REPORT. REPORT 2016 This is an interactive pdf, press the button to begin
ACTELION S MISSION: TREAT MORE PATIENTS WITH GROUNDBREAKING MEDICINES Actelion Ltd. is a leading biopharmaceutical company focused on the discovery, development and commercialization of innovative drugs for diseases with significant unmet medical needs. Actelion is a leader in the field of pulmonary arterial hypertension (PAH). Our portfolio of PAH treatments covers the spectrum of disease, from WHO Functional Class (FC) II through to FC IV, with oral, inhaled and intravenous medications. Although not available in all countries, Actelion also has treatments approved by health authorities for a number of specialist diseases including Type 1 Gaucher disease, Niemann-Pick type C disease, Digital Ulcers in patients suffering from systemic sclerosis, and mycosis fungoides type cutaneous T-cell lymphoma. 03 Financial Review 19 Interim Consolidated Financial Statements 2
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PROFIT AND LOSS Half Year variance Second Quarter variance (in CHF millions, except % variance and EPS) 2016 2015 CHF CER 2016 2015 CHF CER Sales Product sales 1,179 1,008 17% 13% 590 493 20% 15% Opsumit 378 208 82% 76% 200 113 77% 71% Tracleer 546 645-15% -18% 256 301-15% -19% Uptravi 90 - nm nm 56 - nm nm Other 165 155 6% 3% 78 79-0% -4% Core results Operating income 499 423 18% 11% 250 205 22% 14% Net income 440 357 23% 16% 224 172 30% 22% Diluted EPS 4.05 3.11 30% 23% 2.07 1.51 38% 29% US GAAP results Operating income 412 344 20% 12% 204 154 33% 22% Net income 361 287 25% 17% 182 128 42% 31% Diluted EPS 3.32 2.50 33% 23% 1.68 1.12 50% 38% CASH FLOW Half Year Second Quarter (in CHF millions) 2016 2015 2016 2015 Cash flow Operating cash flow 420 278 247 183 Capital expenditure (31) (11) (26) (5) Cash returned to shareholders (294) (596) (225) (596) Free cash flow 14 (540) (53) (483) CASH POSITION AND SHARES June 30, March 31, December 31, (in CHF millions) 2016 2016 2015 Cash position Net cash 418 472 405 Share count (million shares) Issued common shares 114.1 114.1 114.1 Treasury shares held 8.9 9.5 9.1 Outstanding equity instruments 4.7 5.6 5.9 Disclaimer and notes to this financial report: Actelion continues to measure, report and issue guidance on its core operating performance, which management believes more accurately reflects the underlying business performance. The Group believes that these non-gaap financial measurements provide useful supplementary information to investors. These non-gaap measures are reported in addition to, not as a substitute for, US GAAP financial performance. Constant Exchange Rates (CER) percentage changes are calculated by reconsolidating both the H1 2015 and H1 2016 results at constant currencies (the average monthly exchange rates for H1 2015). Rounding differences may occur nm = not meaningful Europe = EU28 and Switzerland 4
During the first six months of 2016, Actelion continued to deliver double digit sales and core operating income growth through excellent execution across the commercial organization and disciplined management of the business. Due to this continued strong performance and increased clarity on a number of factors, Actelion is upgrading its full-year 2016 financial guidance: the company is now confident that, barring unforeseen events, core operating income growth will be in the low-teen percentage range at CER. Product sales rose 13% at CER to 1,179 million Swiss francs driven by the continued growth of our PAH product portfolio led by the strong uptake of Opsumit and the very successful Uptravi launch in the United States where the product was introduced on January 4, 2016. With this strong performance along with the continued growth of Veletri, the transformation of Actelion s PAH portfolio is well underway with almost half of the second quarter 2016 sales stemming from its new outcome-based therapies. Core operating income increased by 11% at CER to 499 million Swiss francs. The strong sales performance was supported by increased investment, as the commercial organization launched Uptravi in the United States, prepared to launch Uptravi in Europe and beyond, and continued Opsumit and Veletri roll-outs in markets around the globe. Core R&D expenses increased to 21% of sales as the company is advancing its late-stage pipeline. The company also made significant progress by entering into Phase II clinical development with its new dual orexin receptor antagonist and Phase III with macitentan (Opsumit) in children with PAH. G&A expenses increased by 5% at CER. US GAAP operating income amounted to 412 million Swiss francs compared to 344 million Swiss francs in the first half of 2015, an increase of 12% at CER. Core net income amounted to 440 million Swiss francs resulting in core diluted earnings per share (EPS) of 4.05 Swiss francs, an increase of 16% and 23% at CER respectively compared to the first half of 2015. US GAAP net income amounted to 361 million Swiss francs resulting in diluted earnings per share (EPS) of 3.32 Swiss francs, an increase of 17% and 23% at CER respectively compared to the first half of 2015. Actelion s net cash position of 418 million Swiss francs at the end of June 2016 is almost unchanged since the start of the year as the company believes the current cash levels are appropriate to retain full financial flexibility in order to seize any external opportunities that would fit the company s strategy while meeting its strict financial criteria to ensure value creation for its shareholders. In the absence of any meaningful acquisition, operating cash flow of 420 million Swiss francs for the first six months of 2016 was almost fully dedicated to return cash to shareholders and manage dilution arising from stock-based compensation, as committed by the Board of Directors: Actelion paid an increased dividend of 1.50 Swiss franc per share (159 million Swiss francs), purchased 0.9 million second-line shares (135 million Swiss francs) and 0.8 million first-line shares (113 million Swiss francs). 5
