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    Half-Year Report 2012


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    Finance in brief Key interim results Sales Core operating profit margin, CER growth % % of sales Pharmaceuticals 2012 +3.8 45.3 2011 –1.3 43.9 Diagnostics 2012 +5.1 19.9 2011 +5.2 21.9 Group 2012 +4.1 38.5 2011 +0.1 38.1 Six months ended 30 June 2012 2011 % change % of sales (mCHF) (mCHF) (CHF) (CER) 2012 2011 IFRS results Sales 22,423 21,671 +3 +4 Operating profit 6,332 7,460 –15 –13 28.2 34.4 Net income 4,368 5,259 –17 –14 19.5 24.3 Net income attributable to Roche shareholders 4,255 5,151 –17 –14 Diluted EPS (CHF) 4.99 6.04 –17 –13 Core results Research and development 4,043 3,873 +4 +3 18.0 17.9 Core operating profit 8,641 8,251 +5 +7 38.5 38.1 Core EPS (CHF) 6.94 6.68 +4 +8 Free cash flow Operating free cash flow 7,170 6,856 +5 +7 32.0 31.6 Free cash flow (1,309) (967) +35 +14 30 June 2012 31 December 2011 % change (mCHF) (mCHF) (CHF) Net debt (17,333) (15,566) +11 Capitalisation 38,629 41,335 –7 – Debt 26,553 26,853 –1 – Equity 12,076 14,482 –17 CER (Constant Exchange Rates): The percentage changes at Constant Exchange Rates are calculated using simulations by reconsolidating both the 2012 and 2011 results at constant exchange rates (the average rates for the year ended 31 December 2011). This is the same concept that was previously labelled as ‘Local currencies’ by the Group. Core results and Core EPS (Earnings Per Share): These exclude non-core items such as global restructuring plans and amortisation and impairment of goodwill and intangible assets. This allows a transparent assessment of both the actual results and the underlying performance of the business. A full income statement for the Group and the operating results of the divisions are shown on both an IFRS and core basis. The core concept is fully described on pages 72–75 and reconciliations between the IFRS and Core results are given there. 1 Roche Half-Year Report 2012 | Finance in brief


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    2012 HIGHLIGHTS FIRST HALF Group sales 22.4 billion Swiss francs: +4% at constant exchange rates (+3% in Swiss francs). Core operating profit up 7% at 8.6 billion Swiss francs. Core operating profit margin rises 1.0 percentage point (+0.4 percentage points in Swiss francs) to 38.5% due to underlying business performance and productivity measures. Core Earnings per Share up 8% at 6.94 Swiss francs. Net income down 14% mainly due to one-off costs related to closure of Nutley and productivity measures in Applied Science and Diabetes Care. Successfully launched breast cancer medicine Perjeta as well as skin cancer drugs Zelboraf and Erivedge; full product pipeline with 72 new molecular entities in clinical development. On track to file for EU, US approval of T–DM1 (trastuzumab emtansine) in aggressive form of breast cancer during the second half of this year. Nutley site closure and streamlining of related R & D activities to result in annual savings of 370 million Swiss francs to be largely allocated for the development of Roche’s growing late-stage pipeline; related one-off closure costs 858 million Swiss francs of which 446 million are cash relevant. Roche confirms full-year outlook. Group and Pharmaceuticals sales expected to grow at low to mid-single-digit rates; Diagnostics to grow above the market; target of high single-digit Core Earnings per Share growth. 2 Roche Half-Year Report 2012 | Highlights


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    Contents Finance in brief 1 Highlights first half 2 Business Review 4 5 Sales 7 Product and pipeline update 6 Profitability and cash flow 7 Pharmaceuticals 6 Outlook 10 Diagnostics Finance 12 13 Financial Review 59 7. Global restructuring plans 46 Roche Group Interim Consolidated 62 8. Goodwill Financial Statements 63 9. Intangible assets 52 Notes to the Roche Group Interim 65 10. Provisions and contingent liabilities Consolidated Financial Statements 66 11. Debt 52 1. Accounting policies 69 12. Equity 54 2. Operating segment information 70 13. Statement of cash flows 56 3. Chugai 70 14. Subsidiaries and associates 57 4. Financial income and financing costs 71 Review Report of the Statutory Auditor 58 5. Income taxes 72 Supplementary Information 58 6. Business combinations 78 Roche Securities 3 Roche Half-Year Report 2012 | Contents


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    BUSINESS REVIEW 4 Roche Half-Year Report 2012 | Business Review


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    Business Review Sales Diagnostics — Roche expands market leadership First-half sales at the Diagnostics Division rose 5% to 5.0 billion In the first half of 2012 Group sales rose 4% 1 to 22.4 billion Swiss francs, outpacing the global in vitro diagnostics market. Swiss francs despite continued pricing pressures, in particular This increase was driven by Professional Diagnostics (+9%), in Europe. The main growth drivers were Roche’s cancer medi- Tissue Diagnostics (+17%) and Molecular Diagnostics (+6%), cines, hepatitis drug Pegasys, rheumatoid arthritis treatment and highlights the demand from clinical laboratories for Actemra/RoActemra and the clinical laboratory business. Roche’s broad product offering. A key growth contributor was the immunoassay business, which helps diagnose diseases Pharmaceuticals — strong growth in US and ranging from viral infections to cancers through highly auto- emerging markets mated immunochemical blood testing. The immunoassay busi- Pharmaceuticals sales rose 4% in the first half, mainly due ness is on track to deliver its 15th consecutive year of double- to Roche’s oncology portfolio, which grew 8%. Pegasys and digit sales growth and now accounts for 22% of divisional Actemra/RoActemra also lifted the division’s performance. sales. Sales in the US, the division’s largest market, grew 6% on the Sales at Diabetes Care fell 2% due to reimbursement changes back of demand for oncology treatments MabThera/Rituxan, in major European markets. Applied Science sales were 3% Herceptin and Xeloda as well as Pegasys. Sales in Roche’s key lower, largely due to competition in gene sequencing and a seven emerging markets 2 grew 13%, due to increased spend- slowdown in public research funding. The unit is now consoli- ing on healthcare and higher use of Roche’s cancer therapies. dating business segments whilst continuing to invest in new In Brazil and China, two of Roche’s fastest-growing markets, technologies, particularly sequencing. Pharmaceuticals sales rose 22% and 24% respectively. Divisional sales grew in all regions. The main growth driver was Sales in Japan remained stable in the first six months as a 12% Asia—Pacific (+17%) as increasing demand for Roche’s lab rise in Avastin sales and the Mircera launch offset a 53% drop solutions boosted sales in China (+32%) and other countries. in Epogin sales. Roche Diagnostics plans to invest over 300 million US dollars over the next five years in China to make lab automation and Sales in Western Europe fell 3%, negatively impacted by gener- diagnostic testing possible in additional cities and hospitals. ics and government austerity measures. In the first six months See Sales by business area and by region on pages 30–31 for of 2012 price pressure had a negative sales growth impact of more details. about 2 percentage points on Pharmaceuticals sales in West- ern Europe and about 1 percentage point on a global level. See Good progress with trade receivables Sales by product and by region on pages 21–24 for more details. The Group made very good progress collecting the money it is owed in Southern Europe. Trade receivables with public cus- tomers fell to 1.5 billion Swiss francs at the end of June 2012 from 2.1 billion at the end of 2011. The new Spanish Govern- ment established a plan, known as the ‘Montoro’ plan, in March 2012 to settle debts from municipalities and regional institutions with suppliers. Roche collected the full amount for which it applied by the end of June. 1 Unless otherwise stated all growth rates are calculated using constant exchange rates. 2 Roche’s key emerging markets, also referred to as the E7 key emerging markets, are Brazil, China, India, Mexico, Russia, South Korea and Turkey. 5 Roche Half-Year Report 2012 | Business Review


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    Profitability and cash flow Outlook Strong core operating results Full-year targets confirmed Group core operating profit increased 7% due to the strong Roche confirms its full-year outlook for 2012. Barring unfore- sales performance and productivity measures. The Pharma- seen events, Roche expects low to mid-single-digit sales ceuticals Division’s core operating profit increased 9%. Diag- growth at constant exchange rates for the Group and the nostics core operating profit fell by 5%. This was mainly Pharmaceuticals Division in 2012. Sales by the Diagnostics because of bad debt write-offs in Turkey and Brazil as well Division are expected to again outpace the market. Despite a as factoring costs related to successful collection of outstand- challenging market environment, based on the expected sales ing trade receivables in Southern Europe. The division also growth and continued efficiency improvements, Roche is aim- recorded higher cost of sales due to substantially more instru- ing for a high single-digit increase in Core Earnings per Share ment placements. at constant exchange rates. Roche will continue its attractive dividend policy. The Group’s core net income rose 6% to 6.0 billion Swiss francs, also reflecting lower financing costs. Group Core Earnings per Share rose by 8% to 6.94 Swiss francs. The operating free cash flow increased 7% to 7.2 billion Swiss francs, reflecting the continued strong underlying cash generation of the Group. Restructuring and other non-core items As announced at the end of June, Roche is restructuring the Pharma Research and Early Development organisation and closing the site in Nutley, New Jersey. The resulting annual savings of 370 million Swiss francs will be largely reinvested in the expanding clinical product pipeline. Associated site clo- sure costs amounted to 858 million Swiss francs in June, of which 446 million is cash relevant. Roche’s Applied Science and Diabetes Care businesses also initiated restructuring measures to sustain their long-term profitability. Roche incurred costs of 289 million Swiss francs for these initiatives. Further costs of 530 million Swiss francs are a result of other global restructuring plans, including costs related to the termi- nation of the dalcetrapib clinical programme. Due to these one-time costs, net income decreased by 14% on an IFRS basis. See Global restructuring plans on pages 16–17 for more details. 6 Roche Half-Year Report 2012 | Business Review


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    Product and pipeline update phase Ib SparkThera (BP22333) study have both shown non-inferior MabThera/Rituxan serum concentration after The Group strengthened its leading position in the global SC injection compared with MabThera/Rituxan intravenous oncology market by successfully launching breast cancer infusion in follicular lymphoma patients. No new medically treatment Perjeta and skin cancer medicine Erivedge in the US relevant safety signals were observed in either trial. Roche as well as melanoma therapy Zelboraf in Europe, Australia, will use the data from SABRINA and SparkThera to support Canada and other countries this year. discussions with regulatory authorities. • BEATRICE, a phase III trial of Avastin combined with che- Roche continued to make excellent progress in the develop- motherapy as adjuvant treatment (following surgery) for ment of the product pipeline, with positive results in seven out patients with triple-negative (HER2-negative, estrogen and of nine late-stage trials. Despite the recent decision to stop the progesterone receptor-negative) breast cancer did not meet development of dalcetrapib, the Group remains committed to its primary endpoint of demonstrating a significant improve- developing medicines for patients with cardiovascular disease ment in invasive disease-free survival versus adjuvant chemo- and diabetes due to the high medical need. therapy alone. These data do not impact the approved use of Avastin in metastatic (advanced) HER2-negative breast can- Roche’s Diagnostics Division expanded its position as market cer or its other approved indications. leader and strengthened its portfolio by launching 25 major • The restructuring of Pharma Research and Early Develop- products in key markets. ment has led to several portfolio decisions, in particular in the areas of inflammation, virology and metabolism. Roche is on track to file trastuzumab emtansine (T–DM1), another innovative treatment for HER2-positive metastatic Clinical trial highlights breast cancer, for approval in both the US and Europe in the Perjeta — HER2-positive metastatic breast cancer, second half of the year. Data showing encouraging efficacy, CLEOPATRA study safety and quality-of-life results for T–DM1 were presented at • Compound: Perjeta (pertuzumab) the American Society of Clinical Oncology annual conference • Disease: HER2-positive metastatic breast cancer in June. T–DM1 and recently launched Perjeta are expected to • Trial: CLEOPATRA, phase III further strengthen Roche’s HER2 franchise over the coming • Primary endpoint: Progression-free survival (PFS) years. • Secondary endpoints: Overall survival, PFS by investigator assessment, safety profile, overall response rate (ORR), Breast cancer is the most common cancer among women duration of response and time to symptom progression globally. Each year about 1.4 million new cases of breast can- cer are diagnosed worldwide, and over 450,000 women will The CLEOPATRA study showed in June that patients treated die of the disease annually. In HER2-positive breast cancer with Perjeta as well as Herceptin and docetaxel chemotherapy increased quantities of the human epidermal growth factor lived significantly longer than those who were treated with receptor 2 (HER2) are present on the surface of the tumour Herceptin and docetaxel chemotherapy only (overall survival). cells. This is known as ‘HER2 positivity’ and affects approxi- At the end of last year the CLEOPATRA study also showed that mately 15–20% of women with breast cancer. patients who were given this combination of therapies lived 6.1 months longer without their disease getting worse (PFS). This outcome was used as the basis for filing in the US, where Pharmaceuticals Perjeta is now being used to fight this particularly aggressive form of breast cancer after its launch in June. Clinical trial update • Two studies investigating the new subcutaneous (SC) for- mulation of MabThera/Rituxan met their primary endpoints: The pivotal phase III SABRINA (BO22334) study and the 7 Roche Half-Year Report 2012 | Business Review


