avatar Novartis Pharma B.V. Wholesale Trade
  • Location: NOORD-HOLLAND 
  • Founded: 1948-10-02
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    OUR MISSION We want to discover, develop and successfully market innovative products to prevent and cure diseases, to ease suffering and to enhance the quality of life. We also want to provide a shareholder return that reflects outstanding performance and to adequately reward those who invest ideas and work in our company. N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    CONTENTS HEALTHCARE PERSPECTIVES by photojournalist Eugene Richards GROUP REVIEW Financial Highlights 2 News in 2011 3 Letter from Daniel Vasella 4 Interview with Joseph Jimenez 8 LIFE IN A CIRCLE 12 HEALTHCARE PORTFOLIO Contents 16 Pharmaceuticals 18 Novartis Institutes for BioMedical Research 29 NO GUARANTEES 32 Alcon 34 NEAR-PERFECT VISION 38 Sandoz 40 JUST THE BEGINNING 44 Vaccines and Diagnostics 46 THE TROUBLESHOOTER 50 Consumer Health 52 AN ONSET OF MALARIA 56 CORPORATE CITIZENSHIP Contents 60 Citizenship at Novartis 62 SOMETHING BEYOND THEMSELVES 68 Commitment to Patients 70 Commitment to People and Communities 72 THE VILLAGES MILES AWAY 74 Commitment to the Environment 76 Commitment to Ethical Business Conduct 78 Independent Assurance Report 81 THE LIVES OF OTHER PEOPLE 82 CORPORATE GOVERNANCE Contents 86 Our Board of Directors 92 Our Management 102 I AM WHO I AM 110 COMPENSATION REPORT Contents 114 Compensation Report 115 A GIFT FOR LIVING 134 NOVARTIS GROUP FINANCIAL REPORT Contents 138 Operating and Financial Review 141 Equity Strategy 187 Novartis Group Consolidated Financial Statements 190 Financial Statements of Novartis AG 262 Acknowledgements and 282 Annual Report Photography Key Dates 2012, Contact Information 284 and Forward-Looking Statements 2 | GROUP REVIEW 16 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 1

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    GROUP REVIEW Novartis provides healthcare solutions that address the evolving needs of patients and societies worldwide. Our portfolio focuses on broad areas of healthcare: pharmaceuticals, eye care, generics, vaccines, consumer-based OTC and animal health. FINANCIAL HIGHLIGHTS KEY FIGURES NET SALES, OPERATING INCOME, NET INCOME, CORE OPERATING (in USD millions, unless indicated otherwise) INCOME AND CORE NET INCOME 4 (Index: 2006 = 100%) 2011 2010 180 Net sales 58 566 50 624 Operating income 10 998 11 526 160 Return on net sales (%) 18.8 22.8 Net income 9 245 9 969 140 Basic earnings per share 1 (USD) 3.83 4.28 Core 2 120 Operating income 15 909 14 006 Core return on net sales (%) 27.2 27.7 100 Net income 13 490 12 029 Basic earnings per share 1 (USD) 5.57 5.15 80 Research & Development 9 239 8 080 2006 2007 2008 2009 2010 2011 As a % of net sales 15.8 16.0 Number of associates (FTE) 3 123 686 119 418 Net sales Core operating income Return on average equity (%) 13.6 15.7 Operating income Core net income Group free cash flow 12 503 12 346 Net income SHARE INFORMATION 2011 NET SALES BY REGION (% and in USD millions) 2011 2010 Share price at year-end (CHF) 53.70 54.95 United States 33 19 225 ADS price at year-end (USD) 57.17 58.95 Europe 37 21 507 Dividend 5 (CHF) 2.25 2.20 Payout ratio 6 63 55 Asia/Africa/Australasia 21 12 354 Canada and Latin America 9 5 480 Total 58 566 1 2011 average number of shares outstanding: 2 382.5 million (2010: 2 285.7 million) 4 To ease comparability, all figures for 2006 and 2007 exclude the Consumer Health Nutrition 2 Core results for operating income, net income, earnings per share (EPS) and R&D eliminate the operations divested in 2007 impact of acquisition-related factors and other significant exceptional items. These adjustments 5 Dividend payment for 2011: proposal to 2012 Annual General Meeting are explained in detail starting on page 179. 6 Payout ratio is calculated based on net income attributable to shareholders of Novartis AG. 2011 3 Full-time equivalent positions at year end based on estimated number of shares outstanding on dividend payment date. 2 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    NEWS IN 2011 PERFORMANCE Net sales rise 16% (+12% in constant currencies) to USD 58.6 billion. Operating income down 5% (+1% cc) to USD 11.0 billion, following a net exceptional charge of USD 1.9 billion. Core operating income increases 14% (+16% cc) to USD 15.9 billion. Net income of USD 9.2 billion declines 7% (-2% cc) in line with operating income. Core net income up 12% (+15% cc) to USD 13.5 billion. Recently launched products fuel growth across the broad healthcare portfolio, with products launched since 20071 accounting for 25% of Group sales, up from 19% in 2010. PRODUCTS Products launched since 20071 grow 38% to USD 14.4 billion. Continuing to rejuvenate the portfolio, Pharmaceuticals sees 15 major regulatory approvals in 2011 in the US, EU and Japan. Approvals include new indications for everolimus (Afinitor/Votubia) in the EU and US, our breakthrough multiple sclerosis therapy Gilenya in Europe and Japan, two new indications for Lucentis in the EU, and Arcapta Neohaler, for treatment of chronic obstructive pulmonary disease, in the US. In the Alcon Division, Dailies Total 1, a daily disposable contact lens that uses silicone hydrogel technology, receives approval in the EU, and WaveLight EX500 Excimer Laser is approved in the US. PIPELINE One of the industry’s leading pharmaceuticals pipelines with more than 130 projects in development. Milestones in development include late-stage studies showing Afinitor, in combination with exemestane, significantly lengthens amount of time women with advanced breast cancer live without disease progression. In Vaccines, two pivotal studies of candidate Bexsero show promise for protecting infants against meningococcal sero- group B. Sandoz starts recruitment for a Phase II trial in rheumatoid arthritis patients for biosimilar rituximab (generic Rituxan®/MabThera®). RESEARCH Significant investment, focusing on areas of greatest patient need and scientific promise at Novartis Institutes for BioMedical Research, aims to discover novel therapies. Biologics account for an increasing proportion of the exploratory pipeline. PORTFOLIO The Group establishes Alcon, the world leader in eye care, as the newest and second- largest division in our diversified healthcare portfolio after securing 100% ownership of Alcon, Inc., on April 8, 2011. Pharmaceuticals acquires oncology laboratory Genoptix, bolstering its Molecular Diagnostics unit, and Vaccines and Diagnostics completes its acquisition of an 85% stake in Zhejiang Tianyuan, one of China’s largest privately held vaccine companies. CORPORATE CITIZENSHIP Engaging with society to improve healthcare is integral to how Novartis operates. Access- to-medicine programs for those in need reach more than 89 million patients in 2011 and, together with our R&D institutes for diseases in developing countries, are valued at USD 1.7 billion, or 3% of net sales. DIVIDEND 15th consecutive dividend increase with 2% raise is proposed for 2011 to CHF 2.25 per share (2010: CHF 2.20 per share), a dividend yield of 4.2%. 1 Excluding A (H1N1) vaccines; including Alcon on a pro forma basis for 2010 2 | GROUP REVIEW 16 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 3 F in anc i al Hig hlig ht s N ew s in 2011

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    DEAR SHAREHOLDER Innovation, quality and productivity are a prerequisite for all divisions to remain com- petitive. Innovative strength is especially crucial for Pharmaceuticals. We therefore invested over 20% of Pharmaceuticals sales in R&D last year, consistent with previous What started with a banking crisis in 2008 years. Our robust pipeline includes products grew into a debt crisis for a number of for the treatment of certain cancers, res- industrialized nations last year. So far there piratory diseases, metabolic disorders, has been a distinct lack of credible propos- infections, as well as autoimmune and oph- als for a short-term solution to tackling the thalmic diseases. Daniel Vasella, M.D. budget deficits and reducing the debt, let alone any long-term solution. It now appears Novartis has successfully established itself unlikely that all the institutions of social wel- in new therapeutic areas and expanded its fare that have been built up over the past product portfolio of highly specialized medi- decades can be maintained in the long term. cines. New discovery approaches could also Expansion of the money supply may paper enable us to tackle previously untreatable over problems in the short term, but there diseases of genetic origin. can be no doubt that the consequences of debt and money supply policies will catch The launch of Gilenya, the first oral therapy up with us one day. for multiple sclerosis is a success. Afinitor/ tor Votubia has proven to be a new and valuable Despite the uncertainties that are shaping cancer therapy. In addition to previously the current mood, Novartis again succeeded approved indications, the results of clinical in posting record sales of USD 58.6 billion studies confirm that it also has consider- and a net income of USD 9.2 billion in able potential in the treatment of estrogen 2011, as well as gained market share in receptor-positive, metastatic breast cancer most divisions. in combination with the aromatase inhibitor exemestane. Tasigna is an even more effec- The strategy of focusing on the healthcare tive treatment for chronic myeloid leukemia sector, which we have pursued over the than Glivec, which already set a very high last 15 years, has proven successful. Our standard in this treatment. Just before the activities include preventive healthcare, end of the year, we received marketing diagnostics and above all drug therapy. This authorization for Lucentis in China. In the opens up multiple opportunities for expan- key countries, Lucentis is approved not only sion both geographically and also in terms for wet macular degeneration, but also for of new products, and it allows knowledge the treatment of diabetic macular edema and experience to be successfully leveraged and retinal vein occlusion. over several business areas. Our focused diversification strategy also reduces risks The year 2011 was also the beginning of pat- notably by diversifying the payor base. ent expiries for Diovan – our most successful 4 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    antihypertensive – in larger European markets. While there were many successes, there were Restructuring is very stressful for associ- Patent expiry in the US will follow in 2012. also setbacks. A long-term study with the ates, especially in an environment of rising Within two years we expect a corresponding antihypertensive aliskiren showed negative unemployment, and it is one of the most decline in sales, which could amount to a results in high-risk patients with pre-existing unpleasant responsibilities for manage- drop of USD 4 billion dollars. We expect this renal or cardiovascular disease. For all the ment. However, a company that fails to make will probably be offset by the dynamic growth advances made in research and development, the necessary adjustments to market con- of new products. there were also delays in the regulatory ditions because of the hardship associated approval of some products. with such decisions will sooner or later pay Thanks to a diligent and highly professional an even higher price for inaction. approach, the integration of Alcon – the world’s Particular attention and further efforts are leading producer of eye-care products – went needed regarding quality management in In 2011, Novartis continued its support for smoothly. The synergy targets that were set production. As with many competitors, patients who are unable to afford treatment. were exceeded while sales increased by 7% Sandoz received a warning letter from the This is especially the case for people in in constant currencies. This new division is US Food and Drug Administration, which developing countries. For several years thus contributing significantly to the growth has tightened up its requirements. For now, all the leprosy medicines needed world- of the Group. quality assurance reasons we also tempo- wide have been provided free of charge by rarily stopped production in our Lincoln, Novartis in collaboration with the World The decision to systematically build up our Nebraska, US, factory for over-the-counter Health Organization. The 480 million doses generics business was initially questioned, and animal health products. Remediation of our antimalarial drug Coartem that have but is now imitated by other companies. actions are now underway including lead- been sold without profit since 2001 have Sandoz, our generics division, shows dynamic ership changes and rigorous training. helped save an estimated 1 million lives – growth worldwide and, over the past 12 Across our businesses, we decided to pro- most of them children. This is the largest months, the anticoagulant enoxaparin has ceed with quality-oriented investments at and most important program of its kind. become our first generic to generate sales our manufacturing sites. of more than USD 1 billion. Our researchers also recently succeeded in As a result of government-imposed price discovering a new and promising class of The Vaccines and Diagnostics Division cuts and patent expiries, productivity ini- compounds for the treatment of malaria, gained market share with Menveo, a vaccine tiatives continue to gain importance. These known as imidazolopiperazines. Addition- for meningitis types A, C, W-135 and Y. factors led to some site closures and related ally, we are continuing our discovery efforts Bexsero – for meningitis type B, an often product transfers. Research and develop- for new medicines and vaccines to treat fatal infection among newborns – is under ment also reviewed their operations, which neglected diseases mainly occurring in regulatory review in Europe. Thanks to led to the outsourcing of some cyclical developing countries. its investment in the vaccines producer activities in development, as well as the Zhejiang Tianyuan Bio-Pharmaceutical Co. reorganization of research activities in Alcon also conducts pro bono programs in in China, the division has access to this neuroscience ultimately resulting in the the fi eld of ophthalmology. In India some promising market. closure of the department in Basel. Due to years ago, Novartis began an innovative ini- the Diovan patent expiry, restructuring of tiative with doctors to improve healthcare Both the self-medication and animal health our US operations remains an imperative. in rural regions. There is significant demand businesses showed growth in the single- At the same time, we are increasing our for this program, which already encom- digit range thanks to their good product investments in growth regions, such as passes 33 000 villages. portfolios. Asia and South America. 2 | GROUP REVIEW 16 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 5 L et te r f ro m D ani e l Va s e ll a

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    In the new year, we will continue to pursue I am grateful to all our associates and our primary objectives in the field of pre- leaders worldwide for their excellent work ventive care and treatment by working to during the past year and their continued discover innovative medicines and vac- engagement in the pursuit of our mission. cines, as well as by offering low-cost, high- quality generics. We also extend our thanks to you, our share- holders, for your loyalty, and are pleased In spite of the uncertain economy – partic- to propose an increase in the dividend to ularly government debt and weak growth – CHF 2.25 for 2011. we will pursue our strategy. Continued inno- vation and expansion in growth markets Sincerely, will remain key to gaining market share in the medium term. At the same time, pricing pricin pressure must be offset by productivity productivit gains, including restructuring activities in i certain markets, which we will implement Daniel Vasella, M.D. with social responsibility. We must con- Chairman of the Board tinue to ensure the highest quality stan- dards across the Group. We are building our research and development center in China and also production sites in Brazil and Russia. We will continue to invest in the training and education of our associates because their competence, motivation and integ- rity are key to our success. The Executive Committee is committed to enforcing our Code of Conduct worldwide. It is essential that the trust of our stakeholders and the company’s good reputation be preserved also in the future. We are confident that thanks to our pipe- line, one of the richest and most promising in the industry, we will be able to continu- ously contribute to the effective treatment of patients worldwide and thereby grow and generate profits. 6 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    BUILDING SUSTAINABLE LEADERSHIP IN HEALTHCARE Novartis strategy is based on focused diversification. Our broad portfolio focuses on science-based healthcare sectors that are growing, reward innovation and enhance the lives of patients. PHARMACEUTICALS ALCON SANDOZ VACCINES AND CONSUMER HEALTH DIAGNOSTICS Novartis discovers and Alcon is the global Sandoz is the number Reflecting a commitment A world leader in develops innovative leader in eye care, two generics company to help prevent disease, over-the-counter patent-protected offering innovative worldwide, providing Novartis is a leader in medicines (OTC) and medicines that enhance surgical, ophthalmic affordable, high-quality influenza vaccines. animal health treat- outcomes for patients pharmaceuticals and medicines. Sandoz The division has a ments, Novartis offers and healthcare providers. vision care products to focuses on differentiated broad development a robust portfolio of The division is a leader address the world’s generics that are more pipeline, including an self-care products – in oncology, primary most pressing eye care difficult to develop, emerging platform including cough, cold, care and specialty needs. As the second- manufacture and of meningococcal respiratory disease, medicines, with an largest division, Alcon market, but that offer vaccines. Our diagnostic digestive health and industry-leading pipe- adds a dynamic new higher growth and tools help safeguard pain management line. Innovation has growth platform to the profitability. Sandoz blood supplies and medication – as well rejuvenated our product diversified healthcare is also the worldwide ensure patient safety. as veterinary products portfolio to drive portfolio of Novartis. leader in biosimilars. that prevent and growth, with recently treat diseases in pets, launched medicines farm animals and representing 28% of cultivated fish. division sales in 2011. PATIENT-CENTRIC PORTFOLIO STRATEGIC PRIORITIES Extend lead in innovation Our research is driven by a distinctive scientific and clinical strategy, focusing on knowledge of disease and unmet medical need. This approach has resulted in an established track record of pacing our markets through innovation. Since 2007, Novartis has received approvals for more innovative medicines in Europe and the United States than any other company. Accelerate growth We are tailoring our commercial model to the rapidly changing healthcare environment. Our aim is to better address unmet medical need of patients and achieve positive treatment outcomes for patients. We are also leveraging our broad portfolio to expand aggressively in emerging and established markets. Drive productivity We strive to continuously simplify and streamline processes, and reduce costs, allowing us to reinvest in innovation. 2 | GROUP REVIEW 16 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 7 L et te r f ro m D ani e l Va s e ll a

