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Form 6-K NOVARTIS AG For: Sep 30

October 22, 2019 8:09 AM EDT



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 6-K
 
 
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 or 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
 
 
Report on Form 6-K dated October 22, 2019
(Commission File No. 1-15024)
 

 
Novartis AG
(Name of Registrant)
 
 
Lichtstrasse 35
4056 Basel
Switzerland
(Address of Principal Executive Offices)
 


 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
 
Form 20-F: x
   
Form 40-F: o
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
 
Yes: o
   
No: x
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
 
Yes: o
   
No: x
 
Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
 
Yes: o
   
No: x
 

 




SIGNATURES
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
Novartis AG
   
     
Date: October 22, 2019
By:
/s/ PAUL PENEPENT
     
 
Name:
Paul Penepent
 
Title:
Head Group Financial Reporting and Accounting
       
 

 
 
 
 
 
 
 
Novartis International AG
Novartis Global Communications
CH-4002 Basel
Switzerland
 
https://www.novartis.com
 
 
 
FINANCIAL RESULTS   •   RÉSULTATS FINANCIERS   •   FINANZERGEBNISSE

Novartis delivered another strong quarter with double digit sales growth and core1 margin expansion; 2019 sales and profit guidance raised; Beovu launched in US

·
Continuing operations2 net sales up 13% (cc1, +10% USD) driven by:
o
Cosentyx sales of USD 937 million (+27% cc), with strong demand across indications and regions
o
Entresto USD 430 million (+61% cc), with increased demand in hospital and ambulatory settings
o
Zolgensma sales of USD 160 million, strong launch including broad access
o
Lutathera sales grew to USD 119 million, total AAA sales were USD 177 million
o
Piqray sales were USD 43 million, off to a strong start in the US
o
Sandoz sales grew 5% (cc, +3% USD), mainly driven by Biopharmaceuticals
·
Core operating income grew 18% (cc, +15% USD) and Innovative Medicines core margin improved to 34.1% of sales, mainly driven by sales momentum and productivity, while funding growth investments
·
Net income from continuing operations was USD 2.0 billion, up 12% (cc, +8% USD)
·
Free cash flow1 grew 26% to USD 4.0 billion, mainly driven by higher cash flows from operating activities
·
Significant innovation milestones:
o
Beovu (brolucizumab) launched in the US in October for treatment of neovascular (wet) AMD, differentiated based on greater fluid reduction and potential for fewer injections
o
Ofatumumab treatment for RMS showed compelling efficacy across all major clinical endpoints in two pivotal Phase III trials. Rolling regulatory submissions planned to start in Q4
o
Cosentyx met primary endpoints in nr-axSpA at weeks 16 and 52 (PREVENT study); submitted to EMA, FDA submission planned for Q4
o
Kisqali showed overall survival (OS) benefit in postmenopausal women (MONALEESA-3), and is now the only CDK4/6 to show an OS benefit in two trials and in pre and post-menopausal women
o
Entresto PARAGON showed clinically important benefit in HFpEF subpopulations, planned to submit to FDA in Q4 for inclusion of data in the label
·
2019 guidance increased for new focused medicines company3 - sales expected to grow high single digit (cc), core operating income expected to grow mid to high teens (cc)
Basel, October 22, 2019 — Commenting on the results, Vas Narasimhan, CEO of Novartis, said:
“Novartis continued its excellent performance this quarter with double digit increases in sales and core operating income with growing margins. We increased our full year sales and core operating income guidance with growth continuing in both Innovative Medicines and Sandoz. Zolgensma and Piqray launched with strong momentum and Beovu just launched with a clearly differentiated label. We also continue our innovation performance with a number of positive milestones highlighted by Ofatumumab’s remarkable efficacy in RMS with the potential to be the first self-administered, subcutaneous, B-cell therapy.”
 
   
Continuing operations2
       
Key figures1
   
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Net sales
   
12 172
     
11 016
     
10
     
13
     
35 042
     
33 270
     
5
     
9
 
Operating income
   
2 358
     
2 239
     
5
     
9
     
7 263
     
7 041
     
3
     
10
 
Net income
   
2 041
     
1 882
     
8
     
12
     
6 018
     
11 580
     
-48
     
-45
 
EPS (USD)
   
0.90
     
0.81
     
11
     
14
     
2.62
     
4.99
     
-47
     
-44
 
Free cash flow
   
3 968
     
3 156
     
26
             
9 449
     
8 343
     
13
         
Core operating income
   
3 748
     
3 258
     
15
     
18
     
10 650
     
9 445
     
13
     
18
 
Core net income
   
3 212
     
2 820
     
14
     
17
     
9 119
     
8 239
     
11
     
16
 
Core EPS (USD)
   
1.41
     
1.22
     
16
     
19
     
3.97
     
3.55
     
12
     
17
 
 
1Constant currencies (cc), core results and free cash flow are non-IFRS measures. An explanation of non-IFRS measures can be found on page 56 of the Condensed Interim Financial Report. Unless otherwise noted, all growth rates in this Release refer to same period in prior year. 2Refers to continuing operations as defined on page 44 of the Condensed Interim Financial Report, excludes Alcon, includes the businesses of Innovative Medicines and Sandoz (including the US generic oral solids and dermatology portfolio), as well as the continuing corporate functions. 3 Removes Alcon and the Sandoz US dermatology and oral solids portfolio from both 2019 and 2018. Forecast assumption that no Gilenya generics enter in 2019 in the US.
 
 
1
 

Financials

In order to comply with International Financial Reporting Standards (IFRS), Novartis has separated the Group’s reported financial data for the current and prior years into “continuing” and “discontinued” operations. The results of the Alcon business are reported as discontinued operations. See page 44 and Notes 2, 3 and 11 in the Condensed Interim Financial Report for a full explanation.

The commentary below focuses on continuing operations including the businesses of Innovative Medicines and Sandoz (including the US generic oral solids and dermatology portfolio), as well as the continuing Corporate functions. We also provide information on discontinued operations.

Continuing operations third quarter

Net sales were USD 12.2 billion (+10%, +13% cc) in the third quarter driven by volume growth of 16 percentage points (cc), mainly from Cosentyx, Entresto, Zolgensma and the Xiidra acquisition. Strong volume growth was partly offset by the negative impacts of pricing (-2 percentage points cc) and generic competition (-1 percentage point cc).

Operating income was USD 2.4 billion (+5%, +9% cc) mainly driven by higher sales and productivity, partly offset by growth investments, lower divestments and higher amortization.

Net income was USD 2.0 billion (+8%, +12% cc) driven by higher operating income and higher income from associated companies. EPS was USD 0.90 (+11%, +14% cc), growing faster than net income driven by lower weighted average number of shares outstanding.

Core operating income was USD 3.7 billion (+15%, +18% cc) mainly driven by higher sales and productivity programs, partly offset by growth investments. Core operating income margin was 30.8% of net sales, increasing by 1.2 percentage points (+1.4 percentage points cc).

Core net income was USD 3.2 billion (+14%, +17% cc) driven by growth in core operating income. Core EPS was USD 1.41 (+16%, +19% cc) growing faster than core net income driven by lower weighted average number of shares outstanding.

Free cash flow from continuing operations amounted to USD 4.0 billion (+26% USD) compared to USD 3.2 billion in prior year, mainly driven by higher net cash flows from operating activities.

Innovative Medicines net sales were USD 9.7 billion (+13%, +15% cc) in the third quarter. Pharmaceuticals BU sales grew 15% (cc), driven by continuing momentum on Cosentyx and Entresto and the benefit from the first full quarter of sales from Zolgensma and Xiidra. Oncology BU grew 14% (cc) driven by continuing momentum on Promacta/Revolade, Tafinlar + Mekinist and Kisqali and the benefit from launches including, Lutathera, Kymriah and Piqray. Volume contributed 17 percentage points to sales growth. Generic competition had a negative impact of 1 percentage point. Net pricing had a negative impact of 1 percentage point.

Sandoz net sales were USD 2.5 billion (+3%, +5% cc) driven by volume growth of 9 percentage points (cc) partially offset by 4 percentage points (cc) of price erosion. Excluding the US, net sales grew 7% (cc) driven by Biopharmaceuticals in Europe. US sales were broadly in line with prior year as the continued industry-wide pricing pressure was mostly offset by first-to-market retail launches.

Novartis continues to expect the previously-announced divestment of the Sandoz US oral solids and dermatology portfolio to be completed in the coming months, pending regulatory approval. Novartis remains fully committed to this business until it is divested to Aurobindo. The results of this business are included in continuing operations.

Continuing operations nine months

Net sales were USD 35.0 billion (+5%, +9% cc) in the first nine months driven by volume growth of 12 percentage points (cc), mainly from Cosentyx, Entresto and Lutathera. Strong volume growth was partly offset by the negative impacts of pricing (-2 percentage points cc) and generic competition (-1 percentage point cc).
 
2
 

Operating income was USD 7.3 billion (+3%, +10% cc) mainly driven by higher sales, improved gross margin and productivity programs, partly offset by growth investments, legal provisions and higher restructuring charges.

Net income was USD 6.0 billion (-48%, -45% cc) as prior year benefited from a USD 5.7 billion net gain recognized from the sale of our stake in the GSK consumer healthcare joint venture. EPS was USD 2.62 (-47%, -44% cc) benefitting from lower weighted average number of shares outstanding.

Core operating income was USD 10.7 billion (+13%, +18% cc) mainly driven by higher sales, improved gross margin and productivity programs, partly offset by growth investments. Core operating income margin was 30.4% of net sales, increasing by 2.0 percentage points (+2.4 percentage points cc).

Core net income was USD 9.1 billion (+11%, +16% cc) driven by growth in core operating income partly offset by the discontinuation of core income from the GSK consumer healthcare joint venture. Core EPS was USD 3.97 (+12%, +17% cc) growing faster than core net income driven by lower weighted average number of shares outstanding.

Free cash flow from continuing operations amounted to USD 9.4 billion (+13% USD) compared to USD 8.3 billion in prior year. The increase is mainly driven by higher operating income adjusted for non-cash items and higher real estate divestment proceeds, partly offset by higher working capital, which in prior year included the receipt of a GSK sales milestone from the divested Vaccines business of USD 0.4 billion, and lower dividends received from associated companies, as prior year included the GSK consumer healthcare joint venture which was divested in Q2 2018.

Innovative Medicines delivered net sales of USD 27.8 billion (+7%, +11% cc) in the first nine months. Pharmaceuticals BU grew 12% (cc) driven by Cosentyx reaching USD 2.6 billion and Entresto USD 1.2 billion. Oncology BU grew 11% (cc) driven by AAA including Lutathera, as well as Promacta/Revolade, Tafinlar + Mekinist and Kisqali. Volume contributed 13 percentage points to sales growth. Generic competition had a negative impact of 1 percentage point. Net pricing had a negative impact of 1 percentage point.

Sandoz net sales were USD 7.2 billion (-2%, +2% cc) driven by volume growth of 9 percentage points (cc) partially offset by 7 percentage points (cc) of price erosion, mainly in the US. Excluding the US, net sales grew 6% (cc). Global sales of Biopharmaceuticals grew 18% (cc), driven by continued strong double-digit growth in Europe from Hyrimoz (adalimumab), Rixathon (rituximab), and Erelzi (etanercept).

Discontinued operations
Discontinued operations include the business of Alcon and certain Corporate costs directly attributable to Alcon up to the spin-off date. As the Alcon spin-off was completed on April 9, 2019, there were no operating results in the third quarter of 2019.

Discontinued operations net sales in the first nine months of 2019 were USD 1.8 billion compared to USD 5.4 billion in 2018 and operating income amounted to USD 71 million compared to an operating loss of USD 171 million in 2018. Net income from discontinued operations in the first nine months of 2019 amounted to USD 4.6 billion compared to a net loss of USD 160 million in 2018 driven by the non-taxable non-cash net gain on distribution of Alcon Inc. to Novartis AG shareholders which amounted to USD 4.7 billion. For further details see Note 3 of the Condensed Interim Financial Report, “Significant transactions – Completion of the spin-off of the Alcon business through a dividend in kind distribution to Novartis AG shareholders”.      

Total Group third quarter

For the total Group, net income amounted to USD 2.0 billion compared to USD 1.6 billion in prior year, and basic earnings per share was USD 0.90 compared to USD 0.70 in prior year. Cash flow from operating activities for the total Group amounted to USD 4.6 billion and free cash flow to USD 4.0 billion.

Total Group nine months

For the total Group, net income amounted to USD 10.6 billion compared to USD 11.4 billion in prior year, and basic earnings per share was USD 4.62 compared to USD 4.92 in prior year. Cash flow from operating activities for the total Group amounted to USD 10.1 billion and free cash flow to USD 9.4 billion.
 
3
 

Key growth drivers (Q3 performance)
Underpinning our financial results in the third quarter is a continued focus on key growth drivers including:
·
Cosentyx (USD 937 million, +27% cc) continued momentum in the US (+31%) and in the rest of the world (+20% cc), driven by strong demand across indications and regions and strong first line access in all three indications.
·
Entresto (USD 430 million, +61% cc) continued strong momentum fueled by increased demand in both hospital and ambulatory settings across regions.
·
Zolgensma (USD 160 million) since its US launch, Zolgensma has been used to treat patients ranging in age from less than one month to two years old including all types of SMA. To date plans are in place covering ~90% of commercial patients and ~30% of Medicaid patients.
·
Lutathera (USD 119 million, +116% cc) continued to grow led by the US, with over 160 centers actively treating patients, and ongoing launches in EU. Sales from all AAA brands were USD 177 million.
·
Promacta/Revolade (USD 380 million, +31% cc) continued to grow at a strong double-digit rate across all regions driven by increased use in chronic immune thrombocytopenia (ITP) and further uptake as first-line treatment for severe aplastic anemia (SAA) in the US and Japan.
·
Tafinlar + Mekinist (USD 345 million, +22% cc) continued strong double-digit growth due to demand in metastatic and adjuvant melanoma as well as NSCLC, with ongoing uptake of the adjuvant melanoma indication in Europe.
·
Jakavi (USD 279 million, +17% cc) continued double-digit growth across all regions driven by demand in the myelofibrosis and polycythemia vera indications.
·
Kisqali (USD 123 million, +76% cc) showed strong growth driven by use in metastatic breast cancer patients, independent of menopausal status or combination partner.
·
Piqray (USD 43 million) US launch progressed well. Piqray is the first and only treatment for patients with a PIK3CA mutation in HR+/HER2- advanced breast cancer.
·
Kymriah (USD 79 million) strong demand continued and sales increased primarily driven by ongoing uptake in the US and Europe. There are over 160 qualified treatment centers and more than 20 countries worldwide that have coverage for at least one indication.
·
Mayzent (USD 4 million) launch is progressing and efforts are ongoing to improve patient on-boarding which was slower due to the special needs of this population.
·
Biopharmaceuticals (biosimilars, biopharmaceutical contract manufacturing and Glatopa) Global sales of Biopharmaceuticals grew 27% (cc), driven by continued strong double-digit growth in Europe from Rixathon (rituximab), Hyrimoz (adalimumab) and Erelzi (etanercept).
·
Emerging Growth Markets, which comprise all markets except the US, Canada, Western Europe, Japan, Australia and New Zealand, sales grew 10% in cc (+7% in USD), mainly driven by double digit growth (cc) in China.
Net sales of the top 20 Innovative Medicines products in 9M 2019
     Q3 2019    
% change
    9M 2019    
% change
 
   
USD m
   
USD
   
cc
   
USD m
   
USD
   
cc
 
Cosentyx
   
937
     
25
     
27
     
2 586
     
27
     
30
 
Gilenya
   
829
     
1
     
3
     
2 420
     
-3
     
0
 
Lucentis
   
500
     
2
     
5
     
1 569
     
3
     
8
 
Tasigna
   
487
     
10
     
11
     
1 389
     
-1
     
2
 
Entresto
   
430
     
59
     
61
     
1 208
     
70
     
75
 
Sandostatin
   
388
     
0
     
1
     
1 183
     
0
     
2
 
Afinitor/Votubia
   
400
     
7
     
8
     
1 174
     
1
     
4
 
Promacta/Revolade
   
380
     
29
     
31
     
1 036
     
23
     
26
 
Tafinlar + Mekinist
   
345
     
19
     
22
     
982
     
17
     
22
 
Galvus Group
   
320
     
4
     
5
     
955
     
0
     
5
 
Gleevec/Glivec
   
320
     
-16
     
-14
     
950
     
-20
     
-17
 
Xolair
   
299
     
17
     
22
     
870
     
13
     
20
 
Jakavi
   
279
     
13
     
17
     
821
     
14
     
21
 
Diovan Group
   
254
     
0
     
3
     
798
     
5
     
11
 
Exforge Group
   
249
     
-2
     
2
     
780
     
4
     
10
 
Exjade/Jadenu
   
253
     
-4
     
-2
     
744
     
-8
     
-6
 
Votrient
   
198
     
1
     
2
     
578
     
-8
     
-5
 
Ilaris
   
177
     
26
     
27
     
493
     
24
     
28
 
Zortress/Certican
   
122
     
2
     
5
     
362
     
5
     
10
 
Lutathera
   
119
     
113
     
116
     
334
     
288
     
287
 
Top 20 products total
   
7 286
     
10
     
13
     
21 232
     
8
     
12
 
 
4
 

Strengthen R&D - Key developments from the third quarter
New approvals and regulatory update
·
Beovu (brolucizumab, formerly RTH258) was launched in the US following FDA approval in October, offering neovascular (wet) AMD patients vision gains and greater fluid reductions vs aflibercept. Beovu demonstrated greater reductions in central subfield thickness, a key indicator of fluid in the retina. Beovu is the only anti-VEGF in wet AMD recommended to maintain eligible patients on up to three-month dosing intervals immediately after the loading phase with no compromise in efficacy.
·
Entresto was approved by FDA for the treatment of symptomatic heart failure with systemic left ventricular systolic dysfunction in children aged 1 year and older.
·
Gilenya was approved in China for relapsing forms of multiple sclerosis (RMS) for adults and children 10 years and older. MS is categorized as rare disease in China with an estimated 30,000 patients.
Regulatory submissions and filings
·
Capmatinib (INC280) was granted FDA Breakthrough Therapy Designation as a first-line treatment for patients with metastatic MET exon14 skipping-mutated non-small cell lung cancer (NSCLC). Novartis plans to file with FDA in Q4.
Results from ongoing trials and other highlights
·
Ofatumumab (OMB157) is a subcutaneous, potent, fully-human monoclonal antibody targeting CD20 positive B-cells, delivering remarkable efficacy with a favorable safety profile. RMS patients on ofatumumab had a reduction in annualized relapse rate of 50.5% (0.11 vs. 0.22) and 58.5% (0.10 vs. 0.25) compared to teriflunomide in two head-to-head Phase III RMS studies (ASCLEPIOS I and II). Ofatumumab also showed significant reductions in 3 and 6 month confirmed disability worsening and acute focal MRI activity versus teriflunomide. These data will form the bases of rolling submissions planned to start in Q4.
·
Cosentyx PREVENT trial in patients with active non-radiographic axial spondyloarthritis (nr-axSpA) met both 16-week and 52-week primary endpoints of ASAS40. Novartis has submitted the data to EMA and plans to submit to the FDA. If approved, Nr-axSpA would be the fourth indication for Cosentyx.
·
Kisqali MONALEESA-3 overall survival data were presented at ESMO in postmenopausal women with HR+/HER2- advanced breast cancer. This follows positive OS data from MONALEESA-7 in pre-menopausal women presented at ASCO in June. OS benefit proven with multiple combination partners and the largest number of patients, including post-, pre- and peri-menopausal patients.
·
QVM149 and QMF149 positive Phase III results announced showing statistically significant improvement in lung function. Filed with EMA in Q2 2019 and in Japan in Q3 2019.
·
Entresto data from PARAGON-HF trial in HFpEF patients showed Entresto reduced the composite primary endpoint of total (first and recurrent) heart failure hospitalizations and CV death by 13% versus valsartan, although narrowly missed statistical significance. The full body of evidence from the trial suggests that treatment with Entresto may result in clinically important benefits in particular subgroups. We plan to submit to FDA in Q4 for inclusion of data in the label. Results from PROVE-HF trial show significant improvements in measures of cardiac remodeling at six months and one year in HFrEF patients; EVALUATE-HF results complement findings.
·
Zolgensma new data were presented at EPNS continuing to show significant therapeutic benefit in prolonging event-free survival now up to 5 years of age in patients with SMA type I. Data from the STRONG trial in SMA type II patients was presented at WMS showing a mean increase of 5.9 points from baseline in HFMSE scores in patients 2 to 5 years of age following treatment with AVXS-101 IT, nearly double the clinically meaningful threshold. Zolgensma is currently under regulatory review in Europe with an anticipated CHMP decision in Q1 2020 and in Japan with anticipated decision in H1 2020.
·
Fevipiprant (QAW039) ZEAL 1 and 2 trials did not meet the primary efficacy endpoint of FEV1 improvement in moderate asthmatic patients. The safety profile was confirmed as clean and placebo like. LUSTER 1 and 2 exacerbation trials in moderate to severe asthmatic patients are the core registration trials and are on track to read out in Q1 2020.
·
Mayzent new post hoc statistical analysis of the pivotal EXPAND study at ECTRIMS showed that Mayzent can help patients keep their mobility (i.e. reduced time to wheel-chair) for over four years longer on average. Further analyses demonstrate Mayzent significantly reduced grey matter volume loss at one and two years, a key driver of disability progression and cognitive decline in patients with SPMS.
·
Aimovig data confirmed long-term efficacy and safety for majority of patients with episodic migraine. 4.5-year data show 77% of patients who continued on treatment experienced at least a 50%
 
5
 

 
reduction in monthly migraine days. Moreover, 33% of patients who continued on treatment achieved a 100% reduction, and 56% achieved a 75% decrease.
·
Sandoz biosimilar natalizumab worldwide agreement with Polpharma Biologics gives Sandoz commercialization rights for RRMS. Natalizumab is the fifth proposed biosimilar in-licensed by Sandoz in the last year, underscoring commitment to further grow pipeline through collaborations.

Capital structure and net debt
Retaining a good balance between investment in the business, a strong capital structure and attractive shareholder returns remains a priority.

In Q3 2019, the up to USD 5 billion share buyback was completed with a total of 55.8 million shares for USD 5.0 billion repurchased since the announcement in June 2018.

During the first nine months of 2019, Novartis repurchased a total of 60.3 million shares for USD 5.4 billion on the SIX Swiss Exchange second trading line, including 46.5 million shares (USD 4.2 billion) bought back under the up to USD 5 billion share buyback and 13.8 million shares (USD 1.1 billion) to mitigate dilution related to participation plans of associates. In addition, 1.7 million shares (USD 0.2 billion) were repurchased from associates. In the same period, 15.4 million shares (for an equity value of USD 0.9 billion) were delivered as a result of options exercised and share deliveries related to participation plans of associates. Consequently, the total number of shares outstanding decreased by 46.6 million versus December 31, 2018. These treasury share transactions resulted in a decrease in equity of USD 4.6 billion and a net cash outflow of USD 5.3 billion.

As of September 30, 2019, net debt increased by USD 3.2 billion to USD 19.4 billion versus December 31, 2018. The increase was mainly driven by the USD 6.6 billion annual dividend payment, net cash outflow for treasury share transactions of USD 5.3 billion and M&A transactions of USD 3.8 billion (mainly the Xiidra acquisition), partly offset by USD 9.4 billion free cash flow from continuing operations during the nine months of 2019 and USD 2.9 billion net inflows related to the Alcon spin-off.

As of Q3 2019, the long-term credit rating for the company is A1 with Moody’s Investors Service and AA- with S&P Global Ratings.

2019 Outlook

Barring unforeseen events

New focused medicines company guidance
Excluding Alcon and the Sandoz US oral solids and dermatology business from both 2018 and 2019
·
Net sales revised upwards: expected to grow high-single digit (cc).
·
From a divisional perspective, we expect net sales performance (cc) in 2019 to be as follows:
o
Innovative Medicines revised upwards: grow high-single digit to low double digit
o
Sandoz revised upwards: grow low-single digit
·
Core operating income revised upwards: expected to grow mid to high-teens (cc).

The guidance above includes the forecast assumption that no Gilenya generics enter in 2019 in the US.

Foreign Exchange impact
If mid-October exchange rates prevail for the remainder of 2019, the currency impact for the year would be negative 3 percentage points on net sales and negative 5 percentage points on core operating income. The estimated impact of exchange rates on our results is provided monthly on our website.
 
 
Nomination for election to the Board of Directors
The Novartis Board of Directors announced today that it is nominating Dr. Simon Moroney, for election to the Board at the Annual General Meeting on February 28, 2020. Dr. Moroney is one of the co-founders of the Germany-based biotechnology company Morphosys and served as it’s CEO until September 1, 2019. Prior to founding Morphosys, Dr.Moroney held several senior academic positions at the University of Cambridge, U.K., University of British Columbia, Canada and ETH in Switzerland.  He also worked at the Harvard Medical School in the United States and was part of the team at US-based ImmunoGen Inc that pioneered the first generation of anti-cancer antibody conjugates. Dr. Moroney’s deep scientific knowledge as well as his experience leading and building a biotechnology company will strengthen the Board’s scientific leadership expertise.  

