukemia (CEL) who have a rearrangement of two genes called FIP1L1 and PDGFR-alpha. HES and CEL are closely related diseases in which the body produces too many eosinophils (a type of white blood cell)
• Adults with myelodysplastic syndromes (MDS) and myeloproliferative disorders (MPD). MDS and MPD are a group of diseases of the blood and bone marrow
• Adults with aggressive systemic mastocytosis (ASM) and dermatofibrosarcoma protuberans (DFSP) when surgery is not possible or the disease has spread. ASM is a form of mast cell disease, and DFSP is a rare skin cancer
Approved indications vary by country.
• Afinitor/Votubia (everolimus) is an oral inhibitor of the mTOR pathway. Afinitor is approved in the US, the EU and other countries to treat patients with certain types of cancer, including:
• Postmenopausal women with advanced hormone receptor-positive (HR+)/human epidermal growth factor receptor 2-negative (HER2-) breast cancer, in combination with the medicine exemestane, when certain other medicines have not worked. HR+/HER2- breast cancer is the most common subtype of breast cancer
• Adults with neuroendocrine tumors of the pancreas, and non-symptomatic neuroendocrine tumors of the stomach and intestine (gastrointestinal) or lung that have progressed and cannot be treated with surgery
Everolimus is also approved as Afinitor/Afinitor Disperz in the US and other countries, and as Votubia (tablets and dispersible tablets) in the EU, to treat certain patients with a genetic condition called tuberous sclerosis complex (TSC), including:
• Adults with TSC and angiomyolipoma (a kidney tumor) when the tumor does not require immediate surgery
• Adults and children with TSC and subependymal giant cell astrocytoma (a brain tumor) when the tumor cannot be removed completely by surgery
Approved indications vary by country. Everolimus is available under the trade names Zortress/Certican for use in transplantation, and is exclusively licensed to Abbott Laboratories and sublicensed to Boston Scientific for use in drug-eluting stents.
• Kisqali (ribociclib) is an oral cyclin-dependent kinase inhibitor approved in the US, the EU and other countries to treat:
• Pre-, peri- and postmenopausal women with hormone receptor-positive (HR+)/human epidermal growth factor receptor 2-negative (HER2-) locally advanced or metastatic breast cancer, in combination with an aromatase inhibitor as initial endo-
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crine-based therapy. HR+/HER2- breast cancer is the most common subtype of breast cancer
• Postmenopausal women with HR+/HER2- locally advanced or metastatic breast cancer, in combination with fulvestrant, as first- or second-line therapy
Kisqali was developed by the Novartis Institutes for BioMedical Research under a research collaboration with Astex Pharmaceuticals.
• Kymriah (tisagenlecleucel) suspension for intravenous infusion is a CD19-directed genetically modified autologous chimeric antigen receptor T-cell (CAR-T) therapy. It is approved in the US, the EU and other countries to treat:
• Patients up to 25 years old with B-cell acute lymphoblastic leukemia (ALL) that is refractory or in second or later relapse. ALL is a cancer of the lymphocytes, a type of white blood cell involved in the body’s immune system
• Adults with relapsed or refractory diffuse large B-cell lymphoma (DLBCL) after two or more lines of systemic therapy. DLBCL is the most common form of non-Hodgkin lymphoma and a cancer of the B-lymphocytes
• Lutathera (lutetium Lu 177 dotatate/lutetium (177Lu) oxodotreotide) is an intravenous targeted radioligand therapy approved in the US, the EU and other countries to treat:
• Adults with somatostatin receptor-positive gastroenteropancreatic neuroendocrine tumors (GEP-NETs). GEP-NETs are rare tumors found in the digestive tract, including the foregut, midgut and hindgut
• Piqray (alpelisib) is an oral kinase inhibitor approved in the US, the EU and other countries to treat:
• Postmenopausal women, and men, with PIK3CA-mutated, hormone receptor-positive (HR+)/human epidermal growth factor receptor 2-negative (HER2-) locally advanced or metastatic breast cancer, in combination with fulvestrant, after disease progression following endocrine therapy as monotherapy (EU), or after disease progression on or following endocrine therapy (US). HR+/HER2- breast cancer is the most common subtype of breast cancer
• Adakveo (crizanlizumab) is a humanized monoclonal antibody that binds to P-selectin, a cell adhesion protein that plays a central role in the multicellular interactions that can lead to vaso-occlusion in sickle cell disease (SCD). Delivered via intravenous infusion, Adakveo is approved in the US, the EU and other countries to:
• Prevent or reduce the frequency of vaso-occlusive crises (VOCs), or pain crises, in patients aged 16 years and older with SCD. SCD is a group of inherited blood disorders in which the body makes abnormally shaped red blood cells that become sticky and can block blood vessels, leading to unpredictable, painful VOCs
Novartis Pharmaceuticals business unit
Immunology, Hepatology and Dermatology1
• Cosentyx (secukinumab) is an injectable fully human monoclonal antibody that specifically inhibits interleukin-17A (IL-17A), a cytokine involved in several immunological diseases. It is approved in the US, the EU and other countries to treat:
• Patients with moderate-to-severe plaque psoriasis. Psoriasis is a debilitating systemic inflammatory disease that is characterized by the appearance of raised, red patches on the skin
• Adults with active ankylosing spondylitis (AS). AS is a long-term inflammatory disease that is characterized by chronic back pain and is generally visible on X-rays
• Adults with active non-radiographic axial spondyloarthritis (nr-axSpA). nr-axSpA is a long-term inflammatory disease that is characterized by chronic back pain and is not visible on X-rays
• Adults with active psoriatic arthritis (PsA). PsA is a type of inflammatory arthritis that results in swollen and painful joints and tendons
Ophthalmology
• Lucentis (ranibizumab) is a recombinant, humanized, high-affinity antibody fragment that binds to vascular endothelial growth factor A (VEGF-A), a protein that can cause the growth of blood vessels in the eye, potentially leading to vision loss. Lucentis is an anti-VEGF therapy that is injected into the eye. It is approved in the EU and other countries to treat patients with certain eye conditions, including:
• Adults with neovascular (wet) age-related macular degeneration (AMD). Wet AMD develops when abnormal blood vessels grow under the macula and leak blood and other fluids in the back of the eye, which can scar the macula
• Adults with proliferative diabetic retinopathy, non-proliferative diabetic retinopathy and/or diabetic macular edema. These conditions are complications of diabetes
• Adults with visual impairment due to macular edema secondary to retinal vein occlusion (branch RVO or central RVO). Retinal vein occlusion is a blockage of the branch or central retinal vein, which carry blood away from the retina
1 Xolair sales for all indications are reported in the Respiratory franchise.
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Approved indications vary by country. Lucentis is licensed from Genentech, and Novartis holds the rights to commercialize the product outside the US. Genentech holds the rights to commercialize Lucentis in the US. For further information, see “Item 18. Financial Statements—Note 27. Transactions with related parties—Roche Holding AG.”
• Xiidra (lifitegrast 0.5%), an LFA-1 antagonist, is a prescription eye drop designed to reduce inflammation by blocking the interaction of two key proteins. It is approved in the US and other countries to treat:
• The signs and symptoms of dry eye disease in adults
• Beovu (brolucizumab) is the first humanized single-chain antibody fragment approved for clinical use. Beovu acts as an anti-VEGF agent and is administered via injection. It is approved in the US, the EU and other countries to treat:
• Patients with neovascular (wet) age-related macular degeneration (AMD). Wet AMD develops when abnormal blood vessels grow under the macula and leak blood and other fluids in the back of the eye, which can scar the macula
Neuroscience
• Gilenya (fingolimod) is an oral sphingosine-1-phosphate (S1P) receptor modulator that crosses the blood-brain barrier to bind to the S1P receptors based in the central nervous system. It is approved:
• In the US to treat adults and children aged 10 years and older with relapsing forms of multiple sclerosis, including clinically isolated syndrome, relapsing-remitting multiple sclerosis (RRMS) and active secondary progressive multiple sclerosis (SPMS). Multiple sclerosis is a disease in which the immune system attacks the protective covering of nerves (known as myelin)
• In the EU to treat adults and children aged 10 years and older who have highly active RRMS despite treatment with at least one disease-modifying agent, or who have rapidly evolving severe RRMS
Gilenya is licensed from Mitsubishi Tanabe Pharma Corporation.
• Zolgensma (onasemnogene abeparvovec) is a one-time intravenous gene therapy designed to address the genetic root cause of spinal muscular atrophy (SMA) by replacing the function of the missing or nonworking SMN1 gene. Zolgensma delivers a new working copy of the SMN1 gene into a patient’s cells. It is approved in the US, the EU and other countries to treat:
• Babies and young children who have SMA and a biallelic mutation in the SMN1 gene. SMA is a rare, genetic neuromuscular disease resulting in the progressive and irreversible loss of motor neurons, which causes muscle weakness and atrophy
• Mayzent (siponimod) is an oral, selective sphingosine-1-phosphate (S1P) receptor modulator that selectively binds to S1P1 and S1P5 receptors and penetrates the central nervous system, where it may impact central nervous system inflammation and repair mechanisms. It is approved:
• In the US and other countries to treat adults with relapsing forms of multiple sclerosis, including clinically isolated syndrome, relapsing-remitting multiple sclerosis (RRMS) and active secondary progressive multiple sclerosis (SPMS). Multiple sclerosis is a disease in which the immune system attacks the protective covering of nerves (known as myelin)
• In the EU and other countries to treat adults with active SPMS
Approved indications vary across other countries.
• Kesimpta (ofatumumab) is an anti-CD20 monoclonal antibody that enables the targeted depletion of B-cells, specifically in lymph nodes. Kesimpta is self-administered as a once-monthly injection via the Sensoready autoinjector pen. It is approved in the US to treat:
• Adults with relapsing forms of multiple sclerosis, including clinically isolated syndrome, relapsing-remitting multiple sclerosis (RRMS) and active secondary progressive multiple sclerosis (SPMS). Multiple sclerosis is a disease in which the immune system attacks the protective covering of nerves (known as myelin)
Ofatumumab was originally developed by Genmab and licensed to GlaxoSmithKline (GSK). Novartis obtained the rights to ofatumumab from GSK across all indications.
Cardiovascular, Renal and Metabolism
• Entresto (sacubitril/valsartan) is an oral, first-in-class angiotensin receptor/neprilysin inhibitor. Entresto enhances the protective effects of a hormone system called the natriuretic peptide system, and simultaneously suppresses the harmful effects of a hormone system called the renin-angiotensin-aldosterone system. It is approved in the US, the EU and other countries to treat:
• Adults who have symptomatic chronic heart failure with reduced ejection fraction (HFrEF). HFrEF is a disease in which the heart cannot pump enough blood
• Children aged 1 year and older who have symptomatic heart failure with systemic left ventricular dysfunction. This is a disease in which the heart cannot pump enough blood
Approved indications vary by country.
• Leqvio (inclisiran) is an injectable small-interfering RNA that reduces LDL cholesterol in patients with atherosclerotic cardiovascular disease. Leqvio is administered twice a year, following an initial dose and a dose at three months. It is approved in the EU to treat:
• Adults with primary hypercholesterolemia (high cholesterol) or mixed dyslipidemia, in combination with maximally tolerated statin therapy. Mixed dyslipidemia is a disorder characterized by elevated levels of LDL cholesterol and triglycerides, and decreased levels of HDL cholesterol
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Novartis obtained global rights to develop, manufacture and commercialize inclisiran under a license and collaboration agreement with Alnylam Pharmaceuticals, Inc.
Respiratory
• Xolair (omalizumab) is an injectable prescription medicine and the only approved antibody designed to target and block immunoglobulin E (IgE). It is approved in the US, the EU and other countries to treat:
• Adults and children aged 6 years and older with moderate-to-severe, or severe, persistent allergic asthma
• Adults and children aged 12 years and older with chronic spontaneous urticaria/chronic idiopathic urticaria (hives)
• Adults with nasal polyps or chronic rhinosinusitis with nasal polyps (CRSwNP). CRSwNP is a chronic inflammation of the nose and the sinuses with the presence of benign lesions (nasal polyps) on the lining of the nasal sinuses or nasal cavity
Approved indications vary by country. Xolair is provided as lyophilized powder for reconstitution, and as liquid formulation in a pre-filled syringe. Novartis co-promotes Xolair with Genentech in the US and shares a portion of operating income, but Novartis does not record any US sales. Novartis records all sales of Xolair outside the US. For further information, see “Item 18. Financial Statements—Note 27. Transactions with related parties—Roche Holding AG.”
Established Medicines
• Galvus (vildagliptin) is an oral inhibitor of the DPP-4 enzyme approved in the EU and other countries to treat:
• Adults with type 2 diabetes that is inadequately controlled by diet and exercise. It can be used as monotherapy; in dual combination with metformin, a sulfonylurea or a thiazolidinedione (antidiabetic medicines); in triple combination with metformin and a sulfonylurea; and as an add-on to insulin with or without metformin
An oral single-pill combination of vildagliptin and metformin, marketed as Eucreas/GalvusMet, is also approved in the EU and other countries to treat adults with type 2 diabetes.
• Diovan (valsartan) is an oral angiotensin II receptor blocker (ARB) approved in the US, the EU and other countries to treat:
• Adults and children with high blood pressure
• Adults with heart failure
• Adults with certain types of heart failure following a heart attack
An oral single-pill combination of valsartan and hydrochlorothiazide, marketed as Diovan HCT/Co-Diovan, is also approved in the US, the EU and other countries to treat high blood pressure.
Compounds in development
The following table provides an overview of the key Innovative Medicines Division projects currently in the Confirmatory Development stage and may also describe certain projects in the Exploratory Development stage. Projects typically enter Confirmatory Development and become the responsibility of our Global Drug Development organization during Phase II testing. (For more information about our drug development program, see “—Research and development—Development program.”) Projects are listed in alphabetical order by compound code, or by product name where applicable. Projects include those seeking to develop potential uses of new molecular entities as well as potential additional indications or new formulations for already marketed products. The table below, entitled “Projects removed from the development table since 2019,” highlights changes to the table entitled “Selected development projects” from the previous year.
The year that each project entered the current phase of development refers to the year of the first patient’s first visit in the first clinical trial of that phase. For projects in Phase II, the year refers to the first patient’s first visit in the first Phase II trial, which can happen prior to the Confirmatory Development stage. We previously reported the current phase based on the year in which the decision to enter the phase was made, and as a result, there may be variations between the reported phases in this year’s table versus last year’s table. Certain previously disclosed projects, noted below, have not yet achieved “first patient, first visit” in any Phase I-III study for the reported indication and route of administration. We have included these projects in the table to maintain continuity with last year’s disclosures, and have disclosed them using the reporting criteria from last year.
A reference to a project being in registration means that an application has been submitted to a health authority for marketing approval. Compounds and new indications in development are subject to required regulatory approvals and, in certain instances, contractual limitations. These compounds and indications are in various stages of development throughout the world. It may not be possible to obtain regulatory approval for any or all of the new compounds and new indications referred to in this Form 20-F in any country or in every country. See “—Regulation” for further information on the approval process.
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Selected development projects
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Projects removed from the development table since 2019
|
Compound/
product |
Potential indication |
Change |
Reason |
||||
|
AVXS-101
|
Spinal muscular atrophy (IV formulation)
|
Commercialized as Zolgensma
|
|
||||
|
BYL719
|
PIK3CA mutant hormone receptor-positive (HR+)/human epidermal growth factor receptor 2-negative (HER2-) postmenopausal advanced breast cancer, 2nd line (+ fulvestrant)
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Commercialized as Piqray
|
|
||||
|
Cosentyx
|
Non-radiographic axial spondyloarthritis
|
Commercialized
|
|
||||
|
|
Psoriatic arthritis head-to-head study versus Humira® (adalimumab)
|
Publication achieved
|
|
||||
|
INC280
|
Non-small cell lung cancer
|
Commercialized as Tabrecta
|
|
||||
|
Kymriah
|
Relapsed/refractory diffuse large B-cell lymphoma (+ pembrolizumab)
|
Removed
|
Development discontinued
|
||||
|
LAM320
|
Multidrug-resistant tuberculosis
|
Removed
|
Planned US submission discontinued
|
||||
|
PDR001
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Metastatic BRAF V600+ melanoma (w/ Tafinlar + Mekinist)
|
Removed
|
Development discontinued
|
||||
|
QMF149
|
Asthma
|
Commercialized as Atectura Breezhaler
|
|
||||
|
QVM149
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Asthma
|
Commercialized as Enerzair Breezhaler
|
|
||||
|
RTH258
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Neovascular (wet) age-related macular degeneration
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Commercialized as Beovu
|
|
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SEG101
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Sickle cell disease
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Commercialized as Adakveo
|
|
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VPM087
|
Renal cell carcinoma, 1st line
|
Removed
|
Development discontinued
|
||||
|
Xolair
|
Nasal polyps
|
Commercialized
|
|
||||
|
ZPL389
|
Atopic dermatitis
|
Removed
|
Development discontinued
|
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Principal markets
The Innovative Medicines Division sells products in approximately 140 countries worldwide. Net sales are primarily concentrated in the US and Europe. The following table sets forth the aggregate 2020 net sales of the Innovative Medicines Division by region:
Innovative Medicines
Many of our Innovative Medicines Division products are used for chronic conditions that require patients to consume the product over long periods of time, ranging from months to years. However, certain of our marketed products and development projects, such as cell and gene therapies, are administered only once. Net sales of the vast majority of our products are not subject to material changes in seasonal demand.
Production
Our primary goal is to ensure the uninterrupted, timely and cost-effective supply of products that meet all product specifications and quality standards. The manufacturing of our products is highly regulated by governmental health authorities around the world, including the FDA and EMA. In addition to regulatory requirements, many of our products involve technically complex manufacturing processes or require highly specialized raw materials.
In 2020, we established five integrated manufacturing and supply platforms: large molecules, small molecules, Sandoz Technical Operations, cell and gene therapy, and local market manufacturing. We manufacture our products across these platforms at facilities worldwide, producing active pharmaceutical ingredients in our own facilities or purchasing them from third-party suppliers (see also “—Item 4.D Property, plants and equipment”). In our manufacturing network, we maintain state-of-the-art processes, with quality as a priority, and require our suppliers to adhere to the same high standards we expect from our own people and processes. Those processes include chemical and biological syntheses; sterile processing, including CAR-T cell processing; and formulation and packaging. We are constantly working to improve our existing manufacturing processes, to develop new and innovative technologies, and to review and adapt our manufacturing network to meet our needs and those of our patients and customers.
We produce raw materials for manufacturing in-house or we purchase them from a number of third-party suppliers. Where possible, we maintain multiple supply sources so that the business is not dependent on a single or limited number of suppliers. However, our ability to do so may at times be limited by regulatory or other requirements. We monitor market developments that could have an adverse effect on the supply of essential materials. Our suppliers of raw materials are required to comply with applicable regulations and Novartis quality standards.
Because the manufacturing of our products is complex and highly regulated by governmental health authorities, supply is never guaranteed. If we or our third-party suppliers fail to comply with applicable regulations, then there could be a product recall or other disruption to our production activities. We have experienced supply interruptions for our products in the past, and there can be no assurance that supply will not be interrupted again in the future. However, we have implemented a global manufacturing strategy to maximize business continuity in case of such events.
Marketing and sales
The Innovative Medicines Division serves customers with 24 432 field force representatives, as of December 31, 2020, including supervisors and administrative personnel. These trained representatives present the therapeutic risks and benefits of our products to physicians, pharmacists, hospitals, insurance groups, managed care organizations and other healthcare professionals. In the US, Novartis advertises certain products via digital and traditional media channels, including the internet, television, newspapers and magazines. Novartis also pursues co-promotion/co-marketing opportunities as well as licensing and distribution agreements with other companies in various markets.
