Novartis AG (NOVN) Earnings Call Transcript & Summary

Good morning, good afternoon, good evening, everyone. Welcome to our ninth annual ESG event. Thanks for spending the time with us over the next 90 minutes. I'm going through the safe harbor statement now. The information presented today contains forward-looking statements that involve known and unknown risks, uncertainties and other factors. This may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. For a description of some of these factors, please refer to the company's Form 20-F and its most recent quarterly results on Form 6-K that, respectively, were filed with and furnished to the U.S. Securities and Exchange Commission. Today, we will have some presentations and the panel discussion. We start with Sir Ronald Cohen followed by a Q&A. And then we have Lutz Hegemann, Steffen Lang and Klaus Moosmayer, walking us through the ESG presentation, and we will do a Q&A as well to end. We start now with a video of Vas, our CEO.

Thank you for joining us for today's event, during which we'll share updates on our efforts to increase access to medicines and environmental sustainability. We've come a long way since our first ESG event in 2014, and we continue to evolve our strategy, strengthen our governance and deliver real and meaningful progress on ESG topics. Novartis has embarked on one of the most ambitious transformations of any large company in recent memory. After over $100 billion in transactions, we are emerging as a fully focused medicines company that delivers high-value medicines to address society's greatest disease burdens. In September, we unveiled our renewed strategy, underpinned by clear focus on 5 core therapeutic areas, key technology platforms and priority geographies. As Novartis reimagines medicine, building trust with society remains a key foundation of our strategy. We remain committed to making progress across the ESG spectrum, and on our most material topics as a medicines company, patient health and safety, access to health care, innovation and ethical standards. Our efforts align with our purpose to improve and extend lives with stakeholder expectations, and ultimately, with where our company is uniquely positioned to deliver real progress for patients, health systems and society at large. In today's event, our teams will focus on 2 of our most material topics, access and innovation and environmental sustainability, where we will continue to play our part in accelerating the transition to a net zero world. We will also share how we are preparing our company to respond to society's changing expectations and adapt to the regulatory landscape. I want to share 2 stories that illuminate the ways we are working to translate our commitments into real progress. First, I want to highlight a program called Beacon of Hope. Novartis and our Novartis U.S. Foundation launched Beacon of Hope last year, an innovative partnership with 26 historically black colleges and universities, the Thurgood Marshall College Fund and other companies across the biopharmaceutical industry aimed at addressing the root causes of racial disparities in health. Among other efforts, the partnership focuses on validating data standards in research and diagnosis and importantly, empowering the next generation of black leaders through educational programs related to health and equity. There's a long and complicated history when it comes to health equity in the United States. And it has resulted in systemic disparities, people of color have been forced to endure for too long. Like all systemic issues, securing real and lasting health equity will require systemic solutions that engages communities directly affected and that bring together institutions that can help shape a brighter future. Our 10-year $50 million commitment is already spurring meaningful action. Through Morehouse School of Medicine, 2 Novartis clinical trials are already underway and includes specific research to help address inherent biases in data standards used to diagnose and treat certain diseases. Data like that could help improve the health system and health practices, many lives and generations to come. I recently met with leaders from Morehouse School of Medicine to discuss the opportunities ahead. And I left our conversation with great optimism for the outcomes our broad inclusive partnership can achieve together, as we work to effect real change for communities who need it most. The second story illuminates progress on one of our flagship programs and speaks to the broader idea that the core mission of our industry to improve human health across the long arc of history, is not one that can be achieved in the short term. When it comes to a disease like malaria, which is one of the oldest known diseases plaguing human kind since biblical times, humanity is still working to eradicate it. That is where long-term efforts from companies like ours can pay off. In collaboration with many others, Novartis has been working to tackle malaria for decades. We have delivered well over 1 billion courses of antimalarial treatment, including hundreds of millions of pediatric treatments, largely at no profit since 1999. And we continue innovation efforts to bring forward the next generation of malaria treatments. Together with our partners at Medicines for Malaria Venture, we recently announced the decision to move a novel Ganaplacide/lumefantrine-SGF combination for adults and children with malaria into Phase III development. These are just a few of the many efforts that are ongoing at Novartis, and there is much more to share. As you've heard me say many times, we aim to deliver sustainable long-term value for our shareholders. We, as a company, keep challenging ourselves to maximize the impact we have on patient lives and human health globally. Both my executive committee and I have integrated ESG-related targets into our objectives, and we are fully committed to meeting those objectives and further driving our ESG agenda. Thank you again for your continued interest in Novartis and for joining us today. I'm confident you'll find the event both informative and inspiring as we share programmatic updates. Continuing efforts like these, I am confident, Novartis will soon become the most valued and trusted medicines company in the world.

It's my pleasure to introduce you now to our speakers. Sir Ronald Cohen is a pioneering philanthropist, venture capitalist, private equity investor and social innovator, who's driving the Global Steering Group for Impact Investment and the Portland Trust. He's a co-founder for social finance in the U.K., U.S. and Israel, and Co-Founder Chair of Bridges Fund Management and former co-founding Chair of Big Society Capital. He graduated from Oxford University and holds an MBA from Howard Business School. He's the author of the Book Impact, Reshaping Capitalism to Drive Real Change. In the second half of the event, we will hear from Lutz Hegemann, Steffen Lang and Klaus Moosmayer. Lutz Hegemann,, a member of the Executive Committee leads the Global Health Unit at Novartis and is responsible for integrating environmental, social, governance matters into the core of the company's business with a special emphasis on innovation and access. Steffen Lang, member of the Executive Committee and President Operations leads a team of over 35,000 associates dedicated to manufacturing and supplying high-quality medicines to patients and providing operational services and quality services to the entire Novartis enterprise. Klaus Moosmayer, member of the Executive Committee and Chief Ethics, Risk and Compliance at Novartis, is transforming the organization in the same way the company is reimagining medicines. By pursuing innovation, using data and digital and unleashing the creative power of employees to embed ethics into the core of our business. And with this, I'm handing over to Sir Ronald Cohen.