SALES Sales by product Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Product sales Opsumit 378 208 82% 76% 200 113 77% 71% Tracleer 546 645-15% -18% 256 301-15% -19% Uptravi 90 - nm nm 56 - nm nm Veletri 48 38 24% 19% 24 19 24% 18% Ventavis 43 57-24% -27% 17 26-35% -37% Valchlor 18 12 49% 43% 9 7 24% 20% Zavesca 52 44 17% 15% 27 25 8% 6% Others 4 3 17% 22% 2 2 13% 15% Total product sales 1,179 1,008 17% 13% 590 493 20% 15% Actelion delivered an outstanding first half 2016, driven by a very strong Uptravi launch in the US and the continued successful uptake of Opsumit. The excellent performance of the company s outcome-based PAH portfolio is the result of consistently strong referrals of new PAH patients across markets, as well as an increase in the number of patients benefitting from double and triple combination PAH therapy. In the US, sales increased by 25% at CER, driven by the strong Uptravi launch, continued Opsumit momentum and ERA market share gains. European sales were 1% lower at CER, despite increased Opsumit uptake and Tracleer use in the digital ulcer indication, due to continued pricing pressure and market erosion from generics particularly in Spain. Sales in Japan increased by 20% at CER, mostly driven by very strong sales of Opsumit (launched in June 2015), Veletri and Zavesca (Japanese trade name Brazaves). Comparing average exchange rates for the first six months of 2016 to the first six months of 2015, the Swiss franc weakened against the US dollar, euro and Japanese yen, but strengthened - on average - against all other currencies, which resulted in a positive currency variance of 39 million Swiss francs. Sales by region Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Product sales by region United States 639 495 29% 25% 313 243 29% 25% Europe 322 318 1% -1% 158 155 1% -3% Japan 116 86 34% 20% 66 45 48% 29% Rest of the world 102 109-6% -3% 54 50 8% 10% Total product sales 1,179 1,008 17% 13% 590 493 20% 15% 6
PAH FRANCHISE Opsumit Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Sales by region United States 246 149 66% 60% 126 80 58% 53% Europe 82 46 79% 74% 44 25 74% 68% Japan 22 1 nm nm 14 1 nm nm Rest of the world 28 12 nm nm 16 7 nm nm Total 378 208 82% 76% 200 113 77% 71% Sales of Opsumit (macitentan) amounted to 378 million Swiss francs for the first six months of 2016, an increase of 76% at CER compared to the first six months of 2015. This increase continues to be driven by the uptake trajectory with commercial availability in over 30 countries. The strong increase in patients benefitting from Opsumit was driven by referral of treatment-naïve patients together with increased early combination with PDE-5 inhibitors, and some switching from Tracleer, notably in Japan. Tracleer Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Sales by region United States 207 249-17% -19% 89 115-23% -25% Europe 203 241-16% -18% 95 114-17% -20% Japan 80 74 8% -3% 45 38 18% 3% Rest of the world 57 81-31% -28% 28 34-18% -16% Total 546 645-15% -18% 256 301-15% -19% Sales of Tracleer (bosentan) amounted to 546 million Swiss francs for the first six months of 2016, a decrease of 18% at CER compared to the first six months of 2015. This decrease was mostly a consequence of lower volumes in countries where Opsumit is available, due to lower referrals of new patients as well as switches to Opsumit. Underlying volumes decreased globally by 16%. Tracleer sales were further impacted by increased generic bosentan competition, notably in Spain, continued pricing pressure in Europe and buying pattern variations in the US. Positively, Tracleer sales were supported by the digital ulcer indication in Europe and Japan and continued solid demand in markets where Opsumit is not yet available. Following the Pediatric Investigation Plan (PIP) compliance statement from the European Committee for Medicinal Products for Human Use (CHMP), applications for extension of the Supplementary Protection Certificate (SPC) were filed in 19 EU countries and have been granted in 15 of those, with 4 still pending. 7
Uptravi Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Sales by region United States 90 - nm nm 55 - nm nm Europe 0 - nm nm 0 - nm nm Japan - - - - Rest of the world 0 - nm nm 0 - nm nm Total 90 - nm nm 56 - nm nm Sales of Uptravi (selexipag) amounted to 90 million Swiss francs for the first six months of 2016. Approximately 60 million Swiss francs can be attributed to patient demand and 30 million Swiss francs to the build-up of the US inventory as 10 different presentations of the drug across the various doses were made available. Uptravi has been launched in the US since January 4, 2016 and in Germany since June 15, 2016. During the second quarter 2016, Uptravi also became available in France under a temporary cohort authorization of use ( ATU ) and in Canada for the private market segment. At the end of June, around 1,150 patients were using this outcomebased, oral selective IP receptor agonist. Veletri Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Sales by region United States 20 20 3% -0% 10 9 7% 4% Europe 11 6 nm nm 6 3 80% 74% Japan 13 10 22% 10% 6 5 20% 4% Rest of the world 3 3 17% 19% 2 1 23% 25% Total 48 38 24% 19% 24 19 24% 18% Sales of Veletri (epoprostenol for injection) amounted to 48 million Swiss francs for the first six months of 2016, an increase of 19% at CER compared to the first six months of 2015. This increase was mostly driven by increased market penetration, successful launches in additional markets and continued growth in Japan (where it is marketed as Epoprostenol ACT ). In March 2016, Actelion Japan was notified of an average 12% price cut for Veletri, effective March 1, 2016. At the end of June 2016, Veletri was available in 15 countries globally. Ventavis Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Sales by region United States 43 57-24% -27% 17 26-35% -37% Europe - - - - Japan - - - - Rest of the world - - - - Total 43 57-24% -27% 17 26-35% -37% Sales of Ventavis (iloprost) amounted to 43 million Swiss francs for the first six months of 2016, a decrease of 27% at CER compared to the first six months of 2015 due to competitive environment, including the availability of Uptravi. Underlying units decreased by 34%. 8
