Biotech Values

[DewDiligence]

NVS Reports 2Q06 Results

[The overall results and outlook are in-line to slightly below expectations, but year-over-year comparisons are tricky because of the Chrion, Hexal, and Eon acquisitions. (The Chiron acquisition, which closed in April, will cost NVS upwards of $400M in one-time cash and non-cash charges.) 2Q06 EPS, including the Chiron-related charges, was $0.73, +4% year-over-year.

NVS’ top-selling drugs, Diovan and Gleevec, continued to shine in the quarter: Diovan broke the $1B mark for a quarter (!) for the first time and was +16% Y-o-Y in local currencies, while Gleevec racked up $640M, +20% Y-o-Y in local currencies.

Among the few dogs was Visudyne (NVS’ 14th-largest drug), which did $77M worldwide and a scant $18M, -64% Y-o-Y, in the U.S. That U.S. Visudyne sales fell off a cliff in Q2 is hardly surprising given the competition in the AMD market, and things will only get worse for Visudyne in Q3 on account of Lucentis. By next year, however, NVS may itself be cashing in on Lucentis sales ex-U.S.

European MAAs for the top-2 late-stage candidates, Galvus and Rasilez, are on track for 2H06 submissions. (NDAs for both were submitted to the FDA during 1H06.)

For further details, including financial tables and sales of each of NVS’ 20-largest drugs, please see
http://hugin.info/134323/R/1064058/178993.pdf .]

http://www.novartis.com

>>
17 July 2006, 01.01 AM ET

SUMMARY

Novartis generates strong sales and earnings growth in the first six months of 2006, growing faster than the world pharmaceuticals market

• Group first half net sales rise 15% (+17% in local currencies) to USD 17.5 billion on outstanding underlying sales growth and contributions from recent acquisitions

- Pharmaceuticals net sales up 8% (+10% lc) on strong US performance and double-digit growth in Cardiovascular, Oncology and Neuroscience franchises

• Group first half operating income advances 21%, supported by all divisions
- Pharmaceuticals operating income climbs 11%, margin expands to 30.7% of net sales on productivity gains

• Net income climbs 17% to USD 3.67 billion in first half and EPS rises 16% to USD 1.56 per share [$0.73 in the second quarter

• First-half results heavily impacted by charges relating to Chiron acquisition. Excluding these charges, Group operating income advances 27% and net income up 23%

• New clinical data underscore potential of highly-rated Novartis pipeline, particularly for Galvus (type 2 diabetes), Rasilez and Exforge (hypertension), and Tasigna (cancer)

Excluding Chiron charges, Q2 Group operating income up 23% and net income up 15%

--
Basel, July 17, 2006 - Commenting on the results, Dr. Daniel Vasella, Chairman and CEO of Novartis, said, "I am pleased with our strong performance in the first half of 2006. Our strategic focus on healthcare delivered dynamic growth, with all divisions achieving excellent results expanding their market share. The Pharmaceutical division strengthened its competitive position, particularly with our cardiovascular and oncology products advancing at strong double-digit growth rates. Productivity gains in the second quarter were strong as we prepare for the launch of several potential blockbusters for the treatment of patients with type 2 diabetes, hypertension, asthma and eye diseases. Led by our strategy and our commitment to innovation, I am confident that Novartis will continue to grow strongly and achieve another year of record sales and earnings."

FIRST HALF SALES

• Key growth drivers for Group sales were good underlying sales expansion in all divisions as well as from acquisitions, including the first-time consolidation of the former Chiron activities into the new Vaccines & Diagnostics division and Pharmaceuticals. Volume growth contributed seven percentage points, while acquisitions added nine percentage points. Currency translation led to a decline of two percentage points and prices across the Group were up one percentage point.

• Pharmaceuticals delivered dynamic growth ahead of the market, as Diovan and Lotrel (hypertension) as well as Gleevec/Glivec (cancer) were the top products by sales in their therapeutic categories and advanced at double-digit rates. US sales advanced 18% on leading brand positions in the new US Medicare prescription drug program started in January 2006. Volume and product mix represented seven percentage points of net sales growth, while net price changes added two percentage points and the first-time consolidation of Chiron's pharmaceuticals one percentage point. Currency translations led to a decline of two percentage points.

• Vaccines & Diagnostics net sales of USD 127 million reflected the first-time consolidation of Chiron's human vaccines and molecular diagnostics activities from the acquisition date of April 20 up to June 30.

