Income Statement Format and Disclosures 2007 Conference call for Financial Analysts, November 2007 Ian Bishop

Transcription

1 Income Statement Format and Disclosures 2007 Conference call for Financial Analysts, November 2007 Ian Bishop This presentation contains certain forward-looking statements. These forward-looking statements may be identified by words such as believes, expects, anticipates, projects, intends, should, seeks, estimates, future or similar expressions or by discussion of, among other things, strategy, goals, plans or intentions. Various factors may cause actual results to differ materially in the future from those reflected in forward-looking statements contained in this presentation, among others: 1 pricing and product initiatives of competitors; 2 legislative and regulatory developments and economic conditions; 3 delay or inability in obtaining regulatory approvals or bringing products to market; 4 fluctuations in currency exchange rates and general financial market conditions; 5 uncertainties in the discovery, development or marketing of new products or new uses of existing products, including without limitation negative results of clinical trials or research projects, unexpected side-effects of pipeline or marketed products; 6 increased government pricing pressures; 7 interruptions in production 8 loss of or inability to obtain adequate protection for intellectual property rights; 9 litigation; 10 loss of key executives or other employees; and 11 adverse publicity and news coverage. Any statements regarding earnings per share growth is not a profit forecast and should not be interpreted to mean that Roche s earnings or earnings per share for this year or any subsequent period will necessarily match or exceed the historical published earnings or earnings per share of Roche. 2

2 Income Statement Current income statement introduced in 2005 Sales Royalties & other operating income Cost of sales Marketing & Distribution Research & Development General & Administration Amortisation and impairment of Intangible Assets Operating profit 3 Group Income Statement Current classification of items of growing significance Sales Royalties & other op income Cost of sales M & D R & D G & A Amortisation and impairment of Intangible Assets 3rd party royalty expense on product sales Gross profit sharing (Bonviva) Genentech collaboration profit sharing expense (Biogen Idec, OSI, Novartis), Phase IV and similar costs Phase IV and similar costs Royalty expense on royalty income, Back-royalties (BioVeris), Phase IV and similar costs Intangibles for marketed products and also intangibles related to technology & development Operating profit 4

3 2007 presentational changes to operating results Restated Full Year 2006 income statement Sales 42, ,041 Royalties & other op. income 1, ,391 Cost of sales -10,616-1,059-1, ,285 Marketing & distribution -10,856-1, ,954 Research & development -6, ,365 General & administration -2, ,098 Amortisation & impairment of IA -1,174 1, Operating profit 11, ,730 Product intangibles Technology and development intangibles Genentech collaboration profit sharing Pass-through royalties on royalty income Royalty exp. on royalty income, incl. back royalties 5 Intangible assets Amortisation and impairment Alliance and royalty expenses Phase IV and similar costs Unrealised profits in inventories Appendices: Impact of changes 6

4 Intangible assets amortisation and impairment Matching the expenses to the function Currently shown on a separate line in the income statement. Applied by Roche due to materiality, but not widespread international practice. The expense is not allocated to the function it relates to, therefore less useful in internal and external reporting. Product intangibles. Patents, Licences, Trademarks, etc arising from business combinations (Genentech, Boehringer-Mannheim) or purchases (Kytril). Often calculated/valued as an avoided royalty expense Relates to product sales, therefore logical to include in Cost of Sales. Technology and development intangibles. IPR&D from business combinations or up-fronts etc from R&D alliances. Under US GAAP would be expensed as R&D. Amortisation of technology intangibles and impairments included in R&D. Upon approval, reclassified as product intangibles. 7 Intangible assets amortisation and impairment Reclassification of 2006 expenses CHF m 2006 Amortisation Impairment Total Cost of sales - Pharmaceuticals Diagnostics Total ,059 Research and development - Pharmaceuticals Diagnostics Total Grand Total ,174 8

5 Intangible assets amortisation and impairment Impact on 2006 income statement Sales 42, ,041 Royalties & other op. income 1, ,391 Cost of sales -10,616-1,059-1, ,285 Marketing & distribution -10,856-1, ,954 Research & development -6, ,365 General & administration -2, ,098 Amortisation & impairment of IA -1,174 1, Operating profit 11, ,730 Product intangibles Technology and development intangibles 9 Intangible assets Amortisation and impairment Alliance and royalty expenses Phase IV and similar costs Unrealised profits in inventories Appendices: Impact of changes 10