SPECIALTY PRODUCTS Valchlor Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Sales by region United States 17 11 56% 50% 9 7 27% 24% Europe 1 1-14% -17% 1 1-19% -23% Japan - - nm nm - - nm nm Rest of the world 0 - nm nm 0 - nm nm Total 18 12 49% 43% 9 7 24% 20% Sales of Valchlor (mechlorethamine) amounted to 18 million Swiss francs for the first six months of 2016, an increase of 43% at CER compared to the first six months of 2015. In the US, the company is continuing its efforts to establish Valchlor as an option in the treatment algorithm for early-stage mycosis fungoides, a type of Cutaneous T-Cell Lymphoma (MF-CTCL). In France, patients benefited from the drug under a temporary nominative authorization for use ( ATU ) program initiated during the second half of 2014. The regulatory dossier is currently under review with the European Medicines Agency (under the trade name Ledaga ). Zavesca Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Sales by region United States 16 10 54% 49% 7 6 17% 14% Europe 24 24 0% -2% 12 12 4% -0% Japan 2 1 33% 19% 1 1 43% 25% Rest of the world 10 9 16% 22% 6 6 4% 7% Total 52 44 17% 15% 27 25 8% 6% Sales of Zavesca (miglustat) amounted to 52 million Swiss francs for the first six months of 2016, an increase of 15% at CER compared to the first six months of 2015. Sales in the US were strong due to a relatively low prior year base as a consequence of last year s inventory adjustment. The global number of patients receiving therapy grew by 5% compared to the first half of 2015, driven by a 14% increase in Niemann-Pick type C demand ex-us. In Europe, sales decreased by 2% mainly due to the launch of generic miglustat (approved for the type 1 Gaucher disease indication only), which has become commercially available in Spain, Sweden and the Czech Republic. Sales in Japan were 19% higher driven by increased patient demand in the Niemann-Pick type C indication. 9
OPERATING EXPENSES Operating expenses break down as follows: Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Operating expenses Core cost of sales 92 94-2% -4% 46 43 7% 5% Core research and development 250 191 31% 30% 124 94 32% 31% Core SG&A 338 300 13% 11% 169 151 13% 10% Core operating expenses 681 585 16% 15% 340 288 18% 16% Depreciation of assets 16 18-12% -12% 8 9-10% -11% Amort. of acquired intangible assets 28 27 3% 2% 14 12 16% 15% Stock-based compensation 32 27 18% 18% 16 15 8% 8% Milestone payment 2 11 nm nm 2 11 nm nm Doubtful debt movements 0 5 nm nm 0 5 nm nm Accretion expenses (benefits) 9 (7) nm nm 6 1 nm nm Other expenses (0) 0 nm nm (0) (0) nm nm Non-core operating expenses 87 82 6% 6% 46 53-14% -14% US GAAP operating expenses 767 667 15% 14% 386 341 13% 12% Cost of sales Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Cost of sales Royalty expenses 56 63-11% -14% 31 28 11% 7% Cost of goods sold 36 31 16% 16% 16 15 1% 2% Core cost of sales 92 94-2% -4% 46 43 7% 5% Non-core cost of sales 9 (7) nm nm 6 1 nm nm US GAAP cost of sales 101 88 15% 13% 52 45 17% 15% Core cost of sales for the first six months of 2016 decreased by 4% at CER to 92 million Swiss francs, despite an increase in sales of 13% at CER. Royalties in the first half of 2016 were lower, mainly due to ceased royalty obligations, following the patent expiry of Tracleer in the US (late November 2015) and Ventavis (mid-march 2015). Royalties were also lower due to a favorable product mix with a low single-digit royalty rate paid on Opsumit sales compared to a high single-digit rate paid on Tracleer sales in markets where Tracleer is still under patent protection and despite a mid-teen royalty rate on Uptravi. Non-core cost of sales relate to the accretion expense for the contingent consideration for Valchlor in H1 2016 compared to a positive impact in H1 2015 due to adjusted sales projections. 10
Research and development ( R&D ) expenses Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Core R&D expenses 250 191 31% 30% 124 94 32% 31% Depreciation 11 13-11% -12% 6 6-9% -9% Stock-based compensation 14 12 19% 19% 6 6 7% 7% Milestone payment 2 11 nm nm 2 11 nm nm US GAAP R&D expenses 1 277 227 22% 22% 138 117 18% 17% Amort. of acquired intangible assets 3 1 nm nm 2 1 nm nm US GAAP R&D expenses 280 228 23% 22% 139 118 18% 18% 1 As reported in the consolidated income statements, excluding amortization of acquired intangible assets. Core R&D expenses amounted to 250 million Swiss francs, an increase of 30% at CER. This increase was driven by higher clinical trial expenses, mainly driven by the strong recruitment in the Phase III OPTIMUM study (ponesimod in multiple sclerosis announced in April 2015) and the Phase III IMPACT study (Cadazolid in Clostridium difficile associated diarrhea), in order to complete enrollment before year-end. Core R&D expenditure represented 21% of product sales. Actelion will continue to focus on carefully balancing investments so as to ensure future growth and delivery of appropriate shareholder returns. US GAAP R&D expenses included depreciation of 11 million Swiss francs (relating to the research building and laboratory equipment) and stock-based compensation expenses of 14 million Swiss francs. Selling, general and administrative ( SG&A ) expenses Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER SG&A expenses Marketing, selling and distribution 243 210 16% 13% 122 106 15% 11% General and administrative 95 89 6% 5% 48 44 8% 6% Core SG&A expenses 338 300 13% 11% 169 151 13% 10% Depreciation 5 6-12% -13% 3 3-13% -14% Stock-based compensation 18 15 17% 17% 9 9 8% 8% Doubtful debt movements 0 5 nm nm 0 5 nm nm Other 0 - nm nm - - nm nm US GAAP SG&A expenses 1 362 326 11% 9% 182 167 9% 6% Amort. of acquired intangible assets 25 26-4% -4% 12 11 8% 7% US GAAP SG&A expenses 386 351 10% 8% 194 179 9% 6% 1 As reported in the consolidated income statements, excluding amortization of acquired intangible assets. Core marketing, selling and distribution expenses amounted to 338 million Swiss francs, an increase of 11% at CER. This increase was driven mostly by costs relating to launch activities of Uptravi in the United States, Canada, Germany and other anticipated European launches. Additionally, the company is continuing the roll-out of Opsumit and Veletri in various markets around the globe. G&A expenses increased by 5%. US GAAP SG&A expenses included depreciation of 5 million Swiss francs and stock-based compensation expenses of 18 million Swiss francs. 11
