# EDGAR Filing Document

**Accession Number:** 0001114448
**File Stem:** 0001370368-23-000009
**Filing Date:** 2023-2
**Character Count:** 492747
**Document Hash:** de2dea9d02f8db16b10875de46880fe3
**Contains OCR:** False
**Source Format:** 

## Filing Content

## Filing Summary
**0001370368-23-000009.hdr.sgml**: 20230201

**ACCESSION NUMBER**: 0001370368-23-000009

**CONFORMED SUBMISSION TYPE**: 6-K

**PUBLIC DOCUMENT COUNT**: 3

**CONFORMED PERIOD OF REPORT**: 20221231

**FILED AS OF DATE**: 20230201

**DATE AS OF CHANGE**: 20230201

**FILER**: 

**COMPANY DATA:**
- **COMPANY CONFORMED NAME:** NOVARTIS AG
- **CENTRAL INDEX KEY:** 0001114448
- **STANDARD INDUSTRIAL CLASSIFICATION:** PHARMACEUTICAL PREPARATIONS [2834]
- **IRS NUMBER:** 000000000
- **STATE OF INCORPORATION:** V8
- **FISCAL YEAR END:** 1231

**FILING VALUES:**
- **FORM TYPE:** 6-K
- **SEC ACT:** 1934 Act
- **SEC FILE NUMBER:** 001-15024
- **FILM NUMBER:** 23574769

**BUSINESS ADDRESS:**
- **STREET 1:** LICHTSTRASSE 35
- **CITY:** BASEL
- **STATE:** V8
- **ZIP:** CH 4056
- **BUSINESS PHONE:** 01141613241111

**MAIL ADDRESS:**
- **STREET 1:** LICHTSTRASSE 35
- **CITY:** BASEL
- **STATE:** V8
- **ZIP:** CH 4056

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**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 6-K**

**REPORT OF FOREIGN PRIVATE ISSUER**

**PURSUANT TO RULE 13a-16 or 15d-16 OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 **Report on Form 6-K dated February 1, 2023**

**(Commission File No. 1-15024)**

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**Novartis AG**

(Name of Registrant)

**Lichtstrasse 35**

**4056 Basel**

**Switzerland**

(Address of Principal Executive Offices)

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Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

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| | |
|:---|:---|
| **Form 20-F: ☒** | Form 40-F: ☐ |

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Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

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| | |
|:---|:---|
| Yes: ☐ | **No: ☒** |

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Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

---

| | |
|:---|:---|
| Yes: ☐ | **No: ☒** |

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Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

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| | |
|:---|:---|
| Yes: ☐ | **No: ☒** |

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**Exhibits:** <br>

[99.1 Annual Report 2022](a230201-99_1.pdf)

[99.2 Novartis in Society - Integrated Report 2022](a230201-99_2.pdf) <br>

**** 

<br> **SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

---

| | | | |
|:---|:---|:---|:---|
|  | **Novartis AG** | **Novartis AG** | **Novartis AG** |
| Date: February 1, 2023 | By: | /s/ PAUL PENEPENT | /s/ PAUL PENEPENT |
|  | Name: | Name: | Paul Penepent |
|  | Title: | Title: | Head Group Financial Reporting and Accounting |

---

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### Attached PDF Documents

**Attachment 1:** `a230201-99_1.pdf`

# Annual Report 2022

NOVARTIS

![img-0.jpeg](img-0.jpeg)

# Annual Report 2022

# Chair's letter

Medical progress and innovation are evolving with impressive speed even in a world of increasing volatility and uncertainty. In 2022, we initiated a major transformation of our organization to further improve our innovation capabilities and align with our growth strategy as a pure-play medicines company.

We expect these changes to simplify our business, enhance accountabilities and strengthen our commercial activities by enabling us to better focus on our in-market products and high-value pipeline assets. Overall, our efforts are set to support our long-term sales and profit growth and help us create sustainable shareholder value.

As part of this transformation, which includes our intention to spin off our Sandoz generics and biosimilars Division, we merged our Oncology and Pharmaceuticals commercial organizations and created a new Operations organization that combines our manufacturing and services activities. Besides substantial cost savings, we expect these steps to increase our operational agility and strengthen our business in key markets such as the United States and China.

The organizational changes, which we expect to finalize in 2023, complete the portfolio shift we started in 2014. Over this time, we have divested several non-core businesses and spun off our eye-care division Alcon. With a view to boosting our innovation power, we have also made substantial investments in cutting-edge technology platforms, including gene and cell therapy, radioligand therapy and RNA technology.

Novartis delivered on its sales and operating profit targets in 2022 despite the challenges of a volatile macroeconomic environment and while executing on our ongoing transformation, which entailed job reductions due to structural changes. This performance was supported by cost discipline and continued operational streamlining, as well as the strong uptake of recently launched medicines, such as multiple sclerosis treatment *Kesimpta*, and continued strong demand for our cardiovascular medicine *Entresto* and psoriasis treatment *Cosentyx*.

Last year also saw new leadership at the Novartis Institutes for BioMedical Research and our Global Drug Development organization, the research and development (R&D) engines of Novartis, and a renewed focus on improving governance and speeding up the transition between early drug discovery and clinical development. These measures should help further strengthen our portfolio of medicines, which we have consistently broadened in recent years with launches including cancer treatments *Pluvicto* and *Scemblix*.

![img-1.jpeg](img-1.jpeg)

We have also further intensified our efforts to integrate our environmental, social and governance (ESG) activities into our daily business, which we believe is vital for the success of Novartis. Among a variety of steps aimed at reaching as many patients as possible, we renewed our commitment to continue our R&D efforts in neglected tropical diseases and to work further toward the elimination of malaria. In addition, we are partnering with the American Society of Hematology to deepen our efforts to fight against sickle cell disease in Africa.

The Board of Directors also remained vigilant in its governance oversight efforts by putting added emphasis on values such as integrity as Novartis pivots towards becoming a high-performance, pure-play medicines company. Likewise, the Executive Committee and the Board of Directors are keeping up the intensive dialogue with stakeholder groups and working towards achieving our vision to be the most valued and trusted medicines companies in the world.

I thank you for the confidence you have placed in our company and am pleased to be able to propose a dividend increase of 3.2% to CHF 3.20 at the next Annual General Meeting.

Sincerely,

A handwritten signature in black ink, written in a cursive style. It appears to read 'J. Reinhardt'.

**Joerg Reinhardt**
Chair of the Board of Directors

1

# CEO's letter

2022 was a year of transformation for Novartis. After more than USD 100 billion in acquisitions and divestures over the last several years, our structural transformation from a diversified healthcare conglomerate into a focused, innovative medicines company will be largely complete after the planned spin-off of Sandoz in 2023.

We also begin 2023 with a simplified organizational structure that will spur innovation and give us a stronger foundation for growth in a rapidly changing global business environment.

While Novartis has pursued bold portfolio change, core elements of our company remain the same. Our vision is to become the most trusted and valued medicines company in the world - valued not only for our business performance, but also for the difference our innovation makes for patients and society.

The world is counting on us to succeed. Fewer than 10% of diseases known to affect humans are currently treatable, and globally, people live an average of 10 years with a disease or disability. Yet new treatments broadly still reach only a fraction of eligible patients, and manageable conditions like heart disease cause millions of avoidable deaths each year.

Our performance in 2022 showed that we are making progress in addressing society's greatest disease burdens. Our focus on cardiovascular disease, for example, gives countries and healthcare systems solutions to address the world's leading cause of death and disability. Entresto, our medicine for heart failure and hypertension, is estimated to be treating around 10 million patients worldwide, while our cholesterol-lowering siRNA treatment *Leqvio* is now approved in 70 countries.

We saw robust growth momentum across our in-market medicines. This includes stronger-than-expected uptake in the US for *Pluvicto*, our novel radioligand therapy for advanced prostate cancer, highlighting our ability to turn the promise of next-generation medicines into a reality for patients.

Despite challenging macroeconomic conditions and an unstable geopolitical environment, we delivered a solid financial performance that underscores the progress we are making, with 4% growth in net sales in constant currencies (cc) and 8% growth (cc) in core operating income compared with the previous year. Looking ahead, we aim to generate sales growth of 4% CAGR over the next five years, and grow above peer median beyond 2027.

Our investments in R&D are key to achieving these ambitions. In 2022, we saw a positive Phase III readout for iptacopan, which was discovered at NIBR, in a rare and deadly blood disorder. We saw an important positive Phase III result for *Pluvicto* in earlier lines of prostate cancer. And

![img-2.jpeg](img-2.jpeg)

we also reported positive Phase III results for *Cosentyx* in hidradenitis suppurativa, offering the potential to expand one of our most successful medicines and bring a new treatment option to patients with this painful skin disease.

As we continue innovating for patients, millions around the world are still without proper access to healthcare. Translating the latest science into lasting progress requires us to work with healthcare systems and other stakeholders to advance access for underserved patients in low- and middle-income countries, while also tackling access barriers in some of the wealthiest countries in the world.

In the US, for example, we expanded our 10-year Beacon of Hope initiative, which seeks to address racial disparities in healthcare, including by increasing diversity among clinical trial participants and investigators. We also pledged to invest USD 250 million in R&D for the treatment of malaria and neglected tropical diseases, building on our decades-long commitment to global health priorities. We continue to make progress in other aspects of our ESG agenda, including reducing greenhouse gas emissions from our own operations by nearly half since 2016.

As we look to the future as a focused medicines company, our dedication to innovation and excellence will drive us forward. We have set clear growth ambitions and we are confident we will meet them. Through reshaping Novartis, we are set to reimagine medicine for decades to come.

Sincerely,

A handwritten signature in black ink, appearing to read 'V.N.' followed by a long horizontal line.

**Vas Narasimhan**  
Chief Executive Officer

II

Table of contents

# Table of contents

| Introduction and use of certain terms | 4 |
| --- | --- |
| Forward-looking statements | 5 |
| PART I | 7 |
| Item 1. Identity of Directors, Senior Management and Advisers | 7 |
| Item 2. Offer Statistics and Expected Timetable | 8 |
| Item 3. Key Information | 9 |
| 3.A [Reserved] | 9 |
| 3.B Capitalization and indebtedness | 9 |
| 3.C Reasons for the offer and use of proceeds | 9 |
| 3.D Risk factors | 9 |
| Item 4. Information on the Company | 21 |
| 4.A History and development of Novartis | 21 |
| 4.B Business overview* | 21 |
| Innovative Medicines | 22 |
| Sandoz | 40 |
| 4.C Organizational structure | 46 |
| 4.D Property, plants and equipment | 46 |
| Item 4A. Unresolved Staff Comments | 48 |
| Item 5. Operating and Financial Review and Prospects* | 49 |
| 5.A Operating results | 49 |
| 5.B Liquidity and capital resources | 74 |
| 5.C Research and development, patents and licenses | 85 |
| 5.D Trend information | 85 |
| 5.E Critical accounting estimates | 85 |
| Item 6. Directors, Senior Management and Employees | 89 |
| 6.A Directors and senior management | 89 |
| 6.B Compensation | 90 |
| 6.C Board practices | 123 |
| 6.D Employees | 158 |
| 6.E Share ownership | 158 |
| Item 7. Major Shareholders and Related Party Transactions | 159 |
| 7.A Major shareholders | 159 |
| 7.B Related party transactions | 160 |
| 7.C Interests of experts and counsel | 160 |
| Item 8. Financial Information | 161 |
| 8.A Consolidated statements and other financial information | 161 |
| 8.B Significant changes | 162 |
| Item 9. The Offer and Listing | 163 |
| 9.A Offer and listing details | 163 |
| 9.B Plan of distribution | 163 |
| 9.C Markets | 163 |
| 9.D Selling shareholders | 163 |
| 9.E Dilution | 163 |
| 9.F Expenses of the issue | 163 |
| Item 10. Additional Information | 164 |
| 10.A Share capital | 164 |
| 10.B Memorandum and articles of association | 164 |
| 10.C Material contracts | 167 |
| 10.D Exchange controls | 168 |
| 10.E Taxation | 168 |
| 10.F Dividends and paying agents | 171 |
| 10.G Statement by experts | 171 |

* "Item 5. Operating and Financial Review and Prospects," together with the sections on compounds in development and selected development projects of our divisions (see "Item 4. Information on the Company-Item 4.B Business overview"), constitute the Operating and Financial Review ("Lagebericht"), as defined by the Swiss Code of Obligations.

2

Table of contents

| 10.H Documents on display | 172 |
| --- | --- |
| 10.I Subsidiary information | 172 |
| Item 11. Quantitative and Qualitative Disclosures About Market Risk | 173 |
| Item 12. Description of Securities Other Than Equity Securities | 174 |
| 12.A Debt securities | 174 |
| 12.B Warrants and rights | 174 |
| 12.C Other securities | 174 |
| 12.D American Depositary Shares | 174 |
| PART II | 176 |
| Item 13. Defaults, Dividend Arrearages and Delinquencies | 176 |
| Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds | 177 |
| Item 15. Controls and Procedures | 178 |
| Item 16A. Audit Committee Financial Expert | 179 |
| Item 16B. Code of Ethics | 180 |
| Item 16C. Principal Accountant Fees and Services | 181 |
| Item 16D. Exemptions from the Listing Standards for Audit Committees | 182 |
| Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers | 183 |
| Item 16F. Change in Registrant's Certifying Accountant | 184 |
| Item 16G. Corporate Governance | 185 |
| Item 16H. Mine Safety Disclosure | 186 |
| Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 187 |
| PART III | 188 |
| Item 17. Financial Statements | 188 |
| Item 18. Financial Statements | 189 |
| Item 19. Exhibits | 190 |

3

Introduction and use of certain terms

# Introduction and use of certain terms

Novartis AG and its consolidated affiliates publish consolidated financial statements expressed in US dollars. Our consolidated financial statements responsive to Item 18 of this Annual Report on Form 20-F (Annual Report) are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). “Item 5. Operating and Financial Review and Prospects,” together with the sections on products in development and key development projects of our businesses (see “Item 4. Information on the Company-Item 4.B. Business overview”), constitute the Operating and Financial Review (“Lagebericht”), as defined by the Swiss Code of Obligations.

Unless the context requires otherwise, the words “we,” “our,” “us,” “Novartis,” “Group,” “Company,” and similar words or phrases in this Annual Report refer to Novartis AG and its consolidated affiliates. However, each Group company is legally separate from all other Group companies and manages its business independently through its respective board of directors or similar supervisory body or other top local management body, if applicable. Each executive identified in this Annual Report reports directly to other executives of the Group company that employs the executive, or to that Group company’s board of directors.

In this Annual Report, references to “US dollars,” “USD” or “$” are to the lawful currency of the United States of America, references to “CHF” are to Swiss francs, and references to “euro” or “EUR” are to the lawful currency of 27 member states participating in the European Union; references to the “United States” or to “US” are to the United States of America, references to the “European Union” or to “EU” are to the European Union and its 27 member states, references to “Latin America” are to Central and South America, including the Caribbean, and references to “Australasia” are to Australia, New Zealand, Melanesia, Micronesia and Polynesia, unless the context otherwise requires; references to the “EC” are to the European Commission; references to “associates” are to employees of our affiliates; references to the “SEC” are to the US Securities and Exchange Commission; references to the “FDA” are to the US Food and Drug Administration; references to the “EMA” are to the European Medicines Agency, an agency of the EU, and references to the “CHMP” are to the Committee for Medicinal Products for Human Use of the EMA; references to “ADR” or “ADRs” are to Novartis American Depositary Receipts, and references to “ADS” or “ADSs” are to Novartis American Depositary Shares; references to the “NYSE” are to the New York Stock Exchange, and references to “SIX” are to the SIX Swiss Exchange; references to “ECN” are to the Executive Committee of Novartis; references to “GSK” are to GlaxoSmithKline plc; references to “Roche” are to Roche Holding AG; references to “Gyroscope Therapeutics” are to Gyroscope Therapeutics Holdings plc; references to “AAA” are to Advanced Accelerator Applications S.A., references to “Novartis Gene Therapies” are to Novartis Gene Therapies, Inc., and references to “Endocyte” are to Endocyte, Inc.

All product names appearing in *italics* are trademarks owned by or licensed to Group companies. Product names identified by a “*” or a “TM” are trademarks that are not owned by or licensed to Group companies and are the property of their respective owners.

4

Forward-looking statements

# Forward-looking statements

This Annual Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the United States Private Securities Litigation Reform Act of 1995, as amended. Other written materials filed with or furnished to the SEC by Novartis, as well as other written and oral statements made to the public, may also contain forward-looking statements. Forward-looking statements can be identified by words such as “potential,” “expected,” “will,” “planned,” “pipeline,” “outlook,” “may,” “could,” “would,” “anticipate,” “seek,” or similar terms, or by express or implied discussions regarding potential new products, potential new indications for existing products, or regarding potential future revenues from any such products; or regarding the potential outcome, or financial or other impact on Novartis, of any of the transactions described; or regarding the potential impact of share buybacks; or regarding potential future sales or earnings of the Group or any of its divisions or potential shareholder returns; or regarding potential future credit ratings of the Group; or by discussions of strategy, plans, expectations or intentions. Such forward-looking statements are based on the current beliefs and expectations of management regarding future events, and are subject to significant known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those set forth in the forward-looking statements. You should not place undue reliance on these statements.

In particular, our expectations could be affected by, among other things:

- • Uncertainties regarding the success of key products and commercial priorities;
- • Uncertainties in the research and development of new healthcare products, including clinical trial results and additional analysis of existing clinical data;
- • Global trends toward healthcare cost-containment, including ongoing government, payer and general public pricing and reimbursement pressures and requirements for increased pricing transparency;
- • The potential that the strategic benefits, operational efficiencies or opportunities expected from our external business opportunities, our intention to separate our Sandoz Division into a new publicly traded standalone company by way of a 100% spin-off, or the implementation of our new organizational structure and operating model, may not be realized or may take longer to realize than expected;
- • Our ability to obtain or maintain proprietary intellectual property protection, including the ultimate extent of the impact on Novartis of the loss of patent protection and exclusivity on key products that commenced in prior years and is expected to continue this year;
- • Our performance on environmental, social and governance matters;
- • Uncertainties in the development or adoption of potentially transformational digital technologies and business models;
- • Uncertainties regarding potential significant breaches of information security or disruptions of our information technology systems;
- • Uncertainties surrounding the implementation of our new Enterprise Resource Planning system and other IT projects;
- • Our reliance on outsourcing key business functions to third parties;
- • Uncertainties regarding actual or potential legal proceedings, including, among others, litigation and other legal disputes with respect to our recent transactions, product liability litigation, litigation and investigations regarding sales and marketing practices, intellectual property disputes and government investigations generally;
- • Safety, quality, data integrity or manufacturing issues;
- • Our ability to attract, integrate and retain key personnel and qualified individuals;
- • Regulatory actions or delays or government regulation generally, including potential regulatory actions or delays with respect to the development of the products described in this Annual Report;

5

Forward-looking statements

- Our ability to comply with data privacy laws and regulations, and uncertainties regarding potential significant breaches of data privacy;
- Our ability to adapt to major geopolitical and macroeconomic developments, including the effects of and efforts to mitigate pandemic diseases such as COVID-19, and the impact of the war in Ukraine;
- Uncertainties involved in predicting shareholder returns;
- Uncertainties regarding the effects of recent and anticipated future changes in tax laws and their application to us;
- Uncertainties regarding future global exchange rates; and
- Uncertainties regarding future demand for our products.

Some of these factors are discussed in more detail in this Annual Report, including under “Item 3. Key Information-Item 3.D. Risk factors,” “Item 4. Information on the Company,” and “Item 5. Operating and Financial Review and Prospects.” Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Annual Report as anticipated, believed, estimated or expected. We provide the information in this Annual Report as of the date of its filing. We do not intend, and do not assume any obligation, to update any information or forward-looking statements set out in this Annual Report as a result of new information, future events or otherwise.

6

Item 1. Identity of Directors, Senior Management and Advisers

## PART I

# **Item 1. Identity of Directors, Senior Management and Advisers**

Not applicable.

---

7

Item 2. Offer Statistics and Expected Timetable

# Item 2. Offer Statistics and Expected Timetable

Not applicable.

8

Item 3. Key Information

# Item 3. Key Information

## 3.A [Reserved]

## 3.B Capitalization and indebtedness

Not applicable.

## 3.C Reasons for the offer and use of proceeds

Not applicable.

## 3.D Risk factors

Our businesses face significant risks and uncertainties. You should carefully consider all of the information set forth in this Annual Report and in other documents we file with or furnish to the SEC, including the following risk factors, before deciding to invest in or to maintain an investment in any Novartis securities. Our business, as well as our reputation, financial condition, results of operations, and share price, could be materially adversely affected by any of these risks, as well as other risks and uncertainties not currently known to us or not currently considered material.

### Strategic risks

#### Key products and commercial priorities

##### Risk description

Failure to deliver key commercial priorities and successfully launch new products

##### Context and potential impact

Our ability to maintain and grow our business and to replace revenue and income lost to generic, biosimilar and other competition depends heavily on the commercial success of our new or existing key products. The commercial success of these products could be impacted at any time by a number of factors, including pressure from new or existing competitive products, changes in the prescribing habits of healthcare professionals, unexpected side effects or safety signals, supply chain issues or other product shortages, pricing pressure, regulatory proceedings, changes in labeling, loss of intellectual property protection, and global pandemics. In addition, our revenue and margins could be significantly impacted by the timing and rate of commercial acceptance of new products.

Healthcare professionals, patients and payers may choose competitor products instead of ours for various

reasons, including if they perceive them to be better in terms of efficacy, safety, cost, convenience or other reasons. The commercial success of our key products and launches in the face of increasing competition requires significant attention and management focus. Such competition could significantly affect the revenue from our products and our results of operations. This impact could also be compounded to the extent that such competition results in us making significant additional investments in research and development, marketing or sales.

#### Research and development

##### Risk description

Failure to successfully prioritize, integrate and execute our research and development programs for new products or new indications for existing products, given our focus on innovative medicines

##### Context and potential impact

We engage in extensive and costly research and development activities, both through our own internal resources and through collaborations with third parties, in an effort to identify and develop new products and new indications for existing products that address unmet and changing medical needs, and that are commercially successful. Our ability to grow our business and our product pipeline; to replace sales lost due to branded competition, entry of generics, or other reasons; and to bring to market products that take advantage of new and potentially disruptive technologies, including cell, gene and radioligand therapies, depends in significant part on the success of these efforts.

Failure to successfully develop our pipeline products is typically the result of the inherent uncertainty of science, suboptimal internal execution, or both. Key elements of internal execution include our ability to prioritize our investments on our highest potential value assets, optimize the transition of assets from research to

9

Item 3. Key Information

development, integrate externally acquired assets in an efficient way, and execute the steps in our drug development process that enable our assets to be approved and reimbursed in a timely manner to positively impact clinical practice. See also “Item 4. Information on the Company- Item 4.B Business overview-Innovative Medicines-Research and development” with regards to the research and development efforts of our Innovative Medicines Division.

Our new products must undergo intensive preclinical and clinical testing and are approved by means of a highly complex, lengthy, and expensive approval process that varies substantially from country to country and may have very specific requirements for the recruitment of patients for clinical trials. We face increasing and evolving regulatory approval and reimbursement requirements. If we fail to successfully progress late-stage assets and the core elements of drug development for key programs, this could have a negative impact on the development of our product pipeline, and ultimately on the success of our business and our financial results.

In addition, in the US it is becoming increasingly challenging to adequately recruit a sufficient number of US patients in clinical trials due to new and changing requirements for recruitment of patients into such trials. As a result, we may be unable to develop the necessary clinical evidence to support the desired indications and product profile for a particular disease that is needed to drive clinical adoption of our new products, and thereby achieve the full potential of our assets (also known as the “target product profile”). Similarly, the post-approval regulatory burden has also increased. These requirements make the maintenance of regulatory approvals for our products increasingly expensive, and further heighten the risk of recalls, product withdrawals, change to product specifications, loss of market share, and loss of revenue and profitability.

The clinical testing, regulatory processes and post-approval activities described above become more difficult during pandemics, such as the COVID-19 pandemic, as well as during periods of geopolitical and economic uncertainty. This is due to challenges related to recruiting, enrolling and treating patients in clinical trials, as well as ensuring the supply of trial materials. For a further description of the research and development of, and approval processes for, the products of our Innovative Medicines Division, see the sections headed “Research and development” and “Regulation” included in the description of our Innovative Medicines Division under “Item 4. Information on the Company-Item 4.B Business overview-Innovative Medicines.”

Our Sandoz Division has made, and expects to continue to make, significant investments in the development of biotechnology-based, “biologic” medicines that are intended for sale as bioequivalent or “biosimilar” versions of currently marketed biotechnology products. While the development of such products is typically significantly less costly and complex than the development of the equivalent originator medicines, it is nonetheless significantly more costly and complex than that for typical small-molecule generic products. For more information about the research and development efforts of our Sandoz Division, see “Item 4. Information on the Company-Item 4.B Business

overview- Sandoz-Development and registration.” In addition, many countries do not yet have fully developed legislative or regulatory pathways to facilitate the development of biosimilars, and to permit their sale in such a way that they are readily substitutable alternatives to the originator product. Further delays or difficulties in the development or marketing of biosimilars could put at risk the significant investments that Sandoz has made, and will continue to make, in its Biopharmaceuticals business. Failure to successfully develop and market biosimilars could have a material adverse effect on the success of the Sandoz Division and the Group as a whole. For more information about the approval processes that must be followed to market Sandoz Division products, see “Item 4. Information on the Company-Item 4.B Business overview-Sandoz-Regulation.”

Furthermore, our research and development activities must be conducted in an ethical and compliant manner. Among other things, we are concerned with patient safety (both pre- and post-product approval), data privacy, current Good Clinical Practices (cGCP) requirements, data integrity, the fair treatment of patients, diversity and inclusion in the recruitment of patients to clinical trials, and animal welfare. Should we fail to properly manage such issues, we risk injury to third parties, damage to our reputation, negative financial consequences as a result of potential claims for damages, sanctions and fines, and the potential that investments in research and development activities may not bring the expected benefits to the Group.

## Pricing, reimbursement and access

### Risk description

Pricing and reimbursement pressure, including pricing transparency and access to healthcare

### Context and potential impact

Our business has continuously experienced significant pressures on the pricing of our products and on our ability to obtain and maintain satisfactory rates of reimbursement for our products by governments, insurers and other payers. These pressures have many sources, including growth of healthcare costs as a percentage of gross domestic product; funding restrictions and policy changes; and public controversies, political debate, investigations and legal proceedings regarding pharmaceutical pricing. Pressures on pricing may negatively impact both our product pricing and the availability of our products.

In addition, we face numerous cost-containment measures imposed by governments and other payers. These include government-imposed industrywide price reductions, mandatory pricing systems, reference pricing systems, payers limiting access to treatments based on cost-benefit analyses, the importation of drugs from lower-cost countries to higher-cost countries, the shifting of the payment burden to patients through higher co-payments and co-pay accumulator programs, the limiting of physicians’ ability to choose among competing medicines, the mandatory substitution of generic drugs for the patented equivalent, pressure on physicians to reduce the prescribing of patented prescription medicines, increasing pressure on intellectual property

10

Item 3. Key Information

protections, and growing requirements for increased transparency on pricing. For more information on price controls, see “Item 4. Information on the Company-Item 4.B Business overview-Innovative Medicines-Price controls.”

Recent trends in the external environment may have an impact on the likelihood of these pricing and reimbursement pressures occurring. A worldwide slowdown in economic growth following the COVID-19 pandemic and the war in Ukraine (contributing to challenges such as high energy costs and inflation) has led to increased strain on fiscal budgets in many major economies. In addition, legislative developments such as those in the US (e.g., the Inflation Reduction Act) and in Europe (e.g., the EU Joint Health Technology Assessment) pose potential further pressures on pricing and timelines for reimbursement in these countries. These external factors may materially affect our ability to achieve value-based prices; to achieve and maintain an acceptable return on our investments in the research and development of our products; and may impact our ability to research and develop new products.

In addition, our Sandoz Division has faced and may continue to face intense competition from other generic and biosimilar pharmaceutical companies that aggressively compete for market share, including through significant price competition. Such competitive actions may increase the costs and risks associated with our efforts to introduce and market generic and biosimilar products, may delay the introduction or marketing of such products, and may further limit the prices at which we are able to sell these products. In particular, in the US in past years, industrywide price competition among generic pharmaceutical companies and consolidation of buyers caused significant declines in sales and profits of Sandoz.

## Alliances, acquisitions and divestments

### Risk description

Failure to identify, execute, and/or realize the expected benefits from our external business opportunities

### Context and potential impact

As part of our strategy, from time to time we acquire and divest products or entire businesses and enter into strategic alliances and collaborations. For example, in February 2022, we closed the acquisition of Gyroscope Therapeutics. This strategy is partly dependent on our ability to identify strategic external business opportunities and to close transactions with third parties on acceptable terms.

Once the terms of a strategic transaction have been agreed with a third party, we may not be able to complete the transaction in a timely manner or at all, nor can we be sure that pre-transaction due diligence will identify all possible issues that might arise during and after the transaction. Our efforts on such transactions can also divert management’s attention from our existing businesses.

After a transaction is closed, efforts to develop and market acquired or licensed products, to integrate the acquired business or to achieve expected synergies may fail or may not fully meet expectations. This may occur

due to difficulties in retaining key personnel, customers and suppliers; failure to obtain marketing approval or reimbursement within expected time frames or at all; differences in corporate culture, standards, controls, processes and policies; or other factors. Transactions can also result in liabilities being incurred that were not known at the time of acquisition, or the creation of tax or accounting issues. Acquired businesses are not always in full compliance with legal, regulatory or Novartis standards, including, for example, Current Good Manufacturing Practices (cGMP) or cGCP standards, which can be costly and time-consuming to remediate. Furthermore, our strategic alliances and collaborations with third parties may not achieve their intended goals and objectives within expected time frames, or at all.

Similarly, we cannot ensure that we will be able to successfully divest or spin off businesses or other assets that we have identified for this purpose, or that any completed divestment or spin-off will achieve the expected strategic benefits, operational efficiencies or opportunities, or that the divestment or spin-off will ultimately maximize shareholder value.

## Intellectual property

### Risk description

Expiry, assertion or loss of intellectual property protection

### Context and potential impact

Many products of our Innovative Medicines Division are protected by intellectual property rights, which may provide us with exclusive rights to market those products for a limited time, and to enable our purpose of reimagining medicine by sustainably financing our research and development. However, the strength and duration of those rights can vary significantly from product to product and from country to country, and they may be successfully challenged by third parties or governmental authorities.

Loss of intellectual property protection and the introduction of generic or biosimilar competition for a patented branded medicine in a country typically result in a significant and rapid reduction in net sales and operating income for the branded product. Such competition can occur after successful challenges to intellectual property rights or the regular expiration of the patent term or other intellectual property rights. Such competition can also result from the entry of generic or biosimilar versions of another medicine in the same therapeutic class as one of our drugs or in a competing therapeutic class, from a Declaration of Public Interest or the compulsory licensing of our intellectual property by governmental authorities, or as a result of a general weakening of intellectual property and governing laws in certain countries around the world. In addition, generic or biosimilar manufacturers may sometimes conduct so-called “launches at risk” of products that are still under legal challenge for infringement, or whose patents are still under legal challenge for validity, before final resolution of legal proceedings.

We also rely in all aspects of our businesses on unpatented proprietary technology, know-how, trade secrets,

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and other confidential information, which we seek to protect through various measures, including confidentiality agreements with licensees, employees, third-party collaborators and consultants who may have had access to such information. If these agreements are breached or our other protective measures should fail, then our contractual or other remedies may not be adequate to cover our losses.

We may also be subject to assertions of intellectual property rights against our innovative medicines by third parties. If successful, these actions may involve payment of future royalties or damages, for example for patent infringement, and may also involve injunctive relief requiring the removal of one or more dosage strengths of a product from the market (or removal of a therapeutic indication from the product's approved labeling) for some period of time or throughout the life of the asserted intellectual property right. Such damages or such an injunction may have a material impact on our operating income and net sales.

In any given year, we may experience a potentially significant impact on our net sales from products that have already lost intellectual property protections, as well as products that may lose protection during the year. Because we may have substantially reduced marketing and research and development expenses related to products that are in their final years of exclusivity, the initial loss of protection for a product during a given year could also have an impact on our operating income for that year in an amount corresponding to a significant portion of the product's lost sales. The magnitude of the impact of generic or biosimilar competition on our income could depend on a number of factors. These include, with respect to income in a given year, the time of year at which the generic or biosimilar competitor is launched; the ease or difficulty of manufacturing a competitor product and obtaining regulatory approval to market it; the number of generic or biosimilar competitor products approved, including whether, in the US, a single competitor is granted an exclusive marketing period; whether an authorized generic is launched; the geographies in which generic or biosimilar competitor products are approved, including the strength of the market for generic or biosimilar pharmaceutical products in such geographies, and the comparative profitability of branded pharmaceutical products in such geographies; and our ability to successfully develop and launch new products for patients that may also offset the income lost to generic or biosimilar competition. For more information on the patent and generic competition status of our Innovative Medicines Division products, see 'Item 4. Information on the Company-Item 4.B Business overview-Innovative Medicines-Intellectual property.'

## Strategic transformations

### Risk description

Failure to meet organizational transformation programs objectives and/or unintended adverse impacts on our business

### Context and potential impact

From time to time, we reassess our business organization to ensure we have the optimal structure with which to execute our strategy. In April 2022, we announced a new organizational structure and operating model designed to support our innovation, growth, and productivity ambitions as a focused medicines company. See 'Item 4. Information on the Company-Item 4.B Overview.'

In addition, in October 2021 we announced the commencement of a strategic review of our Sandoz Division. After exploring all options, ranging from retaining the business to separation, on August 25, 2022, we announced our intention to separate our Sandoz Division into a new publicly traded standalone company, by way of a 100% spin-off in order to maximize shareholder value. See 'Item 4. Information on the Company-Item 4.B Sandoz.'

Our inability to successfully implement our new organizational structure and operating model or to successfully complete the spin-off of our Sandoz Division could have a material adverse effect on the success of the Group as a whole, and could have a material adverse effect on our results of operations and financial condition. The overall extent and pace of these organizational changes, and the additional workload and complexity for our employees in some areas, could trigger uncertainty, stress and fatigue among employees, potentially resulting in instability within the organization that could lead to failure of these organizational changes to succeed or to achieve the desired benefits. As a result, the expected benefits of these organizational changes may never be fully realized or may take longer to realize than expected.

## Environmental, social and governance matters

### Risk description

Failure to meet environmental, social and governance expectations

### Context and potential impact

Increasingly, in addition to financial results, companies are being judged by performance on a variety of environmental, social and governance (ESG) matters, which can contribute to the long-term sustainability of our company's performance. An inability to successfully perform on ESG matters and to meet societal expectations can result in negative impacts on our recruitment, retention, operations, financial results, reputation, and share price.

Topics related to large societal changes such as social inequity, access to medicines and climate change are increasingly important to a wide range of our stakeholders. For example, a variety of organizations measure the performance of companies on ESG topics, and the results of these assessments are widely publicized. In addition, investments in funds that specialize in companies that perform well in such assessments are increasingly popular, and major institutional investors have publicly emphasized the importance of such ESG measures in making their investment decisions. Our actions related

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to ESG topics may in the long-term therefore impact our operations and ability to achieve our strategic goals, and ultimately could have a potential negative impact on the value of Novartis. For this reason, the role of our Board of Directors and executive officers in supervising various sustainability issues is becoming increasingly important.

We actively manage a broad range of ESG matters, taking into consideration their expected impact on the sustainability of our business over time, and the potential impact of our business on society and the environment. We have created a Sustainability & ESG Office, which, in coordination with the ESG Committee of the Executive Committee of Novartis, is tasked with developing our ESG strategy and tracking our performance against our ESG targets. However, considering investors' increasing focus on ESG matters, the fast pace of change of external expectations, and a range of upcoming regulations, there can be no certainty that we will manage such issues successfully, that the ESG standards we currently use to measure our performance against will remain the same, or that we will successfully meet society or investors' expectations.

## Operational risks

### Cybersecurity and IT systems

#### Risk description

Cybersecurity breaches, data loss and catastrophic loss of IT systems

#### Context and potential impact

We are heavily dependent on critical, complex and interdependent information technology (IT) systems, including internet-based systems to support our business processes. We have also outsourced significant parts of our IT infrastructure to third-party providers, and we currently use these providers to perform business-critical IT services for us. We are therefore vulnerable to cybersecurity attacks and incidents on such networks and systems, whether our own or those of the third-party providers we contract, and we have experienced and may in the future experience such cybersecurity threats and attacks. Cybersecurity threats and attacks take many forms, and the size, age and complexity of our IT systems make them potentially vulnerable to external and internal security threats; outages; malicious intrusions and attacks; cybercrimes, including state-sponsored cybercrimes; malware; misplaced data, lost data or data errors; programming or human errors; or other similar events. In the context of the COVID-19 pandemic, the risk of such threats and attacks has increased, as virtual and remote working has become more widely used, and sensitive data is accessed by employees working in less secure, home-based environments. In addition, due to our reliance on third-party providers, we have experienced and may in the future experience interruptions, delays or outages in IT service availability due to a variety of factors outside of our control, including technical failures, natural disasters, fraud, or security attacks experienced by or caused by third-party providers. Interruptions in the service provided by these third parties could affect our ability to perform critical tasks.

A significant information security or other event, such as a disruption or loss of availability of one or more of our IT systems, whether managed by us or a third-party service provider, has previously and could in the future negatively impact important business processes, such as the conduct of scientific research and clinical trials, the submission of data and information to health authorities, our manufacturing and supply chain processes, our shipments to customers, our compliance with legal obligations, and communication between employees and with third parties. IT issues have previously led to, and could in the future lead to, the compromise of trade secrets or other intellectual property that could be sold and used by competitors to accelerate the development or manufacturing of competing products; to the compromise of personal financial and health information; and to the compromise of IT security data such as usernames, passwords and encryption keys, as well as security strategies and information about network infrastructure, which could allow unauthorized parties to gain access to additional systems or data. In addition, malfunctions in software or medical devices that make significant use of IT could lead to a risk of direct harm to patients.

Although we have experienced some of the events described above, to date they have not had a material impact on our operations. Nonetheless, the occurrence of any of the events described above in the future could disrupt our business operations and result in enforcement actions or liability, including potential government fines and penalties, claims for damages, and shareholder litigation or allegations that the public health, or the health of individuals, has been harmed.

Any significant events of this type could require us to expend significant resources beyond those we already invest to remediate any damage, to further modify or enhance our protective measures, and to enable the continuity of our business.

### Fragmented IT landscape and strategic technology programs implementation

#### Risk description

Failure to address fragmented business processes, unclear data ownership, and IT applications and infrastructure nearing their end-of-life, may disrupt our core business processes

#### Context and potential impact

We rely on various IT systems to operate our complex global business. Historically, while highly overlapping data strategy and architectural needs exist across our businesses, in the past we built distinct solutions across both prior business units and our various geographies, which have led to a fragmented and complex landscape of IT systems. Additionally, several of our current IT systems are reaching the end of their useful life, which, together with our fragmented IT landscape, may cause disruptions to our operational stability. As a result, we started to implement several companywide IT programs with a view toward replacing and consolidating outdated IT systems. For example, we have completed the conceptual design phase and started to build a new global Enterprise Resource Planning (ERP) system that seeks to simplify, standardize and digitize processes in our

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commercial, finance and operations functions, thereby helping to ensure efficient and compliant business operations across our businesses and geographies, as well as the availability of high-quality data necessary to aid our decision-making. We expect the first implementation of our new ERP system to begin in the first quarter of 2024, with full implementation by 2028. In addition, we are also implementing other IT projects, seeking to simplify and standardize our processes, systems and tools, and create a unified data marketplace. Implementation and operation of the new ERP system and other IT projects involves certain risks, including a failure of the new ERP system and other IT projects to operate as expected, a failure to properly integrate with other systems we use, potential loss of data or information, compliance issues, or cost overruns and delays. Any disruptions or malfunctions of the new ERP system and other IT projects could cause critical information to be delayed, lost, defective, corrupted, or rendered inadequate or inaccessible, which could negatively impact our operations and the effectiveness of our internal controls.

## Talent management

### Risk description

Inability to attract, retain and motivate qualified individuals in key roles and markets

### Context and potential impact

We rely on attracting and retaining a diverse, highly skilled workforce across our businesses and functions to achieve our business objectives. If we are unable to sustain our supply of key personnel - including senior members of our scientific and management teams, high-quality researchers and development specialists and skilled employees in key markets - our ability to achieve our major business objectives may be adversely affected. In addition, our brand and reputation could be negatively impacted, and the diversity of our workforce may decline.

The market for skilled talent has become increasingly competitive, and we anticipate this trend will persist long-term. We face a challenge to attract and retain top talent in several areas, including biology, chemistry, clinical development, drug manufacturing, IT, oncology, and advanced therapy platforms (i.e., gene and cell therapy, radioligand therapy and “xRNA”). In addition, many biotechnology companies have received significant inflows of capital and are not only competing with us to attract the same skilled talent but are also aggressively pursuing our experienced talent.

In recent years, we have adopted new ways of working that include location flexibility and increasingly recruiting from a global pool of talent. However, the success of our business continues to depend on having employees who possess local knowledge of, and experience in, our key markets. The external talent supply is especially limited in many of the geographies that are expected to be sources of growth for Novartis. In the United States, China and several other markets, the geographic mobility of talent is decreasing, as they find ample career opportunities available closer to home.

In addition, in April 2022 we announced a new, integrated organizational structure and operating model. The

corporate reorganization undertaken to implement this new organizational structure has resulted in significant redundancies and senior leadership changes that may reduce morale, increase employee distraction and prompt higher voluntary turnover, any of which could negatively impact our competitiveness and ability to achieve strategic objectives. For more information on this new organizational structure see “Item 4. Information on the Company-Item 4.B Overview.”

The risks associated with the challenging external talent market and the implementation of our new organizational structure will be exacerbated if we are unable to retain and effectively develop employees and maintain an internal pipeline with critical skills, experiences, and leadership to deliver our business priorities. As a result, development, engagement, motivation, succession planning and performance rewards for our critical talent are essential to achieve our business priorities.

## Third-party management

### Risk description

Failure to maintain adequate governance and oversight over third-party relationships, and failure of third parties to meet their contractual, regulatory or other obligations

### Context and potential impact

We outsource the performance of certain key business functions and services to third parties. Such activities include research and development collaborations, manufacturing operations, warehousing and distribution, certain finance functions, sales and marketing activities, data management and others. Some third parties, particularly those in developing countries, do not have internal compliance systems or resources comparable to those of Novartis. As a result, our investment and efforts in relation to third party management include focusing on risk management and the oversight of such third parties.

Our reliance on third parties poses certain risks, including the misappropriation of our intellectual property, the failure of the third party to comply with regulatory and quality assurance requirements, the failure of the third party to comply with environmental, anti-bribery and human rights standards and regulations, unexpected supply disruptions, breach of our agreement by the third party, and the unexpected termination or non-renewal of our agreement by the third party.

In addition, governments require, and the public expects, Novartis to take responsibility for and report on compliance with various human rights, responsible sourcing and environmental practices, as well as other actions of our third-party contractors around the world.

Ultimately, if third parties fail to meet their obligations to us, we may lose our investment in the relationship with the third parties or fail to receive the expected benefits of our agreements with such third parties. In addition, should any of these third parties fail to comply with the law or our standards, or should they otherwise act inappropriately while performing services for us, there is a risk that we could be held responsible for their acts, that our reputation may suffer, and that penalties may be imposed on us.

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Item 3. Key Information

## Legal, ethics and compliance

### Risk description

Challenges posed by evolving legal and regulatory requirements and societal expectations regarding ethical behavior

### Context and potential impact

We must comply with the laws of all countries in which we operate, and we sell products with respect to a wide and growing range of activities. Such legal requirements are extensive and complex.

The laws and regulations relevant to the healthcare industry and applicable to us are broad in scope, are subject to change, and have evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our business practices. For example, we have been, are currently, and may in the future be, subject to various significant legal proceedings, such as private party litigation, government investigations and law enforcement actions worldwide. These types of matters may take various forms based on evolving government enforcement and private party litigation priorities, and could include, for example, matters pertaining to pricing; bribery and corruption; trade regulation and embargo legislation; product liability; commercial disputes; employment and wrongful discharge; antitrust and competition; securities; government benefit programs; reimbursement; rebates; healthcare fraud; sales and marketing practices; insider trading; occupational health and safety; environmental regulations; tax; cybersecurity; data privacy; regulatory interactions; and intellectual property. Such matters can involve civil and/or criminal proceedings and can retroactively challenge practices previously considered to be legal.

There is also a risk that governance for our medical and patient support activities, and our interactions with governments, public officials/institutions, healthcare professionals, healthcare organizations and patient organizations may be inadequate or fail, or that we may undertake activities based on improper or inadequate scientific justification.

Our Sandoz Division may from time to time seek approval to market a generic version of a product before the expiration of patents claimed by the marketer of the patented product. We do this in cases in which we believe the relevant patents are invalid or unenforceable, or would not be infringed by our generic product. As a result, affiliates of our Sandoz Division frequently face patent litigation, and in certain circumstances we may make the business decision to market a generic product even though patent infringement actions are still pending. Should we elect to do so and conduct a so-called “launch at risk,” we could face substantial damages if the final court decision is adverse to us.

Legal proceedings and investigations are inherently unpredictable, and large judgments sometimes occur. Consequently, we may in the future incur judgments that could involve large payments, including the potential repayment of amounts allegedly obtained improperly, and other penalties, including treble damages. In addition, such legal proceedings and investigations, even if meritless, may affect our reputation, may create a risk of

potential exclusion from government reimbursement programs in the US and other countries, and may lead to civil litigation and/or criminal exposure. As a result, having considered all relevant factors, we have in the past and may again in the future enter into major settlements of such claims without bringing them to final legal adjudication by courts or other such bodies, despite having potentially significant defenses against them, to limit the risks they pose to our business and reputation. Such settlements may require us to pay significant sums of money and to enter into corporate integrity or similar agreements, which are intended to regulate company behavior for extended periods.

For information on significant legal matters pending against us, see “Item 18. Financial Statements-Note 20. Provisions and other non-current liabilities” and “Item 18. Financial Statements-Note 28. Commitments and contingent liabilities.”

New requirements may also be imposed on us due to changing government and societal expectations regarding the healthcare industry, and acceptable corporate behavior generally. For example, we are faced with laws and regulations requiring changes in how we do business, including with respect to disclosures concerning our interactions with healthcare professionals, healthcare organizations and patient organizations. These laws and regulations include requirements that we disclose payments or other transfers of value made to healthcare professionals and organizations, as well as information relating to the costs and prices for our products, which represent evolving standards of acceptable corporate behavior. These requirements may incur significant costs, including substantial time and additional resources, that are necessary to bring our interactions with healthcare professionals and organizations into compliance with these evolving standards.

In addition to legal and regulatory requirements, we aim to meet the evolving societal expectations of the public and our investors regarding ethical behavior and the increasing importance placed on ESG matters.

To support our efforts to comply with the many requirements that impact us, we have a significant global ethics and compliance program in place, and we devote substantial time and resources to efforts to ensure that we conduct business in a lawful manner, and in line with society’s expectations. Despite our efforts, an actual or alleged failure to comply with the law or with heightened public expectations could lead to substantial liabilities that may not be covered by insurance, or to other significant losses.

## Manufacturing and product quality

### Risk description

Inability to ensure proper controls in product development and product manufacturing, and failure to comply with applicable regulations and standards

### Context and potential impact

The development and manufacture of our products is complex and heavily regulated by governmental health authorities around the world. Whether or not our products and the related raw materials are developed and manufactured at our own manufacturing sites or by third

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parties, we must ensure that all development and manufacturing processes comply with regulatory requirements, as well as our own quality standards in order to deliver novel therapies to patients with unmet needs while ensuring patient safety. Failure to comply with regulatory requirements has resulted in, and may in the future result in, warning letters, suspension of manufacturing, seizure of products, injunctions, product recalls, failure to secure product approvals, or debarment.

In recent years, global health authorities have substantially intensified their scrutiny of manufacturers' compliance with regulatory requirements. Any significant failure by us or our third-party suppliers to comply with regulatory requirements, or with health authorities' expectations, may create the need to suspend clinical trials, shut down production facilities or production lines, and recall commercial products. A failure to fully comply with regulatory requirements could also lead to a delay in the approval of new products, an inability to ship or import our products, and significant penalties and reputational harm.

In addition, the technically complex manufacturing processes required to manufacture many of our products increase the risk of both production failures and product recalls and can increase the cost of producing our goods. Some of our products require a supply of highly specialized raw materials, such as cell lines, tissue samples, bacteria, viral strains and radioisotopes. In addition, we manufacture and sell a number of sterile products, biologic products and products that involve advanced therapy platforms, such as CAR-T therapies, gene therapies and radioligand therapy products, all of which are particularly complex and involve highly specialized manufacturing technologies. As a result, even slight deviations at any point in their production processes or in material used have led to, and may in the future lead to, production failures or recalls. See 'Item 4. Information on the Company-Item 4.B. Business overview-Sandoz-Production.'

## Supply chain

### Risk description

Inability to maintain continuity of product supply

### Context and potential impact

Many of our products are produced using technically complex manufacturing processes and require a supply of highly specialized raw materials. For some of our products and raw materials, we may rely on a single source of supply. In addition, we manufacture and sell a number of sterile products, biologic products, and products that involve advanced therapy platforms, such as gene and cell therapy, radioligand therapy, and 'xRNA', all of which are particularly complex and involve highly specialized manufacturing technologies. Due to this complexity, there is a risk of production and supply of critical raw materials failures, which may result in supply interruptions or product recalls due to manufactured products not meeting required specifications.

