SecProbe.io

CORRESP
1
filename1.htm

  Novartis
  AG

  Postfach

  4002
  Basel

  Switzerland

June 26,
2009

BY
FACSIMILE AND REGULAR MAIL

Mr. Jim
B. Rosenberg

Senior
Assistant Chief Accountant

US
Securities and Exchange Commission

100
F Street, N.E.

Washington,
DC  20549

Re:          Novartis AG

Form 20-F
for Fiscal Year Ended December 31, 2008

Filed
January 28, 2009

File
No. 001-15024

Dear
Mr. Rosenberg:

This
is in response to your letter to Dr. Daniel Vasella dated June 11,
2009 setting forth comments regarding our filing, and seeking certain information.  For ease of reference, we set forth your
comments below, followed by our responses.

Item
5.  Operating and Financial Review and
Prospects

5.C  Research & Development, Patents and
Licenses, page 140

SEC
Comment 1:

You
disclose the expiration of patents protecting a number of the top 20 products
in your Pharmaceuticals Division, expected “at risk” launches of generic
products and ongoing competition from approved generic products, which will
lead to significant decreases in your net sales.  Also, you disclose substantive compound
development activities in your Pharmaceuticals Division that appear to indicate
likely future product launches.  Please
revise your disclosure to identify those compounds in development that are
reasonably likely to result in future product launches and quantify the related
market opportunities that you expect to exploit.  In addition for each of these compounds in
development, disclose the anticipated completion dates and estimated costs to
complete development and the period in which resulting net cash inflows are
expected to commence.  To the extent that
you are unable to provide this information, disclose those facts and
circumstances indicating the uncertainties that preclude you from making a
reasonable estimate.

Novartis
Response:

Your
comment refers to our disclosures under Item 5.C of our Form 20-F.  Item 5. C requires companies to:

Provide
a description of the company’s research and development policies for the last
three years, where it is significant, including the amount spent during each of
the last three financial years on company-sponsored research and development
activities.

In
our response to Item 5.C, we did provide a description of the Company’s
research and development policies (by cross reference to Item 4.B), and we did
provide the amount spent on Company-sponsored research and development
activities.

With
respect to the additional information requested by the Staff’s letter, while
not strictly required by Item 5.C, we did supply extensive disclosure regarding
our research and development activities in other portions of our Form 20-F.  In particular, Item 4.B contains an extensive
listing of our compounds in development.
For our Pharmaceuticals Division, we have disclosed more than 60
compounds in development in tabular form, including the date that we plan to
file the compound/indication with health authorities for marketing
approval.  Of these, we have selected 20 “key”
compounds for which we have supplemented the tabular disclosure with a paragraph
of text.  We have also listed a number of
previously-disclosed compounds for which development activities have
terminated.  See
pages 34-41.  We have also provided
text and tabular disclosure of development projects for our Vaccines and
Diagnostics Division (see pages 52,
55-56), and textual disclosure for significant development projects from our
Sandoz and Consumer Health Divisions (see pages 60,
67).

Beyond
this, the Staff’s letter seeks a variety of information regarding compounds in
development “that are reasonably likely to result in future product launches,”
including (i) a quantification of “the related market opportunities”; (ii) “anticipated
completion dates”; (iii) “estimated costs to complete development”; and (iv) “the
period in which resulting net cash inflows are expected to commence.”  But as set forth in the Risk Factors section
of our Form 20-F, the likelihood that any of our development compounds
will be launched as a product in any particular market at any particular time is
subject to significant risks and uncertainties — both scientific and
regulatory.  The compound must first be
proven to work through multiple clinical trials, which may require treatment in
thousands of patients and could take years to complete.  The compound must next be accepted by the FDA
and similar agencies around the world, each of which may have differing
requirements.  As stated in our Risk
Factors,

During
each stage, there is a substantial risk that we will encounter serious
obstacles which will further delay us, or that we will not achieve our goals
and, accordingly, may abandon a product in which we have invested substantial
amounts of time and money.

See Item 3.D Risk
Factors—Our research and development efforts may not succeed in bringing
high-potential products to market (page 9).  See also Item
4.B Business Overview—Pharmaceuticals—Research and Development and —Regulation
(pages 44-47).

