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FINANCIAL REPORT PROJECT

NOVARTIS ANNUAL REPORT.

#1- Novartis is traded in the NY Stock Exchange. Page 100

#2- Novartis is traded under ( NVS) Page 100

#3-Novartis current price is ( $58,12)

#4-Novartis headquarters are located in Basel Switzerland Page 264

#5-Novartis website address is WWW.NOVARTIS.COM Page 264

#6-Novartis is divided operationally on a worldwide basis into four divisions: Pharmaceuticals,

Vaccines and Diagnostics, Sandoz and Consumer Health. Novartis is represented in 64
countries either by subsidiaries , associated companies and joint ventures. Page 243

INCOME STATEMENT

1.

a. Net sales increased from $41,459 in 2008 to$ 44,267 million in 2009 it was an increase of
$2,808 million 6.8% from 2008 to 2009.
($44,267-$ 41,459 million)= $2,808 million Page 182
($2,808/$41,459)X100= 6.8%

b. Novartis recognizes revenue when there is evidence that a sales arrangement exists the
prices are fixed and the collection of the money is assured. Provisions for rebates and discounts
granted to healthcare providers are recorded as a reduction of revenue. Cash discounts are
offered to customers to encourage prompt payment and are recorded as a reduction in revenue. In
cases were historical data is not enough to have a reliable estimation of the outcome revenue
recognition is deferred. Returns are calculated on the terms of historical experience, revenue is
only recorded when there is evidence of consumption or when the right of return has expired.
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Yes it makes sense to me. I think it is the right way of recognizing revenue or I should say it is
the right way for Novartis, in my opinion revenue should be something real should be a fact,
should be recognized only when the transaction is made and fully accepted by both parties with
no special restrictions attached other than the normal ones known to both parties and set forth
under the specific circumstances of the deal. Page190 and page 156

2.

a. The Gross profit increased from 2008 to 2009. Page 182

b. The Gross profit increased from $31,145 million to $32,924 million it is an increase of
$1,779 million which represents an increase of 5.71%. ($1,779/$31,145 million)x100= 5.71%
Page182

c. The Gross profit percentage decreased from the previous year ($31,145/$41,459 million)
x100= 75.1% in (2008) to ($32,924/$44,267 million)x100= 74% in (2009). Page182

3.

a. The cost of goods sold increased from $11,439 million in 2008 to $12,179 million in 2009.
Page182

b. The cost of goods sold increased by 6.5% equivalent to $740 million. Page182

$12,179 million-$11,439 million =$ 740 million ($740/$11,439)x100= 6.5%

4. Discontinued Consumer Health operations (Gerber, Medical Nutrition and Nutrition & Sante)
these only happen prior to and in 2008. Page 178, 195 and 230.

5. No extraordinary items in Novartis annual report.

6. Yes. In 2009 they were mainly related with restructuring of commercial operations of the
Sandoz division in Germany and the technical operations of the Pharmaceutical division in
Switzerland and consequently termination costs of associates totaling for the Year $59 million
dollars. Also in 2008 there was a reorganization of the market sales organization in the USA
and the restructuring of several development facilities in France with the associated termination
costs of associates which totaled $43 million dollars. Restructuring charges are under other
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expense and other income in the Income Statement. Other income was the result of
consolidations synergies resulting from acquisitions. Other expenses are the results of mainly
acquisitions and cash payments in order to pay compensation and benefits like early retirement
and (e.g. packages). Page192, 229

7. No unusual items in the Novartis annual report.

8.

a. Income taxes in 2008 were $1,336 million and in 2009 were $1,468 million that means
an increase of $132 million from previous year.

b. It represents an increase of 9.88%. Page 202

( $132/$1,336 million)x100= 9.88%

c. The effective tax rate for the 2009 year was 14.8%. A statutory tax rate is the legally
imposed rate. An income tax could have multiple statutory rates for different income levels.
Under the federal income tax, the statutory corporate tax rate ranges from 15 to 35 percent, Most
corporate income is taxed at 35%. Novartis paid 14.8% in taxes overall, which is considerable
lower than the statutory tax rate. Corporations have a lot of exemptions and write offs ( expenses
with R&D, tax-loss carry- forwards, deferred tax assets related to taxable losses that eventually
will be utilized against profits etc…) all of this would result in a decrease in the group`s effective
tax rate. Page 202, 203

