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 selected financial information set out below has been extracted from our consolidated financial statements. Our consolidated financial statements
("consolidated financial statements") for the years ended December 31, 2004, 2003 and 2002 are included elsewhere in this Form 20-F. All financial data should be read in
conjunction with "Item 5. Operating and Financial Review and Prospects" and our consolidated financial statements and accompanying notes which are included elsewhere in this
Form 20-F. All financial data presented in this Form 20-F are qualified in their entirety by reference to the consolidated financial statements and such notes.
The
consolidated financial statements used to create the selected consolidated financial data set forth below were prepared in accordance with IFRS. IFRS differs in certain respects from
US GAAP. For a discussion of the significant differences between IFRS and US GAAP, see "Item 18. Financial StatementsNote 32."
Year Ended December 31,
2004
2003
2002
2001
2000
2000
(1)
($ millions, except per share information)
INCOME STATEMENT DATA
Amounts in accordance with IFRS:
Net sales
28,247
24,864
20,877
18,762
20,997
16,986
Operating income
6,539
5,889
5,092
4,325
4,684
4,000
Result from associated companies
142
(200
)
(7
)
83
58
57
Net financial income
227
379
613
284
187
261
Income before taxes and minority interests
6,908
6,068
5,698
4,692
4,929
4,318
Taxes
(1,126
)
(1,008
)
(959
)
(844
)
(1,082
)
(895
)
Minority interests
(15
)
(44
)
(14
)
(12
)
(25
)
(15
)
Net income
5,767
5,016
4,725
3,836
3,822
3,408
Basic earnings per share in $
(2)
2.36
2.03
1.88
1.49
1.46
1.30
Diluted earnings per share in $
(2)
2.34
2.00
1.84
1.49
1.46
1.30
Cash dividends
(3)
1,968
1,724
1,367
1,268
1,259
Cash dividends per share in CHF
(4)
1.05
1.00
0.95
0.90
0.85
Operating income from continuing operations per share:
basic earnings per share in $
(2)
2.67
2.38
2.02
1.68
1.79
1.53
diluted earnings per share in $
(2)
2.66
2.35
1.98
1.68
1.79
1.53
(1)
Financial
data presented on a continuing basis, excluding the results of the Agribusiness Division, which was spun-off in 2000.
(2)
Basic
and Diluted earnings and cash dividends per share have been adjusted to reflect a forty-for-one share split effective May 7, 2001.
The year 2000 has been adjusted to take this split into account, in order to provide per share information on a consistent basis.
(3)
Cash
dividends represent cash payments in the applicable year that generally relate to earnings of the previous year.
(4)
Cash
dividends per share represent dividends proposed that relate to earnings of the current year. Dividends for 2004 will be proposed to the Annual General Meeting on
March 1, 2005 for approval.
2
Year Ended December 31,
2004
2003
2002
2001
2000
($ millions, except per share data)
BALANCE SHEET DATA
Amounts in accordance with IFRS:
Cash, cash equivalents and current marketable securities
14,593
13,259
12,542
13,193
12,659
Inventories
3,558
3,346
2,963
2,449
2,515
Other current assets
6,460
5,668
5,310
4,712
4,923
Long-term assets
29,858
27,044
24,210
19,408
15,410
Total assets
54,469
49,317
45,025
39,762
35,507
Trade accounts payable
2,020
1,665
1,266
1,077
971
Other current liabilities
9,058
7,655
7,006
7,378
6,131
Long-term liabilities and minority interests
9,608
9,568
8,484
6,146
5,914
Total equity
33,783
30,429
28,269
25,161
22,491
Total liabilities and equity
54,469
49,317
45,025
39,762
35,507
Net assets
33,921
30,519
28,355
25,223
22,538
Outstanding share capital
881
896
898
925
946
Amounts in accordance with US GAAP:
Income statement data
Net income
4,989
3,788
3,829
2,419
3,794
Basic earnings per share
(1)
2.12
1.59
1.58
0.98
1.51
Diluted earnings per share
(1)
2.11
1.57
1.55
0.98
1.50
Balance sheet data
Total equity
38,101
34,878
33,225
30,208
29,840
Total assets
59,281
55,748
50,361
45,105
43,976
(1)
Earnings
per share have been adjusted to reflect a forty-for-one share split effective May 7, 2001. 2000 figures have been adjusted to
take this split into account, in order to provide earnings per share information on a consistent basis.
3
Cash Dividends per Share
Cash dividends are translated into US dollars at the Reuters Market System Rate on the payment date. Because we pay dividends in Swiss francs, exchange rate
fluctuations will affect the US dollar amounts received by holders of ADSs.
Year Earned
Month and
Year Paid
Total Dividend
(1)
per share
Total Dividend
per ADS
(CHF)
($)
2000
April 2001
0.85
0.43
2001
March 2002
0.90
0.54
2002
March 2003
0.95
0.68
2003
February 2004
1.00
0.80
2004
(2)(3)
March 2005
1.05
0.93
(1)
2000 figures have been adjusted for a forty-for-one share split and share-to-ADS ratio change on May 7, 2001.
(2)
If the Swiss franc amount for 2004 is translated into US dollars at the rate of $0.88 to the Swiss franc, the Total Dividend per share and Total Dividend per ADS in US dollars would be $0.93. This translation is an
example only, and should not be construed as a representation that the Swiss franc amount represents, or has been or could be converted into, US dollars at that or any other rate.
(3)
Dividend to be proposed at the Annual General Meeting on March 1, 2005.
Exchange Rates
The following table shows, for the years and dates indicated, certain information concerning the rate of exchange of US dollar per Swiss franc based on exchange
rate information found on Reuters Market System. The exchange rate in effect on January 25, 2005, as found on Reuters Market System, was CHF 1.00 = $0.84.
Year ended December 31,
Period End
Average
(1)
Low
High
2000
0.61
0.59
0.55
0.65
2001
0.60
0.59
0.55
0.63
2002
0.71
0.65
0.58
0.72
2003
0.80
0.75
0.70
0.81
2004
0.88
0.81
0.76
0.88
Month end,
August 2004
0.78
0.81
September 2004
0.79
0.80
October 2004
0.79
0.83
November 2004
0.83
0.88
December 2004
0.86
0.88
January 2005
(2)
0.84
0.88
(1)
Represents the average of the exchange rates on the last day of each full month during the year.
(2)
The high and low US dollar/Swiss franc exchange rate is current as of January 25, 2005.
3.B Capitalization and Indebtedness
Not applicable.
4
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 Form 20-F and the following risk factors which we face and which are
faced by our industry. The risks below are not the only ones we face. Additional risks not currently known to us or that we presently 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 Form 20-F 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" on page 1.
Risks Faced By Our Pharmaceuticals Division
We face intense competition from new products.
Our products face intense competition from competitors' products. This competition may increase as new products enter the market. In such an event, our
competitors' products may be safer or more effective or more effectively marketed and sold than our products. Alternately, in the case of generic competition, they may be equally safe and effective
products which are sold at a substantially lower price than our products. As a result, 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.
Like other major pharmaceutical companies, in order to remain competitive, we must continue to launch new and better products each year. To accomplish this, we
commit substantial effort, funds and other resources to research and development, both through our own dedicated resources, and through various collaborations with third parties. Our ongoing
investments in new product launches, new technologies 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 up to 12 years, or even longer, from discovery to commercial product launch. This process is
conducted in various stages. During each stage there is a substantial risk that we will encounter serious obstacles or will not achieve our goals and accordingly we may abandon a product in which we
have invested substantial amounts of time and money. If we are unable to maintain a continuous flow of successful new products and successful new indications or brand extensions for existing products
sufficient to cover our substantial research and development costs and to replace sales that are lost as older products approach the end of their commercial life cycles or are displaced by competing
products or therapies, this could have a material adverse effect on our business and results of operations.
Our
dependence on research and development makes it highly important that we recruit and retain high quality researchers and development specialists. We commit substantial efforts and
funds to this purpose. Should we fail in our efforts, this could have a material adverse effect on our business and results of operations.
We face intense competition from lower-cost generic products.
Our Pharmaceuticals Division also faces increasing competition from lower-cost generic products. Our Pharmaceuticals Division's products are generally
protected by patent rights which are expected to provide us with exclusive marketing rights. However, those patent rights are of varying strengths and durations. In addition, in some countries, patent
protection is significantly weaker than in the US or the
5
EU.
Even in the US and the EU, political pressures to reduce spending on prescription drugs has led to legislation which encourages the approval of generic products. As a result, although it is our
policy to actively protect our patent rights, generic challenges to our products can arise at any time, and we may not be able to prevent the emergence of generic competition for our products.
Loss
of patent protection for a product typically leads to a rapid loss of sales for that product and could affect our future results. In addition, proposals emerge from time to time in
the US and other countries for legislation to further encourage the early and rapid approval of generic drugs. Any such proposal that is enacted into law could worsen this substantial negative effect
on our sales.
Patent
protection is at issue in major markets for the following of our Pharmaceuticals Division's leading products.
Neoral.
Patent protection exists for the
Neoral
micro-emulsion
formulation and other cyclosporin formulations through 2009 and beyond in major markets. Despite this protection, generic cyclosporin products competing with
Neoral
have entered the transplantation
market segment in the US, Germany, Japan, Canada and elsewhere. We have filed patent infringement actions
against manufacturers of these generic products. However, except in one lawsuit in Canada, we have so far not succeeded in obtaining an injunction against any of the manufacturers we have sued.
Sandostatin.
Basic patent protection for the active ingredient in
Sandostatin
SC
has expired in the US, Japan, Germany and the UK, and it will expire in 2006 in France and 2007 in Italy. Several parties have filed applications to market generic versions
of
Sandostatin SC
in the US. We have not, so far, sued any for patent infringement. However, patent protection extending to 2010 (and 2013 and beyond in
the US) continues in major markets for
Sandostatin LAR
, a long-acting version of
Sandostatin,
which represents a significant and growing proportion of our
sales in this product family.
Lotrel/Cibacen/Lotensin/Cibadrex
. The basic benazepril substance patent protection for
Cibacen/Lotensin/Cibadrex
has expired in the US and Japan, and will expire in 2005-08 in major markets in the EU. However,
Lotrel,
which is a combination of benazepril
and amlodipine besylate, is patented in the US until 2017. Teva and Dr. Reddy's Laboratories have
challenged this patent. Dr. Reddy's is seeking marketing approval for a different benazepril combination, using amlodipine maleate, rather than amlodipine besylate. Because of this difference,
the Dr. Reddy's product, if brought to market, would not be automatically substitutable in the US for
Lotrel
. However, Teva is seeking marketing
approval for the same benazepril combination as
Lotrel
, and is thus seeking to bring a fully substitutable product to the US market. We have sued Teva
and Dr. Reddy's in the US for patent infringement. The Dr. Reddy's case is currently stayed.
Lamisil
. The active ingredient in
Lamisil
is covered
generically, but not mentioned specifically, in a patent family which has expired. Another patent family specifically discloses and covers the active ingredient specifically and expires in the US in
2006, and 2005-07 in Japan and major EU countries. The specific US patent had been challenged by Dr. Reddy Laboratories in the US. Dr. Reddy's has since withdrawn its suit
and conceded that this patent is valid and enforceable.
Miacalcin/Miacalcic
. The specific Novartis formulation of this product is covered by patents which will expire
in the US in 2015. However, patents on the Novartis formulation have expired in a number of other major countries, and will expire in Italy in 2006. Apotex has applied to the FDA for the right to sell
a generic version of
Miacalcin
, using the Novartis formulation. We have sued Apotex for infringement. Two other companies have applied to the FDA for
the right to sell a generic version of
Miacalcin
based on a different formulation. We have not sued these companies.
Exelon
. The active ingredient in
Exelon
is covered by a compound
patent (granted to Proterra, AG and licensed to us), which presently expires in 2007, and has been determined by the FDA to qualify for patent term extension until 2012. In addition, we hold an isomer
patent on
Exelon
which expires in 2014. Dr. Reddy's, Sun Pharmaceuticals and Watson Pharmaceuticals have filed
6
applications
to market a generic version of
Exelon
in the US. Together with Proterra, we have sued all three parties for patent infringement.
Focalin
. The active ingredient in
Focalin
is covered by patents
(granted to Celgene Corporation and licensed to us) through 2015 in the US and 2018 in other markets. Teva has challenged these patents and has filed an application for a generic version of
Focalin
in
the US. Together with Celgene, we have sued Teva for patent infringement.
Trileptal
. Patent protection for
Trileptal
's active ingredient
has expired in major countries. In the US, New Chemical Entity data exclusivity under the Hatch-Waxman Act of 1984 is currently scheduled to expire in January 2005. However, we have applied for
a six-month extension of this exclusivity period under the Hatch-Waxman pediatric exclusivity provisions. At the same time, we have pending patent filings relating to our marketed
formulations of
Trileptal
, which, if granted, would expire in 2018 in major countries, including the US.
Starlix
. The active ingredient in
Starlix
is covered by
Ajinomoto patents. The basic US patent will expire in 2006, but a request to extend the term of the patent until 2009 has been filed. In late January 2005 a third party informed us that they have
filed an ANDA application to market a generic version of
Starlix
in the US. We are assessing that information and will respond appropriately.
Foradil
. Patent protection for
Foradil
's active ingredient has
expired in major countries. In the US, Hatch-Waxman data exclusivity is currently scheduled to expire in February 2006.
Voltaren
.
Voltaren
is off-patent. As a result,
revenue from
Voltaren
has declined, and may decline significantly further over the next few years.
Price controls and other pressures may prevent us from setting prices for our products at levels high enough to earn an adequate return on our
investments in them.
In addition to normal price competition in the marketplace, the prices of our Pharmaceutical Division's products are restricted by price controls and other
pricing pressures 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 and other pricing pressures can limit the revenues we earn from our products and may have an adverse effect on
our business and results of operations.
United States
. In the US, ongoing political debates over prescription drug pricing and recent Medicare reform
legislation could increase pricing pressures. In particular, recent Medicare reform legislation is expected to lead to the creation of a new voluntary drug benefit for patients who are eligible for
Medicare, and may require us to extend price discounts to more patients when the benefit goes into effect in 2006. In addition, there is continuing political pressure to amend this legislation to
enable the US government to use its enormous purchasing power to demand discounts from pharmaceutical companies. It is not yet possible to predict with certainty the extent to which this
recently-enacted legislation will affect our business and results of operations.
Europe
. In Europe, our operations are subject to significant price and marketing regulations. Many governments
are introducing health care reforms in a further attempt to curb increasing health care costs.
Japan
. In Japan, the government generally introduces price cut rounds every other year, during which the
government mandates price decreases for specific products.
Regulations favoring generics
. In response to rising healthcare costs, many governments and private medical care
providers, such as Health Maintenance Organizations (HMOs), have instituted reimbursement schemes that favor the substitution of generic pharmaceuticals for more expensive brand-name
pharmaceuticals. In the US, generic substitution statutes have been enacted
7
by
virtually all states and permit or require the dispensing pharmacist to substitute a less expensive generic drug instead of an original branded drug. We expect that the pressure for generic
substitution will increase as a result of the implementation of the Medicare prescription drug benefit in 2006.
Cross-Border Sales.
Price controls in one country can also have an impact in other countries as a result of
cross-border sales. In the EU, products which we have sold to customers in countries with stringent price controls can legally be re-sold to customers in other EU countries with less
stringent price controls, at a lower price than the price at which the product is otherwise available in the importing country. This risk could increase due to the addition of 10 nations to the EU in
2004. In North America, products which we have sold to customers in Canada, which has relatively stringent price controls, are sometimes re-sold into the US, again at a lower price than
the price at which the product is otherwise sold in the US. Such imports from Canada to the US are currently illegal. However, there are ongoing political efforts at the federal, state and local
levels to change the legal status of such imports.
We
expect that pressures on pricing will continue and may increase. Because of these pressures, there can be no certainty that in every instance we will be able to charge prices for a
product that, in a particular country or in the aggregate, enable us to earn an adequate return on our investment in that product.
Public pressure on the pharmaceuticals industry could affect our business and results of operations.
There is considerable public sentiment against the pharmaceuticals industry, and the industry is under the close scrutiny of the public and the media. In addition
there is significant pressure on our industry from certain disadvantaged nations to make our products available to their people at drastically lower costs. Any increase in such negative public
sentiment or increase in public scrutiny or pressure from such disadvantaged nations could lead, among other things, to changes in legislation, to changes in the demand for our products, additional
pricing pressures with respect to our products, or increased efforts to undercut intellectual property protections. Such changes could affect our business and results of operations.
Risks Faced By Sandoz (Generics)
The success of Sandoz depends on our ability to successfully develop and commercialize additional generic pharmaceutical products.
To a significant degree, the future results of Sandoz depend upon our ability to successfully commercialize additional generic pharmaceutical products. We must
develop new generic products, and prove that they are the bio-equivalent of the originator products. Once developed, we must successfully manufacture and bring these new products to
market. The development and commercialization process is both lengthy and costly and involves a high degree of risk. Our products currently under development may not be approved by regulatory
authorities, or may not be approved as quickly as expected. In addition, we may not be able to successfully and profitably produce and market such products. Delays in any part of the process or our
inability to obtain regulatory approval of our products could adversely affect our operating results by restricting or delaying our introduction of new products. The continuous introduction of new
generic products is critical to our business. (Sandoz has been a separate Division since January 1, 2005. Before that Sandoz was a Business Unit of our Consumer Health Division.)
Our revenues and profits from any particular generic pharmaceutical products decline as our competitors introduce their own generic equivalents.
Selling prices of generic drugs typically decline, sometimes dramatically, as additional companies receive approvals for a given product and competition for that
product intensifies. To the extent that we succeed in being the first to bring to market a generic version of a significant product, our sales and our profits can be substantially increased in the
period following the introduction of such product and prior to
8
a
competitor's introduction of an equivalent product. Our ability to sustain our sales and profitability on any product over time is dependent on both the number of new competitors for such product
and the timing of their approvals. The overall profitability of Sandoz depends, among other things, on our ability to to be the first to bring significant new products to market. There can be no
guarantee that we will achieve this goal in the future.
Our generic pharmaceutical products face intense competition from brand-name companies that sell or license their own generic products or
successfully extend their market exclusivity period.
Competition in the generic pharmaceutical market continues to intensify as the pharmaceutical industry adjusts to increased pressures to contain health care
costs. Brand-name companies have taken aggressive steps to counter the growth of the generics industry. In particular, brand-name companies continue to sell their products to
the generic market directly by acquiring or forming strategic alliances with generic pharmaceutical companies. No significant regulatory approvals are required for a brand-name
manufacturer to sell directly or through a third party to the generic market. In addition, brand-name companies continually seek new ways to delay generic introduction and to decrease the
impact of generic competition. These efforts by the brand-name pharmaceutical industry have had, and likely will continue to have, a negative effect on the results of operations of Sandoz.
Recent changes in the US regulatory environment may prevent us from utilizing the exclusivity periods that are important to the success of our generic
products.
