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As filed with the Securities and Exchange Commission on January 28, 2005

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

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FORM 20-F

o	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-15024

NOVARTIS AG
(Exact name of Registrant as specified in its charter)

NOVARTIS Inc.
(Translation of Registrant's name into English)

Switzerland
(Jurisdiction of incorporation or organization)

Lichtstrasse 35
4056 Basel, Switzerland
(Address of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Title of class American Depositary Shares each representing 1 share, nominal value CHF 0.50 per share, and shares		Name of each exchange on which registered New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

        Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report:

2,426,810,076 shares

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes ý No o Not Applicable

Indicate by check mark which financial statement item the Registrant has elected to follow:

Item 17 o Item 18 ý

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TABLE OF CONTENTS

INTRODUCTION AND USE OF CERTAIN TERMS						1
FORWARD-LOOKING STATEMENTS						1
PART I						2
	Item 1.			Identity of Directors, Senior Management and Advisers		2
	Item 2.			Offer Statistics and Expected Timetable		2
	Item 3.			Key Information		2
	3.	A		Selected Financial Data		2
	3.	B		Capitalization and Indebtedness		4
	3.	C		Reasons for the offer and use of proceeds		5
	3.	D		Risk Factors		5
	Item 4.			Information on the Company		13
	4.	A		History and Development of Novartis		13
	4.	B		Business Overview		16
	4.	C		Organizational Structure		81
	4.	D		Property, Plants and Equipment		81
	Item 5.			Operating and Financial Review and Prospects		87
	5.	A		Operating Results		87
	5.	B		Liquidity and Capital Resources		119
	5.	C		Research & Development, Patents and Licenses		122
	5.	D		Trend Information		123
	5.	E		Off-Balance Sheet Arrangements		123
	5.	F		Aggregate Contractual Obligations		123
	Item 6.			Directors, Senior Management and Employees		125
	6.	A		Directors and Senior Management		125
	6.	B		Compensation		131
	6.	C		Board Practices		140
	6.	D		Employees		144
	6.	E		Share Ownership		145
	Item 7.			Major Shareholders and Related Party Transactions		147
	7.	A		Major Shareholders		147
	7.	B		Related Party Transactions		148
	7.	C		Interests of Experts and Counsel		149
	Item 8.			Financial Information		149
	8.	A		Consolidated Statements and Other Financial Information		149
	8.	B		Significant Changes		151
	Item 9.			The Offer and Listing		151
	9.	A		Listing Details		151
	9.	B		Plan of Distribution		153
	9.	C		Market		153
	9.	D		Selling Shareholders		153
	9.	E		Dilution		153
	9.	F		Expenses of the Issue		153
	Item 10.			Additional Information		153
	10.	A		Share capital		153
	10.	B		Memorandum and Articles of Association		153

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	10.	C		Material contracts		157
	10.	D		Exchange controls		157
	10.	E		Taxation		158
	10.	F		Dividends and paying agents		162
	10.	G		Statement by experts		162
	10.	H		Documents on display		162
	10.	I		Subsidiary Information		162
	Item 11.			Quantitative and Qualitative Disclosures about Non-Product-Related Market Risk		163
	Item 12.			Description of Securities other than Equity Securities		166
PART II						167
	Item 13.			Defaults, Dividend Arrearages and Delinquencies		167
	Item 14.			Material Modifications to the Rights of Security Holders and Use of Proceeds		167
	Item 15.			Controls and Procedures		167

	Item 16	A		Audit Committee Financial Expert		167
	Item 16	B		Code of Ethics		168
	Item 16	C		Principal Accountant Fees and Services		168
	Item 16	D		Exemptions from the Listing Standards for Audit Committees		169
	Item 16	E		Purchases of Equity Securities by the Issuer and Affiliated Purchasers		170

PART III						171
	Item 17.			Financial Statements		171
	Item 18.			Financial Statements		171
	Item 19.			Exhibits		172

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INTRODUCTION AND USE OF CERTAIN TERMS

        Novartis AG and our consolidated affiliates ("Novartis" or the "Group") publish consolidated financial statements expressed in US dollars. Our consolidated financial statements found in Item 18 of this annual report on Form 20-F ("Form 20-F") are those for the year ended December 31, 2004. In this Form 20-F, references to "US dollars", "USD" or "$" are to the lawful currency of the United States of America; and references to "CHF" are to Swiss francs.

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        In this Form 20-F, references to the "United States" or to "US" are to the United States of America, references to "Europe" are to all European countries (including Turkey, Russia and the Ukraine), references to the European Union ("EU") are to the European Union and its 25 member states and references to "Americas" are to North, Central (including the Caribbean) and South America, unless the context otherwise requires; references to "Novartis" or the "Group" are to Novartis AG and its consolidated affiliates; references to "associates" are to employees of our affiliates; references to the "FDA" are to the US Food and Drug Administration. All product names appearing in italics are trademarks of Group companies. Product names identified by a "®" or a "™" are trademarks of other companies. You will find the words "we," "our," "us" and similar words or phrases in this Form 20-F. We use those words to comply with the requirement of the US Securities and Exchange Commission to use "plain English" in public documents like this Form 20-F. For the sake of clarification, each operating company in the Group is legally separate from all other companies in the Group and manages its business independently through its respective board of directors or other top local management body. No Group company operates the business of another Group company nor is any Group company the agent of any other Group company. Each executive identified in this Form 20-F reports directly to other executives of the company by whom the executive is employed, or to that company's board of directors.

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        We furnish to registered holders of Novartis AG shares ("shares") annual reports that include a description of operations and annual audited consolidated financial statements prepared in accordance with International Financial Reporting Standards ("IFRS"). IFRS differs in certain significant respects from US Generally Accepted Accounting Principles ("US GAAP"). See "Item 18. Financial Statements-note 32" for a description of the significant differences between IFRS and US GAAP. The financial statements included in the annual reports are examined and reported upon by our independent auditors. We make available to our shareholders, on our web page, quarterly interim press releases that include unaudited interim consolidated financial information prepared in conformity with IFRS with a reconciliation to US GAAP.

FORWARD LOOKING STATEMENTS

        This Form 20-F contains certain "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, relating to our business and the industries in which we operate. Certain forward looking statements can be identified by the use of forward looking terminology such as "believe," "expect," "may," "are expected to," "will," "will continue," "should," "would be," "seek" or "anticipate" or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by express or implied discussions of strategy, plans or intentions. Such statements include express or implied descriptions of our investment and research and development programs and anticipated expenditures in connection therewith, and descriptions of new products, or new indications for existing products, which we expect to introduce, and anticipated customer demand for such products. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performances or achievements that may be expressed or implied by such forward looking statements. Some of these factors are discussed in more detail herein, including under "Item 3. Key Information-3.D. Risk factors," "Item 4. Information on the Company," and "Item 5. Operating and Financial Review and Prospects." Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Form 20-F as anticipated, believed, estimated or expected. We do not intend, and do not assume any obligation, to update any information or forward looking statements set out in this Form 20-F.

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PART I

Item 1.    Identity of Directors, Senior Management and Advisers

        Not applicable.

Item 2.    Offer Statistics and Expected Timetable

        Not applicable.

Item 3.    Key Information

3.A  Selected Financial Data

        The selected financial information set out below has been extracted from our consolidated financial statements. Our consolidated financial statements ("consolidated financial statements") for the years ended December 31, 2004, 2003 and 2002 are included elsewhere in this Form 20-F. All financial data should be read in conjunction with "Item 5. Operating and Financial Review and Prospects" and our consolidated financial statements and accompanying notes which are included elsewhere in this Form 20-F. All financial data presented in this Form 20-F are qualified in their entirety by reference to the consolidated financial statements and such notes.

        The consolidated financial statements used to create the selected consolidated financial data set forth below were prepared in accordance with IFRS. IFRS differs in certain respects from US GAAP. For a discussion of the significant differences between IFRS and US GAAP, see "Item 18. Financial Statements—Note 32."

			Year Ended December 31,
			2004		2003		2002		2001		2000		2000(1)
			($ millions, except per share information)
INCOME STATEMENT DATA
Amounts in accordance with IFRS:
Net sales			28,247		24,864		20,877		18,762		20,997		16,986
Operating income			6,539		5,889		5,092		4,325		4,684		4,000
Result from associated companies			142		(200	)	(7	)	83		58		57
Net financial income			227		379		613		284		187		261
Income before taxes and minority interests			6,908		6,068		5,698		4,692		4,929		4,318
Taxes			(1,126	)	(1,008	)	(959	)	(844	)	(1,082	)	(895	)
Minority interests			(15	)	(44	)	(14	)	(12	)	(25	)	(15	)
Net income			5,767		5,016		4,725		3,836		3,822		3,408
Basic earnings per share in $(2)			2.36		2.03		1.88		1.49		1.46		1.30
Diluted earnings per share in $(2)			2.34		2.00		1.84		1.49		1.46		1.30
Cash dividends(3)			1,968		1,724		1,367		1,268		1,259
Cash dividends per share in CHF(4)			1.05		1.00		0.95		0.90		0.85
Operating income from continuing operations per share:
	basic earnings per share in $(2)		2.67		2.38		2.02		1.68		1.79		1.53
	diluted earnings per share in $(2)		2.66		2.35		1.98		1.68		1.79		1.53

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⁽¹⁾

Financial data presented on a continuing basis, excluding the results of the Agribusiness Division, which was spun-off in 2000.

⁽²⁾

Basic and Diluted earnings and cash dividends per share have been adjusted to reflect a forty-for-one share split effective May 7, 2001. The year 2000 has been adjusted to take this split into account, in order to provide per share information on a consistent basis.

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Cash dividends represent cash payments in the applicable year that generally relate to earnings of the previous year.

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Cash dividends per share represent dividends proposed that relate to earnings of the current year. Dividends for 2004 will be proposed to the Annual General Meeting on March 1, 2005 for approval.

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		Year Ended December 31,
		2004		2003		2002		2001		2000
		($ millions, except per share data)
BALANCE SHEET DATA
Amounts in accordance with IFRS:
Cash, cash equivalents and current marketable securities		14,593		13,259		12,542		13,193		12,659
Inventories		3,558		3,346		2,963		2,449		2,515
Other current assets		6,460		5,668		5,310		4,712		4,923
Long-term assets		29,858		27,044		24,210		19,408		15,410
Total assets		54,469		49,317		45,025		39,762		35,507
Trade accounts payable		2,020		1,665		1,266		1,077		971
Other current liabilities		9,058		7,655		7,006		7,378		6,131
Long-term liabilities and minority interests		9,608		9,568		8,484		6,146		5,914
Total equity		33,783		30,429		28,269		25,161		22,491
Total liabilities and equity		54,469		49,317		45,025		39,762		35,507
Net assets		33,921		30,519		28,355		25,223		22,538
Outstanding share capital		881		896		898		925		946
Amounts in accordance with US GAAP:
Income statement data
Net income		4,989		3,788		3,829		2,419		3,794
Basic earnings per share(1)		2.12		1.59		1.58		0.98		1.51
Diluted earnings per share(1)		2.11		1.57		1.55		0.98		1.50
Balance sheet data
Total equity		38,101		34,878		33,225		30,208		29,840
Total assets		59,281		55,748		50,361		45,105		43,976

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⁽¹⁾

Earnings per share have been adjusted to reflect a forty-for-one share split effective May 7, 2001. 2000 figures have been adjusted to take this split into account, in order to provide earnings per share information on a consistent basis.

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Cash Dividends per Share

        Cash dividends are translated into US dollars at the Reuters Market System Rate on the payment date. Because we pay dividends in Swiss francs, exchange rate fluctuations will affect the US dollar amounts received by holders of ADSs.

Exchange Rates

        The following table shows, for the years and dates indicated, certain information concerning the rate of exchange of US dollar per Swiss franc based on exchange rate information found on Reuters Market System. The exchange rate in effect on January 25, 2005, as found on Reuters Market System, was CHF 1.00 = $0.84.

3.B  Capitalization and Indebtedness

        Not applicable.

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3.C  Reasons for the offer and use of proceeds

        Not applicable.

3.D  Risk Factors

        You should carefully consider all of the information set forth in this Form 20-F and the following risk factors which we face and which are faced by our industry. The risks below are not the only ones we face. Additional risks not currently known to us or that we presently deem immaterial may also impair our business operations. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. This Form 20-F also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere. See "Forward-Looking Statements" on page 1.

Risks Faced By Our Pharmaceuticals Division

We face intense competition from new products.

        Our products face intense competition from competitors' products. This competition may increase as new products enter the market. In such an event, our competitors' products may be safer or more effective or more effectively marketed and sold than our products. Alternately, in the case of generic competition, they may be equally safe and effective products which are sold at a substantially lower price than our products. As a result, if we fail to maintain our competitive position, this could have a material adverse effect on our business and results of operations.

Our research and development efforts may not succeed.

        Like other major pharmaceutical companies, in order to remain competitive, we must continue to launch new and better products each year. To accomplish this, we commit substantial effort, funds and other resources to research and development, both through our own dedicated resources, and through various collaborations with third parties. Our ongoing investments in new product launches, new technologies and research and development for future products could produce higher costs without a proportional increase in revenues.

        In the pharmaceutical business, the research and development process can take up to 12 years, or even longer, from discovery to commercial product launch. This process is conducted in various stages. During each stage there is a substantial risk that we will encounter serious obstacles or will not achieve our goals and accordingly we may abandon a product in which we have invested substantial amounts of time and money. If we are unable to maintain a continuous flow of successful new products and successful new indications or brand extensions for existing products sufficient to cover our substantial research and development costs and to replace sales that are lost as older products approach the end of their commercial life cycles or are displaced by competing products or therapies, this could have a material adverse effect on our business and results of operations.

        Our dependence on research and development makes it highly important that we recruit and retain high quality researchers and development specialists. We commit substantial efforts and funds to this purpose. Should we fail in our efforts, this could have a material adverse effect on our business and results of operations.

We face intense competition from lower-cost generic products.

        Our Pharmaceuticals Division also faces increasing competition from lower-cost generic products. Our Pharmaceuticals Division's products are generally protected by patent rights which are expected to provide us with exclusive marketing rights. However, those patent rights are of varying strengths and durations. In addition, in some countries, patent protection is significantly weaker than in the US or the

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EU. Even in the US and the EU, political pressures to reduce spending on prescription drugs has led to legislation which encourages the approval of generic products. As a result, although it is our policy to actively protect our patent rights, generic challenges to our products can arise at any time, and we may not be able to prevent the emergence of generic competition for our products.

        Loss of patent protection for a product typically leads to a rapid loss of sales for that product and could affect our future results. In addition, proposals emerge from time to time in the US and other countries for legislation to further encourage the early and rapid approval of generic drugs. Any such proposal that is enacted into law could worsen this substantial negative effect on our sales.

        Patent protection is at issue in major markets for the following of our Pharmaceuticals Division's leading products.

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Neoral.    Patent protection exists for the Neoral micro-emulsion formulation and other cyclosporin formulations through 2009 and beyond in major markets. Despite this protection, generic cyclosporin products competing with Neoral have entered the transplantation market segment in the US, Germany, Japan, Canada and elsewhere. We have filed patent infringement actions against manufacturers of these generic products. However, except in one lawsuit in Canada, we have so far not succeeded in obtaining an injunction against any of the manufacturers we have sued.



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Sandostatin.    Basic patent protection for the active ingredient in Sandostatin SC has expired in the US, Japan, Germany and the UK, and it will expire in 2006 in France and 2007 in Italy. Several parties have filed applications to market generic versions of Sandostatin SC in the US. We have not, so far, sued any for patent infringement. However, patent protection extending to 2010 (and 2013 and beyond in the US) continues in major markets for Sandostatin LAR, a long-acting version of Sandostatin, which represents a significant and growing proportion of our sales in this product family.



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Lotrel/Cibacen/Lotensin/Cibadrex.    The basic benazepril substance patent protection for Cibacen/Lotensin/Cibadrex has expired in the US and Japan, and will expire in 2005-08 in major markets in the EU. However, Lotrel, which is a combination of benazepril and amlodipine besylate, is patented in the US until 2017. Teva and Dr. Reddy's Laboratories have challenged this patent. Dr. Reddy's is seeking marketing approval for a different benazepril combination, using amlodipine maleate, rather than amlodipine besylate. Because of this difference, the Dr. Reddy's product, if brought to market, would not be automatically substitutable in the US for Lotrel. However, Teva is seeking marketing approval for the same benazepril combination as Lotrel, and is thus seeking to bring a fully substitutable product to the US market. We have sued Teva and Dr. Reddy's in the US for patent infringement. The Dr. Reddy's case is currently stayed.



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Lamisil.    The active ingredient in Lamisil is covered generically, but not mentioned specifically, in a patent family which has expired. Another patent family specifically discloses and covers the active ingredient specifically and expires in the US in 2006, and 2005-07 in Japan and major EU countries. The specific US patent had been challenged by Dr. Reddy Laboratories in the US. Dr. Reddy's has since withdrawn its suit and conceded that this patent is valid and enforceable.



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Miacalcin/Miacalcic.    The specific Novartis formulation of this product is covered by patents which will expire in the US in 2015. However, patents on the Novartis formulation have expired in a number of other major countries, and will expire in Italy in 2006. Apotex has applied to the FDA for the right to sell a generic version of Miacalcin, using the Novartis formulation. We have sued Apotex for infringement. Two other companies have applied to the FDA for the right to sell a generic version of Miacalcin based on a different formulation. We have not sued these companies.



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Exelon.    The active ingredient in Exelon is covered by a compound patent (granted to Proterra, AG and licensed to us), which presently expires in 2007, and has been determined by the FDA to qualify for patent term extension until 2012. In addition, we hold an isomer patent on Exelon which expires in 2014. Dr. Reddy's, Sun Pharmaceuticals and Watson Pharmaceuticals have filed

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applications to market a generic version of Exelon in the US. Together with Proterra, we have sued all three parties for patent infringement.

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Focalin.    The active ingredient in Focalin is covered by patents (granted to Celgene Corporation and licensed to us) through 2015 in the US and 2018 in other markets. Teva has challenged these patents and has filed an application for a generic version of Focalin in the US. Together with Celgene, we have sued Teva for patent infringement.



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Trileptal.    Patent protection for Trileptal's active ingredient has expired in major countries. In the US, New Chemical Entity data exclusivity under the Hatch-Waxman Act of 1984 is currently scheduled to expire in January 2005. However, we have applied for a six-month extension of this exclusivity period under the Hatch-Waxman pediatric exclusivity provisions. At the same time, we have pending patent filings relating to our marketed formulations of Trileptal, which, if granted, would expire in 2018 in major countries, including the US.



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Starlix.    The active ingredient in Starlix is covered by Ajinomoto patents. The basic US patent will expire in 2006, but a request to extend the term of the patent until 2009 has been filed. In late January 2005 a third party informed us that they have filed an ANDA application to market a generic version of Starlix in the US. We are assessing that information and will respond appropriately.



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Foradil.    Patent protection for Foradil's active ingredient has expired in major countries. In the US, Hatch-Waxman data exclusivity is currently scheduled to expire in February 2006.



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Voltaren.    Voltaren is off-patent. As a result, revenue from Voltaren has declined, and may decline significantly further over the next few years.

Price controls and other pressures may prevent us from setting prices for our products at levels high enough to earn an adequate return on our investments in them.

        In addition to normal price competition in the marketplace, the prices of our Pharmaceutical Division's products are restricted by price controls and other pricing pressures imposed by governments and health care providers in most countries. Price controls operate differently in different countries and can cause wide variations in prices between markets. Currency fluctuations can aggravate these differences. The existence of price controls and other pricing pressures can limit the revenues we earn from our products and may have an adverse effect on our business and results of operations.

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United States.    In the US, ongoing political debates over prescription drug pricing and recent Medicare reform legislation could increase pricing pressures. In particular, recent Medicare reform legislation is expected to lead to the creation of a new voluntary drug benefit for patients who are eligible for Medicare, and may require us to extend price discounts to more patients when the benefit goes into effect in 2006. In addition, there is continuing political pressure to amend this legislation to enable the US government to use its enormous purchasing power to demand discounts from pharmaceutical companies. It is not yet possible to predict with certainty the extent to which this recently-enacted legislation will affect our business and results of operations.



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Europe.    In Europe, our operations are subject to significant price and marketing regulations. Many governments are introducing health care reforms in a further attempt to curb increasing health care costs.



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Japan.    In Japan, the government generally introduces price cut rounds every other year, during which the government mandates price decreases for specific products.



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Regulations favoring generics.    In response to rising healthcare costs, many governments and private medical care providers, such as Health Maintenance Organizations (HMOs), have instituted reimbursement schemes that favor the substitution of generic pharmaceuticals for more expensive brand-name pharmaceuticals. In the US, generic substitution statutes have been enacted

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by virtually all states and permit or require the dispensing pharmacist to substitute a less expensive generic drug instead of an original branded drug. We expect that the pressure for generic substitution will increase as a result of the implementation of the Medicare prescription drug benefit in 2006.

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Cross-Border Sales.    Price controls in one country can also have an impact in other countries as a result of cross-border sales. In the EU, products which we have sold to customers in countries with stringent price controls can legally be re-sold to customers in other EU countries with less stringent price controls, at a lower price than the price at which the product is otherwise available in the importing country. This risk could increase due to the addition of 10 nations to the EU in 2004. In North America, products which we have sold to customers in Canada, which has relatively stringent price controls, are sometimes re-sold into the US, again at a lower price than the price at which the product is otherwise sold in the US. Such imports from Canada to the US are currently illegal. However, there are ongoing political efforts at the federal, state and local levels to change the legal status of such imports.

        We expect that pressures on pricing will continue and may increase. Because of these pressures, there can be no certainty that in every instance we will be able to charge prices for a product that, in a particular country or in the aggregate, enable us to earn an adequate return on our investment in that product.

Public pressure on the pharmaceuticals industry could affect our business and results of operations.

        There is considerable public sentiment against the pharmaceuticals industry, and the industry is under the close scrutiny of the public and the media. In addition there is significant pressure on our industry from certain disadvantaged nations to make our products available to their people at drastically lower costs. Any increase in such negative public sentiment or increase in public scrutiny or pressure from such disadvantaged nations could lead, among other things, to changes in legislation, to changes in the demand for our products, additional pricing pressures with respect to our products, or increased efforts to undercut intellectual property protections. Such changes could affect our business and results of operations.

Risks Faced By Sandoz (Generics)

The success of Sandoz depends on our ability to successfully develop and commercialize additional generic pharmaceutical products.

        To a significant degree, the future results of Sandoz depend upon our ability to successfully commercialize additional generic pharmaceutical products. We must develop new generic products, and prove that they are the bio-equivalent of the originator products. Once developed, we must successfully manufacture and bring these new products to market. The development and commercialization process is both lengthy and costly and involves a high degree of risk. Our products currently under development may not be approved by regulatory authorities, or may not be approved as quickly as expected. In addition, we may not be able to successfully and profitably produce and market such products. Delays in any part of the process or our inability to obtain regulatory approval of our products could adversely affect our operating results by restricting or delaying our introduction of new products. The continuous introduction of new generic products is critical to our business. (Sandoz has been a separate Division since January 1, 2005. Before that Sandoz was a Business Unit of our Consumer Health Division.)

Our revenues and profits from any particular generic pharmaceutical products decline as our competitors introduce their own generic equivalents.

        Selling prices of generic drugs typically decline, sometimes dramatically, as additional companies receive approvals for a given product and competition for that product intensifies. To the extent that we succeed in being the first to bring to market a generic version of a significant product, our sales and our profits can be substantially increased in the period following the introduction of such product and prior to

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a competitor's introduction of an equivalent product. Our ability to sustain our sales and profitability on any product over time is dependent on both the number of new competitors for such product and the timing of their approvals. The overall profitability of Sandoz depends, among other things, on our ability to to be the first to bring significant new products to market. There can be no guarantee that we will achieve this goal in the future.

Our generic pharmaceutical products face intense competition from brand-name companies that sell or license their own generic products or successfully extend their market exclusivity period.

        Competition in the generic pharmaceutical market continues to intensify as the pharmaceutical industry adjusts to increased pressures to contain health care costs. Brand-name companies have taken aggressive steps to counter the growth of the generics industry. In particular, brand-name companies continue to sell their products to the generic market directly by acquiring or forming strategic alliances with generic pharmaceutical companies. No significant regulatory approvals are required for a brand-name manufacturer to sell directly or through a third party to the generic market. In addition, brand-name companies continually seek new ways to delay generic introduction and to decrease the impact of generic competition. These efforts by the brand-name pharmaceutical industry have had, and likely will continue to have, a negative effect on the results of operations of Sandoz.

Recent changes in the US regulatory environment may prevent us from utilizing the exclusivity periods that are important to the success of our generic products.

        Under US law the FDA must award 180 days of market exclusivity to the first generic manufacturer who challenges the patent of a branded product. However, recent changes in the Hatch-Waxman Act may affect the availability of this market exclusivity in the future. The new amendments now require generic applicants to launch their products within certain time frames or risk losing the marketing exclusivity that they had gained through being a first-to-file applicant.

Sandoz's success may depend on its ability to successfully challenge patent rights held by branded pharmaceutical companies.

        At times we seek approval to market generic products before the expiration of patents held by others for those products, based upon our belief that such patents are invalid, unenforceable, or would not be infringed by our products. As a result, we often face significant patent litigation. If we are unsuccessful in such litigation, then our ability to launch new products will be substantially limited. In addition, depending upon a complex analysis of a variety of legal and commercial factors, we may, in certain circumstances, elect to market a generic product even though litigation is still pending. This could be before any court decision or while an appeal of a lower court decision is pending. Should we elect to proceed in this manner, we could face substantial patent liability damages if the final court decision is adverse to us.

Risks Faced By The Entire Novartis Group

Government regulation may adversely affect our business.

        Like our competitors, we are subject to strict government controls on the development, manufacture, marketing, labeling, distribution and pricing of our products. We must obtain and maintain regulatory approval for our pharmaceutical and many of our other products from regulatory agencies in order to sell our products in a particular jurisdiction.

        Risks regarding the development of new products.    Our research and development activities are heavily regulated. If we fail to comply fully with applicable regulations, then there could be a delay in the submission or approval of potential new products for marketing approval. In addition, the submission of an application to a regulatory authority does not guarantee that a license to market the product will be granted. Each authority may impose its own requirements and delay or refuse to grant approval, even when a product has already been approved in another country. In our principal markets, the approval

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process for a new product is complex, lengthy and expensive. The time taken to obtain approval varies by country but generally takes from six months to several years from the date of application. This registration process increases the cost to us of developing new products and increases the risk that we will not succeed in selling them successfully.

        Risks regarding the manufacture of our products.    The manufacture of our products is heavily regulated by governmental authorities around the world, including the FDA. If we or our third party suppliers fail to comply fully with such regulations then there could be a government-enforced shutdown of production facilities, which in turn could lead to product shortages. A failure to comply fully with such regulations could also lead to a delay in the approval of new products.

        Risks regarding the marketing of our products.    The marketing of our products is also heavily regulated by governments throughout the world. In many countries, particularly those in Europe, we are prohibited from marketing many of our products directly to consumers. In the US, some direct-to-consumer marketing practices are permitted, but the scope of allowable marketing practices is still significantly limited. Most countries also place restrictions on the manner and scope of permissible marketing to physicians and other health professionals. The effect of such regulations may be to limit the amount of revenue which we may be able to derive from a particular product. In addition, if we fail to comply fully with such regulations then civil or criminal actions could be brought against us.

        Risks regarding the safety and efficacy of our products.    Regulatory agencies may at any time reassess the safety and efficacy of our products based on new scientific knowledge or other factors. Such reassessments could result in the amendment or withdrawal of existing approvals to market our products, which in turn would result in a loss of revenue, and could serve as an inducement to bring lawsuits against us.

        Other regulatory and legal risks.    Changes in worldwide intellectual property protections and remedies, trade regulations and procedures, product counterfeiting, unstable governments and legal systems, intergovernmental disputes and possible nationalizations could also materially adversely affect our business or results of operations.

We operate in highly competitive and rapidly consolidating industries.

        We operate in highly competitive and rapidly consolidating industries. Our principal competitors are major international corporations with substantial resources for research and development, production and marketing. Our competitors are consolidating, and the strength of combined companies could affect our competitive position in all of our business areas.

Product liability claims could adversely affect our business and results of operations.

        Product liability claims are potentially a significant commercial risk for us. Substantial damage awards have been made in some jurisdictions against companies such as ours based upon claims for injuries allegedly caused by the use of their products. We are involved in a number of product liability cases claiming damages as a result of the use of our products. See "Item 8. Financial Information—8.A Consolidated Statements and Other Financial Information—8.A.7 Legal Proceedings." We maintain product liability insurance policies with third parties, covering claims on a worldwide basis, and we believe that our insurance coverage and provisions are reasonable and prudent in light of our business and the risks to which we are subject. However, because other pharmaceutical companies have faced large product liability losses, third party product liability insurance coverage is becoming increasingly difficult to obtain. As a result, claims may occur which in whole or in part, might not be covered by third party insurance or the provisions that we have put in place. While no such losses are presently expected, there can be no guarantee that we will not also face a loss which far exceeds available insurance and provisions.

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Patent claims by third parties could adversely affect our business and results of operations.

        We take all reasonable steps to ensure that our products do not infringe valid third-party intellectual property rights. Nevertheless, third parties may assert claims against us for infringement. As a result, we can become involved in extensive litigation regarding our products. If we are unsuccessful in defending ourselves against these suits, we could be subject to injunctions preventing us from selling our products, or to damages, which may be substantial. Either event could have a material adverse effect on our consolidated financial position, results of operations or liquidity.

Our business will continue to expose us to risks of environmental liabilities.

        In our product development programs and manufacturing processes, it is sometimes necessary for us to use hazardous materials, chemicals, biologics, viruses and toxic compounds. These programs and processes expose us to risks of accidental contamination, events of noncompliance with environmental laws and regulatory enforcement, personal injury, property damage and claims resulting from these events. If an accident occurred, or if we discover contamination caused by prior operations, we could be liable for clean-up obligations, damages or fines, which could have an adverse effect on our business and results of operations.

        The environmental laws of many jurisdictions impose actual and potential obligations on us to remediate contaminated sites. These obligations may relate to sites:

•

that we acquire, own or operate;



•

that we formerly owned or operated; or



•

where waste from our operations was disposed.

        These environmental remediation obligations could significantly reduce our operating results. In particular, our financial accruals for these obligations may be insufficient if the assumptions underlying the accruals—including our assumptions regarding the portion of the waste at a site for which we are responsible—prove incorrect, or if we are held responsible for additional contamination.

        Stricter environmental, safety and health laws and enforcement policies could result in substantial costs and liabilities to us, and could subject our handling, manufacture, use, reuse or disposal of substances or pollutants to more rigorous scrutiny than is currently the case. Consequently, compliance with these laws could result in significant capital expenditures as well as other costs and liabilities, thereby harming our business and operating results.

The manufacture of our products is technically highly complex, and a supply interruption or delay could adversely affect our business and results of operations.

        The products we market, distribute and sell are either manufactured at our own dedicated manufacturing facilities, or through toll manufacturing arrangements or supply agreements with third parties. Since many of our products are the result of technically complex manufacturing processes, and are sometimes dependent on highly specialized raw materials, we can provide no assurances that supply sources will not be interrupted from time to time. In addition, for these same reasons, the volume of production of any product cannot be rapidly altered. As a result, if we should fail to accurately predict market demand for any of our products then we may not be able to produce enough of the product to meet that demand, or may produce too much of the product, either of which could affect our business and operating results.

Foreign exchange fluctuations may adversely affect our earnings and the value of some of our assets.

        A significant portion of our earnings and expenditures are in currencies other than US dollars, our reporting currency. In 2004, 43% of our sales were made in US dollars, 26% in Euro, 8% in Japanese yen, 3% in Swiss francs and 20% in other currencies. In 2004, 37% of our costs were generated in US dollars,

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23% in Euro, 15% in Swiss francs, 5% in Japanese yen and 20% in other currencies. Changes in exchange rates between the US dollar and other currencies can result in increases or decreases in our costs and earnings. Fluctuations in exchange rates between the US dollar and other currencies may also affect the reported value of our assets measured and the components of shareholders' equity. We seek to minimize our currency exposure by engaging in hedging transactions where we deem it appropriate. To mitigate some of these risks, we may hedge certain foreign currency positions for 2005. We cannot predict, however, all changes in currency and interest rates, inflation or other factors, which could affect our international businesses.

The price of our ADSs and the US dollar value of any dividends may be affected by fluctuations in the US dollar/Swiss franc exchange rate.

        Our American Depositary Shares (ADSs) trade on the New York Stock Exchange in US dollars. Since the shares underlying the ADSs are listed in Switzerland on the SWX Swiss Exchange (SWX) and trade on the European trading platform virt-x in Swiss francs, the value of the ADSs may be affected by fluctuations in the US dollar/Swiss franc exchange rate. If the value of the Swiss franc decreases against the US dollar, the price at which our ADSs trade may decrease. In addition, since any dividends that we may declare will be denominated in Swiss francs, exchange rate fluctuations will affect the US dollar equivalent of dividends received by holders of ADSs. If the value of the Swiss franc decreases against the US dollar, the value of the US dollar equivalent of any dividend will decrease accordingly.

Holders of ADSs may not be able to exercise preemptive rights attached to shares underlying ADSs.

        Under Swiss law, shareholders have preemptive rights to subscribe for cash for issuances of new shares on a pro rata basis. Shareholders may waive their preemptive rights in respect of any offering at a general meeting of shareholders. Preemptive rights, if not previously waived, are transferable during the subscription period relating to a particular offering of shares and may be quoted on the SWX. US holders of ADSs may not be able to exercise the preemptive rights attached to the shares underlying their ADSs unless a registration statement under the US Securities Act of 1933, as amended, is effective with respect to such rights and the related shares, or an exemption from the registration requirements thereunder is available. We would evaluate at the time of any share offering the costs and potential liabilities associated with any such registration statement, as well as the indirect benefits of enabling the exercise by the holders of ADSs of the preemptive rights associated with the shares underlying their ADSs, and any other factors we would consider appropriate at the time, and then would make a decision as to whether to file such a registration statement. We cannot guarantee that any registration statement would be filed, or, if filed, that it would be declared effective. If preemptive rights could not be exercised by an ADS holder, JPMorgan Chase Bank, N.A., as depositary, would, if possible, sell such holder's preemptive rights and distribute the net proceeds of the sale to the holder. If the depositary determines, in its discretion, that such rights could not be sold, the depositary might allow such rights to lapse. In either case, the interest of ADS holders in Novartis would be diluted and, if the depositary allows rights to lapse, holders of ADSs would not realize any value from the granting of preemptive rights.

Decreases in financial income could affect our earnings.

        In recent years, we have earned a level of net financial income that exceeds our benchmarks in a difficult investment environment. We have accomplished this primarily through effective currency management and investment strategies. Given the volatile nature of investment markets, there can be no guarantee that this performance will be repeated in the future, or that we can avoid suffering losses from our management of our financial assets.

Changes in accounting rules could affect our reported results.

        The International Accounting Standards Board has and will continue to critically examine current International Financial Reporting Standards (IFRS) with a view toward increasing international

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harmonization of accounting rules. This process of amendment and convergence of worldwide accounting rules resulted in significant amendments to the existing rules as of January 1, 2005 in such areas as the accounting for share-based compensation, goodwill and intangibles, marketable securities and derivative financial instruments, and the classification of certain income statement and balance sheet positions. These amendments are discussed in more detail in note 32m(xii) to the consolidated financial statements.

Changes in tax laws could adversely affect our earnings.

        Changes in the tax laws of Switzerland, the US, or other countries in which we do significant business, as well as changes in our effective tax rate for the fiscal year caused by other factors, including changes in the interpretation of tax law by local tax officials, could affect our net income. While certain changes were enacted to the tax laws of major countries during 2004, those changes are not expected to materially impact our net income. It is not possible to predict the impact on our results of any tax legislation which may be enacted in the future.

Earthquakes could affect our business and results of operations.

        Our corporate headquarters and certain of our major Pharmaceutical Division production facilities are located near major earthquake fault lines in Basel, Switzerland. In the event of a major earthquake, we could experience business interruptions, destruction of facilities and/or loss of life, all of which could materially adversely affect us.

Changes in global economic conditions and politics could affect our business and results of operations.

        Our future results could be affected by global economic and political changes. In the recent past, terrorist attacks have had an impact on global economic conditions. Any additional terrorist attacks which may occur in the future, and any related military activity around the world, could have a similar impact, which could affect our business and results of operations.

Item 4.    Information on the Company

4.A  History and Development of Novartis

        Novartis is a world leader in the research, development, manufacturing and marketing of products to protect and improve health and well-being. Our goal is to discover, develop and successfully market innovative products to cure diseases, to ease suffering and to enhance quality of life. We also seek to provide a return to shareholders that reflects our performance and to adequately reward those who invest ideas and resources in our company.

        In 2004, Novartis generated consolidated net sales of $28.2 billion, invested $4.2 billion in research and development and employed approximately 81,400 people worldwide through its activities in more than 140 countries.

        Created in 1996 through the merger of Ciba-Geigy and Sandoz, up to December 31, 2004 Novartis was organized into two Divisions:

•

Pharmaceuticals, which comprises our activities in innovation-driven prescription medicines; and



•

Consumer Health, which comprises our activities in Sandoz generic drugs, Over-the-Counter (OTC) self-medication products, animal health, medical nutrition, infant & baby foods, and lens and vision care.

        As of January 1, 2005 Sandoz, which comprises our activities in generic drugs, became a separate Division. It was part of the Consumer Health Division until December 31, 2004.

