Novartis - 20-F annual report 2018

Novartis AG and its consolidated affiliates publish consolidated financial statements expressed in US dollars. Our consolidated financial statements responsive to Item 18 of this Annual Report on Form 20-F (Annual Report) are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). “Item 5. Operating and Financial Review and Prospects,” together with the sections on products in development and key development projects of our businesses (see “Item 4. Information on the Company—Item 4.B. Business overview”), constitute the Operating and Financial Review (“Lagebericht”), as defined by the Swiss Code of Obligations.

Unless the context requires otherwise, the words “we,” “our,” “us,” “Novartis,” “Group,” “Company,” and similar words or phrases in this Annual Report refer to Novartis AG and its consolidated affiliates. However, each Group company is legally separate from all other Group companies and manages its business independently through its respective board of directors or similar supervisory body or other top local management body, if applicable. Each executive identified in this Annual Report reports directly to other executives of the Group company that employs the executive, or to that Group company’s board of directors.

In this Annual Report, references to “US dollars,” “USD” or “$” are to the lawful currency of the United States of America, and references to “CHF” are to Swiss francs; references to the “United States” or to “US” are to the United States of America, references to the “European Union” or to “EU” are to the European Union and its 28 member states, references to “Latin America” are to Central and South America, including the Caribbean, and references to “Australasia” are to Australia, New Zealand, Melanesia, Micronesia and Polynesia, unless the context otherwise requires; references to the “EC” are to the European Commission; references to “associates” are to employees of our affiliates; references to the “SEC” are to the US Securities and Exchange Commission; references to the “FDA” are to the US Food and Drug Administration, references to “EMA” are to the European Medicines Agency, an agency of the EU, and references to the “CHMP” are to the Committee for Medicinal Products for Human Use of the EMA; references to “ADR” or “ADRs” are to Novartis American Depositary Receipts, and references to “ADS” or “ADSs” are to Novartis American Depositary Shares; references to the “NYSE” are to the New York Stock Exchange, and references to “SIX” are to the SIX Swiss Exchange; references to “ECN” are to the Executive Committee of Novartis; references to “GSK” are to GlaxoSmithKline plc, references to “AAA” are to Advanced Accelerator Applications S.A., references to “AveXis” are to AveXis, Inc., and references to “Endocyte” are to Endocyte, Inc.

This Annual Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the United States Private Securities ­Litigation Reform Act of 1995, each as amended from time to time. Other written materials filed with or furnished to the SEC by Novartis, as well as other written and oral statements made to the public, may also contain forward-looking statements. Forward-looking statements can be identified by words such as “potential,” “expected,” “will,” “planned,” “pipeline,” “outlook,” or similar terms, or by express or implied discussions regarding potential new products, potential new indications for existing products, or regarding potential future revenues from any such products; or regarding the potential outcome, or financial or other impact on Novartis, of the proposed spin-off of our Alcon Division, or of the proposed divestiture of certain portions of our Sandoz Division business in the US; or regarding the potential impact of the share buyback plan; or regarding potential future sales or earnings of the Group or any of its divisions or potential shareholder returns; or regarding potential future credit ratings of the Group; or by discussions of strategy, plans, expectations or intentions. Such forward-looking statements are based on the current beliefs and expectations of management regarding future events, and are subject to significant known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those set forth in the ­forward-looking statements. You should not place undue reliance on these statements.

In particular, our expectations could be affected by, among other things:

• Global trends toward healthcare cost containment, including ongoing government, payer and general public pricing and reimbursement pressures and requirements for increased pricing transparency;

• Regulatory actions or delays or government regulation generally, including potential regulatory actions or delays with respect to the proposed transactions or the development of the products described in this Annual Report;

• The potential that the strategic benefits, synergies or opportunities expected from the proposed transactions may not be realized or may take longer to realize than expected;

• The inherent uncertainties involved in predicting shareholder returns;

• The uncertainties inherent in the research and development of new healthcare products, including clinical trial results and additional analysis of existing clinical data;

• Our ability to obtain or maintain proprietary intellectual property protection, including the ultimate extent of the impact on Novartis of the loss of patent protection and exclusivity on key products that commenced in prior years and will continue this year;

• Safety, quality or manufacturing issues;

• Uncertainties regarding actual or potential legal proceedings, including, among others, actual or potential litigation with respect to the proposed transactions, product liability litigation, litigation and investigations regarding sales and marketing practices, intellectual property disputes and government investigations generally;

• Uncertainties involved in the development or adoption of potentially transformational technologies and business models;

• Our performance on environmental, social and governance measures;

• General political, economic and trade conditions, including uncertainties regarding the effects of ongoing instability in various parts of the world;

• Uncertainties regarding future global exchange rates;

• Uncertainties regarding future demand for our products; and

• Uncertainties regarding potential significant breaches of data security or data privacy, or disruptions of our information technology systems.

The selected financial information set out below has been extracted from our consolidated financial statements prepared in accordance with IFRS as issued by the IASB. Our consolidated financial statements for the years ended December 31, 2018, 2017 and 2016, are included in “Item 18. Financial Statements” in this Form 20-F.

All financial data should be read in conjunction with “Item 5. Operating and Financial Review and Prospects.” All financial data presented in this Form 20-F are qualified in their entirety by reference to the consolidated financial statements and their notes.

Cash dividends are translated into US dollars at the Bloomberg Market System Rate on the payment date. Because we pay dividends in Swiss francs, exchange rate fluctuations will affect the US dollar amounts received by holders of ADRs.

Major products of our Innovative Medicines Division, as well as certain products of our Sandoz and Alcon Divisions, are protected by patent and other intellectual property rights, which provide us with exclusive rights to market the products, and give us an opportunity to recoup our investments in research and development. However, the strength and duration of those intellectual property rights can vary significantly from product to product and country to country, and they may be successfully challenged by third parties or governmental authorities. Loss of market exclusivity for one or more important products has had, and can be expected to continue to have, a material adverse effect on our results of operations.

The introduction of generic competition for a patented branded medicine typically results in a significant and rapid reduction in net sales and operating income for the branded product because generic manufacturers typically offer their unpatented versions at sharply lower prices. Such competition can occur after successful challenges to intellectual property rights or the regular expiration of the term of the patent or other intellectual property rights. Such competition can also result from the entry of generic versions of another medicine in the same therapeutic class as one of our drugs or in another competing therapeutic class, from a Declaration of Public Interest or the compulsory licensing of our drugs by governments, or from a general weakening of intellectual property laws in certain countries around the world. In addition, generic manufacturers sometimes take an aggressive approach to challenging intellectual property rights, including conducting so-called “launches at risk” of products that are still under legal challenge for infringement, before final resolution of legal proceedings.

We also rely in all aspects of our businesses on unpatented proprietary technology, know how, trade secrets and other confidential information, which we seek to protect through various measures, including confidentiality agreements with licensees, employees, third-party collaborators, and consultants who may have access to such information. If these agreements are breached or our other protective measures should fail, then our contractual or other remedies may not be adequate to cover our losses.

Some of our best-selling products have begun or are about to face significant competition due to the end of market exclusivity resulting from the expiry of patent or other intellectual property protection.

• Our former top-selling products Gleevec/Glivec, Diovan and Exforge all face continued and increasing generic competition in major markets.

• Patent protection for the marketed forms of our Sandostatin products has expired. Generic versions of Sandostatin SC are available in the US, the EU and Japan. While there is currently no generic competition in the US, the EU or Japan for Sandostatin LAR, the long-acting version of Sandostatin that represents the majority of our Sandostatin sales, such generic competition may arise in the future.

• Intellectual property protecting a number of additional major products is either being challenged or will expire at various times in the coming years, raising the possibility of generic competition. Among these products that may begin to face generic competition in one or more major markets during the next three years are Gilenya, our everolimus products (Afinitor/Votubia and Zortress/Certican), Exjade and Jadenu, and Lucentis.

For more information on the patent and generic competition status of our Innovative Medicines Division’s products, see “Item 4. Information on the Company—Item 4.B Business overview—Innovative Medicines—Intellectual property.”

In 2019, we expect a potentially significant impact on our net sales from products that have already lost intellectual property protection, as well as products that will lose protection during the year. Because we typically have substantially reduced marketing and research and development expenses related to products that are in their final years of exclusivity, the initial loss of intellectual property protection for a product during the year could also have an impact on our 2019 operating income in an amount corresponding to a significant portion of the product’s lost sales. The magnitude of the impact of generic competition on our income could depend on a number of factors, including the time of year at which the generic competitor is launched; the ease or difficulty of manufacturing a competitor product and obtaining regulatory approval to market it; the number of generic competitor products approved, including whether, in the US, a single competitor is granted an exclusive marketing period; whether an authorized generic is launched; the geographies in which generic competitor products are approved, including the strength of the market for generic pharmaceutical products in such geographies and the comparative profitability of branded

pharmaceutical products in such geographies; and our ability to successfully develop and launch profitable new products to replace the income lost to generic competition. See also “—Our research and development efforts may not succeed,” below, with respect to the development and launch of new products.

Our financial performance, including our ability to replace revenue and income lost to generic and other competition and to grow our business, depends heavily on the commercial success of our products. If any of our major products were to become subject to problems such as changes in prescription growth rates, unexpected side effects, loss of intellectual property protection, supply chain issues or other product shortages, regulatory proceedings, changes in labeling, publicity affecting doctor or patient confidence in the product, material product liability litigation, or pressure from new or existing competitive products, the adverse impact on our revenue and profit could be significant. In addition, our revenue and profit could be significantly impacted by the timing and rate of commercial acceptance of key new products.

See also “—Our business is affected by pressures on pricing and reimbursement for our products,” below, with regard to the impact of pricing and reimbursement issues on the commercial success of our products.

All of our businesses face intense competition from new products and technological advances from competitors, and physicians, patients and third-party payers may choose our competitors’ products instead of ours if they perceive them to be safer, more effective, easier to administer, less expensive, more convenient or more cost-effective. Products that compete with ours are launched from time to time. We cannot predict with accuracy the timing of the introduction of such competitive products or their possible effect on our sales. However, products significantly competitive to our major products – including Cosentyx, Lucentis, Gilenya, Sandostatin, Tasigna, Afinitor, Kisqali and Kymriah– are on the market, and others are in development. In addition, numerous companies from around the world are seeking to enter the healthcare field to take advantage of their expertise in digital and other new technologies.

See “—We may fail to develop or take advantage of transformational technologies and business models,” below.

Such competitive products could significantly affect the revenue from our products and our results of operations. This impact could also be compounded to the extent such competition results in us making significant additional investments in marketing and sales, or in research and development.

For example, our US Sandoz business has suffered significant declines in sales and profits in recent years due, at least in part, to increased competition in its product segments. There can be no certainty that Sandoz US sales will recover in the coming years. In any event, such competition and the costs of our efforts to improve the business’s performance, as well as other factors, can be expected to affect the business, financial condition, or results of operations of this organization, at least in the near term. In addition, despite the devotion of significant resources to our efforts to improve the performance of Sandoz US, those efforts may ultimately prove insufficient. Should our efforts fail to accomplish their goals, or fail to do so in a timely manner, it could have a material adverse impact on our business, financial condition, or results of operations beyond the near term, as well.

We engage in extensive and costly research and development activities, both through our own dedicated resources and through collaborations with third parties, in an effort to identify and successfully and cost-effectively develop new products that address unmet and changing medical needs, are accepted by patients and physicians, are reimbursed by payers, and are commercially successful. Our ability to continue to maintain and grow our business; to replace sales lost due to competition, entry of generics or other reasons; and to bring to market products and medical advances that take advantage of new and potentially disruptive technologies, depends in significant part upon the success of these efforts. However, developing new healthcare products and bringing them to market is a highly costly, lengthy and uncertain process. In spite of our significant investments, there can be no guarantee that our research and development activities will produce commercially successful new products that will enable us to replace revenue and income lost to generic and other competition and to grow our business. See also “—We may not successfully achieve our goals in transactions or reorganizations,” below, with regard to our efforts to reorganize our Innovative Medicines product development organization.

Using the products of our Innovative Medicines Division as an example, the research and development process for a new product can take up to 15 years, or even longer, from discovery to commercial product launch – and with limited available intellectual property protections, the longer it takes to develop a product, the less time there may be for us to recoup our research and development costs. New products must undergo intensive preclinical and clinical testing, and must be approved by means of highly complex, lengthy and expensive approval processes that can vary from country to country.

During each stage, there is a substantial risk that we will encounter serious obstacles that will further delay us and add substantial expense, that we will develop a

product with limited potential for commercial success, or that we will be forced to abandon a product in which we have invested substantial amounts of time and money. These risks may include failure of the product candidate in preclinical studies, difficulty enrolling patients in clinical trials, clinical trial holds or other delays in completing clinical trials, insufficient clinical trial data to support the safety or efficacy of the product candidate or to differentiate our product candidate from competitors, delays in completing formulation and other testing and work necessary to support an application for regulatory approval, adverse reactions to the product candidate or other safety concerns, an inability to manufacture sufficient quantities of the product candidate for development or commercialization activities in a timely and cost-effective manner, and failure to obtain, or delays in obtaining, the required regulatory approvals for the product candidate or the facilities in which it is manufactured.

In addition, following the “Brexit” vote in the UK, the EU decided to move the headquarters of the EU’s health authority, the EMA, from the UK to the Netherlands by March 2019. It is expected that a significant percentage of the current employees of the EMA will decide not to make the move to the Netherlands. This raises the possibility that new drug approvals in the EU could be delayed as a result.

Further, in recent years, in order to achieve approvals of new products and new indications, governmental authorities around the world have increasingly required more clinical trial data than they had in the past, the inclusion of significantly higher numbers of patients in clinical trials, and more detailed analyses of the trials. In addition, in order for a product to be reimbursed and to be commercially successful, payers and prescribers have increasingly required additional data that differentiates the product from other drugs on the market. As a result, despite significant efforts by health authorities such as the FDA to accelerate the development of new drugs, the already lengthy and expensive process of obtaining regulatory approvals and reimbursement for pharmaceutical products has in many cases become even more challenging.

Similarly, the post-approval regulatory burden has also increased. Approved drugs are subject to various requirements such as risk evaluation and mitigation strategies (REMS), risk management plans, comparative effectiveness studies, health technology assessments, and requirements to conduct post-approval Phase IV clinical trials to gather additional safety and other data on products. These requirements have the effect of making the maintenance of regulatory approvals for our products increasingly expensive, and further heightening the risk of recalls, product withdrawals, loss of market share, and loss of revenue and profitability.