 
6
 

Continuing operations 1
   
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Net sales
   
12 172
     
11 016
     
10
     
13
     
35 042
     
33 270
     
5
     
9
 
Operating income
   
2 358
     
2 239
     
5
     
9
     
7 263
     
7 041
     
3
     
10
 
As a % of sales
   
19.4
     
20.3
                     
20.7
     
21.2
                 
Core operating income
   
3 748
     
3 258
     
15
     
18
     
10 650
     
9 445
     
13
     
18
 
As a % of sales
   
30.8
     
29.6
                     
30.4
     
28.4
                 
Net income
   
2 041
     
1 882
     
8
     
12
     
6 018
     
11 580
     
-48
     
-45
 
EPS (USD)
   
0.90
     
0.81
     
11
     
14
     
2.62
     
4.99
     
-47
     
-44
 
Core net income
   
3 212
     
2 820
     
14
     
17
     
9 119
     
8 239
     
11
     
16
 
Core EPS (USD)
   
1.41
     
1.22
     
16
     
19
     
3.97
     
3.55
     
12
     
17
 
Cash flows from operating activities
   
4 562
     
3 720
     
23
             
10 007
     
9 613
     
4
         
Free cash flow
   
3 968
     
3 156
     
26
             
9 449
     
8 343
     
13
         
 
Innovative Medicines
   
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Net sales
   
9 688
     
8 596
     
13
     
15
     
27 794
     
25 870
     
7
     
11
 
Operating income
   
2 404
     
2 184
     
10
     
13
     
7 077
     
6 571
     
8
     
14
 
As a % of sales
   
24.8
     
25.4
                     
25.5
     
25.4
                 
Core operating income
   
3 300
     
2 897
     
14
     
16
     
9 528
     
8 382
     
14
     
19
 
As a % of sales
   
34.1
     
33.7
                     
34.3
     
32.4
                 
 
Sandoz
   
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Net sales
   
2 484
     
2 420
     
3
     
5
     
7 248
     
7 400
     
-2
     
2
 
Operating income
   
191
     
358
     
-47
     
-42
     
746
     
1 095
     
-32
     
-25
 
As a % of sales
   
7.7
     
14.8
                     
10.3
     
14.8
                 
Core operating income
   
615
     
541
     
14
     
18
     
1 577
     
1 520
     
4
     
10
 
As a % of sales
   
24.8
     
22.4
                     
21.8
     
20.5
                 
 
Corporate
   
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Operating loss
   
-237
     
-303
     
22
     
21
     
-560
     
-625
     
10
     
8
 
Core operating loss
   
-167
     
-180
     
7
     
6
     
-455
     
-457
     
0
     
-2
 
                                                                 
Discontinued operations 2
   
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Net sales
           
1 763
                     
1 777
     
5 361
   
nm
   
nm
 
Operating  income / loss
           
- 300
                     
71
     
- 171
   
nm
   
nm
 
As a % of sales
           
-17.0
                     
4.0
     
-3.2
                 
Core operating income
           
297
                     
350
     
991
   
nm
   
nm
 
As a % of sales
           
16.8
                     
19.7
     
18.5
                 
Net income / loss
           
- 258
                     
4 590
     
- 160
   
nm
   
nm
 
 
Total Group
   
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Net income
   
2 041
     
1 624
     
26
     
30
     
10 608
     
11 420
     
-7
     
-3
 
EPS (USD)
   
0.90
     
0.70
     
29
     
32
     
4.62
     
4.92
     
-6
     
-2
 
Core net income
   
3 212
     
3 064
     
5
     
7
     
9 397
     
9 057
     
4
     
9
 
Core EPS (USD)
   
1.41
     
1.32
     
7
     
9
     
4.09
     
3.90
     
5
     
10
 
Cash flows from operating activities
   
4 562
     
4 050
     
13
             
10 085
     
10 506
     
-4
         
Free cash flow
   
3 968
     
3 301
     
20
             
9 387
     
8 778
     
7
         
nm = not meaningful
                                                               
1 Continuing operations include the businesses of Innovative Medicines and Sandoz Division including the US generic oral solids and dermatology portfolio and Corporate activities. See page 44 of the Condensed Interim Financial Report for full explanation
 
2 Discontinued operations include the business of Alcon. Net income of discontinued operations for 9M 2019 includes a USD 4.7 billion gain on distribution of Alcon Inc. to Novartis AG shareholders. See page 44 and Notes 2, 3 and 11 of the Condensed Interim Financial Report for full explanation
 


Detailed financial results accompanying this press release are included in the Condensed Interim Financial Report at the link below:
https://ml-eu.globenewswire.com/Resource/download/54b44cbc-188b-48a6-bf59-7a844c1bcd87/
 
7
 

Disclaimer
This press release contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, that can generally be identified by words such as “guidance,” “launched,” “launching,” “strong start,” “momentum,” “growth investments,” “compelling,” “submissions,” “starting,” “submitted,” “submission,” “planned,” “focused,” “expected,” “to grow,” “continued,” “continuing,” “continue,” “potential,” “growing,” “launches,” “continues,” “expect,” “to be completed,” “pending,” “closing conditions,” “committed,” “growth drivers,” “launch,” “to date,” “ongoing,” “filings,” “Breakthrough Therapy Designation,” “delivering,” “will,” “plans,” “to submit,” “suggests,” “may,” “would,” “proposed,” “commitment,” “pipeline,” “priority,” “outlook,” “unforeseen,” “forecast,” “enter,” “to deliver,” “priority review,” “enrollment,” “filed,” “transformative,” “Orphan Drug designation,” “upcoming,” “on track,” “future,” “strategy,” “Fast Track designation,” “Orphan designation,” “Orphan status,” “resubmitted,” “potentially,” “anticipated,” “as early as possible,” “PRIME designation,” “Sakigake designation,” “underway,” “increasing,” “in the coming months,” or similar expressions, or by express or implied discussions regarding potential new products, potential new indications for existing products, potential product launches, or regarding potential future revenues from any such products; or regarding the potential outcome, or financial or other impact on Novartis, of the proposed divestiture of certain portions of our Sandoz Division business in the US; or regarding the potential impact of the completion of the up to USD 5 billion share buyback; or regarding potential future sales or earnings of the Group or any of its divisions or potential shareholder returns; or by discussions of strategy, plans, expectations or intentions. Such forward-looking statements are based on the current beliefs and expectations of management regarding future events, and are subject to significant known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those set forth in the forward-looking statements. You should not place undue reliance on these statements. In particular, our expectations could be affected by, among other things: global trends toward healthcare cost containment, including ongoing government, payor and general public pricing and reimbursement pressures and requirements for increased pricing transparency; regulatory actions or delays or government regulation generally, including potential regulatory actions or delays with respect to the proposed transactions or the development of the products described in this press release; the potential that the proposed divestiture of certain portions of our Sandoz Division business in the US may not be completed in the expected time frame, or at all; the potential that the strategic benefits, synergies or opportunities expected from the proposed divestiture of certain portions of our Sandoz Division business in the US, and other transactions described, may not be realized or may be more difficult or take longer to realize than expected; the inherent uncertainties involved in predicting shareholder returns; the uncertainties inherent in the research and development of new healthcare products, including clinical trial results and additional analysis of existing clinical data; our ability to obtain or maintain proprietary intellectual property protection, including the ultimate extent of the impact on Novartis of the loss of patent protection and exclusivity on key products that commenced in prior years and will continue this year; safety, quality or manufacturing issues; uncertainties involved in the development or adoption of potentially transformational technologies and business models; uncertainties regarding actual or potential legal proceedings, including, among others, product liability litigation, disputes and litigation with business partners or business collaborators, government investigations generally, litigation and investigations regarding sales and marketing practices, and intellectual property disputes; our performance on environmental, social and governance measures; general political, economic and trade conditions, including uncertainties regarding the effects of ongoing instability in various parts of the world; uncertainties regarding future global exchange rates; uncertainties regarding future demand for our products; uncertainties regarding potential significant breaches of data security or data privacy, or disruptions of our information technology systems; and other risks and factors referred to in Novartis AG’s current Form 20-F on file with the US Securities and Exchange Commission. Novartis is providing the information in this press release as of this date and does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise.

All product names appearing in italics are trademarks owned by or licensed to Novartis Group companies.
 
8
 

About Novartis
Novartis is reimagining medicine to improve and extend people’s lives. As a leading global medicines company, we use innovative science and digital technologies to create transformative treatments in areas of great medical need. In our quest to find new medicines, we consistently rank among the world’s top companies investing in research and development. Novartis products reach more than 750 million people globally and we are finding innovative ways to expand access to our latest treatments. About 109,000 people of more than 140 nationalities work at Novartis around the world. Find out more at. www.novartis.com

Novartis will conduct a conference call with investors to discuss this news release today at 14:00 Central European time and 8:00 Eastern Time. A simultaneous webcast of the call for investors and other interested parties may be accessed by visiting the Novartis website. A replay will be available after the live webcast by visiting.
https://www.novartis.com/investors/event-calendar

Detailed financial results accompanying this press release are included in the condensed interim financial report at the link below. Additional information is provided on Novartis divisions and pipeline of selected compounds in late stage development and a copy of today's earnings call presentation can be found at.
https://www.novartis.com/investors/event-calendar
 
Important dates
 
December 5, 2019 
R&D update 2019 – London
January 29, 2020  
Fourth quarter and Full Year results 2019 
April 28, 2020 
First quarter results 2020
July 21, 2020 
Second quarter results 2020
October 27, 2020 
Third quarter results 2020
 
9
 

 
 
 
 
 
 
 
Novartis International AG
Novartis Global
Communications
CH-4002 Basel
Switzerland
 
https://www.novartis.com
 
 
 
 
CONDENSED INTERIM FINANCIAL REPORT – SUPPLEMENTARY DATA

Novartis Q3 and 9M 2019 Condensed Interim Financial Report – Supplementary Data

INDEX
Page
GROUP AND DIVISIONAL OPERATING PERFORMANCE Q3 and 9M 2019
 
Group
2
Innovative Medicines
6
Sandoz
12
CASH FLOW AND GROUP BALANCE SHEET
14
INNOVATION REVIEW
17
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
Consolidated income statements
20
Consolidated statements of comprehensive income
22
Consolidated balance sheets
24
Consolidated statements of changes in equity
25
Consolidated statements of cash flows
28
Notes to condensed interim consolidated financial statements, including update on legal proceedings
30
SUPPLEMENTARY INFORMATION
56
CORE RESULTS
 
Reconciliation from IFRS to core results
58
Group
60
Innovative Medicines
62
Sandoz
64
Corporate
66
Discontinued operations
68
ADDITIONAL INFORMATION
 
Income from associated companies
70
Condensed consolidated changes in net debt / Share information
71
Free cash flow
72
Currency translation rates
74
DISCLAIMER
75


1
 

Novartis Q3 and 9M 2019 Condensed Interim Financial Report – Supplementary Data

Key figures1
   
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc 2
   
 
USD m    
USD m
   
USD
   
cc 2
 
Net sales to third parties from continuing operations
   
12 172
     
11 016
     
10
     
13
     
35 042
     
33 270
     
5
     
9
 
Divisional operating income from continuing operations
   
2 595
     
2 542
     
2
     
5
     
7 823
     
7 666
     
2
     
9
 
Corporate income and expense, from continuing operations, net
   
- 237
     
- 303
     
22
     
21
     
- 560
     
- 625
     
10
     
8
 
Operating income from continuing operations
   
2 358
     
2 239
     
5
     
9
     
7 263
     
7 041
     
3
     
10
 
    As % of net sales
   
19.4
     
20.3
                     
20.7
     
21.2
                 
Income from associated companies
   
253
     
213
     
19
     
19
     
509
     
6 297
   
nm
   
nm
 
Interest expense
   
- 216
     
- 229
     
6
     
5
     
- 647
     
- 684
     
5
     
4
 
Other financial income and expense
   
12
     
28
     
- 57
     
- 33
     
56
     
108
     
- 48
     
- 37
 
Taxes
   
- 366
     
- 369
     
1
     
- 3
     
-1 163
     
-1 182
     
2
     
- 5
 
Net income from continuing operations
   
2 041
     
1 882
     
8
     
12
     
6 018
     
11 580
     
- 48
     
- 45
 
Net loss from discontinued  operations before gain on distribution of Alcon Inc. to Novartis AG shareholders
           
- 258
   
nm
   
nm
     
- 101
     
- 160
   
nm
   
nm
 
Gain on distribution of Alcon Inc. To Novartis AG shareholders
                           
4 691
         
nm
   
nm
 
Net income
   
2 041
     
1 624
     
26
     
30
     
10 608
     
11 420
     
- 7
     
- 3
 
Basic earnings per share from continuing operations (USD)
   
0.90
     
0.81
     
11
     
14
     
2.62
     
4.99
     
- 47
     
-44
 
Basic earnings per share from discontinued operations (USD)
           
-0.11
   
nm
   
nm
     
2.00
     
-0.07
   
nm
   
nm
 
Basic earnings per share (USD)
   
0.90
     
0.70
     
29
     
32
     
4.62
     
4.92
     
- 6
     
-2
 
Cash flows from operating activities from continuing operations
   
4 562
     
3 720
     
23
             
10 007
     
9 613
     
4
         
Free cash flow from continuing operations2
   
3 968
     
3 156
     
26
             
9 449
     
8 343
     
13
         
Core2
                                                               
Core operating income from continuing operations
   
3 748
     
3 258
     
15
     
18
     
10 650
     
9 445
     
13
     
18
 
    As % of net sales
   
30.8
     
29.6
                     
30.4
     
28.4
                 
Core net income from continuing operations
   
3 212
     
2 820
     
14
     
17
     
9 119
     
8 239
     
11
     
16
 
Core net income from discontinued operations
           
244
   
nm
   
nm
     
278
     
818
   
nm
   
nm
 
Core net income
   
3 212
     
3 064
     
5
     
7
     
9 397
     
9 057
     
4
     
9
 
Core basic earnings per share from continuing operations (USD)
   
1.41
     
1.22
     
16
     
19
     
3.97
     
3.55
     
12
     
17
 
Core basic earnings per share from discontinued operations (USD)
           
0.10
   
nm
   
nm
     
0.12
     
0.35
   
nm
   
nm
 
Core basic earnings per share (USD)
   
1.41
     
1.32
     
7
     
9
     
4.09
     
3.90
     
5
     
10
 
nm = not meaningful
1 Continuing operations include the businesses of Innovative Medicines and Sandoz divisions and Corporate activities and discontinued operations include the business of Alcon. See page 44 for full explanation
2 Constant currencies (cc), core results and free cash flow are non-IFRS measures. An explanation of non-IFRS measures can be found on page 56. Unless otherwise noted, all growth rates in this release refer to same period in prior year.

Financials

In order to comply with International Financial Reporting Standards (IFRS), Novartis has separated the Group’s reported financial data for the current and prior years into “continuing” and “discontinued” operations. The results of the Alcon business are reported as discontinued operations. See page 44 and Notes 2, 3 and 11 for a full explanation.

Novartis continues to expect the previously-announced divestment of the Sandoz US oral solids and dermatology portfolio to be completed in the coming months, pending regulatory approval. Novartis remains fully committed to this business until it is divested to Aurobindo. The results of this business are included in continuing operations.

The commentary below focuses on continuing operations including the businesses of Innovative Medicines and Sandoz (including the US generic oral solids and dermatology portfolio), as well as the continuing Corporate functions. We also provide information on discontinued operations.
 
2
 

Continuing operations third quarter

Net sales
Net sales were USD 12.2 billion (+10%, +13% cc) in the third quarter driven by volume growth of 16 percentage points (cc), mainly from Cosentyx, Entresto, Zolgensma and the Xiidra acquisition. Strong volume growth was partly offset by the negative impacts of pricing (-2 percentage points cc) and generic competition (-1 percentage point cc).

Corporate income and expense, net
Corporate income and expense, which includes the cost of Group headquarters and coordination functions, amounted to an expense of USD 237 million in the third quarter compared to USD 303 million in prior year, mainly on account of lower impairment charges from the Novartis Venture Fund financial assets.

Operating income
Operating income was USD 2.4 billion (+5%, +9% cc) mainly driven by higher sales and productivity, partly offset by growth investments, lower divestments and higher amortization. Operating income margin was 19.4% of net sales, decreasing by 0.9 percentage points (-0.7 percentage points cc). Core adjustments amounted to USD 1.4 billion (2018: USD 1.0 billion).

Core operating income was USD 3.7 billion (+15%, +18% cc) mainly driven by higher sales and productivity programs, partly offset by growth investments. Core operating income margin was 30.8% of net sales, increasing by 1.2 percentage points (+1.4 percentage points cc).

Income from associated companies
Income from associated companies increased to USD 253 million from USD 213 million in prior year due to a higher estimated income from Roche Holding AG.

Core income from associated companies increased to USD 313 million from USD 293 million in prior year due to a higher estimated core income contribution from Roche Holding AG.

Interest expense and other financial income/expense
Interest expense decreased to USD 216 million from USD 229 million in prior year, as the decrease in interest expense due to lower outstanding debts more than offset the additional interest expense on lease liabilities of USD 18 million, following the implementation of IFRS 16 Leases as of January 1, 2019.

Other financial income and expense amounted to an income of USD 12 million in the quarter compared to an income of USD 28 million in prior year, mainly due to lower interest income and higher currency losses.

Taxes
The tax rate in the third quarter was 15.2% compared to 16.4% in prior year. The decrease from prior year was mainly the result of a change in profit mix.

The core tax rate for continuing operations was 16.4% compared to 15.8% in prior year, mainly as a result of a change in profit mix.

Net income and EPS
Net income was USD 2.0 billion (+8%, +12% cc) driven by higher operating income and higher income from associated companies. EPS was USD 0.90 (+11%, +14% cc), growing faster than net income driven by lower weighted average number of shares outstanding.

Core net income was USD 3.2 billion (+14%, +17% cc) driven by growth in core operating income. Core EPS was USD 1.41 (+16%, +19% cc) growing faster than core net income driven by lower weighted average number of shares outstanding.

Free cash flow from continuing operations amounted to USD 4.0 billion (+26% USD) compared to USD 3.2 billion in prior year, mainly driven by higher net cash flows from operating activities.
 
3
 

Continuing operations nine months

Net sales
Net sales were USD 35.0 billion (+5%, +9% cc) in the first nine months driven by volume growth of 12 percentage points (cc), mainly from Cosentyx, Entresto and Lutathera. Strong volume growth was partly offset by the negative impacts of pricing (-2 percentage points cc) and generic competition (-1 percentage point cc).

Corporate income and expense, net
Corporate income and expense, which includes the cost of Group headquarters and coordination functions, amounted to an expense of USD 560 million in the nine months compared to USD 625 million in prior year mainly driven by lower impairment charges from the Novartis Venture Fund financial assets.

Operating income
Operating income was USD 7.3 billion (+3%, +10% cc) mainly driven by higher sales, improved gross margin and productivity programs, partly offset by growth investments, legal provisions and higher restructuring charges. Operating income margin was 20.7% of net sales, decreasing by 0.5 percentage points (+0.2 percentage points cc). Core adjustments amounted to USD 3.4 billion (2018: USD 2.4 billion).

Core operating income was USD 10.7 billion (13%, +18% cc) mainly driven by higher sales, improved gross margin and productivity programs, partly offset by growth investments. Core operating income margin was 30.4% of net sales, increasing by 2.0 percentage points (+2.4 percentage points cc).

Income from associated companies
Income from associated companies amounted to USD 509 million in the first nine months of 2019 compared to USD 6.3 billion in prior year. This decrease is mainly due to the pre-tax gain of USD 5.8 billion recognized on the divestment of the 36.5% stake in the GSK consumer healthcare joint venture in 2018.

The share of income from Roche was USD 510 million compared to USD 384 million in prior year. The estimated income for Roche Holding AG, net of amortization, was USD 596 million compared to USD 509 million in prior year and was partly offset by the negative prior year true up of USD 129 million in the first quarter of 2019, compared to a negative prior year true up of USD 125 million recognized in the first quarter of 2018. In addition, a USD 43 million income from revaluation of deferred tax liability, recognized upon initial accounting of the Roche investment, was recorded in the first quarter of 2019, following a change in the enacted tax rate in February 2019 of the Swiss Canton Basel-Stadt, effective January 1, 2019.

Core income from associated companies in the first nine months decreased to USD 844 million compared to USD 899 million in prior year due to the discontinuation of core income from the GSK consumer healthcare joint venture.

The core income contribution from Roche Holding AG increased to USD 845 million from USD 756 million in prior year. The increase is due to the recognition of a favorable prior year core income true up of USD 32 million compared to a favorable true up of USD 8 million in the first quarter of 2018, and to a higher estimated core income contribution from Roche for the current period.

Interest expense and other financial income/expense
Interest expense decreased to USD 647 million from USD 684 million in prior year, as the decrease in interest expense due to lower outstanding debts more than offset the additional interest expense on lease liabilities of USD 50 million, following the implementation of IFRS 16 Leases as of January 1, 2019.

Other financial income and expense amounted to an income of USD 56 million compared to USD 108 million in prior year, as higher currency losses were partly offset by higher interest income.

Taxes
The tax rate in the first nine months was 16.2% compared to 9.3% in prior year. In February 2019, the Swiss canton Basel-Stadt enacted a tax rate reduction effective January 1, 2019. In May 2019, Swiss federal tax reform was enacted, which eliminated certain tax privileges, effective January 1, 2020. This required a revaluation of certain deferred tax assets and liabilities to the newly enacted tax rates. The impact of this revaluation was offset by the impact of a change to uncertain tax positions. The prior year tax rate was significantly impacted by the divestment of the 36.5% stake in the GSK consumer healthcare joint venture.
 
4
 

Excluding the impacts of Swiss canton Basel-Stadt tax rate reduction, the Swiss federal tax reform and the changes to uncertain tax positions in the first half and the GSK consumer healthcare joint venture divestment in prior year, the tax rate in the first nine months would have been 15.4% compared to 16.2% in prior year. The decrease from prior year was mainly the result of a change in profit mix.

The core tax rate was 16.4% compared to 15.7% in prior year, mainly as a result of a change in profit mix.

Net income and EPS
Net income was USD 6.0 billion (-48%, -45% cc) as prior year benefited from a USD 5.7 billion net gain recognized from the sale of our stake in the GSK consumer healthcare joint venture. EPS was USD 2.62 (-47%, -44% cc) benefitting from lower weighted average number of shares outstanding.

Core net income was USD 9.1 billion (+11%, +16% cc) driven by growth in core operating income partly offset by the discontinuation of core income from the GSK consumer healthcare joint venture. Core EPS was USD 3.97 (+12%, +17% cc) growing faster than core net income driven by lower weighted average number of shares outstanding.

Free cash flow from continuing operations amounted to USD 9.4 billion (+13% USD) compared to USD 8.3 billion in prior year. The increase is mainly driven by higher operating income adjusted for non-cash items and higher real estate divestment proceeds, partly offset by higher working capital, which in prior year included the receipt of a GSK sales milestone from the divested Vaccines business of USD 0.4 billion, and lower dividends received from associated companies, as prior year included the GSK consumer healthcare joint venture which was divested in Q2 2018.

Discontinued operations
Discontinued operations include the business of Alcon and certain Corporate costs directly attributable to Alcon up to the spin-off date. As the Alcon spin-off was completed on April 9, 2019, there were no operating results in the third quarter of 2019.

Discontinued operations net sales in the first nine months of 2019 were USD 1.8 billion compared to USD 5.4 billion in 2018 and operating income amounted to USD 71 million compared to an operating loss of USD 171 million in 2018. Net income from discontinued operations in the first nine months of 2019 amounted to USD 4.6 billion compared to a net loss of USD 160 million in 2018 driven by the non-taxable non-cash net gain on distribution of Alcon Inc. to Novartis AG shareholders which amounted to USD 4.7 billion. For further details see Note 3 “Significant transactions – Completion of the spin-off of the Alcon business through a dividend in kind distribution to Novartis AG shareholders”.      

Total Group third quarter

For the total Group, net income amounted to USD 2.0 billion compared to USD 1.6 billion in prior year, and basic earnings per share was USD 0.90 compared to USD 0.70 in prior year. Cash flow from operating activities for the total Group amounted to USD 4.6 billion and free cash flow to USD 4.0 billion.

Total Group nine months

For the total Group, net income amounted to USD 10.6 billion compared to USD 11.4 billion in prior year, and basic earnings per share was USD 4.62 compared to USD 4.92 in prior year. Cash flow from operating activities for the total Group amounted to USD 10.1 billion and free cash flow to USD 9.4 billion.

 
5
 

Innovative Medicines
     
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
   
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Net sales
   
9 688
     
8 596
     
13
     
15
     
27 794
     
25 870
     
7
     
11
 
Operating income
   
2 404
     
2 184
     
10
     
13
     
7 077
     
6 571
     
8
     
14
 
  As % of net sales
   
24.8
     
25.4
                     
25.5
     
25.4
                 
Core operating income
   
3 300
     
2 897
     
14
     
16
     
9 528
     
8 382
     
14
     
19
 
  As % of net sales
   
34.1
     
33.7
                     
34.3
     
32.4
                 

Third quarter

Net sales
Net sales were USD 9.7 billion (+13%, +15% cc) in the third quarter. Pharmaceuticals BU sales grew 13% (+15% cc), driven by continuing momentum on Cosentyx and Entresto and the benefit from the first full quarter of sales from Zolgensma and Xiidra. Oncology BU grew 12% (+14% cc) driven by continuing momentum on Promacta/Revolade, Tafinlar + Mekinist and Kisqali and the benefit from launches including Lutathera, Kymriah and Piqray. Volume contributed 17 percentage points to sales growth. Generic competition had a negative impact of 1 percentage point. Net pricing had a negative impact of 1 percentage point.

Regionally, US sales (USD 3.7 billion, +24%) delivered a strong performance driven by Zolgensma, Cosentyx, Xiidra, Entresto and Lutathera. Europe sales (USD 3.2 billion, +6%, +10% cc) benefited from continued strong performance of Entresto, Tafinlar + Mekinist, Xolair and Kymriah. Japan sales were USD 0.6 billion (+8%, +4% cc). Emerging Growth Markets sales grew (+10%, +13% cc), led by strong double-digit growth in China.

Pharmaceuticals BU sales were USD 6.0 billion (+13%, +15% cc). Cosentyx (USD 937 million, +25%, +27% cc) grew double-digit across all indications. Entresto (USD 430 million, +59%, +61% cc) continued to deliver strong double-digit performance, benefiting from the PIONEER data on hospital initiation and higher demand in ambulatory settings. Zolgensma (USD 160 million) had a strong launch. Lucentis continued to grow (USD 500 million, +2%, +5% cc) while Xolair (USD 299 million, +17%, +22% cc) continued double-digit growth. Gilenya (USD 829 million, +1%, +3% cc) was broadly in line with prior year.

Oncology BU sales were USD 3.7 billion (+12%, +14% cc). Growth was mainly driven by Promacta/Revolade (USD 380 million, +29%, +31% cc), Lutathera (USD 119 million, +113%, +116% cc), Kymriah (USD 79 million, +295%, +295% cc), Tafinlar + Mekinist (USD 345 million, +19%, +22% cc), Kisqali (USD 123 million, +71%, +76% cc) and Piqray (USD 43 million) had a strong launch.

Operating income
Operating income was USD 2.4 billion (+10%, +13% cc) mainly driven by continued strong sales growth and productivity, partly offset by growth investments and lower divestment gains. Operating income margin was 24.8% of net sales decreasing 0.6 percentage points (-0.5 percentage points in cc).

Core adjustments were USD 0.9 billion, including USD 0.7 billion for amortization of intangible assets. Prior year core adjustments were USD 0.7 billion. Core adjustments increased compared to prior year mainly due to prior year divestment gains.

Core operating income was USD 3.3 billion (+14%, +16% cc) mainly driven by higher sales and productivity, partly offset by growth investments. Core operating income margin was 34.1% of net sales, increasing 0.4 percentage points (+0.4 percentage points cc). Core gross margin decreased by 0.3 percentage points (cc) as productivity improvements were more than offset by the ramp up of capacity for cell & gene therapy. Core R&D expenses as a percentage of net sales were in line with prior year. Core SG&A expenses declined by 0.7 percentage points (cc) mainly driven by productivity and sales leverage. Core Other Income and Expense did not have a material impact on margin.
 
6
 

Nine Months

Net sales
Net sales were USD 27.8 billion (+7%, +11% cc) in the first nine months. Pharmaceuticals BU grew 8% (+12% cc) driven by Cosentyx reaching USD 2.6 billion and Entresto USD 1.2 billion. Oncology BU grew 7% (+11% cc) driven by AAA including Lutathera, as well as Promacta/Revolade, Tafinlar + Mekinist and Kisqali. Volume contributed 13 percentage points to sales growth. Generic competition had a negative impact of 1 percentage point. Net pricing had a negative impact of 1 percentage point.

Regionally, US sales (USD 10.1 billion, +16%) delivered a strong performance driven by Cosentyx, Entresto and Lutathera. Europe sales (USD 9.5 billion, +3%, +10% cc) benefited from continued strong performance of Entresto, Tafinlar + Mekinist, Jakavi, Cosentyx and Lucentis. Japan sales were USD 1.8 billion (+3%, +2% cc). Emerging Growth Markets sales grew (+4%, +12% cc), led by double-digit growth in China.

Operating income
Operating income was USD 7.1 billion (+8%, +14% cc), mainly driven by continued strong sales growth and productivity, partly offset by growth investments and legal provisions. Operating income margin was 25.5% of net sales, increasing 0.1 percentage points (+0.7 percentage points cc).

Core adjustments were USD 2.5 billion, mainly due to USD 1.7 billion of amortization. Core adjustments increased compared to prior year mainly driven by higher legal provisions.

Core operating income was USD 9.5 billion (+14%, +19% cc) mainly driven by higher sales and productivity, partly offset by higher growth investments. Core operating income margin was 34.3% of net sales, increasing 1.9 percentage points (+2.2 percentage points cc). Core gross margin increased by 0.3 percentage points (cc), mainly driven by productivity. Core R&D expenses decreased by 1.0 percentage points (cc) mainly driven by sales leverage, productivity and portfolio prioritization. Core SG&A expenses declined by 0.6 percentage points (cc) mainly driven by sales leverage and productivity. Core Other Income and Expense, net increased the margin by 0.3 percentage points (cc).

ONCOLOGY BUSINESS UNIT

     
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Tasigna
   
487
     
444
     
10
     
11
     
1 389
     
1 398
     
-1
     
2
 
Sandostatin
   
388
     
389
     
0
     
1
     
1 183
     
1 188
     
0
     
2
 
Afinitor/Votubia
   
400
     
374
     
7
     
8
     
1 174
     
1 157
     
1
     
4
 
Promacta/Revolade
   
380
     
295
     
29
     
31
     
1 036
     
844
     
23
     
26
 
Tafinlar + Mekinist1
   
345
     
291
     
19
     
22
     
982
     
842
     
17
     
22
 
Gleevec/Glivec
   
320
     
380
     
-16
     
-14
     
950
     
1 188
     
-20
     
-17
 
Jakavi
   
279
     
248
     
13
     
17
     
821
     
721
     
14
     
21
 
Exjade/Jadenu
   
253
     
263
     
-4
     
-2
     
744
     
813
     
-8
     
-6
 
Votrient
   
198
     
197
     
1
     
2
     
578
     
630
     
-8
     
-5
 
Lutathera
   
119
     
56
     
113
     
116
     
334
     
86
   
nm
   
nm
 
Kisqali
   
123
     
72
     
71
     
76
     
325
     
175
     
86
     
92
 
Kymriah
   
79
     
20
   
nm
   
nm
     
182
     
48
   
nm
   
nm
 
Piqray
   
43
           
nm
   
nm
     
49
           
nm
   
nm
 
Other
   
301
     
276
     
9
     
11
     
895
     
839
     
7
     
10
 
Total Oncology business unit
   
3 715
     
3 305
     
12
     
14
     
10 642
     
9 929
     
7
     
11
 
  1Majority of sales for Mekinist and Tafinlar are combination, but both can be used as a monotherapy
 nm = not meaningful

Tasigna (USD 487 million, +10%, +11% cc) grew in the US and EGM, partially offset by a decline in Europe.