In addition, due to the inherent complexities of our manufacturing processes and the supply chains for advanced therapy platforms, we are required to plan our production activities and purchase of materials well in

advance. If we suffer from third-party raw material shortages, underestimate market demand for a product, or fail to accurately predict when a new product will be approved for sale, then we may not be able to produce sufficient product to meet demand. These issues could be made worse during a pandemic, such as the COVID-19 pandemic, or geopolitical events, such as the war in Ukraine, and could lead to (i) a sudden increase in demand for selected medicinal products, resulting in the short-term unavailability of critical materials; (ii) logistical and supply challenges that may lead to our inability to ship products from one place to another due to restrictions imposed as a result of a pandemic or geopolitical events and any related sanctions, which can also impact transportation and warehousing costs; or (iii) our inability to properly operate a manufacturing site due to restrictions imposed as the result of a pandemic or any issues arising from geopolitical events.

Our or our third-party suppliers' inability to manage such issues could lead to shutdowns, product shortages, or to us being entirely unable to supply products to patients for an extended period of time. Furthermore, as our products are intended to promote the health of patients, such shortages or shutdowns could endanger our reputation and have led to, and could continue to lead to, significant losses of sales revenue, potential litigation or allegations that the public health, or the health of individuals, has been harmed.

## Data privacy

### Risk description

Noncompliance with personal data protection laws and regulations

### Context and potential impact

We operate in an environment that relies on the collection, processing, analysis and interpretation of large sets of patients and other individuals' personal information, including via social media and mobile technologies. In addition, the operation of our business requires data to flow across the borders of numerous countries in which there are different, potentially conflicting, and frequently changing, data privacy laws in effect. Examples of such laws include: the EU General Data Protection Regulation (GDPR), which took effect in May 2018; the California Consumer Privacy Act, which took effect in January 2020; Brazil's General Personal Data Protection Law, which entered into force in September 2020; and the Personal Information Protection Law in China, which took effect in November 2021. Such laws impose stringent requirements on how we and third parties with whom we contract collect, share, export or otherwise process personal information, and provide for significant penalties for noncompliance. Breaches of our systems or those of our third-party contractors, or other failures to protect the data we collect from misuse or breach by third parties, could expose such personal information to unauthorized persons.

Events involving the substantial loss of personal information, use of personal information without a legal basis, or other privacy violations could give rise to significant liability, reputational harm, damaged relationships with business partners, and potentially substantial monetary

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penalties and other sanctions under laws enacted or being enacted around the world. Such events could also lead to restrictions on our ability to use personal information and/or transfer personal information across country borders. In addition, there is a trend of increasing divergence of data privacy legal frameworks, not only across these frameworks but also within individual legal frameworks themselves. This divergence may constrain the implementation of global business processes and may lead to different approaches on the use of health data for scientific research, which may have a negative impact on our business and operations.

## Falsified medicines

### Risk description

Impact of falsified medicines on patient safety, and reputational and financial harm to Novartis and our products

### Context and potential impact

We continue to be challenged by the vulnerability of distribution channels to falsified medicines, which include counterfeit, stolen, tampered and illegally diverted medicines as defined by the World Health Organization.

Falsified medicines pose patient safety risks and can be seriously harmful or life-threatening. Reports of adverse events related to falsified medicines and increased levels of falsified medicines in the healthcare system affect patient confidence in genuine medicines and in healthcare systems in general. These events could also cause us substantial reputational and financial harm, and potentially lead to litigation if the adverse event from the falsified medicine is mistakenly attributed to the genuine one. Stolen or illegally diverted medicines that are not properly stored and later sold through unauthorized channels, could adversely impact patient safety, our reputation and our business. Furthermore, there is a direct financial loss when, for example, falsified medicines replace sales of genuine medicines, or genuine medicines are recalled following the discovery of falsified products.

## Emerging risks

### Geopolitical developments

#### Risk description

Impact of geo- and socio-political threats

#### Context and potential impact

Challenging political conditions currently exist in various parts of the world, including an economic downturn; risk of direct conflicts between nations, such as the war in Ukraine; a global pandemic; resistance in certain areas against free trade; anti-corporate sentiment; and social unrest.

The imposition of tariffs, including those imposed by the US and China, and the possibility of additional tariffs or other trade restrictions relating to trade could have a material negative impact on our business. Given that the outcome of ongoing trade negotiations remains uncertain, we cannot yet determine the nature or extent of the potential impact on our business. For example, if tariffs on pharmaceutical products or active pharmaceutical

ingredients (APIs) were increased, this could impact the profitability of our products and disrupt our supply chain. Increasing opposition to free trade may increase the risks we face in our efforts to improve and harmonize standards in regulation and intellectual property.

Furthermore, significant conflicts continue in certain parts of the world. Collectively, such unstable conditions could, among other things, disturb the international flow of goods and increase the costs and difficulties of international transactions, which could in turn significantly impact time to market and our ability to supply our products to patients in an undisrupted fashion, and further erode reimbursement levels for innovative therapies.

## Macroeconomic developments

### Risk description

Impact of macroeconomic developments

### Context and potential impact

Our business may be impacted by deteriorating macroeconomic and financial conditions directly affecting consumers. Given that patients, in many countries, directly pay a sizable portion of their own healthcare costs, there is a risk that consumers may cut back on prescription drugs due to financial constraints.

Negative macroeconomic developments may also adversely affect the ability of payers, as well as our distributors, customers, suppliers, and service providers, to pay for our products, or otherwise to buy necessary inventory or raw materials, and to perform their obligations under agreements with us. Although we make efforts to monitor the financial condition and liquidity of these third parties, our ability to do so is limited, and some of them may become unable to pay their bills in a timely manner or may even become insolvent. These risks may be elevated with respect to our interactions with fiscally challenged government payers, or with third parties with substantial exposure to such payers.

At the same time, significant changes, and potential future volatility in financial markets, the consumer and business environment, the competitive landscape, and the global political and security landscape make it increasingly difficult for us to predict our revenues and earnings. As a result, any revenue or earnings guidance or outlook that we have given or might give may be overtaken by events or may otherwise prove to be inaccurate. Although we endeavor to give reasonable estimates of future revenues and earnings at the time at which we give such guidance, based on then-current knowledge and conditions, there is a risk that such guidance or outlook will prove to be incorrect.

Asset price corrections in financial markets may also result in lower returns on our financial investments. In addition, pricing pressures in developed markets resulting from efforts to reduce the cost of healthcare (e.g., the Inflation Reduction Act in the US, which targets drug prices) may have a negative impact on our revenue and our net sales. In addition, inflation has an impact on our operating costs due to the increased cost of supplies. Higher costs for energy, raw materials, wages, and capital will increase our operating costs, potentially reducing our net sales.

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Item 3. Key Information

Uncertainties around future central bank and other economic policies in the US and EU, as well as high debt levels in some countries could also impact world trade. Sudden increases in economic, currency or financial market volatility in different countries, such as the recent appreciation of the US dollar, have also impacted, and may continue to have an unpredictable impact on our business, or results of operations, including the conversion of our operating results into our reporting currency, the US dollar, as well as the value of our investments in our pension plans.

For a discussion on the effect of price controls on our business, see “Item 4. Information on the Company-Item 4.B-Business overview-Innovative Medicines-Price controls.” See also “Item 5. Operating and Financial Review and Prospects-Item 5.B Liquidity and capital resources-Effects of currency fluctuations,” “Item 5. Operating and Financial Review and Prospects-Item 5.B Liquidity and capital resources-Condensed consolidated balance sheets,” “Item 18. Financial Statements-Note 15. Trade receivables” and “Item 18. Financial Statements-Note 29. Financial instruments - additional disclosures.”

## Climate change

### Risk description

Impact of climate change and increased risk of major natural disasters

### Context and potential impact

Novartis is exposed to a broad range of climate risks such as transition risks (e.g., regulatory frameworks, carbon pricing, and the cost of and access to capital) and physical risks (e.g., heat, water scarcity, sea level rise, and flooding from severe weather events), which could vary in magnitude and impact across different countries.

Climate change has triggered, and may continue to trigger, the adoption of new regulatory requirements across the globe. To comply with such legislation, we may be required to increase our investment in technology to reduce our energy use, water use and greenhouse gas emissions. In addition, legislative and regulatory action, both current and in the future, includes or could include carbon pricing, climate risk related disclosures, and changes in zoning or building codes to increase climate resilience. As a result, the combined impact of these transition risks could increase our direct operating costs and impact our supply chain. We have also committed to incorporating the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) framework into our business, which includes providing qualitative and quantitative disclosures on climate-related topics on a recurring basis. As a result of these transition risks, we are committed to becoming carbon neutral in our own operations by 2025, and carbon neutral across our value chain by 2030. In addition, we are committed to achieving net zero across our value chain by 2040. Any failure to achieve these commitments in the expected time frame, or at all, could result in negative impacts on our reputation, our operations, and the price of our shares.

Climate change has created, and will continue to create, physical risks to our business. Some of our

production facilities that depend on the availability of significant water supplies are located in areas where water is increasingly scarce. Other facilities are located in areas that, due to increasingly violent weather events, rising sea levels, or both, are increasingly at risk of substantial flooding. In regions where such a risk is present, this has an impact not only on our own operations but also our distributed supply chain. Such events may result in the loss of life, increased costs, business interruptions, destruction of facilities, and disruption to healthcare systems that patients use to access our medicines.

Furthermore, our corporate headquarters, the headquarters of our Innovative Medicines and Sandoz Divisions, and a number of major Innovative Medicines Division production and research facilities are located near earthquake fault lines in Basel, Switzerland. Other major facilities are located near major earthquake fault lines in various locations around the world. A major earthquake could result in loss of life, business interruptions and the destruction of our facilities.

## Tax laws and developments

### Risk description

Changes in tax laws or their application

### Context and potential impact

Our multinational operations are taxed under the laws of the countries and other jurisdictions in which we operate. Changes in tax laws or in their application could lead to an increased risk of international tax disputes and an increase in our effective tax rate, which could adversely affect our financial results. The integrated nature of our worldwide operations can produce conflicting claims from revenue authorities in different countries as to the profits to be taxed in the individual countries, including potential disputes relating to the prices our subsidiaries charge one another for intercompany transactions, known as transfer pricing. Most of the jurisdictions in which we operate have double tax treaties with other foreign jurisdictions, which provide a framework for mitigating the impact of double taxation on our revenues and capital gains. However, mechanisms developed to resolve such conflicting claims are largely untried and can be expected to be very lengthy. Accruals for tax contingencies are made based on experience, interpretations of tax law, and judgments about potential actions by tax authorities. However, due to the complexity of tax contingencies, the ultimate resolution of any tax matter may result in payments materially different from the amounts accrued.

In 2019, the Organization for Economic Co-operation and Development (OECD) launched a new initiative on behalf of the G20 to minimize profit shifting by working toward a global tax framework that ensures that corporate income taxes are paid where consumption takes place, in addition to introducing a global standard on minimum taxation combined with new tax dispute resolution processes. This project achieved OECD political consensus in October 2021, and the detailed principles are still under discussion by the OECD and political leaders. The OECD expects that the implementation of these new principles will begin globally in 2024. Once changes to the tax laws in any jurisdiction in which the Group

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operates are enacted or substantially enacted, the Group may be subject to the OECD top-up tax, the aim of which is to bring the total amount of taxes paid on our profit in a jurisdiction up to a minimum rate of 15%. In 2020, the EU announced that it would introduce new centralized taxation powers (which have not yet been introduced) to address the financial impact of the COVID-19 pandemic. In addition, the European Commission continues to extend the application of its policies seeking to limit fiscal aid by member states to particular companies, together with the related investigation into member states' practices regarding the issuance of rulings on tax matters relating to individual companies. Although we have taken steps to comply with evolving initiatives such as these of the OECD and the EU, and we will continue to do so, significant uncertainties remain as to the outcome of our efforts. For more information, see 'Item 18. Financial Statements-Note 6. Income taxes' and 'Item 18. Financial Statements-Note 12. Deferred tax assets and liabilities.'

## General risks

### Indebtedness

#### Risk description

Our indebtedness could adversely affect our operations

#### Context and potential impact

As of December 31, 2022, we had USD 20.2 billion of non-current financial debt, and USD 5.9 billion of current financial debt. Our current and long-term debt requires us to dedicate a portion of our cash flow to service interest and principal payments and, if interest rates rise, this amount may increase. As a result, our existing debt may limit our ability to use our cash flow to fund capital expenditures, to engage in transactions, or to meet other capital needs, or otherwise may place us at a competitive disadvantage relative to competitors that have less debt. Our debt could also limit our flexibility to plan for and react to changes in our business or industry, and increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates or a downturn in our business or the economy. We may also have difficulty refinancing our existing debt or incurring new debt on terms that we would consider to be commercially reasonable, if at all.

### Goodwill and intangible assets

#### Risk description

Goodwill and intangible assets resulting in significant impairment charges

#### Context and potential impact

We carry a significant amount of goodwill and other intangible assets on our consolidated balance sheet, including, in particular, substantial goodwill and other intangible assets obtained through acquisitions, including most recently through our acquisitions of Gyroscope Therapeutics, The Medicines Company, *Xildra*, Endocyte, Novartis Gene Therapies, and AAA. As a result, we may incur significant impairment charges in the future if

the fair value of the intangible assets and the groupings of cash-generating units containing goodwill would be less than their carrying value on the Group's consolidated balance sheet at any point in time.

We regularly review our intangible and tangible assets for impairment, including identifiable intangible assets and goodwill. Any significant impairment charges could have a material adverse effect on our results of operations and financial condition. In 2022, for example, we recorded intangible asset impairment charges of USD 1.3 billion.

For a detailed discussion of how we determine whether an impairment has occurred, what factors could result in an impairment, and the impact of impairment charges on our results of operations, see Item 18. Financial Statements-Note 1. Significant accounting policies' and 'Item 18. Financial Statements-Note 11. Goodwill and intangible assets.'

### Foreign currency exchange rates

#### Risk description

Negative effect on financial results due to foreign currency exchange rate fluctuations

#### Context and potential impact

Changes in exchange rates between the US dollar, our reporting currency, and other currencies can result in significant increases or decreases in our reported sales, costs and earnings as expressed in US dollars, and in the reported value of our assets, liabilities and cash flows.

In addition to ordinary market risk, there is a risk that countries could take affirmative steps that could significantly impact the value of their currencies. Such steps could include 'quantitative easing' measures and potential withdrawals by countries from common currencies. In addition, countries facing local financial difficulties, including countries experiencing high inflation rates, and highly indebted countries facing large capital outflows, may impose controls on the exchange of foreign currency. Currency exchange controls and sanctions could limit our ability to distribute retained earnings from our local affiliates, or to pay intercompany payables due from those countries.

Despite measures undertaken to reduce or hedge against foreign currency exchange risks, as a significant portion of our earnings and expenditures are in currencies other than the US dollar, including expenditures in Swiss francs that are significantly higher than our revenue in Swiss francs, any such exchange rate volatility may negatively and materially impact our results of operations and financial condition, and may impact the reported value of our net sales, earnings, assets and liabilities. In addition, the timing and extent of such volatility can be difficult to predict. Furthermore, depending on the movements of particular foreign exchange rates, we may be materially adversely affected at a time when the same currency movements are benefiting some of our competitors.

For more information on the effects of currency fluctuations on our consolidated financial statements and on how we manage currency risk, see 'Item 5. Operating and Financial Review and Prospects-Item 5.B Liquidity and capital resources-Effects of currency

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Item 3. Key Information

fluctuations” and “Item 18. Financial Statements-Note 29. Financial instruments - additional disclosures.”

## Key customers

### Risk description

Ongoing consolidation among our distributors and retailers, and the concentration of credit risk

### Context and potential impact

A significant portion of our global sales is made to a relatively small number of drug wholesalers, retail chains and other purchasing organizations. For example, our three most important customers globally accounted for approximately 16%, 11% and 7%, respectively, of net sales in 2022. The largest trade receivables outstanding were for these three customers, amounting to 16%, 14% and 7%, respectively, of the Group’s trade receivables at December 31, 2022. The trend has been toward further consolidation among some distributors and retailers. As a result, we may be affected by fluctuations in the buying patterns of such customers. Furthermore, these customers are gaining additional purchasing leverage, increasing the pricing pressures facing our businesses. These pressures can impact our Sandoz Division in particular, the generic products of which can often be obtained from numerous competitors. Moreover, we are exposed to a concentration of credit risk as a result of this concentration among our customers. If one or more of our major customers experienced financial difficulties, the effect on us would be substantial, and could include a substantial loss of sales and an inability to collect amounts owed to us.

## Environmental matters

### Risk description

Impact of environmental liabilities

### Context and potential impact

The environmental laws of various jurisdictions impose actual and potential obligations on us to investigate and remediate contaminated sites, including in connection with activities in the past by businesses that are no longer part of Novartis. In some cases, these remediation efforts may take many years. While we have set aside provisions for known worldwide environmental liabilities that are probable and estimable, there is no guarantee that additional costs will not be incurred beyond the amounts for which we have provided in the Group

consolidated financial statements. If environmental contamination resulting from our facility operations, business activities or products adversely impacts third parties or if we fail to properly manage the safety of our facilities, including the safety of our employees and contractors, and the environmental risks, we may face substantial one-time and recurring costs and other penalties, and be required to increase our provisions for environmental liabilities.

See also “Item 4. Information on the Company-Item 4.D Property, plants and equipment” and “Item 18. Financial Statements-Note 20. Provisions and other non-current liabilities.”

## Pension plans

### Risk description

Inaccuracies in the assumptions and estimates used to calculate our pension plan and other post-employment obligations

### Context and potential impact

We sponsor pension and other post-employment benefit plans in various forms that cover a significant portion of our current and former employees. For post-employment plans with defined benefit obligations, we are required to make significant assumptions and estimates about future events in calculating the expense and the present value of the liability related to these plans. These include assumptions about the discount rates we apply to estimate future defined benefit obligations and net periodic pension expense, as well as rates of future pension increases. In addition, our actuarial consultants provide our management with historical statistical information, such as withdrawal and mortality rates in connection with these estimates.

Assumptions and estimates that we use may differ materially from the actual results we experience due to changing market and economic conditions, higher or lower withdrawal rates, and longer or shorter life spans of participants, among other factors. Depending on events, such differences could have a material effect on our total equity, and may require us to make additional contributions to our pension funds.

For more information on obligations under retirement and other post-employment benefit plans and underlying actuarial assumptions, see “Item 18. Financial Statements-Note 25. Post-employment benefits for employees.”

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Item 4. Information on the Company

# Item 4. Information on the Company

## 4.A History and development of Novartis

### Novartis AG

Novartis AG was incorporated on February 29, 1996, under the laws of Switzerland as a stock corporation (“Aktiengesellschaft”) with an indefinite duration. On December 20, 1996, our predecessor companies, Ciba-Geigy AG and Sandoz AG, merged into this new entity, creating Novartis. We are domiciled in and governed by the laws of Switzerland. Our registered office is located at the following address:

Novartis AG
Lichtstrasse 35
CH-4056 Basel, Switzerland
Telephone: +41-61-324-1111
Web: www.novartis.com

Novartis is a multinational group of companies specializing in the research, development, manufacturing and marketing of a broad range of innovative pharmaceuticals

and cost-saving generic medicines. Novartis AG, our Swiss holding company, owns, directly or indirectly, all of our significant operating companies. For a list of our significant operating subsidiaries, see “Item 18. Financial Statements-Note 31. Principal Group subsidiaries and associated companies.”

For a description of important corporate developments since January 1, 2020, see “Item 18. Financial Statements-Note 2. Significant transactions.” For information regarding the Company’s material commitments for capital expenditures, see “Item 5. Operating and Financial Review and Prospects-Liquidity and Capital Resources-Material short- and long-term cash requirements.”

The SEC maintains an internet site at http://www.sec.gov that contains reports, information statements, and other information regarding issuers that file electronically with the SEC.

## 4.B Business overview

### Overview

Our purpose is to reimagine medicine to improve and extend people’s lives. We use innovative science and technology to address some of society’s most challenging healthcare issues. We discover and develop breakthrough treatments and find new ways to deliver them to as many people as possible. We also aim to reward those who invest their money, time and ideas in our Company. Our vision is to become the most valued and trusted medicines company in the world. Our strategy is to deliver high-value medicines that alleviate society’s greatest disease burdens through technology leadership in research and development (R&D) and novel access approaches. To support this strategy, we have clear focus areas and priorities, ensuring we deliver on our purpose and continue to create value for both stakeholders and society. See, “Item 5. Operating and Financial Review and Prospects-Item 5.A Operating Results-Overview-Our strategy.”

In 2022, Novartis achieved net sales from continuing operations of USD 50.5 billion, and total net income amounted to USD 7.0 billion. Headquartered in Basel, Switzerland, our Group companies employed approximately 102 000 full-time equivalent employees as of December 31, 2022. Our products are sold in approximately 140 countries around the world.

The Group comprises two global operating divisions:

- Innovative Medicines: innovative patent-protected prescription medicines
  For a description of our Innovative Medicines Division, see “-Innovative Medicines-Overview” below.
- Sandoz: generic pharmaceuticals and biosimilars
  For a description of our Sandoz Division, see “-Sandoz” below.

In April 2022, we announced a new, integrated organizational structure and operating model designed to support our innovation, growth, and productivity ambitions as a focused medicines company. As part of this new organizational structure, we have integrated our former Pharmaceuticals and Oncology business units and created two separate commercial organizations-Innovative Medicines US and Innovative Medicines International. The Innovative Medicines Division focuses on five core therapeutic areas-cardiovascular, immunology, neuroscience, solid tumor, and hematology-as well as other promoted brands (in the therapeutic areas of ophthalmology and respiratory) and established brands. For more information, see “Item 4. Information on the Company-Item 4.B Innovative Medicines.” We have also created a new Strategy and Growth function that combines corporate strategy, R&D portfolio strategy and business development. The purpose of our Strategy and Growth function is to help drive the company’s growth strategy

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end-to-end and look across internal and external opportunities to strengthen the Novartis pipeline with medicines that are both transformational and can make significant contributions to growth. Finally, we have combined our former Novartis Technical Operations and Customer & Technology Solutions units to create a new operations unit called Operations. This new unit seeks to provide a stronger and simpler operational backbone that can accelerate multiple technology transformation initiatives more efficiently, create novel digital solutions at scale, and increase productivity, while maintaining industry-leading quality and service levels.

Under this new organizational structure, our divisions are supported by the following organizational units: the Novartis Institutes for BioMedical Research (NIBR), Global Drug Development (GDD), and Operations. The financial results of these organizational units are included in the results of the divisions for which their work is performed. For more information about NIBR, see “-Innovative Medicines-Research and development-Research program” below. For more information about

GDD, see “-Innovative Medicines-Research and development-Development program” below. For more information about Operations, see “-Item 4.D Property, plants and equipment” and “Item 18. Financial Statements-Note 3. Segmentation of key figures 2022, 2021 and 2020.”

## Corporate activities

We separately report the results of Corporate activities. The financial results of our Corporate activities include the costs of the Group headquarters and those of corporate coordination functions in major countries. In addition, Corporate includes other items of income and expense that are not attributable to specific segments, such as certain revenues from intellectual property rights and certain expenses related to post-employment benefits, environmental remediation liabilities, charitable activities, donations and sponsorships.

# Innovative Medicines

## Overview

Our Innovative Medicines Division is a world leader in offering patent-protected medicines to patients and physicians. The Innovative Medicines Division researches, develops, manufactures, distributes and sells patented pharmaceuticals. The Innovative Medicines Division is organized into two commercial organizational units-Innovative Medicines US and Innovative Medicines International. These units were created in April 2022 as part of our new, integrated organizational structure. Prior to April 2022, the Innovative Medicines Division was organized into two global business units: Novartis Oncology and Novartis Pharmaceuticals. See “Item 4. Information on the Company-Item 4.B Overview.”

The Innovative Medicines Division focuses on core therapeutic areas-cardiovascular, immunology, neuroscience, solid tumor, and hematology-as well as other promoted brands (in the therapeutic areas of ophthalmology and respiratory) and established brands.

The Innovative Medicines Division is the larger of our two divisions in terms of consolidated net sales. It reported consolidated net sales of USD 41.3 billion in 2022, which represented 81.7% of the Group’s net sales. The product portfolio of the Innovative Medicines Division includes a significant number of key marketed products, many of which are among the leaders in their respective therapeutic areas.

## Innovative Medicines Division products

The following summaries describe certain key marketed products in our Innovative Medicines Division, listed according to year-end net sales within each therapeutic area or reporting category. Some of the products

described below have lost patent protection or are otherwise subject to generic competition. Others are subject to patent challenges by potential generic competitors. Please see “-Intellectual property” for general information on intellectual property and regulatory data protection, and for more information on the status of patents and exclusivity for Innovative Medicines Division products.

While we typically seek to sell our marketed products throughout the world, not all products and indications are available in every country. The indications described in these summaries may therefore vary by country. In addition, a product may be available under different brand names depending on country and indication.

### Key marketed products

#### Cardiovascular

- *Entresto* (sacubitril/valsartan) is an oral, first-in-class angiotensin receptor neprilysin inhibitor. *Entresto* enhances the protective effects of a hormone system called the natriuretic peptide system, and simultaneously suppresses the harmful effects of a hormone system called the renin-angiotensin-aldosterone system. It is approved:
  - In the US, the EU and other countries to treat adults who have symptomatic heart failure with reduced ejection fraction (HFrEF). HFrEF is a disease in which the heart cannot pump enough blood.
  - In the US and other countries to treat most heart failure patients with preserved ejection fraction (HFpEF). HFpEF is another disease in which the heart cannot pump enough blood.
  - In the US and other countries to treat children aged 1 year and older who have symptomatic heart failure with systemic left ventricular systolic dysfunction

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Item 4. Information on the Company

- In China and Japan to treat patients with essential hypertension (a type of high blood pressure)
- *Leqvio* (inclisiran) is the first and only small-interfering RNA therapy to reduce LDL cholesterol, a risk factor for atherosclerotic cardiovascular disease (ASCVD), which is caused by plaque buildup in the arteries. *Leqvio* is administered by a healthcare professional twice a year as an injection, following an initial dose and a dose at three months. It is approved:
  - In the EU and other countries to treat adults with primary hypercholesterolemia (heterozygous familial and non-familial) or mixed dyslipidemia. In patients unable to reach LDL cholesterol goals, *Leqvio* is used in combination with the maximum tolerated dose of a statin, or alone or in combination with other lipid-lowering therapies in patients who are statin-intolerant or for whom a statin is contraindicated. Primary hypercholesterolemia and mixed dyslipidemia are disorders characterized by high levels of fats in the blood.
  - In the US to treat adults with clinical ASCVD or heterozygous familial hypercholesterolemia (HeFH), as an adjunct to diet and maximally tolerated statin therapy, who require additional lowering of LDL cholesterol. HeFH is an inherited disorder that causes dangerously high levels of LDL cholesterol. (The effect of *Leqvio* on cardiovascular morbidity and mortality has not yet been determined).

Novartis obtained global rights to develop, manufacture and commercialize *Leqvio* under a license and collaboration agreement with Alnylam Pharmaceuticals, Inc.

### Immunology

- *Cosentyx* (secukinumab) is an injectable, fully human monoclonal antibody that selectively inhibits interleukin-17A (IL-17A), a cytokine involved in several immunological diseases. It is approved in the US, the EU and other countries to treat:
  - Adults and children aged 6 years and older with moderate-to-severe plaque psoriasis. Psoriasis is a debilitating systemic inflammatory disease that is characterized by the appearance of raised, red patches on the skin.
  - Adults with active ankylosing spondylitis (AS). AS is a progressive inflammatory disease that is characterized by chronic back pain, is generally visible on X-rays, and can cause structural damage to the bones and joints.
  - Adults with active non-radiographic axial spondyloarthritis (nr-axSpA). This is a long-term inflammatory disease that is characterized by chronic back pain and is not visible on X-rays.
  - Adults and children (aged 2 years and older in the US and 6 years and older in the EU) with active psoriatic arthritis (PsA). PsA is a type of progressive inflammatory arthritis that results in swollen and painful joints and tendons, which can cause structural damage to the bones and joints.
  - Children (aged 4 years and older in the US and 6 years and older in the EU) with enthesitis-related

arthritis (ERA) and children (aged 2 years and older in the US and 6 years and older in the EU) with juvenile psoriatic arthritis (JPsA). ERA and JPsA are subtypes of juvenile idiopathic arthritis. If left untreated, they can lead to high levels of pain and disability.

- *Xolair* (omalizumab) is an injectable prescription medicine and the only approved antibody designed to target and block immunoglobulin E (IgE). It is approved in the US, the EU and other countries to treat:
  - Adults and children aged 6 years and older with moderate-to-severe, or severe, persistent allergic asthma
  - Adults and children aged 12 years and older with chronic spontaneous urticaria/chronic idiopathic urticaria (hives)
  - Adults with nasal polyps or severe chronic rhinosinusitis with nasal polyps (CRSwNP). CRSwNP is a chronic inflammation of the nose and the sinuses with the presence of benign lesions (nasal polyps) on the lining of the nasal sinuses or nasal cavity.

Approved indications vary by country. *Xolair* is provided as lyophilized powder for reconstitution, and as liquid formulation in a pre-filled syringe. Novartis co-promotes *Xolair* with Genentech in the US and shares a portion of operating income, but Novartis does not record any US sales. Novartis records all sales of *Xolair* outside the US. For more information, see “Item 18. Financial Statements-Note 27. Transactions with related parties-Roche Holding AG.”

- *Ilaris* (canakinumab) is an injectable, selective, high-affinity, fully human monoclonal antibody that inhibits interleukin-1 beta (IL-1 beta), a key cytokine in the inflammatory pathway. It is approved in the US, the EU and other countries to treat patients with certain debilitating autoinflammatory disorders, including:
  - Adults and children with periodic fever syndromes. Periodic fever syndromes are a set of rare disorders characterized by recurrent episodes of illness, with fever as the main symptom.
  - Patients with Still’s disease, including systemic juvenile idiopathic arthritis and adult-onset Still’s disease. Still’s disease is a disorder that causes fevers, rash and joint pain.
  - Adults with acute gouty arthritis. Gouty arthritis is a type of arthritis characterized by pain, redness, tenderness and swelling in one or more joints.

Approved indications vary by country.

### Neuroscience

- *Gilenya* (fingolimod) is an oral sphingosine-1-phosphate (S1P) receptor modulator that inhibits the movement of lymphocytes (a type of white blood cell) out of the lymph nodes into the central nervous system, thereby preventing nerve inflammation and nervous tissue damage. It is approved:
  - In the US to treat adults and children aged 10 years and older with relapsing forms of multiple sclerosis, including clinically isolated syndrome, relapsing-remitting multiple sclerosis (RRMS) and active secondary progressive multiple sclerosis (SPMS). Multiple

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Item 4. Information on the Company

sclerosis is a disease in which the immune system attacks the protective covering of nerves (known as myelin).

- In the EU to treat adults and children aged 10 years and older who have highly active RRMS despite treatment with at least one disease-modifying agent, or who have rapidly evolving severe RRMS

Gilenya is licensed from Mitsubishi Tanabe Pharma Corporation.

- Zolgensma (onasemnogene abeparvovec) is a one-time intravenous gene therapy designed to address the genetic root cause of spinal muscular atrophy (SMA) by replacing the function of the missing or nonworking SMN1 gene. Zolgensma delivers a new working copy of the SMN1 gene into a patient's cells. It is approved in the US, the EU and other countries to treat:

- Babies and young children who have SMA with biallelic mutations in the SMN1 gene. SMA is a rare, genetic neuromuscular disease resulting in the progressive and irreversible loss of motor neurons, which causes muscle weakness and atrophy.

- Kesimpta (ofatumumab) is an anti-CD20 monoclonal antibody that enables the targeted depletion of B-cells, specifically in lymph nodes. Kesimpta is self-administered as a once-monthly injection via the Sensoready autoinjector pen. It is approved:

- In the US to treat adults with relapsing forms of multiple sclerosis, including clinically isolated syndrome, relapsing-remitting multiple sclerosis (RRMS) and active secondary progressive multiple sclerosis (SPMS). Multiple sclerosis is a disease in which the immune system attacks the protective covering of nerves (known as myelin).
- In the EU to treat adults with relapsing forms of multiple sclerosis with active disease defined by clinical or imaging features (i.e., relapse, disability, or lesions detected by MRI scans)

Approved indications vary across other countries. Ofatumumab was originally developed by Genmab and licensed to GlaxoSmithKline (GSK). Novartis obtained the rights to ofatumumab from GSK across all indications.

# Solid Tumor

- Tafinlar + Mekinist (dabrafenib + trametinib) is an oral combination therapy. Tafinlar and Mekinist are kinase inhibitors of the BRAF and MEK1/2 proteins, respectively, approved in combination in the US, the EU and other countries to treat patients who have certain types of cancer with a change in the BRAF gene (called a BRAF V600 mutation), including:

- Adults with unresectable or metastatic melanoma with a BRAF V600 mutation. Melanoma is a form of skin cancer; unresectable melanoma cannot be removed with surgery and metastatic melanoma has spread to other parts of the body. Tafinlar and Mekinist are also approved as single agents for this indication.

- Adults with stage III melanoma with a BRAF V600 mutation as an adjuvant treatment (following surgery)
- Adults with advanced non-small cell lung cancer (NSCLC) with a BRAF V600 mutation. NSCLC is the most common type of lung cancer.
- Adults with locally advanced or metastatic anaplastic thyroid cancer (ATC) with a BRAF V600 mutation whose cancer has progressed following treatment, and who have no satisfactory alternative treatment options (US). ATC is a rare and aggressive form of thyroid cancer.

Approved indications vary by country. Novartis has worldwide exclusive rights to develop, manufacture and commercialize trametinib granted by Japan Tobacco Inc.

- Kisqali (ribociclib) is a selective oral cyclin-dependent inhibitor of kinases 4 and 6 (CDK4/6) with somewhat greater inhibitory activity against CDK4 vs CDK6 - the two enzymes involved in the control of cell cycle progression. Kisqali is approved in the US, the EU and other countries to treat:

- Pre-, peri- and postmenopausal women, and men (US), with hormone receptor-positive (HR+)/human epidermal growth factor receptor 2-negative (HER2-) locally advanced or metastatic breast cancer, in combination with an aromatase inhibitor as initial endocrine-based therapy. HR+/HER2- breast cancer is the most common subtype of breast cancer.
- Pre-, peri- (EU) and postmenopausal women, and men (US), with HR+/HER2- locally advanced or metastatic breast cancer, in combination with fulvestrant, as first- or second-line therapy

Kisqali was developed by the Novartis Institutes for BioMedical Research under a research collaboration with Astex Pharmaceuticals.

- Piqray (alpelisib) is an oral kinase inhibitor that specifically targets the PIK3CA gene. This is the most commonly mutated gene in HR+/HER2- breast cancer, the most common subtype of breast cancer. Piqray is approved in the US, the EU and other countries to treat:

- Postmenopausal women, and men, with hormone receptor-positive (HR+)/human epidermal growth factor receptor 2-negative (HER2-) locally advanced or metastatic breast cancer with a PIK3CA mutation. It is used in combination with fulvestrant after disease progression while on or following an endocrine-based regimen (US), or after disease progression following endocrine therapy as monotherapy (EU).

- Pluvicto (lutetium (177Lu) vipivotide tetraxetan) is an intravenous radioligand therapy combining a targeting compound (a ligand) with a therapeutic radionuclide (a radioactive particle, in this case lutetium-177). Pluvicto delivers radiation selectively to PSMA-positive cells and the surrounding cells. It is approved in the US, the EU and other countries to treat:

- Adults with a type of advanced cancer that has spread to other parts of the body (metastatic) called prostate-specific membrane antigen-positive

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metastatic castration-resistant prostate cancer (PSMA-positive mCRPC) who have already been treated with other anticancer treatments (androgen receptor pathway inhibition and taxane-based chemotherapy)

## Hematology

- Promacta/Revolade (eltrombopag) is a once-daily oral thrombopoietin receptor agonist that works by stimulating bone marrow cells to produce platelets. It is approved in the US, the EU and other countries to treat:
- Immune thrombocytopenia (ITP) in patients who have had an insufficient response to or have failed previous therapies. ITP is a bleeding disorder caused by an unusually low number of platelets.
- Thrombocytopenia in patients with chronic hepatitis C to allow them to initiate and maintain interferon-based therapy
- Patients with severe aplastic anemia (SAA). SAA is a condition in which the body does not produce enough blood cells

*Promacta/Revolade* is marketed under a research, development and license agreement between Novartis and RPI Finance Trust (dba Royalty Pharma), as assignee of Ligand Pharmaceuticals.

- *Tasigna* (nilotinib) is a twice-daily oral tyrosine kinase inhibitor that acts by blocking the BCR-ABL protein. It is approved in the US, the EU and other countries to treat:

- Patients with Philadelphia chromosome-positive chronic myeloid leukemia (Ph+ CML) in the chronic and/or accelerated phase who are resistant or intolerant to existing treatment. Ph+ CML is a cancer that starts in the blood-forming cells of bone marrow.
- Newly diagnosed adults and children with Ph+ CML in the chronic phase

- *Jakavi* (ruxolitinib) is an oral inhibitor of the JAK1 and JAK2 tyrosine kinases. It is the first therapy approved in the EU and other countries to treat:

- Adults with myelofibrosis (MF), including primary myelofibrosis, post-polycythemia vera myelofibrosis and post-essential thrombocythemia myelofibrosis. MF is a rare blood cancer characterized by abnormal blood cell production and scarring in the bone marrow, which can lead to an enlarged spleen.
- Adults with polycythemia vera (PV) who are resistant or intolerant to a medication called hydroxyurea. PV is a rare blood cancer in which the bone marrow produces too many red blood cells, resulting in serious problems like clots.
- Patients aged 12 years and older with acute or chronic graft-versus-host disease (GvHD) and who have had an inadequate response to corticosteroids or other systemic therapies. GvHD occurs in stem-cell transplant patients when donor cells see the recipient's healthy cells as foreign and attack them.

Novartis licensed ruxolitinib from Incyte Corporation for development and commercialization in the

indications of oncology, hematology and graft-versus-host disease outside the US. Incyte Corporation markets ruxolitinib as Jakafi® in the US.

- *Scemblix* (asciminib) is an oral kinase inhibitor that works by binding to the ABL myristoyl pocket. It is approved:

- In the US, the EU and other countries to treat adults with Philadelphia chromosome-positive chronic myeloid leukemia (Ph+ CML) in chronic phase who have previously been treated with two or more tyrosine kinase inhibitors (TKIs). CML is a type of cancer that starts in the blood-forming cells of the bone marrow and invades the blood. There are three phases of CML: chronic phase, accelerated phase and blast phase.
- In the US and other countries to treat adults with Ph+ CML in chronic phase with the T315I mutation. Some patients with CML develop mutations that cause resistance to TKI therapy, including the T315I mutation, which confers resistance to most available TKIs. As a result, patients with this mutation have limited treatment options.

## Other Promoted Brands

- *Lucentis* (ranibizumab) is a humanized, high-affinity antibody fragment that binds to vascular endothelial growth factor A (VEGF-A), a protein that can cause the growth of blood vessels in the eye, potentially leading to vision loss. *Lucentis* is an anti-VEGF therapy that is injected into the eye. It is approved in the EU and other countries to treat patients with certain eye conditions, including:

- Adults with neovascular (wet) age-related macular degeneration (AMD). Wet AMD develops when abnormal blood vessels grow under the macula and leak blood and other fluids in the back of the eye, which damages the macula.
- Adults with proliferative diabetic retinopathy, moderately severe to severe non-proliferative diabetic retinopathy, and/or diabetic macular edema. These conditions are complications of diabetes.
- Adults with visual impairment due to macular edema secondary to retinal vein occlusion (branch RVO or central RVO). Retinal vein occlusion is a blockage of the branch or central retinal veins, which carry blood away from the retina.

Approved indications vary by country. *Lucentis* is licensed from Genentech, and Novartis holds the rights to commercialize the product outside the US. Genentech holds the rights to commercialize *Lucentis* in the US. For more information, see “Item 18. Financial Statements-Note 27. Transactions with related parties-Roche Holding AG.”

- *Xiidra* (lifitegrast 0.5%), an LFA-1 antagonist, is a prescription eye drop designed to block the interaction of two key proteins called ICAM-1 and LFA-1, thereby reducing inflammation. It is approved in the US and other countries to treat:

- The signs and symptoms of dry eye disease in adults

25

Item 4. Information on the Company

### **Established Brands**

- *Sandostatin* SC (octreotide acetate for injection) and *Sandostatin* LAR (octreotide acetate for injectable suspension) are somatostatin analogs approved in the US, the EU and other countries to treat:
  - Adults with acromegaly that is inadequately controlled by surgery or radiotherapy. Acromegaly is a chronic disease caused by the oversecretion of growth hormone.
  - Patients with certain symptoms associated with carcinoid tumors and other types of functional gastrointestinal and pancreatic neuroendocrine tumors

*Sandostatin* LAR is also approved in the EU and other countries to treat patients with advanced neuroendocrine tumors of the midgut or of unknown primary tumor origin.

### **Compounds in development**

The following table provides an overview of the key Innovative Medicines Division projects currently in the Confirmatory Development stage and may also describe certain projects in the Exploratory Development stage. Projects typically enter Confirmatory Development and become the responsibility of our Global Drug Development organization during Phase II testing. (For more information about our drug development program, see “-Research and development-Development program.”) Projects are listed in alphabetical order by compound code, or by product name where applicable. Projects include those seeking to develop potential uses of new

molecular entities as well as potential additional indications or new formulations for already marketed products. The table below, entitled “Projects removed from the development table since 2021,” highlights changes to the table entitled “Selected development projects” from the previous year.

The year that each project entered the current phase of development refers to the year of the first patient’s first visit in the first clinical trial of that phase. For projects in Phase II, the year refers to the first patient’s first visit in the first Phase II trial, which can occur before the Confirmatory Development stage. Prior to 2020, we reported the current phase based on the year in which the decision to enter the phase was made. To maintain continuity, we have included certain previously disclosed projects, noted below, that have not yet achieved “first patient, first visit” in any Phase I-III study for the reported indication and route of administration. We have disclosed these projects using our previous reporting criteria.

A reference to a project being in registration means that an application has been submitted to a health authority for marketing approval. Compounds and new indications in development are subject to required regulatory approvals and, in certain instances, contractual limitations. These compounds and indications are in various stages of development throughout the world. 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 in any country or in every country. See “-Regulation” for more information on the approval process.

26

Item 4. Information on the Company

## Selected development projects

| Compound/ product | Common name | Mechanism of action | Potential indication | Category | Formulation/ route of administration | Year project entered current development phase | Planned filing dates/current phase |
| --- | --- | --- | --- | --- | --- | --- | --- |
| AVXS-101 (OAV101) | onasemno- gene abepar- vovec | Survival motor neuron (SMN) gene therapy | Spinal muscular atrophy (IT formulation) | Neuroscience | Intrathecal injection | 2021 | 2025/III |
| Beovu | brolucizumab | VEGF inhibitor | Diabetic retinopathy | Ophthalmology | Intravitreal injection | 2020 | 2025/III |
| CFZ533 | iscalimab | CD40 inhibitor | Sjögren's syndrome | Immunology | Subcutaneous injection | 2019 | ≥2026/II |
| Coartem | artemether + lumefantrine | PGH-1 (artemisinin combination therapy) | Malaria, uncomplicated (<5 kg patients) | Global Health | Oral | 2020 | 2024/III |
| Cosentyx | secukinumab | IL-17A inhibitor | Hidradenitis suppurativa | Immunology | Subcutaneous injection | 2022 | US/EU registration |
|  |  |  | Giant cell arteritis | Immunology | Subcutaneous injection | 2021 | 2025/III |
|  |  |  | Lupus nephritis | Immunology | Subcutaneous injection | 2020 | ≥2026/III |
|  |  |  | Psoriatic arthritis (IV formulation) | Immunology | Intravenous infusion | 2022 | US registration |
|  |  |  | Ankylosing spondylitis (IV formulation) | Immunology | Intravenous infusion | 2022 | US registration |
| JDQ443 | TBD | KRAS inhibitor | Non-small cell lung cancer, 2/3L 1 | Solid Tumor | Oral | 2022 | 2024/III |
| KAE609 | cipargamin | PIATP4 inhibitor | Malaria, uncomplicated | Global Health | Oral | 2017 | ≥2026/II |
|  |  |  | Malaria, severe | Global Health | Oral | 2022 | ≥2026/II |
| KAF156 | ganaplacide | Non-artemisinin plasmodium falciparum inhibitor | Malaria, uncomplicated | Global Health | Oral | 2017 | ≥2026/II |
| Kisqali | ribociclib | CDK4 inhibitor | Hormone receptor-positive (HR+)/human epidermal growth factor receptor 2-negative (HER2-) early breast cancer (adjuvant) | Solid Tumor | Oral | 2018 | 2023/III |
| Leqvio | inclisiran | siRNA (regulation of LDL-C) | Secondary prevention of cardiovascular events in patients with elevated levels of LDL-C | Cardiovascular | Subcutaneous injection | 2018 | ≥2026/III |
| LNA043 | TBD | ANGPTL3 agonist | Knee osteoarthritis | Immunology | Intra-articular | 2021 | ≥2026/II |
| LNP023 | iptacopan | CFB inhibitor | IgA nephropathy | Cardiovascular | Oral | 2021 | 2024/III |
|  |  |  | C3 glomerulopathy | Cardiovascular | Oral | 2021 | 2024/III |
|  |  |  | Paroxysmal nocturnal hemoglobinuria | Hematology | Oral | 2021 | 2023/III |
|  |  |  | Atypical hemolytic uremic syndrome | Hematology | Oral | 2021 | ≥2026/III |
| LOU064 | remibrutinib | BTK inhibitor | Chronic spontaneous urticaria | Immunology | Oral | 2021 | 2024/III |
|  |  |  | Sjögren's syndrome | Immunology | Oral | 2019 | ≥2026/II |
|  |  |  | Multiple sclerosis | Neuroscience | Oral | 2021 | ≥2026/III |
| Lutathera | lutetium Lu 177 dotatate/ lutetium ( 177 Lu) oxodotreotide | Radioligand therapy targeting SSTR | Gastroenteropancreatic neuroendocrine tumors, 1 st line in G2/3 tumors | Solid Tumor | Intravenous infusion | 2020 | 2023/III |
| LXE408 | TBD | Proteasome inhibitor | Visceral leishmaniasis | Global Health | Oral | 2022 | ≥2026/II |
| MBG453 | sabatolimab | TIM-3 antagonist | Myelodysplastic syndrome | Hematology | Intravenous infusion | 2020 | 2024/III |
|  |  |  | Unfit acute myeloid leukemia | Hematology | Intravenous infusion | 2020 | ≥2026/II |
| MUJ821 | onfasprodil | NR2B negative allosteric modulator | Major depressive disorder | Neuroscience | Intravenous infusion | 2021 | ≥2026/II |
| NIS793 | TBD | TGF-beta 1 inhibitor | Pancreatic cancer, 1 st line | Solid Tumor | Intravenous infusion | 2021 | 2025/III |
| Pigray | alpelisib | PI3K-alpha inhibitor | Ovarian cancer | Solid Tumor | Oral | 2021 | 2023/III |
| Pluvicto | lutetium Lu 177 vipivotide tetraxetan/ lutetium ( 177 Lu) vipivotide tetraxetan | Radioligand therapy targeting PSMA | Metastatic castration-resistant prostate cancer, pre-taxane | Solid Tumor | Intravenous infusion | 2021 | 2023/III |
|  |  |  | Metastatic hormone-sensitive prostate cancer | Solid Tumor | Intravenous infusion | 2021 | 2024/III |

$^{1}$ Project added to selected development projects table in 2022 - entered Confirmatory Development

27

Item 4. Information on the Company

| Compound/ product | Common name | Mechanism of action | Potential indication | Category | Formulation/ route of administration | Year project entered current development phase | Planned filing dates/current phase |
| --- | --- | --- | --- | --- | --- | --- | --- |
| PPY988 2 | TBD | Gene therapy - complement factor I modulation | Geographic atrophy | Ophthalmology | Subretinal injection | 2022 | ≥2026/II |
| QGE031 | ligelizumab | IgE inhibitor | Food allergy | Immunology | Subcutaneous injection | 2021 | ≥2026/III |
| SAF312 | libvatrep | TRPV1 antagonist | Chronic ocular surface pain | Ophthalmology | Topical | 2016 | ≥2026/II |
| Scemblix | asciminib | BCR-ABL inhibitor | Chronic myeloid leukemia, 1 st line | Hematology | Oral | 2021 | 2025/III |
| SKO136 3 | ensovibep | Multispecific DARPin | Coronavirus infection | Global Health | Intravenous infusion | Not applicable (N/A) | TBD 4 /II |
| TQJ230 | pelacarsen | ASO targeting lipoprotein(a) | Secondary prevention of cardiovascular events in patients with elevated levels of lipoprotein(a) | Cardiovascular | Subcutaneous injection | 2019 | 2025/III |
| VAY736 | ianalumab | BAFF-R inhibitor | Autoimmune hepatitis | Immunology | Subcutaneous injection | 2018 | ≥2026/II |
|  |  |  | Lupus nephritis 5 | Immunology | Subcutaneous injection | 2022 | ≥2026/III |
|  |  |  | Sjögren's syndrome | Immunology | Subcutaneous injection | 2022 | ≥2026/III |
|  |  |  | Warm autoimmune hemolytic anemia 6 (wAIHA) | Hematology | Intravenous infusion | 2022 | ≥2026/III |
| VDT482 | tislelizumab | Anti-PD-1 monoclonal antibody | Esophageal cancer, 2 nd line | Solid Tumor | Intravenous infusion | N/A | US/EU registration |
|  |  |  | Non-small cell lung cancer | Solid Tumor | Intravenous infusion | N/A | EU registration |
|  |  |  | Nasopharyngeal carcinoma, 1 st line | Solid Tumor | Intravenous infusion | N/A | 2023/III |
|  |  |  | Gastric cancer, 1 st line | Solid Tumor | Intravenous infusion | N/A | 2023/III |
|  |  |  | Esophageal cancer, 1 st line | Solid Tumor | Intravenous infusion | N/A | 2023/III |
|  |  |  | Localized esophageal cancer | Solid Tumor | Intravenous infusion | N/A | 2024/III |
|  |  |  | Hepatocellular carcinoma, 1 st line | Solid Tumor | Intravenous infusion | N/A | 2023/III |
|  |  |  | Small cell lung cancer, 1 st line | Solid Tumor | Intravenous infusion | N/A | 2024/III |
|  |  |  | Urothelial cell carcinoma, 1 st line 8 | Solid Tumor | Intravenous infusion | N/A | ≥2026/III |
| VPM087 | gevokizumab | IL-1 beta antagonist | Colorectal cancer, 1 st line | Solid Tumor | Intravenous infusion | 2019 | ≥2026/I |
| Xolair | omalizumab | IgE inhibitor | Food allergy | Immunology | Subcutaneous injection | 2019 | 2023/III |
| XXB750 9 | TBD | NPR1 agonist | Hypertension | Cardiovascular | Subcutaneous injection | 2022 | ≥2026/II |

$^{2}$ Entered confirmatory development following the acquisition of Gyroscope Therapeutics.

