ANNUAL REPORT 2005 CONTENTS UNCONSOLIDATED REPORT 3 Unconsolidated Financial Highlights 5 Letter to Shareholders 7 Corporate Governance 8 Company's Boards 8 Information for Shareholders 14 Annual General Meeting 14 Investor Relations Activities 14 Earnings Per Share 16 Dividend 16 Share Price Performance 16 Market Capitalisation 19 Management Report 21 Operating Review 25 Markets 26 Gynaecology – a Focus on a Therapeutic Niche 40 Products 44 Research and Development 48 Production 49 Corporate Social Responsibility 50 Human Resources 52 Financial Review 55 Corporate Matters 62 Preference Shares 62 Registered Shareholders 62 Treasury Shares 64 Share Ownership of the Company’s Boards 64 Other Information 65 Recent Litigation 65 Unconsolidated Financial Statements 67 Unconsolidated Financial Record 1995-2005 72 CONSOLIDATED STATEMENTS 77 Consolidated Financial Highlights 79 Consolidated Review 80 Richter – a Regional Multinational Company 80 Consolidated Companies 81 Brief Operating Review 82 Summary Financial Review 83 Consolidated Financial Statements 85 Independent Auditor's Report 86 Notes to the Consolidated Financial Statements 91 Consolidated Financial Record 2002-2005 114 CONTACTS 116 2 ANNUAL REPORT 2005 GEDEON RICHTER LTD. UNCONSOLIDATED FINANCIAL HIGHLIGHTS 2005 2004 Growth 2005 2004 Growth HUF m HUF m % US$ m US$ m % Total sales 140,929 121,593 15.9 705.7 599.0 17.8 Operating profit 37,364 35,008 6.7 187.1 172.4 8.5 Net profit for the year 43,623 37,475 16.4 218.4 184.6 18.3 2005 2004 Growth 2005 2004 Growth HUF HUF % US$ US$ % Earnings per share (EPS) 2,341 2,011 16.4 11.72 9.91 18.3 Dividends per ordinary share 600 500 20.0 3.00 2.46 22.0 HUF m Sales US$ m Sales 160,000 800 140,000 700 120,000 600 100,000 500 80,000 400 60,000 300 40,000 200 20,000 100 0 0 95 96 97 98 99 00 01 02 03 04 05 95 96 97 98 99 00 01 02 03 04 05 HUF Earnings per share US$ Earnings per share 2,400 12 2,000 10 1,600 8 1,200 6 800 4 400 2 0 0 95 96 97 98 99 00 01 02 03 04 05 95 96 97 98 99 00 01 02 03 04 05 HUF Dividends per ordinary share US$ Dividends per ordinary share 600 3.0 500 2.5 400 2.0 300 1.5 200 1.0 100 0.5 0 0 95 96 97 98 99 00 01 02 03 04 05 95 96 97 98 99 00 01 02 03 04 05 Notes: • Earnings per share: Headline, i.e. diluted excluding exceptional and non-recurring items. • 2005 dividends per ordinary share of HUF 600 are as recommended by the Board of Directors. UNCONSOLIDATED REPORT UNCONSOLIDATED FINANCIAL HIGHLIGHTS 5 LETTER TO SHAREHOLDERS I am pleased to report that, notwithstanding at times difficult and changing conditions, our overall dynamic growth continued during 2005. We are proud of our sales and net profit performance both of which provide a strong basis for our confidence in the future. The Company’s performance during 2005 represented a milestone in the history of our business in Russia. Our successful participation in the Russian Government’s subsidised drugs programme resulted in a major step-change in our sales which well surpassed the increases of previous years. Russia together with other CIS republics became our best performing business region in 2005, exceeding our sales in Hungary. The EU, including the new member states, made also a strong contribution to the overall results. In Western countries new product launches and in Central and Eastern Europe our own sales network together contributed to the performance of the Company. Notwithstanding strong competition and uncertainties surrounding the reimbursement system we enjoyed a successful year also in Hungary. Our women’s healthcare business which is based on our unique steroid chemistry capability has continued to progress most satisfactorily. As a medium-sized Central-European multinational Company with chemical knowledge accumulated over many decades, we continued to concentrate our resources on the therapeutic areas where we have an established competitive advantage and which offer the best chances of sound growth. To create the basis for a successful future we had to take important decisions on manufacturing capacity increases, on quality control and needed to keep pace with the industry’s continuing technological progress. Hence we inaugurated last November a new biotechnological laboratory and to augment the original research activities we widened our cooperation with the US-based Forest Laboratories. Our efforts would have been to no avail without the devotion and hard work of our colleagues. On behalf of the Board I wish to express my sincere thanks to all Richter employees both in Hungary and beyond its borders for their exemplary commitment and support. My sincere thanks also go to our Shareholders for their ongoing encourage- ment and their trust in our long-term policy of organic growth. We are convinced that this strategy will bring forth a prosperous future for our shareholders and employees. William de Gelsey Chairman of the Board of Directors UNCONSOLIDATED REPORT LETTER TO SHAREHOLDERS 7 CORPORATE GOVERNANCE Gedeon Richter complies fully with the highest ethical standards and acts according