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  • ANNUAL REPORT 2012

  • 1We want to discover, develop andsuccessfully market innovativeproducts to prevent and curediseases, to ease suffering andto enhance the quality of life.

    We also want to provide ashareholder return that reectsoutstanding performance andto adequately reward thosewho invest ideas and work inour company.

    cONTENTs OUR missiON

    GROUP REviEW Financial Highlights 2

    News in 2012 3

    Letter from Daniel vasella 5

    interview with Joseph Jimenez 11

    HEALTHcARE PORTFOLiO contents 17

    Pharmaceuticals 21

    Novartis institutes for Biomedical Research 33

    Alcon 37

    sandoz 47

    vaccines and Diagnostics 53

    consumer Health 59

    cORPORATE REsPONsiBiLiTy contents 65

    Expanding Access to Healthcare 67

    Doing Business Responsibly 77

    independent Assurance Report 85

    cORPORATE GOvERNANcE contents 87

    Our Board of Directors 96

    Our management 110

    cOmPENsATiON REPORT contents 121

    compensation Report 122

    NOvARTis GROUPFiNANciAL REPORT contents 147

    Financial Highlights 2012 148

    Key Financial Developments 149

    Operating and Financial Review 150

    share information 168

    summary of Key Financial Data 188

    Novartis Group consolidated Financial statements 190

    Financial statements of Novartis AG 258

    Annual Report Photography and Films 278

    Key Dates 2013, contact information 280and Forward-Looking statements

  • KEY FIGURES(in USD millions, unless indicated otherwise)

    SHARE INFORMATION

    2012 2011

    Net sales 56 673 58 566

    Operating income 11 511 10 998

    Return on net sales (%) 20.3 18.8

    Net income 9 618 9 245

    Basic earnings per share 1 (USD) 3.93 3.83

    Core operating income 2 15 160 15 909

    Core return on net sales (%) 26.7 27.2

    Core net income 2 12 811 13 490

    Core earnings per share 1,2 (USD) 5.25 5.57

    Core Research & Development 2 9 116 9 239

    As a % of net sales 16.1 15.8

    Number of associates (FTE) 3 127 724 123 686

    Group free cash flow 11 383 12 503

    2012 2011

    Share price at year end (CHF) 57.45 53.70

    ADS price at year end (USD) 63.30 57.17

    Dividend 4 (CHF) 2.30 2.25

    Payout ratio 5 65 66

    2012 NET SALES BY REGION(% and in USD millions)

    12012 average number of shares outstanding: 2 418.1 million (2011: 2 382.5 million).2Core results for operating income, net income, earnings per share (EPS) and R&D eliminate theimpact of acquisition-related factors and other significant exceptional items. These adjustmentsare explained in detail starting on page 182.

    3Full-time equivalent positions at year end.

    4Dividend payment for 2012: proposal to 2013 Annual General Meeting.5Payout ratio is calculated by converting into USD the proposed total gross dividend amount inCHF at the CHF-USD exchange rate of December 31, 2012 based on an estimated number ofshares outstanding on dividend payment date and dividing it by the USD consolidated netincome attributable to shareholders of Novartis AG based on the Novartis Groups 2012consolidated financial statements.

    NET SALES, OPERATING INCOME, NET INCOME, CORE OPERATINGINCOME AND CORE NET INCOME(Index: 2008 = 100%)

    Net sales Core operating incomeOperating income Core net incomeNet income

    United States 33 18 592

    Europe 35 19 708

    Asia/Africa/Australasia 23 12 936

    Canada and Latin America 9 5 437

    Total 56 673

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    2008 2009 2010 2011 2012

    2 Novart is Group aNNual report 2012

    GROUP REviEW

    Novartis provides healthcare solutions that address the evolving needs of patients and societies worldwide. Our portfolio focuseson broad areas of healthcare: pharmaceuticals, eye care, generics, vaccines, consumer-based OTc and animal health.

    FiNaNcial hiGhliGhts

  • 32 | Group re v iew 17 | HE ALTHcARE PORTFOL iO 65 | cORPORATE REsPONs iB iL i T y 87 | cORPORATE GOvERNANcE 121 | cOmPENsAT iON REPORT 147 | F iNANc iAL REPORTFinancial Highlights | News in 2012

    News iN 2012

    PERFORmANcE Net sales were UsD 56.7 billion, down 3% (unchanged in constant currencies, or cc)from the previous year. Operating income grew 5% (+8% cc) to UsD 11.5 billion. coreoperating income declined 5% (2% cc) to UsD 15.2 billion. core operating incomemargin decreased by 0.5 percentage points to 26.7% of net sales.

    PRODUcTs Recently launched products accounted for UsD 16.3 billion or 29% of Group net sales,up from 25% in 2011. continuing to rejuvenate the portfolio, Pharmaceuticals achieved11 major regulatory approvals for innovative medicines and new indications in theUnited states and the European Union. Key approvals included Anitor in the Unitedstates and the European Union in advanced breast cancer, Jakavi in the EuropeanUnion in myelobrosis, and Seebri Breezhaler in the European Union for patients withchronic obstructive pulmonary disease (cOPD). Alcon also received FDA approval forDailies Total1, the industrys rst water-gradient silicone hydrogel contact lens. in vaccinesand Diagnostics, Flucelvax, the rst cell-culture vaccine in the United states to help pro-tect against seasonal inuenza, received FDA approval, and Bexsero secured a positivecHmP opinion for use preventing meningococcal serogroup B infections in individuals2 months of age and older.

    PiPELiNE Novartis has a leading new product pipeline with more than 200 projects in clinicaldevelopment, including 138 in the Pharmaceuticals Division. in pipeline highlights, therst ve studies in the QvA149 Phase iii iGNiTE clinical trial program all met their primaryendpoints and showed that QvA149 signicantly improved lung function compared withother cOPD therapies. Results from a Phase iii study showed that investigational com-pound RLX030 reduces the mortality rate in patients with acute heart failure. Alcon hasleveraged the capabilities of the Novartis institutes for Biomedical Research to gain accessto a range of technologies and has prioritized glaucoma and macular degeneration indrug discovery efforts. sandoz initiated a Phase iii clinical trial for epoetin alfa in theUnited states, and continued to progress the follicular lymphoma Phase iii clinical trialfor biosimilar monoclonal antibody rituximab. The vaccines and Diagnostics pipelinecontinues to focus on meningococcal disease and inuenza.

    REsEARcH AND DEvELOPmENT Reecting our commitment to innovation, we invested 21% of Pharmaceuticals net salesin R&D, focusing on the areas of greatest patient need and scientic promise.

    PORTFOLiO We continued to strengthen our broad, diversied healthcare portfolio with the acquisitionof Fougera Pharmaceuticals inc. by our sandoz Division, making it the number onegeneric dermatology medicines company in the United states and globally.

    cORPORATE REsPONsiBiLiTy Engaging with society to improve access to healthcare is integral to the way Novartis oper-ates. in 2012, our contributions and programs in this area were valued at UsD 2 billion,providing medicine to more than 100 million patients, and health education, infrastructuredevelopment and other programs to another 7.2 million people worldwide.

    DiviDEND We propose to deliver our 16th consecutive dividend increase, with a 2% raise proposedfor 2012 to cHF 2.30 per share (2011: cHF 2.25 per share), a dividend yield of 4.0%.

  • 52 | Group re v iew 17 | HE ALTHcARE PORTFOL iO 65 | cORPORATE REsPONs iB iL i T y 87 | cORPORATE GOvERNANcE 121 | cOmPENsAT iON REPORT 147 | F iNANc iAL REPORTLet ter from Daniel vasella

    Daniel vasella, m.D.

    DEAR sHAREHOLDER

    the economic and debt crisis has cast ashadow over europe and the united statesfor more than four years, and it signicantlyaffected 2012, as well. Despite major con-certed efforts, the end of this troublingperiod is not yet in sight.

    Even the regions and markets that have sofar escaped the crisis are now in danger ofbeing affected by its socioeconomic sideeffects. Protectionist market interventions,monetary expansion and over-regulation all signs of reactive politics are increasingand can lead to a deepening of structuraldecits. Persistent weak growth is likely,despite low interest rates and monetary ex-pansion. High levels of public debt make theproblemworse inmany countries, and thereis no certainty as to whether pension fundsand social welfare institutions will be able tomeet their promises in the medium term.

    despite this ominousbackdrop,Novartis onceagain posted strong results in 2012. This isall the more remarkable given that we were

    forced to deal with increased price pressure,the patent expiration for our successful heartdrug Diovan, and persistent turbulence onnancial and currency markets. moreover,quality problems at sandoz and consumerHealth led to production downtime, whichalso affected results.

    Despite these far-reaching events, Novartiswas able to provide 1.2 billion patients world-wide with medical care in 2012 exceedingthe record-setting level of previous years thanks to recently launched products and thefurther expansion in fast-growing markets.

    The Groups net sales reached UsD 56.7 bil-lion (3%, unchanged in constant curren-cies), while net income increased by 4% (7%in constant currencies) to UsD 9.6 billion.

    The pharmaceuticals Division (UsD 32.2 bil-lion, 2% in constant currencies) rejuvenatedits product portfolio with the help of recentlylaunched products such as leukemia drugTasigna and ophthalmic medicine Lucentis,which helped balance the Diovan patent loss.moreover, groundbreaking therapies suchas Gilenya and Afinitor which in 2012posted revenue growth in constant curren-cies of 147% and 85%, respectively areexpected to generate sustainable growth inthe future.

    alcon (UsD 10.2 billion, 5% in constant cur-rencies) was able to assert itself and with-stand the growing price pressure and com-petition from generics, due to productlaunches and the successful integration ofciBA vision. sandoz (UsD 8.7 billion, 4% inconstant currencies) succeeded in com-pensating for the competition-driven pricedecline of enoxaparin, on the back of strongdemand for biosimilars, growth in emergingmarkets, and the strategically signicantacquisition of Us dermatology drug makerFougera.