Thank you. Thank you very much, [ Nicol ] and it's a great pleasure to be here with you, the Novartis team and Novartis shareholders. We're living at the time when the world of investment and business is going through a massive transformation. I lived through a similar transformation 50 years ago. when I entered the venture capital and private equity industries and built up Apax Partners into a leading firm. 50 years ago, entrepreneurship came together with the technology and the professional venture capital industry to bring a better revolution in the way we invest and do business. No investor, no business was left untouched by this revolution. I believe we are in the first stage of an equally massive revolution. This time, it's coming from 3 forces coming together. And I would like to spend a couple of minutes on this as a background to the presentations that you're going to hear from Novartis executives and the discussion in which we're going to engage. A few people can refute the fact that we're going through a massive change in values in our societies. It started with young people, 10 or 15 years ago, refusing to buy the products of companies that are doing harm, refusing to work for them and investors becoming aware of the implications for the returns on the portfolios. It's led to a change in financial markets that we have never seen before. $40 trillion of ESG funding are addressing impact as well as profit. $3.5 trillion of impact investment where the intention to create impact is like the intention of the ESG, but when the impact created is measured. And these flows are transforming capital markets in unexpected ways. Novartis in 2018 or '19 launched the first sustainability-linked bond, where its cost of capital basically follows if it achieves certain preset targets. About a certain impact in the case of Novartis, access of vulnerable groups to its drugs. We see today no less than $2.5 trillion of sustainability-linked bonds and loans. So financial markets have absorbed the message of Impact, which is basically that we can no longer just maximize profit and seek to optimize risk and return. We're in a world now where we have to optimize risk, return and impact. The second major force transforming our world for the better, I must say, is the force of technology. We see huge leaps of technology with artificial intelligence, machine learning, augmented reality that genome and powerful computing, ever more powerful computing coming together. And these new technologies enable us to deliver impact globally in ways that humanity could never previously contemplate. Once again, just like the arrival of the microchip and computing and the cell phone and the Internet transformed business models right across the world, we're going to see the transformation of business models now that incorporate technology and impact. Tesla is the first example of this. And for all the [indiscernible] of Elon Musk. It is obvious that Tesla could not have succeeded if it had not had an impact dimension, had they tried to just enter the automobile industry with another combustion engine, it was a fail. But because it optimized risk, return and impact, it was able to attract first consumers, a talent and investors to build what became a $1 trillion company and disrupted the whole of the automobile industry. And we're going to see this disruption occur in every sector. Impact and technology coming together are already of transforming the health industry. We begin to see telehealth platforms that are providing diagnosis to very remote places in the world. We see new education platforms where the students pay for their education once they've got into a job. We're beginning to see FinTech platforms that are reducing the cost of overdraft for poor families and transforming the banking system. We see it, of course, in clean energy. We see it in every area. And so we are going to be living through a second wave of disruption, this time coming from impact and technology converging. And they are converging with the third major force, and that is the force of transparency. For the first time in history, computing power, artificial intelligence, machine learning and big data are enabling us to measure the impact of companies in a granular way and to translate them into monetary terms that make them comparable between impacts and with profits. And then efforts that I have been involved with chairing the Impact-Weighted Accounts initiative at Harvard Business School has published in monetary terms, thousands of companies' impact. Their impact on the environment from the operations, the impact on people through the employment practices, the impact on people and planet from their product and their supply chains. And we see the SEC putting on the table transparency on all environmental impacts that companies create. We see IFRSF which is responsible for financial accounting as all of you probably know, across the world, except the U.S., establishing an International Sustainability Standard Board. to standardize the physical impacts created by companies. We see the EU mandating transparency on investment vehicles. And we see the efforts in standardizing the valuation of impact, which started a target spinning now into the International Foundation for valuing impact. So the message, Nicol, is that we are shifting to a world of optimizing risk return and impact and measuring that impact transparently and in the verified way in the same way that we do profit. Now that has major implications for businesses. Healthcare businesses have a major advantage, the inherent nature of their activities is to do good. But if you go beyond that general objective, to the things that we have already had set in this meeting, to the issue of accessibility by vulnerable groups in developed countries, as we've heard about the black population in the United States, but also in emerging countries. That is going to become one of the factors that pharmaceutical companies are going to fight over, who is delivering the greatest impact and accessibility means price. It means making important drugs available at affordable levels throughout the world. And so as this transparency comes to pharmaceutical companies, their sales and their investments are going to be analyzed by investors and compared, and in this regard, Novartis has been a leader in many ways, again, as we heard it's [indiscernible]. So I hope that these comments help to frame the rest of our discussion today. We're lucky to be living at a time when financial markets and business are beginning to accommodate improvements to the lives of people and planet so that we can meet the great challenges we face.

Thank you very much, Sir Ronald Cohen, for those very interesting insights. That obviously triggers now some questions that I may ask you. Maybe just very simple first, what is the difference between ESG investing versus Impact Investing?

The difference, Nicol, is measurement. First share the same intention. You can argue that ESG's intention has been so far mainly to reduce harm and the Impact Investment is mainly seeking solutions to the challenges we face. But both intentions are valid and worthwhile. The big difference is measurement. Impact Investment measures rigorously and ESG will become impact investment as the transparency, I've been describing that is coming to us through impact accounting, becomes mandatory everywhere. And it won't take more, in my view, than 3 to 5 years because we can already see in the work at Harvard that there is a correlation between companies pollution level and the lower stock market valuation, the higher the pollution level, the lower the stock market valuation. And so regulators have to standardize and verify the information that investors get and ensure that they get it at the same time. We are going through an explosion of impact data today. And as measurement comes in the same way that it came to profit in 1933 and '34, so we're going to be transforming ESG into Impact Investment.

Thank you. You mentioned that impact measurement is the key of the impact revolution, how do you see this from an investor perspective? And how does it work like right, with the short-term targets when we look like from a public company on the quarterly results that we publish? It would be interesting to hear your thoughts on this.

So I'll give you an example. If you look at the data set at the IWA at Harvard, you can see that ExxonMobil creates $39 billion of damage annually on the environment from its operations. It compares with Shell at about $23 billion and BP at $15 billion. If investors look at these 3 companies, and decide that they want to engage with fossil fuel companies, are they going to engage with those that have the worst environmental performance? They will fear that carbon tax will be introduced and the ExxonMobil will be taxed on the $39 billion of damage. They will fear the talent and customers and investors will leave ExxonMobil for the same reason. And if ExxonMobil decides that it wants to remedy it environmental damage, how much is it going to represent in investment? And how is that going to affect its bottom line. And so investors, Nicol, are going to be analyzing the impact that I mentioned -- in the same way that they have been analyzing the profit dimension and the companies that are able to optimize risk, return and in bank are the ones that are going to enjoy the greatest growth, profitability and valuation premium.