Under US law the FDA must award 180 days of market exclusivity to the first generic manufacturer who challenges the patent of a branded product. However,
recent changes in the Hatch-Waxman Act may affect the availability of this market exclusivity in the future. The new amendments now require generic applicants to launch their products within certain
time frames or risk losing the marketing exclusivity that they had gained through being a first-to-file applicant.
Sandoz's success may depend on its ability to successfully challenge patent rights held by branded pharmaceutical companies.
At times we seek approval to market generic products before the expiration of patents held by others for those products, based upon our belief that such patents
are invalid, unenforceable, or would not be infringed by our products. As a result, we often face significant patent litigation. If we are unsuccessful in such litigation, then our ability to launch
new products will be substantially limited. In addition, depending upon a complex analysis of a variety of legal and commercial factors, we may, in certain circumstances, elect to market a generic
product even though litigation is still pending. This could be before any court decision or while an appeal of a lower court decision is pending. Should we elect to proceed in this manner, we could
face substantial patent liability damages if the final court decision is adverse to us.
Risks Faced By The Entire Novartis Group
Government regulation may adversely affect our business.
Like our competitors, we are subject to strict government controls on the development, manufacture, marketing, labeling, distribution and pricing of our products.
We must obtain and maintain regulatory approval for our pharmaceutical and many of our other products from regulatory agencies in order to sell our products in a particular jurisdiction.
Risks regarding the development of new products.
Our research and development activities are heavily regulated. If we fail to
comply fully with applicable regulations, then there could be a delay in the submission or approval of potential new products for marketing approval. In addition, 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 when a product
has already been approved in another country. In our principal markets, the approval
9
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. This
registration process increases the cost to us of developing new products and increases the risk that we will not succeed in selling them successfully.
Risks regarding the manufacture of our products.
The manufacture of our products is heavily regulated by governmental
authorities around the world, including the FDA. If we or our third party suppliers fail to comply fully with such regulations then there could be a government-enforced shutdown of production
facilities, which in turn could lead to product shortages. A failure to comply fully with such regulations could also lead to a delay in the approval of new products.
Risks regarding the marketing of our products.
The marketing of our products is also heavily regulated by governments
throughout the world. In many countries, particularly those in Europe, we are prohibited from marketing many of our products directly to consumers. In the US, some
direct-to-consumer marketing practices are permitted, but the scope of allowable marketing practices is still significantly limited. Most countries also place restrictions on
the manner and scope of permissible marketing to physicians and other health professionals. The effect of
such regulations may be to limit the amount of revenue which we may be able to derive from a particular product. In addition, if we fail to comply fully with such regulations then civil or criminal
actions could be brought against us.
Risks regarding the safety and efficacy of our products.
Regulatory agencies may at any time reassess the safety and efficacy
of our products based on new scientific knowledge or other factors. Such reassessments could result in the amendment or withdrawal of existing approvals to market our products, which in turn would
result in a loss of revenue, and could serve as an inducement to bring lawsuits against us.
Other regulatory and legal risks.
Changes in worldwide intellectual property protections and remedies, trade regulations and
procedures, product counterfeiting, unstable governments and legal systems, intergovernmental disputes and possible nationalizations could also materially adversely affect our business or results of
operations.
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 the strength of combined companies could affect our competitive position in all of our business areas.
Product liability claims could adversely affect our business and results of operations.
Product liability claims are potentially a significant commercial risk for us. Substantial damage awards have been made in some jurisdictions against companies
such as ours 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. See "Item 8. Financial Information8.A Consolidated Statements and Other Financial Information8.A.7 Legal Proceedings." We maintain product liability insurance
policies with third parties, covering claims on a worldwide basis, and we believe that our insurance coverage and provisions are reasonable and prudent in light of our business and the risks to which
we are subject. However, because other pharmaceutical companies have faced large product liability losses, third party product liability insurance coverage is becoming increasingly difficult to
obtain. As a result, claims may occur which in whole or in part, might not be covered by third party insurance or the provisions that we have put in place. While no such losses are presently expected,
there can be no guarantee that we will not also face a loss which far exceeds available insurance and provisions.
10
Patent claims by third parties could adversely affect our business and results of operations.
We take all reasonable steps to ensure that our products do not infringe valid third-party intellectual property rights. Nevertheless, third parties may assert
claims against us for infringement. As a result, we can become involved in extensive litigation regarding our products. If we are unsuccessful in defending ourselves against these suits, we could be
subject to injunctions preventing us from selling our products, or to damages, which may be substantial. Either event could have a material adverse effect on our consolidated financial position,
results of operations or liquidity.
Our business will continue to expose us to risks of environmental liabilities.
In our product development programs and manufacturing processes, it is sometimes necessary for us to use hazardous materials, chemicals, biologics, viruses and
toxic compounds. These programs and processes expose us to risks of accidental contamination, events of noncompliance with environmental laws and regulatory enforcement, personal injury, property
damage and claims resulting from these events. If an accident occurred, or if we discover contamination caused by prior operations, we could be liable for clean-up 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 acquire, own or operate;
that
we formerly owned or operated; or
where
waste from our operations was disposed.
These
environmental remediation obligations could significantly reduce our operating results. In particular, our financial accruals for these obligations may be insufficient if the
assumptions underlying the accrualsincluding our assumptions regarding the portion of the waste at a site for which we are responsibleprove incorrect, or if we are held
responsible for additional 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.
The manufacture of our products is technically highly complex, and a supply interruption or delay could adversely affect our business and results of
operations.
The products we market, distribute and sell are either manufactured at our own dedicated manufacturing facilities, or through toll manufacturing arrangements or
supply agreements with third parties. Since many of our products are the result of technically complex manufacturing processes, and are sometimes dependent on highly specialized raw materials, we can
provide no assurances that supply sources will not be interrupted from time to time. In addition, for these same reasons, the volume of production of any product cannot be rapidly altered. As a
result, if we should fail to accurately predict market demand for any of our products then we may not be able to produce enough of the product to meet that demand, or may produce too much of the
product, either of which could affect our business and operating results.
Foreign exchange fluctuations may adversely affect our earnings and the value of some of our assets.
A significant portion of our earnings and expenditures are in currencies other than US dollars, our reporting currency. In 2004, 43% of our sales were made in US
dollars, 26% in Euro, 8% in Japanese yen, 3% in Swiss francs and 20% in other currencies. In 2004, 37% of our costs were generated in US dollars,
11
23%
in Euro, 15% in Swiss francs, 5% in Japanese yen and 20% in other currencies. Changes in exchange rates between the US dollar and other currencies can result in increases or decreases in our costs
and earnings. Fluctuations in exchange rates between the US dollar and other currencies may also affect the reported value of our assets measured and the components 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 may hedge certain foreign currency positions for 2005. We cannot
predict, however, all changes in currency and interest rates, inflation or other factors, which could affect our international businesses.
The price of our ADSs and the US dollar value of any dividends may be affected by fluctuations in the US dollar/Swiss franc exchange rate.
Our American Depositary Shares (ADSs) trade on the New York Stock Exchange in US dollars. Since the shares underlying the ADSs are listed in Switzerland on the
SWX Swiss Exchange (SWX) and trade on the European trading platform virt-x in Swiss francs, the value of the ADSs may be affected by fluctuations in the US dollar/Swiss franc exchange
rate. If the value of the Swiss franc decreases against the US dollar, the price at which our ADSs trade may decrease. In addition, since any dividends that we may declare will be denominated in Swiss
francs, exchange rate fluctuations will affect the US dollar equivalent of dividends received by holders of ADSs. If the value of the Swiss franc decreases against the US dollar, the value of the US
dollar equivalent of any dividend will decrease accordingly.
Holders of ADSs may not be able to exercise preemptive rights attached to shares underlying ADSs.
Under Swiss law, shareholders have preemptive rights to subscribe for cash for issuances of new shares on a pro rata basis. Shareholders may waive their
preemptive rights in respect of any offering at a general meeting of shareholders. Preemptive rights, if not previously waived, are transferable during
the subscription period relating to a particular offering of shares and may be quoted on the SWX. US holders of ADSs may not be able to exercise the preemptive rights attached to the shares underlying
their ADSs unless a registration statement under the US Securities Act of 1933, as amended, is effective with respect to such rights and the related shares, or an exemption from the registration
requirements thereunder is available. We would evaluate at the time of any share offering the costs and potential liabilities associated with any such registration statement, as well as the indirect
benefits of enabling the exercise by the holders of ADSs of the preemptive rights associated with the shares underlying their ADSs, and any other factors we would consider appropriate at the time, and
then would make a decision as to whether to file such a registration statement. We cannot guarantee that any registration statement would be filed, or, if filed, that it would be declared effective.
If preemptive rights could not be exercised by an ADS holder, JPMorgan Chase Bank, N.A., as depositary, would, if possible, sell such holder's preemptive rights and distribute the net proceeds of the
sale to the holder. If the depositary determines, in its discretion, that such rights could not be sold, the depositary might allow such rights to lapse. In either case, the interest of ADS holders in
Novartis would be diluted and, if the depositary allows rights to lapse, holders of ADSs would not realize any value from the granting of preemptive rights.
Decreases in financial income could affect our earnings.
In recent years, we have earned a level of net financial income that exceeds our benchmarks in a difficult investment environment. We have accomplished this
primarily through effective currency management and investment strategies. Given the volatile nature of investment markets, there can be no guarantee that this performance will be repeated in the
future, or that we can avoid suffering losses from our management of our financial assets.
Changes in accounting rules could affect our reported results.
The International Accounting Standards Board has and will continue to critically examine current International Financial Reporting Standards (IFRS) with a view
toward increasing international
12
harmonization
of accounting rules. This process of amendment and convergence of worldwide accounting rules resulted in significant amendments to the existing rules as of January 1, 2005 in such
areas as the accounting for share-based compensation, goodwill and intangibles, marketable securities and derivative financial instruments, and the classification of certain income statement and
balance sheet positions. These amendments are discussed in more detail in note 32m(xii) to the consolidated financial statements.
Changes in tax laws could adversely affect our earnings.
Changes in the tax laws of Switzerland, the US, or other countries in which we do significant business, as well as changes in our effective tax rate for the
fiscal year caused by other factors, including changes in the interpretation of tax law by local tax officials, could affect our net income. While certain changes were enacted to the tax laws of major
countries during 2004, those changes are not expected to materially impact our net income. It is not possible to predict the impact on our results of any tax legislation which may be enacted in the
future.
Earthquakes could affect our business and results of operations.
Our corporate headquarters and certain of our major Pharmaceutical Division production facilities are located near major earthquake fault lines in Basel,
Switzerland. In the event of a major earthquake, we could experience business interruptions, destruction of facilities and/or loss of life, all of which could materially adversely affect us.
Changes in global economic conditions and politics could affect our business and results of operations.
Our future results could be affected by global economic and political changes. In the recent past, terrorist attacks have had an impact on global economic
conditions. Any additional terrorist attacks which may occur in the future, and any related military activity around the world, could have a similar impact, which could affect our business and results
of operations.
Item 4. Information on the Company
4.A History and Development of Novartis
Novartis is a world leader in the research, development, manufacturing and marketing of products to protect and improve health and well-being. Our
goal is to discover, develop and successfully market innovative products to cure diseases, to ease suffering and to enhance quality of life. We also seek to provide a return to shareholders that
reflects our performance and to adequately reward those who invest ideas and resources in our company.
In
2004, Novartis generated consolidated net sales of $28.2 billion, invested $4.2 billion in research and development and employed approximately 81,400 people worldwide
through its activities in more than 140 countries.
Created
in 1996 through the merger of Ciba-Geigy and Sandoz, up to December 31, 2004 Novartis was organized into two Divisions:
Pharmaceuticals,
which comprises our activities in innovation-driven prescription medicines; and
Consumer
Health, which comprises our activities in Sandoz generic drugs, Over-the-Counter (OTC) self-medication products, animal health,
medical nutrition, infant & baby foods, and lens and vision care.
As
of January 1, 2005 Sandoz, which comprises our activities in generic drugs, became a separate Division. It was part of the Consumer Health Division until December 31,
2004.
13
Our
name, derived from the Latin
novae artes
, means "new skills" and reflects our commitment to focus on research and development to bring
new health-care products to the patients and physicians that we serve.
Ranked
by IMS Health (IMS) as one of the fastest-growing global pharmaceutical companies worldwide in recent years, we are seeking to further expand our market share by introducing new
products and maximizing sales. We have received approvals for 13 new products in the US since 2000.
We are making renewed investments in research and development, particularly in the Novartis Institutes for BioMedical Research headquarters in Cambridge, Massachusetts.
Novartis
is the only major pharmaceutical company with a global leadership position in both patented and generic pharmaceuticals. In light of the aging populations of many major
countries, and the associated rise in health care expenditures, we believe generics will continue to play an increasingly important role as a cost-effective therapeutic option. Our
objective is to strengthen our position as a medicines company, offering a broad range of drug treatment options to patients, physicians and payors, including:
Innovative,
patent-protected prescription medicines that address significant unmet medical needs;
Cost-effective
and high-quality generic medicines of growing importance to health-care systems today; and
Leading
self-medication (OTC) brands to enhance overall health and well-being.
Our
Pharmaceuticals Division has a portfolio of products that is balanced between products marketed to specialists and products which are marketed to primary care physicians. In 2004, a
total of 5 products received regulatory approvals in major markets.
We
intend to continue supporting and accelerating the development of new products in our pipeline, which has a total of 10 projects in clinical development or in registration procedures.
A
total of 52 projects are in late-stage clinical development (Phase II, Phase III and registration), with a particular focus on a group of ten priority compounds, many of
which have the potential to address urgent unmet medical needs and be first-in-class medicines in their respective therapeutic areas.
Novartis
AG, headquartered in Basel, Switzerland, is a public company incorporated under the laws of Switzerland with an indefinite duration. We are domiciled in and governed by the laws
of Switzerland. Our registered office is located at the following address:
Our
registered shares are listed in Switzerland on the SWX Swiss Exchange ("SWX") and traded on the European trading platform virt-x. Our American Depositary Shares are
listed on the New York Stock Exchange ("NYSE"). Our shares are also traded on International Retail Service (IRS) at the London Stock Exchange. In the US, Corporation Service Company (2711 Centerville
Road, Suite 400, Wilmington, Delaware 19808, telephone: 1-800-927-9800) acts as our agent solely for the purpose of accepting service of process in respect of
registration statements on Forms F-3 under the US Securities Act of 1933, as amended.
14
Major Corporate Developments 2002-2004
2004
January
A new CHF 3.0 billion share repurchase program is announced to start following completion of a program initiated in 2002. Shareholders at the Annual General Meeting (AGM) approved the program in February 2004,
and it commenced in August 2004.
February
The global adult medical nutrition business of Mead Johnson & Company, a Bristol-Myers Squibb Company subsidiary is acquired for approximately $385 million in cash.
April
Novartis studies making a bid for a potential business combination with the French-German pharmaceutical group Aventis SA at the request of the Aventis Supervisory Board, but declines to make a bid.
June
Novartis announces plans to acquire two generics companies: the Danish company Durascan A/S from AstraZeneca plc and Sabex Holdings Ltd of Canada. Durascan expands our generics presence in the Nordic region, while Sabex, which was acquired for
$565 million in cash, provides strong growth opportunities in injectable generics and new entry into the Canadian generics sector.
July
Novartis Institute for Tropical Disease opens its new facility in Singapore with particular focus on biomedical research for dengue fever and drug-resistant tuberculosis (TB).
October
Novartis announces the reorganization of its Sandoz generics business. Effective January 1, 2005, Sandoz ceases to be a Business Unit of our Consumer Health Division, and becomes a separate Division.
2003
February
US rights to market the tension headache products
Fioricet
and
Fiorinal
are sold to Watson Pharmaceuticals, Inc. for $178 million.
April
An anti-incontinence product called
Enablex
in certain countries and
Emselex
in other countries is acquired from Pfizer Inc. We will pay up to
$225 million for the rights to this product. Part of that amount is contingent on obtaining approval in the US (approved in December 2004) and EU (approved in October 2004).
May
A majority ownership interest is acquired in Idenix Pharmaceuticals, Inc., for an initial payment of $255 million in cash, with up to an additional $357 million in future contingent payments to the selling stockholders if Idenix
achieves certain future targets. We also obtained options to license future products from Idenix. In each case, we may pay additional amounts to Idenix in the event the applicable drug achieves certain future targets. In July 2004, Idenix
completed an initial public offering (IPO) of its shares, and Novartis retained its existing 57% stake.
June
Novartis groups all of its generic pharmaceutical companies under the brand name Sandoz as part of a worldwide initiative to unite its generic pharmaceutical operations.
November
Novartis confirms its support for the Universal Declaration of Human Rights and announces new corporate human rights guidelines to meet its public commitments under the UN Global Compact.
15
2002
January
Two US farm animal vaccine companies, Grand Laboratories Inc., of Iowa, and ImmTech Biologies Inc., of Kansas, are acquired for a combined minimum purchase price of $99 million, of which $78 million was settled in Novartis
American Depositary Shares. The final price may increase depending on whether certain future sales and other targets are met.
November
Our Food & Beverage business is sold to Associated British Foods plc for $270 million in cash. The remaining Health Food & Slimming and Sports Nutrition businesses were reorganized as a stand-alone unit, Nutrition &
Santé, which for external reporting purposes has been consolidated into the Consumer Health Division's Medical Nutrition Business Unit.
Sandoz acquires more than 99% of Lek Pharmaceuticals d.d., the Slovenian generics company, for $0.9 billion in cash. In 2003, Lek was delisted from the Ljubljana Stock Exchange and Sandoz acquired its remaining outstanding shares.
4.B Business Overview
Novartis
is a world leader in both patent-protected and generic pharmaceuticals as well as consumer health products. Our aim is to seek and maintain leadership positions in these
businesses.
Our
company was organized into two Divisions up to December 31, 2004: Pharmaceuticals and Consumer Health.
The
Pharmaceuticals Division is organized into two marketing organizationsPrimary Care and Specialty Medicinesthat develop and market branded pharmaceutical
products in seven therapeutic areas. It also includes the Novartis Institutes for BioMedical Research (NIBR) which was established in 2003 with the aim of redefining drug discovery in a new era marked
by the completion of the human genome sequence. NIBR is headquartered in Cambridge, Massachusetts, and has affiliates worldwide.
In
2004, the Consumer Health Division had six Business Units, all of which coordinate the worldwide research, development, manufacturing and marketing of their respective products. The
Business Units are: Sandoz (generics), OTC self-medication, Animal Health, Medical Nutrition, Infant & Baby and CIBA Vision. As of January 1, 2005, Sandoz became a separate
Division and will no longer be incorporated in the Consumer Health Division.
Sandoz
is organized as a Retail Generics company which also operates two other businesses, Industrial Products and Biopharmaceuticals. The Retail Generics business produces finished
dosage forms, which are sold to pharmacies, hospitals and other health care outlets. The Industrial Products business manufactures active pharmaceutical ingredients and their intermediates for
internal requirements and industrial customers. The Biopharmaceuticals business, drawing on the company's rich experience in biotechnology, is developing to meet growing demand.