There is also the risk that we may fail to identify significant new product candidates for development or potentially disruptive new technologies, and so may fail to take advantage of a potential new wave of innovation.

Our Alcon Division faces similar challenges in bringing new products to market, including both the products and components that have been developed in house, as well as those that have been acquired from third parties. Alcon’s Surgical and Vision Care products face medical device development and approval processes that are often similarly as difficult as those faced by our Innovative Medicines Division. For example, in 2017 the EU published a new EU Medical Devices Regulation, which has introduced substantial changes to the requirements for medical device manufacturers bringing new products to the EU market, including with respect to clinical development, labeling, technical documentation and quality management systems. The regulation has a three-year implementation period. Further, the FDA is also pursuing various efforts to modernize its regulation of devices, including potential changes to existing regulatory approval pathways that could impact our device approval efforts. Alcon has taken steps to increase its innovation power and the success of its research and development efforts. But these efforts are costly and require extensive efforts over time. There can be no certainty that Alcon will be successful in these efforts, in either the short term or the long term, and if Alcon is not successful, there could be a material adverse effect on the success of the Alcon Division.

In addition, our Sandoz Division has made, and expects to continue to make, significant investments in the development of biotechnology-based, “biologic” medicines intended for sale as bioequivalent or “biosimilar” versions of currently marketed biotechnology products, as well as other differentiated, “difficult-to-make” generic products. While the development of such products typically is significantly less costly and complex than the development of the equivalent originator medicines, it is nonetheless often significantly more costly and complex than that for non-differentiated generic products. In addition, many countries do not yet have fully developed legislative or regulatory pathways to facilitate the development of biosimilars and permit biosimilars to be sold in a manner in which the biosimilar product would be readily substitutable for the originator product. Further delays in the development and completion of such regulatory pathways, or any significant impediments that may ultimately be built into such pathways, or any other significant difficulties that may arise in the development or marketing of biosimilars or other differentiated products, could put at risk the significant investments that Sandoz has made, and will continue to make, in the development of differentiated products in general, and in its Biopharmaceuticals business in particular. Sandoz also achieves significant revenue opportunities when it secures and maintains exclusivity periods granted for generic products in certain markets – particularly the 180-day exclusivity period granted in the US by the Hatch Waxman Act for first-to-file generics. Failure to obtain and maintain such exclusivity periods or to successfully develop and market biosimilars and differentiated generic products could have a material adverse effect on the success of the Sandoz Division and the Group as a whole.

See also “—Competition and failure to successfully develop biosimilars and other differentiated products may impact the success of our Sandoz Division,” below.

Further, in all of our divisions, our research and development activities must be conducted in an ethical and compliant manner. Among other things, we must be concerned with patient safety, data privacy, Good Clinical Practices requirements, data integrity requirements, the fair treatment of patients in developing countries, and animal welfare requirements. Should we fail to properly

manage such issues, we risk injury to third parties, damage to our reputation, negative financial consequences as a result of potential claims for damages, sanctions and fines, and the potential that our investments in research and development activities could have no benefit to the Group.

If we are unable to maintain a flow of successful, cost-effective new products and new indications for existing products that will sustain and grow our business, cover our substantial research and development costs and the decline in sales of older products that become subject to generic or other competition, and take advantage of technological and medical advances, then this could have a material adverse effect on our business, financial condition, or results of operations.

Our businesses are operating in an ever more challenging environment, with significant pressures on the pricing of our products and on our ability to obtain and maintain satisfactory rates of reimbursement for our products by governments, insurers and other payers. The growth of overall healthcare costs as a percentage of gross domestic product in many countries means that governments and payers are under intense pressure to control healthcare spending even more tightly than in the past. These pressures are particularly strong given the increasing demand for healthcare resulting from the aging of the global population and associated increases in noncommunicable diseases, and the resulting impact on healthcare budgets. These pressures are further compounded by significant controversies and intense political debate and publicity about prices for pharmaceuticals that some consider excessive, including government regulatory efforts, funding restrictions, legislative proposals, policy interpretations, investigations and legal proceedings regarding pharmaceutical pricing practices.

See also “—Ongoing consolidation among our distributors and retailers is increasing both the purchasing leverage of key customers and the concentration of credit risk,” below, with regard to the impact of the consolidation among our customers on our pricing; “—Our products face losses of intellectual property protection,” above, with regard to the impact of the loss or risk of loss of intellectual property protections on our pricing; and “—Political and economic instability may impact our results,” below, with regard to the impact of economic conditions on our pricing.

As a result, in addition to ongoing public and political pressures to limit the prices we charge for our products, we face numerous cost-containment measures imposed by governments and other payers, including government-imposed industrywide price reductions, mandatory pricing systems, reference pricing systems, payers limiting access to treatments based on cost-benefit analyses, imports of drugs from lower-cost countries to higher-cost countries, shifting of the payment burden to patients through higher co-payments, limiting physicians’ ability to choose among competing medicines, mandatory substitution of generic drugs for the patented equivalent, growing pressure on physicians to reduce the prescribing of patented prescription medicines, increasing pressure on intellectual property protections, and requirements for increased transparency on pricing. For more information on such price controls, see “Item 4. Information on the Company—Item 4.B Business overview—Innovative Medicines—Price controls.”

We are obligated to comply with the laws of all of the countries around the world in which we operate and sell products with respect to an extremely wide and growing range of activities. Such legal requirements can vary from country to country, and new requirements may be imposed on us from time to time as a result of changing government and public expectations regarding the healthcare industry, and acceptable corporate behavior generally.

For example, we are faced with increasing pressures, including new laws and regulations from around the world, to be more transparent with respect to how we do business, including with respect to our interactions with healthcare professionals and organizations. These laws and regulations include requirements that we disclose payments or other transfers of value made to healthcare professionals and organizations, as well as information relating to the prices for our products. Such measures, including any additional such measures that may be put in place, could have a material adverse impact on our business, financial condition, or results of operations.

In addition, companies and executives in our industry continue to face significant government investigations, legal proceedings and law enforcement activities, both in the US and in countries around the world. Increasingly, such activities can involve criminal proceedings, and can retroactively challenge practices previously considered to be legal. A number of our subsidiaries across each of our divisions are, or may in the future be, subject to various investigations and legal proceedings,

including proceedings regarding sales and marketing practices, pricing, corruption, trade regulation and embargo legislation, product liability, commercial disputes, employment and wrongful discharge, antitrust matters, securities, insider trading, occupational health and safety, environmental matters, tax, cybersecurity, data privacy and intellectual property.

Our Sandoz Division may from time to time seek approval to market a generic version of a product before the expiration of patents claimed by the marketer of the patented product. We do this in cases where we believe that the relevant patents are invalid or unenforceable, or would not be infringed by our generic product. As a result, affiliates of our Sandoz Division frequently face patent litigation, and in certain circumstances, we may elect to market a generic product even though patent infringement actions are still pending. Should we elect to proceed in this manner and conduct a “launch at risk,” we could face substantial damages if the final court decision is adverse to us.

For information on significant legal matters pending against us, see “Item 18. Financial Statements—Note 19. Provisions and other non-current liabilities” and “Item 18. Financial Statements—Note 27. Commitments and contingencies.” See also “—Our reliance on outsourcing key business functions to third parties heightens the risks faced by our businesses,” below.

To help us in our efforts to comply with the many requirements that impact us, we have a significant global ethics and compliance program in place, and we devote substantial time and resources to efforts to ensure that our business is conducted in a lawful and publicly acceptable manner. Nonetheless, despite our efforts, any actual or alleged failure to comply with law or with heightened public expectations could lead to substantial liabilities that may not be covered by insurance, or to other significant losses, and could affect our business, financial position and reputation.

Such proceedings are inherently unpredictable, and large judgments sometimes occur. As a consequence, we may in the future incur judgments that could involve large cash payments, including the potential repayment of amounts allegedly obtained improperly, and other penalties, including treble damages. In addition, such legal proceedings and investigations, even if meritless, may affect our reputation, may create a risk of potential exclusion from government reimbursement programs in the US and other countries, and may lead to civil litigation. As a result, having taken into account all relevant factors, we have in the past and may again in the future enter into major settlements of such claims without bringing them to final legal adjudication by courts or other such bodies, despite having potentially significant defenses against them, in order to limit the risks they pose to our business and reputation. Such settlements may require us to pay significant sums of money and to enter into corporate integrity or similar agreements, which are intended to regulate company behavior for extended periods.

The manufacture of our products is complex and heavily regulated by governmental health authorities around the world, including the FDA. Whether our products and the related raw materials are manufactured at our own dedicated manufacturing facilities or by third parties, we must ensure that all manufacturing processes comply with our own quality standards, as well as with current Good Manufacturing Practices (cGMP) and other applicable regulations.

The technically complex manufacturing processes required to manufacture many of our products increase the risk of production failures and product recalls, and can increase the cost of producing our goods. Many of our products require a supply of highly specialized raw materials. For some of our products and raw materials, we may rely on a single source of supply. In addition, we manufacture and sell a number of sterile products, biologic products and products involving advanced therapy platforms, such as CAR-T therapies, gene therapy and radioligand therapy products, all of which are particularly complex and involve highly specialized manufacturing technologies. As a result, even slight deviations at any point in their production process or in material used may lead to production failures or recalls. For example, for our new CAR-T therapy product Kymriah, manufacturing-related issues have impacted the product’s sales. In sum, because the production process for some of our products is complex and sensitive, the cost of production of these products can be high, and the chance of production failures, lengthy supply interruptions, product recalls or voluntary market withdrawals is increased.

In addition, due to the inherent complexities of our production processes, we are required to plan our production activities well in advance. If we should suffer from raw material shortages, or if we should underestimate market demand for a product, or should fail to accurately predict when the product would be approved for sale, then we may not be able to produce sufficient product to meet demand. Alternatively, if we overestimate the quantity or timing of product to be produced, then we may be required to dispose of excess product, which would result not only in the loss of the product but also in the resources spent to produce it.

These complex production processes are also heavily regulated by health authorities around the world. And in recent years, these health authorities have substantially intensified their scrutiny of manufacturers’ compliance with such requirements. Any significant failure by us or our third-party suppliers to comply with these requirements, or with the health authorities’ expectations, may cause us to shut down the production facilities or production lines and recall previously shipped products. Alternatively, we may be forced to do so by a government health authority, or could be prevented from importing our products from one country to another. In addition, health authorities have in some cases imposed significant penalties for such failures to comply with cGMP. A failure to comply fully with cGMP could also lead to a delay in the approval of new products to be manufactured at the impacted site.

Further, because our products are intended to promote the health of patients, for some of our products, a

supply disruption or other production issue could endanger our reputation and subject us to lawsuits or to allegations that the public health, or the health of individuals, has been harmed.

In sum, complex production processes and compliance with regulatory requirements can increase our cost of producing our products, and any significant disruption in the supply of our products could impact patient health and our sales, which could have a material adverse effect on our business, financial condition, or results of operations, as well as our reputation.

See also “—We may not successfully achieve our goals in transactions or reorganizations,” below, with regard to our efforts to reorganize our product manufacturing organization, and “—Climate change, extreme weather events, earthquakes and other natural disasters could adversely affect our business,” below.

As part of our strategy, from time to time we acquire and divest products or entire businesses in order to expand or complement our existing businesses, or to enable us to focus more sharply on our strategic businesses. For example, we recently completed the acquisitions of AveXis, Inc., a gene therapy company, and Endocyte, Inc., a radioligand therapy company, as well as the divestment of our stake in the GSK consumer healthcare joint venture. We also announced plans to spin off our Alcon Division and to divest the Sandoz US dermatology business and US oral solids portfolio.

Despite expending significant efforts and resources in this area, we cannot ensure that we will identify products or businesses that are suitable for acquisition. In addition, acquisition activities can be thwarted by governmental regulation, including market concentration limitations, political interference, overtures from competitors for the targeted assets, potentially increasing prices demanded by sellers, and other issues. Once an acquisition is agreed upon with a third party, we may not be able to complete the acquisition in the expected form or within the expected timeframe, or at all, due to a failure to obtain required regulatory approvals or a failure to achieve contractual or other required closing conditions. Further, after an acquisition, efforts to develop and market acquired products or to integrate the acquired business may not meet expectations, or may otherwise not be successful, as a result of difficulties in retaining key personnel, customers and suppliers; difference in corporate culture, standards, controls, processes and policies; the price at which we acquired the business; or other reasons. Acquisitions and divestments can also divert management’s attention from our existing businesses, and could result in the existing businesses failing to achieve expected results, or in liabilities being incurred that were not known at the time of acquisition, or the creation of tax or accounting issues.

Similarly, we cannot ensure that we will be able to successfully divest or spin off businesses or other assets that we have identified for this purpose. Neither can we ensure that we will correctly select businesses or assets as candidates for divestment or spin-off, that we will be able to successfully complete any planned divestments or spin-offs, or that any completed divestment or spin-off will achieve the expected strategic benefits, synergies or opportunities, or that the divestment or spin-off will ultimately maximize shareholder value.

In addition, as part of our strategy, from time to time we reassess the optimal organization of our business, such as our ongoing efforts to centralize and optimize our manufacturing and business services organizations, in order to better align our organization with the capabilities and expertise required for competitive advantage. But the expected benefits of such reorganizations may never be fully realized or may take longer to realize than expected. There can be no certainty that the businesses and functions involved will be successfully integrated into the new organizations or that key personnel will be retained. Disruption from the reorganizations may make it more difficult to maintain relationships with customers, employees or suppliers; could result in shortfalls in program oversight; and may result in the Group not achieving the expected productivity and financial benefits.

We are heavily dependent on critical, complex and interdependent information technology systems, including internet-based systems, to support our business processes. In addition, we rely on internet and social media tools and mobile technologies as a means of communications and to gather information, which can include people’s personal data. We also increasingly seek to develop technology-based products such as mobile applications and other digital health products that go “beyond the pill” to improve patient welfare in a variety of ways, which could also result in us collecting personal information about individual patients and others.

