Annual Report 2007 in Detail

Annual Report 2007 In Detail WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Content WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c 01 Marketed Products 04 Summary of Achievements 05 Tracleer® 06 Ventavis® 08 Zavesca® 08

02 Research & Development 10 Drug Discovery 11 Drug Discovery Platforms 11 Therapeutic Areas 12 Clinical Development 18

03 Our Strategy 27

04 Business Development 29

05 Financial Report 32 Corporate Governance 37 Consolidated Financial Statements 49 Holding Company Statements 78

03 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c 01 Marketed Products WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Summary of achievements Actelion’s strong commitment to expand Tracleer® into new indications is demonstrated by the comprehensive clini- Actelion continued its strong performance in 2007 and further cal trial program, including the COMPASS trials (combina- built its leadership position in pulmonary arterial hypertension tion therapy), BUILD 3 (idiopathic pulmonary fibrosis) and (PAH) with Tracleer® (bosentan) sales of CHF 1,18 billion, a FUTURE (pediatric indication). growth of 31% compared to the previous year (+32% in local currencies). This strong performance was seen in all re- Several marketing and life cycle activities were initiated for gions worldwide, including the United States, Europe, and Ventavis® in 2007 to enhance its profile and set it up for con- Japan in particular. It was also the first full year of marketing tinued success in 2008. Ventavis® (iloprost) after the acquisition of CoTherix in the United States. In an increasingly competitive PAH market, Zavesca® (miglustat), Actelion’s second global brand, gener- Ventavis® was able to contribute CHF 78.2 million to our PAH ated sales of CHF 35.3 million, a growth of 39% compared franchise revenues. to the previous year. Increased awareness and acceptance of the value of Zavesca® for patients suffering from Type 1 These excellent results are particularly remarkable consider- Gaucher disease are the basis for future market share growth. ing that new competition entered the market in 2007 within New data published in 2007 confirmed the positive effects the class of endothelin receptor antagonists (sitaxentan in of Zavesca® on Gaucher disease related bone manifestations, the European Union and ambrisentan in the United States). and bone pain in particular, strengthening the competitive Actelion’s in-depth knowledge of the PAH market, together profile of the brand. with our highly professional and determined worldwide marketing and sales force, continued medical education activities, The submission for an expansion of the indication to patients and further geographical expansion, were the basis for main- suffering from Niemann-Pick Type C disease is still under re- taining leadership and further growth. view by the European regulatory authorities.

Actelion further strengthened the profile of its flagship brand, Tracleer®. In 2007, we submitted an application in the US and Europe to expand the indication of Tracleer® for patients with Actelion currently markets the following products: PAH in WHO Functional Class II* (FC II), based on the conclu- sive results of the EARLY study – the only study investigating Product Indication(s) Status Commerciali- the effects of a PAH therapy specifically in a FC II patient zation rights ® group. With EARLY, Tracleer has shown a significant effect Tracleer® Pulmonary arterial hyper- marketed Actelion on delaying time to clinical worsening, a measure of disease tension progression, in three separate randomized controlled trials. Prevention of digital registered(1) Actelion ulcers in patients with The positive results of the double-blind, placebo-controlled, systemic sclerosis multi-national BENEFIT trial – which investigated the effects Prevention of digital in Actelion (2) ® ulcers in patients with registration of Tracleer in a patient population outside of WHO group systemic sclerosis I*, namely patients with chronic thromboembolic pulmo- Ventavis® Pulmonary arterial hyper- marketed Actelion(3) nary hypertension (CTEPH) – further proved to the value of tension ® Tracleer for patients. In June 2007, the EMEA granted ap- Zavesca® Type 1 Gaucher disease marketed Actelion(4) proval in the European Union for an expansion of the indication of Tracleer® for reducing the number of new digital ulcers in patients suffering from systemic sclerosis and ongo- (1) Only in the EU (2) A product is said to be "in registration" when it has completed Phase III clinical trials and ing digital ulcer disease. Digital ulcers are a serious and very its developer is in discussion with the relevant regulatory authorities relating to the filing of debilitating consequence of this disease. a new drug application for the product. (3) Only in the USA. (4) Except Israel, the West Bank and Gaza Strip.

* WHO clinical classification of pulmonary hypertension group diseases sharing similarities. PAH is WHO group 1. Group 1 comprises the following classifications:

I. Patients with pulmonary hypertension in whom there is no limitation of usual physical activity II. Patients with pulmonary hypertension who have mild limitation of physical activity III. Patients with pulmonary hypertension who have a marked limitation of physical activity IV. Patients with pulmonary hypertension who are unable to perform any physical activity at rest and who may have signs of right ventricular failure.

Annual Report 2007 - Marketed Products 05 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Tracleer® sels – makes the vessels stiffer and thicker, and some may become completely blocked. This increased stress causes Actelion’s lead product is Tracleer®, the first and only dual en- the heart to enlarge and become less flexible. As the cycle dothelin receptor antagonist. Tracleer® was the first oral treat- continues, less and less blood is able to flow out of the heart, ment approved for pulmonary arterial hypertension (PAH), a through the lungs and into the body, which causes additional rare, chronic, life-threatening disorder that severely compro- severe symptoms to appear. Heart and lung functions are mises the functions of the lungs and heart. Today, Tracleer® severely compromised in PAH patients, resulting in limited has been approved for the treatment of PAH in more than exercise capacity and, ultimately, a reduced life expectancy. 30 countries, including the United States in November 2001, the European Union in May 2002, and Japan in April 2005. The first signs of PAH – such as dyspnea (shortness of breath), We currently market Tracleer® in all major markets worldwide fatigue and difficulty exercising – are subtle. As a result, the – including the United States, the European Union, Japan, disease is often either misdiagnosed or not diagnosed at all Switzerland, Canada, Australia, and China. until a patient's condition is advanced. According to a 1991 study by D'Alonzo (et al) in the Annals of Internal Medicine, if Actelion received an orphan drug designation for Tracleer® in the disease is left untreated, 45 to 60% of PAH patients die PAH for jurisdictions including the European Union, the Unit- within two years of diagnosis. ed States, Japan, and Australia. Prior to the availability of Tracleer®, the main treatment alter- In addition to the indication in PAH, based on compelling natives for early-stage PAH were vasodilators – such as cal- clinical data, Tracleer® received approval from the European cium channel blockers, which cause blood vessels to expand, regulatory authorities in 2007 for the reduction in the number and oral anti-coagulants, which reduce blood clotting. These of new digital ulcers in patients suffering from systemic scle- therapies are able to relieve some of the symptoms of PAH, rosis and ongoing digital ulcer disease. but do not work in all patients. As the disease progressed, many patients were forced to turn to prostacyclin therapy, which required a 24-hour infusion pump and an intravenous Indications line implanted through the chest to deliver the drug directly into the patient's pulmonary vein. Tracleer® in pulmonary arterial hypertension Pulmonary hypertension, or high blood pressure in the cardio- This treatment is associated with a number of quality-of-life pulmonary system, is a simplified name for a complex health and safety limitations. Ultimately, many patients would re- problem. Pulmonary hypertension is a disease affecting peo- quire lung or heart-lung transplantation; this is costly and se- ple of all ages and ethnic background, seriously impacting verely limited due to the lack of suitable donor organs. the quality of life and life expectancy of patients. Pulmonary hypertension may result from any of a number of primary Tracleer® was approved on the basis of two Phase III clinical diseases. It can also arise idiopathically, that is, without a trials and is a twice-a-day oral formulation offering effective medically understood cause. The World Health Organization treatment for most moderate to severe PAH patients. It has (WHO) classifies five different forms of pulmonary hyperten- been shown to significantly delay disease progression,- im sion. These five forms differ in both their causes and their prove exercise capacity and increases the patient's ability to precise effects. Tracleer® is currently indicated for the WHO perform daily activities without shortness of breath. It also group 1 classification of pulmonary arterial hypertension improves quality of life, in some cases placing the patient (PAH). An estimated 100,000 to 200,000 patients worldwide in a less severe diagnostic class. In a number of patients, currently suffer from this disease. Tracleer® may stabilize the disease, and like any pharmaceutical product, it may be ineffective for others. Chronic and life-threatening, PAH is characterized by abnor- mally high blood pressure in the arteries between the heart and lungs. It may arise in an idiopathic primary form or in secondary forms related to conditions or tissue disorders that affect the lungs, such as scleroderma, lupus, HIV/AIDS or congenital heart disease. PAH begins when small vessels that supply blood to the lungs constrict and make it more difficult for blood to reach the lungs. As a result, the heart has to pump harder. Over time, fibrosis – the scarring of blood ves-

06 Marketed Products WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c i. Additional clinical trials with Tracleer® in PAH The COMPASS 2 study, which evaluates the effect of Tracleer®, when given in combination with sildenafil, on morbidity and Additional clinical trials have been conducted in PAH patients mortality in a group of patients followed for up to three years. to increase the information about the use of Tracleer® in vari- The results will be available sometime in 2010. ous conditions and help treating physicians to manage patients appropriately. These trials are briefly summarized in the Tracleer® in digital ulcers in scleroderma patients table below: Systemic sclerosis (SSc) is a chronic autoimmune disease characterized by progressive fibrosis with deposition of collagen in the skin and internal organs. This uncontrolled fibrotic Study name Target patient Main result population process leads to occlusion of the small vessels in the body which may result in the development of PAH as indicated BREATHE 2 Patient at epopro- Tracleer® further improved cardiac stenol initiation hemodynamic when used in associ- above but also in the development of digital ulcers (DUs). ation with i.v. epoprostenol. DUs are very painful and result in difficult-to-heal open sores BREATHE 3 Children This study has defined the pharma- that occur on fingers and toes, leaving depressed scars. cokinetics of bosentan in children. BREATHE 4 PAH related to Tracleer® improved exercise capacity They also have a negative impact on the ability to work or per- HIV in HIV positive and cardiac hemodynamics. form daily activities. In severe cases, infection can complicate patients the course of the ulcer, sometimes leading to bone infection ® BREATHE 5 PAH related to Tracleer was shown to be safe in and gangrene, where surgery and even amputation may be congenital heart this population and improved both defects with Eisen- cardiac hemodynamics and exercise required. Endothelin is involved in this pathological process, menger syndrome capacity. and the evaluation of the benefit of Tracleer® as an endothelin EARLY PAH patients in Tracleer® improved cardiac hemo- receptor antagonist in this indication was granted. WHO Functional dynamics and delayed the time to Class II (early stage clinical worsening. A trend towards of the disease) an improvement in exercise capacity These potential benefits were tested in two placebo con- was also shown in this study. trolled trials (RAPIDS 1 and RAPIDS 2) in patients with systemic sclerosis and digital ulcers. In the two studies, Tracleer® prevented the occurrence of new digital ulcers and contributed to improving the patients’ quality of life. The two RAPIDS studies confirm the properties of Tracleer® as a dual ii. Use of bosentan with sildenafil: the COMPASS clinical endothelin receptor antagonist that prevents the remodeling trial program of the vessels – the main and common pathological process leading to PAH and the formation of digital ulcers. Additional trials are currently being conducted with Tracleer® in the field of PAH to demonstrate that it needs to be part of In June 2007, the European Commission granted marketing all PAH treatment, either alone or in combination with other approval for Tracleer® for the reduction of the number of new drugs. The COMPASS program evaluates specifically the ef- digital ulcers in patients with systemic sclerosis and ongoing ficacy and safety of the use of bosentan in combination with digital ulcer disease. sildenafil – an approved and effective treatment for PAH but one that addresses another pathological pathway of the dis- As of the end of 2007, regulatory proceedings to extend the ease. label of Tracleer® to include digital ulcerations are ongoing worldwide. The COMPASS program includes two main trials:

The COMPASS 1 study completed in 2007, the results of which are summarized below:

Study name Target patient Main result population COMPASS 1 Patients on chronic Sildenafil showed a positive effect bosentan for PAH on cardiac hemodynamics when added to patients on chronic Tracleer®.

Marketed Products 07 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Tracleer® in the market The analysis of this study showed that the combination of Ventavis® and bosentan therapy was well tolerated, was con- Tracleer® continued strong growth in 2007, confirming its sistent with the safety profile observed in patients receiving market leadership position in PAH. Its sales of CHF 1.18 bil- only iloprost, and provided clinical benefit in patients with lion represent a growth of 31% over the previous year. PAH. Ventavis® is indicated for the treatment of pulmonary arterial hypertension (WHO Group I) in patients with NYHA This strong performance of our flagship product is attributed Class III or IV symptoms. to two main factors: Ventavis® is supported in the United States, as part of our Actelion’s commitment to investigating the potential ben- PAH franchise by the marketing and sales force, for the treat- efits of Tracleer® – in new disease conditions and indications ment of patients suffering from this devastating disease. where there is a high unmet medical need – continues to generate strong and unmatched clinical data that represent Parallel to our marketing and sales efforts, we are running the fundamental position of Tracleer® as the undisputed cor- several initiatives to further improve the convenience of us- nerstone of therapy ing Ventavis®, such as optimizing the cleaning protocol of the inhalation device and reducing inhalation time. Our world class specialized and experienced marketing and sales force has been strengthened and expanded to deal with the increasing awareness and attention in the medical community and to ensure a continued leading share of voice Zavesca® in the market place. In addition, we are also creating the potential for future growth by expanding into new markets in Zavesca® (miglustat), currently the only approved oral treat- Latin America, Eastern Europe and Asia. ment for Type 1 Gaucher disease – a rare and debilitating metabolic disorder – is used in patients for whom enzyme replacement therapy is unsuitable.

Ventavis® In November 2002, Actelion in-licensed miglustat, the active ingredient of Zavesca®, from Oxford GlycoSciences (UK) Ltd. Ventavis® (iloprost) – the only inhalable PAH therapy on the Market introduction in the European Union began in March market – was approved by the FDA in the United States at 2003, followed by the United States in January 2004. In No- the end of 2004. Actelion gained the licensing rights to mar- vember 2005, we entered an agreement with UCB S.A., the ket Ventavis® in the United States through the acquisition legal successor to Oxford GlycoSciences. of the US company, CoTherix Inc., at the end of 2006. 2007 marks the first year of marketing Ventavis® and a strong per- Under this agreement, Actelion is assigned all of UCB S.A’s formance with sales of CHF 78.2 million represent a substan- rights and obligations regarding miglustat, including world- tial addition to our PAH franchise. wide marketing rights, except in Israel, the West Bank and Gaza Strip. Geographical expansion to Australia, where we Ventavis® is an inhaled formulation of iloprost, a synthetic achieved marketing approval during the year is further in- compound that is structurally similar to prostacyclins – natu- creasing the commercial potential of Zavesca®. rally occurring molecules that cause blood vessels to dilate. Iloprost is a synthetic analogue of prostacyclin PGI2 that di- There are approximately 7,000 patients with Type 1 Gaucher lates systemic and pulmonary arterial vascular beds. disease in the EU and the USA, of whom about 3,000 receive enzyme replacement therapy. It also affects platelet aggregation, although the relevance of this effect to the treatment of pulmonary hypertension is un- Based on clinical data with Zavesca® in another life threaten- known. In controlled trials, Ventavis® improved a composite ing lysosomal storage disease, Niemann-Pick Type C, Actelion endpoint consisting of exercise tolerance, symptoms (NYHA filed for marketing authorization in the European Union for an Class), and lack of deterioration. In March 2005, top line data expansion of the Zavesca® label. Assessment of the applica- of the Phase II clinical trial, STEP – evaluating the safety and tion by the European Regulatory Authority is ongoing. This is added benefit of using Ventavis® Inhalation Solution thera- another area of high unmet medical need: there is currently py in patients with PAH already undergoing treatment with no therapeutic option available for patients suffering from this bosentan – were published. debilitating condition, which often affects young children.

08 Marketed Products WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Indications Zavesca® in the market

Zavesca® in Gaucher disease (Type 1) Zavesca® continues to grow steadily and achieved sales of Gaucher disease is an inherited metabolic disorder caused by CHF 35.3 million in 2007 – a growth of 39% compared to pre- a genetic mutation. In Gaucher disease, the patient’s body is vious year. In addition, we were able to significantly increase unable to produce sufficient amounts of glucocerebrosidase, our share in several markets. an enzyme that metabolizes a lipid or fatty substance called glucosylceramide. Because the body cannot properly metab- Since the molecule appears to penetrate deep in tissues, it olize this lipid, harmful quantities accumulate in the spleen, has been hypothezised to have a more significant effect on liver, lungs, bone marrow, and, in rare cases, the brain. bone disease. Recently presented and published data have confirmed the positive effect of Zavesca® on Gaucher dis- Three phenotypes, or clinical forms, of Gaucher disease are ease related bone manifestations and bone pain, in particu- commonly recognized. The first phenotype, Type 1, is non- lar. This data confirms the beneficial effects of Zavesca® for neuronopathic, and by far the most common. Patients in this Gaucher Type 1 patients and could help to further increase group usually bruise easily and experience fatigue due to market share. anaemia and low blood platelet count. They also suffer from liver and spleen enlargement, bone disease manifestations Another key to future market penetration is the Zavesca® and, in some instances, lung and kidney impairment. MAINTENANCE study. This evaluates whether patients with Type 1 Gaucher disease, who are treated with enzyme replace- Before the introduction of Zavesca®, the only treatment for ment therapy, remain stable after switching to Zavesca®. this debilitating disease was intravenous enzyme replacement therapy. With Zavesca®, patients with Gaucher disease have access to an additional treatment option. It has been shown to reduce the organomegaly induced by the accumulation of glycosylceramide.

Zavesca® provides a therapeutic approach to controlling the overall level of glucosylceramide by reducing its generation. The goal of therapy with Zavesca® is to regulate the rate of synthesis of glucosylceramide to a level that allows its further degradation by the residual glucocerebrosidase activity.

We received an orphan drug designation for Zavesca® in Type 1 Gaucher disease in the European Union and the United States.

Marketed Products 09 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c 02 Research and Development WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Drug Discovery The lead is then passed to our pharmacologists, neurobi- ologists, immunologists and electro-physiologists to further Over the past 10 years, Actelion’s efforts in drug discovery characterize the compounds. These lead compounds are then have focused on developing platforms of expertise. This fo- passed back through this cycle until an optimized compound cus allows high productivity in the generation of innovative is available for pre-clinical development by our pharmacoki- compounds potentially addressing a wide range of highly un- neticists, galenicists and toxicologists. met medical needs. This platform approach, combined with our technologic capa- The first focus is the design, synthesis and optimization of bilities and in-house expertise, has resulted in the selection small molecular weight drug-like molecules. The productiv- of a number of valuable compounds for pre-clinical investi- ity of our endeavors is demonstrated with more than 1,000 gations. The final outcome is a robust clinical development pending patent applications and/or granted patents currently pipeline filled with compounds discovered and optimized in in Actelion’s portfolio. In 2007, the company filed 28 priority Actelion’s laboratories. patent applications.

Actelion also focuses on the choice of its molecular target families. Initially, the company looked solely at G-protein cou- Drug discovery platforms pled receptors (GPCR’s) and aspartic proteinases. In recent years, several other target areas have been progressively added. One example is the ion channel blocker platform. An- New chemical entities (NCE) other is the anti-infective’s platform acquired after the integra- tion of a research group specialized in innovative anti-infective Our research focuses on the design and synthesis of novel research. low-molecular-weight, drug-like molecules. Experience has shown that small molecules generally lend themselves to Actelion endeavors to follow innovation where it leads, easier formulation, have a broader array of dosage forms, as evidenced by the fact that from a few target platforms, have greater potential for bioavailability, in particular after oral Actelion’s compounds have found or might find applications administration, and are more efficiently manufactured. While in multiple disease areas, such as cardiovascular or immunol- our medicinal chemistry and parallel chemistry groups syn- ogy. In 2007, we expanded our research efforts by adding a thesize smaller quantities of structurally diverse molecules, dedicated oncology unit to evaluate all our ongoing efforts for our process research chemists prepare the quantities of se- further potential applications in the field of cancer. lected compounds needed for further studies.

To maximize output from our focus on target families, we use the appropriate state-of-the-art technologies. We combine G-Protein coupled receptors technology with human expertise on how to make the best use of our toolbox. We have over 100 medicinal and process G-Protein coupled receptors (GPCR's), also described as chemists creating our low molecular weight compounds. For seven transmembrane domain receptors (7TM's), are inte- example, Actelion scientists have access to the rational input gral membrane proteins. They can be activated by external of computer-assisted molecular modeling. In 2007, we have signals, such as hormones, neurotransmitters or odors. This solved 12 highly complex three-dimensional structures of activation induces a conformational change of the receptor proteins from different projects. which in turn causes activation of G-proteins and the subsequent transmission of biochemical signals within the cell. This, in turn, has provided a basis for designing a multitude There are more than 100 known GPCR's in humans and many of molecules that our molecular biologists and biochemists of them are involved in a broad array of diseases. Some of then characterize in relation to the chosen targets, for which these receptors are the subject of our development pro- they develop a variety of assays and execute screens. In 2007, grams, such as the endothelin receptors ETA and ETB, orexin over one million assay results were generated, managed and receptors OX1 and OX2, or the sphingosine-1-phosphate re- analyzed by our Oracle-based data-warrior programs, built in- ceptor S1P1. house.

Annual Report 2007 - Research and Development 11 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Aspartic proteinases However, since the scientific knowledge and technical capabilities required in this area are very similar to those in the Aspartic proteinases are a class of enzymes that promote area of cardiovascular ion channel therapies, research pro- chemical reactions in and outside of cells. To perform their grams were soon initiated looking for modulators of selected function, aspartic proteinases use an arrangement of two as- ion channels to treat cardiovascular diseases. In 2007, further partic acids in order to activate a water molecule that acts as development of the electrophysiology group led to the initia- a chemical “scissor”. tion of research projects targeting ion channels to treat neurological and immunological diseases. There are more than 50 known aspartic proteinases, of which at least nine are currently known to exist in humans. Al- though knowledge of their precise physiological roles is still emerging, they have been implicated in cancer, as well as in Therapeutic areas inflammatory, degenerative and cardiovascular diseases. In addition, aspartic proteinases play a vital role in organisms that cause infections, including parasites, fungi and retrovi- Cardiovascular disorders ruses such as HIV. Cardiovascular disorders encompass all complaints where there is a disturbance in the function of the heart or blood Anti-infectives vessels. Cardiovascular disease is one of the leading causes of death in industrialized countries, a fact which is also ex- In early 2004, Actelion initiated a research program in the field pected to become the case in developing countries. of antibiotics. Due to the development of resistance to currently available antibiotics and the emergence of new patho- Our focus gens, the medical need for new antibiotic compounds is high. Our program is focused on the discovery of novel classes i. Endothelial system of antibiotics that may offer improved properties, such as increased potency, coverage of multi-resistant infections and The endothelium is an organ consisting of a single layer of a decreased inherent liability for resistance development. A cells between the blood stream and the blood vessel wall. portfolio of projects has been established focusing on both antibiotics for intravenous treatment of severe hospital infec- The main functions of the endothelium include: tions and oral antibiotics for community acquired infections. We currently have one compound in full pre-clinical develop- - maintenance of blood vessel tone, which is critical for regu- ment and are in the optimization phase for several other com- lating blood pressure levels pounds. and - prevention of blood clots forming on the vessel wall by providing a non-adhesive surface. Ion channels The endothelium produces and secretes two important vaso- Ion channels are transmembrane pores that allow the pas- active molecules, endothelin and nitric oxide, that work in op- sage of ions (charged molecules) into or out of a cell. There position. Nitric oxide dilates blood vessels, prevents platelet are hundreds of different ion channels and they are distin- adhesion and inhibits cell proliferation. guished based upon ion selectivity, opening mechanism, and protein sequence. Ion channels can be opened by chemical Endothelin, however, is a powerful blood vessel constric- ligands, voltage fluctuations, acidity changes, temperature tor that also promotes cell proliferation. In a normal, healthy variations, or mechanical stimuli (e.g. touch or sound). state, the body maintains a balance between nitric oxide and endothelin. In contrast, in certain disease states endothelin is In mid-2004, Actelion established an in-house in-vitro electro- produced in excess. In addition to causing vasoconstriction – physiology group. This was primarily to provide internal sup- the narrowing of blood vessels – excessive endothelin can: port for early pre-clinical evaluation of drug safety in the area of cardiac electrophysiology. - stiffen blood vessels and tissues by promoting fibrosis, the accumulation of connective tissue

12 Research and Development WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c - cause vascular remodeling, a change in the vessels' shape, 3. Digital ulcers in systemic sclerosis vascular hypertrophy, an increase in the thickness of blood Systemic sclerosis (SSc) is a chronic autoimmune connective vessel walls and cardiac hypertrophy tissue disease characterized by excessive collagen deposition and in the skin and internal organs, such as the gastrointestinal - predispose the vessels to inflammation. tract, kidney, heart and lungs. Symptoms result from vascular dysfunction, inflammation and progressive fibrosis, which Endothelin binds to two types of receptors found on the lead to occlusion of the microvasculature.

blood vessel walls and in tissues: ETA receptors, which are found predominantly in smooth muscle cells in the blood ves- As a result of the vascular injury, complications such as

sels, and ETB receptors, which are also found in connective pulmonary arterial hypertension (approximately 100,000 to tissue cells, neuronal cells, endothelial cells and hormone- 200,000 PAH patients worldwide) and digital ulcers (approxi- producing cells. mately 5,000 severe cases every year worldwide) can occur. About 50% of systemic sclerosis patients suffer from digital The activation of the endothelin system plays a critical role ulcers (DUs) at least once in their disease history. DUs are in chronic cardiovascular diseases, such as pulmonary hyper- very painful and result in difficult-to-heal open sores that oc- tension, and in acute cardiovascular conditions, such as right cur on fingers and toes. They leave depressed scars and ad- heart failure and cerebral vasospasm – a constriction of blood versely impact the ability to perform work and perform daily vessels in the brain following subarachnoid hemorrhage. activities, particularly those associated with fingertip func- It is also implicated in connective tissue diseases such as tions. In severe cases, infection can become a complication, scleroderma and pulmonary fibrosis. Endothelin levels have leading to osteomyelitis and gangrene, where surgery and been shown to correlate with disease severity. Among our even amputation may be required.

products are oral and intravenous dual ETA-ETB antagonists

and an intravenous selective ETA antagonist for cerebral vaso- DUs are caused by a reduction in the lumen of small blood spasm that block the consequences of excessive endothelin. vessels (obliterative vasculopathy as observed in the lung in PAH) that diminishes the blood flow to the fingers and toes. Disorders of the endothelial system Endothelin, a pathogenic mediator, is implicated in vascular damage in SSc. In addition to causing vasoconstriction, en- 1. Pulmonary arterial hypertension dothelin also has direct deleterious effects, which cause fi- Pulmonary arterial hypertension (PAH) is a serious disease of brosis, vascular hypertrophy, and inflammation. the arteries connecting the lungs to the heart (the pulmonary arteries). Under normal conditions, the right side of the heart 4. Idiopathic pulmonary fibrosis (the right atrium and right ventricle) pumps venous blood Pulmonary fibrosis is a progressive and usually fatal disease through the lungs, so the blood can pick up oxygen. that may arise idiopathically or in association with underlying diseases like systemic sclerosis. It is estimated there are When PAH develops, blood flow through the pulmonary ar- around 60,000 patients worldwide with idiopathic pulmonary teries is restricted and the right side of the heart is put under fibrosis (IPF). increasing strain to pump blood through to the lungs. In IPF, fibrosis destroys both the structure and the function 2. Chronic obstructive thromboembolic pulmonary hyper- of the respiratory system. Endothelin has direct pro-fibrotic tension and pro-inflammatory effects. Since endothelin concentra- Chronic obstructive thromboembolic pulmonary hypertension tions are strongly elevated in interstitial lung disease, there is (CTEPH) is caused by obstruction of the pulmonary arteries evidence implicating endothelin in these diseases as well. For by organized persistent thrombi leading to increased pulmo- patients with IPF, there are currently no approved therapies nary vascular resistance, progressive pulmonary hyperten- available. sion and ultimately right-heart failure. Pulmonary endarterec- tomy (PEA) is the preferred treatment for CTEPH in suitable 5. Vasospasm as a consequence of aneurysmal suba- patients. Nevertheless, up to half of all CTEPH patients can- rachnoid hemorrhage not undergo surgery due to the nature of the disease and the Aneurysmal subarachnoid hemorrhage (aSAH) is a life-threat- location of the thrombi. For patients with inoperable CTEPH, ening condition affecting over 80,000 people in the EU, US there are currently no approved therapies available. and Japan every year.