6 Alliances and royalty expenses Increasing magnitude and importance Number of transactions increasing, as is their complexity. Alliance transactions are an integral part of Roche s business model. Nature of expenses becoming more complex. Royalties, including pass-throughs, back-royalties and other true-ups. Profit-sharing agreements, either at a gross profit or operating profit level, including Genentech collaboration profit sharing with Biogen Idec (MabThera), OSI (Tarceva) and Novartis (Xolair). Expenses currently appear in several different places. Cost of Sales: includes royalty expenses on product sales, plus Bonviva gross profit share. M&D: includes Genentech collaboration sharing G&A: includes royalty expenses on royalty income, notably MabThera royalties paid by Genentech to Biogen Idec on the royalties paid by Roche to Genentech, as well as back royalties and other true-ups. 11 Alliances and royalty expenses Income statement geography is an open topic Current accounting and reporting rules. No specific guidance under IFRS. International practice varies and is not always transparent. Issues with current reporting at Roche. All deals have specific aspects that need to be considered. Some of the deals are quite complex. Expenses are reported in different lines of the income statement. Amounts are increasingly material. but readers need a practical approach. The objective is to communicate what is reported and where it is reported. A simple and consistent approach is needed. Include all alliance and collaboration expenses as part of cost of sales. Royalty income shown net of pass-through royalty expenses. 12

7 Alliances and royalty expenses Impact on 2006 income statement Sales 42, ,041 Royalties & other op. income 1, ,391 Cost of sales -10,616-1,059-1, ,285 Marketing & distribution -10,856-1, ,954 Research & development -6, ,365 General & administration -2, ,098 Amortisation & impairment of IA -1,174 1, Operating profit 11, ,730 Genentech collaboration profit sharing Pass-through royalties on royalty income Royalty exp. on royalty income, incl. back royalties 13 Cost of sales Full Year 2006 CHF m Group Manufacturing cost of goods sold and period costs -8,317 Royalty expenses -2,292 Collaboration & profit-sharing agreements -1,546 Amortisation of intangible assets -941 Impairment of property, plant & equipment -71 Impairment of intangible assets -118 Total -13,285 14

8 Intangible assets Amortisation and impairment Alliance and collaboration expenses Phase IV and similar costs Unrealised profits in inventories Appendices: Impact of changes 15 Phase IV and similar costs Another area of increasing importance Nature of Phase IV and similar costs. Post-approval clinical studies and other trials. Performed after approval and related to the approved indication. Not necessary for obtaining approval, but often important for optimising drug use. Often conducted to evaluate formulations and interactions with other drugs. Dose-response and safety studies are an important part of these. The associated operating costs of the Medical Affairs departments. Relates only the Pharmaceuticals Division. Research & Development or Marketing & Distribution? Carried out post-approval. Nature of activity clearly has a scientific purpose. Results of tests may have a value for product promotion. Phase IV trials are held to the same Good Clinical Practice (GCP) standards as registration studies. 16

9 Phase IV and similar costs Income statement geography is an open topic Current accounting and reporting rules. No specific guidance under IFRS. International practice varies and is not always transparent. Most US companies include this in R&D. Issues with current reporting at Roche. In current Roche reporting, some of these costs are in M&D and some in R&D, with some minor amounts in G&A. The amount of expenditure is increasing. The exact nature and need for trials varies from country to country. Split between M&D and R&D can be arbitrary. Again a practical approach is needed. A simple and consistent approach is needed. Include all Phase IV and similar costs in R&D. Both third-party costs and directly attributable internal costs. 17 Phase IV and similar costs Impact on 2006 income statement Sales 42, ,041 Royalties & other op. income 1, ,391 Cost of sales -10,616-1,059-1, ,285 Marketing & distribution -10,856-1, ,954 Research & development -6, ,365 General & administration -2, ,098 Amortisation & impairment of IA -1,174 1, Operating profit 11, ,730 Phase IV and similar costs in M&D Phase IV and similar costs in G&A 18