2

As
a result, any prediction by the Company that a particular compound is “reasonably
likely” to launch, or that the compound would be likely to launch at a
particular time, or with respect to the other information sought would be
unreasonably speculative, and therefore misleading to investors.

Therefore,
based upon the Staff’s comments, the Company will modify its response to Item
5.C commencing with the filing
of the Form 20-F for 2009 by including a clear
cross-reference to the disclosures in Item 4.B of its Compounds in Development,
and by including the following disclosure:

As
described in the “Risk Factors” section and elsewhere in this Form 20-F,
our drug development efforts are subject to the risks and uncertainties
inherent in any new drug development program.
Due to the risks and uncertainties involved in progressing through
pre-clinical development and clinical trials, and the time and cost involved in
obtaining regulatory approvals, among other factors, we cannot reasonably
estimate the timing, completion dates, and costs, or range of costs, of our
drug development program, or of the development of any particular development
compound.

Item
18.  The Novartis Group Consolidated Financial
Statements

Notes
to the Novartis Group Consolidated Financial Statements

1.
Accounting policies

Research &
development, page F-17

Questions 2 to 4 of your comment letter refer
to our accounting policy note on Research & Development.  Having reflected on your questions we will
enhance the clarity of our disclosure commencing with the filing of the Form 20-F
for 2009 by changing our disclosure as follows:

Internal Research & Development
costs are fully charged to the income statement in the period in which they are
incurred. The Group considers that regulatory and other uncertainties inherent
in the development of new products preclude the capitalization of these
expenses until
marketing approval from a regulatory authority is obtained in a major market.

Payments made to third parties such as contract
research and development organizations are expensed as internal Research &
Development expenses in the period in which they are incurred, unless the
criteria for recognition of an internally generated intangible asset are met,
usually when marketing approval has been achieved from a regulatory authority
in a major market.

Payments made to third parties in order to
in-license or acquire intellectual property rights, compounds and products
(In-Process Research & Development assets, “IPR&D”), as well as
other assets, such as core research and development

3

technologies to be used in Research &
Development activities, including initial upfront and subsequent milestone
payments, are capitalized. Subsequent internal Research & Development
costs in relation to IPR&D and other assets are expensed until marketing approval has been achieved from a
regulatory authority in a major market.  IPR&D assets are amortized
once the related project has been successfully developed and regulatory
approval for a product launch obtained.

Assets used in internal Research & Development
activities are amortized over the Research & Development activity
period. Laboratory buildings and equipment included in property, plant &
equipment are depreciated in the income statement over their estimated useful
lives. Also, acquired core development technologies included in intangible
assets are amortized in the income statement over their estimated useful lives.

With the new disclosure on Research & Development
we have enhanced overall clarity and addressed your three specific questions as
discussed in more detail below.

SEC
Comment 2:

Please provide us with an analysis that
demonstrates how your policy for capitalizing initial upfront payments and
subsequent milestone payments, once the required criteria are met, complies
with paragraph 57 of IAS 38.  Revise your
disclosure to describe “required criteria” and how the criteria are applied
(i.e. on a payment-by-payment basis).

Novartis
Response:

IAS 38 Intangible Assets,
paragraph 21 states that an intangible asset shall be recognised if (a) it
is probable that the expected future economic benefits that are attributable to
the asset will flow to the entity, and (b) if the cost of the asset can be
reliably measured. In line with industry practice we believe that regulatory
and other uncertainties inherent in the development of new products preclude
the capitalization of internally incurred Research & Development
expenses for a product prior to our obtaining regulatory approval for the
product.

IAS 38 Intangible Assets,
paragraph 25 states that “the probability criterion in paragraph 21(a) is
always considered to be satisfied for separately acquired intangible assets.”  IAS 38 Intangible Assets, paragraph 26 states
that “…the cost of a separately acquired intangible asset can usually be
measured reliably.”  Hence, we capitalize
payments to third parties for the acquisition of intellectual
property rights, compounds and products (In-Process Research &
Development assets, “IPR&D”) as well as other assets, such as core research
and development technologies to be used in R&D activities.

4

In response to the Staff’s comment this has
been more clearly reflected in the new disclosure of our accounting policy for
Research & Development we intend to present commencing with the filing
of the Form 20-F for 2009 as indicated above.