The marketplace for healthcare is evolving: Customer groups beyond prescribers have increasing influence on treatment decisions and guidelines, while patients con-
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tinue to become more informed stakeholders in their healthcare decisions and look for solutions to meet their changing needs. Novartis is responding by adapting our business practices to engage appropriately with patients, customer groups and other stakeholders, including by delivering innovative solutions to drive education, access and improved patient care.
The COVID-19 pandemic has accelerated additional changes related to marketing and sales techniques in the healthcare industry. For example, many healthcare professionals have increased their use of virtual platforms when interacting with pharmaceutical companies, and prefer to receive information in a more convenient and personalized way. In response, Novartis has expedited the planned implementation of a new customer engagement model, which combines traditional face-to-face visits with digital methods of engaging healthcare professionals. We are similarly changing our approach to engaging healthcare systems, payers and other healthcare providers.
Although specific distribution patterns vary by country, Novartis generally sells its prescription drugs primarily to wholesale and retail drug distributors, hospitals, clinics, government agencies and managed healthcare providers. The growing number of so-called “specialty” drugs in our portfolio has resulted in increased engagement with specialty pharmacies. In the US, specialty pharmacies continue to grow as a distribution channel for specialty products. Most specialty drugs can only be dispensed through specialty pharmacies that are wholly owned by national pharmacy benefit managers.
In the US, the US Centers for Medicare & Medicaid Services (CMS) is the largest single payer for healthcare services as a result of continuing changes in healthcare economics and an aging population. In addition, both commercial and government-sponsored managed care organizations continue to be among the largest groups of payers for healthcare services in the US. In other countries, national health services are often the only significant payer for healthcare services. In an effort to control prescription drug costs, almost all managed care organizations and national health services use formularies that list specific drugs that may be reimbursed and/or the level of reimbursement for each drug. Managed care organizations and national health services also increasingly use cost-benefit analyses to determine whether or not newly approved drugs will be added to a formulary and/or the level of reimbursement for that drug, and to determine whether or not to continue to reimburse existing drugs. We have dedicated teams that actively seek to optimize patient access, including formulary positions, for our products.
The trend toward consolidation among distributors and retailers of Innovative Medicines Division products continues in the US and internationally, both within country and across countries. This has increased our customers’ purchasing leverage and resulted in increased pricing pressure on our products. Moreover, we are exposed to increased concentration of credit risk as a result of the consolidation among our customers.
Drug pricing is an increasingly prominent issue in many countries as healthcare spending continues to rise. This issue has received significant attention in the US (please see “—Price controls” for further information). At Novartis, we are increasing our efforts to enable patient access through innovative pricing and access initiatives in the US, Europe and other markets. These include contract structures such as pay-over-time and outcome-based agreements.
In 2019, Novartis Gene Therapies (formerly AveXis) formed an agreement with Accredo Health Group, Inc. in the US to offer a pay-over-time option of up to five years for Zolgensma to help ease possible short-term budget constraints for customers. Novartis Gene Therapies also offers payers outcome-based agreements for Zolgensma based on measures included in the clinical trial program, and has these agreements in place with both commercial and Medicaid contracts. In these agreements, if a patient has a significant negative outcome during a five-year period, Novartis Gene Therapies reimburses a percentage of the cost of the therapy relative to the time passed. Following conditional approval of Zolgensma in Europe in 2020, Novartis Gene Therapies established “Day One” early access agreements in multiple European countries. These agreements support early patient access by allowing a variety of customizable options, including retroactive rebates, deferred payments, installment options and outcome-based rebates.
Additionally, Novartis has established an outcome-based framework in the US for one of the approved indications of Kymriah, whereby the product invoice is linked to a successful outcome for each patient at an agreed milestone. Novartis also offers outcome-based agreements for approved indications of Kymriah and Luxturna in certain countries other than the US. These typically involve a full upfront payment of the product with a partial refund in case of failed outcomes, or installment payments based on successful patient outcomes at agreed milestones.
Competition
The global pharmaceutical market is highly competitive. We compete against other major international corporations that have substantial financial and other resources, as well as against smaller companies that operate regionally or nationally. Competition within the industry is intense and extends across a wide range of activities, including pricing, product characteristics, customer service, sales and marketing, and research and development.
Like other companies selling patented pharmaceuticals, Novartis faces challenges from companies selling competing patented products. Generic forms of our products may follow the expiry of intellectual property protection, and generic companies may also gain entry to the market through successfully challenging our intellectual property rights. We use legally permissible measures to defend those rights. See also “—Intellectual property” below. We also may face competition from over-the-counter (OTC) products that do not require a prescription from a physician.
There is ongoing consolidation in the pharmaceutical industry. At the same time, new entrants are looking to use their expertise to establish or expand their presence in healthcare, including technology companies
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seeking to benefit from the increasing importance of data and data management in our industry.
Research and development
The discovery and development of a new drug usually requires approximately 10 to 15 years from the initial research to bringing a drug to market. This includes approximately six to eight years from Phase I clinical trials to market entry. At each of these steps, there is a substantial risk that a compound will not meet the requirements to progress further. In such an event, we may be required to abandon the development of a compound in which we have made a substantial investment.
We manage our research and development expenditures across our entire portfolio in accordance with our strategic priorities. We make decisions about whether or not to proceed with development projects on a project-by-project basis. These decisions are based on the project’s potential to meet a significant unmet medical need or to improve patient outcomes, the strength of the science underlying the project, and the potential of the project (subject to the risks inherent in pharmaceutical development) to generate significant positive financial results for the Company. Once a management decision has been made to proceed with the development of a particular molecule, the level of research and development investment required will be driven by many factors. These include the medical indications for which it is being developed, the number of indications being pursued, whether the molecule is of a chemical or biological nature, the stage of development, and the level of evidence necessary to demonstrate clinical efficacy and safety.
Research program
Our research program is conducted by the Novartis Institutes for BioMedical Research (NIBR), which is the research and early development innovation engine of Novartis. NIBR is responsible for the discovery of new medicines for diseases with unmet medical need. We focus our work in areas where we believe we can have the most impact for patients. This requires the hiring and retention of highly talented employees, a focus on fundamental disease mechanisms that are relevant across different disease areas, continuous improvement in technologies for drug discovery and potential therapies, close alliances with clinical colleagues, and the establishment of strategic external alliances.
Approximately 5 600 full-time-equivalent scientists, physicians and business professionals work at NIBR sites in Basel, Switzerland; Cambridge, Massachusetts; East Hanover, New Jersey; San Diego, California; Emeryville, California; and Shanghai, China. They contribute to research into disease areas such as cardiovascular and metabolic diseases, neuroscience, oncology, muscle disorders, ophthalmology, autoimmune diseases and respiratory diseases. Research at the Friedrich Miescher Institute and the Genomics Institute of the Novartis Research Foundation focuses on basic genetic and genomic research, and the Novartis Institute for Tropical Diseases (NITD), in Emeryville, California, focuses on discovering new medicines to fight tropical diseases, including malaria and cryptosporidiosis.
All drug candidates go through proof-of-concept trials to enable an early assessment of the safety and efficacy of the drug while collecting basic information on pharmacokinetics and tolerability, and adhering to the guidance for early clinical testing set forth by health authorities. Following proof of concept, our Global Drug Development unit conducts confirmatory trials on the drug candidates.
In July 2018, we announced the decision to exit antibacterial and antiviral research. While the science for these programs is compelling, we decided to prioritize our resources in other areas where we believe we are better positioned to develop innovative medicines that will have a positive impact for patients. Since then, we have executed three out-licensing deals with Gilead Sciences, Boston Pharmaceuticals and Amplyx Pharmaceuticals for assets from our infectious diseases portfolio. However, in response to the COVID-19 pandemic, we started a robust and collaborative drug discovery effort to develop an antiviral molecule to potentially treat all coronaviruses, including the virus that causes COVID-19. This longer-term effort with the University of California, Berkeley, and other pharmaceutical companies will target the self-replication machinery that coronaviruses share.
In 2020, we discontinued early discovery research at NIBR’s Shanghai site and focused our research and development activities there on expanding the scale and scope of our early clinical development and later-stage clinical trial operations to help accelerate the development of new medicines.
Development program
Our Global Drug Development (GDD) organization oversees drug development activities for our Innovative Medicines Division. GDD works collaboratively with NIBR to execute our overall pipeline strategy. The GDD organization includes centralized global functions such as Regulatory Affairs and Global Development Operations, and global Development Units aligned with our business franchises. GDD was created to improve resource allocation, technology implementation and process standardization to further increase innovation. GDD includes approximately 11 000 full-time equivalent associates worldwide.
The traditional model of development consists of three phases:
Phase I: The first clinical trials of a new compound – generally performed in a small number of healthy human volunteers – to assess the drug’s safety profile, including the safe dosage range. These trials also determine how a drug is absorbed, distributed, metabolized and excreted, and the duration of its action.
Phase II: Clinical studies performed with patients who have the target disease, with the aim of continuing the Phase I safety assessment in a larger group, assessing the efficacy of the drug in the patient population, and determining the appropriate doses for further evaluation.
Phase III: Large-scale clinical studies with several hundred to several thousand patients, which are conducted
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to establish the safety and efficacy of the drug in specific indications for regulatory approval. Phase III trials may also be used to compare a new drug against a current standard of care to evaluate the overall benefit-risk relationship of the new medicine.
In each of these phases, physicians monitor volunteer patients closely to assess the potential new drug’s safety and efficacy.
Though we use this traditional model, we have tailored the development process to be simpler, more flexible and efficient. We divide the development process into two stages: Exploratory Development to establish proof of concept, followed by Confirmatory Development to confirm the concept in large numbers of patients. Exploratory Development consists of clinical proof-of-concept (PoC) studies, which are small clinical trials (typically involving in the range of between five and 15 patients) that combine elements of traditional Phase I/II testing. NIBR conducts these customized trials, which are designed to give early insights into issues such as safety, efficacy and toxicity for a drug in a given indication. Once a positive proof of concept has been established, the drug moves to the Confirmatory Development stage and becomes the responsibility of GDD. Confirmatory Development has elements of traditional Phase II/III testing and includes trials aimed at confirming the safety and efficacy of the drug in the given indication, leading up to submission of a dossier to health authorities for approval. This stage can also include trials that compare the drug to the current standard of care for the disease in order to evaluate the drug’s overall benefit-risk profile. Further, with new treatment approaches such as gene therapy for rare diseases, elements of Exploratory and Confirmatory Development may be combined and suffice for registration under certain conditions such as high unmet medical need and clinical data showing highly favorable benefit-risk. In these cases, additional post-approval studies may be required by the regulatory authorities to continue to gather important data to further support approval.
The vast amount of data that must be collected and evaluated makes clinical testing the most time-consuming and expensive part of new drug development. The next stage in the drug development process is to seek registration for the new drug. For more information, see “—Regulation.”
Our Innovation Management Board (IMB) manages our activities at each phase of clinical development. The IMB is responsible for all major aspects of our development portfolio and oversees our drug development budget as well as major project phase transitions and milestones following a positive proof-of-concept outcome, including transitions to Confirmatory Development and the decision to submit a regulatory application to the health authorities. The IMB is also responsible for the endorsement of overall development strategy, the endorsement of development project priorities, and decisions on project discontinuations. Our Chief Executive Officer chairs the IMB, and other representatives from Novartis senior management, with expertise spanning multiple fields, are among its core and extended membership.
Alliances and acquisitions
Our Innovative Medicines Division enters into business development agreements with other pharmaceutical and biotechnology companies and with academic and other institutions to develop new products and access new markets. We license products that complement our current product line and are appropriate to our business strategy. We focus on strategic alliances and acquisition activities for key disease areas and indications that we expect to be growth drivers in the future. We review products and compounds we are considering licensing, using the same criteria that we use for our own internally discovered drugs.
In January 2021, we announced a strategic collaboration agreement to in-license tislelizumab from an affiliate of BeiGene, Ltd. in major markets outside of China. Tislelizumab is an anti-PD-1 monoclonal antibody specifically designed to minimize binding to FcyR on macrophages, which accelerates the potential for Novartis to enter the large and growing checkpoint inhibitor field. Closing of this transaction is subject to expiration or early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. For additional information, see “Item 18. Financial Statements—Note 28. Commitments and contingencies—Research and development commitments.”
For additional information, see “Item 18. Financial Statements—Note 2. Significant transactions.”
Regulation
The international pharmaceutical industry is highly regulated. Regulatory authorities around the world administer numerous laws and regulations regarding the testing, approval, manufacturing, importing, labeling and marketing of drugs, and review the safety and efficacy of pharmaceutical products. Extensive controls exist on the non-clinical and clinical development of pharmaceutical products. These regulatory requirements, and the implementation of them by local health authorities around the globe, are a major factor in determining whether a substance can be developed into a marketable product, and the amount of time and expense associated with that development.
Health authorities, including those in the US and the EU, have high standards of technical evaluation. The introduction of new pharmaceutical products generally entails a lengthy approval process. Products must be authorized or registered prior to marketing, and such authorization or registration must subsequently be maintained. In recent years, the registration process has required increased testing and documentation for the approval of new drugs, with a corresponding increase in the expense of product introduction.
To register a pharmaceutical product, a registration dossier containing evidence establishing the safety, efficacy and quality of the product must be submitted to regulatory authorities. Generally, a therapeutic product must be registered in each country in which it will be sold. In every country, the submission of an application to a regulatory authority does not guarantee that approval to market the product will be granted. Although the criteria
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for the registration of therapeutic drugs are similar in most countries, the formal structure of the necessary registration documents and the specific requirements, including risk tolerance, of the local health authorities can vary significantly from country to country. Even if a drug is registered and marketed in one country, the registration authority in another country may request additional information from the pharmaceutical company prior to registration or even reject the product. A drug may be approved for different indications in different countries.
The registration process generally takes between six months and several years, depending on the country, the quality of the data submitted, the efficiency of the registration authority’s procedures, and the nature of the product. Many countries provide for accelerated processing of registration applications for innovative products of particular therapeutic interest. In recent years, the US and the EU have made efforts to harmonize registration requirements in order to achieve shorter development and registration times for medical products. However, the requirement in many countries to negotiate selling prices or reimbursement levels with government regulators and other payers can substantially extend the time until a product may finally be available to patients.
The following provides a summary of the regulatory processes in the principal markets served by Innovative Medicines Division affiliates:
United States
In the US, applications for drug registration are submitted to and reviewed by the FDA. The FDA regulates the testing, manufacturing, labeling and approval for marketing of pharmaceutical products intended for commercialization in the US. The FDA continues to monitor the safety of pharmaceutical products after they have been approved for sale in the US market. The pharmaceutical development and registration process is typically intensive, lengthy and rigorous. When a pharmaceutical company has gathered data that it believes sufficiently demonstrates a drug’s safety, efficacy and quality, then the company may file a New Drug Application (NDA) or Biologics License Application (BLA), as applicable, for the drug. The NDA or BLA must contain all the scientific information that has been gathered about the drug. This typically includes information regarding the clinical experiences of patients tested in the drug’s clinical trials. A Supplemental New Drug Application (sNDA) or BLA amendment must be filed for new indications for a previously approved drug.
Once an application is submitted, the FDA assigns reviewers from its staff, including experts in biopharmaceutics, chemistry, clinical microbiology, pharmacology/toxicology, and statistics. After a complete review, these content experts provide written evaluations of the NDA or BLA. These recommendations are consolidated and are used by senior FDA staff in its final evaluation of the NDA or BLA. Based on that final evaluation, the FDA then provides to the NDA or BLA’s sponsor an approval, or a “complete response” letter if the NDA or BLA application is not approved. If not approved, the letter will state the specific deficiencies in the NDA or BLA that need to be addressed. The sponsor must then submit an adequate response to the deficiencies in order to restart the review procedure.
Once the FDA has approved an NDA, BLA, sNDA or BLA amendment, the company can make the new drug available for physicians and other healthcare providers to prescribe. The drug owner must submit periodic reports to the FDA, including any cases of adverse reactions. For some medications, the FDA requires additional post-approval studies (Phase IV) to evaluate long-term effects or to gather information on the use of the product under specified conditions.
Throughout the life cycle of a product, the FDA requires compliance with standards relating to good laboratory, clinical and manufacturing practices. The FDA also requires compliance with rules pertaining to the manner in which we may promote our products.
European Union
In the EU, there are three main procedures for application for authorization to market pharmaceutical products in more than one EU member state at the same time: the centralized procedure, the mutual recognition procedure and the decentralized procedure. It is also possible to obtain a national authorization for products intended for commercialization in a single EU member state only, or for additional indications for licensed products. The procedure used for first authorization must continue to be followed for subsequent changes, e.g., to add an indication for a licensed product.
Under the centralized procedure, applications are made to the EMA for an authorization that is valid for the European Union (all member states). The centralized procedure is mandatory for all biotechnology products; new chemical entities in cancer, neurodegenerative disorders, diabetes, AIDS, autoimmune diseases and other immune dysfunctions; advanced therapy medicines, such as gene therapy, somatic cell therapy and tissue-engineered medicines; and orphan medicines (medicines for rare diseases). It is optional for other new chemical entities, innovative medicinal products, and medicines for which authorization would be in the interest of public health. When a pharmaceutical company has gathered data that it believes sufficiently demonstrates a drug’s safety, efficacy and quality, the company may submit an application to the EMA. The EMA then receives and validates the application, and the specialized committee for human medicines, the CHMP, appoints a rapporteur and co-rapporteur to review it. The entire review cycle must be completed within 210 days, although there is a “clock stop” at Day 120 to allow the company to respond to questions set forth in the rapporteur and co-rapporteur’s assessment report. When the company’s complete response is received by the EMA, the clock restarts on Day 121. If there are further aspects of the dossier requiring clarification, the CHMP will issue further questions at Day 180, and may also request an oral explanation, in which case the sponsor must not only respond to the further questions but also appear before the committee to justify its responses. On Day 210, the CHMP will take a vote to recommend the approval or non-approval of the application, and their opinion is transferred to the EC. The final EC decision under this
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centralized procedure is a decision that is applicable to all member states. This decision occurs 60 days, on average, after a positive CHMP recommendation.
Under both the mutual recognition procedure (MRP) and the decentralized procedure (DCP), the assessment is led by one member state, called the reference member state (RMS) which then liaises with other member states, known as the concerned member states. In the MRP, the company first obtains a marketing authorization in the RMS, which is then recognized by the concerned member states in 90 days. In the DCP, the application is done simultaneously in the RMS and all concerned member states. During the DCP, the RMS drafts an assessment report within 120 days. Within an additional 90 days, the concerned member states review the application and can issue objections or requests for additional information. On Day 90, each concerned member state must be assured that the product is safe and effective, and that it will cause no risks to the public health. Once an agreement has been reached, each member state grants national marketing authorizations for the product.
After receiving the marketing authorizations, the company must submit periodic safety reports to the relevant health authority (EMA for the centralized procedure, national health authorities for DCP or MRP). In addition, pharmacovigilance measures must be implemented and monitored, including the collection, evaluation and expedited reporting of adverse events, and updates to risk management plans. For some medications, post-approval studies (Phase IV) may be imposed to complement available data with additional data to evaluate long-term effects (called a Post-Approval Safety Study, or PASS) or to gather additional efficacy data (called a Post-Approval Efficacy Study, or PAES).
European marketing authorizations have an initial duration of five years. The holder of the marketing authorization must actively apply for its renewal after this first five-year period. As part of the renewal procedure, the competent authority will perform a full benefit-risk review of the product. Should the authority conclude that the benefit-risk balance is no longer positive, the marketing authorization can be suspended or revoked. Once renewed, the marketing authorization is valid for an unlimited period. If the holder does not apply for renewal, the marketing authorization automatically lapses. Any marketing authorization that is not followed within three years of its granting by the actual placing on the market of the corresponding medicinal product ceases to be valid.