10 Intangible assets Amortisation and impairment Alliance and collaboration expenses Phase IV and similar costs Unrealised profits in inventories Appendices: Impact of changes 19 Unrealised profits in inventories Presentation in operating segment results Unrealised Profit in Inventories (UPI) Currently Genentech sells to Roche and Roche sells to Chugai. At any balance sheet date, a certain amount of inventory is on-hand at Roche that includes Genentech s profit (same for Chugai/Roche). This profit has to be eliminated on consolidation. Changes in internal reporting reflected in external segment results Previously this elimination was allocated to the originating operating segment. For internal purposes, the operating segments are managed and reported as separate entrepreneurial units. Once one segment has sold inventory to another it has completed its earnings activity. UPI is now eliminated as a consolidation entry at a Pharmaceuticals Division level. 20

11 Unrealised profits in inventories Impact on 2006 operating segment results CHF m Roche Pharma Pharma Genentech Chugai Division As originally published Operating profit 6,025 3, ,545 - including unrealised profits in inventories (114) (51) - (165) Restated Operating profit 6,139 4, ,710 Elimination of profit within division (165) Total 10, Intangible assets Amortisation and impairment Alliance and collaboration expenses Phase IV and similar costs Unrealised profits in inventories Appendices: Impact of changes 22

12 Appendix 1 Full year 2006 restated results 23 Income Statement Full Year 2006 Group Sales 42, ,041 Royalties & other op. income 1, ,391 Cost of sales -10,616-1,059-1, ,285 Marketing & distribution -10,856-1, ,954 Research & development -6, ,365 General & administration -2, ,098 Amortisation & impairment of IA -1,174 1, Operating profit 11, ,730 Product intangibles Technology and development intangibles Genentech collaboration profit sharing Pass-through royalties on royalty income Royalty exp. on royalty income, incl. back royalties 24

13 Income Statement Full Year 2006 Pharma Sales 33, ,294 Royalties & other op. income 1, ,209 Cost of sales -6, , ,032 Marketing & distribution -8,761-1, ,859 Research & development -5, ,590 General & administration -1, ,477 Amortisation & impairment of IA Operating profit 10, ,545 Product intangibles Technology and development intangibles Genentech collaboration profit sharing Pass-through royalties on royalty income Royalty exp. on royalty income, incl. back royalties 25 Income Statement Full Year 2006 Diagnostics Sales 8, ,747 Royalties & other op. income Cost of sales -3, ,253 Marketing & distribution -2, ,095 Research & development General & administration Amortisation & impairment of IA Operating profit 1, ,422 Product intangibles Technology and development intangibles Back royalties Pass-through royalties on royalty income 26

14 Operating profit margins Full Year 2006 Pharma CHF m Elimination Roche within Pharma Pharma Genentech Chugai Division Sales 33,294 20,666 9,125 3,503 As published Operating profit 10,545 6,025 3, % of sales 31.7 % 29.2 % 43.3 % 16.2 % Unrealised profits on inventories Restated Operating profit 10,545 6,139 4, % of sales 31.7 % 29.7 % 43.9 % 16.2 % 27 EBITDA margins Full Year 2006 Pharma CHF m Elimination Roche within Pharma Pharma Genentech Chugai Division Sales 33,294 20,666 9,125 3,503 As published EBITDA 12,168 7,030 4, % of sales 36.5 % 34.0 % 48.4 % 20.7 % Unrealised profits on inventories Restated EBITDA 12,168 7,144 4, % of sales 36.5 % 34.6 % 48.9 % 20.7 % 28

15 Appendix 2 Interim 2007 restated half-year results 29 Income Statement Half-Year 2007 Group Sales 22, ,827 Royalties & other op. income 1, ,158 Cost of sales -5, ,820 Marketing & distribution -5, ,559 Research & development -3, ,017 General & administration -1, ,112 Amortisation & impairment of IA Operating profit 7, ,477 Product intangibles Technology and development intangibles Genentech collaboration profit sharing Pass-through royalties on royalty income Royalty exp. on royalty income, incl. back royalties 30

16 Income Statement Half-Year 2007 Pharma Sales 18, ,268 Royalties & other op. income 1, ,070 Cost of sales -3, ,828 Marketing & distribution -4, ,469 Research & development -3, ,657 General & administration Amortisation & impairment of IA Operating profit 6, ,640 Product intangibles Technology and development intangibles Genentech collaboration profit sharing Pass-through royalties on royalty income Royalty exp. on royalty income, incl. back royalties 31 Income Statement Half-Year 2007 Diagnostics Sales 4, ,559 Royalties & other op. income Cost of sales -1, ,992 Marketing & distribution -1, ,090 Research & development General & administration Amortisation & impairment of IA Operating profit Product intangibles Technology and development intangibles Back royalties Pass-through royalties on royalty income 32

