Roche Annual Report 2006 Part 2 Finance Report We Innovate Healthcare Innovation spanning the entire healthcare spectrum As a pharmaceuticals and a diagnostics company, Roche brings pioneering products and services to market for every stage of the healthcare process, from identifying disease susceptibilities and testing for disease in at-risk populations to prevention, diagnosis, therapy and treatment monitoring. Our focus on products that deliver significant benefits to patients and health professionals is a core element of our business strategy, and one of the key reasons for our success. As a research-intensive company with a long-term strategic focus, Roche strives to deliver sustainable value to all stakeholders. Table of Contents Finance Report 2006 Roche Group 2 Finance in brief 2 Finance – 2006 in brief 3 Financial Review 4 Operating results 4 Non-operating results 13 Cash flows and net cash 15 Balance sheet 16 Pensions and other post- employment benefits 17 Roche securities 18 Financial risks 19 International Financial Reporting Standards 21 Roche Group Consolidated Financial Statements 22 Income statement 22 Balance sheet 24 Cash flow statement 25 Statement of recognised income and expense 26 Statement of changes in equity 27 Notes to the Roche Group Consolidated Financial Statements 28 Report of the Group Auditors 97 Multi-Year Overview 98 Supplementary Net Income and EPS Information 101 Roche Securities 102 Roche Holding Ltd, Basel 104 Financial Statements 104 Income statement 104 Balance sheet 105 Notes to the Financial Statements 106 Appropriation of Available Earnings 108 Report of the Statutory Auditors 109 Finance Report 2006 1 Finance in brief Key results Operating profit margin before exceptional items, Local sales growth % % of sales Pharmaceuticals 2006 +21.3 31.7 2005 +24.8 27.6 Diagnostics 2006 +4.7 16.3 2005 +4.2 21.5 Group 2006 +17.4 27.9 2005 +19.3 25.9 2006 2005 % change % of sales (mCHF) (mCHF) (CHF) (LC) 2006 2005 Sales 42,041 35,511 +18 +17 EBITDA1) 14,436 11,568 +25 +24 34.3 32.6 Operating profit before exceptional items 11,730 9,189 +28 +27 27.9 25.9 Profit from continuing businesses before exceptional items 9,151 7,099 +29 21.8 20.0 Net income 9,171 6,866 +34 21.8 19.3 Net cash 16,088 11,215 +43 Equity 46,814 40,158 +17 Equity ratio 62.9% 58.0% Core EPS2) in CHF 9.86 7.84 +26 Dividend per share3) in CHF 3.40 2.50 +36 1) EBITDA: Earnings before exceptional items and before financial income, financing costs, tax, depreciation and amortisation, including impairment. This corresponds to operating profit before exceptional items and before depreciation and amortisation, including impairment. 2) See page 101 for definition of Core EPS. 3) Proposed by the Board of Directors. LC = local currencies. Finance Executive Team Erich Hunziker Chief Financial Officer Hubert Buck Management Development Peter Eisenring Taxes and Insurances Marco Frei Pension Asset Management Andreas Knierzinger Treasury Steve Krognes Corporate Development Karl Mahler Investor Relations Erwin Schneider Accounting and Controlling 2 Finance Report 2006 Finance – 2006 in brief Sales • Group sales grew by 17% in local currencies to 42.0 billion Swiss francs, driven primarily by the fast organic growth of the Pharmaceuticals Division. • Pharmaceuticals sales increased by 21% in local currencies or 6.0 billion Swiss francs, strongly outperforming the global market thanks to the key oncology products and also Tamiflu, Bonviva/Boniva and Lucentis. Pharmaceuticals sales now account for 79% of Group sales. • Oncology product sales grew by 37% in local currencies to 15.3 billion Swiss francs, representing 46% of pharmaceuticals sales. • Diagnostics sales increased by 5% in local currencies to 8.7 billion Swiss francs, driven primarily by the Centralized Diagnostics business. Operating results • Operating profit (before exceptional items) increased by 27% in local currencies to 11.7 billion Swiss francs based on the strong business growth and continuing productivity improvements. • Record profitability, with operating profit margin (before exceptional items) up by 2.0 percentage points to 27.9%. • R&D expenditure increased by 16% in local currencies to 6.6 billion Swiss francs, representing 16% of Group sales. • Significant investment in new biotechnology manufacturing facilities. Treasury • Increase in net financial income to 855 million Swiss francs, compared to 328 million Swiss francs in 2005. • Partial redemption of ‘LYONs V’ convertible notes and further repayment of bank debt reduces debt by 1.4 billion Swiss francs. Financial condition • Increase in net cash to 16.1 billion Swiss francs from 11.2 billion Swiss francs. • Increase in equity ratio to 63% from 58%. • Decrease in debt-equity ratio to 18% from 24%. • Aa1 rating by Moody’s and AA+ rating by Standard & Poor’s maintained. Net income • Increase