SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

 

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

 

Report on Form 6-K dated February 14, 2007
(Commission File No. 1-15024)


 

Novartis AG

(Name of Registrant)

Lichtstrasse 35
4056 Basel
Switzerland
(Address of Principal Executive Offices)


 

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

Form 20-F: x      Form 40-F: o

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

Yes: o      Nox

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

Yes: o      Nox

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

Yes: o      Nox

Enclosure:                                    Novartis AG publishes its Annual Report for 2006

 

 




OUR MISSION

We want to discover, develop and successfully market innovative products to prevent and cure diseases, to ease suffering and to enhance the quality of life.

We also want to provide a shareholder return that reflects outstanding performance and to adequately reward those who invest ideas and work in our company.

CONTENTS

 

 

 

 

 

GROUP REVIEW

 

 

 

 

 

Overview

 

 

Letter from Daniel Vasella

 

 

 

 

 

 

 

 

OPERATIONAL REVIEW

 

 

 

 

 

Pharmaceuticals

 

 

Vaccines and Diagnostics

 

 

Sandoz

 

 

Consumer Health

 

 

 

 

 

 

 

 

CORPORATE CITIZENSHIP

 

 

 

 

 

Introduction

 

 

Commitment to Patients

 

 

Novartis Foundation for Sustainable Development

 

 

Commitment to Our People

 

 

Commitment to Health, Safety and Environment

 

 

Commitment to Ethical Business Conduct

 

 

Independent Assurance Report

 

 

Risk Management

 

 

 

 

 

 

 

 

CORPORATE GOVERNANCE

 

 

 

 

 

Commitment to Corporate Governance

 

 

Board of Directors

 

 

Executive Committee

 

 

Business Unit Heads

 

 

 

 

 

 

 

 

NOVARTIS GROUP

 

 

FINANCIAL REPORT 2006

 

 

 

 

 

Contents

 

 

Operating & Financial Review

 

 

Equity Strategy

 

 

Novartis Group Consolidated Financial Statements

 

 

Novartis AG Financial Statements

 

 

Key Dates 2007

 

 

Contact Addresses

 

 

 

2




GROUP

Novartis is a world leader in providing medicines to protect health, prevent and treat disease, and to improve well-being.

Novartis is the only company with leadership positions in patented and generic pharmaceuticals, vaccines and over-the-counter medicines.

In 2006, Novartis continued to strengthen these strategic growth platforms to meet the needs of patients and society in a dynamically changing healthcare environment.

FINANCIAL HIGHLIGHTS

KEY FIGURES – GROUP1

(In USD millions unless indicated otherwise)

 

 

2006

 

2005

 

Group net sales

 

37 020

 

32 212

 

Group operating income

 

8 174

 

6 905

 

Return on sales (%)

 

22.1

 

21.4

 

Group net income

 

7 202

 

6 141

 

Research and development

 

5 364

 

4 846

 

Research and development as % of Group net sales

 

14.5

 

15.0

 

Free cash flow

 

4 340

 

4 673

 

Number of associates at year-end

 

100 735

 

90 924

 

 


1      Including discontinuing operations

GROUP NET SALES, OPERATING INCOME AND NET INCOME

(Index: 2002 = 100%)


1      Not adjusted for new IFRS accounting rules

2      Pro forma adjusted for new IFRS accounting rules

SHARE INFORMATION

 

 

2006

 

2005

 

Return on average equity (%)

 

19.3

 

19.0

 

Earnings per share (USD)1

 

3.06

 

2.63

 

Operating cash flow per share (USD)

 

3.76

 

3.46

 

ADS price at year-end (USD)

 

57.44

 

52.48

 

Share price at year-end (CHF)

 

70.25

 

69.05

 

Pay-out ratio based on outstanding shares (%)

 

36

 

33

 

 


1      Average number of shares outstanding in 2006: 2 345 232 126 (2005: 2 332 848 144)

2006 GROUP NET SALES BY DIVISION

2006 OPERATING INCOME BY DIVISION1


1      Vaccines and Diagnostics had less than 1% impact on Divisional total operating income

3




NEWS IN 2006

 

GROUP

 

Dynamic 2006 performance from all divisions thanks to a mixture of organic growth and contributions from recent acquisitions. Group net sales up 15% (+14% in local currencies) to USD 37.0 billion, led by Pharmaceuticals. Operating income advances 18% as strong organic growth more than offsets acquisition-related costs.

 

 

 

PHARMACEUTICALS

 

Market share gains and double-digit growth in Cardiovascular and Oncology franchises drive 11% (+11% lc) net sales increase to USD 22.6 billion. Operating income improvement of 11% despite one-time acquisition costs; up 17% excluding these charges.

 

 

 

VACCINES AND DIAGNOSTICS

 

New strategic growth platform created following Chiron acquisition, making Novartis the world’s second-largest supplier of influenza vaccines in the US. Double-digit net sales growth following April 2006 acquisition.

 

 

 

SANDOZ

 

Sandoz integration of Hexal and Eon Labs largely completed, performing well as sales up 27% (+25% lc) on good underlying retail generics growth. Operating income rises sharply on operational improvements.

 

 

 

CONSUMER HEALTH

 

OTC and Animal Health climb in global rankings thanks to strategic brands, targeted acquisitions and product innovations. Medical Nutrition, with 2006 sales of approximately USD 1.0 billion, to be divested during 2007. Net sales, excluding Medical Nutrition, rise 8% (+8% lc) while operating income advances 12%.

 

 

 

PIPELINE

 

One of the industry’s strongest pipelines, with 138 projects in development, focusing on areas of high unmet need. Key R&D areas are cardiovascular/metabolic conditions, oncology and neuroscience as well as respiratory and infectious diseases.

 

 

 

RESEARCH

 

New discovery approaches and focus on biotechnology compounds at Novartis Institutes for BioMedical Research lead to increase in number of early-stage projects.

 

 

 

CORPORATE CITIZENSHIP

 

Novartis access-to-medicine programs for those in need reach 33.6 million patients in 2006 through contributions valued at USD 755 million.

 

 

 

DIVIDEND

 

Proposal to shareholders for 2006 of CHF 1.35 per share, an increase of 17% and representing the tenth consecutive year of paying a higher dividend.

 

4




 

DANIEL VASELLA, M.D.

DEAR SHAREHOLDERS:

It gives me great pleasure in our eleventh business year to report another set of record results.

·     Group net sales rose 15% (+14% in local currencies) to USD 37 billion

·     Operating income advanced 18% to USD 8.2 billion

·     Net income grew 17% to USD 7.2 billion

·     Earnings per share (EPS) were up 16%

·     Free cash flow reached USD 4.3 billion

This outstanding performance reflects our continuous focus on innovation and building a broad portfolio around growth areas of the healthcare sector. Ultimately, the skills and commitment of our associates are the key factors for our success, and I would like to thank them for their contributions.

The pharmaceutical industry is confronted with conflicting trends. Demand is continually rising for healthcare services, medicines, vaccines and diagnostics, which is generating higher costs that in many countries are increasingly the focal point of political and social debate. Studies have repeatedly proven that appropriate use of medicines generally reduces treatment costs and also that the majority of healthcare cost increases are generated in hospitals. However, the pharmaceutical industry remains the primary target in the cost debate even though medicines account for only 10% to 20% of overall costs, depending on the country.

Still, the healthcare sector will remain a dynamic growth area in the future driven by the following trends:

·      The aging of the world’s population continues unabated, generating steadily increasing demand for medicines due to the rising incidence of degenerative diseases and cancer as people grow older. The approaching wave of retirements in the post-war “baby boomer” generation will further stimulate demand in our most important markets.

·      The strong economic expansion in populous countries such as China, India and Russia is translating into over-proportional growth in demand for healthcare services. Accompanying this economic growth has been the increasing adoption of lifestyles typical of affluent, industrial countries. That, in turn, has led to a higher incidence of obesity, chronic cardiovascular disease, diabetes, cancer and lung diseases.

·      Finally, new technologies are enabling the discovery and development of innovative medicines for patients suffering from otherwise untreatable diseases.

At the same time, our industry faces challenges ranging from government price controls and intensified competition to increasingly stringent regulatory controls that are escalating the costs of Research & Development. Product liability risks, which can be very costly, are another important factor that is attracting a great deal of attention and fueling fundamental distrust of the industry.

The most far-reaching cost reduction measures taken by various governments include promoting greater use of generic pharmaceuticals, sales of which are likely to experience double-digit growth in the coming years as opposed to the anticipated single-digit growth forecast for patent-protected medicines.

In these industry conditions, “business as usual” is no longer a viable long-term option. Identifying and addressing the needs of patients remains at the forefront of all that we do. This includes taking a serious look at the economic and political realities in which patients live because this plays a major role in determining how products are made available to them. This is why our business portfolio systematically reflects the dynamically changing healthcare market: growing demand for innovative

5




medicines (Pharmaceuticals), the rising support for greater use of cheaper generics (Sandoz), the increasingly prominent role of vaccines (Vaccines and Diagnostics) and greater empowerment of patients (Consumer Health).

We have the best portfolio to optimally leverage growth opportunities in healthcare in the interest of both our customers and shareholders while also reducing risks.

Novartis has defined the following strategic initiatives:

·   Invest vigorously in R&D to continue bringing new and innovative products to the market

·   Strengthen the Sandoz generics business, which provides affordable treatment options following the expiry of patents

·   Expand businesses with synergy potential, such as between Pharmaceuticals, OTC and Animal Health

·   Further build our new growth platform in Vaccines and Diagnostics by focusing on preventive medicine

We sharpened our focus on these priorities in 2006, which resulted in the healthcare businesses now accounting for 96% of total net sales compared to just 45% in 1995.

Pharmaceuticals is our most important division, again growing faster than the market. Strong demand for our top cardiovascular and oncology drugs led the performance. Sales growth in the US and in emerging markets such as China and Russia were particularly dynamic, with the performance in Europe less robust. The extraordinary success of our antihypertensive medicine Diovan is poised to continue its dynamic growth. Our cancer therapy Gleevec/Glivec generated sales of over USD 2.5 billion in only its fifth year. Two other cancer medicines, Zometa and Femara, have also developed well.

Vaccines and Diagnostics enjoyed impressive growth, with the integration of the newly acquired Chiron business proceeding smoothly and the successful resolution of quality problems in influenza vaccine production. Our new cell culture production technology for influenza vaccines could save lives in the event of a pandemic flu outbreak due to the shorter lead times. A new seasonal influenza vaccine based on this technology was submitted for European approval in 2006. New diseases, such as avian flu and SARS as well as resistant bacterial and fungal infections, will continue to generate strong demand in the future for new vaccines and medicines.

Sandoz expanded its retail generics business, particularly in the US, Eastern and Southern Europe, Russia, Switzerland, Canada, and Australia. In Germany, the impact of severe price pressure was felt. Our recombinant growth hormone Omnitrope became the first follow-on version of an approved biotechnology drug to be granted US and European approvals. Given the large number of biotechnology drugs already without or set to lose patent protection in the coming years, these so-called “biosimilars” are expected to play an increasingly important role by providing patients with affordable, safe and effective alternatives to the original treatments.

The Consumer Health Division performed very well as the OTC and Animal Health businesses each posted double-digit net sales growth. In line with our continued focus on healthcare, we signed a definitive agreement to divest the Medical Nutrition business. I am convinced this transaction is an ideal solution for Medical Nutrition, one that offers the management and associates of this business the best future prospects. Proceeds from the transaction will further strengthen our financial position and provide greater strategic flexibility. Of course, the successes of our businesses depends not only on strategic objectives but also in executing them successfully, particularly in R&D.

We are planning to launch several innovative medicines during the next two years and will keep investing vigorously in R&D. We will also further complement our own R&D programs through alliances and collaborations for development compounds and cutting-edge technologies.

Novartis has 138 projects in clinical development. Among these are 50 new molecular entities (NMEs) and 88 life-cycle management projects with new indications or formulations. In 2006, over 20 new projects were added to the pipeline. Key areas of R&D are cardiovascular/metabolic diseases, cancer and neurological conditions as well as respiratory and infectious diseases.

Shortly before the end of 2006, we received approval from the US Food and Drug Administration (FDA) for Exforge (valsartan and amlodipine), a single-tablet combination of the two most prescribed antihypertensives in their respective classes, and expect European approval to follow during the course of this year. We also anticipate regulatory decisions in 2007 for two other important medicines: Tekturna/Rasilez (aliskiren), a renin inhibitor for the treatment of hypertension, and Galvus (vildagliptin), a once-daily oral treatment for patients with type 2 diabetes. The US regulatory agency extended its review after recently available data for both Tekturna/Rasilez and Galvus were submitted to clarify open questions. Delays are unfortunately part of our industry and inherent in the R&D process.

For two other development compounds, the submissions for US and European regulatory approvals were accelerated and completed earlier than planned in 2006. Tasigna (nilotinib)

6




is a new treatment option for patients with certain forms of chronic myeloid leukemia who have resistance and/or intolerance to treatment with our Gleevec/Glivec, while Aclasta/Reclast (zoledronic acid) is a convenient once-yearly infusion lasting only 15 minutes as a treatment for women with postmenopausal osteoporosis.

Among the many innovative compounds in late-stage development at Novartis, I would like to particularly highlight FTY720 and RAD001.

FTY720 (fingolimod) is seeking to become the first oral once-daily therapy for patients with relapsing multiple sclerosis, a condition estimated to affect more than 2.5 million patients worldwide and women at twice the rate as men. This compound is now in the final stage of development after an earlier Phase II trial showed positive results during two years of treatment in helping patients with this potentially debilitating neurological condition. Submission is on track for 2009.

RAD001 (everolimus) is a novel oral compound in development to inhibit a cell signaling pathway called mTOR considered to be an important therapeutic target in oncology. At effective and well-tolerated doses, RAD001 has demonstrated broad clinical activity in patients with various tumor types. This compound acts by directly inhibiting both the growth of tumor cells as well as the formation of new blood vessels (angiogenesis). If positive results are achieved in clinical trials with difficult-to-treat forms of cancer, the first regulatory submissions could be submitted as early as 2008.

The Novartis Institutes for BioMedical Research (NIBR), created four years ago to strengthen the company’s long tradition in drug discovery, is bolstering the pipeline through new discovery approaches and an increasing focus on biotechnology compounds. We are expanding our existing development activities in China by establishing an integrated R&D institute in Shanghai that will focus on diseases particular to the region, such as liver cancer. This is not a “typical” China investment focused on cost savings but one aimed at gaining access to the country’s vast talent pool and scientific promise. The choice of Shanghai reflects the vitality and economic potential of this city and the changing global economy; it is imperative to have a strong local presence in this fast-growing environment.

Novartis has been rapidly advancing its pipeline by complementing internal efforts with collaborations and targeted acquisitions. Last year, we acquired the UK biopharmaceuticals company NeuTec and added two compounds – Mycograb for fungal infections and Aurograb for bacterial infections – that will further strengthen our presence in the fast-growing hospital infections segment.

Let me close by offering some perspectives on the challenges facing the pharmaceutical industry and how we are addressing the significant social and political changes underway:

Innovation is our core activity. We must not allow the challenging political environment to distract us from our ultimate goal: discovering, developing and quickly bringing to the market new drugs with real therapeutic benefits to both individual patients and to society. The pharmaceutical industry is not without criticism, but thanks to the important contributions of medicines and vaccines, many infectious diseases can now be prevented or effectively treated. Survival rates for children suffering from cancer have doubled in the last 25 years, while the incidence of strokes and heart attacks have been significantly reduced. Novartis medicines – from Gleevec/Glivec and Neoral to Coartem and Clozaril/Leponex – have positively changed the lives of thousands, if not millions, of patients around the world. These patients have benefited enormously from the success of our industry and also Novartis.

Intellectual property rights are central to the economy. Without them, many of the breathtaking technological developments since the Industrial Revolution would not have occurred. Protecting innovation is the best protection for patients, laying the foundation for the massive investments made by the pharmaceuticals industry in R&D that are vital to medical progress. Novartis will continue to resist the pressure to soften its position on the need to vigorously protect intellectual property in favor of short-term political gain.

Reputation is valuable capital in the form of trust, but a resource that cannot be stockpiled. It must be earned daily. Novartis enjoys an excellent international reputation. However, we must better explain to the public the positive impact of our industry, how it functions, the benefits of our products for society and the relationship between risk, reward and innovation. Our industry has failed to communicate effectively on the substantial role medicines play in reducing overall healthcare costs. It would be a serious setback if the demand for innovative medicines continues but without an understanding that innovation requires enormous investments and risks – in other words, that innovation has its price.

Corporate citizenship is taken seriously at Novartis and is an integral component of our business strategy. Our access-to-medicine programs in 2006 reached over 33 million patients worldwide, with contributions totaling USD 755 million. This represented some 2% of our total Group net sales donated to disadvantaged patients.

The Novartis Institute for Tropical Diseases in Singapore has expanded its research activities to include malaria along with tuberculosis and dengue fever, diseases that are still troubling and common in developing countries. We decided in 2006 to sharply reduce the average treatment price of Coartem, the most effective

7




anti-malaria drug, to USD 1.00 – a loss-making activity for us. More than 60 million treatments were delivered to endemic countries last year, a dramatic increase from only four million in 2004 due to our expanded production capacity.

We are doing what we believe is right: helping patients in need while also strengthening our position as a reliable partner in the health sector. At the same time, corporate citizenship also calls for a strong sense of reality, and this means rejecting overblown expectations of some stakeholders. We cannot assume the responsibilities of governments. Well-functioning access-to-medicine programs require governments to create the appropriate infrastructure and distribution networks, provide legal certainty and a safe environment – all of which we cannot provide. This can only be achieved through the collaboration of all involved stakeholders. It is imperative that pharmaceutical companies, governments, international organizations and NGOs work together to ensure that patients in need receive proper care.

We must overcome a culture of blaming each other; the precarious situation in many developing countries is far too serious for symbolic posturing. We are seeking an open dialogue with all stakeholder groups, one based on mutual trust and tolerance with the aim of long-term success – not only in access-to-medicine initiatives but also in day-to-day business activities.

Strong values are critical during this time of rapid change. Now more than ever, strong values are important to hold a company together: to concentrate energies, guide decisions and place greater focus on performance objectives. Our success during the last 10 years has been based on such values – a consistent focus on performance and results, an open culture and acting responsibly for patients and societies. The values of a company become particularly evident during a takeover situation, where there is often a temptation to simply absorb the acquired company. I personally see acquisitions – such as those during the last two years involving Hexal, Eon Labs and Chiron – as learning opportunities and assurance that monotony, complacency and self-satisfaction have no chance of taking hold in our organization.

Balancing global aspirations and local identities is a constant task. The process of globalization is not a one-way street; to think so would be a dangerous illusion. We must respect local and national customs, whether they involve languages, cultural aspects or the law. At the same time, we have established and are implementing standards throughout Novartis – particularly our Code of Conduct and our Corporate Citizenship Policy and guidelines. For example, Novartis has initiated a “living wage” program to set minimum pay standards around the world for its associates. We expect similar conduct from our business partners. We have also set strict global environmental and safety standards, ones that are the same at our Basel headquarters as in developing countries.

As a shareholder, you naturally have an interest in the performance of your company. Our innovative and risk-diversified portfolio has delivered strong returns when looking at share price gains, dividends and spin-offs. Indeed, the value of an investment in Novartis more than tripled from January 1, 1996, to December 31, 2006, exceeding the total shareholder return of most of our competitors. I am confident that Novartis will continue to be successful. Since the creation of Novartis in 1996, our company has been a leader of change and progress, not a passive observer. This remains the case today thanks to our forward-looking strategy, our considerable powers of innovation, operational excellence and solid basic values – Novartis has what it takes to identify future opportunities and to translate them into commercial success.

Dr. Marc Moret, a talented leader who served as Chairman of the Board of Directors of Sandoz until the merger with Ciba-Geigy in 1996, passed away on March 17, 2006. One of his most impressive achievements was certainly the creation of Novartis. With a strategic foresight still admired today, he realized much earlier than others how such strong, global organizations could succeed in an increasingly competitive environment.

The skills, dedication, and integrity of our associates have enabled us to secure our place among the world’s most respected and successful pharmaceutical companies. When it comes to setting the strategic direction, appointing the best talent to key positions and ensuring effective control, our Board of Directors plays a vital role. Dr. h.c. Birgit Breuel will leave the Board at the end of her term at the Annual General Meeting in March 2007. We would like to thank Dr. Breuel for her efficient and valuable contribution to the work of the Boards of both Ciba-Geigy AG and Novartis AG.

I would also like to again thank our associates, whose excellent performance during 2006 enabled Novartis to achieve both another year of record results and improve the lives of countless patients worldwide.

My thanks also to you, our shareholders, for the trust you continue to place in Novartis.

Sincerely,

Daniel Vasella, M.D.

Chairman and Chief Executive Officer

8




PHARMACEUTICALS

Excellent performance in our biggest and most profitable business thanks to dynamic growth and market share gains. Approvals were received for new products and indications addressing the needs of patients worldwide.

Strong net sales growth of 11% (+11% lc) to USD 22.6 billion driven by many top-selling products growing at double-digit rates as well as outstanding performances in the US and priority emerging growth markets.

Operating income rises 17% excluding one-time charges related to integration of Chiron pharmaceuticals business, but up 11% to USD 6.7 billion on a reported basis, in line with sales growth.

Cardiovascular, Oncology and Neuroscience franchises all deliver double-digit net sales growth. Hypertension leader Diovan achieves USD 4.2 billion in net sales, while the Oncology drug Gleevec/Glivec tops USD 2.5 billion and Femara delivers 33% growth in local currencies.

2007 and 2008 set to be exciting years for new product launches, with approvals pending in the US and Europe – particularly for Exforge and Tekturna (hypertension) as well as Galvus (type 2 diabetes) and Lucentis (blindness).

One of the industry’s top-rated pipelines with six compounds moving into pivotal late-stage trials, led by FTY720 (multiple sclerosis), QAB149 (asthma and COPD), AGO178 (depression), RAD001 (cancer), ABF656 (hepatitis C) and SOM230 (Cushing’s disease).

