avatar Roche Holdings, Inc. Manufacturing

Pages

  • Page 1

    Half-Year Report 2005 Roche posts very strong interim results


  • Page 2

    Innovative solutions spanning the entire healthcare spectrum Our capabilities in diagnostics and pharmaceuticals enable us to innovate across the entire healthcare spectrum, from identifying disease pre- dispositions and disease screening in populations at risk to prevention, diagnosis, therapy and treatment monitoring. Hepatitis is one example. Early diagnosis and effective treatment can prevent complications such as liver failure and liver cancer. We supply diagnostic instruments and tests that can detect hepatitis at a very early stage of infection. Thanks to a hepatitis genotyping test from Roche, physicians can tailor treatment with innovative medicines like Pegasys to the infecting viral strain. And once treatment is started, cutting-edge Roche diagnostics enable physicians to monitor their patients’ responses. Predisposition Early detection Prevention Diagnosis Therapy Monitoring Thirty years after receiving a blood transfusion, Paris businesswoman Christine Morise was diagnosed with chronic hepatitis C, caused by a viral infection. Although she had no symptoms, tests later revealed signs of early liver damage. Further testing showed that she was infected with genotype 1 of the hepati- tis C virus (HCV), which is particularly hard to fight. Christine was treated with Roche’s Pegasys and Copegus and now leads a virus-free life, which means she can concentrate on her successful real- estate business again.


  • Page 3

    Table of Contents Half-Year Report Key figures 2 The first half of 2005 in brief 3 Chairman’s letter to shareholders 4 Group and Divisional Results 7 Roche Group 7 Outlook 7 Pharmaceuticals 8 Diagnostics 12 Finance 16 Financial Review 16 Roche Group Interim Consolidated Financial Statements 26 Notes to the Roche Group Interim Consolidated Financial Statements 31 Review Report of the Group Auditors 45 Supplementary Net Income and EPS Information 46 Roche Securities 47 Half-Year Report 2005 1


  • Page 4

    Key figures in millions of CHF Six months ended 30 June % change 2005 2004 CHF LC Sales 16,622 14,526 +14 +17 Research and development 2,559 2,361 +8 +11 EBITDAa) 5,510 4,755 +16 +19 Operating profit before exceptional items 4,373 3,607 +21 +24 Operating profit 4,227 3,325 +27 +30 Profit from continuing businesses before exceptional itemsb) 3,332 2,604 +28 Net income 3,242 3,121 +4 Net income attributable to Roche shareholders 2,798 2,911 –4 Core EPSb, c) in CHF 3.69 3.06 +21 EPSc) in CHF 3.26 3.40 –4 Research and development as % of sales 15.4 16.3 EBITDA as % of sales 33.1 32.7 Operating profit before exceptional items as % of sales 26.3 24.8 Profit from continuing businesses as % of sales 19.5 20.7 Effective tax rate % 24.3 26.5 Net income as % of sales 19.5 21.5 30 June 31 December 30 June 2005 2004 2004 Net liquidity 13,601 11,708 6,640 Total assets 62,748 58,401 58,208 Equity 38,833 33,368 31,368 Debt 7,832 8,960 11,204 Equity ratiod) 62% 57% 54% Debt-equity ratioe) 20% 27% 36% a) EBITDA: Earnings before exceptional items and before interest and other financing costs, financial income, tax, depreciation and amortisation, including impairment. This corresponds to operating profit before exceptional items and before depreciation and amortisation, including impairment. b) Profit from continuing businesses before exceptional items and Core EPS are calculated as shown on page 46. c) EPS: Earnings per share and non-voting equity security (diluted). d) Equity ratio: Equity as a percentage of total assets. e) Debt-equity ratio: Debt as a percentage of equity. LC = local currencies 2 Half-Year Report 2005


  • Page 5

    The first half of 2005 in brief*) Roche posts very strong interim results Roche Group • Group sales up 17%. Pharmaceuticals sales grow three times faster than the global market. • Operating profit rises 30%, outpacing sales growth. • Positive net financial income. • Net income reaches 3.2 billion Swiss francs, surpassing last year’s interim result, which included substantial exceptional gains. Pharmaceuticals • Strong sales growth for oncology products and the anti-influenza drug Tamiflu results in significant additional market share gains. • Avastin, Tarceva and Boniva successfully launched. • Positive results from phase III clinical trials in rheumatoid arthritis and breast, lung and pancreatic cancers. Diagnostics • Roche Diagnostics moves into the lead in Japan – now the number-one supplier of in-vitro diagnostics in all major market regions. • Operating profit margin (before exceptional items) remains significantly above the industry average. • Launch of next-generation Accu-Chek products off to a strong start. • US marketing clearance of first DNA chip-based test opens the way to more personalised treatment. Outlook • Positive outlook for full-year 2005. Forecast for operating profit margin in the Pharmaceuticals Division (before exceptional items) raised again. Additional information about Roche is available at http://www.roche.com. *) All growth rates are based on local currencies. Half-Year Report 2005 3


  • Page 6

    Chairman’s letter to shareholders Franz B. Humer, Chairman and Chief Executive Officer Your company performed extremely well in the Most important of all, though, are the very encour- first half of 2005. Once again the Roche Group aging data coming out of so many of our clinical achieved or exceeded its goals. Sales in local trials – particularly in oncology. These data signal currencies were up strongly by 17%, resulting in new hope for patients with serious illnesses and additional gains in market share, and we saw another their families and have attracted a great deal of significant improvement in the Group’s earnings interest and attention among medical professionals performance. and the public. Operating profit rose 30% in local currencies to Sales in the Pharmaceuticals Division advanced 4.2 billion Swiss francs, and the Group’s operating 22% in local currencies – roughly three times the profit margin increased further. Our improved market growth rate – and the division’s operating earnings performance is also reflected in our profit margin (before exceptional items) increased interim net income. As you know, last year’s results significantly, rising 2.1 percentage points to 28.5%. were positively impacted by after-tax gains totalling Our innovative oncology portfolio was the key fac- almost 700 million Swiss francs from the conver- tor behind these excellent results. A new generation sion and redemption of bonds. Despite these sub- of more targeted, less toxic anticancer medicines has stantial exceptional gains in the prior period, net enabled Roche, within the space of just a few years, income for the first six months of this year was to become the global market leader in oncology. up 4% from 2004, advancing to 3.2 billion Swiss During the first half of 2005 we extended our oncol- francs. This is equivalent to an increase of 28% on ogy leadership by successfully launching Avastin for a comparable basis. colorectal cancer and Tarceva for lung cancer. 4 Half-Year Report 2005


  • Page 7

    Chairman’s letter to shareholders We made important progress with our drug devel- Roche. Activities in this segment during the first opment pipeline. In May we presented data from half of the year included initial market launches eight successful phase III trials at the annual meet- of a new generation of Accu-Chek products for ing of the American Society of Clinical Oncology improved diabetes management. (ASCO), the most important gathering of cancer specialists in the world. Among other things, these The first half of 2005 saw Roche Diagnostics move data show that Herceptin can also offer significant into the market lead in Japan, making it the number- benefits in early-stage breast cancer following one supplier of in-vitro diagnostics in all five of surgery. Adding Herceptin to standard therapy in its market regions. As the market leader, Roche this setting can reduce the risk of cancer recurrence Diagnostics is making major contributions today to by half compared with standard therapy alone. Our better, more cost-efficient healthcare. Herceptin trials also illustrate an important general point about drug research and development: the There is no question that the future of healthcare job is not done as soon as your drug has one belongs to targeted approaches that combine approved indication. Worldwide, approximately medicines and diagnostic tests. Elecsys proBNP, 13,000 patients have been enrolled in clinical trials which is already on the market today, is a prime to support supplemental filings for Herceptin in example of a test that can significantly reduce the early-stage breast cancer. costs of treatment. It enables physicians to diagnose heart failure at a very early stage and is also of value At the same time we are investing heavily in in monitoring patients’ responses to therapy so that expanding our biotech manufacturing facilities to any necessary adjustments can be made promptly. meet the rising demand for our new biopharma- Another example of a targeted healthcare solution ceuticals. Ongoing projects to increase the Group’s is the AmpliChip CYP450 Test, which received FDA biotech manufacturing capacity currently represent marketing clearance in January. Using this DNA investments of over 2.5 billion Swiss francs. chip-based test, physicians can predict how rapidly a patient will metabolise certain drugs on the basis Oncology is not the only therapeutic area where of the patient’s genetic profile. This information Roche had some major successes during the first can help physicians in selecting the most appro- half of this year. Boniva recently became the first priate medicines and dosage regimens for their and only once-monthly oral medication approved patients. Additional chip-based tests, for early by the US Food and Drug Administration (FDA) cancer detection, are currently in late-stage devel- for osteoporosis. The anti-influenza medicine opment. Tamiflu posted impressive sales growth. Sales were driven in part by seasonal demand, but also Roche’s market value is an important indicator reflected the active steps being taken to prepare for of how well your company is performing. Over the a possible influenza pandemic. Roche has been in last three years Roche securities (shares and non- discussions with numerous governments and has voting equity securities), including dividend yields, already scaled up production capacity for the drug have significantly outperformed the average return enormously to meet the sharp rise in demand. delivered by peer pharmaceuticals and diagnostics companies. In the first half of this year Roche’s Overall, Roche Diagnostics had a successful first market value continued to track well ahead of the half-year despite a difficult market environment. industry average. Sales in local currencies rose 4%, in line with global market growth. Divisional profitability remained I would like to take this opportunity to express my high for the industry, although the operating profit thanks to all Roche employees for their dedication margin (before exceptional items) fell 1.3 percent- and professionalism. The value they create every age points to 22.8% as a result of costs related to working day is vital if Roche is to continue to invest launch activities. Diabetes care ranks alongside our in developing innovative solutions for important high-growth molecular diagnostics and immuno- areas of unmet medical need. diagnostics franchises as a key business segment for Half-Year Report 2005 5


  • Page 8

    Chairman’s letter to shareholders We remain confident about the outlook for full- year 2005, despite the likelihood of generic compe- tition to Rocephin in the United States. With its portfolio of innovative medicines, the Pharmaceu- ticals Division is well positioned for future growth. Given our strong first-half performance, we now expect our overall results for full-year 2005 to exceed the guidance provided at the end of the first quarter. In the Pharmaceuticals Division we now expect the operating profit margin to be even higher than indicated when we revised our outlook earlier this year – with above-market sales growth in the double-digits. We reaffirm our other pre- viously announced expectations for 2005. You can be assured that Roche will continue to pur- sue its successful strategy of focused innovation – for the benefit of patients, health professionals, our employees and you, our shareholders. Franz B. Humer 6 Half-Year Report 2005


  • Page 9

    Group and Divisional Results Roche Group restructuring of Group debt. Roche posted a posi- tive financial income for the first half of 2005, with Summary of operating results net income from financial assets and foreign exchange management exceeding financing costs. The Roche Group posted very strong operating results for the first half of 2005, led by its dynamic Net income for the first six months rose 4% in Swiss Pharmaceuticals Division. Group sales increased francs to 3.2 billion francs. This more than com- significantly, advancing 17% in local currencies to pensated for the exceptional after-tax gain of 16.6 billion Swiss francs. Expressed in Swiss francs 687 million Swiss francs realised in the first half of and US dollars, sales for the period were up 14% 2004, primarily on the ‘LYONs IV’ transaction. and 20%, respectively. The Pharmaceuticals Divi- Excluding exceptional items, profit from continu- sion was the key growth driver. Its sales increased ing businesses increased 28%. The Group’s return three times faster than the global market average on sales margin was 19.5%. and significantly ahead of the growth rates in the United States, Europe and Japan, the division’s There was a further significant improvement in the three most important markets. In the Diagnostics Group’s financial position. The ratio of equity Division sales in local currencies increased 4%, in (including minority interests) to total assets is now line with global market growth. 62%, and over 85% of total assets are financed long- term. The strong increase in interim sales had a very positive impact on the Group’s earnings perfor- mance. Operating profit before exceptional items Outlook rose 24% in local currencies to 4.4 billion Swiss francs, and the corresponding operating profit Roche is strengthening the outlook for the full year margin improved substantially, rising 1.5 percent- announced on 19 April 2005 and now expects the age points to 26.3%. The excellent sales growth operating profit margin (before exceptional items) more than offset significantly increased invest- in the Pharmaceuticals Division to be better again ments in Roche’s strong development pipeline and than previously announced. launch and pre-launch activities. For the first time, the operating results for 2005 and for the compara- The Pharmaceuticals Division continues to expect ble restated period in 2004 include the costs of the sales in local currencies to grow above the global Group’s equity compensation plans for employees, market average at a double-digit rate. The Diagnos- which are recorded as an operating expense. The tics Division expects sales for 2005 to show another Group’s improved earnings performance reflects above-market increase, with growth in the single- the significantly higher operating profit margin digit range. in the Pharmaceuticals Division. The Diagnostics Division’s operating profit margin was down The Pharmaceuticals Division now expects its full- slightly from a year ago as a result of expenses year operating profit margin (before exceptional related to product launches. items) to be better than the full-year margin for 2004. The Diagnostics Division anticipates the Cash generation from the Group’s business opera- margin development to continue towards its goal tions remained strong at 6.1 billion Swiss francs, of achieving an operating profit margin of around driven by an increase in EBITDA. EBITDA for 23% (before exceptional items) in 2006. the first six months rose 19% in local currencies to 5.5 billion Swiss francs, reflecting the success of Roche’s operating activities. As anticipated, net financial income showed a significant improvement over last year, thanks to the Group’s strong positive cash flow and the Half-Year Report 2005 7