Research and Development 13 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c This condition can occur when the rupture of an aneurysm on The overproduction of angiotensin II produces a range of del- the cerebral vessels leads to release of blood into the suba- eterious effects. Disorders of this system are a major fac- rachnoid space of the brain. tor in high blood pressure, heart disease and kidney failure. Intravascular coiling or surgical clipping is usually required Drugs that block the renin-angiotensin II system comprise to stop the bleeding and prevent further episodes. Vaso- an important category of cardiovascular drugs used today. spasm (uncontrollable tightening) of the brain blood vessels These drugs – angiotensin II converting enzyme (ACE) inhibi- is a feared complication after aSAH, because a shortage of tors, and angiotensin II receptor blockers, or ARBs – are es- blood supply to the brain can lead to cerebral ischemia and tablished drugs for high blood pressure, kidney disease and infarction. Vasospasm is unpredictable in nature and seen in heart failure and are among the most commercially success- over 67% of untreated patients with angiography at the time ful classes of pharmaceuticals. of maximum spasm around the end of the first week. It becomes symptomatic in about half of these patients. Currently, A compensatory increase in other enzymes, such as chymase, there is no effective treatment for the prevention and treat- can bypass the effects of an ACE inhibitor; furthermore, ARBs ment of the severe complications following vasospasm. do not block all angiotensin II receptors. Therefore, it is pre- dicted that an orally active renin inhibitor may provide a more 6. Right ventricular failure (RVF) specific and a more complete inhibition of the renin-angio- Cardiopulmonary bypass (CPB) is commonly used in heart tensin II system than either an ACE inhibitor or an ARB alone. surgery because of the difficulty of operating on a beating heart. Operations requiring the chambers of the heart to be opened require the use of CPB to support circulation during Central nervous system (CNS) that period. The level of endothelin (ET), one of the strongest vasoconstrictors currently known, increases during and after Central nervous system or brain diseases (psychiatric, neuro- CPB. Increased ET is associated with pulmonary hyperten- logical and neurosurgical disorders) figure among the leading sion (PH) and right ventricular failure (RVF). Actelion’s efforts causes of disease and disability. Recent WHO data suggests in this indication focus particularly on RVF during separation that brain disorders cause 35% of the burden of all diseases from cardiopulmonary bypass (CPB). Patients with left heart in Europe. Of patients in primary care, 25% are affected by a diseases, such as mitral and aortic valve disease, often have neuropsychiatric disease – such as mood disorders (depres- pulmonary hypertension that may be acutely exacerbated sion, anxiety), psychotic conditions (schizophrenia, mania), during weaning from CPB, greatly increasing the risk of right declined cognitive function (Alzheimer and neurodegenera- ventricular failure. In 2003, 200,000 heart valve procedures tive diseases) or brain trauma (stroke, brain or spine lesion). with open-heart surgery took place globally. These are ex- Brain disorders are substantially more costly to society than pected to rise due to an aging population and improved surgi- other important fields in medicine such as heart disease, can- cal techniques. cer and diabetes.

7. Endothelial system related oncology The brain, a very sophisticated and complex organ, cannot Endothelin receptors and endothelin are expressed in several easily be investigated as a separate organ and this has im- tumor types, such as melanoma on tumor cells and stromal pacted the development of neurological and psychiatric treat- cells. They also contribute to invasion and metastasis. Our ments. However, dramatic advances in CNS research over endothelin antagonists are therefore being explored for ap- the last two decades, enables the development of truly in- plication in cancer therapy. novative treatments today. For more information on Actelion’s oncology strategy, please refer to the oncology therapeutic area. Our focus ii. Renin angiotensin system i. Sleep and sleep disorders

The critical enzyme renin is produced in the kidney, where It is widely acknowledged that a lack of sleep can have a sig- it serves as gatekeeper to the biochemical cascade that ul- nificant negative impact on daily functioning, physical and timately results in production of the hormone angiotensin II. mental health. There are four main categories of sleep disor- Under normal conditions, the kidney controls blood volume, der: hypersomnia, circadian rhythm disorders, parasomnias, blood pressure and the electrolyte composition of body fluids and insomnia. Insomnia is, worldwide, the most commonly through the tightly regulated production of renin and there- reported sleep disorder and is estimated to affect up to one fore of angiotensin II. third of the adult population.

14 Research and Development WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Most products on the market enhance the effects of GABA, the public health sector. Some of those diseases like multiple the major inhibitory neurotransmitter in the central nervous sclerosis, psoriasis or type-1 diabetes are characterized by an system. Such medications suffer from a major trade-off: the aberrant attack of the body's own tissue by T cells. The preva- greater the efficacy, the greater the "hangover" effect the next lence rates for allergic asthma has risen in the last 40 years day in terms of impaired mental and physical performance. from below 0.5% in the late 1960s to 3.5% in 2000, and from Usually, sedatives decrease the length of the REM (rapid eye almost 0% to over 8% for allergic rhinitis in a study from Fin- movement) sleep phase, which – together with non-REM land. The trend for increase is observed throughout the devel- sleep – is hypothesized to be important for memory consoli- oped world and is even steeper in developing countries. dation. Our focus 1. The orexin system Our research team is targeting the G-Protein coupled recep- i. S1P system tor’s (GPCR’s) that mediate the actions of orexins. Orexins are neuropeptide hormones produced in specific regions of The adaptive immune system relies on constant circulation of the brain to regulate appetite and alertness. For example, ge- lymphocytes between lymphoid organs and other tissues of netic defects of the orexin peptides, or their receptors, are the body. After maturation, lymphocytes leave the bone mar- associated with certain inherited sleep disorders. Orexins row or thymus, enter the circulation, and travel via the blood have been further associated with increased appetite and and the lymphatic system, surveying for antigens that they increased physical activity in experimental animals. Orexins recognize. In the secondary lymphoid organs, which include may also play a role in other conditions. lymph nodes, Peyer's patches, and the spleen, naïve lymphocytes encounter antigen-presenting cells and may be acti- ii. Alzheimer’s disease vated. Once activated, T cells must leave the lymph node to reach target tissues, whereas B cells can secrete antibodies Alzheimer’s disease is a form of senile dementia, a progres- without leaving the secondary lymphoid organs. Circulation sive neurodegenerative disease. There is a great deal of of lymphocytes between blood, lymphatic system, and non- variation in the progression of the disease from patient to lymphoid tissues is tightly regulated, and it has recently been patient. Early symptoms can be missed easily because they shown that the lysophospholipid sphingosine-1-phosphate resemble the natural signs of aging or can result from fatigue, (S1P) plays a central role in lymphocyte trafficking. grief, depression, illness or alcohol. Since the prevalence of neurodegenerative diseases, such as Alzheimer’s disease, in- S1P is abundantly synthesized and secreted by many cell creases with age, these diseases are likely to become com- types, including erythrocytes, platelets and mast cells, and monplace due to the aging population and will thus become elicits a variety of physiological responses. The concentration a greater burden on family, care-givers and on health care of S1P is low within the lymph node interior but very high services in general. in the adjacent draining lymphatic vessels. These two com- partments are separated by lymphatic endothelium. Lympho- 1. Bace-1 inhibition cytes are able to sense a concentration gradient of S1P and BACE-1 (beta amyloid converting enzyme; or betasecretase) migrate towards the higher S1P concentration. The migration is an important target for development of a drug therapy of lymphocytes out of secondary lymphoid organs is depen-

for Alzheimer's disease. It is hypothesized that inhibition of dent on the S1P1 receptor. BACE-1 will prevent the formation of amyloid plaques, protein fragments that accumulate in the brains of Alzheimer's Sphingosine-1-phospate (S1P) is a phospholipid released by patients. If so, a BACE-1 inhibitor may prove effective in pre- platelets, mast and other cells. It is currently established that venting and treating Alzheimer's disease. S1P stimulates at least five different G-protein coupled recep-

tors (GPCR’s): S1P1,2,3,4, and 5.

Immunology Activation of these GPCR’s mediates a complex variety of bio- logical responses, such as lymphocyte migration, endothelial Autoimmune diseases and allergies are characterized by an cell proliferation, blood vessel constriction, heart rate modula-

inappropriate response of the immune system to either the tion and others. Actelion's efforts in the field of selective S1P1 body's own tissue or to environmental antigens. An estimat- receptor agonists started in 1999 by focusing on receptors ed 5 to 8% of the Northern American population is affected found on the endothelium, the inner lining of blood vessels. by autoimmune diseases, underscoring their importance in

Research and Development 15 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c 1. S1P1 agonists life expectancy around the world in the past century. Yet drug-resistant pathogens have been on the rise in the re-

In the presence of an S1P1 receptor agonist, lymphocytes cent decades. Resistance may be due to exclusion, efflux, lose their ability to sense S1P concentration gradients. As a inactivation of the drug or modification of the cellular- tar

consequence, S1P1 receptor agonists block lymphocyte mi- get. Increasingly, infections that were once treatable with gration out of lymphoid tissue into the lymphatic and vascular antibiotics are becoming difficult or impossible to treat. circulation, thereby reducing peripheral lymphocyte counts and preventing lymphocyte recruitment to sites of inflamma- The ISDA estimated that in 2004, two million people acquired tion. bacterial infections while in hospital and about 90,000 patients died as a result. About 70% of these infections were This new strategy for therapeutic immunomodulation offers due to resistant or multiple-resistant (MDR) pathogens. potential advantages over existing therapies. Sequestration of T cells in lymphoid organs are expected to prevent the pro- Our focus cesses that contribute to inflammatory diseases – such as tissue invasion, local cytokine release, macrophage recruit- Actelion’s research focuses on new targets with proven ment, and direct cell killing – while sparing functions that do antibacterial activity, and new chemical scaffolds with new not rely on homing mechanisms, such as antibody generation mechanism of action. It aims at combining two pharmaco- by B lymphocytes, first line immunological protection by neu- phores into one molecule, thus addressing multiple targets trophils and monocytes, and antigen-dependent T cell activa- in parallel. We believe that this strategy offers the potential tion and expansion. benefits of no cross-resistance with established classes, a low propensity to develop resistance, and a broad spectrum. ii. Allergy

An allergy is a unique type of an immune reaction. Normally, Genetic disorders the immune system responds to foreign microorganisms or particles by producing specific proteins called antibodies. Genetic disorders are chronically debilitating, sometimes life- These antibodies are capable of binding to specific sites, or threatening diseases with a low prevalence and a high level antigens, on the foreign particle. The recognition between of complexity and heterogeneity. There are many high unmet antibody and antigen sets off a series of chemical reactions medical needs in the field of genetic disorders, with only few designed to protect the body from infection. Sometimes, the disease-modifying drugs available. These rare disorders call production of antibodies is triggered by harmless, everyday for a global approach on special and combined efforts to pre- substances such as pollen, dust, and animal dander. When vent significant morbidity or avoidable premature mortality, this occurs, an allergy may develop against the offending sub- and to improve quality of life of those affected. stance (which is then called an allergen). Our focus Not all patients respond to current therapies and the majority of patients do not achieve disease control. This combined with i. Type 1 Gaucher disease inconvenient administration forms and side effects amounts to a high unmet medical need where a new approach is need- Gaucher disease is the most common disease among all in- ed. Actelion’s research targets allergy-specific processes with herited glycosphingolipid storage disorders, affecting approxi- a focus on regulation of specific immune cells. mately 7,000 patients worldwide.

It is an inherited autosomal recessive disorder caused by the Infectious diseases accumulation of glucosylceramide in the lysosomes of mono- cyte-derived macrophages (Gaucher cells), in tissues of the Infectious diseases are the second leading cause of mortality reticuloendothelial system, due to the reduced activity of lys- causing about 20% of global deaths according to the World osomal ß-glucocerebrosidase. Accumulation of glucosylcer- Health Report 2003. Among these, respiratory and other amide in Kuppfer cells in the liver and in splenic macrophages bacterial infections account for four million deaths each year; is associated with enlargement of the corresponding organs. tuberculosis is responsible for another 1.5 million fatalities. Splenomegaly and bone marrow infiltration by Gaucher cells Antibiotics have saved millions of lives since their introduc- lead to progressive anemia and thrombocytopenia. Accu- tion in the 1940s and contributed much to the increase of mulation of glucosylceramide in bone marrow is associated

16 Research and Development WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c with osteopenia, lytic lesions, chronic pain, acute episodes of transported properly to the plasma membrane. As a result, ”bone crisis”, bone infarcts, and osteonecrosis. Overall, Gau- ion and water movements through the epithelial cell mem- cher disease is a multi-system disease with under-diagnosed brane are abnormal, causing mucus hyper viscosity. bone manifestations – in particular, reduced bone mineral density and bone pain, resulting in long-term disability. Current therapies for CF involve mucolytics, antibiotics to prevent bacterial colonization and lung infection, and nutritional Current treatments for Type 1 Gaucher disease include en- management. There is currently no disease-modifying drug zyme replacement therapy (imiglucerase, Cerezyme®) and approved for CF. substrate reduction therapy (miglustat, Zavesca®). Palliative treatments include analgesics, antibiotics and bisphospho- nates. Oncology

ii. Niemann-Pick disease Type C Our understanding of the molecular pathophysiology of cancer has improved significantly over the last 25 years. This Niemann-Pick disease Type C (NPC) is a rare, fatal, degenera- has led to the testing of a large number of new approaches tive, genetic condition primarily affecting children and teenag- to treat cancer patients. Some of these target oriented ap- ers, but which can strike at any age. There are approximately proaches have led to impressive benefits for the patients 900 NPC patients worldwide. The neurological symptoms of with certain cancers, such as Hodgkin lymphoma or chronic NPC are caused by the accumulation of glycosphingolipids in myelogenous leukemia. However, the majority of cancers re- neurons, secondary to abnormal lipid trafficking. It is relent- spond only initially or become resistant to current targeted lessly progressive and most patients die within five to ten therapies or drug combinations. Fortunately, the technologies years of diagnosis. Neurological deterioration is a key feature available today allow rapid progress in further understanding of the disease, and can manifest itself as clumsy body move- the mechanistic basis of cancer and allow the selection and ments, balance problems, slow and slurred speech, swallow- testing of new treatments. The recent identification of tumor ing difficulty, eye movement problems and seizures. Intellec- stem cells, the importance of the tumor stroma – such as tual decline is common. In the final stages of the disease, the angiogenesis and the dissection of the process of tumor me- child or young adult is frequently bedridden, has little muscle tastasis – and the process leading to cancer spread, all offer control and is intellectually impaired. There is currently no many new targets and target combinations. Taken together specific treatment option for this condition. the result is a promise for improved treatments for cancer patients in the future. iii. Cystic fibrosis Our focus Cystic fibrosis (CF) is an autosomal recessive, genetic- dis order that leads to a multi-system organ dysfunction. CF is Actelion’s research programs to identify and develop com- the most common fatal genetic disorder in the Caucasian pounds for cardiovascular and other diseases have provided population, affecting approximately 80,000 patients in the US compounds which can be of potential use in oncology. For and the EU. CF involves all epithelial cells, and classically im- instance, endothelin receptors and endothelin are expressed pacts the lungs, sinuses, pancreas, liver/bile ducts, intestines, in several tumor types, such as melanoma on tumor cells and reproductive tract, bones, and sweat glands. The most seri- stromal cells, and contribute to invasion and metastasis. Our ous consequence of CF is respiratory disease. Due to mu- endothelin antagonists are therefore being explored for ap- cus hyper viscosity, individuals with CF develop chronic lung plication in cancer therapy. infections, leading to chronic inflammation and lung scarring. Progressive lung dysfunction is the most significant cause The test systems we use will not only analyze effects on the of morbidity and mortality with a median survival age of ap- cancer cells but study the interaction between cancer cells proximately 37 years. and the tumor stromal elements (vascular cells and inflammatory cells). Besides exploiting compounds in our pipeline CF is caused by functional defects of the cystic fibrosis trans- from other indication areas, we are using our discovery plat- membrane conductance regulator (CFTR) protein, a chloride form and experience with certain target classes to select channel that controls ion and water content in epithelial cells. novel oncology approaches. A large number of mutations can affect the CFTR protein; the most frequent is delF508. The delF508 mutation gives rise to a CFTR protein that retains some function, but which is not

Research and Development 17 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Clinical Development Clinical Development pipeline

The mission of Actelion’s clinical development department is The following table summarizes our product candidates in to efficiently develop and register, on a global scale, innova- clinical development programs at the end of 2007. Each such tive pharmaceutical products through creative and targeted program can consist of multiple clinical trials. clinical and pharmacological research – supported by high performing strategic clinical development, biometry, drug safety, drug regulatory, life cycle, and operations functions. Product Indication(s) Status Commerciali- zation rights Through life cycle of project teams, strategic clinical develop- Bosentan Pulmonary arterial hyper- Phase III Actelion ment initiates and consolidates the processes – from defining tension WHO Class II the target profile to submission – that are required to advance Pulmonary arterial hyper- Phase III Actelion tension in children innovative compounds through the different phases of clinical development in a rapid and cost-efficient manner. Chronic obstructive throm- Phase III Actelion boembolic pulmonary hypertension Our clinical science function ensures that all clinical programs Combination therapy with Phase III Actelion adhere to the highest standards of science and medicine sildenafil in pulmonary while ensuring the appropriate generation of all information arterial hypertension required by health care authorities worldwide. Idiopathic pulmonary Phase III Actelion fibrosis Through global, cross-functional life cycle teams organized Miglustat Type 1 Gaucher Disease Phase III Actelion(1) (Maintenance) by the development function, we ensure the timely develop- (1) ment of a product to its full potential – from entry-into-man Type 1 Gaucher Disease Phase IV Actelion (Natural History) through market introduction – and all appropriate measures Niemann-Pick Type C Phase III Actelion(1) are undertaken to maximize the full value creation potential of each product until patent expiration. Cystic fibrosis Phase IIa Actelion Clazosentan Vasospasm related morbi- Phase III Actelion dity and all-cause mortality The Biometry function, with expertise in the field of statistics in adult patients with an- and data management, supports the clinical development of eurysmal subarachnoid Actelion’s compounds. In addition, the Biometry function is hemorrhage of key importance to the safety monitoring of marketed prod- Actelion 1 Pulmonary arterial hyper- Phase III Actelion ucts. tension Tezosentan Right heart failure during Phase III Actelion separation from cardiopul- At the end of 2007, Actelion’s clinical development depart- monary bypass in cardiac ment was working on a total of 42 different clinical trials en- surgery rolling close to 4,900 patients. This represents a significant Almorexant Insomnia and sleep Phase III Actelion increase compared to 2006, with 20 trials and almost 3,200 disorders patients. S1P1 Auto-immune diseases Phase I Roche / agonist Actelion(2) Renin Cardiovascular diseases Phase II Merck & Co., inhibitor Inc./Actelion(2) Anti-allergy Allergy Phase I Actelion

(1) Except Israel, the West Bank and Gaza Strip (2) Co-promotion rights

18 Research and Development WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Bosentan in clinical development Bosentan in pediatric pulmonary arterial hypertension (PAH) About bosentan Bosentan (Tracleer®) is an orally active dual endothelin recep- i. Current status tor antagonist (ERA). As of the end of 2007, Tracleer® was approved for pulmonary arterial hypertension (PAH) in WHO As of the end of 2007, discussions on the filing of a pediatric functional class III & IV in the United States and class III in formulation of bosentan were underway with health authori- Europe. In June 2007, Tracleer® was also granted marketing ties. approval by the European Commission for the reduction in the number of new digital ulcers in patients with systemic ii. Supporting studies sclerosis and ongoing digital ulcer disease. Regulatory proceedings to extend the label for Tracleer® to also include digi- The Phase III open label, single-arm FUTURE-1 (pediatric For- tal ulcerations are ongoing on a worldwide basis. mUlation of bosenTan in pUlmonary arterial hypeRtEnsion) study evaluated the safety and pharmacokinetics of a unique, Actelion’s development efforts for bosentan concentrate on specially designed, pediatric formulation of bosentan. This compiling evidence in PAH sub-populations to assist doctors study provided the necessary pharmacokinetic data which in their treatment approach. In addition, our development was presented at the European Society of Cardiology (ESC) team is actively investigating bosentan’s potential in other en- in early September 2007. The longer-term safety and efficacy dothelin-related diseases. Building on our knowledge about continues to be studied in the FUTURE-2 extension study. the effects of elevated endothelin levels, we are developing bosentan beyond PAH and digital ulcers as a treatment for Bosentan in combination with sildenafil idiopathic pulmonary fibrosis (IPF). IPF is a progressive and usually fatal disease of the lungs for which there is currently i. Current status no approved therapy. The COMPASS program specifically evaluates the efficacy and Bosentan in mildly symptomatic pulmonary arterial hy- safety of the use of bosentan in combination with sildenafil pertension (PAH) – an approved treatment for PAH, but one that addresses another pathological pathway of the disease. i. Current status Actelion has concluded COMPASS-1, the first clinical trial to As of the end of 2007, discussions on the addition of the provide detailed hemodynamic information on the combina- EARLY (Endothelin Antagonist tRial in miLdlY symptomatic tion of sildenafil and bosentan. PAH patients) clinical trial results and therefore the inclusion of WHO functional Class II PAH to the Tracleer® label – are The COMPASS-2 study is ongoing and investigates the effect ongoing with health authorities around the world. on mortality and morbidity of a combination of bosentan with sildenafil versus sildenafil monotherapy. ii. Supporting studies ii. Supporting studies The 185-patient EARLY study was a randomized, double blind, placebo-controlled trial and it is the only randomized con- COMPASS-1 demonstrated that the combination of sildenafil trolled trial (RCT) to study a dedicated early-stage, or WHO together with long-term bosentan therapy produces signifi- functional Class II, PAH population. Patients were followed cant hemodynamic improvements, including a highly signifi- for at least six months and results showed a significant re- cant reduction in mean PVR observed 60 minutes after ad- duction in pulmonary vascular resistance and a delay in time ministration of a single dose of sildenafil 25 mg (-15.2% [95% to clinical worsening. A trend towards improvement in exer- CI: –20.8 to –9.6]; p < 0.0001) and a decrease in the mean cise capacity was observed. total pulmonary resistance (-13.3% [95% CI: –17.0 to –9.6]; p < 0.0001).

Research and Development 19 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Bosentan in chronic thromboembolic pulmonary hyper- The total number of new ulcers during the treatment period tension (CTEPH) was 1.4 for patients on bosentan versus 2.7 for patients on placebo representing a 48% reduction in the number of new i. Current status digital ulcers.

Actelion has concluded the first-ever placebo-controlled In late 2003, Actelion initiated a second pivotal Phase III clini- study BENEFiT evaluating BosEntan in iNopErable Forms of cal trial, RAPIDS-2 (RAndomized Placebo-controlled Investi- Chronic Thromboembolic pulmonary hypertension (CTEPH). gation of Digital ulcers in Scleroderma) regarding Tracleer® We intend to discuss with health authorities the option to in ischemic digital ulcers secondary to systemic sclerosis. In broaden the current PAH label for Tracleer® with the inclusion contrast to the earlier RAPIDS-1 trial, this trial evaluated pre- of this disorder. vention and healing in a population with more severe forms of the disease at the time of enrolment. The treatment dura- ii. Supporting studies tion was longer and a withdrawal period was implemented in order to assess the evolution of digital ulcerations after treat- The BENEFiT study met its primary objective with a significant ment interruption. The study enrolled a total of 188 patients reduction in pulmonary vascular resistance PVR (p<0.0001). in 41 centers worldwide. In addition, patients on bosentan showed a significant improvement in breathlessness (Borg dyspnea score) with ex- Patients with systemic sclerosis and at least one digital ul- ercise and there was a trend in favor of bosentan towards cer were treated with either bosentan (62.5mg bid for four prevention of worsening WHO functional class. weeks, then 125mg bid for at least 20 weeks and up to 32 weeks) or placebo. The total number of new ulcers over 24 Bosentan in digital ulcers due to systemic sclerosis weeks was 1.9 ± 0.2 for patients on bosentan versus 2.7 ± 0.3 for patients on placebo representing a 30% reduction in i. Current status the number of new digital ulcers. The reduction in digital ulcers was more pronounced in severe patients with more than In June 2007, the European Commission granted marketing three active DUs at the start of the study. approval for Tracleer® for the reduction in the number of new digital ulcers in patients with systemic sclerosis and ongoing Bosentan in idiopathic pulmonary fibrosis digital ulcer disease. i. Current status As of the end of 2007, regulatory proceedings to extend the label for Tracleer® to include digital ulcerations are ongoing on In May 2006, data presented from the BUILD program (Bosen- a worldwide basis. tan Use in Interstitial Lung Disease) at the American Thoracic Society (ATS) conference provided a strong rationale to fur- ii. Supporting studies ther evaluate the safety and efficacy of bosentan in a morbidity/mortality-driven Phase III study in the idiopathic form of RAPIDS-1 (RAndomized Placebo-controlled Investigation of pulmonary fibrosis (IPF). As of the end of 2007, Actelion is Digital ulcers in Scleroderma) was a placebo-controlled dou- conducting this trial (BUILD-3) in patients suffering from lung ble-blind clinical trial evaluating the prevention of ischemic biopsy proven IPF with the objective to confirm the BUILD-1 digital ulcers in 122 patients with systemic sclerosis at 17 results. The results could be available some time in 2009. centers in Europe and North America. It was the first specifically designed study to look at prevention of ulcer formation. ii. Supporting studies Furthermore, the study is among a very few to demonstrate clinical efficacy in systemic sclerosis. In early 2003, Actelion initiated BUILD-1, a clinical trial which addressed the idiopathic form of pulmonary fibrosis. In No- Patients with systemic sclerosis, who had either a history of vember 2005, the results of this trial became available and, at least one digital ulcer over the past 12 months or active although not statistically significant, positive trends were digital ulcerations at the time of enrolment, were treated with observed for pre-defined secondary endpoints – such as either bosentan (62.5mg bid for four weeks, then 125mg bid the combined incidence of death or treatment failure at 12 for the next 12 weeks) or placebo. months (36.1% in the placebo group versus 22.5% in the bosentan group; p=0.076; 95% CL 0.37, 1.05), representing a relative risk reduction of 38%.

20 Research and Development WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Bosentan in metastatic melanoma i. Current status i. Current status In March 2006, CoTherix, Inc., initiated a Phase III clinical trial called VISION to evaluate the safety and efficacy of iloprost An event-driven, placebo-controlled, Phase II clinical study on top of oral sildenafil in 180 patients with pulmonary arterial was performed in close to 90 patients with stage IV meta- hypertension. Study recruitment was discontinued by year- static melanoma already treated with Dacarbazine (DTIC). end 2007 due to slow enrolment. The study concluded in December 2007, and results did not support the initiation of a full clinical development program in Clinical development of iloprost now concentrates on a pla- this indication. We will fully analyze the data generated and cebo-controlled study to significantly shorten the inhalation discuss the detailed findings with key medical experts in the time of iloprost. Initiation of this study is expected in 2008. field. We will also continue to evaluate the potential use of endothelin receptor antagonism in pre-clinical cancer mod- ii. Supporting studies els. In March 2005, top line data of the Phase II clinical trial STEP ii. Supporting studies – evaluating the safety and added benefit of iloprost inhalation solution therapy in patients with PAH already undergo- Preclinical experiments have shown that endothelin plays a ing treatment with bosentan – were published. The analysis role in the proliferation of abnormal melanocytes in mela- of this study showed that the combination of iloprost and noma. In mid-2003, a pilot clinical trial was initiated with bosentan provided clinical benefit to patients with PAH and bosentan evaluating – without the use of placebo – the safety was well tolerated, consistent with the safety profile ob- of 500 mg bosentan, twice a day, in 35 patients with stage IV served in patients receiving only iloprost. metastatic melanoma.

Miglustat in clinical development Iloprost in clinical development About miglustat About iloprost Miglustat is a low-molecular weight inhibitor of glucosylce- Iloprost (Ventavis®) is an inhaled formulation of a synthetic ramide synthase and glucosidase. With its unique physico- compound that possesses high affinity for the prostacyclin chemical properties miglustat exhibits a large volume of dis- receptor (IP receptor). Iloprost has a similar pharmacological tribution and has the capacity to access deep organs such as profile to endogenous prostacyclin (natural PGI2) but with brain, bone and lung. greater chemical stability and longer half-life. The mechanism of action of iloprost influences all the main pathological Miglustat in Type 1 Gaucher Disease mechanisms involved in pulmonary hypertension (potent vasodilation, antithrombotic activity, antiproliferative activity, i. Current status anti-inflammatory and antifibrotic activity). The MAINTENANCE trial is evaluating the long-term safety In December 2004, the US Food and Drug Administration and efficacy of miglustat as maintenance therapy after a approved Ventavis® (iloprost) inhalation solution, developed switch from enzyme replacement therapy (ERT) in mild-to- by Bayer Schering Pharma for the treatment of pulmonary moderate adult Type 1 Gaucher Disease patients with stable arterial hypertension (WHO Group I) in patients with Func- disease. Patient recruitment for the MAINTENANCE trial is tional Class III or IV. CoTherix, Inc., a biopharmaceutical com- ongoing. pany based in San Francisco, USA, licensed the exclusive rights to develop and commercialize Ventavis® in the United States from Bayer Schering Pharma, which currently markets Ventavis®, as the first inhaled prostacyclin in Europe and other countries outside the US.

In March 2007, Actelion successfully completed the acquisition of CoTherix, Inc., thereby strengthening our PAH franchise by adding Ventavis® to our product offering in the US.

