FINANCE REPORT.
`
`INTERACTIVE ANNUAL REPORT 2016
`
`

`

`Our mission: treat more patients
`with groundbreaking medicines
`
`CONTENTS
`
`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 FINANCE IN BRIEF
`
`
`07
`
`
`FINANCIAL REVIEW
`
`23 CONSOLIDATED FINANCIAL
`
`STATEMENTS
`
`
`
`77 HOLDING COMPANY
`
`FINANCIAL STATEMENTS
`
`FINANCIAL
`REPORT.
`
`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING COMPANY
`FINANCIAL
`STATEMENTS
`
`2
`
`WATSON LABORATORIES, INC. , IPR2017-01621, Ex. 1073, p. 2 of 92
`
`

`

`FINANCE IN BRIEF
`
`FINANCIAL
`REPORT.
`
`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING COMPANY
`FINANCIAL
`STATEMENTS
`
`3
`
`WATSON LABORATORIES, INC. , IPR2017-01621, Ex. 1073, p. 3 of 92
`
`

`

`FINANCIAL
`REPORT.
`
`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING COMPANY
`FINANCIAL
`STATEMENTS
`
`4
`
`WATSON LABORATORIES, INC. , IPR2017-01621, Ex. 1073, p. 4 of 92
`
`

`

`PROFIT AND LOSS
`
`
`(in CHF millions, except % variance and EPS)
`
`Sales
`Product sales
`Opsumit®
`Tracleer®
`Uptravi®
`Other
`
`Core results
`Operating income
`Net income
`Diluted EPS
`
`US GAAP results
`Operating income
`Net income
`Diluted EPS
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`CASH FLOW
`
`
`(in CHF millions)
`
`Cash flow
`Operating cash flow
`Capital expenditure
`Cash returned to shareholders
`Free cash flow
`
`
`CASH POSITION AND SHARES
`
`
`(in CHF millions)
`
`Cash position
`Net cash
`
`Share count (million shares)
`Issued common shares
`Treasury shares held
`Outstanding equity instruments
`
`
`
`
`Twelve Months
`2016
`2015
`
`
`
`
`2,412
`2,042
`831
`516
`1,020
`1,212
`245
`-
`317
`314
`
`
`
`
`992
`814
`881
`693
`8.18
`6.16
`
`
`
`
`789
`656
`696
`552
`6.46
`4.91
`
`
`
`
`variance
`CHF
`
`
`18%
`61%
`-16%
`nm
`1%
`
`
`22%
`27%
`33%
`
`
`20%
`26%
`32%
`
`
`
`
`
`
`
`CER
`
`
`15%
`57%
`-18%
`nm
`-2%
`
`
`17%
`22%
`27%
`
`
`14%
`19%
`25%
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`
`
`627
`519
`235
`162
`229
`278
`85
`-
`78
`80
`
`
`
`
`211
`163
`190
`133
`1.79
`1.22
`
`
`
`
`129
`122
`115
`100
`1.08
`0.91
`
`
`
`
`variance
`CHF
`
`
`21%
`45%
`-17%
`nm
`-2%
`
`
`30%
`43%
`47%
`
`
`5%
`15%
`19%
`
`
`CER
`
`
`19%
`43%
`-19%
`nm
`-4%
`
`
`27%
`40%
`44%
`
`
`1%
`11%
`15%
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Twelve Months
`2016
`2015
`
`
`
`
`920
`658
`(57)
`(44)
`(428)
`(927)
`90
`(800)
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`225
`(16)
`(58)
`85
`
`
`
`125
`(29)
`(119)
`(294)
`
`
`
`
` December 31, September 30,
`
`2016
`2016
`
`
`
`
`
`
`
`495
`411
`
`
`
`
`
`
`
`107.8
`107.8
`
`4.7
`4.1
`
`4.2
`4.6
`
`
`
`
`
`June 30,
`2016
`
`
`418
`
`
`114.1
`8.9
`4.7
`
`
`
`March 31, December 31,
`2016
`2015
`
`
`472
`
`
`114.1
`9.5
`5.6
`
`
`
`114.1
`9.1
`5.9
`
`
`405
`
`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 December 2015 year to date and December 2016
`year to date results at constant currencies (the average monthly exchange rates for December 2015 year to date).
`Rounding differences may occur
`nm = not meaningful
`Europe = EU28 and Switzerland
`
`
`
`FINANCIAL
`REPORT.
`
`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING COMPANY
`FINANCIAL
`STATEMENTS
`
`5
`
`WATSON LABORATORIES, INC. , IPR2017-01621, Ex. 1073, p. 5 of 92
`
`