  • Page 10

    Group and Divisional Results Key figures: Pharmaceuticals Division % change % change in local As % In millions of CHF in CHF currencies of sales Sales 12,652 19 22 100 EBITDA 4,335 21 24 34.3 Operating profit1) 3,608 28 32 28.5 1) Before exceptional items. Sales by region Swiss francs, and the operating profit margin be- Latin America 6% (+17%) fore exceptional items improved significantly, by Japan 14% (+20%) 2.1 percentage points to 28.5%. Others 9% (+21%) Oncology The division’s oncology portfolio delivered out- Europe 32% (+15%) standing first-half growth of 36%. All major brands North America 39% (+30%) contributed to this strong performance, which further consolidates Roche’s position as the world’s leading provider of cancer medications. Over the last four quarters, cumulative worldwide sales of Avastin, for the treatment of colorectal cancer, exceeded one billion Swiss francs. In January Pharmaceuticals the European Commission approved Avastin for the first-line treatment of patients with advanced Strong above-market growth continues colorectal cancer, and the launch roll-out has commenced. An extensive programme to evaluate The Pharmaceuticals Division posted very strong Avastin in a range of cancers is ongoing. Recent growth in the first half of 2005, with sales up 22% phase III results have demonstrated significant in local currencies (19% in Swiss francs; 25% in clinical benefit in advanced non-small cell lung US dollars). This was three times the global market cancer and metastatic breast cancer, in addition to growth rate of 7% and resulted in significant advanced colorectal cancer. market share gains for Roche. Growth was driven primarily by strong demand for the division’s Tarceva, a novel targeted drug with proven survival oncology products, including the new cancer treat- benefit in advanced non-small cell lung cancer, was ments Avastin and Tarceva, and for the anti- launched in the United States last November. Sales influenza drug Tamiflu. in the six months to 30 June exceeded expectations, reaching 145 million Swiss francs. Tarceva was Sales gains significantly outpaced market growth approved in Switzerland in March and in June in each of the three key regions, North America, received a positive opinion from the EU’s Com- Europe and Japan. Divisional operating profit mittee for Medicinal Products for Human Use before exceptional items grew 32%1) to 3.6 billion (CHMP) for the treatment of non-small cell lung cancer. Based on new data showing significant ben- 1) Unless otherwise stated, all growth rates are in local efits with the drug in pancreatic cancer, an applica- currencies. tion for this indication has been submitted in the 8 Half-Year Report 2005


  • Page 11

    Group and Divisional Results Top-selling products Sales for 1st half of 2005 % change % change Product in millions of CHF in CHF in local currencies MabThera/Rituxan1) 1,944 20 23 NeoRecormon, Epogin 2) 1,086 6 8 Pegasys + Copegus3) 893 14 16 Herceptin1) 851 24 27 CellCept3) 800 11 14 Rocephin3) 614 –9 –5 Avastin4) 607 180 192 Tamiflu3) 580 357 363 Xeloda3) 355 46 49 Xenical 312 0 2 1) Jointly marketed by Roche, Genentech and Chugai. 2) Marketed by Chugai. 3) Jointly marketed by Roche and Chugai. 4) Jointly marketed by Roche and Genentech. US, with a filing in the EU planned later this year. Sales of Xeloda continued their strong upward Tarceva is also being tested in a wide range of other trend in the first half of 2005, with growth driven by tumour settings. a steady increase in prescriptions and stabilisation of wholesaler inventories in the United States. In Sales of MabThera/Rituxan, for non-Hodgkin’s March and June, respectively, the EU authorities lymphoma (NHL), remained strong. Particularly and the US Food and Drug Administration (FDA) good uptake was achieved outside the United States approved Xeloda for the adjuvant (after surgery) for the first-line treatment of indolent NHL and for treatment of colon cancer. The new indication is aggressive NHL. Roche plans to file a marketing expected to further accelerate prescription growth. application with the EU authorities in the fourth quarter of 2005 for an additional indication, main- Strong sales growth for Bondronat in the six months tenance treatment of indolent NHL, based on data to 30 June was driven by increasing market penetra- showing that MabThera/Rituxan can dramatically tion and the continued roll-out of the product in improve progression-free survival in patients with Europe for the treatment of metastatic bone disease. this form of the disease. Anemia Herceptin, the only targeted treatment for HER2- Despite sustained price pressure in the anemia mar- positive breast cancer, posted significant sales ket as a whole, sales of NeoRecormon and Epogin growth in the first half of 2005. Demand for the for renal and cancer-related anemia grew steadily. product, which is currently approved for first-line The new prefilled syringe for once-weekly adminis- therapy of advanced (metastatic) disease, remained tration is now the top-selling dosage form of strong in all key markets. Following dramatic NeoRecormon for certain cancer-related anemias. results in three landmark clinical trials of the prod- Roche expects NeoRecormon sales in cancer-related uct as adjuvant treatment in early-stage HER2- anemia to continue to grow following a recommen- positive breast cancer, Roche and Genentech are dation by the CHMP to update the product label. working to prepare marketing applications for As a result, NeoRecormon will be indicated for the this indication. A total of over 8,000 patients were treatment of anemia in patients with all solid and enrolled in the trials. lymphoid cancers receiving any form of chemo- therapy. Half-Year Report 2005 9


  • Page 12

    Group and Divisional Results Major regulatory filings in the first half of 20051) Product Generic name Indication Country Bonviva/Boniva ibandronate Osteoporosis, i. v. formulation EU, Switzerland Major approvals in the first half of 20051) Avastin bevacizumab First-line treatment in combination with chemotherapy of metastatic colorectal cancer EU Bonviva/Boniva ibandronate Osteoporosis, oral once-monthly formulation USA Invirase saquinavir HIV disease, 500 mg formulation EU Pegasys peginterferon alfa-2a Chronic hepatitis B EU, USA HCV–HIV co-infection EU, USA, Switzerland Tarceva erlotinib Second- or third-line treatment of advanced non-small cell lung cancer Switzerland Xeloda capecitabine Adjuvant colon cancer monotherapy EU, USA Xenical orlistat Adolescent obesity EU 1) Includes supplemental indications. Transplantation The Roche Group maintained its global market Fuzeon sales continued to increase steadily in the leadership in the transplantation market, with the six months to 30 June, reaching 116 million Swiss immunosuppressant CellCept posting double-digit francs. Growth was strongest in key European mar- gains globally and in all key regions. kets. Roche continues to roll out educational initia- tives for patients and physicians to accelerate Virology uptake of the product. Pegasys, the only pegylated interferon approved for the treatment of hepatitis B and hepatitis C, Other major products maintained its market leadership and posted solid Boniva, the first once-monthly oral bisphospho- growth in the first half of 2005, helped by further nate for the treatment and prevention of osteo- regulatory approvals. Pegasys plus Copegus has porosis, was approved by the US regulatory author- now been approved by both the FDA and the Euro- ities in March and launched in April by Roche and pean Commission for the treatment of hepatitis C its comarketing partner GlaxoSmithKline. Initial in patients co-infected with HIV. Pegasys has also market response has been in line with expectations. been approved for the treatment of hepatitis B in In June the CHMP recommended EU approval of over 40 countries, including the United States, the once-monthly oral Bonviva (the product’s trade- EU and China. mark outside the US). In addition, the US and EU authorities are currently reviewing marketing First-half sales of Tamiflu grew very strongly, driven applications for intravenous Bonviva/Boniva, the by a late but severe flu season and orders of pan- first injectable bisphosphonate for osteoporosis. demic readiness supplies. Worldwide sales of the drug increased more than fourfold, with sales Global sales of Xenical returned to growth in a flat in Japan alone tripling to 263 million Swiss francs. market. In June the EU authorities approved the use Following warnings by experts about the likelihood of Xenical in obese adolescents aged twelve years of an influenza pandemic, Roche has worked closely and over. Xenical is now the only weight-loss treat- with a number of countries whose governments ment in the United States and the EU with labelling have agreed to stockpile Tamiflu and is in negotia- that provides guidance on use in adolescents. tion with several others. Regulatory filings have been submitted in Europe and the US for use of the Sales of Rocephin declined only slightly overall, product to prevent flu in children aged 1–12 years. with continuing generic erosion in Europe largely 10 Half-Year Report 2005


  • Page 13

    Group and Divisional Results offset by modest gains in the US. Generic pressure In the first half of 2005 Roche Pharmaceuticals is expected to negatively affect total Rocephin sales completed 13 partnering transactions, seven of in the second half of the year after the product’s which were product-related and six research- or US patent expires on 19 July. technology-related. The existing agreement with GlaxoSmithKline covering Xenical in the United Major development activities States has been expanded, as a result of which pre- In addition to the outstanding results achieved in scription Xenical is being promoted using one of phase III trials with the Group’s cancer drugs (see GSK’s US sales forces. In March Roche signed Oncology, above), significant progress was made in an agreement with Astellas Pharma to copromote the development of a number of products in other the novel antifungal agent Mycamine (micafungin therapeutic areas. The clinical development of sodium) in the United States, and the product has CERA, the first continuous erythropoietin receptor now been launched. activator for the treatment of anemia in chronic kidney disease and in cancer patients continues to A state-of-the-art facility for the packaging and progress. Roche expects to file an application for storage of injectable medicines was opened at approval of CERA in renal anemia in 2006. Roche Mannheim (Germany) in June. At Roche Penzberg (Germany) a new facility for the pro- Development of MabThera/Rituxan for the treat- duction of epoetin and CERA has commenced ment of rheumatoid arthritis (RA) is progressing operation. Construction of Roche’s new biotech according to plan. Positive results were achieved in manufacturing facilities in Basel (Switzerland) and a pivotal phase III trial in patients with an inade- Penzberg is progressing as planned. In June Genen- quate response to therapy with current biologics tech agreed to purchase a biologics manufacturing and in a phase IIb study in patients who had pre- facility from Biogen Idec. The additional facility, viously failed treatment with one or more disease located in Oceanside, California, will help the modifying antirheumatic drugs. Global regulatory Group meet the growing demand for its new filings are scheduled for the second half of this year biopharmaceutical products. In February Chugai for the use of MabThera in RA patients with an announced plans to restructure and streamline its inadequate response to current biologics. pharmaceutical manufacturing operations over the coming five to six years. Production is to be con- Development of tocilizumab (previously known as solidated from the current five plants to just two, MRA, from our Japanese affiliate Chugai) is on located in Utsunomiya and Fujieda. track worldwide. International phase III studies in rheumatoid arthritis are well under way. In April Increased transparency the health authorities in Japan approved the drug, In April Roche became one of the first health- under the product name Actemra, for the treatment care companies to launch a publicly accessible of Castleman’s disease, a rare lymphoproliferative clinical trial registry and results database disorder. (www.roche-trials.com), providing comprehensive information on its clinical trials. The new database The division currently has 27 projects spanning a is designed to offer a high degree of transparency number of major new indications in late-stage clin- and enhance communication between Roche, ical development and is planning to file nine new patients and doctors. marketing applications over the next 18 months. In addition, twelve marketing applications were Roche supports the revised pharmaceutical mar- approved by US or EU regulators during the first keting code developed by the European Federation half of this year. of Pharmaceutical Industries and Associations. The new code, which includes stricter ethical standards, is currently being implemented by the national Additional information on Roche’s development industry associations and will come into effect by pipeline is available at the end of 2005. http://www.roche.com/home/investors/inv_pipeline.htm. Half-Year Report 2005 11


  • Page 14

    Group and Divisional Results Key figures: Diagnostics Division % change % change in local As % In millions of CHF in CHF currencies of sales Sales 3,970 2 4 100 davon – Diabetes Care 1,375 2 3 35 davon – Near Patient Testing 338 1 3 8 davon – Centralized Diagnostics 1,430 4 5 36 davon – Molecular Diagnostics 555 3 6 14 davon – Applied Science 272 –1 1 7 EBITDA 1,311 0 1 33.0 Operating profit1) 904 –3 –3 22.8 1) Before exceptional items. Sales by region gin was down slightly from the previous year. Sales Europe 49% (+4%) of these products will contribute to accelerated Japan 5% (+8%) sales growth in the second half of the year. Asia–Pacific 7% (+15%) Others 1% (+11%) Roche Diagnostics moved into the number-one North America 28% (–1%) position in Japan, the world’s second largest market Iberia/Latin America 10% (+10%) for in-vitro diagnostic products, making it the industry leader now in all five of its market regions. Diabetes Care In the first half of 2005 Diabetes Care began rolling out its new generation of state-of-the-art Accu- Chek products for improved diabetes management. The Accu-Chek Aviva blood glucose monitoring Diagnostics system and Accu-Chek Spirit insulin pump were successfully launched in their first European mar- Now number one in all market regions kets. Both devices have received 510K clearance from the Food and Drug Administration in the Roche Diagnostics’ sales rose 4% in local currencies United States. (2% in Swiss francs; 8% in US dollars) during the first half of 2005. The molecular diagnostics, The new, extremely easy-to-use Accu-Chek Com- diabetes care and immunodiagnostics portfolios pact Plus also experienced a very strong market continued to be the main growth drivers. Divisional uptake in Europe. It is the world’s first blood glu- operating profit (before exceptional items) was a cose monitoring system with an integrated lancing strong 904 million Swiss francs, despite substantial device and test strip drum. investments for product launches planned for the second half of the year in Europe and the United The FDA has officially informed Roche Diagnostics States. At 22.8%, the division’s operating profit that it is in agreement with the action initiated margin remained significantly above the industry by the division to address deficiencies in the manu- average. Owing to increased marketing costs for the facturing processes and documentation at the launch of new products, the operating profit mar- Burgdorf site in Switzerland. At the same time the 12 Half-Year Report 2005