16
Key Figures
Year Ended December 31,
2004
2003
2002
(in $ millions)
Net Sales to third parties
Pharmaceuticals
18,497
16,020
13,528
Sandoz
3,045
2,906
1,817
OTC
1,975
1,772
1,521
Animal Health
756
682
623
Medical Nutrition
1,121
815
711
Infant & Baby
1,441
1,361
1,333
CIBA Vision
1,412
1,308
1,135
Consumer Healthongoing
9,750
8,844
7,140
Divested Health & Functional Food activities
209
Consumer Health
9,750
8,844
7,349
Group net sales
28,247
24,864
20,877
Operating income
Pharmaceuticals
5,253
4,423
3,891
Sandoz
235
473
265
OTC
351
309
240
Animal Health
78
88
92
Medical Nutrition
32
82
4
Infant & Baby
274
254
227
CIBA Vision
236
153
118
Divisional Management
(25
)
(39
)
Consumer Healthongoing
1,181
1,320
946
Divested Health & Functional Food activities
140
Consumer Health
1,181
1,320
1,086
Corporate income, net
105
146
115
Group operating income
6,539
5,889
5,092
17
The table below sets forth a regional breakdown of certain data for the years ended December 31, 2004, 2003 and 2002.
Americas
Europe
Asia/Africa/Australia
2004
2003
2002
2004
2003
2002
2004
2003
2002
(in $ millions, except number of employees)
Net sales
13,285
12,036
10,558
10,289
8,788
6,832
4,673
4,040
3,487
Operating income
1,417
897
958
4,625
4,505
3,825
497
487
309
Number of employees (at December 31)
30,186
28,608
28,328
38,229
37,510
32,595
12,977
12,423
11,954
Investment in property, plant and equipment
340
427
537
787
846
498
142
56
33
Depreciation of property, plant and equipment
229
220
198
510
480
355
41
37
39
Net operating assets
6,702
5,984
6,312
18,230
16,271
14,086
1,251
975
965
PHARMACEUTICALS
Overview
Our Pharmaceuticals Division, which is made up of approximately 80 affiliated companies and 47,325 employees and sells to approximately 140 countries,
offers a broad portfolio of branded prescription medicines focused on treating the unmet medical needs of patients worldwide. In 2004, the Division reported consolidated net sales of
$18.5 billion, which represented 65% of total Group net sales.
The
Pharmaceuticals Division develops and markets products in the following therapeutic areas:
Our
Pharmaceutical Division's current product portfolio includes more than 40 key marketed products, many of which are their respective market leaders. In addition, the Division's
portfolio of development projects includes more than 75 potential new products and potential new indications or formulations for existing products in various stages of clinical development.
18
Selected Key Marketed Products
The following table describes selected key marketed pharmaceutical products, in alphabetical order, by therapeutic area. Not all products are registered in all
markets for all of the indications described below.
Therapeutic
Area
Compound
Generic name
Indication
Formulation
PRIMARY
CARE
Cardiovascular
& Metabolism
Diovan HCT/
Co-Diovan
valsartan and
hydrochlorothiazide
Hypertension
Film-coated tablet
Diovan
valsartan
Hypertension
Heart failure in
patients intolerant of
ACE inhibitors
Post-myocardial
infarction
Capsule
Coated tablet
Lescol/
Lescol XL
fluvastatin sodium
Primary
hypercholesterolemia
and mixed dyslipidemia
Secondary prevention
of coronary events
Slowing the
progression of
atherosclerosis
Increase of
high-density
lipoprotein cholesterol
(HDL-C)
Capsule
Tablet
Lotensin/
Cibacen
benazepril
hydrochloride
Hypertension
Coated tablet
Lotensin HCT/
Cibadrex
benazepril
hydrochloride
and hydrochlorothiazide
Hypertension
Adjunct therapy in
heart failure
Progressive chronic
renal insufficiency
Coated tablet
Lotrel
amlodipine besylate
and benazepril
hydrochloride
Hypertension
Capsule
Starlix
nateglinide
Type 2 diabetes
Coated tablet
19
Neuroscience
Comtan
entacapone
Parkinson's disease
Coated tablet
Exelon
rivastigmine tartrate
Alzheimer's disease
Capsule
Oral solution
Focalin
dexmethylphenidate HCl
Attention-deficit
hyperactivity disorder
Tablet
Clozaril/
Leponex
clozapine
Treatment-resistant
schizophrenia
Prevention and
treatment of
recurrent suicidal
behavior in patients
with schizophrenia and
schizoaffective disorder
Tablet
Ritalin/
Ritalin LA
methylphenidate HCl
Attention-deficit
hyperactivity disorder
Tablet
Capsule
Stalevo
carbidopa, levodopa
and entacapone
Parkinson's disease
Coated tablet
Tegretol
carbamazepine
Epilepsy
Acute mania and
bipolar affective
disorders
Treatment of pain
associated with
trigeminal neuralgia
Acute herpes zoster
Recurrent genital
herpes in
immunocompetent
patients
Recurrent
mucocutaneous
herpes simplex
infections in HIV-
infected patients
Tablet
Zelnorm/Zelmac
tegaserod
Irritable bowel
syndrome with
constipation
Chronic
constipation
Tablet
Coartem/
Riamet
artemether and
lumefantrine
Treatment of
Plasmodium falciparum
malaria or mixed
infections that include
Plasmodium falciparum
Standby emergency
malaria treatment
Tablet
Combipatch/Estalis
estradiol norethisterone acetate
Symptoms of estrogen
deficiency in
post-menopausal
women
Post-menopausal
osteoporosis
Patch
Estraderm/
Estraderm MX
estradiol
Symptoms of estrogen
deficiency in
post-menopausal
women
Post-menopausal
osteoporosis
Patch
Estragest
TTS
estradiol norethisterone acetate
Symptoms of estrogen
deficiency in
post-menopausal
women
Post-menopausal
osteoporosis
Patch
21
Miacalcin/
Miacalcic
salmon calcitonin
Osteoporosis
Paget's disease
Hypercalcemia
Nasal spray
Ampoule
Vial
Vivelle-Dot/
Estradot
estradiol
Symptoms of estrogen
deficiency in
post-menopausal
women
Post-menopausal
osteoporosis
Patch
Voltaren
diclofenac
Inflammatory forms of
rheumatism
Pain management
Coated tablet
Drop
Ampoule
Suppository
Gel
SPECIALTY MEDICINES
Oncology &
Hematology
Femara
letrozole tablets/
letrozole
Advanced
post-menopausal
breast cancer
(worldwide)
Extended adjuvant use
in early breast cancer
following tamoxifen
Coated tablet
Gleevec/
Glivec
imatinib mesylate/
imatinib
Certain forms of
Chronic myeloid
leukemia (CML)
Certain forms of
gastrointestinal stromal
tumors (GIST)
Tablet
Capsule
Sandostatin
LAR/
Sandostatin SC
octreotide acetate for
injectable suspension/
octreotide acetate
Acromegaly
Symptoms associated
with functional
gastroenteropancreatic
endocrine tumors
Vial
Ampoule
Pre-filled syringe
Zometa
zoledronic acid for
injection/zoledronic acid
Hypercalcemia of
malignancy
Prevention of
skeletal-related events
in patients with bone
metastases from solid
tumors
Liquid concentrate
Vial
22
Transplantation
& Immunology
Certican
everolimus
Prevention of organ
rejection following heart
or kidney transplantation
Tablet
Tablet for oral
suspension
Myfortic
mycophenolic acid
Prevention of graft
rejection following
kidney transplantation
Enteric coated tablet
Neoral
cyclosporine, USP
modified
Prevention of graft
rejection following
organ and bone
marrow
transplantation
Severe psoriasis
Rheumatoid
arthritis
Capsule
Oral solution
Simulect
basiliximab
Acute organ rejection
in de novo renal
transplantation
Atopic dermatitis
(eczema)
Uveitis
Nephrotic syndrome
Vial
Ophthalmics
Visudyne
verteporfin
Age-related macular
degeneration
(all forms of wet AMD)
Vial, activated
by laser light
Zaditor/
Zaditen
ketotifen
Allergic conjunctivitis
Eye drops
23
Compounds in Development
The following table describes some of our compounds and new indications for our existing products presently under development. "Submission" means that product
registration documents have been submitted to the FDA, to regulatory authorities in the EU (by either the centralized or mutual recognition procedure) and/or to national health authorities in Europe,
but not necessarily in all jurisdictions.
Therapeutic
area
Project/
Compound
Generic
name
Indication
Mechanism of action
Formulation
Planned filing
dates/Current
phase
PRIMARY
CARE
Cardiovascular
& Metabolism
Diovan
valsartan
Heart failure in
patients intolerant
of ACE inhibitors
(Val-HeFT)
Angiotensin-II
receptor
blocker
Oral
US (approved)
EU
(submitted)
Approved in
five markets
Post-myocardial
infarction
(VALIANT)
Oral
US/EU
(submitted)
Approved in
22 markets
Diovan and
Starlix
valsartan and
nateglinide
Prevention of
new onset type 2
diabetes,
cardiovascular
morbidity and
mortality
(NAVIGATOR)
Oral
³
2007/III
Lotrel
amlodipine
besylate and
benazepril
hydrochloride
Hypertension
(5-40 and 10-40)
ACE inhibitor
and calcium
channel blocker
Oral
US
(Submitted)
High-risk
hypertension
(ACCOMPLISH)
Oral
³
2007/III
LAF237
vildagliptin
Type 2 diabetes
Dipeptidyl-pepidase
(DPP-4) inhibitor
Oral
2006/III
SPP100
aliskiren
Hypertension
Renin inhibitor
Oral
2006/III
NKS104
pitavastatin
Dyslipidemia
HMG CoA reductase
inhibitor
Oral
³
2007/II
LBM642
TBD
Dyslipidemia
PPAR alpha and
gamma dual agonist
TBD
³
2007/I
FAD286
TBD
Congestive heart
failure
TBD
TBD/I
VNP489
TBD
Hypertension
NEP inhibitor
TBD
TBD/I
24
Neuroscience
Focalin XR
methylphenidate
Attention-deficit
hyperactivity disorder
Dopamine transport
blocker
Oral
US
(submitted)
Exelon TDS
rivastigmine
tartrate
Alzheimer's disease
Cholinesterase
inhibitor
Transdermal
patch
2006/III
Exelon
rivastigmine
tartrate
Non Alzheimer's
dementia
Cholinesterase inhibitor
Oral
2005/III
Trileptal NP
oxycarbazepine
Neuropathic pain
Voltage sensitive
sodium channel
blocker
Oral
2007/III
LIC477
licarbazepine
Bipolar disorder
Voltage sensitive
sodium channel
blocker
Oral
2007/III
AMP397
TBD
Epilepsy
AMPA receptor
antagonist
Oral
³
2007/II
SAB378
TBD
Neuropathic pain
Cannabinoid-1
receptor agonist
Oral
³
2007/II
FTY720
TBD
Multiple sclerosis
Sphingosine-1-
phosphate receptor
agonist
Oral
³
2007/II
AEP924
TBD
Depression
Somatostatin receptor
antagonist
TBD
³
2007/I
XBD173
TBD
Generalized
anxiety disorder
Mitochondrial
benzodiazepine
receptor agonist
Oral
³
2007/I
25
Respiratory &
Dermatology
Foradil
formoterol
Multi-dose dry
powder inhaler
in asthma
Long-acting beta-2
agonist
Dry powder
for inhalation
US/EU
(submitted)
Approved in
five European
countries
Xolair
omalizumab
Allergic asthma
Anti-IgE monoclonal
antibody
Sub-
cutaneous
US (approved)
EU (submitted)
Peanut allergy
Anti-IgE
monoclonal
antibody
Sub-
cutaneous
2007/I
New formulations
Anti-IgE
monoclonal
antibody
Liquid
formulation
2007/I
Lamisil
terbinafine
Fungal infection
of the scalp in
children
Fungal squalene
epoxidase inhibitor
Oral
2006
(US)/III
Nail lacquer for
fungal infection
Fungal squalene
epoxidase inhibitor
Nail Lacquer
³
2007/I
Elidel
pimecrolimus
Seborrheic
dermatitis
T-cell and mast cell
inhibitor
Cream
2006/II
Atopic dermatitis
in infants
2006/III
Chronic hand
dermatitis
2006/III
Elidel Ointment
pimecrolimus
Inflammatory skin
diseases
T-cell and mast
cell inhibitor
Ointment
2006/II
ASM981
pimecrolimus
oral
Inflammatory
skin diseases
T-cell and mast
cell inhibitor
Oral
TBD/II
QAB149
TBD
Asthma
Chronic obstructive
pulmonary disease
Once-daily beta-2
agonist
Inhalation
2007/II
Foradil/
mometasone
Formoterol/
mometasone
Asthma
Chronic obstructive
pulmonary disease
Long-acting beta-2
agonist/inhaled
corticosteroid
Inhalation
2007/I
ACZ885
TBD
Asthma
Monoclonal antibody
to IL-1 beta
TBD
2007/I
VAG624
TBD
Acne
Steroid sulfatase
inhibitor
TBD
TBD/I
ABN912
TBD
Asthma
Monoclonal antibody to
monocyte
chemoattractant
protein-1
Phase I:
First clinical trial of a new compound, generally performed in a small number of human volunteers, to assess clinical safety, tolerability as well as metabolic and pharmacologic
properties.
Phase II:
Clinical studies that test the safety and efficacy of the compound in patients with the targeted disease with the goal of determining the appropriate doses for further testing and
evaluating study design as well as identifying common side effects and risks. (Cancer drugs, as well as those for other life-threatening diseases, can sometimes be submitted for approval based on only Phase II data).
Phase III:
Large-scale clinical studies with several hundred or several thousand patients to establish safety and effectiveness for regulatory approval for indicated uses and to evaluate the
overall benefit-risk relationship.
The tables shown above and the summary that follows describe key products and compounds in development in the Pharmaceuticals Division. Unless
otherwise indicated, and subject to required regulatory approvals and, in certain instances, contractual limitations, we intend to sell our marketed products throughout the world. These same compounds
are in various stages of development throughout the world. For some compounds, the development process is ahead in the US, for other compounds, development is behind in the US. Due to the
uncertainties associated with the development process, and due to regulatory restrictions in some countries, including the US, it may not be possible to obtain regulatory approval for any or all of
the new compounds and new indications referred to in this Form 20-F.
Primary Care
Cardiovascular & Metabolism
Novartis is a world leader in offering products to treat cardiovascular disease, particularly high blood pressure (hypertension), elevated cholesterol
(hyperlipidemia) and heart failure. We believe that our broad portfolio of cardiovascular and metabolic agents offer some of the best tools available today to treat and protect patients along critical
points of the cardiovascular continuumfrom novel treatments for type 2 diabetes and medicines to manage hypertension and high cholesterol, to life-saving therapies following
heart attack and for patients who are suffering from heart failure.
29
Our pipeline includes compounds with the potential to change the way cardiovascular and metabolic diseases are treated, in particular the oral DPP-4 inhibitor LAF237
(vildagliptin) for type 2 diabetes and the oral renin inhibitor SPP100 (aliskiren) for hypertension.
Key Marketed Products
Diovan
(valsartan) and
Co-Diovan/Diovan HCT
(valsartan and
hydrochlorothiazide) are leaders in the angiotensin II receptor blocker (ARBs) class of anti-hypertensive (high-blood pressure) agents. The ARB drug class has been a key growth
driver in the global anti-hypertensive market, with
Diovan
consistently ranking as the most prescribed brand in this class, according to IMS
Health.
Diovan
specifically inhibits a hormone, angiotensin II, from binding to a receptor and causing arteries to tighten and narrow, an action that
can cause high blood pressure. The fixed combination product
Co-Diovan
, which includes the diuretic hydrochlorotiazide, provides additional
efficacy for patients who require a greater reduction in blood pressure than can be achieved with either agent alone. In the US,
Diovan
is approved for
the treatment of hypertension as well as for congestive heart failure in patients who are intolerant of angiotensin converting enzyme (ACE) inhibitors, another class of anti-hypertensive
agents. Besides the US,
Diovan
is available in more than 50 countries for the treatment of heart failure and in more than 80 for the treatment of
hypertension.
Diovan
was first launched in 1996.
Lescol/Lescol XL
(fluvastatin sodium) is a statin lipid-lowering agent approved as an adjunct to diet for reducing elevated
total cholesterol levels (hyperlipidemia) as well as to treat abnormal cholesterol levels (dyslipidemia) and to slow the progression of hardening of the arteries (atherosclerosis) in patients with
coronary heart disease. Lescol was first launched in the UK in 1995 and it is also indicated for use in reducing the risk of undergoing coronary revascularization procedures in patients with coronary
heart disease.
Lescol XL
is an extended-release formulation launched in 2000 to allow for once-daily dosing.
Lotensin/Cibacen
(benazepril) is an ACE inhibitor used to treat high blood pressure that was first launched in 1989 as
Cibacen
in some areas of the world and then in 1991 in the US under the trade name
Lotensin
. In
addition, in certain countries this medicine is approved for use as an adjunct therapy in heart failure and for the treatment of chronic renal insufficiency, a kidney disorder. A fixed-combination
product called
Lotensin HCT/Cibadrex
has been developed as a second-line high blood pressure therapy that combines benazepril hydrochloride
with hydrochlorothiazide, a widely used diuretic. In January 2005, the Swedish specialty medicines company Meda acquired the rights to
Cibacen
and
Cibadrex
in most European markets for a cash payment of $135 million.
Lotrel
(benazepril and amlodipine) is a fixed combination anti-hypertensive treatment consisting of the ACE
inhibitor benazepril used in
Lotensin/Cibacen
and the leading calcium antagonist amlodipine. Launched in 1996 and only available in the US,
Lotrel
has been
ranked by IMS Health as one of the leading prescribed branded combination anti-hypertensive therapies in the US since 2002.
Starlix
(nateglinide) is an oral blood-glucose lowering agent for use in patients with type 2 diabetes. The drug helps to
control blood glucose levels at mealtime through a rapid onset of action for a short duration. Launched in both the US and EU in 2001, it is approved in the EU for use in combination therapy with
metformin, another type of oral anti-diabetic agent. In the US,
Starlix
is approved as a monotherapy in patients initiating drug treatment
and in combination with the oral anti-diabetic agents metformin or thiazolidinediones.
New Indications in Development
Diovan
(valsartan) has been approved for congestive heart failure in the US and in other global markets. Additionally,
Novartis has filed for this indication in the EU based on the positive clinical benefits in heart failure in the large-scale VAL-HEFT trial.
Diovan
has also been filed in the US
30
and
EU for use in the treatment of patients following a heart attack, known as "post-myocardial infarction," based on data from the VALIANT trial. To date,
Diovan
has been approved for this indication in
over 22 countries. In addition,
Diovan
is in further
development for prevention of new-onset type 2 diabetes and cardiovascular disease in patients with impaired glucose tolerance (IGT).