`

`
`Actelion in 2016
`
`Product sales
`
`Operating results
`
`Net results and EPS
`
`Cash flows
`
`Balance sheet and
`cash position
`
`Total shareholder
`return
`
`
`
`
`
`
`
`
`
`
`
` Building on the solid foundations of the previous years resulted in yet another exceptional year for
`Actelion. This success was driven by the company’s leading portfolio of PAH products, which saw
`continued overall growth in 2016 with the introduction of Uptravi in the US and other markets around
`the globe.
`
` Product sales for 2016 rose to 2,412 million Swiss francs, an increase of 15% at constant exchange
`rates (CER). This excellent commercial performance was driven by the outstanding Uptravi launch in
`the US and Opsumit’s sustained strong growth trajectory. During the fourth quarter of 2016,
`combined sales of the company’s outcome-based PAH portfolio, Opsumit, Uptravi and Veletri,
`reached 55% of total sales, demonstrating the significant progress made in the fundamental
`transformation of the PAH business.
`
` Core operating income rose to 992 million Swiss francs, an increase of 17% at CER.
`
` Core marketing, selling and distribution expenses amounted to 501 million Swiss francs, an increase
`of 7% at CER. This increase was driven mostly by costs relating to launch activities of Uptravi in the
`United States, Germany and other geographies. Core R&D expenses amounted to 509 million Swiss
`francs, an increase of 25% at CER as the company advanced its early- and late-stage compounds
`through the pipeline.
`
` US GAAP operating income increased by 14% at CER to 789 million Swiss francs.
`
` Core net income rose by 22% at CER to 881 million Swiss francs, and core diluted earnings per share
`(EPS) rose by 27% at CER to 8.18 Swiss francs.
`
` US GAAP net income amounted to 696 million Swiss francs, and US GAAP diluted earnings per share
`amounted to 6.46 Swiss francs.
`
` Operating cash flow amounted to 920 million Swiss francs, driven by the strong operating
`performance.
`
` In keeping with its commitment to maximizing shareholder value, Actelion returned 428 million
`Swiss francs to shareholders through the second line share buyback as well as the increased
`dividend of 1.50 Swiss franc paid in May 2016.
`
` Shareholders’ equity was basically unchanged as the Company continued to return substantial cash
`to shareholders. Actelion’s cash position amounted to 495 million Swiss francs at December 31,
`2016.
`
` On 26 January 2017, Actelion and Johnson and Johnson jointly announced that they have entered into
`a definitive transaction agreement under which Johnson & Johnson will launch an all-cash tender
`offer in Switzerland to acquire all of the outstanding shares of Actelion for 280 US dollars per share.
`The Offer Price implies a premium of 46% to the volume-weighted average price of during the sixty
`SIX trading days prior to the publication of the pre-announcement published on 26 January 2017.
`Additionally Actelion shareholders will receive one share of the newly created R&D company for
`each Actelion share they own as a stock dividend
`
`
`
`
`
`
`
`
`
`
`
`
`FINANCIAL
`REPORT.
`
`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING COMPANY
`FINANCIAL
`STATEMENTS
`
`6
`
`WATSON LABORATORIES, INC. , IPR2017-01621, Ex. 1073, p. 6 of 92
`
`

`

`FINANCIAL REVIEW
`
`FINANCIAL
`REPORT.
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING COMPANY
`FINANCIAL
`STATEMENTS
`
`7
`
`WATSON LABORATORIES, INC. , IPR2017-01621, Ex. 1073, p. 7 of 92
`
`

`

`2016 was another strong year for Actelion with the company delivering record sales and earnings.
`
`Product sales rose 15% at CER to reach 2,412 million Swiss francs, mostly driven by the strong Uptravi launch in the United
`States and continued strong Opsumit uptake in markets around the globe. This strong commercial performance coupled
`with tight financial oversight resulted in core operating income growth of 17%, US GAAP operating income growth of 14 %
`and US GAAP diluted EPS growth of 25%, all at CER.
`
`Moreover, 2016 was a busy year with the Company involved in strategic discussions to ensure maximum value creation for
`shareholders.
`
`On 26 January 2017, Actelion and Johnson and Johnson jointly announced that they have entered into a definitive
`transaction agreement under which Johnson & Johnson will launch an all-cash tender offer in Switzerland to acquire all of
`the outstanding shares of Actelion for 280 US dollars per share.
`
`The Offer Price implies a 100% valuation of 30 billion US dollars which implies a premium of 46% to the volume-weighted
`average price of during the sixty SIX trading days prior to the publication of the pre-announcement.
`
`Additionally, Actelion shareholders will receive one share of a newly created R&D company that will be spun out
`concurrently with the closing of the proposed transaction.
`
`The Board of directors of Actelion unanimously recommended the proposed transaction as its innovative structure allows
`Actelion shareholders to monetize their holdings at a very attractive price whilst retaining upside potential in the earlier
`stage pipeline.
`
`It is worth noting the value creation for loyal shareholders over the last years: since the IPO in 2000, the value increased
`thirty-fold and during the last 5 years, the increase was more than nine-fold.
`
`
`
`
`
`FINANCIAL
`REPORT.
`
`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING COMPANY
`FINANCIAL
`STATEMENTS
`
`8
`
`WATSON LABORATORIES, INC. , IPR2017-01621, Ex. 1073, p. 8 of 92
`
`