Maybe a follow-up on the measurement, right? It's still very early. How we measure, so we are still like in a nascent phase, so why should a company make an impact or a focus to actually measure impact if it's so difficult to do so? Would be interesting to hear your thoughts on this.

Well, you don't have to measure every single impact to start with. And in many places. We see companies that are already measuring and valuing their impacts. At Howard, we counted about 100 companies across the world valuing the impacts, not just measuring it in quantity terms. Why are these companies doing it? Because they realized that the goalposts have moved for business and that as transparency comes, those who are doing badly in terms of impact performance, will see their valuations punished. And so they are engaging in impact measurement in order to manage and improve their impact, take a food company, a company like Danone. Danone in the Howard data create $8.5 billion of damage a year because of the sugar in its products. You compare it with General Mills. General Mills create $2.5 billion of positive impact because it's selling fiber. What are the implications for Danone product portfolio? How much money is it going to have to spend in updating its product portfolio to deliver positive health benefits because as the transparency comes, its competitors are going to be going in that direction. And so you can see that the transparency is going to create a race to the top, and those companies that don't embrace impact today, are going to be like those that didn't embrace technology when it started to come on the scene 4 or 5 decades ago. They will be overtaken by new and existing competitors, very often by new ones.

Thank you. You talked about the challenge of risk return and impact. If I may ask you for a multinational company when they shift, what do you see as the biggest challenge for them to implement?

I think different companies, if they have transparency on their impact will begin to address the various dimensions of the impact creation. For some companies, it may be the product portfolio that requires heavy investment. For others, it may be the environmental emissions and the damage that they cause. For others, it may be that labor practices. And for yet others, it may be their supply chains. So it will vary from sector to sector. But what we can already see happening, as companies focusing on all the impacts as Novartis is trying to do and to improve the impact performance on these 4 dimensions of impact creation.

You're mentioning that there are differences, right, depending from company to company. But are there some practical mass tools to prepare a company to do this shift that you could share with us?

I think it is crucial today for companies to introduce to their finance departments, an entity that measures and values the impacts they create. Boardrooms, before the end of this decade, will not just be looking at the profit and loss statement or profit budgets, they're going to be looking P&Ls and impact performance because that's what investors are demanding, and that's what talent is demanding. So the key today is to manage your impact. And if you want to manage your impacts, you self-evidently have to measure them first. That is what every company should be doing now. And investors are going to be looking for these impacts in order to assess the likely upside or downside in terms of both earnings per share and valuation multiples PE ratios.

Okay. And then maybe in your book, you write a lot about the strategy and impact. What is your thinking? Like what needs to be done to really make the impact part of decision-making and part of a living strategy and not that it's just like a talking and the story and nothing tangible.

I think competition is doing that. You can see what happened in the automobile industry when electric cars were brought by Tesla. The whole of the industry had to go in that direction. Now many people in the automobile industry up until then, believed that electric vehicles would come, but they had no pressure to do anything about it. Now with transparency coming, we're going to see pressure on companies to update their product portfolios. And it's going to disrupt the way in which they're carrying out that business. And we're going to see investors working out the correlation between better impact performance and future growth and profits. Let me give you an example. I invest in early-stage tech impact companies. One of these companies is a company which has AI-based software to manage public transport. In the old days, such a company and many of the original competitors in that field still today only measure that growth in profit. But if you look at this company, it tracks the carbon emissions from its vehicles. It tries to reduce the carbon emissions by better plotting of routes, better sizing of vehicles at different times of day according to the demand. It measures commuting times for more vulnerable populations, it measures working hours for the drivers. So they don't work over long hours, and it measures reduction in the number of accidents. Every company, every company in my view, by the end of this decade, it's going to have to start to measure its impact and to manage them as well as its profits. And the issue around transparency, Nicol, is no different than what happened after the Wall Street crash of '19 when investors set up and said, "My God, we don't know what profit businesses are making". Every company can pick its own accounting principles, they are no auditors to verify them and companies can even put part of their profit into a hidden reserve without telling shareholders. 4 years later, we had the introduction of GAAP accounting and auditing and then the creation of the SEC. We have $40 trillion of money today, seeking to achieve impact with noticeability on the impact being created and green washing is right. It's taken us a couple of years since the crash of 2019 to get to the moves that are described by the SEC and by the ISSB and by the EU. It will not take us a lot longer than it took us in the early 30s to react to this situation. And so the catalyst for these changes in strategy at every aspect of a company's impact creation are going to come much sooner than most people expect.

Thank you. No very nice example, and obviously, right transparency is very key because you can only measure what you see. Maybe a very simple question, how do you define impact exactly?

To me, the impact is the positive effect that you have on lives and/or planet. That is something that has been missing from our capital system up until now. Of course, impact has always been in the background for some business leaders that have tried to do good and to do well at the same time, but the system has focused on optimizing risk and return only. And this created almost unsurmountable challenges semantically and socially, we see the gap between rich and poor and that was giving the figures for black populations in the United States in terms of health getting wider and wider as wide as that ever been since 1929. And so our system is having to change to enable us to cope with these challenges, and it is bringing impact to overthrow the tyranny of profit. Putting impact performance alongside profit performance to keep profit in its place. And the beauty of this transformation is that those who know how to optimize risk, return and impact, maybe even more profitable, probably will be more profitable than those who simply ignore what's happening in terms of values today and technology and continue to think of profit alone.

All right. We have a couple of questions on the web. So Jo Walton from Credit Suisse is asking. You have a EUR 2 billion sustainability bond with access elements linked to Sandoz. How will you handle this as you split Sandoz? What element of overall Access to Medicine product delivery score, do you think comes from Sandoz operations. I think this is one that we will pass and take in the next Q&A when we talk with our Novartis executives. But here, I have one for you Sir Ronald. For an industry that does so much good for the broader world, the public image of the big pharmaceutical industry, as measured by pulse such as the Gallup survey, et cetera, is pretty poor. What do you think the industry could do differently to address this?

