AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 2001
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended
December 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-15024
NOVARTIS AG
(Exact name of registrant as specified in its charter)
NOVARTIS INC.
(Translation of Registrant's name into English)
SWITZERLAND
(Jurisdiction of incorporation or organization)
LICHTSTRASSE 35
CH-4056 BASEL, SWITZERLAND
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
AMERICAN DEPOSITARY SHARES NEW YORK STOCK EXCHANGE, INC.
EACH REPRESENTING 1/40 ORDINARY SHARE,
NOMINAL VALUE CHF 20 PER ORDINARY SHARE,
AND ORDINARY SHARES
Securities registered pursuant to Section 12(g) of the Act:
NONE
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
NONE
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
72,130,117 ORDINARY SHARES
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days:
YES _X_ NO____ NOT APPLICABLE____
Indicate by check mark which financial statement item the Registrant has elected
to follow:
ITEM 17____ ITEM 18 _X_
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TABLE OF CONTENTS
INTRODUCTION AND USE OF CERTAIN TERMS................................. 4
FORWARD-LOOKING STATEMENTS............................................ 4
PART I .............................................................. 5
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS....... 5
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..................... 5
ITEM 3. KEY INFORMATION............................................. 5
3.A Selected Financial Data..................................... 5
3.B Capitalization and Indebtedness............................. 7
3.C Reasons for the offer and use of proceeds................... 7
3.D Risk factors................................................ 7
ITEM 4. INFORMATION ON THE COMPANY.................................. 10
4.A History and Development of Novartis......................... 10
4.B Business Overview........................................... 11
4.C Organizational Structure.................................... 41
4.D Property, Plants and Equipment.............................. 41
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS................ 44
5.A Operating Results........................................... 44
5.B Liquidity and Capital Resources............................. 62
5.C Research and Development, Patents and Licenses.............. 64
5.D Trend Information........................................... 64
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.................. 65
6.A Directors and Senior Management............................. 65
6.B Compensation................................................ 69
6.C Board Practices............................................. 71
6.D Employees................................................... 71
6.E Share Ownership............................................. 72
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS........... 73
7.A Major Shareholders.......................................... 73
7.B Related Party Transactions.................................. 73
7.C Interests of Experts and Counsel............................ 74
ITEM 8. FINANCIAL INFORMATION....................................... 74
8.A Consolidated Statements and Other Financial Information..... 74
8.B Significant Changes......................................... 75
ITEM 9. THE OFFER AND LISTING....................................... 75
9.A Listing Details............................................. 75
9.B Plan of Distribution........................................ 76
9.C Market...................................................... 76
9.D Selling Shareholders........................................ 76
9.E Dilution.................................................... 76
9.F Expenses of the Issue....................................... 76
2
ITEM 10. ADDITIONAL INFORMATION...................................... 76
10.A Share capital............................................... 76
10.B Memorandum and articles of association...................... 76
10.C Material contracts.......................................... 81
10.D Exchange controls........................................... 81
10.E Taxation.................................................... 81
10.F Dividends and paying agents................................. 85
10.G Statement by experts........................................ 85
10.H Documents on display........................................ 85
10.I Subsidiary Information...................................... 85
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. 85
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...... 88
PART II ............................................................. 89
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES............. 89
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS............................................. 89
ITEM 15. [RESERVED].................................................. 89
ITEM 16. [RESERVED].................................................. 89
PART III ............................................................. 89
ITEM 17. FINANCIAL STATEMENTS........................................ 89
ITEM 18. FINANCIAL STATEMENTS........................................ 89
ITEM 19. EXHIBITS.................................................... 89
3
INTRODUCTION AND USE OF CERTAIN TERMS
Novartis AG and our consolidated subsidiaries ("Novartis" or the "Group")
publish consolidated financial statements expressed in Swiss francs ("CHF"). Our
consolidated financial statements included in Item 18 of this annual report on
Form 20-F ("Form 20-F") include those for the year ended December 31, 2000. In
this Form 20-F, references to "CHF" are to Swiss francs; references to
"U.S. dollars" or "$" are to the lawful currency of the U.S.; and references to
"m" are to million. Solely for the convenience of the reader, this Form 20-F
contains translations of certain Swiss franc amounts into U.S. dollar amounts at
specified rates. These translations should not be construed as representations
that the Swiss franc amounts actually represent such U.S. dollar amounts or
could be converted into U.S. dollars at the rate indicated or at any other rate.
Unless otherwise indicated, the translations from Swiss francs into
U.S. dollars have been made at the market rate as quoted by the Reuters Market
System in effect on December 29, 2000, which was $1.00 = CHF 1.64.
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In this Form 20-F, references to "Novartis" or the "Group" are to Novartis
AG and our consolidated subsidiaries; references to "Europe" are to all European
countries (including Turkey, Russia and the Ukraine), whereas references to the
European Union ("EU") are to each of the 15 member-states of the EU and
references to "Americas" are to North, Central (including the Caribbean) and
South America, unless the context otherwise requires.
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We furnish to holders of our ordinary shares ("shares") annual reports that
include a description of operations and annual audited consolidated financial
statements prepared in accordance with International Accounting Standards
("IAS"), which differs in certain significant respects from Generally Accepted
Accounting Principles in the U.S. ("U.S. GAAP"). See "Item 18. Financial
Statements--Note 32" for a description of the significant differences between
IAS and U.S. GAAP. The financial statements included in the annual reports are
examined and reported upon by Novartis' independent auditors. We also furnish
holders of our shares with half-year interim reports that include unaudited
interim consolidated financial information prepared in conformity with IAS with
a reconciliation to U.S. GAAP.
FORWARD-LOOKING STATEMENTS
This Form 20-F contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, relating to our
business and the sectors in which we and our subsidiaries and interests operate.
Certain such forward-looking statements can be identified by the use of
forward-looking terminology such as "believe", "expect", "may", "are expected
to", "will", "will continue", "should", "would be", "seek" or "anticipate" or
similar expressions or the negative thereof or other variations thereof or
comparable terminology, or by discussions of strategy, plans or intentions. Such
statements include descriptions of our investment and research and development
programs and anticipated expenditures in connection therewith, descriptions of
new products we expect to introduce and anticipated customer demand for such
products. Such statements reflect our current views with respect to future
events and are subject to certain risks, uncertainties and assumptions. Many
factors could cause our actual results, performance or achievements to be
materially different from any future results, performances or achievements that
may be expressed or implied by such forward-looking statements. Some of these
factors are discussed in more detail herein, including under "Item 3. Key
Information," "Item 4. Information on the Company," and "Item 5. Operating and
Financial Review and Prospects." Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in this Form 20-F as
anticipated, believed, estimated or expected. We do not intend, and do not
assume any obligation, to update any industry information or forward-looking
statements set out in this Form 20-F.
4
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
3.A SELECTED FINANCIAL DATA
The financial data set forth below at December 31, 2000, 1999, 1998, 1997
and 1996 have been derived from audited financial statements. Our consolidated
financial statements ("consolidated financial statements") for the years ended
December 31, 2000, 1999 and 1998 are included elsewhere herein. The data should
be read in conjunction with "Item 5. Operating and Financial Review and
Prospects" and our consolidated financial statements and notes thereto included
elsewhere herein and are qualified in their entirety by reference to the
consolidated financial statements and such notes.
The audited financial statements from which the selected consolidated
financial data set forth below have been derived were prepared in accordance
with IAS, which differ in certain respects from U.S. GAAP. For a discussion of
the significant differences between IAS and U.S. GAAP, see "Item 18. Financial
Statements--Note 32."
For further information regarding continuing and discontinuing activities
(the Agribusiness sector), see "Item 5. Operating and Financial Review and
Prospects--5.A. Operating Results" and "Item 4. Information on the
Company--Spin-off of Agribusiness."
YEAR ENDED DECEMBER 31,
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2000(1) 2000 2000(2) 1999 1999(2) 1998 1997(3) 1996(3)
-------- -------- -------- -------- -------- -------- -------- --------
($) (CHF) (CHF) (CHF) (CHF) (CHF) (CHF) (CHF)
(IN MILLIONS EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
AMOUNTS IN ACCORDANCE WITH
IAS:
Net sales.................. 21,832 35,805 29,112 32,465 25,409 31,702 31,180 36,233
Operating income........... 4,806 7,883 6,727 7,343 6,696 6,920 6,688 5,781
Income from associates..... 60 98 97 383 376 239 45 --
Net financial
income/expenses.......... 665 1,091 1,216 793 990 759 167 (245)
Income before taxes and
minority interests....... 5,531 9,072 8,040 8,519 8,062 7,918 6,900 2,597
Taxes...................... (1,110) (1,820) (1,504) (1,833) (1,683) (1,882) (1,674) (291)
Minority interests......... (26) (42) (25) (27) (20) (26) (18) (2)
Net income................. 4,395 7,210 6,511 6,659 6,359 6,010 5,208 2,304
Basic and diluted earnings
per share................ 67 110 100 100 96 91 79 33
Cash dividends(4).......... 1,259 2,064 -- 1,935 -- 1,663 1,320 1,158
Cash dividends per share... 21 34 -- 32 -- 29 25 20
Operating income from
continuing operations per
share (basic and
diluted)................. 63 103 103 101 101 88 -- --
5
YEAR ENDED DECEMBER 31,
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2000(1) 2000 1999 1998 1997(3) 1996(3)
--------- --------- --------- --------- --------- ---------
($) (CHF) (CHF) (CHF) (CHF) (CHF)
(IN MILLIONS EXCEPT PER SHARE DATA)
BALANCE SHEET DATA
AMOUNTS IN ACCORDANCE WITH IAS:
Cash, cash equivalents and current
marketable securities............. 12,514 20,523 16,328 14,170 13,722 19,044
Inventories......................... 2,513 4,122 6,887 6,695 6,545 7,961
Other current assets................ 5,057 8,294 11,464 9,088 9,139 9,293
Long-term assets.................... 15,400 25,257 30,848 26,272 24,244 21,729
Total assets........................ 35,484 58,196 65,527 56,225 53,650 58,027
Trade accounts payable.............. 970 1,591 1,971 1,537 1,757 1,983
Other current liabilities........... 6,127 10,049 15,442 13,453 15,889 16,819
Long-term liabilities and minority
interests......................... 5,910 9,694 10,898 9,839 9,533 11,548
Total equity........................ 22,477 36,862 37,216 31,396 26,471 27,677
Total liabilities and equity........ 35,484 58,196 65,527 56,225 53,650 58,027
Net assets.......................... 22,524 36,940 37,437 31,590 26,699 28,006
Capital stock....................... 795 1,304 1,313 1,328 1,370 1,377
AMOUNTS IN ACCORDANCE WITH U.S.
GAAP:
INCOME STATEMENT DATA
Net income.......................... 4,215 6,913 5,419 4,955
Basic and diluted earnings per
share............................. 67 110 84 77
BALANCE SHEET DATA
Total equity........................ 29,757 48,802 50,575 47,823
Total assets........................ 43,949 72,077 79,756 73,014
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(1) The Swiss franc amounts have been translated into United States dollars at
the rate of CHF 1.64 to the dollar. Such translations should not be
construed as representations that the Swiss franc amounts represent, or have
been or could be converted into, United States dollars at that or any other
rate.
(2) Financial data is presented on a continuing basis and gives effect to the
Agribusiness spin-off (see "Item 4. Information on the Group--4.A. History
and Development of the Group").
(3) The years 1996 and 1997 have not been restated for changes in IAS adopted in
1998 and subsequent years.
(4) Cash dividends represent cash payments in the applicable year that generally
relate to earnings of the previous year.
CASH DIVIDENDS PER SHARE
Cash dividends are translated into U.S. dollars at the Noon Buying Rate on
the payment date. Because dividends are paid by the Company in Swiss francs,
exchange rate fluctuations will affect the U.S. dollar amounts received by
holders of ADSs.
MONTH AND TOTAL DIVIDEND TOTAL DIVIDEND TOTAL DIVIDEND(1)
YEAR EARNED YEAR PAID PER SHARE PER SHARE PER ADS
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(CHF) ($) ($)
1996............................ April 1997 20.00 13.61 0.2893
1997............................ April 1998 25.00 16.67 0.3555
1998............................ April 1999 29.00 19.20 0.4049
1999............................ April 2000 32.00 19.52 0.4098
2000............................ March 2001 34.00 20.98 0.4262
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(1) A two-for-one share split for the ADSs was affected on May 11, 2000.
6
EXCHANGE RATES
The following table sets forth, for the years and dates indicated, certain
information concerning the rate of exchange of the Swiss franc to the U.S.
dollar based on the Noon Buying Rate. The Noon Buying Rate in effect on
April 10, 2001 was CHF 1.7165 = $1.00.
YEAR ENDED DECEMBER 31,
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PERIOD END AVERAGE(1) HIGH LOW
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1996................................................. 1.34 1.24 1.35 1.16
1997................................................. 1.46 1.45 1.54 1.34
1998................................................. 1.37 1.45 1.54 1.29
1999................................................. 1.59 1.51 1.60 1.36
2000.......................................................................... 1.83 1.55
November 2000................................................................. 1.81 1.74
December 2000................................................................. 1.73 1.62
January 2001.................................................................. 1.66 1.60
February 2001................................................................. 1.69 1.63
March 2001.................................................................... 1.74 1.65
April 2001 (through April 10, 2001)........................................... 1.7317 1.6951
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(1) Represents the average of the exchange rates on the last day of each full
month during the year.
3.B CAPITALIZATION AND INDEBTEDNESS
Not applicable.
3.C REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
3.D RISK FACTORS
You should carefully consider all of the information set forth in this
annual report and the following risk factors. The risks below are not the only
ones we face. Additional risks not currently known by us or that we deem
immaterial may also impair our business operations. Our business, financial
condition or results of operations could be materially adversely affected by any
of these risks. This annual report also contains forward-looking statements that
involve risks and uncertainties. Our results could materially differ from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks we face as described below and elsewhere. See "Forward
Looking Statements."
WE FACE INTENSE COMPETITION FROM NEW PRODUCTS AND FROM LOWER-COST GENERIC
PRODUCTS
Our products that are under patent protection face intense competition from
competitors' proprietary products. This competition may increase as new products
enter the market. We also face increasing competition from lower-cost generic
products after patents on our products expire. Loss of patent protection
typically leads to loss of sales in the product's markets and could affect
future results. Patent protection is no longer available in major markets for
the active ingredients used in a number of Novartis Pharmaceuticals' leading
products. Generic products competing with Neoral-Registered Trademark- entered
the transplantation market segment in the U.S. in 2000, despite patent
protection in the U.S. for the Neoral-Registered Trademark- microemulsion
formulation until 2011. Marketing authorizations have also been granted for such
generic products in certain countries in Europe and elsewhere. The patent for
Aredia-Registered Trademark- is currently being challenged by generic
7
producers in the U.S., who may launch generic products in the near future. We
have a follow-up drug, Zometa-Registered Trademark-, which has been approved by
regulatory authorities in 22 countries, including Switzerland and the EU
countries, and which is currently under regulatory review in the U.S. and other
countries. Patent protection or regulatory exclusivity will expire in the next
few years in major markets for the key product
Sandostatin-Registered Trademark-. The basic octreotide substance patents expire
in the U.S., Japan and minor countries in the next two years, but will remain in
place in the EU. Patent protection continues, however, in all major markets for
Sandostatin-Registered Trademark- LAR, which represents a significant and
growing proportion of Novartis Pharmaceuticals' octreotide sales. These patents
will extend to 2010, and in some cases beyond. The basic benazepril substance
patent for Cibacen-Registered Trademark- will expire in the U.S. and in Japan
within the next two years, but will remain in place in major markets in the EU.
Lotrel-Registered Trademark-, the fast growing combination of benazepril with
amlodipine, on the other hand, received patent extension to 2017, and is
expected to at least partially offset potential generic erosion on
Cibacen-Registered Trademark- sales. Voltaren-Registered Trademark- and
Sandimmun-Registered Trademark- are experiencing competition from generic
products. Voltaren-Registered Trademark- is off-patent and revenue declines
year-over-year may be significant over the next few years.
As new products enter the market, our products may become obsolete or our
competitors' products may be more effective or more effectively marketed and
sold than our products. If we fail to maintain our competitive position, this
could have a material adverse effect on our business and results of operations.
OUR RESEARCH AND DEVELOPMENT EFFORTS MAY NOT SUCCEED OR OUR COMPETITORS MAY
DEVELOP MORE EFFECTIVE OR SUCCESSFUL PRODUCTS
In order to remain competitive, we must commit substantial resources each
year to research and development through our dedicated resources as well as
various collaborations with third parties. Our ongoing investments in new
product launches and research and development for future products could produce
higher costs without a proportional increase in revenues.
In the pharmaceutical business, the research and development process can
take from 10 to 12 years from discovery to commercial product launch. This
process is conducted in various stages, and during each stage there is a
substantial risk that we will not achieve our goals and accordingly we may
abandon a product in which we have invested substantial amounts. If we fail to
continue developing commercially successful products, or if competitors develop
more effective products or a greater number of successful new products, this
could have a material adverse effect on our business and results of operations.
PRODUCT REGULATION MAY ADVERSELY AFFECT OUR ABILITY TO BRING NEW PRODUCTS TO
MARKET
We and our competitors are subject to strict government controls on the
development, manufacture, labeling, distribution and marketing of products. We
must obtain and maintain regulatory approval for our pharmaceutical and other
products from regulatory agencies before products may be sold in a particular
jurisdiction. The submission of an application to a regulatory authority does
not guarantee that a license to market the product will be granted. Each
authority may impose its own requirements and delay or refuse to grant approval,
even though a product has been approved in another country. In our principal
markets, the approval process for a new product is complex, lengthy and
expensive. The time taken to obtain approval varies by country but generally
takes from six months to several years from the date of application. Regulatory
delays, the inability to successfully complete clinical trials, claims and
concerns about safety and efficacy, new discoveries, patents and products of
competitors and related patent disputes and claims about adverse side effects
are only a few of the factors that could adversely affect the realization of
product registration. This increases the cost to us of developing new products
and increases the risk that we will not succeed in selling them successfully.
Changes in intellectual property protections and remedies, trade regulations
and procedures and actions affecting approval, production, pricing,
reimbursement and marketing of products, as well as unstable governments and
legal systems, intergovernmental disputes and possible nationalization could
also materially adversely affect our business or results of operations.
8
PRICE CONTROLS CAN LIMIT OUR REVENUES AND ADVERSELY AFFECT OUR BUSINESS AND
RESULTS OF OPERATIONS
In addition to normal price competition in the marketplace, the prices of
our pharmaceutical products are restricted by price controls imposed by
governments and health care providers in most countries. Price controls operate
differently in different countries and can cause wide variations in prices
between markets. Currency fluctuations can aggravate these differences. The
existence of price controls can limit the revenues we earn on our products and
may have an adverse effect on our business and results of operations.
In the United States, the current national debate over Medicare reform could
increase pricing pressures. If Medicare reform results in the provision of
outpatient pharmaceutical coverage for beneficiaries, the U.S. government could
use its enormous purchasing power to demand discounts from pharmaceutical
companies thereby creating de facto price controls on prescription drugs. In
Europe, our operations are also subject to price and market regulations. Many
governments are introducing healthcare reforms in an attempt to curb increasing
healthcare costs. In Japan, where we also operate, governmental price cut rounds
are introduced biannually. In response to rising healthcare costs, many
governments and private medical care providers, such as HMOs, have instituted
reimbursement schemes that favor the substitution of generic pharmaceuticals for
more expensive brand-name pharmaceuticals. In the U.S., generic substitution
statutes have been enacted by virtually all states and permit or require the
dispensing pharmacist to substitute a less expensive generic drug instead of an
original ethical drug. As a result, we expect that pressures on pricing and
operating results will continue.
WE OPERATE IN HIGHLY COMPETITIVE AND RAPIDLY CONSOLIDATING INDUSTRIES
We operate in highly competitive and rapidly consolidating industries. Our
principal competitors are major international corporations with substantial
resources for research and development, production and marketing. Our
competitors are consolidating, and combined companies could affect our
competitive position in all of our business sectors.
PRODUCT LIABILITY CLAIMS COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF
OPERATIONS
Product liability is a significant commercial risk for us. Substantial
damage awards have been made in some jurisdictions against pharmaceutical
companies based upon claims for injuries allegedly caused by the use of their
products. We are involved in a number of product liability cases claiming
damages as a result of the use of our products. We believe that any reasonably
foreseeable unaccrued costs and liabilities associated with such matters will
not have a material adverse effect on our consolidated financial position,
results of operations or liquidity. There can, however, be no assurance that a
future product liability claim or series of claims brought against us would not
have an adverse effect on our business or results of operations.
OUR BUSINESS WILL CONTINUE TO EXPOSE US TO RISKS OF ENVIRONMENTAL LIABILITIES
We use hazardous materials, chemicals, viruses and toxic compounds in our
product development programs and manufacturing processes which have exposed us
and in the future could expose us to risks of accidental contamination and
events of noncompliance with environmental laws and regulatory enforcement,
personal injury and property damage claims resulting therefrom. If an accident
occurred or if we were to discover contamination caused by prior operations, we
could be liable for cleanup obligations, damages or fines, which could have an
adverse effect on our business and results of operations.
The environmental laws of many jurisdictions impose actual and potential
obligations on us to remediate contaminated sites. These obligations may relate
to sites:
- that we currently own or operate;
- that we formerly owned or operated; or
- where waste from our operations was disposed.
9
These environmental remediation obligations could significantly reduce our
operating results. In particular, our accruals for these obligations may be
insufficient if the assumptions underlying the accruals prove incorrect or if we
are held responsible for additional, currently undiscovered contamination.
Stricter environmental, safety and health laws and enforcement policies
could result in substantial costs and liabilities to us, and could subject our
handling, manufacture, use, reuse or disposal of substances or pollutants to
more rigorous scrutiny than is currently the case. Consequently, compliance with
these laws could result in significant capital expenditures as well as other
costs and liabilities, thereby harming our business and operating results.
WE DEPEND ON THIRD PARTY SUPPLIERS FOR MANUFACTURE OF CERTAIN OF OUR PRODUCTS,
AND A SUPPLY INTERRUPTION COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF
OPERATION
The products we market, distribute and sell are either manufactured at our
dedicated manufacturing facilities or through toll manufacturing arrangements or
through supply agreements with third parties. Inasmuch as many of our products
are chemically based and are the result of technically complex manufacturing
processes, we can provide no assurances that supply sources will not be
interrupted from time to time.
FOREIGN EXCHANGE FLUCTUATIONS MAY ADVERSELY AFFECT OUR EARNINGS AND THE VALUE OF
OUR NON-SWISS ASSETS
We record our transactions and prepare our financial statements in Swiss
francs, but a significant portion of our earnings and expenditures are in other
currencies. In 2000, 44% of our sales were made in U.S. dollars, 8% in Japanese
yen, 24% in Euro and 6% in Swiss francs and 18% in other currencies, while 33%
of our costs were generated in U.S. dollars, 5% in Japanese yen, 23% in Euro and
26% in Swiss francs and 13% in other currencies. Changes in exchange rates
between the Swiss franc and these other currencies can result in increases or
decreases in our costs and earnings. Fluctuations in exchange rates between the
Swiss franc and other currencies may also affect the book value of our assets
outside Switzerland and the amount of shareholders' equity. We seek to minimize
our currency exposure by engaging in hedging transactions, where we deem it
appropriate. To mitigate some of these risks, we have hedged certain U.S. dollar
and Japanese yen positions for 2001. We cannot predict, however, all changes in
currency and interest rates, inflation or other factors which could affect our
international businesses.
ITEM 4. INFORMATION ON THE COMPANY
4.A HISTORY AND DEVELOPMENT OF NOVARTIS
Novartis AG was formed in December 1996 as a public company incorporated
under the laws of Switzerland with an indefinite duration. We are domiciled in
and are governed by the laws of Switzerland.
Headquartered in Basel, Switzerland, we employ approximately 68,000 people
worldwide, we operate in over 140 countries and are listed on the Swiss Exchange
(the "SWX") and the New York Stock Exchange ("NYSE"). Our registered office is
located at Lichtstrasse 35, CH-4056 Basel and our telephone number is
011-41-61-324-1111.
Novartis AG was created by the merger of Sandoz AG and CIBA-Geigy AG (the
"Merger") in December 1996. Prior to the Merger, Sandoz AG and CIBA-Geigy AG
were each global participants in the pharmaceutical and agrochemical industries.
Our predecessor companies merged to realize sales, cost and cross-sector
synergies, and to create a combined entity with the resources and ability to
compete in the long-term in an increasingly competitive global environment.
In November 2000, we spun-off and merged our Crop Protection and Seeds
businesses with AstraZeneca's Zeneca Agrochemicals to create the world's first
dedicated agribusiness company with pro forma combined sales in 1999 of
approximately $7.0 billion. The new company, Syngenta AG ("Syngenta"), is
headquartered in Basel, Switzerland, and is listed on the Swiss, London, New
York and
10
Stockholm stock exchanges. Our Agribusiness sector which comprises Crop
Protection and Seeds, is accordingly shown as a discontinuing activity.
In 2000, we made acquisitions in our Pharmaceuticals, Generics, CIBA Vision
and Animal Health sectors. Our most significant acquisitions were in CIBA Vision
and Novartis Pharmaceuticals.
On October 2, 2000, CIBA Vision acquired 100% of Wesley Jessen
VisionCare Inc., a U.S. corporation for CHF 1.3 billion (approximately
$800 million) in cash. Wesley Jessen brings to CIBA Vision a range of products
that complement our existing brands as well as technological expertise,
especially in the area of specialty lenses. CIBA Vision's established global
sales and marketing operations will expand the global reach of Wesley Jessen's
product lines. The market share of the combined company will make us the
second-leading player in the contact lens industry. As a result of the
combination, we expect to offer our customers a steady flow of new products and
vision correction options.
On December 21, 2000, Novartis Pharmaceuticals completed the acquisition of
the antiviral products Famvir-Registered Trademark- (famciclovir) and
Vectavir-Registered Trademark-/Denavir-Registered Trademark- (penciclovir) from
SmithKline Beecham, for a total price of CHF 2.7 billion approximately (U.S.
$1.6 billion). We expect the acquisition of these products to expand our
franchise in the primary care market.
For a description of our principal capital expenditures and divestitures,
see "Item 5. Operating and Financial Review and Prospects--5.B. Liquidity and
Capital Resources."
4.B BUSINESS OVERVIEW
GENERAL
We are a world leader both in sales and in innovation in our continuing core
businesses: pharmaceuticals, generics, consumer health, eyecare products and
medicines ("CIBA Vision"), and animal health. We aim to hold a leadership
position in all of these businesses. We are committed to improving health and
well-being through innovative products and services. The name "Novartis" is
derived from the Latin NOVAE ARTES, meaning "new skills," which reflects our
focus on research and development.
PRODUCT SECTORS AND GEOGRAPHIC MARKETS
We currently operate in five principal industry sectors: Pharmaceuticals,
Generics, Consumer Health, CIBA Vision, and Animal Health. All references to
Group figures, unless otherwise indicated, including employees and sales,
include the Agribusiness sector, up until the November 6, 2000 spin-off. The
11
following tables set forth the Group's sales and operating income by business
sector for the financial years ended December 31, 2000, 1999 and 1998.
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
2000 1999(2)(3) 1999(3) 1998(3)
-------------- -------------- -------------- --------------
(CHF MILLIONS) (CHF MILLIONS) (CHF MILLIONS) (CHF MILLIONS)
SALES TO THIRD PARTIES
Pharmaceuticals............... 17,611 15,275 15,595 14,501
Generics...................... 1,938 1,823 1,823 1,529
Consumer Health--ongoing...... 6,395 5,570 5,250 4,752
Divested Consumer Health
activities.................. -- 182 182 1,036
CIBA Vision................... 2,085 1,632 1,632 1,505
Animal Health................. 1,083 927 927 901
SALES OF CONTINUING
ACTIVITIES.................. 29,112 25,409 25,409 24,224
Sales from discontinuing
Agribusiness
activities(1)............... 6,693 7,056 7,056 7,478
GROUP SALES................... 35,805 32,465 32,465 31,702
OPERATING INCOME
Pharmaceuticals............... 5,403 4,676 4,830 4,502
Generics...................... 227 347 347 278
Consumer Health--ongoing...... 824 807 653 647
Divested Consumer Health
activities.................. -- 375 375 80
CIBA Vision................... 158 250 250 225
Animal Health................. 179 216 216 211
Corporate and Other........... (64) 25 25 (91)
OPERATING INCOME FROM
CONTINUING ACTIVITIES....... 6,727 6,696 6,696 5,852
Operating income from
discontinuing Agribusiness
activities(1)............... 1,156 647 647 1,068
GROUP OPERATING INCOME........ 7,883 7,343 7,343 6,920
- -------------
(1) Agribusiness: Crop Protection and Seeds businesses through November 6, 2000,
the date of spin-off.
(2) Restated to reflect the transfer as of January 1, 2000 of certain products
from the Pharmaceuticals sector to the Consumer Health sector. In 1999 these
products generated CHF 320 million and CHF 154 million of sales and
operating income, respectively.
(3) Restated to reflect CHF 90 million and CHF 30 million of Corporate and other
expenses allocated to the discontinuing Agribusiness activities in 1999 and
1998, respectively.
12
The table below sets forth a regional breakdown of certain data for the
years ended December 31, 2000, 1999 and 1998.
AMERICAS EUROPE REST OF THE WORLD
------------------------------ ------------------------------ ------------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- -------- -------- -------- --------
Sales (CHF m).................. 17,761 15,328 15,292 11,729 11,620 11,789 6,315 5,517 4,621
Operating Income (CHF m)....... 2,474 2,170 2,742 4,469 4,549 3,658 940 624 520
Number of Employees (at
December 31)................. 27,063 29,077 27,832 28,815 38,125 40,105 11,775 14,652 14,512
Investment in Tangible Fixed
Assets (CHF m)............... 475 510 498 790 754 1,010 88 107 69
Depreciation of Tangible Fixed
Assets (CHF m)............... (388) (351) (321) (705) (790) (770) (103) (120) (70)
Net Operating Assets (CHF m)... 9,774 7,780 6,266 11,176 14,936 12,765 1,529 2,043 1,795
PHARMACEUTICALS
We are a world leader in the discovery, development, manufacture and
marketing of prescription medicines. Our goal is to provide a broad portfolio of
effective and safe products and services to patients through healthcare
professionals around the world. This goal is supported by a dedicated, global
organization, operating in more than 140 countries through approximately 80
affiliates. In 2000, Novartis Pharmaceuticals employed 37,167 people and had CHF
17,611 million in sales, which represented 49% of the Group's sales.
Our product portfolio includes a wide range of products in seven major
disease areas: (i) cardiovascular/metabolism/endocrinology; (ii) central nervous
system; (iii) dermatology; (iv) oncology/ hematology; (v) respiratory;
(vi) rheumatology/bone/hormone replacement therapy ("HRT"); and
(vii) transplantation/immunology. Effective January 1, 2001, Novartis
Pharmaceuticals took over responsibility for operating the ophthalmic
pharmaceutical business previously managed by CIBA Vision.
The current product portfolio includes 27 key marketed products, of which 10
are recently launched products. In addition, the portfolio includes a further 54
projects in development. See "--Research and Development."
13
KEY MARKETED PRODUCTS
The table below sets forth certain summary information relating to our key
marketed products. The
Neoral-Registered Trademark-/Sandimmun-Registered Trademark- brand accounts for
more than 10% of Novartis Pharmaceuticals' sales.
THERAPEUTIC AREA PRODUCT CLASS TREATMENT AREA
- ---------------- -------------------------------------- ----------------------------------------- ------------------------------
Cardiovascular/ Diovan-Registered Trademark- Angiotensin II-receptor blocker Hypertension
Metabolism/ (valsartan)
Endocrinology Co-Diovan-Registered Trademark- Angiotensin II-receptor blocker + Hypertension
(valsartan+HCTZ) diuretic
Cibacen-Registered Trademark-/ ACE-inhibitor Hypertension
Lotensin-Registered Trademark-
(benazepril)
Lotrel-Registered Trademark- ACE-inhibitor + calcium channel blocker Hypertension
(benazepril-amlodipine)
Lescol-Registered Trademark- Statin Elevated lipids (cholesterol-
(fluvasatin) lowering agent)
Starlix-Registered Trademark- Non-sulphonylurea insulin Type-II diabetes
(nateglinide) secretagogue
Central Nervous Comtan-Registered Trademark- COMT-inhibitor Parkinson's disease
System (entacapone)
Exelon-Registered Trademark- AchE-inhibitor Alzheimer's disease
(rivastigmine)
Leponex-Registered Trademark-/Clozaril Dopamine antagonist/agonist Antipsychotic agent for
(clozapine) treatment-resistant
schizophrenia
Tegretol-Registered Trademark- Anti-epileptic iminostilbene Epilepsy, acute and bipolar
(carbamazepine) affective disorders
Trileptal-Registered Trademark- Anti-epileptic iminostilbene Epilepsy
(oxcarbazepine)
Dermatology Lamisil-Registered Trademark- Fungal ergosterol inhibitor Fungal infections of the skin,
(terbinafine) nails and scalp
Apligraf-Registered Trademark- Living skin tissue equivalent Venous and diabetic leg ulcers
Famvir-Registered Trademark- Antiviral Acute herpes zoster
(famciclovir)
Vectavir/Denavir-Registered Trademark- Antiviral Recurrent cold sores
(penciclovir)
Oncology/ Sandostatin-Registered Trademark-/ Growth hormone inhibitor, Acromegaly
Hematology Sandostatin-Registered Trademark- LAR Gastroenteropancreatic tumor inhibitor Gastroenteropancreatic
(octreotide) endocrine tumors
Aredia-Registered Trademark- Anti-osteolytic Bishopsphonate Bone metastases, multiple
(pamidronate) myeloma
Femara-Registered Trademark- Aromatase inhibitor Advanced breast cancer
(letrozole)
Respiratory Foradil-Registered Trademark- Beta 2 agonist Asthma, bronchitis
(formoterol)
Rheumatology/ Miacalcic-Registered Trademark- Mineral metabolism regulator Osteoporosis
Bone/Hormone (salmon calcitonin)
Replacement Voltaren-Registered Trademark- Nonsteroidal anti-inflammatory drug Inflammation
Therapy (diclofenac)
Estalis-Registered Trademark- Hormone replacement therapy Estrogen deficiency
(estradiol) following menopause
Estraderm-Registered Trademark- MX Hormone replacement therapy Estrogen deficiency
(estradiol) following menopause
Transplantation/ Simulect-Registered Trademark- Immunosuppressant Acute organ rejection in
Immunology (basiliximab) kidney transplation
Neoral-Registered Trademark- Immunosuppressant Prevention of graft rejection
(cyclosporin for microemulsion) and following organ and bone
Sandimmun-Registered Trademark- marrow transplanation
(cyclosporin)
Sandoglobulin-Registered Trademark- Immunosuppressant Immunodeficiencies
(human immunoglobulin)
Not all products are registered in all markets for the treatment areas
described above.
14
COMPOUNDS IN DEVELOPMENT
The following table sets forth certain summary information relating to our
most prominent compounds in development. "Filed" means either filed with the
Food and Drug Administration ("FDA") in the United States or the European Agency
for the Evaluation of Medicinal Products ("EMEA") in the European Union or both,
but not necessarily in all jurisdictions.
THERAPEUTIC AREA COMPOUND TARGET INDICATION PHASE(1)/CATEGORY(2)
- ---------------- ------------------------------------------ ------------------------------------------------ --------------------
Cardiovascular/ SPP100(3) Hypertension II (NDA)
Metabolism/ DPP728/LAF237 Type-II diabetes II (NDA)
Endocrinology Zelmac-Registered Trademark- Functional dyspepsia II (sNDA)
Gastroesophageal reflux disease II (sNDA)
Chronic constipation III (sNDA)
Irritable bowel syndrome Filed (NDA)
Diovan-Registered Trademark- Congestive heart failure, pre-/post-myocardial III (sNDA)
infarction
Sandostatin-Registered Trademark- Diabetic retinopathy and other indications III (sNDA)
Central Nervous DTA201 Psychosis II (NDA)
System NKP608 Anxiety disorders II (NDA)
Ritalin-Registered Trademark- LA Attention deficit hyperactivity disorder Filed (sNDA)
Zomaril-Registered Trademark- Schizophrenia III (NDA)
Dermatology Elidel-Registered Trademark- cream Inflammatory skin disease Filed (NDA)
Elidel-Registered Trademark- oral Inflammatory skin disease III (sNDA)
Inflammatory skin disease II (sNDA)
Lamisil-Registered Trademark- Systemic mycosis, tinea capitis III (NDA)
Apligraf-Registered Trademark- Wound healing III (sNDA)
Oncology/ Zometa-Registered Trademark- HCM (hypercalcemia of malignancy) Filed (NDA)
Hematology Zometa-Registered Trademark- Bone metastases--prevention/treatment III (sNDA)
PKC 412 Solid tumors II (NDA)
Femara-Registered Trademark- (letrozole) Breast cancer (adjuvant therapy) II (NDA)
Breast cancer (first line) Filed (sNDA)
ICL670 Chronic iron overload II (NDA)
Glivec-TM- Chronic myeloid leukemia and acute lymphoic Filed (NDA)
leukemia
Ophthalmics Visudyne-TM- Pathologic myopia Filed (sNDA)
Age-related macular degeneration (minimally III (sNDA)
classic)
Age-related macular degeneration (occult) III (sNDA)
Rescula-TM- Glaucoma Filed (NDA)
Zaditen-Registered Trademark- Allergy Filed (NDA)
PKC412 Diabetic macular edema II (NDA)
Respiratory DNK333 Rhinitis, asthma, chronic obstructive pulmonary II (NDA)
disease
LTB019 Chronic obstructive pulmonary disease II (NDA)
Foradil-Registered Trademark- Multiple dose dry powder inhaler in asthma II (sNDA)
Aerolizer in asthma, chronic obstructive Filed (sNDA)
pulmonary disease
Xolair-Registered Trademark- Asthma/prevention of seasonal allergic rhinitis Filed (NDA)
Rheumatology/ Zometa-Registered Trademark- (zoledronate) Post-menopausal osteoporosis II (sNDA)
Bone/Hormone COX189 Rheumatoid arthritis III (NDA)
Replacement Estalis-Registered Trademark- Osteoporosis Filed (sNDA)
Therapy
Transplantation/ FTY720 Transplantation II (NDA)
Immunology Certican-Registered Trademark- Transplantation III (NDA)
ERL080 Transplantation III (NDA)
- -------------
(1) For a description of Novartis Pharmaceuticals' clinical development program,
see "--Research and Development."
(2) The category classification refers to the type of filing application for the
U.S. Food & Drug Administration. For a discussion of "NDA" and "sNDA", see
"--Regulation."
(3) We have licenced out this compound to Speedel but have retained a call-back
option.
15
The foregoing tables and following summary describe each of Novartis
Pharmaceuticals' seven key therapeutic areas. Unless otherwise indicated, the
key marketed products described below are marketed worldwide. These same
compounds are in various stages of development throughout the world. In some
compounds, the development process is ahead in the United States, whereas in
other compounds, development is behind in the United States. Due to regulatory
restrictions in some countries, including the United States, it may not be
possible to obtain registration of compounds in development for all indications
referred to in this annual report.
CARDIOVASCULAR/METABOLISM/ENDOCRINOLOGY
We market a wide range of products for the treatment of cardiovascular
disease, including products for the treatment of hypertension, hyperlipidemia,
angina pectoris and heart failure. Ongoing research is focused on the
development of innovative new agents to treat metabolic disorders, such as
Type-II diabetes and obesity, which are associated with serious cardiovascular
sequelae including peripheral vascular disease, diabetic retinopathy,
nephropathy, stroke and myocardial infarction. Research and development is aimed
at extending the product portfolio in the areas of hypertension, hyperlipidemia,
heart failure and coronary artery disease.
RECENTLY LAUNCHED PRODUCTS
- Starlix-Registered Trademark- (nateglinide) is a member of a new class of
drugs for the treatment of patients with Type-II diabetes, also known as
adult-onset diabetes, which affects approximately 6% of the developed
world's population, many of whom are presently undiagnosed. We in-licensed
the compound from Ajinomoto and own marketing rights for the drug
worldwide, except Japan and several other Asian markets.
Starlix-Registered Trademark- is derived from an amino acid, the basic
building block of proteins, and is chemically and pharmacologically
distinct from other oral hypoglycemic agents, such as glitazones. The drug
aims to restore the early phase of insulin release which helps control
blood glucose levels at mealtime. The compound has been approved in the
United States and the EU.
KEY MARKETED PRODUCTS
- Cibacen-Registered Trademark-/Lotensin-Registered Trademark- (benazepril)
is an ACE-inhibitor indicated for the first-line treatment of hypertension
and as adjunct therapy in heart failure.
- Diovan-Registered Trademark- (valsartan) and
Co-Diovan-Registered Trademark- (valsartan+HCTZ) are early entrants in a
new class of antihypertensive agents, the angiotensin II receptor blockers
(ARBs). The ARBs are forecast to be a key growth class of drugs within the
antihypertensive market. The fixed combination product,
Co-Diovan-Registered Trademark-, provides additional antihypertensive
efficacy for patients who require a greater reduction in blood pressure
than can be achieved with monotherapy.
- Lotrel-Registered Trademark- (benazepril-amlodipine) is a fixed
combination of the ACE-inhibitor benazepril and a leading calcium
antagonist (amlodipine). It is marketed only in the United States.
- Lescol-Registered Trademark- (fluvastatin) is a lipid-lowering drug
(statin) indicated for the treatment of hyperlipidemia. In addition,
Lescol-Registered Trademark- has been approved in the U.S. to be marketed
for slowing the progression of coronary atherosclerosis in patients with
primary hyperlipidemia (including mild forms) and congestive heart
failure. Hyperlipidemia is forecast to continue to be a major growth
segment in the cardiovascular market.
COMPOUNDS IN DEVELOPMENT
- Zelmac-Registered Trademark- (tegaserod) is a 5-HT(4) partial agonist
developed to address the need for a safe and effective treatment of
irritable bowel syndrome, relieving such symptoms as abdominal pain,
altered bowel movements and possibly bloating. The compound is currently
in the registration phase in the
16
U.S. and the EU. Since April 2000, Zelmac-Registered Trademark- has been
filed with the FDA, and in June 2000, the FDA Advisory Committee
recommended approval of Zelmac-Registered Trademark- for the treatment of
irritable bowel syndrome in women. The Zelmac-Registered Trademark- trade
name is likely to be changed in the U.S. market due to FDA safety
nomenclature concerns.
CENTRAL NERVOUS SYSTEM
We market a broad range of central nervous system products, including agents
to treat patients with schizophrenia, epilepsy, Parkinson's disease, Alzheimer's
disease, attention deficit hyperactivity disorder and migraine headaches.
Ongoing research to extend the current product portfolio in this disease area
includes projects in psychiatric disease (psychoses, depression, and anxiety),
neurological disorders (epilepsy, Parkinson's disease, Alzheimer's disease,
multiple sclerosis, and trauma following stroke), learning disorders and chronic
pain.
RECENTLY LAUNCHED PRODUCTS
- Comtan-Registered Trademark- (entacapone) further strengthens our position
in the treatment of Parkinson's disease. Comtan-Registered Trademark-
enhances the action of levodopa, the standard therapy for Parkinson's
disease. The compound is in-licensed from Orion Pharma.
- Exelon-Registered Trademark- (rivastigmine) is a new therapy for the
treatment of patients with mild to moderate Alzheimer's disease.
Exelon-Registered Trademark- is also in-licensed and has been approved in
all major markets, including the 15 member-states of the EU and the United
States.
- Trileptal-Registered Trademark- (oxcarbazepine) is an anti-epileptic drug
for the treatment of partial seizures as adjunctive or monotherapy in
adults, or as adjunctive therapy in children.
KEY MARKETED PRODUCTS
- Tegretol-Registered Trademark- (carbamazepine) was launched in 1963 for
the treatment of epileptic seizures and remains a principal product in the
market for the treatment of the disease.
- Leponex-Registered Trademark-/Clozaril-Registered Trademark- (clozapine)
is a neuroleptic agent used in treatment-resistant schizophrenia.
COMPOUNDS IN DEVELOPMENT
- Zomaril-Registered Trademark- (iloperidone) is a mixed serotonin/dopamine
antagonist for the treatment of schizophrenia and other related psychotic
disorders. Zomaril-Registered Trademark- is in-licensed and is currently
in Phase III clinical trials.
- NKP608 is a selective antagonist of substance P at the NK-1 receptor for
the treatment of anxiety disorders. NKP608 is in Phase II clinical trials.
DERMATOLOGY
Our dermatology portfolio covers a broad range of indications, with marketed
products for the treatment of fungal infections, psoriasis and wound healing. In
addition, ongoing research and development is aimed at developing new compounds
and extending the clinical utility of existing compounds in the areas of
allergic and inflammatory skin disease, such as atopic dermatitis and psoriasis.
There is considerable demand for new treatments in these areas where current
therapies are handicapped by limited efficacy or unacceptable side-effects.
RECENTLY LAUNCHED PRODUCTS
- Apligraf-Registered Trademark- is the first tissue-engineered,
full-thickness living human skin equivalent.
Apligraf-Registered Trademark- offers improved wound healing to patients
with difficult-to-heal wounds resulting from venous leg ulcers
17
and diabetic foot ulcers. Apligraf-Registered Trademark- is in-licensed
from Organogenesis in the United States. This product is on the U.S.
market and in Phase III clinical trials in the EU.
KEY MARKETED PRODUCTS
- Lamisil-Registered Trademark- (terbinafine) is used in the treatment of
fungal infections of the skin, nails and scalp.
Lamisil-Registered Trademark- kills the fungus, rather than simply
preventing further fungal growth.
- Famvir-Registered Trademark-, used in the treatment of acute herpes zoster
and genital herpes, and
Vectavir-Registered Trademark-/Denavir-Registered Trademark-, used in the
treatment of recurrent cold sores, were acquired in 2000 from SmithKline
Beecham. The acquisition includes global marketing rights, production
rights and all intellectual property rights to both products.
COMPOUNDS IN DEVELOPMENT
- Elidel-Registered Trademark- Cream (ASM981) is a cytokine inhibitor in
development for the treatment of atopic dermatitis. The compound is a
member of a new class of agents--the ascomycin macrolactams--which appear
to be suitable for both short- and long-term treatments. An application to
market this product in the U.S. was filed with the FDA in December 2000.
An application will be submitted mid-year with the European health
authorities (EMEA). It is currently our intention to market
Elidel-Registered Trademark- in the United States, the EU and eventually
Japan.
ONCOLOGY/HEMATOLOGY
Our oncology/hematology area is an important specialty segment. We market
products for the treatment of a number of different cancers and for metastatic
bone disease. Research and development in this disease area is aimed at the
discovery and development of innovative approaches to the treatment of cancer,
focusing in particular on the major forms of solid tumors (lung, breast and
colorectal), which account for approximately 50% of all deaths from cancer. In
addition, compounds are being developed for the treatment of other forms of
cancer including glioblastoma, melanoma, ovarian, leukemia, lymphoma and
sarcoma.
RECENTLY LAUNCHED PRODUCTS
- Sandostatin-Registered Trademark- LAR (octreotide) is a depot injection
used for the treatment of acromegaly. In addition, this long-acting
release formulation is approved for the control of symptoms, such as the
severe diarrhea and flushing, associated with metastatic carcinoid tumors,
and the severe diarrhea associated with vasoactive intestinal polypeptide
secreting tumors.
KEY MARKETED PRODUCTS
- Sandostatin-Registered Trademark- (octreotide) is a synthetic octapeptide
derivative of the hormone somatostatin indicated for the treatment of
pancreatic and gastrointestinal endocrine tumors, acromegaly, AIDS-related
diarrhea, and following pancreatic surgery.
- Aredia-Registered Trademark- (pamidronate) is a therapy for cancer-related
bone complications, including tumor-induced hypercalcemia, multiple
myeloma, and bone metastases.
- Femara-Registered Trademark- (letrozole) is an oral aromatase inhibitor
for the treatment of advanced breast cancer in women with natural or
artificially induced post-menopausal status. It recently received approval
for first-line therapy in the U.S. and EU.
18
COMPOUNDS IN DEVELOPMENT
- Zometa-Registered Trademark- (zoledronate) is a bisphosphonate being
developed for the treatment of cancer patients at risk of developing tumor
induced hypercalcemia ("TIH") and for bone metastases. The compound, which
is in the registration phase for TIH and in Phase III clinical trials for
bone metastases treatment and prevention, is being developed as an advance
on Aredia-Registered Trademark-. Zometa-Registered Trademark- is currently
in registration with the FDA and has been approved for marketing in the
EU.
- Glivec-TM- is a signal transduction inhibitor being developed to treat
several forms and phases of chronic myeloid leukemia. It was recently
filed with the FDA and EMEA. On March 26, 2001, the FDA designated
Glivec-TM- for priority review for possible use in the treatment of
chronic myeloid leukemia in the blast crisis, accelerated or chronic
phases of the disease after failure of interferon-alpha therapy. In
addition, the potential of Glivec-TM- will be studied in solid tumors as a
basis for widening the range of indications to include other types of
cancer.
RESPIRATORY
Based on our long-standing business in the respiratory market, we are
committed to expanding our product range in this important disease area. A
discovery and development program is aimed at providing improved therapeutic
options in the treatment of asthma and chronic obstructive pulmonary disease
("COPD"), which includes chronic bronchitis and emphysema.
RECENTLY LAUNCHED/KEY MARKETED PRODUCTS
- Foradil-Registered Trademark- (formoterol) is a long-acting bronchodilator
indicated for the treatment of asthma, approved in the U.S. in
February 2001, and is due to be launched in the U.S. in 2001. The product
was launched in its original form in 1994 outside the U.S. The long-acting
bronchodilator is a relatively new addition to the range of treatments for
asthma, and is distinguished by its rapid onset of action (one to three
minutes) and long-lasting effect from a single dose (12 hours). In
addition, we are working to strengthen our position in this segment by
extending the Foradil-Registered Trademark- line with an active
development program. See "Compounds in development."
Foradil-Registered Trademark- is currently marketed principally in Europe
in a single-dose dry powder inhaler (Aerolizer-Registered Trademark-), and
in certain markets as a pressurized metered dose inhaler.
COMPOUNDS IN DEVELOPMENT
- Ongoing research and product development is aimed at extending the
clinical utility of Foradil-Registered Trademark- by registering the
product for use as rescue medication during an asthma attack in children
and for use in patients with chronic obstructive pulmonary disease
("COPD"). In addition, we have entered into a collaborative agreement with
SkyePharma to jointly develop a new multi-dose dry powder presentation of
Foradil-Registered Trademark- using SkyePharma's patented multi-dose dry
powder inhaler device. Foradil-Registered Trademark- is currently in Phase
III clinical trials for the indication of COPD.
- Xolair-Registered Trademark- (olizumab) is an anti-IgE monoclonal antibody
used to treat allergic disease, irrespective of allergen, by normalizing
serum IgE. The drug is being developed in partnership with Genentech and
Tanox and is currently in registration with the FDA and EMEA.
Xolair-Registered Trademark- is being developed for the treatment of
allergic asthma and seasonal allergic rhinitis.
RHEUMATOLOGY/BONE/HORMONE REPLACEMENT THERAPY (HRT)
We are a market leader in the rheumatology/bone/hormone replacement therapy
area, with products for the treatment of potential arthritis, osteoporosis and
early menopausal symptoms, such as hot flashes, and preventing the long-term
complications of the condition, which include cardiovascular disease and
osteoporosis resulting from menopausal change. The bone and rheumatology
research and development pipeline includes new compounds for the treatment of
rheumatoid arthritis, osteoarthritis and bone
19
metabolism disorders, such as osteoporosis. Research and development in HRT is
primarily focused on improving the delivery of therapy via transdermal patch
technology.
RECENTLY LAUNCHED PRODUCTS
- Estalis-Registered Trademark- (estradiol/norethisterone acetate
transdermal system) is for the treatment of menopausal symptoms, including
disturbed sleep, memory loss, skin atrophy and brittle bones. The compound
is in-licensed from Aventis.
KEY MARKETED PRODUCTS
- Voltaren-Registered Trademark- (diclofenac) is a non-steroidal
anti-inflammatory drug ("NSAID") for the treatment of inflammatory and
degenerative forms of rheumatism (articular and non-articular),
post-operative and post-traumatic pain, acute attacks of gout and
migraines. The brand has been extended as an over-the-counter preparation,
Voltaren-Registered Trademark- Emulgel-Registered Trademark-, a topical
form of diclofenac for post-traumatic inflammation of tendons, ligaments,
muscles and joints, and for localized forms of soft-tissue and
degenerative rheumatism. This product faces generic competition.
- Miacalcic-Registered Trademark- (synthetic salmon calcitonin) is available
as an injectable form and nasal spray for the prevention of progressive
loss of bone mass, mainly in post-menopausal women and in elderly
patients, Paget's disease and hypercalcemia.
- Estraderm-Registered Trademark- MX (17B-estradiol) is a treatment for
estrogen deficiency and subsequent bone loss due to menopause, whether
natural or surgically induced.
COMPOUNDS IN DEVELOPMENT
- COX189 is an NSAID that selectively inhibits the COX-2 enzyme. The
compound is in Phase III clinical trials. Target indications include
osteoarthritis, rheumatoid arthritis and pain indications.
TRANSPLANTATION/IMMUNOLOGY
We are a leader in the field of transplantation medicine, producing widely
used products that prevent the rejection of organs following transplantation. A
wide-ranging research and development program is aimed at developing new
compounds and interventions in the area of chronic rejection, tolerance
induction, B-cell inhibition, ischemia/reperfusion injury to reduce delayed
graft function, inhaled therapies for lung transplantation and pancreatic islet
transplantation.
RECENTLY LAUNCHED PRODUCTS
- Simulect-Registered Trademark- (basiliximab) is a chimeric monoclonal
antibody that suppresses interleukin-driven proliferation of T-cells.
Simulect-Registered Trademark- is designed to complement
Neoral-Registered Trademark- in preventing acute rejection episodes in
organ transplantation.
KEY MARKETED PRODUCTS
- Sandimmun-Registered Trademark- (cyclosporin) was introduced in 1982 to
improve the survival rates among patients with solid organ (kidney, heart,
lung and liver) transplants and bone marrow transplantation. This product
faces generic competition.
- Neoral-Registered Trademark- (cyclosporin) builds on the established
clinical utility of Sandimmun-Registered Trademark- to provide improved
primary immunosuppression in organ transplant patients.
Neoral-Registered Trademark- is formulated as a microemulsion, thereby
providing improved absorption and less variability in dosing. Despite
patent protection, generic companies have launched competing products in
the United States and are expected to compete vigorously. Marketing
authorizations have also been granted for such generic products in Europe
and elsewhere. Neoral-Registered Trademark- was launched in Japan in 2000,
and these sales may partially offset reduction of sales in the United
States.
20
COMPOUNDS IN DEVELOPMENT
- Certican-Registered Trademark- (RAD) is a new immunosuppressant being
developed for transplantation. The compound currently is in Phase III
clinical trials and will be used in combination with
Neoral-Registered Trademark- to prevent rejection episodes in patients
with kidney, lung, heart and liver transplants.
Certican-Registered Trademark- is being developed in a tablet formulation.
- FTY 720 is a novel immunosuppressant being developed for transplantation.
The compound currently is in Phase II clinical trials and is planned to be
used in combination with Neoral-Registered Trademark- or
Certican-Registered Trademark- to prevent rejection episodes or to enhance
graft survival in patients with kidney transplants. FTY 720 has a new
mechanism of action altering lymphocyte homing. FTY 720 is being developed
in capsule, oral liquid and injectable formulations. This product has been
in-licensed from Yoshitomi of Japan.
