Novartis AG (NVS)

PRESSURE OF PATENT EXPIRATIONS AND GENERIC COMPETITION

The pharmaceuticals industry faces a continuing high level of patent expirations, with branded products representing approximately USD 24 billion in combined annual sales set to lose patent protection in 2009, similar to levels seen in recent years, according to IMS Health.

Given the ongoing pressure of patent expirations, innovation is critical to the success of companies like Novartis. Sustainable growth can come only by discovering and developing new products that address unmet needs, are accepted by patients and physicians, and are reimbursed by payors. Our ability to gain regulatory approvals, and then successfully secure and defend intellectual property rights is particularly important for the Pharmaceuticals Division. The loss of exclusivity for one or more important product — due to patent expiration, generic challenges, competition from new branded products or changes in regulatory status — could have a material negative impact on the Group’s results of operations.

Novartis takes active steps to defend its intellectual property rights, including initiating patent infringement lawsuits against generic drug manufacturers and, to a lesser degree, against other research-based pharmaceutical companies. Some generics manufacturers, however, are increasingly conducting “at risk” launches of products before final resolution of legal challenges for patent infringement.

In 2008, sales of four Novartis pharmaceutical products — Lotrel (high blood pressure), Lamisil (fungal infections), Trileptal (epilepsy) and Famvir (viral infections) — continued to lose sales following the start of generic competition in the US during 2007. As a result of generic competition, combined net sales for these products in the US declined from USD 2.6 billion in 2006 to USD 1.6 billion in 2007, and further to USD 536 million in 2008. This sharp reduction had an adverse effect on the results of operations of the Pharmaceuticals Division in 2007 and 2008.

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Pressure of Patent Expirations and Generic Competition

        The pharmaceuticals industry faces a continuing high level of patent expirations, with branded products representing approximately $24 billion in combined annual sales set to lose patent protection in 2009, similar to levels seen in recent years, according to IMS Health.

        Given the ongoing pressure of patent expirations, innovation is critical to the success of companies like Novartis. Sustainable growth can come only by discovering and developing new products that address unmet needs, are accepted by patients and physicians, and are reimbursed by payors. Our ability to gain regulatory approvals, and then successfully secure and defend intellectual property rights is particularly important for the Pharmaceuticals Division. The loss of exclusivity for one or more important product—due to patent expiration, generic challenges, competition from new branded products or changes in regulatory status—could have a material negative impact on the Group's results of operations.

        Novartis takes active steps to defend its intellectual property rights, including initiating patent infringement lawsuits against generic drug manufacturers and, to a lesser degree, against other research-based pharmaceutical companies. Some generics manufacturers, however, are increasingly conducting "at risk" launches of products before final resolution of legal challenges for patent infringement.

        In 2008, sales of four Novartis pharmaceutical products—Lotrel (high blood pressure), Lamisil (fungal infections), Trileptal (epilepsy) and Famvir (viral infections)—continued to lose sales following the start of generic competition in the US during 2007. As a result of generic competition, combined net sales for these products in the US declined from $2.6 billion in 2006 to $1.6 billion in 2007, and further to $536 million in 2008. This sharp reduction had an adverse effect on the results of operations of the Pharmaceuticals Division in 2007 and 2008.

        Our three best-selling products—Diovan (high blood pressure), Gleevec/Glivec and Zometa (both for cancers)—could potentially face significant competition in the coming two to six years in various markets, particularly the US and Europe. Competition could come in a number of forms: patent challenges, the entry of generic versions of another medicine in the same therapeutic class, or the regular expiration of patents. In particular, the patent on our top-selling drug, Diovan, expires in major European Union countries during 2011 and in the US in September 2012. In addition, sales of Diovan may begin to erode earlier in certain EU countries and the US ahead of a competitor product, Cozaar®, becoming the first branded medicine in this therapeutic class to lose market exclusivity (EU: 2009, US: 2010). Similarly, zoledronic acid, the active ingredient in Zometa as well as in Aclasta/Reclast (osteoporosis), is currently the subject of US patent litigation, with the possibility of an "at risk" launch by one or more generic competitors as early as the end of 2010. The loss of exclusivity for any one of these products could have a material adverse effect on the Group's business, financial condition and results of operations.

        In addition to Zometa and Aclasta/Reclast, key products in the Pharmaceuticals Division that are the subject of ongoing US patent litigation include Femara (breast cancer), Lescol (high cholesterol), Focalin/Ritalin LA (Attention Deficit/Hyperactivity Disorder) and Comtan/Stalevo (Parkinson's disease). The loss of exclusivity for some of these products could have a significant adverse effect on the results of operations of the Pharmaceuticals Division. In addition, Neoral (transplantation) and Voltaren (pain), which are still among the Pharmaceuticals Division's top-ten selling products and had combined net sales of $1.8 billion in 2008, have encountered generic competition for some time in many markets. Although these products continue to generate relatively stable results, future sales from these products may decline further, which in turn could have an adverse effect on the Pharmaceuticals Division's business, financial condition and results of operations.