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
2
3
4
5
6
7
8
9
10
11
pricing and product initiatives of competitors;
legislative and regulatory developments and economic conditions;
delay or inability in obtaining regulatory approvals or bringing products to market;
fluctuations in currency exchange rates and general financial market conditions;
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;
increased government pricing pressures;
interruptions in production
loss of or inability to obtain adequate protection for intellectual property rights;
litigation;
loss of key executives or other employees; and
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
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
3rd party royalty expense on product sales
Gross profit sharing (Bonviva)
M&D
Genentech collaboration profit sharing expense (Biogen
Idec, OSI, Novartis), Phase IV and similar costs
R&D
Phase IV and similar costs
G&A
Royalty expense on royalty income, Back-royalties
(BioVeris), Phase IV and similar costs
Amortisation and impairment Intangibles for marketed products and also intangibles
related to technology & development
of Intangible Assets
Operating profit
4
2007 presentational changes to operating results
Restated Full Year 2006 income statement
CHF m
as
published
Intangible
Assets
Alliances
Phase IV
Restated
42,041
-
-
-
42,041
Royalties & other op. income
1,466
Cost of sales
-10,616
Marketing & distribution
-10,856
Research & development
-6,589
General & administration
-2,542
Amortisation & impairment of IA -1,174
-1,059
-115
1,174
-75
-1,610
1,260
425
-
642
-661
19
-
1,391
-13,285
-8,954
-7,365
-2,098
-
-
-
-
11,730
Sales
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
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”
¾ 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.
¾ Amortisation of technology intangibles and impairments included in R&D.
¾ Upon approval, reclassified as product intangibles.
7
Intangible assets – amortisation and impairment
Reclassification of 2006 expenses
2006
CHF m
Amortisation
Impairment
Total
- Pharmaceuticals
619
-
619
- Diagnostics
322
118
440
941
118
1,059
27
13
40
9
66
75
36
79
115
977
197
1,174
Cost of sales
Total
Research and development
- Pharmaceuticals
- Diagnostics
Total
Grand Total
8
Intangible assets – amortisation and impairment
Impact on 2006 income statement
CHF m
as
published
Intangible
Assets
Alliances
Phase IV
Restated
42,041
-
-
-
42,041
Royalties & other op. income
1,466
Cost of sales
-10,616
Marketing & distribution
-10,856
Research & development
-6,589
General & administration
-2,542
Amortisation & impairment of IA -1,174
-1,059
-115
1,174
-75
-1,610
1,260
425
-
642
-661
19
-
1,391
-13,285
-8,954
-7,365
-2,098
-
-
-
-
11,730
Sales
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
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.
¾ Include all alliance and collaboration expenses as part of cost of sales.
¾ Royalty income shown net of pass-through royalty expenses.
12
Alliances and royalty expenses
Impact on 2006 income statement
CHF m
as
published
Intangible
Assets
Alliances
Phase IV
Restated
42,041
-
-
-
42,041
Royalties & other op. income
1,466
Cost of sales
-10,616
Marketing & distribution
-10,856
Research & development
-6,589
General & administration
-2,542
Amortisation & impairment of IA -1,174
-1,059
-115
1,174
-75
-1,610
1,260
425
-
642
-661
19
-
1,391
-13,285
-8,954
-7,365
-2,098
-
-
-
-
11,730
Sales
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
Impairment of property, plant & equipment
Impairment of intangible assets
Total
-941
-71
-118
-13,285
14
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
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.
¾ Include all Phase IV and similar costs in R&D.
¾ Both third-party costs and directly attributable internal costs.
17
Phase IV and similar costs
Impact on 2006 income statement
CHF m
as
published
Intangible
Assets
Alliances
Phase IV
Restated
42,041
-
-
-
42,041
Royalties & other op. income
1,466
Cost of sales
-10,616
Marketing & distribution
-10,856
Research & development
-6,589
General & administration
-2,542
Amortisation & impairment of IA -1,174
-1,059
-115
1,174
-75
-1,610
1,260
425
-
642
-661
19
-
1,391
-13,285
-8,954
-7,365
-2,098
-
-
-
-
11,730
Sales
Operating profit
11,730
Phase IV and similar costs in M&D
Phase IV and similar costs in G&A
18
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.
¾ UPI is now eliminated as a consolidation entry at a Pharmaceuticals Division level.