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    INTERVIEW WITH JOSEPH JIMENEZ sales. Productivity gains, particularly in procurement, generated cost savings of more than USD 2 billion, beating the figure for 2010. While results were strong, Novartis is facing WHAT WERE THE HIGHLIGHTS OF 2011 FOR an increasingly difficult external environment NOVARTIS? that is likely to get even tougher over the next few years. The global debt crisis is forcing Novartis had another successful year in governments to cut spending, and health- 2011. We are still well-positioned to take care is a prime target. On top of pricing Joseph Jimenez advantage of the positive industry trends pressure, upcoming patent expirations will but also to offset some of the headwinds. slow growth of our Pharmaceuticals Division Once again the strength of our diversified during 2012 and 2013. We took action in portfolio helped us deliver strong growth. 2011 to prepare the company for this exter- nal environment. Group net sales climbed 12% in constant currencies and core operating income rose WHAT IS THE OUTLOOK FOR PERFORMANCE at a rate of 16%, refl ecting productivity OF THE COMPANY? gains. All divisions helped to achieve this performance, and recently launched prod- We live in extraordinarily volatile times. This ucts continue to rejuvenate our portfolio makes it even more difficult to give a reli- and drive growth. Sales of these products able outlook. But based on what we know, rose 38% in 2011 versus the previous year 1 I believe Novartis is the best positioned and now account for about 25% of total company in healthcare. We focus on science- Group net sales. Free cash flow was also very based innovation that is spread across strong. multiple high-growth segments of health- care. It’s critical to have the best scientists Looking beyond financial metrics to strategic and to maintain a high level of investment priorities, I am proud of the innovation that in research and development because we delivered in 2011. Fundamentally health- breakthroughs in medicine will drive our care is a growth industry, and a key success growth in the future. factor is our ability not only to innovate but also to transform the potential of our pipe- We have entered an important period in the line into new products that drive sales. We company’s history during which we will gained key approvals and advanced devel- lose patent protection on Diovan and other opment of important medicines and vaccines key products. In major European markets, during 2011. Diovan patents began to expire in November 2011, and we will lose exclusivity in the Importantly, we also completed the acquisi- United States in September 2012. Femara tion and integration of Alcon, adding the world patents also began to expire in 2011, with leader in eye care as a new growth platform. generics entering the US market in April. Group sales in emerging markets climbed This will clearly have an impact on growth, 17% and now represent 10% of our total net but based on current projections we expect 1 Excluding A (H1N1) vaccines; including Alcon on a pro forma basis for 2010 8 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    to be one of the few companies to actually as well as high-quality generics for patients complementary nature of the businesses offset losses during a period like this. in Russia. It is part of a broader package of means we expect to grow faster together investment by Novartis in Russia that also than either Novartis or Alcon would have SALES GROWTH ACCELERATED IN THE TOP SIX includes research and development and managed on its own. EMERGING MARKETS LAST YEAR. WHAT WERE public health initiatives in tuberculosis, and THE KEY DRIVERS? a program in Yaroslavl that aims to reduce NOVARTIS ANNOUNCED STRUCTURAL the high prevalence of hypertension. CHANGES TO REDUCE COSTS. WHY WAS Net sales in our top six emerging markets THIS NECESSARY? rose 17% in constant currencies during HOW HAS THE INTEGRATION OF THE NEW 2011, representing 10% of Group net sales. ALCON DIVISION PROGRESSED SINCE We are implementing a program to reduce China was a major success story, with net CONSOLIDATION IN APRIL? our cost base – including consolidation sales climbing 38% in constant currencies. and transfer of some manufacturing and A new local management team leading the Alcon was one of our fastest-growing divi- research and development activities. These Pharmaceuticals Division concentrated on sions during 2011 with pro forma net sales initiatives will take place over the next three marketing and sales skills, and the new growth of 7% in constant currencies. That to five years, but we wanted to be trans- decentralized organization introduced last tells me that Alcon management has not let parent about our plans as early as possible year covering inland provinces in China is the integration work get in the way of great so associates affected can prepare for the starting to pay off. execution. future. Expanding our presence in China – as well The surgical and ophthalmic pharmaceuticals I get a lot of questions about why we would as in other fast-growing countries such as businesses drove Alcon’s performance. announce plans for cost reductions at a time Brazil, Russia and India – is critical to our Another highlight was 22% growth (con- when the company is doing so well. We must long-term growth strategy, and we achieved stant currencies) in pro forma sales in the address the increasingly challenging exter- several milestones during 2011. Novartis top six emerging markets, led by China, South nal environment from a position of strength. completed the purchase of an 85% holding Korea and India. To continue to be successful we need to reduce in Zhejiang Tianyuan Bio-Pharmaceutical Co., our cost base. In this sense, cost savings one of China’s largest privately held vaccine Eye care exemplifi es the changing demo- are strategic. They allow us to maintain companies. The agreement is expected to graphics and aging of populations that will strong levels of research and development enable Novartis to deliver a broad range of increase demand for healthcare in the spending, which leads to innovation and, in vaccines in China. future. Alcon has built leadership positions turn, sales growth. across all of its businesses, and the new Also this year, the Vaccines and Diagnostics division provides a stronger vehicle for the At Novartis innovation is at the center of Division began design of its first plant in contact lens business, which is now expected everything we do, and we plan to keep our Brazil. The plant will be located in the to have a great platform for growth. The spending on research and development at Northeast coastal state of Pernambuco global rollout of Dailies Total 1, a new gen- the high end of the healthcare industry. and is expected to produce vaccines eration of daily disposable contact lenses, against meningococcal disease when it began in selected European markets dur- Because of the success of our research comes onstream in 2014. ing the fourth quarter and is planned to around the world, we have a growing num- expand during 2012. ber of compounds entering development. Novartis also began construction of a pharma- Simplifying our organization is a way to free ceutical manufacturing plant in St. Petersburg, The new division was accretive to Group up resources to invest in new research Russia, our most significant investment in core income margins, and there is expected platforms and projects, and ensure we keep Russia to date. The new facility is expected to to be a further boost to margins from cost our track record of innovation going. manufacture innovative pharmaceuticals synergies of USD 350 million by 2013. The 2 | GROUP REVIEW 16 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 9 Inte r view with J o s e ph Jim e n e z

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    RECENTLY LAUNCHED MEDICINES HAVE metastatic estrogen-receptor-positive breast FUELED GROWTH AT THE PHARMACEUTICALS cancer. We have submitted regulatory DIVISION IN RECENT YEARS. DID THAT filings in that additional indication and, if PORTFOLIO TRANSFORMATION CONTINUE? approved, Afinitor tor could help potentially tens of thousands of women with advanced The Pharmaceuticals Division continues to breast cancer who lack effective treatment deliver robust sales growth, through out- options today. standing launches of new medicines such as Gilenya as well as important new indica- HOW DID OTHER DIVISIONS PERFORM IN 2011? tions for approved medicines, including our anticancer treatment Afinitor/Votubia. The At the Vaccines and Diagnostics Division, division has also managed its cost base the meningococcal franchise is growing extremely well. strongly, driven by market share gains for Menveo in the United States. Bexsero, our A year ago, Gilenya was still in registration, meningococcal serogroup B vaccine, is un- and the launch to date has outpaced bench- der review in Europe, and has the potential marks for existing multiple sclerosis to protect against the most common cause of therapies. More than 25 000 patients are bacterial meningitis in European countries. being treated with commercial drug. We completed reimbursement negotiations in The Sandoz Division delivered robust growth several countries in Europe as well as in Asia. in 2011 – with great sales execution in many In another important milestone, Gilenya was regions of the world. Sandoz enoxaparin approved in Japan during September. became our first generic “blockbuster,” achieving sales of more than USD 1 billion Sales of Lucentis rose 26% in constant cur- in its first 12 months on the US market. The rencies during the year, mainly in treatment outlook for the generics industry is very of the “wet” form of age-related macular positive going forward: Generics help lower degeneration (AMD). Lucentis has been healthcare costs for payors around the world, approved for two new indications – diabetic and demand for high-quality generics is macular edema and retinal vein occlusion. expected to remain strong in coming years. Each of these indications represents a new We also expect dynamic growth in the rapidly market comparable in size to wet AMD. emerging segment of biosimilars, where Sandoz is the global leader, with three mar- Tasigna – the second-generation treatment keted products and a strong pipeline. for chronic myeloid leukemia – grew strongly and now represents more than 19% of sales However Sandoz tends to have greater in our CML franchise. One newly diagnosed year-to-year volatility than other Novartis CML patient in three begins treatment with divisions due to limited periods of exclu- Tasigna, an important gauge of how the sivity, which are a fundamental part of the market is likely to evolve in coming years. generics business. It can be diffi cult to deliver strong growth coming off a high In the landmark BOLERO-2 clinical trial, base like 2011 – especially if Sandoz no lon- Afinitor in combination with the aromatase ger markets the only generic version of inhibitor exemestane more than doubled enoxaparin available in the United States in progression-free survival of women with 2012. 10 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    Our consumer-based OTC and Animal WHAT ADVANCES HAS NOVARTIS MADE IN I am pleased that Alcon, our newest division, Health businesses help to balance periodic ENHANCING ACCESS TO MEDICINE AND also has a strong track record in corporate volatility at Sandoz and Pharmaceuticals. IN CORPORATE RESPONSIBILITY OVERALL? responsibility. Alcon’s corporate giving, Both OTC and Animal Health have histori- focused on broadening access to eye care in cally outgrown their markets, reflecting At Novartis our mission is to care and to developing markets and local communities, global positions as number one or two in cure. This means a strong commitment to complements our commitment to reaching niche categories in their respective indus- underserved populations to ensure access more patients and addressing significant tries. As predominantly self-pay busi- to medicines. Novartis reached 89 million unmet medical need. nesses less dependent on reimbursement, patients in need through access-to-medicine OTC and Animal Health also provide a programs during 2011, and we continued Our company’s shared commitment to degree of insulation from the current fi- to make progress on some of our important corporate responsibility rests with every nancial pressure on governments and other programs against so-called neglected Novartis associate. We made progress on major payors. diseases. governance of corporate responsibility during 2011, anchoring it more strongly YOU HAVE BEEN A DRIVING FORCE BEHIND THE The Novartis Malaria Initiative entered a within the Executive Committee. George LAUNCH OF THE INTERNAL INITIATIVE BE new phase following expiration of our Gunn, Division Head, Animal Health, assumed HEALTHY. WHAT INSPIRED YOUR INITIATION 10-year partnership with the World Health an additional position as Head of Corporate OF THE PROGRAM DURING 2011? Organization to provide Coartem at no profit Social Responsibility. for use by public health systems in devel- I believe Novartis has a responsibility to oping countries. Underscoring our commit- We can all be proud of what Novartis has offer all Group company associates the tools ment to the battle against malaria, Novartis accomplished in enhancing access to medi- they need to live healthier lives. We are a plans to continue to provide Coartem to cine worldwide. healthcare company, and healthcare starts developing countries on the same terms. with our own employees. Be Healthy is a voluntary global initiative with four com- We received several awards for SMS for Life, ponents: encouraging physical exercise, a collaboration developed by Novartis to choosing a healthy diet, fostering greater help prevent rural clinics in Africa from awareness of key health indicators, and running out of critical malaria treatments. offering support for associates who become Using mobile phone text messages, rural ill to manage their illness and ultimately clinics report levels of medicines they return to work. have in stock once a week, and distribution sites use the information to schedule more We rolled out the program to 76 Novartis de liveries. SMS for Life was first intro- Group company sites during 2011, and the duced in Tanzania and is being expanded remaining sites around the world will be to other countries. added during 2012. We held a celebration week in September to build awareness but Novartis also continues to lead the global this isn’t a once-a-year initiative. We all effort to eradicate leprosy. For more than 20 need to keep our health top-of-mind and years, we have provided the only multidrug think about small changes to keep us in therapy for leprosy free to patients. In Brazil, better shape – from daily exercise to low- Novartis has sponsored a mobile clinic that cost healthy meals that we have introduced travels to remote areas of the country to pro- in Novartis cafeterias. vide diagnosis and treatment for patients who otherwise would not receive therapy. 2 | GROUP REVIEW 16 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 11 Inte r view with J o s e ph Jim e n e z

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    Life in a circle JUAN MEJÍA MIRANDA: “As a parent, I have an obligation to take life as it comes. When your children are sick, you can’t just stand there hoping, with your fingers crossed. My daughter is the patient and tomorrow I am giving her my kidney, and I’m overjoyed. “My daughter’s name is Dayrin Elizabeth Mejía Garcia. She was born on October 12, 1995. My person is, I’m 38 years old and from a little village in Petén, which is 500 kilometers from this hospital, from Guatemala City. I had studied accounting, but because of the lack of employment, nowadays I work in construction and earn 1 975 quetzales a month ($258), the minimum wage. There are five children – four boys and Dayrin is the only girl – so we don’t have the money to go to private clinics. We use the national hospital to get the services. And I’m thankful. Dayrin has been having problems with her health since she’s been born. She was born at home and the midwife was the first one to see the little ball at the bottom of her column, of her spine. Clinically that name is myelomeningocele. And the fear was terrible, because people in the village told my wife, Miria, that our daughter would never be able to walk, or talk. But before she was one year old, my daughter was walking, though most kids who suffer this disease cannot. Then she again broke the barrier, and said ‘Mami’ and ‘Papi.’ “From that time we began traveling back and forth from our village to get help. The doctors said she would need a surgery. When she was three years old, they did the first one. But after that operation, Dayrin still had little repeats of problems, again and again. I remember that even before she began school, we explained to the teachers what she had, H E A LT H C A R E P E R S P E C T I V E S : L I F E I N A C I R C L E 13