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    T–DM1 — HER2-positive metastatic breast cancer, Solid pipeline EMILIA study As of 30 June 2012, the Pharmaceuticals Division’s clinical • Compound: T–DM1 (trastuzumab emtansine) development portfolio included 72 new molecular entities. Full • Disease: HER2-positive metastatic breast cancer details of Roche’s pipeline are available at www.roche.com. • Trial: EMILIA, phase III • Co-primary endpoints: Progression-free survival (PFS) and Recently launched products overall survival Zelboraf for BRAF V600 mutated metastatic melanoma Zelboraf was launched successfully in the US in August last The EMILIA trial, which was presented at ASCO in June, is the year and in Europe in February this year. In the US Zelboraf is first randomised phase III study of T–DM1. The study enrolled being used as a first-line therapy in approximately 85% of people with HER2-positive metastatic breast cancer (mBC) patients with metastatic melanoma who test positive for the who had previously received treatment with Herceptin and a BRAF V600E mutation. Early indications suggest uptake in the taxane (chemotherapy). The trial showed people who received EU will be similarly strong. Roche has also secured approval in T–DM1 were 35% less likely to experience a worsening of their Canada, Australia, New Zealand, Mexico and several other disease (PFS) compared to those who received lapatinib plus countries. Discussions with regulatory and reimbursement Xeloda (capecitabine). There was also a trend for patients who authorities are ongoing. received T–DM1 to live longer (overall survival) than those who received lapatinib plus Xeloda, but these data are currently not Erivedge for advanced basal cell carcinoma mature. Erivedge became the first and only FDA-approved treatment for advanced forms of basal cell carcinoma in February this Actemra/RoActemra — rheumatoid arthritis, year. It is also the first in a new class of anti-cancer treatments ADACTA study called hedgehog pathway inhibitors. Early market response is • Compound: RoActemra (tocilizumab) encouraging. Roche has submitted Erivedge for marketing • Disease: Rheumatoid arthritis (RA) approval in the EU, Australia, Mexico, Israel and Canada. • Trial: ADACTA, phase IV • Primary endpoint: Significantly greater reduction in disease Perjeta for first-line HER2-positive metastatic activity score (DAS28) at 24 weeks from baseline in patients breast cancer receiving RoActemra monotherapy compared to those re- Perjeta was approved in the US in June 2012 after FDA-priority ceiving adalimumab monotherapy. review. Upon approval Roche made the product immediately available to patients. Roche and Chugai have also filed for ADACTA met the primary endpoint. Study results published in approval in the EU and Japan. Perjeta in combination with Her- June showed that patients who received RoActemra (known ceptin is likely to shift the standard of care for HER2-positive as Actemra outside Europe) as monotherapy experienced a breast cancer patients. significantly greater improvement in disease activity compared to adalimumab — a commonly used anti-TNF therapy — as monotherapy. Patients with RA are often treated with a number of medicines, combining protein-based biologic therapies with methotrexate (MTX). However, about one-third of patients on a biologic treatment like RoActemra receive it as monotherapy, largely due to intolerance to MTX. RA is an autoimmune dis- ease that is estimated to affect up to 70 million people globally, including children. Joints become chronically inflamed, painful and swollen and patients can become increasingly disabled. 8 Roche Half-Year Report 2012 | Business Review


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    Pharmaceuticals Division — major clinical and regulatory news flow up to mid-July 2012 Compound Indication Milestone Actemra Rheumatoid arthritis DMARD inadequate Phase III ADACTA H2H vs. adalimumab Q1  responders (monotherapy) Actemra Polyarticular juvenile idiopathic arthritis Phase III CHERISH Q1  Avastin Metastatic colorectal cancer Phase III TML Q1  (treatment across multiple lines) Erivedge Advanced basal cell carcinoma US approval Q1  T–DM1 2nd -line HER2+ metastatic breast cancer Phase III EMILIA Q1  Zelboraf Metastatic melanoma EU approval Q1  Actemra Rheumatoid arthritis Phase III SUMMACTA Q2  subcutaneous Avastin Platinum-resistant recurrent ovarian cancer Phase III AURELIA Q2  Dalcetrapib Atherosclerosis cardiovascular risk red. Phase III dal-OUTCOMES (2nd interim analysis) Q2  MabThera Non-Hodgkin’s lymphoma Phase III SABRINA Q2  subcutaneous Perjeta 1st -line HER2+ metastatic breast cancer US approval Q2  Avastin Triple-negative adjuvant breast cancer Phase III BEATRICE Q3  Pharmaceuticals Division — upcoming clinical and regulatory news flow in 2012 Compound Indication Milestone Actemra Rheumatoid arthritis DMARD inadequate US approval H2 responders (1L) Actemra Rheumatoid arthritis Phase III BREVACTA H2 subcutaneous Avastin Newly diagnosed glioblastoma Phase III AVAglio H2 Avastin Platinum-sensitive recurrent ovarian cancer EU approval H2 Erivedge Advanced basal cell carcinoma EU approval H2 2012/2013 Herceptin Adjuvant HER2+ breast cancer Phase III HERA 2 years vs. 1 year H2 Lucentis Diabetic macular edema US approval H2 Perjeta 1st -line HER2+ metastatic breast cancer EU approval H2 2012 9 Roche Half-Year Report 2012 | Business Review


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    Diagnostics Clinical trials Roche continues investing in and collaborating on studies to New products explore and prove the medical benefit of its diagnostics prod- In the first half of 2012 Roche Diagnostics launched 25 major ucts. products in key markets (see table on page 11). These allow the early detection, diagnosis and monitoring of a broad range VISION study 3 — Troponin T test identifies mortality risk of conditions, helping medical professionals and patients to after surgery optimise treatment choices, disease management and costs. A study published in JAMA 4 showed that monitoring post- Highlights include: operative troponin T levels with Roche’s Elecsys Troponin T blood test, an established marker for myocardial infarctions, Blood gas analyser for critical care can help identify patients who are at higher risk for 30-day The FDA approved cobas b 123, a blood gas analyser for use mortality and therefore need extra observation and care after in emergency and intensive care units, operating rooms and non-cardiac surgery. Every year more than 200 million adults laboratories in May. From a drop of blood, the device delivers worldwide have major non-cardiac surgery, and over 1 million critical information in less than two minutes, including blood die within 30 days. The study results are expected to help phy- gas, electrolytes, glucose, lactate and bilirubin, that physicians sicians assess the risk to patients and tailor monitoring and need to be able to make life-saving decisions. It marks an therapy accordingly. important advance in blood gas testing, the biggest hospital point-of-care segment worth over 1.2 billion US dollars. Pathology lab automation Roche strengthened its leadership in pathology lab automa- tion with two new instruments. The BenchMark Special Stains platform enables staining of patient tissue with a variety of dyes to visualise structures and pathogens for the diagnosis of cancers and other diseases. Its complete workflow drives lab efficiency and minimises exposure to lab personnel. The VENTANA iScan HT slide scanner for digital pathology can scan up to 80 tissue slides per hour into high-resolution digital images (20× and 40× magnification). Launched in May and June, both systems contribute to increased lab efficiency, reduced possibility of human error and faster delivery of patient results. Cervical disease detection Roche launched the cervical cancer biomarker test p16 His- tology in May for worldwide use on its automated tissue diag- nostics systems. The test helps more accurately identify cervi- cal disease (dysplasia) and pre-cancer in biopsy samples by detecting overexpression of the protein p16INK4a . Roche now offers the broadest spectrum of products for cervical cancer prevention in industry — from gynecologist screening with the human papillomavirus (HPV) DNA test through histopa- 3 VISION = Vascular events In noncardiac Surgery patIents cOhort thological diagnosis. Worldwide it is estimated that 450,000 evaluatioN, ongoing global study with over 40,000 patients. women per year are diagnosed with cervical cancer. 4 Journal of the American Medical Association, June 2012. 10 Roche Half-Year Report 2012 | Business Review


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    Diagnostics Division — major product launches in the first half of 2012 Area Product name Description Market Quarter Instruments/devices Laboratories BenchMark Special Stains Fully automated tissue stainer WW Q2 VENTANA iScan HT Scanner that enables digital viewing of tissue slides EU, US Q2 cobas p 312 Pre-analytical system (decapping, sorting and archiving) EU, US Q1–2 cobas p 630 Pre-analytical molecular testing system US Q1 cobas IT middleware solution Software to control the lab workflow until the test result EU Q1 1.00 Point of care cobas b 123 Blood gas analyser for critical care US Q2 Diabetes Care Accu-Chek Nano SmartView Small, no-code blood glucose meter US Q2 Accu-Chek Mobile Next-generation strip-free blood glucose meter EU Q2 Life sciences cOmplete ULTRA Protease inhibitor tablets for use in molecular biology WW Q1 MycoTOOL Real-time PCR analysis kit for detection of mycoplasma WW Q1 Tests/assays Oncology p16 Histology IHC tissue test for cervical disease early detection WW Q2 EGFR, MYC, FGFR1, ISH probes for the detection of genes in tissue samples WW Q1 Chromosome 7 and 8 Ki-67, PR and p53 Algorithms Image analysis applications for antigens Ki-67, US Q1–2 PR and p53, support breast cancer diagnosis GS GType TET2/CBL/KRAS Gene sequencing primer sets for leukemia research WW Q1 and RUNX1 Primer Sets Virology/ HCV II Immunoassay to detect hepatitis C infections EU Q1 infectiology HBc IgM Immunoassay to detect hepatitis B infections US Q1 CT/NG PCR test to detect chlamydia and gonorrhoea infections US Q1 HIV-1, v2.0 PCR dual-target test to measure HIV viral load US Q2 Metabolism Accu-Chek Aviva/Performa Require users to insert a code chip into their meter only WW Q2 universally coded test strips once, with ongoing calibration of subsequent test strips Diagnostics Division — key product launches planned for the second half of 2012 Area Product name Description Market Instruments/devices Laboratories cobas t 611 Coagulation analyser for mid- and high-throughput testing EU Point of care cobas b 101 Multi-blood lipid and glucose point-of-care analyser EU Diabetes Care Accu-Chek Combo Combined insulin pump and blood glucose meter US SOLO Micropump Insulin micropump with blood glucose meter EU Tests/assays Oncology HE4 Immunoassay for early ovarian cancer detection US ER IHC tissue test for diagnosis of breast cancer US Virology CMV PCR test to monitor cytomegalovirus infections US Metabolism Vitamin D Immunoassay, measures vitamins D2 and D3 US black type = new product/first market launch, grey type = new product/launch in additional markets. EU = European Union; US = United States; WW = worldwide. ER = estrogen receptor; GS = Genome Sequencer; HE4 = human epididymis secretory protein E4; HIV = human immunodeficiency virus; IHC = immunohistochemistry; ISH = in situ hybridisation; p16 = protein p16 INK4a; PCR = polymerase chain reaction. 11 Roche Half-Year Report 2012 | Business Review


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    FINANCE 12 Roche Half-Year Report 2012 | Finance


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    Financial Review Group results Sales in billions of CHF Core operating profit in billions of CHF % CER growth % of sales 0 5 10 15 20 25 0 3 6 9 2012 + 4.1 38.5 2011 +0.1 38.1 2010 +4.7 37.2 Net income attributable to Roche shareholders in billions of CHF Core EPS in CHF 0 2 4 6 0 2 4 6 2012 4.3 6.94 2011 5.2 6.68 2010 5.5 6.95 The Roche Group’s results for the first half of 2012 showed growth in its core operating activities, with sales up by 4% and core operating profit up by 7% at constant exchange rates. Sales volume increases more than offset pricing pressures in many markets, and costs were held at the necessary levels to support the future development of the business, notably for research and development which increased by 3%. This strong operating performance combined with lower financing costs, partially offset by a slightly higher tax rate, is responsible for an increase in Core EPS of 8% at constant exchange rates. Operating free cash flow grew at 7% to 7.2 billion Swiss francs or 32% of sales. During 2012 the Group has initiated a number of major restructuring initiatives to position the business for the future, notably in the Pharmaceuticals Division’s research and development organisation with the announcement of the closure of the Nutley site in the US. In Diagnostics, the division initiated global programmes in the Applied Science and Diabetes Care business areas to address long-term profitability by focussing on fewer businesses and products and by consolidating operations. The cost of these restructuring activities, together with a number of other one-time items, resulted in a decrease in net income on an IFRS basis of 14% at constant exchange rates. Sales in the Pharmaceuticals Division rose by 4%, led by 8% growth in the oncology portfolio with half-yearly sales of over 10 billion Swiss francs. The key growth drivers were Herceptin, MabThera/Rituxan and Pegasys, with Avastin returning to growth. Emerging markets showed growth of 13%, led by 24% sales growth in China. Diagnostics sales grew at 5%, consolidating the division’s leading market position. The major growth areas were Professional Diagnostics and Tissue Diagnostics, while sales in Diabetes Care and Applied Science both declined. Core operating profit increased by 7%, with the Pharmaceuticals Division growing at 9% while Diagnostics fell by 5%. Both divisions showed increases in marketing and distribution costs driven by investments in key markets, notably in the US and China. There were also increases in factoring costs for both divisions, which resulted in improved cash collections, especially in Southern Europe. The profitability in Pharmaceuticals benefited from a decrease in cost of sales from productivity improvements and strict prioritisation of research and development programmes. In Diagnostics profitability in the interim 2012 results was affected by bad debt write-offs and higher cost of sales from substantially higher instrument placements. Operating free cash flow was 7.2 billion Swiss francs, an increase of 7% compared to the first half of 2011. This reflects the continued strong underlying cash generation of the Group’s operations while it makes the necessary investments to develop the business. The increase in free cash outflow was primarily due to the increased annual dividend payments of 5.9 billion Swiss francs and higher tax payments more than offsetting the higher operating free cash flow. 13 Roche Half-Year Report 2012 | Financial Review