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        Our name, derived from the Latin novae artes, means "new skills" and reflects our commitment to focus on research and development to bring new health-care products to the patients and physicians that we serve.

        Ranked by IMS Health (IMS) as one of the fastest-growing global pharmaceutical companies worldwide in recent years, we are seeking to further expand our market share by introducing new products and maximizing sales. We have received approvals for 13 new products in the US since 2000. We are making renewed investments in research and development, particularly in the Novartis Institutes for BioMedical Research headquarters in Cambridge, Massachusetts.

        Novartis is the only major pharmaceutical company with a global leadership position in both patented and generic pharmaceuticals. In light of the aging populations of many major countries, and the associated rise in health care expenditures, we believe generics will continue to play an increasingly important role as a cost-effective therapeutic option. Our objective is to strengthen our position as a medicines company, offering a broad range of drug treatment options to patients, physicians and payors, including:

•

Innovative, patent-protected prescription medicines that address significant unmet medical needs;



•

Cost-effective and high-quality generic medicines of growing importance to health-care systems today; and



•

Leading self-medication (OTC) brands to enhance overall health and well-being.

        Our Pharmaceuticals Division has a portfolio of products that is balanced between products marketed to specialists and products which are marketed to primary care physicians. In 2004, a total of 5 products received regulatory approvals in major markets.

        We intend to continue supporting and accelerating the development of new products in our pipeline, which has a total of 10 projects in clinical development or in registration procedures.

        A total of 52 projects are in late-stage clinical development (Phase II, Phase III and registration), with a particular focus on a group of ten priority compounds, many of which have the potential to address urgent unmet medical needs and be first-in-class medicines in their respective therapeutic areas.

        Novartis AG, headquartered in Basel, Switzerland, is a public company incorporated under the laws of Switzerland with an indefinite duration. We are domiciled in and governed by the laws of Switzerland. Our registered office is located at the following address:

Novartis AG
Lichtstrasse 35
CH-4056 Basel
Switzerland
Telephone: 011-41-61-324-1111
Web: www.novartis.com

        Our registered shares are listed in Switzerland on the SWX Swiss Exchange ("SWX") and traded on the European trading platform virt-x. Our American Depositary Shares are listed on the New York Stock Exchange ("NYSE"). Our shares are also traded on International Retail Service (IRS) at the London Stock Exchange. In the US, Corporation Service Company (2711 Centerville Road, Suite 400, Wilmington, Delaware 19808, telephone: 1-800-927-9800) acts as our agent solely for the purpose of accepting service of process in respect of registration statements on Forms F-3 under the US Securities Act of 1933, as amended.

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Major Corporate Developments 2002-2004

2004

January		A new CHF 3.0 billion share repurchase program is announced to start following completion of a program initiated in 2002. Shareholders at the Annual General Meeting (AGM) approved the program in February 2004, and it commenced in August 2004.
February		The global adult medical nutrition business of Mead Johnson & Company, a Bristol-Myers Squibb Company subsidiary is acquired for approximately $385 million in cash.
April		Novartis studies making a bid for a potential business combination with the French-German pharmaceutical group Aventis SA at the request of the Aventis Supervisory Board, but declines to make a bid.
June		Novartis announces plans to acquire two generics companies: the Danish company Durascan A/S from AstraZeneca plc and Sabex Holdings Ltd of Canada. Durascan expands our generics presence in the Nordic region, while Sabex, which was acquired for $565 million in cash, provides strong growth opportunities in injectable generics and new entry into the Canadian generics sector.
July		Novartis Institute for Tropical Disease opens its new facility in Singapore with particular focus on biomedical research for dengue fever and drug-resistant tuberculosis (TB).
October		Novartis announces the reorganization of its Sandoz generics business. Effective January 1, 2005, Sandoz ceases to be a Business Unit of our Consumer Health Division, and becomes a separate Division.
2003
February		US rights to market the tension headache products Fioricet and Fiorinal are sold to Watson Pharmaceuticals, Inc. for $178 million.
April		An anti-incontinence product called Enablex in certain countries and Emselex in other countries is acquired from Pfizer Inc. We will pay up to $225 million for the rights to this product. Part of that amount is contingent on obtaining approval in the US (approved in December 2004) and EU (approved in October 2004).
May		A majority ownership interest is acquired in Idenix Pharmaceuticals, Inc., for an initial payment of $255 million in cash, with up to an additional $357 million in future contingent payments to the selling stockholders if Idenix achieves certain future targets. We also obtained options to license future products from Idenix. In each case, we may pay additional amounts to Idenix in the event the applicable drug achieves certain future targets. In July 2004, Idenix completed an initial public offering (IPO) of its shares, and Novartis retained its existing 57% stake.
June		Novartis groups all of its generic pharmaceutical companies under the brand name Sandoz as part of a worldwide initiative to unite its generic pharmaceutical operations.
November		Novartis confirms its support for the Universal Declaration of Human Rights and announces new corporate human rights guidelines to meet its public commitments under the UN Global Compact.

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2002
January		Two US farm animal vaccine companies, Grand Laboratories Inc., of Iowa, and ImmTech Biologies Inc., of Kansas, are acquired for a combined minimum purchase price of $99 million, of which $78 million was settled in Novartis American Depositary Shares. The final price may increase depending on whether certain future sales and other targets are met.
November		Our Food & Beverage business is sold to Associated British Foods plc for $270 million in cash. The remaining Health Food & Slimming and Sports Nutrition businesses were reorganized as a stand-alone unit, Nutrition & Santé, which for external reporting purposes has been consolidated into the Consumer Health Division's Medical Nutrition Business Unit.
		Sandoz acquires more than 99% of Lek Pharmaceuticals d.d., the Slovenian generics company, for $0.9 billion in cash. In 2003, Lek was delisted from the Ljubljana Stock Exchange and Sandoz acquired its remaining outstanding shares.

4.B  Business Overview

        Novartis is a world leader in both patent-protected and generic pharmaceuticals as well as consumer health products. Our aim is to seek and maintain leadership positions in these businesses.

        Our company was organized into two Divisions up to December 31, 2004: Pharmaceuticals and Consumer Health.

        The Pharmaceuticals Division is organized into two marketing organizations—Primary Care and Specialty Medicines—that develop and market branded pharmaceutical products in seven therapeutic areas. It also includes the Novartis Institutes for BioMedical Research (NIBR) which was established in 2003 with the aim of redefining drug discovery in a new era marked by the completion of the human genome sequence. NIBR is headquartered in Cambridge, Massachusetts, and has affiliates worldwide.

        In 2004, the Consumer Health Division had six Business Units, all of which coordinate the worldwide research, development, manufacturing and marketing of their respective products. The Business Units are: Sandoz (generics), OTC self-medication, Animal Health, Medical Nutrition, Infant & Baby and CIBA Vision. As of January 1, 2005, Sandoz became a separate Division and will no longer be incorporated in the Consumer Health Division.

        Sandoz is organized as a Retail Generics company which also operates two other businesses, Industrial Products and Biopharmaceuticals. The Retail Generics business produces finished dosage forms, which are sold to pharmacies, hospitals and other health care outlets. The Industrial Products business manufactures active pharmaceutical ingredients and their intermediates for internal requirements and industrial customers. The Biopharmaceuticals business, drawing on the company's rich experience in biotechnology, is developing to meet growing demand.

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Key Figures

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        The table below sets forth a regional breakdown of certain data for the years ended December 31, 2004, 2003 and 2002.

		Americas						Europe						Asia/Africa/Australia
		2004		2003		2002		2004		2003		2002		2004		2003		2002
		(in $ millions, except number of employees)
Net sales		13,285		12,036		10,558		10,289		8,788		6,832		4,673		4,040		3,487
Operating income		1,417		897		958		4,625		4,505		3,825		497		487		309
Number of employees (at December 31)		30,186		28,608		28,328		38,229		37,510		32,595		12,977		12,423		11,954
Investment in property, plant and equipment		340		427		537		787		846		498		142		56		33
Depreciation of property, plant and equipment		229		220		198		510		480		355		41		37		39
Net operating assets		6,702		5,984		6,312		18,230		16,271		14,086		1,251		975		965

   
PHARMACEUTICALS

Overview

        Our Pharmaceuticals Division, which is made up of approximately 80 affiliated companies and 47,325 employees and sells to approximately 140 countries, offers a broad portfolio of branded prescription medicines focused on treating the unmet medical needs of patients worldwide. In 2004, the Division reported consolidated net sales of $18.5 billion, which represented 65% of total Group net sales.

        The Pharmaceuticals Division develops and markets products in the following therapeutic areas:

Primary Care

•

Cardiovascular & Metabolism



•

Neuroscience



•

Respiratory & Dermatology



•

ABGHI (Arthritis, bone, gastrointestinal, hormone replacement therapy, infectious diseases)

Specialty Medicines

•

Oncology & Hematology



•

Transplantation & Immunology



•

Ophthalmics

        Our Pharmaceutical Division's current product portfolio includes more than 40 key marketed products, many of which are their respective market leaders. In addition, the Division's portfolio of development projects includes more than 75 potential new products and potential new indications or formulations for existing products in various stages of clinical development.

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Selected Key Marketed Products

        The following table describes selected key marketed pharmaceutical products, in alphabetical order, by therapeutic area. Not all products are registered in all markets for all of the indications described below.

Therapeutic Area		Compound		Generic name		Indication		Formulation
PRIMARY CARE
Cardiovascular & Metabolism		Diovan HCT/ Co-Diovan		valsartan and hydrochlorothiazide		Hypertension		Film-coated tablet
		Diovan		valsartan		Hypertension Heart failure in patients intolerant of ACE inhibitors Post-myocardial infarction		Capsule Coated tablet
		Lescol/ Lescol XL		fluvastatin sodium		Primary hypercholesterolemia and mixed dyslipidemia Secondary prevention of coronary events Slowing the progression of atherosclerosis Increase of high-density lipoprotein cholesterol (HDL-C)		Capsule Tablet
		Lotensin/ Cibacen		benazepril hydrochloride		Hypertension		Coated tablet
		Lotensin HCT/ Cibadrex		benazepril hydrochloride and hydrochlorothiazide		Hypertension Adjunct therapy in heart failure Progressive chronic renal insufficiency		Coated tablet
		Lotrel		amlodipine besylate and benazepril hydrochloride		Hypertension		Capsule
		Starlix		nateglinide		Type 2 diabetes		Coated tablet

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Neuroscience		Comtan		entacapone		Parkinson's disease		Coated tablet
		Exelon		rivastigmine tartrate		Alzheimer's disease		Capsule Oral solution
		Focalin		dexmethylphenidate HCl		Attention-deficit hyperactivity disorder		Tablet
		Clozaril/ Leponex		clozapine		Treatment-resistant schizophrenia Prevention and treatment of recurrent suicidal behavior in patients with schizophrenia and schizoaffective disorder		Tablet
		Ritalin/ Ritalin LA		methylphenidate HCl		Attention-deficit hyperactivity disorder		Tablet Capsule
		Stalevo		carbidopa, levodopa and entacapone		Parkinson's disease		Coated tablet
		Tegretol		carbamazepine		Epilepsy Acute mania and bipolar affective disorders Treatment of pain associated with trigeminal neuralgia		Tablet Chewable tablet Syrup Suppository
		Trileptal		oxcarbazepine		Epilepsy, including pediatric monotherapy		Tablet Oral suspension
Respiratory & Dermatology		Elidel		pimecrolimus cream		Atopic dermatitis (eczema)		Cream
		Foradil		formoterol		Asthma Chronic obstructive pulmonary disease		Aerolizer (capsules) Aerosol
		Lamisil		terbinafine		Fungal infections of the skin and nails		Tablet Cream DermGel Solution Spray
		Xolair		omalizumab		Allergic asthma		Subcutaneous injection

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ABGHI (Arthritis, Bone, Gastrointestinal disease, Hormone replacement therapy and Infectious diseases)		Enablex/ Emselex		darifenacin hydrobromide		Overactive bladder		Tablet
		Famvir		famciclovir		Acute herpes zoster Recurrent genital herpes in immunocompetent patients Recurrent mucocutaneous herpes simplex infections in HIV- infected patients		Tablet
		Zelnorm/Zelmac		tegaserod		Irritable bowel syndrome with constipation Chronic constipation		Tablet
		Coartem/ Riamet		artemether and lumefantrine		Treatment of Plasmodium falciparum malaria or mixed infections that include Plasmodium falciparum Standby emergency malaria treatment		Tablet
		Combipatch/Estalis		estradiol norethisterone acetate		Symptoms of estrogen deficiency in post-menopausal women Post-menopausal osteoporosis		Patch
		Estraderm/ Estraderm MX		estradiol		Symptoms of estrogen deficiency in post-menopausal women Post-menopausal osteoporosis		Patch
		Estragest TTS		estradiol norethisterone acetate		Symptoms of estrogen deficiency in post-menopausal women Post-menopausal osteoporosis		Patch

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		Miacalcin/ Miacalcic		salmon calcitonin		Osteoporosis Paget's disease Hypercalcemia		Nasal spray Ampoule Vial
		Vivelle-Dot/ Estradot		estradiol		Symptoms of estrogen deficiency in post-menopausal women Post-menopausal osteoporosis		Patch
		Voltaren		diclofenac		Inflammatory forms of rheumatism Pain management		Coated tablet Drop Ampoule Suppository Gel
SPECIALTY MEDICINES
Oncology & Hematology		Femara		letrozole tablets/ letrozole		Advanced post-menopausal breast cancer (worldwide) Extended adjuvant use in early breast cancer following tamoxifen		Coated tablet
		Gleevec/ Glivec		imatinib mesylate/ imatinib		Certain forms of Chronic myeloid leukemia (CML) Certain forms of gastrointestinal stromal tumors (GIST)		Tablet Capsule
		Sandostatin LAR/ Sandostatin SC		octreotide acetate for injectable suspension/ octreotide acetate		Acromegaly Symptoms associated with functional gastroenteropancreatic endocrine tumors		Vial Ampoule Pre-filled syringe
		Zometa		zoledronic acid for injection/zoledronic acid		Hypercalcemia of malignancy Prevention of skeletal-related events in patients with bone metastases from solid tumors		Liquid concentrate Vial

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Transplantation & Immunology		Certican		everolimus		Prevention of organ rejection following heart or kidney transplantation		Tablet Tablet for oral suspension
		Myfortic		mycophenolic acid		Prevention of graft rejection following kidney transplantation		Enteric coated tablet
		Neoral		cyclosporine, USP modified		Prevention of graft rejection following organ and bone marrow transplantation Severe psoriasis Rheumatoid arthritis		Capsule Oral solution
		Simulect		basiliximab		Acute organ rejection in de novo renal transplantation Atopic dermatitis (eczema) Uveitis Nephrotic syndrome		Vial
Ophthalmics		Visudyne		verteporfin		Age-related macular degeneration (all forms of wet AMD)		Vial, activated by laser light
		Zaditor/ Zaditen		ketotifen		Allergic conjunctivitis		Eye drops

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Compounds in Development

        The following table describes some of our compounds and new indications for our existing products presently under development. "Submission" means that product registration documents have been submitted to the FDA, to regulatory authorities in the EU (by either the centralized or mutual recognition procedure) and/or to national health authorities in Europe, but not necessarily in all jurisdictions.

Therapeutic area			Project/ Compound		Generic name		Indication		Mechanism of action		Formulation		Planned filing dates/Current phase
PRIMARY CARE
Cardiovascular & Metabolism			Diovan		valsartan		Heart failure in patients intolerant of ACE inhibitors (Val-HeFT)		Angiotensin-II receptor blocker		Oral		US (approved) EU (submitted) Approved in five markets
							Post-myocardial infarction (VALIANT)				Oral		US/EU (submitted) Approved in 22 markets
			Diovan and Starlix		valsartan and nateglinide		Prevention of new onset type 2 diabetes, cardiovascular morbidity and mortality (NAVIGATOR)				Oral		³2007/III
			Lotrel		amlodipine besylate and benazepril hydrochloride		Hypertension (5-40 and 10-40)		ACE inhibitor and calcium channel blocker		Oral		US (Submitted)
							High-risk hypertension (ACCOMPLISH)				Oral		³2007/III
			LAF237		vildagliptin		Type 2 diabetes		Dipeptidyl-pepidase (DPP-4) inhibitor		Oral		2006/III
			SPP100		aliskiren		Hypertension		Renin inhibitor		Oral		2006/III
			NKS104		pitavastatin		Dyslipidemia		HMG CoA reductase inhibitor		Oral		³2007/II
			LBM642		TBD		Dyslipidemia		PPAR alpha and gamma dual agonist		TBD		³2007/I
			FAD286		TBD		Congestive heart failure				TBD		TBD/I
			VNP489		TBD		Hypertension		NEP inhibitor		TBD		TBD/I

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Neuroscience

Focalin XR

methylphenidate

Attention-deficit hyperactivity disorder

Dopamine transport blocker

Oral

US (submitted)

Exelon TDS

rivastigmine tartrate

Alzheimer's disease

Cholinesterase inhibitor

Transdermal patch

2006/III

Exelon

rivastigmine tartrate

Non Alzheimer's dementia

Cholinesterase inhibitor

Oral

2005/III

Trileptal NP

oxycarbazepine

Neuropathic pain

Voltage sensitive sodium channel blocker

Oral

2007/III

LIC477

licarbazepine

Bipolar disorder

Voltage sensitive sodium channel blocker

Oral

2007/III

AMP397

TBD

Epilepsy

AMPA receptor antagonist

Oral

³2007/II

SAB378

TBD

Neuropathic pain

Cannabinoid-1 receptor agonist

Oral

³2007/II

FTY720

TBD

Multiple sclerosis

Sphingosine-1- phosphate receptor agonist

Oral

³2007/II

AEP924

TBD

Depression

Somatostatin receptor antagonist

TBD

³2007/I

XBD173

TBD

Generalized anxiety disorder

Mitochondrial benzodiazepine receptor agonist

Oral

³2007/I

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Respiratory & Dermatology

Foradil

formoterol

Multi-dose dry powder inhaler in asthma

Long-acting beta-2 agonist

Dry powder for inhalation

US/EU (submitted) Approved in five European countries

Xolair

omalizumab

Allergic asthma

Anti-IgE monoclonal antibody

Sub- cutaneous

US (approved) EU (submitted)

Peanut allergy

Anti-IgE monoclonal antibody

Sub- cutaneous

2007/I

New formulations

Anti-IgE monoclonal antibody

Liquid formulation

2007/I

Lamisil

terbinafine

Fungal infection of the scalp in children

Fungal squalene epoxidase inhibitor

Oral

2006 (US)/III

Nail lacquer for fungal infection

Fungal squalene epoxidase inhibitor

Nail Lacquer

³2007/I

Elidel

pimecrolimus

Seborrheic dermatitis

T-cell and mast cell inhibitor

Cream

2006/II

Atopic dermatitis in infants

2006/III

Chronic hand dermatitis

2006/III

Elidel Ointment

pimecrolimus

Inflammatory skin diseases

T-cell and mast cell inhibitor

Ointment

2006/II

ASM981

pimecrolimus oral

Inflammatory skin diseases

T-cell and mast cell inhibitor

Oral

TBD/II

QAB149

TBD

Asthma Chronic obstructive pulmonary disease

Once-daily beta-2 agonist

Inhalation

2007/II

Foradil/ mometasone

Formoterol/ mometasone

Asthma Chronic obstructive pulmonary disease

Long-acting beta-2 agonist/inhaled corticosteroid

Inhalation

2007/I

ACZ885

TBD

Asthma

Monoclonal antibody to IL-1 beta

TBD

2007/I

VAG624

TBD

Acne

Steroid sulfatase inhibitor

TBD

TBD/I

ABN912

TBD

Asthma

Monoclonal antibody to monocyte chemoattractant protein-1

TBD

³2007/I

QAN747

TBD

Asthma Chronic obstructive pulmonary disease

TBD

³2007/I

QAE397

TBD

Asthma

TBD

³2007/I

QAK423

TBD

Asthma Chronic obstructive pulmonary disease

TBD

³2007/I

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ABGHI (Arthritis, Bone, Gastrointestinal diseases, Hormone replacement therapy, Infectious diseases)

Prexige

lumiracoxib

Osteoarthritis Acute pain Primary dysmenorrhea

Cyclo-oxygenase-2 inhibitor

Oral

UK (approved) EU (2005/III) US 2007/III

Rheumatoid arthritis

Cyclo-oxygenase-2 inhibitor

Oral

EU 2006/III

New formulations (oral suspension; parenteral)

Cyclo-oxygenase-2 inhibitor

Oral

TBD/I

Zelnorm/Zelmac

tegaserod

Irritable bowel syndrome with constipation Dyspepsia Gastroesophageal reflux disease Chronic constipation in certain countries

5HT4-receptor agonist

Oral Solution

US (approved) EU (submitted) 2006/II 2007/II

Aclasta

zoledronic acid

Paget's disease Osteoporosis Rheumatoid arthritis

Bisphosphonate, osteoclast inhibitor

Intravenous

US/EU (submitted) 2007/III ³2007/II

LTD600

telbivudine

Hepatitis B

Viral polymerase inhibitor

Oral

2005/III

LDC300

valtorcitabine

Hepatitis B

Viral polymerase inhibitor

Oral

³2007/II

AAE581

balicatib

Osteoporosis

Cathepsin K inhibitor

Oral

³2007/II

SMC021

calcitonin

Osteoporosis

Regulator of calcium homeostasis

Oral

³2007/II

ACZ885

TBD

Rheumatoid arthritis

Monoclonal antibody to IL-1 beta

TBD

³2007/I

AKU517

TBD

Gastroesophageal reflux disease

Reversible acid pump antagonist

TBD

³2007/I

LBM415

TBD

Anti-bacterial

Peptide deformylase inhibitor

TBD

³2007/I

AFG495

TBD

Osteoporosis

TBD

TBD/I

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SPECIALTY MEDICINES

Oncology & Hematolgy

Zometa

zoledronic acid

Treatment of bone metastases

Bisphosphonate

Intravenous

Japan (submitted)

Femara

letrozole

Breast cancer (extended adjuvant therapy)

Aromatase inhibitor

Oral

US (approved) EU (submitted)

Breast cancer (early adjuvant therapy)

Aromatase inhibitor

Oral

2005/III

ICL670

deferasirox

Chronic iron overload

Iron chelator

Oral

2005/III

PTK787

vatalanib

Colorectal cancer Solid tumors

Angiogenesis inhibitor

Oral

2005/III TBD/I

EPO906

patupilone

Solid tumors

Microtubule depolymerization inhibitor

Oral

2007/II

OctreoTher

edotreotide

Somatostatin receptor-positive tumors

Radioactive labeled peptide

Intravenous

TBD/II

PKC412

midostaurin

Acute myeloid leukemia (AML)

Signal transduction inhibitor

Oral

TBD/II

SOM230

pasireotide

Acromegaly GEP neuroendocrine tumors

Somatostatin (sst) 1/2/3/5 binder and hormone inhibitor

Intramuscular injection Sub cutaneous injection

2006/II

Gleevec/ Glivec

imatinib mesylate/ imatinib

Solid tumors

Signal transduction inhibitor

Oral

2007/II

LBQ707

gimatecan

Solid tumors

Topoisomerase-I inhibitor (cytotoxic)

Oral

2007/II

RAD001

everolimus

Solid tumors

Growth-factor-induced cell proliferation signal transduction inhibitor

Oral

³2007/II

AMN107

TBD

Chronic myeloid leukemia (CML)

Signal transduction inhibitor

Oral

2007/I

LBH589

TBD

Solid and liquid tumors

Histone deacetylase inhibitor

Oral

2007/I

AEE788

TBD

Solid tumors

Tyrosine kinase inhibitor

Oral

³2007/I

ABJ879

TBD

Solid tumors

Microtubule stabilizer

Intravenous injection

³2007/I

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Transplantation & Immunology

Certican

everolimus

Prevention of organ rejection

Growth-factor-induced cell proliferation inhibitor

Oral

EU (approved) US (submitted)

FTY720

TBD

Prevention of organ rejection

Sphingosine-1 -phosphate receptor agonist

Oral

2006/III

AEB071

TBD

Prevention of organ rejection

T-cell activation Ophthalmics

TBD

TBD/I

Ophthalmics

Visudyne

verteporfin

Age-related macular degeneration (AMD)(occult)

Photosensitizer for photodynamic therapy

Intravenous

2005/III

Sandostatin LAR

octreotide acetate

Diabetic retinopathy Other indications

Growth hormone and IGF-1 inhibitor

Intra muscular

2005/III

Lucentis™

ranibizumab

Age-related macular degeneration (AMD)

VEGF blocker

Intra-vitreal

2005 (EU)/III

Elidel

pimecrolimus

Dry eye

T-cell and mast cell

Eye drops

³2007/II

Blepharitis

inhibitor

Eye ointment

³2007/II

Phase I: First clinical trial of a new compound, generally performed in a small number of human volunteers, to assess clinical safety, tolerability as well as metabolic and pharmacologic properties.

Phase II: Clinical studies that test the safety and efficacy of the compound in patients with the targeted disease with the goal of determining the appropriate doses for further testing and evaluating study design as well as identifying common side effects and risks. (Cancer drugs, as well as those for other life-threatening diseases, can sometimes be submitted for approval based on only Phase II data).

Phase III: Large-scale clinical studies with several hundred or several thousand patients to establish safety and effectiveness for regulatory approval for indicated uses and to evaluate the overall benefit-risk relationship.

        The tables shown above and the summary that follows describe key products and compounds in development in the Pharmaceuticals Division. Unless otherwise indicated, and subject to required regulatory approvals and, in certain instances, contractual limitations, we intend to sell our marketed products throughout the world. These same compounds are in various stages of development throughout the world. For some compounds, the development process is ahead in the US, for other compounds, development is behind in the US. Due to the uncertainties associated with the development process, and due to regulatory restrictions in some countries, including the US, it may not be possible to obtain regulatory approval for any or all of the new compounds and new indications referred to in this Form 20-F.

Primary Care

Cardiovascular & Metabolism

        Novartis is a world leader in offering products to treat cardiovascular disease, particularly high blood pressure (hypertension), elevated cholesterol (hyperlipidemia) and heart failure. We believe that our broad portfolio of cardiovascular and metabolic agents offer some of the best tools available today to treat and protect patients along critical points of the cardiovascular continuum—from novel treatments for type 2 diabetes and medicines to manage hypertension and high cholesterol, to life-saving therapies following heart attack and for patients who are suffering from heart failure.

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        Our pipeline includes compounds with the potential to change the way cardiovascular and metabolic diseases are treated, in particular the oral DPP-4 inhibitor LAF237 (vildagliptin) for type 2 diabetes and the oral renin inhibitor SPP100 (aliskiren) for hypertension.

Key Marketed Products

•

Diovan (valsartan) and Co-Diovan/Diovan HCT (valsartan and hydrochlorothiazide) are leaders in the angiotensin II receptor blocker (ARBs) class of anti-hypertensive (high-blood pressure) agents. The ARB drug class has been a key growth driver in the global anti-hypertensive market, with Diovan consistently ranking as the most prescribed brand in this class, according to IMS Health. Diovan specifically inhibits a hormone, angiotensin II, from binding to a receptor and causing arteries to tighten and narrow, an action that can cause high blood pressure. The fixed combination product Co-Diovan, which includes the diuretic hydrochlorotiazide, provides additional efficacy for patients who require a greater reduction in blood pressure than can be achieved with either agent alone. In the US, Diovan is approved for the treatment of hypertension as well as for congestive heart failure in patients who are intolerant of angiotensin converting enzyme (ACE) inhibitors, another class of anti-hypertensive agents. Besides the US, Diovan is available in more than 50 countries for the treatment of heart failure and in more than 80 for the treatment of hypertension. Diovan was first launched in 1996.



•

Lescol/Lescol XL (fluvastatin sodium) is a statin lipid-lowering agent approved as an adjunct to diet for reducing elevated total cholesterol levels (hyperlipidemia) as well as to treat abnormal cholesterol levels (dyslipidemia) and to slow the progression of hardening of the arteries (atherosclerosis) in patients with coronary heart disease. Lescol was first launched in the UK in 1995 and it is also indicated for use in reducing the risk of undergoing coronary revascularization procedures in patients with coronary heart disease. Lescol XL is an extended-release formulation launched in 2000 to allow for once-daily dosing.



•

Lotensin/Cibacen (benazepril) is an ACE inhibitor used to treat high blood pressure that was first launched in 1989 as Cibacen in some areas of the world and then in 1991 in the US under the trade name Lotensin. In addition, in certain countries this medicine is approved for use as an adjunct therapy in heart failure and for the treatment of chronic renal insufficiency, a kidney disorder. A fixed-combination product called Lotensin HCT/Cibadrex has been developed as a second-line high blood pressure therapy that combines benazepril hydrochloride with hydrochlorothiazide, a widely used diuretic. In January 2005, the Swedish specialty medicines company Meda acquired the rights to Cibacen and Cibadrex in most European markets for a cash payment of $135 million.



•

Lotrel (benazepril and amlodipine) is a fixed combination anti-hypertensive treatment consisting of the ACE inhibitor benazepril used in Lotensin/Cibacen and the leading calcium antagonist amlodipine. Launched in 1996 and only available in the US, Lotrel has been ranked by IMS Health as one of the leading prescribed branded combination anti-hypertensive therapies in the US since 2002.



•

Starlix (nateglinide) is an oral blood-glucose lowering agent for use in patients with type 2 diabetes. The drug helps to control blood glucose levels at mealtime through a rapid onset of action for a short duration. Launched in both the US and EU in 2001, it is approved in the EU for use in combination therapy with metformin, another type of oral anti-diabetic agent. In the US, Starlix is approved as a monotherapy in patients initiating drug treatment and in combination with the oral anti-diabetic agents metformin or thiazolidinediones.

New Indications in Development

•

Diovan (valsartan) has been approved for congestive heart failure in the US and in other global markets. Additionally, Novartis has filed for this indication in the EU based on the positive clinical benefits in heart failure in the large-scale VAL-HEFT trial. Diovan has also been filed in the US

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and EU for use in the treatment of patients following a heart attack, known as "post-myocardial infarction," based on data from the VALIANT trial. To date, Diovan has been approved for this indication in over 22 countries. In addition, Diovan is in further development for prevention of new-onset type 2 diabetes and cardiovascular disease in patients with impaired glucose tolerance (IGT). Diovan is currently being investigated alone and in combination with Starlix (nateglinide) in the NAVIGATOR (Nateglinide and Valsartan in Impaired Glucose Tolerance and Outcomes Research) trial. At its conclusion, the trial will demonstrate whether Diovan and/or Starlix can reduce the incidence of cardiovascular disease events and prevent people with IGT from progressing to clinical diabetes. Results are expected to be available in 2008.

•

Starlix (nateglinide) is currently being investigated in combination with Diovan as part of the NAVIGATOR trial.



•

Lotrel (amlodipine besylate and benazepril hydrochloride) has two new dosages being developed for hypertension (Lotrel 5-40 and Lotrel 10-40). We received an "approvable" letter from the FDA for these new dosages, requesting additional data before the dosages can be approved. We are conducting further studies in order to develop that data, and expect the studies to be completed in the second quarter of 2005. In addition, more than 12,000 patients are being treated with Lotrel or with a combination of benazepril hydrochloride and the diuretic hydrochlorothiazide in the ACCOMPLISH trial that began in October 2003 to investigate cardiovascular morbidity and mortality in patients with high-risk hypertension

Compounds in Development

•

LAF237 (vildagliptin) is an oral dipeptidyl peptidase (DPP)-4 inhibitor in Phase III development for the treatment of type 2 diabetes. The first in a novel class called incretin enhancers, vildagliptin increases levels of two specific incretin hormones found in the stomach—glucagon-like peptide (GLP)-1 and gastric inhibitory polypeptide (GIP)—by blocking the action of DPP-4, an enzyme that normally inactivates them. GLP-1 and GIP are secreted from the intestine in response to food and stimulate insulin production by the beta cells of the pancreas. GLP-1 also reduces the secretion of glucagon, a hormone that signals the liver to produce glucose. In this way, LAF237 helps to address the imbalance between insulin supply and demand, one of the underlying causes of type 2 diabetes. LAF237 is currently in Phase III development after Phase IIb studies showed it to be efficacious both as monotherapy and in combination with metformin as well as showing a good safety and tolerability profile. In addition, the combination of LAF237 and metformin showed good durability of efficacy over a one-year period compared to metformin alone. Phase III data are expected at the end of 2005. Submission is planned for early 2006.



•

SPP100 (aliskiren) is the first in a new class of hypertension agents called renin inhibitors that offers a once-daily treatment with efficacy and safety comparable to angiotensin-receptor blockers (ARBs), another class of high blood pressure treatments. In contrast to other antihypertensive agents, SPP100 lowers renin enzyme activity in the bloodstream, so it may have the potential to better protect against heart attacks (myocardial infarction) and kidney disease. Phase IIb/III data confirmed efficacy as a monothereapy and suggested benefits of combination with ARBs. Phase III data are expected in Q3 2005. The first regulatory submission is planned for early 2006.



•

NKS104 (pitavastatin) is a lipid-lowering agent in development for the treatment of elevated total cholesterol. Novartis has the European marketing rights under a licensing agreement from Kowa. Clinical trials have shown that NKS104 lowers "bad" LDL cholesterol and triglycerides while increasing "good" HDL cholesterol levels. It is currently in Phase II development.



•

LBM642 is a preoxisome proliferator-activated receptor (PPAR) alpha and gamma dual agonist being developed for the treatment of abnormal cholesterol (dyslipidemia), diabetes and obesity. Triglyceride-lowering effects have been demonstrated in a Phase I trial, and additional Phase I trials are ongoing with respect to diabetes.

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•

FAD286 is a novel compound for the treatment of congestive heart failure, currently in Phase I trials.



•

VNP489 is the combination of a novel inhibitor of the neutral endopeptidase and valsartan, now in Phase I trials for the treatment of hypertension.

Neuroscience

        Novartis has been a leader in the neuroscience area for more than 50 years, having pioneered early breakthrough treatments for a series of disorders that include Alzheimer's disease, Parkinson's disease, attention deficit/hyperactivity disorder, epilepsy, depression, schizophrenia and migraine.

        Among our leading products are the anti-epileptic Trileptal, which has been used to treat over one million adults and children suffering from epilepsy, and Exelon, which was first approved in 1997 and is now available for the treatment of mild to moderate Alzheimer's disease in more than 70 countries.

        Novartis continues to be active in the research and development of new compounds and is committed to addressing unmet medical needs as well as supporting patients and their families affected by these disorders. Ongoing research to extend the current product portfolio in Neuroscience includes projects in psychiatric diseases (bipolar disorder, psychosis, depression and anxiety), neurological disorders (Alzheimer's disease, multiple sclerosis, amyotrophic lateral sclerosis) and chronic pain.

Key Marketed Products

•

Clozaril/Leponex (clozapine) remains a leading anti-psychotic for treatment-resistant schizophrenia. First launched in the 1970s and facing generic competition in the US and many other markets, this product is also indicated for the prevention of suicidal behavior in patients with schizophrenia or schizo-affective disorder.



•

Comtan (entacapone) treats Parkinson's disease by enhancing the action of levodopa, the standard therapy for Parkinson's disease. The compound is licensed from Orion Pharma, which retains exclusive rights to market Comtan under a different brand name in certain European countries.



•

Exelon (rivastigmine tartrate) is a symptomatic treatment of mild to moderate Alzheimer's disease dementia. It belongs to a class of drugs known as cholinesterase inhibitors (ChEI's) that increase neurotransmitter activity in the brain. It was approved for the treatment of Alzheimer's disease in 1997 and is currently used in over 70 countries with over 2.8 million patient years of treatment.



•

Focalin (dexmethylphenidate HCl) is the single isomer version of methylphenidate and is approved in the US for the treatment of ADHD (attention deficit/hyperactivity disorder). This compound is licensed from Celgene Corporation.



•

Ritalin LA (methylphenidate hydrochloride) is a once-daily formulation of Ritalin launched in 2002 for the treatment of attention-deficit hyperactivity disorder in both children and adults. This product, which removes the need for a midday dose, has been approved in a number of countries, including the US, EU and countries in Latin America.



•

Stalevo (carbidopa, levodopa and entacapone) is an optimized levodopa product indicated for the treatment of Parkinson's disease patients with signs and symptoms of end-of-dose "wearing off." This product combines levodopa, considered the most effective treatment for Parkinson's disease, with the enzyme inhibitors carbidopa and entacapone. It has been shown to significantly improve the ability of patients with Parkinson's disease to perform everyday tasks and to reduce symptoms associated with the disease. Licensed from Orion Pharma, Stalevo was first launched in the US in 2003 and is now available in all major European markets. Orion retains exclusive rights to this product in certain Scandinavian countries, Germany, the UK and Ireland.



•

Tegretol XR/CR (carbamazepine) is the long-acting formulation of Tegretol, which has long been a mainstay for the treatment of epileptic seizures and has faced generic competition for some time.

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First launched in 1996, Tegretol XR/CR is also indicated in the US for the treatment of pain associated with trigeminal neuralgia, which is characterized by attacks of intense pain affecting the face, as well as for the treatment of acute mania and bipolar affective disorders in the EU.

•

Trileptal (oxcarbazepine) is an anti-epileptic drug for the treatment of partial seizures as adjunctive or monotherapy in both adults and children over age 4. It acts by stabilizing neuronal functions, thereby controlling and limiting the spread of seizures. First approved in Europe in 1999 and in the US in 2000, Trileptal can be used as a monotherapy in adults and children or in combination with other anti-epileptic medicines in adults.

New Indications in Development

•

Exelon (rivastigmine tartrate) is in development for further indications like dementia associated with Parkinson's disease. In addition, a transdermal formulation called Exelon TDS is in Phase III development for Alzheimer's disease and aims to increase patient convenience and compliance due to improved tolerability of the therapy.