Diovan
is currently being investigated alone and in combination with
Starlix
(nateglinide) in the NAVIGATOR (Nateglinide and Valsartan in Impaired Glucose
Tolerance and Outcomes Research) trial. At its conclusion, the trial will demonstrate whether
Diovan
and/or
Starlix
can reduce the incidence of
cardiovascular disease events and prevent people with IGT from progressing to clinical diabetes. Results are
expected to be available in 2008.
Starlix
(nateglinide) is currently being investigated in combination with
Diovan
as part of the NAVIGATOR trial.
Lotrel
(amlodipine besylate and benazepril hydrochloride) has two new dosages being developed for hypertension
(
Lotrel
5-40 and
Lotrel
10-40). We received an "approvable" letter from the FDA
for these new dosages, requesting additional data before the dosages can be approved. We are conducting further studies in order to develop that data, and expect the studies to be completed in the
second quarter of 2005. In addition, more than 12,000 patients are being treated with
Lotrel
or with a combination of benazepril hydrochloride and the
diuretic hydrochlorothiazide in the ACCOMPLISH trial that began in October 2003 to investigate cardiovascular morbidity and mortality in patients with high-risk hypertension
Compounds in Development
LAF237
(vildagliptin) is an oral dipeptidyl peptidase (DPP)-4 inhibitor in Phase III development for the treatment of type 2 diabetes. The first in a novel class
called incretin enhancers, vildagliptin increases levels of two specific incretin hormones found in the
stomachglucagon-like peptide (GLP)-1 and gastric inhibitory polypeptide (GIP)by blocking the action of DPP-4, an enzyme that normally
inactivates them. GLP-1 and GIP are secreted from the intestine in response to food and stimulate insulin production by the beta cells of the pancreas. GLP-1 also reduces the
secretion of glucagon, a hormone that signals the liver to produce glucose. In this way, LAF237 helps to address the imbalance between insulin supply and demand, one of the underlying causes of type 2
diabetes. LAF237 is currently in Phase III development after Phase IIb studies showed it to be efficacious both as monotherapy and in combination with metformin as well as showing a good safety and
tolerability profile. In addition, the combination of LAF237 and metformin showed good durability of efficacy over a one-year period compared to metformin alone. Phase III data are
expected at the end of 2005. Submission is planned for early 2006.
SPP100
(aliskiren) is the first in a new class of hypertension agents called renin inhibitors that offers a once-daily treatment with efficacy and safety comparable to
angiotensin-receptor blockers (ARBs), another class of high blood pressure treatments. In contrast to other antihypertensive agents, SPP100 lowers renin enzyme activity in the bloodstream, so it may
have the potential to better protect against heart attacks (myocardial infarction) and kidney disease. Phase IIb/III data confirmed efficacy as a monothereapy and suggested benefits of combination
with ARBs. Phase III data are expected in Q3 2005. The first regulatory submission is planned for early 2006.
NKS104
(pitavastatin) is a lipid-lowering agent in development for the treatment of elevated total cholesterol. Novartis has the European marketing rights under a licensing
agreement from Kowa. Clinical trials have shown that NKS104 lowers "bad" LDL cholesterol and triglycerides while increasing "good" HDL cholesterol levels. It is currently in Phase II development.
LBM642
is a preoxisome proliferator-activated receptor (PPAR) alpha and gamma dual agonist being developed for the treatment of abnormal cholesterol (dyslipidemia), diabetes
and obesity. Triglyceride-lowering effects have been demonstrated in a Phase I trial, and additional Phase I trials are ongoing with respect to diabetes.
31
FAD286
is a novel compound for the treatment of congestive heart failure, currently in Phase I trials.
VNP489
is the combination of a novel inhibitor of the neutral endopeptidase and valsartan, now in Phase I trials for the treatment of hypertension.
Neuroscience
Novartis has been a leader in the neuroscience area for more than 50 years, having pioneered early breakthrough treatments for a series of disorders that
include Alzheimer's disease, Parkinson's disease, attention deficit/hyperactivity disorder, epilepsy, depression, schizophrenia and migraine.
Among
our leading products are the anti-epileptic
Trileptal
, which has been used to treat over one million adults and children
suffering from epilepsy, and
Exelon
, which was first approved in 1997 and is now available for the treatment of mild to moderate Alzheimer's disease in
more than 70 countries.
Novartis
continues to be active in the research and development of new compounds and is committed to addressing unmet medical needs as well as supporting patients and their families
affected by these disorders. Ongoing research to extend the current product portfolio in Neuroscience includes projects in psychiatric diseases (bipolar disorder, psychosis, depression and anxiety),
neurological disorders (Alzheimer's disease, multiple sclerosis, amyotrophic lateral sclerosis) and chronic pain.
Key Marketed Products
Clozaril/Leponex
(clozapine) remains a leading anti-psychotic for treatment-resistant schizophrenia. First
launched in the 1970s and facing generic competition in the US and many other markets, this product is also indicated for the prevention of suicidal behavior in patients with schizophrenia or
schizo-affective disorder.
Comtan
(entacapone) treats Parkinson's disease by enhancing the action of levodopa, the standard therapy for Parkinson's
disease. The compound is licensed from Orion Pharma, which retains exclusive rights to market
Comtan
under a different brand name in certain European
countries.
Exelon
(rivastigmine tartrate) is a symptomatic treatment of mild to moderate Alzheimer's disease dementia. It belongs to a
class of drugs known as cholinesterase inhibitors (ChEI's) that increase neurotransmitter activity in the brain. It was approved for the treatment of Alzheimer's disease in 1997 and is currently used
in over 70 countries with over 2.8 million patient years of treatment.
Focalin
(dexmethylphenidate HCl) is the single isomer version of methylphenidate and is approved in the US for the treatment
of ADHD (attention deficit/hyperactivity disorder). This compound is licensed from Celgene Corporation.
Ritalin LA
(methylphenidate hydrochloride) is a once-daily formulation of
Ritalin
launched in 2002 for
the treatment of attention-deficit hyperactivity disorder in both children and adults. This product, which removes the need
for a midday dose, has been approved in a number of countries, including the US, EU and countries in Latin America.
Stalevo
(carbidopa, levodopa and entacapone) is an optimized levodopa product indicated for the treatment of Parkinson's
disease patients with signs and symptoms of end-of-dose "wearing off." This product combines levodopa, considered the most effective treatment for Parkinson's disease, with the
enzyme inhibitors carbidopa and entacapone. It has been shown to significantly improve the ability of patients with Parkinson's disease to perform everyday tasks and to reduce symptoms associated with
the disease. Licensed from Orion Pharma,
Stalevo
was first launched in the US in 2003 and is now available in all major European markets. Orion retains
exclusive rights to this product in certain Scandinavian countries, Germany, the UK and Ireland.
Tegretol XR/CR
(carbamazepine) is the long-acting formulation of
Tegretol,
which has long been a
mainstay for the treatment of epileptic seizures and has faced generic competition for some time.
32
First
launched in 1996,
Tegretol XR/CR
is also indicated in the US for the treatment of pain associated with trigeminal neuralgia, which is
characterized by attacks of intense pain affecting the face, as well as for the treatment of acute mania and bipolar affective disorders in the EU.
Trileptal
(oxcarbazepine) is an anti-epileptic drug for the treatment of partial seizures as adjunctive or
monotherapy in both adults and children over age 4. It acts by stabilizing neuronal functions, thereby controlling and limiting the spread of seizures. First approved in Europe in 1999 and in the US
in 2000,
Trileptal
can be used as a monotherapy in adults and children or in combination with other anti-epileptic medicines in adults.
New Indications in Development
Exelon
(rivastigmine tartrate) is in development for further indications like dementia associated with Parkinson's disease.
In addition, a transdermal formulation called
Exelon TDS
is in Phase III development for Alzheimer's disease and aims to increase patient convenience
and compliance due to improved tolerability of the therapy.
Focalin XR
(dexmethylphenidate HCl) is the single-isomer version of methylphenidate, the active ingredient in
Ritalin
. A long-acting formulation was submitted for US regulatory approval in July 2004 for the treatment of pediatric and adult
attention-deficit hyperactivity disorder. This compound is licensed from Celgene.
Focalin XR
uses SODAS technology, a proprietary drug
delivery technology under license from Elan.
Exelon
(rivastigmine tartrate) is in development for additional indications and formulations. A transdermal formulation,
Exelon
TDS
, is in Phase III for Alzheimer's disease, and is aimed at increasing patient convenience and compliance due to improved tolerability of the
therapy.
Trileptal NP
(oxcarbazepine) is in Phase III for the treatment of neuropathic pain.
Trileptal
(oxcarbazepine) is being prepared for US and EU submission to extend the pediatric indication down to one month of
age.
Compounds in Development
LIC477
(licarbazepine) is a sodium channel blocker. Phase III trials were initiated in 2004 for the treatment of acute manic episodes in bipolar disorders.
AMP397
is an AMPA receptor antagonist in Phase II development for treating epilepsy.
SAB378
is a cannabinoid-(CB)-1 receptor agonist in Phase II development for the treatment of neuropathic pain.
FTY720,
an oral immunomodulator with a novel mechanism of action, has shown significant efficacy in multiple sclerosis (MS) in a Phase II study. FTY720 has the potential to
become the first efficacious oral therapy for MS, a condition estimated to affect more than one million people worldwide. Data from the Phase II study showed a significant reduction in the relapse
rate and in the number of brain lesions detected by MRI scan as well as a longer time to first relapse. The vast majority of patients are continuing in the extension phase. One-year data are expected
in mid-2005. Phase III studies are planned to start in mid-2005. FTY720 is licensed from Mitsubishi.
AEP924
is a somastatin receptor antagonist in Phase I trials for the treatment of depression.
XBD173
is a mitochondrial benzodiazepine ligand in Phase I trials for the treatment of anxiety.
Iloperidone
has been out-licensed to Vanda Pharmaceuticals, Inc., while AAG561 and TCH346 have been terminated.
33
Respiratory & Dermatology
Our current focus in dermatology is on the treatment of two very common diseasesthe inflamed skin condition known as atopic dermatitis, or eczema,
and fungal nail infections. Novartis offers a series of leading medicines for these conditions.
Elidel
is the first and only non-steroid
cream for eczema, a disease that affects about 10% of children in the US, while
Lamisil
is the most frequently prescribed treatment worldwide for fungal
nail infection.
Novartis
also offers various therapies in the respiratory field, including the long-acting bronchodilator
Foradil
for the
treatment of asthma and chronic obstructive pulmonary disease (COPD). In addition, we are developing
Xolair
, a novel biological therapy already approved
in the US, Australia, New Zealand and Brazil that targets an underlying cause of allergic asthma.
Key Marketed Products
Elidel
(pimecrolimus cream) is the first non-steroid cream approved for the treatment of atopic dermatitis, a
skin condition commonly known as eczema, in adults and children. It is one of the first new eczema treatments introduced since the 1950s, when topical corticosteroidshistorically the
mainstay of therapybecame available. First launched in 2002 in the US,
Elidel
is now registered in approximately 90 countries, including
many EU markets.
Foradil
(formoterol fumarate) is a long-acting bronchodilator that offers 5 minute onset of action and 12 hour
relief of symptoms for patients with asthma and chronic obstructive pulmonary disease (COPD), which includes chronic bronchitis and emphysema. It was first approved and launched in Switzerland in
1994, followed by other key European markets in 1997. US approval was granted in 2001, and Novartis then licensed
Foradil
to Schering-Plough in 2002 in
the US but continues to market and distribute the product in other areas of the world.
Foradil Aerolizer
is a single-dose dry powder
inhaler, while a metered-dose inhaler is available in some countries. This product is licensed from Yamanouchi.
Lamisil
(terbinafine) is a leading therapy for onychomycosis, also known as fungal nail infection.
Lamisil
tablets kill the fungus that causes the infection at its source, working through the patient's bloodstream. This product was first launched in
1991 and is now available in more than 90 countries, with the US being the leading market.
Lamisil
tablets are also approved for treating
athlete's foot (tinea pedis) and fungal infection of the scalp (tinea capitis) in some countries, though not yet in the US. Our Consumer Health Division's OTC Business Unit markets
over-the-counter (OTC) cream formulations of
Lamisil
for use in treating athlete's foot in many markets, including the US.
Xolair
(omalizumab) is the first humanized therapeutic antibody for the treatment of allergic asthma and the first approved
therapy designed to target the antibody IgE, a key underlying cause of the symptoms of allergic asthma.
Xolair
is the only asthma treatment dosed every
two or four weeks and is administered by subcutaneous injection. In the US and Canada,
Xolair
is indicated for use in adults and children over age 12
with moderate-to-severe allergic asthma whose symptoms are inadequately controlled with inhaled corticosteroids.
Xolair
, which
gained US and Australian regulatory approval in 2003, is being jointly developed with Genentech and Tanox, and is co-marketed in the US by Novartis Pharmaceuticals Corporation and
Genentech.
Xolair
has also been submitted for EU regulatory approval for the treatment of severe allergic asthma.
New Indications in Development
Foradil
(formoterol) has received an approvable letter in the US for the
Certihaler
formulation
.
The
Certihaler
is a novel,
breath-activated multi-dose dry powder inhaler technology that was developed by SkyePharma, which will also manufacture the device. The
Certihaler
has a dose counter which is easy to read and also gives
patients confirmation that the full dose has been administered. We licensed the
exclusive US distribution and marketing rights for this product to Schering-Plough.
34
Product
registration files for the
Foradil Certihaler
have also been submitted in Europe and the rest of the world, and regulatory approvals have been
received in five European countries and Mexico. This replaces a prior agreement with Ivax to market
Foradil
with Ivax's Airmax® device,
which has been discontinued. In 2002, we entered into a co-development and co-commercialization agreement with Schering-Plough to bring to market a fixed-dose combination
Foradil
product with the
inhaled steroid mometasone. The Phase I/II program for the fixed-dose combination product is expected to start in
2005, and submission is planned for 2007.
Xolair
(omalizumab) is being studied in clinical trials in patients with peanut allergy and in children ages 6-12
with allergic asthma. A liquid formulation to improve patient convenience is also in development. This product is being jointly developed with Genentech and Tanox.
Lamisil
(terbinafine) is in Phase III development for ringworm of the scalp (tinea capitis). A new topical formulation (nail
lacquer) is also in phase I for the treatment of fungal nail infections.
Elidel
(pimecrolimus) cream 1% is in Phase II development for seborrheic dermatitis and in Phase III development for atopic
dermatitis in infants, chronic hand dermatitis and prophylactic treatment of severe atopic dermatitis.
Compounds in Development
QAB149
has the potential to be the first beta-2 agonist that offers true 24-hour control for the treatment of asthma and chronic obstructive
pulmonary disease (COPD). This compound, which is currently in Phase II, has been shown to have a fast onset of action and proven efficacy for over 24 hours with once-daily dosing.
It is expected to have an improved side-effect profile compared to current beta-2 agonists. We have entered into an agreement with SkyePharma to develop QAB149 using the
Certihaler
multi-dose dry powder
inhalation device. Regulatory submissions are planned for 2007. Several options for combinations are
currently being evaluated in parallel.
ASM981
(pimecrolimus, the active component of Elidel cream) oral and ointment formulations are also in Phase II development for inflammatory skin diseases.
ACZ885
is an inhibitor of IL-1 mediated eosinophilla and lung macrophage accumulation that is in Phase I development for the treatment of asthma and chronic
obstructive pulmonary disease (COPD).
VAG624
is a steroid sulphatase inhibitor in Phase I development for the treatment of acne.
ABN912
is a fully human monoclonal antibody to Monocyte Chemoattractant Protein-1 in Phase I development for the treatment of asthma and chronic obstructive
pulmonary disease (COPD).
QAN747
is a novel compound in Phase I development for the treatment of asthma and chronic obstructive pulmonary disease (COPD).
QAE397
is a novel compound for the treatment of asthma and chronic obstructive pulmonary disease (COPD).
QAK423
is a novel compound in Phase I development for the treatment of asthma and chronic obstructive pulmonary disease (COPD).
The primary focus of this therapeutic area is on patients with a variety of internal diseases that have significant unmet medical needs, particularly in the areas
of gastrointestinal disorders (including urinary incontinence), arthritis, osteoporosis, the treatment of pain and infectious diseases.
35
We have entered the gastrointestinal market with the launch of
Zelnorm/Zelmac
for the treatment of irritable bowel syndrome (IBS), a
condition where the bowel (large intestine) does not function properly. More than 40 million Americans are estimated to suffer from IBS with constipation, and
Zelnorm/Zelmac
is the first and only
medication approved to treat this condition.
Zelnorm/Zelmac
is also
approved for the treatment of chronic idiopathic constipation in the US and several other countries. We intend to further strengthen our GI franchise with development efforts regarding the use of
Zelnorm/Zelmac
to treat upper gastrointestinal disorders such as dyspepsia, gastroesophageal reflux disease (GERD) and other conditions.
Another
important area of focus are bone disorders like osteoporosis, a progressive disease that causes bones to become thin and porous, increasing the risk for fractures. Led by
Miacalcin/Miacalcic
, Novartis
has a number of treatments in development for this disease, which is estimated to affect up to one in three women over age
50 worldwide, according to the International Osteoporosis Foundation. The most advanced compound in development for bone disorders is
Aclastsa
, which
was submitted in the US for the treatment of Paget's disease in 2004 and is being studied for use in osteoporosis.
Our
infectious diseases portfolio consists of three main areas: anti-virals, anti-bacterials and tropical medicine. We market
Famvir
for herpes and
Coartem
for
malaria. Ongoing research and development efforts are focused on new
specific anti-virals against Hepatitis B and C as well as on novel antibiotics for respiratory tract infections. We established Infectious Diseases as a separate franchise following our
May 2003 purchase of a majority of the outstanding capital stock of Idenix Pharmaceuticals, Inc. As a result of that transaction, we obtained certain rights to market Idenix products as
well as options to license additional Idenix compounds in the future.
Key Marketed Products
Enablex/Emselex
(darifenacin) is a once-daily oral treatment that is part of a new group called
M3-selective receptor antagonists for the treatment of overactive bladder. Known as Enablex in the US and Emselex in the EU, this product was approved in the EU in October 2004 and
approved in the US in December 2004.
Enablex/Emselex
has been shown to effectively
reduce the number of weekly incontinence episodes by up to 77% versus placebo. It was acquired from Pfizer in April 2003.
Famvir
(famciclovir) is an anti-viral agent for the treatment of recurrent genital herpes, a
sexually-transmitted, life-long disease, and shingles (herpes zoster), which is caused by the reactivation of the highly contagious variacella-zoster virus, the same virus that causes
chickenpox. Other indications include the treatment of recurrent mucocutaneous herpes simplex infections in HIV-infected patients.