Sandostatin (USD 388 million, 0%, +1% cc) sales were broadly in line with prior year, as growth in the US was offset by competitive pressure, mainly in EGM and Japan.

Afinitor/Votubia (USD 400 million, +7%, +8% cc) showed solid growth in the US, partially offset by first generic competition in Europe. In the US, the Abbreviated New Drug Application (ANDA) challenges to the compound patent, and the ANDA and IPR challenges to the renal cell carcinoma use patent, have been resolved and the patents upheld. Novartis has resolved patent litigation with certain generic manufacturers which may result in limited generic competition for Afinitor toward the end of 2019, and additional generic competition starting in mid-2020.
 
7
 

Promacta/Revolade (USD 380 million, +29%, +31% cc) continued to grow at a strong double-digit rate across all regions driven by increased use in chronic immune thrombocytopenia (ITP) and further uptake as first-line treatment for severe aplastic anemia (SAA) in the US and Japan.

Tafinlar + Mekinist (USD 345 million, +19%, +22% cc) continued strong double-digit growth due to demand in metastatic and adjuvant melanoma as well as NSCLC, with ongoing uptake of the adjuvant melanoma indication in Europe.

Gleevec/Glivec (USD 320 million, -16%, -14% cc) continued to decline due to generic competition in most major markets.

Jakavi (USD 279 million, +13%, +17% cc) continued double-digit growth across all regions driven by demand in the myelofibrosis and polycythemia vera indications.

Exjade/Jadenu (USD 253 million, -4%, -2% cc) declined mainly due to pressure from generic competition in the US and in other regions.

Votrient (USD 198 million, +1%, +2% cc) sales were broadly in line with prior year.


Lutathera (USD 119 million, +113%, +116% cc) continued to grow led by the US, with over 160 centers actively treating patients, and ongoing launches in Europe. Sales from all AAA brands (including Lutathera and radiopharmaceutical diagnostic products) were USD 177 million.

Kisqali (USD 123 million, +71%, +76% cc) showed strong growth in the US driven by use in metastatic breast cancer patients, independent of menopausal status or combination partner, with solid uptake continuing in Europe and other regions.   
Kymriah (USD 79 million) strong demand continued and sales increased primarily driven by ongoing uptake in the US and Europe. There are over 160 qualified treatment centers and more than 20 countries worldwide that have coverage for at least one indication. Reimbursement for DLBCL was received in Scotland and for both pediatric ALL and DLBCL in Italy.

Piqray (USD 43 million) US launch progressed well. Piqray is the first and only treatment for patients with a PIK3CA mutation in HR+/HER2- advanced breast cancer.

PHARMACEUTICAL BUSINESS UNIT

OPHTHALMOLOGY
     
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Lucentis
   
500
     
491
     
2
     
5
     
1 569
     
1 526
     
3
     
8
 
Travoprost Group
   
109
     
128
     
-15
     
-13
     
330
     
386
     
-15
     
-12
 
Xiidra
   
102
           
nm
   
nm
     
102
           
nm
   
nm
 
Other
   
503
     
475
     
6
     
7
     
1 548
     
1 519
     
2
     
5
 
Total Ophthalmology
   
1 214
     
1 094
     
11
     
13
     
3 549
     
3 431
     
3
     
8
 
nm = not meaningful

Lucentis (USD 500 million, +2%, +5% cc) grew driven by strong market growth.

Travoprost Group (USD 109 million, -15%, -13% cc) declined mainly due to increased competition in the US and generic competition in Europe.

Xiidra (USD 102 million) (lifitegrast) is a prescription eye drop solution approved to treat the signs and symptoms of dry eye disease. It is dosed twice per day, approximately 12 hours apart, in each eye. Xiidra is approved in multiple markets including the US, Canada and Australia. It is under regulatory review in a number of additional markets. Novartis acquired Xiidra from Takeda and began recording sales as of July 1, 2019. The integration is ongoing.

Luxturna is an adeno-associated virus vector-based gene therapy indicated for the treatment of patients with confirmed biallelic RPE65 mutation-associated retinal dystrophy. In January 2018, Spark Therapeutics entered into licensing and supply agreements with Novartis covering development, registration and commercialization rights to Luxturna in markets outside the US. In the UK, in September
 
8
 

2019 NICE recommended Luxturna for treating patients with vision loss due to RPE65 genetic mutations.

NEUROSCIENCE

     
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Gilenya
   
829
     
818
     
1
     
3
     
2 420
     
2 505
     
-3
     
0
 
Zolgensma
   
160
           
nm
   
nm
     
175
           
nm
   
nm
 
Aimovig1
   
33
           
nm
   
nm
     
75
           
nm
   
nm
 
Mayzent
   
4
           
nm
   
nm
     
9
           
nm
   
nm
 
Other
   
16
     
20
     
-20
     
-21
     
46
     
63
     
-27
     
-24
 
Total Neuroscience
   
1 042
     
838
     
24
     
26
     
2 725
     
2 568
     
6
     
9
 
nm = not meaningful
1Ex-US, Ex-Japan sales are reported. Aimovig is co-commercialized with Amgen in the US, where Amgen records sales and Novartis has exclusive rights in all ex-US territories excluding Japan

Gilenya (USD 829 million, +1%, +3% cc) grew in the US benefitting from stock and trade movements, partly offset by increased competitive pressure worldwide. In the US, the ANDA (Abbreviated New Drug Application) proceedings challenging the compound patent and extensions expiring in 2019 have been resolved and the patent upheld.

Zolgensma (USD 160 million) was approved by the FDA on May 24, 2019 for the treatment of pediatric patients less than 2 years of age with spinal muscular atrophy (SMA) with bi-allelic mutations in the survival motor neuron 1 (SMN1) gene. Zolgensma has been used to treat patients ranging in age from less than one month to two years old including all types of SMA. Novartis has been working closely with payers and to date plans are in place covering ~90% of commercial patients and ~30% of Medicaid patients. Zolgensma was filed in Europe with PRIME designation and in Japan with Sakigake designation in Q4 2018 for infant SMA. Zolgensma is currently under regulatory review in Europe with an anticipated CHMP decision in Q1 2020 and in Japan with anticipated decision in H1 2020. Novartis is fully committed to bringing this innovative therapy to European and Japanese patients in need as early as possible.

Aimovig (USD 33 million, ex-US) is the most prescribed anti-CGRP worldwide, with more than 300,000 patients prescribed worldwide in the post-trial setting. It has now been launched in 31 countries for the preventive treatment of migraine and additional launches are underway. Aimovig is co-commercialized with Amgen in the US, where Amgen records sales and Novartis has exclusive rights in all ex-US territories excluding Japan. The collaboration continues during the litigation between the companies and will remain in force until and unless a final court decision terminates the agreements.

Mayzent (USD 4 million) launch is progressing and efforts are ongoing to improve patient on-boarding which was slower due to the special needs of this population. Mayzent was approved by the FDA on March 26, 2019 and is indicated for the treatment of relapsing forms of multiple sclerosis (MS), to include clinically isolated syndrome, relapsing-remitting disease, and active secondary progressive MS, in adults. Mayzent is the only FDA approved oral therapy for active SPMS based on evidence from a pivotal prospective Phase III clinical trial (EXPAND) in a typical SPMS population.

IMMUNOLOGY, HEPATOLOGY and DERMATOLOGY
     
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Cosentyx
   
937
     
750
     
25
     
27
     
2 586
     
2 031
     
27
     
30
 
Ilaris
   
177
     
141
     
26
     
27
     
493
     
399
     
24
     
28
 
Total Immunology, Hepatology and Dermatology
   
1 114
     
891
     
25
     
27
     
3 079
     
2 430
     
27
     
30
 
Xolair sales for all indications are reported in the Respiratory franchise
 

Cosentyx (USD 937 million, +25%, +27% cc) continued momentum in the US (+31%) and in the rest of the world (+15%, +20% cc), driven by strong demand across indications and regions and strong first line access in all three indications. In September, Novartis announced positive new data from the Phase III PREVENT trial evaluating the efficacy and safety of Cosentyx in patients with non-radiographic axial spondyloarthritis (nr-axSpA). Nr-axSpA forms part of the axial spondyloarthritis (axSpA) spectrum and is characterized by chronic inflammatory back pain and symptoms such as nocturnal pain, fatigue, morning stiffness and functional disability. Novartis has submitted the data to EMA and plans to submit to the FDA. Nr-axSpA would be the fourth indication for Cosentyx.
 
9
 

Ilaris (USD 177 million, +26%, +27% cc) sales were driven by strong double-digit volume growth, mostly in Europe and the US.

Xolair continued to grow in Chronic Spontaneous Urticaria (CSU, also known as Chronic Idiopathic Urticaria, CIU), a severe skin disease. Xolair on a global level is managed by the Respiratory franchise which reports all Xolair sales.

RESPIRATORY
     
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Ultibro Breezhaler
   
97
     
110
     
-12
     
-8
     
313
     
332
     
-6
     
0
 
Seebri Breezhaler
   
28
     
34
     
-18
     
-16
     
93
     
111
     
-16
     
-11
 
Onbrez Breezhaler
   
20
     
24
     
-17
     
-16
     
62
     
78
     
-21
     
-15
 
Subtotal COPD Portfolio
   
145
     
168
     
-14
     
-10
     
468
     
521
     
-10
     
-5
 
Xolair
   
299
     
255
     
17
     
22
     
870
     
771
     
13
     
20
 
Other
   
4
     
6
     
-33
     
-21
     
16
     
19
     
-16
     
-6
 
Total Respiratory
   
448
     
429
     
4
     
9
     
1 354
     
1 311
     
3
     
10
 
 Xolair sales for all indications are reported in the Respiratory franchise

Xolair (USD 299 million, +17%, +22% cc) continued to grow in both indications Severe Allergic Asthma (SAA) and Chronic Spontaneous Urticaria (CSU). Growth was mainly driven by CSU indication and the recent approval of Xolair for home-use in Europe. We co-promote Xolair with Genentech in the US and share a portion of operating income, but we do not record any US sales.

Ultibro Breezhaler (USD 97 million, -12%, -8% cc) an inhaled LABA/LAMA, sales declined mainly due to enhanced competition in Japan and Europe.
 
Seebri Breezhaler (USD 28 million, -18%, -16% cc) an inhaled LAMA, and Onbrez Breezhaler (USD 20 million, -17%, -16% cc) an inhaled LABA, declined mainly due to competition in Europe.

CARDIOVASCULAR, RENAL AND METABOLISM

     
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Entresto
   
430
     
271
     
59
     
61
     
1 208
     
710
     
70
     
75
 
Other
   
7
     
6
     
17
     
10
     
19
     
16
     
19
     
17
 
Total Cardiovascular, Renal & Metabolism
   
437
     
277
     
58
     
60
     
1 227
     
726
     
69
     
73
 

Entresto (USD 430 million, +59%, +61% cc) continued strong momentum fueled by increased demand in both hospital and ambulatory settings. Entresto further supported its benefit to patients as an essential treatment in Heart Failure with data presented at ESC from the PROVE and EVALUATE trials showing how Entresto works directly on the heart to reverse damage caused by Heart Failure. In the US, generic manufacturers have filed ANDAs challenging the Orange Book-listed patents.

ESTABLISHED MEDICINES

     
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
 
 
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Galvus Group
   
320
     
307
     
4
     
5
     
955
     
957
     
0
     
5
 
Diovan Group
   
254
     
254
     
0
     
3
     
798
     
763
     
5
     
11
 
Exforge Group
   
249
     
253
     
-2
     
2
     
780
     
751
     
4
     
10
 
Zortress/Certican
   
122
     
120
     
2
     
5
     
362
     
344
     
5
     
10
 
Neoral/Sandimmun(e)
   
101
     
114
     
-11
     
-9
     
314
     
349
     
-10
     
-6
 
Voltaren/Cataflam
   
105
     
104
     
1
     
0
     
313
     
333
     
-6
     
-3
 
Other
   
567
     
610
     
-7
     
-5
     
1 696
     
1 978
     
-14
     
-10
 
Total Established Medicines
   
1 718
     
1 762
     
-2
     
0
     
5 218
     
5 475
     
-5
     
0
 

Galvus Group (USD 320 million, +4%, +5% cc) grew led by solid performance in Emerging Growth Markets, including China.
Diovan Group (USD 254 million, 0%, +3% cc) grew in Europe and Emerging Growth Markets, partially offset by declines in the US and Japan.

 
10
 

Exforge Group (USD 249 million, -2%, +2% cc) grew in Emerging Growth Markets, offset by decline in Europe and Japan due to generic competition.
Zortress/Certican (USD 122 million, +2%, +5% cc) continued to grow in most regions.
Neoral/Sandimmun(e) (USD 101 million, -11%, -9% cc) declined due to generic competition and mandatory price reductions.
Voltaren/Cataflam (USD 105 million, +1%, 0% cc) sales were broadly in line with prior year.
 
11
 

Sandoz

     
Q3 2019
     
Q3 2018
   
% change
     
9M 2019
     
9M 2018
   
% change
 
   
USD m
   
USD m
   
USD
   
cc
   
USD m
   
USD m
   
USD
   
cc
 
Net sales
   
2 484
     
2 420
     
3
     
5
     
7 248
     
7 400
     
-2
     
2
 
Operating income
   
191
     
358
     
-47
     
-42
     
746
     
1 095
     
-32
     
-25
 
  As % of net sales
   
7.7
     
14.8
                     
10.3
     
14.8
                 
Core operating income
   
615
     
541
     
14
     
18
     
1 577
     
1 520
     
4
     
10
 
  As % of net sales
   
24.8
     
22.4
                     
21.8
     
20.5
                 

Sandoz US Generics Transaction

Novartis announced on September 6, 2018 that it has agreed to sell selected portions of its Sandoz US portfolio, specifically the Sandoz US dermatology business and US oral solids portfolio, to Aurobindo Pharma USA Inc. This transaction is expected to be completed in the coming months, pending regulatory approval. The results of this business are included in continuing operations.

Third quarter

Net sales
Net sales were USD 2.5 billion (+3%, +5% cc) driven by strong volume growth of 9 percentage points (cc) partially offset by 4 percentage points (cc) of price erosion mainly in the US. Excluding the US, net sales grew (+4%, +7% cc).

Sales in Europe were USD 1.3 billion (+8%, +12% cc) mainly driven by strong biosimilar growth. Sales in the US were USD 655 million declining 1% with the continued industry-wide pricing pressure mostly offset by first-to-market launches and Medicaid gross-to-net adjustments. Sales in Asia / Africa / Australasia were USD 333 million (-9%, -8% cc) impacted by high prior year base and market optimization. Sales in Canada and Latin America were USD 199 million (+5%, +7% cc).

Global sales of Biopharmaceuticals (biosimilars, biopharmaceutical contract manufacturing and Glatopa) grew to USD 430 million (+23%, +27% cc), driven by continued strong double-digit growth in Europe from Hyrimoz (adalimumab), Rixathon (rituximab), and Erelzi (etanercept). Launch roll-outs in Asia / Africa / Australasia continue to contribute to growth.

Retail sales were USD 1.9 billion (-1%, +1% cc) as sales from first-to-market launches offset pricing pressure. Total Anti-Infectives franchise sales were USD 321 million (-1%, +2% cc), including finished dosage forms sold under the Sandoz name and Anti-Infectives sold to third parties for sale under their own name (USD 124 million, +2%, +5% cc).

Operating income
Operating income was USD 191 million (-47%, -42% cc) impacted by changes in legal settlement provisions, higher net manufacturing and Sandoz transformation restructuring expenses and lower divestment income. Operating income margin was 7.7% of net sales, declining 7.1 percentage points   (-6.6 percentage points cc).

Core adjustments were USD 424 million, including USD 79 million of amortization. Prior year core adjustments were USD 183 million. The change in core adjustments compared to prior year was driven by changes in legal settlement provisions and higher net manufacturing and Sandoz transformation restructuring expenses.

Core operating income was USD 615 million (+14%, +18% cc) driven by sales growth and continued gross margin improvements, including Medicaid gross-to-net adjustments. Core operating income margin was 24.8% of net sales, increasing 2.4 percentage points (2.8 percentage points cc). Core gross margin increased by 1.4 percentage points (cc), as favorable product and geographic mix, ongoing productivity improvements and Medicaid gross-to-net adjustments were partly offset by the impact of price erosion mainly in the US. Core R&D expenses decreased by 0.2 percentage points (cc) and Core SG&A expenses decreased by 0.5 percentage points (cc). Core Other Income and Expense increased the margin by 0.7 percentage points (cc) mainly due to lower net legal settlements partly offset by lower divestment income.
 
12
 

Nine months

Net sales
Net sales were USD 7.2 billion (-2%, +2% cc) driven by strong volume growth of 9 percentage points (cc) partially offset by 7 percentage points (cc) of price erosion, mainly in the US. Excluding the US, net sales grew (0%, +6% cc).

Sales in Europe were USD 3.8 billion (+2%, +9% cc) mainly driven by biosimilars. Sales in the US were USD 1.9 billion (-8%), mainly due to continued industry-wide pricing pressure. Sales in Asia / Africa / Australasia were USD 984 million (-4%, -1% cc) broadly in line with prior year. Sales in Canada and Latin America were USD 570 million (-1%, +5% cc).

Global sales of Biopharmaceuticals (biosimilars, biopharmaceutical contract manufacturing and Glatopa) grew to USD 1.2 billion (+13%, +18% cc), driven by continued strong double-digit growth in Europe from Hyrimoz (adalimumab), Rixathon (rituximab), and Erelzi (etanercept). Launch roll-outs in Asia / Africa / Australasia also contributed to growth.

Retail sales were USD 5.7 billion (-4%, 0% cc), as first-to-market launches slowed the decline in the US (-4%) and the segment grew in the rest of world. Total Anti-Infectives franchise sales were USD 970 million (-5%, -1% cc), including finished dosage forms sold under the Sandoz name and Anti-Infectives sold to third parties for sale under their own name (USD 383 million, -6%, -2% cc).

Operating income
Operating income was USD 746 million (-32%, -25% cc) impacted by changes in legal settlement provisions and higher net manufacturing and Sandoz transformation restructuring expenses. Operating income margin was 10.3% of net sales, declining 4.5 percentage points (-3.9 percentage points cc).

Core adjustments were USD 831 million, including USD 239 million of amortization. Prior year core adjustments were USD 425 million. The change in core adjustments compared to prior year was driven mainly by changes in legal settlement provisions, higher net manufacturing and Sandoz transformation restructuring expenses and lower gains from divestments.

Core operating income was USD 1.6 billion (+4%, +10% cc) as sales growth and gross margin improvements were partly offset by lower divestment income and higher net legal settlements. Core operating income margin was 21.8% of net sales, increasing 1.3 percentage points (1.6 percentage points cc). Core gross margin increased by 1.9 percentage points (cc), as favorable product and geographic mix and ongoing productivity improvements, were partly offset by the impact of price erosion mainly in the US. Core R&D expenses increased by 0.1 percentage points (cc) while core SG&A expenses decreased by 0.7 percentage points (cc) mainly driven by productivity and sales leverage. Core Other Income and Expense decreased the margin by 0.9 percentage points (cc) mainly due to lower divestment income and higher net legal settlements.
 
13
 

GROUP CASH FLOW AND BALANCE SHEET

Cash flow

Third quarter
Net cash flows from operating activities from continuing operations amounted to USD 4.6 billion, compared to USD 3.7 billion in the prior year quarter. The increase was mainly driven by higher net income adjusted for non-cash items and other adjustments, including divestment gains, and favorable working capital.

Net cash flows used in investing activities from continuing operations amounted to USD 3.4 billion, compared to USD 0.7 billion in the prior year quarter. The current year quarter includes mainly cash outflows for the purchase of property, plant and equipment of USD 0.4 billion, for intangible assets of USD 0.2 billion, for financial assets and other non-current assets of USD 0.1 billion and for acquisitions and divestments of businesses, net of USD 3.5 billion, mainly for the acquisition of Xiidra from Takeda Pharmaceutical Company Limited, partly offset by cash inflows from the proceeds of the sale of financial assets of USD 0.6 billion (including USD 543 million proceeds from the sale of Alcon Inc. shares) and intangible assets of USD 0.1 billion.

In the prior year quarter, net cash flows used in investing activities from continuing operations were mainly related to cash outflows for the purchase of property, plant and equipment of USD 0.3 billion, for intangible assets of USD 0.5 billion, and for financial and other non-current assets of USD 0.1 billion. This was partly offset by cash inflows from the sale of intangible and financial assets of USD 0.4 billion. Cash outflows for acquisitions of interests in associated companies, net amounted to USD 0.1 billion.

Net cash flows used in financing activities from continuing operations amounted to USD 2.7 billion, compared to USD 1.5 billion in the prior year quarter. The current year quarter mainly includes the cash outflows for net treasury share transactions of USD 2.9 billion (mainly related to the up to USD 5 billon share buyback), net payments of lease liabilities of USD 0.1 billion, partly offset by a net increase in financial debts of USD 0.3 billion.

In the prior year quarter, net cash flows used in financing activities from continuing operations included cash outflows for net treasury share transactions of USD 1.0 billion, net repayments of financial debts of USD 0.6 billion, partly offset by other net financing cash inflows of USD 0.2 billion.

Free cash flow from continuing operations amounted to USD 4.0 billion (+26% USD) compared to USD 3.2 billion in prior year quarter, mainly driven by higher net cash flows from operating activities.

Nine months
Net cash flows from operating activities from continuing operations amounted to USD 10.0 billion, compared to USD 9.6 billion in the prior year period. This increase was driven by higher net income adjusted for non-cash items and other adjustments, including divestment gains, partly offset by lower dividends received from associated companies due to the divestment of the GSK consumer healthcare joint venture in Q2 2018, higher provision payments and higher working capital, which included the receipt of a GSK sales milestone from the divested Vaccines business of USD 0.4 billion in the prior year period.

Net cash flows from operating activities from discontinued operations are USD 78 million, compared to USD 893 million in the prior year period. This reduction is due to the completion of the Alcon spin-off on April 9, 2019.

Net cash flows used in investing activities from continuing operations amounted to USD 1.4 billion, compared to USD 0.2 billion in the prior year period. The current year mainly includes cash outflows for the purchase of property, plant and equipment of USD 0.9 billion, for intangible assets of USD 0.7 billion, for financial assets and other non-current assets of USD 0.3 billion, and for acquisitions and divestments of businesses, net of USD 3.8 billion, mainly for the acquisition of IFM Tre, Inc. (USD 0.3 billion) and the acquisition of Xiidra from Takeda Pharmaceutical Company Limited (USD 3.5 billion), partly offset by net proceeds from the sales of marketable securities and commodities of USD 2.3 billion, cash inflows from the sale of property, plant and equipment of USD 0.8 billion (including the proceeds from the sale and leaseback of real estate), from the sale of financial assets of USD 0.7 billion (including USD 656 million proceeds from the sale of Alcon Inc. shares) and intangible assets of USD 0.4 billion.
 
14
 

In the prior year period, net cash flows used in investing activities from continuing operations were mainly related to the cash inflow of USD 13.0 billion from the divestment of our 36.5% stake in the GSK consumer healthcare joint venture. This was offset by cash outflows for the purchase of intangible assets of USD 1.2 billion and for the acquisitions and divestments of businesses, net of USD 11.9 billion, mainly Advanced Accelerator Applications S.A. of USD 3.5 billion, net (USD 3.9 billion, net of cash acquired USD 0.4 billion) and AveXis, Inc. of USD 8.3 billion, net (USD 8.7 billion, net of cash acquired USD 0.4 billion).

Net cash flows used in investing activities from discontinued operations amounted to USD 1.1 billion, compared to USD 0.5 billion in the prior year period. The current year period includes mainly the cash outflow for the acquisition of PowerVision, Inc. of USD 0.3 billion and USD 0.6 billion due to the derecognized cash and cash equivalents following the completion of the Alcon spin-off on April 9, 2019.

Net cash flows used in financing activities from continuing operations amounted to USD 15.7 billion, compared to USD 4.2 billion in the prior year period. The current year mainly includes the cash outflows for the dividend payment of USD 6.6 billion, for net treasury share transactions of USD 5.3 billion (mainly related to the up to USD 5 billon share buyback) and net cash outflows of USD 3.1 billion for non-current financial debts (mainly driven by the repayment at maturity of a US dollar bond of USD 3.0 billion). The net repayments of current financial debts amounted to USD 0.5 billion. Payments for lease liabilities, net and other financing cash flows resulted in a net cash outflow of USD 0.1 billion.

In the prior year period, net cash flows used in financing activities from continuing operations included cash outflows for the dividend payment of USD 7.0 billion, the repayment of non-current financial debts of USD 0.4 billion and for net treasury transactions of USD 1.4 billion. This was partly offset by cash inflows from the issuance of euro bonds totaling USD 2.8 billion (notional amount EUR 2.25 billion), the net increase in current financial debts of USD 1.2 billion, and other net financing cash inflows of USD 0.4 billion.

Net cash inflows from financing activities from discontinued operations amounted to USD 3.3 billion compared to a cash outflow of USD 0.5 billion in the prior year period. The current year period includes mainly the cash inflows of USD 3.5 billion from Alcon borrowings, partly offset by USD 0.2 billion payments for transaction costs.

Free cash flow from continuing operations amounted to USD 9.4 billion (+13% USD) compared to USD 8.3 billion in the prior year period. The increase is mainly driven by higher operating income adjusted for non-cash items and higher real estate divestment proceeds, partly offset by higher working capital, which in the prior year period included the receipt of a GSK sales milestone from the divested Vaccines business of USD 0.4 billion, and lower dividends received from associated companies, as the prior year period included the GSK consumer healthcare joint venture which was divested in Q2 2018.

Balance sheet

There has been a significant change in the consolidated balance sheet resulting from the spin-off of the Alcon business through the dividend in kind distribution to Novartis AG shareholders completed on April 9, 2019 (see Note 2, Note 3 and Note 11 for further details). The December 31, 2018 consolidated balance sheet includes the assets and liabilities of the Alcon business. The September 30, 2019 consolidated balance sheet excludes the assets and liabilities of the Alcon business, due to derecognition of the Alcon business at the date of the spin-off. The consolidated balance sheet discussion and analysis that follows excludes the impacts from derecognition of the Alcon business at the date of the spin-off.

Assets
Total non-current assets of USD 89.3 billion at September 30, 2019 increased by USD 3.0 billion compared to December 31, 2018, excluding the impact of the derecognition of the Alcon business non-current assets as a result of the spin-off. This increase was mainly driven by recognition of right-of-use assets resulting from the implementation of IFRS 16 – Leases on January 1, 2019 amounting to USD 1.7 billion, an increase in intangible assets other than goodwill of USD 1.7 billion, mainly from the acquisition of Xiidra from Takeda Pharmaceutical Company Limited, and the increase in financial assets of USD 0.8 billion, primarily from the financial investments in Alcon Inc. shares recognized by certain consolidated foundations through the Alcon spin-off. This was partially offset by the decrease in property, plant and equipment of USD 0.9 billion, mainly due to depreciation in excess of net additions and a decrease in goodwill of USD 0.1 billion, as additions were more than offset by currency translation
 
15
 

adjustments. Investments in associated companies, deferred tax assets and other non-current assets were broadly in line compared to December 31, 2018.
Total current assets of USD 26.7 billion at September 30, 2019 decreased by USD 5.5 billion compared to December 31. 2018, excluding the impact of the derecognition of the Alcon business current assets as a result of the spin-off. This decrease was mainly driven by the reduction in cash and cash equivalents of USD 4.7 billion and in marketable securities, commodities, time deposits and derivative financial instruments of USD 2.4 billion, mainly due to the repayment of financial debts and the dividend payment. This was partially offset by an increase in inventories by USD 0.6 billion, in trade receivables by USD 0.4 billion and in other current assets by USD 0.5 billion. Income tax receivable and assets of disposal group held for sale remained broadly in line compared to December 31, 2018.