$^{3}$ In-licensed from Molecular Partners in 2021 (option deal)

$^{4}$ No definite submission date can be provided at this time

$^{5}$ Project added to selected development projects table in 2022 - entered Confirmatory Development

$^{6}$ Formerly 'bladder urothelial cell carcinoma'. Indication language updated in 2022 to reflect latest development plan

28

Item 4. Information on the Company

# **Projects removed from the development table since 2021**

| Compound/product | Potential indication | Change | Reason |
| --- | --- | --- | --- |
| ACZ885 (canakinumab) | Non-small cell lung cancer, adjuvant | Removed | Development discontinued |
| Beovu | Diabetic macular edema | Commercialized |  |
| CFZ533 (iscalimab) | Liver transplantation | Removed | Development discontinued |
| Cosentyx | Ankylosing spondylitis head-to-head study versus Sandoz biosimilar Hynmoz (adalimumab) | Removed | Development discontinued |
| Cosentyx | Lichen Planus | Removed | Development discontinued |
| CSJ117 | Asthma | Removed | Development discontinued |
| Jakavi | Acute graft-versus-host disease | Commercialized |  |
| Jakavi | Chronic graft-versus-host disease | Commercialized |  |
| Kymriah | Relapsed/refractory follicular lymphoma | Commercialized |  |
| LJN452 | Nonalcoholic steatohepatitis | Removed | Development discontinued |
| LMI070 | Huntington's disease | Removed | Development discontinued |
| LNP023 | Membranous nephropathy | Removed | Development discontinued |
| Vijioice 1 | PIK3CA-related overgrowth spectrum | Commercialized |  |
| Pigray | Triple negative breast cancer | Removed | Development discontinued |
| Pigray | Human epidermal growth factor receptor 2-positive (HER2+) advanced breast cancer | Removed | Development discontinued |
| Pluvicto | Metastatic castration-resistant prostate cancer, post-taxane | Commercialized |  |
| QBW251 (icenticaftor) | Chronic obstructive pulmonary disease | Removed | Development discontinued |
| QGE031 (ligelizumab) | Chronic spontaneous urticaria | Removed | Development discontinued |
| QGE031 (ligelizumab) | Chronic inducible urticaria | Removed | Development discontinued |
| Scemblix | Chronic myeloid leukemia, 3 rd line | Commercialized |  |
| UNR844 | Presbyopia | Removed | Development discontinued |

$^{1}$ Formerly listed as BYL719

29

Item 4. Information on the Company

## Principal markets

The Innovative Medicines Division sells products in approximately 130 countries worldwide. Net sales are primarily concentrated in the US and Europe. The following table sets forth the aggregate 2022 net sales of the Innovative Medicines Division by region:

### Innovative Medicines

|  | 2022 net sales to third parties |  |
| --- | --- | --- |
|  | USD millions | % |
| United States | 15 899 | 39 |
| Europe | 13 554 | 33 |
| Asia, Africa, Australasia | 8 929 | 22 |
| Canada and Latin America | 2 914 | 6 |
| Total | 41 296 | 100 |
| Of which in Established Markets 1 | 30 548 | 74 |
| Of which in Emerging Growth Markets 1 | 10 748 | 26 |

$^{1}$ Emerging Growth Markets comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand.

Many of our Innovative Medicines Division products are used for chronic conditions that require patients to consume the product over long periods of time, ranging from months to years. However, certain of our marketed products and development projects, such as cell and gene therapies, are administered only once. Net sales of the vast majority of our products are not subject to material changes in seasonal demand.

## Production

Our primary goal is to ensure the uninterrupted and timely supply of medicines that meet all product specifications and quality standards, and that are produced in the most cost-effective and sustainable manner. The manufacturing of our products is highly regulated by governmental health authorities around the world, including the US Food and Drug Administration (FDA) and European Medicines Agency (EMA). In addition to regulatory requirements, many of our products involve technically complex manufacturing processes or require highly specialized raw materials.

In 2022, we began to integrate Advanced Accelerator Applications (AAA), a Novartis company that focuses on radioligand therapies, into our existing manufacturing and supply structure. We manufacture our products across the following technologies at facilities worldwide: large molecules, small molecules, cell and gene therapy, RNA therapy and radioligand therapy (see also “-Item 4.D Property, plants and equipment”). In our manufacturing network, we maintain state-of-the-art processes, with quality as a priority, and require our suppliers to adhere to the same high standards we expect from our own people and processes. These processes include: chemical and biological syntheses; radioisotope handling, which relates to our radioligand therapies; sterile processing, including CAR-T cell processing; and formulation and packaging. We are constantly working to improve our existing manufacturing processes, develop new and innovative technologies, and review and adapt

our manufacturing network to meet our needs and those of our patients and customers.

We produce raw materials for manufacturing in-house or purchase them from a number of third-party suppliers. Where possible, we 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 or other requirements. We monitor market developments that could have an adverse effect on the supply of essential materials. Our suppliers of raw materials are required to comply with applicable regulations and Novartis quality standards.

Because the manufacturing of our products is complex and highly regulated by governmental health authorities, supply is never guaranteed. If we or our third-party suppliers fail to comply with applicable regulations, then there could be a product recall or other disruption to our production activities. We have experienced supply interruptions for our products in the past, and there can be no assurance that supply will not be interrupted again in the future. However, we have implemented a global manufacturing strategy to maximize business continuity in case of such events.

## Marketing and sales

The Innovative Medicines Division serves customers with 21 564 field force representatives, as of December 31, 2022, including supervisors and administrative personnel. These trained representatives present the therapeutic benefits and risks of our products to physicians, pharmacists, hospitals, insurance groups, managed care organizations and other healthcare professionals. In the US, Novartis advertises certain products via digital and traditional media channels, including the internet, television, newspapers and magazines. Novartis also pursues co-promotion or co-marketing opportunities as well as licensing and distribution agreements with other companies in various markets.

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Item 4. Information on the Company

The marketplace for healthcare is evolving. Customer groups beyond prescribers have increasing influence on treatment decisions and guidelines, while patients continue to become more informed stakeholders in their healthcare decisions and look for solutions to meet their changing needs. Novartis is responding by adapting our business practices to engage appropriately with patients, customer groups and other stakeholders, including by delivering innovative solutions to drive education, access and improved patient care.

The COVID-19 pandemic has accelerated additional changes related to marketing and sales techniques in the healthcare industry. For example, many healthcare professionals have increased their use of virtual platforms when interacting with pharmaceutical companies, and prefer to receive information in a more convenient and personalized way. In response, Novartis is working to implement a new customer engagement model that combines traditional face-to-face visits with digital and other methods of engaging healthcare professionals to improve the efficiency and effectiveness of every interaction. We are similarly changing our approach to engaging healthcare systems, payers and other healthcare providers.

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 healthcare providers. The growing number of so-called “specialty” drugs in our portfolio has resulted in increased engagement with specialty pharmacies.

In the US, the US Centers for Medicare & Medicaid Services (CMS) is the largest single payer for healthcare services as a result of continuing changes in healthcare economics and an aging population. In addition, both commercial and government-sponsored managed care organizations continue to be among the largest groups of payers for healthcare services in the US. In other countries, national health services are often the only significant payer for healthcare services. In an effort to control prescription drug costs, almost all managed care organizations and national health services use formularies that list specific drugs that may be reimbursed and/or the level of reimbursement for each drug. Managed care organizations and national health services also increasingly use cost-benefit analyses to determine whether or not newly approved drugs will be added to a formulary and/or the level of reimbursement for that drug, and to determine whether or not to continue to reimburse existing drugs. We have dedicated teams that actively seek to optimize patient access, including formulary positions, for our products.

The trend toward consolidation among distributors and retailers of Innovative Medicines Division products continues in the US and internationally, both within and across countries. This has increased our customers’ purchasing leverage and resulted in increased pricing pressure on our products. Moreover, we are exposed to increased concentration of credit risk as a result of the consolidation among our customers.

Drug pricing is an increasingly prominent issue in many countries as healthcare spending continues to rise. This issue has received significant attention in the US, especially with the recent passage of the Inflation

Reduction Act (please see “-Price controls” for more information). At Novartis, we are increasing our efforts to enable patient access through innovative pricing and access initiatives in the US, Europe and other markets. These include contract structures such as pay-over-time and outcome-based agreements.

In 2021, Novartis reached an agreement with the National Health Service (NHS) in England to implement a first-of-its-kind population health management approach designed to provide faster and broader access to *Leqvio* for certain high-risk patients with atherosclerotic cardiovascular disease. Novartis is engaging in similar collaborations with other countries.

Additionally, following conditional approval of *Zolgensma* in Europe in 2020, Novartis Gene Therapies established “Day One” early access agreements in multiple European countries. These agreements support early patient access by allowing a variety of customizable options, including retroactive rebates, deferred payments, installment options, outcome-based rebates, and collaborations with healthcare systems to optimize disease management. These efforts have expanded globally, and we now have multiple early access agreements and pay-for-performance agreements (i.e., outcome-based arrangements) in place in various markets around the world. *Zolgensma* is approved in 45 countries.

## Competition

The global pharmaceutical market is highly competitive. We compete against other major international corporations that have substantial financial and other resources, as well as against smaller companies that operate regionally or nationally. Competition within the industry is intense and extends across a wide range of activities, including pricing, product characteristics, customer service, sales and marketing, and research and development.

Like other companies selling patented pharmaceuticals, Novartis faces challenges from companies selling competing patented products. Generic forms of our products may follow the expiry of intellectual property protection or regulatory exclusivities, and generic companies may also gain entry to the market through successfully challenging our intellectual property rights and exclusivities. We use appropriate, legally permissible measures to defend those rights and exclusivities. (See also “-Intellectual property” below). We also may face competition from over-the-counter (OTC) products that do not require a prescription from a physician.

There is ongoing consolidation in the pharmaceutical industry. At the same time, new entrants are looking to use their expertise to establish or expand their presence in healthcare, including technology companies seeking to benefit from the increasing importance of data and data management in our industry.

## Research and development

The discovery and development of a new drug usually requires approximately 10 to 15 years from the initial research to bringing a drug to market. This includes

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Item 4. Information on the Company

approximately six to eight years from Phase I clinical trials to market entry. At each of these steps, there is a substantial risk that a compound (i.e., drug or biologic) or other therapeutic candidate will not meet the requirements to progress further. In such an event, we may be required to abandon the development of a potential therapy in which we have made a substantial investment.

We manage our research and development expenditures across our entire portfolio in accordance with our strategic priorities. We make decisions about whether or not to proceed with development projects on a project-by-project basis. These decisions are based on the project's potential to meet a significant unmet medical need or to improve patient outcomes, the strength of the science underlying the project, and the potential of the project (subject to the risks inherent in pharmaceutical development) to generate significant positive financial results for the Company. Once a management decision has been made to proceed with the development of a particular molecule, the level of research and development investment required will be driven by many factors. These include the medical indications for which it is being developed, the number of indications being pursued, whether the molecule is of a chemical or biological nature, the stage of development, and the level of evidence necessary to demonstrate clinical efficacy and safety.

### Research program

Our research program is conducted by the Novartis Institutes for BioMedical Research (NIBR), which is the research and early development innovation engine of Novartis. NIBR is responsible for the discovery of new medicines for diseases with unmet medical need. We focus our work in areas where we believe we can have the most impact for patients. This requires the hiring and retention of highly talented employees, a focus on fundamental disease mechanisms that are relevant across different disease areas, continuous improvement in technologies for drug discovery and potential therapies, working with patients to understand their diseases and the potential benefits of therapies, close alliances with clinical and commercial colleagues, and the establishment of strategic external alliances.

Approximately 5 500 full-time-equivalent scientists, physicians and business professionals work at NIBR sites in Basel, Switzerland; Cambridge, Massachusetts; East Hanover, New Jersey; San Diego, California; and Emeryville, California. They contribute to research into disease areas such as cardiovascular, renal and metabolic diseases; neuroscience; oncology; hematology; muscle disorders; ophthalmology; autoimmune diseases; and respiratory and allergic diseases. Research at the Friedrich Miescher Institute focuses on basic genetic and genomic research, and the Novartis Institute for Tropical Diseases (NITD), in Emeryville, California, focuses on discovering new medicines to fight tropical diseases, including malaria and cryptosporidiosis.

All drug candidates go through proof-of-concept trials to enable an early assessment of the safety and efficacy of the drug while collecting basic information on pharmacokinetics and tolerability, and adhering to the guidance for early clinical testing set forth by health

authorities. Following proof of concept, our Global Drug Development unit conducts confirmatory trials on the drug candidates.

In 2022, we integrated the Genomics Institute of the Novartis Research Foundation (GNF), which is based in San Diego, US, into NIBR. This enables closer collaboration with colleagues across NIBR and gives greater access to biological, therapeutic, and translational platforms to researchers across Novartis. The NIBR San Diego site is focused on developing novel technology to drive drug discovery research, including regenerative medicine, small interfering RNA therapy and covalent drug discovery.

### Development program

Our Global Drug Development (GDD) organization oversees and executes drug development activities, working collaboratively with NIBR, our commercial organization and other parts of the Company on our overall pipeline strategy. The GDD organization includes centralized global functions such as Regulatory Affairs and Global Development Operations, and global Development Units, and has approximately 12 800 full-time equivalent employees worldwide.

The traditional model of clinical development consists of three phases:

**Phase I:** The first clinical trials of a new compound - generally performed in a small number of healthy human volunteers - to assess the drug's safety profile, including the safe dosage range. These trials also determine how a drug is absorbed, distributed, metabolized and excreted, and the duration of its action.

**Phase II:** Clinical studies performed with patients who have the target disease, with the aim of continuing the Phase I safety assessment in a larger group, assessing the efficacy of the drug in the patient population, and determining the appropriate doses for further evaluation.

**Phase III:** Large-scale clinical studies with several hundred to several thousand patients, which are conducted to establish the safety and efficacy of the drug in specific indications for regulatory approval. Phase III trials may also be used to compare a new drug against a current standard of care to evaluate the overall benefit-risk relationship of the new medicine.

In each of these phases, physicians monitor volunteer patients closely to assess the safety and efficacy of a potential new drug or indication.

Although we use this traditional model, we have tailored the development process to be simpler, more flexible and more efficient. We divide the development process into two stages: Exploratory Development to establish proof of concept, followed by Confirmatory Development to confirm the concept in large numbers of patients. Exploratory Development consists of clinical proof-of-concept (PoC) studies, which are small clinical trials (typically involving between five and 15 patients) that combine elements of traditional Phase I/II testing. NIBR conducts these customized trials, which are designed to give early insights into issues such as safety, efficacy and toxicity for a drug in a given indication. Once a positive proof of concept has been established, the

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drug moves to the Confirmatory Development stage and becomes the responsibility of GDD. Confirmatory Development has elements of traditional Phase II/III testing and includes trials aimed at confirming the safety and efficacy of the drug in the given indication, leading up to submission of a dossier to health authorities for approval. This stage can also include trials that compare the drug to the current standard of care for the disease in order to evaluate the drug's overall benefit-risk profile. Further, with new treatment approaches such as gene therapy for rare diseases, elements of Exploratory and Confirmatory Development may be combined and suffice for registration under certain conditions such as high unmet medical need and clinical data showing highly favorable benefit-risk. In these cases, additional post-approval studies may be required by the regulatory authorities to continue to gather important data to further support approval.

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. For more information, see '-Regulation.'

Our Innovation Management Board (IMB) is responsible for all strategic aspects of our development portfolio and oversees our drug development budget as well as major project phase transitions and milestones following a positive proof-of-concept outcome, including transitions to Confirmatory Development and the decision to submit a regulatory application to the health authorities. The IMB is also responsible for the endorsement of overall development strategy, the endorsement of development project priorities, and decisions on project discontinuations. Our Chief Executive Officer chairs the IMB, and other representatives from Novartis senior management, with expertise spanning multiple fields, are among its core and extended membership.

### **Alliances and acquisitions**

Our Innovative Medicines Division enters into business development agreements with other pharmaceutical and biotechnology companies and with academic and other institutions to develop new products and access new markets. We license products that complement our current product line and are appropriate to our business strategy. We focus on strategic alliances and acquisition activities for key disease areas and indications that we expect to be growth drivers in the future. We review products and compounds we are considering licensing, using the same criteria that we use for our own internally discovered drugs.

In February 2022, Novartis completed the acquisition of Gyroscope Therapeutics Holdings Plc. Through the acquisition, Novartis added PPY988 (GT005), an investigational one-time gene therapy for geographic atrophy, to its portfolio.

For more information about recent business acquisitions, see 'Item 18. Financial Statements-Note 2. Significant transactions.'

## **Regulation**

The international pharmaceutical industry is highly regulated. Regulatory authorities around the world administer numerous laws and regulations regarding the testing, approval, manufacturing, importing, labeling and marketing of drugs, and review the safety and efficacy of pharmaceutical products. Extensive controls exist on the non-clinical and clinical development of pharmaceutical products. These regulatory requirements, and the implementation of them by local health authorities around the globe, 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.

Health authorities, including those in the US and the EU, have high standards of technical evaluation. The introduction of new pharmaceutical products generally entails a lengthy approval process. Products must be authorized or registered prior to marketing, and such authorization or registration must subsequently be maintained. In recent years, the registration process has required increased testing and documentation for the approval 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 safety, efficacy and quality 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 and the specific requirements, including risk tolerance, of the local health authorities can vary significantly from country to country. Even if a drug is registered and marketed in one country, the registration authority in another country may request additional information from the pharmaceutical company prior to registration or even reject the product. 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, the US and the EU have made efforts 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 and other payers can substantially extend the time until a product may finally be available to patients.

The following provides a summary of the regulatory processes in the principal markets served by Innovative Medicines Division affiliates:

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## United States

In the US, applications for drug registration are submitted to and reviewed by the FDA. The FDA regulates the testing, manufacturing, labeling and approval for marketing of pharmaceutical products intended for commercialization in the US. The FDA continues to monitor the safety of pharmaceutical products after they have been approved for sale in the US market. The pharmaceutical development and registration process is typically intensive, lengthy and rigorous. When a pharmaceutical company has gathered data that it believes sufficiently demonstrates a drug's safety, efficacy and quality, the company may file a New Drug Application (NDA) or Biologics License Application (BLA), as applicable, for the compound. The NDA or BLA must contain all the scientific information that has been gathered about the compound. This typically includes information regarding the clinical experiences of patients tested in the drug's clinical trials. A Supplemental New Drug Application (sNDA) or Supplemental Biologics License Application (sBLA) must be filed for new indications and dosage forms for a previously approved drug.

Once an application is submitted, the FDA assigns reviewers from its staff, including experts in biopharmaceutics, chemistry, clinical microbiology, pharmacology/toxicology, and statistics. After a complete review, these content experts provide written evaluations of the NDA or BLA. These recommendations are consolidated and are used by senior FDA staff in its final evaluation of the NDA or BLA. Based on that final evaluation, the FDA then provides to the NDA or BLA's sponsor an approval, or a 'complete response' letter if the NDA or BLA application is not approved. If not approved, the letter will state the specific deficiencies in the NDA or BLA that need to be addressed. The sponsor must then submit an adequate response to the deficiencies in order to restart the review procedure.

Once the FDA has approved an NDA, BLA, sNDA or sBLA, the company can make the new drug available for physicians and other healthcare providers 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 specified conditions.

Throughout the life cycle of a product, the FDA requires compliance with standards relating to good laboratory, clinical and manufacturing practices. The FDA also requires compliance with rules pertaining to the manner in which we may promote our products.

## European Union

In the EU, there are three main procedures for application for authorization to market pharmaceutical products in more than one EU member state at the same time: the centralized procedure, the mutual recognition procedure and the decentralized procedure. It is also possible to obtain a national authorization for products intended for commercialization in a single EU member state only. The procedure used for first authorization must continue to be followed for subsequent changes, e.g., to add an indication for a licensed product.

Under the centralized procedure, applications are made to the EMA for an authorization that is valid for the European Union (all member states). The centralized procedure is mandatory for all biotechnology products; new chemical entities in cancer, neurodegenerative disorders, diabetes, AIDS, autoimmune diseases and other immune dysfunctions; advanced therapy medicines, such as gene therapy, somatic cell therapy and tissue-engineered medicines; and orphan medicines (medicines for rare diseases). It is optional for other new chemical entities, innovative medicinal products, and medicines for which authorization would be in the interest of public health. When a pharmaceutical company has gathered data that it believes sufficiently demonstrates a drug's safety, efficacy and quality, the company may submit an application to the EMA. The EMA then receives and validates the application, and the specialized committee for human medicines, the CHMP, appoints a rapporteur and co-rapporteur to review it. They use experts from their countries to carry out the assessment but can also draw on expertise from other member states ('multinational teams'). The entire review cycle must be completed within 210 days, although there are 'clock stops' to allow the company to respond to questions set forth in the rapporteur and co-rapporteur's assessment report and agreed with the CHMP. The first clock stop is at Day 120 and the clock restarts on Day 121, when the company's complete response is received by the EMA. If there are further aspects of the dossier requiring clarification, the CHMP will issue further questions at Day 180, and may also request an oral explanation, in which case the sponsor must not only respond to the further questions but also appear before the committee to justify its responses. On Day 210, the CHMP will take a vote to recommend the approval or non-approval of the application, and their opinion is transferred to the EC. The final EC decision under this centralized procedure is a single decision that is applicable to all member states. This decision occurs 60 days, on average, after a positive CHMP recommendation.

Under both the mutual recognition procedure (MRP) and the decentralized procedure (DCP), the assessment is led by one member state, called the reference member state (RMS) which then liaises with other member states, known as the concerned member states. In the MRP, the company first obtains a marketing authorization in the RMS, which is then recognized by the concerned member states in 90 days. In the DCP, the application is done simultaneously in the RMS and all concerned member states. During the DCP, the RMS drafts an assessment report within 120 days. Within an additional 90 days, the concerned member states review the application and can issue objections or requests for additional information. On Day 90, each concerned member state must be assured that the product is safe and effective, and that it will cause no undue risks to the public health. Once an agreement has been reached, each member state grants national marketing authorizations for the product.

After receiving the marketing authorizations, the company must submit periodic safety reports to the relevant health authority (EMA for the centralized procedure, national health authorities for DCP or MRP). In addition, pharmacovigilance measures must be implemented

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and monitored, including the collection, evaluation and expedited reporting of adverse events, and updates to risk management plans. For some medications, post-approval studies (Phase IV) may be imposed to complement available data with additional data to evaluate long-term effects (called a Post-Approval Safety Study, or PASS) or to gather additional efficacy data (called a Post-Approval Efficacy Study, or PAES).

European marketing authorizations have an initial duration of five years. The holder of the marketing authorization must actively apply for its renewal after this first five-year period. As part of the renewal procedure, the competent authority performs a full benefit-risk review of the product. Should the authority conclude that the benefit-risk balance is no longer positive, the marketing authorization can be suspended or revoked. Once renewed, the marketing authorization is valid for an unlimited period, unless it is determined that the product must be further monitored for safety reasons. In this case, the authority may require another renewal at 10 years. If the holder does not apply for renewal, the marketing authorization automatically lapses. Any marketing authorization that is not followed within three years of its granting by the actual placing on the market of the corresponding medicinal product ceases to be valid.

## Price controls

In most of the markets where we operate, the prices of pharmaceutical products are subject to both direct and indirect price controls 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 robust - and potentially even strengthened - and to have a continued negative influence on the prices we are able to charge for our products.

### Direct governmental efforts to control prices

United States: The Inflation Reduction Act of 2022 (the “Act”) was signed into law, which mandates the negotiation of eligible Medicare Part B and Part D drugs; redesigns the Medicare Part D benefit, including a USD 2 000 out-of-pocket cap for Medicare beneficiaries; and imposes penalties for Medicare drugs that increase in price faster than the rate of inflation. Under the Act, the US government is required to negotiate the Medicare prices of single-sourced small molecule drugs that have been on the market for seven years following FDA approval as well as single-sourced biologics that have been on the market for 11 years after FDA approval.

Medicare drugs with the highest total cost to the US government will be selected for negotiation once they become eligible. Exemptions include orphan drugs with an indication for one rare disease or condition, drugs with a total cost to the US government of less than USD 200 million, and plasma-derived drugs.

The negotiated price will be publicly available and will become effective for selected drugs nine years after FDA approval for eligible small molecules and 13 years after approval for eligible biologics. The negotiated price will be implemented as follows:

- 10 eligible Medicare Part D drugs in 2026;

- an additional 15 eligible Medicare Part D drugs in 2027;
- an additional 15 eligible combined Medicare Part B and Part D drugs in 2028;
- an additional 20 eligible combined Medicare Part B and Part D drugs in 2029; and
- an additional 20 eligible combined Medicare Part B and Part D drugs each year after 2029

Novartis will participate in the Medicare negotiation process if Novartis drugs are selected. Pharmaceutical manufacturers that choose not to participate in the negotiation process will be subject to an excise tax of up to 95% of sales. Novartis may also be affected by other provisions of the Act, such as price increase penalties for Medicare Part D drugs starting in 2022 and for Medicare Part B drugs in 2023, and rebates on eligible Medicare Part D sales starting in 2025.

In addition, by December 31, 2022, 20 US states had passed legislation intended to impact pricing or requiring manufacturer price transparency reporting, with eight of these states also allowing for drug affordability (i.e., price control) review boards. The disclosure requirements vary by state. Many states require multiple types of reporting, including for new drug applications, new drug launches, prior notice of price increases, and quarterly or annual reporting. It is expected that state legislatures will continue to focus on drug pricing in 2023 and that similar bills will be passed in more states.

Europe: In Europe, our operations are subject to significant price and marketing regulations. Many governments are introducing healthcare reforms in a further attempt to curb increasing healthcare costs. In some member states, these include reforms to permit the reimbursed use of off-label medicines, despite the presence of licensed alternatives on the market. 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 patients. The downward pressure on healthcare costs in general in the EU, particularly with regard to prescription drugs, is intense. Increasingly strict analyses are applied when evaluating the entry of new products, and as a result, access to innovative medicines is limited based on strict cost-benefit assessments. In addition, prices for marketed products are referenced within member states and across international borders, further impacting individual EU member state pricing. Member states also collaborate to enhance pricing transparency and have started conducting joint health technology assessments, joint pricing negotiations and/or joint purchasing. As an additional control for healthcare budgets, some EU countries have passed legislation to impose further mandatory rebates for pharmaceutical products and/or financial claw-backs on the pharmaceutical industry. The calculation of these rebates and claw-backs may lack transparency in some cases and can be difficult to predict.

### Regulations favoring generics and biosimilars

In response to rising healthcare costs, most governments and private medical care providers have established reimbursement schemes that favor the substitution of generic pharmaceuticals for more expensive

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brand-name pharmaceuticals. All US states have generic substitution statutes. These statutes permit or require the dispensing pharmacist to substitute a less expensive generic drug instead of an original drug. Other countries, including many European countries, have similar laws. We expect that the pressure for generic substitution will continue to increase. In addition, the US, the EU and other jurisdictions are increasingly introducing laws and regulations encouraging the development of biosimilar versions of biologic drugs, which can also be expected to have an impact on pricing.

### Cross-border sales

Price controls in one country can have an impact in other countries as a result of cross-border sales. In the EU, products that we have sold to customers in countries with stringent price controls can be legally resold to customers in other EU countries at a lower price than the price at which the product is otherwise available in the importing country (known as parallel trade). In North America, products that we have sold to customers in Canada - which has relatively stringent price controls - are sometimes resold 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 and other countries into the US are currently illegal in most states. However, six US states (Colorado, Florida, Minnesota, New Hampshire, New Mexico, and Vermont) have enacted laws allowing the import of pharmaceutical drugs from select foreign countries. The Secretary of the US Department of Health and Human Services (HHS) must certify that each state's importation plan is safe and cost-effective before it can be implemented.

We expect that pressures on pricing will continue worldwide and will likely 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, would enable us to earn an adequate return on our investment in that product.

## Intellectual property

We attach great importance to intellectual property (IP) rights - including patents, trademarks, copyrights, know-how, trade secrets and regulatory data protection - as essential to our purpose of reimagining medicine to improve and extend people's lives, and to protect our investment in research and development, manufacturing and marketing. The IP system provides a means to attract the investments needed to conduct and sustainably finance innovative R&D, and to manage the risks inherent in our work. For example, we seek IP protection under applicable laws for significant product developments in major markets. Among other things, patents may cover the products themselves, including the product's active ingredient or ingredients and its formulation. Patents may cover processes for manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the product. Patents may also cover particular uses of a product, such as its use to treat a particular disease, or its dosage regimen. In addition, patents may cover tests for certain diseases or

biomarkers - which can improve patient outcomes when administered with certain drugs - as well as assays, research tools and other techniques used to identify new drugs. The protection afforded, which may vary from country to country, depends upon the type of patent, its duration and its scope of coverage.

In the US and other countries, the law recognizes that product development and review by the FDA and other health authorities can take an extended period, and provides an extension of patent term for a period related to the time taken for the conduct of clinical trials and for the health authority's review. However, the length of this extension and the patents to which it applies cannot be known in advance and can only be determined after the product is approved. In practice, it is not uncommon for patent term extensions (PTEs) or supplementary protection certificates (SPCs) to not fully account for the time it took to develop the product and receive marketing authorization. As a result, it is rarely the case, for example, that a 'product's active ingredient(s) will have a full patent term at the time the product is approved by the FDA and other health authorities.

In addition to patent protection, various countries provide regulatory-based protection, including regulatory data protection (RDP) and/or other market exclusivities, for a prescribed period of time. RDP is a distinct type of IP right providing exclusivity that precludes a potential competitor from filing a regulatory application that relies on the sponsor's clinical trial data, or that precludes the regulatory authority from approving the application for a set period of time. The RDP period can vary depending on the type of data included in the sponsor's application. When it is available, market exclusivity, unlike RDP, may preclude a competitor from obtaining marketing approval for a product even if a competitor's application relies on its own data. RDP and market exclusivity periods generally run from the date a product is approved, and so their expiration dates cannot be known with certainty until the product approval date is known and exclusivity has been granted by the relevant authorities.

### United States Patents

In the US, a patent issued from an application filed today will receive a term of 20 years from the earliest application filing date, subject to potential patent term adjustments for delays in patent issuance based upon certain delays in prosecution by the United States Patent and Trademark Office (USPTO). A US pharmaceutical patent that claims a product, method of treatment using a product, or method of manufacturing a product may also be eligible for a PTE. This type of extension may only extend the patent term for a maximum of five years, and may not extend the patent term beyond 14 years from regulatory approval. Only one patent may be extended for a product based on FDA review.

### RDP and market exclusivity

Separate from patent exclusivities, the FDA may provide regulatory-based protection, which runs in parallel to any patent protection.

- A new small-molecule active pharmaceutical ingredient receives five years of RDP, during which time a competitor generally may not obtain final approval of an

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application to the FDA based on a sponsor's clinical data.

- A new biologic active pharmaceutical ingredient receives 12 years of regulatory-based market exclusivity, during which time a competitor generally may not market the same or similar drug.
- The FDA may also request that a sponsor conduct pediatric studies and, in exchange, it will grant an additional six-month period of pediatric market exclusivity if the sponsor makes a timely submission of the reports of the pediatric studies in response to the FDA's Written Request. The sponsor must also have a patent-based and/or regulatory-based exclusivity period for the product to which the pediatric market exclusivity is appended.
- Orphan drug exclusivity provides seven years of market exclusivity for drugs designated by the FDA as orphan drugs, meaning drugs that treat rare diseases. During this period, a potential competitor generally may not market the same or similar drug for the same indication even if the competitor's application does not rely on data from the sponsor.

### European Union Patents

Patent applications in Europe may be filed in the European Patent Office (EPO) or in a particular country or countries. The EPO system permits a single application to be granted for the EU plus other non-EU countries such as Switzerland, Turkey and the UK. When the EPO grants a patent, it is then validated in the countries that the patent owner designates. The term of a patent granted by the EPO or a European country office is 20 years from the earliest application filing date. Pharmaceutical patents can be granted a further period of exclusivity under the SPC system. SPCs are designed, in part, to account for the time taken to receive marketing authorization of a product by the European health authorities. An SPC may be granted to provide, in combination with the patent, up to 15 years of exclusivity from the date of the first European marketing authorization. However, an SPC cannot last longer than five years. The SPC duration may be extended by a further six months if the product is the subject of an agreed and successfully completed pediatric investigation plan. The post-grant phase of patents, including the SPC system, is currently administered on a country-by-country basis under national laws that, while differing, are intended to (but do not always) have the same effect.

### RDP and market exclusivity

Separate from patent exclusivities, the EU provides a system of regulatory data protection for authorized human medicines that runs in parallel to any patent protection. The system for new drugs being approved today is usually referred to as "8+2+1" because it provides an initial period of eight years of data protection, during which a competitor cannot rely on the relevant data; a further period of two years of market exclusivity, during which the data can be used to support applications for marketing authorization but a competitive product cannot be launched; and a possible one-year extension of the market exclusivity period if, during the initial eight-year

data exclusivity period, the sponsor registered a new therapeutic indication with "significant clinical benefit." This system generally applies both to national and centralized authorizations in the EU plus other non-EU countries such as the UK.

The EU also has an orphan drug exclusivity system for medicines. If a medicine is designated as an orphan drug, then it benefits from 10 years of market exclusivity after it is authorized, during which time an application for the same or similar medicine for the same indication will not generally be accepted or granted. Under certain circumstances, this exclusivity can be extended with a two-year pediatric extension.

### Third-party patents and challenges to intellectual property

Third parties can challenge our IP, including patents, patent term extensions, RDP and marketing exclusivities (such as pediatric extensions and orphan drug exclusivity), through various proceedings. For example, patents in the US can be challenged in the United States Patent and Trademark Office (USPTO) through various proceedings, including Inter Partes Review (IPR) and Post-Grant Review (PGR) proceedings. They may also be challenged through patent infringement litigation under the Abbreviated New Drug Application (ANDA) provisions of the Hatch-Waxman Act or under the Biologics Price Competition and Innovation Act (BPCIA). In the EU, patents may be challenged through oppositions in the EPO, or national patents may be challenged in national courts or national patent offices. The outcomes of such challenges can be difficult to predict.

In addition to directly challenging our IP rights, in some circumstances a competitor may be able to market a generic version of one of our products by, for example, designing around our patents or marketing the generic product for non-patent-protected indications, or filing a separate New Drug Application (NDA) under the Hatch-Waxman Act (typically referred to as a 505(b)(2) application). Despite RDP, a competitor could opt to incur the costs of conducting its own clinical trials and preparing its own regulatory application, and avoid our RDP altogether. There is a risk that some countries may seek to impose limitations on or seek not to recognize the availability of IP rights for pharmaceutical products, or limit the extent to which such rights may be enforced. Also, even though we may own, co-own or in-license patents protecting our products, and conduct freedom-to-operate analyses, a third party may nevertheless assert that one of our products infringes a third-party patent for which we do not have a license, seeking remedies such as monetary damages or an injunction against our continued marketing of the product.

As a result, there can be no assurance that our IP rights will protect our products or that we will be able to avoid adverse effects from the loss of IP protection or from third-party patents in the future.

### Intellectual property protection for certain key marketed products and compounds in development

We present additional details below regarding certain IP protection for the listed Innovative Medicines Division products. For each, we identify issued, unexpired

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patents by their general subject matter and, in parentheses, years of expiry, if relevant, in the US and the EU. The identified patents are owned, co-owned or exclusively in-licensed by Novartis and relate to at least one dosage strength of the product or to the method of treatment or its use as it is currently approved and marketed or, in the case of a compound in development, as it is currently submitted to the FDA and/or the EMA for approval. Identification of an EU patent refers to national patents in EU countries and/or to the national patents that have been derived from a patent granted by the EPO. Novartis may own, co-own, control or have rights to additional patents, for example, relating to compound forms, methods of treatment or use, formulations, devices, processes, product-by-process, synthesis, purification and detection.

We identify unexpired RDP periods and, in parentheses, years of expiry if the relevant marketing authorizations have been authorized or granted. We identify certain unexpired patent term extensions and marketing exclusivities and, in parentheses, years of expiry if they are granted; their subject matter scope may be limited and is not specified. Marketing exclusivities and patent term extensions include orphan drug exclusivity (ODE), pediatric exclusivity (PE), patent term extension (PTE) and supplementary protection certificate (SPC). We designate these as “pending” if they have been applied for but not granted and include years of expiry if estimable. Such pending applications ultimately may or may not be granted.

In the case of the EU, identification of a patent, supplementary protection certificate, marketing exclusivity or regulatory data protection means grant, authorization and maintenance in at least one EU country or the UK. However, it could be pending, not granted, expired or found invalid in others.

For each product below, we indicate whether there is current generic or biosimilar competition for one or more product versions in one or more approved indications in either the US or one or more EU countries, if IP is otherwise disclosed. We identify certain enforcement actions, or ongoing challenges to the disclosed IP, including IPRs or PGRs if instituted by the USPTO, that have not been finally resolved (including appeals) unless noted. Challenges identified as being in administrative entities, such as national patent offices, include judicial appeals from decisions of those entities. Resolution of challenges to the disclosed IP, which in the EU may involve IP in one or more EU countries, may include settlement agreements under which Novartis permits or does not permit future launch of generic versions of our products before expiration of that IP. We identify certain material terms of such settlement agreements where they could have a material adverse effect on our business. In other cases, such settlement agreements may contain confidentiality obligations restricting what may be disclosed.

In the event that a product listed below does not have identified patents as described above, we provide information only on generic competition.

For additional information regarding commercial arrangements with respect to these products, see “-Key marketed products.”

### Cardiovascular

- • *Entresto*. US: Four patents on combination (2023 (4)), PTE (2025), four PEs (2023, 2023, 2024, 2025); two patents on complex (2026, 2027), two PEs (2027, 2027); three patents on methods of treatment (2033 (3)); patent on dosage regimen (2036); RDP for new pediatric patient population (2022), PE (2023); RDP for labeling changes related to new clinical investigation (2024). EU: Patent on combination (2023), SPC (2028); two patents on complex (2026, 2026), two SPCs (2030, 2030); patent on formulation (2028); patent on method of use (2034); RDP (2025). There is no generic competition in the US or the EU. In the US, two combination patents, the two complex patents, and the dosage regimen patent are being challenged in ANDA proceedings against generic manufacturers. In the EU, one complex patent and the use patent are being opposed in the EPO. In some EU countries, the combination patent or its associated SPC is being challenged by generic manufacturers.
- • *Leqvio*. US: Two patents on composition of matter (2027, 2034), PTE pending (2035); two patents on method of treatment and dosing regimen (2027, 2036); RDP (2026). EU: One patent on composition of matter (2033), SPC (2035); RDP (2030). There is no generic competition in the US or the EU.

### Immunology

- • *Cosentyx*. US: Five patents on composition of matter (2025 (4), 2026), PTE (2029); patent on psoriatic arthritis use (2031); patent on psoriasis use (2032); two patents on ankylosing spondylitis use (2032, 2033); RDP (2027). EU: Four patents on composition of matter (2025 (4)), SPC (2030), PE (2030); patent on psoriasis use (2031); patent on ankylosing spondylitis use (2031); RDP (2026). There is no generic competition in the US or the EU. In the EU, the patent on ankylosing spondylitis use is being opposed in the EPO.
- • *Xolair*. US: Two patents on syringe formulation (2024, 2025). EU: Three patents on syringe formulation (2024, 2024, 2025). There is no generic competition in the US or the EU.
- • *Ilaris*. US: Patent on composition of matter (2024); patent on cryopyrin-associated periodic syndromes use (2026); patent on familial Mediterranean fever (FMF) use (2026); patent on systemic onset juvenile idiopathic arthritis (SJIA) use (2028); patent on hyperimmunoglobulin D syndrome and tumor necrosis factor receptor-associated periodic syndrome use (2029); patent on formulation (2029). EU: Patent on composition of matter (2021), SPC (2024), PE (2025); patent on SJIA use (2026); patent on FMF use (2026); two patents on formulation (2029, 2029). There is no generic competition in the US or the EU.

### Neuroscience

- • *Gilenya*. US: Patent on dosage regimen (2027), PE (2027); patent on 0.25 mg formulation (2032), PE (2032); patent on method of treatment (2027). EU: Patent on formulation (2024), SPC (2026); patent on

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0.25 mg formulation (2032); patent on dosing regimen (2027). There is generic competition in the US and in most EU countries. In the US, the dosage regimen patent was challenged in ANDA proceedings against a generic manufacturer and was found invalid by the US Court of Appeals for the Federal Circuit in June 2022. Novartis has filed a petition seeking further review with the US Supreme Court. Novartis is also enforcing the method of treatment patent against a generic manufacturer. In the EU, Novartis is enforcing the dosing regimen patent against generic manufacturers. The dosing regimen patent is being opposed in the EPO.

- *Zolgensma*. US: Four patents on composition of matter (2024, 2024, 2026, 2033), PTE pending (2029); three patents on methods of treatment (2028, 2028, 2029); ODE for spinal muscular atrophy (SMA) in patients less than 2 years old with biallelic mutations in the SMN1 gene (2026); RDP (2031). EU: Three patents on composition of matter (2024, 2024, 2028), SPC (2029); two patents on methods of use (2028, 2028), SPC (2033), SPC pending (2033); ODE for SMA in patients with a biallelic mutation in the SMN1 gene and a clinical diagnosis of SMA type 1, or patients with a biallelic mutation in the SMN1 gene and up to three copies of the SMN2 gene (2030); RDP (2030). There is no generic competition in the US or the EU.
- *Kesimpta*. US: Patent on compound (2031); patent on dosing regimen (2037). EU: Patent on compound (2023); patent on use (2023), SPC (2028); patent on formulation (2028), patent on formulation and use (2028), SPC (2033); patent on dosing regimen (2037). There is no generic competition in the US or the EU.

### Solid Tumor

- *Tafinlar* and *Mekinist*.

*Tafinlar*. US: Two patents on compound (2030, 2030); patent on method of treatment (2029). EU: Patent on compound (2029); RDP (2024). There is no generic competition in the US or the EU.

*Mekinist*. US: Patent on compound (2025), PTE (2027); patent on method of treatment (2025); four patents on formulation (2032 (4)). EU: Patent on compound (2025), SPC (2029); patent on formulation (2031); RDP (2025). There is no generic competition in the US or the EU. In the EU, the formulation patent is being opposed in the EPO.

Use of *Mekinist* with *Tafinlar* or *Tafinlar* with *Mekinist*. US: Patent on combination (2030); four patents on method of use of combination (2025, 2030, 2030, 2033); ODE on non-small cell lung cancer (2024); ODE on adjuvant treatment of melanoma (2025); ODE on anaplastic thyroid cancer (2025); ODE on metastatic solid tumors (2025). EU: Patent on combination (2030); patent on adjuvant for melanoma use (2033). There is no generic competition in the US or the EU. In the EU, the adjuvant use patent is being opposed in the EPO.

- *Kisqali*. US: Three patents on compound (2028, 2030, 2031), PTE (2031); three patents on methods of treatment (2029, 2029, 2031); patent on salt form (2031); patent for tablet formulation (2036). EU: Patent on compound (2027); patent on compound (2029), SPC (2032); patent on salt form (2031); patent on methods of use with letrozole (2034); patent on formulation (2036); RDP (2027). There is no generic competition in the US or the EU. In the US, the three compound patents, the three method of treatment patents, the salt patent and the formulation patent are being challenged in ANDA proceedings against generic manufacturers. In the EU, the method of use patent is being opposed in the EPO.
- *Piqray*. US: Patent on compound (2029); patent on compound and use (2029), PTE pending (2033); RDP (2024). EU: Patent on compound and use (2029), SPC (2034); RDP (2030). There is no generic competition in the US or the EU.
- *Pluvicto*. US: Three patents on composition of matter (2028, 2028, 2034); RDP (2027). PTE pending. EU: RDP (2032). There is no generic competition in the US or the EU.

### Hematology

- *Promacta/Revolade*. US: Patent on compound (2021), PTE (2022), PE (2023); patent on method of enhancing platelet production using salt (2023), PE (2023); patent on salt form and thrombocytopenia use (2025), PE (2026); five patents on tablet formulations of different dose strengths (2027 (5)), five PEs (2028 (5)); ODE on severe aplastic anemia patients in combination with standard immunosuppressive therapy (2025). EU: Patent on compound (2021), SPC (2025), PE (2025); patent on salt form (2023); patent on severe aplastic anemia use (2028). There is no generic competition in the US or the EU. In the US, generic manufacturers have filed ANDAs challenging certain patents other than the compound patent. In the EU, the severe aplastic anemia use patent is being opposed in the EPO.
- *Tasigna*. US: Patent on compound (2023), PE (2024); two patents on salt forms (2026, 2028), two PEs (2027, 2029); patent on polymorph compound form (2026), PE (2027); two patents on capsule form (2026, 2027), two PEs (2027, 2028); patent on method of treatment (2032), PE (2032). EU: Patent on compound (2023); patent on salt form (2026); patent on polymorph compound form (2026); patent on capsule form (2027); patent on method of treatment (2030). There is no generic competition in the US or the EU. In the US, generic manufacturers have filed ANDAs challenging certain patents other than the compound patent.
- *Jakavi*. EU: Patent on compound (2026), SPC (2027); two patents on salt form (2028, 2028); patent on compound for polycythemia vera (PV) use (2026); patent on salt form for graft-versus-host disease (GvHD) use (2028). There is no generic competition in the EU.

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- *Scemblix*. US: Patent on compound (2033), PTE pending (2035); Patent on polymorph compound form (2040); RDP (2026); ODE (2028). EU: Patent on compound (2033), SPC pending (2037); RDP (2032); ODE (2032). There is no generic competition in the US or the EU.

#### Other Promoted Brands

- *Xuidera*. US: Four patents on compound (2024, 2024, 2025, 2026); two patents on formulation (2024, 2033); five patents on method of treatment (2024, 2024, 2026, 2029, 2029); one patent on polymorph compound form (2029). PTE pending. There is no generic competition in the US. *Xuidera* is not marketed in the EU. In the US, the compound, compound and use, formulation, method of treatment, and polymorph compound form patents are being challenged in ANDA proceedings against generic manufacturers.

## Sandoz

Our Sandoz Division is a global leader in generic pharmaceuticals and biosimilars, and sells products in well over 100 countries. In 2022, the Sandoz Division achieved consolidated net sales of USD 9.2 billion, representing 18.3% of the Group's total net sales. Sandoz develops, manufactures and markets finished dosage form medicines as well as intermediary products including active pharmaceutical ingredients.

Sandoz is organized globally into three franchises: Retail Generics, Anti-Infectives and Biopharmaceuticals. In Retail Generics, Sandoz develops, manufactures and markets finished dosage forms of small-molecule pharmaceuticals for sale to third parties across a broad range of therapeutic areas, including finished dosage form anti-infectives sold to third parties. In Anti-Infectives, Sandoz manufactures and supplies active pharmaceutical ingredients and intermediates - mainly antibiotics - for internal use by Retail Generics and for sale to third-party customers. In Biopharmaceuticals, Sandoz develops, manufactures and markets protein- and other biotechnology-based products, including biosimilars.

The Sandoz strategic ambition is to be the world's leading and most valued generics and biosimilars company. Our divisional strategy focuses on three areas: developing a broad and consistent pipeline of generic and biosimilar launches across key geographies and across a broad range of therapeutic areas; positioning Sandoz to be 'first in' by having a strong pipeline with a focus on being first to market and 'last out' by way of competitive costs and stable supply; and instilling a true 'generic mindset,' with a focus on priorities, simple and rapid decision-making, and focused resource allocation.

Sandoz is a global market leader in biosimilars, with a total of eight approved and marketed products, and a pipeline of over 15 molecules. In addition to internally developed projects, our biosimilar portfolio comprises

#### Established Brands

- *Sandostatin SC* and *Sandostatin LAR*:

*Sandostatin SC*: There is generic competition in the US and the EU.

*Sandostatin LAR*: There is generic competition in most EU countries but no generic competition in the US.

#### Compounds in development

We provide certain patent information for non-marketed compounds in development that have been submitted to the FDA and/or the EMA for registration but have not yet been approved by either agency. For these products, Novartis will seek all appropriate RDP, will continue to seek additional intellectual property protection for significant product developments, and will apply for PTEs and SPCs in keeping with the great importance we attach to intellectual property.

- VDT482 (tislelizumab). US: Patent on composition of matter (2033). EU: Patent on composition of matter (2033).

publicly announced commercialization agreements with BioCon, Gan & Lee, EirGenix, Polpharma Biologics and Bio-Thera Solutions Ltd. Availability of our biosimilars varies by country.