Research and Development 21 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c ii. Supporting studies Twelve children under 12 years of age were included in an additional group; all received miglustat at a dose adjusted Zavesca® (miglustat 100 mg) is the only oral drug available for for body surface area. All participants were then treated with the treatment of Type 1 Gaucher Disease. The product was miglustat for an additional year in an extension study. The approved on the basis of three international open-label clini- primary endpoint was horizontal saccadic eye movement cal trials. The rationale for the use of miglustat in Type 1 Gau- (HSEM) velocity, based on its correlation with disease pro- cher Disease is to help balance the overall level of glucosylce- gression. At 12 months, HSEM velocity had improved in pa- ramide by reducing its production to a level compatible with tients treated with miglustat versus those receiving standard breakdown by residual glucocerebrosidase activity, a unique care; results were significant when patients taking benzodi- mode of action known as ”substrate reduction therapy”. Re- azepines were excluded (p=0.028). Children showed an im- cently, results from a pooled analysis of the three open-label provement in HSEM velocity of similar magnitude. Improve- clinical trials have shown that miglustat monotherapy may ment in swallowing capacity, stable auditory acuity, and a reduce the incidence of bone pain and improve bone min- slower deterioration in ambulatory index were also seen in eral density in Type 1 Gaucher Disease patients, including treated patients of 12 years or older. those with a high risk of bone loss – such as splenectomized and osteoporotic patients (Pastores et al, Clin. Ther. 2007 29, Although the extension phase of the trial was not con- 1645-1654). trolled, the data at 24 months confirmed that treatment with Zavesca® can provide disease stabilization for important Miglustat in Niemann-Pick Disease Type C markers of neurological dysfunction in NPC disease, both in the juvenile/adult and pediatric groups. The 24 month results i. Current status further strengthen the interpretation of a treatment effect of miglustat indicated by the 12 month, controlled clinical The results of the clinical trial OGT 918-007 evaluating safety trial phase previously reported. The safety and tolerability of and efficacy of miglustat in patients with Niemann-Pick dis- miglustat 200mg, three times daily in NPC patients was con- ease Type C (NPC) were submitted to health authorities in Eu- sistent with previous trials in GD1 patients, where 100 mg rope. These results served as the basis for a type II variation three times daily was used. application which Actelion submitted to extend the indication for Zavesca® in the treatment of neurological manifestations Miglustat in cystic fibrosis in patients with NPC. In October 2007, the Committee for Medicinal Products for Human Use (CHMP) issued a nega- i. Current status tive opinion on this type II variation. At Actelion’s request, the CHMP is re-examining its original negative opinion, and a final In October 2007, Actelion initiated a Phase IIa proof-of-con- opinion is expected in Q1 2008. cept clinical trial with miglustat in cystic fibrosis (CF). It is the first time that miglustat is being tested in a clinical setting Furthermore, a multi-center, retrospective survey has been involving CF patients. The proof-of-concept clinical trial has initiated to collect physicians’ assessment of changes of neu- been designed as a single center, double-blind, randomized, rological manifestations and overall utility of miglustat treat- placebo-controlled, crossover study in 25 CF patients affected ment in NPC patients currently or previously treated with by the specific delF508 mutation. As a primary endpoint, the miglustat outside of clinical trials. The results of this retro- trial will investigate the effect of miglustat on the nasal po- spective survey will be presented in Q2 2008. tential difference, a sensitive and non-invasive functional test for the cystic fibrosis transmembrane conductance regulator ii. Supporting studies (CFTR). Defects of CFTR are responsible for the characteristic morbidities of the disease. Miglustat is able to cross the blood-brain barrier and, in an NPC mouse model, substrate reduction therapy with Actelion expects full results of this proof-of-concept clinical miglustat was shown to reduce glycosphingolipid accumula- trial to become available at the end of 2008. These results, if tion in the brain, improve neuromotor performance and in- positive, will determine the need, size and duration of future crease survival. This data served as the basis for conduct- studies. ing the randomized controlled clinical trial OGT 918-007. In this trial, NPC patients aged 12 years or older (n=29) were randomly assigned to receive either miglustat 200 mg three times a day (n=20), or standard care (n=9) for 12 months.

22 Research and Development WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c ii. Supporting studies Clazosentan in clinical development

Pre-clinical studies, performed by Dr F. Becq (CNRS, Univer- About clazosentan sité de Poitiers, France) have shown that miglustat is able Clazosentan (Pivlaz®) is an intravenous endothelin receptor to correct the transfer of the mutated delF508 CFTR protein antagonist added to Actelion’s pipeline through the acquisi- to the plasma membrane and thus to restore its function. In tion of Axovan in 2003. Clazosentan is evaluated for the pre- addition, miglustat was able to normalize Ca2+ homeostasis vention of vasospasm following aneurysmal subarachnoid and ENaC activity in CF cells, and to reduce the inflamma- hemorrhage (aSAH). In 2003, orphan status was granted for tory response in bronchial epithelial cells. These observations clazosentan in Europe. For the US, orphan drug status was suggest that using a pharmacological agent such as miglustat granted in 2006. to restore the trafficking of delF508 could improve not only the chloride channel activity of CFTR but also other CFTR- i. Current status dependent cellular functions. The pivotal Phase III study CONSCIOUS-2 (Clazosentan to Overcome Neurological iSChemia and Infarct OccUrring after Tezosentan in clinical development Subarachnoid hemorrhage) began enrolment in December of 2007. It will measure the clinical benefits of clazosentan About tezosentan through the primary endpoint of vasospasm-related morbid- Tezosentan (VeletriTM) is a potent intravenous dual endothelin ity and all-cause mortality, which includes neurological deteri- receptor antagonist that has been shown to be well tolerated oration, new brain infarcts, introduction of vasospasm rescue in a clinical setting, and significantly improve cardiac hemo- therapy or death from any cause. dynamics. High pulmonary arterial pressure and low cardiac index are important indicators of cardiovascular pathology. CONSCIOUS-2 is a global study which will include a minimum Treatment with tezosentan may therefore provide benefit in of 765 patients with aSAH and aneurismal surgical clipping acute conditions of high pulmonary pressure in which the en- from more than 100 centers, randomized 2:1 to receive ei- dothelin system plays a role. ther 5 mg/h of clazosentan or placebo. The centers represent over 25 countries in the EU, Canada, Asia, Australia and New i. Current status Zealand. As of the end of 2007, discussions with the US Food and Drug Administration (FDA) are ongoing; it is planned to As of the end of 2007, Actelion is investigating tezosentan include an additional 24 centers in the United States. Study in a Phase III program. This evaluates safety and efficacy for results may become available in the second half of 2009. reduction of clinically relevant right ventricular failure (RVF) associated with difficult separation from bypass (DSB) in pa- ii. Supporting studies tients undergoing cardiac surgery with cardiopulmonary bypass (CPB). The first study will enroll up to 270 patients, with Clazosentan has shown promising results in the prevention results expected in the second half of 2008. If positive, we and treatment of vasospasm in pre-clinical models of aSAH. will then immediately perform a similar second pivotal study Phase I trials in healthy volunteers have shown that infu- to compile a full registration dossier. sions of clazosentan are generally well tolerated. A proof-of- concept phase IIa placebo-controlled study of vasospasm in ii. Supporting studies patients with SAH was published in 2005 [1]. Fewer cases of vasospasm and less severe vasospasm were observed In November 2004, a clinical trial with tezosentan in acute in the clazosentan group compared with the placebo group. heart failure (AHF), known as VERITAS, was discontinued for This was accompanied by fewer patients with new cerebral futility reasons. Although improved hemodynamics were ob- infarcts in the clazosentan treated group. served in the treatment arm and were consistent with previous studies, the chance was too remote for the efficacy end- CONSCIOUS-1 was a multi-centre, international, double- points to become statistically significant. No safety issues blind, randomized, placebo-controlled, parallel group, dose- were reported in the study. finding study to evaluate the efficacy of three dose levels of clazosentan (15, 5 and 1mg/hour) in preventing the occurrence of cerebral vasospasm following SAH in patients who underwent either clipping or coiling to stop the initial bleed, assessed by angiography.

Research and Development 23 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c CONSCIOUS-1 showed a strong treatment effect on the pri- The overall frequency of adverse events was similar to those mary endpoint. Clazosentan significantly reduced moderate/ observed in the placebo group. Similar to other endothe- severe vasospasm at all tested doses, with a relative risk re- lin receptor antagonists, Actelion-1 may potentially exhibit duction compared to placebo of 65% at the highest dose. A known class effects such as a propensity for elevated liver post-hoc analysis showed a trend in favor of reducing morbid- enzymes, which will be monitored in the SERAPHIN study. ity/mortality related to vasospasm using central assessment. Additional interaction studies concluded prior to the start of The trend was most pronounced with 5 mg/h with a relative the SERAPHIN study have shown no clinically relevant inter- risk reduction of 28%. action with warfarin, sildenafil, or ketoconazole.

Reference 1. Vajkoczy P. et al. Journal of Neurosurgery. 103, 9-17, 2005 Almorexant in clinical development

About almorexant Actelion-1 in clinical development Almorexant is a first-in-class orexin receptor antagonist which has the potential to shift the paradigm for treating sleep dis- About Actelion-1 orders. It is an oral therapy that penetrates the blood-brain Actelion-1 is a highly potent, tissue-targeting endothelin re- barrier and is capable of inducing a transient and reversible ceptor antagonist discovered in an in-house research program. blockade of the orexin receptors. Orexins are neuropeptides Through complete blockade of tissular endothelin, Actelion-1 produced in the brain, or more specifically, by a very small is expected to protect tissue from the damaging effect of el- number of specialized neurons located in the hypothalamus. evated endothelin, specifically in the cardiovascular system. Orexins play an important role in maintaining wakefulness In pre-clinical studies, Actelion-1 also exhibited effects sug- and therefore regulate the sleep-wake-cycle. Almorexant was gesting that it maintains the integrity of the vascular wall and discovered in an in-house research program. improves long-term outcome. Accordingly, Actelion-1 may provide therapeutic benefit in a wide range of cardiovascular i. Current status indications. In December 2007, almorexant entered the comprehensive i. Current status Phase III program RESTORA (REstore physiological Sleep with The Orexin Receptor antagonist Almorexant). The first In December 2007 Actelion-1 entered in the phase III study Phase III study, RESTORA 1, is designed to evaluate efficacy SERAPHIN (Study with an Endothelin Receptor Antagonist in and safety of almorexant in patients diagnosed with primary Pulmonary arterial Hypertension to Improve cliNical outcome). insomnia. This study is designed to evaluate the safety and efficacy of Actelion-1 in delaying disease progression and mortality in RESTORA 1 is expected to confirm the effects of almorexant patients with pulmonary arterial hypertension (PAH). on sleep induction and sleep maintenance that were previously observed. This study is also expected to provide ad- SERAPHIN is a global study and will enroll more than 500 pa- ditional information on sleep architecture and sleep quality, tients from at least 180 centers, randomized 1:1:1 to receive thereby providing further insight into the role of almorexant two different doses of Actelion-1 (3 mg and 10 mg once daily) in restoring normal physiological sleep. or placebo. The centers represent over 40 countries in North and South America, Europe, Asia Pacific and Africa. RESTORA 1 includes an active reference arm with zolpidem to generate reference information with this agent approved SERAPHIN will evaluate the clinical benefit of Actelion-1 for the treatment of insomnia. through the primary endpoint of morbidity and all-cause mortality in patients with symptomatic PAH. ii. Supporting studies ii. Supporting studies A proof-of-concept/dose-ranging study in patients with primary insomnia indicated that almorexant significantly improved In a phase II study with 379 hypertensive patients, Actelion-1 the primary parameter of sleep efficiency as measured by was significantly better than placebo and better than enalapril polysomnography (PSG) in a dose-dependent manner. [1] in reducing blood pressure 24 hours after drug intake. In this patient population, Actelion-1 was generally well tolerated.

24 Research and Development WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Analysis of secondary and exploratory endpoints, for which Renin inhibitor in clinical development the study was not powered, also indicated that the use of almorexant resulted in other clinically relevant improvements About Actelion’s renin inhibition program in important PSG-assessed sleep parameters. Almorexant Since the early 1980s, the pharmaceutical industry has been was found again in a dose-dependent fashion to decrease actively searching for suitable renin inhibitors. While proto- latency to persistent sleep (LPS) and wake-after-sleep onset typical renin inhibitors had been identified, they all shared a (WASO). common flaw in having a limited bioavailability on oral administration. Most major pharmaceutical companies abandoned Almorexant increased or maintained both percentage of time their efforts in the field in the mid-1990s. spent in REM (Rapid-Eye-Movement) and non-REM sleep in a normal proportion. Almorexant also significantly improved Actelion's research team initiated a new program starting subjective sleep variables. Treatment with almorexant was from new small molecules with good oral absorption but not associated with any relevant negative effects on next-day weak renin inhibitor activity. After several years of compound performance (assessed by fine motor testing and mean reac- optimization, we arrived at potent, orally active renin inhibition time). tors with significantly improved oral bioavailability. We believe that a number of these compounds may be suitable for clini- Treatment with almorexant was well tolerated. There were no cal development and have protected our renin inhibitors with reports of serious adverse events and no emerging safety numerous patent applications. findings. These results are consistent with earlier observations made in pre-clinical and early clinical studies recently Actelion and Merck & Co., Inc. formed an exclusive world- published in Nature Medicine [2]. wide alliance in December 2003 to discover, develop and market new classes of orally available renin inhibitors for pa- The entry-into-human study in 70 healthy male subjects as- tients suffering from cardio-renal diseases. As of December sessing tolerability, safety, pharmacokinetics and pharma- 2007, Actelion had received a total of USD 47 million as part codynamics revealed that the tested doses (up to 1000 mg) of a series of upfront, research and development milestones. were well tolerated and there were no safety concerns. A Potential additional development and approval milestones of multiple-ascending dose (MAD) study, performed on both up to USD 225 million are envisioned for the successful com- healthy female and male subjects receiving up to 1000mg for mercialization of the first collaborative product. up to six days, showed similar results. i. Current status Milestones Project initiated in-house in 1998 In December 2007, the renin alliance achieved its fourth Entry-into-man study initiated 2005 milestone with the commencement of dosing in a Phase II Phase III RESTORA study initiated 2007 program for its first compound, a new renin inhibitor for the Patent protection will expire in 2025 at the earliest. treatment of hypertension. The two companies will jointly fund Phase II development, with Merck responsible for fund- References ing all Phase III and outcome studies. Merck will lead and 1. Dingemanse J et al. Proof-of-concept study in primary in- fund commercialization. Actelion retains a worldwide option somnia patients with almorexant (ACT-078573), a dual orexin to co-promote any product resulting from this alliance as a receptor antagonist. Poster and oral presentation at the 5th paid-for sales force. World Congress of the World Federation of Sleep Research and Sleep Medicine Societies, Cairns, Australia, 2–6 Septem- ii. Supporting studies ber 2007; P0653-J. In July 2006, the alliance entered its first compound - which 2. Brisbare-Roch C. et al. Promotion of sleep by targeting the demonstrated good bioavailability in animal models - into orexin system in rats, dogs and humans. Nat Med. 2007 Feb; man. A series of Phase I studies – including pharmacokinet- 13 (2):150-5. ics and pharmacodynamics – have been performed. In addition, studies to evaluate the interactions with other drugs were initiated and/or completed.

Research and Development 25 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c S1P1 receptor agonists in clinical development

About Actelion’s S1P1 receptor agonists Actelion has selected novel small molecules for clinical development on the basis of their S1P1 receptor selectivity. They also have high potency and a favorable pharmacokinetic profile after oral dosing, resulting in a substantial and rapidly reversible depletion of circulating lymphocytes. They are effective in animal models of T-cell mediated inflammation.

Our S1P1 receptor agonists are potential therapeutic agents for immune disorders in which activated T cells play a critical role. In these pathological situations, traditional immunosup- pressants have a high potential for toxicity, slow reversibility, and may increase the risk of infection or malignancy. i. Current status

Actelion and Roche entered into an exclusive worldwide collaboration in July 2006 to jointly develop and commercialize

Actelion’s selective S1P1 receptor agonist as an immuno- modulator with the potential for once-a-day oral dosing for multiple autoimmune disorders.

As of the end of 2007, Phase I safety and tolerability testing was ongoing.

Anti-allergy in clinical development

About Actelion’s anti-allergy compound Actelion’s anti-allergy compound targets the allergic inflammation at the beginning of the cascade. This has the potential to be used as controller therapy in both allergic asthma and/ or allergic rhinitis, as well as in multiple potential additional allergic indications. i. Current status

The compound entered Phase I in the second quarter of 2007.

26 Research and Development WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c 03 Our strategy WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Our business strategy is based on four principles:

- Follow innovation where it leads. We will pursue internal and external R&D opportunities, balancing the perspectives of scientific merit, unmet medical needs, and commercial potential.

- Retain the value of innovation. We aim to develop projects as far as possible within the company, while considering partnerships for strategic and/or financial benefit. When partnerships are established, we will retain the right to book as large a portion of sales as possible.

- Excel in sales and marketing. We will expand and enhance our commercial infrastructure to ensure that it is world class to maximize product growth.

- Retain core values and independence. We nurture a culture focused on our four core values of innovation, trust and teamwork, open communication and a results-driven orientation throughout our organization. In so doing we aim to foster an environment that is stimulating for employees and company development.

To drive growth from the short to long term, we focused on five key initiatives throughout 2007:

1. Strengthen the foundation of our existing business by continuing to invest in Tracleer® (bosentan), Ventavis® (iloprost), and Zavesca® (miglustat). 2. Accelerate and optimize our research and development portfolio by prioritizing projects according to scientific and commercial potential. 3. Search for and, if appropriate, acquire new products from outside Actelion to enhance growth, reduce risk, and optimize resources. 4. Optimize our geographic Sales, Marketing, and R&D expansion by pushing into new regions with both marketed and clinical stage products. 5. Recruit industry best personnel across all functions, develop a strong support infrastructure, and make Actelion a great place to work by focusing on our core values.

28 Annual Report 2007 - Our strategy WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c 04 Business Development WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c CoTherix Inc. acquisition and US license for Partnerships and collaborations Ventavis® from Bayer Schering Pharma AG The following section describes our main partnerships and In January 2007, we acquired CoTherix Inc., USA. An integra- collaborations. In addition to the collaborations described tion process followed that was completed shortly thereafter. below, we have entered into distribution agreements for With this acquisition, Actelion gained access to the exclusive Tracleer® in a number of countries and regions – including US rights for inhaled iloprost, sold under the brand name Israel, the Middle East, Taiwan, certain Southeast Asian coun- Ventavis® the only approved inhaled treatment for pulmo- tries, Eastern Europe, Latin America, and the Scandinavian nary arterial hypertension (PAH). CoTherix Inc. had licensed countries. this product from Schering AG (now part of Bayer Schering Pharma). Renin inhibitor alliance with Merck & Co., Inc. Ventavis® enables Actelion to extend its offering to PAH patients with a product that immediately contributes to the In December 2003, Actelion and Merck & Co., Inc. announced sales and profit margin of the company, while leveraging the an exclusive worldwide alliance to discover, develop and mar- existing sales force. This has further strengthened Actelion’s ket new classes of renin inhibitors. Through a joint commit- leadership position in PAH. Prior to the deal, Actelion and tee, we collaborate with Merck & Co., Inc. on the develop- CoTherix Inc. were already engaged in a longstanding rela- ment of products. Pursuant to the agreement, we granted tionship in PAH, notably the STEP program which explored Merck & Co., Inc. an exclusive worldwide license to develop, the combined use of Tracleer® and Ventavis®. manufacture and sell any renin inhibitor to which Actelion has rights or which results from the alliance, as well as any Actelion assumed US development responsibilities and mar- products containing the compound. Under the agreement, kets the product in the US. In 2007, the foundation for the Actelion is responsible for funding all preclinical research and future collaboration with Bayer Schering Pharma achieved the Phase I clinical trials until two compounds have successfully establishment of a joint Development and Commercialization completed these phases. Merck & Co., Inc. will fund these Committee. costs for subsequent compounds. Costs for Phase II clinical trials will be shared equally, and Merck & Co., Inc. will fund Actelion books all sales in the US and pays a royalty on sales pivotal Phase III and clinical outcome trials. Merck & Co., Inc. to Bayer Schering Pharma AG. In addition to this royalty, will also lead and fund commercialization. Actelion retains a Actelion is contractually required to pay one final milestone worldwide option to use its sales force to co-promote any payment to Bayer Schering Pharma upon achieving a certain product resulting from this alliance and to be reimbursed by sales target. Merck & Co., Inc., for these services.

The acquisition also brought with it the North American and Merck & Co., Inc. paid Actelion an upfront payment of USD European exclusive rights for fasudil, a Rho-kinase inhibitor. 10 million and a further USD 15 million following the com- However, rights were returned to Asahi Kasei Pharma Corpo- pletion of technology transfer to Merck & Co., Inc. Following ration by Actelion after the acquisition. these payments, we received the first milestone payment from Merck & Co., Inc. of USD 5 million in March 2005. In July 2006, the alliance entered its first compound into Phase I, which triggered a second milestone payment of USD 7 million. The entry of the lead compound into Phase IIa in December 2007 triggered a USD 10 million milestone payment to Actelion. In addition, Actelion will be eligible to receive further research, development and approval milestone payments of up to USD 225 million for the successful development and commercialization of the first collaboration product. Certain milestone payments for the successful development and commercialization of additional products are also included in the agreement. Merck & Co., Inc. will pay Actelion royalties on the sale of all products resulting from the renin inhibitor alliance.

30 Annual Report 2007 - Business Development WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c S1P1 global collaboration with Roche

In July 2006, Actelion and Roche announced an exclusive worldwide collaboration to jointly develop and commercialize

Actelion‘s selective S1P1 receptor agonist, an immunomodu- lator with the potential for once-a-day oral dosage. We will jointly develop and commercialize this novel compound for multiple autoimmune disorders.

This S1P1 collaboration covers both the current selective

S1P1 receptor agonist in Phase I, as well as any other selective S1P1 receptor agonists resulting from our research efforts in the field. We received an upfront payment of USD 75 million in July 2006. In the case of future development and approval milestones being achieved, we will be eligible to receive further payments of up to USD 555 million for the first compound for all targeted indications. Further development and approval milestone payments are due for additional compounds. Roche will pay us undisclosed royalties on all product sales.

For the current selective S1P1 receptor agonist, we will fully fund all development activities up to the end of Phase II for the first two indications. All subsequent development and commercialization costs will be shared equally between Roche and Actelion. Both companies will co-promote any product resulting from this collaboration and equally share profit.

Business Development 31 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c 05 Financial Report WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Net Revenues In 2007 we recognized a total of CHF 7.9 million (2006 CHF 9.1 million) from this collaboration. Also included in contract

This year Actelion celebrated its 10th anniversary, and we revenues is the recognition of milestones from the S1P1 col- also celebrated a major financial milestone as we surpassed laboration with Roche, which we entered into in July 2006. the CHF 1 billion revenue mark. Total net revenues reached We recognized a total of CHF 11.1 million from this collabora- CHF 1.32 billion, up 39% from CHF 945.7 million in 2006. As tion in 2007 (2006 CHF 5.6 million). Milestone payments re- in the previous year, this strong increase was driven mostly ceived for both of these collaborations are being recognized by sales of Tracleer® (bosentan). over the estimated development periods of these compounds. The remaining contract revenues relate to older agreements Tracleer® sales increased by 31% to reach CHF 1.18 billion. entered into with Genentech for bosentan and tezosentan. Similar to previous years, the majority of this increase can Revenue recognized from these agreements totaled CHF 6.3 be attributed to more patients benefiting from the drug. In million in both 2006 and 2007. local currency terms, Tracleer® sales increased by 32% year on year. Currency markets continue to be volatile and, with 48% of our revenues generated in the US, we were affected by the US dollar, which retreated from an average of 1.2450 Operating expenses in 2006, to an average rate of 1.2006 in 2007. Offsetting this variance was a strengthened Euro, which moved against the Total operating expenses for the period increased to CHF 1.17 Swiss Franc to average 1.6431 in 2007 compared to 1.5733 billion, an increase of 73% compared to 2006. Included in in 2006. these expenses is an In-Process Research and Development (IPRD) charge related to the acquisition of CoTherix Inc. of As in previous years, we have benefited from a positive price CHF 224.8 million. Excluding this IPRD charge, operating ex- movement in the US compared to some pricing pressure in penses increased by 40%. Europe. Overall, however, the main driver of sales growth continues to be more patients on drug. At the end of 2007, Cost of sales in 2007 was CHF 137.7 million, or 10.7% of Tracleer® was available in more than 30 countries and territo- sales revenues, compared to 9.8% in 2006. This decrease in ries, including all major pharmaceutical markets worldwide. the gross margin is attributable to the higher selling cost of sales for Ventavis® relative to the cost of sales for Tracleer® In early January 2007, we completed the acquisition of and Zavesca®. CoTherix Inc., adding Ventavis® (iloprost), also for the treatment of PAH, to our list of marketed products in the US. Sales of Total research and development expenses for the year in- Ventavis® from the effective acquisition date reached CHF creased by 38% to CHF 292.1 million. Our pipeline now has 78.2 million. This clearly demonstrated its value in grow- 10 compounds in clinical development; five of which are in ing our top line, and represented around 21% of our total Phase III as well as numerous projects in pre-clinical devel- revenue growth for the year. For the calendar year on year, opment. In 2007, the level of operational activity in clinical Ventavis® sales on a like-for-like basis grew by 24% in local development significantly increased. Compared to 2006, the currency terms. number of patients or healthy volunteers enrolled in clinical trials increased by 39%. Zavesca® (miglustat) sales continued to grow in what remains a very difficult market, which is dominated by a competitor R&D spending relative to total revenues remained at just over product using enzyme replacement therapy as a mode of 22% and is expected to increase as a percentage of revenues action. Sales increased by 39% from the 2006 level to reach over the short to medium term. A number of the programs CHF 35.3 million. Virtually 100% of this increase is attribut- started in 2007 did not commence recruitment until late in able to new patient growth. Zavesca® is commercially avail- the year and we will see the full financial impact of these able in the US and in several markets in the European Union. programs in 2008.

Contract revenue was CHF 25.3 million, compared to CHF Marketing and advertising expenses increased by 26% to 21.5 million in 2006. In 2007, Actelion received a USD 10 mil- CHF 234.1 million compared to the previous year. We are lion milestone payment from Merck & Co.,Inc. in relation to continuing to support our products in all markets through our global collaboration in the field of renin inhibition as dos- medical education, increasing disease awareness as well as ing was initiated in the Phase II program with our renin inhibi- generating new clinical data in Phase IV medical marketing tor. trials.

Annual Report 2007 - Financial Report 33 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c A large proportion of the increase in 2007 is driven by spend- A major driver of the increase seen in 2007 is the accelerated ing on Ventavis®, which we acquired in early 2007 through vesting of our “Challenge Award Plan” due to achievement the acquisition of CoTherix Inc. A further 14% is the result of its performance criteria more than two years ahead of of increased non-cash charges from equity based compensa- the original estimate. The plan foresaw two conditions: total tion programs as described below. revenues of over CHF 1 billion and a 100% increase of the share price from the time of the plan’s approval by sharehold- Selling, general and administrative expenses increased to ers. CHF 266.1 million from CHF 185.1 million in 2006. Of this increase, approximately 60% can be attributed to sales and distribution costs. The remaining 40% comes from the build- up of General & Administrative (G&A) support services to Operating income and cash EBIT cope with the increasing operational burden on the organization – resulting both from an increase in sales and marketing Actelion’s operating income for 2007 was CHF 142.6 million activities as well as in development activity. compared to CHF 268.2 million in 2006. This decrease is predominantly due to the IPRD charge of CHF 224.8 million, as Included in our increased selling costs was an increase in well as to the increase in equity-based compensation, which costs directly related to the growth in sales revenues – that masks what otherwise is an extremely strong underlying in- is, sales-based compensation and direct distribution costs. crease in profitability. In order to more accurately measure These actually increased marginally, disproportionately to the our operating performance, we use a non-US GAAP measure increase in sales revenues, due to higher distribution expens- called cash earnings before interest and taxes (EBIT). Cash es in the US as a result of programs supporting patients in EBIT is calculated by adding back to the operating income relation to Medicare and insurance reimbursement. non-cash charges such as IPRD, depreciation and amortization, and employee stock options. Additional increases were from equity-based compensation as described below. A proportion of this increase is due to For 2007, cash EBIT was CHF 471.4 million, an increase of the expansion of our sales force both in 2006 and in the year 47% compared to the previous year. The corresponding cash under review, as we continually adapt to changes in market EBIT margin also grew by 2% to reach 36%. In local currency environments. terms, the increase in cash EBIT year on year was similar to the increase in Swiss Franc terms, with the net currency ef- The increase in G&A was similarly affected by an increase in fect being marginal. equity-based compensation and a number of one-off acquisition related expenses incurred in the first quarter of 2007. A large proportion of the increase in G&A is an increase in Cash EBIT Op Inc services to support our growth such as an increase in human 500 resource capability, including training and development, an increase in our information technology platforms as well as 400 office space.