Price controls
In most of the markets where we operate, the prices of pharmaceutical products are subject to both direct and indirect price controls and to drug reimbursement programs with varying price control mechanisms. Due to increasing political pressure and governmental budget constraints, we expect these mechanisms to remain robust – and potentially even to be strengthened – and to have a continued negative influence on the prices we are able to charge for our products.
Direct governmental efforts to control prices
United States: In the US, former President Donald Trump and congressional leaders declared the reduction of drug prices a key priority in 2020. Former President Trump signed an executive order that included a most favored nation (MFN) policy limiting prices in Medicare parts B and D to no greater than those paid by developed countries outside the US, and his administration finalized the rule to begin implementing a seven-year demonstration project for the MFN in Medicare Part B on January 1, 2021. However, lawsuits were filed in several US states, and the district courts granted orders delaying implementation. The Biden administration will likely determine next steps. Former President Trump also signed an executive order allowing US states to develop plans for the importation of drugs from Canada and permit personal importation from countries outside the US. These state plans must be approved by the US Department of Health and Human Services (HHS) prior to implementation. However, a lawsuit was filed against HHS challenging the importation of certain prescription drugs from Canada without drug manufacturer authorization or oversight, and in parallel, the Canadian government blocked the distribution of certain medicines outside Canada to avoid shortages within the country. It is anticipated that focus on drug pricing will continue at the federal level in 2021. Further, by December 31, 2020, 18 US states had passed legislation intended to impact pricing or requiring price transparency reporting, with five of these states also allowing for price control review boards. The disclosure requirements vary by state. Many states require multiple types of reporting, including for new drug applications, new drug launches, prior notice of price increases, and quarterly or annual reporting. It is expected in 2021 that state legislatures will continue to focus on drug pricing and that similar bills will be passed in more states.
Europe: In Europe, our operations are subject to significant price and marketing regulations. Many governments are introducing healthcare reforms in a further attempt to curb increasing healthcare costs. In some member states, these include reforms to permit the reimbursed use of off-label medicines, despite the presence of licensed alternatives on the market. In the EU, governments influence the price of pharmaceutical products through their control of national healthcare systems that fund a large part of the cost of such products to patients. The downward pressure on healthcare costs in general in the EU, particularly with regard to prescription drugs, is intense. Increasingly strict analyses are applied when evaluating the entry of new products, and as a result, access to innovative medicines is limited based on strict cost-benefit assessments. In addition, prices for marketed products are referenced within member states and across international borders, further impacting individual EU member state pricing. Member states also collaborate to enhance pricing transparency and have started conducting joint health technology assessments, joint pricing negotiations and/or joint purchasing. As an additional control for healthcare budgets, some EU countries have passed legislation to impose further mandatory rebates for pharmaceutical products and/or finan-
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cial claw-backs on the pharmaceutical industry. The calculation of these rebates and claw-backs may lack transparency in some cases and can be difficult to predict.
Regulations favoring generics and biosimilars
In response to rising healthcare costs, most governments and private medical care providers have established reimbursement schemes that favor the substitution of generic pharmaceuticals for more expensive brand-name pharmaceuticals. All US states have generic substitution statutes. These statutes permit or require the dispensing pharmacist to substitute a less expensive generic drug instead of an original drug. Other countries, including many European countries, have similar laws. We expect that the pressure for generic substitution will continue to increase. In addition, the US, the EU and other jurisdictions are increasingly crafting laws and regulations encouraging the development of biosimilar versions of biologic drugs, which can also be expected to have an impact on pricing.
Cross-border sales
Price controls in one country can have an impact in other countries as a result of cross-border sales. In the EU, products that we have sold to customers in countries with stringent price controls can be legally resold to customers in other EU countries at a lower price than the price at which the product is otherwise available in the importing country (known as parallel trade). In North America, products that we have sold to customers in Canada – which has relatively stringent price controls – are sometimes resold into the US, again at a lower price than the price at which the product is otherwise sold in the US. Such imports from Canada and other countries into the US are currently illegal. However, given the increased focus on pharmaceutical prices in the US, the former Trump administration, certain members of the US Congress, and several US states continued to explore regulatory and legislative ways to allow the safe importation of pharmaceutical products into the US from select countries, including Canada. Six US states have enacted drug importation laws, but the Secretary of HHS must certify that each state’s importation plan is safe and cost-effective before it can be implemented.
We expect that pressures on pricing will continue worldwide and will likely increase. Because of these pressures, there can be no certainty that in every instance we will be able to charge prices for a product that, in a particular country or in the aggregate, would enable us to earn an adequate return on our investment in that product.
Intellectual property
We attach great importance to intellectual property (IP) rights – including patents, trademarks, copyrights, know-how, trade secrets and regulatory data protection – as essential to our purpose of reimagining medicine to improve and extend people’s lives, and to protect our investment in research and development, manufacturing and marketing. The IP system provides a means to attract the investments needed to conduct and sustainably finance innovative R&D, and to manage the risks inherent in our work. For example, we seek IP protection under applicable laws for significant product developments in major markets. Among other things, patents may cover the products themselves, including the product’s active ingredient or ingredients and its formulation. Patents may cover processes for manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the product. Patents may also cover particular uses of a product, such as its use to treat a particular disease, or its dosage regimen. In addition, patents may cover tests for certain diseases or biomarkers – which can improve patient outcomes when administered with certain drugs – as well as assays, research tools and other techniques used to identify new drugs. The protection afforded, which may vary from country to country, depends upon the type of patent, its duration and its scope of coverage.
In the US and other countries, the law recognizes that product development and review by the FDA and other health authorities can take an extended period, and permits an extension of patent term for a period related to the time taken for the conduct of clinical trials and for the health authority’s review. However, the length of this extension and the patents to which it applies cannot be known in advance and can only be determined after the product is approved. In practice, it is not uncommon for patent term extensions (PTEs) to not fully account for the time it took to develop the product and receive marketing authorization. As a result, for example, it is rarely the case that a product’s active ingredient(s) will have a full patent term at the time the product is approved by the FDA and other health authorities.
In addition to patent protection, various countries offer regulatory data protection (RDP) or marketing exclusivities for a prescribed period of time. RDP is a distinct type of IP right providing exclusivity that precludes a potential competitor from filing a regulatory application that relies on the sponsor’s clinical trial data, or that precludes the regulatory authority from approving the application for a set period of time. The RDP period can vary depending upon the type of data included in the sponsor’s application. When it is available, market exclusivity, unlike RDP, may preclude a competitor from obtaining marketing approval for a product even if a competitor’s application relies on its own data. RDP and market exclusivity periods generally run from the date a product is approved, and so their expiration dates cannot be known with certainty until the product approval date is known and exclusivity has been granted by the relevant authorities.
United States
Patents
In the US, a patent issued for an application filed today will receive a term of 20 years from the earliest application filing date, subject to potential patent term adjustments for delays in patent issuance based upon certain delays in prosecution by the United States Patent and Trademark Office (USPTO). A US pharmaceutical patent that claims a product, method of treatment using a product, or method of manufacturing a product may also be eligible for a PTE. This type of extension may only extend the patent term for a maximum of five years, and may not
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extend the patent term beyond 14 years from regulatory approval. Only one patent may be extended for any product based on FDA review.
RDP and market exclusivity
Separate from patent exclusivities, the FDA may provide RDP or market exclusivity, which runs in parallel to any patent protection.
• A new small-molecule active pharmaceutical ingredient receives five years of RDP, during which time a competitor generally may not submit or obtain approval of an application to the FDA based on a sponsor’s clinical data.
• For a small-molecule active pharmaceutical ingredient, the FDA may also request that a sponsor conduct pediatric studies and, in exchange, it will grant an additional six-month period of pediatric market exclusivity if the FDA accepts the data, the sponsor makes a timely application for approval for pediatric treatment, and the sponsor has either a patent-based or regulatory-based exclusivity period for the product that can be extended.
• Orphan drug exclusivity provides seven years of market exclusivity for drugs designated by the FDA as orphan drugs, meaning drugs that treat rare diseases. During this period, a potential competitor generally may not market the same or similar drug for the same indication even if the competitor’s application does not rely on data from the sponsor.
• A new biologic active pharmaceutical ingredient receives 12 years of market exclusivity, during which time a competitor generally may not market the same or similar drug.
European community
Patents
Patent applications in Europe may be filed in the European Patent Office (EPO) or in a particular country or countries. The EPO system permits a single application to be granted for the EU plus other non-EU countries such as Switzerland and Turkey. When the EPO grants a patent, it is then validated in the countries that the patent owner designates. The term of a patent granted by the EPO or a European country office is generally 20 years from the earliest application filing date. Pharmaceutical patents can be granted a further period of exclusivity under the Supplementary Protection Certificate (SPC) system. SPCs are designed, in part, to account for the time it took to receive marketing authorization of a product by the European health authorities. An SPC may be granted to provide, in combination with the patent, up to 15 years of exclusivity from the date of the first European marketing authorization. However, an SPC cannot last longer than five years. The SPC duration may be extended by a further six months if the product is the subject of an agreed pediatric investigation plan. The post-grant phase of patents, including the SPC system, is currently administered on a country-by-country basis under national laws that, while differing, are intended to (but do not always) have the same effect.
RDP and market exclusivity
Separate from patent exclusivities, the EU provides a system of regulatory data protection for authorized human medicines that runs in parallel to any patent protection. The system for drugs being approved today is usually referred to as “8+2+1” because it provides an initial period of eight years of data protection, during which a competitor cannot rely on the relevant data; a further period of two years of market exclusivity, during which the data can be used to support applications for marketing authorization but a competitive product cannot be launched; and a possible one-year extension of the market exclusivity period if, during the initial eight-year data exclusivity period, the sponsor registered a new therapeutic indication with “significant clinical benefit.” This system applies both to national and centralized authorizations.
The EU also has an orphan drug exclusivity system for medicines. If a medicine is designated as an orphan drug, then it benefits from 10 years of market exclusivity after it is authorized, during which time an application for the same or similar medicine for the same indication will not generally be accepted or granted. Under certain circumstances, this exclusivity can be extended with a two-year pediatric extension.
Third-party patents and challenges to intellectual property
Third parties can challenge our IP, including patents, patent term extensions, RDP and marketing exclusivities (such as pediatric extensions and orphan drug exclusivity), through various proceedings. For example, patents in the US can be challenged in the USPTO through various proceedings, including Inter Partes Review (IPR) and Post-Grant Review (PGR) proceedings. They may also be challenged through patent infringement litigation under the Abbreviated New Drug Application (ANDA) provisions of the Hatch-Waxman Act or under the Biologics Price Competition and Innovation Act (BPCIA). In the EU, patents may be challenged through oppositions in the EPO, or national patents may be challenged in national courts or national patent offices. The outcomes of such challenges can be difficult to predict.
In addition to directly challenging our IP rights, in some circumstances a competitor may be able to market a generic version of one of our products by, for example, designing around our patents or marketing the generic product for non-patent-protected indications. Despite RDP, a competitor could opt to incur the costs of conducting its own clinical trials and preparing its own regulatory application, and avoid our RDP altogether. There is a risk that some countries may seek to impose limitations on or seek not to recognize the availability of IP rights for pharmaceutical products, or limit the extent to which such rights may be enforced. Also, even though we may own, co-own or in-license patents protecting our products, and conduct freedom-to-operate analyses, a third party may nevertheless assert that one of our products infringes a third-party patent for which we do not have a license.
As a result, there can be no assurance that our IP rights will protect our products or that we will be able to avoid adverse effects from the loss of IP protection or from third-party patents in the future.
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Intellectual property protection for certain key marketed products and compounds in development
We present below additional details regarding IP protection for certain Innovative Medicines Division products. For each, we identify issued, unexpired patents by general subject matter and, in parentheses, years of expiry in, if relevant, the US and the EU. The identified patents are owned, co-owned or exclusively in-licensed by Novartis and relate to at least one dosage strength of the product or to the method of treatment or its use as it is currently approved and marketed or, in the case of a compound in development, as it is currently submitted to the FDA and/or the EMA for approval. Identification of an EU patent refers to national patents in EU countries and/or to the national patents that have been derived from a patent granted by the EPO. Novartis may own, co-own, control or have rights to additional patents, for example, relating to compound forms, methods of treatment or use, formulations, devices, processes, synthesis, purification and detection.
We identify unexpired RDP periods and, in parentheses, years of expiry if the relevant marketing authorizations have been authorized or granted. We identify certain unexpired patent term extensions and marketing exclusivities and, in parentheses, years of expiry if they are granted; their subject matter scope may be limited and is not specified. Marketing exclusivities and patent term extensions include orphan drug exclusivity (ODE), pediatric exclusivity (PE), patent term extension (PTE) and supplementary protection certificate (SPC). We designate them as “pending” if they have been applied for but not granted and include years of expiry if estimable. Such pending applications may or may not ultimately be granted.
In the case of the EU, identification of a patent, supplementary protection certificate, marketing exclusivity or regulatory data protection means grant, authorization and maintenance in at least one country. However, it could be pending, not granted, or found invalid in others.
For each product below, we indicate whether there is current generic or biosimilar competition for one or more product versions in one or more approved indications in either the US or the EU, if IP is otherwise disclosed. We identify certain enforcement actions, or ongoing challenges to the disclosed IP that have not been finally resolved, including IPRs or PGRs if instituted by the USPTO. Challenges identified as being in administrative entities, such as national patent offices, include judicial appeals from decisions of those entities. Resolution of challenges to the disclosed IP, which in the EU may involve IP in one or more EU countries, may include settlement agreements under which Novartis permits or does not permit future launch of generic versions of our products before expiration of that IP. We identify certain material terms of such settlement agreements where they could have a material adverse effect on our business. In other cases, such settlement agreements may contain confidentiality obligations restricting what may be disclosed.
For additional information regarding commercial arrangements with respect to these products, see “—Key marketed products.”
Novartis Oncology business unit
Oncology
• Tasigna. US: Patent on compound (2023), PE (2024); three patents on salt forms (2026, 2027, 2028), three PEs (2027, 2028, 2029); patent on polymorph compound form (2026), PE (2027); two patents on capsule form (2026, 2027), two PEs (2027, 2028); patent on method of treatment (2032), PE (2032). EU: Patent on compound (2023); patent on salt form (2026); patent on polymorph compound form (2026); patent on capsule form (2027); patent on method of treatment (2030). There is no generic competition in the US or the EU. In the US, generic manufacturers have filed ANDAs challenging certain patents other than the compound patent. In the EU, the method-of-treatment patent and the capsule form patent are being opposed in the EPO.
• Promacta/Revolade. US: Patent on compound (2021), PTE (2022), PE (2023); two patents on compound (2021, 2021), two PEs (2021, 2021); patent on thrombocytopenia use (2021), PE (2021); patent on method of enhancing platelet production (2021), PE (2021); patent on method of enhancing platelet production using salt (2023), PE (2023); patent on salt form and thrombocytopenia use (2025), PE (2026); five patents on tablet formulations of different dose strengths (2027) (5), five PEs (2028) (5); ODE on severe aplastic anemia patients with an insufficient response to immunosuppressive therapy (2021), PE (2022); ODE on severe aplastic anemia patients in combination with standard immunosuppressive therapy (2025). EU: Patent on compound (2021), SPC (2025), PE (2025); patent on salt form (2023); patent on formulation (2027); patent on severe aplastic anemia use (2028); patent on severe aplastic anemia dosing regimen (2030). There is no generic competition in the US or the EU. In the US, generic manufacturers have filed ANDAs challenging certain patents other than the compound patent. In the EU, the formulation patent is being opposed in the EPO.
• Tafinlar and Mekinist.
Tafinlar. US: Two patents on compound (2030, 2030); patent on method of treatment (2029). EU: Patent on compound (2029); RDP (2023). There is no generic competition in the US or the EU.
Mekinist. US: Patent on compound (2025), PTE (2027); patent on method of treatment (2025); four patents on formulation (2032) (4). EU: Patent on compound (2025), SPC (2029); patent on formulation (2031); RDP (2025). There is no generic competition in the US or the EU.
Use of Mekinist with Tafinlar or Tafinlar with Mekinist. US: Patent on combination (2030); two patents on method of use of combination (2025, 2030); ODE on melanoma with certain mutations (2021); ODE on non-small cell lung cancer (2024); ODE on adjuvant treatment of melanoma (2025); ODE on anaplastic thyroid cancer (2025). EU: Patent on combination (2030);
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RDP (2025). There is no generic competition in the US or the EU.
• Sandostatin SC and Sandostatin LAR.
Sandostatin SC. There is no such patent protection in the US or the EU. There is generic competition in the US and the EU.
Sandostatin LAR. There is no such patent protection in the US or the EU. There is generic competition in some EU markets but no generic competition in the US.
• Jakavi. EU: Patent on compound (2026), SPC (2027); patent on salt form (2028); patent on compound for polycythemia vera (PV) use (2026); patent on salt form for PV use (2028); RDP (2023). There is no generic competition in the EU. In the EU, the salt form patent and the patent on salt form for PV use are being opposed in the EPO.
• Gleevec/Glivec. US: Patent on gastrointestinal stromal tumor (GIST) use (2021), PE (2022). EU: Patent on GIST use (2021); patent on tablet formulation (2023). There is generic competition in the US and the EU. National enforcement and validity actions are also ongoing on the GIST use patent in certain EU countries.
• Afinitor/Votubia and Afinitor Disperz/Votubia dispersible tablets. US: Patent on dispersible tablet formulation (2022), PE (2023); patent on tuberous sclerosis complex (TSC)/subependymal giant cell astrocytoma (SEGA) use (2022), PE (2022); patent on breast cancer use (2022), PE (2022); patent on renal cell carcinoma use (2025), PE (2026); patent on pancreatic neuroendocrine tumor use (2028); ODE for Afinitor on neuroendocrine tumors of gastrointestinal or lung origin (2023); ODE for Afinitor Disperz on tuberous sclerosis (2025). EU: Two patents on dispersible tablet formulation (2022, 2022); patent on breast cancer use (2022); patent on renal cell carcinoma use (2022); patent on neuroendocrine tumors of pancreatic origin use (2022); patent on neuroendocrine tumors of lung origin use (2022); patent on TSC/SEGA, TSC/renal angiomyolipoma and TSC/seizures use (2027); ODE (Votubia, tuberous sclerosis) (2023). There is generic competition in the EU, and in the US for the three lower-dosage strengths for Afinitor. In the US, Novartis has resolved patent litigation relating to Afinitor, which may result in further generic competition prior to the expiration in February 2022 of the breast cancer use patent. Also in the US, Novartis has resolved patent litigation relating to Afinitor Disperz, which may result in generic competition prior to the expiration in February 2022 of the TSC use patent. In the EU, the breast cancer use patent, the TSC/SEGA, TSC/renal angiomyolipoma and TSC/seizures use patent, the renal cell carcinoma use patent, and the use patents on neuroendocrine tumors of pancreatic origin and of lung origin are being opposed in the EPO. National enforcement and validity actions are also ongoing on some of these patents in certain EU countries.
• Kisqali. US: Three patents on compound (2028, 2030, 2031), PTE pending (2031); three patents on methods of treatment (2029, 2029, 2031); patent on salt form (2031); RDP (2022). EU: Patent on compound (2027); patent on compound (2029), SPC (2032); patent on salt form (2031); patent on methods of use (2029); RDP (2027). There is no generic competition in the US or the EU.
• Kymriah. US: Seven patents on cells and/or pharmaceutical compositions comprising the cells (2031) (7); four patents on methods of use of cells and/or pharmaceutical compositions comprising the cells (2031) (4); RDP (2029), PE (2030); ODE for relapsed or refractory (r/r) pediatric acute lymphoblastic leukemia (2024), PE (2025); ODE for r/r diffuse large B-cell lymphoma (2025), PE (2025). EU: Patent on methods of use (2031), SPC (2033); RDP (2028); ODE (2028), PE (2030). There is no generic competition in the US or the EU.