9




PHARMACEUTICALS

KEY FIGURES

(In USD millions unless indicated otherwise)

 

 

2006

 

2005

Net sales

 

22 576

 

20 262

Operating income

 

6 703

 

6 014

Research and development

 

4 265

 

3 972

Research and development as % of net sales

 

18.9

 

19.6

Free cash flow

 

6 501

 

5 968

Net operating assets

 

13 640

 

8 807

Additions to property, plant & equipment1

 

1 135

 

686

Number of associates at year-end

 

54 314

 

49 308

 


1      Excluding impact of business combinations

NET SALES AND OPERATING INCOME

(Index: 2002 = 100%)


1       Not adjusted for new IFRS accounting rules

2       Pro forma adjusted for new IFRS accounting rules

NET SALES BY REGION

PORTFOLIO REJUVENATION

(Net sales in USD millions)

10




The Novartis Pharmaceuticals clinical pipeline holds a broad stream of 138 promising future products, with 104 projects in Phase II and beyond as of December 2006, including both new molecular entities and additional indications or formulations for marketed products.

Glossary of terms:

Compound Molecular entity

Generic name International Nonproprietary Name (INN) designated by the World Health Organization (WHO)

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

Phase I First clinical trials in patients to determine safety, tolerability and usually proof of concept

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

Phase III Large clinical trials to determine definitive safety and efficacy in patients

Submitted In registration

Therapeutic area

 

Project/compound

 

Generic name

 

Indication

Cardiovascular

 

Galvus

 

vildagliptin

 

Type 2 diabetes

and Metabolism

 

Tekturna1/Rasilez1

 

aliskiren

 

Hypertension

 

Exforge1

 

valsartan, amlodipine

 

Hypertension

 

Diovan/Starlix

 

valsartan, nateglinide

 

Prevention of new-onset type 2 diabetes,

 

NAVIGATOR2

 

 

 

cardiovascular morbidity and mortality

 

Lotrel ACCOMPLISH

 

amlodipine, benazepril

 

High-risk hypertension

Oncology &

 

Tasigna1

 

nilotinib

 

Chronic myeloid leukemia (CML)

Hematology

 

Tasigna1

 

nilotinib

 

Gastrointestinal Stromal Tumor (GIST)

 

 

PTK7876

 

vatalanib

 

Colorectal cancer, solid tumors

 

 

Gleevec/Glivec

 

imatinib mesylate

 

Glioblastoma multiforme

 

 

EPO906

 

patupilone

 

Ovarian cancer and other solid tumors

 

 

RAD001

 

everolimus

 

Renal cell cancer, pancreatic islet

 

 

 

 

 

 

cell tumor and other solid tumors

 

 

SOM230

 

pasireotide

 

Acromegaly, GEP9 tumors, neuroendocrine

 

 

 

 

 

 

tumors, Cushing’s Disease

 

 

PKC412

 

midostaurin

 

Acute myeloid leukemia (AML)

 

 

LBQ707

 

gimatecan

 

Solid tumors

 

 

LBH589

 

 

Cutaneous T-cell lymphoma,

 

 

 

 

 

 

hematologic tumors

Neuroscience

 

Comtan

 

entacapone

 

Parkinson’s disease

 

Exelon Patch

 

rivastigmine

 

Dementia

 

LIC477

 

licarbazepine

 

Bipolar disorder

 

AGO178

 

agomelatine10

 

Depression

 

FTY720

 

fingolimod

 

Multiple sclerosis

 

SAB378

 

 

Chronic pain

Respiratory

 

QAB149

 

indacaterol

 

COPD11

 

 

MFF258

 

formoterol and mometasone

 

Asthma/COPD11

 

 

NVA237

 

glycopyrronium bromide

 

COPD11

Ophthalmics

 

Lucentis12

 

ranibizumab

 

Age-related macular degeneration (AMD)

Dermatology

 

Lamisil

 

terbinafine

 

Fungal infection of the scalp in children

Gastrointestinal &

 

PTK787

 

vatalanib

 

AMD14

Urology (ODGU)

 

Elidel

 

pimecrolimus

 

Dry eye

 

Zelnorm/Zelmac

 

tegaserod

 

Irritable bowel syndrome with constipation

 

Zelnorm/Zelmac

 

tegaserod

 

Functional dyspepsia

Infectious

 

Certican

 

everolimus

 

Prevention of organ rejection

Diseases,

 

Tyzeka/Sebivo

 

telbivudine

 

Hepatitis B

Transplantation

 

Mycograb

 

efungumab

 

Severe fungal infections

& Immunology

 

LDC300

 

valtorcitabine

 

Hepatitis B

(IDTI)

 

Albuferon

 

Albumin interferon alpha 2-b

 

Hepatitis C

 

 

NM28316

 

valopacitabine

 

Hepatitis C

 

 

Aurograb

 

 

Severe Staphylococcus aureus infections

 

 

AEB071

 

 

Transplantation (organ rejection)

Arthritis & Bone

 

Aclasta17

 

zoledronic acid

 

Paget’s disease of the bone

(AB)

 

Aclasta17

 

zoledronic acid

 

Osteoporosis

 

Prexige18

 

lumiracoxib

 

Osteoarthritis, acute pain,

 

 

 

 

 

primary dysmenorrhea

 

ACZ885

 

 

Muckle Wells syndrome

 

ACZ885

 

 

Rheumatoid arthritis

 

SMC021

 

calcitonin

 

Osteoporosis

 

11




 

Project/compound

 

Mechanism of action

 

Formulation

 

Plannedsubmissiondates

 

Phase I

 

Phase II

 

Phase III

 

Submitted

Galvus

Tekturna
1/Rasilez1

 

Dipeptidyl peptidase 4 (DPP 4) inhibitor
Renin inhibitor

 

Oral

Oral

 

Submitted EU, US

Submitted EU, US

 

XXXXXXXXXXXXXXXXXXXXXXXX

XXXXXXXXXXXXXXXXXXXXXXXX

Exforge1

 

Angiotensin-II receptor antagonist (ARB) and calcium channel blocker

 

Oral

 

Submitted EU, (approved US)19

 

XXXXXXXXXXXXXXXXXXXXXXXX

Diovan/Starlix
NAVIGATOR2

 

Angiotensin-II receptor antagonist (ARB) and insulin secretagogue

 

Oral

 

>2010

 

XXXXXXXXXXXXXXXXXX

Lotrel
ACCOMPLISH

 

Angiotensin I converting enzyme (ACE) inhibitor and calcium channel blocker

 

Oral

 

2009

 

XXXXXXXXXXXXXXXXXX

Tasigna1

 

Bcr-Abl3, c-Kit4 and PDGFR5 inhibitor

 

Oral

 

Submitted EU, US

 

XXXXXXXXXXXXXXXXXXXXXXXX

Tasigna1

 

Bcr-Abl3, c-Kit4 and PDGFR5 inhibitor

 

Oral

 

2009

 

XXXXXXXXXXXX

PTK7876

 

VEGFR7 inhibitor

 

Oral

 

2007

 

XXXXXXXXXXXXXXXXXX

Gleevec/Glivec

 

Bcr-Abl3, c-Kit4 and PDGFR5 inhibitor

 

Oral

 

2008

 

XXXXXXXXXXXXXXXXXX

EPO906

 

Microtubule depolymerization inhibitor

 

Intravenous

 

2009

 

XXXXXXXXXXXXXXXXXX

RAD001

 

mTOR8 inhibitor

 

Oral

 

2008

 

XXXXXXXXXXXX

SOM230

 

Somatostatin analogue

 

Injection

 

2009

 

XXXXXXXXXXXX

PKC412

 

Signal transduction inhibitor

 

Oral

 

>2010

 

XXXXXXXXXXXX

LBQ707

 

Topoisomerase-I inhibitor

 

Oral

 

>2010

 

XXXXXXXXXXXX

LBH589

 

Deacetylase inhibitor

 

Oral

 

2008

 

XXXXXXXXXXXX

Comtan

 

Catechol-O-methyltransferase inhibitor

 

Oral

 

Submitted Japan, (approved EU, US)

 

XXXXXXXXXXXXXXXXXXXXXXXX

Exelon Patch

 

Cholinesterase inhibitor

 

Transdermal Patch

 

Submitted EU, US

 

XXXXXXXXXXXXXXXXXXXXXXXX

LIC477

 

Voltage-sensitive sodium channel blocker

 

Oral

 

2008

 

XXXXXXXXXXXXXXXXXX

AGO178

 

Melatonin (M1/2) receptor agonist and serotonin

 

Oral

 

2008

 

XXXXXXXXXXXXXXXXXX

 

(5-HT2C) receptor antagonist

 

 

 

 

 

 

FTY720

 

Sphingosine-1-phosphate receptor modulator

 

Oral

 

2009

 

XXXXXXXXXXXXXXXXXX

SAB378

 

Cannabinoid-1 receptor agonist

 

Oral

 

>2010

 

XXXXXXXXXXXX

QAB149

 

Once-daily beta-2 agonist

 

Inhalation

 

2008

 

XXXXXXXXXXXXXXXXXX

MFF258

 

Once-daily beta-2 agonist and long-acting steroid

 

Inhalation

 

2008

 

XXXXXXXXXXXXXXXXXX

NVA237

 

Long acting antimuscarinic

 

Inhalation

 

>2010

 

XXXXXXXXXXXX

Lucentis12

 

VEGF13 blocker

 

Intra-vitreal injection

 

Submitted EU

 

XXXXXXXXXXXXXXXXXXXXXXXX

Lamisil

 

Fungal squalene epoxidase inhibitor

 

Oral

 

Submitted US

 

XXXXXXXXXXXXXXXXXXXXXXXX

PTK787

 

Angiogenesis inhibitor

 

Oral

 

>2010

 

XXXXXXXXXXXX

Elidel

 

T-cell and mast cell inhibitor

 

Eye drops

 

>2010

 

XXXXXXXXXXXX

Zelnorm/Zelmac

 

5HT4-receptor agonist

 

Oral

 

2007 (EU)15, (approved US)

 

XXXXXXXXXXXXXXXXXXXXXXXX

Zelnorm/Zelmac

 

5HT4-receptor agonist

 

Oral

 

2008

 

XXXXXXXXXXXXXXXXXX

Certican

 

Growth-factor-induced cell proliferation inhibitor

 

Oral

 

Submitted US, Japan, (approved EU)

 

XXXXXXXXXXXXXXXXXXXXXXXX

Tyzeka/Sebivo

 

Viral polymerase inhibitor

 

Oral

 

Submitted EU, (approved US)

 

XXXXXXXXXXXXXXXXXXXXXXXX

Mycograb

 

Anti-HSP90 antibody

 

Intravenous

 

2009 (US), (submitted EU)

 

XXXXXXXXXXXXXXXXXXXXXXXX

LDC300

 

Viral polymerase inhibitor

 

Oral

 

2009

 

XXXXXXXXXXXXXXXXXX

Albuferon

 

Long-acting interferon

 

Intravenous

 

2009

 

XXXXXXXXXXXXXXXXXX

NM28316

 

Viral polymerase inhibitor

 

Oral

 

>2010

 

XXXXXXXXXXXX

Aurograb

 

Anti-Staph. aureus antibody

 

Intravenous

 

>2010

 

XXXXXXXXXXXX

AEB071

 

Protein Kinase C inhibitor

 

Oral

 

>2010

 

XXXXXXXXXXXX

Aclasta17

 

Bisphosphonate: osteoclast inhibitor

 

Intravenous

 

Submitted US, (approved EU)

 

XXXXXXXXXXXXXXXXXXXXXXXX

Aclasta17

 

Bisphosphonate: osteoclast inhibitor

 

Intravenous

 

Submitted EU, US

 

XXXXXXXXXXXXXXXXXXXXXXXX

Prexige18

 

Cyclo-oxygenase-2 inhibitor

 

Oral

 

2007 (US), (approved EU)

 

XXXXXXXXXXXXXXXXXXXXXXXX

ACZ885

 

Anti-interleukin-1 beta (IL-1b) antibody

 

Injection

 

2009

 

XXXXXXXXXXXX

ACZ885

 

Anti-IL-1b antibody

 

Injection

 

>2010

 

XXXXXXXXXXXX

SMC021

 

Regulator of calcium homeostasis

 

Oral

 

>2010

 

XXXXXXXXXXXX

 

 


1

Trade name pending regulatory approval

2

NAVIGATOR trial examining combination therapy of Diovan and Starlix

3

Bcr-Abl: Breakpoint cluster region-Abelson fusion protein

4

c-Kit: an important receptor tyrosine kinase protein

5

Platelet-derived growth factor receptor protein

6

Co-development with Schering AG; registration strategy under review

7

Vascular endothelial growth factor receptor protein

8

Mammalian target of rapamycin protein

9

Gastroenteropancreatic

10

Licensed from Servier; Novartis has rights in the US

11

Chronic obstructive pulmonary disease

12

Approved in US; Novartis has rights outside North America

13

Vascular endothelial growth factor

14

Age-related macular degeneration

15

Novartis plans to appeal opinion from European Medicines Agency (EMEA) committee recommending against European approval of Zelmac

16

Idenix compound; Novartis has exercised option to license

17

Zoledronic acid (5 mg) is marketed under the trade name Aclasta in Europe and is awaiting US approval of a new trade name

18

Lumiracoxib is marketed under the trade name Prexige in various markets and is awaiting US approval of a new trade name

19

Tentative approval – pending expiration of amlodipine besylate pediatric exclusivity

 

12




 

CARDIOVASCULAR AND METABOLISM

High blood pressure and its consequences affect one in four adults – more than a billion people worldwide – and kill more than 7 million people every year. Type 2 diabetes causes 3 million deaths annually. Both diseases remain under-diagnosed and poorly treated – but Novartis is poised to expand its broad Cardiovascular and Metabolism portfolio, offering patients and physicians break-through innovations with the potential to transform treatment.

US regulatory approval of Exforge in December culminated a year packed with submissions and decisions for Novartis, setting the stage for a series of major launches over the next two years.

Exforge is the first treatment for high blood pressure to combine the two most prescribed, branded antihypertensive medicines in their classes – Diovan and the calcium channel blocker amlodipine besylate. Tentative approval by the US Food and Drug Administration will permit the launch of Exforge in September 2007, after the expiration of market exclusivity for amlodipine besylate.

In an extensive clinical program involving over 5 000 patients, Exforge helped up to 9 out of 10 patients reach their treatment goal (diastolic blood pressure under 90 mm Hg, or more than a 10 mm Hg reduction in diastolic pressure from baseline). That high proportion of treatment success stands in sharp contrast to the estimated 7 of 10 people with high blood pressure today who either remain undiagnosed or fail to reach their blood pressure targets.

Exforge offers a potential solution to many people with high blood pressure who currently need two or more medicines to control their illness,” says James Shannon, M.D., Head of Pharmaceutical Development at Novartis.

Meanwhile, two additional breakthrough medicines from Novartis are poised to fortify the dynamic portfolio of the Cardiovascular and Metabolism franchise. Galvus (vildagliptin) and Tekturna1 (aliskiren) completed clinical testing last year and are now under regulatory review in both the US and Europe for treatment of type 2 diabetes and hypertension, respectively.

“We are very confident of the efficacy and safety profiles of Galvus and Tekturna,” says Thomas Ebeling, Head of the Pharmaceuticals Division and member of the Executive Committee of Novartis. “And we are ready to roll as soon as we receive the go-ahead from regulators.”

Both medicines have innovative mechanisms of action and may offer patients the added promise of delaying, or perhaps even preventing, disease onset. Novartis has embarked on major “outcome” trial programs for Galvus and Tekturna to realize their full medical and commercial potential. Tekturna was developed in collaboration with Speedel.

Outcome studies can span several years, involve thousands of patients and cost hundreds of millions of dollars – but they are viewed as the gold standard in demonstrating safety and efficacy of a drug to patients and physicians. They also are considered the gold standard of value-for-money by cost-conscious governments, insurers and other payors.

 “We drove Diovan success by creating and continuously adding to outcome data,” says John Glasspool, Head of the Cardiovascular and Metabolism Business Franchise at Novartis. “We aim to do the same for Galvus and Tekturna, and move medical practice


1                   Marketed under the brand name Rasilez outside the US

 

13




forward with studies we believe will demonstrate that these novel therapies can prevent and modify progression of type 2 diabetes and hypertension, and ultimately help save lives.”

The Diovan Heritage

Exforge builds upon the heritage of Diovan, the flagship antihypertensive treatment from Novartis. Diovan sustained buoyant growth during 2006 as sales climbed 15%, to USD 4.2 billion. Already the world’s most prescribed angiotensin receptor blocker (ARB), Diovan is expected to pass branded amlodipine this year and become the top-selling medication for high blood pressure worldwide.

The success of Diovan has been fueled by powerful efficacy and a broad range of approved indications. Those multiple applications reflect a comprehensive program of outcome studies involving more than 40 000 patients across the cardiovascular continuum.

The megatrial program delivered new results in 2006 when the biggest clinical study of an ARB to date in Japan confirmed the efficacy of Diovan, as well as its excellent cardiovascular profile, compared to the other studied antihypertensive therapies. The JIKEI Heart Study – involving more than 3 000 patients, and conducted by the Jikei University School of Medicine in Tokyo – was halted early for ethical reasons after an interim statistical analysis showed Diovan had reduced stroke by 40%, and heart failure by 46%, compared to non-ARB therapies being used as comparators.

According to Professor Sebu Mochizuki, M.D., of Jikei University, Chairman of the JIKEI Heart Study executive committee, the significantly reduced incidence of stroke shown in the trial “will be of particular interest to clinicians because there is a higher prevalence of stroke in the Japanese population than in Western society.”

Biggest Killer

High blood pressure and its consequences affect an estimated one in four adults – a billion people worldwide. The disorder is the leading cause of risk-attributable death, accounting for more than 7 million deaths per year. One person dies somewhere in the world from a hypertension-related disease every five seconds.

“Blood pressure is very poorly controlled,” says Matthew Weir, M.D., Professor of Medicine at University of Maryland. Even using a relatively unchallenging definition of normal blood pressure, Dr. Weir adds, only 30% of patients in the US achieve goal blood pressure. “And America does better than anyplace else. Our friends in Europe have much lower percentages of people with high blood pressure under control.”

Clinical studies have clearly demonstrated that effective treatment of high blood pressure reduces coronary and renal events, and strokes. Yet to the frustration of health authorities around the world, it’s a formidable challenge to keep patients on therapy long enough to reap those benefits.

Physicians increasingly view combination therapy as an important tool to improve patient compliance. “If you use two drugs as a single entity, as opposed to giving them as multiple tablets, there is significantly better adherence to therapy,” Dr. Weir says. “I think this is the way we have to go in the future and I suspect that sooner or later we will see the development of triple combinations as well.”

In the Exforge clinical trial program, involving more than 5 000 people with hypertension, clinically significant blood pressure reductions and a good safety and tolerability profile were observed. “Exforge really starts to separate from other highly effective agents in treatment of poorly controlled patients with severe hypertension,” says Ameet Nathwani, M.D., Head of Clinical Development and Medical Affairs, Cardiovascular and Metabolism Business Franchise. One example, he says, is a study where Exforge produced greater blood pressure reductions than treatment with a combination of lisinopril and hydrochlorothiazide.

“We believe Exforge may become the most efficacious agent in the antihypertensive category,” Dr. Nathwani adds.

Promise of Galvus

An estimated 240 million people worldwide have diabetes today, and prevalence is expected to rise rapidly, reaching 380 million people by 2025, according to the International Diabetes Federation (IDF). Over the coming two decades, IDF estimates that the number of people with diabetes in Europe will rise by 20%. Corresponding increases will be 50% in North America, 85% in Latin America and a doubling of prevalence in Africa and South-East Asia.

Type 2 diabetes, which accounts for about 90% of total diabetes cases, has emerged as a public health epidemic, causing more than 3 million deaths a year. Diabetes is a leading cause of blindness in adults in developed countries, as well as the most common cause of non-accident-related amputation.

Treatment costs for diabetes account for between 5% and 10% of national healthcare budgets worldwide, according to IDF. Both the human and economic costs of the disease could be reduced by aggressive

14




investment in prevention – particularly early detection to avoid onset of diabetic complications.

That isn’t happening, however, and at least half of all people with diabetes remain unaware of their condition. Type 2 diabetes, where control of blood sugar deteriorates over time, has traditionally been associated with advancing age and is more common in people who are overweight or obese, or have a family history of diabetes. That profile is changing, however, with younger people increasingly being diagnosed with the condition.

Dysfunction of insulin-producing islet cells in the pancreas is a major factor underlying type 2 diabetes, together with insulin resistance, or deterioration in the body’s ability to use the insulin that islet cells manage to produce. Normally, blood glucose is maintained at optimal levels by an exquisite balance between insulin – the hormone that removes sugar from the blood to be stored as energy in cells – and glucagon, a hormone which releases sugar into the blood to feed the body’s energy requirements.

Once beta islet cells which produce insulin and alpha islet cells that produce glucagon start failing, the usual fine control of blood glucose is disrupted. As insulin secretion dwindles, the usual check-and-balance on glucagon weakens. Alpha cells are unleashed to flood glucagon into the blood and drive up glucose levels, the hallmark of type 2 diabetes.

The mechanism of action of Galvus – inhibiting an enzyme called DPP-4 – increases insulin release and reduces secretion of glucagon, improving the ability of beta and alpha islet cells to appropriately sense and respond to sugar in the blood.

“The impact of glucagon has been undervalued, and more and more physicians are recognizing that maintaining the glucagon/insulin balance not only can normalize islet function but also have an impact on insulin resistance by peripheral utilization,” Dr. Nathwani says. “That’s one of the reasons why we are really excited by the new mechanism of action.”

Galvus – a once-daily oral agent – has been evaluated both as monotherapy and in combination with other antidiabetic agents. In clinical studies involving more than 4 500 patients, Galvus demonstrated significant reductions in blood sugar that were sustained during treatment for up to two years.

Improved tolerability also sets Galvus apart from traditional oral antidiabetic medicines – and could help to improve current low levels of compliance. The majority of patients who receive treatment for type 2 diabetes today fail to reach the target levels for blood glucose set by the American Diabetes Association.

“Patients aren’t treated optimally because existing drugs have significant limitations and aren’t well tolerated,” Dr. Shannon says. “Patients don’t like to move onto therapy because all drugs, including thiazolidinediones (TZDs), are encumbered by side effects, particularly edema and weight gain. By acting against patients when they are trying very hard to lose weight, those drugs create a significant psychological problem that weakens adherence to therapy.”