Net assets of disposal group held for sale relate to the pending divestment of the Sandoz US dermatology business and generic US oral solids portfolio to Aurobindo Pharma USA Inc. announced on September 6, 2018, and amount to USD 0.8 billion (see Note 3). Novartis expects the divestment to be completed in the coming months, pending regulatory approval.
 
Liabilities
Total non-current liabilities of USD 35.2 billion increased by USD 0.4 billion compared to December 31, 2018, excluding the impact of the derecognition of the Alcon business non-current liabilities as a result of the spin-off. This increase was mainly driven by the recognition of lease liabilities resulting from the implementation of IFRS 16 – Leases on January 1, 2019 amounting to USD 1.7 billion, and the USD 1.2 billion increase in provisions and other non-current liabilities, mainly due to higher pension plan liabilities resulting from the decrease in discount rates used to calculate the actuarial defined benefit obligations. This was partially offset by the USD 2.3 billion decrease in long-term financial debts, mainly driven by the reclassification from non-current to current financial debt of USD 2.0 billion US dollar bonds due in 2020, and a USD 0.3 billion decrease in deferred tax liabilities.

Total current liabilities of USD 28.2 billion increased by USD 0.4 billion compared to December 31, 2018, excluding the impacts of the derecognition of the Alcon business current liabilities as a result of the spin-off. This was mainly driven by an increase in provisions and other current liabilities of USD 1.6 billion, primarily from higher legal and revenue deduction provisions, and increases in current income tax liabilities by USD 0.4 billion and in lease liabilities by USD 0.3 billion, resulting from the implementation of IFRS 16 – Leases on January 1, 2019. This was partially offset by a USD 1.6 billion decrease in financial debts and derivative financial instruments, mainly due to the repayment of USD 3.0 billion of bonds issued in February 2009, and a USD 0.2 billion decrease in trade payables.

Group equity
The Group’s equity decreased by USD 26.1 billion to USD 52.6 billion at September 30, 2019 compared to USD 78.7 billion at December 31, 2018. This decrease was mainly due to derecognition of the dividend in kind distribution liability of USD 23.4 billion upon completion of the Alcon spin-off (see Note 2, 3 and 11 for further details), the cash-dividend payment of USD 6.6 billion, purchase of treasury shares of USD 5.5 billion, net actuarial losses of USD 1.3 billion, transaction costs of USD 0.3 billion, unfavorable currency translation differences of USD 0.5 billion and taxes on treasury shares of USD 0.2 billion. This was partially offset by net income of USD 10.6 billion, the net effect of exercise of options and employee transactions of USD 0.8 billion, and a decrease in the treasury share repurchase obligation under a share buyback trading plan of USD 0.3 billion.

Net debt and debt/equity ratio
The net debt increased to USD 19.4 billion at September 30, 2019 compared to USD 16.2 billion at December 31, 2018. The Group’s liquidity amounted to USD 8.7 billion at September 30, 2019 compared to USD 16.0 billion at December 31, 2018, and the total of the non-current and current financial debt, including derivatives, amounted to USD 28.1 billion at September 30, 2019, compared to USD 32.1 billion at December 31, 2018. The debt/equity ratio increased to 0.54:1 at September 30, 2019 compared to 0.41:1 at December 31, 2018.
 
16
 

Innovation Review

Benefitting from our continued focus on innovation, Novartis has one of the industry’s most competitive pipelines with more than 200 projects in clinical development.

Selected Innovative Medicines approvals: US, EU and Japan
Product
Active ingredient/
Descriptor
Indication
Approval date
Lucentis
ranibizumab
Retinopathy of prematurity
EU – Sep 2019
Beovu
(RTH258)
brolucizumab
Neovascular (wet) AMD
US – Oct 2019

Selected Innovative Medicines projects awaiting regulatory decisions
      
Completed submissions
   
Product
Indication
 
US
   
EU
   
Japan
 
News update
Cosentyx
Non-radiographic axial spondyloarthritis
        Q3 2019        
- 52 week data for US submission positive in Q3. On track for filing to FDA in Q4
Mayzent
Secondary Progressive Multiple Sclerosis
Approved
Q3 2018 Q1 2019  
-  US approved in RMS including active SPMS
BYL719
(Piqray in US,
alpelisib)
PIK3CA mutant HR+/HER2- postmenopausal advanced or metastatic BC
 
Approved
  Q4 2018      
Lucentis
 
Retinopathy of prematurity
       
Approved
     Q1 2019    
Diabetic retinopathy         Q4 2018          
- CHMP positive opinion received – Sep 2019
RTH258
Neovascular (wet) AMD
 
Approved
    Q1 2019     Q2 2019    
SEG101
Sickle cell disease
  Q2 2019     Q2 2019          
- US Priority review
QMF149
Asthma
  Q2 2019     Q3 2019  
- QUARTZ study meets primary and key secondary endpoints
- Positive results Phase III  PALLADIUM study – Sep 2019
QVM149
Asthma
          Q2 2019     Q3 2019  
- Positive results Phase III IRIDIUM study – Sep 2019
Xiidra
Dry eye
 
Approved
    Q4 2018          
- CHMP opinion anticipated Q1 2020
Xolair
Nasal polyps
  Q3 2019                      
Zolgensma
(AVXS-101)
Spinal Muscular Atrophy Type 1 (IV formulation)
 
Approved
    Q4 2018     Q4 2018    


Selected Innovative Medicines pipeline projects
Project/
Compound
Potential indication/
Disease area
First planned submissions
 Current Phase
News update
ABL001
Chronic myeloid leukemia 3rd  line
2021
III
 
Chronic myeloid leukemia 1st  line
≥2023
III
 
ACZ885
(canakinumab)
Adjuvant NSCLC
2022
 III
Enrollment ongoing for Phase III studies
1st line NSCLC
2021
 III
2nd line NSCLC
2021
 III
AVXS-101 IT
Spinal Muscular Atrophy Type 2/3 (IT formulation)
2020
 I / II
- Interim data presented at AAN in May and updated at World Muscle Society in October
- Awaiting FDA feedback on IT filing approach
 
17
 

AVXS-201
Rett Syndrome
≥2023
 I  
BYL719
(Piqray in US)
 
PROS (PIK3CA-related overgrowth spectrum)
2020
 II
 
HR- HER+ adv. breast cancer
≥2023
 III
 
Triple negative breast cancer
≥2023
 III
 
Head and neck squamous cell carcinoma
≥2023
 III
 
Ovarian Cancer
≥2023
 III
 
CAD106
Alzheimer’s disease
NA
 II / III
- Program retired in Q3
CFZ533
(iscalimab)
Solid organ transplantation
≥2023
 II
- Enrollment has started in the phase IIb de novo and maintenance kidney transplant study
Sjoegren’s syndrome
≥2023
 II
 
Cosentyx
 
 
Non-radiographic axial spondyloarthritis
2019
 US III
- Submitted to EMA in Q3, planned to submit to FDA in Q4
Psoriatic arthritis head-to-head vs. adalimumab
2020
 III
 
Ankylosing spondylitis head-to-head vs. adalimumab
2022
 III
 
Hidradenitis suppurativa
2022
 III
 
Giant cell arteritis
≥2023
 II
 
CSJ117
Severe asthma
≥2023
 II
 
ECF843
Dry eye
2022
 II
 
Entresto
Chronic heart failure with preserved ejection fraction
2019
 III
- PARAGON-HF topline results presented at ESC – Sep 2019
Post-acute myocardial infarction
2021
 III
 
HDM201
Acute myeloid leukemia
≥2023
 II
 
INC280
(capmatinib)
NSCLC (cMET amp and mut)
2019
 II
- Primary analysis in the GEOMETRY mono -1 study demonstrates promising efficacy – June 2019
- Breakthrough Therapy designation granted by FDA
- Orphan Drug designation granted by FDA and MHLW (Japan)
Jakavi
Acute graft-versus-host disease (GvHD)
2021
III
 
Chronic graft-versus-host disease (GvHD)
2021
III
 
KAE609
(cipargamin)
Malaria acute uncomplicated
≥2023
II
 
Severe Malaria
≥2023
II
 
KAF156
(ganaplacide)
Malaria acute uncomplicated
≥2023
II
 
Kisqali
+ endocrine therapy
HR+/HER2- early BC (adjuvant)
≥2023
III
- Enrollment ongoing
 
Kymriah (tisagenlecleucel)
+ pembrolizumab
r/r Follicular lymphoma
2021
II
 
r/r DLBCL in 1st relapse
2021
III
 
r/r DLBCL
≥2023
    
LAM320
Multi-drug resistant tuberculosis
2021
III
 
LJC242
(tropifexor + cenicriviroc)
Non-alcoholic steatohepatitis (NASH)
≥2023
II
 
LJN452
(tropifexor)
Non-alcoholic steatohepatitis (NASH)
≥2023
II
- FDA Fast Track designation
 
18
 

LMI070
Spinal Muscular Atrophy
≥2023
II
- FDA Orphan designation, EMA Orphan status obtained
- Dose ranging study ongoing
LNP023
Paroxysmal nocturnal hemoglobinuria
2022
II
 
IgA nephropathy
≥2023
II
 
Membranous nephropathy
≥2023
II
 
C3 glomerulopathy
≥2023
II
 
LOU064
Chronic spontaneous urticaria
≥2023
II
- Phase IIb study start achieved
177Lu-PSMA-617
Metastatic castration-resistant prostate cancer
2020
III
 
LXE408
Visceral leishmaniosis
≥2023
I
 
MBG453
Myelodysplastic syndrome
2021
II
 
MOR106
Atopic dermatitis
≥2023
II
 
OMB157 (ofatumumab)
Relapsing multiple sclerosis
2019
III
- Phase III ASCLEPIOS I & II studies met primary endpoints – Aug 2019
PDR001 + Tafinlar + Mekinist
Metastatic BRAF V600+ melanoma
2020
III
- On track for H2 2019 interim analysis data readout
PDR001 Combo
Metastatic melanoma
≥2023
II
- Enrollment ongoing
QAW039
(fevipiprant)
Asthma
2020
III
- ZEAL 1 and 2 missed primary endpoint
- LUSTER 1 and 2 core registration trials on track for Q1 2020 readout
QBW251
COPD
≥2023
II
 
QGE031
(ligelizumab)
Chronic spontaneous urticaria / chronic
idiopathic urticaria
2021
III
- Phase III trials initiated enrollment
RTH258 (brolucizumab)
Diabetic macular edema
2021
III
 
Retinal vein occlusion
≥2023
III
 
Proliferative diabetic retinopathy
≥2023
III
 
Rydapt (PKC412)
Acute myeloid leukemia (FLT3 wild type)
2022
III
 
SAF312
Chronic ocular surface pain
≥2023
II
 
TQJ230
Secondary prevention of cardiovascular events in patients with elevated levels of lipoprotein (a)
≥2023
III
- Phase III planned to initiate in Q1 of 2020
UNR844
Presbyopia
≥2023
II
 
VAY736
(lanalumab)
Auto-immune hepatitis
≥2023
II
 
Primary Sjoegren’s syndrome
≥2023
II
- FDA Fast Track designation
- Phase II study fully recruited
VAY785 (emricasan)
Non-alcoholic steatohepatitis (NASH)
NA
II
Program retired in Q3
VPM087
1st line colorectal cancer / 1st line renal cell carcinoma
≥2023
I
 
Xolair
Nasal polyps
2019
EU III
 
- POLYP 1 and POLYP2 positive study read out – May 2019
ZPL389
(adriforant)
Atopic dermatitis
2022
II
- Phase IIb trial enrollment initiated


Selected Sandoz approvals and pipeline projects (biosimilars)
Project/
Compound
Potential indication/
Disease area
Submission status
Current Phase
News update
LA-EP2006 (pegfilgrastim)
Chemotherapy-induced neutropenia and others (same as originator)
US
EU
Submitted
Approved
- Resubmitted to FDA in April
GP2411 (denosumab)
Osteoporosis, skeletal-related in bone met. pts (same as originator)
EU/US
III
- First patient enrolled July 2019
 
19
 

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Consolidated income statements

Third quarter (unaudited)



(USD millions unless indicated otherwise) Note Q3 2019 Q3 2018 Change
Net sales to third parties from continuing operations 10 12 172 11 016 1 156
Sales to discontinued operations 28 -28
Net sales from continuing operations 12 172 11 044 1 128
Other revenues 10 310 342 -32
Cost of goods sold -3 776 -3 463 -313
Gross profit from continuing operations 8 706 7 923 783
Selling, general and administration -3 549 -3 261 -288
Research and development -2 199 -2 147 -52
Other income 196 596 -400
Other expense -796 -872 76
Operating income from continuing operations 2 358 2 239 119
Income from associated companies 253 213 40
Interest expense -216 -229 13
Other financial income and expense 12 28 -16
Income before taxes from continuing operations 2 407 2 251 156
Taxes -366 -369 3
Net income from continuing operations 2 041 1 882 159
Net loss from discontinued operations before gain on distribution of Alcon Inc. to Novartis AG shareholders 11 -258 258
Net loss from discontinued operations -258 258
Net income 2 041 1 624 417
Attributable to:
Shareholders of Novartis AG
2 042 1 623 419
Non-controlling interests
-1 1 -2
Weighted average number of shares outstanding - Basic (million) 2 272 2 315 -43
Basic earnings per share from continuing operations (USD)1 0.90 0.81 0.09
Basic earnings per share from discontinued operations (USD)1 -0.11 0.11
Total basic earnings per share (USD)1 0.90 0.70 0.20
Weighted average number of shares outstanding – Diluted (million) 2 297 2 338 -41
Diluted earnings per share from continuing operations (USD)1 0.89 0.80 0.08
Diluted earnings per share from discontinued operations (USD)1 -0.11 0.11
Total diluted earnings per share (USD)1 0.89 0.69 0.19
Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.

20

 
Consolidated income statements

Nine months to September 30 (unaudited)



(USD millions unless indicated otherwise) Note 9M 2019 9M 2018 Change
Net sales to third parties from continuing operations 10 35 042 33 270 1 772
Sales to discontinued operations 53 61 -8
Net sales from continuing operations 35 095 33 331 1 764
Other revenues 10 866 871 -5
Cost of goods sold -10 433 -10 472 39
Gross profit from continuing operations 25 528 23 730 1 798
Selling, general and administration -10 464 -10 040 -424
Research and development -6 549 -6 255 -294
Other income 1 388 1 465 -77
Other expense -2 640 -1 859 -781
Operating income from continuing operations 7 263 7 041 222
Income from associated companies 509 6 297 -5 788
Interest expense -647 -684 37
Other financial income and expense 56 108 -52
Income before taxes from continuing operations 7 181 12 762 -5 581
Taxes -1 163 -1 182 19
Net income from continuing operations 6 018 11 580 -5 562
Net loss from discontinued operations before gain on distribution of Alcon Inc. to Novartis AG shareholders 11 -101 -160 59
Gain on distribution of Alcon Inc. to Novartis AG shareholders 3, 11 4 691 4 691
Net income/loss from discontinued operations 4 590 -160 4 750
Net income 10 608 11 420 -812
Attributable to:
Shareholders of Novartis AG
10 607 11 416 -809
Non-controlling interests
1 4 -3
Weighted average number of shares outstanding - Basic (million) 2 298 2 322 -24
Basic earnings per share from continuing operations (USD)1 2.62 4.99 -2.37
Basic earnings per share from discontinued operations (USD)1 2.00 -0.07 2.07
Total basic earnings per share (USD)1 4.62 4.92 -0.30
Weighted average number of shares outstanding – Diluted (million) 2 323 2 345 -22
Diluted earnings per share from continuing operations (USD)1 2.59 4.94 -2.35
Diluted earnings per share from discontinued operations (USD)1 1.98 -0.07 2.04
Total diluted earnings per share (USD)1 4.57 4.87 -0.30
Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.   



21

 
Consolidated statements of comprehensive income

Third quarter (unaudited)



(USD millions) Q3 2019 Q3 2018 Change
Net income 2 041 1 624 417
Other comprehensive income to be eventually recycled into the consolidated income statement:
Novartis share of other comprehensive income recognized by associated companies, net of taxes
-40 46 -86
Net investment hedge
81 1 80
Currency translation effects
-700 361 -1 061
Total of items to eventually recycle -659 408 -1 067
Other comprehensive income never to be recycled into the consolidated income statement:
Actuarial (losses)/gains from defined benefit plans, net of taxes
-418 350 -768
Fair value adjustments on equity securities, net of taxes
-99 52 -151
Total of items never to be recycled -517 402 -919
Total comprehensive income 865 2 434 -1 569
Attributable to:
Shareholders of Novartis AG
868 2 435 -1 567
Continuing operations
868 2 714 -1 846
Discontinued operations
-279 279
Non-controlling interests
-3 -1 -2
  
  
  
  
 

22

 
Consolidated statements of comprehensive income

Nine months to September 30 (unaudited)



(USD millions) 9M 2019 9M 2018 Change
Net income 10 608 11 420 -812
Other comprehensive income to be eventually recycled into the consolidated income statement:
Fair value adjustments on debt securities, net of taxes
1 -2 3
Fair value adjustments on deferred cash flow hedges, net of taxes
1 9 -8
Total fair value adjustments on financial instruments, net of taxes
2 7 -5
Novartis share of other comprehensive income recognized by associated companies, net of taxes 1
-94 -482 388
Net investment hedge
93 60 33
Currency translation effects2
-511 594 -1 105
Total of items to eventually recycle -510 179 -689
Other comprehensive income never to be recycled into the consolidated income statement:
Actuarial (losses)/gains from defined benefit plans, net of taxes3
-1 308 574 -1 882
Fair value adjustments on equity securities, net of taxes
-25 202 -227
Total of items never to be recycled -1 333 776 -2 109
Total comprehensive income 8 765 12 375 -3 610
Attributable to:
Shareholders of Novartis AG
8 766 12 376 -3 610
Continuing operations
4 189 12 500 -8 311
Discontinued operations
4 577 -124 4 701
Non-controlling interests
-1 -1 0
In 2018, Novartis share of other comprehensive income recognized by associated companies, net of taxes of USD 511 million was recycled into the consolidated income statement as a result of the divestment of the investment in GSK Consumer Healthcare Holdings Ltd. (see Note 3).
In 2019, cumulative currency translation gains of USD 123 million were recycled into the consolidated income statement as a result of the Alcon spin-off (see Note 3 and 11). In 2018, cumulative currency translation losses of USD 946 million were recycled into the consolidated income statement as a result of the divestment of the investment in GSK Consumer Healthcare Holdings Ltd.
Included in 2019 is a USD -358 million impact related to the revaluation of deferred tax assets on Swiss pension plans that were previously recognized through other comprehensive income. This revaluation resulted from enactment of the Swiss canton Basel-Stadt tax rate reduction, effective on January 1, 2019.



23

 
Consolidated balance sheets


(USD millions)


Note
Sep 30,
2019
(unaudited)
Dec 31,
2018
(audited)


Change
Assets
Non-current assets
Property, plant and equipment 10 11 878 15 696 -3 818
Right-of-use assets 6 1 682 1 682
Goodwill 10 26 306 35 294 -8 988
Intangible assets other than goodwill 10 29 694 38 719 -9 025
Investments in associated companies 8 284 8 352 -68
Deferred tax assets 7 985 8 699 -714
Financial assets 2 778 2 345 433
Other non-current assets 689 895 -206
Total non-current assets 89 296 110 000 -20 704
Current assets
Inventories 6 123 6 956 -833
Trade receivables 7 826 8 727 -901
Income tax receivables 244 248 -4
Marketable securities, commodities, time deposits and derivative financial instruments 339 2 693 -2 354
Cash and cash equivalents 8 378 13 271 -4 893
Other current assets 2 920 2 861 59
Assets of disposal group held for sale 3 845 807 38
Total current assets 26 675 35 563 -8 888
Total assets 115 971 145 563 -29 592
Equity and liabilities
Equity
Share capital 936 944 -8
Treasury shares -80 -69 -11
Reserves 51 668 77 739 -26 071
Issued share capital and reserves attributable to Novartis AG shareholders 52 524 78 614 -26 090
Non-controlling interests 74 78 -4
Total equity 52 598 78 692 -26 094
Liabilities
Non-current liabilities
Financial debts 20 131 22 470 -2 339
Lease liabilities 6 1 702 1 702
Deferred tax liabilities 5 682 7 475 -1 793
Provisions and other non-current liabilities 7 638 7 319 319
Total non-current liabilities 35 153 37 264 -2 111
Current liabilities
Trade payables 4 669 5 556 -887
Financial debts and derivative financial instruments 8 017 9 678 -1 661
Lease liabilities 6 266 266
Current income tax liabilities 2 325 2 038 287
Provisions and other current liabilities 12 919 12 284 635
Liabilities of disposal group held for sale 3 24 51 -27
Total current liabilities 28 220 29 607 -1 387
Total liabilities 63 373 66 871 -3 498
Total equity and liabilities 115 971 145 563 -29 592
 

24

 
Consolidated statements of changes in equity 

Third quarter (unaudited)




(USD millions)




Share
capital




Treasury
shares




Retained
earnings




Total value
adjustments
Issued share
capital and
reserves
attributable
to Novartis
shareholders



Non-
controlling
interests




Total
equity
Total equity at July 1, 2019 936 -67 55 645 -5 088 51 426 78 51 504
Net income 2 042 2 042 -1 2 041
Other comprehensive income -40 -1 134 -1 174 -2 -1 176
Total comprehensive income 2 002 -1 134 868 -3 865
Purchase of treasury shares -14 -2 521 -2 535 -2 535
Equity-based compensation 1 193 194 194
Taxes on treasury share transactions -4 -4 -4
Decrease of treasury share repurchase obligation under a share buyback trading plan 2 573 2 573 2 573
Changes in non-controlling interests -1 -1
Fair value adjustments on financial assets sold 38 -38
Other movements1 2 2 2
Total of other equity movements -13 281 -38 230 -1 229
Total equity at September 30, 2019 936 -80 57 928 -6 260 52 524 74 52 598
Impact of hyperinflationary economies


(USD millions)




Share
capital




Treasury
shares




Retained
earnings




Total value
adjustments
Issued share
capital and
reserves
attributable
to Novartis
shareholders



Non-
controlling
interests




Total
equity
Total equity at July 1, 2018 944 -63 79 793 -3 859 76 815 86 76 901
Net income 1 623 1 623 1 1 624
Other comprehensive income 46 766 812 -2 810
Total comprehensive income 1 669 766 2 435 -1 2 434
Purchase of treasury shares -6 -985 -991 -991
Exercise of options and employee transactions 1 1 1
Equity-based compensation 199 199 199
Increase of treasury share repurchase obligation under a share buyback trading plan -526 -526 -526
Transaction costs1 -28 -28 -28
Changes in non-controlling interests -1 -1
Fair value adjustments on financial assets sold -1 1
Impact of change in ownership of consolidated entities 4 4 -3 1
Other movements2 29 29 29
Total of other equity movements -6 -1 307 1 -1 312 -4 -1 316
Total equity at September 30, 2018 944 -69 80 155 -3 092 77 938 81 78 019
Transaction costs directly attributable to the distribution (spin-off) of the Alcon business to Novartis AG shareholders (see Note 2)
Impact of hyperinflationary economies



25

 
Consolidated statements of changes in equity 

Nine months to September 30, 2019 (unaudited)




(USD millions)




Share
capital




Treasury
shares




Retained
earnings




Total value
adjustments
Issued share
capital and
reserves
attributable
to Novartis
shareholders



Non-
controlling
interests




Total
equity
Total equity at January 1, 2019, as previously reported 944 -69 82 191 -4 452 78 614 78 78 692
Impact of change in accounting policies1 3 3 3
Restated equity at January 1, 2019 944 -69 82 194 -4 452 78 617 78 78 695
Net income 10 607 10 607 1 10 608
Other comprehensive income -94 -1 747 -1 841 -2 -1 843
Total comprehensive income 10 513 -1 747 8 766 -1 8 765
Dividends -6 645 -6 645 -6 645
Dividend in kind2 -23 434 -23 434 -23 434
Purchase of treasury shares -31 -5 476 -5 507 -5 507
Reduction of share capital -8 12 -4
Exercise of options and employee transactions 3 197 200 200
Equity-based compensation 5 636 641 641
Shares delivered to Alcon employees as a result of the Alcon spin-off 32 32 32
Taxes on treasury share transactions3 -189 -189 -189
Decrease of treasury share repurchase obligation under a share buyback trading plan 284 284 284
Transaction costs4 -253 -253 -253
Changes in non-controlling interests -1 -1
Fair value adjustments on financial assets sold 57 -57
Fair value adjustments related to divestments 4 -4
Impact of change in ownership of consolidated entities -3 -3 -2 -5
Other movements5 15 15 15
Total of other equity movements -8 -11 -34 779 -61 -34 859 -3 -34 862
Total equity at September 30, 2019 936 -80 57 928 -6 260 52 524 74 52 598
The impact of change in accounting policy includes USD 3 million related to the implementation of IFRS 16 – Leases (see Notes 2 and 6 for further details).
Fair value of the dividend-in-kind of the Alcon business distributed to Novartis AG shareholders and ADR (American Depositary Receipt) holders approved at the 2019 Annual General Meeting held on February 28, 2019. Distribution was effected on April 9, 2019, whereby each Novartis AG shareholders and ADR holder received 1 Alcon Inc. share for every 5 Novartis AG shares/ADRs they held on April 8, 2019, close of business (see Note 2, 3 and 11 for further details)
In 2019, USD 69 million impact related to the revaluation of deferred tax liability on treasury shares are recognized through retained earnings. This revaluation resulted from the Swiss Federal tax reform enacted in May 2019, effective January 1, 2020.
Transaction costs directly attributable to the distribution (spin-off) of the Alcon business to Novartis AG shareholders (see Note 2)
Impact of hyperinflationary economies

26

 
Consolidated statements of changes in equity 

Nine months to September 30, 2018 (unaudited)




(USD millions)




Share
capital




Treasury
shares




Retained
earnings




Total value
adjustments
Issued share
capital and
reserves
attributable
to Novartis
shareholders



Non-
controlling
interests




Total
equity
Total equity at January 1, 2018, as previously reported 969 -100 77 639 -4 340 74 168 59 74 227
Impact of change in accounting policies1 237 -177 60 60
Restated equity at January 1, 2018 969 -100 77 876 -4 517 74 228 59 74 287
Net income 11 416 11 416 4 11 420
Other comprehensive income -482 1 442 960 -5 955
Total comprehensive income 10 934 1 442 12 376 -1 12 375
Dividends -6 966 -6 966 -6 966
Purchase of treasury shares -11 -1 780 -1 791 -1 791
Reduction of share capital -25 34 -9
Exercise of options and employee transactions 4 430 434 434
Equity-based compensation 4 551 555 555
Increase of treasury share repurchase obligation under a share buyback trading plan -889 -889 -889
Transaction costs2 -39 -39 -39
Changes in non-controlling interests -1 -1
Fair value adjustments on financial assets sold 17 -17
Impact of change in ownership of consolidated entities 1 1 24 25
Other movements3 29 29 29
Total of other equity movements -25 31 -8 655 -17 -8 666 23 -8 643
Total equity at September 30, 2018 944 -69 80 155 -3 092 77 938 81 78 019
The impact of change in accounting policies includes USD 60 million relating to IFRS 15 implementation and USD 177 million relating to IFRS 9 implementation (see Note 1 and 29 of the 2018 Annual report).
Transaction costs directly attributable to the distribution (spin-off) of the Alcon business to Novartis AG shareholders (see Note 2).
Impact of hyperinflationary economies

27

 
Consolidated statements of cash flows

Third quarter (unaudited)