300 As already mentioned, the non-cash In-Process Research and Development charge is related to the acquisition of CoTherix Inc., finalized in January 2007. This added CHF 224.8 mil- CHF mio 200 lion to our operating expenses. The increase in amortization charges is also, in the main, related to CoTherix Inc. and re- 100 presents the amortization of the value ascribed to Ventavis® at the time of acquisition. 0 2004 2005 2006 2007

Also included in each line of operating expenses, and as seen on the face of the Profit & Loss Statement, are the non-cash charges related to our employee stock option plans. The total of these charges in 2007 were CHF 64.1 million compared to a charge in 2006 of CHF 32.7 million.

34 Financial Report WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Non-operating income and tax The decrease was the result of lower US-GAAP earnings as well as an increase in the number of shares used to calculate Interest income in 2007 amounted to CHF 20.4 million com- EPS. The number of shares increased in 2007 as a result of pared to CHF 8.4 million in 2006. Interest expense was CHF the exercise of employee stock options and the conversion of 0.2 million, unchanged from 2006. The increase in income is the 2008 convertible bond. Overall, 2.56 million shares were attributable to both enhanced returns and higher amounts of issued to employees resulting in net proceeds to Actelion of invested cash. CHF 59.2 million. The conversion of the bond resulted in the creation of 4.7 million shares. The decrease in amortization of debt discount and issuance costs, to CHF 4.1 million from CHF 8.4 million in 2006, is However, we remain committed to minimizing the impact of mainly due to Actelion forcing conversion of the CHF 143.75 future dilution on our shareholders. In addition to repurchas- million convertible bond (due 2008) in February of 2007. This ing an additional 3.7 million treasury shares at a cost of CHF bond carried a yield to maturity of 4.75%. Since the 2011 219.7 million – to mitigate dilution from the 2008 convertible CHF 460 million convertible bond has a zero yield to maturity, bond called in February of 2007 – we also initiated a program there has been, to date, no interest charges associated with to manage dilution resulting from the exercise by our em- this bond, and only the issuance costs are being amortized. ployees of employee stock options. As of December 31, 2007, This situation may change as from 2009, if a proposed change Actelion owned 3.3% of its own shares as well as 2.7 million in accounting treatment for bonds with the same features call options, which can be used to offset future dilution over as our 2011 bond, is formally made public by the Financial the coming years. This initial program was completed in Janu- Accounting Standards Board. If this is the case, there is no ary 2008. change in the economic circumstances for Actelion, only a recording of a notional non-cash charge.

Other financial income in 2007 was CHF 9.6 million,- com Balance sheet and cash flow pared to CHF 10.7 million in 2006. This income is mostly due to foreign exchange gains and losses from hedging opera- Our operating activities continued to show strong cash gen- tions that we have in place to protect operational cash flows. eration, with cash from operations of CHF 394.2 million driven by strong growth in cash EBIT, and careful management Income tax expense in 2007 was CHF 43.7 million, com- of working capital. Our strong cash position should enable pared to CHF 37.6 million in 2006, and is mostly due to in- us to fully fund all ongoing and future research, development creased profitability across our operations. On a rate basis, and marketing programs from our own resources, without and excluding the IPRD charge, our tax rate decreased from recourse to capital markets. 13.5% in 2006 to 11.1%. This decrease was possible, de- spite increasing profitability due to an increase in deferred Due to the increase in product sales, trade and other receiv- tax benefits due to the utilization of previously unrecognized ables increased to CHF 329.5 million at the end of December tax losses, some of which were due to the acquisition of 2007 from CHF 217.4 million at the end of December 2006. CoTherix Inc. as well as the capitalization of certain temporary This represented an increase in days sales outstanding (DSO) differences. This increase in deferred tax assets is masked by of eight days. Over the course of 2007, Actelion took action in some changes in accounting presentation of gross and net a number of markets to improve cash collections. Importantly, benefits. in a number of European countries, “factoring” arrangements were entered into, vastly improving the debtor positions in those countries. Further attention will be paid to improving cash collections in difficult markets in 2008. Net income and earnings per share Overall net working capital increased by 39.0 million, includ- Net income for 2007 was CHF 124.6 million, compared to ing an increase in inventories as a result of the acquisition of CHF 241.1 million in 2006, again impacted by above men- CoTherix Inc. and subsequent marketing of Ventavis®. tioned non cash charges. Basic earnings per share (EPS) were CHF 1.05 compared to CHF 2.13 in 2006. On a fully diluted basis, EPS in 2007 were CHF 1.00, compared to CHF 2.05 in 2006.

Financial Report 35 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Actelion continued to increase investment in property, plant In keeping with Actelion‘s commitment to maintain a con- and equipment throughout 2007, totaling CHF 55.4 million for trol infrastructure capable of supporting high quality financial the year compared to 42.5 million for 2006. A large propor- statements in the face of rapid growth, for the second con- tion of this investment is in the completion of construction secutive year, Actelion can announce Internal Controls over of a new building in Allschwil, Switzerland, as well as com- Financial Reporting certified as compliant with the require- mencement of a new headquarter building in the same area, ments of SOX 404 as at December 31, 2007 (Sarbanes-Oxley in order to cope with the rapid growth we have experienced Act 2002, section 404). and expect to experience in the coming years. Total balance of property, plant and equipment (PPE) as at year-end was 114.0 million, compared to 82.0 million as at the end of 2006.

Clearly, a major use of funds in 2007 was for the acquisition of CoTherix Inc. at the beginning of the year. In total, the acquisition cost was CHF 538.6 million.

Total liquid funds at the end of 2007 were CHF 859 million compared to CHF 1.1 billion at the end of 2006. By definition, liquid funds does not include the CHF 231 million holding cost of treasury shares. Total funds available to Actelion at the end of 2007 were CHF 1.09 billion.

As already mentioned, we initiated a program towards the end of 2007 aimed at reducing the future dilutive effect of the exercise of employee stock options. We have purchased call options which match a number of existing employee options and have offset the cost of those call options by purchasing a call spread. The total premium from these transactions has mostly been deferred, resulting in – in accounting terms – a bank loan.

As at balance date, in addition to the CHF 460 million convertible bond, we showed a total of CHF 117.1 million in financial debt, CHF 33 million in short term financial debt and CHF 84.1 million in long term financial debt. The options have a range of maturity from one to four years, which approximately matches the exercise pattern of employee options that we have observed in the past.

Total shareholders funds have increased from CHF 578.1 million at the end of 2006 to CHF 652.4 million at the end of 2007. During the year there were a number of factors driving this increase. The forced conversion of the 2008 bond resulted in an increase to shareholders funds of CHF 165.7 million as well as another CHF 59.2 million coming from the exercise of employee stock options. The major negative impact was the net increase in our holding of Treasury Shares to CHF 219.1 million, as well as the premium of CHF 117.1 million resulting from our dilution management program. In total, these two programs which were completed in January 2008 will prevent the need in the future to issue approximately 8% of new shares, significantly adding value for our shareholders.

36 Financial Report WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Corporate Governance Actelion US Holding Company, based in Wilmington, Dela- ware, a 100% subsidiary of Actelion Ltd, is the holding company of the Actelion companies in the USA. Actelion’s Articles of Association, its By-Laws including the The remaining group companies serve as import, marketing Charters of the Board Committees and its Policy on Ethi- and sales companies for the group. cal Conduct, all provide the basis for its principles of Cor- porate Governance. These documents can be found on All listed companies belonging to the issuer’s group www.actelion.com under “Investors”, “Corporate Governance”. Actelion Ltd Gewerbestrasse 16 CH-4123 Allschwil Switzerland Group structure and shareholders Listed on the SWX Swiss Exchange under the code ATLN ISIN CH0010532478 Group structure Market capitalization as of December 31, 2007: CHF 6,351,705,951 Description of Actelion’s operational group structure Actelion Ltd is the holding and finance company of the group. The non-listed companies belonging to the issuer’s con- Actelion Pharmaceuticals Ltd, based in Allschwil, a 100% solidated entities subsidiary of Actelion Ltd, is in charge of the discovery, de- See Financial Section, note 2, page 80 velopment, registration, production, quality assurance, safety, marketing coordination, group management and coordination. Actelion Pharmaceuticals Ltd further holds the intellec- Significant shareholders tual property rights of the group. See Financial Section, note 9, page 82

Actelion Registration Ltd, based in London, a 100% subsid- Shareholder structure iary of Actelion Ltd, holds the marketing authorizations for Registered shareholders: There were 6,756 shareholders reg- products marketed by Actelion. istered in the share holders register on December 31, 2007.

Actelion Percurex AG, based in Allschwil, a 100% subsidiary The distribution of shareholdings is divided as follows: of Actelion Ltd, was merged into Actelion Pharmaceuticals Ltd on June 25, 2007. Number of shares Number of registered shareholders on December 31, 2007 Actelion Clinical Research, Inc., based in New Jersey, a 100% 1 to 100 1,454 subsidiary of Actelion US Holding Company, performs clinical 101 to 1,000 4,199 operations on behalf of the group. 1,001 to 10,000 864 Actelion Pharmaceuticals Israel Ltd, based in Ramat-Gan, a 10,001 to 100,000 176 100% subsidiary of Actelion Ltd, performs clinical operations 100,001 to 1,000,000 52 on behalf of the group. More than 1,000,000 11

Actelion Paris Organisation SAS, based in Paris, a 100% subsidiary of Actelion Ltd, performs administrative and market- The shareholder body on December 31, 2007 was constituting services in Europe for the group. ed as follows:

Actelion Finance SCA and Actelion Partners SNC, both based Shareholder structure according to category of investors in Luxemburg, Actelion Participation GmbH, based in Allschwil, (number of shares) and Actelion Cyprus Limited, based in Nicosia, all four 100% subsidiaries of Actelion Ltd, as well as Actelion Luxemburg Private persons 19.3% SARL, based in Luxemburg, a 100 % subsidiary of Actelion Institutional shareholders 43.8% Participation GmbH, perform financing for the group. Not registered 36.7%

Corporate Governance 37 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Shareholder structure by country (number of shares) Limitation on transferability and nominee registrations

Not registered 36.7% Limitations on transferability for each share category, Switzerland 25.3% along with an indication of statutory group clauses, if any, United Kingdom 19.1% See Article 5 of the Articles of Association USA 5.1% Other 13.8% and rules on making exceptions. None

Reasons for making exceptions in the year under review. Cross-shareholdings Not applicable None Admissibility of nominee registrations, along with an indication of percent clauses, if any, and registration conditions. Capital structure See article 5 of the Articles of Association

Procedure and conditions for canceling statutory privi- Capital leges and limitations on transferability. See Financial Section, notes 3, 4 and 5, page 81 Statutory privileges and limitations on transferability can be canceled with a two-thirds majority of the votes represented at the General Meeting of Shareholders. Authorized and conditional capital in particular

Conditional share capital Convertible bonds and options See Financial Section, note 4, page 81, note 19, page 69 and Article 3a of the Articles of Association Convertible bonds See Financial Section, note 15, page 66 and note 19, page 69 Authorized share capital See Financial Section, note 5, page 81, note 19, page 69 and Options Article 3b of the Articles of Association The standard employee share option plan is intended to promote the interests of the company by providing employees and members of the Board of Directors with the opportunity Changes of capital to acquire a proprietary interest, or otherwise increase their See Financial Section, page 52 proprietary interest, in the company as an incentive for them to remain in the service of the company and to help align the employees’ interests with those of the shareholders. Options Shares and participation certificates are normally granted annually to employees who are already employed at the company based on the function within the Shares company and on the achievement of defined performance See Financial Section, note 3, page 81 criteria. Upon hiring, the company may grant options depending on the future function at the company. Grant levels are Participation certificates reviewed by the Compensation Committee and approved by None the Board. Once options are granted, the Board is not entitled to increase the benefit accruing to the optionee without the approval of the Actelion shareholders. Profit sharing certificates None For further information, see Financial Section, note 20, page 70

38 Corporate Governance WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c The Board of Directors Education: Medical degree in France; further training in pharmacology and physiology at the University of Montreal, Cana- da, and the University of California, San Francisco. Members of the Board of Directors Professional background: Practicing cardiologist for 11 years, and 1974 to 1985; Head of Drug Discovery Group in the Cardiovas- cular Department of F. Hoffmann-La Roche for 12 years, 1985 Other activities and functions of the mem- to 1997; Founder and Chief Executive Officer of Actelion. bers of the Board of Directors Other activities and functions: Appointed for a one-year term Robert E. Cawthorn as Professor to the Chair of Technical Innovation – Liliane Bet- Birth Date: 28 September 1935 tencourt at College de France, Paris, France. Nationality: British Education: Bachelor’s degree in agriculture, Cambridge Uni- Juhani Anttila versity, England. Birth Date: 20 April 1954 Nationality: Finnish Professional background: Managing Director of Global Health Education: Master’s degree in law at the University of Hel- Partners, DLJ Merchant Banking Partners, 1997 to 2001; sinki, Finland, 1978. Chairman and CEO of Rhone-Poulenc-Rorer, Inc. (formerly Rorer Group), 1985 to 1996; President of Biogen Inc., 1979 to Professional background: Managing partner at CA Corporate 1982; various executive positions at Pfizer International. Advisers, Zurich, 1981 to 1985; Managing Director of Nokia GmbH, Zurich, 1985 to 1988; Member of the Executive Board Other activities and functions: Member of the Board of Direc- of Nokia Consumer Electronics Division1989 to 1995; Chair- tors of the following unlisted companies: The March Group, man of the Executive Board of Nokia (Deutschland) GmbH, NextPharma Technologies, Leerink Swann & Co., Biodesix Germany, 1990 to 1995; President and CEO of the Swisslog Inc. (chairman). Holding Ltd, 1996 to 2002; CEO of Ascom Holding Ltd, 2003 to 2004. André J. Mueller Birth Date: 5 February 1944 Other activities and functions: Member of the Board of Di- Nationality: Swiss rectors of the listed company Ascom Holding Ltd (Chairman), Education: Chartered chemical engineer, Superior Technical since 2002. College, Geneva (1964); Licenciate in Business Economics, University of Geneva (1970), MBA, INSEAD Fontainebleau Carl Feldbaum (1971). Birth Date: 1 February 1944 Nationality: USA Professional background: Process engineer with CIBA Ltd.; Education: Bachelor‘s degree in biology from Princeton Uni- management positions in planning and finance at Sandoz versity; law degree from the University of Pennsylvania Law (now Novartis) in Switzerland and the US; five years as School. the first Chief Financial Officer of Biogen; Co-Founder of Genevest venture capital group; member of the management Professional background: Assistant special prosecutor for the consulting practice of Deloitte and Touche from 1993 to 1997; Watergate special prosecution force, 1973 to 1975; Inspector member of founding team of Actelion and Chief Financial Of- General for defense intelligence in the U.S. Department of ficer until 2003. Defense, 1976 to 1979; Assistant to the Secretary of Energy, 1979 to 1980; president and founder of the Palomar Corpora- Other activities and functions: Member of the Board of Direc- tion, 1980 to 1988; Chief of staff to Senator Arlen Specter tors of the listed companies Synthes Inc. and Addex Pharma- (R-PA) of Pennsylvania, 1988 to 1993; President of the Bio- ceuticals Ltd. (chairman), and chairman of the unlisted com- technology Industry Organization (BIO) in Washington, D.C., pany Cerenis Therapeutics. 1993 to 2005.

Jean-Paul Clozel Other activities and functions: Member of the Board of Direc- Birth Date: 3 April 1955 tors of the listed company Exelexis, Inc., South San Francisco, Nationality: French CA. Consultant, Biotechnology Industry Organization.

Corporate Governance 39 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Werner Henrich Between 1977 and 1978, Financial Analyst at the French Em- Birth Date: 3 November 1943 bassy in Singapore. Nationality: French Education: Chemist and European Patent Attorney. Other activities and functions: As of 2000, Senior Partner and Chief Investment Officer at Breen Investors L.P., a registered Professional background: Former Head of Global Intellectual investment advisor. Property and Licensing, F. Hoffmann-La Roche Ltd, Basel.

Other activities and functions: Member of the Board of Direc- Cross-involvement tors of the listed companies Basilea Pharmaceutica AG (chair- None man) and Addex Pharmaceuticals Ltd., and of the following unlisted companies:, TET Systems AG, PregLem SA (chairman), URRMA Inc. and CEO of Pivalor AG. Elections and terms of office

Armin Kessler Principles of the election procedure and limits of the Birth Date: 31 March 1938 terms of office Nationality: Swiss According to Article 16 of the Articles of Association, the five Education: Degree in physics and chemistry from Pretoria to eleven members of the Board of Directors are elected by University in South Africa, degree in chemical engineer- the Annual General Meeting of the Shareholders for a term of ing from the University of Cape Town, South Africa, and a office of three years. One year of office is understood to be juris doctorate from Seton Hall University; registered Patent the period from one ordinary meeting of shareholders to the Attorney at the U.S. Patent Office. next ordinary meeting of shareholders. In principle, the Board of Directors is renewed each year by one third. The term of Professional background: Chief Operating Officer of F. Hoff- office of newly elected members shall be fixed at the time mann-La Roche Ltd, Basel, Switzerland, from 1990 to 1995. of election under due consideration of the renewal cycle. In Prior to appointment as COO, senior management positions addition, the By-Laws currently foresee that members who at Roche, including Head of the Diagnostics and Pharmaceu- have completed their seventy-fourth year of age shall retire tical divisions. Earlier positions included Director of Pharma- per the next ordinary meeting of shareholders. ceutical Marketing Worldwide at Sandoz (now Novartis) and President of Sandoz KK in Tokyo. Formerly on the Board of Time of first election and remaining term of office for Syntex Chemicals, Genentech and F. Hoffmann-La Roche. each member of the Board of Directors

Other activities and functions: Member of the Board of Di- rectors of the following listed companies: The Medicines Co. Name of Board Executive Date of Date of AGM of and Gen-Probe Inc. (vice chairman and lead director), and the member member AGM of first AGM of end of election renewal term of unlisted company Medgenisis. office Robert E. Cawthorn No 2000 2006 2009 Jean Malo Birth Date: 16 July 1954 André J. Mueller No 2001 2006 2009 Nationality: French Jean-Paul Clozel Yes 2000 2005 2008 Education: M.B.A. from ESSEC, Cergy Pontoise, France, in Juhani Anttila No 2005 N/a 2008 1977. Carl Feldbaum No 2005 N/a 2008 Werner Henrich No 2000 2007 2010 Professional background: Chartered Financial Analyst and Armin Kessler No 2004 2007 2010 a member of the Association for Investment Management Jean Malo No 2004 2007 2010 and Research and the Houston Society of Financial Analysts. Chief Investment Officer for Vaughan Nelson Scarborough and McCullough, including managing several equity portfolios between 1997 and 2000. From 1989 to 1997, managed both equity and fixed income portfolios for Daniel Breen and Company in Houston. From 1978 to 1989, Corporate Banker for Banque Indosuez in Saudi Arabia, Houston, and New York.

40 Corporate Governance WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Internal organizational structure The Finance and Audit Committee reviews the internal controls and finances of the group in accordance with the Allocation of tasks within the Board of Directors “Charter of the Finance and Audit Committee” adopted on November 30, 2005. The Committee has the following tasks and duties: (i) evaluation of management’s proposals and for- Name of Board Chairman Vice-Chairman Delegate mulation of recommendations to the full Board in regards to member financial planning; (ii) review the proposed concepts of finan- Robert E. Cawthorn X cial objectives; (iii) review the finance policy, operations and André J. Mueller X risk management framework in the areas of treasury, con- Jean-Paul Clozel X trolling, taxes, insurances, investments and acquisitions; (iv) review the US GAAP and statutory financial statements prior Juhani Anttila to release and submission of annual financial statements to Carl Feldbaum the Board of Directors; (v) supervise the composition and ac- Werner Henrich tivity of the Internal Audit (IA) function, assure implementa- Armin Kessler tion of IA recommendations, approve annual mission plans Jean Malo and review IA’s cooperation with External Auditors; (vi) evaluate, and propose to the Board, the External Auditors (EA) to be nominated for shareholder approval, evaluate the terms Name of Board Compensation Finance and Nominating of engagement, compensation, performance and indepen- member Committee Audit Com- and Governance dence of the EA and review the audit process, discuss audit mittee Committee results with the EA; (vii) oversee, in all material respects, the Robert E. Cawthorn X X company’s compliance with applicable financial and securi- André J. Mueller X (Chairman) X ties laws. The Finance and Audit Committee reports to the full Jean-Paul Clozel Board of Directors at regular intervals and submits propos- Juhani Anttila X als for Board resolutions, if necessary. In 2007, the Finance and Audit Committee met eight times (either in person or by Carl Feldbaum X (Chairman) telephone conference). Each meeting took on average three Werner Henrich X to four hours. The Chairman at his discretion can invite any Armin Kessler X (Chairman) X person to attend the meetings. Jean Malo X The Nominating and Governance Committee reviews con- siderations relating to Board composition, including size of Members list, tasks and area of responsibility of each the Board and criteria for membership on the Board of Direc- Committee of the Board of Directors tors, identifies, reviews, considers and recommends to the The Compensation Committee reviews and approves the Board qualified candidates to serve as Board members and company compensation philosophy and components and re- members of the various Committees of the Board. It further views general employee compensation, benefit policies and reviews directorships and consulting agreements of Board HR practices of the company. This Committee also reviews members for conflicts of interest. In addition, this Committee global incentive plans and annual objectives and evaluates reviews and recommends Corporate Governance policies and performance against these. It determines the compensation principles for the company, handles compliance issues, annu- of the CEO based on the review of the CEO’s performance ally oversees an evaluation of the Board of Directors, main- against annual goals set by the Board and approves that of Se- tains an orientation program for new Board members and an nior Managers who report directly to the CEO. The manage- ongoing education program for existing Board members and ment keeps the Compensation Committee informed of other makes related recommendations to the Board. Moreover, it global HR projects and policies, which are being implemented makes such recommendations to the Board of Directors as or considered. The Committee presents the Compensation the Committee may consider appropriate and consistent with Committee report to the Board. In 2007, the Compensation its purpose, and take such other actions and perform such Committee met four times in person. Each meeting took on services as may be referred to it from time to time by the average two hours. The Chairman at his discretion can invite Board of Directors, including the engagement of any outside any person to attend the meetings. The compensation of the advisor, at the company’s expense, it may deem necessary or CEO is not discussed in his presence. appropriate. In 2007, the Nominating and Governance Com- mittee met four times in person. Each meeting took on aver-

Corporate Governance 41 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c age one-and-a-half to two hours. The Chairman at his discre- On December 31, 2007, the Scientific Advisory Board was tion can invite any person to attend the meetings. composed of the following external experts of worldwide reputation: Professors Joël Ménard, Craig Pratt, Richard Tsien, David Shlaes, Hugo Kubinyi and Graeme Stewart. Work methods of the Board of Directors and its Committees In 2007, the Board of Directors met four times in person, and a majority (if not all) of the members were present at each Information and control instruments vis-à- Board meeting. Physical Board meetings take in average sev- vis the Management Board en to eight hours. When the situation so warrants, the Board of Directors holds additional ad hoc meetings or telephone The Board of Directors receives monthly reports regarding conferences to discuss specific issues. Any member can re- the financial and business situation of the company and quar- quest a meeting. The CEO is entitled to attend every meeting terly reports presented by the CEO. Additionally, the Finance of the Board of Directors and to participate in its debates and and Audit Committee receives and the Board of Directors ap- deliberations with the exception of executive sessions. How- proves quarterly financial results before they are released to ever, the CEO is not entitled to vote, unless a member of the the public. Board of Directors. Effective internal controls over financial reporting, in line The management presents reports and then the majority of with the Sarbanes-Oxley Act of 2002, Section 404, have the Board takes the decisions on the relevant issues, except been maintained in 2007. In the financial area, the Board is where the Board has delegated specific decisions to a Com- informed regularly of financial risks and the proposed actions mittee. to be taken.

In the case of Committees, after the presentation of the is- As the principal agent for corporate management, the Board sue by the management, the Committee takes a preliminary of Directors received and evaluated the outcome of the risk decision for approval to the full Board, which will be reported assessment of the group, as required under Article 663b along with the details of the issue, to the entire Board, who pt 12 of the Swiss Code of Obligations. Currently, the risk will take the final decision. management systems address the areas of, inter alia, production, development, business operations and finance. In An orientation program is being provided for new members the production area, an effective quality system following the of the Board of Directors and an ongoing education program principles of Good Manufacturing Practices ensures that the will be provided for existing members of the Board of Direc- products achieve the required quality to be marketed. The tors. Furthermore, the members of the Board of Directors are internal review of clinical development ensures the safe de- required to fill in a self-assessment form annually after a term velopment of the product and an extensive post marketing of office of one year. surveillance monitors the continuing safety of the marketed products. The global quality management function performs independent quality audits ensuring Good Clinical Practice Definition of area of responsibility within clinical development and therefore ensures adherence to globally recognized ethical and quality standards for devel- The Board of Directors has delegated the management of the opment of investigational medicinal products. A program of company’s business to the Chief Executive Officer (CEO) of Internal Audit reviews provides a systematic and disciplined the company and to the Actelion Executive Committee (AEC) approach to evaluate and improve the effectiveness of risk and has granted the CEO the power to appoint the members management, control and governance processes within the of the AEC. group for review by the Finance and Audit Committee. The Board of Directors has access to Internal Audit reports on re- The Board of Directors carries out the tasks reserved to it by quest from the Finance and Audit Committee. These reports law. The AEC takes all other management decisions. The By- detail risks arising in the areas of operations, compliance and Laws contain detailed information regarding the assignment internal control over financial reporting. of responsibilities to the Board of Directors and the AEC. Management has set up a Scientific Advisory Board, with the task of reviewing the company’s progress in research and clinical development and evaluating new scientific perspectives alongside the company’s management.

42 Corporate Governance WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Management Board Nationality: French Education: Business School in Paris in 1976 and degrees in accounting. Members of the Management Board Professional background: External auditor. From 1982 to 2000 On December 31, 2007, the Actelion Executive Committee worked for Roche Group, mainly in Finance and Administra- (AEC), constituting the “Management Board” as per the Cor- tion; Internal auditor; Finance Manager of Roche, Brussels; porate Governance Directive, was composed of: Assistant of the vice-chairman of the Roche Group; Finance Manager of Pharma International. Jean-Paul Clozel Title and function: Chief Executive Officer (since 1999) Roland Haefeli See page 39 Title and function: Vice President, Head of Investor Relations and Public Affairs (since 2001) Simon Buckingham Birth date: 5 September 1964 Title and function: President, Corporate and Business Devel- Nationality: Swiss opment (since 2005) Education: Advanced degrees in contemporary history from Birth date: 20 July 1962 the University of Bern (Switzerland) and University of North Nationality: Australian Carolina, Chapel Hill (USA) in political science. Education: Bachelor of veterinary science (Honors), Univer- sity of Sydney, Australia; Doctor of philosophy, University of Professional background: Stock market training program in a Melbourne, Australia, graduate management qualification, Swiss Private Bank; several years as a news writer, presenter Australian Graduate School of Management, University of and editor for several print and electronic media operations; New South Wales, Australia. two years as a delegate for the International Committee of the Red Cross (ICRC) in Bosnia and Rwanda; corporate Professional background: President, North America and Asia spokesperson for F. Hoffmann-La Roche, Head of Media Rela- Pacific, Actelion; President, Actelion US; Sales and Market- tions for other companies, including Serono. ing Director, Parke-Davis US (a division of Warner Lambert), 1998 to 2000; Global Project Director, F. Hoffmann-La Roche, Isaac Kobrin Switzerland, 1995 to 1997; Product Marketing Manager and Title and function: Senior Vice President, Head of Clinical De- Territory Manager, F. Hoffmann-La Roche, Australia. velopment (since 1999) Birth date: 18 December 1947 Christian Chavy Nationality: Israeli Title and function: President, Business Operations (since Education: Internist educated in Israel with further training 2005 and until January 14, 2008) (Fullbright Fellowship) at Ochsner Medical Foundation in New Birth date: 2 January 1949 Orleans, LA, in the cardiovascular field. Nationality: French Education: ESSEC Business School (Ecole Supérieure des Professional background: Senior physician and senior lecturer Sciences Economiques et Commerciales) in Paris; Master’s in internal medicine at Hadassah Hospital in Jerusalem, Is- Degree of Business Management from ICG (Institut de con- rael. Group leader of the Cardiovascular Clinical Development trôle de Gestion) in Paris. Group, F. Hoffmann-La Roche, 1997 to 1999.

