NVS

Business Context and Reporting Period

This Form 6-K, dated February 7, 2003, reports the Annual Report 2002 for Novartis AG, a Swiss-based global pharmaceutical and consumer health company. The reporting period covers the fiscal year ended December 31, 2002. The company operates through two primary divisions: Pharmaceuticals and Consumer Health. Notably, 2002 was the final year of financial reporting in Swiss francs (CHF); the company announced a transition to US dollar reporting effective January 1, 2003, to better align with its revenue mix and competitors.

Key Financial Metrics

Research & Development: Total R&D expenditure was CHF 4,339 million (13.4% of sales), with the Pharmaceuticals division spending CHF 3,580 million (17% of its sales).

Material Changes vs. Prior Period

• Revenue Growth: Group sales grew 11% in local currencies, driven by volume growth of 10%. The Pharmaceuticals division grew 13% in local currencies, outperforming the industry average, while the Consumer Health division grew 7% in local currencies.
• Profitability: Operating income grew faster than sales (8% vs. 2%) due to productivity gains and a favorable product mix, which reduced the cost of goods sold by 3%.
• Strategic Acquisitions: Novartis acquired Lek d.d., a Slovenian generics company, for CHF 1.3 billion to strengthen its position in Central and Eastern Europe. It also increased its stake in Roche Holding AG to 32.7% of voting shares.
• Divestitures: The Food & Beverage business (including Ovaltine) was sold to Associated British Foods for CHF 402 million, resulting in a divestment gain of CHF 205 million.
• Impairments: The company recorded impairment charges of CHF 540 million, primarily related to goodwill on biotechnology investments (Genetic Therapy, Systemix, Imutran) and the pitavastatin marketing rights, reflecting a shift in R&D strategy.

Guidance, Outlook, and Risks

Management Commentary: CEO Daniel Vasella highlighted record results and consistent growth for the sixth consecutive year. The company is refocusing on core pharmaceuticals and generics, divesting non-core food businesses, and investing heavily in innovation. A new research headquarters, the Novartis Institutes for Biomedical Research (NIBRI), is being established in Cambridge, Massachusetts, with an initial investment of USD 250 million.

Outlook: The company expects to maintain capital expenditure levels at 2002 levels in 2003, funded by internal resources. The shift to US dollar reporting is intended to facilitate fairer comparisons with US-based competitors.

Risks and Contingencies:

• Regulatory and Pricing Pressure: Continued pressure from governments and insurers to reduce prices and increase generic substitution.
• Intellectual Property: Risks related to the undermining of patent rights in developing countries and the expiration of patents on key products.
• Legal and Environmental: Ongoing litigation regarding products such as Ritalin, Parlodel, and PPA. The company maintains environmental provisions of CHF 229 million for remediation costs.
• Market Volatility: Exposure to foreign exchange fluctuations, particularly the strengthening Swiss franc, which negatively impacted reported sales growth by 9%.

Key Facts for Investor Verification

• Currency Transition: Verify the impact of switching from CHF to USD reporting on future financial comparability and exchange rate exposure.
• R&D Strategy Shift: Confirm the long-term impact of the CHF 540 million impairment charges on biotech assets and the ROI of the new Cambridge research facility.
• Roche Investment: Monitor the equity method accounting adjustments related to the increased 32.7% stake in Roche Holding AG.
• Generics Integration: Assess the integration progress and synergies from the acquisition of Lek d.d. in the Eastern European market.
• Product Pipeline: Track the commercial performance of key new launches (Gleevec, Zometa, Elidel, Zelnorm) and the impact of patent expirations on mature products like Aredia.