Zelnorm/Zelmac
(tegaserod) is the first in a new class of medicines known as serotonin-4 (5-HT4)
receptor partial agonists approved for the short-term treatment of the multiple symptoms associated with irritable bowel syndrome with constipation (IBS-C) in women. This
product, which is known as
Zelnorm
in North America and South Africa, and
Zelmac
in other markets, acts
by decreasing the visceral sensitivity of the intestinal tract, increasing intestinal secretion and increasing gastro-intestinal motility. This reduces the impact of symptoms such as abdominal pain,
bloating and constipation. In 2004,
Zelnorm
received US approval to become the first treatment approved for chronic idiopathic constipation in men and
women under age 65. First launched in 2002, this product has now been approved in more than 30 countries and has been submitted for EU approval.
Coartem
/
Riamet
(artemether and lumefantrine) is an effective and
well-tolerated anti-malarial treatment for adults and children that achieves cure rates of up to 95%, based on clinical trial data, even in malaria patients with
multi-drug resistance. It is indicated for treatment of falciparum malaria, the most dangerous form of malaria.
Coartem
is the only
fixed-dose combination of the two agents artemether, an artemisinin derivative, and lumefantrine, known as the Artemisinin
36
Combination
Therapy (ACT).
Coartem
, which is also marketed commercially as
Riamet
in some countries, was
co-developed by Novartis in collaboration with Chinese parties that supply some of the active ingredients (artemether) and is produced in China by Novartis. First approved in 1998,
Coartem
is currently
registered in approximately 75 countries. Novartis has provided more than six million treatments at cost to the World Health
Organization (WHO) as part of the Roll Back Malaria initiative since 2002. The WHO has added
Coartem
to its List of Essential Medicines, and Novartis is
increasing production capacity to help meet a significant increase in demand for the ACT therapy.
Voltaren
(diclofenac sodium) is a leading non-steroidal anti-inflammatory drug (NSAID) for the
treatment of inflammatory and degenerative
forms of rheumatism, and in the treatment of pain and inflammation. This product, which faces generic competition, has a wide variety of ingestible dosage forms marketed by the Pharmaceuticals
Division as well as a topical therapy offered as
Voltaren Emugel
in several markets for the treatment of inflammation of tendons, ligaments, muscles and
joints as well as certain localized forms of rheumatism.
Miacalcin/Miacalcic
(salmon calcitonin) is an important treatment for bone metabolic diseases, especially for established
post-menopausal osteoporosis in women.
Miacalcin/Miacalcic
was first launched as an injection in 1974 and as a nasal spray in 1986, and it
was first launched as an injection in the US in 1989 and in 1995 in an intra-nasal form. It contains chemically synthesized salmon calcitonin, a thyroid hormone that regulates the calcium content in
the blood. Available in the US in both injectable form and as a nasal spray,
Miacalcin/Miacalcic
is indicated for use in women with low bone mass more
than five years after menopause who refuse or cannot tolerate estrogens or in whom estrogens are contraindicated. As injection, it is also indicated for the treatment of symptomatic Paget's disease, a
chronic condition that causes the growth of abnormal bone, and for the treatment of hypercalcenia, when a rapid decrease in serum calcium is required.
Combipatch/Estalis
(estradiol & norethindrone acetate transdermal system) is a combination estrogen/progestin
treatment for symptoms of estrogen deficiency in post-menopausal women, and the prevention of post-menopausal osteoporosis. The product offers a convenient treatment in a
single patch for patients with an intact uterus.
Combipatch
is not approved in the US for the prevention of post-menopausal osteoporosis.
This product is sublicensed from Aventis for sale in countries outside the US and Japan under the brand name
Estalis
. In the US, the product is licensed
by Noven Pharmaceuticals to Vivelle Ventures, which is a joint venture between Noven and our US affiliate, for sale under the brand name
Combipatch
.
Estraderm
and
Estraderm MX
(estradiol transdermal system) are
estrogen-only treatments for symptoms of estrogen deficiency in post-menopausal women, and prevention of post-menopausal osteoporosis. These are earlier generations
of transdermal patches.
Estragest TTS
(estradiol & norethindrone acetate transdermal system) is a low-dose combination
estrogen/progestin treatment for symptoms of estrogen deficiency in post-menopausal women, and prevention of post-menopausal osteoporosis.
Estragest
TTS
is an earlier generation of transdermal patches.
Estragest TTS
offers a high amenorrhea rate in a single patch for patients
with an intact uterus. This product is not approved in the US.
Vivelle-Dot/Estradot
(estradiol transdermal system), licensed from Noven Pharmaceuticals is an
estrogen-only treatment for symptoms of estrogen deficiency in post-menopausal women, and prevention of post-menopausal osteoporosis.
Vivelle-Dot/Estradot
is the smallest estrogen patch available and
offers a thin, flexible and discreet hormone therapy. The lowest dose of
Vivelle-Dot/Estradot
(0.025 mg/d) is approved for the prevention of post-menopausal osteoporosis.
New Indications in Development
Zelnorm/Zelmac
(tegaserod maleate/tegaserod) has been submitted for EU approval for the treatment of irritable bowel syndrome
with constipation in women. In addition,
Zelnorm/Zelmac
is
37
under
development for the treatment of various upper gastro-intestinal tract disorders, such as severe upset stomach (dyspepsia), which is in Phase III, and gastroesophageal reflux disease (GERD),
which is in Phase II.
Aclasta
(zoledronic acid) is a bisphosphonate being developed for the treatment of various benign metabolic bone diseases,
including osteoporosis and Paget's disease.
Aclasta
was submitted for US and EU regulatory approval in 2004 for the treatment of Paget's disease
following positive Phase III trial results. The product name is subject to regulatory approval, as well. On January 20, 2005, the EU's Committee for Medicinal Products for Human Use (CHMP)
recommended that the European Commission grant a Marketing Authorization for
Aclasta
for the treatment of Paget's disease in all 25 EU countries
plus Norway and Iceland. A Phase II trial in post-menopausal osteoporosis patients demonstrated that zoledronic acid, administered as a once-yearly infusion, induced sustained
reduction in bone resorption and significant increases in bone mineral density at different skeletal sites. Phase III trials in different osteoporosis target groups (treatment and prevention of
postmenopausal osteoporosis, male osteoporosis, corticosteroid-induced osteoporosis, prevention of recurrent clinical fracture after acute hip fracture) are currently in progress. Zoledronic acid at a
different dosing regimen is marketed for oncology indications under the brand name
Zometa
.
Compounds in Development
Prexige
(lumiracoxib) is a COX-2 inhibitor that was submitted for US and UK regulatory approval as well as to
several other health authorities for the treatment of osteoarthritis, rheumatoid arthritis and acute pain, including painful menstrual cramps (primary dysmenorrhea).
Prexige
received its first
regulatory approval in Mexico in March 2003 for all indications, followed by approvals in Australia, Brazil, Ukraine,
New Zealand and several Latin American countries. Approval of the osteoarthritis and acute pain indications was obtained in the UK in September 2003, and the Mutual Recognition Procedure (MRP)
in the EU was started in September 2004. We received a non-approvable letter in the US in September 2003. The FDA requested the submission of the final report of the TARGET
study as well as additional clinical data for the indications of osteoarthritis and acute pain. In TARGET, lumiracoxib at two or four times the recommended daily dose for treating osteoarthritis
showed a 79% reduction in serious upper gastrointestinal ulcer complications compared to NSAIDs (naproxen 500mg twice daily and ibuprofen 800 mg three times daily). There was no significant difference
in cardiovascular safety compared to NSAIDs, and no significant difference in the frequency of serious hepatic adverse events. These findings were published in
The
Lancet
. In November 2004, we temporarily withdrew
Prexige
from the MRP due to the European Medicines Agency's (EMEA)
ongoing review of the cardiovascular safety of COX-2 inhibitors, which had been triggered by Merck's withdrawal of Vioxx® from the market. We expect to resume the MRP in
mid-2005 after the EMEA completes this review. In the US, discussions are underway with the FDA on requirements for a new cardiovascular safety study. Additional studies are already
underway to support the 100 mg dose for treating osteoarthritis. However, submission for US approval is not expected before 2007.
LDT600
(telbivudine
)
and LDC300 (
valtorcitabine)
are currently in development
for the treatment of hepatitis B. We have licensed these compounds from Idenix, a company in which we own a majority of the issued stock. We have the right to co-promote or
co-market these compounds with Idenix in the US, the UK, France, Germany, Italy and Spain, and to market these compounds on our own in the rest of the world. These compounds are currently
in Phase III and Phase II clinical trials, respectively. In addition to the license to these hepatitis B compounds, Idenix also granted us an option to license all other compounds developed by Idenix,
including Idenix's hepatitis C drug candidate, NMC283, which is currently in Phase I clinical trials.
AAE581
is a compound with a novel mode of action for the treatment of osteoporosis that is currently in Phase II development. It is a specific inhibitor of
osteoclast-derived cathepsin K, which
38
leads
to reduced collagen breakdown and osteoclast-mediated bone resorption. AAE581 has been shown to effectively suppress biological markers of bone turnover for up to 28 days in healthy
volunteers and for up to three months in healthy post-menopausal women compared to placebo.
SMC021
(calcitonin) is an oral formulation of salmon calcitonin, the active ingredient in
Miacalic/Miacalcin,
used in the
treatment of osteoporosis. This compound, a novel concept in oral peptide delivery, is currently in Phase II development for the treatment of osteoporosis.
ACZ885
is a human monoclonal antibody directed against human IL-1-beta that is in Phase I development for the treatment of rheumatoid arthritis and
respiratory diseases.
AKU517
is a reversible acid pump antagonist which is in Phase I development in collaboration with Sankyo for the treatment of gastroesophageal reflux disease (GERD), also
known as heartburn.
LBM415
is a new mode of action antibiotic known as a peptide deformylase inhibitor currently in Phase I development for respiratory tract infections.
AFG495
is a novel compound for the treatment of osteoporosis currently in Phase I trials.
RGN303
and RAD001 (rheumatoid arthritis) have been terminated.
Specialty Medicines
Oncology & Hematology
Oncology & Hematology provides a range of innovative therapies and practical solutions for cancer patients. We market products for the treatment of a
number of different cancers and for cancer complications, including advanced malignancies involving bone. Research and development in this disease area is aimed at the discovery and development of
innovative approaches to the treatment of cancer.
Novartis
ranks No. 3 worldwide in the global oncology market with a 9.1% market share as of October 2004, according to IMS Health.
Key
products include
Gleevec/Glivec,
to treat certain forms of life-threatening gastrointestinal stromal tumors (GIST) and
chronic myeloid leukemia (CML),
Femara,
a leading treatment in certain types of breast cancer, and
Zometa,
a novel treatment for certain cancers that have
spread to the bones. Important compounds in development include PTK787, an angiogenesis
inhibitor initially being studied for the treatment of colorectal cancer, and the iron chelator ICL670 for use in patients suffering from chronic iron overload.
Key Marketed Products
Femara
(letrozole) is an oral aromatase inhibitor for the treatment of certain forms of breast cancer. It works by inhibiting
the synthesis of estrogen, a hormone that promotes the growth of some breast cancers.
Femara
received US approval in October 2004 as an extended
adjuvant (post-surgery) therapy treatment for early breast cancer in post-menopausal women who have received adjuvant tamoxifen therapy for five years. Use in this setting has
also been approved in Switzerland, the UK, Mexico and other countries, and EU approval is expected in early 2005. Data from the landmark MA-17 study presented at the American Society of
Clinical Oncology, which was the basis for this new indication. The new labeling for this indication reflects data showing an overall reduced risk of recurrence (38%) and a reduction in distant
recurrences (distant metastases) of 39%.
Femara
was first launched in 1996, and it has since then received approval as a first-line
treatment for postmenopausal women with hormone receptor positive or hormone receptor unknown locally advanced or metastatic breast cancer, treatment of advanced breast cancer in postmenopausal women
with disease progression following anti-estrogen therapy, and neo-adjuvant (pre-operative) therapy.
Femara
is
currently available in more than 80 countries worldwide.
39
Gleevec/Glivec
(imatinib mesylate/imatinib) is a signal transduction inhibitor approved to treat certain forms of leukemia
and gastrointestinal stromal tumors. It is one of the first oncology drugs that validates rational drug design based on an understanding of how some cancer cells work. A signal transduction inhibitor
interferes with the pathways that stimulate the growth of tumor cells. In the US,
Gleevec
(known outside the US as
Glivec
), is indicated for the treatment
of newly diagnosed adult and pediatric patients with a form of chronic myeloid leukemia (CML). This condition is
a rare form of cancer but one of the most common adult leukemias, and it usually tests positive for the presence of the Philadelphia (Ph) chromosome.
Gleevec/Glivec
is also indicated for the treatment
of patients with certain forms of gastrointestinal stromal tumors (GIST).
Gleevec/Glivec
, which is also being studied in solid tumors, was first launched in 2001 and is now available in more than 80
countries. The Glivec
International Patient Assistance Program is now available in 71 countries and has provided treatment at no charge to more than 10,000 patients worldwide who otherwise would not have access to this
innovative therapy.
Sandostatin
SC
/Sandostatin LAR
(octreotide acetate) is primarily used for the
treatment of patients with acromegaly, a chronic disease in adults caused by over-secretion of pituitary growth hormone. Complications associated with acromegaly include cardiovascular
disease, respiratory distress such as upper airways obstruction, malignancies such as colon cancer, and carbohydrate intolerance, which can lead to diabetes.
Sandostatin
is a synthetic protein that
mimics the action of somatostatin, a naturally occurring hormone. This product is also indicated for the
treatment of certain symptoms associated with pancreatic and gastrointestinal endocrine tumors.
Sandostatin SC
, which was launched in the US in 1988, is
subject to near-term patent expirations. However, patent protection for
Sandostatin LAR
, which represents a significant and growing
proportion of our octreotide sales, continues in major markets. See "Intellectual Property" for further information.
Sandostatin LAR
is a
long-acting release formulation that requires administration once every 28 days and has
been 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.
Zometa
(zoledronic acid) is a treatment for certain cancers that have spread to the bones that is used most often along with
other cancer treatments, such as radiation, hormonal therapy or chemotherapy.
Zometa
, a third-generation bisphosphonate, is approved in most key markets
for the treatment of hypercalcemia of malignancy, which means tumor-induced excessive levels of calcium, as well as the treatment of skeletal-related events in patients with cancer types such as
prostate, breast, lung and multiple myeloma that have spread to involve bone.
New Indications in Development
Zometa
(zoledronic acid) has been submitted for regulatory approval in Japan for the treatment of bone metastases, an
indication approved in the US and EU in 2001.
Femara
(letrozole) has been submitted for extended adjuvant breast cancer treatment in the EU based on the MA-17
study and is in Phase III development for use in the early adjuvant treatment setting. This Phase III study, called BIG 1-98, involves nearly 8,000 post-menopausal women with
early breast cancer and will compare the utility of four different treatment paradigms of
Femara
compared to the anti-estrogen agent
tamoxifen. This trial is ongoing and initial safety and efficacy results are expected to be presented by early 2005. Submission for regulatory approval is expected in 2005 for the Femara vs. tamoxifen
arms, and data from the sequential arms of the study are expected in 2008.
40
Gleevec/Glivec
(imatinib mesylate/imatinib) is being studied as a potential treatment of solid tumors primarily as part of a
combination therapy. Preclinical data have shown that
Gleevec/Glivec
enhances the effect of chemotherapy in animal models. Phase II trials are in
progress in the following cancers: hormone-refractory prostate cancer, KIT-positive acute myeloid leukemia (AML), glioblastoma multiforme and as an adjuvant use in treating refractory
gastrointestinal stromal tumors (GIST).
Compounds in Development
ICL670
(deferasirox) is an oral iron chelator in Phase III development to reduce excess iron in the blood. Iron accumulation resulting from repeated blood transfusions,
particularly for patients with thalassemia (an inherited genetic defect that damages red blood cells and requires frequent blood transfusions) and sickle cell disease, can lead to organ damage and
death. ICL670 has been shown in clinical trials to efficiently induce iron excretion and has the potential to become the first significant breakthrough therapy for this condition in more than
40 years, replacing the need for patients to undergo 12-hour infusions for five to seven days per week. Submissions for US and EU regulatory approval are expected in the first half
of 2005.
PTK787
(vatalanib) is a new molecular entity called an angiogenesis inhibitor that blocks all known vascular endothelial growth factors (VEGF). Two Phase III
studiesCONFIRM 1 and CONFIRM 2are evaluating this compound in patients with colorectal cancer compared to and in combination with the FOLFOX4 chemotherapy regimen,
which is the combination of oxaliplatin, fluorouracil and leucovorin. PTK787 has been shown to be generally well tolerated based on experience in treating more than 1,000 patients. This compound is
being developed in collaboration with, and, if approved, will be marketed jointly with Schering AG of Germany.
EPO906
(patupilone), a cytotoxic, is a novel tubulin polymerizingcompound known as an epothilone that inhibits cancer cells with a similar mechanism as paclitaxel, a taxane
that has been a member of one of the most successful class of anti-cancer treatments. EPO906 has shown more potency than paclitaxel in pre-clinical trials and more activity in
paclitaxel-resistant tumors in pre-clinical trials. Responses have been observed in Phase II in several solid tumors. Dose-limiting toxicity, diarrhea, and significant
myelosuppression has not been reported to date. This compound is currently in Phase II development.
OctreoTher
(edetreotide) is an intravenous peptide hormone analogue in Phase II development for the treatment of solid
tumors. It carries a radioactive element specific to receptor-positive malignant cells containing the hormone somatostatin.
PKC412
(midostaurin) is a protein kinase inhibitor (FLT3 inhibitor) in Phase II development for the treatment of acute myeloid leukemia (AML). Pilot studies have shown
biological activity in more than 70% of patients with FLT3 mutations who were treated with PKC412 as a single agent therapy. Studies are investigating PKC412 in combination with chemotherapy to
determine if responses of longer duration can be achieved.
SOM230
is a somatostatin analog in Phase II development for the treatment of acromegaly; Cushing's syndrome, a rare disorder in which body tissue is exposed to excess levels
of the stress hormone cortisol; and gastro-entero-pancreatic (GEP) tumors.
LBQ707
(gimatecan) is a cytotoxic in Phase II development for the treatment of solid tumors. This compound, which has been licensed from Sigma-Tau, is a novel
oral topoisomerase I inhibitor. Preclinical data have shown greater potency than topotecan or irinotecan as well as activity in cell lines resistant to these two anti-cancer agents.
Confirmed partial responses have been seen in Phase I studies in non-small cell lung cancer, breast cancer and colorectal cancer.
RAD001
(everolimus) is an mTOR pathway inhibitor in Phase II for the treatment of solid tumors. RAD001 is a novel macrolide being developed as an
anti-proliferative drug through its inhibition of
41
the
mTOR protein kinase, making it an attractive candidate for a broad range of cancer indications.
AMN107
is a highly potent signal transduction inhibitor being studied for patients with a form of chronic myeloid leukemia (CML) resistant to
Gleevc/Glivec
, the standard of care. AMN107, like
Gleevec
, binds to the BCR-ABL protein that
causes white blood cells to grow and divide uncontrollably. AMN107 has been shown to be the most selective BCR-ABL inhibitor to date and more potent that
Gleevec.