• Sandoz net sales for the first half were supported by a strong underlying volume expansion in the retail business and leading performances in Eastern Europe, Germany, Australia and Switzerland as well as the contribution of 75 percentage points in local currencies to net sales growth from Hexal and Eon Labs, which have been performing ahead of expectations. No sales contribution was recorded from these acquisitions in the year-ago period.

• Consumer Health net sales were led by double-digit growth from OTC and Animal Health. On a comparable basis excluding the impact of the Nutrition & Santé divestiture in February 2006, net sales were up 8% in USD over the 2005 period.

SECOND QUARTER SALES

Group net sales rise 18% (+18% lc) to USD 9.2 billion

Pharmaceuticals, Sandoz and Consumer Health all delivered good performances, while the first-time consolidation of Chiron further supported growth. Volume increases delivered eight percentage points of net sales growth, while acquisitions added ten percentage points. Currency translation and net price changes had no impact.

Novartis improved its share of the global healthcare market (Pharmaceuticals and Sandoz) to 5.35% for the first five months of 2006, up from 5.30% in the year-ago period (restated to include Hexal and Eon Labs), according to IMS Health. Pharmaceuticals increased its share of the global healthcare market to 3.90% from 3.85% in the same period.

Pharmaceuticals net sales up 11% (+11% lc) to USD 5.7 billion

Led by the Cardiovascular, Oncology and Neuroscience franchises, which delivered double-digit growth, Pharmaceuticals again grew faster than the industry. Cardiovascular strategic brand sales rose 13% (+13 % lc) to USD 1.6 billion on robust performances from Diovan (+16% lc) and Lotrel (+25% lc), while Oncology sales were USD 1.5 billion, up 13% (+13% lc) from Gleevec/Glivec (+20% lc) and Femara (+27% lc). The first-time consolidation of Chiron's pharmaceuticals added two percentage points to net sales growth.

In the US, net sales advanced 20% to USD 2.4 billion as many key brands delivered double-digit growth, in part supported by the new Medicare drug program. Partially offsetting this performance were lower sales of Elidel and Visudyne. In Europe, net sales rose 4% in USD and local currencies as market share gains for Diovan and good sales of Gleevec/Glivec were partially offset by price cuts imposed by government healthcare reforms and the entry of generic versions of Lamisil and Foradil. The priority emerging growth markets - China, India, Russia and Turkey - had dynamic growth with sales up 13% (+16% lc).

Vaccines & Diagnostics net sales of USD 127 million

Net sales were USD 127 million from the April 20 acquisition date to June 30 in the first-time consolidation of these Chiron activities. Vaccines for pediatric use and for travelers to endemic disease regions as well as products for use in blood testing are the primary product groups. Other revenues, representing mainly royalty income, were USD 61 million.

Sandoz net sales advance 74% (+74% lc) to USD 1.5 billion

Eastern Europe, Switzerland, Germany, Spain and Italy performed well. Hexal and Eon Labs added 72 percentage points to overall net sales growth in local currencies. Responding to new healthcare regulations in Germany, Sandoz proactively adapted to compulsory price reductions and related changes during the quarter by lowering net selling prices in Germany by about 10%. The reductions, assuming no short-term volume gains in 2006, are expected to reduce the division's 2006 net sales by approximately USD 50 million.

Consumer Health net sales climb 4% (+4% lc) to USD 1.9 billion

Double-digit sales expansions in OTC, Animal Health and Gerber drove the increase, mainly from increasing focus on strategic brands for OTC and Animal Health and new product introductions for Gerber in the US. The CIBA Vision lens-care manufacturing facility is running at capacity, with all lines back in production and shipments resuming.

FIRST HALF OPERATING INCOME

• Group operating income advanced at a strong rate in the first half, supported by excellent underlying performances in Pharmaceuticals, Sandoz and Consumer Health. A one-time gain of USD 129 million in the first quarter from the Nutrition & Santé divestment also supported Consumer Health. Vaccines & Diagnostics and Pharmaceuticals were negatively impacted by one-time Chiron acquisition costs.

• Pharmaceuticals operating income expanded strongly in the first half as the strong underlying business expansion and benefits from productivity initiatives were impacted by one-time costs related to the acquisition of Chiron's pharmaceutical activities. Marketing & Sales expenses rose at a slower rate than net sales mainly on the phasing of investments for new product launches, which were higher in the first half of 2005 and are expected to increase in the second half of 2006. Research & Development investments as a percentage of net sales fell slightly based on high investments in the year-ago period for late-stage clinical trials. Excluding Chiron acquisition-related charges, operating income grew 16%.