The size, age and complexity of our information technology systems make them potentially vulnerable to external and internal security threats; outages; malicious intrusions and attacks; cybercrimes, including state-sponsored cybercrimes; malware; misplaced or lost data; programming or human errors; or other similar events. Although we have devoted and continue to devote significant resources and management attention to cybersecurity, information management and business

continuity efforts, like many companies, we have experienced certain of these events and expect to continue to experience them in the future, as the external and internal information security threat continues to grow. We believe that the information security incidents we have experienced to date have yet to result in significant disruptions to our operations, and have not had a significant adverse effect on our results of operations, or on third parties. However, we may not be able to prevent future outages, security incidents or other breaches in our systems from having a material adverse effect on our business, financial condition, results of operations, or reputation.

A significant information security or other such event could negatively impact important business processes, such as the conduct of scientific research and clinical trials, the submission of the results of such efforts to health authorities in support of requests for product approvals, the functioning of our manufacturing and supply chain processes, our compliance with legal obligations, communication between employees and with third parties, and other key business activities. Information technology issues could also lead to the compromise of trade secrets or other intellectual property that could be sold and used by competitors to accelerate the development or manufacturing of competing products; to the compromise of personal financial and health information that could be misused for fraud and identity theft; and to the compromise of information technology security data such as usernames, passwords and encryption keys, as well as security strategies and information about network infrastructure, which could allow unauthorized parties to gain access to additional information on our systems. In addition, malfunctions in software or medical devices that make significant use of information technology, including our Alcon surgical equipment, could lead to a risk of direct harm to patients.

In addition, our routine business operations increasingly involve our gathering personal information (including sensitive personal information) about patients, vendors, customers, employees, collaborators and others, through the use of information technologies such as the internet, social media, mobile technologies and technology-based medical devices. Breaches of our systems or those of our third-party contractors, or other failures to protect such information, could expose such people’s personal data to unauthorized persons. Any event involving the substantial loss of personal data could give rise to significant liability, reputational harm, damaged relationships with business partners, and potentially substantial monetary penalties under laws enacted or being enacted around the world. Such events could also lead to restrictions on our ability to transfer personal data across country borders.

We also use internet, social media and mobile tools as a means to communicate with the public, including about our products or about the diseases our products are intended to treat. However, such uses create risks, such as potential violations of rules regulating the promotion of prescription medicines and the potential loss of trade secrets or other intellectual property. In addition, there continues to be significant uncertainties as to the rules that apply to such communications, and as to the interpretations that health authorities will apply in this context to the rules that do exist. As a result, despite our efforts to comply with applicable rules, there is a significant risk that our use of internet, social media and mobile technologies for such purposes may cause us to nonetheless be found in violation of them.

Rapid progress in medical and digital technologies and in the development of sometimes radical new business models is substantially transforming numerous industries around the world, creating new businesses and new opportunities for revenue and profit, while sometimes quickly rendering established businesses uncompetitive or obsolete. Such transformations, both positive and negative, may impact the healthcare industry, and numerous companies from the digital technology and other industries are seeking to enter the healthcare field.

To take advantage of these opportunities, Novartis has embarked upon a digital transformation strategy, with the goal of making Novartis an industry leader in leveraging advanced analytics and other new technologies. As part of this effort, we have created a new role of Chief Digital Officer, reporting directly to the CEO, charged with creating and executing a Companywide digital strategy, to be led by the Executive Committee of Novartis.

In order to reach our goal, we expect to invest substantial resources into efforts to improve the way we use data in drug discovery and development; to improve the ways we engage with patients, doctors and other stakeholders; and to automate business processes. With our commitment to using innovative science and digital technologies to help create transformative treatments for patients, together with our expertise and the extensive data we have and continue to amass, we believe that we have an opportunity to transform our business model using digital technologies.

There is no guarantee that our efforts toward a digital transformation will succeed, or that we will successfully transform our business model, or that we will be able to do so at any particular cost or any particular time. In order to succeed, we will be required to encourage a cultural change among our employees, attract and retain employees with appropriate skills and mindset, and successfully innovate across a variety of technology fields.

At the same time, other companies with specialized expertise or business models are entering the

healthcare field, from research and development to pharmaceutical distribution, potentially disrupting our relationships with patients, healthcare professionals, customers, distributors and suppliers, with unknown potential consequences for us. For example, companies such as Amazon, which acquired PillPack; IBM, with its Watson project; Alphabet, with its subsidiaries Verily and Calico; and Amazon, Berkshire Hathaway and JPMorgan, with their healthcare joint venture, as well as other established technology companies and specialized startup organizations, are aggressively seeking to move forward in this field. In addition, we face new competitors from different regions of the world, including China, which is moving aggressively to expand its role in the sciences and in many industries. Such new competitors may successfully impact our share of the healthcare value chain, or even develop products or technologies that could make our products uncompetitive or obsolete.

In an effort to maintain and advance our position as a leader in healthcare and related technology, we have made significant efforts to develop and to collaborate with other organizations in the development of advanced therapy platforms, including CAR-T therapy, developed in collaboration with the University of Pennsylvania; gene therapy, through our acquisition of AveXis and the licensing of Luxturna outside the US from Spark Therapeutics; and radioligand therapy, through our acquisitions of Advanced Accelerator Applications and Endocyte, Inc.

Increasingly, in addition to the importance of their financial performance, companies are being judged by their performance on a variety of environmental, social and governance (ESG) matters, which are considered to contribute to the long-term sustainability of companies’ performance.

A variety of organizations measure the performance of companies on such ESG topics, and the results of these assessments are widely publicized, including, for example, MSCI, Sustainalytics, the Dow Jones Sustainability Index and, in the healthcare industry, the Access to Medicine Index. In addition, investment in funds that specialize in companies that perform well in such assessments are increasingly popular, and major institutional investors, such as BlackRock, have publicly emphasized the importance of such ESG measures to their investment decisions. Topics taken into account in such assessments include the company’s efforts and impacts on climate change and human rights, ethics and compliance with law, and the role of the company’s board of directors in supervising various sustainability issues. In addition to the topics typically considered in such assessments, in our healthcare industry, issues of the public’s ability to access our medicines are of particular importance.

We actively manage a broad range of such ESG matters, taking into consideration their expected impact on the sustainability of our business over time, and on the potential impact of our business on society. For a description of our activities on such topics, see “Item 4. Information on the Company—Item 4.B Business overview—Overview—Corporate responsibility.” However, in a rapidly changing world, there can be no certainty that we will manage such issues successfully, or that we will successfully meet society’s expectations as to our proper role. Any failure or perceived failure by us in this regard could have a material adverse effect on our reputation and on our business, financial condition, or results of operations, including the sustainability of our business over time.

We carry a significant amount of goodwill and other intangible assets on our consolidated balance sheet, primarily due to acquisitions, including, in particular, substantial goodwill and other intangible assets obtained as a result of our acquisitions of Alcon and of certain oncology assets from GSK. As a result, we may incur significant impairment charges in the future if the fair value of the intangible assets and the groupings of cash-generating units containing goodwill would be less than their carrying value on the Group’s consolidated balance sheet at any point in time.

We regularly review for impairment our long-lived intangible and tangible assets, including identifiable intangible assets, investments in associated companies, and goodwill. Goodwill, intangible assets with an indefinite useful life, acquired research projects not ready for use, and acquired development projects not yet ready for use are subject to impairment review at least annually. Other long-lived assets are reviewed for impairment when there is an indication that an impairment may have occurred. Impairment testing under IFRS may lead to impairment charges in the future. Any significant impairment charges could have a material adverse effect on our results of operations and financial condition. In 2018, for example, we recorded intangible asset impairment charges of USD 1.2 billion.

For a detailed discussion of how we determine whether an impairment has occurred, what factors could result in an impairment, and the impact of impairment charges on our results of operations, see “Item 5. Operating and Financial Review and Prospects—Item 5.A Operating results—Critical accounting policies and

Unpredictable political conditions currently exist in various parts of the world, including a backlash in certain areas against free trade, anti-immigrant sentiment, social unrest, fears of terrorism, and the risk of direct conflicts between nations. In the US, the presidential administration’s imposition of tariffs and opposition to free-trade agreements could have a negative impact on international trade. Similarly, there is a risk that barriers to free trade and the free movement of people may rise in Europe as a result of the UK’s “Brexit” efforts and the rise of nationalist, separatist and populist sentiment in various countries, sometimes exacerbated by large-scale migration flows. Furthermore, significant conflicts continue in parts of the Middle East, including conflicts involving Saudi Arabia and Iran, and with respect to places such as Russia, Ukraine and North Korea. Collectively, such difficult conditions could, among other things, disturb the international flow of goods and increase the costs and difficulties of international transactions.

In addition, local economic conditions may adversely affect the ability of payers, as well as our distributors, customers, suppliers and service providers, to pay for our products, or otherwise to buy necessary inventory or raw materials, and to perform their obligations under agreements with us. Although we make efforts to monitor these third parties’ financial condition and their liquidity, our ability to do so is limited, and some of them may become unable to pay their bills in a timely manner, or may even become insolvent, which could negatively impact our business or results of operations. These risks may be elevated with respect to our interactions with fiscally challenged government payers, or with third parties with substantial exposure to such payers. See also “—Our reliance on outsourcing key business functions to third parties heightens the risks faced by our businesses,” below.

Financial market issues may also result in a lower return on our financial investments, and a lower value on some of our assets. Alternatively, inflation could accelerate, which could lead to higher interest rates, increasing our costs of raising capital. Uncertainties around future central bank and other economic policies in the US and EU, as well as high debt levels in certain other countries, could also impact world trade. Sudden increases in economic, currency or financial market volatility in different countries have also impacted, and may continue to unpredictably impact, our business or results of operations, including the conversion of our operating results into our reporting currency, the US dollar, as well as the value of our investments in our pension plans.

For further information on such risks, see “—Foreign exchange fluctuations may adversely affect our earnings and the value of some of our assets,” and “—Any inaccuracy in the assumptions and estimates used to calculate our pension plan obligations could substantially increase our pension-related expenses,” below. See also “—Our business is affected by pressures on pricing and reimbursement for our products,” above, and “Item 5. Operating and Financial Review and Prospects—Item 5.B Liquidity and capital resources—Effects of currency fluctuations.”

There is also a risk that countries facing local financial difficulties, including countries experiencing high inflation rates and highly indebted countries facing large capital outflows, may impose controls on the exchange of foreign currency. Such exchange controls could limit our ability to distribute retained earnings from our local affiliates, or to pay intercompany payables due from those countries.

See also “Item 5. Operating and Financial Review and Prospects—Item 5.B Liquidity and capital resources—Condensed consolidated balance sheets,” and “Item 18. Financial Statements—Note 14. Trade receivables” and “Item 18. Financial Statements—Note 28. Financial instruments—additional disclosures.”

Similarly, increased scrutiny of corporate taxes and executive pay may lead to significant business disruptions or other adverse business conditions, and may interfere with our ability to attract and retain qualified personnel. See “—Changes in tax laws or their application could adversely affect our results of operations” and “—An inability to attract and retain qualified personnel could adversely affect our business,” below.

To the extent that economic and financial conditions directly affect consumers, then our Innovative Medicines and Sandoz Divisions may be impacted. Given the requirements in certain countries that patients directly pay an increasingly large contribution toward their own healthcare costs, there is a risk that consumers may cut back on prescription drugs to help cope with rising costs. In addition, the elective surgical and contact lens businesses of our Alcon Division may be particularly sensitive to declines in consumer spending.

At the same time, significant changes and potential future volatility in the financial markets, in the consumer and business environment, in the competitive landscape, and in the global political and security landscape make it increasingly difficult for us to predict our revenues and earnings into the future. As a result, any revenue or earnings guidance or outlook that we have given or might give may be overtaken by events, or may otherwise turn out to be inaccurate. Though we endeavor to give reasonable estimates of future revenues and earnings at the time we give such guidance, based on then-current knowledge and conditions, there is a significant risk that such guidance or outlook will turn out to be, or to have been, incorrect.

As of December 31, 2018, we had USD 22.5 billion of non-current financial debt and USD 9.7 billion of current

We outsource the performance of certain key business functions to third parties, and invest a significant amount of effort and resources into doing so. Such outsourced functions can include research and development collaborations, manufacturing operations, warehousing and distribution activities, certain finance functions, marketing activities, data management and others. We may particularly rely on third parties in developing countries, including for the sales, marketing and distribution of our products, and to obtain the intermediate and raw materials used in the manufacture of our products.

Our reliance on outsourcing and third parties for the research and development or manufacturing of our products may reduce the potential profitability of such products.

In addition, governments and the public are increasingly placing pressure on major corporations, including Novartis, to take responsibility for compliance with human rights and appropriate environmental practices, as well as other actions, of their third-party contractors around the world. Examples of this include the Conflict Minerals rule in the US, and the UK Modern Slavery Act.

We place strict contractual requirements on such contractors to comply with law and with our high standards. We also expend significant resources on efforts to screen out inappropriate contractors, to monitor the activities of those we have retained, and to seek their compliance with the law and with our expectations. Nonetheless, many of these companies have limited resources, and, in particular, do not have internal compliance resources comparable to those within our organization.

Our Sandoz Division faces intense competition from companies that market patented pharmaceutical products, which sometimes take aggressive steps to delay the introduction of generic and biosimilar medicines, to limit the availability of exclusivity periods or to reduce their value. At the same time, Sandoz faces strong competition from other generic and biosimilar pharmaceutical companies, which aggressively compete for market share, including through significant price competition. Such competitive actions by other patented, generic and biosimilar pharmaceutical manufacturers may increase the costs and risks associated with our efforts to introduce and market such products, may delay the introduction or marketing of such products, and may further limit the prices at which we are able to sell these products and impact our results of operations. In particular, in the US in recent years, industrywide price competition among generic pharmaceutical companies and consolidation of buyers have significantly hurt Sandoz sales. Expecting these trends to continue, we agreed to sell the Sandoz US dermatology business and generic US oral solids portfolio to Aurobindo Pharma USA Inc.

In addition, Sandoz has invested heavily in the development of biosimilar drugs and other differentiated products, with the expectation that such products offer the potential for higher profitability than less complex products. Sandoz has invested in the development of such products despite the fact that their development is more difficult and expensive than the development of standard generic drugs, and despite the fact that regulations concerning the approval, marketing and sale of biosimilars in certain countries, including in the US, are still under development or not entirely clear. If Sandoz should fail in its efforts to develop and market biosimilars or other such differentiated products, or if the developing biosimilars regulations do not ultimately favor the development and sale of such products, or if we are unable to sell our biosimilar products for a sufficient price, then this could have an adverse effect on the success of our Sandoz Division, and we may fail to achieve expected returns on the investments by Sandoz in the development of biosimilars and other differentiated products.