Phase I/II data showed hematological
responses of over 50% in
Gleevec
-resistant patients in
advanced disease stages (accelerated or blast phase). Phase II trials are expected to begin in the first half of 2005.
LBH589
is a histone deacetylase inhibitor in Phase I development for the treatment of solid tumors.
AEE788
is a tyrosine kinase protein inhibitor that targets EGFR, HER2 and VEGFR2 that is in phase I development for the treatment of solid tumors.
ABJ879
is a microtubule stabilizer in Phase I development for the treatment of solid tumors.
Development
of LAQ824 and XAA296 have been terminated.
Transplantation & Immunology
Novartis is a world leader in transplantation and immunology, pioneering and revolutionizing the field of transplantation with the discovery and introduction of
cyclosporine more than 20 years ago. We have one of the broadest portfolios of immunosuppressant due to our continued research and strong commitment to provide solutions to unmet medical needs
for the transplant recipient.
Neoral
and
Simulect
are established products used to protect transplanted
organs from rejection. Our new products are
Certican
and
myfortic
, which has now been approved in more
than 40 countries, are providing more choices to transplant physicians. A novel immunomodulating agent, FTY720, is currently in Phase III for use in transplantation, and patient enrollment was
completed in September 2004. With a worldwide research program, Transplantation & Immunology is committed to developing a new and innovative range of therapeutic products for the
prophylaxis of organ rejection and to maintain our role as a global leader in this field.
Key Marketed Products
Neoral
(cyclosporine, USP modified) is a micro-emulsion formulation of cyclosporine, an immunosuppressant used in both adults
and children to prevent organ rejection following a kidney, liver or heart transplant. According to IMS Health,
Neoral
is the world's most commonly used
primary immunosuppressant after largely replacing its predecessor
Sandimmun/Sandimmune
, which was introduced in 1982 and revolutionized organ
transplantation. First launched in 1995,
Neoral
was designed to provide improved and constant absorption. It is also used in treating severe autoimmune
disorders such as psoriasis and rheumatoid arthritis. Despite our patent protection for Neoral, generic companies have launched competing products in the US, Europe and elsewhere, and will continue to
compete vigorously. See "Intellectual Property" for further information.
Certican
(everolimus) is a new immunosuppressant drug called a "proliferation signal inhibitor" (or motor inhibitor) that
targets the primary causes of allograft dysfunction (also known as chronic rejection) of a transplanted organ, including acute rejection and vascular remodeling.
Certican
is used in combination with
Neoral
and corticosteroids. First approved in Europe in 2003,
Certican
has completed the EU mutual recognition procedure and is in the process of being
launched in the region. In the US, following discussions with
the FDA regarding the FDA's requests for additional data, FDA has agreed to hold an Advisory Committee meeting regarding the heart transplantation indication later in 2005. We also plan to begin new
Phase III clinical trials in renal and heart transplantation shortly.
42
myfortic
(mycophenolic acid) is a new treatment option that has been studied for use in combination with
Neoral
and
corticosteroids to prevent rejection episodes in patients with kidney transplants.
myfortic
has been approved in over 40 countries, including Switzerland (the first approval in 2003), the US, Germany, France, the UK, Australia, India, Brazil and a number of Latin American countries.
Simulect
(basiliximab) is a chimeric monoclonal antibody that suppresses interleukin-driven proliferation of
T-cells.
Simulect
is used for induction therapy, and is designed to complement
Neoral
or
other primary immunosuppressants in preventing acute rejection episodes in kidney transplantation.
Compounds in Development
FTY720,
the first agent in a new class of drugs called Sphingosine 1-Phosphate Receptor (S1P-R) agonists. It is designed to prevent rejection by
redirecting lymphocytes away from the transplant graft, preventing lymphocytes from damaging the graft while maintaining the response of lymphocytes against infective agents. FTY720 is being developed
for the prevention of renal acute rejection in combination with
Neoral
or FK506 (tacrolimus) and has completed enrollment for phase III clinical trials.
In addition, FTY720 is in Phase II development for the treatment of multiple sclerosis. It is licensed from Mitsubishi.
AEB071
is a T-cell activation blocker in development for the prevention of organ rejection now in Phase I trials.
Ophthalmics
We develop and market products for the treatment of a number of different ophthalmic diseases. Our research and development in this disease area is aimed at the
discovery and development of innovative treatments for "Back of the Eye" diseases as well as on "Dry Eye." Both of these areas are characterized by high growth and significant unmet medical needs. The
"Back of the Eye" area encompasses several disease areas, such as wet and dry age-related macular degeneration (AMD), diabetic retinopathy, diabetic macular edema and retinitis pigmentosa.
The key area of focus within "Back of the Eye" is "wet" AMD, a condition when leaky blood vessels grow across the central portion of the retina, or macula, for unknown reasons and cause bleeding, scar
formation and permanent damage, leading to vision loss. Our ophthalmics business has built a leadership position with its flagship product
Visudyne
. In
cooperation with collaborator Genentech, we are also developing Lucentis, a VEGF inhibitor that is currently in Phase III clinical trials for the treatment of "wet" AMD and will be marketed by
Novartis outside of North America.
Key Marketed Products
Visudyne
(verteporfin) is a light-activated drug used in a two-step procedure that can be performed in a doctor's
office. First, the drug is injected intravenously into the patient's arm. A non-thermal laser light is then shone into the patient's eye to activate the drug. First launched in 2000,
Visudyne
is
commercially available in over 75 countries for the treatment of predominantly classic subfoveal choroidal neovascularization (CNV), a major
cause of vision loss caused by age-related macular degeneration (AMD). It is also approved in over 40 countries for the treatment of occult subfoveal CNV secondary to AMD (including the
EU, where it gained approval in 2002). In addition,
Visudyne
is approved in over 45 countries, including the EU, US and Canada for the treatment of
subfoveal CNV due to pathologic myopia (severe near-sightedness). In Japan,
Visudyne
was recently approved for all types of subfoveal CNV
secondary to AMD. Further geographic expansion is planned, including China.
Visudyne
is licensed from QLT.
Zaditor/Zaditen
(ketotifen) is an eye drop that provides fast and lasting relief of symptoms in patients suffering from
ocular allergy.
Zaditen
works through multiple mechanisms of action to
43
provide
relief within minutes and a duration of action of up to 12 hours.
Zaditen
was first launched in Japan and has been approved in more than
60 countries, including the US, where it is marketed as
Zaditor
, and the EU.
New Indications in Development
Elidel
(pimecrolimus), is currently in Phase II development for the treatment of dry eye in a novel drops formulation and for
blepharitis in a novel eye ointment formulation.
Sandostatin LAR
(octreotide acetate) is in Phase III development for diabetic retinopathy. This condition affects
approximately 25-30% of patients with diabetes and is one of the leading causes of blindness in people of working age. There are currently no pharmacological treatments available to treat
diabetic retinopathy.
Visudyne
(verteporfin) is in development for an additional indication. Phase III trials are ongoing in occult CNV secondary
to AMD.
Compounds in Development
Lucentis
(ranibizumab) is a recombinant humanized high affinity antibody fragment that binds to VEGF. It is designed to penetrate the retina to decrease
permeability and inhibit the formation of choroidal neovascularization, which leads to blindness in AMD patients. It is currently in Phase III development for the treatment of "wet" AMD. We have
licensed the right to develop and market Lucentis outside of North America from Genentech. Data from two Phase III trials are expected in 2005. Submission for EU approval is
planned for 2006.
PIR335
has been terminated.
Principal Markets
The Pharmaceuticals Division has a commercial presence in approximately 140 countries worldwide, but net sales are generally concentrated in the US, Europe and
Japan, which together accounted for
85% of 2004 net sales. The following table sets forth certain data relating to our principal markets in the Pharmaceuticals Division.
Pharmaceuticals
Net Sales 2004
($ millions)
(%)
United States
7,368
40
Americas (except the United States)
1,244
7
Europe
6,370
34
Japan
2,081
11
Rest of the World
1,434
8
Total
18,497
100
Many of our Pharmaceuticals Division's products are used for chronic conditions that require patients to consume the product over long periods of
time, from months to years. Net sales of the vast majority of our products are not subject to material changes in seasonal demand.
44
Production
The primary goal of our manufacturing and supply chain management program is ensuring the uninterrupted, timely and cost-effective supply of products
that meet all product specifications. To achieve this objective, we manufacture our products at five bulk chemical and 15 pharmaceutical production facilities as well as two biotechnology sites. Bulk
chemical production involves the manufacture of therapeutically active compounds, mainly by chemical synthesis or by a biological process such as fermentation. Pharmaceutical production involves the
manufacture of "galenical" forms of pharmaceutical products such as tablets, capsules, liquids, ampoules, vials and creams. Major bulk chemical sites are located in Basel, Switzerland; Grimsby, UK;
and Ringaskiddy, Ireland. Significant pharmaceutical production facilities are located in Stein, Switzerland; Wehr, Germany; Torre, Italy; Barbera, Spain; Suffern, New York; Sasayama, Japan, and in
various other locations in Europe, including France, the UK and Turkey. Our two biotechnology plants are in Switzerland and France.
During
clinical trials, which can last several years, the manufacturing process for a particular product 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 to these manufacturing processes may continue throughout a product's
life cycle.
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. The manufacture of our products is heavily regulated, making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there
could be a recall or a government-enforced shutdown of production facilities, which in turn could lead to product shortages. We have implemented a global manufacturing strategy to maximize business
continuity.
Raw
materials for the manufacturing process are either produced in-house or 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. However, our ability to do so may at times be limited by regulatory requirements. We monitor
market developments that could have an adverse effect on the supply of essential materials. All raw materials we purchase must comply with our quality standards. Overall, prices are not volatile for
materially significant raw materials.
Marketing and Sales
The Pharmaceuticals Division serves customers with approximately 6,000 field force representatives in the US, and an additional 13,000 in the rest of the world.
These trained representatives, where permitted by law, present the economic and therapeutic benefits of our products to physicians, pharmacists, hospitals, insurance groups and managed care
organizations.
Although
specific distribution patterns vary by country, Novartis generally sells its prescription drugs primarily to wholesale and retail drug distributors, hospitals, clinics,
government agencies and managed care providers.
In
the US, certain products are advertised by way of television, newspaper and magazine advertising. Novartis also pursues co-promotion/co-marketing opportunities
as well as licensing and distribution agreements with other companies when economically attractive.
Competition
The global pharmaceutical market is highly competitive and we compete against other companies selling branded prescription pharmaceutical products. These
companies include Abbott, AstraZeneca, Bristol-Myers Squibb, Eli Lilly, GlaxoSmithKline, Johnson & Johnson, Merck, Pfizer, Sanofi-Aventis, Schering-Plough and Wyeth. Competition within the
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.
45
As
is the case with other pharmaceutical companies selling patented pharmaceuticals, Novartis faces an increasing challenge from companies selling generic forms of our products following
the expiry of patent protection. Generic companies may also gain entry to the market through successfully challenging our patents, but we vigorously defend our intellectual property rights from
generic challenges that infringe upon our patents and trademarks. We also face competition from over-the-counter (OTC) products that do not require a prescription from a
physician.
There
is no guarantee that any product, even with patent protection, will remain successful if another company develops a new product offering significant improvements over existing
therapies.
Research and Development
We are among the leaders in the pharmaceuticals industry in terms of research and development investment. In 2004, we invested approximately $3.5 billion
in Pharmaceuticals Division research and development, which represents 18.8% of the Division's total net sales. Our Pharmaceuticals Division invested $3.1 billion and $2.4 billion on
research and development in 2003 and 2002 respectively. There are currently more than 75 projects in clinical development. In 2005, as a result of these efforts, we expect to launch
Aclasata
and
Focalin XR,
as well as new indications or formulations for
Gleevec/Glivec
,
Diovan, Femara, Zelnorm/Zelmac
and
Xolair,
in various markets worldwide.
We
have long term research commitments totaling $1.2 billion as of December 31, 2004, including $0.6 billion in milestone payments. We intend to fund these
expenditures from internally developed resources.
The
discovery and 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, including six to eight
years from Phase I clinical trials to market. At each of these steps, there is a substantial risk that we will not achieve our goals. In such an event, we may be required to abandon a product in which
we have made a substantial investment.
Research program
The discovery of new drugs is the responsibility of our Research program. This is a complex and challenging process which is split into different phases. These
phases provide tools that allow our Research team to manage and benchmark their activities. Milestones are established for each phase of the evaluation process. Candidates only advance to the next
stage if defined sets of criteria are met. The primary goal of our Research program is to determine that a compound is ready for Proof of Concept in humans. To determine whether a compound may be
tested in humans, we must invest significant resources in preclinical activities to satisfy safety requirements, including toxicology studies. Only those compounds that pass this more comprehensive
series of preclinical testing (on average, about one in ten candidates) advance to the development stage of a drug's life-cycle. See "Clinical development program."
In
2003, we established the Novartis Institutes for BioMedical Research (NIBR), headquartered in Cambridge, Massachusetts, with affiliates worldwide. NIBR is redefining drug discovery in
the era which began with the completion of the human genome sequence. Our strategies at NIBR include integrating previously segregated disciplines, fostering interaction among scientists, both within
and outside of Novartis and investing and advancing new discovery approaches. Our goal is to produce more relevant, predictable drug discovery and offer new and better medicines for patients
worldwide.
Completed
in 2004, our Cambridge facility contains a total of 75,300 square meters of laboratory and office space. It is expected to house over 800 scientists and technology experts, and
approximately 1,000 employees in total.
Several
of our discovery research platforms, including Functional Genomics, Molecular and Developmental Pathways, Models of Disease, Global Discovery Chemistry, and Epigenetics, are
based at our Cambridge headquarters. Disease-area research groups in Cambridge include cardiovascular disease, diabetes and metabolism, infectious disease and oncology.
46
Outside of the Cambridge site, an additional 2,000 scientists and technology experts conduct research in Switzerland, Austria, the UK, Japan and various other US sites. Research is
conducted in the areas of Neuroscience, Autoimmune Disease (including Dermatology, Transplantation, and Arthritis) and Respiratory Disease at these sites. In addition, research platforms such as
Discovery Technologies and Information Knowledge and Management are headquartered in the NIBR site in Basel.
Development program
The testing of new drugs in humans, to determine whether they are safe and effective, is the focus of our Development program. Clinical trials of drug candidates
generally proceed through three phases. In Phase I clinical trials, a drug is usually 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 larger numbers of volunteer patients (in some cases more than 15,000 patients in total) in clinics
and hospitals. In each of these phases, physicians monitor volunteer patients closely to determine the drug's efficacy and to 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 research and development processes
We are working to be more efficient in selecting candidate drugs for development. For example, we are now better able to select the best compounds for development
by having senior management focus on development projects at an early stage. Where possible we run early proof of concept studies in patients which include biomarkers for potential efficacy and which
enable us to make an earlier evaluation of the probability that the compound could be successfully developed into a marketable product. Under another initiative, special teams work to develop late
stage products more quickly. The goal is to improve the likelihood of therapeutic and commercial success, which should reduce development costs and decrease time to market. In several other
initiatives we are improving electronic management of the clinical trial processes, including data capture and transfer, as well as electronic storage and archiving of study data and documents. Most
recently we have initiated electronic
submissions to health authorities, vastly reducing the quantity of paper documents which need to be submitted and also enabling faster and more efficient review of data by health authorities. Overall,
these initiatives have reduced clinical trial outsourcing, have improved data quality and speed of clinical trial reporting, substantially reduced the time between initial research and the
introduction of the drug to market, and have provided us with considerable cost savings.
Alliances and acquisitions
Our Pharmaceuticals Division forms alliances with other pharmaceutical and biotechnology companies, and with academic institutions in order to develop new
products, acquire platform technologies and access new markets. We license products that complement our current product line and are appropriate to our business strategy. Therapeutic area strategies
have been established to focus on alliances and acquisition activities for key disease areas/indications that are expected to be growth drivers in the future. We review products and compounds we are
considering licensing using the same criteria as we use for our own internally discovered drugs.
Regulation
The international pharmaceutical industry is highly regulated. Regulatory authorities around the world administer numerous laws and regulations regarding the
testing, approval, manufacturing,
47
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. 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 that development.
World
regulatory authorities, especially those in the US, Switzerland, 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. In recent years, the registration process has required increased testing and documentation for clearance of new drugs, with a corresponding
increase in the expense of product introduction.
To
register a pharmaceutical product, a registration dossier containing evidence establishing the 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 every country, the submission of an application to a regulatory authority does not guarantee that
approval to market the product will be granted. Although the criteria for the registration of therapeutic drugs are similar in most countries, the formal structure of the necessary registration
documents varies significantly from country to country. 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. It is also possible that a drug may be approved for different indications in different
countries.
The
registration process generally takes between six months and several years, depending on the country, the quality of the data submitted, the efficiency of the registration authority's
procedures and the nature of the product. Many countries provide for accelerated processing of registration applications for innovative products of particular therapeutic interest. In recent years,
intensive efforts have been made among the US, 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 to negotiate selling prices or reimbursement levels with government regulators can substantially extend the time until final marketing approval is granted.
The
following provides a summary of the regulatory process in the principal markets served by Pharmaceuticals Division affiliates:
United States
In the US, applications for drug registration are submitted to and reviewed by the FDA. The FDA regulates the testing, approval, manufacturing, importing,
labeling and marketing of pharmaceutical products intended for commercialization in the US. The FDA also monitors all pharmaceutical products currently on the US market. The pharmaceutical development
and registration process is typically intensive, lengthy and rigorous. When a pharmaceutical company has gathered data which it believes sufficiently demonstrates a drug's quality, safety and
efficacy, then the company may file a New Drug Application ("NDA") for the drug. The NDA must contain all the scientific information that has been gathered about the drug and typically includes
information regarding the clinical experiences of all patients tested in the drug's clinical trials. A supplemental new drug application ("sNDA") must be filed for a line extension of, or new
indications for, a previously registered drug.
Once
an NDA is submitted, the FDA assigns reviewers from the fields of biopharmaceuticals, chemistry, medicine, microbiology, pharmacology/toxicology, statistics and labeling. After a
complete review, these experts then provide written evaluations of the NDA, including a recommendation. These recommendations are consolidated and are used by the FDA in its evaluation of the NDA.
Based on that evaluation, FDA then provides to the NDA's sponsor an approval, or an approvable, or non-approvable letter. The approvable and non-approvable letters will state
the specific deficiencies in the NDA which
48
need
to be addressed. The sponsor must then submit complete responses to the deficiencies in order to restart the review procedure.
Once
the FDA has approved an NDA or sNDA, the company can make the new drug available for physicians to prescribe. The drug owner must submit periodic reports to the FDA, including any
cases of adverse reactions. For some medications, the FDA requires additional post-approval studies (Phase IV) to evaluate long-term effects or to gather information on
the use of the product under special conditions. The FDA also requires compliance with standards relating to good laboratory, clinical and manufacturing practices.