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    and they gave my wife permission to go into the school and change her Trying to keep her from getting depressed, we’ve reminded her that after diapers. After that, sometimes, the children would tease my daughter the transplant she will be able to go home. about her size – she is very, very small for her age – and the diapers. But even now she cannot control her pee; it’s from the myelomeningocele. “But like I said, I am not at all nervous. My wife, though, is completely Six years after that first surgery, the doctors told me Dayrin had a nervous, and has been ever since the surgery on Dayrin last year, when neuro genic bladder. The way I understand it, her bladder is too small, they had to reconstruct her bladder. That surgery was six hours long. and because the walls of the bladder are not able to contain the pee, it Miria was hesitating and scared about the transplant, because I am the goes back to the kidneys and that’s why the kidneys get sick. only one who is working and providing food for the family. But I got her to agree.” “Now this is my first time as a patient, but I’m really feeling very calm because I know that I’m going to do what no one else is going to do Two days later for my child. Finally, she will be transplanted. For the past six months, three times a week, three hours a day, Dayrin has been on dialysis, which “I remember nothing about the surgery. Nothing, nothing. Except some- is for purifying the blood. But of course she doesn’t like this. Because of one was talking to me this way, someone the other way. Pain, there these treatments, she had no opportunity to go to school, and was really was a lot at first. A lot. Then I got worried. After they had us back in sad. So I made a solemn promise that next year she’s going to school. our room, they were hurrying around my daughter, working with her, 14 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    battling for her. She was in danger. It was real complicated, her surgery, about paying. And I’m so grateful for the Fundanier Foundation, which and Dayrin had a lot of water remaining in her body. They had to dialyze helps children with renal problems, and for its founder Dr. Randall Lou her. Then when I could finally speak to Dayrin I tried to motivate her, Meda; for the hospital director; for the surgeons, pediatricians and tell her that though the difficult days are not all over and ahead of us nurses in this place that’s a long way from where I live. And I’m grateful is a long healing process, this is a chance for her to continue her life. for my wife, who has suffered a lot raising our daughter; for my father, who was an exemplary father; for my wife’s mother and my mother who “Today, they woke me up at 6 a.m. to take a bath. They want me to be sometimes helped my family when I went to work. active. So yeah, I walked. And I have a scar that’s really special. And my daughter also has a special scar. The doctors are telling me because “You can say now that this time with my daughter has been like life in a of this surger y and the medicines, my daughter’s body is already circle – from birth to rebirth. I do believe God has a plan for each human working different than it used to. She’ll be able to live 20 years more. And being and a path that is written, and that each of us has to accomplish if science today starts creating more medicines, she might live 30 or 40 that journey. Because when the time comes, he’s going to ask for an years more. Now I don’t have the specific words to thank everyone. accounting. And what are we going to say to him?” Since Roosevelt Hospital is the national hospital, I don’t have to worry H E A LT H C A R E P E R S P E C T I V E S : L I F E I N A C I R C L E 15

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    HEALTHCARE PORTFOLIO In 2011, our products reached more than 1.1 billion patients around the world, according to internal estimates. While healthcare remains a growth industry, both positive and negative trends are affecting the way we operate. Rapid aging of the population, greater access to healthcare in emerging markets and advances in science create opportunities to enhance the lives of patients. At the same time, an uncertain economy, pricing pressures, regulatory issues and patent expirations exert downward pressure. Tensions will grow as healthcare spending outpaces economic growth. Novartis is a leader in navigating these pressures and meeting changing customer needs. Our strategy of focused diversification helps us to fully leverage the changes in our industry while balancing risk. CONTENTS HEALTHCARE PORTFOLIO Healthcare Portfolio Overview 17 Pharmaceuticals 18 Novartis Institutes for BioMedical Research 29 Alcon 34 Sandoz 40 Vaccines and Diagnostics 46 Consumer Health 52 16 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    HEALTHCARE PORTFOLIO OVERVIEW 1 2011 NET SALES BY SEGMENT 2011 CORE OPERATING INCOME 3 BY SEGMENT (% and in USD millions) (% and in USD millions) Pharmaceuticals 56 32 508 Pharmaceuticals 61 10 040 Alcon 17 9 958 Alcon 21 3 492 Sandoz 16 9 473 Sandoz 12 1 921 Vaccines and Diagnostics 3 1 996 Vaccines and Diagnostics 1 135 Consumer Health 8 4 631 Consumer Health 5 873 Total 58 566 Corporate Expenses, net – 552 Total 15 909 2011 NET SALES BY REGION AND SEGMENT (% and in USD millions) Pharmaceuticals Alcon Sandoz Vaccines and Diagnostics Consumer Health United States 31 9 973 38 3 810 35 3 300 37 737 30 1 405 Europe 36 11 595 29 2 835 47 4 445 33 668 43 1 964 Asia/Africa/Australasia 24 7 928 22 2 207 11 1 064 19 373 17 782 Canada and Latin America 9 3 012 11 1 106 7 664 11 218 10 480 Total 32 508 9 958 9 473 1 996 4 631 NET SALES BY SEGMENT 2 CORE OPERATING INCOME 3 BY SEGMENT 2 (Index: 2006 = 100%; Alcon only consolidated from August 25, 2010. (Index: 2006 = 100%; Alcon only consolidated from August 25, 2010. However, Alcon 2011 growth rate is based on pro forma full year data for 2010) However, Alcon 2011 growth rate is based on pro forma full year data for 2010) 300 300 250 250 200 200 150 150 100 100 50 50 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 Pharmaceuticals Alcon Sandoz Vaccines and Diagnostics Consumer Health 1 Data since 2009 has been restated to reflect new segment allocation introduced in 2011 as explained in detail on page 159. 2 2006-2011 for Consumer Health only includes OTC and Animal Health 3 Core operating income eliminates the impact of acquisition-related factors and other significant exceptional items. These adjustments are explained in detail starting on page 179. 2 | GROUP REVIEW 1 6 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 17 H e athc are Por t fo lio O ve r view

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    PHARMACEUTICALS OVERVIEW KEY FIGURES PORTFOLIO REJUVENATION (in USD millions, unless indicated otherwise) (Share of sales from recently launched products 1 in %) 2011 20101 2008 2009 2010 2011 Net sales 32 508 30 306 26 331 28 287 30 306 32 508 Operating income 8 296 8 471 +6 28 +5 Return on net sales (%) 25.5 28.0 +7 22 17 Core operating income 2 10 040 9 586 10 Core return on net sales (%) 30.9 31.6 Core Research & Development 2 6 860 6 344 As % of net sales 21.1 20.9 Free cash flow 10 789 10 355 Net operating assets 13 696 15 212 Additions to property, plant & equipment 3 1 041 777 Number of associates (FTE) 4 60 527 59 409 1 Restated to reflect new segment allocation introduced during 2011 as explained in detail on Recently launched products page 159. 2 Core operating income eliminates the impact of acquisition-related factors and other significant Established products exceptional items. These adjustments are explained in detail starting on page 179. 1 Major products launched since 2007 including Lucentis, Tasigna, Exjade, Sebivo/Tyzeka, Exforge, 3 Excluding impact of business combinations Galvus, Aclasta/Reclast, Cubicin, Exelon Patch, Afinitor/ tor Votubia, Tekturna/Rasilez, Extavia, Onbrez, 4 Full-time equivalent positions at year end pt and Ilaris Gilenya, Fanapt NEWS IN 2011 Recently launched products drive portfolio rejuvenation across therapeutic franchises. Net sales rise 7% (+4% in constant currencies, or cc) to USD 32.5 billion. Europe (USD 11.6 billion, +2% cc), our largest region, maintains strong volume growth, more than offsetting the negative impacts of healthcare cost-containment measures and generic erosion. Our top six emerging markets (USD 3.2 billion, +7% cc) are led by double-digit growth in China and India. Growth is solid in Japan, Latin America and Canada; the US is flat, contributing 31% of net sales for the division. Products launched since 2007 (USD 9.2 billion) comprise 28% of division net sales, up from 22% in 2010. Key growth drivers include Lucentis, Tasigna, Afinitor, Gilenya, Exforge, Galvus, Exelon Patch, Exjade, Reclast/Aclasta and Onbrez Breezhaler. Operating income declines 2% (+4% cc) to USD 8.3 billion, following net exceptional charges including amortization of USD 1.7 billion (including USD 903 million for Tekturna/Rasilez in the fourth quarter). Core operating income advances 5% (+8% cc) to USD 10.0 billion. Constant currency core operating income margin expands by 1.4 percentage points due to continuing productivity efforts. However, this improvement was offset by a negative currency impact of 2.1 percentage points, resulting in a net decrease in core operating income margin of 0.7 percentage points to 30.9 % of net sales. Promising development pipeline, with more than 130 projects, achieves 15 major regulatory approvals in 2011. Gilenya, our multiple sclerosis treatment, gains approval in EU, Switzerland, Japan and many other countries. Afinitor/Votubia is approved in US and Europe for subependymal giant cell astrocytomas associated with tuberous sclerosis and advanced pancreatic neuroendocrine tumors. Lucentis gains two new EU approvals to treat diabetic macular edema and retinal vein occlusion. In late December, following the seventh interim review of data from the ALTITUDE study with Tekturna/Rasilez, Novartis announced that the trial was halted on the recommendation of the independent Data Monitoring Committee overseeing the study. 18 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    PHARMACEUTICALS Novartis Oncology has built one of the industry’s broadest pipelines of anticancer medicines, with more than 20 pivotal clinical trials ongoing. Oncology is a forerunner of the strategy at the Novartis Pharmaceuticals Division, using companion diagnostic tests to match the right drug with the right patient and explore the full potential of innovative medicines. On June 29, 2011, an Independent Data endothelial growth factor-targeted therapy Monitoring Committee met in Newark, New such as sunitinib or sorafenib. Those approv- Jersey, for a scheduled interim review of als were just the beginning of a bold program BOLERO-2, a clinical study of the Novartis of parallel clinical trials. medicine Afinitortor in treatment of advanced In October 2010 the US Food and Drug breast cancer. Administration (FDA) approved everolimus Because important studies like BOLERO-2 as the first medication for children and adults can take years to complete, interim analyses with subependymal giant cell astrocytoma are designed to assess safety data and crit- (SEGA), a benign brain tumor associated ical efficacy endpoints without comprising with the genetic disorder tuberous sclerosis. scientific integrity. The stakes are high. Inde- European regulators followed suit in pendent Data Monitoring Committees can September 2011. Moreover, during 2011 both recommend continuation, modification or the FDA and European regulators approved even termination when there is compelling tor as the first new treatment in nearly Afinitor evidence that one treatment is superior to three decades for patients with advanced the comparator. pancreatic neuroendocrine tumors, a rare but For BOLERO-2, the Committee’s verdict aggressive cancer for which there have been was unequivocally positive. The interim limited treatment options. review showed that the study’s primary Parallel with the BOLERO-2 study, endpoint had been met: Everolimus, the everolimus is being investigated in pivotal common name for Afinitor, tor, in combination tor studies for treatment of patients with HER2- with the aromatase inhibitor exemestane, positive advanced breast cancer. Clinical trials significantly extended time without tumor are also ongoing in liver cancer, as well as a growth in postmenopausal women with form of benign kidney tumors associated estrogen-receptor-positive but human with tuberous sclerosis complex. epidermal growth factor receptor 2 (HER2)- The success of everolimus underscores negative metastatic breast cancer, who had the rejuvenation of the product portfolio and failed initial endocrine therapy. The trial was commercial model at the Pharmaceuticals stopped early and data from BOLERO-2 Division’s Oncology Business Unit. Oncology formed the basis for worldwide regulatory sales rose 3% in constant currencies dur- submissions that are currently pending. ing 2011, buoyed by dynamic growth of Everolimus had previously been approved everolimus and Tasigna, a second-generation in Europe and the United States for multiple treatment for chronic myeloid leukemia. indications, from prevention of rejection in “The products that grew fastest are the ones organ transplants to treatment of advanced that are most important for our long-term renal cell carcinoma in patients whose disease success,” said Herve Hoppenot, President, has progressed after treatment with vascular Novartis Oncology. 2 | GROUP REVIEW 1 6 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 19 Phar m a c eutic al s