•

Focalin XR (dexmethylphenidate HCl) is the single-isomer version of methylphenidate, the active ingredient in Ritalin. A long-acting formulation was submitted for US regulatory approval in July 2004 for the treatment of pediatric and adult attention-deficit hyperactivity disorder. This compound is licensed from Celgene. Focalin XR uses SODAS™ technology, a proprietary drug delivery technology under license from Elan.



•

Exelon (rivastigmine tartrate) is in development for additional indications and formulations. A transdermal formulation, Exelon TDS, is in Phase III for Alzheimer's disease, and is aimed at increasing patient convenience and compliance due to improved tolerability of the therapy.



•

Trileptal NP (oxcarbazepine) is in Phase III for the treatment of neuropathic pain.



•

Trileptal (oxcarbazepine) is being prepared for US and EU submission to extend the pediatric indication down to one month of age.

Compounds in Development

•

LIC477 (licarbazepine) is a sodium channel blocker. Phase III trials were initiated in 2004 for the treatment of acute manic episodes in bipolar disorders.



•

AMP397 is an AMPA receptor antagonist in Phase II development for treating epilepsy.



•

SAB378 is a cannabinoid-(CB)-1 receptor agonist in Phase II development for the treatment of neuropathic pain.



•

FTY720, an oral immunomodulator with a novel mechanism of action, has shown significant efficacy in multiple sclerosis (MS) in a Phase II study. FTY720 has the potential to become the first efficacious oral therapy for MS, a condition estimated to affect more than one million people worldwide. Data from the Phase II study showed a significant reduction in the relapse rate and in the number of brain lesions detected by MRI scan as well as a longer time to first relapse. The vast majority of patients are continuing in the extension phase. One-year data are expected in mid-2005. Phase III studies are planned to start in mid-2005. FTY720 is licensed from Mitsubishi.



•

AEP924 is a somastatin receptor antagonist in Phase I trials for the treatment of depression.



•

XBD173 is a mitochondrial benzodiazepine ligand in Phase I trials for the treatment of anxiety.



•

Iloperidone has been out-licensed to Vanda Pharmaceuticals, Inc., while AAG561 and TCH346 have been terminated.

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Respiratory & Dermatology

        Our current focus in dermatology is on the treatment of two very common diseases—the inflamed skin condition known as atopic dermatitis, or eczema, and fungal nail infections. Novartis offers a series of leading medicines for these conditions. Elidel is the first and only non-steroid cream for eczema, a disease that affects about 10% of children in the US, while Lamisil is the most frequently prescribed treatment worldwide for fungal nail infection.

        Novartis also offers various therapies in the respiratory field, including the long-acting bronchodilator Foradilfor the treatment of asthma and chronic obstructive pulmonary disease (COPD). In addition, we are developing Xolair, a novel biological therapy already approved in the US, Australia, New Zealand and Brazil that targets an underlying cause of allergic asthma.

Key Marketed Products

•

Elidel (pimecrolimus cream) is the first non-steroid cream approved for the treatment of atopic dermatitis, a skin condition commonly known as eczema, in adults and children. It is one of the first new eczema treatments introduced since the 1950s, when topical corticosteroids—historically the mainstay of therapy—became available. First launched in 2002 in the US, Elidel is now registered in approximately 90 countries, including many EU markets.



•

Foradil (formoterol fumarate) is a long-acting bronchodilator that offers 5 minute onset of action and 12 hour relief of symptoms for patients with asthma and chronic obstructive pulmonary disease (COPD), which includes chronic bronchitis and emphysema. It was first approved and launched in Switzerland in 1994, followed by other key European markets in 1997. US approval was granted in 2001, and Novartis then licensed Foradil to Schering-Plough in 2002 in the US but continues to market and distribute the product in other areas of the world. Foradil Aerolizer is a single-dose dry powder inhaler, while a metered-dose inhaler is available in some countries. This product is licensed from Yamanouchi.



•

Lamisil (terbinafine) is a leading therapy for onychomycosis, also known as fungal nail infection. Lamisil tablets kill the fungus that causes the infection at its source, working through the patient's bloodstream. This product was first launched in 1991 and is now available in more than 90 countries, with the US being the leading market. Lamisil tablets are also approved for treating athlete's foot (tinea pedis) and fungal infection of the scalp (tinea capitis) in some countries, though not yet in the US. Our Consumer Health Division's OTC Business Unit markets over-the-counter (OTC) cream formulations of Lamisil for use in treating athlete's foot in many markets, including the US.



•

Xolair (omalizumab) is the first humanized therapeutic antibody for the treatment of allergic asthma and the first approved therapy designed to target the antibody IgE, a key underlying cause of the symptoms of allergic asthma. Xolair is the only asthma treatment dosed every two or four weeks and is administered by subcutaneous injection. In the US and Canada, Xolair is indicated for use in adults and children over age 12 with moderate-to-severe allergic asthma whose symptoms are inadequately controlled with inhaled corticosteroids. Xolair, which gained US and Australian regulatory approval in 2003, is being jointly developed with Genentech and Tanox, and is co-marketed in the US by Novartis Pharmaceuticals Corporation and Genentech. Xolair has also been submitted for EU regulatory approval for the treatment of severe allergic asthma.

New Indications in Development

•

Foradil (formoterol) has received an approvable letter in the US for the Certihaler formulation. The Certihaler is a novel, breath-activated multi-dose dry powder inhaler technology that was developed by SkyePharma, which will also manufacture the device. The Certihaler has a dose counter which is easy to read and also gives patients confirmation that the full dose has been administered. We licensed the exclusive US distribution and marketing rights for this product to Schering-Plough.

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Product registration files for the Foradil Certihaler have also been submitted in Europe and the rest of the world, and regulatory approvals have been received in five European countries and Mexico. This replaces a prior agreement with Ivax to market Foradil with Ivax's Airmax® device, which has been discontinued. In 2002, we entered into a co-development and co-commercialization agreement with Schering-Plough to bring to market a fixed-dose combination Foradil product with the inhaled steroid mometasone. The Phase I/II program for the fixed-dose combination product is expected to start in 2005, and submission is planned for 2007.

•

Xolair (omalizumab) is being studied in clinical trials in patients with peanut allergy and in children ages 6-12 with allergic asthma. A liquid formulation to improve patient convenience is also in development. This product is being jointly developed with Genentech and Tanox.



•

Lamisil (terbinafine) is in Phase III development for ringworm of the scalp (tinea capitis). A new topical formulation (nail lacquer) is also in phase I for the treatment of fungal nail infections.



•

Elidel (pimecrolimus) cream 1% is in Phase II development for seborrheic dermatitis and in Phase III development for atopic dermatitis in infants, chronic hand dermatitis and prophylactic treatment of severe atopic dermatitis.

Compounds in Development

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QAB149 has the potential to be the first beta-2 agonist that offers true 24-hour control for the treatment of asthma and chronic obstructive pulmonary disease (COPD). This compound, which is currently in Phase II, has been shown to have a fast onset of action and proven efficacy for over 24 hours with once-daily dosing. It is expected to have an improved side-effect profile compared to current beta-2 agonists. We have entered into an agreement with SkyePharma to develop QAB149 using the Certihaler multi-dose dry powder inhalation device. Regulatory submissions are planned for 2007. Several options for combinations are currently being evaluated in parallel.



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ASM981 (pimecrolimus, the active component of Elidel cream) oral and ointment formulations are also in Phase II development for inflammatory skin diseases.



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ACZ885 is an inhibitor of IL-1 mediated eosinophilla and lung macrophage accumulation that is in Phase I development for the treatment of asthma and chronic obstructive pulmonary disease (COPD).



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VAG624 is a steroid sulphatase inhibitor in Phase I development for the treatment of acne.



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ABN912 is a fully human monoclonal antibody to Monocyte Chemoattractant Protein-1 in Phase I development for the treatment of asthma and chronic obstructive pulmonary disease (COPD).



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QAN747 is a novel compound in Phase I development for the treatment of asthma and chronic obstructive pulmonary disease (COPD).



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QAE397 is a novel compound for the treatment of asthma and chronic obstructive pulmonary disease (COPD).



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QAK423 is a novel compound in Phase I development for the treatment of asthma and chronic obstructive pulmonary disease (COPD).

Arthritis/Bone/Gastrointestinal/Hormone Replacement Therapy/Infectious Diseases (ABGHI)

        The primary focus of this therapeutic area is on patients with a variety of internal diseases that have significant unmet medical needs, particularly in the areas of gastrointestinal disorders (including urinary incontinence), arthritis, osteoporosis, the treatment of pain and infectious diseases.

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        We have entered the gastrointestinal market with the launch of Zelnorm/Zelmac for the treatment of irritable bowel syndrome (IBS), a condition where the bowel (large intestine) does not function properly. More than 40 million Americans are estimated to suffer from IBS with constipation, and Zelnorm/Zelmac is the first and only medication approved to treat this condition. Zelnorm/Zelmac is also approved for the treatment of chronic idiopathic constipation in the US and several other countries. We intend to further strengthen our GI franchise with development efforts regarding the use of Zelnorm/Zelmac to treat upper gastrointestinal disorders such as dyspepsia, gastroesophageal reflux disease (GERD) and other conditions.

        Another important area of focus are bone disorders like osteoporosis, a progressive disease that causes bones to become thin and porous, increasing the risk for fractures. Led by Miacalcin/Miacalcic, Novartis has a number of treatments in development for this disease, which is estimated to affect up to one in three women over age 50 worldwide, according to the International Osteoporosis Foundation. The most advanced compound in development for bone disorders is Aclastsa, which was submitted in the US for the treatment of Paget's disease in 2004 and is being studied for use in osteoporosis.

        Our infectious diseases portfolio consists of three main areas: anti-virals, anti-bacterials and tropical medicine. We market Famvir for herpes and Coartem for malaria. Ongoing research and development efforts are focused on new specific anti-virals against Hepatitis B and C as well as on novel antibiotics for respiratory tract infections. We established Infectious Diseases as a separate franchise following our May 2003 purchase of a majority of the outstanding capital stock of Idenix Pharmaceuticals, Inc. As a result of that transaction, we obtained certain rights to market Idenix products as well as options to license additional Idenix compounds in the future.

Key Marketed Products

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Enablex/Emselex (darifenacin) is a once-daily oral treatment that is part of a new group called M3-selective receptor antagonists for the treatment of overactive bladder. Known as Enablex in the US and Emselex in the EU, this product was approved in the EU in October 2004 and approved in the US in December 2004. Enablex/Emselex has been shown to effectively reduce the number of weekly incontinence episodes by up to 77% versus placebo. It was acquired from Pfizer in April 2003.



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Famvir (famciclovir) is an anti-viral agent for the treatment of recurrent genital herpes, a sexually-transmitted, life-long disease, and shingles (herpes zoster), which is caused by the reactivation of the highly contagious variacella-zoster virus, the same virus that causes chickenpox. Other indications include the treatment of recurrent mucocutaneous herpes simplex infections in HIV-infected patients.



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Zelnorm/Zelmac (tegaserod) is the first in a new class of medicines known as serotonin-4 (5-HT4) receptor partial agonists approved for the short-term treatment of the multiple symptoms associated with irritable bowel syndrome with constipation (IBS-C) in women. This product, which is known as Zelnorm in North America and South Africa, and Zelmac in other markets, acts by decreasing the visceral sensitivity of the intestinal tract, increasing intestinal secretion and increasing gastro-intestinal motility. This reduces the impact of symptoms such as abdominal pain, bloating and constipation. In 2004, Zelnorm received US approval to become the first treatment approved for chronic idiopathic constipation in men and women under age 65. First launched in 2002, this product has now been approved in more than 30 countries and has been submitted for EU approval.



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Coartem/Riamet (artemether and lumefantrine) is an effective and well-tolerated anti-malarial treatment for adults and children that achieves cure rates of up to 95%, based on clinical trial data, even in malaria patients with multi-drug resistance. It is indicated for treatment of falciparum malaria, the most dangerous form of malaria. Coartem is the only fixed-dose combination of the two agents artemether, an artemisinin derivative, and lumefantrine, known as the Artemisinin

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Combination Therapy (ACT). Coartem, which is also marketed commercially as Riamet in some countries, was co-developed by Novartis in collaboration with Chinese parties that supply some of the active ingredients (artemether) and is produced in China by Novartis. First approved in 1998, Coartem is currently registered in approximately 75 countries. Novartis has provided more than six million treatments at cost to the World Health Organization (WHO) as part of the Roll Back Malaria initiative since 2002. The WHO has added Coartem to its List of Essential Medicines, and Novartis is increasing production capacity to help meet a significant increase in demand for the ACT therapy.

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Voltaren (diclofenac sodium) is a leading non-steroidal anti-inflammatory drug (NSAID) for the treatment of inflammatory and degenerative forms of rheumatism, and in the treatment of pain and inflammation. This product, which faces generic competition, has a wide variety of ingestible dosage forms marketed by the Pharmaceuticals Division as well as a topical therapy offered as Voltaren Emugel in several markets for the treatment of inflammation of tendons, ligaments, muscles and joints as well as certain localized forms of rheumatism.



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Miacalcin/Miacalcic (salmon calcitonin) is an important treatment for bone metabolic diseases, especially for established post-menopausal osteoporosis in women. Miacalcin/Miacalcic was first launched as an injection in 1974 and as a nasal spray in 1986, and it was first launched as an injection in the US in 1989 and in 1995 in an intra-nasal form. It contains chemically synthesized salmon calcitonin, a thyroid hormone that regulates the calcium content in the blood. Available in the US in both injectable form and as a nasal spray, Miacalcin/Miacalcic is indicated for use in women with low bone mass more than five years after menopause who refuse or cannot tolerate estrogens or in whom estrogens are contraindicated. As injection, it is also indicated for the treatment of symptomatic Paget's disease, a chronic condition that causes the growth of abnormal bone, and for the treatment of hypercalcenia, when a rapid decrease in serum calcium is required.



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Combipatch/Estalis (estradiol & norethindrone acetate transdermal system) is a combination estrogen/progestin treatment for symptoms of estrogen deficiency in post-menopausal women, and the prevention of post-menopausal osteoporosis. The product offers a convenient treatment in a single patch for patients with an intact uterus. Combipatch is not approved in the US for the prevention of post-menopausal osteoporosis. This product is sublicensed from Aventis for sale in countries outside the US and Japan under the brand name Estalis. In the US, the product is licensed by Noven Pharmaceuticals to Vivelle Ventures, which is a joint venture between Noven and our US affiliate, for sale under the brand name Combipatch.



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Estraderm and Estraderm MX (estradiol transdermal system) are estrogen-only treatments for symptoms of estrogen deficiency in post-menopausal women, and prevention of post-menopausal osteoporosis. These are earlier generations of transdermal patches.



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Estragest TTS (estradiol & norethindrone acetate transdermal system) is a low-dose combination estrogen/progestin treatment for symptoms of estrogen deficiency in post-menopausal women, and prevention of post-menopausal osteoporosis. Estragest TTS is an earlier generation of transdermal patches. Estragest TTS offers a high amenorrhea rate in a single patch for patients with an intact uterus. This product is not approved in the US.



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Vivelle-Dot/Estradot (estradiol transdermal system), licensed from Noven Pharmaceuticals is an estrogen-only treatment for symptoms of estrogen deficiency in post-menopausal women, and prevention of post-menopausal osteoporosis. Vivelle-Dot/Estradot is the smallest estrogen patch available and offers a thin, flexible and discreet hormone therapy. The lowest dose of Vivelle-Dot/Estradot (0.025 mg/d) is approved for the prevention of post-menopausal osteoporosis.

New Indications in Development

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Zelnorm/Zelmac (tegaserod maleate/tegaserod) has been submitted for EU approval for the treatment of irritable bowel syndrome with constipation in women. In addition, Zelnorm/Zelmac is

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under development for the treatment of various upper gastro-intestinal tract disorders, such as severe upset stomach (dyspepsia), which is in Phase III, and gastroesophageal reflux disease (GERD), which is in Phase II.

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Aclasta (zoledronic acid) is a bisphosphonate being developed for the treatment of various benign metabolic bone diseases, including osteoporosis and Paget's disease. Aclasta was submitted for US and EU regulatory approval in 2004 for the treatment of Paget's disease following positive Phase III trial results. The product name is subject to regulatory approval, as well. On January 20, 2005, the EU's Committee for Medicinal Products for Human Use (CHMP) recommended that the European Commission grant a Marketing Authorization for Aclasta for the treatment of Paget's disease in all 25 EU countries plus Norway and Iceland. A Phase II trial in post-menopausal osteoporosis patients demonstrated that zoledronic acid, administered as a once-yearly infusion, induced sustained reduction in bone resorption and significant increases in bone mineral density at different skeletal sites. Phase III trials in different osteoporosis target groups (treatment and prevention of postmenopausal osteoporosis, male osteoporosis, corticosteroid-induced osteoporosis, prevention of recurrent clinical fracture after acute hip fracture) are currently in progress. Zoledronic acid at a different dosing regimen is marketed for oncology indications under the brand name Zometa.

Compounds in Development

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Prexige (lumiracoxib) is a COX-2 inhibitor that was submitted for US and UK regulatory approval as well as to several other health authorities for the treatment of osteoarthritis, rheumatoid arthritis and acute pain, including painful menstrual cramps (primary dysmenorrhea). Prexige received its first regulatory approval in Mexico in March 2003 for all indications, followed by approvals in Australia, Brazil, Ukraine, New Zealand and several Latin American countries. Approval of the osteoarthritis and acute pain indications was obtained in the UK in September 2003, and the Mutual Recognition Procedure (MRP) in the EU was started in September 2004. We received a non-approvable letter in the US in September 2003. The FDA requested the submission of the final report of the TARGET study as well as additional clinical data for the indications of osteoarthritis and acute pain. In TARGET, lumiracoxib at two or four times the recommended daily dose for treating osteoarthritis showed a 79% reduction in serious upper gastrointestinal ulcer complications compared to NSAIDs (naproxen 500mg twice daily and ibuprofen 800 mg three times daily). There was no significant difference in cardiovascular safety compared to NSAIDs, and no significant difference in the frequency of serious hepatic adverse events. These findings were published in The Lancet. In November 2004, we temporarily withdrew Prexige from the MRP due to the European Medicines Agency's (EMEA) ongoing review of the cardiovascular safety of COX-2 inhibitors, which had been triggered by Merck's withdrawal of Vioxx® from the market. We expect to resume the MRP in mid-2005 after the EMEA completes this review. In the US, discussions are underway with the FDA on requirements for a new cardiovascular safety study. Additional studies are already underway to support the 100 mg dose for treating osteoarthritis. However, submission for US approval is not expected before 2007.



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LDT600 (telbivudine) and LDC300 (valtorcitabine) are currently in development for the treatment of hepatitis B. We have licensed these compounds from Idenix, a company in which we own a majority of the issued stock. We have the right to co-promote or co-market these compounds with Idenix in the US, the UK, France, Germany, Italy and Spain, and to market these compounds on our own in the rest of the world. These compounds are currently in Phase III and Phase II clinical trials, respectively. In addition to the license to these hepatitis B compounds, Idenix also granted us an option to license all other compounds developed by Idenix, including Idenix's hepatitis C drug candidate, NMC283, which is currently in Phase I clinical trials.



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AAE581 is a compound with a novel mode of action for the treatment of osteoporosis that is currently in Phase II development. It is a specific inhibitor of osteoclast-derived cathepsin K, which

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leads to reduced collagen breakdown and osteoclast-mediated bone resorption. AAE581 has been shown to effectively suppress biological markers of bone turnover for up to 28 days in healthy volunteers and for up to three months in healthy post-menopausal women compared to placebo.

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SMC021 (calcitonin) is an oral formulation of salmon calcitonin, the active ingredient in Miacalic/Miacalcin, used in the treatment of osteoporosis. This compound, a novel concept in oral peptide delivery, is currently in Phase II development for the treatment of osteoporosis.



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ACZ885 is a human monoclonal antibody directed against human IL-1-beta that is in Phase I development for the treatment of rheumatoid arthritis and respiratory diseases.



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AKU517 is a reversible acid pump antagonist which is in Phase I development in collaboration with Sankyo for the treatment of gastroesophageal reflux disease (GERD), also known as heartburn.



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LBM415 is a new mode of action antibiotic known as a peptide deformylase inhibitor currently in Phase I development for respiratory tract infections.



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AFG495 is a novel compound for the treatment of osteoporosis currently in Phase I trials.



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RGN303 and RAD001 (rheumatoid arthritis) have been terminated.

Specialty Medicines

Oncology & Hematology

        Oncology & Hematology provides a range of innovative therapies and practical solutions for cancer patients. We market products for the treatment of a number of different cancers and for cancer complications, including advanced malignancies involving bone. Research and development in this disease area is aimed at the discovery and development of innovative approaches to the treatment of cancer.

        Novartis ranks No. 3 worldwide in the global oncology market with a 9.1% market share as of October 2004, according to IMS Health.

        Key products include Gleevec/Glivec, to treat certain forms of life-threatening gastrointestinal stromal tumors (GIST) and chronic myeloid leukemia (CML), Femara, a leading treatment in certain types of breast cancer, and Zometa, a novel treatment for certain cancers that have spread to the bones. Important compounds in development include PTK787, an angiogenesis inhibitor initially being studied for the treatment of colorectal cancer, and the iron chelator ICL670 for use in patients suffering from chronic iron overload.

Key Marketed Products

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Femara (letrozole) is an oral aromatase inhibitor for the treatment of certain forms of breast cancer. It works by inhibiting the synthesis of estrogen, a hormone that promotes the growth of some breast cancers. Femara received US approval in October 2004 as an extended adjuvant (post-surgery) therapy treatment for early breast cancer in post-menopausal women who have received adjuvant tamoxifen therapy for five years. Use in this setting has also been approved in Switzerland, the UK, Mexico and other countries, and EU approval is expected in early 2005. Data from the landmark MA-17 study presented at the American Society of Clinical Oncology, which was the basis for this new indication. The new labeling for this indication reflects data showing an overall reduced risk of recurrence (38%) and a reduction in distant recurrences (distant metastases) of 39%. Femara was first launched in 1996, and it has since then received approval as a first-line treatment for postmenopausal women with hormone receptor positive or hormone receptor unknown locally advanced or metastatic breast cancer, treatment of advanced breast cancer in postmenopausal women with disease progression following anti-estrogen therapy, and neo-adjuvant (pre-operative) therapy. Femara is currently available in more than 80 countries worldwide.

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Gleevec/Glivec (imatinib mesylate/imatinib) is a signal transduction inhibitor approved to treat certain forms of leukemia and gastrointestinal stromal tumors. It is one of the first oncology drugs that validates rational drug design based on an understanding of how some cancer cells work. A signal transduction inhibitor interferes with the pathways that stimulate the growth of tumor cells. In the US, Gleevec (known outside the US as Glivec), is indicated for the treatment of newly diagnosed adult and pediatric patients with a form of chronic myeloid leukemia (CML). This condition is a rare form of cancer but one of the most common adult leukemias, and it usually tests positive for the presence of the Philadelphia (Ph) chromosome. Gleevec/Glivec is also indicated for the treatment of patients with certain forms of gastrointestinal stromal tumors (GIST). Gleevec/Glivec, which is also being studied in solid tumors, was first launched in 2001 and is now available in more than 80 countries. The Glivec International Patient Assistance Program is now available in 71 countries and has provided treatment at no charge to more than 10,000 patients worldwide who otherwise would not have access to this innovative therapy.



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Sandostatin SC/Sandostatin LAR (octreotide acetate) is primarily used for the treatment of patients with acromegaly, a chronic disease in adults caused by over-secretion of pituitary growth hormone. Complications associated with acromegaly include cardiovascular disease, respiratory distress such as upper airways obstruction, malignancies such as colon cancer, and carbohydrate intolerance, which can lead to diabetes. Sandostatin is a synthetic protein that mimics the action of somatostatin, a naturally occurring hormone. This product is also indicated for the treatment of certain symptoms associated with pancreatic and gastrointestinal endocrine tumors. Sandostatin SC, which was launched in the US in 1988, is subject to near-term patent expirations. However, patent protection for Sandostatin LAR, which represents a significant and growing proportion of our octreotide sales, continues in major markets. See "—Intellectual Property" for further information. Sandostatin LAR is a long-acting release formulation that requires administration once every 28 days and has been approved for the control of symptoms such as the severe diarrhea and flushing associated with metastatic carcinoid tumors and the severe diarrhea associated with vasoactive intestinal polypeptide secreting tumors.



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Zometa (zoledronic acid) is a treatment for certain cancers that have spread to the bones that is used most often along with other cancer treatments, such as radiation, hormonal therapy or chemotherapy. Zometa, a third-generation bisphosphonate, is approved in most key markets for the treatment of hypercalcemia of malignancy, which means tumor-induced excessive levels of calcium, as well as the treatment of skeletal-related events in patients with cancer types such as prostate, breast, lung and multiple myeloma that have spread to involve bone.

New Indications in Development

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Zometa (zoledronic acid) has been submitted for regulatory approval in Japan for the treatment of bone metastases, an indication approved in the US and EU in 2001.



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Femara (letrozole) has been submitted for extended adjuvant breast cancer treatment in the EU based on the MA-17 study and is in Phase III development for use in the early adjuvant treatment setting. This Phase III study, called BIG 1-98, involves nearly 8,000 post-menopausal women with early breast cancer and will compare the utility of four different treatment paradigms of Femara compared to the anti-estrogen agent tamoxifen. This trial is ongoing and initial safety and efficacy results are expected to be presented by early 2005. Submission for regulatory approval is expected in 2005 for the Femara vs. tamoxifen arms, and data from the sequential arms of the study are expected in 2008.

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Gleevec/Glivec (imatinib mesylate/imatinib) is being studied as a potential treatment of solid tumors primarily as part of a combination therapy. Preclinical data have shown that Gleevec/Glivec enhances the effect of chemotherapy in animal models. Phase II trials are in progress in the following cancers: hormone-refractory prostate cancer, KIT-positive acute myeloid leukemia (AML), glioblastoma multiforme and as an adjuvant use in treating refractory gastrointestinal stromal tumors (GIST).

Compounds in Development

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ICL670 (deferasirox) is an oral iron chelator in Phase III development to reduce excess iron in the blood. Iron accumulation resulting from repeated blood transfusions, particularly for patients with thalassemia (an inherited genetic defect that damages red blood cells and requires frequent blood transfusions) and sickle cell disease, can lead to organ damage and death. ICL670 has been shown in clinical trials to efficiently induce iron excretion and has the potential to become the first significant breakthrough therapy for this condition in more than 40 years, replacing the need for patients to undergo 12-hour infusions for five to seven days per week. Submissions for US and EU regulatory approval are expected in the first half of 2005.



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PTK787 (vatalanib) is a new molecular entity called an angiogenesis inhibitor that blocks all known vascular endothelial growth factors (VEGF). Two Phase III studies—CONFIRM 1 and CONFIRM 2—are evaluating this compound in patients with colorectal cancer compared to and in combination with the FOLFOX4 chemotherapy regimen, which is the combination of oxaliplatin, fluorouracil and leucovorin. PTK787 has been shown to be generally well tolerated based on experience in treating more than 1,000 patients. This compound is being developed in collaboration with, and, if approved, will be marketed jointly with Schering AG of Germany.



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EPO906 (patupilone), a cytotoxic, is a novel tubulin polymerizingcompound known as an epothilone that inhibits cancer cells with a similar mechanism as paclitaxel, a taxane that has been a member of one of the most successful class of anti-cancer treatments. EPO906 has shown more potency than paclitaxel in pre-clinical trials and more activity in paclitaxel-resistant tumors in pre-clinical trials. Responses have been observed in Phase II in several solid tumors. Dose-limiting toxicity, diarrhea, and significant myelosuppression has not been reported to date. This compound is currently in Phase II development.



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OctreoTher (edetreotide) is an intravenous peptide hormone analogue in Phase II development for the treatment of solid tumors. It carries a radioactive element specific to receptor-positive malignant cells containing the hormone somatostatin.



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PKC412 (midostaurin) is a protein kinase inhibitor (FLT3 inhibitor) in Phase II development for the treatment of acute myeloid leukemia (AML). Pilot studies have shown biological activity in more than 70% of patients with FLT3 mutations who were treated with PKC412 as a single agent therapy. Studies are investigating PKC412 in combination with chemotherapy to determine if responses of longer duration can be achieved.



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SOM230 is a somatostatin analog in Phase II development for the treatment of acromegaly; Cushing's syndrome, a rare disorder in which body tissue is exposed to excess levels of the stress hormone cortisol; and gastro-entero-pancreatic (GEP) tumors.



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LBQ707 (gimatecan) is a cytotoxic in Phase II development for the treatment of solid tumors. This compound, which has been licensed from Sigma-Tau, is a novel oral topoisomerase I inhibitor. Preclinical data have shown greater potency than topotecan or irinotecan as well as activity in cell lines resistant to these two anti-cancer agents. Confirmed partial responses have been seen in Phase I studies in non-small cell lung cancer, breast cancer and colorectal cancer.



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RAD001 (everolimus) is an mTOR pathway inhibitor in Phase II for the treatment of solid tumors. RAD001 is a novel macrolide being developed as an anti-proliferative drug through its inhibition of

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the mTOR protein kinase, making it an attractive candidate for a broad range of cancer indications.

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AMN107 is a highly potent signal transduction inhibitor being studied for patients with a form of chronic myeloid leukemia (CML) resistant to Gleevc/Glivec, the standard of care. AMN107, like Gleevec, binds to the BCR-ABL protein that causes white blood cells to grow and divide uncontrollably. AMN107 has been shown to be the most selective BCR-ABL inhibitor to date and more potent that Gleevec. Phase I/II data showed hematological responses of over 50% in Gleevec-resistant patients in advanced disease stages (accelerated or blast phase). Phase II trials are expected to begin in the first half of 2005.



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LBH589 is a histone deacetylase inhibitor in Phase I development for the treatment of solid tumors.



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AEE788 is a tyrosine kinase protein inhibitor that targets EGFR, HER2 and VEGFR2 that is in phase I development for the treatment of solid tumors.



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ABJ879 is a microtubule stabilizer in Phase I development for the treatment of solid tumors.



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Development of LAQ824 and XAA296 have been terminated.

Transplantation & Immunology

        Novartis is a world leader in transplantation and immunology, pioneering and revolutionizing the field of transplantation with the discovery and introduction of cyclosporine more than 20 years ago. We have one of the broadest portfolios of immunosuppressant due to our continued research and strong commitment to provide solutions to unmet medical needs for the transplant recipient. Neoral and Simulect are established products used to protect transplanted organs from rejection. Our new products are Certican and myfortic, which has now been approved in more than 40 countries, are providing more choices to transplant physicians. A novel immunomodulating agent, FTY720, is currently in Phase III for use in transplantation, and patient enrollment was completed in September 2004. With a worldwide research program, Transplantation & Immunology is committed to developing a new and innovative range of therapeutic products for the prophylaxis of organ rejection and to maintain our role as a global leader in this field.

Key Marketed Products

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Neoral (cyclosporine, USP modified) is a micro-emulsion formulation of cyclosporine, an immunosuppressant used in both adults and children to prevent organ rejection following a kidney, liver or heart transplant. According to IMS Health, Neoral is the world's most commonly used primary immunosuppressant after largely replacing its predecessor Sandimmun/Sandimmune, which was introduced in 1982 and revolutionized organ transplantation. First launched in 1995, Neoral was designed to provide improved and constant absorption. It is also used in treating severe autoimmune disorders such as psoriasis and rheumatoid arthritis. Despite our patent protection for Neoral, generic companies have launched competing products in the US, Europe and elsewhere, and will continue to compete vigorously. See "—Intellectual Property" for further information.



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Certican (everolimus) is a new immunosuppressant drug called a "proliferation signal inhibitor" (or motor inhibitor) that targets the primary causes of allograft dysfunction (also known as chronic rejection) of a transplanted organ, including acute rejection and vascular remodeling. Certican is used in combination with Neoral and corticosteroids. First approved in Europe in 2003, Certican has completed the EU mutual recognition procedure and is in the process of being launched in the region. In the US, following discussions with the FDA regarding the FDA's requests for additional data, FDA has agreed to hold an Advisory Committee meeting regarding the heart transplantation indication later in 2005. We also plan to begin new Phase III clinical trials in renal and heart transplantation shortly.

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myfortic (mycophenolic acid) is a new treatment option that has been studied for use in combination with Neoral and corticosteroids to prevent rejection episodes in patients with kidney transplants. myfortic has been approved in over 40 countries, including Switzerland (the first approval in 2003), the US, Germany, France, the UK, Australia, India, Brazil and a number of Latin American countries.



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Simulect (basiliximab) is a chimeric monoclonal antibody that suppresses interleukin-driven proliferation of T-cells. Simulect is used for induction therapy, and is designed to complement Neoral or other primary immunosuppressants in preventing acute rejection episodes in kidney transplantation.

Compounds in Development

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FTY720, the first agent in a new class of drugs called Sphingosine 1-Phosphate Receptor (S1P-R) agonists. It is designed to prevent rejection by redirecting lymphocytes away from the transplant graft, preventing lymphocytes from damaging the graft while maintaining the response of lymphocytes against infective agents. FTY720 is being developed for the prevention of renal acute rejection in combination with Neoral or FK506 (tacrolimus) and has completed enrollment for phase III clinical trials. In addition, FTY720 is in Phase II development for the treatment of multiple sclerosis. It is licensed from Mitsubishi.



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AEB071 is a T-cell activation blocker in development for the prevention of organ rejection now in Phase I trials.

Ophthalmics

        We develop and market products for the treatment of a number of different ophthalmic diseases. Our research and development in this disease area is aimed at the discovery and development of innovative treatments for "Back of the Eye" diseases as well as on "Dry Eye." Both of these areas are characterized by high growth and significant unmet medical needs. The "Back of the Eye" area encompasses several disease areas, such as wet and dry age-related macular degeneration (AMD), diabetic retinopathy, diabetic macular edema and retinitis pigmentosa. The key area of focus within "Back of the Eye" is "wet" AMD, a condition when leaky blood vessels grow across the central portion of the retina, or macula, for unknown reasons and cause bleeding, scar formation and permanent damage, leading to vision loss. Our ophthalmics business has built a leadership position with its flagship product Visudyne. In cooperation with collaborator Genentech, we are also developing Lucentis, a VEGF inhibitor that is currently in Phase III clinical trials for the treatment of "wet" AMD and will be marketed by Novartis outside of North America.

Key Marketed Products

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Visudyne (verteporfin) is a light-activated drug used in a two-step procedure that can be performed in a doctor's office. First, the drug is injected intravenously into the patient's arm. A non-thermal laser light is then shone into the patient's eye to activate the drug. First launched in 2000, Visudyne is commercially available in over 75 countries for the treatment of predominantly classic subfoveal choroidal neovascularization (CNV), a major cause of vision loss caused by age-related macular degeneration (AMD). It is also approved in over 40 countries for the treatment of occult subfoveal CNV secondary to AMD (including the EU, where it gained approval in 2002). In addition, Visudyne is approved in over 45 countries, including the EU, US and Canada for the treatment of subfoveal CNV due to pathologic myopia (severe near-sightedness). In Japan, Visudyne was recently approved for all types of subfoveal CNV secondary to AMD. Further geographic expansion is planned, including China. Visudyne is licensed from QLT.



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Zaditor/Zaditen (ketotifen) is an eye drop that provides fast and lasting relief of symptoms in patients suffering from ocular allergy. Zaditen works through multiple mechanisms of action to

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provide relief within minutes and a duration of action of up to 12 hours. Zaditen was first launched in Japan and has been approved in more than 60 countries, including the US, where it is marketed as Zaditor, and the EU.

New Indications in Development

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Elidel (pimecrolimus), is currently in Phase II development for the treatment of dry eye in a novel drops formulation and for blepharitis in a novel eye ointment formulation.



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Sandostatin LAR (octreotide acetate) is in Phase III development for diabetic retinopathy. This condition affects approximately 25-30% of patients with diabetes and is one of the leading causes of blindness in people of working age. There are currently no pharmacological treatments available to treat diabetic retinopathy.



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Visudyne (verteporfin) is in development for an additional indication. Phase III trials are ongoing in occult CNV secondary to AMD.

Compounds in Development

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Lucentis™ (ranibizumab) is a recombinant humanized high affinity antibody fragment that binds to VEGF. It is designed to penetrate the retina to decrease permeability and inhibit the formation of choroidal neovascularization, which leads to blindness in AMD patients. It is currently in Phase III development for the treatment of "wet" AMD. We have licensed the right to develop and market Lucentis™ outside of North America from Genentech. Data from two Phase III trials are expected in 2005. Submission for EU approval is planned for 2006.



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PIR335 has been terminated.

Principal Markets

        The Pharmaceuticals Division has a commercial presence in approximately 140 countries worldwide, but net sales are generally concentrated in the US, Europe and Japan, which together accounted for 85% of 2004 net sales. The following table sets forth certain data relating to our principal markets in the Pharmaceuticals Division.

        Many of our Pharmaceuticals Division's products are used for chronic conditions that require patients to consume the product over long periods of time, from months to years. Net sales of the vast majority of our products are not subject to material changes in seasonal demand.

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Production

        The primary goal of our manufacturing and supply chain management program is ensuring the uninterrupted, timely and cost-effective supply of products that meet all product specifications. To achieve this objective, we manufacture our products at five bulk chemical and 15 pharmaceutical production facilities as well as two biotechnology sites. Bulk chemical production involves the manufacture of therapeutically active compounds, mainly by chemical synthesis or by a biological process such as fermentation. Pharmaceutical production involves the manufacture of "galenical" forms of pharmaceutical products such as tablets, capsules, liquids, ampoules, vials and creams. Major bulk chemical sites are located in Basel, Switzerland; Grimsby, UK; and Ringaskiddy, Ireland. Significant pharmaceutical production facilities are located in Stein, Switzerland; Wehr, Germany; Torre, Italy; Barbera, Spain; Suffern, New York; Sasayama, Japan, and in various other locations in Europe, including France, the UK and Turkey. Our two biotechnology plants are in Switzerland and France.