In one head-to-head comparison between Galvus and rosiglitazone, an insulin sensitizer, patients treated with Galvus had a mean reduction of body weight greater than one kilogram; there was an overall mean difference of 2.8 kilograms between the Galvus and rosiglitazone groups. This weight loss was achieved with blood sugar-lowering efficacy comparable to rosiglitazone.

Extended Review

Late last year, Novartis announced a three-month extension of the US regulatory review of Galvus after the company decided to submit additional clinical data to the FDA. The original regulatory submission to the FDA had included data from approximately 2 800 patients, treated for up to 12 months, and the subsequent submission represented data from an additional 1 000 patient years of treatment with Galvus.

The submission of supplemental data came in response to questions from the FDA about lesions seen on the skin of some monkeys treated with Galvus in a study requested by the agency. In that study, however, monkeys received doses several orders of magnitude higher than the proposed therapeutic dose. The side effects hadn’t been seen in previous studies by Novartis in monkeys given a therapeutic dose of Galvus. Moreover, there hasn’t been a similar finding in any other species – or in any human patient treated with Galvus in clinical trials lasting up to 24 months.

“FDA has the right to extend the review period if they believe that a company already has in its possession sufficient data to address concerns the agency may have,” Dr. Shannon says. “We haven’t seen anything even resembling this in our patient studies – that’s why we have submitted the additional data.”

Underscoring that confidence, Novartis has embarked on a new round of clinical studies aiming to demonstrate the full potential of Galvus. A study known as GALIANT, involving more than 7 500 people in the US, is comparing safety and efficacy of Galvus and the TZD class of insulin sensitizers in a real-world, primary care setting. Importantly, the GALIANT study will assess the impact

15




of Galvus in many different patient populations, including the elderly, different ethnic groups, and patients with varying degrees of body mass index.

GALIANT is seeking to confirm results of a smaller study where patients receiving Galvus as monotherapy had significant reductions in blood sugar similar to levels seen in patients treated with rosiglitazone, a drug in the TZD class.

The GLORIOUS program comprises five studies designed to demonstrate the disease modification potential of Galvus. The studies will explore the potential of Galvus both to prevent progression to diabetes in groups at high risk of developing the disease – as well as to delay disease progression in people who already have developed type 2 diabetes.

Like GALIANT, the GLORIOUS studies will involve diverse patient populations. One will test the ability of Galvus to prevent progression to type 2 diabetes in Asian patients with impaired glucose tolerance, a major risk factor. “Asian populations have a different pathophysiology and a very high conversion rate to diabetes,” Dr. Nathwani says.

“We’re also looking to see if we can stabilize patients with type 2 diabetes by adding Galvus to metformin, the current standard of care,” he adds. “Most doctors are already using metformin and this study will provide cutting-edge information they want. Often, combination studies only appear years after a new medicine comes to market.”

The GLORIOUS program will seek to confirm early indications that treatment with Galvus leads to meaningful reductions in blood pressure of patients, parallel with beneficial effects on blood sugar levels. “We plan to look at a novel population of high-risk cardiovascular patients treated with Galvus. Endpoints will include both a reduction in cardiovascular events, as well as development of their diabetes,” Dr. Nathwani explains.

It is an area of longstanding interest. Novartis believes that preventing diabetes will also lead to a reduction in cardiovascular consequences.

In parallel, groundbreaking data is expected from NAVIGATOR, an ongoing study in the Diovan megatrial program, that is exploring the possibility of preventing progression of type 2 diabetes and cardiovascular events in people with impaired glucose tolerance.

“In the VALUE study, treatment with Diovan reduced new-onset diabetes by 23%,” Dr. Nathwani says. “We’re confident that GLORIOUS and NAVIGATOR will provide definitive evidence that reducing new-onset diabetes can prevent heart attacks and stroke.”

“A Long Way to Go…”

Medicines blocking the renin-angiotensin-aldosterone system (RAAS), including ACE inhibitors and ARBs, have led to some impressive advances in treatment of high blood pressure. “Yet current therapies have not delivered the major reductions of cardiovascular outcomes researchers and physicians had hoped for,” Dr. Weir says. “There is a long way yet to go.”

Part of the problem seems to be a biological bypass route that, over time, circumvents the effect of some drugs that block the outputs of the RAAS. For several decades researchers have speculated that directly inhibiting the activation point of RAAS may be more effective. The enzyme renin is the key activator of the RAAS.

Tekturna, the new first-in-class direct renin inhibitor from Novartis, represents the first new treatment approach for high blood pressure in more than a decade.

Regulatory applications for Tekturna filed in Europe and the US last year included data from 44 clinical trials, involving almost 8 000 people with hypertension. Results show Tekturna produces sustained, double-digit reductions in blood pressure beyond 24 hours, with placebo-like tolerability within the expected therapeutic dose range.

In particular, clinical data presented late last year highlighted the power of Tekturna to offer “beyond 24-hour” blood pressure control during up to a full year of therapy. “Control beyond 24 hours may give doctors confidence that if a patient does occasionally miss a dose, which happens fairly often in the real world, there would not be a blood pressure penalty to be paid,” Dr. Weir says. “And that could be a very positive attribute in selecting an antihypertensive.”

The FDA’s review of Tekturna was extended by three months in December to enable the agency to consider additional data submitted by Novartis to support the safety profile of the new medicine. Novartis continues to work closely with the FDA and is confident that the supplementary information will help secure approval of Tekturna in the US.

Demonstrating Concrete Benefits

A more definitive assessment of renin inhibition will come in the Tekturna outcome program called ASPIRE HIGHER – a suite of studies involving more than 30 000 people with high blood pressure that will be conducted over the coming five years. ASPIRE HIGHER aims to demonstrate that Tekturna has the potential to redefine treatment standards and provide long-term benefits beyond blood pressure control – such as preventing hypertension or the onset of diabetes, and reducing cardiovascular mortality

16




and morbidity among high-risk patients still at an early stage of the disease.

Direct renin inhibition may offer a beneficial effect for both the kidney and the heart. In studies to date, Novartis researchers have identified a dose-dependent increase in renal blood flow among patients treated with Tekturna. Results expected this year from studies called AVOID and ALOFT could give early insight into a possible protective effect of Tekturna.

Moreover, studies have shown that Tekturna reduces plasma renin activity (PRA) – and some scientists believe that lowering PRA will reduce the risk of heart attacks and kidney failure. “There is a huge hypertensive population out there at risk of developing cardiovascular and renal disease,” Dr. Shannon says. “But if there are concrete benefits beyond blood pressure from reducing PRA, we still have to demonstrate them in the ASPIRE HIGHER program.”

One opportunity will be a study called ALTITUDE, part of the ASPIRE HIGHER program. “Although the science is still emerging, direct renin inhibition may offer substantial benefits to patients,” says Hans-Henrik Parving, M.D., a researcher at the Steno Diabetes Center in Denmark and lead investigator for ALTITUDE.

Patients and physicians around the world will be watching. “Outcome trials such as Val-HEFT, VALIANT and JIKEI are worth gold to doctors,” says Alan Gradman, M.D., Chief of Cardiovascular Diseases at The Western Pennsylvania Hospital in Pittsburgh, Pennsylvania.

“Many patients have co-morbidities like kidney disease or a history of heart attack that I have to consider when treating them. These outcome trials not only advance cardiovascular medicine, they help me answer key questions about treating patients on a day-to-day basis,” Dr. Gradman adds. “We look forward to the results of megatrials like NAVIGATOR as well as the outcome trials Novartis is planning for Tekturna and Galvus.”

17




ONCOLOGY AND HEMATOLOGY

Iron overload is a potentially life-threatening disorder – a consequence of repeated blood transfusions required to treat disorders ranging from thalassemia to sickle cell disease. The promise of Exjade is greater convenience for patients currently receiving treatment – and expansion of benefits to people who haven’t previously been treated.

Cathi-Jo Langan – CJ to her friends – was born with beta thalassemia, a disease caused by a genetic mutation that damages red blood cells.

Ms. Langan has survived thanks to regular blood transfusions since the age of three – yet those repeated transfusions also have a serious side effect, a potentially fatal build-up of iron in her body. For years, she kept the iron overload under control by injecting a medicine from Novartis called Desferal.

Desferal is an iron chelator that removes excess iron from the body. The drug is well tolerated and effective – but requires cumbersome infusions via a portable pump that take up to 12 hours a day, five to seven days a week. Eventually, that lifelong regimen became all but unbearable to Ms. Langan.

Speaking at an open hearing at the US Food and Drug Administration, she described “pushing and pushing with all my might to get this needle into my stomach but it would never penetrate, causing much aggravation and ending with me sitting on my floor, in pure desperation.”

In 2003, she joined a clinical study testing a new oral iron chelator from Novartis. The drug is called Exjade (deferasirox) and it is formulated as a tablet that can be dispersed in a glass of juice or water. “I cannot tell you how much Exjade has changed my life,” Ms. Langan adds.

As the first and only once-daily oral iron chelator, Exjade is an important break-through in providing continuous protection against the harmful effects of excess iron due to blood transfusions. With a single daily dose, Exjade has the potential to greatly enhance acceptance of therapy not just among people with thalassemia, but also iron overload in transfused patients with sickle cell disease, myelodysplastic syndromes and other rare anemias.

Leyla Agaoglu, M.D., a hematologist based in Istanbul, Turkey, sees many people with thalassemia in her practice, reflecting the relatively high incidence of the disorder among people of Mediterranean origin or ancestry, as well as people of Asian and African descent. Dr. Agaoglu calls Exjade and Glivec, the breakthrough, targeted anticancer therapy from Novartis, “the two most significant advances in hematology in decades.”

Centuries of migration by people crossing borders in search of a better life have spread thalassemia and other transfusion-related anemias around the world – but effective treatment hasn’t kept pace. Up to two-thirds of the estimated 40 000 people in the US who have iron overload as a result of regular blood transfusions don’t currently receive iron chelation therapy. If patients don’t receive adequate chelation, iron can accumulate in the liver, the heart and various endocrine organs, eventually causing organ failure, significant morbidity and early death.

Ms. Langan insists that Exjade could make a positive impact on many people in the US, and around the world. As she told the FDA panel: “Children could go to sleepovers without fear of ridicule and their parents could let them go without being afraid the kids would skip their medicine. Young adults would feel more confident and accepted at

18




college,” she added. “We patients would have free lives, no longer tethered to a pump. And we could have less of the anger and frustration that we can’t get rid of right now.”

Improving on Desferal

It took 14 years of research to deliver a successor to Desferal, a medicine launched more than 40 years ago and derived from a natural substance originally discovered in an iron-eating bacterium called Streptomyces pilosus. Novartis scientists repeatedly encountered obstacles in their hunt for a replacement and synthesized hundreds of molecules before choosing a candidate compound called ICL670 to enter clinical testing.

The clinical studies for ICL670 – later given the brand name Exjade – were the largest program ever for an investigational iron chelator. Data involving more than 1 000 patients with a broad range of underlying diseases demonstrated that Exjade is effective at managing and reducing body iron burden.

After a “priority review” which the FDA reserves for innovations that target major unmet medical need, Exjade was approved in November 2005 for treatment of chronic iron overload due to blood transfusions in adults and children age two and older. In August 2006, the European Commission also granted approval for Exjade in all 25 member states of the European Union to help patients with transfusional iron overload. By the end of 2006, Exjade was available in more than 70 countries worldwide.

In its first full year on the market, Exjade posted sales of USD 143 million. “The uptake has exceeded our expectations and reflects the significant unmet medical need Exjade is addressing,” says David Epstein, Head of Novartis Oncology. Importantly, initial data from the US and Switzerland show that patients who weren’t previously receiving chelation therapy account for about 50% of Exjade prescription volume.

“And treatment of transfusional iron overload could turn out to be just the beginning,” Mr. Epstein adds. “New studies in other disease areas may expand the number of people who can benefit from Exjade.” One such study is already underway – testing Exjade in treatment of hereditary hemochromatosis, a genetic disorder leading to abnormal accumulation of iron in the liver, heart and endocrine organs.

To address the needs of US patients undergoing chelation therapy, Novartis has implemented a patient support program – called EPASS Complete Care. EPASS includes features ranging from convenient home delivery of prescription refills by a mail-order pharmacy, to ongoing compliance programs and individual case management regarding prescription reimbursement coverage.

Unmet medical need, and the opportunity for Exjade, may be even greater outside the US and Europe – where the majority of thalassemic patients live, often without access to universal medical care. Writing in the New England Journal of Medicine in 2005, hematologists Deborah Rund, M.D., and Eliezer Rachmilewitz, M.D., noted that thalassemia is among the most common genetic disorders worldwide. Most patients with the disease, however, reside in less developed countries where “safe transfusion” and chelation are not universally available.

“Many patients with thalassemia in underdeveloped nations die in childhood or adolescence. Programs that provide acceptable care, including transfusion of safe blood and supportive therapy including chelation, must be established,” the authors added.

Recognizing the medical need for deferasirox, Novartis will work with local health authorities and others on a country-by-country basis to enhance access. For most countries, this will be accomplished through the Exjade brand – but for low-income patients in countries in the Indian subcontinent and Africa, with high medical need and sufficient healthcare infrastructure to support treatment, Novartis will provide deferasirox through a specific brand at a preferential price.

Life-threatening Anemia

People with thalassemia have fewer red blood cells than normal and at the same time have inherited genetic mutations that reduce output of hemoglobin, the protein in red blood cells that carries oxygen to all parts of the body. The result is anemia that can be life-threatening.

Regular transfusions normalize both the number of red blood cells and hemoglobin levels – but at the same time lead to excess levels of iron which can damage the liver, heart and other parts of the body. By the time a patient has received 10 transfusions, significant iron overload has already begun.

The body, however, has no mechanism to remove the excess iron. Desferal, the standard of care in chelation, has a half-life in the body of 20–30 minutes and must be given by continuous infusion. Survival is excellent if a patient takes treatment five or more days per week – but falls off sharply if patients fail to comply with prolonged daily infusions.

Exjade, by contrast, has a half-life of 12 to 16 hours, so a single daily dose maintains effective levels of active chelator for more than 24 hours, ensuring that there are no gaps in chelation coverage. Clinical studies

19




consistently demonstrated that Exjade removes iron from the body in a dose-dependent manner.

Patients who received Exjade doses of 20 milligrams (mg) and 30 mg per kilogram of body weight had maintenance, or reduction, in body iron burden similar to that achieved with Desferal. In clinical trials, Exjade was shown to be generally well tolerated with most adverse events being mild to moderate in severity, and transient in nature.

In developed countries, virtually all patients with the severe form of thalassemia are routinely transfused and treated for iron overload. According to market research by Novartis, a majority of physicians anticipate that thalassemia patients receiving Exjade will be treated more days per year for iron overload than at present. Moreover, the 24-hour continuous chelation coverage provided by Exjade promises to make treatment even more effective.

Myelodysplastic Syndromes

While Exjade has the potential to improve compliance and efficacy among people already receiving chelation therapy, the medicine is also expected to expand use of chelation among undertreated patients with forms of transfusion-dependent anemia.

One example is Myelodysplastic Syndromes (MDS), a diverse group of bone marrow disorders that typically affect people over the age of 60. Estimates suggest that more than 200 000 people worldwide may be affected by MDS. Blood transfusions are the mainstay of supportive care to manage symptoms of anemia.

“But the majority of MDS patients aren’t receiving intensive chelation therapy,” says Professor Norbert Gattermann, M.D., Dept. of Hematology at Heinrich-Heine University in Dusseldorf, Germany. “There is no question whatsoever that Exjade is a breakthrough for iron chelation in thalassemia,” Dr. Gattermann adds. “But we don’t yet have reliable data telling us how much morbidity and mortality in MDS can be attributed to iron overload.”

Ongoing research is beginning to fill that vacuum. A study by hematologists at the University of Pavia (Italy) demonstrated that MDS patients who were transfusion dependent had significantly shorter survival than those whose conditions didn’t require transfusions. The study found that developing a secondary iron overload had a significant, negative effect on the survival of transfusion-dependent MDS patients. By contrast, at the 2006 annual meeting of the American Society of Hematology, physicians from the University of British Columbia (Canada) presented the first data documenting improvement in clinical outcome in MDS patients receiving iron chelation therapy.

In May 2005, more than 30 leading international hematologists met in conjunction with the 8th International Symposium on Myelodysplastic Syndromes in Nagasaki, Japan and produced consensus guidelines for diagnosis, monitoring and management of iron overload in MDS. According to Dr. Gattermann, who was a participant, the Nagasaki Guidelines suggest that the MDS patients most likely to benefit from iron chelation are those in the low-risk group, with estimated median survival of five years or more. “They are the candidates likely to develop clinically relevant problems of iron overload,” he says.

Overall, Dr. Gattermann estimates that roughly a third of all MDS patients may be candidates for iron chelation. And even as research advances, demographics will expand use of chelation therapy, he adds.

“Older age groups are expanding as a percentage of the total population in industrialized countries – and older age groups are the ones with a particularly high incidence of MDS, so we’ll see increasing numbers of MDS patients in coming years,” Dr. Gattermann says. “Hematologists and physicians have been reluctant to start iron chelation therapy because of all the trouble with compliance and complications associated with Desferal. But we’ll see a greater awareness of the iron overload problem, and more willingness to begin chelation therapy in the future, because Exjade makes the problem so much easier to treat.”

Sickle Cell Disease

Sickle cell disease is one of the most common inherited anemias treated with transfusions. According to the US National Institutes of Health, more than 70 000 Americans suffer from sickle cell disease and an estimated 250 000 children worldwide are born with the disorder every year.

The underlying cause is a mutation in the sickle cell gene – resulting in abnormal, crescent-shaped red blood cells that can have difficulty passing through small blood vessels. Complications range from anemia and frequent infections, to acute chest syndrome – a blockage of the flow of oxygen in tiny vessels in the lungs – and a dramatically increased risk of stroke, when misshapen blood cells block major blood vessels that supply the brain with oxygen.

The mutation has persisted largely because it confers a survival advantage against falciparium malaria, the most deadly form of malaria, and the sickle cell mutation is common in people whose families come from sub-Saharan Africa, the Mediterranean region, Latin America and India.

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In recent decades, advances in diagnosis and treatment have transformed sickle cell disease from a pediatric affliction often leading to early death, to a chronic disorder with a median life span exceeding 40 years. But improved management of the condition – particularly broader use of chronic blood transfusions – could offer further benefits, says Kwaku Ohene-Frempong, M.D., Professor of Pediatrics at the University of Pennsylvania and Director of the Sickle Cell Center at the Children’s Hospital of Philadelphia.

“We know that transfusions prevent strokes as well as other complications of sickle cell disease and we are moving into an era where more and more of our patients are going to receive transfusions on a chronic basis,” Dr. Ohene-Frempong adds. “But as blood transfusions grow more common, iron overload will become one of patients’ biggest problems. We are excited about the potential for Exjade to improve compliance as well as results of chelation therapy among our patients.”

Dr. Ohene-Frempong has an intensely personal connection with sickle cell disease, and as one of the world’s leading authorities in the field he has played a key role in landmark research projects that helped revolutionize diagnosis and treatment over the past four decades. A star athlete who represented his native Ghana in the 1968 Olympic Games, he wasn’t aware that he carried a defective copy of the sickle cell gene until a routine physical examination before the Mexico City Olympics. “There was a lot of concern about possible effects of the high altitude in Mexico City on people with the sickle cell trait,” he recalls. “Our doctor suggested that all team members be tested and it showed that I had the sickle cell trait.”

Four years later, after Dr. Ohene-Frempong had begun medical studies at Yale University, his newborn son was diagnosed with sickle cell disease. At the time, Yale operated one of only two hospitals in the US that screened newborn babies for SCD. “Hematology textbooks at the time still claimed that it was impossible to detect SCD in newborns,” Dr. Ohene-Frempong says. “We were lucky to have this great doctor who made the diagnosis, put my son on penicillin prophylaxis and began to teach my wife and me about the disease.”

Today screening of newborns for sickle cell disease is required in 49 states in the US and is routinely conducted in many countries in Europe. Screening is credited for much of the improved life expectancy for people with the disorder in recent decades.

During a stint back home in Ghana to work on a thesis, Dr. Ohene-Frempong was able to foster his interest in sickle cell disease. Assembling data from a large urban hospital, he was dismayed to find that only a handful of children had been treated for sickle cell disease during the previous decade.

“Doctors in Ghana simply didn’t make the diagnosis and only a tiny part of the real burden of SCD was acknowledged,” he muses. “Unlike my son, many children were dying from this disease undiagnosed – with nobody knowing what actually had killed them.” When he returned to Yale, he switched the focus of his medical studies – to hematology, with a special focus on sickle cell disease.

During the 1990s, scientists built on the success of newborn screening by developing a technique using ultrasound to identify young children at high risk of stroke and other severe complications. “As soon as we see signs of severe disease we put the child on chronic transfusions and it helps prevent stroke,” Dr. Ohene-Frempong adds. “And we have found that transfusions also opened up the possibility to prevent other complications as well.”

A landmark US study, called Stroke Prevention Trial in Sickle Cell Anemia (STOP) demonstrated that regular blood transfusions significantly reduced the risk of stroke in at-risk children identified by the ultrasound test. Moreover, transfusions also reduce the risk of repeat strokes, which occur in nearly two thirds of children with sickle cell disease unless they’re treated.

As a medical student, Dr. Ohene-Frempong had planned to practice in Ghana but his distinguished career in the US postponed his return. In 1995, he finally realized that dream by opening Ghana’s first center to screen newborn babies in Kumasi, the country’s second-biggest city. Funded in part by the US National Institutes of Health, the Kumasi clinic has screened tens of thousands of newborns and provides treatment today for more than 10 000 people with sickle cell disease.

“There has been a tremendous increase in awareness – expectant mothers from around the country come to Kumasi so their babies can be tested,” Dr. Ohene-Frempong says. Despite ongoing expansion of the clinic, however, resources are dwarfed by unmet need in Ghana, and across Africa, which bears the greatest share of the global burden of sickle cell disease. “We don’t have enough doctors or nurses,” Dr. Ohene-Frempong says. “And the thing that really pains me is that we don’t have a good transfusion service in Ghana. It’s hard – and we need all the help we can get to develop these centers across Africa.”