Sandoz is also the global market leader in generic antibiotics. Its Kundl, Austria, manufacturing site is the hub of the last fully vertically integrated penicillin production chain in Europe, which offers certain competitive advantages including added supply chain resilience.

In January 2020, we closed the previously announced acquisition of the Japanese business of Aspen Global Incorporated, consisting of off-patent branded medicines with a focus on anesthetics and specialty brands.

In July 2020, Sandoz and the Austrian government announced a planned combined investment of more than EUR 150 million to enhance the long-term competitiveness and supply resilience of European production for key antibiotics.

In May 2021, Sandoz confirmed details of a previously announced investment of EUR 100 million in antibiotic manufacturing technology for its Kundl, Austria, manufacturing site, and announced an additional EUR 50 million investment in a new sterile production line in Palafolls, Spain. In November 2022, Sandoz announced an additional EUR 50 million investment to support increased manufacturing capacity for finished dosage form penicillin at its Kundl, Austria, manufacturing site.

In October 2021, Sandoz announced that its planned acquisition of GSK's global cephalosporin antibiotics business, first announced in February 2021, had been successfully closed.

On October 1, 2021, Sandoz Inc., the US subsidiary of Sandoz, entered into a settlement agreement with the Civil Division of the US Department of Justice (DOJ) concerning the department's years-long pricing investigation into the US generic drug industry. This settlement

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was an expected outcome of the resolution the company reached in March 2020 with the DOJ Antitrust Division regarding the same investigation and underlying conduct. As part of the settlement, Sandoz agreed to certain corporate integrity obligations as part of a corporate integrity agreement with the Office of Inspector General of the US Department of Health and Human Services, which have now been implemented. The settlement contains no new factual allegations against Sandoz and, in 2020, the Group fully provisioned for this settlement and disclosed the agreement in principle as part of the March 2020 resolution. For more information, see “Item 18. Financial Statements-Note 20. Provisions and other non-current liabilities.”

In August 2022, Novartis announced its intention to separate the Sandoz business to create a standalone company by way of a 100% spin-off, concluding the

Strategic Review announced in October 2021. The Strategic Review determined that a 100% spin-off would be in the best interests of shareholders as it would create two standalone companies focused on their respective growth strategies. The new company is planned to be incorporated in Switzerland and to be listed on the SIX Swiss Exchange, with an American Depositary Receipt (ADR) program in the US. Completion of the transaction is subject to certain conditions, including consultation with works councils and employee representatives (as required), general market conditions, tax rulings and opinions, final Board of Directors endorsement and shareholder approval in line with Swiss corporate law. The transaction is expected to be generally tax neutral to Novartis, with completion expected in the second half of 2023.

## Key marketed products

The Sandoz global portfolio covers a wide range of therapeutic areas. The following are some of the Sandoz key marketed products in each of its franchises (availability varies by market):

### Retail Generics

| Product | Originator drug | Description |
| --- | --- | --- |
| Amoxicillin/clavulanic acid | Augmentin® | Antibiotic |
| Zoledronic acid | Aclasta | Osteoporosis treatment |
| Acetylcysteine | Various | Mucolytic agent |
| Tacrolimus | Various | Immunosuppressive agent |

### Anti-Infectives

| Active ingredients | Description |
| --- | --- |
| Oral and sterile penicillins | Anti-infectives |
| Oral and sterile cephalosporins | Anti-infectives |
| Clavulanic acid and mixtures with clavulanic acid | Beta-lactam inhibitors |
| Classical and semisynthetic macrolides | Anti-infectives |

| Intermediates | Description |
| --- | --- |
| Various cephalosporin intermediates | Anti-infectives |
| Macrolide base intermediates | Anti-infectives |
| Various crude compounds produced by fermentation | Cyclosporine, ascomycin, rapamycin, mycophenolic acid, etc. |

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Item 4. Information on the Company

## Biopharmaceuticals

| Product | Originator drug | Description |
| --- | --- | --- |
| Omnitrope | Genotropin ® | Recombinant human growth hormone to treat growth disorders and growth hormone deficiency |
| Binocrit and Epoetin alfa Hexal | Eprex ® /Erypo ® | Recombinant protein (erythropoiesis-stimulating) agent to treat anemia |
| Zarzio, Zarxio and Filgrastim Hexal | Neupogen ® | Recombinant protein (granulocyte colony-stimulating factor, short-acting) used in oncology |
| Glatopa | Copaxone ® | Treatment for relapsing forms of multiple sclerosis |
| Erelzi 1 | Enbrel ® | Fusion protein (TNF-alpha receptor) to treat multiple immune-mediated inflammatory diseases |
| Rixathon | MabThera ® | Chimeric monoclonal antibody (directed against CD20 protein on B-cells) to treat blood cancers and immunological diseases |
| Hyrimoz | Humira ® | Monoclonal antibody (TNF-alpha antibody) to treat multiple immune-mediated inflammatory diseases |
| Zessly | Remicade ® | Monoclonal antibody (TNF-alpha antibody) to treat multiple immune-mediated inflammatory diseases |
| Ziextenzo | Neulasta ® | PEGylated form of a recombinant human granulocyte colony-stimulating factor (long-acting) to reduce duration of chemotherapy-induced neutropenia and incidence of chemotherapy-induced febrile neutropenia |

$^{1}$ Approved in the US in 2016. In patent litigation with Amgen, which markets Enbrel$^{®}$, the US District Court of New Jersey ruled against Sandoz in August 2019, which was upheld on appeal. The decision is final and Sandoz cannot launch its *Erelzi* product in the US until 2029.

## Selected development projects - biosimilars in Phase III development and registration

The following table describes Sandoz biosimilar projects that are in registration trial or in registration with a regulatory agency (including filing preparation):

| Project/product | Common name (INN) | Mechanism of action | Potential indication/indications | Therapeutic areas | Route of administration | Current phase |
| --- | --- | --- | --- | --- | --- | --- |
| GP2411 | denosumab | Anti-RANKL monoclonal antibody | Osteoporosis (same as originator) | Endocrinology, Neurology | Subcutaneous | Phase III |
| SOK583 | aflibercept | Recombinant fusion protein that blocks VEGF-A | Ophthalmology indication (same as originator) | Ophthalmology | Intravitreal | Phase III |
| EGI014A1 1 | trastuzumab | Anti-HER2 recombinant IgG1, humanized monoclonal antibody | HER2+ cancer tumors | Oncology | Intravenous | Registration |
| DST356A1 2 | natalizumab | Anti-alpha4 integrin monoclonal antibody | Multiple sclerosis and Crohn's disease | Neurology, Immunology (US only) | Intravenous | Registration |
| HFT896, SMQ969, PYB106 3 | insulin glargine, lispro, aspart | Long-acting (HFT896)/rapid-acting insulin | Diabetes | Endocrinology, Diabetology | Subcutaneous | Phase III/Phase I |
| VVF379 4 | bevacizumab | Recombinant humanized monoclonal antibody that blocks VEGF | Solid tumors | Oncology | Intravenous | Registration |

$^{1}$ Development in collaboration with EirGanix, Inc.

$^{2}$ Development in collaboration with Polpharma Biologics

$^{3}$ Development in collaboration with Gan & Lee

$^{4}$ Development in collaboration with Bio-Thera Solutions

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## Principal markets

The two largest generics markets in the world - the US and Europe - are the principal markets for Sandoz. The following table sets forth the aggregate 2022 net sales of Sandoz by region:

### Sandoz

|  | 2022 net sales to third parties |  |
| --- | --- | --- |
|  | USD millions | % |
| Europe | 4 913 | 53 |
| United States | 1 754 | 19 |
| Asia, Africa, Australasia | 1 613 | 17 |
| Canada and Latin America | 969 | 11 |
| Total | 9 249 | 100 |
| Of which in Established Markets 1 | 6 460 | 70 |
| Of which in Emerging Growth Markets 1 | 2 789 | 30 |

$^{1}$ Emerging Growth Markets comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand.

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 and over-the-counter cough and cold products are subject to material changes in seasonal demand, while sales of the vast majority of our other products are not. The COVID-19 pandemic has substantially impacted seasonal variation in recent years.

## Production

For information on the production of our products, see “-Item 4.B Business overview-Innovative Medicines-Production.”

In September 2020, as part of a broader reorganization of Novartis Technical Operations (NTO), we established the Sandoz Technical Operations (STO) platform within NTO. STO focuses on producing generic medicines for Sandoz, as well as related external supply operations and supply chain. In October 2021, Sandoz created a new position, Global Head, Sandoz Operations. This new, broader role, includes full operational and financial accountability for manufacturing and supply as of January 1, 2023, and was established in anticipation of the intended Sandoz 100% spin-off.

Due to impurities found in the active ingredient batches sourced from third-party manufacturers, we recalled Sandoz valsartan, losartan and irbesartan products in the second half of 2018 and the first quarter of 2019, and ranitidine film-coated tablets in the second half of 2019, from several markets, in line with our quality standards for all of our marketed products. The discovery of nitrosamines in some types of drug products led several health regulators (e.g., EMA, FDA and others) to conduct a detailed analysis of these impurities in affected medicinal products. Novartis works with health authorities around the world to continuously review all chemical and biological human medicines for the possible presence of nitrosamines. The EMA, FDA and other health authorities have provided guidance to the pharmaceutical industry to prevent unacceptable levels of nitrosamines in medicines. The EMA review concluded in March 2021 for chemical human medicines and in July 2021 for biological human medicines. Based on guidance from health authorities, any chemical and/or biological human medicines products identified with a potential risk for nitrosamines will undergo further testing. For these

products, we have provided initial testing and potential control strategy updates to the EMA and other health authorities. Due to constant and rapidly evolving health authority requirements, the risk assessment and related testing that we may be required to perform may increase. We will submit and communicate the final outcome of any risk assessment and related testing to the relevant health authorities within their expected time frame, and make changes to the control strategy update, if necessary.

Beginning in September 2021, we initiated a voluntary recall of all finished product batches of losartan and losartan HCT products exceeding or potentially exceeding acceptable regulatory limits of the losartan azide impurity in the losartan drug substance. This impurity, which is viewed as an industrywide issue, was initially considered a mutagen that may increase the risk of cancer over time if allowed to rise above certain levels. This recall was unrelated to the nitrosamine-related recalls described above, and supply was re-established in March 2022. Since the voluntary recall, further information has been provided to the EMA by Novartis and other companies in the industry, and the EMA has concluded that the losartan azide impurity is to be classified as a non-mutagenic impurity.

## Marketing and sales

Sandoz sells a broad portfolio of products, including the products of our Retail Generics franchise and biosimilars, to wholesalers, pharmacies, hospitals and other healthcare outlets. Sandoz adapts its marketing and sales approach to local decision-making processes, depending on the structure of the market in each country.

In response to rising healthcare costs, many governments and private medical care providers, such as health

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maintenance organizations, have instituted reimbursement schemes that favor the substitution of bioequivalent generic versions of originator pharmaceutical products, such as those sold by our Retail Generics franchise. In the US, statutes have been enacted by all states that permit or require pharmacists to substitute a less expensive generic product for the brand-name version of a drug that has been prescribed to a patient. Generic use is growing in Europe, but penetration rates in many EU countries (as a percentage of volume) remain well below those in the US.

Recent trends have been toward continued consolidation among distributors and retailers of Sandoz products, both in the US and internationally, which has increased our customers’ purchasing leverage.

Legislative or regulatory changes can have a significant impact on our business in a country. For more information on such changes, see “-Item 4.B Business overview-Innovative Medicines-Price controls.”

Our Anti-Infectives franchise supplies active pharmaceutical ingredients and intermediates - mainly antibiotics - for internal use by Retail Generics and for sale to the pharmaceutical industry worldwide.

Our Biopharmaceuticals franchise operates in an already mature market framework in Europe and some other markets, while the business environment is rapidly evolving in the US and many international markets. Regulatory pathways for approving biosimilar products are at various stages of maturity by market, but in some cases are still relatively new or still in development. Policies have not yet been fully defined or implemented regarding the substitution and reimbursement of biosimilars in many markets, including the US.

## Competition

The market for generic products is characterized by increasing demand for high-quality pharmaceuticals that can be marketed at lower costs due to comparatively minimal initial research and development investments. Increasing pressure on healthcare expenditure and numerous patent and data exclusivity period expirations have encouraged more generic product launches, resulting in increased competition among the companies selling generic pharmaceutical products, leading to ongoing price pressure. In particular, Sandoz faces increased industrywide pressure on prices for generic products, particularly in the US, driven by factors including customer consolidation and growing competition from other manufacturers of generic medicines. These factors contributed to a decline in industrywide US sales that began in 2017 and continued through 2022.

## Development and registration

Development of Sandoz Biopharmaceuticals is jointly overseen by Sandoz and GDD, and is governed by the IMB. Development and registration activities for Retail Generics products, and registration activities for Biopharmaceuticals products, are also overseen by Sandoz.

Before a generic pharmaceutical may be marketed, intensive technical and clinical development work must be performed to demonstrate, in bioavailability studies, the bioequivalence of the generic product to the

reference product. Nevertheless, research and development costs associated with generic pharmaceuticals are generally much lower than those of the originator pharmaceuticals, as no original drug discovery, preclinical studies or clinical trials on dose finding, safety and efficacy are typically performed by the generics company. As a result, the different focus and lower costs of the generic pharmaceutical model ultimately allow generic pharmaceutical products to be offered at lower prices, which support and contribute to the cost containment goals of healthcare systems.

While generic pharmaceuticals are follow-on versions of chemically synthesized molecules, biosimilar products contain a version of the active substance of an already approved biological reference medicine. Due to the inherent variability and complexity of biologic products, including batch-to-batch differences and variations following manufacturing changes, the development and the regulatory pathway of biosimilars differ significantly from that of generics.

The development of a biosimilar product is much more technically challenging than the development of a typical generic small-molecule pharmaceutical. While generic pharmaceuticals normally do not require clinical studies in patients, regulators worldwide do still require such targeted studies for biosimilar products. International regulators are nonetheless increasingly discussing the potential for “tailored development” (which refers to proposals that seek to implement a more efficient and expedited biosimilar development process that eliminates the current need for comparative clinical efficacy and safety studies of biosimilars, without any resulting compromise on quality, safety or efficacy) for certain molecules. Biosimilars are engineered to match the reference medicine in quality, safety and efficacy. This is achieved by systematically defining the target range of the reference medicine and then comparing the biosimilar to the reference medicine at various development stages to confirm biosimilarity and to establish that there are no clinically meaningful differences between the proposed biosimilar and the reference biologic. Because the purpose of a biosimilar clinical development program is to confirm biosimilarity and not to establish efficacy and safety de novo, the clinical studies required are less than those required for a reference biologic. Therefore, the cost of development for a biosimilar is usually less than that of a reference biologic.

The development and registration staff employed by affiliates of the Sandoz Division are based worldwide, including at facilities in Holzkirchen, Germany; Hyderabad, India; Kundl, Austria; Ljubljana, Slovenia; and Rudolstadt, Germany. In November 2020, Sandoz completed (i) the previously announced closure of the Holzkirchen, Germany, development and registration site, with the exception of patch development and the project management group, and (ii) the closure of the product development and registration site as well as the maintenance and development regulatory centers in Unterach, Austria. We conduct an ongoing review of our global development and regulatory network to consolidate and streamline operations and optimize our network structure to enable Sandoz to compete sustainably in an increasingly challenging generics environment. In 2021, Sandoz completed the previously announced closures of its maintenance regulatory center in Barleben, Germany, its Fougera development center located in

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Melville, New York, as well as its product development center in Boucherville, Canada.

## Regulation

### Generics

The Hatch-Waxman Act in the US (and similar legislation in the EU and in other countries) eliminated the requirement that manufacturers of generic pharmaceuticals repeat the extensive clinical trials required for reference products, so long as the generic version could be shown to be therapeutically equivalent to the reference product.

In the US, the decision on whether a generic pharmaceutical is therapeutically equivalent to the original product is made by the FDA based on an Abbreviated New Drug Application (ANDA) filed by the generic product's manufacturer. An ANDA is generally permitted to be filed four years after the initial approval of the reference product and generally cannot be fully approved by the FDA until any regulatory exclusivity of the reference product has expired. The process typically takes nearly two years from the filing of the ANDA until FDA approval. However, delays can occur if issues arise, for example, 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 product does not infringe on any current applicable patents on the product held by the holder of the marketing authorization for the reference product, or to certify that such patents are invalid. This certification often results in a patent infringement lawsuit being brought against the generics company. In the event of such a lawsuit, the Hatch-Waxman Act imposes an automatic 30-month stay in the approval of the ANDA to allow the parties to resolve the intellectual property issues. For generic applicants who are the first to file their ANDA containing a certification claiming non-infringement or patent invalidity, the Hatch-Waxman Act generally provides those applicants with 180 days of marketing exclusivity, enabling such generic applicants to exclusively market their product alongside the reference product at a certain point in time, which is generally after any intellectual property issues have been resolved. However, after such point in time, the generic applicants must launch their products within certain time frames or risk losing the marketing exclusivity that they had gained by being a first-to-file applicant.

In the EU, decisions on the granting of a marketing authorization are made either by the European Commission based on a positive recommendation by the EMA under the centralized procedure, or by a single member state under the national or decentralized procedure. See '-Innovative Medicines-Regulation-European Union.' Companies may submit abridged applications for approval of a generic medicinal product based upon its 'essential similarity' to a medicinal product authorized and marketed in the EU following the expiration of the product's data exclusivity period. In such cases, the generics company is able to submit its abridged application based on the data submitted by the innovator

company for the reference product, without the need to conduct extensive Phase III clinical trials of its own. For all products that received a marketing authorization in the EU after late 2005, the abridged application can be submitted throughout the EU. However, the data submitted by the innovator company in support of its application for a marketing authorization for the reference product is generally protected for 10 years after the first grant of marketing authorization in all member states, and can be extended for an additional year if, during the initial eight-year data exclusivity period, the innovator company registers a new therapeutic indication with 'significant clinical benefit.' In the case of orphan drugs, it may be extended with a two-year pediatric extension. See '-Item 4.B Business overview-Innovative Medicines-Intellectual property.'

### Biosimilars

The regulatory pathways for approval of biosimilar medicines are still being developed and established in many countries of the world. A regulatory framework for the approval of biosimilars has been established in the EU, Japan, Canada and the US, while the World Health Organization (WHO) has issued guidance. Sandoz has successfully registered and launched the first biosimilar (or biosimilar-type) medicine in Europe, the US, Canada, Japan, Taiwan, Australia, and many countries in Latin America and Asia. Sandoz was the first company to secure approval for and launch a biosimilar under the US biosimilar pathway that was established as part of the Biologics Price Competition and Innovation Act (BPCIA). The approval of biosimilars in Europe follows a process similar to that followed for small molecules. However, biosimilars usually have to be approved through the centralized procedure because they are manufactured using recombinant DNA technology. As part of the approval process in the EU, biosimilars have to demonstrate comparability to the reference medicine in terms of safety, efficacy and quality through an extensive comparability exercise, based on strict guidelines set by the authorities. Regulators will only approve a biosimilar based on data that allows the regulators to conclude that there are no clinically meaningful differences between the reference medicine and the biosimilar.

In the US, under the BPCIA, a biosimilar must be highly similar with no clinically meaningful differences compared to the reference medicine. Approval of a biosimilar in the US requires the submission of a BLA to the FDA, including an assessment of immunogenicity and pharmacokinetics; an efficacy study; and possibly a pharmacodynamics study. The BLA for a biosimilar can be submitted as soon as four years after the initial approval of the reference biologic, but can only be approved 12 years after the initial approval of the reference biologic.

## Intellectual property

We take all reasonable steps to ensure that our products do not infringe valid intellectual property rights held by others, including taking steps to proactively challenge intellectual property rights that we believe should not have been granted. Nevertheless, competing companies

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commonly assert patent and other intellectual property rights. As a result, we can become involved in significant litigation regarding our products. If we are unsuccessful in defending these suits, we could be subject to injunctions preventing us from selling our products and to potentially substantial damages.

Wherever possible, our products are protected by our own patents. Among other things, patents may cover

the products themselves, including the product's formulation, or the processes for manufacturing a product. However, there can be no assurance that our intellectual property will protect our products or that we will be able to avoid adverse effects from the loss of intellectual property protection in the future.

## 4.C Organizational structure

### Organizational structure

See “Item 4. Information on the Company-Item 4.A History and development of Novartis” and “Item 4. Information on the Company-Item 4.B Business overview-Overview.”

### Significant subsidiaries

See “Item 18. Financial Statements-Note 31. Principal Group subsidiaries and associated companies.”

## 4.D Property, plants and equipment

Our principal executive offices are located in Basel, Switzerland. Our divisions operate through a number of affiliates that have offices, research and development facilities, and production sites throughout the world.

We generally own our facilities or have entered into long-term lease arrangements for them. Some of our principal facilities are subject to mortgages and other security interests granted to secure certain debts.

Novartis Operations manages the production, supply chains and quality of our Innovative Medicines and Sandoz Division products through a network of 55

manufacturing sites, as well as through external suppliers, and warehouse and distribution centers. In addition, Novartis Operations also manages non-production real estate owned or leased by Novartis around the world.

The following table sets forth our major headquarters and most significant production, research and development, and administrative facilities. See also “-Item 4.B Business overview-Innovative Medicines-Production” and “-Item 4.B Business overview-Sandoz-Production” for a discussion of our manufacturing processes.

### Major facilities

| Location | Size of site (in square meters) | Major activity |
| --- | --- | --- |
| Basel, Switzerland - St. Johann | 589 000 | Global Group headquarters; global Innovative Medicines Division headquarters; global Sandoz Division headquarters; research and development; production of drug substances and drug intermediates |
| Kundl and Schaftenau, Austria | 480 000 | Production of biotechnological products, drug products and finished products, anti-infectives, active drug substances and nucleic acids; product development |
| East Hanover, New Jersey | 391 000 | Innovative Medicines Division US headquarters; research and development |
| Barleben, Germany | 340 000 | Production of broad range of generics finished dosage forms |
| Cambridge, Massachusetts | 201 800 | Research and development |
| Menges, Slovenia | 133 763 | Production of drug substances and drug intermediates |
| Shanghai, China | 106 500 | Research and development |
| Stein, Switzerland | 64 700 | Production of sterile vials, pre-filled syringes and ampoules; inhalation capsules, tablets and transdermals; active pharmaceutical ingredients; and cell and gene therapies |
| Holzkirchen, Germany | 64 200 | Sandoz Division production of transdermal delivery systems and certain international and global service functions. |
| Huningue, France | 35 000 | Production of drug substances for clinical and commercial supply |
| Durham, North Carolina | 15 794 | Manufacture, package and release commercial Zolgensma product and certain clinical development activities |
| Princeton, New Jersey | 14 300 | Sandoz Division US headquarters |
| Schweizerhalle, Switzerland | 8 880 | Manufacture of small-interfering RNA (siRNA) drug substance for Leqvio |

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Item 4. Information on the Company

As our product portfolio evolves, Novartis Operations is adapting our manufacturing capacity and capabilities to meet our changing needs, shifting from high-volume products toward lower-volume, customized and personalized medicines. As of December 31, 2022, we have closed, exited or sold 19 manufacturing sites since 2019 and have announced the closure, exit or sale of seven additional manufacturing sites. We have continued to invest in new technologies implemented at our sites, such as the new targeted radioligand therapy production facility in Indianapolis, Indiana, which is currently under construction (with an expected size of approximately 67 thousand square meters), the FDA-approved *Zolgensma* production site in Durham, North Carolina, and the small-interfering RNA (siRNA) oligonucleotide manufacturing facility in Schweizerhalle, Switzerland. We are leveraging innovation to increase the reliability and productivity of our manufacturing network, including using data and digital technologies. We continue to seek opportunities to manage our production facilities as

efficiently as possible, optimize external spend, and simplify and standardize across our manufacturing network to help us increase our cost competitiveness and optimize the value of our products. At the same time, we are working to improve our environmental sustainability, for example by reducing energy, waste disposal and water consumption at our sites by making our manufacturing processes more efficient, introducing new technologies, and switching to clean and renewable energy solutions.

For a description of the impact of environmental matters, see “Item 3. Key Information-Item 3.D Risk factors-Environmental, social and governance matters-Failure to meet increasingly challenging environmental, social and governance expectations,” “Item 3. Key Information-Item 3.D Risk factors-Environmental matters-Impact of environmental liabilities,” and “Item 3. Key Information-Item 3.D Risk factors-Climate change-Climate change and increased risk of major natural disasters.” See also “Item 18. Financial Statements-Note 20. Provisions and other non-current liabilities.”

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Item 4A. Unresolved Staff Comments

# Item 4A. Unresolved Staff Comments

Not applicable.

48

Item 5. Operating and Financial Review and Prospects

# Item 5. Operating and Financial Review and Prospects

## 5.A Operating results

This operating and financial review should be read with the Group's consolidated financial statements in this Annual Report, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (see "Item 18. Financial Statements"). "Item 5. Operating and Financial Review and Prospects" with the sections on compounds in development and selected development projects of our divisions (see "Item 4. Information on the Company-Item 4.B Business overview") constitute the Operating and Financial Review (Lagebericht), as defined by the Swiss Code of Obligations.

The discussion and analysis of the financial condition and results of operations of certain items from fiscal year ended December 31, 2020, and year-to-year comparison between fiscal year ended December 31, 2021, and December 31, 2020, that are not included in this Form 20-F can be found in "Item 5. Operating and Financial Review and Prospects" of our Form 20-F for the fiscal year ended December 31, 2021, which is incorporated by reference herein.

## Overview

Our purpose is to reimagine medicine to improve and extend people's lives. We use innovative science and technology to address some of society's most challenging healthcare issues. We discover and develop breakthrough treatments and find new ways to deliver them to as many people as possible. We also aim to reward those who invest their money, time and ideas in our Company. Our vision is to become the most valued and trusted medicines company in the world.

The businesses of Novartis are divided operationally on a worldwide basis into two identified reporting segments:

- Innovative Medicines: innovative patent-protected prescription medicines
- Sandoz: generic pharmaceuticals and biosimilars

In addition, we separately report the results of Corporate activities. The financial results of our Corporate activities include the costs of the Group headquarters and those of corporate coordination functions in major countries. Corporate also includes other items of income and expense that are not attributable to specific segments, such as certain revenues from intellectual property rights and certain expenses related to post-employment benefits, environmental remediation liabilities, charitable activities, donations and sponsorships.

In April 2022, we announced a new, integrated organizational structure and operating model designed to support our innovation, growth, and productivity ambitions as a focused medicines company. For information about this

new organizational structure, see "Item 4. Information on the Company-Item 4.B Overview." Under this new organizational structure, our divisions are supported by the following organizational units: the Novartis Institutes for BioMedical Research, Global Drug Development, and Novartis Operations. The financial results of these organizational units are included in the results of the divisions for which their work is performed.

Significant transactions are discussed in "Item 18. Financial Statements-Note 2. Significant transactions," and "Item 18. Financial Statements-Note 3. Segmentation of key figures 2022, 2021 and 2020."

## Our business environment

Medical technology continues to accelerate, with new advanced treatments emerging to meet the growing need for high-quality healthcare. At the same time, aging populations are putting pressure on healthcare resources, while access to healthcare remains a challenge around the world. As a result, we see challenges and opportunities in our business environment: the need for continuous innovation in healthcare, increasing access to medicines, the adoption of new working practices and the growing use of data science and technology. The following are some major trends currently shaping our business environment.

- Spending on healthcare continues to grow. The need for high-quality healthcare is more critical than ever. Over the next five years, global spending on medicines is forecast to rise faster than GDP in many developed countries. The price of medicines remains a key issue as increased healthcare spending and a more uncertain economic outlook weigh on government budgets.
- Aging populations are fueling a rise in chronic illness. Aging and lifestyle changes are triggering an increase in noncommunicable diseases, such as cancer, heart disease and diabetes, causing millions of preventable deaths and putting further pressure on healthcare resources.
- Medical science continues to accelerate. Scientific innovation is advancing at an unprecedented pace. In recent years, new types of treatments have been approved, including RNA therapies, gene and cell therapies, and radioligand therapies, which offer targeted approaches to treating serious diseases. Because these medicines are complex, they require focused investment and expertise to bring them to reality for patients.
- Access to healthcare remains a formidable challenge. Worldwide, millions of patients struggle to access the medicines they need. This may be because of cost, inequity, or structural issues in healthcare systems. While access to medicines remains an acute issue in lower-income countries, it is a problem in developed

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countries too, where the COVID-19 pandemic highlighted that deep health inequities remain entrenched.

- Patients are moving to the center of healthcare. Patients are demanding more say over their treatment through patient representative groups and other means. In response, healthcare systems and pharmaceutical companies are adapting, moving toward a more integrated, end-to-end approach, with an increased focus on patient engagement in drug development and other areas. At the same time, patients are becoming more important as data owners - as personal data allows more targeted treatments and supports development of new medicines.
- Economic uncertainty is growing, post-COVID-19 pandemic. The global economy is facing considerable uncertainty, driven by concerns over rising energy prices and geopolitical instability. Forecasts suggest the current economic slowdown is likely to continue in 2023. In our own industry, the COVID-19 pandemic put strain on supply chains and highlighted the importance of resilient supplies of active pharmaceutical ingredients - the raw materials used to make finished medicines. See “Item 3. Key Information-Item 3.D Risk factors-Pricing, reimbursement and access-Pricing and reimbursement pressure, including pricing transparency and access to healthcare,” and “Item 3. Key Information-Item 3.D Risk factors-Macroeconomic developments-Impact of macroeconomic developments.”
- Biopharma searches for more efficiency. At a time of growing economic uncertainty, investors are looking for sustainable growth in margins and earnings. To remain competitive, pharmaceutical companies are moving to more agile, cost-efficient business models, particularly as they invest to build specialized capabilities in research and development (R&D) and manufacturing. Meanwhile, rates of return on R&D are increasing for the first time in several years, largely because of emergency approvals during the COVID-19 pandemic and faster innovation cycles.
- New technologies are reshaping our industry. The use of data science and technology is increasing across the industry in everything from R&D to manufacturing and marketing. This has brought greater efficiency, but it also requires new investment and skills. Importantly, new technologies are helping close gaps between companies, healthcare systems and patients - for example, by providing insights into the social determinants of heart health enabling the development of new prevention measures.
- Working practices are changing. Working practices are changing in many countries. Demand for new skills is increasing, especially in areas such as data science. Workforces are becoming more flexible and more diverse, allowing companies to tap into new talent pools - important at a time of skills shortages in many parts of the economy.
- Climate change is increasingly affecting human health. Climate change could undermine decades of progress in improving human health at a time when antimicrobial resistance is also rising. At the same time, more governments are looking to decarbonize their economies over the long-term, while companies also face increased scrutiny over the sustainability of their operations and

supply chains. See “Item 3. Key Information-Item 3.D Risk factors-Climate change-Impact of climate change and increased risk of major natural disasters.”

## Our strategy

Our strategy as a focused medicines company is to deliver high-value medicines that alleviate society’s greatest disease burdens through technology leadership in R&D and novel access approaches.

We have made significant progress in transforming Novartis from a diversified healthcare conglomerate into a focused medicines company. In doing so, we have divested or spun off non-core businesses and made targeted acquisitions to focus on our core business: discovering and developing new medicines and finding new ways to deliver them to as many people as possible.

In 2022, we continued to execute on our strategy by putting in place a new organizational structure to support innovation, growth and productivity. We also updated our strategic priorities and announced our intention to spin-off our Sandoz business, which paves the way for Novartis to advance as a company focused fully on innovative medicines. See “Item 4. Information on the Company-Item 4.B Overview” and “Item 4. Information on the Company-Item 4.B Sandoz.”

Our strategy has clear focus areas and priorities to meet the challenges and opportunities we see in our business environment, and ensure we continue to create value for our stakeholders and society.

Our focus areas determine where we invest most of our time, energy and resources and include:

- Core therapeutic areas with high unmet patient needs: cardiovascular; immunology; neuroscience; solid tumors; and hematology.
- Technology platforms where we have the depth and scale to discover, develop and commercialize new therapies: Chemistry; biotherapeutics; xRNA; radioligand therapy; and gene and cell therapy.
- Priority geographies which, taken together, account for the majority of the forecast growth in global healthcare spending: US, China, Germany and Japan. While these are our priority countries, we will continue to invest in other markets worldwide.

Our focus areas are supported by three strategic priorities, which determine how we implement our strategy. These three strategic priorities are:

- Deliver high-value medicines to accelerate growth. Delivering new medicines for major diseases is at the core of our purpose and value creation as a company. We focus on high-value innovative medicines with the potential to transform the treatment of diseases across our five core therapeutic areas. To do this, we seek to maximize the potential of our key in-market and launch medicines, while finding new ways to deliver them to as many people as possible and investing in R&D to deliver the next generation of high-value therapies for patients over the longer term. As part of our efforts, we continue our longstanding commitment to reduce the burden of infectious and tropical diseases that predominantly affect underserved populations in low- and middle-income countries.

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- **Embed operational excellence to deliver returns.** We aim to drive efficiency and free up resources to invest in innovation for patients. This also underpins our financial performance and makes us more agile; better able to take quick decisions and scale the use of new technologies, with effective cooperation across our business. In everything we do, we maintain high standards of product quality and patient safety, while also working to reduce our environmental footprint.
- **Strengthen our foundations by:**
  *Unleashing the power of our people.* We continue to focus on culture as a key enabler of our strategy to drive innovation and long-term performance. For us,

this is about building an agile, diverse workforce and making sure we attract and retain the right talent for the future.

*Scaling data science and technology.* We are investing in data science and technology to increase efficiency, support innovation, better respond to the needs of patients and healthcare professionals, and ultimately improve the way we develop and deliver our medicines.
*Building trust with society.* We aim to increase access to our medicines for underserved populations around the world and follow high standards of ethical behavior wherever we operate.

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# Results of operations

## Financial year 2022 compared with 2021

### Key figures$^{1}$

| (USD millions unless indicated otherwise) | Year ended Dec 31, 2022 | Year ended Dec 31, 2021 | Change in USD % | Change in constant currencies % 1 |
| --- | --- | --- | --- | --- |
| Net sales to third parties | 50 545 | 51 626 | - 2 | 4 |
| Other revenues | 1 283 | 1 251 | 3 | 4 |
| Cost of goods sold | - 15 486 | - 15 867 | 2 | - 4 |
| Gross profit | 36 342 | 37 010 | - 2 | 4 |
| Selling, general and administration | - 14 253 | - 14 886 | 4 | - 1 |
| Research and development | - 9 996 | - 9 540 | - 5 | - 9 |
| Other income | 805 | 1 852 | - 57 | - 54 |
| Other expense | - 3 701 | - 2 747 | - 35 | - 43 |
| Operating income | 9 197 | 11 689 | - 21 | - 13 |
| % of net sales to third parties | 18.2 | 22.6 |  |  |
| (Loss)/income from associated companies | - 9 | 15 339 | nm | nm |
| Interest expense | - 837 | - 811 | - 3 | - 5 |
| Other financial income and expense | 20 | - 80 | nm | nm |
| Income before taxes | 8 371 | 26 137 | - 68 | - 64 |
| Income taxes | - 1 416 | - 2 119 | 33 | 25 |
| Net income | 6 955 | 24 018 | - 71 | - 67 |
| Attributable to: |  |  |  |  |
| Shareholders of Novartis AG | 6 955 | 24 021 | - 71 | - 67 |
| Non-controlling interests | 0 | - 3 | nm | nm |
| Basic earnings per share (USD) | 3.19 | 10.71 | - 70 | - 66 |
| Net cash flows from operating activities | 14 236 | 15 071 | - 6 |  |
| Free cash flow 1 | 11 945 | 13 282 | - 10 |  |

$^{1}$ For an explanation of non-IFRS measures and reconciliation tables, see '-Non-IFRS measures as defined by Novartis.'

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Item 5. Operating and Financial Review and Prospects

## Group overview

Net sales to third parties for Novartis were USD 50.5 billion, down 2% in USD reported terms and up 4% measured in constant currencies (cc) to remove the impact of exchange rate movements. Sales growth was driven by volume growth of 11 percentage points, mainly driven by continued strong growth from *Entresto*, *Kesimpta*, *Kisqali*, *Pluvicto* and *Cosentyx*. Generic competition had a negative impact of 3 percentage points, mainly due to *Gilenya*, *Afinitor/Votubia*, and *Gleevec/Glivec*. Pricing had a negative impact of 4 percentage points. Sales in the US were USD 17.7 billion (+5%) and in the rest of the world USD 32.8 billion (-6%, +4% cc).

By division, Innovative Medicines delivered net sales of USD 41.3 billion (-2%, +4% cc) and Sandoz net sales were USD 9.2 billion (-4%, +4% cc).

In Emerging Growth Markets, which comprise all markets excluding the US, Canada, Western Europe, Japan, Australia and New Zealand, sales to third parties were USD 13.5 billion (+2%, +9% cc) driven by China (USD 3.1 billion) growing 2% (+6% cc).

Operating income was USD 9.2 billion (-21%, -13% cc), mainly due to higher restructuring costs (USD 1.2 billion) primarily related to the implementation of the previously announced streamlined organizational model, higher impairments (USD 1.0 billion), and lower divestment gains (USD 0.6 billion). Operating income margin was 18.2% of net sales, decreasing by 4.4 percentage points (-3.8 percentage points cc).

Net income was USD 7.0 billion compared with USD 24.0 billion in the prior year, impacted by Roche income in the prior year. Excluding the impact of Roche income, net income declined -9% (cc). Earnings per share were

USD 3.19 compared with USD 10.71 in the prior year. Excluding the impact of Roche income, EPS declined -7% (cc).

Net cash flows from operating activities amounted to USD 14.2 billion, compared with USD 15.1 billion in 2021. This decrease was mainly due to unfavorable changes in working capital and lower dividends from associated companies (2021 included the USD 0.5 billion dividends received from our investment in Roche, which was divested in the fourth quarter of 2021), partly offset by lower income taxes paid and favorable hedging results.

Free cash flow amounted to USD 11.9 billion (-10% USD), compared with USD 13.3 billion in 2021, mainly due to a decrease in net cash flows from operating activities and lower divestment proceeds, partly offset by lower purchases of property, plant and equipment.

We also present our core results$^{1}$, which exclude the impact of amortization, impairments, disposals, acquisitions, restructurings and other significant items, to help investors understand our underlying performance.

Core operating income was USD 16.7 billion (0%, +8% cc), benefiting from higher sales, partly offset by higher research and development (R&D) investments. Core operating income margin was 33.0% of net sales, increasing by 0.9 percentage points (+1.3 percentage points cc).

Core net income was USD 13.4 billion (-5%, +3% cc) as growth in core operating income was partly offset by the loss of Roche core income. Excluding the impact of Roche core income, core net income grew +11% (cc).

$^{1}$ For an explanation of non-IFRS measures and reconciliation tables, see “Non-IFRS measures as defined by Novartis.”

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Item 5. Operating and Financial Review and Prospects

## Net sales to third parties by segment

The following table provides an overview of net sales to third parties by segment:

| (USD millions) | Year ended Dec 31, 2022 | Year ended Dec 31, 2021 | Change in USD % | Change in constant currencies % |
| --- | --- | --- | --- | --- |
| Innovative Medicines | 41 296 | 41 995 | - 2 | 4 |
| Sandoz | 9 249 | 9 631 | - 4 | 4 |
| Net sales to third parties | 50 545 | 51 626 | - 2 | 4 |

## Innovative Medicines

The Innovative Medicines Division delivered net sales of USD 41.3 billion (-2%, +4% cc) with volume contributing 12 percentage points to growth. Generic competition had a negative impact of 4 percentage points. Pricing had a negative impact of 4 percentage points. Sales in the US were USD 15.9 billion (+6%) and in the rest of the world USD 25.4 billion (-6%, +3% cc).

Sales growth was mainly driven by continued strong growth from *Entresto* (USD 4.6 billion, +31%, +37% cc), *Kesimpta* (USD 1.1 billion, +194%, +200% cc), *Kisqali* (USD 1.2 billion, +31%, +38% cc), *Pluvicto* (USD 271 million) and *Cosentyx* (USD 4.8 billion, +1%, +5% cc), partly offset by generic competition mainly for *Gilenya*, *Afinitor/Votubia* and *Gleevec/Glivec*.

In the US (USD 15.9 billion +6%), sales growth was mainly driven by *Entresto*, *Kesimpta* and *Pluvicto*, partly offset by the impact of generic competition on *Afinitor/Votubia* and *Gilenya*. In Europe (USD 13.6 billion, -9%, +1% cc) sales growth was driven by *Entresto*, *Kisqali* and *Kesimpta*, partly offset by increased generic competition for *Gilenya*. Emerging Growth Markets grew +2% (+9% cc), with China sales USD 2.9 billion (+3%, +7% cc) driven by *Cosentyx*.

The following table provides an overview of net sales to third parties by core therapeutic area; other promoted brands; and established brands in the Innovative Medicines Division:

| (USD millions) | Year ended Dec 31, 2022 | Year ended Dec 31, 2021 1 | Change in USD % | Change in constant currencies % |
| --- | --- | --- | --- | --- |
| Cardiovascular | 4 756 | 3 560 | 34 | 40 |
| Immunology | 7 287 | 7 205 | 1 | 7 |
| Neuroscience | 5 051 | 5 007 | 1 | 5 |
| Solid Tumors | 4 723 | 4 101 | 15 | 21 |
| Hematology | 6 452 | 6 430 | 0 | 7 |
| Other Promoted Brands | 3 127 | 3 451 | - 9 | - 1 |
| Total Promoted Brands | 31 396 | 29 754 | 6 | 12 |
| Established Brands | 9 900 | 12 241 | - 19 | - 13 |
| Total Innovative Medicines | 41 296 | 41 995 | - 2 | 4 |

$^{1}$ Reclassified to reflect the new Innovative Medicines divisional structures announced on April 4, 2022

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Item 5. Operating and Financial Review and Prospects

The following table provides the top 20 Innovative Medicines Division product net sales to third parties in 2022 as well as the change compared with 2021:

| Brands | Brand classification by therapeutic area, other promoted brands or established brands | Key indications | US |  | Rest of world |  |  | Total |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  | USD m | % change USD/cc 2 | USD m | % change USD | % change cc 2 | USD m | % change USD | % change cc 2 |
| Cosentyx | Immunology | Psoriasis (PsO), ankylosing spondylitis (AS), psoriatic arthritis (PsA), non-radiographic axial spondyloarthritis (nr-axSPA) | 2 770 | - 4 | 2 018 | 10 | 20 | 4 788 | 1 | 5 |
| Entresto | Cardiovascular | Chronic heart failure, hypertension | 2 354 | 38 | 2 290 | 25 | 37 | 4 644 | 31 | 37 |
| Promacta/Revolade | Hematology | Immune thrombocytopenia (ITP), severe aplastic anemia (SAA) | 1 083 | 14 | 1 005 | - 6 | 5 | 2 088 | 4 | 9 |
| Gilenya | Neuroscience | Relapsing multiple sclerosis (RMS) | 1 153 | - 19 | 860 | - 37 | - 29 | 2 013 | - 28 | - 24 |
| Tasigna | Hematology | Chronic myeloid leukemia (CML) | 877 | - 1 | 1 046 | - 11 | - 2 | 1 923 | - 7 | - 1 |
| Lucentis | Other Promoted Brands | Age-related macular degeneration (AMD), diabetic macular edema (DME), retinal vein occlusion (RVO) |  |  | 1 874 | - 13 | - 4 | 1 874 | - 13 | - 4 |
| Tafinlar + Mekinist | Solid Tumors | BRAF V600+ metastatic adjuvant melanoma, advanced non-small cell lung cancer (NSCLC), tumor agnostic with BRAF mutation indication | 678 | 12 | 1 092 | 0 | 10 | 1 770 | 5 | 11 |
| Jakavi | Hematology | Myelofibrosis (MF), polycytoma vera (PV), graft-versus-host disease (GvHD) |  |  | 1 561 | - 2 | 9 | 1 561 | - 2 | 9 |
| Zolgensma | Neuroscience | Spinal muscular atrophy (SMA) | 434 | - 7 | 936 | 6 | 12 | 1 370 | 1 | 5 |
| Xolair 1 | Immunology | Severe allergic asthma (SAA), chronic spontaneous urticaria (CSU), nasal polyps |  |  | 1 365 | - 4 | 6 | 1 365 | - 4 | 6 |
| Sandostatin | Established Brands | Carcinoid tumors, acromegaly | 800 | - 5 | 438 | - 23 | - 16 | 1 238 | - 12 | - 10 |
| Kisqali | Solid Tumors | HR+/HER2- metastatic breast cancer | 472 | 39 | 759 | 27 | 38 | 1 231 | 31 | 38 |
| Ilaris | Immunology | Auto-inflammatory (CAPS, TRAPS, HIDS/MKD, FMF, SJIA, AOSD, gout) | 570 | 14 | 563 | 1 | 16 | 1 133 | 7 | 15 |
| Kesimpta | Neuroscience | Relapsing-remitting multiple sclerosis (RRMS) | 921 | 165 | 171 | nm | nm | 1 092 | 194 | 200 |
| Galvus Group | Established Brands | Type 2 diabetes |  |  | 859 | - 21 | - 12 | 859 | - 21 | - 12 |
| Gleevec/Glivec | Established Brands | Chronic myeloid leukemia (CML), gastrointestinal stromal tumors (GIST) | 205 | - 22 | 540 | - 29 | - 23 | 745 | - 27 | - 22 |
| Exforge Group | Established Brands | Hypertension | 14 | 0 | 729 | - 18 | - 12 | 743 | - 18 | - 12 |
| Diovan Group | Established Brands | Hypertension | 55 | 8 | 597 | - 17 | - 10 | 652 | - 16 | - 9 |
| Kymriah | Hematology | r/r pediatric and young adults acute lymphoblastic leukemia (ALL), diffuse large B-cell lymphoma (DLBCL), follicular lymphoma (FL) | 196 | - 15 | 340 | - 5 | 7 | 536 | - 9 | - 2 |
| Afinitor/Votubia | Established Brands | Breast cancer/ tuberous sclerosis complex (TSC) | 171 | - 67 | 341 | - 18 | - 8 | 512 | - 45 | - 41 |
| Top 20 brands total |  |  | 12 753 | 6 | 19 384 | - 5 | 5 | 32 137 | - 1 | 5 |
| Rest of portfolio |  |  | 3 146 | 6 | 6 013 | - 9 | 0 | 9 159 | - 4 | 2 |
| Total division net sales to third parties |  |  | 15 899 | 6 | 25 397 | - 6 | 3 | 41 296 | - 2 | 4 |

$^{1}$ Net sales to third parties reflect *Xolair* sales for all indications.

$^{2}$ For an explanation of non-IFRS measures and reconciliation tables, see '-Non-IFRS measures as defined by Novartis.'

nm = not meaningful

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For the table providing the top 20 Innovative Medicines Division product net sales to third parties in 2021, see “Item 18. Financial statements-Note 3. Segmentation of key figures 2022, 2021 and 2020.”

For information about the approved indications for certain products described, see “Item 4. Information on the Company-Item 4.B Business overview-Innovative Medicines- Innovative Medicines Division products.”

## CARDIOVASCULAR

Sales in the Cardiovascular therapeutic area were USD 4.8 billion (+34%, +40% cc), sales growth mainly driven by *Entresto*.

*Entresto* (USD 4.6 billion, +31%, +37% cc) sustained robust demand-led growth, with increased patient share across all geographies. Guidelines position *Entresto* as the first choice RASi versus ACEi/ARB in patients with HFrEF. *Entresto* benefits from the adoption of guideline directed medical therapy for these patients in all geographies. In the US, *Entresto* benefits from being added to guidelines for patients with HFpEF (with LVEF below normal). In China, *Entresto* has been listed in the National Reimbursement Drug List (NRDL) for both HFrEF and hypertension, effective January 2022. In China and Japan, *Entresto* volume growth is fueled by increased penetration in hypertension in addition to growth in heart failure. It is estimated that around 10 million patients are on treatment with *Entresto*.

L *Leqvio* (USD 0.1 billion) launch in the US and other markets is ongoing, with focus on patient on-boarding, removing access hurdles and enhancing medical education. *Leqvio* is the first and only small interfering RNA (siRNA) therapy to lower low-density lipoprotein cholesterol approved in the US and was launched in January 2022. In the US, *Leqvio* is covered at or near label for 76% of patients eleven months after launch. *Leqvio* in the US has been assigned a unique Healthcare Common Procedure Coding System code (J-code) and average sales price. *Leqvio* is now approved in 70 countries. Novartis obtained global rights to develop, manufacture and commercialize *Leqvio* under a license and collaboration agreement with Alnylam Pharmaceuticals.

## IMMUNOLOGY

Sales in the Immunology therapeutic area reached USD 7.3 billion (+1%, +7% cc), sales growth was mainly driven by *Cosentyx* and *Ilaris*.

*Cosentyx* (USD 4.8 billion, +1%, +5% cc) sales grew in Emerging Growth Markets, Europe and Japan, partly offset by decline in the US due to higher revenue deductions. In China, *Cosentyx* growth was fueled by increased biologic uptake and inclusion in approximately 1,900 hospital listings. Since initial approval in 2015, *Cosentyx* has proven its sustained efficacy and consistent safety profile across five systemic inflammatory conditions and has treated more than 960,000 patients worldwide.

*Xolair* (USD 1.4 billion, -4%, +6% cc) sales grew (cc) in Emerging Growth Markets, Europe and Japan. Novartis co-promotes *Xolair* with Genentech in the US and shares a portion of revenue as operating income but does not record any US sales.

*Ilaris* (USD 1.1 billion, +7%, +15% cc) showed continued growth across all geographies. Contributors to growth include the adult-onset Still’s disease indication, together with the other adult rheumatology indications in the US and Europe, as well as strong performance for the Periodic Fevers Syndrome indications in Japan.

## NEUROSCIENCE

Sales in the Neuroscience therapeutic area were USD 5.1 billion (+1%, +5% cc), sales growth (cc) mainly driven by *Kesimpta*, which was partly offset by sales decline of *Gilenya*.

