NVS

Business Context and Reporting Period

This Form 6-K, dated February 14, 2007, reports the publication of Novartis AG's Annual Report for the fiscal year ended December 31, 2006. Novartis is a global leader in pharmaceuticals, operating through four primary divisions: Pharmaceuticals, Vaccines and Diagnostics, Sandoz (generics), and Consumer Health. The reporting period reflects a year of significant strategic expansion, including the full acquisition of Chiron Corporation in April 2006, which established the new Vaccines and Diagnostics division, and the acquisition of NeuTec Pharma plc.

Key Financial Metrics (2006 vs. 2005)

Material Changes and Divisional Performance

• Pharmaceuticals: Net sales rose 11% to $22.6 billion, driven by double-digit growth in Cardiovascular (Diovan, Lotrel) and Oncology (Gleevec/Glivec, Femara) franchises. Operating income increased 11% to $6.7 billion.
• Vaccines and Diagnostics: A new division formed via the Chiron acquisition. Reported net sales of $956 million for the post-acquisition period (April–Dec 2006), representing a 42% increase over the comparable 2005 period. The division reported an operating loss of $26 million due to significant one-time acquisition and restructuring costs ($333 million).
• Sandoz: Net sales surged 27% to $6.0 billion, fueled by the integration of Hexal and Eon Labs and strong growth in retail generics. Operating income more than doubled to $736 million.
• Consumer Health: Continuing operations saw net sales rise 8% to $6.5 billion, led by OTC and Animal Health. The Medical Nutrition business unit was classified as a discontinuing operation following the announcement of its divestiture to Nestlé.
• Acquisition Impact: Total acquisition-related charges reduced operating income by $642 million. Excluding these charges, operating income would have increased by 28%.

Guidance, Outlook, and Risks

• Dividend: The Board proposed a dividend of CHF 1.35 per share for 2006, a 17% increase, marking the tenth consecutive year of dividend growth.
• Pipeline and Launches: Management anticipates regulatory decisions in 2007 for key products including Tekturna/Rasilez (hypertension), Galvus (diabetes), and Lucentis (blindness). Exforge received US approval in late 2006.
• Divestitures: The sale of the remaining Medical Nutrition business to Nestlé for $2.5 billion is expected to close in the second half of 2007.
• Risks:
  • Patent Expirations: Key products like Lamisil and Trileptal face patent expirations in major markets in 2007, potentially leading to generic competition.
  • Regulatory Delays: Regulatory reviews for Galvus and Tekturna were extended by the FDA to address additional data requests.
  • Legal and Environmental: Ongoing litigation includes product liability claims (e.g., Zometa/Aredia, HRT) and environmental remediation costs. Management believes provisions are adequate but notes inherent unpredictability.
  • Pandemic Preparedness: A major focus for 2006 was preparing for a potential influenza pandemic to ensure business continuity.

Investor Verification Checklist

• Verify the final closing date and regulatory approval status of the $2.5 billion Medical Nutrition divestiture to Nestlé.
• Monitor the FDA approval timeline for Galvus (vildagliptin) and Tekturna (aliskiren) following the extended review periods.
• Assess the impact of the 2007 patent expirations for Lamisil and Trileptal on the Pharmaceuticals division's sales trajectory.
• Review the integration progress and cost realization of the Chiron acquisition, specifically regarding the new cell culture influenza vaccine manufacturing capabilities.
• Confirm the status of ongoing product liability litigation, particularly regarding Zometa/Aredia and the HRT cases.