NVS

Novartis AG Form 6-K Summary: Nine Months Ended September 30, 2002

Business Context and Reporting Period

This Form 6-K, dated October 17, 2002, reports the unaudited consolidated financial results for Novartis AG for the nine-month period ended September 30, 2002. Novartis is a global leader in pharmaceuticals and consumer health, headquartered in Basel, Switzerland. The report highlights a strategic shift to report financial results in US dollars starting in the first quarter of 2003 to better reflect performance and mitigate currency volatility, given that 43% of sales are generated in the US.

Key Financial Metrics

Note: USD figures are convenience translations at a rate of 1.58 CHF/USD.

Material Changes vs. Prior Period

• Sales Growth: Group sales rose 11% in local currencies, driven by volume increases in Pharmaceuticals (+13% local currency) and Generics (+24% local currency). This growth offset a 7 percentage point negative currency impact due to the strong Swiss franc.
• Profitability: Operating income grew 11% in CHF, supported by productivity gains and a favorable product mix. Net income increased 4% despite lower net financial income compared to the prior year's record levels.
• Divisional Performance:
  • Pharmaceuticals: Strong growth in cardiovascular (Diovan, Lotrel) and oncology (Gleevec, Zometa) franchises.
  • Generics: Operating income soared 40% due to top-line growth and margin expansion.
  • Consumer Health: Mixed results; Infant & Baby and CIBA Vision grew in local currencies, while OTC sales remained flat in local currencies.
• Balance Sheet: Equity decreased by CHF 4.0 billion due to share buybacks (CHF 5.2 billion), dividends, and translation losses, partially offset by net income. The debt-to-equity ratio improved.

Guidance, Outlook, and Risks

• Full-Year Outlook: Management expects good sales growth for the full year, driven by Pharmaceuticals. The Group anticipates meeting its target of approximately 10% sales growth in local currencies for the Pharmaceuticals division.
• Currency Impact: The sustained strength of the Swiss franc against the US dollar and Japanese yen is expected to significantly impact full-year results, though transactional exposures are fully hedged.
• Financial Income: Net financial income is expected to be slightly lower than the previous year's record level.
• Acquisitions and Divestitures:
  • Acquisition: A friendly takeover bid for Lek (Slovenia) was announced with an offer expiring October 28, 2002.
  • Divestiture: The sale of the Food & Beverage business (including Ovaltine) to Associated British Foods for approximately CHF 400 million is expected to close before year-end.
• Risks: Forward-looking statements are subject to risks including clinical trial uncertainties, regulatory delays, intellectual property protection, and government pricing pressures.

Key Facts for Investor Verification

• Currency Translation: Verify the impact of the strong Swiss franc on reported CHF figures versus local currency growth, noting the planned switch to USD reporting in 2003.
• Share Repurchases: Confirm the status of the third share buy-back program (up to CHF 4 billion), with CHF 1.4 billion utilized as of September 30, 2002.
• Product Pipeline: Monitor the commercial performance of new launches (Elidel, Zelnorm, Zometa) and the reimbursement status of key oncology drugs (Gleevec).
• Accounting Restatements: Note that 2001 sales were restated to reflect a change in the classification of sales incentives, reducing prior year sales by CHF 300 million.
• US GAAP Reconciliation: Review the significant differences between IAS and US GAAP net income (CHF 5.6 billion vs. CHF 4.6 billion) due to purchase accounting and pension provisions.