• Lutathera. US: Patent on formulation (2038); patent on formulation process (2038); RDP (2023); ODE (2025). EU: RDP (2027); ODE (2027). There is no generic competition in the US or the EU.
• Piqray. US: Patent on compound (2029); patent on compound and use (2030), PTE pending (2033); RDP (2024). EU: Patent on compound and use (2029), SPC (2034); RDP (2030). There is no generic competition in the US or the EU.
• Adakveo. US: Patent on composition of matter (2028), PTE pending (2032); patent on methods of treatment (2027); RDP (2031), PE (2032); ODE (2026). EU: Patent on composition of matter (2027); patent on dissociation use (2031); RDP (2030); ODE (2030). There is no generic competition in the US or the EU.
Novartis Pharmaceuticals business unit
Immunology, Hepatology and Dermatology
• Cosentyx. US: Patent on composition of matter (2026), PTE (2029); patent on psoriasis use (2032); patent on ankylosing spondylitis use (2033); RDP (2027). EU: Patent on composition of matter (2025), SPC (2030), PE (2030); patent on psoriasis use (2031); RDP (2026). There is no generic competition in the US or the EU.
Ophthalmology
• Lucentis. EU: Patent on composition of matter (2018), SPC (2022), PE (2022). There is no generic competition in the EU. In the EU, the pre-filled syringe patent is being opposed in the EPO.
• Xiidra. US: Patent on compound (2024); three patents on compound and use (2024, 2024, 2025); patent on formulation (2024); five patents on method of treatment (2024, 2024, 2026, 2029, 2029); two patents on polymorph compound form (2029, 2029); RDP (2021). PTE pending. There is no generic competition in the US. Xiidra is not marketed in the EU. In the US, the compound, compound and use, formulation, method of treatment, and polymorph compound form patents are being challenged in ANDA proceedings against a generic manufacturer.
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• Beovu. US: Patent on composition of matter (2029), PTE pending (2033); patent on method of treatment (2029); patent on nucleic acid molecule (2029); patent on antibodies (2023); patent on dosing regimen (2035); RDP (2031). EU: Two patents on composition of matter (2029, 2029), SPC (2034); patent on antibodies (2023); RDP (2030). There is no generic competition in the US or the EU.
Neuroscience
• Gilenya. US: Patent on dosage regimen (2027), PE (2027); patent on 0.25 mg formulation (2032), PE (2032); patent on method of treatment (2027); RDP for pediatric use and 0.25 mg (2021), PE (2021). EU: Patent on formulation (2024), SPC (2026); patent on 0.25 mg formulation (2032); RDP (2022). There is no generic competition in the US or the EU. In the US, the dosage regimen patent is being challenged in ANDA proceedings against a generic manufacturer and was upheld as being valid and infringed. The decision has been appealed. In parallel, an appeal against a USPTO decision upholding that patent in IPR proceedings is ongoing. Novartis is also enforcing the method of treatment patent against a generic manufacturer. Novartis has entered into settlement agreements with a number of manufacturers that had filed ANDAs to market a generic version of 0.5 mg Gilenya. Under the confidential terms of these settlements, these ANDA filers will be able to launch a generic version of 0.5 mg Gilenya on an agreed-upon date that is prior to the expiration of the dosage regimen patent.
• Zolgensma. US: Three patents on vector (2024, 2024, 2026); two patents on methods of treatment (2028, 2028); ODE for spinal muscular atrophy (SMA) in patients less than 2 years old with biallelic mutations in the SMN1 gene (2026); RDP (2031). EU: Two patents on vector (2024, 2028); two patents on methods of use (2028, 2028); ODE for SMA in patients with a biallelic mutation in the SMN1 gene, or patients with a biallelic mutation in the SMN1 gene and up to three copies of the SMN2 gene (2030); RDP (2030). There is no generic competition in the US or the EU.
• Mayzent. US: Patent on compound (2024); patent on treatment initiation use (2030); RDP (2024). PTE pending. EU: Patent on compound (2024); patent on solid form (2029); patent on treatment initiation use (2029), SPC (2034); patent on formulation (2032); RDP (2030). There is no generic competition in the US or the EU.
• Kesimpta. US: Patent on compound (2031); RDP (2021). EU: Three patents on compound (2023) (3); two patents on formulation (2028, 2028); patent on dosing regimen (2037). There is no generic competition in the US. Kesimpta is not currently marketed in the EU.
Cardiovascular, Renal and Metabolism
• Entresto. US: Four patents on combination (2023) (4), four PEs (2023 (3), 2024); two patents on complex (2026, 2027), two PEs (2027, 2027); RDP for new pediatric patient population (2022), PE (2023). PTE pending. EU: Patent on combination (2023), SPC (2028); two patents on complex (2026, 2026), two SPCs (2030, pending 2030); patent on method of use (2034); RDP (2025). There is no generic competition in the US or the EU. In the US, two combination patents and the two complex patents are being challenged in ANDA proceedings against generic manufacturers. In the EU, the two complex patents and the use patent are being opposed in the EPO.
• Leqvio. US: Patent on composition of matter (2034), anticipated PTE (2035); patent on dosing regimen (2036). EU: Patent on composition of matter (2033), anticipated SPC (2035); RDP (2030). There is no generic competition in the EU. Leqvio is not currently marketed in the US.
Respiratory
• Xolair. US: Two patents on syringe formulation (2021, 2025). EU: Two patents on syringe formulation (2021, 2024). There is no generic competition in the US or the EU.
Established Medicines
• Galvus and Eucreas. EU: Patent on compound (2019), SPC (2022); patent on combination (2021), SPC (2022); patent on Galvus formulation (2025); patent on Eucreas formulation (2026). Galvus/Eucreas is not marketed in the US. There is generic competition for Galvus and Eucreas in some EU countries. The EU Galvus formulation patent is being opposed in the EPO.
• Diovan and Co-Diovan/Diovan HCT. Diovan: There is no such patent protection for Diovan in the US or the EU. There is generic competition in the US and the EU. Co-Diovan/Diovan HCT: There is no such patent protection for Co-Diovan/Diovan HCT in the US or the EU. There is generic competition in the US and the EU.
Compounds in development
We provide patent information for non-marketed compounds in development that have been submitted to the FDA and/or the EMA for registration but have not yet been approved by either agency. We currently do not have any non-marketed compounds in development that have been submitted for registration but have not yet been approved by either agency.
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Sandoz
Our Sandoz Division is a global leader in generic pharmaceuticals and biosimilars, and sells products in well over 100 countries. In 2020, the Sandoz Division achieved consolidated net sales of USD 9.6 billion, representing 20% of the Group’s total net sales. Sandoz develops, manufactures and markets finished dosage form medicines as well as intermediary products including active pharmaceutical ingredients.
Sandoz is organized globally into three franchises: Retail Generics, Anti-Infectives and Biopharmaceuticals. In Retail Generics, Sandoz develops, manufactures and markets active ingredients and finished dosage forms of small-molecule pharmaceuticals to third parties across a broad range of therapeutic areas, as well as finished dosage form anti-infectives sold to third parties. In Anti-Infectives, Sandoz manufactures and supplies active pharmaceutical ingredients and intermediates – mainly antibiotics – for internal use by Retail Generics and for sale to third-party customers. In Biopharmaceuticals, Sandoz develops, manufactures and markets protein- or other biotechnology-based products, including biosimilars, and provides biotechnology manufacturing services to other companies.
The Sandoz strategic ambition is to be the world’s leading and most valued generics company (including biosimilars). Our divisional strategy focuses on three areas: developing a broad and consistent pipeline of off-patent launches across key geographies and across a broad range of therapeutic areas; positioning Sandoz to be “first in” by having a strong pipeline with a focus on being first to market and “last out” by way of competitive costs and stable supply; and instilling a true “generic mindset,” with a focus on priorities, simple and rapid decision-making, and focused resource allocation.
Sandoz is the global market leader in biosimilars, with a total of eight approved and marketed products, and a pipeline of over 15 molecules. In addition to internally developed projects, our biosimilar portfolio comprises publicly announced commercialization agreements with BioCon, Gan & Lee, EirGenix and Polpharma Biologics. Availability of our biosimilars varies by country.
Sandoz is also the global market leader in generic antibiotics. Its Kundl, Austria, manufacturing site is the hub of the last vertically integrated antibiotics production chain in Europe, which offers certain competitive advantages including added supply chain resilience.
On January 31, 2020, we closed the previously announced acquisition of the Japanese business of Aspen Global Incorporated, consisting of off-patent branded medicines with a focus on anesthetics and specialty brands.
We received a CRL from the FDA in 2018 for our submission for a generic form of fluticasone propionate and salmeterol inhalation powder, for oral inhalation (GSK’s Advair®). In January 2020, we decided to discontinue the generic Advair® development program in the US, following a detailed review of the latest data read-outs.
On March 2, 2020, we announced a resolution with the US Department of Justice (DOJ) Antitrust Division concerning the DOJ’s antitrust investigation into the US generic drug industry. For more information, see “Item 18. Financial Statements—Note 20. Provisions and other non-current liabilities.”
In 2018, Novartis announced an agreement to sell selected portions of its Sandoz US portfolio, specifically the Sandoz US dermatology business and generic US oral solids portfolio, to Aurobindo Pharma USA Inc., for USD 0.8 billion in cash and potential earn-outs. On April 2, 2020, Novartis announced the mutual agreement with Aurobindo to terminate the sale agreement, as approval from the US Federal Trade Commission for the transaction was not obtained within anticipated timelines. Sandoz continues to operate its oral solids and dermatology businesses as well as its dermatology development center as part of the Sandoz US business.
On July 27, 2020, Sandoz and the Austrian government announced a planned combined investment of more than EUR 150 million to enhance the long-term competitiveness and supply resilience of European production for key antibiotics.
Key marketed products
The Sandoz global portfolio covers a wide range of therapeutic areas. The following are some of the Sandoz key marketed products in each of its franchises (availability varies by market):
Retail Generics
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Product
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Originator drug
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Description
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Amoxicillin/clavulanic acid
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Augmentin®
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Antibiotic
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Zoledronic acid
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Aclasta
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Osteoporosis treatment
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Acetylcysteine
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Various
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Mucolytic agent
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Tacrolimus
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Various
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Immunosuppressive agent
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Anti-Infectives
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Active ingredients
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Description
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Oral and sterile penicillins
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Anti-infectives
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Oral and sterile cephalosporins
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Anti-infectives
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||
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Clavulanic acid and mixtures with clavulanic acid
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ß-lactam inhibitors
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Classical and semisynthetic macrolides
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Anti-infectives
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||
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Intermediates
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Description
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||
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Various cephalosporin intermediates
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Anti-infectives
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Macrolide base intermediates
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Anti-infectives
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Various crude compounds produced by fermentation
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Cyclosporine, ascomycin, rapamycin, mycophenolic acid, etc.
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Biopharmaceuticals
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Product
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Originator drug
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Description
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Omnitrope
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Genotropin®
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Recombinant human growth hormone to treat growth disorders and growth hormone deficiency
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Binocrit and Epoetin alfa Hexal
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Eprex®/Erypo®
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Recombinant protein (erythropoiesis-stimulating) agent to treat anemia
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Zarzio, Zarxio and Filgrastim Hexal
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Neupogen®
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Recombinant protein (granulocyte colony-stimulating factor (GCSF), short-acting) used in oncology
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Glatopa
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Copaxone®
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Treatment for relapsing forms of multiple sclerosis (MS)
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Erelzi 1
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Enbrel®
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Fusion protein (TNF-α receptor) to treat multiple immune-mediated inflammatory diseases
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Rixathon
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MabThera®
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Chimeric monoclonal antibody (directed against CD20 protein on B-cells) to treat blood cancers and immunological diseases
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Hyrimoz
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Humira®
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Monoclonal antibody (TNF-α antibody) to treat multiple immune-mediated inflammatory diseases
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Zessly
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Remicade®
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Monoclonal antibody (TNF-α antibody) to treat multiple immune-mediated inflammatory diseases
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Ziextenzo
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Neulasta®
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PEGylated form of a recombinant human granulocyte colony- stimulating factor (GCSF) (long-acting) to reduce duration of chemotherapy-induced neutropenia and incidence of chemotherapy-induced febrile neutropenia
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|||||
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1 Approved in the US in 2016. Launch in the US pending final resolution of litigation with Amgen, which markets Enbrel®. The US District Court of New Jersey ruled against Sandoz in August 2019, which was upheld on appeal; Sandoz is now considering its further appeal options.
|
|||||
Selected development projects – Biosimilars in Phase III development and registration
The following table describes Sandoz biosimilar projects that are in Phase III clinical trials (including filing preparation) and registration:
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Principal markets
The two largest generics markets in the world – the US and Europe – are the principal markets for Sandoz. The following table sets forth the aggregate 2020 net sales of Sandoz by region:
Sandoz
Many Sandoz products are used for chronic conditions that require patients to consume the product over long periods of time, from months to years. Sales of our anti-infective products and over-the-counter cough and cold products are subject to seasonal variation. Sales of the vast majority of our other products are not subject to material changes in seasonal demand.
Production
For information on the production of our products, see “—Item 4.B Business overview—Innovative Medicines—Production.”
In September 2020, as part of a broader reorganization of Novartis Technical Operations (NTO), we established the Sandoz Technical Operations (STO) platform within NTO. STO will focus on producing generic medicines for Sandoz, as well as related external supply operations and supply chain.
Due to impurities found in the active ingredient batches sourced from third-party manufacturers, we recalled Sandoz valsartan, losartan and irbesartan products in the second half of 2018 and first quarter of 2019, and ranitidine film-coated tablets in the second half of 2019, from several markets, in line with our quality standards for all of our marketed products. The discovery of nitrosamines in some types of drug products led several health regulators (e.g., EMA, FDA and others) to conduct a detailed analysis of these impurities in affected medicinal products. Novartis works with health authorities around the world to continuously review all chemical and biological human medicines for the possible presence of nitrosamines. The EMA, FDA and other health authorities have provided guidance to the pharmaceutical industry to prevent unacceptable levels of nitrosamines in medicines. The EMA review is due to conclude in March 2021 for chemical human medicines and in July 2021 for biological human medicines.
Marketing and sales
Sandoz sells a broad portfolio of products, including the products of our Retail Generics franchise and biosimilars, to wholesalers, pharmacies, hospitals and other healthcare outlets. Sandoz adapts its marketing and sales approach to local decision-making processes, depending on the structure of the market in each country.
In response to rising healthcare costs, many governments and private medical care providers, such as health maintenance organizations, have instituted reimbursement schemes that favor the substitution of bioequivalent generic versions of originator pharmaceutical products, such as those sold by our Retail Generics franchise. In the US, statutes have been enacted by all states that permit or require pharmacists to substitute a less expensive generic product for the brand-name version of a drug that has been prescribed to a patient. Generic use is growing in Europe, but penetration rates in many EU countries (as a percentage of volume) remain well below those in the US.
Recent trends have been toward continued consolidation among distributors and retailers of Sandoz products, both in the US and internationally, which has increased our customers’ purchasing leverage.
Legislative or regulatory changes can have a significant impact on our business in a country. For more information on such changes, see ““—Item 4.B Business overview—Innovative Medicines—Price controls.”
Our Anti-Infectives franchise supplies active pharmaceutical ingredients and intermediates – mainly antibiotics – for internal use by Retail Generics and for sale to the pharmaceutical industry worldwide.
Our Biopharmaceuticals franchise operates in an emerging business environment, particularly in the US. Regulatory pathways for approving biosimilar products are either relatively new or still in development, and policies have not yet been fully defined or implemented regarding the automatic substitution and reimbursement of biosimilars in many markets, including the US. As a result, in many of these markets, our biosimilar products are marketed as branded competitors to the originator products.
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Competition
The market for generic products is characterized by increasing demand for high-quality pharmaceuticals that can be marketed at lower costs due to comparatively minimal initial research and development investments. Increasing pressure on healthcare expenditure and numerous patent and data exclusivity period expirations have encouraged more generic product launches, resulting in increased competition among the companies selling generic pharmaceutical products, leading to ongoing price pressure. In particular, Sandoz faces increased industrywide pressure on prices for generic products, particularly in the US, driven by factors including customer consolidation and growing competition from other manufacturers of generic medicines. These factors contributed to a decline in US sales that began in 2017 and continued through 2020.
In addition, research-based pharmaceutical companies are participating directly in the generic conversion process by licensing their patented products to generic companies (so-called “authorized generics”). Consequently, generic companies that were not otherwise in a position to launch a specific product may participate in the market using the innovator’s product authorization. Authorized generics serve as a business opportunity for Sandoz when the product of a research-based pharmaceutical company loses patent protection and Sandoz secures a license from the research-based pharmaceutical company to launch the authorized generic of that product.
Development and registration
Development of Sandoz Biopharmaceuticals is jointly overseen by Sandoz and by Global Drug Development (GDD) and is mostly executed by GDD. Development and registration activities for Retail Generics products, and certain registration activities for Biopharmaceuticals products, continue to be overseen directly by Sandoz.
Before a generic pharmaceutical may be marketed, intensive technical and clinical development work must be performed to demonstrate, in bioavailability studies, the bioequivalence of the generic product to the reference product. Nevertheless, research and development costs associated with generic pharmaceuticals are much lower than those of the originator pharmaceuticals, as no preclinical studies or clinical trials on dose finding, safety and efficacy must be performed by the generic company. As a result, generic pharmaceutical products can be offered for sale at prices often much lower than those of products protected by patents and data exclusivity, which must recoup substantial research and development costs through higher prices over the life of the product’s patent and data exclusivity period.
While generic pharmaceuticals are follow-on versions of chemically synthesized molecules, biosimilar products contain a version of the active substance of an already approved biological reference medicine. Due to the inherent variability and complexity of biologic products, including batch-to-batch differences and variations following manufacturing changes, the development and the regulatory pathway of biosimilars differ significantly from that of generics.
The development of a biosimilar product is much more technically challenging than the development of a typical generic small-molecule pharmaceutical. While generic pharmaceuticals normally do not require clinical studies in patients, regulators worldwide do require such targeted studies for biosimilar products. Biosimilars are engineered to match the reference medicine in quality, safety and efficacy. This is achieved by systematically defining the target range of the reference medicine and then comparing the biosimilar to the reference medicine at various development stages to confirm biosimilarity and to establish that there are no clinically meaningful differences between the proposed biosimilar and the reference biologic. Because the purpose of a biosimilar clinical development program is to confirm biosimilarity and not to establish efficacy and safety de novo, the clinical studies required are less than those required for a reference biologic. Therefore, the cost of development for a biosimilar is usually less than that of a reference biologic.
The Development and Registration staff employed by affiliates of the Sandoz Division are based worldwide, including at facilities in Holzkirchen, Germany; Hyderabad, India; Kundl, Austria; Ljubljana, Slovenia; and Rudolstadt, Germany. In November 2020, Sandoz completed (i) the previously announced closure of the Holzkirchen, Germany, development and registration site, with the exception of patch development and the project management group, and; (ii) the closure of the product development and registration site as well as the maintenance and development regulatory centers in Unterach, Austria. We are conducting a review of our global development and regulatory network to consolidate and streamline operations and optimize our network structure to enable Sandoz to compete sustainably in an increasingly challenging generics environment. As part of this review, in the fourth quarter of 2020, Sandoz announced the planned closure of its maintenance regulatory center in Barleben, Germany, which we expect will be completed in the fourth quarter of 2021. Sandoz also announced the planned closure of the Fougera development center located in Melville, New York as well as the product development center in Boucherville, Canada, which we expect will be completed in 2021.