PRINCIPAL MARKETS
The world market for pharmaceuticals is concentrated in the major markets of
the U.S., Europe and Japan. The following table sets forth certain data relating
to our principal markets.
NOVARTIS PHARMACEUTICALS SALES 2000
- ------------------------ --------------------------
(CHF MILLIONS) (%)
U.S......................................................... 6,644 38
Americas (except the U.S.).................................. 1,715 10
Europe...................................................... 5,586 32
Japan....................................................... 2,264 13
Rest of the World........................................... 1,402 7
TOTAL....................................................... 17,611 100
Most of our products are used for chronic conditions that require patients
to consume the product over long periods of time, from months to years.
Accordingly, sales are not subject to material changes in seasonal demand.
PRODUCTION
The key goals in the manufacture and supply chain management program are to
ensure the uninterrupted and cost-effective supply of products that meet all
product specifications. In order to achieve this objective, we manufacture our
prescription medicines at 22 bulk chemical and secondary production facilities,
including our principal production facilities located in Stein and Basel,
Switzerland; Ringaskiddy, Ireland; and Suffern, New York. Bulk chemical
production involves the manufacture of therapeutically active compounds, mainly
by chemical synthesis or by a biological process such as fermentation.
During clinical trials, which can last several years, the manufacturing
process is rationalized and refined. By the time clinical trials are completed
and products are launched, the manufacturing processes have been extensively
tested and are considered stable. However, improvements may continue throughout
a product's life cycle.
Raw materials for the manufacturing process are purchased from a number of
third party suppliers. Where possible, our policy is to maintain multiple supply
sources, so that the business is not dependent on a single or limited number of
suppliers, for essential raw materials. Moreover, we monitor developments that
could have an adverse effect on the supply of essential materials. While we have
not experienced material supply interruptions in the past, there can be no
assurance that supply will not be interrupted in the future as a result of
unforeseen circumstances.
In order to mitigate risks in the supply chain, multiple suppliers are
available for most raw materials required to manufacture marketed products.
Availability of multiple suppliers contributes to continuity of
21
supply and competitive stable supply prices. Overall, prices are not volatile
for materially significant raw materials.
MARKETING AND DISTRIBUTION
We have invested significant resources in our sales and marketing
organization to achieve a competitive presence in all of the main pharmaceutical
markets worldwide. In particular, the sector has a strong presence in the U.S.
and the EU.
Products are sold to wholesale and retail drug distributors, hospitals,
clinics, government agencies and managed care providers. In each market, we
deploy sales representatives and supporting medical staff to market the sector's
products and to provide medical information to prescribers and healthcare
purchasers. At December 31, 2000 Novartis Pharmaceuticals had 4,602
representatives in the U.S. field force, and 14,655 representatives worldwide.
Our sales and marketing reach is further extended through various agreements
with promotion and marketing partners, licensees, associates and distributors.
For example, we recently announced co-marketing agreements with Merck KGaA
(Germany) for Starlix-Registered Trademark- in Europe and with Bristol-Myers
Squibb, Inc. for Zelmac-Registered Trademark- (pending registration) in the
United States.
COMPETITION
We compete in most major markets with other global pharmaceutical companies,
including Abbott Laboratories, American Home Products, AstraZeneca, Aventis,
Bayer, Bristol-Myers Squibb, Eli Lilly, GlaxoSmithKline, Johnson & Johnson,
Merck, Pfizer, Pharmacia, Roche, and Schering-Plough. Competition within the
pharmaceutical industry is intense and extends across a wide range of commercial
activities, including pricing, product characteristics, customer service, sales
and marketing, and research and development investment. We believe that no
single competitor offers a comparable product offering for the same full range
of therapeutic areas and indications as we do.
In addition to competition from ethical pharmaceutical companies, that is,
companies selling patented pharmaceuticals under trademarked brand names, our
pharmaceuticals business faces an increasing challenge from companies selling
generic forms of Novartis brands following the expiry of patent protection on
our key products. In response to generic challenges, we vigorously defend our
intellectual property rights. Where appropriate, we extend the product range
with patent-protected value-added line extensions and focus our marketing
efforts to increase brand awareness and loyalty. While competition from generic
products can have a significant impact on product value, there is no guarantee
that any product, even with patent protection, will remain successful if a
competitor develops a new product offering significant improvements over
existing therapies.
OPHTHALMIC PHARMACEUTICALS
We expect the ophthalmic pharmaceutical market to experience growth as new
products are brought to market, patient awareness increases and the population
ages. Currently, the market is split between prescription products and
over-the-counter products. Significant opportunities exist in glaucoma,
age-related macular degeneration, dry eye syndrome, and corneal diseases. We
believe we are well positioned with our glaucoma product Rescula-TM-, which was
approved by the FDA in August 2000, and with a number of development projects in
other areas. Moreover, with Visudyne-TM-Therapy, we are among the first to
market a non-destructive treatment option for the wet form of age-related
macular degeneration.
Our principal competitors in ophthalmic pharmaceuticals are Alcon, Allergan,
Bausch & Lomb, Merck, Pharmacia and Santen.
22
RESEARCH AND DEVELOPMENT
We are among the leaders in the pharmaceuticals industry in terms of
research and development investment. In 2000, Novartis Pharmaceuticals invested
approximately CHF 3,228 million in research and development, which represents
18% of total pharmaceuticals sales. Novartis Pharmaceuticals invested CHF
2,848 million and CHF 2,609 million on research and development in 1999 and
1998. There are currently 54 projects in clinical development, with 16 in Phase
I and 14 in Phase II and 24 in Phase III and in registration. Potential key
products Zelmac-Registered Trademark-, Zometa-Registered Trademark- and
Xolair-Registered Trademark- are each in the registration phase.
CLINICAL DEVELOPMENT PROGRAM
Development of a new drug is a lengthy process, usually requiring 10 to
12 years from the initial research to bringing a drug to market and six to eight
years from Phase I clinical trials to market. Usually in Phase I clinical
trials, a drug is tested with about 20 to 80 normal, healthy volunteers. The
tests study the drug's safety profile, including the safe dosage range. The
studies also determine how a drug is absorbed, distributed, metabolized and
excreted, and the duration of its action. In Phase II clinical trials, the drug
is tested in controlled studies of approximately 100 to 300 volunteer patients
(I.E., persons with the targeted disease) to assess the drug's effectiveness and
safety, and to establish a proper dose. In Phase III clinical trials, the drug
is further tested on approximately 1,000 to 3,000 volunteer patients (in some
cases up to 15,000 patients in total) in clinics and hospitals. Physicians
monitor volunteer patients closely to determine efficacy and identify possible
adverse reactions. The vast amount of data that must be collected and evaluated
makes clinical testing the most time-consuming and expensive part of new drug
development. The next stage in the drug development process is to seek
registration for the new drug. See ``--Regulation."
INITIATIVES TO OPTIMIZE THE DISCOVERY AND DEVELOPMENT PROCESS
Within research and development, initiatives are being implemented aimed at
improving efficiency in the process of selecting candidate drugs for
development. For example, we have undertaken to improve internal processes and
operations by focusing senior management expertise on development projects at an
early stage to aid in the selection of the best compounds. Under another
initiative, special teams are formed to work on developing late stage products
more quickly. The goal is to improve the likelihood of therapeutic and
commercial success, thereby reducing development costs and decreasing time to
market. Overall, these initiatives have the potential to reduce the time between
initial research and the introduction of the drug to market.
ALLIANCES AND ACQUISITIONS
We believe that alliances and acquisitions are an important vehicle to
acquire technologies and to rapidly extend the expertise within the organization
in identified key areas. Novartis Pharmaceuticals has numerous strategic
relationships to build and extend our expertise in our core therapeutic areas.
These collaborations are exploratory and opportunistic in character, allowing us
to maintain relationships with smaller enterprises and academic institutions
that are in the forefront of their niche areas of expertise. In this way we
enable a number of approaches by funding development in early stages on a number
of fronts. In addition, we may in-license certain products that complement our
product line and are appropriate to our marketing organization.
During 2000, we entered into a long-term research agreement with Vertex
Pharmaceuticals, Inc., to discover, develop and commercialize small molecule
drugs. Under that agreement, we will provide research funding of CHF
328 million (approximately $200 million) over 6 years. Furthermore, licence
fees, milestone payments and reimbursements of CHF 656 million (approximately
$400 million) or more are possible subject to the outcome of the research
according to predefined criteria. We had other long-term research commitments
totaling CHF 1.6 billion (approximately $980 million) in the aggregate, at
23
December 31, 2000. See note 28 to the consolidated financial statements. We
intend to fund these expenditures from internally generated resources.
IMPLEMENTATION OF NEW TECHNOLOGIES
The completion of the human genome sequence and advances in technologies and
computing are changing the way we are discovering new drugs. Functional genomics
at Novartis Pharmaceuticals aims at focusing our discovery efforts on drug
targets which are disease-relevant and offer potential for new medicines which
prevent or slow the progression of the disease, rather than just treat its
symptoms. Our genomics groups are located in Basel, Switzerland, and New Jersey
(U.S.) with further support from the Novartis Foundation for Functional Genomics
in California (U.S.), and are staffed by around 300 scientific and technical
experts. This strong in-house capability is complemented by external
collaborations with some of the best biotech companies and academic groups
world-wide. Advances made at Novartis Pharmaceuticals and in alliances with
partner organizations in combinatorial chemistry, ultra high throughput
screening technologies, miniaturization, computational approaches, and robotics
and engineering are being incorporated into our new discovery processes in order
to maximize their effectiveness.
REGULATION
The international pharmaceutical industry is highly regulated. National and
supranational regulatory authorities administer numerous laws and regulations
regarding the testing, approval, manufacturing, importing, labeling and
marketing of drugs, and also review the safety and efficacy of pharmaceutical
products. Further controls exist on the non-clinical and clinical development of
pharmaceutical products in particular. These regulatory requirements are a major
factor in determining whether a substance can be developed into a marketable
product and the amount of time and expense associated with such development.
Novartis Pharmaceuticals believes it is in material compliance with all
applicable regulations in the jurisdictions in which it operates.
The national and supranational regulatory authorities, especially in the
U.S., the EU and Japan, have high standards of technical evaluation. The
introduction of new pharmaceutical products generally entails a lengthy approval
process. Of particular importance is the requirement in all major countries that
products be authorized or registered prior to marketing, and that such
authorization or registration be subsequently maintained. The regulatory process
requires increased testing and documentation for clearance of new drugs, and a
corresponding increase in the expense of product introduction.
To register a pharmaceutical product, a registration dossier containing
evidence establishing the quality, safety and efficacy of the product must be
submitted to regulatory authorities. Generally, a therapeutic product must be
registered in each country in which it will be sold. In all jurisdictions, the
submission of an application to a regulatory authority does not guarantee that
approval to market the product will be granted. Although the criteria for the
registration of therapeutic drugs are similar in all countries, the formal
structure of the necessary registration documents varies significantly from
jurisdiction to jurisdiction. It is possible that a drug can be registered and
marketed in one country while the registration authority in a neighboring
country may, prior to registration, request additional information from the
pharmaceutical company or even reject the product.
The registration process generally takes between six months and several
years, depending on the jurisdiction, the quality of the data submitted, the
efficiency of the registration authority's procedures and the nature of the
product. In certain instances, innovative products of particular therapeutic
interest may be processed on an accelerated basis in many countries. In recent
years, intensive efforts have been made among the U.S., the EU and Japan to
harmonize registration requirements in order to achieve shorter development and
registration times for medical products. However, the requirement in many
countries (including Japan and several member-states of the EU) to negotiate
selling prices or reimbursement levels with government regulators can
substantially extend the time until final marketing approval is granted.
24
The following provides a summary of the regulatory process in Novartis
Pharmaceuticals' principal markets:
UNITED STATES
In the U.S., applications for drug registration are submitted to and
reviewed by the FDA. The FDA regulates the testing, approval, manufacturing, and
labeling of pharmaceutical products intended for commercialization in the U.S.,
as well as the monitoring of all pharmaceutical products currently on the U.S.
market. The pharmaceutical development and registration process is typically
intensive, lengthy and rigorous. A new drug application ("NDA") is filed with
the FDA if the data sufficiently demonstrate the drug's quality, safety and
efficacy. The NDA must contain all the scientific information that has been
gathered and typically covers all patients tested in clinical trials. A
supplemental new drug application ("sNDA") must be filed for a line extension of
a previously registered drug.
Once the FDA approves the NDA/sNDA, the new pharmaceutical becomes available
for physicians to prescribe. Thereafter, the drug owner must submit periodic
reports to the FDA, including any cases of adverse reactions. For some
medications, the FDA requires additional studies (Phase IV) to evaluate
long-term effects or to gather information on the use of the product under
special conditions. The FDA also requires compliance with standards relating to
laboratory, clinical and manufacturing practices.
EUROPEAN UNION
In the EU, there are two main procedures for application for marketing
authorization, namely the Centralized Procedure and the Mutual Recognition
Procedure. In the Centralized Procedure, applications are made to EMEA for an
authorization which is valid across all EU member-states. The Centralized
Procedure is mandatory for all biotechnology products and optional for other new
chemical compounds or innovative medicinal products. In the Mutual Recognition
Procedure, a first authorization is granted by a single EU member-state.
Subsequently, mutual recognition of this first authorization is sought from the
remaining EU member-states. National authorizations are only possible for
products intended for commercialization in a single EU member-state only, or for
line extensions to existing national product licenses.
JAPAN
In Japan, applications for new products are made through the Pharmaceutical
and Medical Devices Evaluation Center ("PMDEC"). After a data reliability survey
and a Good Clinical Practice inspection are carried out by the Organization for
Pharmaceutical Safety and Research ("OPSR"), a team evaluation is passed to the
Central Pharmaceuticals Affairs Council ("CPAC"), whose special members,
committees and executive committees provide a report back to the PMDEC. After a
further team evaluation, a report is provided to the Ministry of Health, Labor
and Welfare ("MHLW"), which makes a final determination for approval and refers
this to the CPAC which then advises the MHLW on final approvability. Drug
manufacturing or import license approval is issued by the local prefecture
government.
PRICE CONTROLS
In many of the markets where we operate, the prices of pharmaceutical
products are subject to direct price controls (by law) and to drug reimbursement
programs with varying price control mechanisms.
In the U.S., debate over the reform of the healthcare system has resulted in
an increased focus on pricing. Although there are currently no government price
controls over private sector purchases in the U.S., federal legislation requires
pharmaceutical manufacturers to pay prescribed rebates on certain drugs to
enable them to be eligible for reimbursement under healthcare programs. In the
absence of new government regulation, managed care has become a potent force in
the market place that increases downward pressure on the prices of
pharmaceutical products. In addition, the current national debate over Medicare
reform could increase pricing pressures. If Medicare reform results in the
provision of outpatient
25
pharmaceutical coverage for beneficiaries, the U.S. government could use its
enormous purchasing power to demand discounts from pharmaceutical companies
thereby creating de facto price controls on prescription drugs. On the other
hand, Medicare drug reimbursement legislation may increase the volume of
pharmaceutical drug purchases, offsetting, at least in part, potential price
discounts. As a result, we expect that pressures on pricing and operating
results will continue.
In the EU, governments influence the price of pharmaceutical products
through their control of national healthcare systems that fund a large part of
the cost of such products to consumers. The downward pressure on healthcare
costs in general, particularly prescription drugs, has become very intense. As a
result, increasingly high barriers are being erected to the entry of new
products, as exemplified by the National Institute for Clinical Excellence in
the UK, which evaluates the data supporting new medicines and passes
reimbursement recommendations to the government. In addition, in some countries
cross-border imports from low-priced markets (parallel imports) exert a
commercial pressure on pricing within a country.
In Japan, the National Health Ministry bi-annually reviews the
pharmaceutical prices of individual products. In the past, these reviews have
resulted in price reductions. The Japanese government is planning a healthcare
reform to be implemented in 2002 and the pharmaceutical pricing system will be
one of the issues closely looked at. The key issues are the evaluation of
innovative products and the pricing of long-listed products, including the
biannual reduction of reimbursement prices adjusted for actual discounts given.
The previously proposed reference price system has been abandoned by the
government.
INTELLECTUAL PROPERTY
We attach great importance to patents, trademarks, and know-how in order to
protect our investment in research and development, manufacturing and marketing.
It is Novartis Pharmaceuticals' policy to seek the broadest possible protection
for significant product developments in all major markets. Patents may cover
products PER SE, product formulations, processes, intermediate products and
product uses.
Protection for individual products extends for varying periods depending on
the date on which the patent application was granted and the legal life of
patents in the various countries. The protection afforded, which may also vary
from country to country, depends upon the type of patent and its scope of
coverage. In most industrial countries, patent protection exists for new active
substances and formulations, as well as for new indications and production
processes. We monitor our competitors and vigorously challenge patent and
trademark infringements. In addition, we take advantage of any statutes, to the
extent considered advisable, that may prolong the life of a patent.
Patent protection is no longer available in several major markets for the
active ingredients used in a number of Novartis Pharmaceuticals' leading
products. Generic products competing with Neoral-Registered Trademark- entered
the transplantation market in the U.S. in 2000 despite U.S. patent protection
for the Neoral-Registered Trademark- microemulsion formulation through 2011.
Marketing authorizations have also been granted for such generic products in
Europe and elsewhere. The patent for Aredia-Registered Trademark- is currently
being challenged by generic producers in the U.S., who could launch generic
products in the near future. We have a follow-up drug,
Zometa-Registered Trademark-, which is currently under regulatory review in the
U.S. and other countries. Patent protection or regulatory exclusivity will
expire in major markets for the key product Sandostatin-Registered Trademark-.
The basic octreotide substance patents expire in the next few years in the U.S.,
Japan and minor countries, but will remain in place in the EU. However,
protection continues in all major markets for Sandostatin-Registered Trademark-
LAR, extending to 2010 and beyond, which represents a significant and growing
proportion of Novartis Pharmaceuticals octreotide sales. The basic benazepril
substance patent for Cibacen-Registered Trademark- will expire in the U.S. and
in Japan within the next two years, but will remain in place in major markets in
the EU. Lotrel-Registered Trademark-, the fast growing combination of benazepril
with amlodipine, on the other hand, received patent extension to 2017 and is
expected to at least partially offset potential generic erosion on
Cibacen-Registered Trademark- sales. Lotrel-Registered Trademark- contributes a
growing proportion of Cibacen-Registered Trademark- sales.
Voltaren-Registered Trademark- and Sandimmun-Registered Trademark- are two other
products facing generic competition.
26
The loss of patent protection can have a significant impact on Novartis
Pharmaceuticals, and we work to offset these negative effects by developing and
patenting new processes, formulations and uses and by positioning many of our
products in specific market niches. However, there can be no assurance that this
strategy will be effective in the future to extend patent protection or
competitive advantage, or that we will be able to avoid substantial adverse
effects from future patent expirations.
GENERICS
Novartis Generics operates worldwide and provides off-patent pharmaceutical
products and substances. We offer our products in two forms: finished dosage
forms ("Generic Pharmaceuticals Business") and active pharmaceutical ingredients
and their intermediates ("Industrial Business"). In the Generic Pharmaceuticals
Business, finished dosage forms are sold to pharmacies, hospitals and other
healthcare outlets, while in Industrial Business, active ingredients and their
intermediates for pharmaceutical and biotechnological substances are sold to
industrial customers.
As of December 31, 2000, Novartis Generics employed 5,712 people. Our
generics products are sold in over 120 countries throughout the world. In 2000,
Novartis Generics had CHF 1,938 million in sales which represented 5% of the
Group's sales.
We negotiated five generics acquisitions in 2000 although the three major
ones will be closed only in 2001. The acquisition of the U.S. commodity generics
business of Apothecon, Inc. from Bristol-Myers Squibb and the acquisition of
BASF AG's generics business in six European countries have been effective since
January 1, 2001. Apothecon's acquisition in the U.S. will add several unbranded
antibiotics to our product offering, while the BASF generics acquisition will
expand our product offering generally. The acquisition of Labinca S.A., a major
supplier of generic pharmaceuticals in Argentina, is still pending approval of
the local competition authority.
KEY MARKETED PRODUCTS
Approximately 56% of our sales are derived from the Generic Pharmaceuticals
Business and approximately 44% of our sales are derived from the Industrial
Business. Our key marketed product areas are antibiotics (such as pencillins,
cephalosporins, macrolides and medicines for the treatment of tuberculosis),
central nervous system drugs, cardiovascular system drugs, alimentary tract
preparations and hormonal tract preparations.
PRINCIPAL MARKETS
Our principal markets are the two largest generics markets in the world: the
U.S. and Europe. The following table sets forth 2000 sales of Novartis Generics
by region:
NOVARTIS GENERICS SALES 2000
- ----------------- --------------------------
(CHF MILLIONS) (%)
U.S......................................................... 568 29
Americas (except the U.S.).................................. 131 7
Europe...................................................... 850 44
Rest of the World........................................... 389 20
TOTAL....................................................... 1,938 100
Most of our products are used for chronic conditions. Sales are not subject
to material changes in seasonal demand.
PRODUCTION
Approximately half of our production facilities are located in the EU. For
finished dosage forms, the principal plants are located in Broomfield, Colorado
(U.S.); Dayton, New Jersey (U.S.); Gerlingen,
27
Germany; Kundl, Austria; Jakarta, Indonesia; Spartan, South Africa; Tongi,
Bangladesh; and upon closing of the Labinca S.A. acquisition, in Buenos Aires,
Argentina. Plants for active pharmaceutical ingredients are located in Kundl and
Schaftenau, Austria; Frankfurt, Germany; Rovereto, Italy; Les Franqueses, Spain;
and Jakarta, Indonesia.
Agricultural raw materials such as flours and sugars are sourced from
multiple suppliers based in both the U.S. and the EU. Chemicals and other raw
materials are globally sourced with a focus on U.S. and EU-based suppliers. Raw
materials are priced for the most part on world markets, and price fluctuations
can partially be avoided by long-term supply-contracts. In addition,
e-procurement methods are being initiated to further strengthen our purchasing
position.
Biotech substances like enzymes for detergents, and many of the active
pharmaceutical ingredients, like penicillius, are produced using modern
biotechnological methods. Main production methods include fermentation
processes, chemical syntheses and physical production methods, such as sterile
precipitation. The fermentation process uses genetically modified
micro-organisms, such as e-coli bacteria and molds, and other new manufacturing
processes are constantly being developed.
MARKETING AND DISTRIBUTION
The largest operating entities of Novartis Generics are:
- Biochemie GmbH, which is in both the Generics Pharmaceuticals Business and
the Industrial Business on a global basis;
- Geneva Pharmaceuticals, Inc., our Generics Pharmaceuticals Business
supplier in the United States;
- Azupharma GmbH, our Generics Pharmaceuticals Business supplier in Germany,
and
- Multipharma, our Generics Pharmaceuticals Business supplier in the
Netherlands.
We have a broad portfolio of patent-free medicines that we deliver to
pharmacies, hospitals, and other healthcare outlets. Depending on the structure
of local markets, these markets are serviced either by our field services team
or by well established partners or joint venture associates.
In the Industrial Business, active pharmaceutical ingredients and biotech
substances are sold to manufacturers in the generic and ethical pharmaceutical
industries.
In response to rising healthcare costs, many governments and private medical
care providers, such as HMOs, have instituted reimbursement schemes that favor
the substitution of generic pharmaceuticals for more expensive brand-name
pharmaceuticals. In the U.S., generic substitution statutes have been enacted by
virtually all states and permit or require the dispensing pharmacist to
substitute a less expensive generic drug instead of an original ethical drug. In
Europe, use of generic drugs is growing, but penetration rates are still below
those reached in the U.S. because, in some EU countries, reimbursement practices
do not create an efficient incentive for generic substitution.
COMPETITION
In our Generic Pharmaceuticals Business, key competitors in the U.S. are
Barr, Mylan, Roxane, Teva/ Noropharm/Copley, Watson and Schein and Zenith
Goldline. In Europe, our key competitors are Alpharma, Hexal, Ratiopharm, Stada
Teva, CT Arzneimittel, Pharmachemie, Genfarma, Centrafarma and Dumes.
The market for generic products is characterized by increasing demand for
high-quality pharmaceuticals that are no longer protected by patents. Increasing
pressure on healthcare expenditures and numerous patent expirations have created
a favourable market environment for the generics industry. This positive market
trend, however, brings increased competition within the generics industry,
leading to ongoing price pressure on generic pharmaceuticals.
28
In 2000, in the U.S., Geneva Pharmaceuticals, Inc. achieved high-volume
growth and increased market share but suffered significant pressure on margins
resulting from substantial price erosion (due to over capacity in the generics
industry) and the adverse impact of the U.S. pediatric exclusivity rules,
leading to delays in the introduction of generic products by Geneva. To address
the challenges facing the U.S. generics industry, Geneva is integrating certain
of its operations and has initiated a number of restructuring efforts. These
efforts should help to solidify Geneva's position as a leading U.S. generics
company in the coming years.
In Industrial Business, the main competitors for active pharmaceutical
ingredients are Antibioticos and DSM-Anti-Infectives (both headquartered in the
EU). East-Asian manufacturers are increasingly competing in this sector in
selected markets.
World market prices for bulk pencillins have stablized at a moderately
increased level due to increased demand in the Chinese domestic market. Prices
of erythromycin have slightly recovered due to the reduction in suppliers and
increased demand for new makrolides. Prices for 7-ACA, a key intermediate for
most major cefalosporin-antibiotics, remained stable on a low level.
Our Industrial Business unit succeeded in realizing strong volume growth. In
addition, due to the shift to high-value-compounds for cefalosporin-antibiotics
and additional long-term contracts with major pharmaceutical and biotech
companies, we achieved improved performance in 2000 in our Industrial Business.
RESEARCH AND DEVELOPMENT
There is intensive development work required in order to demonstrate a
generic drug is bioequivalent to the original ethical drug. Nevertheless,
research and development costs associated with generic drugs are much lower than
those of their orginal counterparts, and, therefore, patent-free drugs can be
offered for sale at prices much lower than those of patented drugs, the pricing
of which must recoup substantial basic research and development costs over the
life of the product's patent.
Currently, Novartis Generics employs approximately 650 researchers who
explore alternative routes for the manufacture of known compounds and who aim to
develop innovative forms of generic drugs. Most of these researchers are based
at our facilities in Kundl, Austria; Broomfield, Colorado; Dayton, New Jersey;
and Mumbai, India. We invested CHF 170 million, CHF 126 million and CHF
98 million in research and development related to generic products in 2000, 1999
and 1998, respectively.
REGULATION
The Waxman-Hatch Act in the United States (and similar legislation in some
other countries) eliminated the repetition of extensive clinical trials for
generic drugs so long as they could be shown to be of identical quality and
purity and to be biologically equivalent to the original ethical drug.
In the EU, although certain new drugs are subject to a Centralized
Registration Procedure, most applications for marketing approval still need to
be filed on the national level. However, in an effort to streamline the
registration process, a national registration may be used as the basis for EU
marketing approval under the Mutual Recognition Procedure. See
"Pharmaceuticals--Regulation."
CONSUMER HEALTH
Novartis Consumer Health develops, manufactures and markets a wide range of
health and medical nutrition products and a portfolio of "over-the-counter"
("OTC") self-medication brands. In 2000, we employed 12,949 people in Consumer
Health and we had CHF 6,395 million in sales, which represented 18% of the
Group's sales. Headquartered in Nyon, Switzerland, Novartis Consumer Health
operates in 51 countries worldwide.
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Our Consumer Health business was formed on January 1, 1999 by merging the
Group's OTC and nutrition businesses. In connection with the formation of this
new sector, non-core brands were divested in 1998 and 1999. All significant
restructuring and integration activities relating to the merger have been
successfully completed. Cost savings of approximately CHF 70 million per year
resulting from the merger have been achieved, and growth opportunities enabled
by the merger are being pursued. We are comprised of three business units: OTC,
Health and Functional Nutrition, and Medical Nutrition. These business units
(excluding divested brands) contribute to sector sales as follows:
CONSUMER HEALTH SALES 2000 SALES 1999(1) SALES 1999 SALES 1998
- --------------- ----------- ------------- ----------- -----------
(%) (%) (%) (%)
OTC..................................... 39.1 40.2 36.6 35.6
Health and Functional Nutrition......... 51.0 49.9 52.9 54.8
Medical Nutrition....................... 9.9 9.9 10.5 9.6
TOTAL................................... 100.0 100.0 100.0 100.0
- -------------
(1) 1999 has been restated to reflect the transfer from January 1, 2000 of
certain products from the Pharmaceutical sector to the Consumer Health
sector.
KEY MARKETED PRODUCTS
OTC
Our OTC business provides products for in-home diagnosis, treatment and
prevention of medical conditions and ailments to enhance people's overall health
and well being. The main product categories are cough, cold and allergy
treatments, gastrointestinal treatments, dermatological treatments, analgesics,
vitamins, minerals and supplements, venous disorder treatments and smoking
cessation treatment. The major OTC brands are:
KEY BRANDS MARKET/SEGMENT
- ---------- --------------
Sandoz-Registered Trademark-................................ Minerals
Nicotinell/Habitrol-Registered Trademark-................... Smoking cessation
Voltaren-Registered Trademark-.............................. Topical muscle pain
NeoCitran/TheraFlu-Registered Trademark-.................... Cold & Flu
Triaminic-Registered Trademark-............................. Pediatric cough & cold
Maalox-Registered Trademark-................................ Antacid
LamisilAT-Registered Trademark- Cream....................... Athlete's foot treatment
Otrivin-Registered Trademark-............................... Cold remedies
Tavegyl-Registered Trademark-/Tavist-Registered Trademark-... Cough, cold, allergy
Life-cycle management became an important tool to Novartis Consumer Health
following the transfer of two key brands from Novartis Pharmaceuticals:
Voltaren-Registered Trademark- Emulgel-Registered Trademark- and
Lamisil-Registered Trademark- Cream. In the United States,
LamisilAT-Registered Trademark- Cream rapidly built a strong OTC market share
following its switch from prescription only to OTC status by providing consumers
with a new standard in efficacy for the common problem of athlete's foot. We
have followed this success with a number of innovative line extensions and have
plans for the introduction of the cream in other global markets in 2001.
Voltarene-Registered Trademark- Emulgele-Registered Trademark-, the topical
analgesic for muscular pain, has also enjoyed significant growth when it
switched to OTC from prescription only status. In the EU, a winning marketing
campaign first introduced in Germany for Voltaren-Registered Trademark-
Schmerzgel-Registered Trademark- has now been rolled out to numerous other
markets with similar success. In the Swiss market, our first OTC systemic
variant, Voltaren-Registered Trademark- Dolo-Registered Trademark-, is showing
promising signs that auger well for the future of the
Voltaren-Registered Trademark- brand.
In 2000, we formed a joint venture with Kao Corporation of Japan--Novartis
Kao Co., Ltd.--to sell OTC medications and jointly develop products in Japan.
The first products of this joint venture were launched in the first quarter of
2001.
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In 2000, we voluntarily recalled products containing phenylpropanolamine
(PPA) in response to an FDA recommendation. This resulted in a one-time expense
of CHF 84 million (approximately $50 million).
HEALTH AND FUNCTIONAL NUTRITION
The Health and Functional Nutrition business encompasses foods designed to
serve the particular nutritional needs of target groups including adults such as
the elderly, infants and athletes. Products include baby foods, consumer
products such as sports drinks, slimming aids and functional health foods. We
have prominent brands in this area, such as Gerber-Registered Trademark-,
Isostar-Registered Trademark- and
Ovaltine-Registered Trademark-/Ovomaltine-Registered Trademark-.
In 1999, Novartis Consumer Health and Quaker Oats formed a 50/50 joint
venture in the United States, Altus Food Company, marrying the complementary
skills of both companies. The Altus goal is to become a category leader in the
emerging functional food and beverage industry with innovations that could not
have been achieved by the joint-venture parties individually.
The major brands and product groups in Health and Functional Nutrition are:
KEY BRANDS PRODUCT GROUPS MAIN MARKETS
- ---------- -------------- ------------
Gerber-Registered Trademark-, Baby food U.S, Latin America,
Galactina-Registered Trademark-, Tender Europe, Asia
Harvest-Registered Trademark-,
Graduates-Registered Trademark-....................
Cercbeal-Registered Trademark-, Health foods Europe
Gerble-Registered Trademark-.......................
Ovaltine-Registered Trademark-/Ovomaltine-Registered Trademark-... Food drinks U.S., Europe, Asia
Isostar-Registered Trademark-........................ Sports Europe
nutrition
Modifast-Registered Trademark-, Slimming Europe
Gerlinea-Registered Trademark-,
Pesofarma-Registered Trademark-....................
MEDICAL NUTRITION
Our Medical Nutrition business focuses on the nutritional needs of people
with serious conditions (often chronic) as well as hospitalized or convalescing
patients. Our product portfolio ranges from enteral tube feeds and devices to
oral supplements. Our main brands and product groups in this area include:
KEY BRANDS PRODUCT GROUPS
- ---------- --------------
Isosource-Registered Trademark-,
Novasource-Registered Trademark-,
IMPACT-Registered Trademark-,
Vivonex-Registered Trademark-............................. Tube feeds
Isosource-Registered Trademark-,
Novasource-Registered Trademark-,
IMPACT-Registered Trademark-,
Resource-Registered Trademark-
Professional-Registered Trademark-........................ Clinical supplements
Resource-Registered Trademark-.............................. Health Care Food Service
Compat-Registered Trademark-................................ Medical devices
PRINCIPAL MARKETS
In 2000, Novartis Consumer Health realized the majority of its sales in its
two principal markets: the U.S. and the EU. The following table sets out our
2000 Consumer Health sales by geographic region.
CONSUMER HEALTH SALES 2000
- --------------- -------------------------
(CHF MILLIONS) (%)
U.S......................................................... 3,175 50
Americas (except the U.S.).................................. 661 10
Europe...................................................... 2,101 33
Rest of World............................................... 458 7
TOTAL....................................................... 6,395 100
Apart from the cough and cold business which represents 15% of our sales,
Novartis Consumer Health sales are not characterized by seasonal fluctuations.
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PRODUCTION
Our Consumer Health business is engaged in the manufacture and supply of
products in several segments. Our major production sites ranked by importance
are in the U.S., Switzerland, Mexico, France, the U.K., Germany, Poland, Costa
Rica and China.
The goals of our supply chain strategy include the achievement of
competitive costs, but also the mitigation of risks through multiple production
capabilities. Regional sites serve specific markets but are also capable of
providing support as needed to other regions in the event of supply disruption.
Raw materials for the manufacturing process are purchased from a number of
our internal affiliates and third party suppliers. For the most part, the
products and services we procure are not proprietary and are available from a
number of suppliers. We often "single-source" supplies, but we have a policy of
having at least a second approved and validated supplier registered for most key
materials so that substitution is made possible. We also proactively monitor
markets and developments that could have an adverse effect on the supply of
essential materials. While we have not experienced material supply interruptions
caused by vendors in the past, there can be no assurance that supply will not be
interrupted in the future as a result of unforeseen circumstances. Additionally,
we operate in a dynamic regulatory environment, making supply never an absolute
certainty.
The non-proprietary nature of most of our raw materials contributes to
reliable pricing structures that are by their nature competitive. Although we
face volatility in the commodity markets just like any similarly situated
company, prices for our unique raw materials are not volatile.
MARKETING AND DISTRIBUTION
We aim to be a leading global participant in fulfilling the needs of
patients and consumers for health and medical nutrition and self-medication
healthcare. Strong brands, science-based products and in-house marketing and
sales organizations are key strengths that can allow the business to achieve
this objective.
We distribute our products through various channels, such as hospitals,
nursing homes, pharmacies, food, drug and mass retail outlets. As our
distribution channels increasingly overlap, we believe significant sales and
distribution synergies can be realized across our business units.
COMPETITION
The fundamental trends driving the growth of our OTC business are increasing
pressures on government health funding, changing consumer attitudes towards
personal well-being, the rise of a self-care mentality among consumers and
successful switches of prescription products to OTC status. Our principal
competitors in this highly competitive market segment are major international
corporations with substantial financial and other resources, including American
Home Products, Aventis, Bayer, GlaxoSmithKline, Johnson & Johnson, Procter &
Gamble, Roche and Pfizer.
The functional food market is emerging at the intersection of the
traditional food and pharmaceutical markets. In this segment, the health
benefits of nutritional products are enhanced with specific active ingredients
that have been developed using methods traditionally associated with the
pharmaceutical industry. Market trends support the growth of this segment by
increasing consumer awareness and scientific understanding of the role played by
food in health, an increasing consumer interest for self-medication, and cost
pressures on healthcare funding. We aim to combine our scientific know-how in
therapeutic areas, our credibility with healthcare opinion leaders, our
prominent brands in the nutrition business, and our ability to develop good
tasting and convenient food products to drive market share and industry growth.
The market is very fragmented and consists of a number of competitors.
Major competitors in the medical nutrition market are Abbott Ross and Mead
Johnson in the U.S., and Numico and Fresenius in Europe.
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RESEARCH AND DEVELOPMENT
Our nutrition and OTC research and development mutually benefit from joint
efforts and share clinical trial, regulatory and pharmaceutical development
expertise. In OTC, the focus is primarily on cough, cold, allergy,
gastrointestinal, minerals, analgesics, dermatology, cardiovascular risk
reduction (through smoking cessation programs) and management of venous
diseases. Novartis Consumer Health is also working closely with Novartis
Pharmaceuticals to evaluate appropriate products that can be switched from
prescription to OTC status. In Health and Functional Nutrition and Medical
Nutrition, there are numerous research programs underway, especially in the
areas of bone, cardiovascular disease, gastrointestinal disorders and the immune
system.
Currently, Novartis Consumer Health has approximately 90 research and
development projects in progress. The majority of these are in the OTC business
unit, with approximately 20 in each of Health and Functional Nutrition and
Medical Nutrition. Novartis Consumer Health supports our worldwide consumer
business with a dedicated research and development team of over 350 employees
based mainly in the U.S. and Switzerland. We devoted CHF 186 million, CHF
167 million and CHF 136 million to research and development relating to our
Consumer Health products in 2000, 1999 and 1998 respectively.
REGULATION
For OTC products, the regulatory process for bringing a product to market
consists of preparing and filing a detailed dossier with the appropriate
national or international registration authority and obtaining approval in the
U.S. or registration in the EU.
Approval of OTC products in the U.S. is regulated by the FDA. The U.S. Food
Drug and Cosmetic Act establishes two legal bases for marketing an OTC product,
either through an approved NDA to establish a product's safety and effectiveness
for its intended use, or if the active ingredient is generally recognized as
safe and effective, through a regulatory process known as the OTC Review. In the
OTC Review, the FDA specifies in a series of monographs (by pharmacological
category) the conditions under which certain active ingredients would generally
be recognized as safe and effective for their intended use. Compliance with the
published monograph, therefore, permits marketing without an NDA and its formal
approval process. See "--Pharmaceuticals--Regulation."
Development, manufacturing, packaging, quality (food standards,
ingredients), safety, labeling and advertising of foods are the subject of
international and national food regulations. New food ingredients, new product
claims, quality of new products not in conformity with existing national food
law, food standards or national nutrition policies, all require special
approvals from national food authorities. Many new medical foods, functional
foods, dietetic foods and some new baby foods require such approvals.
In the U.S., the safety of new food ingredients is assessed by the FDA. In
the EU, the safety of new food ingredients is assessed with the Novel Food
Process. An EU member-state makes the initial risk assessment, which may then be
challenged afterwards by the EU Commission and the other EU member-states. In
Japan, functional foods are put on the market after getting approval from the
MHLW as Food for Specified Health Use. This includes approval of product
quality, ingredients and product claims.
INTELLECTUAL PROPERTY
Our Consumer Health businesses are brand-oriented and, therefore, we
consider our trademarks to be of particular value. Most of our brands are
protected by trademarks in the majority of the markets where our brands are
sold, and we vigorously protect these trademarks from infringement. Our most
important trademarks are used in a number of countries. Local variations of
these international trademarks are employed where legal or linguistic
considerations require the use of an alternative.
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CIBA VISION
With products sold in over 70 countries, CIBA Vision is a world leader in
the research, development and manufacturing of eye care products, namely soft
contact lenses, lens care products, ophthalmic pharmaceuticals and ophthalmic
surgical products. As of December 31, 2000, CIBA Vision employed 8,874 people.
On January 1, 2001, 1,230 of those employees were transferred to the
Pharmaceuticals sector as the Ophthalmics business unit and its products were
reorganized. In 2000, CIBA Vision had sales of CHF 2,085 million, which
represented 6% of the Group's sales. We completed the acquisition of Wesley
Jessen VisionCare, Inc., a leading provider of specialty contact lenses in the
United States, in October 2000.
RECENTLY LAUNCHED PRODUCTS
- We launched Visudyne-TM- therapy, a new treatment for the wet form of
age-related macular degeneration, the leading cause of blindness in people
over 50. Visudyne-TM- therapy, developed by CIBA Vision in collaboration
with QLT Inc., involves the use of a light-activated compound combined
with a non-thermal laser and is part of an emerging new platform
technology called photodynamic therapy. The FDA granted approval for the
marketing of Visudyne-TM- in April 2000. Visudyne-TM- therapy is currently
available in more than 30 countries worldwide.
- Rescula-TM-, the first of a new class of glaucoma treatments received FDA
approval in August 2000 and was launched in the U.S. in September.
- FDA approval is pending for Focus-Registered Trademark- Night&Day-TM-, a
high-oxygen extended wear contact lens that can be worn for up to 30 days
and nights. The lens was first launched in Mexico and Spain in
February 1999 and received a CE Mark, the regulatory approval for medical
devices in the EU, in early 1999. Focus-Registered Trademark-
Night&Day-TM- lenses are now available in more than 40 countries.
- Focus-Registered Trademark- DAILIES-Registered Trademark-, a daily
disposable contact lens, became the leading new fit brand of daily
disposable lens in the U.S. and is also a leader in its category in Japan,
Canada and major European markets. Focus-Registered Trademark-
DAILIES-Registered Trademark- are manufactured using our patented
Lightstream Technology-TM- and are now available in more than 30
countries.
- Focus-Registered Trademark- PROGRESSIVES-Registered Trademark-, launched
in the U.S. in September 1999, is a contact lens that offers a solution
for patients requiring presbyopic correction.
- We launched Focus-Registered Trademark- DAILIES-Registered Trademark-
Progressives in Italy in November 2000. It is the first daily disposable
contract lens in the world to correct presbyopia.
- SOLO-care-Registered Trademark- 10 Minute, approved by the FDA in
July 1999, is a one-bottle lens disinfection system for both soft contact
lenses and rigid gas permeable lenses.
- AOSept Plus, a new formulation of our leading hydrogen peroxide
disinfectant, was launched in Europe in November 2000.
- BLUESept, a tablet-based lens cleaning system, was launched in Europe in
November 2000.
- We relaunched, after a voluntary recall due to limited reports of
inflammation, our MemoryLens-Registered Trademark-, the only pre-rolled
intraocular lens in the world. It is used to restore vision in patients
with cataracts.
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KEY MARKETED PRODUCTS
The table below sets out the key marketed products in each of CIBA Vision's
four principal product segments:
MAIN PRODUCTS DESCRIPTION
- ------------- -----------
CONTACT LENSES
Focus-Registered Trademark- Toric............ Correct astigmatism
Focus-Registered Trademark- Monthly.......... Replaced monthly
Focus-Registered Trademark- 1-2 Week......... Replaced every one to two weeks
Focus-Registered Trademark- One-day disposable
DAILIES-Registered Trademark-..............
Focus-Registered Trademark- Progressives..... Correct presbyopia
Focus-Registered Trademark- NIGHT&DAY-TM-.... Extended wear
Focus-Registered Trademark- DAILIES One day disposable to correct presbyopia
Progressives...............................
LENS CARE PRODUCTS
AOSept-Registered Trademark-................. Hydrogen peroxide disinfectant system
SOLO-care-Registered Trademark-.............. One bottle lens disinfectant system
QuickCARE-TM-/InstaCARE-TM-.................. Five-minute disinfectant system
OPHTHALMIC PHARMACEUTICALS
Visudyne-TM- Therapy......................... Treatment for the wet form of age-related
macular degeneration
Voltaren-Registered Trademark- Non-stereoidal anti-inflammatory
Ophthalmic-Registered Trademark-...........
Zaditen-Registered Trademark-/Zaditor-TM-.... Anti-allergy eye drop
Rescula-TM-.................................. Glaucoma treatment
OPHTHALMIC SURGICAL
MemoryLens-Registered Trademark-............. Pre-rolled, foldable intra-ocular lens, used
in a surgical procedure to restore vision in
people with cataracts.
PRODUCTS IN DEVELOPMENT
CIBA Vision intends to expand our product portfolio through both our own
dedicated research and development resources as well as the acquisition of new
and innovative technologies. The product development focus is on contact lenses
and ophthalmic surgical products and involves the creation and development of
totally new product offerings in these markets as well as line extensions of
current products. The acquisition of Wesley Jessen VisionCare includes several
exciting technologies and CIBA Vision anticipates incorporating these
technologies into other contact lens products in its pipeline.
PRINCIPAL MARKETS
Our principal markets, in terms of 2000 sales, were North America (U.S. and
Canada), Japan and Europe. Sales are not subject to seasonality. The following
table sets forth 2000 sales for CIBA Vision by region:
CIBA VISION SALES 2000
- ----------- -------------------------
(CHF MILLIONS) (%)
U.S......................................................... 919 44
Americas (except the U.S.).................................. 133 6
Europe...................................................... 636 31
Rest of the World........................................... 397 19
TOTAL....................................................... 2,085 100
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PRODUCTION
We have nine major manufacturing sites for CIBA Vision: Grosswaldstadt,
Germany (contact lenses); Amwiler Facility, Atlanta, Georgia (contact lenses);
Johns Creek Facility, Atlanta, Georgia (contact lenses); Batam, Indonesia
(contact lenses); Mississauga, Canada (lens care products and ophthalmic
pharmaceuticals); Annonay, France (lens care products); and Cidra, Puerto Rico
(intra-ocular lenses) with the acquisition of Wesley Jessen, we also acquired
contact lens manufacturing sites in Des Plaines, Illinois; Southampton, UK; and
Cidra, Puerto Rico. We purchase basic chemical commodity raw materials for our
lens products from industrial vendors. These raw materials are then reformulated
into the polymers and monomers required to produce contact lenses. The polymers
and monomers we produce are the innovative element in our contact lens products.
The technology to produce the polymers and monomers is stable and well defined.
We enter into long term supply contracts (generally over one to two years)
with industrial raw material vendors, which limits volatility. In addition, most
raw materials are basic chemical commodities and multiple suppliers are
available. In addition, certain lens products use proprietary chemicals that are
produced specifically for and sold only to us. We also use a custom-designed
syntheses process to produce macromonomer, the key raw material needed to
produce contact lens, which is produced by a contract vendor for a negotiated
price.
MARKETING AND DISTRIBUTION
Contact lenses are considered medical devices by regulatory authorities and,
therefore, are available only with a prescription from an eyecare professional.
CIBA Vision lenses can be purchased from independent eyecare professionals and
optical chains, such as Lenscrafters in the United States. CIBA Vision's lens
care products can be found in major drug, food and mass merchandising retail
chains in the United States, Europe, Japan and elsewhere. In addition, mail
order and Internet sales are becoming increasingly important channels in the
United States, Europe, Japan and elsewhere.
Eyecare professionals are CIBA Vision's primary marketing focus. In
addition, we have direct-to-consumer ("DTC") initiatives including free trials,
coupons and bundling.
COMPETITION
CONTACT LENSES
Growth in the contact lenses market is driven primarily by an increased
demand for lenses and an increasingly varied product mix. As consumers move
toward frequent replacement lenses, including one-day disposable lenses,
consumer demand for lenses is increasing. Additionally, the customer base is
expanding with the development of new contact lens options, such as daily
disposable, 30-day extended wear, toric lenses for astigmatic patients and
lenses to correct presbyopia, a condition prevalent among the "Baby Boom"
generation. We are well-positioned in the contact lens market as the
second-leading player on the basis of market-share. With the acquisition of
Wesley Jessen, we now have the broadest product portfolio of any competitor in
the industry. Although the market has experienced the successful introduction of
laser vision correction as an alternative to contact lenses, we have a number of
products for consumers who are not candidates for laser correction such as
teenagers and presbyopes. The colored lens technology acquired with Wesley
Jessen also creates a strong combination with our CIBA Vision products that will
attract teenagers and others to the category. Our principal competitors in
contact lenses are Bausch & Lomb and Johnson & Johnson.
LENS CARE
We expect to increase our share in the one-bottle market segment with our
SOLO-Care-Registered Trademark- 10 minute lens care product and to maintain a
leadership position in the peroxide category with AOSept-Registered Trademark-.
Lens care,
36
which is required by wearers of conventional contact lenses, is a mature market
and the products will continue to face competitive pressure due to the
increasing preference for daily disposable and extended wear lenses, which
require no lens care.
The overall consolidation of lens care product inventories by retailers in
the U.S. reduced manufacturer sales during 2000. However, CIBA Vision is a
global leader in the peroxide lens care category with
AOSept-Registered Trademark-, although this is a declining segment of the
market, and our share is increasing in the growing one-bottle market segment
with our SOLO-Care-Registered Trademark- 10 minute disinfection system. New
products are being rolled out in 2001. Our principal competitors in lens care
are Alcon, Allergan and Bausch & Lomb.
OPHTHALMIC SURGICAL
The Ophthalmic Surgical market includes intra-ocular lenses for cataracts,
laser vision correction, surgical devices, surgical adjuncts and vitreo-retinal
products. We believe we are well positioned with our intra-ocular lens,
MemoryLens-Registered Trademark- which is the only pre-folded intraocular lens
in the world. Also, we are the only company with a position in both the anterior
and posterior phakic refractive lens market where we have acquired several
licences. Phakic refractive lenses are used for patients requiring a high degree
of correction. Our principal competitors in the ophthalmic surgical market are
Alcon, Allergan, Bausch & Lomb, Pharmacia and Staar.
RESEARCH AND DEVELOPMENT
Our Group's research provides CIBA Vision with new chemical compounds for
future products and access to developments in biotechnology. These resources are
complemented by CIBA Vision's internal research and development capabilities,
licensing agreements and joint research and development partnerships with third
parties (companies, individuals and universities). In particular, agreements
with QLT Inc. and Destiny Pharma to develop an emerging new technology platform
that uses light-activated drugs in the treatment of eye diseases, expanding the
market with new products like Visudyne-TM-. We invested CHF 150 million, CHF
144 million and CHF 153 million in research and development of eye care products
in 2000, 1999 and 1998 respectively.
REGULATION
CONTACT LENSES AND LENS CARE
Contact lenses and lens care products are regulated as medical devices in
the U.S. and the EU. Both jurisdictions have a risk-based classification system
that determines the type of submission or dossier required.
Medical devices in the U.S. are classified by the FDA into one of three
classes: Class I, II or III, on the basis of the controls deemed by the FDA to
be necessary to reasonably ensure their safety and effectiveness. All devices
must receive pre-market approval by the FDA. There are two review procedures to
gain this pre-market approval: a pre-market application ("PMA") and 510(k)
submission. Under a PMA the manufacturer must, with supporting evidence, prove
the safety and effectiveness of the device. The FDA has 180 days to review a
PMA. Certain products, however, may qualify for a submission authorized by
Section 510(k) of the U.S. Food Drug and Cosmetic Act, wherein the manufacturer
gives the FDA a pre-market notification of the manufacturer's intention to
commence marketing the product having established that it is substantially
equivalent to another marketed product. The FDA has 90 days to review a 510(k)
submission. In the U.S., extended-wear lenses are deemed high risk and are
therefore classified as Class III devices requiring a PMA. Lens care products
are Class II devices and generally qualify for 510(k) submission. The FDA will
inspect all manufacturing facilities in order to ensure compliance with
manufacturing requirements.
37
The CE Mark, an international symbol of adherence to quality assurance
standards and compliance with applicable medical device directives, is required
for all medical products sold in the EU. The majority of contact lenses and lens
care products are deemed medium risk in the EU. These products require prior
marketing approval based on compliance with the design controls which constitute
the CE Mark.
In Japan, contact lenses are categorized as medical devices and are subject
to an approval process similar to that in the U.S. Although there is an
improvement in the willingness to accept foreign data and a general
harmonization of requirements, in order to enter the Japanese market, local
clinical trials must be performed and local protocols must be observed. Lens
care products for soft lenses take several years to gain approval due to the
extensive amount of additional data and clinical testing required. Saline
solutions for hard lenses are unregulated.
INTELLECTUAL PROPERTY
The majority of our products are protected by patents and trademarks. It is
our policy to seek the broadest possible protection for significant product
developments in all major markets. Patents may cover products PER SE, product
formulations, processes, intermediate products and product uses.
ANIMAL HEALTH
Novartis Animal Health maintains and improves the health and well being of
companion animals as well as farm animals, whose productivity is a significant
economic factor in many countries. At December 31, 2000, our Animal Health
sector employed 1,975 people and had sales of CHF 1,083 million which
represented 3% of Group's sales.
Represented in more than 40 countries, our Animal Health sector researches,
develops, manufactures and markets a wide variety of products for both companion
and farm animals. The companion animal segment accounts for 53% of our Animal
Health sales, while the farm animal segment accounts for 47%. Products include
parasite control in companion and farm animals, antibacterials, vaccines and
veterinary specialities. Our Animal Health business has a dedicated research
team and benefits from synergies with our other Novartis businesses and, most
notably, Novartis Pharmaceuticals research.
In 2000, we made acquisitions in the UK and Canada to bolster our vaccine
businesses. The purchases of Vericore (UK), Cobequid (a Canadian biotechnology
company) and the vaccine business of Biostar (Canada) is expected to expand our
product offering for cattle, sheep and farmed fish vaccines. These products are
being globalized where possible.
RECENTLY LAUNCHED PRODUCTS
PRODUCT DESCRIPTION REGISTRATION/LAUNCH STATUS
- ----------------------------- ----------- --------------------------
Fasimec-Registered Trademark- Parasite control for farm animals, cattle and Registered and launched in the U.S. for sheep
sheep
Econor-Registered Trademark- Antimicrobial against enteric and respiratory Registered and launched in more than
diseases in pigs 20 countries worldwide.
Clik-Registered Trademark- All-season protection against blowflies in sheep Registered and launched in New Zealand and
Australia.
Capstar-Registered Trademark- Fast-acting oral flea control for pets Registered and launched in Australia,
New Zealand, Switzerland, Brazil, South Africa
and the United States.
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KEY MARKETED PRODUCTS
Key products for pets include Sentinel-Registered Trademark-,
Interceptor-Registered Trademark- and Program-Registered Trademark- for the
prevention of fleas, heartworm and intestinal worms; and
Fortekor-Registered Trademark- for the treatment of heart failure in dogs and
chronic renal insufficiency in cats. Key products for farm animals include
Ventrazin-Registered Trademark- against blowfly in sheep;
Fasinex-Registered Trademark- and Endex-Registered Trademark- for the treatment
and control of liver fluke and gastrointestinal worms in cattle and sheep; and
Tiamulin-Registered Trademark- and Dynamutilin-Registered Trademark-
(antimicrobials) to treat bacterial infections in pigs and poultry. We also
market products for farm fly control, as well as vaccines for farm animals and
farmed fish.
PRODUCTS IN DEVELOPMENT
Our research and development focuses on the area of antiparasitics, vaccines
and veterinary specialities.
PRINCIPAL MARKETS
Our products for companion animals are sold predominantly in the U.S., the
EU and Japan. In most other countries, sales of farm animal products dominate.