OPERATING RESULTS Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Operating results Product sales 1,179 1,008 17% 13% 590 493 20% 15% Core operating expenses (681) (585) 16% 15% (340) (288) 18% 16% Core operating income 499 423 18% 11% 250 205 22% 14% Contract revenue 0 3 nm nm 0 2 nm nm Non core operating expenses (87) (82) 6% 6% (46) (53) -14% -14% US GAAP operating income 412 344 20% 12% 204 154 33% 22% Core operating income amounted to 499 million Swiss francs, an increase of 11% or 47 million Swiss francs at CER. The weakening of the Swiss franc against the major currencies affecting Actelion s performance had a positive impact of 29 million Swiss francs on core operating income. Non core operating expenses were stable excluding accretion effects and milestone payments. US GAAP operating income amounted to 412 million Swiss francs, an increase of 12% at CER. NET RESULTS Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Net results Core operating income 499 423 18% 11% 250 205 22% 14% Core financial results 3 (17) nm nm 4 (10) nm nm Core income tax (62) (48) nm nm (30) (23) nm nm Core net results 440 357 23% 16% 224 172 30% 22% Core net income amounted to 440 million Swiss francs, an increase of 16% at CER. Core financial result amounted to 3 million Swiss francs related to foreign exchange gains. Actelion aims to minimize the volatility of the company s financial results and uses forward contracts to hedge transaction exposures arising from foreign currency cash flows and cash positions held in foreign currencies. Actelion no longer incurs interest expense as the company is debt-free. Core tax expense amounted to 62 million Swiss francs, which translates into an effective core tax rate of 12.3%. This core tax rate is slightly higher than in 2015 due to higher profits outside of Switzerland and is expected to remain around this level for the remainder of the year. Half Year variance Second Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Net results Operating results 412 344 20% 12% 204 154 33% 22% Financial results 3 (17) nm nm 4 (10) nm nm Income tax (55) (42) nm nm (26) (18) nm nm Net results 360 284 26% 18% 182 125 45% 34% Net loss attr. to the nonctrl. interests 1 3 nm nm 1 3 nm nm US GAAP net results 361 287 25% 17% 182 128 42% 31% Below the operating line, US GAAP results do not materially differ from core results. 12
EARNINGS PER SHARE (EPS) Half Year variance Second Quarter variance (in CHF millions, unless otherwise indicated) 2016 2015 CHF CER 2016 2015 CHF CER Net results Core net results 440 357 23% 16% 224 172 30% 22% US GAAP net results 361 287 25% 17% 182 128 42% 31% Basic earnings per share Weighted avg no. of shares (in mm) 105.1 110.5 nm nm 105.3 110.0 nm nm Core basic EPS (in CHF) 4.18 3.23 29% 22% 2.13 1.56 36% 27% US GAAP basic EPS (in CHF) 3.43 2.60 32% 23% 1.73 1.16 49% 37% Diluted earnings per share Weighted avg no. of shares (in mm) 108.6 114.7 nm nm 108.2 114.1 nm nm Core diluted EPS (in CHF) 4.05 3.11 30% 23% 2.07 1.51 38% 29% US GAAP diluted EPS (in CHF) 3.32 2.50 33% 23% 1.68 1.12 50% 38% The increase in core and US GAAP EPS was driven by higher net income and the decrease in number of common shares. The average share count for basic EPS decreased by 5.4 million shares due to the second-line share repurchase program. The average share count for diluted EPS decreased by 6.1 million shares as the average number of dilutive instruments decreased by 0.7 million shares despite an increase in the average share price (145 Swiss francs per share in H1 2016 compared to 119 Swiss francs in H1 2015). IMPACT OF FOREIGN EXCHANGE RATES ON SALES AND OPERATING RESULTS Actelion s exposure to foreign currency movements affecting its sales and operating results as expressed in Swiss francs is summarized in the table below. Half Year variance variance (in CHF millions, except % variance) 2016 2015 CHF CHF % CER CER % Core operating results Product sales 1,179 1,008 171 17% 132 13% Operating expenses 681 585 95 16% 85 15% Operating income 499 423 76 18% 47 11% Net income 440 357 82 23% 57 16% US GAAP results Revenues 1,180 1,011 169 17% 130 13% Operating expenses 767 667 100 15% 92 14% Operating income 412 344 69 20% 40 12% Net income 361 287 73 25% 48 17% As a result of the weakening of the Swiss franc against the main currencies that the company operates, foreign exchange rates had for the first half year 2016 a positive net impact of 39 million Swiss francs on sales (US dollar 22 million, euro 9 million and Japanese yen 12 million Swiss francs) and 29 million Swiss francs on core operating income (US dollar 16 million, euro 7 million and Japanese yen 7 million Swiss francs). 13
CASH FLOW AND CASH POSITION Operating cash flow Half Year Second Quarter (in CHF millions) 2016 2015 2016 2015 Operating cash flow Net results 360 284 182 125 Depreciation and amortization 44 45 22 21 Stock-based compensation 32 27 16 15 Other non cash items 6 (41) 15 (15) Funds from operations 442 316 235 146 Net change in trade and other receivables (11) (58) 16 2 Net change in trade and other payables (6) (10) 3 (6) Net change in other operating assets and liabilities (34) (2) (16) 25 Decrease (increase) in net working capital (51) (71) 2 21 Decrease (increase) in deferred taxes 28 32 10 16 Operating cash flow 420 278 247 183 Operating cash flow amounted to 420 million Swiss francs for the first six months of 2016. The strong underlying business performance resulted in funds from operations of 442 million Swiss francs. Working capital increased by 51 million Swiss francs, driven by an increase of 11 million Swiss francs in trade and other receivables due to strong sales. Cash collection remained solid with days of sales outstanding (DSO) at 53 days. Deferred tax net positions decreased by 28 million Swiss francs mainly driven by the utilization of net operating losses in the US and Switzerland. Free cash flow Half Year Second Quarter (in CHF millions) 2016 2015 2016 