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    Growth of new products more than offset cancer medicines. That global infrastruc- loss of patent protection on Femara, a block- ture is essential to parallel development of buster treatment for breast cancer. Novartis multiple indications as seen in the Afinitor Oncology also is set to lose exclusivity on program. Recruitment of patients can be Zometa, another blockbuster medicine, by challenging, especially for studies of tar- 2013. “It is the nature of our business: We geted medicines in relatively uncommon receive patents in recognition of innovation, types of cancer. “We need to involve a large we develop medicines and grow sales during number of cancer centers around the world the years we have exclusivity, but ultimately to identify sufficient numbers of patients we lose them,” Mr. Hoppenot said. “Obviously, who have exactly the type of mutation or we have been preparing for this for several pathway abnormality we are looking for,” Mr. years.” Hoppenot said. Along with its new medicines, Novartis The Afinitor tor prototype of early studies of Oncology has a packed pipeline of targeted a drug in multiple parallel indications will be anticancer treatments undergoing clinical a common model for Novartis Oncology in trials. “The field of oncology is in the middle the future. “We would rather start earlier in of a complete revolution – it is a turning point multiple directions than follow a traditional, in treating cancer,” Mr. Hoppenot said. “We sequential approach to development,” Mr. are learning to treat these patients intelli- Hoppenot added. “Speed is crucial – there gently. And if we are successful in following will be competition for each indication.” the direction in which science is leading us, And Novartis Oncology is a forerunner there is enormous potential to transform of the strategy at the Pharmaceuticals treatment of cancer in the same way anti- Division. “The whole idea of matching the biotics changed the world in the 20th century right drug with the right patient at the right or the first effective medicines changed HIV / dose and the right time was really born out AIDS from a deadly disease to one with of Oncology,” said David Epstein, Division which patients could live relatively normal Head, Novartis Pharmaceuticals, and mem- lives for a long time.” ber of the Executive Committee of Novartis. Just as everolimus has already won “There are multiple lessons from Oncology approval for multiple disease indications, that we are applying to our expanding port- Mr. Hoppenot believes cancer treatments folio of specialty medicines. One is the impor- in the future will build sales through layers tance of understanding genetics, and how of indications for use in specific patient each patient is different and responds indi- populations. “Breakthroughs in the future vidually to a medicine. That puts a premium will be drugs where we understand the bio- on use of a companion diagnostic test to logical target very well, understand the ensure the drug prescribed hits the path- mechanism of action very well and have way that is actually responsible for the developed diagnostic tools to identify the patient’s disease. We also are developing right patients to be treated with these novel technological interventions such as remote products,” he added. monitoring to optimize the outcome of Meanwhile, signifi cant investment in treatment for patients. And just as with recent years has strengthened development r, Pharmaceuticals plans to conduct Afinitor, teams in countries such as Japan and China, broad development programs, including which traditionally lagged Europe and North parallel clinical trials in multiple indica- America in testing and approval of new tions, for most of our drugs.” 20 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    TRANSLATIONAL MEDICINE patients who have genetic alterations in the been approved in more than 70 countries The emerging wave of targeted therapies PI3 kinase pathway,” Dr. Weber explained. for use in kidney and heart transplantations. refl ects a modern view of cancer as a “With our newest PI3 kinase inhibitor, we By the late 1990s, however, Novartis disease caused by genetic defects in key opened the Phase I study only to patients researchers began to explore the potential molecular pathways. These pathways play with PI3 kinase pathway mutations, an of everolimus in treatment of cancer. an important role in cell growth and develop- approach that to our knowledge has not Normally, cells keep the machinery respon- ment in normal cells. Sometimes, however, been taken before. Despite concern that sible for growth and proliferation under tight these pathways can be abnormally activated patient selection would slow down our control, but the PI3 kinase/mTOR pathway or deregulated by genetic changes, leading studies, accrual has gone exceptionally well. is activated by genetic mutations affecting to the uncontrolled cell proliferation charac- External investigators think it is the right many different nodes. Everolimus works teristic of cancer. Breakthroughs such as thing to do for patients and for drug devel- against different types of cancer in which Gleevec/Glivec – the pioneering medicine opment, and have been fully behind us.” activation of the mTOR pathway is a common from Novartis for treatment of chronic One challenge for both standard chemo- feature. “mTOR is located strategically at the myeloid leukemia, gastrointestinal stromal therapies and targeted anticancer agents bottom of multiple signaling pathways in the tumors and other types of rare tumors – is that some patients fail to respond or even- cell,” Dr. Weber said. “Regardless of the demonstrated how targeting an underlying tually develop resistance to treatment. The exact genetic alteration upstream, all roads genetic defect could halt or delay progres- BOLERO-2 study demonstrated the value lead into mTOR.” sion of cancer and keep a large proportion of combination therapy in overcoming Tuberous sclerosis complex, the inher- of patients in remission for years. resistance. “Signaling pathways talk to ited brain disorder, offers a model of aber- Novartis Oncology has built one of the each other, and sometimes inhibiting one rant activation of mTOR and the therapeutic industry’s broadest pipelines of targeted pathway will trigger activation of a backup benefit of mTOR inhibition. TSC1 and TSC2 anticancer medicines. Innovative therapies pathway,” Dr. Weber added. “We know that are nodes in the PI3 kinase/mTOR signaling with almost a dozen different mechanisms with few exceptions, optimal treatment is cascade located upstream of mTOR, and of action are currently being tested in going to require combinations, so we are their normal function is to keep the mTOR more than 20 pivotal clinical trials. Devel- moving forward quickly with combinations switch in the inactive position. Mutations in opment programs for these targeted thera- of our new drugs, particularly with our PI3 TSC1 or TSC2 activate the mTOR pathway, pies are as groundbreaking as the drugs kinase inhibitors.” leading to abnormal growth of tumors in the themselves. brain, kidneys, skin and other vital organs. Oncology Translational Medicine is re- MASTER SWITCH Regulatory applications for everolimus in sponsible for testing new drugs in carefully Everolimus inhibits mammalian target of treatment of SEGA associated with tuberous selected subgroups of patients based on the rapamycin, or mTOR. A biological master sclerosis were based on a study conducted molecular target of the compound. “Novartis switch located at the intersection of several by Cincinnati Children’s Hospital Medical has an unwavering commitment to patient major signaling pathways, mTOR controls Center in which nearly a third of patients selection,” said Barbara Weber, M.D., Global key cellular functions ranging from metab- experienced a reduction of 50% or greater Head, Oncology Translational Medicine, at olism and growth of cells and tumor cell in the size of their largest SEGA tumor Novartis. “All our new compounds are being division, to angiogenesis, or growth of new after six months of treatment. None of the developed with a strategy for enriching the blood vessels. patients developed a new SEGA tumor while study with patients most likely to benefit Everolimus was synthesized in 1992, and receiving everolimus. from the new drug.” development of the new medicine pro- One example is the portfolio of PI3 gressed simultaneously with elucidation of DRIVING TUMOR GROWTH kinase inhibitors, a promising class of anti- the mTOR pathway. Initial preclinical testing Some breast tumors need hormones to grow cancer drugs, where Novartis Oncology is showed that inhibition of mTOR suppressed and for more than a century, the hormone developing three compounds in parallel. the immune system, and development estrogen has been linked with progression “Scientific data indicate strongly that PI3 confirmed that potential. Under the brand of breast cancer, driving tumor growth and kinase inhibitors give the greatest benefit for names Certican and Zortress, everolimus has cell proliferation in an estimated 70% of all 2 | GROUP REVIEW 1 6 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 21 Phar m a c eutic al s

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    breast cancer cases. When diagnostic assays and downstream activation of mTOR,” Dr. Riva show that a breast tumor has estrogen said. “Preclinical data indicate that if we receptors, hormone therapy is most often inhibit the mTOR pathway, we may achieve recommended as a treatment option. a synergistic effect with Herceptin®.” The “Biology always told us that activation BOLERO-1 and BOLERO-3 studies are of mTOR is linked with development of resis- recruiting well, Dr. Riva added, and Novartis tance to hormonal therapy, and evidence expects to disclose results of the studies by from preclinical studies confirmed that late 2012 or early 2013. hypothesis. Based on this evidence we took the risk of running a large Phase III trial,” PRE-EMPTING RESISTANCE explained Alessandro Riva, M.D., Head of Studies testing everolimus in combination Global Development and Medical Affairs, therapy reflect a broader challenge: Inhibi- Novartis Oncology. “The success of BOLERO-2 tion of mTOR appears to activate other could change the treatment paradigm for pathways that can lead to emergence of estrogen-receptor-positive metastatic breast resistance. One way to pre-empt resistance cancer; in the future, we expect Afinitor tor to could be to target two nodes in the PI3 become a key component in combination kinase/mTOR pathway or even two separate therapy to avoid the onset of resistance,” he pathways simultaneously. added. “The idea underlying combination tor is also being tested in a different Afinitor therapy is that, if we could hit the cancer cell combination for treatment of another form a little bit harder in a smart way, its defenses of breast cancer caused by a protein called should fall apart,” said David Lebwohl, M.D., HER2, which promotes the growth of tumor Global Program Head Afinitor. “We are cells. HER2-positive tumors tend to be trying to learn where we see activity and more aggressive than other types of breast what combinations make sense.” cancer, and they are less responsive to One combination to be tested will be hormone treatment. everolimus and a PI3 kinase inhibitor. PI3 A therapy called trastuzumab (marketed kinase is a critical regulator of cell growth by Roche Holding AG under the brand name and survival. “mTOR is the lowest of the Herceptin®) has transformed treatment of potential targets in the pathway, so going HER2-positive cancer, but a recent editorial upstream is a natural progression,” said in the Journal of Clinical Oncology observed Samit Hirawat, M.D., who leads the PI3 kinase that many patients with HER2-positive inhibitor development program. breast cancer will either not respond to But there are also potential pitfalls. “As Herceptin® or develop resistance to the drug. you go higher and higher above mTOR in “Understanding and overcoming resistance the pathway, you have to start screening is a critical step toward the improvement of patients for the specifi c genetic defect outcomes for this subtype of breast cancer,” targeted by your drug,” Dr. Hirawat observed. the authors wrote. In patients with either overexpression of Novartis is conducting two trials of the HER2 or mutations in the Epidermal Growth ® combination Afinitor/Herceptin or or/Herceptin in treatment Factor Receptor, “therapy is only effective of HER2-positive breast cancer. “Just as with when the receptor is overexpressed or when estrogen-receptor-positive breast cancer, there is presence of an activating mutation biology clearly tells us that patients who in the tumor,” he added. carry amplification of HER2 also have a link For patients entered into studies with with activation of the PI3 kinase pathway PI3 kinase inhibitors, tissue is collected and 22 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    prospectively analyzed for several bio- options. Novartis licensed INC424 from tein needed to fold proteins into their active markers. “Patients are stratified according Incyte Corp. for development and potential shapes. Proteins encoded by mutant cancer to whether they carry mutated versions of commercialization outside the United States. genes may be particularly dependent on the gene encoding PI3 kinase, or inactive The European Commission has granted HSP90 – thus cancer cells driven by those versions of PTEN, a tumor suppressor gene INC424 orphan drug status for treatment of mutations may be susceptible to killing by often dysfunctional in cancer patients,” Dr. myelofibrosis. Under Europe’s orphan drug AUY922. Several genes commonly mutated Hirawat explained. Other biomarkers also rules, INC424 would be entitled to an expe- in lung cancer are among those that may be are included in study protocols but haven’t dited regulatory review and, if approved, a sensitive to HSP90 inhibitors, and Novartis been publicly disclosed. period of market exclusivity. Oncology has promising early data in this Emulating the Afinitor tor model, the clinical INC424 inhibits the Janus kinase (JAK1 common cancer. program for PI3 kinase inhibitors is planned and JAK2) pathway, which regulates produc- The success of targeted anticancer ther- to include parallel trials in multiple indica- tion of blood cells. Abnormal signaling leads apies has reinforced confidence in the new tions, ranging from endometrial and lung to an enlarged spleen and other severe compli- development paradigm, particularly patient cancers to breast cancer and glioblastoma, cations. INC424 is also being investigated in preselection and the use of combination the most common form of brain tumors. The clinical trials for treatment of polycythemia therapies even before resistance to treat- three PI3 kinase inhibitors have distinctive vera, a rare blood disorder in which the bone ment has actually been observed. “Patient mechanisms of action. BKM120 is a PI3 marrow makes too many red blood cells. preselection has become commonplace in kinase inhibitor that targets all four types of LDE225 is a compound that inhibits the field and thus is more readily accepted PI3 kinase found in human cells. BEZ235 is a Smoothened (Smo), a node in the hedgehog by oncologists than specialists in other dis- PI3 kinase inhibitor that also inhibits the pro- pathway. Smo is normally active during fetal ease areas,” Dr. Weber said. “The state of the teins that make up mTOR complexes, known development and inactive in adult cells. science is so far along that we are in a position as mTORC1 and mTORC2. Everolimus blocks Abnormal activation of the pathway by to be able to really take advantage of that only the mTORC1 complex, for example, and mutations in Smo or other key genes is a knowledge in a way that isn’t possible quite preclinical data indicate that cancer cells are cause of several kinds of cancer. Mutations yet in other therapeutic areas.” less able to evade a drug that hits both in Smo are common in medulloblastoma, She added: “Of course the clinical value mTORC1 and mTORC2. the most common malignant brain tumor of of that knowledge often is enhanced by having BKM120 and BEZ235 are currently in children. LDE225 is being tested in treat- a good drug to test. Oncologists have seen Phase II trials. “This is the start of a great new ment of medulloblastoma in both children many examples in which preselection has era,” said Mark C. Fishman, M.D., President and adults, with promising early results. meant the difference between a drug working of the Novartis Institutes for BioMedical Another targeted anticancer compound or not working in trials. What’s changing Research and member of the Executive discovered in Novartis labs is PKC412, cur- things for cancer patients is getting good Committee of Novartis. “The PI3 kinase/ rently at a late stage of Phase III trials for drugs – and the right combinations – into mTOR pathway is activated abnormally in treatment of acute myeloid leukemia in the right people at the right time.” one-third of all solid tumors. Drugs that hit patients who carry a mutated version of the this pathway have the potential to become gene encoding FLT3. FLT3 is mutated in the staple of cancer therapy.” approximately one-third of acute myeloid leukemia patients, and PKC412 inhibits PIPELINE PROGRESS another molecular target believed to play For all the promise of PI3 kinase inhibitors, important roles in the pathogenesis of the Novartis Oncology passed major milestones disease. The Phase III study enlisted the across its broad pipeline during 2011. Results efforts of three cooperative trial groups in from two pivotal Phase III studies demon- different parts of the world to bolster the strated the positive effects of ruxolitinib, a recruitment of patients with this genetic drug also known by the research number alteration, which is relatively uncommon. INC424, in treating patients with myelofibrosis, AUY922 is a compound that inhibits heat a blood cancer with limited therapeutic shock protein 90 (HSP90), a chaperone pro- 2 | GROUP REVIEW 1 6 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 23 Phar m a c eutic al s

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    PIPELINE Project /product Common name Mechanism of action Novartis is consistently rated as having one of the ACZ885 canakinumab Anti-interleukin-1ß monoclonal antibody industry’s most respected development pipelines, with 134 projects in clinical development. Several of these AEB071 sotrastaurin Protein kinase C inhibitor pharmaceutical projects, which include potential uses of new molecular entities as well as additional indica- AFQ056 mavoglurant Metabotropic glutamate receptor 5 antagonist tions or new formulations for marketed products, are AIN457 secukinumab Anti-interleukin-17 monoclonal antibody for potentially best-in-class and first-in-class medicines that would significantly advance treatment standards. ATI355 – Anti NOGO 3-A mAb AUY922 – ATP-competitive non geldanamycin This table provides an overview of selected pharma- inhibitor of HSP 4 90 ceutical projects in confirmatory development. BCT197 – Anti-inflammatory agent BEZ235 – PI3K /mTOR 5 inhibitor For a glossary of terms, see page 28. BGS649 – Aromatase inhibitor BKM120 – PI3K inhibitor CAD106 – Beta-amyloid-protein therapy DEB025 alisporivir Cyclophilin inhibitor Exjade deferasirox Iron chelator Gilenya fingolimod Sphingosine-1-phosphate (S1P) receptor modulator HCD122 – Anti-CD40 monoclonal antibody INC424 ruxolitinib Janus kinase (JAK) inhibitor LBH589 panobinostat Histone deacetylase inhibitor LCI699 – Aldosterone synthase inhibitor LCQ908 – Diacylglycerol acyl transferase-1 inhibitor LCZ696 – Angiotensin receptor-neprilysin inhibitor (ARNI) LDE225 – Smoothened receptor / hedgehog signaling inhibitor LFF571 – Bacterial elongation factor Tu (EFTu) inhibitor LGT209 – Lipid modulator 1 Refers to fi rst planned fi ling date in a major market (US or EU) for lead indication 2 Refers to current phase of lead indication only 3 Neurite outgrowth inhibitor 4 Heat shock protein 5 Mammalian target of rapamycin 24 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    Potential indication/indications Therapeutic area Route of administration Planned submission dates 1 Current phase 2 Gouty arthritis (lead indication), systemic onset Integrated Hospital Care, Critical Care Subcutaneous Submitted US, EU Submission juvenile idiopathic arthritis, diabetes mellitus, secondary prevention of cardiovascular events Prevention of organ rejection after trans- Integrated Hospital Care Oral ≥ 2016 II plantation (kidney, liver), psoriasis Fragile X syndrome (lead indication), L-dopa Neuroscience Oral 2013 II induced dyskinesia in Parkinson’s disease Psoriasis (lead indication), arthritidies – rheumatoid Integrated Hospital Care, Neuroscience Subcutaneous, intravenous 2013 III arthritis, ankylosing spondylitis, psoriatic arthritis, multiple sclerosis Spinal cord injury Neuroscience Intrathecal spinal infusion ≥ 2016 I Solid tumors Oncology Intravenous ≥ 2016 II Chronic obstructive pulmonary disease Primary Care Oral ≥ 2016 II Solid tumors Oncology Oral 2014 II Obese hypogonadotropic hypogonadism Critical Care Oral ≥ 2016 II Endometrial cancer Oncology Oral 2014 II Alzheimer’s disease Neuroscience Subcutaneous, ≥ 2016 II intramuscular Chronic hepatitis C Integrated Hospital Care Oral 2013 III Non-transfusion dependent thalassemia Oncology Oral Submitted US, EU Submission Chronic inflammatory demyelinating neuropathy Neuroscience Oral 2014 II Hematological tumors Oncology Intravenous ≥ 2016 I Myelofibrosis (lead indication), polycythemia vera Oncology Oral Submitted US, EU Submission Relapsed or relapsed-and-refractory multiple Oncology Oral 2013 III myeloma (lead indication), hematological cancers Solid tumors Oncology Oral ≥ 2016 II Metabolic diseases Critical Care Oral 2014 II Heart failure (lead indication), hypertension Critical Care, Primary Care Oral 2014 III Basal cell carcinoma Oncology Oral 2014 III Clostridium difficile infection Integrated Hospital Care Oral ≥ 2016 II Hypercholesterolemia Critical Care Subcutaneous ≥ 2016 II continued on next page 2 | GROUP REVIEW 1 6 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 25 Pip e lin e