  • 6 Novart is Group aNNual report 2012

    research and development, distribution,and production allows us to benet from theadvantages of our Group structure.

    central to our strategy and the fulllment ofour primary task is our ability to consistentlyintroduce new drugs that are more effectiveor more cost-efcient. Research and devel-opment remains our essential core compe-tency in achieving this mission. This is whyNovartis began several years ago to over-haul and promote its internal researchactivities. These efforts have paid off: From1996 through 2011, Novartis received moreproduct approvals for new molecular enti-ties in Europe and the United states thanour competitors, and our product pipeline,currently with 138 pharmaceutical develop-ment projects, is one of the most promisingin the industry.

    To maintain our leading position, Novartisinvested more than UsD 9 billion in theresearch and development of new drugs in2012. This is especially noteworthy be-cause many of our competitors are insteadreducing their research spending to achieveshort-term savings in this difcult economicclimate. We believe this strategy is short-sighted. The detrimental effects of theseactivities often will not come to light untilsometime in the future, which is not in thebest long-term interests of patients, thecompany and shareholders.

    Novartis achieved a number of key approv-als in 2012. in the past 12 months, thePharmaceuticals Division has reached 11major regulatory approvals.

    and our rich pipeline also offers the pros-pect of future success. We are focusing onserious illnesses for which there are cur-rently no or only inadequate treatments.This applies to cancer, diabetes, and cardio-vascular and lung diseases, which areexpected to increase due to global demo-graphic trends.

    The performance ofotc and animal health,which together make up consumer health(UsD3.7 billion, 16% in constant currencies),was hurt by quality issues at a Us productionsite in Lincoln, Nebraska, which requiredadditional investment. Both divisions, how-ever, are expected to return to growth onceagain in 2013.

    Productionbottlenecks also affectedvaccinesand diagnostics (UsD 1.9 billion, 4% in con-stant currencies). On an encouraging note,the division received EU approval in January2013 for the new, potentially life-savingmenin-gococcal disease vaccine Bexsero.

    our strategy of focused diversification iseffective, especially during times of crisis.Geared toward the needs of patients, thestrategy centers on the research and devel-opment of innovative and cost-effectivemed-ical treatments. This clearly dened approachenables us to respond to ever-changingdemand and to focus on areas that have thepotential for long-term success.

    since Novartis was created in 1996, we haveconsistently focused on markets and tech-nologies with potential for sustainablegrowth. This has enabled the company togrow from a chemical and pharmaceuticalgroup into a pure healthcare company. Thisforward-looking approach and long-termplanning have helped maintain the growthand earnings prospects of Novartis despitethe expiration of the patent for Diovan andother products.

    Our geographic diversication is just as crit-ical as our broad product portfolio. Our globalpresence enables us to take advantage ofmarket opportunities quickly and decisively especially during turbulent times, whichrequire exibility, a stable foundation and theability to adapt to new market conditions.

    in addition to cost synergies in purchasing,cross-divisional cooperation in sales,

  • 7setbacks in order to offer the long-terminnovation and ongoing medical progressthat society justiably demands. But thishas its economic price.

    the tougher environment requires additionalskills from business leaders. managers canno longer measure their performance basedsolely on nancial success. They must alsobe measured by their ability to deal with thegrowing number of interest groups thatparticipate in the often emotionally chargedhealthcare debate. Business leaders mustset clear priorities, as it is impossible to takeall wishes and demands into consideration,especially when they are often mutually in-compatible. close attention should be paidto the legitimate needs of patients, employ-ees and shareholders.

    This clash of opposing needs is also behindthe dilemmas that arise ever more frequentlyin the current tense economic climate, whenprivate healthcare companies deliver agreed-upon services without being compensatedaccordingly, or at all. A way out of this situ-ation, which must always keep the patientswell-being inmind, can only be found througha cooperative process in which interestgroups work together and engage in a ratio-nal dialogue in order to identify long-termsolutions. We should avoid imprudent mea-sures that often entail unforeseen risks.

    This goal cannot be achieved in an atmo-sphere of distrust, which is reected in therising number of conicts that are fought outin court. This tendency is reective of theanxious atmosphere that has struck vastportions of society since the outbreak ofthe economic crisis. This also includes theincreased attacks that risk undermininglegal and contractual certainty, which onlywill lead to further instability.

    thanks to our protability in 2012, we wereonce again able to supportmillions of patientswho lack sufcient nancial resources and

    access to life-saving treatments. As part ofour corporate responsibility, we were ableto provide more than 100 million peoplewith access to medicines and treatmentsvalued at more than UsD 2 billion, or about3.6% of total sales.

    Besides our free anti-leprosy drugs we haveprovided combination therapies to morethan 5 million people since 2000 Novartiscontinues to work with partners such as theWorld Health Organization and UNicEF toght the spread of malaria and to stem theepidemics health and economic conse-quences. since 2001, the Novartis malariainitiative has distributedmore than 500mil-lion treatments of Coartem and CoartemDispersible without prot. in order to helpmore patients and to save even more lives,Novartis is breaking new ground by usingstate-of-the-art information technology toimprove the distribution and managementof drugs in Africa and Asia. These new solu-tions will enable us to supply much-neededdrugs to people in remote areas in the future.

    But the concept of corporate responsibilitygoes beyond charitable donations. To combatthe health disparity resulting from neglecteddiseases and develop new therapies againstwidespread infectious diseases, Novartisalso maintains research facilities such asthe Novartis institute for Tropical Diseasesin singapore and the Novartis vaccinesinstitute for Global Health in siena, italy.

    in addition, we are extending our for-protsocial business to improve access to medi-cines in economically underdeveloped regionsof Kenya, vietnam, indonesia, Nigeria andGhana. This builds on work we have doneover the past five years to provide accesstomedical care tomore than 40million peo-ple in 33 000 villages in rural india.

    times of structural change are marked byuncertainties. There is no question, however,that the macroeconomic challenges will

    As scientic understanding of geneticsadvances, we are increasingly able to dis-cover drugs that can be used in a targetedmanner, even for diseases with differentphenotypes.

    We are also advancing the research of med-icines for rare and neglected diseases. Onemilestone has been the approval of Signiforto treat adults with cushings disease, a rareand life-threatening disease caused by toomuch cortisol in the blood.

    a closer look reveals, however, that increas-ingly stringent public policies in particular,pressure on drug prices threaten to erodethe culture of innovation in healthcare. Thisis made worse by the one-sided and biasedpublic debate that ignores the built-inuncertainties that are part of a complexknowledge-based industry such as thehealthcare sector.

    Despite major medical breakthroughs andtherapeutic successes, the healthcare sec-tor remains an industry fraught with consid-erable risks. The costs involved in bringinga drug to market have risen substantiallyin recent years and have surpassed theUsD 1 billion mark, which is repeatedlyquoted as the cost of a successful druglaunch. But according to retrospective anal-yses for the period from 1997 to 2011,launching a new drug actually costs any-where from UsD 3.7 billion to UsD 11.8 bil-lion, depending on the company. During thisperiod, Novartis obtained the most approv-als from Us authorities and had the second-highest rate of productivity.

    Even though research and development atNovartis is among the most productive inthe world, deep nancial resources aloneare no guarantee that drugs will receivemarketing approval, even when they haveadvanced to late-stage development. Thetremendous complexity of modern drugresearch must therefore factor in the risk of

    2 | Group re v iew 17 | HE ALTHcARE PORTFOL iO 65 | cORPORATE REsPONs iB iL i T y 87 | cORPORATE GOvERNANcE 121 | cOmPENsAT iON REPORT 147 | F iNANc iAL REPORT

    Let ter from Daniel vasella

  • 8 Novart is Group aNNual report 2012

    dividend payments and above-averagecreditworthiness.

    Thanks to our strategic positioning, focuson innovation, strong product portfolio andhealthy pipeline, we can therefore look tothe future with condence and the certaintythat we can build on the strong performancewe have delivered in the past.

    i would like to take this opportunity to thankall employees for their dedication and tire-less commitment, which helped us in 2012to generate results on par with our record-breaking results of the past despite the pit-falls of the nancial crisis and the expirationof the patent for Diovan. We will continue todo everything we can in 2013 to consistentlyfocus our efforts on the needs of patientsaround the world, and i am condent thatthis will enable us to generate strong, sus-tainable results over the long term.

    Dear shareholders, i am pleased to proposean increase in the dividend to cHF 2.30 (2%)at the next Annual General meeting. Andnally, i would like to thank you for the trustyou have placed in our company and myleadership. After 25 years with the companyand 17 years in a top management position,i have decided not to stand for re-electionto the Board of Directors. i am pleased topropose Dr. Jrg Reinhardt, a very experi-enced healthcare executive with deep knowl-edge of our company, as my successor. Jrgwill serve as Non-Executive chairman of theBoard after an interim period during whichProf. Dr. Ulrich Lehner will lead the Board ofDirectors.

    sincerely,

    Daniel vasella, m.D.chairman of the Board

    remain signicant and the threat of over-regulation will grow. As a consequence weneed a stronger dialogue between the privateand public sector to nd common groundand keep the crisis from escalating. short-termpolitical calculations can domajor harmto the healthcare industry, which dependson long-term policies. This ultimately couldrisk prolonging the current crisis and irrep-arably weaken the economic structure.

    Excessive price reductions and discounts ondrugs usually receive quick and broad-based political support, but they threatenthe necessary funding for the research anddevelopment of new drugs. Hasty populardecisions also disregard the fact that in-patient and outpatient treatments generatea large part of todays healthcare costs, andgloss over the positive economic impact ofeffective medical therapies. studies showthat spending UsD 1 on drugs can saveabout UsD 6 in the healthcare sector andthus provide signicant savings to the over-all economy.

    society simply has not yet recognized thepotential of prevention. At a timewhen health-care budgets are restricted and debatesrage over how to allocate resources fairly,prevention measures offer a sensible alter-native due to their high cost-benefit ratio.Healthy lifestyles should be rewarded, asshould diagnostic tests to advance earlydetection so diseases can be diagnosed andtreated in a timely manner. measures suchas these can benet the entire healthcaresystem and help rein in costs.

    our business model has proven itself to bestable and attractive to investors despite theongoing economic and political challenges.in a time of dangerous levels of debt andfundamental uncertainty over what an ef-cient market economy should look like,together with uctuating share prices, weoffer our shareholders a high degree of reli-ability, evidenced by continually increasing

  • 92 | Group re v iew 17 | HE ALTHcARE PORTFOL iO 65 | cORPORATE REsPONs iB iL i T y 87 | cORPORATE GOvERNANcE 121 | cOmPENsAT iON REPORT 147 | F iNANc iAL REPORTLet ter from Daniel vasella

  • 112 | Group re v iew 17 | HE ALTHcARE PORTFOL iO 65 | cORPORATE REsPONs iB iL i T y 87 | cORPORATE GOvERNANcE 121 | cOmPENsAT iON REPORT 147 | F iNANc iAL REPORTinterview with Joseph Jimenez

    iNTERviEW WiTH JOsEPH JimENEz

    what were the hiGhliGhts oF 2012 For

    Novartis?