The following table sets out 2000 market sales of our Animal Health products by
region:
NOVARTIS ANIMAL HEALTH SALES 2000
- ---------------------- -------------------------
(CHF MILLIONS) (%)
U.S......................................................... 409 38
Americas (except the U.S.).................................. 148 13
Europe...................................................... 313 29
Rest of the World........................................... 213 20
TOTAL....................................................... 1,083 100
The animal health market is expected to grow slowly over the next few years
due to relatively few product launches with high sales potential in the
companion animal segment and food safety issues for farm animals. Some growth is
expected from speciality pharmaceuticals for companion animals and ecro-/
endectoparasiticides products. Medicinal feed additives may be increasingly
replaced. The trend towards consolidation in the animal health market continues.
Our performance in 2000 was above market growth in all product categories
and helped to strengthen our position in relation to our competitors. In the
next few years, growth is expected to remain slightly above-market with
single-digit growth rates.
Novartis Animal Health sales are seasonal, particularly sales of
parasiticides.
PRODUCTION
Five commodity products are produced at our Shanghai, China production site.
Formulation facilities are in France, China, the United Kingdom, Canada,
Colombia, Taiwan, and Bangladesh. Approximately 80% of production volume is
manufactured by third parties, including other Novartis businesses, as
outsourcing partners.
Sources of raw materials are widespread globally. We depend on suppliers to
a large extent for the purchasing of raw materials. Price volatility is low due
to defined transfer prices of final products supplied to Novartis Animal Health.
MARKETING AND DISTRIBUTION
Our products are predominantly prescription-only treatments for animals. The
major distribution channels are veterinarians and wholesalers of veterinary
products. Primary marketing efforts are targeted
39
at veterinarians using such marketing tools as printed materials, direct mail,
advertisements and articles in the veterinary special press, our participation
at conferences for veterinarians and organization of special educational events.
Our sales forces are active in all countries where Animal Health is represented.
In addition, we engage in general public relations activities, including
advertising in the general printed media and direct advertising of name brands
where regulatory and legal restrictions allow it.
COMPETITION
Although all leading industry players have products for all major animal
species, there is an increasing focus on the companion animal sector. Our major
competitors in the companion and farm animal business are Merial, Pfizer,
Intervet, Bayer and Schering-Plough. Most of our competitors offer a broad range
of products and their marketing efforts are comparable to ours in both resources
and tactics.
RESEARCH AND DEVELOPMENT
Novartis Animal Health has dedicated research facilities in Switzerland,
Australia, the UK and Canada. We devoted CHF 88 million, CHF 65 million and CHF
61 million to our Animal Health research in 2000, 1999 and 1998, respectively.
Based on high-capacity, in-vitro microscreens, high-throughput screening
focuses on assessing a number of natural products and synthetic chemicals. Our
researchers collaborate with external partners to develop veterinary treatments.
Drug delivery projects, also in collaboration with external partners, will
concentrate on the identification and development of suitable sustained release
formulations for use in parasite control.
In addition to these research activities, we exploit synergies with our
other sectors to develop new products; products originally intended for human
use are further developed to treat companion animals.
REGULATION
The registration procedures for animal medicines are similar to those for
human medicines. In the U.S., animal health products are regulated by the FDA
and the Environmental Protection Agency (the "EPA"). Within the FDA, the Center
for Veterinary Medicine is responsible for animal drugs. An NDA for product
registration must be accompanied by clinical studies data which support the
safety and efficacy of the product, as well as information on manufacturing,
environmental effects and labeling. During this phase additional or supplemental
information is submitted by the manufacturer as it becomes available.
In the EU, veterinary medicinal products need marketing authorization from
the competent authority of a member-state (national authorization) or through a
procedure authorized by the EU, which is either the Centralized Procedure or the
Mutual Recognition Procedure. In the former, applications are submitted to EMEA,
and the marketing authorization that is granted by the European Commission is
then valid throughout the EU; in the latter, the marketing authorization granted
by the first member-state is mutually recognized by the other member-states.
In Japan, veterinary medicinal products are approved by the Ministry of
Agriculture Fisheries and Food ("MAFF"). The application is reviewed by the MAFF
and a general investigational committee, a special investigational committee and
a permanent investigational committee before authorization is granted.
INTELLECTUAL PROPERTY
All recently introduced products of our Animal Health business are patent
protected. It is our policy to seek the broadest possible protection for
significant product developments in all major markets. Patents may cover
products PER SE, product formulations, processes, intermediate products and
product uses.
40
4.C ORGANIZATIONAL STRUCTURE
We are a multinational group of companies specializing in the research,
development, manufacture, sales and distribution of innovative healthcare
products. Novartis AG, a Swiss holding company owns, directly or indirectly,
100% of all significant operating companies. For a list of our subsidiaries, see
note 31 to the consolidated financial statements.
4.D PROPERTY, PLANTS AND EQUIPMENT
Our principal executive offices are located in Basel, Switzerland. Our
various businesses operate through a number of offices, research facilities and
production sites.
It is our policy to own our facilities. A few (mainly in the U.S.) are
leased under long-term leases. Some of our principal facilities are subject to
mortgages and other security interests granted to secure indebtedness to certain
financial institutions. As of December 31, 2000, the total amount of
indebtedness secured by these facilities was not material to the Group. We
believe that our production plants and research facilities are well maintained
and generally adequate to meet our needs for the foreseeable future.
Below is a summary that sets out our major production facilities. For a
further description of our material facilities, see "--4.B Business Overview,"
and the sections entitled "--Production" and "--Research and Development"
included within each of our business segment discussions.
LOCATION/SECTOR SIZE OF SITE MAJOR ACTIVITY
- --------------- ------------ --------------
PHARMACEUTICALS
Brazil 500,000 square meters Suppositories, hard capsules, soft
capsules, tablets, syrups,
suspensions, creams, drop
solutions, powders
County Cork, Ireland 532,000 square meters; Final steps of active drug
40,000 of which is chemical substances
production.
Basel, Switzerland 460,000 square meters; 3,000 Steriles, tabs, caps, transdermals
of which is chemical
production; 30,000 of which
is pharmaceutical production
Basel, Switzerland 515,000 square meters; Active drug substances,
95,000 of which is chemical intermediates and final steps
production; 41,000 of which
is pharmaceutical production
212,000 square meters Active drug substances,
intermediates and final steps
Grimsby, United Kingdom 929,000 square meters; Active drug substance
350,000 of which is chemical intermediates
production
Suffern, NY U.S. 656,000 square meters; Tablets, capsules, transdermals
37,000 of which is
pharmaceutical production
41
LOCATION/SECTOR SIZE OF SITE MAJOR ACTIVITY
- --------------- ------------ --------------
GENERICS
Kundl, Austria 250,000 square meters; Infusion/injection bottles,
28,000 of which is chemical granules, film-coated-tablets,
production; 4,000 of which hard-gelatine- capsules and
is pharmaceutical production liquids for antibiotics and
recombinant and classical biotech
substances.
Broomfield, CO USA 60,000 square meters Pharmaceutical production of a
broad range of finished dosage
forms.
CONSUMER HEALTH
Fremont, MI U.S. 512,500 square meters Jarred baby food, furit and
vegetable juices, dry boxed cereal
Lincoln, NE U.S. 1,721,200 square meters Triaminic-Registered Trademark-,
Maalox-Registered Trademark- and
Tavist-Registered Trademark-
Rzeszow, Poland 1,780,000 square meters Gerber-Registered Trademark-baby
food, Frugo-Registered Trademark-
drinks, Bobo-Registered Trademark-
fruit juice
CIBA VISION
Pulau Batam, Indonesia 16,700 square meters Contact lenses
Duluth, GA U.S. 16,700 square meters Molding of contact lenses
Des Plaines, IL 12,100 square meters Freshlook-Registered Trademark-
product line
ANIMAL HEALTH
WUSI-Farm, China 40,000 square meters of Insecticides antibacterials
chemical production; 2,000 acaricides, powders
square meters of
pharmaceutical production
Dundee, Scotland 30,000 square meters of Packaging, formulation liquids,
chemical production; 4,000 solids, creams, sterile filling
square meters of vaccines
pharmaceutical production
MAJOR RESEARCH AND DEVELOPMENT FACILITIES:
PHARMACEUTICALS
East Hannover, NY (U.S.) 804,700 square meters General
Summit, NY (U.S.) 356,136 square meters General
Basel, Switzerland 60,642 square meters General
Vienna, Austria 39,000 square meters Dermatology and infectious
diseases
Horsham, UK 16,000 square meters Respiratory disease
42
LOCATION/SECTOR SIZE OF SITE MAJOR ACTIVITY
- --------------- ------------ --------------
GENERICS
Kundl, Austria 250,000 square meters Development of new improved
biotech processes, innovations in
cefalosporin antibiotics
Broomfield, CO (U.S.) 60,000 square meters Development of new formulations
for generic pharmaceuticals.
CONSUMER HEALTH
Summit, NY (U.S.) 356,136 square meters Nutrition
Nyon, Switzerland 58,400 square meters Over-the-Counter
CIBA VISION
Duluth, GA (U.S.) 9,000 square meters General
ANIMAL HEALTH
St. Aubin, Switzerland 9,000 square meters Parasiticides
ENVIRONMENTAL MATTERS
We integrate core values of environmental protection into our business
strategy to add value to the business, manage risk and enhance our reputation.
We are subject to laws and regulations concerning the environment, safety
matters, regulation of chemicals and product safety in countries where we
manufacture and sell our products or otherwise operate our business. These
requirements include regulation of the handling, manufacture, transportation,
use and disposal of materials, including the discharge of pollutants into the
environment. In the normal course of our business, we are exposed to risks
relating to possible releases of hazardous substances into the environment which
could cause environmental or property damage or personal injuries and which
could require remediation of contaminated soil and groundwater. Under certain
laws, we are also subject to the remediation of contamination at our properties
regardless of whether the contamination was caused by us, or previous
businesses.
We believe we are in substantial compliance with environmental, health and
safety requirements and are committed to providing safe and environmentally
sound workplaces that will not adversely affect the health or environment of
employees or the communities in which we operate. We believe we have obtained
all material environmental permits required for the operation of our facilities
as well as all material authorizations required for products produced by us. We
believe that we are not currently subject to liabilities for non-compliance with
applicable environmental, health and safety laws that would materially and
adversely affect our business, financial condition or results of operations,
although there is a risk that legislation enacted in the future could create
liabilities for past activities undertaken in compliance with then current laws
and regulations or that there is environmental or other damage of which we are
not aware.
In recent years, the operations of all companies have become subject to
increasingly stringent legislation and regulation related to occupational safety
and health, product registration and environmental protection. Such legislation
and regulations are complex and constantly changing, and there can be no
assurance that future changes in laws or regulations would not require us to
install additional controls for certain of our emission sources, to undertake
changes in our manufacturing processes or to remediate soil or groundwater
contamination at facilities where such clean-up is not currently required.
A few of our facilities are over 50 years old, and there may be soil and
groundwater contamination at such
43
facilities. However, based on current information, we do not believe that
expenditures related to such possible contamination, beyond those already
accrued, will be significant.
Our expenditures, excluding Agribusiness, related to capital investments for
environmental, health and safety compliance measures were approximately CHF
54 million in 2000 (CHF 20 million for environment), CHF 72 million in 1999 (CHF
29 million for environment) and approximately CHF 100 million in 1998 (CHF
52 million for environment). While we cannot predict with certainty our
aggregate capital environmental investments in 2001, based on current
information and existing assets, we estimate such aggregate expenditures to be
comparable to the 2000 figure.
It is difficult to estimate the future costs of environmental protection and
remediation because of many uncertainties, including uncertainties about the
states of laws, regulations and information related to individual locations and
sites. Subject to the foregoing, but taking into consideration our experience to
date regarding environmental matters of a similar nature and facts currently
known, we believe that compliance with existing and known national and local
environmental laws and regulations will not have a material effect on our total
capital expenditures, earnings or competitive position.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5.A OPERATING RESULTS
The following operating and financial review and prospects should be read in
conjunction with our consolidated financial statements included herein. The
consolidated financial statements and the financial information discussed below
have been prepared in accordance with IAS. For a discussion of the significant
differences between IAS and U.S. GAAP, see "Item 18. Financial
Statements--Note 32."
OVERVIEW
We are a world leader both in sales and in innovation in our continuing core
businesses: pharmaceuticals, generics, consumer health, eyecare products and
medicines and animal health, with global sales of CHF 35,805 million in 2000
(including the divested Agribusiness). We aim to hold a leadership position in
all of our businesses.
Novartis AG was formed in 1996 out of a merger of two global participants in
the pharmaceutical and agrochemical industries, Sandoz AG and CIBA-Geigy AG.
Accounting for the merger under IAS was based on a uniting of interests and
therefore did not result in any goodwill nor in any goodwill amortization. Under
U.S. GAAP, the Merger is accounted for as a purchase of CIBA-Geigy AG by Sandoz
AG. For a discussion of the significant differences between IAS and U.S. GAAP
for purchase accounting under U.S. GAAP, see "Item 18. Financial
Statements--Note 32."
On December 2, 1999, we announced with AstraZeneca that we had agreed to
spin-off and merge our Crop Protection and Seeds businesses with Zeneca
Agrochemicals to create the world's first dedicated agribusiness company with
pro forma combined sales of approximately $7.0 billion (based on 1999 figures).
The new company is called Syngenta AG, headquartered in Basel, Switzerland, and
is listed on the Swiss, London, New York and Stockholm stock exchanges. Our
shareholders received approximately 61% and AstraZeneca's shareholders received
approximately 39% of the shares of Syngenta. Our Crop Protection and Seeds
businesses are shown as discontinuing activities in the subsequent discussion.
After this divestment, our focus will be on businesses in the pharmaceuticals,
generics, consumer health, eyecare products and medicines and animal health
sectors.
FACTORS AFFECTING RESULTS
The global healthcare market is growing rapidly due to, among other reasons,
the aging population in developed countries, unmet needs in many therapeutic
areas (such as cancer and cardiovascular disease), the adoption of more
industrialized lifestyles in emerging economies, and increased consumer demand
44
fueled by broad and rapid access to information. At the same time, the
healthcare industry is coming under pricing pressures as costs come under closer
scrutiny by payers, both public and private.
Our revenues are directly related to our ability to identify high performing
products while they are still in development and to market them quickly and
effectively. Research and development takes on crucial importance in this
environment, as we, like our competitors, search for efficacious and
cost-efficient pharmaceutical solutions to health problems. The necessity for
broad-based resources adequate to access the full range of new platform
technologies have been among the reasons for the consolidation across the
industry, and also has spawned the growing number of collaborative relationships
between leading companies and niche players at the forefront of their particular
technology areas. The growth in new technology, particularly genomics, will
almost certainly have a fundamental impact on the pharmaceutical industry as a
whole and upon our future development.
The competitive conditions in the pharmaceutical industry have intensified
as a result of regulation, price reductions, reference prices, parallel imports,
higher patient co-payments and increased pressure on physicians to limit
prescribing. In the future, pressure on our Pharmaceuticals sector and other
pharmaceutical companies to lower prices is expected to increase. The pressure
on prices is influenced primarily by the following factors: government actions
that reduce patient reimbursement, restrict physicians' prescribing levels,
increase the use of generic products and impose overall mandatory price cuts;
the introduction of new, technologically innovative products and devices by
competitors; and growing parallel imports, mainly in the EU. Parallel imports
affect Novartis Pharmaceuticals' results as products sold in to low-priced
countries are re-exported to high-priced countries thereby reducing direct sales
to those countries. See "Item 4. Information on the Group--4.A Business
Overview--Pharmaceuticals--Price Controls."
Exchange rate exposure also affects the Group's results as we have both
sales and cost exposure in many currencies other than the Swiss franc, giving
rise to both transaction and translation exposure when results and foreign
subsidiary balance sheets are translated into our Swiss franc consolidated
financial statements. See "Exchange Rate Exposure and Risk Management" below.
Inflation has not been a significant factor on our results.
45
RESULTS OF OPERATIONS
The following table sets forth for each of the periods indicated our
selected income statement data.
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
2000 1999(1) 1999(2) 1998(2)
-------------- -------------- -------------- --------------
(CHF MILLIONS) (CHF MILLIONS) (CHF MILLIONS) (CHF MILLIONS)
SALES TO THIRD PARTIES
Pharmaceuticals..................... 17,611 15,275 15,595 14,501
Generics............................ 1,938 1,823 1,823 1,529
Consumer Health--ongoing............ 6,395 5,570 5,250 4,752
Divested Consumer Health
activities........................ -- 182 182 1,036
CIBA Vision......................... 2,085 1,632 1,632 1,505
Animal Health....................... 1,083 927 927 901
SALES FROM CONTINUING ACTIVITIES.... 29,112 25,409 25,409 24,224
Sales from discontinuing
Agribusiness activities(3)........ 6,693 7,056 7,056 7,478
GROUP SALES......................... 35,805 32,465 32,465 31,702
Cost of goods sold.................. (10,242) (9,822) (9,822) (10,052)
Marketing and distribution.......... (10,945) (9,561) (9,561) (8,790)
Research and development............ (4,657) (4,246) (4,246) (3,906)
Administration and general
overheads......................... (2,078) (1,493) (1,493) (2,034)
OPERATING INCOME.................... 7,883 7,343 7,343 6,920
OPERATING INCOME BY SECTORS
Pharmaceuticals..................... 5,403 4,676 4,830 4,502
Generics............................ 227 347 347 278
CIBA Vision......................... 158 250 250 225
Consumer Health--ongoing............ 824 807 653 647
Divested Consumer Health
activities........................ -- 375 375 80
Animal Health....................... 179 216 216 211
Corporate and other expenses........ (64) 25 25 (91)
OPERATING INCOME FROM CONTINUING
ACTIVITIES........................ 6,727 6,696 6,696 5,852
Operating income from discontinuing
Agribusiness activities(2)(3)..... 1,156 647 647 1,068
GROUP OPERATING INCOME.............. 7,883 7,343 7,343 6,920
Income from associated companies.... 98 383 383 239
Financial income, net............... 1,091 793 793 759
INCOME BEFORE TAXES AND MINORITY
INTERESTS......................... 9,072 8,519 8,519 7,918
Taxes............................... (1,820) (1,833) (1,833) (1,882)
INCOME BEFORE MINORITY INTERESTS.... 7,252 6,686 6,686 6,036
Minority interests.................. (42) (27) (27) (26)
NET INCOME.......................... 7,210 6,659 6,659 6,010
- -------------
(1) Restated to reflect the transfer as of January 1, 2000 of certain products
from the Pharmaceuticals sector to the Consumer Health sector. In 1999 these
products generated CHF 320 million and CHF 154 million of sales and
operating income, respectively. CHF 90 million of Corporate and other
expenses have also been allocated to the discontinuing Agribusiness
activities.
(2) Restated to reflect CHF 90 million and CHF 30 million of Corporate and other
expenses allocated to the discontinuing Agribusiness activities in 1999 and
1998, respectively.
(3) Agribusiness: Crop Protection and Seeds businesses.
46
2000 COMPARED TO 1999
OVERVIEW
THE FOLLOWING COMPARE THE RESULTS OF THE YEAR ENDED DECEMBER 31, 2000 TO
THOSE OF THE YEAR ENDED DECEMBER 31, 1999, WITH 1999 INFORMATION RESTATED TO
REFLECT THE TRANSFER AS OF JANUARY 1, 2000 OF CERTAIN PRODUCTS FROM THE
PHARMACEUTICALS SECTOR TO THE CONSUMER HEALTH SECTOR. SEE FOOTNOTE 1 ABOVE.
In Swiss francs, our sales in 2000 increased by 10% over 1999 to CHF
35.8 billion, operating income by 7% to CHF 7.9 billion, net income by 8% to CHF
7.2 billion, and free cash flow (excluding acquisitions of subsidiaries and
product rights) by 28% in Swiss francs to CHF 4.5 billion.
The 2000 figures include the discontinuing Novartis Agribusiness sector only
up to November 6, 2000, the date it was spun-off.
Results of operations from ongoing activities not only exclude the Novartis
Agribusiness sector but also, in 1999, the divested Consumer Health business.
In Swiss francs, our sales from ongoing activities in 2000 grew by 15% to
CHF 29.1 billion, and operating income grew by 6% to CHF 6.7 billion.
The operating margin from ongoing activities in 2000 was 23.1% of sales, a
decrease of 2 percentage points compared with 1999 (25.1%). Cost of goods sold
and research and development expenses increased at a lower rate than sales.
Marketing and distribution expenses increased sharply (23%). Overall, marketing
and distribution expenses reached 33% of sales (1999: 31% of sales). Research
and development expenses were maintained at 14% of sales.
Administration and general overheads in 2000 increased by CHF 384 million to
CHF 1.5 billion in 2000. The increase was principally due to a number of
exceptional or one-off items such as product withdrawal costs in Novartis
Consumer Health of CHF 84 million, integration costs for the acquisition of
Wesley Jessen of CHF 41 million, increases in provisions for legal and product
liabilities and Agribusiness related spin-off costs. Furthermore, 1999 benefited
from CHF 76 million of exceptional insurance recoveries.
Margins were retained at last year's level at Novartis Pharmaceuticals (31%)
but declined in all other sectors. At Novartis Generics and Novartis Animal
Health, declines were due to competitive pressures in the market and an increase
in investments in research and development. At CIBA Vision and at Novartis
Consumer Health, marketing and distribution was increased at the expense of
operating margins to support the launch of new products.
SALES
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999(1) CHANGE
-------------- -------------- --------
(CHF MILLIONS) (CHF MILLIONS) (%)
SALES
Pharmaceuticals..................................... 17,611 15,275 15
Generics............................................ 1,938 1,823 6
Consumer Health (excluding divested activities)..... 6,395 5,570 15
CIBA Vision......................................... 2,085 1,632 28
Animal Health....................................... 1,083 927 17
SALES FROM ONGOING ACTIVITIES....................... 29,112 25,227 15
Sales from discontinuing Agribusiness
activities(2)..................................... 6,693 7,056
Sales from divested Consumer Health activities...... -- 182 --
GROUP SALES......................................... 35,805 32,465 10
- -------------
(1) Restated to reflect the transfer as of January 1, 2000 of certain products
from the Pharmaceuticals sector to the Consumer Health sector. In 1999 these
products generated CHF 320 million of sales.
(2) Agribusiness: Crop Protection and Seeds businesses.
47
SALES FROM ONGOING ACTIVITIES
Sales from ongoing activities increased by 15% (8% in local currencies) to
CHF 29.1 billion in 2000 from CHF 25.2 billion in 1999. 44% of sales was
generated in the NAFTA region (42% in the U.S.), 32% in Europe and 24% in the
rest of the world. Diovan-Registered Trademark- was the most important
contributor to increased sales in 2000 with sales of CHF 1,229 million, an
increase of CHF 489 million over the year. Strongest sector sales growth was
recorded by CIBA Vision, as a result of the launch of Visudyne-TM- (age-related
macular degeneration) and the consolidation of Wesley Jessen for three months.
Overall, growth from ongoing activities was driven by a volume increase of 6%.
There was less than a 2% benefit from price increases and acquisition effects.
The sales performance was supported by a 7% favorable currency effect as the
Swiss franc depreciated against the U.S. dollar by an average of 12% and against
the yen by 17%.
PHARMACEUTICALS. Sales increased by 15% in Swiss francs or by 7% in local
currencies to CHF 17,611 million in 2000 from CHF 15,275 million in 1999. Growth
was driven by a good performance in Europe and by an improved performance in the
U.S. Increased focus on marketing and distribution to support the five key
growth drivers Diovan-Registered Trademark- (hypertension),
Lotrel-Registered Trademark- (hypertension), Lamisil-Registered Trademark-
(fungal infections), Miacalcic-Registered Trademark- (osteoporosis) and
Exelon-Registered Trademark- (Alzheimer's disease) resulted in superior growth
rates in local currencies and in market share gains in their respective market
segments. Sandimmun-Registered Trademark-/Neoral-Registered Trademark-
(transplantation) achieved more than CHF 2 billion of sales for the second year
running. Sales in local currencies terms declined by 5%, as the first generic
cyclosporin capsules were launched in the U.S. market in May. Sales of this
product are expected to decline in the coming years, mainly driven by generic
erosion in the U.S. Voltaren-Registered Trademark- (antirheumatic) sales
continued to come under pressure (-12% in local currencies) from generic
products in the U.S. and from the launch of a new class of anti-inflammatory
drugs (Cox-2 inhibitors). Aredia-Registered Trademark- (bone metastasis)
continued with a strong performance as its sales exceeded CHF 1.1 billion. The
follow-up product Zometa-Registered Trademark- has been launched in Canada and
in March 2001 received approval in the EU. Final regulatory approval is pending
in the U.S. and in Europe. Diovan-Registered Trademark- (hypertension) achieved
sales of over CHF 1.2 billion and a growth rate of 55% in local currencies. It
is the only product in its class to have demonstrated a positive effect in
congestive heart failure. Cibacen-Registered Trademark- (hypertension) posted
29% growth, driven in particular by the performance of
Lotrel-Registered Trademark- (combination of Cibacen-Registered Trademark- with
a calcium channel blocker). A new direct-to-consumer (DTC) campaign in the U.S.
boosted sales of Lamisil-Registered Trademark- (fungal infections), for which
the share in the onychomycosis segment of the overall market in the U.S. has
been increased by 5.1% to 69.5%. In 2000, Exelon-Registered Trademark-
(Alzheimer's disease) as well as Trileptal-Registered Trademark- (epilepsy) were
launched in the U.S. contributing to the overall sector sales growth.
TOP 20 PHARMACEUTICAL PRODUCTS
CHANGE IN LOCAL
BRANDS THERAPEUTIC AREA SALES 2000 CURRENCIES
- ------ ---------------- ------------------ ------------------
(CHF MILLIONS) (%)
Sandimmun-Registered Trademark-/ Transplantation, rheumatoid 2,052 (5)
Neoral-Registered Trademark- arthritis, psoriasis
Voltaren-Registered Trademark- Antirheumatic 1,355 (12)
Lamisil-Registered Trademark- Fungal infections 1,278 12
Cibacen-Registered Trademark- 1,260 29
/Lotensin-Registered Trademark- Hypertension
Diovan-Registered Trademark- Hypertension 1,229 55
Aredia-Registered Trademark- Oncology (bone metastasis) 1,121 24
Lescol-Registered Trademark- Cholestrol reduction 724 (4)
Miacalcic-Registered Trademark- Osteoporosis 718 18
Tegretol-Registered Trademark- Epilepsy 705 2
Sandostatin-Registered Trademark- Acromegaly 663 16
Leponex-Registered Trademark- 584 (9)
/Clozaril-Registered Trademark- Schizophrenia
48
CHANGE IN LOCAL
BRANDS THERAPEUTIC AREA SALES 2000 CURRENCIES
- ------ ---------------- ------------------ ------------------
(CHF MILLIONS) (%)
Estraderm-Registered Trademark- Hormone replacement 430 7
Nitroderm-Registered Trademark- Angina pectoris, congestive 357 0
heart failure
Foradil-Registered Trademark- Respiratory 332 25
Zaditen-Registered Trademark- Asthma, allergy 316 (7)
Sandoglobulin-Registered Trademark- Immunodeficiency syndromes 280 (7)
Ritalin-Registered Trademark- Attention 241 (5)
deficit/hyperactivity disorder
Parlodel-Registered Trademark- Parkinson's disease 227 (12)
Exelon-Registered Trademark- Alzheimer's disease 202 196
Desferal-Registered Trademark- Oncology/hematology 162 (7)
GENERICS. Sales increased by 6% in Swiss francs or by 4% in local
currencies to CHF 1,938 million from CHF 1,823 million in 1999.
The continuing rise in healthcare expenditures in most countries created a
favorable market environment for the increased use of generic pharmaceuticals
but also led in some countries to strong price competition within the generics
industry.
In the U.S., Geneva Pharmaceuticals, Inc. achieved strong volume growth and
gained market share, but suffered severely from strong price erosion and
wholesaler rebates.
Our Generics Pharmaceuticals Business (for finished pharmaceutical products)
achieved sales growth of 8% due to many product launches and the global
introduction of the new generic version of the combination of amoxicillin and
clavulanic acid.
Our Industrial Business, (active pharmaceutical ingredients and biotech
substances), experienced continued low prices for bulk antibiotics. Sales growth
was achieved by increased volumes and a shift to higher value products.
CONSUMER HEALTH. Sales increased by 15% in Swiss francs or 7% in local
currencies, to CHF 6,395 million in 2000 from CHF 5,570 million in 1999. Gerber
sales continued to grow in the U.S. where market share reached 74% and expansion
in Latin America continued. OTC sales grew in particular in the U.S. with
Lamisil-Registered Trademark- Cream (athlete's foot) and in Europe with
Voltaren-Registered Trademark- (anti-inflammatory). Medical Nutrition sales
expanded in all segments: in tube feeding products, healthcare food services,
clinical supplements and medical devices, with marked expansion in Europe.
CIBA VISION. Sales increased by 28% in Swiss francs, or 18% in local
currencies, to CHF 2,085 million in 2000, (including Wesley Jessen fourth
quarter sales of CHF 106 million), from CHF 1,632 million in 1999. Apart from
the impact of the Wesley Jessen acquisition, sales were driven by the strong
performance in ophthalmic drugs owing to the launches of Visudyne-TM-
(age-related macular degeneration) and Rescula-TM- (glaucoma). Visudyne-TM-
achieved worldwide sales of CHF 169 million, only 8 months after its first
introduction to the U.S. market. Strong sales growth was also generated with the
lens business, particularly with the new generation Focus-Registered Trademark-
contact lenses, which includes Focus-Registered Trademark-
DAILIES-Registered Trademark-, the daily disposable lenses. Sales of lens care
products continued to suffer in an overall declining market.
ANIMAL HEALTH. Sales increased by 17% in Swiss francs, or 9% in local
currencies, to CHF 1,083 million in 2000 from CHF 927 million in 1999. In the
companion animal business, the flea product Program-Registered Trademark- was
under significant competitive pressure, while Interceptor-Registered Trademark-
against heartworms and Fortekor-Registered Trademark- against heart failure in
dogs achieved excellent growth.
49
The farm animal business grew overall, driven by the anti-infective
Tiamulin-Registered Trademark-, which has become one of the top three Novartis
Animal Health sector brands.
DISCONTINUING AGRIBUSINESS SECTOR AND DIVESTED CONSUMER HEALTH
ACTIVITIES: Agribusiness is only included in our Group figures up to its
spin-off on November 6, 2000. In 1999, certain divested Consumer Health
activities were included in sales up to their respective divestment dates in the
first half of 1999.
EXPENSES
DISCONTINUING/
DIVESTED ONGOING
ACTIVITIES ACTIVITIES GROUP
-------------- -------------- --------------
(CHF MILLIONS) (CHF MILLIONS) (CHF MILLIONS)
2000
Cost of goods sold........................... (2,926) (7,316) (10,242)
Marketing and distribution................... (1,389) (9,556) (10,945)
Research and development..................... (646) (4,011) (4,657)
Administration and general overheads......... (576) (1,502) (2,078)
1999
Cost of goods sold........................... (3,334) (6,488) (9,822)
Marketing and distribution................... (1,775) (7,786) (9,561)
Research and development(1).................. (731) (3,515) (4,246)
Administration and general overheads(1)...... (376) (1,117) (1,493)
- -------------
(1) Restated to reflect CHF 90 million of Corporate and other expenses allocated
to the discontinuing Agribusiness activities.
2000 1999(1) CHANGE
-------------- -------------- -------------
(CHF MILLIONS) (CHF MILLIONS) (%)
SALES FROM ONGOING ACTIVITIES................ 29,112 25,227 15
Cost of goods sold........................... (7,316) (6,488) (13)
Marketing and distribution................... (9,556) (7,786) (23)
Research and development..................... (4,011) (3,515) (14)
Administration and general overheads......... (1,502) (1,117) (34)
OPERATING INCOME FROM ONGOING ACTIVITIES..... 6,727 6,321 6
- -------------
(1) Restated to allocate CHF 90 million of Corporate and general overheads to
the discontinuing Agribusiness sector.
COST OF GOODS SOLD
Cost of goods sold for ongoing activities decreased as a percentage of sales
from 25.7% in 1999 to 25.1% in 2000. This was mainly due to productivity
increases and the positive currency effect of the stronger U.S. dollar and
Japanese yen against the Swiss franc.
MARKETING AND DISTRIBUTION
Marketing and distribution expenses for ongoing activities as a percentage
of sales increased from 30.9% in 1999 to 32.8% in 2000 as significant
investments were made in field force and promotion activities to support key
products, such as Diovan-Registered Trademark- and Exelon-Registered Trademark-
in Pharmaceuticals and Focus-Registered Trademark-DAILIES-Registered Trademark-
in CIBA Vision. Within marketing and distribution further resources were
allocated from low priority products to high priority products.
50
RESEARCH AND DEVELOPMENT
Research and development expenses for ongoing activities as a percentage of
sales were 13.8% in 2000 compared with 13.9% in 1999. This reflects the
continuing heavy emphasis on development in Pharmaceuticals, where numerous key
projects are in late phase clinical development or have been filed for
registration. Increases in research and development expenses were also recorded
in most other sectors, in order to support the development of new products.
ADMINISTRATION AND GENERAL OVERHEADS
As a percentage of sales from ongoing activities, there was an increase in
administration and general overheads to 5.2% in 2000 from 4.4% in 1999. The
increase was due to a number of exceptional or one-off items such as the Wesley
Jessen related restructuring costs of CHF 41 million, the recall of the Consumer
Health products containing phenylpropanolamine (PPA) of CHF 84 million,
additional Generics litigation expenses and Agribusiness related spin-off costs.
Furthermore, 1999 benefited from non-recurring income of CHF 76 million
resulting from the settlement of environmental litigation with insurance
companies.
OPERATING INCOME
2000 1999(1) CHANGE
--------------- --------------- ------------
(CHF MILLIONS) (CHF MILLIONS) (%)
Pharmaceuticals..................................... 5,403 4,676 16
Generics............................................ 227 347 (35)
Consumer Health (excluding divested activities)..... 824 807 2
CIBA Vision......................................... 158 250 (37)
Animal Health....................................... 179 216 (17)
Corporate and other expenses........................ (64) 25 --
OPERATING INCOME FROM ONGOING ACTIVITIES............ 6,727 6,321 6
Operating income from discontinuing Agribusiness
activities(2)..................................... 1,156 647 79
Gains on Consumer Health divestments and related
operating income.................................. -- 375 --
GROUP OPERATING INCOME.............................. 7,883 7,343 7
- -------------
(1) Restated to reflect the transfer as of January 1, 2000 of certain products
from the Pharmaceuticals sector to the Consumer Health sector. In 1999,
these products generated CHF 154 million of operating income. Furthermore,
CHF 90 million of Corporate and other expenses have also been allocated to
the discontinuing Agribusiness sector.
(2) Agribusiness: Crop Protection and Seeds businesses.
OPERATING INCOME FROM ONGOING ACTIVITIES
The operating margin on ongoing activities was 23.1% of sales, a decrease of
2 percentage points compared with 1999 (25.1%). Margins remained flat in
Pharmaceuticals as a result of increased marketing and distribution expenditures
to support key new products. Strong margin declines were seen in Generics and in
Animal Health owing to competitive pressures in the U.S. market and an increase
in research and development spending. CIBA Vision's margin was affected by
one-time acquisition related charges of CHF 110 million. Furthermore, in both
CIBA Vision and Consumer Health, marketing and distribution was also increased
at the expense of operating margins to support the launch of new products.
PHARMACEUTICALS. Operating income increased 16% to CHF 5,403 million from
CHF 4,676 million in 1999. Our operating margin was maintained at 31% despite
the increase in marketing and distribution expense from 30% to 32% of sales as
field forces and promotion activities were increased in preparation for major
product launches. Research and development expenses on the other hand were
maintained at
51
over 18% of sales. Further improvements were achieved in reducing the cost of
goods sold and administration and general overheads as a percentage of sales.
The impact of a CHF 42 million restructuring charge required primarily in
connection with the sale of the Summit site in the U.S. was substantially
compensated by CHF 30 million released from other restructuring provisions as
settlements could be made at amounts less than initially anticipated.
GENERICS. Generics had an operating income of CHF 227 million, a decrease
of 35% compared with CHF 347 million in the prior year. The operating margin
suffered a decline from 19.0% to 11.7% due to several factors. These included
increased price pressure especially in the U.S.; some U.S. product launches had
to be postponed due to changes in the U.S. regulatory environment; costs related
to legal actions in the U.S. and finally investments in marketing and
distribution as well as in research and development were stepped up. With these
investments in marketing and distribution and research and development, mid-term
competitiveness should be strengthened, especially in the U.S. Research and
development expenses were increased from 7% to 9% of sales.
CONSUMER HEALTH. Operating income on a comparable basis increased by 2%
from CHF 807 million in 1999 to CHF 824 million despite additional marketing and
distribution expenses to support new initiatives. Operating margins, however,
fell from 14.5% to 12.9%. Results were also negatively affected by a one-time
expense of CHF 84 million relating to the voluntary withdrawal of products
containing phenylpropanolamine (PPA) in response to FDA recommendations.
Research and development expense remained at 3% of sales, while general and
administration costs declined slightly over the year when compared to sales. The
cost of goods sold remained stable as a percentage of sales.
CIBA VISION. Operating income declined from CHF 250 million in 1999 to
CHF 158 million (-37%) principally due to the incurrence of one-time costs for
the integration of Wesley Jessen of CHF 110 million (inventory adjustments of
CHF 69 million and restructuring charges of CHF 41 million) and one-time costs
related to the transfer of the Ophthalmics business to the Pharmaceuticals
sector from January 1, 2001. Additionally, productivity improvements were more
than offset by increased marketing and distribution expenses in support of
Visudyne-TM- (age-related macular degeneration) and Rescula-TM- (glaucoma),
primarily in the U.S. and in Europe. Research and development expenses increased
by 4% representing 7.2% of sales. As a result of these factors, the operating
margin dropped from 15.3% in 1999 to 7.6% in 2000.
ANIMAL HEALTH. Operating income fell by 17% from CHF 216 million in 1999 to
CHF 179 million and the operating margin declined from 23.3% in 1999 to 16.5% in
2000. Although the sector showed good sales growth, 2000 operating income
suffered from major changes in the product mix and one-time expenses due to the
Vericore acquisition; the full operational separation in the wake of the
Agribusiness sector spin-off; the implementation of a new U.S. distribution
strategy and an increase in research and development expenditure to 8.1% of
sales.
CORPORATE AND OTHER EXPENSES. Corporate and other expenses, which include
the costs of corporate and country management, were partially offset by employee
benefit, share and share option plan charges levied on the operating companies.
Corporate and other expenses were CHF 64 million in 2000 compared with a gain in
1999 of CHF 25 million. Also included in 2000 are one-time costs such as
expenses incurred as a result of the Agribusiness spin-off, whereas 1999
included the positive impact of environmental litigation settlements of
CHF 76 million and releases from merger-related restructuring provisions due to
settlements at less than initially anticipated amounts of CHF 121 million.
OPERATING INCOME FROM DISCONTINUING AGRIBUSINESS ACTIVITIES. Agribusiness
is only included for the period up to its spin-off on November 6, 2000. During
2000, Agribusiness experienced a sharp recovery in performance so that the
operating income generated in the period consolidated in 2000 amounted to
CHF 1,156 million compared with only CHF 647 million for the whole of 1999.
Improved performance was
52
due to generally more favorable market conditions and the effects of cost
control and restructuring measures.
NET INCOME
2000 1999 CHANGE
---------------- ---------------- ------------
(CHF MILLIONS) (CHF MILLIONS) (%)
GROUP OPERATING INCOME.............................. 7,883 7,343 7
Income from associated companies.................... 98 383 (74)
Financial income, net............................... 1,091 793 38
INCOME BEFORE TAXES AND MINORITY INTERESTS.......... 9,072 8,519 6
Taxes............................................... (1,820) (1,833) 1
INCOME BEFORE MINORITY INTERESTS.................... 7,252 6,686 8
Minority interests.................................. (42) (27) 56
NET INCOME.......................................... 7,210 6,659 8
INCOME FROM ASSOCIATED COMPANIES
Income from associated companies is mainly due to the investment in Chiron.
In 1999 income from this investment was boosted by an exceptional gain of
CHF 208 million as a result of Chiron divesting its diagnostic businesses.
FINANCIAL INCOME, NET
Total Group financial income, increased from CHF 793 million to CHF
1,091 million. This was mainly the result of higher investment income, in
particular gains on the sale of U.S. dollar denominated bonds and successful
currency management.
TAXES
Despite increased profits, the tax charge of CHF 1,820 million was almost
the same as in 1999. Taxes as a percentage of income before tax were reduced to
20.1% compared with 21.5% in 1999. This was a result of higher financial income
which is taxed at lower then average Group rates and due to a change of the
operating income mix.
NET INCOME
Total Group net income (including divested and discontinuing activities) as
a percentage of total sales reduced slightly from 20.5% in 1999 to 20.1% in
2000. This decrease was due to margin declines in some of the businesses and
one-time gains in 1999 such as a gain of CHF 208 million arising from the
divestment of Chiron's diagnostics business and the CHF 352 million one-time
gain from the divestiture of the non-core Consumer Health activities.
Return on average equity rose slightly from 19.4% in 1999 to 19.5% in 2000,
owing to the increase in net income and slightly lower average equity.
1999 COMPARED TO 1998
OVERVIEW ON RESULTS
THE FOLLOWING COMPARE THE RESULTS OF THE YEAR ENDED DECEMBER 31, 1999 TO
THOSE OF THE YEAR ENDED DECEMBER 31, 1998, BUT DO NOT REFLECT THE TRANSFER OF
CERTAIN PRODUCTS FROM THE PHARMACEUTICAL SECTOR TO THE CONSUMER HEALTH SECTOR
WHICH OCCURRED WITH EFFECT FROM JANUARY 1, 2000.
53
In 1999, Group sales increased from 1998 by 2% in Swiss francs to
CHF 32,465 million, operating income by 6% in Swiss francs to
CHF 7,343 million, net income by 11% in Swiss francs to CHF 6,659 million and
free cash flow by 34% in Swiss francs to CHF 3,525 million. Ongoing activities
(continuing activities less the divested Consumer Health businesses) grew at 9%
in Swiss francs in both sales and operating income.
The operating margin on ongoing activities was maintained in 1999 at 24.7%
of sales, the same level as in 1998. Productivity gains were achieved in
particular in administration and general overheads (where expenses were reduced
by 7%), and in manufacturing (cost of goods sold growth was lower than sales
growth). These gains were reinvested in marketing and distribution, which
overall increased by 13%, and in research and development, which increased by
10%. Most of the marketing and distribution and research and development
investments went into Pharmaceuticals, in order to support products like
Neoral-Registered Trademark-, Diovan-Registered Trademark- and
Lamisil-Registered Trademark-, as well as to prepare the launch of new products
such as Exelon-Registered Trademark-, Comtan-Registered Trademark-,
Trileptal-Registered Trademark- and Starlix-Registered Trademark-.
SALES
YEAR ENDED DECEMBER 31
--------------------------------------------------
1999 1998 CHANGE
---------------- ---------------- ------------
(CHF MILLIONS) (CHF MILLIONS) (%)
SALES
Pharmaceuticals..................................... 15,595 14,501 8
Generics............................................ 1,823 1,529 19
Consumer Health (excluding divested activities)..... 5,250 4,752 10
CIBA Vision......................................... 1,632 1,505 8
Animal Health....................................... 927 901 3
SALES FROM ONGOING ACTIVITIES....................... 25,227 23,188 9
Sales from discontinuing Agribusiness
activities(1)..................................... 7,056 7,478 (6)
Sales from divested Consumer Health activities...... 182 1,036 (82)
GROUP SALES......................................... 32,465 31,702 2
- -------------
(1) Agribusiness: Crop Protection and Seeds businesses
SALES FROM ONGOING ACTIVITIES
Sales from ongoing activities increased by 9% in Swiss francs, or 6% in
local currencies, to CHF 25,227 million in 1999 from CHF 23,188 million in 1998.
In 1999, 37% of sales were generated in the U.S. and 36% in Europe. Volumes rose
by 5%, driven in particular by Generics and Consumer Health. Higher prices in
Pharmaceuticals compensated for price decreases in Generics and CIBA Vision, so
there was no overall price increase. The sales performance was affected by a
positive currency impact of 3%, mainly due to the depreciation of the Swiss
franc against the Japanese yen (21%) and the U.S. dollar (3%). No major
acquisitions were made in 1999 that significantly affected the sales performance
of the Group.
PHARMACEUTICALS. Sales increased by 8% in Swiss francs, or 4% when
expressed in local currencies, to CHF 15,595 million in 1999 from
CHF 14,501 million in 1998. This increase was primarily due to sales growth in
Japan and Europe, which offset lower sales in Latin America, especially in
Brazil. Sales of the top ten products grew by 12% as a result of the continued
shift of marketing resources towards key products.
Sandimmun-Registered Trademark-/Neoral-Registered Trademark-, Novartis
Pharmaceuticals' largest selling brand, had increased sales of 5% in local
currencies to over CHF 2 billion Voltaren-Registered Trademark- came under
increased pressure from generic products and new COX-2 competitor products and
lost therefore 13% in sales in local currencies. Approximately 1% of sales were
transferred from the prescription business to the OTC business due to the switch
of Lamisil-Registered Trademark- Cream to OTC status in the U.S. and
Voltaren-Registered Trademark- Emulgel-Registered Trademark- in Germany. Despite
the
54
switch of Lamisil-Registered Trademark- Cream to OTC status,
Lamisil-Registered Trademark- sales increased 8% in local currencies. The growth
in Lamisil-Registered Trademark- sales was driven by the tablet form, market
share gains against Johnson & Johnson's Sporanox and the favorable uptake in
Japan. Aredia-Registered Trademark- booked a 44% sales increase in local
currencies in 1999. While sales of the Cibacen-Registered Trademark- group only
increased slightly, Diovan-Registered Trademark- sales grew by 78% to reach
CHF 740 million in the highly competitive hypertension market. Marketing and
distribution resources resulted in market share gains by
Diovan-Registered Trademark- in all major countries. By in-licensing the HRT
patches Menorest-Registered Trademark- and Estalis-Registered Trademark- from
Aventis, we complemented our product portfolio in the HRT market, where
competitive pressure from combination patches had a negative impact on
Estraderm-Registered Trademark- sales in 1999. Important contributors to
incremental sales were also Lescol-Registered Trademark- ,
Tegretol-Registered Trademark-, Miacalcic-Registered Trademark-,
Sandostatin-Registered Trademark-, Foradil-Registered Trademark- and
Exelon-Registered Trademark-. Sales of the remaining products, excluding the top
20 pharmaceutical products, decreased from 22.7% of total sales
(CHF 3,288 million) to 21.0% of total sales (CHF 3,272 million). In the effort
to focus more on key products, we will eliminate about one hundred brands which
account for less than 1% of our sales.
TOP 20 PHARMACEUTICAL PRODUCTS
CHANGE IN LOCAL
BRANDS THERAPEUTIC AREA SALES 1999 CURRENCIES
- ------ ---------------- ------------------ ------------------
(CHF MILLIONS) (%)
Sandimmun-Registered Trademark-/ Transplantation, rheumatoid 2,009 5
Neoral-Registered Trademark- arthritis, psoriasis
Voltaren-Registered Trademark- Antirheumatic 1,420 (13)
Lamisil-Registered Trademark- Fungal infections 1,051 8
Cibacen-Registered Trademark-/ Hypertension 882 2
Lotensin-Registered Trademark-
Aredia-Registered Trademark- Oncology (bone metastasis) 835 44
Diovan-Registered Trademark- Hypertension 740 78
Lescol-Registered Trademark- Cholestrol reduction 689 7
Tegretol-Registered Trademark- Epilepsy 645 4
Leponex-Registered Trademark-/ Schizophrenia 594 (1)
Clozaril-Registered Trademark-
Miacalcic-Registered Trademark- Osteoporosis 563 19
Sandostatin-Registered Trademark- Acromegaly 541 18
Estraderm-Registered Trademark- Hormone replacement 380 (13)
Nitroderm-Registered Trademark- Angina pectoris, congestive 332 (8)
heart failure
Zaditen-Registered Trademark- Asthma, allergy 294 (7)
Sandoglobulin-Registered Trademark- Immunodeficiency syndromes 285 (3)
Foradil-Registered Trademark- Respiratory 270 21
Parlodel-Registered Trademark- Parkinson's disease 233 (9)
Ritalin-Registered Trademark- Attention 231 (1)
deficit/hyperactivity
disorder
Desferal-Registered Trademark- Oncology/hematology 167 18
Anafranil-Registered Trademark- Depression 162 (5)
GENERICS. Sales increased by 19% in Swiss francs, or 18% in local
currencies, to CHF 1,823 million in 1999 from CHF 1,529 million in 1998. In the
Generics Pharmaceuticals Business, sales were driven by new product launches, in
particular by Terazosin (benign prostate hypertrophy) in the U.S., compensating
for the price pressure on established products. In Industrial Business, the
strongly performing cephalosporin-antibiotics business offset price erosion in
the erythromycin and penicillin markets.
CONSUMER HEALTH (EXCLUDING DIVESTED ACTIVITIES). Sales increased by 10% in
Swiss francs, or 8% in local currencies, to CHF 5,250 million in 1999 from
CHF 4,752 million in 1998. The sales development was
55
driven by the higher performance in Medical Nutrition, the OTC business and
Health and Functional Food. Medical Nutrition sales expanded in all segments, in
tube feeding products, healthcare food services, clinical supplements and
medical devices, with marked sales expansion in Latin America and Europe. The
OTC sales grew in particular in the U.S. due to higher sales of cough and cold
products NeoCitran-Registered Trademark- and Triaminic-Registered Trademark-,
and due to the sales recovery of Otrivin-Registered Trademark-. The growth was
also attributable to the transfer of Lamisil-Registered Trademark- Cream
(athlete's foot) from prescription to OTC status. Growth in Health and
Functional Food was mainly due to further market share gains of Gerber in the
U.S. and Latin America.
CIBA VISION. Sales increased by 8% in Swiss francs, or 4% in local
currencies, to CHF 1,632 million in 1999 from CHF 1,505 million in 1998,
primarily due to sales growth in Japan. Ophthalmic pharmaceuticals recorded
sales above sector development with Arteoptic-Registered Trademark- (glaucoma)
and Zaditen-Registered Trademark-/ Zaditor-TM- (anti-allergic eye drops) more
than compensating generic erosion of Voltaren-Registered Trademark- Ophthalmic.
While sales of the lens care products suffered from strong competition and a
flat market, sales of the contact lenses were driven by the new generation of
Focus-Registered Trademark- contact lens, in particular
Focus-Registered Trademark-DAILIES-Registered Trademark- (daily disposable
lenses). Our Ophthalmic Pharmaceuticals business was transferred to Novartis
Pharmaceuticals effective January 1, 2001.
ANIMAL HEALTH. Sales increased by 3% in Swiss francs to CHF 927 million,
and remained constant when measured in local currencies. Growth was recorded in
the U.S. and in the Asia Pacific region, whereas sales volume decreased in
Europe and Latin America (in particular in Brazil). In the companion animal
business, higher sales from Sentinel-Registered Trademark- (combined flea,
intestinal and heartworm treatment for pets) and
Interceptor-Registered Trademark- (intestinal and heartworm treatment for pets)
offset the decline recorded with the anti-flea product
Program-Registered Trademark-. In the farm animal business, weak farm economies
had a negative impact on sales.
SALES FROM DISCONTINUING/DIVESTED ACTIVITIES
DISCONTINUED AGRIBUSINESS ACTIVITIES. Sales decreased by 6% in Swiss
francs, or 7% when measured in local currencies, to CHF 7,056 million in 1999
from CHF 7,478 million in 1998. The decline was primarily caused by difficult
market conditions, particularly weak farm economies, price pressure, the
introduction of a new class of fungicides by competitors (strobilurins), acreage
reductions and the increased practice of using farm-saved soybean seed. Sales
declined in the U.S. as well as in Europe, while a positive trend was seen in
the Asia Pacific region. The economic crises in Brazil, Russia and Ukraine
continued, resulting in a decrease in sales to these regions. In Crop
Protection, herbicides were negatively affected by the unfavorable market
environment, while fungicides met with strong competition from the strobilurins.
Sales of insecticides remained stable while increased turf & ornamentals sales
were realized. In Seeds, corn was affected by price pressure and acreage
reductions, and soybeans by increased use of farm-saved soybean seed. Sales
expanded for sugar beet, vegetables, flower seed, winter oilseed, rape and
sunflowers.
DIVESTED CONSUMER HEALTH ACTIVITIES. With the sale of OLW, Eden and Wasa,
we completed the divestment program begun in August 1998. Sales from all the
divested activities (including Redline, Roland, OLW, Wasa, Eden and the Italian
sugar-free brands) amounted to CHF 1,036 million in 1998, whereas sales from
OLW, Eden and Wasa amounted to CHF 182 million in 1999. Redline, Roland and the
Italian sugar-free brands were divested in 1998.
56
EXPENSES
DISCONTINUING/ ONGOING
DIVESTED ACTIVITIES ACTIVITIES GROUP
------------------- ---------------- ---------
(CHF MILLIONS)
1999
Cost of goods sold............................... (3,334) (6,488) (9,822)
Marketing and distribution....................... (1,775) (7,786) (9,561)
Research and development(1)...................... (731) (3,515) (4,246)
Administration and general overheads(1).......... (376) (1,117) (1,493)
1998
Cost of goods sold............................... (3,960) (6,092) (10,052)
Marketing and distribution....................... (1,909) (6,881) (8,790)
Research and development(1)...................... (677) (3,229) (3,906)
Administration and general overheads(1).......... (820) (1,214) (2,034)
1999 1998 CHANGE
---------------- ---------------- ---------
(CHF MILLIONS) (CHF MILLIONS) (%)
SALES FROM ONGOING ACTIVITIES.................... 25,227 23,188 9
Cost of goods sold............................... (6,488) (6,092) (7)
Marketing and distribution....................... (7,786) (6,881) (13)
Research and development(1)...................... (3,515) (3,229) (9)
Administration and general overheads(1).......... (1,117) (1,214) 8
OPERATING INCOME FROM ONGOING ACTIVITIES......... 6,321 5,772 10
- -------------
(1) Restated to allocate CHF 90 million and CHF 30 million in 1999 and 1998,
respectively, of Corporate and general overheads to the Agribusiness sector.
COST OF GOODS SOLD
Cost of goods sold on ongoing activities as a percentage of sales decreased
from 26.3% in 1998 to 25.7% in 1999. This was mainly driven by merger related
cost savings. In addition, with the strengthening of the U.S. dollar and the
Japanese yen, the cost exposure in Swiss francs had a positive impact on the
gross margin.
Cost of goods sold related to the discontinuing/divested activities reduced
by CHF 626 million over the year due to the reduction in sales in the
discontinuing Agribusiness sector with the balance coming from the reduced cost
of goods sold due to the divestment of the non-core Consumer Health brands.
MARKETING AND DISTRIBUTION
Marketing and distribution expenses from ongoing activities as a percentage
of sales went up from 29.7% in 1998 to 30.9% in 1999 with particularly high
increases in Pharmaceuticals and CIBA Vision to support key products, such as
Diovan-Registered Trademark- or Focus-Registered Trademark-
DAILIES-Registered Trademark-. Within marketing and distribution further
resources were allocated from low priority to high priority products.
Marketing and distribution costs of the discontinuing/divested activities
fell by CHF 134 million. CHF 37 million relates to a lower expense in the
discontinuing Agribusiness sector, the balance of CHF 97 million coming from the
impact of the divested Consumer Health brands.