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TRANSLATIONAL MEDICINE AT NIBR: THE BRIDGE FROM BASIC SCIENCE TO NEW DRUG

Discovering innovative medicines demands deep understanding of disease. Type 2 diabetes is a prime example where scientists at the Novartis Institutes for BioMedical Research (NIBR) have identified novel biological targets and dispatched promising compounds into the development pipeline – while at the same time advancing fundamental knowledge about the disease through landmark studies with elite academic centers.

When Professor Mark Fishman, M.D., took the helm at the Novartis Institutes for BioMedical Research (NIBR), he spoke of revolutionizing the way major pharmaceutical companies like Novartis discover new medicines.

Underpinning that vision, Dr. Fishman delivered an uncompromising diagnosis of where change had to start. “We simply don’t know enough yet about the molecular causes of many diseases, and if you don’t understand the mechanism, you can’t make a drug for it,” he said. “Over the coming years we will understand more and more, but let’s not presume to try and treat diseases we don’t understand yet.”

Today, that quest for understanding permeates NIBR labs worldwide. But the Diabetes and Metabolism Disease Area is arguably the best example so far of a NIBR unit advancing fundamental knowledge about a major disease, while at the same time continuing to identify novel biological targets, and churn out promising molecules ready to commence development.

Late last year, NIBR unveiled early results from a landmark study with a pair of academic partners to decipher genetic causes of diabetes. The initial findings provided strong support for a link between type 2 diabetes and previously unknown disease genes, including those that control function of mitochondria, tiny power plants found inside cells, that are a prime focus of diabetes research at NIBR.

At the same time, the collaboration uncovered other stunning genetic influences on diabetes that could lead to additional revolutionary approaches to therapy. The study is a three-way collaboration, with Sweden’s Lund University, and the Broad Institute, a prestigious academic center located near NIBR headquarters in Cambridge, Massachusetts.

“In essence, the collaboration is laying out a foundation for new hypotheses about type 2 diabetes,” says Thomas Hughes, Ph.D., Head of the Diabetes and Metabolism Disease Area at NIBR. “Which of those hypotheses will prove to have high impact on clinical and medical approaches to the disease will have to be proven over the course of the next few years,” he adds. “But no one in our shop will look at type 2 diabetes in the same way after this. And we are in a very privileged situation to be sitting with this information at this time.”

Pragmatic Portfolio

The evolution of the Diabetes and Metabolism (D&M) Disease Area mirrors the dynamic expansion of NIBR which will celebrate its fifth anniversary later this year. Since Novartis decided to relocate global research headquarters to a new US center in Cambridge, almost a thousand scientists have been recruited, trained and placed in jobs at that center.

“The recent history of our area provides a snapshot of the tremendous evolution at NIBR over the past few years,” Dr. Hughes says. “This organization has power unlike anything that Novartis has ever seen before.”

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From a core of 30 scientists who moved with Dr. Hughes to Cambridge from New Jersey in 2002, the D&M group has expanded to more than 150 people. During that build-up phase, however, there was no immunity from the relentless pressure on productivity and constant evaluation intrinsic to industrial research.

“Pretty much everybody who was here at the beginning understood that there was no time to lose,” Dr. Hughes says “We had to establish a beachhead – by finding first-in-class opportunities that could be phased – so that we could reach sustainable productivity as rapidly as possible, while at the same time enabling our new people to learn about the various stages of the drug discovery process.”

The solution was a pragmatic portfolio strategy, comprising short, medium and eventually long-term projects, with diverse degrees of innovation as well as varying levels of risk. The medium-term program revolved around a potential link between dysregulation of fatty acid metabolism and diabetes.

Fats play several roles in the body. They are critical raw materials required for production of cell membranes – and they provide a very efficient energy source. When the body is exposed to excess fatty acids – through a sedentary lifestyle or obesity – cells have to decide whether to burn fats, producing energy, or to store the excess. Yet accumulation of fatty acids in some tissues, including skeletal muscle, appears to damage insulin signaling and drive the onset of insulin resistance.

To address the underlying problem, Novartis scientists zeroed in on biological switches believed to regulate the cell’s decision to burn fats or store them – testing the hypothesis that increasing fat oxidation might suppress development of insulin resistance and delay onset of type 2 diabetes, even in people exposed to high-fat diets.

“These are not (biological) targets that we came up with on our own – they were chosen on the basis of some very good scientific papers and advice we got from collaborators. But the program is very comprehensive and we are definitely competitive with other groups in the pharmaceutical industry working in this area,” Dr. Hughes says.

“Still, it looks like we’re going to get more traction with the fatty acid program in the obesity area than insulin resistance, per se,” he adds. “That’s fine – we went into this with an open mind and there are compounds coming out of this program that appear to have good utility in the treatment of obesity. We will have a first compound from the program enter development by the end of 2006.”

Cellular Power Plants

In 2003, with the fatty acid program underway, Dr. Hughes inaugurated a visionary project he had been dreaming about for years.

The opportunity emerged when Dr. Fishman established a “Milestone” program, aiming to give NIBR scientists breathing room to take on higher-risk projects. These projects offered the potential to continue the tradition of feeding the pipeline with truly innovative approaches to disease-modifying therapy.

For almost a decade, Dr. Hughes had been convinced that type 2 diabetes might be treated effectively by enhancing activity of mitochondria, tiny power plants that account for virtually all the energy generated in a cell. “In my own mind, I concluded that we should find a way to treat diabetes by increasing the number or function of mitochondria,” he recalls. “So after stewing on this for so many

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years, when Dr. Fishman started talking about the Milestone program, I said immediately ‘I have one’. And we finally got to take a crack at it.”

The role of mitochondria had come into sharp focus as a result of observations that mitochondrial function was reduced in people with type 2 diabetes – and elderly people who had impaired sensitivity to insulin. Those observations were supported by studies with electron microscopy showing that mitochondria were smaller and less functional in people with type 2 diabetes, compared to healthy controls.

Gerald I. Shulman, M.D., Professor of Medicine at Yale University School of Medicine, reported that insulin resistance was associated with low mitochondrial activity, especially in the elderly. “Gradually the link between low mitochondrial activity and type 2 diabetes really began to cement itself,” Dr. Hughes recalls.

Even as evidence accumulated, the researchers faced a major hurdle. No validated targets yet existed for either regulation of mitochondria, or generation of new ones, so-called mitochondriogenesis. “We had to build from scratch,” Dr. Hughes says.

The advent of a Milestone program around mitochondria coincided with the creation of a target discovery team within the D&M group. “We built a brand new team of people who came in to NIBR with skill sets that had never been present in our group before,” Dr. Hughes says. “In the past, the only way we could get targets was by reading the scientific literature. Today, we invest about a quarter of our biology resources into these target-discovery initiatives.”

The search for genes involved in regulation of mitochondria was a case study in systematic deployment of state-of-the-art research tools. Each gene in the human genome – as well as yeast and fruit-fly genes – was systematically tested in assays for activity on mitochondria. “It’s where we are in science today – for the first time ever, we have the ability to be really comprehensive,” Dr. Hughes says.

The Milestone program gave Novartis a head start in the field and D&M is currently working with multiple targets to enhance mitochondrial function for treatment of type 2 diabetes, and related metabolic disorders. Moreover, mitochondriogenesis has been recognized as a possible therapeutic approach in other disease areas including cardiovascular disease, muscle wasting and neurode-generation. D&M is collaborating with other NIBR disease areas to accelerate validation of pathways in these areas.

“The real value of the mitochondria project may come out of the broader context of degeneration as a process,” Dr. Hughes says. “In the next few years, we are going to find ourselves focusing on a number of druggable targets that probably will deal with many of the underlying problems of aging that manifest themselves in different ways in different people. One person will develop type 2 diabetes, and deafness, while another will lose muscle strength or develop dementia.

“This is going to be one of our larger programs,” he adds. “We have a fully integrated effort running, with chemists making molecules. We are finding targets that can be manipulated and when we manipulate those targets, the right things seem to happen, at least in animals.”

And while Novartis traditionally has remained tight-lipped about preclinical programs, Dr. Hughes and his team speak openly about the company’s interest in mitochondriogenesis at research updates for financial analysts, as well as at major scientific meetings. “We’re not saying exactly what we’ve found,” Dr. Hughes says. “But it’s been part of our mission to take the basic biology out to the public, to show how this is working.”

Hiding in the Genome

In 2004, when Dr. Fishman agreed to join forces with the Broad Institute and Lund University to probe the genetic causes of type 2 diabetes, he told the journal Science that the three-year project “was a statement to the world of medical science that the patient should come first.”

It was the latest in a succession of major projects at Novartis attempting to unlock the full potential of the Human Genome Project by “functionalizing” the genome, unraveling the biological function of the estimated 30 000 human genes and ultimately their role in major diseases.

Results to date have exceeded expectations on both counts. “We know that diabetes is a very strongly heritable disease. So surely the information that matters is hiding in the genome,” Dr. Hughes says. “We wanted to see if we could pull that knowledge out – to show how to look at patient populations to determine who would be most likely to respond to certain drugs. And we hoped the knowledge would lead us into areas where we could find new pathways and nodes to target as well.”

The collaboration is studying DNA samples from roughly 3 000 diabetic patients treated by Professor Leif Groop, M.D., and his team at Lund University in southern Sweden. The samples are complemented by carefully annotated patient histories – though the identity of each patient has been scrupulously protected.

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Faculty at the Broad Institute – which itself is a partnership between Massachusetts Institute of Technology, Harvard University and affiliated hospitals plus the Whitehead Institute for Biomedical Research – includes many scientists who played key roles in the Human Genome Project.

“We’re basically sampling 500 000 places on the genomes of 3 000 people with type 2 diabetes. It’s not all the genes – but a huge and highly representative sample,” Dr. Hughes says.

NIBR’s focus on the needs of patients and physicians “allowed us to filter out things of low relevance to physicians while answering the questions they really want to have answered,” he adds. “As a result we hope to learn about the key genetic drivers of diabetes – plus genetic drivers of a number of other traits that are contained within this population – from body mass index and insulin resistance itself, to levels of high- and low-density lipoprotein, blood pressure and a bunch of other things.”

Novartis and the Broad Institute will put genetic variation data collected under the collaboration on a public website, accessible for researchers around the world.

“It’s a huge amount of information – all of which has to be replicated in an independent population,” Dr. Hughes says. “But when you actually begin to see what the data are telling you, you realize very quickly that we’ve been looking at the disease through the wrong end of the telescope. For example, there are changes in the genome in areas that control immune function that also are linked to type 2 diabetes. And there are genes that appear to influence development of the body in a way that eventually leads to susceptibility to type 2 diabetes. It’s very, very strange and mysterious, and hard to understand.

“This is information about this disease that we as an industry absolutely have to have. But it is too big for a single company to digest on its own,” he adds. “And it really belongs to humanity – not just to a pharmaceutical company. So having and holding it actually isn’t going to help us as much as having it and letting other people chew on it too.”

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VACCINES AND DIAGNOSTICS

Newly created strategic growth platform with strong performance in 2006. New division formed through acquisition of remaining stake in Chiron Corporation in April 2006.

Net sales of USD 956 million for the period from the acquisition in April 2006, up 42% over the comparable eight months of 2005 reported by Chiron, thanks to sharp increase in influenza vaccine deliveries to the US.

Novartis now the second-largest supplier of influenza vaccines in the US. Robust product portfolio also includes meningococcal, pediatric and travel vaccines that offer protection against many life-threatening viral and bacterial diseases.

Strong pipeline supports key franchises while exploring new disease areas. Primary focus on influenza vaccines utilizing modern cell-based manufacturing technology as well as pandemic/pre-pandemic H5N1 vaccines. Meningitis vaccines have potential to become a strong growth driver in the future.

Diagnostic business renamed “Chiron,” dedicated to preventing the spread of infectious diseases through novel blood-screening tools and very strong position in the US. Options are being evaluated to grow business and expand into molecular diagnostics.

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VACCINES AND DIAGNOSTICS

KEY FIGURES

(In USD millions unless indicated otherwise)

 

 

2006

 

Net sales

 

956

 

Operating income

 

-26

 

Research and development

 

148

 

Research and development as % of net sales

 

15.5

 

Free cash flow

 

151

 

Net operating assets

 

4 536

 

Additions to property, plant & equipment1

 

113

 

Number of associates at year-end

 

3 935

 

 


1                   Excluding impact of business combinations

2005 FULL-YEAR NET SALES AS REPORTED BY CHIRON

2006 COMPARABLE FULL-YEAR NET SALES

VACCINES DEVELOPMENT PIPELINE


1                  Flu cell culture vaccine; trade name pending regulatory approval
2                   Influenza strain predicted most likely to cause a new influenza pandemic; H5N1 vaccine in Phase II in US
3                   Neisseria meningitidis serogroups A, C, W and Y
4                   Neisseria meningitidis serogroup B
5                   Hepatitis C virus; therapeutic and prophylactic vaccine
6                   Human immunodeficiency virus

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VACCINES AND DIAGNOSTICS

Vaccines are the most cost-effective public health intervention, saving millions of lives every year by preventing major human diseases. New research techniques and manufacturing technologies have sparked a revival and strong double-digit growth. The new Novartis Vaccine and Diagnostics Division holds leading positions in meningococcal vaccines – as well as vaccines to prevent seasonal flu and potentially also pandemic influenza.

Acquiring full control of Chiron Corp. in April 2006 brought Novartis an attractive new strategic platform in vaccines, a resurgent industry where novel products and innovative manufacturing technologies are expected to fuel dynamic, double-digit growth over the next decade.

Integration proceeded smoothly with the creation of the new Vaccines and Diagnostics Division, comprising most operations of the former Chiron. Moreover, the Novartis Pharmaceuticals Division absorbed Chiron’s biopharmaceuticals, while the Novartis Institutes of BioMedical Research gained a new research site, with a special emphasis on oncology programs.

An urgent priority for the new Division was continuation of the remediation program underway at the Liverpool influenza vaccine factory, where contamination problems had forced withdrawal of Chiron’s US influenza vaccine in 2004. Those efforts continued to be successful and Novartis Vaccines became the first manufacturer to ship influenza vaccine to US customers for the 2006–07 season.

“We are committed to bringing improved vaccines, diagnostics and treatments to protect the public health – as well as to contribute to a secure and sufficient supply of vaccines to address the threat of a flu pandemic,” says Daniel Vasella, M.D., Chairman and Chief Executive Officer of Novartis. “In vaccines we have a challenging task, not just to fix lingering quality and productivity issues, but also to increase our capacity and bring innovative new vaccines to market.”

To head the new Division, Dr. Vasella tapped Joerg Reinhardt, Ph.D., longtime head of Pharmaceutical Development at Novartis. Along with geographical expansion and operational excellence, Dr. Reinhardt sees innovation as a key to future success. “There is substantial potential for innovative new vaccines to address unmet medical need around the world, with influenza and meningitis as key areas of focus for us and our competitors,” he says.

Dr. Reinhardt moved aggressively to broaden the product base at Novartis Vaccines with major initiatives during 2006. In July, Novartis announced plans to build the first cell culture-derived influenza vaccine manufacturing plant in the US, at a new site in Holly Springs, North Carolina. Construction of the USD 600 million facility has already started. In parallel, Novartis is making additional investments to expand capacity for flu cell culture vaccine production in Marburg, Germany.

Cell Culture-Based Influenza Vaccines

Cell culture technology promises many advantages over traditional egg-based production, from greater reliability to a reduction in production lead time and shorter production cycles. Such advantages could be pivotal in the event of an influenza pandemic.

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Underscoring its leading position in the new technology, Novartis Vaccines submitted the first application for a flu cell culture vaccine to European regulators in June of last year, following successful completion of Phase III clinical studies. In the US, clinical trials of the cell culture influenza vaccine began in 2005 – and are ongoing.

The US government offered key support for the new technology when the Dept. of Health and Human Services (HHS) awarded Novartis a contract of up to USD 220 million to support development and manufacture of cell culture-derived influenza vaccine in the US. The contract is part of a larger HHS initiative to expand domestic infrastructure for influenza vaccines, as well as ensure domestic capacity to produce 600 million doses of pandemic influenza vaccine within six months of a pandemic declaration. The new Novartis facility would represent up to 150 million doses of that capacity. Part of the HHS contract will support planning and equipment for the new cell culture-based influenza vaccine manufacturing plant in Holly Springs, North Carolina.

Predecessor companies of Novartis Vaccines spent more than a decade developing proprietary technology that uses mammalian cell culture as an alternative host to chicken eggs for virus replication. The first clinical trial of this new flu cell culture vaccine was conducted in Germany in 2002 and, in all, six successful clinical trials involving more than 3 000 people have been completed to date.

Dispensing with eggs in production also promises benefits to people who are allergic to eggs. Currently, strains of seed virus used in seasonal influenza vaccine are selected partly because of their ability to grow well in eggs. This egg adaptation won’t be needed with cell culture-based influenza vaccines, which could translate into better efficacy of seasonal vaccines by more closely matching the vaccine with the influenza strain in circulation.

Despite availability of safe and effective vaccines, seasonal influenza causes millions of infections and kills an estimated 250 000 people worldwide every year. Health authorities in many countries are gearing up to increase coverage rates for seasonal flu vaccine, in line with a recommendation from the World Health Organization (WHO) to reach 75% coverage of at-risk groups – the elderly and people with chronic diseases – by 2010. The US is leading the way, recommending seasonal flu vaccinations for all Americans over the age of 50, children from the age of two months to five years and other at-risk groups, including healthcare workers.

Buoyed by rising demand, sales of seasonal flu vaccine are expected to grow at double-digit rates over the next five years. Production capacity is also expected to rise sharply by 2009 – yet the WHO acknowledges that the projected rise in capacity for seasonal flu vaccine won’t reach levels sufficient to serve the worldwide population in case of a pandemic.

Pandemic Preparedness

Clearly, cell culture technology represents a potentially critical tool to boost production capacity, and thereby help to reduce the current gap between potential vaccine demand and supply anticipated during an influenza pandemic. The WHO’s latest action plan for a global influenza pandemic warns that potential vaccine supply today is “several billion doses short of the amount needed to provide protection to the global population.”

During the 20th century, there were three pandemics, or simultaneous worldwide epidemics of influenza. The 1918 “Spanish flu” killed more than 20 million people. Subsequent pandemics in 1957 and 1968 were less severe but also killed millions around the globe.

A new influenza strain, known as H5N1, is spreading through bird populations in Asia, Africa and Europe. Only 244 human cases have been recorded so far, but chillingly, the fatality rate has been more than 50%. Though avian flu remains primarily an animal disease, if the virus develops the capacity for sustained, efficient human-to-human transmission, it could spread quickly around the globe.

Novartis Vaccines has long been in the front ranks of global pandemic preparedness. In 1999, the division was the first manufacturer to successfully test an experimental vaccine against a variant of the H5N1 influenza virus following the initial outbreak of avian flu in Hong Kong. Ironically, because the H5N1 strain that caused the outbreak was lethal to the egg cells that are needed in egg-based production to support virus replication, Novartis Vaccines was forced to use a closely related H5N3 strain to produce its vaccine.

That initial H5 vaccine also included a proprietary adjuvant called MF59. An adjuvant is a substance added to a vaccine to boost the body’s immune response against the vaccine’s active constituent, called the antigen. In 2003, a follow-up study showed that the adjuvanted H5 vaccine from Novartis also offered cross-protection against H5N1 strains that have circulated across Asia since the initial Hong Kong outbreak.

Importantly, the use of an adjuvant could provide effective protection at lower doses than nonadjuvanted vaccines, potentially enhancing production capacity, and supply, in the event of a pandemic. The WHO has

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proposed clinical studies of H5N1 vaccines – including MF59 and other adjuvants with a proven safety record in humans – as part of its global pandemic action plan.

The Novartis cell culture-based pandemic vaccine is still in preclinical development but clinical trials are expected to begin this year. In Europe, Novartis was one of several vaccine producers in 2006 to file “mock-up,” or stand-by registrations for a pandemic vaccine that would enable the companies to begin production immediately if the WHO declares a pandemic. Novartis has also submitted a dossier to the European Medicines Agency (EMEA) for a H5N1 pre-pandemic vaccine that could be sold freely to private individuals and companies, in addition to governments and other payors.

Meanwhile, Novartis Vaccines has received orders from the US and UK to supply pre-pandemic H5N1 avian influenza vaccine – in some cases containing MF59 adjuvant – for national stockpiles.

“We continue to work closely with regulatory agencies in Europe and North America, and we expect to have much more visibility regarding a pandemic, or pre-pandemic, vaccine in 2007,” Dr. Reinhardt says. “Together with other companies, we aim to make it possible for the public to obtain voluntary vaccination with a potential pandemic strain, in addition to the normal seasonal flu vaccinations.”

Turning Point

Novartis Vaccines also is a world leader in the battle against meningococcal meningitis. According to the WHO, an estimated 500 000 cases, and 50 000 deaths from meningococcal meningitis are reported each year.

“But it is a disease that casts a shadow far beyond what this incidence would suggest,” says Peter Dull, M.D., Team Leader, Clinical Research, Development and Medical Affairs, at Novartis Vaccines. “It strikes infants, and adolescents and young adults at the beginning of their productive lives – in their prime. And it strikes in an overwhelming fashion,” Dr. Dull adds.

Sometimes, meningococcal meningitis can lead to death only hours after the onset of symptoms, despite prompt treatment with antibiotics. A large proportion of people who survive meningococcal meningitis suffer major complications, such as neurological damage or amputations.

And the disease has epidemic potential, causing increased risk among people who come in close contact to someone with the disease. In sub-Saharan Africa, major epidemics are common and constitute a major public health threat. In developed countries, outbreaks occur unpredictably and while the UK and Australia have introduced nationwide vaccination programs against Neisseria meningitidis serogroup C (MenC), epidemics caused by N. meningitidis serogroup B (MenB) have occurred in countries ranging from Norway and New Zealand to the Normandy region of northern France.

One Novartis vaccine is already in use against a strain of MenB found only in New Zealand. Since the launch of the vaccine in 2004, the incidence of MenB disease in New Zealand has fallen by more than 80%.