I think the pharmaceutical industry has to recognize the access to its drugs, is a key aspect of its impact. To innovate in a cancer treatment that costs $300,000 a shot is not an innovation that provides huge impact in the world. If you could come up with a treatment that costs $10,000 a shot, then you would see much greater impact. And I'm making these comments with specific companies in mind, which it wouldn't be appropriate to name. So the pharmaceutical industry is going to be measured in the future on who benefits from the drugs that are produced? Is it only the middle class and the wealthy? Is it the vulnerable as well in developed countries? Is it emerging country customers as well? And what efforts are pharmaceutical companies making to deliver the maximum impact? So pharma has to get its head around optimizing risk return and impact, and companies are going to be competing with one another in achieving the best performance from these 3 dimensions. Those companies that are able to show great impact performance, great accessibility for their drugs, will do better in terms of growth and valuation than those that stubbornly trying to maximize profit only and ignore the populations that they are serving.

Yes. So thank you very much. We have one last question on the web, right. You mentioned before when you talked about the impact, the positive impact, now when we look at the other side, how do you measure in dollars negative impact on society, for example, the weapon industry?

Which industry?

The weapon industry.

Weapon industry. So there are some major difficulties in measuring every impact. And in a similar way, we have judgments in financial analysis that determine the profit and the value of companies. We've recently seen a change in the treatment of leases, which transformed some company's balance sheet. We make constant assumptions about revenue recognition, the different types of companies which also affect their bottom line. And so I think we're going to start off by measuring the large number of simple things to measure before we get to really tough questions like the weapons industry. Now clearly, within the weapons industry, there are some companies that are producing primarily defensive weapon, radar would be an example. And there are others that are working on offensive weapons. We're living through a period when offensive weapons have become an important part of defending democracy and the right of a nation to survive. And so we're going to have to improve our ability to measure these types of impacts. And it may be that there will be a distinction between defense companies. I haven't thought about it in detail, Nicol, but just as happened with financial accounting, where we started in the 30s with the system, which has taken 9 decades to refine, we will be constantly refining the way in which we measure impact. And investors will contribute to that thinking. And at the end of the day, will lead to the establishment of standards that they feel should apply to different categories of companies, including those in defense.

Thank you very, very much for your insights and the time that you spent with us. I think we all got a good sense of right what is still ahead of us. So thanks a lot, again, for joining us. And with this, I'm handing over now to Lutz Hegemann.