• Vaccines & Diagnostics had an operating loss of USD 38 million driven by one-time restructuring and related integration costs of USD 19 million, USD 23 million impact from increasing acquisition-related inventory to selling prices less distribution margin and the acquisition-related amortization of intangible assets of USD 25 million.

• Sandoz operating income was sharply higher thanks to strong expansion of the retail generics and anti-infectives businesses, operational improvements and the Hexal and Eon Labs contributions.

• Consumer Health operating income rose mainly on the performance of strategic brands in OTC and Animal Health as well as USD 129 million from the divestiture gain of Nutrition & Santé in February 2006. Excluding this divestiture, operating income still grew faster than sales, up 11% over the year-ago period.

SECOND QUARTER OPERATING INCOME

Group operating income advances 11% to USD 2.1 billion

Operating income grew at a slower pace than net sales, reflecting the one-time costs and amortization of intangible assets related to the Chiron acquisition. Excluding these charges of USD 209 million, which affected the Pharmaceuticals and the newly created Vaccines & Diagnostics division, operating income would have risen 23%.

Pharmaceuticals operating income up 4% to USD 1.7 billion

The strong underlying performance in the second quarter reflected productivity gains in all areas and the phasing of expenses. Before charges of USD 142 million relating to the integration of Chiron's pharmaceutical activities, operating income grew 13%. Marketing & Sales expenses rose only 5% ahead of the planned investments to support the launch of Galvus (type 2 diabetes), Rasilez and Exforge (hypertension), Xolair (asthma) and Lucentis (eye disease) - in the second half of 2006 and 2007. R&D expenses rose 9%, also slower than sales, following the completion in 2005 of several Phase III trials and ahead of anticipated investments during the second half of 2006, including for FTY720 (multiple sclerosis) and QAB149 (asthma and COPD). Costs of Goods Sold (COGS) rose 19% but only 14% before Chiron-related acquisition costs. General & Administrative expenses as a percentage of net sales were flat on continued productivity improvements.

Vaccines & Diagnostics operating loss of USD 38 million

Vaccines & Diagnostics had a net operating loss of USD 38 million in the second quarter, reflecting the impact of one-time acquisition and related integration costs of USD 67 million for the period from April 20 to June 30.

Sandoz operating income rises dynamically to USD 207 million

Thanks to the strong underlying retail generics and anti-infectives businesses as well as synergies from Hexal and Eon Labs acquisitions, operating income was sharply higher in the second quarter. Cost of Goods Sold (COGS) improved on a better product mix and operating efficiency improvements, offsetting acquisition-related amortization charges and the impairment of intangible assets related to recent acquisitions. Advances were also seen in reducing General & Administrative costs.

Consumer Health operating income up 8% to USD 312 million

Strong performances from OTC and Animal Health were the leading contributors. Tighter management of functional costs offset mainly higher Cost of Goods Sold (COGS) tied to increased commodity and energy prices.

FIRST HALF NET INCOME

First half Group net income rises 17% to USD 3.7 billion

In the first half of 2006, Group net income expanded faster than net sales as the net income margin rose to 21.0% of net sales compared to 20.6% in the year-ago period. The 21% improvement in Group operating income more than offset reductions in financial income and associated companies due to the Chiron acquisition. Excluding the Chiron acquisition-related impact of USD 183 million, net income in the first half of 2006 rose 23%.

Vaccines & Diagnostics creates a new strategic growth platform

Novartis completed the acquisition of Chiron on April 20, creating a new strategic growth platform in human vaccines and molecular diagnostics. These fast-growing areas offer dynamic growth potential and complement existing activities in innovative medicines, generic drugs and over-the-counter (OTC) treatments. Annual cost synergies totaling

USD 200 million are anticipated within three years after closing, with 50% expected to be achieved in the first 18 months.

Before the acquisition, the 44% interest in Chiron held by Novartis was accounted for in the Novartis consolidated income statement under "Income from Associated Companies." The post-acquisition results to June 30 have been consolidated for the first time.

The human vaccines and molecular diagnostics activities of Chiron form a new division called Vaccines & Diagnostics. Chiron's pharmaceutical activities have been integrated into the Pharmaceuticals division.