9.

a. The Group net income increased from the previous year, in 2008 it was $8,233 million
and in 2009 it was $8,454 million Page 164

b. The net income increased by $221 million. It is a 2.7% increase. Page 164

c. 2008 Net income =$ 8,233 million, Net sales = $41,459 million, Ratio = 19.9%
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($8,233 million/$41,4590 million)X100= 19.9%

2009 Net income =$ 8,454 million, Net sales =$44,267 million, Ratio = 19.09%

($8,454 million/$44,267 million)X100= 19.09% It decreased by 0.81% Page 164

10.

d. Novartis has Basic and Diluted earnings per share.

e. Basic Earnings per share (EPS) is the portion of a company's profit allocated to each
outstanding share of common stock. Page 180

The diluted Earnings per share ( EPS) reveals the earnings per-share a business would
have generated if all stock options, warrants, convertibles, have been exercised. Page 180

11. Novartis in 2009 achieved another year of record results mainly due to the launch of new
and innovative products. Net sales rose 6.8% to $44,267 million dollars, the gross profit
increased $1,779 million dollars representing a 5.71% increase from the previous year of 2008,
but the gross profit percentage in relation to net sales in 2009 decreased 1.1% compared with
2008, one of the reasons if not the main reason was the sharp increase of the cost of goods sold
which increased 6.5% comparing to 2008. Operating income from continuing operations
advances 11% to $10.0 billion dollars compared with $9.0 billion in 2008, which demonstrates a
solid business expansion and productivity gains. Group Net income grows 4% to $8,454 million
dollars in 2009 from $8,233 million in 2008. Net income grew at a slower rate compared with
Operating income due to financing costs related with Alcon acquisition. Taxes increased from
$1,336 million in 2008 to $1,468 million in 2009 a $132 million, representing a 9.9% increase.
Basic earnings per share (EPS) rose 3% to $3.70 dollars in 2009 from $3.59 dollars in 2008
largely in line with the net income, the diluted earnings per share also rose to $3.69 dollars in
2009 compared to $3.56 dollars in 2008.
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IV- Balance Sheet

A. Yes, Novartis has a consolidated balance sheet.

A consolidated balance sheet combines the balance sheets of a parent company and its
subsidiaries and affiliates (Firms in which Novartis owns an important financial stake
usually close to or over 50% of the associated company stock). GAAP (Generally
Accepted Accounting Principles) requires companies with multiple divisions to be
included in the parent company`s balance sheet information. Page 184

B. The Marketable securities and derivative financial statement. They went up from $4,079
million in 2008 to $14,555 million in 2009. Footnote #16 Page 214.
Because Novartis uses these funds with the intention of hedging foreign currency risk
arising from highly probable forecast intra-group transactions on which there is a
possibility of risk associated with currency exchange in the consolidated financial
statements. From 2008 to 2009 Novartis anticipated high volatility in the financial
markets in relation to foreign currency and therefore they invested heavily on securities.
Page 214, 215, 216

D. Current Assets and Liabilities

1. Cash and Cash Equivalents

a. Cash and cash equivalents increased from the previous year from $ 2,038 million in
2008 to $2,894 million in 2009.

b. In 2008 it was 9.8% ($2,038 million/$20,881 million) x 100 = 9.76% and in 2009 it
was 8.6% ($2,894 million/$33,691 million) x 100 = 8.58%

c. Yes it is mentioned on footnote #1. It says that cash and cash equivalents include
highly liquid investments with short maturity (3 months) and that they are readily convertible
to known amounts of cash. It is also mentioned in footnote #4 and it is related to the
payment of dividend to shareholders. It is mentioned in footnote #16 and it is related with
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liquidity risk, which is defined (e.g. as the risk that the group could not be able to settle or
meet its obligations on time or at reasonable price). It is also mentioned in footnote #20 and
concerns the payments of environmental liabilities, and the payment of court settlements
concerning different types of litigation that Novartis is involved. It is also mentioned in
footnote #21 and it is related with restructuring charges.

d. In 2008 the cash balance was $2,038 million and in 2009 it was $2,894 million in the
statement of cash flows and it agrees with the amount in the Balance sheet. Page 195

2. Receivables

a. Receivables in 2008 were $7,026 million and in 2009 were $8,310 million. Page 184

Total current assets in 2008 were $20,881 million and in 2009 were $33,691 million.