Professional background: Vice-President and Head of Global Andrew J. Oakley Therapeutic Area Reproductive Health at Serono International Title and function: Vice President, Chief Financial Officer in Geneva; Managing Director of Serono France, 1992 to 2000; (since 2003) President of Rhone-Poulenc Rorer Canada Inc.; Managing Di- Birth date: 23 April 1962 rector of Rorer France, 1987 to 1992; Marketing Manager at Nationality: Australian Bristol-Myers France, Smith-Kline and Merck Sharp & Dohme. Education: MBA from London Business School

Louis de Lassence Professional background: Member of the Australian Institute Title and function: Vice President, Head of Corporate Services of Chartered Accountants, since 1987, following several years (since 2001) working for a major accounting firm. In his last position be- Birth date: 3 November 1953 fore joining Actelion, served in a senior finance capacity for

Corporate Governance 43 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c the global holding companies of Accenture. Previously held at the University of California, San Francisco; executive positions in major multinational building material companies and spent several years as an equity analyst Professional background: Assistant professor, Neonatology; with banks in Australia, the United Kingdom and the United Scientific expert, Leader drug discovery projects, F.- Hoff States. mann-La Roche

On January 14, 2008, Christian Chavy left his position and Walter Fischli was succeeded by Otto Schwarz as new Head of Business Title and function: Senior Vice President, Head of Drug Discov- Operations: ery, Molecular Biology & Biochemistry (since 1997), founder Birth date: 4 May 1949 Otto Schwarz Nationality: Swiss Title and function: President, Business Operations Education: Biochemist educated at the Swiss Institute of Tech- Birth date: 13 October 1955 nology (ETH) Zurich with further training in molecular biology Nationality: Austrian and organic chemistry; research fellowship at the Addiction Education: PhD pharmacy/pharmaceutical chemistry at the Research Foundation, Stanford University, Palo Alto, USA. University of Vienna Professional background: 15 years of experience in drug dis- Professional background: EVP Commercial Operations, covery at F. Hoffmann-La Roche; Founder of Actelion, build-up Nycomed; Member Executive Board Business Strategy & and leader of new discovery units. Commercial Operations, Altana Pharma AG. Various managerial positions at Schering Plough incl. SrVP Schering-Plough Thomas Weller Mid-Europe; Marketing Planning Manager at Eli Lilly. Title and function: Vice President, Head of Drug Discovery, Chemistry (since 1999) In addition to the above-mentioned persons of the AEC, the Birth date: 20 June 1954 Senior Management (not being part of the Management Nationality: Swiss Board as per the Corporate Governance Directive) comprised Education: Chemist educated at the Swiss Institute of Tech- the following individuals: nology (ETH) Zurich with postdoctoral training in organic chemistry at Columbia University, New York, USA. Marian Borovsky Title and function: Vice President, General Counsel (since Professional background: Scientific expert, leader drug dis- 2000) & Corporate Secretary (since 2003) covery projects, F. Hoffmann-La Roche. Birth date: 25 September 1969 Nationality: Swiss The disclosure of compensation and ownership of shares Education: Doctor of law (Dr.iur.) educated at the University of and option rights refers only to the members of the AEC, as Basel, attorney at law admitted to the Bar in Switzerland and only members of the AEC are members of the management qualified business mediator. within the relevant meaning of Art. 663bbis of the Swiss Code of Obligations (SCO). Professional background: Started his professional career as an attorney at law with an insurance company and subsequently worked as a legal and tax advisor for PricewaterhouseCoo- Other activities and functions pers. In addition, he completed a secondment to an interna- None tional business law firm in London.

Martine Clozel Management contracts Title and function: Senior Vice President, Head of Drug Discov- None ery Pharmacology & Pre-clinical Development (since 1997), member of founding team of Actelion Birth date: 27 December 1955 Nationality: French Education: Paediatrician specialized in neonatal intensive care, educated at the University of Nancy, France; Training in physiology and pharmacology at McGill University, Montreal, and

44 Corporate Governance WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Compensation, shareholdings and loans No additional remuneration was paid to non-executive members of the Board of Directors.

Content and method of determining the Executive Members compensations and of the shareholding For the executive members’ remuneration, please refer to programs Section “Remuneration of the AEC”.

General Process Options allotted to the executive members of the Board of Every year, the Board of Directors reviews and approves Directors are subject to immediate vesting, the taxation of the company’s financial goals for the following year. At this the options can be chosen by the executive members of the meeting the Board also evaluates and approves the level of Board of Directors and this can be either at grant or at exer- achievement in respect to the targeted financial objectives cise, consequently the life of the options is adjusted based of the past year. The compensation of the Board of Direc- on this choice to 10 or 10.5 years from grant date. The strike tors and AEC is determined by the Board of Directors upon price of the options is defined as the closing share price on recommendation of the Compensation Committee based on the last trading day immediately prior to the grant date. regular surveys regarding compensation of comparable companies and functions and taking into account advice from an The executive members’ of the Board of Directors individual external consultant specialized in this area. The benchmark performance is reviewed and approved by the non-executive surveys are held on a regular basis every one to two years. members of the Board of Directors.

Remuneration of the members of the Board of Directors Remuneration of the AEC The members of the AEC receive (i) a fixed annual remunera- Non-Executive Members tion, taking into consideration benchmark data. The bench- Non-executive members of the Board of Directors receive (i) mark companies for compensation differ depending on the a yearly fixed compensation (retainer) for their membership nature of the specific function. For specific pharmaceutical to the Board as well as to the different Committees, (ii) meet- functions, a peer group of pharmaceutical companies is con- ing fees according to their individual attendance at Board and sidered. For other functions, a wider group of relevant bench- Committee meetings (either in person or by telephone con- mark companies is considered from a variety of different in- ference), (iii) a standard pre-defined absolute Swiss Francs dustry sectors. (ii) A cash bonus as a percentage of the fixed value in allotment of shares and/or stock options based on annual remuneration (depending on the individual based on a individual choice by the non-executive members of the Board target from 30% to 100% of effective fixed annual remunera- of Directors based on the DSOP (Director Stock Opion Plan); tion) adjusted based on company‘s, unit‘s and individual‘s (see Financial Section, note 20, page 70). performance against defined goals, (iii) deferred cash incentive based on company profit and (iv) an allotment of options Shares allotted are subject to immediate vesting and a one- under the ESOP (Employee Stock Option Plan), the number year mandatory blocking period; taxation of the shares is at of which is determined according to a grid agreed by the grant. Options allotted are subject to immediate vesting, the Board of Directors and which takes into account the function taxation of the options can be chosen by the non-executive of the AEC member in question (see Financial Section, note members of the Board of Directors and this can be either at 20, page 71). However, executive members of the Board of grant or at exercise, consequently the life of the options is Directors may receive options under the DSOP. The number adjusted based on this choice to 10 or 10.5 years from grant of options is determined by the non-executive members of date. The strike price of the options is defined as the closing the Board of Directors. share price on the last trading day immediately prior to the grant date. The items used for the definition of the CEO direct reports cash bonus are defined as follows: (i) the company‘s perfor- The shares and options are granted once a year to the non- mance (quantitative as well as qualitative) is defined and eval- executive members of the Board of Directors. uated by the Board of Directors, (ii) the unit‘s performance is approved by the Board of Directors upon proposal from Other benefits the CEO and (iii) the individual performance is defined and In addition to the above, the non-executive members received evaluated by the direct line management and approved by in 2007 employer contributions to social security schemes for the Board of Directors. a total of CHF 57,474.

Corporate Governance 45 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Other benefits Registration in share register In addition to the above, the members of the AEC received in 2007 additional employer contributions to social security Only shareholders who are registered in the shareholders schemes and pension plans for a total of CHF 777,605 and register of the company on the date falling approximately 10 Actelion paid additional benefits for a total of CHF 121,600. days prior to the Annual General Meeting of Shareholders are entitled to vote at the Annual General Meeting of Sharehold- Special Severance Agreements ers. The exact deadline for being registered in the sharehold- One member of the AEC has an individual severance pay- ers register is made public with the press release following ment agreement of 18 months salary in case of termination. the presentation of the financials to the public for the year- end December 31. Another member of the AEC has an individual severance payment agreement of six months salary in case of termination.

For information regarding the individual compensation and Changes of control and defense measures ownership of shares and option rights of the members of the Board of Directors and the AEC, please refer to note 10 of the Financial Statements 2007 on page 83. Duty to make an offer There are no opting-out or opting-up provisions in the Articles of Association.

Shareholder’s participation rights Clauses of change of control

Voting rights and representation restrictions There are addendums to the employee agreements of a See Articles 5 and 11 of the Articles of Association. certain number of employees in key positions providing for compensation in case of loss of position due to a change of control. Statutory quorums See Article 15 of the Articles of Association and the law. Overall, 74 members of the Management Board and of the other management as well as other key employees of the Actelion group worldwide have employment agreements Convening of general meetings of shareholders with change of control clauses. Managerial positions are not See Articles 9, 12 and 13 of the Articles of Association and necessarily congruent with key functions; therefore, it is un- the law. clear where to draw the line between other management and non-management functions.

Agenda They may receive a severance payment equivalent to twice the yearly total compensation. However, this severance pay- Shareholders holding more than CHF 1 million worth of ment would only be due if, within six (6) months prior to or shares are entitled to add items to the agenda of the Annual two (2) years after the effective date of a change in control, General Meeting of Shareholders. Proposals for the Annual the employing Actelion company terminates the employee‘s General Meeting of Shareholders must be sent to the com- employment without Cause or the employee terminates his pany to arrive approximately 40 days prior to the date of the employment with Good Reason (Good Reason being either Annual General Meeting of Shareholders. The exact deadline (a) a reduction in the key employee‘s salary, or (b) a material for sending in proposals is made public approximately two reduction or adverse or substantive change in the key em- months prior to the date of the Annual General Meeting of ployee‘s duties or responsibilities, or (c) the requirement that Shareholders. the key employee relocate to a worksite more than fifty (50) kilometres from the employing company’s current principal office).

The ESOP provides the principle that in case of change of control all options vest and become exercisable immediately.

46 Corporate Governance WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Auditors the Finance and Audit Committee and fulfils all independence criteria. In 2007, the external auditors met several times with the Finance and Audit Committee, at least once each quarter. Duration of the mandate and term of office of Head Auditor Regarding the selection of external auditors, on an infrequent basis, the Finance and Audit Committee will assess offers Ernst & Young AG, Basel, was elected as the Head Auditor of and presentations from several appropriate, independent ex- the company for the first time in 2006 and was re-elected for ternal audit firms and the Finance and Audit Committee then the financial year 2007 by resolution of the shareholders on makes a proposal to the full Board, based on preset service May 4, 2007. level and quality criteria, as to the external auditors to be recommended for election. The final approval of the external Mr. Jürg Zürcher is head auditor since 2006. auditors is made by the shareholders at the Annual General Meeting of Shareholders.

Auditing honorarium

On an accruals basis, the auditing fees for the year under re- Information policy view are as follows:

Audit fees The management issues statements regarding the compa- Ernst & Young: CHF 1,653,599 ny‘s progress on a quarterly basis, at the same time as the Audit related fees financials are made public. Ernst & Young: CHF 42,299 The shareholders are regularly informed of Actelion’s business via ad-hoc releases, internet announcements, road Additional honorarium shows, major news agencies and the Swiss Official Com- mercial Gazette. In addition to the fees described above, aggregate fees of CHF 373,184 were billed by Ernst & Young during the year The Investor Relations & Public Affairs department is available ending December 31, 2007, mainly for income tax compli- to respond to shareholders’ or potential investors’ queries. ance and related tax services. The company’s website can be accessed at www.actelion.com. The site contains information useful to investors, including Supervisory and control instruments vis-à- media releases, financial statements and background infor- vis the auditors mation on marketed products as well as clinical and pre-clinical projects. The Finance and Audit Committee deals with the review of the internal control of the accounts and finances of the Com- pany via its supervisory activities over both external and internal audit functions (see page 41). During 2006, this process High ethical standards has been further strengthened by an increased transparency resultant from internal controls over financial reporting and the presence of the head of Internal Audit at all Finance and Actelion’s Code of Ethical Conduct establishes corporate Audit Committee meetings. The external auditors meet with standards of behavior for all employees and sets out the the Finance and Audit Committee to present their plan, scope, company’s expectations for contractors, agents and repre- audit approach, compensation and audit results. The Finance sentatives. The code assigns employee responsibilities that and Audit Committee reviews these and evaluates the inde- enable Actelion to fulfill its commitment to the highest legal pendence of the external auditors, from a risk analysis per- and ethical principles in business. spective. In addition, the auditors present their opinions resultant from an integrated audit, along with a management The in-house training system ensures the rapid distribution letter annually. The company has ensured that the auditor’s of these standards to all employees and gives them the partner in charge has unrestricted access to the Chairman of opportunity to raise questions. Over 90% of Actelion’s em-

Corporate Governance 47 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c ployees have confirmed reading and understanding the Code of Ethical Conduct. Under Actelion’s Whistleblower Policy, an employee who makes a report has a strict guarantee of non- retaliation. Violations of this right are not tolerated.

The Corporate Compliance Office coordinates the business ethics and compliance programs and is a resource to assist employees with questions or interpretations of the Actelion Code of Ethical Conduct and related issues. Employees and other parties who become aware of violations of Actelion corporate principles can bring them to the attention of their managers or report them to the Compliance Officer Peter Herrmann (direct phone number +41 (0) 61 565 65 39).

Actelion strives for a culture in which its employees recognize that acting honestly, respectfully and with integrity is expected and appreciated.

Clinical trial protocol registry and marketing and sales guidelines Actelion is dedicated to enhancing the transparency of its clinical trials by means of public databases. The project Study MetA DAta Registry (SMADAR) is designed to serve this goal (see http://www.trials.actelion.com) by helping patients, caregivers and physicians find clinical trials that may be appropriate for them.

Actelion has implemented a number of international guidelines relating to promotional material, websites and orga- nizing events. These globally applicable rules ensure that advertising material complies with legally valid regulations. Actelion has implemented the marketing code of the Euro- pean Federation of Pharmaceuticals Industries’ Association (EFPIA). In the United States, Actelion adheres strictly to the principles of the PhRMA code.

48 Corporate Governance WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Consolidated Financial Statements

Consolidated Income Statements

Twelve months ended December 31,

(in CHF thousands, except per share amounts) 2007 2006 Net revenue: Products sales 1,292,083 924,141 Contract revenue 25,309 21,532 Total net revenue 1,317,392 945,673

Operating expenses (1) Cost of sales 137,748 90,594 Research and development 292,137 211,814 Marketing and advertising 234,052 185,491 Selling, general and administration 266,083 185,075 Amortization of acquired intangible assets 19,950 4,510 Write-off of acquired in-process research and development 224,820 – Total operating expense 1,174,790 677,484

Operating income 142,602 268,189

Interest income 20,408 8,386 Interest expense (233) (163)

Amortization of debt discount and issuance costs (4,090) (8,410) Other financial income, net 9,587 10,724 Income before income tax expense 168,274 278,726

Income tax expense (43,688) (37,636) Net income 124,586 241,090

Basic net income per share 1.05 2.13 Number of shares (in thousands) used in computation 118,098 113,269 Diluted net income per share 1.00 2.05 Number of shares and share options (in thousands) used in computation 124,809 121,627

(1) Includes employee stock option costs as follows: Research and development 22,755 11,328 Marketing and advertising 15,676 9,035 Selling, general and administration 25,667 12,298 Total stock-based compensation 64,098 32,661

The accompanying notes form an integral part of these consolidated financial statements.

Consolidated Financial Statements 49 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Consolidated Balance Sheets

December 31, December 31, (in CHF thousands, except number of shares) 2007 2006 Assets Current assets Cash and cash equivalents 331,586 926,137 Short-term deposits 527,415 189,098 Derivative instruments 322 3,667 Marketable securities – 29,750 Trade and other receivables, net 329,528 217,376 Inventories 42,787 24,320 Other current assets 35,386 27,635 Deferred tax asset, current portion 559 4,518 Total current assets 1,267,583 1,422,501

Property, plant and equipment, net 113,993 81,970 Other assets 10,011 11,486 Intangible assets, net 187,417 19,159 Goodwill, net 81,155 27,385 Deferred tax asset 15,275 15,669 Total assets 1,675,434 1,578,170

Liabilities and shareholders' equity Current liabilities Trade and other payables 89,101 67,297 Accrued expenses 208,961 130,894 Deferred revenue, current portion 28,434 27,314 Other current liabilities 1,184 1,649 Short-term financial debt 493,000 626,832 Total current liabilities 820,680 853,986

Long-term financial debt 84,100 – Deferred revenue, less current portion 106,514 120,890 Other non-current liabilities 5,213 4,395 Pension liability 4,000 19,835 Deferred tax liability 2,546 932 Total liabilities 1,023,053 1,000,038

Shareholders' equity Common shares (par value CHF 0.50 per share, authorized 213,275,590 and 207,033,200 shares; issued 122,027,729 and 114,779,420 shares in 2007 and 2006 respectively) 61,014 57,390 Additional paid-in capital 569,920 394,090 Accumulated profit 281,207 156,621 Treasury shares, at cost (230,627) (11,118) Accumulated other comprehensive income (loss) (29,133) (18,851) Total shareholders' equity 652,381 578,132 Total liabilities and shareholders' equity 1,675,434 1,578,170

The accompanying notes form an integral part of these consolidated financial statements.

50 Consolidated Financial Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Consolidated Statements of Cash Flows

Twelve months ended December 31, (in CHF thousands) 2007 2006 Cash flow from operating activities Net income 124,586 241,090 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 39,923 19,525 Stock-based compensation 64,606 32,979 Excess tax benefits from share-based payment arrangements (7,401) (3,959) (Gains) Losses on derivative instruments 3,096 (7,423) (Gains) Losses on marketable securities (742) – Write-off of acquired in-process research and development 224,820 68 Amortization of debt discount and expense 4,090 8,410 Trade and other receivables (100,190) (58,812) Inventories (7,525) 2,052 Other current assets (11,942) (4,914) Other assets (3,820) (11,547) Trade and other payables 23,025 7,317 Accrued expenses 61,153 46,040 Deferred revenue (13,438) 80,347 Other liabilities (3,185) 3,942 Changes in other operating cash flow items (2,892) (2,358) Net cash flow provided by operating activities 394,164 352,757 Cash flow from investing activities Purchase of short-term deposits (1,050,153) (323,157) Withdrawal of short-term deposits 711,679 378,900 Purchase of property, plant and equipment (55,382) (42,519) Purchase of marketable securities – (20,000) Proceeds from sale of marketable securities 109,125 – Purchase of derivative instruments (505) (1,434) Proceeds from sale of derivative instruments 505 1,434 Purchase of intangible assets (7,230) (11,124) Increase of investment (16,708) – Acquisition of subsidiary (520,271) – Net cash flow used in investing activities (828,940) (17,900) Cash flow from financing activities Payments on capital leases (238) (226) Issuance of 2006 convertible bond (260) 451,430 Conversion costs 2003 convertible bond (2,213) – Bank loan 117,100 – Proceeds from exercise of stock options, net of expense 59,161 31,026 Purchase of treasury shares (219,650) (10,839) Purchase of call option (117,054) (20,562) Excess tax benefits from share-based payment arrangements 7,401 3,959 Net cash flow provided by (used in) financing activities (155,753) 454,788 Net effect of exchange rates on cash and cash equivalents (4,022) (1,525) Net change in cash and cash equivalents (594,551) 788,120 Cash and cash equivalents at beginning of period 926,137 138,017 Cash and cash equivalents at end of period 331,586 926,137 Supplemental disclosures of cash flow information Cash paid during the year for: Interest 196 163 Taxes 24,942 11,997

The accompanying notes form an integral part of these consolidated financial statements.

Consolidated Financial Statements 51 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Consolidated Statement of Changes in Shareholders’ Equity

Additional Other Common shares paid-in- Accumulated Treasury comprehensive Shareholders' Shares Amount capital profit shares income (loss) equity (in CHF thousands, except number of shares) At January 1, 2006 112,696,750 56,364 348,011 (84,469) (467) 2,275 321,714 Comprehensive income net of tax effect: Net income 241,090 241,090 Other comprehensive income: Currency translation adjustment (3,071) (3,071) Additional minimum pension liability (2,332) (2,332) Unrealized loss on marketable securities (70) (70) Comprehensive income 235,617 Additional pension liability, adoption of SFAS 158 (15,653) (15,653) Excess tax benefit from share-based payment 3,850 3,850 Exercise of stock options 2,051,685 1,026 30,000 31,026 Transactions in treasury shares (247,500) 130 (10,651) (10,521) Options related to own shares (20,562) (20,562) Stock-based compensation expense, net 32,661 32,661

At December 31, 2006 114,500,935 57,390 394,090 156,621 (11,118) (18,851) 578,132 Comprehensive income net of tax effect: Net income 124,586 124,586 Other comprehensive income: Currency translation adjustment (24,526) (24,526) Not recognized components of net periodic benefit costs 14,157 14,157 Unrealized gain on marketable securities 87 87 Comprehensive income 114,304 Excess tax benefit from share-based payment 7,209 7,209 Exercise of stock options 2,562,969 1,281 57,880 59,161 Equity increase from debt conversion 4,685,340 2,343 163,330 165,673 Transactions in treasury shares (3,662,025) 367 (219,509) (219,142) Options related to own shares (117,054) (117,054) Stock-based compensation expense, net 64,098 64,098 At December 31, 2007 118,087,219 61,014 569,920 281,207 (230,627) (29,133) 652,381

The accompanying notes form an integral part of these consolidated financial statements.

52 Consolidated Financial Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Notes to the Consolidated Financial Statements lished for estimated uncollectible amounts, product returns (CHF thousands, except share and per share amounts) and discounts.

Note 1. Description of business and summa- Taxes collected from customers and remitted to governmen- ry of significant accounting policies tal authorities like sales taxes, VAT are generally deducted directly from gross sales without recording them in revenue. Actelion Ltd (“Actelion” or the “Group”), a biopharmaceutical company headquartered in Allschwil, Switzerland, discov- Contract revenue ers, develops and commercializes innovative low molecular Contract revenue includes license fees and milestone pay- weight drugs for high unmet medical needs. ments associated with collaborative agreements with third parties. The Group recognizes revenue from collaborative Basis of accounting agreements when the services are performed and collect- The Group’s consolidated financial statements have been pre- ibility is reasonably assured. Revenue from non-refundable, pared under United States Generally Accepted Accounting upfront license fees and performance milestones where the Principles (“US GAAP”). All amounts are presented in Swiss Group has continuing involvement is recognized over the francs (“CHF”), unless otherwise indicated. estimated performance or agreement period, depending on the terms of the agreement. The recognition of revenue is Principles of consolidation prospectively adjusted for subsequent changes in the de- The consolidated financial statements include the accounts of velopment or agreement period. Revenue associated with the Group and its wholly-owned affiliated companies in which performance milestones where the Group has no continu- the Group has a controlling financial interest and exercises ing involvement or service obligation is recognized upon control over their operations as well as entities for which the achievement of the milestone. Payments received in excess Group has determined to be the primary beneficiary under of amounts earned are classified as deferred revenue until the Financial Accounting Standards Board Interpretation No. earned. 46(R), Consolidation of Variable Interest Entities (“VIE”), an interpretation of ARB No. 51 (“FIN 46(R)”). Shipping and handling costs The Group recognizes expenses relating to shipping and han- Use of estimates dling costs in cost of sales. The preparation of financial statements in conformity with US GAAP requires management to make judgments, assump- Research and development tions and estimates that affect the amounts and disclosures Research and development expense consists primarily of reported in the consolidated financial statements and accom- compensation and other expenses related to research and panying notes. On an on-going basis, management evaluates development personnel; costs associated with pre-clinical its estimates, including those related to revenue recognition testing and clinical trials of the Group’s product candidates, for contract revenue, allowance for doubtful accounts, stock- including the costs of manufacturing the product candidates; based compensation, purchase accounting, impairment of expenses for research and services rendered under co-devel- goodwill, provisions and income taxes. The Group bases opment agreements; and facilities expenses. All research and its estimates on historical experience and on various other development costs are charged to expense when incurred. market-specific assumptions that are believed to be reasonable under the circumstances. The results of these estimates Payments made to acquire research and development assets, form the basis for making judgments about the carrying val- including those payments made under licensing agreements, ues of assets and liabilities that are not readily apparent from that are deemed to have an alternative future use or are re- other sources. Actual results may differ significantly from lated to proven products are capitalized as intangible assets; these estimates. otherwise, they are expensed as research and development costs. For further information on payments made under the Revenue recognition Group’s licensing agreements refer to Note 3, “Licensing agreements”. Product sales The Group recognizes revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. Allowances are estab-

Consolidated Financial Statements 53 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Advertising and promotional costs Actelion shareholders had approved this stock split at their The Group expenses the costs of advertising, including pro- Annual General Meeting on May 4, 2007. motional expenses, as incurred. Advertising and promotional costs were CHF 121.9 million and CHF 98.6 million in 2007 Dividends and 2006, respectively. The Group may declare dividends upon the recommendation of the Board of Directors and the approval of shareholders Patents and trademarks at their Annual General Meeting. Under Swiss corporate law, Costs associated with the filing and registration of patents and the Group’s right to pay dividends may be limited in specific trademarks are expensed in the period in which they occur. circumstances.

Taxes Cash and cash equivalents The Group accounts for income taxes in accordance with The Group considers all highly liquid investments with an orig- Statement of Financial Accounting Standards No. 109, Ac- inal maturity of three months or less when purchased to be counting for Income Taxes (“SFAS 109”). Under this method, cash equivalents. Additionally, the Group includes all amounts deferred tax assets and liabilities are determined based on dif- held in money market funds as cash equivalents. ferences between financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rules and Short-term deposits laws that will be in effect when differences are expected to Short-term deposits with maturities greater than three reverse. The Group performs periodic evaluations of recorded months have been separated from cash and cash equivalents tax assets and liabilities and maintains a valuation allowance and are reported in a separate line in the consolidated bal- if deemed necessary. Since January 1, 2007, effective settle- ance sheet. ment of tax positions is determined in compliance with FASB Interpretation 48, Accounting for Uncertainty of Income Taxes Marketable securities (“FIN 48”) and related FASB staff position papers. Significant The Group classifies marketable securities as either “avail- estimates are required in determining income tax expense able-for-sale” or “held-to-maturity”. Available-for-sale securi- and benefits. Various internal and external factors may have ties are carried at fair value with unrealized gains and losses favorable or unfavorable effects on the future effective tax rate, recorded as a separate component of shareholders’ equity. which would directly impact the Group’s financial position or Held-to-maturity securities are carried at amortized cost. Divi- results of operations. These factors include, but are not lim- dends and interest income are accrued as earned. Realized ited to, changes in tax laws, regulations and/or rates, chang- gains and losses are determined on an average cost basis. ing interpretations of existing tax laws or regulations, future The Group reviews marketable securities for impairment levels of capital expenditures, and changes in overall levels of whenever circumstances indicate that a decline in the fair pre-tax earnings. Interest and penalties related to uncertain value of the security below its amortized cost may be other tax positions are recognized as income tax expense. than temporary. Securities with unrealized losses for more than six months are presumed to be impaired, absent com- Earnings per share pelling evidence to the contrary. In addition, securities with In accordance with Statement of Financial Accounting Stan- unrealized losses for less than six months may be deemed dards No. 128, Earnings Per Share (“SFAS 128”), basic earn- impaired in certain circumstances. ings per share are computed by dividing net income available to common shareholders by the weighted-average common Derivative instruments shares outstanding for the fiscal year. Diluted earnings per A significant portion of the Group’s operations is denominat- share reflect the maximum potential dilution that could occur if ed in foreign currencies, principally in US Dollars and Euros. dilutive securities, such as share options or convertible debt, These exposures may adversely impact the Group’s net in- were exercised or converted into common shares or resulted come and net assets. The Group uses derivatives to partially in the issuance of common shares that would participate in offset market exposure to fluctuations in foreign currencies. net income. The Group records all derivatives on the balance sheet at fair value. The Group’s derivative instruments, while providing ef- In June 2007, a one-to-five split in shares of Actelion Ltd took fective economic hedges under the Group’s policies, do not effect. Basic and diluted EPS have been adjusted retroac- qualify for hedge accounting as defined by Statement of Fi- tively for all periods presented to reflect the change in the nancial Accounting Standards No. 133, Accounting for Deriva- number of shares. tive Instruments and Hedging Activities (“SFAS 133”).