  • Page 15

    Group and Divisional Results Top-selling product lines in the first half of 2005 Sales % change for 1st half of 2005 in local Product line Market segment Business area in millions of CHF currencies Accu-Chek Diabetes management Diabetes Care 1,375 3 Cobas Integra1), Roche Hitachi1) Clinical chemistry Centralized Diagnostics 746 0 Elecsys Immunodiagnostics Centralized Diagnostics 503 16 Amplicor tests, Cobas Amplicor Clinical molecular diagnostics Molecular Diagnostics 335 4 Cobas AmpliScreen Nucleic acid-based blood screening Molecular Diagnostics 147 8 CoaguChek Coagulation monitoring Near Patient Testing 87 18 1) Excluding HIAs (homogeneous immunoassays). Major product launches in the first half of 2005 Business area Product Diabetes Care Accu-Chek Aviva, a high-end successor to the Advantage/Sensor blood glucose monitoring system Centralized Diagnostics Cobas Integra 800 HbA1c (glycated hemoglobin) analyser Molecular Diagnostics AmpliChip CYP450 Test, a DNA chip-based drug metabolism test (US IVD) Cobas AmpliScreen HCV and HIV-1 Tests for screening organ and tissue donations (US IVD, new indication) Cobas AmpliScreen HBV Test for screening donated whole blood, blood components, source plasma and other tissues from living donors for hepatitis B virus (US IVD) Cobas AmpliPrep/Cobas TaqMan HIV-1, HCV and HBV Tests, PCR-based assays for quantitative detection of HIV-1, hepatitis C and hepatitis B Linear Array HCV Genotyping Test, for determining hepatitis C genotype (CE IVD) Linear Array HPV Genotyping Test, an assay capable of detecting 37 genotypes of human papillomavirus (CE IVD) Applied Science Universal Probe Library for real-time PCR gene expression and LightCycler 2.0 system for real-time PCR diagnostics (CE IVD) IVD = for clinical use. CE = European CE (Conformité européenne) mark approval. Half-Year Report 2005 13


  • Page 16

    Group and Divisional Results FDA announced that it would be conducting its Early this year the FDA cleared the AmpliChip re-audit of the site at the end of July 2005. CYP450 Test for clinical use. This DNA chip-based test can contribute to better, more personalised care Near Patient Testing by helping physicians predict how patients will Roche Near Patient Testing maintained its leader- respond to certain medicines. Inappropriate treat- ship in the fiercely competitive point-of-care ments can thus be avoided right from the start, and market. The CoaguChek S system (coagulation successful therapeutic outcomes can be achieved monitoring), Accutrend GC and GCT systems faster. This will benefit patients while also helping (cholesterol monitoring) and Cardiac Reader (eval- to reduce healthcare costs. uation of suspected myocardial damage) made the biggest contribution to sales. Sales of Omni S and The FDA approved the AmpliScreen HBV Test Omni C blood gas analysers and reagents grew as a screening test to detect hepatitis B virus in significantly faster than the market. donated whole blood, blood components, source plasma and other tissues from living donors. The Recent clinical trial data show that self-manage- agency also approved expanded use of the Cobas ment of anticoagulant therapy with the CoaguChek AmpliScreen HCV (hepatitis C virus) and HIV-1 S system reduces the frequency of bleeding compli- Tests to screen organ and tissue donations. These cations by up to 70% and mortality after heart valve approvals will help significantly increase the safety replacement by up to 60%. In addition to protect- of tissue and organ transplants. ing patients from potentially life-threatening risks, CoaguChek S can also help healthcare systems In May Roche Diagnostics and Applera reached a reduce unnecessary treatment costs. settlement on outstanding litigation and arbitra- tion relating to the interpretation and performance Centralized Diagnostics of contracts between Roche and Applera for the Growth in this business area was fuelled primarily commercialisation of PCR and real-time PCR tech- by the continued upward trend in immunodiag- nology. nostics sales. Placements of Elecsys instruments rose approximately 20% for the period. Roche Diagnostics’ LinearArray HPV Genotyping Test, which received CE mark approval in June, Additional data have confirmed the importance of is the first commercially available test capable of Elecsys proBNP as a prognostic test for cardiovas- detecting 37 genetic variants of human papilloma- cular disease. A major study has now demonstrated virus (HPV). HPV infection is recognised as the that NT-proBNP is the most reliable marker for leading cause of cervical cancer. diagnosing heart failure in emergency patients. Another study has shown the clinical value of this In addition, the Linear Array HCV Genotyping innovative cardiac marker for stratifying risk in Test, for determining the genotype of hepatitis C patients with stable coronary artery disease. viruses, was launched in Europe in June. The test makes it possible to provide individualised thera- Molecular Diagnostics pies tailored specifically to the infecting HCV geno- Roche Molecular Diagnostics continued to expand type. its market lead, helped by robust sales of blood screening and women’s health products, which Applied Science remain the business area’s key growth drivers. Roche Applied Science maintained its market posi- tion. A new addition to the business area’s portfolio, In the roughly five years since Roche Diagnostics the LightCycler 480 system for high-throughput entered the blood screening market, its PCR (poly- DNA amplification, is expected to contribute to a merase chain reaction)-based tests have been used significant increase in sales growth in the second to screen more than 100 million blood donations. half of this year. This makes PCR the most frequently used blood screening technology in the world. 14 Half-Year Report 2005


  • Page 17

    Group and Divisional Results An agreement signed with 454 Life Sciences (USA) in May of this year marks Roche Diagnostics’ entry into the high-potential market for DNA sequencing products. Half-Year Report 2005 15


  • Page 18

    Financial Review Operating results Group operating results Following the sale of the Consumer Health (OTC) business, the Group is now clearly focused on its two high-tech healthcare businesses Pharmaceuticals and Diagnostics. The interim results for 2005 show strong operating results in terms of both top-line growth and profit margins, mainly driven by the Pharmaceuticals Division. Sales grew by 17% in local currencies to 16.6 billion Swiss francs, with Pharmaceuticals contributing 76% to Group sales and Diagnostics representing 24%. Operating profit before exceptional items increased by 24% in local currencies to 4.4 billion Swiss francs. The corresponding operating profit margin increased by 1.5 percentage points to 26.3% mainly as a result of the strong sales growth, which more than covered significantly increased investments for launch and pre-launch activities and the strong development pipeline. The increase also more than compensated for the costs of the Group’s equity compensation plans for employees, which were for the first time recorded as an operating expense. Excluding the additional equity compensation plan costs for Genentech (which is by far the largest plan in the Group), the Group operating profit margin before exceptional items would have been 27.1% (2004: 25.1%). Group operating results: six months ended 30 June 2005 in millions of CHF Pharmaceuticals Diagnostics Corporate Group Sales 12,652 3,970 – 16,622 Operating profit before exceptional items 3,608 904 (139) 4,373 – margin 28.5 22.8 – 26.3 EBITDA 4,335 1,311 (136) 5,510 – margin 34.3 33.0 – 33.1 Group operating results: development of interim results compared to interim period 2004 Pharmaceuticals Diagnostics Corporate Group Sales: % increase in local currencies +22 +4 – +17 Operating profit before exceptional items: % increase in local currencies +32 –3 –2 +24 – margin: percentage point increase +2.1 –1.3 – +1.5 EBITDA: % increase in local currencies +24 +1 –2 +19 – margin: percentage point increase +0.6 –0.8 – +0.4 Pharmaceuticals operating results In the first six months of 2005, the Pharmaceuticals Division showed strong sales growth of 22% in local currencies. This result significantly outpaced market growth globally and also in the three major regions of the United States, Europe and Japan. Major drivers were the strong demand for established oncology products, Avastin, which was launched in February 2004, first-time sales of Tarceva and Boniva, and by the anti-influenza drug Tamiflu. Growth of operating profit before exceptional items was 32% in local currencies, significantly ahead of sales growth, leading to a margin increase of 2.1 percentage points to 28.5%. Marketing support for important products such as MabThera/Rituxan, Herceptin, Avastin and Pegasys + Copegus, and launch and pre-launch activities, notably for Tarceva and Boniva, were significant, and there were continued investments in the strong development pipeline. All Pharmaceuticals sub-divisions (Roche Pharmaceuticals, Genentech and Chugai) contributed to the improved operating results. Excluding the equity compensation plan costs for Genentech, the Pharmaceuticals operating profit margin before exceptional items would have been 29.5% (2004: 26.9%), and Genentech’s operating profit margin before exceptional items would have been 33.6% (2004: 32.0%). 16 Half-Year Report 2005


  • Page 19

    Financial Review Pharmaceuticals Division results in millions of CHF Six months ended 30 June % change % change 2005 2004 (CHF) (local currencies) Sales 12,652 10,647 +19 +22 Royalties and other operating income 542 625 –13 –9 Cost of sales (2,858) (2,310) +24 +25 Marketing and distribution (3,366) (3,019) +11 +14 Research and development (2,215) (2,029) +9 +12 General and administration (815) (722) +13 +17 Amortisation and impairment of intangible assets (332) (377) –12 –9 Operating profit before exceptional items 3,608 2,815 +28 +32 – margin 28.5 26.4 +2.1 EBITDA 4,335 3,584 +21 +24 – margin 34.3 33.7 +0.6 Sales: The increase in sales was principally driven by 36% local currency sales growth in the oncology franchise, including Avastin, and first-time sales of Tarceva of 145 million Swiss francs. There was also strong growth (50%) in the virology franchise, mainly due to Tamiflu and Pegasys + Copegus, and the transplantation franchise (14%) with products such as CellCept and Valcyte/Cymevene. Boniva contributed first-time sales of 21 million Swiss francs. A major growth contribution came from strong Tamiflu sales of 580 million Swiss francs compared to 127 million Swiss francs in the interim period of 2004. This increase was partially due to the flu outbreak in the first quarter of 2005 (most notably in Japan) and partially due to government pandemic purchases. Royalties and other operating income: The decrease was due to lower gains on product divestments in the first half of 2005 (11 million Swiss francs) compared to 215 million Swiss francs in the same period of 2004, which included the disposal of Soriatane. This was partly offset by higher royalty income, notably from Genentech’s new licence arrangement with ImClone on sales of Erbitux. There was also higher out-licensing income at Roche Pharmaceuticals, in particular milestone income following the FDA approval for Boniva in the United States. Cost of sales: The increase of 25% in local currencies is slightly higher than the 22% increase in sales. This is primarily due to 49 million Swiss francs paid by Genentech to cancel certain manufacturing obligations, together with an increase of royalty expenses to 521 million Swiss francs from 409 million Swiss francs in the interim period of 2004. These developments were partially compensated for by the sales growth in high-margin products, economies of scale in production and continuing productivity improvements. Marketing and distribution: These costs increased by 14% in local currencies. This is lower than the growth in sales, even taking into account the ongoing strong support for established products and for newly launched products such as Avastin, Xolair, Tarceva, Raptiva and Boniva. Marketing and distribution as a percentage of sales declined by 1.8 percentage points to 26.6% compared to the first half of 2004. Excluding the equity compensation plan costs for Genentech, marketing and distribution costs would have also increased by 14% in local currencies. Research and development: The increase of 12% in local currencies reflects the ongoing clinical development of the product pipeline and higher expenses for early-stage projects. Research and development costs as a percentage of sales were 17.5% in the first half of 2005, down 1.6 percentage points from the ratio in the comparative period. Excluding the equity compensation plan costs for Genentech, research and development costs would have increased by 10% in local currencies. Half-Year Report 2005 17


  • Page 20

    Financial Review General and administration: The increase of 17% in local currencies was primarily attributable to Genentech. This was due to an alignment of the infrastructure at Genentech reflecting the continuing strong growth of the business, software implementation costs and the transition impacts of expensing equity compensation plans at Genentech. Excluding the equity compensation plan costs for Genentech, general and administration costs would have increased by 14% in local currencies. Another factor was restructuring costs, including 34 million Swiss francs at Chugai for the restructuring of their production facilities. Amortisation and impairment of intangible assets: The decline is solely due to Genentech’s decision in the first half of 2004 to stop commercialisation of Nutropin Depot, which resulted in an impairment of the Nutropin Depot intangible assets of 23 million Swiss francs in the comparative results. Pharmaceuticals sub-divisional results in millions of CHF Operating Operating profit before Divisional EBITDA profit before exceptional sales to third as % of exceptional items Six months ended 30 June 2005 parties EBITDA sales items as % of sales Roche Pharmaceuticals 7,978 2,758 34.6 2,318 29.1 Genentech 2,867 1,051 36.7 838 29.2 Chugai 1,807 526 29.1 452 25.0 Pharmaceuticals Division 12,652 4,335 34.3 3,608 28.5 Six months ended 30 June 2004 Roche Pharmaceuticals 7,040 2,432 34.5 1,968 28.0 Genentech 2,052 844 41.1 612 29.8 Chugai 1,555 308 19.8 235 15.1 Pharmaceuticals Division 10,647 3,584 33.7 2,815 26.4 Additional information on the Pharmaceuticals Division’s sub-divisional results is given in Note 3 to the Interim Financial Statements. Overall the Pharmaceuticals Division showed strong sales increases in all sub-divisions and this resulted in improved operating margins. The margin at Genentech was adversely impacted by the expensing of employee stock options. Excluding this the margin would have increased by 1.6 percentage points. At Chugai, the improved sales performance, particularly for Tamiflu, was the main contributor to margin improvement. In addition personnel expenses were lower, following Chugai’s early retirement plan that was implemented in the second half of 2004. Diagnostics operating results Interim sales grew by 4% in local currencies in line with market growth. The Division posted a strong operating profit before exceptional items of 904 million Swiss francs in spite of significant investments for planned product launches in Europe and in the United States in the second half of 2005. The operating profit margin was 22.8%, again well ahead of the market. Compared to the comparative period the margin was down by 1.3 percentage points due to launch expenses. 18 Half-Year Report 2005