in overall net income of 34% to 9.2 billion Swiss francs, primarily from the strong operating performance. Shareholder return • Market capitalisation increased by 12% to 192 billion Swiss francs. Share price up by 13%, price of non-voting equity security up by 11%. • Increase in Core EPS of 26% to 9.86 Swiss francs, outpacing Swiss franc sales growth by 8 percentage points. • Increase in proposed dividend of 36% to 3.40 Swiss francs, representing the 20th consecutive year of dividend growth. Finance Report 2006 3 Roche Group Financial Review Operating results Group operating results Sales Operating profit (before exceptional items) in billions of CHF % LC growth in billions of CHF % of sales 2006 +17.4 27.9 2005 +19.3 25.9 20041) +11.8 22.9 0 10 20 30400 246810 12 1) Continuing businesses. The 2006 annual results once again show a strong operating performance both in terms of top-line sales growth as well as profit margins, mainly driven by the Pharmaceuticals Division. Total sales grew by 17% in local currencies (18% in Swiss francs; 18% in US dollars) to 42.0 billion Swiss francs, with the Pharmaceuticals Division contributing 79% of Group sales and the Diagnostics Division representing 21%. The incremental sales increase of 6.5 billion Swiss francs was achieved through organic growth and primarily driven by strong demand for the Group’s oncology drugs Herceptin, Avastin, MabThera/Rituxan and Tarceva, by the anti-influenza drug Tamiflu, and by Bonviva/Boniva and Lucentis. This sales increase is after absorbing over 500 million Swiss francs of lower Rocephin sales globally following the product’s US patent expiry in July 2005. The Group’s operating profit before exceptional items increased by 27% in local currencies to 11.7 billion Swiss francs and the corresponding operating profit margin grew by 2.0 percentage points to 27.9%. This was driven by an increase in Pharmaceuticals of 4.1 percentage points which more than offset a decline in the margin in Diagnostics of 5.2 percentage points. This overall margin growth was achieved at the same time as the Group continued to increase investments in the strong development pipeline and in launch and pre-launch activities. The exchange rate impact on sales and operating profit growth as expressed in Swiss francs was moderate, with Swiss-franc growth being 0 to 1 percentage point higher than local-currency growth. In 2006, the average exchange rate for the US dollar was 1% higher and the euro was 2% higher, while the Japanese yen lost 5%. 4 Finance Report 2006 Roche Group Financial Review Group operating results 2006 Pharmaceuticals Diagnostics Corporate Group (mCHF) (mCHF) (mCHF) (mCHF) Sales 33,294 8,747 – 42,041 Operating profit before exceptional items 10,545 1,422 (237) 11,730 – margin 31.7 16.3 – 27.9 EBITDA 12,168 2,500 (232) 14,436 – margin 36.5 28.6 – 34.3 Group operating results – Development of results compared to 2005 Pharmaceuticals Diagnostics Corporate Group Sales – % increase in local currencies +21 +5 – +17 Operating profit before exceptional items – % increase in local currencies +40 –21 +96 +27 – margin: percentage point increase +4.1 –5.2 – +2.0 EBITDA – % increase in local currencies +34 –5 +99 +24 – margin: percentage point increase +3.2 –3.1 – +1.7 Pharmaceuticals operating results The Pharmaceuticals Division showed a strong sales increase, with growth of 21% in local currencies (22% in Swiss francs; 21% in US dollars) to 33.3 billion Swiss francs, outpacing growth in the global market by a factor of more than three. Operating profit before exceptional items was 10.5 billion Swiss francs, representing a growth of 40% in local currencies. Consequently there was a further margin increase of 4.1 percentage points to 31.7%. Marketing and distribution costs significantly increased by 17% in local currencies to 8.8 billion Swiss francs reflecting the support for recently launched on-market products and pre-launch activities for global rollouts and new indications. R&D investment in the pipeline continued with 5.9 billion Swiss francs of expenditure, an increase of 19% in local currencies. Pharmaceuticals Division results 2006 2005 % change % change (mCHF) (mCHF) (CHF) (local currencies) Sales 33,294 27,268 +22 +21 Royalties and other operating income 1,277 1,176 +9 +8 Cost of sales (6,868) (6,016) +14 +11 Marketing and distribution (8,761) (7,458) +17 +17 Research and development (5,889) (4,970) +18 +19 General and administration (1,849) (1,785) +4 +3 Amortisation and impairment of intangible assets (659) (676) –3 –3 Operating profit before exceptional items 10,545 7,539 +40 +40 – margin 31.7 27.6 +4.1 EBITDA 12,168 9,073 +34 +34 – margin 36.5 33.3 +3.2 Sales: The major growth drivers were the oncology, transplantation and virology franchises (including Tamiflu), with the key oncology franchise again significantly outpacing the market.