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    In the first half of 2012, the Swiss franc was stronger compared to the first half of 2011 for many currencies including the euro, but weakened against some others, notably the US dollar and Japanese yen. The overall impact is slightly negative on the results expressed in Swiss francs compared to constant exchange rates. Income statement Six months ended 30 June 2012 2011 % change % change (mCHF) (mCHF) (CHF) (CER) IFRS results Sales 22,423 21,671 +3 +4 Royalties and other operating income 880 796 +11 +8 Cost of sales (6,048) (6,098) –1 –1 Marketing and distribution (4,104) (3,858) +6 +7 Research and development (4,958) (3,985) +24 +23 General and administration (1,861) (1,066) +75 +72 Operating profit 6,332 7,460 –15 –13 Associates (2) – – – Financial income 239 373 –36 –36 Financing costs (1,058) (1,165) –9 –10 Profit before taxes 5,511 6,668 –17 –15 Income taxes (1,143) (1,409) –19 –18 Net income 4,368 5,259 –17 –14 Attributable to – Roche shareholders 4,255 5,151 –17 –14 – Non-controlling interests 113 108 +5 –1 Diluted EPS (CHF) 4.99 6.04 –17 –13 Core results Sales 22,423 21,671 +3 +4 Royalties and other operating income 880 796 +11 +8 Cost of sales (5,666) (5,659) 0 0 Marketing and distribution (4,005) (3,839) +4 +5 Research and development (4,043) (3,873) +4 +3 General and administration (948) (845) +12 +11 Operating profit 8,641 8,251 +5 +7 Associates (2) – – – Financial income 239 373 –36 –36 Financing costs (1,058) (1,165) –9 –10 Profit before taxes 7,820 7,459 +5 +7 Income taxes (1,785) (1,638) +9 +10 Net income 6,035 5,821 +4 +6 Attributable to – Roche shareholders 5,922 5,697 +4 +7 – Non-controlling interests 113 124 –9 –13 Core EPS (CHF) 6.94 6.68 +4 +8 14 Roche Half-Year Report 2012 | Financial Review


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    Sales In the first half of 2012 sales increased by 4% at constant exchange rates (+3% in Swiss francs; +1% in US dollars) to 22.4 billion Swiss francs. Sales in the Pharmaceuticals Division rose 4% with Herceptin, MabThera/Rituxan, Pegasys, Actemra/RoActemra, Xeloda and Zelboraf growing strongly. Avastin also returned to growth with a 3% increase in sales. These positive results were partially offset by the continued decline in Bonviva/Boniva and CellCept sales from generic erosion following patent expiry and NeoRecormon/Epogin due to competition from biosimilars. Emerging market sales in Pharmaceuticals grew by 13%, led by 24% in China, and now represent over 10% of the division’s sales. The Diagnostics Division recorded sales of 5.0 billion Swiss francs, an increase of 5% at constant exchange rates, consolidating its leading market position. The major growth area was Professional Diagnostics, which represents half of the division’s sales and grew by 9%. Tissue Diagnostics (+17%) also showed strong growth, while Diabetes Care sales decreased by 2% and Applied Science sales declined by 3%. Divisional operating results for the six months ended 30 June 2012 Pharmaceuticals Diagnostics Corporate Group (mCHF) (mCHF) (mCHF) (mCHF) Sales 17,409 5,014 – 22,423 Core operating profit 7,889 998 (246) 8,641 – margin, % of sales 45.3 19.9 – 38.5 Operating profit 6,438 464 (570) 6,332 – margin, % of sales 37.0 9.3 – 28.2 Operating free cash flow 6,639 793 (262) 7,170 – margin, % of sales 38.1 15.8 – 32.0 Divisional operating results – Development of results compared to the six months ended 30 June 2011 Pharmaceuticals Diagnostics Corporate Group Sales – % increase CER +4 +5 – +4 Core operating profit – % increase CER +9 –5 +24 +7 – margin: percentage point change +2.1 –2.0 – +1.0 Operating profit – % increase CER –3 –44 +178 –13 – margin: percentage point change –2.8 –8.0 – –5.6 Operating free cash flow – % increase CER +5 +30 +10 +7 – margin: percentage point change +0.4 +3.0 – +0.8 Core operating results On a core basis, the Group’s operating profit increased by 7% at constant exchange rates (5% in Swiss francs), while sales increased by 4% at CER (3% in Swiss francs). The Group’s core operating profit margin improved by 1.0 percentage points to 38.5% of sales, with the Pharmaceuticals Division increasing by 2.1 percentage points and Diagnostics Division decreasing by 2.0 percentage points. Currency translation did not have a strong impact on the operating results compared to prior periods, with a negative effect of 0.6 percentage points on Group core operating margin, 0.7 percentage points for the Pharmaceuticals Division and no impact for the Diagnostics Division. 15 Roche Half-Year Report 2012 | Financial Review


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    Pharmaceuticals Division. The division increased its core operating profit by 9% in constant currencies, driven by growth of the underlying business with a 4% increase in sales, an improved gross profit margin and cost savings. Core research and development costs were held at a 3% increase, while there was an increase of general and administration in part due to the relatively low spending at Chugai in the prior year following the East Japan Earthquake. Diagnostics Division. Core operating profit was down 5%, with the 5% sales increase more than offset by higher operating expenses, notably from write-offs of bad debts in Turkey and Brazil, factoring costs and higher cost of sales arising from increased instrument placements and related installation costs. General and administration costs increased due to informatics projects and the roll-out of Finance Shared Service Centres. As described below, the division has initiated global restructuring plans to address the long-term profitability of the Applied Science and Diabetes Care business areas. Global restructuring plans During the interim period of 2012 the Group initiated several major global restructuring plans, notably for the reorganisation of research and development in the Pharmaceuticals Division and to address long-term profitability in the Applied Science and Diabetes Care business areas in Diagnostics. Global restructuring plans: costs incurred in millions of CHF Pharma Pharma R &D 1) Diagnostics 2) Informatics Other plans 3) Total Six months ended 30 June 2012 Global restructuring costs – Employee-related costs 194 67 49 75 385 – Site closure costs 367 15 – 110 492 – Other reorganisation expenses 10 12 – 184 206 Total global restructuring costs 571 94 49 369 1,083 Additional costs – Impairment of goodwill – 185 – – 185 – Impairment of intangible assets 45 10 – 112 167 – Legal and environmental costs 242 – – – 242 Total costs 858 289 49 481 1,677 1) Includes closure of the Nutley site and associated infrastructure and environmental remediation costs. 2) Includes restructuring of the Applied Science and Diabetes Care business areas. 3) Includes Operational Excellence (Pharmaceuticals and Diagnostics) and dalcetrapib (Pharmaceuticals). Pharmaceuticals Division – Research and Development reorganisation. On 26 June 2012 the Group announced a streamlining of the research and development activities within the Pharmaceuticals Division. As part of this plan the US site in Nutley, New Jersey, will be closed by the end of 2013, with a reduction in the workforce of approximately 1,000 people. The research and development activities currently undertaken at Nutley will be consolidated at existing sites in Switzerland and Germany and at the planned Translational Clinical Research Center in the US. The resulting savings from the global site consolidation and related infrastructure costs, the bundling of support functions as well as shifts in the portfolio will allow the reallocation of resources to the growing number of clinical programmes. During the interim period costs of 571 million Swiss francs were incurred, based on initial estimates of the cost of the reorganisation. Of this amount, 194 million Swiss francs were provisions for severance payments and other employee-related costs, net of estimated pension curtailment gains. A charge of 367 million Swiss francs was recorded for impairments of property, plant and equipment at the Nutley site. In addition to these restructuring costs, environmental remediation costs of 242 million Swiss francs were recorded based on the initial estimates of the additional remediation activities that may be needed before the Nutley site can be sold. Impairment charges to intangible assets of 45 million Swiss francs were recorded as a result of portfolio prioritisation decisions linked to this reorganisation. 16 Roche Half-Year Report 2012 | Financial Review


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    Diagnostics Division – Applied Science and Diabetes Care restructuring. Initiatives were announced in 2012 for the Applied Science and Diabetes Care businesses, which include streamlining the product portfolio and increasing the efficiency of marketing and distribution operations and research and development activities. In total, costs of 94 million Swiss francs were incurred in the first half of 2012, which relate to employee termination and site closure costs. In addition, goodwill impairment charges of 185 million Swiss francs were incurred for the full write-off of the goodwill from the 2007 NimbleGen acquisition, resulting from the decision to exit the microarray business as part of the reorganisation of the Applied Science business area. Pharmaceuticals Division – Global informatics reorganisation. Costs of 49 million Swiss francs were incurred, which mainly consist of severance payments and other employee-related costs. Other global restructuring plans. During the interim period costs of 239 million Swiss francs were incurred for the previously announced Operational Excellence programme, mainly for employee-related costs for sales force restructuring initiatives in the Pharmaceutical Division and employee-related and site closure costs in the Diagnostics Division for the sites in Burgdorf, Switzerland and Graz, Austria. In the second quarter of 2012 the Pharmaceuticals Division initiated a detailed review following the announcement of the results of the second interim analysis of the dalcetrapib dal-OUTCOMES Phase III trial and the subsequent termination of the dal-OUTCOMES trial and all the studies in the dal-HEART programme. In the interim results restructuring costs of 130 million Swiss francs were incurred, which consist of provisions for remaining trial costs and write-offs of inventories and property, plant and equipment. Additionally 112 million Swiss francs were expensed for the write-off of previously acquired intangible assets. Impairment of goodwill and intangible assets In the interim period impairment charges for goodwill and intangible assets were 185 million Swiss francs and 477 million Swiss francs, respectively, the majority of which was incurred for the various global restructuring initiatives as described above. In addition, unrelated to global restructuring plans, further impairment charges of 310 million Swiss francs were recorded. The major elements of this amount are charges of 103 million Swiss francs following from a portfolio prioritisation decision by the Pharmaceuticals Division, which relates to a decision to return the global rights to the monoclonal antibody RG 7334 anti-PLGF MAb to the alliance partners, and charges of 160 million Swiss francs follow from the latest clinical data assessment of a project acquired as part of the Marcadia acquisition. Legal and environmental settlements In addition to the environmental remediation costs of 242 million Swiss francs for the Nutley site mentioned above, a further 95 million Swiss francs of legal and environmental costs were recorded, unrelated to global restructuring plans. These are mainly for the estimated additional remediation costs of a landfill site near Grenzach, Germany, that was previously used by manufacturing operations that were closed some years ago. Treasury and taxation Financial income was 0.2 billion Swiss francs, a decrease of 36% mainly due to a normalisation in the foreign currency result after the unusually high devaluation-related foreign exchange gains recorded in Venezuela in the first half of 2011. Financing costs were 1.1 billion Swiss francs, a decrease of 107 million Swiss francs, with interest costs being 10% lower at constant exchange rates as debt was repaid. Core tax expenses increased by 10% to 1.8 billion Swiss francs and the Group’s effective core tax rate increased to 22.8% compared to 22.0% in the first half of 2011 mainly as a consequence of the higher percentage of core profit contribution coming from the US, which has a relatively higher local tax rate than the average Group rate, and the non-renewal of the US research and development tax credit rules so far in 2012. Net income and Earnings per share Net income decreased by 14% and diluted EPS decreased by 13% at constant exchange rates with the strong core operating performance more than offset by costs of the various global restructuring plans. On a core basis, which excludes non-core items such as global restructuring costs and amortisation and impairment of goodwill and intangible assets, net income was 6% higher and Core EPS 8% higher, driven by a strong operating performance and lower financing costs. This was partially offset by a higher tax rate. Supplementary net income and EPS information is given on pages 72–75. This includes calculations of Core EPS and reconciles the Core results to the Group’s published IFRS results. 17 Roche Half-Year Report 2012 | Financial Review


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    Financial position 30 June 2012 31 December 2011 % change % change (mCHF) (mCHF) (CHF) (CER) Pharmaceuticals Net working capital 6,472 5,445 +19 +18 Long-term net operating assets 13,500 14,563 –7 –8 Diagnostics Net working capital 3,594 3,501 +3 +3 Long-term net operating assets 11,750 12,022 –2 –3 Corporate Net working capital 1 (42) – – Long-term net operating assets (330) 2 – – Net operating assets 34,987 35,491 –1 –2 Net debt (17,333) (15,566) +11 +10 Pensions (6,104) (4,952) +23 +24 Income taxes 912 174 +424 Over +500 Other non-operating assets, net (386) (665) –42 –43 Total net assets 12,076 14,482 –17 –16 During the first half of 2012 the Swiss franc slightly weakened against many currencies, most importantly against the US dollar. Following the intervention of the Swiss National Bank starting from the second half of 2011, the Swiss franc has been stable against the euro during 2012. In the Pharmaceuticals Division net working capital increased significantly by 18% at constant exchange rates. Inventories increased by 9% mainly due to inventory building to meet higher sales demand and in support of patient access programmes. Trade receivables declined slightly, with the impacts of continued sales growth being offset by the collection of outstanding receivables, notably in Southern Europe. Payables decreased as a result of the settlement of significant year-end accounts payable and accruals, including employee benefits and lower levels of accrued royalties. Long-term net operating assets decreased by 8% mainly due to the impact of global restructuring plans and lower intangible assets. In Diagnostics the increase in net working capital of 3% was driven by higher inventory levels due to product launches and decreases in payables due to the settlement of year-end accruals. The long-term net operating assets decreased by 3% as intangible assets decreased slightly and provisions for restructuring costs have been created. The increase in the net debt position was mainly due to the annual dividend payments of 5.9 billion Swiss francs and higher tax payments which more than offset the higher operating free cash flow. The net pension liabilities increased by 1.2 billion Swiss francs due to continuing low interest rates increasing the discounted defined benefit obligation. The net tax assets increased mainly due to the deferred tax effect of this increase in net pension liabilities. Other non-operating net assets increased by 0.3 billion Swiss francs due to a decrease in interest payables. Free cash flow Six months ended 30 June 2012 2011 % change % change (mCHF) (mCHF) (CHF) (CER) Pharmaceuticals 6,639 6,476 +3 +5 Diagnostics 793 617 +29 +30 Corporate (262) (237) +11 +10 Operating free cash flow 7,170 6,856 +5 +7 Treasury activities (1,147) (1,048) +9 +7 Taxes paid (1,481) (1,086) +36 +36 Dividends paid (5,851) (5,689) +3 +3 Free cash flow (1,309) (967) +35 +14 18 Roche Half-Year Report 2012 | Financial Review