(USD millions) Note Q3 2019 Q3 2018 Change
Net income from continuing operations 2 041 1 882 159
Adjustments to reconcile net income from continuing operations to net cash flows from operating activities from continuing operations
Reversal of non-cash items and other adjustments 7 2 271 1 758 513
Dividends received from associated companies and others 0 1 -1
Interest received 32 68 -36
Interest paid -134 -173 39
Other financial receipts 51 108 -57
Other financial payments -9 -8 -1
Taxes paid1 -235 -219 -16
Net cash flows from operating activities from continuing operations before working capital and provision changes 4 017 3 417 600
Payments out of provisions and other net cash movements in non-current liabilities -146 -208 62
Change in net current assets and other operating cash flow items 691 511 180
Net cash flows from operating activities from continuing operations 4 562 3 720 842
Net cash flows from operating activities from discontinued operations 1 330 -330
Total net cash flows from operating activities 4 562 4 050 512
Purchase of property, plant and equipment -357 -295 -62
Proceeds from sales of property, plant and equipment -3 4 -7
Purchase of intangible assets -205 -546 341
Proceeds from sales of intangible assets 140 286 -146
Purchase of financial assets -69 -77 8
Proceeds from sales of financial assets 565 74 491
Purchase of other non-current assets -10 -13 3
Proceeds from sales of other non-current assets 1 3 -2
Acquisitions of interests in associated companies, net1 -1 -81 80
Acquisitions and divestments of businesses, net 7 -3 460 -20 -3 440
Purchase of marketable securities and commodities -69 -79 10
Proceeds from sales of marketable securities and commodities 67 43 24
Net cash flows used in investing activities from continuing operations -3 401 -701 -2 700
Net cash flows from/used in investing activities from discontinued operations 2 3 -185 188
Total net cash flows used in investing activities -3 398 -886 -2 512
Acquisition of treasury shares -2 940 -1 013 -1 927
Proceeds from exercise of options and other treasury share transactions 5 1 4
Increase in non-current financial debts 93 0 93
Repayments of non-current financial debts -186 -1 -185
Change in current financial debts 423 -603 1 026
Payments of lease liabilities, net -92 -92
Receipts from finance sublease receivables 7 7
Impact of change in ownership of consolidated entities -1 -7 6
Dividends paid to non-controlling interests and other financing cash flows -2 157 -159
Net cash flows used in financing activities from continuing operations -2 693 -1 466 -1 227
Net cash flows used in financing activities from discontinued operations 3 -20 -155 135
Total net cash flows used in financing activities -2 713 -1 621 -1 092
Net change in cash and cash equivalents before effect of exchange rate changes -1 549 1 543 -3 092
Effect of exchange rate changes on cash and cash equivalents -64 11 -75
Total net change in cash and cash equivalents -1 613 1 554 -3 167
Cash and cash equivalents at July 1 9 991 12 446 -2 455
Cash and cash equivalents at September 30 8 378 14 000 -5 622
In Q3 2018, the total net tax payment amounted to USD 336 million, of which USD 75 million was included in the line "Acquisitions of interests in associated companies, net" and USD 42 million was included in the line “Net cash flows from operating activities from discontinued operations.”     
For additional information related to Q3 2019 "Net cash flows from/used in investing activities from discontinued operations", refer to Note 11.
Including USD 20 million (Q3 2018: USD 33 million) transaction cost payments directly attributable to the distribution (spin-off) of the Alcon business to Novartis shareholders (see Note 2)

28

 
Consolidated statements of cash flows

Nine months to September 30 (unaudited)



(USD millions) Note 9M 2019 9M 2018 Change
Net income from continuing operations 6 018 11 580 -5 562
Adjustments to reconcile net income from continuing operations to net cash flows from operating activities from continuing operations
Reversal of non-cash items and other adjustments 7 6 372 -861 7 233
Dividends received from associated companies and others 463 719 -256
Interest received 172 154 18
Interest paid -540 -545 5
Other financial receipts 61 146 -85
Other financial payments -25 -22 -3
Taxes paid1 -1 195 -1 109 -86
Net cash flows from operating activities before working capital and provision changes from continuing operations 11 326 10 062 1 264
Payments out of provisions and other net cash movements in non-current liabilities -662 -472 -190
Change in net current assets and other operating cash flow items -657 23 -680
Net cash flows from operating activities from continuing operations 10 007 9 613 394
Net cash flows from operating activities from discontinued operations1 78 893 -815
Total net cash flows from operating activities 10 085 10 506 -421
Purchase of property, plant and equipment -918 -810 -108
Proceeds from sales of property, plant and equipment 809 55 754
Purchase of intangible assets -703 -1 188 485
Proceeds from sales of intangible assets 421 702 -281
Purchase of financial assets -223 -148 -75
Proceeds from sales of financial assets 742 138 604
Purchase of other non-current assets -34 -26 -8
Proceeds from sales of other non-current assets 4 7 -3
Acquisitions and divestments of interests in associated companies, net 1 -4 12 919 -12 923
Acquisitions and divestments of businesses, net 7 -3 842 -11 879 8 037
Purchase of marketable securities and commodities -189 -302 113
Proceeds from sales of marketable securities and commodities 2 495 334 2 161
Net cash flows used in investing activities from continuing operations -1 442 -198 -1 244
Net cash flows used in investing activities from discontinued operations 2 -1 102 -458 -644
Total net cash flows used in investing activities -2 544 -656 -1 888
Dividends paid to shareholders of Novartis AG -6 645 -6 966 321
Acquisition of treasury shares -5 530 -1 787 -3 743
Proceeds from exercise options and other treasury share transactions 205 434 -229
Increase in non-current financial debts 93 2 856 -2 763
Repayments of non-current financial debts -3 194 -366 -2 828
Change in current financial debts -519 1 199 -1 718
Payments of lease liabilities, net -183 -183
Receipts from finance sublease receivables 7 7
Impact of change in ownership of consolidated entities -6 -14 8
Dividends paid to non-controlling interests and other financing cash flows 69 417 -348
Net cash flows used in financing activities from continuing operations -15 703 -4 227 -11 476
Net cash flows from/used in financing activities from discontinued operations 3 3 279 -470 3 749
Total net cash flows used in financing activities -12 424 -4 697 -7 727
Net change in cash and cash equivalents before effect of exchange rate changes -4 883 5 153 -10 036
Effect of exchange rate changes on cash and cash equivalents -10 -13 3
Total net change in cash and cash equivalents -4 893 5 140 -10 033
Cash and cash equivalents at January 1 13 271 8 860 4 411
Cash and cash equivalents at September 30 8 378 14 000 -5 622
In 2019, the total net tax payment amounted to USD 1 233 million, of which USD 38 million is included in the line “Net cash flows from operating activities from discontinued operations.” In 2018, the total net tax payment amounted to USD 1 319 million, of which USD 75 million was included in the line "Acquisitions and divestments of interests in associated companies, net" and USD 135 million was included in the line “Net cash flows from operating activities from discontinued operations.”      
For additional information related to 9M 2019 "Net cash flows used in investing activities from discontinued operations", refer to Note 11.
Including USD 190 million (2018: USD 41 million) transaction cost payments directly attributable to the distribution (spin-off) of the Alcon business to Novartis shareholders (see Note 2)

29

 
Notes to the Condensed Interim Consolidated Financial Statements for the three-month and nine-month period ended September 30, 2019 (unaudited)

1. Basis of preparation

These Condensed Interim Consolidated Financial Statements for the three-month and nine-month period ended September 30, 2019, were prepared in accordance with International Accounting Standard 34 Interim Financial Reporting and accounting policies set out in the 2018 Annual Report published on January 30, 2019.

2. Selected critical accounting policies

The Group’s principal accounting policies are set out in Note 1 to the Consolidated Financial Statements in the 2018 Annual Report and conform with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.

The presentation of financial statements requires management to make subjective and complex judgments that affect the reported amounts. Because of the inherent uncertainties, actual outcomes and results may differ from management’s assumptions and estimates.

As disclosed in the 2018 Annual Report, goodwill, and acquired In-Process Research & Development projects are reviewed for impairment at least annually and these, as well as all other investments in intangible assets, are reviewed for impairment whenever an event or decision occurs that raises concern about their balance sheet carrying value. The amount of goodwill and other intangible assets on the Group’s consolidated balance sheet has risen significantly in recent years, primarily from acquisitions. Impairment testing may lead to potentially significant impairment charges in the future that could have a materially adverse impact on the Group’s results of operations and financial condition.

During the first quarter of 2019, at the Annual General Meeting (AGM) of Novartis AG shareholders, held on February 28, 2019, the Novartis AG shareholders approved a special distribution by way of a dividend in kind to effect the spin-off of Alcon Inc. The shareholder approval required the recognition of a distribution liability at the fair value of the Alcon business to be distributed to Novartis AG shareholders. This required the use of valuation techniques for purposes of impairment testing of the Alcon business’ assets to be distributed and for the measurement of the fair value of the distribution liability. These valuations required the use of management assumptions and estimates related to the Alcon business’ future cash flows, market multiples to estimate day one market value and control premiums to apply in estimating the Alcon business fair value. These fair value measurements are classified as “Level 3” in the fair value hierarchy. Note 1 and Note 10 to the Consolidated Financial Statements in the 2018 Annual Report provide additional information on key assumptions that are highly sensitive in the estimation of fair values using valuation techniques. Due to these factors and inherent uncertainties in the use of estimates, actual outcomes and results could vary significantly.

The February 28, 2019, shareholder approval for the spin-off required the Alcon Division and selected portions of Corporate activities attributable to Alcon’s business (the “Alcon business”) to be reported as discontinued operations. Refer to Note 3 and Note 11 for further details.

Transaction costs recorded in Equity

Transaction costs that are directly attributable to the distribution (spin-off) of the Alcon business to the Novartis AG shareholders, and that would otherwise have been avoided, are recorded as a deduction from equity.

Non-current assets held for sale or held for distribution to owners

Non-current assets are classified as assets held for sale or related to discontinued operations when their carrying amount is to be recovered principally through a sale transaction or distribution to owners and a sale or distribution to owners is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell with any resulting impairment recognized. Assets

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related to discontinued operations and assets of disposal group held for sale are not depreciated or amortized. The December 31, 2018, consolidated balance sheet is not restated.

Distribution liability

The distribution liability was recorded at the date of shareholder approval for the distribution of the business assets to the shareholders. The Group has elected to measure the distribution liability at the fair value of the business assets taken as a whole to be distributed to shareholders. As a result, the distribution liability was recognized based on the fair value of the Alcon business. The distribution liability was recognized through a reduction in retained earnings. It is adjusted at each balance sheet date for changes in its estimated fair value, up to the date of the distribution to shareholders through retained earnings. Any resulting impairment of the business assets to be distributed is recognized in the consolidated income statements in “Other expense” of discontinued operations, at the date of initial recognition of the distribution liability or at subsequent dates resulting from changes of the distribution liability valuation. At the distribution settlement date, any resulting gain, which is measured as the excess amount of the distribution liability over the then carrying value of the assets of the business distributed, is recognized on the line “Gain on distribution of Alcon Inc. to Novartis AG shareholders” in the income statement of discontinued operations.

New IFRS standards effective as of January 1, 2019

IFRS 16 LEASES

IFRS 16 Leases substantially changed the financial statements as the majority of leases for which the company is the lessee became on-balance sheet liabilities with corresponding right-of-use assets also recognized on the balance sheet. The lease liability reflects the net present value of the remaining lease payments, and the right-of-use asset corresponds to the lease liability, adjusted for payments made before the commencement date, lease incentives and other items related to the lease agreement. The standard replaces IAS 17 Leases and related interpretations.

Upon adoption of the new standard, a portion of the annual operating lease costs, which was previously fully recognized as a functional expense, is recorded as interest expense. In addition, the portion of the lease payments which represents the reduction of the lease liability is recognized in the cash flow statement as an outflow from financing activities, which was previously fully recognized as an outflow from operating activities. Given the leases involved and the current low interest rate environment, these effects are not significant to the presentation of our consolidated income statement as well as consolidated cash flows from operating activities and from financing activities.

The Group implemented the new standard on January 1, 2019, and applied the modified retrospective method, with right-of-use assets measured at an amount equal to the lease liability, adjusted by the amount of the prepaid or accrued lease payments relating to those leases recognized in the balance sheet immediately before the date of initial application and will not restate prior years.

Results of our impact assessment:

The undiscounted operating lease commitments as of December 31, 2018, disclosed in Note 27 to the Consolidated Financial Statements in the Annual Report 2018, amounted to USD 3.6 billion. This includes approximately USD 0.1 billion of leases with a commencement date in 2019 and short-term leases, as well as low-value leases that are recognized from January 1, 2019, upon adoption of IFRS 16, on a straight-line basis as expense in profit and loss. This also includes USD 0.2 billion lease commitments related to the Alcon Division, which is attributable to discontinued operation in 2019. For the remaining lease commitments attributable to continuing operations of USD 3.3 billion, the Group recognized on January 1, 2019, lease liabilities of USD 1.74 billion and right-of-use assets USD 1.55 billion (after adjustments for the USD 0.18 billion prepayments and accrued lease payments recognized as at December 31, 2018). For the lease commitments attributable to discontinued operations, the Group recognized on January 1, 2019, lease liabilities and right-of-use assets of USD 0.2 billion. This does not include the discontinued operations right-of-use assets and lease liability on finance lease agreements of USD 75 million and USD 89 million, respectively. There was an insignificant impact to retained earnings upon adoption of IFRS 16 of USD 3 million that arose from subleases that were

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accounted for as operating lease agreements under IAS 17 and are accounted for as finance leases under IFRS 16.

As a lessor, the Group had no significant impact upon adoption.

For further information on the impact of adoption and additional disclosures of IFRS 16 Leases, see Note 6.

The Group has updated accounting policies, effective January 1, 2019, upon adoption of IFRS 16 – Leases are as follows:

Leases

As lessee, the Group assesses whether a contract contains a lease at inception of a contract and upon a modification of a contract. The Group elected to allocate the consideration in the contract to the lease component and non-lease component on the basis of its relative stand‑alone price.

The Group recognizes a right-of-use asset and a corresponding lease liability for all arrangements in which it is a lessee, except for leases with a term of twelve months or less (short-term leases) and low value leases. For these short-term and low value leases, the Group recognizes the lease payments as an operating expense on a straight-line basis over the term of the lease.

The lease liability is initially measured at the present value of the future lease component payments, as from the commencement date of the lease. The lease payments are discounted using the interest rate implicit in the lease or, if not readily determinable, the Novartis incremental borrowing rate in the respective markets.

The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever there is, a change to the lease terms or expected payments under the lease, or a modification that is not accounted for as a separate lease.

The right-of-use assets are initially recognized on the balance sheet at cost, which comprises the amount of the initial measurement of the corresponding lease liability, adjusted for any lease payments made at or prior to the commencement date of the lease, any lease incentive received and any initial direct costs incurred by Novartis, and expected costs for obligations to dismantle and remove right-of-use assets when they are no longer used.

Right-of-use assets are depreciated on a straight-line basis from the commencement date of the lease over the shorter of the useful life of the right-of-use asset or the end of the lease term.

Right-of-use assets are assessed for impairment whenever there is an indication that the balance sheet carrying amount may not be recoverable using cash flow projections for the useful life.

3. Significant transactions

Significant transaction in 2019

Completion of the spin-off of the Alcon business through a dividend in kind distribution to Novartis AG shareholders

On June 29, 2018, Novartis announced its intention to seek shareholder approval for the spin-off of the Alcon business into a separately traded standalone company, following the complete structural separation of the Alcon business into a standalone company (the Alcon business or Alcon Inc.).

The Novartis AG shareholders approved the spin-off of the Alcon business at the 2019 Annual General Meeting held on February 28, 2019, subject to completion of certain conditions precedent to the distribution. Upon shareholder approval, the Alcon business was reported as discontinued operations and the fair value of the Alcon business exceeded the carrying value of its net assets.

The conditions precedent to the spin-off were met and on April 8, 2019, the spin-off of the Alcon business was effected by way of a distribution of a dividend in kind of Alcon Inc. shares to Novartis AG

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shareholders and ADR (American Depositary Receipt) holders (the Distribution). Through the Distribution, each Novartis AG shareholder received 1 Alcon Inc. share for every 5 Novartis AG shares/ADRs they held on April 8, 2019, close of business. As of April 9, 2019, the shares of Alcon Inc. are listed on the SIX Swiss Exchange (SIX) and on the New York Stock Exchange (NYSE) under the symbol “ALC”.

The dividend in kind distribution liability to effect the spin-off of the Alcon business (the distribution liability) amounted to USD 26.4 billion at March 31, 2019, unchanged from its initial recognition on February 28, 2019, and was in excess of the carrying value of the Alcon business net assets as of February 28, 2019, and as of March 31, 2019. The net assets of the Alcon business amounted to USD 23.1 billion as at March 31, 2019.

On March 6, 2019, Alcon entered into financing arrangements with a syndicate of banks under which it borrowed on April 2, 2019 a total amount of USD 3.2 billion. These borrowings consisted of approximately USD 2.8 billion and the equivalent of USD 0.4 billion in EUR in bridge and other term loans under such Alcon facilities agreement. In addition, approximately USD 0.3 billion of borrowings under a number of local bilateral facilities in different countries, with the largest share of borrowings in Japan, were raised. This resulted in a total gross debt of USD 3.5 billion. These outstanding borrowings of the Alcon legal entities were recorded in the balance sheet and financing cash flow from discontinued operations. Prior to the spin-off, through a series of intercompany transactions, Alcon legal entities paid approximately USD 3.1 billion in cash to Novartis and its affiliates.

At the April 8, 2019 Distribution, the fair value of the distribution liability of the Alcon business amounted to USD 23.4 billion, a decrease of USD 3.0 billion from March 31, 2019. As mentioned above, prior to the spin-off, through a series of intercompany transactions, Alcon legal entities incurred additional net financial debt and paid approximately USD 3.1 billion in cash to Novartis and its affiliates. This additional net debt and transactions resulted in a decrease in Alcon’s net assets to USD 20.0 billion at the date of the Distribution of the dividend in kind to Novartis AG shareholders on April 8, 2019. The distribution liability at April 8, 2019, remained in excess of the then carrying value of the Alcon business net assets.

Certain consolidated foundations own Novartis AG dividend bearing shares restricting their availability for use by the Group. These Novartis AG shares are accounted for as treasury shares. Through the Distribution, these foundations received Alcon Inc. shares representing an approximate 4.7% equity interest in Alcon Inc. Upon the loss of control of Alcon Inc. through the Distribution, the financial investment in Alcon Inc. was recognized at its fair value based on the opening traded share price of Alcon Inc. on April 9, 2019 (a Level 1 hierarchy valuation). At initial recognition, its fair value of USD 1.3 billion was reported on the Group’s consolidated balance sheet as a financial asset. Management has designated this investment at fair value through other comprehensive income.

The total non-taxable non-cash gain recognized at the completion of the spin-off of the Alcon business on April 9, 2019, amounted to USD 4.7 billion consisting of:

(USD millions)
Net assets derecognized1 -20 025
Derecognition of distribution liability 23 434
Difference between net assets and distribution liability 3 409
Recognition of Alcon Inc. shares obtained through consolidated foundations 1 273
Currency translation gains recycled into the consolidated income statement 123
Transaction costs recognized in the consolidated income statement -114
Gain on distribution of Alcon Inc. to Novartis AG shareholders 4 691
See Note 11 for additional information.



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Significant transaction closed in 2019 – Continuing operations

Innovative Medicines – Acquisition of IFM Tre, Inc.
On May 7, 2019, Novartis acquired IFM Tre, Inc., a privately held, US based biopharmaceutical company focused on developing anti-inflammatory medicines targeting the NLRP3 inflammasome. The acquisition gives Novartis full rights to IFM Tre, Inc.’s portfolio of NLPR3 antagonists. The NLPR3 antagonists portfolio consists of one clinical and two pre-clinical programs: IFM-2427, a first-in-class, clinical stage systemic antagonist for an array of chronic inflammatory disorders including atherosclerosis and nonalcoholic steatohepatitis (NASH); a pre-clinical stage gutdirected molecule for the treatment of inflammatory bowel disease; and a pre-clinical stage central nervous system (CNS)-penetrant molecule.

The previously held interest of 9% is adjusted to its preliminary fair value of USD 33 million through the consolidated income statement at acquisition date. This remeasurement resulted in a gain of USD 14 million. The preliminary fair value of the total purchase consideration for acquiring the 91% stake Novartis did not already own amounted to USD 361 million. The amount consisted of an initial cash payment of USD 285 million and the preliminary net present value of the contingent consideration of USD 76 million due to the IFM Tre, Inc. shareholders, which they are eligible to receive upon the achievement of specified development and commercialization milestones. The preliminary purchase price allocation resulted in net identifiable assets of USD 355 million, mainly intangibles, and goodwill of USD 39 million. Results of operations since the date of acquisition were not material.

Innovative Medicines – Acquisition of Xiidra
On May 8, 2019, Novartis entered into an agreement with Takeda Pharmaceutical Company Limited (Takeda) to acquire the assets associated with Xiidra (lifitegrast ophthalmic solution) 5% worldwide. Xiidra is the first and only prescription treatment approved to treat both signs and symptoms of dry eye by inhibiting inflammation caused by the disease. The transaction bolsters the Novartis front-of-the-eye portfolio and ophthalmic leadership. The transaction closed on July 1, 2019. The purchase price consists of an USD 3.4 billion upfront payment, customary purchase price adjustments of USD 0.1 billion and the potential milestone payments up to USD 1.9 billion, which Takeda is eligible to receive upon the achievement of specified commercialization milestones.

The fair value of the total purchase consideration is USD 3.7 billion. The amount consists of an initial cash payment of USD 3.5 billion and the net present value of the contingent consideration of USD 0.2 billion, which Takeda is eligible to receive upon the achievement of specified commercialization milestones.

The preliminary purchase price allocation resulted in net identifiable assets of approximately USD 3.6 billion, consisting mainly of intangible assets of USD 3.6 billion and goodwill amounted to approximately USD 0.1 billion. In 2019, from the date of acquisition, the business generated net sales of USD 0.1 billion. Management estimates net sales for the nine-month period ended September 30, 2019, would have amounted to USD 0.2 billion, had the business been acquired at the beginning of the 2019 reporting period. Results of operations since the date of acquisition were not material.

For significant transactions closed in 2019 for Discontinued operations, see Note 11.

Significant pending transaction

Sandoz – Divestment of US dermatology business and generic US oral solids portfolio
On September 6, 2018, Novartis announced it has agreed to sell selected portions of its Sandoz US portfolio, specifically the Sandoz US dermatology business and generic US oral solids portfolio, to Aurobindo Pharma USA Inc. (Aurobindo), for USD 0.8 billion in cash and potential earn-outs.

The Sandoz US portfolios to be sold to Aurobindo include approximately 300 products as well as additional development projects. The sale includes the Sandoz US generic and branded dermatology businesses as well as its dermatology development center. As part of the transaction, Aurobindo will acquire the manufacturing facilities in Wilson, North Carolina, and in Hicksville and Melville, New York.

The transaction is expected to be completed in the coming months, pending regulatory approval. As the fair value of the consideration (USD 0.8 billion) less costs to sell was below the carrying value of

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the divested business (USD 1.0 billion, which includes an allocation of Sandoz goodwill of USD 0.2 billion), an impairment of the net assets to be divested in the amount of USD 0.2 billion was recognized as a reduction to goodwill.

In the Group’s consolidated balance sheet at September 30, 2019 and at December 31, 2018, the business assets and liabilities of the Sandoz US dermatology business and generic US oral solids portfolio are separately shown as assets and liabilities of disposal group held for sale.

The disposal group, assets and liabilities classified as held for sale consist of the following:


(USD millions)
Sep 30,
2019
Dec 31,
2018
Assets of disposal group classified as held for sale
Property, plant and equipment 163 148
Intangible assets other than goodwill 474 478
Deferred tax assets 10 8
Other non-current assets 2 1
Inventories 186 165
Other current assets 10 7
Total 845 807
Liabilities of disposal group classified as held for sale
Deferred tax liabilities 2 2
Provisions and other non-current liabilities 4 4
Provisions and other current liabilities 18 45
Total 24 51

There are no cumulative income or expenses included in other comprehensive income relating to the disposal group.

Significant transactions in 2018

Innovative Medicines – Acquisition of Advanced Accelerator Applications S.A.
On October 30, 2017, Novartis entered into a binding memorandum of understanding with Advanced Accelerator Applications S.A. (AAA), a company headquartered in Saint-Genis-Pouilly, France, under which Novartis agreed to commence a tender offer for 100% of the share capital of AAA subject to certain conditions. Novartis commenced the tender offer on December 7, 2017, to purchase all of the outstanding ordinary shares for a price of USD 41 per share and USD 82 per American Depositary Share (ADS), each representing two ordinary shares of AAA, which expired on January 19, 2018. The offer valued AAA’s equity at USD 3.9 billion, on a fully diluted basis.

As of January 19, 2018, the expiration date of the tender offer, approximately 97% of the then-outstanding fully diluted ordinary shares, including ordinary shares represented by ADSs (hereinafter collectively referred to as “the outstanding shares”), were validly tendered. On January 22, 2018, Novartis accepted and paid USD 3.9 billion for the outstanding shares tendered in the offer. On January 22, 2018, Novartis commenced a subsequent offering period that expired on January 31, 2018. As of the expiration of the subsequent offering period, an additional 1.8% of the outstanding shares were validly tendered. Novartis accepted and paid approximately USD 60 million, resulting in an increase in Novartis ownership in AAA to 98.7%.

The fair value of the total purchase consideration was USD 3.9 billion. The purchase price allocation resulted in net identifiable assets of approximately USD 1.9 billion, consisting of USD 2.5 billion intangible assets, USD 0.6 billion net deferred tax liabilities, and goodwill of approximately USD 2.0 billion. In 2018, from the date of the acquisition the business generated net sales of USD 0.4 billion. Management estimates net sales for the entire year 2018 would have amounted to USD 0.4 billion had AAA been acquired at the beginning of 2018. The 2018 results from operations since the date of the acquisition were not material.

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As of December 31, 2018, Novartis held 99.1% of the then-outstanding fully diluted ordinary shares, including ordinary shares represented by ADSs.

AAA is a radiopharmaceutical company that develops, produces and commercializes molecular nuclear medicines – including Lutathera (USAN: lutetium Lu 177 dotatate/INN: lutetium (177Lu) oxodotreotide), a first-in-class radioligand therapy product for neuroendocrine tumors – and a portfolio of diagnostic products. Radiopharmaceuticals, such as Lutathera, are unique medicinal formulations containing radioisotopes, which are used clinically for both diagnosis and therapy.

Innovative Medicines – Acquisition of AveXis, Inc.
On April 6, 2018, Novartis entered into an agreement and plan of merger with AveXis, Inc., a US-based clinical stage gene therapy company, under which Novartis commenced on April 17, 2018, a tender offer to purchase all outstanding common stock of AveXis, Inc. for USD 218 per share in cash. On May 15, 2018, Novartis completed the acquisition of the common stock of AveXis, Inc. and paid a total of USD 8.7 billion.

The fair value of the total purchase consideration was USD 8.7 billion. The purchase price allocation resulted in net identifiable assets of approximately USD 7.2 billion, consisting of USD 8.5 billion intangible assets, USD 1.6 billion net deferred tax liabilities and other net assets of USD 0.3 billion, and goodwill of approximately USD 1.5 billion. The 2018 results of operations since the date of acquisition were not material.

AveXis, Inc. is focused on developing and commercializing novel treatments for patients suffering from rare and life-threatening neurological genetic diseases. AveXis, Inc.’s initial product candidate, AVXS-101, is a proprietary gene therapy currently in development for the treatment of spinal muscular atrophy (SMA) type 1 – the leading genetic cause of infant mortality – and SMA types 2 and 3. In addition, AveXis, Inc. has a pipeline of other novel treatments for rare neurological diseases, including Rett syndrome (RTT) and a genetic form of amyotrophic lateral sclerosis (ALS) caused by mutations in the superoxide dismutase 1 (SOD1) gene.

Innovative Medicines – Acquisition of Endocyte, Inc.
On October 18, 2018, Novartis entered into an agreement and plan of merger with Endocyte, a US-based bio-pharmaceutical company focused on developing targeted therapeutics for cancer treatment. The transaction was completed on December 21, 2018. Under the terms of the agreement, Novartis acquired all outstanding shares of Endocyte common stock for USD 24 per share. The total consideration amounted to USD 2.1 billion.