57
RESEARCH AND DEVELOPMENT
Research and development expenses from ongoing activities in percent of
sales remained at 14.0% in 1999 compared with 14.0% in 1998. This reflected the
continuing heavy emphasis on development in Pharmaceuticals, where numerous key
projects were in late phase clinical development or have been filed for
registration. Significant increases in research and development were also
recorded in Consumer Health, in order to support the development of new products
in the functional food business.
All of the research and development expense for the discontinuing/divested
activities related to the discontinuing Agribusiness sector.
ADMINISTRATION AND GENERAL OVERHEADS
As a percentage of sales from ongoing activities, there was a decrease in
administration and general overheads to 4.4% in 1999 from 5.2% in 1998. Tight
cost management enabled the Group to reduce the general and administrative
overheads in particular by Pharmaceuticals, Consumer Health and Animal Health.
Releases from restructuring provisions due to settlements at less than
anticipated amounts were to a great extent offset by the addition of further
restructuring provisions of CHF 70 million in 1999 relating to downsizing
Pharmaceutical production facilities mainly in the U.S. and Canada and
CHF 208 million in 1998 relating to restructuring Consumer Health worldwide and
the Pharmaceuticals sector in the U.S. The net operating income impact on
ongoing activities was a gain of CHF 144 million in 1999 and a charge of
CHF 38 million in 1998. Furthermore, there were certain other exceptional items,
such as the settlement of environmental litigations with insurance companies for
which Novartis received CHF 76 million and CHF 42 million, respectively in 1999
and 1998.
The reduction of CHF 444 million in the administration and general overheads
relating to discontinuing/divested activities arose from a decrease of
CHF 165 million in the discontinuing Agribusiness sector with the balance
relating to the divested Consumer Health activities.
OPERATING INCOME
1999(2) 1998(2) CHANGE
-------------- -------------- --------
(CHF MILLIONS) (CHF MILLIONS) (%)
Pharmaceuticals..................................... 4,830 4,502 7
Generics............................................ 347 278 25
Consumer Health (excluding divested activities)..... 653 647 1
CIBA Vision......................................... 250 225 11
Animal Health....................................... 216 211 2
Corporate and other expenses........................ 25 (91) --
OPERATING INCOME FROM ONGOING ACTIVITIES............ 6,321 5,772 10
Operating income from discontinuing Agribusiness
activities(1)..................................... 647 1,068 (39)
Gains on Consumer Health divestments and related
operating income.................................. 375 80 369
GROUP OPERATING INCOME.............................. 7,343 6,920 6
- -------------
(1) Agribusiness: Crop Protection and Seeds businesses.
(2) Restated to allocate CHF 90 million and CHF 30 million in 1999 and 1998,
respectively of Corporate and general overheads to the discontinuing
Agribusiness sector.
Operating margins from ongoing activities remained virtually constant at
24.7% (1998: 24.8%). Margin improvements were recorded in Generics and CIBA
Vision, compensating for the margin decrease in Consumer Health. The operating
margin for the whole group including the divested or to be discontinued
activities increased from 21.8% in 1998 to 22.6% in 1999. This resulted in a
return on net operating assets of 31.3%.
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OPERATING INCOME FROM ONGOING ACTIVITIES
PHARMACEUTICALS. Pharmaceuticals generated more than three-quarters of the
total operating income from ongoing businesses. Operating margins were
maintained in 1999 at the high prior year level of 31.0%. Cost of goods sold as
a percentage of sales improved due to merger related cost savings and a
depreciation of the Swiss franc against the U.S. dollar and the Japanese yen. In
Novartis Pharmaceuticals, we significantly increased our investments in
marketing and distribution and research and development in order to support our
strategic products in the market and our key projects in development. General
and administration expenses remained constant in absolute terms due to tight
cost control. Releases from merger related provisions due to settlements at less
than initially anticipated amounts were to a great extent offset by the addition
of further restructuring provisions of CHF 70 million in 1999 relating to
downsizing Pharmaceutical production facilities mainly in the U.S. and Canada
and CHF 112 million in 1998 relating to the U.S. The net operating income impact
of these releases was a gain of CHF 23 million in 1999 and a charge of CHF
12 million in 1998.
GENERICS. Operating margins improved from 18.2% in 1998 to 19.0%. The
increase resulted primarily from sales growth in both Generics Pharmaceuticals
Business and Industrial Business. Generics achieved a 25% increase in operating
profit despite an increase in research and development expenses due to expected
loss of patent protection of certain ethical drugs and a 10% price erosion.
Investments in marketing and distribution and cost of goods sold increased at a
lower rate than sales due to better usage of Novartis' distribution network and
cost containment programs.
CONSUMER HEALTH (EXCLUDING DIVESTED ACTIVITIES). Operating margins
decreased by 1.2% to 12.4% as more resources were allocated to research and
development in order to support the development of new products in the
functional food business. Investments in marketing and distribution went up as a
result of numerous important launches, such as Aviva-Registered Trademark-, a
hard claim brand for heart, bone and digestive health,
Oclea-Registered Trademark-, a soft claim brand with natural ingredients and the
Gerber-Registered Trademark- Wellness product line. Cost savings, in particular
in administration and general overheads, were realized as a consequence of the
merger of the OTC and nutrition businesses announced in 1998.
CIBA VISION. Operating margins at 15.3% represented a 0.3% improvement over
the year. The increase in operating income was mainly due to the sales
performance in the contact lens and ophthalmic pharmaceutical businesses. Cost
of goods sold increased at a greater rate than sales as a result of price
pressure. Conversely, research and development expenses were less than in the
previous year, when exceptionally high investments in the development of new
generation contact lenses were made. Marketing and distribution expenses
developed slightly above sales due to launches of the key products
Focus-Registered Trademark- DAILIES-Registered Trademark-,
Focus-Registered Trademark- Night&Day-Registered Trademark- and the U.S. launch
of Zaditor-TM-.
ANIMAL HEALTH. Operating margins at 23.3% remained at almost the previous
year's level of 23.4%. Ongoing structural improvement projects led to lower
general and administration expenses. Higher investments in research and
development were made to broaden the companion animal franchise.
CORPORATE AND OTHER EXPENSES. Corporate and other expenses, which included
the costs of corporate and country management were again reduced significantly
and resulted in a net income of CHF 25 million in 1999 compared to net expenses
of CHF 91 million in 1998. The reduction included the positive impacts of
environmental litigation settlements of CHF 76 million in 1999 and CHF
42 million in 1998 and the benefits of allocation of the net pension
contribution of the Novartis Group which was CHF 213 million in 1999 compared
with CHF 42 million in 1998. The increase in net pension contribution was
related to the increased expected return on plan assets due to an increase in
the plan assets and reduced interest cost. Releases from merger related
restructuring provisions due to settlements at less than initially anticipated
amounts had a positive impact of CHF 121 million in 1999 and CHF 70 million in
1998. In 1999, CHF 90 million of Corporate administrative and general overheads
were allocated to the discontinuing Agribusiness sector as compared to CHF
30 million in 1998.
59
OPERATING INCOME FROM DISCONTINUING/DIVESTED ACTIVITIES
DISCONTINUING AGRIBUSINESS ACTIVITIES. Operating margins declined to 9.2%
from 14.2% in 1998 due to price pressures, reduced volumes and high litigation
expenses for the protection of intellectual property. In addition exceptional
costs of CHF 100 million were recorded for the Project Focus restructuring
program, which was launched in August 1999. Investments in marketing and
distribution as well as research and development remained high, in order to
support and to prepare the launch of key products such as the fungicide
Flint-Registered Trademark- and the insecticide
Actara-Registered Trademark-/Cruiser-Registered Trademark-, and to further build
on new technologies.
DIVESTED CONSUMER HEALTH ACTIVITIES. With the sale of OLW, Eden and Wasa,
the sector completed our divestment program that started in August 1998.
Operating income from all the divested activities up to their date of divestment
(RedLine, Roland, OLW, Eden, Wasa and the Italian sugar-free brands) amounted to
CHF 80 million in 1998, and from OLW, Eden and Wasa up to the date of their
divestments in 1999 amounted to CHF 23 million. Novartis Consumer Health
realized an exceptional gain due to these divestments of CHF 352 million in
1999. In 1998 the divestment gain of CHF 95 million was offset by a similar
amount of one-off restructuring costs (CHF 96 million).
NET INCOME
1999 1998 CHANGE
-------------- -------------- --------
(CHF MILLIONS) (CHF MILLIONS) (%)
GROUP OPERATING INCOME.............................. 7,343 6,920 6
Income from associated companies.................... 383 239 60
Financial income, net............................... 793 759 4
INCOME BEFORE TAXES AND MINORITY INTERESTS.......... 8,519 7,918 8
Taxes............................................... (1,833) (1,882) (3)
INCOME BEFORE MINORITY INTERESTS.................... 6,686 6,036 11
Minority interests.................................. (27) (26) 4
NET INCOME.......................................... 6,659 6,010 11
INCOME FROM ASSOCIATED COMPANIES
Income from associated companies, at CHF 383 million reflected, for the most
part, our 44% stake in Chiron. Income from this stake was boosted by a gain of
CHF 208 million from the divestment of the Chiron diagnostic businesses. In
1998, we booked our portion of the Chiron divestment gain, amounting to CHF
130 million.
FINANCIAL INCOME, NET
Financial income, net reached a new record high of CHF 793 million. Interest
expense was reduced by CHF 191 million due to lower average debt levels
throughout the year. Financial income, net, was also CHF 136 million lower than
in 1998 as gains from options and forward contract positions were reduced by CHF
270 million and was only partially compensated by the increase in interest
income of CHF 203 million due to successful interest rate management in the bond
portfolio, our largest asset category. The return on the portfolio of equities
compared to the market suffered from the fact that the market was mainly driven
by a few high-tech stocks that were underrepresented in our portfolio. At market
values, the return on liquid funds was 8.9%, significantly above the risk
adjusted benchmarks based on comparable investments. This performance was
achieved in spite of a very low value at risk (VAR) profile. A lower risk policy
was adopted due to the high valuation of certain markets and the consequent risk
of a set-back. Net currency loss was CHF 157 million.
TAXES
Despite increased profits, taxes were reduced by 3% and the tax rates were
at a new low of 21.5%, down from 23.8% a year earlier. This improvement was
possible due to a change in mix of the sectors
60
contributing to taxable income from the more highly taxed Agribusiness
activities to Pharmaceuticals, the exceptional Consumer Health divestment gain
and successful tax planning measures.
NET INCOME
Net income as a percentage of total sales amounted to 20.5% up from 19% of
1998. Return on average equity fell from 20.7% in 1998 to 19.4% in 1999 due to
the increase in retained earnings, positive translation movements and the
increase in equity due to the adoption of IAS 19 (revised).
EXCHANGE RATE EXPOSURE AND RISK MANAGEMENT
We transact our business in many currencies other than the Swiss franc. In
2000, 44% of sales were generated in U.S. dollars, 24% in Euro, 6% in Swiss
francs, 8% in Japanese yen and 18% in other currencies. In 1999, 42% of sales
were generated in U.S. dollars 26% in Euro, 6% in Swiss francs, 7% in Japanese
yen and 19% in other currencies. In 1998, 43% of sales were generated in U.S.
dollars, 27% in Euro, 6% in Swiss francs, 6% in Japanese yen and 18% in other
currencies.
In 2000, 33% of our operating costs were generated in U.S. dollars, 23% in
Euro, 26% in Swiss francs, 5% in Japanese yen, and 13% in other currencies. In
1999, 31% of operating costs were generated in U.S. dollars, 23% in Euro, 23% in
Swiss francs, 5% in Japanese yen, and 18% in other currencies. In 1998, 31% of
operating costs were generated in U.S. dollars, 25% in Euro, 23% in Swiss
francs, 4% in Japanese yen and 17% in other currencies.
As a result of our foreign currency exposure, exchange rate fluctuations
have a significant impact in the form of both translation risk and transaction
risk on our income statement. Translation risk is the risk that our consolidated
financial statements for a particular period or as of a certain date may be
affected by changes in the prevailing rates of the various currencies of the
reporting subsidiaries against the Swiss franc. Transaction risk is the risk
that the local currency impact of transactions executed in currencies other than
the local currency may vary according to currency fluctuations.
On average in 2000, the Swiss franc was weaker against the U.S. dollar and
the Japanese yen, but strengthened against the currencies participating in the
Euro. The total positive currency effect on ongoing sales growth was 7% and the
total positive impact on ongoing operating income was 4%.
On average in 1999, the Swiss franc was weaker against the U.S. dollar and
the Japanese yen, yet remained almost at the same level for the major European
currencies. The positive currency effect on sales growth was 3% and the positive
impact on operating income was 2%. See "Item 11. Quantitative and Qualitative
Disclosures About Market Risk" and "Item 18. Financial Statements--Note 1" for
further information.
NEW ACCOUNTING PRONOUNCEMENTS
See Item 18. Financial Statements--Note 32 for a discussion of the effect of
new accounting standards.
INTRODUCTION OF THE EURO
On January 1, 1999, the Euro was introduced in 11 member-states of the EU
participating in the European Monetary Union as a common legal currency
alongside the national currencies ("legacy currency") of each of the
participating countries.
The conversion rates between the Euro and the legacy currencies are fixed.
From January 1, 1999 through January 1, 2002, the participating countries are
also scheduled to maintain their legacy currencies as the legal tender for goods
and services. Beginning January 1, 2002, new Euro-denominated bills and coins
will be issued, and legacy currencies must be withdrawn from circulation no
later than July 1, 2002.
We established task forces in each of the participating countries to plan,
coordinate and implement all measures necessary for the transition to the Euro.
Each task force reports directly to our Group treasurer.
61
We implemented dual currency reporting (legacy currencies and Euro) on
January 1, 2000. We did not experience, and do not expect to experience, any
operational or technological difficulties with regard to the introduction of the
Euro.
We believe that the introduction of the Euro will reduce our cost of bearing
foreign currency exchange risk and will diminish uncertainties relating to
currency fluctuations from export sales within the European Monetary Union. The
foreign currency exposure from transactions in U.S. dollar or Japanese yen or
other currencies outside the European Monetary Union will not be changed by the
introduction of the Euro and will depend on actual exposure at the time of risk
assessment.
5.B LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain information about our cash flow and
net liquidity for each of the periods indicated.
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(CHF MILLIONS)
Cash flow from operating activities......................... 7,612 6,893 5,853
Cash flow from investing activities......................... (216) (3,017) (3,836)
Cash flow from financing activities......................... (4,755) (4,320) (3,213)
Translation effect on cash and cash equivalents............. (119) 74 (31)
CHANGE IN CASH AND CASH EQUIVALENTS......................... 2,522 (370) (1,227)
Increase in short- and long-term marketable securities...... (4,839) 1,755 2,503
Change in short- and long-term financial debts.............. 3,861 466 2,274
Translation effect on marketable securities and financial
debts..................................................... 239 63 42
INCREASE IN NET LIQUIDITY................................... 1,783 1,914 3,592
Net liquidity at beginning of the year...................... 12,678 10,764 7,172
NET LIQUIDITY AT END OF THE YEAR............................ 14,461 12,678 10,764
Our primary source of liquidity is cash generated from operations. Cash flow
from operations increased to CHF 7,612 million in 2000 from CHF 6,893 million in
1999, and CHF 5,853 million in 1998. Of the CHF 719 million increase in 2000,
CHF 196 million is attributable to reduced restructuring provision payments and
CHF 454 million to reductions in funding of working capital. Of the CHF
1 billion increase in 1999, CHF 253 million is attributable to an increase in
net financial receipts, CHF 210 million to reduced restructuring provision
payments, CHF 153 million to a reduction in tax payments, and CHF 79 million to
reductions in the funding of working capital.
Cash outflow from investing activities decreased to CHF 216 million in 2000
from CHF 3,017 million in 1999. The CHF 2,801 million decrease primarily
resulted from the large cash inflow of CHF 4.8 billion from disposing of
marketable securities, mainly bonds initially intended to be held-to-maturity,
compared to increasing the holding in 1999 by CHF 1.8 billion. This increased
cash flow was partly used to finance the CHF 1.4 billion acquisition of
subsidiaries (Wesley Jessen alone CHF 1.3 billion) and the purchase of
intangibles, mainly Famvir-Registered Trademark-/Denavir-Registered Trademark-
for CHF 2.7 billion.
Cash flow used for investing activities decreased to CHF 3,017 million in
1999 from CHF 3,836 million in 1998. This CHF 819 million decrease primarily
resulted from the fact that we invested CHF 748 million less in marketable
securities and CHF 206 million less in tangible fixed assets.
Cash flow used for financing activities increased to CHF 4,755 million in
2000 from CHF 4,320 million in 1999 due to an increase of over CHF 1 billion in
debt repayments and an increase of CHF 129 million in dividend repayments,
offset by lower treasury share acquisitions. Cash flow used for financing
activities increased to CHF 4,320 million in 1999 from CHF 3,213 million in 1998
due to the cash spent on the acquisition of treasury shares of CHF
1,919 million, compared to proceeds from sales of treasury shares of
62
CHF 722 million in 1998. In 2000, CHF 1,526 million was spent reducing debt
compared to CHF 466 million in 1999 and CHF 2.3 billion in 1998.
Overall net liquidity (cash, cash equivalents and marketable securities less
financial debt) at December 31, 2000 compared to at December 31, 1999 was
increased by CHF 1,783 million to CHF 14,461 million. Our net liquidity at
December 31, 1999 compared to at December 31, 1998 increased by CHF
1,914 million to CHF 12,678 million from CHF 10,764 million at December 31,
1998.
Free cash flow (defined as cash flow from operating activities minus net
investment in tangible fixed, intangible and financial assets minus dividends
paid to third parties) went down by CHF 1.7 billion to CHF 1.9 billion in 2000,
due to the CHF 2.7 billion spent on acquiring
Famvir-Registered Trademark-/Denavir-Registered Trademark-. Excluding this, free
cash flow would have increased by 28% to CHF 4.5 billion. Free cash flow went up
by CHF 974 million to CHF 3.5 billion in 1999, principally due to the CHF
1.0 billion increase of cash flow from operations, which offset CHF 272 million
in higher dividend payments.
Our gross capital expenditure on tangible fixed assets at average rates of
exchange for the 2000 financial year totaled CHF 1,353 million, compared to CHF
1,371 million in 1999 and CHF 1,577 million in 1998. This level of capital
expenditure reflects the ongoing investment in production and research and
development facilities. We intend to maintain spending at 2000 levels in 2001.
We expect to fund these expenditures with internally generated resources.
During 2000, we entered into a long-term research agreement with Vertex
Pharmaceuticals Inc., to discover, develop and commercialize small molecule
drugs. Under the agreement, we will provide research funding of CHF 328 million
(approximately $200 million) over 6 years. Furthermore licence fees, milestone
payments and reimbursements of CHF 656 million (approximately $400 million) or
more are possible, subject to the outcome of the research according to
predefined criteria.
We entered into other long-term research agreements with various
institutions where we will fund various research projects in the future totaling
CHF 1,612 million in the aggregate at December 31, 2000. (See note 28 to the
consolidated financial statements.) We expect to fund these long-term research
agreements with internally generated resources.
The transfer of CHF 3.3 billion of debt to Syngenta and the use of excess
liquidity to repay financial debts resulted in total financial debts falling by
CHF 3.9 billion over the year. As a result of these factors the year-end
debt/equity ratio improved from 0.27:1 in 1999 to 0.16:1 in 2000.
We have long-term financial debt principally in the form of bonds. At
December 31, 2000, we had CHF 1,110 million in convertible bonds outstanding,
compared with CHF 1,088 million at December 31, 1999. We had CHF 961 million in
non-convertible bonds at December 31, 2000, down from CHF 1,574 million at
December 31, 1999. For details on the maturity profile of debt, currency and
interest rate structure, see note 10 to the consolidated financial statements.
Our debt continues to be rated by Standard & Poors and Moodys respectively as
AAA and Aaa for long-term maturities and A1+ and P1 for short-term debt. We
consider our working capital to be sufficient for our present requirements.
We use marketable securities and derivative financial instruments to manage
the volatility of our exposures to market risk in foreign exchange, interest
rates and market value of liquid investments. Our objective is to reduce, where
appropriate, fluctuations in earnings and cash flows. We sell existing assets or
transactions and future transactions (in the case of anticipatory hedges) we
expect we will have in the future based on past experience. We therefore expect
that any loss in value for those instruments generally would be offset by
increases in the value of those hedged transactions.
We use the Swiss franc as our reporting currency and are therefore exposed
to foreign exchange movements in U.S. dollar, European, Japanese, other Asian
and Latin American currencies. We enter into various contracts, which are
impacted by currency movements. As a result various contracts are entered into
to preserve the value of assets, commitments and anticipated transactions.
Forward contracts and foreign currency option contracts are used to hedge
certain anticipated foreign currency revenues and the
63
net investments in certain foreign subsidiaries. See "Item 11. Quantitative and
Qualitative Disclosures About Market Risk", for additional information.
SHARE REPURCHASE PROGRAM
On August 27, 1999, we announced our intention to repurchase shares in the
open market for an amount of up to CHF 4 billion. The program was completed in
January 2001. The program was wholly financed with our surplus liquidity. The
acquired shares will be kept as treasury stock. During 2000, we increased our
holding of treasury shares by 0.5 million to a total of 7.0 million treasury
shares as of December 31, 2000, which is 10% of the total number of shares
outstanding. A new share repurchase program of CHF 4 billion was announced on
February 15, 2001. Shares acquired under this program will be cancelled.
CONVERTIBLE BONDS
On October 6, 1995, Sandoz Capital BVI Ltd. (now Novartis Capital Ltd.,
"Novartis Capital"), Tortola, British Virgin Islands, an indirectly wholly owned
subsidiary of the Company, issued a 2% Convertible Bond guaranteed by Sandoz AG
due 2002 in the amount of $750 million. Each bond in the principal amount of
$10,000 entitles the holder thereof to receive 9.6 of our shares. The number of
shares deliverable upon conversion is subject to certain adjustments under
certain circumstances. Due to the Syngenta spin-off, the conversion is only for
our shares. Fractions of shares will not be delivered on conversion but cash
payments in Swiss francs based on the then current market price of the shares
will be made in respect thereof. The bonds may be converted up to and including
September 30, 2002. As of December 31, 2000, bonds in the amount of
$717.8 million entitling their holders to a maximum of 689,186 shares were
outstanding.
On October 23, 1995, Novartis Capital issued a 1 1/4% Convertible Bond
guaranteed by Sandoz AG due 2002 in the amount of CHF 750 million. Each bond in
the principal amount of CHF 5,000 is convertible into 5 of our shares and due to
the Agribusiness spin-off, also into 5 shares of Syngenta up to and including
October 9, 2002. In case of a conversion, each bondholder will also receive an
amount of CHF 239.95 per bond in cash. The conversion terms are subject to
certain adjustments under certain circumstances. As of December 31, 2000, bonds
in the amount of CHF 24.5 million entitling their holders to a maximum of 24,500
shares were outstanding.
5.C RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
Research and development spending amounted to CHF 4,657 million, CHF
4,246 million and CHF 3,906 million for the years 2000, 1999 and 1998,
respectively. Our research and development policies are specific to each of our
five business sectors. For a description of our research and development
policies for the last three years, see "Item 4. Information on the Company--4.B
Business Overview."
5.D TREND INFORMATION
We expect to have five new products available in 2001:
- Starlix-Registered Trademark- for Type-II diabetes, is in the process of
being introduced in the United States and has been approved for marketing
in the EU.
- Zometa-Registered Trademark- (hypercalcemia of malignancy) has been filed
in the U.S. and been granted marketing approval in the EU.
- Zelmac-Registered Trademark- (irritable bowel syndrome), and
- Xolair-Registered Trademark- (asthma and allergic rhinitis) are currently
undergoing regulatory review.
- Glivec-TM- (chronic meyloid leukemia) has been filed with the FDA and
designated for priority review for certain indications.
64
On the basis of our current performance and launch program, we will increase
our marketing and sales investments in 2001 for new launches by an extra CHF
1 billion. As a result, a contraction in the Pharmaceuticals margin by
approximately 2% is expected for the near term. Furthermore, on a restated basis
the transfer of the Ophthalmics business unit from CIBA Vision will reduce our
Pharmaceuticals margin by an additional 1% in 2001. The current level of
investment in Pharmaceutical research and development, as a percentage of sales,
will be maintained.
The integration of Wesley Jessen should contribute to significant growth in
CIBA Vision. Recently acquired businesses should also boost Generics, which is
expected to achieve significant growth over the coming year.
Our financial statements have been prepared in accordance with IAS, which
differs in certain significant respects from U.S. GAAP. Details are contained in
note 32 of the consolidated financial statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A DIRECTORS AND SENIOR MANAGEMENT
Our Board of Directors has the duties set forth under the Swiss Code of
Obligations. The Board is ultimately responsible for the policies and management
of the corporation and establishes the strategic, accounting, organizational and
financial policies to be followed by the corporation. The Board further appoints
the executive officers and the authorized signatories of the corporation and
supervises the management of the corporation. Moreover, the Board is entrusted
with preparing shareholders' meetings and carrying out shareholders'
resolutions. The Board may, pursuant to its regulations, delegate the conduct of
the day-to-day business operations to management.
Certain information regarding our directors and senior management is set out
below.
DIRECTORS
DR. DANIEL VASELLA (AGE 47). Chairman of the Board of Directors, Chief
Executive Officer of the Company and Head of the Executive Committee.
Dr. Vasella assumed the position of Chairman in April 1999, having served as
President, Chief Executive Officer and Head of the Executive Committee since the
Merger in December 1996. From 1995 until the Merger, Dr. Vasella was a member of
the Sandoz Group Executive Committee and served as Chief Executive Officer of
Sandoz Pharma Ltd. In that position he was responsible for managing all
pharmaceutical activities of the Sandoz Group worldwide. Prior to his
appointment as Chief Executive Officer of Sandoz Pharma Ltd., Dr. Vasella was
Chief Operating Officer of Sandoz Pharma Ltd. Prior to that, he was Senior Vice
President and Head of Worldwide Development, where he was responsible for the
separation of research and development functions and the establishment of a
matrix organization of international project teams and worldwide line functions.
In 1993, Dr. Vasella was Head of Corporate Marketing of the former Sandoz Group.
Dr. Vasella currently is a member of the Board of Directors of Credit Suisse
Group, the Supervisory Board of Siemens AG in Munich, Germany and the
International Board of Governors of the Perez Center for Peace in Tel Aviv,
Israel. In addition, Dr. Vasella is also a member of several industry
associations, including the International Business Leaders Advisory Council for
the Mayor of Shanghai, a member of the Board of INSEAD (Institute Europeen
d'Administration des Affaires, I.E., the European Institute for Business
Administration), IMD (International Institute of Management Development) and a
member of the Global Leaders for Tomorrow Group of the World Economic Forum in
Davos, Switzerland. Dr. Vasella graduated with a Ph.D. in medicine from the
University of Berne in 1980. He has published scientific papers on
psychosomatics and central nervous system disorders and has lectured at the
Universities of Berne and Fribourg, as well as other medical colleges and civic
groups.
PROF. DR. HELMUT SIHLER (AGE 70). Vice Chairman of our Board and Lead
Director and a member of the Chairman's Committee. He has served in these
positions since the Merger in December 1996. From 1983 until the Merger, he was
a member of the Board of Directors and the Chairman's Committee of
65
CIBA-Geigy AG, and Vice Chairman of the Board since 1993. From 1980 to 1992,
Prof. Sihler was Chairman of the Central Board of Management of Henkel KGaA in
Dusseldorf, Germany, and has served as a member of the Shareholders' Committee
of that company since 1992. Prof. Sihler also is Chairman of the Supervisory
Boards of Deutsche Telekom AG, Bonn, Germany and Dr. Ing. H.c. F. Porsche AG in
Stuttgart, Germany. Prof. Sihler serves as honorary professor for economics in
Munster, Germany. Prof. Sihler studied philology and law in Graz, Austria and
Vermont and graduated with a Ph.D. in philology and in law.
HANS-JORG RUDLOFF (AGE 60). Vice Chairman of our Board of Directors.
Mr. Rudloff has served in this position since the Merger in December 1996. From
1995 to 1996, Mr. Rudloff was Vice Chairman of the Board of Directors of Sandoz
AG. He was elected a Director of Sandoz AG in 1994. Mr. Rudloff has been the
Head of Investment Banking of the Barclays Group since 1998. From 1995 to 1998,
he served as Chairman of Marcuard Cook & Cie and Chairman of MC-BBL. From 1989
to 1994, he was Chairman and Chief Executive Officer of Credit Suisse First
Boston in London, UK, and also served as a member of the Executive Board of
Credit Suisse Holding from 1993 to 1994. Mr. Rudloff also is a member of the
boards of various companies, including Pargesa S.A. in Geneva, Switzerland and
TBG (Thyssen-Bornemisza Group). He also serves on the Advisory Board of the
Landeskreditbank in Baden Wurttemberg. Mr. Rudloff studied economics at the
Universities of Berne and Grenoble and graduated in 1965.
BIRGIT BREUEL (AGE 63). Director. Mrs. Breuel has served as a Director
since the Merger in 1996 and prior to that, she was a Director of CIBA-Geigy AG
since 1994. Since 1995, Mrs. Breuel has been acting as the General Commissioner
and since 1997, she has been a member of the Executive Board for the World
Exposition EXPO 2000 in Hannover, Germany. From 1990 to 1995, Mrs. Breuel was a
member of the Board and from 1991 to 1995, she was President of the
Treuhandanstalt, which was responsible for the privatization of the former East
Germany's economy. From 1986 to 1990, she was Minister of Finance and from 1978
to 1986, Minister of Economy and Transport of the Land Niedersachsen (Lower
Saxony), the second largest state of Germany. Mrs. Breuel also serves as a
member of the Board of Gruner+Jahr AG in Hamburg, Germany and as a member of the
Advisory Board of J.P. Morgan GmbH in Frankfurt, Germany. Mrs. Breuel studied
politics at the Universities of Hamburg, Oxford and Geneva.
PROF. DR. PETER BURCKHARDT (AGE 62). Director. Prof. Burckhardt has held
this position since the Merger in December 1996. He has been Professor of
Internal Medicine and Chairman of the Department of Internal Medicine at the
University of Lausanne since 1982. He has done active research in metabolic bone
disease, calcium metabolism, osteoporosis and clinical nutrition and has
published over 200 articles and 150 abstracts in his fields of research. He also
serves as the Head of Medical Service at the University Hospital of Lausanne
since 1992. Prof. Burckhardt also serves as Chairman of the Board of National
Osteoporosis Societies, trustee of the International Foundation of Osteoporosis
and member of the Committee of Appeal of the Swiss Inter-Cantonal Office for the
Control of Drugs. Until 1995, he was President of the Swiss Society of Internal
Medicine and the Swiss Osteoporosis Association. Prof. Burckhardt graduated with
a Ph.D. in medicine from the University of Basel in 1965.
DR. HANS-ULRICH DOERIG (AGE 61). Director. Dr. Doerig has held this
position since the Merger in December 1996. Since 1998, Dr. Doerig has served as
Vice Chairman of the Executive Board and Chief Risk Officer of Credit Suisse
Group. With the merger of the former Credit Suisse International and the former
CS First Boston in 1997, he became Chief Executive Officer of Credit Suisse
First Boston in Zurich. In 1996, he was appointed President of the General
Management of Credit Suisse in Zurich, following the Credit Suisse Group
restructuring. From 1993 to 1996, Dr. Doerig served as full-time Vice Chairman
of the Board of Credit Suisse, heading the Credit and Finance Committee as well
as the Audit Committee of the Board. Dr. Doerig is also Vice Chairman of the
Board of the University of Zurich. In addition, he is the author of various
publications and lectures at the University of Zurich and the Swiss Banking
School in Zurich. Dr. Doerig studied economics and law at the University of St.
Gallen and graduated with a Ph.D. in economics.
66
WALTER G. FREHNER (AGE 67). Director. Mr. Frehner has served as a Director
since the Merger and prior to that, as Director of CIBA-Geigy AG since 1994.
From 1993 until his retirement in May 1996, Mr. Frehner served as Chairman of
the Board of Directors of Swiss Bank Corporation, which merged with Union Bank
of Switzerland in 1997. From 1987 to 1993, Mr. Frehner was President of the
Executive Board of Swiss Bank Corporation, which he joined in 1958. From 1954 to
1957, he was an apprentice with the Bernese Cantonal Bank in Berne. Mr. Frehner
is also a Director of Schindler Holding AG and Vice Chairman of the insurance
company Baloise Holding AG, in Basel, Switzerland.
WILLIAM W. GEORGE (AGE 58). Director. Mr. George has held this position
since May 1999. He has been Chairman (since 1996) and Chief Executive Officer
(since 1991) of Medtronic, Inc. in Minneapolis, Minnesota, where he also served
as President and Chief Operating Officer from 1989 to 1991. Mr. George served as
corporate Vice President of Honeywell from 1978 to 1989, and prior to that,
President of Litton Microwave Cooking Products. Mr. George is also a member of
the Boards of Directors of Dayton Hudson, Imitation, and Allina Health Systems.
Mr. George received his BIE with high honors from Georgia Tech in 1964 and his
MBA with high distinction from Harvard University in 1966.
ALEXANDRE F. JETZER (AGE 60). Director. Mr. Jetzer has held this position
since the Merger in 1996. From the Merger until 1999, he was a member of the
Executive Committee and Head of International Coordination, Legal & Taxes of
Novartis. From May 1995 to December 1996, he was Vice Chairman and Chief
Executive Officer of Sandoz Corporation in New York, NY and Chief Executive
Officer of Sandoz Pharmaceuticals Corporation in East Hanover, NJ. From 1981 to
1995 he was a member of the Sandoz Group Executive Committee. He received a
degree in law and economics from the University of Neuchatel in 1963 and 1967,
respectively.
PIERRE LANDOLT (AGE 53). Director. Mr. Landolt has held this position since
the Merger, and prior to that, was a Director of Sandoz AG since 1986. He has
been the President of the Sandoz family foundation since 1994. Mr. Landolt is a
member of various boards, including Emasan AG, Basel, Switzerland; Curacao
International Trust Company, Curacao and Parmigiani Mesure et Art du Temps,
Fleurier, Switzerland. Mr. Landolt graduated with a Bachelor of Laws from the
University of Sorbonne in Paris.
HEINI LIPPUNER (AGE 67). Director and a member of the Chairman's Committee.
Mr. Lippuner has served as Director of the Company since the Merger in
December 1996 and as a member of the Chairman's Committee since April 1999. From
1986 to 1996, he was a member of the Executive Committee as well as Chief
Operating Officer of the CIBA-Geigy Group. Mr. Lippuner is a member of the
Boards of Directors of Credit Suisse Group, Buhler AG in Uzwil, Switzerland and
Winterthur Insurance Ltd. in Winterthur, Switzerland. He also serves in a number
of industry organizations.
PROF. DR. ROLF M. ZINKERNAGEL (AGE 57). Director. Prof. Zinkernagel has
held this position since May 1999. He has been Professor and Director of the
Institute of Experimental Immunology at the University of Zurich since 1992.
Prof. Zinkernagel won the Nobel Prize for Medicine (Immunology) in 1996. He is a
member of the Swiss Society of Allergy and Immunology (President, 1993 to 1994),
the American Associations of Immunologists and of Pathologists, the ENI European
Network of Immunological Institutions, the International Society for Antiviral
Research, the Scientific Advisory Board of Cytos in Zurich, CTL Toronto/Delaware
and the Lombard Odier bank in Zurich. Prof. Zinkernagel graduated from the
University of Basel with a Ph.D. in medicine in 1970.
EXECUTIVE OFFICERS
DR. DANIEL VASELLA (AGE 47). Chief Executive Officer of Novartis and Head
of the Executive Committee. For further information, see "--Directors."
DR. RAYMUND BREU (AGE 55). Chief Financial Officer and a member of the
Executive Committee. Dr. Breu has held these positions since the Merger in
December 1996. Dr. Breu was Head of Group Finance and a member of the Sandoz
Group Executive Committee from 1993 until December 1996. Prior
67
to that, he served as Group Treasurer of the former Sandoz AG. Dr. Breu
graduated from the Swiss Federal Institute of Technology in Zurich with a Ph.D.
in mathematics in 1971.
THOMAS EBELING (AGE 42). Chief Operating Officer of Novartis
Pharmaceuticals (since December 1999) and member of the Executive Committee
(since September 1998). From September 1998 to December 1999, Mr. Ebeling was
Chief Executive Officer of Novartis' Consumer Health Division. Prior to that, he
was Chief Executive Officer of Novartis' global nutrition operations, a position
he assumed in December 1997. Mr. Ebeling joined Novartis in May 1997 as General
Manager of Novartis Nutrition for Germany and Austria and was responsible for
the management of three business units: Medical Nutrition, Health and Functional
Nutrition and OTC. Before joining Novartis, Mr. Ebeling worked for Pepsi-Cola
Germany for six years, during which he served in various capacities: from 1996
to 1997, he was General Manager of Pepsi-Cola in Germany, responsible for the
restructuring and streamlining of the organization and the introduction of
several new products; from 1994 to 1996, he served as National Sales and
Franchise Director and before that as Marketing Director for Germany and
Austria. Mr. Ebeling graduated with a degree in psychology from the University
of Hamburg, Germany in 1986.
AL PIERGALLINI (AGE 54). Chief Executive Officer of Novartis Consumer
Health and member of the Executive Committee. Mr. Piergallini assumed these
positions in December 1999. Prior to that, he was President and Chief Executive
Officer of Novartis Consumer Health North America. Before that, he was Chairman,
President and Chief Executive Officer of Gerber Products Company. He joined
Gerber in 1989 as President and Chief Operating Officer. Mr. Piergallini has
more than 30 years of marketing, sales and operating experience with leading
consumer goods companies. He holds an MBA in Finance and Marketing from the
University of Chicago and a B.A. in Economics from Lafayette College.
DR. URS BARLOCHER (AGE 58). Head of Legal and General Affairs and a member
of the Executive Committee. Mr. Barlocher has held these positions since
June 1999. From December 1996 until May 1999, he was Head of Corporate Legal,
Taxes and Insurance. From 1995 until the Merger, Dr. Barlocher served as
Chairman of the Board of Sandoz Deutschland GmbH (Germany) and Biochemie GmbH
(Austria). Prior to that, he was Chief Executive Officer of Sandoz Pharma Ltd.
for three years. Dr. Barlocher graduated from the University of Basel with a
Ph.D. in law in 1971.
NORMAN C. WALKER (AGE 48). Head of Human Resources since May 1998 and a
member of the Executive Committee since June 1999. Before joining Novartis,
Mr. Walker worked for Kraft Jacobs Suchard in Zurich for seven years, where he
was responsible for human resource activities for commercial and manufacturing
operations in 26 countries. Mr. Walker has a degree in Business Studies from the
University of Brighton and attended the ISMP from Harvard Business School.
DR. GILBERT WENZEL (AGE 45). Head of Strategic Planning and a member of the
Executive Committee since November 2000. Prior to joining us, Mr. Wenzel spent
fifteen years with McKinsey & Company, where he was a member of the European
Leadership Group of the Pharma/Healthcare Sector and a leading member of the
European New Venture Initiative, which provides consultancy services to venture
capital firms and start-ups. From 1981 to 1985, he was consultant to Hoechst AG
regarding global strategies for generics and over-the-counter medicines in
Germany. Dr. Wenzel has a degree in Pharmaceutical Sciences and earned a PhD in
economics.
DR. GLEN BRADLEY (AGE 56). Chief Executive Officer of CIBA Vision.
Dr. Bradley has held this position since 1990. Dr. Bradley is responsible for
all aspects of CIBA Vision's worldwide contact lens and lens care operations,
and through December 31, 2000, our ophthalmic pharmaceuticals business. Prior to
becoming the Chief Executive Officer of CIBA Vision, Dr. Bradley headed the U.S.
operations of CIBA Vision, which he joined in 1986. Dr. Bradley joined the
former Geigy Chemical Company in 1969 and held senior management
responsibilities in the agricultural, plastics and additives, and electronic
equipment divisions of the former CIBA-Geigy Corporation. Dr. Bradley holds a
Ph.D. in chemical engineering from Louisiana State University and received an
MBA in finance/marketing from the University of Connecticut.
68
HANS-BEAT GURTLER (AGE 53). Head of Novartis Animal Health. Mr. Gurtler has
held this position since the Merger in December 1996. From 1990 to 1996, he was
the Head of the Animal Health Sector of the former CIBA-Geigy Group. Before
that, he had served as the Head of the former CIBA-Geigy's Animal Health Sector
in the Northern hemisphere for eight years. Mr. Gurtler graduated with a diploma
in commerce in 1966 and joined CIBA-Geigy AG in 1969.
DR. OSWALD SELLEMOND (AGE 67). Chief Executive Officer of Novartis
Generics. Dr. Sellemond has held this position since the Merger in
December 1996. Since 1990, he has been Chief Executive Officer of Biochemie GmbH
in Kundl, Austria, formerly a division of the Sandoz Group, and in 1999 he
became Chairman of Biochemie GmbH. From 1979 to 1989, he served as a member of
the Executive Committee of Biochemie GmbH in Kundl, Austria where he was
responsible for technical operations, safety and environmental protection and
quality control. Dr. Sellemond received a Ph.D. in technical chemistry in 1957
from the University for Technical Sciences in Graz, Austria.
None of the above officers have any family relationship with any director or
any other executive officer of Novartis. Executive officers are elected by the
Board for an indefinite term of office and may be removed by the Board at any
time. None of the above executive officers were appointed pursuant to an
arrangement or understanding between such officer and the Board or any member or
members thereof.
6.B COMPENSATION
Our compensation programs are designed to attract, develop, retain and
motivate the high caliber of executives, managers and associates that are
critical to the long-term success of the business. Globalization of labor
markets and a "war for talent" have led to a rapid narrowing of the gap between
U.S. and EU principles of compensation with a clear focus on long-term, equity
based forms of programs.
Overall, the intent of the programs is to provide compensation opportunities
that:
- are comparable to the opportunities provided by a selected group of
similarly high-performing growth companies in our industry;
- support a high performance environment and allow high performers to
achieve superior rewards; and
- align executive, management and associates interest with the aim of
creating shareholder value.
The key compensation programs are designed to be fully competitive with the
marketplace. Base salary is targeted at a median of comparable companies in our
industry, annual cash incentive awards are based on company and individual
performance, and long-term incentive awards are comprised of stock options and
other forms of equity participation.
Senior management compensation programs strongly encourage significant
levels of stock ownership and put a high portion of total compensation at risk,
subject to individual and company performance and the appreciation of our
shareholder value.
The aggregate amount of compensation expensed in 2000 by us in respect of
our directors and senior management for services in all capacities, including
former directors and senior management who left Novartis in 2000 pursuant to the
spin-off of Syngenta, as well as senior managers who retired during 2000, was
CHF 29.4 million, of which CHF 13.8 million was salaries and CHF 9.0 million was
for cash bonuses (to executive officers only). CHF 6.6 million was set aside for
pension, retirement and similar benefits.
Senior management as a group also were granted, free of charge, an aggregate
of 2,136 of our shares in 2000, which had a fair market value as of
December 29, 2000 of CHF 6.16 million, in recognition of their performance in
concluding the spin-off of Novartis Agribusiness and its merger into Syngenta.
These shares vest between December 31, 2001 and January 4, 2010. If a current
executive officer leaves our employ prior to December 31, 2003, unvested shares
will be forfeited.
69
NOVARTIS STOCK OPTION PLAN
As part of our compensation strategy, we implemented a Stock Option Plan in
1997 according to which directors, executive officers and other selected
employees of Novartis (collectively, the "Participants") are granted options to
purchase shares of the Company. Currently there are approximately 940
Participants. The Participants are determined each year by the Stock Option
Committee. The options under the Novartis Stock Option Plan are granted both as
a recognition for past performance as well as an incentive for future
contributions by the Participants. They allow the Participants to benefit as the
price of the shares increases over time, and thus provide the Participants with
a long-term incentive to improve the Group's profitability and success. If a
Participant voluntarily leaves the employ of Novartis, options not yet vested
will generally forfeit. The options under the Novartis Stock Option Plan are
granted free of charge and entitle the holder thereof to exercise the options
during the exercise period, I.E., after the lapse of a vesting period until the
end of the term of the options. The options may be exercised either by
converting them for one share per option against payment of a pre-determined
exercise price or by selling the options to the market maker or a third party.
Novartis is only informed if the options are converted, but not if a Participant
sells his/her options to the market maker or a third party. If options are
converted, the market maker will deliver to the Participant such number of
shares as options have been converted against payment of the aggregate exercise
price. The shares delivered by the market maker upon conversion of the options
will not be newly issued shares, but will be issued and outstanding shares.
Under the 2000 Novartis Stock Option Plan, 16,471 Novas10 options were
granted to directors and senior management on March 7, 2001 including former
directors and senior management who left Novartis in 2000 pursuant to the
Syngenta spin-off, as well as senior managers who retired during 2000. The
exercise price of Novas10 Options is CHF 2,800 and the options may be converted
at any time between March 10, 2003 and March 7, 2010.
NOVARTIS STOCK APPRECIATION RIGHTS PLAN
In 1997, the Compensation Committee approved the Novartis Stock Appreciation
Rights Plan ("SAR-Plan") for selected employees. The directors and senior
management as a group were granted a total of 199,120 SARs in 2000. All SARs
were granted free of charge and have an exercise price of U.S.$31.22. The SARs
may be exercised from March 7, 2003 to March 7, 2010. SAR holders are entitled
to receive the difference in U.S. dollars between the exercise price and the
fair market value of the Novartis ADSs as reported by the Company's Depositary,
Morgan Guaranty Trust Co. of New York, at the close of business on the date of
exercise. As of March 30, 2001, the fair market value of a Novartis ADR
evidencing one ADS stood at $39.33.
NOVARTIS STOCK PROGRAMS
In 2000, a new management long-term performance plan and a restricted stock
program were established. The grants in relation to these programs are designed
to foster long-term participation for eligible employees by aligning their
contribution to our long-term performance. Under the long-term performance plan,
a total of 3,897 shares and 16,890 ADSs were granted to directors and senior
management in 2001. There were no grants to directors and senior management in
2000 under the restricted stock program.
LEVERAGED STOCK SAVINGS PROGRAM
In 2001, a new bonus compensation program was offered to certain senior
executives, who may now choose between a cash bonus or a bonus in shares. All
shares granted under this plan have a 5-year vesting period. At the end of the
vesting period, Novartis will match the bonus taken in shares on a one-for-one
basis. Under this leveraged stock savings program, 3,896 shares were granted for
2000 to directors and senior management.
70
6.C BOARD PRACTICES
The table below shows the terms of office of the Company's Board of
Directors:
NAME START OF TERM END OF TERM
- ---- ------------- -----------
Dr. Daniel Vasella (Chairman)............................... 1996 2004
Prof. Dr. Helmut Sihler (Vice Chairman and Lead Director)... 1996 2004
Hans-Jorg Rudloff (Vice Chairman)........................... 1996 2004
Birgit Breuel............................................... 1996 2001
Prof. Dr. Peter Burckhardt.................................. 1996 2002
Dr. Hans-Ulrich Doerig...................................... 1996 2002
Walter G. Frehner........................................... 1996 2001
William W. George........................................... 1999 2003
Alexandre F. Jetzer......................................... 1996 2001
Pierre Landolt.............................................. 1996 2002
Heini Lippuner.............................................. 1996 2002
Prof. Dr. Rolf M. Zinkernagel............................... 1999 2003
We have service contracts for Board Members which are customary under Swiss
law and do not provide for benefits on termination.
AUDIT COMMITTEE
Our Audit Committee assists the Board of Directors in fulfilling its
oversight responsibilities. It maintains a working relationship with the Board
of Directors, management and the internal and external auditors and has
oversight responsibilities for internal control, exercised through reports from,
and discussions with, management and internal and external auditors. Members are
appointed for four year terms of office and are independent of us. Current
members of the Audit Committee are Prof. Dr. Helmut Sihler, Birgit Breuel and
Dr. Hans-Ulrich Doerig.
COMPENSATION COMMITTEE
The Compensation Committee of our Board of Directors is composed of the
Chairman and three other non-employee, independent directors. The Compensation
Committee meets on a regular basis and reviews, recommends and approves changes
to our compensation policies and programs. It is also responsible for reviewing
and approving compensation actions for the Executive Committee and other
selected key executives as deemed appropriate. The Compensation Committee from
time to time seeks outside expert advice to support recommendations and
decisions.
Current members of the Compensation Committee are Dr. Daniel Vasella,
Hans-Jorg Rudloff, Prof. Dr. Helmut Sihler and William W. George.
6.D EMPLOYEES
On average during 2000, we had 69,068 employees group-wide, including 26,459
employees in the Americas, 30,711 in Europe and 11,898 in Asia, Africa and
Australia. A relatively small number of our employees are represented by unions.
We have not experienced any material work stoppages in recent years, and we
consider our employee relations to be good.
71
The table below sets forth the breakdown of average full time equivalent
employees by main category of activity and geographic area for the past three
years. Year 2000 has been adjusted to exclude employees of the discontinuing
Agribusiness sector.
FOR THE YEAR ENDED DECEMBER 31, MARKETING
2000 RESEARCH & PRODUCTION & & GENERAL &
(FULL TIME EQUIVALENTS) DEVELOPMENT SUPPLY DISTRIBUTION ADMINISTRATION TOTAL
- ------------------------------- ----------- ------------ ------------ -------------- --------
Europe........................ 5,627 9,961 9,461 5,662 30,711
The Americas.................. 2,957 9,656 10,941 2,905 26,459
Asia/Africa/ Australia........ 674 3,691 6,537 996 11,898
TOTAL......................... 9,258 23,308 26,939 9,563 69,068
FOR THE YEAR ENDED DECEMBER 31, MARKETING
1999 RESEARCH & PRODUCTION & & GENERAL &
(FULL TIME EQUIVALENTS) DEVELOPMENT SUPPLY DISTRIBUTION ADMINISTRATION TOTAL
- ------------------------------- ----------- ------------ ------------ -------------- --------
Europe........................ 7,881 13,234 11,782 7,379 40,276
The Americas.................. 4,230 10,170 10,422 3,232 28,054
Asia/Africa/ Australia........ 1,086 4,157 7,371 1,515 14,129
TOTAL......................... 13,197 27,561 29,575 12,126 82,459
FOR THE YEAR ENDED DECEMBER 31, MARKETING
1998 RESEARCH & PRODUCTION & & GENERAL &
(FULL TIME EQUIVALENTS) DEVELOPMENT SUPPLY DISTRIBUTION ADMINISTRATION TOTAL
- ------------------------------- ----------- ------------ ------------ -------------- --------
Europe........................ 8,021 14,812 11,133 7,718 41,684
The Americas.................. 4,257 10,492 11,177 3,499 29,425
Asia/Africa/Australia......... 1,086 4,845 7,217 1,578 14,726
TOTAL......................... 13,364 30,149 29,527 12,795 85,835
6.E SHARE OWNERSHIP
DIRECTORS AND SENIOR MANAGEMENT SHARE OWNERSHIP
The aggregate amount of our shares held by current directors and senior
management as of March 30, 2001, based on information available to us, was
20,499 shares. The aggregate amount of our options, including other information
regarding the options, held by current directors and senior management as of
March 30, 2001, is set forth below:
AMOUNT OF EXERCISE PURCHASE TOTAL NUMBER
SHARES CALLED FOR PRICE PRICE OF OPTIONS
TITLE OF OPTIONS BY THE OPTIONS (CHF) (IF ANY) EXPIRATION DATE HELD
- ------------------------ ----------------- -------- -------- ----------------- ------------
Novas07 Options......... 1 1,710 0 January 15, 2007 6,752(1)
Novas08 Options......... 1 2,734 0 January 16, 2008 7,718
Novas09 Options......... 1 2,053 0 March 10, 2009 16,689
Novas10 Options......... 1 2,800 0 March 7, 2010 14,939
------
TOTAL NOVARTIS
OPTIONS............. 46,098
------
1995 Sandoz Options..... 1 1,213 0 May 12, 2001 466
1996 Sandoz Options..... 1 1,402 0 December 12, 2001 834
------
TOTAL SANDOZ
OPTIONS............. 1,300
------
TOTAL................. 47,398
======
- -------------
(1) Novas07 options became vested and freely tradeable on April 8, 2000. Of the
total number of Novas07 options currently outstanding, some may have been
traded and thus no longer held by a director or member of senior management.
72
NOVARTIS EMPLOYEE OWNERSHIP PLAN
Pursuant to the Novartis Employee Ownership Plan, which was approved by the
Board of Directors in 1998, all employees of Swiss subsidiaries are entitled to
purchase three shares at a predetermined discount price of currently CHF 500 per
share after each full year of service. Two shares are freely disposable, the
third must be deposited with us until the person concerned leaves us or at the
latest until retirement. Employees are required to immediately buy the shares to
which they have become entitled. During 2000, 1999 and 1998, an aggregate of
35,738, 38,860 and 40,582 shares, respectively were acquired by employees under
this plan.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A MAJOR SHAREHOLDERS
Based on our share register, we believe we are not directly or indirectly
owned or controlled by another corporation or government, and that there are no
arrangements the operation of which may result in a change of control.
As of December 31, 2000, our registered share capital was CHF 1,442,602,340,
divided into 72,130,117 shares with a nominal value of CHF 20 each, with 79% of
the registered shares held in Switzerland. Based on our share register, we
believe that approximately 8% of our shares are held in the U.S. Since certain
of the shares are held by brokers or other nominees, the above numbers are not
representative of the actual number of U.S. and Swiss persons who are beneficial
owners.
As of December 31, 2000 no person or entity was the owner of more than 5% of
the shares, whether or not the voting rights of such shares were exercisable.
Our largest shareholders, owning between 2% and 5% of our share capital, are the
Emasan group (3.84%) and Swiss Life Insurance and Pension Company (2.12%). In
1999, these shareholders held 3.94% and 2.36% respectively. Both of these
shareholders are entered in the share register as shareholders with voting
rights for their entire shareholdings. The largest nominee shareholder with
voting rights is Chase Manhattan (6.6%), which entered into a nominee agreement
with us and disclosed the names, addresses and number of shares of the
beneficial owners for whose account it holds the shares. No other nominee
shareholders nor any beneficial owner known to us holds more than 2% of the
Company's share capital.
7.B RELATED PARTY TRANSACTIONS
The Novartis Group has formed certain foundations with the purposes of
advancing employee welfare, employee share participation, research and
charitable contributions. The charitable foundations foster health care and
social development in rural countries, and conduct agricultural development and
research. The foundations are autonomous, and their boards are responsible for
administering the foundations in accordance with the foundations' purpose and
applicable law.
The employee share participation foundations have not been included in our
consolidated financial statements prepared under IAS as the International
Accounting Standards Committee, Standing Interpretations Committee No. 12
exempts post-employment and equity compensation plans from its scope. The total
assets of these foundations as of December 31, 2000 included 2.5 million shares
of Novartis AG with a market value of CHF 7.0 billion. As of December 31, 1999,
their assets totaled CHF 4.9 billion and included 2,243,520 Novartis shares with
a fair market value of CHF 5.2 billion. These foundations are consolidated under
U.S. GAAP and are included as a reconciling item in the U.S. GAAP
reconciliation.
In 2000 the Group granted short-term loans totaling CHF 936 million to these
employee welfare foundations, received short-term loans totaling CHF
241 million from them and sold 35,000 Novartis shares to them at market rates.