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    The Group’s operating free cash flow for the first six months of 2012 was 7.2 billion Swiss francs, with the 7% increase in core operating profit feeding through to a 7% increase in operating free cash flow. Cash generation in the Pharmaceuticals Division increased by 5% to 6.6 billion Swiss francs as the strong operating results were partially offset by increases in net working capital from the inventory investments and settlement of year-end payables described above. Diagnostics operating free cash flow increased significantly due to improved collection of trade receivables and factoring initiatives in Southern European countries. The free cash flow in the first half of 2012 shows an increased cash outflow of 0.3 billion Swiss francs to a cash outflow of 1.3 billion Swiss francs. This was primarily due to higher annual dividend and tax payments more than offsetting the higher operating free cash flow. Pharmaceuticals operating results Pharmaceuticals Division interim operating results 2012 2011 % change % change (mCHF) (mCHF) (CHF) (CER) IFRS results Sales 17,409 16,815 +4 +4 Royalties and other operating income 802 746 +8 +5 Cost of sales (3,640) (3,846) –5 –7 Marketing and distribution (2,791) (2,681) +4 +4 Research and development (4,472) (3,543) +26 +25 General and administration (870) (671) +30 +28 Operating profit 6,438 6,820 –6 –3 – margin, % of sales 37.0 40.6 –3.6 –2.8 Core results 1) Sales 17,409 16,815 +4 +4 Royalties and other operating income 802 746 +8 +5 Cost of sales (3,486) (3,607) –3 –5 Marketing and distribution (2,751) (2,665) +3 +3 Research and development (3,587) (3,442) +4 +3 General and administration (498) (462) +8 +6 Core operating profit 7,889 7,385 +7 +9 – margin, % of sales 45.3 43.9 +1.4 +2.1 Financial position Net working capital 6,472 5,445 +19 +18 Long-term net operating assets 13,500 14,563 –7 –8 Net operating assets 19,972 20,008 0 –1 Free cash flow Operating free cash flow 6,639 6,476 +3 +5 – margin, % of sales 38.1 38.5 –0.4 +0.4 1) See pages 72–75 for definition of Core results and Core EPS. 19 Roche Half-Year Report 2012 | Financial Review


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    Sales overview Pharmaceuticals Division – Interim sales by therapeutic area 2012 2011 % change % of sales % of sales Therapeutic area (mCHF) (mCHF) (CER) (2012) (2011) Oncology 10,524 9,804 +8 60 58 Virology 1,572 1,402 +12 9 8 Inflammation/Autoimmune/Transplantation 1,476 1,421 +4 8 9 Metabolism/Bone 800 1,064 –26 5 6 Ophthalmology 745 769 –5 4 5 Respiratory diseases 602 547 +9 3 3 Cardiovascular diseases 483 470 +1 3 3 Central nervous system 443 446 +2 3 3 Renal anemia 433 513 –16 3 3 Infectious diseases 178 178 0 1 1 Other therapeutic areas 153 201 –23 1 1 Total sales 17,409 16,815 +4 100 100 Pharmaceuticals Division sales increased 4% at constant exchange rates, with growth in most key products offsetting negative impacts from pricing pressures as well as expected decreases in sales of certain major medicines. Sales growth was primarily driven by six products: Herceptin, MabThera/Rituxan, Pegasys, Actemra/RoActemra, Xeloda and Zelboraf. These products represent 48% of the portfolio (2011: 44%) and together generated 1 billion Swiss francs of additional sales in the first half of 2012. This growth was partly offset by lower sales of Bonviva/Boniva, NeoRecormon/Epogin, CellCept, Xenical and Tamiflu. Oncology continued to account for the majority of the division’s sales, with continued growth in Herceptin and MabThera/ Rituxan and a return to growth for Avastin. The recently launched Zelboraf was also a significant growth contributor. In virology, Pegasys continued the growth seen in the second half of 2011 while sales of Tamiflu continued to decline. Sales in inflammation/autoimmune/transplantation increased due to strong uptake of Actemra/RoActemra and growth of MabThera/ Rituxan in rheumatoid arthritis more than compensating for the negative impact of continued generic erosion of CellCept. 20 Roche Half-Year Report 2012 | Financial Review


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    Product sales Pharmaceuticals Division – Interim sales 2012 2011 % change % of sales % of sales (mCHF) (mCHF) (CER) (2012) (2011) Oncology Herceptin 2,951 2,716 +11 17 16 Avastin 2,805 2,726 +3 16 16 MabThera/Rituxan 1) 2,780 2,565 +9 16 15 Xeloda 763 668 +14 4 4 Tarceva 666 614 +8 4 4 Neutrogin 125 135 –12 1 1 NeoRecormon/Epogin 2) 95 118 –16 1 1 Zelboraf 92 – – 0 n/a Others 247 262 –26 1 1 Total Oncology 10,524 9,804 +8 60 58 Virology Pegasys 903 695 +31 5 4 Valcyte/Cymevene 307 282 +9 2 2 Tamiflu 221 262 –18 1 2 Copegus 75 96 –20 1 0 Others 66 67 +3 0 0 Total Virology 1,572 1,402 +12 9 8 Inflammation/Autoimmune/Transplantation MabThera/Rituxan 1) 535 491 +9 3 3 CellCept 454 538 –15 3 3 Actemra/RoActemra 385 277 +39 2 2 Others 102 115 –15 0 1 Total Inflammation/Autoimmune/ Transplantation 1,476 1,421 +4 8 9 Metabolism/Bone Bonviva/Boniva 207 394 –46 1 2 Nutropin 154 169 –11 1 1 Evista 89 93 –9 1 0 Xenical 62 131 –52 0 1 Others 288 277 0 2 2 Total Metabolism/Bone 800 1,064 –26 5 6 Ophthalmology Lucentis 745 769 –5 4 5 Total Ophthalmology 745 769 –5 4 5 Respiratory diseases Xolair 345 300 +12 2 2 Pulmozyme 257 247 +4 1 1 Total Respiratory diseases 602 547 +9 3 3 21 Roche Half-Year Report 2012 | Financial Review


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    Pharmaceuticals Division – Interim sales (continued) 2012 2011 % change % of sales % of sales (mCHF) (mCHF) (CER) (2012) (2011) Cardiovascular diseases Activase/TNKase 285 231 +21 2 1 Others 198 239 –18 1 2 Total Cardiovascular diseases 483 470 +1 3 3 Central nervous system Madopar 157 150 +8 1 1 Rivotril 101 100 +6 1 1 Others 185 196 –4 1 1 Total Central nervous system 443 446 +2 3 3 Renal anemia NeoRecormon/Epogin 2) 256 375 –32 2 2 Mircera 177 138 +30 1 1 Total Renal anemia 433 513 –16 3 3 Infectious diseases Rocephin 133 130 +2 1 1 Others 45 48 –3 0 0 Total Infectious diseases 178 178 0 1 1 Other therapeutic areas 153 201 –23 1 1 Total sales 17,409 16,815 +4 100 100 1) Total MabThera/Rituxan sales of 3,315 million Swiss francs (2011: 3,056 million Swiss francs) split between oncology and Inflammation/Autoimmune/ Transplantation franchises. 2) Total NeoRecormon/Epogin sales of 351 million Swiss francs (2011: 493 million Swiss francs) split between renal anemia and oncology franchises. MabThera/Rituxan. For non-Hodgkin’s lymphoma (NHL), chronic lymphocytic leukemia (CLL) and rheumatoid arthritis (RA). Sales growth in the oncology franchise of 9% was driven by the uptake of the new first-line maintenance indication in follicular lymphoma (a type of NHL) in the US and Europe. US sales were 1.6 billion Swiss francs, an increase of 8%, while sales in Western Europe were up by 6%. Sales grew by 13% in the International region, particularly in China and Brazil, due to growth in all NHL and CLL indications. Sales growth in the RA franchise was 9%, with continued positive impact from increased use in patients who have responded inadequately to treatment with tumour necrosis factor inhibitors. Herceptin. For HER2-positive breast cancer and HER2-positive metastatic (advanced) stomach cancer. Sales grew in all regions except Japan, and particularly in the International region, where sales grew by 22% to 985 million Swiss francs. US sales were 816 million Swiss francs, an increase of 10%. In Western Europe, Herceptin is the Group’s leading product with sales of 992 million Swiss francs, an increase of 3%. Global growth was mainly due to expanded access in developing countries, increased use in previously untreated breast cancer patients, uptake in the stomach cancer indication and improved HER2 testing. Avastin. For advanced colorectal, breast, lung and renal cancer, and for relapsed glioblastoma (a type of brain tumour). Global sales recovered from the decline in 2011 and increased by 3% compared to the first half of 2011. Sales in the United States were 1.2 billion Swiss francs, down by 2%, which was more than offset by growth in the International region (+15%), in Japan (+12%) and in Western Europe (+2%). Growth was driven mainly by increased use in lung and colorectal cancer as well as the recently approved use in ovarian cancer. In the US the slight decline reflected lower wholesaler inventories at the end of June 2012 and lower use in breast cancer compared to the first half of 2011. 22 Roche Half-Year Report 2012 | Financial Review


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    Lucentis. For wet age-related macular degeneration (AMD) and macular edema following retinal vein occlusion (RVO). US sales declined by 5% to 745 million Swiss francs. Share of sales for the RVO indication was stable, while the share of sales for AMD declined modestly due to the increasingly competitive environment. Pegasys. For hepatitis B and C. Sales increased by 31% to 903 million Swiss francs. This was mainly due to increasing demand in the US, where sales increased by 122%, for Pegasys in triple-combination therapy with new direct-acting hepatitis C antivirals and ribavirin. As the leading pegylated interferon, Pegasys has established itself as a key component of this new treatment regimen, further expanding its market share. Other products. Actemra/RoActemra sales increased by 39%, with growth in all regions driven by positive clinical results supporting the effectiveness in monotherapy treatment. The renal anemia medication Mircera grew by 30%, driven by strong demand in Japan following the launch in July 2011. There were lower sales of the more established anemia medicines, Roche’s NeoRecormon and Chugai’s Epogin. CellCept and Bonviva/Boniva sales continued to decline in the US, Western Europe and the International region due to further generic erosion following patent expiry. Uptake of Zelboraf in the US and Western Europe continued with sales of 92 million Swiss francs. During the first half of 2012 Zelboraf received marketing approvals in the EU, Canada, Australia, New Zealand, Mexico and several other countries. Pharmaceuticals Division – Interim sales by region 2012 2011 % change % of sales % of sales Region (mCHF) (mCHF) (CER) (2012) (2011) United States 6,815 6,285 +6 39 37 Western Europe 4,000 4,299 –3 23 26 Japan 1,943 1,831 +1 11 11 International 4,651 4,400 +8 27 26 – CEMAI 1) 1,626 1,566 +9 9 9 – Latin America 1,299 1,213 +13 8 7 – Asia–Pacific 1,291 1,108 +13 7 7 – Other regions 435 513 –15 3 3 Total sales 17,409 16,815 +4 100 100 1) Central and Eastern Europe, Middle East, Africa, Central Asia, Indian Subcontinent. United States. Sales grew by 6% in US dollar terms. The leading products were the oncology medicines MabThera/Rituxan, Avastin and Herceptin, with sales of 1.6 billion Swiss francs (+8%), 1.2 billion Swiss francs (–2%) and 0.8 billion Swiss francs (+10%), respectively. Of the other products, growth drivers were Pegasys, Xeloda, Zelboraf, Activase/TNKase and Actemra/ RoActemra. These increases more than offset the expected declines in Bonviva/Boniva, Tamiflu, Lucentis and CellCept. Western Europe. Sales decreased by 3% in constant currencies, being impacted by continuing pricing pressures. There was growth from the oncology products MabThera/Rituxan, Herceptin and Avastin (up 6%, 3% and 2% respectively for total sales of 2.5 billion Swiss francs) and from the successful launch of Zelboraf and the further uptake of Actemra/RoActemra. This was more than offset by the continuing impact of generic erosion on Bonviva/Boniva and CellCept sales and lower sales of NeoRecormon in the highly competitive renal anemia market. Japan. Sales grew by 1% in Japanese yen terms. The major growth drivers were Avastin with sales of 345 million Swiss francs, up by 12%, and the launch of Mircera with 88 million Swiss francs of sales. There was also growth in MabThera/ Rituxan (+12%) and Tamiflu, offset by lower sales of Epogin (–53%). 23 Roche Half-Year Report 2012 | Financial Review


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    International. Sales increased by 8% driven by Latin America, Asia–Pacific and CEMAI sub-regions. Growth in Latin America was mainly due to the oncology products, especially Herceptin (+27%) and Xeloda (+21%), and also Pegasys (+100%). Sales growth in Brazil was partly offset by Mexico, where there was a continuing negative impact from biosimilar competition. Asia–Pacific growth was driven by increases in MabThera/Rituxan (+16%) and Herceptin (+10%). China was the main driver in this region, with overall sales growth of 24%. Sales growth in the CEMAI sub-region was mainly due to increased Herceptin, MabThera/Rituxan and Avastin sales. Total sales in the E7 key emerging markets grew by 13%. The sales decline in Russia is due to the timing of tender sales, which in 2011 were concentrated in the first half of the year, whereas in 2012 these are expected to happen mainly in the second half of the year. Pharmaceuticals Division – Interim sales for E7 leading emerging markets 2012 2011 % change (CER) % of sales % of sales Country (mCHF) (mCHF) total (2012) (2011) Brazil 515 470 +22 3 3 China 604 460 +24 3 3 India 49 42 +17 0 0 Mexico 188 231 –11 1 1 Russia 133 184 –27 1 1 South Korea 111 83 +35 1 1 Turkey 151 142 +19 1 1 Total sales 1,751 1,612 +13 10 10 Operating results Royalties and other operating income. The constant currency increase of 5% was due to higher income from royalties and product disposals. This disposal income came from the disposal of Rocaltrol ampoules in Japan and rights for Ostac in certain markets. These increases were partly offset by lower income from out-licensing agreements. Pharmaceuticals Division – Royalties and other operating income for the six months ended 30 June 2012 2011 % change (mCHF) (mCHF) (CER) Royalty income 662 560 +16 Income from out-licensing agreements 15 93 –85 Income from disposal of products and other 125 93 +31 Total – IFRS and Core basis 802 746 +5 Cost of sales. Core costs decreased by 5% at constant exchange rates due to lower manufacturing costs and royalty expenses. As a percentage of sales, cost of sales declined to 20.0% (2011: 21.5%). The 4% decrease in manufacturing cost of goods sold and period costs was mainly due to network and productivity improvements, and product mix effects. Royalty expenses were 21% lower driven by lower royalty expenses related to sales of Bonviva/Boniva, CellCept and Tamiflu. Expenses from collaboration and profit-sharing agreements increased mainly driven by higher co-promotion expenses due to higher sales of MabThera/Rituxan, Tarceva and Xolair. Global restructuring costs relate mostly to write-offs of property, plant and equipment and other manufacturing costs related to the dalcetrapib trial termination. 24 Roche Half-Year Report 2012 | Financial Review