European Union
In the EU, there are two main procedures for application for authorization to market pharmaceutical products in all of the EU Member States, the Centralized
Procedure and the Mutual Recognition Procedure. It is also possible to obtain a national authorization for products intended for commercialization in a single EU member-state only, or for line
extensions to existing national product licenses.
Under
the Centralized Procedure, applications are made to the European Medicines Agency (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. When a pharmaceutical company has gathered data which it believes
sufficiently demonstrates a drug's quality, safety and efficacy, then the company may submit an application to the EMEA. The EMEA then receives and validates the application, and appoints a Rapporteur
and Co-Rapporteur to review it. The entire review cycle must be completed within 210 days, although there is a "clock stop" at day 120, to allow the company to respond to questions
set forth in the Rapporteur/Co-Rapporteur's Assessment Report. When the company's complete response is received by the EMEA, the clock restarts on day 121. If there are further aspects of
the dossier requiring clarification, the EMEA will then request an Oral Explanation on day 180, in which the sponsor must appear before the EMEA's Scientific Committee (the CPMP) to provide the
requested additional information. On day 210, the CPMP will then take a vote to recommend the approval or non-approval of the application. The final decision under
this Centralized Procedure is an EU Community decision which is applicable to all Member States. This decision occurs on average 90 days after a positive CPMP recommendation.
Under
the Mutual Recognition Procedure (MRP), the company first obtains a marketing authorization by a single EU member-state. Subsequently, the company may seek mutual recognition of
this first authorization from some or all of the remaining EU Member-States. Then, within 90 days of this initial decision, each Member State reviews the application and can issue objections or
requests for additional information. On Day 90, each Member State must be assured that the product is safe and effective, and that it will cause no risks to the public health. Once agreement has been
reached, each Member State grants separate marketing authorizations for the product.
After
the Marketing Authorizations have been granted, the company must submit periodic safety reports to the EMEA (Centralized Procedure) or to the National Health Authorities (MRP).
These Marketing Authorizations must be renewed on a 5 year basis.
Japan
In Japan, applications for new products are made through the Pharmaceutical and Medical Devices Agency (PMDA). After a data reliability survey and a Good Clinical
Practice inspection are carried out by the PMDA, a team evaluation is carried out by the Pharmaceutical and Medical Devices Evaluation Center (PMDEC) of the PMDA. Its results are passed to PMDA's
external experts who then report back to the PMDA. 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 Central Pharmaceuticals Affairs Council (CPAC) which then advises the MHLW on final approvability. Drug
49
manufacturing
or import license approval is issued by the local prefecture government. Once the MHLW has approved the application and has listed its national health insurance price, the company can
make the new drug available for physicians to prescribe and obtain reimbursement. For some medications, the MHLW requires additional post-approval studies (Phase IV) to evaluate
safety, effects and/or to gather information on the use of the product under special conditions. The MHLW also requires the Sponsor to submit safety reports.
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. Due to increasing political pressure and governmental budget constraints, we expect these mechanisms to remain in placeand to perhaps even be
strengthenedand to have a negative influence on the prices we are able to charge for our products.
In
the US, 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 US, federal legislation requires pharmaceutical manufacturers to pay prescribed rebates on certain drugs to enable them to be eligible for reimbursement under some government
healthcare programs. In the absence of government pricing regulations, managed care has become a potent force in the US market place that increases downward pressure on the prices of pharmaceutical
products. In addition, the recently enacted Medicare reform legislation, which creates a prescription drug benefit for Medicare patients, could influence prices. The legislation could ultimately
enable the US government to use its enormous purchasing power to demand additional discounts from pharmaceutical companies. At the same time, this legislation could increase the volume of
pharmaceutical drug purchases, perhaps offsetting, at least in part, potential additional price discounts. It is too soon to predict the full impact of this new legislation with certainty. Another
potential influence on pricing in the US is the ongoing efforts by consumers and others to obtain our products from distributors in Canada, which has relatively stringent price controls. Such imports
from Canada to the US are currently illegal. However, there are ongoing political efforts to change the legal status of such imports.
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 in the EU, particularly with regard to prescription drugs, has become very intense. As a result, increasingly high barriers are being
erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert commercial pressure on pricing within a country. The EU enlargement
(with 10 countries having joined the EU in 2004) will probably complicate the environment and have some influence on prices in the region and parallel trade.
In
Japan, the MHLW reviews the prices of individual pharmaceutical products every two years. In the past, these reviews have resulted in price reductions. The Japanese government is
currently undertaking a healthcare reform initiative, and the pharmaceutical pricing system is one of the issues being reviewed. In particular, the government is reviewing the pricing of older
products, including the biannual reduction of reimbursement prices adjusted for actual discounts given.
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 our policy to seek the broadest possible protection for significant product developments in all major markets. Among other things, patents may cover the products themselves, including
the product's active substance and its formulation. Patents may also cover the processes for manufacturing a product, including processes for manufacturing intermediate substances used in the
manufacture of the products. Patents may also cover particular uses of a product, such as its use to treat a particular disease, or its dosage regimen.
50
The
protection offered by such patents extends for varying periods depending on 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. We monitor our competitors and vigorously challenge infringements of our intellectual property.
In
general, published pharmaceutical industry benchmarks show that we are at a comparatively low risk of loss of significant amounts of revenue due to patent expirations. As examples, we
have basic patent protection (including extensions) on valsartan (the active ingredient used in our best-selling product
Diovan
) until 2012
in the US, until 2011 in the major countries of the EU, and until 2013 in Japan. We have basic patent protection (including extensions) on imatinib (the active ingredient used in our leading product
Gleevec/Glivec
) until January 2015 in the US (excluding pediatric extension), until 2016 in the major EU countries, and until 2013 in Japan.
However,
patent protection is no longer available in several major markets for the active substances used in a number of our Pharmaceuticals Division's leading products:
Neoral.
Patent protection exists for the
Neoral
micro-emulsion
formulation and other cyclosporin formulations through 2009 and beyond in major markets. Despite this protection, generic cyclosporin products competing with
Neoral
have entered the transplantation
market segment in the US, Germany, Japan, Canada and elsewhere. We have filed patent infringement actions
against manufacturers of these generic products. However, except in one lawsuit in Canada, we have so far not succeeded in obtaining an injunction against any of the manufacturers that we have sued.
Sandostatin.
Basic patent protection for the active ingredient of
Sandostatin
SC
has expired in the US, Japan, Germany and the UK, and it will expire in 2006 in France and 2007 in Italy. Several parties have filed applications to market generic versions
of
Sandostatin
SC in the US. We have not, so far, sued any for patent infringement. However, patent protection extending to 2010 (and 2013 and beyond in
the US) continues in major markets for
Sandostatin LAR
, a long-acting version of
Sandostatin
which represents a significant and growing proportion of our sales in this product family.
Lotrel/Cibacen/Lotensin/Cibadrex
. The basic benazepril substance patent protection for
Cibacen/Lotensin/Cibadrex
has expired in the US and Japan, and will expire in 2005-08 in major markets in the EU. However,
Lotrel,
which is a combination of benazepril
and amlodipine besylate, is patented in the US until 2017. Teva and Dr. Reddy's Laboratories have
challenged this patent. Dr. Reddy's is seeking marketing approval for a different benazepril combination, using amlodipine maleate rather than amlodipine besylate. Because of this difference,
the Dr. Reddy's product, if brought to market, would not be automatically substitutable in the US for
Lotrel
. However, Teva is seeking marketing
approval for the same benazepril combination as
Lotrel
, and is thus seeking to bring a fully substitutable product to the US market. We have sued Teva
and Dr. Reddy's in the US for patent infringement. The Dr. Reddy's case is currently stayed.
Lamisil
. The active ingredient in
Lamisil
is covered
generically, but not mentioned specifically, in a patent family which has expired. Another patent family specifically discloses and covers the active ingredient and expires in the US in 2006, and in
2005-07 in Japan and major EU countries. The specific US patent had been challenged by Dr. Reddy's Laboratories in the US. Dr. Reddy's has since withdrawn its suit and
conceded that this patent is valid and enforceable.
Miacalcin/Miacalcic
. The specific Novartis formulation of this product is covered by patents which will expire
in the US in 2015. However, patents on the Novartis formulation have expired in a number of major countries and will expire in Italy in 2006. Apotex has applied to the FDA for the right to sell a
generic version of
Miacalcin
using the Novartis formulation. We have sued Apotex for infringement. Two other companies have applied to the FDA for the
right to sell a generic version of
Miacalcin
based on a different formulation. We have not sued these companies.
51
Exelon
. The active ingredient in
Exelon
is covered by a compound
patent (granted to Proterra, AG and licensed to us), which presently expires in 2007, and has been determined by the FDA to qualify for patent term extension until 2012. In addition, we hold an isomer
patent on
Exelon
which expires in 2014. Dr. Reddy's, Sun Pharmaceuticals and Watson Pharmaceuticals have filed applications to market a generic
version of
Exelon
in the US. Together with Proterra, we have sued all three parties for patent infringement.
Focalin
. The active ingredient in
Focalin
is covered by patents
(granted to Celgene Corporation and licensed to us) through 2015 in the US and 2018 in other markets. Teva has challenged these patents and has filed an application for a generic version of
Focalin
in
the US. Together with Celgene, we have sued Teva for patent infringement.
Trileptal
. Patent protection for
Trileptal's
active ingredient
has expired in major countries. In the US, New Chemical Entity data exclusivity under the Hatch-Waxman Act of 1984 is currently scheduled to expire in January 2005. However, we have applied for
a six-month extension of this exclusivity period under the Hatch-Waxman pediatric exclusivity provisions. At the same time, we have pending patent filings relating to our marketed
formulations of
Trileptal
, which, if granted, would expire in 2018 in major countries, including the US.
Starlix
. The active ingredient in
Starlix
is covered by
Ajinomoto patents. The basic US patent will expire in 2006, but a request to extend the term of the patent until 2009 has been filed. In late January 2005 a third party informed us that they
have filed an ANDA application to market a generic version of
Starlix
in the US. We are assessing that information and will respond
appropriately.
Foradil
. Patent protection for
Foradil's
active ingredient has
expired in major countries. In the US, Hatch-Waxman data exclusivity is currently scheduled to expire in February 2006.
Voltaren
.
Voltaren
is off-patent. As a result,
revenue from
Voltaren
has declined, and may decline significantly further over the next few years.
The
loss of patent protection can have a significant impact on our Pharmaceuticals Division. We work to offset these negative effects by developing and patenting inventions that result
in process and product enhancements 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
competitive advantage, or that we will be able to avoid substantial adverse effects from future patent expirations.
CONSUMER HEALTH
Our Consumer Health Division is a world leader in the research, development, manufacturing and marketing of a wide range of competitively differentiated products
that restore, maintain or improve the health and well being of our consumers. The business of our Consumer Health Division is conducted by a number of affiliated companies throughout the world.
Created in July 2002, the Consumer Health Division consists of the following Business Units: OTC self-medication, Animal Health, Medical Nutrition (including the Nutrition &
Santé franchise), Infant & Baby, and CIBA Vision. Sandoz (generics) was a Business Unit of the Consumer Health Division until December 31, 2004, after which time it became
a separate Division. Therefore, for reporting purposes, the 2004 results of the Sandoz business are included with the results of the Consumer Health Division.
As
of December 31, 2004, the affiliates of the Consumer Health Division employed 32,548 associates worldwide. In 2004, the affiliates of the Consumer Health Division (including
Sandoz) achieved consolidated net sales of $9.75 billion, which represented 35% of the Group's total net sales, and invested $0.6 billion in research and development.
Our
Consumer Health Division places considerable emphasis on the development of strong, consumer-oriented and trustworthy brands. We believe each Business Unit has a leading market
position in growth-oriented healthcare segments beyond our core pharmaceuticals business, and provides essential,
52
high
quality health-related products. In order to deliver accelerated sales growth, and to achieve leadership positions in the fields in which we compete, our Consumer Health Division seeks to give
voice to the consumer and to determine the consumer's needs and desires.
In
the dynamic world of consumer healthcare, aging populations are increasingly affluent and becoming more knowledgeable about their health and the benefits of
self-medication.
The success of each Business Unit depends upon its ability to anticipate and meet the needs of such consumers and of health professionals worldwide.
SANDOZ
In 2004, Sandoz was still a Business Unit of our Consumer Health Division. As of January 1, 2005, it became a separate Division organized as a Retail
Generics company which also operates two other businesses, Industrial Products and Biopharmaceuticals. The business of Sandoz is conducted by a number of affiliated companies and sells to
approximately 140 countries. Sandoz is a world leader in the development, manufacturing and marketing of pharmaceutical products and substances which are no longer protected by patents. As of
December 31, 2004, Sandoz employed 13,397 associates worldwide. In 2004, the affiliates of Sandoz achieved consolidated net sales of $3.0 billion, which represented 11% of the Group's
total net sales.
Because
Sandoz was part of the Consumer Health Division until December 31, 2004, for reporting purposes, the 2004 results of the Sandoz business are included with the results of
the Consumer Health Division.
In
August 2004, we acquired Sabex Holdings Ltd., a Canadian generic company with a leading position in injectable products. This acquisition provides Sandoz with strong
growth opportunities in injectable generics. This acquisition also gives Sandoz a new operational presence in Canada, the world's sixth largest generics market, and offers the opportunity to increase
sales in Canada of our existing portfolio of solid-dosage-form products.
In
June 2004, we acquired the Danish generics company Durascan A/S from AstraZeneca plc. This acquisition provides Sandoz with a leadership position in the Danish market. In
addition, Durascan's broad portfolio of generic products offers growth opportunities for Sandoz throughout the Nordic region.
In
2003, we united 14 of our generics company brands under the single global umbrella name Sandoz, to strengthen recognition and leverage share of voice in the highly competitive
marketplace for generic products. This initiative capitalizes on the strong reputation of the Sandoz name, which has a high level of awareness and trust among physicians, pharmacists and patients.
In
2002, we acquired Lek Pharmaceuticals d.d., Slovenia's largest pharmaceuticals company. This acquisition provided Sandoz with a leadership position in the sales of generic
pharmaceutical products in Central and Eastern Europe and in the former Soviet Union. For the time being, Lek products will
continue to be sold under that well-regarded name, as agreed between the management of Novartis and Lek.
In
2004, Sandoz competed in three business franchises: finished dosage forms (the Generics Pharmaceuticals Business), active pharmaceutical ingredients and intermediates (the Industrial
Products Business) and Biopharmaceuticals (the Biopharmaceuticals Business).
In
the Generics Pharmaceuticals Business (now Retail Generics), we develop and manufacture drugs that are no longer protected by patents into finished dosage forms, and we sell them to
wholesalers, pharmacies, hospitals and other healthcare outlets around the world. In the Industrial Products Business, we develop and manufacture off-patent active pharmaceutical
ingredients and intermediates and sell them worldwide to customers who use them to manufacture finished goods. In developing our new Biopharmaceuticals Business, we are seeking to leverage our
technology and expertise to develop, manufacture and market high-quality biopharmaceutical products, such as protein hormones and other
53
human
proteins, to be sold as substitutes for branded biopharmaceutical products after their patents have expired. Sandoz is also an important manufacturer of biopharmaceuticals for a number of third
parties.
In
2004, Sandoz net sales decreased by approximately 1% in local currencies. The business year was characterized by a highly competitive environment, especially in the US and
Germany, and the acquisitions of Durasacan A/S and Sabex Holdings Ltd.
Approximately
76% of our Sandoz net sales are derived from our Generics Pharmaceuticals Business, approximately 21% of net sales are derived from our Industrial Products Business and
approximately 3% are attributable to the Biopharmaceuticals Business.
In
2004, net sales of our Generics Pharmaceutical Business in the US decreased by 11%, mainly driven by fierce competition, the erosion of prices and volume losses. In particular, sales
of our amoxicillin/potassium clavulanate product (a generic version of the antibiotic Augmentin®), a key driver of sales in 2003, were hurt by increasing competition.
In
Germany, the second largest market for our Generics Pharmaceutical Business products, net sales were hurt by significant price competition. In addition, the introduction of new
regulations in 2004 caused a significant decline of the number of products that were reimbursable.
In
other key European markets, our Generics Pharmaceutical Business achieved double-digit net sales growth. These markets included France and Russia.
In
2004, our Industrial Products Business enlarged its activities in the field of modern sterile penicillins (Amoxicillin Sodium, sterile combinations with Clavulanic Acid), in generic
macrolides (Clarithromycin, Azithromicin), and advanced cephalosporin intermediates. The Industrial Products Business was negatively affected by low prices offered by Asian suppliers and a strong
Euro, the main currency in the production network. As a consequence, Sandoz announced the closure of one production line in Italy.
In
2004, our Biopharmaceuticals Business continued the development of follow-on biologics, leveraging more than 20 years of biotech experience. With its
biopharmaceuticals portfolio, Sandoz is at the forefront of emerging regulatory policies for follow-on biologics in Europe and the US. Sandoz is determined to contribute to the
availability of safe and effective follow-on biologics. In September 2004, we received the first marketing authorization for the recombinant human growth hormone
Omnitrope
in Australia.
However,
in September 2004, Sandoz also received notice from the FDA that the agency was unable to reach a decision on whether to approve an application for the marketing of
Omnitrope
. According to the FDA
letter issued to Sandoz, the agency did not identify any deficiencies in the application. However, the FDA stated that
it had been unable to reach a final decision on the application due to uncertainty regarding scientific and legal issues.
In
addition, in November 2003, the European Commission notified Sandoz about its intent not to proceed with the decision for a marketing authorization for
Omnitrope
under the regulatory pathway chosen
by Sandoz. In January 2004, Sandoz filed its complaint to the European Court of First Instance.
Recently Launched Products
The following is a summary of the most important products launched by Sandoz in 2004:
Levothyroxine
(a generic version of Synthroid® and Levoxyl®, a treatment for hyperthyroidism) was launched in the US in June 2004.
Ribavarin
(a generic version of Rebetol®, a treatment for chronic hepatitis C in combination with interferon) was launched in the US in April 2004.
54
Paroxetine
(a generic version of Paxil®, a treatment for major depressive disorder, obsessive compulsive disorder, panic disorder and social anxiety disorder)
was launched in the UK in May, in the US in June, in France in August, and in the Netherlands in September 2004.
Ramipril
(a generic version of Altace®, a treatment for hypertension) was launched in the Netherlands in January 2004 followed by launches in other
European countries in 2004.
Cefuroxime
Axetil (a generic version of Zinnat®, an antibiotic) was launched in Germany in January 2004.
Pravastatin
(a generic version of Pravachol®, a cholesterol lowering drug) was launched in Spain in April and in the UK, Germany, the Netherlands and Denmark in
August 2004.
Amlodipine
mesylate (a generic version of Norvasc®, a treatment for hypertension) was launched in the Nordic region (Denmark, Finland, Norway) and in the
Netherlands in March, and in Austria in July 2004.