In 1999, we granted short-term loans totaling CHF 330 million to the
foundations, received short-term loans totaling CHF 192 million from them and
sold 277,000 Novartis shares to them at market rates. In 1998, we sold to these
foundations marketable securities to cover option
73
obligations of these foundations at market values for a total of CHF
218 million realizing a gain of CHF 160 million and 244,000 Novartis shares at
market rates.
In addition, there are approximately thirty other foundations that were
established for charitable purposes that have not been consolidated, as the
Group does not receive a benefit therefrom. As of December 31, 2000 these
foundations held approximately 158,000 shares of Novartis with a cost of
approximately CHF 40 million. See notes 5, 25 and 26 to the consolidated
financial statements for disclosure of other related party transactions and
balances.
7.C INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
8.A CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
8.A.1 See Item 18.
8.A.2 See Item 18.
8.A.3 See Report of Independent Accountants, page F-1.
8.A.4 We have complied with this requirement.
8.A.5 Not applicable.
8.A.6 Not applicable.
8.A.7 LEGAL PROCEEDINGS.
We are involved in a number of legal proceedings and claims incidental to
the normal conduct of our businesses, relating to such matters as product
liability, patent infringement, anti-trust, licensing, environmental claims and
other matters. Although the outcome of these claims, legal proceedings and other
matters in which we are involved cannot be predicted with any certainty, we do
not believe that any liability resulting from the resolution of any such claim
or proceeding would have a material adverse effect on our financial condition,
results of operations or cash flow.
We also maintain general liability insurance, including product liability
insurance, covering claims on a world-wide basis with coverage limits and
retention amounts which management believes to be adequate and appropriate in
light of our businesses and the risks to which they are subject.
8.A.8 DIVIDEND POLICY.
Subject to the dividend policy described below, our Board of Directors
expects to recommend the payment of a dividend in respect of each financial
year. Dividends will be payable following the end of the relevant financial
year, if approved by our shareholders at the relevant annual ordinary
shareholders' meeting, which will normally be held in March or April. Any person
who is recorded in the share register on the date notice of a shareholders'
meeting is given shall be deemed to be entitled to receive dividends and, in
bonus issues, new shares, and to exercise shareholders' preemption rights to
participate in issues of securities. Dividends are reflected in our financial
statements in the year in which they are approved by our shareholders.
Our Board's stated policy is that, in the long term, the size of the
dividend should be geared to our growth in earnings. All future dividends paid
by us will depend upon our financial condition, results of operations and other
factors.
Because dividends are paid by us in Swiss francs, exchange rate fluctuations
will affect the U.S. dollar amounts received by holders of ADSs.
74
8.B SIGNIFICANT CHANGES
On March 23, 2001, our shareholders approved a reduction in the nominal
value of the shares subject to a change in Swiss law which we believe will occur
in May 2001. This decision will permit us to split our shares by a factor of 40.
ITEM 9. THE OFFER AND LISTING
9.A LISTING DETAILS
The principal trading market for our shares is the SWX Swiss Exchange (the
"SWX"). Since 1996, the shares have also been quoted on London's SEAQ
International. The American Depositary Shares ("ADS") program has existed since
December 1996, and was established pursuant to a Deposit Agreement entered into
between us and Morgan Guaranty Trust Co. as Depositary (the "Deposit
Agreement"). Our ADSs in the U.S. are traded under the symbol "NVS".
The table below sets forth, for the periods indicated, the high and low
closing sales prices in Swiss francs for our shares traded on the SWX and in
U.S. dollars for the ADSs traded on the NYSE and, before our NYSE listing in
May, 2000 on the over-the-counter markets. The data below reflects price and
volume information for trades completed by members of the SWX during the day as
well as for inter-dealer trades completed off the SWX and certain inter-dealer
trades completed during trading on the previous business day.
SHARES ADSS
------------------------------------------------ ------------------------------------------------
HIGH LOW HIGH LOW
----------------------- ----------------------- ----------------------- -----------------------
(CHF PER SHARE) ($ PER ADS)
ANNUAL INFORMATION FOR THE
PAST FIVE YEARS
2000......................... 2,956 1,989 44.94 34.63
1999......................... 2,918 1,707 53.13 34.63
1998......................... 2,774 1,932 53.25 35.50
1997......................... 2,525 1,435 44.25 25.44
1996......................... 1,466 1,459 -- --
QUARTERLY INFORMATION FOR THE
PAST TWO YEARS
2000
First Quarter................ 2,367 1,989 36.38 28.62
Second Quarter............... 2,597 2,248 39.12 33.08
Third Quarter................ 2,708 2,526 39.61 35.03
Fourth Quarter............... 2,956 2,650 44.94 36.68
1999
First Quarter................ 2,530 2,350 52.25 39.75
Second Quarter............... 2,895 2,185 42.68 35.56
Third Quarter................ 2,418 2,119 38.25 34.93
Fourth Quarter............... 2,528 2,177 40.00 35.50
MONTHLY INFORMATION FOR MOST
RECENT SIX MONTHS
October 2000................. 2,787 2,659 38.57 36.68
November 2000................ 2,837 2,650 40.81 37.23
December 2000................ 2,956 2,730 44.94 40.13
January 2001................. 2,975 2,610 46.88 40.25
February 2001................ 2,830 2,735 42.89 41.14
March 2001................... 2,897 2,493 44.30 34.60
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Fluctuations in the exchange rate between the Swiss franc and the U.S.
dollar will affect the U.S. dollar equivalent of the Swiss franc price of the
shares on the SWX.
The average daily volumes traded on the SWX for the years 2000, 1999 and
1998 were 166,202, 179,957 and 201,899, respectively. These numbers are based on
total annual turnover statistics supplied by the SWX via the Swiss Market Feed,
which supplies such data to subscribers and to other information providers.
A 2-for-1 share split for the ADSs was affected on May 11, 2000. On
March 30, 2001, the closing sales price per share on the SWX was CHF 2,709
(approximately $1,652 per share) and the ADS price was $39.33.
9.B PLAN OF DISTRIBUTION
Not applicable.
9.C MARKET
The principal trading market for our shares is the SWX. Since 1996, our
shares have also been quoted on SEAQ International.
American Depositary Shares ("ADSs"), each representing one-fortieth of a
share, have been available in the U.S. through an American Depositary Receipts
("ADR") program since December 1996, which was established pursuant to a Deposit
Agreement entered into between the Company and Morgan Guaranty Trust Co. as
Depositary. ADSs in the U.S. are traded on the New York Stock Exchange under the
symbol "NVS." The Depositary informed us that as of February 28, 2001, there
were in issue ADSs representing approximately 70,744,280 million ADSs or
approximately 1,768,607 shares (approximately 2% of all shares). See "Item 9.
The Offer and Listing--9.A. Offer and Listing Details--American Depositary
Receipts."
9.D SELLING SHAREHOLDERS
Not applicable.
9.E DILUTION
Not applicable.
9.F EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
10.A SHARE CAPITAL
Not applicable.
10.B MEMORANDUM AND ARTICLES OF ASSOCIATION
Set forth below is a summary of the material provisions of our Articles of
Association (the "Articles") and the Swiss Code of Obligations relating to the
shares. This description does not purport to be complete and is qualified in its
entirety by reference to Swiss statutory law and to the Articles.
76
SHARES
We have one class of registered shares with a nominal value of CHF 20 each.
The shares are fully paid-up and non-assessable.
Each share carries one vote at the shareholders' meeting. Voting rights may
be exercised only after a shareholder has been recorded in the share register as
a shareholder with voting rights. Registration with voting rights is subject to
certain restrictions. See "--Transfer of shares" and "--Shareholders' Meeting."
We may issue certificates representing several shares which may be exchanged
at any time for smaller portions or individual share certificates. With the
consent of the owner of the shares, we may renounce the printing and delivery of
share certificates.
CAPITAL STRUCTURE
Our share capital is CHF 1,442,602,340 divided into 72,130,117 fully paid-up
registered shares, with a nominal value of CHF 20 each.
As of December 31, 2000, we (including some foundations which are
independent from Novartis under Swiss company law, but which, for purposes of
this annual report, have been included as a U.S. GAAP adjustment in the
reconciliation from IAS to U.S. GAAP) hold 9,413,392 shares in treasury, out of
which 5,076,492 shares qualify as treasury shares in the sense of the Swiss Code
of Obligations. See "--Repurchase of shares."
SHARE REGISTER AND VOTING RESTRICTIONS
Shares represented by a certificate and individually held are transferred by
an endorsement. Shares not represented by a certificate, and shares represented
by a certificate in a common deposit, are transferred by assignment. The
transfer of such shares not represented by a certificate is effected by
corresponding entry in the books of a bank or depositary institution following
an agreement in writing by the selling shareholder and notification of such
assignment to us by the bank or the depositary institution. In each case, the
transfer of shares further requires that the purchaser file a share registration
form in order to be registered in our share register as a shareholder with
voting rights. Failing such registration, the purchaser may not vote at, or
participate in, shareholders' meetings.
No shareholder may be registered as a shareholder with voting rights in
respect of more than 2% of the share capital as set forth in the commercial
register. If a shareholder holds more than 2% of Novartis' shares, such
shareholder will be recorded in the share register for the excess shares as a
shareholder without voting rights. For purposes of this 2% rule, groups of
companies and groups of shareholders acting in concert are considered to be one
shareholder.
Subject to the foregoing restriction, a shareholder will be registered in
the share register as a shareholder with voting rights upon disclosure of its
name, domicile, address and citizenship (in case of legal entities the
registered office). However, we may decline a registration with voting rights if
the shareholder does not explicitly declare that it has acquired the shares in
its own name and for its own account. If the shareholder refuses to make such
declaration, it will be registered as a shareholder without voting rights.
The Board of Directors may register nominees to hold voting rights for up to
0.5% of the share capital. Nominees are persons who do not explicitly declare in
the request for registration to hold the shares for their own account. Shares
held by a nominee that exceed the limit of 0.5% may be registered in the share
register if the nominee discloses the names, addresses and the number of shares
held by each person for whom it holds 0.5% or more of the share capital,
provided the nominee has entered arrangement with us to provide this
information. We have agreed, pursuant to the Deposit Agreement, to register the
Depositary or its nominee or the Custodian or its nominee (but no individual
holders), as the
77
case may be, in our share register as holding voting rights with respect to
shares deposited with the Custodian up to a limit of 5% of our share capital for
the benefit of the holders of ADSs.
The Board of Directors may, on a case by case basis, allow exceptions from
both the 2% rule for shareholders and the 0.5% rule for nominees. The Board may
delegate this power.
There are no limitations under Swiss law or our Articles on the right of
non-Swiss residents or nationals to own or vote shares other than those
applicable to shareholders generally.
SHAREHOLDERS' MEETINGS
Under Swiss law, an annual ordinary shareholders' meeting must be held
within six months after the end of a corporation's financial year. Shareholders'
meetings may be convened by the Board of Directors or, if necessary, by the
statutory auditors. The Board is further required to convene an extraordinary
shareholders' meeting if so resolved by a shareholders' meeting or if so
requested by shareholders holding an aggregate of at least 10% of the registered
share capital. Shareholders holding shares with a nominal value of at least
CHF 1,000,000 (I.E., 50,000 shares of the Company) have the right to request
that a specific proposal be put on the agenda and voted upon at the next
shareholders' meeting. A shareholders' meeting is convened by publishing a
notice in the Swiss Official Commercial Gazette (SCHWEIZERISCHES
HANDELSAMTSBLATT) at least 20 days prior to such meeting. Shareholders may also
be informed by mail.
There is no provision in the Articles requiring a quorum for the holding of
a shareholders' meeting.
Shareholders' resolutions generally require the approval of the majority of
the votes present at a shareholders' meeting (I.E., abstentions have the effect
of votes against the resolution). Shareholders' resolutions requiring a vote by
such "absolute majority" include amendments to the Articles, elections of
directors and statutory auditors, approval of the annual report and the annual
accounts, setting the annual dividend, decisions to discharge directors and
management from liability for matters disclosed to the shareholders' meeting,
and the ordering of an independent investigation into specific matters proposed
to the shareholders' meeting.
A resolution passed at the shareholders' meeting with a supermajority of at
least two-thirds of the votes present at such meeting is required for: (1) an
alteration of the purpose of the Company; (2) the creation of shares with
increased voting powers; (3) an implementation of restrictions on the transfer
of registered shares and the removal of such restrictions; (4) an authorized or
conditional increase of the share capital; (5) an increase of the share capital
by conversion of equity, by contribution in kind, for the purpose of an
acquisition of property and the grant of special rights; (6) a restriction or an
elimination of preemptive rights of shareholders; (7) a change in the place of
incorporation; or (8) the dissolution of the Company without liquidation (E.G.,
by a merger). In addition, the introduction or abolition of any provision in the
Articles providing for a supermajority must be resolved in accordance with such
supermajority voting requirements.
At shareholders' meetings, shareholders can be represented by proxy.
However, such proxy must either be the shareholder's legal representative,
another shareholder with the right to vote, a proxy appointed by the Company, an
independent representative nominated by the Company, or a depositary. Votes are
taken by a show of hands unless the shareholders' meeting resolves to have a
ballot or such ballot is ordered by the chairman of the meeting.
NET PROFIT AND DIVIDENDS
Swiss law requires that at least 5% of the annual net profits of a
corporation be retained as general reserves for so long as these reserves amount
to less than 20% of the corporation's registered share capital. The articles of
a corporation may provide for further mandatory reserves. The Articles of the
Company do not contain any such provision for further reserves.
78
Under Swiss law, dividends may be paid only if the Company has sufficient
distributable retained earnings from previous business years, or if the reserves
of the Company are sufficient to allow distribution of a dividend. In either
event, dividends may only be paid after approval by the shareholders' meeting.
The Board of Directors may propose that a dividend be paid, but cannot itself
set the dividend. The Company's auditors must confirm that the dividend proposal
of the Board conforms with the Swiss Code of Obligations and the Articles. In
practice, the shareholders' meeting usually approves the dividend proposal of
the Board of Directors. The Board of the Company intends to propose a dividend
once a year. See "Item 3. Key Information--3.A. Selected Financial Data--Cash
Dividends per Share."
Dividends are usually due and payable immediately after the shareholders'
resolution relating to the allocation of retained earnings has been passed.
Under Swiss law, the statute of limitations in respect of dividend payments is
five years. For information about deduction of the withholding tax, see "Item
10. Additional Information--10.E Taxation."
PREEMPTIVE RIGHTS
Under Swiss law, any issuance of shares is subject to prior approval of the
shareholders' meeting. Shareholders of a Swiss corporation have certain
preemptive rights to subscribe for newly issued shares in proportion to the
nominal value of the shares they already hold. A resolution adopted at a
shareholders' meeting with a supermajority may, however, limit or suspend
preemptive rights in certain limited cases.
BORROWING POWER
Neither Swiss law nor the Articles restrict in any way the Company's power
to borrow or raise funds. The decision to borrow funds is taken by, or under the
direction of, the Company's Board of Directors, and no shareholders' resolution
is required.
CONFLICT OF INTERESTS
Swiss law does not have a general provision on conflicts of interests.
However, the Swiss Code of Obligations requires directors and members of senior
management to safeguard the interests of the corporation and, in this
connection, imposes a duty of care and a duty of loyalty on such persons. This
rule is generally interpreted to mean that directors and members of senior
management are disqualified from participating in decisions which affect them
personally. Directors and officers are personally liable to the corporation for
any breach of these provisions. In addition, Swiss law contains a provision
under which payments made to a shareholder or a director or any other persons
associated with them, other than payments at arm's length, must be repaid to the
corporation if the shareholder or director was acting in bad faith.
REPURCHASE OF SHARES
Swiss law limits a corporation's ability to hold or repurchase its own
shares. We and our subsidiaries may only repurchase shares if we have sufficient
free reserves equal to the purchase price paid, and if the aggregate nominal
value of all such shares held by us and our subsidiaries does not exceed 10% of
the nominal value of our share capital. Furthermore, we must create a special
reserve on the Company's balance sheet in the amount of the purchase price of
the acquired shares. Such shares held by us or our subsidiaries do not carry any
rights to vote at the shareholders' meeting, but are entitled to the economic
benefits generally connected with the shares. It should be noted that the
definition of what constitutes subsidiaries, and therefore, treasury shares, for
purposes of the above described reserves requirement and voting restrictions
differs from the definition included in the consolidated financial statements,
which requires consolidation for financial reporting purposes of special purpose
entities, irrespective of their legal structure, in instances where we have the
power to govern the financial and operating policies of an
79
entity so as to obtain benefits from its activities. Furthermore, we may
repurchase shares for the purpose of capital reduction which must be voted by
the Annual General Meeting.
NOTICES
Notices to shareholders are validly made by publication in the Swiss
Official Commercial Gazette. The Board of Directors may designate further means
of communication for publishing notices to the shareholders.
Notices required under the listing rules of the SWX will be published in two
Swiss newspapers in German and French. The Company or the SWX may also
disseminate the relevant information on the online exchange information system.
PURPOSE, DURATION, LIQUIDATION, MERGER
The business purpose of the Company as stated in the Articles is to hold
interests in enterprises, particularly in the area of health care, nutrition,
physics or related areas. The Company may acquire, mortgage, liquidate or sell
real estate and intellectual property rights in Switzerland and abroad.
The duration of the Company is unlimited. The Company may be dissolved at
any time by a shareholders' resolution. In case of a dissolution by way of
liquidation, such resolution requires the approval of the majority of votes
present at the shareholders' meeting. In case of a dissolution without
liquidation, at least two-thirds of the votes present at the meeting must vote
their shares in favor of such resolution. Dissolution by court is possible if
the Company becomes bankrupt or for cause if shareholders holding at least 10%
of the registered share capital so demand. Under Swiss law, any surplus arising
out of a liquidation (I.E., after the settlement of all claims of all creditors)
is distributed to the shareholders in proportion to the paid-up nominal value of
their shares.
A resolution to merge with another corporation may be passed at any time.
Such resolution requires the consent of at least two-thirds of all votes present
at the necessary shareholders' meeting.
DISCLOSURE OF PRINCIPAL SHAREHOLDERS
Under the Swiss Stock Exchange Act, holders of voting securities of a listed
Swiss company are required to notify the Company and the Swiss Exchange where
such securities are listed of the level of their holding whenever such holding
reaches, exceeds, or falls short of, certain thresholds which have been set at
5%, 10%, 20%, 33 1/3%, 50% and 66 2/3% of the corporation's outstanding voting
rights, whether or not such voting rights are exercisable. Following receipt of
such notification the corporation must inform the public by publishing the
information in the Swiss Official Commercial Gazette and in at least one of the
principal electronic media that disseminate stock exchange information. The
Company shall publish the information in the Swiss Official Commercial Gazette
and in at least one of the principal electronic media that disseminate stock
exchange information.
MANDATORY TENDER OFFER
Under the Swiss Stock Exchange Act, shareholders and groups of shareholders
acting in concert who acquire more than 33 1/3% of the voting rights of a listed
Swiss corporation will have to submit a takeover bid to all remaining
shareholders. This mandatory bid obligation may be waived under certain
circumstances, in particular if another shareholder owns a higher percentage of
voting rights than the acquirer. A waiver from the mandatory bid rule is granted
by the Swiss Takeover Board or the Swiss Federal Banking Commission. If no
waiver is granted, the mandatory takeover bid must be made pursuant to the
procedural rules set forth in the Swiss Stock Exchange Act and the ordinances
enacted thereunder.
80
BOARD OF DIRECTORS
Pursuant to Swiss law, each member of the Board must hold at least one share
in the Company. Directors must retire when they reach age 71, although the
General Meeting may grant an exemption from this rule. The Company has no
mandatory retirement age for executive officers.
AMERICAN DEPOSITARY SHARES
We incorporate by reference the disclosure regarding our ADS program
included in the registration statement on Form 20-F/A (File No. I-15024), as
filed with the Commission on May 9, 2000, in the section entitled
"Part II--Item 14. Description of Securities to be Registered--American
Depositary Receipts."
10.C MATERIAL CONTRACTS
On December 2, 1999, we signed a Master Agreement with AstraZeneca to
spin-off and merge our Crop Protection and Seeds businesses with AstraZeneca's
Zeneca Agrochemicals to create Syngenta AG ("Syngenta"). This agreement was
amended and restated on September 7, 2000, and the transaction closed in
November 2000. Our Agribusiness sector which comprises Crop Protection and
Seeds, is accordingly shown as a discontinuing activity. There are no other
material contracts other than those entered into in the ordinary course of
business.
10.D EXCHANGE CONTROLS
There are no Swiss governmental laws, decrees or regulations that restrict
the export or import of capital, including any foreign exchange controls, or
that affect the remittance of dividends or other payments to non-residents or
non-citizens of Switzerland who hold the Company's shares. In addition, there
are no limitations imposed by Swiss law or the Company's Articles of Association
on the right of non-residents or non-citizens of Switzerland to hold or vote the
Company's shares.
10.E TAXATION
The taxation discussion set forth below is intended only as a descriptive
summary and does not purport to be a complete analysis or listing of all
potential tax effects relevant to the acquisition, ownership, exercise or
disposition of our shares or ADSs. The statements of United States and Swiss tax
laws set forth below are based on the laws and regulations in force as of the
date of this 20-F, including the current Convention Between the United States
and the Swiss Confederation for the Avoidance of Double Taxation with Respect to
Taxes on Income entered into force on December 19, 1997 (the "Treaty"), and the
U.S. Internal Revenue Code of 1986, as amended (the "Code"), and may be subject
to any changes in United States and Swiss law, and in any double taxation
convention or treaty between the United States and Switzerland occurring after
that date which changes may have retroactive effect.
SWISS TAXATION
SWISS RESIDENTS
WITHHOLDING TAX ON DIVIDENDS AND DISTRIBUTIONS. Dividends paid and similar
cash or in-kind distributions made by us to a holder of shares or ADSs
(including distributions of liquidation proceeds in excess of the nominal value,
stock dividends and, under certain circumstances, proceeds from repurchases of
shares by us in excess of the nominal value) are subject to a federal
withholding tax (the "Withholding Tax") at a current rate of 35%. The
Withholding Tax must be withheld by us from the gross distribution and be paid
to the Swiss Federal Tax Administration. The Withholding Tax is refundable in
full to Swiss residents who are the beneficial owners of the taxable
distribution at the time it is resolved and duly report the gross distribution
received on their personal tax return or in their financial statements for tax
purposes, as the case may be.
81
INCOME TAX ON DIVIDENDS. A Swiss resident who receives dividends and
similar distributions (including stock dividends and liquidation surplus) on
shares or ADSs is required to include such amounts in the personal income tax
return. A corporate shareholder may claim substantial relief from taxation of
dividends and similar distributions received if the shares held represent a fair
market value of at least CHF 2 million.
CAPITAL GAINS TAX UPON DISPOSAL OF SHARES. Under current Swiss tax law, the
gain realized on shares held by a Swiss resident who holds shares or ADSs as
part of his private property is generally not subject to any federal, cantonal
or municipal income taxation on gains realized on the sale or other disposal of
shares or ADSs. However, gains realized upon a repurchase of shares by us may be
characterized as taxable dividend income if certain conditions are met. Book
gains realized on shares or ADSs held by a Swiss corporate entity or by a Swiss
resident individual as part of the business property are included in the taxable
income of such person.
RESIDENTS OF OTHER COUNTRIES
Recipients of dividends and similar distributions on the shares who are
neither residents of Switzerland for tax purposes nor holding shares as part of
a business conducted through a permanent establishment situated in Switzerland
("Non-resident Holders") are not subject to Swiss income taxes in respect of
such distributions. Moreover, gains realized by such recipients upon the
disposal of shares are not subject to Swiss income taxes.
Non-resident Holders of shares are, however, subject to the Withholding Tax
on dividends and similar distributions mentioned above and under certain
circumstances to the Stamp Duty described below. Such Non-resident Holders may
be entitled to a partial refund of the Withholding Tax if the country in which
they reside has entered into a bilateral treaty for the avoidance of double
taxation with Switzerland. Non-resident Holders should be aware that the
procedures for claiming treaty refunds (and the time frame required for
obtaining a refund) may differ from country to country. Non-resident Holders
should consult their own tax advisors regarding receipt, ownership, purchase,
sale or other dispositions of shares or ADSs and the procedures for claiming a
refund of the Withholding Tax.
As of January 1, 2000, Switzerland has entered into bilateral treaties for
the avoidance of double taxation with respect to income taxes with the following
countries, whereby a part of the above-mentioned Withholding Tax may be refunded
(subject to the limitations set forth in such treaties):
Australia Greece Mexico South Africa
Austria Hungary Morocco Spain
Belgium Iceland Netherlands Sri Lanka
Bulgaria India New Zealand Sweden
Canada Indonesia Norway Thailand
China Italy Pakistan Trinidad and Tobago
Croatia Ivory Coast Poland Tunisia
Czech Republic Republic of Ireland Portugal United Kingdom
Denmark Jamaica Romania United States of America
Ecuador Japan Russia Venezuela
Egypt Republic of Korea Singapore Vietnam
Finland (South Korea) Slovak Republic Commonwealth of
France Luxembourg Slovenia Independent States(1)
Germany Malaysia
- -------------
(1) Excluding Estonia, Kazakhstan, Latvia, Lithuania and Russia.
82
In addition, negotiations have been completed for new double taxation
treaties with Albania, Argentina, Belarus, Kazakhstan, Kuwait, Moldavia,
Mongolia, the Philippines and Zimbabwe. Negotiations for new double taxation
treaties with Macedonia and Pakistan are still in progress.
A Non-resident Holder of shares or ADSs will not be liable for any Swiss
taxes other than the Withholding Tax described above and the Stamp Duty
described below if the transfer occurs through or with a Swiss bank or other
Swiss securities dealer. If, however, the shares or ADSs of Non-resident Holders
can be attributed to a permanent establishment or a fixed place of business
maintained by such person within Switzerland during the relevant tax year, the
shares or ADSs may be subject to Swiss income taxes in respect of income and
gains realized on the shares or ADSs and such person may qualify for a full
refund of the Withholding Tax based on Swiss tax law.
RESIDENTS OF THE U.S. A Non-resident Holder who is a resident of the U.S.
for purposes of the Treaty is eligible for a reduced rate of tax on dividends
equal to 15% of the dividend, provided that such holder (i) qualifies for
benefits under the Treaty and (ii) holds, directly and indirectly, less than 10%
of our voting stock and, (iii) does not conduct business through a permanent
establishment or fixed base in Switzerland to which the shares or ADSs are
attributable. Such an eligible holder must apply for a refund of the amount of
the Withholding Tax in excess of the 15% Treaty rate. The claim for refund must
be filed on Swiss Tax Form 82 (82C for corporations; 82I for individuals; 82E
for other entities), which may be obtained from any Swiss Consulate General in
the U.S. or from the Federal Tax Administration of Switzerland at the address
below, together with an instruction form. Four copies of the form must be duly
completed, signed before a notary public of the U.S., and sent to the Federal
Tax Administration of Switzerland, Eigerstrasse 65, CH-3003 Berne, Switzerland.
The form must be accompanied by suitable evidence of deduction of Swiss tax
withheld at source, such as certificates of deduction, signed bank vouchers or
credit slips. The form may be filed on or after July 1 or January 1 following
the date the dividend was payable, but no later than December 31 of the third
year following the calendar year in which the dividend became payable.
STAMP DUTY UPON TRANSFER OF SECURITIES. The sale of shares, whether by
Swiss residents or Non-resident Holders, may be subject to federal securities
transfer Stamp Duty of 0.15% calculated on the sale proceeds if it occurs
through or with a Swiss bank or other Swiss securities dealer as defined in the
Swiss Federal Stamp Duty Act. The Stamp Duty has to be paid by the securities
dealer and may be charged to the parties in a taxable transaction who are not
securities dealers. Stamp Duty may also be due if a sale of shares occurs with
or through a non-Swiss bank or securities dealer, provided (i) such bank or
dealer is a member of the SWX and (ii) the sale takes place on the SWX. In
addition to this Stamp Duty, the sale of shares by or through a member of the
SWX may be subject to a minor stock exchange levy.
UNITED STATES FEDERAL INCOME TAXATION
The following is a general discussion of certain U.S. federal income tax
consequences to you if you are a U.S. Holder (as defined below) of the
ownership, and disposition of our shares or ADSs. Because this discussion does
not consider any specific circumstances of any particular holder of our shares
or ADSs, persons who are subject to U.S. taxation are strongly urged to consult
their own tax advisers as to the overall U.S. federal, state and local tax
consequences, as well as to the overall Swiss and other foreign tax
consequences, of the ownership and disposition of our shares or ADSs. In
particular, additional rules may apply to dealers in securities, tax-exempt
entities, certain insurance companies, broker-dealers, investors liable for
alternative minimum tax, holders that hold shares or ADSs as part of a straddle
or a hedging or conversion transaction, holders whose functional currency is not
the U.S. dollar, and holders of 10% or more of our voting stock. This discussion
generally applies only to U.S. Holders who qualify for benefits under the
Treaty, who hold the shares as a capital asset, and whose functional currency is
the U.S. dollar.
For purposes of this discussion, a "U.S. Holder" is a beneficial owner of
our shares or ADSs who is (i) an individual citizen or resident of the United
States for U.S. federal income tax purposes, (ii) a
83
corporation created or organized under the laws of the United States or a state
thereof, (iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source, or (iv) a trust subject to primary
supervision of a U.S. court and the control of one or more U.S. persons.
This discussion assumes that each obligation in the Deposit Agreement and
any related agreement will be performed in accordance with its terms. For
purposes of this discussion, U.S. Holders of ADRs will be treated as owners of
the ADSs evidenced by such ADRs and the shares represented by such ADSs.
DIVIDENDS. For U.S. federal income tax purposes, you will be required to
include the full amount (unreduced by any Withholding Tax) of a dividend paid
with respect to our shares or ADSs as ordinary income. For this purpose, a
"dividend" will include any distribution paid by us with respect to our shares
or ADSs (other than certain distributions of our capital stock or rights to
subscribe for shares of our capital stock), as the case may be, but only to the
extent such distribution is not in excess of our current and accumulated
earnings and profits as defined for U.S. federal income tax purposes. Such
dividend will constitute income from sources outside the United States. Subject
to the limitations and conditions provided in the Code, you may deduct from your
U.S. federal taxable income, or claim as a credit against your U.S. federal
income tax liability, the 15% withholding tax withheld pursuant to the Treaty.
Under the Code, dividend payments by us on the shares or ADSs are not eligible
for the dividends received deduction generally allowed to corporate
shareholders. Any distribution that exceeds our earnings and profits will be
treated as a nontaxable return of capital to the extent of your tax basis in the
shares or ADSs and thereafter as capital gain.
In general, a U.S. Holder will be required to determine the amount of any
dividend paid in Swiss francs by translating the Swiss francs into U.S. dollars
at the spot rate on the date of receipt. The tax basis of Swiss francs received
by you if you are a U.S. Holder generally will equal the U.S. dollar equivalent
of such Swiss francs at the spot rate on the date such Swiss francs are
received. Upon subsequent exchange of such Swiss francs for U.S. dollars, or
upon the use of such Swiss francs to purchase property, you will generally
recognize exchange gain or loss equal to the difference between your tax basis
for the Swiss francs and the U.S. dollars received or, if property is received,
the fair value of the property on the date of the exchange.
SALE OR OTHER DISPOSITION. Upon a sale or exchange of shares or ADSs, you
generally will recognize capital gain or loss in an amount equal to the
difference between the amount realized on the disposition and your tax basis in
the shares or ADSs. This capital gain or loss will be long-term capital gain or
loss if your holding period in the shares or ADSs exceeds one year. The
deductibility of capital losses is subject to limitations. If you are an
individual, any capital gain generally will be subject to U.S. federal income
tax at preferential rates if you meet the specified minimum holding periods.
Such gain or loss, if any, generally will be U.S. source gain or loss.
UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING. Dividend
payments with respect to shares or ADSs and proceeds from the sale, exchange or
redemption of shares or ADSs may be subject to information reporting to the
Internal Revenue Service ("IRS") and possible U.S. backup withholding at a 31%
rate. Certain exempt recipients (such as corporations) are not subject to these
information reporting requirements. Backup withholding will not apply, however,
to a holder who furnishes a correct taxpayer identification number or
certificate of foreign status and makes any other required certification or who
is otherwise exempt from backup withholding. Any U.S. persons required to
establish their exempt status generally must file IRS Form W-9 ("Request for
Taxpayer Identification Number and Certification"). Non-U.S. holders are
generally not subject to U.S. information or backup withholding. However, such
holders may be required to provide certification of non-U.S. status in
connection with payments received in the United States or through U.S.-related
financial intermediaries. Amounts withheld as backup withholding may be credited
against a holder's federal income tax liability, and a holder may obtain a
refund of any excess amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS and furnishing any required
information. Finalized Treasury regulations have generally expanded the
circumstances under which U.S. information reporting and backup withholding may
apply. Holders should consult their own tax advisors regarding the application
of the U.S. information reporting and backup withholding rules, including the
finalized Treasury regulations.
84
10.F DIVIDENDS AND PAYING AGENTS
Not applicable.
10.G STATEMENT BY EXPERTS
Not applicable.
10.H DOCUMENTS ON DISPLAY
The documents that are exhibits to or incorporated by reference in this
annual report can be read at the U.S. Securities and Exchange Commission's
public reference facilities at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549.
10.I SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
LOCAL
CURRENCIES CHF
---------- --------
GROWTH 2000 AND CURRENCY CONTRIBUTION (ONGOING ACTIVITIES):
Sales....................................................... 8% 15%
Operating income............................................ 2% 6%
Net income.................................................. 5% 8%
SALES COSTS
--------- --------
SALES AND OPERATING COSTS BY CURRENCIES:
$........................................................... 44% 33%
Euro........................................................ 24% 23%
CHF......................................................... 6% 26%
Yen......................................................... 8% 5%
Other....................................................... 18% 13%
LIQUID FINANCIAL
FUNDS DEBT
--------- ---------
LIQUID FUNDS AND FINANCIAL DEBT BY CURRENCIES:
$........................................................... 27% 45%
Euro........................................................ 31% 15%
CHF......................................................... 41% 30%
Yen......................................................... -- 7%
Other....................................................... 1% 3%
LOCAL
CURRENCIES CHF
---------- --------
GROWTH 1999 AND CURRENCY CONTRIBUTION (ONGOING ACTIVITIES):
Sales....................................................... 6% 9%
Operating income............................................ 7% 9%
Net income.................................................. 9% 11%
85
SALES COSTS
--------- --------
SALES AND OPERATING COSTS BY CURRENCIES:
$........................................................... 42% 31%
Euro........................................................ 26% 23%
CHF......................................................... 6% 23%
Yen......................................................... 7% 5%
Other....................................................... 19% 18%
LIQUID FINANCIAL
FUNDS DEBT
--------- ---------
LIQUID FUNDS AND FINANCIAL DEBT BY CURRENCIES:
$........................................................... 49% 38%
Euro........................................................ 20% 9%
CHF......................................................... 27% 29%
Yen......................................................... 2% 9%
Other....................................................... 2% 15%
MARKET RISK
We are exposed to market risk, primarily related to foreign exchange,
interest rates and market value of the investments of liquid funds. Management
actively monitors these exposures. To manage the volatility relating to these
exposures, we enter into a variety of derivative financial instruments. Our
objective is to reduce, where it is deemed appropriate to do so, fluctuations in
earnings and cash flows associated with changes in interest rates, foreign
currency rates and market rates of investments of liquid funds. It is our policy
and practice to use derivative financial instruments to manage exposures and to
enhance the yield on the investment of liquid funds. We do not enter any
financial transactions containing a risk that cannot be quantified at the time
the transaction is concluded; I.E., we do not sell short. We only sell existing
assets in transactions and future transactions (in the case of anticipatory
hedges) which we confidently expect we will have in the future based on past
experience. In the case of liquid funds, we write call options on assets we have
or we write put options on positions we want to acquire and have the liquidity
to acquire. We, expect that any loss in value for those instruments generally
would be offset by increases in the value of the underlying transactions.
FOREIGN EXCHANGE RATES: We use the Swiss franc as our reporting currency
and are, therefore, exposed to foreign exchange movements, primarily in U.S.,
European, Japanese, other Asian and Latin American currencies. Consequently, we
enter into various contracts, which change in value as foreign exchange rates
change, to preserve the value of assets, commitments and anticipated
transactions. We use forward contracts and foreign currency option contracts to
hedge certain anticipated net revenues in foreign currencies. At December 31,
2000, we had long and short forward exchange/option contracts with notional
principal values of CHF 8.2 billion and CHF 13.8 billion, respectively. At
December 31, 1999, we had long and short forward exchange/option contracts with
notional principal values of CHF 4.3 billion and CHF 19.1 billion, respectively.
At December 31, 1998, we had long and short forward exchange/option contracts
with U.S. dollar equivalent notional principal values of CHF 4.0 billion and CHF
14.5 billion, respectively.
Net investments in foreign countries are long-term investments. Their fair
value changes through movements of the currency exchange rates. In the very long
term, however, the difference in the inflation rate should match the exchange
rate movement, so that the market value of the real assets abroad will
compensate the change due to currency movements. For this reason, we only hedge
the net investments in foreign subsidiaries in exceptional cases.
86
COMMODITIES: We have only a very limited exposure to price risk related to
anticipated purchases of certain commodities used as raw materials by our
businesses. A change in those prices may alter the gross margin of a specific
business, but generally by not more than 10% of the margin and thus below
materiality levels. Accordingly, we do not enter into significant commodity
future, forward and option contracts to manage fluctuations in prices of
anticipated purchases.
INTEREST RATES: We manage our net exposure to interest rate risk through
the proportion of fixed rate debt and variable rate debt in our total debt
portfolio. To manage this mix, we may enter into interest rate swap agreements,
in which we exchange the periodic payments, based on a notional amount and
agreed-upon fixed and variable interest rates. Our percentage of fixed rate debt
to total financial debt was 34%, 28% and 32% at December 31, 2000, 1999 and
1998, respectively.
EQUITY RISK: We purchase equities as investments of our liquid funds. As a
policy, we limit our holdings in an unrelated company to less than 5% of our
liquid funds. Potential investments are thoroughly analyzed in respect of their
past financial track record (mainly cash flow return on investment), their
market potential, their management and their competitors. Call options are
written on stocks which we have and put options are written on equities which we
want to buy and for which cash has been reserved.
MANAGEMENT SUMMARY: Use of the above-mentioned derivative financial
instruments has not had a material impact on our financial position at
December 31, 2000 and 1999 or our results of operations for the years ended
December 31, 2000, 1999 and 1998.
VALUE AT RISK: We use a value at risk ("VAR") computation to estimate the
potential ten-day loss in the fair value of our interest rate-sensitive
financial instruments, the loss in pre-tax earnings of our foreign currency
price-sensitive derivative financial instruments as well as the potential
ten-day loss of our equity holdings. We use a ten-day period because it is
assumed that not all positions could be undone in a single day, given the size
of the positions. The VAR computation includes our debt; short-term and
long-term investments; foreign currency forwards, swaps and options and
anticipated transactions. Foreign currency trade payables and receivables, and
net investments in foreign subsidiaries are excluded from the computation.
The VAR estimates are made assuming normal market conditions, using a 95%
confidence interval. We use a "Delta Normal" model to determine the observed
inter-relationships between movements in interest rates, stock markets and
various currencies. These inter-relationships are determined by observing
interest rate, stock market movements and forward currency rate movements over a
60-day period for the calculation of VAR amounts.
The estimated potential ten-day loss in fair value of our interest
rate-sensitive instruments, primarily debt and investments of liquid funds under
normal market conditions, the estimated potential ten-day loss in pre-tax
earnings from foreign currency instruments under normal market conditions, and
the estimated potential ten-day loss on our equity holdings, as calculated in
the VAR model, follow:
AT DECEMBER 31,
-------------------
2000 1999
-------- --------
(CHF MILLIONS)
Instruments sensitive to foreign currency rates............. 34 41
Instruments sensitive to equity market movements............ 164 80
Instruments sensitive to interest rates..................... 18 80
Total all instruments....................................... 241 123
The increase in the VAR for instruments sensitive to equity market movements
and for the total VAR for all instruments relates to the large increase in the
equity shares held in the portfolio. The reduction in
87
the VAR for instruments sensitive to interest rates relates to the decrease in
our total amount of financial debt.
The average, high, and low VAR amounts for 2000 are as follows:
AVERAGE HIGH LOW
-------- -------- --------
(CHF MILLIONS)
Instruments sensitive to foreign currency rates............. 227 397 34
Instruments sensitive to equity market movements............ 130 186 89
Instruments sensitive to interest rates..................... 53 122 18
Total all instruments....................................... 274 457 126
The VAR computation is a risk analysis tool designed to statistically
estimate the maximum probable ten-days loss from adverse movements in interest
rates, foreign currency rates and equity prices under normal market conditions.
The computation does not purport to represent actual losses in fair value or
earnings to be incurred by us, nor does it consider the effect of favorable
changes in market rates. We cannot predict actual future movements in such
market rates and do not present these VAR results to be indicative of future
movements in such market rates or to be representative of any actual impact that
future changes in market rates may have on our future results of operations or
financial position.
In addition to these VAR analyses, we use stress-testing techniques. Such
stress-testing is aimed at reflecting a worst case scenario. For these
calculations, we use the worst movements during a period of six months over the
past 20 years in each category. For 2000, the worst case loss scenario was
configured as follows:
AT DECEMBER 31,
-------------------
2000 1999
-------- --------
(CHF MILLIONS)
Bond portfolio.............................................. 96 1,143
Money market and linked financial instruments............... 760 206
Equities.................................................... 1,539 591
Foreign exchange risks...................................... 449 314
TOTAL....................................................... 2,844 2,254
In our risk analysis, we consider this worst case scenario acceptable
inasmuch as it could reduce the income, but would not endanger the solvency
and/or the investment grade credit standing of the Group. While it is highly
unlikely that all worst case fluctuations would happen simultaneously, as shown
in the model, the actual market can of course produce bigger movements in the
future.
The major financial risks are managed centrally by our Group Treasury. Only
residual risks and some currency risks are managed in the subsidiaries. The
collective amount of the residual risks is, however, below 10% of the global
risks.
We have a written Treasury Policy, have implemented a strict segregation of
front office and back office controls and do random checks of our positions with
the counterparties. In addition, internal audits on the information management
of the treasury function are performed at regular intervals.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
88
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements are filed as part of this annual report
on Form 20-F.
PAGE
--------
Index to consolidated financial statements.................. F-1
Report of PricewaterhouseCoopers AG......................... F-2
Consolidated income statements.............................. F-3
Consolidated balance sheets................................. F-4
Consolidated cash flow statements........................... F-5
Consolidated statement of changes in equity................. F-6
Notes to the consolidated financial statements.............. F-8
Report of PricewaterhouseCoopers AG on financial statement
schedule.................................................. F-77
Schedule II--valuation and qualifying accounts.............. F-78
ITEM 19. EXHIBITS
1.1 Articles of Association as amended to date (in English translation)
(incorporated by reference from the Registration Statement on Form 20-F/A,
File No. 1-15024, as filed with the Commission on May 9, 2000)
2.1 Amended and Restated Deposit Agreement dated as of May 11, 2000 among
Novartis AG, Morgan Guaranty Trust Company of New York, as depositary, and
all holders from time to time of ADR's issued thereunder (incorporated by
reference from the Registration Statement on Form F-6, File No. 333-11758,
as filed with the Commission on March 30, 2000)
2.2 Amendment No. 1 to the Amended and Restated Deposit Agreement (incorporated
by reference from Post-Effective Amendment No. 1 to the Registration
Statement on Form F-6, File No. 333-11758, as filed with the Commission on
September 8, 2000)
89
4.1 Master Agreement dated December 2, 1999 between Novartis AG and AstraZeneca
PLC, as amended and restated on September 7, 2000 (incorporated by reference
from Syngenta AG's Registration Statement on Form F-1, File No. 333-12640,
as filed with the Commission on September 29, 2000).
8.1 For a list of all of our subsidiaries, see note 31 to our consolidated
financial statements.
90
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
NOVARTIS AG
By: /s/ DR. RAYMUND BREU
-----------------------------------------
Name: Dr. Raymund Breu
Title: Chief Financial Officer
By: /s/ DR. URS BARLOCHER
-----------------------------------------
Name: Dr. Urs Barlocher
Title: Head of Legal and General Affairs
Date April 11, 2001
91
NOVARTIS GROUP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of PricewaterhouseCoopers AG......................... F-2
Consolidated income statements.............................. F-3
Consolidated balance sheets................................. F-4
Consolidated cash flow statements........................... F-5
Consolidated statement of changes in equity................. F-6
Notes to the consolidated financial statements.............. F-8
Report of PricewaterhouseCoopers AG on financial statement
schedule.................................................. F-77
Schedule II--valuation and qualifying accounts.............. F-78
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF THE NOVARTIS GROUP, BASEL
We have audited the consolidated financial statements (balance sheet, income
statement, cash flow statement, statement of changes in equity and notes) of the
Novartis Group as of December 31, 2000 and 1999 and for each of the three years
in the period ended December 31, 2000, all expressed in Swiss francs.
These consolidated financial statements are the responsibility of the Board of
Directors. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We confirm that we meet the Swiss
legal requirements concerning professional qualification and independence.
Our audits were conducted in accordance with auditing standards promulgated by
the profession and with International Standards on Auditing issued by the
International Federation of Accountants (IFAC) and auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement. We have
examined on a test basis evidence supporting the amounts and disclosures in the
consolidated financial statements. We have also assessed the accounting
principles used, significant estimates made and the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements give a true and fair view
of the financial position, of the Novartis Group as of December 31, 2000 and
1999 and the results of operations and the cash flows for each of the three
years in the period ended December 31, 2000 in accordance with International
Accounting Standards and comply with Swiss law.
International Accounting Standards vary in certain respects from accounting
principles generally accepted in the United States of America. The application
of the latter would have affected the determination of the net income of the
Group expressed in Swiss francs for each of the three years in the period ended
December 31, 2000 and the determination of equity of the Novartis Group also
expressed in Swiss francs at December 31, 2000 and 1999 to the extent summarized
in Note 32 to the consolidated financial statements.
PricewaterhouseCoopers AG
S.A.J. Bachmann J. P. Herron
Basel, January 31, 2001
F-2
NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENTS
(FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998)
2000 2000 1999 1998
NOTES $ MILLIONS(1) CHF MILLIONS CHF MILLIONS CHF MILLIONS
-------- ------------- ------------ ------------ ------------
SALES.......................... 3/4 21,832 35,805 32,465 31,702
Cost of goods sold............. (6,245) (10,242) (9,822) (10,052)
GROSS PROFIT................... 15,587 25,563 22,643 21,650
Marketing & distribution....... (6,674) (10,945) (9,561) (8,790)
Research & development......... 3 (2,840) (4,657) (4,246) (3,906)
Administration & general
overheads.................... (1,267) (2,078) (1,493) (2,034)
OPERATING INCOME............... 3/4 4,806 7,883 7,343 6,920
Income from associated
companies.................... 11 60 98 383 239
Financial income, net.......... 5 665 1,091 793 759
INCOME BEFORE TAXES AND
MINORITY INTERESTS........... 5,531 9,072 8,519 7,918
Taxes.......................... 6 (1,110) (1,820) (1,833) (1,882)
INCOME BEFORE MINORITY
INTERESTS.................... 4,421 7,252 6,686 6,036
Minority interests............. (26) (42) (27) (26)
------- ------- ------- -------
NET INCOME..................... 4,395 7,210 6,659 6,010
------- ------- ------- -------
Earnings per share............. 7 67 110 100 91
------- ------- ------- -------
Diluted earnings per share..... 7 67 110 100 91
======= ======= ======= =======
- -------------
The accompanying notes form an integral part of the consolidated financial
statements.
(1) The Swiss franc amounts have been translated into United States dollars at
the rate of 1.64 to the dollar. Such translations should not be construed as
representations that the Swiss franc amounts represent, or have been or
could be converted into, United States dollars at that or any other rate.
F-3
NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(AT DECEMBER 31, 2000 AND 1999)
2000 2000 1999
NOTES $ MILLIONS(1) CHF MILLIONS CHF MILLIONS
-------- ------------- ------------ ------------
ASSETS
LONG-TERM ASSETS
Tangible fixed assets........................ 8 5,506 9,030 11,666
Intangible assets............................ 9 3,555 5,830 3,214
Marketable securities........................ 10 -- -- 6,273
Investments in associated companies.......... 11 933 1,531 1,640
Deferred taxes............................... 12 1,991 3,265 3,458
Other financial assets....................... 13 3,415 5,601 4,597
------ ------ ------
TOTAL LONG-TERM ASSETS....................... 15,400 25,257 30,848
------ ------ ------
CURRENT ASSETS
Inventories.................................. 14 2,513 4,122 6,887
Trade accounts receivable.................... 15 3,221 5,283 7,041
Other current assets......................... 16 1,836 3,011 4,423
Marketable securities........................ 10 7,146 11,720 10,047
Cash and cash equivalents.................... 5,368 8,803 6,281
------ ------ ------
TOTAL CURRENT ASSETS......................... 20,084 32,939 34,679
------ ------ ------
TOTAL ASSETS................................. 35,484 58,196 65,527
====== ====== ======
EQUITY AND LIABILITIES
EQUITY....................................... 17
Share capital................................ 880 1,443 1,443
Treasury shares.............................. (85) (139) (130)
Reserves..................................... 21,682 35,558 35,903
------ ------ ------
TOTAL EQUITY................................. 22,477 36,862 37,216
------ ------ ------
MINORITY INTERESTS........................... 47 78 221
------ ------ ------
LIABILITIES
LONG-TERM LIABILITIES
Financial debts.............................. 18 1,392 2,283 2,444
Deferred taxes............................... 12 2,127 3,488 3,646
Other long-term liabilities.................. 19 2,344 3,845 4,587
------ ------ ------
TOTAL LONG-TERM LIABILITIES.................. 5,863 9,616 10,677
------ ------ ------
SHORT-TERM LIABILITIES
Trade accounts payable....................... 970 1,591 1,971
Financial debts.............................. 21 2,304 3,779 7,479
Other short-term liabilities................. 22 3,823 6,270 7,963
------ ------ ------
TOTAL SHORT-TERM LIABILITIES................. 7,097 11,640 17,413
------ ------ ------
TOTAL LIABILITIES............................ 12,960 21,256 28,090
------ ------ ------
TOTAL EQUITY AND LIABILITIES................. 35,484 58,196 65,527
====== ====== ======
- -------------
The accompanying notes form an integral part of the consolidated financial
statements.
(1) The Swiss franc amounts have been translated into United States dollars at
the rate of 1.64 to the dollar. Such translations should not be construed as
representations that the Swiss franc amounts represent, or have been or
could be converted into, United States dollars at that or any other rate.
F-4
NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED CASH FLOW STATEMENTS
(FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998)
2000 2000 1999 1998
NOTES $ MILLIONS(1) CHF MILLIONS CHF MILLIONS CHF MILLIONS
-------- ------------- ------------ ------------ ------------
NET INCOME.............................. 4,395 7,210 6,659 6,010
Reversal of non-cash items
Minority interests.................... 26 42 27 26
Taxes................................. 1,110 1,820 1,833 1,882
Depreciation and amortization on
Tangible fixed assets............... 729 1,196 1,261 1,161
Intangible assets................... 189 309 248 227
Income from associated companies...... (60) (98) (383) (239)
Divestment gains...................... (1) (1) (288) (89)
Net financial income.................. (665) (1,091) (793) (759)
Interest and other financial receipts... 1,185 1,944 1,816 2,114
Interest and other financial payments... (738) (1,211) (815) (1,366)
Taxes paid.............................. (1,327) (2,176) (1,690) (1,843)
CASH FLOW BEFORE WORKING CAPITAL
CHANGES............................... 4,843 7,944 7,875 7,124
Restructuring payments.................. (178) (292) (488) (698)
Change in net current assets and other
operating cash flow items............. 23 (24) (40) (494) (573)
------ ------ ------ ------
CASH FLOW FROM OPERATING ACTIVITIES..... 4,641 7,612 6,893 5,853
------ ------ ------ ------
Investment in tangible fixed assets..... (825) (1,353) (1,371) (1,577)
Proceeds from disposals of tangible
fixed assets.......................... 212 347 286 303
Purchase of intangible and financial
assets................................ (1,920) (3,149) (733) (384)
Proceeds from disposals of intangible
and financial assets.................. 287 471 385 91
Acquisition/divestment of
subsidiaries.......................... 24 (836) (1,371) 239 235
Acquisition of minorities............... 0 0 (68) (1)
Sale of (investment in) marketable
securities............................ 2,951 4,839 (1,755) (2,503)
------ ------ ------ ------
CASH FLOW USED FOR INVESTING
ACTIVITIES............................ (131) (216) (3,017) (3,836)
------ ------ ------ ------
Premium from option rights.............. -- -- -- 2
Acquisition of treasury shares.......... (710) (1,165) (1,919) 722
Reduction in long-term financial
debts................................. (76) (124) (336) (691)
Reduction in short-term financial
debts................................. (855) (1,402) (130) (1,583)
Dividends paid.......................... (1,259) (2,064) (1,935) (1,663)
------ ------ ------ ------
CASH FLOW USED FOR FINANCING
ACTIVITIES............................ (2,900) (4,755) (4,320) (3,213)
------ ------ ------ ------
Net effect of currency translation on
cash and cash equivalents............. (73) (119) 74 (31)
------ ------ ------ ------
NET CHANGE IN CASH AND CASH
EQUIVALENTS........................... 1,537 2,522 (370) (1,227)
------ ------ ------ ------
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR................. 3,831 6,281 6,651 7,878
------ ------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF THE
YEAR.................................. 5,368 8,803 6,281 6,651
====== ====== ====== ======
- -------------
The accompanying notes form an integral part of the consolidated financial
statements.
(1) The Swiss franc amounts have been translated into United States dollars at
the rate of 1.64 to the dollar. Such translations should not be construed as
representations that the Swiss franc amounts represent, or have been or
could be converted into, United States dollars at that or any other rate.
F-5
NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998)
IN CHF MILLIONS
CUMULATIVE TOTAL
SHARE RETAINED TRANSLATION TOTAL SHARE TREASURY TOTAL
PREMIUM EARNINGS DIFFERENCES RESERVES CAPITAL SHARES(1) EQUITY
-------- -------- ----------- -------- -------- --------- --------
JANUARY 1, 1998........... 3,662 22,758 (1,270) 25,150 1,443 (122) 26,471
Change in accounting
policy on deferred
taxes................... 478 478 478
Dividends to third
parties................. (1,663) (1,663) (1,663)
Exercise of options
rights.................. 2 2 2
Disposal of treasury
shares.................. 715 715 7 722
Goodwill on
disposals(2)............ 77 77 77
Translation effects....... (701) (701) (701)
Net income................ 6,010 6,010 6,010
------ ------ ------ ------ ----- ------ -------
JANUARY 1, 1999........... 4,379 27,660 (1,971) 30,068 1,443 (115) 31,396
Change in accounting
policy on employee
benefits(3)............. 1,071 1,071 1,071
Dividends to third
parties................. (1,935) (1,935) (1,935)
Acquisition of treasury
shares.................. (1,904) (1,904) (15) (1,919)
Translation effects....... 1,944 1,944 1,944
Net income................ 6,659 6,659 6,659
------ ------ ------ ------ ----- ------ -------
JANUARY 1, 2000........... 2,475 33,455 (27) 35,903 1,443 (130) 37,216
Dividends to third
parties................. (2,064) (2,064) (2,064)
Transfer(4)............... (2,186) 2,186
Acquisition of treasury
shares.................. (1,156) (1,156) (9) (1,165)
Effect of Agribusiness
spin-off(5)............. (3,655) (109) (3,764) (3,764)
Translation effects(6).... (571) (571) (571)
Net income................ 7,210 7,210 7,210
------ ------ ------ ------ ----- ------ -------
DECEMBER 31, 2000......... 289 35,976 (707) 35,558 1,443 (139) 36,862
====== ====== ====== ====== ===== ====== =======
- -------------
(1) Treasury shares are deducted from equity at their nominal value of CHF 20
per share. Differences between this amount and the amount paid for
acquiring, or received for disposing of, treasury shares were allocated to
the share premium account up to January 1, 2000 and thereafter to retained
earnings.