We sponsor pension and other post-employment benefit plans in various forms. These plans cover a significant portion of our current and former associates. While most of our plans are now defined contribution plans, certain of our associates remain participants in defined benefits

plans. For these defined benefits plans, we are required to make significant assumptions and estimates about future events in calculating the present value of expected future plan expenses and liabilities. These include assumptions used to determine the discount rates we apply to estimated future liabilities and rates of future compensation increases. Assumptions and estimates used by Novartis may differ materially from the actual results we experience in the future, due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants, among other variables. For example, in 2018, a decrease in the interest rate we apply in determining the present value of expected future defined benefit obligations of one-quarter of 1% would have increased our year-end defined benefit pension obligation for plans in Switzerland, the US, the UK, Germany and Japan, which represent 94% of the Group total defined benefit pension obligation, by USD 0.8 billion. Any differences between our assumptions and estimates and our actual experience could require us to make additional contributions to our pension funds. Further, additional employer contributions might be required if plan funding falls below the levels required by local rules. Either such event could have a material effect on our results of operations and financial condition.

Our multinational operations are taxed under the laws of the countries and other jurisdictions in which we operate. However, the integrated nature of our worldwide operations can produce conflicting claims from revenue authorities in different countries as to the profits to be taxed in the individual countries, including potential disputes relating to the prices our subsidiaries charge one another for intercompany transactions, known as transfer pricing. The majority of the jurisdictions in which we operate have double tax treaties with other foreign jurisdictions, which provide a framework for mitigating the impact of double taxation on our revenues and capital gains. However, mechanisms developed to resolve such conflicting claims are largely untried, and can be expected to be very lengthy.

In recent years, tax authorities around the world have increased their scrutiny of company tax filings, and have become more rigid in exercising any discretion they may have. As part of this, the Organization for Economic Co-operation and Development (OECD) has proposed a number of tax law changes under its Base Erosion and Profit Shifting (BEPS) Action Plans to address issues of transparency, coherence and substance.

At the same time, the European Commission is finalizing its Anti Tax Avoidance Directive, which seeks to prevent tax avoidance by companies and to ensure that companies pay appropriate taxes in the markets where profits are effectively made and business is effectively performed. The EU also adopted a new Directive on Administrative Cooperation (DAC6) in 2018, which seeks additional reporting. In addition, the European Commission continues to extend the application of its policies seeking to limit fiscal aid by member states to particular companies, and the related investigation of the member states’ practices regarding the issuance of rulings on tax matters relating to individual companies.

These OECD and EU tax reform initiatives also need local country implementation, including in our home country of Switzerland, which may result in significant changes to established tax principles. Although we have taken steps to be in compliance with the evolving OECD and EU tax initiatives, and will continue to do so, significant uncertainties remain as to the outcome of these efforts.

Switzerland is in the process of considering the implementation of corporate tax reform, which could become effective as early as the first quarter of 2019. However, the outcome of these efforts remains subject to change and could be enacted in a materially different form from what is currently proposed, or could be administered or implemented in a manner different from our expectations. There is also a risk that the EU may not be satisfied with the outcome of Switzerland’s tax reform efforts, and take steps to seek further changes. Accordingly, there can be no assurance that Swiss corporate tax reform will not adversely affect our business or financial condition.

In addition, in the US, the Tax Cuts and Jobs Act, enacted at the end of 2017, included substantial changes to the US taxation of individuals and businesses. Although the law substantially decreased tax rates applicable to corporations in the US, we do not yet know what all of the consequences of this new statute will be, including whether the law will have any unintended consequences. In particular, significant uncertainties remain as to how the US government will implement the new law, including with respect to the tax qualification of interest deductions, the concept of a territorial tax regime, royalty payments and cost of goods sold.

Our industry continues to be challenged by the vulnerability of distribution channels to illegal counterfeiting and the presence of counterfeit products in a growing number of markets and over the internet. Counterfeit products are frequently unsafe or ineffective, and can potentially be life-threatening. To distributors and patients, counterfeit products may be visually indistinguishable from the authentic version. Reports of product

Changes in exchange rates between the US dollar, our reporting currency, and other currencies can result in significant increases or decreases in our reported sales, costs and earnings as expressed in US dollars, and in the reported value of our assets, liabilities and cash flows.

In addition to ordinary market risk, there is a risk that countries could take affirmative steps that could significantly impact the value of their currencies. Such steps could include “quantitative easing” measures and potential withdrawals by countries from common currencies. In addition, countries facing local financial difficulties, including countries experiencing high inflation rates and highly indebted countries facing large capital outflows, may impose controls on the exchange of foreign currency. Such exchange controls could limit our ability to distribute retained earnings from our local affiliates, or to pay intercompany payables due from those countries. See “—Political and economic instability may have a material adverse effect on our results,” below.

Despite measures undertaken to reduce or hedge against foreign currency exchange risks, because a significant portion of our earnings and expenditures are in currencies other than the US dollar, including expenditures in Swiss francs that are significantly higher than our revenue in Swiss francs, any such exchange rate volatility may negatively and materially impact our results of operations and financial condition, and may impact the reported value of our net sales, earnings, assets and liabilities. In addition, the timing and extent of such volatility can be difficult to predict. Further, depending on the movements of particular foreign exchange rates, we may be materially adversely affected at a time when the same currency movements are benefiting some of our competitors.

We highly depend upon skilled personnel in key parts of our organization, and we invest heavily in recruiting, training and retaining qualified individuals, including significant efforts to enhance the diversity of our workforce. The loss of the service of key members of our organization – including senior members of our scientific and management teams, high-quality researchers and development specialists, and skilled personnel in developing countries – could delay or prevent the achievement of major business objectives.

Our future growth will demand talented associates and leaders, yet the market for talent has become increasingly competitive. In particular, Emerging Growth Markets are expected to continue to be an important source of growth, but in many of these countries there is a limited pool of executives with the training and international experience needed to work successfully in a global organization like Novartis.

In addition, shifting demographic trends are expected to result in fewer students, fewer graduates and fewer people entering the workforce in the Western world in the next 10 years. Moreover, many members of younger generations around the world have changing expectations toward careers, engagement and the integration of work in their overall lifestyles.

The supply of talent for certain key functional and leadership positions is decreasing, and a talent gap is visible for some professions and geographies – engineers in Germany, for example. Recruitment is increasingly regional or global in specialized fields such as clinical development, biosciences, chemistry and information technology. In addition, the geographic mobility of talent is expected to decrease in the future, with talented individuals in developed and developing countries anticipating ample career opportunities closer to home than in the past. This decrease in mobility may be worsened by anti-immigrant sentiments in many countries, and laws discouraging immigration. See “—Political and economic instability may impact our results,” above.

In addition, our ability to hire qualified personnel also depends on the flexibility to reward superior performance and to pay competitive compensation. Laws and regulations on executive compensation, including legislation in our home country, Switzerland, may restrict our ability to attract, motivate and retain the required level of qualified personnel.

The environmental laws of various jurisdictions impose actual and potential obligations on us to remediate contaminated sites, in some cases over many years. While we have set aside substantial provisions for worldwide environmental liabilities, there is no guarantee that additional costs will not be incurred beyond the amounts for which we have provided in the Group consolidated financial statements. If environmental contamination related to our facilities or products adversely impacts third parties, if we fail to properly manage the safety of our facilities and the environmental risks, or if we are required to further increase our provisions for environmental liabilities in the future, this could have a material adverse effect on our business, financial condition, results of operations, and reputation.

In recent years, extreme weather events and changing weather patterns such as storms, flooding, droughts and temperature changes have become more common. As a result, we are potentially exposed to varying natural disaster or extreme weather risks such as hurricanes, tornadoes, droughts or floods, or other events that may result from the impact of climate change on the environment, such as sea level rise. For example, some of our production facilities that depend on the availability of significant water supplies are located in areas where water is increasingly scarce. Other facilities are located in places that, because of increasingly violent weather events, sea level rise, or both, are increasingly at risk of substantial flooding. As a result, we could experience increased production or other costs, business interruptions, destruction of facilities, and loss of life, all of which could have a material adverse effect on our business, financial condition, or results of operations.

Novartis AG was incorporated on February 29, 1996, under the laws of Switzerland as a stock corporation (Aktiengesellschaft) with an indefinite duration. On December 20, 1996, our predecessor companies, Ciba-Geigy AG and Sandoz AG, merged into this new entity, creating Novartis. We are domiciled in and governed by the laws of Switzerland. Our registered office is located at the following address:

Novartis AG

Lichtstrasse 35

CH-4056 Basel, Switzerland

Telephone: 011-41-61-324-1111

Web: www.novartis.com

Novartis is a multinational group of companies specializing in the research, development, manufacturing and marketing of a broad range of healthcare products led by innovative pharmaceuticals and also including high-quality generic pharmaceuticals and eye care products. Novartis AG, our Swiss holding company, owns, directly or indirectly, all of our significant operating companies. For a list of our significant operating subsidiaries, see “Item 18. Financial Statements—Note 31. Principal Group subsidiaries and associated companies.”

Novartis announces that on December 21, 2018, it completed the previously-announced acquisition of Endocyte, a US-based biopharmaceutical company focused on developing targeted therapeutics for cancer treatment, in a transaction valued at approximately USD 2.1 billion.

Novartis announces that on December 19, 2018, it completed the acquisition of Tear Film Innovations, Inc., a privately-held company and manufacturer of the iLux Device, a therapeutic device used to treat meibomian gland dysfunction (MGD), a leading cause of dry eye.

Novartis announces the appointment of Susanne Schaffert, Ph.D., as CEO Novartis Oncology and a member of the Executive Committee of Novartis (ECN), effective January 1, 2019. Dr. Schaffert succeeds Liz Barrett, who stepped down effective December 31, 2018.

Novartis announces that it has entered into a clinical development agreement with Pfizer that will include a study combining tropifexor and one or more Pfizer compounds for the treatment of nonalcoholic steatohepatitis (NASH).

Novartis announces it has agreed to sell selected portions of its Sandoz US portfolio, specifically the Sandoz US dermatology business and generic US oral solids portfolio, to Aurobindo Pharma USA Inc., for USD 0.9 billion in cash plus USD 0.1 billion in potential earn-outs. This transaction is expected to close in 2019, subject to the completion of customary closing conditions.

Novartis announces that it has signed a renewed Memorandum of Understanding with the World Health Organization to extend its agreement for the donation of Egaten (triclabendazole) for the treatment of liver fluke (fascioliasis) until 2022.

Novartis announces its intention to seek shareholder approval for a 100% spin-off of its Alcon Division into a standalone public company. In addition to shareholder approval, completion of the proposed Alcon spin-off remains subject to certain conditions precedent, such as no material adverse events, receipt of necessary authorizations as well as tax rulings and opinions.

Novartis announces that it will initiate a share buyback of up to USD 5 billion to be executed by the end of 2019.

Novartis announces that Shannon Thyme Klinger, previously Chief Ethics, Risk and Compliance Officer, was appointed Group General Counsel effective June 1, 2018, and will continue as a member of the ECN, following the decision by Felix R. Ehrat to retire from the Company.

Novartis announces that Robert Weltevreden will be appointed as Head of Novartis Business Services (NBS) and a member of the ECN, reporting to the CEO of Novartis, effective June 1, 2018.

Novartis announces the appointment of John Tsai, M.D., as Head of Global Drug Development (GDD) and Chief Medical Officer of Novartis, and a member of the ECN, reporting to the CEO of Novartis, effective May 1, 2018. Dr. Tsai succeeds Dr. Narasimhan, who became CEO of Novartis on February 1, 2018. Dr. Robert Kowalski, who led GDD ad interim from February 1, 2018, will resume his responsibilities as Head of Global Regulatory Affairs for GDD.

Novartis announces that its Sandoz Division has entered into a collaboration with Pear Therapeutics to commercialize and continue development of novel prescription digital therapeutics, including reSET for patients with substance use disorder and reSET-O for patients with opioid use disorder who are currently receiving buprenorphine. Novartis announced the commercial launch of reSET for patients with substance use disorder in November 2018 and announced FDA clearance of reSET-O for patients with opioid use disorder in December 2018 and launch in January 2019.

Novartis announces that it has entered into a collaboration and licensing agreement with the Wyss Institute for Biologically Inspired Engineering at Harvard University and the Dana-Farber Cancer Institute to develop biomaterial systems for its portfolio of immuno-oncology therapies.

Novartis announces that Bertrand Bodson, Chief Digital Officer; Steffen Lang, Global Head Novartis Technical Operations; and Shannon Klinger, Chief Ethics, Risk and Compliance Officer, have been appointed to the ECN effective as of April 1, 2018. André Wyss, President Novartis Operations, has decided to step down from the ECN on April 1, 2018, to pursue his career outside of Novartis.

Novartis announces an additional strategic alliance with Science 37 to design and initiate up to 10 new clinical trials over the next three years, which are intended to blend virtual and traditional clinical trial models, with increasing degrees of decentralization toward a mostly “site-less” model.

Novartis announces an alliance with the Bill & Melinda Gates Foundation to advance development of Novartis drug candidate KDU731 for the treatment of cryptosporidiosis.

Novartis announces on January 22, 2018, that it had successfully completed its previously announced tender offer for all of the then-outstanding ordinary shares, including ordinary shares represented by American Depositary Shares (ADSs), of AAA. As of the expiration of the offer on January 19, 2018, approximately 97% of the then-outstanding fully diluted ordinary shares, including ordinary shares represented by ADSs, were validly tendered. In addition, on January 22, 2018, Novartis commenced a subsequent offering period that expired as scheduled on January 31, 2018. As of the expiration of the subsequent offering period, an additional 1.8% of the outstanding shares were validly tendered, resulting in an increase in Novartis ownership in AAA to 98.7% of all outstanding ordinary shares, including ordinary shares represented by ADSs. AAA is a radiopharmaceutical company headquartered in Saint Genis-Pouilly, France, that develops, produces and commercializes molecular nuclear medicines – including Lutathera (USAN: lutetium Lu 177 dotatate/INN: lutetium (¹⁷⁷Lu) oxodotreotide), a first-in-class radioligand therapy product for neuroendocrine tumors – and diagnostic products.