The percentage in 2008 was 33.6% ($7,026 million /$20,881 million)x 100=33.6%

The percentage in 2009 was 24.7% ($8,310 million/$33,691million)x100= 24.7%

b. The percentage of total assets in 2008 was 9% ($7,026 million/$78,299 million)x100=

8.97%. Page 184

The percentage of total assets in 2009 was 8.7% ($8,310 million/$95,505

million)x100=8.7%

c. Total gross receivables for 2008 were $7,208 million the net total $7,208-$182 million
(doubtful receivables)= $7,026 million. Page 213

Total gross receivables for 2009 were $8,453 million and the net total $8,453 million-
$143 million (doubtful Receivables ) = $8,310 million. . Page 213

d. For 2008 it Is ( $182 million/$7,208 million)x100= 2.5% Page 213

For 2009 it is ( $143 million/$8,453 million)x100=1.7% Page 213

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e. Novartis initially recognizes its trade receivables at a fair value (e.g. invoiced amounts
less adjustments for estimated revenue deductions such as rebates, chargeback’s and cash
discounts) It states that Novartis establishes provisions for doubtful trade receivables based
on historical loss experience and when a trade receivable becomes uncollectible, it is written
off. Footnote #15. Page 213

f. Factoring is a financial transaction where a business sells its accounts receivable to a

third party (called a factor) at a discount in exchange for immediate money with which to
finance its future business. Novartis do not use that technique. Footnote #15

g. Securitizing means that a Firm that generates a substantial amount of accounts receivable
sells those receivables at a modest discount to a subsidiary ( or to an independent firm) of the
mother firm which in turn issues securities to willing investors. That is a fast way of getting
cash for future investment. Novartis do not sell its receivables. Footnote #15

3. Inventories

a. Novartis valuates it`s purchased products at the acquisition cost while own
manufactured products are valued at manufacturing costs plus related manufacturing
expenses. Novartis as provisions for slow moving inventory. If it becomes apparent that such
inventory can be reused than the inventory will be reevaluated either to the estimated lowest
fair market value or to the original cost. Regulatory agencies have a word to say about certain
inventory, for example if the inventory is produced ahead of regulatory approval it will be
released only when the approval is granted. Footnote #1

b. Novartis uses FIFO. Footnot#1

c. Novartis breaks down the inventory between Raw materials consumables and Finished
products. Footnote#14

d. Novartis in 2008 had $5,792 million in inventory, the percentage in relation to total
current assets is ($5,792 million/$20,881 million) x100 = 27.7% Page 184

Novartis in 2009 had $5,830 million in inventory the percentage in relation to total
current assets is ($5,830 million /$33,691million) x100 = 17.3% Page 184
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e. In relation to total assets 2008 was ($5,792 million/$78,299 million) x100= 7.8%

In relation to total assets 2009 was ($5,830 million/$95,505 million) x100= 6.1%
Page 184

4. Current Liabilities

a. Current ratio Is (current assets/current liabilities)

Novartis total current liabilities for the year of 2008 was $16,504 million, Total
current assets $20,881 million. ( $20,881 million/$16,505 million) =1.2 (current ratio) Page 184

Novartis total current liabilities for the year of 2009 was $19,470 million, Total
current assets $33,691 million. ($33,691 million/$19,470 million = 1.7 (current ratio) Page 184

b. Acid test for the year of 2008 (cash + securities +receivables/current liabilities)

Ratio= $2,038 million+$4,079million+$7,026 million/$16,504 million= 0.8 Page 184

Acid test for the year of 2009 (cash + securities +receivables/current liabilities)
Ratio=$2,894million+$14,555million+$8,310 million/$$19,470 million=1.3 Page 184