20
Unrealised profits in inventories
Impact on 2006 operating segment results
CHF m
Roche
Pharma
Genentech
Chugai
Pharma
Division
6,025
(114)
3,951
(51)
569
-
10,545
(165)
6,139
4,002
569
10,710
(165)
As originally published
Operating profit
- including unrealised profits in inventories
Restated
Operating profit
Elimination of profit within division
Total
10,545
21
Intangible assets – Amortisation and impairment
Alliance and collaboration expenses
Phase IV and similar costs
Unrealised profits in inventories
Appendices: Impact of changes
22
Appendix 1
Full year 2006 restated results
23
Income Statement Full Year 2006
Group
CHF m
as
published
Intangible
Assets
Alliances
Phase IV
Restated
42,041
-
-
-
42,041
Royalties & other op. income
1,466
Cost of sales
-10,616
Marketing & distribution
-10,856
Research & development
-6,589
General & administration
-2,542
Amortisation & impairment of IA -1,174
-1,059
-115
1,174
-75
-1,610
1,260
425
-
642
-661
19
-
1,391
-13,285
-8,954
-7,365
-2,098
-
-
-
-
11,730
Sales
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
Income Statement Full Year 2006
Pharma
CHF m
as
published
Intangible
Assets
Alliances
Phase IV
Restated
33,294
-
-
-
33,294
1,277
-6,868
-8,761
-5,889
-1,849
-659
-619
-40
659
-68
-1,545
1,260
353
-
642
-661
19
-
1,209
-9,032
-6,859
-6,590
-1,477
-
10,545
-
-
-
10,545
Sales
Royalties & other op. income
Cost of sales
Marketing & distribution
Research & development
General & administration
Amortisation & impairment of IA
Operating profit
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
CHF m
as
published
Intangible
Assets
Alliances
Phase IV
Restated
8,747
-
-
-
8,747
Royalties & other op. income
189
Cost of sales
-3,748
Marketing & distribution
-2,095
Research & development
-700
General & administration
-456
Amortisation & impairment of IA -515
-440
-75
515
-7
-65
72
-
-
182
-4,253
-2,095
-775
-384
-
-
-
-
1,422
Sales
Operating profit
1,422
Product intangibles
Technology and development intangibles
Back royalties
Pass-through royalties on royalty income
26
Operating profit margins Full Year 2006
Pharma
CHF m
Sales
Elimination
within
Division
Pharma
Roche
Pharma
Genentech
Chugai
33,294
20,666
9,125
3,503
10,545
31.7 %
6,025
29.2 %
3,951
43.3 %
569
16.2 %
-
+114
+51
-
-165
10,545
31.7 %
6,139
29.7 %
4,002
43.9 %
569
16.2 %
-165
As published
Operating profit
% of sales
Unrealised profits on inventories
Restated
Operating profit
% of sales
27
EBITDA margins Full Year 2006
Pharma
CHF m
Sales
Elimination
within
Division
Pharma
Roche
Pharma
Genentech
Chugai
33,294
20,666
9,125
3,503
12,168
36.5 %
7,030
34.0 %
4,413
48.4 %
725
20.7 %
-
+114
+51
-
-165
12,168
36.5 %
7,144
34.6 %
4,464
48.9 %
725
20.7 %
-165
As published
EBITDA
% of sales
Unrealised profits on inventories
Restated
EBITDA
% of sales
28
Appendix 2
Interim 2007 restated half-year results
29
Income Statement Half-Year 2007
Group
CHF m
as
published
Intangible
Assets
Alliances
Phase IV
Restated
22,827
-
-
-
22,827
1,191
-5,629
-5,552
-3,635
-1,237
-488
-456
-32
488
-33
-735
650
118
-
343
-350
7
-
1,158
-6,820
-4,559
-4,017
-1,112
-
7,477
-
-
-
7,477
Sales
Royalties & other op. income
Cost of sales
Marketing & distribution
Research & development
General & administration
Amortisation & impairment of IA
Operating profit
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
Income Statement Half-Year 2007
Pharma
CHF m
as
published
Intangible
Assets
Alliances
Phase IV
Restated
18,268
-
-
-
18,268
Royalties & other op. income
1,100
Cost of sales
-3,715
Marketing & distribution
-4,462
Research & development
-3,276
General & administration
-944
Amortisation & impairment of IA -331
-300
-31
331
-30
-813
650
193
-
343
-350
7
-
1,070
-4,828
-3,469
-3,657
-744
-
-
-
-
6,640
Sales
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
CHF m
as
published
Intangible
Assets
Alliances
Phase IV
Restated
4,559
-
-
-
4,559
Royalties & other op. income
91
Cost of sales
-1,914
Marketing & distribution
-1,090
Research & development
-359
General & administration
-181
Amortisation & impairment of IA -157
-156
-1
157
-3
78
-75
-
-
88
-1,992
-1,090
-360
-256
-
-
-