  • Page 21

    Financial Review Diagnostics Division results in millions of CHF Six months ended 30 June % change % change 2005 2004 (CHF) (local currencies) Sales 3,970 3,879 +2 +4 Royalties and other operating income 168 165 +2 +5 Cost of sales (1,490) (1,450) +3 +5 Marketing and distribution (1,043) (981) +6 +8 Research and development (344) (332) +4 +5 General and administration (191) (195) –2 –1 Amortisation and impairment of intangible assets (166) (152) +9 +12 Operating profit before exceptional items 904 934 –3 –3 – margin 22.8 24.1 –1.3 EBITDA 1,311 1,311 0 +1 – margin 33.0 33.8 –0.8 Sales: The sales increase of 4% in local currencies (2% in Swiss francs) represents an impressive result, taking into account the previous year’s strong first half. The Molecular Diagnostics business (6%) and the Diabetes Care (3%) and Immunodiagnostics (11%) portfolios all made major contributions to growth. Royalties and other operating income: In the first half of 2005 royalty income increased by 5% in local currencies, mainly from the granting of PCR licences. This result was achieved despite the substantial one-off royalty income from BioVeris of 63 million Swiss francs in the comparative period. Cost of sales: The increase of 5% in local currencies was slightly more than sales growth. The main reasons for this were production start-up costs in the United States and higher production costs for products with enhanced customer features. The absence of the royalty expenses paid to Igen, which was acquired by the Group during 2004, and further improvements in manufacturing productivity partially compensated for this development. Cost of sales includes royalty expenses of 113 million Swiss francs (2004: 151 million Swiss francs). Marketing and distribution: The increase of 8% in local currencies was higher than the increase in sales. This is a result of the launch of a number of new Diabetes Care products such as the Accu-Chek Aviva blood glucose meter in selected European markets and from the pre-launch activities for these products in major European markets and in the United States. Therefore, marketing and distribution as a percentage of sales increased by 1.0 percentage points to 26.3%. Research and development: Interim costs grew by 5% in local currencies, slightly more than sales. This is due to investment in the strong product pipeline and establishing a global clinical trial fund. As a percentage of sales, research and development cost remained basically stable at 8.7%. General and administration: Interim costs were stable, showing a decrease of 4 million Swiss francs (1% lower in local currencies). Amortisation and impairment of intangible assets: The increase is partially due to the amortisation of the intangible assets acquired in the Igen acquisition. The 2005 interim results include a charge of 29 million Swiss francs compared to 20 million Swiss francs in the 2004 interim results (representing 4 months since acquisition). Amortisation expenses for recently acquired licence rights account for the rest of the increase. Corporate operating costs General and administration: Costs in the interim period were stable at 139 million Swiss francs (142 million Swiss francs in 2004). Half-Year Report 2005 19


  • Page 22

    Financial Review Exceptional operating items Exceptional operating items in millions of CHF Pharmaceuticals Diagnostics Corporate Roche Group Six months ended 30 June 2005 2004 2005 2004 2005 2004 2005 2004 Operating profit before exceptional items 3,608 2,815 904 934 (139) (142) 4,373 3,607 Amortisation of goodwill – (120) – (162) – – – (282) Major legal cases – – (146) – – – (146) – Changes in Group organisation – – – – – – – – Operating profit 3,608 2,695 758 772 (139) (142) 4,227 3,325 Amortisation of goodwill: Following the International Financial Reporting Standards changes the amortisation of goodwill ceased effective 1 January 2005. No impairments to goodwill were recorded. Major legal cases: During the interim period provisions for certain litigation and arbitration matters in the Diagnostics Division were increased by 146 million Swiss francs. The provisions recorded are based on current litigation and settlement negotiations and recent settlement agreements. Changes in Group organisation: There were no significant developments in 2005 and no additional income or expenses were recorded. Operating profit: Overall operating profit increased by 902 million Swiss francs or 30% in local currencies. This reflects the continued improvement in the Group’s operating performance. The additional costs for expensing of Genentech equity compensation plans of 126 million Swiss francs (2004: 45 million Swiss francs) were more than compensated for by the absence of goodwill amortisation expenses of 282 million Swiss francs. Non-operating results Non-operating results in millions of CHF Six months ended 30 June 2005 2004 Operating profit 4,227 3,325 Associated companies – (27) Financial income 241 213 Financing costs (187) (383) Exceptional income from bond conversion and redemption – 965 Profit before taxes 4,281 4,093 Income taxes (1,040) (1,084) Profit from continuing businesses 3,241 3,009 Profit from discontinued businesses 1 112 Net income 3,242 3,121 Attributable to – Roche shareholders 2,798 2,911 – Minority interests 444 210 20 Half-Year Report 2005


  • Page 23

    Financial Review During the interim period, the Group’s treasury operations delivered a positive net financial income, with the net income from financial assets and foreign exchange management exceeding financing costs by 54 million Swiss francs. The redemption of the ‘Sumo’ bonds in March 2005 will further reduce borrowing costs. The Group’s effective tax rate was reduced, mainly due to the discontinuation of amortisation of goodwill from 1 January 2005. Profit from continuing businesses increased due to the combination of positive developments on the operating, financial and tax lines, which more than compensated for the exceptional financial income in the interim 2004 results. Excluding this after-tax amount of 687 million Swiss francs and other exceptional items, profit from continuing businesses increased by 728 million Swiss francs or 28%. Net income increased by 121 million Swiss francs to 3.2 billion Swiss francs. Associated companies: The result of associates was not significant. Financial income: Financial income showed further improvement. Interim net income from equity securities was 122 million Swiss francs compared to 106 million Swiss francs in 2004. Interest income and income from debt securities more than doubled to 172 million Swiss francs due to higher holdings and increases in US interest rates. Interim net foreign exchange losses were 65 million Swiss francs compared to gains of 9 million Swiss francs in 2004. A full analysis of financial income is given in Note 9 to the Interim Financial Statements. Financing costs: Total financing costs were 187 million Swiss francs in the interim period, a reduction of 51%. This was mainly due to the retirement of various debt instruments and a reduction in bank borrowings. A full analysis of financing costs is given in Note 9 to the Interim Financial Statements. Exceptional income from bond conversion and redemption: During the interim period of 2004 as part of the continuing refinancing and restructuring of the Group’s debt, the ‘LYONs IV’ and ‘LYONs III’ notes were called for redemption and the Group also redeemed part of the ‘Chameleon’ bond by a public tender. A net pre-tax gain of 965 million Swiss francs arose from these transactions, primarily from the Group’s partial disposal of its interest in Genentech on the conversion of the ‘LYONs IV’ notes. Income taxes: The Group’s effective tax rate was 24.3% compared to the 2004 interim rate of 26.5%. The main influence was the discontinuation of goodwill amortisation in the 2005 results, which reduced the rate by approximately 2% in the interim period. The underlying tax rate shows an increase, reflecting the increasing relative contribution of Genentech and Chugai to the Group’s overall results. A reconciliation of the effective tax rate is given in Note 10 to the Interim Financial Statements. Profit from continuing businesses: The increase of 8% compared to 2004 is mainly due to the positive developments on the operating, financial and tax lines, which more than offset the exceptional financial income of 687 million Swiss francs (after-tax) in the interim 2004 results. Excluding this and other exceptional items, profit from continuing businesses increased by 728 million Swiss francs or 28%. Discontinued businesses: The 2005 results include the operating results for the remaining 2% of the OTC (Consumer Health) business that was transferred to Bayer in the first quarter of 2005. The comparative interim results include the results of the whole OTC (Consumer Health) business, which was still fully owned by the Roche Group at 30 June 2004. Further information about discontinued businesses is given in Note 6 to the Interim Financial Statements. Net income: In the first half of 2005 Group net income increased by 4% to 3.2 billion Swiss francs and the return on sales margin was 19.5%. Net income attributable to the Roche shareholders was slightly lower than in the comparative period (which includes the exceptional financial income of 687 million Swiss francs, after-tax), whereas the share of net income attributable to minorities increased due to the continually improving profit contribution by Genentech and Chugai. Of net income, 276 million Swiss francs are attributable to Genentech minority interests and 162 million Swiss francs to Chugai minority interests. Half-Year Report 2005 21


  • Page 24

    Financial Review EPS and Core EPS: Diluted EPS decreased by 4% to 3.26 CHF from 3.40 CHF. Again, the increase in overall net income was offset by the various exceptional items and the increase in net income attributable to minority interests. The Core EPS, which excludes exceptional items and also amortisation of intangible assets, increased by 21% to 3.69 CHF from 3.06 CHF. This shows the underlying improvements in the Group’s operating, financial and tax results. Supplementary net income and EPS information is given on page 46. This includes calculations of profit from continuing businesses before exceptional items and Core EPS and reconciles these to the Group’s published IFRS results. Cash flows and net liquidity Condensed cash flow statement in millions of CHF Six months ended 30 June 2005 2004 Cash generated from business operations 6,083 5,130 (Increase) decrease in working capital (570) (452) Costs of major legal cases paid (78) (77) Other operating cash flows (313) (426) Operating activities before income taxes 5,122 4,175 Income taxes paid (all activities) (1,222) (410) Operating activities 3,900 3,765 Investing activities (466) (556) Financing activities (2,688) (5,038) Net effect of currency translation on cash 203 17 Increase (decrease) in cash 949 (1,812) A full consolidated cash flow statement is given in the Interim Financial Statements on page 30. Operating cash flows: The Group’s business operations continued to show strong cash generation of 6.1 billion Swiss francs, driven by continued growth in EBITDA. Tax payments were considerably higher than the interim 2004 results, mainly due to the payment of tax on the gain on disposal of the Consumer Health (OTC) business and increased payments at Genentech and Chugai. Overall operating cash flows increased by 4% to 3.9 billion Swiss francs. Investing cash flows: The largest investing cash flow was the receipt from Bayer of 2.9 billion Swiss francs proceeds from the divestment of the Consumer Health (OTC) business which was received on 1 January 2005. Other investing cash flows also include expenditure on property, plant and equipment, in particular the 0.5 billion Swiss francs used by Genentech to purchase the Oceanside biologics manufacturing facility. The increased net investment in marketable securities is mainly a result of the reinvestment of the Bayer proceeds. In 2004 there was a large net cash inflow from sales of part of the Group’s portfolio of marketable securities in order to fund the repayment of debt instruments. Financing cash flows: The most significant financing cash flows in 2005 and 2004 relate to dividend payments and the redemption of debt instruments. Dividends paid in 2005 were 1.7 billion Swiss francs (2004: 1.4 billion Swiss francs) and cash used for the redemption of debt instruments 1.2 billion Swiss francs (used for the ‘Sumo’ bonds) compared to 3.0 billion Swiss francs in 2004 (used for the ‘LYONs III’ notes and ‘Chameleon’ bonds). The redemption and conversion of the ‘LYONs IV’ notes in 2004 had a cash impact of only 5 million Swiss francs as the debt obligation was almost entirely settled by the delivery of Genentech shares. 22 Half-Year Report 2005


  • Page 25

    Financial Review Net liquidity in millions of CHF 30 June 31 December 2005 2004 % change Cash and marketable securities 16,402 12,999 +26 Receivable from Bayer Group collected on 1 January 2005 – 2,886 –100 Financial long-term assets and restricted cash 1,873 1,999 –6 Derivative financial instruments, net 205 (19) – Own equity instruments 2,953 2,803 +5 Financial assets 21,433 20,668 +4 Long-term debt (7,354) (6,947) +6 Short-term debt (478) (2,013) –76 Total debt (7,832) (8,960) –13 Net liquidity 13,601 11,708 +16 Net liquidity increased during the interim period, the main driver being a strong cash inflow from operating activities of 3.9 billion Swiss francs. The payment of the dividend reduced net liquidity by 1.7 billion Swiss francs. The purchase of the Oceanside biologics manufacturing facility by Genentech reduced net liquidity by 0.5 billion Swiss francs. The ‘Sumo’ redemption reduces both debt and cash and therefore has no effect on net liquidity. Balance sheet Condensed balance sheet in millions of CHF 30 June 31 December 2005 2004 % change Long-term assets 31,802 28,722 +11 Current assets 30,946 29,679 +4 Total assets 62,748 58,401 +7 Equity 38,833 33,368 +16 Non-current liabilities 15,970 14,899 +7 Current liabilities 7,945 10,134 –22 Total equity and liabilities 62,748 58,401 +7 A full consolidated balance sheet is given in the Interim Financial Statements on page 28. Long-term assets: The increase in the US dollar to 1.28 against the Swiss franc during the interim period increased long-term assets in Swiss franc terms since many of the Group’s production facilities and intangible assets are US dollar denominated. The purchase of the Oceanside biologics manufacturing facility by Genentech increased property, plant and equipment by 0.5 billion Swiss francs. Following the decision of the California Supreme Court in February 2005 to review the litigation between Genentech and the City of Hope, the surety bond of 0.9 billion Swiss francs that was posted by Genentech in 2002 has been reclassified from current assets to long-term assets. Current assets: Current assets decreased by the 1.7 billion Swiss francs cash used for payment of dividends and the 1.2 billion Swiss francs cash used in the redemption of the ‘Sumo’ bonds. Equity: The most significant movements were the net income of 3.2 billion Swiss francs, the dividend payment of 1.7 billion Swiss francs and currency translation gains of 2.3 billion Swiss francs. Equity compensation plan effects were 1.3 billion Swiss francs, being mostly cash received from exercises and tax benefits. Non-current liabilities: The movement in the US dollar rates increased the Swiss franc carrying value of the Group’s US dollar denominated debt instruments. The provision of 0.8 billion Swiss francs made by Genentech for the City of Hope litigation has been reclassified from current liabilities to non-current liabilities. Half-Year Report 2005 23


