Novartis (NVS) Risk Analysis

Expiry, assertion or loss of intellectual property protection Many of our products are protected by intellectual property rights, including patents and regulatory exclusivities, which may provide us with exclusive rights to market those products for a limited time, to enable our purpose of reimagining medicine by sustainably financing our research and development. However, the strength and duration of those rights can vary significantly from product to product and from country to country, and they may be successfully challenged by third parties or governmental authorities. If we fail to obtain and maintain adequate intellectual property protection, we may not be able to prevent third parties from launching generic or biosimilar versions of our branded products or from using our proprietary technologies. Intellectual property protection relating to particular compound forms, uses, formulations, or processes may not preclude third parties from designing around our rights in order to compete with our products. Loss of intellectual property protection and the introduction of generic or biosimilar competition for a patented branded medicine in a country typically result in a significant reduction in net sales and operating income for the branded product. Such competition can occur after successful challenges to intellectual property rights or the regular expiration of the patent term or other intellectual property rights. Such competition can also result from the entry of generic or biosimilar versions of another medicine in the same therapeutic class as one of our drugs or in a competing therapeutic class, from a Declaration of Public Interest or the compulsory licensing of our intellectual property by governmental authorities, or as a result of a general weakening of intellectual property and governing laws in certain countries around the world. In addition, generic or biosimilar manufacturers may sometimes launch products "at risk" before the final resolution of legal proceedings concerning the infringement or validity of relevant patents or regulatory exclusivities. We also rely in all aspects of our businesses on unpatented proprietary technology, know-how, trade secrets and other confidential information, which we seek to protect through various measures, including confidentiality agreements with employees, licensees, third-party collaborators, contractors and consultants who may have had access to such information. If these agreements are breached or our other protective measures should fail, we may not be able to prevent a third party from copying or otherwise obtaining and using our trade secrets or other intellectual property without authorization, and our contractual or other remedies may not be adequate to cover our losses. Further, others may independently and lawfully develop substantially similar or identical products that circumvent our intellectual property by means of alternative designs or processes or otherwise. In addition, third parties may claim that our products or business infringes, misappropriates or otherwise violates patents or other intellectual property rights held by them. Claims of intellectual property infringement, misappropriation or other violations can be costly and time-consuming to resolve and may delay or prevent product launches. If successful, these actions may involve payment of future royalties or damages (including treble damages on US sales if we are found to have willfully infringed valid patent rights of a third party) and may also involve injunctive relief requiring the removal of one or more dosage strengths of a product from the market (or removal of a therapeutic indication from the product's approved labeling) for a period of time or throughout the life of the asserted intellectual property right. Such damages or such an injunction may have a material impact on our operating income and net sales. In any given year, we may experience a potentially significant impact on our net sales from products that have already lost intellectual property protection, as well as products that may lose protection during the year. A third party may also claim that our owned or licensed patent rights are not infringed, or are invalid or unenforceable in a litigation. The outcome following such legal assertions is unpredictable, and the loss of patent rights as a result of such assertions could result in the introduction of generic or biosimilar competition for, and reduction in sales of, the branded product covered by such patent rights. The outcome may also result in our inability to obtain fair value for the use of our patents, or to obtain an injunction preventing the unlicensed practice of our patents. In addition, intellectual property protection in certain jurisdictions outside the EU and US is weak and we face heightened risks to our intellectual property rights in these jurisdictions, including competition with generic, infringing or counterfeit versions of our products at or after launch. Because we may have substantially reduced marketing and research and development expenses related to products that are in their final years of exclusivity, the initial loss of protection for a product during a given year could also have an impact on our operating income for that year in an amount corresponding to a significant portion of the product's lost sales. The magnitude of the impact of generic or biosimilar competition on our income could depend on a number of factors. These include, with respect to income in a given year, the time of year at which the generic or biosimilar competitor is launched; the ease or difficulty of manufacturing a competitor product and obtaining regulatory approval to market it; the number of generic or biosimilar competitor products approved, including whether, in the US, a single competitor is granted an exclusive marketing period; whether an authorized generic is launched; the geographies in which generic or biosimilar competitor products are approved, including the strength of the market for generic or biosimilar pharmaceutical products in such geographies, and the comparative profitability of branded pharmaceutical products in such geographies; and our ability to successfully develop and launch new products for patients that may also offset the income lost to generic or biosimilar competition. For more information on the patent and generic competition status of our products, see "Item 4. Information on the Company-Item 4.B Business overview-Intellectual property."