        During clinical trials, which can last several years, the manufacturing process for a particular product is rationalized and refined. By the time clinical trials are completed and products are launched, the manufacturing processes have been extensively tested and are considered stable. However, improvements to these manufacturing processes may continue throughout a product's life cycle.

        While we have not experienced material supply interruptions in the past, there can be no assurance that supply will not be interrupted in the future as a result of unforeseen circumstances. The manufacture of our products is heavily regulated, making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a recall or a government-enforced shutdown of production facilities, which in turn could lead to product shortages. We have implemented a global manufacturing strategy to maximize business continuity.

        Raw materials for the manufacturing process are either produced in-house or purchased from a number of third party suppliers. Where possible, our policy is to maintain multiple supply sources so that the business is not dependent on a single or limited number of suppliers. However, our ability to do so may at times be limited by regulatory requirements. We monitor market developments that could have an adverse effect on the supply of essential materials. All raw materials we purchase must comply with our quality standards. Overall, prices are not volatile for materially significant raw materials.

Marketing and Sales

        The Pharmaceuticals Division serves customers with approximately 6,000 field force representatives in the US, and an additional 13,000 in the rest of the world. These trained representatives, where permitted by law, present the economic and therapeutic benefits of our products to physicians, pharmacists, hospitals, insurance groups and managed care organizations.

        Although specific distribution patterns vary by country, Novartis generally sells its prescription drugs primarily to wholesale and retail drug distributors, hospitals, clinics, government agencies and managed care providers.

        In the US, certain products are advertised by way of television, newspaper and magazine advertising. Novartis also pursues co-promotion/co-marketing opportunities as well as licensing and distribution agreements with other companies when economically attractive.

Competition

        The global pharmaceutical market is highly competitive and we compete against other companies selling branded prescription pharmaceutical products. These companies include Abbott, AstraZeneca, Bristol-Myers Squibb, Eli Lilly, GlaxoSmithKline, Johnson & Johnson, Merck, Pfizer, Sanofi-Aventis, Schering-Plough and Wyeth. Competition within the industry is intense and extends across a wide range of commercial activities, including pricing, product characteristics, customer service, sales and marketing, and research and development.

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        As is the case with other pharmaceutical companies selling patented pharmaceuticals, Novartis faces an increasing challenge from companies selling generic forms of our products following the expiry of patent protection. Generic companies may also gain entry to the market through successfully challenging our patents, but we vigorously defend our intellectual property rights from generic challenges that infringe upon our patents and trademarks. We also face competition from over-the-counter (OTC) products that do not require a prescription from a physician.

        There is no guarantee that any product, even with patent protection, will remain successful if another company develops a new product offering significant improvements over existing therapies.

Research and Development

        We are among the leaders in the pharmaceuticals industry in terms of research and development investment. In 2004, we invested approximately $3.5 billion in Pharmaceuticals Division research and development, which represents 18.8% of the Division's total net sales. Our Pharmaceuticals Division invested $3.1 billion and $2.4 billion on research and development in 2003 and 2002 respectively. There are currently more than 75 projects in clinical development. In 2005, as a result of these efforts, we expect to launch Aclasata and Focalin XR, as well as new indications or formulations for Gleevec/Glivec, Diovan, Femara, Zelnorm/Zelmac and Xolair, in various markets worldwide.

        We have long term research commitments totaling $1.2 billion as of December 31, 2004, including $0.6 billion in milestone payments. We intend to fund these expenditures from internally developed resources.

        The discovery and development of a new drug is a lengthy process, usually requiring 10 to 12 years from the initial research to bringing a drug to market, including six to eight years from Phase I clinical trials to market. At each of these steps, there is a substantial risk that we will not achieve our goals. In such an event, we may be required to abandon a product in which we have made a substantial investment.

Research program

        The discovery of new drugs is the responsibility of our Research program. This is a complex and challenging process which is split into different phases. These phases provide tools that allow our Research team to manage and benchmark their activities. Milestones are established for each phase of the evaluation process. Candidates only advance to the next stage if defined sets of criteria are met. The primary goal of our Research program is to determine that a compound is ready for Proof of Concept in humans. To determine whether a compound may be tested in humans, we must invest significant resources in preclinical activities to satisfy safety requirements, including toxicology studies. Only those compounds that pass this more comprehensive series of preclinical testing (on average, about one in ten candidates) advance to the development stage of a drug's life-cycle. See "—Clinical development program."

        In 2003, we established the Novartis Institutes for BioMedical Research (NIBR), headquartered in Cambridge, Massachusetts, with affiliates worldwide. NIBR is redefining drug discovery in the era which began with the completion of the human genome sequence. Our strategies at NIBR include integrating previously segregated disciplines, fostering interaction among scientists, both within and outside of Novartis and investing and advancing new discovery approaches. Our goal is to produce more relevant, predictable drug discovery and offer new and better medicines for patients worldwide.

        Completed in 2004, our Cambridge facility contains a total of 75,300 square meters of laboratory and office space. It is expected to house over 800 scientists and technology experts, and approximately 1,000 employees in total.

        Several of our discovery research platforms, including Functional Genomics, Molecular and Developmental Pathways, Models of Disease, Global Discovery Chemistry, and Epigenetics, are based at our Cambridge headquarters. Disease-area research groups in Cambridge include cardiovascular disease, diabetes and metabolism, infectious disease and oncology.

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        Outside of the Cambridge site, an additional 2,000 scientists and technology experts conduct research in Switzerland, Austria, the UK, Japan and various other US sites. Research is conducted in the areas of Neuroscience, Autoimmune Disease (including Dermatology, Transplantation, and Arthritis) and Respiratory Disease at these sites. In addition, research platforms such as Discovery Technologies and Information Knowledge and Management are headquartered in the NIBR site in Basel.

Development program

        The testing of new drugs in humans, to determine whether they are safe and effective, is the focus of our Development program. Clinical trials of drug candidates generally proceed through three phases. In Phase I clinical trials, a drug is usually tested with about 20 to 80 normal, healthy volunteers. The tests study the drug's safety profile, including the safe dosage range. The studies also determine how a drug is absorbed, distributed, metabolized and excreted, and the duration of its action. In Phase II clinical trials, the drug is tested in controlled studies of approximately 100 to 300 volunteer patients (i.e., persons with the targeted disease) to assess the drug's effectiveness and safety, and to establish a proper dose. In Phase III clinical trials, the drug is further tested on larger numbers of volunteer patients (in some cases more than 15,000 patients in total) in clinics and hospitals. In each of these phases, physicians monitor volunteer patients closely to determine the drug's efficacy and to identify possible adverse reactions. The vast amount of data that must be collected and evaluated makes clinical testing the most time-consuming and expensive part of new drug development. The next stage in the drug development process is to seek registration for the new drug. See "—Regulation."

Initiatives to optimize the research and development processes

        We are working to be more efficient in selecting candidate drugs for development. For example, we are now better able to select the best compounds for development by having senior management focus on development projects at an early stage. Where possible we run early proof of concept studies in patients which include biomarkers for potential efficacy and which enable us to make an earlier evaluation of the probability that the compound could be successfully developed into a marketable product. Under another initiative, special teams work to develop late stage products more quickly. The goal is to improve the likelihood of therapeutic and commercial success, which should reduce development costs and decrease time to market. In several other initiatives we are improving electronic management of the clinical trial processes, including data capture and transfer, as well as electronic storage and archiving of study data and documents. Most recently we have initiated electronic submissions to health authorities, vastly reducing the quantity of paper documents which need to be submitted and also enabling faster and more efficient review of data by health authorities. Overall, these initiatives have reduced clinical trial outsourcing, have improved data quality and speed of clinical trial reporting, substantially reduced the time between initial research and the introduction of the drug to market, and have provided us with considerable cost savings.

Alliances and acquisitions

        Our Pharmaceuticals Division forms alliances with other pharmaceutical and biotechnology companies, and with academic institutions in order to develop new products, acquire platform technologies and access new markets. We license products that complement our current product line and are appropriate to our business strategy. Therapeutic area strategies have been established to focus on alliances and acquisition activities for key disease areas/indications that are expected to be growth drivers in the future. We review products and compounds we are considering licensing using the same criteria as we use for our own internally discovered drugs.

Regulation

        The international pharmaceutical industry is highly regulated. Regulatory authorities around the world administer numerous laws and regulations regarding the testing, approval, manufacturing,

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importing, labeling and marketing of drugs, and also review the safety and efficacy of pharmaceutical products. Further controls exist on the non-clinical and clinical development of pharmaceutical products. These regulatory requirements are a major factor in determining whether a substance can be developed into a marketable product, and the amount of time and expense associated with that development.

        World regulatory authorities, especially those in the US, Switzerland, the EU and Japan, have high standards of technical evaluation. The introduction of new pharmaceutical products generally entails a lengthy approval process. Of particular importance is the requirement in all major countries that products be authorized or registered prior to marketing, and that such authorization or registration be subsequently maintained. In recent years, the registration process has required increased testing and documentation for clearance of new drugs, with a corresponding increase in the expense of product introduction.

        To register a pharmaceutical product, a registration dossier containing evidence establishing the quality, safety and efficacy of the product must be submitted to regulatory authorities. Generally, a therapeutic product must be registered in each country in which it will be sold. In every country, the submission of an application to a regulatory authority does not guarantee that approval to market the product will be granted. Although the criteria for the registration of therapeutic drugs are similar in most countries, the formal structure of the necessary registration documents varies significantly from country to country. It is possible that a drug can be registered and marketed in one country while the registration authority in a neighboring country may, prior to registration, request additional information from the pharmaceutical company or even reject the product. It is also possible that a drug may be approved for different indications in different countries.

        The registration process generally takes between six months and several years, depending on the country, the quality of the data submitted, the efficiency of the registration authority's procedures and the nature of the product. Many countries provide for accelerated processing of registration applications for innovative products of particular therapeutic interest. In recent years, intensive efforts have been made among the US, the EU and Japan to harmonize registration requirements in order to achieve shorter development and registration times for medical products. However, the requirement in many countries to negotiate selling prices or reimbursement levels with government regulators can substantially extend the time until final marketing approval is granted.

        The following provides a summary of the regulatory process in the principal markets served by Pharmaceuticals Division affiliates:

United States

        In the US, applications for drug registration are submitted to and reviewed by the FDA. The FDA regulates the testing, approval, manufacturing, importing, labeling and marketing of pharmaceutical products intended for commercialization in the US. The FDA also monitors all pharmaceutical products currently on the US market. The pharmaceutical development and registration process is typically intensive, lengthy and rigorous. When a pharmaceutical company has gathered data which it believes sufficiently demonstrates a drug's quality, safety and efficacy, then the company may file a New Drug Application ("NDA") for the drug. The NDA must contain all the scientific information that has been gathered about the drug and typically includes information regarding the clinical experiences of all patients tested in the drug's clinical trials. A supplemental new drug application ("sNDA") must be filed for a line extension of, or new indications for, a previously registered drug.

        Once an NDA is submitted, the FDA assigns reviewers from the fields of biopharmaceuticals, chemistry, medicine, microbiology, pharmacology/toxicology, statistics and labeling. After a complete review, these experts then provide written evaluations of the NDA, including a recommendation. These recommendations are consolidated and are used by the FDA in its evaluation of the NDA. Based on that evaluation, FDA then provides to the NDA's sponsor an approval, or an approvable, or non-approvable letter. The approvable and non-approvable letters will state the specific deficiencies in the NDA which

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need to be addressed. The sponsor must then submit complete responses to the deficiencies in order to restart the review procedure.

        Once the FDA has approved an NDA or sNDA, the company can make the new drug available for physicians to prescribe. The drug owner must submit periodic reports to the FDA, including any cases of adverse reactions. For some medications, the FDA requires additional post-approval studies (Phase IV) to evaluate long-term effects or to gather information on the use of the product under special conditions. The FDA also requires compliance with standards relating to good laboratory, clinical and manufacturing practices.

European Union

        In the EU, there are two main procedures for application for authorization to market pharmaceutical products in all of the EU Member States, the Centralized Procedure and the Mutual Recognition Procedure. It is also possible to obtain a national authorization for products intended for commercialization in a single EU member-state only, or for line extensions to existing national product licenses.

        Under the Centralized Procedure, applications are made to the European Medicines Agency (EMEA) for an authorization which is valid across all EU member states. The Centralized Procedure is mandatory for all biotechnology products and optional for other new chemical compounds or innovative medicinal products. When a pharmaceutical company has gathered data which it believes sufficiently demonstrates a drug's quality, safety and efficacy, then the company may submit an application to the EMEA. The EMEA then receives and validates the application, and appoints a Rapporteur and Co-Rapporteur to review it. The entire review cycle must be completed within 210 days, although there is a "clock stop" at day 120, to allow the company to respond to questions set forth in the Rapporteur/Co-Rapporteur's Assessment Report. When the company's complete response is received by the EMEA, the clock restarts on day 121. If there are further aspects of the dossier requiring clarification, the EMEA will then request an Oral Explanation on day 180, in which the sponsor must appear before the EMEA's Scientific Committee (the CPMP) to provide the requested additional information. On day 210, the CPMP will then take a vote to recommend the approval or non-approval of the application. The final decision under this Centralized Procedure is an EU Community decision which is applicable to all Member States. This decision occurs on average 90 days after a positive CPMP recommendation.

        Under the Mutual Recognition Procedure (MRP), the company first obtains a marketing authorization by a single EU member-state. Subsequently, the company may seek mutual recognition of this first authorization from some or all of the remaining EU Member-States. Then, within 90 days of this initial decision, each Member State reviews the application and can issue objections or requests for additional information. On Day 90, each Member State must be assured that the product is safe and effective, and that it will cause no risks to the public health. Once agreement has been reached, each Member State grants separate marketing authorizations for the product.

        After the Marketing Authorizations have been granted, the company must submit periodic safety reports to the EMEA (Centralized Procedure) or to the National Health Authorities (MRP). These Marketing Authorizations must be renewed on a 5 year basis.

Japan

        In Japan, applications for new products are made through the Pharmaceutical and Medical Devices Agency (PMDA). After a data reliability survey and a Good Clinical Practice inspection are carried out by the PMDA, a team evaluation is carried out by the Pharmaceutical and Medical Devices Evaluation Center (PMDEC) of the PMDA. Its results are passed to PMDA's external experts who then report back to the PMDA. After a further team evaluation, a report is provided to the Ministry of Health, Labor and Welfare (MHLW), which makes a final determination for approval and refers this to the Central Pharmaceuticals Affairs Council (CPAC) which then advises the MHLW on final approvability. Drug

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manufacturing or import license approval is issued by the local prefecture government. Once the MHLW has approved the application and has listed its national health insurance price, the company can make the new drug available for physicians to prescribe and obtain reimbursement. For some medications, the MHLW requires additional post-approval studies (Phase IV) to evaluate safety, effects and/or to gather information on the use of the product under special conditions. The MHLW also requires the Sponsor to submit safety reports.

Price Controls

        In many of the markets where we operate, the prices of pharmaceutical products are subject to direct price controls (by law) and to drug reimbursement programs with varying price control mechanisms. Due to increasing political pressure and governmental budget constraints, we expect these mechanisms to remain in place—and to perhaps even be strengthened—and to have a negative influence on the prices we are able to charge for our products.

        In the US, debate over the reform of the healthcare system has resulted in an increased focus on pricing. Although there are currently no government price controls over private sector purchases in the US, federal legislation requires pharmaceutical manufacturers to pay prescribed rebates on certain drugs to enable them to be eligible for reimbursement under some government healthcare programs. In the absence of government pricing regulations, managed care has become a potent force in the US market place that increases downward pressure on the prices of pharmaceutical products. In addition, the recently enacted Medicare reform legislation, which creates a prescription drug benefit for Medicare patients, could influence prices. The legislation could ultimately enable the US government to use its enormous purchasing power to demand additional discounts from pharmaceutical companies. At the same time, this legislation could increase the volume of pharmaceutical drug purchases, perhaps offsetting, at least in part, potential additional price discounts. It is too soon to predict the full impact of this new legislation with certainty. Another potential influence on pricing in the US is the ongoing efforts by consumers and others to obtain our products from distributors in Canada, which has relatively stringent price controls. Such imports from Canada to the US are currently illegal. However, there are ongoing political efforts to change the legal status of such imports.

        In the EU, governments influence the price of pharmaceutical products through their control of national healthcare systems that fund a large part of the cost of such products to consumers. The downward pressure on healthcare costs in general in the EU, particularly with regard to prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert commercial pressure on pricing within a country. The EU enlargement (with 10 countries having joined the EU in 2004) will probably complicate the environment and have some influence on prices in the region and parallel trade.

        In Japan, the MHLW reviews the prices of individual pharmaceutical products every two years. In the past, these reviews have resulted in price reductions. The Japanese government is currently undertaking a healthcare reform initiative, and the pharmaceutical pricing system is one of the issues being reviewed. In particular, the government is reviewing the pricing of older products, including the biannual reduction of reimbursement prices adjusted for actual discounts given.

Intellectual Property

        We attach great importance to patents, trademarks, and know-how in order to protect our investment in research and development, manufacturing and marketing. It is our policy to seek the broadest possible protection for significant product developments in all major markets. Among other things, patents may cover the products themselves, including the product's active substance and its formulation. Patents may also cover the processes for manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the products. Patents may also cover particular uses of a product, such as its use to treat a particular disease, or its dosage regimen.

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        The protection offered by such patents extends for varying periods depending on the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage. We monitor our competitors and vigorously challenge infringements of our intellectual property.

        In general, published pharmaceutical industry benchmarks show that we are at a comparatively low risk of loss of significant amounts of revenue due to patent expirations. As examples, we have basic patent protection (including extensions) on valsartan (the active ingredient used in our best-selling product Diovan) until 2012 in the US, until 2011 in the major countries of the EU, and until 2013 in Japan. We have basic patent protection (including extensions) on imatinib (the active ingredient used in our leading product Gleevec/Glivec) until January 2015 in the US (excluding pediatric extension), until 2016 in the major EU countries, and until 2013 in Japan.

        However, patent protection is no longer available in several major markets for the active substances used in a number of our Pharmaceuticals Division's leading products:

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Neoral.    Patent protection exists for the Neoral micro-emulsion formulation and other cyclosporin formulations through 2009 and beyond in major markets. Despite this protection, generic cyclosporin products competing with Neoral have entered the transplantation market segment in the US, Germany, Japan, Canada and elsewhere. We have filed patent infringement actions against manufacturers of these generic products. However, except in one lawsuit in Canada, we have so far not succeeded in obtaining an injunction against any of the manufacturers that we have sued.



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Sandostatin.    Basic patent protection for the active ingredient of Sandostatin SC has expired in the US, Japan, Germany and the UK, and it will expire in 2006 in France and 2007 in Italy. Several parties have filed applications to market generic versions of Sandostatin SC in the US. We have not, so far, sued any for patent infringement. However, patent protection extending to 2010 (and 2013 and beyond in the US) continues in major markets for Sandostatin LAR, a long-acting version of Sandostatin which represents a significant and growing proportion of our sales in this product family.



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Lotrel/Cibacen/Lotensin/Cibadrex.    The basic benazepril substance patent protection for Cibacen/Lotensin/Cibadrex has expired in the US and Japan, and will expire in 2005-08 in major markets in the EU. However, Lotrel, which is a combination of benazepril and amlodipine besylate, is patented in the US until 2017. Teva and Dr. Reddy's Laboratories have challenged this patent. Dr. Reddy's is seeking marketing approval for a different benazepril combination, using amlodipine maleate rather than amlodipine besylate. Because of this difference, the Dr. Reddy's product, if brought to market, would not be automatically substitutable in the US for Lotrel. However, Teva is seeking marketing approval for the same benazepril combination as Lotrel, and is thus seeking to bring a fully substitutable product to the US market. We have sued Teva and Dr. Reddy's in the US for patent infringement. The Dr. Reddy's case is currently stayed.



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Lamisil.    The active ingredient in Lamisil is covered generically, but not mentioned specifically, in a patent family which has expired. Another patent family specifically discloses and covers the active ingredient and expires in the US in 2006, and in 2005-07 in Japan and major EU countries. The specific US patent had been challenged by Dr. Reddy's Laboratories in the US. Dr. Reddy's has since withdrawn its suit and conceded that this patent is valid and enforceable.



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Miacalcin/Miacalcic.    The specific Novartis formulation of this product is covered by patents which will expire in the US in 2015. However, patents on the Novartis formulation have expired in a number of major countries and will expire in Italy in 2006. Apotex has applied to the FDA for the right to sell a generic version of Miacalcin using the Novartis formulation. We have sued Apotex for infringement. Two other companies have applied to the FDA for the right to sell a generic version of Miacalcin based on a different formulation. We have not sued these companies.

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Exelon.    The active ingredient in Exelon is covered by a compound patent (granted to Proterra, AG and licensed to us), which presently expires in 2007, and has been determined by the FDA to qualify for patent term extension until 2012. In addition, we hold an isomer patent on Exelon which expires in 2014. Dr. Reddy's, Sun Pharmaceuticals and Watson Pharmaceuticals have filed applications to market a generic version of Exelon in the US. Together with Proterra, we have sued all three parties for patent infringement.



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Focalin.    The active ingredient in Focalin is covered by patents (granted to Celgene Corporation and licensed to us) through 2015 in the US and 2018 in other markets. Teva has challenged these patents and has filed an application for a generic version of Focalin in the US. Together with Celgene, we have sued Teva for patent infringement.



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Trileptal.    Patent protection for Trileptal's active ingredient has expired in major countries. In the US, New Chemical Entity data exclusivity under the Hatch-Waxman Act of 1984 is currently scheduled to expire in January 2005. However, we have applied for a six-month extension of this exclusivity period under the Hatch-Waxman pediatric exclusivity provisions. At the same time, we have pending patent filings relating to our marketed formulations of Trileptal, which, if granted, would expire in 2018 in major countries, including the US.



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Starlix.    The active ingredient in Starlix is covered by Ajinomoto patents. The basic US patent will expire in 2006, but a request to extend the term of the patent until 2009 has been filed. In late January 2005 a third party informed us that they have filed an ANDA application to market a generic version of Starlix in the US. We are assessing that information and will respond appropriately.



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Foradil.    Patent protection for Foradil's active ingredient has expired in major countries. In the US, Hatch-Waxman data exclusivity is currently scheduled to expire in February 2006.



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Voltaren.    Voltaren is off-patent. As a result, revenue from Voltaren has declined, and may decline significantly further over the next few years.

        The loss of patent protection can have a significant impact on our Pharmaceuticals Division. We work to offset these negative effects by developing and patenting inventions that result in process and product enhancements and by positioning many of our products in specific market niches. However, there can be no assurance that this strategy will be effective in the future to extend competitive advantage, or that we will be able to avoid substantial adverse effects from future patent expirations.

CONSUMER HEALTH

        Our Consumer Health Division is a world leader in the research, development, manufacturing and marketing of a wide range of competitively differentiated products that restore, maintain or improve the health and well being of our consumers. The business of our Consumer Health Division is conducted by a number of affiliated companies throughout the world. Created in July 2002, the Consumer Health Division consists of the following Business Units: OTC self-medication, Animal Health, Medical Nutrition (including the Nutrition & Santé franchise), Infant & Baby, and CIBA Vision. Sandoz (generics) was a Business Unit of the Consumer Health Division until December 31, 2004, after which time it became a separate Division. Therefore, for reporting purposes, the 2004 results of the Sandoz business are included with the results of the Consumer Health Division.

        As of December 31, 2004, the affiliates of the Consumer Health Division employed 32,548 associates worldwide. In 2004, the affiliates of the Consumer Health Division (including Sandoz) achieved consolidated net sales of $9.75 billion, which represented 35% of the Group's total net sales, and invested $0.6 billion in research and development.

        Our Consumer Health Division places considerable emphasis on the development of strong, consumer-oriented and trustworthy brands. We believe each Business Unit has a leading market position in growth-oriented healthcare segments beyond our core pharmaceuticals business, and provides essential,

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high quality health-related products. In order to deliver accelerated sales growth, and to achieve leadership positions in the fields in which we compete, our Consumer Health Division seeks to give voice to the consumer and to determine the consumer's needs and desires.

        In the dynamic world of consumer healthcare, aging populations are increasingly affluent and becoming more knowledgeable about their health and the benefits of self-medication. The success of each Business Unit depends upon its ability to anticipate and meet the needs of such consumers and of health professionals worldwide.

SANDOZ

        In 2004, Sandoz was still a Business Unit of our Consumer Health Division. As of January 1, 2005, it became a separate Division organized as a Retail Generics company which also operates two other businesses, Industrial Products and Biopharmaceuticals. The business of Sandoz is conducted by a number of affiliated companies and sells to approximately 140 countries. Sandoz is a world leader in the development, manufacturing and marketing of pharmaceutical products and substances which are no longer protected by patents. As of December 31, 2004, Sandoz employed 13,397 associates worldwide. In 2004, the affiliates of Sandoz achieved consolidated net sales of $3.0 billion, which represented 11% of the Group's total net sales.

        Because Sandoz was part of the Consumer Health Division until December 31, 2004, for reporting purposes, the 2004 results of the Sandoz business are included with the results of the Consumer Health Division.

        In August 2004, we acquired Sabex Holdings Ltd., a Canadian generic company with a leading position in injectable products. This acquisition provides Sandoz with strong growth opportunities in injectable generics. This acquisition also gives Sandoz a new operational presence in Canada, the world's sixth largest generics market, and offers the opportunity to increase sales in Canada of our existing portfolio of solid-dosage-form products.

        In June 2004, we acquired the Danish generics company Durascan A/S from AstraZeneca plc. This acquisition provides Sandoz with a leadership position in the Danish market. In addition, Durascan's broad portfolio of generic products offers growth opportunities for Sandoz throughout the Nordic region.

        In 2003, we united 14 of our generics company brands under the single global umbrella name Sandoz, to strengthen recognition and leverage share of voice in the highly competitive marketplace for generic products. This initiative capitalizes on the strong reputation of the Sandoz name, which has a high level of awareness and trust among physicians, pharmacists and patients.

        In 2002, we acquired Lek Pharmaceuticals d.d., Slovenia's largest pharmaceuticals company. This acquisition provided Sandoz with a leadership position in the sales of generic pharmaceutical products in Central and Eastern Europe and in the former Soviet Union. For the time being, Lek products will continue to be sold under that well-regarded name, as agreed between the management of Novartis and Lek.

        In 2004, Sandoz competed in three business franchises: finished dosage forms (the Generics Pharmaceuticals Business), active pharmaceutical ingredients and intermediates (the Industrial Products Business) and Biopharmaceuticals (the Biopharmaceuticals Business).

        In the Generics Pharmaceuticals Business (now Retail Generics), we develop and manufacture drugs that are no longer protected by patents into finished dosage forms, and we sell them to wholesalers, pharmacies, hospitals and other healthcare outlets around the world. In the Industrial Products Business, we develop and manufacture off-patent active pharmaceutical ingredients and intermediates and sell them worldwide to customers who use them to manufacture finished goods. In developing our new Biopharmaceuticals Business, we are seeking to leverage our technology and expertise to develop, manufacture and market high-quality biopharmaceutical products, such as protein hormones and other

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human proteins, to be sold as substitutes for branded biopharmaceutical products after their patents have expired. Sandoz is also an important manufacturer of biopharmaceuticals for a number of third parties.

        In 2004, Sandoz net sales decreased by approximately 1% in local currencies. The business year was characterized by a highly competitive environment, especially in the US and Germany, and the acquisitions of Durasacan A/S and Sabex Holdings Ltd.

        Approximately 76% of our Sandoz net sales are derived from our Generics Pharmaceuticals Business, approximately 21% of net sales are derived from our Industrial Products Business and approximately 3% are attributable to the Biopharmaceuticals Business.

        In 2004, net sales of our Generics Pharmaceutical Business in the US decreased by 11%, mainly driven by fierce competition, the erosion of prices and volume losses. In particular, sales of our amoxicillin/potassium clavulanate product (a generic version of the antibiotic Augmentin®), a key driver of sales in 2003, were hurt by increasing competition.

        In Germany, the second largest market for our Generics Pharmaceutical Business products, net sales were hurt by significant price competition. In addition, the introduction of new regulations in 2004 caused a significant decline of the number of products that were reimbursable.

        In other key European markets, our Generics Pharmaceutical Business achieved double-digit net sales growth. These markets included France and Russia.

        In 2004, our Industrial Products Business enlarged its activities in the field of modern sterile penicillins (Amoxicillin Sodium, sterile combinations with Clavulanic Acid), in generic macrolides (Clarithromycin, Azithromicin), and advanced cephalosporin intermediates. The Industrial Products Business was negatively affected by low prices offered by Asian suppliers and a strong Euro, the main currency in the production network. As a consequence, Sandoz announced the closure of one production line in Italy.

        In 2004, our Biopharmaceuticals Business continued the development of follow-on biologics, leveraging more than 20 years of biotech experience. With its biopharmaceuticals portfolio, Sandoz is at the forefront of emerging regulatory policies for follow-on biologics in Europe and the US. Sandoz is determined to contribute to the availability of safe and effective follow-on biologics. In September 2004, we received the first marketing authorization for the recombinant human growth hormone Omnitrope in Australia.

        However, in September 2004, Sandoz also received notice from the FDA that the agency was unable to reach a decision on whether to approve an application for the marketing of Omnitrope. According to the FDA letter issued to Sandoz, the agency did not identify any deficiencies in the application. However, the FDA stated that it had been unable to reach a final decision on the application due to uncertainty regarding scientific and legal issues.

        In addition, in November 2003, the European Commission notified Sandoz about its intent not to proceed with the decision for a marketing authorization for Omnitrope under the regulatory pathway chosen by Sandoz. In January 2004, Sandoz filed its complaint to the European Court of First Instance.

Recently Launched Products

        The following is a summary of the most important products launched by Sandoz in 2004:

•

Levothyroxine (a generic version of Synthroid® and Levoxyl®, a treatment for hyperthyroidism) was launched in the US in June 2004.



•

Ribavarin (a generic version of Rebetol®, a treatment for chronic hepatitis C in combination with interferon) was launched in the US in April 2004.

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•

Paroxetine (a generic version of Paxil®, a treatment for major depressive disorder, obsessive compulsive disorder, panic disorder and social anxiety disorder) was launched in the UK in May, in the US in June, in France in August, and in the Netherlands in September 2004.



•

Ramipril (a generic version of Altace®, a treatment for hypertension) was launched in the Netherlands in January 2004 followed by launches in other European countries in 2004.



•

Cefuroxime Axetil (a generic version of Zinnat®, an antibiotic) was launched in Germany in January 2004.



•

Pravastatin (a generic version of Pravachol®, a cholesterol lowering drug) was launched in Spain in April and in the UK, Germany, the Netherlands and Denmark in August 2004.



•

Amlodipine mesylate (a generic version of Norvasc®, a treatment for hypertension) was launched in the Nordic region (Denmark, Finland, Norway) and in the Netherlands in March, and in Austria in July 2004.



•

Clarithromycin (a generic version of Biaxin®, an antibiotic) was launched in Germany in November, Croatia in May, and in Finland and Denmark in July 2004.



•

Setraline (a generic version of Zoloft®, a treatment for depression) was launched in Spain in August 2004.

Key Marketed Products

        The following table describes the key marketed products for Sandoz. Not all products are available in all markets.

Generics Pharmaceuticals Business

Product		Originator Drug		Description
Amoxicillin/clavulanic acid		Augmentin®		anti-infective
Omeprazole		Prilosec®		ulcer and heartburn treatment
Citalopram		Celexa®		anti-depressant
Loratadine		Claritin®		antihistamine
Atenolol		Tenoric®		anti-hypertension
Penicillin				anti-infective
Lisinopril		Prinivil®		ACE inhibitor
Ranitidine		Zantac®		anti-ulcerant
Metformin		Glucophage®		anti-diabetic
Terazosin		Hytrin®		anti-hypertension and benign prostatic hyperplasia
Enalapril		Lexxel®		ACE inhibitor
Metoprolol		Lopressor®		Anti-hypertension

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Industrial Products Business

Active Ingredient		Description
Oral and sterile penicillins		Anti-infectives
Oral and sterile cefalosporins		Anti-infectives
Clavulanic acid and mixtures with clavulanic acid		ß-lactam inhibitors
Classical and semisynthetic erythromycins		Anti-infectives
Tiamuline		Anti-infectives
Lovastatin, Simvastatin, Pravastatin		Statins
Vancomycin		Anti-infectives
Lisinopril		ACE-inhibitor
Thyroxine		Hormones

Intermediates		Description
Various cephalosporin intermediates		Anti-infectives
Erythromycin base		Anti-infectives
Various crude compounds produced by fermentation		Cyclosporine, ascomysine, rapamycine, mycophenolic acid, etc.

Principal Markets

        The principal markets for Sandoz are the two largest generics markets in the world: the US and Europe. The following table sets forth the aggregate 2004 net sales of Sandoz by region:

        Many Sandoz products are used for chronic conditions that require patients to consume the product over long periods of time, from months to years. Sales of our anti-infective products are subject to seasonal variation. Sales of the vast majority of our other products are not subject to material changes in seasonal demand.

Production

        We manufacture our Sandoz products at 28 production facilities around the world. Among these, our principal production facilities are located in Kundl, Austria; Menges and Ljubljana, Slovenia; Broomfield, US; Stryków, Poland; Kalwe, India; Palafolls, Spain; and Boucherville, Canada. While we have not experienced material supply interruptions in the past, there can be no assurance that supply will not be interrupted in the future as a result of unforeseen circumstances. The manufacture of our products is heavily regulated, making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a recall or a government-enforced shutdown of production facilities, which in turn could lead to product shortages.

        Active pharmaceuticals ingredients are manufactured in our facilities or purchased from a number of our affiliates and third-party suppliers. Where possible, our policy is to maintain multiple supply sources so that the business is not dependent on a single or limited number of suppliers and competitive material

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sourcing can be assured. However, our ability to do so may at times be limited by regulatory requirements. We monitor market developments that could have an adverse effect on the supply of essential active pharmaceutical ingredients. All active pharmaceutical ingredients that we purchase must comply with our quality standards. In order to sustain cost competitiveness and reliable quality, we produce some of our active pharmaceutical ingredients, like penicillins, by vertical integration, using modern bio-technological methods. These methods include fermentation processes, chemical syntheses and physical production methods, such as sterile processing. We are constantly working to develop other new manufacturing processes.

        We obtain agricultural raw materials such as flours and sugars from multiple suppliers based in the EU. We obtain chemicals and other raw materials from suppliers around the world. The raw materials we purchase are generally subject to market price fluctuations. We seek to avoid these fluctuations, where possible, through the use of long-term supply contracts.

Marketing and Sales

        In our Generics Pharmaceuticals Business, we have a broad portfolio of off-patent drugs that we sell to wholesalers, pharmacies, hospitals, and other healthcare outlets. Depending on the structure of the local market, customers are serviced either by the field service team of the local Sandoz affiliate or by established partners or joint venture associates.

        Our Industrial Products Business supplies our Generics Pharmaceutical Business and the pharmaceutical industry worldwide with a broad portfolio of active pharmaceutical ingredients and intermediates.

        In response to rising healthcare costs, many governments and private medical care providers, such as health maintenance organizations (HMOs), have instituted reimbursement schemes that favor the substitution of branded pharmaceuticals by generics. In the US, generic substitution statutes have been enacted by virtually all states and permit or require the dispensing pharmacist to substitute a less expensive generic drug for the brand-name version of the drug. In Europe, the use of generic drugs is growing. But in some EU countries, reimbursement practices do not create an efficient incentive for generic substitution. As a result, generic penetration rates in many European countries are still below those reached in the US.

Competition

        Other major companies selling finished dosage form generic pharmaceutical products are Alpharma, Barr, Dr. Reddy's, Hexal, Ivax, Krka, Merck Generics, Mylan, Pliva, Ranbaxy, Ratiopharm, Stada, Teva and Watson.

        Other companies selling active pharmaceutical ingredients & intermediates are Antibioticos, Dr. Reddy's, DSM-Anti-Infectives, Ranbaxy and Teva, as well as certain East Asian manufacturers.

        The market for generic products is characterized by increasing demand for high-quality pharmaceuticals which can be produced at lower costs due to minimized initial research and development investments. Increasing pressure on healthcare expenditures and numerous patent expirations have created a favorable market environment for the generics industry. This positive market trend, however, brings increased competition within the generics industry, leading to ongoing price pressure on generic pharmaceuticals.

        In addition, branded pharmaceutical companies have responded to the increased competition from generic products by licensing their branded products to generic companies (the so-called "authorized generic"). By doing so, branded companies participate in the conversion of their branded product to generics. Consequently, generic companies that were not in a position to compete on a specific product are allowed to enter the generic market using the innovator's product. The innovator's authorized generic is not, at this time subject to the Hatch-Waxman rules regarding exclusivity. See "—Regulation." As a

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result, the company that launches an authorized generic typically enters the market at the same time as the generic exclusivity holder. This tends to reduce the value of the exclusivity for the first generic.

Research and Development

        Before a generic drug may be marketed, intensive technical and clinical development work must be performed in order to demonstrate the bioequivalency of the generic drug to the original branded drug. Nevertheless, research and development costs associated with generic drugs are much lower than those of their original counterparts. As a result, off-patent drugs can be offered for sale at prices much lower than those of patented drugs, which must recoup substantial basic research and development costs through higher prices over the life of the product's patent.