The fair value of the total purchase consideration was USD 2.1 billion. The preliminary purchase price allocation resulted in net identifiable assets of approximately USD 1.5 billion, consisting of USD 1.4 billion intangible assets, USD 0.2 billion net deferred tax liabilities and other net assets of USD 0.3 billion, and goodwill of approximately USD 0.6 billion. The purchase price allocation remains preliminary and will be finalized within the 12-month purchase price allocation measurement period, which started as of the acquisition date. Adjustments made to the December 31, 2018, preliminary purchase price allocation were not material and the Group currently does not expect any potential additional revisions to be material. The 2018 results from operations since the date of the acquisition were not material.

Endocyte uses drug conjugation technology to develop targeted therapies with companion imaging agents, including 177Lu-PSMA-617, a potential first-in-class investigational radioligand therapy for the treatment of metastatic castration-resistant prostate cancer (mCRPC).

Corporate – Divestment of 36.5% stake in GlaxoSmithKline Consumer Healthcare Holdings Ltd.
On March 27, 2018, Novartis entered into an agreement with GlaxoSmithKline plc (GSK) to divest its 36.5% stake in GlaxoSmithKline Consumer Healthcare Holdings Ltd. to GSK for USD 13.0 billion in cash. As a result, Novartis discontinued the use of equity method accounting starting from April 1, 2018.

On June 1, 2018, the transaction closed and Novartis realized a pre-tax gain of USD 5.8 billion, recorded in income from associated companies.

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4. Summary of equity attributable to Novartis AG shareholders

Number of outstanding shares (in millions) Issued share capital and reserves attributable to Novartis AG shareholders (in USD millions)
2019 2018 Change 9M 2019 9M 2018 Change
Balance at beginning of year 2 311.2 2 317.5 -6.3 78 614 74 168 4 446
Impact of change in accounting policy 1 3 60 -57
Restated equity at January 1 78 617 74 228 4 389
Shares acquired to be cancelled -60.3 -21.2 -39.1 -5 351 -1 684 -3 667
Other share purchases -1.7 -1.4 -0.3 -156 -107 -49
Exercise of options and employee transactions 5.5 7.8 -2.3 200 434 -234
Equity-based compensation 9.9 7.3 2.6 641 555 86
Shares delivered to Alcon employees as a result of the Alcon spin-off 32 32
Taxes on treasury share transactions 2 -189 -189
Decrease/(increase) of treasury share repurchase obligation under a share buyback trading plan 284 -889 1 173
Dividends to shareholders of Novartis AG -6 645 -6 966 321
Dividend in kind3 -23 434 -23 434
Net income of the period attributable to shareholders of Novartis AG 10 607 11 416 -809
Other comprehensive income attributable to shareholders of Novartis AG -1 841 960 -2 801
Transaction costs4 -253 -39 -214
Impact of change in ownership of consolidated entities -3 1 -4
Other movements5 15 29 -14
Balance at September 30 2 264.6 2 310.0 -45.4 52 524 77 938 -25 414
 
In 2019, the impact of change in accounting policy includes USD 3 million related to the implementation of IFRS 16 – Leases (see Notes 2 and 6 for further details). In 2018, the impact of change in accounting policy includes USD 60 million relating to the implementation of IFRS 15 – Revenue from Contracts with Customers implementation and USD 177 million relating to the implementation IFRS 9 - Financial instruments (see Note 1 and 29 of the 2018 Annual report)
Included in 2019 is a USD 69 million impact related to the revaluation of deferred tax liability on treasury shares that are recognized through retained earnings. This revaluation resulted from the Swiss Federal tax reform enacted in May 2019, effective January 1, 2020.
Fair value of the dividend-in-kind of Alcon Inc. shares to Novartis AG shareholders and ADR (American Depositary Receipt) holders approved at the 2019 Annual General Meeting held on February 28, 2019. Distribution was effected on April 8, 2019, whereby each Novartis AG shareholders and ADR holder received 1 Alcon Inc. share for every 5 Novartis AG shares/ADRs they held on April 8, 2019, close of business (see Note 2, 3 and 11 for further details)
Transaction costs directly attributable to the distribution (spin-off) of the Alcon business to Novartis AG shareholders (see Note 2)
Impact of hyperinflationary economies

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5. Financial instruments

Fair value by hierarchy

The following table illustrates the three hierarchical levels for valuing financial instruments at fair value and those measured at amortized cost as of September 30, 2019 and December 31, 2018. For additional information on the hierarchies and other matters, please refer to the Consolidated Financial Statements in the 2018 Annual Report, published on January 30, 2019.

Level 1 Level 2 Level 3 Valued at amortized cost or cost Total

(USD millions)
Sep 30,
2019
Dec 31,
2018
Sep 30,
2019
Dec 31,
2018
Sep 30,
2019
Dec 31,
2018
Sep 30,
2019
Dec 31,
2018
Sep 30,
2019
Dec 31,
2018
Debt securities 302 24 23 24 325
Fund investments 37 35 37 35
Total marketable securities 37 337 24 23 61 360
Time deposits and short term investments with original maturity more than 90 days 81 2 087 81 2 087
Derivative financial instruments 86 130 86 130
Accrued interest on debt securities 12 12
Total marketable securities, time deposits and derivative financial instruments 37 337 110 153 81 2 099 228 2 589
Financial investments and long-term loans
Financial investments 1 238 698 639 488 1 877 1 186
Fund investments 223 251 223 251
Contingent consideration receivables 409 396 409 396
Long-term loans and receivables from customers and finance lease, advances, security deposits 269 512 269 512
Financial investments and long-term loans 1 238 698 1 271 1 135 269 512 2 778 2 345
Associated companies at fair value through profit or loss 174 145 174 145
Contingent consideration payables -1 065 -907 -1 065 -907
Other financial liabilities -36 -10 -36 -10
Derivative financial instruments -154 -58 -154 -58
Total financial liabilities at fair value -154 -58 -1 101 -917 -1 255 -975

There were no significant transfers from one level to the other and no significant transactions associated with level 3 financial instruments.

The fair value of straight bonds amounted to USD 23.7 billion at September 30, 2019 (USD 25.4 billion at December 31, 2018) compared to the balance sheet value of USD 21.9 billion at September 30, 2019 (USD 25.3 billion at December 31, 2018). For all other financial assets and liabilities, the carrying amount is a reasonable approximation of the fair value. The carrying amount of financial assets included in the line financial investments and long-term loans of USD 2.8 billion at September 30, 2019 (USD 2.3 billion at December 31, 2018) is included in line “Financial and other non-current assets” of the consolidated balance sheets.

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During the third quarter of 2019, Alcon Inc. shares with a fair value of USD 543 million (USD 656 million in the nine-month period ended September 30, 2019) were sold and the USD 39 million (USD 48 million in the nine-month period ended September 30, 2019) gain on disposal was transferred from other comprehensive income to retained earnings.

The Group’s exposure to financial risks has not changed significantly during the period and there have been no major changes to the risk management department or in any risk management policies.

6. Right-of-use assets and lease liabilities

Note 2 explains the changes and new accounting policy introduced on January 1, 2019, resulting from the adoption of the new accounting standards IFRS 16 – Leases.

On transition to IFRS 16, the Group elected to apply the practical expedient to not reassess whether a contract is, or contains, a lease at January 1, 2019, the implementation date of IFRS 16. As a result, at the date of implementation, the Group applied IFRS 16 only to contracts that were previously identified as leases under IAS 17 – Leases and related interpretations, and the definition of a lease under IFRS 16 was applied only to contracts entered into or changed on or after 1 January 2019.

The impact on retained earnings upon implementation of IFRS 16 was USD 3 million arising from subleases that were accounted for as operating lease agreements under IAS 17 and are accounted for as finance leases under IFRS 16.

The Group has entered into various fixed-term leases, mainly for vehicles and real estate.

The lease liabilities recorded in continuing operations on January 1, 2019, were USD 1.7 billion and the right-of-use assets were USD 1.6 billion.

Reconciliation of lease commitment disclosed on December 31, 2018, and lease liabilities recorded in continuing operations on January 1, 2019, are as follows:

(USD millions)
Operating lease commitments December 31, 20181 3 612
Operating lease commitments December 31, 2018 related to discontinued operations -222
Operating lease commitments December 31, 2018 related to continuing operations 3 390
Recognition exemption for short term leases -30
Recognition exception for low value leases -12
Lease arrangements with commencement date after December 31, 2018 -65
Undiscounted future lease payments continuing operations as of January 1, 2019 3 283
Effect of discounting -1 547
Lease liabilities as of January 1, 20192 1 736
    
As reported in Annual Report 2018 Note 27
Weighted average incremental borrowing rate of 3.5% was applied at January 1, 2019, the date of implementation of IFRS 16 - Leases.

The right-of-use assets of continuing operations at January 1, 2019, by underlying class of asset comprise the following:

(USD millions) January 1, 2019
Land 536
Buildings 848
Vehicles 147
Machinery and equipment and other assets 23
Right-of-use assets1 1 554
    
Right-of-use assets were lower than the lease liabilities at the date of implementation of IFRS 16 by USD 182 million, due to adjustments made for prepayments and accrued lease payments recognized at December 31, 2018.

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The lease liabilities recorded in discontinued operations on January 1, 2019, were USD 286 million and the right-of-use assets were USD 276 million, including USD 89 million and USD 75 million, respectively, for the previously reported finance lease obligations.

As a result of applying the modified retrospective method at the date of implementation of IFRS 16 on January 1, 2019, whereby the right-of-use assets were measured at the amount equal to the lease liabilities, there is no impact to the reported deferred tax assets and deferred tax liabilities on the consolidated balance sheet, as the corresponding deferred tax assets and deferred tax liabilities attributable to the lease liabilities and right-of-use assets relate to income taxes levied by the same taxation authority within the same legal entity, and were therefore offset.

The following table summarizes the movements of the right-of-use assets of continuing operations:

(USD millions)
Right-of-use assets at January 1, 2019 1 554
Additions1 428
Depreciation charge -227
Lease contract terminations2 -63
Currency translation effects -10
Total right-of-use assets at September 30, 2019 1 682
 No impairments were recorded in the period.
Additions in Q3 amounted to USD 29 million.
Lease contract terminations represent modifications to existing leases that result in reductions to the right-of-use assets, which includes contract terminations.

The right-of-use assets carrying value and depreciation charge of continuing operations at September 30, 2019, are shown below by underlying class of asset:

Depreciation charge

(USD millions)
September 30, 2019
Carrying value

Q3 2019

9M 2019
Land 538 2 10
Buildings 989 50 147
Vehicles 133 24 65
Machinery and equipment and other assets 22 2 5
Total right-of-use assets 1 682 78 227

The lease liabilities of continuing operations at September 30, 2019, amounted to USD 2.0 billion and its breakdown by maturity is as follows:

(USD millions) September 30, 2019
Less than one year 266
Between one and two years 201
Between two and three years 163
Between three and four years 138
Between four and five years 121
After five years 1 079
Total lease liabilities 1 968

The following table provides additional disclosures related to right-of-use assets and lease liabilities of continuing operations:

40

 
(USD millions) Q3 2019 9M 2019
Interest expense on lease liabilities1 18 50
Expense on short-term leases2 2 6
Expense on low-value leases2 3 7
Total cash outflow for leases 108 219
Thereof repayment of lease liabilities3
92 183
Gain arising from sale and leaseback transaction 0 468
Weighted average interest rate is 3.2% and 3.6% for Q3 2019 and 9M 2019, respectively.
Cash flows from short-term and low value leases are included within total net cash flows from operating activities
Reported as cash outflows used in financing activities net of lease incentives received of USD 33 million in 9M 2019 (Q3 2019: USD 4 million)
 There were no variable lease payments not included in the measurement of the lease liabilities.

The net investment held and the income from subleasing right-of-use assets was not significant.

In the second quarter 2019, the Group completed a sale and leaseback transaction for certain property plant and equipment as part of its plans to consolidate sites. The transaction resulted in net cash flow inflows of USD 0.6 billion and the recognition of USD 86 million of lease liabilities, and USD 30 million of right-of-use assets. The right-of-use assets value reflects the proportion of the property, plant and equipment retained for a period of 1 to 5 years, with two 5 year extension periods for certain right-of-use assets, and the liabilities reflect the net present value of future lease payments. The net gain on the sale and leaseback transaction amounted to USD 0.5 billion.

Following the completion of the Alcon Distribution (spin-off) on April 9, 2019, the right-of-use assets and lease liabilities classified as discontinued operations were derecognized (refer to Note 2, 3 and 11 for further details).

7. Details to the consolidated statements of cash flows

Reversal of non-cash items and other adjustments

(USD millions) Q3 2019 Q3 2018 Change
Depreciation, amortization and impairments on:
Property, plant and equipment
524 454 70
Intangible assets
878 911 -33
Financial assets1
-29 57 -86
Non-cash change in provisions and other non-current liabilities 382 178 204
Gains on disposal and other adjustments on property, plant and equipment; intangible assets; financial assets; and other non-current assets, net -17 -368 351
Equity-settled compensation expense 216 169 47
Income from associated companies -253 -213 -40
Taxes 366 369 -3
Net financial expense 204 201 3
Total 2 271 1 758 513
Includes fair value adjustments
 

41

 
(USD millions) 9M 2019 9M 2018 Change
Depreciation, amortization and impairments on:
Property, plant and equipment
1 392 1 307 85
Intangible assets
2 497 2 268 229
Financial assets1
-49 -49 0
Non-cash change in provisions and other non-current liabilities 1 400 425 975
Gains on disposal and other adjustments on property, plant and equipment; intangible assets; financial assets; and other non-current assets, net -701 -779 78
Equity-settled compensation expense 588 506 82
Income from associated companies2 -509 -6 297 5 788
Taxes 1 163 1 182 -19
Net financial expense 591 576 15
Total 6 372 -861 7 233
Includes fair value adjustments
2018 includes a reversal of a pre-tax gain (USD 5.8 billion) recognized from the divestment of the investment in GSK Consumer Healthcare Holdings Ltd. (see Note 3). The net cash proceed of USD 13.0 billion from the divestment was included in the consolidated statements of cash flows in line "Acquisitions and divestments of interests in associated companies, net."

Cash flows arising from acquisitions and divestments of businesses, net

(USD millions) Q3 2019 Q3 2018 9M 2019 9M 2018
Net assets recognized as a result of business combinations -3 651 -4 124 -11 848
Fair value of previously held equity interests 33
Receivables and payables contingent consideration, net 166 242 -5
Other payments and deferred consideration, net -3 -37
Cash flows used for acquisitions of businesses -3 485 -3 852 -11 890
Cash flows from/used in divestments of businesses1 25 -20 10 11
Cash flows used for acquisitions and divestments of businesses, net -3 460 -20 -3 842 -11 879
In 2019 the USD 10 million (Q3 2019: USD 25 million) includes USD 19 million (Q3 2019: USD 4 million) net cash outflows from previous years divestments and USD 29 million net cash inflows in the current year quarter from business divestments in 2019. The net identifiable assets of the 2019 divested businesses amounts to USD 63 million, comprised of non-current asset of USD 65 million, current assets of USD 9 million, non-current liabilities USD 7 million and current liabilities of USD 4 million. In 2018, the USD 11 million represents the net cash inflows from previous years divestments (Q3 2018: USD 20 million net cash outflows).

For net cash flows used in investing activities from discontinued operations, see Note 11.

42

 
8. Acquisitions of businesses

(USD millions) 9M 2019 9M 2018
Property, plant and equipment 44 135
Currently marketed products 3 550 2 230
Acquired research and development 433 8 584
Other intangible assets 0 1
Deferred tax assets 52 242
Financial and other assets 8 17
Inventories 186 17
Trade receivables and other current assets 4 81
Cash and cash equivalents 809
Deferred tax liabilities -123 -2 656
Current and non-current financial debts -2 -14
Trade payables and other liabilities -167 -431
Net identifiable assets acquired 3 985 9 015
Acquired cash and cash equivalents -809
Non-controlling interests -27
Goodwill 139 3 669
Net assets recognized as a result of business combinations 4 124 11 848

9. Legal proceedings update

A number of Novartis companies are, and will likely continue to be, subject to various legal proceedings, including litigations, arbitrations and governmental investigations, that arise from time to time. Legal proceedings are inherently unpredictable. As a result, the Group may become subject to substantial liabilities that may not be covered by insurance and may in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations or cash flow. Note 19 to the Consolidated Financial Statements in our 2018 Annual Report and 2018 Form 20-F contains a summary as of the date of these reports of significant legal proceedings to which Novartis or its subsidiaries were a party. The following is a summary as of October 21, 2019 of significant developments in those proceedings, as well as any new significant proceedings commenced since the date of the 2018 Annual Report and 2018 Form 20-F.

INVESTIGATIONS AND RELATED LITIGATIONS
Southern District of New York (S.D.N.Y.) marketing practices investigation and litigation
In 2013, the US government filed a civil complaint in intervention to an individual qui tam action against Novartis Pharmaceuticals Corporation (NPC) in the United States District Court for the S.D.N.Y. The complaint, as subsequently amended, asserts federal False Claims Act and common law claims with respect to speaker programs and other promotional activities for certain NPC cardiovascular medications (including Lotrel, Starlix and Valturna) allegedly serving as mechanisms to provide kickbacks to healthcare professionals from 2002 to 2011. It seeks damages and disgorgement of Novartis profits from the alleged unlawful conduct which, based on the government’s calculation, with trebling and penalties could exceed USD 1 billion. Also in 2013, New York State filed a civil complaint in intervention asserting similar claims. Neither government complaint in intervention adopted the individual relator’s claims with respect to off-label promotion of Valturna, which were subsequently dismissed with prejudice by the court. The individual relator continues to litigate the kickback claims on behalf of other states and municipalities. Novartis is engaged in settlement discussions to resolve the above-described claims and has recorded a provision in the amount of USD 0.7 billion in Q2 2019.

In addition to the matter described above, there have been other developments in the other legal matters described in Note 19 to the Consolidated Financial Statements contained in our 2018 Annual Report and 2018 Form 20-F.

The developments during the third quarter of 2019 do not significantly affect the assessment of management concerning the adequacy of the total provisions recorded for legal proceedings.

43

 
10. Segmentation of key figures

The businesses of Novartis are divided operationally on a worldwide basis into two identified reporting segments, Innovative Medicines and Sandoz. In addition, we separately report Corporate activities.

Reporting segments are presented in a manner consistent with the internal reporting to the chief operating decision maker which is the Executive Committee of Novartis. The reporting segments are managed separately because they each research, develop, manufacture, distribute and sell distinct products that require differing marketing strategies.

The Executive Committee of Novartis is responsible for allocating resources and assessing the performance of the reporting segments.

The reporting segments are as follows:

Innovative Medicines researches, develops, manufactures, distributes and sells patented prescription medicines. The Innovative Medicines Division is organized into two global business units: Novartis Oncology and Novartis Pharmaceuticals. Novartis Oncology consists of the global business franchise Oncology, and Novartis Pharmaceuticals consists of the global business franchises Ophthalmology; Neuroscience; Immunology, Hepatology and Dermatology; Respiratory; Cardiovascular, Renal and Metabolism; and Established Medicines.

Sandoz develops, manufactures and markets finished dosage form medicines as well as intermediary products including active pharmaceutical ingredients. Sandoz is organized globally into three franchises: Retail Generics, Anti-Infectives and Biopharmaceuticals. In Retail Generics, Sandoz develops, manufactures and markets active ingredients and finished dosage forms of pharmaceuticals to third parties. Retail Generics includes the areas of cardiovascular, central nervous system, dermatology, gastrointestinal and hormonal therapies, metabolism, oncology, ophthalmics, pain and respiratory, as well as finished dosage form anti-infectives sold to third parties. In Anti-Infectives, Sandoz manufactures and supplies active pharmaceutical ingredients and intermediates, mainly antibiotics, for internal use by Retail Generics and for sale to third-party customers. In Biopharmaceuticals, Sandoz develops, manufactures and markets protein- or other biotechnology-based products, including biosimilars, and provides biotechnology manufacturing services to other companies.

The divisions are supported by Novartis Institutes for BioMedical Research, Global Drug Development, Novartis Technical Operations and Novartis Business Services. Corporate includes the costs of the Group headquarters and those of corporate coordination functions in major countries, and items that are not specific to one segment. Further details are provided in Note 3 to the Consolidated Financial Statements of the Annual Report 2018.

Following the February 28, 2019, shareholders’ approval of the spin-off of the Alcon business, the Group reported its financial results for the current and prior years as “continuing operations” and “discontinued operations” (refer to Notes 2, 3 and 11 for further details).

Continuing operations comprise the activities of Innovative Medicines and Sandoz Divisions and the continuing Corporate activities.

Discontinued operations include the operational results from the Alcon eye care devices business and certain Corporate activities attributable to the Alcon business prior to the spin-off, the gain on distribution of Alcon Inc. to Novartis AG shareholders and certain other expenses related to the Distribution (See Note 2, 3 and 11).

44

 
Segmentation – Consolidated income statement – Third quarter

Innovative Medicines Sandoz Corporate (including eliminations) Group
(USD millions) Q3 2019 Q3 2018 Q3 2019 Q3 2018 Q3 2019 Q3 2018 Q3 2019 Q3 2018
Net sales to third parties from continuing operations 9 688 8 596 2 484 2 420 12 172 11 016
Sales to continuing and discontinued segments 190 206 42 49 -232 -227 28
Net sales from continuing operations 9 878 8 802 2 526 2 469 -232 -227 12 172 11 044
Other revenues 295 299 7 38 8 5 310 342
Cost of goods sold -2 679 -2 341 -1 354 -1 364 257 242 -3 776 -3 463
Gross profit from continuing operations 7 494 6 760 1 179 1 143 33 20 8 706 7 923
Selling, general and administration -2 868 -2 614 -532 -534 -149 -113 -3 549 -3 261
Research and development -2 002 -1 951 -197 -196 -2 199 -2 147
Other income 86 354 40 186 70 56 196 596
Other expense -306 -365 -299 -241 -191 -266 -796 -872
Operating income from continuing operations 2 404 2 184 191 358 -237 -303 2 358 2 239
as % of net sales 24.8% 25.4% 7.7% 14.8% 19.4% 20.3%
Income from associated companies 1 1 252 212 253 213
Interest expense -216 -229
Other financial income and expense, net 12 28
Income before taxes from continuing operations 2 407 2 251
Taxes -366 -369
Net income from continuing operations 2 041 1 882
Net loss from discontinued operations before gain on distribution of Alcon Inc. to Novartis AG shareholders -258
Net loss from discontinued operations -258
Net income 2 041 1 624
 
 
 

45

 
Segmentation – Consolidated income statement – Nine months to September 30

Innovative Medicines Sandoz Corporate (including eliminations) Group
(USD millions) 9M 2019 9M 2018 9M 2019 9M 2018 9M 2019 9M 2018 9M 2019 9M 2018
Net sales to third parties from continuing operations 27 794 25 870 7 248 7 400 35 042 33 270
Sales to continuing and discontinued segments 616 551 118 140 -681 -630 53 61
Net sales from continuing operations 28 410 26 421 7 366 7 540 -681 -630 35 095 33 331
Other revenues 806 807 41 48 19 16 866 871
Cost of goods sold -7 230 -6 973 -3 945 -4 166 742 667 -10 433 -10 472
Gross profit from continuing operations 21 986 20 255 3 462 3 422 80 53 25 528 23 730
Selling, general and administration -8 432 -7 947 -1 644 -1 729 -388 -364 -10 464 -10 040
Research and development -5 960 -5 665 -589 -590 -6 549 -6 255
Other income 1 008 862 122 426 258 177 1 388 1 465
Other expense -1 525 -934 -605 -434 -510 -491 -2 640 -1 859
Operating income from continuing operations 7 077 6 571 746 1 095 -560 -625 7 263 7 041
as % of net sales 25.5% 25.4% 10.3% 14.8% 20.7% 21.2%
Income from associated companies 1 2 5 506 6 292 509 6 297
Interest expense -647 -684
Other financial income and expense, net 56 108
Income before taxes from continuing operations 7 181 12 762
Taxes -1 163 -1 182
Net income from continuing operations 6 018 11 580
Net loss from discontinued operations before gain on distribution of Alcon Inc. to Novartis AG shareholders -101 -160
Gain on distribution of Alcon Inc. to Novartis AG shareholders 4 691
Net income/loss from discontinued operations 4 590 -160
Net income 10 608 11 420
 
 
 

Segmentation – Additional consolidated balance sheet disclosure1

Innovative Medicines Sandoz Alcon Corporate (including eliminations) Group

(USD millions)
Sep 30,
2019
Dec 31,
2018
Sep 30,
2019
Dec 31,
2018
Sep 30,
2019

Dec 31,
2018

Sep 30,
2019
Dec 31,
2018
Sep 30,
2019
Dec 31,
2018
Net operating assets 56 617 53 999 13 372 13 951 24 007 72 029 94 876
Included in net operating assets are:
Property, plant and equipment 9 466 10 098 1 897 2 159 2 878 515 561 11 878 15 696
Goodwill 18 636 18 551 7 663 7 837 8 899 7 7 26 306 35 294
Intangible assets other than goodwill 28 017 26 042 1 626 1 875 10 679 51 123 29 694 38 719
From February 28, 2019, the Alcon Division was reported as discontinued operations (see Note 2, 3 and 11). In accordance with IFRS, the December 31, 2018 consolidated balance sheet includes the assets and liabilities of the Alcon eye care devices business and certain Corporate assets and liabilities attributable to the Alcon business.   
 

46

 
Segmentation – Net sales by region1 – Third quarter

Q3 2019 Q3 2018 % change Q3 2019 Q3 2018
USD m USD m USD cc 2 % of total % of total
Innovative Medicines
Europe
3 195 3 027 6 10 33 35
US
3 725 3 003 24 24 38 35
Asia/Africa/Australasia
2 112 1 929 9 10 22 22
Canada and Latin America
656 637 3 9 7 8
Total 9 688 8 596 13 15 100 100
Of which in Established Markets
7 405 6 518 14 15 76 76
Of which in Emerging Growth Markets
2 283 2 078 10 13 24 24
Sandoz
Europe
1 297 1 204 8 12 52 50
US
655 661 -1 -1 26 27
Asia/Africa/Australasia
333 366 -9 -8 13 15
Canada and Latin America
199 189 5 7 9 8
Total 2 484 2 420 3 5 100 100
Of which in Established Markets
1 823 1 749 4 7 73 72
Of which in Emerging Growth Markets
661 671 -1 0 27 28
Continuing operations
Europe
4 492 4 231 6 11 37 38
US
4 380 3 664 20 20 36 33
Asia/Africa/Australasia
2 445 2 295 7 7 20 21
Canada and Latin America
855 826 4 9 7 8
Total 12 172 11 016 10 13 100 100
Of which in Established Markets
9 228 8 267 12 14 76 75
Of which in Emerging Growth Markets
2 944 2 749 7 10 24 25
Net sales from operations by location of third-party customer. Emerging Growth Markets comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand.
Constant currencies (cc) is a non-IFRS measure. A definition of non-IFRS measures used by Novartis can be found starting on page 56.
 

Segmentation – Net sales by region1 – Nine months to September 30

9M 2019 9M 2018 % change 9M 2019 9M 2018
USD m USD m USD cc 2 % of total % of total
Innovative Medicines
Europe
9 547 9 231 3 10 34 36
US
10 054 8 678 16 16 36 34
Asia/Africa/Australasia
6 235 5 978 4 7 22 23
Canada and Latin America
1 958 1 983 -1 9 8 7
Total 27 794 25 870 7 11 100 100
Of which in Established Markets
21 043 19 391 9 11 76 75
Of which in Emerging Growth Markets
6 751 6 479 4 12 24 25
Sandoz
Europe
3 807 3 733 2 9 53 50
US
1 887 2 061 -8 -8 26 28
Asia/Africa/Australasia
984 1 030 -4 -1 14 14
Canada and Latin America
570 576 -1 5 7 8
Total 7 248 7 400 -2 2 100 100
Of which in Established Markets
5 314 5 417 -2 2 73 73
Of which in Emerging Growth Markets
1 934 1 983 -2 3 27 27
Continuing operations
Europe
13 354 12 964 3 10 38 39
US
11 941 10 739 11 11 34 32
Asia/Africa/Australasia
7 219 7 008 3 6 21 21
Canada and Latin America
2 528 2 559 -1 8 7 8
Total 35 042 33 270 5 9 100 100
Of which in Established Markets
26 357 24 808 6 9 75 75
Of which in Emerging Growth Markets
8 685 8 462 3 10 25 25
Net sales from operations by location of third-party customer. Emerging Growth Markets comprise all markets other than the Established Markets of the US, Canada, Western Europe, Japan, Australia and New Zealand.
Constant currencies (cc) is a non-IFRS measure. A definition of non-IFRS measures used by Novartis can be found starting on page 56.
 