-
949
Sales
Operating profit
949
Product intangibles
Technology and development intangibles
Back royalties
Pass-through royalties on royalty income
32
Operating profit margins Half-Year 2007
Pharma
CHF m
Sales
Elimination
within
Division
Pharma
Roche
Pharma
Genentech
Chugai
18,268
11,367
5,227
1,674
6,640
36.3 %
3,605
31.7 %
2,701
51.7 %
334
20.0 %
-
-22
+248
-
-226
6,640
36.3 %
3,583
31.5 %
2,949
56.4 %
334
20.0 %
-226
As published
Operating profit
% of sales
Unrealised profits on inventories
Restated
Operating profit
% of sales
33
EBITDA margins Half-Year 2007
Pharma
CHF m
Sales
Elimination
within
Division
Pharma
Roche
Pharma
Genentech
Chugai
18,268
11,367
5,227
1,674
7,424
40.6 %
4,079
35.9 %
2,940
56.2 %
405
24.2 %
-
-22
+248
-
-226
7,424
40.6 %
4,057
35.7 %
3,188
61.0 %
405
24.2 %
-226
As published
EBITDA
% of sales
Unrealised profits on inventories
Restated
EBITDA
% of sales
34
Appendix 3
Interim 2006 restated half-year results
35
Income Statement Half-Year 2006
Group
CHF m
as
published
Intangible
Assets
Alliances
Phase IV
Restated
19,849
-
-
-
19,849
727
-4,934
-5,208
-3,063
-1,072
-494
-476
-18
494
-30
-749
616
163
-
291
-297
6
-
697
-6,159
-4,301
-3,378
-903
-
5,805
-
-
-
5,805
Sales
Royalties & other op. income
Cost of sales
Marketing & distribution
Research & development
General & administration
Amortisation & impairment of IA
Operating profit
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
Income Statement Half-Year 2006
Pharma
CHF m
as
published
Intangible
Assets
Alliances
Phase IV
Restated
15,577
-
-
-
15,577
Royalties & other op. income
636
Cost of sales
-3,160
Marketing & distribution
-4,187
Research & development
-2,736
General & administration
-786
Amortisation & impairment of IA -328
-315
-13
328
-27
-749
616
160
-
291
-297
6
-
609
-4,224
-3,280
-3,046
-620
-
-
-
-
5,016
Sales
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
CHF m
as
published
Intangible
Assets
Alliances
Phase IV
Restated
4,272
-
-
-
4,272
Royalties & other op. income
91
Cost of sales
-1,774
Marketing & distribution
-1,021
Research & development
-327
General & administration
-165
Amortisation & impairment of IA -166
-161
-5
166
-3
3
-
-
88
-1,935
-1,021
-332
-162
-
-
-
-
910
Sales
Operating profit
910
Product intangibles
Technology and development intangibles
Pass-through royalties on royalty income
38
Operating profit margins Half-Year 2006
Pharma
CHF m
Sales
Elimination
within
Division
Pharma
Roche
Pharma
Genentech
Chugai
15,577
9,670
4,223
1,684
5,016
32.2 %
3,054
31.6 %
1,686
39.9 %
276
16.4 %
-
-18
+6
-
+12
5,016
32.2 %
3,036
31.4 %
1,692
40.1 %
276
16.4 %
+12
As published
Operating profit
% of sales
Unrealised profits on inventories
Restated
Operating profit
% of sales
39
EBITDA margins Half-Year 2006
Pharma
CHF m
Sales
Elimination
within
Division
Pharma
Roche
Pharma
Genentech
Chugai
15,577
9,670
4,223
1,684
5,847
37.5 %
3,576
37.0 %
1,916
45.4 %
355
21.1 %
-
-18
+6
-
+12
5,847
37.5 %
3,558
36.8 %
1,922
45.5 %
355
21.1 %
+12
As published
EBITDA
% of sales
Unrealised profits on inventories
Restated
EBITDA
% of sales
40
Appendix 4
Operating performance Half-Year 2007 vs. 2006
41
Operating performance Half-Year 2007 vs. 2006
Group
2007
CHF m % sales
Sales
2007 vs. 2006
local growth
22,827
100.0
+2,978
1,158
5.1
+461
Cost of sales
-6,820
-29.9
-661
M&D
R&D
G&A
-4,559
-4,017
-1,112
-19.9
-17.6
-4.9
-258
-639
-209
7,477
32.8
+1,672
Royalties & other op inc
Operating profit
15%
71%
12%
7%
21%
25%
27%
42
Operating performance Half-Year 2007 vs. 2006
Pharma
2007
CHF m % sales
Sales
Royalties & other op inc
18,268
2007 vs. 2006
local growth
100.0
+2,691
1,070
5.8
+461
Cost of sales
-4,828
-26.4
-604
M&D
R&D
G&A
-3,469
-3,657
-744
-19.0
-20.0
-4.1
-189
-611
-124
6,640
36.3
+1,624
Operating profit
18%
81%
17%
7%
22%
23%
31%
43
Operating performance Half-Year 2007 vs. 2006
Diagnostics
2007
CHF m % sales
Sales
2007 vs. 2006
local growth
4,559
100.0
+287
88
1.9
-
Cost of sales
-1,992
-43.7
-57
M&D
R&D
G&A
-1,090
-360
-256
-23.9
-7.9
-5.6
-69
-28
-94
949
20.8
+39
Royalties & other op inc
Operating profit
5%
0%
1%
6%
7%
57%
3%
44
We Innovate Healthcare
45