    Two things set Novartis apart and drove ourperformance in 2012: Our broad healthcareportfolio centered on growing segments ofhealthcare, and our sustained commitmentto science-based innovation. Despite anotheryear of transformational change for thehealthcare industry, we met most of ourobjectives for the year, andmade signicantprogress across our core strategic prioritiesof innovation, growth and productivity.

    in financial terms, we delivered results gen-erally in line with the previous year, despitethe loss of the patent for Diovan in key mar-kets and higher investments in quality.Group net sales amounted to UsD 56.7 bil-lion, which represents a 3% decline in UsDcompared to the prior year. in constantcurrencies the sales remained flat. Groupcore operating income margin was 26.7%,slightly below 2011. These numbers are inline with our expectations set at the begin-ning of the year.

    strong new product launches are rejuvenatingour portfolio. We achieved 17major approv-als across our portfolio in 2012. We lead theindustry in revenue frommedicines launchedover the past ve years, offsetting lossesfrom patent expirations. Recently launchedproducts now comprise UsD 16.3 billion, or29%, of Group net sales, up from 25% a yearago. For example, in our PharmaceuticalsDivision, Gilenya grew 147%; Tasigna rose44%; Lucentis was up 22%; and Anitorclimbed 85% (all in constant currencies, or cc),as sales accelerated with the approval totreat advanced breast cancer. Together, withour pipeline, we believe these productsstrongly position the division for growth.

    Alcon, our eye care business, grew 5% cc.many factors drove this, including the introduc-tion ofDailies Total1, technologically advancedcontact lenses that offer superior comfort.

    sandoz experienced a decline in 2012 due toloss of exclusivity of enoxaparin and supplyissues. But sandoz delivered strong double-digit sales growth inWestern Europe (outsideof Germany), Asia and parts of Latin America.in biosimilars, we maintained our position astheglobal leader, withmore than50%segmentshare in key countries, and many moremolecules in various stages of development.

    Net sales were down for vaccines and Diag-nostics and consumer Health, due largelyto shipping delays and production issues.

    We continued to improve productivity focusing on procurement, resource alloca-tion, our manufacturing network and theongoing Alcon integration saving aroundUsD 2.8 billion this year. This is importantstrategically because it helped offsetlosses from patent expirations and enabledus to invest in growth opportunities.

    Throughout 2012, weve been on a journey to-ward achieving quality beyond compliance,

    Joseph Jimenez

  • 12 Novart is Group aNNual report 2012

    and have taken significant steps forward.We had 264 health authority inspections,including 56 from the Us Food and DrugAdministration (FDA) the majority withgood or satisfactory results. We still havemore work to do at our consumer Healthfacility in Lincoln, Nebraska, and at two ofthe sandoz sites under the warning letter inNorth America. But were making progress.The sandoz site in Broomeld, colorado, hada satisfactory FDA inspection; progress onthe warning letter items was recognized andresulting compliance status of the facility wasupgraded. We continue to invest in improvingskills, modifying processes and modernizingequipment to enhance our level of quality asquickly as possible at the sites with remain-ing issues. Diligence about quality is criticalto our reputation with regulators.

    how is Novartis turNiNG iNNovatioN iNto

    Growth?

    We focus on driving growth across the broadspectrum of healthcare through our strategyof science-based innovation, the intersec-tion of cutting-edge science and patientneeds. Were investing signicantly in R&Deven as other companies cut back.

    As a result, we have one of the industrysstrongest pipelines. Our 138 pharmaceuticalR&D projects include 71 new compounds,which is among the highest number of newmolecular entities in the industry. Over thepast ve years, Novartis has surpassedcompetitors in delivering 43 approvals ofnew molecules in Europe, the Unitedstates and Japan. And sandoz leads in seg-ments of generics driven by innovation biosimilars, injectables, ophthalmics anddermatology.

    vaccines and Diagnostics has 13 programsin development focused on novel targets among the highest of our peers. One prom-ising product, Bexsero, was just approved in

    the European Union. Bexsero is the rstbroad-spectrum vaccine that can help pro-tect all age groups, including infants, againstthe B serogroup of meningogoccal disease,which can kill within 24 hours. in addition,the FDA approved Flucelvax as the rst cell-culture-derived u vaccine.

    several of our Oncology medicines showhow we aspire to discover novel treatmentsthat change the practice of medicine. Anitor,which gained approval this year in Europeand the United states for the most commonform of advanced breast cancer, representsthe rst major breakthrough in 15 years forthe 220 000 women who are diagnosedeach year with this disease. Jakavi, an oraldrug, is the rst treatment option for a rareblood cancer called myelofibrosis, whichhas a median survival rate of less than sixyears. And Tasigna, a second-generationtyrosine kinase inhibitor, has the potentialto achieve deep molecular response inpatients with Philadelphia chromosome-positive chronicmyeloid leukemia, providingthe foundation for a new clinical researchprogram to explore whether patients canachieve treatment-free remission.

    We are also making progress in heart failureand working to build a portfolio across itsspectrum. Today, about half of all heart fail-ure patients die within ve years of diagno-sis. This disease places a tremendous bur-den on healthcare systems, with acute heartfailure causing more than 2 million hospi-talizations per year in the United states andthe European Union alone. Our therapyRLX030 demonstrated in a six-month studythat it helped to reduce deaths of patientswith acute heart failure.

    what perFormaNce did you see iN emerGiNG

    markets?

    We are delivering strong performance inemerging markets, and with 6% growth cc,

  • 13

    these markets contributed UsD 13.8 billion,or 24%, to Group net sales. china, which nowranks among our top 10 markets, led thisgrowth, with net sales up 24% cc over theprevious year.

    We are prioritizing innovation in china. OurPharmaceuticals Division is leading this,with strong results from Diovan, Glivec,Exforge and Aclasta, and recent approvals forOnbrez Breezhaler, Galvus and Lucentis,which is off to a good start. Alcon and vac-cines and Diagnostics are also advancingtheir positions in china.

    We credit much of this success to our empha-sis on recruitment and training in china. it isvery important that our associates under-stand the Novartis medicines for which theyare responsible, and that they can discussthem with doctors. Thats why weve createdthe Novartis china University to systemati-cally train associates. This is a competitiveadvantage, and its important for our growth.

    in Russia, we are the largest healthcare com-pany, and we continue to expand our pres-ence through the construction of a new plantin st. Petersburg. Were also actively con-tributing to the governments goal of raisinglife expectancy from 69 years to 71 by 2015.Through a partnership in the yaroslavlregion northeast of moscow, where cardio-vascular problems are common, a newRegional Hypertension center and a publiceducation campaign have been established,and three pilot sites now offer hyperten-sion intervention tools. As a result of thesemeasures, blood pressure control rates atthe pilot sites have nearly doubled over thepast 18 months.

    We are also focusing on Africa, where weexpect rising demand for healthcare. Africais home to one-seventh of the worlds pop-ulation. sub-saharan Africa has up to one-quarter of the global disease burden, but

    only 2% of its doctors. Theres a lot ofopportunity to help people in Africa livelonger, healthier lives. Today were the third-largest multinational healthcare companyin Africa, and were making a long-termcommitment to be part of the solution.

    why is it valuaBle For Novartis to have Five

    diFFereNt BusiNesses that deliver such diF-

    FereNt results?

    Our broad healthcare portfolio enables usto offer a full range of healthcare solutions.Patients need innovativemedicines, vaccines,generic options and therapies for self-care.We offer products in each of these seg-ments, increasing choices available topatients. And in this uncertain economy, ourdiversied portfolio also helps us to balancerisks in the marketplace. Our diversicationmeans that less than 55% of our overallsales are reimbursed by a public agency,which insulates us more than pure-playpharma companies.

    We also gain from sharing knowledge andrelationships across our divisions, particu-larly in R&D. Our sandoz biosimilar work isa good example. Our generics division col-laborates with our Pharmaceuticals Divisionand our Oncology business unit to designand implement trials to get to the clinicfaster for testing.

    We see benets as well on the commercialside. This year our customers First initiative,through which our divisions work together toserve the diverse needs of our customers,helped generate more than UsD 800 millionin additional revenue. so our structure gen-erates results.

    how is Novartis helpiNG more people GaiN

    access to healthcare?

    Nothing is more important than ensuringthat patients have access to healthcare,

    regardless of where they live or their abilityto pay. We have several efforts under wayto make sure this happens. in the developingworld, we are committed to working to elim-inate leprosy and malaria. Were pioneeringnew business approaches to deliver health-care sustainably in low-income areas. Andour scientists are searching for new thera-pies and adapting existing medicines totreat neglected diseases.

    Our access to healthcare programs reachedmore than 100 million patients in 2012, andwe reached 7.2 million people with healtheducation, infrastructure development andother sustainable programs.