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    PIPELINE (CONTINUED) Project /product Common name Mechanism of action This table provides an overview of selected pharma- Lucentis ranibizumab Anti-VEGF 6 monoclonal antibody ceutical projects in confirmatory development. MEK162 – MEK 8 inhibitor For a glossary of terms, see page 28. NIC002 – Nicotine Qbeta therapeutic vaccine NVA237 glycopyrronium bromide Long-acting muscarinic antagonist PKC412 midostaurin Signal transduction inhibitor QAW039 – Anti-inflammatory agent QMF149 indacaterol, Long-acting beta-2 agonist mometasone furoate and inhaled corticosteroid QTI571 imatinib mesylate Protein tyrosine kinase inhibitor QVA149 indacaterol, Long-acting beta-2 agonist and glycopyrronium bromide long-acting muscarinic antagonist RAD001 (Afinitor) everolimus mTOR 5 inhibitor RLX030 – Vascular modulator SOM230 pasireotide Somatostatin analogue Tasigna nilotinib Signal transduction inhibitor TKI258 dovitinib lactate VEGFR 1-3 11, FGFR 1-3 12, PDGFR 13 and angiogenesis RTK 14 inhibitor Xolair omalizumab Anti-IgE monoclonal antibody Zortress/Certican everolimus mTOR inhibitor 6 Vascular endothelial growth factor 7 Choroidal neovascularization (CNV) and macular edema (ME) secondary to conditions other than age- related macular degeneration, diabetic macular edema, retinal vein occlusion and pathologic myopia 8 Combination of mitogen activated protien kinase (MAP) and extracellular signal-regulated kinase (ERK) 9 Angiomyolipomas 10 Transmembrane receptor tyrosine kinase 11 Vascular endothelial growth factor receptor 12 Fibroblast growth factor receptor 13 Platelet-derived growth factor receptor 14 Receptor tyrosine kinase 26 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    Potential indication/indications Therapeutic area Route of administration Planned submission dates 1 Current phase 2 Pathological myopia, choroidal neovascularization Ophthalmology Intravitreal 2012 III and macular edema 7 Solid tumors Oncology Oral ≥ 2016 II Smoking cessation Primary Care Subcutaneous ≥ 2016 II Chronic obstructive pulmonary disease Primary Care Inhalation Submitted EU, US (TBD) Submission Aggressive systemic mastocytosis Oncology Oral 2013 II (lead indication), acute myeloid leukemia Asthma Primary Care Oral ≥ 2016 II Asthma, chronic obstructive pulmonary disease Primary Care Inhalation 2015 II Pulmonary arterial hypertension Critical Care Oral 2012 III Chronic obstructive pulmonary disease Primary Care Inhalation 2012 III Tuberous sclerosis complex – AML 9 (lead indica- Oncology Oral Submitted US, EU (2012) Submission tion), advanced ER+HER2-breast cancer, breast cancer HER2-over-expressing first line, breast HER2-over-expressing second /third line, hepato- cellular carcinoma, lymphoma Acute heart failure Critical Care Intravenous 2013 III Cushing’s disease (lead indication), acromegaly, Oncology Subcutaneous, Submitted EU, US (2012) Submission carcinoid syndrome intramuscular Metastatic melanoma with c-KIT 10 mutation Oncology Oral 2014 II Renal cell cancer, solid tumors Oncology Oral 2013 III Chronic idiopathic urticaria Critical Care Subcutaneous 2013 III Prevention of organ rejection – liver Integrated Hospital Care Oral Submitted US, EU Submission 2 | GROUP REVIEW 1 6 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 27 Pip e lin e

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    PIPELINE GLOSSARY Confirmatory development Phase I Projects for which a positive proof of concept has been established First clinical trials of a new compound, generally performed in a and are currently in either post proof-of-concept clinical trials small number of healthy human volunteers, to assess the clinical (Phase I /II / III) or under review by the regulatory agencies for safety, tolerability, as well as metabolic and pharmacologic prop- the purpose of granting marketing authorization (submission). erties of the compound. Project /product Phase II Project refers to the Novartis development project reference code Clinical studies that are performed on patients with the targeted (combination of three letters and three numbers), used for disease, with the aim of continuing Phase I safety assessment in a projects in development. Product refers to the brand name for larger group, assessing the efficacy of the drug in the patient popu- a marketed product. lation and determining the appropriate doses for further testing. Common name Phase III Official international non-proprietary name or generic name for Large-scale clinical studies with several hundred to several an individual molecular entity as designated by the World Health thousand patients, to establish the safety and effectiveness of Organization. the drug for regulatory approval for indicated uses. Phase III trials also may be used to compare a new drug against a current Mechanism of action standard of care in order to evaluate the overall benefit-risk Specific biochemical interaction with a molecular target such as relationship of the new drug. a receptor or enzyme, through which a drug substance produces its pharmacological effect. Submission An application for marketing approval has already been filed Potential indication /indications with one or both of the following regulatory agencies: FDA Disease or condition for which a compound or marketed product (United States), EMA (European Union). Novartis has not yet is in development and is being studied as a potential therapy. received marketing authorization from both regulatory agencies.1 The application contains comprehensive data and information Route of administration gathered during the animal studies and human clinical trials con- Path by which a medicinal preparation is administered into the ducted through the various phases of development of the drug. body, such as oral, subcutaneous or intravenous. 1 Filings that have received approval in one of the markets (either US or EU) but are awaiting approval in the other market are included in the preceding table. 28 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    NOVARTIS INSTITUTES FOR BIOMEDICAL RESEARCH Regenerative medicine is an emerging field focusing on therapies that repair damage caused by disease or aging. In line with a distinctive pathways strategy, the Novartis Institutes for BioMedical Research are racing to discover new medicines or proteins that can make stem cells or other types of progenitor cells perform their proper role and enhance regeneration. Since 2009 the Novartis Institutes for tissues damaged by injury or aging,” said BioMedical Research (NIBR) have stepped Mark C. Fishman, M.D., President of NIBR up research programs focusing on regen- and member of the Executive Committee of erative medicine. Novartis. Regenerative medicine is a rapidly This regenerative medicine initiative evolving, interdisciplinary fi eld aiming to builds on NIBR’s distinctive pathways develop therapies that repair or replace strategy. Single proteins are the building organs and tissues damaged by disease or blocks of life, assembled in a limited number aging. In recent years, the fi eld has been of core signaling pathways that regulate revolutionized by breakthroughs in under- critical cellular functions. These pathways standing the biology and ex vivo cultivation are conserved through evolution in highly of stem cells, a remarkable category of cells reproducible ways. NIBR scientists are with singular properties. A stem cell is self- racing to decipher these pathways – and renewing – able to divide and generate an their nodes – in great enough detail to pro- exact copy of itself numerous times. Each vide new and proprietary targets for drugs. of these cells retains the potential to differ- As well as having direct therapeutic entiate into one of several different cell types potential, stem cells also provide powerful under appropriate conditions. new tools for drug discovery. “We can do It was originally thought that stem cells experiments today that were not possible as occurred only in a few specialized locations recently as two or three years ago,” said in the body such as bone marrow, but in Jeffrey Porter, Ph.D., Global Head of the recent years, scientists have identified stem Developmental and Molecular Pathways cells in many mature tissues. At least in platform. One example is the recent break- theory, these “local” stem cells represent a through that allows scientists to culture in readily available source of replacement cells the laboratory a complete stem cell niche – and tissues. Increasingly sophisticated the specialized, carefully controlled micro- reprogramming and differentiation tech- environment in which cells live. “Under the niques are emerging to generate desired but right conditions it is possible to generate often difficult-to-obtain cell populations. what we call organoids – in essence, mini- “During development, stem cells provide organs that elaborate the exact structures the precursors for many cells of an organ. that you see in human tissue,” Mr. Porter said. These cells are guided to adopt their proper “To a scientist, all the action is there – fate and position within organs by signaling the system is alive, well and firing. We use pathways. Our goal is to find medicines that organoids to ask big questions: What could capture these pathways and use intrinsic stimulate pathways and turn up production residual stem cells in the adult to repair of stem cells or progenitor cells and make it 2 | GROUP REVIEW 1 6 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 29 N ov ar ti s Ins titute s fo r B io M e dic al Re s e arc h

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    possible to rebuild tissue? What would make aging is an increasingly prevalent medical 50. By contrast to cachexia, sarcopenia is more differentiated cells and what would condition driven by loss of muscle, a process not currently recognized as a disease. Yet stop the system? It allows us to look at regen- termed sarcopenia. the estimated prevalence of sarcopenia- eration in a very controlled fashion.” With an aging world population, unmet related disability is between 5% and 10% Although stem cell technology and path- need can only increase. “After the age of 50, among people over age 60, and manage- way analysis have elevated regenerative people get weaker due to the loss of certain ment of the condition costs healthcare medicine to a new level, Novartis has been types of muscle cells – including stem cells systems billions of dollars annually. Falls active in regenerative medicine for years – – and a variety of muscle proteins seem to leading to significant or severe injury for example, through discovery and devel- diminish over the course of a lifetime,” Dr. requiring hospitalization could be reduced opment of medicines to treat osteoporosis, Fishman observed. “We do not fully under- by improving muscle mass and function in a progressive bone-thinning disease. Bone stand why muscle loss occurs in aging but frail patients. When frailty eventually metabolism is a dynamic process in which we believe blocking the pathway that nor- becomes so significant that it interferes with osteoclasts, a class of specialized cells, mally limits muscle growth, in a manner the ability to live independently, institu- remove old bone while osteoblasts rebuild analogous to blocking sclerostin in bone, will tionalization in assisted living incurs addi- new bone. “Peak bone density is usually be beneficial. We are currently in the clinic tional costs and leads to decrease in quality attained around 30 years of age, after which with early-stage therapies to block activity of life. the balance gradually changes and we start of that pathway and hopefully restore Over the last decade, research has dem- to break down more than we build up,” said muscle lost to aging.” onstrated a coordinated set of signaling Michaela Kneissel, Ph.D., Head of NIBR’s pathways that can modulate muscle mass. Bone Research Group. An effective medicine MUSCLE WASTING In an article published in the Annals of the like Reclast/Aclasta slows the activity of Loss of muscle is a serious consequence of New York Academy of Sciences, David Glass, osteoclasts to improve the balance between many chronic diseases – and aging itself – M.D., head of NIBR’s muscle disease group, breakdown and growth of bone. leading to weakness, loss of independence and Ronenn Roubenoff, M.D., MHS, head Current research efforts by NIBR to and increased risk of death. Millions of of Musculoskeletal Translational Medicine at stimulate true regeneration of bone focus people around the world are affected by NIBR, described how cachexias eventually on the Wnt pathway – in particular a protein cachexias associated with chronic obstruc- signal into “conserved pathways that mod- called sclerostin that impedes signaling tive pulmonary disease (COPD), cancer, ulate the breakdown of the sarcomere, through the Wnt pathway and inhibits heart failure and HIV/AIDS. Cachexia leads perturb protein synthesis and block the growth of new bone. Genetic analysis has to involuntary loss of more than 5% of body differentiation of the satellite [stem] cell into shown that people with mutated versions weight and muscle over a period of only a a multinucleated [muscle] fiber.” of the gene encoding sclerostin have par- few months. Emerging most often in incur- Studies in several animal species have ticularly heavy and strong skeletons. A able patients toward the end of life, cancer highlighted the role of a signaling pathway compound discovered by NIBR blocks ac- cachexia limits the intensity of chemo- induced by a protein called myostatin, which tivity of sclerostin to correct the imbalance therapy and is one of the most common ulti- activates a molecular brake on muscle in bone metabolism and spur regeneration mate causes of mortality in cancer patients. growth. “A breed of cattle known as Belgian of bone. This sclerostin inhibitor is currently Treatment for cachexia traditionally has Blue are double-muscled, the result of a being tested in proof-of-concept studies. been limited to improvement of diet and mutated version of the gene encoding A profound unmet medical need exists exercise. Patients with COPD and other myostatin, suggesting that inhibition of the for innovative medicines that enhance types of organ failure often are intolerant to myostatin pathway could release the brake regeneration in tissues other than bone. exercise, and inactivity exacerbates muscle and stimulate muscle growth,” observed Cachexia, the muscle wasting associated wasting. Brian Richardson, Ph.D., Global Head of with several severe diseases, afflicts millions Sarcopenia, the age-related loss of Musculoskeletal Diseases Research. of people around the world but remains skeletal muscle mass and function, occurs NIBR researchers have identified anti- largely untreated. Frailty associated with progressively in almost everyone over age bodies that interfere with this pathway, 30 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    and are investigating them in early clinical “Mucositis is the clinical indication, but Medicine for NIBR’s New Indication Discovery studies of patients who have muscle weak- we know nature is conservative, so the path- Unit. “Supporting cells in the inner ear are ness of different etiologies. ways involved in organogenesis or homeo- precursors one step removed from hair stasis in the intestine are likely to be central cells. You just need to turn on a switch and ACCELERATING RECOVERY to stem cell function in many tissues,” said in this case the switch is the Atoh1 gene.” Each year in the United States, more than Tewis Bouwmeester, Ph.D., who heads the In 2010 Novartis acquired rights to 80 000 patients receiving chemotherapy Developmental and Molecular Pathways GenVec’s hearing loss treatment based on or radiation therapy for cancer develop Group in Basel, Switzerland. “For this reason, Atoh1. It was a bold step: A number of mucositis, a painful inflammation and we believe that what we discover in mucositis major pharmaceutical companies, including ulceration of the mucous membranes lining has the potential to also be applied to regen- Novartis, had invested heavily in gene the digestive tract. Mucositis can become eration of other organs.” therapy programs that failed during the so severe that patients are forced to reduce 1990s. “One problem was that earlier gene dosage of chemotherapy – or even halt GENETIC SWITCH therapy projects were trying to run before treatment. NIBR continues to closely monitor progress they could walk,” Dr. Klickstein acknowl- NIBR’s mucositis program attempts to in more futuristic applications such as cell edged. “They wanted sustained, high level modulate stem cells to regenerate cells of therapy and gene therapy through alliances expression of the new gene, and exposed the the mucosa. Chemotherapy works by killing with academic groups and biotechnology entire body of patients to the risk of toxicity rapidly dividing cells, which includes tumor firms. With GenVec Inc., a biotech firm from vectors used for gene delivery.” cells but also the intestine, one of the most based in Gaithersburg, Maryland, NIBR is The Atoh1 therapy attempts to avoid regenerative tissues in the body that renews testing the frontier of gene delivery to many of those pitfalls. The replacement itself roughly every five days. restore hearing. gene is delivered directly into the inner Healing in mucosa is mediated by Hearing loss is increasingly afflicting ear, which is sealed off from the blood epithelial cells that are attracted to the site younger individuals as well as the elderly. circulation. Moreover the Atoh1 gene will of the ulcer and begin to cover the wound. One in six adults in Europe and the United be delivered through a single injection Growth factors that attract epithelial cells States suffers from hearing loss great enough rather than repeated administrations. Still, or enhance differentiation of amplifying to adversely affect daily life, and almost half delivery of therapeutic genes remains progenitor cells could accelerate recovery of adults over age 75 have hearing impair- challenging, and drug delivery to the inner or even be used preventively to strengthen ment. The most common cause of hearing ear is unprecedented. mucosal tissue prior to chemotherapy. loss is degeneration of sensory hair cells in Discovering the growth factors and the inner ear, resulting from infections, auto- other signaling proteins that stimulate immune disorders or aging. self-renewal and differentiation of local Hair cells are responsible for converting stem cells is a prime objective of NIBR’s sound into electrical signals sent to the brain regenerative medicine initiative. The muco- via the auditory nerve for processing. Loss sitis program is a prototype because the of hair cells is irreversible but preclinical stem cell system of the small intestine is experiments indicate that a gene known as among the best-defined of any body tissue. Atoh1 that triggers differentiation of NIBR scientists employ organoids as precursors into hair cells during embryonic cutting-edge screening systems to test a development can have the same effect on library comprising thousands of growth so-called “supporting” cells in adults – and factors and secreted proteins. Promising restore auditory function. “Atoh1 is a key lead compounds have emerged from the transcriptional regulator that activates the screening programs and are in early stages pathways that drive differentiation,” said of preclinical testing. Lloyd Klickstein, M.D., Head Translational 2 | GROUP REVIEW 1 6 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 31 N ov ar ti s Ins titute s fo r B io M e dic al Re s e arc h