54 Consolidated Financial Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Changes in the fair value of all derivative instruments are rec- Inventories ognized immediately in other financial income (expense) in Inventories are stated at the lower of cost or market value the consolidated income statement. with cost determined by the average-cost method. Invento- ries consist of semi-finished and finished products. In 2006, The Group does not regularly enter into agreements contain- the Group changed its accounting principle for inventories ing embedded derivatives. However, when such agreements from the first-in first-out (FIFO) method to the average-cost are executed, an assessment is made of any embedded de- method as preferable method with no material impact. rivative based on the criteria set out in SFAS 133 to determine if the derivative is required to be bifurcated and accounted for Property, plant and equipment as a stand alone derivative instrument. Property, plant and equipment is recorded at historical cost less accumulated depreciation. Financial instruments indexed to own shares The costs of contracts indexed to own shares which meet all Depreciation expense is recorded utilizing the straight-line of the applicable criteria for equity classification as outlined in method over the estimated useful life of the asset. Assets Emerging Issues Task No. 00-19, Accounting for Derivative Finan- are written down to their estimated residual value. Leasehold cial Instruments Indexed to, and Potentially Settled in, a Compa- improvements and assets acquired under capital leases are ny’s Own Stock, are classified in shareholder’s equity. The Group amortized using the straight-line method over the shorter of applies settlement date accounting to such instruments. the lease term or estimated useful life of the asset. Assets acquired under capital leases in which title transfers to the Accounts receivable Group at the end of the agreement are recorded at their es- Accounts receivable are recorded at net realizable value af- timated fair value and amortized over the useful life of the ter deducting an allowance for doubtful accounts. The Group asset. The estimated useful lives are as follows: maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Group’s Group of assets Useful life customers were to deteriorate, resulting in an impairment of Computers 3 years their ability to make payments, an increase to the allowance Furniture and fixtures 5 years might be required, which could affect future earnings. Laboratory equipment 5 years Leasehold improvements 5 to 10 years The Group accounts for the securitization of trade receivables in accordance with Statement of Financial Accounting Buildings 40 years Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”). SFAS 140 requires an entity to recognize the financial and servicing assets it controls and the liabilities it has in- Impairment of long-lived assets curred and to derecognize financial assets when control has Long-lived assets and certain identifiable intangible assets been surrendered. At the time the Group meets the criteria to be held and used are reviewed for impairment when of SFAS 140, the balances are removed from trade receiv- events or changes in circumstances indicate that the carrying ables and costs associated with the sale of receivables are amount of such assets may not be recoverable. Determina- included in the determination of earnings. Additionally, the tion of recoverability is based on an estimate of undiscounted Group evaluates whether the purchasing entities qualify as future cash flows resulting from the use of the asset and its VIEs and whether the Group is required to consolidate these eventual disposition. In the event that such cash flows are not entities in accordance with FIN 46(R). expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair The Group, in its normal course of business, sells receivables values. Long-lived assets and certain identifiable intangible outside its securitization programs without recourse. Sales or assets to be disposed of are reported at the lower of carrying transfers that do not meet the requirements of SFAS 140 are amount or fair value less cost to sell. accounted for as secured borrowings.

Consolidated Financial Statements 55 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Goodwill and intangible assets The Challenge Award related expenses are recognized ratably Goodwill represents the excess of purchase price over the over the requisite service period for each separately vesting estimated fair value of net assets acquired in a business com- portion of the award. Stock-based compensation costs relat- bination. Pursuant to Statement of Financial Accounting Stan- ed to employees engaged in the production process generally dards No. 142, Goodwill and Other Intangibles (“SFAS 142”), are recognized in a manner similar to all other compensation goodwill is not amortized but rather tested annually for im- paid to these employees and are capitalized as part of inven- pairment and whenever events and changes in circumstanc- tory. Due to the immateriality of such cost, no stock-based es suggest that the carrying amount may not be recoverable. compensation cost was capitalized in the periods presented. Stock option exercises are settled out of the reserved condi- Intangible assets with definite lives consist primarily of ac- tional capital, treasury shares or equity indexed call options quired existing licenses and internal use software, which are which the Group purchases on the market. amortized on a straight-line basis over the economic lives of the respective assets ranging from three to eleven years, and In June 2007, a one-to-five split in shares of Actelion Ltd took are reviewed for impairment when events or changes in cir- effect. Prior year grants have been adjusted retroactively for cumstances indicate that the carrying amount of such assets all periods presented to reflect the change in the number of may not be recoverable. shares. Actelion shareholders had approved this stock split at their Annual General Meeting on May 4, 2007. The Group changed the date of the annual impairment testing from December 31 to October 1. Pension accounting In December 2006, the Group adopted Statement of Finan- Stock-based compensation cial Accounting Standards No. 158, Employer’s Accounting Stock-based compensation costs are recognized in earn- for Defined Benefit Pension and Other Postretirement Plans ings using the fair-value based method for all new awards (“SFAS 158”), which requires the recognition of the funded granted after July 1, 2005. Compensation costs for unvested status of plans in the Group’s balance sheet. The Group rec- stock options and awards that were outstanding at July 1, ognizes actuarial gains and losses in accumulated other com- 2005, are recognized in earnings over the requisite service prehensive income. period based on the grant-date fair value of those options and awards. Comprehensive income (loss) Comprehensive income (loss) is comprised of net income Fair values of awards granted under the share option plans and other comprehensive income (loss). Other compre- until December 2004 were estimated at grant or purchase hensive income (loss) includes unrealized gains/losses on dates using a Black-Scholes option pricing model. Fair value available-for-sale securities, currency translation adjustments, of awards granted after December 2004 was estimated by actuarial gains/losses and prior year service costs resulting use of a Binomial Lattice option pricing model. The model from defined benefit plans. Comprehensive income (loss) input assumptions are determined based on available inter- for the years ended December 31, 2007 and 2006, has been nal and external data sources. The risk free rate used in the reflected in the consolidated statement of changes in share- model is based on the 10 year Swiss zero coupon rate. The holders’ equity. probability of death is derived from data of the Swiss Fed- eral Statistical Office. Expected volatility is based on equal Foreign currency exposure weighting of historic and forward looking data which includes Income, expense and cash flows of foreign subsidiaries are the Group’s historic volatility, average peer group volatility translated into the Group’s reporting currency at monthly av- and implied volatility on the longest outstanding convertible erage exchange rates and the corresponding balance sheets debt and traded warrants. Resignation, redundancy, retire- at the period-end exchange rate. Exchange differences arising ment and early exercise behavior assumptions are based on from the translation of the net investment in foreign subsidiar- the Group’s historical headcount data and analyses of histori- ies and long-term internal financial debt are recorded, net of cal early exercises of the Group’s employees, respectively. tax, in currency translation adjustment in shareholders’ equity. The Group recognizes compensation costs considering esti- Foreign currency transactions are accounted for at the ex- mated future forfeitures and will adjust these estimates for change rates prevailing at the date of the transactions. Gains actual forfeitures as differences occur. Amortization of total and losses resulting from the settlement of such transactions compensation costs for the standard share option plans is and from the translation of monetary assets and liabilities de- recognized on a straight-line basis over the requisite service nominated in foreign currencies are recognized in the subsid- period for the entire award. iary’s income statements in the corresponding period.

56 Consolidated Financial Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Interest rate risk In February 2007, FASB issued Statement on Financial Ac- Interest rate risk arises from movements in interest rates, counting Standards No. 159, The Fair Value Option for Finan- which could have adverse effects on the Group’s net income cial Assets and Financial Liabilities (“SFAS 159”). This stan- or financial position. Changes in interest rates cause varia- dard provides companies with an irrevocable option to report tions in interest income and expenses on interest-bearing selected financial assets and liabilities at fair value. It aims assets and liabilities. In addition, they can affect the market reduction of complexity in accounting and volatility in earn- value of certain financial assets, liabilities and instruments. ings caused by differences in the existing accounting rules. Specifically, the standard enables companies to avoid the Segment information complex hedge accounting rules for derivatives. The standard Statement of Financial Accounting Standards No. 131, Disclo- is effective for financial statements issued for fiscal years sures about Segments of an Enterprise and Related Informa- beginning after November 15, 2007. The Group does not be- tion (“SFAS 131”), establishes standards for reporting infor- lieve that, if elected, the adoption of this standard will have a mation on operating segments in interim and annual financial material effect on the Group’s consolidated financial position, statements. The Group’s chief operating decision-makers re- results of operations or cash flows. view the profit and loss of the Group on an aggregate basis and manage the operations of the Group as a single operating In November 2007, the Emerging Task Force (“EITF”) of FASB segment. Accordingly, the Group operates in one segment. reached consensus on Issue 07-1, Accounting for collaborative arrangements related to the development and commer- Recent accounting pronouncements cialization of intellectual property (“EITF 07-1”). This issue In December 2007, the Financial Accounting Standards specifically addresses accounting and presentation issues Board (“FASB”) issued Statement on Financial Accounting concerning jointly development, manufacturing and market- Standards No. 141 R), Business Combinations, an amend- ing of a drug candidate characteristic for companies in the ment of FASB Statements No. 141 (“SFAS 141 R)”). As part biotechnology or pharmaceutical industry. Such companies of the conversion project with the International Accounting often collaborate without creating a separate legal entity. The Standard Board (IASB) this statement implements new ap- consensus requires collaborators to present the result of ac- plication rules for acquisition accounting, such as exclusion tivities for which they act as the principal on a gross basis of transaction costs from the purchase price allocation and and report any payments received from (made to) other col- recognition of acquired in-process research and development laborators based on other applicable GAAP. Application of this as an indefinite-lived intangible asset. The standard is effec- EITF Issue becomes effective for fiscal years beginning after tive for fiscal years beginning after December 15, 2008 and December 15, 2008, and interim periods within those fis- should be applied prospectively. Early adoption is not permit- cal years. Retroactive application is required. The Group has ted. In the event of a material future acquisition subsequent not yet evaluated the effects of adoption of this EITF on the to the adoption of this standard, a material effect on the Group’s consolidated financial position, results of operations Group’s consolidated financial position, results of operations or cash flows. or cash flows may result. In June 2007, the EITF reached consensus on Issue 07-3, In September 2006, the FASB issued SFAS No. 157, Fair Value Accounting for advance payments for research and develop- Measurements (“SFAS 157”). SFAS 157 provides enhanced ment activities (“EITF 07-3”). The consensus provides guid- guidance for using fair value to measure assets and liabilities, ance on treatment of non-refundable prepayments for use in expands the required disclosures about fair value measure- research and development activities. It requires companies ment, and is applicable whenever other standards require to defer and capitalize prepaid, non-refundable research and assets or liabilities to be measured at fair value. However, it development payments to third parties over the period that does not expand the use of fair value in any new circum- the research and development activities are performed. The stances. SFAS 157 is effective for financial instruments in consensus is effective for new contracts entered into in fiscal fiscal years beginning after November 15, 2007, and for all years beginning after December 15, 2007, including interim other assets and liabilities in fiscal years beginning after No- periods of those years. Early application is not permitted. As vember 15, 2008. The Group does not believe that adoption this EITF is consistent with the Group’s current policy, the of this statement related to financial instruments will have a adoption of this EITF issue will not have a material effect on material effect on the Group’s consolidated financial position, the Group’s consolidated financial position, results of opera- results of operations or cash flows. The Group is currently in tions or cash flows. the process of assessing the impact of the adoption of this statement related to non-financial assets and liabilities.

Consolidated Financial Statements 57 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Note 2. Acquisitions The cash outflows include direct and indirect expenses for costs to complete manufacturing, sales, marketing, routine CoTherix technical maintenance, general and administrative, and taxes. On January 9, 2007, the Group acquired 100 percent of the issued and outstanding shares of the common stock of Co- The net cash inflows were ascribed to their respective intan- Therix, Inc. (“CoTherix”) via a cash tender offer in which the gible assets and discounted to present value. Tax benefits Group paid cash consideration of USD 13.50 per share. The resulting from the amortization of the intangible assets were results of CoTherix’s operations have been included in the then added to the present value of the excess cash flows to consolidated financial statements since that date. CoTherix is derive fair value. The estimated fair values of IPR&D, the iden- a biopharmaceutical company focused on licensing, develop- tifiable intangible asset and property, plant and equipment ing and commercializing therapeutic products for the poten- were determined with the assistance of an independent valu- tial treatment of cardiovascular diseases. ation firm. The amount allocated to IPR&D with no alternative future use was CHF 224.8 million (USD 181 million) which CoTherix licensed the exclusive U.S. rights to Ventavis® from represents the estimated fair value based on risk-adjusted Schering AG. Ventavis® (iloprost) is the only approved inhaled cash flows related to incomplete research and development therapy for the treatment of pulmonary arterial hypertension projects. At the date of the acquisition, development of these (“PAH”) in the United States. The acquisition of CoTherix con- projects had not yet reached technological feasibility and the solidates the Group’s leadership position in PAH and delivers research and development in progress has no alternative fu- operational synergies, from both a sales and expense per- ture use. Accordingly, these costs were expensed as of the spective, thus enhancing value creation from Ventavis®. acquisition date. CHF 197.1 million (USD 159.1 million) of the purchase price were allocated to an intangible asset with a The aggregate purchase price was CHF 538.6 million (USD definite life of approximately 13 years. The intangible asset 434.8 million) and consisted of cash paid to former CoTherix represents the estimated fair value of the marketed product shareholders of CHF 519.2 million (USD 419.1 million), direct Ventavis® and will be amortized over its useful life. transaction costs of CHF 7.6 million (USD 6.2 million) and employee-related severance costs of CHF 11.8 million (USD 9.5 The rates utilized to discount the net cash flows to their pres- million). Employee-related severance costs are included as part ent value were based on estimated cost of capital calcula- of the purchase price, as we established a workforce reduction tions and the Internal Rate of Return implied by the fair value plan as part of the acquisition transaction in accordance with of the operating business enterprise value of CoTherix. Due EITF Issue No. 95-3, Recognition of Liabilities in Connection to the risks associated with the projected cash flow forecast, with a Purchase Business Combination (“EITF 95-3”). During a discount rate of 12.3% was considered appropriate for the 2007, all severance related accruals have been paid. marketed product and 14.3% for the IPR&D considering an incremental level of development risk. The selected rates re- The acquisition was recorded as a business combination and, flect the inherent uncertainties surrounding the sales expec- accordingly, the purchase price was allocated to the assets tation of the marketed product, successful development of acquired and liabilities assumed based on their estimated fair the purchased in-process technology, the useful life of such values at the date of the acquisition. Since the fair value of as- technology, and the uncertainty of technological advances sets acquired and liabilities assumed was below the fair value that are unknown at this time. of the consideration paid, the Group recorded goodwill of CHF 40.7 million (USD 32.9 million) including a net deferred If projects are not successfully developed, the sales and tax liability of CHF 17.7 million (USD 14.3 million). profitability of the combined companies may be adversely affected in future periods. Additionally, the value of the ac- In making its purchase price allocation, the Group considered quired intangible assets may become impaired. The Group present value calculations of income, an analysis of project believes that the research and development projects and in- accomplishments, an assessment of overall contributions, as tangible assets acquired in connection with the acquisition of well as technological and regulatory risks. The marketed prod- CoTherix are expected to continue in line with the estimates uct and the in-process research and development projects described above. (“IPR&D”) were valued using a variation of the Income Ap- proach known as the Multi-Period Excess Earning Approach. This method utilizes a forecast of expected cash inflows, cash outflows, and pro-forma charges for economic returns of and on tangible assets employed.

58 Consolidated Financial Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c The following table summarizes the purchase price allocation The unaudited pro forma results of operations for the year as of January 9, 2007: ended December 31, 2006 are summarized below. No pro forma disclosure is made for the current period 2007 as the CHF USD* acquisition had been completed near the beginning of the Cash and cash equivalents 6,540 5,280 year on January 9, 2007. Short-term marketable securities 79,184 63,925 Accounts receivable, net 11,811 9,535 For the twelve months ended December 31, 2006* Inventory 11,830 9,550 Total revenues 1,024,455 Prepaid expenses 2,990 2,414 Net income 210,690 Property, plant and equipment, net 2,570 2,075 Basic earnings per share 1.86 Purchased in-process research and 224,205 181,000 development Diluted earnings per share 1.80 Identifiable intangible asset 197,116 159,131

Goodwill 40,692 32,850 *The US Dollar/Swiss Franc foreign exchange rate used for translation of the CoTherix’s Other long-term assets 248 200 revenue and net loss is 1.25, which is the average foreign exchange rate for the year 2006. Total assets acquired 577,186 465,960 Accounts payables (1,226) (990) Axovan Accruals (19,089) (15,410) On October 31, 2003, the Group acquired Axovan Ltd (“Axovan”), Other non-current liabilities (564) (455) a privately-held biopharmaceutical company in Switzerland fo- Deferred tax liability (17,708) (14,295) cused on the research and development of new compounds. Total liabilities assumed (38,587) (31,150) The Group acquired Axovan to gain access to Axovan’s licenses Net assets acquired 538,599 434,810 and to expand the Group’s research capacities.

The acquisition was recorded as a business combination and, *The US Dollar/Swiss Franc foreign exchange rate used for translation of the CoTherix’s opening balance is 1.24, which is the foreign exchange rate as of the acquisition date. accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition. The Group agreed to pay additional amounts to the shareholders of The initial purchase price allocation as of January 9, 2007 Axovan upon achievement of future product development has been adjusted for the completion of certain items which milestones. In December 2004, a milestone related to ini- were not final as of that date. Specifically, accruals have been tiation of a Phase IIb/III clinical trial was achieved and a pay- increased by CHF 3.2 million in the context of a claim against ment of CHF 32.5 million was recorded in January 2005. In CoTherix related to a pre-existing license agreement for 2007, further milestone payments of CHF 16.7 million were Fasudil, a drug which the Group decided to not further de- triggered by an Axovan compound entering into Phase I and velop. Therefore the agreement was terminated by CoTherix initiation of the clazosentan Phase III program. The total ad- as a result of its acquisition by Actelion. The licensor of ditional value of remaining unpaid milestone payments could Fasudil filed a request for arbitration against CoTherix based amount to CHF 129 million. on alleged multiple breaches of contract, in particular (a) dis- continuation of development of the licensed compound, and The Group considers all milestone payments to be perfor- (b) non-payment of invoices for manufactured drug. At the mance-related measures and as such, treats them as good- time of the acquisition the anticipated penalty costs related will, when paid. to this claim were probable, however the amounts were not estimable. New facts became available to the Group in Oc- tober 2007, which allowed for a reasonable estimate to be made for the amount of the penalty. Deferred Tax Liabilities decreased by CHF 57.2 million (net of deferred tax assets) related to the finalization of the tax accounts.

The combination of both of these adjustments resulted in a decrease in goodwill by CHF 54.0 million.

Consolidated Financial Statements 59 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Note 3. Licensing agreements The agreement called for the Group to make an initial payment to Roche as well as payments upon the achievement of In conjunction with the acquisition of Axovan on October 31, certain milestones. The Group will make milestone payments 2003, the Group gained access to the license granted from upon the filing and approval of new drug applications in the Roche for clazosentan. No payments were made in 2007 and United States and the European Union. If the Group is suc- 2006. cessful in obtaining regulatory approval for tezosentan, the Group will pay a royalty to Roche based on a percentage of On November 22, 2002, the Group entered into a license net sales of products with tezosentan as the active ingredi- agreement with Oxford GlycoSciences (“OGS”) for miglus- ent. No payments were made under this agreement during tat, the active ingredient of Zavesca®. OGS has since been 2007 and 2006. acquired by Celltech Group plc, which was subsequently acquired by UCB SA. The Group has been granted exclusive marketing rights to sell Zavesca® in all countries except Israel Note 4. Collaborative agreements and the adjacent West Bank and Gaza Strip territories where the Group will ensure the drug supply to Teva Pharmaceutical In July 2006, the Group entered into an agreement with Roche Industries Ltd., the license holder of Zavesca® in Israel. In ad- for joint development and commercialization of the Group’s dition, full responsibility was assumed for manufacturing and selective S1P1 receptor agonist. This collaboration enables supply chain, patent-related activities, clinical and pre-clinical the Group and Roche to combine their development and activities of Zavesca®. The Group made an upfront payment marketing capabilities to improve medical care for patients of EUR 7.5 million (CHF 11.7 million) to UCB, which was capi- with autoimmune disorders. The S1P1 collaboration covers talized as an intangible asset, in exchange for a single-digit both the current selective S1P1 receptor agonist in Phase I as ® royalty rate on future Zavesca sales in glycosphingolipid well as any other selective S1P1 receptor agonists resulting (GSL) storage disorders. from the Group’s research efforts in the field. Roche paid the Group an upfront payment of USD 75 million (CHF 92.8 mil- On November 4, 1998, the Group entered into a license agree- lion) in July 2006. In the case of future development and ap- ment with F. Hoffman-La Roche (“Roche”) for bosentan, the proval milestones being achieved, the Group will be eligible active ingredient in the Group’s product, Tracleer®. The license to receive payments of up to an additional USD 555 million for grants the Group the exclusive worldwide rights to develop, the first compound for all targeted indications. Further devel- manufacture, sell any pharmaceutical product with bosentan opment and approval milestone payments are due for further as its active ingredient for any human therapeutic use, and compounds. On all product sales, Roche will pay the Group grant sub-licenses to third parties. The agreement called for a royalty. For the current selective S1P1 receptor agonist, the the Group to make an initial payment to Roche as well as Group will fully fund all development activities up to the end payments upon the achievement of certain milestones. All of Phase II for the first two indications. All subsequent devel- payments made to Roche prior to receiving regulatory ap- opment and commercialization costs will be shared equally proval were expensed as acquired in-process research and between Roche and the Group. Both companies will co-pro- development costs. Payments made to Roche subsequent to mote any product resulting from this collaboration and, in ad- receiving regulatory approval were capitalized and are being dition to the above mentioned milestones and royalty, equally amortized over the life of the agreement. As of December share profit. The agreement shall continue in effect until the 31, 2007 and 2006, payments of CHF 9 million are included expiration of all royalty and/or profit sharing obligations. For in intangible assets and are amortized over eleven years. The the years ended December 31, 2007 and 2006, the Group agreement also calls for the Group to pay a royalty to Roche recognized revenue of CHF 11.1 million and CHF 5.6 million, based on a percentage of net sales of products with bosen- respectively, under this agreement. tan as the active ingredient. In December 2003, the Group and Merck & Co., Inc. (“Merck”) On March 19, 1998, the Group entered into a license agree- formed an exclusive worldwide alliance to discover, develop ment with Roche for tezosentan. Under this agreement, and market new classes of renin inhibitors. This alliance en- Roche granted the Group an exclusive worldwide right to ables the Group and Merck to combine their discovery, devel- manufacture and sell any product with tezosentan as its ac- opment and marketing capabilities with the goal to efficiently tive ingredient. The license covers any human therapeutic provide innovative and better medicines to patients suffering use of tezosentan except acute renal failure and subarach- from cardio-renal diseases. Development funding will be ini- noid hemorrhage. The Group may also grant sub-licenses to tially shared by both parties, with Merck fully responsible to third parties. fund pivotal Phase III and outcome studies.

60 Consolidated Financial Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Merck will lead and fund commercialization, whereas the For each of the years ended December 31, 2007 and 2006, Group retains a worldwide option to co-promote any product the Group recognized revenue of CHF 1.5 million related to resulting from this alliance as a paid-for sales force. Merck this agreement. made upfront payments of USD 37 million (CHF 45.9 million) in the period through December 2006. With initiation of the Phase II program, the Group received in December 2007, a Note 5. Income taxes further milestone payment of USD 10 million (CHF 11.5 million). In addition, the Group will be eligible to receive addition- The following table sets forth the income before taxes: al payments of up to USD 225 million for the successful commercialization of the first collaboration product. The Group will also be eligible to receive certain milestone payments For the twelve months ended for the successful commercialization of additional products. December 31 Merck will pay the Group substantial royalties on the sale of 2007 2006 all products resulting from this alliance. For the years ended Switzerland 368,997 235,487 December 31, 2007 and 2006, the Group recognized revenue Foreign (200,723) 43,239 of CHF 7.9 million and CHF 9.1 million, respectively, under Total income before taxes 168,274 278,726 this agreement.

In December 2000, the Group entered into an agreement with Genentech Inc. (“Genentech”) for the co-exclusive, royalty- The following table sets forth the current and deferred in- bearing right and license to research, develop, manufacture come tax expense: and sell bosentan, the active ingredient in Tracleer®, in the

United States. Genentech receives a royalty on net sales of For the twelve months ended bosentan in the United States. Upon signing the contract the December 31 Group received an upfront payment of USD 35 million (CHF 2007 2006 56.4 million), a portion of which was refundable only if the Current tax expense: Group did not complete Phase III trials for bosentan for use Switzerland 22,676 21,136 in the treatment of chronic heart failure. The non-refundable Foreign 26,261 14,742 portion of the upfront payment is being recognized over the Total current tax expense 48,937 35,878 agreement period, which began in December 2000. In De- cember 2001, the Group received FDA approval for bosentan Deferred tax (benefit) expense: in the United States for the treatment of pulmonary arterial Switzerland 18 757 hypertension and began paying Genentech a royalty on net Foreign (5,267) 1,001 sales. In January 2002, the Group completed Phase III trials Total deferred tax (benefit) expense (5,249) 1,758 for bosentan for the use in the treatment of chronic heart fail- Total income tax expense 43,688 37,636 ure and received neutral results. Upon completion of Phase III trials and receipt of the neutral results, the Group began recognizing the refundable portion of the upfront payment over the life of the agreement, estimated to be twelve years. Income taxes payable and accrued as of December 31, 2007 For each of the years ended December 31, 2007 and 2006, and 2006, amounted to CHF 55.4 million and CHF 30.6 million, the Group recognized revenue of CHF 4.9 million related to respectively. Significant components of the Group’s deferred this agreement. tax assets as of December 31, 2007 and 2006, are shown below. As of December 31, 2007 and 2006, a valuation allow- In February 2000, the Group entered into an agreement with ance of CHF 22.9 million and CHF 19.9 million, respectively, Genentech for the co-exclusive, royalty-bearing right and li- has been recognized for certain Group companies based on cense to research, develop, manufacture and sell tezosentan their historical cumulative operating losses. in the United States. Genentech may elect to co-promote the drug for certain indications in the United States or receive a royalty on net sales of tezosentan in the United States. Upon signing the contract the Group received an upfront payment of USD 15 million (CHF 24.7 million), which is being recognized over the life of the agreement, estimated to be 17 years.

Consolidated Financial Statements 61 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c 2007 2006 Reconciliation between the effective income tax expense and Deferred tax assets: expense computed using the Swiss statutory tax rate of 25%: Net benefit from operating loss carry forwards 56,728 24,591 Deferred revenue 3,125 3,261 2007 2006 Fair value option expense 10,460 5,689 Tax at Swiss statutory tax rate of 25% 42,069 69,682 Accrued expenses 4,175 3,143 Non deductible expenses, non taxable income 1,678 (2,835) Intangible assets 9,933 – IPRD charge 89,974 – Other temporary differences 15,662 3,396 Tax rates different from the Swiss statutory rate (91,153) (30,173) Total deferred tax assets 100,083 40,080 Utilization of unrecognized tax losses (117) (1,904) Valuation allowance for deferred tax assets (22,925) (19,893) Change in valuation allowance 3,032 (1,699) Deferred tax assets 77,158 20,187 Prior year adjustments and other items (1,795) 4,565

Effective income tax expense 43,688 37,636 Deferred tax liabilities: Intangible assets 63,357 – Other temporary differences 513 932 Deferred tax liabilities 63,870 932 As of January 1, 2007, the Group adopted FIN48 and the effect of adoption was not material. As of January 1, 2007, the total uncertain tax positions were zero and as of December 31, 2007, the total uncertain tax positions were CHF 4 million. Deferred tax assets and liabilities are presented net in the Future recognition of this amount would effect the effective balance sheet. The total offset amount is CHF 61.3 million. tax rate. The changes in uncertain tax positions during the year are a result of gross increases to current year tax posi- The gross value of unused tax loss carry forwards with their tions. It is the Group’s policy to recognize interest and penal- expiry dates is as follows: ties related to tax positions as tax expense, however, there were no such material amounts for the financial year 2007. The statute of limitations for assessment in the major juris- Tax losses dictions in which the Group operates are open for the years One year 637 2004-2007. The Group has not identified any tax positions for Two years 698 which it is reasonably possible that a significant change will Three years 824 occur during the next 12 months. Four years 1,928 Five years 11,941 Six years – Seven years – Note 6. Earnings per share More than seven years 137,510 Total 153,538 At the Annual General Meeting on May 4, 2007, the shareholders approved a share split of one-to-five, that became effective as of June 6, 2007. The number of shares used for computation and disclosure in the current annual report have On January 9, 2007, the Group purchased 100 percent of the been adjusted accordingly. outstanding stock of CoTherix. For financial reporting purposes, the Group accounted for this acquisition as a business Basic and diluted earnings per share are based on weighted combination with a purchase price allocation to the assets average common shares and exclude anti-dilutive shares re- acquired and liabilities assumed based on their estimated fair lating to employee share options of 7,576,863 and 12,933,025 values at the date of the acquisition. For tax purposes, how- for the years ended December 31, 2007 and 2006, respec- ever, historic tax bases and attributes carried over, thereby tively. The following table sets forth the basic and diluted creating a net deferred tax liability upon acquisition of USD earnings per share calculations: 14.3 million. CoTherix’s pre-acquisition tax losses totaled USD 67.8 million.