For the full year, Novartis expects the consolidation of Chiron (based on preliminary estimates) to have a net negative effect on operating income of between USD 350 million and USD 400 million. This estimate reflects the operating income contribution from Chiron in both the newly created Vaccines & Diagnostics division as well as Pharmaceuticals offset by a number of acquisition-related charges, which include integration, restructuring, inventory step-up costs and amortization of intangibles. The negative impact on Group net income is expected to be between USD 400 million and USD 450 million, reflecting in addition one-time charges in associated income and lower net financial income based on reduced net liquidity. Sales of approximately USD 800 million are expected for the new Vaccines & Diagnostics division in 2006 as well as a contribution of USD 200 million from Chiron's former activities that have been integrated into the Pharmaceuticals division.

OUTLOOK
(Barring any unforeseen events)

Delivering dynamic growth from its medicine-based portfolio, Novartis is preparing to launch a series of new products that address urgent medical needs and have significant sales potential. The addition of a fourth division - Vaccines & Diagnostics - following the Chiron acquisition provides a new strategic growth platform. For the full year, double-digit net sales growth in local currencies is expected for the Group, while Pharmaceuticals net sales are seen growing in local currencies at a high-single-digit rate. Record levels of operating and net income are expected in 2006.

Pharmaceutical business and key product highlights

Note: All growth figures refer to worldwide sales growth in local currencies for the first six months of 2006, unless otherwise specified.

Diovan (USD 2.0 billion, +16% lc) maintained a 30% global share for the angiotensin-receptor blocker (ARB) class of anti-hypertension agents thanks to new indications, new higher-strength dosages and excellent efficacy data. In the US, Diovan reached in May a 38% share of the ARB market segment and had the strongest growth rate in new prescriptions in this class (Source: IMS). Disease awareness programs and a strong US Medicare formulary position have underpinned growth, with second quarter net sales growth expanding at a faster pace than in the first quarter. The popularity of Co-Diovan (combination with a diuretic) has driven the double-digit growth performance in Europe. New data presented in May showed Diovan was the first blood pressure medicine in a large-scale trial to lower high sensitivity C-reactive-protein (hsCrp), a marker of inflammation.

Gleevec/Glivec (USD 1.2 billion, +19% lc), for patients with all stages of Philadelphia-chromosome positive (Ph+) chronic myeloid leukemia (CML) and for certain forms of gastro-intestinal stromal tumors (GIST), maintained robust growth. New data at the American Society of Clinical Oncology (ASCO) showed nearly 90% of patients treated with Gleevec/Glivec for five years for CML were still alive and the yearly risk of progression to advanced disease declined the longer patients took the medicine. Growth has been driven by ongoing penetration of the CML and GIST markets, an increase in the average daily dose and the increasing number of patients thanks to improved survival.

Lotrel (USD 643 million, +26% only in US), the No. 1 fixed-dose combination treatment for hypertension in the US since 2002, was supported by increasing use of multiple therapies to treat hypertension and the impact of US disease awareness campaigns. Two new dosing strengths were launched in June combining the calcium channel blocker amlodipine with the highest-available dose of the angiotensin-converting enzyme (ACE inhibitor) benazepril.

Zometa (USD 627 million, +4% lc), an intravenous bisphosphonate for patients with bone metastases, has experienced moderating growth on overall slowing of the bisphosphonates segment. Zometa continued to sustain strong leadership in this segment despite competition in Europe. In April, Zometa received approval in Japan for treatment of bone metastases. Enrollment has been completed in the AZURE trial, the first large-scale study to evaluate if Zometa improves disease-free survival in women with high-risk early breast cancer.

Lamisil (USD 483 million, -13% lc), an oral treatment for fungal nail infections, had lower worldwide sales following generic entries in several European markets in late 2005, but sales in the US were up strongly 14%.

Neoral/Sandimmun (USD 449 million, -1% lc), for use in organ transplantation, nearly maintained sales worldwide despite ongoing generic competition in the US that were offset by resilient sales in the rest of the world, which account for 86% of net sales. Neoral was approved in June for a new indication in Japan for the treatment of patients with Myasthenia Gravis, an autoimmune disorder.

Sandostatin (USD 439 million, -2% lc), for patients with acromegaly as well as treatment of patients with certain tumors, reported 12% worldwide net sales growth for the long-acting LAR version that accounts for approximately 70% of total brand sales, offsetting the impact of generic competition in the US for the subcutaneous formulation.