*Gilenya* (USD 2.0 billion, -28%, -24% cc) sales declined mainly in Europe and in the US due to generic pressure.

*Zolgensma* (USD 1.4 billion, +1%, +5% cc) has been approved in 47 countries to date. As this represents most major markets, sales growth is now mainly driven by the Incident patient population where we’ve seen double digit growth in 2022. Access pathways are now in place in 35 countries with negotiations ongoing in additional markets.

*Kesimpta* (USD 1.1 billion, +194%, +200% cc) showed strong sales growth driven by launch momentum across all geographies. *Kesimpta* is a targeted B-cell therapy that can deliver powerful and sustained high efficacy, with a favorable safety and tolerability profile and the flexibility of an at home self-administration for a broad population of RMS patients. *Kesimpta* is now approved in 80 countries with more than 36,000 patients treated.

*Mayzent* (USD 0.4 billion, +27%, +32% cc) sales grew across all geographies in MS patients showing signs of progression despite being on other treatments. *Mayzent* is the first and only oral disease-modifying therapy studied and proven to delay disease progression in a broad SPMS patient population.

*Aimovig* (USD 0.2 billion, +1%, +11% cc) sales grew in Europe and Emerging Growth Markets. *Aimovig* is reimbursed in 32 markets and has been prescribed to over 759,000 patients worldwide. Earlier this year, *Aimovig* was submitted for approval in China. In October 2022, Novartis reached an agreement in Germany by which *Aimovig* is reimbursed as a 1$^{st}$ line prophylactic migraine treatment based on the HER-MES trial.

## SOLID TUMORS

Sales in the Solid Tumors therapeutic area were USD 4.7 billion (+15%, +21% cc), sales growth mainly driven by *Kisqali*, *Pluvicto* and *Tafinlar + Mekinist*.

*Tafinlar + Mekinist* (USD 1.8 billion, +5%, +11% cc) sales grew across all geographies, driven by demand in BRAF+ adjuvant melanoma and NSCLC indications, while maintaining demand in the highly competitive BRAF+ metastatic melanoma market. *Tafinlar + Mekinist* remains the worldwide targeted therapy leader in BRAF+ melanoma. Following FDA approval in late June, *Tafinlar + Mekinist* is the first and only therapy with a tumor-agnostic indication for adult and pediatric patients with solid tumors that have a BRAF V600E mutation, which drives tumor growth in more than 20 different tumor types.

*Kisqali* (USD 1.2 billion, +31%, +38% cc) sales grew strongly across all geographies, based on increasing recognition of its overall survival and quality of life benefits in HR+/HER2- advanced breast cancer. It is a CDK4/6

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inhibitor with proven overall survival benefit across all three Phase III trials of the MONALEESA program regardless of menopausal status, line of therapy, site and number of metastases, endocrine resistance, or endocrine partner.

*Votrient* (USD 0.5 billion, -18%, -13% cc) declined due to increased competition, especially from immuno-oncology agents in metastatic renal cell carcinoma.

*Lutathera* (USD 0.5 billion, -1%, +3% cc) sales grew (cc) in Europe and Japan, partly offset by decline in the US. There are approximately 500 centers actively treating patients globally. In the second quarter of 2022, there was a temporary suspension in manufacturing during the quarter; production and deliveries of patient doses resumed in early June.

*Piqray* (USD 0.4 billion, +13%, +14% cc) sales grew mainly in the US, benefiting from indication expansion into PIK3CA-related overgrowth spectrum (PROS). *Piqray* is the first and only therapy specifically developed for the approximately 40% of HR+/HER2- advanced breast cancer patients who have a PIK3CA mutation, which is associated with a worse prognosis.

*Pluvicto* (USD 0.3 billion) launch is progressing well, with more than 160 active centers ordering. *Pluvicto* is the first and only radioligand therapy approved by the FDA for the treatment of progressive, PSMA-positive metastatic castration-resistant prostate cancer, who have already been treated with other anticancer treatments (ARPI and taxane-based chemotherapy).

*Tabrecta* (USD 0.1 billion, +48%, +48% cc) sales grew across all geographies, as the first therapy approved by the FDA to specifically target metastatic NSCLC with a mutation that leads to MET exon 14 skipping (METex14).

## HEMATOLOGY

Sales in the Hematology therapeutic area were USD 6.5 billion (0%, +7% cc), sales growth (cc) mainly driven by *Promacta/Revolade*, *Jakavi* and *Scemblix*.

*Promacta/Revolade* (USD 2.1 billion, +4%, +9% cc) growth was driven by the US, Europe and Emerging Growth Markets, partly offset by decline in Japan. Sales growth was driven by increased use in second-line persistent and chronic immune thrombocytopenia and as first-line and/or second-line treatment for severe aplastic anemia.

*Tasigna* (USD 1.9 billion, -7%, -1% cc) sales declined in Europe, Japan and the US, partly offset by growth in Emerging Growth Markets.

*Jakavi* (USD 1.6 billion, -2%, +9% cc) sales grew (cc) in Europe, Emerging Growth Markets, Japan, driven by strong demand in both the myelofibrosis and polycythemia vera indications. In May, EC approved *Jakavi* for the treatment of patients aged 12 years and older with acute or chronic GvHD who have inadequate response to corticosteroids or other systemic therapies.

*Kymriah* (USD 0.5 billion, -9%, -2% cc) sales declined in the US and Europe due to lower DLBCL demand in both geographies and was partly offset by growth in Emerging Growth Markets and Japan. In May, EC and FDA approved *Kymriah* for the treatment of adult patients

with relapsed or refractory (r/r) follicular lymphoma (FL) after two or more lines of systemic therapy.

*Adakveo* (USD 0.2 billion, +18%, +19% cc) continued to grow worldwide, reaching more than 11,800 patients with vaso-occlusive crises caused by sickle cell disease to date.

*Scemblix* (USD 0.1 billion) continued its strong launch uptake in the US, with launches underway in EU and Japan, demonstrating the high unmet need in CML, particularly patients previously treated with 2 or more tyrosine kinase inhibitors, or with the T315I mutation. In October 2022, US FDA converted the accelerated approval of *Scemblix* to a full approval, confirming the clinical benefit after longer exposure.

## OTHER PROMOTED BRANDS

Sales for Other Promoted Brands were USD 3.1 billion (-9%, -1% cc).

*Lucentis* (USD 1.9 billion, -13%, -4% cc) sales declined in Japan and Europe mainly due to competition, which was partly offset by growth in Emerging Growth Markets.

*Xiidra* (USD 0.5 billion, +4%, +4% cc) sales grew mainly in the US.

*Ultibro Group* (USD 0.5 billion, -18%, -9% cc) sales declined in Europe and Emerging Growth Markets due to competition and was partly offset by growth in Japan. *Ultibro Group* consists of *Ultibro Breezhaler*, *Seebri Breezhaler* and *Onbrez Breezhaler*.

*Beovu* (USD 0.2 billion, +9%, +18% cc) sales grew in Europe, Emerging Growth Markets and Japan, partly offset by decline in the US. *Beovu* received approval for diabetic macular edema (DME) in the EU in the first quarter of 2022, and in the US in the second quarter of 2022.

## ESTABLISHED BRANDS

The Established Brands had sales of USD 9.9 billion (-19%, -13% cc).

*Sandostatin* (USD 1.2 billion, -12%, -10% cc) declined across all geographies due to ongoing competitive pressure, including generic competition ex-US.

*Galvus Group* (USD 0.9 billion, -21%, -12% cc) declined in Japan, Europe and Emerging Growth Markets.

*Gleevec/Glivec* (USD 0.7 billion, -27%, -22% cc) declined due to increased generic competition.

*Exforge Group* (USD 0.7 billion, -18%, -12% cc) declined across all geographies.

*Diovan Group* (USD 0.7 billion, -16%, -9% cc) declined in Emerging Growth Markets, Japan and Europe.

*Afinitor/Votubia* (USD 0.5 billion, -45%, -41% cc) declined in the US and Europe driven by generic competition.

*Voltaren/Cataflam* (USD 0.3 billion, -10%, 0% cc) sales were stable (cc).

*Zortress/Certican* (USD 0.3 billion, -24%, -14% cc) declined in the US and Japan.

*Exjade/Jadenu* (USD 0.3 billion, -43%, -38% cc) declined due to pressure from generic competition.

*Neoral/Sandimmun(e)* (USD 0.3 billion, -16%, -8% cc) declined across all geographies.

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## Sandoz

Sandoz net sales were USD 9.2 billion (-4%, +4% cc) with volume contributing 10 percentage points to growth. Pricing had a negative impact of 6 percentage points.

Sales in Europe were USD 4.9 billion (-7%, +4% cc), in the US USD 1.8 billion (-4%) in Asia/Africa/Australasia USD 1.6 billion (-3%, +6% cc) and in Canada and Latin America USD 969 million (+11%, +15% cc) driven by volume increases and tender wins.

The following table provides an overview of net sales to third parties by business franchise in the Sandoz Division:

| (USD millions) | Year ended Dec 31, 2022 | Year ended Dec 31, 2021 | Change in USD % | Change in constant currencies % |
| --- | --- | --- | --- | --- |
| Retail Generics 1 | 6 776 | 7 092 | - 4 | 4 |
| Biopharmaceuticals | 2 093 | 2 116 | - 1 | 9 |
| Anti-Infectives (partner label/API) 1 | 380 | 423 | - 10 | - 5 |
| Total Sandoz | 9 249 | 9 631 | - 4 | 4 |

$^{1}$ Sandoz total anti-infectives net sales to third parties amounted to USD 1.2 billion (2021: USD 1.1 billion; 2020: USD 1.2 billion), of which USD 777 million (2021: USD 707 million; 2020: USD 694 million) is sold through the Retail Generics business franchise and USD 380 million (2021: USD 423 million; 2020: USD 474 million) is sold to other third-party companies through the Anti-Infectives business franchise.

### Retail Generics

In Retail Generics, Sandoz develops, manufactures and markets finished dosage forms of small molecule pharmaceuticals for sale to third parties across a broad

range of therapeutic areas, including finished dosage form of anti-infectives sold to third parties.

Retail sales were USD 6.8 billion (-4%, +4% cc), growing across all regions ex-US.

### Biopharmaceuticals

In Biopharmaceuticals, Sandoz develops, manufactures and markets protein- and other biotechnology-based products, including biosimilars, and provides biotechnology manufacturing services to other companies. The Biopharmaceuticals business also includes *Glatopa*, a generic version of Copaxone®, which treats relapsing forms of multiple sclerosis and is marketed in the US.

Global sales of Biopharmaceuticals (biosimilars, biopharmaceutical contract manufacturing and *Glatopa*) grew to USD 2.1 billion (-1%, +9% cc), growing across all regions.

### Anti-Infectives

In Anti-Infectives, Sandoz manufactures and supplies active pharmaceutical ingredients and intermediates, mainly antibiotics, for internal use by Retail Generics and for sale to third-party customers.

Total Anti-Infectives sales were USD 1.2 billion (+2%, +10% cc) of which USD 777 million were sold through the Retail Generics business franchise and USD 380 million were sold to other third-party companies through the Anti-Infectives business franchise. The sales of the Anti-Infectives business franchise declined mainly due to product discontinuations and supply challenges.

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Item 5. Operating and Financial Review and Prospects

## Operating income

The following table provides an overview of operating income by segment:

| (USD millions) | Year ended Dec 31, 2022 | % of net sales to third parties | Year ended Dec 31, 2021 | % of net sales to third parties | Change in USD % | Change in constant currencies % |
| --- | --- | --- | --- | --- | --- | --- |
| Innovative Medicines | 8 786 | 21.3 | 10 688 | 25.5 | - 18 | - 9 |
| Sandoz | 1 448 | 15.7 | 1 600 | 16.6 | - 10 | - 2 |
| Corporate | - 1 037 |  | - 599 |  | - 73 | - 84 |
| Operating income | 9 197 | 18.2 | 11 689 | 22.6 | - 21 | - 13 |

Operating income was USD 9.2 billion (-21%, -13% cc), mainly due to higher restructuring (USD 1.2 billion) primarily related to the implementation of the previously announced streamlined organizational model, higher impairments (USD 1.0 billion) and lower divestment gains (USD 0.6 billion). Operating income margin was 18.2% of net sales, decreasing by 4.4 percentage points (-3.8 percentage points cc).

## Core operating income key figures$^{1}$

| (USD millions unless indicated otherwise) | Year ended Dec 31, 2022 | Year ended Dec 31, 2021 | Change in USD % | Change in constant currencies % |
| --- | --- | --- | --- | --- |
| Core gross profit | 40 392 | 41 097 | - 2 | 4 |
| Selling, general and administration | - 14 190 | - 14 815 | 4 | - 1 |
| Research and development | - 9 088 | - 9 041 | - 1 | - 5 |
| Other income | 384 | 421 | - 9 | - 2 |
| Other expense | - 833 | - 1 074 | 22 | 17 |
| Core operating income | 16 665 | 16 588 | 0 | 8 |
| As % of net sales to third parties | 33.0 | 32.1 |  |  |

$^{1}$ For an explanation of non-IFRS measures and reconciliation tables, see “-Non-IFRS measures as defined by Novartis.”

The adjustments made to operating income to arrive at core operating income amounted to USD 7.5 billion (compared with USD 4.9 billion in the prior year). For details, please see “-Non-IFRS measures as defined by Novartis-2022 and 2021 reconciliation from IFRS results to core results.”

Core operating income was USD 16.7 billion (0%, +8% cc) benefiting from higher sales, partly offset by higher R&D investments. Core operating income margin was 33.0% of net sales, increasing by 0.9 percentage points (+1.3 percentage points cc).

The following table provides an overview of core operating income by segment:

| (USD millions) | Year ended Dec 31, 2022 | % of net sales to third parties | Year ended Dec 31, 2021 | % of net sales to third parties | Change in USD % | Change in constant currencies % |
| --- | --- | --- | --- | --- | --- | --- |
| Innovative Medicines | 15 237 | 36.9 | 15 215 | 36.2 | 0 | 8 |
| Sandoz | 1 903 | 20.6 | 2 064 | 21.4 | - 8 | - 1 |
| Corporate | - 475 |  | - 691 |  | 31 | 28 |
| Core operating income | 16 665 | 33.0 | 16 588 | 32.1 | 0 | 8 |

### Innovative Medicines

Operating income was USD 8.8 billion (-18%, -9% cc), driven by higher impairments, restructuring, lower divestment gains and higher R&D expenses, partly offset by higher gross margin. Operating income margin was 21.3% of net sales, decreasing 4.2 percentage points (-3.4 percentage points in cc).

Core adjustments were USD 6.5 billion, mainly due to amortization, impairments and restructuring, compared to USD 4.5 billion in prior year. Core adjustments increased compared to prior year, mainly due to higher impairments and restructuring.

Core operating income was USD 15.2 billion (0%, +8% cc), mainly driven by higher gross margin, partly offset

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Item 5. Operating and Financial Review and Prospects

by higher R&D investments. Core operating income margin was 36.9% of net sales, increasing 0.7 percentage points (+1.3 percentage points cc). Revenues as a percentage of sales increased by 0.1 percentage points (cc). Core cost of goods sold as a percentage of sales was in line with the prior year. Core R&D expenses as a percentage of net sales increased by 0.2 percentage points (cc). Core selling, general and administration (SG&A) expenses as a percentage of net sales decreased by 1.4 percentage points (cc). Core other income and expense as a percentage of net sales was in line with the prior year.

### Sandoz

Operating income was USD 1.4 billion (-10%, -2% cc), with the decline mainly due to higher SG&A investments to drive higher sales and inflationary pressures on input costs, which were partly offset by higher sales. Operating income margin was 15.7% of net sales, decreasing by 0.9 percentage points (-1.0 percentage points in cc).

Core adjustments were USD 455 million, including USD 221 million of amortization. Prior year core adjustments were USD 464 million, including USD 236 million of amortization.

Core operating income was USD 1.9 billion (-8%, -1% cc), with the decline mainly due to higher SG&A, partly offset by higher sales. Core operating margin was 20.6% of net sales, decreasing by 0.8 percentage points (-1.1 percentage points cc). Core gross margin as a percentage of sales decreased by 0.3 percentage points (cc), due to higher inflation and input costs. Core R&D expenses as a percentage of net sales decreased by 0.5 percentage points (cc). Core SG&A expenses increased by 0.9 percentage points (cc). Core other income and expense decreased the margin by 0.4 percentage points (cc).

### Corporate income and expense, net

Corporate income and expense, which includes the cost of Group headquarter and coordination functions, amounted to an expense of USD 1.0 billion, compared to an expense of USD 599 million in 2021, mainly driven by higher restructuring costs, lower contributions from the Novartis Venture Fund and prior year income from a fair value adjustment on contingent receivables related to intellectual property rights, partly offset by prior year adjustments to provisions on M&A transactions.

## Innovative Medicines Division research and development

The following table provides an overview of the reported and core research and development expense of the Innovative Medicines Division:

| (USD millions unless indicated otherwise) | Year ended Dec 31, 2022 | Year ended Dec 31, 2021 | Change in USD % | Change in constant currencies % |
| --- | --- | --- | --- | --- |
| Research and exploratory development | - 2 938 | - 3 209 | 8 | 6 |
| Confirmatory development | - 6 234 | - 5 432 | - 15 | - 20 |
| Total Innovative Medicines Division research and development expense | - 9 172 | - 8 641 | - 6 | - 10 |
| As % of Innovative Medicines net sales to third parties | 22.2 | 20.6 |  |  |
| Core research and exploratory development 1 | - 2 784 | - 2 809 | 1 | - 1 |
| Core confirmatory development 1 | - 5 483 | - 5 341 | - 3 | - 7 |
| Total core Innovative Medicines Division research and development expense | - 8 267 | - 8 150 | - 1 | - 5 |
| As % of Innovative Medicines net sales to third parties | 20.0 | 19.4 |  |  |

$^{1}$ Core results exclude impairments, amortization and certain other items. For an explanation of non-IFRS measures and reconciliation tables, see “-Non-IFRS measures as defined by Novartis.”

Innovative Medicine Division research and exploratory development expense decreased by 8% (+6% cc) to USD 2.9 billion. Confirmatory development expense amounted to USD 6.2 billion, increasing by 15% (-20% cc) versus prior year mainly due to higher impairment charges and higher investments in development to support recently acquired assets.

Total core research and development expense in the Innovative Medicine Division as a percentage of sales increased by 0.6 percentage points (+0.2 percentage points cc) to 20.0% of net sales, mainly driven by higher investments in recently acquired assets.

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Item 5. Operating and Financial Review and Prospects

## Non-operating income and expense

The term “non-operating income and expense” includes all income and expense items outside operating income. The following table provides an overview of non-operating income and expense:

| (USD millions unless indicated otherwise) | Year ended Dec 31, 2022 | Year ended Dec 31, 2021 | Change in USD % | Change in constant currencies % |
| --- | --- | --- | --- | --- |
| Operating income | 9 197 | 11 689 | - 21 | - 13 |
| (Loss)/income from associated companies | - 9 | 15 339 | nm | nm |
| Interest expense | - 837 | - 811 | - 3 | - 5 |
| Other financial income and expense | 20 | - 80 | nm | nm |
| Income before taxes | 8 371 | 26 137 | - 68 | - 64 |
| Income taxes | - 1 416 | - 2 119 | 33 | 25 |
| Net income | 6 955 | 24 018 | - 71 | - 67 |
| Attributable to: |  |  |  |  |
| Shareholders of Novartis AG | 6 955 | 24 021 | - 71 | - 67 |
| Non-controlling interests | 0 | - 3 | nm | nm |
| Basic earnings per share (USD) | 3.19 | 10.71 | - 70 | - 66 |

nm = not meaningful

### Income from associated companies

Income from associated companies was a loss of USD 9 million compared to an income of USD 15.3 billion in prior year. This decrease was due to the divestment of our investment in Roche that closed in the fourth quarter of 2021 where a gain of USD 14.6 billion was recognized.

### Interest expense and other financial income and expense

Interest expense amounted to USD 837 million, broadly in line with prior year.

Other financial income and expense amounted to an income of USD 20 million compared to an expense of USD 80 million in the prior year, as higher interest income was partly offset by financial expenses and currency losses.

### Income taxes

The tax rate was 16.9% compared to 8.1% in the prior year period. In the prior year, the tax rate was impacted by the Roche income from associated companies (including the divestment gain recognized on the sale of our investment in Roche in December 2021), the impact of increases in uncertain tax positions and prior-year items. For comparability, excluding these impacts, the prior year tax rate would have been 16.8%, broadly in line with 16.9% in the current year.

### Net income

Net income was USD 7.0 billion (-71%, -67% cc), impacted by Roche income in the prior year. Excluding the impact of Roche income, net income declined -9% (cc).

### Earnings per share

Basic earnings per share were USD 3.19 compared with USD 10.71 in the prior year, mainly due to prior year Roche income. Excluding the impact of Roche income, EPS declined -7% (cc).

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Item 5. Operating and Financial Review and Prospects

## Core non-operating income and expense$^{1}$

The following table provides an overview of core non-operating income and expense:

| (USD millions unless indicated otherwise) | Year ended Dec 31, 2022 | Year ended Dec 31, 2021 | Change in USD % | Change in constant currencies % |
| --- | --- | --- | --- | --- |
| Core operating income | 16 665 | 16 588 | 0 | 8 |
| Core (loss)/income from associated companies | - 9 | 993 | nm | nm |
| Core interest expense | - 837 | - 811 | - 3 | - 5 |
| Core other financial income and expense | 141 | - 41 | nm | nm |
| Core income before taxes | 15 960 | 16 729 | - 5 | 3 |
| Core income taxes | - 2 608 | - 2 635 | 1 | - 7 |
| Core net income | 13 352 | 14 094 | - 5 | 3 |
| Core basic earnings per share (USD) | 6.12 | 6.29 | - 3 | 6 |

nm = not meaningful

### Core income from associated companies

Core income from associated companies was a loss of USD 9 million compared with an income of USD 993 million in prior year. This decrease was due to the divestment of our investment in Roche that closed in the fourth quarter of 2021.

### Core interest expense and other financial income and expense

Core interest expense amounted to USD 837 million, broadly in line with prior year.

Core other financial income and expense amounted to an income of USD 141 million compared to an expense of USD 41 million in the prior year as higher interest income was only partly offset by currency losses.

### Core income taxes

The core tax rate (core taxes as a percentage of core income before tax) was 16.3% compared to 15.8% in the prior year. For comparability, excluding Roche Income from associated companies (divested in December 2021), the prior year core tax rate would have been 16.7% compared to 16.3% in the current year, decreasing mainly as a result of a change in core profit mix.

### Core net income

Core net income was USD 13.4 billion (-5%, +3% cc) as growth in core operating income was partly offset by the loss of Roche core income. Excluding the impact of Roche core income, core net income grew +11% (cc).

### Core earnings per share

Core EPS was USD 6.12 (-3%, +6% cc), benefiting from lower weighted average number of shares outstanding. Excluding the impact of Roche core income, core EPS grew +14% (cc).

$^{1}$ For an explanation of non-IFRS measures and reconciliation tables, see “-Non-IFRS measures as defined by Novartis.”

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Item 5. Operating and Financial Review and Prospects

### Results of operations excluding Roche investment impacts

To enhance investors' understanding of the Group's performance in comparison with the prior year, the following table provides a comparison of our 2022 published IFRS results and non-IFRS measures core results and free cash flow with the 2021 results, excluding the impacts related to our Roche investment, due to its divestment.

|  | Year ended Dec 31, 2022 | Excluding Roche investment impacts 2 |  |  |
| --- | --- | --- | --- | --- |
|  |  | Year ended Dec 31, 2021 | % change USD | % change cc 1 |
| Operating income | 9 197 | 11 689 | - 21 | - 13 |
| Loss from associated companies | - 9 | - 2 | nm | nm |
| Interest expense | - 837 | - 811 | - 3 | - 5 |
| Other financial income and expense | 20 | - 96 | nm | nm |
| Income taxes | - 1 416 | - 2 119 | 33 | 25 |
| Net income | 6 955 | 8 661 | - 20 | - 9 |
| Basic earnings per share (USD) | 3.19 | 3.86 | - 17 | - 7 |
| Net cash flows from operating activities | 14 236 | 14 549 | - 2 |  |
| Free cash flow 1 | 11 945 | 12 760 | - 6 |  |
| Core 1 |  |  |  |  |
| Core operating income | 16 665 | 16 588 | 0 | 8 |
| Core net income | 13 352 | 13 099 | 2 | 11 |
| Core basic earnings per share (USD) | 6.12 | 5.84 | 5 | 14 |

$^{1}$ For an explanation of non-IFRS measures and reconciliation tables, see '-Non-IFRS measures as defined by Novartis.'

$^{2}$ For a reconciliation of 2021 IFRS results and non-IFRS measures core results and free cash flow to exclude the impacts of the 2021 divestment of our Roche investment, see '-Non-IFRS measures as defined by Novartis.'

nm = not meaningful

63

Item 5. Operating and Financial Review and Prospects

## Factors affecting comparability of year-on-year results of operations

### Significant transactions in 2022 and 2021

The comparability of the year-on-year results of our operations for the total Group can be significantly affected by acquisitions and divestments. As part of our

long-term strategy to focus Novartis as a leading medicines company, we announced and/or completed several acquisitions and divestments during 2022 and 2021.

A detailed description of significant transactions in 2022 and 2021, can be found in “Item 18. Financial Statements-Note 2. Significant transactions.”

## Internal control over financial reporting

The Group’s management has assessed the effectiveness of internal control over financial reporting. The Group’s independent statutory auditor also issued an opinion on the effectiveness of internal control over financial reporting. Both the Group’s management and

its external auditors concluded that the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022. For more details, see “Item 15. Controls and Procedures.”

## Approach to risk management

See “Item 6. Directors, Senior Management and Employees-Item 6.C Board practices-Corporate governance-Information and control systems-Risk

management” and “Item 18. Financial Statements-Note 29. Financial instruments - additional disclosures.”

## Non-IFRS measures as defined by Novartis

Novartis uses certain non-IFRS metrics when measuring performance, especially when measuring current-year results against prior periods, including core results, constant currencies and free cash flow.

Despite the use of these measures by management in setting goals and measuring the Group’s performance, these are non-IFRS measures that have no standardized meaning prescribed by IFRS. As a result, such measures have limits in their usefulness to investors.

Because of their non-standardized definitions, the non-IFRS measures (unlike IFRS measures) may not be

comparable to the calculation of similar measures of other companies. These non-IFRS measures are presented solely to permit investors to more fully understand how the Group’s management assesses underlying performance. These non-IFRS measures are not, and should not be viewed as, a substitute for IFRS measures, and should be viewed in conjunction with IFRS financials.

As an internal measure of Group performance, these non-IFRS measures have limitations, and the Group’s performance management process is not solely restricted to these metrics.

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Item 5. Operating and Financial Review and Prospects

## Core results

The Group's core results - including core operating income, core net income and core earnings per share - exclude fully the amortization and impairment charges of intangible assets, excluding software, net gains and losses on fund investments and equity securities valued at fair value through profit and loss, and certain acquisition- and divestment-related items. The following items that exceed a threshold of USD 25 million are also excluded: integration- and divestment-related income and expenses; divestment gains and losses; restructuring charges/releases and related items; legal-related items; impairments of property, plant and equipment, software, and financial assets, and income and expense items that management deems exceptional and that are or are expected to accumulate within the year to be over a USD 25 million threshold.

Novartis believes that investor understanding of the Group's performance is enhanced by disclosing core measures of performance, since core measures exclude items that can vary significantly from year to year, they enable better comparison of business performance across years. For this same reason, Novartis uses these core measures in addition to IFRS and other measures as important factors in assessing the Group's performance.

The following are examples of how these core measures are utilized:

- In addition to monthly reports containing financial information prepared under International Financial Reporting Standards (IFRS), senior management receives a monthly analysis incorporating these core measures.
- Annual budgets are prepared for both IFRS and core measures.

As an internal measure of Group performance, the core results measures have limitations, and the Group's performance management process is not solely restricted to these metrics. A limitation of the core results measures is that they provide a view of the Group's operations without including all events during a period, such as the effects of an acquisition, divestment, or amortization/impairments of purchased intangible assets, impairments to property, plant and equipment and restructurings and related items.

## Constant currencies

Changes in the relative values of non-US currencies to the US dollar can affect the Group's financial results and financial position. To provide additional information that may be useful to investors, including changes in sales volume, we present information about our net sales and various values relating to operating and net income that are adjusted for such foreign currency effects.

Constant currency calculations have the goal of eliminating two exchange rate effects so that an estimate

can be made of underlying changes in the consolidated income statement excluding the impact of fluctuations in exchanges rates:

- The impact of translating the income statements of consolidated entities from their non-USD functional currencies to USD
- The impact of exchange rate movements on the major transactions of consolidated entities performed in currencies other than their functional currency.

We calculate constant currency measures by translating the current year's foreign currency values for sales and other income statement items into USD (excluding the IAS 29 "Financial Reporting in Hyperinflationary Economies" adjustments to the local currency income statements of subsidiaries operating in hyperinflationary economies), using the average exchange rates from the prior year and comparing them to the prior year values in USD.

We use these constant currency measures in evaluating the Group's performance, since they may assist us in evaluating our ongoing performance from year to year. However, in performing our evaluation, we also consider equivalent measures of performance that are not affected by changes in the relative value of currencies.

## Growth rate calculation

For ease of understanding, Novartis uses a sign convention for its growth rates such that a reduction in operating expenses or losses compared with the prior year is shown as a positive growth.

## Free cash flow

Novartis defines free cash flow as net cash flows from operating activities and cash flows from investing activities associated with purchases and sales of property, plant and equipment, of intangible assets, of financial assets and of other non-current assets. Excluded from free cash flow are cash flows from investing activities associated with acquisitions and divestments of businesses and of interests in associated companies, purchases and sales of marketable securities, commodities, time deposits and net cash flows from financing activities.

Free cash flow is a non-IFRS measure and is not intended to be a substitute measure for net cash flows from operating activities as determined under IFRS. Free cash flow is presented as additional information because management believes it is a useful supplemental indicator of the Group's ability to operate without reliance on additional borrowing or use of existing cash. Free cash flow is a measure of the net cash generated that is available for investment in strategic opportunities, returning to shareholders and for debt repayment. Free cash flow is a non-IFRS measure, which means it should not be interpreted as a measure determined under IFRS.

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Item 5. Operating and Financial Review and Prospects

## Additional information

### NET DEBT

Novartis calculates net debt as current financial debts and derivative financial instruments plus non-current financial debt less cash and cash equivalents and marketable securities, commodities, time deposits and derivative financial instruments.

Net debt is presented as additional information because it sets forth how management monitors net debt or liquidity and management believes it is a useful supplemental indicator of the Group’s ability to pay dividends, to meet financial commitments, and to invest in new strategic opportunities, including strengthening its balance sheet.

For the table that shows the Group’s net debt, see “- Item 5.B Liquidity and capital resources - Group liquidity, financial debts and net debt.”

### EBITDA

Novartis defines earnings before interest, tax, depreciation and amortization (EBITDA) as operating income, excluding depreciation of property, plant and equipment, depreciation of right-of-use assets, amortization of intangible assets, and impairments of property, plant and equipment, right-of-use assets and of intangible assets.

| (USD millions) | 2022 | 2021 |
| --- | --- | --- |
| Operating income | 9 197 | 11 689 |
| Depreciation of property, plant and equipment | 1 163 | 1 208 |
| Depreciation of right-of-use assets | 300 | 318 |
| Amortization of intangible assets | 3 982 | 3 903 |
| Impairments of property, plant and equipment, right-of-use assets and intangible assets 1 | 1 736 | 684 |
| EBITDA | 16 378 | 17 802 |

$^{1}$ There were no impairments of right-of-use assets in 2021.

### ENTERPRISE VALUE

Enterprise value represents the total amount that shareholders and debt holders have invested in Novartis, less the Group’s liquidity.

| (USD millions) | Dec 31, 2022 | Dec 31, 2021 |
| --- | --- | --- |
| Market capitalization | 191 530 | 196 107 |
| Non-controlling interests | 81 | 167 |
| Non-current financial debts | 20 244 | 22 902 |
| Current financial debts and derivative financial instruments | 5 931 | 6 295 |
| Marketable securities, commodities, time deposits and derivative financial instruments | - 11 413 | - 15 922 |
| Cash and cash equivalents | - 7 517 | - 12 407 |
| Enterprise value | 198 856 | 197 142 |

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Item 5. Operating and Financial Review and Prospects

## Reconciliation from IFRS results to core results

The following tables provide an overview of the reconciliation from IFRS results to core results:

### 2022 and 2021 reconciliation from IFRS results to core results

| (USD millions unless indicated otherwise) | Innovative Medicines |  | Sandoz |  | Corporate |  | Group |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 |
| IFRS operating income | 8 786 | 10 688 | 1 448 | 1 600 | - 1 037 | - 599 | 9 197 | 11 689 |
| Amortization of intangible assets | 3 585 | 3 528 | 221 | 236 |  |  | 3 806 | 3 764 |
| Impairments |  |  |  |  |  |  |  |  |
| Intangible assets | 1 291 | 360 | 25 | 27 | 2 |  | 1 318 | 387 |
| Property, plant and equipment related to the Group-wide rationalization of manufacturing sites | 286 | 219 | - 2 | 7 |  |  | 284 | 226 |
| Other property, plant and equipment | 85 | 40 |  |  |  |  | 85 | 40 |
| Total impairment charges | 1 662 | 619 | 23 | 34 | 2 |  | 1 687 | 653 |
| Acquisition or divestment of businesses and related items |  |  |  |  |  |  |  |  |
| - Income |  | - 2 |  |  | - 4 | - 64 | - 4 | - 66 |
| - Expense | 8 | 1 |  |  |  | 106 | 8 | 107 |
| Total acquisition or divestment of businesses and related items, net | 8 | - 1 |  |  | - 4 | 42 | 4 | 41 |
| Other items |  |  |  |  |  |  |  |  |
| Divestment gains | - 161 | - 649 |  | - 4 | - 5 | - 75 | - 166 | - 728 |
| Financial assets - fair value adjustments | 134 | - 43 |  |  | 126 | 5 | 260 | - 38 |
| Restructuring and related items |  |  |  |  |  |  |  |  |
| - Income | - 33 | - 32 | - 14 | - 36 | - 1 | - 6 | - 48 | - 74 |
| - Expense | 1 572 | 833 | 167 | 193 | 449 | 32 | 2 188 | 1 058 |
| Legal-related items |  |  |  |  |  |  |  |  |
| - Income | - 51 |  |  | - 11 |  |  | - 51 | - 11 |
| - Expense | 364 | 170 | 56 | 53 |  |  | 420 | 223 |
| Additional income | - 692 | - 139 | - 6 | - 1 | - 6 | - 138 | - 704 | - 278 |
| Additional expense | 63 | 241 | 8 |  | 1 | 48 | 72 | 289 |
| Total other items | 1 196 | 381 | 211 | 194 | 564 | - 134 | 1 971 | 441 |
| Total adjustments | 6 451 | 4 527 | 455 | 464 | 562 | - 92 | 7 468 | 4 899 |
| Core operating income | 15 237 | 15 215 | 1 903 | 2 064 | - 475 | - 691 | 16 665 | 16 588 |
| as % of net sales | 36.9% | 36.2% | 20.6% | 21.4% |  |  | 33.0% | 32.1% |
| (Loss)/income from associated companies | - 2 | 5 | 2 | 2 | - 9 | 15 332 | - 9 | 15 339 |
| Core adjustments to income from associated companies, net of tax |  |  |  |  |  | - 14 346 |  | - 14 346 |
| Interest expense |  |  |  |  |  |  | - 837 | - 811 |
| Other financial income and expense |  |  |  |  |  |  | 20 | - 80 |
| Core adjustments to other financial income and expense |  |  |  |  |  |  | 121 | 39 |
| Income taxes, adjusted for above items (core income taxes) |  |  |  |  |  |  | - 2 608 | - 2 635 |
| Core net income |  |  |  |  |  |  | 13 352 | 14 094 |
| Core net income attributable to shareholders of Novartis AG |  |  |  |  |  |  | 13 352 | 14 097 |
| Core basic EPS (USD) 1 |  |  |  |  |  |  | 6.12 | 6.29 |

$^{1}$ Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.

67

Item 5. Operating and Financial Review and Prospects

## 2022 and 2021 reconciliation from IFRS results to core results - Group

| 2022 (USD millions unless indicated otherwise) | IFRS results | Amortization of intangible assets 1 | Impairments 2 | Acquisition or divestment of businesses and related items 3 | Other items 4 | Core results |
| --- | --- | --- | --- | --- | --- | --- |
| Gross profit | 36 342 | 3 648 | 338 |  | 64 | 40 392 |
| Operating income | 9 197 | 3 806 | 1 687 | 4 | 1 971 | 16 665 |
| Income before taxes | 8 371 | 3 806 | 1 687 | 4 | 2 092 | 15 960 |
| Income taxes 5 | - 1 416 |  |  |  |  | - 2 608 |
| Net income | 6 955 |  |  |  |  | 13 352 |
| Basic EPS (USD) 6 | 3.19 |  |  |  |  | 6.12 |

### The following are adjustments to arrive at core gross profit

| Other revenues | 1 283 |  |  |  | - 86 | 1 197 |
| --- | --- | --- | --- | --- | --- | --- |
| Cost of goods sold | - 15 486 | 3 648 | 338 |  | 150 | - 11 350 |

### The following are adjustments to arrive at core operating income

| Selling, general and administration | - 14 253 |  |  |  | 63 | - 14 190 |
| --- | --- | --- | --- | --- | --- | --- |
| Research and development | - 9 996 | 158 | 954 |  | - 204 | - 9 088 |
| Other income | 805 |  | - 3 | - 4 | - 414 | 384 |
| Other expense | - 3 701 |  | 398 | 8 | 2 462 | - 833 |

### The following are adjustments to arrive at core income before taxes

| Other financial income and expense | 20 |  |  |  | 121 | 141 |
| --- | --- | --- | --- | --- | --- | --- |

$^{1}$ Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to currently marketed products and other production-related intangible assets, research and development includes the amortization of acquired rights for technologies

$^{2}$ Impairments: cost of goods sold, research and development and other expense include impairment charges related to intangible assets; other income and other expense include net impairment charges related to property, plant and equipment

$^{3}$ Acquisition or divestment of businesses and related items, including restructuring and integration charges: other income and other expense include transitional service fee income and charges related to divestments; other income also includes adjustments to provisions; other expense includes stamp duties related to an acquisition

$^{4}$ Other items: other revenues includes a net income from an outlicensing agreement, cost of goods sold, selling, general and administration, research and development, other income and other expense include restructuring income and charges related to the restructuring initiative to implement a new streamlined organizational model; the Sandoz strategic review, the Group-wide rationalization of manufacturing sites and other net restructuring charges and related items; cost of goods sold, selling, general and administration, research and development and other expense include adjustments to provisions and related items; cost of goods sold and research and development also include contingent consideration adjustments; other income and other expense include fair value adjustments and divestment gains and losses on financial assets and legal-related items; other income also includes gains from the divestment of products and property, curtailment gains and an adjustment to an environmental provision; other expense includes a reversal of an accrual and other costs and items; other financial income and expense includes the monetary loss on the restatement of non-monetary items for subsidiaries in hyperinflationary economies and a revaluation impact of a financial liability incurred through the Alcon distribution

$^{5}$ Taxes on the adjustments between IFRS and core results take into account, for each individual item included in the adjustment, the tax rate that will finally be applicable to the item based on the jurisdiction where the adjustment will finally have a tax impact. Generally, this results in amortization and impairment of intangible assets and acquisition-related restructuring and integration items having a full tax impact. There is usually a tax impact on other items, although this is not always the case for items arising from legal settlements in certain jurisdictions. Adjustments related to income from associated companies are recorded net of any related tax effect. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments of USD 7.6 billion to arrive at the core results before tax amounts to USD 1.2 billion. The average tax rate on the adjustments is 15.7% since the full year core tax charge of 10.3% has been applied to the pre-tax income of the period.

$^{6}$ Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.

68

Item 5. Operating and Financial Review and Prospects

| 2021 (USD millions unless indicated otherwise) | IFRS results | Amortization of intangible assets 1 | Impairments 2 | Acquisition or divestment of businesses and related items 3 | Other items 4 | Core results |
| --- | --- | --- | --- | --- | --- | --- |
| Gross profit | 37 010 | 3 655 | 18 |  | 414 | 41 097 |
| Operating income | 11 689 | 3 764 | 653 | 41 | 441 | 16 588 |
| Income before taxes | 26 137 | 3 974 | 653 | - 14 531 | 496 | 16 729 |
| Income taxes 5 | - 2 119 |  |  |  |  | - 2 635 |
| Net income | 24 018 |  |  |  |  | 14 094 |
| Basic EPS (USD) 6 | 10.71 |  |  |  |  | 6.29 |

# **The following are adjustments to arrive at core gross profit**

| Cost of goods sold | - 15 867 | 3 655 | 18 |  | 414 | - 11 780 |
| --- | --- | --- | --- | --- | --- | --- |

# **The following are adjustments to arrive at core operating income**

| Selling, general and administration | - 14 886 |  |  |  | 71 | - 14 815 |
| --- | --- | --- | --- | --- | --- | --- |
| Research and development | - 9 540 | 109 | 369 |  | 21 | - 9 041 |
| Other income | 1 852 |  | - 100 | - 66 | - 1 265 | 421 |
| Other expense | - 2 747 |  | 366 | 107 | 1 200 | - 1 074 |

# **The following are adjustments to arrive at core income before taxes**

| Income from associated companies | 15 339 | 210 |  | - 14 556 |  | 993 |
| --- | --- | --- | --- | --- | --- | --- |
| Other financial income and expense | - 80 |  |  | - 16 | 55 | - 41 |

$^{1}$ Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to currently marketed products and other production-related intangible assets; research and development includes the amortization of acquired rights for technologies; income from associated companies includes USD 210 million for the Novartis share of the estimated Roche core items

$^{2}$ Impairments: cost of goods sold and research and development include impairment charges related to intangible assets; other income and other expense include reversals of impairment charges and impairment charges related to property, plant and equipment

$^{3}$ Acquisition or divestment of businesses and related items, including restructuring and integration charges: other income includes adjustments to portfolio transformation and Alcon spin-off accruals; other income and other expense include transitional service-fee income and expenses related to the Alcon distribution; other expense also includes adjustments to provisions; income from associated companies includes the gain related to the divestment of our investment in Roche; other financial income and expense includes other financial gains related to the divestment of our investment in Roche

$^{4}$ Other items: cost of goods sold, research and development, other income and other expense include net restructuring and other charges related to the Group-wide rationalization of manufacturing sites; cost of goods sold, selling, general and administration, other income and other expense include other restructuring income and charges and related items; cost of goods sold, research and development, other income and other expense also include adjustments to contingent consideration, selling, general and administration, research and development, other income and other expense include adjustments to provisions; other income and other expense also include gains and losses from the divestment of products and financial assets and fair value adjustments on financial assets, adjustments to environmental provisions and legal-related items; other financial income and expense includes a charge related to the monetary loss due to hyperinflation in Argentina and Venezuela and a revaluation impact of a financial liability incurred through the Alcon distribution

$^{5}$ Taxes on the adjustments between IFRS and core results take into account, for each individual item included in the adjustment, the tax rate that will finally be applicable to the item based on the jurisdiction where the adjustment will finally have a tax impact. Generally, this results in amortization and impairment of intangible assets and acquisition-related restructuring and integration items having a full tax impact. There is usually a tax impact on other items, although this is not always the case for items arising from legal settlements in certain jurisdictions. Adjustments related to income from associated companies are recorded net of any related tax effect. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments of USD 9.4 billion to arrive at the core results before tax amounts to USD 516 million. Excluding the gain on the divestment of our investment in Roche, the tax on the total adjustments of USD 5.2 billion to arrive at the core results before tax amounts to USD 516 million and the average tax rate on the adjustments was 10.0%

$^{6}$ Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.

69

Item 5. Operating and Financial Review and Prospects

## 2022 and 2021 reconciliation from IFRS results to core results - Innovative Medicines

| 2022 (USD millions) | IFRS results | Amortization of intangible assets 1 | Impairments 2 | Acquisition or divestment of businesses and related items 3 | Other items 4 | Core results |
| --- | --- | --- | --- | --- | --- | --- |
| Gross profit | 31 801 | 3 427 | 314 |  | - 29 | 35 513 |
| Operating income | 8 786 | 3 585 | 1 662 | 8 | 1 196 | 15 237 |

### The following are adjustments to arrive at core gross profit

| Other revenues | 1 249 |  |  |  | - 86 | 1 163 |
| --- | --- | --- | --- | --- | --- | --- |
| Cost of goods sold | - 11 569 | 3 427 | 314 |  | 57 | - 7 771 |

### The following are adjustments to arrive at core operating income

| Selling, general and administration | - 11 679 |  |  |  | 50 | - 11 629 |
| --- | --- | --- | --- | --- | --- | --- |
| Research and development | - 9 172 | 158 | 953 |  | - 206 | - 8 267 |
| Other income | 531 |  | - 1 |  | - 311 | 219 |
| Other expense | - 2 695 |  | 396 | 8 | 1 692 | - 599 |

$^{1}$ Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to currently marketed products and other production-related intangible assets; research and development includes the amortization of acquired rights for technologies

$^{2}$ Impairments: cost of goods sold, research and development and other expense include impairment charges related to intangible assets, other income and other expense include net impairment charges related to property, plant and equipment

$^{3}$ Acquisition or divestment of businesses and related items, including restructuring and integration charges: other expense includes stamp duties related to an acquisition and transitional service fee charges related to divestments

$^{4}$ Other items: other revenues includes a net income from an outlicensing agreement, cost of goods sold, selling, general and administration, research and development, other income and other expense include restructuring income and charges related to the initiative to implement a new streamlined organizational model, the Group-wide rationalization of manufacturing sites and other net restructuring charges and related items, cost of goods sold and research and development also include contingent consideration adjustments and adjustments to provisions and related items, other income and other expense include fair value adjustments and divestment gains and losses on financial assets and legal-related items, other income also includes gains from the divestment of products and property, curtailment gains and an adjustment to an environmental provision, other expense includes a reversal of an accrual and other costs and items

| 2021 (USD millions) | IFRS results | Amortization of intangible assets 1 | Impairments 2 | Acquisition or divestment of businesses and related items 3 | Other items 4 | Core results |
| --- | --- | --- | --- | --- | --- | --- |
| Gross profit | 32 218 | 3 419 |  |  | 344 | 35 981 |
| Operating income | 10 688 | 3 528 | 619 | - 1 | 381 | 15 215 |

### The following are adjustments to arrive at core gross profit

| Cost of goods sold | - 11 751 | 3 419 |  |  | 344 | - 7 988 |
| --- | --- | --- | --- | --- | --- | --- |

### The following are adjustments to arrive at core operating income

| Selling, general and administration | - 12 306 |  |  |  | 71 | - 12 235 |
| --- | --- | --- | --- | --- | --- | --- |
| Research and development | - 8 641 | 109 | 360 |  | 22 | - 8 150 |
| Other income | 1 149 |  | - 45 | - 2 | - 837 | 265 |
| Other expense | - 1 732 |  | 304 | 1 | 781 | - 646 |

$^{1}$ Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to currently marketed products and other production-related intangible assets; research and development includes the amortization of acquired rights for technologies

$^{2}$ Impairments: research and development includes impairment charges related to intangible assets, other income and other expense include reversals of impairment charges and impairment charges related to property, plant and equipment

$^{3}$ Acquisition or divestment of businesses and related items, including restructuring and integration charges: other income and other expense include transitional service fee income and expenses related to the Alcon distribution

$^{4}$ Other items: cost of goods sold, research and development, other income and other expense include net restructuring and other charges related to the Group-wide rationalization of manufacturing sites, cost of goods sold, selling, general and administration, other income and other expense include other restructuring income and charges and related items; cost of goods sold, research and development and other expense include adjustments to contingent consideration, selling, general and administration, research and development and other expense include adjustments to provisions, other income and other expense include gains and losses from the divestment of products and financial assets and fair value adjustments on financial assets; other expense also includes legal-related items and adjustments to environmental provisions

70

Item 5. Operating and Financial Review and Prospects

## 2022 and 2021 reconciliation from IFRS to core results - Sandoz

| 2022 (USD millions) | IFRS results | Amortization of intangible assets 1 | Impairments 2 | Acquisition or divestment of businesses and related items | Other items 3 | Core results |
| --- | --- | --- | --- | --- | --- | --- |
| Gross profit | 4 504 | 221 | 24 |  | 93 | 4 842 |
| Operating income | 1 448 | 221 | 23 |  | 211 | 1 903 |

### The following are adjustments to arrive at core gross profit

| Cost of goods sold | - 4 978 | 221 | 24 |  | 93 | - 4 640 |
| --- | --- | --- | --- | --- | --- | --- |

### The following are adjustments to arrive at core operating income

| Selling, general and administration | - 2 062 |  |  |  | 9 | - 2 053 |
| --- | --- | --- | --- | --- | --- | --- |
| Research and development | - 824 |  | 1 |  | 2 | - 821 |
| Other income | 103 |  | - 2 |  | - 14 | 87 |
| Other expense | - 273 |  |  |  | 121 | - 152 |

$^{1}$ Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to currently marketed products and other production-related intangible assets

$^{2}$ Impairments: cost of goods sold and research and development include impairment charges related to intangible assets; other income includes a reversal of an impairment charge related to property, plant and equipment

$^{3}$ Other items: cost of goods sold, selling, general and administration, research and development, other income and other expense include charges related to the Sandoz strategic review, the Group-wide rationalization of manufacturing sites and other net restructuring charges and related items; other expense also includes legal-related items; cost of goods sold and selling, general and administration include adjustments to provisions and related items

| 2021 (USD millions) | IFRS results | Amortization of intangible assets 1 | Impairments 2 | Acquisition or divestment of businesses and related items | Other items 3 | Core results |
| --- | --- | --- | --- | --- | --- | --- |
| Gross profit | 4 725 | 236 | 18 |  | 70 | 5 049 |
| Operating income | 1 600 | 236 | 34 |  | 194 | 2 064 |

### The following are adjustments to arrive at core gross profit

| Cost of goods sold | - 5 147 | 236 | 18 |  | 70 | - 4 823 |
| --- | --- | --- | --- | --- | --- | --- |

### The following are adjustments to arrive at core operating income

| Research and development | - 899 |  | 9 |  | - 1 | - 891 |
| --- | --- | --- | --- | --- | --- | --- |
| Other income | 233 |  | - 55 |  | - 51 | 127 |
| Other expense | - 397 |  | 62 |  | 176 | - 159 |

$^{1}$ Amortization of intangible assets: cost of goods sold includes the amortization of acquired rights to currently marketed products and other production-related intangible assets

$^{2}$ Impairments: cost of goods sold and research and development include impairment charges related to intangible assets, other income and other expense include reversals of impairment charges and impairment charges related to property, plant and equipment

$^{3}$ Other items: cost of goods sold, other income and other expense include net restructuring and other charges related to the Group-wide rationalization of manufacturing sites and other restructuring income and charges and related items, research and development includes adjustments to provisions, other income includes net gains from the divestment of a product, other income and other expense include legal-related items

71

Item 5. Operating and Financial Review and Prospects

## 2022 and 2021 reconciliation from IFRS results to core results - Corporate

| 2022 (USD millions) | IFRS results | Amortization of intangible assets | Impairments 1 | Acquisition or divestment of businesses and related items 2 | Other items 3 | Core results |
| --- | --- | --- | --- | --- | --- | --- |
| Gross profit | 37 |  |  |  |  | 37 |
| Operating loss | - 1 037 |  | 2 | - 4 | 564 | - 475 |

### The following are adjustments to arrive at core operating loss

| Selling, general and administration | - 512 |  |  |  | 4 | - 508 |
| --- | --- | --- | --- | --- | --- | --- |
| Other income | 171 |  |  | - 4 | - 89 | 78 |
| Other expense | - 733 |  | 2 |  | 649 | - 82 |

$^{1}$ Impairments: other expense includes impairment charges related to intangible assets

$^{2}$ Acquisition or divestment of businesses and related items, including restructuring and integration charges: other income includes adjustments to provisions and transitional service fee income related to divestments

$^{3}$ Other items: selling, general and administration, other income and other expense include restructuring income and charges related to the initiative to implement a new streamlined organizational model, the Sandoz strategic review and other net restructuring charges and related items; other income and other expense also include fair value adjustments and divestment gains and losses on financial assets; other income also includes a curtailment gain

| 2021 (USD millions) | IFRS results | Amortization of intangible assets | Impairments | Acquisition or divestment of businesses and related items 1 | Other items 2 | Core results |
| --- | --- | --- | --- | --- | --- | --- |
| Gross profit | 67 |  |  |  |  | 67 |
| Operating loss | - 599 |  |  | 42 | - 134 | - 691 |

### The following are adjustments to arrive at core operating loss

| Other income | 470 |  |  | - 64 | - 377 | 29 |
| --- | --- | --- | --- | --- | --- | --- |
| Other expense | - 618 |  |  | 106 | 243 | - 269 |

$^{1}$ Acquisition or divestment of businesses and related items, including restructuring and integration charges: other income includes adjustments to portfolio transformation and Alcon spin-off accruals; other income and other expense include transitional service fee income and expenses related to the Alcon distribution; other expense also includes adjustments to provisions

$^{2}$ Other items: other income includes an adjustment to a contingent consideration receivable; other income and other expense include fair value adjustments and divestment gains and losses on financial assets, adjustments to environmental provisions and restructuring income and charges and related items

72

Item 5. Operating and Financial Review and Prospects

### Reconciliation of 2021 IFRS results and non-IFRS measures core results and free cash flow to exclude the impacts of the 2021 divestment of our Roche investment

To enhance investor understanding of the Group's performance in comparison with the prior year, we presented the 2021 IFRS results and non-IFRS measures core results and free cash flow excluding the impacts related to our Roche investment, due to its divestment in the fourth quarter of 2021.