`

`SALES
`
`Sales by product
`
`(in CHF millions, except % variance)
`
`Product sales
`Opsumit®
`Tracleer®
`Uptravi®
`Veletri®
`Ventavis®
`Valchlor®
`Zavesca®
`Others
`Total product sales
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Twelve Months
`2016
`2015
`
`
`
`
`831
`516
`1,020
`1,212
`245
`-
`97
`83
`73
`105
`35
`27
`104
`92
`8
`7
`2,412
`2,042
`
`
`
`
`variance
`CHF
`
`
`61%
`-16%
`nm
`17%
`-30%
`30%
`13%
`7%
`18%
`
`
`
`
`CER
`
`
`57%
`-18%
`nm
`12%
`-32%
`27%
`12%
`8%
`15%
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`
`
`235
`162
`229
`278
`85
`-
`26
`23
`15
`24
`10
`8
`26
`24
`2
`2
`627
`519
`
`
`
`
`variance
`CHF
`
`
`45%
`-17%
`nm
`12%
`-37%
`20%
`10%
`-6%
`21%
`
`
`CER
`
`
`43%
`-19%
`nm
`9%
`-38%
`19%
`10%
`-7%
`19%
`
`Actelion’s excellent commercial performance during 2016 was driven by the outstanding Uptravi launch in the US and
`Opsumit’s sustained strong growth trajectory. During the fourth quarter of 2016, combined sales of the company’s
`outcome-based PAH portfolio, Opsumit, Uptravi and Veletri, reached 55% of total sales, demonstrating the significant
`progress made in the fundamental transformation of the PAH business.
`
`In the US, sales increased by 25% at CER, driven by the strong Uptravi launch, the continued Opsumit momentum due to
`share gains in an expanding ERA market. European sales were 1% higher compared to 2015. A strong Opsumit
`performance and solid Tracleer use in the digital ulcer indication were impacted by continued pricing pressure and market
`erosion from bosentan generics, particularly in Spain. Sales in Japan increased by 19% at CER, driven by very strong sales
`of Opsumit (launched in June 2015), Tracleer momentum in digital ulcer indication and Zavesca (Japanese trade name
`Brazaves).
`
`Comparing average exchange rates for 2016 to 2015, the Swiss franc weakened, mostly against the US dollar, euro and
`Japanese yen, resulting in a positive currency variance of 63 million Swiss francs.
`
`Sales by region
`
`(in CHF millions, except % variance)
`
`Product sales by region
`United States
`Europe
`Japan
`Rest of the world
`Total product sales
`
`
`
`
`Twelve Months
`2016
`2015
`
`
`
`
`1,306
`1,026
`646
`634
`258
`190
`201
`192
`2,412
`2,042
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`variance
`CHF
`
`
`27%
`2%
`36%
`5%
`18%
`
`
`
`
`CER
`
`
`25%
`1%
`19%
`6%
`15%
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`
`
`342
`259
`162
`159
`77
`58
`47
`42
`627
`519
`
`
`
`
`variance
`CHF
`
`
`32%
`2%
`31%
`10%
`21%
`
`
`CER
`
`
`30%
`4%
`17%
`9%
`19%
`
`FINANCIAL
`REPORT.
`
`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING COMPANY
`FINANCIAL
`STATEMENTS
`
`9
`
`WATSON LABORATORIES, INC. , IPR2017-01621, Ex. 1073, p. 9 of 92
`
`