    This year we extended our collaboration withWHO in its efforts to end leprosy. Novartis willcontinue to provide free multidrug therapy,valued at UsD22million, to treat an estimated850 000 people through 2020. Additionally,since 2001, we have delivered more than 500million antimalarial treatments without prot,including 100million treatments of our child-friendly formulation. We are expanding smsfor Life, a tool to monitor supply of medicines,throughout Kenya and Tanzania. This technol-ogy platform uses text messages and elec-tronic mapping to track supply of malariatreatments, diagnostics and patient surveil-lance data at public health facilities. sms forLife works with vodafone, iBm, Roll Backmalaria and the government. it has alreadyreduced stockouts in Tanzania by 70%.

    it is clear, however, that philanthropic aid isno longer enough. The best way to improveglobal quality of life and health is to buildlocally sustainable solutions that will havean enduring impact. The most importantsocietal issues in developing countries arehealthcare education, infrastructure anddistribution. We have launched a series ofNovartis social ventures to address theseissues by blending corporate responsibilitywith innovative business models.

    2 | Group re v iew 17 | HE ALTHcARE PORTFOL iO 65 | cORPORATE REsPONs iB iL i T y 87 | cORPORATE GOvERNANcE 121 | cOmPENsAT iON REPORT 147 | F iNANc iAL REPORT

    interview with Joseph Jimenez

  • 14 Novart is Group aNNual report 2012

    One example is our Arogya Parivar or healthyfamily program in india. Through the pro-gram, we recruit and train local people tobecome health educators. At the same time,mobile clinics provide access to screening,diagnosis and therapies to patients in remotevillages. We also increase access to 80med-icines from our sandoz, Pharmaceuticals,OTc and vaccines portfolios by selling themin smaller packages, which helps to track apatients compliance and keep weekly out-of-pocket costs low. Arogya Parivar nowoffers improved healthcare for more than40 million people living in 33 000 villagesacross india. And were in the process of roll-ing out similar ventures in Asia and sub-saharan Africa, with the aim to reach morethan 100 million people in need of care.

    how is Novartis positioNed iN the GloBal

    competitioN For taleNt?

    Were making a lot of progress in talentdevelopment. We have a new leadershipdevelopment framework in place that helpsassociates learn how to better lead them-selves, their teams, and their businesses.

    ive personally led the creation of a devel-opment program for promising leaders inemerging markets, called LEAD. This yearweve expanded the program to include peo-ple from across divisions and regions, includ-ing the middle East, Asia and Latin America.Over 12months, LEAD participants will worktogether in six small teams, each led by aNovartis Executive committee member. Theteams will work on action-learning projectsin: 1) meeting and beating the local com-petition; 2) winning the war for talent; and3) enhancing affordability and access tomedicine. Exploring innovative approachesin each of these categories is important forour future success in emerging markets.

    where do you see the BiGGest challeNGes

    aNd opportuNities iN 2013?

    As i look ahead, i think of 2013 as a year withtwo halves for Novartis. in the rst half, wewill face the challenges of fully absorbingthe impact of the expiration of the patent forDiovan and investing to improve our qualitystandards. in the second part, we expect toexperience signicant opportunity, withpotential new product launches that weexpect to move us into the next growthphase for our company.

    With our industry-leading position, we willalso be able to help shape the future ofhealthcare. For example, we need to breakthe mold on time and cost for clinical trials.The industry has said for a long time that ittakes 10 years on average and costs inexcess of UsD 1 billion to develop a newtherapy. And its rising higher, as trials getmore complex, with a recent 65% increase inthe average number of total procedures re-quired per trial protocol. This is unaccept-able. Using biomarkers, we are better ableto identify patients most likely to respond totherapies, shortening development time-lines. We aim to use these types of ap-proaches to lead collaborations with regu-lators, bringing new medicines to patientsmore quickly.

    Finally, the technologies we use in our dailylives, such as smartphones and tabletdevices, couldmake a real difference in help-ing patients to manage their own health. Weare exploring ways to use these tools toimprove compliance rates and enable health-care professionals to monitor patient prog-ress remotely. And because these technolo-gies grew from the same spirit of innovationthat drives Novartis, i see a real opportunityfor our company to contribute.

    Looking ahead, im condent that Novartiswill make further progress on moving awayfrom the industrys traditional businessmodel of simply selling pills, toward anintensified focus on delivering positivepatient outcomes. We believe that this willbe good for the patients we serve, and goodfor Novartis.

    im looking forward to 2013. it will be anexciting year.

  • 15

    BuildiNG sustaiNaBle leadership iN healthcare

    Novartis is the only healthcare company with leading positions in pharmaceuticals, eye care, generic medicines, vaccines and diagnostics,and consumer health. We focus on innovating to meet the evolving needs of patients, growing our presence in new and emerging markets,and enhancing our productivity to invest for the future and increase shareholder return.

    strateGic priorities

    extend lead in innovation Fueled by a distinctive scientic and clinical strategy, our research focuses on knowledge of disease andunmet medical need. This approach has resulted in a proven track record of bringing innovative products to market. since 2007,Novartis has received approvals for more innovative medicines in Europe and the United states than any other company.

    accelerate growth To better address unmet medical needs and achieve positive treatment outcomes for patients, we are tailoringour commercial model to the rapidly changing healthcare environment. By successfully launching products, we are driving growthacross our portfolio. We also are leveraging our broad portfolio to expand aggressively in emerging and established markets.

    drive productivity We strive to continuously simplify and streamline processes to improve protability and support reinvestmentin the business. This helps us sustain growth through patent expirations and continue to deliver high-quality, innovative medicinesfor patients in need.

    coNsumer health

    Novartis is a worldleader in over-the-counter medicines andanimal health treat-ments. Our robustportfolio includes self-care products suchas medicines for coughs,colds, respiratory dis-eases, digestive healthand pain management as well as veterinaryproducts that preventand treat diseases inpets, farm animals andcultivated sh.

    alcoN

    As the global leader ineye care, Alcon offersa broad spectrum ofinnovative surgical,ophthalmic pharma-ceutical and visioncare products. Alconhas played a key rolein the evolution of cat-aract surgery and isthe leading manufac-turer of technologiesused to treat cataracts.Alcon is helping peoplesee the world better,enhancing sight to en-hance life.

    saNdoz

    sandoz is the worldsnumber two genericmedicine company,providing affordable,high-quality medicines.The division is a leaderin differentiatedgenerics that are dif-cult to develop, manu-facture and market,and that can generategreater growth andprotability. sandozis also the globalleader in biosimilarmedicines.

    patieNt-ceNtric portFolio

    vacciNes aNddiaGNostics

    committed to diseaseprevention, Novartisis a leader in providingproducts to protectagainst many seriousvaccine-preventableviral and bacterial dis-eases. The divisionsbroad developmentpipeline, with morethan 15 potential newproducts, includes anemerging platformof meningococcal vac-cines. Our diagnostictools help safeguardblood supplies andensure patient safety.

    2 | Group re v iew 17 | HE ALTHcARE PORTFOL iO 65 | cORPORATE REsPONs iB iL i T y 87 | cORPORATE GOvERNANcE 121 | cOmPENsAT iON REPORT 147 | F iNANc iAL REPORT

    interview with Joseph Jimenez

    pharmaceuticals

    Novartis discovers anddevelops innovativepatent-protected med-icines to enhancehealth outcomes forpatients and health-care providers. Withan industry-leadingpipeline, the divisionis a leader in oncology,primary care and spe-cialty medicines. inno-vation continues torejuvenate our productportfolio to drivegrowth, with recentlylaunched medicinesrepresenting 35% ofdivision sales in 2012.

  • 17

    HEALTHcARE PORTFOLiO

    Our products reached 1.2 billion patientsaround the world in 2012, according tointernal estimates.

    While healthcare remains a growth industry,positive and negative trends continue toimpact the way we operate. Aging populations,greater access to healthcare in emergingmarkets, and scientic advances create oppor-tunities to enhance the lives of patients.

    At the same time, an uncertain economy, patentexpirations, regulatory issues, manufacturingissues, pricing pressures, and investigationsand litigation exert downward pressure. Tensionswill increase as healthcare spending outpaceseconomic growth.

    Novartis is a leader in successfully navigatingthese pressures and meeting changingcustomer needs. Our strategy helps us fullyleverage the changes in our industry whilebalancing risk.

    coNteNts

    Healthcare Portfolio Overview 18

    Pharmaceuticals 21

    Novartis institutes for Biomedical Research 33

    Alcon 37

    sandoz 47

    vaccines and Diagnostics 53

    consumer Health 59

  • 2012 NET SALES BY SEGMENT

    USD% millions

    2012 NET SALES BY REGION AND SEGMENT(% and in USD millions)

    Pharmaceuticals Alcon Sandoz Vaccines and Diagnostics Consumer Health

    2012 CORE OPERATING INCOME 2 BY SEGMENT

    USD% millions

    1Data since 2009 has been restated to reflect new segment allocation introduced in 2011.2Core operating income eliminates the impact of acquisition-related factors and other significant exceptional items. These adjustments are explained in detail starting on page 182.3Emerging Growth Markets are all markets other than the Established Markets of the United States, Canada, Japan, Australia, New Zealand and Western Europe.

    NET SALES BY SEGMENT(Index: 2008 = 100%; Alcon only consolidated from August 25, 2010.However, Alcon 2011 growth rate is based on pro forma full year data for 2010)

    Pharmaceuticals Alcon Sandoz Vaccines and Diagnostics Consumer Health

    150

    125

    120

    115

    110

    105

    100

    90

    2008 2009 2010 2011 2012

    Pharmaceuticals 57 32 153

    Alcon 18 10 225

    Sandoz 15 8 702

    Vaccines and Diagnostics 3 1 858

    Consumer Health 7 3 735

    Total 56 673

    Pharmaceuticals 66 10 213

    Alcon 24 3 698

    Sandoz 9 1 503

    Vaccines and Diagnostics 0 75

    Consumer Health 1 159

    Corporate Expenses, net 338

    Total 15 160

    United States 32 10 392 39 4 016 32 2 786 40 746 17 652

    Europe 32 10 238 27 2 710 49 4 225 35 658 50 1 877

    Asia/Africa/Australasia 26 8 434 23 2 395 12 1 057 15 273 21 777

    Canada and Latin America 10 3 089 11 1 104 7 634 10 181 12 429

    Total 32 153 10 225 8 702 1 858 3 735

    Established Markets 3 77 24 778 76 7 805 74 6 402 77 1 434 65 2 415

    Emerging Growth Markets 3 23 7 375 24 2 420 26 2 300 23 424 35 1 320

    Total 32 153 10 225 8 702 1 858 3 735

    CORE OPERATING INCOME 2 BY SEGMENT(Index: 2008 = 100%; Alcon only consolidated from August 25, 2010.However, Alcon 2011 growth rate is based on pro forma full year data for 2010)

    330

    230

    130

    120

    110

    100

    90

    0

    2008 2009 2010 2011 2012

    233

    345

    44

    24

    135

    138

    166

    9199 20

    18 Novart is Group aNNual report 2012

    healthcare portFolio overview 1

  • 352822

    2009 2010 2011 2012

    28 287 30 306 32 508 32 153

    KEY FIGURES(in USD millions, unless indicated otherwise)

    PORTFOLIO REJUVENATION(Sales in USD millions; share of sales from recently launched products 1

    in % of total sales and increase of share of recently launched products 1

    in percentage points (ppt.))