62 Consolidated Financial Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c 2007 2006 Basic Diluted Basic Diluted Numerator Income from continuing operations 124,586 124,586 241,090 241,090 Effect of assumed conversion of 2003 convertible debt – – – 8,248 Net income available for earnings per share calculation 124,586 124,586 241,090 249,338

Denominator Weighted average shares 118,098,177 118,098,177 113,268,600 113,268,600 Incremental shares for assumed conversion: Convertible bonds – 560,028 – 4,685,465 Share options – 6,150,739 – 3,672,825 Total average equivalent shares 118,098,177 124,808,944 113,268,600 121,626,890

Earnings per share 1.05 1.00 2.13 2.05

Note 7. Cash and cash equivalents In 2007 proceeds from the sales of available-for-sale securities totaled CHF 109.1 million and gross realized gains totaled Cash and cash equivalents consisted of the following at De- CHF 0.7 million. There have been no sales of available-for-sale cember 31: marketable securities during 2006.

Derivative financial instruments The following tables reflect the contract or underlying princi- 2007 2006 pal amounts and fair values of derivative financial instruments Cash 238,832 923,938 analyzed by type of contract as of December 31, 2007 and Short-term bank deposits 92,754 2,199 2006. Contract or underlying principal amounts indicate the Total 331,586 926,137 volume of outstanding positions at the balance sheet date and do not represent amounts at risk.

In December 2006, the Group entered into a forward foreign Note 8. Investments exchange rate contract to economically hedge the US Dol- lar currency exposure related to the anticipated acquisition of Marketable securities CoTherix. The forward contract was contingent on the con- During 2006, the Group purchased structured debt instru- summation of the acquisition. On January 9, 2007, the con- ments, consisting of a straight bond and embedded deriva- tingent forward foreign exchange rate contract was exercised tive instrument linked to the development of the CHF Libor with a net realized gain of CHF 10.8 million recorded in other interest rate, for CHF 20.0 million, which were classified as financial income (expense). available-for-sale securities. In connection with the acquisition of CoTherix on January 9, 2007, a part of the purchase Fair values are determined using external price quotations or price was allocated to a marketable security portfolio with a standard pricing models at December 31, 2007 and 2006. fair value of CHF 79.2 million (USD 63.9 million), which was classified within available-for-sale securities. During 2007 all Changes in the fair value of these derivatives are recognized marketable security investments were sold. On December 31, in other financial income (expense), as they do not meet the 2006 the aggregated fair value of available-for-sale marketable definition of a hedge. securities was CHF 29.8 million, consisting of debt securities, with unrealized gains and losses being immaterial.

Consolidated Financial Statements 63 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Derivative financial instruments Contract or underlying principal amount Positive fair values Negative fair values 2007 Foreign currency options 97,692 - 375 Forward rate contracts 79,618 322 360 Total 177,310 322 735

2006 Foreign currency options 211,890 1,425 984 Forward foreign exchange rate contract to manage foreign currency exposure of anticipated acquisition of Cotherix 510,321 2,119 - Other contracts - 123 - Total 722,211 3,667 984

Note 9. Trade and other receivables Note 10. Inventories

Trade and other receivables consisted of the following at De- Inventories consisted of the following at December 31: cember 31:

2007 2006 2007 2006 Semi-finished products 17,676 13,040 Trade receivables 310,842 208,980 Finished products 25,111 11,280 Other receivables 19,172 9,235 Total 42,787 24,320 Trade and other receivables, gross 330,014 218,215 Bad debt allowance (486) (493) Unamortized discount1) – (346) Note 11. Other current assets Total trade and other receivables, net 329,528 217,376 Other current assets consisted of the following at December 31: 1) The unamortized discount related to certain trade receivables and was amortized as interest expense over the expected payment term. 2007 2006 Unearned income 2,209 1,026 In 2007 and 2006, the Group sold without recourse certain Prepaid expenses 26,136 16,791 trade accounts receivables from one of its subsidiaries to Commission on convertible bond 7,041 9,818 VIEs, unrelated to the Group, in one time securitization pro- Total 35,386 27,635 grams. The net book value of the receivables sold was EUR 6.8 million (CHF 11.3 million) and EUR 4.1 million (CHF 6.4 million) for 2007 and 2006, respectively, which was received Note 12. Goodwill and intangible assets in cash. Loss on sale and fees paid were not material. These transactions were accounted for as a sale and consequently Changes in the net carrying amount of goodwill in 2007 are the related receivables have been excluded from the accom- as follows: panying consolidated balance sheets. There is no continuing involvement of the Group with respect to the sold receivables. The VIEs are not required to be consolidated in accor- Balance at Translation effects Additions Balance at January 1 December 31 dance with FIN 46(R). 27,385 (3,629) 57,399 81,155

In addition, the Group factored receivables without recourse with a net book value of EUR 1.9 million (CHF 3.1 million). The related receivables have been excluded from the accom- The goodwill increase in 2007 is due to the acquisition of panying consolidated balance sheet. Transaction costs were CoTherix and further milestone payments associated with immaterial. Axovan (see Note 2, “Acquisitions”).

64 Consolidated Financial Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Intangible assets consisted of the following at December 31:

2007 2006 Total revenues Gross carrying Accumulated Net carrying Gross carrying Accumulated Net carrying amount amortization amount amount amortization amount

Acquired licenses 199,952 (21,507) 178,445 20,659 (5,616) 15,043 Acquired software and other 17,531 (8,559) 8,972 9,463 (5,347) 4,116

Total 217,483 (30,066) 187,417 30,122 (10,963) 19,159

Amortization expense of intangible assets was CHF 19.9 mil- Note 13. Property, plant and equipment lion and CHF 4.5 million in 2007 and 2006, respectively. Property, plant and equipment consisted of the following at The expected future annual amortization expense of other in- December 31: tangible assets is as follows:

2007 2006 For the year ending December 31, Amortization expense At cost: 2008 20,327 Land 11,217 7,471 2009 19,316 Buildings 18,338 400 2010 17,908 Furniture and fixtures and lab equipment 91,753 71,908 2011 16,235 Computers 20,951 16,459 2012 15,957 Other tangible assets 6,801 4,653 Thereafter 97,674 Less: accumulated depreciation (63,983) (48,217) Total expected future amortization 187,417 Construction in progress 28,916 29,296 Property, plant and equipment, net 113,993 81,970

In 2007, the Group invested CHF 60.5 million in tangible assets. CHF 5.1 million of those were unpaid as of December 31, 2007, and appropriately excluded from presentation in the consolidated statement of cash flows. Depreciation expense of property, plant and equipment including capital leases was CHF 20.0 million and CHF 15.0 million in 2007 and 2006, respectively.

Consolidated Financial Statements 65 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Note 14. Accrued expenses is in compliance with all applicable covenants.

Accrued expenses consisted of the following at December As of mid January 2008, the total financing arrangement of 31: CHF 215 million was utilized.

2007 2006 At December 31, 2007, the Group had a credit line of CHF 10 Personnel and compensation costs 76,625 61,801 million as margin cover for over-the-counter trades as well Accrued taxes 57,493 32,434 as senior mortgage certificates (ISB and NSB) in the total Rebates and allowances 19,187 10,050 amount of CHF 12.7 million. Both credit facilities were un- Research and development 26,425 7,824 used as of December 31, 2007. Marketing and royalties 11,447 6,968 Professional services 6,790 3,374 Convertible bonds Process development – 922 Book value of the outstanding convertible bonds consisted of Other accrued expenses 10,994 7,521 CHF 460 million and CHF 626.8 million as of December 31, Total 208,961 130,894 2007 and 2006, respectively.

2006 convertible bond In November 2006, the Group issued CHF 460 million in con- Note 15. Borrowings vertible bonds (“2006 convertible bond”). The 2006 convertible bond is structured as a zero coupon convertible bond The aggregate contractual maturities of all debt obligations with a yield to maturity of zero percent. The conversion price due subsequent to December 31, 2007 are as follows: is CHF 54.17 per share, issue and redemption price were set at 100% and is non-callable for life. On or after June 30, 2007 and until the 30th trading day prior to the maturity date on Maturity date Financing Convertible Total November 22, 2011, the 2006 convertible bond is, in accor- arrangement bond dance with its terms, convertible free of charge into cash up 2008 33,000 – 33,000 to the principal amount and any conversion value above the 2009 51,000 – 51,000 principal amount may be settled, at the option of the Group, 2010 33,100 – 33,100 into cash or shares or a combination of cash and shares. The 2011 – 460,000 460,000 shares to be delivered to bondholders upon conversion were Total 117,100 460,000 577,100 initially capped at 5,314,535 shares corresponding to the available conditional capital of the Group as of the issuance date of the convertible bond. The Annual General Meeting on May 4, 2007, authorized the creation of sufficient additional As of December 31, 2007, the total book value of outstanding conditional capital to remove the cap. The fair value at De- debt obligations was CHF 577.1 million and consisted of CHF cember 31, 2007 is 118.52% of the principal amount (CHF 460 million convertible bond obligation and CHF 117.1 million 545.2 million). Debt issuance costs of CHF 8.5 million were bank loan. recorded in other current assets and are being amortized using the effective interest method. Credit facilities In 2007, the Group entered into a financing arrangement for As the 2006 convertible bond is convertible since June 30, CHF 215 million. The arrangement is split into two facilities of 2007 for cash up to the principal amount and there are no con- CHF 100 million (unsecured) and CHF 115 million (secured). tingencies to be met for the bondholders to be able to convert, The CHF 115 million facility is secured with a general deed of the 2006 convertible bond is classified as short-term debt. pledge in the amount of CHF 119 million, which covers all of the Group’s assets held at the pledger. The interest rates are 2003 convertible bond based on the 3-months-LIBOR rate plus an average margin In October 2003, the Group issued CHF 143.8 million in of 22.5 basis points for the secured and 52.5 basis points for convertible bonds (“2003 convertible bond”). The 2003 con- the unsecured facility. As of December 31, 2007, CHF 117.1 vertible bond was convertible into shares of the Group up to million of the CHF 215 million financing arrangement were October 1, 2008 and carried a zero coupon with a yield to utilized. The financing arrangement contains financial and maturity at the time of issuance of 4.75%. The conversion non-financial covenants. As of December 31, 2007, the Group price was CHF 30.68 per share. On January 18, 2007, the

66 Consolidated Financial Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Group exercised its right to call for an early redemption of the Note 17. Commitments and guarantees 2003 convertible bond. The redemption date was February 19, 2007, with a redemption price of 116.79% of the principal In the context of its ongoing construction work, the Group amount. All 2003 convertible bondholders elected to convert has entered into capital commitments totaling CHF 40.7 mil- their bonds into shares. The 2003 convertible bond was con- lion, with the majority of this amount expected to be paid verted into 4,685,340 shares. Conversion expense amounted during 2008. to CHF 2.2 million. Debt issuance costs of CHF 3.2 million were recorded in other current assets and amortized using In connection with the acquisition of CoTherix, the Group the effective interest method. Debt issuance costs were fully entered into a manufacturing and supply agreement with expensed as of February 19, 2007, upon redemption of the Schering AG for Ventavis®. Under the agreement, the Group 2003 convertible bond. has a purchase commitment for the product in the amount of EUR 3 million for 2008, EUR 2.2 million for 2009 and EUR 0.5 million for 2010. Note 16. Lease commitments Within the framework of its dilution management program Operating leases the Group bought stock indexed instruments of CHF 7 million The Group has several operating leases for its office space, in December 2007 with a value date in January 2008, which research and development facilities and various equipment. were consequently not recorded on the balance sheet as of The leases expire between 2008 and 2027, most of them with December 31, 2007. options to extend for one to ten years. The aggregate of the minimum annual operating lease payments are expensed on The Group issued a letter of indemnity to a financial institu- a straight-line basis over the term of the related lease. The tion in the amount of CHF 10 million to secure its obligations amount by which straight-line rent expense differs from ac- from derivative trading and forward transactions in foreign tual lease payments is recognized as either pre-paid rent or currencies. deferred rent liability and is amortized in later years. In the ordinary course of business the Group has entered into Future minimum payments under non-cancelable operating certain guarantee contracts and letters of credit. The guar- and capital leases at December 31, 2007 are as follows: antees primarily relate to operating leases and credit lines for subsidiaries in foreign jurisdictions. Due to the nature of these arrangements, the Group has never been required to Year ended December 31, Operating Capital make payments under these contracts and does not expect leases leases any potential required future payments to be material. 2008 29,749 178 2009 25,149 136 2010 22,273 45 Note 18. Pension plans 2011 18,264 – 2012 15,481 – The Group maintains a pension plan (the “Plan”) covering Thereafter 70,489 – all of its employees in Switzerland. In addition to retirement Total minimum payments 181,405 359 benefits, the plan provides benefits on death or long-term Less amounts representing interest (51) disability of its employees. The Group and its employees pay Present value of future lease payments 308 retirement contributions, which are defined as a percentage Less current portion of lease payments (142) of the employees’ covered salaries, to a collective pension Non-current portion of lease payments 166 fund operated by an insurance company. Interest is credited to the employees’ accounts at the minimum rate provided in the Plan, payment of which is guaranteed by an insurance contract, which represents the Plan’s primary asset. Future Rent expense under operating leases was CHF 27.2 million benefit payments are managed by the insurance company. and CHF 25.2 million for the years ended December 31, 2007 The Group has entered into this Plan with a third party insur- and 2006, respectively. ance company to minimize the risk associated with a pension obligation. This investment strategy was adopted as a means to reduce the uncertainty and volatility of the Plan’s assets for the Group. Fair value of the Plan’s assets is the estimated

Consolidated Financial Statements 67 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c cash surrender value at the respective balance sheet date. The following tables set forth the change in present value of Investment strategy and policies are determined by the insur- obligations and change in fair value of plan assets at Decem- ance company. ber 31, for the Group’s pension plans:

In addition, the Group maintains other pension plans outside 2007 2006 Switzerland, which are insignificant to the Group. The Group Change in present value of obligations uses a measurement date of December 31 for all pension Present value of obligations – beginning of year 89,895 56,782 plans. Net periodic benefit costs for the Group’s pension Plan amendments - 1,719 plans include the following components: Service cost 9,074 6,681 Interest cost 2,453 2,047 2007 2006 Plan participant contributions 5,367 4,234 Service cost 9,074 6,681 Actuarial loss (gain) (12,425) 17,046 Interest cost 2,453 2,047 Benefits paid (98) (57)1) Expected return on plan assets (2,665) (2,144) Transfers in/out 4,324 3,7211) Amortization of net (gain) loss 1,044 (62) Premiums paid (2,912) (2,313) Net periodic benefit cost 9,906 6,522 Foreign currency translation 51 35 Present value of obligations – end of year 95,729 89,895

Change in fair value of plan assets The following table provides the weighted average assump- Plan assets at fair value – beginning of year 70,060 55,886 tions used to calculate net periodic benefit cost and the actu- Actual return on plan assets 1,829 1,325 arial present value of projected benefit obligations: Group contributions 10,522 6,592 Plan participant contributions 5,367 4,234 2007 2006 Benefits paid (98) (57)1) Weighted average discount rate 3.72% 2.73% Premiums paid (2,912) (2,313) Expected long-term rate of return on plan assets 3.51% 3.50% Transfers in/out 4,430 4,3931) Rate of increase in compensation levels (salary) 2.63% 2.77% Adjustments 2,507 - Foreign currency translation 24 - Fair value of plan assets – end of year 91,729 70,060

The expected long-term rate of return on plan assets repre- 1) Changes in presentation have been performed to better reflect substance of transactions sents a weighted average of expected returns per asset cat- without impact on present value of the pension liability or on fair value of plan assets. egory. It considers historical and estimated future risk-free rates of return as well as risk premiums for the relevant investment categories.

68 Consolidated Financial Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c The movement in the net asset or liability and the amounts In January 2008, the Group decided to implement changes in recognized in the balance sheet were as follows: its pension plans becoming effective as of January 1, 2008. Plan changes will primarily consist in changes of the legal 2007 2006 structure and increased pension and risk coverage for all em- Present value of obligations (95,729) (89,895) ployees. Accordingly, the Group will re-calculate its projected Fair value of plan assets 91,729 70,060 benefit obligation as of January 1, 2008, and reflect changes Present value of net obligation (funded status) (4,000) (19,835) to net periodic benefit costs and other comprehensive- in come prospectively. Changes in other comprehensive income (loss) Components of net periodic benefit costs – beginning of year (17,985) - Note 19. Shareholders’ equity Net gain (loss) arising during the period 14,370 (2,524) Amortization of net gain (loss)1) 962 - Authorized capital Transition obligation - (16,940) The Annual General Meeting on May 4, 2007, authorized the Taxes (1,175) 1,479 creation of authorized share capital to be used for strategic Total included in other comprehensive income and/or financial business purposes. The Board of Directors is (loss) - end of year (3,828) (17,985) authorized until May 4, 2009, to increase the Group’s share

1) In financial year 2008, the Group does not expect a further amortization of not recognized capital to an amount of not more than CHF 17.5 million by components of net periodic benefit costs. issuance of not more than 35 million fully paid-in registered shares with a nominal value of CHF 0.50 per share.

Conditional capital As of December 31, 2007, an amount of CHF 3.8 million net of Since inception, the Group has created conditional capital for tax related to the pension plans has been recognized in other the establishment of share option plans, convertible bonds comprehensive income (2006: CHF 18 million). The liability and similar forms of financing. At December 31, 2007, the represents not yet recognized components of net periodic Group has conditional capital of CHF 28.1 million of which benefit costs such as not amortized actuarial gains/losses, CHF 16.2 million relate to share option plans and CHF 11.9 not recognized prior year service costs as well as transition million to convertible bonds and similar forms of financing. obligations arisen at initial adoption of SFAS 158 in 2006. Movements in conditional capital are as follows: The expected future cash flows to be paid by the Group in respect of the pension plans as of December 31, were as January 1, 2006 19,653 follows: Creation of conditional capital for employee share option plans - Employer contributions Exercise of options (1,026) 2008 (estimated) 8,704 December 31, 2006 18,627 Expected future benefit payments Creation of conditional capital for 2008 721 convertible bonds and similar forms of financing 9,250 2009 864 Creation of conditional capital for 2010 1,102 employee share option plans 4,160 2011 1,332 Forfeited Challenge Award options (289) 2012 1,700 Exercise of options (1,281) Next 5 years thereafter 21,795 Conversion of 2003 convertible bond (2,343) December 31, 2007 28,124

Certain of the Group’s subsidiaries sponsor defined contribution plans with Group’s contributions fixed at 2.25% to 7% of Treasury shares the employee’s annual salary. These plans are structured as At December 31, 2007, the Group held 3,940,510 treasury saving schemes without further obligation of the Group. To- shares, which were acquired at an average price of CHF tal expense of these defined contribution plans was CHF 4.4 58.53. During 2007, the Group acquired 3,671,375 treasury million and CHF 2.5 million in 2007 and 2006, respectively. shares at an average price of CHF 59.83 and members of the

Consolidated Financial Statements 69 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Board of Directors received 9,350 treasury shares at an aver- Note 20. Stock-based compensation age price of CHF 54.30 as compensation. Share-based payment arrangements Treasury shares are deducted from equity at their cost value and The Group has several share-based payment plans for em- are shown as a separate component of shareholders’ equity. ployees and members of the Board of Directors. Total compensation costs recognized in the consolidated financial In February 2007, the Group completed the first stock repur- statements with respect to these plans were CHF 64.1 mil- chase program with a total amount of shares repurchased of lion and CHF 32.7 million in 2007 and 2006, respectively. Total 0.9 million for an aggregate cost of CHF 45.3 million. Under related tax benefits of CHF 6.9 million and CHF 3.8 million the second stock repurchase program, completed in August were recognized in 2007 and 2006, respectively. The follow- 2007, the Group repurchased 3.0 million shares at an aggre- ing assumptions have been applied in the valuation model: gate cost of CHF 185.2 million. The Group intends to use the repurchased stock to offset dilution caused by the issuance of Year ended December 31, shares related to the Group’s share-based payment plans and 2007 2006 shares issued upon conversion of the 2006 convertible bond. Expected term 6 years 6 years Interest rate 2.87% 2.47% Call options Volatility 40.2% 44.3% In connection with the 2006 convertible bond, the Group used Expected dividend yield – – a portion of the proceeds to purchase call spread options on its own shares from an international financial institution to mitigate the exposure to potential dilution from conversion of the 2006 convertible bond. The total premium paid was Standard share option plan CHF 20.6 million, which has been recorded as a reduction The Group granted standard share options to employees and in shareholders’ equity. The number of options purchased is directors, which generally vest over a four-year period with 8.5 million with a lower strike price at CHF 54.17 and an up- 25% of the options becoming exercisable each year. Options per strike price at CHF 58.92. The call spread will expire in granted to members of the Board out of the Group’s Director tranches during November and December 2011. Share Option Plan vest immediately. Each option entitles the holder to one share. Options generally expire between ten In December 2007, the Group committed to a program to pur- and ten and a half years after the plan issuance date. chase several financial instruments indexed to its own stock in order to manage the potential dilution of earnings per share In 2007, the shareholders approved an increase in condi- caused by exercises of employee stock options. The Group tional capital of 8,320,075 shares. In addition, 1,679,925 committed to purchase 2.66 million physically settled calls unallocated shares, which were originally reserved for the with an exercise price of CHF 53. Each call option permits Challenge Award, will be used in connection with standard the Group to acquire one share. These options expire serially, employee stock option plans. At December 31, 2007, there in varying amounts, through December 2011. In addition, the were 11,503,695 conditional shares available for grant of fu- Group committed to purchase 2.66 million net share settled ture share options. capped call options with a lower strike price of CHF 5 and a higher strike price of CHF 42.40 (0.27 million options), CHF 47.70 (0.53 million options) and CHF 53 (1.86 million options). Each net share settled option represents the right to the share equivalent of the profit differential on the option contract up to the price cap at the time of exercise. These options expire serially, in varying amounts, through December 2011.

The net premiums paid through December 31, 2007, of this option structure were CHF 117.1 million. This amount is classified in shareholders’ equity.

As of mid-January 2008, the Group completed the purchase of these options with an additional premium of CHF 106 million, which amount will also be reflected in shareholders’ equity.

70 Consolidated Financial Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c The following table summarizes activities under the standard share option plan for the twelve months ended December 31:

2007 2006 Share options Weighted average Share options Weighted average exercise price exercise price Outstanding, beginning of year 12,906,725 21.32 12,691,960 18.98 Granted 3,197,050 56.81 2,700,735 28.10 Forfeited (353,690) 34.89 (434,285) 24.51 Exercised (2,341,267) 20.31 (2,051,685) 15.12 Outstanding, end of year 13,408,818 29.60 12,906,725 21.32 Exercisable, end of year 6,458,993 6,456,270

The following is a summary of standard share options outstanding and exercisable at December 31, 2007:

Share options outstanding Share options exercisable Share options Weighted average Weighted average Share options Weighted average Weighted average outstanding remaining exercise price exercisable remaining exercise price contractual contractual Range of exercise prices life in years life in years 0.00 – 5.00 863,445 0.95 0.80 863,445 0.95 0.80 5.01 – 10.00 387,665 4.39 9.56 252,425 4.21 9.40 10.01 – 15.00 1,846,313 4.41 12.35 1,341,068 4.16 12.34 15.01 – 20.00 491,219 5.54 18.60 287,344 5.54 18.57 20.01 – 25.00 1,021,700 5.45 22.67 647,480 4.72 22.55 25.01 – 30.00 5,150,026 7.18 27.41 2,427,211 6.58 27.33 30.01 – 35.00 126,660 3.50 32.41 113,260 2.90 32.53 35.01 – 45.00 420,440 3.49 38.07 383,860 2.98 37.85 45.01 – 60.00 2,994,350 9.25 56.55 142,900 9.33 56.75 60.01 – 75.00 107,000 9.41 63.25 Total 13,408,818 6,458,993

The Group recorded stock-based compensation expense for The weighted-average grant date fair values of options grant- the standard share option plans of CHF 35.4 million and CHF ed during the years ended December 31, 2007 and 2006 25.8 million for the years ended December 31, 2007 and were CHF 23.70 and CHF 12.46, respectively, and equaled 2006, respectively, which is being amortized in accordance the market price of the Group’s shares at the grant date. with SFAS 123(R) over the vesting periods of the related options, which is generally four years. The total intrinsic value of options exercised during the years ended December 31, 2007 and 2006 was CHF 86.3 million and CHF 42.0 million, respectively. The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2007 was CHF 315.8 million and CHF 204.7 million, respectively. The fair value of options vested was CHF 29.3 million and CHF 24.4 million in 2007 and 2006, respectively. There were no expirations during the periods presented.

Consolidated Financial Statements 71 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c A summary of the status of non-vested share options and The following table summarizes activities under the Challenge changes during the year is presented below: Award for the years ended December 31, 2007:

2007 2007 2006 Share Weighted Share Share options average options options grant date Outstanding, beginning of year 7,897,200 7,656,050 fair values Granted 422,875 986,800 Outstanding non-vested, beginning of year 4,944,660 12.28 Forfeited (577,685) (745,650) Granted 3,197,050 23.70 Exercised (221,702) – Forfeited (315,300) 16.37 Outstanding, end of year 7,520,688 7,897,200 Vested (2,391,570) 12.27 Exercisable, end of year 3,694,298 – Outstanding non-vested, end of year 5,434,840 18.77

As of December 31, 2007, there was CHF 69.0 million of total Weighted average remaining contractual life for options out- unrecognized compensation cost related to non-vested op- standing and exercisable at December 31, 2007 was 7.24 and tions which is expected to be recognized over a weighted 7.25 years respectively. The total intrinsic value of options ex- average period of 1.6 years. ercised during the year ended December 31, 2007 was CHF 1.7 million. Challenge Award In 2004, the shareholders approved an increase in the total A summary of the status of non-vested share options and number of conditional shares by 10,000,000 to be used in changes during the year is presented below: connection with a special one-time incentive plan (“Chal- lenge Award”) linked to specific achievements by the Group. 2007 The two conditions to be met were a) cumulative net rev- Share Weighted enues on four consecutive calendar quarters reach CHF 1 bil- options average grant date lion and b) the market share price equals at least CHF 57.20 fair values and remains at an average of that level for at least twenty Outstanding non-vested, beginning of year 7,897,200 5.59 consecutive trading days. The achievement date was defined Granted 422,875 22.34 as the first trading day following the day both conditions were Forfeited (539,700) 6.90 fulfilled. On that date, the first quarter of the granted options Vested (3,953,985) 6.44 would vest and become exercisable. Of the remaining three Outstanding non-vested, end of year 3,826,390 6.39 quarters, the first quarter would vest and become exercisable after six months, the second quarter after twelve months and the third quarter after eighteen months after the achievement date. The exercise price of all options granted under the plan was CHF 57.20. Both conditions were fulfilled by March 31, The weighted average grant date fair value of options granted 2007 and the first quarter of the granted options vested on in the year ended December 31, 2006 was CHF 4.0. Total fair April 2, 2007, the second quarter on October 2, 2007. Op- value of options vested in 2007 was CHF 25.4 million. tions generally expire ten and a half years after the grant date. There were no expirations during the periods presented. No The Group recorded stock-based compensation expense for further options will be granted under this plan. the Challenge Award of CHF 28.7 million for the year ended December 31, 2007. As of December 31, 2007, there was CHF 5.1 million of total unrecognized compensation cost related to non-vested options. That cost is expected to be recognized during 2008. The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2007 was zero.

72 Consolidated Financial Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c The Actelion Share Challenge 2011 Plan In December 2007, the Group initiated the Actelion Share Challenge 2011 Plan. The plan is intended to promote a long- term perspective on managing business in alignment with shareholder interests and to reward long-term employee dedication if the Group’s performance is outstanding having resulted in the achievement of certain goals by December 31, 2011. There were no options granted under this plan in 2007.

Note 21. Accumulated other comprehensive income (loss)

Accumulated other comprehensive income (loss) consists of the following for the years ended:

December 31, 2007: Pre-tax Income tax After tax Foreign currency translation adjustments1) (25,305) - (25,305) Not recognized components of net periodic benefit costs (4,132) 304 (3,828) Unrealized losses on available-for-sale securities - - - Total accumulated other comprehensive income (loss) (29,437) 304 (29,133) December 31, 2006: Foreign currency translation adjustments1) (779) - (779) Not recognized components of net periodic benefit costs (19,464) 1,479 (17,985) Unrealized losses on available-for-sale securities (87) - (87) Total accumulated other comprehensive income (loss) (20,330) 1,479 (18,851)

1) Income taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries.

Note 22. Concentrations In 2007 and 2006, the Group did not record any significant additions to, or losses against, its allowance for doubtful ac- Cash and cash equivalents, marketable securities and accounts. counts receivables are financial instruments, which potentially subject the Group to concentrations of credit risk. The The Group is dependent upon toll manufacturers to manufac- Group has not experienced any significant credit losses and ture its products. For the year ended December 31, 2007, one does not generally require collateral on receivables. supplier accounted for approximately 40% of total purchases, while in 2006 another supplier accounted for approximately For the years ended December 31, 2007 and 2006, three dis- 25% of total purchases. Management believes other suppli- tributors accounted for approximately 42% and 43%, respec- ers could provide similar products on comparable terms. A tively, of total sales. At December 31, 2007 and 2006, CHF change in suppliers, however, could cause a delay in fulfill- 54.1 million and CHF 25.1 million, respectively, of trade ac- ment of customer orders and a possible loss of sales, which counts receivable related to these distributors. Management could adversely affect operating results. Management be- believes other distributors could be identified which would lieves that the Group maintains sufficient inventory levels to purchase the Group’s products on comparable terms; how- minimize the impact that a change in suppliers would have on ever, the establishment of new distributor relationships could operating results. take several months. The Group performs ongoing credit evaluations of its customers’ financial condition and extends credit, generally without collateral.