Novartis announces a licensing agreement and a manufacturing and supply agreement with Spark Therapeutics to develop, register and commercialize in markets outside the US voretigene neparvovec, a gene therapy approved as Luxturna in the EU in November 2018 for the treatment of patients with vision loss due to a genetic biallelic mutation of the RPE65 (retinal pigment epithelial 65kDa protein) gene and who have enough viable retinal cells.

Novartis announces a global collaboration between Sandoz and Biocon Ltd. to develop, manufacture and commercialize multiple biosimilars in immunology and oncology.

Novartis announces that it has made significant progress in its ongoing strategic review of the Alcon Division and has examined all options, ranging from retaining the business to a capital markets solution (e.g., an IPO or a spin-off). As part of this, we updated Alcon’s strategic plan, which confirms that it has the potential to grow sales at or above market while delivering profitability at least in line with the industry.

Novartis announces a collaboration with UC Berkeley to establish the Novartis-Berkeley Center for Proteomics and Chemistry Technologies.

Novartis announces that it has entered into a clinical research collaboration in which Bristol-Myers Squibb is to investigate the safety, tolerability and efficacy of Mekinist (trametinib) in combination with Opdivo^® (nivolumab) and Opdivo^® + Yervoy^® (ipilimumab) regimen as a potential treatment option for metastatic colorectal cancer in patients with microsatellite stable tumors where the tumors are proficient in mismatch repair (MSS mCRC pMMR).

Novartis announces an expanded collaboration agreement with Amgen to co-commercialize erenumab (AMG 334) in the US, currently being investigated for the prevention of migraine. This agreement builds on the previously announced 2015 global collaboration between Novartis and Amgen.

Novartis announces that it has entered into a clinical trial agreement with Allergan plc to conduct a Phase IIb study involving the combination of a Novartis FXR agonist and Allergan’s cenicriviroc for the treatment of nonalcoholic steatohepatitis (NASH).

Novartis announces that it is considering options for the Alcon Division. The review will explore all options, ranging from retaining all or part of the business to separation via a capital markets transaction (e.g., IPO or spin-off), in order to determine how to best maximize value for our shareholders.

Novartis announces that it is initiating a share buyback of up to USD 5.0 billion in 2017 under existing shareholder authority.

Novartis announces that it has entered into a definitive agreement for the acquisition of Encore Vision, Inc., a privately held company focused on the development of UNR844 (formerly EV06), an investigational, first-in-class, potentially disease-modifying topical treatment for presbyopia. This acquisition was completed on January 20, 2017.

Novartis announces the signing of an exclusive option, collaboration and license agreement with Conatus Pharmaceuticals Inc., for the global rights to emricasan, an investigational, first-in-class, oral, pan-caspase inhibitor for the treatment of nonalcoholic steatohepatitis (NASH) with advanced fibrosis and cirrhosis of the liver. Novartis

exercised the option on May 4, 2017. Novartis obtained an exclusive, worldwide license to develop and commercialize products containing emricasan on July 5, 2017.

Novartis announces that it has entered into a collaboration and licensing agreement with Xencor for the development of bispecific antibodies for treating cancer.

Shareholders authorize the Novartis Board of Directors to execute share buybacks within the framework of a seventh share repurchase program that will allow Novartis to repurchase shares for cancellation up to a maximum of CHF 10 billion.

Novartis announces that it has entered into an agreement to acquire Transcend Medical, Inc., a privately held, US-based company focused on developing minimally invasive surgical devices to treat glaucoma, such as the CyPass Micro-Stent. This acquisition was completed on March 23, 2016.

Novartis announces leadership changes effective February 1, 2016. Mike Ball has been appointed Division Head and CEO Alcon, succeeding Jeff George; Dr. Vas Narasimhan has been appointed Global Head Drug Development and Chief Medical Officer, a new position in the ECN; and André Wyss has been appointed President, Novartis Operations.

Novartis announces that it is taking a number of steps to further build on its strategy, including focusing the Alcon Division on its Surgical and Vision Care franchises and strengthening the ophthalmic medicines business by transferring Alcon’s Ophthalmic Pharmaceuticals products to the Innovative Medicines Division, and by shifting selected mature, non-promoted pharmaceutical products from the Innovative Medicines Division into the Sandoz Division, which changes were operationally completed as of April 1, 2016; and by centralizing manufacturing operations across divisions within a single technical operations unit; increasing Group-wide coordination of drug development by establishing a single Global Head of Drug Development and centralizing certain common functions such as the Chief Medical Office, which changes were operationally completed as of July 1, 2016.

Novartis announces a collaboration and licensing agreement with Surface Oncology, which gives Novartis access to four preclinical programs in immuno-oncology.

As a leading global medicines company, we use innovative science and digital technologies to create transformative treatments in areas of great medical need. In our quest to find new medicines, we consistently rank among the world’s top companies investing in research and development. Novartis products reach more than 800 million people globally and we are finding innovative ways to expand access to our latest treatments. Our purpose is to reimagine medicine to improve and extend people’s lives. Our vision is to be a trusted leader in changing the practice of medicine. Our strategy is to focus Novartis as a leading medicines company powered by advanced therapy platforms and data science.

In 2018, Novartis achieved net sales of USD 51.9 billion, while net income amounted to USD 12.6 billion. Headquartered in Basel, Switzerland, our Group companies employed 125,000 full-time equivalent associates as of December 31, 2018. Our products are sold in approximately 155 countries around the world.

The Group comprises three global operating divisions:

• Innovative Medicines: innovative patent-protected prescription medicines

• Sandoz: generic pharmaceuticals and biosimilars

• Alcon: surgical and vision care products

In June 2018, we announced that we plan to spin off Alcon into a separately-traded standalone company. As two distinct publicly traded companies, we believe Novartis and Alcon will be better positioned to capitalize on significant growth opportunities and focus resources on their respective businesses and strategic priorities.

Our divisions are supported by the following cross-divisional organizational units: the Novartis Institutes for BioMedical Research, Global Drug Development, Novartis Technical Operations and Novartis Business Services. The financial results of these organizational units are included in the results of the divisions for which their work is performed. As part of the planned spin-off of Alcon, efforts are being undertaken to prepare for the separation of Alcon from Novartis and to enable Alcon to operate as a standalone public company. As part of these efforts, Alcon has formed, and will continue to form, its own support functions, including its own service organization.

The Novartis Institutes for BioMedical Research (NIBR) is the innovation engine of Novartis, which conducts drug discovery research and early clinical development trials for our Innovative Medicines Division and also collaborates with our Sandoz Division. Approximately 6 000 full-time equivalent scientists and associates at NIBR are working to discover new medicines for various diseases at sites located in the US, Switzerland and China. For more information about NIBR, see “—Innovative Medicines—Research and development—Research program” below.

Our Global Drug Development (GDD) organization oversees all drug development activities for our Innovative Medicines Division and the biosimilars portfolio of our Sandoz Division. The development of products for the Surgical and Vision Care franchises within our Alcon Division and of small-molecule generics for our Sandoz Division is not included in GDD. GDD works collaboratively with NIBR, Innovative Medicines and Sandoz to execute our overall pipeline strategy and takes an enterprise approach to pipeline portfolio management. GDD incorporates centralized global functions such as Regulatory Affairs and Global Development Operations, as well as Global Development units aligned with our business franchises. GDD includes approximately 11 000 full-time equivalent associates worldwide.

Novartis Technical Operations (NTO) was established to centralize management of our manufacturing operations and supply chain across our Innovative Medicines and Sandoz Divisions, with a goal of further improving efficiency. Manufacturing for Alcon’s Surgical and Vision Care franchises continues to be managed by our Alcon Division. NTO is expected to optimize capacity planning and adherence to quality standards, and to lower costs through simplification, standardization and external spend optimization. Centralization is also expected to improve our ability to develop next-generation technologies, implement continuous manufacturing and share best practices across divisions. NTO includes approximately 25 200 full-time equivalent associates and 64 manufacturing sites across our Innovative Medicines and Sandoz Divisions.

Novartis Business Services (NBS), our shared services organization, delivers integrated solutions to all Novartis divisions and units worldwide. NBS seeks to drive efficiency and effectiveness across Novartis by simplifying and standardizing services across six service domains: human resources, real estate and facility services, procurement, information technology, commercial and medical support activities, and financial reporting and accounting operations. NBS has approximately 10 500 full-time equivalent associates in more than 30 countries. NBS works to leverage the full scale of Novartis to create value across the Company and to free up resources to invest in innovation and our product pipeline. NBS continues to transfer the delivery of selected services to its five Global Service Centers in Dublin, Ireland; Hyderabad, India; Kuala Lumpur, Malaysia; Mexico City, Mexico; and Prague, Czech Republic.

Our Alcon Division, a global leader in eye care, researches, develops, manufactures, distributes and sells eye care products. Alcon is organized into two global business franchises: Surgical and Vision Care. Surgical researches, develops, manufactures, distributes and sells ophthalmic products for cataract surgery, vitreoretinal surgery, refractive laser surgery and glaucoma surgery. The Surgical portfolio also includes implantables, consumables and surgical equipment required for these procedures and supports the end-to-end procedure needs of the ophthalmic surgeon. Vision Care researches, develops, manufactures, distributes and sells daily disposable, reusable, and color-enhancing contact lenses and a comprehensive portfolio of ocular health products, including products for dry eye, contact lens care and ocular allergies, as well as ocular vitamins and redness relievers. Alcon also provides services, training, education and technical support for both the Surgical and Vision Care businesses.

We continue to embed a principles based approach to compliance through the new Professional Practices Policy (P3), which in 2018 replaced separate divisional compliance policies. We believe this approach will help ensure that employees act in the best interest of patients, physicians and Novartis.

Since 2016, we have adjusted the ratio of fixed to variable total compensation for our sales force to help ensure that the target variable component is a maximum of 35% of total compensation, on a country average basis. To receive any form of variable compensation, each employee, including the sales force, must perform to a minimum standard with regard to our Values and Behaviors, which include acting with integrity. For our sales force, in particular, 20% of target variable pay is based on demonstration of our Values and Behaviors. We are in the process of implementing these standards in every country in which Novartis operates. Ultimately, no sales representative will receive the variable compensation unless he or she meets expectations with respect to Values and Behaviors. In 2018, we assessed the rollout of the new incentive system with positive results. Across divisions, there was a 54% reduction in the number of reported complaints of fraud or professional practices in the sales force in 2018 compared to 2017.

Despite this progress, we are still facing questions about our business practices. Following the issue with Essential Consultants, when our political consultancy practices came into question, we took steps to improve oversight and help prevent similar matters in the future. We have strengthened the relevant contracting and due diligence processes to help ensure more ownership and

transparency at a senior management level. For example, before Novartis engages political consultants, we will secure an independent due diligence report from an external partner.

In addition, we continue to strengthen our Integrity & Compliance (I&C) function. In 2018, we combined our risk management and compliance functions in a single organization to help enable more effective risk management and mitigation efforts. We created the role of Chief Ethics, Risk and Compliance Officer to head the combined organization, and we elevated this role to the Executive Committee of Novartis (ECN).

To help monitor and enforce our integrity standards, we added more than 100 people to the I&C function in recent years. The expanded team has increased the number of country visits to share learnings from across the organization, reaching about 220 in 2018. We also harmonized our I&C risk assessment and monitoring process and control activities into a single, continuous process supported by an online tool.

Our medications reach more than 800 million people worldwide every year, but billions more still lack access to essential medicines and healthcare. We are making a fundamental shift in the way we do business and are reimagining how to expand access to critical healthcare innovations.

We launched the Novartis Access Principles, embarking on a journey to systematically integrate access strategies into how we research, develop and deliver our new medicines globally. These strategies include adopting innovative pricing and access models, refocusing research and development based on society’s healthcare needs, and supporting approaches to strengthen healthcare systems. We made significant progress in setting up our internal systems and training our internal teams on our new business standards. The ECN reviewed plans for key brands in launch phase to assess access strategies targeting underserved populations. For example, Aimovig, our innovative medicine for the treatment of migraine, is supported by programs designed to help accelerate access both before and after reimbursement, as well as to speed up introduction and access in low- and middle-income countries (LMICs). We are also co-creating employer-based access schemes in selected markets, including Russia and Mexico.

We aim to price our medicines responsibly, based on the value they deliver to patients, healthcare systems and society. In the US we recently implemented guidelines for limiting average net price increases across our portfolio to the healthcare inflation rate, and we publish average price increases annually in the Novartis in Society US report.

In addition, we take local affordability into account when pricing our medicines. In LMICs, for instance, we introduced more affordable local brands of many innovative therapies, such as our heart failure treatment Entresto, to help speed up and improve access where there is inadequate healthcare coverage or reimbursement. Through our continued efforts and an impactful access strategy, the number of patients reached with Entresto in LMICs grew two-and-a-half-fold in the last 12 months. Overall, we have launched more than 60 local brands across more than 30 developing markets, reaching more than 220 000 additional patients to date. In addition, we are now able to reduce the time lag between availability of medicines in higher- and lower-income countries. For example, the first Entresto local brand was launched within 12 months of the launch in the European Union. We plan to further expand these strategies.

Through our Novartis Social Business (NSB) group, we continue to pursue unique social business models, such as the Novartis Access and Healthy Family programs, to help expand access to healthcare in lower-income countries. Novartis Access, which offers a portfolio of 15 medicines to governments, nongovernmental organizations and other institutional customers for USD 1 per treatment, per month, delivered almost 2.3 million monthly treatments to five countries in 2018, and Healthy Family reached 7.8 million people with health education initiatives. Since January, NSB has adapted its product and price offering in six African and Asian countries, expanding reach to patients across all income levels.

Novartis does not file or enforce patents in least developed countries or low-income countries. In late 2018, we reviewed our approach to patent filing in LMICs in an effort to better align it with the local socio-economic circumstances that exist in many of these countries. As a result, effective 2019, we decided to stop filing patent applications in nine LMICs, where Novartis had previously filed. In addition, in the remaining LMICs, we will aim to restrict patent filings to those patent applications covering new molecules or new chemical entities.