(2) Portion of disposal proceeds relating to the goodwill on the original
acquisition that was written off directly to retained earnings between the
adoption of International Accounting Standards in 1991 and the end of 1994
when the capitalization of goodwill arising on acquisition became mandatory
under International Accounting Standards.
F-6
NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998)
IN CHF MILLIONS
(3) The following is a summary of the adjustments resulting from adopting
revised IAS 19 from January 1, 1999.
CHF MILLIONS
------------
Unrecognized funded pension surpluses....................... 1,673
Additional unfunded pension deficits........................ (489)
-----
Net increase in assets from pension plans................... 1,184
Previously unrecognized actuarial gains from unfunded other
post-retirement benefit plans............................. 218
Deferred tax................................................ (316)
Minority interest........................................... (15)
-----
Net increase in equity at January 1, 1999................... 1,071
=====
(4) At the extraordinary general meeting of October 11, 2000 the shareholders
reduced the Novartis AG share premium account to the legal minimum by
approving a transfer to available retained earnings. A corresponding
transfer has been reflected in the consolidated statement of changes in
equity.
(5) Effect of Agribusiness spin-off is shown net of the amount received from
shareholders for the exercise of purchase rights of CHF 687 million.
(6) During the year held-to-maturity bonds were sold which resulted in the
liquidation of a subsidiary and CHF 1,041 million of cumulative translation
differences being transferred to financial income, net. Cumulative
translation differences include the net of tax hedging gain of CHF 96
million from hedging the net investment in a foreign subsidiary.
If the Group had adopted revised IAS 19 as of January 1, 1998, the effect on
the Group's 1998 consolidated income statement would not have been material.
Total recognized gains and losses, representing the total of net income and
translation effects allocated to equity, for the years ended December 31, 2000,
1999, and 1998 were CHF 6,639 million, CHF 8,603 million, and
CHF 5,386 million, respectively.
The amount available for dividend distribution is based on the
Novartis AG's shareholders' equity determined in accordance with the legal
provisions of the Swiss Code of Obligations.
The Board of Directors proposes a dividend in respect of 2000 of CHF 34 per
share (1999: CHF 32 per share; 1998: CHF 29 per share) totaling CHF 2.4 billion
for all dividend bearing shares or CHF 2.2 billion on all shares outstanding at
December 31, 2000.
F-7
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The Novartis Group ("Group") consolidated financial statements are prepared
in accordance with the historical cost convention and comply with the standards
formulated by the International Accounting Standards Committee (IASC) and the
following significant accounting policies.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual outcomes could differ from those estimates.
CHANGES IN ACCOUNTING PRINCIPLES IASC has issued a number of new standards
in recent years.
Adoption of revised IAS 12 from January 1, 1998 has resulted in a change in
the recognition of deferred tax on unrealized intercompany profits. The impact
of this change at January 1, 1998 has been credited directly to retained
earnings of the Group.
With effect from January 1, 1999, the Group has adopted revised IAS 19
relating to employee benefits. The most significant change is that the discount
rate used to value the defined benefit obligation is now the current long-term
rate at the balance sheet date instead of a long-term average interest rate. The
transitional provisions of this Standard require that any unrecognized surpluses
in the funded plans, using the appropriately revised actuarial assumptions, are
recognized immediately. Furthermore, the new actuarial assumptions produced
deficits in certain funds, which have also been recognized immediately.
As permitted by IAS, the Group has chosen to record the impact of this
change in accounting policy, net of any deferred tax consequences, as a net
credit to Group equity at January 1, 1999. For practicality reasons no
restatement of prior year amounts has been made.
The following are the significant standards which were adopted by the
Novartis Group from January 1, 2000:
--IAS 36 "Impairment of Assets"
--IAS 37 "Provisions, Contingent Liabilities and Contingent Assets"
--IAS 38 "Intangible Assets"
The adoption of these standards did not have any significant impact on the
comparability of the 2000 consolidated financial statements with those of 1999
and 1998.
The Group will adopt IAS 39 "Financial Instruments: Recognition and
Measurement" from January 1, 2001. This will involve the recording in the
balance sheet of the unrealized gains on the available-for-sale and derivatives
portfolios. The pre-tax amount, which will be recorded directly in equity, is
approximately CHF 2.2 billion or approximately CHF 1.9 billion post-tax.
SCOPE OF CONSOLIDATION The financial statements include all companies which
Novartis AG, Basel, directly or indirectly controls (generally over 50% of
voting interest).
Investments in associated companies, (generally investments of between 20%
and 50% in a company's equity) where the Group has significant influence, and
joint ventures are accounted for by using the equity method. All other minority
investments are valued at their acquisition cost less any impairment in value.
With effect from 1999, the Group has adopted Interpretation 12 of the IAS
Standing Interpretations Committee (SIC) concerning the consolidation of special
purpose entities. This requires consolidation for
F-8
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
financial reporting purposes of special purpose entities, irrespective of their
legal structure, in instances where the Group has the power to govern the
financial and operating policies of an entity so as to obtain benefits from its
activities.
PRINCIPLES OF CONSOLIDATION The annual closing date of the individual
financial statements is December 31. The financial statements of consolidated
companies operating in highly inflationary economies are adjusted to eliminate
the impact of high inflation.
The purchase method of accounting is used for acquired businesses. Companies
acquired or disposed of during the year are included in the consolidated
financial statements from the date of acquisition or up to the date of disposal.
The Group was formed on December 20, 1996 when all assets and liabilities of
Sandoz AG and Ciba-Geigy AG were transferred by universal succession to Novartis
AG. The transaction was structured as a merger of equals based on an exchange of
shares, providing former Sandoz AG shareholders with 55% and former Ciba-Geigy
AG shareholders with 45% of the new company. The uniting of interests method was
used for this transaction. The merger was consummated before the effective date
of Interpretation 9 of the SIC on accounting for business combinations.
Significant intercompany income and expenses, including unrealized gross
profits from internal Novartis transactions, and intercompany receivables and
payables have been eliminated.
REVENUE AND EXPENSE RECOGNITION Sales are recognized on delivery or on
providing services to third parties and are reported net of sales taxes and
rebates. Provisions for rebates to customers are recognized in the same period
that the related sales are recorded based on the contract terms. Expenses of
research and service contracts in progress are recognized based on their
percentage of completion.
FOREIGN CURRENCIES The consolidated financial statements of Novartis are
expressed in Swiss francs ("CHF" or "Swiss francs"). The local currency has
primarily been used as the reporting currency throughout the world.
The Group accounts for foreign currency in accordance with IAS 21 (revised)
and IAS 29.
In the respective local financial statements, monetary assets and
liabilities denominated in foreign currencies are translated at the rate
prevailing at the balance sheet date. Transactions are recorded using the
approximate exchange rate at the time of the transaction. All resulting foreign
exchange transaction gains and losses are recognized in the local income
statement.
Income, expense and cash flows of the consolidated companies have been
translated into Swiss francs using average exchange rates. The balance sheets
are translated using the year end exchange rates. Translation differences
arising from movements in the exchange rates used to translate equity and
long-term internal financing and net income are allocated to reserves.
DERIVATIVE FINANCIAL INSTRUMENTS The Group uses the concept of portfolio
basis valuation. For each portfolio the net unrealized gain or loss is
determined by combining all unrealized gains and losses per instrument.
Realized and unrealized gains and losses on contracts designated as specific
hedges are recognized in the same period that the foreign currency exposure is
realized. The result on instruments which hedge risk positions in future years
(forecasted transactions including foreign currency hedges of anticipated
F-9
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
transactions, cash flows and earnings) is deferred to the period when gains and
losses on the corresponding positions materialize. Option premiums, realized and
unrealized gains and losses are included in the currency result component of
financial income.
Unrealized gains and losses on contracts designated as a hedge of
available-for-sale securities are deferred until the underlying security is
disposed of when they are included in the related capital gain or loss component
of financial income.
Realized and unrealized gains and losses on contracts designated as a hedge
of a net investment in foreign subsidiaries are recognized through the statement
of changes in equity and are included in cumulative translation differences.
Non-hedging currency instruments are valued at the lower of cost on
inception and fair value on a portfolio basis. A net unrealized loss is included
in the current year's result. A net unrealized gain is not recorded. Option
premiums, realized gains and losses and changes in net unrealized losses are
recorded in the income or expense on options and forward contracts component of
financial income.
Financial instruments which are intended to be held for the long-term or to
maturity, principally interest rate swaps and Forward Rate Agreements (FRAs),
are valued on a portfolio basis at the lower of cost, which is usually zero, and
a valuation taking into account market values and anticipated cash flows through
to the maturity of the instruments. A net unrealized loss is recorded in the
current year's result in the income or expense on options and forward contracts
component of financial income. A net unrealized gain is not recorded. FRA
settlement sums and interest paid and received are recorded as interest income
and expense.
FRAs not included above are valued on a portfolio basis with a net loss
recognized in the income statement, in the income or expense on options and
forward contracts component of financial income, together with the settlement
sums. A net unrealized gain is not recorded.
Options on securities are accounted for at the lower of cost and fair value.
Net unrealized losses on written options and the underlying assets as well as
option premiums are recorded in the income statement, in the income or expense
on options and forward contracts component of financial income. Net unrealized
gains are not recorded.
Option premiums are recognized immediately on payment or receipt.
TANGIBLE FIXED ASSETS Tangible fixed assets have been valued at cost of
acquisition or production cost and depreciated on a straight-line basis to the
income statement, over the following estimated useful lives:
Buildings................................................... 20 to 40 years
Machinery and equipment..................................... 10 to 20 years
Furniture and vehicles...................................... 5 to 10 years
Computer hardware........................................... 3 to 7 years
Land is valued at acquisition cost, except if held under long-term lease
arrangements, when it is amortized over the life of the lease. Land held under
long-term lease agreements relates to upfront payments to lease land on which
certain of the Group's buildings are located. Additional costs which extend the
useful life of the tangible fixed assets are capitalized. Financing costs
associated with the construction of tangible fixed assets are not capitalized.
Tangible fixed assets which are financed by leases
F-10
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
giving rights to use the assets as if owned are capitalized at their estimated
cost at the inception of the lease, and depreciated in the same manner as other
tangible fixed assets.
Long lived assets, including identifiable intangibles and goodwill, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. When such events
or changes in circumstances indicate the asset may not be recoverable, the Group
estimates the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of such expected discounted future cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized for the amount by which the asset's net book value exceeds its fair
market value. For purposes of assessing impairment, assets are grouped at the
lowest level for which there are separately identifiable cash flows. Fair value
can be based on sales of similar assets, or other estimates of fair value such
as discounting estimated future cash flows. Considerable management judgment is
necessary to estimate discounted future cash flows. Accordingly, actual outcomes
could vary significantly from such estimates.
INTANGIBLE ASSETS These are valued at their cost and reviewed periodically
and adjusted for any diminution in value as noted in the preceding paragraph. In
the case of business combinations, the excess of the purchase price over the
fair value of net identifiable assets acquired is recorded as goodwill in the
balance sheet. Goodwill, which is denominated in the local currency of the
related acquisition, is amortized to income through administration and general
overheads on a straight-line basis over its useful life. The amortization period
is determined at the time of the acquisition, based upon the particular
circumstances, and ranges from 5 to 20 years. Goodwill relating to acquisitions
arising prior to January 1, 1995 has been fully written off against reserves.
Management determines the estimated useful life of goodwill based on its
evaluation of the respective companies at the time of the acquisition,
considering factors such as existing market share, potential sales growth and
other factors inherent in the acquired companies.
Other acquired intangible assets are written off on a straight-line basis
over the following periods:
Trademarks.................................................. 10 to 15 years
Product Rights.............................................. 5 to 15 years
Software.................................................... 3 years
Others...................................................... 3 to 5 years
Trademarks are amortized on a straight-line basis over their estimated
economic or legal life, whichever is shorter, while the history of the Group has
been to amortize product rights over estimated useful lives of 5 to 15 years.
The useful lives assigned to acquired product rights are based on the maturity
of the products and the estimated economic benefit that such product rights can
provide.
FINANCIAL ASSETS Associated companies and joint ventures are accounted for
by the equity method. All other minority investments are reported at their
acquisition cost and loans at their nominal value. Adjustments are made for any
permanent impairment in value.
INVENTORIES Purchased products are valued at acquisition cost while
own-manufactured products are valued at manufacturing costs including related
production expenses. In the balance sheet inventory is primarily valued at
standard cost, which approximates to historical cost determined on a
first-in-first-out
F-11
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
basis, and this value is used for the cost of goods sold in the income
statement. Provisions are made for inventories with a lower market value or
which are slow-moving. Unsaleable inventory is fully written off.
TRADE ACCOUNTS RECEIVABLE The reported values represent the invoiced
amounts, less adjustments for doubtful receivables.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid
investments with original maturities of three months or less. This position is
readily convertible to known amounts of cash.
MARKETABLE SECURITIES Marketable securities consist of equity and debt
securities which are traded in liquid markets and are classified as
available-for-sale or as bonds held-to-maturity. Marketable securities
available-for-sale are stated at the lower of cost or market value on an
individual basis. Gross unrealized losses are included as financial expense in
the income statement. Unrealized gains are not recorded.
Up to January 1, 2000, the portfolio of bonds intended to be
held-to-maturity was valued at amortized cost, whereby the discount or premium
was amortized into the income statement on a pro rata basis until maturity and
included in the financial result. Except for permanent diminutions in value, if
any, changes in market value were not recorded for this portfolio of bonds. The
majority of this portfolio was disposed of in 2000 and any remaining bonds were
reclassified to available-for-sale marketable securities.
REPURCHASE AGREEMENTS The underlying securities are contained within
marketable securities. The repurchase agreements for the securities sold and
agreed to be repurchased under the agreement, are recognized gross and included
in cash and cash equivalents and short-term financial debts. Income and expenses
are recorded in interest income and expense, respectively.
TAXES Taxes on income are accrued in the same periods as the revenues and
expenses to which they relate. Deferred taxes have been calculated using the
comprehensive liability method. They are calculated on the temporary differences
that arise between the tax base of an asset or liability and its carrying value
in the balance sheet of Group companies, prepared for consolidation purposes,
except for those differences related to investments in subsidiaries where their
reversal will not take place in the foreseeable future. Furthermore, withholding
or other taxes on eventual distribution of retained earnings of Group companies
are only taken into account where a dividend has been planned since, generally,
the retained earnings are reinvested.
Deferred tax assets or liabilities, calculated using applicable local tax
rates, are included in the consolidated balance sheet as either a long-term
asset or liability, with changes in the year recorded in the income statement.
Deferred tax assets are fully recognized and reduced by a valuation allowance
only if it is probable that a benefit will not be realized in the future.
PENSION FUND, POST-RETIREMENT BENEFITS, OTHER LONG-TERM EMPLOYEE BENEFITS AND
EMPLOYEE SHARE PARTICIPATION PLANS
(a) DEFINED BENEFIT PENSION PLANS
The liability in respect of defined benefit pension plans is in all material
cases the defined benefit obligation calculated annually by independent
actuaries using the projected unit credit method. The defined benefit obligation
is measured at the present value of the estimated future cash flows. The charge
for such pension plans, representing the net periodic pension cost less employee
contributions, is included in the personnel expenses of the various functions
where the employees are located. Plan assets are
F-12
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
recorded at their fair values. Significant gains or losses arising from
experience adjustments, changes in actuarial assumptions, and amendments to
pension plans are charged or credited to income over the service lives of the
related employees.
(b) POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
Certain subsidiaries provide healthcare and insurance benefits for a portion
of their retired employees and their eligible dependents. The cost of these
benefits is actuarially determined and included in the related function expenses
over the employees' working lives. The related liability is included in
long-term liabilities.
(c) OTHER LONG-TERM EMPLOYEE BENEFITS
Other long-term employee benefits represent amounts due to employees under
deferred compensation arrangements mandated by certain jurisdictions in which
the Group conducts its operations. Benefits cost is recognized on an accrual
basis in the personnel expenses of the various functions where the employees are
located. The related obligation is accrued in other long-term liabilities.
(d) EMPLOYEE SHARE PARTICIPATION PLANS
No compensation cost is recognized in these financial statements for options
or shares granted to employees from employee share participation plans.
RESEARCH AND DEVELOPMENT Research and development expenses are fully
charged to the income statement. The Group considers that the regulatory and
other uncertainties inherent in the development of its key new products preclude
it from capitalizing development costs. Acquired projects which have achieved
technical feasibility, usually signified by U.S. Food & Drug Administration or
comparable regulatory body approval, are capitalized because it is probable that
the costs will give rise to future economic benefits. Laboratory buildings and
equipment included in tangible fixed assets are depreciated over their estimated
useful lives.
GOVERNMENT GRANTS Government grants are deferred and recognized in the
income statement over the period necessary to match them with the related costs
which they are intended to compensate for.
RESTRUCTURING CHARGES Restructuring charges are accrued against operating
income in the period management commits itself to a plan and it is probable a
liability has been incurred and the amount can be reasonably estimated.
Restructuring charges or releases are included in general overheads. Releases of
accrued amounts are recognized in the period in which the release occurs.
ENVIRONMENTAL LIABILITIES Novartis is exposed to environmental liabilities
relating to its past operations, principally in respect of remediation costs.
Provisions for non-recurring remediation costs are made when expenditure on
remedial work is probable and the cost can be estimated. Cost of future
expenditures do not reflect any claims or recoveries. The Group records
recoveries at such time the amount is reasonably estimable and collection is
probable. With regard to recurring remediation costs, the discounted amount of
such annual costs for the next 30 years are calculated and recorded in long-term
liabilities.
F-13
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
DIVIDENDS Dividends are recorded in the Group's financial statements in the
period in which they are approved by the Group's shareholders.
TREASURY SHARES Treasury shares are deducted from equity at their nominal
value of CHF 20 per share. Differences between this amount and the amount paid
for acquiring, or received for disposing of, treasury shares are recorded in
consolidated equity.
2. CHANGES IN THE SCOPE OF CONSOLIDATION
The following significant changes were made during 2000, 1999 and 1998:
ACQUISITIONS 2000
GENERICS
On April 10, 2000, the generics sector acquired 72% of Grandis Biotech GmbH,
Freiburg, Germany for CHF 26 million in cash. The acquisition was accounted for
under the purchase method of accounting and the related goodwill was CHF 32
million which is being amortized over 15 years.
CIBA VISION
On October 2, 2000 the sector acquired 100% of Wesley Jessen
VisionCare Inc., Des Plaines, Illinois, USA for CHF 1.3 billion (USD 0.8
billion) in cash.
The net assets acquired consisted of tangible fixed assets (CHF 177
million), inventories (CHF 182 million), trade accounts receivable (CHF 93
million), deferred tax assets (CHF 56 million), other assets (CHF 118 million);
deferred tax liabilities (CHF 241 million), short term financial debts (CHF 155
million) and other liabilities (CHF 330 million). The acquisition was accounted
for under the purchase method of accounting and the related goodwill was
CHF 1.4 billion which is being amortized on a straight-line basis over
20 years.
ANIMAL HEALTH
In January 2000, Novartis Animal Health completed the 100% acquisition of
Vericore Ltd., a UK-based company focussed on vaccines, parasiticides and other
products for farm animals, pharmaceuticals for companion animals, and
aquaculture. The acquisition price amounted to CHF 96 million and was paid in
cash.
In June 2000, Novartis Animal Health increased the 40% stake in the
Canadian-based aquaculture company Cobequid Life Sciences Inc., which had been
obtained in the Vericore acquisition, to 100% for CHF 38 million in cash.
These acquisitions were accounted for under the purchase method of
accounting and the related goodwill was CHF 163 million which is being amortized
on a straight-line basis over 15 years.
F-14
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CHANGES IN THE SCOPE OF CONSOLIDATION (CONTINUED)
ACQUISITIONS 1999
GENERICS
On December 9, 1999, the sector company Geneva Pharmaceuticals Inc., USA
acquired the assets of Invamed Inc., New Jersey, USA for CHF 149 million. The
acquisition was accounted for under the purchase method of accounting and the
related goodwill was CHF 127 million which is being amortized on a straight-line
basis over 15 years.
CIBA VISION
On July 2, 1999, the sector acquired the assets of the interocular lens
business of Mentor Corporation, California for CHF 60 million. The acquisition
was accounted for under the purchase method of accounting and the related
goodwill was CHF 26 million which is being amortized on a straight-line basis
over 15 years.
ACQUISITIONS 1998
GENERICS
On November 1, 1998 the Generics sector acquired the antibiotics business
and the Frankfurt fermentation plant of Hoechst Marion Roussel Germany, GmbH for
CHF 49 million in cash. No goodwill has been recognized on this acquisition.
Sales have been included in operations since the acquisition date.
AGRIBUSINESS
On September 1, 1998, Novartis acquired a production plant and related
operating assets from Oriental Chemicals Industries, South Korea for CHF 196
million. The acquisition was accounted for under the purchase method of
accounting and the related goodwill was CHF 110 million. This goodwill is being
amortized on a straight-line basis over 15 years based on the expected
accelerated growth achieved as a result of the immediate control of sales and
marketing and better positioning for the development of new products in the
Korean market, the 12th largest crop protection market in the world. In
addition, the Group does not believe that actions by competitors would
materially affect the estimated useful life of goodwill. Sales have been
included in operations since the acquisition date.
The above mentioned 2000, 1999, and 1998 acquisitions did not have a
material pro forma impact on the Group's results of operations, cash flows or
financial position.
DIVESTMENTS 2000
AGRIBUSINESS
On December 1, 1999, the Board of Novartis approved the divestment of the
Agribusiness sector by merging it with the Agrochemicals business of AstraZeneca
Plc.
Novartis spun-off its Agribusiness sector on November 6, 2000 to its
shareholders as part of the transactions necessary to form Syngenta AG. On the
same day AstraZeneca Plc. also spun-off its Crop Protection activities which
were then merged with Novartis Agribusiness. On spin-off, Novartis AG
shareholders owned 61% of the new company and AstraZeneca shareholders 39%.
Syngenta AG was listed on the Swiss, New York, London and Stockholm exchanges on
November 13, 2000.
F-15
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CHANGES IN THE SCOPE OF CONSOLIDATION (CONTINUED)
The sales and operating income recorded by Novartis Agribusiness up to the
spin-off date were CHF 6.7 billion and CHF 1.2 billion, respectively. This
transaction involved the Novartis Group transferring CHF 3.3 billion of debt to
Syngenta. The Novartis Group's equity has been reduced by a net CHF 3.8 billion
(after taking into account a receipt from Novartis shareholders of CHF 687
million in connection with this transaction) due to this spin-off to its
shareholders. Novartis incurred costs in relation to this transaction of CHF 69
million.
DIVESTMENTS 1999
CONSUMER HEALTH
The Group's 51% interest in OLW Snacks AB, Sweden and 49% interest in Chips
OLW AB, Sweden were sold on January 25, 1999. The Group's 100% stake in the
German Eden Group was sold on May 11, 1999, and the 100% interest in Wasa
operations in Sweden, Germany, Denmark, Norway and Poland were sold on June 30,
1999.
The sales price for these divestments totaled CHF 625 million and resulted
in a pre-tax gain of CHF 352 million which has been recorded in operating income
in the consolidated income statement. 1999 sales of the various divested
activities up to their respective date of divestment amounted to CHF 182
million.
Sales relating to these businesses generated an operating income in 1999 and
1998 of CHF 23 million and CHF 80 million, respectively.
DIVESTMENTS 1998
CONSUMER HEALTH
On September 30, 1998 Roland SA, Murten, Switzerland on November 10, 1998
Redline Healthcare Inc., USA and on December 30, 1998 certain business lines of
Novartis Nutrition S.r.l., Bologna, Italy, were sold. Total sales of Roland and
Redline activities recorded up to their respective date of divestment amounted
to CHF 499 million.
The Italian divested activities were consolidated for the whole year and
made sales of CHF 186 million in 1998. The sale price for these divestments
totaled CHF 490 million.
AGRIBUSINESS
Effective April 30, 1998, SDS Biotech K.K. Tokyo, Japan was divested. Sales
in the period up to divestment were CHF 59 million.
F-16
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SECTORIAL BREAKDOWN OF KEY FIGURES 2000, 1999 AND 1998
Novartis is organized on a worldwide basis into five continuing operating
sectors and Corporate activities. Agribusiness is presented as a discontinuing
sector. These sectors, which are based on internal management accounts, are as
follows:
CONTINUING SECTORS
The PHARMACEUTICALS sector manufactures, distributes, and sells branded
pharmaceuticals in the following therapeutic areas: transplantation and
immunology; Central Nervous System (CNS); rheumatism, bone and hormone
replacement therapy; oncology and hematology; dermatology; cardiovascular,
endocrine and respiratory diseases.
The GENERICS sector manufactures, distributes and sells off patent
pharmaceutical products and substances.
The CONSUMER HEALTH sector manufactures, distributes and sells health and
medical nutrition products and a variety of OTC medicines.
The CIBA VISION sector manufactures, distributes and sells contact lenses,
lens care products, pharmaceuticals and ophthalmic surgical products.
The ANIMAL HEALTH sector manufactures, distributes and sells veterinary
products for farm and companion animals.
CORPORATE
This includes the costs of the Group headquarters and those of corporate
coordination functions in major countries. In addition, it includes certain
items of income and expense which are not directly attributable to specific
sectors. Usually no allocation of any of these amounts is made to the continuing
sectors although an allocation of CHF 60 million in 2000, CHF 90 million in 1999
and CHF 30 million in 1998, was made to the discontinuing Agribusiness sector.
DISCONTINUING SECTOR
The AGRIBUSINESS sector principally manufactures, distributes and sells
insecticides, herbicides and fungicides and sells seeds for growing corn,
sugarbeet, oilseeds, vegetables and flowers.
The Group's sectors are businesses that offer different products. These
sectors are managed separately because they manufacture, distribute, and sell
distinct products which require differing technologies and marketing strategies.
Revenues on intersector sales are determined on an arm's length basis. The
accounting policies of the sectors described above are the same as those
described in the summary of accounting policies. The Group principally evaluates
sector performance and allocates resources based on operating income.
Net sector operating assets consist primarily of tangible fixed assets,
intangible assets, inventories and receivables less operating liabilities.
Corporate assets and liabilities principally consist of net liquidity (cash,
cash equivalents, marketable securities less financial debts) and deferred and
current taxes.
F-17
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. SECTORIAL BREAKDOWN OF KEY FIGURES 2000, 1999 AND 1998 (CONTINUED)
(IN CHF MILLIONS EXCEPT EMPLOYEES)
TOTAL
CONSUMER CONTINUING
2000 PHARMACEUTICALS GENERICS HEALTH CIBA VISION ANIMAL HEALTH CORPORATE SECTORS
- ---- --------------- -------- --------- ----------- ------------- --------- ----------
Sales to third parties............. 17,611 1,938 6,395 2,085 1,083 29,112
Sales to other sectors............. 245 170 42 8 (465)
------ ------ ------ ------ ----- ------- -------
SALES OF SECTORS................... 17,856 2,108 6,437 2,093 1,083 (465) 29,112
====== ====== ====== ====== ===== ======= =======
OPERATING INCOME................... 5,403 227 824 158 179 (64) 6,727
====== ====== ====== ====== ===== =======
Income from associated companies... 104 1 (7) (1) 97
Financial income, net.............. 1,216
INCOME BEFORE TAXES AND MINORITY
INTERESTS........................ 8,040
Taxes.............................. (1,504)
INCOME BEFORE MINORITY INTERESTS... 6,536
Minority interests................. (25)
-------
NET INCOME......................... 6,511
=======
Included in operating income are:
Research and development........... (3,228) (170) (186) (150) (88) (189) (4,011)
Depreciation of tangible fixed
assets........................... (624) (115) (101) (86) (12) (32) (970)
Amortization of intangible
assets........................... (62) (58) (38) (32) (12) (3) (205)
Restructuring charges.............. (42) (16) (2) (41) (101)
TOTAL ASSETS....................... 16,887 2,575 4,426 3,169 842 30,297 58,196
Liabilities........................ (4,477) (636) (2,142) (824) (198) (12,979) (21,256)
------ ------ ------ ------ ----- ------- -------
TOTAL EQUITY AND MINORITY
INTERESTS........................ 12,410 1,939 2,284 2,345 644 17,318 36,940
Less net liquidity................. (14,461) (14,461)
------ ------ ------ ------ ----- ------- -------
NET OPERATING ASSETS............... 12,410 1,939 2,284 2,345 644 2,857 22,479
====== ====== ====== ====== ===== ======= =======
Included in total assets are:
Total tangible fixed assets........ 5,770 974 880 648 72 686 9,030
Additions to tangible fixed
assets........................... 534 241 122 120 20 142 1,179
Total investments in associated
companies........................ 1,375 5 2 5 144 1,531
EMPLOYEES AT YEAR END.............. 37,167 5,712 12,949 8,874 1,975 976 67,653
====== ====== ====== ====== ===== ======= =======
DISCONTINUING
AGRIBUSINESS
2000 SECTOR GROUP
- ---- ------------- --------
Sales to third parties............. 6,693 35,805
Sales to other sectors.............
------ -------
SALES OF SECTORS................... 6,693 35,805
====== =======
OPERATING INCOME................... 1,156 7,883
Income from associated companies... 1 98
Financial income, net.............. (125) 1,091
INCOME BEFORE TAXES AND MINORITY
INTERESTS........................ 1,032 9,072
Taxes.............................. (316) (1,820)
INCOME BEFORE MINORITY INTERESTS... 716 7,252
Minority interests................. (17) (42)
------ -------
NET INCOME......................... 699 7,210
====== =======
Included in operating income are:
Research and development........... (646) (4,657)
Depreciation of tangible fixed
assets........................... (226) (1,196)
Amortization of intangible
assets........................... (104) (309)
Restructuring charges.............. (101)
TOTAL ASSETS....................... 58,196
Liabilities........................ (21,256)
-------
TOTAL EQUITY AND MINORITY
INTERESTS........................ 36,940
Less net liquidity................. (14,461)
-------
NET OPERATING ASSETS............... 22,479
=======
Included in total assets are:
Total tangible fixed assets........ 9,030
Additions to tangible fixed
assets........................... 174 1,353
Total investments in associated
companies........................ 1,531
EMPLOYEES AT YEAR END.............. 67,653
====== =======
F-18
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. SECTORIAL BREAKDOWN OF KEY FIGURES 2000, 1999 AND 1998 (CONTINUED)
(IN CHF MILLIONS EXCEPT EMPLOYEES)
CONSUMER CONSUMER
HEALTH HEALTH
1999 PHARMACEUTICALS GENERICS ONGOING DIVESTED CIBA VISION ANIMAL HEALTH CORPORATE
- ---- --------------- -------- --------- --------- ----------- ------------- ---------
Sales to third parties........... 15,275 1,823 5,570 182 1,632 927
Sales to other sectors........... 155 169 57 2 1 (384)
------ ------ ------ ------ ------ ----- -------
SALES OF SECTORS................. 15,430 1,992 5,627 182 1,634 928 (384)
====== ====== ====== ====== ====== ===== =======
OPERATING INCOME................. 4,676 347 807 375 250 216 25
====== ====== ====== ====== ====== ===== =======
Income from associated
companies...................... 363 2 11
Financial income, net............
INCOME BEFORE TAXES AND MINORITY
INTERESTS......................
Taxes............................
INCOME BEFORE MINORITY
INTERESTS......................
Minority interests...............
NET INCOME.......................
Included in operating income are:
Research and development......... (2,848) (126) (167) (1) (144) (65) (164)
Depreciation of tangible fixed
assets......................... (589) (107) (105) (57) (9) (139)
Amortization of intangible
assets......................... (45) (41) (27) (19) (1) (5)
Divestment gain.................. 352
Restructuring charges............ (70)
TOTAL ASSETS..................... 14,784 2,552 4,123 1,195 623 33,023
Liabilities...................... (4,094) (661) (2,025) (403) (162) (19,043)
------ ------ ------ ------ ----- -------
TOTAL EQUITY AND MINORITY
INTERESTS...................... 10,690 1,891 2,098 792 461 13,980
Less net liquidity............... (12,678)
------ ------ ------ ------ ----- -------
NET OPERATING ASSETS............. 10,690 1,891 2,098 792 461 1,302
====== ====== ====== ====== ===== =======
Included in total assets are:
Total tangible fixed assets...... 6,285 887 865 461 59 731
Additions to tangible fixed
assets......................... 621 157 116 143 10 64
Total investments in associated
companies...................... 1,319 5 146
EMPLOYEES AT YEAR END............ 35,721 5,451 12,254 46 6,041 1,499 3,481
====== ====== ====== ====== ====== ===== =======
TOTAL DISCONTINUING
CONTINUING AGRIBUSINESS
1999 SECTORS SECTOR GROUP
- ---- ---------- ------------- --------
Sales to third parties........... 25,409 7,056 32,465
Sales to other sectors...........
------- ------ -------
SALES OF SECTORS................. 25,409 7,056 32,465
======= ====== =======
OPERATING INCOME................. 6,696 647 7,343
Income from associated
companies...................... 376 7 383
Financial income, net............ 990 (197) 793
INCOME BEFORE TAXES AND MINORITY
INTERESTS...................... 8,062 457 8,519
Taxes............................ (1,683) (150) (1,833)
INCOME BEFORE MINORITY
INTERESTS...................... 6,379 307 6,686
Minority interests............... (20) (7) (27)
------- ------ -------
NET INCOME....................... 6,359 300 6,659
======= ====== =======
Included in operating income are:
Research and development......... (3,515) (731) (4,246)
Depreciation of tangible fixed
assets......................... (1,006) (255) (1,261)
Amortization of intangible
assets......................... (138) (110) (248)
Divestment gain.................. 352 352
Restructuring charges............ (70) (100) (170)
TOTAL ASSETS..................... 56,300 9,227 65,527
Liabilities...................... (26,388) (1,702) (28,090)
------- ------ -------
TOTAL EQUITY AND MINORITY
INTERESTS...................... 29,912 7,525 37,437
Less net liquidity............... (12,678) (12,678)
------- ------ -------
NET OPERATING ASSETS............. 17,234 7,525 24,759
======= ====== =======
Included in total assets are:
Total tangible fixed assets...... 9,288 2,378 11,666
Additions to tangible fixed
assets......................... 1,111 260 1,371
Total investments in associated
companies...................... 1,470 170 1,640
EMPLOYEES AT YEAR END............ 64,493 17,361 81,854
======= ====== =======
1999 sector reporting has been restated to reflect the transfer from
January 1, 2000 of certain products from the Pharmaceutical sector to the
Consumer Health sector. In 1999 these products generated sales of CHF
320 million and operating income of CHF 154 million. Furthermore, in 1999 CHF
90 million of Corporate administration and general overheads were allocated to
the discontinuing Agribusiness sector.
F-19
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. SECTORIAL BREAKDOWN OF KEY FIGURES 2000, 1999 AND 1998 (CONTINUED)
(IN CHF MILLIONS EXCEPT EMPLOYEES)
TOTAL
CONSUMER CONTINUING
1998 PHARMACEUTICALS GENERICS HEALTH CIBA VISION ANIMAL HEALTH CORPORATE SECTORS
- ---- --------------- -------- --------- ----------- ------------- --------- ----------
Sales to third parties............. 14,501 1,529 5,788 1,505 901 24,224
Sales to other sectors............. 165 158 53 1 2 (379)
------ ------ ------ ------ ----- ------- -------
SALES OF SECTORS................... 14,666 1,687 5,841 1,506 903 (379) 24,224
====== ====== ====== ====== ===== ======= =======
OPERATING INCOME................... 4,502 278 727 225 211 (91) 5,852
====== ====== ====== ====== ===== =======
Income from associated companies... 230 2 3 235
Financial income, net.............. 1,034
INCOME BEFORE TAXES AND MINORITY
INTERESTS........................ 7,121
Taxes.............................. (1,594)
INCOME BEFORE MINORITY INTERESTS... 5,527
Minority interests................. (19)
-------
NET INCOME......................... 5,508
=======
Included in operating income are:
Research and development........... (2,609) (98) (136) (153) (61) (172) (3,229)
Depreciation of tangible fixed
assets........................... (583) (96) (119) (40) (8) (86) (932)
Amortization of intangible
assets........................... (36) (37) (32) (4) (2) (17) (128)
Divestment gain.................... 95 95
Restructuring charges.............. (112) (96) (208)
TOTAL ASSETS....................... 13,391 2,056 3,609 890 540 26,970 47,456
Liabilities........................ (3,496) (505) (1,765) (316) (174) (16,528) (22,784)
------ ------ ------ ------ ----- ------- -------
TOTAL EQUITY AND MINORITY
INTERESTS........................ 9,895 1,551 1,844 574 366 10,442 24,672
Less net liquidity................. (10,764) (10,764)
------ ------ ------ ------ ----- ------- -------
NET OPERATING ASSETS............... 9,895 1,551 1,844 574 366 (322) 13,908
====== ====== ====== ====== ===== ======= =======
Included in total assets are:
Total tangible fixed assets........ 6,007 803 957 353 55 946 9,121
Additions to tangible fixed
assets........................... 789 153 124 151 11 57 1,285
Total investments in associated
companies........................ 844 3 9 120 976
EMPLOYEES AT YEAR END.............. 36,170 4,888 13,636 5,926 1,474 3,633 65,727
====== ====== ====== ====== ===== ======= =======
DISCONTINUING
AGRIBUSINESS
1998 SECTOR GROUP
- ---- ------------- --------
Sales to third parties............. 7,478 31,702
Sales to other sectors.............
------ -------
SALES OF SECTORS................... 7,478 31,702
====== =======
OPERATING INCOME................... 1,068 6,920
Income from associated companies... 4 239
Financial income, net.............. (275) 759
INCOME BEFORE TAXES AND MINORITY
INTERESTS........................ 797 7,918
Taxes.............................. (288) (1,882)
INCOME BEFORE MINORITY INTERESTS... 509 6,036
Minority interests................. (7) (26)
------ -------
NET INCOME......................... 502 6,010
====== =======
Included in operating income are:
Research and development........... (677) (3,906)
Depreciation of tangible fixed
assets........................... (229) (1,161)
Amortization of intangible
assets........................... (99) (227)
Divestment gain.................... 95
Restructuring charges.............. (208)
TOTAL ASSETS....................... 8,769 56,225
Liabilities........................ (1,851) (24,635)
------ -------
TOTAL EQUITY AND MINORITY
INTERESTS........................ 6,918 31,590
Less net liquidity................. (10,764)
------ -------
NET OPERATING ASSETS............... 6,918 20,826
====== =======
Included in total assets are:
Total tangible fixed assets........ 2,251 11,372
Additions to tangible fixed
assets........................... 292 1,577
Total investments in associated
companies........................ 133 1,109
EMPLOYEES AT YEAR END.............. 16,722 82,449
====== =======
- -------------
No restatement has been made for the transfer of certain products from the
Pharmaceuticals sector to the Consumer Health sector which occurred with effect
from January 1, 2000, as the reclassification for 1998 cannot be provided
without unreasonable effort or expense. However, this information has been
restated to allocate CHF 30 million of Corporate administration and general
overheads to the discontinuing Agribusiness sector.
F-20
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REGIONAL BREAKDOWN OF KEY FIGURES 2000, 1999 AND 1998
(IN CHF MILLIONS EXCEPT EMPLOYEES)
ASIA/AFRICA
2000 EUROPE THE AMERICAS AUSTRALIA TOTAL
- ---- -------- ------------ ----------- --------
SALES(1).......................................... 11,729 17,761 6,315 35,805
OPERATING INCOME(2)............................... 4,469 2,474 940 7,883
Depreciation of tangible fixed assets included in
operating income................................. (705) (388) (103) (1,196)
NET OPERATING ASSETS(3)........................... 11,176 9,774 1,529 22,479
Additions to tangible fixed assets included in net
operating assets................................. 790 475 88 1,353
Personnel costs................................... 3,703 3,282 828 7,813
EMPLOYEES AT YEAR END............................. 28,815 27,063 11,775 67,653
ASIA/AFRICA
1999 EUROPE THE AMERICAS AUSTRALIA TOTAL
- ---- -------- ------------ ----------- --------
SALES(1).......................................... 11,620 15,328 5,517 32,465
OPERATING INCOME(2)............................... 4,549 2,170 624 7,343
Depreciation of tangible fixed assets included in
operating income................................. (790) (351) (120) (1,261)
NET OPERATING ASSETS(3)........................... 14,936 7,780 2,043 24,759
Additions to tangible fixed assets included in net
operating assets................................. 754 510 107 1,371
Personnel costs................................... 3,761 2,732 691 7,184
EMPLOYEES AT YEAR END............................. 38,125 29,077 14,652 81,854
ASIA/AFRICA
1998 EUROPE THE AMERICAS AUSTRALIA TOTAL
- ---- -------- ------------ ----------- --------
SALES(1).......................................... 11,789 15,292 4,621 31,702
OPERATING INCOME(2)............................... 3,658 2,742 520 6,920
Depreciation of tangible fixed assets included in
operating income................................. (770) (321) (70) (1,161)
NET OPERATING ASSETS(3)........................... 12,765 6,266 1,795 20,826
Additions to tangible fixed assets included in net
operating assets................................. 1,010 498 69 1,577
Personnel costs................................... 3,904 2,610 579 7,093
EMPLOYEES AT YEAR END............................. 40,105 27,832 14,512 82,449
- -------------
(1) Sales by location of third party customer.
(2) Operating income as recorded in the legal entities in the respective region.
(3) Long-term and current assets (excluding marketable securities, cash and
fixed-term deposits) less non-interest bearing liabilities.
F-21
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REGIONAL BREAKDOWN OF KEY FIGURES 2000, 1999 AND 1998 (CONTINUED)
The following countries accounted for more than 5% of the respective Group
totals as at, or for the years ended, December 31, 2000, 1999, and 1998:
SALES(1)
---------------------------------------------------------------
COUNTRY 2000 % 1999 % 1998 %
- ------- -------- -------- -------- -------- -------- --------
Switzerland.......... 624 2 631 2 654 2
USA.................. 13,859 39 11,912 37 11,822 37
Japan................ 2,891 8 2,266 7 1,775 6
Germany.............. 2,208 6 2,257 7 2,185 7
France............... 2,009 5 2,223 7 2,258 7
Other................ 14,214 40 13,176 40 13,008 41
------ --- ------ --- ------ ---
TOTAL GROUP.......... 35,805 100 32,465 100 31,702 100
====== === ====== === ====== ===
INVESTMENT IN TANGIBLE FIXED ASSETS
---------------------------------------------------------------
COUNTRY 2000 % 1999 % 1998 %
- ------- -------- -------- -------- -------- -------- --------
Switzerland.......... 270 20 280 20 400 26
USA.................. 389 29 440 32 407 26
Japan................ 17 1 16 1 13 1
Germany.............. 110 8 76 6 56 4
France............... 90 7 50 4 63 4
Other................ 477 35 509 37 638 39
----- --- ----- --- ----- ---
TOTAL GROUP.......... 1,353 100 1,371 100 1,577 100
===== === ===== === ===== ===
NET OPERATING ASSETS(3)
------------------------------------------------------------------
COUNTRY 2000 % 1999 % 1998 %
- ------- -------- -------- -------- -------- -------- --------
Switzerland.......... 3,782 17 6,383 26 6,461 31
USA.................. 8,540 38 6,400 26 4,971 24
Japan................ 891 4 934 4 886 4
Germany.............. 292 1 875 4 971 5
France............... 436 2 882 4 915 4
Other................ 8,538 38 9,285 36 6,622 32
------ --- ------ --- -------- ---
TOTAL GROUP.......... 22,479 100 24,759 100 20,826 100
====== === ====== === ======== ===
- -------------
(1) Sales by location of third party customer.
(2) Operating income as recorded in the legal entities in the respective region.
(3) Long-term and current assets (excluding marketable securities, cash and
fixed-term deposits) less non-interest bearing liabilities.
No single customer accounts for 10% or more of the Group's total sales.
5. FINANCIAL INCOME, NET
2000 1999 1998
CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ------------ ------------
Interest income................................... 1,052 1,132 929
Dividend income................................... 91 23 34
Capital gains..................................... 784 628 677
Income on options and forward contracts........... 804 121 391
Other financial income............................ 5 6 15
------ ------ ------
FINANCIAL INCOME.................................. 2,736 1,910 2,046
------ ------ ------
Interest expense.................................. (510) (542) (733)
Expenses on options and forward contracts......... (1,334) (303) (337)
Other financial expense........................... (130) (115) (88)
------ ------ ------
FINANCIAL EXPENSE................................. (1,974) (960) (1,158)
------ ------ ------
CURRENCY RESULT, NET.............................. 329 (157) (129)
------ ------ ------
TOTAL, NET........................................ 1,091 793 759
====== ====== ======
2000 interest income includes a total of CHF 14 million (1999: CHF
1 million income, 1998: CHF 8 million expense) received from the foundations
referred to in Note 27 at commercial interest rates on the outstanding
short-term debt.
F-22
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. TAXES
Income before taxes and minority interests consists of the following:
2000 1999 1998
CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ------------ ------------
Switzerland....................................... 2,482 3,575 3,163
Foreign........................................... 6,590 4,944 4,755
------ ------ ------
TOTAL INCOME BEFORE TAXES AND MINORITY
INTERESTS....................................... 9,072 8,519 7,918
====== ====== ======
Current income tax expense consists of the following:
2000 1999 1998
CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ------------ ------------
Switzerland....................................... (351) (349) (317)
Foreign........................................... (1,571) (1,312) (1,215)
------ ------ ------
TOTAL CURRENT INCOME TAX EXPENSE.................. (1,922) (1,661) (1,532)
====== ====== ======
Deferred income tax income/(expense) consists of the following:
2000 1999 1998
CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ------------ ------------
Switzerland....................................... (83) (136) (328)
Foreign........................................... 185 (36) (22)
------ ------ ------
TOTAL DEFERRED TAX INCOME/(EXPENSE)............... 102 (172) (350)
------ ------ ------
TOTAL INCOME TAX EXPENSE.......................... (1,820) (1,833) (1,882)
====== ====== ======
Temporary differences related to tax write-down of
investments in subsidiaries on which no deferred
tax has been provided as they are permanent in
nature.......................................... 1,340 2,421 2,619
====== ====== ======
The gross value of net operating loss carryforwards with their expiry dates
is as follows:
2000 1999 1998
CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ------------ ------------
one year.......................................... 22 21 13
two years......................................... 74 22 3
three years....................................... 21 21 25
four years........................................ 51 23 17
five years........................................ 80 115 8
more than five years.............................. 587 810 593
------ ------ ------
TOTAL............................................. 835 1,012 659
====== ====== ======
Of these gross values CHF 411 million has been capitalized as a deferred tax
asset (1999: CHF 245 million, 1998: CHF 255 million).
F-23
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. TAXES (CONTINUED)
ANALYSIS OF TAX RATE The main elements contributing to the difference
between the Group's overall expected tax rate (the weighted average tax rate
based on the result before tax of each subsidiary) and the effective tax rate
are:
2000 1999 1998
-------- -------- --------
% % %
Expected tax rate........................................... 19.5 21.2 23.1
Effect of disallowed expenditures........................... 1.5 1.8 1.8
Effect of utilization of tax losses brought forward from
prior periods............................................. (0.3) (0.3) (0.7)
Effect of income taxed at reduced rates..................... (1.9) (3.2) (1.4)
Prior year and other items.................................. 1.3 2.0 1.0
---- ---- ----
EFFECTIVE TAX RATE.......................................... 20.1 21.5 23.8
==== ==== ====
The utilization of tax loss carryforwards lowered the tax charge by CHF
26 million, CHF 27 million, and CHF 53 million in 2000, 1999 and 1998,
respectively.
7. EARNINGS PER SHARE (EPS)
Basic earnings per share is calculated by dividing the net income
attributable to shareholders by the weighted average number of shares
outstanding during the year, excluding from the issued shares the average number
of shares purchased by the Group and held as treasury shares.
2000 1999 1998
----------- ----------- -----------
Net income attributable to shareholders (CHF
millions)............................................ 7,210 6,659 6,010
Weighted average number of shares outstanding.......... 65,338,690 66,345,501 66,172,155
----------- ----------- -----------
BASIC EARNINGS PER SHARE (EXPRESSED IN CHF)............ 110 100 91
=========== =========== ===========
For the diluted earnings per share the weighted average number of shares
outstanding is adjusted to assume conversion of all potential dilutive shares.
The Group's convertible debt represents a potential dilution in the earnings per
share to the extent that it is not covered by a hedge with non-consolidated
employee share participation and employee benefit foundations to deliver the
required number of shares
F-24
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EARNINGS PER SHARE (EPS) (CONTINUED)
on conversion. In the diluted EPS calculation the convertible debt is assumed to
have been converted into shares and the net income is adjusted to eliminate the
applicable interest expense less the tax effect.
2000 1999 1998
----------- ----------- -----------
Net income attributable to shareholders (CHF
millions)............................................ 7,210 6,659 6,010
Elimination of interest expense on convertible debt
(net of tax effect) (CHF millions)................... 2 3 4
----------- ----------- -----------
Net income used to determine diluted earnings per share
(CHF millions)....................................... 7,212 6,662 6,014
=========== =========== ===========
Weighted average number of shares outstanding.......... 65,338,690 66,345,501 66,172,155
Adjustment for assumed conversion of convertible
debt................................................. 124,519 149,935 180,622
Adjustment for dilutive stock options.................. 24,564 13,977 18,104
----------- ----------- -----------
Weighted average number of shares for diluted earnings
per share............................................ 65,487,773 66,509,413 66,370,881
----------- ----------- -----------
DILUTED EARNINGS PER SHARE (EXPRESSED IN CHF).......... 110 100 91
=========== =========== ===========
8. TANGIBLE FIXED ASSET MOVEMENTS
PLANT UNDER
CONSTRUCTION
AND OTHER
LAND BUILDINGS MACHINERY EQUIPMENT 2000 1999 1998
(CHF MILLIONS) -------- --------- --------- ------------ -------- -------- --------
COST
JANUARY 1...................... 565 8,442 12,705 1,301 23,013 21,552 21,624
Consolidation changes.......... 9 26 185 7 227 (90) (75)
Additions...................... 2 307 1,010 34 1,353 1,371 1,577
Disposals...................... (27) (560) (741) (24) (1,352) (1,265) (1,151)
Effect of Agribusiness
spin-off..................... (164) (1,846) (3,514) (112) (5,636) -- --
Translation effects............ (23) (31) (54) 1,445 (423)
------- ------ ------- ------- ------- ------- -------
DECEMBER 31.................... 385 6,346 9,645 1,175 17,551 23,013 21,552
======= ====== ======= ======= ======= ======= =======
ACCUMULATED DEPRECIATION
JANUARY 1...................... (1) (3,974) (7,372) (11,347) (10,181) (10,021)
Consolidation changes.......... (1) (25) (26) 73 88
Depreciation charge............ (271) (925) (1,196) (1,456) (1,204)
Depreciation on disposals...... 1 301 598 900 888 780
Effect of Agribusiness
spin-off..................... 3 860 2,282 3,145 -- --
TRANSLATION EFFECTS............ (3) 13 (7) 3 (671) 176
------- ------ ------- ------- ------- ------- -------
DECEMBER 31.................... -- (3,072) (5,449) -- (8,521) (11,347) (10,181)
------- ------ ------- ------- ------- ------- -------
NET BOOK VALUE--DECEMBER 31.... 385 3,274 4,196 1,175 9,030 11,666 11,371
------- ------ ------- ------- ------- ------- -------
INSURED VALUE--DECEMBER 31..... 21,329 22,775 22,260
------- ------- -------
NET BOOK VALUE OF TANGIBLE
FIXED ASSETS UNDER FINANCE
LEASE CONTRACTS.............. 17 22 15
======= ======= =======
F-25
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. TANGIBLE FIXED ASSET MOVEMENTS (CONTINUED)
At December 31, 2000 commitments for purchases of tangible fixed assets
totaled CHF 248 million (1999: CHF 139 million).
9. INTANGIBLE ASSET MOVEMENTS
PRODUCT OTHER
GOODWILL RIGHTS TRADEMARKS SOFTWARE INTANGIBLES 2000 1999
(CHF MILLIONS) -------- -------- ---------- -------- ----------- -------- --------
COST
JANUARY 1........................ 1,768 1,719 257 62 175 3,981 3,125
Additions........................ 1,584 2,722 36 17 90 4,449 633
Disposals........................ -- (83) -- (13) 88 (8) (17)
Effect of Agribusiness
spin-off....................... (346) (1,498) (12) (8) (46) (1,910) --
Translation effects.............. (41) 41 2 (3) (3) (4) 240
------ ------ ---- --- ---- ------ -----
DECEMBER 31...................... 2,965 2,901 283 55 304 6,508 3,981
====== ====== ==== === ==== ====== =====
ACCUMULATED AMORTIZATION
JANUARY 1........................ (234) (307) (61) (45) (120) (767) (470)
Amortization..................... (126) (110) (21) (16) (36) (309) (248)
Disposals........................ -- 4 -- 12 (8) 8 9
Effect of Agribusiness
spin-off....................... 46 340 2 6 8 402 --
Translation effects.............. 3 (18) -- 2 1 (12) (58)
------ ------ ---- --- ---- ------ -----
DECEMBER 31...................... (311) (91) (80) (41) (155) (678) (767)
------ ------ ---- --- ---- ------ -----
NET BOOK VALUE--DECEMBER 31...... 2,654 2,810 203 14 149 5,830 3,214
====== ====== ==== === ==== ====== =====
On December 21, 2000 the Pharmaceutical sector paid CHF 2.7 billion (USD
1.6 billion) to acquire the product rights of Famvir-Registered Trademark- and
Vectavir-Registered Trademark-/Denavir-Registered Trademark- from SmithKline
Beecham. These product rights will be amortized over 15 years. The allocation of
the purchase price is based on a preliminary estimate of the fair value of the
assets acquired. These estimates could change until the estimates of the fair
values of the assets are finalized.
10. MARKETABLE SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS
MARKET RISK The Group is exposed to market risk, primarily related to
foreign exchange, interest rates and market value of the investment of liquid
funds. Management actively monitors these exposures. To manage the volatility
relating to these exposures, the Group enters into a variety of derivative
financial instruments. The Group's objective is to reduce, where it is deemed
appropriate to do so, fluctuations in earnings and cash flows associated with
changes in interest rates, foreign currency rates and market rates of investment
of liquid funds and of the currency exposure of certain net investments in
foreign subsidiaries. It is the Group's policy and practice to use derivative
financial instruments to manage exposures and to enhance the yield on the
investment of liquid funds. The Group does not enter any financial transaction
containing a risk that cannot be quantified at the time the transaction is
concluded; i.e. it does not sell short assets it does not have or does not know
it will have in the future. The Group only sells existing assets or transactions
and future transactions (in the case of anticipatory hedges) it knows it will
have in the future based on past experience. In the case of liquid funds, it
writes options on assets it has or on positions it wants to acquire and has the
liquidity to acquire.
F-26
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. MARKETABLE SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The Group therefore expects that any loss in value for those instruments
generally would be offset by increases in the value of those hedged
transactions.