Regulation
Generics
The Hatch-Waxman Act in the US (and similar legislation in the EU and in other countries) eliminated the requirement that manufacturers of generic pharmaceuticals repeat the extensive clinical trials required for reference products, so long as the generic version could be shown to be therapeutically equivalent to the reference product.
In the US, the decision on whether a generic pharmaceutical is therapeutically equivalent to the original product is made by the FDA based on an Abbreviated New Drug Application (ANDA) filed by the generic product’s manufacturer. The process typically takes nearly two years from the filing of the ANDA until FDA approval.
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However, delays can occur if issues arise, for example, regarding the interpretation of bioequivalence study data, labeling requirements for the generic product, or qualifying the supply of active ingredients. In addition, the Hatch-Waxman Act requires a generic manufacturer to certify in certain situations that the generic product does not infringe on any current applicable patents on the product held by the holder of the marketing authorization for the reference product, or to certify that such patents are invalid. This certification often results in a patent infringement lawsuit being brought against the generic company. In the event of such a lawsuit, the Hatch-Waxman Act imposes an automatic 30-month delay in the approval of the ANDA to allow the parties to resolve the intellectual property issues. For generic applicants who are the first to file their ANDA containing a certification claiming non-infringement or patent invalidity, the Hatch-Waxman Act generally provides those applicants with 180 days of marketing exclusivity to recoup the expense of challenging the patents on the reference product. However, generic applicants must launch their products within certain timeframes or risk losing the marketing exclusivity that they had gained by being a first-to-file applicant.
In the EU, decisions on the granting of a marketing authorization are made either by the European Commission based on a positive recommendation by the EMA under the centralized procedure, or by a single member state under the national or decentralized procedure. See “—Innovative Medicines—Regulation—European Union.” Companies may submit Abridged Applications for approval of a generic medicinal product based upon its “essential similarity” to a medicinal product authorized and marketed in the EU following the expiration of the product’s data exclusivity period. In such cases, the generic company is able to submit its Abridged Application based on the data submitted by the innovator company for the reference product, without the need to conduct extensive Phase III clinical trials of its own. For all products that received a marketing authorization in the EU after late 2005, the Abridged Application can be submitted throughout the EU. However, the data submitted by the innovator company in support of its application for a marketing authorization for the reference product will be protected for 10 years after the first grant of marketing authorization in all member states, and can be extended for an additional year if a further innovative indication has been authorized for that product, based on preclinical and clinical trials filed by the innovator company that show a significant clinical benefit in comparison to the existing therapies.
Biosimilars
The regulatory pathways for approval of biosimilar medicines are still being developed and established in many countries of the world. A regulatory framework for the approval of biosimilars has been established in the EU, Japan, Canada and the US, while the World Health Organization (WHO) has issued guidance. Sandoz has successfully registered and launched the first biosimilar (or biosimilar-type) medicine in Europe, the US, Canada, Japan, Taiwan, Australia, and many countries in Latin America and Asia. Sandoz was the first company to secure approval for and launch a biosimilar under the US biosimilar pathway that was established as part of the Biologics Price Competition and Innovation Act (BPCIA).
The approval of biosimilars in Europe follows a process similar to that followed for small molecules. However, biosimilars usually have to be approved through the centralized procedure because they are manufactured using recombinant DNA technology. As part of the approval process in the EU, biosimilars have to demonstrate comparability to the reference medicine in terms of safety, efficacy and quality through an extensive comparability exercise, based on strict guidelines set by the authorities. Regulators will only approve a biosimilar based on data that allows the regulators to conclude that there are no clinically meaningful differences between the reference medicine and the biosimilar.
In the US, under the BPCIA, a biosimilar must be highly similar with no clinically meaningful differences compared to the reference medicine. Approval of a biosimilar in the US requires the submission of an ABLA to the FDA, including an assessment of immunogenicity, and pharmacokinetics or pharmacodynamics. The ABLA for a biosimilar can be submitted as soon as four years after the initial approval of the reference biologic, but can only be approved 12 years after the initial approval of the reference biologic.
Intellectual property
We take all reasonable steps to ensure that our products do not infringe valid intellectual property rights held by others. Nevertheless, competing companies commonly assert patent and other intellectual property rights. As a result, we can become involved in significant litigation regarding our products. If we are unsuccessful in defending these suits, we could be subject to injunctions preventing us from selling our products and to potentially substantial damages.
Wherever possible, our products are protected by our own patents. Among other things, patents may cover the products themselves, including the product’s formulation, or the processes for manufacturing a product. However, there can be no assurance that our intellectual property will protect our products or that we will be able to avoid adverse effects from the loss of intellectual property protection in the future.
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4.C Organizational structure
Organizational structure
See “Item 4. Information on the Company—Item 4.A History and development of Novartis” and “Item 4. Information on the Company—Item 4.B Business overview—Overview.”
Significant subsidiaries
See “Item 18. Financial Statements—Note 32. Principal Group subsidiaries and associated companies.”
4.D Property, plants and equipment
Our principal executive offices are located in Basel, Switzerland. Our divisions operate through a number of affiliates that have offices, research and development facilities, and production sites throughout the world.
We generally own our facilities or have entered into long-term lease arrangements for them. Some of our principal facilities are subject to mortgages and other security interests granted to secure certain debts.
Novartis Technical Operations (NTO) manages the production, supply chains and quality of our Innovative Medicines and Sandoz Division products through a network of 54 manufacturing sites, as well as through external suppliers, and warehouse and distribution centers. In addition, our Innovative Medicines Division manages six AAA sites for radioligand therapies production and six sites for Novartis Gene Therapies (formerly AveXis) for research and development, production, warehousing and administrative offices. Endocyte manages two sites for research and its headquarters and administrative offices.
The following table sets forth our major headquarters and most significant production, research and development, and administrative facilities. See also “—Item 4.B Business overview—Innovative Medicines—Production” and “—Item 4.B Business overview—Sandoz—Production” for a discussion of our manufacturing processes.
Major facilities
|
Location |
Size of site (in
square meters) |
Major activity |
|||
|
Basel, Switzerland – St. Johann
|
589 000
|
Global Group headquarters; global Innovative Medicines Division headquarters; Global Sandoz Division headquarters; research and development; production of drug substances and drug intermediates
|
|||
|
Kundl and Schaftenau, Austria
|
480 000
|
Production of biotechnological products, drug products and finished products, anti-infectives, active drug substances, product development
|
|||
|
East Hanover, New Jersey
|
391 000
|
Innovative Medicines Division US headquarters, research and development
|
|||
|
Barleben, Germany
|
340 000
|
Production of broad range of generics finished dosage forms
|
|||
|
Cambridge, Massachusetts
|
201 800
|
Research and development
|
|||
|
Shanghai, China
|
106 500
|
Research and development
|
|||
|
Stein, Switzerland
|
64 700
|
Production of sterile vials, pre-filled syringes and ampoules; inhalation capsules, tablets and transdermals; active pharmaceutical ingredients, and cell and gene therapies
|
|||
|
Holzkirchen, Germany
|
64 200
|
Global Sandoz Division, production of oral films, transdermal delivery systems, matrix patches, product development
|
|||
|
Huningue, France
|
35 000
|
Production of drug substances for clinical and commercial supply
|
|||
|
Princeton, New Jersey
|
14 300
|
Sandoz Division US headquarters
|
|||
|
Libertyville, Illinois
|
9 800
|
Production, warehouse and administrative offices for the Novartis Gene Therapies unit within the Innovative Medicines Division
|
|||
As our product portfolio evolves, NTO is adapting our manufacturing capacity and capabilities to meet our changing needs, shifting from high-volume products toward lower-volume, customized and personalized medicines. As of December 31, 2020, we have closed, exited or sold 18 manufacturing sites since 2016 and have announced the closure, exit or sale of seven additional manufacturing sites. We have continued to expand our capacity in personalized medicines and complex biologic drugs, such as in Stein, Switzerland, as well as investing in new facilities to provide cell and gene therapies, such as in Les Ulis, France. We are leveraging innovation to increase the reliability and productivity of our manufacturing network, including using data and digital technologies. We continue to seek opportunities to manage our production facilities as efficiently as possible, optimize
48
external spend, and simplify and standardize across our manufacturing network to help us lower costs and help optimize the value of our products. At the same time, we are working to improve our environmental sustainability, for example by reducing energy and water consumption at our sites.
For a description of the impact of environmental matters, see “Item 3. Key Information—Item 3.D Risk factors—Environmental, social and governance—Unsuccessful management of environmental, social and governance matters,” “Item 3. Key Information—Item 3.D Risk factors—Environmental matters—Impact of environmental liabilities,” and “Item 3. Key Information—Item 3.D Risk factors—Climate change—Climate change and associated increased risk of major natural disasters.” See also “Item 18. Financial Statements—Note 20. Provisions and other non-current liabilities.”
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Item 4A. Unresolved Staff Comments
Not applicable.
50
Item 5. Operating and Financial Review and Prospects
5.A Operating results
This operating and financial review should be read with the Group’s consolidated financial statements in this Annual Report, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (see “Item 18. Financial Statements”). “Item 5. Operating and Financial Review and Prospects” with the sections on compounds in development and selected development projects of our divisions (see “Item 4. Information on the Company—Item 4.B Business overview”) constitute the Operating and Financial Review (Lagebericht), as defined by the Swiss Code of Obligations.
The discussion and analysis of the financial condition and results of operations of certain items from fiscal year ended December 31, 2018 and year to year comparison between fiscal year ended December 31, 2019 and December 31, 2018 that are not included in this Form 20-F can be found in “Item 5. Operating and Financial Review and Prospects” of our Form 20-F for the fiscal year ended December 31, 2019, which is incorporated by reference herein.
Overview
Our purpose is to reimagine medicine to improve and extend people’s lives. We use innovative science and technology to address some of society’s most challenging healthcare issues. We discover and develop breakthrough treatments and find new ways to deliver them to as many people as possible. We also aim to reward those who invest their money, time and ideas in our Company. Our vision is to become the most valued and trusted medicines company in the world.
The businesses of Novartis are divided operationally on a worldwide basis into two identified reporting segments:
• Innovative Medicines: innovative patent-protected prescription medicines
• Sandoz: generic pharmaceuticals and biosimilars
In addition, we separately report the results of Corporate activities. The financial results of our Corporate activities include the costs of the Group headquarters and those of corporate coordination functions in major countries. Corporate also includes other items of income and expense that are not attributable to specific segments, such as certain revenues from intellectual property rights and certain expenses related to post-employment benefits, environmental remediation liabilities, charitable activities, donations and sponsorships.
Our divisions are supported by the following organizational units: the Novartis Institutes for BioMedical Research, Global Drug Development, Novartis Technical Operations and Novartis Business Services. The financial results of these organizational units are included in the results of the divisions for which their work is performed.
Significant transactions are discussed in “Item 18. Financial Statements—Note 2. Significant transactions”, “Item 18. Financial Statements—Note 3. Segmentation of key figures 2020, 2019 and 2018,” and “Item 18. Financial Statements—Note 30. Discontinued operations.”
Following the February 28, 2019, shareholders’ approval of the spin-off of the Alcon business, the Group reported its consolidated financial statements as “continuing operations” and “discontinued operations” for the current and prior years to comply with IFRS. Continuing operations include the businesses of the Innovative Medicines and Sandoz Divisions, and the continuing Corporate activities. Discontinued operations include the Alcon eye care devices business and certain Corporate activities attributable to the Alcon business prior to the spin-off, the gain on distribution of Alcon Inc. to Novartis AG shareholders and certain other expenses related to the spin-off. See “Item 18. Financial Statements—Note 1. Significant Accounting Policies”, “Item 18. Financial Statements—Note 2. Significant Transactions” and “Item 18. Financial Statements—Note 30. Discontinued operations.”
Our environment
We live in an era of amazing medical innovation, driven by better understanding of the genetic and biological roots of disease, and surging use of data analytics and digital technology in science and healthcare. At the same time, the world’s population continues to grow and people are living longer, fueling a rise in chronic diseases. Together, these factors are increasing demand for high-quality care worldwide and pressuring healthcare systems to restrain spending growth.
Our strategy
Our strategy is to build a leading, focused medicines company powered by advanced therapy platforms and data science. As we implement our strategy, we have five priorities to shape our future and help us continue to create value for our company, our shareholders and society:
• Unleash the power of people. We believe that culture is fundamental to driving our performance and value for stakeholders. We are implementing this priority by building one consistent organizational culture that is inspired, curious and unbossed. Engagement of our associates is now at an all-time high. Externally, more than half of our candidates reference culture as one of the reasons to join Novartis. In the future, we expect to make real-time insights on company culture available
51
to our leaders to drive our performance and further foster our culture.
• Deliver transformative innovation. We prioritize first-in-class medicines in our pipeline to address the needs of patients with no or limited treatment options. Our commitment is to go beyond traditional modalities (for example, small molecules and biologics) and invest in advanced therapy platforms (for example, cell therapy, gene therapy, radioligand therapy and RNA-based therapeutics). Novartis has a leading pipeline based on scale, innovation and future value, including 118 assets in Phase I or II, 49 in Phase III or undergoing registration and more than 65 new molecular entities as of December 31, 2020. The pipeline is expected to fuel growth in the mid-to long-term, with around 90% potential first-in-class/first-in-indication medicines and about 80% of targets in areas of high unmet patient need. The company is strengthening its advanced therapy platforms along the value chain with 20 advanced platform therapies in clinical development alongside a large number of pre-clinical projects. We are also making significant progress on the manufacturing and commercialization of these advanced therapy platforms.
• Embrace operational excellence. We believe that operational excellence is becoming an increasingly important factor to the success of our business. We are focused on three key areas: (i) Launch excellence and the performance of our growth drivers. We are reinforcing our approach to product launches to become more consistent across markets. To ensure we deploy our resources effectively, we are investing in earlier pre-launch preparations, including talking with doctors, patients and insurers to better understand their needs. Using data science, we are expanding our ability to test and learn from new commercial models and employ real-time analysis of marketing data in order to target customers with personalized content, orchestrated across multiple marketing channels; (ii) Transformation of NTO to deliver consistent productivity gains together with high levels of quality and service. We are consolidating our manufacturing footprint to achieve better asset utilization and increased focus on making medicines. At the same time, we are investing in innovative technologies and advanced therapy platforms, while supporting launches and growth drivers through dedicated product management teams. NTO is digitizing its key processes and leveraging data to establish next-generation manufacturing capabilities. Our resilient supply network has helped us to respond to the COVID-19 pandemic, supporting an uninterrupted supply of our medicines; and (iii) NBS continuing on its journey to become an industry-leading enterprise transformation engine. We are strengthening our Global Service Centers, while building strong IT and digital foundations, realizing significant procurement efficiencies, and driving simplification of key enterprise processes.
• Go big on data and digital. We believe that the growth and implementation of digital technologies in our industry, including for research and development, production, marketing and sales, and as a component of our products is an important trend in our industry. Our digital ambition is to transform how we innovate, how we engage with customers and how we operate. We plan to achieve this by focusing on four areas: (i) Scale our digital foundational programs designed to jumpstart our digital transformation in key areas of our business; (ii) Make Novartis digital by working to build up our talent, infrastructure and ways of working to enable us to work more efficiently with data and to improve the quality of that data; (iii) Become the healthcare partner of choice in the tech ecosystem by transforming how we work with all of our partners - from nimble start-ups and innovative academic institutions to some of the biggest organizations in the industry. We have created the Novartis Biome as a bridge to help our partners become more like an extension of our own teams and to work with us as easily and productively as possible; and (iv) We are preparing for potential future disruptive healthcare scenarios such as AI-based digital disease management.
• Build trust with society. Building trust with society has become an important requirement for companies like Novartis. Stakeholders are increasingly expressing preference for companies with clear ESG plans, and some institutional investors increasingly believe there is a correlation between company valuations and ESG performance. We focus on four strategic pillars defined as material by strategic stakeholders: (i) Ethical standards: In 2020, we focused our activities on operational excellence including the launch of a new Code of Ethics and strengthening our third-party risk management framework; (ii) Pricing and Access: We continue to systematically integrate access strategies into the research, development and delivery of our medicines globally, including in low and middle-income countries. In 2020, we issued the first healthcare industry sustainability-linked bond which was also the first sustainability-linked bond incorporating social targets tied to targets for expanding access to our innovative medicines and addressing key global health challenges, two areas where we believe we can drive the greatest value for society; (iii) Global Health Challenges: We continue to expand our global health programs in malaria, leprosy, Chagas disease, and sickle-cell-disease, and in 2020 launched our new Sub-Saharan-Africa strategy with our Sub-Saharan-Africa unit deploying innovative approaches to increase patient reach across countries regardless of income level; and (iv) Corporate Citizenship: We aim at achieving gender balance in management and fulfill our UN pay equity and transparency pledge by 2023. We also aim to achieve full carbon, plastic and water neutrality by 2030. Beyond our four strategic pillars, we continue our efforts to strengthen our governance and increase transparency. In 2020, we created an ESG Management Office within Corporate Strategy tasked with improving oversight, and facilitating embedding ESG measures into our business operations. Further, we have created an ESG Index to allow ESG analysts to more easily locate our ESG disclosures across our public disclosures and channels.
52
Results of operations
Financial year 2020 compared to 2019
Key figures1
|
(USD millions unless indicated otherwise) |
Year ended Dec 31, 2020 |
Year ended Dec 31, 2019 |
Change in USD % |
Change in
constant currencies % 2 |
|||||
|
Net sales to third parties from continuing operations
|
48 659
|
47 445
|
3
|
3
|
|||||
|
Sales to discontinued operations
|
|
53
|
nm
|
nm
|
|||||
|
Net sales from continuing operations
|
48 659
|
47 498
|
2
|
3
|
|||||
|
Other revenues
|
1 239
|
1 179
|
5
|
5
|
|||||
|
Cost of goods sold
|
– 15 121
|
– 14 425
|
– 5
|
– 3
|
|||||
|
Gross profit from continuing operations
|
34 777
|
34 252
|
2
|
3
|
|||||
|
Selling, general and administration
|
– 14 197
|
– 14 369
|
1
|
1
|
|||||
|
Research and development
|
– 8 980
|
– 9 402
|
4
|
6
|
|||||
|
Other income
|
1 742
|
2 031
|
– 14
|
– 17
|
|||||
|
Other expense
|
– 3 190
|
– 3 426
|
7
|
9
|
|||||
|
Operating income from continuing operations
|
10 152
|
9 086
|
12
|
19
|
|||||
|
% of net sales to third parties
|
20.9
|
19.2
|
|
|
|||||
|
Income from associated companies
|
673
|
659
|
2
|
2
|
|||||
|
Interest expense
|
– 869
|
– 850
|
– 2
|
– 4
|
|||||
|
Other financial income and expense
|
– 78
|
45
|
nm
|
nm
|
|||||
|
Income before taxes from continuing operations
|
9 878
|
8 940
|
10
|
17
|
|||||
|
Taxes
|
– 1 807
|
– 1 793
|
– 1
|
– 7
|
|||||
|
Net income from continuing operations
|
8 071
|
7 147
|
13
|
20
|
|||||
|
Net loss from discontinued operations before gain on distribution of Alcon Inc. to Novartis AG shareholders
|
|
– 101
|
nm
|
nm
|
|||||
|
Gain on distribution of Alcon Inc. to Novartis AG shareholders
|
|
4 691
|
nm
|
nm
|
|||||
|
Net income from discontinued operations
|
|
4 590
|
nm
|
nm
|
|||||
|
Net income
|
8 071
|
11 737
|
– 31
|
– 27
|
|||||
|
Attributable to:
|
|
|
|
|
|||||
|
Shareholders of Novartis AG
|
8 072
|
11 732
|
– 31
|
– 27
|
|||||
|
Non-controlling interests
|
– 1
|
5
|
nm
|
nm
|
|||||
|
Basic earnings per share from continuing operations (USD)
|
3.55
|
3.12
|
14
|
21
|
|||||
|
Basic earnings per share from discontinued operations (USD)
|
|
2.00
|
nm
|
nm
|
|||||
|
Total basic earnings per share (USD)
|
3.55
|
5.12
|
– 31
|
– 26
|
|||||
|
Net cash flows from operating activities from continuing operations
|
13 650
|
13 547
|
1
|
|
|||||
|
Free cash flow from continuing operations 2
|
11 691
|
12 937
|
– 10
|
|
|||||
|
|
|||||||||
|
1 Continuing operations include the businesses of the Innovative Medicines and Sandoz Divisions and the continuing Corporate activities and discontinued operations include the Alcon eye care devices business and certain Corporate activities attributable to the Alcon business prior to the spin-off, the gain on distribution of Alcon Inc. to Novartis AG shareholders in 2019 and certain other expenses related to the distribution. See “Item 18. Financial Statements—Note 1. Significant accounting policies”, “Item 18. Financial Statements—Note 2. Significant transactions—Significant transactions in 2019,” and “Item 18. Financial Statements—Note 30. Discontinued operations.”
|
|||||||||
|
2 For an explanation of non-IFRS measures and reconciliation tables, see "Item 5.A Operating results—Non-IFRS measures as defined by Novartis."
|
|||||||||
|
nm = not meaningful
|
|||||||||
53
Group overview
The COVID-19 situation continues to evolve and is taking differing courses across the multitude of geographies that Novartis operates in. We continue to take strong actions to help address the pandemic consequences. Our primary concerns remain the health and safety of our associates and patients.