  • Page 26

    Financial Review Current liabilities: The redemption of the ‘Sumo’ bonds reduced short-term debt by 1.2 billion Swiss francs. Strong financial condition: The Group remains solidly financed, with equity (including minority interests) representing 62% of total assets and 87% of total assets financed long-term. Financial risks Foreign exchange risk: During the first half of 2005 the management of exposures has maintained foreign exchange risks at relatively low levels. Interest rate risk: The Group has further reduced its outstanding debt since the year-end through repayment of bank debt and the redemption of the ‘Sumo’ bonds. The comparatively small risks from re-pricing or re-financing were contained at reasonable levels. Market risk of financial assets: The Group’s financial assets are mostly allocated to highly liquid fixed income and money market instruments. The Group has not made any new investments in equity securities. Foreign exchange rates Rates of exchange for the major currencies used by the Group against the Swiss franc 30 June Average to 31 December Average to 2005 30 June 2005 2004 30 June 2004 1 USD 1.28 1.20 1.13 1.27 1 EUR 1.55 1.55 1.54 1.55 1 GBP 2.31 2.25 2.18 2.31 100 JPY 1.16 1.14 1.10 1.17 International Financial Reporting Standards The Roche Group has been using International Financial Reporting Standards (IFRS) to report its consolidated results since 1990. Since late 2003 the International Accounting Standards Board (IASB) has published a number of new and revised standards, which the Group implemented effective 1 January 2005. These are fully discussed in Note 1 to the Interim Financial Statements. Goodwill amortisation: Effective 1 January 2005 the amortisation of goodwill has ceased, although goodwill will continue to be tested for impairment. This change requires prospective application. Had the standard been applied in 2004, then goodwill amortisation expenses of 282 million Swiss francs would not have been recorded in the interim results and interim net income attributable to Roche shareholders would have been 224 million Swiss francs higher. Share-based payment: The fair value of equity compensation plans awarded to employees is estimated at grant date and recorded as an expense over the vesting period. This change has been applied retrospectively, using certain transitional requirements. Applying the transitional requirements, the impact on the previously reported interim operating income and net income attributable to Roche shareholders for 2004 is 60 million Swiss francs and 26 million Swiss francs respectively. Due to the transitional requirements these are not indicative of the future impacts. Recognition of intangible assets: The revised standards on intangible assets and business combinations will typically result in more intangible assets being recognised from acquisitions, in-licensing collaborations and alliances than previously. The standards require prospective application. 24 Half-Year Report 2005


  • Page 27

    Financial Review Financial instruments: The Group had already fully applied the previous IAS 39 on ‘Financial Instruments’ since 2001. The changes to the standards on financial instruments, which require retrospective application, do not have a significant effect. Equity and minority interests: Minority interests is now included as part of the Group’s equity and not as a separate category on the balance sheet. This increases the Group’s equity by 5,594 million Swiss francs, applied retrospectively to 1 January 2004. Presentation of income statement: Following the above changes the Group has revised the presentation of the income statement, which now includes a full divisional split of the Group’s operating results. These changes were made in accordance with the requirements of the new and revised standards and in order to further improve comparability of results to other healthcare companies and to allow readers to make a more accurate assessment of the sustainable earnings capacity of the Group. The comparative results in the Interim Financial Statements have been restated into the new format. Full details of the changes are given in Note 1 to the Interim Financial Statements. Supplementary presentation materials from the investor update held on 8 March 2005 are available on the ‘Investor Relations’ section of the Group’s website at www.roche.com. Half-Year Report 2005 25


  • Page 28

    Roche Group Interim Consolidated Financial Statements Reference numbers indicate the corresponding Notes to the Interim Consolidated Financial Statements. The Interim Consolidated Financial Statements are unaudited. The Interim Consolidated Financial Statements have been reviewed by the Group’s auditors and their review report is presented on page 45. Consolidated income statement for the six months ended 30 June 2005 in millions of CHF Pharmaceuticals Diagnostics Corporate Group Sales3 12,652 3,970 – 16,622 Royalties and other operating income8 542 168 – 710 Cost of sales (2,858) (1,490) – (4,348) Marketing and distribution (3,366) (1,043) – (4,409) Research and development3 (2,215) (344) – (2,559) General and administration (815) (191) (139) (1,145) Amortisation and impairment of intangible assets3 (332) (166) – (498) Operating profit before exceptional items3 3,608 904 (139) 4,373 Amortisation of goodwill3 – – – – Major legal cases7 – (146) – (146) Changes in Group organisation2 – – – – Operating profit3 3,608 758 (139) 4,227 Associated companies – Financial income9 241 Financing costs9 (187) Profit before taxes 4,281 Income taxes10 (1,040) Profit from continuing businesses 3,241 Profit from discontinued businesses6 1 Net income 3,242 Attributable to – Roche shareholders 2,798 – Minority interests 444 Continuing Earnings per share and non-voting equity security businesses Group Basic (CHF) 3.32 3.32 Diluted (CHF) 3.26 3.26 26 Half-Year Report 2005


  • Page 29

    Roche Group Interim Consolidated Financial Statements Consolidated income statement for the six months ended 30 June 2004 in millions of CHF Pharmaceuticals Diagnostics Corporate Group Sales3 10,647 3,879 – 14,526 Royalties and other operating income8 625 165 – 790 Cost of sales (2,310) (1,450) – (3,760) Marketing and distribution (3,019) (981) – (4,000) Research and development3 (2,029) (332) – (2,361) General and administration (722) (195) (142) (1,059) Amortisation and impairment of intangible assets3 (377) (152) – (529) Operating profit before exceptional items3 2,815 934 (142) 3,607 Amortisation of goodwill3 (120) (162) – (282) Major legal cases7 – – – – Changes in Group organisation2 – – – – Operating profit3 2,695 772 (142) 3,325 Associated companies (27) Financial income9 213 Financing costs9 (383) Exceptional income from bond conversion and redemption9 965 Profit before taxes 4,093 Income taxes10 (1,084) Profit from continuing businesses 3,009 Profit from discontinued businesses6 112 Net income 3,121 Attributable to – Roche shareholders 2,911 – Minority interests 210 Continuing Earnings per share and non-voting equity security businesses Group Basic (CHF) 3.34 3.46 Diluted (CHF) 3.28 3.40 As disclosed in Note 1, the income statement for 2004 has been restated following the changes in IFRS that were adopted effective 1 January 2005. A reconciliation to the previously published income statement is provided in Note 1. Half-Year Report 2005 27


  • Page 30

    Roche Group Interim Consolidated Financial Statements Consolidated balance sheet in millions of CHF 30 June 31 December 2005 2004 Long-term assets Property, plant and equipment 14,048 12,408 Goodwill 5,963 5,532 Intangible assets 6,338 6,340 Investments in associated companies 54 55 Financial long-term assets 1,873 1,227 Other long-term assets 560 484 Deferred income tax assets 1,356 1,099 Post-employment benefits 1,610 1,577 Total long-term assets 31,802 28,722 Current assets Inventories 4,931 4,614 Accounts receivable 7,664 7,014 Current income tax assets 311 159 Other current assets 1,638 2,007 Marketable securities 12,848 10,394 Receivable from Bayer Group collected on 1 January 20056 – 2,886 Cash and cash equivalents 3,554 2,605 Total current assets 30,946 29,679 Total assets 62,748 58,401 Equity Share capital 160 160 Non-voting equity securities (Genussscheine) p. m. p. m. Own equity instruments (3,795) (4,326) Retained earnings 37,571 35,890 Fair value and other reserves (1,976) (3,641) Equity attributable to Roche shareholders 31,960 28,083 Minority interests 6,873 5,285 Total equity 38,833 33,368 Non-current liabilities Long-term debt 7,354 6,947 Deferred income tax liabilities 3,280 3,564 Liabilities for post-employment benefits 2,836 2,744 Provisions11 1,570 683 Other non-current liabilities 930 961 Total non-current liabilities 15,970 14,899 Current liabilities Short-term debt 478 2,013 Current income tax liabilities 792 947 Provisions11 666 1,223 Accounts payable 1,635 1,844 Accrued and other current liabilities 4,374 4,107 Total current liabilities 7,945 10,134 Total equity and liabilities 62,748 58,401 p. m. = pro memoria. Non-voting equity securities have no nominal value. 28 Half-Year Report 2005


  • Page 31

    Roche Group Interim Consolidated Financial Statements Consolidated condensed statement of changes in equity in millions of CHF Six months ended 30 June 2005 2004 Share capital Balance at 1 January and at period end 160 160 Non-voting equity securities (Genussscheine) Balance at 1 January and at period end p. m. p. m. Own equity instruments Balance at 1 January (4,326) (4,583) Movements during the period 531 187 Balance at period end (3,795) (4,396) Retained earnings Balance at 1 January – as previously reported 35,890 30,985 Changes in accounting policy1 – (126) Balance at 1 January – restated 35,890 30,859 Net income attributable to Roche shareholders 2,798 2,911 Dividends paid (1,721) (1,414) Equity compensation plans 688 444 Genentech and Chugai share repurchases (108) (411) Convertible debt instruments 24 105 Balance at period end 37,571 32,494 Fair value and other reserves Balance at 1 January (3,641) (2,992) Changes in accounting policy1 – 186 Balance at 1 January – restated (3,641) (2,806) Convertible debt instruments (24) (71) Changes in fair value attributable to available-for-sale investments and qualifying cash flow hedges (14) 127 Fair value (gains) losses attributable to available-for-sale investments and qualifying cash flow hedges recognised in the income statement (63) (65) Fair value (gains) losses attributable to qualifying cash flow hedges transferred to adjust the initial measurement of acquisition cost of assets or other carrying amount of hedged assets – 43 Deferred income taxes and minority interests 63 (47) Currency translation gains (losses) 1,703 88 Balance at period end (1,976) (2,731) Equity attributable to Roche shareholders 31,960 25,527 Minority interests Balance at 1 January – as previously reported, restated as equity 5,285 5,594 Changes in accounting policy1 – (164) Balance at 1 January – restated 5,285 5,430 Net income attributable to minority interests 444 210 Dividends paid – Chugai and other minority shareholders (32) (41) Equity compensation plans 653 383 Genentech and Chugai share repurchases (85) (318) Convertible debt instruments 8 79 Currency translation gains (losses) 600 98 Balance at period end 6,873 5,841 Total equity at period end 38,833 31,368 p. m. = pro memoria. Non-voting equity securities have no nominal value. Half-Year Report 2005 29


  • Page 32

    Roche Group Interim Consolidated Financial Statements Consolidated cash flow statement in millions of CHF Six months ended 30 June 2005 2004 Cash flows from operating activities Cash generated from operations 6,083 5,130 (Increase) decrease in working capital (570) (452) Vitamin case payments6 (78) (11) Major legal cases7 – (66) Payments made for defined benefit post-employment plans (170) (177) Utilisation of restructuring provisions (66) (97) Utilisation of other provisions (70) (77) Other operating cash flows (7) (75) Cash flows from operating activities, before income taxes paid 5,122 4,175 Income taxes paid (1,222) (410) Total cash flows from operating activities 3,900 3,765 Cash flows from investing activities Purchase of property, plant and equipment (1,617) (897) Purchase of intangible assets (170) (26) Disposal of property, plant and equipment 191 56 Disposal of intangible assets 2 9 Disposal of products8 11 218 Acquisitions of subsidiaries and associated companies2 – (1,819) Divestments of subsidiaries and associated companies2 2,913 – Interest and dividends received 116 118 Sales of marketable securities 3,463 4,137 Purchases of marketable securities (5,357) (2,360) Other investing cash flows (18) 8 Total cash flows from investing activities (466) (556) Cash flows from financing activities Proceeds from issue of long-term debt instruments12 – – Repayment of long-term debt instruments12 (1,178) (3,036) Increase (decrease) in other long-term debt (297) (329) Transactions in own equity instruments 484 150 Increase (decrease) in short-term borrowings (264) 106 Interest and dividends paid (1,770) (1,656) Exercises of equity compensation plans 560 464 Genentech share repurchases (193) (729) Other financing cash flows (30) (8) Total cash flows from financing activities (2,688) (5,038) Net effect of currency translation on cash and cash equivalents 203 17 Increase (decrease) in cash and cash equivalents 949 (1,812) Cash and cash equivalents at beginning of period 2,605 5,276 Cash and cash equivalents at end of period 3,554 3,464 30 Half-Year Report 2005