2015 Free cash flow Operating cash flow 420 278 247 183 Acquisition of tangible, intangible and other assets (31) (11) (26) (5) Acquisition of businesses (2) (1) (1) (1) Operating free cash flow 387 266 221 178 Second-line share repurchase (135) (454) (66) (454) Dividend (159) (142) (159) (142) First-line share purchase (113) (261) (76) (100) Proceeds from exercise of stock options 19 61 13 38 Other items 14 (10) 14 (3) Free cash flow 14 (540) (53) (483) Free cash flow reconciles the net cash position between the opening and closing period. In the absence of any meaningful acquisition, operating cash flow was fully dedicated to return cash to shareholders and to manage dilution arising from stock-based compensation, as the company believes that cash levels around 400 million Swiss francs are appropriate to retain full financial flexibility. The company paid a dividend of 159 million Swiss francs, purchased 0.9 million second-line shares for a consideration of 135 million Swiss francs (including withholding tax) and also acquired 0.8 million first-line shares for a consideration of 113 million Swiss francs. 14
Net cash position The net cash position amounted to 418 million Swiss francs on June 30, 2016 and breaks down by currency as follows: June 30, Closing rate (CHF millions unless otherwise indicated) 2016 in % against CHF Cash position by currency Swiss franc 97 23% - US dollar 115 27% 1 USD = 0.98 Euro 115 28% 1 EUR = 1.09 Japanese yen 32 8% 100 JPY = 0.95 Other foreign currencies 58 14% - Total net cash position 418 100% - BALANCE SHEET June 30, March 31, December 31, (in CHF millions) 2016 2016 2015 Assets Cash position 1 418 472 405 Trade and other receivables, net 447 452 427 Other current assets 185 166 131 Tangible assets 340 343 348 Intangible assets 408 401 414 Goodwill 134 134 134 Other non-current assets 52 52 56 Total assets 1,985 2,021 1,915 Liabilities and shareholders' equity Other current liabilities 467 427 421 Other non-current liabilities 175 171 179 Total liabilities 642 598 600 Share capital and accumulated reserves 2,522 2,632 2,455 Treasury shares (1,175) (1,206) (1,137) Total Actelion's shareholders' equity 1,347 1,426 1,318 Noncontrolling interests Equity attributable to noncontrolling interests (4) (3) (3) Total equity 1,343 1,423 1,315 Total liabilities and equity 1,985 2,021 1,915 1 Cash position includes cash, cash equivalents and short-term deposits. There are no significant changes in the balance sheet which continues to be strong with a net cash position of 418 million Swiss francs ensuring full financial flexibility. 15
ACTELION SHARES The movement of Actelion treasury shares is shown in the table below: First-line Second-line Total Average price Treasury shares (numbers in thousands, except where indicated) treasury shares treasury shares treasury shares (in CHF) (in CHF million) Treasury shares - total December 31, 2015 2,988 6,072 9,060 125.55 1,137 Acquisition of treasury shares Q1 264 445 709 136.69 97 Outgoing shares Q1 (253) - (253) 125.06 (29) March 31, 2015 2,998 6,517 9,515 126.70 1,206 Acquisition of treasury shares Q2 498 428 926 153.64 142 Outgoing shares Q2 (1,499) - (1,499) 115.34 (173) June 30, 2016 1,998 6,945 8,943 131.39 1,175 The movement in outstanding dilutive instruments is shown in the table below: ESOP RSU PSU Total Issued Equity (numbers in thousands, except %) shares Overhang Dilutive instruments and equity overhang Outstanding dilutive instruments Dec. 31, 2015 2,884 1,523 1,454 5,862 114.1 5.1% Grants - 350 309 659 Exercised / Vesting (422) (660) (666) (1,748) Forfeited (1) (22) (16) (39) Outstanding dilutive instruments Jun. 30, 2016 2,462 1,191 1,080 4,733 114.1 4.1% 16
RECONCILIATION US GAAP TO CORE RESULTS FOR THE FIRST HALF 2016 (in CHF millions, except per share amounts and EPS) US GAAP results Depreciation, amortization, impairment Stock-based compensation Doubtful debt movements Milestones or contract Accretion expense Core results Net revenue Product sales 1,179 - - - - - 1,179 Contract revenue 0 - - - (0) - - Total net revenue 1,180 - - - (0) - 1,179 Operating (expenses) Cost of sales (101) - - - - 9 (92) Research and development (277) 11 14-2 - (250) Selling, general and administration (362) 5 18 0 - - (338) Amortization of acquired intangible assets (28) 28 - - - - - Total operating (expenses) (767) 44 32 0 2 9 (681) Operating results 412 44 32 0 2 9 499 Total financial results 3 - - - - - 3 Income before income tax benefit (expense) 415 44 32 0 2 9 501 Income tax benefit (expense) (55) (4) (2) (0) (0) (1) (62) Noncontrolling interest 1 - - - (1) - - Net results 361 40 30 0 1 8 440 Diluted net income (loss) per share 3.32 0.37 0.27 0.00 0.01 0.07 4.05 Weighted-average number of common shares 108.578 108.578 RECONCILIATION US GAAP TO CORE RESULTS FOR THE SECOND QUARTER 2016 (in CHF millions, except per share amounts and EPS) US GAAP results Depreciation, amortization, impairment Stock-based compensation Doubtful debt movements Milestones or contract Accretion expense Core results Net revenue Product sales 590 - - - - - 590 Contract revenue 0 - - - (0) - - Total net revenue 590 - - - (0) - 590 Operating (expenses) Cost of sales (52) - - - - 6 (46) Research and development (138) 6 6-2 - (124) Selling, general and administration (182) 3 9 0 - - (169) Amortization of acquired intangible assets (14) 14 - - - - - Total operating (expenses) (386) 22 16 0 2 6 (340) Operating results 204 22 16 0 2 6 250 Total financial results 4 - - - - - 4 Income before income tax benefit (expense) 208 22 16 0 2 6 254 Income tax benefit (expense) (26) (2) (1) (0) (0) (0) (30) Noncontrolling interest 1 - - - (1) - - Net results 182 20 15 0 1 6 224 Diluted net income (loss) per share 1.68 0.19 0.14 0.00 0.01 0.05 2.07 Weighted-average number of common shares 108.243 108.243 17
QUARTERLY RESULTS Q3 2015 Q4 2015 Q1 2016 Q2 2016 (in CHF millions) three months three months three months three months US GAAP Operating results Net revenue 515 520 590 590 Operating expenses (325) (397) (381) (386) Operating income 189 122 208 204 Financial results (2) (1) (1) 4 Income tax results (23) (22) (29) (26) Noncontrolling interest 0 1 0 1 Net results 165 100 178 182 Core operating results Product sales 514 519 589 590 Operating expenses (286) (357) (341) (340) Operating income 228 163 249 250 Financial results (2) (1) (1) 4 Income tax results (24) (28) (32) (30) Net results 203 133 215 224 18