to both the legal and regu- Dr György Bíró (1945) latory requirements following the Corporate Governance Recommendations of the Budapest Stock Exchange. Legal adviser, specialising on economic law. Director of Industrial Association, Legal-International-Secretariat Directorate. Is member of Ethical Board of Conciliation Committee of Interests. Joined the Board in 1998. The Annual General Meeting is the highest decision-making body of the Company, comprising all shareholders. The Company differentiates the roles and responsibilities of the Board of Directors, the ultimate decision-making Gábor Bojár (1949) body which itself operates with two subcommittees since 2004 – the Corporate Governance subcommittee and President and Founder of Graphisoft Software Development Ltd., established in 1982. A physicist, graduate of the Compensation subcommittee, the Executive Board which is responsible for the executive management of the Eötvös Loránd Tudományegyetem (ELTE) in Budapest. Previously worked in the Geophysical Institute at ELTE. Company’s business, and the Supervisory Board which is the controlling body of the Company. Has been a member of the Board since 1995. Dr Jenô Koltay (1944) Economist, University doctorate in Economic Sciences. Director of Institute of Economics of the Hungarian Academy of Sciences. Visiting fellow and visiting professor at several Research Institutions and Universities. Joined the Board in 1998. COMPANY’S BOARDS Dr László Kovács (1944) HONORARY PRESIDENT Deputy Managing Director with responsibility for Commerce and Marketing from 1990 to 2005. Currently strategic adviser to the Executive Board of Gedeon Richter Ltd. Economist, University doctorate in Economic Sciences. Formerly with Medimpex from 1966 to 1990, Secretary of the Commercial Section of the Hungarian Embassy in Lajos Pillich (1913) São Paulo, Brazil, 1975 to 1978. Graduated from the Technical University of Budapest. Chemical engineer. With Richter since 1935 and was Technical Director, managing production and technical development of Research and Development from 1942 to 1976. Chairman between 1990 and 1999. Became Honorary Life President in 1999. Christopher William Long (1938) Career diplomat. Experience in the full range of diplomatic work including management, personnel, political and economic analysis. British Ambassador to Hungary from 1995 to 1998. Joined the Board in 1998. BOARD OF DIRECTORS Dr Gábor Perjés (1941) William de Gelsey (1921) Medical doctor, urologist, nephrologist. Between 1966 and 1970 assistant at the Postgraduate Medical School. Senior adviser to the Managing Board of CA IB Corporate Finance Beratungs GmbH (a wholly owned subsidiary Member of Parliament from 1990 to 1994. Currently practising as a physician, appointed medical manager of of Bank Austria-Creditanstalt) Vienna and London. Has over 45 years of international investment banking Gyógyír XI. Public Company responsible for medical services in XIth district of Budapest. Has been a member experience. He also has significant banking experience in Hungary. A graduate of Trinity College, Cambridge. Joined of the Board since 1992. the Board in 1995. Chairman since 1999. István Somkuti (1958) Erik Bogsch (1947) Economist, has worked with the Hungarian State Privatization and Holding Company Ltd. since December 2002, Appointed Managing Director in November 1992. Chemical engineer, qualified economic engineer. With Richter Managing Director of the Privatisation Department II. Joined the Board in 2004. since 1970 in a number of Research and Development management positions. Medimpex director in Mexico from 1977 to 1983. Managing Director of Medimpex UK from 1988 to 1992. Member of the Board of MAGYOSZ, Chairman from March 2006. 8 UNCONSOLIDATED REPORT CORPORATE GOVERNANCE COMPANY’S BOARDS UNCONSOLIDATED REPORT COMPANY’S BOARDS 9 EXECUTIVE BOARD Erik Bogsch (1947) Appointed Managing Director in November 1992. Chemical engineer, qualified economic engineer. With Richter since 1970 in a number of Research and Development management positions. Medimpex director in Mexico from 1977 to 1983. Managing Director of Medimpex UK from 1988 to 1992. Member of the Board of MAGYOSZ, Chairman from March 2006. Dr László Kovács (1944) Deputy Managing Director with responsibility for Commerce and Marketing from 1990 to 2005. Currently strategic adviser to the Executive Board of Gedeon Richter Ltd. Economist, University doctorate in Economic Sciences. Formerly with Medimpex from 1966 to 1990, Secretary of the Commercial Section of the Hungarian Embassy in São Paulo, Brazil, 1975 to 1978. Dr Gábor Gulácsi (1958) Appointed Deputy Managing Director upon joining the Company in February 2000. Responsible for Finance. Economist, University doctorate in Economic Sciences. Previously General Secretary of State, Ministry of Economic Affairs. Lajos Kovács (1960) Appointed Director in 2005. Responsible for Technical services. Chemical engineer, with postgraduate degree in phar- maceutical research. With Richter since 1984 in different positions.