(a) FOREIGN EXCHANGE RATES
The Group uses the Swiss franc as its reporting currency and is therefore
exposed to foreign exchange movements, primarily in USD, European, Japanese,
other Asian and Latin American currencies. Consequently, it enters into various
contracts, which change in value as foreign exchange rates change, to preserve
the value of assets, commitments and anticipated transactions. The Group uses
forward contracts and foreign currency option contracts to hedge certain
anticipated foreign currency revenues and the net investment in certain foreign
subsidiaries. At December 31, 2000, the Group had long and short forward
exchange/option contracts with equivalent values of CHF 8.2 billion and CHF
13.8 billion, respectively. At December 31, 1999, the Group had long and short
forward exchange/option contracts with equivalent values of CHF 4.3 billion and
CHF 19.1 billion, respectively.
(b) COMMODITIES
The Group has only a very limited exposure to price risk related to
anticipated purchases of certain commodities used as raw materials by the
Group's businesses. A change in those prices may alter the gross margin of a
specific business, but generally by not more than 10% of that margin and is thus
below materiality levels. Accordingly, the Group does not enter into commodity
future, forward and option contracts to manage fluctuations in prices of
anticipated purchases.
(c) INTEREST RATES
The Group manages its exposure to interest rate risk through the proportion
of fixed rate debt and variable rate debt in its total debt portfolio. To manage
this mix, the Group may enter into interest rate swap agreements, in which it
exchanges the periodic payments, based on a notional amount and agreed upon
fixed and variable interest rates. The Group's percentage of fixed rate debt to
total financial debt was 34% and 28% at December 31, 2000 and 1999,
respectively.
Use of the above-mentioned derivative financial instruments has not had a
material impact on the Group's financial position at December 31, 2000 and 1999
or the Group's results of operations for the years ended December 31, 2000, 1999
and 1998.
COUNTERPARTY RISK Counterparty risk encompasses issuer risk on marketable
securities, settlement risk on derivative and money market contracts and credit
risk on cash and time deposits. Issuer risk is minimized by only buying
securities which are at least AA rated. Settlement and credit risk is reduced by
the policy of entering into transactions with counterparties that are usually at
least AA rated banks or financial institutions. Exposure to these risks is
closely monitored and kept within predetermined parameters.
The Group does not expect any losses from non-performance by these
counterparties and does not have any significant grouping of exposures to
financial sector or country risk.
DERIVATIVE FINANCIAL INSTRUMENTS The tables below show the contract or
underlying principal amounts and fair values of derivative financial instruments
analyzed by type of contract at December 31, 2000 and 1999. Contract or
underlying principal amounts indicate the volume of business outstanding at the
balance
F-27
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. MARKETABLE SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
sheet date and do not represent amounts at risk. The fair values represent the
gain or loss a contract would realize when exchanged or settled using values
determined by the markets or standard pricing models at December 31, 2000 and
1999.
CONTRACT OR
UNDERLYING
PRINCIPAL POSITIVE FAIR NEGATIVE
AMOUNT VALUES FAIR VALUES
------------------- ------------------- -------------------
2000 1999 2000 1999 2000 1999
(CHF MILLIONS) -------- -------- -------- -------- -------- --------
CURRENCY RELATED HEDGING INSTRUMENTS
Forward foreign exchange rate contracts........... 7,617 1,632 334 25 (5) (49)
Over the counter currency options................. 3,684 4,911 106 10 (4) (59)
------ ------ --- --- ---- ----
TOTAL OF CURRENCY RELATED HEDGING INSTRUMENTS..... 11,301 6,543 440 35 (9) (108)
====== ====== === === ==== ====
CURRENCY RELATED NON-HEDGING INSTRUMENTS
Forward foreign exchange rate contracts........... 574 2,638 21 19 -- (54)
Over the counter currency options................. 10,131 14,169 13 4 (151) (22)
Cross currency swaps.............................. -- 354 -- 3 -- (29)
------ ------ --- --- ---- ----
TOTAL OF CURRENCY RELATED NON-HEDGING
INSTRUMENTS..................................... 10,705 17,161 34 26 (151) (105)
====== ====== === === ==== ====
Interest related instruments
Interest rate swaps............................... 2,854 3,945 21 44 (30) (39)
Forward rate agreements........................... 2,950 11,310 1 8 (6) (22)
Caps and floors................................... 300 960 -- 3 (2) (11)
------ ------ --- --- ---- ----
TOTAL OF INTEREST RELATED INSTRUMENTS............. 6,104 16,215 22 55 (38) (72)
====== ====== === === ==== ====
OPTIONS ON SECURITIES............................. 10,386 2,050 503 46 (528) (122)
------ ------ --- --- ---- ----
TOTAL DERIVATIVE FINANCIAL INSTRUMENTS............ 38,496 41,969 999 162 (726) (407)
====== ====== === === ==== ====
All of the currency related hedging instruments mature within twelve months.
Out of the total currency related hedging instruments included above, CHF
3,083 million (1999: CHF 1,659 million) was contracted with the intention of
hedging anticipated transactions which are expected to occur in 2001.
The amount of deferred hedging gains and losses at December 31, 2000 are as
follows:
CHF MILLIONS
------------
Anticipated transactions.................................... 138
Available-for-sale securities............................... (281)
Net investment in foreign subsidiaries...................... 128
====
Net losses per portfolio on non-hedging currency contracts and on interest
related instruments are recognized in the income statement. Net unrealized gains
are not recorded. The majority of interest related instruments are utilized for
managing the returns on the Group's liquidity.
F-28
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. MARKETABLE SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The contract or underlying principal amount of currency and interest related
derivative financial instruments at December 31, 2000 and 1999 are set forth by
currency in the table below.
FORWARD FORWARD
FOREIGN RATE OPTIONS, CAPS TOTAL TOTAL
EXCHANGE AGREEMENTS AND FLOORS 2000 1999
(CHF MILLIONS) -------- ---------- ------------- -------- --------
CHF.................................... 2,950 300 3,250 11,860
USD.................................... 574 1,967 2,541 6,850
EUR.................................... 6,697 6,697 8,771
DEM.................................... 410
GBP.................................... 1,467 1,467 1,186
------ ------ ------ ------ ------
TOTAL.................................. 574 2,950 10,431 13,955 29,077
====== ====== ====== ====== ======
Currency related hedging instruments... 11,301 6,543
Cross currency swaps................... 354
Interest rate swaps.................... 2,854 3,945
Equity options......................... 10,386 2,050
------ ------
TOTAL DERIVATIVE FINANCIAL
INSTRUMENTS.......................... 38,496 41,969
====== ======
BALANCE SHEET UNREALIZED
VALUE GAINS/LOSSES MARKET VALUE
------------------- ------------------- -------------------
2000 1999 2000 1999 2000 1999
MARKETABLE SECURITIES (CHF MILLIONS) -------- -------- -------- -------- -------- --------
BONDS HELD-TO-MATURITY
Debt securities issued or backed by foreign
governments................................. 1,134 (17) 1,117
Corporate debt securities..................... 5,373 (113) 5,260
Other debt securities......................... 1,104 (21) 1,083
------ ------ ----- ---- ------ ------
TOTAL BONDS HELD-TO-MATURITY(1)............... -- 7,611 -- (151) -- 7,460
------ ------ ----- ---- ------ ------
AVAILABLE-FOR-SALE SECURITIES
Equities...................................... 3,364 2,141 1,157 319 4,521 2,460
Debt securities............................... 6,118 5,998 185 139 6,303 6,137
------ ------ ----- ---- ------ ------
TOTAL AVAILABLE-FOR-SALE SECURITIES........... 9,482 8,139 1,342 458 10,824 8,597
------ ------ ----- ---- ------ ------
TIME DEPOSITS LONGER THAN 90 DAYS............. 2,238 570 2,238 570
------ ------ ----- ---- ------ ------
TOTAL AT DECEMBER 31.......................... 11,720 16,320 1,342 307 13,062 16,627
====== ====== ===== ==== ====== ======
- -------------
(1) During 2000, the Group disposed of the majority of its holding of bonds
designated as being held-to-maturity. Any remaining bonds in this category
have been reclassified to the available-for-sale category of marketable
securities.
F-29
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INVESTMENT IN ASSOCIATED COMPANIES
Novartis has the following significant investments in associated companies
which are accounted for by using the equity method:
BALANCE SHEET VALUE INCOME STATEMENT EFFECT
--------------------------- ------------------------------------------
2000 1999 2000 1999 1998
CHF MILLIONS CHF MILLIONS CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ------------ ------------ ------------ ------------
Chiron Corporation,
USA................. 1,360 1,300 97 342 188
CIMO Compagnie
industrielle de
Monthey SA,
Switzerland(1)...... 104 (17)
Others................ 171 236 1 41 68
----- ----- -- --- ---
TOTAL................. 1,531 1,640 98 383 239
===== ===== == === ===
- -------------
(1) Spun-off in connection with Agribusiness.
CHIRON CORPORATION The recording of the results of the strategic interest
in Chiron commenced on January 1, 1995. Its equity valuation is based on the
Chiron equity at September 30 of each year. The amounts for Chiron incorporated
in the Novartis consolidated financial statements take into account the effects
stemming from differences in accounting policies between Novartis and Chiron
(primarily Novartis' amortization over 10 years of in-process technology arising
on Chiron's non-Ciba 1995 acquisitions which were written off by Chiron in
1995). The difference between the equity interest in the underlying net
assets and the carrying value of Chiron is CHF 71 million and CHF 124 million as
of September 30, 2000 and 1999, respectively, and primarily relates to goodwill.
Novartis' effective shareholding in Chiron was 43.3% at September 30, 2000. This
had a market value at December 31, 2000 of CHF 5.8 billion (USD 3.5 billion).
A significant part of the 1999 and 1998 income statement effect results from
Chiron's disposal of discontinued operations.
The Group's associated companies utilize local accounting standards, which
are then adjusted to IAS.
F-30
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. DEFERRED TAXES
2000 1999
CHF MILLIONS CHF MILLIONS
------------- -------------
Assets associated with --employee benefit liabilities 479 554
--net operating loss carryforwards 319 308
--inventory 1,159 1,360
--intangible assets 255 255
--other provisions and accruals 1,290 1,346
Less: valuation
allowance (237) (365)
----- -----
DEFERRED TAX ASSETS
LESS VALUATION
ALLOWANCE............ 3,265 3,458
----- -----
Liabilities associated
with --tangible fixed asset depreciation 961 1,106
--prepaid pensions 1,164 973
--other provisions and accruals 1,054 1,192
--inventories 309 375
----- -----
TOTAL LIABILITIES...... 3,488 3,646
----- -----
NET DEFERRED TAX
LIABILITY............ (223) (188)
===== =====
A reversal of the valuation allowance could occur when circumstances make
the realization of deferred tax assets probable. This would result in a decrease
in the Group's effective tax rate.
At December 31, 2000 and 1999, unremitted earnings of CHF 29 billion and
CHF 26 billion, respectively, have been retained indefinitely by subsidiary
companies for reinvestment. No provision is made for income taxes that would be
payable upon the distribution of such earnings. If the earnings were remitted,
an immaterial income tax charge would result based on the tax statutes currently
in effect.
13. OTHER FINANCIAL ASSETS
2000 1999
CHF MILLIONS CHF MILLIONS
------------- -------------
Long-term loans to associated companies..................... 6 113
Other investments and long-term loans....................... 1,489 797
Prepaid pension............................................. 4,106 3,687
----- -----
TOTAL....................................................... 5,601 4,597
===== =====
The market value of the investments and loans at December 31, 2000 were
CHF 2,260 million (1999: CHF 967 million).
F-31
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INVENTORIES
2000 1999
CHF MILLIONS CHF MILLIONS
------------- -------------
Raw material, consumables................................... 1,315 1,773
Finished products........................................... 2,807 5,114
----- -----
TOTAL....................................................... 4,122 6,887
===== =====
At December 31, 2000 and 1999 inventory write-downs of CHF 386 million and
CHF 487 million respectively were deducted in arriving at the above amounts.
15. TRADE ACCOUNTS RECEIVABLE
2000 1999
CHF MILLIONS CHF MILLIONS
------------- -------------
Total....................................................... 5,531 7,666
Provision for doubtful receivables.......................... (248) (625)
----- -----
TOTAL NET................................................... 5,283 7,041
===== =====
16. OTHER CURRENT ASSETS
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
Withholding tax recoverable................................. 499 1,535
Gerber Life insurance receivables........................... 462 978
Advance payments in respect of acquisitions................. 105 --
Fair value adjustment on financial derivatives.............. 225 --
Prepaid expenses --third parties........................ 437 172
--associated companies.................. 4 104
Other receivables --third party.......................... 1,035 1,492
--associated companies.................. 9 142
Amounts outstanding from Syngenta........................... 235 --
----- -----
TOTAL OTHER CURRENT ASSETS.................................. 3,011 4,423
===== =====
F-32
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. DETAILS OF SHARE CAPITAL MOVEMENTS
NUMBER OF SHARES
SHARE CAPITAL (ALL SHARES ---------------------------------------------------------------------------------------------
HAVE A NOMINAL VALUE OF JANUARY 1, MOVEMENT DECEMBER 31, MOVEMENT DECEMBER 31, MOVEMENT DECEMBER 31,
CHF 20 EACH) 1998 IN YEAR(1) 1998 IN YEAR(1) 1999 IN YEAR 2000
- ------------------------- ---------- ---------- ------------ ---------- ------------ --------- ------------
Registered shares....... 64,058,249 64,058,249 8,071,868 72,130,117 72,130,117
Bearer shares........... 8,071,868 8,071,868 (8,071,868) -- --
---------- ---------- ---------- ---------- ---------- -------- ----------
TOTAL NOVARTIS AG
SHARES(2)............. 72,130,117 -- 72,130,117 -- 72,130,117 -- 72,130,117
========== ========== ========== ========== ========== ======== ==========
TREASURY SHARES
REGISTERED SHARES
Reserved for convertible
bonds and dividend
bearing............... 192,496 (23,749) 168,747 (37,625) 131,122 (13,206) 117,916
Other dividend bearing... 2,961,065 (214,995) 2,746,070 957,865 3,703,935 464,676 4,168,611
Non-dividend bearing.... 1,430,000 1,430,000 1,246,700 2,676,700 2,676,700
---------- ---------- ---------- ---------- ---------- -------- ----------
TOTAL TREASURY REGISTERED
SHARES................ 4,583,561 (238,744) 4,344,817 2,166,940 6,511,757 451,470 6,963,227
========== ========== ========== ========== ========== ======== ==========
BEARER SHARES
Dividend bearing........ 270,019 (90,056) 179 963 (179,963) -- --
Non-dividend bearing.... 1,246,700 1,246,700 (1,246,700) -- --
---------- ---------- ---------- ---------- ---------- -------- ----------
TOTAL TREASURY BEARER
SHARES................ 1,516,719 (90,056) 1,426,663 (1,426,663) -- --
========== ========== ========== ========== ========== ======== ==========
TOTAL TREASURY SHARES... 6,100,280 (328,800) 5,771,480 740,277 6,511,757 451,470 6,963,227
========== ========== ========== ========== ========== ======== ==========
OUTSTANDING SHARES
Registered shares....... 59,474,688 238,744 59,713,432 5,904,928 65,618,360 (451,470) 65,166,890
Bearer shares........... 6,555,149 90,056 6,645,205 (6,645,205) -- --
---------- ---------- ---------- ---------- ---------- -------- ----------
TOTAL OUTSTANDING
SHARES................ 66,029,837 328,800 66,358,637 (740,277) 65,618,360 (451,470) 65,166,890
========== ========== ========== ========== ========== ======== ==========
CHF CHF CHF CHF CHF CHF CHF
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
--------- ---------- ------------ --------- ------------ --------- ------------
Total share capital..... 1,443 1,443 1,443 1,443
Treasury shares......... (122) 7 (115) (15) (130) (9) (139)
----- ----- ----- ----- ----- ----- -----
OUTSTANDING SHARE
CAPITAL............... 1,321 7 1,328 (15) 1,313 (9) 1,304
===== ===== ===== ===== ===== ===== =====
- -------------
(1) On April 21, 1999 the Company's Annual General Meeting approved the
conversion of all Novartis AG's bearer shares into an equal number of
registered shares.
(2) All shares are authorized, issued and fully paid. All shares are voting
shares and, except as noted in the table, are dividend bearing.
F-33
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. LONG-TERM FINANCIAL DEBTS
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
Convertible bonds................................................................ 1,110 1,088
Straight bonds................................................................... 961 1,574
Liabilities to banks and other financial institutions(1)......................... 278 563
Finance lease obligations........................................................ 8 12
----- -----
TOTAL (INCLUDING CURRENT PORTION OF LONG-TERM DEBT).............................. 2,357 3,237
Less current portion of long-term debt........................................... (74) (793)
----- -----
TOTAL............................................................................ 2,283 2,444
===== =====
CONVERTIBLE BONDS
USD USD 750 million 2.00% convertible bonds 1995/2002 of
Novartis Capital Ltd., British Virgin Islands(2)....... 1,085 1,026
CHF CHF 750 million 1.25% convertible bonds 1995/2002 of
Novartis Capital Ltd., British Virgin Islands(3)....... 25 62
----- -----
TOTAL CONVERTIBLE BONDS.......................................................... 1,110 1,088
===== =====
STRAIGHT BONDS
USD USD 300 million 6.375% bonds 1993/2000 of Novartis
Overseas Finance Ltd., British Virgin Islands.......... -- 478
USD USD 100 million 5.88% Euro Medium Term Note 1993/2000 of
Novartis Corporation, Summit, New Jersey, USA.......... -- 160
USD USD 300 million 6.625% bonds 1995/2005 of Novartis
Corporation, Summit, New Jersey, USA................... 492 478
USD USD 250 million 6.625% Euro Medium Term Note 1995/2005 of
Novartis Corporation, Summit, New Jersey, USA and
subsidiaries........................................... 410 398
USD USD 36 million 9.0% bonds 2006 of Gerber Products,
Fremont................................................ 59 60
----- -----
TOTAL STRAIGHT BONDS............................................................. 961 1,574
===== =====
- -------------
(1) Average interest rate 3.7% (1999: 3.6%).
(2) Bonds of USD 10,000 par value are convertible up to September 30, 2002 into
approx. 9.60 issued and outstanding, fully paid registered shares of
Novartis AG. Novartis Capital Ltd. has acquired options from the
non-consolidated employee share participation and employee benefit
foundations to cover partly its obligation to deliver shares under the
conversion terms of the bonds. It also has options to cover the balance of
its obligations from entities, which are consolidated. At December 31, 2000
the outstanding hedge with the non-consolidated entities represented 595,816
shares. An appropriate number of treasury shares are reserved for the
balance. At December 31, 2000 bonds totaling USD 32.2 million had been
converted. The difference between the nominal value of USD 717.8 million and
the balance sheet value of USD 662.3 million is due to the accrual from the
original debt value to the maturity value of 100%.
(3) Bonds of CHF 5,000 par value are convertible up to October 9, 2002 into 5
issued and outstanding, fully paid shares of Novartis AG and 5 issued and
outstanding fully paid shares of Syngenta AG with each converting bondholder
receiving an amount of CHF 239.95 per bond in cash. Novartis Capital Ltd.
has acquired options from consolidated entities to cover its obligation to
deliver shares under the conversion terms of the bonds. An appropriate
number of treasury shares and Syngenta AG shares are reserved. At
December 31, 2000 bonds totaling CHF 725.5 million had been converted.
F-34
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. LONG-TERM FINANCIAL DEBTS (CONTINUED)
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
Breakdown by maturity............................... 2000 793
2001 74 121
2002 1,204 1,184
2003 21 36
2004 40 81
2005 907
Thereafter 111 1,022
----- -----
TOTAL............................................... 2,357 3,237
===== =====
Breakdown by currency............................... USD 2,068 2,712
CHF 26 63
JPY 59 209
Others 204 253
----- -----
TOTAL............................................... 2,357 3,237
===== =====
2000 2000 1999 1999
BALANCE SHEET FAIR VALUES BALANCE SHEET FAIR VALUES
FAIR VALUE COMPARISON CHF MILLIONS CHF MILLIONS CHF MILLIONS CHF MILLIONS
- --------------------- ------------- ------------ ------------- ------------
Convertible bonds................... 1,110 2,079 1,088 1,782
Straight bonds...................... 961 984 1,574 1,551
Others.............................. 286 286 575 575
----- ----- ----- -----
TOTAL............................... 2,357 3,349 3,237 3,908
===== ===== ===== =====
2000 1999
COLLATERALIZED LONG-TERM DEBTS AND PLEDGED ASSETS CHF MILLIONS CHF MILLIONS
- ------------------------------------------------- ------------ ------------
Total amount of collateralized long-term financial debts.... 263 245
Total net book value of tangible fixed assets pledged as
collateral for long-term financial debts.................. 168 415
===== =====
The financial debts including short-term financial debts, contain only
general default covenants. The Group is in compliance with these covenants.
F-35
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. OTHER LONG-TERM LIABILITIES
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
Employee benefits--unfunded defined benefit plans 888 1,123
-- other long-term employee benefits and
deferred compensation..................... 379 705
Other post-retirement benefits.............................. 676 630
Liabilities for insurance activities........................ 627 711
Environmental provisions.................................... 207 332
Provision for legal and product liability settlements....... 357 496
Deferred purchase consideration............................. 217 231
Restructuring provision..................................... 17 67
Provision for leasehold renovations......................... -- 54
Other provisions............................................ 477 238
----- -----
TOTAL....................................................... 3,845 4,587
===== =====
20. MOVEMENTS IN OTHER LONG-TERM LIABILITIES
RESTRUCTURING CHARGES
The Group has experienced significant merger and divestment activity since
1996, when Sandoz and Ciba merged to form Novartis, and the Group divested Ciba
Specialty Chemicals ("CSC") with effect from January 1, 1997. Restructuring
accruals in 1996 totaled CHF 4,126 million, comprised of employee termination
costs of CHF 1,945 million, other third party costs of CHF 1,594 million and
tangible fixed asset impairments of CHF 587 million. Charges for restructuring
plans were related to continuing operations, including the reduction of excess
staffing, the streamlining of facilities and operations and other restructuring
measures. 12,000 employees were identified in the original plan all of whom have
now left the Group. All other significant actions associated with the
restructuring charge have been completed by December 31, 2000 with the exception
of CHF 159 million relating primarily to non-cancellable lease payments for
unoccupied office space in the U.S.
Charges of CHF 208 million were incurred during 1998 in conjunction with the
restructuring of the Consumer Health sector worldwide as well as the
Pharmaceuticals sector in the U.S. The charges included employee termination
costs of CHF 135 million, other third party costs of CHF 51 million and tangible
fixed asset impairments of CHF 22 million. 581 production, administration and
sales employees were identified in the original plan, all of whom have left the
Group as of December 31, 2000. All significant actions associated with these
plans have been completed.
In June 1999, the Agribusiness sector initiated "Project Focus". The charges
of CHF 100 million incurred in conjunction with this project were comprised of
employee termination costs of CHF 61 million, other third party costs of CHF 22
million and tangible fixed asset impairments of CHF 17 million. 1,100 employees
were identified in the original plan, 700 of whom had left the Group as of the
Agribusiness spin-off date of November 6, 2000. The remaining employees and the
corresponding restructuring provisions were transferred to Syngenta.
In July 1999 charges of CHF 70 million were incurred in conjunction with the
plan to downsize certain pharmaceutical production facilities mainly in the U.S.
and Canada. The charges were comprised of employee termination costs of CHF 54
million and other third party costs of CHF 16 million.
F-36
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. MOVEMENTS IN OTHER LONG-TERM LIABILITIES (CONTINUED)
146 employees were identified in the original plan, of which 20 employees remain
with the Group as of December 31, 2000, all of whom will leave in 2001. All
significant actions associated with the plan are expected to be completed by
June 30, 2001.
On October 2, 2000, the CIBA Vision sector acquired Wesley Jessen
VisionCare Inc., a leading worldwide developer, manufacturer and marketer of
specialty contact lenses. Total costs of CHF 118 million were incurred in
connection with the integration and restructuring of the CIBA Vision and Wesley
Jessen activities worldwide. CHF 41 million was charged to operating income and
CHF 77 million was included in the net assets acquired. The total cost includes
employee termination costs of CHF 59 million, other third party costs of CHF 35
million and tangible fixed asset impairments of CHF 24 million. 1,100 employees
have been identified in the plan and most are scheduled to leave by the end of
2001 when all significant actions associated with the plan are expected to be
completed.
In November 2000 charges of CHF 15 million were incurred in conjunction with
the closure and relocation of part of the Generics operations in the U.S. All of
these charges are for employee termination costs. 200 employees have been
identified in the plan, all of whom remained employed as of December 31, 2000
although they had been informed of the restructuring plan and its benefit terms
by this date. All significant actions associated with the plan are expected to
be completed by June 30, 2001.
In December 2000 charges of CHF 40 million were incurred in conjunction with
the closure and sale of the Pharmaceutical sector Summit site in the U.S. The
charges comprised employee termination costs of CHF 10 million and other third
party costs of CHF 30 million. 122 employees have been identified in the plan,
84 of whom remained employed as of December 31, 2000. All significant actions
associated with the plan are expected to be completed by March 2003.
F-37
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. MOVEMENTS IN OTHER LONG-TERM LIABILITIES (CONTINUED)
The release to income in 2000 of CHF 39 million was the result of
settlements of liabilities at lower amounts than originally anticipated.
EMPLOYEE TANGIBLE FIXED OTHER THIRD
TERMINATION ASSET PARTY
COSTS IMPAIRMENTS COSTS TOTAL
CHF MILLIONS CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ -------------- ------------ ------------
BALANCE AT JANUARY 1, 1998.......... 805 473 787 2,065
Cash payments....................... (422) (90) (186) (698)
Releases............................ (59) (53) (58) (170)
Additions........................... 135 22 51 208
Non-income tangible fixed asset
write-offs........................ (43) (43)
Translation gain/(loss), net........ (4) (9) (13) (26)
---- ---- ---- -----
BALANCE AT DECEMBER 31, 1998........ 455 300 581 1,336
Cash payments....................... (251) (15) (222) (488)
Releases............................ (89) (2) (193) (284)
Additions........................... 115 17 38 170
Non-income tangible fixed asset
write-offs........................ (278) (278)
Translation gain/(loss), net........ 50 20 34 104
---- ---- ---- -----
BALANCE AT DECEMBER 31, 1999........ 280 42 238 560
Cash payments....................... (201) (91) (292)
Releases............................ (20) (8) (11) (39)
Additions(1)........................ 90 24 64 178
Non-income tangible fixed asset
write-offs........................ (4) (4)
Effect of Agribusiness spin-off..... (10) (2) (6) (18)
Translation gain/(loss), net........ 1 1 10 12
---- ---- ---- -----
BALANCE AT DECEMBER 31, 2000........ 140 53 204 397
==== ==== ==== =====
Included in short-term
liabilities....................... 380
Included in long-term liabilities... 17
-----
TOTAL............................... 397
=====
- -------------
(1) Additions charged to the operating income of the period were CHF 101
million. Additions to restructuring provisions of CHF 77 million relating to
the Wesley Jessen acquisition were included in the net assets acquired.
TANGIBLE FIXED ASSET IMPAIRMENTS
Based on the review of the carrying values of tangible fixed assets,
write-downs are recorded for tangible fixed assets impaired or related to
activities to be restructured, divested or abandoned. The provision is
transferred to accumulated depreciation as the tangible fixed assets are
restructured, divested or abandoned.
OTHER THIRD PARTY COSTS
Other third party costs are mainly associated with lease and other
obligations due to the abandonment of certain facilities.
F-38
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. MOVEMENTS IN OTHER LONG-TERM LIABILITIES (CONTINUED)
ENVIRONMENTAL MATTERS
In the U.S., Novartis Agribusiness was named under federal legislation (the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended) as a potentially responsible party ("PRP") in respect of several sites.
The responsibility for these sites was allocated to Syngenta as part of the
spin-off process. Novartis actively participates in or monitors the clean-up
activities at the sites in respect of which it is a PRP.
Novartis has provisions in respect of environmental remediation costs in
accordance with the accounting policy described in Note 1. These provisions
include future remediation payments totaling CHF 23 million which have been
discounted at a risk free rate of 6% to a recorded liability of CHF 12 million.
These discounted amounts will be paid out over the period of remediation for the
applicable sites, which is expected to be 30 years. The accrual recorded at
December 31, 2000 consists of CHF 132 million provided for remediation at
third-party sites and CHF 82 million for remediation of owned facilities. The
estimated reserve takes into consideration the number of other PRPs at each site
and the identity and financial position of such parties in light of the joint
and several nature of the liability.
The requirement in the future for Novartis ultimately to take action to
correct the effects on the environment of prior disposal or release of chemical
substances by Novartis or other parties, and its costs, pursuant to
environmental laws and regulations, is inherently difficult to estimate. The
material components of the environmental provisions consist of a risk assessment
based on investigation of the various sites. Novartis' future remediation
expenses are affected by a number of uncertainties which include, but are not
limited to, the method and extent of remediation, the percentage of material
attributable to Novartis at the remediation sites relative to that attributable
to other parties, and the financial capabilities of the other potentially
responsible parties.
Novartis believes that its reserves are adequate based upon currently
available information, however, given the inherent difficulties in estimating
liabilities in this area, it cannot be guaranteed that additional costs will not
be incurred beyond the amounts accrued. The effect of resolution of environment
matters on results of operations cannot be predicted due to uncertainty
concerning both the amount and the timing of future expenditures and the results
of future operations. Management believes that such additional amounts, if any,
would not be material to the Novartis financial condition but could be material
to the Novartis results of operations in a given period.
ENVIRONMENTAL PROVISIONS
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
January 1................................................... 379 310
Cash payments............................................. (35) (18)
Additions................................................. 24 70
Effect of Agribusiness spin-off........................... (166) --
Translation gain, net..................................... 12 17
---- ---
DECEMBER 31................................................. 214 379
Less short-term liability................................... (7) (47)
---- ---
LONG-TERM LIABILITY......................................... 207 332
==== ===
F-39
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. MOVEMENTS IN OTHER LONG-TERM LIABILITIES (CONTINUED)
PROVISIONS FOR LEGAL AND PRODUCT LIABILITY
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
January 1................................................... 496 358
Cash payments............................................. (43) (36)
Additions................................................. 283 103
Effect of Agribusiness spin-off........................... (98) --
Translation gain, net..................................... 1 71
---- ---
DECEMBER 31................................................. 639 496
Less short-term liability................................... (282) --
---- ---
LONG-TERM LIABILITY......................................... 357 496
==== ===
21. SHORT-TERM FINANCIAL DEBTS
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
Bank and other financial debt (including interest bearing
employee accounts)........................................ 3,053 4,747
Commercial paper............................................ 408 1,019
Current portion of long-term financial debt................. 74 793
Financial obligation for repurchase agreements.............. 244 920
----- -----
TOTAL....................................................... 3,779 7,479
===== =====
The above balance sheet values of short-term financial debt, other than the
current portion of long-term financial debts, approximates to the estimated fair
value due to the short-term nature of these instruments.
Bank and other financial debt includes no amounts payable to pension and
other employee benefit funds, employee share participation plans and other
foundations referred to in notes 26 and 27.
The weighted average interest rate on the bank and other financial debt was
4.5% and 4.6% as of December 31, 2000 and 1999, respectively.
F-40
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. OTHER SHORT-TERM LIABILITIES
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
Income and other taxes...................................... 1,263 2,784
Restructuring provisions.................................... 380 493
Accrued expenses............................................ 3,098 3,037
Current portion of provision for potential claims from
insurance activities...................................... 250 240
Social security/pension funds............................... 150 203
Current portion of environmental provisions................. 7 47
Deferred income relating to government grants............... 25 30
Deferred divestment proceeds................................ 155 54
Fair value adjustment on financial derivatives.............. 91 190
Provisions for goods returned and commissions............... 14 222
Provision for legal and product liability settlements....... 282 --
Amount due to Syngenta...................................... 25 --
Other payables.............................................. 530 663
----- -----
TOTAL....................................................... 6,270 7,963
===== =====
23. CASH FLOWS ARISING FROM CHANGES IN WORKING CAPITAL EXCLUDING RESTRUCTURING
ITEMS
2000 1999 1998
CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ------------ ------------
Change in inventories............................. 230 469 (364)
Change in trade accounts receivable and other net
current assets.................................. (376) (1,257) 32
Change in trade accounts payable.................. 106 294 (241)
---- ------ ----
TOTAL............................................. (40) (494) (573)
==== ====== ====
F-41
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. CASH FLOWS ARISING FROM MAJOR ACQUISITIONS AND DIVESTMENTS OF SUBSIDIARIES
The following is a summary of the cash flow impact of the major divestments
and acquisitions of subsidiaries:
2000 2000 1999 1999 1998 1998
ACQUISITIONS DIVESTMENTS ACQUISITIONS DIVESTMENTS ACQUISITIONS DIVESTMENTS
(CHF MILLIONS) ------------ ----------- ------------ ----------- ------------ -----------
Tangible fixed assets...... (199) 2,491 (77) 148 (70) 107
Other long-term assets..... (105) 2,415 (42) 16 (1) 141
Inventories................ (196) 2,551 (56) 55 (48) 82
Trade accounts receivable
and other current
assets................... (165) 2,631 (163) 70 (102) 248
Marketable securities, cash
and short-term
deposits................. (51) (70) (7) 13 (7) 15
Long-term and short-term
debt to third parties.... 200 (3,336) 106 (49) 33 (14)
Trade accounts payable and
other liabilities........ 635 (2,918) 73 17 62 (113)
------ ------ ---- --- ---- ----
NET ASSETS
ACQUIRED/DIVESTED........ 119 3,764 (166) 270 (133) 466
Less acquired/divested
liquidity................ 51 70 8 (13) 7 (15)
Less decrease in
investments in associated
companies................ 23 122
------ ------ ---- --- ---- ----
SUB-TOTAL.................. 170 3,834 (135) 257 (4) 451
Goodwill................... (1,612) (203) (327)
Reversal of goodwill
formerly charged to
equity................... 77
Changes in equity and
minority interests due
to:
--net assets transferred
to Syngenta............ (4,463)
--proceeds received from
Novartis shareholders
in respect of Syngenta
related purchase
rights................. 687
--other.................. 12 39 (7) (51)
Divestment gains........... 1 288 89
------ ------ ---- --- ---- ----
NET CASH FLOW.............. (1,442) 71 (299) 538 (331) 566
====== ====== ==== === ==== ====
The significant changes in the companies that have been consolidated are
described in Note 2.
All acquisitions were for cash. The significant divestment in 2000 was the
spin-off of Novartis Agribusiness to form Syngenta AG.
F-42
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. CASH FLOWS ARISING FROM MAJOR ACQUISITIONS AND DIVESTMENTS OF SUBSIDIARIES
(CONTINUED)
The following are the cash flows from the discontinuing Agribusiness sector
included in the consolidated cash flow statement.
2000 1999 1998
CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ------------ ------------
Cash flow from operating activities............... 1,437 927 813
Cash flow from investing activities............... (166) (425) (460)
Cash flow from financing activities............... (818) (525) (366)
25. EMPLOYEE BENEFITS
(a) PENSION PLANS
The Group has, apart from the legally required social security schemes,
numerous independent pension plans. For certain Group companies, however, no
independent assets exist for the pension and other long-term employee benefit
obligations. In these cases the related liability is included in the balance
sheet.
Defined benefit pension plans cover the majority of the Group's employees.
The defined benefit obligations and related assets of all major plans are
reappraised annually by independent actuaries.
Plan assets are recorded at fair values. The defined benefit obligations of
all significant plans are covered by assets. The surplus on implementing revised
IAS 19 was reported as an adjustment to the opening balance of retained earnings
as of January 1, 1999.
The following is a summary of the status of the main defined benefit plans
at December 31, 2000 and 1999 using the IAS 19 (revised) actuarial assumptions:
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
Funded assets of independent defined benefit pension
plans:.................................................... 25,426 25,454
Defined benefit obligations of active and retired
employees................................................. (17,662) (21,304)
------- -------
FUNDED STATUS............................................... 7,764 4,150
Limitation on recognition of surplus due to uncertainty of
obtaining future benefits................................. (1,965) (455)
Unrecognized gain........................................... (2,581) (1,131)
------- -------
NET ASSET IN BALANCE SHEET.................................. 3,218 2,564
======= =======
In certain countries, as part of the contract terms for the creation of
Syngenta AG, the Novartis Group has become irrevocably committed to ensuring
that, in circumstances where Agribusiness employees were contained in Novartis
Group plans, these plans transfer the appropriate portion of their assets to
independently funded employee benefit plans of Syngenta. Final transfer of all
of these funds will occur in 2001, however, Novartis has calculated that CHF
1.5 billion of assets will be transferred to Syngenta and these assets have been
deducted from the Novartis Group's funded assets.
F-43
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
25. EMPLOYEE BENEFITS (CONTINUED)
The net asset in the balance sheet consists of:
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
Prepaid pension expense included in financial assets(1)..... 4,106 3,687
Accrued pension costs included in other long-term
liabilities............................................... (888) (1,123)
----- ------
TOTAL NET ASSET............................................. 3,218 2,564
===== ======
- -------------
(1) Prepaid pension expense includes CHF 52 million of settlement gains that
were credited to equity as a result of the Agribusiness spin-off.
The following are the principal actuarial assumptions, used for calculating
the 2000 and 1999 income statement amounts and the above December 31, 2000 and
1999 funded status of the main defined benefit plans:
FUNDED
INCOME STATEMENT STATUS
------------------------------ -------------------
WEIGHTED AVERAGE % 2000 1999 1998 2000 1999
- ------------------ -------- -------- -------- -------- --------
% % % % %
- --discount rate............................................. 4.1 3.6 4.9 4.5 4.1
- --payroll indexation........................................ 2.8 2.8 4.3 2.8 2.8
- --return on assets.......................................... 6.2 6.1 5.2 6.2 6.1
In some Group companies employees are covered by defined contribution plans
and other long-term employee benefits. The liability of the Group for these
benefits is reported in other long-term employee benefits and deferred
compensation and amounts at December 31, 2000 to CHF 379 million (1999:
CHF 705 million). In 2000 contributions charged to the consolidated income
statement for the defined contribution plans were CHF 91 million (1999: CHF
122 million, 1998: CHF 79 million).
The number of Novartis AG shares held by pension and similar benefit funds
at December 31, 2000 was 1.1 million shares with a market value of CHF
3.1 billion (1999: CHF 1.2 million shares with a market value of CHF
2.8 billion).
The plan sold 113,885 Novartis AG shares during the year ended December 31,
2000 (1999: purchased 40,000 shares). The amount of dividends received on
Novartis AG shares held as plan assets was CHF 37 million for the year ended
December 31, 2000 (1999: CHF 34 million).
F-44
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
25. EMPLOYEE BENEFITS (CONTINUED)
(b) OTHER POST-RETIREMENT BENEFITS
The Group's post-retirement healthcare, insurance and other related
post-retirement benefits are not funded.
The following are the principal actuarial assumptions used for calculating
these post-retirement benefits:
2000 1999 1998
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
---------------- ---------------- ----------------
% % %
- --discount rate........................... 7.7 7.7 6.8
- --healthcare cost trend (initial)......... 5.9 5.9 6.2
- --healthcare cost trend (ultimate)........ 4.8 4.8 5.0
In 2000 the cost of post-retirement benefits other than pensions totaled
CHF 77 million. (1999: CHF 62 million; 1998: CHF 27 million).
The following is a summary of the balance sheet movements and income
statement amounts in relation to defined benefit plans and other post-retirement
benefits:
DEFINED BENEFIT OTHER POST-
PENSION PLANS RETIREMENT BENEFITS
--------------------------- ---------------------------
2000 1999 2000 1999
CHF MILLIONS CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ------------ ------------ ------------
ASSET/(LIABILITY) AT BEGINNING OF
THE YEAR.......................... 2,564 832 (630) (831)
Additional net assets due to
adoption of IAS 19 (revised)...... 1,184 218
Increase in prepaid pensions........ 419 408
Decrease/(increase) in accrued
liabilities....................... 235 140 (46) (17)
----- ----- ---- ----
ASSET/(LIABILITY) AT END OF YEAR.... 3,218 2,564 (676) (630)
===== ===== ==== ====
The amounts recognized in the income statement are as follows:
DEFINED BENEFIT OTHER POST-
PENSION PLANS RETIREMENT BENEFITS
--------------------------- ---------------------------
2000 1999 2000 1999
CHF MILLIONS CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ------------ ------------ ------------
Expected return on plan assets...... 1,584 1,505
Current service cost................ (428) (508) (11) (15)
Interest cost....................... (857) (784) (48) (47)
Amortization of actuarial
gains/(losses).................... 49 (18)
----- ----- ---- ----
INCOME/(EXPENSE)(1)................. 348 213 (77) (62)
===== ===== ==== ====
- -------------
(1) Settlement gains of CHF 52 million resulting from the Agribusiness spin-off
were directly credited to equity.
The actual return on plan assets for 2000 was CHF 2,949 million (1999: CHF
1,429 million).
F-45
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
26. EMPLOYEE SHARE PARTICIPATION PLANS
Employee and management share participation plans exist as follows:
(a) EMPLOYEE SHARE OWNERSHIP PLAN
In 1998, a Novartis Employee Share Ownership Plan was introduced for all
employees of Swiss subsidiaries. This entitles employees after 1 year of service
to acquire 3 shares in Novartis AG every year at a price determined by the
Board's compensation committee, which is currently CHF 500 per share. Employees
are immediately required to buy the shares to which they have become entitled.
During the year 35,738 shares (1999: 38,860 shares) were distributed under this
plan.
(b) NOVARTIS STOCK OPTION PLAN
Under the current plan options, exercisable after 3 years and terminating
after 10 years, are granted annually as part of the remuneration of executive
officers and other employees outside the USA selected by the Board's
compensation committee. Each option entitles them to acquire Novartis AG shares
(1 share per option) at a predetermined strike price. The number of options
granted depends on the performance of individuals and of the sector in which
they work.
2000 1999
------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
(000) CHF (000) CHF
-------- -------------- -------- --------------
Options outstanding at beginning of the year..... 134 2,164 90 2,155
Granted.......................................... 70 2,714 45 2,150
Exercised........................................ (1) 1,077 (1) 946
Cancelled........................................ (2) 2,430 -- --
--- ----- --- -----
Outstanding at the end of the year............... 201 2,362 134 2,164
--- ----- --- -----
Exercisable at the end of the year............... 49 1,793 14 1,959
--- ----- --- -----
Weighted average fair value of options granted
during the year (CHF).......................... 900 676
===== =====
All options were granted at an exercise price which was greater than the
market price of the Group's shares at the grant date.
The following table summarizes information about share options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------
NUMBER AVERAGE REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
PRICES (000) YEARS CHF (000) CHF
- ----------------- ----------- ----------------- ---------------- ----------- ----------------
1,200-1,900.......... 43 6.0 1,681 44 1,681
2,100-2,900.......... 158 8.3 2,549 5 2,768
------- --- ----- ------ -----
201 7.8 2,362 49 1,793
======= === ===== ====== =====
F-46
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
26. EMPLOYEE SHARE PARTICIPATION PLANS (CONTINUED)
As a consequence of the spin-off of Agribusiness on November 6, 2000
conversion adjustments were made to the options outstanding from the plan years
1998 and 1999. Each existing Novartis Option was exchanged into a new Novartis
Option and a Syngenta Option. Immediately following the spin-off the exercise
prices were adjusted to reflect the impact of the spin-off and to preserve the
economic value of those options that existed just prior to the spin-off for the
holders of Novartis stock options.
The following table summarizes the outstanding Syngenta options:
2000
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
(000) CHF
-------- --------------
Granted..................................................... 100 64
--- --
Outstanding at the end of the year.......................... 100 64
=== ==
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------
NUMBER AVERAGE REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
PRICES (000) YEARS CHF (000) CHF
- ----------------- ----------- ----------------- ---------------- ----------- ----------------
57-76................ 100 7.9 64 100 64
(c) U.S. MANAGEMENT ADS APPRECIATION CASH PLAN
Options are granted annually as part of the remuneration of executive
officers and other employees selected by the Board's compensation committee. The
number of options granted depends on the performance of individuals and of the
sector in which they work. As with the Novartis Stock Option Plan due to the
Agribusiness spin-off to Syngenta, the options had to be converted. Adjustments
were made to all options outstanding and not exercised on the date of the
spin-off. Immediately following the spin-off the exercise prices were adjusted
in order to preserve the economic value of those options.
In 2000, options on Novartis ADSs totaled 4,863,940 and options on Syngenta
ADSs totaled 597,773 (1999: 2,555,200 options on Novartis ADSs and 319,379
options on Syngenta ADSs) exercisable after 3 years and terminating after
10 years, were granted as part of the remuneration of eligible Novartis
employees in the U.S. entitling them to cash compensation equivalent to the
increase in the value of Novartis or Syngenta ADSs compared to the market price
of the ADSs on the grant date.
(d) MANAGEMENT SHARE PROGRAMS
In 2000 a new management long term performance plan and a restricted stock
program were established. The grants in relation to these programs are designed
to foster long term participation for eligible employees by aligning their
contribution to the long term performance of the Group. Grants are restricted
and vest after 3 years. 7,688 shares were granted in 2000.
(e) In 2000, 1999 and 1998, the cost of the non-U.S. plans referred to in (a),
(b) and (d) above was borne wholly by Novartis employee share participation
foundations which are not consolidated. The cost of the U.S. plans referred to
in (c) above was hedged by the U.S. subsidiaries and ultimately is also borne
wholly by Novartis employee share participation foundations. These foundations
have adequate resources to meet the needs of the above plans for the foreseeable
future.
F-47
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
26. EMPLOYEE SHARE PARTICIPATION PLANS (CONTINUED)
(f) Movements in Novartis AG shares held by the Novartis employee share
participation foundations were as follows:
2000 1999 1998
NUMBER NUMBER NUMBER
OF SHARES OF SHARES OF SHARES
(000) (000) (000)
--------- --------- ---------
JANUARY 1................................................... 2,243 1,717 2,060
Shares bought in the market................................. 243 565 (298)
Shares distributed to employees............................. (36) (39) (45)
----- ----- -----
DECEMBER 31................................................. 2,450 2,243 1,717
===== ===== =====
The market value of the Novartis AG shares held by these foundations at
December 31, 2000 was CHF 7.0 billion (1999: CHF 5.2 billion).
27. RELATED PARTIES
The Group has in the past set up certain foundations with the objects of
employee welfare, employee share participation and charitable contributions. The
charitable foundations foster health care and social development in rural
countries, and conduct agricultural development and research.
These foundations are autonomous, with independent boards responsible for
administering the foundations in accordance with the foundations' objects and
the law.
The employee share participation foundations have not been consolidated as
SIC 12 exempts equity compensation plans from its scope. The total assets of
these foundations as of December 31, 2000, include 2.5 million shares of
Novartis AG with a fair value of CHF 7.0 billion.
Furthermore, there are approximately thirty other foundations that were
established for charitable purposes that have not been consolidated, as the
Group does not receive benefit. As of December 31, 2000 these foundations held
approximately 158,000 shares of Novartis AG with a cost of approximately
CHF 40 million.
In 2000, the Novartis Group:
- granted short-term loans totaling CHF 936 million to these foundations.
- received short-term loans totaling CHF 241 million from these foundations.
- sold to these foundations 35,000 Novartis AG shares at market rates.
In 1999, the Novartis Group:
- granted short-term loans totaling CHF 330 million to these foundations.
- received short-term loans totaling CHF 192 million from these foundations.
- sold to these foundations 277,000 Novartis AG shares at market rates.
In 1998, the Novartis Group sold to these foundations
- marketable securities to cover option obligations of these foundations at
market values for a total of CHF 218 million realizing a gain of CHF 160
million.
- 244,000 Novartis AG shares at market rates.
See notes 5, 25 and 26 for disclosure of other related party transactions
and balances.
F-48
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
28. COMMITMENTS AND CONTINGENCIES
NOVARTIS AGRIBUSINESS In connection with the Agribusiness Master Agreement,
there remain several assets which are not material to the business of Novartis
that have not been transferred legally due to local requirements that
necessarily prolong administrative proceedings required for such transfer. All
such administrative proceedings have been initiated and Novartis expects no
difficulties in completing transfer during 2001.
Pursuant to the Master Agreement and related service agreements, Novartis
and Syngenta, and their local subsidiaries, have agreed to render each other
specified services for an interim period. These services include support for
human resources, health, safety and environment, insurance, legal and other
functional areas. None of the services are material to the business of Novartis
and are provided merely as an accommodation to permit an orderly separation of
the businesses in a manner that efficiently addresses local concerns.
CHIRON In addition to its investment in Chiron shares, Novartis has agreed
to:
- purchase up to USD 500 million of new Chiron equity, at Chiron's request.
This has not been requested to date.
- guarantee up to USD 703 million of Chiron debt. Utilization of the
guarantee in excess of USD 425 million reduces the equity put amount
mentionedabove.
- guarantee an additional USD 200 million of credit facilities to enable
repayment of certain convertible debt of Chiron.
- invest at least USD 265 million for research support. USD 256 million was
invested up to December 31, 2000 and the balance of USD 9 million will be
paid in 2001.
LEASING COMMITMENTS
Commitments arising from fixed-term operational leases in effect at
December 31 are as follows:
2000
CHF MILLIONS
-------------
2001....................................................... 173
2002....................................................... 117
2003....................................................... 70
2004....................................................... 45
2005....................................................... 42
Thereafter................................................. 191
-----
TOTAL...................................................... 638
=====
The leasing expense from fixed term operational leases was
CHF 205 million, CHF 211 million, and CHF 199 million for 2000, 1999, and 1998,
respectively.
RESEARCH & DEVELOPMENT COMMITMENTS During 2000, the Group has entered into
a long-term research agreement with Vertex Pharmaceuticals Inc., to discover,
develop and commercialize small molecule drugs. Under the agreement, Novartis
will provide research funding of CHF 328 million (USD 200 million) over
6 years. Furthermore licence fees, milestone payments and reimbursements of
CHF 656 million (USD 400 million) or more are possible subject to the outcome of
the research according to predefined criteria.
F-49
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
28. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Group has entered into other long-term research agreements with various
institutions where the Group will fund various research projects and other
commitments. The approximate payments to those institutions as of December 31,
2000 are as follows:
2000
CHF MILLIONS
-------------
2001....................................................... 650
2002....................................................... 328
2003....................................................... 243
2004....................................................... 186
2005....................................................... 101
Thereafter................................................. 104
-----
TOTAL...................................................... 1,612
=====
CONTINGENCIES Group companies have to observe the laws, government orders
and regulations of the country in which they operate. A number of them are
currently involved in administrative proceedings arising out of the normal
conduct of their business.
The Group, along with numerous other prescription drug manufacturers, is a
defendant in various actions brought by certain U.S. retail pharmacies, alleging
antitrust and pricing violations. The Group believes that these actions are
without merit.
A number of Group companies are also the subject of litigation arising out
of the normal conduct of their business, as a result of which claims could be
made against them which, in whole or in part, might not be covered by insurance.
In the opinion of Group management, however, the outcome of the actions referred
to will not materially affect the Group's financial position, result of
operations or cash flow.
The material components of the environmental liability consist of a risk
assessment based on investigation of the various sites. The Group's future
remediation expenses are affected by a number of uncertainties. These
uncertainties include, but are not limited to, the method and extent of
remediation, the percentage of material attributable to the Group at the
remediation sites relative to that attributable to other parties, and the
financial capabilities of the other potentially responsible parties. The Group
does not expect the resolution of such uncertainties to have a material effect
on the consolidated financial statements.
F-50
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
29. PRINCIPAL CURRENCY TRANSLATION RATES
2000 1999 1998
CHF CHF CHF
-------- -------- --------
Year end rates used for the consolidated balance sheets:
1 USD 1.64 1.59 1.38
1 EUR 1.52 1.60 --
100 DEM 77.83 81.99 82.35
100 FRF 23.21 24.45 24.55
1 GBP 2.45 2.58 2.29
100 ITL 0.079 0.083 0.083
100 JPY 1.43 1.56 1.21
Average rates of the year used for the consolidated
income and cash flow statements:
1 USD 1.69 1.50 1.45
1 EUR 1.56 1.60 --
100 DEM 77.38 81.81 82.36
100 FRF 23.07 24.40 24.53
1 GBP 2.56 2.43 2.40
100 ITL 0.078 0.083 0.083
100 JPY 1.57 1.34 1.11
30. SUBSEQUENT EVENTS
In December 2000 the Generics sector announced that it was in the process of
concluding the following three acquisitions subject to obtaining the required
regulatory approval:
- The acquisition of 100% of Apothecon Inc., USA from Bristol-Myers Squibb
for approximately USD 50 million.
- The acquisition from BASF AG, Germany of its generics business in six
European countries for CHF 175 million (Euro 115 million).
- The 100% acquisition of Labinca SA, Buenos Aires, Argentina for
approximately CHF 123 million.
The acquisitions will be accounted for under the purchase method of
accounting and the related goodwill, if any, will be amortized on a
straight-line basis over a period not exceeding 20 years.
F-51
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31. GROUP SUBSIDIARIES, JOINT VENTURES AND ASSOCIATED COMPANIES AS AT
DECEMBER 31, 2000
The following descriptions describe the various types of entities within the
Group:
/ / HOLDING/FINANCE: This entity is a holding company and/or performs
finance functions for the Group.
u SALES: This entity performs sales and marketing activities for the Group.
t PRODUCTION: This entity performs manufacturing and/or production
activities for the Group.
s RESEARCH: This entity performs research and development activities for the
Group.