5. Novartis balance sheet discloses Novartis assets, liabilities and stock owners equity for a
particular point in time ( December 31, 2009 and 2008). Total non-current assets went up
from $57,418 million in 2008 to $61,814 million in 2009 representing a 7.7% increase.
Marketable securities and derivatives went up from $4,079 million in 2008 to $14,555 million
in 2009 showing the intension of avoiding big fluctuations in exchange rates. Cash and cash
equivalents increased from the previous year from $ 2,038 million in 2008 to $2,894 million
in 2009 it shows in the balance sheet a better liquidity in relation to 2008, that is an increase
of $856 million dollars. Receivables in 2008 were $7,026 million and in 2009 were $8,310
million representing an increase of $1,284 million it represents a big increase in sales and
therefore in the moneys to be received. Trade receivables are recognized at their fair value,
Novartis as a provision for doubtful trade receivables and are accounted based upon the
difference between the recognized value and the estimated net collectible amount. Novartis
breaks down the inventory between Raw materials consumables and Finished products the
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total value of the inventory in 2008 was $5,792 million and in 2009 it was $5,830 million it
was an increase of $38 million which is not to relevant, and it shows the care that Novartis
uses with their inventory. Keeping inventory is very expensive and ties the assets (money)
and uses a lot of resources (space, and man hours etc…). Novartis uses the FIFO concept
first in first out in the balance sheet. The Firm as provisions for slow-moving and low
market value inventories. Inventories that are considered unsalable it is fully written off.
Total current assets wet up from $20,881 million in 2008 to $33,691 million in 2009 showing
an increase of $12,810 million demonstrating a strong performance in the year of 2009. Total
current liabilities for the year of 2008 was $16,504 million, and for the year 2009 was $19,470
million it shows an increase of $2,966 million, most of it due to financing of new acquisitions.
The current ratio is an indication of a firm's Market liquidity and ability to meet creditor's
demands. Novartis current ratio (current assets/current liabilities) in 2008 was 1.2 and in
2009 it was 1.7 it means that in 2008 for each dollar that the company owned it had a $1.20
available in current assets, and in 2009 it was a $1.70, a current less than 1 is considered bad
it means that the company may have problems meeting its short term obligations. Novartis
ratio is not the best but is not the worst either, in 2009 Novartis had a lot of cash on hand to
meet all its obligations and it was in a good position financially. After the acquisition of Alcon
the cash went down and Novartis incurred in a lot of debt to pay for its obligations. One way
of checking for the financial health of a corporation very fast is the Acid test (cash +
securities +receivables/current liabilities) in 2008 for Novartis it was 0.8 and in 2009 it was
1.3.
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E- Long-term Assets

6. Long term investments.

a. Yes. Novartis has what they call long term strategies to create sustainable growth.

b. Novartis plans to sustain its future growth through an aggressive investment in Research
and Development focusing in unmet medical needs, Novartis also wants to Selectively
strengthen their portfolio through acquisitions and partnerships. Novartis also intends to expand
its presence in high-growth markets ( e.g. Asia, South America etc…) they give a lot of
importance to Organizational efficiencies there is a lot of investment in that aspect of the
business (productivity is an ongoing process). They also put a lot of emphasis in a performance
oriented culture. Page`s 146 to 151

c. Novartis uses” fair value”.

d. Footnote #1 Talks about intangible assets that are acquired in a business combination
and recognized at their fair value ( R&D assets, milestones payments on licensed or acquired
compounds etc…) the financial assets are recorded at their fair market value either long term or
short term. Page 186 to 189

7. Novartis has financial instruments, such as Derivatives financial instruments, which are
Currency related instruments, interest rate related instruments and Hedging instruments, these
instruments were used in 2008 to anticipate transactions maturing within 12 months and were
contracted with the intention of hedging anticipated transactions expected to occur in 2009. Page
186, 214 and 215

8. Long term Operational assets

a. They are mentioned in footnote #1 (accounting policies) and in footnote #10. It shows
depreciation in each category (e.g. land over 20 to 40 years, machinery and equipment 7 to 20
years, furniture and vehicles 5 to 10 years and computer hardware 3 to 7 years). Page 207 and
208.

b. Novartis has a specific footnote for Property, Plant and Equipment which is #10. It states
(that Land is recorded at acquisition cost less cumulative impairment) and talks about long term
leasehold land agreements are amortized over the life of the lease. Other items of property,
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plant and equipment are recorded at acquisition cost or production cost and are amortized in a
straight-line basis. Property, plant and equipment are reviewed for impairment whenever
events or changes in circumstances related to the item in question indicates that the balance
sheet amount given to the mentioned item is not or may not be recoverable. Page 207 and 208.