        Currently, the affiliates of Sandoz employ about 1000 Research and Development staff who explore alternative routes for the manufacture of known compounds and who aim to develop innovative forms of generic drugs. These associates are based worldwide, including facilities in Kundl and Schaftenau, Austria; Menges and Ljubljana, Slovenia; Kolshet, India; Boucherville, Canada; and Dayton, New Jersey.

        In 2004, Sandoz invested $286 million in research and development, which amounted to 9.4% of net sales. We have long-term research commitments totaling $61 million in the aggregate as of December 31, 2004. We intend to fund these expenditures from internally generated resources.

Regulation

        The Hatch-Waxman Act in the US (and similar legislation in the EU and in other countries) eliminated the requirement that generic drug manufacturers repeat the extensive clinical trials which are required for originator drugs, so long as the generic version could be shown to be of identical quality and purity, and to be biologically equivalent to the original branded drug.

        In the US, the decision whether a generic drug is bioequivalent to the original branded drug is made by the FDA based on an Abbreviated New Drug Application (ANDA) filed by the generic drug's manufacturer. The process typically takes approximately eighteen months from the filing of the ANDA until FDA approval. However, delays can occur if issues arise regarding the interpretation of bioequivalence study data, labeling requirements for the generic product, or qualifying the supply of active ingredients. In addition, the Hatch-Waxman Act requires a generic manufacturer to certify in certain situations that the generic drug does not infringe any current applicable patents on the drug held by the innovator, or to certify that such patents are invalid. This certification often results in a patent infringement lawsuit being brought by the originator against the generic company. In the event of such a lawsuit, the Hatch-Waxman Act imposes an automatic 30-month delay in the approval of the generic drug in order to allow the parties to resolve the intellectual property issues. For generic applicants who are first to file their ANDA containing a certification claiming non-infringement or patent invalidity, the Hatch-Waxman Act provides those applicants with 180-days of marketing exclusivity to recoup the expense of challenging the innovator patents. However, recent changes in the Hatch-Waxman Act may affect the availability of generic marketing exclusivity in the future. The new amendments now require generic applicants to launch their products within certain time frames or risk losing the marketing exclusivity that they had gained through being a first to file applicant.

        In the EU, decisions on bioequivalence can be made by the EMEA under the Centralized Procedure, or by a single member state, after which the MRP may be followed. See "Pharmaceuticals—Regulation—European Union." Companies may submit Abridged Applications for approval of a generic pharmaceutical product, based upon its "essential similarity" to a medicinal product authorized and marketed in the EU for not less than ten years.

Intellectual Property

        Wherever possible our products are protected by our own patents. Among other things, patents may cover the products themselves, including the product's active substance and its formulation. Patents may

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also cover the processes for manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the products. Patents may also cover particular uses of a product, such as its use to treat a particular disease, or its dosage regimen. It is our policy to seek the broadest possible protection for significant product developments in all major markets.

        We take all reasonable steps to ensure that our generic products do not infringe valid intellectual property rights held by others. Nevertheless, originating companies commonly assert patent and other intellectual property rights in an effort to delay or prevent the launch of competing generic products. As a result, we can become involved in extensive litigation regarding our generic products. If we are unsuccessful in defending these suits, we could be subject to injunctions preventing us from selling our generic products, or to damages, which may be substantial.

        In addition, we face the risk that generic competitors may file patents to protect product developments which could block Sandoz's own development projects. If this were to occur we could be forced to terminate a development program, which would require us to write-off any resources invested in that project, and would mean a loss of revenue.

        We are currently involved in litigation in a number of countries with affiliates of AstraZeneca regarding omeprazole, our generic version of AstraZeneca's Prilosec®. We launched omeprazole in the US in August 2003. While some of the European cases have been decided in our favor, many of the cases, including the cases pending in the US, may continue for some time. We believe that we will be successful in these lawsuits. However, should AstraZeneca succeed in any or all of the lawsuits, then AstraZeneca will likely seek to recover from us its lost profits for sales it would have made had our product not been on the market.

OTC

        Our Over-the-Counter (OTC) self medication Business Unit is a world leader in the research, development, manufacturing and marketing of products for the treatment and prevention of common medical conditions and ailments, to enhance people's overall health and well being. The business of our OTC Business Unit is conducted by a number of affiliated companies in more than 50 countries. As of December 31, 2004, the affiliates of our OTC Business Unit employed 4,047 associates worldwide. In 2004, the affiliates of our OTC Business Unit achieved consolidated net sales of $2.0 billion, which represented 7% of the Group's total net sales.

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Key Marketed Products

        The OTC Business Unit's main product categories are cough, cold and allergy treatments, gastrointestinal treatments, dermatological treatments, analgesics, vitamins, minerals and supplements, venous disorder treatments and smoking cessation treatment. The major OTC brands are:

        In 2004, the OTC Business Unit had a number of key brand achievements:

•

Voltaren, OTC's analgesic franchise continued its exceptional growth in all regions driven by new launches of patch and systemic forms as well as a range of line extensions. In Germany, Voltaren became the number two OTC brand behind Bayer's Aspirin and worldwide the brand surpassed the $200 million threshold for the first time.



•

Theraflu and Triaminic were strengthened with the innovative launch of Thin Strips, a novel delivery form for the company's cough and cold medicines. Our OTC Business Unit was the first company to launch products containing an active pharmaceutical substance using this technology.



•

Nicotinell/Habitrol, our smoking cessation franchise, had another year of solid growth, driven by effective marketing campaigns behind the coated gums and government campaigns to reduce smoking in Western Europe.



•

Lamisil^AT, the one week antifungal treatment for athlete's foot, strongly increased net sales based in part on its continued geographic expansion, including its launch in Japan via Sankyo and on its first full year of sales in certain Latin American countries.



•

Benefiber/NovaFibra, the innovative tasteless, clear and grit free soluble fiber product, continued to gain share and attention in the marketplace as its net sales grew strongly in both Italy and the US.

Principal Markets

        In 2004, OTC realized the majority of its net sales in its two principal markets: the US and Europe, including Eastern Europe. In 2002, the OTC Business Unit and Kao Corporation agreed to end their joint

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venture to market OTC products in Japan. However, OTC remains committed to expanding its presence in the Japanese market. The following table sets out our 2004 net sales by geographic region.

        The OTC business is marked by a high degree of seasonality, with our cough, cold and allergy brands, which include Triaminic, NeoCitran/Theraflu and Otrivin, significantly impacted by the timing and severity of the annual cold and flu season and allergy seasons.

Production

        Our OTC Business Unit has a manufacturing and supply infrastructure comprised of the Business Unit's own plants, strategic third parties and other Novartis Group plants (which are predominantly owned and operated by the Pharmaceuticals Division). The primary OTC plants are located in Lincoln, Nebraska; Nyon, Switzerland; and Humacao, Puerto Rico.

        The goal of our supply chain strategy is to produce and distribute high quality products efficiently. Our balance of internal, external and Group sites provides flexibility and predictable sources of supply in the event of capacity constraints or other potential disruptions to supply. The manufacture of our products is heavily regulated, making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a recall or a government-enforced shutdown of production facilities, which in turn could lead to product shortages. While we have not experienced material supply interruptions in the past, there can be no assurance that supply will not be interrupted in the future as a result of unforeseen circumstances.

        Raw materials for the manufacturing process are purchased from a number of our affiliates and third party suppliers. For the most part, the products and services we procure are not proprietary and are available from a number of suppliers. We often "single-source" supplies, but we have a policy of having at least a second approved and validated supplier registered for most key materials so that substitution is possible. Where practical and beneficial, we have long-term contracts in place on key production inputs. We also proactively monitor markets and developments that could have an adverse effect on the supply of essential materials.

Marketing and Sales

        We aim to be a leading global participant in fulfilling the needs of patients and consumers for self-medication healthcare. Strong, leading brands, science-based products and in-house marketing and sales organizations are key strengths in pursuing this objective. We distribute our products through various channels, such as pharmacies, food, drug and mass retail outlets.

Competition

        The fundamental trends driving the growth of our OTC business worldwide are increasing pressures on government health funding, changing consumer attitudes towards personal well being, and the rise of a self-care mentality among consumers, and successful switches of prescription products to OTC status,

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including switches of products which are used for chronic conditions that require patients to consume the product over long periods of time, from months to years. Other companies selling over-the-counter pharmaceutical products include major international corporations with substantial financial and other resources, such as Johnson & Johnson, Sanofi-Aventis, Bayer, GlaxoSmithKline, Pfizer, Procter & Gamble and Wyeth.

Research and Development

        In OTC, the focus of research and development activities is primarily on dermatology, analgesics, cough, cold, allergy, gastrointestinal, minerals, and cardiovascular risk reduction (through smoking cessation programs). OTC also works closely with the Pharmaceuticals Division to evaluate appropriate products that can be switched from prescription to OTC status. The development of line extensions to leverage brand equities is also of high importance. These extensions can take many forms including new flavors, new galenical forms and more consumer-friendly packaging.

        The OTC business employs 263 associates in Research and Development with the primary facility located in Nyon, Switzerland. Local country Research and Development organizations largely manage compliance, regulatory needs and medical affairs. In 2004, the OTC Business Unit spent $84 million in Research and Development, representing 4.3% of net sales.

Regulation

        For OTC products, the regulatory process for bringing a product to market consists of preparing and filing a detailed dossier with the appropriate national or international registration authority and obtaining approval in the US or registration in the EU and the rest of the world. See "Pharmaceuticals—Regulation."

        In the US, in addition to the NDA process which is also used to approve prescription pharmaceutical products, an OTC product may be sold if the FDA has determined that the product's active ingredient is generally recognized as safe and effective. FDA makes this determination through a regulatory process known as the OTC Review. In the OTC Review, the FDA establishes, in a series of monographs, the conditions under which particular active ingredients may be recognized as safe and effective for OTC use. Pharmaceutical companies can market products containing these active ingredients without the necessity of filing an NDA and going through its formal approval process, so long as the company complies with the terms of the published monograph.

        Most countries also have a regulatory process for switching a particular pharmaceutical product from prescription to OTC status. These processes vary from country to country.

Intellectual Property

        Our OTC business is brand-oriented and, therefore, we consider our trademarks to be of utmost value. Enforceable trademarks protect most of our brands in the majority of the markets where these brands are sold, and we vigorously protect these trademarks from infringement. Our most important trademarks are used in a number of countries. Local variations of these international trademarks are employed where legal or linguistic considerations require the use of an alternative.

        Wherever possible our products are protected by patents. Among other things, patents may cover the products themselves, including the product's active substance and its formulation. Patents may also cover the processes for manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the products. Patents may also cover particular uses of a product, such as its use to treat a particular disease, or its dosage regimen. It is our policy to seek the broadest possible protection for significant product developments in all major markets.

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ANIMAL HEALTH

        Our Animal Health Business Unit is a world leader in the research, development, manufacturing and marketing of products and services to save, prolong and improve animal lives. The business of our Animal Health Business Unit is conducted by a number of affiliated companies in 39 countries. As of December 31, 2004, the affiliates of Animal Health employed 2,248 associates worldwide. In 2004, the affiliates of Animal Health achieved consolidated net sales of $756 million, which represented 3% of the Group's total net sales.

        In 2003, we announced a new organizational structure for our Animal Health Business Unit. We have divided our Animal Health business geographically into four Regions—North America, Latin America, Europe and Asia Pacific—and have moved operational responsibilities from our head office to offices in each of these regions, in order to be closer to our markets.

        Animal Health researches, develops, manufactures and markets a wide range of products for both companion and farm animals including farmed fish. In 2004, the companion animal segment accounted for 57% of our total Animal Health net sales and the farm animal business, including Vaccines and Aqua Culture Products, accounted for 43%. Our Animal Health products include parasiticides, antimicrobials, vaccines and veterinary pharmaceuticals. Our Animal Health business has a dedicated research and development team, which benefits from synergies with other Novartis businesses, most notably, research in the Pharmaceuticals Division.

        We acquired Grand Laboratories Inc. and ImmTech Biologics Inc. in the US in January 2002 for a combined minimum purchase price of $99 million. The final price may increase depending on whether certain future net sales and other targets are met. These businesses specialize in the development, manufacture and marketing of vaccine products for cattle and pigs. Through these acquisitions we increased the share of vaccines to 8% of the Business Unit's total sales in 2003, strengthened our position in the vaccines market and established our presence in the US farm animal segment.

        2004 was characterized by an expansion of our product range, with new products contributing 26% to total annual net sales. This range rejuvenation included new product introductions, geographical extensions, new indications for existing products, and the phase out of non-strategic brands. In parallel, our investments in Marketing & Sales and Research & Development were increased over 2003 to exploit the existing portfolio.

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Recently Launched Products

Product		Description		Registration/Launch Status
Companion and Farm Animals
Adequan		Disease modifying treatment against osteoarthritis in dogs		Launched in the US
Agita		Farm fly control		Launched in Peru, Greece, Portugal and the Middle East
Atopica		Treatment of atopic dermatitis in dogs		Launched in Germany, Netherlands, Ireland and Spain
Deramaxx		First COX-2 inhibitor approved for pain control in dogs		Geographical expansion to Canada
Ethicon		Veterinary suture line		Launched in the US
Fortekor (new palatable presentation)		Congestive Heart Failure in dogs, Chronic Renal Insufficiency in cats		Launched in France, Ireland, Benelux and Italy
Milbemax		Control of intestinal worms in cats and dogs		Launched in Western Europe, Australia, South Africa and Brazil
Vaccines and Aqua Culture Products
Coxabic		Coccidia vaccine in poultry breeders		Launched in Thailand, South Africa and Argentina
Vaccine line extension in US		Cattle, pig and equine vaccines		2 new products in swine and 1 improved product (ViraShield) were launched in the US
Vaccine line extension in Aqua Culture		Vaccines for salmon and trout		1 vaccine launched in Chile, 1 in Canada, and 1 in Europe

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Key Marketed Products

Products		Description
Companion Animals
Atopica		Treatment of atopic dermatitis in dogs
Deramaxx		Control of osteoarthritis pain, postoperative orthopedic pain and inflammation in dogs
Ethicon		Veterinary suture line
Fortekor		Treatment of congestive heart failure in dogs and chronic renal insufficiency in cats
Interceptor		Prevention of heartworm and intestinal worms
Milbemax		Control of intestinal worms in cats and dogs
Program		Control of fleas in dogs and cats
Sentinel		Prevention of heartworm and control of fleas and intestinal worms in dogs
Farm Animals
Actatak		Tick growth regulator for beef cattle
Agita		Farm fly control
Clik/Vetrazin		Prevention of blowfly strikes in sheep
Endex		Treatment and control of liver fluke and gastro-intestinal worms in cattle and sheep
Fasinex		Treatment and control of liver flukes in cattle and sheep
Vaccines and Aqua Health
Apex IHN		Prevention of infectious haematopoietic necrosis
Betamax, Excis		Treatment and control of salmon lice
Bovidec		Prevention of bovine viral diarrhea in cattle
Forte VI		Prevention of infectious salmon anemia and bacterial diseases in farmed salmon
Lipogen Forte		Prevention of bacterial diseases in farmed
Pentium Forte		Prevention of infectious pancreatic necrosis and bacterial diseases in farmed salmon
PneumoStar Myco		Prevention of mycoplasmal pneumonia in swine
Pyceze		Treatment and control of fungal infections in fish and fish eggs

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Principal Markets

        Products for companion animals are sold predominantly in North America, the EU, Australia and Japan. In most other countries, sales of farm animal products dominate. The following table sets out 2004 total net sales of our Animal Health products by region:

        Pharmaceutical and biological product sales in all of our main Animal Health businesses (aqua, farm and companion animals) fluctuate seasonally, and can be significantly affected by climatic and economic conditions, and by changing health or reproduction rates of animal populations.

Production

        Approximately 80% of our production volume is manufactured by third parties and Novartis affiliates in other Business Units. Animal Health has production facilities of its own located around the world, with main sites in Wusi Farm, China; Dundee and Braintree (UK); Larchwood, Iowa (US); and Huningue, France.

        The manufacture of our products is heavily regulated, making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a government-enforced shutdown of production facilities, which in turn could lead to product shortages. While we have not experienced material supply interruptions in the past, there can be no assurance that supply will not be interrupted in the future as a result of unforeseen circumstances.

        We obtain our raw materials from sources around the world. We depend to a large extent on suppliers for the raw materials, intermediates and active ingredients. We make use of long term supply agreements to limit the volatility of prices charged to us for raw materials.

Marketing and Sales

        Our products are predominantly prescription-only treatments for animals. The major distribution channels are veterinarians and wholesalers of veterinary products. Primary marketing efforts are targeted at veterinarians using such marketing tools as visits by sales representatives, printed materials, direct mail, advertisements and articles in the veterinary special press, our participation at conferences for veterinarians and the organization of special educational events, focusing primarily on key brands and treatment areas. In addition, we engage in general public relations activities, including media advertisements and other direct advertisements of brands, to the extent permitted by law in each country.

Competition

        Other companies selling veterinary pharmaceutical products for companion and farm animals are Bayer, Elanco (Eli Lilly), Fort Dodge (Wyeth), Intervet (Akzo Nobel), Merial, Pfizer, and Schering-Plough. Most of these companies offer a broad range of products for both companion and farm animals, and their marketing efforts are at a comparable level to ours.

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Research and Development

        Novartis Animal Health has dedicated research facilities in Switzerland and Australia for parasiticide. In the US, UK and Canada, we focus on the development of new vaccines for farm animals and farmed fish. In 2004, we stepped up our investment into development projects, devoting $82 million to research and development. This amount represented 11% of total net sales.

        In these efforts, we use high-capacity, in-vitro micro-screening to assess a large number of natural products and synthetic chemicals for bioactivity. Our researchers exploit synergies with other Novartis businesses and also collaborate with external partners to develop veterinary treatments. Drug delivery projects, some in collaboration with external partners, concentrate on our key treatment areas and aim to improve efficacy and ease of use.

        We have long-term research commitments totaling $2 million in the aggregate as of December 31, 2004. We intend to fund these expenditures from internally generated resources.

Regulation

        The registration procedures for animal medicines are similar to those for human medicines. An animal drug application for product registration must be accompanied by extensive data on residue and food safety, target animal safety, environmental effects, efficacy in laboratory and clinical studies as well as information on manufacturing, quality control and labeling.

        In the US, animal health products are generally regulated by the FDA's Center for Veterinary Medicine. Certain product categories are regulated by the Environmental Protection Agency (EPA), and vaccines are under the control of the US Department of Agriculture (USDA).

        In the EU, veterinary medicinal products need marketing authorization from the competent authority of a member-state (national authorization) or from the EU Commission (community authorization) following either the Centralized Procedure or the MRP. See "Pharmaceuticals—Regulation."

        In Japan, veterinary medicinal products are approved by the Ministry of Agriculture, Forestry and Fisheries (MAFF). The application, including supplementary local trial data, is reviewed by the MAFF and a General Investigation Committee, a Special Investigation Committee and a Permanent Investigational Committee before authorization is granted. In addition, any product that is intended for food animals or fish is reviewed by the Food Safety Commission, which was newly established in July 2003, to evaluate the risks to human health of any composition in the products.

Intellectual Property

        Our business is brand-oriented and, therefore, we consider our trademarks to be of utmost value. Trademarks protect most of our brands in the majority of the markets where these brands are sold, and we vigorously protect these trademarks from infringement. Our most important trademarks are used in a number of countries. Local variations of these international trademarks are employed where legal or linguistic considerations require the use of an alternative.

        Wherever possible our products are protected by patents. Our patents may cover the products themselves, including the product's active substance and its formulation, or the processes for manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the products. Some patents may also cover particular uses of a product, such as its use to treat a particular disease, or its dosage regimen. It is our policy to seek the broadest possible protection for significant product developments in all major markets.

        Our business also sells products which are not currently covered by patents. Some of these products have never been patent-protected and others have lost protection due to patent expiry.

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MEDICAL NUTRITION

        Our Medical Nutrition Business Unit is a world leader in the research, development, manufacturing and marketing of enteral and oral nutrition products and devices tailored to the varying needs of patients and healthcare professionals. The business of our Medical Nutrition Business Unit is conducted by a number of affiliated companies in 47 countries. As of December 31, 2004, the affiliates of Medical Nutrition (including Nutrition & Santé) employed 2,948 associates worldwide. In 2004, Medical Nutrition (including Nutrition & Santé) posted $1.1 billion in net sales, representing 4% of the Group's total net sales.

        Our 2004 operating income was significantly affected by a provision of $51 million with regard to an investigation by the US Department of Justice in the US enteral pump market, including whether certain US federal criminal statutes have been violated. Novartis Nutrition Corporation is currently in the process of negotiating a possible settlement of that portion of the investigation directed against it. See "Item 8. Financial Information—8.A Consolidated Statements and Other Financial Information—8.A.7 Legal Proceedings."

        Medical Nutrition is dedicated to maintaining and improving the health and well being of consumers and patients—at home or in health care delivery settings (hospitals, nursing homes and home health care)—by fulfilling their nutritional needs. Working with health care professionals, Medical Nutrition offers high quality medical nutrition products, devices and services ranging from standard to disease-specific products that improve health and quality of life for all age groups—from pediatrics to geriatrics. This broad range of supplements, tube feedings and food provides essential nutrients for good nutrition when illness or disabilities limit a person's ability to eat a balanced diet.

        In February 2004, we completed the acquisition of the adult medical nutrition business of the Bristol-Myers Squibb Company subsidiary Mead Johnson & Company for a total cost of $385 million. As of December 2004, the integration of this business was substantially completed. This acquisition has created significant opportunities for growth for our Medical Nutrition Business Unit because of existing business and Mead Johnson's complementary brand portfolios and institutional distribution channels, and because the acquisition gave us enhanced access to the retail sector. Key brands acquired through this acquisition are:

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Boost, a complete oral nutrition liquid supplement designed to meet the caloric and nutritional requirements of the adult population



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Isocal, an isotonic tube-feeding formula used to help patients manage inadequate voluntary oral intake



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Ultracal, a general tube-feeding formula for patients who require dietary fiber



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Nutrament, an energy drink

        In July 2003, we secured exclusive global rights for a novel ingredient to treat patients with severe diarrhea. This product was licensed-in from AS Faktor AB, a subsidiary of Lantmannen, Sweden's largest agricultural cooperative.

        In June 2003, we acquired Semper Clinical Nutrition, the second largest medical nutrition business in the Scandinavian region. Semper Clinical Nutrition was part of Semper AB, a subsidiary of Arla Foods amba, headquartered in Vidy, Denmark.

        In November 2002, we divested our Food & Beverage business, including Ovaltine®/Ovomaltine®, Caotina® and Lacovo®, to Associated British Foods plc for $270 million. The transaction was in furtherance of our strategy of focusing on healthcare and our core pharmaceuticals business. Our remaining Health Food & Slimming and Sports Nutrition businesses were reorganized into a stand-alone unit called Nutrition & Santé. For reporting purposes, this unit's results have been included in the results of the Medical Nutrition Business Unit. We have announced our intention to sell Nutrition & Santé once an attractive bid is received.

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Key Marketed Products

        Medical Nutrition.    Our Medical Nutrition Business Unit covers the full spectrum of disease and age specific nutrition. Depending on their condition, patients need specific nutritional support to protect and accelerate their recovery from a disease or surgery. From our comprehensive range of innovative and trusted products for Medical Nutrition, we have created strong and recognizable global brands.

Key brands		Market/segment
Resource		Range of standard and disease-specific oral nutritional supplements
Isosource		A complete range of tube and sip feeds, providing for normal nutritional requirements
Novasource		Nutritionally complete disease or condition-specific enteral feeds
Impact		Oral and enteral products specifically formulated for the critically ill and surgical patients
Compat		Range of standard and specialty devices to deliver tube feeds to the gastrointestinal tract of patients
Optifast		Clinical weight loss program and products
Boost		A complete oral nutrition liquid supplement designed to meet the caloric and nutritional requirements of the adult population
Isocal		An isotonic tube-feeding formula used to help patients manage inadequate voluntary oral intake
Ultracal		A general tube-feeding formula for patients who require dietary fiber
Nutrament		An energy drink

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        Nutrition & Santé.    The stand-alone unit Nutrition & Santé has the following brands:

Key brands		Market/segment
Health Food & Slimming brands:
Céréal		A broad range of natural and dietetic foods for health conscious consumers
Gerblé		A broad range of health food products, many made with wheat germ, which deliver functional benefits
Gerlinéa		An affordable slimming product range, targeting consumers who wish to remain slim while eating as normally as possible, rather than consumers with a medical weight issue
Modifast		Slimming products with added vitamins, minerals and proteins
Dietisa		A product portfolio range including medicinal plants, health foods, dietary supplements and cosmetics, sold mostly in Spain and Portugal
Pesoforma		Similar product range as Gerlinéa focusing on the Italian market
Lecinova		Food supplement sold in Italy
Milical		Meal substitutes range with very low calorie diet and vitamins, minerals & supplements
Sports Nutrition brands:
Isostar		Marketed with a niche, scientific strategy to appeal primarily to professional and performance-driven athletes
Powerplay		Products targeted to bodybuilders, available only in Switzerland, Germany and Austria
Mineralplus		A recovery powder targeted at athletes who participate in endurance sports, available only in Germany and Austria

Principal Markets

        In 2004, our Medical Nutrition Business Unit (including Nutrition & Santé) realized the majority of its sales in its two principal markets: the US and the EU. With the acquisition and integration of the global adult medical nutrition business of Mead Johnson & Company we have also established a firm base in key Asian markets, most notably Japan. The following table sets out our 2004 net sales by geographic region. The figures include the net sales of Nutrition & Santé.

Medical Nutrition		Net Sales 2004
		($ millions)		(%)
United States		415		37
Americas (except the United States)		49		4
Europe		563		50
Rest of the World		94		9
Total		1,121		100

        Our products are not subject to seasonality of demand.

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Production

        Our Medical Nutrition Business Unit has a manufacturing and supply infrastructure comprised of the Business Unit's own plants as well as strategic third party suppliers and other Novartis Group plants. The most significant of the dedicated Medical Nutrition plants are located in Minneapolis, Minnesota and Osthofen, Germany.

        The goal of our supply chain strategy is to produce high quality products in an efficient manner. The balance of internal and external sites provides flexibility and predictable sources of supply in the event of capacity constraints or other potential disruptions to ongoing supply.

        Raw materials for the manufacturing process are purchased from a number of our affiliates and third party suppliers. For the most part, the products and services we procure are not proprietary and are available from a number of suppliers. Where practical and beneficial, we have long-term contracts in place on key production inputs. We also proactively monitor markets and developments that could have an adverse effect on the supply of essential materials. The manufacture of many of our products is regulated, making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a government-enforced shutdown of production facilities, which in turn could lead to product shortages. While we have not experienced material supply interruptions in the past, there can be no assurance that supply will not be interrupted in the future as a result of unforeseen circumstances.

Marketing and Sales

        The majority of the Medical Nutrition Business Unit's net sales (excluding Nutrition & Santé) are to health institutions, such as hospitals, nursing homes, home healthcare providers and group purchasing organizations. As a result of the acquisition of the global adult medical nutrition business of Mead Johnson & Company, we also have a significant level of retail business, principally in the US market. This retail business benefits from a collaboration with the Gerber sales force of our Infant & Baby Business Unit, which markets the Boost brand, in the US retail channel. In addition, in the US, outpatient consumers can purchase our products directly through our Walgreens partnership, by means of a toll-free telephone call or the Internet.

Competition

        Novartis Medical Nutrition (excluding Nutrition & Santé) is the second largest medical nutrition company in the world in terms of net sales, with strong positions in the US (second largest) and in Europe (second largest). Other companies selling medical nutrition products are Abbott Ross, Fresenius, Nestlé and Numico.

Research and Development

        The Medical Nutrition research and development function is responsible for generating new products and therapies based on the needs of the market. Concepts are developed into prototypes using new and existing ingredients, processes, and packaging. Prototypes are scaled from bench top to pilot plant to production scale. Product attributes are validated through clinical trials under the direction of our Research and Development team, in order to determine whether the product is safe and well-tolerated. Label claims, label designs, and regulatory compliance issues are also addressed. On-going product quality is monitored and improved through specification development, testing, and corrective and preventative action.

        In 2004, we invested $20 million in research and development, which amounted to 2% of net sales.

        In July 2003, we announced the globalization of the Medical Nutrition Research and Development function in order to enhance the speed, quality and time to market of our new product innovations across all regions, for both our existing mature product portfolio and our growing disease specific products. Our

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global research headquarters has been moved to the US in order to take advantage of the clinical and scientific resources available there, and to help further strengthen our collaboration with the Pharmaceuticals Division.

Regulation

        Foodstuffs are highly regulated in order to protect the public health. The following areas are generally subject to international and national food regulations: development, manufacturing, packaging, quality (food standards, ingredients), safety, labeling and advertising of foods. In the US, the Medical Nutrition Business Unit's products are covered by FDA regulations covering medical foods, dietary supplements and medical devices.

Intellectual Property

        Our Medical Nutrition businesses are brand-oriented and, therefore, we consider our trademarks to be of utmost value. Trademarks protect most of our brands in the majority of the markets where these brands are sold, and we vigorously protect these trademarks from infringement. Our most important trademarks are used in a number of countries. Local variations of these international trademarks are employed where legal or linguistic considerations require the use of an alternative.

        Wherever possible our products are protected by patents. Among other things, patents may cover the products themselves, including the product's active substance and its formulation. Patents may also cover the processes for manufacturing a product, including processes for manufacturing intermediate substances used in the manufacture of the products. Patents may also cover particular uses of a product, such as its use to treat a particular disease, or its dosage regimen. It is our policy to seek the broadest possible protection for significant product developments in all major markets.

INFANT & BABY

        Our Infant & Baby Business Unit is a world leader in the research, development, manufacturing and marketing of foods and products for babies. The business of our Infant & Baby Business Unit is conducted by a number of affiliated companies in more than 50 countries. As of December 31, 2004, the affiliates of Infant & Baby employed 4,385 associates worldwide. In 2004, the affiliates of Infant & Baby achieved consolidated net sales of $1.4 billion, which represented 5% of the Group's total net sales.

        Our Infant & Baby Business Unit is best known for its Gerber products which are marketed in the US and in certain other countries. The major contributor to the continued solid performance of the Business Unit is the Gerber business in the US, whose mission is to help parents to raise happy, healthy babies. Business growth in 2004 was driven by such innovations as the conversion of the packaging of pureed products from glass to plastic containers, and the introduction of Finger Foods Fruit and Veggie Puffs. Besides nutrition products, the Business Unit offers a wide variety of other products for infants and toddlers, including a baby care line (featuring nursing and feeding aids), wellness products (such as lotions and washes) and life insurance.

        Through its "Start Healthy, Stay Healthy" campaign, Gerber continues to proactively address the obesity epidemic in the US. Together with the American Dietetic Association, Gerber introduced a set of dietary guidelines for babies and toddlers under the age of two years. The aim of Start Healthy, Stay Healthy is to provide parents and nutrition professionals with practical advice about the importance of beginning, and how to instill, healthy eating habits early in life.

Key Marketed Products

        Globally, our Infant & Baby Business Unit offers more than 200 food products. From 1st FOODS to Graduates, the company's product line covers each phase of child development with diverse flavors and

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textures. Gerber baby and toddler foods include Cereals, 1st FOODS, 2nd FOODS, 3rd FOODS, Tender Harvest (organic food), Finger Foods, Fruit and Vegetable Juices and Graduates toddler food. Gerber's nutrition business began in 1928, in Fremont, Michigan and marked its 75th anniversary in 2003. Gerber began its baby care line in 1960 and now markets more than 350 Gerber and NUK® branded products. Bottles, teethers, pacifiers, breastfeeding accessories and spill-proof cups are just a few of the products now being distributed to babies and parents around the world.

        Continuing its commitment to baby care, Gerber introduced a complete line of skin care and health care products in 1999, all designed to help parents raise happy, healthy babies. The skin care products include a full line of washes, lotions and tear-free shampoos. The health care line includes pediatric electrolyte solution, tooth & gum cleanser, diaper rash ointment, gas relief drops and vitamin drops.

        Since 1967, our affiliate Gerber Life Insurance Company, has been marketing life insurance protection directly to the consumer. Currently, Gerber Life's Grow Up policy is the leading juvenile whole life insurance product distributed in the US and Canada.

        In addition, we have licensed the Gerber trademark to an unaffiliated company, Gerber Childrenswear, Inc., which sells bibs, apparel, shoes and similar products carrying the trademark. Gerber Childrenswear, Inc. pays royalties to our affiliate, Gerber Products Company, for the use of the trademark.

        The major brands and product groups in Infant & Baby are:

Key Brands		Product groups		Main markets
Gerber, Graduates, Lil' Entrees, Tender Harvest, Yukery, 1st FOODS, 2nd FOODS, 3rd FOODS		Baby food		US, Latin America, Europe, Asia
Argos, Fiona, Gerber, Lillo by Gerber, Ninet, NUK®		Baby Care		US, Canada, Asia, Latin America
Argos, Capent, Gerber, Ninet		Baby Wellness		US, Latin America
Gerber Life		Insurance		US

Recently Launched Products

        In the US, Gerber continued to build on its position as a leader in infant feeding and care with a number of innovations in 2004. In response to consumers' need for convenience, Gerber continued to convert to single serve plastic packages, ideal for out-of-home feeding. In 2004, Gerber improved and changed the 1st FOODS products to this consumer preferred format. Gerber now offers all juices and 1st FOODS and 2nd FOODS fruit purees in single-serve plastic containers. The number of different products packaged in plastic containers will increase in future years. Additionally, the Finger Foods line now offers the popular Fruit and Veggie Puffs, a healthy snack for babies learning to self-feed.

        Within the Gerber Care/Wellness business, a number of innovative new products were launched in 2004. The new Premium Feeding System features an innovative manual breast pump, whose funnel replicates the action of a nursing baby's mouth and tongue. Additionally, this line includes a full range of interchangeable cups and bottles to make it easier for mothers to breastfeed. Innovation on the Wellness franchise continued with the introduction of the Grins & Giggles line of skincare products, designed to make bath time "fun time" for parents and babies.

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Principal Markets

        In 2004, the Infant & Baby Business Unit realized the majority of its sales in its two principal markets: the US and Latin America. The following table sets out our 2004 net sales by geographic region.

Infant & Baby		Net Sales 2004
		($ millions)		(%)
North America		1,197		83
Latin America		194		14
Europe/Middle East/Africa		35		2
Rest of the World		15		1
Total		1,441		100

        Infant & Baby retail sales are not significantly affected by seasonal variations.

Production

        Key factors in Infant & Baby's successful supply chain strategy include a high efficiency, low cost structure and the mitigation of risks through multiple production sources, both internal and external. Regional sites serve specific markets but are also capable of providing support as needed to other regions in the event of supply disruption. Gerber operates its own production facilities in North America, South America and Eastern Europe for nutrition and Baby Care products. Major production sites are in Fremont, Michigan; Fort Smith, Arkansas; Reedsburg, Wisconsin; Querétaro, Mexico and Rzeszow, Poland. In addition, we contract with 17 companies for the manufacture of our nutrition products, and with 48 companies for our Baby Care products.

        The manufacture of most of our products is heavily regulated, making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a government-enforced shutdown of production facilities, which in turn could lead to product shortages. While we have not experienced material supply interruptions in the past, there can be no assurance that supply will not be interrupted in the future as a result of unforeseen circumstances. The Baby Care and Wellness franchises tend to utilize suppliers from a wider geographic area.

        We often "single-source" supplies, but we have a policy of having at least a second approved and validated supplier registered for most key materials so that substitution is possible. Where practical and beneficial, we have long-term contracts in place on key production inputs. We also proactively monitor markets and developments that could have an adverse effect on the supply of essential materials.

        Raw materials for the manufacturing process are purchased from a number of third party suppliers. For the most part, raw materials for our nutrition products are sourced from within the country of use. Our growers and suppliers are well versed in our strict agricultural requirements and generally have long term relationships with us. We are subject to adverse weather and growing conditions, but mitigate this as much as possible with alternative geographic sourcing areas.

Marketing and Sales

        The mission for the Infant and Baby Business Unit is to leverage our brand leadership of trust in helping parents nurture happy, healthy babies into the leading infant and baby brand around the world. In 2004, Gerber continued converting glass jars to plastic containers for its nutrition products. This major innovation is a result of consumer data, which clearly indicates the preference for plastic as a better fit for today's active parents and families in the US. Gerber will continue to work with the government and

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experts in the field of nutrition with respect to its "Start Healthy, Stay Healthy" campaign to help parents start their babies off on a lifetime of healthy eating habits.

        Strong brands, product development based on sound nutrition principles, and in-house marketing and sales organizations are some of our key strengths. Gerber products are distributed through food, drug and mass merchandiser retail outlets.

Competition

        Other companies selling infant and baby foods are Del Monte and Beechnut in the US, Nestlé and Heinz in Latin America, Nutricia in Eastern Europe and other regional businesses elsewhere. Other companies selling baby care and wellness products are Johnson & Johnson, Playtex and Avent in the US. There are other companies selling these products located in Latin America and Asia. Another company selling juvenile life insurance policies in the US is Globe Life and Accident Insurance Co., an affiliate of Torchmark Corporation.

Research and Development

        The Infant & Baby Business Unit has a Research and Development department which uses a multi-faceted approach to deliver consumer innovation by developing new processes, products and packaging for the nutrition, Baby Care and Wellness franchises. Internally developed new processes include NatureLock, a patented cooking process for jarred fruits and vegetables. Recent product innovations include Lil' Entrees, our nutritious, portable meals for toddlers, and the popular Fruit and Veggie Puffs, a healthy snack for babies learning to self-feed. Packaging innovations include aseptic plastic packaging, which provide additional convenience for consumers.