  • Page 33

    Notes to the Roche Group Interim Consolidated Financial Statements Reference numbers indicate the corresponding Notes to the Interim Consolidated Financial Statements. The Interim Consolidated Financial Statements are unaudited. The Interim Consolidated Financial Statements have been reviewed by the Group’s auditors and their review report is presented on page 45. 1. Accounting policies Basis of preparation of financial statements These financial statements are the unaudited interim consolidated financial statements (hereafter ‘the Interim Financial Statements’) of Roche Holding Ltd, a company registered in Switzerland, and its subsidiaries (hereafter ‘the Group’) for the six-month period ended 30 June 2005 (hereafter ‘the interim period’). They are prepared in accordance with the International Accounting Standard 34 (IAS 34) ‘Interim Financial Reporting’. These Interim Financial Statements should be read in conjunction with the Consolidated Financial Statements for the year ended 31 December 2004 (hereafter ‘the Annual Financial Statements’), as they provide an update of previously reported information. They were approved for issue by the Board of Directors on 19 July 2005. The accounting policies used are consistent with those used in the Annual Financial Statements, except where noted below. The presentation of the Interim Financial Statements is consistent with the Annual Financial Statements, except where noted below. Where necessary, the comparatives have been reclassified or extended from the previously reported Interim Financial Statements to take into account any presentational changes made in the Annual Financial Statements or in these Interim Financial Statements. The preparation of the Interim Financial Statements requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities and disclosure of contingent liabilities at the date of the Interim Financial Statements. If in the future such estimates and assumptions, which are based on management’s best judgement at the date of the Interim Financial Statements, deviate from the actual circumstances, the original estimates and assumptions will be modified as appropriate in the period in which the circumstances change. The Group operates in industries where significant seasonal or cyclical variations in total sales are not experienced during the financial year. Income tax expense is recognised based upon the best estimate of the weighted average income tax rate expected for the full financial year. Changes in accounting policies In late 2003 the International Accounting Standards Board (IASB) published a revised version of IAS 32 ‘Financial Instruments: Disclosure and Presentation’, a revised version of IAS 39 ‘Financial Instruments: Recognition and Measurement’ and ‘Improvements to International Accounting Standards’, which makes changes to 14 existing standards. In the first quarter of 2004 the IASB published IFRS 2 ‘Share-based Payment’, IFRS 3 ‘Business Combinations’, IFRS 4 ‘Insurance Contracts’, IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’, revised versions of IAS 36 ‘Impairment of Assets’ and IAS 38 ‘Intangible Assets’ and further amendments to IAS 39. The Group adopted these effective 1 January 2005. A description of these changes and their effect on the Interim Financial Statements is given below. The Group is currently assessing the potential impacts of the new and revised standards that will be effective from 1 January 2006. IAS 8: ‘Accounting Policies, Changes in Accounting Estimates and Errors’. Amongst other matters the revised standard requires that changes in accounting policies that arise from the application of new or revised standards and interpretations are applied retrospectively, unless otherwise specified in the transitional requirements of the particular standard or interpretation. Previously the Group has applied all changes prospectively, unless otherwise specified in the transitional requirements. Retrospective application means that the results of the comparative period and the opening balances of that period are restated as if the new accounting policy had always been applied. Prospective application means that the new accounting policy is only applied to the results of the current period and the comparative period is not restated. Half-Year Report 2005 31


  • Page 34

    Notes to the Roche Group Interim Consolidated Financial Statements IFRS 2: ‘Share-based Payment’. Amongst other matters, the new standard requires that the fair value of all equity compensation plans awarded to employees be estimated at grant date and recorded as an expense over the vesting period. The expense is charged against the appropriate income statement heading. Under the Group’s previous policy no expenses were recorded for equity-settled equity compensation plans. Expenses for cash- settled equity compensation plans were recorded based on the intrinsic value of the outstanding obligation as part of ‘Other operating expenses’. The standard also requires retrospective application, within certain transitional requirements. Applying the transitional requirements, a pre-tax expense of 197 million Swiss francs has been recorded in the interim period (98 million Swiss francs in the restated interim period of 2004). Due to the impact of the transitional requirements these amounts are not indicative of the future expenses for such plans. Expenses for cash-settled plans totalling 38 million Swiss francs in the interim period of 2004 were reclassified from ‘Other operating expenses’. Expenses for equity compensation plans in interim results in millions of CHF Retrospective Previously reported Total Total application as ‘Other operating Interim 2004 Interim of IFRS 2 expenses’ (restated) 2005 Cost of sales 3 2 5 11 Marketing and distribution 9 8 17 43 Research and development 22 6 28 79 General and administration 26 22 48 64 Total operating expense 60 38 98 197 The new standard also affects the Group’s effective tax rate, as deferred tax is recorded based on the expected tax benefits arising from vested awards. In the United States and many other tax jurisdictions the current equity price is used as an input to the calculation. The impact on the income statement of any income tax benefit is capped with reference to the IFRS 2 pre-tax expense, with any excess recognised directly in equity. As a result of the implementation of IFRS 2, net assets on the consolidated balance sheet at 31 December 2004 were 75 million Swiss francs higher. This consists of inventories (40 million Swiss francs asset), deferred tax assets (52 million Swiss francs asset) and liabilities for cash-settled equity compensation plans (17 million Swiss francs liability). Further information on the Group’s equity compensation plans is given in Notes 5, 6 and 12 to the Annual Financial Statements. IFRS 3: ‘Business Combinations’. Amongst other matters, the new standard requires that amortisation of goodwill cease from the date of implementation. Goodwill will continue to be tested for impairment. The standard requires prospective application. Had this standard been applied in the interim period of 2004, then goodwill amortisation expenses of 282 million Swiss francs would not have been recorded. No additional impairment would have been necessary. In addition, together with IAS 38 (revised) ‘Intangible Assets’, this standard will typically result in more intangible assets being recognised from acquisitions than previously and consequently less goodwill will arise. The new standard also affects the Group’s effective tax rate, as no tax benefit was recorded in respect of goodwill amortisation. Based on the Group’s 2004 results, the Group’s effective tax rate is expected to decrease by between two and three percentage points. IAS 38 (revised): ‘Intangible Assets’. Amongst other matters, the revised standard will typically result in more intangible assets being recognised from in-licensing arrangements and similar research and development alliances. Previously such expenditure would be recorded as research and development expenses. The revised standard requires prospective application. 32 Half-Year Report 2005


  • Page 35

    Notes to the Roche Group Interim Consolidated Financial Statements IAS 32 (revised) and IAS 39 (revised): ‘Financial Instruments’. Since the Group already fully applied the previous IAS 32 and IAS 39 on ‘Financial Instruments’ the revised standards did not have a significant effect on the Group’s results and financial position. Amongst other matters, the revised standards require that a significant or prolonged decline in the fair value of available-for-sale financial assets be considered as objective evidence of impairment. Under the Group’s previous accounting policy, a decline in fair value of available-for-sale financial assets was considered as objective evidence of impairment where the decline was significant and prolonged. Consequently, the revised standards will typically result in impairment charges being recognised for available- for-sale financial assets at an earlier stage than under the previous accounting policy. The revised standards require retrospective application and this additionally resulted in a restatement of the equity conversion elements of certain of the Group’s convertible debt instruments in 2004. As a result equity as at 1 January 2004 was reduced by 112 million Swiss francs and an additional pre-tax income of 20 million Swiss francs has been recorded for the restated interim period of 2004. IAS 1 (revised): ‘Presentation of Financial Statements’. Amongst other matters, the revised standard permits the presentation of the results of discontinued businesses as a single amount on the face of the income statement. Additionally the revised standard requires that minority interests are included as part of the Group’s equity and not as a separate category on the balance sheet. As a result of this change, and from the implementation of IFRS 2, the net accounting effect of Genentech and Chugai stock repurchases and stock options is recorded to equity and allocated to retained earnings and minority interests based on the relevant ownership percentages. Previously these entries were recorded to minority interests. The revised standard requires retrospective application and accordingly 169 million Swiss francs were reclassified from minority interests to retained earnings as at 1 January 2004. Presentation of income statement: The new and revised standards result in significant changes to the format and content of the income statement. In addition the Group has made certain presentational changes in order to further improve comparability of results to other healthcare companies and to allow readers to make a more accurate assessment of the sustainable earnings capacity of the Group. These changes, which have been applied retrospectively, are listed below. • ‘Royalties and other operating income’ are shown as a separate line after ‘Sales’. • ‘Cost of sales’ includes royalty expenses that are directly linked to goods sold. In the interim period this was 634 million Swiss francs (2004: 560 million Swiss francs). • ‘Other operating expenses’ is removed from the income statement. ‘Administration’ is expanded to ‘General and administration’ to additionally include ‘Other operating expenses’ other than royalty expenses included in ‘Cost of sales’. • ‘Financial income’ and ‘Financing costs’ are disclosed separately on the face of the income statement. • Capital taxes are reported as part of ‘General and administration’ instead of ‘Financial income’ as previously. In the interim period this was 18 million Swiss francs (2004: 12 million Swiss francs) and has been included in the ‘Corporate’ business segment. Half-Year Report 2005 33


  • Page 36

    Notes to the Roche Group Interim Consolidated Financial Statements Restated income statement for the six months ended 30 June 2004 in millions of CHF As originally Discontinued IAS 32 Other Group published businesses IFRS 2 IAS 39 changes restated Sales 15,413 (887) – – – 14,526 Other operating income and operating expenses (11,853) 724 (60) – (12) (11,201) Operating profit 3,560 (163) (60) – (12) 3,325 Financial and non-operating items 727 9 – 20 12 768 Profit before taxes 4,287 (154) (60) 20 – 4,093 Income taxes (1,148) 42 25 (3) – (1,084) Profit from continuing businesses n/a (112) (35) 17 – 3,009 Profit from discontinued businesses n/a 112 – – – 112 Net income 3,139 – (35) 17 – 3,121 Attributable to – Roche shareholders 2,920 – (26) 17 – 2,911 – Minority interests 219 – (9) – – 210 Earnings per share and non-voting equity security Diluted – Group (CHF) 3.41 – (0.03) 0.02 – 3.40 Consistent with the presentation in the Annual Financial Statements: • The business segment ‘Chugai OTC’ results for the interim period of 2004 have been reclassified as discontinued, as this business was sold in the second half of 2004. • A total of 22 million Swiss francs of administration and other costs that were previously allocated to the Consumer Health (OTC) business in the published 2004 interim results have been reclassified to the business segment ‘Corporate’ within the Group’s continuing business results. These items are not transferred with the sale of the business. In addition provisions for sales returns and sales charge-backs are now classified as provisions and accrued liabilities, respectively. Previously they were reported within accounts receivable. In the 31 December 2004 balance sheet a total of 233 million Swiss francs has been reclassified from ‘accounts receivable’ to ‘provisions- current’ (137 million Swiss francs) and ‘accrued and other liabilities’ (96 million Swiss francs). There was no impact on net income or equity from this reclassification. Restated equity for 1 January 2004 in millions of CHF As originally IAS 1 IAS 32 Other Group published (revised) IFRS 2 IAS 39 changes restated Share capital 160 – – – – 160 Own equity instruments (4,583) – – – – (4,583) Retained earnings 30,985 – 3 (298) 169 30,859 Fair value and other reserves (2,992) – – 186 – (2,806) Equity attributable to Roche shareholders 23,570 – 3 (112) 169 23,630 Minority interests – 5,594 5 – (169) 5,430 Total equity 23,570 5,594 8 (112) – 29,060 2. Group organisation Discontinued businesses The Consumer Health (OTC) and Vitamins and Fine Chemicals businesses are discussed in Note 6. 2005 acquisitions and divestments GlycArt: On 18 July 2005 the Group signed an agreement with the shareholders of GlycArt Biotechnology AG (hereafter ‘GlycArt’) under which the Group will acquire 100% of the share capital of GlycArt. GlycArt is a privately owned biotechnology research company based in Schlieren-Zürich in Switzerland. The purchase consideration 34 Half-Year Report 2005


  • Page 37

    Notes to the Roche Group Interim Consolidated Financial Statements will be approximately 235 million Swiss francs and the transaction is expected to close in the third quarter of 2005. GlycArt will be reported as part of the Roche Pharmaceuticals business segment. There were no other significant acquisitions and divestments in the interim period of 2005. Cash flows from changes in Group organisation in millions of CHF Six months ended 30 June 2005 2004 Acquisitions – Igen – (1,815) – other acquisitions – (4) Total cash flows from acquisitions of subsidiaries and associated companies – (1,819) Divestments – Consumer Health (OTC) business 2,902 – – other divestments 11 – Total cash flows from divestments of subsidiaries and associated companies 2,913 – These amounts are net of any cash balances in the acquired/divested company/business and include cash outflows for incidental transaction costs. 3. Business segment information Divisional information in millions of CHF Pharmaceuticals Division Diagnostics Division Corporate Group Six months ended 30 June 2005 2004 2005 2004 2005 2004 2005 2004 Segment revenues Segment revenues / divisional sales 12,942 10,974 3,971 3,882 – – 16,913 14,856 Less inter-divisional sales (290) (327) (1) (3) – – (291) (330) Divisional sales to third parties 12,652 10,647 3,970 3,879 – – 16,622 14,526 Segment results Operating profit before exceptional items 3,608 2,815 904 934 (139) (142) 4,373 3,607 Amortisation of goodwill – (120) – (162) – – – (282) Major legal cases – – (146) – – – (146) – Changes in Group organisation – – – – – – – – Segment results / operating profit 3,608 2,695 758 772 (139) (142) 4,227 3,325 Other segment information Capital expenditure 1,302 568 398 2,459 1 1 1,701 3,028 Depreciation 395 389 241 225 3 2 639 616 Amortisation of intangible assets 332 353 166 151 – – 498 504 Impairment of long-term assets – 27 – 1 – – – 28 Equity compensation plan expenses 175 75 17 15 5 8 197 98 Restructuring expenses 56 8 1 – – – 57 8 Research and development costs 2,215 2,029 344 332 – – 2,559 2,361 Half-Year Report 2005 35