c. Novartis uses the Straight line Depreciation method. Page 187

d. Novartis annual financial statement do not mention anything about the age of the Property,
Plant or Equipment! In one hand looking at the amount of depreciation in millions in 2009 it
was $1,241 million dollars to me it represent an enormous amount of money. On the other
hand we are talking about an enormous corporation with hundreds if not thousands of
buildings and property and an enormous amount of equipment, so it is difficult to say much
about the age. I would say that it is mixed with more tendency for the newer than older. Page
178

e. Novartis has leases, and talks about leases related with property and equipment (cars and
real state) on footnote #1 and #28. Page 187.

f. Novartis annual report talks about impairments in relation to Property, Plant and
Equipment on Footnote #1. It says that whenever the amount represented on the balance
sheet may not be recoverable, Property, Plant and Equipment will be reviewed for impairment,
or at least once a year. Goodwill is considered to have an indefinite life and is tested for
impairment at least once a year. All intangible assets are tested for Impairment at least once a
year with the exception of the IPR&D (in process research and development). Page 187

9. Long term Operational Assets: intangibles.

a. Yes. Novartis has intangible assets. All acquired R&D assets including payments on
licensed or acquired new compounds are capitalized as intangible assets and recognized at
their fair value. Goodwill (excess of the purchase price over the fair value of the net
identifiable asset) is another intangible asset which is recognized in the balance sheet.
Goodwill is considered to have an indefinite life and is tested for impairment at least once a
year. Also trademarks, core technologies, product and marketing rights are intangible assets
owned by Novartis. Page 187 and 188

b. Yes they are amortized. Acquired intangible assets such as Trademarks, Core
technologies, Product and marketing rights and others are amortized on a straight line basis
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over their estimated useful life. In process R&D is the only exception of intangible assets
that are not amortized, it is tested for impairment at least once a year or when facts and
circumstances warrant it. Page 188

c. Novartis mention Impairments and they say that (e.g. intangible assets are reviewed for
impairment whenever facts and circumstances indicate their carrying value may not be
recoverable). When evaluating an intangible asset for impairment they estimate the
recoverable amount based on the intangible asset`s fair value less the costs to sell. If the cost
of the asset exceeds the recoverable amount, an impairment loss for the difference is
recognized. Page 188

10. Novartis long term investments are all oriented to create sustainable growth for the future.
They talk about selectively strengthen the portfolio which means ceasing all the opportunities
available for the corporation to get new products ( medicines) and new ways of delivery through
acquisitions, partnerships and mergers in order to grow their own portfolio. The investment in
R&D goes up every year and it is focused mainly in finding solutions for unmet medical needs.
The strategy to expand into the emerging markets special the ones with potential high growth
gives an opportunity for high yields in the future. Derivative financial instruments are
recognized originally at their fair value and they are evaluated again at the end of each period.
Long term operational assets (property, plant and equipment) are recorded in the balance sheet at
their acquisition cost, and they depreciate on an straight-line basis. Long term Operational
Intangible Assets are recognized at their fair value. Goodwill (e.g. the excess of the purchase
price over the fair value) is considered to have an indefinite life and is tested for impairment at
least annually. When Novartis evaluates Goodwill for a possible impairment, first they estimate
the recoverable amount based on the fair value less the cost to sell, if they find that the actual
recognized amount is more than the recoverable amount, than an impairment loss is recognized.
Other intangible assets such as R&D assets, including milestone payments and licensed or
acquired compounds are recognized at their fair value. Acquired intangible assets are amortized
on a straight-line basis. Page 188
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F. Long-term liabilities.