    2012 2011

    Net sales 32 153 32 508

    Operating income 9 598 8 296

    Return on net sales (%) 29.9 25.5

    Core operating income 1 10 213 10 040

    Core return on net sales (%) 31.8 30.9

    Core Research & Development 1 6 697 6 860

    As a % of net sales 20.8 21.1

    Free cash flow 9 796 10 538

    Net operating assets 14 283 13 696

    Number of associates (FTE) 2 61 268 60 527

    1Core operating income eliminates the impact of acquisition-related factors and other significantexceptional items. These adjustments are explained in detail starting on page 182.

    2Full-time equivalent positions at year end.Recently launched products

    Established products

    1Major products launched since 2007 including Lucentis, Tasigna, Exjade, Sebivo/Tyzeka, Exforge,Galvus, Aclasta/Reclast, Cubicin, Exelon Patch, Afinitor/Votubia, Tekturna/Rasilez, Extavia, ArcaptaNeohaler/Onbrez Breezhaler, Gilenya, Fanapt and Ilaris

    +5 ppt. +6 ppt. +7 ppt.17

    212 | GROUP REv iEW 17 | healthcare portFol io 65 | cORPORATE REsPONs iB iL i T y 87 | cORPORATE GOvERNANcE 121 | cOmPENsAT iON REPORT 147 | F iNANc iAL REPORTPharmaceuticals

    News iN 2012

    Pharmaceuticals delivered net sales of UsD 32.2 billion (1%, +2% cc), with strong volume growth (8 percentage points) more thanoffsetting the negative impact of generic competition (6 percentage points).

    Products launched since 2007 (UsD 11.4 billion) contributed 35% of division net sales, up from 28% in 2011, driving portfoliorejuvenation across therapeutic areas. These products include: Lucentis, Exforge, Gilenya, Tasigna, Galvus, Exjade, Exelon Patch,Anitor/Votubia, Arcapta Neohaler/Onbrez Breezhaler and Ilaris.

    The division achieved 11 major regulatory approvals in the United states and the European Union in 2012. Of note, Anitor gainedUs and EU approval in HR+/HER2- advanced breast cancer, marking the rst advance in the treatment of this disease in more thana decade. Jakavi was approved in the European Union in myelobrosis, a life-threatening blood cancer, and Seebri Breezhaler wasapproved in the European Union for patients with chronic obstructive pulmonary disease.

    Europe (UsD 10.2 billion, 5% cc) and the United states (UsD 10.4 billion, +4%), our largest regions, maintained strong volume growthin recently launched products, which generated 45% and 33% of net sales in those regions, respectively, helping offset the negativeimpact of generic competition, particularly Diovan. Emerging Growth markets (UsD 7.4 billion, +6% cc) were led by double-digit growthin china and india. Japan, Latin America and canada maintained solid growth rates.

    Operating income grew 16% (+19% cc) to UsD 9.6 billion. core operating income advanced 2% (+5% cc) to UsD 10.2 billion.

    constant currency core operating income margin expanded by 0.7 percentage points due to continuing productivity efforts.currency had a positive impact of 0.2 percentage points, resulting in a core operating income margin of 31.8% of net sales.

    pharmaceuticals overview

  • 22 Novart is Group aNNual report 2012

  • 23

    in November 2010, Dee schoeld was hos-pitalized after suffering an acute attack ofchronic obstructive pulmonary disease, alsoknown as cOPD.

    A part-time teacher and mother of six,mrs. schoeld had never heard of cOPDbefore the frightening episode. i had a con-stant cough and had reached the stagewhere i couldnt walk a hundred yards upthe road without stopping to get my breathback, she said. i had avoided going to thedoctor because i smoked and i didnt believeanything could be done about smokerscough. But i got such a shock ending up inhospital on oxygen, that i realized i couldntcarry on like that.

    After leaving the hospital, she managedto stop smoking and began taking medica-tion to treat her cOPD symptoms. Today ifeel im in control, she said. i have the airto breathe and i often can do whatever i wantto do.

    cOPD refers to a group of progressivelung diseases including chronic bronchitisand emphysema primarily associated withtobacco smoking, air pollution and occu-pational exposure. Although cOPD affectsan estimated 210 million worldwide, it isunderdiagnosed, undertreated and poorlyunderstood.

    Furthermore, cOPD is becoming moreand more prevalent, and by 2020, it likelywill be the third-leading cause of death inthe world. The vast majority of cOPD-relateddeaths will occur in low- andmiddle-incomecountries such as china, a global tobaccohotspot with more than 320million smokers more than the entire population of the

    pharmaceuticals

    Through an emerging portfolio of pioneering medicines, devices and services, Novartis is addressing the unmetneeds of patients with chronic obstructive pulmonary disease, or cOPD. This innovative portfolio is designedto establish a new standard of care and improve treatment outcomes for the estimated 210 million peopleliving with cOPD.

    United states. many people also still cookindoors over wood or biomass res, andexposure to smoke greatly increases the riskof cOPD.

    The disease affects men and women innearly equal numbers, and this partially isattributed to increased tobacco use amongwomen in high-income countries. AlthoughcOPD is often associated with the elderly,half of all patients are between the ages of50 and 65 many of whom are at their peakearning power and among the most active,productive contributors to society.

    As a result, the nancial burden of cOPDon healthcare systems is daunting. Accordingto a recent study by Harvard Universitysschool of Public Health, the direct world-wide cost of cOPD totaled about UsD 1.9 tril-lion in 2010, and this gure could reachUsD 4.3 trillion by 2030. costs are drivenprimarily by exacerbations acute, debili-tating bouts of breathlessness that oftennecessitate hospitalization.

    Today cOPD cannot be cured, and under-lying damage to patients lungs cannot befully reversed. However, cOPD can be man-aged effectively, especially if it is diagnosedearly. Bronchodilators medicines that relaxand open air passages in the lungs arethe fundamental rst-line maintenancetreatment for the symptomatic manage-ment of cOPD.

    Novartis is addressing the unmet needsof cOPD patients through an emergingportfolio of pioneering medicines, devicesand services that may help transform thedelivery of care and improve treatment out-comes, beneting patients and physicians,

    2 | GROUP REv iEW 17 | healthcare portFol io 65 | cORPORATE REsPONs iB iL i T y 87 | cORPORATE GOvERNANcE 121 | cOmPENsAT iON REPORT 147 | F iNANc iAL REPORT

    Pharmaceuticals

  • 24 Novart is Group aNNual report 2012

    as well as healthcare payors. We are com-mitted to innovation at every level of cOPDand at a time when many other companiesare exiting the eld of respiratory medicine,Novartis is well-positioned to provide a broadrange of innovative medicines to help physi-cians select the right treatment for the rightpatient at the right time, said David Epstein,Division Head, Novartis Pharmaceuticalsand member of the Executive committee ofNovartis.

    Because of the compelling efcacy datawe have seen in clinical trials, we believe ourportfolio is an opportunity to change theway cOPD patients are treated. And theseinnovative medicines are all being madeavailable in the Breezhaler device whichallows patients to hear, feel and see that theyhave taken the drug correctly.

    emerGiNG portFolio

    The Novartis cOPD portfolio spans fourmedicines with different, but complemen-tary, mechanisms of action. These medi-cines include Onbrez Breezhaler, known asArcapta Neohaler in the United states, whichis a long-acting beta2-adrenergic agonist(LABA) and the only cOPD treatment on themarket that offers clinically relevant 24-hourbronchodilation combined with rapid onsetof action at rst dose. LABAs work by stim-ulating receptors in the smooth muscle ofthe airways, increasing the diameter of theairways that become constricted in cOPDpatients. First approved in 2009, OnbrezBreezhaler now is registered in more than85 countries around the world.

    Additionally, Seebri Breezhaler, approvedin september 2012 in Europe under thebrand name Seebri Breezhaler and in Japanunder the brand name Seebri inhalationcapsules, is a long-acting muscarinic antag-onist (LAmA) developed as a once-dailyinhaled maintenance therapy for the treat-ment of cOPD. LAmAs prevent a natural

    chemical called acetylcholine from stimu-lating muscarinic receptors in the musclessurrounding the airways, allowing the air-ways to relax and open. clinical trials dem-onstrated that Seebri Breezhaler improvedpatients exercise endurance, reduced exac-erbations and increased lung function overa 24-hour period compared to placebo, witha rapid onset of action at rst dose.

    Rapid onset of action can be particularlyimportant to many cOPD patients whoreport that symptoms of breathlessness aremore severe in the morning than at otherparts of the day. The GLOW3 study showedthat after Seebri Breezhaler was adminis-tered in the morning, patients experiencedimproved exercise tolerance from the rstdose, onward. in all studies, Seebri Breezhalerhad an incidence of adverse events similarto placebo.

    in October, Novartis also submitted anapplication to regulatory authorities inEurope forQvA149, an investigational, inhaledonce-daily xed-dose combination of theactive ingredients in Onbrez Breezhaler andSeebri Breezhaler. These regulatory submis-sions are based on ve studies that are partof the iGNiTE clinical trial program, one ofthe largest international programs for cOPDto date, encompassing 10 studies in total andmore than 7 000 patients across 42 coun-tries. A regulatory ling for QvA149 in theUnited states is expected at the end of 2014.