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CONSOLIDATED INCOME STATEMENTS Six months ended June 30, (in CHF thousands, except per share amounts) Notes 2016 2015 (unaudited) (unaudited) Net revenue Product sales 15 1,179,294 1,007,883 Contract revenue 15 261 2,723 Total net revenue 1,179,555 1,010,606 Operating (expenses) 1 Cost of sales 2 (100,560) (87,725) Research and development (277,389) (226,503) Selling, general and administration (361,633) (325,699) Amortization of acquired intangible assets (27,512) (26,827) Total operating (expenses) (767,094) (666,754) Operating income 412,461 343,852 Interest income (expense), net 458 (5,545) Other financial income (expense), net 7 2,124 (11,838) Total financial income (expense) 2,582 (17,383) Income before income tax benefit (expense) 415,043 326,469 Income tax benefit (expense) (55,248) (41,977) Net income 359,795 284,492 Less: Net loss attributable to the noncontrolling interests 915 2,933 Net income attributable to Actelion's shareholders 360,710 287,425 Basic net income per share attributable to Actelion's shareholders 5 3.43 2.60 Weighted-average number of common shares (in thousands) 105,124 110,480 Diluted net income per share attributable to Actelion's shareholders 5 3.32 2.50 Weighted-average number of common shares (in thousands) 108,578 114,741 1Includes stock-based compensation as follows: Research and development (13,843) (11,587) Selling, general and administration (18,080) (15,390) Total stock-based compensation (31,923) (26,977) 2 Excludes amortization of intangible assets as presented separately. The accompanying notes form an integral part of these consolidated financial statements. 20
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Six months ended June 30, (in CHF thousands) 2016 2015 (unaudited) (unaudited) Net income 359,795 284,492 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 6,739 (28,633) Change of unrecognized components of net periodic benefit costs - (5,482) Amortization of components of net periodic benefit costs 796 947 Other comprehensive income (loss), net of tax 7,535 (33,168) Comprehensive income 367,330 251,324 Less: Comprehensive loss attributable to noncontrolling interests 915 2,933 Comprehensive income attributable to Actelion's shareholders 368,245 254,257 The accompanying notes form an integral part of these consolidated financial statements. 21
CONSOLIDATED BALANCE SHEETS (in CHF thousands, except number of shares) Notes June 30, 2016 December 31, 2015 ASSETS (unaudited) Current assets Cash and cash equivalents 6 418,406 404,892 Trade and other receivables, net 447,117 427,223 Inventories 8/9 121,026 62,107 Other current assets 7 64,054 68,828 Total current assets 1,050,603 963,050 Noncurrent assets Property, plant and equipment, net 339,976 348,277 Intangible assets, net 408,190 413,542 Goodwill 2 134,096 134,494 Deferred tax assets 25,374 39,159 Other noncurrent assets 26,734 16,415 Total noncurrent assets 934,370 951,887 TOTAL ASSETS 1,984,973 1,914,937 LIABILITIES Current liabilities Trade and other payables 71,021 83,878 Accrued expenses 9 352,297 302,729 Other current liabilities 7 43,808 34,375 Total current liabilities 467,126 420,982 Noncurrent liabilities Pension liability 62,353 67,204 Contingent considerations 2 87,164 83,759 Other noncurrent liabilities 25,266 27,979 Total noncurrent liabilities 174,783 178,942 Total liabilities 641,909 599,924 EQUITY Actelion's shareholders' equity 12 Common shares (par value CHF 0.50 per share, authorized 154,120,077 and 154,120,627; issued 114,128,427 shares in 2016 and 2015, respectively) 57,064 57,064 Accumulated profit 2,695,935 2,636,931 Treasury shares, at cost (1,174,972) (1,137,399) Accumulated other comprehensive income (loss) 13 (231,260) (238,795) Total Actelion's shareholders equity 1,346,767 1,317,801 Equity attributable to noncontrolling interests (3,703) (2,788) Total equity 1,343,064 1,315,013 TOTAL LIABILITIES AND EQUITY 1,984,973 1,914,937 The accompanying notes form an integral part of these consolidated financial statements. (audited) 22
CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, (in CHF thousands) 2016 2015 (unaudited) (unaudited) Cash flow from operating activities Net income 359,795 284,492 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 43,705 45,177 Stock-based compensation, incl. treasury shares to members of Board of Directors 32,401 27,441 Excess tax benefits from share-based payment arrangements (11,533) (10,538) Deferred taxes 28,354 31,661 Deferred revenue (282) (778) (Gains) Losses on derivative instruments (2,299) (39,229) Interest expense on bonds - 5,987 Accretion expense (benefit) on contingent considerations 8,517 (6,658) Changes in operating assets and liabilities: Trade and other receivables (11,063) (58,376) Inventories (58,930) 5,953 Trade and other payables (5,546) (9,696) Accrued expenses 53,975 (16,834) Changes in other operating cash flow items (17,510) 18,990 Net cash flow provided by (used in) operating activities 419,584 277,592 Cash flow from investing activities Purchase of property, plant and equipment (8,124) (8,303) Purchase of intangible assets (22,705) (2,222) Acquisition of a business, incl. contingent consideration payments (2,036) (1,095) Net cash flow provided by (used in) investing activities (32,865) (11,620) Cash flow from financing activities Dividend payment (158,510) (142,429) Payments on capital leases - (3) Proceeds from exercise of stock options, net of expense 19,303 60,776 Purchase of treasury shares (248,019) (714,339) Excess tax benefits from share-based payment arrangements 11,533 10,538 Contributions from noncontrolling interests' owners - 1,136 Net cash flow provided by (used in) financing activities (375,693) (784,321) Net effect of exchange rates on cash and cash equivalents 2,488 (21,847) Net change in cash and cash equivalents 13,514 (540,196) Cash and cash equivalents at beginning of period 404,892 1,204,958 Cash and cash equivalents at end of period 418,406 664,762 The accompanying notes form an integral part of these consolidated financial statements. 23
