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This operating and financial review should be
read in conjunction with the consolidated financial statements.
The consolidated financial statements and the financial information
discussed below have been prepared in accordance with International
Financial Reporting Standards (IFRS). Please see note 32 of the
consolidated financial statements for a discussion of the significant
differences between IFRS and US Generally Accepted Accounting Principles
(US GAAP).
Factors affecting results
The global healthcare market is growing
rapidly due to, among other reasons, the aging population in developed
countries, unmet needs in many therapeutic areas (such as cancer
and cardiovascular disease), the adoption of more industrialized
lifestyles in emerging economies, and increased consumer demand
fueled by broad and rapid access to information. At the same time,
the healthcare industry is under increasing pressure to reduce prices
as payors in the public and private sectors seek to curb rising
healthcare costs.
Novartis Group revenues are directly related
to the Group’s ability to identify high potential products while they
are still in development and to bring them to market quickly and effectively.
Efficient and productive research and development is crucial in this
environment as Novartis, like its competitors, searches for efficacious
and cost-efficient pharmaceutical solutions to health problems. The
necessity for adequate resources
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to access the full range of new technologies
has been one reason for industry consolidation, and the increase
in collaborations between leading companies and niche players at
the forefront of their particular technology areas. The growth in
new technology, particularly genomics, will almost certainly have
a fundamental impact on the pharmaceutical industry as a whole,
and upon the Group’s future development.
In addition, competitive conditions have
intensified as a result of regulation, price reductions, reference
prices, higher patient co-payments and increased pressure on physicians
to limit prescribing. Pressure on the Novartis Pharmaceutical Division
and other pharmaceutical companies to lower prices is expected to
increase primarily as a result of government initiatives to reduce
patient reimbursement; restrict prescribing levels; increase the use
of generics and impose overall price cuts. The introduction of technologically
innovative products and devices by competitors and growing product
distribution anomalies, mainly in the EU, pose additional challenges.
Exchange rate exposure also affects the Group’s results as Novartis
has both sales and costs in many currencies other than the US dollar.
This gives rise to both transaction exposure in subsidiary financial
statements due to foreign currency denominated transactions and translation
exposure from converting foreign subsidiary results and balance sheets
into the Group’s US dollar consolidated financial statements. The
Group’s results have not been significantly affected by inflation.
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