Thank you very much, Nicol. Good afternoon, ladies and gentlemen. In the next 10 minutes, I'll take you a little deeper into the topic of innovation and access to medicines as it was already outlined by Vas Narasimhan in his opening comments. Now I would like to start by reminding us that at Novartis, we have been engaged in the question around access and how we can make our innovation accessible as broadly as possible for more than 20 years. Initially, like many private sector players, we started with a donation model. And as of today, we are still the sole donor of multidrug therapy for leprosy to the WHO. And I was personally very touched just a few weeks ago at the 21st International leprosy Congress when the leprosy community thanked us at Novartis for this continued support of the efforts to eliminate this terrible disease. In 2001, and Vas had briefly mentioned that, we developed our new antimalarial, which is currently still the standard of care, Coartem, and we developed a no-loss strategy, which was already a bit more business oriented than the initial start with the donation program. And then over the years, we have been piloting new approaches, whether that was our Healthy Family community health care model, which I had the pleasure, you will see the picture below together with my leadership team visiting in India just last month or the introduction of emerging market brands in low and middle income countries, which allow us to demand a lower price point for our innovation. Novartis Access was another step on the road. And then as of 2017 onwards, we are, based on our materiality assessment now integrating access into the business, doing it in a sustainable way, but considering it throughout the entire value chain. Examples here are the Novartis Access principles that many of you are familiar with, which we launched in 2017. The new strategy for Sub-Sahara in Africa, which I'll be speaking to in a minute, the sustainability-linked bond that was being mentioned by Sir Ronald or the collaboration in the U.S. to address health and equity, also in high-income countries as an example that Vas had mentioned, and I'll elaborate on that a little further in a minute. Why does access matter still today and probably today, even more than it did in the past. We have, according to WHO estimations, 2 billion people worldwide who do not get the medicines that they truly need. And it's becoming increasingly obvious and the COVID pandemic exacerbated this that this is not just the low and middle-income country issue, but also a challenge in high-income countries. In low- and middle-income countries, we still have a dual burden of disease where we have an unfinished agenda in communicable diseases like malaria, leprosy, Chagas, dengue, many other diseases. But then we see also tremendous rise of noncommunicable diseases that now the deaths related to noncommunicable diseases from low and middle income countries has long surpassed the death rate in high-income countries. And underlying our structural challenges, we have weak and fragile health systems. We have systems that are under resourced, lack of investment, but also geopolitical and economic challenges and trouble to Africa quite frequently, and it's heartbreaking to see the current implications that the geopolitical and economic uncertainty has on those communities specifically. But then also in high-income countries, we see challenges with the sustainability of health systems largely linked to demographic and economic challenges as well. The aging population puts an ever more strong demand on health systems. And, of course, it is difficult to continue with the current financing mechanisms to enable this. And then we do see health disparity as has been mentioned before. So the Novartis Access principles that we introduced in 2017 commit us to systematically integrate access strategy across the entire value chain from research and development through affordability and access and health system strengthening is a very important component here as well. And our aim is that 100% of our launches have a global access strategy. Now for research and development, essentially what we need to ensure is that the innovations are fit for purpose in resource-rich and resource-poor settings. Affordability and availability is often singled out as the biggest barrier to access. And while it is important, we have proven through the different approaches that we have taken over the years that by just reducing the price of a medicine or even giving it for free, we do not necessarily generate broader access. And what is becoming increasingly obvious is that a main barrier is the absorptive capacity of a health care or the lack thereof and that we need to work together with partners to strengthen the health system to derive the maximum benefit from our innovations. Now what does that mean in practice? And allow me to share a few real-life examples, starting with malaria, which, as you heard in Vas video, remains one of the world's biggest killer and has a particular damaging effect on small children. And over the years, we have been dedicated to the course of malaria elimination. You see a few milestones here, particularly on the research and development side, outlined, given the fact that there is not many private sector players engaged in the fight against malaria. But whether it is the introduction of new technology or the commitment is recently reemphasized at the Kigali Summit to continue researching and developing new medicines, our commitment remains very firm. And most recently, we have now transitioned our front-runner molecule combination, Ganaplacide and lumefantrine into Phase III development, which also has the ability to address emerging resistance of which we see early signs. And then we have paired this with a business model that is largely a no-loss strategy and we'll continue to do that for future malaria innovations as well. And as you see, the impact has been very significant. We have delivered well over 1 billion treatments to patients in need. And according to WHO, estimations roughly saved about 7.5 million lives or even more. And we remain committed to this cause and have a fairly substantial pipeline for malaria, but also for other neglected diseases like leishmaniasis, Chagas disease, dengue, cryptosporidiosis and other diseases at our dedicated research facility, the Novartis Institute for Tropical Diseases in Emeryville. And I'm very encouraged personally by this broad and deep pipeline that we will now gradually take forward into development and then into programmatic implementation. Another example that required us to take a holistic approach is sickle cell disease, which is a hereditary disease, and it disproportionately affects people in sub-Saharan Africa, where the life expectancy is much, much lower than in other parts of the world, while in Africa, patients 50% to 90% of infants die before they even reach the age of 5 years, people in the United States or the United Kingdom, with the same condition, can reach a productive adulthood and can live in a fairly healthy way due to some relatively simple interventions. The first intervention is the early detection of the disease through newborn screening. The second intervention is first-line treatment like hydroxyurea. And the third then becomes disease-modifying treatments like our own crizanlizumab which we launched a few years ago in the United States. And now bringing this to the largest patient population worldwide in sub-Saharan Africa required us to strengthen the entire ecosystem, working with partners to build up diagnostic capabilities, working with partners to bring hydroxyurea into the country at an affordable level but also working with governments or national treatment guidelines, building up treatment centers, centers of excellence in countries and/or leveraging data and digital like digital application for newborn screening to strengthen those resource-constrained settings. And we're committed to take a model that we have initially piloted in Ghana, where we now have been able to essentially hand over this model to the Ghanian government at their expenses -- we are now replicating this in countries across sub-Saharan Africa. Ultimately, our goal and here we have been partnering with Bill & Melinda Gates Foundation to develop a curative treatment for this genetic disease which would, of course, require to reimagine how we are applying gene therapy relative to how we do it today. And the idea is to do this in a very frugal way in a way where it can be injected into patients and deliver its benefit. Oncology, another health priority which requires a very different approach just given the complexity of this disease area. And here, we have taken from the very get-go, very strong partnership approach, working with The Max Foundation, we have been working with the foundation for over 20 years and constantly expanding the countries that we serve as well as the conditions in which we operate, but also more recently, being a founding member of the Access to Oncology Medicines Coalition, ATOM, we have been partnering the first voluntary license with the Medicines Patent Pool for a noncommunicable disease. Our approach in sub-Saharan Africa, where we have pivoted from a classical financially-driven approach to an impact-driven approach, trying to reach as many patients as possible across 3 core therapeutic areas and different specialty and programs has proven to achieve its goal to reach patients more and more. And also to the financials follow through, which, to me, is a proof of concept that you can do the right thing for impact and that your financials essentially follow in parallel and it can be sustainable. And while we still need to further optimize this model, it is a model that we are very committed to and convinced that it can be continued and will be continued in the future. Now lastly, coming to the Beacon of Hope project that Vas had briefly mentioned, which is a unique program that looks at health disparity in the United States, especially as it's being linked to race, but it also shows that work needs to be done in high-income countries. And as you see on the left panel of this slide, and I've just selected 2 metrics here, the impact of a pandemic where you see a disproportionate effect on the black population. You had 40% higher death rates in Black Americans than in White Americans which speaks to that health disparity or if you look at cancer survival on the lower left panel, where you see just the curves separating from each other in a very alarming way. And the idea here of the Beacon of Hope project is, first, that we want to make a long-term commitment because this is not a quick fix, and we are committing to work together with the communities for more than 10 years. And secondly, it is this co-creation with the affected communities, we cannot come in and say, here, we have a solution for your problem, but we first need to listen and that is exactly what the team did by first listening to the concerns and barriers for a period of more than 6 months. And what we saw was that the problem lies very, very deeply, and we need to also address it from the ground up. If we want more patients of color in clinical trials, we first need to train investigators of colors. We need to build up trial centers where those patients go to seek care. And all of that is being entailed in the Beacon of Hope project with the impact that we hope to see then, of course, that we will have a greater level of acceptance in underserved populations of science and innovation, but also a higher level of trial participation as it is becoming increasingly mandated in addition to this being the right thing to do. This brings me to the end, and I'll be back to join the question and answers later. But at this point, I'd like to hand it over to my colleague, Steffen Lang, who is the President of Operations to give us an update on the environmental sustainability. Steffen?