        In addition, Gerber Research and Development oversees research regarding the needs of infants and their development. For example, as a part of the "Start Healthy, Stay Healthy" campaign, Gerber's Feeding Infants and Toddlers Study (FITS) analyzed the feeding habits and nutrient intake of a cross-sectional, random sample of more than 3,000 US children ranging from 4 to 24 months of age. The results of this Study were published in January 2004, in a special supplement to the Journal of the American Dietetic Association. Gerber commissioned the survey in response to the growing obesity epidemic in the US, in order to better understand eating habits early in life when they are being formed. FITS is the largest scientific study of its kind ever conducted and fills a critical gap in knowledge. The findings have formed the core of the "Start Healthy, Stay Healthy" campaign.

        In 2004, the Infant & Baby Business Unit invested approximately $29 million in research and development, representing 2% of Infant & Baby net sales.

Regulation

        Foodstuffs are highly regulated in order to protect the public health. The following areas are generally subject to international and national food regulations: development, manufacturing, packaging, quality (food standards, ingredients), safety, labeling and advertising of foods. Infant foods are regulated by various governmental agencies on a country-by-country basis. There is no global harmony of requirements and regulations. Many countries require food products to be registered in order to document the safety and nutrition of imported food products. Gerber food products are specifically designed to meet the nutritional needs of infants and toddlers in the regions where they are sold and to meet or exceed requirements of the local regulatory agencies. These nutritional need standards are determined based on independent, peer-reviewed research, or by studies sanctioned by authorities such as the US Department of Health and Human Services.

        In the US, agencies such as the FDA, the USDA, the EPA and the Consumer Product Safety Commission are responsible for providing safety specifications and otherwise regulating our products and ingredients. The FDA and USDA have issued regulations and standards regarding the use of specific ingredients in certain types of food products, including which ingredients are allowed, and at what level, as

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well as ingredients that may be required in certain products. In addition, these agencies regulate food product labeling and the claims which can be made regarding food products. Globally, safety of ingredients and products are guided by recommendations from the Codex Alimentarius, a section of the WHO.

Intellectual Property

        Our Infant & Baby Business Unit is brand-oriented, with the Gerber baby trademark among the most recognized in the world. Therefore, we consider this trademark, as well as others within Infant & Baby, to be of utmost value. Trademarks protect most of our brands in the majority of the markets where these brands are sold, and we vigorously protect these trademarks from infringement. Our most important trademarks are used in a number of countries. Local variations of these international trademarks are employed where legal or linguistic considerations require the use of an alternative.

        Wherever possible our products are protected by patents. Patents may cover products, product formulations, designs, processes, intermediate products or product uses. It is our policy to seek the broadest possible protection for significant product developments in all major markets.

CIBA VISION

        CIBA Vision is a world leader in the research, development, manufacturing and marketing of eye care products, specifically soft contact lenses and lens care products. The business of our CIBA Vision Business Unit is conducted by a number of affiliated companies in more than 40 countries. As of December 31, 2004, the affiliates of CIBA Vision employed 5,479 associates worldwide. In 2004, the affiliates of CIBA Vision achieved consolidated net sales of $1.4 billion, representing 5% of the Group's total net sales.

        In 2003 and 2004, CIBA Vision sold to third parties the various assets which made up its former surgical business.

Recently Launched Products

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O₂OPTIX, a new, breathable silicone hydrogel contact lens designed for the health of eyes, received FDA approval and a CE mark in Europe for up to 6 nights extended wear in September 2004. This product permits more than five times the oxygen of the leading contact lens to reach the eye, offering wearers a superior option in reducing corneal oxygen deficiency created by ordinary contact lenses.



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AQuify, 5 Minute Multi-Purpose Solution, a lens care solution that provides a quick way to clean, disinfect and moisturize their contact lenses, was launched in August 2004. This product was previously launched outside of the US under the name SOLO-care AQUA.

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Key Marketed Products

        The table below sets out the key marketed products in each of CIBA Vision's two principal product segments:

Main Products		Description
Contact Lenses
O2OPTIX		New, breathable silicone hydrogel contact lens with weekly/monthly replacement
Focus DAILIES		One-day disposable
Focus DAILIES Progressives		One-day disposable to correct presbyopia
Focus DAILIES Toric		One-day disposable to correct astigmatism
Focus NIGHT&DAY		Extended wear for up to 30 days and nights continuous wear
Focus Progressives		Corrects presbyopia
Focus Toric		Corrects astigmatism
Focus Monthly		Replaced monthly
Focus 1-2 Week		Replaced every one to two weeks
Focus 1-2 Week SoftColors		Replaced every one to two weeks; enhances the color of light eyes
DuraSoft 3 Colors		Conventional cosmetic tinted lenses
FreshLook Colorblends		Opaque lenses that blend three colors on one lens creating a more natural looking cosmetic tinted lens for dark or light eyes
FreshLook Colors		Disposable lenses for eye color change
FreshLook Dimensions		Lenses which enhance the color and appearance of light eyes
FreshLook Radiance		Lenses for people with light or dark eyes that provide illuminating effects which vary based on a person's natural eye color, skin tone and hair color
WildEyes		Novelty lenses
Illusions Opaque		Conventional lenses for changing the color of dark eyes
Cibasoft		Conventional lenses with handling tint
Cibasoft Softcolors		Conventional lenses for enhancing the color of light eyes

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Lens Care Products
AOSept Clear Care/AOSept PLUS		An enhanced formulation of our leading AOSept hydrogen peroxide disinfectant; the first one-bottle, no-rub lens care solution with no added preservatives in the US
AQuify/SOLO-care AQUA		Latest generation one-bottle lens care solution formulated with ProVitamin B5 to promote moisture. Product is sold as AQuify in the US. Outside the US, the product is sold under the name SOLO-care AQUA, and each package includes a MicroBlock anti-bacterial contact lens case.
BLUE Sept/BLUE Vision		One-step hydrogen peroxide lens disinfection system; features blue color indicator
QuickCARE/InstaCARE		Five-minute disinfectant system
Pure Eyes		Two-bottle hydrogen peroxide system
AQuify Lens Drops		Lens drop that replicates natural tears
Focus Lens Drops		Lens drop for lubricating contact lenses

Principal Markets

        Our principal markets, in terms of 2004 net sales, were North America (US and Canada), Europe and Japan. Sales are not subject to seasonality. The following table sets forth 2004 net sales for CIBA Vision by region:

Production

        CIBA Vision has major production facilities in Batam, Indonesia; Duluth, Georgia; Des Plaines, Illinois; Grosswallstadt, Germany; Cidra, Puerto Rico; and Toronto, Canada. The manufacture of our products is heavily regulated, making supply never an absolute certainty. If we or our third party suppliers fail to comply fully with such regulations then there could be a government-enforced shutdown of production facilities, which in turn could lead to product shortages. While we have not experienced material supply interruptions in the past, there can be no assurance that supply will not be interrupted in the future as a result of unforeseen circumstances.

        We purchase basic chemical commodity raw materials for our lens products from industrial vendors. These raw materials are then reformulated into the monomers and polymers required to produce contact

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lenses. Polymer chemistry is one of the innovative elements in our contact lens products. The technology to produce the polymers and monomers is stable and well-defined.

        We enter into long-term supply contracts (generally over one to two years) with industrial raw material vendors, which limits volatility. In addition, most raw materials are basic chemical commodities and multiple suppliers are available. Certain lens products use proprietary chemicals that are produced specifically for us and sold exclusively to us. We also use a custom- designed process to synthesize macromonomers, a key raw material needed in contact lens production, which are produced by a contract vendor for a negotiated price.

Marketing and Sales

        Contact lenses are considered medical devices by regulatory authorities and, therefore, are available only with a prescription from an eye-care professional in most countries. CIBA Vision lenses can be purchased from independent eye care professionals and optical chains. CIBA Vision's lens care products can be found in major drug, food and mass merchandising retail chains in the United States, Europe, Japan and elsewhere. In addition, mail order and Internet sales are becoming increasingly important channels in major markets worldwide.

        While eye care professionals have traditionally been CIBA Vision's primary marketing focus, that focus has been shifting toward direct-to-consumer initiatives including free trials and coupons, as well as consumer advertising.

Competition

Contact Lenses

        Growth in the contact lens market is driven primarily by an increased demand for lenses and an increasingly varied product mix. As consumers move toward frequent replacement lenses, including one-day disposable lenses, demand for lenses is increasing. Additionally, the customer base is expanding with the development of new contact lens options, such as high oxygen transmissibility silicone hydrogels, daily disposable, 30-night continuous wear, toric lenses for astigmatic patients and lenses to correct presbyopia, a condition prevalent among the "Baby Boom" generation. We are the second largest seller of contact lenses in the world, with leading positions in certain contact lens segments such as silicone hydrogel lenses, cosmetic colored lenses, and, in Europe, daily disposable lenses. We believe CIBA Vision now has the broadest product portfolio of any competitor in the industry. Our colored lens technology also creates a strong combination with our other products that should prove attractive to women and teenagers, in particular. Other companies selling contact lenses are Bausch & Lomb, Johnson & Johnson, Cooper and OSI.

Lens Care

        We expect to increase our presence in the one-bottle lens care market segment with our AQuify/SOLO-care AQUA brand lens care products and to maintain a leading position in the peroxide category with AOSept Clear Care lens care, which is targeted to wearers of frequent replacement and conventional contact lenses. The peroxide category is a mature market segment and the products will continue to face competitive pressure due to the increasing preference for daily disposable and continuous wear lenses, which require little or no lens care. CIBA Vision is a global leader in the peroxide lens care category with AOSept and AOSEPT Clear Care. Other companies selling lens care products are Alcon, Advanced Medical Optics and Bausch & Lomb.

Research and Development

        The research results of other Novartis affiliates provide CIBA Vision with new chemical compounds for future products and access to developments in biotechnology. These resources are complemented by

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CIBA Vision's internal research and development capabilities, licensing agreements and joint research and development partnerships with third parties (companies, individuals and universities).

        CIBA Vision is continually working to expand its product portfolio through its own dedicated research and development resources as well as through the acquisition of new and innovative technologies. Product development involves the creation of entirely new product offerings as well as line extensions of current products.

        For contact lenses our key focus is in three areas: daily disposable contact lenses, silicon hydrogel lenses for continuous or daily wear and an ongoing expansion of our cosmetic and color lenses. In lens care, our development efforts focus on making our lens care solutions more convenient to use, while ensuring that the solutions provide the safety and cleaning power needed to help maintain ocular health.

        We invested $65 million in research and development of eye care products in 2004, representing 4.6% of the Business Unit's net sales.

Regulation

        Contact lenses, surgical devices and lens care products are regulated as medical devices in the US, the EU and Japan. These jurisdictions each have risk-based classification systems that determine the type of information which must be provided to the local regulators in order to obtain the right to market a product.

        In the US, all devices must receive pre-market approval by the FDA. There are two review procedures to gain this pre-market approval: a pre-market application (PMA) and a 510(k) submission. Under a PMA, the manufacturer must submit to the FDA supporting evidence sufficient to prove the safety and effectiveness of the device. The FDA has 180 days to review a PMA. Certain products, however, may qualify for a submission authorized by Section 510(k) of the US Food, Drug and Cosmetic Act. Under this procedure, the manufacturer gives the FDA a pre-market notification that it intends to commence marketing the product, and that it has established that the product is substantially equivalent to another product already on the market. The FDA has 90 days to review a 510(k) submission. In the US, no 30-day extended-wear lenses had previously existed on the market, so we were required to proceed under the PMA procedure. Lens care products generally qualify for 510(k) submission.

        In the EU, the "CE" mark is required for all medical devices sold. CIBA Vision affiliates hold a CE mark for the classes of vision care medical devices that they sell. The CE mark allows CIBA Vision to market products upon signing a declaration of conformity with the EU's Medical Device Directive requirements, which CIBA Vision affiliates do for each product sold. In addition, medical device sales in the EU require auditing by a certified third party (a "Notified Body") to ensure that the manufacturer's quality systems are in compliance with the requirements of the ISO 9000 standards. CIBA Vision has two Notified Bodies which routinely audit the company's quality systems.

        In Japan, contact lenses are categorized as medical devices and are subject to an approval process similar to that in the US. Although there has been an improvement in the willingness to accept foreign data and a movement toward harmonization of requirements, in order to enter the Japanese market, local clinical trials often are required and local protocols must then be observed. Lens care products for soft lenses take several years to gain approval due to the extensive amount of data and clinical testing required. Saline solutions for hard lenses are unregulated.

Intellectual Property

        Our CIBA Vision business is brand-oriented and, therefore, we consider our trademarks to be of utmost value. Trademarks protect most of our brands in the majority of the markets where these brands are sold, and we vigorously protect these trademarks from infringement. Our most important trademarks are used in a number of countries. Local variations of these international trademarks are employed where legal or linguistic considerations require the use of an alternative.

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        Wherever possible our products are protected by patents. Among other things, patents may cover the products themselves, including contact lenses, polymers and formulations. Patents may also cover the processes and devices for manufacturing a product. Patents may also cover particular uses of a product. It is our policy to seek the broadest possible protection for significant product developments in all major markets.

        We have settled all patent litigation against Bausch & Lomb (B&L) regarding patents covering silicone hydrogel long-term wear contact lenses (the "Nicolson" patents). As a result of that settlement, B&L may resume manufacture and sale of its PureVision™ contact lenses within the US starting in April 2005, when the "Harvey" patent (which was not licensed to B&L) expires. The settlement requires B&L to pay us a royalty on their PureVision™ sales until 2014 in the US and until 2016 in other countries. As part of the settlement, B&L granted a royalty-free license to CIBA Vision for certain of its patents related to silicone hydrogel technology.

        Separately, Johnson & Johnson (J&J) filed suit against CIBA Vision in the US and in Australia in September 2003, and later in New Zealand, claiming that our silicone hydrogel product Focus NIGHT & DAY infringes a J&J packaging patent, and seeking a declaration that their planned launch of a silicone hydrogel lens product does not infringe the Nicolson patents or that the patents are invalid. These cases are still pending.

4.C  Organizational Structure

        The Novartis Group is a multinational group of companies specializing in the research, development, manufacturing and marketing of innovative healthcare products. Novartis AG, our Swiss holding company, owns, directly or indirectly, 100% of all significant operating companies. For a list of our significant operating subsidiaries, see note 31 to the consolidated financial statements.

        Up to December 31, 2004, the Group was divided operationally into two Divisions: Pharmaceuticals and Consumer Health.

        Our Pharmaceuticals Division is organized into two marketing segments - Primary Care and Specialty Medicines - that develop and market branded pharmaceutical products in seven therapeutic areas. The business of the Pharmaceuticals Division is organized into five Business Units: Primary Care, Oncology, Transplantation, Mature Products and Ophthalmics. However, because the Business Units of the Pharmaceuticals Division have common long-term economic perspectives, common customers, common research, development, production and distribution practices, and a common regulatory environment, their financial data is not required to be separately disclosed.

        In 2004 the Consumer Health Division was comprised of six Business units: Sandoz generics, OTC self-medication, Animal Health, Medical Nutrition, Infant & Baby and CIBA Vision.

        As of January 1, 2005, Sandoz is a separate Division organized as a Retail Generics company which also operates two other businesses, Industrial Products and Biopharmaceuticals. Prior to January 1, 2005, Sandoz was a Business Unit of the Consumer Health Division and was made up of three business franchises: pharmaceuticals, biopharmaceuticals and industrial products.

4.D  Property, Plants and Equipment

        Our principal executive offices are located in Basel, Switzerland. Our Business Units operate through a number of affiliates having offices, research facilities and production sites throughout the world.

        It is our policy to own our facilities. A few sites (mainly in the US) are leased under long-term leases. Some of our principal facilities are subject to mortgages and other security interests granted to secure indebtedness to certain financial institutions. As of December 31, 2004, the total amount of indebtedness secured by these facilities was not material to the Group. We believe that our production plants and research facilities are well maintained and generally adequate to meet our needs for the foreseeable future.

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        The following table sets forth our major production and research facilities.

Location/Division or Business Unit		Size of Site (in square meters)		Major Activity
Major Production facilities:
Pharmaceuticals
Taboão da Serra, Brazil		539,000 square meters		Capsules, tablets, syrups, suppositories, suspensions, creams, drop solutions, powders
Ringaskiddy, Ireland		532,000 square meters		Drug substances, intermediates
Basel, Switzerland—Klybeck		254,000 square meters		Drug substances, intermediates
Basel, Switzerland—St. Johann		219,000 square meters		Drug substances, intermediates, biotechnology
Basel, Switzerland—Schweizerhalle		237,000 square meters		Drug substances, intermediates
Stein, Switzerland		460,000 square meters		Steriles, tablets, capsules, transdermals
Grimsby, UK		929,000 square meters		Drug substances, intermediates
Suffern, NY		656,000 square meters		Tablets, capsules, transdermals
Horsham, UK		112,000 square meters		Tablets, capsules
Wehr, Germany		165,000 square meters		Tablets, creams, ointments
Torre, Italy		210,000 square meters		Tablets, biotechnology
Barbera, Spain		51,000 square meters		Tablets, capsules
Huningue, France		250,000 square meters (includes Animal Health facilities)		Suppositories, liquids, solutions, suspensions, biotechnology
Kurtkoy, Turkey		109,000 square meters		Tablets, capsules, effervescents
Sasayama, Japan		104,000 square meters		Capsules, tablets, syrups, suppositories, creams, drop solutions, powders
Consumer Health
Sandoz
Kundl and Schaftenau, Austria		320,000 square meters (production and R&D facilities)		Biotech products, intermediates, active drug substances, final steps (finished pharmaceuticals)

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Menges, Slovenia		131,000 square meters (production and R&D facilities)		Biotech products and active drug substances
Ljubljana, Slovenia		83,000 square meters (production and R&D facilities)		Broad range of finished dosage forms
Broomfield, CO		60,000 square meters		Broad range of finished dosage forms
Stryków, Poland		20,000 square meters		Broad range of finished dosage forms
Palafolls, Spain		13,000 square meters		Injectable products
Kalwe, India		10,000 square meters		Broad range of finished dosage forms
Boucherville, Canada		4,600 square meters		Injectable products
OTC
Lincoln, NE		44,870 square meters		Liquids, creams and tablets
Nyon, Switzerland		14,700 square meters (production and R&D facilities)		Liquids and creams
Humacao, Puerto Rico		8,000 square meters		Sugar coated tablets, small chocolate tablets, packaging of softgels
Animal Health
Wusi Farm, China		42,000 square meters		Insecticides, antibacterials, acaricides, powders
Dundee, UK		34,000 square meters		Packaging, formulation liquids, solids, creams, sterile filling
Larchwood, IA		29,700 square meters (production and R&D facilities)		Veterinary immunologicals
Braintree, UK		10,000 square meters		Veterinary immunologicals
Huningue, France		6,000 square meters		Formulation and packaging of tablets, creams, ointments, suspensions and liquids
Medical Nutrition
Minneapolis, MN		33,500 square meters (production and R&D facilities)		Medical nutrition products

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Osthofen, Germany		17,000 square meters (production and R&D facilities)		Medical nutrition and Nutrition & Santé products
Infant & Baby
Fremont, MI		107,000 square meters (production and R&D facilities)		Gerber jarred baby food, fruit and vegetable juices, dry boxed cereal
Fort Smith, AR		80,451 square meters		Gerber jarred baby food, dry cereal
Querétaro, Mexico		205,000 square meters		Gerber jarred baby food, fruit and vegetable juices, dry canned and bagged cereal
Reedsburg, WI		30,000 square meters		Baby Care products; spill-proof cups, bottles, nipples, breast pads, pacifiers, overcaps
Campo Grande, Brazil		89,000 square meters		Baby Care products; spill-proof cups, bottles, nipples, breast pads, pacifiers, overcaps
Rzeszow, Poland		45,000 square meters		Gerber baby food, fruit juice
CIBA Vision
Pulau Batam, Indonesia		19,000 square meters		Contact lenses
Duluth, GA		34,000 square meters		Contact lenses
Des Plaines, IL		27,400 square meters		Freshlook product line
Grosswallstadt, Germany		23,000 square meters		Contact lenses
Cidra, Puerto Rico		6,100 square meters		Contact lenses
Toronto, Canada		14,500 square meters		Lens care products
Major Research and Development Facilities:
Pharmaceuticals
East Hanover, NJ		177,398 square meters		General pharmaceutical products
Cambridge, MA		75,300 square meters		General pharmaceutical products
Basel, Switzerland—Klybeck		140,000 square meters		General pharmaceutical products

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Basel, Switzerland—St. Johann		150,000 square meters		General pharmaceutical products
Vienna, Austria		39,000 square meters		Dermatology
Tsukuba, Japan		20,600 square meters		General pharmaceutical products
Horsham and London, UK		37,700 square meters		Respiratory and nervous system diseases
Consumer Health
Sandoz
Kundl and Schaftenau, Austria		320,000 square meters total area (production and R&D facilities)		Biotech processes, innovations in antibiotic technologies
Menges, Slovenia		131,000 square meters (production and R&D facilities)		Biotech products and active drug substances
Ljubljana, Slovenia		83,000 square meters (production and R&D facilities)		Broad range of finished dosage forms
Kolshet, India		5,000 square meters		Generic pharmaceuticals
Dayton, NJ		29,000 square meters		Broad range of finished dosage forms
Boucherville, Canada		4,377 square meters		Injectable products
OTC
Lincoln, NE		44,870 square meters		Liquids, creams and tablets
Nyon, Switzerland		14,700 square meters (production and R&D facilities)		Over-the-counter medicine products
Animal Health
St. Aubin, Switzerland		26,000 square meters		Parasiticides
Larchwood, IA		29,700 square meters (production and R&D facilities)		Veterinary immunologicals development
Yarandoo, Australia		3,250 square meters		Animal Health products
Medical Nutrition
Minneapolis, MN		33,500 square meters (production and R&D facilities)		Medical nutrition products

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Osthofen, Germany		17,000 square meters (production and R&D facilities)		Medical nutrition and Nutrition & Santé products
Infant & Baby
Fremont, MI		107,000 square meters (production and R&D facilities)		Baby food products
CIBA Vision
Duluth, GA		9,000 square meters		Vision-related medical devices

        In 2004, we completed the expansion of the Novartis Institutes for BioMedical Research, Inc. (NIBRI) facility in Cambridge, Massachusetts., This new research facility contains a total of 75,300 square meters of laboratory and office space. It will house over 800 scientists and technology experts, and approximately 1,000 employees in total. To date, we have invested approximately $503 million in property, plant and equipment at this new facility.

        Progress is being made in the long-term redevelopment of our St. Johann headquarters site in Basel. This project, called "Campus," was started in 2001 with the aim of transforming the site into a knowledge location with a primary emphasis on research activities and international corporate functions. Research now accounts for a greater proportion of our activities at the site, and these changes need to be reflected since it is currently designed primarily for pharmaceuticals production. For the first phase of the Campus Project, which is planned through 2008, a total of approximately $577 million (CHF 655 million) has been approved by the Board of Directors. A second phase is also planned. Costs related to this project will depend on the pace of construction.

        In 2004, we announced plans to build a new pharmaceuticals production facility in Singapore, providing additional needed capacity within our global manufacturing network. The facility will produce tablets for the global market, and is expected to begin operations in 2007. We will invest approximately $180 million in the project, which includes building and equipment, leasing of land, a distribution center and start-up costs.

        We also announced plans for an approximately $95 million (EUR 70 million) overall investment in a new generics production and logistics facility in Stryków, Poland. Operated by Lek, a Sandoz company, the 25,000-meter complex will include an administration building, laboratories, production lines and storage centers.

        Also in 2004, we sold our pharmaceuticals production site in Hettlingen, Switzerland, to the French company Bernard Fraisse Group.

Environmental Matters

        We integrate core values of environmental protection into our business strategy to add value to the business, manage risk and enhance our reputation.

        We are subject to laws and regulations concerning the environment, safety matters, regulation of chemicals and product safety in the countries where we manufacture and sell our products or otherwise operate our business. These requirements include regulation of the handling, manufacture, transportation, use and disposal of materials, including the discharge of pollutants into the environment. In the normal course of our business, we are exposed to risks relating to possible releases of hazardous substances into the environment which could cause environmental or property damage or personal injuries, and which

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could require remediation of contaminated soil and groundwater. Under certain laws, we may be required to remediate contamination at certain of our properties regardless of whether the contamination was caused by us, or by previous occupants of the property.

        We believe that we are in substantial compliance with environmental, health and safety requirements applicable to us. We are committed to providing safe and environmentally sound workplaces that will not adversely affect the health or environment of employees or the communities in which we operate. We believe that we have obtained all material environmental permits required for the operation of our facilities as well as all material authorizations required for the products produced by us. We believe that we are not currently subject to liabilities for non-compliance with applicable environmental, health and safety laws that would materially and adversely affect our business, financial condition or results of operations. However, there is a risk that legislation enacted in the future could create liabilities for past activities undertaken in compliance with then-current laws and regulations or that there is environmental or other damage of which we are not aware.

        In recent years, the operations of all companies have become subject to increasingly stringent legislation and regulation related to occupational safety and health, product registration and environmental protection. Such legislation and regulations are complex and constantly changing, and there can be no assurance that future changes in laws or regulations would not require us to install additional controls for certain of our emission sources, to undertake changes in our manufacturing processes or to remediate soil or groundwater contamination at facilities where such clean-up is not currently required. Some of our facilities are over 50 years old, and there may be soil and groundwater contamination at such facilities. However, based on current information, we do not believe that expenditures related to such possible contamination, beyond those already accrued, will be significant.

        Our expenditures related to capital investments for environmental, health and safety compliance measures were approximately $79 million in 2004 ($10 million for environment), $88 million in 2003 ($12 million for environment) and $42 million in 2002 ($7 million for environment). While we cannot predict with certainty our aggregate capital environmental investments in 2005, based on current information and existing assets, we estimate that such aggregate expenditures will be comparable to the 2004 figure.

        It is difficult to estimate the future costs of environmental protection and remediation because of many uncertainties, including uncertainties about the state of laws, regulations and information related to individual locations and sites. However, given our experience to date regarding environmental matters and the facts currently known, we believe that compliance with existing and known national and local environmental laws and regulations will not have a material effect on our financial condition, but could be material to our results of operations in a given period.

Item 5.    Operating and Financial Review and Prospects

5.A  Operating Results

        The following operating and financial review and prospects should be read in conjunction with our consolidated financial statements included in this Form 20-F. The consolidated financial statements and the financial information discussed below have been prepared in accordance with International Financial Reporting Standards (IFRS). Please see "Item 18. Financial Statements—note 32" for a discussion of the significant differences between IFRS and US Generally Accepted Accounting Principles (US GAAP).

Overview

        We are a world leader both in sales and in innovation in our continuing core businesses: pharmaceuticals and consumer health, which includes generics, OTC self-medication, animal health, medical nutrition, infant and baby foods and products, and eyecare products, with global net sales of $28.2 billion in 2004. We aim to hold a leadership position in all of our businesses.

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        Novartis AG was formed in 1996 out of a merger of two global participants in the pharmaceutical and agrochemical industries, Sandoz AG and CIBA-Geigy AG. Accounting for the merger under IFRS was based on a uniting of interests and therefore did not result in any goodwill nor in any goodwill amortization. Under US GAAP, the merger is accounted for as a purchase of CIBA-Geigy AG by Sandoz AG. For a discussion of the significant differences between IFRS and US GAAP purchase accounting, see "Item 18. Financial Statements—note 32."

        In November 2000, we spun off our Crop Protection and Seeds businesses and merged them with AstraZeneca's Zeneca Agrochemicals to create Syngenta AG, a public company.

Factors affecting results

        The global health care market is growing rapidly due to, among other reasons, the aging population in developed countries, unmet needs in many therapeutic areas (such as cancer and cardiovascular disease), the adoption of more industrialized lifestyles in emerging economies, and increased consumer demand fueled by broad and rapid access to information. At the same time, the health care industry is under increasing pressure to reduce prices as payors in the public and private sectors seek to curb rising health care costs.

        Our revenues are directly related to our ability to identify and develop high potential products and to bring them to market quickly and effectively. Efficient and productive research and development is crucial in this environment since Novartis, like its competitors, searches for efficacious and cost-efficient pharmaceutical solutions to health problems. The resource requirements to access the full range of new technologies has been one reason for industry consolidation, as well as the increase in collaborations between leading companies and niche players at the forefront of their particular technology areas. The growth in new technology, particularly genomics, is expected to have a fundamental impact on the pharmaceutical industry and upon our future development.

        Competition in the generic pharmaceutical market continues to intensify as the pharmaceutical industry adjusts to increased pressures to contain health care costs. Brand-name companies have taken aggressive steps to counter the growth of the generics industry. In particular, brand-name companies continue to sell their products to the generic market directly by acquiring or forming strategic alliances with generic pharmaceutical companies. No significant regulatory approvals are required for a brand-name manufacturer to sell directly or through a third party to the generic market. In addition, brand-name companies continually seek new ways to delay generic introduction and to decrease the impact of generic competition. These efforts by the brand-name pharmaceutical industry have had, and likely will continue to have, a negative effect on the results of operations of our Sandoz Division.

        Under US law the Food and Drug Administration (FDA) must award 180 days of market exclusivity to the first generic manufacturer who challenges the patent of a branded product. However, recent changes in the Hatch-Waxman Act may affect the availability of this market exclusivity in the future. The new amendments now require generic applicants to launch their products within certain time frames or risk losing the marketing exclusivity that they had gained through being a first-to-file applicant.

        At times we seek approval to market generic products before the expiration of patents held by others for those products, based upon our belief that such patents are invalid, unenforceable, or would not be infringed by our products. As a result, Novartis often faces significant patent litigation. If we are unsuccessful in such litigation, then its ability to launch new products will be substantially limited. In addition, depending upon a complex analysis of a variety of legal and commercial factors, we may, in certain circumstances, elect to market a generic product even though litigation is still pending. This could be before any court decision or while an appeal of a lower court decision is pending. Should we elect to proceed in this manner, we could face substantial patent liability damages if the final court decision is adverse to us.

        In addition, competitive conditions have intensified as a result of regulation, price reductions, reference prices, parallel imports, higher patient co-payments and increased pressure on physicians to

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reduce their prescribing of prescription medicines. Pressure on our Pharmaceutical Division and other pharmaceutical companies to lower prices is expected to increase primarily due to government initiatives to reduce patient reimbursement, restrict prescribing levels, increase the use of generics and impose overall price cuts. The introduction of technologically innovative products and devices by competitors and growing product distribution and importation anomalies, mainly in the EU, pose additional challenges. Exchange rate exposure also affects our results since we have both sales and costs in many currencies other than the US dollar, our reporting currency. This gives rise to both transaction exposure in subsidiary financial statements due to foreign currency denominated transactions and translation exposure from converting non-US dollar subsidiary results and balance sheets into the our US dollar consolidated financial statements. Our results have not been significantly affected by inflation.

Critical Accounting Policies

        Our principal accounting policies are set out in note 1 of the Group's consolidated financial statements and conform to International Financial Reporting Standards (IFRS). Significant judgments and estimates are used in the preparation of the consolidated financial statements which, to the extent that actual outcomes and results may differ from these assumptions and estimates, could affect the accounting in the areas described in this section.

Revenue

        Revenue is recognized when title and risk of loss for the products is transferred to the customer. Accruals for US Medicaid and similar rebates in the US and other countries, chargebacks, estimated returns, customer rebates and discounts are established concurrently with the recognition of revenue. Accordingly, sales are reported net of these allowances which, since they are estimated, may not fully reflect the final outcome.

        The following briefly describes the nature of each accrual and how such accruals are estimated with specific reference to the US practices:

•

The US Medicaid program, established under Title XIX of the Social Security Act, is a state administered program, using state and federal funds, to provide assistance to certain vulnerable and needy individuals and families. In 1990, the Medicaid Drug Rebate Program was established to reduce state and federal expenditures for prescription drugs. Under the rebate program, we have signed an agreement to provide a rebate on drugs paid for by a state. Provisions for estimating Medicaid Rebates are calculated using a combination of historical experience, product and population growth, anticipated price increases, the impact of contracting strategies and specific terms in the individual state agreements. These provisions are adjusted based upon the established refiling process with the individual states.



•

We participate in prescription drug savings programs that offer savings to patients that are eligible Medicare participants. These savings vary based on a patient's current drug coverage and personal income levels.



•

We have arrangements with certain parties establishing discounted prices for our products. A chargeback represents the difference between the invoice price to the wholesaler and the indirect customer's contract discount price. Provisions for estimating chargebacks are calculated using a combination of historical experience, product growth rates and the specific terms in each agreement.



•

Where there is a historical experience of agreeing to customers returns, we record a reserve for estimated sales returns by applying historical experience of customer returns to the amounts invoiced and the amount of returned product to be destroyed versus product that can be placed back in inventory for resale.

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•

Our policy relating to supply of pharmaceuticals products is to maintain inventories on a consistent level from year to year based on the pattern of consumption. A process exists at Novartis Pharmaceuticals Corporation to monitor on a monthly basis inventory levels at wholesalers based on the gross sales volume, prescription volumes based on IMS data and information received from the key wholesalers. Based on this information, the inventories on hand at wholesalers and other distribution channels in the US are less than one month at December 31, 2004. Similar processes exist in the Sandoz generics and OTC businesses. We believe the third party data sources of information are sufficiently reliable, however their accuracy cannot be verified.



•

Customer rebates are offered to key managed care, group purchasing organizations and other direct and indirect customers to sustain and increase our product market share. These rebate programs provide that the customer receive a rebate after attaining certain performance parameters relating to product purchases, formulary status and/or pre-established market share milestones relative to competitors. Since rebates are contractually agreed upon, rebates are estimated based on the specific terms in each agreement, historical experience and product growth rates.



•

Cash discounts are offered to customers to encourage prompt payment that is accrued at the time of invoicing.



•

Shelf-stock adjustments are granted to customers based on the existing inventory of a customer following decreases in the invoice or contract price of the related product. Provisions for shelf-stock adjustments are determined at the time of the price decline or at the point of sale if a price decline is reasonably estimable and are based on estimated inventory levels.



•

Historical data has been adjusted, where applicable, to give effect to subsequent events, including, primarily, the effect of increased turnover on such provisions.

        The US market has the most complex arrangements in this area. The following tables show the extent of rebates made and payment experiences in the US in 2004 for our key subsidiaries affected, which are Novartis Pharmaceuticals Corporation, Sandoz Inc. and Novartis Consumer Health Inc. (OTC):

Accruals for Revenue Deductions in the US

						Income Statement charge
		January 1, 2004		Payments		Adjustments of prior years		Current year		December 31, 2004
		($ millions)		($ millions)		($ millions)		($ millions)		($ millions)
Medicaid rebates & credits including prescription drug saving cards		247		(562	)	(15	)	639		309
Managed Health Care rebates & other rebates		251		(565	)	(34	)	572		224
Chargebacks		162		(819	)	(1	)	799		141
Sales Returns		190		(127	)	(1	)	103		165
Other deductions		91		(351	)	(1	)	345		84
Total		941		(2,424	)	(52	)	2,458		923

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Gross to Net sales reconciliation in the US

		2004		% of gross sales
		($ millions)
Gross Sales subject to deductions		11,028		100
Medicaid & Medicare rebates and prescription drug saving cards		(624	)	(6	)
Managed Health Care rebates & other rebates		(538	)	(5	)
Chargebacks including Hospital chargebacks		(800	)	(7	)
Sales Returns		(115	)	(1	)
Other deductions		(355	)	(3	)
Total Gross to Net sales adjustments(1)		(2,432	)	(22	)
Net sales		8,596		78

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$26 million was charged directly to the Income Statement without being recorded in the Revenue Deduction Accruals.

Impairment of long-lived assets

        Long-lived assets are regularly reviewed for impairment, including identifiable intangibles and goodwill, whenever events or changes in circumstance indicate that the balance sheet carrying amount of the asset may not be recoverable. In order to assess if there is any impairment, estimates are made of the future cash flows expected to result from the use of the asset and its eventual disposal. If the balance sheet carrying amount of the asset is more than the higher of its value in use to us or its anticipated net selling price, an impairment loss for the difference is recognized. Actual outcomes could vary significantly from such estimates of discounted future cash flows. Factors such as changes in the planned use of buildings, machinery or equipment, or closing of facilities or lower than anticipated sales for products with capitalized rights could result in shortened useful lives or impairment. Additional information on the US GAAP carrying values of trademarks, product and marketing rights is presented in note 32 m (xi).

Fair value or impairments adjustments on financial instruments

        We have extensive investments in marketable securities and have significant derivative financial instrument positions that are mainly, but not exclusively, held for hedging underlying positions. Depending on the development of equity and derivative markets, it may be necessary to recognize impairments on the marketable securities or losses on the derivative positions in our consolidated income statement.

Investments in associated companies

        We have investments in associated companies (defined generally as investments of between 20% and 50% of a company's voting shares) that are accounted for by using the equity method. Due to the various estimates that have been made in applying the equity method, the amounts recorded in the consolidated financial statements in respect of Roche Holding AG and Chiron Corporation may require adjustments in the following year after more financial and other information becomes publicly available.

Retirement benefit plans

        We sponsor pension and other retirement plans in various forms covering employees who meet eligibility requirements. These plans cover the majority of our employees. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense and liability related to

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the plans. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases, as determined by our management within certain guidelines. In addition, our actuarial consultants use statistical information such as withdrawal and mortality rates for their estimates. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of pension income or expense recorded in future years.