A Novartis conjugate vaccine providing simultaneous protection against the A, C, W and Y strains of N. meningitidis has advanced to Phase III clinical trials. If trials are successful, the new MenACWY vaccine would be the first approved by regulators in major countries to treat infants and young children less than 11 years of age, a particularly vulnerable group which accounts for a majority of bacterial meningitis cases in the US every year.

In addition, a vaccine offering protection against most strains of MenB has advanced to Phase II clinical trials and, if successful, could represent a turning point in the way vaccines are discovered and developed. This universal MenB vaccine is a prototype for use of genomics for vaccine development – a radically new approach called “reverse vaccinology,” pioneered by scientists at Novartis Vaccines.

Since the days of Louis Pasteur, vaccine development has been based on growth and inactivation of microorganisms that cause disease. But reverse vaccinology relies as much on computers as Petri dishes.

In 1997, Rino Rappuoli, Ph.D., research director at Novartis Vaccines, convinced maverick American gene hunter Craig Venter and the Institute for Genomic Research (TIGR) to sequence the genome of N. meningitidis. Searching the genome sequence for similarities to known genes, researchers uncovered dozens of novel targets. “The whole scientific community – working for 50 years – had only found about a dozen antigens to use in a potential MenB vaccine,” Dr. Rappuoli says. “Using reverse vaccinology, we identified more than 90 antigens within 18 months.”

That list of candidate antigens was narrowed to five finalists which have been combined into a multi-component vaccine. In tests, the universal MenB vaccine has shown capacity to kill more than 75% of MenB strains, a dramatic improvement over the best previous vaccines, which achieved coverage of about 20%. With clinical testing still at an early stage, Dr. Rapuoli cautions that it’s premature to predict the long-term utility of reverse vaccinology in providing new generation vaccines. “But we believe we will have a universal MenB vaccine on the market in the next five years,” he says.

30




SANDOZ

Integration of Hexal and Eon Labs – acquired in mid-2005 – largely completed to create world’s second-largest generics company based on sales. New product launches, differentiation through difficult-to-make generics and leading positions in key markets driving growth.

Net sales advance 27% (+25% lc) to USD 6.0 billion, benefiting from good underlying retail generics sales, particularly in the US, Eastern Europe and Russia.

Operating income more than doubles thanks to new product launches, strengthening positions in leading markets, and contributions from Hexal and Eon Labs.

Strengthening leading positions in fast-growing markets – particularly the US and Eastern Europe – as new product launches lead to market share gains. Leadership position in Germany maintained in a tough market.

Differentiating Sandoz against the competition through success in difficult-to-make generics and innovative product applications. Particular focus on applying new technologies, such as skin patches and inhalation devices.

Pioneer US and European approvals of Omnitrope as the first follow-on version of a previously approved recombinant biotechnology drug. Several similar projects are being developed to further transform the use of generics.

31




SANDOZ

KEY FIGURES

(In USD millions unless indicated otherwise)

 

 

2006

 

2005

 

Net sales

 

5 959

 

4 694

 

Operating income

 

736

 

342

 

Research and development

 

477

 

434

 

Research and development as % of net sales

 

8.0

 

9.2

 

Free cash flow

 

876

 

685

 

Net operating assets

 

13 464

 

12 715

 

Additions to property, plant & equipment1

 

264

 

212

 

Number of associates at year-end

 

21 117

 

20 066

 

 


1                   Excluding impact of business combinations

NET SALES AND OPERATING INCOME

(Index: 2002 = 100%)


1                  Not adjusted for new IFRS accounting rules
2                  Pro forma adjusted for new IFRS accounting rules

NUMBER OF PRODUCT LAUNCHES 20061


1                   Launch definition based on new molecules (US: ANDAs)

32




SANDOZ

Approval of Omnitrope in Europe and the US as the first follow-on version of an approved recombinant biotechnology medicine underscores the commitment and tenacity of Sandoz as it lives its strategy focusing on difficult-to-produce generics. With additional follow-on proteins under development in Sandoz labs, Omnitrope could be just the beginning.

Novartis achieved a major milestone in the first half of 2006 when European Union regulators and the US Food and Drug Administration approved Omnitrope, the company’s recombinant form of human growth hormone, as the first follow-on version of a previously approved recombinant biotechnology medicine.

Follow-on recombinant proteins – also known as “biosimilars” – are subsequent versions of biological reference medicines that are not protected by patents. In coming years, a spate of biological drugs will lose patent protection and competition from biosimilars could help governments and other healthcare payors lower their costs, freeing resources for innovative drugs and providing an indirect stimulus to innovation.

“Novartis is uniquely positioned in a healthcare market that faces intensified cost containment pressures due to increasing demand for drugs and services from an aging population,” says Daniel Vasella, M.D., Chairman and Chief Executive Officer of Novartis.

“We need to be able to offer truly differentiated innovative therapies that address unmet medical need. But patients and payors also should have access to less expensive generics, once innovator drugs have lost their patents. Generics actually drive innovation: knowing that innovative drugs have finite life cycles forces companies to innovate.”

Sandoz, the generic pharmaceuticals division of Novartis, lives that vision as the first company to take advantage of the reg-ulatory pathway charted by the EU to allow approval of biosimilars.

By contrast, approval of Omnitrope in the US culminated a seven-year process where Sandoz worked in close collaboration with FDA officials to clarify issues and uncertainties – then showed tenacity at critical moments when the process reached an apparent impasse.

“The approval of Omnitrope shows the science is there to move forward on approval of follow-on biologics through abbreviated applications,” says Andreas Rummelt, Ph.D., Head of Sandoz and member of the Executive Committee of Novartis. “It shows that regulators are comfortable approving these products through an abbreviated process. And the Omnitrope case underscores the commitment and perseverance of Sandoz in making sure these products move forward, and increase access to treatment for whole sections of the patient population.”

Biosimilars are a key component of Sandoz strategy. Development and marketing of difficult-to-produce generics is a dynamic and profitable complement to the Division’s broad portfolio of more than 840 active ingredients, available in more than 5 000 dosage forms and marketed through a global network stretching across more than 100 countries.

Biosimilars are the epitome of difficult-to-produce products – and Sandoz has more than 25 years of experience in production of biological medicines. “For microbially expressed recombinant proteins – produced using bacteria and yeast – the Sandoz

33




facility in Kundl, Austria is one of the biggest development and manufacturing sites in the world,” says Joerg Windisch, Ph.D., Head Technical Development and Clinical Manufacturing for Biopharmaceutical Operations.

Though Sandoz manufactures more than a dozen recombinant proteins on behalf of other companies, that pedigree isn’t known because of confidentiality agreements with customers. “So far, Omnitrope is the only biosimilar product developed and produced in Kundl that is being sold under the Sandoz name,” Dr. Windisch adds.

Hatch-Waxman Act

There are parallels between regulatory issues facing biosimilars today and the rules that existed for traditional chemical drugs before legislation was passed in the US during the 1980s, creating the modern generics industry. At that time, patents had expired on a large number of prescription medicines, but no simple, or abbreviated, regulatory pathway had been defined for approval of generic copies.

The Hatch-Waxman Act, passed in 1984, contained two sets of changes. First, the new law provided patent-term extensions for innovator drugs, adding several years to patent protection to offset time spent during the FDA review process and the clinical testing phase.

But at the same time, Hatch-Waxman eliminated duplicative testing requirements for generic products, enabling manufacturers of generic pharmaceuticals to obtain FDA approval more quickly once the patent on an innovator product had expired. Generic manufacturers also were allowed to file abbreviated new drug applications – based on development programs designed to prove bio-equivalence with the innovator medicine. Those changes dramatically shortened the average time between patent expiration and entry of the first generic – to less than three months, from more than three years previously.

Sandoz believes that rigorous scientific criteria should be consistently applied to the approval process for all follow-on biotechnology medicines. Unnecessary duplication of animal studies and human clinical trials should be avoided, however, so that resources are not wasted that could otherwise be invested in innovation.

Biotechnology medicines are produced in living organisms, altered by recombinant technology. But by using advanced product development, analytical methodologies and manufacturing processes, Sandoz can manufacture biosimilars designed to have the same quality, efficacy and safety characteristics as the reference product.

Sophisticated analytical tools used today are more powerful than those available at the time when reference products were approved. “Characterizations of molecules that weren’t possible scientifically a decade ago are commonplace today,” Dr. Windisch says. “And Sandoz and Novartis have been part of that advance of science all the way.”

Patient Safety Is Paramount

The manufacturer of a biosimilar eliminates some requirements of a conventional new drug application by establishing the bridge between the reference medicine and its own product. Streamlined requirements for clinical trials – and the opportunity for competition once the originator drug has lost patent protection – translate into lower prices for biosimilar products.

Above all, patient safety remains paramount for Sandoz and Novartis. From the outset of Omnitrope development in 1997, the medicine was tested in eight Phase III studies over a period of six years, involving more than 250 patients in five European countries. Safety and efficacy data from the studies conform to those of the reference product.

Omnitrope still had a circuitous route to market and was forced to overcome repeated legal hurdles in both Europe and the US. Initial approval in 2004 came in Australia, where Omnitrope was launched a year later for treatment of growth disorders in children.

But the first regulatory application to the European Medicines Agency (EMEA), the EU’s main medical regulator, was submitted much earlier, in May 2001. Omnitrope received a positive review by EMEA’s scientific committee two years later – yet the EU decided not to approve Omnitrope in November 2003, for reasons relating to the approval pathway.

Sandoz filed suit in an EU Court in January 2004, contesting that negative decision on Omnitrope – and resubmitted the regulatory application with additional clinical data in July 2004. At the beginning of 2006, EMEA’s scientific committee once again recommended approval of Omnitrope.

This time, the European Commission followed EMEA’s advice, and in March granted marketing authorization in all 25 EU member states. By year-end, Omnitrope had been launched in four EU markets, – Germany, Austria, the Netherlands and the UK – with plans to launch the product in additional EU countries during the first half of 2007.

In the US, Sandoz worked in close consultation with the FDA for several years to prepare an abbreviated application for Omnitrope. That application was submitted in July 2003. But a year later, FDA announced that while there were no deficiencies in the application, the agency was unable to reach

34




a decision on whether to approve Omnitrope. In September 2005, Sandoz filed a lawsuit, seeking to compel the FDA to act. In April of 2006, the US District Court for the District of Columbia granted summary judgement in favor of Sandoz, requiring the FDA to issue a decision on the Omnitrope application. On May 31, 2006, the FDA approved Omnitrope and by year-end it had been made available to US patients.

“After working cooperatively with the FDA throughout the process, Sandoz felt compelled after many meetings and much correspondence to bring the lawsuit,” Dr. Rummelt adds. “Let’s be very clear: the lawsuit was not to force an approval. Unfortunately, at a key point the process broke down and we sued to get it back on track and ensure FDA made the decision it was obligated to make, within the statutory timeframe.”

While approvals of Omnitrope represent a breakthrough for biosimilars, major hurdles remain before regulatory pathways are comprehensively defined for all recombinant biological medicines. In the future, for example, the EU plans to assess applications for biosimilars on a case-by-case basis. In the US, Omnitrope was approved under a regulatory category called 505(b)(2), but the majority of recombinant protein medicines currently on the market were approved through a different legislative pathway, the Public Health Services Act (PHS). An abbreviated pathway for biosimilars comparable to the one used for Omnitrope hasn’t yet been defined for reference products approved under the PHS.

Another key issue is substitution by pharmacists, which is widely allowed for generic versions of traditional chemical drugs. The possibility to substitute varies from country to country and at present there is no specific guidance on substitution of biopharmaceutical reference products by biosimilars. “Sandoz believes in substitution – but we understand that it will take time before substitution of biosimilars is widely accepted,” Dr. Rummelt says.

Late last year, however, legislation was introduced in the US Congress that would authorize the FDA to approve abbreviated applications for biosimilars, without unnecessarily repeating expensive clinical trials. The “Access to Life-Saving Medicines Act” establishes a rigorous case-by-case scientific process for approving biosimilars to ensure they are as safe and as effective as brand name counterparts. “Recent approvals by FDA of (biosimilar products) like Omnitrope show that this approach is scientifically feasible,” the bill’s sponsors said.

Sandoz is working constructively with other members of industry to assure that the regulations necessary to bring PHS reference medicines to the market under abbreviated applications will be put in place for the future.

35




CONSUMER HEALTH

OTC and Animal Health lead the performance and improve their global rankings thanks to strategic brands, expansion in key markets and targeted acquisitions.

Excluding Medical Nutrition, net sales advance 8% (+8% lc) to USD 6.5 billion, thanks to double-digit expansions in OTC and Animal Health.

OTC becomes the world’s No. 4 OTC company based on net sales, moving up from No. 6. Strategic brands such as Voltaren, Theraflu and Lamisil deliver excellent growth, with market share gains in key countries.

Animal Health continues to grow faster than the market, moving up three positions and now ranking No. 5 in its industry. Growth comes from companion animal business and record performance by the US farm animal business.

Gerber is supported by the launch of innovative new toddler products in the US, where it is the leading baby nutrition company.

CIBA Vision successfully restarts global distribution of lens care supply materials.

Discontinuing Consumer Health operations comprise Nutrition & Santé, divested in February 2006, and Medical Nutrition business, to be divested to Nestlé for USD 2.5 billion in 2007.

36




CONSUMER HEALTH

KEYFIGURES – CONTINUING OPERATIONS
(In USD millions unless indicated otherwise)

 

 

2006

 

2005

 

Net sales

 

6 540

 

6 049

 

Operating income

 

1 068

 

952

 

Research and development

 

288

 

270

 

Research and development as % of net sales

 

4.4

 

4.5

 

Free cash flow

 

778

 

811

 

Net operating assets

 

4 122

 

4 433

 

Additions to property, plant & equipment1

 

222

 

233

 

Number of associates at year-end

 

17 658

 

16 831

 

 


1       Excluding impact of business combinations

NET SALES AND OPERATING INCOME – CONTINUING OPERATIONS

(Index: 2002 = 100%)


1            Not adjusted for new IFRS accounting rules 
2
        Pro forma adjusted for new IFRS accounting rules

NET SALES BY REGION – CONTINUING OPERATIONS

CONTINUING AND DISCONTINUING
CONSUMER HEALTH OPERATIONS

37




CONSUMER HEALTH

Sales growth at the Novartis Animal Health Business Unit has outpaced the global market for three consecutive years fueled by successful veterinary versions of human medicines. It’s a major synergy for Novartis and a competitive edge as Animal Health steadily improves its global ranking in a fragmented, but expanding industry.

El Pomar is a nine-year-old Labrador retriever, trained as a service dog for its quadriplegic owner, Jim Pearson.

Mr. Pearson and El Pomar have been together for seven years. During much of that time, however, the dog suffered from atopic dermatitis, a canine skin allergy with symptoms ranging from scratching, hair loss and secondary infections to unpleasant odor. El Pomar responds to dozens of commands but Mr. Pearson found himself constantly repeating two negative ones – “Leave it” and “Don’t” – to prevent the dog from scratching or biting sores on its skin.

“We’ve only been apart one day in seven years,” Mr. Pearson says. “His happiness is my happiness and I’d do anything for him.”

Mr. Pearson tried virtually every therapy available but none provided more than temporary relief for El Pomar. Finally, a canine dermatologist ran a gamut of tests and recommended treatment with Atopica, an innovative medicine from Novartis Animal Health.

Within days of starting treatment, El Pomar stopped scratching, for the first time in years. A month later, the dog was off shots and steroids and remains itch-free today, Mr. Pearson says, thanks to one Atopica capsule every other day.

Atopica, a veterinary medicine for canine atopic dermatitis, contains the same active ingredient as Neoral, a Novartis medicine that also is approved for treatment of severe atopic dermatitis in humans. Like human allergies, canine atopic dermatitis is a life-long condition that can be controlled, but not cured. Veterinarians estimate that one dog in seven is afflicted with the disorder.

Atopica selectively targets specific immune cells to block the allergic response that causes the dog’s scratching and other symptoms. Sales of the medicine rose more than 20% during 2006 and future prospects are upbeat. With a further simplification of the diagnosis, more veterinarians are expected to adopt Atopica to provide relief to the dogs and their owners.

Atopica is one of several human medicines from Novartis – from painkillers to cardio-renal medications – that have been successfully developed and registered for veterinary use. Novartis Animal Health has significantly outpaced growth of the global market for three consecutive years, fueled in part by successful versions of human-to-veterinary “switches.”

With research centers in Switzerland, the US, Canada and Australia, innovation at Novartis Animal Health covers companion animals, as well as food animals, including fish. “Our success is based on innovative products that meet the evolving needs of our customers,” says George Gunn, Head of Novartis Animal Health.

“Developing veterinary formulations of medicines originally discovered for human indications will remain a valuable synergy for the Novartis Group, and a key competitive strength for Animal Health as we continue to strengthen our global position in a fragmented, but expanding industry.”

38




Close Cooperation

While Atopica is approved for similar indications in humans and dogs, prescription medicines often have different activity profiles in different species. A drug that is effective for humans may not be useful or not safe for use in pets – or vice versa.

The search for potential switch candidates at Novartis Animal Health focuses primarily on diseases afflicting the heart or kidney, where the human form is similar to that found in dogs and cats. Pain management is another priority indication.

Convenience of administration is a crucial attribute for potential veterinary medicines. Deramaxx, a painkiller from Novartis used widely to treat osteoarthritis in dogs, is available as a chewy, beef-flavored tablet. The development pipeline at Novartis Animal Health includes other novel formulations with flavors and textures that ease administration. Moreover, innovative topical medicines can be delivered by placing a few drops onto the skin of an animal.

“Whenever possible, we look for ways to make it easier for owners to administer the medicine,” says Peter Wells, Ph.D., Head of Research and Development at the Animal Health Business Unit.

Dr. Wells and the Development team work closely with scientists at the Novartis Institutes for BioMedical Research as well as other Novartis divisions. Certain anti-infectives marketed by Novartis Animal Health were discovered by researchers at Sandoz, but later developed exclusively for veterinary applications. “We also have a number of projects in the development portfolio that have come out of cooperation with the Pharmaceuticals Division,” Dr. Wells adds. “We see real opportunities for the future.”

From Chronic Pain to Separation Anxiety

Fortekor is a veterinary formulation of benazepril hydrochloride, the active ingredient in Cibacen/Lotensin, an ACE inhibitor from Novartis approved to treat people with high blood pressure, heart failure and chronic renal disease. Dogs and cats develop both heart disease and kidney disease, though the causes of their disorders are different than in humans. So it seemed logical to explore possible veterinary applications for benazepril.

“When we started development of a veterinary version of benazepril, nobody was sure if it would work,” recalls Jonathan King, Ph.D., International Project Leader for Development at Novartis Animal Health. Subsequent testing, however, showed that Fortekor was effective, and well tolerated, in both dogs and cats.

“The big cardiovascular indication in dogs is chronic heart failure – where ACE inhibitors already were the standard of care for humans,” Dr. King says. Fortekor, however, is the only ACE inhibitor approved to date for veterinary use in cats – to treat chronic renal insufficiency. “Fortekor is very well tolerated,” Dr. King adds.

Deramaxx, the painkiller launched by Novartis Animal Health in 2002, has been prescribed by more than 14 000 veterinary practices to treat chronic pain associated with osteoarthritis and postoperative pain in dogs. The first drug in the so-called coxib class approved to date by the US Food and Drug Administration for veterinary use, Deramaxx was licensed in by Novartis Animal Health largely because its pharmacokinetic profile made the compound more suitable for use in dogs than other coxibs, Dr. King says.

A further attraction of Deramaxx was clinical data in humans demonstrating that coxibs reduce the incidence of gastrointestinal ulcers, compared to treatment with non-selective nonsteroidal anti-inflammatory drugs (NSAIDs). “That’s what generated our interest in Deramaxx from the start,” Dr. Wells says.

Osteoarthritis is the most common cause of chronic pain in dogs and as many as one in five adult dogs is afflicted with pain severe enough to make it difficult to jump, climb stairs, or even get in and out of cars. While there is no cure, routine screening by veterinarians is important for early detection of the disorder. And careful management can control pain and improve a dog’s quality of life.

Another successful switch is Clomicalm, the veterinary version of the human antidepressant Anafranil originally discovered by Novartis. Clomicalm is the only medication approved for the treatment of separation anxiety in dogs. Dogs with separation anxiety are often well behaved when people are present but become anxious when left alone, which can lead to chewing and house soiling. Punishment by frustrated owners often aggravates the problem because dogs with the disorder can’t control their behavior. Clomicalm is used together with behavioral training to help relieve anxiety, making it easier for a dog to learn new, positive behaviors. Therapy should only be undertaken by veterinarians familiar with treatment of behavioral disorders.

39




CORPORATE CITIZENSHIP

Corporate Citizenship at Novartis rests on four pillars: Commitments to Patients; to Our People; to Health, Safety and Environment (HSE); and to Ethical Business Conduct.

Treatments worth USD 755 million were contributed through access-to-medicine programs in 2006, reaching 33.6 million patients in need.

Novartis reduces average treatment price of Coartem to one US dollar, subsidizing access to this leading antimalarial medicine. Deliveries quintupled in 2006 to 62 million treatment courses.

Novartis named the healthcare sector leader in the Dow Jones Sustainability Index (DJSI), which tracks the performance of companies in terms of corporate sustainability.

Novartis included in the FTSE4Good index and also rated a top sustainability performer, with a triple-A score, in the 2006 Global Pharmaceutical Sector Report by Innovest.

Business Week magazine rates Novartis one of the 50 most valuable brands worldwide and across all industries.

Novartis named by Barron’s magazine as one of the 25 most respected companies worldwide, while Fortune magazine lists Novartis among the world’s 50 most admired companies.