Femara (USD 326 million, +30% lc) delivered robust growth based on expansion of use in both the treatment of women with hormone-related breast cancer immediately after surgery (adjuvant) in the US as well as after completing tamoxifen therapy (extended adjuvant) worldwide. In the US, market share of Femara in new patients has grown by two percentage points since January 2006, primarily on greater use in adjuvant patients. Femara is now approved in more than 40 countries worldwide for adjuvant treatment, including 10 European countries following initial European Union approval in the first quarter. Femara, which also received approval in Japan during the first quarter, is the first aromatase inhibitor to demonstrate greater benefit in women at increased risk of breast cancer recurrence. A new global 4,000 patient head-to-head trial comparing Femara to anastrozole called FACE (Femara vs. Anastrozole Clinical Evaluation) was also launched during the first quarter.

Zelnorm/Zelmac (USD 263 million, +44% lc), for irritable bowel syndrome with constipation (IBS-C) and chronic idiopathic constipation, maintained strong growth as use in the US reached an all-time high of 270,000 total prescriptions in May 2006, a 28% increase over May 2005. Increasing awareness about the disease has driven growth for Zelnorm, which is approved in over 55 countries for IBS-C and in more than 20 countries for chronic constipation.

Visudyne (USD 202 million, -18% lc), for the eye condition "wet" AMD (age-related macular degeneration), was impacted by off-label competition but performed well outside the US, particularly in Turkey, Japan and the UK.

Exjade (USD 50 million), the first and only once-daily oral iron chelator for chronic iron overload, has now been approved in 26 countries worldwide after receiving accelerated US regulatory approval in November 2005. On June 29, the Committee for Medicinal Products (CHMP) issued a positive opinion recommending that the European Commission (EC) grant approval. Local country approvals typically occur within approximately three months of this decision. Exjade has been used primarily to help patients with the blood disorders sickle cell anemia, myelodysplastic syndrome (MDS) and thalassemia.

Xolair (USD 41 million) has performed well since this novel therapy for severe allergic asthma was launched in Germany, the UK, Sweden, Spain and Greece following EU approval in October 2005. Launches are planned for France, Italy and Poland as well as Mexico and Brazil by the end of 2006. Xolair is considered one of the most significant therapeutic advances in the last 15 years for patients with asthma. Submission for Japanese approval was completed in June. In the US, Xolair is co-promoted by Novartis and Genentech, which distributes Xolair in the US and shares a portion of its operating income with Novartis and Tanox. Genentech reported first half sales of USD 200 million for the product in the US. This resulted for Novartis in a corresponding contribution to Other Revenues of USD 74 million.

Novartis pipeline and regulatory update

Novartis has a number of important compounds that address significant medical needs awaiting regulatory approval, while other priority projects are making progress. European submissions for Galvus (type 2 diabetes) and Rasilez (hypertension) are set to be completed by the end of 2006 following submissions in the US earlier in 2006. In addition, a series of in-licensing agreements as well as a targeted acquisition have been announced that complement internal discovery efforts in the prevention and treatment of infectious diseases.

Among the recent Pharmaceuticals division developments:

• Galvus (vildagliptin), under development as a new once-daily oral treatment option for type 2 diabetes, was highlighted at the recent American Diabetes Association annual meeting through new Phase III data demonstrating impressive efficacy, especially in patients with poor blood sugar control. Data underscored the good efficacy and tolerability previously reported from the Galvus program, both as a monotherapy and in use with other anti-diabetic agents. Galvus was accepted for US regulatory review in March 2006. Submission for European approval is scheduled before the end of 2006.

• Rasilez (aliskiren), expected to be the first in a new class of oral anti-hypertensive agents called renin inhibitors developed in collaboration with Speedel AG, was shown in new Phase III data to provide superior reductions in systolic blood pressure over the ACE inhibitor ramipril in patients with diabetes and hypertension. This added to earlier data showing additive blood pressure reductions achieved by Rasilez when co-administered with an ACE inhibitor, diuretic or calcium channel blocker. Other data reaffirmed that Rasilez, developed as a monotherapy and in co-administration with other anti-hypertensive medicines, provided blood pressure reductions sustained over 24 hours. The US submission of Rasilez was completed in April 2006, while the European submission remains on track for the end of 2006.