During the year, there have been COVID-19 related lockdowns in several geographies negatively impacting certain therapeutic areas, most notably in: ophthalmology, dermatology and the Sandoz Retail Generics Business. However, our operations remain stable and cash collections continue to be according to our normal trade terms, with days sales outstanding at normal levels. Novartis remains well positioned to meet its ongoing financial obligations and has sufficient liquidity to support our normal business activities. At present, drug development operations are continuing with manageable disruptions, with our range of digital technologies allowing us to proactively manage our clinical trials portfolio and rapidly mitigate any disruptions (see the section on compounds in development and selected development projects of our divisions within “Item 4. Information on the Company – Item 4.B Business overview”).
Novartis launched a first-of-its-kind not-for-profit portfolio of 15 medicines from the Sandoz Division for symptomatic treatment of COVID-19. The portfolio addresses urgent unmet needs and is sold at no profit to governments in up to 79 eligible low and lower middle income countries. We continue to work closely with third parties to fight the COVID-19 pandemic. Novartis is also undertaking drug discovery efforts to develop the first oral medicines for COVID-19 and other coronaviruses. We are investigating two potential medicines, DFV890 and MAS825, in early stage development focused on the immune response. In October, we announced a collaboration with Molecular Partners to develop, manufacture and commercialize Molecular Partners’ anti-COVID-19 DARPin® program, potential medicines for the prevention and treatment of COVID-19.
In 2020, Novartis delivered sales growth, margin expansion, and continued to progress its next wave of medicines.
Net sales to third parties for Novartis continuing operations were USD 48.7 billion, up 3% in reported terms and up 3% measured in constant currencies (cc) to remove the impact of exchange rate movements. Sales growth was driven by volume growth of 9 percentage points, mainly driven by Entresto, Zolgensma, Cosentyx, Ilaris and the Xiidra acquisition for the Novartis Pharmaceuticals business unit and Promacta/Revolade, Jakavi, Kisqali, Tafinlar + Mekinist and Piqray for the Novartis Oncology business unit. The strong volume growth was partly offset by the negative impacts of pricing (3 percentage points) and generic competition (3 percentage points).
By division, Innovative Medicines delivered net sales of USD 39.0 billion (+3%, +4% cc). Sandoz net sales were USD 9.6 billion (-1%, 0% cc), impacted by ongoing disruptions to hospitals and HCP practices due to COVID- 19, which limited patient access to treatments for our retail business across regions.
In Emerging Growth Markets, which comprise all markets excluding the US, Canada, Western Europe, Japan, Australia and New Zealand, sales from continuing operations were USD 11.9 billion (+1%, +6% cc) driven by China (USD 2.6 billion) growing 16%, (+16% cc).
Operating income from continuing operations was USD 10.2 billion (+12%, +19% cc), mainly driven by higher sales and productivity including lower spend. Operating income margin from continuing operations was 20.9% of net sales, increasing by 1.7 percentage point (+2.9 percentage points cc).
Net income from continuing operations was USD 8.1 billion (+13%, +20% cc) mainly driven by higher operating income. Earnings per share from continuing operations were USD 3.55 (+14%, +21% cc), growing faster than net income and benefiting from lower weighted average number of shares outstanding.
Net cash flows from operating activities from continuing operations amounted to USD 13.6 billion, compared to USD 13.5 billion in 2019. This increase was mainly driven by higher net income adjusted for non-cash items and other adjustments including divestment gains, partly offset by higher payments out of provisions related to legal matters.
Free cash flow from continuing operations amounted to USD 11.7 billion (-10%) compared to USD 12.9 billion in 2019, as higher operating income adjusted for non-cash items was more than offset by payments related to legal matters and lower divestment proceeds.
We also present our core results1, which exclude the impact of amortization, impairments, disposals, acquisitions, restructurings and other significant items, to help investors understand our underlying performance.
Core operating income from continuing operations was USD 15.4 billion (+9%, +13% cc) driven by sales growth, lower spend and productivity. Core operating income margin was 31.7% of net sales, increasing by 2.0 percentage points (+2.8 percentage points cc).
Core net income from continuing operations was USD 13.2 billion (+9%, +12% cc) mainly driven by growth in core operating income. Core earnings per share from continuing operations were USD 5.78 (+9%, +13% cc), growing faster than core net income benefiting from lower weighted average number of shares outstanding.
In 2020, there were no operational activities related to discontinued operations. In 2019, discontinued operations net sales were USD 1.8 billion, operating income amounted to USD 71 million and net income from discontinued operations was USD 4.6 billion, including the non-taxable non-cash net gain on distribution of Alcon Inc. to Novartis AG shareholders which amounted to USD 4.7 billion.
For the total Group, net income amounted to USD 8.1 billion compared to USD 11.7 billion in the prior year, including the non-taxable non-cash net gain on distribution of Alcon Inc. which amounted to USD 4.7 billion. Basic earnings per share were USD 3.55 compared to USD 5.12 in prior year. Cash flow from operating activities for the total Group amounted to USD 13.6 billion and free cash flow to USD 11.7 billion.
1 For an explanation of non-IFRS measures and reconciliation tables, see “Item 5.A Operating results—Non-IFRS measures as defined by Novartis.”
54
Net sales by segment
The following table provides an overview of net sales to third parties by segment:
|
(USD millions) |
Year ended Dec 31, 2020 |
Year ended Dec 31, 2019 |
Change in USD % |
Change in
constant currencies % |
|||||
|
Innovative Medicines
|
39 013
|
37 714
|
3
|
4
|
|||||
|
Sandoz
|
9 646
|
9 731
|
– 1
|
0
|
|||||
|
Net sales to third parties from continuing operations
|
48 659
|
47 445
|
3
|
3
|
|||||
|
|
|||||||||
|
|
|||||||||
Innovative Medicines
The Innovative Medicines Division delivered net sales of USD 39.0 billion in 2020, up 3% in reported terms and 4% in constant currencies (cc). The Novartis Pharmaceuticals business unit delivered net sales of USD 24.3 billion in 2020, growing 4% (+5% cc), driven by Entresto, Zolgensma, Cosentyx, Ilaris and the Xiidra acquisition. Growth was partly offset by declines in Gilenya, and lower demand for Lucentis due to COVID-19. Other Ophthalmology products were also impacted by both COVID-19 and generic competition. The Novartis Oncology business unit delivered net sales of USD 14.7 billion, growing 2% (+3% cc), driven by Promacta/Revolade, Jakavi, Kisqali, Tafinlar + Mekinist and Piqray, partially offset by generic competition for Afinitor and Exjade. Volume contributed 10 percentage points to sales growth. Pricing had a negative impact of 3 percentage points. Generic competition had a negative impact of 3 percentage points.
Regionally, US sales (USD 14.3 billion, +4%) delivered strong performance of Entresto, Zolgensma and Cosentyx. Europe sales (USD 13.5 billion, +5%, +4% cc) grew driven by Entresto, Zolgensma, Jakavi, Kisqali and Kymriah. Japan sales were USD 2.4 billion (0%, -3% cc) as growth was negatively impacted by the Galvus co-promotion agreement. Emerging Growth Markets sales grew 3% (+7% cc), led by double-digit growth in China, including the launches of Cosentyx and Entresto.
The following table provides an overview of net sales to third parties by business franchise in the Innovative Medicines Division:
|
(USD millions) |
Year ended Dec 31, 2020 |
Year ended Dec 31, 2019 |
Change in USD % |
Change in
constant currencies % |
|||||
|
Total Novartis Oncology business unit
|
14 711
|
14 370
|
2
|
3
|
|||||
|
Total Novartis Pharmaceuticals business unit
|
24 302
|
23 344
|
4
|
5
|
|||||
|
Immunology, Hepatology and Dermatology
|
4 868
|
4 222
|
15
|
16
|
|||||
|
Ophthalmology
|
4 410
|
4 776
|
– 8
|
– 8
|
|||||
|
Neuroscience
|
4 323
|
3 773
|
15
|
14
|
|||||
|
Cardiovascular, Renal and Metabolism
|
2 498
|
1 750
|
43
|
42
|
|||||
|
Respiratory
|
1 900
|
1 825
|
4
|
5
|
|||||
|
Established Medicines
|
6 303
|
6 998
|
– 10
|
– 8
|
|||||
|
Total Innovative Medicines
|
39 013
|
37 714
|
3
|
4
|
|||||
|
|
|||||||||
|
|
|||||||||
55
The following table provides the top 20 Innovative Medicines Division product net sales in 2020 as well as the change compared to 2019:
For the table providing the top 20 Innovative Medicines Division product net sales in 2019, see “Item 18. Financial statements—Note 3. Segmentation of key figures 2020, 2019 and 2018.”
For information about the approved indications for certain products described, see “Item 4. Information on the Company—Item 4.B Business overview—Innovative Medicines— Innovative Medicines Division products.”
Novartis Oncology business unit
Tasigna (USD 2.0 billion, +4%, +5% cc) sales grew due to a strong performance in key markets including the US and China, partly offset by a decline in Europe.
Promacta/Revolade (USD 1.7 billion, +23%, +23% cc) grew across all regions, driven by increased use in chronic immune thrombocytopenia (ITP) and as first-line treatment for severe aplastic anemia (SAA) in the US.
Tafinlar + Mekinist (USD 1.5 billion, +15%, +16% cc), the worldwide leader in BRAF/MEK-inhibition, continued to deliver strong growth driven by demand in adjuvant melanoma, as well as advanced NSCLC. Tafinlar +
56
Mekinist is the first and only targeted therapy to achieve five-year relapse-free survival (RFS) and overall survival (OS) data in the adjuvant and metastatic melanoma settings, respectively.
Sandostatin (USD 1.4 billion, -9%, -8% cc) sales declined due to ongoing competitive pressure in Europe, US and Japan. The brand was also impacted by generic competition in Europe.
Jakavi (USD 1.3 billion, +20%, +20% cc) growth was driven by strong demand in the myelofibrosis and polycythemia vera indications. Data readouts from two Phase III studies (REACH2 and REACH3) showed Jakavi significantly improved outcomes in patients with steroid-resistant/dependent graft-versus-host disease (GvHD) compared to best available therapy. Regulatory filings based on the GvHD data are planned for 2021.
Gleevec/Glivec (USD 1.2 billion, -6%, -6% cc) declined due to increased generic competition.
Afinitor/Votubia (USD 1.1 billion, -30%, -29% cc) declined due to generic competition in the US, Europe and Emerging Growth Markets.
Kisqali (USD 687 million, +43%, +45% cc) continued strong growth across all geographies benefiting from the impact of positive overall survival (OS) data from two pivotal Phase III trials (MONALEESA-7 and MONALEESA-3). Kisqali stands apart as the only CDK4/6 inhibitor that significantly improves OS in two large Phase III trials, regardless of metastatic sites, endocrine treatment (ET) resistance, ET partner, treatment line or menopausal status, while maintaining quality of life.
Exjade/Jadenu (USD 653 million, -33%, -33% cc) declined mainly due to pressure from generic competition in the US and other regions.
Votrient (USD 635 million, -16%, -15% cc) declined due to increased competition in Europe and the US.
Kymriah (USD 474 million, +71%, +68% cc) grew strongly in Europe, US and Japan. Coverage continued to expand, with more than 280 qualified treatment centers and 27 countries having coverage for at least one indication. FDA granted Regenerative Medicine Advanced Therapy designation and orphan drug status for Kymriah in follicular lymphoma. At the interim analysis, the Phase II ELARA trial in patients with relapsed or refractory follicular lymphoma met its primary endpoint of complete response rate. Regulatory approvals in Switzerland, France and Japan expanded manufacturing capabilities for Kymriah to meet increased demand.
Lutathera (USD 445 million, +1%, +1% cc) sales were broadly in line with prior year, as the COVID-19 pandemic had an impact on the brand. There are 384 total centers now actively treating patients. Sales from all AAA brands (including Lutathera and radiopharmaceutical diagnostic products) were USD 681 million.
Piqray (USD 320 million, +176%, +176% cc) grew significantly in the US as the launch roll out continued. Piqray in combination with fulvestrant received European Commission (EC) approval to treat HR+/HER2- advanced breast cancer with a PIK3CA mutation. Piqray is the first and only therapy specifically developed for the approximately 40% of HR+/HER2- advanced breast cancer patients who have a PIK3CA mutation, which is associated with poor prognosis. Piqray is now approved in more than 50 countries, including the US and EU member states. Piqray launched in the US in June 2019.
Adakveo (USD 105 million) US launch continued to progress well, with more than 600 accounts purchasing Adakveo to date. Payer coverage decisions expanded, both in Medicaid and commercial (with 94% coverage among commercial plans to date). Following approval in Europe in Q4, reimbursement discussions with individual countries are underway.
Tabrecta (USD 35 million) US launch progressed well. Ninety leading lung cancer institutions have started patients on treatment. Tabrecta is the first and only therapy approved by the US FDA to specifically target metastatic NSCLC with a mutation that leads to MET exon 14 skipping (METex14), as detected by an FDA-approved test. Tabrecta also secured regulatory approval in Japan.
Novartis Pharmaceuticals business unit
Immunology, Hepatology and Dermatology
Sales in the Immunology, Hepatology and Dermatology franchise reached USD 4.9 billion (+15%, +16% cc), of which Cosentyx delivered USD 4.0 billion.
Cosentyx (USD 4.0 billion, +13%, +13% cc) saw continued growth across indications despite lower new patient starts across the market in dermatology and rheumatology in most geographies due to COVID-19. In the second quarter, Cosentyx received approval and launched in the EU and US for non-radiographic axial spondyloarthritis (nr-axSpA), its fourth major indication, and in August became the first treatment approved in Japan for this indication. In April, Cosentyx also became the first IL17A inhibitor approved in China for the treatment of AS. In July, Cosentyx received EU approval as a first-line systemic treatment for pediatric psoriasis. In November, Cosentyx received EC approval for a new 300 mg autoinjector and pre-filled syringe, which enable the 300 mg dose to be administered in a single injection. In China, Cosentyx has been listed in the National Reimbursement Drug List (NRDL) as the only interleukin inhibitor with planned execution March 1, 2021
Ilaris (USD 873 million, +30%, +31% cc) sales were driven by strong double-digit volume growth, particularly coming from the US, Europe and Japan. In June, Ilaris was granted a new indication in the US for active Still’s disease including Adult-Onset Still’s Disease (AOSD); this is in addition to its previously-granted indication for systemic juvenile idiopathic arthritis (SJIA). Ilaris is the first FDA-approved treatment for AOSD.
Ophthalmology
Sales in the Ophthalmology franchise were USD 4.4 billion (-8%, -8% cc) and were impacted by the COVID-19 pandemic.
Lucentis (USD 1.9 billion, -7%, -8% cc) sales declined due to the negative impact of the COVID-19 pandemic, which has significantly disrupted ophthalmology practices and limited patient access to treatment of retinal diseases. Sales have been consistently recovering from the COVID-19 impact since May until the end of the third quarter, and showed less impact of the pandemic in the fourth quarter compared to the second quarter.
57
Xiidra (USD 376 million, +96%, +95% cc) was impacted by COVID-19 pandemic as ophthalmology visits declined significantly. In the latter part of the second quarter, the US dry eye market began to rebound as eye care practices began opening. Novartis has informed the European Medicines Agency of its decision to withdraw the centralized application for Marketing Authorization of Xiidra. Novartis acquired Xiidra from Takeda and began recording sales as of July 1, 2019.
Beovu (USD 190 million) launch roll-out continued, with approval now in 57 countries. Post marketing case reports termed as “retinal vasculitis” and/or “retinal vascular occlusion” that may result in severe vision loss, typically associated with intraocular inflammation, and the COVID-19 pandemic had an unfavorable impact on sales. Novartis has a comprehensive plan, in strong collaboration with leading external global experts to educate the retina community about the positive benefit / risk profile of Beovu.
Other Ophthalmology products declined due to the negative impact of the COVID-19 pandemic and generic impacts in the US, primarily for Travatan and Ciprodex.
Neuroscience
Sales in the Neuroscience franchise were USD 4.3 billion (+15%, +14% cc), mainly driven by the sales growth of Zolgensma, partly offset by sales decline of Gilenya.
Gilenya (USD 3.0 billion, -7%, -7% cc) sales declined due to increased competition and the impact of the COVID-19 pandemic. Gilenya remains the top prescribed high efficacy therapy in 41 countries and the only one approved to treat pediatric RMS.
Zolgensma (USD 920 million, +155%, +151% cc) delivered significant growth despite the negative impact of the COVID-19 pandemic in the US and ex-US, with geographic expansion in Europe and Japan contributing strongly. Reimbursement is now secured in six countries, with access pathways in nine EU countries through our Day One Access initiative representing approximately 25% of the EU population. As anticipated, there was a shift from prevalent patients to incident patients in all markets post launch, with increased newborn screening in the US contributing to growth. Zolgensma recent approvals include Brazil, Israel, Canada and Taiwan. Zolgensma is viewed as an essential one-time treatment and is the only therapy for spinal muscular atrophy (SMA) that addresses the genetic root cause of SMA by replacing the function of the missing SMN1 gene. Its clinical profile and one-time dosing are anticipated to remain differentiators for both physicians and patients when making a treatment choice. Zolgensma launched in the US in June 2019.
Mayzent (USD 170 million) continued to grow steadily. Growth was driven by fulfilling an important unmet need in patients showing signs of progression despite being on other treatments. Mayzent is the first and only oral DMT studied and proven to delay disease progression in a broad SPMS patient population. In addition to the US and EU, Mayzent is now approved in the UK, Australia, Canada, Japan and Switzerland.
Aimovig (USD 164 million, ex-US, ex-Japan, +59%, +57% cc) is the most prescribed anti-CGRP worldwide, with more than half a million patients prescribed worldwide in the post-trial setting. Aimovig is co-commercialized with Amgen in the US, where Amgen records sales. Novartis has exclusive rights and records sales in all ex-US territories excluding Japan. During the ongoing litigation between the companies the collaboration continues and will remain in force until a final court decision.