11. Pensions.

a. Novartis balance sheet do not show any specific liability on Pensions, but it is included
in the Provisions and other non-current liabilities. Page 184 and 224

b. Novartis annual report footnote #1 states that the defined benefit obligation is measured
as the present value of the estimated future payments in order to settle the pension obligation that
is equivalent to the service of the associates in the current and prior periods of employment with
Novartis. It also states that plan assets are recorded at their fair value. Page 190

12. Leases.

a. Novartis balance sheet do not show any specific liability on Leases. Page 184

b. There is a brief discussion about leases on footnote #28. Page 240

c. Novartis entered into various fixed term operational leases mainly for cars and
properties ( buildings, offices and land ), the commitment for the leasing in the future is $2,030
million and for the year of 2009 it was $338 million. It means that Novartis has a great deal of
interest in leasing mainly for tax purposes. Page 240

13. Long-term Dept

a. long term dept appears in the balance sheet as Non-current liabilities and the total
Non-current liabilities was in 2009 the amount of $18,573 million.

b. Novartis as long term Deferred tax liabilities, Financial debts and Provisions and other
Non-current liabilities.

c. Foot note #12, 19 and 20 are pretty extensive and it gives you a fair overview of all the
tax deferred moneys in 2008 and 2009 it also gives you a difference between deferred tax
assets and liabilities the explanation is right to the point. All other liabilities like Financial debts
(bonds, lease obligations and liabilities to banks and other financial institutions) are very well
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explained on Footnote #19. Employee benefits, provisions for environmental, product

liabilities and legal matters are explained on footnote #20 very extensively.

14. Contingencies

A contingency is an event that may occur but that is not likely or intended to happen.

Footnote #28 talks about contingencies in general. It tells us that the group`s is potential
involved in administrative proceedings, litigations and investigations and that although they are
expecting some losses they are not sure of how much. They talk about potential environmental
liability and they say that it will be assessed based on a risk assessment and consequent
investigation on the specific sites identified as at risk for environmental exposure. Page 240

15. Total Liabilities for 2008 = $27,862 million, Total Assets for 2008 = $78,299 million

($27,862 million/$78,299 million) x100 = 35,6%

Total Liabilities for 2009 = $38,048 million, Total Assets for 2009 =$95,505 million

($38,048 million/$95,505 million) x100 = 39.8% Page 184

The percentage of the total liabilities from 2008 to 2009 went up ($38,048 million- $27,862
million) = $10,186 million/$27,862 million = 36.6%, Total assets from 2008 to 2009 went up
($95,505 million- $78,299million) = $17,206 million/$78,299 million = 22% we can see that
although Total assets went up in relation to the previous year 2008 the total liabilities went up
even more. So profits were not as good in 2009.

16. Interest earned in 2008 was $22.8 million and in 2009 it was $11.7million Page 182

2008 = $8,233+(-$290 million ) + (-$1,336 million)/(-$290 million) = 22.8 million

2009 =$8,454 million + (-$551 million) + (-$1,468 million)/(-$551 million) =11.7 million

It shows that the interest earned in 2008 from the investments went up although the total
assets were higher in 2009 so it is an indication that in 2008 Novartis had a lot less debt.

17. Novartis balance sheet shows that the 2009 total non-current liabilities such as financial
debt deferred tax liabilities provisions and other non-current liabilities went up ($38,048
million/$95,505 million) x100 = 39.8%, comparing with 2008 ($27,862 million/$78,299 million)
x100 = 35,6%, the total current liabilities such as Trade payables, financial debts and derivative
financial instruments, current income tax liabilities and provisions and other current liabilities,
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G. Stockholders’ Equity

18. In 2008 the Stockholders equity was $50,437 million and in 2009 it was $57,462 million.
Page 184

a. Novartis has Common stock, Treasury stock (reserved and unreserved). Page 222
b. Novartis in 2008 had a total amount of shares of 2 643 623 000 billion , and in 2009 it

was 2 637 623 000 Billion all registered, authorized, issued and paid in full.

Novartis had on December 2008, 2 264 852 842 Billion shares outstanding.