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    No guarantees DR. THIERRY DIAGANA: “Why science? In the late 1960s, there was this “Now, many years later, what I’m doing at Novartis Institute for Tropical huge summit in Rome that produced reports on the challenges the world Diseases is struggling to translate our hypotheses into medicines, in the was facing: increasing populations, unchecked disease, the need for fight against what we call neglected diseases. Here we have programs for producing more food. When I read them, I was in junior high school. My tuberculosis and dengue, although malaria is a big chunk of what we’re teacher basically said that science was a place to solve some of these trying to do. Drug discovery is really a place where you are absolutely problems, so after that, I thought of science as maybe my calling. In high 100% dependent on multidisciplinary approaches. Biology, chemistry, school, I took more classes in physics and chemistry and biology, then pharmacology alone cannot solve the problems. As the head of the went on to major in biochemistry as an undergrad, before taking on a drug discovery unit, my role is to help scientists on the team from all Ph.D. in molecular genetics. At the end of my postdoc, I was preparing different disciplines to design experiments, gather data, interpret the to have my own small lab, get a grant, become an associate professor. results and help guide decisions on what to do next. There is a sense of So yes, academic research was something I could have done, but I urgency here, so those moments when you have to redo the experiments wanted to do something that was concretely applicable to people. can be disappointing. But I try to detach myself emotionally from these things, because I can only control what I can control. What we’re up “I was born in France, but my relatives are from West Africa and they against is the hard reality of science and biology. Sometimes we think live with malaria all the time, see it all the time, talk about it all the time. we’re right, but the parasite proves us wrong. It’s just part of their lives, essentially a disease of poverty. The critical period for malaria is from zero to five years old, when your immune “Now the public only hears about medicines that work. They are prob- system is not robust enough to protect you against the parasite. And if ably thinking: What’s so hard about this? You get some money, do the you develop the severe form of the disease, you have 24 hours to get research, and there it is, something that saves lives. Why can’t you do treated. Then the mortality rate shoots up, kids go into a coma. And it’s that again and again? I mean, we probably make tens of thousands of mostly kids, because the older people have seen it six, seven, 20 times, molecules to get one that works. Drug discovery is not like producing and have developed some sort of tolerance. There’s always a debate, the next model of a smartphone, where you put a lot of intelligent but the official statistic is that 800 000 people die from malaria each people in a room, put a timeline on it, and in two years have the product. year. Ninety percent of these people live in sub-Saharan Africa and most Launching a medicine has nothing in common with this. It’s a trial-and- are young kids, so my interest in the disease is not an abstract thing. error process. You have tremendous minds at work and tremendous technological resources, but there are no guarantees.” 32 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    H E A LT H C A R E P E R S P E C T I V E S : N O G U A R A N T E E S 33

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    ALCON OVERVIEW KEY FIGURES NET SALES GROWTH BY REGION1 (in USD millions, unless indicated otherwise) (in %) 2011 20101 Net sales 9 958 9 031 US 6 Operating income 1 472 1 181 Europe, Middle East and Africa 5 Return on net sales (%) 14.8 13.1 Japan 8 Core operating income 2 3 492 3 095 Core return on net sales (%) 35.1 34.3 Asia 17 Core Research & Development 2 869 826 Latin America and Canada 10 As a % of net sales 8.7 9.1 Total 7 Free cash flow 3 3 498 1 191 1 Net operating assets 3 43 792 46 253 2011 % net sales growth in constant currencies based on full-year 2010 pro forma fi gures Additions to property, plant & equipment 3; 4 354 193 Number of associates (FTE) 3; 5 22 987 22 108 1 2010 on a full year pro forma basis as explained in detail on page 184, except where otherwise indicated. 2 Core operating income eliminates the impact of acquisition-related factors and other significant exceptional items. These adjustments are explained in detail starting on page 179. 3 2010 on a restated basis as explained in detail on page 159. 4 Excluding impact of business combinations 5 Full-time equivalent positions at year end NEWS IN 2011 Integration of Alcon, CIBA Vision and certain ophthalmics products from Novartis Pharmaceuticals creates one global leader in eye care. Now the second-largest business in the Novartis portfolio, Alcon offers an extensive breadth of products serving the full life cycle of patient needs across eye diseases, vision conditions and refractive errors. Net sales of USD 10.0 billion rise 10% (+7% in constant currencies, or cc) on a pro forma basis, underpinned by strong growthin our ophthalmic pharmaceuticals franchise (+10% cc) and surgical franchise (+8% cc). Sales in our top six emerging markets increase 26% (+22% cc), led by China and India. The division also delivers strong operating leverage through realization of post-integration synergies (USD 75 million). Operating income of USD 1.5 billion rises 24% (+14% cc) on a pro forma basis, while core operating income of USD 3.5 billion increases by 13% (+9% cc) on a pro forma basis. Core operating income margin improves from 34.3% to 35.1% of net sales. The surgical portfolio is supported by uptake of advanced technology intraocular lenses, growth in emerging markets particularly with increased adoption of the phacoemulsification procedure for cataract surgery, as well as the global launch of the femtosecond cataract refractive laser. The surgical business strongly benefits from growth in the vitreoretinal and refractive categories, based on introduction of new industry-leading technology. The ophthalmic pharmaceuticals product category shows consistent growth despite generic entrants in the prostaglandin segment in glaucoma in selected markets, including the US. Key drivers of strong performance include combination glaucoma products DuoTrav and Azarga, and launch of new formulations of Travatan and DuoTrav solutions. In addition, allergy, anti-infective, anti-infl ammatory and dry eye products perform well. Through integration of CIBA Vision, the Alcon vision care business now has the broadest portfolio across contact lenses and lens care products. The Air Optix family of monthly contact lenses is a strong growth driver for the year. EU approval of Dailies Total 1, the first water gradient silicone hydrogel daily disposable contact lens, adds breakthrough innovation based on improved comfort. 34 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    ALCON In 2011 Novartis completed the acquisition of Alcon, Inc. Alcon now offers the widest spectrum of eye care products in surgical, ophthalmic pharmaceuticals and vision care on the market, presenting opportunities to accelerate growth and address urgent, unmet patient needs even more effectively than in the past. When the top 150 executives of the Alcon Institute of Eye Research estimates 2.5 billion Division assembled in Frisco, Texas, for their people worldwide will be affected by myopia first global leadership conference, the theme (nearsightedness) and 60 million people are – “Going Beyond Number One” – crystallized expected to have open-angle glaucoma, the their aspiration for the new division. second-leading cause of blindness after On April 8, 2011, Novartis completed the cataracts. acquisition of Alcon, Inc. – the global leader “These numbers are staggering, and as in eye care. The new Alcon Division includes an industry we have just started to address assets transferred from Novartis to reinforce these clinical needs. As the leader in eye its leadership in the eye care industry. care, Alcon must strive for breakthrough A portfolio of ophthalmic medicines from innovations that bring relief to millions of Novar tis augmented Alcon’s existing patients,” Mr. Buehler added. “There is pharmaceutical product range. In addition, potential to accelerate growth and access to the contact lens and lens care operations of treatment in each of our businesses and in CIBA Vision were combined with Alcon’s every region of the world. We have a unique portfolio of contact lens solutions to create opportunity to build a division where 1 plus 1 a stronger Vision Care business. With the translates into a number much bigger than 2.” merger, Alcon now offers the widest spectrum Alcon began to deliver on that promise of eye care products in surgical, ophthalmic during 2011. Pro forma net sales climbed pharmaceuticals and vision care on the 7%, measured in constant currencies, and market, and addresses the broadest range core operating income, 9%. Net sales in the of customer and patient needs. division’s six major emerging markets In his keynote speech at the leadership surged 26% (22% in constant currencies) conference, Alcon Division Head Kevin and now represent 10% of overall net sales. Buehler emphasized opportunities to Alcon’s advanced technology intraocular accelerate growth and address urgent, lenses to treat cataracts posted double-digit unmet patient needs even more effectively growth. Glaucoma medicines also posted than in the past. “Several hundred million significant growth and the Air Optix range of people around the world live with blindness contact lenses became Alcon’s fastest- or serious vision impairment,” Mr. Buehler growing brand worldwide. observed, “but 80% of all visual impairment The Alcon Division realized post- can be prevented, treated or cured.“ integration synergies of USD 75 million in Globally, uncorrected refractive errors are 2011, in line with the target of annual cost the main cause of visual impairment and savings of USD 350 million by 2013. In cataracts remain the leading cause of addition to merger-related savings, Mr. blindness. About 90% of the world’s visually Buehler held out prospects for further cost impaired live in developing countries, reductions in areas such as procurement. according to the World Health Organization. “Productivity has not been a core strength The burden of eye disorders is expected to at Alcon,” he acknowledged. “It is something grow as people live longer. By 2020, the that we hope to learn from Novartis. We 2 | GROUP REVIEW 1 6 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 35 A lc on

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    obviously can benefi t from procurement the world’s most pressing eye care needs, efficiency and also leveraging our manufac- the Alcon Division plans to invest more than turing footprint.” USD 5 billion in research and development Joseph Jimenez, Chief Executive Officer (R&D) over the next five years – the largest and member of the Executive Committee announced corporate commitment in the of Novartis, reiterated that the Alcon eye care industry. acquisition is primarily about long-term Alcon has R&D capabilities in both growth, not cost synergies. “In eye care, just medical devices and pharmaceuticals. The as with other Novartis segments, innovation new Alcon Division will have the benefit of is the key driver of success. The aging working closely with the Novartis Institutes population and areas of significant unmet for BioMedical Research (NIBR). As scien- medical need make it likely that eye care will tists from NIBR and Alcon R&D joined forces remain an industry with strong growth well during the integration process, they discov- into the future,” Mr. Jimenez said. “The ered how complementary their capabilities Alcon Division adds another growth plat- were. More than 20 joint teams have been form to Novartis, and we expect that, formed, including projects in which com- because of the complementary nature of pounds from NIBR are being evaluated in Alcon and Novartis, the companies will grow preclinical models developed by Alcon. faster together than they would have Alcon scientists have gained access to a otherwise.” range of technologies, from biologics to structural biology and high throughput “WE FOCUS ON THE EYE...” screening, that previously were only available Ophthalmology is a USD 30 billion-a-year through external partners. Glaucoma and industry growing about 5% per year. Alcon macular degeneration will be priority areas comprises three businesses – Surgical, for drug discovery efforts. Ophthalmic Pharmaceuticals and Vision Mr. Buehler also expects Novartis to help Care – covering the full life cycle of patient improve market access and reimbursement needs across eye diseases, vision conditions for Alcon products, especially in Europe, and refractive errors, with the exception of Japan and emerging markets. One example eyeglasses. Alcon ranks number one or is advanced technology intraocular lenses number two globally in sales across all three that are implanted during surgery to correct of its businesses. Strategic focus has been cataracts, or clouding of the eye’s lens as critical for the company’s success. “It is a result of aging or injury. In addition to cor- important to understand that we do one recting cataracts, Alcon’s range of AcrySof thing: We do the eye, and we do it well, intraocular lenses correct other vision dis- enhancing quality of life by improving orders such as presbyopia and astigmatism vision,” Mr. Buehler said. at the same time, enabling a patient to see Alcon has the largest sales force in the without glasses. eye care industry, with more than 5 000 sales For elderly patients in the United States, representatives worldwide. “We are going to the government pays the cost of the basic lead – and lead with a commanding share of cataract procedure but patients can choose voice – in any channel that uses eye care an advanced lens to address those additional products,” Mr. Buehler said. vision needs and pay the difference out-of- As part of Novartis, Alcon’s research pocket. As a result, penetration of advanced capability will be further enhanced. With technology intraocular lenses has reached nearly 2 000 associates working to address low-to-mid teens in the United States but 36 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    remains significantly lower in Europe and During 2011 Alcon introduced the gel, a material developed by CIBA Vision that Japan. “We believe we can leverage the LenSx Laser that delivers the accuracy of a allows more oxygen to pass through the lens capability of Novartis to talk with regulators femtosecond laser to refractive cataract for better eye health. and governments in Europe and Japan to gain surgery. The LenSx Laser is designed to In late 2011, the Vision Care business broader market access for these advanced predictably perform many of the most launched a new generation of daily dispos- technology lenses,” Mr. Buehler said. challenging aspects of traditional cataract able silicone hydrogel lenses in several surgery with highly reproducible computer European markets. Alcon’s Dailies Total 1 lens PREVENTING BLINDNESS precision. represents a new era in contact lenses – the Alcon offers equipment, instruments, Alcon’s portfolio of pharmaceuticals is first water gradient silicone hydrogel daily disposable products and intraocular lenses used to treat chronic and acute diseases of disposable lens. This innovative contact for surgical procedures that address cata- the eye, from glaucoma and allergies to anti- lens has the highest surface lubricity and racts, vitreoretinal conditions, glaucoma infective, anti-inflammatory disorders and the highest oxygen transmissibility of any and refractive errors. Cataract surgery is the dry eye. The Ophthalmic Pharmaceuticals leading daily disposable contact lens, deliv- cornerstone of Alcon’s Surgical business. business also oversees the line of profes- ering exceptional comfort. The only known treatment for cataracts is sionally driven over-the-counter brands in The development of Dailies Total 1 lenses surgical removal of the natural lens which, artificial tears and ocular vitamins. is based on breakthrough innovation in if combined with implantation of a replace- Glaucoma is a disorder that results in terms of production technology as well as ment intraocular lens, can restore vision. optic nerve damage due to elevated lens design. “We believe that the Vision Care “As people age, cataracts become intraocular pressure. “While glaucoma is the team has managed to create a truly new increasingly common. We have the ability to second-leading cause of blindness today, type of silicone hydrogel lens where the address this form of preventable blindness, we have simply started to scratch the sur- composition is so close to the physiology of thanks to highly effective surgical proce- face in addressing this disease,” said Sabri the eye’s tear film that it should provide dures,” Mr. Buehler said. “Still, an estimated Markabi, M.D., Senior Vice President for unprecedented comfort,” Dr. Markabi said. 18 million people around the world go blind Research and Development for the Alcon as a result of untreated cataracts. There is Division. a big opportunity to build sustainable infra- Alcon’s portfolio of glaucoma treatments, structure, particularly in emerging markets, including Travatan Z solution, helps lower such as India, China and Russia.” elevated intraocular pressure associated Alcon has been the driving force in the with open-angle glaucoma or ocular hyper- worldwide adoption of phacoemulsification tension. The DuoTrav BAK-free solution, systems, a technology that uses ultrasound Alcon’s latest innovation, was developed in energy to break up and remove the defective response to customer preference for the lens. Together with the development of fold- convenient combination of medicines. able intraocular lenses, phacoemulsification These eye drops have the additional benefit has transformed cataract surgery through of being free from the preservative BAK that smaller surgical incisions, faster recovery can cause some irritation of the surface of times and improved patient outcomes. the eye following chronic use. Phacoemulsifi cation surgical systems are spearheading Alcon’s rapid growth in NEW ERA IN CONTACT LENSES emerging markets. To achieve sustainable The Air Optix range of monthly silicone eye care through the broad adoption of hydrogel lenses continued its dynamic state-of-the-art cataract procedures, Alcon growth of recent years, posting a double- offers extensive training programs with local digit increase in net sales during 2011. The hospitals and professional associations success of the Air Optix ix contact lens portfolio that provide hands-on training in surgical underscores the high value consumers techniques and equipment. place on the high comfort of silicone hydro- 2 | GROUP REVIEW 1 6 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 37 A lc on