47

 
Segmentation – Net sales by business franchise

Innovative Medicines net sales by business franchise – Third quarter

Q3 2019 Q3 2018 % change % change
USD m USD m USD cc 3
Oncology
Tasigna 487 444 10 11
Sandostatin 388 389 0 1
Afinitor/Votubia 400 374 7 8
Promacta/Revolade 380 295 29 31
Tafinlar + Mekinist 345 291 19 22
Gleevec/Glivec 320 380 -16 -14
Jakavi 279 248 13 17
Exjade/Jadenu 253 263 -4 -2
Votrient 198 197 1 2
Lutathera 119 56 113 116
Kisqali 123 72 71 76
Kymriah 79 20 295 295
Piqray 43 nm nm
Other 301 276 9 11
Total Oncology business unit 3 715 3 305 12 14
Ophthalmology
Lucentis 500 491 2 5
Travoprost Group 109 128 -15 -13
Xiidra 102 nm nm
Other 503 475 6 7
Total Ophthalmology 1 214 1 094 11 13
Neuroscience
Gilenya 829 818 1 3
Zolgensma 160 nm nm
Aimovig 33 nm nm
Mayzent 4 nm nm
Other 16 20 -20 -21
Total Neuroscience 1 042 838 24 26
Immunology, Hepatology and Dermatology
Cosentyx 937 750 25 27
Ilaris 177 141 26 27
Total Immunology, Hepatology and Dermatology 1 114 891 25 27
Respiratory
Ultibro Breezhaler 97 110 -12 -8
Seebri Breezhaler 28 34 -18 -16
Onbrez Breezhaler 20 24 -17 -16
Subtotal COPD1 portfolio 145 168 -14 -10
Xolair2 299 255 17 22
Other 4 6 -33 -21
Total Respiratory 448 429 4 9
Cardiovascular, Renal and Metabolism
Entresto 430 271 59 61
Other 7 6 17 10
Total Cardiovascular, Renal and Metabolism 437 277 58 60
Established Medicines
Galvus Group 320 307 4 5
Diovan Group 254 254 0 3
Exforge Group 249 253 -2 2
Zortress/Certican 122 120 2 5
Neoral/Sandimmun(e) 101 114 -11 -9
Voltaren/Cataflam 105 104 1 0
Other 567 610 -7 -5
Total Established Medicines 1 718 1 762 -2 0
Total Pharmaceuticals business unit 5 973 5 291 13 15
Total Division net sales 9 688 8 596 13 15
Chronic Obstructive Pulmonary Disease
Xolair sales for all indications are reported in the Respiratory franchise.
Constant currencies (cc) is a non-IFRS measure. A definition of non-IFRS measures used by Novartis can be found starting on page 56.
 
 
nm = not meaningful

48

 
Innovative Medicines net sales by business franchise – Nine months to September 30

9M 2019 9M 2018 % change % change
USD m USD m USD cc 3
Oncology
Tasigna 1 389 1 398 -1 2
Sandostatin 1 183 1 188 0 2
Afinitor/Votubia 1 174 1 157 1 4
Promacta/Revolade 1 036 844 23 26
Tafinlar + Mekinist 982 842 17 22
Gleevec/Glivec 950 1 188 -20 -17
Jakavi 821 721 14 21
Exjade/Jadenu 744 813 -8 -6
Votrient 578 630 -8 -5
Lutathera 334 86 288 287
Kisqali 325 175 86 92
Kymriah 182 48 279 288
Piqray 49 nm nm
Other 895 839 7 10
Total Oncology business unit 10 642 9 929 7 11
Ophthalmology
Lucentis 1 569 1 526 3 8
Travoprost Group 330 386 -15 -12
Xiidra 102 nm nm
Other 1 548 1 519 2 5
Total Ophthalmology 3 549 3 431 3 8
Neuroscience
Gilenya 2 420 2 505 -3 0
Zolgensma 175 nm nm
Aimovig 75 nm nm
Mayzent 9 nm nm
Other 46 63 -27 -24
Total Neuroscience 2 725 2 568 6 9
Immunology, Hepatology and Dermatology
Cosentyx 2 586 2 031 27 30
Ilaris 493 399 24 28
Total Immunology, Hepatology and Dermatology 3 079 2 430 27 30
Respiratory
Ultibro Breezhaler 313 332 -6 0
Seebri Breezhaler 93 111 -16 -11
Onbrez Breezhaler 62 78 -21 -15
Subtotal COPD1 portfolio 468 521 -10 -5
Xolair2 870 771 13 20
Other 16 19 -16 -6
Total Respiratory 1 354 1 311 3 10
Cardiovascular, Renal and Metabolism
Entresto 1 208 710 70 75
Other 19 16 19 17
Total Cardiovascular, Renal and Metabolism 1 227 726 69 73
Established Medicines
Galvus Group 955 957 0 5
Diovan Group 798 763 5 11
Exforge Group 780 751 4 10
Zortress/Certican 362 344 5 10
Neoral/Sandimmun(e) 314 349 -10 -6
Voltaren/Cataflam 313 333 -6 -3
Other 1 696 1 978 -14 -10
Total Established Medicines 5 218 5 475 -5 0
Total Pharmaceuticals business unit 17 152 15 941 8 12
Total Division net sales 27 794 25 870 7 11
Chronic Obstructive Pulmonary Disease
Xolair sales for all indications are reported in the Respiratory franchise.
Constant currencies (cc) is a non-IFRS measure. A definition of non-IFRS measures used by Novartis can be found starting on page 56.
 
 
nm = not meaningful

49

 
Net sales of the top 20 Innovative Medicines products in 2019 – Third quarter

US Rest of world Total

Brands


Business franchise


Key indication


USD m
%
change
USD/cc 2


USD m
%
change
USD
%
change
cc 2


USD m
%
change
USD
%
change
cc 2
Cosentyx Immunology, Hepatology and Dermatology Psoriasis, ankylosing spondylitis and psoriatic arthritis 601 31 336 15 20 937 25 27
Gilenya Neuroscience Relapsing multiple sclerosis 469 7 360 -6 -1 829 1 3
Lucentis Ophthalmology Age-related macular degeneration 500 2 5 500 2 5
Tasigna Oncology Chronic myeloid leukemia 212 16 275 5 8 487 10 11
Entresto Cardiovascular, Renal and Metabolism Chronic heart failure 220 46 210 75 82 430 59 61
Sandostatin Oncology Carcinoid tumors and acromegaly 222 6 166 -8 -4 388 0 1
Afinitor/Votubia Oncology Breast cancer/TSC 266 18 134 -9 -7 400 7 8
Promacta/Revolade Oncology Immune thrombocytopenia (ITP), severe aplastic anemia (SAA) 188 31 192 26 31 380 29 31
Tafinlar + Mekinist Oncology BRAF V600+ metastatic and adjuvant melanoma; advanced non-small cell lung cancer (NSCLC) 126 8 219 26 31 345 19 22
Galvus Group Established Medicines Diabetes 320 4 5 320 4 5
Gleevec/Glivec Oncology Chronic myeloid leukemia and GIST 81 -26 239 -11 -9 320 -16 -14
Xolair 1 Respiratory Severe Allergic Asthma (SAA) and Chronic Spontaneous Urticaria (CSU) 299 17 22 299 17 22
Jakavi Oncology Myelofibrosis (MF), polycytomia vera (PV) 279 13 17 279 13 17
Diovan Group Established Medicines Hypertension 22 -15 232 2 5 254 0 3
Exforge Group Established Medicines Hypertension 5 0 244 -2 2 249 -2 2
Exjade/Jadenu Oncology Chronic iron overload 124 -3 129 -4 -1 253 -4 -2
Votrient Oncology Renal cell carcinoma 86 -9 112 9 11 198 1 2
Ilaris Immunology, Hepatology and Dermatology Auto-inflammatory (CAPS, TRAPS, HIDS/MKD, FMF, SJIA, AOSD and gout) 80 16 97 35 37 177 26 27
Zortress/Certican Established Medicines Transplantation 43 10 79 -2 2 122 2 5
Lutathera Oncology GEP-NETs gastroenteropancreatic neuroendocrine tumors 96 104 23 156 199 119 113 116
Top 20 products total 2 841 16 4 445 7 11 7 286 10 13
Rest of portfolio 884 58 1 518 5 8 2 402 20 22
Total division sales 3 725 24 5 963 7 10 9 688 13 15
Xolair sales for all indications are reported in the Respiratory franchise.
Constant currencies (cc) is a non-IFRS measure. A definition of non-IFRS measures used by Novartis can be found starting on page 56.

50

 
Net sales of the top 20 Innovative Medicines products in 2019 – Nine months to September 30

US Rest of world Total

Brands


Business franchise


Key indication


USD m
%
change
USD/cc 2


USD m
%
change
USD
%
change
cc 2


USD m
%
change
USD
%
change
cc 2
Cosentyx Immunology, Hepatology and Dermatology Psoriasis, ankylosing spondylitis and psoriatic arthritis 1 609 36 977 16 23 2 586 27 30
Gilenya Neuroscience Relapsing multiple sclerosis 1 302 -1 1 118 -6 1 2 420 -3 0
Lucentis Ophthalmology Age-related macular degeneration 1 569 3 8 1 569 3 8
Tasigna Oncology Chronic myeloid leukemia 596 -1 793 -1 4 1 389 -1 2
Entresto Cardiovascular, Renal and Metabolism Chronic heart failure 640 65 568 77 87 1 208 70 75
Sandostatin Oncology Carcinoid tumors and acromegaly 655 7 528 -8 -2 1 183 0 2
Afinitor/Votubia Oncology Breast cancer/TSC 759 12 415 -13 -8 1 174 1 4
Promacta/Revolade Oncology Immune thrombocytopenia (ITP), severe aplastic anemia (SAA) 506 22 530 23 30 1 036 23 26
Tafinlar + Mekinist Oncology BRAF V600+ metastatic and adjuvant melanoma; advanced non-small cell lung cancer (NSCLC) 356 6 626 23 32 982 17 22
Galvus Group Established Medicines Diabetes 955 0 5 955 0 5
Gleevec/Glivec Oncology Chronic myeloid leukemia and GIST 256 -22 694 -19 -15 950 -20 -17
Xolair 1 Respiratory Severe Allergic Asthma (SAA) and Chronic Spontaneous Urticaria (CSU) 870 13 20 870 13 20
Jakavi Oncology Myelofibrosis (MF), polycytomia vera (PV) 821 14 21 821 14 21
Diovan Group Established Medicines Hypertension 67 0 731 5 12 798 5 11
Exforge Group Established Medicines Hypertension 12 -14 768 4 10 780 4 10
Exjade/Jadenu Oncology Chronic iron overload 355 -7 389 -10 -5 744 -8 -6
Votrient Oncology Renal cell carcinoma 258 -16 320 -1 5 578 -8 -5
Ilaris Immunology, Hepatology and Dermatology Auto-inflammatory (CAPS, TRAPS, HIDS/MKD, FMF, SJIA, AOSD and gout) 222 19 271 27 36 493 24 28
Zortress/Certican Established Medicines Transplantation 125 19 237 -1 6 362 5 10
Lutathera Oncology GEP-NETs gastroenteropancreatic neuroendocrine tumors 282 nm 52 174 182 334 288 287
Top 20 products total 8 000 14 13 232 5 11 21 232 8 12
Rest of portfolio 2 054 22 4 508 -1 4 6 562 5 9
Total division sales 10 054 16 17 740 3 9 27 794 7 11
Xolair sales for all indications are reported in the Respiratory franchise.
Constant currencies (cc) is a non-IFRS measure. A definition of non-IFRS measures used by Novartis can be found starting on page 56.

51

 
Sandoz net sales by business franchise – Third quarter

Q3 2019 Q3 2018 % change % change
USD m USD m USD cc 2
Retail Generics1 1 930 1 949 -1 1
Biopharmaceuticals 430 349 23 27
Anti-Infectives 124 122 2 5
Total Division net sales 2 484 2 420 3 5
Of which USD 197 million (2018: USD 201 million) represents Anti-Infectives sold under Sandoz name
Constant currencies (cc) is a non-IFRS measure. A definition of non-IFRS measures used by Novartis can be found starting on page 56.



Sandoz net sales by business franchise – Nine months to September 30

9M 2019 9M 2018 % change % change
USD m USD m USD cc 2
Retail Generics1 5 683 5 947 -4 0
Biopharmaceuticals 1 182 1 046 13 18
Anti-Infectives 383 407 -6 -2
Total Division net sales 7 248 7 400 -2 2
Of which USD 587 million (2018: USD 618 million) represents Anti-Infectives sold under Sandoz name
Constant currencies (cc) is a non-IFRS measure. A definition of non-IFRS measures used by Novartis can be found starting on page 56.



The product portfolio of Sandoz is widely spread in 2019 and 2018.



52

 
Segmentation – Other revenue – Third quarter

Innovative Medicines Sandoz Corporate Group
(USD millions) Q3 2019 Q3 2018 Q3 2019 Q3 2018 Q3 2019 Q3 2018 Q3 2019 Q3 2018
Profit sharing income 192 234 1 1 193 235
Royalty income 30 36 6 4 6 5 42 45
Milestone income 60 29 33 60 62
Other1 13 2 15
Total other revenues 295 299 7 38 8 5 310 342
Other includes revenue from activities such as manufacturing or other services rendered, to the extent such revenue is not recorded under net sales.
 

Segmentation – Other revenue – Nine months to September 30

Innovative Medicines Sandoz Corporate Group
(USD millions) 9M 2019 9M 2018 9M 2019 9M 2018 9M 2019 9M 2018 9M 2019 9M 2018
Profit sharing income 542 564 2 2 544 566
Royalty income 79 121 13 7 19 16 111 144
Milestone income 158 107 23 36 181 143
Other1 27 15 3 3 30 18
Total other revenues 806 807 41 48 19 16 866 871
Other includes revenue from activities such as manufacturing or other services rendered, to the extent such revenue is not recorded under net sales.

53

 
11. Discontinued operations

Consolidated income statement – Discontinued operations

(USD millions) Q3 2019 1 Q3 2018 9M 2019 9M 2018
Net sales to third parties of discontinued operations 1 763 1 777 5 361
Sales to continuing segments 32 3
Net sales of discontinued operations 1 763 1 809 5 364
Cost of goods sold -1 214 -860 -3 073
Gross profit of discontinued operations 549 949 2 291
Selling, general and administration -690 -638 -2 027
Research and development -132 -142 -420
Other income -7 15 74
Other expense -20 -113 -89
Operating income of discontinued operations -300 71 -171
as % of net sales -17.0% 4.0% -3.2%
Interest expense -6 -10 -19
Other financial income and expense -2 -3 -1
Income before taxes of discontinued operations -308 58 -191
Taxes2 50 -159 31
Net loss from discontinued operations before gain on distribution of Alcon Inc. to Novartis AG shareholders -258 -101 -160
Gain on distribution of Alcon Inc. to Novartis AG shareholders 3 4 691
Net loss/income of discontinued operations -258 4 590 -160
As the Alcon spin-off was completed on April 9, 2019, there were no results of operations from the Alcon business recorded in Q3 2019.
The tax rate on the net loss from discontinued operations before gain on distribution of Alcon Inc. to Novartis AG shareholders of 274% was impacted by prior period items, which the Group has concluded is not material to the current period or the prior periods to which they related, and changes in uncertain tax positions. Excluding these items, the tax rate would have been 15.5%.
See Note 3 for further details on the gain on distribution of Alcon Inc. to Novartis AG shareholders.



The following are included in net income from discontinued operations:

(USD millions) Q3 2019 1 Q3 2018 9M 2019 9M 2018
Interest income 1
Depreciation of property, plant and equipment -61 -42 -177
Amortization of intangible assets -264 -174 -794
Impairment charges on intangible assets -350 -389
Additions to restructuring provisions -4
Equity-based compensation of Novartis equity plans -11 -9 -34
As the Alcon spin-off was completed on April 9, 2019, there were no results of operations from the Alcon business recorded in Q3 2019.

54

 
Supplemental cash flow disclosures related to the Alcon business distributed to Novartis AG shareholders



Net assets derecognized

(USD millions)
Property, plant and equipment 2 858
Right-of-use assets 269
Goodwill 8 906
Intangible assets other than goodwill 11 121
Deferred tax assets 732
Financial and other non-current assets 526
Inventories 1 469
Trade receivables and other current assets 1 787
Cash and cash equivalents 628
Deferred tax liabilities -1 713
Current and non-current lease liabilities -269
Current and non-current financial debts -3 538
Trade payables, provisions and other liabilities -2 751
Net assets derecognized 20 025



Net cash flows used in investing activities from discontinued operations

(USD millions) Q3 2019 9M 2019
Payments out of provisions for transaction costs attributable to the spin-off of the Alcon business -12 -26
Divested cash and cash equivalents -628
Cash flows attributable to the spin-off of the Alcon business -12 -654
Other cash flows from/used in investing activities, net 15 -448
Net cash flows from/used in investing activities from discontinued operations 3 -1 102

Significant transaction closed in 2019 – Discontinued operations

In March 2019, Alcon acquired PowerVision, Inc. (PowerVision), a privately-held, US-based medical device development company focused on developing accommodative, implantable intraocular lenses. The fair value of the total purchase consideration was USD 424 million. The amount consisted of an initial cash payment of USD 289 million and the net present value of the contingent consideration of USD 135 million, due to PowerVision shareholders, which they are eligible to receive upon the achievement of specified regulatory and commercialization milestones. The preliminary purchase price allocation resulted in net identifiable assets of USD 418 million, consisting of intangible assets, of USD 505 million, net deferred tax liabilities of USD 93 million, other net assets of USD 6 million, and goodwill of USD 6 million. The 2019 results of operations since the date of the acquisition are not material.

For additional information related to the distribution (spin-off) of the Alcon business to Novartis AG shareholders, effected through a dividend in kind distribution that was completed on April 9, 2019, refer to Note 2 and 3.

55

 
SUPPLEMENTARY INFORMATION (unaudited)

Non-IFRS disclosures

Core results

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

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

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

• In addition to monthly reports containing financial information prepared under International Financial Reporting Standards (IFRS), senior management receives a monthly analysis incorporating these core measures.

• Annual budgets are prepared for both IFRS and core measures.

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

Because of their non-standardized definitions, the core measures (unlike IFRS measures) may not be comparable to the calculation of similar measures of other companies. These core measures are presented solely to permit investors to more fully understand how the Group’s management assesses underlying performance. These core measures are not, and should not be viewed as, a substitute for IFRS measures.

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

Constant currencies

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

Constant currency calculations have the goal of eliminating two exchange rate effects so that an estimate can be made of underlying changes in the consolidated income statement excluding the impact of fluctuations in exchanges rates:

• the impact of translating the income statements of consolidated entities from their non-USD functional currencies to USD; and

56

 
• the impact of exchange rate movements on the major transactions of consolidated entities performed in currencies other than their functional currency.

We calculate constant currency measures by translating the current year’s foreign currency values for sales and other income statement items into USD using the average exchange rates from the prior year and comparing them to the prior year values in USD.

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

Growth rate calculation

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

Net debt and free cash flow

Net debt and free cash flow are non-IFRS financial measures, which means they should not be interpreted as measures determined under IFRS. Net debt is presented as additional information because management believes it is a useful supplemental indicator of the Group’s ability to pay dividends, to meet financial commitments and to invest in new strategic opportunities, including strengthening its balance sheet. Free cash flow is presented as additional information because management believes it is a useful supplemental indicator of the Group’s ability to operate without reliance on additional borrowing or use of existing cash. Free cash flow is a measure of the net cash generated that is available for debt repayment, investment in strategic opportunities and for returning to shareholders. Cash flows in connection with the acquisition or divestment of subsidiaries, associated companies and non-controlling interests in subsidiaries are not taken into account to determine free cash flow. Free cash flow is not intended to be a substitute measure for net cash flows from operating activities as determined under IFRS.

57

 
CORE RESULTS –Reconciliation from IFRS results to core results – Group – Third quarter

Innovative Medicines Sandoz Corporate Group
(USD millions unless indicated otherwise) Q3 2019 Q3 2018 Q3 2019 Q3 2018 Q3 2019 Q3 2018 Q3 2019 Q3 2018
IFRS operating income from continuing operations 2 404 2 184 191 358 -237 -303 2 358 2 239
Amortization of intangible assets 732 644 79 91 811 735
Impairments
Intangible assets
13 50 32 110 45 160
Property, plant and equipment related to the Group-wide rationalization of manufacturing sites
44 1 62 5 106 6
Other property, plant and equipment
33 33
Total impairment charges 57 84 94 115 151 199
Acquisition or divestment of businesses and related items
- Income
-2 -40 -3 -42 -3
- Expense
31 13 44 5 75 18
Total acquisition or divestment of businesses and related items, net 29 13 4 2 33 15
Other items
Divestment gains
-6 -213 -10 -6 -223
Financial assets - fair value adjustments
-45 -44 16 41 -29 -3
Restructuring and related items
- Income
-15 -3 -2 -3 -20 -3
- Expense
110 229 91 30 50 65 251 324
Legal-related items
- Income
-1 -1
- Expense
31 11 72 60 103 71
Additional income
-8 -142 -83 -83 -150
Additional expense
3 1 90 29 86 25 179 55
Total other items 78 -28 251 -23 66 121 395 70
Total adjustments 896 713 424 183 70 123 1 390 1 019
Core operating income from continuing operations 3 300 2 897 615 541 -167 -180 3 748 3 258
as % of net sales 34.1% 33.7% 24.8% 22.4% 30.8% 29.6%
Income from associated companies 1 1 252 212 253 213
Core adjustments to income from associated companies, net of tax 60 80 60 80
Interest expense -216 -229
Other financial income and expense 12 28
Core adjustments to other financial income and expense -15
Taxes, adjusted for above items (core taxes) -630 -530
Core net income from continuing operations 3 212 2 820
Core net income from discontinued operations1 244
Core net income 3 212 3 064
Core net income attributable to shareholders of Novartis AG 3 213 3 063
Core basic EPS from continuing operations (USD)2 1.41 1.22
Core basic EPS from discontinued operations (USD)2 0.10
Core basic EPS (USD)2 1.41 1.32
For details on discontinued operations reconciliaton from IFRS to core net income, please refer to page 68.
Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.

58

 
CORE RESULTS –Reconciliation from IFRS results to core results – Group –Nine months to September 30

Innovative Medicines Sandoz Corporate Group
(USD millions unless indicated otherwise) 9M 2019 9M 2018 9M 2019 9M 2018 9M 2019 9M 2018 9M 2019 9M 2018
IFRS operating income from continuing operations 7 077 6 571 746 1 095 -560 -625 7 263 7 041
Amortization of intangible assets 1 710 1 680 239 283 1 949 1 963
Impairments
Intangible assets
442 112 44 144 486 256
Property, plant and equipment related to the Group-wide rationalization of manufacturing sites
78 99 70 44 148 143
Other property, plant and equipment
1 42 6 7 42
Total impairment charges 521 253 120 188 641 441
Acquisition or divestment of businesses and related items
- Income
-7 -79 -19 -86 -19
- Expense
57 99 83 27 140 126
Total acquisition or divestment of businesses and related items, net 50 99 4 8 54 107
Other items
Divestment gains
-630 -490 -78 2 -55 -628 -623
Financial assets - fair value adjustments
-53 -122 4 73 -49 -49
Restructuring and related items
- Income
-38 -11 -3 -2 -5 -2 -46 -15
- Expense
338 328 270 99 82 90 690 517
Legal-related items
- Income
-1 -31 -63 -31 -64
- Expense
719 30 144 90 863 120
Additional income
-253 -38 -4 -142 -89 -346 -180
Additional expense
87 83 96 50 107 54 290 187
Total other items 170 -221 472 -46 101 160 743 -107
Total adjustments 2 451 1 811 831 425 105 168 3 387 2 404
Core operating income from continuing operations 9 528 8 382 1 577 1 520 -455 -457 10 650 9 445
as % of net sales 34.3% 32.4% 21.8% 20.5% 30.4% 28.4%
Income from associated companies 1 2 5 506 6 292 509 6 297
Core adjustments to income from associated companies, net of tax 335 -5 398 335 -5 398
Interest expense -647 -684
Other financial income and expense 56 108
Core adjustments to other financial income and expense 5
Taxes, adjusted for above items (core taxes) -1 789 -1 529
Core net income from continuing operations 9 119 8 239
Core net income from discontinued operations1 278 818
Core net income 9 397 9 057
Core net income attributable to shareholders of Novartis AG 9 396 9 053
Core basic EPS from continuing operations (USD)2 3.97 3.55
Core basic EPS from discontinued operations (USD)2 0.12 0.35
Core basic EPS (USD)2 4.09 3.90
For details on discontinued operations reconciliaton from IFRS to core net income, please refer to page 69.
Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.

59

 
CORE RESULTS – Reconciliation from IFRS results to core results – Group – Third quarter


(USD millions unless indicated otherwise)


Q3 2019
IFRS results

Amortization
of intangible
assets 1



Impairments 2
Acquisition or
divestment of
businesses and
related items 3



Other items 4


Q3 2019
Core results


Q3 2018
Core results
Gross profit from continuing operations 8 706 798 32 25 103 9 664 8 657
Operating income from continuing operations 2 358 811 151 33 395 3 748 3 258
Income before taxes from continuing operations 2 407 871 151 33 380 3 842 3 350
Taxes from continuing operations5 -366 -630 -530
Net income from continuing operations 2 041 3 212 2 820
Net income from discontinued operations6 244
Net income 2 041 3 212 3 064
Basic EPS from continuing operations (USD)7 0.90 1.41 1.22
Basic EPS from discontined operations (USD)7 0.10
Basic EPS (USD)7 0.90 1.41 1.32
The following are adjustments to arrive at core gross profit
Cost of goods sold -3 776 798 32 25 103 -2 818 -2 729
The following are adjustments to arrive at core operating income
Selling, general and administration -3 549 2 -15 -3 562 -3 246
Research and development -2 199 13 13 -3 1 -2 175 -1 938
Other income 196 -42 -142 12 144
Other expense -796 106 51 448 -191 -359
The following are adjustments to arrive at core income before taxes
Income from associated companies 253 60 313 293
Other financial income and expense 12 -15 -3 28
Amortization of intangible assets: cost of goods sold includes amortization of acquired rights to in-market products and other production-related intangible assets; research and development includes the amortization of acquired rights for technologies; income from associated companies includes USD 60 million for the Novartis share of the estimated Roche core items
Impairments: cost of goods sold and research and development include impairment charges related to intangible assets; other expense includes net impairment charges related to property, plant and equipment
Acquisition or divestment of businesses and related items, including restructuring and integration charges: cost of goods sold, selling, general and administration, research and development and other expense include net charges related to acquisitions; other income and other expense include transitional service-fee income and expenses, and other items related to the portfolio transformation and the Alcon spin-off
Other items: cost of goods sold and other expense include net restructuring and other charges related to the Group-wide rationalization of manufacturing sites; cost of goods sold, selling, general and administration, research and development, other income and other expense include other restructuring income and charges and related items; other income and other expense include fair value adjustments and divestment gains and losses on financial assets and environmental provisions; selling, general and administration also includes other provisions; other income also includes net gains from the divestment of products; other expense also includes legal-related items; other financial income and expense includes a revaluation impact of a financial liability incurred through the Alcon distribution
Taxes on the adjustments between IFRS and core results take into account, for each individual item included in the adjustment, the tax rate that will finally be applicable to the item based on the jurisdiction where the adjustment will finally have a tax impact. Generally, this results in amortization and impairment of intangible assets and acquisition-related restructuring and integration items having a full tax impact. There is usually a tax impact on other items, although this is not always the case for items arising from legal settlements in certain jurisdictions. Adjustments related to income from associated companies are recorded net of any related tax effect. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments of USD 1.4 billion to arrive at the core results before tax amounts to USD 264 million. The average tax rate on the adjustments is 18.4%, since the estimated quarterly core tax charge of 16.4% has been applied to the pre-tax income of the period.
For details on discontinued operations reconcilaition from IFRS to core net income please refer to page 68.
Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.