December 2009, 2 274 353 351 Billion Shares outstanding. Page 222, footnote 18

19.

c. In 2008 It included Dividends, acquisition of treasury shares net, Reduction of share

capital, Equity-based compensation, changes in non-controlling interests. In 2009 it included
Dividends, sale of treasury share net, reduction of share capital, Equity based compensation
and changes in non-controlling interests. Page 183

d. In 2008 Novartis acquired treasury shares and in 2009 Novartis sold treasury shares.

e. Yes, Novartis paid dividends. In 2008 Novartis paid $3,941 Million and in 2009
Novartis paid $4,609 million in Dividends. Page 178

f. Novartis paid in 2008, $3,941 million in dividends, and in 2009 Novartis paid $4,609
million. Novartis group net income was in 2008, $8,233 million and in 2009 Novartis had a net
income of $8,454 million. The ratio for 2008 ( $3,941 million /$8,233 million) X100= 48% and
the ratio for 2009 ($4,609 million/$8,454 million) x100= 55% . Novartis net income went up
$221 million and due to higher net income Novartis board of directors decided to raise the
dividend payments. Historically speaking Novartis dividends have been going up since 1996.
Page 178

20. Yes Novartis has treasury stock (shares). In 2008 Novartis had a total of 378 770 158
million treasury shares. In 2009 Novartis had a total of 363 269 649 million treasury shares.
Page 222

21. Comment ?????18 through 20

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V. Statement of cash flows

22. Novartis statement of cash flows only show the years of 2008 and 2009. Page 173

Cash flows 2008 2009

Cash flow operating activities $9,769 million $12,191 million
Cash flow investing activities ($10,367 million) ($14,219 million)
Cash flow financing activities ($2,573 million) $2,809 million

23. Novartis operating funds in 2008 were not enough to cover Investing and financing
activities due to the group investment in marketable securities and acquisitions, financed by the
issue of debt (bonds). In 2009 it was enough due to a cash inflow from financing activities of
$2,809 million. Page 173

24. Novartis group net income in 2008 and 2009 was less than the cash flow from operations.
In 2008 it was $8,233 million and in 2009 it was $8,454 million. I believe that it is not too good,
because it forces the group to borrow to finance operations (e.g. bond issuing, selling stock,
borrowing from financial institutions etc…)

25. Novartis in 2008 the two major investments were marketable securities and acquisitions
(e.g. Alcon) it demonstrates that investing in the financial market is very lucrative and investing
in new acquisitions is and will be in the future a strategy that Novartis will follow. It strengths
Novartis portfolio and gives Novartis the rights to any new innovation either technologically or
intellectually. For the year 2009 investments in associated companies and acquisitions (e.g.
EBEWE generic). Page 173 and 184

26. Novartis in 2008 and 2009 financed its investments trough a issuance of bonds and
selling of stock Expand a little more

27. Comment for #22 through #26.

VI.

28. Yes, I found Government grants, and the way they are recognized in the income statement,
they say when there is a reasonable assurance that the grant will be received and the group will
comply with the attached conditions the Grant is recognized at its fair value. It also states that
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government grants are deferred and recognized over the time necessary to match them with the
related costs that these Grants were intended to offset. These Grants are deducted at the same
time that the related expense is reported. Page 191

29. Novartis as a strategy based on the concept of diversification within the health care sector,
primarily in previously identified growth areas of the health care market. The recently proposed
merger with Alcon (eye care) will turn Novartis immediately into a major world leader in eye
care, the acquisition of EBEWE Pharma’s specialty generics business, which specializes in
injectable cancer medicines and will strength the generic side of Novartis which is represented
by (Sandoz generics division), in addition they are acquiring a Chinese Vaccines manufacturer
with an interesting pipeline in the field of viral and bacterial diseases. Novartis feels that trough
strategic acquisitions and mergers and with a very strong investment In R&D they will became
more competitive. Novartis investments are clearly becoming more focused on what they call
the fundamental eastward shift in the world economy. Novartis feels that all the acquisitions and
mergers affected the firm in a positive way and at the end Novartis portfolio is stronger and more
diverse. Page 193

30. Novartis has a variety of equity based participation plans of associates. They have the
Novartis equity plan “select” in which the participants can elect to receive their incentive in the
form of shares, share options or a mix of both, they have a plan called select outside of North
America and in North America these plans are only for a specific group of associates (directors,
executives etc…) they are grouped and they may receive the awards collectively. Novartis has
another plan (long term performance plan) and it is only granted to key executives based on a
three year performance period. To reward exceptional performance Novartis gives Special
Share Awards of restricted and unrestricted shares. Last year of 2009 they had an impact of
$777 million on the financial statements. Page 235