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    Pharmaceuticals Division – Cost of sales for the six months ended 30 June 2012 2011 % change (mCHF) (mCHF) (CER) Manufacturing cost of goods sold and period costs (2,078) (2,133) –4 Royalty expenses (624) (792) –21 Collaboration and profit-sharing agreements (775) (685) +11 Restructuring expenses – 1 – Impairment of property, plant and equipment (9) 2 – Cost of sales – Core basis (3,486) (3,607) –5 Global restructuring plans (66) (78) –14 Amortisation of intangible assets (75) (69) +5 Impairment of intangible assets (13) (32) –60 East Japan Earthquake – (60) – Total – IFRS basis (3,640) (3,846) –7 Marketing and distribution. Core costs increased at constant exchange rates by 3%. As a percentage of sales, costs were stable at 15.8%. Sales and marketing efforts focussed on supporting continuing growth in emerging markets, the existing oncology portfolio, including the extension of Avastin in the ovarian cancer indication, and the product launches of Zelboraf and Erivedge. The increase was also partly due to factoring and collection-related costs, in particular for Southern Europe. Global restructuring costs of 40 million Swiss francs were recorded, primarily due to sales force restructuring initiatives. Pharmaceuticals Division – Marketing and distribution for the six months ended 30 June 2012 2011 % change (mCHF) (mCHF) (CER) Marketing and distribution – Core basis (2,751) (2,665) +3 Global restructuring plans (40) (15) +159 East Japan Earthquake – (1) – Total – IFRS basis (2,791) (2,681) +4 Research and development. Core costs increased by 3% at constant exchange rates. Research and development costs as a percentage of sales were 20.6% in line with 20.5% in the first half of 2011. There were increased investments in central nervous system, mostly due to the ramp-up of phase III studies in bitopertin and ocrelizumab MS. These were partially offset by lower life cycle investments in oncology and metabolism due to the discontinuation of Avastin adjuvant breast cancer studies in 2011 and dalcetrapib in 2012. In addition the Pharmaceuticals Division spent 147 million Swiss francs on the in-licensing of pipeline compounds and technologies, which are capitalised as intangible assets. In total the division spent 3.7 billion Swiss francs on internal and purchased research and development from in-licensing and other alliance deals. The 2012 impairments of intangible assets include 112 million Swiss francs from the decision to stop further development activities on dalcetrapib, 103 million Swiss francs from the returning of the global rights to the monoclonal antibody RG 7334 anti-PLGF MAb to the alliance partners, and also 160 million Swiss francs from the latest clinical data assessment of a project acquired as part of the Marcadia acquisition. In addition, 73 million Swiss francs of impairment charges arose as a result of portfolio prioritisation decisions and following recent clinical data. Global restructuring costs include 165 million Swiss francs of employee-related costs and 73 million Swiss francs of property plant and equipment impairments related to the closure of the Nutley site and 93 million Swiss francs following the dalcetrapib trial termination, which consists of provisions for remaining trial costs and write-offs of inventories. 25 Roche Half-Year Report 2012 | Financial Review


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    Pharmaceuticals Division – Research and development for the six months ended 30 June 2012 2011 % change (mCHF) (mCHF) (CER) Research and development – Core basis (3,587) (3,442) +3 Global restructuring plans (423) (61) Over +500 Amortisation of intangible assets (14) (8) +67 Impairment of intangible assets (448) (32) Over +500 Total – IFRS basis (4,472) (3,543) +25 General and administration. Core costs increased by 6% at constant exchange rates. Costs increased relative to the first half of 2011 in part as a result of reduced Chugai spending in the first half of 2011 following the East Japan Earthquake. Other general items also include the costs for the US Branded Pharmaceutical Product Fee (‘Excise Tax’) of 74 million Swiss francs (2011: 80 million Swiss francs). General and administration expenses as a percentage of sales increased to 2.9% from 2.7%. Global restructuring costs relate to the site closure costs for Nutley, mainly impairments of property, plant and equipment, and the division’s global informatics restructuring programme. The release of the provision for contingent consideration from the Marcadia acquisition resulted in a net income for alliance and business combination costs. Pharmaceuticals Division – General and administration for the six months ended 30 June 2012 2011 % change (mCHF) (mCHF) (CER) Administration (447) (447) –1 Restructuring expenses – (1) – Gains (losses) on disposal of property, plant and equipment – 1 – Other general items (51) (15) +209 General and administration – Core basis (498) (462) +6 Global restructuring plans (400) (204) +93 Alliances and business combinations 44 (2) – Legal and environmental settlements (16) – – East Japan Earthquake – (3) – Total – IFRS basis (870) (671) +28 Roche Pharmaceuticals and Chugai sub-divisional operating results Pharmaceuticals sub-divisional interim operating results in millions of CHF Roche Pharmaceuticals Pharmaceuticals Chugai Division 2012 2011 2012 2011 2012 2011 Sales – External customers 15,466 14,984 1,943 1,831 17,409 16,815 – Within division 426 435 156 101 582 536 Core operating profit 7,423 7,081 419 406 7,889 7,385 – margin, % of sales 48.0 47.3 21.6 22.2 45.3 43.9 Operating profit 6,009 6,616 382 306 6,438 6,820 – margin, % of sales 38.9 44.2 19.7 16.7 37.0 40.6 Operating free cash flow 5,975 5,958 664 518 6,639 6,476 – margin, % of sales 38.6 39.8 34.2 28.3 38.1 38.5 Pharmaceuticals Division total core operating profit and operating profit both include the elimination of 47 million Swiss francs (2011: –102 million Swiss francs) of unrealised inter-company profits between Roche Pharmaceuticals and Chugai. 26 Roche Half-Year Report 2012 | Financial Review


  • Page 28

    Sales increased in both sub-divisions. In constant currencies sales and core operating profit of Roche Pharmaceuticals increased significantly despite higher spending in marketing and distribution and research and development. Sales by Chugai were stable, but the Chugai core operating profit declined slightly due to a lower gross margin due to product mix effects, which was only partly offset by lower costs in research and development. The operating free cash flow at Chugai increased significantly mainly as a result of improved net working capital with decreases in accounts receivables and inventories. Financial position Pharmaceuticals Division – Net operating assets Movement: Movement: 30 June 2012 31 Dec. 2011 % change % change Transactions CTA (mCHF) (mCHF) (CHF) (CER) (mCHF) (mCHF) Receivables 8,020 7,861 +2 +1 114 45 Inventories 3,516 3,177 +11 +9 290 49 Payables (5,064) (5,593) –9 –11 596 (67) Net working capital 6,472 5,445 +19 +18 1,000 27 Property, plant and equipment 11,122 11,586 –4 –5 (568) 104 Goodwill and intangible assets 4,534 4,851 –7 –8 (402) 85 Provisions (2,436) (2,124) +15 +13 (268) (44) Other long-term assets, net 280 250 +12 +10 24 6 Long-term net operating assets 13,500 14,563 –7 –8 (1,214) 151 Net operating assets 19,972 20,008 0 –1 (214) 178 The absolute amount of the movement between the 30 June 2012 and 31 December 2011 consolidated balances reported in Swiss francs is split between actual 2012 transactions (translated at average rates for 2011) and the currency translation adjustment (CTA) that arises on consolidation. The 2012 transactions include non-cash movements and therefore the movements in this table are not the same as the amounts shown in the operating free cash flow (which only includes the cash movements). A full consolidated balance sheet is given on page 49 of the Interim Financial Statements, and a reconciliation between that balance sheet and the information given above is on page 77. Currency translation effects on balance sheet amounts. During the first half of 2012 the Swiss franc slightly weakened against many currencies, most importantly against the US dollar. Following the intervention of the Swiss National Bank starting from the second half of 2011, the Swiss franc has been stable against the euro during 2012. Net working capital. The increase of 18% at constant exchange rates was mainly due to an increase in inventories and a decrease in payables. The balance sheet value of inventories increased mainly due to inventory building to meet higher sales demand, patient access programmes, product launches and in support of production transfers between manufacturing facilities. Receivables were relatively stable, with the continued growth of the business in China, Brazil and the CEMAI sub- region offset by strong collection of outstanding receivables from some Southern European countries. Payables decreased in comparison to December 2011 as a result of the settlement of significant year-end accounts payable and accruals, including employee benefits and lower levels of accrued royalties. Long-term net operating assets. These decreased by 8% at constant exchange rates mainly due to the impact of the global restructuring programmes and lower intangible assets. Impairments of property, plant and equipment were made in respect of the Nutley site closure and provisions made for the employee-related costs of both the Nutley site closure and global informatics reorganisation. Provisions were also made for remaining trial costs in respect of dalceptrapib. Intangibles decreased mainly due to impairments in respect of dalcetrapib, the portfolio prioritisation decision regarding the monoclonal antibody RG 7334 anti-PLGF MAb, the impairment of a project acquired as part of the Marcadia acquisition and other impairment charges related to portfolio prioritisation and clinical data. 27 Roche Half-Year Report 2012 | Financial Review


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    Free cash flow Pharmaceuticals Division – Operating free cash flow for the six months ended 30 June 2012 2011 % change (mCHF) (mCHF) (CER) Operating profit – IFRS basis 6,438 6,820 –3 – Depreciation, amortisation and impairment 1,512 851 +75 – Provisions 263 (220) – – Equity compensation plans 81 143 –46 – Other 202 343 –41 1) Operating profit cash adjustments 2,058 1,117 +81 Operating profit, net of operating cash adjustments 8,496 7,937 +9 (Increase) decrease in net working capital – Accounts receivable (69) (272) –80 – Inventories (440) 73 – – Accounts payable (719) (695) +5 Total (increase) decrease in net working capital (1,228) (894) +36 Investments in property, plant and equipment (482) (481) –1 Investments in intangible assets (147) (86) +67 Operating free cash flow 6,639 6,476 +5 – as % of sales 38.1 38.5 +0.4 1) A detailed breakdown is provided on page 76. The Pharmaceuticals Division’s operating free cash flow increased to 6.6 billion Swiss francs. The increased cash generation from the underlying business was partly offset by increases in net working capital. Increases in accounts receivables were lower as compared to the first half of 2011 as the impact of continued sales growth was offset by strong collections within some Southern European countries. This was offset by an increase in the cash invested in inventories due to the growth in key growth markets, such as Asia–Pacific, especially China, and Latin America. Payables decreased due to settlement of significant year-end accounts payable and accruals including employee benefits and lower levels of accrued royalties. 28 Roche Half-Year Report 2012 | Financial Review


  • Page 30

    Diagnostics operating results Diagnostics Division interim operating results 2012 2011 % change % change (mCHF) (mCHF) (CHF) (CER) IFRS results Sales 5,014 4,856 +3 +5 Royalties and other operating income 78 50 +56 +56 Cost of sales (2,408) (2,252) +7 +9 Marketing and distribution (1,313) (1,177) +12 +14 Research and development (486) (442) +10 +11 General and administration (421) (194) +117 +116 Operating profit 464 841 –45 –44 – margin, % of sales 9.3 17.3 –8.0 –8.0 Core results 1) Sales 5,014 4,856 +3 +5 Royalties and other operating income 78 50 +56 +56 Cost of sales (2,180) (2,052) +6 +9 Marketing and distribution (1,254) (1,174) +7 +9 Research and development (456) (431) +6 +7 General and administration (204) (186) +10 +10 Core operating profit 998 1,063 –6 –5 – margin, % of sales 19.9 21.9 –2.0 –2.0 Financial position Net working capital 3,594 3,501 +3 +3 Long-term net operating assets 11,750 12,022 –2 –3 Net operating assets 15,344 15,523 –1 –2 Free cash flow Operating free cash flow 793 617 +29 +30 – margin, % of sales 15.8 12.7 +3.1 +3.0 1) See pages 72–75 for definition of Core results and Core EPS. Sales The Diagnostics business continued to increase sales above the in vitro diagnostics (IVD) global market with a growth of 5% at constant exchange rates. Professional Diagnostics, with 9% sales growth, was the main growth contributor led by its Immunodiagnostics business. Tissue Diagnostics sales grew by 17% driven by the advanced staining market. Both business areas grew substantially ahead of their respective markets. Diabetes Care sales decreased by 2% mainly due to reimbursement changes in Europe and difficult market conditions. Sales in Molecular Diagnostics increased by 6% driven by the blood screening segment and HCV monitoring. Applied Science sales decreased by 3% due to increasing competition in sequencing and a slowdown in public research funding. 29 Roche Half-Year Report 2012 | Financial Review