    Furthermore, QmF149, an investiga-tional treatment that combines the activeingredient in Onbrez Breezhaler with theinhaled corticosteroidmometasone furoate,is in Phase ii clinical trials.

    All of thesemedicines are inhaled throughBreezhaler, a single-dose, dry-powder device.This common inhaler has low air ow resis-tance and therefore is appropriate for allcOPD patients regardless of their age orthe severity of their disease. Additionally, ithas multiple feedback features that help

  • 25

    patients determine if they properly admin-istered their medication. From an efciencystandpoint, a common inhaler also elimi-nates the need for physicians to teach theirpatients how to use it more than once.

    struGGle to Breathe

    People with cOPD feel suffocated, andwithout treatment, they become trappedin a cycle of deteriorating health, saidmark Lightowler, Global Brand Director forQvA149. Because they struggle to breathe,their physical activity is limited. The goal oftherapy is to improve shortness of breathand tomake patientsmore active, to improvequality of life.

    Primary care physicians initially treatmost cOPD patients, and diagnosing thedisease is challenging, to say the least. Oneobstacle is comorbidities, the presence ofone or more disorders in addition to theprimary disease. Potential comorbiditiesrange from asthma and diabetes to anemia,high blood pressure and heart failure.

    many of these disorders are effects ofthe same lifestyle as cOPD particularlysmoking, said Thys van der molen, m.D.,Ph.D., professor of primary care medicineat the Groningen Research institute forAsthma and cOPD in Groningen, the Neth-erlands. A lot of things are interacting witheach other, and primary care physicianshave to deal with all of them.

    A key to successfully managing cOPD isearly diagnosis, limiting damage to the lungsbefore treatment begins. its getting better:We have data showing that new diagnosestend to be at an earlier stage today than 20years ago, said David Price, m.D., professorof primary care respiratory medicine at theUniversity of Aberdeen, scotland. About20% of patients are diagnosed after missedopportunities they were in front of doctorsfor respiratory tract infections, for example,but no one thought to test for cOPD.

    His prescription is systematic use of asimple diagnostic test called spirometry thatmeasures howmuch air a person can inhaleand exhale, and how fast air can move intoand out of the lungs. A quick blow into aspirometer should be a standard part of anyconsultation for smokers with diabetes, highblood pressure or other potential comorbid-ities or even just having a routine healthcheck. it only takes 30 seconds, and smallhand-held spirometers are really good forruling out cOPD, he said. After all, wewouldnt dream of sending patients awaywithout taking their blood pressure.

    increasingly, healthcare systems areadopting integrated care models in whichprimary care physicians receive supportfrom central laboratories and pulmonaryspecialists in diagnosing cOPD patients.in Groningen, patients are referred to a lab-oratory that administers questionnairesand conducts a spirometry examination;results are reviewed by a pulmonologistwhomakes a preliminary diagnosis and pro-vides treatment recommendations to theprimary care physician.

    Dr. van der molen saysmore than 15 000patients have participated in Groningensintegrated care model to date. The systemworks: What we have seen is a pretty largereduction in thenumber of exacerbations, andstable health status for patients over threeyears, he said. The focus on early detectionmeansweget younger patients,more females,because smoking habits are changing. Thesepatients want to know how they can dealwith cOPD and they have higher expecta-tions for treatment after diagnosis.

    in London, a community RespiratoryAssessment Unit was established in 2004to provide diagnostic support to primarycare physicians working within the Hammer-smith and Fulham area. The unit aimed toprovide high-quality spirometry in associa-tion with focused history-taking to enhance

    detection of respiratory disease. A recentaudit of the rst four years of operationsrevealed that about one-third of cOPD diag-noses in the community were incorrect,resulting in a signicant number of inappro-priate prescriptions.

    exacerBatioNs

    Physicians, patients and payors agree thatexacerbations are a major unmet need inthe cOPD space. Frequent exacerbations arelinked to an accelerated decline in lung func-tion, and many patients also have a poorerquality of life. Admissions to hospitals as aresult of exacerbations are increasing, andpatients with more severe underlying dis-ease account for about 70% of the directmedical costs of cOPD.

    Exacerbations kill cOPD patients, saidDavidmorris, m.D., Global Head, Primary careDevelopment at Novartis Pharmaceuticals.more frequent exacerbations acceleratethe decline in lung function and result inhigher mortality.

    A one-size-ts-all strategy isnt enough.Patients respond differently to differenttreatments, and we have to lookmore deeplyto understand the needs of the individualpatient. Take comorbidities: Treatment withcorticosteroids is effective in patients withasthma and is often used in patients withcOPD, but corticosteroids can potentiallyworsen a comorbid disease such as diabe-tes or hypertension in a patient with cOPD.

    Novartis scientists are targeting exacer-bations in two ways. First, they are develop-ing inhaled therapies to reduce the rate atwhich patients have exacerbations andextend the time between exacerbations. insPARK, a Phase iii study in which patientswere treated for 64 weeks, QvA149 was sta-tistically more effective in reducing the over-all rate of exacerbations (mild, moderateand severe) comparedwith Seebri Breezhaler50 micrograms and open label tiotropium

    2 | GROUP REv iEW 17 | healthcare portFol io 65 | cORPORATE REsPONs iB iL i T y 87 | cORPORATE GOvERNANcE 121 | cOmPENsAT iON REPORT 147 | F iNANc iAL REPORT

    Pharmaceuticals

  • 26 Novart is Group aNNual report 2012

    18micrograms. The adverse event prole ofQvA149was similar to both Seebri Breezhaler50 micrograms and open label tiotropium18 micrograms.

    in addition, Novartis is racing to developnovel anti-inammatorymedicines to addressunderlying inammation and other mecha-nisms of lung destruction. A promising anti-inflammatory compound known by theresearch number BcT197 is currently inPhase ii clinical trials.

    smart iNhalers

    The Breezhaler device was designed to pro-vide multiple forms of feedback. For exam-ple, a patient can see when the capsuleinserted into the inhaler is empty. When itis used, the Breezhaler device also emits adistinctive whirring sound and leaves asweet taste of lactose at the back of pa-tients throats.

    Novartis also is taking the developmentof devices to a new level beyond todaysmechanical devices designed exclusively todeliver medicines, to next-generation smartdevices incorporating electronics that sup-port both patients and physicians. Our ideais to provide physicians and patients withreal-time feedback on their disease andthe effect of treatment, Dr. morris said. itcaptures an overall vision at Novartis: goingbeyond the pill to provide an entire packageof care to ensure the right patient gets theright drug at the right time.

    The rst step toward realizing that visionis a line extension of the normal Breezhalerdevice to the electronic Breezhaler device.Through an electronic chip designed torecognize distinct sound signatures, theelectronic Breezhaler device can register thedate and time the device is used. That infor-mation will be fed into a telehealth systemand transmitted wirelessly to the physiciansoffice. if a patient misses a dose, for exam-ple, a reminder can be sent automatically.

    During 2012, Novartis conducted a clinicaltrial assessing the ability of patients to usethe respective devices and whether use ofthe electronic Breezhaler device togetherwith the telehealth system results in bettertreatment outcomes.

    meanwhile, a next-generation smartinhaler is being developed at the Novartiscenter of Excellence for inhalation Therapyin san carlos, california. This locationenables the inhalation Therapy unit to tapthe acumen of engineers in silicon valley tocomplement the innovative inhaler design.

    The san carlos unit includes staff andadvanced technical expertise acquiredwhen Novartis purchased the pulmonarybusiness unit of Nektar Therapeutics inc. in2008. Today, working closely with the Basel,switzerland-based modeling and simula-tion group, as well as Technical Researchand Development experts, scientists in sancarlos are applying computational uiddynamics and advanced mathematicalmodels to track how drug particles of differ-ent sizes travel in healthy airways - and howthose normal patterns are altered in cOPDpatients with abnormal lungs.

    This is a unique platform for inhalationtherapies, pinpointing how particles owand where they are ultimately deposited inthe diseased airway, Dr. morris said.

    the telehealth system

    The telehealth system is a critical link torealize the full potential of next-generationinhalers. Today cOPD patients receivecare in the same way as many other chronicconditions, said caroline Feeley, NewProducts Director for devices and telehealthat Novartis Pharmaceuticals. They spend agreat deal of time sitting in doctors ofces,and sometimes they are so sick that they godirectly to the emergency room on their own,knowing they will have to stay in hospitaluntil theyre better. These patients drive a

  • 27

    signicant proportion of total healthcarecosts today and its simply not a sustain-ablemodel for the future, ms. Feeley added.

    she continued: People diagnosed at arelatively young age are not going to behappy just sitting and waiting for care.We believe that people will increasinglyutilize e-health services and expect closerinteraction with their physician. increas-ingly, the more severe patients are going tobe willing to monitor themselves at home sothe doctor can do something before theyactually end up in the hospital. What we aredoing is to try to change this in the future.

    Through the telehealth system, patientswill have a Novartis health hub in theirhomes. Resembling a contemporary tabletcomputer, the health hub will coach andguide patients through the different typesof measurements that need to be taken andtheir personal activity plans. moreover, thedata collected by the health hub will beaccessible to patients physicians through adatabase. methodology of these studies willbe consistent with regulations on patientprivacy and informed consent.

    Additionally, algorithms will provide atrafc light system that will help identifypatients whose conditions are worseningand enable physicians to better detect andprevent potential exacerbations.

    We understand that doctors cantwade through piles of spreadsheets of dataevery day to monitor patients and maketreatment decisions, ms. Feeley said. Thewhole aim of the system is to enablepatients to remain at home for as long aspossible, and help them to lead active andproductive lives.

    During 2013, the telehealth system willundergo pilot studies at a number of largeacademic hospitals in Europe that specializein cOPD treatment.

    in chronic diseases like cOPD, we knowpatients need more than a prescription and

    an appointment to see the doctor again insix months, said marc miravitlles, m.D., asenior researcher in the Department ofPneumology at the Hospital clinic Barcelonaand lead investigator in a telehealth studyplanned in spain. The interaction betweenphysician and patient is crucial for the out-come of treatment, and we need to providebetter tools for self-management helpingpatients to take medication as prescribed,maintain good nutrition and remain physi-cally active.

