Novartis Annual Report 2020

Annual Report2020

Annual Report2020

Chairman’s letterThe COVID-19 pandemic in 2020 created massive societal, economic and healthcare challenges. Novartis tookcareful steps to protect our associates, maintain suppliesof medicines to pa tients and ensure business continuity,helping us also meet the needs and in terests of ourhealthcare partners, stake holders and shareholders.These actions enabled Novartis to na vi gate the pandemicand paved the way for future growth. We increased salesand operating profit in 2020, generated good cash flowsand continued to innovate. We absorbed the economicshock without resorting to government support or dividend cuts, and we committed to no COVID-19-relatedjob losses during the year. Our performance de monstratesour strong operational resilience and ability to cater todiverse patient needs in challenging situations.Even as the healthcare landscape changed, we launchednew pro ducts and strengthened our foothold in the biosimilars arena. Our new launches included the multiplesclerosis medicine Kesimpta and the lung cancer treatment Tabrecta. We supported these market entries throughdigital platforms. Biosimilars, meanwhile, benefited fromincreased demand amid a continued focus on healthcarecosts.global health efforts and strengthened our governanceframework. We consider these steps essential to contribute to efforts led by the United Nations to fight poverty and climate change, and work toward the creationof more equitable societies.With the goal of strengthening our reputation and protecting the interests of patients, stakeholders and shareholders, we also overhauled our third-party risk management to establish stricter controls of our supplier network.Our new Code of Ethics, crowdsourced by associatesand rolled out in 2020, is aimed at integrating ethics moreclosely into business decision-making. These steps arehelping Novartis make progress to ward its ambition to beone of the world’s most trusted healthcare partners.Our research and development acti vities remainedrobust. We leveraged remote monitoring technology toen sure patient safety while keeping the majority of ourclinical trials on track. We also enhanced internal andexternal collaboration to bolster our medical pipe line.Going forward, we will continue to pursue our science-based innovation strategy, focusing on fast-growing areas of healthcare, including oncology, cardiologyand lung diseases.I thank you for the confidence you have placed in ourcompany and am pleased to be able to propose a dividend in crease of 2% to CHF 3.00 at the next Annual General Meeting.We also participated in cross-industry collaborations tofight the pandemic and took steps to support patients inlow-income and lower-middle-income countries througha dedicated generic medicines portfolio as well as thecreation of a relief fund for affected communities. Theseefforts are designed to help mitigate the effects of thepandemic in the months and years to come, especially inthe most vulnerable re gions of the world, wherehealthcare- related challenges can have undue long-termsocietal and economic consequences.Sincerely,Demonstrating the Board of Directors’ and management’s attention to the growing importance of ourenviron mental, social and governance (ESG) agenda, wefurther reduced our environmental footprint, expanded ourJoerg ReinhardtChairman of the Board of Directors I