Novartis is also a founding member of the Patent Information Initiative for Medicines (Pat-INFORMED), a unique public online resource launched in September 2018 that provides basic patent information for medicines of participating companies, and that aims to help procurement agencies around the world better understand patent status to help inform procurement decisions. As of December, Novartis has listed patent information for all of our small-molecule medicines, which goes significantly beyond Pat-INFORMED’s near-term goal of capturing information for medicines in a more limited number of disease areas.

We regularly review our early- and late-stage development programs to identify further opportunities for adapting our existing medicines to address unmet patient needs in countries with a high disease burden. In 2018,

Novartis has a long history of helping tackle some of the biggest global health challenges, particularly leprosy and malaria.

The Novartis Foundation helped found the Global Partnership for Zero Leprosy in 2018. It brings together international organizations and national leprosy programs, with support from the World Health Organization, to accelerate progress toward eliminating the disease. The Novartis Foundation and Microsoft are partnering to develop a proof-of-concept digital health tool, enabled by artificial intelligence, and a Leprosy Intelligent Image Atlas – in collaboration with local investigators from the Oswaldo Cruz Foundation in Brazil – to aid in the early detection of leprosy. The launch of the first public version of the atlas is planned for 2019.

In April, we renewed our commitment to malaria elimination, pledging USD 100 million to research and develop next-generation antimalarials over the next five years. In addition, we will help expand access to antimalarials formulated for children, and we plan to implement programs to strengthen healthcare systems in four sub-Saharan countries.

We also launched efforts in other areas where we believe we can have significant impact. In October, in Latin America, we kicked off our partnership with the World Heart Federation to develop a roadmap for addressing Chagas disease, the second most common cause of chronic heart failure in Latin America.

Building trust with society requires doing business responsibly wherever we operate. This includes minimizing our environmental impact, managing risk in our supply chain, respecting human rights and being transparent.

We have adopted a more ambitious 2030 environmental sustainability strategy, aiming for carbon neutrality, plastic neutrality and water sustainability. We have already taken steps to mitigate our exposure to environmental risk, completing a series of comprehensive supplier audits and taking relevant actions. For example, in the Hyderabad area of India, we are severing ties with six suppliers that failed to comply with our Supplier Code, and we are working with nine suppliers to improve their performance in critical areas such as operational efficiency, waste management, and use of natural resources. These suppliers share our values for environmental stewardship and employee health and safety.

In October, our Third-Party Risk Management program went live in Mexico. The program is to be rolled out globally in 2019 in a phased regional approach, beginning in the Americas (including the US) and followed by Asia-Pacific and Europe later in the year.

After completing human rights impact assessments in our own operations in Egypt, Turkey, China and Malaysia, we have established that we have strong policies and solid processes to identify and manage potential human rights risks. We have also identified common risk areas that require additional follow up action in 2019. For example, we need more regular and broader engagement and consultation with external stakeholders at a local level – including representatives from patient groups, local communities, health authorities and third-party partners – to gain a better understanding of issues; to help ensure that formal grievance mechanisms and processes are in place for communities living close to our manufacturing operations; and, in some markets, to address risks associated with our outsourced workforce.

For additional information, see “—Item 4.B Business overview—Sandoz.”

Our Innovative Medicines Division is a world leader in offering innovation-driven, patent-protected medicines to patients and physicians. The Innovative Medicines Division researches, develops, manufactures, distributes and sells patented pharmaceuticals, and is composed of two global business units: Novartis Oncology and Novartis Pharmaceuticals.

The Novartis Oncology business unit is responsible for the commercialization of products in the areas of cancer and hematologic disorders. The Novartis Pharmaceuticals business unit is organized into the following global business franchises responsible for the commercialization of various products in their respective therapeutic areas: Ophthalmology; Neuroscience; Immunology, Hepatology and Dermatology; Respiratory; Cardio-Metabolic; and Established Medicines.

Following an internal reorganization announced on January 27, 2016, 19 mature products were transferred from our Innovative Medicines Division to the Retail Generics franchise of our Sandoz Division, and the

Ophthalmic Pharmaceuticals products of Alcon were transferred to our Innovative Medicines Division, effective as of January 1, 2018.

We subsequently transferred our over-the-counter ophthalmic products and certain surgical diagnostic products (2017 sales of USD 747 million) from the Innovative Medicines Division to the Alcon Division, effective January 1, 2018. Our prescription Ophthalmic medicines business remains with the Innovative Medicines Division. In compliance with IFRS, beginning with our first-quarter 2018 results, Novartis updated its segment financial information to reflect this transfer, both for the current and prior years, to aid comparability of year-on-year results.

The Innovative Medicines Division is the largest contributor among the divisions of Novartis and reported consolidated net sales of USD 34.9 billion in 2018, which represented 67% of the Group’s net sales.

Novartis Oncology business unit

Novartis Pharmaceuticals business unit

Novartis Oncology business unit

Oncology

• Tasigna (nilotinib) is a signal transduction inhibitor of the BCR-ABL tyrosine kinase. Since its launch in 2007, Tasigna has been approved in more than 125 countries to treat patients with Philadelphia chromosome-positive chronic myeloid leukemia (Ph+ CML) in the chronic and/or accelerated phase who are resistant or intolerant to existing treatment, including Gleevec/Glivec, and to treat newly diagnosed patients in the chronic phase. In June 2017, the European Commission (EC) approved the inclusion of treatment-free remission data in the summary of product characteristics for Tasigna. In December 2017, the FDA also approved the inclusion of treatment-free remission data in the US label for Tasigna. In November 2017, the EC approved Tasigna for the treatment of newly diagnosed pediatric patients with Ph+ CML in the chronic phase (CP), and Ph+ CML-CP pediatric patients with resistance or intolerance to prior therapy including imatinib. In March 2018, the FDA approved Tasigna for this pediatric indication.

• Sandostatin SC (octreotide acetate for injection) and Sandostatin LAR (octreotide acetate for injectable suspension) are somatostatin analogs indicated for the treatment of patients with acromegaly, a chronic disease caused by the over-secretion of growth hormone in adults. Sandostatin is also indicated for the treatment of patients with certain symptoms associated with carcinoid tumors and other types of gastrointestinal and pancreatic neuroendocrine tumors. Additionally, Sandostatin LAR is approved in more than 60 countries for the treatment of patients with advanced neuroendocrine tumors of the midgut or unknown primary tumor location. Sandostatin SC was first launched in 1988 and is approved in more than 100 countries.

• Gleevec/Glivec (imatinib mesylate/imatinib) is a kinase inhibitor approved as a targeted therapy for adult and pediatric patients with Ph+ CML in the chronic phase. It is also approved to treat patients with Ph+ CML in the blast, accelerated or chronic phase after failure with interferon; to treat patients with metastatic and/or unresectable gastrointestinal stromal tumors (GIST) that are KIT (CD117)-positive (KIT+); and as an adjuvant treatment for certain adult patients following resection of KIT+ GIST. First launched in 2001, Gleevec/Glivec is approved in approximately 125 countries. It is approved in more than 80 countries as a post-surgery therapy for certain adult patients with KIT+ GIST. Additionally, Gleevec/Glivec is approved in the US, the EU and Japan to treat Ph+ acute lymphoblastic leukemia (a rapidly progressive form of leukemia); in the US and EU to treat dermatofibrosarcoma protuberans (a rare solid tumor), hypereosinophilic syndrome, myelodysplastic/myeloproliferative diseases and other rare blood disorders; and in the US (as Gleevec) to treat aggressive systemic mastocytosis.

• Afinitor/Votubia (everolimus) is an oral inhibitor of the mTOR pathway. Afinitor is approved in more than 120 countries, including the US, EU member states and Japan, for patients with advanced renal cell carcinoma whose disease has progressed during or after treatment with vascular endothelial growth factor-targeted therapy (in the EU), or after failure of treatment with sunitinib or sorafenib (in the US). Additionally, Afinitor is approved in more than 110 countries, including the US, EU member states and Japan, for patients with progressive neuroendocrine tumors (NETs) of pancreatic origin that are unresectable, locally advanced or metastatic; in more than 45 countries, including the US and EU member states, for patients with progressive, well-differentiated, nonfunctional NETs of gastrointestinal or lung origin that are unresectable, locally advanced or metastatic; and in 117 countries, in combination with exemestane, for postmenopausal women with advanced hormone receptor-positive (HR+)/human epidermal growth factor receptor 2-negative (HER2-) breast cancer after recurrence or progression following treatment with a nonsteroidal aromatase inhibitor (in the EU), or after failure of treatment with letrozole or anastrozole (in the US). All oncology indications are approved under the trade name Afinitor, in the tablet formulation. Everolimus, under the trade name Afinitor in the US and Votubia in the EU, is also approved in more than 100 countries to treat patients with tuberous sclerosis complex (TSC) who have subependymal giant cell astrocytoma (SEGA) not requiring immediate surgery, and in more than 95 countries to treat patients with TSC who have renal angiomyolipoma not requiring immediate surgery. The dispersible tablets for oral suspension formulation are approved in more than 40 countries – including the US (under the trade name Afinitor Disperz), EU member states (under the trade name Votubia) and Japan (under the trade name Afinitor) – for patients with TSC who have SEGA. Dispersible tablets are also approved in more than 30 countries – including EU member states (as Votubia) and the US (as Afinitor Disperz) – as adjunctive treatment for patients aged 2 years and older with TSC-associated partial-onset seizures. Everolimus is available under the trade names Zortress/Certican for use in transplantation in the US and EU, respectively. It is exclusively licensed to Abbott and sublicensed to Boston Scientific for use in drug-eluting stents.

• Promacta/Revolade (eltrombopag) is a once-daily oral thrombopoietin receptor agonist that works by stimulating bone marrow cells to produce platelets. It is the only approved once-daily oral thrombopoietin receptor agonist, and is marketed under the brand name Promacta in the US and Revolade in most countries outside the US. It is approved in more than 90 countries for the treatment of thrombocytopenia in adult patients with chronic immune (idiopathic) thrombocytopenia (ITP) who have had an inadequate response or are intolerant to other treatments. In the US and EU, Promacta/Revolade is approved for pediatric patients 1 year and older with chronic ITP who have had an insufficient response to other treatments. Promacta/Revolade is also approved in more than 40 countries for the treatment of thrombocytopenia in patients with chronic hepatitis C to allow them to initiate and maintain interferon-based therapy. It is approved in the US and Japan for aplastic anemia as first-line therapy, and in 45 countries for the treatment of patients with severe

aplastic anemia (SAA) who are refractory to other treatments (including in the EU for adults with acquired SAA who were either refractory to prior immunosuppressive therapy or heavily pretreated and are unsuitable for hematopoietic stem cell transplant). Promacta/Revolade is marketed under a collaboration agreement between Ligand Pharmaceuticals, Inc. and Novartis.

• Tafinlar + Mekinist (dabrafenib + trametinib) is a combination therapy approved for the treatment of patients with unresectable or metastatic melanoma with a BRAF V600 mutation; the adjuvant treatment of patients with stage III melanoma with a BRAF V600 mutation; the treatment of patients with advanced non-small cell lung cancer with a BRAF V600 mutation; and the treatment of patients with locally advanced or metastatic anaplastic thyroid cancer with a BRAF V600 mutation. Usage in the adjuvant treatment of melanoma was approved in the US, the EU, Japan and other countries worldwide in 2018, making Tafinlar + Mekinist the first targeted therapy approved in this setting. The 2018 FDA approval of Tafinlar + Mekinist for the treatment of anaplastic thyroid cancer represented the first approval of any therapy in the US for this aggressive form of thyroid cancer. Tafinlar and Mekinist are kinase inhibitors of BRAF and MEK1/2, respectively, and are also indicated as single agents to treat patients with unresectable or metastatic melanoma with a BRAF V600 mutation. Novartis has worldwide exclusive rights to develop, manufacture and commercialize trametinib granted by Japan Tobacco Inc.

• Exjade and Jadenu (deferasirox) is an oral iron chelator approved for the treatment of chronic iron overload due to blood transfusions in patients 2 years of age and older, and of chronic iron overload in patients 10 years of age and older with non-transfusion-dependent thalassemia. Exjade, a dispersible tablet for oral suspension, was first approved in 2005 and is now approved in more than 100 countries, including the US, the EU and Japan. An oral film-coated tablet formulation that can be swallowed or crushed is also approved in countries including the US and Canada (under the Jadenu or Exjade trade name, depending on the country). Additionally, the formulation has been developed as granules and is approved in the US, the EU and Japan.

• Jakavi (ruxolitinib) is an oral inhibitor of the JAK1 and JAK2 tyrosine kinases. It is the first JAK inhibitor indicated for the treatment of disease-related splenomegaly or symptoms in adult patients with primary myelofibrosis, post-polycythemia vera myelofibrosis or post-essential thrombocythemia myelofibrosis, and for the treatment of adult patients with polycythemia vera who are resistant or intolerant to hydroxyurea. Jakavi is currently approved in more than 100 countries for patients with myelofibrosis, and in more than 75 countries – including EU member states and Japan – for patients with polycythemia vera. Novartis licensed ruxolitinib from Incyte Corporation for development and commercialization in the indications of oncology, hematology and Graft-versus-host disease outside the US. Ruxolitinib, marketed in the US as Jakafi® by Incyte Corporation, was approved by the FDA for the treatment of patients with intermediate or high-risk myelofibrosis, including primary myelofibrosis, post-polycythemia vera myelofibrosis and post-essential thrombocythemia myelofibrosis. Jakafi® was also approved by the FDA for the treatment of patients with polycythemia vera who have had an inadequate response or are intolerant to hydroxyurea.

• Votrient (pazopanib) is a small-molecule tyrosine kinase inhibitor that targets a number of growth factors to limit new blood vessel and tumor growth and cell survival. Votrient is approved in the US for the treatment of patients with advanced renal cell carcinoma (RCC), and in the EU for first-line treatment of adult patients with advanced RCC and for patients who have received prior cytokine therapy for advanced disease. Votrient is also indicated for the treatment of patients with advanced soft tissue sarcoma (STS) who have received prior chemotherapy (efficacy in adipocytic STS or gastrointestinal stromal tumors has not been demonstrated), and in the EU for the treatment of adult patients with selective subtypes of advanced STS who have received prior chemotherapy for metastatic disease or who have progressed within 12 months after (neo)adjuvant therapy. Votrient is approved in more than 100 countries worldwide for advanced RCC and in more than 90 countries for advanced STS.