• Exforge, a one-tablet combination of the calcium channel blocker amlodipine and the angiotensin receptor blocker valsartan, showed in the first Phase III data strong blood pressure reductions - up to 43 mmHg in the most severe patients - with excellent tolerability. The data also showed that the two complementary mechanisms of action helped more than 80% of patients studied to reach their recommended blood pressure goals. Exforge has been shown to be safe and well tolerated in a program involving 5,000 patients. Exforge may be the optimal way to use amlodipine due to a lower incidence of peripheral edema (fluid retention) and additional efficacy as well as potential end-organ protection compared to those taking amlodipine alone. US and EU submissions were completed earlier in 2006.

• Tasigna (nilotinib, formerly AMN107) achieved several important data milestones in the second quarter with the publication of Phase I clinical data in the "New England Journal of Medicine" as well as the presentation of interim results from an ongoing Phase II registration study during the American Society of Clinical Oncology (ASCO) annual meeting. The interim Phase II results found that 46% of patients with chronic phase Philadelphia chromosome-positive (Ph+) chronic myeloid leukemia (CML) resistant or intolerant to optimized Gleevec/Glivec therapy achieved a major cytogenic response with Tasigna after six months of treatment. Both Tasigna and Gleevec/Glivec inhibit Bcr-Abl, the definitive cause of Ph+ CML. Tasigna was specifically designed to be a more selective inhibitor of Bcr-Abl and its mutations. Novartis has launched ENACT (Expanding Nilotinib Access in Clinical Trials) to provide expanded global access to Tasigna. Novartis plans to submit Tasigna for US and EU approval in late 2006 compared to earlier estimates for 2007.

• FTY720 (fingolimod), an oral once-daily treatment for relapsing forms of multiple sclerosis (MS), is currently in Phase III development. Discussions with the FDA have been concluded successfully and the first patients have been enrolled in the US into the placebo-controlled Phase III trial. A trial comparing FTY720 to interferon has also been initiated. These studies are designed to demonstrate the efficacy of FTY720 in reducing the frequencies of MS relapses and evaluate its efficacy in slowing the progression of disability. US and EU submissions are planned for 2009.

• Prexige (lumiracoxib), for treatment of osteoarthritis and acute pain, is now available in 13 countries, including 10 countries in Latin America (including Brazil and Mexico) as well as Australia, New Zealand and the UK. New data presented at the European Congress of Rheumatology demonstrated the effectiveness of Prexige in relieving the acute pain of gout, while sub-analyses of the TARGET study reinforced its safety profile versus traditional non-steroidal medications. EU regulatory re-submission is ongoing and US submission is set for 2007.

• Cubicin (daptomycin), an antibiotic for complicated skin and soft tissue infections (cSSTI), was launched in the UK, Germany and the Netherlands after EU approval in January. Launches in other countries are planned for 2006 and 2007. Obtained through the Chiron acquisition, Cubicin is the first Novartis product for the hospital infections market. Cubist Pharmaceuticals has rights in North America, Japan, Israel, Korea and China.

• Novartis has made a recommended offer to acquire NeuTec Pharma plc (LSE: NTP), a UK biopharmaceutical company specializing in hospital anti-infectives. NeuTec has two novel compounds - the antifungal Mycograb1 and the antibacterial Aurograb1 - that are both in late-stage development.

• Albuferon, a late-stage interferon drug about to enter Phase III trials for patients with hepatitis C, was in-licensed from Human Genome Sciences in June 2006. Albuferon is expected to require less frequent injections and potentially provide a better safety/tolerability profile over pegylated interferons, the current standard of care. Over 170 million patients worldwide are infected with the hepatitis C virus.

Among the recent developments in other divisions:

• Omnitrope, for use in treatment of growth disorders in children and adults, received precedent-setting US approval in May as the first follow-on version of a previously approved recombinant biotechnology drug. The FDA's decision in favor of Sandoz follows approval in April by the European Commission. Omnitrope is now available in Germany, with launches planned for additional countries in Europe later this year, and is also available in Australia, where it was launched in November 2005.

• Novartis Vaccines was awarded a grant of up to USD 220 million from the US government to support the development of a cell culture-derived influenza vaccine, both to supply seasonal influenza vaccines and to respond rapidly in the event of an influenza pandemic. The award was made as part of a larger initiative to expand the US influenza vaccine infrastructure. An investigational flu cell culture vaccine is expected to be submitted for approval in Europe later this year, while additional clinical studies are ongoing in both the US and Europe.