CEO’s letter2020 was a unique year in the long history of Novartis,as the COVID-19 pandemic challenged us to deliver onour purpose despite immense challenges to healthcaresystems and society. Our company has the utmostrespect and gratitude for healthcare professionalsaround the world who are caring for patients, as well asfor scientists who are finding ways to end the pandemic.As we review our performance for the year, I feel proudof the resilience and agility of our people who continuedto make progress in reimagining medi cine. In challengingcircumstances, they maintained the supply of Novartismedicines to patients around the world while advancingour pipeline and pivoting to new ways of engaging withcustomers and each other.We continued to make progress on our strategic priorities. We delivered new innovative medicines for patients,including a treatment for relapsing forms of multiple sclerosis and a first-in-class siRNA cholesterol-loweringtreatment. We continued to develop and build out ourpipeline, which remains one of the most valuable in theindustry. We’re especially optimistic about our mid- tolate-stage pipeline, tracking five promising assets in ourOncology pipeline, six in our Pharma ceuticals pipeline,and an additional five medicines that are already approvedand that we believe can be further applied to expandedareas of treatment.I’m also proud of the ways Novartis c ontributed to theglobal pandemic response. Through Sandoz, Novartiswas the first company to commit to keeping the pricesof essential generic medicines stable. We launched a first- of-its-kind not-for-profit portfolio of medicines totreat symptoms of COVID-19. And we played our part inthe scientific effort to find treatments for the disease.Across the industry, we are sharing our scientific findings and our research and manufacturing capa city whilecommitting to equitable distribution of diagnostics, therapeutics and vaccines. Many more response efforts areoutlined in this report.Our ongoing commitments to o perational excellence andour digital transformation were critical to our success.We managed disruptions to our development programs,with our early investments in data science and technology helping to keep the majority of our clinical trials ontrack. As most of the world went into lockdown, we mitigated the disruption as much as we could by shifting todigital launches. We kept our supply stable while continuing to transform our production network to prepare forfuture growth.Delivering on our strategy supported our financial performance in 2020. Although the pandemic affecteddemand in some therapeutic areas, strength in key products helped us post net sales of USD 48.7 billion, up 3%,measured in constant currencies (cc). Our core operating income rose 13% (cc) to USD 15.4 billion.As I write this letter at the end of 2020, the world remainsin the grip of COVID-19. Yet we have reasons to be optimistic. The pandemic has demonstrated what is possiblewhen human resilience and collaborative science rise tothe occasion. Novartis will continue to deliver on our purpose to reimagine medicine by developing transformative new treatments and finding innovative solutions to theworld’s most pressing healthcare challenges.We also continued to make progress in building trust withsociety. We announced new, ambitious targets regardingaccess to medicine and global health, and we issued asustainability-linked bond to reinforce our commitment toachieving them. We also strengthened our environmentaltargets, launched a new Code of Ethics, and followedthrough on our promise to settle legacy legal matters fromyears prior.Sincerely,Culture underpinned all of our efforts. The pandemic connected associates even more strongly to our purpose,created new demands for learning, and demonstratedthe benefits of empowered working. We launched a newworking model in 2020 designed to provide associateswith greater flexibility while ensuring we continue to driveinnovation and performance.Vas NarasimhanChief Executive Officer II

Table of contentsTable of contentsIntroduction and use of certain terms.4Forward-looking statements.5PART I7Item 1.Identity of Directors, Senior Management and Advisers.7Item 2.Offer Statistics and Expected Timetable.8Item 3.Key Information.93.A Selected financial data.93.B Capitalization and indebtedness.103.C Reasons for the offer and use of proceeds.103.D Risk factors. 11Item 4.Information on the Company.234.A History and development of Novartis.23*4.B Business overview.23Innovative Medicines.24Sandoz. 434.C Organizational structure. 484.D Property, plants and equipment. 48Item 4A. Unresolved Staff Comments.50Item 5.Operating and Financial Review and Prospects.*.515.A Operating results.515.B Liquidity and capital resources.775.C Research and development, patents and licenses.865.D Trend information.865.E Off-balance sheet arrangements.865.F Tabular disclosure of contractual obligations.87Item 6.Directors, Senior Management and Employees.886.A Directors and senior management.886.B Compensation.896.C Board practices.1256.D Employees.1616.E Share ownership.161Item 7.Major Shareholders and Related Party Transactions.1627.A Major shareholders.1627.B Related party transactions.1637.C Interests of experts and counsel.163Item 8.Financial Information.1648.A Consolidated statements and other financial information.1648.B Significant changes.165Item 9.The Offer and Listing.1669.A Offer and listing details.1669.B Plan of distribution.1669.C Markets.1669.D Selling shareholders.1669.E Dilution.1669.F Expenses of the issue.166Item 10. Additional Information.16710.A Share capital.16710.B Memorandum and articles of association.16710.C Material contracts. 17010.D Exchange controls. 17110.E Taxation. 17110.F Dividends and paying agents. 174* “Item 5. Operating and Financial Review and Prospects” together 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 ofObligations. 2

Table of contents10.G Statement by experts. 17510.H Documents on display. 17510.I Subsidiary information. 175Item 11. Quantitative and Qualitative Disclosures About Market Risk. 176Item 12. Description of Securities Other Than Equity Securities.17712.A Debt securities.17712.B Warrants and rights.17712.C Other securities.17712.D American Depositary Shares.177PART II179Item 13. Defaults, Dividend Arrearages and Delinquencies. 179Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.180Item 15. Controls and Procedures. 181Item 16A. Audit Committee Financial Expert.182Item 16B. Code of E

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. Operati