40




KEY PERFORMANCE INDICATORS

Indicator1

 

2006

 

2005

 

2004

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

 

 

Economic

 

 

 

 

 

 

 

 

 

 

 

Group net sales in USD billions

 

37.0

 

32.2

 

28.2

 

24.9

 

20.9

 

Group net income in USD billions (% of Group net sales)

 

7.2

(19)

6.1

(19)

5.6

(20)

4.9

(20)

4.7

(23)

Research & Development in USD billions (% of Group net sales)

 

5.4

(15)

4.8

(15)

4.1

(14)

3.7

(15)

2.8

(14)

Purchased goods and services2 in USD billions (% of Group net sales)

 

17.9

(48)

15.7

(49)

13.0

(46)

11.0

(44)

9.1

(44)

Net value added (NVA) in USD billions (% of Group net sales)

 

18.1

(49)

15.7

(49)

14.9

(53)

13.7

(55)

12.5

(60)

– to associates in USD billions (% of NVA)

 

9.1

(51)

7.9

(51)

7.0

(47)

6.3

(45)

5.1

(41)

– retained for future growth in USD billions (% of NVA)

 

5.2

(29)

4.1

(26)

4.3

(29)

4.3

(31)

3.3

(26)

– to authorities in USD billions (% of NVA)

 

1.5

(8)

1.3

(8)

1.3

(9)

1.2

(9)

1.1

(9)

– to financial institutions in USD billions (% of NVA)

 

0.3

(1)

0.3

(2)

0.3

(2)

0.2

(2)

1.6

(13)

– to shareholders/dividends in USD billions (% of NVA)

 

2.0

(11)

2.1

(13)

2.0

(13)

1.7

(13)

1.4

(11)

 

 

 

 

 

 

 

 

 

 

 

 

Social

 

 

 

 

 

 

 

 

 

 

 

Number of associates (headcount)

 

100 735

 

90 924

 

81 392

 

78 541

 

72 877

 

Resignations, separations, hiring (% of associates)

 

8, 4, 19

 

8, 4, 16

 

7, 3, 15

 

 

 

Number of associates trained on Code of Conduct (e-learning courses)3

 

14 574

 

33 000

 

 

 

 

Cases of misconduct reported

 

651

 

442

4

410

5

 

 

Cases of misconduct substantiated

 

228

 

142

4

204

5

 

 

Dismissals/resignations (related to misconduct)

 

130

 

78

4

107

5

 

 

Access to Medicine6: value in USD millions

 

755

 

696

 

570

 

371

 

255

 

Access to Medicine6: patients reached in millions

 

33.6

 

6.5

 

4.25

 

2.76

 

 

Number of suppliers informed (turnover more than USD 10 000)

 

42 200

 

39 000

 

30 000

 

 

 

Number of suppliers to confirm key standards (self-declaration)

 

8 600

 

5 500

 

4 600

 

 

 

Number of suppliers audited (including labor standards)

 

92

 

55

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Health, Safety & Environment7

 

 

 

 

 

 

 

 

 

 

 

Lost time accident rate [accidents per 200 000 hours worked]

 

0.40

(8)

0.44

(9)

0.48

 

0.7

 

0.71

 

Resources

 

 

 

 

 

 

 

 

 

 

 

Water use [million m3]

 

90.1

 

91.5

 

86.4

 

92.6

 

89.9

 

Energy [million GJ]

 

18.0

 

16.9

 

16.3

 

16.0

 

15.7

 

Emissions

 

 

 

 

 

 

 

 

 

 

 

Emission CO2/GHG, Scope 1: Combustion and processes [1000 t]

 

488

 

458

 

470

 

477

 

471

 

Emission into Air: hal- and nonhalogenated VOCs [t]

 

1 769

 

1 407

 

1 317

 

1 676

 

1 736

 

Total Operational Waste [1000 t]

 

303

 

288

 

228

 

224

 

251

 

 


1     Data reported in the “Economic” and “Social” sections above (except “Number of suppliers” items) include the entire Group;

Data reported in “Number of suppliers” items and “Health, Safety and Environment” section (except “Lost time accident rate”) exclude the new Vaccines and Diagnostics Division

2     Element of indirect economic contributions

3     Other mandatory courses: Human Rights, E-compliance and Records Management

4     From April to December 2005

5     From October 2003 to September 2004

6     See table page 50

7     Details see: www.novartis.com/hse

8     Excludes Hexal/Eon Labs and Vaccines and Diagnostics

9     Excludes Hexal/Eon Labs

 

41




CORPORATE CITIZENSHIP

Novartis places a strong emphasis on Corporate Citizenship because it is the right thing to do. But sustainable Corporate Citizenship initiatives are also good for business, increasing trust in the communities where we are located and with governments that regulate our operations.

Novartis has a longstanding commitment to active engagement in society, reflected in our Policy on Corporate Citizenship and its implementation through management processes across the Group. We pledge to recognize the interests of stakeholders, and the public at large, in our social behavior and the health, safety and environmental impacts of our business.

We seek to engage in an active dialogue with diverse stakeholder groups through community panels, focus groups and collaborations with patient advocacy organizations.

While remaining externally focused, we are building a reputation as an exciting place to work, where people can realize their professional ambitions. We strive for a motivating environment where creativity and effectiveness are encouraged and where cutting-edge technologies are applied.

Novartis places such a strong emphasis on Corporate Citizenship because it’s the right thing to do. But sustainable Corporate Citizenship initiatives are also good for business. For a company to be successful, relationships with the communities it serves must be based on trust and good will. By doing the right thing, we are trusted by communities, and by the governments that give us an opportunitiy to operate, to innovate and to grow.

A strong Corporate Citizenship program reduces business risks and provides a competitive advantage by enhancing access to markets and customers for Novartis products and associates. Efficient use of energy and other natural resources saves money and at the same time mitigates environmental risks. Neighboring communities also benefit from sound stewardship of the environment.

Our Corporate Citizenship approach is based on our values and reflects our commitment to the United Nations Global Compact. The Global Compact asks companies to embrace, support and enact a set of core values in the areas of human rights, labor standards, the environment and efforts to combat corruption.

Our Corporate Citizenship Policy is supported by specific guidelines, covering material areas such as working conditions, business ethics, human rights and third-party management. Novartis fosters a culture where associates are expected to behave not only lawfully, but ethically. Besides complying with laws and regulations that govern our operations in more than 140 countries around the world, Novartis associates uphold the ideals and values defined in our Code of Conduct and Corporate Citizenship Policy, and in related policies and guidelines.

Corporate Citizenship at Novartis is firmly anchored at the Board level. The Audit and Compliance committee is responsible for auditing Corporate Citizenship implementation and compliance. The Executive Committee of Novartis is responsible for implementation and has established a steering committee which has overall responsibility for Corporate Citizenship Policy and guidelines.

The operating units within each of our Divisions establish appropriate structures, and allocate sufficient resources to reasonably meet the expectations of our Corporate Citizenship Policy. Through management reviews, as well as internal and external audits and assurances, we measure progress and verify compliance with the Policy, related guidelines and regulatory requirements.

Senior managers within Novartis are responsible for implementing these guidelines and performance is measured. Progress against our objectives is presented each year in our annual report and in an online report in accordance with the guidelines of the Global Reporting Initiative.

42




COMMITMENT TO PATIENTS

Through its uniquely broad portfolio of medicine-based businesses, Novartis has pioneered an array of models to enhance both affordability and access to treatment. We recognize that access to our medicines usually favors people who live in affluent, developed societies – but we strive to be leaders and partners in finding solutions to help close the access gap.

Novartis endorses the right to health. We believe that each sphere of society – government, medical professionals, individuals and business – has a role to play in support of the right to health.

Our most important contribution to society and to the fulfillment of the right to health is to discover, develop, produce and distribute high-quality healthcare products, targeting unmet medical need. Our commitment to patients leads us to maintain one of the highest levels of research investment among top-tier pharmaceutical companies. Our drug development program has been one of the most productive in the global pharmaceutical industry in recent years.

We recognize, however, that access to our medicines clearly favors people who live in affluent, developed societies. We want to be leaders and partners in finding, and implementing, solutions to help close the access gap.

Thanks to our business results, we are able to help where there is immediate need with products, funds and other supportive measures, on a case-by-case basis. Last year, we were able to contribute products valued USD 755 million and reach more than 33 million patients in need through access-to-medicine projects around the world.

The Novartis Institute for Tropical Diseases – based in Singapore – is bringing the ongoing revolution in biomedical science and technology to bear on diseases of the developing world, initially tuberculosis and dengue fever, but now also malaria.

We provide medicines at no profit – or sometimes free – to patients in the developing world afflicted by diseases such as leprosy, malaria and tuberculosis. We also offer discounts and support programs to patients without medical insurance or other financial resources in industrialized countries.

For more than 25 years, the Novartis Foundation for Sustainable Development (NFSD) has made significant contributions to the health of people in need in the developing world. The NFSD supports patient-education programs against malaria, and is developing new patient-centered daily-observed-treatment systems for tuberculosis.

Inner Compass

Some nongovernmental organizations argue that drug prices and patents are the principal obstacles to access to medicine in the developing world. Yet the problem is much more complex – involving virtually all aspects of poverty.

Novartis and other healthcare organizations strongly assert that medicines alone cannot solve the underlying problems of poverty, inadequate public health services or the lack of healthcare personnel and infrastructure that beset all developing countries. Moreover, weakening intellectual property rights would jeopardize, rather than expand, long-term access to medicines by removing incentives for innovation.

At the Group’s biennial research conference last year, Daniel Vasella, M.D., Chairman

43




and Chief Executive Officer of Novartis, addressed the major trends influencing healthcare today. He acknowledged the challenges Novartis faces in dealing with a diverse array of stakeholders – but also described the distinctive strategy Novartis has adopted to enhance both access and affordability through a broad portfolio of medicine-based businesses.

“If we look at the outside world with which Novartis is dealing, it’s an increasingly complex map of stakeholders,” Dr. Vasella said. “And expectations of these stakeholders are often contradictory, so we have to make a decision about how we are going to navigate. I think it’s extremely important to follow the direction shown by our own inner compass.”

Aging of populations, changing lifestyles, rapid economic growth in some emerging markets and the emergence of new infectious diseases – potentially including pandemic influenza – will create opportunities for future growth but at the same time impose intense cost pressures on healthcare systems.

“The core of our business in the healthcare arena is the Pharmaceuticals Division – highly innovative medicines to address still unmet medical needs,” he added. “Sandoz provides high-quality, low-cost medicines to reduce the financial burden for healthcare systems and other payers. Vaccines make sure people don’t get sick in the first place, and Diagnostics prevents contamination of blood supply. Rounding out the picture is Consumer Health – people taking responsibility for self-medication is important to us.”

Pricing: “An investment, not just a cost…”

Pharmaceutical manufacturers do not unilaterally determine the price of drugs. In most European countries, prices must be negotiated with national agencies which set the price based on the cost of existing therapies, overall healthcare impact and benchmarks in other countries. Moreover, price levels for pharmaceuticals, like other goods, depend on the economic ability and willingness of different countries and patients to pay.

Once a prescription medicine leaves the factory, there are markups at each link of the distribution chain, from wholesalers through retail pharmacies – resulting in an average markup in the European Union of 30%. As a consequence, pharmacy prices, which are the ones most visible to consumers, vary much more than the ex-factory prices charged by manufacturers.

Novartis believes that healthcare spending is an investment, not simply a cost. Health Technology Assessment (HTA) represents an important tool for governments and other payers to develop mechanisms for evaluating the clinical and cost-effectiveness of medicines and other healthcare technologies. At the same time, however, HTA should not be used as a means to delay or exclude new medicines from reaching patients. To that end, Novartis urges that governments and other healthcare payers conduct HTAs guided by a clear transparent set of key principles.

Novartis is committed to providing timely, accurate and detailed information to governments and other health payers. Indeed, the Group works with external advisors to measure the impact of new therapies using HTA. By taking into account the perspective of payers and patients, Novartis is better able to highlight added value of its products.

Above all, the price of a medicine must always be viewed in relation to the value provided to patients and payers. A study presented at the World Aging & Generations Congress in St. Gallen, Switzerland last year showed that treatment of people with high blood pressure in the US reduced deaths from cardiovascular disease by two thirds between 1950 and 1994.

Without antihypertensive therapy, the study found, an estimated 86 000 excess premature deaths from cardiovascular disease and more than 800 000 hospitalizations for stroke and heart attacks would have occurred.

Treatment of hypertension was highly cost effective, creating USD 10 in value for each dollar spent for American women, and a payback of USD 6 per dollar spent for treatment of American men with high blood pressure.

To demonstrate the value of its medicines, Novartis conducts and supports extensive health economic research. The analysis is often based on large clinical trials but increasingly also “real-world” outcomes.

A study involving Diovan, for example, analyzed claims data from a US pharmacy benefit manager showing treatment outcomes for more than 140 000 patients with hypertension. The study found that patients who received Diovan “in a usual care setting” had better compliance with therapy than people who received either amlodipine or lisinopril, two other antihypertensive medicines. According to the authors, the findings suggest that choice of Diovan for chronic drug management of hypertension “has the potential to affect patient drug-taking behavior and perhaps longer-term outcomes in a typical real-world setting.”

Moreover, in one of the clearest examples yet of the value of a pioneering medicine, Novartis broke new ground with Gleevec/Glivec, an innovative treatment for people with chronic myeloid leukemia who were in an advanced stage of the disease, blast crisis or intolerant to interferon. After being designated an orphan drug, Glivec was

44




approved in record time on the basis of uncontrolled trials demonstrating improvements on surrogate outcomes: clearance of cancer cells from the bloodstream and the bone marrow.

Novartis managed to link these outcomes to long-term survival, and demonstrate the cost-effectiveness of Glivec. Sir Michael Rawlins, Chairman of the UK’s National Institute for Health and Clinical Excellence (NICE), has used Glivec as an example for good health-economic analyses, and proof that NICE, a prototype agency for HTA, recognizes the full value of therapies and societal judgment in its appraisals.

For the past 50 years, the research-based pharmaceutical industry has been the only viable model to discover and develop effective treatments for many diseases. The industry – and Novartis – have contributed novel medicines to improve both mortality and morbidity rates in cardiovascular disease, cancer, diabetes, organ transplantation, gastrointestinal disease and many other disorders. Without such innovations, medicine would not be as effective as it is today, and many patients would suffer and die.

The challenge before the pharmaceutical industry is a difficult one. Companies like Novartis must balance an increased commitment to Corporate Citizenship in developing countries and elsewhere against the demands of investors and financial markets to generate sufficient financial returns on extensive investments in innovation.

Special pricing arrangements that allow prices for individual products to be adapted to the specific need of developing countries offer a solution by providing incentives for research, while at the same time preserving a wider distribution of medicines at an appropriate rate of return. These arrangements, however, must be supported by important safeguards, including provisions to ensure that artificially low prices for medicines offered to developing countries are not used subsequently as the basis for reference prices for drug reimbursement in developed countries. In addition, effective trade controls must prevent re-exportation of such low-priced medicines to affluent markets.

Unique Portfolio

With a unique position among world leaders in innovative medicines as well as generics, Novartis has pioneered a broad array of programs to enhance affordability of treatment.

The generic business highlights another dimension of value. Generic products account for more than half of all prescription drugs consumed in the US and fierce competition among manufacturers shrinks prices to a fraction of what the originator medicine fetched before loss of patent protection.

However, many European nations continue to forgo huge potential savings that competition could deliver. A study by the US Dept. of Commerce three years ago examined drug-price regulatory systems in 11 OECD countries that rely on some form of price controls to limit spending on pharmaceuticals. For patented drugs that were best sellers in the US, prices in other OECD countries were 18% to 67% less than US prices, representing a total of USD 27 billion in reduced sales.

Paradoxically, these same 11 OECD countries also employ regulatory practices that limit competition in generic pharmaceuticals. Higher utilization of generic drugs at lower prices could save up to USD 30 billion annually, according to the Commerce Dept. “This range of potential savings suggests that if prices of on-patent drugs were to rise to competitive market levels, then the additional cost to OECD countries could be significantly or fully offset by a more competitive generic market,” the study said.

Vaccines are widely regarded as among the most cost-effective interventions in healthcare – but they remain underutilized throughout the world. The new Vaccines and Diagnostics Division at Novartis has a broad research program, focusing on major diseases such as pandemic influenza, meningo-coccal disease and HIV/AIDS. But even lesser-known diseases can result in acute unmet medical need.

Last year Novartis Vaccines announced the successful conclusion of a two-year vaccination campaign in New Zealand, the biggest in the country’s history, using a meningococcal B vaccine tailor-made for the small Pacific-island nation.

The MeNZB vaccine, developed jointly by Novartis, the New Zealand government and drawing upon earlier work by Norway’s Institute of Public Health, halted a 14-year epidemic that struck thousands of New Zealanders, killing more than 200 people and leaving more than a thousand people permanently disabled. The epidemic was caused by a strain of Neisseria meningitidis serogroup B (MenB) found only in New Zealand.

The vaccination campaign ran from July 2004 through June 2006. More than a million people were vaccinated, ranging from infants to adolescents up to 20 years of age. Since the launch of the vaccine, the incidence of MenB disease in New Zealand has fallen by more than 80%.

“We set out to end an epidemic by undertaking the largest mass immunization program in New Zealand’s history,” says Minister of Health Pete Hodgson. “We are now seeing dramatic declines in meningococcal B cases. And the rapid decline has given us the

45




confidence to push ahead with an extension of the campaign.”

Still, the limited commercial potential for a vaccine tailor-made for a small country like New Zealand was a major hurdle to the MeNZB project. “People questioned the decision to develop this vaccine many times, arguing that there was no money in it. And they were right. We more or less managed to cover our costs,” says Rino Rappuoli, Ph.D., Head of Research at Novartis Vaccines.

“So this was a philanthropic project – but one that also added to our knowledge and helped the field to progress,” he adds. “We started from scratch and in four years we were eliminating the disease. A program like this normally takes closer to a decade. And we did it without compromising safety. It shows that when public-private partnerships are done the right way, with goodwill and close cooperation, things happen very quickly.”

Public-Private Partnerships

In recent years, Novartis has forged a succession of public-private partnerships and not-for-profit initiatives with partners ranging from the World Health Organization (WHO) and the Economic Development Board of Singapore (EDB) to the Medicines for Malaria Venture and the Wellcome Trust. The initiatives target “neglected diseases” such as leprosy, malaria, dengue fever and tuberculosis. Since the year 2000, for example, Novartis has provided free treatment for all leprosy patients worldwide in a pioneering collaboration with the WHO. More than 4 million people with leprosy have been treated through use of effective multi-drug therapy (MDT) supplied by Novartis.

But the framework for support from Novartis is dynamic and increasingly, these initiatives are evolving as a result of recognition by payers of the value of a therapy, as well as countries’ rising ability to pay. The clearest example of this evolution to date is patient access initiatives for Glivec, the breakthrough, targeted anticancer medicine from Novartis.

When Glivec was launched, Novartis also introduced one of the most comprehensive and far-reaching patient assistance programs ever implemented on a global scale to help people who otherwise would not be able to afford treatment. The program has proved successful and in 2006 more than 15 000 people with certain forms of chronic myeloid leukemia (CML) or gastrointestinal stromal tumors (GIST) received treatment under the Glivec International Patient Assistance Program (GIPAP). A separate Patient Assistance Program in the US provided treatment for 3 500 patients last year.

GIPAP provides Glivec at no cost to eligible patients in developing countries with minimal reimbursement capabilities, and no available generic versions of Glivec. Access is provided to patients who are properly diagnosed, not covered by local reimbursement or insurance, and have no other financial resources.

Unlike traditional donation programs, GIPAP is based on a “patient-direct” model – facilitating delivery of Glivec to patients by their treating physician. Indeed, local physicians are the cornerstone of the program, selected to participate because of their expertise and willingness to take time from busy schedules to bring treatment to people in need. GIPAP also provides information and referral assistance to patients, their family members and caregivers.

The flexible structure of the access programs makes it possible to maximize effectiveness in different countries. Because GIPAP does not supplement government obligation or insurance, access programs are able to adapt to changing healthcare policies – reflecting local conditions, while supporting sustainability over the long term.

In a number of countries, local Glivec assistance programs have evolved toward a new “shared contribution” model. The traditional donation model – GIPAP – is increasingly being reserved for countries that can’t afford to pay.

“When we set up GIPAP, we didn’t distinguish between very poor countries, which lack sufficient reimbursement capabilities, and emerging economies that have begun to develop reimbursement capacity in pace with rapid economic development,” says Stephanie Lassarat, Head Global Patient Access at the Novartis Oncology Business Unit. “Our commitment to shared contribution shows that Novartis believes in these emerging countries. We are helping them to bridge the gap, and make innovative therapies broadly available to patients through creative and sustainable public-private collaborations that enhance access to treatment.”

Details vary from country to country but shared contribution means that local payers – from national healthcare systems to insurers and charities – assume a share of the cost of treatment with Glivec. Countries supporting expanded access to Glivec through a shared contribution model include Hong Kong, Colombia, Tunisia, Ukraine, Cuba and some provinces in China. In Russia, Novartis also continues to support treatment with Glivec for some patients in need during a transition period for the country’s healthcare system.

“Joining forces and dividing up the cost is an important step toward sustainable patient access,” Ms. Lassarat adds. “And once countries start paying part of the cost, they feel a bigger stake in the success of treatment. This, in turn, is leading to

46




enhanced interaction between Novartis and healthcare systems in many countries. And we believe shared contribution models can be a trigger for these emerging countries to ultimately broaden reimbursement of very innovative treatments like Glivec which are highly cost-effective.”

In another major advance, regulatory authorities in Europe and the US approved Gleevec/Glivec to help patients afflicted with rare but potentially life-threatening disorders with limited treatment options. The action represented the first time that a regulatory authority has ever simultaneously approved one targeted medicine for so many disorders.

“We continue to work on improving access at multiple levels,” says David Epstein, Head of Novartis Oncology. “You start by bringing a drug to market – even though sometimes the therapy can be perceived as having small value in typical Western markets. But access in developed markets can also be hindered by having a restricted label,” he adds.

“So even if all these additional approvals for rare indications for Gleevec/Glivec won’t make us all that much money, it means that patients in many countries, particularly in Europe, who previously haven’t been able to get treatment through public health systems, will now have improved access.”

Changing the Face of Malaria

In collaboration with the WHO and the United Nations Children’s Fund (UNICEF), Novartis is changing the face of malaria by providing the pioneering antimalarial medicine Coartem on a non-profit basis for public sector use in developing countries where the disease is endemic. In the meantime, with the volume of deliveries still climbing rapidly, Novartis is moving to broaden distribution channels to include recognized international procurement agencies, from the UN’s Development Program and Mission Pharma to Crown Agents and the International Dispensary Association, a not-for-profit foundation founded by pharmacists in the Netherlands during the 1970s to supply medicines to developing countries.