EQUITY HOLDING/
INTEREST FINANCE SALES PRODUCTION RESEARCH
-------- -------- -------- ---------- --------
ARGENTINA
Novartis Argentina S.A., Buenos Aires....... - u t
AUSTRALIA
Novartis Australia Pty Ltd., Pendle Hill,
NSW....................................... - / /
Novartis Pharmaceuticals Australia
Pty Ltd., North Ryde, NSW................. - u s
Novartis Consumer Health Australasia
Pty Ltd., Rowville, Victoria.............. - u t
Novartis Animal Health Australasia
Pty Ltd., Pendle Hill, NSW................ - u s
AUSTRIA
Novartis Pharma GmbH, Vienna................ - u
Novartis Forschungsinstitut GmbH, Vienna.... - s
Biochemie GmbH, Kundl....................... - / / u t s
Novartis Animal Health GmbH, Kundl.......... - u
BANGLADESH
Novartis (Bangladesh) Limited, Dhaka........ w u t
BELGIUM
N.V. Novartis Management Services S.A.,
Brussels.................................. - / /
N.V. Novartis Pharma S.A., Brussels......... - u
N.V. Novartis Consumer Health S.A.,
Bruxelles................................. - u
N.V. CIBA Vision Benelux S.A., Mechelen..... - u
BERMUDA
Triangle International Reinsurance Ltd.,
Hamilton.................................. - / /
Novartis International Pharmaceutical Ltd.,
Hamilton.................................. - / / u
BRAZIL
Novartis Biociencias S.A., Sao Paulo........ - u t
Novartis Consumer Health Ltda., Rio de
Janeiro................................... - u t
Novartis Saude Animal Ltda., Sao Paulo...... - u t
- ----------
- - = subsidiary; > 90%--fully consolidated
w = subsidiary; above 50% and up to 90%--fully consolidated
c = investment in associated companies; above 20% up to 50%--equity method
accounting
F-52
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31. GROUP SUBSIDIARIES, JOINT VENTURES AND ASSOCIATED COMPANIES AS AT
DECEMBER 31, 2000 (CONTINUED)
EQUITY HOLDING/
INTEREST FINANCE SALES PRODUCTION RESEARCH
-------- -------- -------- ---------- --------
BRITISH VIRGIN ISLANDS
Novartis Overseas Finance Ltd., Road Town,
Tortola................................... - / /
Novartis Capital Ltd., Road Town, Tortola... - / /
CANADA
Novartis Pharmaceuticals Canada Inc.,
Dorval/ Montreal.......................... - u t s
Novartis Consumer Health Canada Inc.,
Mississauga, Ontario...................... - u
CIBA Vision Canada Inc., Mississauga,
Ontario................................... - u t
Novartis Animal Health Canada Inc.,
Mississauga, Ontario...................... - u
CHILE
Novartis Chile S.A., Santiago de Chile...... - u
CHINA
Beijing Novartis Pharma Ltd., Beijing....... w u t
Novartis Pharmaceuticals (HK) Limited, Hong
Kong...................................... - u
Novartis Shanghai Trading Ltd., Shanghai.... - u
Shanghai Novartis Nutrition Ltd.,
Shanghai.................................. w u t
COLOMBIA
Novartis de Colombia S.A., Santafe de
Bogota.................................... - u t
COSTA RICA
Productos Gerber de Centroamerica, S.A., San
Jose...................................... - u t
CZECH REPUBLIC
Novartis Czech Republic s.r.o., Prague...... - u
DENMARK
Novartis Danmark A/S, Copenhagen............ - / /
Novartis Healthcare A/S, Copenhagen......... - u
ECUADOR
Novartis Ecuador S.A., Quito................ - u
EGYPT
Novartis Pharma S.A.E., Cairo............... - u t
- ----------
- - = subsidiary; > 90%--fully consolidated
w = subsidiary; above 50% and up to 90%--fully consolidated
c = investment in associated companies; above 20% up to 50%--equity method
accounting
F-53
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31. GROUP SUBSIDIARIES, JOINT VENTURES AND ASSOCIATED COMPANIES AS AT
DECEMBER 31, 2000 (CONTINUED)
EQUITY HOLDING/
INTEREST FINANCE SALES PRODUCTION RESEARCH
-------- -------- -------- ---------- --------
FINLAND
Novartis Finland Oy, Espoo.................. - u
FRANCE
Novartis Groupe France S.A.,
Rueil-Malmaison........................... - / /
Novartis France S.A., Rueil-Malmaison....... - / /
Novartis Pharma S.A., Rueil-Malmaison....... - u t s
Novartis Sante Familiale S.A., Revel........ - u t
Nutrition et Sante S.A., Revel.............. - / / u t s
CIBA Vision Ophthalmics S.A., Blagnac....... - u
CIBA Vision S.A., Blagnac................... - u
Novartis Sante Animale S.A.,
Rueil-Malmaison........................... - u t
GERMANY
Novartis Deutschland GmbH, Wehr............. - / /
Novartis Pharma GmbH, Nuremberg............. - u t s
Azupharma GmbH & Co., Gerlingen near
Stuttgart................................. - u t
BC Biochemie GmbH, Frankfurt am Main........ - u t
Novartis Consumer Health GmbH, Munich....... - u t s
Novartis Nutrition GmbH, Munich............. - u t s
CIBA Vision Vertriebs GmbH, Grossostheim/
Aschaffenburg............................. - u
CIBA Vision GmbH, Grosswallstadt............ - u t s
GREAT BRITAIN
Novartis UK Ltd., Farnborough............... - / /
Novartis (Financial Services) Ltd.,
Farnborough............................... - / /
Novartis Pharmaceuticals UK Ltd., Frimley/
Camberley................................. - u t s
Novartis Grimsby Ltd., Grimsby.............. - t
Imutran Ltd., Cambridge..................... - s
Novartis Consumer Health UK Ltd., Horsham... - u t
Novartis Nutrition UK Ltd., King's
Langley................................... - t s
CIBA Vision (UK) Ltd., Southampton.......... - u
Wesley Jessen PBH Ltd., Southampton......... - u t
Novartis Animal Health UK Ltd., Litlington/
Royston................................... - u s
GREECE
Novartis (Hellas) S.A.C.I., Athens.......... - u
HUNGARY
Novartis Hungary Healthcare and Agribusiness
Limited Liability Co., Budapest........... - u
- ----------
- - = subsidiary; > 90%--fully consolidated
w = subsidiary; above 50% and up to 90%--fully consolidated
c = investment in associated companies; above 20% up to 50%--equity method
accounting
F-54
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31. GROUP SUBSIDIARIES, JOINT VENTURES AND ASSOCIATED COMPANIES AS AT
DECEMBER 31, 2000 (CONTINUED)
EQUITY HOLDING/
INTEREST FINANCE SALES PRODUCTION RESEARCH
-------- -------- -------- ---------- --------
INDIA
Novartis India Limited, Mumbai.............. w u
Novartis Enterprises Limited, Mumbai........ - u t
INDONESIA
PT Novartis Biochemie, Jakarta.............. w u t
PT CIBA Vision Batam, Batam................. - t
IRELAND
Novartis Ireland Limited, Dublin............ - u
Novartis Ringaskiddy Limited, Ringaskiddy,
County Cork............................... - t
ITALY
Novartis Italia S.p.A., Origgio............. - / /
Novartis Farma S.p.A., Origgio.............. - u t s
Biochemie S.p.A., Rovereto.................. - t
Novartis Consumer Health S.p.A., Origgio.... - u
CIBA Vision S.r.l., Marcon.................. - u
JAPAN
Novartis Pharma K.K., Tokyo................. - u s
Ciba-Geigy Japan Limited, Takarazuka........ - t
CIBA Vision K.K., Tokyo..................... - u
Novartis Animal Health K.K., Tokyo.......... - u
MALAYSIA
Novartis Corporation (Malaysia) Sdn. Bhd.,
Shah Alam................................. w u
MEXICO
Novartis de Mexico, S.A. de C.V., Mexico
City...................................... - / /
Novartis Farmaceutica, S.A. de C.V., Mexico
City...................................... - u t
Novartis Nutrition, S.A. de C.V., Mexico
City...................................... - u
Productos Gerber, S.A. de C.V., Queretaro... - u t
Novartis Salud Animal, S.A. de C.V.,
Guadalajara............................... - u t
NETHERLANDS
Novartis Netherlands B.V., Enkhuizen........ - / /
Novartis Pharma B.V., Arnhem................ - u
Multipharma B.V., Weesp..................... - u t
Novartis Consumer Health B.V., Breda........ - u t
NETHERLANDS ANTILLES
Novartis Investment N.V., Curacao........... - / /
NEW ZEALAND
Novartis New Zealand Ltd., Auckland......... - u
- ----------
- - = subsidiary; > 90%--fully consolidated
w = subsidiary; above 50% and up to 90%--fully consolidated
c = investment in associated companies; above 20% up to 50%--equity method
accounting
F-55
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31. GROUP SUBSIDIARIES, JOINT VENTURES AND ASSOCIATED COMPANIES AS AT
DECEMBER 31, 2000 (CONTINUED)
EQUITY HOLDING/
INTEREST FINANCE SALES PRODUCTION RESEARCH
-------- -------- -------- ---------- --------
NORWAY
Novartis Norge AS, Oslo..................... - u
PAKISTAN
Novartis Pharma (Pakistan) Limited,
Karachi................................... - u t
PANAMA
Novartis Pharma (Logistics), Inc., Panama... - u
PERU
Novartis Biosciences Peru S.A., Lima........ - u
PHILIPPINES
Novartis Healthcare Philippines, Inc.,
Makati/ Manila............................ - u
Novartis Consumer Health Philippines, Inc.,
Pasig/Manila.............................. - u t
POLAND
Novartis Poland Sp. z o.o., Warsaw.......... - u
Alima-Gerber S.A., Warsaw................... - u t
PORTUGAL
Novartis Portugal SGPS Lda., Sintra......... - / /
Novartis Farma--Produtos
Farmaceuticos S.A., Sintra................ - u
Novartis Consumer Health--Produtos
Farmaceuticos e Nutricao Lda., Lisbon..... - u t
PUERTO RICO
Gerber Products Company of Puerto
Rico, Inc., Carolina...................... - u t
SOUTH AFRICA
Novartis South Africa (Pty) Ltd., Spartan/
Johannesburg.............................. - u t
SOUTH KOREA
Novartis Korea Ltd., Seoul.................. - u t
SPAIN
Novartis Farmaceutica, S.A., Barcelona...... - / / u t
Biochemie, S.A., Les Franqueses del Valles/
Barcelona................................. - u t s
Novartis Consumer Health, S.A., Barcelona... - u t
CIBA Vision, S.A., Barcelona................ - u
- ----------
- - = subsidiary; > 90%--fully consolidated
w = subsidiary; above 50% and up to 90%--fully consolidated
c = investment in associated companies; above 20% up to 50%--equity method
accounting
F-56
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31. GROUP SUBSIDIARIES, JOINT VENTURES AND ASSOCIATED COMPANIES AS AT
DECEMBER 31, 2000 (CONTINUED)
EQUITY HOLDING/
INTEREST FINANCE SALES PRODUCTION RESEARCH
-------- -------- -------- ---------- --------
SWEDEN
Novartis Sverige Participations AB,
Taby/Stockholm.............................. - / /
Novartis Sverige AB, Taby/Stockholm........... - u
CIBA Vision Nordic AB, Askim/Goteborg......... - u
SWITZERLAND
Novartis International AG, Basel.............. - / /
Novartis Pharma AG, Basel..................... - / / u t s
Novartis Services AG, Basel................... - / /
Novartis Holding AG, Basel.................... - / /
Novartis Research Foundation, Basel........... - s
Novartis Technology Research Foundation,
Zug......................................... - s
Novartis Foundation for Management
Development, Zug............................ - / /
Novartis Pharma Services AG, Basel............ - u
Novartis Pharma Schweizerhalle AG,
Schweizerhalle.............................. - t
Novartis Pharma Stein AG, Stein............... - t s
Novartis Pharma Schweiz AG, Berne............. - u
Novartis Consumer Health S.A., Nyon........... - / / u t s
Novartis Consumer Health International S.A.,
Nyon........................................ - u
Novartis Consumer Health Schweiz AG, Berne.... - u
Novartis Nutrition AG, Berne.................. - / /
Wander AG, Neuenegg........................... - t
CIBA Vision AG, Hettlingen.................... - / / u t s
Novartis Animal Health AG, Basel.............. - / / u t s
Novartis Centre de Recherche Sante Animale
S.A., St. Aubin............................. - s
TAIWAN
Novartis (Taiwan) Co., Ltd., Taipei........... - u t
THAILAND
Novartis (Thailand) Limited, Bangkok.......... - u
Novartis Nutrition (Thailand) Limited,
Bangkok..................................... w u t
TURKEY
Novartis Saglik, Gida ve Tarim Urunleri Sanayi
ve Ticaret A.S., Istanbul................... - u t
URUGUAY
Novartis Uruguay S.A., Montevideo............. - u
- ----------
- - = subsidiary; > 90%--fully consolidated
w = subsidiary; above 50% and up to 90%--fully consolidated
c = investment in associated companies; above 20% up to 50%--equity method
accounting
F-57
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31. GROUP SUBSIDIARIES, JOINT VENTURES AND ASSOCIATED COMPANIES AS AT
DECEMBER 31, 2000 (CONTINUED)
EQUITY HOLDING/
INTEREST FINANCE SALES PRODUCTION RESEARCH
-------- -------- -------- ---------- --------
USA
Novartis Corporation, New York, NY............ - / /
Novartis Finance Corporation, New York, NY.... - / /
Novartis Pharmaceuticals Corporation, East
Hanover, NJ................................. - u t s
Novartis Institute for Functional
Genomics, Inc., San Diego, CA............... - s
Genetic Therapy, Inc., Gaithersburg, MD....... - s
SyStemix, Inc., Palo Alto, CA................. - s
Chiron Corporation, Emeryville, CA............ c / / u t s
Geneva Pharmaceuticals, Inc., Broomfield,
CO.......................................... - u t s
Novartis Consumer Health, Inc., Summit, NJ.... - u t s
Novartis Nutrition Corporation, Minneapolis,
MN.......................................... - u t s
Gerber Products Company, Fremont, MI.......... - / / u t s
Gerber Life Insurance Company, White Plains,
NY.......................................... - u
CIBA Vision Corporation, Duluth, GA........... - / / u t s
Wesley Jessen Corporation, Des Plaines, IL.... - / / u t s
Novartis Animal Health U.S., Inc., Greensboro,
NC.......................................... - u t s
VENEZUELA
Novartis de Venezuela SA, Caracas............. - u
Novartis Nutrition de Venezuela SA, Caracas... - u t
VIETNAM
Novartis (Vietnam) Limited, Bien Hoa City..... - u t
- ----------
- - = subsidiary; > 90%--fully consolidated
w = subsidiary; above 50% and up to 90%--fully consolidated
c = investment in associated companies; above 20% up to 50%--equity method
accounting
In addition, the Group is represented by subsidiaries, associated companies
or joint ventures in the following countries:
Algeria, Dominican Republic, Guatemala, Morocco, Russian Federation and
Singapore.
F-58
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP)
The Group's consolidated financial statements have been prepared in
accordance with IAS, which as applied by the Group, differs in certain
significant respects from U.S. GAAP. The effects of the application of U.S. GAAP
to net income and equity are set out in the tables below:
2000 2000 1999 1998
NOTES $ MILLIONS(1) CHF MILLIONS CHF MILLIONS CHF MILLIONS
-------- ------------- ------------- ------------- -------------
NET INCOME REPORTED UNDER IAS.......... 4,395 7,210 6,659 6,010
U.S. GAAP adjustments:
Purchase accounting: Ciba-Geigy........ a (260) (426) (457) (425)
Purchase accounting: other
acquisitions......................... b (148) (242) (277) (252)
Restructuring costs.................... c (44) (72) (931) (228)
Available-for-sale securities.......... d 300 492 138 1
Pension provisions..................... e 6 10 79 (26)
Stock-based compensation............... f (102) (168) (41) (125)
Consolidation of stock-based
compensation foundations............. g (13) (21) (5) (31)
Deferred taxes......................... h (14) (23) (26) (106)
In-process research and development.... i (81) (133) 4
Fair value of derivative financial
instruments.......................... j 180 295 (31)
Other.................................. k 41 66 18 (44)
Deferred tax effect on U.S. GAAP
adjustments.......................... (45) (75) 289 181
----- ----- ----- -----
NET INCOME REPORTED UNDER U.S. GAAP.... 4,215 6,913 5,419 4,955
===== ===== ===== =====
BASIC EARNINGS PER SHARE UNDER U.S.
GAAP................................. 67 110 84 77
----- ----- ----- -----
DILUTED EARNINGS PER SHARE UNDER
U.S. GAAP............................ 67 110 84 77
===== ===== ===== =====
2000 DECEMBER 31, 2000 DECEMBER 31, 1999
NOTES $ MILLIONS(1) CHF MILLIONS CHF MILLIONS
-------- ------------- ------------------- -------------------
EQUITY REPORTED UNDER IAS................... 22,477 36,862 37,216
U.S. GAAP adjustments Purchase accounting:
Ciba-Geigy................................ a 3,138 5,147 7,219
Purchase accounting: other acquisitions..... b 3,309 5,427 5,638
Restructuring costs......................... c -- -- 72
Available-for-sale securities............... d 1,288 2,112 458
Pension provisions.......................... e 1,143 1,874 1,909
Stock-based compensation.................... f (40) (66) (22)
Consolidation of stock-based compensation
foundations............................... g (459) (753) (252)
Deferred taxes.............................. h (360) (590) (609)
In-process research and development......... i (81) (133) (53)
Fair value of derivative financial
instruments............................... j (1) (1) (31)
Other....................................... k (32) (52) (178)
Deferred tax effect on U.S. GAAP
adjustments............................... (625) (1,025) (792)
------ ------ ------
EQUITY REPORTED UNDER U.S. GAAP............. 29,757 48,802 50,575
====== ====== ======
- -------------
(1) The Swiss franc amounts have been translated into United States dollars at
the rate of 1.64 to the dollar. Such translations should not be construed as
representations that the Swiss franc amounts represent, or have been or
could be converted into, United States dollars at that or any other rate.
F-59
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
COMPONENTS OF EQUITY IN ACCORDANCE WITH U.S. GAAP
2000 2000 1999
$ MILLIONS(1) CHF MILLIONS CHF MILLIONS
------------- ------------ ------------
Share capital....................................... 880 1,443 1,443
Treasury shares, at nominal value................... (115) (189) (172)
Share premium....................................... (1,520) (2,493) 303
Retained earnings................................... 29,671 48,661 47,953
Accumulated other comprehensive income:
Currency translation adjustment..................... 196 321 846
Unrealized market value adjustment on
available-for-sale securities (net of taxes of CHF
213 million and CHF 23 million, respectively)..... 645 1,059 202
------ ------ ------
TOTAL............................................... 29,757 48,802 50,575
====== ====== ======
- -------------
(1) The Swiss franc amounts have been translated into United States dollars at
the rate of 1.64 to the dollar. Such translations should not be construed as
representations that the Swiss franc amounts represent, or have been or
could be converted into, United States dollars at that or any other rate.
F-60
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
CHANGES IN U.S. GAAP EQUITY
$ MILLIONS(1) CHF MILLIONS
------------- ------------
JANUARY 1, 1998............................................. 27,106 44,455
Net income for the year under U.S. GAAP................... 3,021 4,955
Dividends paid............................................ (1,014) (1,663)
Net unrealized market value adjustment.................... (27) (45)
Increase in share premium related to stock based
compensation............................................ 51 83
Increase in share premium for options written on own
stock................................................... 165 270
Foreign currency translation adjustment................... (583) (956)
Disposal of treasury shares............................... 440 722
Other changes in shareholders' equity..................... 1 2
------- -------
DECEMBER 31, 1998........................................... 29,160 47,823
Net income for the year under U.S. GAAP................... 3,304 5,419
Dividends paid............................................ (1,180) (1,935)
Net unrealized market value adjustment.................... (218) (358)
Increase in share premium related to stock-based
compensation............................................ 45 73
Foreign currency translation adjustment................... 1,573 2,579
Acquisition of treasury shares............................ (1,845) (3,026)
------- -------
DECEMBER 31, 1999........................................... 30,839 50,575
Net income for the year under U.S. GAAP................... 4,215 6,913
Dividends paid............................................ (1,259) (2,064)
Net unrealized market value adjustment.................... 522 857
Increase in share premium related to stock-based
compensation............................................ 45 73
Foreign currency translation adjustment................... (320) (525)
Acquisition of treasury shares............................ (1,072) (1,758)
Effect of Agribusiness spin-off........................... (3,213) (5,269)
------- -------
DECEMBER 31, 2000........................................... 29,757 48,802
======= =======
- -------------
(1) The Swiss franc amounts have been translated into United States dollars at
the rate of 1.64 to the dollar. Such translations should not be construed as
representations that the Swiss franc amounts represent, or have been or
could be converted into, United States dollars at that or any other rate.
DISCONTINUED OPERATIONS
Under IAS 35, the disposal of the Agribusiness sector was considered a
discontinued operation as of December 1, 1999, when the Board of Novartis
approved the divestment. However under U.S. GAAP, the disposal did not qualify
as a discontinued operation until the shareholders of Novartis approved the
required transactions on October 11, 2000.
F-61
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
The income from continuing and discontinued operations under U.S. GAAP as of
December 31, 2000, 1999, and 1998, respectively is as follows:
2000(1) 2000 1999 1998
$ MILLIONS CHF MILLIONS CHF MILLIONS CHF MILLIONS
---------- ------------ ------------ ------------
Income from continuing operations under
U.S. GAAP............................ 3,869 6,346 5,230 4,655
Income from discontinued operations
under U.S. GAAP
(net of taxes of CHF 314 million, CHF
146 million, and CHF 257
respectively)........................ 346 567 189 300
----- ----- ----- -----
NET INCOME REPORTED UNDER U.S. GAAP.... 4,215 6,913 5,419 4,955
===== ===== ===== =====
2000(1) 2000 1999 1998
$ CHF CHF CHF
--------- ------------ ------------ ------------
EARNINGS PER SHARE
BASIC:
Income from continuing operations
under U.S. GAAP.................... 62 101 81 72
Income from discontinued operations
under U.S. GAAP.................... 5 9 3 5
--- --- -- --
BASIC EARNINGS PER SHARE UNDER U.S.
GAAP................................. 67 110 84 77
--- --- -- --
DILUTED:
Income from continuing operations
under U.S. GAAP.................... 62 101 81 72
Income from discontinued operations
under U.S. GAAP.................... 5 9 3 5
--- --- -- --
DILUTED EARNINGS PER SHARE UNDER U.S.
GAAP................................. 67 110 84 77
=== === == ==
- -------------
(1) The Swiss franc amounts have been translated into United States dollars at
the rate of 1.64 to the dollar. Such translations should not be construed as
representations that the Swiss franc amounts represent, or have been or
could be converted into, United States dollars at that or any other rate.
(a) PURCHASE ACCOUNTING: CIBA-GEIGY
The accounting treatment for the 1996 merger of Sandoz and Ciba-Geigy under
IAS is different from the accounting treatment under U.S. GAAP. For IAS purposes
the merger was accounted for as a uniting of interests, however, for U.S. GAAP
the merger does not meet all of the required conditions of Accounting Principles
Board Opinion No. 16 for a pooling of interests and therefore is accounted for
as a purchase under U.S. GAAP. Under U.S. GAAP, Sandoz would be deemed to be the
acquirer with the
F-62
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
assets and liabilities of Ciba-Geigy being recorded at their estimated fair
values and the results of Ciba-Geigy being included from December 20, 1996.
Under U.S. GAAP, the cost of Ciba-Geigy to Sandoz was approximately CHF
38.1 billion.
The components of the equity and income statement adjustments related to the
U.S. GAAP purchase accounting adjustment for 2000, 1999, and 1998 are as
follows:
2000 1999 1998
COMPONENTS TO RECONCILE COMPONENTS TO RECONCILE COMPONENTS TO RECONCILE
--------------------------- --------------------------- ---------------------------
NET INCOME EQUITY NET INCOME EQUITY NET INCOME EQUITY
------------ ------------ ------------ ------------ ------------ ------------
CHF MILLIONS CHF MILLIONS CHF MILLIONS CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ------------ ------------ ------------ ------------ ------------
Intangible assets
related to marketed
products........... (528) 6,865 (548) 9,323 (548) 9,871
Tangible fixed
assets............. 79 (1,098) 81 (1,375) 81 (1,456)
Inventory............ (19) 711 (43) 980 -- 1,023
Other identifiable
intangibles........ (60) 188 (66) 460 (66) 526
Investments.......... (34) 202 (34) 236 (34) 270
Deferred taxes....... 136 (1,721) 153 (2,405) 142 (2,558)
---- ------ ---- ------ ---- ------
TOTAL ADJUSTMENT..... (426) 5,147 (457) 7,219 (425) 7,676
==== ====== ==== ====== ==== ======
The intangible assets related to marketed products and other identifiable
intangibles are being amortized over 20 and 10 years, respectively.
As a result of the spin-off of Novartis Agribusiness, CHF 1,646 million of
the equity adjustment that existed at December 31, 1999, which was included in
the U.S. GAAP net assets, was spun-off to shareholders at the spin-off date.
(b) PURCHASE ACCOUNTING: OTHER ACQUISITIONS
In accordance with IAS 22 (revised 1993), the difference between the
purchase price and the aggregate fair value of tangible and intangible assets
and liabilities acquired in a business combination is capitalized as goodwill
and amortized over its useful life, not to exceed 20 years. Under U.S. GAAP, the
difference between the purchase price and fair value of net assets acquired as
part of a business combination is capitalized as goodwill and amortized through
the income statement over its estimated useful life, which may not exceed
40 years. For the purpose of the reconciliation to U.S. GAAP, goodwill is
generally being amortized through the income statement over an estimated useful
life of 20 years.
Prior to January 1, 1995, the Group wrote-off all goodwill directly to
equity, in accordance with IAS existing at that time. The adoption of IAS 22
(revised 1993) did not require prior period restatement. The material component
of goodwill recorded directly to equity, under IAS prior to January 1, 1995,
related primarily to the acquisition of Gerber Products in 1994. The net book
value of goodwill under U.S. GAAP
F-63
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
attributable to Gerber Products was CHF 4,845 million and CHF 4,842 million as
of December 31, 2000 and 1999 respectively and is being amortized over
40 years.
(c) RESTRUCTURING COSTS
Under IAS restructuring charges are accrued against operating income in the
period management commits itself to a plan, it is probable a liability has been
incurred and the amount can be reasonably estimated. Up to January 1, 2000 U.S.
GAAP was more prescriptive than IAS; for example, in order to qualify as
restructuring costs under U.S. GAAP, it was necessary that employees were
informed regarding the key provisions of the restructuring plan prior to the end
of the reporting period. Also, there was a rebuttable presumption under U.S.
GAAP that an exit plan would be completed and the exit costs incurred within one
year from the commitment date. Therefore, certain costs permitted to be accrued
under IAS up to January 1, 2000 were not allowable under U.S. GAAP.
The following schedule reconciles restructuring accruals under IAS to
amounts determined under U.S. GAAP.
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
Total accruals in accordance with IAS....................... 397 560
Reclassification of restructuring accruals to tangible fixed
assets.................................................... (53) (42)
Adjustments in restructuring accruals to accord with U.S.
GAAP...................................................... -- (72)
--- ---
RESTRUCTURING ACCRUALS IN ACCORDANCE WITH U.S. GAAP......... 344 446
=== ===
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
Employee termination costs.................................. -- 40
Other third party costs..................................... -- 32
--- ---
ADJUSTMENTS IN RESTRUCTURING ACCRUALS TO ACCORD WITH U.S.
GAAP...................................................... -- 72
=== ===
Restructuring accruals according to U.S. GAAP are comprised of the
following:
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
Employee termination costs.................................. 140 240
Other third party costs..................................... 204 206
--- ---
RESTRUCTURING ACCRUALS IN ACCORDANCE WITH U.S. GAAP......... 344 446
=== ===
(d) AVAILABLE-FOR-SALE SECURITIES
In accordance with IAS, investments are stated at the lower of cost or
market value on an individual basis. Any losses resulting from the application
of the lower of cost or market valuation are charged to the
F-64
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
income statement. U.S. GAAP requires that investments in debt and certain equity
securities are classified as either trading, available-for-sale, or
held-to-maturity, depending on management's intent and ability with respect to
holding such investments. Investments classified as available-for-sale are
carried at fair value, with any unrealized gain or loss recorded as a separate
component of equity. For purposes of U.S. GAAP, the losses recognized from the
application of the lower of cost or market valuation are credited back to income
and considered as unrealized losses in a separate component of the equity.
(e) PENSION PROVISIONS
Under IAS, pension costs and similar obligations are accounted for in
accordance with IAS 19, "Employee Benefits". For purposes of U.S. GAAP, pension
costs for defined benefit plans are accounted for in accordance with SFAS
No. 87 "Employers' Accounting for Pensions" and the disclosure is presented in
accordance with SFAS No. 132 "Employers' Disclosures about Pensions and Other
Post-retirement Benefits". The version of IAS 19 in force up to December 31,
1998 required that the discount rate used in the calculation of benefit plan
obligations is of an average long-term nature, whereas U.S. GAAP requires that
the discount rate is based on a rate that the obligations could be currently
settled.
The following is a reconciliation of the balance sheet and income statement
amounts recognized for IAS and U.S. GAAP for both pension and post-retirement
benefit plans:
2000 1999 1998
CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ------------ ------------
PENSION BENEFITS:
Prepaid asset recognized for IAS.................. 3,218 2,564 832
Increase in PBO for SFAS 87 purposes.............. -- -- (1,173)
Difference in unrecognized amounts................ 1,874 1,909 4,187
----- ----- ------
PREPAID ASSET RECOGNIZED FOR U.S. GAAP............ 5,092 4,473 3,846
----- ----- ------
Net periodic income recognized for IAS............ 348 213 42
Amounts directly recognized to income............. -- -- 19
Amortization of transition asset.................. 88 240 239
Difference in amortization of actuarial amounts... (78) (161) (284)
----- ----- ------
NET PERIODIC PENSION BENEFIT INCOME RECOGNIZED FOR
U.S. GAAP....................................... 358 292 16
===== ===== ======
OTHER POST-RETIREMENT BENEFITS:
Liability recognized for IAS...................... (676) (630) (831)
Difference in unrecognized amounts................ (144) (173) 114
----- ----- ------
LIABILITY RECOGNIZED FOR U.S. GAAP................ (820) (803) (717)
----- ----- ------
Net periodic benefit recognized for IAS........... (77) (62) (27)
Amortization of actuarial amounts................. 33 7 (9)
----- ----- ------
NET PERIODIC POST-RETIREMENT BENEFIT COSTS
RECOGNIZED FOR U.S. GAAP........................ (44) (55) (36)
===== ===== ======
F-65
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
(f) STOCK-BASED COMPENSATION
The Group does not account for stock-based compensation, as it is not
required under IAS. Under U.S. GAAP, the Group applies Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its plans. As described in Note 26, the Group
has several plans that are subject to measurement under APB No. 25. These
include the Novartis Stock Option Plan, the Management ADS Appreciation Cash
Plan, the Novartis Share Ownership Plan, and the Novartis Management Share
Programs.
The ownership plan is considered to be compensatory based on the amount of
the discount allowed for employee share purchases. Compensation expense is
recorded at the grant date and is calculated as the spread between the share
price and the strike price on that date. The Group sold 35,738 shares and 38,860
shares to employees during the years ended December 31, 2000 and 1999 for CHF
18 million and CHF 19 million, respectively. Compensation expense recognized
under the ownership plan was CHF 72 million, CHF 73 million, and
CHF 83 million for the years ended December 31, 2000, 1999, and 1998,
respectively. The discount to the Group's share price was recorded in share
premium. The percentage discount to the Group's share price under the ownership
plan was 83%, 79%, and 80% for the years ended December 31, 2000, 1999, and
1998, respectively.
The option plan is considered to be variable under APB No. 25 as the number
of shares to be issued is not known at the date of grant. Compensation expense
is recorded at each balance sheet date by estimating the ultimate number of
shares to be issued multiplied by the spread between the share price on the
balance sheet date and the strike price. In addition, the Group grants loans to
its option holders in certain jurisdictions for payment of the tax liability
associated with the grant of stock options. If certain conditions are met, the
Group waives repayment of the loans. Compensation expense is recorded at the
date the loan is waived and is calculated as the amount of the loan that will
not be repaid to the Group. Compensation expense recognized under the option
plan was CHF 11 million for the year ended December 31, 2000.
The appreciation plan is considered to be variable because the final benefit
to employees depends on the Group's share price at the exercise date.
Compensation expense is recorded at each balance sheet date by estimating the
number of rights outstanding multiplied by the spread between the share price on
the balance sheet date and the strike price. Compensation expense and the
increase of the accrual under the appreciation plan was CHF 77 million, and
CHF 42 million for the years ended December 31, 2000, and 1998, respectively.
Reduction in compensation expense and the release of the accrual under the
appreciation plan was CHF 32 million for the year ended December 31, 1999.
The management share programs are considered to be compensatory based on the
strike price for the underlying instruments, which is zero at the date of grant.
Compensation expense is recorded at the grant date and is calculated as the
number of instruments granted multiplied by the share price on the date.
Compensation expense recognized under these plans was CHF 8 million for the year
ended December 31, 2000.
The total U.S. GAAP expense of the above items is CHF 168 million (1999: CHF
41 million, 1998: CHF 125 million).
F-66
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
(g) CONSOLIDATION OF STOCK-BASED COMPENSATION FOUNDATIONS
The Group has certain foundations that settle the obligations of the Group's
stock-based compensation plans that are not required to be consolidated for IAS,
however, the foundations are consolidated under U.S. GAAP.
The impact of consolidating these foundations is to reduce net income by
CHF 21 million, CHF 5 million, and CHF 31 million in 2000, 1999, and 1998,
respectively. U.S. GAAP equity at December 31, 2000 and 1999 decreases by
CHF 753 million and CHF 252 million, respectively.
(h) DEFERRED TAXES
Under IAS 12 (revised) and U.S. GAAP, unrealized profits resulting from
intercompany transactions are eliminated from the carrying amount of assets,
such as inventory. In accordance with IAS 12 (revised) the Group calculates the
tax effect with reference to the local tax rate of the company that holds the
inventory (the buyer) at period-end. However, U.S. GAAP requires the tax effect
to be calculated with reference to the local tax rate on the seller's or
manufacturer's jurisdiction.
(i) IN-PROCESS RESEARCH AND DEVELOPMENT (IPR&D)
IAS does not consider that IPR&D is an intangible asset that can be
separated from goodwill. Under U.S. GAAP it is considered to be a separate asset
that needs to be written-off immediately following the acquisition as the
feasibility of the acquired research and development has not been fully tested
and the technology has no alternative future use. During 2000 IPR&D has been
identified for U.S. GAAP purposes in connection with acquisitions, principally
Wesley Jessen.
The technology acquired from Wesley Jessen consists of two projects and five
technologies to be used in research and development. The successful completion
of the acquired research and development projects is subject to achieving
technological feasibility for each technology acquired. Further work is required
to achieve this feasibility which is dependent on completing certain tasks for
the projects to be used in research and development. Management anticipates the
tasks will be completed between 2001 and 2003 and commercialization of the
projects between 2002 and 2005.
The income approach was used to determine the value of the ongoing research
and development projects and technologies that were acquired in the purchase.
Under this approach the value of the technology is based upon the present value
of future cash flows over 15 to 18 years using a risk-adjusted discount rate of
15%. Management has reviewed the approaches used to value these technologies and
agrees that they appropriately reflect the value of the technologies to the
ongoing research and development efforts.
(j) FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
Under U.S. GAAP, the Group values all of its derivative financial
instruments that do not qualify for hedge accounting to fair value on an
individual basis through the income statement. Under IAS, the Group uses the
concept of portfolio valuation and only records net losses on portfolios of
similar derivative financial instruments through the income statement, except
for items that qualify for hedge accounting. The primary difference between IAS
and U.S. GAAP net income at December 31, 2000 relates to the
F-67
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
recognition of a gain, and a corresponding asset, upon valuing equity options on
Novartis shares to market under U.S. GAAP. There was no resulting impact on U.S.
GAAP net equity as an offsetting liability was created by equity options which
hedge available-for-sale securities for which the related unrealized loss is
deferred in other comprehensive income until the hedged exposure is recognized.
(k) OTHER
There are also differences between IAS and U.S. GAAP in relation to
(1) capitalized interest and capitalized software, (2) other post-retirement
benefits, (3) accretion on convertible debentures, and (4) LIFO inventory. None
of these differences are individually significant and they are therefore shown
as a combined total.
(l) ADDITIONAL U.S. GAAP DISCLOSURES
FINANCIAL ASSETS AND LIABILITIES
Apart from the following exceptions, the U.S. GAAP carrying value of
financial assets and liabilities is equal to the IAS carrying values.
CASH, CASH EQUIVALENTS AND TIME DEPOSITS
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
Carrying value of cash and cash equivalents under IAS....... 8,803 6,281
Carrying values of time deposits under IAS (Note 10)........ 2,238 570
Change due to consolidation of stock-based compensation
foundations under U.S. GAAP............................... (935) 1
------ -----
TOTAL UNDER U.S. GAAP....................................... 10,106 6,852
====== =====
MARKETABLE SECURITIES
2000 1999
CHF MILLIONS CHF MILLIONS
------------ ------------
Carrying values of marketable securities under IAS
(Note 10)................................................. 9,482 15,750
Carrying values of other investments under IAS (Note 13).... 308 --
Unrealized gains not recorded under IAS (Notes 10 and 13)... 2,113 458
Marketable securities in stock-based compensation
foundations consolidated under U.S. GAAP.................. 196 70
------ ------
TOTAL UNDER U.S. GAAP....................................... 12,099 16,278
====== ======
F-68
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
The components of available-for-sale marketable securities under U.S. GAAP
at December 31, 2000 and 1999 are the following:
CARRYING VALUE
GROSS UNREALIZED GROSS UNREALIZED AND ESTIMATED
COST GAINS LOSSES FAIR VALUE
CHF MILLIONS CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ---------------- ---------------- --------------
AS OF DECEMBER 31, 2000
AVAILABLE-FOR-SALE SECURITIES:
Equity securities.............. 4,297 2,068 (569) 5,796
Debt securities................ 6,276 185 (158) 6,303
------ ----- ---- ------
TOTAL.......................... 10,573 2,253 (727) 12,099
====== ===== ==== ======
AS OF DECEMBER 31, 1999
AVAILABLE-FOR-SALE SECURITIES:
Equity securities.............. 2,320 346 (136) 2,530
Debt securities................ 6,097 139 (99) 6,137
------ ----- ---- ------
TOTAL.......................... 8,417 485 (235) 8,667
====== ===== ==== ======
Under IAS, unrealized holding gains on available-for-sale securities are not
recorded. Gross unrealized holding losses on available-for-sale securities are
recorded in the other financial expense component of financial income, net. The
discount or premium on held-to-maturity securities is amortized into the other
financial expense component of financial income, net.
Under U.S. GAAP, unrealized holding gains and losses on available-for-sale
securities are recorded as a component of other comprehensive income.
The carrying value and estimated fair values of held-to-maturity securities
is provided in Note 10 to the IAS consolidated financial statements.
Proceeds from sales of available-for-sale securities were CHF
21,007 million and CHF 12,300 million in 2000 and 1999, respectively. Gross
realized gains were CHF 607 million and CHF 1,018 million on those sales in 2000
and 1999, respectively. Gross realized losses were CHF 291 million and CHF
301 million on those sales in 2000 and 1999, respectively. The cost used to
determine the gain or loss on these sales was calculated using the weighted
average method.
F-69
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
The maturities of the available-for-sale debt securities included above at
December 31, 2000 are as follows:
2000
CHF MILLIONS
------------
Within one year............................................. 674
Over one year through five years............................ 3,422
Over five years through ten years........................... 1,766
Over ten years.............................................. 441
-----
TOTAL....................................................... 6,303
=====
During 2000, the Group disposed of the majority of its holding of bonds
designated as held-to-maturity in order to recognize the gains related to these
securities. The remaining bonds in this category were reclassified to the
available-for-sale category of marketable securities. The majority of these
transferred securities were then sold during the year. CHF 4,829 million and CHF
3,711 million of held-to-maturity bonds, at amortized cost, were sold and
transferred to available-for-sale securities, respectively. CHF 466 million in
gains were recognized upon the sale of the related securities. Unrealized losses
of CHF 64 million were transferred to available-for-sale securities.
DERIVATIVE FINANCIAL INSTRUMENTS
Under U.S. GAAP, the Group marks all of its derivative financial instruments
that do not qualify for hedge accounting to fair value on an individual basis
through the income statement and thus their carrying value is equal to their
fair values. Under IAS, the Group uses the concept of portfolio valuation for
derivative financial instruments. As described in Note 1, for each portfolio of
similar instruments the net unrealized holding gain or loss is determined by
netting unrealized holding gains and losses on each instrument in the portfolio.
Forward foreign exchange rate contracts that qualify as a hedge of a net
investment in foreign subsidiaries are marked to fair value through the
statement of changes in equity and are included in cumulative translation
differences. This treatment is in line with IAS.
Unrealized gains and losses on forward foreign exchange rate contracts and
over-the-counter currency options that qualify as a hedge of the foreign
currency exposure of anticipated cash flows are deferred and recognized in the
same period that the hedged exposure is recognized. This treatment is in line
with IAS.
Realized and unrealized gains and losses on equity options designated as a
hedge of available-for-sale securities are deferred in other comprehensive
income until the underlying security is disposed of, at which time they are
included with the related capital gain or loss.
When a hedging instrument expires or is sold, or when a hedge no longer
meets the criteria for hedge accounting, any cumulative gain or loss existing in
equity at that time remains in equity and is recognized when the committed or
forecasted transaction ultimately is recognized in the income statement or when
the underlying available-for-sale security is disposed of. However, if a
committed or forecasted transaction
F-70
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
is no longer expected to occur, the cumulative gain or loss that was reported in
equity is immediately transferred to the income statement.
At the inception of a hedging transaction, the Group documents the
relationship between hedging instruments and hedged items, as well as its risk
management objective and strategy for undertaking various hedge transactions.
This process includes linking all derivatives designated as hedges to specific
assets and liabilities or to specific firm commitments or forecasted
transactions. The Group also documents its assessment, both at the hedge
inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair values
or cash flows of hedged items.
The estimated fair values of derivative financial instruments is provided in
Note 10 to the IAS consolidated financial statements.
Derivative financial instruments are held for purposes other than trading.
Total gains recognized in accordance with U.S. GAAP on options settled in
Novartis shares that require a net cash settlement were CHF 278 million and CHF
16 million for the years ended December 31, 2000 and 1999, respectively.
NON-DERIVATIVE FINANCIAL INSTRUMENTS
The U.S. GAAP carrying values are equivalent to the IAS carrying values for
all non-derivative financial assets and liabilities, except for marketable
securities as described above.
Non-derivative financial assets consist of cash and cash equivalents, time
deposits, and marketable securities. Non-derivative liabilities consist of
commercial paper, bank or other short-term financial debts, and long-term debt.
The carrying amount of cash and cash equivalents, time deposits, commercial
paper, and bank and other short-term financial debts approximates their
estimated fair values, due to the short-term nature of these instruments. The
fair value for marketable securities are estimated based on listed market prices
or broker or dealer price quotes. The fair value of long-term debt is estimated
based on the current quoted market rates available for debt with similar terms
and maturities.
The estimated fair values of the long and short-term financial debt are
provided in notes 18 and 21 to the IAS consolidated financial statements.
EARNINGS PER SHARE
As discussed in item (g) above, in the past, the Group established Novartis
employee share participation foundations to assist the Group in meeting its
obligations under various employee benefit plans and programs. These foundations
support existing, previously approved employee benefit plans.
For U.S. GAAP purposes, the Group consolidates the Novartis employee share
participation foundations. The cost of Novartis AG shares held by the
foundations is shown as a reduction of shareholders' equity in the Group's
balance sheet. Any dividend transactions between the Group and the foundations
are eliminated, and the difference between the fair value of the shares on the
date of contribution to the foundations and the fair values of the shares at
December 31, 2000 and 1999 is included
F-71
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
in consolidated retained earnings. Shares held in the foundations are not
considered outstanding in the computation of earnings per share.
The consolidation of those entities has the following impact on basic and
diluted earnings per share:
2000 1999 1998
---------- ---------- ----------
Net income attributable to shareholders (CHF millions)
under U.S. GAAP........................................ 6,913 5,419 4,955
---------- ---------- ----------
Weighted average number of shares in issue under IAS..... 65,338,690 66,345,501 66,172,155
Weighted average treasury shares due to consolidation of
additional foundations foundations under U.S. GAAP..... (2,344,590) (1,980,181) (1,890,212)
---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF SHARES IN ISSUE UNDER U.S.
GAAP................................................... 62,994,100 64,365,320 64,281,943
---------- ---------- ----------
BASIC EARNINGS PER SHARE (EXPRESSED IN CHF) UNDER U.S.
GAAP................................................... 110 84 77
========== ========== ==========
2000 1999 1998
---------- ---------- ----------
Net income attributable to shareholders (CHF millions)
under U.S. GAAP........................................ 6,913 5,419 4,955
Elimination of interest expense on convertible debt (net
of tax effect) (CHF millions).......................... 20 18 17
---------- ---------- ----------
Net income used to determine diluted earnings per share
(CHF millions)......................................... 6,933 5,437 4,972
---------- ---------- ----------
Weighted average number of shares in issue under IAS..... 65,338,690 66,345,501 66,172,155
Adjustment for assumed conversion of convertible debt.... 235,562 263,850 323,945
Adjustment for dilutive stock options.................... 24,564 13,977 18,104
Weighted average treasury shares due to consolidation of
additional foundations foundations under U.S. GAAP..... (2,344,590) (1,980,181) (1,890,212)
---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF SHARES FOR DILUTED EARNINGS
PER SHARE UNDER U.S. GAAP.............................. 63,254,226 64,643,147 64,623,992
---------- ---------- ----------
DILUTED EARNINGS PER SHARE (EXPRESSED IN CHF) UNDER U.S.
GAAP................................................... 110 84 77
========== ========== ==========
PRO FORMA EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" established accounting and disclosure requirements
using a fair-value based method of accounting for
F-72
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
stock-based employee compensation. Had the Group accounted for stock options in
accordance with SFAS 123, net income and earnings per share would have been the
pro forma amounts indicated below:
2000 1999 1998
-------- -------- --------
Net income under U.S. GAAP (CHF in millions):
As reported............................................... 6,913 5,419 4,955
Pro forma................................................. 6,884 5,396 4,933
Earnings per share (CHF):
As reported
Basic................................................... 110 84 77
Diluted................................................. 110 84 77
Pro forma
Basic................................................... 109 84 77
Diluted................................................. 109 84 77
The weighted average assumptions used in determining fair value of option
grants were as follows:
2000 1999 1998
-------- -------- --------
Dividend yield.............................................. 1.3% 1.6% 1.2%
Expected volatility......................................... 24.0% 23.0% 24.0%
Risk-free interest rate..................................... 4.0% 3.8% 3.6%
Expected life............................................... 10yr 10yr 10yr
These pro forma effects may not be representative of future amounts since
the estimated fair value of stock options on the date of grant is amortized to
expense over the vesting period and additional options may be granted in future
years.
DEFERRED TAX
The deferred tax asset less valuation allowance at December 31, 2000 and
1999 comprises CHF 2,221 million and CHF 2,409 million of current assets and
CHF 1,044 million and CHF 1,049 million of non-current assets, respectively. The
deferred tax liability at December 31, 2000 and 1999 comprises CHF 786 million
and CHF 1,023 million of current liabilities and CHF 2,702 million and
CHF 2,623 million of non-current liabilities, respectively.
F-73
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
EMPLOYEE BENEFIT PLANS
Presented below are the disclosures required by U.S. GAAP which are
different from those provided under IAS. The following provides a reconciliation
of benefit obligations, plan assets and funded status of the plans.
PENSION BENEFITS OTHER POST-RETIREMENT BENEFITS
------------------------------------------ ------------------------------------------
2000 1999 1998 2000 1999 1998
CHF MILLIONS CHF MILLIONS CHF MILLIONS CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ------------ ------------ ------------ ------------ ------------
BENEFIT OBLIGATION:
At beginning of year................. 21,304 21,926 19,546 655 614 702
Service cost......................... 467 543 458 11 13 11
Interest cost........................ 857 784 920 48 42 42
Actuarial (gain) loss................ (1,759) (1,264) 2,193 (21) (45) (32)
Plan amendments...................... 3 (11) (22)
Settlement--Novartis Agribusiness.... (1,909) (1)
Foreign currency translation......... (78) 532 (135) 17 95 (39)
Employee contributions............... 50
Benefit payments..................... (1,220) (1,220) (1,106) (49) (53) (48)
------ ------ ------ ---- ---- ----
BENEFIT OBLIGATION AT END OF YEAR.... 17,662 21,304 21,926 660 655 614
====== ====== ====== ==== ==== ====
PLAN ASSETS AT FAIR VALUE:
At beginning of year................. 25,454 24,456 23,673
Actual return on plan assets......... 2,949 1,429 1,990
Foreign currency translation......... (18) 655 (181)
Employer contribution................ 73 98 30
Employee contributions............... 39 36 50
Settlement--Novartis Agribusiness.... (1,851)
Benefit payments..................... (1,220) (1,220) (1,106)
====== ====== ======
PLAN ASSETS AT FAIR VALUE AT END OF
YEAR............................... 25,426 25,454 24,456
====== ====== ======
Funded status........................ 7,764 4,150 2,530 (660) (655) (614)
Unrecognized transition (asset)...... (88) (327)
Unrecognized actuarial (gain) loss... (2,672) 411 1,643 (160) (148) (103)
------ ------ ------ ---- ---- ----
PREPAID (ACCRUED) BENEFIT COSTS...... 5,092 4,473 3,846 (820) (803) (717)
====== ====== ====== ==== ==== ====
AMOUNTS RECOGNIZED IN THE BALANCE
SHEET:
Prepaid benefit costs................ 5,783 5,362 4,746
Accrued benefit liability............ (691) (889) (900) (820) (803) (717)
------ ------ ------ ---- ---- ----
NET AMOUNT RECOGNIZED................ 5,092 4,473 3,846 (820) (803) (717)
====== ====== ====== ==== ==== ====
BENEFIT COST:
Service cost......................... 467 543 458 11 13 11
Interest cost........................ 857 784 920 48 42 42
Expected return on plan assets....... (1,583) (1,505) (1,389)
Employee contributions............... (39) (36) (50)
Amortization of transition (asset)... (88) (239) (239)
Amortization of actuarial (gain)
loss............................... 28 161 284 (15) (8)
Curtailment (gain)................... (9)
------ ------ ------ ---- ---- ----
NET PERIODIC BENEFIT (INCOME) COST... (358) (292) (16) 44 55 36
====== ====== ====== ==== ==== ====
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
DECEMBER 31:....................... % % % % % %
Discount rate........................ 4.5 4.1 3.4 7.7 7.7 6.8
Rate of payroll indexation........... 2.8 2.8 4.3
Expected return on plan assets....... 6.2 6.1 5.2
F-74
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
The Group recorded a net gain of CHF 52 million directly in shareholders'
equity during fiscal 2000 based on the settlement of its defined benefit pension
plans attributable to Novartis Agribusiness.
The assumed health care cost trend rate at December 31, 2000 was 6.0% for
those under age 65 and 6.0% for those over age 65, decreasing to 4.75% in 2006
and thereafter for both groups. The assumed health care cost trend rate at
December 31, 1999 was 6.35% for those under age 65 and 6.50% for those over age
65, decreasing to 4.75% in 2006 and thereafter for both groups.
A one-percentage-point change in the assumed health care cost trend rates
compared to those used for 2000 would have the following effects:
1% POINT INCREASE 1% POINT DECREASE
CHF MILLIONS CHF MILLIONS
----------------- -----------------
Effects on total of service and interest cost
components............................................ 7 (6)
Effect on post-retirement benefit obligations........... 67 (60)
COMPREHENSIVE INCOME
SFAS No. 130 "Reporting Comprehensive Income" established standards for the
reporting and display of comprehensive income and its components. Comprehensive
income includes net income and all changes in equity during a period that arise
from non-owner sources, such as foreign currency items and unrealized gains and
losses on securities available-for-sale. The additional disclosures required
under U.S. GAAP are as follows:
2000 1999 1998
CHF MILLIONS CHF MILLIONS CHF MILLIONS
------------ ------------ ------------
Net income under U.S. GAAP........................ 6,913 5,419 4,955
Other comprehensive income:
Foreign currency translation adjustment......... (525) 2,579 (956)
Unrealized market value adjustment on
available-for-sale securities (net of taxes of
CHF 227 million and CHF 34 million,
respectively)................................... 1,137 287 418
Reclassification adjustment:
Net realized gains on sales of securities (net
of taxes of CHF 36 million and CHF 72 million,
respectively)................................... (280) (645) (463)
----- ----- -----
COMPREHENSIVE INCOME UNDER U.S. GAAP.............. 7,245 7,640 3,954
===== ===== =====
FOREIGN CURRENCY TRANSLATION
The Group has accounted for operations in highly inflationary economies in
accordance with IAS 21 (revised) and IAS 29. The accounting under IAS 21
(revised) and IAS 29 complies with Item 18 of Form 20-F and is different from
that required by U.S. GAAP.
F-75
NOTES TO THE NOVARTIS GROUP
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. SIGNIFICANT DIFFERENCES BETWEEN IAS AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (U.S. GAAP) (CONTINUED)
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
INTERNATIONAL ACCOUNTING STANDARDS
IAS 39 "Financial Instruments: Recognition and Measurement" requires all
financial assets and financial liabilities to be recognized on the balance
sheet, including all derivatives. They are initially measured at cost, which is
the fair value or whatever was paid or received to acquire the financial asset
or liability. Subsequent to initial recognition, all financial assets should be
measured at fair value except for certain specified exceptions. After
acquisition most financial liabilities should be measured at original recorded
amount less principal repayments and amortization. For those financial assets
and liabilities that are remeasured to fair value, the Group can either
recognize the adjustment in the income statement or in equity until the asset is
sold.
Upon adoption of the standard on January 1, 2001, the Group will record a
one-time net of tax credit to retained earnings for the initial adoption of IAS
39 totaling approximately CHF 1.6 billion related to net unrealized gains and
losses on available-for-sale securities and related equity options hedging these
securities and CHF 261 million related to derivatives that are not designated as
hedges. The Group will also record an unrealized gain net of tax, of CHF
105 million for cash flow hedging instruments in a separate component of equity.
In connection with IAS 39, various revisions have been made to IAS 32
"Financial Instruments: Disclosure and Presentation" in order to make the
authoritative literature and underlying accounting guidelines consistent. The
revisions to IAS 32 become effective for periods beginning on or after July 1,
2001. The effect of these revisions will require additional disclosures in
conjunction with the implementation of IAS 39 as described above.
IAS 40 "Investment Property" prescribes the accounting treatment for
investment property and related disclosure requirements. This standard replaces
IAS 25 "Accounting for Investments" whereby an enterprise was permitted to
choose from among a variety of accounting treatments for investment property.
IAS 40 permits enterprises to choose either a fair value model or a cost model
for measurement. Under the fair value method, investment property should be
measured at fair value and changes in fair value should be recognized in the
income statement. Under the cost model, investment property should be measured
at depreciated cost, less any accumulated impairment losses, with the related
fair values disclosed. The Group has not determined what, if any, effect this
new standard will have on the financial statements. This standard is effective
for periods beginning on or after January 1, 2001.
U.S. GAAP
Statement of Financial Accounting Standards SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and
No. 138, requires all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income. Upon adoption of the
standard on January 1, 2001, the Group will record a net of tax
cumulative-effect-type gain of approximately CHF 105 million in accumulated
other comprehensive income to recognize at fair value all derivative instruments
that are designated as cash flow hedging instruments.
F-76
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF THE NOVARTIS GROUP
BASEL
Our audits of the consolidated financial statements referred to in our
report dated January 31, 2001, appearing on page F-2 of this Form 20-F, also
included an audit of the financial statement schedule listed in Item 19 of this
Form 20-F. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers AG
S. A. J. Bachmann J. P. Herron
Basel, January 31, 2001
F-77
NOVARTIS GROUP
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998)
BALANCE AT
BEGINNING BALANCE AT END
CHF MILLIONS OF PERIOD ADDITIONS DEDUCTIONS(1) OF PERIOD
- ------------ ---------- --------- ------------- --------------
DESCRIPTIONS:
YEAR ENDED DECEMBER 31, 2000:
Provision for doubtful receivables...... (625) (337) 714 (248)
Provision for inventories............... (487) (317) 418 (386)
Allowance for deferred taxes............ (365) (112) 240 (237)
------ ---- ------ ------
(1,477) (766) 1,372 (871)
====== ==== ====== ======
YEAR ENDED DECEMBER 31, 1999:
Provision for doubtful receivables...... (455) (308) 138 (625)
Provision for inventories............... (390) (434) 337 (487)
Allowance for deferred taxes............ (214) (179) 28 (365)
------ ---- ------ ------
(1,059) (921) 503 (1,477)
====== ==== ====== ======
YEAR ENDED DECEMBER 31, 1998:
Provision for doubtful receivables...... (375) (284) 204 (455)
Provision for inventories............... (275) (279) 164 (390)
Allowance for deferred taxes............ (348) (34) 168 (214)
------ ---- ------ ------
(998) (597) 536 (1,059)
====== ==== ====== ======
- -------------
(1) Represents amounts used for the purposes for which the accounts were created
and reversal of amounts no longer required.
F-78