Consolidated Financial Statements 73 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Note 23. Segment and geographic information

The Group operates in one segment of discovering, developing and commercializing drugs for unmet medical needs. The chief operating decision-makers, which are comprised of the Group’s executive committee, review the profit and loss of the Group on an aggregated basis and manage the operations of the Group as a single operating unit. The Group currently derives product revenue from sales of Tracleer®, Zavesca® and Ventavis®. Contract revenue is derived from collaboration and service agreements with third parties. Product revenue attributable to individual countries is based on location of the customer.

The Group’s geographic information is as follows:

December 31, 2007: Switzerland United States Europe Other Total Product revenue from external customers 17,166 617,393 513,406 144,118 1,292,083 Contract revenue from external customers 25,309 - - - 25,309 Long-lived assets 162,334 209,919 7,186 3,126 382,565

December 31, 2006: Product revenue from external customers 14,716 422,201 392,680 94,544 924,141 Contract revenue from external customers 21,265 - - 267 21,532 Long-lived assets 114,843 4,939 5,727 3,005 128,514

Note 24. Related party transactions

During 2007, one of our Board members held a Board seat with Pharmaceutical Research Associates International Inc. (“PRA”), a clinical research organization. In the ordinary course of business the Group entered into arm’s-length transactions with PRA in the amount of CHF 2.2 million (USD 2 million) of which CHF 0.5 million (USD 0.5 million) were outstanding as of December 31, 2007.

The detailed disclosures regarding executive remuneration that are required by Swiss Company Law are included in the accompanying statutory financial statements of Actelion Ltd, Allschwil (Holding Company Statements).

74 Consolidated Financial Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Report of Actelion Management on Internal Control over Financial Reporting

Actelion’s Board of Directors and Management of the Group are responsible for establishing and maintaining adequate internal control over financial reporting. Actelion’s internal control system was designed to provide reasonable assurance to Actelion’s Management and Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of its published consolidated financial statements. All internal control systems no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Actelion Management assessed the effectiveness of the Group’s internal control over financial reporting as of December 31, 2007. In making this assessment, it used the criteria established within Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment Management has concluded that, as of December 31, 2007, Actelion’s internal control over financial reporting is effective based on those criteria.

Ernst & Young, Switzerland, an independent registered public accounting firm, has issued an opinion on the effectiveness of the Group’s internal control over financial reporting which is included in this Annual Report on page 76.

Dr. Jean-Paul Clozel Andrew J. Oakley CEO CFO

Allschwil, February 15, 2008

Consolidated Financial Statements 75 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Report on Internal Control over Financial Reporting

To the Board of Directors and Shareholders of Actelion Ltd and its subsidiaries

We have audited Actelion Ltd and its subsidiaries’ (“Actelion”) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Actelion’s Board of Directors and management are responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally -ac cepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Actelion Ltd and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Actelion Ltd and its subsidiaries and our report dated February 15, 2008, expressed an unqualified opinion thereon.

Ernst & Young AG

Jürg Zürcher Robin Ginn Swiss Certified Accountant Certified Public Accountant (Auditor in charge)

Basel, February 15, 2008

76 Consolidated Financial Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Report of the Group Auditors

To the General Meeting of Actelion Ltd, Allschwil

As group auditors, we have audited the accompanying consolidated balance sheets of Actelion Ltd and its subsidiaries as of De- cember 31, 2007 and 2006, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We confirm that we meet the legal requirements concerning professional qualification and independence.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Actelion Ltd and its subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles and comply with Swiss law.

We recommend that the consolidated financial statements submitted to you be approved.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Actelion Ltd’s and its subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control − Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 15, 2008, expressed an unqualified opinion thereon.

Ernst & Young AG

Robin Ginn Jürg Zürcher Certified Public Accountant Swiss Certified Accountant (Auditor in charge)

Basel, February 15, 2008

Consolidated Financial Statements 77 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Holding Company Statements

Balance Sheets

December 31, December 31, (in CHF thousands, except number of shares) 2007 2006 Assets Current assets Cash and cash equivalents 121,991 281,397 Marketable securities - 19,855 Derivative instruments - 2,119 Other receivables 561 643 Other receivables with group companies 324,765 55,329 Prepayments and accrued income 688 1,038 Total current assets 448,005 360,381

Non-current assets Investments in subsidiaries 762,031 194,535 Derivative instruments 136,871 20,562 Treasury shares 965 11,118 Long-term loans to subsidiaries 134,010 156,981 Total non-current assets 1,033,877 383,196 Total assets 1,481,882 743,577

Liabilities and shareholders’ equity

Current liabilities Short-term financial debt 33,000 - Trade and other payables 98 66 Trade and other payables with group companies 11,817 223 Accrued expenses 951 716 Other short-term liabilities with group companies - 17,025 Total current liabilities 45,866 18,030

Non-current liabilities Long-term financial debt 84,100 - Other non-current liabilities with group companies 81,823 66,991 Total non-current liabilities 165,923 66,991 Total liabilities 211,789 85,021

Shareholders’ equity Common shares (par value CHF 0.50 per share, authorized 213,275,590 and 207,033,200 shares; issued 122,027,729 and 114,779,420 shares in 2007 and 2006, respectively) 61,014 57,390 Legal reserves – share premium 628,032 343,543 Treasury shares reserve 230,626 11,118 Accumulated profit 350,421 246,505 Total shareholders’ equity 1,270,093 658,556 Total liabilities and shareholders’ equity 1,481,882 743,577

78 Holding Company Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Income Statements

Twelve months ended December 31, (in CHF thousands) 2007 2006

Financial income 391,063 222,472 Total income 391,063 222,472

Administrative expense (6,926) (3,049) Financial expense (49,595) (21,111) Total expense (56,521) (24,160) Income before and after taxes (net income) 334,542 198,312

Holding Company Statements 79 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Notes to the Financial Statements 2007

1. Accounting principles

The financial statements of Actelion Ltd have been prepared in accordance with the accounting principles as prescribed by Swiss Company Law.

2. Material investments

Company Country Location Ownership Consolidation Function Share capital interest method Actelion Pharmaceuticals Australia Pty Ltd Australia Sydney 100% Full Sales AUD 2,016,667 Actelion Pharmaceuticals Austria GmbH Austria Vienna 100% Full Sales EUR 35,000 Actelion Pharmaceuticals do Brasil Ltda Brazil Rio de Janeiro 100% Full Sales BRL 7,375,973 Actelion Pharmaceuticals Canada Inc. Canada Laval 100% Full Sales CAD 100,000 Actelion Pharmaceuticals France SAS France Paris 100% Full Sales EUR 200,000 Actelion Pharmaceuticals Deutschland GmbH Germany Freiburg 100% Full Sales EUR 1,000,000 Actelion Pharmaceuticals Hellas SA Greece Chalandri 100% Full Sales EUR 421,500 Actelion Pharmaceuticals Italia S r l Italy Milan 100% Full Sales EUR 15,000 Actelion Pharmaceuticals Japan Ltd Japan Tokyo 100% Full Sales JPY 95,000,000 Actelion Pharmaceuticals Nederland BV Netherlands Woerden 100% Full Sales EUR 50,010 Actelion Pharmaceuticals Espana SL Spain Barcelona 100% Full Sales EUR 127,100 Actelion Pharmaceuticals Sverige AB Sweden Danderyd 100% Full Sales SEK 1,000,000 Actelion Ilac Ticaret L.S Turkey Istanbul 100% Full Sales TRY 2,633,275 Actelion Pharmaceuticals Ltd (CH) Switzerland Allschwil 100% Full Research, CHF 614,610 Developm., Prod., Marketing, Sales Actelion Pharmaceuticals UK Ltd United Kingdom London 100% Full Sales GBP 250,000 Actelion Registration Ltd United Kingdom London 100% Full Holder marketing authorization EU GBP 1 Actelion Pharmaceuticals US Inc. United States South 100% Full Sales USD 5,000 San Francisco Actelion Pharma Schweiz AG Switzerland Baden 100% Full Marketing CHF 100,000 Actelion Paris Organisation SAS France Paris 100% Full Marketing EUR 200,000 Actelion Clinical Operations, Inc. United States Cherry Hill, 100% Full Development USD 1,000 New Jersey Actelion Finance SCA Luxembourg Luxembourg 100% Full Financing CHF 62,000 Actelion Partners SNC Luxembourg Luxembourg 100% Full Financing USD 1,000 Actelion Lux. SARL Luxembourg Luxembourg 100% Full Financing EUR 12,500 Actelion Participation GmbH Switzerland Allschwil 100% Full Financing CHF 20,000 Actelion Pharmaceuticals Israel Ltd Israel Ramat-Gan 100% Full Development NIS 100 Actelion Pharmaceuticals Portugal Portugal Lisboa 100% Full Sales EUR 5,000 Actelion Pharmaceuticals Belgium NV Belgium Wilrijk 100% Full Sales EUR 600,000 Actelion Pharmaceuticals Korea Ltd South Korea Seoul 100% Full Sales KRW 100,000,000 Actelion US Holding Co. United States Delaware 100% Full US Holding USD 1 CoTherix Inc. United States South 100% Full Sales USD 1 San Francisco Actelion Cyprus Limited Cyprus Nicosia 100% Full Financing EUR 2,000 Actelion Pharmaceuticals Singapore PTE Ltd Singapore Singapore 100% Full Sales SGD 1

80 Holding Company Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c 3. Share capital 6. Treasury shares

At December 31, 2007, the issued share capital amounts to At December 31, 2007, the Company and its affiliates held CHF 61,013,865 consisting of 122,027,729 common shares 3,940,510 treasury shares, which were acquired at an aver- (including 3,940,510 treasury shares) with a nominal value of age price of CHF 58.53. During 2007, the Company acquired CHF 0.50 each. The shares are registered and fully paid-up. 3,671,375 treasury shares at an average price of CHF 59.83 Each share is entitled to one vote. and members of the Board of Directors received 9,350 treasury shares at an average price of CHF 54.30 as compensation. The treasury shares are considered as long-term invest- 4. Conditional capital ment and therefore valued at lower of cost or market.

Since inception the Company has created conditional capital for the establishment of share option plans, convertible bonds 7. Long-term derivative instrument and similar forms of financing. At December 31, 2007, the Company has conditional capital of CHF 28.1 million of which In connection with the 2006 convertible bond, the Company CHF 16.2 million relate to share option plans and CHF 11.9 mil- used a portion of the proceeds to purchase call spread op- lion to convertible bonds and similar forms of financing. tions on its own shares from an international financial institution to mitigate the exposure to potential dilution from con- Movements in conditional capital are as follows (in CHF thou- version of the 2006 convertible bond. The total premium paid sands): was CHF 20.6 million, which has been recorded as a long- term derivative instrument. The number of options purchased is 8.5 million with a lower strike price at CHF 54.17 and an January 1, 2006 19,653 upper strike price at CHF 58.92. The call spread will expire in Creation of conditional capital for employee tranches during November and December 2011. share option plans - Exercise of options (1,026) Call and capped call options December 31, 2006 18,627 In December 2007, the Company committed to a program Creation of conditional capital for convertible bonds to purchase several financial instruments indexed to its own and similar forms of financing 9,250 stock in order to manage the potential dilution of earnings per Creation of conditional capital for employee share caused by exercises of employee stock options. The share option plans 4,160 Company committed to purchase 2.66 million physically set- Forfeited Challenge Award options (289) tled calls with an exercise price of CHF 53. Each call option Exercise of options (1,281) permits the Company to acquire one share. These options Conversion of 2003 convertible bond (2,343) expire serially, in varying amounts, through December 2011. December 31, 2007 28,124 In addition, the Company committed to purchase 2.66 million net share settled capped call options with a lower strike price of CHF 5 and a higher strike price of CHF 42.40 (0.27 million options), CHF 47.70 (0.53 million options) and CHF 53 (1.86 5. Authorized capital million options). Each net share settled option represents the right to the share equivalent of the profit differential on the The Annual General Meeting on May 4, 2007, authorized the option contract up to the price cap at the time of exercise. creation of authorized share capital to be used for strategic These options expire serially, in varying amounts, through and/or financial business purposes. The Board of Directors is December 2011. authorized to increase the share capital to an amount of not more than CHF 17.5 million by issuance of not more than 35 The net premiums paid through December 2007 of this op- million fully paid-in registered shares with a nominal value of tion structure were CHF 117.1 million. This amount is classi- CHF 0.50 per share until May 4, 2009. fied in long-term derivative instruments. As of mid-January 2008, the Company completed the purchase of these options with an additional premium of CHF 106 million that will also be reflected in long-term derivative instruments.

Holding Company Statements 81 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c 8. Guarantees and commitments In 2004, Actelion Ltd has issued a stand-by letter of credit of JPY 90,000,000 for securing the rent obligations of Actelion In 2007, Actelion Ltd has issued a first demand guarantee Pharmaceuticals Japan Ltd. In 2003, Actelion Ltd has issued a of up to USD 1,786,715 to Deutsche Bank Mortgage Capital, first demand guarantee of up to EUR 1,100,000 to Deutsche USA, for securing the rent obligations of Actelion Clinical Op- Bank for their credit facility with Actelion Pharmaceuticals erations, USA. Germany GmbH.

In 2007, Actelion Ltd has increased the stand-by letter of The Company belongs to the Swiss value-added tax (VAT) credit from JPY 39,571,200 to JPY 45,506,880 for securing group of Actelion Pharmaceuticals Ltd, and thus carries joint office rent obligations of Actelion Pharmaceuticals Japan Ltd. liability to the Swiss federal tax authority for value-added tax. In 2007, the Company issued a letter of indemnity to a financial institution in the amount of CHF 10 million to secure its Financing arrangement obligations from derivative trading and forward transactions In 2007, the Company entered into a financing arrangement in foreign currencies. In addition, as of December 31, 2007, for CHF 215 million. The arrangement is split into two facilities other guarantees in the amount of CHF 831,997 exist. of CHF 100 million (unsecured) and CHF 115 million (secured). The CHF 115 million facility is secured with a general deed of In November 2006, Actelion Finance SCA issued a CHF pledge in the amount of CHF 119 million, which covers all of 460 million convertible bond (the „Bond“). Under the guar- the Company’s assets held at the pledger. The interest rates antee agreement signed on November 22, 2006, Actelion are based on the 3-months-LIBOR rate plus an average mar- Ltd unconditionally guarantees the due payment of the gin of 22.5 basis points for the secured and 52.5 basis points amounts payable by Actelion Finance SCA pursuant to the for the unsecured facility. As of December 31, 2007, CHF terms of the Bond, or, upon conversion of the bonds, the 117.1 million of the CHF 215 million financing arrangement due delivery of the shares and/or cash payment for fractions. were utilized. The financing arrangement contains financial Actelion Ltd also guarantees that Actelion Finance SCA will and non-financial covenants. As of December 31, 2007, the earn, both before and after conversion of the Bonds into shares Company is in compliance with all applicable covenants. and irrespective of an effective on-lending of the proceeds of the Bonds, on all Group Financing except loans granted to As of mid January 2008, the total financing arrangement of Actelion Partners SNC a net spread of 12.5 basis points in CHF 215 million was utilized. respect of such Group Financing.

9. Significant shareholders

According to the information available to the Board of Directors the following shareholders held a significant percentage of shares:

Name 2007 2007 20061) Percentage Percentage Percentage Percentage Percentage Percentage of share of voting of purchase of sale of share of voting capital rights positions positions capital rights Members of the Board of Directors , the AEC and Senior Management > 5% > 5% < 3% >10% >10% Actelion Ltd > 3% > 3% < 3% Rudolf Maag > 5% > 5% > 5% > 5% BB Biotech Invest SA > 5% > 5% > 5% > 5% Fidelity Management & Research Co. > 5% > 5% >10% >10% MFS Investment Management > 3% > 3% > 5% > 5% Credit Suisse Group2) < 3% < 3% > 5%

1) This information is based on the thresholds applicable in 2006 (minimum threshold: 5%. 2) According to Credit Suisse‘s disclosure notification

82 Holding Company Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c 10. Compensation and shareholdings of the Compensation Board of Directors members of the Board of Directors and AEC Total compensation Only members of the Actelion Executive Committee are In 2007, the 7 non-executive members of the Board of Direc- members of the management within the relevant meaning tors received a total compensation of CHF 1,275,020 consist- of Art 663bbis of the Swiss Code of Obligations (SCO) and as ing of a cash compensation of CHF 403,000; social security such disclosed in the following tables. contributions of CHF 57,474; 17,900 options at a fair value at grant date of CHF 17.54 and 9,350 shares at fair value at grant date of CHF 53.538. Each director can decide in which manner this last compensation should be paid (options or shares).

Individual compensation of the members of the Board of Directors

Name Functions Total com- Remu- Options Shares pensation neration (DSOP)1) CHF Total Grant date Total Grant date number fair value number fair value (CHF)2) (CHF)2) Robert E. Cawthorn Chairman 244,316 83,450 4,135 17.54 1,650 53.538 Member of the Compensation Committee Member of the Nominating & Governance Committee André J. Mueller Vice Chairman 169,202 72,644 5,505 17.54 - - Chairman of the Finance & Audit Committee Member of the Nominating & Governance Committee Juhani Anttila Member 179,426 61,642 - - 2,200 53.538 Member of the Finance & Audit Committee Carl Feldbaum Member 161,917 54,704 2,755 17.54 1,100 53.538 Chairman of the Nominating & Governance Committee Werner Henrich Member 176,274 58,490 - - 2,200 53.538 Member of the Compensation Committee Armin Kessler Member 185,913 68,130 - - 2,200 53.538 Chairman of the Compensation Committee Member of the Nominating & Governance Committee Jean Malo Member 157,972 61,414 5,505 17.54 - - Member of the Finance & Audit Committee Jean-Paul Clozel Delegate See Section “Highest total compensation” Total 1,275,020 460,474 17,900 - 9,350 - (excluding Jean-Paul Clozel)

1) The Company has a share-based payment plan for the Board of Directors (DSOP). Options 2) The fair value of the options granted in 2007 was estimated by use of a Binomial Lattice granted to members of the Board out of the Company’s Director Share Option Plan vest im- option pricing model. The model input assumptions are determined based on available inter- mediately. Each option entitles the holder to one share. Options generally expire between nal and external data sources. ten and ten and a half years after the plan issuance date.

Holding Company Statements 83 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c AEC compensation This compensation relates to both functions (Chief Executive Officer and member of the Board of Directors) and cannot be Total compensation distinguished. In 2007, the executive members of the Board of Directors and the AEC received a total compensation of CHF 13,756,582 consisting of actual cash payments of CHF 6,738,195; so- Loans and other payments to members of cial security contributions of CHF 703,827; 172,500 options the Board of Directors, the AEC and related (ESOP3)) at a fair value at grant date of CHF 23.896 and parties 125,000 (DSOP) options at a fair value at grant date of CHF 17.54 in aggregate. Loans No loans were granted to current or former members of the 3) The Company has a share-based payment plan for employees (ESOP). Granted standard Board of Directors, of the AEC or to “Related Parties” as per share options within ESOP generally vest over a four-year period with 25% of the options bis becoming exercisable each year. Each option entitles the holder to one share. Options gen- Article 663b SCO during 2007. No such loans were out- erally expire between ten and ten and a half years after the plan issuance date. standing as of December 31, 2007.

Highest total compensation Other payments In 2007, Jean-Paul Clozel, Chief Executive Officer and mem- During 2007, no payments (or waivers of claims) other than ber of the Board of Directors, received the highest total com- those set out above were made to current members of the pensation amounting to CHF 4,300,546 and composed of the Board of Directors, of the AEC or to “Related Parties” as per following: Article 663bbis SCO. Effectively paid cash remuneration: CHF 1,869,496 Social Security Contributions: CHF 238,550 Payments to former members of the Board of Directors Option allotment: 125,000 (DSOP, fair value at grant date: During 2007, no payments (or waivers of claims) were made CHF 17.54). to former members of the Board of Directors, of the AEC or Share allotment: none to “Related Parties” as per Article 663bbis SCO.

Shares owned by the members of the Board of Directors as of December 31, 2007

Name Function Number of shares Number of option rights (related voting rights) (related potential voting rights) Robert E. Cawthorn1) Chairman 915,420 (0.76%) 98,375 (<0.1%) Member of the Compensation Committee Member of the Nominating & Governance Committee André J. Mueller Vice Chairman 687,505 (0.57%) 125,505 (0.10%) Chairman of the Finance & Audit Committee Member of the Nominating & Governance Committee Jean-Paul Clozel1) Delegate 6,026,805 (5.04%) 532,065 (0.44%) Juhani Anttila Member 8,825 (<0.1%) 17,145 (<0.1%) Member of the Finance & Audit Committee Carl Feldbaum1) Member 4,100 (<0.1%) 32,845 (<0.1%) Chairman of the Nominating & Governance Committee Werner Henrich Member 9,990 (<0.1%) 26,450 (<0.1%) Member of the Compensation Committee Armin Kessler Member 5,325(<0.1%) 15,000 (<0.1%) Chairman of the Compensation Committee Member of the Nominating & Governance Committee Jean Malo Member - 37,025 (<0.1%) Member of the Finance & Audit Committee Total 7,657,970 (6.41%)2) 884,410 (0.74%)2)

1) Including related parties 2) Share of the Company’s registered capital

84 Holding Company Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Shares owned by the members of the AEC as of December 31, 2007

Name Title and Function Number of shares Number of option rights (related voting rights) (related potential voting rights) Jean-Paul Clozel Chief Executive Officer See table “Shares owned by the members of the Board of Directors” Simon Buckingham President, Corporate and Business Development 236,875 (0.19%) 198,685 (0.17%) Christian Chavy President, Business Operations 120 (<0.1%) 457,695 (0.38%) Louis de Lassence Vice President, 40,100 (<0.1%) 312,800 (0.26%) Head of Corporate Services Roland Haefeli Vice President, Head of Investor - 229,355 (0.19%) Relations and Public Affairs Isaac Kobrin Senior Vice President, - 189,345 (0.15%) Head of Clinical Development Andrew J. Oakley Vice President, - 153,000 (0.13%) Chief Financial Officer Total 277,095 (0.23%)1) 1,540,880 (1.28%)1) (excluding Jean-Paul Clozel)

1) Share of the Company’s registered capital

12. Change in accounting policies

The Company has changed the methodology to recognize financial income from the option sold to Actelion Finance SCA in 2006. Starting from 2007 total financial income will be recognized upon conversion of the bond instead of amortizing it as deferred revenue on a straight-line basis over the period of the agreement.

Proposed appropriation of available earnings

2007 2006 Retained earnings at beginning of the year 246,505 48,193 Reserves for own shares (230,626) - Net income for the year 334,542 198,312 Total available earnings carried forward 350,421 246,505 Balance to be carried forward 350,421 246,505

Holding Company Statements 85 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Report of the Statutory Auditors

To the General Meeting of Actelion Ltd, Allschwil

As statutory auditors, we have audited the accounting records and the financial statements (balance sheets, income statements and notes, pages 78 to 85) of Actelion Ltd for the year ended December 31, 2007.

These financial statements are the responsibility of the board of directors. Our responsibility is to express an opinion on these financial statements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence.

Our audit was conducted in accordance with Swiss Auditing Standards, which require that an audit be planned and performed to obtain reasonable assurance about whether the financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the financial statements. We have also assessed the accounting principles used, significant estimates made and the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the accounting records and financial statements and the proposed appropriation of available earnings comply with the Swiss law and the company’s articles of incorporation.

We recommend that the financial statements submitted to you be approved.

Ernst & Young AG

Jürg Zürcher Robin Ginn Swiss Certified Accountant Certified Public Accountant (Auditor in charge)

Basel, February 15, 2008

86 Holding Company Statements WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Board of Directors Actelion Executive Committee

Robert E. Cawthorn Jean-Paul Clozel Chairman, Retired Chairman and CEO, Rhône-Poulenc-Rorer Founder, Chief Executive Officer

André J. Mueller Simon Buckingham Vice-Chairman, Former Chief Financial Officer President, Global Corporate & Business Development

Jean-Paul Clozel Christian Chavy Founder, Chief Executive Officer President, Business Operations (until January 14, 2008)

Juhani Anttila Louis de Lassence Chairman, Ascom Holding Ltd. Vice President, Head of Corporate Services

Carl Feldbaum Roland Haefeli Former President of the Biotechnology Industry Organization Vice President, Head of Investor Relations & Public Affairs (BIO) Isaac Kobrin Werner Henrich Senior Vice President, Head of Clinical Development Chairman, Basilea Pharmaceutica Ltd. Andrew J. Oakley Armin Kessler Vice President, Chief Financial Officer Former Chief Operating Officer, F. Hoffmann-La Roche Otto Schwarz Jean Malo President, Business Operation (as of January 14, 2008) Chief Investment Officer, Breen Investors LP.

Scientific Advisory Board Senior Management

Joël Ménard Marian Borovsky Professor of Public Health, Faculty of Medicine René Des- Vice President, General Counsel & Corporate Secretary cartes, Paris 5, France Martine Clozel Hugo Kubinyi Senior Vice President, Head of Drug Discovery, Pharmacolo- Professor of Pharmaceutical Chemistry, University of Heidel- gy & Preclinical Development berg, Germany Walter Fischli Craig M. Pratt Founder, Senior Vice President, Head of Drug Discovery, Mo- Director of Research, The Methodist DeBakey Heart Center, lecular Biology & Biochemistry Houston, Texas, USA Thomas Weller David Shlaes Vice President, Head of Drug Discovery, Chemistry Anti-Infectives Consulting, Stonington, CT, USA

Graeme Stewart Professor of Medicine, Westmead Hospital, Sydney, Australia

Richard Tsien Professor of Molecular & Genetic Medicine, Stanford Univer- sity, California, USA

Holding Company Statements 87 WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Shareholder Information

Share price The following table shows the reported high and low quarterly closing share price of the Actelion shares on the SWX main market during the year 2007.

High Low First quarter 65 51.25 Second quarter 60.80 51.50 Third quarter 68.75 55.80 Fourth quarter 71.50 45.50

On December 31, 2007, the last reported closing share price was CHF 52.05 and market capitalization of Actelion Ltd was CHF 6.35 billion, compared with a share price of CHF 53.60 and market capitalization of CHF 6.15 billion the previous year. The total number of registered shareholders on December 31, 2007 was 6,756.

Actelion Ltd is organized under Swiss law and is the holding company of the Actelion Group. The Company’s initial equity funding was provided in 1998 and 1999 in two separate rounds of financing totaling CHF 66 million.

The registered shares of Actelion Ltd have been listed on the SWX New Market since April 6, 2000 (symbol: ATLN). A total of 1,000,000 primary shares were placed at the Company‘s Initial Public Offering at the price of CHF 260 per share raising CHF 246.1 million. On June 20, 2001, Actelion Ltd announced a 4:1 split in its shares. A second split (5:1) took place in on 6 June 2007.

On September 9, 2002, Actelion listed the Company‘s registered shares on the SWX Main Market. The SWX Swiss Imprint Exchange waived the requirement for a listing prospectus. The trading symbol remains the same and the Company will continue to report full quarterly figures. Since September Publisher Actelion Ltd, Investor Relations & Public Affairs, Allschwil, Switzerland 2007, Actelion shares trade on Virt-x, the pan-european cross- Concept & Design border platform of the SWX. Kelemen & Katz - Communication and Visual Design, Neu-Ulm, Germany Actelion Ltd is part of the following indices: SPI, SLI, SMIM, Editorial Support SPIMLC, SPI20, SPISMC, SXXP, SXDP, SBC100, SNSPIX, Maeve Kelly, Wide Circle, Freiburg, Germany SMHCAX, SLDI, SXI LIFE SCIENCES and SXI Bio+Medtech. Photographs Dirk Spath, München, Germany Print Actelion is traded under the following symbols: Reuters: Werner Druck, Basel, Switzerland ATLN.S/ Bloomberg ATLN

88 Shareholder Information WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Imprint

Publisher Actelion Ltd, Investor Relations & Public Affairs, Allschwil, Switzerland Concept & Design Kelemen & Katz - Communication and Visual Design, Neu-Ulm, Germany Editorial Support Maeve Kelly, Wide Circle, Freiburg, Germany Photographs Dirk Spath, München, Germany Print Werner Druck, Basel, Switzerland WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c Phone +41 61 565 65 65 / Fax +41 61 565 65 00 /www.actelion.comPhone +416156565/Fax /[email protected] +41615656500 Actelion PharmaceuticalsLtd/Gewerbestrasse 16 /CH-4123 Allschwil /Switzerland

WorldReginfo - 954f6161-6bac-48a4-873f-6ee9f4f1d49c

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