In September 2006, Novartis announced a significant reduction in the average price of Coartem for public sector use. “The dramatic increase achieved in our production capacity – plus the compelling need for an inexpensive and highly effective malaria treatment in low-income countries – prompted our decision to provide Coartem below our costs,” Dr. Vasella says. “I am very pleased that the WHO and other organizations such as UNICEF and Médecins Sans Frontières can now become even more effective in rolling back malaria.”

This price reduction is expected to have the greatest impact on children, who suffer disproportionately from malaria. Nearly 75% of all malaria patients taking Coartem are children and adolescents.

In another recent initiative, the Novartis Institute for Tropical Diseases (NITD), the Wellcome Trust, the Economic Development Board of Singapore (EDB) and Medicines for Malaria Venture (MMV) agreed to jointly support research aiming to discover and develop the next generation of drugs to treat malaria. The Wellcome Trust, EDB and MMV – a non-profit foundation dedicated to developing affordable new antimalarials – will provide funding of approximately USD 20 million for the new research partnership. NITD will manage the program and conduct research jointly with several institutions including the Genomics Institute of the Novartis Research Foundation and the Swiss Tropical Institute.

More than 60 countries – 28 in Africa alone – have rewritten their national malaria control guidelines in recent years, scrapping older, ineffective medicines and adopting artemisinin-based combination therapy (ACT), the class of medicines spearheaded by Coartem. In 2006 Novartis delivered more than 60 million treatments of Coartem, a 15-fold rise from the 4 million treatments delivered in 2004. Production capacity for Coartem is even higher – 100 million treatments – and could be utilized if demand exceeds current projections.

“The scale-up of production capacity for Coartem has been the most rapid increase for any drug I know – but especially remarkable for a product provided on a not-for-profit basis,” Dr. Vasella says. “Effective drugs are available now, but solving the problem of malaria is much more than just a question of drug availability. Malaria-endemic countries are facing a lack of physicians and nurses; the lack of an efficient distribution system and other preventive steps, such as treated bednets against unnecessary infection. Governments, health ministries, international organizations and industry all have roles to play in addressing and resolving this challenge,” he adds.

Novartis also is pushing ahead with initiatives such as joint development of a new pediatric formulation of Coartem with MMV. Malaria takes a daunting toll among infants and young children in Africa, where a child is estimated to die of malaria every 30 seconds.

At the moment, parents crush adult Coartem tablets for young children but because Coartem has a bitter taste, infants and young children tend to spit out the medicine. A more palatable pediatric form could improve adherence to therapy and Novartis and MMV are developing a new Coartem formulation as a dispersible tablet.

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The price cut announced by Novartis in September 2006 reduced the average price per Coartem treatment course to USD 1.00, from USD 1.57 previously. The move reflected cost reductions as well as benefits from economy of scale – and underscored the Group’s commitment to remove price as a barrier to access to Coartem. Nevertheless, the price remains below cost, a potentially significant financial risk for Novartis because costs are dependent on both production volume and the volatile price of raw materials.

There is growing concern about the financial risks manufacturers have incurred to scale-up capacity, and to pay upfront the costs of raw material procurement, without any guarantee that the end product will actually find a market. In Saving Lives, Buying Time, a recent report on the economics of malaria drugs, the Institute of Medicine (IOM), a branch of the US National Academies, describes a “chicken-and-egg dilemma surrounding ACT supply and demand. Without an assured market, potential manufacturers will not commit to adequate ACT production, nor will farmers expand the cultivation of Artemisia annua, the source plant.” To jump start production, the IOM said, “The global community must provide sufficient funds to encourage investments by manufacturers, guarantee purchases of ACTs and generally stimulate a robust world market.”

Novartis and its partners, for example, invested more than USD 50 million during 2005 to expand plant and equipment – plus an even larger dollar amount to secure raw material supplies. “We need something that removes the risk of write-offs from companies – so that when we embark on a 14-month production cycle we can be confident of at least covering our costs through binding forecasts or advance purchase commitments,” says Silvio Gabriel, Executive Vice President Malaria Initiatives at Novartis. “That risk can’t be transferred to countries –they obviously can’t afford it.”

Various models are under active discussion – from binding multi-year forecasts by the Global Fund, to other forms of market guarantees to put the supply chain on a more predictable basis.

Distribution through the private sector is one of the biggest remaining challenges for the Coartem program. The private sector remains the primary source of care for a large proportion of Africa’s working poor, particularly in remote rural areas or in countries where the public health system is underdeveloped.

A potential partner for Novartis in private sector distribution is Population Services International, the world’s largest social marketing organization, which has expressed an interest in Coartem as part of integrated malaria control programs. Other pilot projects are under discussion where subsidies provided by Western donors would enable Novartis to offer Coartem at deeply discounted prices.

Tanzania is piloting an innovative private sector distribution system, aiming to strengthen delivery of healthcare products via shopkeepers certified by the government. Staff receive training and are allowed to dispense essential medicines under the status of Accredited Drug Dispensing Outlets.

Novartis remains confident that new partners will help Coartem become even more successful. “The biggest hurdles in access-to-medicine programs in the developing world usually are funding – and finding someone willing to take a financial risk in providing the drugs,” Mr. Gabriel says. In the case of Coartem, he adds, both funding and the drug are already available so the missing links are sustainable procurement practices and improved processes for transfer of donor funds. “Now we are talking about operational things, where countries can help themselves by going fast, using money and medicines effectively and showing positive results.”

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NOVARTIS FOUNDATION FOR SUSTAINABLE DEVELOPMENT

The mission of the Novartis Foundation for Sustainable Development is to ease conditions of life for the poorest of the poor. Contributions, while focused on health, extend far beyond medical care to shaping new healthcare models.

For more than 25 years, the Novartis Foundation for Sustainable Development (NFSD) has made significant contributions to ease life for the poorest of the poor in the developing world.

NFSD concentrates its efforts on health problems. But its definition of health goes beyond medical care – the absence of disease or infirmity – to encompass physical, mental and social well-being.

Since the year 2000, Novartis has provided free treatment for all leprosy patients worldwide in a pioneering collaboration with the World Health Organization (WHO). More than 4 million people with leprosy have been treated through the use of effective multi-drug therapy supplied by Novartis. In addition to providing free drugs, however, NFSD has improved access to treatment by helping to change the traditional stigma surrounding the disease, integrate effective diagnosis into public health services and sponsor comprehensive rehabilitation programs in both India and Sri Lanka.

“Our focus has always been on doing things differently,” says Professor Klaus Leisinger, President of NFSD. “We try to find best practice, design pilot programs, and if they succeed we help to expand that model within a country, and in other countries.”

Ongoing programs range from support for AIDS orphans in sub-Saharan Africa, and community-based health insurance in Mali, to developing new training technologies for health personnel in the area of Integrated Management of Childhood Illnesses. NFSD also conducts think-tank activities in fields including corporate social responsibility, and human rights and business.

While NFSD is a related party of Novartis, it manages development-related and humanitarian activities independently. Close links with the Group are reflected in the private sector perspective that the foundation often brings to public debate. Access to professional skills within Novartis is another benefit.

In one current example, the Human Resources function at Novartis will assist with an upgrade of operations and management processes planned by the Regional Psychosocial Support Initiative for Children Affected by AIDS, Poverty and Conflict (REPSSI) to expand support for AIDS orphans beyond Tanzania, to a dozen additional countries in southern Africa.

Psychosocial Support for AIDS Orphans

As a consequence of the epidemic of HIV / AIDS sweeping sub-Saharan Africa, more than 12 million children under the age of 18 have lost their father, mother or both parents. The number of orphaned children is expected to rise steadily, reaching 16 million by the year 2010.

Humuliza, a pilot project for AIDS orphans which NFSD has helped to develop in northwest Tanzania, provides a lifeline for more than 2 000 youths. The program aims to help empower the children by providing opportunities for education as well as training in agriculture and other types of employment.

As a result of the successful pilot phase, the project is being scaled up across southern Africa. NFSD and more than 140 nongovernmental organizations sponsoring REPSSI will roll out the Humuliza model in new countries ranging from the Republic of South Africa and Angola to Mozambique and Zambia. REPSSI is also consulting with governments in the region about broader introduction of psychosocial support programs.

Community-based Health Insurance

One of the latest examples of the support NFSD is providing at the local level in developing countries is a pilot program introducing health insurance in 72 remote villages in Mali. Launched by the rural commune of Cinzana in 2003, the insurance program seemed a risky initiative. Previous insurance schemes in the region had collapsed, leaving villagers who had paid premiums without care when they needed it most.

Over the past three years, however, more than 2 000 members have joined the Cinzana insurance program – roughly 12% of all residents in the catchment area. The annual premium – less than USD 3 – covers 60% of the cost of basic healthcare at a local clinic, and a higher 75% of costs when obstetric complications require more sophisticated care at a regional health facility.

A co-founder of the Cinzana program, NFSD provides its local partners with funding, as well as managerial support ranging from planning and financial controlling to marketing. Along with basic health services, the program is stepping up efforts in preventive care – including distribution of insecticide-treated bed nets to members.

Cinzana’s program has become the biggest single health insurer in Ségou, a region of Mali with two million residents. From 2007, core elements of the Cinzana model will be scaled up and introduced throughout the Segou region, an important step toward creating bigger risk pools capable of financing more costly health interventions that are urgently needed.

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NOVARTIS ACCESS-TO-MEDICINE PROJECTS 2006

 

 

 

 

 

 

Value

 

Patients

 

Project

 

Objective

 

Target region

 

(USD millions)

 

reached

 

Malaria/WHO1

 

Provide Coartem at cost for public sector use

 

Africa, Asia,
Latin America

 

179

 

33 000 000

 

Leprosy/WHO2

 

Eliminate leprosy by providing free medications to all patients worldwide, with WHO, through 2010

 

Global

 

4

 

226 000

 

Tuberculosis2

 

Donation of fixed-dose combinations

 

Tanzania,
Sri Lanka

 

3

 

134 000

 

Novartis Institute for Tropical Diseases (NITD)3

 

Discover novel treatments and prevention methods for major tropical diseases; NITD discoveries to be available in poor endemic countries without profit

 

Developing countries

 

11

 

 

Novartis Foundation for Sustainable Development3

 

Work at policy and field level to improve access to healthcare for the world’s poorest people

 

Developing countries

 

7

 

95 000

 

Patient Assistance Programs (PAP)2; excl. Gleevec/Glivec

 

Assistance to patients experiencing financial hardship, without third-party insurance coverage for their medicines

 

US

 

129

 

155 000

 

Gleevec US PAP2

 

Within capability of Novartis, continue to ensure access for patients in the US who cannot afford the drug

 

US

 

55

 

3 500

 

 

 

 

 

 

 

 

 

 

 

Glivec Global PAP2

 

Within capability of Novartis, continue to ensure access for patients outside the US who cannot afford the drug

 

Global (excluding US)

 

362

 

15 000

 

Together Rx Access

 

Discount program for the uninsured

 

US

 

1

 

15 000

 

Emergency Relief2

 

Support major humanitarian organizations

 

Global

 

4

 

 

 

 

 

 

Total

 

755

 

33.6 million

 

 


1     During 2006, Novartis shipped 62 million Coartem treatments for public sector use. Of these shipments, an estimated 33 million treatments actually reached patients by year-end, based on preliminary analysis of local distribution. Value of the Coartem program in 2006 was calculated using the number of treatments shipped and the ex-factory price of Coartem to private-sector purchasers in malaria-endemic developing countries, minus payments to Novartis to cover costs under terms of the public-private partnership with WHO. These payments were received through WHO, UNICEF and other procurement agencies, acting on behalf of governments and other public sector institutions in developing countries eligible to receive Coartem at the “not-for-profit” price.

2     Ex-factory price to private market

3     Operating costs

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COMMITMENT TO OUR PEOPLE

The employer value proposition at Novartis offers an achievement-based culture, intense focus on innovation and the opportunity to work with extraordinary people in a truly global organization. Rapid expansion of operations in China exemplifies how those commitments are being translated into concrete career advancement and development for local managers.

At Novartis, a high-performance, results-driven culture, combined with a steadfast focus on innovation and breakthrough medicines addressing unmet medical need, has been critical to success.

World-class performance is based on three priorities: offering the best products for patients and customers; promoting a fierce competitive spirit among associates; and developing skilled and cohesive teams. Looking ahead, Novartis will continue to concentrate on its medicine-based portfolio – protecting health, preventing and treating disease, and improving well-being.

Last year, the Group turned to associates in an attempt to distill the qualities that make Novartis attractive, perhaps even unique, as an employer. Workshops with more than 4 000 associates identified six attributes as the core of an Employer Value Proposition (EVP). The Group’s most distinctive features, associates said, ranged from the achievement-based culture, intense focus on innovation, and dynamic growth, to the opportunity to work with extraordinary people in a truly global organization, and to do work that really matters to the health and well-being of humanity.

“Novartis is an attractive employer first of all because we are successful,” says Juergen Brokatzky-Geiger, Ph.D., Head of Human Resources and member of the Executive Committee of Novartis. “Our product pipeline is seen as one of the most promising in the pharmaceutical industry and our growth speaks for itself. But development of associates is a cornerstone of our culture. If you are willing to perform, you have a promising future with Novartis,” Dr. Brokatzky-Geiger adds.

“The great diversity of nationalities, educational backgrounds, cultures and interests across the Group is an enriching experience that opens up personal as well as professional horizons.”

Following up the EVP project, Novartis launched the first, uniform Group-wide climate survey during 2006. In an initial stage, 50 000 associates from the Pharmaceuticals Division worldwide will have a chance to respond via a detailed questionnaire, offered in about 20 languages. Other Divisions are expected to complete the survey by the end of 2007.

China

One example of this commitment to people at Novartis is the China Leadership Development Center introduced three years ago.

Nurturing leaders is a perennial challenge for major international companies but it has assumed added urgency for Novartis in China amid rapid growth in recent years. Ambitious expansion plans include both a new research and development center in Shanghai, and a development and production plant in Changshu, which will begin operations this year.

“We aren’t just a local player any longer – we are an international player in a strategic market,” says James Deng, Head Country

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Pharma Organization in China. “Everyone is watching China and we have to upgrade our talent standard across the board.”

It won’t be easy. China’s explosive economic growth has translated into accelerating management turnover rates, particularly at international companies. According to estimates, annual average turnover is approaching 20% and is even higher for sales executives.

The limited supply of local talent with appropriate skills isn’t expected to improve significantly anytime soon. While China produces more than 3 million university graduates per annum, less than 10% have the skills required by an international group like Novartis. At the current rate of economic growth, China will need an estimated 75 000 managers able to assume managerial positions with international firms within five years. But only 5 000 executives with that training and background are available today.

At Novartis operations in China, the annual rate of management turnover is currently running below 15%, reflecting at least in part the rich array of career development programs now available. One key pillar of leadership development is the Beijing International MBA program (BiMBA), a popular MBA program at Peking University tailor-made for Novartis middle managers in collaboration with the China Center for Economic Research.

Another key leadership initiative is the “Trailblazer” rotation program, enabling senior Novartis sales executives in China to spend 12–18 months in the US, absorbing best practice from American peers. “It’s a major commitment. These are our best-performing sales managers and it disturbs our business to remove them from their normal jobs for such a long time,” Mr. Deng says. “But we’re building for the future and the exposure these managers are getting in the US will enable them to develop in new directions and perform at an even higher level when they return home.”

The first two Novartis cohorts in the BiMBA program comprise almost 200 middle managers, out of the Group’s total work-force in China of roughly 2 000 associates. The cohort beginning the BiMBA program in 2007 will be significantly larger than in previous years.

Selection of participants in both the BiMBA and Trailblazer programs is closely coordinated with the global Organization and Talent Review at Novartis. The transparency of that process is an attractive feature of the program to top performers, says Jennifer Jin, Head of Human Resources for the Novartis Pharmaceuticals Division in China.

“In China, people traditionally look first at seniority and expect managers who have been with the company longest to get these opportunities,” Ms. Jin says. “We say this is an opportunity you earn based on performance and high potential – and that sends the right message through the organization.”

Moreover, by targeting middle managers, the BiMBA program aims to shore up leadership – and motivation of managers and associates at levels of the organization that haven’t received significant attention in the past. “As BiMBA participants improve their management skills and become more mature, they can play a critical role in reducing turnover within their teams,” Ms. Jin says.

Because the Novartis BiMBA program is closed to outsiders, course material can be based on actual operations. “We all come from some Novartis entity so our discussions are closely focused on daily issues and practices – and Group policy,” says Steele Zhang, Staffing Manager and Human Resource Manager at headquarters in China – and a member of the initial BiMBA cohort. “It’s very useful and we can begin applying what we have learned immediately when we return to work.”

Guang Yang, Brand Manager for Mature Products and another member of the initial BiMBA cohort, says he already is applying skills and techniques he learned during the course. “As a manager you try to make decisions that are correct and fact-based,” he says. “But leading is different than managing. As a leader, you need to go further and make sure everybody understands the objectives of the team, and strives to achieve that broader goal.”

STAFF FLUCTUATIONS 2006

Associates as of January 1, 2006

 

90 924

 

100

%

Separations

 

-3 908

 

-4

%

Retirements

 

-751

 

-1

%

Resignations

 

-7 420

 

-8

%

External hirings

 

16 982

 

19

%

Acquisition changes

 

4 908

 

5

%

Associates as of December 31, 2006

 

100 735

 

111

%

(Figures represent headcount)

52




Mixing managers from different divisions and functions also pays dividends, says Lucy Huang, a finance manager at the Novartis Animal Health Business Unit based in Shanghai. “There is limited communication between Novartis Business Units in China and the BiMBA course gives us an opportunity to find out more about what’s going on at the Corporate level and in the Pharmaceuticals Division,” Ms. Huang says. “Because we’re all middle level managers and share the same background, it’s easy to benefit from experience of other managers, how they handle problems, issues and pressures.”

“This course is very important for my personal development and I hope other talents growing up at Novartis here in China have the same chance to improve themselves,” she adds.

Parallel with the BiMBA program, some Novartis executive learning programs previously held at elite business schools in the US or Europe have been shifted to China – giving Novartis managers around the world an opportunity to see and understand the transformation of China and its economy first-hand. “China used to be a country where companies like Novartis only focused on manufacturing or selling a small slice of their product range,” says John Yang, Ph.D., Professor of Management at Peking University and a key figure in the Novartis BiMBA program.

“Today China is a strategic country globally. And it is exciting for Novartis executives from around the world to come here,” Dr. Yang says. “They discuss why local culture, organization and management practice is so different in China from their own country. That’s easier to understand while they are here in China and this actually is helping Novartis very much in terms of strategic implementation.”

Diversity and Inclusion

Fostering Diversity and Inclusion at Novartis isn’t just the right thing to do – the program underscores a key business imperative for the organization around the world.

As our customer base grows increasingly diverse, a diverse talent pool becomes a critical bridge between the workplace and the marketplace. For example, more women and people from minority groups are entering the medical field than ever before. And today women and minorities account for the vast majority of households’ healthcare buying decisions worldwide.

The Novartis talent pool must evolve to mirror the market. Diversity of our workforce enhances customer insight and our ability to meet the needs of patients and other stake-holders.

In the US, Novartis associates have formed a dozen Employee Resource Groups (ERGs) – internal support systems and peer networks linking dozens or hundreds of people with shared interests. The ERGs range from gender and ethnic groups, to ones comprising working parents, veterans of the armed forces, or associates who are living with cancer, or have loved ones afflicted with the disease.

Each ERG is sponsored by a member of the US Pharmaceuticals Division’s executive committee who helps the group set annual, business-relevant objectives. The African American leaders group served as an in-house focus group during launch preparations by the Exjade brand team last year and is now working closely in a similar capacity with the Galvus brand team. Meanwhile, the Women in Leadership group partnered with the Cardiovascular Business Franchise and the American Heart Association in developing programs helping physicians promote good cardiovascular health in women.

ASSOCIATES BY REGION AND DIVISION AS OF DECEMBER 31, 2006

 

 

 

 

Canada and

 

 

 

Africa/Asia/

 

 

 

 

 

US

 

Latin America

 

Europe

 

Australia

 

Total

 

Pharmaceuticals

 

15 331

 

4 930

 

24 096

 

9 957

 

54 314

 

Vaccines and Diagnostics

 

791

 

 

 

2 986

 

158

 

3 935

 

Sandoz

 

1 286

 

2 088

 

14 125

 

3 618

 

21 117

 

Consumer Health

 

7 475

 

3 378

 

5 796

 

2 956

 

19 605

 

Corporate

 

677

 

32

 

902

 

153

 

1 764

 

Total

 

25 560

 

10 428

 

47 905

 

16 842

 

100 735

 

(Figures represent headcount)

53




Last year, more than 250 female managers from more than 30 countries gathered in Basel for the second Novartis Female Leadership Forum. Michelle Gadsden-Williams, Head of Diversity and Inclusion, said that in addition to attracting and fostering female managers, Novartis culture needs to accommodate many different management styles to retain that talent.

For the sixth consecutive year, Novartis and the University of Basel offered a mentoring program called Women into Industry that encourages promising female academics to consider careers in business and industry. Participants in the program meet monthly with professional managers from Novartis, and also assist in planning and networking.

Diversity and Inclusion is anchored on the pillars of Novartis Values and Leadership Standards, and complemented by the commitment to the Global Compact and Corporate Citizenship Policy and guidelines. We are committed to inclusive leadership behaviors that create and sustain dignity and respect. We strive to value differences that are reflected in society. We recognize that our customer base is growing more diverse in our existing markets as well as emerging growth markets. By understanding the needs and aspirations of our diverse customer base, we will be better able to provide tailored services resulting in increased loyalty and market share.

Living Wage

Novartis is one of the first international companies to develop and implement a voluntary commitment to pay a “living wage” to all its employees around the world.

As an initial step, Novartis commissioned the consulting firm Business for Social Responsibility (BSR) to establish a methodology to calculate living wage levels. Using those BSR calculations as a starting point, Novartis rolled out the living wage program, working in close consultation with local management in countries with divergent economic systems and standards of living. By early 2006, the Group had aligned the pay of more than 90 000 employees worldwide with living wage levels.