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    Diagnostics Division – Interim sales by business area 2012 2011 % change % of sales % of sales Business area (mCHF) (mCHF) (CER) (2012) (2011) Professional Diagnostics 2,515 2,360 +9 50 49 Diabetes Care 1,260 1,316 –2 25 27 Molecular Diagnostics 571 544 +6 12 11 Applied Science 363 377 –3 7 8 Tissue Diagnostics 305 259 +17 6 5 Total sales 5,014 4,856 +5 100 100 Professional Diagnostics. Sales were up 9%, growing at almost double the rate of the global market. The business area was the major contributor to divisional performance in all regions, with growth being primarily driven by the immunoassay business (+14%), which now represents 22% of divisional sales. This was supported by the clinical chemistry and coagulation monitoring businesses with growth of 6% and 8% respectively. There were launches of two new immunoassays, HCV II in the EU and HBc IgM in the US. The business also introduced the cobas p 312 pre-analytical system in the EU and US and received FDA approval for the cobas b 123 blood gas analyser in the US. Diabetes Care. Sales declined by 2% primarily due to reimbursement changes for blood glucose (bG) monitoring supplies in major European and other markets, including Germany, France and Poland. Sales in North America were down slightly by 1% while sales grew in Asia–Pacific (+14%) and Latin America (+12%) driven by the new Accu-Chek portfolio. Recent launches include the Accu-Chek Nano SmartView bG meter in the US and the next-generation Accu-Chek Mobile bG meter in ten European countries and in Australia. In the US the FDA has cleared the Accu-Chek Combo system, an insulin pump/ bG meter combination. In 2012 Roche Diabetes Care initiated a restructuring, notably of research and development activities but also including some marketing and manufacturing activities, to sustain long-term profitability. Molecular Diagnostics. Sales rose 6% with the largest contribution coming from the blood screening business (+12%), mainly from the US, China, Canada, Mexico and smaller EMEA markets. This was supported by virology (+3%), with HCV monitoring having the largest growth contribution. Key products launched in 2011, such as the cobas HPV test (cervical cancer screening) and cobas BRAF test (melanoma patient selection), continued their positive uptake. Roche Molecular Diagnostics signed over 30 new contracts for HPV in the US and a Swedish pilot study for cervical cancer primary screening with Roche’s HPV test started this year. FDA approvals were received for three tests for chlamydia/gonorrhea, HIV and cytomegalovirus. Applied Science. The 3% decline in sales was mainly due to increasing competition in the genomics segment (sequencing and microarrays) which was down 18% and a slowdown in public research funding. This decline was partially offset by continued sales growth of 9% in the Custom Biotech business. In the second quarter of 2012, under a new strategy, Roche Applied Science started to streamline its product portfolio, focusing on fewer segments with market leadership potential or other strategic interest. As a consequence there will be an exit from the NimbleGen microarray business, keeping only the sequence capture products, a streamlining of the cellular analysis portfolio and a consolidation of operations. Tissue Diagnostics. Sales rose 17%, at around double the rate of the global market, driven by the advanced tissue staining portfolio (+18%). This was supported by the rapid uptake of HER2 Dual ISH, a test for personalised breast cancer therapy, which was launched in summer 2011 in the US. This test has achieved global sales of 90,000 tests within a year and is now a market leader. The business made further progress in its Personalised Healthcare strategy with five new external collaborations (Aeterna Zentaris, Bayer, Pfizer, Seattle Genetics/Millennium and Syndax). Roche Tissue Diagnostics also expanded its leadership in pathology laboratory automation through the launch of the BenchMark Special Stains platform and the VENTANA iScan HT scanner. 30 Roche Half-Year Report 2012 | Financial Review


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    Diagnostics Division – Interim sales by region 2012 2011 % change % of sales % of sales Region (mCHF) (mCHF) (CER) (2012) (2011) Europe, Middle East and Africa (EMEA) 2,365 2,469 +1 47 51 North America 1,281 1,196 +5 25 24 Asia–Pacific 736 615 +17 15 13 Latin America 348 323 +13 7 7 Japan 284 253 +7 6 5 Total sales 5,014 4,856 +5 100 100 Sales continued to grow in all regions. The Asia–Pacific region achieved strong growth of 17%, driven mainly by Professional Diagnostics. The sales increase in this region was also due to increasing sales in China (+32%), coming from governmental healthcare investments, public demand and Roche’s expanding presence and wide portfolio. In North America sales grew by 5% driven by increased business with clinical laboratories, led by Professional Diagnostics. In Latin America the positive performances of Professional Diagnostics and Diabetes Care resulted in a total sales growth of 13%. In EMEA sales increased by 1% as increased sales in Professional Diagnostics and Tissue Diagnostics were partially offset by the decline in Diabetes Care sales from reimbursement changes. Sales in Japan grew by 7%, several times the market rate, mainly driven by Professional Diagnostics. Diagnostics Division – Interim sales for E7 leading emerging markets 2012 2011 % change % of sales % of sales Country (mCHF) (mCHF) (CER) (2012) (2011) Brazil 114 118 +7 2 2 China 304 217 +32 6 5 India 50 43 +32 1 1 Mexico 49 48 +10 1 1 Russia 84 73 +20 2 2 South Korea 76 68 +13 2 1 Turkey 62 60 +15 1 1 Total sales 739 627 +21 15 13 Operating results Royalties and other operating income. Income was 78 million Swiss francs, an increase of 56% at constant exchange rates driven by higher royalty income. This is mainly the result of back royalty payments in Molecular Diagnostics and the receipt of a royalty payment in Diabetes Care. Diagnostics Division – Royalties and other operating income for the six months ended 30 June 2012 2011 % change (mCHF) (mCHF) (CER) Royalty income 71 33 +121 Income from out-licensing agreements 2 12 –82 Income from disposal of products and other 5 5 –10 Total – IFRS and Core basis 78 50 +56 31 Roche Half-Year Report 2012 | Financial Review


  • Page 33

    Cost of sales. Cost of sales increased by 9% at constant exchange rates on a core basis primarily due to an increase in manufacturing cost of goods sold and period costs of 10%. While previous cost reduction initiatives continued to have a positive impact, this was more than offset by the increase in placements of instruments and related installation costs. Instrument placements were up in the Clinical Chemistry and Immunology businesses by 41% driven by strong customer demand and partly due to the installation of instruments sourced from Hitachi High Technologies that had been subject to supply disruptions following the East Japan Earthquake in March 2011. The decrease in royalty expenses was due to patent expirations for certain in-licensed intellectual property. Overall, the cost growth on a core basis was slightly above sales growth resulting in a higher cost of sales ratio of 43.5% (2011: 42.3%). Global restructuring costs were incurred mainly due to closing costs for the Graz and Burgdorf sites. Amortisation of product intangibles decreased as some intangible assets were fully amortised by the end of 2011. Diagnostics Division – Cost of sales for the six months ended 30 June 2012 2011 % change (mCHF) (mCHF) (CER) Manufacturing cost of goods sold and period costs (2,090) (1,950) +10 Royalty expenses (90) (99) –8 Collaboration and profit-sharing agreements – (1) – Impairment of property, plant and equipment – (2) – Cost of sales – Core basis (2,180) (2,052) +9 Global restructuring plans (39) (13) +201 Amortisation of intangibles assets (173) (187) –7 Impairment of intangible assets (16) – – Total – IFRS basis (2,408) (2,252) +9 Marketing and distribution. The increase of 9% at constant exchange rates on a core basis mainly reflects higher costs due to bad debt expenses of 47 million Swiss francs in Turkey and Brazil and increases in factoring costs related to the reduction of outstanding trade receivables in Southern Europe. There were also additional costs to strengthen the sales organisation in support of key product launches in the United States. On a core basis, marketing and distribution costs as a percentage of sales were 25.0% compared to 24.1% in 2011. Global restructuring costs were mainly due to the reorganisations in the Applied Science and Diabetes Care businesses to improve the efficiency of marketing and distribution activities. Diagnostics Division – Marketing and distribution for the six months ended 30 June 2012 2011 % change (mCHF) (mCHF) (CER) Marketing and distribution – Core basis (1,254) (1,174) +9 Global restructuring plans (56) (1) Over +500 Amortisation of intangible assets (3) (2) +27 Total – IFRS basis (1,313) (1,177) +14 Research and development. Core costs increased by 7% at constant exchange rates. This was driven by the development of new immunoassays and tests in Professional Diagnostics and new insulin pumps in Diabetes Care. As a percentage of sales, research and development costs increased to 9.1% from 8.9% in 2011. Global restructuring costs were mainly due to costs related to the reorganisation in the Applied Science business. Diagnostics Division – Research and development for the six months ended 30 June 2012 2011 % change (mCHF) (mCHF) (CER) Research and development – Core basis (456) (431) +7 Global restructuring plans (29) (10) +185 Amortisation of intangible assets (1) (1) +3 Total – IFRS basis (486) (442) +11 32 Roche Half-Year Report 2012 | Financial Review


  • Page 34

    General and administration. Costs increased by 10% at constant exchange rates on a core basis. The cost increase in administration was due to informatics projects and the roll-out of Finance Shared Service Centres. As a percentage of sales, costs increased by 0.3 percentage points to 4.1%. Global restructuring costs were mainly due to employee-related costs at the Graz and Burgdorf sites. In addition, goodwill impairment charges of 185 million Swiss francs were incurred for the full write-off of the goodwill from the NimbleGen acquisition, resulting from the decision to exit the microarrays business as part of the reorganisation of the Applied Science business area. Diagnostics Division – General and administration for the six months ended 30 June 2012 2011 % change (mCHF) (mCHF) (CER) Administration (174) (163) +8 Other general items (30) (23) +25 General and administration – Core basis (204) (186) +10 Global restructuring plans (21) (5) +334 Impairment of goodwill (185) – – Alliances and business combinations (5) (1) Over +500 Legal and environmental settlements (6) (2) +218 Total – IFRS basis (421) (194) +116 Financial position Diagnostics Division – Net operating assets Movement: Movement: 30 June 2012 31 Dec. 2011 % change % change Transactions CTA (mCHF) (mCHF) (CHF) (CER) (mCHF) (mCHF) Receivables 3,509 3,593 –2 –3 (102) 18 Inventories 1,996 1,883 +6 +7 111 2 Payables (1,911) (1,975) –3 –4 79 (15) Net working capital 3,594 3,501 +3 +3 88 5 Property, plant and equipment 4,511 4,484 +1 +1 23 4 Goodwill and intangible assets 7,864 8,118 –3 –4 (348) 94 Provisions (525) (481) +9 +9 (44) 0 Other long-term assets, net (100) (99) +1 +4 (3) 2 Long-term net operating assets 11,750 12,022 –2 –3 (372) 100 Net operating assets 15,344 15,523 –1 –2 (284) 105 The absolute amount of the movement between the 30 June 2012 and 31 December 2011 consolidated balances reported in Swiss francs is split between actual 2012 transactions (translated at average rates for 2011) and the currency translation adjustment (CTA) that arises on consolidation. The 2012 transactions include non-cash movements and therefore the movements in this table are not the same as the amounts shown in the operating free cash flow (which only includes the cash movements). A full consolidated balance sheet is given on page 49 of the Interim Financial Statements, and a reconciliation between that balance sheet and the information given above is on page 77. Currency translation effects on balance sheet amounts. During the first half of 2012 the Swiss franc slightly weakened against many currencies, most importantly against the US dollar. Following the intervention of the Swiss National Bank starting from the second half of 2011, the Swiss franc has been stable against the euro during 2012. 33 Roche Half-Year Report 2012 | Financial Review


  • Page 35

    Net working capital. The 3% increase at constant exchange rates was driven by increases in inventories and decreases in payables. Inventory increases were due to the launch and growth of key products in Professional Diagnostics and Tissue Diagnostics and the establishment of a Middle-East Hub. The main factors for the decreases in receivables are collections and factoring initiatives in Southern European countries and bad debt write-offs. Payables decreased by 4% compared to the end of 2011 due to the settlement of accruals, including employee benefits, and lower purchase volumes of Hitachi instruments. Long-term net operating assets. The decrease of 3% at constant exchange rates was due to a decrease in intangible assets due to the NimbleGen goodwill impairment and increases in provisions, mainly due to global restructuring plans. Property, plant and equipment remained stable as capital expenditure was fully offset by depreciation. Free cash flow Diagnostics Division – Operating free cash flow for the six months ended 30 June 2012 2011 % change (mCHF) (mCHF) (CER) Operating profit – IFRS basis 464 841 –44 – Depreciation, amortisation and impairment 790 572 +40 – Provisions 64 (2) – – Equity compensation plans 4 14 –77 – Other 126 27 +400 1) Operating profit cash adjustments 984 611 +64 Operating profit, net of operating cash adjustments 1,448 1,452 +2 (Increase) decrease in net working capital – Accounts receivable 52 (287) – – Inventories (153) (85) +107 – Accounts payable (59) (13) +319 Total (increase) decrease in net working capital (160) (385) –56 Investments in property, plant and equipment (480) (444) +11 Investments in intangible assets (15) (6) +157 Operating free cash flow 793 617 +30 – as % of sales 15.8 12.7 +3.0 1) A detailed breakdown is provided on page 76. The operating free cash flow of the Diagnostics Division increased by 30% at constant exchange rates and 29% in Swiss francs. This was primarily due to a lower increase in net working capital in the first half of 2012 compared to the first half of 2011. The improved collection of trade receivables and cash received from factoring initiatives resulted in a decrease in receivables. The higher inventory levels resulted from the launch and growth of key products in Professional Diagnostics and Tissue Diagnostics and the establishment of a Middle-East Hub. Payables were lower due to the settlement of accruals, including employee benefits, and lower purchase volumes of Hitachi instruments. Capital expenditure for property, plant and equipment increased by 11% driven by investments in China and Brazil. In total the operating free cash flow margin increased by 3.0 percentage points. 34 Roche Half-Year Report 2012 | Financial Review