The following tables provide a reconciliation of our 2021 published IFRS results and non-IFRS measures core results and free cash flow to the 2021 results, excluding the impacts related to our Roche investment, due to its divestment.

| (USD millions unless indicated otherwise) | 2021 |  |  |  |
| --- | --- | --- | --- | --- |
|  | Results as published | Our Roche investment impacts excluding the divestment gain | Gain on divestment of our investment in Roche | Results excluding impacts from the divestment of our Roche investment |
| Operating income | 11 689 |  |  | 11 689 |
| Income from associated companies | 15 339 | - 785 | - 14 556 | - 2 |
| Interest expense and other financial income and expense | - 891 |  | - 16 | - 907 |
| Income before tax | 26 137 | - 785 | - 14 572 | 10 780 |
| Income taxes | - 2 119 |  |  | - 2 119 |
| Net income | 24 018 | - 785 | - 14 572 | 8 661 |
| Basic earnings per share (USD) | 10.71 | - 0.35 | - 6.50 | 3.86 |
| Effective tax rate 1 | 8.1% |  |  | 19.7% |
| Core operating income | 16 588 |  |  | 16 588 |
| Core income from associated companies | 993 | - 995 |  | - 2 |
| Core interest expense and core other financial income and expense | - 852 |  |  | - 852 |
| Core income before tax | 16 729 | - 995 |  | 15 734 |
| Core income taxes | - 2 635 |  |  | - 2 635 |
| Core net income | 14 094 | - 995 |  | 13 099 |
| Core basic earnings per share (USD) | 6.29 | - 0.45 |  | 5.84 |
| Core effective tax rate 2 | 15.8% |  |  | 16.7% |
| Free cash flow 3 | 13 282 | - 522 |  | 12 760 |

$^{1}$ Effective tax rate is calculated as Income taxes divided by Income before tax.

$^{2}$ Core effective tax rate is calculated as Core income taxes divided by Core income before tax.

$^{3}$ The free cash flow impact represents the dividend received in Q1 2021 from Roche in relation to the distribution of its 2020 net income.

73

Item 5. Operating and Financial Review and Prospects

|  | 2021 |  |  |
| --- | --- | --- | --- |
| (USD millions) | Free cash flow as published | Dividends received from Roche in relation to the distribution of its 2020 net income 1 | Free cash flow excluding dividends received from Roche |
| Operating income | 11 689 |  | 11 689 |
| Adjustments for non-cash items | 7 030 |  | 7 030 |
| Operating income adjusted for non-cash items | 18 719 |  | 18 719 |
| Dividends received from associated companies and others | 525 | - 522 | 3 |
| Interest and other financial payments, net | - 953 |  | - 953 |
| Income taxes paid | - 2 342 |  | - 2 342 |
| Other operating cash flow items, net | - 878 |  | - 878 |
| Net cash flows from operating activities | 15 071 | - 522 | 14 549 |
| Net purchases of property, plant and equipment, intangible assets, financial assets and other non-current assets | - 1 789 |  | - 1 789 |
| Free cash flow | 13 282 | - 522 | 12 760 |

$^{1}$ In 2021, the dividend received from Roche in relation to the distribution of its 2020 net income was received in Q1 2021.

The following table provides a summary of the percentage point impact from excluding the effect of the divestment of our investment in Roche (in the fourth quarter of 2021) on the USD and constant currencies % change on key Group figures.

|  | In USD |  |  | In constant currencies |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | % change as published 2022 | % change excluding impacts from the divestment of our Roche investment 2022 | Percentage point impact 2022 | % change as published 2022 | % change excluding impacts from the divestment of our Roche investment 2022 | Percentage point impact 2022 |
| Net income | - 71 | - 20 | - 51 | - 67 | - 9 | - 58 |
| Basic earnings per share (USD) | - 70 | - 17 | - 53 | - 66 | - 7 | - 59 |
| Free cash flow | - 10 | - 6 | - 4 |  |  |  |
| Core net income | - 5 | 2 | - 7 | 3 | 11 | - 8 |
| Core basic earnings per share (USD) | - 3 | 5 | - 8 | 6 | 14 | - 8 |

## 5.B Liquidity and capital resources

The following tables summarize the Group's cash flows and net debt:

| (USD millions) | 2022 | 2021 |
| --- | --- | --- |
| Net cash flows from operating activities | 14 236 | 15 071 |
| Net cash flows from investing activities | 1 468 | 4 208 |
| Net cash flows used in financing activities | - 20 562 | - 16 264 |
| Effect of exchange rate changes on cash and cash equivalents | - 32 | - 266 |
| Net change in cash and cash equivalents | - 4 890 | 2 749 |
| Change in marketable securities, commodities, time deposits and derivative financial instruments | - 4 509 | 14 017 |
| Change in current and non-current financial debts and derivative financial instruments | 3 022 | 6 847 |
| Change in net debt | - 6 377 | 23 613 |
| Net debt at January 1 | - 868 | - 24 481 |
| Net debt at December 31 | - 7 245 | - 868 |

74

Item 5. Operating and Financial Review and Prospects

# Cash flow

## Financial year 2022 compared with 2021

Net cash flows from operating activities amounted to USD 14.2 billion, compared with USD 15.1 billion in 2021. This decrease was mainly due to unfavorable changes in working capital and lower dividends from associated companies (2021 included the USD 0.5 billion dividends received from our investment in Roche, which was divested in the fourth quarter of 2021), partly offset by lower income taxes paid and favorable hedging results.

Net cash inflows from investing activities amounted to USD 1.5 billion, compared with USD 4.2 billion in 2021.

The current year cash inflows were driven by net proceeds of USD 4.7 billion from the sale of marketable securities, commodities and time deposits; USD 0.5 billion from the sale of intangible assets, financial assets and property, plant and equipment. These cash inflows were partly offset by cash outflows of USD 1.5 billion for purchases of intangible assets; USD 1.2 billion for purchases of property, plant and equipment; USD 0.1 billion for purchases of financial assets; and USD 0.9 billion for acquisitions and divestments of businesses, net (primarily the acquisition of Gyroscope Therapeutics Holdings plc for USD 0.8 billion).

In 2021, net cash inflows from investing activities of USD 4.2 billion were driven by proceeds of USD 20.7 billion from the divestment of our investment in Roche; USD 2.3 billion from the sale of marketable securities, commodities and time deposits; and USD 1.4 billion from the sale of intangible assets, financial assets and property, plant and equipment. These cash inflows were partly offset by USD 16.4 billion cash outflows for purchases of

marketable securities and time deposits, mainly due to the investment of a portion of the proceeds from the divestment of our investment in Roche; USD 1.6 billion for purchases of intangible assets (including the upfront payment to in-license tislelizumab from an affiliate of Bei-Gene, Ltd); USD 1.4 billion for purchases of property, plant and equipment; USD 0.6 billion for acquisitions and divestments of businesses, net (including the acquisition of GSK's cephalosporin antibiotics business for USD 351 million); and USD 0.2 billion for purchases of financial assets.

Net cash outflows used in financing activities amounted to USD 20.6 billion, compared with USD 16.3 billion in 2021.

The current year cash outflows were mainly driven by USD 10.6 billion for net treasury share transactions; USD 7.5 billion for the dividend payment; USD 2.5 billion in aggregate for the repayment of two US dollar bonds; and USD 0.3 billion payments of lease liabilities. These cash outflows were partly offset by cash inflows of USD 0.3 billion from the net increase in current financial debts.

In 2021, net cash outflows used in financing activities of USD 16.3 billion were driven by USD 7.4 billion for the dividend payment; USD 3.0 billion for net treasury share transactions; USD 3.5 billion net decrease in current financial debts; and USD 2.2 billion for the repayment of two bonds denominated in euro (notional amount of EUR 1.25 billion and of EUR 0.6 billion) at maturity. Payments of lease liabilities and other financing cash flows resulted in a net cash outflow of USD 0.2 billion.

## Free cash flow

Free cash flow is a non-IFRS measure, see '-Item 5.A Operating results-Non-IFRS measures as defined by Novartis-Free cash flow' for further information.

The following table is a reconciliation of the three major categories of the IFRS consolidated statements of cash flows to free cash flow:

| (USD millions) | 2022 |  |  | 2021 |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | IFRS cash flow | Adjustments | Free cash flow | IFRS cash flow | Adjustments | Free cash flow |
| Net cash flows from operating activities | 14 236 |  | 14 236 | 15 071 |  | 15 071 |
| Net cash flows from/(used in) investing activities 1 | 1 468 | - 3 759 | - 2 291 | 4 208 | - 5 997 | - 1 789 |
| Net cash flows used in financing activities 2 | - 20 562 | 20 562 | 0 | - 16 264 | 16 264 | 0 |
| Free cash flow |  |  | 11 945 |  |  | 13 282 |

$^{1}$ Excluded from the free cash flow are cash flows from investing activities associated with acquisitions and divestments of businesses and of interest in associated companies, purchases and sales of marketable securities, commodities and time deposits.

$^{2}$ Net cash flows used in financing activities are excluded from the free cash flow.

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The following table is a summary of the free cash flow:

| (USD millions) | 2022 | 2021 |
| --- | --- | --- |
| Operating income | 9 197 | 11 689 |
| Adjustments for non-cash items |  |  |
| Depreciation, amortization and impairments | 7 441 | 6 075 |
| Change in provisions and other non-current liabilities | 1 403 | 896 |
| Other | 460 | 59 |
| Operating income adjusted for non-cash items | 18 501 | 18 719 |
| Dividends received from associated companies and others | 1 | 525 |
| Interest and other financial receipts | 325 | 13 |
| Interest and other financial payments | - 728 | - 966 |
| Income taxes paid | - 1 975 | - 2 342 |
| Payments out of provisions and other net cash movements in non-current liabilities | - 885 | - 1 119 |
| Change in inventories and trade receivables less trade payables | - 1 467 | - 329 |
| Change in other net current assets and other operating cash flow items | 464 | 570 |
| Net cash flows from operating activities | 14 236 | 15 071 |
| Purchases of property, plant and equipment | - 1 198 | - 1 378 |
| Proceeds from sale of property, plant and equipment | 167 | 240 |
| Purchases of intangible assets | - 1 473 | - 1 593 |
| Proceeds from sale of intangible assets | 202 | 748 |
| Purchases of financial assets | - 121 | - 191 |
| Proceeds from sale of financial assets | 133 | 442 |
| Purchases of other non-current assets | - 1 | - 61 |
| Proceeds from sale of other non-current assets |  | 4 |
| Free cash flow | 11 945 | 13 282 |

### Financial year 2022 compared with 2021

Free cash flow amounted to USD 11.9 billion (-10% USD), compared with USD 13.3 billion in 2021, mainly due to a decrease in net cash flows from operating activities and lower divestment proceeds, partly offset by lower purchases of property, plant and equipment.

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# Condensed consolidated balance sheets

| (USD millions) | Dec 31, 2022 | Dec 31, 2021 |
| --- | --- | --- |
| Assets |  |  |
| Property, plant and equipment | 10 764 | 11 545 |
| Right-of-use assets | 1 431 | 1 561 |
| Goodwill | 29 301 | 29 595 |
| Intangible assets other than goodwill | 31 644 | 34 182 |
| Investments in associated companies | 143 | 205 |
| Deferred tax assets | 3 739 | 3 743 |
| Financial assets and other non-current assets | 3 521 | 5 246 |
| Total non-current assets | 80 543 | 86 077 |
| Inventories | 7 175 | 6 666 |
| Trade receivables | 8 066 | 8 005 |
| Other current assets and income tax receivables | 2 739 | 2 718 |
| Marketable securities, commodities, time deposits and derivative financial instruments | 11 413 | 15 922 |
| Cash and cash equivalents | 7 517 | 12 407 |
| Total current assets | 36 910 | 45 718 |
| Total assets | 117 453 | 131 795 |
| Equity and liabilities |  |  |
| Total equity | 59 423 | 67 822 |
| Liabilities |  |  |
| Financial debts | 20 244 | 22 902 |
| Lease liabilities | 1 538 | 1 621 |
| Deferred tax liabilities | 2 686 | 3 070 |
| Provisions and other non-current liabilities | 4 906 | 6 172 |
| Total non-current liabilities | 29 374 | 33 765 |
| Trade payables | 5 146 | 5 553 |
| Financial debts and derivative financial instruments | 5 931 | 6 295 |
| Lease liabilities | 251 | 275 |
| Provisions and other current liabilities and current income tax liabilities | 17 328 | 18 085 |
| Total current liabilities | 28 656 | 30 208 |
| Total liabilities | 58 030 | 63 973 |
| Total equity and liabilities | 117 453 | 131 795 |

## Assets

Total non-current assets of USD 80.5 billion at December 31, 2022, decreased by USD 5.5 billion compared to December 31, 2021.

Intangible assets other than goodwill decreased by USD 2.5 billion as additions (including the acquisition of Gyroscope Therapeutics Holdings plc) were more than offset by amortization, impairments and unfavorable currency translation adjustments.

Goodwill decreased by USD 0.3 billion, mainly due to unfavorable currency translation adjustments.

Property, plant and equipment decreased by USD 0.8 billion, as net additions were more than offset by depreciation, unfavorable currency translation adjustments and impairments.

Financial and other non-current assets decreased by USD 1.7 billion, driven by the decrease of the prepaid post-employment benefit plans of USD 0.9 billion, resulting mainly from the pension accounting effects from increases in actuarial discount rates and of USD 0.6 billion from fair value losses on listed equity and fund investments.

Right-of-use assets, investments in associated companies and deferred tax assets were broadly in line with December 31, 2021.

Total current assets of USD 36.9 billion at December 31, 2022, decreased by USD 8.8 billion compared to December 31, 2021.

Cash and cash equivalents decreased by USD 4.9 billion, mainly due to the dividend payment, the purchase of treasury shares and net repayments of financial debt, partly offset by the cash generated from operating activities and from investing activities, which includes the net proceeds from the sales of marketable securities, commodities and time deposits.

Marketable securities, commodities, time deposits and derivative financial instruments decreased by USD 4.5 billion mainly driven by the net sales of marketable securities, commodities and time deposits.

Inventories increased by USD 0.5 billion and trade receivables and other current assets and income tax receivables were broadly in line with December 31, 2021.

We consider our provisions for doubtful trade receivables to be adequate. We particularly monitor the level of trade receivables in countries deemed to have an

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elevated credit risk. We consider macroeconomic environment, historical experience, country and political risk, in addition to other relevant information when assessing risk. These risk factors are monitored regularly to determine any adjustments in risk classification. The majority of the past due trade receivables from elevated credit risk countries are due from local governments or from government-funded entities. Deteriorating credit and economic conditions as well as other factors in these elevated credit risk countries have resulted in, and may continue to result in, an increase in the average length of time that it takes to collect these trade receivables and may require the Group to re-evaluate the expected credit loss amount of these trade receivables in future periods. At December 31, 2022, amounts past due for more than one year were not significant in elevated credit risk countries.

For a table showing an overview of the aging analysis of total trade receivables and the total amount of the provision for doubtful trade receivables as of December 31, 2022, and 2021, see “Item 18. Financial Statements-Note 15. Trade receivables.”

There is also a risk that certain countries could devalue their currency. Currency exposures are described in more detail in “-Effects of currency fluctuations.”

### Liabilities

Total non-current liabilities of USD 29.4 billion decreased by USD 4.4 billion compared to December 31, 2021.

Non-current financial debts decreased by USD 2.7 billion, mainly due to the reclassification of USD 2.3 billion from non-current to current financial debts of two EUR denominated bonds with notional amounts of EUR 750 million and EUR 1.25 billion maturing in 2023 and favorable currency translation adjustments of USD 0.4 billion.

Provisions and other non-current liabilities decreased by USD 1.3 billion, mainly driven by decreases in accrued liabilities for employee benefits of USD 1.2 billion (primarily due to a decrease in accrued liabilities for defined benefit pension plans of USD 0.9 billion, resulting from the pension accounting effects from increases in actuarial discount rates), and in contingent consideration of USD 0.3 billion, a reclassification of non-current legal matters provisions to current portion of USD 0.2 billion, partly offset by the increase in other non-current liabilities of USD 0.4 billion.

Deferred tax liabilities decreased by USD 0.4 billion and non-current lease liabilities were broadly in line with December 31, 2021.

Total current liabilities of USD 28.7 billion decreased by USD 1.6 billion compared to December 31, 2021.

Provisions and other current liabilities and current income tax liabilities decreased by USD 0.8 billion, mainly driven by the decrease in the commitment for repurchase of own shares liability of USD 2.8 billion, partly offset by increases in restructuring provisions of USD 0.8 billion (primarily due to the initiative announced in April 2022, to implement a new streamlined organizational model), in provisions for legal matters of USD 0.5 billion, including a USD 0.2 billion reclassification from non-current provisions for legal matters, and in provisions for revenue deductions of USD 0.3 billion.

Current financial debts and derivative financial instruments decreased by USD 0.4 billion, mainly due to the repayment of two US dollar bonds of USD 1.0 billion and USD 1.5 billion, the closure during the third quarter of 2022 of the interest-bearing accounts of employees payable on demand, which amounted to USD 1.8 billion at December 31, 2021, and favorable currency translation adjustments, partly offset by the reclassification from non-current to current financial debts of USD 2.3 billion and an increase of USD 1.9 billion in commercial paper.

Trade payables decreased by USD 0.4 billion and current lease liabilities were broadly in line with December 31, 2021.

In our key countries, Switzerland and the United States, assessments have been agreed by the tax authorities up to 2017 in Switzerland and up to 2014 in the United States, with the exception of one open United States position related to the 2007 tax filing. Uncertainties also exist on the application of a taxing right based on a German non-resident tax regulation for specific revenues derived from German registered intellectual property rights.

Novartis believes that its total provisions are adequate based upon currently available information. However, given the inherent difficulties in estimating liabilities in this area, Novartis may incur additional costs beyond the amounts provided. Management believes that such additional amounts, if any, would not be material to the Group’s financial condition but could be material to the results of operations or cash flows in a given period.

### Equity

The Group’s equity decreased by USD 8.4 billion to USD 59.4 billion at December 31, 2022, compared to December 31, 2021.

This decrease was mainly due to the cash-dividend payment of USD 7.5 billion, purchase of treasury shares of USD 10.9 billion, unfavorable currency translation differences of USD 0.5 billion and fair value adjustments on equity securities of USD 0.4 billion. This was partially offset by the net income of USD 7.0 billion, decrease of the treasury share repurchase obligation of USD 2.8 billion, and equity-based compensation of USD 0.9 billion.

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## Summary of equity movements attributable to Novartis AG shareholders

|  | Number of outstanding shares (in millions) |  | Equity attributable to Novartis AG shareholders |  |
| --- | --- | --- | --- | --- |
|  | 2022 | 2021 | 2022 USD millions | 2021 USD millions |
| Balance at beginning of year | 2 234.9 | 2 256.8 | 67 655 | 56 598 |
| Shares acquired to be canceled | - 126.2 | - 30.7 | - 10 787 | - 2 775 |
| Other share purchases | - 1.4 | - 1.5 | - 123 | - 145 |
| Exercise of options and employee transactions | 1.9 | 0.6 | 88 | 39 |
| Equity-based compensation | 10.4 | 9.6 | 854 | 745 |
| Shares delivered to Alcon employees as a result of the Alcon spin-off | 0.0 | 0.1 | 5 | 17 |
| Taxes on treasury share transactions |  |  | 14 | 1 |
| Decrease/(increase) of treasury share repurchase obligation under a share buyback trading plan |  |  | 2 809 | - 1 040 |
| Transaction costs, net of taxes |  |  |  | 12 |
| Dividends |  |  | - 7 506 | - 7 368 |
| Net income of the year attributable to shareholders of Novartis AG |  |  | 6 955 | 24 021 |
| Other comprehensive income attributable to shareholders of Novartis AG |  |  | - 839 | - 2 493 |
| Impact of change in ownership of consolidated entities |  |  |  | - 5 |
| Other movements 1 |  |  | 217 | 48 |
| Balance at end of year | 2 119.6 | 2 234.9 | 59 342 | 67 655 |

$^{1}$ Impact of hyperinflationary economies (see 'Item 18. Financial Statements-Note 1. Significant accounting policies').

In 2022, Novartis repurchased a total of 126.2 million shares for USD 10.8 billion on the SIX Swiss Exchange second trading line, including 115.3 million shares (USD 9.9 billion) under the up-to USD 15 billion share buyback announced in December 2021 and 10.9 million shares (USD 0.9 billion) to mitigate dilution related to participation plans of associates. In addition, 1.4 million shares (USD 0.1 billion) were repurchased from associates. In the same period, 12.3 million shares (for an equity value of USD 0.9 billion) were delivered as a result of option exercises and share deliveries related to participation plans of associates. Consequently, the total number of shares outstanding decreased by 115.3 million versus December 31, 2021. These treasury share transactions resulted in a decrease in equity of USD 10.0 billion and a net cash outflow of USD 10.6 billion.

In 2021, Novartis repurchased a total of 30.7 million shares for USD 2.8 billion on the SIX Swiss Exchange second trading line, including 19.6 million shares (USD 1.8 billion) under the up-to USD 2.5 billion share buyback announced in November 2020, 8.6 million shares (USD 0.8 billion) to mitigate dilution related to participation plans of associates and 2.5 million shares (USD 0.2

billion) under the up-to USD 15 billion share buyback announced in December 2021. In addition, 1.5 million shares (USD 0.1 billion) were repurchased from associates. In the same period, 10.3 million shares (for an equity value of USD 0.8 billion) were delivered as a result of options exercised and share deliveries related to participation plans of associates. Consequently, the total number of shares outstanding decreased by 21.9 million versus December 31, 2020. These treasury share transactions resulted in a decrease in equity of USD 2.1 billion and a net cash outflow of USD 3.0 billion.

### Treasury shares

At December 31, 2022, our holding of treasury shares amounted to 284.1 million shares, or approximately 12% of the total number of issued shares. Approximately 99.0 million treasury shares were held in entities that restrict their availability for use.

At December 31, 2021, our holding of treasury shares amounted to 199.5 million shares, or approximately 8% of the total number of issued shares. Approximately 102.5 million treasury shares were held in entities that restrict their availability for use.

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## Effects of currency fluctuations

We transact our business in many currencies other than the US dollar, our reporting currency.

The following table provides an overview of net sales and operating expenses based on IFRS values for 2022 and 2021, for currencies most important to the Group:

| Currency | 2022 |  | 2021 |  |
| --- | --- | --- | --- | --- |
|  | Net sales % | Operating expenses % 1 | Net sales % | Operating expenses % 1 |
| US dollar (USD) | 37 | 36 | 35 | 35 |
| Euro (EUR) | 27 | 24 | 29 | 26 |
| Swiss franc (CHF) | 2 | 20 | 2 | 18 |
| Chinese yuan (CNY) | 6 | 4 | 6 | 3 |
| Japanese yen (JPY) | 4 | 2 | 5 | 3 |
| Canadian dollar (CAD) | 3 | 1 | 3 | 2 |
| British pound (GBP) | 2 | 2 | 3 | 2 |
| Russian ruble (RUB) | 2 | 1 | 2 | 1 |
| Brazilian real (BRL) | 2 | 1 | 1 | 1 |
| Australian dollar (AUD) | 1 | 1 | 1 | 1 |
| Other currencies | 14 | 8 | 13 | 8 |

$^{1}$ Operating expenses include cost of goods sold; selling, general and administration; research and development; other income and other expense.

We prepare our consolidated financial statements in US dollars. As a result, fluctuations in the exchange rates between the US dollar and other currencies can have a significant effect on both the Group's results of operations as well as the reported value of our assets, liabilities and cash flows. This in turn may significantly affect reported earnings (both positively and negatively) and the comparability of period-to-period results of operations.

For purposes of our consolidated balance sheets, we translate assets and liabilities denominated in other currencies into US dollars at the prevailing market exchange rates as of the relevant balance sheet date. For purposes of the Group's consolidated income and cash flow statements, revenue, expense and cash flow items in local currencies are translated into US dollars at average exchange rates prevailing during the relevant period. As a result, even if the amounts or values of these items remain unchanged in the respective local currency, changes in exchange rates have an impact on the amounts or values of these items in our consolidated financial statements.

Because our expenditure in Swiss francs is significantly higher than our revenue in Swiss francs, volatility

in the value of the Swiss franc can have a significant impact on the reported value of our earnings, assets and liabilities, and the timing and extent of such volatility can be difficult to predict.

The Group manages its global currency exposure by engaging in hedging transactions where management deems appropriate, after taking into account the natural hedging afforded by our global business activity. In 2022 and 2021, we entered into various contracts that change in value with movements in foreign exchange rates, to preserve the value of assets, commitments and expected transactions. We use forward contracts and foreign currency options to hedge. For more information on how these transactions affect our consolidated financial statements and on how foreign exchange rate exposure is managed, see 'Item 18. Financial Statements-Note 1. Significant accounting policies,' 'Item 18. Financial Statements-Note 5. Interest expense and other financial income and expense,' 'Item 18. Financial Statements-Note 15. Trade receivables,' 'Item 18. Financial Statements-Note 28. Commitments and contingent liabilities' and 'Item 18. Financial Statements-Note 29. Financial instruments - additional disclosures.'

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The following table sets forth the foreign exchange rates of the US dollar against key currencies used for foreign currency translation when preparing the Group’s consolidated financial statements:

| USD per unit | Average for year |  |  | Year-end |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | 2022 | 2021 | Change in % | 2022 | 2021 | Change in % |
| Australian dollar (AUD) | 0.695 | 0.752 | - 8 | 0.678 | 0.726 | - 7 |
| Brazilian real (BRL) | 0.194 | 0.186 | 4 | 0.189 | 0.180 | 5 |
| Canadian dollar (CAD) | 0.769 | 0.798 | - 4 | 0.738 | 0.785 | - 6 |
| Swiss franc (CHF) | 1.048 | 1.094 | - 4 | 1.081 | 1.093 | - 1 |
| Chinese yuan (CNY) | 0.149 | 0.155 | - 4 | 0.144 | 0.157 | - 8 |
| Euro (EUR) | 1.054 | 1.183 | - 11 | 1.065 | 1.131 | - 6 |
| British pound (GBP) | 1.237 | 1.376 | - 10 | 1.207 | 1.351 | - 11 |
| Japanese yen (JPY (100)) | 0.766 | 0.912 | - 16 | 0.757 | 0.868 | - 13 |
| Russian ruble (RUB (100)) | 1.481 | 1.357 | 9 | 1.380 | 1.336 | 3 |

The following table provides a summary of the currency impact on key Group figures due to their conversion into US dollars, the Group’s reporting currency. For additional information on the constant currency calculation (“cc”), see “-Item 5.A Operating results-Non-IFRS measures as defined by Novartis-Constant currencies”.

### Currency impact on key figures

|  | Change in USD % 2022 | Change in constant currencies % 2022 | Percentage point currency impact 2022 | Change in USD % 2021 | Change in constant currencies % 2021 | Percentage point currency impact 2021 |
| --- | --- | --- | --- | --- | --- | --- |
| Total Group |  |  |  |  |  |  |
| Net sales to third parties | - 2 | 4 | - 6 | 6 | 4 | 2 |
| Operating income | - 21 | - 13 | - 8 | 15 | 13 | 2 |
| Net income | - 71 | - 67 | - 4 | 198 | 195 | 3 |
| Basic earnings per share (USD) | - 70 | - 66 | - 4 | 202 | 200 | 2 |
| Core operating income | 0 | 8 | - 8 | 8 | 6 | 2 |
| Core net income | - 5 | 3 | - 8 | 7 | 5 | 2 |
| Core basic earnings per share (USD) | - 3 | 6 | - 9 | 9 | 7 | 2 |
| Innovative Medicines |  |  |  |  |  |  |
| Net sales to third parties | - 2 | 4 | - 6 | 8 | 6 | 2 |
| Operating income | - 18 | - 9 | - 9 | 17 | 15 | 2 |
| Core operating income | 0 | 8 | - 8 | 12 | 10 | 2 |
| Sandoz |  |  |  |  |  |  |
| Net sales to third parties | - 4 | 4 | - 8 | 0 | - 2 | 2 |
| Operating income | - 10 | - 2 | - 8 | 53 | 48 | 5 |
| Core operating income | - 8 | - 1 | - 7 | - 12 | - 14 | 2 |
| Corporate |  |  |  |  |  |  |
| Operating loss | - 73 | - 84 | 11 | nm | nm | nm |
| Core operating loss | 31 | 28 | 3 | - 23 | - 20 | - 3 |

nm = not meaningful

For additional information on the effects of currency fluctuations, see “Item 18. Financial Statements-Note 29. Financial instruments - additional disclosures.”

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Item 5. Operating and Financial Review and Prospects

# Group liquidity, financial debts and net debt

The following table shows Group liquidity, financial debts and net debt:

| (USD millions) | 2022 | 2021 |
| --- | --- | --- |
| Non-current financial debts | - 20 244 | - 22 902 |
| Current financial debts and derivative financial instruments | - 5 931 | - 6 295 |
| Total financial debts | - 26 175 | - 29 197 |
| Less liquidity |  |  |
| Cash and cash equivalents | 7 517 | 12 407 |
| Marketable securities, commodities, time deposits and derivative financial instruments | 11 413 | 15 922 |
| Total liquidity | 18 930 | 28 329 |
| Net debt at December 31 1 | - 7 245 | - 868 |

$^{1}$ For further information about the net debt measure, which is a non-IFRS measure, see “-Item 5.A Operating results-Non-IFRS measures as defined by Novartis-Net debt.”

## Financial year 2022

Group net debt at December 31, 2022, increased to USD 7.2 billion, compared with USD 0.9 billion at December 31, 2021.

Total financial debts amounted to USD 26.2 billion at December 31, 2022, compared with USD 29.2 billion at December 31, 2021. Non-current financial debts decreased by USD 2.7 billion, mainly due to the reclassification of USD 2.3 billion from non-current to current financial debts of two EUR denominated bonds with notional amounts of EUR 750 million and EUR 1.25 billion maturing in 2023 and favorable foreign currency translation adjustments of USD 0.4 billion.

Current financial debts and derivative financial instruments decreased by USD 0.4 billion, mainly due to the repayment of two US dollar bonds of USD 1.0 billion and USD 1.5 billion, the closure during the third quarter of 2022 of the interest-bearing accounts of employees payable on demand, which amounted to USD 1.8 billion at December 31, 2021, and favorable currency translation adjustments, partly offset by the reclassification from non-current to current financial debts of USD 2.3 billion and an increase of USD 1.9 billion in commercial paper.

Novartis has two US commercial paper programs under which it can issue up to USD 9.0 billion in the aggregate of unsecured commercial paper notes. Novartis also has a Japanese commercial paper program under which it can issue up to JPY 150 billion (approximately USD 1.1 billion) of unsecured commercial paper notes. Commercial paper notes totaling USD 2.8 billion under these three programs were outstanding as per December 31, 2022 (2021: USD 0.9 billion).

Novartis also has a committed credit facility of USD 6.0 billion, which was extended in 2022. This credit

facility is provided by a syndicate of banks and is intended to be used as a backstop for the US commercial paper programs. The extended facility matures in September 2025 and was undrawn as per December 31, 2022, and December 31, 2021.

Total liquidity decreased to USD 18.9 billion compared with USD 28.3 billion at December 31, 2021.

As of year-end 2022, Moody’s Investors Service rated the Company A1 for long-term maturities and P-1 for short-term maturities and S&P Global Ratings rated the company AA- for long-term maturities and A-1+ for short-term maturities.

For the tables showing the maturity schedule of our current financial assets, current and non-current financial debts and net debt at December 31, 2022 and December 31, 2021, see “Item 18. Financial Statements-Note 29. Financial instruments - Additional disclosures-Nature and extent of risks arising from financial instruments-Liquidity risk.”

For a description of risks and restrictions on the ability of subsidiaries to transfer funds to the Company via cash dividends, loan or advances, please see “-Liquidity/short-term funding” and “Item 18. Financial Statements-Note 29. Financial instruments - Additional disclosures-Nature and extent of risks arising from financial instruments.”

Information regarding the Company’s material commitments for capital expenditures as of the end of 2022 and 2021 and an indication of the general purpose of such commitments and the anticipated sources of funds needed to fulfill such commitments are provided in “-Material short- and long-term cash requirements.”

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## Liquidity and financial debt by currency

The following table provides a breakdown of liquidity and financial debt by currency as of December 31:

|  | Liquidity in % 2022 1 | Liquidity in % 2021 1 | Financial debt in % 2022 2 | Financial debt in % 2021 2 |
| --- | --- | --- | --- | --- |
| USD | 85 | 92 | 62 | 57 |
| CHF | 4 | 4 | 6 | 12 |
| EUR | 7 | 2 | 29 | 27 |
| JPY |  |  | 1 | 1 |
| Other | 4 | 2 | 2 | 3 |
|  | 100 | 100 | 100 | 100 |

$^{1}$ Liquidity includes cash and cash equivalents and marketable securities, including debt securities, commodities and time deposits.

$^{2}$ Financial debt includes non-current and current financial debt.

## Bonds

In April 2022, a 5-year USD denominated bond of USD 1.0 billion with a coupon of 2.40% was repaid, in advance of its maturity date at no additional cost.

In September 2022, a 10-year USD denominated bond of USD 1.5 billion with a coupon of 2.40% was repaid at maturity.

In March 2021, a 4-year EUR denominated bond of EUR 1.25 billion with a coupon of 0.00% was repaid at maturity.

In November 2021, a 7-year EUR denominated bond of EUR 0.6 billion with a coupon of 0.75% was repaid at maturity.

## Liquidity/short-term funding

The Group's liquidity amounted to USD 18.9 billion at December 31, 2022, compared with USD 28.3 billion at December 31, 2021. Total non-current and current financial debts, including derivatives, amounted to USD 26.2 billion at December 31, 2022, compared with USD 29.2 billion at December 31, 2021.

The debt/equity ratio increased to 0.44:1 at December 31, 2022, compared with 0.43:1 at December 31, 2021. The net debt increased to USD 7.2 billion at

December 31, 2022, compared with USD 0.9 billion at December 31, 2021.

We continuously track our liquidity position and asset/liability profile. This involves modeling cash flow maturity profiles based on both historical experiences and contractual expectations to project our liquidity requirements. We seek to preserve prudent liquidity and funding capabilities. We are confident that we have sufficient liquidity to support our normal business activities for the foreseeable future.

Certain countries have legal or economic restrictions on the ability of subsidiaries to transfer funds to the Group in the form of cash dividends, loans or advances, but these restrictions do not have an impact on the ability of the Group to meet its cash obligations.

We are not aware of any significant demands to change the level of liquidity needed to support our normal business activities. We make use of various borrowing facilities provided by several financial institutions. We also successfully issued various bonds in previous years and raised funds through our commercial paper programs.

The maturity schedule of our net debt can be found in 'Item 18. Financial Statements-Note 29. Financial instruments - Additional disclosures-Nature and extent of risks arising from financial instruments-Liquidity risk.'

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Item 5. Operating and Financial Review and Prospects

## Material short- and long-term cash requirements

The following table summarizes the Group's material short- and long-term cash requirements:

| (USD millions) | Payments due by period |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  | Total | Less than 1 year | 2-3 years | 4-5 years | After 5 years |
| Non-current financial debt, including current portion | 22 485 | 2 241 | 5 428 | 3 547 | 11 269 |
| Interest on non-current financial debt, including current portion | 5 532 | 476 | 821 | 611 | 3 624 |
| Lease liabilities, non-current and current portion | 1 789 | 251 | 357 | 259 | 922 |
| Interest on lease liabilities, non-current and current portion | 1 416 | 46 | 76 | 67 | 1 227 |
| Commitments for leases not yet commenced | 83 | 10 | 14 | 15 | 44 |
| Unfunded pensions and other post-employment benefit plans | 1 281 | 115 | 215 | 204 | 747 |
| Research and development potential milestone commitments | 5 814 | 420 | 1 256 | 969 | 3 169 |
| Contingent consideration liabilities | 835 | 131 | 339 | 98 | 267 |
| Property, plant and equipment purchase commitments | 549 | 441 | 93 | 15 |  |
| Total contractual cash obligations | 39 784 | 4 131 | 8 599 | 5 785 | 21 269 |

The Group intends to fund the research and development; property, plant and equipment; intangible asset purchase commitments with internally generated resources, and the acquisition of business commitment through available cash and short- and long-term borrowings.

For other contingent liabilities, see 'Item 8. Financial Information-Item 8.A Consolidated statements and

other financial information,' 'Item 18. Financial Statements-Note 10. Right-of-use assets and lease liabilities,' 'Item 18. Financial Statements-Note 20. Provisions and other non-current liabilities,' and 'Item 18. Financial Statements-Note 28. Commitments and contingent liabilities.'

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## 5.C Research and development, patents and licenses

Our research and development spending totaled USD 10.0 billion and USD 9.5 billion (Core research and development USD 9.1 billion and USD 9.0 billion) for the years 2022 and 2021, respectively.

Each of our divisions has its own research and development and patents. Our divisions have numerous products in various stages of development. For further information on these policies and these products in development, see “Item 4. Information on the Company-Item 4.B Business overview.”

As described in the risk factors section and elsewhere in this Annual Report, our drug development efforts are subject to the risks and uncertainties inherent in any new drug development program. Due to the

risks and uncertainties involved in progressing through preclinical development and clinical trials, and the time and cost involved in obtaining regulatory approvals, among other factors, we cannot reasonably estimate the timing, completion dates and costs, or range of costs, of our drug development programs, or of the development of any particular development compound (see “Item 3. Key Information-Item 3.D Risk factors”). In addition, for a description of the research and development process for the development of new drugs and our other products, and the regulatory process for their approval, see “Item 4. Information on the Company-Item 4.B Business overview.”

## 5.D Trend information

Please see “-Item 5.A Operating results”, “-Item 5.B Liquidity and capital resources” and “Item 4. Information

on the Company-Item 4.B Business overview” for trend information.

## 5.E Critical accounting estimates

Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The preparation of financial statements requires management to make certain estimates and assumptions, either at the balance sheet date or during the year, which affect the reported amounts of revenues, expenses, assets, liabilities and contingent amounts. Our significant accounting policies that are set out in “Item 18. Financial Statements-Note 1. Significant accounting policies” include a description of the estimates, assumptions and judgments applied in the preparation of the consolidated financial statements of the Group.

Given the uncertainties inherent in our business activities, we must make certain estimates and assumptions that require difficult, subjective and complex judgments. Because of uncertainties inherent in such judgments, actual outcomes and results may differ from our assumptions and estimates, which could materially affect the Group’s consolidated financial statements. Application of the following accounting policies requires certain assumptions and estimates that have the potential for the most significant impact on our consolidated financial statements.

Management believes that the estimation uncertainties described below did not have or are not reasonably likely to have a material impact on the Group’s financial condition but could be material to the results of operations or cash flows in a given period.

### Deductions from revenues

As is typical in the pharmaceutical industry, the consideration we receive in exchange for goods and services maybe fixed or variable. The most common elements of variable consideration are primarily composed of rebates and discounts granted to wholesalers, retailers, government agencies, government supported healthcare systems, private health systems, pharmacy benefit managers, managed healthcare organizations and other customers. Variable consideration is recognized when it is highly probable that a significant reversal will not occur. These elements of variable consideration represent estimates of the related obligations, requiring the use of judgment when estimating the effect of these considerations for a reporting period.

The following summarizes the nature of some of these deductions and how the deduction is estimated. After recording these, net sales represent our best estimate of the cash that we expect to ultimately collect. The US market has the most complex arrangements related to revenue deductions.

#### United States-specific healthcare plans and program rebates

The United States Medicaid Drug Rebate Program is administered by state governments, using state and federal funds to provide assistance to certain vulnerable and needy individuals and families. Calculating the rebates to be paid related to this program involves use of estimates and interpreting relevant regulations, which are subject to challenge or change in interpretative

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guidance by government authorities. Provisions for estimated Medicaid rebates are calculated using a combination of historical experience, product and population growth, product pricing, and the mix of contracts and specific terms in the individual state agreements.

The United States Federal Medicare Program, which funds healthcare benefits to individuals aged 65 and older, and to people with certain disabilities, provides prescription drug benefits under the Part D section of the program. This benefit is provided and administered through private prescription drug plans. Calculating the rebates to be paid related to this program involves use of estimates and interpreting relevant regulations, which are subject to challenge or change in interpretative guidance by government authorities. Provisions for estimated Medicare Part D rebates are calculated based on the terms of individual plan agreements, product sales and population growth, product pricing, including inflation impacts, and the mix of contracts.

We offer rebates to key managed healthcare and private plans in an effort to ensure patient access to our products and to sustain and increase the market share of our products. These programs provide a rebate after the plans have demonstrated they have met all terms and conditions set forth in their contract with us.

These rebates and discounts, applied using provision rates, are estimated based on the specific terms in the individual states and plans agreements, historical experience, product pricing and projected product growth rates, as appropriate to the individual rebate and discount arrangements, and are recorded as a deduction from revenue at the time the related revenues are recorded.

These provisions are adjusted based on established processes and experiences from filing data with individual states and plans. There is often a time lag between recording of revenue deductions and the final accounting for them.

#### **Non-United States-specific healthcare plans and program rebates**

In certain countries other than the US, we provide rebates to governments and other entities. These rebates are often mandated by laws or government regulations. These rebates, applied using provision rates, are estimated based on government regulations, laws and terms of individual rebate arrangements, historical experience and other relevant factors, and are recorded as a deduction from revenue at the time the related revenue is recorded. These estimates are adjusted periodically to reflect actual experience. There is often a time lag between the recording of revenue deductions and the final accounting for them.

#### **Innovative pay-for-performance arrangements**

We enter into innovative pay-for-performance arrangements (i.e. outcome based arrangements) with certain healthcare providers and governments. Under these agreements, we may be required to make refunds, defer a portion of the sales price until anticipated treatment outcomes meet predefined targets, or to provide additional medicines free of charge if anticipated treatment outcomes do not meet predefined targets.

The impact of potential refunds or a deferral of a portion of the sales price are estimated and recorded as a deduction from revenue at the time the related sales are recorded. The impact of the future delivery of additional medicines at no cost is estimated and recorded as a contract liability at the time the related revenues are recorded. Estimates are based on historical experience and clinical data available for the product, as well as specific terms of the individual agreements. In cases where historical experience and clinical data are not sufficient for a reliable estimation of the outcome, revenue recognition is deferred until the uncertainty is resolved, until such history is available or the period of the refund right has expired.

These provisions for revenue deductions are adjusted periodically based on established processes and actual experience, including the products' actual outcomes achieved compared with the anticipated predefined targets.

There is often a time lag between recording of the revenue deductions and the final accounting for them.

#### **Non-healthcare plans and program rebates, returns and other deductions**

We offer rebates to purchasing organizations and other direct and indirect customers to sustain and increase market share and to ensure patient access to our products. Since rebates are contractually agreed upon, the related provisions are estimated based on the terms of the individual agreements, historical experience and projected product sales growth rates.

Chargebacks occur where our subsidiaries have arrangements with indirect customers to sell products at prices that are lower than the price charged to wholesalers. A chargeback represents the difference between the invoice price to the wholesaler and the indirect customer's contract price. We account for chargebacks by reducing revenue by the estimate of chargebacks attributable to a sales transaction. Provisions for estimated chargebacks are calculated using a combination of factors, such as historical experience, product growth rates, product pricing, level of inventory in the distribution channel, and the terms of individual agreements.

When we sell a product providing a customer the right to return it, we record a provision for estimated sales returns based on our sales return policy and historical return rates. Other factors considered include actual product recalls, expected marketplace changes, the remaining shelf life of the product, and the expected entry of generic products. In 2021, sales returns amounted to approximately 1% of gross product sales. If sufficient experience is not available, sales are only recorded based on evidence of product consumption or when the right of return has expired.

We enter into distribution service agreements with major wholesalers, which provide a financial disincentive for the wholesalers to purchase product quantities in excess of current customer demand. Where possible, we adjust shipping patterns for our products to maintain wholesalers' inventory levels consistent with underlying patient demand.

We offer cash discounts to customers to encourage prompt payment. Cash discounts are estimated and

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provisioned at the time of revenue recognition and are deducted from revenue.

Following a decrease in the price of a product, we generally grant customers a “shelf stock adjustment” for their existing inventory for the relevant product. Shelf stock adjustments are generally granted to customers, primarily of the Sandoz Division, to cover the inventory held by them at the time a price decline becomes effective. Revenue deduction provisions for shelf stock adjustments are recorded when the price decline is anticipated, based on the impact of the price decline on the customer’s estimated inventory levels.

Other sales discounts, such as consumer coupons, vouchers and copay discount cards, are offered in some markets. The estimated amounts of these discounts are recorded at the time of sale or when the coupons are issued, and are estimated utilizing historical experience and the specific terms for each program.

In addition, we offer global patient assistance programs.

We adjust provisions for revenue deductions periodically to reflect actual experience. To evaluate the adequacy of provision balances, we use internal and external estimates of the inventory in transit, the level of inventory in the distribution and retail channels, actual claims data received, and the time lag for processing rebate claims. External data sources include reports from wholesalers and third-party market data purchased by Novartis.

For the table showing the worldwide extent of our revenue deductions provisions and related payment experiences for the Group see “Item 18. Financial Statements-Note 22. Provisions and other current liabilities.”

## Impairment of goodwill, intangible assets and property, plant and equipment

We review intangible assets and property, plant and equipment for impairment whenever events or changes in circumstance indicate that the asset’s balance sheet carrying amount may not be recoverable. Goodwill and other intangible assets that are not yet amortized, are reviewed for impairment at least annually.