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Noncontrolling Actelion's shareholders interests Common shares Additional Accum. other Equity attrib. to (in CHF thousands, except number of shares) Shares Amount paid-in capital Accum. profit Treasury shares comprehensive income (loss) noncontrolling interests Total equity At January 1, 2015 111,128,427 57,064-2,359,573 (287,701) (208,513) - 1,920,423 Comprehensive income (loss) 1 : Net income - - - 287,425 - - (2,933) 284,492 Other comprehensive income (loss) - - - - - (33,168) - (33,168) Comprehensive income (loss) 1 - - - 287,425 - (33,168) (2,933) 251,324 Excess tax benefits from share-based payments - - 10,538 - - - - 10,538 Transactions in treasury shares (4,116,146) - 105,095 (268,749) (573,540) - - (737,194) Stock-based compensation expense - - 26,796 - - - - 26,796 Dividend payment - - (142,429) - - - - (142,429) Contributions from owners - - - - - - 1,136 1,136 At June 30, 2015 (unaudited) 107,012,281 57,064-2,378,249 (861,241) (241,681) (1,797) 1,330,594 Comprehensive income (loss) 1 : Net income - - - 264,434 - - (991) 263,443 Other comprehensive income (loss) - - - - - 2,886-2,886 Comprehensive income (loss) 1 - - - 264,434-2,886 (991) 266,329 Excess tax benefits from share-based payments - - (473) - - - - (473) Transactions in treasury shares (1,943,364) - (29,106) (5,752) (276,158) - - (311,016) Stock-based compensation expense - - 29,540 - - - - 29,540 Dividend payment - - 39 - - - - 39 At December 31, 2015 (audited) 105,068,917 57,064-2,636,931 (1,137,399) (238,795) (2,788) 1,315,013 Comprehensive income (loss) 1 : Net income - - - 360,710 - - (915) 359,795 Other comprehensive income (loss) - - - - - 7,535-7,535 Comprehensive income (loss) 1 - - - 360,710-7,535 (915) 367,330 Excess tax benefits from share-based payments - - 7,182 - - - - 7,182 Transactions in treasury shares 116,880-119,816 (301,706) (37,573) - - (219,463) Stock-based compensation expense - - 31,512 - - - - 31,512 Dividend payment - - (158,510) - - - - (158,510) At June 30, 2016 (unaudited) 105,185,797 57,064-2,695,935 (1,174,972) (231,260) (3,703) 1,343,064 1 Comprehensive income (loss) is presented net of tax. The accompanying notes form an integral part of these consolidated financial statements. 24
NOTES TO THE UNAUDITED (CHF thousands, except share and per share amounts) NOTE 1. BASIS OF PRESENTATION The unaudited interim consolidated financial statements for Actelion Ltd ( Actelion or the Group ) have been prepared under Generally Accepted Accounting Principles in the United States ( US GAAP ) for interim financial information. Accordingly, such financial statements do not include all the information and footnotes required by US GAAP for annual financial statements. These interim financial statements should be read in conjunction with the audited consolidated financial statements of the Group for the year ended December 31, 2015. All US GAAP references relate to the Accounting Standards Codification ( ASC or Codification ) established by the Financial Accounting Standards Board ( FASB ) as the single authoritative source of US GAAP to be applied by non-governmental entities. All amounts are presented in Swiss francs ( CHF ), unless otherwise indicated. In addition, certain prior period amounts within the consolidated financial statements and related notes have been reclassified to conform to the current presentation. Use of estimates The preparation of financial statements in conformity with US GAAP requires management to make judgments, assumptions and estimates that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. On an on-going basis, management evaluates its estimates, including those related to revenue recognition for contract revenue, allowance for doubtful accounts, stock-based compensation, inventory and costs of goods sold, intangible assets, clinical trial and rebate accruals, impairment of indefinite lived intangibles including goodwill, provisions, contingent considerations arising from acquisitions, loss contingencies and income taxes. The Group bases its estimates on historical experience and on various market-specific and other relevant assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates. NOTE 2. ACQUISITIONS AND GOODWILL Ceptaris Therapeutics, Inc. In 2013, the Group acquired 100 percent of privately-held Ceptaris Therapeutics, Inc. ( Ceptaris ), a specialty pharmaceutical company based in Malvern, Pennsylvania, US. The transaction was recorded as a business combination in compliance with the requirements of ASC 805. In conjunction with the acquisition, the Group assumed contingent considerations related to achievement of future performance and commercialization milestones as well as a contingent consideration related to future royalty stream payments. The maximum undiscounted amount of the performance and commercialization milestones is US dollars ( USD ) 445 million as of June 30, 2016. Since arising from the acquisition, the contingent considerations are re-measured at fair value at each reporting date using Level 3 inputs. The resulting fair value adjustments of the acquisition contingencies are included in cost of sales. Since denominated in USD, the contingent considerations are revalued at each reporting date. 25