• IC51, a vaccine in Phase III trials for prevention of infections from the Japanese Encephalitis virus, was acquired from Intercell AG. Novartis gained the rights in the US, Europe and certain other markets. US submission is expected to start in 2006. Some 30,000 to 50,000 cases of this virus are estimated to occur annually in Asia.

CORPORATE

Net financial income in the second quarter was USD 4 million, down from USD 61 million in the year-ago period. For the first half of 2006, net financial income was USD 54 million compared to USD 106 million in the 2005 first half, reflecting sharply lower average net liquidity of USD 0.75 billion at June 30 compared to USD 6.15 billion in the previous year. The return on net liquidity was 14.4% in the first half, up from 3.5% a year ago as a result of successful currency management.

Income from associated companies

There was only a USD 1 million net contribution from associated companies in the second quarter compared with USD 28 million in the same period for 2005. The investment in Chiron, which was accounted for as an associated company until the April 20 acquisition, contributed a loss of USD 77 million compared to a loss of USD 16 million in the prior-year period. The loss reflected acquisition-related expenses of USD 53 million, primarily accelerated share-based compensation costs and litigation expenses recorded in the pre-acquisition period. The investment in Roche contributed income of USD 72 million. This represented an anticipated USD 102 million contribution from Roche's net income for the 2006 second quarter, which was reduced by USD 30 million in charges related to amortization of intangible assets. In the first half, associated companies provided income of USD 105 million against USD 61 million in the year-ago period.

Balance sheet

The Group's equity increased by USD 4.0 billion to USD 37.2 billion at June 30, 2006, compared with USD 33.2 billion at the end of 2005. This increase came from net income of USD 3.7 billion in the first half of 2006, an upward revaluation of USD 0.7 billion in the initial Chiron minority investment, additional actuarial gains from defined benefit plans of USD 0.3 billion, a translation gain of USD 1.0 billion and other net equity increases of USD 0.3 billion. This was partially offset by a dividend payment of USD 2.0 billion.

Net debt amounted to USD 2.1 billion at June 30, 2006, compared to net liquidity of USD 2.5 billion at the beginning of the year. This change of USD 4.6 billion was principally due to the Chiron acquisition. The debt/equity ratio remains at 0.25:1 at June 30, unchanged from December 31, 2005.

Total non-current assets increased by USD 9.8 billion in the first half of the year principally due to USD 8.8 billion of goodwill, intangible assets and property, plant & equipment arising from the Chiron acquisition.

Novartis did not repurchase any shares during the first half of the year through its share repurchase program via a second trading line on the SWX Swiss Exchange.

Novartis is one of the few non-financial services companies worldwide to have attained the highest credit ratings from Standard & Poor's, Moody's and Fitch, the three benchmark rating agencies. S&P has rated Novartis as AAA for long-term maturities and as A1+ for short-term maturities. Moody's has rated the Group as Aaa and P1, respectively, while Fitch has rated Novartis as AAA for long-term maturities and as F1+ for short-term maturities.

Cash flow from operating activities increased by USD 0.6 billion in the 2006 first half to USD 3.9 billion, reflecting the business expansion and strict management of working capital by the divisions. Cash flow used for investing activities includes the net investment of USD 4.3 billion to acquire Chiron and proceeds of USD 0.2 billion from the Nutrition & Santé divestment. Free cash flow after dividends for the first half of 2006 was USD 0.8 billion, unchanged from the year-ago period as the increase in operating cash flow was offset by higher net purchases of intangible assets and higher net capital expenditures.

About Novartis

Novartis AG (NYSE: NVS) is a world leader in offering medicines to protect health, cure disease and improve well-being. Our goal is to discover, develop and successfully market innovative products to treat patients, ease suffering and enhance the quality of life. Novartis is the only company with leadership positions in both patented and generic pharmaceuticals. We are strengthening our medicine-based portfolio, which is focused on strategic growth platforms in innovation-driven pharmaceuticals, high-quality and low-cost generics, human vaccines and leading self-medication OTC brands. In 2005, the Group's businesses achieved net sales of USD 32.2 billion and net income of USD 6.1 billion. Approximately USD 4.8 billion was invested in R&D. Headquartered in Basel, Switzerland, Novartis Group companies employ approximately 97,000 people and operate in over 140 countries around the world. For more information, please visit http://www.novartis.com.
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