  • Page 36

    Corporate operating results Corporate interim operating results summary 2012 2011 % change (mCHF) (mCHF) (CER) Administration (210) (185) +13 Gains (losses) on divestment of subsidiaries – 4 – Restructuring expenses – – – Other general items (36) (16) +119 General and administration costs – Core basis 1) (246) (197) +24 Global restructuring plans (9) (4) +121 Alliances and business combinations – – – Legal and environmental settlements (315) – – Total costs – IFRS basis (570) (201) +178 Financial position Net working capital 1 (42) – Long-term net operating assets (330) 2 – Net operating assets (329) (40) Over +500 Free cash flow Operating free cash flow (262) (237) +10 1) See pages 72–75 for definition of Core results and Core EPS. General and administration costs increased by 24% at constant exchange rates as a result of the shift of certain functions from the Pharmaceuticals and Diagnostics Divisions to Corporate and increased informatics costs from various initiatives. Total costs on an IFRS basis grew due to increased environmental provisions of 242 million Swiss francs as an initial estimate of the costs of the additional remediation activities that may be needed at the Nutley site in the US prior to it being sold. Further environmental costs were for the estimated additional remediation costs of a landfill site near Grenzach, Germany, that was previously used by manufacturing operations that were closed some years ago. Further details of these matters are given in Notes 7 and 10 to the Interim Financial Statements. Corporate operating free cash flow showed an increase in the net outflow driven by the higher administration expenses described above. 35 Roche Half-Year Report 2012 | Financial Review


  • Page 37

    Foreign exchange impact on operating results The Group’s exposure to movements in foreign currencies affecting its operating results, as expressed in Swiss francs, is summarised by the following key figures and comments. Growth (reported at CER and Swiss francs) for the six months ended 30 June % change (CER) % change (CHF) 2012 2011 2012 2011 Pharmaceuticals Division Sales +4 –1 +4 –13 Core operating profit +9 +5 +7 –10 Diagnostics Division Sales +5 +5 +3 –8 Core operating profit –5 +5 –6 –9 Group Sales +4 0 +3 –12 Core operating profit +7 +5 +5 –10 Exchange rates against the Swiss franc Average to Average to 30 June 2012 30 June 2012 31 December 2011 30 June 2011 1 USD 0.97 0.93 0.94 0.91 1 EUR 1.20 1.20 1.22 1.27 100 JPY 1.22 1.17 1.21 1.11 In the first half of 2012, the Swiss franc was stronger compared to the first half of 2011 for many currencies including the euro, but weakened against some others, notably the US dollar and Japanese yen. The overall impact is slightly negative on the results expressed in Swiss francs compared to constant exchange rates. For sales, these developments resulted in a negative impact of 1 percentage point, equivalent to 0.1 billion Swiss francs when translated into Swiss francs. The currency translation exposure for the operating profit is mitigated by the Group having the majority of its cost base located outside of Switzerland. Core operating profit increased in Swiss francs by 5% compared to an increase of 7% at constant exchange rates. This negative impact of 2 percentage points is equivalent to 0.1 billion Swiss francs. The sensitivity of Group sales and core operating profit to a 1% movement in foreign currencies against the Swiss franc during the first half of 2012 is shown in the table below. Currency sensitivities for the six months ended 30 June 2012 Impact of 1% change in average exchange rate Sales Core operating profit versus the Swiss franc (mCHF) (mCHF) US dollar 82 31 Euro 50 26 Japanese yen 22 14 All other currencies 59 36 36 Roche Half-Year Report 2012 | Financial Review


  • Page 38

    Treasury and taxation results Treasury and taxation interim results 2012 2011 % change % change (mCHF) (mCHF) (CHF) (CER) IFRS results Operating profit 6,332 7,460 –15 –13 Associates (2) – – – Financial income 239 373 –36 –36 Financing costs (1,058) (1,165) –9 –10 Profit before taxes 5,511 6,668 –17 –15 Income taxes (1,143) (1,409) –19 –18 Net income 4,368 5,259 –17 –14 Attributable to – Roche shareholders 4,255 5,151 –17 –14 – Non-controlling interests 113 108 +5 –1 Core results 1) Operating profit 8,641 8,251 +5 +7 Associates (2) – – – Financial income 239 373 –36 –36 Financing costs (1,058) (1,165) –9 –10 Profit before taxes 7,820 7,459 +5 +7 Income taxes (1,785) (1,638) +9 +10 Net income 6,035 5,821 +4 +6 Attributable to – Roche shareholders 5,922 5,697 +4 +7 – Non-controlling interests 113 124 –9 –13 Financial position – Treasury and taxation Net debt (17,333) (15,566) +11 +10 Pensions (6,104) (4,952) +23 +24 Income taxes 912 174 +424 Over +500 Financial long-term assets 374 360 +4 +2 Derivatives, net (293) 170 – – Collateral, net 60 (233) – – Interest payable (462) (887) –48 –49 Other non-operating assets, net (65) (75) –13 –20 Total net assets (liabilities) (22,911) (21,009) +9 +8 Free cash flow – Treasury and taxation Treasury activities (1,147) (1,048) +9 +7 Taxes paid (1,481) (1,086) +36 +36 Dividends paid (5,851) (5,689) +3 +3 Total (8,479) (7,823) +8 +8 1) See pages 72–75 for definition of Core results and Core EPS. 37 Roche Half-Year Report 2012 | Financial Review


  • Page 39

    Financial income Financial income was 239 million Swiss francs, a decrease of 36%. Interest income and income from debt securities were 18 million Swiss francs, a decrease of 53% due to the low prevailing interest rates during 2012. The net foreign exchange result reflects hedging costs and was a loss of 40 million Swiss francs compared to a gain of 26 million Swiss francs in the first half of 2011. The foreign exchange result in 2011 included gains of 42 million Swiss francs in Venezuela following the enactment of a law allowing the Group to benefit from pre-devaluation treatment for certain transactions. Net income from equity securities was 20 million Swiss francs, down by 63%. Expected returns on pension plan assets were 252 million Swiss francs, broadly in line with 2011. A full analysis of financial income is given in Note 4 to the Interim Financial Statements. Financing costs Financing costs were 1,058 million Swiss francs, a decrease of 107 million Swiss francs or 10% compared to the first half of 2011. The main driver was a 10% decrease in interest expenses which reflects the continued repayment of the debt incurred to finance the Genentech transaction. Financing costs also include 47 million Swiss francs for the loss on the repurchase of 782 million euros of notes that were due 4 March 2013. The comparative period in 2011 contained 89 million Swiss francs for the loss on early redemption of debt. The interest cost of pension plans remained stable at 288 million Swiss francs. A full analysis of financing costs is given in Note 4 to the Interim Financial Statements. Income taxes The Group’s effective core tax rate increased by 0.8 percentage points to 22.8% in the first half of 2012 (2011: 22.0%). The main reasons for the increase of the effective tax rate were the higher percentage core profit contribution from the US, which has a relatively higher local tax rate than the average Group rate, and the non-renewal of the US research and development tax credit rules so far in 2012. A tax benefit of 642 million Swiss francs was recorded for the non-core items described above compared to a tax benefit of 229 million Swiss francs in the first half of 2011. The increase was primarily due to the higher tax benefit resulting from the global restructuring plans including intangible asset impairments as well as legal and environmental costs as compared to 2011, partially offset by the tax effects of the costs resulting from the 2011 East Japan Earthquake. Analysis of the Group’s effective tax rate for the six months ended 30 June 2012 2011 Profit Income Profit Income before tax taxes Tax rate before tax taxes Tax rate (mCHF) (mCHF) (%) (mCHF) (mCHF) (%) Group’s effective tax rate – Core basis 7,820 (1,785) 22.8 7,459 (1,638) 22.0 Global restructuring plans (1,083) 309 28.5 (391) 116 29.7 Goodwill and intangible assets (928) 248 26.7 (331) 113 34.1 Other (298) 85 28.5 (69) – – Group’s effective tax rate – IFRS basis 5,511 (1,143) 20.7 6,668 (1,409) 21.1 Financial position The increase in the net debt position was mainly due to the annual dividend payments of 5.9 billion Swiss francs and tax payments which more than offset the operating free cash flow, as is more fully described in the net debt section below. The increase in net pension liabilities reflects falling interest rates leading to the discounted defined benefit obligation being higher. The net tax assets increased mainly due to the deferred tax effect of the increased net pension liabilities. Additionally total taxes paid exceeded income tax expenses for the first half of 2012. The net derivative position decreased to a net liability of 0.3 billion Swiss francs, mainly due to lower valuations on the cross-currency swaps following a stronger US dollar compared to the euro. Interest payable relates mostly to bonds and notes with coupon payment dates in March and September, and the decline is due to 1.0 billion Swiss francs of coupon payments on bonds and notes during the interim period. At 30 June 2012 the Group held financial long-term assets with a market value of 0.4 billion Swiss francs, which consist mostly of holdings in biotechnology companies which were acquired in the context of licensing transactions or scientific collaborations. 38 Roche Half-Year Report 2012 | Financial Review


  • Page 40

    Free cash flow The cash outflow from treasury activities increased slightly to 1.1 billion Swiss francs mostly due to non-recurrence of foreign exchange gains and lower gains from sales of marketable securities partially offset by lower interest payments. Total taxes paid in the first half of 2012 were 1.5 billion Swiss francs, an increase of 36% at constant exchange rates. This was due to prepayments of tax and higher tax payments in the United States and at Chugai. Total dividends paid in the first half of 2012 were 5.9 billion Swiss francs, an increase of 0.2 billion Swiss francs compared to the first half of 2011, reflecting the 3% increase of the Roche Group dividend. Cash flows and net debt Operating free cash flow in billions of CHF Free cash flow in billions of CHF 0 3 6 9 –2.0 –1.5 –1.0 –0.5 0 2012 7.2 (1.3) 2011 6.9 (1.0) 2010 6.4 (1.6) Free cash flow for the six months ended 30 June Pharmaceuticals Diagnostics Corporate Group (mCHF) (mCHF) (mCHF) (mCHF) 2012 Operating profit – IFRS basis 6,438 464 (570) 6,332 Operating profit cash adjustments 2,058 984 324 3,366 Operating profit, net of operating cash adjustments 8,496 1,448 (246) 9,698 (Increase) decrease in net working capital (1,228) (160) (15) (1,403) Investments in property, plant and equipment (482) (480) (1) (963) Investments in intangible assets (147) (15) – (162) Operating free cash flow 6,639 793 (262) 7,170 Treasury activities (1,147) Taxes paid (1,481) Dividends paid (5,851) Free cash flow (1,309) 2011 Operating profit – IFRS basis 6,820 841 (201) 7,460 Operating profit cash adjustments 1,117 611 2 1,730 Operating profit, net of operating cash adjustments 7,937 1,452 (199) 9,190 (Increase) decrease in net working capital (894) (385) (38) (1,317) Investments in property, plant and equipment (481) (444) – (925) Investments in intangible assets (86) (6) – (92) Operating free cash flow 6,476 617 (237) 6,856 Treasury activities (1,048) Taxes paid (1,086) Dividends paid (5,689) Free cash flow (967) 39 Roche Half-Year Report 2012 | Financial Review


  • Page 41

    Operating free cash flow increased by 7% at constant exchange rates to 7.2 billion Swiss francs, mainly due to the continued strong growth of the underlying operating business, which showed a 7% increase in core operating profit. In Pharmaceuticals the strong operating results were partially offset by increases in net working capital and higher investments in intangible assets. Diagnostics operating free cash flow increased significantly due to improved collection of trade receivables and factoring initiatives in Southern European countries. The cash outflow from treasury activities slightly increased to 1.1 billion Swiss francs mostly due to the non-recurrence of foreign exchange gains. Total taxes paid were 1.5 billion Swiss francs, an increase due to prepayments of tax and higher tax payments in the United States and at Chugai. Total dividends paid were also higher due to the 3% increase of the annual Roche Group dividend. Free cash flow showed an outflow of 1.3 billion Swiss francs, a higher outflow by 0.3 billion Swiss francs compared to the first half of 2011. The increase of the outflow was primarily due to the higher dividend and tax payments which more than offset the growth in the operating free cash flow. Net debt in millions of CHF 31 December 2011 Cash and cash equivalents 3,854 Marketable securities 7,433 Long-term debt (23,459) Short-term debt (3,394) Net debt at beginning of period (15,566) Free cash flow for six months ended 30 June 2012 (1,309) Transactions in own equity instruments (36) Business combinations, net of divestments of subsidiaries (36) Hedging and collateral arrangements (237) Currency translation, fair value and other movements (149) Net change in net debt (1,767) 30 June 2012 Cash and cash equivalents 4,106 Marketable securities 5,114 Long-term debt (21,153) Short-term debt (5,400) Net debt at end of period (17,333) 40 Roche Half-Year Report 2012 | Financial Review


  • Page 42

    Net debt – Currency profile in millions of CHF Cash and marketable securities Debt 30 June 2012 31 Dec. 2011 30 June 2012 31 Dec. 2011 US dollar 1) 1,229 1,102 (21,865) (24,896) Euro 2,646 2,133 (1,204) (8) Swiss franc 2,355 5,351 (2,980) (1,484) Japanese yen 2,478 2,080 (1) – Pound sterling 217 262 (296) (287) Other 295 359 (207) (178) Total 9,220 11,287 (26,553) (26,853) 1) US dollar-denominated debt includes those bonds and notes denominated in euros, Swiss francs and pounds sterling that were swapped into US dollars, and therefore in the financial statements have economic characteristics equivalent to US dollar-denominated bonds and notes. The net debt position of the Group at 30 June 2012 was 17.3 billion Swiss francs, an increase of 1.8 billion Swiss francs from 31 December 2011. The increase in net debt was mainly due to the negative free cash flow of 1.3 billion Swiss francs described above. As the fair value of derivative hedging instruments moved down due to the strengthening of the US dollar against the euro during the first six months of 2012, cash collateral of 0.3 billion Swiss francs was delivered by Roche. The collateral balance in relation to the hedges on the non-US dollar-denominated bonds and notes is mainly sensitive to the foreign exchange rate between the US dollar and the euro, but also to pound sterling. Currently the collateral balance moves by approximately 100 million US dollars if all of these foreign exchange rates move by 1% simultaneously. Collateral volatility will decrease to less than 60 million US dollars for each 1% movement in foreign exchange rates by mid-2013 as a significant portion of the non-US dollar-denominated bonds and notes will have been repaid by this time. The redemption and repurchase of bonds and notes and also the issuance of new bonds and notes during the first half of 2012 (see Note 11) had an impact on liquid funds. However, this had no impact on the net debt position. 41 Roche Half-Year Report 2012 | Financial Review