  • Page 38

    Notes to the Roche Group Interim Consolidated Financial Statements Pharmaceuticals sub-divisional information in millions of CHF Roche Pharmaceuticals Genentech Chugai Pharmaceuticals Division Six months ended 30 June 2005 2004 2005 2004 2005 2004 2005 2004 Segment revenues Segment revenues / divisional sales 8,174 7,297 2,961 2,122 1,807 1,555 12,942 10,974 Less inter-divisional sales (196) (257) (94) (70) – – (290) (327) Divisional sales to third parties 7,978 7,040 2,867 2,052 1,807 1,555 12,652 10,647 Segment results Operating profit before exceptional items 2,318 1,968 838 612 452 235 3,608 2,815 Amortisation of goodwill – 21 – (135) – (6) – (120) Major legal cases – – – – – – – – Changes in Group organisation – – – – – – – – Segment results / operating profit 2,318 1,989 838 477 452 229 3,608 2,695 Other segment information Capital expenditure 347 276 899 229 56 63 1,302 568 Depreciation 242 258 116 97 37 34 395 389 Amortisation of intangible assets 198 203 97 111 37 39 332 353 Impairment of long-term assets – 3 – 24 – – – 27 Equity compensation plan expenses 48 30 126 45 1 – 175 75 Restructuring expenses 22 8 – – 34 – 56 8 Research and development costs 1,291 1,292 660 488 264 249 2,215 2,029 Consistent with the presentation in the Annual Financial Statements: • The ‘Chugai OTC’ segment results for 2004 have been reclassified as a discontinued business, as this business was sold in the second half of 2004. • A total of 22 million Swiss francs of administration and other costs that were previously allocated to the Consumer Health (OTC) business in the published 2004 interim results have been reclassified to the business segment ‘Corporate’ within the Group’s continuing business results. These items are not transferred with the sale of the business. 4. Genentech The common stock of Genentech is publicly traded and is listed on the New York Stock Exchange, under the symbol DNA. At 30 June 2005 the Group’s interest in Genentech was 55.3% (31 December 2004: 56.1%). Genentech prepares financial statements in conformity with accounting principles generally accepted in the United States (US GAAP). These are filed on a quarterly basis with the US Securities and Exchange Commission (SEC). Due to certain consolidation entries and differences in the requirements of International Financial Reporting Standards (IFRS) and US GAAP, there are differences between Genentech’s stand-alone results on a US GAAP basis and the results of Genentech as consolidated by the Roche Group in accordance with IFRS. These are discussed in Note 5 of the Annual Financial Statements. The impacts on the interim results are reconciled in the table below. 36 Half-Year Report 2005


  • Page 39

    Notes to the Roche Group Interim Consolidated Financial Statements Reconciliation of Genentech results Six months ended Six months ended 30 June 2005 30 June 2004 USD CHF USD CHF millions millionsa) millions millionsa) Operating margin (US GAAP basis) 800 500 – redemption costs 69 76 – special litigation items 31 27 Operating margin (non-US GAAP basis) 900 603 Add (deduct) differences and consolidation entries – add back redemption costs (69) (76) – expenses for equity compensation plans (105) (35) – other differences and consolidation entries (30) (8) Operating profit before exceptional items (IFRS basis) 696 838 484 612 Add (deduct) exceptional items – amortisation of goodwill – (135) – major legal cases – – Segment result /operating profit (IFRS basis) 838 477 Add (deduct) non-operating items (IFRS basis) – financial income and financing costs 20 10 – income taxes (234) (212) Net income (IFRS basis) 624 275 Minority interest percentage (average during period) 44.2% 43.1% Income applicable to minority interest (IFRS basis) 276 118 a) Translated at 1.00 USD = 1.20 CHF (2004: 1.00 USD = 1.27 CHF). Genentech stock repurchases and stock options On 15 June 2005 Genentech announced that its Board of Directors has authorised an extension of the current stock repurchase programme to repurchase up to a further 2 billion US dollars of Genentech’s common stock for a total of 4 billion US dollars through 30 June 2006. During the interim period Genentech repurchased common stock worth 161 million US dollars (2004: 576 million US dollars) and exercises from Genentech’s equity compensation plans resulted in a cash inflow of 465 million US dollars (2004: 367 million US dollars). Oceanside biologics manufacturing facility On 23 June 2005 Genentech completed the purchase of the Oceanside biologics manufacturing facility in San Diego, California, from Biogen Idec. The purchase cost, including closing costs, was 531 million Swiss francs. Genentech Senior Notes On 13 July 2005 Genentech announced the offering of 2 billion US dollars aggregate principal amount of 5-year, 10-year and 30-year Senior Notes. The offering was priced on the same day as 500 million US dollars of 4.40% Senior Notes due 2010, 1 billion US dollars of 4.75% Senior Notes due 2015 and 500 million US dollars of 5.25% Senior Notes due 2035. Genentech intends to use the proceeds for reduction or repayment of certain lease arrangements, for funding future capital expenditure, including upgrade, start-up and validation costs at Oceanside and for general corporate purposes. Half-Year Report 2005 37


  • Page 40

    Notes to the Roche Group Interim Consolidated Financial Statements 5. Chugai The common stock of Chugai is publicly traded and is listed on the Tokyo Stock Exchange. At 30 June 2005 the Group’s interest in Chugai was 50.6% (31 December 2004: 50.6%). Chugai prepares financial statements in con- formity with accounting principles generally accepted in Japan (JGAAP). These are filed on a quarterly basis with the Tokyo Stock Exchange. Due to certain consolidation entries and differences in the requirements of International Financial Reporting Standards (IFRS) and JGAAP, there are differences between Chugai’s stand- alone results on a JGAAP basis and the results of Chugai as consolidated by the Roche Group in accordance with IFRS. These are discussed in Note 6 of the Annual Financial Statements. The impacts on the interim results are reconciled in the table below. Reconciliation of Chugai results in millions of CHF Six months ended 30 June 2005 2004 Chugai operating profit before exceptional items and before acquisition accounting impacts (IFRS basis) 491 274 – depreciation of property, plant and equipment (5) (5) – amortisation of acquisition-related intangible assets (34) (34) Chugai operating profit before exceptional items (IFRS basis) 452 235 Add (deduct) exceptional items – amortisation of goodwill – (6) Chugai segment result /operating profit (IFRS basis) 452 229 Add (deduct) Chugai OTC and non-operating items (IFRS basis) – financial income, financing costs and Chugai OTC 9 14 – income taxes (163) (98) Net income (IFRS basis) 298 145 Minority interest calculation Add back acquisition accounting impact on net income 30 30 Net income excluding acquisition accounting 328 175 Minority interest percentage (average during period) 49.4% 49.5% Income applicable to minority interest (IFRS basis) 162 87 Translated at 100 JPY = 1.14 CHF (2004: 100 JPY = 1.17 CHF). Dividends The dividends distributed to third parties holding Chugai shares during the interim period totalled 28 million Swiss francs (2004: 41 million Swiss francs) and have been recorded to equity. Dividends paid by Chugai to Roche are eliminated on consolidation as inter-company items. Restructuring of production facilities On 28 February 2005 Chugai announced a restructuring of its production facilities, under which five existing plants will be integrated into two facilities within the next five to six years. As part of this restructuring the plant at Kagamiishi was sold during the first half of 2005. Total restructuring costs in the interim period, including the loss on disposal of the Kagamiishi plant, were 34 million Swiss francs. 38 Half-Year Report 2005


  • Page 41

    Notes to the Roche Group Interim Consolidated Financial Statements 6. Discontinued businesses Results of discontinued businesses in millions of CHF Six months ended 30 June 2005 Six months ended 30 June 2004 Consumer Vitamins Consumer Vitamins Health and Fine Health and Fine (OTC) Chemicals Total (OTC) Chemicals Total Segment revenues 25 – 25 888 – 888 Business result (3) (4) (7) 118 (6) 112 Gain (loss) on disposal 8 – 8 – – – Profit from discontinued businesses 5 (4) 1 118 (6) 112 Earnings per share and non-voting equity security Basic (CHF) 0.00 0.13 Diluted (CHF) 0.00 0.13 Divestment of Consumer Health (OTC) business On 19 July 2004 the Group announced the sale of Roche Consumer Health, its global OTC (over-the-counter medicines) business, to the Bayer Group. The sale also included five production facilities belonging to the Roche Pharmaceuticals business. Under the agreement with Bayer the majority of local businesses were transferred to Bayer at the end of 2004. By 31 December 2004, 98% of the divestment to Bayer was completed, measured in terms of Roche Consumer Health sales to third parties. The divestment of the remaining 2% was completed in the first quarter of 2005. The calculations of the final amounts arising from the agreed purchase price mechanisms are expected to be completed by the end of 2005. Under the terms of the agreement the majority of cash proceeds, totalling 2,886 million Swiss francs, were transferred to the Group on 1 January 2005. In addition the Group received a further 16 million Swiss francs during the interim period for the remaining part of the divestment that was completed in the first half of 2005. On 30 July 2004 Chugai announced the sale of its OTC business to Lion Corporation. This sale was completed effective 29 December 2004. The results of the Consumer Health (OTC) business are shown above. The interim results for 2005 include the remaining part of Roche Consumer Health that was transferred to Bayer in the first quarter of 2005. The 2004 interim results include the whole Consumer Health (OTC) business for that period. Cash outflow from operations of 4 million Swiss francs (2004: cash inflow of 183 million Swiss francs) arises from the operating profit before exceptional items and before depreciation, amortisation and impairment. There were no significant investing and financing cash flows other than the receipt of the divestment proceeds received from Bayer that are described above. Divestment of Vitamins and Fine Chemicals business Effective 30 September 2003, after receiving the final regulatory approvals, the Group completed the sale of its global Vitamins and Fine Chemicals business (‘the VFC business’) to the Dutch company DSM. Under the terms of the final purchase agreement with DSM, there were certain agreed purchase price adjustment mechanisms. During the interim period the final amounts arising from these mechanisms were approved by the Group and DSM. No additional cash was transferred between the Group and DSM and no additional amounts were recorded in the Interim Financial Statements. Following the sale of the VFC business, certain assets and liabilities of the Vitamins and Fine Chemicals Division, mainly associated with the vitamin case, remain with the Group. During the interim period expenses of 4 million Swiss francs were recorded (2004: 6 million Swiss francs), which represent the after-tax amortisation of discounted provisions. Vitamin case Total payments in the interim period were 78 million Swiss francs (2004: 11 million Swiss francs), which were covered by provisions previously made. Half-Year Report 2005 39


  • Page 42

    Notes to the Roche Group Interim Consolidated Financial Statements On 17 January 2003 the District of Columbia Circuit Court of Appeals ruled that non-US plaintiffs may bring claims in US courts under US anti-trust laws for alleged damages suffered from transactions outside the United States in connection with the vitamin case. On 14 June 2004 the Supreme Court of the United States nullified the decision of the District of Columbia Circuit Court of Appeals in a class action litigation brought on behalf of non-US purchasers of bulk vitamins from Roche and other manufacturers. The Supreme Court remanded the case to the lower court to review alternative arguments which might permit such claims to proceed in the United States. On remand, on 28 June 2005 a panel of the District of Columbia Circuit Court of Appeals ruled unanimously that US courts do not have jurisdiction over the plaintiffs’ claims and affirmed the initial dismissal of the complaint. Plaintiffs may petition the entire District of Columbia Circuit Court of Appeals or the US Supreme Court for further discretionary review. 7. Major legal cases Diagnostics litigation and arbitration cases During the interim period provisions for certain litigation and arbitration matters in the Diagnostics Division were increased by 146 million Swiss francs. The provisions recorded are based on current litigation and settlement negotiations and recent settlement agreements. This additional expense is disclosed separately in the income statement due to the materiality of the amount and in order to fairly present the Group’s results. On 9 May 2005 the Group announced that a settlement agreement had been reached with Applera Corporation with regard to the outstanding litigation and arbitration related to contractual relationships involving rights to and commercialisation of polymerase chain reaction (‘PCR’) technology. Genentech legal cases On 2 February 2005 the California Supreme Court granted Genentech’s petition seeking a review of the jury verdict and damages awarded to the City of Hope Medical Center by the Superior Court in Los Angeles County, California, in June 2002. It is expected that the resolution of this matter will take more than one year. A full provision has been recorded for these awards, and this has now been reclassified from short-term to long-term following the California Supreme Court decision of 2 February 2005. During the appeals process interest accrues on the total amount of the damages at a simple annual rate of 10%. During the interim period interest of 30 million Swiss francs (2004: 33 million Swiss francs) was recorded as the time cost of provisions within interest expenses (see Note 9). On 3 October 2002 Genentech entered into an arrangement with third party insurance companies to post a surety bond of 600 million US dollars in connection with this judgment. As part of this arrangement Genentech pledged 630 million US dollars in cash and investments to secure this bond. This was increased in 2004 by 52 million US dollars to 682 million US dollars (874 million Swiss francs). This amount has been reclassified from other current assets to financial long-term assets following the California Supreme Court decision of 2 February 2005. Genentech's annual report and quarterly SEC filings contain the detailed disclosures on litigation matters that are required by US GAAP. These include further details on the above matters as well as including information on other litigation that is not currently as significant as the matters referred to above. 8. Royalties and other operating income Royalties and other operating income in millions of CHF Six months ended 30 June 2005 2004 Royalty income 563 470 Income from out-licensing agreements 127 96 Gains on disposal of products 11 215 Other 9 9 Total royalties and other operating income 710 790 Royalty income Royalty income for the Pharmaceuticals Division was 408 million Swiss francs (2004: 310 million Swiss francs), and for the Diagnostics Division was 155 million Swiss francs (2004: 160 million Swiss francs). 40 Half-Year Report 2005