Kesimpta (ofatumumab, formerly OMB157) (USD 15 million) was launched in the US following FDA approval in August. To initiate access, we are providing Kesimpta free of charge to US patients who are eligible for reimbursement until they are covered by their insurance. Kesimpta is a targeted B-cell therapy that can deliver sustained high efficacy, with a favorable safety profile and the flexibility of an at home self-administration for a broad population of RMS patients. We have seen a promising start with our flexible hybrid face-to-face / digital launch.
Cardiovascular, Renal and Metabolism
Sales in the Cardiovascular, Renal and Metabolism franchise were USD 2.5 billion (+43%, +42% cc).
Entresto (USD 2.5 billion, +45%, +44% cc) sustained strong growth with increased patient share across markets, driven by demand as the essential first choice therapy for HF patients (reduced ejection fraction). Entresto was successfully launched in Japan in August. FDA Cardiovascular and Renal Drugs Advisory Committee voted 12 to 1 to support the use of Entresto in treatment of patients with heart failure with preserved ejection fraction (HFpEF). Expected FDA approval has the potential to make Entresto the first therapy indicated for both HFpEF and HFrEF in the US, and a final decision is expected in the first quarter of 2021.
Respiratory
Sales in the Respiratory franchise were USD 1.9 billion (+4%, +5% cc), of which Xolair delivered USD 1.3 billion.
Xolair (USD 1.3 billion, +7%, +8% cc) continued growth in the severe allergic asthma (SAA) and chronic spontaneous urticaria (CSU) indications. In the first half 2020, Xolair received approval from the US and the European Commission (EC) for a new indication to treat severe chronic rhinosinusitis with nasal polyps (CRSwNP). Novartis co-promotes Xolair with Genentech in the US and shares a portion of operating income, but we do not record any US sales.
Ultibro Group (USD 623 million, -1%, -1% cc) sales were broadly in line with prior year, as strong Ultibro Breezhaler sales were offset by the decline in Seebri Breezhaler and Onbrez Breezhaler. Ultibro Group consists of inhaled COPD therapies Ultibro Breezhaler, Seebri Breezhaler and Onbrez Breezhaler.
Enerzair Group consists of Enerzair Breezhaler and Atectura Breezhaler. Enerzair Breezhaler (indacaterol / glycopyrronium bromide / mometasone, formerly known as QVM149) is an inhaled LABA/LAMA/ICS combination for patients whose asthma is uncontrolled with LABA/ICS. Atectura Breezhaler (indacaterol / mometasone, formerly known as QMF149) is a LABA/ICS fixed-dose combination for patients whose asthma is uncontrolled with SABA and ICS. Both medicines were approved in the EU, Japan, Canada, Australia, Switzerland and South Korea in 2020, together with the digital companion (sensor and app) for Enerzair Breezhaler in the EU and Switzerland. They have been launched to date in seven markets, including Germany, Japan and the UK.
58
Established Medicines
The Established Medicines franchise had sales of USD 6.3 billion (-10%, -8% cc).
Galvus Group (USD 1.2 billion, -8%, -5% cc) declined primarily due to generic competition in Emerging Growth Markets and pricing impact from our co-promotion agreement in Japan that started in 2019.
Diovan Group (USD 1.0 billion, -6%, -4% cc) declined mainly due to generic competition and the impact of VBP in China.
Exforge Group (USD 980 million, -4%, -3% cc) declined in Europe due to generic competition, partly offset by growth in China.
Zortress/Certican (USD 452 million, -7%, -7% cc) declined mainly due to generic competition in the US.
Neoral/Sandimmun(e) (USD 393 million, -6%, -6% cc) declined mainly due to generic competition and mandatory price reductions.
Voltaren/Cataflam (USD 360 million, -14%, -12% cc) declined mainly due to generic competition and external supply issues following the COVID-19 pandemic.
Sandoz
Net sales were USD 9.6 billion (-1%, 0% cc) with volume growth of 2 percentage points despite the COVID-19 impacts. There was a negative price effect of 2 percentage points, despite the benefit from off-contract sales and favorable revenue deduction adjustments.
Sales in Europe were USD 5.2 billion (+2%, +2% cc). Sales in the US were USD 2.1 billion (-14%), due to the continued volume decline in oral solids including partnership terminations. Sales in Asia / Africa / Australasia were USD 1.5 billion (+12%, +11% cc) including the contribution from the Aspen Japan acquisition. Sales in Canada and Latin America were USD 772 million (-2%, +8% cc).
The following table provides an overview of net sales to third parties by business franchise in the Sandoz Division:
Retail Generics
In Retail Generics, Sandoz develops, manufactures and markets active ingredients and finished dosage forms of small molecule pharmaceuticals to third parties across a broad range of therapeutic areas, as well as finished dosage form of anti-infectives sold to third parties.
Retail Generics sales were USD 7.2 billion (-5%, -4% cc) impacted by the declines in the US and COVID-19 related impact across regions.
Biopharmaceuticals
In Biopharmaceuticals, Sandoz develops, manufactures and markets protein- and other biotechnology-based products, including biosimilars, and provides biotechnology manufacturing services to other companies. The Biopharmaceuticals business also includes Glatopa, a generic version of Copaxone®, which treats relapsing forms of multiple sclerosis and is marketed in the US.
Global sales of Biopharmaceuticals (biosimilars, biopharmaceutical contract manufacturing and Glatopa) grew to USD 1.9 billion (+20%, +19% cc), driven by continued double-digit growth in Europe from Hyrimoz (adalimumab), Erelzi (etanercept) and Zessly (infliximab) and growth from Omnitrope (somatropin) across all regions. Launch roll-outs in other geographies also contributed to growth.
Anti-Infectives
In Anti-Infectives, Sandoz manufactures and supplies active pharmaceutical ingredients and intermediates, mainly antibiotics, for internal use by Retail Generics and for sale to third-party customers.
Total Anti-Infectives franchise sales were USD 1.2 billion (-11%, -11% cc) including finished dosage forms sold under the Sandoz name (USD 694 million, -11%, -10% cc) and Anti-Infectives sold to third parties for sale under their own name (USD 474 million, -11%, -12% cc), which were impacted by a planned contract discontinuation.
59
Operating income from continuing operations
The following table provides an overview of operating income from continuing operations by segment:
|
(USD millions) |
Year ended Dec 31, 2020 |
% of
net sales to third parties |
Year ended Dec 31, 2019 |
% of
net sales to third parties |
Change in USD % |
Change in
constant currencies % |
|||||||
|
Innovative Medicines
|
9 172
|
23.5
|
9 287
|
24.6
|
– 1
|
4
|
|||||||
|
Sandoz
|
1 043
|
10.8
|
551
|
5.7
|
89
|
106
|
|||||||
|
Corporate
|
– 63
|
|
– 752
|
|
nm
|
nm
|
|||||||
|
Operating income from continuing operations
|
10 152
|
20.9
|
9 086
|
19.2
|
12
|
19
|
|||||||
|
|
|||||||||||||
|
|
|||||||||||||
|
|
|||||||||||||
Operating income was USD 10.2 billion (+12%, +19% cc) mainly driven by higher sales and productivity including lower spend.
Core operating income from continuing operations key figures1
The adjustments made to operating income from continuing operations to arrive at core operating income from continuing operations amounted to USD 5.3 billion (compared to USD 5.0 billion in the prior year). For details please see “Item 5.A Operating results–2020 and 2019 reconciliation from IFRS results to core results.”
Core operating income was USD 15.4 billion (+9%, +13% cc) driven by sales growth, lower spend and productivity. Core operating income margin was 31.7% of net sales, increasing by 2.0 percentage points (+2.8 percentage points cc).
The following table provides an overview of core operating income from continuing operations by segment:
|
(USD millions) |
Year ended Dec 31, 2020 |
% of
net sales to third parties |
Year ended Dec 31, 2019 |
% of
net sales to third parties |
Change in USD % |
Change in
constant currencies % |
|||||||
|
Innovative Medicines
|
13 645
|
35.0
|
12 650
|
33.5
|
8
|
11
|
|||||||
|
Sandoz
|
2 334
|
24.2
|
2 094
|
21.5
|
11
|
15
|
|||||||
|
Corporate
|
– 563
|
|
– 632
|
|
11
|
14
|
|||||||
|
Core operating income from continuing operations
|
15 416
|
31.7
|
14 112
|
29.7
|
9
|
13
|
|||||||
|
|
|||||||||||||
|
|
|||||||||||||
Innovative Medicines
Operating income was USD 9.2 billion (-1%, +4% cc). Growth at constant currencies was mainly driven by sales growth, partly offset by lower divestment gains and higher amortization. Operating income margin was 23.5% of net sales, decreasing 1.1 percentage points (+0.1 percentage points cc).
Core adjustments were USD 4.5 billion, mainly due to USD 3.0 billion of amortization. Core adjustments increased compared to prior year (USD 3.4 billion) mainly due to lower divestment gains and higher amortization.
Core operating income was USD 13.6 billion (+8%, +11% cc) mainly driven by sales growth, lower COVID-19 related spending and improved gross margin productiv-
60
ity. Core operating income margin was 35.0% of net sales, increasing 1.5 percentage points (+2.2 percentage points cc).
Core gross margin increased by 0.4 percentage points (cc) mainly driven by productivity. Core R&D expenses as a percentage of net sales decreased by 0.9 percentage points (cc) mainly driven by the higher net sales, productivity, and COVID-19 related spending impacts. Core SG&A expenses declined by 1.2 percentage points (cc) benefiting from COVID-19 related spending impacts. Core Other Income and Expense net decreased the margin by 0.3 percentage points (cc).
Sandoz
Operating income was USD 1.0 billion, (+89%, +106% cc), an increase of USD 492 million versus prior year mainly due to lower impairments, continued gross margin improvements and lower spending. Operating income margin increased by 6.0 percentage points in constant currencies; currency had a negative impact of 0.9 percentage points, resulting in a net increase of 5.1 percentage points to 10.8% of net sales.
Core adjustments were USD 1.3 billion, mainly from USD 0.6 billion of amortization and impairments and USD 0.4 billion legal charges. Prior year core adjustments were USD 1.5 billion. The change in core adjustments compared to prior year was mainly due to higher prior year impairments.
Core operating income was USD 2.3 billion (+11%, +15% cc), driven by gross margin improvements, lower spending from cost discipline and COVID-19. Core operating income margin was 24.2% of net sales, increasing 2.7 percentage points (3.3 percentage points cc). Core gross margin increased by 1.9 percentage points (cc), driven by favorable product and geographic mix, ongoing productivity improvements and lower price effects. Core R&D increased by 0.5 percentage points (cc) driven by biosimilar pipeline investments. Core SG&A expenses declined by 1.6 percentage points (cc) benefiting from COVID-19 related spending impacts. Core Other Income and Expense decreased by 0.3 percentage points (cc).
Corporate income and expense, net
Corporate income and expense, which includes the cost of Group headquarter and coordination functions, amounted to an expense of USD 63 million in the full year, compared to an expense of USD 752 million in prior year, mainly driven by favorable contributions from the Novartis Venture Fund, income from a fair value adjustment on contingent receivables, royalty settlement gains related to intellectual property rights and lower restructuring costs.
Innovative Medicines Division research and development
The following table provides an overview of the reported and core research and development expense of the Innovative Medicines Division:
Innovative Medicines Division research and exploratory development expense decreased by 4% (+6% cc) to USD 2.7 billion, and confirmatory development expense amounted to USD 5.4 billion, increasing by 2% (-1% cc) versus prior year. This was mainly due to lower impairment charges, lower spending due to COVID-19 and productivity.
Total core research and development expense in the Innovative Medicines Division as a percentage of sales decreased by 0.5 percentage points (0.9 percentage points cc) to 19.6% of net sales, mainly driven by the higher net sales, productivity, and COVID-19 related spending impacts.
61
Non-operating income and expense
The term “non-operating income and expense” includes all income and expense items outside operating income. The following table provides an overview of non-operating income and expense from continuing operations:
|
(USD millions unless indicated otherwise) |
Year ended Dec 31, 2020 |
Year ended Dec 31, 2019 |
Change in USD % |
Change in
constant currencies % |
|||||
|
Operating income from continuing operations
|
10 152
|
9 086
|
12
|
19
|
|||||
|
Income from associated companies
|
673
|
659
|
2
|
2
|
|||||
|
Interest expense
|
– 869
|
– 850
|
– 2
|
– 4
|
|||||
|
Other financial income and expense
|
– 78
|
45
|
nm
|
nm
|
|||||
|
Income before taxes from continuing operations
|
9 878
|
8 940
|
10
|
17
|
|||||
|
Taxes
|
– 1 807
|
– 1 793
|
– 1
|
– 7
|
|||||
|
Net income from continuing operations
|
8 071
|
7 147
|
13
|
20
|
|||||
|
Net loss from discontinued operations before gain on distribution of Alcon Inc. to Novartis AG shareholders
|
|
– 101
|
nm
|
nm
|
|||||
|
Gain on distribution of Alcon Inc. to Novartis AG shareholders
|
|
4 691
|
nm
|
nm
|
|||||
|
Net income from discontinued operations
|
|
4 590
|
nm
|
nm
|
|||||
|
Net income
|
8 071
|
11 737
|
– 31
|
– 27
|
|||||
|
Attributable to:
|
|
|
|
|
|||||
|
Shareholders of Novartis AG
|
8 072
|
11 732
|
– 31
|
– 27
|
|||||
|
Non-controlling interests
|
– 1
|
5
|
nm
|
nm
|
|||||
|
Basic earnings per share from continuing operations (USD)
|
3.55
|
3.12
|
14
|
21
|
|||||
|
Basic earnings per share from discontinued operations (USD)
|
|
2.00
|
nm
|
nm
|
|||||
|
Total basic earnings per share (USD)
|
3.55
|
5.12
|
– 31
|
– 26
|
|||||
|
|
|||||||||
|
nm = not meaningful
|
|||||||||
Income from associated companies
Income from associated companies amounted to USD 673 million in 2020 compared to USD 659 million in the prior year. This comprises mainly the share of income from Roche amounting to USD 677 million, which was broadly in line with the prior year amount of USD 662 million.
Interest expense and other financial income and expense
Interest expense increased to USD 869 million from USD 850 million in the prior year, mainly due to an increase in interest expense from discounting long term liabilities.
Other financial income and expense amounted to a loss of USD 78 million compared to an income of USD 45 million in prior year mainly due to lower interest income in 2020.
Taxes
The tax rate for continuing operations was 18.3% compared to 20.1% in the prior year. The current year tax rate was impacted by the effect of non-deductible legal charges and uncertain tax positions. The prior year tax rate was impacted by a one-time, non-cash deferred tax expense resulting from legal entity reorganizations, a prior year item and an increase to an uncertain tax position, partially offset by the deferred tax credit from Swiss tax reform.
Excluding these impacts, the rate from continuing operations would have been 15.6% compared to 15.4% in the prior year. The increase from prior year was mainly the result of a change in profit mix.
Net income from continuing operations
Net income was USD 8.1 billion (+13%, +20% cc) mainly driven by higher operating income.
Earnings per share
Basic earnings per share from continuing operations were USD 3.55 (+14%, +21% cc), growing faster than net income and benefiting from lower weighted average number of shares outstanding.
62
Core non-operating income and expense from continuing operations1
The following table provides an overview of core non-operating income and expense from continuing operations:
Core income from associated companies
Core income from associated companies was USD 1.1 billion in 2020, in line with the prior year, mainly driven by the core income contribution from Roche.
Core interest expense and other financial income and expense
Core interest expense increased to USD 869 million from USD 850 million in the prior year, mainly due to an increase in interest expense from discounting long term liabilities. Core other financial income and expense amounted to a loss of USD 83 million compared to an income of USD 56 million in prior year mainly due to lower interest income in 2020.
Core taxes
The core tax rate from continuing operations (core taxes as a percentage of core income before tax from continuing operations) was 15.4% compared to 16.0% in the prior year mainly as a result of a change in profit mix.
Core net income
Core net income was USD 13.2 billion (+9%, +12% cc) mainly driven by growth in core operating income.
Core earnings per share
Core earnings per share were USD 5.78 (+9%, +13% cc), growing faster than core net income and benefiting from lower weighted average number of shares outstanding.
Discontinued operations
Discontinued operations include the business of Alcon and certain corporate costs directly attributable to Alcon up to the spin-off date. As the Alcon spin-off was completed on April 9, 2019, the prior year included three months of operating results of the divested business.
In 2020, there were no operational activities related to discontinued operations. In 2019, discontinued operations net sales were USD 1.8 billion, operating income amounted to USD 71 million and net income from discontinued operations was USD 4.6 billion, including the non-taxable non-cash net gain on distribution of Alcon Inc. to Novartis AG shareholders which amounted to USD 4.7 billion.
For further details, see “Item 18. Financial Statements—Note 1. Significant accounting policies—Distribution of Alcon Inc. to Novartis AG shareholders,” “Item 18. Financial Statements—Note 2. Significant transactions—Significant transactions in 2019—Completion of the spin-off of the Alcon business through a dividend in kind distribution to Novartis AG shareholders,” and “Item 18. Financial Statements—Note 30. Discontinued operations.”
Total Group
For the total Group, net income amounted to USD 8.1 billion compared to USD 11.7 billion in the prior year, including the non-taxable non-cash net gain on distribution of Alcon Inc. which amounted to USD 4.7 billion. Basic earnings per share were USD 3.55 compared to USD 5.12 in prior year. Cash flow from operating activities for the total Group amounted to USD 13.6 billion and free cash flow to USD 11.7 billion.
63
Factors affecting comparability of year-on-year results of operations
Significant transactions in 2020 and 2019
The comparability of the year-on-year results of our operations for the total Group can be significantly affected by acquisitions and divestments. As part of our long-term strategy to focus Novartis as a leading medicines company, we announced and/or completed several acquisitions and divestments during 2020 and 2019.
A detailed description of significant transactions in 2020 and 2019, can be found in “Item 18. Financial Statements—Note 2. Significant transactions.”
Critical accounting policies and estimates
Our significant accounting policies which are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) are set out in “Item 18. Financial Statements—Note 1. Significant accounting policies.”
Given the uncertainties inherent in our business activities, we must make certain estimates and assumptions that require difficult, subjective and complex judgments. Because of uncertainties inherent in such judgments, actual outcomes and results may differ from our assumptions and estimates, which could materially affect the Group’s consolidated financial statements. Application of the following accounting policies requires certain assumptions and estimates that have the potential for the most significant impact on our consolidated financial statements.
Deductions from revenues
As is typical in the pharmaceutical industry, our gross sales are subject to various deductions, which are primarily composed of rebates and discounts to retail customers, government agencies, wholesalers, health insurance companies and managed healthcare organizations. These deductions represent estimates of the related obligations, requiring the use of judgment when estimating the effect of these sales deductions on gross sales for a reporting period. These adjustments are deducted from gross sales to arrive at net sales.
The following summarizes the nature of some of these deductions and how the deduction is estimated. After recording these, net sales represent our best estimate of the cash that we expect to ultimately collect. The US market has the most complex arrangements related to revenue deductions.
United States-specific healthcare plans and program rebates
The United States Medicaid Drug Rebate Program is administered by state governments, using state and federal funds to provide assistance to certain vulnerable and needy individuals and families. Calculating the rebates to be paid related to this program involves interpreting relevant regulations, which are subject to challenge or change in interpretative guidance by government authorities. Provisions for estimating Medicaid rebates are calculated using a combination of historical experience, product and population growth, product pricing, and the mix of contracts and specific terms in the individual state agreements.
The United States Federal Medicare Program, which funds healthcare benefits to individuals aged 65 and older, and to people with certain disabilities, provides prescription drug benefits under the Part D section of the program. This benefit is provided and administered through private prescription drug plans. Provisions for estimating Medicare Part D rebates are calculated based on the terms of individual plan agreements, product sales and population growth, product pricing, and the mix of contracts.