  • Page 43

    Debt To finance the Genentech transaction, the Group issued bonds and notes equivalent to 48.2 billion Swiss francs in February and March 2009. Of the debt raised in early 2009, 48% had already been repaid by 30 June 2012. This includes the redemption of 2.2 billion Swiss franc-denominated notes on due date and 0.8 billion euros of notes originally due 4 March 2013 that were repurchased on 23 March 2012 following a tender offer. During the interim period, Roche issued a total of 1.5 billion Swiss francs notes that will be due in 2013, 2018, and 2022. Furthermore, Roche issued 1.0 billion euros of notes due in 2018. These bonds have coupons between 0.3% and 2.0% and were issued to partly refinance debt redemptions in an attractive market environment. The maturity schedule of the Group’s bonds and notes outstanding at 30 June 2012 is shown in the table below, which includes those instruments that were already in issue prior to the Genentech transaction. Bonds and notes: nominal amounts at 30 June 2012 by contractual maturity US dollar Euro Pound sterling Swiss franc Total 1) Total 1) (mUSD) (mEUR) (mGBP) (mCHF) (mUSD) (mCHF) 2012 – – – – – – 2013 – 3,506 2) – 400 4,776 4,611 2014 1,750 – – – 1,750 1,690 2015 1,000 – 900 2) – 2,396 2,313 2016 – 2,750 2) – – 3,421 3,303 2017 – – – 1,500 1,554 1,500 3) 2018–2022 4,500 2,750 – 1,100 9,060 8,747 2023 and beyond 3,000 – 200 – 3,310 3,196 Total 10,250 9,006 1,100 3,000 26,267 25,360 1) Total translated at 30 June 2012 exchange rates. 2) The proceeds from these bonds and notes were swapped into US dollars, and therefore in the financial statements the bonds and notes have economic characteristics equivalent to US dollar-denominated bonds and notes. 3) Of the proceeds from these bonds and notes, 1.75 billion euros of notes were swapped into US dollars, and therefore in the financial statements the bonds and notes have economic characteristics equivalent to US dollar-denominated bonds and notes. The Group plans to meet its debt obligations using existing liquid funds as well as cash generated from business operations. In the full year 2011 the free cash flow was 3.9 billion Swiss francs, which included the cash generated from operations, as well as payment of interest, tax and dividends. In the first half of 2012 free cash flow was an outflow of 1.3 billion Swiss francs, which includes 5.9 billion Swiss francs used for the payment of dividends. For short-term financing requirements, the Group has a commercial paper programme in the United States under which it can issue up to 7.5 billion US dollars of unsecured commercial paper notes and committed credit lines of 3.9 billion euros available as back-stop lines. Commercial paper notes totalling 1.0 billion US dollars were outstanding as of 30 June 2012. For longer-term financing the Group maintains strong long-term investment-grade credit ratings of AA- by Standard & Poor’s and A1 by Moody’s which should facilitate efficient access to international capital markets. As described above in the commentary on the net debt position and in the Annual Financial Statements, in 2009 the Group entered into derivative contracts with third parties to hedge the foreign exchange risk arising from bonds and notes issued in currencies other than US dollar. At the same time collateral agreements were entered with the derivative counterparties to mitigate counterparty risk. 42 Roche Half-Year Report 2012 | Financial Review


  • Page 44

    Financial risks As at 30 June 2012 the Group has a net debt position of 17.3 billion Swiss francs (31 December 2011: 15.6 billion Swiss francs). The financial assets of the Group are managed in a conservative way with the objective to meet the Group’s financial obligations at all times. Asset allocation. A considerable portion of the cash and marketable securities the Group currently holds is being used for debt redemptions. Liquid funds are either held as cash or are invested in high-quality, investment-grade fixed income securities with an investment horizon to meet those liquidity requirements. During the first six months of 2012, Roche reduced its money market portfolio by 2.6 billion Swiss francs as the instruments matured or were sold. Cash and marketable securities 30 June 2012 31 December 2011 (mCHF) (% of total) (mCHF) (% of total) Cash and cash equivalents 4,106 44 3,854 34 Money market instruments 3,186 35 5,764 51 Bonds, debentures and other investments 1,621 18 1,428 13 Shares 307 3 241 2 Total cash and marketable securities 9,220 100 11,287 100 Credit risk. Credit risk arises from the possibility that counterparties to transactions may default on their obligations causing financial losses for the Group. The rating profile of the Group’s 8.9 billion Swiss francs fixed income marketable securities remained strong with 96% being invested in the A-AAA range. As noted previously the Group has signed netting and collateral agreements with the counterparties in order to mitigate counterparty risk on derivative positions. The Group has trade receivables of 10.1 billion Swiss francs. Since the beginning of 2010 there have been increasing financial difficulties in Southern European countries, notably Spain, Italy, Greece and Portugal. The Group is a leading supplier to the healthcare sectors in these countries and has trade receivables of 1.3 billion euros (1.5 billion Swiss francs) with the public customers in these countries. This is a reduction of 0.5 billion euros from 31 December 2011, which is mainly due to collections in Spain following the Montoro plan as well as increased factoring deals in Italy. The Group uses different measures to improve collections in these countries, including intense communication with customers, factoring, negotiations of payments plans, charging of interest for late payments, and legal action. The Group is also applying cash on delivery with some public hospitals in Greece and Portugal. Liquidity risk. Liquidity risk arises through a surplus of financial obligations over available financial assets due at any point in time. The Group’s approach to liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at any point in time. In addition to the current liquidity position, the Group has strong cash generation ability. Those future cash flows will be used to repay debt instruments in the coming years. Even after the Genentech transaction, Roche enjoys strong long-term investment-grade credit ratings of AA- by Standard & Poor’s and A1 by Moody’s. At the same time Roche is rated at the highest available short-term ratings by those agencies. In the event of financing requirements, the ratings and the strong credit of Roche should permit efficient access to international capital markets, including the commercial paper market. The Group has committed credit lines with various financial institutions totalling 5.2 billion Swiss francs of which 4.7 billion Swiss francs serve as back-stop line for the commercial paper programme. As at 30 June 2012 no debt has been drawn under these credit lines. 43 Roche Half-Year Report 2012 | Financial Review


  • Page 45

    Market risks. Market risk arises from changing market prices of the Group’s financial assets or financial liabilities. The exposures are predominantly related to changes in interest rates, foreign exchange rates and equity prices. The Group uses Value-at-Risk (VaR) to assess the impact of market risk on its financial instruments. VaR data indicates the value range within which a given financial instrument will fluctuate with a pre-set probability as a result of movements in market prices. The VaR data in the table below indicates the economic loss level over a period of one month which with 95% probability will not be exceeded. Actual future economic gains and losses associated with our treasury activities may differ materially from the VaR analyses performed due to the inherent limitations associated with predicting the timing and amount of changes to interest rates, foreign currency exchanges rates and equity investment prices, particularly in periods of high market volatilities. Furthermore, the VaR numbers below do not include a credit risk component. Market risk of financial instruments 30 June 2012 31 December 2011 (mCHF) (mCHF) VaR – Interest rate component 245 301 VaR – Foreign exchange component 35 49 VaR – Other price component 35 35 Diversification (34) (69) VaR – Total 281 316 Total VaR decreased by 11% to 281 million Swiss francs. The interest rate VaR decreased reflecting the ageing of debt. As all issued debt is held at amortised cost, the interest rate VaR is a sole metric for economic fair value changes, but there is no impact on the carrying value or profit and loss of the Group. The foreign exchange VaR decreased due to a broader mix of currency exposures leading to higher diversification effects. The VaR for other price risk components, which arises mainly from movements in the prices of equity securities, remained stable. At 30 June 2012 the Group held equity securities with a market value of 0.5 billion Swiss francs (31 December 2011: 0.4 billion Swiss francs). This includes holdings in biotechnology companies which were acquired in the context of licensing transactions or scientific collaborations. Further information on financial risk management and financial risks and the VaR methodology is included in Note 31 to the 2011 Annual Financial Statements. 44 Roche Half-Year Report 2012 | Financial Review


  • Page 46

    International Financial Reporting Standards The Roche Group has been using International Financial Reporting Standards (IFRS) to report its consolidated results since 1990. In 2012 the Group has implemented various minor amendments to existing standards and interpretations, which have no material impact on the Group’s overall results and financial position. Several new and revised standards have been issued, which should be implemented by 2013. These are listed in Note 1 to the Interim Financial Statements. The Group is currently assessing the potential impacts of the various new and revised standards which the Group has not yet applied. Amongst other matters the revised version of IAS 19 ‘Employee Benefits’ includes the following changes to the existing standard: Eliminating the option to defer the recognition of actuarial gains and losses from defined benefit post-employment plans, known as the ‘corridor method’. The Group does not currently apply this option, but rather uses the option to recognise such gains and losses directly in equity. The option currently applied by the Group will henceforth be a requirement under the revised standard and therefore this change will have no impact on the Group’s financial statements. The current method of including the expected income from plan assets at an estimated asset return would be replaced by using the discount rate that is used to discount the defined benefit obligation. Based on an initial review the Group estimates that, had this method been applied to the 2011 Annual Financial Statements, net financial income would have been approximately 130 million Swiss francs lower than that published. Operating profit would not have been materially affected. 45 Roche Half-Year Report 2012 | Financial Review


  • Page 47

    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 71. Roche Group consolidated income statement for the six months ended 30 June 2012 in millions of CHF Pharmaceuticals Diagnostics Corporate Group Sales 2 17,409 5,014 – 22,423 Royalties and other operating income 2 802 78 – 880 Cost of sales (3,640) (2,408) – (6,048) Marketing and distribution (2,791) (1,313) – (4,104) Research and development 2 (4,472) (486) – (4,958) General and administration (870) (421) (570) (1,861) Operating profit 2 6,438 464 (570) 6,332 Associates (2) Financial income 4 239 Financing costs 4 (1,058) Profit before taxes 5,511 Income taxes 5 (1,143) Net income 4,368 Attributable to – Roche shareholders 4,255 – Non-controlling interests 113 Earnings per share and non-voting equity security Basic (CHF) 5.02 Diluted (CHF) 4.99 46 Roche Half-Year Report 2012 | Roche Group Interim Consolidated Financial Statements


  • Page 48

    Roche Group consolidated income statement for the six months ended 30 June 2011 in millions of CHF Pharmaceuticals Diagnostics Corporate Group Sales 2 16,815 4,856 – 21,671 Royalties and other operating income 2 746 50 – 796 Cost of sales (3,846) (2,252) – (6,098) Marketing and distribution (2,681) (1,177) – (3,858) Research and development 2 (3,543) (442) – (3,985) General and administration (671) (194) (201) (1,066) Operating profit 2 6,820 841 (201) 7,460 Associates – Financial income 4 373 Financing costs 4 (1,165) Profit before taxes 6,668 Income taxes 5 (1,409) Net income 5,259 Attributable to – Roche shareholders 5,151 – Non-controlling interests 108 Earnings per share and non-voting equity security Basic (CHF) 6.06 Diluted (CHF) 6.04 47 Roche Half-Year Report 2012 | Roche Group Interim Consolidated Financial Statements


  • Page 49

    Roche Group consolidated statement of comprehensive income in millions of CHF Six months ended 30 June 2012 2011 Net income recognised in income statement 4,368 5,259 Other comprehensive income Available-for-sale investments 19 33 Cash flow hedges (24) (113) Currency translation of foreign operations (153) 132 Defined benefit post-employment plans (900) (162) Other comprehensive income, net of tax (1,058) (110) Total comprehensive income 3,310 5,149 Attributable to – Roche shareholders 3,183 5,258 – Non-controlling interests 127 (109) Total 3,310 5,149 48 Roche Half-Year Report 2012 | Roche Group Interim Consolidated Financial Statements


  • Page 50

    Roche Group consolidated balance sheet in millions of CHF 30 June 2012 31 December 2011 Non-current assets Property, plant and equipment 15,761 16,201 8 Goodwill 7,777 7,843 Intangible assets 9 4,621 5,126 Associates 22 24 Financial long-term assets 374 360 Other long-term assets 474 460 Deferred income tax assets 3,200 2,762 Post-employment benefit assets 580 568 Total non-current assets 32,809 33,344 Current assets Inventories 5,513 5,060 Accounts receivable 9,559 9,799 Current income tax assets 245 222 Other current assets 2,261 1,864 Marketable securities 5,114 7,433 Cash and cash equivalents 4,106 3,854 Total current assets 26,798 28,232 Total assets 59,607 61,576 Non-current liabilities Long-term debt 11 (21,153) (23,459) Deferred income tax liabilities (235) (604) Post-employment benefit liabilities (6,684) (5,520) Provisions 10 (1,160) (991) Other non-current liabilities (296) (310) Total non-current liabilities (29,528) (30,884) Current liabilities Short-term debt 11 (5,400) (3,394) Current income tax liabilities (2,298) (2,206) Provisions 10 (2,257) (1,742) Accounts payable (1,623) (2,053) Accrued and other current liabilities (6,425) (6,815) Total current liabilities (18,003) (16,210) Total liabilities (47,531) (47,094) Total net assets 12,076 14,482 Equity Capital and reserves attributable to Roche shareholders 9,616 12,095 Equity attributable to non-controlling interests 2,460 2,387 Total equity 12,076 14,482 49 Roche Half-Year Report 2012 | Roche Group Interim Consolidated Financial Statements

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