Cybersecurity breaches, data loss and catastrophic loss of IT systems We are heavily dependent on critical, complex and interdependent information technology (IT) systems, including internet-based systems to support our business processes. We also outsource significant parts of our IT infrastructure to third-party providers, including those who provide AI services and technology, and currently use these providers to perform business-critical IT services for us. We are therefore vulnerable to cybersecurity attacks and incidents on such networks and systems, whether our own or those of the third-party providers that we contract, and we have experienced, and may in the future experience, such cybersecurity threats and attacks. Cybersecurity threats and attacks take many forms, and the size, age and complexity of our IT systems make them potentially vulnerable to external and internal security threats; outages; malicious intrusions and attacks; cybercrimes, including state-sponsored cybercrimes; malware; ransomware; misplaced data, lost data or data errors; programming or human errors; or other similar events. We may not be able to anticipate all types of security threats, and we may not be able to implement preventive measures effective against all such security threats. The risk of such threats and attacks has increased, in part due to the rise of AI, and as virtual and remote working have become more common, and sensitive data is accessed by employees working in less secure, home-based environments. In addition, due to our reliance on third-party providers, we have experienced, and may in the future experience, interruptions, delays or outages in IT service availability due to a variety of factors outside of our control, including technical failures, natural disasters, fraud, or security attacks experienced by or caused by third-party providers. Interruptions in the service provided by these third parties could affect our ability to perform critical tasks. A significant information security or other event, such as a disruption or loss of availability of one or more of our IT systems, whether managed by us or a third-party service provider, has previously and could in the future negatively impact important business processes, such as the conduct of scientific research and clinical trials, the submission of data and information to health authorities, our manufacturing and supply chain processes, our shipments to customers, our compliance with legal obligations, and communication between employees and with third parties. In the ordinary course of business, we collect, store and transmit confidential information (including but not limited to intellectual property, proprietary business information and personal information). IT issues have previously led to, and could in the future lead to, the compromise of trade secrets, confidential information or other intellectual property that could be sold and used by competitors to accelerate the development or manufacturing of competing products; the compromise of personal financial and health information; and the compromise of IT security data such as usernames, passwords and encryption keys, as well as security strategies and information about network infrastructure, which could allow unauthorized parties to gain access to additional systems or data. In addition, malfunctions in software or medical devices that make significant use of IT could lead to a risk of direct harm to patients. The costs related to significant security breaches or disruptions could be material and any cybersecurity insurance that we may have in place may not cover such expenses. If the information technology systems of our third-party providers become subject to disruptions or security breaches, we may have insufficient recourse against such third parties and we may have to expend significant resources to mitigate the impact of such an event, and to develop and implement protections to prevent future events of this nature from occurring. The occurrence of any of the events described above in the future could disrupt our business operations and result in enforcement actions or liability, including potential government fines and penalties, claims for damages, and shareholder litigation or allegations that the public health, or the health of individuals, has been harmed. Any significant events of this type could require us to expend significant resources beyond those we already invest to remediate any damage, to further modify or enhance our protective measures, and to enable the continuity of our business.

Failure to successfully implement our IT strategy may disrupt our core business processes We rely on various IT systems to operate our complex global business and several of our current IT systems are reaching the end of their useful life, which could cause disruptions to our operational stability. As a result, we are implementing several companywide IT programs to replace and consolidate outdated IT systems and to simplify and standardize our processes, systems and tools, and create a unified data marketplace. Implementation and operation of these new systems involves certain risks, including the potential for a failure of the new systems to operate as expected; a failure to properly integrate new systems with other systems we use; delays in adopting and scaling new systems; potential loss of data or information; a failure of, or potential issues with, systems related to our payment and procurement processes; compliance issues; and cost overruns and delays. Our inability to timely and successfully implement our IT strategy may prevent us from materializing expected business benefits or capitalizing on opportunities and could lead to business disruptions, cost inefficiencies and potential exposure to legal, regulatory and reputational risks as our internal controls could be negatively affected. Any disruptions or malfunctions of new systems could cause critical information to be delayed, lost, defective, corrupted, or rendered inadequate or inaccessible, which could negatively impact our operations, the effectiveness of our internal controls and financial condition.

Goodwill and intangible assets resulting in significant impairment charges We carry a significant amount of goodwill and other intangible assets on our consolidated balance sheet, including, in particular, substantial goodwill and other intangible assets obtained through acquisitions, including most recently through our acquisitions of Chinook Therapeutics, MorphoSys AG, Mariana Oncology and Kate Therapeutics. As a result, we have incurred, and may in the future incur further, significant impairment charges if the fair value of the intangible assets and the groupings of cash-generating units containing goodwill would be less than their carrying value on our consolidated balance sheet at any point in time. We regularly review our intangible and tangible assets for impairment, including identifiable intangible assets and goodwill. If one or more events occur that would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill and other intangible assets, such revision could result in an impairment charge in the period in which it occurs. Any significant impairment charges could have a material adverse effect on our results of operations and financial condition. In 2024, for example, we recorded goodwill and intangible asset impairment charges of USD 1.4 billion. For a detailed discussion about how we determine whether an impairment has occurred, what factors could result in an impairment, and the impact of impairment charges on our results of operations, see Item 18. Financial Statements-Note 1. Accounting policies" and "Item 18. Financial Statements-Note 11. Goodwill and intangible assets other than goodwill."