We offer rebates to key managed healthcare and private plans in an effort to ensure patient access to our products and to sustain and increase the market share of our products. These programs provide a rebate after the plans have demonstrated they have met all terms and conditions set forth in their contract with us.
These rebates are estimated based on the terms of individual agreements, historical experience, product pricing and projected product growth rates, and are recorded as a deduction from revenue at the time the related revenues are recorded.
These provisions are adjusted based on established processes and experiences from filing data with individual states and plans. There is often a time lag of several months between recording of the revenue deductions and the final accounting for them.
Non-United States-specific healthcare plans and program rebates
In certain countries other than the US, we provide rebates to governments and other entities. These rebates are often mandated by laws or government regulations. These rebates are estimated based on government regulations, laws and terms of individual rebate arrangements, historical experience and other relevant factors, and are recorded as a deduction from revenue at the time the related revenue is recorded. These estimates are adjusted periodically to reflect actual experience. There is often a time lag of several months between the recording of revenue deductions and the final accounting for them.
Innovative pay-for-performance arrangements
In several countries, we enter into innovative pay-for-performance arrangements (i.e. outcome based arrange-
64
ments) with certain healthcare providers. Under these agreements, we may be required to make refunds to the healthcare providers or to provide additional medicines free of charge if anticipated treatment outcomes do not meet predefined targets. The impact of potential refunds or the delivery of additional medicines at no cost is estimated and recorded as a deduction from revenue at the time the related revenues are recorded. Estimates are based on historical experience and clinical data. In cases where historical experience and clinical data are not sufficient for a reliable estimation of the outcome, revenue recognition is deferred until such history is available.
There is often a time lag of several months between recording of the revenue deductions and the final accounting for them.
Non-healthcare plans and program rebates, returns and other deductions
We offer rebates to purchasing organizations and other direct and indirect customers to sustain and increase market share and to ensure patient access to our products. Since rebates are contractually agreed upon, the related provisions are estimated based on the terms of the individual agreements, historical experience and projected product sales growth rates.
Chargebacks occur where our subsidiaries have arrangements with indirect customers to sell products at prices that are lower than the price charged to wholesalers. A chargeback represents the difference between the invoice price to the wholesaler and the indirect customer’s contract price. We account for chargebacks by reducing revenue by the estimate of chargebacks attributable to a sales transaction. Provisions for estimated chargebacks are calculated using a combination of factors, such as historical experience, product growth rates, product pricing, level of inventory in the distribution channel, and the terms of individual agreements.
When we sell a product providing a customer the right to return it, we record a provision for estimated sales returns based on our sales return policy and historical return rates. Other factors considered include actual product recalls, expected marketplace changes, the remaining shelf life of the product, and the expected entry of generic products. In 2020, sales returns amounted to approximately 1% of gross product sales. If sufficient experience is not available, sales are only recorded based on evidence of product consumption or when the right of return has expired.
We enter into distribution service agreements with major wholesalers, which provide a financial disincentive for the wholesalers to purchase product quantities in excess of current customer demand. Where possible, we adjust shipping patterns for our products to maintain wholesalers’ inventory levels consistent with underlying patient demand.
We offer cash discounts to customers to encourage prompt payment. Cash discounts are estimated and accrued at the time of invoicing and are deducted from revenue.
Following a decrease in the price of a product, we generally grant customers a “shelf stock adjustment” for their existing inventory for the relevant product. Provisions for shelf stock adjustments, which are primarily relevant within the Sandoz Division, are determined at the time of the price decline or at the point of sale, if the impact of a price decline on the products sold can be reasonably estimated based on the customer’s inventory levels of the relevant product.
Other sales discounts, such as consumer coupons and copay discount cards, are offered in some markets. The estimated amounts of these discounts are recorded at the time of sale or when the coupons are issued, and are estimated utilizing historical experience and the specific terms for each program. If a discount for a probable future transaction is offered as part of a sales transaction, then an appropriate portion of revenue is deferred to cover this estimated obligation.
In addition, we offer global patient assistance programs.
We adjust provisions for revenue deductions periodically to reflect actual experience. To evaluate the adequacy of provision balances, we use internal and external estimates of the inventory in transit, the level of inventory in the distribution and retail channels, actual claims data received, and the time lag for processing rebate claims. External data sources include reports from wholesalers and third-party market data purchased by Novartis.
For the table showing the worldwide extent of our revenue deductions provisions and related payment experiences for the Group see “Item 18. Financial Statements—Note 22. Provisions and other current liabilities.”
Gross-to-net sales reconciliation
The table below shows the gross-to-net sales reconciliation for our Innovative Medicines Division:
|
(USD millions) |
2020 |
In % of
gross sales to third parties |
2019 |
In % of
gross sales to third parties |
|||||
|
Innovative Medicines gross sales subject to deductions
|
56 067
|
100.0
|
52 956
|
100.0
|
|||||
|
US-specific healthcare plans and program rebates
|
– 5 412
|
– 9.7
|
– 4 824
|
– 9.1
|
|||||
|
Non-US-specific healthcare plans and program rebates
|
– 3 746
|
– 6.7
|
– 3 438
|
– 6.5
|
|||||
|
Non-healthcare plans and program-related rebates, returns and other deductions
|
– 7 896
|
– 14.0
|
– 6 980
|
– 13.2
|
|||||
|
Total Innovative Medicines gross-to-net sales adjustments
|
– 17 054
|
|
– 30.4
|
– 15 242
|
– 28.8
|
||||
|
Innovative Medicines net sales
|
39 013
|
69.6
|
37 714
|
71.2
|
|||||
65
Impairment of goodwill, intangible assets and property, plant and equipment
We review long-lived intangible assets and property, plant and equipment for impairment whenever events or changes in circumstance indicate that the asset’s balance sheet carrying amount may not be recoverable. Goodwill and other currently not amortized intangible assets are reviewed for impairment at least annually.
An asset is considered impaired when its balance sheet carrying amount exceeds its estimated recoverable amount, which is defined as the higher of its fair value less costs of disposal and its value in use. Usually, Novartis applies the fair value less costs of disposal method for its impairment assessment. In most cases, no directly observable market inputs are available to measure the fair value less costs of disposal. Therefore, an estimate is derived indirectly and is based on net present value techniques utilizing post-tax cash flows and discount rates. In the limited cases where the value in use method would be applied, net present value techniques would be applied using pre-tax cash flows and discount rates.
Fair value less costs of disposal reflects estimates of assumptions that market participants would be expected to use when pricing the asset or cash generating units (CGUs), and for this purpose, management considers the range of economic conditions that are expected to exist over the remaining useful life of the asset.
The estimates used in calculating the net present values are highly sensitive and depend on assumptions specific to the nature of the Group’s activities as indicated in “Item 18. Financial Statements—Note 1. Significant accounting policies.” Due to these factors, actual cash flows and values could vary significantly from forecasted future cash flows and related values derived using discounting techniques.
The recoverable amount of the grouping of cash-generating units to which goodwill is allocated is based on fair value less costs of disposal. The valuations are derived from applying discounted future cash flows based on key assumptions, including the terminal growth rate and discount rate. For additional information on impairment charges recognized and reversed by divisions, see “Item 18. Financial Statements—Note 1. Significant accounting policies—Impairment of goodwill and intangible assets” and “Item 18. Financial Statements—Note 11. Goodwill and intangible assets.”
Goodwill and other intangible assets represent a significant part of our consolidated balance sheet, primarily due to acquisitions. Although no significant additional impairments are currently anticipated, impairment evaluation could lead to material impairment charges in the future. For more information, see “Item 18. Financial Statements—Note 11. Goodwill and intangible assets.”
For net impairment charges for property, plant and equipment from continuing operations see “Item 18. Financial Statements—Note 9. Property, plant and equipment.”
Contingent consideration
In an acquisition or divestment of a business, it is necessary to recognize contingent future amounts due to previous owners representing contractually defined potential amounts as a liability or asset. Usually for Novartis, these are linked to milestone or royalty payments related to certain assets and are recognized as a financial liability or financial asset at their fair value, which is then remeasured at each subsequent reporting date. These estimations typically depend on factors such as technical milestones or market performance, and are adjusted for the probability of their likelihood of payment and, if material, are appropriately discounted to reflect the impact of time.
Changes in the fair value of contingent consideration liabilities in subsequent periods are recognized in the consolidated income statement in “Cost of goods sold” for currently marketed products and in “Research and development” for in-process research and development (IPR&D). Changes in contingent consideration assets are recognized in “Other income” or “Other expense,” depending on their nature.
The effect of unwinding the discount over time is recognized for contingent liabilities in “Interest expense” and for contingent assets as interest income recognized in the consolidated income statement within “Other financial income and expense.”
Retirement and other post-employment benefit plans
We sponsor pension and other post-employment benefit plans in various forms that cover a significant portion of our current and former associates. For post-employment plans with defined benefit obligations, we are required to make significant assumptions and estimates about future events in calculating the expense and the present value of the liability related to these plans. These include assumptions about the interest rates we apply to estimate future defined benefit obligations and net periodic pension expense, as well as rates of future pension increases. In addition, our actuarial consultants provide our management with historical statistical information, such as withdrawal and mortality rates in connection with these estimates.
Assumptions and estimates used by the Group may differ materially from the actual results we experience due to changing market and economic conditions, higher or lower withdrawal rates, and longer or shorter life spans of participants, among other factors.
Depending on events, such differences could have a material effect on our total equity. For more information on obligations under retirement and other post-employment benefit plans and underlying actuarial assumptions, see “Item 18. Financial Statements—Note 25. Post-employment benefits for associates.”
Provisions and contingencies
A number of Group companies are involved in various government investigations and legal proceedings (intellectual property, sales and marketing practices, product liability, commercial, employment and wrongful discharge, environmental claims, etc.) arising out of the normal conduct of their businesses. For more information, see “Item 18. Financial Statements—Note 20. Provisions and other
66
non-current liabilities” and “Item 18. Financial Statements—Note 28. Commitments and contingencies.”
We record provisions for legal proceedings when it is probable that a liability has been incurred and the amount can be reliably estimated. These provisions are adjusted periodically as assessments change or additional information becomes available. For significant product liability cases, the provision is actuarially determined based on factors such as past experience, amount and number of claims reported, and estimates of claims incurred but not yet reported.
Provisions are recorded for environmental remediation costs when expenditure on remedial work is probable and the cost can be reliably estimated. Remediation costs are provided for under “Non-current liabilities” in the Group’s consolidated balance sheet.
Provisions relating to estimated future expenditure for liabilities do not usually reflect any insurance or other claims or recoveries, since these are only recognized as assets when the amount is reasonably estimable and collection is virtually certain.
Research and development
Internal research and development (R&D) costs are fully charged to the consolidated income statement in the period in which they are incurred. We consider that regulatory and other uncertainties inherent in the development of new products preclude the capitalization of internal development expenses as an intangible asset usually until marketing approval from the regulatory authority is obtained in a relevant major market, such as for the United States, the European Union or Switzerland.
Costs for post-approval studies performed to support the continued registration of a marketed product are recognized as marketing expenses. Costs for activities that are required by regulatory authorities as a condition for obtaining marketing approval are capitalized and recognized as currently marketed products.
Healthcare contributions
In some countries, our subsidiaries are required to make contributions to the country’s healthcare costs as part of programs other than the ones mentioned above under deductions from revenues. The amounts to be paid depend on various criteria such as the subsidiary’s market share or sales volume compared to certain targets. Considerable judgment is required in estimating these contributions, as not all data is available when the estimates need to be made.
The largest of these healthcare contributions relates to the US healthcare reform fee, which was introduced in 2011. This fee is an annual levy paid by US pharmaceutical companies, including various Novartis subsidiaries. The calculation of the annual expense for this levy requires use of management judgement and estimates. This is required as the US healthcare reform fee owed is based on the Group’s percentage share of the total industry qualifying sales subject to the healthcare reform fee, which requires estimation as the total industry qualifying sales subject to the healthcare reform fee is not publicly available until the following year when the fee is due for payment. This pharmaceutical fee levy is recognized in “Other expense.”
Taxes
We prepare and file our tax returns based on an interpretation of tax laws and regulations, and we record estimates based on these judgments and interpretations. Our tax returns are subject to examination by the competent taxing authorities, which may result in an assessment being made, requiring payments of additional tax, interest or penalties. Since Novartis uses its intellectual property globally to deliver goods and services, the transfer prices within the Group as well as arrangements between subsidiaries to finance research and development and other activities may be challenged by the national tax authorities in any of the jurisdictions in which Novartis operates. Therefore, inherent uncertainties exist in our estimates of our tax positions, but we believe that our estimated amounts for current and deferred tax assets or liabilities, including any amounts related to any uncertain tax positions, are appropriate based on currently known facts and circumstances.
Internal control over financial reporting
The Group’s management has assessed the effectiveness of internal control over financial reporting. The Group’s independent statutory auditor also issued an opinion on the effectiveness of internal control over financial reporting. Both the Group’s management and its external auditors concluded that the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020. For more details, see “Item 15. Controls and Procedures.”
Approach to risk management
See “Item 6. Directors, Senior Management and Employees—Item 6.C Board practices—Corporate governance—Information and control systems—Risk management” and “Item 18. Financial Statements—Note 29. Financial instruments – additional disclosures.”
67
Non-IFRS measures as defined by Novartis
Novartis uses certain non-IFRS metrics when measuring performance, especially when measuring current-year results against prior periods, including core results, constant currencies, free cash flow and net debt.
Despite the use of these measures by management in setting goals and measuring the Group’s performance, these are non-IFRS measures that have no standardized meaning prescribed by IFRS. As a result, such measures have limits in their usefulness to investors.
Because of their non-standardized definitions, the non-IFRS measures (unlike IFRS measures) may not be comparable to the calculation of similar measures of other companies. These non-IFRS measures are presented solely to permit investors to more fully understand how the Group’s management assesses underlying performance. These non-IFRS measures are not, and should not be viewed as, a substitute for IFRS measures, and should be viewed in conjunction with IFRS financials.
As an internal measure of Group performance, these non-IFRS measures have limitations, and the Group’s performance management process is not solely restricted to these metrics.
Core results
The Group’s core results – including core operating income, core net income and core earnings per share – exclude fully the amortization and impairment charges of intangible assets, excluding software, net gains and losses on fund investments and equity securities valued at fair value through profit and loss, and certain acquisition- and divestment-related items. The following items that exceed a threshold of USD 25 million are also excluded: integration- and divestment-related income and expenses; divestment gains and losses; restructuring charges/releases and related items; legal-related items; impairments of property, plant and equipment, and financial assets, and income and expense items that management deems exceptional and that are or are expected to accumulate within the year to be over a USD 25 million threshold.
Novartis believes that investor understanding of the Group’s performance is enhanced by disclosing core measures of performance since, core measures exclude items that can vary significantly from year to year, they enable better comparison of business performance across years. For this same reason, Novartis uses these core measures in addition to IFRS and other measures as important factors in assessing the Group’s performance.
The following are examples of how these core measures are utilized:
• In addition to monthly reports containing financial information prepared under International Financial Reporting Standards (IFRS), senior management receives a monthly analysis incorporating these core measures.
• Annual budgets are prepared for both IFRS and core measures.
As an internal measure of Group performance, the core results measures have limitations, and the Group’s performance management process is not solely restricted to these metrics. A limitation of the core results measures is that they provide a view of the Group’s operations without including all events during a period, such as the effects of an acquisition, divestment, or amortization/impairments of purchased intangible assets and restructurings.
Constant currencies
Changes in the relative values of non-US currencies to the US dollar can affect the Group’s financial results and financial position. To provide additional information that may be useful to investors, including changes in sales volume, we present information about our net sales and various values relating to operating and net income that are adjusted for such foreign currency effects.
Constant currency calculations have the goal of eliminating two exchange rate effects so that an estimate can be made of underlying changes in the consolidated income statement excluding the impact of fluctuations in exchanges rates:
• The impact of translating the income statements of consolidated entities from their non-USD functional currencies to USD
• The impact of exchange rate movements on the major transactions of consolidated entities performed in currencies other than their functional currency
We calculate constant currency measures by translating the current year’s foreign currency values for sales and other income statement items into USD, using the average exchange rates from the prior year and comparing them to the prior-year values in USD.
We use these constant currency measures in evaluating the Group’s performance, since they may assist us in evaluating our ongoing performance from year to year. However, in performing our evaluation, we also consider equivalent measures of performance that are not affected by changes in the relative value of currencies.
Growth rate calculation
For ease of understanding, Novartis uses a sign convention for its growth rates such that a reduction in operating expenses or losses compared to the prior year is shown as a positive growth.
68
Free cash flow
Novartis defines free cash flow as net cash flows from operating activities and cash flows from investing activities associated with purchases and sales of property, plant and equipment, of intangible assets, of financial assets and of other non-current assets. Excluded from free cash flow are cash flows from investing activities associated with acquisitions and divestments of businesses and of interests in associated companies, purchases and sales of marketable securities and commodities and net cash flows from financing activities.
Free cash flow is a non-IFRS measure and is not intended to be a substitute measure for net cash flows from operating activities as determined under IFRS. Free cash flow is presented as additional information because management believes it is a useful supplemental indicator of the Group’s ability to operate without reliance on additional borrowing or use of existing cash. Free cash flow is a measure of the net cash generated that is available for investment in strategic opportunities, returning to shareholders and for debt repayment. Free cash flow is a non-IFRS measure, which means it should not be interpreted as a measure determined under IFRS.
Net debt
Novartis calculates net debt as current financial debts and derivative financial instruments plus non-current financial debt less cash and cash equivalents and marketable securities, commodities, time deposits and derivative financial instruments.
Net debt is a non-IFRS measure, which means it should not be interpreted as a measure determined under IFRS. Net debt is presented as additional information because management believes it is a useful supplemental indicator of the Group’s ability to pay dividends, to meet financial commitments, and to invest in new strategic opportunities, including strengthening its balance sheet.
Novartis Cash Value Added
Novartis Cash Value Added (NCVA) is a metric that is based on what the Company assesses to be its cash flow return less a capital charge on gross operating assets. NCVA is used as the primary internal financial measure for determining payouts under the old Long-Term Performance Plan (LTPP) introduced in 2014. The LTPP performance measures were changed effective January 1, 2019, and from the 2019 cycle onward no longer include NCVA as a performance measure. More information on NCVA is presented as part of the Compensation Report; see “Item 6. Directors, Senior Management and Employees—Item 6.B Compensation.”
Additional information
EBITDA
Novartis defines earnings before interest, tax, depreciation and amortization (EBITDA) as operating income, excluding depreciation of property, plant and equipment, depreciation of right-of-use assets, amortization of intangible assets, and impairments of plant and equipment, right-of-use assets and of intangible assets.
Enterprise value
Enterprise value represents the total amount that shareholders and debt holders have invested in Novartis, less the Group’s liquidity.
|
(USD millions)
|
Dec 31, 2020
|
Dec 31, 2019
|
|||
|
Market capitalization
|
214 269
|
214 815
|
|||
|
Non-controlling interests
|
68
|
77
|
|||
|
Non-current financial debts
|
26 259
|
20 353
|
|||
|
Current financial debts and derivatives financial instruments
|
9 785
|
7 031
|
|||
|
Marketable securities, commodities, time deposits and derivative financial instruments
|
– 1 905
|
– 334
|
|||
|
Cash and cash equivalents
|
– 9 658
|
– 11 112
|
|||
|
Enterprise value
|
238 818
|
230 830
|
|||
|
|
|||||
69
Reconciliation from IFRS results to core results
The following tables provide an overview of the reconciliation from IFRS results to core results.
2020 and 2019 reconciliation from IFRS results to core results
70
2020 and 2019 reconciliation from IFRS results to core results – Group