An asset is considered impaired when its balance sheet carrying amount exceeds its estimated recoverable amount, which is defined as the higher of its fair value less costs of disposal and its value in use. Usually, Novartis applies the fair value less costs of disposal method for its impairment assessment. In most cases, no directly observable market inputs are available to measure the fair value less costs of disposal. Therefore, an estimate is derived indirectly and is based on net present value techniques utilizing post-tax cash flows and discount rates. In the limited cases where the value in use method would be applied, net present value techniques would be applied using pre-tax cash flows and discount rates.

Fair value less costs of disposal reflects estimates of assumptions that market participants would be expected to use when pricing the asset or cash generating units (CGUs), and for this purpose, management considers

the range of economic conditions that are expected to exist over the remaining useful life of the asset.

The estimates used in calculating the net present values are highly sensitive and depend on assumptions specific to the nature of the Group’s activities as indicated in “Item 18. Financial Statements-Note 1. Significant accounting policies.” Due to these factors, actual cash flows and values could vary significantly from forecasted future cash flows and related values derived using discounting techniques.

The recoverable amount of the grouping of cash-generating units to which goodwill is allocated is based on fair value less costs of disposal. The valuations are derived from applying discounted future cash flows based on key assumptions, including the terminal growth rate and discount rate. For additional information on impairment charges recognized and reversed by divisions, see “Item 18. Financial Statements-Note 1. Significant accounting policies-Impairment of goodwill and intangible assets” and “Item 18. Financial Statements-Note 11. Goodwill and intangible assets.”

Goodwill and other intangible assets represent a significant part of our consolidated balance sheet, primarily due to acquisitions. Although no significant additional impairments are currently anticipated based on our impairment assessment and review of reasonable possible changes in key assumptions to the respective impairment assessment, future impairment evaluation could lead to material impairment charges in the future.

For more information, see “Item 18. Financial Statements-Note 11. Goodwill and intangible assets.”

For net impairment charges for property, plant and equipment see “Item 18. Financial Statements-Note 9. Property, plant and equipment.”

## Retirement and other post-employment benefit plans

We sponsor pension and other post-employment benefit plans in various forms that cover a significant portion of our current and former employees. For post-employment plans with defined benefit obligations, we are required to make significant assumptions and estimates about future events in calculating the expense and the present value of the liability related to these plans. These include assumptions about the interest rates we apply to estimate future defined benefit obligations and net periodic pension expense, as well as rates of future pension increases. In addition, our actuarial consultants provide our management with historical statistical information, such as withdrawal and mortality rates in connection with these estimates.

Assumptions and estimates used by the Group may differ materially from the actual results we experience due to changing market and economic conditions, higher or lower withdrawal rates, and longer or shorter life spans of participants, among other factors.

Depending on events, such differences could have a material effect on our total equity.

For more information on obligations under retirement and other post-employment benefit plans and underlying actuarial assumptions, see “Item 18. Financial

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Statements-Note 25. Post-employment benefits for employees.”

## Income taxes

We prepare and file our tax returns based on an interpretation of tax laws and regulations, and we record estimates based on these judgments and interpretations. Our tax returns are subject to examination by the competent taxing authorities, which may result in an assessment being made, requiring payments of additional tax, interest or penalties. Since Novartis uses its intellectual property globally to deliver goods and services, the transfer prices within the Group as well as arrangements between subsidiaries to finance research and development and other activities may be challenged by the national tax authorities in any of the jurisdictions in which Novartis operates. Therefore, inherent uncertainties exist in our estimates of our tax positions, but we believe that our estimated amounts for current and deferred tax assets or liabilities, including any amounts related to any uncertain tax positions, are appropriate based on currently known facts and circumstances. Uncertain (income) tax positions are periodically (re)assessed by the Company based on management’s best judgment given any changes in the facts, circumstances and information available and applicable tax laws. When it is probable that the tax authorities will not accept the position taken, the Group recognizes income tax liabilities based on the most likely amount of the liability (recovery) or weighted average of various possible outcomes to reflect the effect of the uncertainty in determining the related taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates, to the extent that a reliable estimate can be made.

For more information, see “Item 18. Financial Statements-Note 6. Income taxes” and “Item 18. Financial Statements-Note 12. Deferred tax assets and liabilities.”

## Provisions and contingent liabilities

A number of Group companies are involved in various government investigations and legal proceedings (intellectual property, sales and marketing practices, product liability, commercial, employment and wrongful discharge, environmental claims, etc.) arising out of the normal conduct of their businesses.

We record provisions for legal proceedings when it is probable that a liability has been incurred and the amount can be reliably estimated. These provisions are adjusted periodically as assessments change or additional information becomes available. For significant product liability cases, the provision is actuarially determined based on factors such as past experience, amount and number of claims reported, and estimates of claims incurred but not yet reported.

Provisions are recorded for environmental remediation costs when expenditure on remedial work is probable and the cost can be reliably estimated.

Novartis believes that its total provisions are adequate based upon currently available information. However, given the inherent difficulties in estimating liabilities in this area, Novartis may incur additional costs beyond the amounts provided. Management believes that such additional amounts, if any, would not be material to the Group’s financial condition but could be material to the results of operations or cash flows in a given period.

For more information, see “Item 18. Financial Statements-Note 20. Provisions and other non-current liabilities” and “Item 18. Financial Statements-Note 28. Commitments and contingent liabilities.”

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# Item 6. Directors, Senior Management and Employees

## 6.A Directors and senior management

The information set forth under “Item 6. Directors, Senior Management and Employees-Item 6.C Board practices-Corporate governance-Board of Directors” and

“Item 6. Directors, Senior Management and Employees-Item 6.C Board practices-Corporate governance-Executive Committee” is incorporated by reference.

---

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## 6.B Compensation

# Dear shareholder,

I am pleased to share with you the Novartis Compensation Report for 2022.

We believe that our compensation system supports our strategy and motivates our executives to deliver sustainable growth, successful outcomes on our financial and strategic targets, and value creation for our shareholders. Over the course of 2022, we engaged with shareholders and proxy advisors to share how our compensation system is aligned with short and long-term performance, and to secure their continued support for our compensation system design. Based on the feedback from these interactions and the positive response to our 2021 Compensation Report, which received a 90.7% vote in favor, we will retain the current design of our executive compensation system, with small enhancements as explained later in this letter.

### 2022 performance highlights

2022 was a year of solid financial performance, with growth in constant currencies (cc) across sales, core profits and core margins. Sales growth drivers were *Entresto* (USD 4.6 billion), *Kesimpta* (USD 1.1 billion), *Kisqali* (USD 1.2 billion), *Cosentyx* (USD 4.8 billion), along with the *Pluvicto* launch. Our six in-market growth drivers with multi-billion sales potential (*Cosentyx*, *Entresto*, *Zolgensma*, *Kisqali*, *Kesimpta* and *Leqvio*) grew 26% (cc) in 2022, and now represent 32% of total Innovative Medicines sales, up from 26% in 2021. Overall sales were broadly in line with target.

In April 2022, we announced the introduction of a new organizational model designed to support the company's innovation, growth, and productivity ambitions as a focused medicines company. The restructuring will simplify the organization and our processes, and is expected to deliver USD 1.5 billion in savings by 2024 with a proportion of these savings already delivered in 2022, enabling us to raise our long-term core operating income margin guidance. These savings are expected to help us progress towards our aspiration of achieving ~40%+ core margin beyond 2027 and further invest in our pipeline, as a pure-play medicines company (after the planned Sandoz spin-off which is subject to approval of the Novartis AG Board of Directors and shareholders). Nonetheless, there was an immediate impact on Operating Income as we incorporated related costs in the latter part of the year, that, along with higher legal settlements and unfavorable fair market value adjustments on financial assets, impacted operating income growth.

In 2022, we continued to deliver high value medicines to patients. We received 23 approvals in our key focus markets US, EU, China and Japan, including US and EU approvals for *Pluvicto*, a novel radioligand therapy for advanced prostate cancer. We advanced our focused pipeline of investigational medicines, with several important clinical data readouts paving the way for further launches in 2023 and beyond, a significant one being

iptacopan, our investigational monotherapy in the treatment of paroxysmal nocturnal hemoglobinuria (PNH). However, we also had disappointments as some clinical trials of experimental compounds did not meet their primary endpoints, including ACZ885 (canakinumab) in lung cancer, and UNR844 in presbyopia.

We are proud that Novartis also continued to deliver on its commitments to broaden access to medicines and tackle major global health challenges. We pledged further investment in research into malaria and neglected tropical diseases, increased access to our innovative medicines for low- and middle-income countries and formed new collaborations with governments and other partners to strengthen healthcare systems. More details on our ESG efforts can be found in our Novartis in Society Integrated Report 2022.

### 2022 CEO compensation

As a result of the above performance, the CEO was awarded a 2022 Annual Incentive of 100%, having overall met the financial targets and strategic objectives set at the beginning of the cycle. When determining performance against the operating income metric, the Board of Directors approved adjustments to exclude restructuring costs arising from the implementation of the new organizational model and costs related to the planned Sandoz spin-off, which are investments in the future of the company in terms of both sales and margin growth. These adjustments ensured that the performance assessment was consistent with the basis on which the original targets were set.

The 2020-2022 Long-Term Performance Plan (LTPP) vested at 57% of target. The LTPP outcome was heavily affected by the relative Total Shareholder Return (rTSR) performance over the period, as well as reduced sales growth during 2020 and 2021, which was substantially impacted by the COVID-19 pandemic. No adjustments were made for the COVID-19 impact, or for any other factors. (For more information, please see '-LTPP performance outcomes').

Despite a solid 2022 performance, as outlined above, the CEO's 2022 total realized compensation was CHF 8 452 176, a decrease of 24.7% compared with prior year, driven mainly by the 2020-2022 LTPP outcome.

### Changes to Executive Committee compensation system and disclosures

During the year, we reviewed our Executive Committee compensation system, with the aim of simplification and increased transparency of our performance assessment measures and strengthening our focus on key strategic priorities, while also considering developments in compensation best practices.

Effective the 2022-2024 cycle of the LTPP, we strengthened the assessment of research and early development performance under the Innovation metrics,

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to ensure that targets are focused more directly on activities that create long-term value, and are measurable over a three-year performance period. For the innovation performance measure, the Science & Technology Committee sets targets that take into account the expected Net Present Value (eNPV) of programs transitioning to late-stage clinical development rather than the previous approach to set targets related to early-stage milestones.

Effective from performance year 2023, we will remove “Share of Peers” as a financial performance measure for the Annual Incentive plan, to simplify the metrics and focus on targets that provide greater transparency. The weighting of the three remaining financial measures, Group Net Sales, Group Operating Income and Group Free Cash Flow, will be 40%, 30% and 30%, respectively. In addition, we will fold division specific financial targets, where applicable, into individual strategic objectives (40% weighting) of the related Executive Committee member. All Executive Committee members will be evaluated, with a 60% weighting, against the performance of Group financial measures mentioned above.

During the year, we announced our intention to separate our Sandoz generics and biosimilars Division into a new publicly traded standalone company, by way of a 100% spin-off, subject to approval of the Novartis AG Board of Directors and shareholders. Based on the planned completion of the spin-off in 2023, the Compensation Committee made some initial decisions on the 2023 compensation elements related to the spin-off.

Finally, the 2023 Compensation Report will also include additional disclosures following the reform of Swiss corporate law that came into effect on January 1, 2023. For more information, please see “-2023 Executive Compensation Changes”.

#### **Inflation and cost-of-living impact on broader employee group**

The Board and the Executive Committee are mindful of the cost-of-living challenges that are impacting many of our associates in different markets. The Executive

Committee has considered these as part of its pay decisions and outcomes, and where appropriate, it has initiated local level initiatives to support associates.

In most countries, our 2023 salary budgets are higher than in previous years, reflecting the overall higher market forecasts driven by inflation. In some of our larger markets we are making a one-time payment to certain employee populations. Where legally possible, we have tried to target these one-time payments to our lower paid employees, who are most impacted. We will continue to monitor our compensation against the Living Wage, and regularly monitor and adjust wages in hyperinflation markets to support our local associates.

These actions reflect our commitment to pay market-competitive and sustainable salaries, rather than to fully match the current volatile inflation environment.

2023 base salary increases for ECN members, including the CEO, are made in line with policy, and no ECN member will receive any inflation related one-time payments.

#### **2023 Annual General Meeting (AGM)**

At the 2023 AGM, shareholders will be asked to vote on both the maximum aggregate amount of compensation for the Board of Directors from the 2023 AGM to the 2024 AGM, and the maximum aggregate amount of compensation for the Executive Committee for the financial year 2024. Furthermore, we will request an advisory vote on this Compensation Report.

We welcome your feedback, which is invaluable in driving improvements in our compensation system and practices. On behalf of the Compensation Committee, I would like to thank you for your continued support and trust.

**Simon Moroney, D.Phil.**
Chair of the Compensation Committee

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# Compensation at a glance

## 2022 outcomes

### CEO pay for performance

#### 2022 Annual Incentive

![img-0.jpeg](img-0.jpeg)

#### Long-Term Performance Plan (2020-2022 performance)

![img-1.jpeg](img-1.jpeg)

### CEO total realized compensation

The 2022 total realized compensation for the CEO was CHF 8 452 176. It includes payouts of the Annual Incentive and LTPP based on actual performance assessed for the cycles concluding in 2022. More information on the assessment of the CEO by the Board of Directors can be found in “-2022 CEO balanced scorecard” and “-LTPP performance outcomes”.

![img-2.jpeg](img-2.jpeg)[caption": "**Total realized compensation: CHF 8 452 176**"}]

**Total realized compensation: CHF 8 452 176**

$^{1}$ The amounts shown represent the underlying share value of the total number of shares vested (including dividend equivalents of CHF 317 316) to the CEO for the 2020-2022 LTPP performance cycle.

### Board compensation

The total actual compensation earned by Board members in the 2022 financial year is shown in the table below.

| CHF 000s | 2022 total compensation 1 |
| --- | --- |
| Board Chair | 3 804 |
| Other members of the Board | 4 703 |
| Total | 8 506 |

$^{1}$ Includes an amount of CHF 29 250 for mandatory employer contributions for all Board members paid by Novartis to Swiss governmental social security systems. This amount is out of total employer contributions of CHF 453 083 and provides a right to the maximum future insured government pension benefit for the Board members.

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## 2023 compensation systems

An overview of the 2023 compensation systems for the Executive Committee and the Board of Directors is provided below.

### Executive Committee compensation system

Effective 2023, financial measures of the Annual Incentive plan comprise Group Net Sales (40%), Group Operating Income (30%) and Group Free Cash Flow (30%) for all Executive Committee members. Additionally, “Share of Peers” will be removed from the financial measures.

|  | 2023 fixed pay and benefits |  | Performance-related variable pay |  |
| --- | --- | --- | --- | --- |
|  | Annual base salary | Pension and other benefits | 2023 Annual Incentive | Long-Term Incentive awards cycle 2023-2025 LTPP 1 |
| Purpose | Reflects responsibilities, experience and skill sets | Provide retirement and risk insurances (tailored to local market practices/regulations) | Rewards performance against short-term financial and strategic objectives, and Values and Behaviors | Rewards long-term shareholder value creation and innovation in line with our strategy |
| Form of payment | Cash | Country/individual-specific and aligned with other employees | 50% cash 50% equity 2 deferred for three years 2 | Equity, vesting following a three-year performance period |
| Performance measures | - | - | Balanced scorecard comprising: • Financial measures 4 (60%) • Strategic objectives 5 (40%) | • Net sales CAGR (25%) • Core operating income CAGR (25%) • Innovation (25%) • Relative TSR (25%) |

$^{1}$ LTPP = Long-Term Performance Plan

$^{2}$ Executive Committee members may elect to receive more of their Annual Incentive in equity instead of cash

$^{3}$ The Annual Incentive deferred in equity is granted under the Deferred Share Bonus Plan (DSBP)

$^{4}$ Financial Measures are Group Net Sales (40%), Group Operating Income (30%) and Group Free Cash Flow (30%)

$^{5}$ Strategic objectives are aligned with our transformation to become a pure-play Innovative Medicines company: Strategy, Growth / Launches, Innovation, Operational excellence, Build trust with society

### Board compensation system

There are no changes to the Board compensation system for 2023.

| CHF 000s | AGM 2023-2024 annual fee |
| --- | --- |
| Board Chair | 3 800 |
| Board membership | 280 |
| Vice-Chair | 50 |
| Lead Independent Director | 20 |
| Chair of the Audit and Compliance Committee | 130 |
| Chair of the Compensation Committee | 90 |
| Chair of the following committees: |  |
| • Governance, Sustainability and Nomination Committee |  |
| • Science & Technology Committee |  |
| • Risk Committee | 70 |
| Membership of the Audit and Compliance Committee | 70 |
| Membership of the following committees: |  |
| • Compensation Committee |  |
| • Governance, Sustainability and Nomination Committee |  |
| • Science & Technology Committee |  |
| • Risk Committee | 40 |

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# Executive Committee compensation philosophy and principles

## Novartis compensation philosophy

Our compensation philosophy aims to ensure that we attract and retain outstanding Executive Committee members and reward them according to their success in implementing the Company strategy, and their contribution to Company performance and long-term value creation. The main elements of our compensation philosophy are set out in the table below.

| Pay for performance | Variable compensation is tied directly to the achievement of strategic Company targets |
| --- | --- |
| Shareholder alignment | Our incentives are significantly weighted toward long-term equity-based plans Measures under the Long-Term Incentive plans are calibrated to promote the creation of shareholder value Executive Committee members are expected to build and maintain substantial shareholdings |
| Balanced rewards | Balanced set of measures to create sustainable value Mix of targets based on financial metrics, strategic objectives, and performance versus our competitors |
| Business ethics | The Novartis Values and Behaviors are an integral part of our compensation system They underpin the assessment of overall performance for the Annual Incentive |
| Competitive compensation | Total compensation must be sufficient to attract and retain key global talent Overarching emphasis on pay for performance |

## Alignment with Company strategy

Executive compensation is strongly connected to business strategy. In 2022, we refocused our strategy to deliver high-value medicines that alleviate society's greatest disease burdens through technology leadership in research and development, and novel access approaches. Our strategy focuses on five core therapeutic areas with high unmet patient needs, two core and three emerging technology platforms, and four priority geographies, which together account for the majority of expected growth in global healthcare spending.

In line with this refocused strategy, we updated our strategic priorities to target innovation power, sales growth, delivering both margin and total shareholder returns, and sector leadership in material ESG factors. The Long-Term Incentive Plan was adapted, with greater emphasis now on the delivery of high value programs in our research and early development targets. The Annual Incentive plan has been simplified effective 2023, with three key financial metrics: Net Sales, weighted 40%; Operating Income, weighted 30%; and Free Cash Flow, weighted 30%.

## Approach to market benchmarking

There continues to be significant competition for top executive talent with deep expertise, the requisite competencies and proven performance within the pharmaceutical and biotechnology industries. As such, external peer compensation data is one of a number of key reference points considered by the Board of Directors and the Compensation Committee when making decisions on executive pay, so as to help ensure that the compensation system and compensation levels at Novartis remain competitive. Novartis is committed to confirming benchmarking practices, including the peer group, to shareholders on an annual basis.

The Compensation Committee believes in a rigorous approach to peer group construction and maintenance. Furthermore, it believes that using a consistent set of peers that is similar in size and scope enables shareholders to evaluate the compensation year on year and make pay-for-performance comparisons. In 2022, the Compensation Committee decided to maintain the same primary peer group of **14 global healthcare companies**, as presented in the table below.

### GLOBAL HEALTHCARE PEER GROUP

| AbbVie | Amgen | AstraZeneca |
| --- | --- | --- |
| Biogen | Bristol-Myers Squibb | Eli Lilly & Co. |
| GlaxoSmithKline | Gilead Sciences | Johnson & Johnson |
| Novo Nordisk | Merck & Co. | Pfizer |
| Roche | Sanofi |  |

The companies in this peer group reflect our industry and are similar to Novartis in terms of both size and scope of operations. Although Novartis is headquartered in Switzerland, more than a third of its sales come from the US market, and the US remains a significant talent pool for the recruitment of executives by the Company. It is therefore critical that Novartis is able to attract and retain key talent globally, especially from the US.

To ensure European and local practices were fully taken into account, in 2022 the Compensation Committee also reviewed a cross-industry peer group of Europe-headquartered multinational companies, selected based on comparability to Novartis in terms of industry, size, global scope of operations, and economic influence. Based on this review, the Committee retained the same group of **European peers** as in 2021: Anheuser-Busch InBev, AstraZeneca, Bayer, BMW, GlaxoSmithKline, L'Oréal, Merck KGaA, Nestlé, Novo Nordisk, Reckitt Benckiser, Roche, Siemens, Sanofi, and Unilever.

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## Executive Committee appointments compensation policy

### ELEMENT OF COMPENSATION POLICY

| ELEMENT OF COMPENSATION | POLICY |
| --- | --- |
| Level | The overall package should be market-competitive to enable the recruitment of global executive talent with deep expertise and competencies. |
| Annual base salary | The Compensation Committee may appoint individuals who are new to a role on an annual base salary that is below the market level, with a view to increase this toward market level over a period of three to four years as an individual develops in the role. If the scope of an existing Executive Committee member's role changes significantly during the year, the Compensation Committee may make adjustments to the individual's base salary (and/or incentives) in consideration of the benchmark of the new role and the Executive Committee appointments compensation policy. This prudent approach ensures pay levels are merit-based, with increases dependent on strong performance and proven ability in the role over a sustained period. |
| Incentives | The compensation package will normally include the key compensation elements and incentive opportunities in line with those offered to current Executive Committee members. In exceptional circumstances, higher incentive opportunities than those offered to current Executive Committee members may be provided at the Compensation Committee's discretion. Performance measures may include business-specific measures tailored to the specific role. |
| Pension and other benefits | Newly appointed Executive Committee members are eligible for the local country pension plan and other benefits in line with the wider employee group. |
| Buyouts | The Compensation Committee seeks to balance the need to offer competitive compensation opportunities to acquire the talent required by the business with the principle of maintaining a strong focus on pay for performance. As such, when an individual forfeits variable compensation as a result of an appointment at Novartis, the Compensation Committee may offer replacement awards to compensate the commercial equivalent value or fair value of payments and awards forfeited by the individual, in such form as the Compensation Committee considers appropriate, taking into account relevant factors. Relevant factors include the expected value of the forfeited award, the replacement vehicle (i.e., cash, restricted share units, restricted shares or performance share units), whether the award is contingent on meeting performance conditions or not, the timing of forfeiture (i.e., Novartis mirrors the blocking or vesting period of the forfeited award) and the leaver conditions, in case the recruited individual leaves Novartis prior to the end of the blocking or vesting period. |
| International mobility | If individuals are required to relocate or be assigned away from their home location to take up their position, relocation support may be provided in line with our global mobility policies (e.g., relocation support, tax equalization). This includes ongoing US state income tax liabilities on behalf of US citizens locally employed outside the US who have US workdays and therefore, US state taxable compensation that generates a US state tax liability. |

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## Treatment of variable compensation for Executive Committee leavers

| ELEMENT OF COMPENSATION | POLICY |
| --- | --- |
| Annual Incentive - cash element | Retirement, termination by the Company (for reasons other than performance or conduct), change of control, disability, death, i.e., “good leavers” Pro-rata Annual Incentive is paid to reflect the portion of the year the individual was employed. Voluntary resignation or termination by the Company for misconduct or poor performance Annual Incentive is fully forfeited. |
| Annual Incentive - mandatory deferral into restricted shares/ restricted share units (RSUs) | Retirement, termination by the Company for reasons other than performance or conduct, and change of control Awards are released on the original blocking end date. There is no accelerated vesting. All awards are subject to forfeiture in the event that a leaver joins a competitor company as defined in the applicable plan rules, before the end of the three-year blocking date, starting from the date of grant. Death or long-term disability Accelerated vesting is applied. Voluntary resignation or termination by the Company for misconduct or poor performance Unvested restricted shares and restricted share units (RSUs) are forfeited. |
| Annual Incentive - voluntary restricted shares/RSUs/American Depository Receipts (ADRs) (ADRs applicable for US employees only) | Awards are not subject to forfeiture during the deferral period. |
| Long-Term Incentive - mandatory performance share units (PSUs) | Retirement, termination by the Company for reasons other than performance or conduct, and change of control Awards vest on the regular vesting date, subject to performance, on a pro-rata basis for time spent with the Company during the performance cycle. There is no accelerated vesting. All awards are subject to forfeiture in the event that a leaver joins a competitor company as defined in the applicable plan rules, until the vesting date. Death or long-term disability Accelerated vesting at target is applied. Voluntary resignation or termination by the Company for misconduct or poor performance All of the award is forfeited. |

## Malus and clawback

Any incentive compensation paid to Executive Committee members is subject to malus and clawback rules. This means that the Board of Directors for the CEO, and the Compensation Committee for the other Executive Committee members, may decide - subject to applicable law - to retain any unpaid or unvested incentive compensation (malus), or to recover incentive compensation that has been paid or vested in the past (clawback). This applies in cases where the payout has resulted from a

violation of laws or conflicts with internal management standards, including Company and accounting policies.

This principle applies to both the short-term Annual Incentive and Long-Term Incentive (LTI) plans.

The Compensation Committee is assessing the impact of the final clawback rule in the Federal Register published by the US Securities and Exchange Commission in 2022, and any required changes to the policy will be disclosed in the 2023 Compensation Report.

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## Executive Committee performance management process

To foster a high-performance culture, the Company applies a performance management process based on quantitative and qualitative criteria. The CEO and the other Executive Committee members are subject to a formal three-step process: objective setting, performance evaluation and compensation determination. This process is explained in the chart below.

Performance targets are generally set before the start of the relevant performance cycle. A rigorous framework is in place for establishing targets to ensure they are suitably robust and challenging, and align with the strategic priorities of the Group.

The key factors taken into account when setting targets include:

- Internal and external market expectations
- Novartis strategic priorities
- Regulatory factors (e.g., new launches, patent expiries)
- Investment in capital expenditure
- Values and Behaviors

The targets are challenged at multiple stages before they are ultimately approved by the Board of Directors. In line with good governance practices, the Compensation Committee works to set targets that are ambitious and challenging but do not encourage undue risk-taking.

Following the end of the performance cycle, the Board of Directors and the Compensation Committee consider performance against the targets originally set. The CEO and Executive Committee members are not present while the Board of Directors and the Compensation Committee discuss their individual performance evaluations and determine their individual compensation. Prior to determining the final outcome, related factors such as performance relative to peers, wider market conditions, general industry trends and good practice are used to inform the overall performance assessment.

| Objective setting | Performance evaluation | Compensation determination |
| --- | --- | --- |
| The CEO proposes their targets to the Board Chair; they are then reviewed and approved by the Board of Directors, based on input from the Compensation Committee. For other Executive Committee members, targets for their division or unit are initially discussed with the CEO and subsequently approved by the Board of Directors and the Compensation Committee. | The CEO's performance against the individual balanced scorecard is assessed by the Board of Directors. For Executive Committee members, the CEO discusses each member's performance (assessed against his or her individual balanced scorecard) with the Board Chair before making recommendations to the Board of Directors for final determination. Periodic assessments, including at the mid-year stage, ensure progress is suitably tracked. | A recommendation for the CEO's variable pay is made by the Compensation Committee to the Board of Directors for final determination. For the Long-Term Incentive financial measures' payout schedules, a formulaic approach applies, and the Compensation Committee can also exercise judgment to ensure there is appropriate alignment between payout levels and overall performance achieved. The same principle of discretion applies to the relative TSR and innovation performance measures. The CEO's recommendations for other Executive Committee members are considered and approved by the Compensation Committee, after which the Board of Directors is notified of the outcomes. |

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# 2022 Executive Committee compensation

## Annual base salary

| Overview | The annual base salary is reviewed each year, taking into account: the individual's role, performance and experience; business performance and the external environment; increases across the Group; and market movements. |
| --- | --- |
| 2022 annual base salaries | The 2022 annual base salaries were as follows: CEO (effective March 1, 2022): CHF 1 789 500. OTHER EXECUTIVE COMMITTEE MEMBERS (effective March 1, 2022): All other members of the Executive Committee were awarded increases in line with the average of all Novartis employees, with the exception of five individuals as disclosed in Item 6.B of the 2021 Annual Report. |

## Pension and other benefits

| Overview | Pension and other benefits do not constitute a significant proportion of total compensation and are provided to the Executive Committee on the same terms as all other employees based on local country practices and regulations. The CEO and all other Swiss-based members of the Executive Committee are members of the Novartis Swiss pension funds, which provide Company contributions on the base salary and Annual Incentive up to the legal cap on the insured salary of CHF 860 400. No supplementary pension plans or savings plans are provided. The CEO's employer pension contributions represent 9.77% of his base salary. Globally the Company operates both defined benefit and defined contribution pension plans (see also Note 25 to the Group's consolidated financial statements). Novartis may provide other benefits according to local market practice. These include Company car provision, tax and financial planning, and insurance benefits. Executive Committee members who are required to relocate internationally may also receive additional benefits (including tax equalization), in line with the Company's global mobility policies. |
| --- | --- |

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## 2022 Annual Incentive

### PLAN OVERVIEW

| Target Annual Incentive | Annual base salary x Target incentive (% of base salary) = Target Annual Incentive |
| --- | --- |
| On-target opportunities | CEO: 150% of annual base salary Other Executive Committee members: 80% to 120% of annual base salary |
| Performance measures | An Annual Incentive balanced scorecard containing: Financial performance measures (60% weighting) related to Group, division or business unit, where relevant Strategic objectives (40% weighting) are aligned with our transformation to become a pure-play Innovative Medicines company: Strategy, Growth / Launches, Innovation, Operational excellence, Build trust with society The balanced scorecard targets and achievements of the CEO are detailed on the next page. The balanced scorecards for other Executive Committee members include Group financial targets as well as financial or other quantitative targets that relate to their division or business unit, if applicable. Values and Behaviors are a key component of the Annual Incentive and are embedded in our culture. As such, members of the Executive Committee are expected to demonstrate these to the highest standards. |
| Target setting | Financial targets are set at the beginning of each financial year and align with the strategic plan proposed by management to the Board of Directors for approval. The strategic objectives are aligned with the most important priorities in any performance year. |
| Payout ranges | The payout schedule for the Annual Incentive incorporates performance against financial and strategic objectives. The payout range is 0% to 200% of on-target opportunity based on performance, as shown below: PERFORMANCE PAYOUT (% of on-target) Outstanding 170% - 200% Exceeds expectations 130% - 160% Meets expectations 80% - 120% Partially meets expectations 40% - 70% Below expectations 0% |
| Payout formula | Annual base salary x Target incentive (% of base salary) x Payout factor (% of target: 0%-200%) = Realized Annual Incentive |
| Payout vehicle | At the end of the performance period, 50% is paid in cash, and the remaining 50% is delivered in Novartis restricted shares or RSUs, deferred for three years (see “-Executive Committee compensation system”). Executives may choose to receive all or part of the cash portion of their Annual Incentive in Novartis shares or American Depositary Receipts (ADRs; US only) that will not be subject to forfeiture conditions. In the US, awards may also be delivered in cash under the US-deferred compensation plan. |
| Dividend rights, voting rights and settlement | Novartis restricted shares and ADRs carry voting rights and dividends during the vesting period. RSUs are of equivalent value but do not carry voting rights and dividends during the vesting period. Following the vesting period, settlement of RSUs is made in unrestricted Novartis shares or ADRs. |

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## 2022 CEO BALANCED SCORECARD

This section presents the balanced scorecard for the CEO. Balanced scorecard performance is measured in constant currencies (cc) to reflect operational performance that can be influenced. The Board of Directors uses a stringent process to set ambitious financial targets to incentivize superior performance. In addition to the financial targets, the CEO also has ambitious strategic objectives across key priority areas, including targets related to ESG matters.

| CEO achievements - 2022 | Target | Achievement versus target |
| --- | --- | --- |
| Financial measures - 60% of total Annual Incentive, comprising: |  |  |
| Group net sales (cc) (30%) | 54 360 million | Met |
| Group operating income (cc) (30%) | 11 630 million | Met* |
| Group free cash flow as a % of sales (cc) (20%) | 24.8% | Below |
| Share of peers for Novartis Group (20%) | 7.3% | Met |
| Overall assessment of Group financial targets in constant currencies |  | Met |

* The Board concluded that the achievement for Group operating income versus target was “Met” after approving adjustments mainly to exclude restructuring costs arising from the implementation of the new organizational model announced to investors on April 4, 2022 (and were not available at the time of target setting in January 2022), and costs related to the planned Sandoz spin-off, to transform Novartis into a focused medicines company.

### Strategic objectives - 40% of total Annual Incentive, comprising:

| Strategy (15%) | Met |
| --- | --- |
| In 2022, the CEO launched a new strategy and laid the foundation to improve our growth profile via a strong focus on our five core therapeutic areas (cardiovascular, immunology, neuroscience, solid tumors, and hematology), two established (chemistry and biotherapeutics) and three emerging (gene & cell therapy, radioligand therapy, and xRNA) technology platforms, and four key geographies (China, Germany and Japan, and a particular priority in the US market). This strategy will transform Novartis into a pure-play Innovative Medicines business, with multiple in-market brands of multi-billion dollar peak sales potential, and prioritize our pipeline to focus on high-value assets that address high disease burden and have substantial growth potential. |  |
| Sandoz separation analysis was completed with spin-off being the preferred separation path given potential future value upside for shareholders. Substantial progress was also made on the preparation for the planned spin-off, which is expected to take place in the second half of 2023. |  |
| Growth/Launches (15%) | Met |
| Recent launch products Pluvicto (USD 271 million), Kesimpta (USD 1.1 billion), and Scemblix (USD 149 million) achieved higher than target sales. However, lower uptake for Leqvio resulted in sales behind target. |  |
| In-market growth drivers (including Cosentyx , Entresto , Zolgesma , Kisqali , Kesimpta , and Leqvio ) delivered combined sales of USD 13.2 billion, which was slightly behind target. This was largely due to the below target performance of Cosentyx (total sales of USD 4.8 billion, impacted by US payer pressures, China business and Inflation Reduction Act headwinds). This was partly offset by strong performance of Entresto (USD 4.6 billion) and Kisqali (USD 1.2 billion). |  |
| Innovation (15%) | Met |
| In 2022, we received 23 approvals in our top four markets (US, EU, China and Japan). Major approvals included Pluvicto (US, EU), Scemblix (EU), and further indication expansions for Kymriah and Cosentyx . |  |
| 24 submissions were made across the top four markets. We advanced our focused pipeline of investigational medicines, with several important clinical data readouts including Iptacopan for patients with paroxysmal nocturnal hemoglobinuria (PNH), a rare and deadly blood disorder, and Pluvicto in earlier lines of prostate cancer. Cosentyx was submitted to the US FDA for an additional indication, ahead of planned timelines. |  |
| Among our early-stage development activities, we secured ten proofs of concept (POCs) / proofs of mechanisms (POMs). Additionally, we achieved First Patient First Visit in six pivotal trial-enabling studies against our Research and Development target of five. |  |
| The year also experienced some disappointments, with important trials not meeting primary goals (such as canakinumab for lung cancer and UNR844 in presbyopia). |  |

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## 2022 CEO BALANCED SCORECARD - CONTINUED

### Operational excellence (15%)

Met

In April 2022, we introduced a new operating model to make our organization more agile and efficient in support of our strategy. This simplified and leaner organization is expected to deliver identified cost savings of approximately USD 1.5 billion by 2024, and help drive mid-term Innovative Medicines margin to the low 40s.

Financial performance for 2022 improved from prior year in constant currencies on core operating income and core margin to USD 16.7 billion and 33.0% respectively.

The Operations unit, comprising our legacy Technical Operations unit and the legacy Customer and Technology Solutions unit, achieved savings of USD 998 million against a combined target of USD 785 million. However, these savings were partially offset by external headwinds, driven mainly by inflation, of approximately USD 350 million.

### Build trust with society (40%)

Above

### INNOVATION AND ACCESS

In 2022, we achieved a 26% increase in patient reach with our strategic innovative therapies, reaching 1.2 million patients, compared with the previous year (0.95 million).

All our product launches in 2022 included a tiered pricing strategy based on national income level and value-based pricing, in line with target.

With our commitment to diversity in clinical trials, 100% of our US Phase 3 studies evaluated Diversity & Inclusion principles in feasibility planning, in line with our target.

Through our Novartis Global Health flagship programs, we reached 31 million patients in 2022, beating our Sustainability-linked Bond target of 22.6 million patients by 2025.

In 2022, we renewed our commitment to the research and development of new medicines for malaria and neglected tropical diseases, pledging to invest USD 250mn over five years (2021-2025), and we advanced the clinical development of next-generation malaria medicines.

### PEOPLE AND CULTURE

We progressed towards a “Performance Culture” mindset with the implementation of a new “high support / high challenge” approach.

We remain committed in our efforts to increase workforce diversity. The percentage of women in management increased to 47%, slightly behind our target of 48%.

### ENVIRONMENTAL SUSTAINABILITY

In 2022, we reduced our Scope 1 and 2 carbon emissions by 49%, our water consumption by 42%, and our waste sent for disposal by 59%, compared with our 2016 baseline. This was broadly in line or ahead of our 50%, 41% and 50% targets, respectively. To advance on our Scope 3 emissions target, environmental sustainability criteria have been integrated into supply contracts covering more than a third of our Scope 3 supplier emissions.

### ETHICAL BUSINESS PRACTICES

We assessed 100% of our applicable policies & controls in the areas of Access to Medicine & Artificial Intelligence and categorized them as either “aligned with Human Right standards” or “needs update with defined scope to meet Human Rights standards”, in line with our target.

### Overall assessment of strategic objectives

Met

### Overall assessment of CEO balanced scorecard

Met

## ANNUAL INCENTIVE PAYOUT

| Payout | The 2022 CEO performance showed solid financial results, including sales and operating income performance at target and most strategic objectives were achieved or exceeded. The launch of a new focused strategy transforming Novartis into a pure-play medicines company, performance of launch products and preparation for planned Sandoz spin-off were key highlights. However, Free Cash Flow performance was impacted by decrease in net cash flows from operating activities and lower divestment proceeds. On balance, based on the overall assessment, the Board of Directors decided on an Annual Incentive payout for the CEO amounting to CHF 2 684 321 , which is 100% of target, within the range of 0-200%. |
| --- | --- |

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# Long-Term Performance Plan, 2020-2022 cycle

## OVERVIEW OF LONG-TERM PERFORMANCE PLAN

| Award vehicle | Performance share units (PSUs) are granted at the beginning of the three-year performance cycle and vest at the end of the cycle to the extent that performance conditions have been met. At the time of vesting, they are converted into Novartis shares. PSUs carry dividend equivalents that are paid in shares at the end of the cycle. |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
| Grant formula | At the start of the performance cycle, PSUs are granted under the Long-Term Incentive plan, as follows: |  |  |  |  |
|  | Step 1 | Annual base salary | x | Target incentive % | = Grant value |
|  | Step 2 | Grant value | / | Share price | = Target number of PSUs |
| Target opportunity | CEO: 325% of annual base salary Other Executive Committee members: between 180% and 260% of annual base salary |  |  |  |  |
| Performance measures | Net sales CAGR (25%) Core operating income CAGR (25%) Innovation (25%) Relative TSR (25%) |  |  |  |  |
| Target setting | Financial targets: Targets for net sales CAGR and core operating income CAGR are set based on the strategic plan of the Company. Innovation: Global Drug Development (GDD) targets are based on targeted filings communicated at the start of each performance cycle, weighted 70%. The Science & Technology Committee determines the most important Novartis Institutes for BioMedical Research (NIBR) milestones, weighted 30%. Effective the 2022-2024 LTPP cycle, NIBR targets set by the Science & Technology Committee take into account the expected Net Present Value (eNPV) of programs transitioning to late-stage clinical development. |  |  |  |  |
| Payout range | Financial targets: When assessing performance, achievements for threshold, target and maximum payout are defined for each metric, and a payout curve is applied to determine the corresponding payout between 0-200% against target. Innovation: At the end of the cycle, the Compensation Committee determines the payout factor in the range of 0-150% based on the performance assessment made by the Science & Technology Committee. A payout between 150-200% of target is only delivered for truly exceptional performance. Relative TSR: Performance on TSR is assessed relative to a global healthcare peer group, as outlined below. A three-month averaging method is used for both the start and the end of the performance cycle. Companies are then ranked in order of highest to lowest TSR in USD. |  |  |  |  |
|  | Global healthcare peer group |  |  | Novartis position in the peer group | Payout range (% of target) |
|  | Abbvie | Amgen | AstraZeneca | Position 1 - 2 | 170% - 200% |
|  | Biogen | Bristol-Myers Squibb | Eli Lilly & Co | Position 3 - 5 | 130% - 160% |
|  | GlaxoSmithKline | Gilead Sciences | Johnson & Johnson | Position 6 - 8 | 80% - 120% |
|  | Novo Nordisk | Merck & Co. | Pfizer | Position 9 - 15 | 0% |
|  | Roche | Sanofi |  |  |  |
|  | The Compensation Committee may use its discretion on each metric, including deciding on the payout within the ranges where appropriate. In doing so, it takes into consideration factors such as the underlying assumptions of the targets set at the beginning of the cycle, overall economic conditions, currency fluctuations and other unforeseeable situations. |  |  |  |  |
| Payout formula | Target number of PSUs | x | Performance factor | + | Dividend equivalents = Realized PSUs |

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## LTPP performance outcomes

The charts below illustrate the performance of the 2020-2022 LTPP against target.

### NET SALES CAGR

(25% weighting)

Vesting range 0-200% of target

![img-0.jpeg](img-0.jpeg)

Notes:

A minimum achievement of 3.7% CAGR was required to receive a payout under this performance measure

Novartis achieved a net sales CAGR of 3.8% (in constant currencies - cc) against the 5.7% target set at the beginning of the performance cycle. The lower than target performance was mainly due to the negative and unexpected impact of COVID-19 in 2020 and 2021, the Beovu safety update, and the slower uptake of Zolgensma.

Following the application of the payout curve, the net sales CAGR (cc) achievement generates a payout factor of 43% (maximum 200%) for this metric.

### INNOVATION

(25% weighting)

The following developments were considered in our 2020-2022 LTPP innovation performance:

- US and EU approvals for *Pluvicto*
- EU approval for *Scemblix* for adult patients with chronic myeloid leukemia
- US approval for *Kymriah* in the treatment of adult patients with relapsed or refractory follicular lymphoma
- Filing of *Cosentyx* for *Hidradenitis* suppurativa with both the US FDA and the European Medicines Agency (EMA)
- Submission of *Cosentyx* for an additional indication ahead of planned timelines
- Tislelizumab's acceptance by the EMA for regulatory review in esophageal and lung cancers
- CANOPY trials, Ligelizumab PEARL studies in chronic spontaneous urticaria (CSU), and Sabatolimab STIMULUS MDS-1 where important trial milestones were delayed/not submitted
- In NIBR, advancement of multiple development candidates including two novel radioligand therapies

Based on input from the Science & Technology Committee, the Board of Directors approved an innovation performance factor of **92%** of target.

### 2020-2022 LTPP PAYOUT

Overall, the Board of Directors approved a 2020-2022 LTPP payout at **57%** of target, within the range of 0-200%. No adjustments, pandemic-related or otherwise, were made in the evaluation of performance, despite the substantial shortfall in sales growth caused by Covid-19. This resulted in an LTPP payout of **CHF 3 307 422** for the CEO, including dividend equivalents of CHF 317 316.

![img-1.jpeg](img-1.jpeg)

### CORE OPERATING INCOME (COI) CAGR

(25% weighting)

Vesting range 0-200% of target

![img-2.jpeg](img-2.jpeg)

Notes:

A minimum achievement of 6.6% CAGR was required to receive a payout under this performance measure

Actual performance was adjusted for mergers and acquisitions as well as business development and licensing projects not included in the target

Novartis achieved a COI CAGR of 9.9% (cc) against the 10.6% target set at the beginning of the performance cycle. This was mainly due to lower than target Innovative Medicines sales over the three-year cycle, which was partly offset by lower spend in selling, general and administrative expenses (SG&A). In 2022, the Company took organizational transformative measures, delivering savings reflected in COI improvement for the year.

Following the application of the payout curve, the COI CAGR (cc) achievement generates a payout factor of 93% (maximum 200%) for this metric.

### RELATIVE TOTAL SHAREHOLDER RETURN (TSR)

(25% weighting)

| Novartis position in the peer group | Payout range (% of target) |
| --- | --- |
| Position 1 - 2 | 170% - 200% |
| Position 3 - 5 | 130% - 160% |
| Position 6 - 8 | 80% - 120% |
| Position 9 - 15 | 0% |

 → Actual ranking
**12% = 0%** of target

</table>

TSR for the 2020-2022 cycle was 5.5%. As a result, Novartis ranked No. 12 out of 15 healthcare companies (including Novartis). Considering that the relative TSR rank is below median, there was a zero payout for this metric.

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## Compensation for joining and departing Executive Committee members in 2022

### 2022 Executive Committee member appointments

In 2022, four new appointments were made to the Executive Committee, which comprise an internal promotion and three external appointments.

Victor Bulto was promoted internally as President, Innovative Medicines US, and joined the Executive Committee on May 1, 2022.

In line with our compensation policy, externally appointed Executive Committee members were granted buyout awards to compensate for entitlements forfeited by them as a result of joining Novartis, as described in the table below (see “-Executive Committee appointments compensation policy”). Further details on the vesting of the awards below will be provided in relevant future compensation reports.

| Name | Date of appointment | Currency | Cash payments | Equity awards | Total value at grant |
| --- | --- | --- | --- | --- | --- |
| Shreeram Aradhye, President, Global Drug Development and Chief Medical Officer | May 16, 2022 | CHF | No cash buyout | 5 708 RSUs, vesting over the period 2023-2026 | 491 915 |
| Aharon Gal, Chief Strategy & Growth Officer | July 18, 2022 | CHF | 818 202 | 43 253 RSUs, vesting over the period 2022-2023 | 4 353 702 |
| Fiona Marshall, President, Novartis Institutes for BioMedical Research | November 1, 2022 | USD | 522 000 to be paid out in March 2023 | 31 861 RSUs and 9 649 PSUs, vesting over the period 2023-2026 | 3 886 801 |

### 2022 Executive Committee member departures

In determining the compensation arrangements for departing Executive Committee members, the Compensation Committee ensures that contractual entitlements are respected, and all payments are in line with our plan rules and the Swiss Ordinance against Excessive Compensation in Listed Companies.

All Executive Committee members have a 12-month notice period during which they are entitled to their contractual base salary, pension, Annual Incentive and other benefits. No new LTPP grants are made during the notice period. In line with the new regulations arising from the reform of Swiss corporate law, any compensation payments toward non-competition agreements from 2023 onwards, will not exceed the average annual compensation of the previous three financial years.

Equity plan rules state that malus and clawback as well as non-compete restrictions will continue to apply. No severance payments are made to departing Executive Committee members. Further details on the policy treatment of variable compensation for departing Executive Committee members can be found in “-Treatment of variable compensation for Executive Committee leavers.”

Former President of Novartis Oncology, Susanne Schaffert, stepped down from her role following the Company’s decision to integrate the Pharmaceuticals and Oncology business units and create separate US and International commercial organizations under the Innovative Medicines (IM) Division, and started her notice period on May 1, 2022.

Former Head of Customer & Technology Solutions (CTS), Robert Weltevreden, stepped down from his role following the Company’s decision to combine Novartis Technical Operations (NTO) and CTS into a new Operations unit, and started his notice period on May 1, 2022.

Former Head of Global Drug Development and Chief Medical Officer, John Tsai, stepped down from his role effective May 15, 2022, and started his notice period on the same day.

Former President of the Novartis Institutes for BioMedical Research (NIBR), James Bradner, stepped down from his role effective October 31, 2022, and started his notice period on November 1, 2022.

All four executives departed under good leaver conditions. Outstanding LTI grants will vest at the end of the relevant performance cycles on a pro-rata basis, as per their contractual agreements and in line with the said plan rules.

To avoid a conflict of interest, Richard Saynor, Chief Executive Officer of Sandoz, stepped down from the Executive Committee with effect from October 25, 2022, following his appointment as CEO designate of the Sandoz standalone company that is planned to be created in the second half of 2023. He will continue to report directly to the CEO and to lead the Sandoz division.

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## Realized compensation

To aid shareholders' understanding of the link between pay and performance, the Compensation Committee discloses the realized compensation for the CEO individually, and for the other members of the Executive Committee on an aggregated basis. Disclosing realized compensation means that the Annual Incentive and the LTI are disclosed at the end of their respective performance cycles, reflecting actual payouts based on performance.

The total actual payout may vary year on year depending on multiple factors, including the composition of the Executive Committee and the tenure of its members (as new members may not have a vested LTI), compensation increases, payout of variable compensation based on actual performance, share price fluctuations of the LTI, and dividend equivalents.

### 2022 realized compensation for the CEO and other Executive Committee members

The table below shows fixed and other compensation for the year, including the Annual Incentive for the 2022 performance year, the realized LTI for the 2020-2022 performance cycle, and any buyouts vesting in 2022. The portion of the Annual Incentive paid in shares for the year 2022 is disclosed using the underlying value of Novartis shares at the date of grant, while the realized values of any other equity awards (including dividend equivalents) are calculated using the share price on the date of vesting.

To determine the appropriateness of the 2022 CEO and executive compensation payouts under the Annual Incentive and LTI plans, the Board of Directors and the Compensation Committee reviewed management's performance and contribution, taking the following into consideration:

- Operational and financial performance against targets
- Progress toward strengthening our global product portfolio
- Accomplishments across all strategic pillars, with careful attention given to ESG performance

The incentive performance outcomes, combined with base salary and other benefits, pension, and dividend equivalents, resulted in 2022 total realized compensation for the CEO of CHF 8 452 176.