As of June 30, 2016, the fair value of the contingent considerations amounts to CHF 91.4 million (USD 93.4 million). Thereof, CHF 4.2 million (USD 4.4 million) are included in other current liabilities and CHF 87.2 million (USD 89 million) are disclosed as contingent considerations in the consolidated balance sheet. The table below states the changes in the contingent considerations for the six months ended June 30, 2016: December 31, 2015 Contingent consideration expense Settlements Foreign currency translation June 30, 2016 USD CHF USD CHF USD CHF CHF USD CHF 88,006 87,586 7,480 7,309 (2,082) (2,036) (1,431) 93,404 91,427 In determining the fair value of the contingent considerations the Group evaluates probabilities and timing of milestone events occurrence. Further, management develops cash flow projections on expected net revenues and royalty payments, which are then deferred, probability-weighted and adjusted for the time value of money in order to derive their reporting date fair value. As of June 30, 2016, the Group applied a discount rate of 8% for the contingent consideration arising from the royalty streams. This rate corresponds to the weighted-average costs of capital ( WACC ) and is calculated by weighting the required returns for interest-bearing debt and common equity capital in proportion to their estimated percentages in an expected capital structure. Management believes that the WACC appropriately captures a market participant s view of the risk associated with the expected contingent consideration payments because such payments are impacted by broader, non-diversifiable industry and business risks which are not completely captured in developing the probability weightedpayment estimates. Further, the Group used a discount rate of 5.3% for determination of the fair value of the contingent consideration related to the commercialization milestones. This discount rate corresponds to the global market participants required return on debt capital considered in the WACC calculation, which management believes is equivalent to the market participant s costs of borrowing. The following table provides the significant unobservable inputs applied on the fair value measurement of the contingent considerations for the periods presented: Assumptions Level 3 fair value measurement Valuation technique Unobservable input June 30, 2016 December 31, 2015 Probability of performance milestones' payments 0% 0% Probability of commercialization milestones 0%-90% 0%-90% Contingent considerations Probability of royalty payments 100% 100% arising from acquisitions Discounted cash flows Expected period of payments 2016-2028 2016-2028 Discount rate commercialization milestones 5.3% 5.9% Discount rate 8% 9% If the actual results deviate significantly from the developed projections, the net income of the Group may be adversely affected in future periods. In addition, an increase in the probability of performance milestone payments or a significant decrease in the discount rate could lead to a significantly higher fair value measurement of the contingent considerations in the period of revaluation. None of the changes in the unobservable inputs would lead to a change of the current maximum undiscounted amount of the performance milestones contingencies of USD 445 million. If the performance-based milestone for 2016 is not achieved, the maximum undiscounted amount of the performance milestones contingencies will be decreased to USD 395 million as of December 31, 2016. Goodwill Except for the effect of foreign currency translation, the net carrying amount of goodwill has not been adjusted in the current reporting period: Balance at January 1 Translation effects Balance at June 30 134,494 (398) 134,096. 26
NOTE 3. NONCONTROLLING INTERESTS AND VARIABLE INTEREST ENTITIES Vaxxilon Ltd ( Vaxxilon ) In 2015, the Group established a new majority owned company, Vaxxilon Ltd., which aims to discover, develop, and commercialize synthetic carbohydrate vaccines. Vaxxilon was incorporated under the laws of Switzerland together with the Max Planck Society ( MPS ), a publicly funded non-profit organization in Munich, Germany, and Seeberger Science GmbH, a private company in Kleinmachnow, Germany. The Group is the principal investor and majority shareholder holding 73.9% of the voting interests of the company. Vaxxilon has licensed exclusive rights to multiple preclinical vaccine candidates and additional technologies from Max-Planck Innovation GmbH ( MPI ), Munich, Germany, the technology transfer office of MPS. As of June 30, 2016, CHF 3.7 million net assets and CHF 0.4 million research and development ( R&D ) expenses allocated to minority shareholders have been disclosed as noncontrolling interests. Other In addition, there are other noncontrolling interests, which are variable interest entities ( VIE ), where the Group is the primary beneficiary and which are not material to the Group. Note 4. Licensing and collaborative agreements provides further information on the Group s involvement with VIEs. The following table reflects the effect of noncontrolling interests on the Group s equity: Equity attributable to Equity attributable to Total equity Actelion's shareholders noncontrolling interests At January 1, 2015 1,920,423-1,920,423 Net income of the Group 561,037-561,037 Net (loss) from noncontrolling interests (9,178) (3,924) (13,102) Contributions from owners - 1,136 1,136 Change from net income (loss) and contributions from owners 551,859 (2,788) 549,071 Other changes in equity 1 (1,154,481) - (1,154,481) At December 31, 2015 1,317,801 (2,788) 1,315,013 Net income of the Group 362,239-362,239 Net (loss) from noncontrolling interests (1,529) (915) (2,444) Change from net income (loss) and contributions from owners 360,710 (915) 359,795 Other changes in equity 1 (331,744) - (331,744) At June 30, 2016 1,346,767 (3,703) 1,343,064 1 Details on other changes in equity are provided in the consolidated statements of changes in equity. NOTE 4. LICENSING AND COLLABORATIVE AGREEMENTS Endo International plc ( Endo ) In February 2012, the Group entered into a long-term collaborative agreement with Auxilium Pharmaceuticals, Inc. ( Auxilium ) to develop, supply and commercialize Xiaflex for the potential treatment of Dupuytren s contracture and Peyronie s disease in Canada, Australia, Brazil and Mexico upon receipt of the respective regulatory approvals. During 2013 and 2014, the Group notified Auxilium that it would no longer pursue approval and commercialization in Mexico and Brazil. In January 2015, Endo acquired Auxilium and consequently assumed Auxilium s rights and obligations in conjunction with the collaboration with Actelion. In July 2016, the parties mutually agreed to terminate the collaboration for Canada and agreed upon certain transition services to be provided by Actelion until approval of the transfer of the drug identification 27