Thank you very much, Lutz, and good morning, good afternoon to all of you. It's my pleasure to be here with you today. Sustainability is a key component of our strategy, and we aim to drive sustainability across the entire value chain. Today, I would like to focus on 3 key aspects. Our environmental sustainability targets, our progress until now and the actions we are taking to build and maintain a resilient supply chain. Our environmental sustainability ambition is focused around 3 dimensions: climate, waste and water. Across all these dimensions, we have 3 major milestones, 2025, 2030 and 2040. For climate, we aim to be carbon neutral in our own operations by 2025 and become fully carbon neutral across the value chain by 2030. Last year, we further strengthened our climate ambition to net zero by 2040. This year, we have committed to the SBTi, the Science Based Targets initiative, to develop our targets in line with the 1.5 degree pathways. For waste, we had set a target to reduce our waste by 50% by 2025. We have achieved this target already last year. By 2030, we strive to become plastic neutral in that area. For water, we aim to reduce consumption by 50% by 2025 and ensure no water quality impact for our own manufacturing affluence both at our own sites and suppliers' manufacturing product for us. We aim to be water sustainable as well as a company by 2030. We have defined a very systematic approach across all those areas to meet our sustainability targets. And these sustainability targets are well embedded in the objectives of our leaders, and for example, a site head in our manufacturing operations, has this in his personal scorecard. And we follow this on a quarterly basis, the progress we are making against those targets. Here's our performance depicted against our 2025 targets. Overall, we are on track to meet our targets, as outlined here, which we have laid out for 2025. We have clear approaches in place to reduce our environmental footprint, and we build our approach around 2 key principles. The first priority is always to reduce consumption of natural resources. We typically do this by implementing appropriate innovative technology in manufacturing. So to conserve energy like use of electricity, steam, material usage or water and cleaning. And nice examples of also upgrading our utilities like boilers, pumps and motors. Second priority is to switch to clean utilities and renewable solutions. We are implementing various on-site renewable energy solutions, for example, based on wind and solar across our entire network. This year onwards, we are using 100% renewable energy -- electricity in our entire operations in the U.S. and in Europe. Similar initiatives we are also deploying in the area of waste and water. Like most companies, Scope 3 emissions, that means the emissions associated with the external supply chain are very significant for us, as you can see, also depicted here. More than 90% of our emissions associated with the value chain from outside. Our suppliers, therefore, play a key role in our sustainability journey. To address the Scope 3 emissions, we are working on several key aspects. First, we have identified hot spots. This means where in our supply chain, do we really have the big consumers of energy, for example, and causing emissions. We realize that about 60% of our Scope 3 is related to activities where external parties produce for us, chemicals, pharmaceutical active ingredients or drug products. Very similar activities we do ourselves in our Scope 1 and 2. So here, the approach is that we share our learnings with our suppliers to make sure that they apply similar principles. And so that we are also very confident that they will follow the trajectory which we have laid down already in Scope 1 and 2. Secondly, it's very important to have a manageable number of suppliers. We're working constantly to reduce the supplier number we have. We have a very large number, more than 40,000 suppliers. A nice example of the progress we are making as we started several years ago in manufacturing with more than 12,000 suppliers. As of today, we have reduced this number to 8,000, and we have plans by 2025 to reduce this number further to lower than 5,000 suppliers. Through that, we believe we also have a larger impact by working with fewer suppliers. We have, for this activity as well, launched the environmental sustainability criteria to ensure that we have a consistent approach focused also on the outcome with our suppliers. And we will embed this. We're in the process of embedding this into the contracts so that there is also a firm commitment written down. Of course, this is a journey that is not an easy and the one size fits all solution, so we work closely with our external parties on this journey together. And we are making the environmental sustainability criteria as part of our business discussions with our supplier equally as we are used to talk about quality and reliability of delivery of supplies, we also augment these discussions through the commitments we have laid down on the environmental sustainability. As I mentioned, Scope 3 is very important as a topic for us. many suppliers we are talking to are on the same page, they're engaged, they want to do it. But we also use the opportunity, of course, over the coming years to reassess. And if we see that our suppliers are not following our ambition then we will also deselect those suppliers from our supply chain. I want to close by sharing with you what actions we have taken to maintain a resilient supply chain in these challenging times. We have a supply chain, this has proven, which was very resilient through the pandemic, which, of course, was a big challenge for all of us. And we have shown that we can really react in a responsive and agile way to maintain supply. One key aspect for this is that we maintain a very diverse supply network of our 50 manufacturing sites. And we have built in a dual supply chain of more than 85% of our key products to ensure that if in one part of our supply chain, there is an issue, we can always continue to supply. We also have in our organization, implemented since many years, dedicated product management teams who manage our supply chain end-to-end byproduct from sourcing to manufacturing and distribution to our customers. These dedicated product setup covers products contributing to more than 90% of our value chain, so we have a big coverage here. Also, we maintained adequate stock levels of inventory for products more than 6 months, which gives us also an additional reassurance. We also have established a very strong demand and supply planning process to ensure high customer service levels. Throughout the pandemic, this was also proven to be very successful, the values we have seen here for innovative medicines close to 100% service levels. These are year-to-date numbers, but these were the same levels we also delivered throughout the pandemic. These are only a few examples, and we will continue, of course, to focus on activities that help maintain and even improve our supply chain resilience to ensure that patients have access to their medicines. With that, I would like to close my part and hand over to my colleague, Klaus Moosmayer. Over to you, Klaus, please.

Yes. Thank you very much, Steffen, Lutz and Sir Ronald. So I think we're all absolutely well aware we can go to the next slide, how important it is for the reputation of a company to have a strong ethical culture in the corporation. And this is basically a cross-cutting theme for all pillars of ESG and for building trust with society. So in our journey of our holistic ethics, risk management and compliance approach as Novartis, we are doing both. We are looking, of course, as the external developments, laws, the regulations, the standards, the best practices to build a holistic ethic system and compliance management system. But we're also listening very carefully to all our stakeholders, of course, also to our associates. And I want to give you a practical example. We have now concluded 2 global service in the last years and the third one to come next year on the ethical culture in our organization, which is especially important to do this in times of transformation, as Vas had said in the beginning of this session. It was very encouraging to see that in each of the service between 30,000 and 40,000 of the associated participated. And we got very valuable insight for our ethics, risk and compliance program system. So based on the feedback, we just recently announced a stand-alone non-retaliation policy because the fear retaliation of not being able to speak up is a very important topic to foster the culture in the company. But also when we look at our compliance system, when we look at the stakeholder feedback and the collective action we do on our third-party risk management, which is closely linked to the operational topic Steffen raised in the session before on our supply chain. We take all this input and continuously evolve and enhance our ethics and compliance system. We will, in a couple of days, announce our new human rights commitments, which is updated and also issue a new third-party code binding for all of our suppliers and third parties, which has now a very strong focus on the topic of environmental footprint reduction as Steffen has just mentioned in his part. If you go to the next slide. If you look at the focus of society of regulation, it's clear that the theme of third-party risk management closely linked to human rights is a very, very important factor on ESG on the G pillar, also on the S pillar, I would say, to build trust with society. Due diligence is definitely the basis of what we do, but not enough. We would say to have a holistic picture, especially on the third party risk management and the human rights aspects. So next to due diligence, we also, of course, offer a grievance and remediation. We offer trainings, and we engage in collective action and on-the-site activities with our suppliers based on a proper risk management especially where we see vulnerable communities in labor rights or in the environmental side. So again, just to reflect on this, we see our comprehensive, holistic 3-pillar approach on ethics, enterprise risk management and crisis management and compliance as a good answer for the emerging and developing regulation. Please, the next slide. Because -- and we will not go into the details, you're all aware of this, we see that the expectation of society but also of the regulators and you see this year is continuously evolving. And we are already there. The ESG clearly has developed from a topic for conferences for discussions or TED talk to a regulated landscape. Novartis has taken quite early already steps to address these regulations and reporting challenges. We have already published our integrated report, which includes Novartis in Society aspects. We have brought ESG also as a topic to the risk committee. We also have a proper setup in our Board of Directors with a specific focus on ESG. And we've also a task of financial organization to include nonfinancial reporting in the scope. Maybe on closing, coming to the last slide before we go back to Nicol for the Q&A. Next slide, please. Reporting, of course, is important, and the compliance with all these standards is relevant. But at the end, this should close the cycle back to Vas and Sir Ronald, at the end, it's not about only reporting numbers and figures. It's about impact we have as a pharmaceutical company, which is rightfully so in a very specific position given the purpose for our patients. And therefore, the impact on ESG is a topic which you all will have in front of our minds. Thank you very much and getting back to Nicol for the Q&A.