### 2022 realized compensation for the CEO and other Executive Committee members

|  | Currency | 2022 annual base salary | 2022 pension benefits 1 | 2022 Annual Incentive |  | Long-Term Incentives LTPP 2020 - 2022 cycle | Other 2022 compensation | Total realized compensation (incl. share price movement) 2 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  | Cash (amount) | Amount | Cash | Equity 3 | Equity (value at vesting date) 4 | Amount 5,6 |  |
| Executive Committee members |  |  |  |  |  |  |  |  |
| Vasant Narasimhan (CEO) | CHF | 1 786 500 | 174 488 | 1 342 125 | 1 342 196 | 3 307 422 | 499 445 | 8 452 176 |
| Aggregate realized compensation of the other 15 Executive Committee members, including the members who stepped down during the financial year 2022 7,8 | CHF | 9 122 792 | 1 978 304 | 4 211 841 | 5 918 318 | 10 025 047 | 9 716 294 | 40 972 595 |
| Total | CHF | 10 909 292 | 2 152 792 | 5 553 966 | 7 260 514 | 13 332 469 | 10 215 739 | 49 424 771 |

See 2021 realized compensation for the CEO and other Executive Committee members for 2021 comparative figures.

$^{1}$ Includes mandatory employer contributions of CHF 4 560 for the CEO and CHF 67 148 for the other current Executive Committee members paid by Novartis to governmental social security systems. This amount is out of total employer contributions of CHF 3 937 537 paid in 2022 for all Executive Committee members, and provides a right to the maximum future insured government pension benefit.

$^{2}$ The portion of the Annual Incentive delivered in equity is rounded up to the nearest share, based on the closing share price on the grant date (January 25, 2023) of CHF 85.30 per Novartis share and USD 92.81 per ADR.

$^{3}$ The amounts represent the underlying share value of the 97 361 LTPP PSUs vesting on January 25, 2023, to the CEO and other Executive Committee members for the 2020-2022 performance cycle and dividend equivalents for the three-year cycle (for details, see "- LTPP performance outcomes"). The taxable value is determined using the closing share price on the day the Novartis Board of Directors approved the final LTPP performance factor (i.e., January 25, 2023) of CHF 85.30 per Novartis share and USD 92.81 per ADR. Robert Kowalski was promoted to the Executive Committee during the course of the 2021 performance period and Victor Bulto during the course of the 2022 performance period, and as such, the information disclosed reflects their pro-rata LTPP 2020-2022 payout attributable to the period in which they were members of the Executive Committee. Sreeram Aradhya rejoined Novartis and Karen Hale, Aharon Gal and Fiona Marshall joined Novartis after the 2020 LTI awards were made and hence did not receive an LTPP award for the 2020-2022 performance period.

$^{4}$ Includes any other perquisites, benefits in kind, and international assignment benefits as per the global mobility policy (e.g., housing, international health insurance, children's school fees, tax equalization). The 2022 tax payments were CHF 221 633 for Richard Saynor, as well as CHF 533 927 for Victor Bulto, CHF 127 980 for Robert Kowalski, CHF 109 966 for Aharon Gal, and CHF 417 826 for Vas Narasimhan.

$^{5}$ Includes 696 vested RSUs and 2 765 PSUs (for a total value of CHF 268 158), which vested on March 13, 2022, to John Tsai in lieu of the LTI that he forfeited when leaving his previous employer. Also includes 2 348 vested RSUs and 1 586 vested PSUs (for a total value of CHF 313 815), which vested on February 13, 2022, to Richard Saynor in lieu of the LTI that he forfeited when leaving his previous employer, and 3 675 vested PSUs (CHF 287 238) on January 18, 2022, to Klaus Moosmayer in lieu of the LTI he forfeited when leaving his previous employer as well as 15 446 RSUs (CHF 1 292 225), which vested on December 1, 2022, to Aharon Gal in lieu of the LTI that he forfeited when leaving his previous employer.

$^{6}$ All amounts are before deduction of the social security contribution and income tax due from the Executive Committee member.

$^{7}$ Includes compensation of the following members who stepped down from the ECN: Richard Saynor, Sandoz CEO designate, James Bradner, former President NIBR, Susanne Schaffert, former CEO Oncology, John Tsai, former Global Head of Drug Development and Chief Medical Officer and Robert Wellevreden, former Head of Customer and Technology Solutions, including the vesting of their Long-Term Incentives for 2020-2022 performance cycle, as per the plan rules. The compensation and benefits elements related to the period after the step-down dates are reported under the 'other 2022 compensation' column. See "-2022 Executive Committee member departures" for details.

$^{8}$ Amounts for Executive Committee members paid in USD were converted at a rate of USD 1.00 = CHF 0.9548, which is the same average exchange rate used in the Group's 2022 consolidated financial statements (a similar rule applies to payments made in other currencies during the year).

105

Item 6. Directors, Senior Management and Employees

The table and information below provide additional details on awards granted as part of the 2020-2022 LTPP performance cycle, including the number of shares awarded and delivered, following the application of the payout factor and the addition of dividend equivalent shares.

## 2020-2022 LTPP performance cycle

|  | PSUs at grant |  | Shares delivered at vesting |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | PSUs (target number) | PSUs (target value at grant date) (CHF) 2 | Payout factor for ECN LTPP (% of target) | Performance shares delivered at vesting (number) | Performance shares delivered at vesting (value at vesting date) (CHF) 3 | Dividend equivalent shares delivered at vesting (number) 4 | Dividend equivalent shares delivered at vesting (value at vesting date) (CHF) | Total shares delivered at vesting (value at vesting date) (CHF) |
| Executive Committee members 1 |  |  |  |  |  |  |  |  |
| Vasant Narasimhan | 61 498 | 5 712 549 | 57% | 35 054 | 2 990 106 | 3 720 | 317 316 | 3 307 422 |
| Other 15 Executive Committee members, including the members who stepped down during the financial year 2022 5 | 183 733 | 17 005 806 | 57% | 105 530 | 9 058 150 | 11 156 | 966 897 | 10 025 047 |
| Total | 245 231 | 22 718 356 |  | 140 584 | 12 048 256 | 14 876 | 1 284 213 | 13 332 469 |

$^{1}$ Robert Kowalski and Victor Bulto joined the Executive Committee during the course of the 2020-2022 performance period. As such, the information disclosed reflects their pro-rata LTPP 2020-2022 attributable to the period in which they were members of the Executive Committee. Karen Hale, Aharon Gal, Fiona Marshall and Shreeram Aradhye joined Novartis after the 2020-2022 LTPP awards were made and hence did not receive an LTPP award for this performance period.

$^{2}$ The shown amounts represent the underlying share value of the target number of PSUs granted to each Executive Committee member for the 2020-2022 performance period, based on the closing share price on the grant date (January 21, 2020) of CHF 92.89 per Novartis share and USD 95.19 per ADR.

$^{3}$ The shown amounts represent the underlying share value of the number of PSUs vested for the 2020-2022 performance period, based on the closing share price on the day the Novartis Board of Directors approved the final LTPP performance payout factor (i.e., January 25, 2023) of CHF 85.30 per Novartis share and USD 92.81 per ADR.

$^{4}$ Dividend equivalent shares are calculated on the dividend each member of the Executive Committee would have received, based on the actual number of shares delivered at the end of the 2020-2022 performance period. At vesting, the dividend equivalents are credited in shares or ADRs.

$^{5}$ Includes the LTPP vesting for Richard Saynor, Sandoz CEO Designate, James Bradner, former President NIBR, Susanne Schaffer, former CEO Oncology, John Tsai, former Global Head of Drug Development and Chief Medical Officer and Robert Weltevreden, former Head of Customer and Technology Solutions for the 2020-2022 performance cycle, as per the plan rules.

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Item 6. Directors, Senior Management and Employees

The table and information below provide details on the 2021 realized compensation for the CEO and other Executive Committee members, for comparative purposes.

## 2021 realized compensation for the CEO and other Executive Committee members

|  | 2021 annual base salary | 2021 pension benefits 1 | 2021 Annual Incentive | Long-Term Incentives | Other 2021 compensation |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  | Currency | Cash (amount) | Amount | Cash | Equity 2 | Equity Value at vesting date 3 | Amount 4,5 |
|  |  |  |  |  |  |  | Total realized compensation (incl. share price movement) 6 |
| Executive Committee members |  |  |  |  |  |  |  |
| Vasant Narasimhan (CEO) | CHF | 1 769 200 | 176 731 | 1 328 625 | 1 328 642 | 6 356 128 | 265 401 |
| Aggregate realized compensation of the other 14 Executive Committee members, including the members who stepped down during the financial year 2021 7,8 | CHF | 8 983 841 | 2 065 561 | 4 174 006 | 5 400 015 | 18 770 029 | 6 021 712 |
|  |  |  |  |  |  |  | 45 415 164 |
| Total | CHF | 10 753 041 | 2 242 292 | 5 502 631 | 6 728 657 | 25 126 157 | 6 287 113 |
|  |  |  |  |  |  |  | 56 639 891 |

$^{1}$ Includes mandatory employer contributions of CHF 5 498 for the CEO and CHF 53 693 for the other Executive Committee members paid by Novartis to governmental social security systems. This amount is out of total employer contributions of CHF 4 966 397 paid in 2021 for all Executive Committee members, and provides a right to the maximum future insured government pension benefit.

$^{2}$ The portion of the Annual Incentive delivered in equity is rounded up to the nearest share, based on the closing share price on the grant date (January 26, 2022) of CHF 78.16 per Novartis share and USD 84.24 per ADR.

$^{3}$ The amounts represent the underlying share value of the 296 741 LTPP PSUs vested on January 22, 2022, to the CEO and other Executive Committee members for the 2019-2021 performance cycle, inclusive of earned Alcon Keep Whole awards and dividend equivalents for the three-year cycle (for details, see '-LTPP performance outcomes'). The taxable value is determined using the closing share price on the day the Novartis Board of Directors approved the final LTPP performance factor (i.e., January 26, 2022) of CHF 78.16 per Novartis share and USD 84.24 per ADR. Marie-France Tschudin and Robert Kowalski were promoted to the Executive Committee during the course of the 2019-2021 performance period, and as such, the information disclosed reflects their pro-rata LTPP 2019-2021 payout attributable to the period in which they were members of the Executive Committee. Richard Saynor and Karen Hale joined Novartis after the 2019 LTI awards were made and hence did not receive an LTPP award for the 2019-2021 performance period.

$^{4}$ Includes any other perquisites, benefits in kind, and international assignment benefits as per the global mobility policy (e.g., housing, international health insurance, children's school fees, tax equalization). The 2021 tax payments were CHF 127 009 for Mr. Saynor, as well as CHF 822 808 for Susanne Schaffert, and CHF 156 788 for Vas Narasimhan.

$^{5}$ Includes 6 128 vested PSUs and 3 546 PSUs (for a total value of CHF 782 649), which vested partially on March 13, 2021, and partially on July 28, 2021, to John Tsai in lieu of the LTI that he forfeited when leaving his previous employer. Also includes 2 584 vested PSUs and 2 043 vested PSUs (for a total value of CHF 379 414), which vested on February 14, 2021, to Mr. Saynor in lieu of the LTI that he forfeited when leaving his previous employer, and 4 313 vested PSUs (CHF 370 961) on January 18, 2021, to Klaus Moosmayer in lieu of the LTI he forfeited when leaving his previous employer.

$^{6}$ All amounts are before deduction of the social security contribution and income tax due from the Executive Committee member.

$^{7}$ Includes the first six weeks of Karen Hale's compensation, before her appointment to the Executive Committee, under other compensation. Comprises the compensation of Bertrand Bodson, former Chief Data Officer and Steven Baert, former Chief People & Organization Officer, including the vesting of their Long-Term Incentives for 2019-2021 performance cycle, as per the plan rules. The compensation and benefits elements related to the period after the step-down dates are reported under the other compensation column. Unvested shares for Shannon Klinger were forfeited upon her departure from the Company. See '-2021 Executive Committee member departures' for details.

$^{8}$ Amounts for Executive Committee members paid in USD were converted at a rate of USD 100 = CHF 0.9139, which is the same average exchange rate used in the Group's 2021 consolidated financial statements (a similar rule applies to payments made in other currencies during the year).

## Realized compensation for the CEO and other Executive Committee members for 2022 compared with 2021

The 2022 total realized compensation for the CEO was CHF 8 452 176. This is a reduction of 24.7% compared with the prior year, mainly due to the lower performance payout of the 2020-2022 LTPP (57% compared with the 107% payout for the 2019-2021 LTPP). At the end of the 2020-2022 LTPP performance cycle, the rTSR ranking for Novartis, which is weighted 25% of the overall LTPP opportunity, was below median, which resulted in zero payout for this measure. Payout for Net Sales CAGR performance, also weighted 25%, was significantly lower (43% compared with 119% in 2019-2021), mainly driven by the impact of Covid-19 on Sales growth during 2020 and 2021. Furthermore, the Alcon 'keep-whole' awards, granted at the time of Alcon spin-off in 2019, ended with the 2019-2021 LTPP payout.

The 2022 total realized compensation for the Executive Committee members, including the CEO, was CHF 49 424 771. This decrease of 12.7% compared with the prior year can be attributed to the same reasons mentioned above. For more detail, please refer to '-LTPP performance outcomes'.

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## Compensation at grant value

In accordance with the Swiss Ordinance against Excessive Compensation in Listed Companies, Novartis continues to disclose total compensation at grant value for the CEO and other Executive Committee members. The tables below disclose the following information for the CEO and other Executive Committee members:

- Fixed 2022 compensation (base salary and benefits)
- Actual cash portion and the deferred portion granted in equity of the 2022 Annual Incentive
- 2022-2024 LTPP performance cycle awards, which are reported at target grant date value, based on the assumption that the awards will vest at 100% achievement, excluding any share price movement and dividend equivalents that may be accrued over the performance cycle. The future payout will be determined only after the performance cycle concludes in three years (i.e., at the end of 2024), with a payout range of 0% to 200% of the target value
- Other compensation for 2022, which includes other benefits, either paid in cash or granted in equity during the year

The compensation paid, promised or granted to the members of the Executive Committee during financial year 2022 was within the amount approved by shareholders at the 2021 AGM.

To assess CEO actual pay for performance in 2022, including the Annual Incentive payout for the 2022 performance year and the LTI payouts for the 2020-2022 performance cycle, shareholders should refer to the 2022 realized compensation table in “-2022 realized compensation for the CEO and other Executive Committee members.”

### 2022 compensation at grant value for the CEO and other Executive Committee members

| Currency | Fixed compensation and pension benefits |  | Variable compensation |  |  |  | Other 2022 compensation | Total compensation paid, promised or granted 2022 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Actual compensation paid or granted for 2022 |  | Long-Term Incentive 2022-2024 cycle grants at target |  |  |  |  |  |
|  | 2022 annual base salary | 2022 pension benefits | 2022 Annual Incentive (performance achieved) | LTPP 2022-2024 cycle | 2022-2024 cycle grants at target | 2022-2024 cycle grants at target |  |  |
|  | Cash (amount) | Amount 1 | Cash (amount) | Equity (value at grant date) 2 | PSUs (target value at grant date) 3 | Amount 4 | Amount 5 |  |
| Executive Committee members active on December 31, 2022 |  |  |  |  |  |  |  |  |
| Vasant Narasimhan | CHF 1 786 500 | 174 488 | 1 342 125 | 1 342 196 | 5 815 886 | 499 445 | 10 960 639 |  |
| Shreeram Aradhye (from May 16, 2022) 6 | CHF 538 656 | 110 041 | 270 959 | 270 998 | 1 629 233 | 581 328 | 3 401 215 |  |
| Victor Bulto (from May 1, 2022) 7, 8 | USD 622 596 | 49 434 | 310 445 | 310 449 | 873 500 | 782 443 | 2 948 867 |  |
| Aharon Gal (from July 18, 2022) 9 | CHF 363 441 | 78 083 | 150 000 | 150 043 | - | 4 576 719 | 5 318 285 |  |
| Karen Hale | CHF 845 834 | 215 842 | - | 935 059 | 1 700 058 | 146 154 | 3 842 946 |  |
| Harry Kirsch | CHF 1 082 250 | 177 526 | 655 820 | 655 872 | 2 818 450 | 36 456 | 5 426 373 |  |
| Robert Kowalski | CHF 705 833 | 207 628 | 349 965 | 349 986 | 1 272 601 | 307 969 | 3 193 982 |  |
| Steffen Lang | CHF 840 833 | 180 675 | 165 136 | 935 826 | 1 722 021 | 14 431 | 3 858 923 |  |
| Fiona Marshall (from November 1, 2022) 10, 11 | USD 186 154 | 16 222 | 101 085 | 101 163 | - | 3 961 064 | 4 365 688 |  |
| Klaus Moosmayer | CHF 580 000 | 181 112 | 313 740 | 313 819 | 1 045 859 | 32 026 | 2 466 555 |  |
| Marie-France Tschudin | CHF 951 250 | 164 480 | 527 209 | 527 239 | 2 220 057 | 8 804 | 4 399 040 |  |
| Total | 8 466 817 | 1 552 567 | 4 167 896 | 5 874 057 | 19 058 209 | 10 732 583 | 49 852 130 |  |
| Executive Committee members who stepped down during 2022 |  |  |  |  |  |  |  |  |
| James Bradner (until October 31, 2022) 12 | USD 1 006 294 | 280 763 | 605 668 | 605 771 | 3 030 029 | 651 499 | 6 180 024 |  |
| Richard Saynor (until October 25, 2022) 13 | CHF 641 721 | 150 920 | 383 977 | 384 021 | 1 493 403 | 706 394 | 3 760 436 |  |
| Susanne Schaffert (until April 4, 2022) 14 | CHF 292 466 | 59 180 | 161 112 | 161 217 | 2 138 458 | 1 306 257 | 4 118 690 |  |
| John Tsai (until May 15, 2022) 15 | CHF 321 967 | 67 322 | 161 031 | 161 132 | 2 192 544 | 1 396 407 | 4 300 403 |  |
| Robert Weltevreden (until April 4, 2022) 16 | CHF 225 479 | 54 721 | 101 638 | 101 678 | 1 374 053 | 1 029 246 | 2 886 815 |  |
| Subtotal | 2 442 475 | 600 225 | 1 386 070 | 1 386 456 | 10 091 626 | 5 060 376 | 20 967 229 |  |
| Total | 10 909 292 | 2 152 792 | 5 553 966 | 7 260 514 | 29 149 836 | 15 792 959 | 70 819 358 |  |

Based on assumption of 100% payout at target. Actual payout (0-200% of target) will be known at the end of the three-year cycle in January 2025

See text page for 2021 comparative figures.

1 Includes mandatory employer contributions of CHF 4 560 for the CEO and CHF 67 148 for the other current Executive Committee members paid by Novartis to governmental social security systems. This amount is out of total employer contributions of CHF 3 937 537 paid in 2022 for all Executive Committee members, and provides a right to the maximum future insured government pension benefit.

2 The portion of the Annual Incentive delivered in equity is rounded up to the nearest share, based on the closing share price on the grant date (January 25, 2023) of CHF 95.30 per Novartis share and USD 92.81 per ADR. The amounts represent the underlying share value of the target number of PSUs granted to Executive Committee members for the 2022-2024 performance cycle, based on the closing share price on the grant date (January 26, 2022) of CHF 76.16 per Novartis share and USD 84.24 per ADR for all members.

3 Includes any other perquisites, benefits in kind, and international assignment benefits as per the global mobility policy (e.g., housing, international health insurance, children's school fees, tax equalization). The compensation and benefits elements related to the period after the step-down dates are also reported under other 2022 compensation.

4 All amounts are before deduction of the social security contribution and income tax due by the Executive Committee member.

5 Shreeram Aradhye received a pro-rata LTPP award of 18 905 PSUs on June 1, 2022 (at CHF 95.18 closing share price on grant date) upon joining the organization, as per contractual entitlement.

6 Victor Bulto received his 2022 LTPP grant before his appointment to Executive Committee, therefore the reported LTPP amount is pro-rated to reflect his time on Executive Committee member over the full performance cycle.

7 Amounts in USD for Victor Bulto, Fiona Marshall and James Bradner were converted at a rate of CHF 100+ USD 1.0473, which is the average rate used in the Group's 2022 consolidated financial statements.

8 Aharon Gal and Fiona Marshall did not receive a pro-rata LTPP award upon joining the organization, as they received buyout grants for their forfeited awards upon joining.

9 James Bradner stepped down from the Executive Committee on October 31, 2022 and will end his notice period on October 31, 2023, in line with his contractual notice period (for more details, see “-2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules.

10 Richard Saynor left the Executive Committee on October 25, 2022. The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle, subject to the plan rules.

11 Susanne Schaffert stepped down from the Executive Committee on April 4, 2022 and will end her notice period on April 30, 2023, in line with her contractual notice period (for more details, see “-2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules.

12 John Tsai stepped down from the Executive Committee on May 15, 2022 and will end his notice period on May 15, 2023, in line with his contractual notice period (for more details, see “-2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules.

13 Robert Weltevreden stepped down from the Executive Committee on April 4, 2022 and will end his notice period on April 30, 2023, in line with his contractual notice period (for more details, see “-2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules.

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## 2021 compensation at grant value for the CEO and other Executive Committee members
For comparative purposes, the table below provides the compensation at grant value for 2021.

### Executive Committee member compensation at grant for financial year 2021

| Currency | Fixed compensation and pension benefits |  | Variable compensation |  |  | Other 2021 compensation | Total compensation paid, promised or granted 2021 |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Actual compensation paid or granted for 2021 |  | Long-Term Incentive 2021-2023 cycle grants at target |  |  |  |  |  |  |
|  | 2021 annual base salary | 2021 pension benefits | 2021 Annual Incentive (performance achieved) | Equity (value at grant date) 2 | PSUs (target value at grant date) 3 |  |  | Amount 4 | Amount 5 |
| Executive Committee members active on December 31, 2021 |  |  |  |  |  |  |  |  |  |
| Vasant Narasimhan | CHF 1 769 200 | 176 731 | 1 328 625 | 1 328 642 | 5 757 423 | 265 401 | 10 626 023 |  |  |
| James Bradner 6 | USD 1 164 462 | 367 246 | 712 802 | 712 839 | 2 970 016 | 92 286 | 6 039 652 |  |  |
| Karen Hale (from May 15, 2021) 7 | CHF 519 750 | 85 987 | 261 062 | 261 133 | 1 442 371 | 542 689 | 3 112 992 |  |  |
| Harry Kirsch | CHF 1 072 084 | 177 174 | 354 255 | 1 062 820 | 2 791 111 | 43 617 | 5 501 060 |  |  |
| Robert Kowalski (from September 1, 2021) 8 | CHF 233 333 | 49 692 | 105 288 | 105 360 | 448 824 | 160 428 | 1 122 925 |  |  |
| Steffen Lang | CHF 780 833 | 180 413 | 508 680 | 763 076 | 1 570 027 | 14 430 | 3 817 459 |  |  |
| Klaus Moosmayer | CHF 566 667 | 198 992 | 253 000 | 253 004 | 1 035 044 | 49 850 | 2 356 557 |  |  |
| Richard Saynor | CHF 785 000 | 190 263 | 196 500 | 196 572 | 1 493 478 | 416 693 | 3 278 506 |  |  |
| Susanne Schaffert | CHF 881 333 | 180 837 | 88 250 | 794 262 | 2 118 082 | 856 650 | 4 919 415 |  |  |
| John Tsai | CHF 875 834 | 186 807 | 306 950 | 307 012 | 2 192 567 | 201 307 | 4 070 477 |  |  |
| Marie-France Tschudin | CHF 861 333 | 164 980 | 706 000 | 706 019 | 2 029 750 | - | 4 488 083 |  |  |
| Robert Weltevreden | CHF 673 333 | 171 352 | 299 200 | 299 275 | 1 292 042 | - | 2 735 202 |  |  |
| Total | 10 121 211 | 2 098 866 | 5 059 259 | 6 728 657 | 24 885 096 | 2 655 408 | 51 548 498 |  |  |
| Executive Committee members who stepped down during 2021 |  |  |  |  |  |  |  |  |  |
| Steven Baert (until June 30, 2021) 9 | CHF 400 277 | 87 753 | 399 887 | - | 422 223 | 1 831 302 | 3 141 442 |  |  |
| Bertrand Bodson (until January 31, 2021) 10 | CHF 54 451 | 15 240 | 43 485 | - | - | 1 339 471 | 1 452 647 |  |  |
| Shannon Thyme Klinger (until March 15, 2021) 11 | CHF 177 102 | 40 434 | - | - | 279 791 | 2 018 161 | 2 515 487 |  |  |
| Subtotal | 631 830 | 143 427 | 443 372 | 0 | 702 014 | 5 188 934 | 7 109 576 |  |  |
| Total | 10 753 041 | 2 242 292 | 5 502 631 | 6 728 657 | 25 587 110 | 7 844 343 | 58 658 074 |  |  |

Based on assumption of 100% payout at target. Actual payout (0-250% of target) will be known at the end of the three-year cycle in January 2024

$^{1}$ Includes mandatory employer contributions of CHF 5 496 for the CEO and CHF 53 693 for the other Executive Committee members paid by Novartis to governmental social security systems. The amount is out of total employer contributions of CHF 4 966 397 paid in 2021 for all Executive Committee members, and provides a right to the maximum future insured government pension benefit.

$^{2}$ The portion of the Annual Incentive delivered in equity is rounded up to the nearest share, based on the closing share price on the grant date (January 28, 2022) of CHF 78.16 per Novartis share and USD 84.34 per ADR.

$^{3}$ The amounts represent the underlying share value of the target number of PSUs granted to Executive Committee members for the 2021-2023 performance cycle, based on the closing share price on the grant date (January 20, 2021) of CHF 86.01 per Novartis share and USD 96.92 per ADR for all members.

$^{4}$ Includes any other periparties, benefits in kind, and international assignment benefits as per the global mobility policy (e.g., housing, international health insurance, children's school fees, tax equalization). The compensation and benefits elements related to the period after the step-down dates are also reported under 'other 2021 compensation'.

$^{5}$ All amounts are before deduction of the social security contribution and income tax due by the Executive Committee member.

$^{6}$ Amounts in USD for James Bradner were converted at a rate of CHF 1.00 = USD 1.0942, which is the average rate used in the Group's 2021 consolidated financial statements.

$^{7}$ Karen Hale received a pro-rata LTP award of 16 659 PSUs on Apr-2, 2021 (at CHF 8.15 share price at grant) upon joining the organization, as per contractual entitlement. The other compensation amount includes the first six weeks of compensation before her appointment to the Executive Committee.

$^{8}$ Robert Kowalski received his 2021 LTP grant before his appointment to Executive Committee, therefore the reported LTP amount is pro-rated to reflect his time as Executive Committee member over the full performance cycle.

$^{9}$ Steven Baert left the Executive Committee on June 30, 2021 and ended his notice period on September 30, 2021, in line with his reduced contractual notice period (for more details, see '~2021 Executive Committee member departures'). He received his 2021 Annual Incentive 100% in cash on a pro-rata basis, and the LTP grant for the 2021-2023 performance cycle, included in the table above, will rest at the end of the performance cycle on a pro-rata basis subject to the plan rules.

$^{10}$ Bertrand Bodson left the Executive Committee on January 31, 2021 and ended his notice period on November 30, 2021, in line with his reduced contractual notice period (for more details, see '~2021 Executive Committee member departures'). He received his 2021 Annual Incentive 100% in cash on a pro-rata basis, and his LTP was granted for the 2021-2023 performance cycle.

$^{11}$ Shannon Klinger resigned as Chief Legal Officer as of March 15, 2021, and left the Company on May 31, 2021, in line with her reduced contractual notice period (for more details, see '~2021 Executive Committee member departures'). The 2021 Annual Incentive and LTP 2021-2023 cycle grant (25 586 PSUs), displayed at pro-rata value for the time she was in her role in 2021, were forfeited in full upon her departure.

### Compensation at grant value for the CEO and other Executive Committee members for 2022 compared with 2021

Compensation at grant delivered in 2022 to the CEO and the other Executive Committee members, including those who stepped down, was CHF 70 819 358, which was an increase of 20.7% compared with the prior year. This increase was driven mainly by the change in composition of the Executive Committee during 2022. Compensation at grant for the active Executive Committee members on December 31, 2022 (11 active members versus 12 in prior year) was CHF 49 852 130, which is a reduction of 3.3% from December 31, 2021.

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Item 6. Directors, Senior Management and Employees

## Additional disclosures for the CEO and other Executive Committee members

This section provides additional disclosures, including information about the shareholdings of the CEO and the other Executive Committee members.

### Malus and clawback

Consistent with our “-Executive Committee compensation philosophy and principles,” in 2022 there was no legal or factual basis on which to exercise malus or clawback for current or former Executive Committee members.

### Number of equity instruments granted to the CEO and other Executive Committee members for the financial year 2022

|  | Variable compensation 1 |  |  |
| --- | --- | --- | --- |
|  | 2022 Annual Incentive (performance achieved) | LTPP 2022-2024 cycle | Other |
|  | Equity (number) 2 | PSUs (target number) 3 | Equity/PSUs (number) |
| Executive Committee members active on December 31, 2022 |  |  |  |
| Vasant Narasimhan | 15 735 | 74 410 | 0 |
| Shreeram Aradhye (from May 16, 2022) | 3 177 | 18 905 | 5 708 |
| Victor Bulto (from May 1, 2022) | 3 345 | 10 671 | 0 |
| Aharon Gal (from July 18, 2022) | 1 759 | 0 | 43 253 |
| Karen Hale | 10 962 | 21 751 | 0 |
| Harry Kirsch | 7 689 | 36 060 | 0 |
| Robert Kowalski | 4 103 | 16 282 | 0 |
| Steffen Lang | 10 971 | 22 032 | 0 |
| Fiona Marshall (from November 1, 2022) | 1 090 | 0 | 41 510 |
| Klaus Moosmayer | 3 679 | 13 381 | 0 |
| Marie-France Tschudin | 6 181 | 28 404 | 0 |
| Total | 68 691 | 241 896 | 90 471 |
| Executive Committee members who stepped down during 2022 |  |  |  |
| James Bradner (until October 31, 2022) 4 | 6 527 | 35 969 | 0 |
| Richard Saynor (until October 25, 2022) 5 | 4 502 | 19 107 | 0 |
| Susanne Schaffert (until April 4, 2022) 6 | 1 890 | 27 360 | 0 |
| John Tsai (until May 15, 2022) 7 | 1 889 | 28 052 | 0 |
| Robert Weltevreden (until April 4, 2022) 8 | 1 192 | 17 580 | 0 |
| Subtotal | 16 000 | 128 068 | 0 |
| Total | 84 691 | 369 964 | 90 471 |

$^{1}$ See next page for 2021 comparative figures.

$^{2}$ The values of the awards are reported in the table “2022 compensation at grant value for the CEO and other Executive Committee members.”

$^{3}$ Vested shares, restricted shares and/or RSUs granted under the Annual Incentive for the 2022 performance period.

$^{4}$ Target number of PSUs granted under the LTPP as applicable for the 2022-2024 performance cycle.

$^{5}$ James Bradner stepped down from the Executive Committee on October 31, 2022 and will end his notice period on October 31, 2023, in line with his contractual notice period (for more details, see “-2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules.

$^{6}$ Richard Saynor left the Executive Committee on October 25, 2022. The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle, subject to the plan rules.

$^{7}$ Susanne Schaffert stepped down from the Executive Committee on April 4, 2022 and will end her notice period on April 30, 2023, in line with her contractual notice period (for more details, see “-2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules.

$^{8}$ John Tsai stepped down from the Executive Committee on May 15, 2022 and will end his notice period on May 15, 2023, in line with his contractual notice period (for more details, see “-2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules.

$^{9}$ Robert Weltevreden stepped down from the Executive Committee on April 4, 2022 and will end his notice period on April 30, 2023, in line with his contractual notice period (for more details, see “-2022 Executive Committee member departures”). The LTPP grant for the 2022-2024 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules.

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### Number of equity instruments granted to the CEO and other Executive Committee members for the financial year 2021 (comparative information)

|  | Variable compensation 1 |  |  |
| --- | --- | --- | --- |
|  | 2021 Annual Incentive (performance achieved) | LTPP 2021-2023 cycle | Other |
|  | Equity (number) 2 | PSUs (target number) 3 | Equity/PSUs (number) |
| Executive Committee members active on December 31, 2021 |  |  |  |
| Vasant Narasimhan | 16 999 | 66 939 | 0 |
| James Bradner | 8 462 | 30 644 | 0 |
| Karen Hale (from May 15, 2021) | 3 341 | 17 823 | 0 |
| Harry Kirsch | 13 598 | 32 451 | 0 |
| Robert Kowalski (from September 1, 2021) | 1 348 | 5 067 | 0 |
| Steffen Lang | 9 763 | 18 254 | 0 |
| Klaus Moosmayer | 3 237 | 12 034 | 0 |
| Richard Saynor | 2 515 | 17 364 | 0 |
| Susanne Schaffert | 10 162 | 24 626 | 0 |
| John Tsai | 3 928 | 25 492 | 0 |
| Marie-France Tschudin | 9 033 | 23 599 | 0 |
| Robert Weltevreden | 3 829 | 15 022 | 0 |
| Total | 86 215 | 289 315 | 0 |
| Executive Committee members who stepped down during 2021 |  |  |  |
| Steven Baert (until June 30, 2021) 4 | 0 | 4 909 | 0 |
| Bertrand Bodson (until January 31, 2021) 5 | 0 | 0 | 0 |
| Shannon Thyme Klinger (until March 15, 2021) 6 | 0 | 3 253 | 0 |
| Subtotal | 0 | 8 162 | 0 |
| Total | 86 215 | 297 477 | 0 |

$^{1}$ The values of the awards are reported in the table '2021 compensation at grant value for the CEO and other Executive Committee members.'

$^{2}$ Vested shares, restricted shares and/or RSUs granted under the Annual Incentive for the 2021 performance period.

$^{3}$ Target number of PSUs granted under the LTPP as applicable for the 2021-2023 performance cycle.

$^{4}$ Steven Baert left the Executive Committee on June 30, 2021 and ended his notice period on September 30, 2021, in line with his reduced contractual notice period (for more details, see '~2021 Executive Committee member departures'). The LTPP grant for the 2021-2023 performance cycle, included in the table above, will vest at the end of the performance cycle on a pro-rata basis subject to the plan rules.

$^{5}$ Bertrand Bodson left the Executive Committee on January 31, 2021 and ended his notice period on November 30, 2021, in line with his reduced contractual notice period (for more details, see '~2021 Executive Committee member departures'). No LTPP was granted for the 2021-2023 performance cycle.

$^{6}$ Shannon Klinger resigned as Chief Legal Officer as of March 15, 2021, and left the Company on May 31, 2021, in line with her reduced contractual notice period (for more details, see '~2021 Executive Committee member departures'). The LTPP 2021-2023 cycle grant (23 586 PSUs), displayed at pro-rata value for the time she was in her role in 2021, was forfeited in full upon her departure.

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Item 6. Directors, Senior Management and Employees

### Share ownership requirements for the CEO and other Executive Committee members

Executive Committee members are required to own at least a minimum multiple of their annual base salary in Novartis shares or RSUs within five years of hire or promotion, as set out in the table here. In addition, the CEO and CFO are required to hold the equity vesting under the LTPP plan (granted since 2022) for a minimum of two years after the vesting date. In the event of a substantial rise or drop in the share price, the Board of Directors may, at its discretion, amend that time period accordingly.

The determination of equity amounts against the share ownership requirements is defined to include vested and unvested Novartis shares or American Depositary Receipts (ADRs), together with RSUs acquired under the Company's compensation plans. Unvested PSUs are, however, excluded. The determination also includes other shares and vested options of Novartis shares or ADRs that are owned directly or indirectly by 'persons closely linked' to an Executive Committee member. The Compensation Committee reviews compliance with the share ownership guideline on an annual basis.

| FUNCTION | OWNERSHIP LEVEL |
| --- | --- |
| CEO | 5 x base compensation |
| Other Executive Committee members | 3 x base compensation |

### Shares, ADRs and other equity rights owned by Executive Committee members as at December 31, 2022$^{1}$

The following table shows, in alphabetical order after the CEO, the total number of shares, ADRs and other equity rights owned by the CEO and the other Executive Committee members and 'persons closely linked' to them as at December 31, 2022. As at December 31, 2022, no members of the Executive Committee, either individually or together with 'persons closely linked' to them, owned 1% or more of the outstanding shares or ADRs of Novartis. As at December 31, 2022, all members who have served at least five years on the Executive Committee have met or exceeded their personal Novartis share ownership requirements.

|  | Vested shares and ADRs 1 | Unvested shares and other equity rights 2 | Equity ownership level as a multiple of annual base salary 3 | Unvested target PSUs (e.g., LTPP) 4 | Total as at December 31, 2022 |
| --- | --- | --- | --- | --- | --- |
| Vasant Narasimhan | 228 614 | 69 687 | 13x | 108 201 | 406 502 |
| Shreeram Aradhye (from May 16, 2022) | 1 241 | 8 885 | 0x | 4 268 | 14 394 |
| Victor Bulto (from May 1, 2022) | 0 | 21 292 | 2x | 15 094 | 36 386 |
| Aharon Gal (from July 18, 2022) | 17 948 | 45 012 | 6x | 0 | 62 960 |
| Karen Hale | 0 | 9 458 | 0x | 19 110 | 28 568 |
| Harry Kirsch | 312 682 | 34 816 | 26x | 52 450 | 399 948 |
| Robert Kowalski | 0 | 17 398 | 2x | 15 097 | 32 495 |
| Steffen Lang | 118 057 | 27 383 | 14x | 28 797 | 174 237 |
| Fiona Marshall (from November 1, 2022) | 0 | 32 951 | 2x | 2 029 | 34 980 |
| Klaus Moosmayer | 16 713 | 12 524 | 4x | 18 184 | 47 421 |
| Marie-France Tschudin | 52 818 | 28 447 | 6x | 46 699 | 127 964 |
| Subtotal | 748 073 | 307 853 |  | 309 929 | 1 365 855 |

### Executive Committee members who stepped down during 2022

| James Bradner (until October 31, 2022) | 0 | 34 231 | 2x | 70 171 | 104 402 |
| --- | --- | --- | --- | --- | --- |
| Richard Saynor (until October 25, 2022) | 0 | 16 843 | 1x | 48 117 | 64 960 |
| Susanne Schaffert (until April 4, 2022) | 142 844 | 26 245 | 15x | 44 981 | 214 070 |
| John Tsai (until May 15, 2022) | 13 550 | 21 812 | 3x | 49 826 | 85 188 |
| Robert Weltevreden (until April 4, 2022) | 28 755 | 14 436 | 5x | 27 317 | 70 508 |
| Subtotal | 185 149 | 113 567 |  | 240 412 | 539 128 |
| Total | 933 222 | 421 420 |  | 550 341 | 1 904 983 |

$^{1}$ Includes holdings of 'persons closely linked' to Executive Committee members (see the 'persons closely linked' definition).

$^{2}$ Includes unvested shares and ADRs as well as other equity rights applicable for the determination of equity amounts for the share ownership requirements, as per the definition above.

$^{3}$ The multiple is calculated based on the full-year annual base salary and the closing share price as at the end of the 2022 financial year. The share price on the final trading day of 2022 was CHF 83.59 / USD 90.72 as at December 31, 2022.

$^{4}$ The target number of PSUs is disclosed pro-rata to December 31, 2022, unless the award qualified for full vesting under the relevant plan rules.

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### Fixed and variable compensation

The following table summarizes the annual base salary and variable compensation mix at grant value for the financial year 2022 for the CEO and other Executive Committee members.

|  | Annual base salary 1 | Variable compensation 2 |
| --- | --- | --- |
| Vasant Narasimhan | 16.6% | 83.4% |
| Shreeram Aradhye (from May 16, 2022) | 16.4% | 83.6% |
| Victor Bulto (from May 1, 2022) | 21.5% | 78.5% |
| Aharon Gal (from July 18, 2022) | 6.9% | 93.1% |
| Karen Hale | 23.3% | 76.7% |
| Harry Kirsch | 20.6% | 79.4% |
| Robert Kowalski | 23.6% | 76.4% |
| Steffen Lang | 22.9% | 77.1% |
| Fiona Marshall (from November 1, 2022) | 4.3% | 95.7% |
| Klaus Moosmayer | 25.4% | 74.6% |
| Marie-France Tschudin | 22.5% | 77.5% |
| Total 3 | 17.5% | 82.5% |

$^{1}$ Excludes pension and other benefits and is pro-rated for ECN time.

$^{2}$ See the table '2022 compensation at grant value for the CEO and other Executive Committee members' with regard to the disclosure principles of variable compensation.

$^{3}$ Excludes members, who stepped down during the year.

### Other payments to Executive Committee members

During 2022, no other payments or waivers of claims other than those set out in the tables (including the footnotes) contained in this Compensation Report were made to Executive Committee members or to 'persons closely linked' to them.

### Payments to former Executive Committee members

Under the former Executive Committee members' contracts and in line with the Company's LTI plan rules, payments were made to 8 former members. Of this, CHF 993 574 relates to the vesting of LTI awards. In addition, contractual amounts totaling CHF 167 106 were made (comprising the base salary, the Annual Incentive and other benefits), and tax equalization on variable compensation granted during international assignments amounted to a total of CHF 296 627.

No other payments (or waivers of claims) were made to former Executive Committee members or to 'persons closely linked' to them during 2022.

### Persons closely linked

'Persons closely linked' are (i) their spouse, (ii) their children (under 18 years of age), (iii) any legal entities that they own or otherwise control, and (iv) any legal or natural person who is acting as their fiduciary.

### Note 27 to the Group's audited consolidated financial statements

The total expense for the year for compensation awarded to Executive Committee and Board members, using International Financial Reporting Standards (IFRS) measurement rules, is presented in Note 27 to the Group's audited consolidated financial statements.

### Award and delivery of equity to Novartis employees

During 2022, 12.7 million unvested restricted shares (or ADRs), RSUs and target PSUs were granted, and 10.4 million Novartis vested shares (or ADRs) were delivered to Novartis employees under various equity-based participation plans. Current unvested equity instruments (restricted shares, RSUs and target PSUs) and outstanding equity options held by employees represent 1.05% of issued shares. Novartis delivers treasury shares to employees to fulfill these obligations and aims to offset the dilutive impact from its equity-based participation plans.

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Item 6. Directors, Senior Management and Employees

## Interim update regarding ongoing LTI performance cycles

Below we report how performance is tracking against our stretch targets for our ongoing LTI performance cycles.

### 2021-2023 LTPP

After the first two years of the three-year LTPP performance cycle, both net sales CAGR and core operating income CAGR are tracking behind target, driven mainly by the impact of the safety update on Beovu. Innovation is on track. At the end of 2022, the relative TSR for Novartis was below median among our global healthcare peer group.

| PERFORMANCE MEASURES | TRACKING |
| --- | --- |
| Net sales CAGR (25%) | ▶ |
| Core operating income CAGR (25%) | ▶ |
| Innovation (25%) | ● |
| Relative TSR (25%) | ▶ |

CAGR = compound annual growth rate

### 2022-2024 LTPP

After the first year of the three-year LTPP performance cycle, net sales CAGR is on target and core operating income CAGR is ahead of target, while innovation performance is on target. At the end of 2022, the relative TSR for Novartis was below the median among our global healthcare peer group.

| PERFORMANCE MEASURES | TRACKING |
| --- | --- |
| Net sales CAGR (25%) | ● |
| Core operating income CAGR (25%) | ● |
| Innovation (25%) | ● |
| Relative TSR (25%) | ▶ |

CAGR = compound annual growth rate

● On or ahead of target ▶ Slightly behind or behind target

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Item 6. Directors, Senior Management and Employees

# 2023 Executive Committee compensation

## 2023 Executive Committee compensation changes

The Compensation Committee believes that the compensation system supports the company's strategy and ensures a strong link between pay and performance.

Following a positive vote of 90.6% in favor of our 2021 Compensation Report at the 2022 AGM, the Board and Compensation Committee decided to make evolutionary changes to the compensation system. The aim of these changes is to simplify and increase the transparency of our performance assessment measures, in addition to strengthening our focus on key strategic priorities, while also considering developments in compensation best practices.

There are also changes as a result of the Swiss Corporate Law reform, which came into effect on January 1, 2023.

Assuming that the Sandoz spin-off will occur in 2023, some impact is expected on 2023 Executive Compensation.

### Annual Incentive

Following a review, the Compensation Committee decided to adapt the financial performance in the Annual Incentive Plan effective as of performance year 2023 as below:

- Remove "Share of Peers" from the financial performance measures in the Annual Incentive plan. As a result, the Annual Incentive financial performance measures are Group Net Sales (40%), Group Operating Income (30%) and Group Free Cash Flow1 (30%), thereby retaining a strong link to our key priorities
- Group financial measures will be weighted at 60% for all Executive Committee members. Financial targets that relate to a division or business unit, where applicable, will be part of the individual strategic objectives (40% weight)

### Swiss Corporate Law reform

Following the reform of Swiss corporate law, which came into effect on January 1, 2023, the following changes will be made to compensation design and disclosure in the 2023 Compensation Report:

- Contracts of Executive Committee members will be adapted so that any non-compete compensation will not exceed the average annual compensation of the previous three financial years
- In previous years, the Swiss regulations permitted companies to award compensation of up to 40% above the shareholder approved budget for newly appointed members of the Executive Committee, whether that be through internal promotions or external hires. From 2023, this additional budget of 40% will only be made available for external appointments of Executive Committee members

These changes will require adjustments to the Articles of Incorporation of Novartis, which will be submitted to Novartis shareholders for their approval at the 2023 AGM.

### Sandoz spin-off

In August 2022, we announced our intention to separate Sandoz, our generics and biosimilars division, into a new publicly traded standalone company, by way of a 100% spin-off, subject to approval of the Novartis AG Board of Directors and shareholders. In view of the planned spin-off, the Compensation Committee made the following decisions.

#### Sandoz CEO 2023 Annual Incentive

Based on the assumption that the spin-off will be implemented in the second half of 2023, the 2023 Balanced Scorecard for Richard Saynor, CEO designate of Sandoz, will be adapted so that his 2023 Annual Incentive will be based exclusively on the financial and strategic performance of Sandoz.

#### Equity Restoration principles

If and when the planned spin-off occurs, holders of vested and unvested awards in the form of Novartis shares or ADRs will receive a dividend in kind resulting from the spin-off in the same way as other Novartis shareholders. Holders of unvested RSUs and PSUs will not receive the dividend in kind resulting from the spin-off. To compensate for the expected reduction in shareholder value after the issue of dividend in kind, Novartis will grant equity awards (called "Keep Whole awards") to its employees, including the Executive Committee members, following the spin-off. This will be undertaken in accordance with the Sandoz equity restoration plan, as follows:

- The Keep Whole awards will have a value similar to the value of the dividend in kind resulting from the spin-off that each RSU or PSU would have received had it been a Novartis share or ADR
- The aim of the Keep Whole awards is to ensure that Novartis employees who have been granted RSUs or PSUs, including Executive Committee members, are not disadvantaged by the spin-off relative to Novartis shareholders

More details will be shared at the time of the spin-off.

1 For the purposes of the 2023 annual incentives, free cash flow is defined as net cash flows from operating activities less purchases of property, plant and equipment.

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Item 6. Directors, Senior Management and Employees

## 2023 Executive Committee member compensation increases

Each year, we collaborate with our external advisors to benchmark the compensation levels of the members of the Executive Committee and assess the competitiveness of their total target compensation. 2023 salary increases have been made in line with their demonstrated performance and ability in their respective roles, and commensurate to changes in responsibilities, if any, as outlined in our “-Executive Committee appointments compensation policy”.

In general, Executive Committee members (including the CEO) will receive compensation changes applicable to associates in Switzerland or where applicable, the US. The members who will receive an additional increase based on the principles outlined above are mentioned below.

### **Karen Hale, Chief Legal Officer**

Ms. Hale, who has joined the Executive Committee in May 2021, delivered many highlights in 2022, including effectively managing ongoing cases with the SEC/DOJ, creating a new, focused and efficient global legal function, preparing for the Sandoz spin-off effectively, and continuing to improve the governance of the company. Effective March 1, 2023, Ms. Hale will receive a 6% increase in annual base salary increase and a 10% increase LTI target, as a percentage of annual base salary.

### **Klaus Moosmayer, Chief Ethics, Risk & Compliance Officer**

Following the implementation of the new organization structure in 2022, Mr. Moosmayer took over additional management responsibilities in the areas of HSE governance, Data Privacy, and Digital & Artificial Intelligence Compliance. He demonstrated strong leadership across all responsibilities of compliance, risk, ethics, and managing emerging issues including the company’s continuing response to the global pandemic, the lockdown in China and crisis management related to the war in Ukraine. Effective March 1, 2023, Mr. Moosmayer will receive a 12% increase in annual base salary increase and a 10% increase LTI target, as a percentage of annual base salary, to recognize these additional responsibilities.

### **Marie-France Tschudin, President, Innovative Medicines International & Chief Commercial Officer**

Following her appointment in April 2022 as the President, Innovative Medicines International & Chief Commercial Officer, Ms. Tschudin effectively executed the creation of our new Innovative Medicines International organization and Chief Commercial Office. During the year, she designed the new organization structure, implementing a large restructuring program and creating new therapeutic areas with clear portfolio focus, while delivering strong commercial performance in Region International and ensuring growth above target for many key brands. Effective March 1, 2022, Ms. Tschudin will receive a 5% increase in annual base salary, and a 10% increase in both her Annual Incentive target and LTI target, as a percentage of annual base salary, to recognize her increased responsibilities as the Chief Commercial Officer.

Following an assessment of their compensation competitiveness and performance, recently appointed Executive Committee members Victor Bulto, Aharon (Ronny) Gal, and Robert Kowalski will receive a 10-20% increase in their Annual Incentive target and/or LTI target, in line with the “-Executive Committee appointments compensation policy”. Steffen Lang will also receive a 10% increase in LTI target as a result of his enhanced responsibilities in Operations.

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