  • Page 43

    Notes to the Roche Group Interim Consolidated Financial Statements Income from out-licensing agreements Certain Group companies, notably Genentech, receive from third parties up-front, milestone and other similar non-refundable payments relating to the sale or licensing of products or technology. Revenue associated with performance milestones is recognised based on achievement of the milestones, as defined in the respective agreements. Revenue from non-refundable up-front payments and licence fees is initially reported as deferred income and is recognised in income as earned over the period of the development collaboration or the manufacturing obligation. Gains on disposal of products As part of the continuous realignment of its product portfolio, the Group periodically disposes of product lines that are no longer considered as core products or priorities within the product development portfolio. The proceeds are reinvested in the Group’s in-licensing arrangements and other research and development alliances and collaborations. On 9 February 2004 the Group announced the sale of the exclusive US rights to Soriatane to Connetics Corporation. The cash received was 155 million Swiss francs. As the products concerned had no book value the gain on disposal was the same as the cash proceeds and is reported within the operating profit of the ‘Roche Pharmaceuticals’ segment. 9. Financial income and financing costs Financial income in millions of CHF Six months ended 30 June 2005 2004 Gains on sale of equity securities 135 107 (Losses) on sale of equity securities (25) (7) Dividend income 4 21 Gains (losses) on equity derivatives, net 18 – Write-downs and impairments of equity securities (10) (15) Net income from equity securities 122 106 Interest income 175 87 Gains on sale of debt securities 41 62 (Losses) on sale of debt securities (44) (67) Write-downs and impairments of long-term loans – – Net interest income and income from debt securities 172 82 Foreign exchange gains (losses), net 34 (85) Gains (losses) on foreign currency derivatives, net (99) 94 Net foreign exchange gains (losses) (65) 9 Net other financial income (expense) 12 16 Total financial income 241 213 Financing costs in millions of CHF Six months ended 30 June 2005 2004 Interest expense (108) (257) Amortisation of discount on debt instruments (38) (105) Gains (losses) on interest rate derivatives, net (3) 12 Time cost of provisions (38) (33) Total financing costs (187) (383) Half-Year Report 2005 41


  • Page 44

    Notes to the Roche Group Interim Consolidated Financial Statements Exceptional income from bond conversion and redemption in millions of CHF Six months ended 30 June 2004 ‘LYONs IV’ US dollar exchangeable notes 1,136 ‘LYONs III’ US dollar exchangeable notes (97) ‘Chameleon’ US dollar bonds (74) Total 965 During the interim period of 2004 the Group converted or redeemed certain of its debt instruments. This net gain is disclosed separately in the income statement due to the materiality of the gain and in order to fairly present the Group’s results. The redemption of the ‘Sumo’ bonds in 2005 had no impact on net income. Further details are given in Note 12. 10. Income taxes Reconciliation of the Group’s effective tax rate in millions of CHF Six months ended 30 June 2005 Six months ended 30 June 2004 Profit Profit before Income Tax before Income Tax tax taxes rate tax taxes rate Effective tax rate before exceptional items 4,427 (1,095) 24.7 3,410 (806) 23.6 Amortisation of goodwill – – (282) – Major legal cases7 (146) 55 – – Changes in Group organisation2 – – – – Exceptional income from conversion and redemption of bonds9 – – 965 (278) Group’s effective tax rate 4,281 (1,040) 24.3 4,093 (1,084) 26.5 The Group’s effective tax rate decreased to 24.3% from 26.5%. The major reason for the decrease comes from the ending of amortisation of goodwill, which reduces the effective tax rate by approximately 2%. The underlying tax rate showed an increase compared to 2004, which mainly arises from the increasing relative contribution of Genentech and Chugai to the Group’s net income. 11. Provisions and contingent liabilities Provisions in millions of CHF 30 June 31 December 2005 2004 Environmental and legal provisions 1,442 1,198 Restructuring provisions 303 348 Other provisions 491 360 Total provisions 2,236 1,906 of which – Current portion of provisions 666 1,223 – Non-current portions of provisions 1,570 683 Total provisions 2,236 1,906 Following the decision of the California Supreme Court to review the litigation between Genentech and the City of Hope, the provisions recorded by Genentech in 2002 for this litigation have been reclassified from current to non-current during the interim period. See also Note 7. Tamiflu Development and License Agreement On 23 June 2005 Gilead Sciences, Inc. (hereafter ‘Gilead’) delivered to the Group a notice of termination of the 1996 Development and License Agreement for Tamiflu for alleged material breach of the agreement. Through this action Gilead is seeking to terminate the 1996 Agreement, which would result in the rights to Tamiflu held by the Group reverting to Gilead. Sales of Tamiflu in the interim period were 580 million Swiss francs. 42 Half-Year Report 2005


  • Page 45

    Notes to the Roche Group Interim Consolidated Financial Statements The 1996 Agreement specifies a 30/90 day cure period for the breaches alleged by Gilead, and the Group is currently in discussions with Gilead to resolve the dispute. If there is no resolution of the dispute, an Alternative Dispute Resolution process can be initiated. No significant changes in the Group’s contingent liabilities have occurred since the Annual Financial Statements, other than those described above and in Notes 6 and 7. 12. Debt Redemption of ‘Sumo’ Japanese yen exchangeable notes: On the due date of 25 March 2005 the Group redeemed these bonds at the original issue amount plus accrued original issue discount (OID). The cash outflow was 1,178 million Swiss francs. There was no gain or loss recorded for the redemption of these bonds. Conversion and redemption of ‘LYONs IV’ US dollar exchangeable notes: On 3 March 2004 the Group exercised its option to call these notes for redemption on 5 April 2004 at the original issue amount plus accrued original issue discount (OID). The effective interest rate of these notes was 4.26%. In the period to 5 April 2004 notes with a principal amount of 1,506 million US dollars were called for conversion by the holders and the remaining notes were redeemed for cash on 5 April 2004. A total of 12,999,662 Genentech shares were used to meet these obligations. As a result the Group’s ownership of Genentech decreased by 2.45% and the Group realised a pre-tax gain of 1,136 million Swiss francs on the part disposal of its interest in Genentech and redemption of the remaining notes. Redemption of ‘LYONs III’ US dollar exchangeable notes: On 5 April 2004 the Group exercised its option to call these notes for redemption on 6 May 2004 at the original issue amount plus accrued original issue discount (OID). The effective interest rate of these notes was 6.91%. Notes with a principal amount of 3 billion US dollars were redeemed for cash. The Group realised a pre-tax loss of 97 million Swiss francs on the early redemption of the notes. Partial redemption of ‘Chameleon’ US dollar bonds: On 3 June 2004 the Group announced a tender offer for the redemption of the ‘Chameleon’ bond. The effective interest rate of these bonds was 6.77%. The tender offer expired on 23 June 2004 and pricing was on 24 June 2004, at which point bonds with a principal amount of 513 million US dollars, representing approximately 51.25% of the outstanding bonds, had been tendered for redemption. Settlement was made on 29 June 2004. The Group realised a pre-tax loss of 74 million Swiss francs on the partial early redemption of these bonds. Cash outflows from repayments and redemptions of debt instruments in millions of CHF Six months ended 30 June 2005 2004 ‘Sumo’ Japanese yen exchangeable bonds (1,178) – ‘LYONs IV’ US dollar exchangeable notes – (5) ‘LYONs III’ US dollar exchangeable notes – (2,316) ‘Chameleon’ US dollar bonds – (715) Total cash outflows from repayments and redemptions during the year (1,178) (3,036) Half-Year Report 2005 43


  • Page 46

    Notes to the Roche Group Interim Consolidated Financial Statements 13. Equity Share capital and non-voting equity securities (Genussscheine) The authorised and called-up share capital of the Group and the number of issued non-voting equity securities have not changed during the interim period. The weighted average number of shares and non-voting equity securities in issue during the interim period was 843 million (2004: 840 million). Dividends On 28 February 2005 the shareholders approved the distribution of a dividend of CHF 2.00 per share and non- voting equity securities (2004: CHF 1.65) in respect of the 2004 business year. The distribution to holders of outstanding shares and non-voting equity securities totalled 1,721 million Swiss francs (2004: 1,414 million Swiss francs) and has been recorded against retained earnings in 2005. Own equity instruments The net inflow during the interim period from transactions in own equity instruments was 531 million Swiss francs (2004: net inflow of 187 million Swiss francs). Own equity instruments in equivalent number of non-voting equity securities 30 June 2005 31 December 2004 Non-voting equity securities 177,747 87,386 Low Exercise Price Options 15,940,981 21,080,081 Forward purchases and derivative instruments 7,901,605 4,723,565 Total non-voting equity instruments 24,020,333 25,891,032 44 Half-Year Report 2005


  • Page 47

    Review Report of the Group Auditors To the Board of Directors of Roche Holding Ltd, Basel We have been engaged to review the Interim Consolidated Financial Statements (income statement, balance sheet, condensed statement of changes in equity, cash flow statement and selected explanatory notes on pages 26 to 44) of Roche Holding Ltd for the six-month period ended 30 June 2005. These Interim Consolidated Financial Statements are the responsibility of the Board of Directors. Our responsibility is to issue a report on these Interim Consolidated Financial Statements based on our review. We conducted our review in accordance with the Swiss Auditing Standard 910 and with the International Standard on Review Engagements 2400. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the Interim Consolidated Financial Statements do not give a true and fair view of the financial position as of 30 June 2005, and the results of operations and cash flows for the six-month period then ended in accordance with International Accounting Standard 34 'Interim Financial Reporting'. KPMG Klynveld Peat Marwick Goerdeler SA John A. Morris Erik F. J. Willems Basel, 19 July 2005 Half-Year Report 2005 45


  • Page 48

    Supplementary Net Income and EPS Information Profit from continuing businesses before exceptional items and core net income in millions of CHF Six months ended 30 June 2005 2004 Profit from continuing businesses 3,241 3,009 Goodwill amortisation – 282 Major legal cases 146 – – income taxes (55) – 91 – Changes in Group organisation – – – income taxes – – – – Exceptional financial income – (965) - income taxes – 278 – (687) Profit from continuing businesses before exceptional items 3,332 2,604 Minority interests – Profit from continuing businesses (444) (204) – Goodwill amortisation – (58) (444) (262) Net income attributable to Roche shareholders (continuing businesses before exceptional items) 2,888 2,342 Amortisation of intangible assets 498 504 – income taxes (179) (181) – minority interests (37) (41) 282 282 Core net income 3,170 2,624 EPS (continuing businesses before exceptional items) and Core EPS EPS (continuing businesses before exceptional items) Core EPS Six months ended 30 June 2005 2004 2005 2004 Net income (millions of CHF) 2,888 2,342 3,170 2,624 Elimination of interest expense, net of tax, of convertible debt instruments, where dilutive 23 25 23 25 Increase in minority share of net income, net of tax, assuming all outstanding Genentech and Chugai stock options exercised (27) (18) (30) (21) Net income used to calculate diluted earnings per share 2,884 2,349 3,163 2,628 Per share information (millions of shares and non-voting equity securities) Weighted average number of shares and non-voting equity securities in issue 843 840 843 840 Adjustment for assumed conversion of convertible debt instruments, where dilutive 14 19 14 19 Adjustment for equity compensation plans, where dilutive 1 – 1 – Weighted average number of shares and non-voting equity securities in issue used to calculate diluted earnings per share 858 859 858 859 Earnings per share (diluted) (CHF) 3.36 2.73 3.69 3.06 46 Half-Year Report 2005


  • Page 49

    Roche Securities Number of shares and non-voting equity securities 30 June 30 June 2005 2004 Number of shares 160,000,000 160,000,000 Number of non-voting equity securities 702,562,700 702,562,700 Total 862,562,700 862,562,700 Data per share and non-voting equity security in CHF Six months ended 30 June 2005 2004 Diluted earnings per share and non-voting equity security 3.26 3.40 Stock price of share High 184.90 193.00 Low 139.00 163.75 Period end 182.50 164.75 Stock price of non-voting equity security High 162.20 140.25 Low 120.60 118.75 Period end 162.20 124.00 Market capitalisation in millions of CHF 30 June 30 June 2005 2004 140,541 110,782 All prices shown are daily closing prices. Half-Year Report 2005 47


  • Page 50

    Published by Cautionary statement regarding forward- F. Hoffmann-La Roche Ltd looking statements 4070 Basel, Switzerland Tel. +41 (0)61 688 11 11 This Half-Year Report contains certain forward- Fax +41 (0)61 691 93 91 looking statements. These forward-looking state- ments may be identified by words such as ‘believes’, Media Office ‘expects’, ‘anticipates’, ‘projects’, ‘intends’, ‘should’, Corporate Communications ‘seeks’, ‘estimates’, ‘future’ or similar expressions 4070 Basel, Switzerland or by discussion of, among other things, strat- Tel. +41 (0)61 688 88 88 egy, goals, plans or intentions. Various factors may Fax +41 (0)61 688 27 75 cause actual results to differ materially in the future from those reflected in forward-looking statements Investor Relations contained in this Half-Year Report, among others: 4070 Basel, Switzerland (1) pricing and product initiatives of competi- Tel. +41 (0)61 688 88 80 tors; (2) legislative and regulatory developments Fax +41 (0)61 691 00 14 and economic conditions; (3) delay or inability in obtaining regulatory approvals or bringing World Wide Web products to market; (4) fluctuations in cur- http://www.roche.com rency exchange rates and general financial market conditions; (5) uncertainties in the discovery, To order publications development or marketing of new products or new Tel. +41 (0)61 688 83 39 uses of existing products; (6) increased government Fax +41 (0)61 688 43 43 pricing pressures; (7) interruptions in production; E-mail: basel.webmaster@roche.com (8) loss of or inability to obtain adequate protec- tion for intellectual property rights; (9) litigation; (10) loss of key executives or other employees; and (11) adverse publicity and news coverage. All trademarks mentioned enjoy legal protection. The Roche Half-Year Report is published in German (original language) and English. The Roche Half-Year Report is issued by F. Hoffmann-La Roche Ltd, Basel, Corporate Communications. Design: Wirz Corporate AG, Zurich Source Associates AG, Zurich Photos: Roland Tännler, Zurich Typesetting: Stauffer-Febel AG, Basel Lithos: Lithoteam AG, Allschwil-Basel Printers: Kreis Druck AG, Basel Binding: Buchbinderei Grollimund AG, Reinach-Basel 48 Half-Year Report 2005

  • View More

Get the full picture and Receive alerts on lawsuits, news articles, publications and more!