Thank you, Klaus, Steffen and Lutz. And now I can welcome you to the stage for the Q&A. And maybe what I suggest we start with the question that we had from the web on Sandoz, maybe for Lutz, right? We have a sustainability bond, what is the impact with the potential Sandoz spin on that? And then what element of your overall access to medicines effective product delivery score do you think comes from Sandoz operations?

Yes. Thank you very much for the question. Let me start by reminding us the parameters of the sustainability-linked bonds. Then if you all recall, there is 2 elements to it. One is linked to the global health programs, malaria, Chagas disease, sickle cell disease and leprosy. And here's the medicines that we need in order to make progress are already Novartis medicines or will become Novartis medicines in the future. The medicine that has the largest impact on the world currently is Coartem and it was a medicine that was developed in our own laboratories. And then second to that, I would say, the leprosy medicine, which is part of our heritage. So this element is in good shape. And then the second part of the sustainability-linked bond was from the get-go linked to strategic innovative medicines. And those are recently launched innovations as being decided by the Executive Committee and the Innovation Management Board. So by definition, also those are not touching upon Sandoz medicines. So I feel very confident that the sustainability-linked bond goals are being unaffected by the planned spin of Sandoz. Now when it comes to the question of access at large, and it may sound a bit counterintuitive then you would argue that generics have to play a role. And I would argue that, that indeed is the case, but the main benefit of generics is not so much to drive access but to lower health care expenditures. And that, of course, in itself, is a very important goal as we are seeing health systems becoming less and less affordable, and of course, the generics provide a basic on which we can then bring innovation into communities, but those generics do not necessarily have to be Sandoz generics or do not have to be necessarily under the umbrella of Novartis. I think it is important that basic care is available and affordable in a country but it is only indirectly linked to our access considerations with aim at bringing innovative medicines into the countries. It's often an enabler, but it is not a goal in itself. And furthermore, of course, we are also considering how we can continue the collaboration that we had in the past with Sandoz in the future, and I'm very encouraged that we will find a good way that continues to allow us to deliver the impact to the societies and patients.

A question for Steffen. Novartis has committed to net zero by 2040. Question number one, we get from investors is how do you plan to get there? And then there is also a question on the web, which is a bit linked to this, what is the difference between net zero and carbon neutral across the value chain, Scope 1, 2 and 3? Maybe you can address both of them.

Yes, sure. I think it's correct. The net zero objective, which we have is an ambitious objective, but we believe it's the right thing to do, and that's why we are focusing on it. And I think we are on a journey and we are making good progress. I think we approach it in steps to get carbon neutral first in our own operations. And second step, then extending this same principle to our suppliers or external suppliers. And I think we do this by reviewing and improving our process technology, which allow us to produce medicines in a more effective way, using less resources, less energy, for example. And the same we also then, of course, export to our suppliers who, in large part, do the same efforts as we do with regard to producing but also with regard to becoming more efficient. The other part, of course, is then the energy we use, we switch more and more to renewable clean energy. But it's very clear when we think about moving to net zero that it's a very ambitious objective, and this will require much more collaboration. So we can do our part. And I think there are a lot of initiatives underway across industry initiatives. A good example is the Energize initiative, where we are founding members. This is under the leadership of Schneider Electric, where several other pharma companies are also joining in. And the effort here is to increase access of renewable energy for pharma suppliers. More than 300 pharma suppliers are already part of that effort, more to join. And so this, we also believe we can do a step change here. And I think with that as well as embedding it, of course, also in the objectives of our leaders. It starts at the top, as Vas mentioned, it's part of the CEO scorecard, it's part of the Executive Committee scorecard, but also our site manufacturing leaders have this embedded objectives. So it's part of our way of doing business. It's a long journey. We are taking it step wise, and we are confident that we are making progress.

Thank you, Steffen. I have now a question for Klaus from the web. Accepting that the company's key human rights issues are likely to be with third parties and suppliers. However, does human rights due diligence also extends to the direct operations given that human rights risks are likely to occur in the direct workforce also.

It's a great question. And indeed, from our risk assessment, that's not a surprise. We see the bigger risk in the third parties. But absolutely. I mean the whole topic of the cultural journey of being in a dialogue with our associates, we have specifically targeted ethics and compliance program communication stream into the manufacturing side to see are there any concerns? Now to make this very tactical, I'm also together with Steffen responsible for health, safety, environment, which is also a basic human right topic. We have the highest health, safety, environment standards in our own operations. And last point as a practical example because I believe practical examples matter. We just concluded with Lutz and his Global Health organization, a joint screening of human rights topics, especially in our Global Health activities inside the company towards our partners in Global Health because we believe we have to go broader than just supply chain human rights and look basically at the full scale of our operations.

Thank you, Klaus. Then I have another question on the web for Lutz from Steven Scala from Cowen. In order to facilitate the goal of access to medications, then why wouldn't it make sense for Novartis to reenter vaccines in a big way, since vaccines are one of the most effective and accessible modalities for improving health.