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    Near-perfect vision I was operated on first for the right eye. After the bandage was taken “The basic cataract operation involves the surgical removal of the off, I looked out the window and saw such a nice green tree. Then I natural lens of the eye, after the lens has become opaque or cloudy. noticed that the doctor was so young. As for my husband, the two of When we begin, the patient is covered by a sterile cover; only one eye us have been together from 1964, so the way he looks doesn’t any shows. There is an anesthesiologist, just in case any additional help is longer make any difference to me. – Aliadna Lyashko, age 76 needed, though normally the surgeon does local anesthesia. Then once the eye is anesthetized, I make micro-cuts, since a smaller cut reduces DR. ALEXANDER IGOREVICH SAMOYLENKO: “My parents, grandparents, the later consequences, like infection or astigmatism. After separating great-grandparents – all doctors. Brothers, sisters, my wife; it’s a family of the lens with the knife, the phacoemulsification process is next. Ultra- doctors. There’s no escaping. Originally inspired by the work of Svyatoslav sound destroys the unwanted lens, chopping it into fragments, so they Fyodorov, our outstanding and famous eye surgeon, I’ve worked at the become fluid and can be vacuumed out or aspirated. The new lens is Moscow Ophthalmic Clinical Hospital since 1996. The hospital is 180 then implanted. years old, one of the very first eye centers in the world. “The total operation usually takes 10, 15 minutes at most. There is, “Surgery for cararacts was almost certainly begun in ancient Egypt. Today, of course, the potential for problems, but they’re rare. The outcome it’s the eye operation most in demand. For the 25 surgeons who work here, is highly predictable, most always perfect if you follow the prescribed 60 to 70% of the procedures are for cataracts, 30 to 40% for other techniques closely. Now I have to admit that after all the years I’ve problems, like glaucoma or detached retinas. Whereas once people had been doing this work, the procedure has become sort of routine for me. surgery just to regain their eyesight, they are now operated on to allow them While the patient feels this is a miracle – being blind one day, having not to wear glasses. They are operated on for myopia, presbyopia, hyperopia. nearly perfect vision the next – this is something I do again and again throughout a day. During those very first cataract operations many years “Twenty years ago the patients with cataracts who came here were ago, I would have been emotionally involved. But, the mind is selective. older than 65 and nearly completely blind. They were afraid of having What I tend to remember are problem patients. It’s easy to forget what’s surgery, or delayed coming in for financial reasons. This is a public most important. hospital, so even now the people who come here are seldom rich. Though it should be noted that those coming in now are doing so earlier, “Now what do people who once couldn’t see, see after the surgery? even at age 40 or 45. Perhaps the stresses of modern life are a contributing It depends often upon their gender and on their age. Men are happy factor or perhaps better diagnostic practices are revealing the problem because they can drive again, or hunt. Women can be unhappy when earlier. No one is exactly sure why, but cataracts are getting younger. they see themselves clearly in the mirror.” 38 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    SANDOZ OVERVIEW KEY FIGURES 2011 NET SALES 1 – DIFFERENTIATED VS. COMMODITIZED GENERICS (in USD millions, unless indicated otherwise) (in %) 2011 20101 Net sales 9 473 8 592 Operating income 1 422 1 321 Return on net sales (%) 15.0 15.4 +222 47% 53% –22 Core operating income 2 1 921 1 742 Core return on net sales (%) 20.3 20.3 Core Research & Development 2 724 618 As a % of net sales 7.6 7.2 Free cash flow 1 587 2 141 Net operating assets 15 223 15 576 Differentiated Products3 Commoditized Products Additions to property, plant & equipment 3 335 307 1 Net sales percentage based on retail generics and biosimilar sales Number of associates (FTE) 4 24 377 23 536 2 2011 Sandoz third party net sales growth in constant currencies versus 2010 3 Differentiated products refer to products requiring specialized knowledge and expertise in 1 Restated to reflect new segment allocation introduced during 2011 as explained in detail on development, production and/or commercialization, characterized by the active ingredient, page 159. formulation/delivery mechanism and/or underlying technology. Examples include complex 2 Core operating income eliminates the impact of acquisition-related factors and other significant oral solids, transdermal patches, implants, ophthalmics, inhalables, injectables and exceptional items. These adjustments are explained in detail starting on page 179. biosimilars 3 Excluding impact of business combinations 4 Full-time equivalent positions at year end NEWS IN 2011 Growth continues over previous year as our portfolio of differentiated medicines expands, despite pricing pressures in several key markets. Net sales are up 10% (+7% in constant currencies, or cc) to USD 9.5 billion, driven by significant growth in US retail generics and biosimilars (+22% cc), with more than USD 1 billion in enoxaparin sales, making it our first generic “blockbuster.” Strong performances in Western Europe, Central and Eastern Europe, Canada, Latin America and Asia also contribute to growth, as do differentiated products, which now account for 47% of Sandoz global sales. Operating income grows 8% (+10% cc) over the prior year to USD 1.4 billion. Core operating income rises 10% (+11% cc) to USD 1.9 billion, with declining prices more than offset by additional sales volume, new product launches and productivity improvements in all areas. Constant currency core operating income margin increases by 0.8 percentage points to 21.2%. Currency has a negative impact, resulting in a 20.3% core operating income margin. Sandoz captures the number one position globally in generic injectable medicines in mid-2011 based on IMS figures, with growth driven by both enoxaparin and oncology injectables. Sandoz confirms its position as leader in biosimilars, with sales reaching USD 261 million in 2011 (+37% cc). Strong progress on biosimilar pipeline, including the start of a Phase II trial in rheumatoid arthritis patients for Sandoz biosimilar monoclonal antibody rituximab (generic Rituxan®/MabThera®) and a complementary Phase III trial for rituximab in patients suffering from follicular lymphoma, a blood cancer that affects the lymphatic system. 40 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    SANDOZ Enoxaparin is part of a broad portfolio of rapidly growing differentiated medicines at the Sandoz Division. The differentiated portfolio includes pioneering biosimiliars, follow-on versions of biologic medicines that have lost patent protection. Sandoz continues to break new ground in making biosimilars available for patients in markets around the world. In 2011 Sandoz enoxaparin became one of a marathon five-year regulatory review. The the generic industry’s first “blockbusters” – approval set important precedents for exceeding sales of USD 1 billion during its generic versions of large complex molecules first 12 months on the market. that reside on the border of traditional drugs That achievement highlights the vast and biologics. commercial potential of differentiated Sandoz, and its collaborator Momenta generics. These products, with challenging Pharmaceuticals Inc., invested heavily in active ingredients or specialized formula- development of state-of-the art analytical tions, are more difficult to develop, manu- methods and complex mathematical mod- facture and market than commoditized eling to show convincingly the “sameness,” generics but offer greater growth potential or equivalence, of the Sandoz enoxaparin and profi tability. Enoxaparin may be and the originator product Lovenox ®, a low the biggest success story to date but it is molecular weight heparin developed and part of a broad portfolio of differentiated marketed by Sanofi SA. Interestingly, the medicines at the Sandoz Division. FDA’s review of Sandoz enoxaparin revealed Burgeoning demand for that differenti- an approach that appears to hold preceden- ated portfolio has fueled robust growth at tial value for the development of biosimilars Sandoz during the past two years and as well. accounted for 47% of the division’s sales in Writing in the New England Journal of 2011, up from 30% of sales in 2008. Medicine (NEJM) in August 2011, four FDA The focus on differentiated products is officials, including Janet Woodcock, M.D., epitomized by biosimilars, follow-on versions director of the agency’s Center for Drug of existing biotechnology medicines that Evaluation and Research, cited the approval have lost patent protection. Sandoz pioneered of enoxaparin as an example of “fingerprint”- the field, winning regulatory approval for the like characterization that “will be essential first biosimilar medicines in Europe, the in designing a US biosimilars policy.” The United States, Japan, Canada, Australia and United States has lagged Europe and other Taiwan between 2006 and 2009. Sandoz regions in establishing a regulatory pathway remained the world leader during 2011, for biosimilars, but a legislative break- accounting for roughly half of worldwide through came in 2010 when the landmark biosimilar sales in regulated markets and Biologics Price and Competition Act autho- exceeding the combined market segment rized the FDA to oversee an abbreviated share of its two closest rivals. pathway for approval of biologics that are Regulatory prowess is an important “biosimilar” to already-approved products. competitive edge for Sandoz because dif- In their NEJM article, the FDA officials ferentiated products often must surmount declared an abbreviated pathway “will formidable hurdles. Sandoz enoxaparin eliminate unnecessary (and therefore was approved by the US Food and Drug unethical) testing of biosimilars in animals Administration (FDA) in July 2010 following and humans.” The authors also acknowledged 2 | GROUP REVIEW 1 6 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 41 S an doz

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    the FDA “is carefully scrutinizing lessons “Lower prices give physicians more from the European Medicines Agency,” freedom to treat patients in the way they which published general guidelines on consider appropriate,” said Jeff George, biosimilars in 2005 and approved its first Division Head, Sandoz, and member of the biosimilar in 2006. Executive Committee of Novartis. “We’re Ironically, the United States has the seeing this happen in Europe now, but I world’s most dynamic market for conven- expect to see the same effect from the intro- tional generic medicines. The use of generic duction of biosimilars in the United States prescription drugs in place of patented and the rest of the world in years to come.” counterparts has saved the US healthcare system more than USD 1 trillion from 2000 COMPLEX COMMERCIAL MODEL through 2010. At a time when biologics Since the 2006 launch of Omnitrope, a bio- represent a steadily increasing share of similar human growth hormone, Sandoz has global drug sales, the US Federal Trade expanded biosimilar operations to more Commission predicts that availability of bio- than 40 countries. “We have refined our similars will significantly reduce biologics’ commercial model for biosimilars – it is not cost and increase their accessibility. just about price,” said Ameet Mallik, Global Gains in access are already apparent in Head of the Sandoz Biopharmaceuticals and Europe. One example is granulocyte colony- Oncology Injectables business. Omnitrope stimulating factor, or G-CSF, a protein that has gained more than 10% of the US market stimulates bone marrow to increase pro- segment for human growth hormone despite duction of white blood cells. Filgrastim, the entrenched competition from six rival recombinant form of G-CSF, is used as sup- companies. portive therapy to offset the effects of When physicians in the United States aggressive chemotherapy, which can deplete write a prescription for human growth white blood cells and leave patients vulner- hormone, they expect the manufacturer to able to infections. provide a comprehensive package of patient- Treatment guidelines suggest filgrastim support services ranging from help in pro- be used preventively at the same time that cessing reimbursement applications to patients start chemotherapy to avoid infec- education that includes training patients tions, but in the United Kingdom use of the in use of the injection device. “It is only medicine was often relegated to second-line when all these elements are in place – therapy – because of cost – to patients who including a very good device – that payors had already developed infections. The can really improve patient access and still number of patients receiving filgrastim was capture savings in the healthcare systems,” declining until Sandoz and other manufac- Mr. Mallik added. turers introduced biosimilar filgrastim at a In Europe Zarzio, the biosimilar filgrastim price roughly 50% below the originator from Sandoz, and Binocrit, a biosimilar product – Amgen Inc.’s Neupogen®. Access to epoetin alfa used to regulate formation of an affordable biosimilar allowed physicians red blood cells, are used more by hospitals to treat patients preventively as recom- and dialysis clinics, which adopt biosimilars mended, moving the product back to first- more readily than primary care physicians. line therapy and rejuvenating the market. “You need a good key account manager to Although more patients are receiving treat- call on hospitals, as well as a field force to ment today, expenditure on filgrastim has educate physicians about the products,” declined. Mr. Mallik said. 42 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    The next generation of biosimilars cur- The biosimilar rituximab program draws effect, originator companies are making bio- rently in development is expected to include on valuable experience Sandoz has gained similar versions of their original products.” monoclonal antibodies, the largest and fast- through approval of three biosimilar medi- The analysis of rituximab was particu- est growing segment of biologics. Products cines. Unique to all biologics, including larly valuable to clarify the variability with projected annual sales of USD 63 billion biosimilars, is batch-to-batch variability that resulting from changes in manufacture of will lose patent protection by 2016. But that is inherent in the manufacturing process. the originator product over the years – and off-patent slice of biologics will surge to an Sandoz has taken advantage of this variability to ensure that variability of the Sandoz bio- estimated USD 100 billion by 2020 as patents by establishing “goalposts,” or boundaries similar rituximab remains within the bound- on monoclonal antibody-based therapies of acceptable variability for the originator aries accepted by regulatory agencies. “The begin to expire. “By 2016 biologic products biologic, and applying these goalposts to the study exemplifies the sensitivity of our ana- are expected to represent seven of the 10 development of biosimilar products. lytical technology,” Dr. McCamish said. top-selling drugs worldwide – each with Because scant data are available about annual sales exceeding USD 5 billion,” Mr. the precise degree of variability regulators EXTRAPOLATION OF DATA Mallik said. “Their patents will expire within tolerate, Sandoz researchers analyzed mul- The European Medical Agency’s review of the next decade and you can imagine that tiple batches of three major recombinant Zarzio underscores how analytical charac- our biosimilar pipeline includes many of therapeutic proteins that were commercially terization can accelerate registration of a these originator products.” available from 2007 to 2010. These origina- biosimilar product. Based on the initial tor medicines were Aranesp®, Enbrel® and analytical characterization, the agency ABBREVIATED CLINICAL TRIALS Rituxan®, and the analysis pinpointed exam- endorsed an abbreviated clinical trial pro- The Sandoz biosimilar pipeline currently ples of variability even though the products gram and subsequently approved four comprises up to 10 projects including the remained on the market with unchanged separate indications for Zarzio based on division’s first monoclonal antibody, a bio- product labels. extrapolation of data generated in a single similar version of Rituxan ®/Mabthera ®, a Publishing the data in the scientifi c open-label study. “Although rituximab is blockbuster medicine known by the common journal Nature Biotechnology, the Sandoz more complex than Zarzio, by showing com- name rituximab, developed and marketed researchers observed: “Current analytical parability with the originator, we believe by Roche Holding AG. The Sandoz biosim- methods allow the detection of even small our biosimilar rituximab can follow an ilar rituximab is in pivotal Phase III clinical changes in quality attributes and can appropriately abbreviated clinical develop- trials for treatment of follicular lymphoma, therefore enable sensitive monitoring of ment path,” Dr. McCamish added. a slow-growing cancer of the immune system. variability of the manufacturing process.” Meanwhile, Sandoz is joining forces with In a parallel clinical program, the Sandoz The studies, they added, “reveal substantial other Novartis units to fine-tune design and rituximab is in Phase II trials for treatment alterations of the glycosylation profile for all recruitment for clinical studies of rituximab of rheumatoid arthritis. tested products...most probably caused by and other biosimilar projects. For example, Regulatory review of a biosimilar in changes in the manufacturing processes.” Sandoz and Novartis Oncology have estab- Europe proceeds through two distinct “Biosimilars are not called bioidentical lished a joint project team to manage devel- phases. The first involves a detailed analyt- or biogeneric due to this inherent variability opment of monoclonal antibodies for ical characterization of the biosimilar in rela- compared with the originator,” Dr. McCamish oncology indications, including rituximab in tion to the originator reference product. said. “But that is nothing new; even origi- follicular lymphoma. Based on the results of that initial analytical nators can’t make exact copies of their prod- “Novartis Oncology excels in clinical characterization, regulators then fix the pro- ucts. Regulatory agencies accept a degree development including recruitment of gram of clinical trials required for approval. of variability between batches. Advanced patients, while Sandoz is particularly strong “The closer your product is to the originator analytical tools enabled Sandoz to document on technical development, intellectual prop- in the analytical characterization, the more this variability over the production life of the erty issues and the regulatory side,” Mr. abbreviated the subsequent clinical trial originator biologic and demonstrate that our Mallik said. “We’re combining the best program can be,” explained Mark McCamish, biosimilar has product attributes that are assets of both to do something that will be M.D., Ph.D., Global Head of Development for within the variability of the originator. Due good for patients and payors.” Sandoz Biopharmaceuticals. to the variability we find in the originator, in 2 | GROUP REVIEW 1 6 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 43 S an doz

