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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 34 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 health care market is
growing rapidly due to a number of reasons, particularly 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 health care industry is under increasing
pressure to reduce costs as payors in the public and private sectors seek to curb
rising health care expenses. Novartis Group revenues
are directly related to the Group’s ability to identify and develop high-potential
products and to bring them to market quickly and effectively. Efficient and productive
research and development is crucial in this environment since Novartis, like its
competitors, searches for efficacious and cost-efficient pharmaceutical solutions
to health problems. The resource requirements to access the full range of new
technologies has been one reason for industry consolidation as well as for 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, is expected to have a fundamental impact on the pharmaceutical
industry and upon the Group’s future development.
In addition, competitive conditions have intensified as a result of regulation,
price reductions, reference prices, parallel imports, higher patient co-payments
and increased pressure on physicians to reduce their prescribing of prescription
medicines. Pressure on the Novartis Pharmaceuticals Division and other pharmaceutical
companies to lower prices is expected to increase primarily due to 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
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anomalies, mainly in the EU, pose additional challenges. Competition
in the generic pharmaceutical market continues to intensify as the pharmaceutical
industry adjusts to increased pressures to contain health care costs. Brand-name
pharmaceutical companies have taken aggressive steps to counter the growth of
the generics industry. Certain brand-name pharmaceutical companies continue to
sell their products to the generic market directly by acquiring or forming strategic
alliances with generic pharmaceutical companies. No significant regulatory approvals
are required for a brand-name pharmaceutical manufacturer to sell directly or
through a third party to the generic market. In addition, certain brand-name pharmaceutical
companies continually seek new ways to delay generic introductions and to decrease
the impact of generic competition. These efforts by the brand-name pharmaceutical
industry have had, and likely will continue to have, a negative effect on the
results of operations of the Sandoz Division. Under
US law, the Food and Drug Administration (FDA) must award 180 days of market exclusivity
to the first generic manufacturer who challenges the patent of a branded product.
However, recent changes in the Hatch-Waxman Act may affect the availability of
this market exclusivity in the future. These amendments now require generic applicants
to launch their products within certain time frames or risk losing the marketing
exclusivity that they had gained through being a first-to-file applicant.
At times Sandoz seeks approval to market generic products before the expiration
of patents held by others for those products, based upon its belief that such
patents are invalid, unenforceable, or would not be infringed by its products.
As a result, Sandoz often faces significant patent litigation. If Sandoz is unsuccessful
in such litigation, then its ability to launch new products will be substantially
limited. In addition, depending upon a complex analysis of a variety of legal
and commercial factors, Sandoz may, in certain circumstances, elect to market
a generic product even though litigation is still pending. This could be before
any court decision or while an appeal of a lower court decision is pending. Should
Sandoz elect to proceed in this manner, it could face substantial patent liability
damages if the final court decision is adverse to the expectations of Sandoz and
Novartis. Exchange rate exposure also affects the
Group’s results since Novartis has both sales and costs in many currencies other
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