Clarithromycin
(a generic version of Biaxin®, an antibiotic) was launched in Germany in November, Croatia in May, and in Finland and Denmark in July 2004.
Setraline
(a generic version of Zoloft®, a treatment for depression) was launched in Spain in August 2004.
Key Marketed Products
The following table describes the key marketed products for Sandoz. Not all products are available in all markets.
Generics Pharmaceuticals Business
Product
Originator Drug
Description
Amoxicillin/clavulanic acid
Augmentin®
anti-infective
Omeprazole
Prilosec®
ulcer and heartburn treatment
Citalopram
Celexa®
anti-depressant
Loratadine
Claritin®
antihistamine
Atenolol
Tenoric®
anti-hypertension
Penicillin
anti-infective
Lisinopril
Prinivil®
ACE inhibitor
Ranitidine
Zantac®
anti-ulcerant
Metformin
Glucophage®
anti-diabetic
Terazosin
Hytrin®
anti-hypertension and
benign prostatic hyperplasia
Enalapril
Lexxel®
ACE inhibitor
Metoprolol
Lopressor®
Anti-hypertension
55
Industrial Products Business
Active Ingredient
Description
Oral and sterile penicillins
Anti-infectives
Oral and sterile cefalosporins
Anti-infectives
Clavulanic acid and mixtures with clavulanic acid
ß-lactam inhibitors
Classical and semisynthetic erythromycins
Anti-infectives
Tiamuline
Anti-infectives
Lovastatin, Simvastatin, Pravastatin
Statins
Vancomycin
Anti-infectives
Lisinopril
ACE-inhibitor
Thyroxine
Hormones
Intermediates
Description
Various cephalosporin intermediates
Anti-infectives
Erythromycin base
Anti-infectives
Various crude compounds produced by fermentation
Cyclosporine, ascomysine, rapamycine,
mycophenolic acid, etc.
Principal Markets
The principal markets for Sandoz are the two largest generics markets in the world: the US and Europe. The following table sets forth the aggregate 2004 net sales
of Sandoz by region:
Sandoz
Net Sales 2004
($ millions)
(%)
United States
981
32
Americas (except the United States)
187
6
Europe
1,448
48
Rest of the World
429
14
Total
3,045
100
Many Sandoz products are used for chronic conditions that require patients to consume the product over long periods of time, from months to years.
Sales of our anti-infective products are subject to seasonal variation. Sales of the vast majority of our other products are not subject to material changes in seasonal demand.
Production
We manufacture our Sandoz products at 28 production facilities around the world. Among these, our principal production facilities are located in Kundl, Austria;
Menges and Ljubljana, Slovenia; Broomfield, US; Stryków, Poland; Kalwe, India; Palafolls, Spain; and Boucherville, Canada. 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. The manufacture of our products is heavily regulated,
making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a recall or a government-enforced shutdown of production
facilities, which in turn could lead to product shortages.
Active
pharmaceuticals ingredients are manufactured in our facilities or purchased from a number of our affiliates and 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 and competitive material
56
sourcing
can be assured. However, our ability to do so may at times be limited by regulatory requirements. We monitor market developments that could have an adverse effect on the supply of essential
active pharmaceutical ingredients. All active pharmaceutical ingredients that we purchase must comply with our quality standards. In order to sustain cost competitiveness and reliable quality, we
produce some of our active pharmaceutical ingredients, like penicillins, by vertical integration, using modern bio-technological methods. These methods include fermentation processes,
chemical syntheses and physical production methods, such as sterile processing. We are constantly working to develop other new manufacturing processes.
We
obtain agricultural raw materials such as flours and sugars from multiple suppliers based in the EU. We obtain chemicals and other raw materials from suppliers around the world. The
raw materials we purchase are generally subject to market price fluctuations. We seek to avoid these fluctuations, where possible, through the use of long-term supply contracts.
Marketing and Sales
In our Generics Pharmaceuticals Business, we have a broad portfolio of off-patent drugs that we sell to wholesalers, pharmacies, hospitals, and other
healthcare outlets. Depending on the structure of the local market, customers are serviced either by the field service team of the local Sandoz affiliate or by established partners or joint venture
associates.
Our
Industrial Products Business supplies our Generics Pharmaceutical Business and the pharmaceutical industry worldwide with a broad portfolio of active pharmaceutical ingredients and
intermediates.
In
response to rising healthcare costs, many governments and private medical care providers, such as health maintenance organizations (HMOs), have instituted reimbursement schemes that
favor the substitution of branded pharmaceuticals by generics. In the US, generic substitution statutes have been enacted by virtually all states and permit or require the dispensing pharmacist to
substitute a less expensive generic drug for the brand-name version of the drug. In Europe, the use of generic drugs is growing. But in some EU countries, reimbursement practices do not
create an efficient incentive for generic substitution. As a result, generic penetration rates in many European countries are still below those reached in the US.
Competition
Other major companies selling finished dosage form generic pharmaceutical products are Alpharma, Barr, Dr. Reddy's, Hexal, Ivax, Krka, Merck Generics,
Mylan, Pliva, Ranbaxy, Ratiopharm, Stada, Teva and Watson.
Other
companies selling active pharmaceutical ingredients & intermediates are Antibioticos, Dr. Reddy's, DSM-Anti-Infectives, Ranbaxy and Teva, as
well as certain East Asian manufacturers.
The
market for generic products is characterized by increasing demand for high-quality pharmaceuticals which can be produced at lower costs due to minimized initial research
and development investments. Increasing pressure on healthcare expenditures and numerous patent expirations have created a favorable 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.
In
addition, branded pharmaceutical companies have responded to the increased competition from generic products by licensing their branded products to generic companies (the
so-called "authorized generic"). By doing so, branded companies participate in the conversion of their branded product to generics. Consequently, generic companies that were not in a
position to compete on a specific product are allowed to enter the generic market using the innovator's product. The innovator's authorized generic is not, at this time subject to the Hatch-Waxman
rules regarding exclusivity. See "Regulation." As a
57
result,
the company that launches an authorized generic typically enters the market at the same time as the generic exclusivity holder. This tends to reduce the value of the exclusivity for the first
generic.
Research and Development
Before a generic drug may be marketed, intensive technical and clinical development work must be performed in order to demonstrate the bioequivalency of the
generic drug to the original branded drug. Nevertheless, research and development costs associated with generic drugs are much lower than those of their original counterparts. As a result,
off-patent drugs can be offered for sale
at prices much lower than those of patented drugs, which must recoup substantial basic research and development costs through higher prices over the life of the product's patent.
Currently,
the affiliates of Sandoz employ about 1000 Research and Development staff who explore alternative routes for the manufacture of known compounds and who aim to develop
innovative forms of generic drugs. These associates are based worldwide, including facilities in Kundl and Schaftenau, Austria; Menges and Ljubljana, Slovenia; Kolshet, India;
Boucherville, Canada; and Dayton, New Jersey.
In
2004, Sandoz invested $286 million in research and development, which amounted to 9.4% of net sales. We have long-term research commitments totaling $61 million in
the aggregate as of December 31, 2004. We intend to fund these expenditures from internally generated resources.
Regulation
The Hatch-Waxman Act in the US (and similar legislation in the EU and in other countries) eliminated the requirement that generic drug manufacturers repeat the
extensive clinical trials which are required for originator drugs, so long as the generic version could be shown to be of identical quality and purity, and to be biologically equivalent to the
original branded drug.
In
the US, the decision whether a generic drug is bioequivalent to the original branded drug is made by the FDA based on an Abbreviated New Drug Application (ANDA) filed by the generic
drug's manufacturer. The process typically takes approximately eighteen months from the filing of the ANDA until FDA approval. However, delays can occur if issues arise regarding the interpretation of
bioequivalence study data, labeling requirements for the generic product, or qualifying the supply of active ingredients. In addition, the Hatch-Waxman Act requires a generic manufacturer to certify
in certain situations that the generic drug does not infringe any current applicable patents on the drug held by the innovator, or to certify that such patents are invalid. This certification often
results in a patent infringement lawsuit being brought by the originator against the generic company. In the event of such a lawsuit, the Hatch-Waxman Act imposes an automatic 30-month
delay in the approval of the generic drug in order to allow the parties to resolve the intellectual property issues. For generic applicants who are first to file their ANDA containing a certification
claiming non-infringement or patent invalidity, the Hatch-Waxman Act provides those applicants with 180-days of marketing exclusivity to recoup the expense of challenging the
innovator patents. However, recent changes in the Hatch-Waxman Act may affect the availability of generic marketing exclusivity in the future. The new amendments now require generic applicants to
launch their products within certain time frames or risk losing the marketing exclusivity that they had gained through being a first to file applicant.
In
the EU, decisions on bioequivalence can be made by the EMEA under the Centralized Procedure, or by a single member state, after which the MRP may be followed. See
"PharmaceuticalsRegulationEuropean Union." Companies may submit Abridged Applications for approval of a generic pharmaceutical product, based upon its "essential similarity"
to a medicinal product authorized and marketed in the EU for not less than ten years.
Intellectual Property
Wherever possible our products are protected by our own patents. Among other things, patents may cover the products themselves, including the product's active
substance and its formulation. Patents may
58
also
cover the processes for manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the products. Patents may also cover particular uses of a
product, such as its use to treat a particular disease, or its dosage regimen. It is our policy to seek the broadest possible protection for significant product developments in all major markets.
We
take all reasonable steps to ensure that our generic products do not infringe valid intellectual property rights held by others. Nevertheless, originating companies commonly assert
patent and other intellectual property rights in an effort to delay or prevent the launch of competing generic products. As a result, we can become involved in extensive litigation regarding our
generic products. If we are unsuccessful in defending these suits, we could be subject to injunctions preventing us from selling our generic products, or to damages, which may be substantial.
In
addition, we face the risk that generic competitors may file patents to protect product developments which could block Sandoz's own development projects. If this were to occur we
could be forced to terminate a development program, which would require us to write-off any resources invested in that project, and would mean a loss of revenue.
We
are currently involved in litigation in a number of countries with affiliates of AstraZeneca regarding omeprazole, our generic version of AstraZeneca's Prilosec®. We
launched omeprazole in the US in August 2003. While some of the European cases have been decided in our favor, many of the cases, including the cases pending in the US, may continue for some
time. We believe that we will be successful in these lawsuits. However, should AstraZeneca succeed in any or all of the lawsuits, then AstraZeneca will likely seek to recover from us its lost profits
for sales it would have made had our product not been on the market.
OTC
Our Over-the-Counter (OTC) self medication Business Unit is a world leader in the research, development, manufacturing and marketing of
products for the treatment and prevention of common medical conditions and ailments, to enhance people's overall health and well being. The business of our OTC Business Unit is conducted by a number
of affiliated companies in more than 50 countries. As of December 31, 2004, the affiliates of our OTC Business Unit employed 4,047 associates worldwide. In 2004, the affiliates of our OTC
Business Unit achieved consolidated net sales of $2.0 billion, which represented 7% of the Group's total net sales.
59
Key Marketed Products
The OTC Business Unit's 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
Nicotinell/Habitrol
Smoking cessation
Voltaren Emulgel
Topical muscle pain
Sandoz
Minerals
Lamisil
AT
Cream
Athlete's foot treatment
NeoCitran/TheraFlu
Cold and flu treatment
Benefiber/NovaFibra
Fiber supplements
Triaminic
Pediatric cough & colds
Maalox
Antacid
Ex-Lax
Laxative
Gas-X
Anti gas
Otrivin
Nasal decongestant
Fenistil
Wound healing
In 2004, the OTC Business Unit had a number of key brand achievements:
Voltaren,
OTC's analgesic franchise continued its exceptional growth in all regions driven by new launches of patch and
systemic forms as well as a range of line extensions. In Germany,
Voltaren
became the number two OTC brand behind Bayer's Aspirin and worldwide the
brand surpassed the $200 million threshold for the first time.
Theraflu
and
Triaminic
were strengthened with the innovative launch of
Thin
Strips
, a novel delivery form for the company's cough and cold medicines. Our OTC Business Unit was the first company to launch products containing
an active pharmaceutical substance using this technology.
Nicotinell/Habitrol
, our smoking cessation franchise, had another year of solid growth, driven by effective marketing
campaigns behind the coated gums and government campaigns to reduce smoking in Western Europe.
Lamisil
AT
,
the one week antifungal treatment for athlete's foot, strongly increased net sales based in part on
its continued geographic expansion, including its launch in Japan via Sankyo and on its first full year of sales in certain Latin American countries.
Benefiber/NovaFibra
, the innovative tasteless, clear and grit free soluble fiber product, continued to gain share and
attention in the marketplace as its net sales grew strongly in both Italy and the US.
Principal Markets
In 2004, OTC realized the majority of its net sales in its two principal markets: the US and Europe, including Eastern Europe. In 2002, the OTC Business Unit and
Kao Corporation agreed to end their joint
60
venture
to market OTC products in Japan. However, OTC remains committed to expanding its presence in the Japanese market. The following table sets out our 2004 net sales by geographic region.
OTC
Net Sales 2004
($ millions)
(%)
United States
521
26
Americas (except the United States)
190
10
Europe
1,056
53
Rest of the World
208
11
Total
1,975
100
The OTC business is marked by a high degree of seasonality, with our cough, cold and allergy brands, which include
Triaminic
,
NeoCitran/Theraflu
and
Otrivin,
significantly
impacted by the timing and severity of the annual cold and flu season and allergy seasons.
Production
Our OTC Business Unit has a manufacturing and supply infrastructure comprised of the Business Unit's own plants, strategic third parties and other Novartis Group
plants (which are predominantly owned and operated by the Pharmaceuticals Division). The primary OTC plants are located in Lincoln, Nebraska; Nyon, Switzerland; and Humacao, Puerto Rico.
The
goal of our supply chain strategy is to produce and distribute high quality products efficiently. Our balance of internal, external and Group sites provides flexibility and
predictable sources of supply in the event of capacity constraints or other potential disruptions to supply. The manufacture of our products is heavily regulated, making supply never an absolute
certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a recall or a government-enforced shutdown of production facilities, which in turn could
lead to product shortages. 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.
Raw
materials for the manufacturing process are purchased from a number of our 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 possible. Where practical and beneficial, we have long-term contracts in place on key production inputs. We also proactively monitor markets and
developments that could have an adverse effect on the supply of essential materials.
Marketing and Sales
We aim to be a leading global participant in fulfilling the needs of patients and consumers for self-medication healthcare. Strong, leading brands,
science-based products and in-house marketing and sales organizations are key strengths in pursuing this objective. We distribute our products through various channels, such as pharmacies,
food, drug and mass retail outlets.
Competition
The fundamental trends driving the growth of our OTC business worldwide are increasing pressures on government health funding, changing consumer attitudes towards
personal well being, and the rise of a self-care mentality among consumers, and successful switches of prescription products to OTC status,
61
including
switches of products which are used for chronic conditions that require patients to consume the product over long periods of time, from months to years. Other companies selling
over-the-counter pharmaceutical products include major international corporations with substantial financial and other resources, such as Johnson & Johnson,
Sanofi-Aventis, Bayer, GlaxoSmithKline, Pfizer, Procter & Gamble and Wyeth.
Research and Development
In OTC, the focus of research and development activities is primarily on dermatology, analgesics, cough, cold, allergy, gastrointestinal, minerals, and
cardiovascular risk reduction (through smoking cessation programs). OTC also works closely with the Pharmaceuticals Division to evaluate appropriate products that can be switched from prescription to
OTC status. The development of line extensions to leverage brand equities is also of high importance. These extensions can take many forms including new flavors, new galenical forms and more
consumer-friendly packaging.
The
OTC business employs 263 associates in Research and Development with the primary facility located in Nyon, Switzerland. Local country Research and Development organizations largely
manage compliance, regulatory needs and medical affairs. In 2004, the OTC Business Unit spent $84 million in Research and Development, representing 4.3% of net sales.
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 US or registration in the EU and the rest of the world. See "PharmaceuticalsRegulation."
In
the US, in addition to the NDA process which is also used to approve prescription pharmaceutical products, an OTC product may be sold if the FDA has determined that the product's
active ingredient is generally recognized as safe and effective. FDA makes this determination through a regulatory process known as the OTC Review. In the OTC Review, the FDA establishes, in a series
of monographs, the conditions under which particular active ingredients may be recognized as safe and effective for OTC use. Pharmaceutical companies can market products containing these active
ingredients without the necessity of filing an NDA and going through its formal approval process, so long as the company complies with the terms of the published monograph.
Most
countries also have a regulatory process for switching a particular pharmaceutical product from prescription to OTC status. These processes vary from country to country.
Intellectual Property
Our OTC business is brand-oriented and, therefore, we consider our trademarks to be of utmost value. Enforceable trademarks protect most of our brands in the
majority of the markets where these 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.
Wherever
possible our products are protected by patents. Among other things, patents may cover the products themselves, including the product's active substance and its formulation.
Patents may also cover the processes for manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the products. Patents may also cover
particular uses of a product, such as its use to treat a particular disease, or its dosage regimen. It is our policy to seek the broadest possible protection for significant product developments in
all major markets.
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ANIMAL HEALTH
Our Animal Health Business Unit is a world leader in the research, development, manufacturing and marketing of products and services to save, prolong and improve
animal lives. The business of our Animal Health Business Unit is conducted by a number of affiliated companies in 39 countries. As of
December 31, 2004, the affiliates of Animal Health employed 2,248 associates worldwide. In 2004, the affiliates of Animal Health achieved consolidated net sales of $756 million, which
represented 3% of the Group's total net sales.
In
2003, we announced a new organizational structure for our Animal Health Business Unit. We have divided our Animal Health business geographically into four RegionsNorth
America, Latin America, Europe and Asia Pacificand have moved operational responsibilities from our head office to offices in each of these regions, in order to be closer to our markets.
Animal
Health researches, develops, manufactures and markets a wide range of products for both companion and farm animals including farmed fish. In 2004, the companion animal segment
accounted for 57% of our total Animal Health net sales and the farm animal business, including Vaccines and Aqua Culture Products, accounted for 43%. Our Animal Health products include parasiticides,
antimicrobials, vaccines and veterinary pharmaceuticals. Our Animal Health business has a dedicated research and development team, which benefits from synergies with other Novartis businesses, most
notably, research in the Pharmaceuticals Division.
We
acquired Grand Laboratories Inc. and ImmTech Biologics Inc. in the US in January 2002 for a combined minimum purchase price of $99 million. The final price
may increase depending on whether certain future net sales and other targets are met. These businesses specialize in the development, manufacture and marketing of vaccine products for cattle and pigs.
Through these acquisitions we increased the share of vaccines to 8% of the Business Unit's total sales in 2003, strengthened our position in the vaccines market and established our presence in the US
farm animal segment.
2004
was characterized by an expansion of our product range, with new products contributing 26% to total annual net sales. This range rejuvenation included new product introductions,
geographical extensions, new indications for existing products, and the phase out of non-strategic brands. In parallel, our investments in Marketing & Sales and Research &
Development were increased over 2003 to exploit the existing portfolio.