Environmental provisions

        We have provisions for environmental remediation costs. The material components of the environmental provisions consist of costs to fully clean and refurbish contaminated sites and to treat and contain contamination at sites where the environmental exposure is less severe. Future remediation expenses are affected by a number of uncertainties that include, but are not limited to, the method and extent of remediation, the percentage of waste material attributable to us at the remediation sites relative to that attributable to other parties, and the financial capabilities of the other potentially responsible parties. We believe that our total provisions for environmental matters are adequate based upon currently available information. However, given the inherent difficulties in estimating liabilities in this area, we cannot guarantee that additional costs will not be incurred beyond the amounts accrued. The effect of resolution of environmental matters on results of operations cannot be predicted due to uncertainty concerning both the amount and the timing of future expenditures and the results of future operations. Our management believes that such additional amounts, if any, would not be material to our financial condition but could be material to future results of operations in a given period.

Litigation provisions

        A number of our subsidiaries are subject to litigation arising out of the normal conduct of their businesses, as a result of which claims could be made against them which might not be covered by existing provisions or by insurance. Our management believes that the outcomes of such actions, if any, would not be material to our financial condition but could be material to future results of operations in a given period.

Goodwill under US GAAP

        In 2004, according to IFRS we continued to amortize goodwill even though for US GAAP purposes we ceased to amortize goodwill in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142 Goodwill and Other Intangible Assets. SFAS 142 requires us to perform an annual review of our US GAAP goodwill for impairment. Based on this annual review, we recognize impairment losses if necessary. In particular, just under US GAAP, we have goodwill relating to Gerber Products with a carrying amount of $2.9 billion at December 31, 2004. As required, we performed our annual impairment test of goodwill in 2004, which did not require us to record an impairment charge. The process of evaluating goodwill involves making adjustments and estimates relating to the projection and discounting of future cash flows. This evaluation is sensitive to changes in the discount rate. An increase to discount rates is likely to result in a significant impairment charge under US GAAP.

Accounting developments

        The International Accounting Standards Board (IASB) has and will continue to critically examine current International Financial Reporting Standards (IFRS) with a view toward increasing international harmonization of accounting rules. This process of amendment and convergence of worldwide accounting rules resulted in significant amendments to the existing rules from January 1, 2005 in such areas as the accounting for share-based compensation, goodwill and intangibles, marketable securities and derivative financial instruments as well as the classification of certain income statement and balance sheet positions. These are discussed in more detail in note 32 m (xii) of our consolidated financial statements.

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Compliance with Sarbanes-Oxley Act of 2002 on internal control over financial reporting

        In line with domestic US registrants with the Securities and Exchange Commission (SEC), we have successfully completed our assessment of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act in 2004 and obtained on this assessment a report from our independent auditors. No material weaknesses were revealed by this extensive review of the internal control over financial reporting. Please see Item 15—"Controls and Procedures" for a more detailed discussion of our assessment.

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Results of Operations

        The following table sets forth selected income statement data for each of the periods indicated.

			2004		2003		2002
			($ millions)		($ millions)		($ millions)
Net sales to third parties
Pharmaceuticals			18,497		16,020		13,528
	Sandoz		3,045		2,906		1,817
	OTC		1,975		1,772		1,521
	Animal Health		756		682		623
	Medical Nutrition		1,121		815		711
	Infant & Baby		1,441		1,361		1,333
	CIBA Vision		1,412		1,308		1,135
Consumer Health—ongoing			9,750		8,844		7,140
Divested Health & Functional Food activities							209
Consumer Health			9,750		8,844		7,349
Group net sales			28,247		24,864		20,877
Net sales			28,247		24,864		20,877
Cost of Goods Sold			(6,625	)	(5,894	)	(4,994	)
Marketing & Sales			(8,873	)	(7,854	)	(6,737	)
Research & Development			(4,207	)	(3,756	)	(2,843	)
General & Administration			(1,540	)	(1,381	)	(1,146	)
Other income & expense			(463	)	(90	)	(65	)
Group Operating income			6,539		5,889		5,092
Operating income by Division/Business Unit
Pharmaceuticals			5,253		4,423		3,891
	Sandoz		235		473		265
	OTC		351		309		240
	Animal Health		78		88		92
	Medical Nutrition		32		82		4
	Infant & Baby		274		254		227
	CIBA Vision		236		153		118
	Divisional Management		(25	)	(39	)
Consumer Health—ongoing			1,181		1,320		946
Divested Health & Functional Food activities							140
Consumer Health			1,181		1,320		1,086
Corporate income, net			105		146		115
Operating income			6,539		5,889		5,092
Result from associated companies			142		(200	)	(7	)
Financial income, net			227		379		613
Taxes			(1,126	)	(1,008	)	(959	)
Minority interests			(15	)	(44	)	(14	)
Net income			5,767		5,016		4,725

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2004 Compared to 2003

        The following compares our results in the year ended December 31, 2004 to those of the year ended December 31, 2003. Our analysis is divided as follows:

1.

Overview



2.

Net Sales by Division and Business Unit



3.

Operating Expenses



4.

Operating Income by Division and Business Unit



5.

Net Income

1. Overview

        Our net sales rose 14% (+9% in local currencies, or lc) to $28.2 billion in 2004 as strong results were recorded in both Pharmaceuticals as well as Consumer Health, where OTC and Medical Nutrition offset lower net sales growth in the Sandoz generics business. Volume increases were the primary growth driver contributing 8 percentage points to our net sales growth. Currency benefits added 5 percentage points, while acquisitions added one percentage point and price increases across the Group were insignificant (<1%). Pharmaceuticals accounted for 65% of our total net sales and Consumer Health 35%, while the US accounted for 40% of our total net sales, Europe for 36% and the rest of the world for 24%.

        Operating income advanced 11%, supported by strong volume expansion of leading Pharmaceutical products. Most categories of functional expenses had a positive impact on the operating margin. Cost of Goods Sold (COGS) rose 12% but declined as a percentage of net sales by 0.2 percentage points to 23.5% owing mainly to efficiency gains and better product mix in Pharmaceuticals. Marketing & Sales fell 0.2 percentage points to 31.4% of net sales based primarily on sales-force productivity improvements, while Research & Development declined 0.2 percentage points to 14.9% of net sales following fewer upfront development costs. General & Administrative expenses also rose at a slower pace than net sales, accounting for 5.5% of net sales. Our operating margin, however, fell 0.6 percentage points to 23.1% from 23.7% in 2003 due mainly to one-time charges in Sandoz, Medical Nutrition and Animal Health that led to higher Other Operating Expenses.

        The main factors contributing to higher Other Operating Expenses were substantially lower Corporate pension income of $102 million; increased restructuring charges and related impairments on property, plant & equipment in the Sandoz generics business of $37 million, a reduction of $171 million in hedging gains on anticipated intragroup sales and lower product divestment gains principally due to the $178 million Fioricet/Fiorinal gain recorded in 2003. Overall, the strong organic growth and positive contribution this year from associated companies resulted in net income expanding 15% to $5.8 billion. Earnings per share rose 16%, slightly more than net income due to the impact of the share buy-back program, to $2.36 per share in 2004 from $2.03 per share in 2003.

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2. Net Sales by Division and Business Unit

        The following table sets forth selected net sales data for each of the periods indicated.

			Year ended December 31,
							Change in $		Change in local currencies
			2004		2003
			($ millions)		($ millions)		(%)		(%)
Net sales
Pharmaceuticals			18,497		16,020		15		10
	Sandoz		3,045		2,906		5		(1	)
	OTC		1,975		1,772		11		5
	Animal Health		756		682		11		5
	Medical Nutrition		1,121		815		38		31
	Infant & Baby		1,441		1,361		6		6
	CIBA Vision		1,412		1,308		8		2
Consumer Health			9,750		8,844		10		5
Total			28,247		24,864		14		9

        As discussed in the Critical Accounting Policies Section, the US market has the most complex arrangements in the area of deductions from gross sales to arrive at net sales, which is the starting point for all our discussions on our sales developments. The following table shows the extent of rebates made in the US for our key subsidiaries affected, which are Novartis Pharmaceuticals Corporation, Sandoz Inc. and Novartis Consumer Health Inc. (OTC):

Gross to Net sales reconciliation in the US

		2004		% of gross sales		2003		% of gross sales
		($ millions)				($ millions)
Gross Sales subject to deductions		11,028		100		10,429		100
Medicaid & Medicare rebates and prescription drug saving cards		(624	)	(6	)	(390	)	(4	)
Managed Health Care rebates & other rebates		(538	)	(5	)	(557	)	(5	)
Chargebacks including Hospital chargebacks		(800	)	(7	)	(1,008	)	(10	)
Sales Returns		(115	)	(1	)	(184	)	(2	)
Other deductions		(355	)	(3	)	(411	)	(4	)
Total Gross to Net sales adjustments(1)		(2,432	)	(22	)	(2,550	)	(25	)
Net sales		8,596		78		7,879		75

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⁽¹⁾

$26 million was charged directly to the Income Statement without being recorded in the Revenue Deduction Accruals (2003: $38 million).

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        The principal reason for the changes in the percentage deductions from gross sales are the following:

        The 2 percentage points increase in Medicaid & Medicare rebates and prescription drug saving cards is mainly due to an increase in Consumer Price Index penalties resulting from 2004 pricing actions, additional state supplemental programs and an increase in the growth of the Medicaid population.

        The Consumer Price Index (CPI) penalties represent the increase in Medicaid rebates due to Novartis price increases in a given year exceeding the U.S. inflation rate, which is calculated on a cumulative basis over the life of each product.

        The 3 percentage points decrease of Chargebacks including Hospital chargebacks is principally a reflection of the lower gross sales in 2004 compared to 2003 of Sandoz Inc.

Pharmaceuticals Division

        The Pharmaceuticals Division, bolstered by the five blockbusters Diovan, Gleevec/Glivec, Lamisil, Zometa and Neoral, reported a net sales increase of 15% (+10% lc) amid outstanding performances from top-selling prescription drugs in both the Primary Care and Specialty Medicines portfolios and above-average growth in several key markets. Most therapeutic areas expanded at double-digit rates in US dollars. Volume expansion contributed 10 percentage points, while currency benefits added five percentage points. Price changes had little impact.

        Total net sales of strategic franchise products (Pharmaceutical net sales excluding mature products) rose 21% (+16% lc) to $15.4 billion as seven of the top ten drugs delivered robust double-digit net sales increases. Primary Care (excluding Mature Products) reported a net sales increase of 21% (+17% lc), led by the strong cardiovascular franchise (+21%, +17% lc) with the ongoing growth of the antihypertensive medicines Diovan, the No. 1 angiotensin receptor blocker (ARB) and No. 2 branded antihypertensive worldwide, and Lotrel, the No. 1 branded US combination high blood pressure treatment. Net sales in Specialty Medicines, which includes our activities in Oncology, Transplantation & Immunology, and Ophthalmics, rose 22% (+15% lc) to $6.1 billion and accounted for 33% of Pharmaceuticals net sales versus 31% in 2003. The Oncology franchise reported a 28% (+22% lc) advance, ranking as one of the fastest-growing businesses in its sector. The key oncology drugs Gleevec/Glivec, Zometa and Femara delivered dynamic growth as new data was presented during 2004 that continued to demonstrate benefits to patients. Mature Products reported a 7% decline (-12% lc) in net sales to $3.1 billion.

Primary Care

•

Diovan (+28%; +22% lc; +20% US) maintained a strong growth rate in 2004 in the US and worldwide with net sales exceeding $3.0 billion, reaffirming its position as the world's leading ARB and one of the fastest-growing branded hypertension medicines. In the US, Diovan reached 2.6% of the US broad antihypertension market segment and 38.5% of the ARB therapeutic category (IMS Health data as of December 2004), which is expected to remain one of the most dynamic pharmaceutical categories in the coming years. Net sales growth has been driven primarily by data from recent successful outcome trials, the global rollout of more effective doses and the recent launch of our sponsored hypertension awareness program in the US. We recently received an approvable letter from the US Food and Drug Administration (FDA) for Diovan to treat high-risk heart attack patients, an indication already approved in 27 countries, including the UK. Approval is pending further discussions with the FDA.



•

Lotrel (+18% US), the No. 1 US fixed combination treatment for hypertension, delivered double-digit net sales growth in 2004, amid an increased focus on the efficacy of antihypertension agents in the US. Lotrel has expanded its position as the No. 1 branded combination therapy, a position held since 2002, based on greater awareness of the need for patients to achieve lower blood pressure goals set by national guidelines. Lotrel, which is sold only in the US, also benefited from the US hypertension awareness program.

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•

Lamisil (+19%; +14% lc; +23% US), the leading treatment wordwide for fungal nail infections, achieved net sales of more than $1 billion for the first time after extending its US market segment leadership position to a high of 72% (IMS Health data as of November 2004). Higher disease awareness in the US and in leading European markets were key growth drivers, with France reporting the highest net sales in Europe.



•

Elidel (+49%; +47% lc; +36% US), the world's No. 1 branded prescription agent for eczema, outperformed the market segment growth (+54% Elidel vs. 7.8% IMS top 16 countries as of October 2004) to deliver excellent net sales. In 2004, the influential UK National Institute for Clinical Excellence (NICE) recommended the use of Elidel, which is now available in approximately 90 countries worldwide, for treating appropriate cases of eczema.



•

Zelnorm/Zelmac (+81%; +80% lc +89% US), a breakthrough therapy for irritable bowel syndrome (IBS) with constipation (IBS-C) and the first and only prescription medicine for chronic idiopathic constipation, reached $299 million in net sales. A key driver has been increasing patient and physician awareness of the availability of a medicine to treat these diseases effectively. Results of the ZENSAA study published in 2004 showed the treatment to be highly effective as a repeat treatment for women with IBS and additionally demonstrated dramatic improvements in important quality of life measures. This study was the basis for resubmission in the European Union in October 2004, with a decision expected in 2005. The US Food and Drug Administration (FDA) granted approval in August 2004 for the additional indication of treating chronic idiopathic constipation in both men and women under age 65.

Specialty Medicines

Oncology

        Net sales rose 28% to $4.2 billion driven by growth in the following products:

•

Gleevec/Glivec (+45%; +36% lc; +23% US), for all stages of Philadelphia-chromosome positive (Ph+) chronic myeloid leukemia (CML) and certain forms of gastro-intestinal stromal tumors (GIST), continued to grow dynamically amid further penetration of both the CML and GIST markets as well as continued increases in the average daily dose. New data presented at the American Society of Hematology meeting in December demonstrated that most newly diagnosed patients with Ph+ CML receiving 400 mg daily maintained their response to therapy long term. A separate study found patients receiving 800 mg daily had better outcomes compared to patients receiving 400 mg daily. In addition, encouraging data on the use of Gleevec/Glivec in the treatment of Ph+ acute lymphoblastic leukemia (ALL) and gliobastoma multiforme (GBM) were presented at major medical meetings in the fourth quarter. The Glivec International Patient Assistance Program is now open in 71 countries, and the combined Gleevec/Glivec patient assistance programs are providing treatments to more than 10,000 patients worldwide who otherwise would not have access to this innovative therapy.



•

Zometa (+21%; +17% lc; US: +10%), the top intravenous bisphosphonate for bone metastases, achieved blockbuster status in 2004 by continuing to post solid growth despite challenges related to US Medicare reimbursement policy and increasing competition as well as high penetration rates in breast cancer and myeloma. Zometa continued to make progress on increasing the use of intravenous (IV) bisphosphonates in the treatment of prostate and lung cancer patients, two of the most common forms of cancer worldwide.



•

Femara (+70%; +62% lc; US: +137%), a leading first-line therapy for early and advanced breast cancer in postmenopausal women, generated high double-digit growth in 2004. Femara has now been approved in 20 countries, including the US, for a new indication as the only post-tamoxifen treatment for early breast cancer based on the landmark MA-17 study, which showed Femara significantly increased a woman's chance of staying cancer-free following five years of adjuvant (post-surgery) tamoxifen therapy.

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Ophthalmics

        Net sales rose 25% (+19% lc) to $0.8 billion based on a continued strong performance from Visudyne (+25%; +20% lc; +15% US), the world's leading treatment for "wet" AMD (age-related macular degeneration), the leading cause of blindness in people over age 50 in developed countries. Improved US Medicare reimbursement for additional lesion types supported US sales growth, while sales in Europe remained strong.

Transplantation

        Net sales rose 1% (-5% lc) to $1.1 billion as the Neoral/Sandimmun franchise (-1%; -7% lc; -17% US) experienced slightly decreased net sales worldwide although, market share gains were made in the US liver transplant segment because of an overall slow erosion by generic competition in the US and some other key markets. Myfortic, an immunosuppressant used in kidney transplant patients, was launched in over 40 countries, including the US, and continued to gain market share. Certican, a novel proliferation signal inhibitor, received European Union Mutual Recognition Procedure review from 10 new EU accession countries and was approved in Australia. We celebrated our 20 years of experience in transplantation in 2004 at the International Society of Transplantation meeting in Vienna.

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Top 20 Pharmaceutical Division Product Net Sales—2004

Brands		Therapeutic Area		United States		% change in local currencies		Rest of the World		% change in local currencies		Total		% change in local currencies
				($ millions)				($ millions)				($ millions)
Diovan/Co-Diovan		Hypertension		1,323		20		1,770		25		3,093		22
Gleevec/Glivec		Chronic myeloid leukemia/Gastro-intestinal stromal tumors		368		23		1,266		41		1,634		36
Lamisil (group)		Fungal infections		528		23		634		7		1,162		14
Zometa		Cancer complications		630		10		448		29		1,078		17
Neoral/Sandimmun		Transplantation		180		(17	)	831		(4	)	1,011		(7	)
Lotrel		Hypertension		920		18						920		18
Sandostatin (group)		Acromegaly		374		18		453		11		827		14
Lescol		Cholesterol reduction		284		(8	)	474		3		758		(2	)
Voltaren (group)		Inflammation/pain		9		13		629		1		638		1
Trileptal		Epilepsy		391		28		127		30		518		29
Top ten products				5,007		15		6,632		16		11,639		16
Visudyne		Wet form of age-related macular degeneration		209		15		239		25		448		20
Exelon		Alzheimer's disease		179		(1	)	243		20		422		10
Tegretol (incl. CR/XR)		Epilepsy		103		(16	)	293		5		396		(2	)
Femara		Breast cancer		166		137		220		29		386		62
Miacalcic		Osteoporosis		236		(1	)	141		(13	)	377		(6	)
Elidel		Eczema		279		36		70		123		349		47
Foradil		Asthma		13		44		308		1		321		2
Leponex/Clozaril		Schizophrenia		72		(16	)	236		(3	)	308		(7	)
Zelnorm/Zelmac		Irritable bowel syndrome		249		89		50		45		299		80
Famvir		Viral infections		160		10		95				255		6
Top twenty products				6,673		17		8,527		15		15,200		16
Rest of portfolio				695		(20	)	2,602		(5	)	3,297		(9	)
Total				7,368		12		11,129		9		18,497		10

Consumer Health Division

        Net sales rose 10% (+5% lc) to $9.8 billion as double-digit net sales expansion, in part due to currency exchange benefits resulting from a weakness of the US dollar, in OTC, Animal Health and Medical Nutrition offset slower growth in Sandoz, Infant & Baby and CIBA Vision. Volume expansion overall in Consumer Health contributed two percentage points to growth, while currencies added five percentage points. Price increases, on average, were insignificant.

Sandoz

        Sandoz net sales rose 5% (-1% lc) to $3.0 billion following an exceptionally strong 2003 performance driven by the launch of the antibiotic AmoxC in the US. Competitive pricing pressures also emerged during 2004 especially in the US and Germany.

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OTC (Over-The-Counter self-medications)

        OTC net sales climbed 11% (+5% lc) to $2.0 billion, led by strong performances from key strategic brands, including the smoking cessation product Nicotinell/Habitrol, the topical OTC version of the antifungal agent Lamisil and the laxatives Ex-Lax/Benefiber. Another key growth driver was the introduction of a new thin-film form of the cold/cough remedies Triaminic/Thera-Flu, strategic OTC brands, that melts on the tongue with no need for water.

Animal Health

        Animal Health net sales reported a 11% (+5% lc) increase to $0.8 billion, supported by double-digit growth in the companion-animal franchise and strong market share gains for new brands such as Deramaxx for the treatment of pain and inflammation associated with osteoarthritis in dogs as well as Milbemax for intestinal worm control in dogs and cats. Growth from these new products helped to offset the loss of net sales from recently divested products. In the farm animal franchise, the farm fly control product Agita supported net sales growth.

Medical Nutrition

        Medical Nutrition net sales rose 38% (+31% lc) to $1.1 billion, due mainly to the successful completion in February 2004 of the acquisition of the adult medical nutrition business of Mead Johnson from Bristol-Myers Squibb Company. This acquisition added 28 percentage points to Medical Nutrition's net sales growth in 2004. Organic growth was driven by a continued focus on targeting the needs of patients with specific diseases such as cancer and diabetes and on the home-care channel.

Infant & Baby

        Infant & Baby net sales grew 6% (+6% lc) to $1.4. billion, outpacing industry growth due to the Gerber baby food brand in the US. The packaging conversion to plastic jars continued to boost net sales in the US baby food segment, as did the launch of innovative finger food products for toddlers.

CIBA Vision

        CIBA Vision net sales were up 8% (+2% lc) to $1.4 billion, supported by ongoing growth of the DAILIES, NIGHT & DAY lenses and the lens care product range. CIBA Vision launched its 0₂ Optix product range in 2004, a group of contact lenses with higher oxygen transmissibility, to competitively penetrate the weekly/monthly lens segment.

3. Operating Expenses

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Cost of Goods Sold

        Cost of Goods Sold rose 12% to $6.6 billion in 2004 but fell as a percentage of net sales to 23.5% in 2004 from 23.7% in 2003 due mainly to ongoing productivity improvements and a favorable product mix in Pharmaceuticals.

        Our current definition of Cost of Goods Sold excludes the amortization and impairment of product and patent rights and trademarks. $264 million amortization and impairment charges (2003: $260 million) relating to these intangibles are included in Other Operating Expenses. Had these charges been included in Cost of Goods Sold then the gross profit margin would have been 75.6% and 75.2% in 2004 and 2003, respectively.

Marketing & Sales

        Marketing & Sales expenses increased 13% to $8.9 billion but declined slightly as a percentage of net sales to 31.4% compared to 31.6% in 2003, mainly reflecting the impact of productivity gains in the Pharmaceuticals US sales-force.

Research & Development

        Research & Development expenses rose 12% in 2004 to $4.2 billion, reflecting investments in the Novartis Institutes for BioMedical Research in the US, but declined as a percentage of net sales to 14.9% compared to 15.1% in 2003, partly reflecting lower development milestone payments compared to 2003.

General & Administration

        General & Administration expenses rose 12% to $1.5 billion in 2004 expanding at a slower pace than net sales, leading to a modest improvement as a percentage of net sales to 5.5% compared to 5.6% in 2003.

Other Income & Expense

        Other Income & Expense was a net charge of $463 million in 2004 compared to $90 million in 2003, reflecting a series of factors that included $102 million less Corporate pension income, $171 million less hedging gains on intragroup sales, as well as lower income from product divestments principally related to the $178 million gain in 2003 from selling the Fioricet/Fiorinal product range and $37 million additional impairment and restructuring charges in Sandoz.

        As noted above Other Income & Expense includes $264 million (2003: $260 million) of amortization and impairment charges related to product and patent rights and trademarks. Under US GAAP, these expenses would be included in Cost of Goods Sold.

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4. Operating Income by Division and Business Unit

        Operating income growth advanced 11% to $6.5 billion at a slower rate than net sales due to higher Other Operating Expenses in 2004 leading to an operating margin decline of 0.6 percentage points from 23.7% of net sales in 2003 to 23.1% in 2004.

Pharmaceuticals Division

        In Pharmaceuticals, operating income expanded significantly faster than net sales, rising 19% to $5.3 billion. This resulted in a margin expansion of 0.8 percentage points to 28.4% of net sales from 27.6% in 2003. An improvement of 0.8 percentage points in Cost of Goods Sold (COGS), mainly from productivity gains and improved product mix, was an important contributor. Marketing & Sales expenses fell 0.2 percentage points to 33.0% based in part on sales-force productivity improvements, particularly in the US. Research & Development expenses rose 13% on investments in the Novartis Institutes for BioMedical Research (NIBR) and late-stage clinical trial programs. However, R&D expenses declined 0.4 percentage points to 18.8% as fewer upfront development costs were paid compared to 2003. Other Operating Expenses increased 56% as a result of several factors, including a decline of $171 million in hedging gains on intragroup sales and lower income from product divestments compared to 2003, which included a one-time gain of $178 million from the sale of the Fioricet/Fiorinal product range. General & Administrative costs fell to 3.5% of net sales from 3.6% in 2003.

Consumer Health Division

        Operating income declined 11% to $1.2 billion despite strong expansion in OTC, Animal Health and CIBA Vision. One-off charges of $120 million were recorded, which included $37 million in restructuring charges and related impairments of property, plant & equipment at Sandoz, a one-time inventory write-down of $18 million in Animal Health, one-time costs of $14 million associated with the acquisition of Mead Johnson and the creation of a $51 million provision in Medical Nutrition to cover legal liabilities related to an investigation by the US Department of Justice in the US enteral pump market. Novartis Nutrition Corporation is currently in the process of negotiating a possible settlement of that portion of the investigation directed against it which is described in more detail in Item 8.A.7—legal proceedings. Excluding these one-off items, operating income would have declined 1% to $1.3 billion and the operating margin would have been 13.3% compared to 14.9% in 2003.

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Sandoz

        Operating income declined sharply to $235 million compared to $473 million in 2003, due primarily to the impact of competitive pressures on pricing, particularly in the US and Germany. As a consequence, a further impairment of our German operation's goodwill of $73 million was required due to the effects that competitive pressures were likely to have on the business outlook. This follows a similar impairment of $72 million recorded in 2003. Other operating expenses also included $37 million of restructuring charges and related impairments of property, plant & equipment related to operations in Germany, Italy, Austria and Slovenia affecting 363 employees in total. The operating margin fell to 7.7% compared to 16.3% in 2003.

OTC (over-the-counter self medication)

        Operating income rose 14% to $351 million, benefiting from strong volume growth in strategic brands and tight cost control as well as the 2003 impact of non-recurring costs from exiting a Japanese joint venture.

Animal Health

        Operating income fell 11% to $78 million, due mainly to the negative impact of a one-time inventory write-down of $18 million.

Medical Nutrition

        Despite productivity gains and product mix improvements, operating income fell 61% to $32 million. The decline was due principally to the recording of a provision of $51 million with regard to an investigation by the US Department of Justice in the US enteral pump market, including whether certain US federal criminal statutes have been violated. Novartis Nutrition Corporation is currently in the process of negotiating a possible settlement of that portion of the investigation directed against it which is described in more detail in Item 8.A.7—legal proceedings. In addition, one-time expenses of $14 million were associated with the Mead Johnson acquisition. Excluding these one-off charges operating income would have increased 18.3% to $97 million and the operating margin would have been 8.7% compared to 10.1% in 2003.

Infant & Baby

        Operating income rose 8% to $274 million as the operating margin improved to 19.0% from 18.7% in 2003.

CIBA Vision

        Operating income reached $236 million, an increase of 54% over 2003, due mainly to the divestment of loss making activities in late 2003 and improved net sales volumes and product mix. The operating margin increased to 16.7% in 2004 compared to 11.7% in 2003.

Corporate Income, net

        Net Corporate income totaled $105 million in 2004, compared to $146 million in 2003. The principal reason for the fall was $102 million less pension income in 2004 compared to 2003.

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5. Net income

        The following table sets forth selected income statement data for the periods indicated.

Results from associated companies

        Associated companies are accounted for using the equity method when we own between 20% and 50% of the voting shares of these companies. Income from associated companies is mainly derived from our investments in Roche Holding AG and Chiron Corporation. Overall, income from associated companies increased to $142 million from an expense of $200 million in 2003.

        Our 42.5% interest in Chiron contributed pre-tax income of $33 million compared to $134 million in 2003. This reduction was mainly due to manufacturing production issues at a Chiron site in the United Kingdom that prevented Chiron from delivering flu vaccines to the US for the 2004/2005 flu season.

        Our 33.3% interest in Roche voting shares, which represents a 6.3% interest in the total equity of Roche, generated pre-tax income of $97 million compared to a pre-tax loss of $354 million in 2003. The 2003 performance was due to Roche's unexpected loss of CHF 4.0 billion in 2002 which was reflected by us as a change in estimate in 2003. The pre-tax income for 2004 reflects an estimate of our share of Roche's 2004 pre-tax income, which is $399 million, including a positive prior year adjustment of $30 million. This income was reduced by a goodwill and intangible amortization charge of $302 million arising from the allocation of the purchase price to property, plant & equipment and intangible assets and goodwill.

        A survey of analyst estimates is used to predict our share of the net income of both Roche and Chiron. Any differences between these estimates and actual results will be adjusted in 2005.

Financial income, net

        Because of the ongoing low-yield environment, net financial income was $227 million in 2004 compared to $379 million in 2003. The overall return on net liquidity was 3.4%, compared to 5.2% in the year-ago period. See Item 11 for a discussion of our risk management policy, the employment of financial instruments and their accounting.

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        The following table provides an analysis of our sources of net financial income:

		Equity options		Bond options		Forward exchange contracts		Foreign exchange options		Interest Rate Swaps/Cross Currency Swaps/Forward Rate Agreements		Total
		($ millions)		($ millions)		($ millions)		($ millions)		($ millions)		($ millions)
2004
Income on options and forward contracts		93		9		59		68		77		306
Expenses on options and forward contracts		(104	)	(8	)	(162	)	(58	)			(332	)
Options and forward contracts results, net		(11	)	1		(103	)	10		77		(26	)
Net interest												127
Dividend income												12
Net capital gains												123
Impairment of marketable securities												(66	)
Other financial result, net												(39	)
Currency result, net												96
Total financial income, net												227
2003
Income on options and forward contracts		270				185		331		327		1,113
Expenses on options and forward contracts		(419	)			(140	)	(250	)			(809	)
Options and forward contracts results, net		(149	)			45		81		327		304
Net interest												80
Dividend income												17
Net capital gains												11
Impairment of marketable securities												(66	)
Other financial result, net												(31	)
Currency result, net												64
Total financial income, net												379

Taxes

        The tax charge of $1.1 billion increased by 12% compared to 2003. Our effective tax rate (taxes as a percentage of income before tax) was 16.3% in 2004 compared to 16.6% in 2003.

        Our expected tax rate (weighted average tax rate based on the result before tax of each subsidiary) was 16.8% in 2004 compared to 14.8% in 2003. Our effective tax rate is different than the expected tax rate due to the effect of equity accounting in the income statement for associated companies of 0.7 percentage points (2003: 1.9 percentage points) and various adjustments to expenditures and income

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for tax purposes. See note 6 to the consolidated financial statements for details of the main elements contributing to the difference.

Net income

        Net income grew 15% to $5.8 billion from $5.0 billion in 2003. As a percentage of total net sales, net income rose to 20.4% in 2004 compared to 20.2% in 2003 due mainly to the strong improvement in operating income.

        Return on average equity was 18.0% in 2004 (17.1% in 2003).

2003 Compared to 2002

        The following compares our results in the year ended December 31, 2003 to those of the year ended December 31, 2002. Our analysis is divided as follows:

1.

Overview



2.

Net Sales by Division and Business Unit



3.

Operating Expenses



4.

Operating Income by Division and Business Unit



5.

Net Income

1. Overview

        In US dollars, our net sales in 2003 increased by 19% over 2002 to $24.9 billion (+11% in local currencies); operating income grew by 16% to $5.9 billion; net income increased by 6% to $5.0 billion; and cash flow from operating activities increased by 27% to $6.7 billion.

        Our Pharmaceuticals Division accounted for 64% of our total net sales and our Consumer Health Division accounted for 36%. The two Divisions generated 77% and 23% of divisional operating income, respectively.

        Geographically, 45% of our net sales were generated in the North American Free Trade Association (NAFTA) region (41% in the USA), 35% in Europe and 20% in the rest of the world.

        Net sales growth was driven by a volume increase of 8%. All Business Units except Sandoz and CIBA Vision benefited from small price increases which in total amounted to 1%. The net sales increase due to acquisitions was 2%. The sales performance in US dollars benefitted from a 8% positive currency effect as the US dollar weakened on average 16% against the Swiss franc, 8% against the yen and 20% against the euro.

        Our operating margin in 2003 was 23.7% of net sales, a decrease of 0.7 percentage points over the 24.4% of net sales of the previous year. As a percentage of net sales, productivity gains and improvements in the product mix led to a 0.2 percentage point reduction in the Cost of Goods Sold, while Marketing & Sales expenses decreased by 0.7 percentage points, although still increasing by 17% over 2002, to support product launches and key growth drivers. Research & Development investments were increased by 32% mainly due to increased development expenses, especially connected with milestone payments on in-licensed compounds, and due to the Pharmaceuticals Division research strategy of establishing a new facility in Cambridge, US. General & Administration expenses grew by 21%, 2% more than net sales.

        As a result of all these factors, operating income increased 16% in US dollars to $5.9 billion.

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2. Net Sales by Division and Business Unit

        The following table sets forth selected sales data for each of the periods indicated.

			Year ended December 31,
			2003		2002		Change in $		Change in local currencies
			($ millions)		($ millions)		(%)		(%)
Sales
Pharmaceuticals			16,020		13,528		18		11
	Sandoz		2,906		1,817		60		47
	OTC		1,772		1,521		17		7
	Animal Health		682		623		9		3
	Medical Nutrition		815		711		15		3
	Infant & Baby		1,361		1,333		2		3
	CIBA Vision		1,308		1,135		15		7
Consumer Health—ongoing			8,844		7,140		24		16
Divested Health & Functional Food activities					209
Consumer Health			8,844		7,349		20		12
Total			24,864		20,877		19		11

        As discussed in the Critical Accounting Policies Section, the US market has the most complex arrangements in the area of deductions from gross sales to arrive at net sales, which is the starting point for all our discussions on our sales developments. The following table shows the extent of rebates made in the US for our key subsidiaries affected, which are Novartis Pharmaceuticals Corporation, Sandoz Inc. and Novartis Consumer Health Inc. (OTC):

Gross to Net sales reconciliation in the US

		2003		% of gross sales		2002		% of gross sales
		($ millions)				($ millions)
Gross Sales subject to deductions		10,429		100		9,215		100
Medicaid & Medicare rebates and prescription drug saving cards		(390	)	(4	)	(270	)	(3	)
Managed Health Care rebates & other rebates		(557	)	(5	)	(493	)	(5	)
Chargebacks including Hospital chargebacks		(1,008	)	(10	)	(1,045	)	(11	)
Sales Returns		(184	)	(2	)	(193	)	(2	)
Other deductions		(411	)	(4	)	(350	)	(4	)
Total Gross to Net sales adjustments(1)		(2,550	)	(25	)	(2,351	)	(25	)
Net sales		7,879		75		6,864		75

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⁽¹⁾

$38 million was charged directly to the Income Statement without being recorded in the Revenue Deduction Accruals (2002: $37 millions).

        No major changes occurred in the above percentage deductions from gross sales between 2003 and 2002.

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Pharmaceuticals Division

        Our core Pharmaceuticals business sustained above market net sales growth throughout the year to deliver an 18% rise in net sales (11% in local currencies). We moved up to the number five position in the global health care ranking (based on November 2003 IMS data) as we captured further segment share in the key US market (net sales: +15% in US dollars), in Japan (net sales: +23%; +14% in local currencies), the second largest single market, as well as in Europe (net sales: +25%; +6% in local currencies). Based on latest available data (IMS), our overall share of the global health care market rose to 4.4% in 2003.

        Our cardiovascular (+36%; +29% in local currencies) and oncology franchises (+36%; +26% in local currencies) continued to be the main drivers, led in particular by the flagship brands Diovan, Lotrel, Lescol, Gleevec/Glivec, Zometa and Femara.

        Newly launched products made further in-roads; Zelnorm/Zelmac generated net revenues of $165 million, with US total and new prescriptions growing 32% in the fourth quarter. Meanwhile, net sales of Elidel reached $235 million, as the product extended its position as the number-one branded eczema treatment worldwide.

Primary Care

•

Diovan (+46%; +38% in local currencies; US: +42%) became in 2003 the world's leading angiotensin receptor blocker (ARB) and continued to capture further market share from its competitors. With the heart failure indication approved in more than 40 markets, the flagship brand continued to outpace its fast-growing ARB market segment, with year-to-date net sales in the US surpassing the $1 billion mark by December.


The fourth quarter was marked by the publication of the VALIANT mega-trial at the American Heart Association Scientific Session. The results showed that Diovan reduces the risk of death by 25% in post-myocardial infarction patients. A supplemental new drug application based on these results was filed in the US.

•

Diovan HCT (valsartan + hydrochorothiazide) became the second most prescribed product in the combination ARB segment (mono and combination therapy) in the US. This rapid growth was powered by the roll-out of new dosage forms, the heart failure indication and new treatment guidelines. In Germany, the flagship brand secured the number-one rank, buoyed by the success of Co-Diovan 160/12.5 mg.



•

Lotrel (US: +20%), the leading combination treatment for hypertension, posted strong full-year prescription growth while fourth-quarter net sales were spurred by a disease awareness campaign launched in August. Overall, the brand steadily gained market segment share as a result of Joint National Committee on Prevention, Detection, Evaluation, and Treatment of High Blood Pressure (JNC7) guidelines recommending more aggressive treatment; a focus on patients who are not controlled by ACE inhibitors and calcium channel blockers; and the successful launch of the new dosage strength, which add efficacy and dosing flexibility.