Yes, I can only agree that vaccines, of course, of tremendous benefit to global public health. And -- but of course -- and we have seen this, I believe, in the COVID-19 pandemic, is that it is not either/or but it ultimately is an and, you need both parts. You need the vaccines in order to reduce the disease burden at population level. But then you also need very effective medicines in order to treat those patients who, despite vaccines, are still falling sick. And then, of course, there is many diseases that are not susceptible to vaccination where vaccines cannot help. So I believe and I have great respect for the companies that work in the vaccine space and that innovate here and supply vaccines to the people in need. But I believe it is not just vaccines and the impacts that we are aspiring to drive comes from the innovation and comes from the competencies that we have. I always look from a global health perspective into where do I have a need, but also where do I have internal competencies that give us the right to address this need. And based on a strategic decision many years ago, which I firmly believe was the right one, we have exited the vaccine space, but there is still enough to do for us. And I believe that with what we are doing, we can still generate significant impact on global health.

Another question for Steffen, maybe a follow-up on the carbon emissions, right? 80% of -- 80% to 90% of Novartis carbon emissions are coming from Scope 3. And you mentioned that we have more than 40,000 suppliers. Do you have some concrete examples what we are doing to reduce them? And can you also share with us some reactions from the suppliers?

Yes, for sure, certainly, it's a big number, 40,000 suppliers. And we also realized when we start the discussion about our ambition that many suppliers have the same ambition, and this is also coming that it's a public interest overall. So not only from us, society, but also people joining companies. They make a selection as well, which companies has what values and environmental sustainability plays more and more targets. So I think there is a community being built up of companies like us, but also some of our suppliers, others not yet. There we, of course, want to help. We want to support. Sometimes it's also a bit uncertain because there is not the right level of understanding there what can be done. And as I described before, we have progressed this journey for our internal activities to reduce the consumption of resources through technology. But at the same time as well then to focus more and more on clean energy, clean utilities. And when we have these discussions with our suppliers, they realize that this can be done. And then, of course, it's about sharing best practices and so on. And we see several very, very good examples of collaborations, and then at the same time, we also see suppliers who are not interested. And here, as this is a multiyear program, we set ourselves up that we really partner with those suppliers where we see they have the same values also in that direction to become our long-term partners and others, we deselect, and of course, for us, it's also good to have fewer suppliers because then we have fewer discussions, fewer interfaces, we can rely of the quality. And as I said before, we are in the process of embedding now the requirements we have on their rental sustainability side by side to our requirements we have in other important areas like product quality, like reliability and so on. So this is then becoming part of our norm. And so with this, we can achieve both. We have fewer suppliers and those suppliers are then the one really who share our values. And that's the journey we are taking.

Then I have one more for Klaus, right, reflecting on various events over the last year with COVID, the war that we have, inflation, et cetera. What do you see as the biggest risk coming to us for 2023?

Yes. I think we all get humble in risk management. Looking back what happened in the last couple of years, what is our guiding principle is that we look holistically on risk. We look at strategic risks and there definitely we see the topics of market access launches, pricing and reimbursement as top risk. But also, we mentioned this, how will ESG develop? How will the expectation of society and the regulation increase? And are we, what we firmly believe, able to keep the pace here? Another point for Novartis specifically as we are moving to stand fully focused innovative medicines company, the importance of risk of research and development is becoming, of course, even bigger from a risk perspective for our company. On the operational risks, definitely, the topics, what we have seen like cybersecurity, like the relevance of a stable and reliable IT infrastructure. And, of course, the ethical and compliance challenges we are seeing are there. And on the emerging risks, we try to figure in all these developments like COVID, which is not gone, look at China at the moment, like the war in Ukraine into our risk assessment and in concrete risk preventive actions and mitigation -- more mitigation activities like to secure energy supply, to secure supply from regions or you may have supply problems in the next years. These are definitely risk areas we have a specific focus on.

Thank you, Klaus. I have 2 more questions. One for Lutz and one for Steffen. Let's go first with the one that is for Steffen from Richard Vosser from JPMorgan. We saw you take proactive steps on identifying nitrosamine impurities and Sandoz recalling valsartan, losartan, and irbesartan. Can you provide us with an update on where you are in terms of testing of other products for nitrosamine impurities and control strategies you have put in place to mitigate the risk?

Yes. Thank you very much. Very good question. Of course, the nitrosamine topic is a cross-industry topic, which emerged several years ago. And in line with the regulations, which were laid out by key regulators, we are going through our portfolio with regard to assessing the risk and identifying where necessary to introduce additional testing. We are very well advanced by now. We are roughly 70% through our portfolio. There are a number of products where we, as a consequence, have implemented end-product testing. And I expect this to continue this, the remainder of the portfolio over the coming quarters, and we are well in time also, which was set by the regulators. So all in all, a big effort across industry. We work also closely with our peers and with many regulators, but we are progressing very well to conclude this somewhere towards the end of next year.

Thanks, Steffen. So last question is from Keyur Parekh from Goldman Sachs for Lutz. How would positive impact for our innovative pharma company be measured, reduction in disability, reduction in mortality, improvement in productive life?

It's a great question, but also a very complex one. And if you find someone who has the answer, please send him or her my way because we are struggling, of course, like many others, to really find the best way of quantifying the impact and describing this impact. At the current point in time, we are counting patients in terms of patient reach, which makes sense if you do a longitudinal assessment. But of course, it falls short when you are comparing different disease areas or different types of intervention. Disability-adjusted life years could be another next step that sort of takes it closer to the true impact at population level or individual level, but I see this as a journey, and it's still somewhat nascent when it comes to the methodology. You may be aware that we are very much engaged in helping advance and mature this methodology, whether it's the weighted account initiative at Harvard or the value balancing alliance, so we'd love to find more precise measures of impact, for the time being, we are counting patients that is a validated and audited methodology as we needed for the sustainability-linked bond. But I do hope that we will have better metrics in the future. Thank you.

Thank you, Lutz. I think that's a nice way to end, right? Still a lot to do, but I think we made a lot of progress. With this, I would like to end the event, and thank you all for your participation and interest in the company. Thank you very much.