SEC
Comment 3:

Revise
your disclosure to describe the factors that you consider in determining the
R&D activity has produced a “salable product.”

Novartis
Response:

In the context of the Company’s principal Research &
Development activities, a saleable product normally results when marketing
approval is obtained from the relevant regulators in major markets.  In those circumstances the related intangible
asset is amortized through cost of goods sold over the period the product is
expected to generate economic benefits.

In response to the Staff’s comment this has
been more clearly reflected in the new disclosure of our accounting policy for
Research & Development we intend to present commencing with the filing
of the Form 20-F for 2009 as indicated above.

SEC
Comment 4:

Please
explain to us how your recognition of non-qualifying R&D expenses on a
percentage-of-completion basis complies with IAS 38. Revise your disclosure to
explain how this policy is applied.

Novartis
Response:

Internal research costs are expensed as
incurred in accordance with IAS 38 Intangible Assets
paragraph 54. For internal development costs the capitalisation criteria in IAS
38 Intangible Assets paragraph 57 are
considered. The Group considers the technical feasibility is not met until
marketing approval from a regulatory authority is obtained in a major market.

The treatment is identical where the Group
conducts research and development activities on an outsourced basis,.

In response to the Staff’s comment this has
been more clearly reflected in the new disclosure of our accounting policy for Research &
Development we intend to present commencing with the filing of the Form 20-F
for 2009 as indicated above.

5

11.  Deferred tax assets and liabilities, page F-41

SEC
Comment 5:

Based
on your history of profits, please revise your disclosure to clarify why you
believe that it is not probable that future taxable profits will be available
to utilize the losses not capitalized.
In particular, ensure that your revised disclosure addresses the
guidance in paragraphs 24 and 44 of IAS 12.

Novartis
Response:

The Group has disclosed on page F-43
of its 2008 Form 20-F that: “tax-loss carryforwards are capitalized if it
is probable that future taxable profits will be available to utilize the losses.”
 Although the Group has a history of
consolidated profits there are certain legal entities which are loss bearing
and where utilization of tax-loss carryforwards cannot be expected. In
particular the related disclosure on page F-43 of the Group’s 2008 Form 20-F
states: “In 2008 $6 million of unused tax-loss carryforwards expired (2007: $58
million; 2006: $12 million).”

The Group’s accounting
policies further state that:

·                  “Deferred taxes are
determined using the comprehensive liability method and are calculated on the
temporary differences that arise between the tax base of an asset or liability
and its carrying value in the subsidiary’s balance sheet prepared for
consolidation purposes, except for those temporary differences related to
investments in subsidiaries and associated companies, where the timing of their
reversal can be controlled and it is probable that the difference will not
reverse in the foreseeable future.”;

·                  “Deferred tax assets on an entity’s taxable
loss are recognized to the extent future taxable profits will probably be
available against which they can be utilized.”

Consequently, we believe that
the guidance in paragraphs 24 and 44 of IAS 12, Income Taxes,
is adequately addressed in the current accounting policies. However, to improve
the existing disclosures, in response to the Staff’s comment, we plan to
provide the following enhancement in our filing of the Form 20-F for 2009:

Deferred
tax assets related to taxable losses of relevant entities within the Group will
be recognised to the extent it is considered probable that future taxable
profits will be available against which such losses can be utilized in the
foreseeable future.

*       *       *

6

The
Company acknowledges that:

·                  the Company is
responsible for the adequacy and accuracy of the disclosure in the filing;

·                  staff comments
or changes to disclosure in response to staff comments do not foreclose the
Commission from taking any action with respect to the filing; and

·                  the Company may
not assert staff comments as a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the United
States.

We trust that this letter
responds to the issues raised in your comment letter.  If you have additional questions, please do
not hesitate to contact us.

  Respectfully
  submitted,

  Novartis
  AG

  /s/
  RAYMUND BREU

  /s/
  THOMAS WERLEN

  Raymund
  Breu

  Thomas
  Werlen

  Chief
  Financial Officer

  General
  Counsel

  Novartis
  Group

  Novartis
  Group

cc:                                 Don Abbott, Senior Staff
Accountant, US Securities and Exchange Commission

Frank Wyman, Staff Accountant, US Securities and Exchange Commission

7