60

 
CORE RESULTS – Reconciliation from IFRS results to core results – Group – Nine months to September 30


(USD millions unless indicated otherwise)


9M 2019
IFRS results

Amortization
of intangible
assets 1



Impairments 2
Acquisition or
divestment of
businesses and
related items 3



Other items 4


9M 2019
Core results


9M 2018
Core results
Gross profit from continuing operations 25 528 1 914 44 25 202 27 713 25 887
Operating income from continuing operations 7 263 1 949 641 54 743 10 650 9 445
Income before taxes from continuing operations 7 181 2 284 641 54 748 10 908 9 768
Taxes from continuing operations5 -1 163 -1 789 -1 529
Net income from continuing operations 6 018 9 119 8 239
Net income from discontinued operations6 4 590 278 818
Net income 10 608 9 397 9 057
Basic EPS from continuing operations (USD)7 2.62 3.97 3.55
Basic EPS from discontined operations (USD)7 2.00 0.12 0.35
Basic EPS (USD)7 4.62 4.09 3.90
The following are adjustments to arrive at core gross profit
Other revenues 866 -66 800 871
Cost of goods sold -10 433 1 914 44 25 268 -8 182 -8 315
The following are adjustments to arrive at core operating income
Selling, general and administration -10 464 10 57 -10 397 -10 016
Research and development -6 549 35 442 10 -131 -6 193 -5 978
Other income 1 388 -2 -86 -954 346 404
Other expense -2 640 157 95 1 569 -819 -852
The following are adjustments to arrive at core income before taxes
Income from associated companies 509 335 844 899
Other financial income and expense 56 5 61 108
Amortization of intangible assets: cost of goods sold includes amortization of acquired rights to in-market products and other production-related intangible assets; research and development includes the amortization of acquired rights for technologies; income from associated companies includes USD 335 million for the Novartis share of the estimated Roche core items
Impairments: cost of goods sold and research and development include impairment charges related to intangible assets; research and development also includes the reversal of an impairment charge; other income and other expense include net impairment charges related to property, plant and equipment
Acquisition or divestment of businesses and related items, including restructuring and integration charges: cost of goods sold, selling, general and administration, research and development, other income and other expense include net charges related to acquisitions; other income and other expense also include transitional service fee income and expenses, and other items related to the portfolio transformation and the Alcon spin-off
Other items: other revenues includes a net income from an outlicensing agreement and an income related to an amendment of a collaboration agreement; cost of goods sold, other income and other expense include net restructuring and other charges related to the Group-wide rationalization of manufacturing sites; cost of goods sold, selling, general and administration, other income and other expense include other restructuring income and charges and related items; selling, general and administration also includes a receivable expected credit loss provision and other provisions; research and development also includes fair value adjustments of contingent consideration liabilties; other income also includes net gains from the divestment of products and property, plant & equipment and a provision release; other income and other expense also include fair value adjustments and divestment gains and losses on financial assets and legal-related items as well as environmental provisions; other expense also includes a provision for onerous contracts; other financial income and expense includes a revaluation impact of a financial liability incurred through the Alcon distribution
Taxes on the adjustments between IFRS and core results take into account, for each individual item included in the adjustment, the tax rate that will finally be applicable to the item based on the jurisdiction where the adjustment will finally have a tax impact. Generally, this results in amortization and impairment of intangible assets and acquisition-related restructuring and integration items having a full tax impact. There is usually a tax impact on other items, although this is not always the case for items arising from legal settlements in certain jurisdictions. Adjustments related to income from associated companies are recorded net of any related tax effect. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments for continuing operations of USD 3.7 billion to arrive at the core results before tax amounts to USD 626 million. The average tax rate on the adjustments is 16.8%, since the estimated full year core tax charge of 16.4% has been applied to the pre-tax income of the period.
For details on discontinued operations reconcilaition from IFRS to core net income please refer to page 69.
Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.

61

 
CORE RESULTS – Reconciliation from IFRS results to core results – Innovative Medicines – Third quarter


(USD millions)


Q3 2019
IFRS results

Amortization
of intangible
assets 1



Impairments 2
Acquisition or
divestment of
businesses
and related items 3


Other
items 4


Q3 2019
Core results


Q3 2018
Core results
Gross profit 7 494 719 25 55 8 293 7 358
Operating income 2 404 732 57 29 78 3 300 2 897
The following are adjustments to arrive at core gross profit
Cost of goods sold -2 679 719 25 55 -1 880 -1 743
The following are adjustments to arrive at core operating income
Selling, general and administration -2 868 2 -20 -2 886 -2 606
Research and development -2 002 13 13 -3 1 -1 978 -1 742
Other income 86 -2 -67 17 64
Other expense -306 44 7 109 -146 -177
Amortization of intangible assets: cost of goods sold includes amortization of acquired rights to in-market products and other production-related intangible assets; research and development includes the amortization of acquired rights for technologies
Impairments: research and development includes impairment charges related to intangible assets; other expense includes impairment charges related to property, plant and equipment
Acquisition or divestment of businesses and related items, including restructuring and integration charges: cost of goods sold, selling, general and administration, research and development and other expense include charges related to acquisitions; other income and other expense include transitional service-fee income and expenses related to the portfolio transformation and the Alcon spin-off
Other items: cost of goods sold and other expense include restructuring and other charges related to the Group-wide rationalization of manufacturing sites; cost of goods sold, selling, general and administration, research and development, other income and other expense include other restructuring income and charges and related items; other income and other expense include fair value adjustments on financial assets; other income also includes net gains from the divestment of products and financial assets; other expense includes legal-related items

62

 
CORE RESULTS – Reconciliation from IFRS results to core results – Innovative Medicines – Nine months to September 30


(USD millions)


9M 2019
IFRS results

Amortization
of intangible
assets 1



Impairments 2
Acquisition or
divestment of
businesses
and related items 3



Other items 4


9M 2019
Core results


9M 2018
Core results
Gross profit 21 986 1 675 25 78 23 764 21 981
Operating income 7 077 1 710 521 50 170 9 528 8 382
The following are adjustments to arrive at core gross profit
Other revenues 806 -66 740 807
Cost of goods sold -7 230 1 675 25 144 -5 386 -5 247
The following are adjustments to arrive at core operating income
Selling, general and administration -8 432 10 42 -8 380 -7 930
Research and development -5 960 35 442 10 -131 -5 604 -5 388
Other income 1 008 -1 -7 -784 216 191
Other expense -1 525 80 12 965 -468 -472
Amortization of intangible assets: cost of goods sold includes amortization of acquired rights to in-market products and other production-related intangible assets; research and development includes the amortization of acquired rights for technologies
Impairments: research and development includes impairment charges and a reversal of impairment charges related to intangible assets; other income and other expense include net impairment charges related to property, plant and equipment
Acquisition or divestment of businesses and related items, including restructuring and integration charges: cost of goods sold, selling, general and administration, research and development, other income and other expense include net charges related to acquisitions; other income and other expense also include transitional service-fee income and expenses related to the portfolio transformation and the Alcon spin-off
Other items: other revenues includes a net income from an outlicensing agreement and an income related to an amendment of a collaboration agreement; cost of goods sold, other income and other expense include restructuring and other charges related to the Group-wide rationalization of manufacturing sites; cost of goods sold, selling, general and administration, research and development, other income and other expense include other restructuring income and charges and related items; research and development also includes fair value adjustments of contingent consideration liabilities; other income and other expense include fair value adjustments on financial assets; other income also includes net gains from the divestment of property, plant and equipment, products and financial assets and provision releases; other expense includes legal-related items

63

 
CORE RESULTS – Reconciliation from IFRS results to core results – Sandoz – Third quarter


(USD millions)


Q3 2019
IFRS results

Amortization
of intangible
assets 1



Impairments 2
Acquisition or
divestment of
businesses
and related items


Other
items 3


Q3 2019
Core results


Q3 2018
Core results
Gross profit 1 179 79 32 48 1 338 1 279
Operating income 191 79 94 251 615 541
The following are adjustments to arrive at core gross profit
Cost of goods sold -1 354 79 32 48 -1 195 -1 228
The following are adjustments to arrive at core operating income
Selling, general and administration -532 5 -527 -527
Other income 40 -2 38 44
Other expense -299 62 200 -37 -59
Amortization of intangible assets: cost of goods sold includes amortization of acquired rights to in-market products and other production-related intangible assets
Impairments: cost of goods sold includes impairment charges related to intangible assets; other expense includes impairment charges related to property, plant and equipment
Other items: cost of goods sold and other expense include net restructuring and other charges related to the Group-wide rationalization of manufacturing sites; cost of goods sold, selling, general and administration, other income and other expense include restructuring income and charges and related items; selling, general and administration also includes other provisions; other expense includes legal-related items, an environmental provision and a provision for onerous contracts

64

 
CORE RESULTS – Reconciliation from IFRS results to core results – Sandoz – Nine months to September 30


(USD millions)


9M 2019
IFRS results

Amortization
of intangible
assets 1



Impairments 2
Acquisition or
divestment of
businesses
and related items


Other
items 3


9M 2019
Core results


9M 2018
Core results
Gross profit 3 462 239 44 124 3 869 3 853
Operating income 746 239 120 472 1 577 1 520
The following are adjustments to arrive at core gross profit
Cost of goods sold -3 945 239 44 124 -3 538 -3 735
The following are adjustments to arrive at core operating income
Selling, general and administration -1 644 15 -1 629 -1 722
Other income 122 -1 -34 87 141
Other expense -605 77 367 -161 -162
Amortization of intangible assets: cost of goods sold includes amortization of acquired rights to in-market products and other production-related intangible assets
Impairments: cost of goods sold includes impairment charges related to intangible assets; other income and other expense include net impairment charges related to property, plant and equipment
Other items: cost of goods sold and other expense include net restructuring and other charges related to the Group-wide rationalization of manufacturing sites; cost of goods sold, selling, general and administration, other income and other expense include restructuring income and charges and related items; selling, general and administration also includes a receivable expected credit loss provision and other provisions; other income and other expense include legal-related items; other expense also includes an environmental provision and a provision for onerous contracts

65

 
CORE RESULTS – Reconciliation from IFRS results to core results – Corporate continuing – Third quarter


(USD millions)


Q3 2019
IFRS results

Amortization
of intangible
assets 1



Impairments
Acquisition or
divestment of
businesses
and related items 2


Other
items 3


Q3 2019
Core results


Q3 2018
Core results
Gross profit 33 33 20
Operating loss -237 4 66 -167 -180
The following are adjustments to arrive at core operating income
Other income 70 -40 -73 -43 36
Other expense -191 44 139 -8 -123
The following are adjustments to arrive at core income before taxes
Income from associated companies 252 60 312 292
Other financial income and expense 12 -15 -3 28
Amortization of intangible assets: income from associated companies includes USD 60 million for the Novartis share of the estimated Roche core items
Acquisition or divestment of businesses and related items, including restructuring and integration charges: other income and other expense include transitional service fee income and expenses, and other items related to the portfolio transformation and the Alcon spin-off
Other items: other income and other expense include fair value adjustments and divestment gains and losses on financial assets, restructuring charges and related items as well as environmental provisions; other financial income and expense includes a revaluation impact of a financial liability incurred through the Alcon distribution

66

 
CORE RESULTS – Reconciliation from IFRS results to core results – Corporate continuing – Nine months to September 30


(USD millions)


9M 2019
IFRS results

Amortization
of intangible
assets 1



Impairments
Acquisition or
divestment of
businesses
and related items 2


Other
items 3


9M 2019
Core results


9M 2018
Core results
Gross profit 80 80 53
Operating loss -560 4 101 -455 -457
The following are adjustments to arrive at core operating income
Other income 258 -79 -136 43 72
Other expense -510 83 237 -190 -218
The following are adjustments to arrive at core income before taxes
Income from associated companies 506 335 841 894
Other financial income and expense 56 5 61 108
Amortization of intangible assets: income from associated companies includes USD 335 million for the Novartis share of the estimated Roche core items
Acquisition or divestment of businesses and related items, including restructuring and integration charges: other income and other expense include transitional service fee income and expenses, and other items related to the portfolio transformation and the Alcon spin-off
Other items: other income and other expense include fair value adjustments and divestment gains and losses on financial assets, restructuring income and charges and related items as well as environmental provisions; other financial income and expense includes a revaluation impact of a financial liability incurred through the Alcon distribution

67

 
CORE RESULTS – Reconciliation from IFRS results to core results – Discontinued operations – Third quarter


(USD millions)


Q3 2019
IFRS results

Amortization
of intangible
assets



Impairments
Acquisition or
divestment of
businesses
and related items


Other
items


Q3 2019
Core results


Q3 2018
Core results
Gross profit 1 124
Operating income of discontinued operations 297
Income before taxes of discontinued operations 289
Taxes -45
Net income from discontinued operations before gain on distribution of Alcon Inc. to Novartis AG shareholders 244
Net income from discontinued operations 244
Basic EPS (USD)1 0.10
Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.
 

68

 
CORE RESULTS – Reconciliation from IFRS results to core results – Discontinued operations – Nine months to September 30


(USD millions)


9M 2019
IFRS results

Amortization
of intangible
assets 1



Impairments
Acquisition or
divestment of
businesses
and related items 2


Other
items 3


9M 2019
Core results


9M 2018
Core results
Gross profit 949 165 9 1 123 3 408
Operating income of discontinued operations 71 167 112 350 991
Income before taxes of discontinued operations 58 337 971
Taxes4 -159 -59 -153
Net loss/income from discontinued operations before gain on distribution of Alcon Inc. to Novartis AG shareholders -101 278 818
Gain on distribution of Alcon Inc. to Novartis AG shareholders 4 691 -4 691
Net income from discontinued operations 4 590 278 818
Basic EPS (USD)5 2.00 0.12 0.35
The following are adjustments to arrive at core gross profit
Cost of goods sold -860 165 9 -686 -1 956
The following are adjustments to arrive at core operating income
Selling, general and administration -638 14 -624 -2 027
Research and development -142 2 4 -136 -384
Other income 15 -3 12 28
Other expense -113 88 -25 -34
Amortization of intangible assets: cost of goods sold includes amortization of acquired rights to in-market products and other production-related intangible assets; research and development includes the amortization of acquired rights for technologies
Acquisition or divestment of businesses and related items represents represents the non-taxable non-cash gain adjustment related to the distribution of Alcon Inc. (spin-off) to Novartis AG shareholders
Other items: cost of goods sold, selling, general and administration, research and development and other expense include other restructuring charges and related items; research and development also includes amortization of option rights and the fair value adjustment of a contingent consideration liability; other income includes a fair value adjustments on a financial asset; other expense also includes legal-related items
Taxes on the adjustments between IFRS and core results take into account, for each individual item included in the adjustment, the tax rate that will finally be applicable to the item based on the jurisdiction where the adjustment will finally have a tax impact. Generally, this results in amortization and impairment of intangible assets and acquisition-related restructuring and integration items having a full tax impact. There is usually a tax impact on other items, although this is not always the case for items arising from legal settlements in certain jurisdictions. Due to these factors and the differing effective tax rates in the various jurisdictions, the tax on the total adjustments, excluding the non-taxable non-cash gain on the distribution (spin-off) of Alcon Inc. to Novartis AG shareholders of USD 279 million to arrive at the core results before tax amounts to USD 100 million. The 2019 core tax rate excluding the effect of the gain on distribution of Alcon Inc. to Novartis AG shareholders is 17.5%.
Earnings per share (EPS) is calculated on the amount of net income attributable to shareholders of Novartis AG.

69

 
Income from associated companies

(USD millions) Q3 2019 Q3 2018 9M 2019 9M 2018
Share of estimated Roche reported results
283 250 695 621
Prior-year adjustment
-129 -125
Amortization of additional intangible assets recognized by Novartis on initial accounting for the equity interest
-30 -37 -99 -112
Partial release of deferred tax liability recognized
43
Net income effect from Roche Holding AG 253 213 510 384
Share of estimated GSK Consumer Healthcare Holdings Ltd. reported results
119
Prior-year adjustment
4
Amortization of additional intangible assets recognized by Novartis on initial accounting for the equity interest
-3
Gain on divestment of GSK Consumer Healthcare Holdings Ltd., pre-tax 1 5 791
Net income effect from GlaxoSmithKline Consumer Healthcare Holdings Ltd. 1 5 911
Others -1 2
Income from associated companies 253 213 509 6 297
 
On March 27, 2018, Novartis entered into the agreement to divest its 36.5% investment in GSK Consumer Healthcare Holdings Ltd. to GSK. As a result, equity accounting was discontinued starting from April 1, 2018. The transaction closed on June 1, 2018, see Note 3.

Core income from associated companies

(USD millions) Q3 2019 Q3 2018 9M 2019 9M 2018
Income from associated companies 253 213 509 6 297
Share of estimated Roche core adjustments 60 80 174 239
Roche prior year adjustment 161 133
Share of estimated GSK Consumer Healthcare Holdings Ltd. core adjustments 1 20
GSK Consumer Healthcare Holdings Ltd. prior year adjustment 1
Gain on divestment of GSK Consumer Healthcare Holdings Ltd., pre-tax 1 -5 791
Core income from associated companies 313 293 844 899
 
On March 27, 2018, Novartis entered into the agreement to divest its 36.5% investment in GSK Consumer Healthcare Holdings Ltd. to GSK. As a result, equity accounting was discontinued starting from April 1, 2018. The transaction closed on June 1, 2018, see Note 3.



70

 
Condensed consolidated changes in net debt 

Third quarter

(USD millions) Q3 2019 Q3 2018
Change in cash and cash equivalents -1 613 1 554
Change in marketable securities, commodities, financial debts and financial derivatives 68 584
Increase/reduction in net debt -1 545 2 138
Net debt at July 1 -17 886 -19 210
Net debt at September 30 -19 431 -17 072



Nine months to September 30

(USD millions) 9M 2019 9M 2018
Change in cash and cash equivalents -4 893 5 140
Change in marketable securities, commodities, financial debts and financial derivatives 1 646 -3 165
Increase/reduction in net debt -3 247 1 975
Net debt at January 1 -16 184 -19 047
Net debt at September 30 -19 431 -17 072



Components of net debt


(USD millions)
Sep 30,
2019
Sep 30,
2018
Non-current financial debts -20 131 -22 605
Current financial debts and derivative financial instruments -8 017 -9 177
Total financial debt -28 148 -31 782
Less liquidity:
Cash and cash equivalents
8 378 14 000
Marketable securities, commodities, time deposits and derivative financial instruments
339 710
Total liquidity 8 717 14 710
Net debt at September 30 -19 431 -17 072

Share information

Sep 30,
2019
Sep 30,
2018
Number of shares outstanding 2 264 608 111 2 309 972 655
Registered share price (CHF) 86.54 84.40
ADR price (USD) 86.90 86.16
Market capitalization (USD billions)1 197.5 199.6
Market capitalization (CHF billions)1 196.0 195.0
Market capitalization is calculated based on the number of shares outstanding (excluding treasury shares). Market capitalization in USD is based on the market capitalization in CHF converted at the quarter end CHF/USD exchange rate.

71

 
Free cash flow

Third quarter

(USD millions) Q3 2019 Q3 2018 Change
Operating income from continuing operations 2 358 2 239 119
Adjustments for non-cash items
Depreciation, amortization and impairments
1 373 1 422 -49
Change in provisions and other non-current liabilities
382 178 204
Other
199 -199 398
Operating income adjusted for non-cash items 4 312 3 640 672
Dividends received from associated companies and others 0 1 -1
Interest and other financial receipts 83 176 -93
Interest and other financial payments -143 -181 38
Taxes paid -235 -219 -16
Payments out of provisions and other net cash movements in non-current liabilities -146 -208 62
Change in inventory and trade receivables less trade payables 17 -199 216
Change in other net current assets and other operating cash flow items 674 710 -36
Net cash flows from operating activities from continuing operations 4 562 3 720 842
Purchase of property, plant and equipment -357 -295 -62
Proceeds from sales of property, plant and equipment -3 4 -7
Purchase of intangible assets -205 -546 341
Proceeds from sales of intangible assets 140 286 -146
Purchase of financial assets -69 -77 8
Proceeds from sales of financial assets, net1 -91 74 -165
Purchase of other non-current assets -10 -13 3
Proceeds from sales of other non-current assets 1 3 -2
Free cash flow from continuing operations 3 968 3 156 812
Free cash flow from discontinued operations 145 -145
Total free cash flow 3 968 3 301 667
For the free cash flow, proceeds from the sales of financial assets excludes the cash inflows from the sale of a portion of the Alcon Inc. shares recognized by certain consolidated foundations through the Alcon spin-off, which amounted to USD 656 million. (see Note 3)

72

 
Free cash flow

Nine months to September 30

(USD millions) 9M 2019 9M 2018 Change
Operating income from continuing operations 7 263 7 041 222
Adjustments for non-cash items
Depreciation, amortization and impairments
3 840 3 526 314
Change in provisions and other non-current liabilities
1 400 425 975
Other
-113 -273 160
Operating income adjusted for non-cash items 12 390 10 719 1 671
Dividends received from associated companies and others 463 719 -256
Interest and other financial receipts 233 300 -67
Interest and other financial payments -565 -567 2
Taxes paid -1 195 -1 109 -86
Payments out of provisions and other net cash movements in non-current liabilities -662 -472 -190
Change in inventory and trade receivables less trade payables -1 289 -950 -339
Change in other net current assets and other operating cash flow items 632 973 -341
Net cash flows from operating activities from continuing operations 10 007 9 613 394
Purchase of property, plant and equipment -918 -810 -108
Proceeds from sales of property, plant and equipment 809 55 754
Purchase of intangible assets -703 -1 188 485
Proceeds from sales of intangible assets 421 702 -281
Purchase of financial assets -223 -148 -75
Proceeds from sales of financial assets1 86 138 -52
Purchase of other non-current assets -34 -26 -8
Proceeds from sales of other non-current assets 4 7 -3
Free cash flow from continuing operations 9 449 8 343 1 106
Free cash flow from discontinued operations -62 435 -497
Total free cash flow 9 387 8 778 609
For the free cash flow, proceeds from the sales of financial assets excludes the cash inflows from the sale of a portion of the Alcon Inc. shares recognized by certain consolidated foundations through the Alcon spin-off, which amounted to USD 656 million. (see Note 3)

73

 
Principal currency translation rates

Third quarter


(USD per unit)

Average
rates
Q3 2019

Average
rates
Q3 2018
Period-end
rates
Sep 30,
2019
Period-end
rates
Sep 30,
2018
1 CHF 1.014 1.017 1.008 1.024
1 CNY 0.143 0.147 0.140 0.145
1 EUR 1.112 1.163 1.094 1.163
1 GBP 1.232 1.303 1.229 1.307
100 JPY 0.932 0.897 0.927 0.882
100 RUB 1.548 1.525 1.546 1.523



Nine months to September 30


(USD per unit)

Average
rates
9M 2019

Average
rates
9M 2018
Period-end
rates
Sep 30,
2019
Period-end
rates
Sep 30,
2018
1 CHF 1.005 1.029 1.008 1.024
1 CNY 0.146 0.154 0.140 0.145
1 EUR 1.124 1.195 1.094 1.163
1 GBP 1.273 1.352 1.229 1.307
100 JPY 0.917 0.912 0.927 0.882
100 RUB 1.538 1.632 1.546 1.523



 
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Disclaimer
This press release contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, that can generally be identified by words such as “guidance,” “launched,” “launching,” “strong start,” “momentum,” “growth investments,” “compelling,” “submissions,” “starting,” “submitted,” “submission,” “planned,” “focused,” “expected,” “to grow,” “continued,” “continuing,” “continue,” “potential,” “growing,” “launches,” “continues,” “expect,” “to be completed,” “pending,” “closing conditions,” “committed,” “growth drivers,” “launch,” “to date,” “ongoing,” “filings,” “Breakthrough Therapy Designation,” “delivering,” “will,” “plans,” “to submit,” “suggests,” “may,” “would,” “proposed,” “commitment,” “pipeline,” “priority,” “outlook,” “unforeseen,” “forecast,” “enter,” “to deliver,” “priority review,” “enrollment,” “filed,” “transformative,” “Orphan Drug designation,” “upcoming,” “on track,” “future,” “strategy,” “Fast Track designation,” “Orphan designation,” “Orphan status,” “resubmitted,” “potentially,” “anticipated,” “as early as possible,” “PRIME designation,” “Sakigake designation,” “underway,” “increasing,” “in the coming months,” or similar expressions, or by express or implied discussions regarding potential new products, potential new indications for existing products, potential product launches, or regarding potential future revenues from any such products; or regarding the potential outcome, or financial or other impact on Novartis, of the proposed divestiture of certain portions of our Sandoz Division business in the US; or regarding the potential impact of the completion of the up to USD 5 billion share buyback; or regarding potential future sales or earnings of the Group or any of its divisions or potential shareholder returns; or by discussions of strategy, plans, expectations or intentions. Such forward-looking statements are based on the current beliefs and expectations of management regarding future events, and are subject to significant known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those set forth in the forward-looking statements. You should not place undue reliance on these statements. In particular, our expectations could be affected by, among other things: global trends toward healthcare cost containment, including ongoing government, payor and general public pricing and reimbursement pressures and requirements for increased pricing transparency; regulatory actions or delays or government regulation generally, including potential regulatory actions or delays with respect to the proposed transactions or the development of the products described in this press release; the potential that the proposed divestiture of certain portions of our Sandoz Division business in the US may not be completed in the expected time frame, or at all; the potential that the strategic benefits, synergies or opportunities expected from the proposed divestiture of certain portions of our Sandoz Division business in the US, and other transactions described, may not be realized or may be more difficult or take longer to realize than expected; the inherent uncertainties involved in predicting shareholder returns; the uncertainties inherent in the research and development of new healthcare products, including clinical trial results and additional analysis of existing clinical data; our ability to obtain or maintain proprietary intellectual property protection, including the ultimate extent of the impact on Novartis of the loss of patent protection and exclusivity on key products that commenced in prior years and will continue this year; safety, quality or manufacturing issues; uncertainties involved in the development or adoption of potentially transformational technologies and business models; uncertainties regarding actual or potential legal proceedings, including, among others, product liability litigation, disputes and litigation with business partners or business collaborators, government investigations generally, litigation and investigations regarding sales and marketing practices, and intellectual property disputes; our performance on environmental, social and governance measures; general political, economic and trade conditions, including uncertainties regarding the effects of ongoing instability in various parts of the world; uncertainties regarding future global exchange rates; uncertainties regarding future demand for our products; uncertainties regarding potential significant breaches of data security or data privacy, or disruptions of our information technology systems; and other risks and factors referred to in Novartis AG’s current Form 20-F on file with the US Securities and Exchange Commission. Novartis is providing the information in this press release as of this date and does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise.

All product names appearing in italics are trademarks owned by or licensed to Novartis Group companies.
 
75
 

About Novartis
Novartis is reimagining medicine to improve and extend people’s lives. As a leading global medicines company, we use innovative science and digital technologies to create transformative treatments in areas of great medical need. In our quest to find new medicines, we consistently rank among the world’s top companies investing in research and development. Novartis products reach more than 750 million people globally and we are finding innovative ways to expand access to our latest treatments. About 109,000 people of more than 140 nationalities work at Novartis around the world. Find out more at. www.novartis.com

Novartis will conduct a conference call with investors to discuss this news release today at 14:00 Central European time and 8:00 Eastern Time. A simultaneous webcast of the call for investors and other interested parties may be accessed by visiting the Novartis website. A replay will be available after the live webcast by visiting.
https://www.novartis.com/investors/event-calendar

Detailed financial results accompanying this press release are included in the condensed interim financial report at the link below. Additional information is provided on Novartis divisions and pipeline of selected compounds in late stage development and a copy of today's earnings call presentation can be found at.
https://www.novartis.com/investors/event-calendar
 
Important dates
 
December 5, 2019 
R&D update 2019 – London
January 29, 2020  
Fourth quarter and Full Year results 2019 
April 28, 2020 
First quarter results 2020
July 21, 2020 
Second quarter results 2020
October 27, 2020 
Third quarter results 2020
 
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