17 Operating profit margins Half-Year 2007 Pharma CHF m Elimination Roche within Pharma Pharma Genentech Chugai Division Sales 18,268 11,367 5,227 1,674 As published Operating profit 6,640 3,605 2, % of sales 36.3 % 31.7 % 51.7 % 20.0 % Unrealised profits on inventories Restated Operating profit 6,640 3,583 2, % of sales 36.3 % 31.5 % 56.4 % 20.0 % 33 EBITDA margins Half-Year 2007 Pharma CHF m Elimination Roche within Pharma Pharma Genentech Chugai Division Sales 18,268 11,367 5,227 1,674 As published EBITDA 7,424 4,079 2, % of sales 40.6 % 35.9 % 56.2 % 24.2 % Unrealised profits on inventories Restated EBITDA 7,424 4,057 3, % of sales 40.6 % 35.7 % 61.0 % 24.2 % 34

18 Appendix 3 Interim 2006 restated half-year results 35 Income Statement Half-Year 2006 Group Sales 19, ,849 Royalties & other op. income Cost of sales -4, ,159 Marketing & distribution -5, ,301 Research & development -3, ,378 General & administration -1, Amortisation & impairment of IA Operating profit 5, ,805 Product intangibles Technology and development intangibles Genentech collaboration profit sharing Pass-through royalties on royalty income Royalty exp. on royalty income, incl. back royalties 36

19 Income Statement Half-Year 2006 Pharma Sales 15, ,577 Royalties & other op. income Cost of sales -3, ,224 Marketing & distribution -4, ,280 Research & development -2, ,046 General & administration Amortisation & impairment of IA Operating profit 5, ,016 Product intangibles Technology and development intangibles Genentech collaboration profit sharing Pass-through royalties on royalty income Royalty exp. on royalty income, incl. back royalties 37 Income Statement Half-Year 2006 Diagnostics Sales 4, ,272 Royalties & other op. income Cost of sales -1, ,935 Marketing & distribution -1, ,021 Research & development General & administration Amortisation & impairment of IA Operating profit Product intangibles Technology and development intangibles Pass-through royalties on royalty income 38

20 Operating profit margins Half-Year 2006 Pharma CHF m Elimination Roche within Pharma Pharma Genentech Chugai Division Sales 15,577 9,670 4,223 1,684 As published Operating profit 5,016 3,054 1, % of sales 32.2 % 31.6 % 39.9 % 16.4 % Unrealised profits on inventories Restated Operating profit 5,016 3,036 1, % of sales 32.2 % 31.4 % 40.1 % 16.4 % 39 EBITDA margins Half-Year 2006 Pharma CHF m Elimination Roche within Pharma Pharma Genentech Chugai Division Sales 15,577 9,670 4,223 1,684 As published EBITDA 5,847 3,576 1, % of sales 37.5 % 37.0 % 45.4 % 21.1 % Unrealised profits on inventories Restated EBITDA 5,847 3,558 1, % of sales 37.5 % 36.8 % 45.5 % 21.1 % 40

21 Appendix 4 Operating performance Half-Year 2007 vs Operating performance Half-Year 2007 vs Group 2007 CHF m % sales 2007 vs local growth Sales 22, ,978 15% Royalties & other op inc 1, Cost of sales -6, M & D -4, R & D -4, G & A -1, % 12% 21% 25% 71% Operating profit 7, ,672 27% 42

22 Operating performance Half-Year 2007 vs Pharma 2007 CHF m % sales Sales 18, ,691 18% 2007 vs local growth Royalties & other op inc 1, Cost of sales -4, M & D -3, R & D -3, G & A % 17% 22% 23% 81% Operating profit 6, ,624 31% 43 Operating performance Half-Year 2007 vs Diagnostics 2007 CHF m % sales 2007 vs local growth Sales 4, % Royalties & other op inc Cost of sales -1, M & D -1, R & D G & A % 1% 6% 7% 57% Operating profit % 44

23 We Innovate Healthcare 45