• Kisqali (ribociclib) is a cyclin-dependent kinase inhibitor, a class of drugs that helps slow the progression of cancer by inhibiting two proteins called cyclin-dependent kinase 4 and 6 (CDK4/6). It is indicated for the treatment of postmenopausal women (and, in the US, pre- or perimenopausal women) with HR+/HER2- locally advanced or metastatic breast cancer as initial endocrine-based therapy in combination with an aromatase inhibitor. In the US and the EU, Kisqali is also indicated for use in combination with fulvestrant as first- or second-line therapy in postmenopausal women. Kisqali was originally approved in the US in 2017 and is now approved in more than 70 countries, including EU member states. In 2017, the FDA also approved the Kisqali Femara Co-Pack (ribociclib tablets and letrozole tablets). Kisqali was developed by the Novartis Institutes for BioMedical Research under a research collaboration with Astex Pharmaceuticals.

• Kymriah (tisagenlecleucel) suspension for intravenous infusion is a CD19-directed genetically modified autologous chimeric antigen receptor T-cell (CAR-T) therapy. Kymriah received FDA approval in 2017 for the treatment of patients up to 25 years of age with B-cell precursor acute lymphoblastic leukemia (ALL) that is refractory or in second or later relapse, and in May 2018 for the treatment of adult patients with relapsed or refractory (r/r) large B-cell lymphoma, including diffuse large B-cell lymphoma (DLBCL), high-grade B-cell lymphoma, and DLBCL arising from follicular lymphoma. Kymriah is not indicated for the treatment of patients with primary central nervous system lymphoma. Kymriah is also approved in countries including EU

member states and Switzerland for the treatment of children and young adults with r/r B-cell ALL, and adult patients with r/r DLBCL.

• Lutathera (USAN: lutetium Lu 177 dotatate/INN: lutetium (¹⁷⁷Lu) oxodotreotide) is a lutetium Lu 177-labeled somatostatin analog peptide. It is a radioligand therapy and comprises a targeting molecule that carries a radioactive component. Lutathera has received orphan drug designation from the FDA and the EMA. In the US, Lutathera is approved for the treatment of somatostatin receptor-positive gastroenteropancreatic neuroendocrine tumors (GEP-NETs), including foregut, midgut and hindgut neuroendocrine tumors, in adults. In Europe, it is approved for the treatment of unresectable or metastatic, progressive, well-differentiated (G1 and G2), somatostatin receptor-positive GEP-NETs in adults.

Novartis Pharmaceuticals business unit

Ophthalmology

• Lucentis (ranibizumab) is a recombinant humanized high-affinity antibody fragment that binds to vascular endothelial growth factor A (VEGF-A), a key mediator of intraocular neovascularization. Lucentis is an anti-VEGF therapy specifically designed for the eye, minimizing systemic exposure. It is approved for six indications: neovascular (wet) age-related macular degeneration (nAMD), visual impairment due to diabetic macular edema (DME), visual impairment due to macular edema secondary to branch retinal vein occlusion (BRVO), visual impairment due to macular edema secondary to central retinal vein occlusion (CRVO), visual impairment due to choroidal neovascularization secondary to pathologic myopia (myopic CNV), and visual impairment due to choroidal neovascularization (CNV) secondary to other pathologies. Lucentis is available in more than 110 countries, and the Lucentis pre-filled syringe has launched in 37 countries. Lucentis is licensed from Genentech, and Novartis holds the rights to commercialize the product outside the US. Genentech holds the rights to commercialize Lucentis in the US. For further information, see “Item 18. Financial Statements—Note 26. Transactions with related parties—Genentech/Roche.”

• Travatan (travoprost), Travatan Z (travoprost) and Duotrav (travoprost/timolol) are indicated for the reduction of elevated intraocular pressure (IOP) in patients with open-angle glaucoma or ocular hypertension. Single-agent travoprost products (Travatan, Travatan Z, Travatan BAK-Free and Izba) are prescribed as first-line agents and are marketed in more than 110 countries, including the US and EU member states. Duotrav is a fixed-dose combination solution of the prostaglandin analog travoprost with the beta-blocker timolol, and is approved as a second-line treatment in adults for the reduction of IOP in patients with open-angle glaucoma or ocular hypertension who are insufficiently responsive to topical beta-blockers or prostaglandin analogs. Duotrav is currently marketed in more than 105 countries, including EU member states.

• Luxturna (voretigene neparvovec) is a one-time gene therapy approved in the EU in November 2018 to treat children and adults with vision loss caused by mutations in both copies of the RPE65 gene and who have sufficient viable retinal cells. In January 2018, Spark Therapeutics entered into a licensing agreement and a manufacturing and supply agreement with Novartis covering development, registration and commercialization rights to Luxturna in markets outside the US. Upon the transfer of the EU marketing authorization from Spark Therapeutics to Novartis, Novartis plans to commercialize Luxturna in the EU/EEA, with Spark Therapeutics as supplier of the gene therapy.

Immunology, Hepatology and Dermatology

• Cosentyx (secukinumab) is a fully human monoclonal antibody that selectively inhibits circulating interleukin-17A (IL-17A), a cytokine involved in the pathogenesis of psoriasis, ankylosing spondylitis and psoriatic arthritis. Cosentyx is approved in more than 90 countries, including the US, EU member states and Japan, for the treatment of moderate-to-severe plaque psoriasis. It is approved in more than 80 countries, including the US, EU member states and Japan, for the treatment of adults with ankylosing spondylitis and psoriatic arthritis. Cosentyx is also approved in Japan for the treatment of pustular psoriasis and psoriasis vulgaris. In 2017, a label update for Cosentyx was approved in the EU based on data showing long-term superiority over Stelara® (ustekinumab) in moderate-to-severe plaque psoriasis, along with efficacy in the treatment of moderate-to-severe scalp psoriasis – one of the most difficult-to-treat forms of the disease. In 2018, the FDA approved a label update for Cosentyx to include moderate-to-severe scalp psoriasis, and new evidence that Cosentyx inhibits progression of joint structural damage in psoriatic arthritis.

• Xolair (omalizumab) is a recombinant, DNA-derived, humanized IgG1 monoclonal antibody. Xolair is designed to block IgE, which limits the release of mediators in the early and late phases of the allergic cascade. It is currently approved in more than 90 countries, including the US, EU member states and Japan, as a treatment for chronic spontaneous urticaria (CSU), also known as chronic idiopathic urticaria (CIU). In the EU, Xolair is indicated as add-on therapy for the treatment of CSU in adults and adolescents 12 years of age and older with inadequate response to H1 antihistamine treatment. In the US, Xolair is approved to treat adults and adolescents 12 years of age and older with CIU who remain symptomatic despite H1 antihistamine treatment. (See also Xolair in “Respiratory” below.) We co-promote Xolair with Genentech in the US and share a portion of operating income, but we do not record any US sales. Novartis records all sales of Xolair outside the US. For further information, see “Item 18. Financial Statements—Note 26. Transactions with related parties—Genentech/Roche.”

• Ilaris (canakinumab) is a selective, high-affinity fully human monoclonal antibody that inhibits interleukin-1 beta (IL-1 beta), a key cytokine in the inflammatory pathway. Ilaris is approved in the US, EU member states and

Japan to treat systemic juvenile idiopathic arthritis and various auto-inflammatory conditions, such as cryopyrin-associated periodic syndromes and other distinct periodic fevers (also known as hereditary periodic fevers). It is also approved in the EU for adult-onset Still’s disease and the symptomatic treatment of refractory acute gouty arthritis. Ilaris is approved in one or more indications in approximately 70 countries worldwide.

Neuroscience

• Gilenya (fingolimod) is an oral disease-modifying therapy approved to treat relapsing forms of multiple sclerosis (MS). It has a reversible lymphocyte redistribution effect targeting both focal and diffuse central nervous system damage caused by MS. In the US, Gilenya is indicated for relapsing forms of MS in patients who are 10 years of age and older. In the EU, Gilenya is indicated for adult patients who have high disease activity despite treatment with at least one disease-modifying agent, or who have rapidly evolving severe relapsing-remitting MS. Additionally, it received European Commission approval in November 2018 for the treatment of children and adolescents with relapsing-remitting MS. Results from the Phase IIIb ASSESS study, announced in October 2018, showed that Gilenya 0.5 mg is superior in reducing relapses to glatiramer acetate in a controlled, head-to-head trial. Treatment with Gilenya 0.5 mg resulted in a 40.7% relative reduction in the rate of relapses over one year, compared to patients on glatiramer acetate 20 mg. Adults taking Gilenya 0.25 mg achieved a numerical risk reduction in relapses compared to the comparator, but did not reach statistical significance. Gilenya is currently approved in more than 80 countries around the world. Gilenya is licensed from Mitsubishi Tanabe Pharma Corporation.

• Aimovig (erenumab) is designed specifically to block the calcitonin gene-related peptide receptor (CGRP-R), which plays a critical role in migraine. It is the first FDA- and EMA-approved CGRP-targeted therapy for the prevention of migraine in adults. Aimovig received US approval in May 2018 and EU approval in July 2018, and is currently approved in 37 countries worldwide. Aimovig is co-commercialized with Amgen in the US, where Amgen records sales, and Novartis has exclusive commercialization rights for all territories excluding the US and Japan.

Respiratory

• Xolair (omalizumab) is approved for the treatment of moderate-to-severe, or severe, persistent allergic asthma in children (age 6 and older) and adults. It has been approved in more than 90 countries, including the US since 2003, the EU since 2005, Japan since 2009, and China since 2018. Xolair is provided as lyophilized powder for resolution, and as liquid formulation in a pre-filled syringe. In December 2018, the European Commission approved the Xolair pre-filled syringe for self-administration across all indications. (See also Xolair in “Immunology, Hepatology and Dermatology” above.) We co-promote Xolair with Genentech in the US and share a portion of operating income, but we do not record any US sales. Novartis records all sales of Xolair outside the US. For further information, see “Item 18. Financial Statements—Note 26. Transactions with related parties—Genentech/Roche.”

Cardio-Metabolic

• Entresto (sacubitril/valsartan) is a first-in-class angiotensin receptor/neprilysin inhibitor indicated for the treatment of symptomatic chronic heart failure with reduced ejection fraction (HFrEF). It acts to enhance the protective neurohormonal systems of the heart (neprilysin system) while simultaneously suppressing the harmful system (the renin-angiotensin-aldosterone system, or RAAS). Entresto was approved in the US and in the EU in 2015. It is now approved in more than 100 countries and launched in more than 90 countries. Both European Society of Cardiology heart failure guidelines and US heart failure guidelines have given a Class I recommendation, the strongest class of recommendation, for the use of sacubitril/valsartan in patients with HFrEF.

Established Medicines

• Galvus (vildagliptin), an oral DPP-4 inhibitor, and Eucreas, a single-pill combination of vildagliptin and metformin, are indicated for the treatment of type 2 diabetes. The products were first approved in 2007. Galvus is currently approved in more than 130 countries, including EU member states, Japan (as Equa), Latin America and Asia-Pacific. Eucreas is currently approved in more than 125 countries. It was the first single-pill combination of a DPP-4 inhibitor and metformin approved in Japan (as EquMet) and Europe, and is marketed as Galvus Met in most non-EU countries. In the EU, Galvus received approval for expanded use as a second-line monotherapy for type 2 diabetes patients who cannot take metformin. The EU also approved Galvus in combination with insulin, with or without metformin, for type 2 diabetes when diet, exercise and a stable dose of insulin do not result in glycemic control, and in triple combination with metformin and a sulphonylurea (SU) for type 2 diabetes when diet and exercise plus dual therapy with vildagliptin and metformin do not provide adequate glycemic control. In 2017, Galvus was approved as an add-on to insulin and an add-on to SU treatment. Galvus and Eucreas are co-marketed by Merck KGaA as Jalra and Jalra M, respectively, in some countries in Latin America.

• Diovan (valsartan), together with Diovan HCT/Co-Diovan (valsartan and hydrochlorothiazide), is an angiotensin II receptor blocker (ARB). Diovan is the only agent in its class approved to treat all of the following: patients with high blood pressure (including children 6 to 18 years old), high-risk heart attack survivors, and patients with heart failure. Diovan first launched in 1996 and is available in more than 120 countries; Diovan HCT/Co-Diovan first launched in 1997 and is available in more than 100 countries.

• Exforge (valsartan and amlodipine besylate) is a single-pill combination of the ARB Diovan and the calcium channel blocker amlodipine besylate. First approved for the treatment of high blood pressure in Switzerland in 2006, and in the US and EU in 2007, it is now

available in more than 100 countries. Exforge HCT (valsartan, amlodipine besylate and hydrochlorothiazide) is a single pill combining three widely prescribed high blood pressure treatments: an ARB, a calcium channel blocker and a diuretic (hydrochlorothiazide). Exforge HCT was approved in the EU and the US in 2009, and is now available in more than 75 countries.

• Zortress/Certican (everolimus) is an oral inhibitor of the mTOR pathway. Zortress/Certican is approved in countries including the US, EU member states and Japan for the prevention of organ rejection in adult patients at low to moderate immunological risk receiving an allogeneic kidney or liver transplant. Additionally, it is approved in EU member states and Japan for adult patients receiving a heart transplant. First approved in July 2003, Zortress/Certican is now available in more than 80 countries worldwide and is the only mTOR inhibitor approved for liver and heart transplants.

• Neoral (cyclosporine, USP Modified) is an immunosuppressant to prevent organ rejection following a kidney, liver or heart transplant. It is approved for use in lung transplant in many countries outside the US. This micro-emulsion formulation of cyclosporine is also indicated for treating certain autoimmune disorders, such as psoriasis and rheumatoid arthritis. First launched in 1995, Neoral is marketed in approximately 100 countries.

The following table and paragraph summaries provide an overview of the key Innovative Medicines Division projects currently in the Confirmatory Development stage and may also describe certain projects in the Exploratory Development stage. Projects include those seeking to develop potential uses of new molecular entities as well as potential additional indications or new formulations for already marketed products. Changes to the selected development projects table are highlighted in the table below entitled “Projects added to and subtracted from the development table since 2017.”

Compounds and new indications in development are subject to required regulatory approvals and, in certain instances, contractual limitations. These compounds and indications are in various stages of development throughout the world. It may not be possible to obtain regulatory approval for any or all of the new compounds and new indications referred to in this Form 20-F in any country or in every country. See “—Regulation” for further information on the approval process.