31. Novartis are defined as 4 independent divisions ( Pharmaceuticals, Vaccines and

Diagnostics, Sandoz and Consumer Health) and they all report for the Executive Committee.
The Pharmaceutical division researches, develops manufactures and sells prescription medicines.
The Vaccines and Diagnostics division consists of two activities. Vaccines researches develops,
manufactures and sells human vaccines worldwide. Diagnostics researches develops,
manufactures and sells blood testing and molecular diagnostics products. The Sandoz division
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develops manufactures, distributes and sells prescription and generic medicines. The Consumer
Health division consists of three business units. OTC (over the counter medicines), Animal
Health and CIBA Vision. They all have independent research, development, manufacturing,
distribution and selling capabilities. Page 192 and 195

32. Quarterly reports are not included but there is a summary of quarterly financial data for
2008 and 2009. Page 177

33. Footnote #10. I found particularly interesting that the government gives Grants to private
Firms (entities), I do believe that is part of National Security strategy. The Grants were awarded
for the construction of a manufacturing facility to produce flu vaccines.

34. The Board of Directors is responsible for the financial statements. Page 245

35. There are three reports issued by an independent registered public accounting firm
(PricewaterhouseCoopers AG, Switzerland). The report on the Consolidated Financial
statements of Novartis AG, the report on Other Legal Requirements and the report on the
Effectiveness of Internal Control Over Financial Reporting . They issued an opinion stating
that quote “ in our opinion the consolidated financial statements for the year ended December 31,
2009 present fairly, in all material respects, the financial position, the results of operations and
the cash flows in accordance with International Financial Reporting Standards (IFRS). Page 246

36. The Management Discussion and Analysis gives us an overview of all the activities of the
Corporation, and its future strategies for sustainable growth. It starts with an overview of the
Group in general. Novartis corporation is organized into four global operating divisions:
Pharmaceuticals, Vaccines and diagnostics, Sandoz (Generics) and Consumer health. Novartis is
the only pharmaceutical company to have leadership position in each of these areas. To continue
to have it they are investing heavily on innovation, and strategically expanding the portfolio
through what they call” targeted acquisitions” as an example the purchase in 2009 of EBEWE
Pharma`s generic inject able business in the Sandoz division creating a global growth platform
and world leader in inject able cancer medicines. The results from continuing operations, and
the underlying double digit expansion in pharmaceuticals led the Group`s healthcare portfolio in
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2009 to another year of record results. Net sales rose 7% to $44.3 billion, Operating income
grew 11% to $10.0 billion Net income rose 4% to $8.5 billion and basic EPS was up 3% to
$3.70. The corporation is based in Basel, Switzerland, the group employs approximately
100,000 people worldwide. In the healthcare business and more in particular Novartis there are
factors that influence the Group`s results negatively, the growing burden of health care costs as a
percentage of the gross domestic product in many countries has led governments and payers to
focus to control spending through the use of Generics and more preventive medicine. At the
same time, investment costs in R&D have risen dramatically in part due to more scrutiny by the
agencies (e.g. FDA) and better informed patients. Management thinks that the fundamental
drivers for the expansion of the business remain stronger. The aging population age 65 and older
represents a big percentage of the world population and the need for medicine is rising
proportional with the older population, Novartis is well positioned with its portfolio that could
provide strong benefits for the older population. Also the emerging markets are growing faster
than developed countries, due mainly to government price controls, tougher regulations and
successful patent challenges and expirations for many top medicines in the developed countries.
That gives the pharmaceutical industry a great opportunity for expansion and economic growth.
Novartis is investing heavily on these markets specially in China, India, Brazil, Russia, South
Korea and Turkey as a result in 2009 the group generated $4.0 billion which was 9% of the total
net sales for the Group. Following the sustained growth strategy for the future Novartis made
several acquisitions and investments during 2009 such as EBEWE Pharma a specialty generics
injectables business, Zhejiang Tianyuan Bio-pharmaceuticals in China as part of a strategy to
became the leader for vaccines in the Chinese market and Corthera inc., in the USA gaining fast
assess to new compounds and worldwide rights to Relaxin for the treatment of acute heart
failure. Novartis enter into another significant transactions such as issuance of bonds in Euros
(1.5 billion) and in dollars ($5 billion).

37. Comment 28 through 36

VII. Summary and conclusion

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