Our indebtedness could adversely affect our operations As of December 31, 2024, we had USD 21.4 billion of non-current financial debt, and USD 8.2 billion of current financial debt. Our current and long-term debt requires us to dedicate a portion of our cash flow to service interest and principal payments and, if interest rates rise, this amount may increase. As a result, our existing debt may limit our ability to use our cash flow to fund capital expenditures, to engage in transactions, or to meet other capital needs, or otherwise may place us at a competitive disadvantage relative to competitors that have less debt. Our debt could also limit our flexibility to plan for and react to changes in our business or industry, and increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates or a downturn in our business or the economy. We may also have difficulty refinancing our existing debt or incurring new debt on terms that we would consider to be commercially reasonable, if at all.

Failure to manage physical and transition risks from climate change We are exposed to a broad range of climate risks such as transition risks (e.g., regulatory frameworks, carbon pricing, and the cost of and access to capital) and physical risks (e.g., heat, water scarcity, rising sea levels, and flooding from severe weather events), which could vary in magnitude and impact across different countries. Climate change has triggered, and may continue to trigger, the adoption of new regulatory requirements across the globe, such as in Switzerland, the EU, the United Kingdom, or Australia, as well as rapidly evolving societal expectations. As a result, we may be required to increase our investment in technology to reduce our energy use, water use and greenhouse gas emissions. In addition, legislative and regulatory action, both current and in the future, includes or could include, carbon pricing, climate risk-related disclosures, and changes in zoning or building codes to increase climate resilience. As a result, the combined impact of these transition risks could increase our direct operating costs or be passed on to us through the impact on our supply chain. Further, any failure to achieve climate-related commitments we have made in the past, or that we make in the future, in the expected timeframe, or at all, could result in negative impacts on our reputation, our operations, and the price of our shares. Climate change has created, and will continue to create, physical risks to our business and our supply chain. Some of our production facilities and supplier locations that depend on the availability of significant water supplies are located in areas where fresh water is increasingly scarce. Other facilities and suppliers are located in areas that, due to increasingly violent weather events, rising sea levels, or both, are increasingly at risk of substantial damage. In regions where such a risk is present, this has an impact not only on our own operations but also our distributed supply chain. Such events may result in the loss of life, increased costs, business interruptions, destruction of facilities, and disruption to healthcare systems that patients use to access our medicines.

Negative effect on financial results due to foreign currency exchange rate fluctuations Changes in exchange rates between the US dollar, which is our reporting currency, and other currencies has previously resulted in, and in the future may result in significant increases or decreases in our reported sales, costs and earnings as expressed in US dollars, and in the reported value of our assets, liabilities and cash flows. In addition to ordinary market risk, there is a risk that countries could take affirmative steps that could significantly impact the value of their currencies. Such steps could include unconventional monetary policies, tariffs and potential withdrawals by countries from common currencies. In addition, countries facing local financial difficulties, including countries experiencing high inflation rates, and highly indebted countries facing large capital outflows, may impose controls on the exchange of foreign currency. Currency exchange controls and sanctions could limit our ability to distribute retained earnings from our local affiliates, or to pay intercompany payables due from those countries. Despite measures undertaken to reduce or hedge against foreign currency exchange risks, as a significant portion of our earnings and expenditures are in currencies other than the US dollar, including expenditures in Swiss francs that are significantly higher than our revenue in Swiss francs, any such exchange rate volatility may negatively and materially impact our results of operations and financial condition, and may impact the reported value of our net sales, earnings, assets and liabilities. In addition, the timing and extent of such volatility can be difficult to predict. Furthermore, depending on the movements of particular foreign exchange rates, we may be materially adversely affected at a time when the same currency movements are benefiting some of our competitors. For more information on the effects of currency fluctuations on our consolidated financial statements and on how we manage currency risk, see "Item 5. Operating and Financial Review and Prospects-Item 5.B Liquidity and capital resources-Effects of currency fluctuations" and "Item 18. Financial Statements-Note 28. Financial instruments – additional disclosures."

Concentration among our key customers A significant portion of our global sales is made to a relatively small number of drug wholesalers, retail chains and other purchasing organizations. For example, our three most important customers globally accounted for approximately 17%, 13% and 7%, respectively, of net sales from continuing operations in 2024. The largest trade receivables outstanding were for these three customers, amounting to 19%, 12% and 7%, respectively, of the trade receivables at December 31, 2024. Historically, there has been a trend of consolidation among our customer base, which may continue in the future. As a result, we are exposed to a concentration of credit risk among our key customers. If one or more of our major customers experienced financial difficulties, the effect on us would be considerable, and could include a substantial loss of sales and an inability to collect amounts owed to us.