Selected development projects

Key development projects

• ACZ885 (canakinumab) was first approved as Ilaris in 2009 for cryopyrin-associated periodic syndromes. In 2017, data from CANTOS, a Phase III study evaluating quarterly injections of ACZ885 in people with a prior heart attack and inflammatory atherosclerosis, was presented at the European Society of Cardiology Congress and published simultaneously in The New England Journal of Medicine and The Lancet. A review of a blinded, pre-planned lung cancer safety analysis revealed a 77% reduction in lung cancer mortality and a 67% reduction in lung cancer cases in patients treated with 300 mg of ACZ885. As a result of these findings, Novartis has initiated three Phase III studies of ACZ885 in lung cancer, with data from primary analyses expected to report out in 2021. We received a complete response letter from the FDA in October 2018 regarding our supplemental Biologics License Application for ACZ885 in cardiovascular risk reduction.

• AVXS-101 (onasemnogene abeparvovec-xxxx, Zolgensma) is a gene replacement therapy candidate designed to address the genetic root cause of spinal muscular atrophy (SMA), a progressive neuromuscular disease and the leading cause of genetic mortality in infants globally. In December 2018, we announced that the FDA accepted the Biologics License Application for Zolgensma for the treatment of SMA type 1, the most severe form of the disease. Delivered as a single, one-time infusion, Zolgensma works by replacing the missing or defective SMN1 gene with a functional copy that makes the SMN protein, thereby improving motor neuron function and survival. The Biologics License Application filing is supported by data from the Phase I START trial, which demonstrated an increase in survival and improved achievement of developmental milestones compared to the natural history of SMA type 1. Zolgensma is currently being studied in a Phase III trial in patients with SMA type 1 in the US (STR1VE) and in Europe (STR1VE-EU), with a planned Phase III study in the Asia-Pacific region (STR1VE-AP). Zolgensma is also being studied in a Phase I trial in the US in patients with SMA type 2 (STRONG), and in a Phase III multinational trial in presymptomatic patients with SMA with two or three copies of the SMN2 gene (SPR1NT). A trial in pediatric patients with SMA types 1, 2 and 3 (REACH) is planned for 2019. Patients from the START trial had the option to voluntarily enroll in a long-term, 15-year observational follow-up study. The brand name Zolgensma has been provisionally approved by the FDA for AVXS-101, but the product itself has not received marketing authorization or Biologics License Application approval from any regulatory authorities.

• BAF312 (siponimod, Mayzent) is an oral, second-generation sphingosine-1-phosphate (S1P) receptor modulator under development for the treatment of secondary progressive multiple sclerosis (SPMS). It binds selectively to the S1P receptor subtypes 1 and 5, and penetrates effectively to the central nervous system, where it may impact central nervous system inflammation and repair mechanisms. Results from the EXPAND Phase III study, evaluating efficacy and safety for SPMS, demonstrated that Mayzent reduced three- and six-month confirmed disability progression against placebo, with a safety profile similar to other S1P1 receptor modulators. The full results from the Phase III EXPAND study of oral, once-daily Mayzent in SPMS were published in The Lancet in March 2018. Further analyses from the EXPAND study presented in April 2018 at the American Academy of Neurology showed that the efficacy of Mayzent on disability was largely independent from relapse activity in SPMS. The analyses also revealed positive data on cognitive decline. In October 2018, we announced that both the FDA and EMA had accepted our New Drug Application and Marketing Authorization Application, respectively, for review. Submissions are now also underway in Japan and China. If approved, label content will be subject to negotiation with regulatory authorities, but it is expected to reflect the typical SPMS population studied in the EXPAND trial. The brand name Mayzent has been provisionally approved by the FDA and EMA for BAF312, but the product itself has not been approved for sale in any country.

• BYL719 (alpelisib) is an investigational, orally bioavailable, alpha-specific PI3K inhibitor. In breast cancer cell lines harboring PIK3CA mutations, BYL719 has been shown to potentially inhibit the PI3K pathway and have antiproliferative effects. In addition, cancer cell lines with PIK3CA mutations were more sensitive to BYL719 than those without the mutation across a broad range of different cancers. At ESMO 2018, positive results from the global Phase III SOLAR-1 trial evaluating BYL719 in combination with fulvestrant were presented. In patients with PIK3CA-mutated HR+/HER2- advanced breast cancer, BYL719 plus fulvestrant nearly doubled median progression-free survival compared to fulvestrant alone. Novartis is also conducting the Phase II open-label BYLieve trial evaluating BYL719 plus fulvestrant or letrozole in patients with PIK3CA-mutated HR+/HER2- advanced breast cancer who have progressed on prior therapy. The study investigates BYL719 in a broader patient population as compared with SOLAR-1, including two cohorts exclusively enrolling patients who have progressed on or after prior CDK4/6 inhibitor therapies.

• Cosentyx (secukinumab) is a fully human monoclonal antibody that selectively neutralizes interleukin-17A (IL-17A). Cosentyx is in Phase III development in non-radiographic axial spondyloarthritis. We expect results from this trial in 2019. Cosentyx is also in a Phase III head-to-head clinical trial in psoriatic arthritis against Humira® (adalimumab), and a Phase III head-to-head clinical trial in ankylosing spondylitis against the Sandoz biosimilar Hyrimoz (adalimumab).

• Entresto (sacubitril/valsartan) is a first-in-class angiotensin receptor/neprilysin inhibitor approved and marketed for the treatment of chronic heart failure with reduced ejection fraction (HFrEF). Novartis is conducting multiple studies of Entresto as part of the FortiHFy clinical program. FortiHFy includes studies to provide reinforcing evidence in HFrEF, such as PIONEER-HF and TRANSITION, which both read out in 2018 and confirmed safety as well as superiority of Entresto versus enalapril, an angiotensin-converting enzyme inhibitor (ACE inhibitor), in the hospital setting in a wide range of HFrEF patients hemodynamically stabilized after an acute decompensated heart failure event. FortiHFy also includes studies to investigate Entresto use in novel indications and expanded patient populations. These include PARAGON-HF and PARALLAX-HF, Phase III trials of Entresto in patients with chronic heart failure with preserved ejection fraction (PARAGON-HF enrollment is completed and results are expected in 2019, while PARALLAX-HF enrollment is ongoing and results are expected in 2020); PARADISE-MI, a Phase III trial for patients at high risk for heart failure after an acute myocardial infarction (enrollment is ongoing and results are expected in 2020); PARALLEL-HF, a Phase III trial in Japan for patients with HFrEF (enrollment is completed and results are expected in 2019); and PANORAMA-HF, a Phase III trial for pediatric patients with heart failure (enrollment is ongoing and results are expected in 2021).

• INC280 (capmatinib) is an investigational, oral and selective MET inhibitor currently in a Phase II study in adult patients with advanced non-small cell lung cancer harboring MET exon 14 skipping mutations, as well as additional early-stage studies in combination with other compounds. In October 2018, Novartis presented preliminary results of the Phase II study at the European Society of Medical Oncology congress. INC280 is licensed by Novartis from Incyte Corporation. Under the licensing agreement, Incyte granted Novartis exclusive worldwide development and commercialization rights to this MET inhibitor compound.

• KAF156 (ganaplacide) belongs to a novel class of antimalarial compounds called imidazolopiperazines. It has the potential to clear malaria infection, including resistant strains, and to block the transmission of the malaria parasite. As demonstrated in a Phase IIa proof-of-concept trial, the compound is fast-acting and potent across multiple stages of the parasite’s lifecycle, rapidly clearing both Plasmodium falciparum and Plasmodium vivax parasites. In August 2017, Novartis began a Phase IIb study to test multiple dosing combinations and dosing schedules of KAF156 and lumefantrine, including the feasibility of a single dose therapy in adults, adolescents and children.

• Kisqali (ribociclib) is a selective cyclin-dependent kinase inhibitor that inhibits two proteins called cyclin-dependent kinase 4 and 6 (CDK4/6). Novartis is continuing to assess Kisqali through the MONALEESA clinical trial program, which includes MONALEESA-2, MONALEESA-3 and MONALEESA-7, as well as the NataLEE adjuvant trial. These trials are

evaluating Kisqali in multiple endocrine therapy combinations across a broad range of patients, including men and premenopausal women. Kisqali was developed by Novartis as part of a drug discovery collaboration with Astex Pharmaceuticals.

• Kymriah (tisagenlecleucel) is a CD19-directed genetically modified autologous chimeric antigen receptor T-cell (CAR-T) therapy that uses the patient’s own immune system to fight certain types of cancer. CARs are engineered proteins that enable a patient’s own T-cells to seek out specific target proteins present on a patient’s cancerous cells. When these cells are reintroduced into the patient’s blood, they demonstrate the potential to bind to the cancer cells and destroy them. Kymriah targets a protein called CD19, which is associated with a number of B-cell malignancies. Novartis is starting pivotal clinical studies of Kymriah in relapsed or refractory (r/r) follicular lymphoma, adult r/r acute lymphoblastic leukemia (ALL), first-line high-risk pediatric ALL, diffuse large B-cell lymphoma after first relapse, and r/r chronic lymphoblastic leukemia. Novartis and the University of Pennsylvania’s Perelman School of Medicine, which developed Kymriah, have a global collaboration to research, develop and commercialize CAR-T therapies, including Kymriah, for the investigational treatment of cancers.

• LJN452 (tropifexor) is a potent, non-bile acid, farnesoid X receptor (FXR) agonist that is being developed for the treatment of nonalcoholic steatohepatitis (NASH). LJN452 has been shown to reduce steatosis, inflammation and fibrosis in animal models, alongside a favorable safety profile in first-in-human studies. This oral treatment is designed to break the cycle of fatty buildup in the liver and harness the body’s built-in mechanisms for coping with excess bile acid. Recruitment is underway for the first LJN452 clinical study with histological endpoints in NASH patients.

• OMB157 (ofatumumab) is a fully human monoclonal antibody administered by subcutaneous injection. It is in development for multiple sclerosis (MS). OMB157 works by binding to the CD20 molecule on the B-cell surface and inducing B-cell depletion. Positive Phase IIb results in MS patients were presented in 2014 and showed significant reduction in the number of new brain lesions in the first 24 weeks after OMB157 administration. Novartis initiated a Phase III program for OMB157 in relapsing MS in August 2016. The program is fully enrolled and is on track for completion in 2019. In addition, a registration study for Japan was initiated in March 2018.

• PDR001 (spartalizumab) is an investigational PD-1 antagonist that may restore the ability of immune cells to induce cell death and fight cancer. PDR001 is being evaluated in a Phase III trial in combination with Tafinlar + Mekinist for metastatic BRAF V600+ melanoma, and in combination in other clinical trials across different tumor types.

• QAW039 (fevipiprant) is a once-daily oral therapy that blocks the DP2 pathway, a principal regulator of the inflammatory cascade. By targeting the DP2 pathway, QAW039 blocks the asthma inflammatory cascade at multiple points. In asthma, this results in the reduction of eosinophil activation and migration; in the reduced release of pro-inflammatory cytokines IL-4, IL-5 and IL-13; and in the reduction of smooth muscle cell mass in the airways. Positive Phase II results showed improvement of lung function, reduction of sputum eosinophil levels, and improvement of asthma symptoms. Phase III studies are ongoing, measuring improvement of lung function and reduction of asthma attacks in moderate to severe patients with unresolved asthma despite treatment with inhaled therapies. Phase III development started in 2015, with first pivotal trial readouts expected this year.

• QVM149 (indacaterol acetate, glycopyrronium bromide, mometasone furoate) is a fixed-dose combination of indacaterol acetate (an inhaled long-acting beta2-adrenergic agonist), glycopyrronium bromide (an inhaled long-acting muscarinic antagonist), and mometasone furoate (an inhaled corticosteroid) delivered once-daily via the Breezhaler device, a unit dose dry powder inhaler. It is in development as a maintenance treatment for poorly controlled asthmatic patients. All three mono-components have previously been developed as individual drugs for either chronic obstructive pulmonary disease or asthma. QVM149 is currently in Phase III clinical trials to support registration outside the US.

• RTH258 (brolucizumab) is a single-chain antibody fragment that acts as an anti-vascular endothelial growth factor (anti-VEGF) agent. RTH258 is currently in development for neovascular age-related macular degeneration (nAMD) and diabetic macular edema. In nAMD, RTH258 met its primary endpoint of non-inferiority to aflibercept in mean change in best-corrected visual acuity in two Phase III clinical trials, HAWK and HARRIER. Additionally, superiority was shown in three secondary endpoints that are considered key markers of nAMD disease: central subfield retinal thickness, retinal fluid (intraretinal and subretinal), and disease activity. A majority of patients were maintained on a 12-week treatment schedule immediately following the loading phase to Week 48, also assessed by secondary endpoints in the HAWK and HARRIER trials. Year Two data reaffirmed the Year One findings. We expect to make global regulatory filings for nAMD, starting in the US, the EU and Japan.

• SEG101 (crizanlizumab) is an investigational humanized anti-P-selectin monoclonal antibody that is in late-stage development for the prevention of vaso-occlusive pain crises (VOCs) in patients with sickle cell disease (SCD). SCD is a debilitating genetic blood disorder that affects the shape of red blood cells and can cause VOCs. In December 2018, the FDA granted SEG101 breakthrough therapy designation for the prevention of vaso-occlusive crises in sickle cell disease.

• UNR844 is a potential first-in-class topical treatment in development for presbyopia. It is believed to work through the reduction of disulfide bonds, softening the

crystalline lens. Presbyopia is a common age-related loss of near-distance vision characterized by a progressive inability to focus on objects nearby, making everyday activities (such as reading) a challenge. In a Phase I/II masked, placebo-controlled proof-of-concept study, 50 patients were treated daily for 90 days with topical UNR844, and 25 patients were treated with placebo. UNR844 showed a statistically significant difference to placebo in distance-corrected near vision at all time points measured (from Day Eight). At Day 90, 82% of participants treated with UNR844 had 20/40 near vision (or 0.30 LogMAR) versus 48% in the placebo group. Near vision of 20/40 allows for the majority of near-vision tasks in most people. UNR844 was acquired by Novartis through the acquisition of Encore Vision, Inc. in January 2017.