    The Hospital clinic Barcelona is relatedto the medical school of the University ofBarcelona and is a reference center in spainfor the treatment of cOPD. We have a largeregistry of cOPD patients, and extensiveexperience in managing these patients fol-lowing admissions, Dr. miravitlles added.

    still, he emphasized the importance ofproceeding carefully with pilot studies toverify the usefulness of the telehealth tech-nology. There is a lot of interest in thesestrategies, but the key is to identify the rightsubgroup of patients who really need thistype of support, he said. We have someclues about who they are. Until we try it andsee the nal results, we wont know for sure.

    traNsFormiNG druG developmeNt

    At the same time, Novartis is putting tech-nology to work when it comes to developingmedicines and, in particular, conductingclinical trials. We see potential to reducedevelopment costs, improve post-marketingsafety surveillance, and provide outcomedata demonstrating the value of a medicineto patients, to payors and to society, Dr.morris said. Timing of the telehealth initia-tive has been ideal, and we are capturingthis across our entire portfolio.

    Additionally, advanced technologies arehelping continuouslymonitor cardiac activityin trials of investigational medicines to treatheart failure and multiple sclerosis.

    At a time of increasing surveillance ofdrug safety by regulatory authorities, tele-health promises to be a valuable tool. Theefcacy of a new drug in a large clinical trialcan be undermined if patients dont take themedicine the way they are supposed to,Dr. morris said. if we had a better way ofcollecting data at the point of care, we couldeliminate some of that noise. The telehealthsystem provides data we can trust: We canmonitor a device delivering the drug, as wellas patient adherence, he added.

    in the future, it can help us to distinguishadverse events resulting from a patientsfailure to take medication, from side effectsrelated to themedicine itself. Thats anotherexample of how technology is leading tochanges in the practice of medicine that wehave only just begun to imagine.

    2 | GROUP REv iEW 17 | healthcare portFol io 65 | cORPORATE REsPONs iB iL i T y 87 | cORPORATE GOvERNANcE 121 | cOmPENsAT iON REPORT 147 | F iNANc iAL REPORT

    Pharmaceuticals

  • 28 Novart is Group aNNual report 2012

    pharmaceuticals pipeliNe

    project /product common name mechanism of action

    Acz885 canakinumab Anti-interleukin-1 monoclonal antibody

    AFQ056 mavoglurant metabotropic glutamate receptor 5antagonist

    AiN457 secukinumab Anti-interleukin-17 monoclonalantibody

    ATi355 Anti NOGO3-A mAb

    AUy922 ATP-competitive non-geldanamycininhibitor of HsP490

    BAF312 siponimod sphingosine-1-phosphate (s1P)receptor modulator

    BcT197 Anti-inammatory agent

    BEz235 Pi3K/mTOR5 inhibitor

    BGs649 Aromatase inhibitor

    BKm120 Pi3K inhibitor

    ByL719 Pi3K inhibitor

    Bym338 inhibitor of Activin receptor type ii

    cAD106 Beta-amyloid-protein immunotherapy

    cTL019 cD19-targeted chimeric antigen receptor(cAR) T-cell immunotherapy

    DEB025 alisporivir cyclophilin inhibitor

    Exjade deferasirox iron chelator

    Gilenya ngolimod sphingosine-1-phosphate (s1P)receptor modulator

    Jakavi ruxolitinib Janus kinase (JAK) inhibitor

    KAE609 Unknown

    LBH589 panobinostat Histone deacetylase inhibitor

    Lci699 Aldosterone synthase inhibitor

    LcQ908 Diacylglycerol acyl transferase-1 inhibitor

    Lcz696 Angiotensin receptor-neprilysininhibitor (ARNi)

    LDE225 smoothened receptor/hedgehog signaling inhibitor

    LDK378 ALK inhibitor

    Novartis is consistently rated as having one of theindustrys most respected pipelines, with 138 projectsin clinical development in the Pharmaceuticals Division.several of these projects, which include potential usesof new molecular entities, as well as additional indica-tions or new formulations for marketed products, arefor potentially best-in-class and rst-in-class medicinesthat would signicantly advance treatment standards.

    this table provides an overview of selected pharma-ceutical projects in conrmatory development.

    1Refers to rst planned ling date in a major market (Us or EU) for lead indication2Refers to current phase of lead indication only3Neurite outgrowth inhibitor4Heat shock protein5mammalian target of rapamycin

    pipeliNe Glossary

    conrmatory development Projects for which a positive proof-of-concept has been established and are currently in either post-proof-of-concept clinical trials (Phase i /ii /iii) or under reviewby the regulatory agencies for the purpose of granting marketingauthorization (submission).

    project/product Project refers to the Novartis developmentproject reference code (combination of three letters and threenumbers) used for projects in development. Product refers tothe brand name for a marketed product.

    common name Ofcial international non-proprietary name orgeneric name for an individual molecular entity as designatedby the World Health Organization.

    mechanism of action specic biochemical interaction with amolecular target such as a receptor or enzyme, through whicha drug substance produces its pharmacological effect.

    potential indication/indications Disease or condition for whicha compound or marketed product is in development and is beingstudied as a potential therapy.

    route of administration Path by which a medicinal preparationis administered into the body, such as oral, subcutaneous orintravenous.

    The glossary continues on page 30.

  • 29

    potential indication/indications Business franchise route of administration planned submission dates 1 current phase 2

    Gouty arthritis (lead development indication),systemic onset juvenile idiopathic arthritis,diabetes mellitus, secondary prevention ofcardiovascular events

    integrated Hospital care, critical care subcutaneous submitted Us, EU submission

    Fragile X syndrome (lead indication), L-dopa-induced dyskinesia in Parkinsons disease

    Neuroscience Oral 2014 i i i

    Psoriasis (lead indication), arthritides rheumatoid arthritis, ankylosing spondylitis,psoriatic arthritis, multiple sclerosis

    integrated Hospital care, Neuroscience subcutaneous, intravenous 2013 ii i

    spinal cord injury Neuroscience intrathecal spinal infusion 2017 i

    solid tumors Oncology intravenous 2017 ii

    multiple sclerosis Neuroscience Oral 2017 ii i

    chronic obstructive pulmonary disease Primary care Oral 2017 ii

    solid tumors Oncology Oral 2017 ii

    Obese hypogonadotropic hypogonadism critical care Oral 2017 ii

    Breast cancer (lead indication), solid tumors Oncology Oral 2015 i i i

    solid tumors Oncology Oral 2017 i

    sporadic inclusion body myositis integrated Hospital care intravenous 2016 ii

    Alzheimers disease Neuroscience subcutaneous,intramuscular

    2017 ii

    Leukemia Oncology intravenous 2016 ii

    chronic hepatitis c integrated Hospital care Oral 2017 ii i

    Non-transfusion dependent thalassemia Oncology Oral Approved EU, submitted Us submission

    chronic inammatory demyelinatingpolyneuropathy

    Neuroscience Oral 2016 i i

    Polycythemia vera Oncology Oral 2014 iii

    malaria Established medicines Oral 2017 ii

    Relapsed or relapsed-and-refractory multiplemyeloma

    Oncology Oral 2013 i i i

    cushings disease Oncology Oral 2016 i i

    Familial chylomicronemia syndrome critical care Oral 2014 i i i

    Hypertension (lead indication), heart failure critical care, Primary care Oral 2013 i i i

    Basal cell carcinoma (lead indication),solid tumors

    Oncology Oral 2014 i i

    Non-small cell lung cancer Oncology Oral 2014 i i

    continued on next page

    2 | GROUP REv iEW 17 | healthcare portFol io 65 | cORPORATE REsPONs iB iL i T y 87 | cORPORATE GOvERNANcE 121 | cOmPENsAT iON REPORT 147 | F iNANc iAL REPORT

    Pharmaceuticals Pipeline

  • 30 Novart is Group aNNual report 2012

    pharmaceuticals pipeliNe (coNtiNued)

    LFF571 Bacterial elongation factorTu (EFTu) inhibitor

    LGX818 RAF inhibitor

    LiK066 sGLT 1/2 inhibitor

    Lucentis ranibizumab Anti-vEGF 3 monoclonal antibody

    mEK162 mEK 6 inhibitor

    PKc412 midostaurin signal transduction inhibitor

    QAW039 Anti-inammatory agent

    QGE031 High afnity anti-igE mAb

    QmF149 indacaterol,mometasone furoate

    Long-acting beta-2 agonistand inhaled corticosteroid

    QvA149 indacaterol,glycopyrronium bromide

    Long-acting beta-2 agonist andlong-acting muscarinic antagonist

    Anitor /Votubia everolimus mTOR 7 inhibitor

    RLX030 serelaxin Recombinant form of human relaxin-2hormone

    Seebri glycopyrronium bromide Long-acting muscarinic antagonist

    Signifor LAR 8 pasireotide somatostatin analogue

    Tekturna aliskiren Direct renin inhibitor

    TKi258 dovitinib lactate vEGFR 1-3 9, FGFR 1-3 10, PDGFR 11 andangiogenesis RTK12 inhibitor

    Xolair omalizumab Anti-igE monoclonal antibody

    Zortress/Certican everolimus mTOR 7 inhibitor

    1 Refers to rst planned ling date in a major market (Us or EU) for lead indication2 Refers to current phase of lead indication only3 vascular endothelial growth factor4 visual impairment due to choroidal neovascularization secondary to pathological myopia5 choroidal neovascularization and macular edema secondary to conditions other than age-relatedmacular degeneration, diabetic macular edema, retinal vein occlusion and pathologic myopia

    6 combination of mitogen-activated protein kinase and extracellular signal-regulated kinase7 mammalian target of rapamycin8 Long-acting release9 vascular endothelial growth factor receptor10 Fibroblast growth factor receptor11 Platelet-derived growth factor receptor12 Receptor tyrosine kinase

    project /product common name mechanism of actionGlossary (coNtiNued)

    phase i First clinical trials of a new compound, generally per-formed in a small number of healthy human volunteers, toassess the clinical safety, tolerability, as well as metabolic andpharmacologic properties of the compound.

    phase ii clinical studies that are performed on patients withthe targeted disease, with the aim of continuing Phase i safetyassessment in a larger group, assessing the efcacy of the drugin the patient population and determining the appropriate dosesfor further testing.

    phase iii Large-scale clinical studies with several hundred toseveral thousand patients to establish the safety and effec-tiveness of the drug for regulatory approval for indicated uses.Phase iii trials also may be used to compare a new drug againsta current standard of care in order to evaluate the overall benet-risk relationship of the new drug.

    submission An application for marketing approval has alreadybeen led with one or both of the following regulatory agencies:FDA (United states), EmA (European Union). Novartis has not yetreceived marketing authorization from both regulatory agencies.*

    The application contains comprehensive data and informationgathered during the animal studies and human clinical trials con-ducted through the various phases of development of the drug.