Novartis and BSR continue to work on further improvements, such as periodic adjustments of the initial living wage calculations for key factors such as inflation. For countries with a negative inflation, Novartis recommends that wages be kept at their current levels and not reduced.

Novartis believes that paying a living wage locally is a key benchmark of its commitment to the United Nations Global
Compact – as well as the Group’s longstanding pledge to be a good corporate neighbor in communities where it operates. A key lesson in taking the living wage from idea to implementation is that active participation of local management in the decision-making process is critical to success. Local management bears the ultimate responsibility for the living wage to become accepted as a core principle of a company’s operations and culture.

A living wage reflects the cost of a certain basket of goods and services that is required to cover certain basic goods, taking into account the social circumstances and requirements of the environment. A living wage generally is higher than the minimum wage in the same country, an hourly amount defined by law which employers must pay workers. While minimum wages apply only to discrete geographies, an increasing number of countries across the developed world has passed minimum wage laws over the past century. Many developing countries haven’t yet enacted minimum wage laws, however.

Minimum wages often increase slowly over time and sometimes do not correspond to increases in the cost of goods. A minimum wage, for example, may be the result of a political process or a union negotiation, and not directly based on what that wage will be able to purchase, or if those purchases will provide for a family’s basic needs or ensure an adequate standard of living.

Novartis considers the living wage initiative an opportunity to contribute to the improvement of labor standards, and have a positive impact on communities where the Group operates. Such concerns have become increasingly important as Novartis and other pharmaceutical companies have stepped up activities in developing countries, where legal protections for workers aren’t as advanced as in industrialized nations.

The guideline on fair working conditions set the stage for the living wage initiative. Much of that guideline is rooted in the language of the third principle of the Global Compact principle addressing collective bargaining and freedom of association. Novartis chose to implement the living wage commitment within a framework of wage standards that extended beyond the boundary established by the Global Compact.

Following the conclusion of a 2005 round of consultations with affiliates, a review by Novartis HR found that 93 employees – out of a total workforce of more than 90 000 – were being paid less than the living wage level in their country of employment. Wages of those employees were increased – bringing the entire global work-force in line with living wage levels.

54




COMMITMENT TO HEALTH, SAFETY AND ENVIRONMENT

Novartis believes that careful stewardship of natural resources, particularly tight control of greenhouse gas emissions and energy efficiency, is not only important for the Group but critical for global society and future generations. Social and environmental sustainability is an integral part of our strategy and a key reason for the success of Novartis.

Novartis continuously seeks innovative, sustainable strategies and systems to strengthen its commitment to Health, Safety and Environment (HSE) and Business Continuity Management.

Rigorous technical standards, reinforced with engineering solutions to ensure that the workplace is safe for associates, remain the foundation of HSE performance. At the same time, the Occupational Medicine organization offers proactive programs to maintain health, reduce absenteeism and enhance motivation to return to work after illness or injury.

In recent years 50 Novartis sites, out of 208 reporting units worldwide, have remained accident-free for more than a million consecutive working hours. Such stellar safety records owe as much to the prudent behavior of well-trained associates as to elaborately engineered systems.

Indeed, behavior-based programs are increasingly seen as the key to continued improvement of occupational health and safety, and HSE performance, in coming years.

In many countries, accidents related to work are less common than lost time due to injuries sustained by associates off the job. And helping associates modify personal behaviors to reduce the risk of cardiovascular disease, cancer and other forms of illness has become a core element of modern occupational health programs.

At Novartis, these support systems are the shared responsibility of line management and individual associates. Participation by associates, however, remains strictly voluntary.

Training is an indispensable element of the Group’s commitment to HSE excellence. Annual workshops are held in all regions of the world, allowing specialists from HSE to share examples of best practice, and support local implementation of sustainability measures.

Energy and Climate

Similar behavior-based approaches are also being used to foster more efficient use of energy and other resources. The energy-efficiency program at Novartis reflects a balance of incentives and targets to build pride in achieving challenging objectives, and to maintain vigilance of associates at a continually high level.

A unit at the Sandoz site in Kundl, Austria that produces final dosage forms of antibiotics such as penicillins and cephalosporins has reduced energy consumption per production unit by 30% over the past three years. Energy-saving measures ranged from a heat recovery project, water-saving valves and reduced pressure in pumps, to turning down air conditioning and warm-water boiler temperature.

Novartis believes that careful stewardship of natural resources, particularly tight control of greenhouse gas (GHG) emissions and energy efficiency, is not only important for the Group but critical for global society and future generations in combating climate change.

In 2005, as a first step, Novartis made a voluntary commitment to reduce its GHG

55




emissions from global operations for the period 2008–2012 to a similar level as that prescribed in the Kyoto Protocol, i.e. 5% below the corresponding 1990 level.

Good progress has been made toward achieving this long-term GHG target. Scope 1 – GHG emissions from internal operational processes and the Novartis vehicle fleet – was stable in 2006, compared to 2005. Scope 2 – GHG emissions from purchased energy – increased by 6.2% last year. Both areas are receiving increased attention through the Group’s energy efficiency target and programs.

GHG EMISSIONS 2003–2006
VERSUS TARGET PATH TO 2012

Still, fulfilling this voluntary target promises to be challenging in view of the rapid growth of the Group’s operations. Novartis currently projects a gap in reduction of GHG emissions for the 2008–12 period, despite actual and forecast internal energy efficiency improvements. Consequently, the Group plans to make use of the Kyoto Flexible Mechanisms, compensating a potential increase in emissions with emission reduction and sequestration projects in developing countries.

Major initiatives include an overhaul of the Group’s vehicle fleet – with the goal of reducing CO2 emissions by 10% by 2010. Vehicle emissions were measured and incorporated in Scope 1 for the first time in 2005. The target for vehicle emissions was established last year.

Currently, Novartis associates make use of over 24 000 cars worldwide which collectively emit about 200 000 tons of CO2 annually. The environmental impact of the vehicle fleet can be substantially lowered through the introduction of hybrid gasoline-electric cars, and increased use of diesel engines fitted with particulate filters as well as other emission-reduction options such as liquid natural gas and bio-fuels. Taking a regional approach, and progressing at a pace determined partly by available supply of hybrid vehicles, these technologies will be phased-in over the replacement cycle of the car fleet.

To support its energy and climate strategy, Novartis applies a proactive policy for capital investments associated with energy conservation. As an exception to normal project requirements, energy projects are allowed to pay back the initial investment over the lifetime of the asset.

At the same time, energy-efficiency and renewable-energy challenges have become mandatory elements of the capital appropriation procedures for all major projects worldwide. Strong leadership and commitment by senior Group management to improved energy efficiency in Divisions is supported by organizational measures and intensified promotional activities.

The initial wave of energy-related investments has delivered significant financial benefits in every Division and Business

56




Unit. “This campaign has environmental value but also real economic value,” says Keith Saveal, Head Corporate Health, Safety and Environment. “We are seeing much faster payback times than had been expected initially for these energy efficiency projects.”

Energy consumption is increasing at a considerably slower rate than sales. Since 2003, Group-wide energy use (including businesses acquired) has increased 12%, compared to a 49% rise in sales during the same period.

Energy intensity – or energy use in relation to several normalizing factors such as sales, number of associates and production – is closely followed and managed by all Divisions and Business Units. Energy efficiency has also improved significantly since 2003, and the original three-year energy efficiency target of 6% for 2006, set in 2003, has been substantially exceeded.

A new energy efficiency target has been set – aiming for a further 10% improvement of energy efficiency by 2010, based on the 2006 performance.

Increasingly, divisions and business units are appointing energy managers and energy advisors for all their operations worldwide. Management tools and dedicated training programs are applied systematically, together with continuous monitoring of targets and performance.

Enhanced energy efficiency by itself will not enable Novartis to achieve the greenhouse gas target and the Group is focusing increasingly on energy systems with reduced carbon intensity. Novartis has almost completed the switch of fossil fuels from oil or coal to natural gas. The current challenge is to reduce carbon intensity further by fostering combined heat and power systems and renewable energy sources such as fuel from waste, bio-fuels or solar, wind and geothermal energy.

Bagasse, a locally available bio-fuel from sugar cane, together with corn and wastes from renewable sources available at sites, are being used as fuels for on-site energy systems wherever possible. A Sandoz plant near Frankfurt, Germany has begun using by-products from fermentation to generate biogas for electricity.

Last year, the Novartis site in East Hanover, New Jersey installed a 130-kilowatt array of solar panels. The array comprises more than 400 solar panels and produces an estimated 500 gigajoules of power a year, roughly 10% of electricity consumed in the building where it is located.

Employee Health

Lost Time Accident Rate (LTAR) is a benchmark indicator that allows direct comparison between the performance of Novartis units and country organizations.

LTAR for continuing operations at Novartis was further reduced, to 0.40 per 200 000 hrs worked in 2006 from 0.44 the previous year.

LOST TIME ACCIDENT RATE 2002 – 2006

(accidents per 200 000 hours worked)

We extend our condolences to the families of the two associates who died in a motorcycle accident during 2006.

Despite significant progress, the Group’s long-term LTAR target hasn’t yet been achieved at businesses acquired during the past two years. Programs to reduce LTAR and reach parity with the rest of Novartis have been introduced at units acquired by Sandoz, as well as at the new Vaccines and Diagnostics Division. The ultimate goal for both established and new businesses is to strive for zero accidents.

Risk Management

Novartis manages risks proactively by implementing appropriate preventive and contingency measures. This risk management process is designed to identify potential hazards and take action to reduce the risk of an event – the likelihood of occurrence and severity of consequences – to an acceptable minimum level.

Each year, Novartis sites update their risk portfolios, which are consolidated at Group level and reviewed by senior management. Action plans are developed for these HSE and business risks, ensuring reduction of the risks and a planned professional response to any incident. During 2006, measures were taken to reduce the priority risks included in the corporate risk portfolio of 2005, and implementation of action plans is ongoing.

In addition to a controlling function, regular HSE audits provide direct support and guidance to the Novartis sites being audited. Audits are conducted by both corporate and divisional specialists. Following audits, sites develop action programs. Implementation of measures to correct deficiencies is closely controlled by the

57




Divisions and also reviewed at the corporate level.

As a further element of our risk management strategy, Novartis has established an Emergency Management (NEM) system to safeguard employees, the public and the environment in case of an incident. Members of NEM Teams worldwide attend regular training programs. NEM is a compulsory, uniform system with defined roles and responsibilities, emergency reporting procedures and clear decision-making structures throughout the Group.

Anticipating incidents that could affect mission-critical functions and processes – as well as adopting preventive and contingency measures – are key requirements for Business Continuity Management. Novartis prepares response plans defining the actions that are necessary, and the resources that are needed to enable the organization to manage any interruption.

Minor violations, however, do occur from time to time. During 2006, Novartis paid a total of USD 27 568 in fines for minor HSE violations at a number of sites.

Minimizing Environmental Impacts

We strive to make efficient use of natural resources and to minimize the environmental impact of our activities, and our products over their life cycle. We assess HSE implications to ensure that the benefits of new products, processes and technologies outweigh remaining risks. We periodically review such assessments in light of new concerns or evidence.

Historical Landfills and Old Industrial Sites

Novartis strives to minimize all environmental impacts and some of the biggest challenges are inherited as a result of operations and practices in past years. Responsibility for historical landfills and brownfields inherited by Novartis from predecessor companies remains a relevant environmental issue today.

Novartis shares a number of confirmed or potential liabilities on the surveillance and remediation of old industrial premises and historical landfills with other companies.

In order to responsibly manage these cases and related environmental risks, Novartis, as a principle, takes a cautious science-based approach, in full cooperation with the respective local authorities and governmental agencies. Where and whenever potential risks are identified, investigations and assessments are carried out in a systematic manner and remediation actions taken when necessary. Novartis has set aside the financial reserves to manage these liabilities worldwide.

Air Emissions and Hazardous Waste to Landfills

One current environmental impact target is a voluntary reduction of emissions of halogenated volatile organic compounds (VOCs) by more then 90% from the 2005 level. In 2006, halogenated VOC emissions declined to 179 metric tons from 372 metric tons the previous year – achieving the intermediate target.

The objective of lowering emissions of non-halogenated VOCs to below 800 tons in 2006 was not achieved because of additional solvent losses associated with increased production at manufacturing facilities. In these cases VOC abatement projects are under preparation.

The amount of hazardous waste disposed in landfills has been effectively minimized from 1 127 metric tons in 2005 to 467 metric tons in 2006. We are well on our way to reaching our voluntary target of disposing less than 100 tons of the remaining hazardous waste that cannot be incinerated in landfills by 2008.

Pharmaceuticals in the Environment

Novartis is committed to minimizing the environmental impact of our products. Pharmaceuticals entering the aquatic environment are an inevitable consequence of science-based healthcare and our business activity. Yet as scientific knowledge evolves in this field, we regularly benchmark our activities, and in addition actively support academia, regulators and other stakeholders in developing more efficient risk-management practices.

The levels of active pharmaceutical ingredients found in the environment are below doses approved as safe by medicinal regulatory agencies, according to current knowledge, and Novartis believes those levels do not present a health risk for humans.

We strive to minimize, to the extent practical, discharges of active pharmaceutical ingredients in our wastewater, and avoid landfilling of our pharmaceutical waste. That waste is incinerated in approved, state-of-the-art facilities. We work with third parties to ensure that they are guided by this policy in their waste minimization activities.

Novartis has also supported research by a group of German wastewater engineers by making available a selection of in-market medicines, as well as innovative compounds still in development. The aim of this pioneering effort is to demonstrate that affordable, reliable wastewater technology works in practice – and helps remove existing, as well as new, pharmaceuticals from waste-water before they reach the environment.

58




Performance Management

Performance of operating units against key HSE indicators is monitored on a monthly basis at Novartis. Last year, a tailor-made HSE Data Management System was developed and introduced worldwide to facilitate data collection, in line with more stringent reporting standards. This new system for monitoring HSE performance provides all management levels throughout the Group with information needed to take early action if deviations against targets occur.

Novartis sets HSE targets covering periods of at least three years to allow better analysis, planning and implementation of programs. Progress towards targets is reviewed annually with each division and business unit, that are also involved in target setting based on recommendations by functional experts. (See table below for 2007 targets.)

Group HSE Targets

Target

 

Change

 

Date

VOC halogenated1

 

decrease 90%

 

by 2008

VOC nonhalogenated1

 

decrease 30%

 

by 2008

Hazardous waste to landfill

 

below 100 tons

 

by 2008

Energy efficiency improvement2

 

10%

 

by 2010

Contact water efficiency improvement2

 

10%

 

by 2010

CO2 from vehicles1

 

decrease 10%

 

by 2010

Scope 1 GHG emissions from operations

 

5% below 1990 level

 

by 2008 – 2012

Lost Time Accident Rate

 

down to 0.2

 

by 2010


1      Baseline level 2005

2      Change of 10% from 2006

HSE Reporting Principles

Global Reporting Initiative

Since 2004, Novartis has reported its HSE performance following the 2002 Guidelines for Sustainability Reporting of the Global Reporting Initiative (GRI). The Novartis GRI Report Index – along with a more detailed overview of our HSE performance – is available at: www.novartis.com

Reporting Entity

HSE performance data for 2006 was collected from 208 sites around the world, owned and managed by Novartis Group companies. This covers all sites with relevant HSE impacts, including all production, formulation, research and development sites as well as major headquarter offices. Hexal and Eon Labs, which were acquired in 2005, are now included in all performance management. Chiron, which was consolidated by Novartis for only part of 2006, is reported separately.

Reporting Scope

Novartis believes the performance data presented in this Annual Report and on the adjacent Novartis website represent a fair and balanced picture of the Novartis HSE performance. Performance Indicators follow GRI requirements for core environmental and social indicators.

59




NOVARTIS HEALTH, SAFETY AND ENVIRONMENT DATA 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Former

 

 

 

Novartis Group*

 

Pharmaceuticals

 

Novartis Research

 

Sandoz*

 

Consumer Health

 

Hexal*/Eon Labs

 

Chiron*

 

 

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

2006

 

Associates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HSE Personnel [number of associates working at least 50% for HSE]

 

495

 

523

 

210

 

214

 

24

 

23

 

128

 

159

 

132

 

125

 

34

 

29

 

29

 

Health/safety

Lost time accident rate [accidents per 200 000 hours worked]

 

0.40

 

0.44

 

0.43

 

0.46

 

0.18

 

0.15

 

0.54

 

0.64

 

0.32

 

0.35

 

0.93

 

1.51

 

0.78

 

Production

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total production [1000 t = metric tons]

 

608

 

655

 

23

 

24

 

0

 

0

 

86

 

92

 

499

 

505

 

11

 

10

 

0.8

 

Resources

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Water use [million m(3)]

 

89.4

 

91.5

 

19.6

 

18.9

 

1.2

 

1.1

 

60.2

 

64

 

8.3

 

7.4

 

0.7

 

0.7

 

0.8

 

Energy use [million GJ]

 

17.1

 

17

 

5.4

 

5.2

 

1.0

 

1.1

 

6.7

 

6.8

 

4.0

 

3.8

 

0.9

 

0.9

 

1.2

 

Emissions into water

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effluent discharge [million m(3)]

 

18.6

 

19.2

 

3.7

 

3.8

 

0.5

 

0.5

 

7.9

 

8.7

 

6.4

 

6.1

 

0.5

 

0.5

 

0.3

 

Chemical oxygen demand COD [1000 t]

 

3.77

 

3.73

 

0.62

 

0.36

 

0

 

0

 

2.64

 

2.79

 

0.50

 

0.50

 

0.05

 

0.05

 

0

 

Emissions into air

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sulfur dioxide, SO2 [t]

 

141

 

131

 

9

 

22

 

0

 

0

 

126

 

105

 

6

 

5

 

0

 

2

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nitrogen oxide NO2 [t]

 

372

 

343

 

140

 

136

 

8

 

10

 

110

 

93

 

114

 

101

 

24

 

22

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volatile organic compounds (VOC) halogenated [t]

 

152

 

289

 

7

 

10

 

0

 

0

 

145

 

280

 

0

 

0

 

27

 

83

 

0

 

Volatile organic compounds (VOC) nonhalogenated [t]

 

1231

 

1 117

 

434

 

217

 

0

 

0

 

742

 

837

 

55

 

63

 

359

 

416

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Emissions CO2 / GHG

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scope 1, Combustion and process [1000 t]

 

454

 

458

 

144

 

158

 

11

 

17

 

156

 

153

 

144

 

127

 

34

 

32

 

35

 

Scope 1, Vehicles [1000 t]

 

190

 

192

 

143

 

146

 

0

 

0

 

17

 

14

 

25

 

25

 

10

 

9

 

1

 

Scope 2, From purchased energy [1000 t]

 

907

 

858

 

214

 

197

 

66

 

61

 

340

 

334

 

287

 

262

 

47

 

41

 

48

 

Waste

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonhazardous operational waste [1000 t]

 

179

 

185

 

19.8

 

28.1

 

2.3

 

2.7

 

13.1

 

14.8

 

144

 

134

 

3.8

 

2.7

 

2.5

 

Hazardous operational waste [1000 t]

 

115

 

102

 

71

 

75.8

 

0.8

 

0.6

 

40.8

 

23.7

 

2.1

 

2.3

 

4.8

 

4.5

 

0.6

 

Debris, nonhazardous [1000 t]

 

121

 

349

 

100

 

347

 

1.3

 

0.1

 

18.7

 

0.9

 

0.4

 

0.8

 

1.1

 

0.2

 

4.5

 

Debris, hazardous [1000 t]

 

13.0

 

113

 

12.9

 

113

 

0

 

0.08

 

0.15

 

0.01

 

0

 

0.01

 

0

 

0

 

0.12

 

Hazardous operational waste landfilled [1000 t]

 

0.46

 

1.12

 

0

 

0.23

 

0

 

0

 

0.45

 

0.89

 

0

 

0.01

 

0.01

 

0

 

0.07

 


* HSE figures for Novartis Group exclude Hexal and Eon Labs and the former Chiron sites. Hexal and Eon Labs were consolidated by Novartis for only part of 2005, and are not included in the Sandoz data. The former Chiron sites were consolidated by Novartis for only part of 2006. Full-year data for the former Chiron sites are provided in a separate column in the table; comparable figures for 2005 are not available.

The Reporting Process

The HSE Data Management System and data-collection process are key elements of Corporate Citizenship Management at Novartis. In gathering this data, we take into account impacts originating from our own operations (Scope 1) – as well as major material flows across boundaries and CO2 emissions from purchased energy (Scope 2). We currently do not monitor impacts for the manufacture and delivery of purchased goods, nor use of energy and related CO2 emissions for activities outside company boundaries (Scope 3), such as transportation by third parties.

HSE data is collected and reviewed on a quarterly basis. The 2006 environmental and resource data published in the Annual Report and on our website are actual data for the period from January through September and best estimates for the period October through December, which will be updated with actual data in the first quarter of 2007. Significant deviations will be reported on our website and restated in next year’s Annual Report. The Employees and Health/Safety data are actual from January through December 2006.

Restatement of 2005 data

The emission and resource data published in the 2005 Annual Report included estimates for the October through December period that in several areas required subsequent adjustments. Inaccuracies identified in data from previous years were also corrected. The Data Table in the 2006 Annual Report includes full-year actual values for 2005.

60




COMMITMENT TO ETHICAL BUSINESS CONDUCT

Even as senior management focuses more than ever on high standards of ethical behavior, and training programs are intensified, compliance can’t be imposed from the top. Appropriate conduct is the responsibility of every manager and associate. It can’t be delegated – or separated from other aspects of doing business.

Today, a major international company like Novartis is judged by the quality of its products and financial performance, but also by the way it does business.

“Our customers want good products and they like a company with a desire to win in the marketplace. But we need to behave with integrity to keep our license to operate,” says Daniel Vasella, M.D., Chairman and Chief Executive Officer of Novartis. “If we don’t have a set of values – and live by them – the Group won’t be successful.”

Yet even as senior management focuses more than ever before on high standards of ethical behavior, compliance can’t be imposed from the top. “Compliance is the responsibility of every single manager and every single employee. It can’t be delegated – or separated from other aspects of doing business,” says Thomas Wel