•

Lescol (+27%; +18% in local currencies; US: +19%; cholesterol reduction) continued strong net sales growth driven by proven benefits in high-risk patients, the successful rollout of the XL (extended release) formulation in France, Italy and Spain and the launch of the secondary prevention indication in the US.



•

Trileptal (+42%; +39% in local currencies; US: +43%; epilepsy) clearly outpaced its market. In August, the FDA granted approval for the use of Trileptal as monotherapy in children. Trileptal was now indicated for the treatment of partial seizures as a monotherapy and adjunctive therapy in adults and children of 4 years and upwards.

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•

Elidel (+147%; +144% in local currencies; US: +125%; non-steroid eczema treatment) achieved full year net sales of $235 million, generated predominantly in the US. In less than two years since its first launch, Elidel became the number-one branded prescription treatment for eczema and was available in more than 38 markets.



•

Zelnorm/Zelmac (irritable bowel syndrome with constipation) net revenues reached $165 million (US: $132 million) reflecting the product's therapeutic benefits and the increase in disease awareness. Total US prescriptions as well as new prescriptions recently increased more than 32%. Zelnorm/Zelmac was launched in 39 countries and was filed, in the fourth quarter, for the new indication of chronic constipation in the US.

Oncology

        Net sales rose 36% to $3.3 billion driven by growth in the following products:

•

Gleevec/Glivec (+84%; +68% in local currencies; US: +41%), for chronic myeloid leukemia (CML) and gastro-intestinal stromal tumors (GIST), continued to grow dynamically, boosted by its use as first-line therapy and its approval for GIST in the US, Europe and Japan. The number of patients enrolled in the Gleevec/Glivec Patient Assistance Program rose to more than 8,000 worldwide, providing treatment to many needy patients who otherwise would not have access.



•

Zometa (+83%; +74% in local currencies; US: +59%), the most prescribed intravenous bisphosphonate for bone metastases, continued to post dynamic growth. Several launches in Europe fueled additional growth, as did the continued expanded use into a number of tumor types including lung, prostate, multiple myeloma, and breast.



•

Sandostatin (+14%; +7% in local currencies; US: +13%; acromegaly and carcinoid syndrome) net sales continued to grow, driven by US net sales.



•

Femara (first-line therapy for advanced breast cancer in postmenopausal women) achieved a 30% rise (+18% in local currencies; US: + 22%) in net sales supported by its strong profile and the landmark results of the MA-17 study published in the fourth quarter. These showed a 43% reduction in the risk of cancer recurrence, in addition to significantly improved disease-free survival in postmenopausal women with early breast cancer, who had completed five years of tamoxifen therapy.

Ophthalmics

        Net sales rose 9% to $0.6 billion driven by growth of Visudyne.

•

Visudyne (+24%; +16% in local currencies; US: +8%; treatment in age-related macular degeneration) continued to post overall growth, benefiting from increased market penetration and strong net sales in Europe, Latin America and the Asia Pacific regions.

Transplantation

        Net sales decreased slightly by 1.9% to $1.1 billion.

•

Neoral/Sandimmun (immunosuppression) net sales declined only modestly (-10% in local currencies) despite the use of lower dosing regimen in the US, in addition to generic competition and compulsory price-cuts in Germany and Italy. Sales momentum was sustained in Japan even though reimbursement was reduced by the authorities.



•

Myfortic, the new enteric-coated formulation of mycophenolate sodium used to prevent organ rejection, gained approval in 27 countries by the end of 2003.

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Top 20 Pharmaceuticals Division Product Net Sales—2003

Brands		Therapeutic Area		United States		% change in local currencies		Rest of the World		% change in local currencies		Total		% change in local currencies
				($ millions)				($ millions)				($ millions)
Diovan/Co-Diovan		Hypertension		1,107		42		1,318		34		2,425		38
Gleevec/Glivec		Chronic myeloid leukemia/Gastro-intestinal stromal tumors		299		41		829		82		1,128		68
Neoral/Sandimmun		Transplantation		216		(21	)	804		(6	)	1,020		(10	)
Lamisil (group)		Fungal infections		428		2		550		9		978		5
Zometa		Cancer complications		574		59		318		118		892		74
Lotrel		Hypertension		777		20						777		20
Lescol		Cholesterol reduction		309		19		425		18		734		18
Sandostatin (group)		Acromegaly		318		13		377		2		695		7
Voltaren (group)		Inflammation/pain		8		(33	)	591		(5	)	599		(6	)
Cibacen/Lotensin/Cibadrex		Hypertension		306		(9	)	127		(8	)	433		(9	)
Top ten products				4,342		21		5,339		20		9,681		20
Trileptal		Epilepsy		305		43		92		27		397		39
Miacalcic		Osteoporosis		239				150		(14	)	389		(6	)
Tegretol (incl. CR/XR)		Epilepsy		122		1		262		(1	)	384
Exelon		Alzheimer's disease		181		8		186		19		367		13
Visudyne		Wet form of age-related macular degeneration		181		8		176		27		357		16
Leponex/Clozaril		Schizophrenia		86		(28	)	223		(2	)	309		(12	)
Foradil		Asthma		9		(61	)	280		2		289		(4	)
Elidel		Eczema		205		125		30		575		235		144
Famvir		Viral infections		146		(7	)	87		19		233
HRT Range		Hormone replacement		125		(9	)	106		(24	)	231		(16	)
Top twenty products				5,941		18		6,931		16		12,872		17
Rest of portfolio				643		(9	)	2,505		(9	)	3,148		(9	)
Total				6,584		15		9,436		8		16,020		11

Consumer Health Division

        Net sales in our Consumer Health Division's ongoing businesses grew a substantial 24% (+16% in local currencies) driven mainly by the Sandoz generics Business Unit, and fueled by above-market net sales growth throughout the other businesses, of which OTC, Medical Nutrition and CIBA Vision all delivered double-digit net sales increases in US dollars.

Sandoz

        Net sales at Sandoz rose 60% (+47% in local currencies) to $2.9 billion, driven by the US Generic Pharmaceuticals Business and the Lek acquisition, which contributed 38 percentage points to net sales growth. The US net sales increased by 56% fuelled by the strong sales of AmoxC (the generic version of Augmentin®) and by the successful roll-out of prescription loratadine (a generic version of the allergy treatment Claritin®). Further impetus was added through the roll-out of citalopram in the UK (a generic version of the anti-depressant Celexa®) and of omeprazole in the US (a generic version of the ulcer and heartburn treatment Prilosec®).

        The Industrial Business posted a net sales increase of 12% in US dollars and a 6% decrease in local currencies. Sandoz also continued its efforts to develop its new Biopharmaceuticals Business, focused on the manufacture of active ingredients, mostly modern recombinant products.

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OTC (over-the-counter self medication)

        In 2003, OTC net sales rose 17% (7% in local currencies) to $1.8 billion, led by Nicotinell/Habitrol (smoking cessation), Lamisil (topical antifungal), and by Ex-Lax/Benefiber (laxative) with US private-label loratadine also contributing to overall net sales growth.

Animal Health

        Net sales were up 9% in US dollars or 3% in local currencies to $682 million.

        Net sales at the companion animal franchise grew in double-digits, driven in particular by strong market share gains of the new brands Deramaxx (pain and inflammation control associated with osteoarthritis in dogs) and Milbemax (intestinal worm control in dogs and cats). Fortekor (heart/kidney disease), strengthened by a novel palatable formulation for cats, complemented results again with a net sales increase well above market growth.

        In the farm-animal franchise Agita, the innovative farm fly control product consistently added to net sales, while the therapeutic anti-infectives business contended with increased generic competition especially in the pig market.

Medical Nutrition

        Net Sales reached $815 million, up 15% in US dollars (+3% in local currencies).

        Double digit growth in Europe lifted Medical Nutrition net sales, which were driven by the strong performance of Enteral Nutrition (Isosource and Novasource) and additional net sales impetus from the Medical Food franchise (Resource). In Nutrition & Santé, net sales growth from the core brands offset the impact of distributor changes in China and Italy, while Sports Nutrition net sales were lifted by the introduction of Isostar "Fast Hydration".

Infant & Baby

        Net sales grew 2% (3% in local currencies) outpacing industry growth and leading to overall net sales of $1.4 billion. The major contributor was Gerber in the US, spurred by innovations in the Juice, Graduates, and Tender Harvest lines and the success of the Lil' Entrees line of microwavable convenience trays targeted at the toddler segment.

CIBA Vision

        Net sales grew 15% in US dollars terms and rose 7% in local currencies to $1.3 billion, driven by the growth of Focus DAILIES and Focus NIGHT & DAY lenses which allowed the company to maintain leadership of the daily disposables and continuous wear categories. Focus DAILIES Toric, the world's first and only daily disposable lens for astigmatism correction, was launched also in the US and Japan following last year's introduction in Europe. FreshLook colored lenses remained the leading brand in the cosmetic lens segment, supported by the launch of FreshLook Radiance and FreshLook Dimensions. More emphasis was put on direct-to-consumer advertising with new successful TV and print campaigns for Focus NIGHT & DAY and FreshLook.

        Despite competing in a shrinking market, net sales of lens care products were flat versus the prior year, supported by the launch of AOSEPT ClearCare in US and SOLO-Care AQUA in selective European countries. Sales of FreshLook Care in Japan continued to grow.

        The ophthalmic surgical business contributed growing net sales during the year. In August 2003, CIBA Vision announced its intention to pursue strategic alternatives for this business, including its potential sale. Agreements were reached with certain third parties to sell to them certain assets of the surgical business.

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3. Operating Expenses

        The following table sets forth our operating expenses.

Cost of Goods Sold

        Cost of Goods Sold decreased as a percentage of net sales from 23.9% in 2002 to 23.7% in 2003. This was mainly due to continued improvements in productivity and a favorable product mix in our Pharmaceuticals Division.

        Our current definition of Cost of Goods Sold excludes the amortization and impairment of product and patent rights and trademarks. $260 million amortization and impairment charges (2002: $267 million) relating to these intangibles are included in Other Operating Expenses. Had these charges been included in Cost of Goods Sold then the gross profit margin would have been 75.2% and 74.8% in 2003 and 2002 respectively.

Marketing & Sales

        Marketing & Sales expenses as a percentage of net sales decreased by 0.7% over 2002 to 31.6% of net sales.

Research & Development

        Research & Development expenses increased 32% owing to in-licensing deals in our Pharmaceuticals Division and the build-up of the Cambridge research facility. As a percentage of net sales, Research & Development was 15.1% (2002: 13.6%).

General & Administration

        General & Administration expenses increased to 5.6% of net sales in 2003 from 5.5% in 2002 reflecting a modest increase.

Other Income & Expense

        Other Income & Expense was a net charge of $90 million in 2003 compared to $65 million in 2002, reflecting a series of factors including the impairment of property, plant and equipment and intangible assets of $136 million and write-down of certain financial investments, including biotechnology ventures due to their poor performance, of $80 million, exchange rate movements and royalty payments. Conversely this net charge was reduced by the release of $90 million of legal provisions (at Corporate and Sandoz level) as a result of a litigation settlement with GlaxoSmithKline.

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        As noted above Other Income & Expense includes $260 million (2002: $267 million) of amortization and impairment charges related to product and patent rights and trademarks. Under US GAAP, these expenses would be included in Costs of Goods Sold.

4. Operating Income by Division and Business Unit

        Operating income rose 16% to $5.9 billion in 2003 compared to 2002 and the operating margin decreased 0.7 percentage points to 23.7% (2002: 24.4%). The following table sets forth selected operating income data for each of the periods indicated.

Pharmaceuticals Division

        Earnings growth accelerated in the year as net sales continued to expand strongly. The Cost of Goods Sold, as well as investments in Marketing & Sales slightly decreased as a percentage of Division's net sales compared to the prior year, Research & Development increased significantly as considerable payments related to development milestones and attractive in-licensing deals were completed. Product-mix changes and productivity gains in the Cost of Goods Sold continued to drive gross profit improvements. Research & Development expenses reached 19.1% of Divisional net sales (reflecting the sustained high-level investment in the new Cambridge facilities and in-licensing opportunities). Other income & expense grew from 2.3% to 2.4% of Divisional net sales owing to several factors including the write-down of certain financial investments in biotechnology ventures due to their poor performance, exchange rate movements, royalty payments and increased product liability insurance costs. This was partially offset by one time gains on the sale of non-core products, primarily the Fioricet and Fiorinal lines for $178 million. Gains on hedging intragroup sales recorded in the Division's other income & expenses were $171 million in 2003 compared to $176 million in 2002.

        During 2003, our Pharmaceuticals Division completed a number of transactions to strengthen its product portfolio. In April, we acquired the urinary incontinence treatment Enablex (darifenacin) from Pfizer for a total of up to $225 million, part of which was conditional on certain marketing approvals in the US and EU. In 2003, we also acquired the rights to the IL1-trap compound from Regeneron and the rights to develop and market Lucentis™ outside North America from Genentech. These transactions resulted in

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$151 million of milestone payments. In May, we acquired an additional 51% of the capital stock of Idenix Pharmaceuticals Inc. of Cambridge, Massachusetts, for an initial payment of $255 million.

Consumer Health Division

        Operating income from the ongoing business of our Consumer Health Division rose 40% in the year, outpacing net sales and driven in particular by Sandoz (+78%), where volume expansions and productivity gains, more than offset increased investments in Marketing & Sales and Research & Development. Apart from Sandoz, CIBA Vision (+30%), Medical Nutrition and OTC (+29%), all achieved considerable increases in operating income, the latter benefiting from the exceptional contribution of loratadine.

        Overall, in Consumer Health continued productivity gains, lower costs of certain raw materials and product-mix improvements contributed to a reduction in the Cost of Goods Sold as a percentage of net sales. Marketing & Sales investments were maintained at a high level in order to drive recently launched products and to support key brands, however the increase was less than net sales growth. On the other hand, Research & Development investments increased overproportionally, which was mainly due to the expansion of internal Research & Development capabilities at Sandoz, licensing agreements and other initiatives to accelerate innovation.

        Other income and expense increased mainly on account of the impairment of goodwill of $72 million relating to Sandoz, Germany. The impairment of this goodwill was recorded after taking into account the entity's loss of market share, which in the near future, was considered to be difficult to regain. This was partially offset by the release of $49 million of provisions following the successful conclusion of a litigation with GlaxoSmithKline.

        With almost all Business Units achieving margin improvements, the Division's ongoing operating margin improved 1.7 percentage points to 14.9% of net sales.

Sandoz

        Operating income increased significantly by 78% over 2002, fueled by net sales growth especially related to the acquistion of Lek, productivity gains and a stronger focus on higher margin products and favorable product mix. This increase in operating income was achieved despite increases in Research & Development expenses. Research & Development investments increased 90% to $263 million due to product developments and the funding of Research & Development in the US.

        Other income and expense included a $72 million goodwill impairment charge relating to the German activities however, benefited from a release of $49 million of litigation provisions following the successful conclusion of negotiations with GlaxoSmithKline.

        The operating margin rose 1.7 percentage points to 16.3%.

OTC (over-the-counter self medication)

        Operating income increased 29% over the year to $309 million, as a result of net sales growth led by Nicotinell/Habitrol and the launch of private label loratadine in the US and the non-recurrence of exit costs from a Japanese joint venture. The operating margin increased 1.6 percentage points to 17.4%.

Animal Health

        2003 operating income fell 4% to $88 million, leading to an operating margin of 12.9% (2002: 14.8%). Operating costs increased due to Marketing & Sales investments focused on recently launched products and due to additional Research & Development on essential project studies.

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Medical Nutrition

        Operating income increased to $82 million as a result of productivity gains, lower raw material costs and product mix improvements resulting from more focus on disease specific segments. The operating margin increased to 10.1% from 0.6% in 2002 or from 4.5% when $28 million of exceptional items related to restructuring the Business Unit and other one time items are excluded from the 2002 operating income.

Infant & Baby

        2003 operating income rose 12% to $254 million. Operating margin increased to 18.7% from 17.0% in 2002 when there were $27 million of impairment charges on some of our South American operations' goodwill and intangible assets due to non-achievement of performance expectations.

CIBA Vision

        Operating income reached $153 million, an increase of 30% over the year. This operational result was achieved due to the margin on the additional net sales and reduction in structural costs, partially offset by increased investment in advertising and promotion activities and a $22 million charge for asset impairments related to the planned disposal of the refractive surgery activities. Operating margin increased to 11.7% in 2003 compared with 10.4% in 2002.

Divested Health & Functional Food activities in 2002

        The 2002 operating income of $140 million includes a divestment gain of $132 million after related restructuring charges arising on the divestment of our former Food & Beverage business. In addition there was a net $8 million operating income from these activities after taking into account $18 million of goodwill impairment charges necessary due to the divestment.

Corporate Income, net

        Net corporate income totaled $146 million, $31 million more than in the prior year. Higher income from charging share and share option plan costs to the operations and the settlement of a litigation for $41 million less than the provision, more than offset increased investments in Corporate research, the negative currency translation effects on non-US dollar costs, and lower pension income.

5. Net income

        The following table sets forth selected income statement data for the periods indicated.

		Year ended December 31,
						Change in $
		2003		2002
		($ millions)		($ millions)		(%)
Operating income		5,889		5,092		16
Results from associated companies		(200	)	(7	)
Financial income, net		379		613		(38	)
Income before taxes and minority interests		6,068		5,698		6
Taxes		(1,008	)	(959	)	5
Income before minority interests		5,060		4,739		7
Minority interests		(44	)	(14	)
Net income		5,016		4,725		6

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Results from associated companies

        Associated companies are accounted for using the equity method where we generally own between 20% and 50% of the voting shares of such companies. Income from associated companies is mainly derived from our investments in Roche Holding AG and Chiron Corporation.

        Our 42% interest in Chiron contributed pre-tax income of $134 million (2002: $107 million). Our 33.3%, just under one third (2002: 32.7%) interest in Roche voting shares, which represented a 6.3% (2002: 6.2%) interest in the total Roche equity instruments generated a pre-tax loss of $354 million (2002: $116 million loss), $269 million of which was due to our share in Roche's unexpected loss of CHF 4.0 billion in 2002, booked only in 2003. The remainder represents an estimate of our share ($185 million) in Roche's 2003 pre-tax income. This share of pre-tax income is reduced by a $270 million goodwill and intangible depreciation charge arising from allocating the purchase price to property, plant and equipment, intangible assets and goodwill.

        Our share of the net income of both Roche and Chiron was based upon analysts' estimates. Differences between these estimates and actual results were adjusted in 2004. In total, associated companies resulted in an overall expense of $200 million in 2003 (2002: $7 million).

Financial income, net

        Amid persistently challenging equity market conditions, lower interest rates and a lower level of average net liquidity than in the prior year, net financial income declined 38% or $234 million. See Item 11 for a discussion of our risk management policy, the employment of financial instruments and their accounting.

        The following table provides an analysis of our sources of net financial income:

		Equity options		Forward exchange contracts		Foreign exchange options		Interest Rate Swaps/Cross Currency Swaps/Forward Rate Agreements		Total
		($ millions)		($ millions)		($ millions)		($ millions)		($ millions)
2003
Income on options and forward contracts		270		185		331		327		1,113
Expenses on options and forward contracts		(419	)	(140	)	(250	)			(809	)
Options and forward contracts results, net		(149	)	45		81		327		304
Net interest										80
Dividend income										17
Net capital gains										11
Impairment of marketable securities										(66	)
Other financial result, net										(31	)
Currency result, net										64
Total financial income, net										379

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		Equity options		Bond options		Forward exchange contracts		Foreign exchange options		Interest Rate Swaps/Cross Currency Swaps/Forward Rate Agreements		Total
		($ millions)		($ millions)		($ millions)		($ millions)		($ millions)		($ millions)
2002
Income on options and forward contracts		1,180		7		136		256		80		1,659
Expenses on options and forward contracts		(942	)	(11	)	(53	)	(255	)			(1,261	)
Options and forward contracts results, net		238		(4	)	83		1		80		398
Net interest												222
Dividend income												68
Net capital losses												(79	)
Other financial result, net												(65	)
Currency result, net												69
Total financial income, net												613

Taxes

        Despite increased profits, the tax charge of $1.0 billion increased only $49 million over the prior year. Our effective tax rate (taxes as a percentage of income before tax) was 16.6% in 2003 compared to 16.8% in 2002.

        Our expected tax rate (weighted average tax rate based on the result before tax of each subsidiary) was 14.8% in 2003 compared to 15.3% in 2002. Our effective tax rate was is different from the expected tax rate due to the income statement effects of equity accounting for associated companies of 1.9% (2002: 0.3%) and various adjustments to expenditures and income for taxation purposes. For details of the main elements contributing to the difference, see note 6 to the consolidated financial statements.

Net income

        Net income as a percentage of total net sales decreased from 22.6% in 2002 to 20.2% in 2003 principally due to lower financial income and the negative impact of the results of associated companies.

        Return on average equity decreased from 17.7% in 2002 to 17.1% in 2003.

Exchange Rate Exposure and Risk Management

        We transact our business in many currencies other than the US dollar, our reporting currency. As a result of our foreign currency exposure, exchange rate fluctuations have a significant impact in the form of both translation risk and transaction risk on our income statement. Translation risk is the risk that the our consolidated financial statements for a particular period or as of a certain date may be affected by changes in the prevailing rates of the various currencies of the reporting subsidiaries against the US dollar. Transaction risk is the risk that the value of transactions executed in currencies other than the subsidiary's measurement currency may vary according to currency fluctuations.

        In 2004, 43% of net sales were generated in US dollars, 26% in euro, 3% in Swiss francs, 8% in yen and 20% in other currencies. In 2003, 43% of net sales were generated in US dollars, 26% in euro, 4% in Swiss francs, 8% in yen and 19% in other currencies. In 2002, 43% of our net sales were generated in US dollars, 25% in euro, 5% in Swiss francs, 8% in yen and 19% in other currencies.

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        In 2004, 37% of operating costs were generated in US dollars, 23% in euro, 15% in Swiss francs, 5% in yen, and 20% in other currencies. In 2003, 41% of operating costs were generated in US dollars, 23% in euro, 17% in Swiss francs, 4% in yen, and 15% in other currencies. In 2002, 41% of our operating costs were generated in US dollars, 22% in euro, 22% in Swiss francs, 4% in yen, and 11% in other currencies.

New Accounting Pronouncements

        See note 32(m)(xii) and (xiii) to the consolidated financial statements for a discussion of the effect of new accounting standards.

5.B  Liquidity and Capital Resources

Cash Flow

        The following table sets forth certain information about our cash flow and net liquidity for each of the periods indicated.

		Year ended December 31,
		2004		2003		2002
		($ millions)		($ millions)		($ millions)
Cash flow from operating activities		6,725		6,652		5,229
Cash flow used for investing activities		(3,219	)	(1,298	)	(2,865	)
Cash flow used for financing activities		(3,124	)	(5,764	)	(4,041	)
Net effect of currency translation on cash and cash equivalents		55		258		836
Change in cash and cash equivalents		437		(152	)	(841	)
Change in short- and long-term marketable securities		897		869		189
Change in short- and long-term financial debts		(885	)	(400	)	(402	)
Change in net liquidity		449		317		(1,054	)
Net liquidity at January 1		7,289		6,972		8,026
Net liquidity at December 31		7,738		7,289		6,972

        The analysis of our cash flow is divided as follows:

1.

Cash flow from Operating Activities and Free Cash Flow



2.

Cash flow used for Investing Activities



3.

Cash flow used for Financing Activities



4.

Net Liquidity

1. Cash Flow From Operating Activities and Free Cash Flow

        Our primary source of liquidity is cash generated from our operations. In 2004, cash flow from operating activities increased by $73 million (1%) to $6.7 billion. Depreciation, amortization and impairment charges remained at the prior year level of $1.4 billion, while current tax payments rose $241 million compared to the previous year.

        In 2003, the cash flow from operating activities increased by $1.4 billion (27%) from 2002 to $6.7 billion mainly as result of improved working capital management and higher net income.

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Depreciation, amortization and impairment charges increased from 2002 by $50 million to $1.4 billion. Tax payments in 2003 were $49 million higher than the prior year.

        Our free cash flow, excluding the impact of the acquisitions or divestments of subsidiaries, associated companies and minority investments decreased 7% to $3.4 billion in 2004 from $3.6 billion in 2003. The free cash flow increased 23% from $3.0 billion in 2002 to $3.6 billion in 2003.

        Our capital expenditure on property, plant and equipment for 2004 and 2003 totaled $1.3 billion (4.5% of net sales in 2004 and 5.3% of net sales in 2003), compared to $1.1 billion in 2002 (5.3% of net sales).

        This level of capital expenditure reflects the continuing investment in Production as well as Research and Development facilities. We expect to maintain spending at approximately the 2004 percentage of sales levels in 2005 and to fund these expenditures with internally generated resources.

        We present Free Cash Flow as additional information as it is a useful indicator of our ability to operate without reliance on additional borrowing or usage of existing cash. Free Cash Flow is a measure of the net cash generated which is available for debt repayment and investment in strategic opportunities, including strengthening our balance sheet. We use Free Cash Flow in internal comparisons of our Divisions' and Business Units' results. Free Cash Flow of our Divisions and Business Units uses the same definition as that for our Group, however no dividends, tax or financial receipts or payments are included in the Division and Business Unit calculation. Free Cash Flow is not intended to be a substitute measure for cash flow from operating activities (as determined under IFRS or US GAAP).

        The following table details the components of these increases.

		Year ended December 31,
		2004		2003		2002
		($ millions)		($ millions)		($ millions)
Cash flow from operating activities		6,725		6,652		5,229
Purchase of property, plant & equipment fixed assets		(1,269	)	(1,329	)	(1,068	)
Purchase of intangibles assets		(181	)	(214	)	(90	)
Purchase of financial assets		(747	)	(816	)	(725	)
Proceeds from sale of property, plant & equipment, intangible and financial assets		799		1,059		979
Dividends paid to third parties		(1,968	)	(1,724	)	(1,367	)
Free cash flow		3,359		3,628		2,958

2. Cash Flow used for Investing Activities

        In 2004, cash outflow due to investing activities was $3.2 billion. A total of $1 billion was spent on acquisitions, while investments in property, plant & equipment amounted to $1.3 billion. The net payments for acquiring marketable securities was $0.8 billion and other investments accounted for $0.1 billion.

        In 2003, our cash outflow due to investing activities was $1.3 billion. $0.4 billion was spent to increase the strategic investment in Roche and for the acquisition of Idenix. Our investment in property, plant and equipment totaled $1.3 billion. The net proceeds from sales of marketable securities was $0.4 billion.

        In 2002, our net cash outflow from investing activities was $2.9 billion. Thereof $2.7 billion was spent to increase the strategic investment in Roche and for the acquisition of Lek.

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3. Cash Flow used for Financing Activities

        Cash flow used for financing activities in 2004 was $3.1 billion, down $2.6 billion from 2003. $1.9 billion was spent on the acquisition of treasury shares and $2.0 billion on dividend payments. $0.8 billion was due to the increase in short and long-term financial debt and a capital inflow from the IPO of Idenix Inc.

        In 2003, the cash flow used for financing activities was $5.8 billion. $0.3 billion was spent for the acquisition of treasury shares, $1.7 billion for dividend payments and $3.5 billion for the repayment of equity instruments.

        Our net cash outflow used for financing activities was $4.1 billion in 2002. In 2002, $3.3 billion was spent for the acquisition of treasury shares and $1.4 billion for dividend payments while the issue of a EUR 1 billion bond and the conversions of the remaining two convertible bonds contributed to a net inflow of $0.6 billion.

4. Net Liquidity

        Overall liquidity (cash, cash equivalents and marketable securities including financial derivatives) amounted to $14.6 billion at December 31, 2004. Net liquidity (liquidity less financial debt) at year-end was $7.7 billion an increase of $0.4 billion from December 31, 2003.

        Our overall liquidity amounted to $13.3 billion at December 31, 2003. Net liquidity at year end was $7.3 billion, $0.3 billion more than at December 31, 2002.

        We present overall liquidity and net liquidity as additional information as they are useful indicators of our ability to meet our financial commitments and to invest in new strategic opportunities, including strengthening our balance sheet. These items should not be interpreted as measures determined under IFRS.

        We use marketable securities and derivative financial instruments to manage the volatility of our exposures to market risk in interest rates and liquid investments. Our objective is to reduce, where appropriate, fluctuations in earnings and cash flows. We manage these risks by selling existing assets or entering into transactions and future transactions (in the case of anticipatory hedges) which we expect we will have in the future, based on past experience. We therefore expect that any loss in value for those securities or derivative financial instruments generally would be offset by increases in the value of those hedged transactions.

        We use the US dollar as our reporting currency and are therefore exposed to foreign exchange movements primarily in European, Japanese and other Asian and Latin American currencies. We manage the risk associated with currency movements by entering into various contracts to preserve the value of assets, commitments and anticipated transactions. In particular, we enter into forward contracts and foreign currency option contracts to hedge certain anticipated foreign currency revenues in foreign subsidiaries. See "Item 11. Quantitative and Qualitative Disclosures About Market Risk," for additional information.

Share repurchase program

        In August 2004, we announced the completion of the third share-repurchase program and the start of a fourth program to repurchase shares via a second trading line on the SWX Swiss Exchange for approximately $2.4 billion (CHF 3.0 billion). In 2004, a total of 22.8 million shares were repurchased for $1.0 billion to complete the third repurchase program. Since the start of the fourth program, a total of 15.2 million shares have been repurchased for $0.7 billion. Overall in 2004, a total of 41 million shares have been repurchased for $1.9 billion, which includes shares bought through the repurchase programs and additional shares bought on the first trading line. A proposal will be made at the Annual General Meeting on March 1, 2005 to reduce the share capital by 38.0 million shares bought through the purchase

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programs on the second trading line and to initiate a fifth share repurchase program for approximately $3.5 billion (CHF 4.0 billion).

        In 2004, our share capital was reduced by 24.3 million shares relating to shares bought on the second trading line in 2003.

        On July 22, 2002, we initiated our third share buy-back program to repurchase shares on the SWX Swiss Exchange for up to a total of CHF 4 billion. During 2003, 24.3 million shares were repurchased via a second trading line for a total amount of $939 million (2002: 24.6 million shares for a total amount of $1.0 billion). In 2003, the Group's share capital was reduced by 22.7 million shares relating to shares bought on the second trading line in 2002.

        During the year to December 31, 2003 an additional 17.1 million shares, net, were also sold on the first trading line for a total of $666 million (2002: 55.4 million shares, net were bought for $2.4 billion).

        At December 31, 2004, our holding of treasury shares (excluding the amount that we will propose to be cancelled at the March 1, 2005 Annual General Meeting) under IFRS amounted to 312 million shares or 11% of the total number of issued shares.

Other equity instruments

        During December 2001, through indirectly held affiliates, we sold a total of 55 million ten-year call options (Low Exercise Price Options—"LEPOs") on our shares, with an exercise price of CHF 0.01, for EUR 2.2 billion in proceeds (EUR 40 per LEPO). We accounted for the LEPOs as an increase in share premium at fair value less related issuance costs. Following changes in US GAAP and expected changes in IFRS, on June 26, 2003 we redeemed these equity instruments in advance of their exercise date.

        We had previously also sold a total of 55 million nine and ten-year put options on our shares to a third party with an exercise price of EUR 51 receiving EUR 0.6 billion in proceeds (EUR 11 per put option). We accounted for the option premium associated with the put options as an increase in share premium less related issuance costs. Following changes in US GAAP and expected changes in IFRS, on June 26, 2003 we redeemed these equity instruments in advance of their exercise date.

Straight Bonds

        On November 14, 2002, our affiliate, Novartis Securities Investment Ltd, Bermuda, issued a 3.75% bond, guaranteed by Novartis AG and due in 2007, in the amount of EUR 1 billion.

        On October 17, 2001, our affiliate, Novartis Securities Investment Ltd., Bermuda, issued a 4% bond, guaranteed by Novartis AG and due in 2006, in the amount of EUR 900 million.

Direct Share Purchase Plans

        Since 2001 Novartis has been offering US investors the ADS Direct Plan, which provides investors in the United States an easy and inexpensive way of directly purchasing Novartis stock and of reinvesting dividends. This plan holds Novartis American Depositary Shares (ADSs) which are listed on the New York Stock Exchange under the trading symbol NVS. At the end of 2004, the US Direct Share Purchase Plan had 332 participants. Since September 1, 2004 Novartis also offers a Direct Share Purchase Program to investors residing in Switzerland, Liechtenstein, France and the United Kingdom, which is the first of its kind in Europe. With this plan Novartis offers an easy and inexpensive way of directly purchasing Novartis registered shares and of depositing them free of charge with SAS SIS Aktienregister AG. As of December 31, 2004, a total of 8,862 shareholders were or had been enrolled in this program.

5.C  Research & Development, Patents and Licenses

        Our Research & Development spending totaled $4.2 billion, $3.8 billion and $2.8 billion for the years 2004, 2003 and 2002, respectively. Each of our Divisions and Business Units has its own Research &

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Development and patents policies. For a description of those research and development and patents policies, see "Item 4. Information on the Company—4.B Business Overview."

5.D  Trend Information

        Please see "—5.A Operating Results" and "Item 4. Information on the Company—4.B Business Overview" for trend information.

5.E  Off-Balance Sheet Arrangements

        We have no unconsolidated special purpose financing or partnership entities or other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that is material to investors. See also notes 27 and 28 of the consolidated financial statements and matters described in Item 5.F, "Aggregate Contractual Obligations—Contingencies".

5.F   Aggregate Contractual Obligations

        We have long-term research agreements with various institutions which require us to fund various research projects in the future. As of December 31, 2004, the aggregate total amount of payments, including potential milestones, which may be required under these agreements was $1.2 billion. We expect to fund these long-term research agreements with internally generated resources.

        As of December 31, 2004, our total financial debt was $6.9 billion, as compared with $6.0 billion as of December 31, 2003, and $5.6 billion as of December 31, 2002.

        The increase from 2003 to 2004 was primarily due to new repurchase agreements of $709 million and currency translation effects on our euro denominated bonds of $213 million. The increase from 2002 to 2003 is due to currency translation effect on our euro denominated bonds. Our year end debt/equity ratio remained stable at 0.20:1 in 2004 (No change in ratio from 2003 and 2002).

        We had $3.2 billion in non-convertible bonds at December 31, 2004, up from $3.0 billion at December 31, 2003 and $2.6 billion as of December 31, 2002. The increases in 2004 and 2003 have been due to currency translation effect on our euro denominated bonds.

        For details on the maturity profile of debt, currency and interest rate structure, see note 18 to the consolidated financial statements.

        As of December 31, 2004, we had short-term debt (excluding the current portion of long-term debt) of $3.4 billion as compared with $2.7 billion as of December 31, 2003, and $2.7 billion as of December 31, 2002.

        This short-term debt consisted mainly of $0.7 billion in repurchase agreements created in 2004; $0.4 billion (2003: $0.6 billion; 2002 $0.9 billion) commercial paper; and other bank and financial debt, including interest bearing employee accounts, of $2.1 billion (2003: $1.6 billion; 2002: $1.5 billion).

        We are in compliance with all covenants or other requirements set forth in our financing agreements. We do not have any rating downgrade triggers that would accelerate maturity of our debt. For details of the maturity profile of debt, currency and interest rate structure, see note 18 to the consolidated financial statements. Our debt continues to be rated by Standard & Poor's and Moody's respectively as AAA and

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Aaa for long-term maturities and A1+ and P1 for short-term debt. We consider our financial resources and facilities to be sufficient for our present requirements.

			Payments Due by Period
Contractual Obligations			Total		Less than 1 year		2-3 years		4-5 years		After 5 years
			($ millions)		($ millions)		($ millions)		($ millions)		($ millions)
Long-Term Debt			3,416		680		2,676		36		24
Operating Leases			926		233		304		143		246
Research & Development Commitments
	—unconditional		665		285		245		113		22
	—potential milestone payments		582		91		158		200		133
Purchase commitments
	—property,plant & equipment		325		241		66		18
	—other assets		57		28		29
Total Contractual Cash Obligations			5,971		1,558		3,478		510		425

Contingencies

        In connection with our original investment in January 1996 in Chiron:

•

We have agreed to purchase up to $500 million of new Chiron equity at fair value, at Chiron's request. To date, Chiron has made no such request.



•

We have agreed to guarantee up to $703 million of Chiron debt. Utilization of the guarantee in excess of $403 million reduces the equity put amount mentioned above. Our obligation under the guarantee is only effective if Chiron defaults on the debt.



•

Chiron has granted to us an option to purchase newly issued shares of equity securities directly from Chiron at fair market value. We may exercise this option at any time subject to certain conditions, including a limitation on our aggregate ownership not to exceed 55% of Chiron's then outstanding common stock.

        The outstanding equity put and guarantee expire no later than 2011.

        For other contingencies, see "Item 4. Information on the Company—4.D Property, Plants and Equipment—Environmental Matters" and "Item 8. Financial Information—8.A Consolidated Statements and Other Financial Information—8.A.7 Legal Proceedings."

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Item 6.    Directors, Senior Management and Employees

6.A  Directors and Senior Management

Directors

        Members of the Board of Directors

		Age		Director Since		Term Expires
Daniel Vasella, M.D.		51		1996		2007
Helmut Sihler, J.D., Ph.D.		74		1996		2007
Hans-Joerg Rudloff		64		1996		2007
Dr. h.c. Birgit Breuel		67		1996		2005
Peter Burckhardt, M.D.		66		1996		2005
Srikant Datar, Ph.D.		51		2003		2006
William W. George		62		1999		2006
Alexandre F. Jetzer		63		1996		2005
Pierre Landolt		57		1996		2005
Ulrich Lehner, Ph.D.		58		2002		2005
Dr.-Ing. Wendelin Wiedeking		52