    *Filings that have received approval in one of the markets (either Us or EU) but are awaitingapproval in the other market are included in the table

  • 31

    clostridium difcile infection integrated Hospital care Oral 2017 ii

    melanoma Oncology Oral 2017 i

    Type ii diabetes Primary care Oral 2017 ii

    Pathological myopia (lead developmentindication) 4, choroidal neovascularization andmacular edema 5

    Ophthalmology intravitreal submitted EU submission

    melanoma Oncology Oral 2015 i i

    Acute myeloid leukemia (lead indication),aggressive systemic mastocytosis

    Oncology Oral 2015 i i i

    Asthma Primary care Oral 2017 ii

    Allergic diseases Primary care subcutaneous 2017 ii

    Asthma, chronic obstructive pulmonary disease Primary care inhalation 2015 ii

    chronic obstructive pulmonary disease Primary care inhalation submitted EU submission

    Breast HER2 over expressing 2nd/3rd line (leaddevelopment indication), breast cancer HER2over expressing 1st line, hepatocellular carcinoma,diffuse large B-cell lymphoma, non-functioningGi and lung neuroendocrine tumors, tuberoussclerosis complex (Tsc) seizures

    Oncology Oral 2013 ii

    Acute heart failure critical care intravenous submitted EU submission

    chronic obstructive pulmonary disease Primary care inhalation Approved EU ii i (Us)

    Acromegaly (lead indication), cushings disease Oncology subcutaneous,intramuscular

    2013 i i i

    Reduction of cv death/hospitalizations inchronic heart failure

    critical care Oral 2015 i i i

    Renal cell cancer (lead indication),solid tumors

    Oncology Oral 2013 i i i

    chronic idiopathic urticaria integrated Hospital care subcutaneous 2013 iii

    Prevention of organ rejection liver integrated Hospital care Oral Approved EU, submitted Us submission

    potential indication/indications Business franchise route of administration planned submission dates 1 current phase 2

    2 | GROUP REv iEW 17 | healthcare portFol io 65 | cORPORATE REsPONs iB iL i T y 87 | cORPORATE GOvERNANcE 121 | cOmPENsAT iON REPORT 147 | F iNANc iAL REPORT

    Pharmaceuticals Pipeline

  • 32 Novart is Group aNNual report 2012

  • 332 | GROUP REv iEW 17 | healthcare portFol io 65 | cORPORATE REsPONs iB iL i T y 87 | cORPORATE GOvERNANcE 121 | cOmPENsAT iON REPORT 147 | F iNANc iAL REPORTNovar tis institutes for Biomedical Research

    Novartis is a leader in the discovery anddevelopment of innovative therapies for rarediseases.

    Rare diseases are central to ourmission,saidmark c. Fishman,m.D., President of NiBRand member of the Executive committee ofNovartis.

    We choose to work where there is unmetneed and where the scientic understandingis strongest. Diseases that are uncommonoften lack good therapy, in part because theyhave not been the focus of large pharma-ceutical companies, Dr. Fishman added.in some of these diseases the underlyingmechanism is well understood: For example,6 000 or so diseases have a genetic cause.This combination of great need with under-standing of mechanism provides the foun-dation of a rational, scientific approach todrug discovery.

    There is more to this logic as a corner-stone for drug discovery. Nature is conser-vative. The same mechanism that explains arare disease may well be at work in subsetsof patients with more common disorders.

    Testing of promising new medicines atNovartis often starts with a rare disease ina proof-of-concept study. choosing well-dened diseases or homogeneous patientpopulations enables quick conrmation ofpreclinical hypotheses about a drugs mech-anism of action and potential therapeuticbenet. if successful, NiBR quickly extendsdevelopment to other diseases in which thesame mechanism is believed to be involved.

    caNary iN the coal miNe

    spinal muscular atrophy (smA) is a group ofinherited diseases that causes progressivemuscle weakness and ultimately leads todeath. There is no cure.

    Novartis iNstitutes For Biomedical research

    With state-of-the-art technologies, the Novartis institutes for Biomedical Research (NiBR) is discovering innovativetherapies for rare diseases. Focused on areas where unmet medical needs and mechanistic understanding aregreatest, NiBR scientists take a rational, scientic approach to drug discovery.

    This is a devastating disorder that canstrike without any prior family history, saidBrian Tseng, m.D., Ph.D., a Translationalmedicine specialist in musculoskeletal dis-ease research at NiBR. According toDr. Tseng,who has in-depth experience treating chil-dren with smA, Babies with the severe formof smA appear well in the newborn nursery,and go home ne. By 3 or 4 months of age,they are working so hard to breathe whilefeeding that they cant get enough nutrition.They slip into the failure to thrive category,which brings them to medical attention.

    These observations lead to a genetictest. if the results come back positive, it canbe a death sentence by 2 years of age in themost severe cases, Dr. Tseng said. We haveno approved medicine that can change thenatural history of the disease. invasive med-ical interventions can help to support growthand breathing, but the baby cannot sit up,crawl, nor walk.

    smA is caused by mutations in a genecalled survival ofmotor neuron1, or smN1.The protein encoded by smN1 is necessaryfor survival of nerve cells, or neurons, thatcontrol allmuscles in the body. in the absenceof smN protein, motor neurons do not func-tion normally, causingmuscles toweaken andshrink. The imminent danger comes fromweakness of muscles needed to breathe.

    smA greatly varies in severity amongpatients. Humans have a second copy of thesurvival ofmotor neurongene, or smN2,whichcan partially compensate for loss of smN1.

    The severity of smA varies, depending onthe number of copies of smN2 and uponhow effective the smN2 gene is atmaking thesmN protein. We cannot change the numberof smN2 genes. However, the Developmentaland molecular Pathways group in NiBR, led

  • 34 Novart is Group aNNual report 2012

    Up to 80% of patients with tuberoussclerosis complex develop kidney tumorsknown as angiomyolipomas. Over time thesetumors may grow large enough to causesevere internal bleeding, require emergencysurgery, or lead to kidney failure. By inhib-iting mTOR activity and signaling throughthe Pi3 kinase pathway, everolimus mayreduce cell proliferation and blood vesselgrowth associated with these tumors.

    The success of everolimus in tuberoussclerosis has prompted research programsin two other rare genetic syndromes linkedto defects in mTOR and the Pi3 kinasepathway. Tuberous sclerosis, neurofibro-matosis and cowden syndrome can all leadto hamartomas, benign tumors that occur inmany parts of the body, said William sellers,m.D., Head of Oncology Research at NiBR.instead of proliferative growth typical ofcancer, hamartomas are abnormal, disorga-nized aggregations of cells and tissue. Wealso believe they have a common etiology inthe Pi3 kinase pathway but they are causedby different genetic defects, he said.

    Neurobromatosis results from muta-tions in genes called NF1 and NF2 that causetumors to grow in the nervous system; forexample, from cells making up the protec-tive myelin sheaths around nerves. Patientswith neurobromatosis have an increasedrisk of developing cancer. Recent studiessuggest that mTOR is activated in sometumors with NF1 mutations, and severalacademic centers currently are conductingclinical trials of everolimus in treatment ofneurobromatosis.

    by Jeffrey Porter, Ph.D., wondered if theycould help it be more effective at makingsmN protein.

    The smN2 gene has a mutation thatleads to faulty splicing, or editing of the orig-inal DNA sequence into a streamlined RNAblueprint used by cellular machinery tomanufacture proteins. could we improvesplicing? mr. Porter asked. if you could cor-rect the splicing decit in smN2, you couldmitigate symptoms by producingmore smNprotein. That would be a novel type of drug,and an approach with great ramications.

    smA isnt the only disease caused bysplicing errors. Researchers estimate thatRNA splicing errors may account for up to15% of all inherited diseases, ranging fromneurological to metabolic disorders. Genesplicing happens in every cell in the body,but neurons are particularly sensitive likethe canary in the coal mine in terms ofsymptoms appearing early in affected indi-viduals. We felt like smA was a diseasewhere we might be able to make progressapplying some of our new research tools,mr. Porter explained.

    NiBR scientists designed assays forsplicing, and then screened hundreds ofthousands of compounds from their chem-ical library for activity. Lead compoundsfrom that rst round of screening wereretested in genetically engineered motorneuron cells derived from skin cells providedby smA patients. skin cells can be changedinto nerve cells in culture by addition of afew genes, mr. Porter said.

    We have several molecules now whichwork quite well in our assays and are beingrened to have better drug properties. Theyseem to modulate splicing with exquisitespecicity. Amazingly, they push produc-tion of more smN protein through thisbackup [smN2] system.

    The lead compound in the drug discoveryprogram is undergoing toxicology studies a necessary precondition for clinical trials

    in humans. We are going as fast as we pos-sibly can, and will be talking with regulatoryagencies soon about the design of potentialclinical studies, mr. Porter added.

    pathway prowess

    The NiBR strategy is partially based on theimportance of signaling pathways in humanbiology and disease. A relatively small num-ber of core pathways play fundamental rolesduring embryonic development, as well aslater in li