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    Just the beginning DR. OMAR BHOLAT: “You’ve got three minutes…GO! Usually you take down there and slice him open as rapidly as I can. Today I can do it a some time; still, this needs to be done right the first time. Needs to lot faster, because back then I was worried about cutting things I wasn’t be done fast, or they die. And this is just opening them up, is just the supposed to. We’re used to the pericardium, the sac the heart’s sitting beginning, doing your initial assessment. I still have to open the peri- in, being paper-thin; you can see right through it. On a 16-year-old, it’s cardium, lift the heart, cross-clamp the aorta, do open-heart massage, a quarter-inch thick, so when you start cutting, you’re thinking, ‘My and fix whatever needs to be fixed. God, am I cutting into the heart?’ Eventually you open it up widely, pick up the heart, there’s a clot everywhere. Lift up the heart, see a hole, you “Now what kind of a person does this? My first surgery…it was during toss a Foley in there, blow up the balloon like they taught you back in my third-year surgical rotation and one of the vascular surgeons decided the old days. Then all of a sudden, he wakes up and looks at you while he wanted to see if I had what it took to be a surgeon. I’m out at the his chest is open, which is slightly disconcerting, because he has no scrub sink, ask him if I can come in, and he says, ‘Come here,’ and has blood pressure. Ultimately this kid went on to die, because there was me amputating a toe and pulling on it. Next thing, I have a toe in my such ischemic insult to the heart. He passed, but I learned a lot from hand. And he looked at me to see what I was going to do next, whether it. I learned you can’t save everyone. Did I feel defeated? I feel defeated or not I was going to fall to the ground, unconscious. And I said, ‘OK, every time I lose one. If you don’t, you shouldn’t be doing this anymore. what’s next?’ “I’ve been a trauma surgeon for 12 years, a good long time. Now some “Following a surgical residency, my first job was in a Philadelphia people still like to think it’s the moon being full that brings people in emergency room as a trauma surgeon. They’d just gone bankrupt and here, but I’ve seen lots of business on moonless nights. It’s the heat there were two people in the department, my boss and me. Our case- that brings them in, the long days, everything that gets people out of load was a lot busier than here. An average weekend I’d open at least their apartments and interacting, drinking, behaving badly, getting into one chest. This was 1999. Lots of drug dealing. People were getting trouble. Next thing you know, this one’s fighting with that one. That shot all over North Philadelphia. One day, on the way to work, I found a one’s stabbing that one, or grabbing a baseball bat. The other stuf f guy hanging from a tree and called the police. ‘No,’ I said to them. ‘He’s happens all the time. Someone’s crossing the street, certain of their not alive…. No, I had nothing to do with it.’ right-of-way to cross. Then there’s someone driving with the green light, making the turn, and they meet. Hit by cars is 50% of my business. If “To crack a chest for the first time is very frightening. The first time I I stop these people from crossing the street and getting hit by cars, I’m did it was on a kid who’d been stabbed in the posterior chest, from out of business. But that’s OK, that’s OK.” behind. He had arrested a few minutes out from the hospital. So I get 44 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    VACCINES AND DIAGNOSTICS OVERVIEW KEY FIGURES VACCINES LATE-STAGE DEVELOPMENT PIPELINE (in USD millions, unless indicated otherwise) 2011 2010 Phase I Phase II Phase III Registration Net sales 1 996 2 918 Menveo 2-10 1 Operating loss / income – 249 612 Menveo infant 1 Return on net sales (%) – 12.5 21.0 Bexsero 2 Core operating income 1 135 1 066 Fluad pediatric Core return on net sales (%) 6.8 36.5 Optaflu 3 Core Research & Development 1 494 506 Agriflu pediatric As a % of net sales 24.7 17.3 MenABCWY 4 Free cash flow – 292 1 336 Pseudomonas aeruginosa 5 Net operating assets 5 067 4 804 GBS 6 Additions to property, plant & equipment 2 192 159 FCC 3 H5N1 Number of associates (FTE) 3 6 122 5 394 1 Neisseria meningitidis bacteria serogroups A, C, W-135 and Y 2 Neisseria meningitidis bacteria serogroup B 1 Core operating income eliminates the impact of acquisition-related factors and other significant 3 Influenza cell culture exceptional items. These adjustments are explained in detail starting on page 179. 4 Neisseria meningitidis bacteria serogroups A, B, C, W-135 and Y 2 Excluding impact of business combinations 5 Collaboration with Intercell 3 Full-time equivalent positions at year end 6 Group B Streptococcus NEWS IN 2011 Strong underlying sales growth is driven by the meningococcal disease franchise and emerging markets. Net sales are USD 2.0 billion, down 32% (-34% in constant currencies, or cc) compared with USD 2.9 billion in 2010. The primary driver of net sales variance is USD 1.3 billion of A (H1N1) pandemic flu vaccine sales in 2010 not repeated in 2011. Excluding A (H1N1), we achieve growth of 22% cc driven by all strategic franchises, with a particularly strong contribution from our meningococcal disease franchise – including Menveo – which reaches over USD 140 million in 2011 sales. Reported operating loss is USD 249 million for 2011 compared to an operating income of USD 612 million in 2010, due in large part to the nonrecurrence of A (H1N1) pandemic flu vaccine sales from the prior year. Core operating income is USD 135 million, down from USD 1.1 billion in 2010. Excluding the impact of A (H1N1), core operating income improves over 2010. Our strong pipeline progresses with more than 15 vaccines in clinical trials to prevent several serious infectious diseases. Menveo is now approved in more than 50 countries – including US and EU – for prevention of meningococcal serogroups A, C, W-135 and Y in adolescents; applications to expand approval for use in younger patients filed in countries around the world, including US. EU regulatory filing review for Bexsero for prevention of meningococcal serogroup B is in progress. Majority acquisition of Chinese vaccines supplier Zhejiang Tianyuan is completed in 2011, providing an opportunity for significant expansion in the fast-growing Chinese vaccines market. 46 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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    VACCINES AND DIAGNOSTICS The emerging meningococcal vaccine franchise anchors the vaccines development pipeline and epitomizes the division’s “reverse vaccinology” research approach. In 2011, the US Food and Drug Administration broadened approval of Menveo, part of this growing franchise, to include patients from 2 to 10 years of age. Bexsero, a second vaccine against meningococcal disease, is under review by regulators in Europe. The Vaccines and Diagnostics Division Menveo is a vaccine that helps to protect continued to deliver on the promise of its against four of the five major serogroups: pipeline during 2011 by expanding the age A, C, W-135 and Y. In early 2010, regulators indication for the quadrivalent meningo- in Europe and the United States approved coccal conjugate vaccine Menveo in the Menveo for active immunization of people United States. A Marketing Authorization from age 11 to 55, and the vaccine is cur- Application for Bexsero, potentially the first rently approved in more than 50 countries. broad-coverage vaccine for use against dis- The clinical development program for ease caused by meningococcal serogroup Menveo was comprehensive; more than B bacteria (MenB), is currently under review 30 clinical trials involving more than 35 000 at the European Medicines Agency (EMA). participants have been completed or are The division markets a broad portfolio in progress. of vaccines with leading positions in influ- In January 2011, the US Food and Drug enza vaccines, cell-culture-derived influ- Administration (FDA) and regulators in enza vaccine technology and adjuvants – Canada expanded the Menveo indication to enhancers of vaccine efficacy. The emerging include individuals 2 to 10 years of age, an meningococcal vaccine franchise anchors a extension currently under review at the pipeline with more than 15 vaccine candi- EMA. Later in the year, the FDA accepted for dates in development. review a supplemental application to extend Meningococcal disease is a rare but the indication to infants and toddlers from potentially life-threatening infection that can 2 months of age. Infants are the age group manifest as bacterial meningitis, an infection most vulnerable to meningococcal disease, of the membrane around the brain and spinal and represent the greatest unmet need. cord, and septicemia, a blood infection. Most cases occur in previously healthy peo- BROAD COVERAGE ple without any warning, and even with early MenB is responsible for up to 90% of menin- and appropriate treatment, patients can die, gococcal disease cases in Europe and often within 24 to 48 hours of the onset of more than 80% of meningococcal cases symptoms. Of those who survive, one in five among infants in Canada. Novartis Vaccines will suffer lifelong complications such as brain and Diagnostics submitted a Marketing damage, hearing loss and amputations. Authorization Application for the inves- Five serogroups, or subtypes, of Neisseria tigational vaccine Bexsero to the EMA in meningitidis – A, B, C, W-135 and Y – cause the late 2010. majority of an estimated 500 000 cases of The submission was based on com- meningococcal disease that lead to more than pleted clinical trials that involved more than 50 000 deaths worldwide each year. Distri- 8 000 participants; data supports use of the bution of serogroups varies widely between vaccine in infants from 2 months of age and geographic regions and changes over time. older, adolescents and adults. Additional 2 | GROUP REVIEW 1 6 | H E A LT H C A R E P O R T F O L I O 6 0 | C O R P O R AT E C I T I Z E N S H I P 8 6 | C O R P O R AT E G O V E R N A N C E 114 | C O M P E N S AT I O N R E P O R T 13 8 | F I N A N C I A L R E P O R T 47 Va c c in e s an d D i a g no s t i c s

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    applications were submitted during 2011 most circulating strains and induce bac- to regulatory agencies in Brazil and Australia tericidal antibodies,” Dr. Dull explained. – as well as in Canada. “Unfortunately, finding those proteins was a “MenB disease is a major public health real struggle.” concern that can have a devastating impact on vulnerable populations,” said Andrin “REVERSE VACCINOLOGY” Oswald, M.D., Division Head, Vaccines and Bexsero is a prototype for a genome-based Diagnostics, and member of the Executive approach – known as “reverse vaccinology” Committee of Novartis. “The Bexsero sub- – which has revolutionized vaccine discovery missions are important milestones toward and development. In the mid-1990s Rino achieving the world’s first broad-coverage Rappuoli, Ph.D., Global Head of Research for MenB vaccine through our unique multi- Novartis Vaccines and Diagnostics, con- component approach.” vinced maverick gene hunter Craig Venter MenB is an exceptionally difficult vaccine to sequence the genome of N. meningitidis. target. Meningococci can mutate key genes Novartis scientists mined that sequence or exchange genes with bacterial cousins data to discover dozens of novel proteins from other serogroups. Expression of key that were assessed as potential antigens. proteins varies at different stages of the bac- No single antigen is sufficient to provide terium’s life cycle. MenB can even manipu- broad protection to cover the diversity of late pathways in the host to deflect attacks MenB strains. But the multiple antigens ulti- by the host’s immune system. mately selected for Bexsero are essential for “All of us who work on this bacterium the bacterium’s survival, function or ability should remain humble – it is not an easy to cause infection, and can be found in the road,” said Peter Dull, M.D., Head of Clinical majority of MenB strains circulating globally. Development for Meningococcal Vaccines. One antigen – neisserial adhesion A Technologies used for conjugate vac- (NadA) – is a protein that promotes invasion cines like Menveo that target the capsule of the bacterium and adhesion to human of the bacterium won’t work against MenB. epithelial cells, an important property for an The capsular polysaccharide found on the invasive pathogen. Factor H binding protein surface of MenB is identical to a molecule (fHbp) is another selected antigen. It binds present in the human body and cannot be with Factor H, a common protein found in the used safely as an antigen, the active ingre- blood, enabling the bacterium to evade attack dient in a vaccine. To surmount that hurdle, by the host immune system. “The organism subcapsular proteins found in the outer simply surrounds itself with Factor H to membrane surrounding the MenB bacte- hide,” Dr. Dull said. A third antigen, Neisseria rium have been used as antigens, and vac- heparin binding antigen, also helps MenB cines based on outer membrane proteins survive in human blood and is present in have been deployed against epidemics in nearly all strains of meningococci. Finally, Norway and New Zealand. Those vaccines Novartis scientists added Por A, a protein are only effective against the local strain, that is important in certain highly virulent however, and fail to provide protection strains of MenB. against the thousands of different MenB Clinical trials were conducted through- strains in circulation around the world. out the world, and during 2011 data from “The ideal antigens for a MenB vaccine pivotal studies were published showing that would be proteins found on the surface of Bexsero induces a robust immune response the bacterium that are conserved across in infants when given alone or with other 48 N OVART I S G R OU P AN N UA L R E PO R T 2 011

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