`

`PAH FRANCHISE
`
`Opsumit®
`
`(in CHF millions, except % variance)
`
`Sales by region
`United States
`Europe
`Japan
`Rest of the world
`Total
`
`
`
`
`
`
`
`
`
`
`
`
`
`Twelve Months
`2016
`2015
`
`
`
`
`524
`362
`176
`111
`72
`12
`59
`30
`831
`516
`
`
`
`
`variance
`CHF
`
`
`45%
`58%
`nm
`92%
`61%
`
`
`
`
`CER
`
`
`41%
`58%
`nm
`92%
`57%
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`
`
`143
`109
`48
`35
`30
`8
`14
`10
`235
`162
`
`
`
`
`variance
`CHF
`
`
`31%
`36%
`nm
`50%
`45%
`
`
`CER
`
`
`30%
`41%
`nm
`45%
`43%
`
`Sales of Opsumit (macitentan) amounted to 831 million Swiss francs for 2016, an increase of 57% at CER compared to 2015.
`The strong growth across all regions and all relevant markets (Opsumit is now available in almost 40 markets) was driven
`by solid quarterly increases in the net number of patients treated in an expanding ERA market due to increased use in
`combination with PDE-5 inhibitors, and some upgrades from Tracleer, notably in Japan.
`
`Tracleer®
`
`(in CHF millions, except % variance)
`
`Sales by region
`United States
`Europe
`Japan
`Rest of the world
`Total
`
`
`
`
`
`
`
`
`
`
`
`
`
`Twelve Months
`2016
`2015
`
`
`
`
`370
`470
`387
`460
`156
`153
`106
`130
`1,020
`1,212
`
`
`
`
`variance
`CHF
`
`
`-21%
`-16%
`2%
`-18%
`-16%
`
`
`
`
`CER
`
`
`-23%
`-17%
`-10%
`-17%
`-18%
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`
`
`79
`103
`89
`107
`39
`43
`22
`24
`229
`278
`
`
`
`
`variance
`CHF
`
`
`-23%
`-17%
`-10%
`-8%
`-17%
`
`
`CER
`
`
`-24%
`-15%
`-20%
`-8%
`-19%
`
`Sales of Tracleer (bosentan) amounted to 1,020 million Swiss francs for 2016, a decrease of 18% at CER compared to 2015,
`driven to a large extent by volume erosion resulting from the significant impact of Opsumit uptake on the Tracleer patient
`base and increased generic competition, notably in Spain where generic bosentan entered the market in January 2016.
`
`Tracleer sales were supported by the digital ulcer indication in Europe and Japan.
`
`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
`granted in all possible 19 EU countries until the end of August 2017.
`
`
`
`FINANCIAL
`REPORT.
`
`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING COMPANY
`FINANCIAL
`STATEMENTS
`
`10
`
`WATSON LABORATORIES, INC. , IPR2017-01621, Ex. 1073, p. 10 of 92
`
`

`

`Uptravi®
`
`(in CHF millions, except % variance)
`
`Sales by region
`United States
`Europe
`Japan
`Rest of the world
`Total
`
`
`
`
`
`
`
`
`
`
`
`
`
`Twelve Months
`2016
`2015
`
`
`
`
`232
`-
`11
`-
`-
`-
`2
`-
`245
`-
`
`
`
`
`variance
`CHF
`
`
`nm
`nm
`
`nm
`nm
`
`
`
`
`CER
`
`
`nm
`nm
`
`nm
`nm
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`
`
`77
`-
`7
`-
`-
`-
`1
`-
`85
`-
`
`
`
`
`variance
`CHF
`
`
`nm
`nm
`
`nm
`nm
`
`
`CER
`
`
`nm
`nm
`
`nm
`nm
`
`Sales of Uptravi (selexipag) amounted to 245 million Swiss francs for 2016.
`
`Since the US launch at the beginning of January 2016, patient demand has continued to increase with sales of 232 million
`Swiss francs (which includes 30 million Swiss francs for the build up of inventory in the US). For the fourth quarter, US
`sales amounted to 77 million Swiss francs compared to 66 million Swiss francs for the third quarter, 45 million Swiss francs
`in the second quarter and 15 million Swiss francs in the first quarter of 2016.
`
`In other geographies, Uptravi sales were driven by the particularly successful launch in Germany. Uptravi is also available
`in several other markets, most recently launched with full reimbursement in the Netherlands and Switzerland.
`
`At the end of 2016, just over 2,400 patients were being treated with Uptravi globally, with more than 1,900 patients coming
`from the US.
`
`Veletri®
`
`(in CHF millions, except % variance)
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`variance
`Twelve Months
`variance
`CER
`CHF
`2016
`2015
`CER
`CHF
`2016
`2015
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Sales by region
`-0%
`0%
`9
`9
`-2%
`-0%
`39
`39
`United States
`21%
`17%
`6
`5
`60%
`60%
`24
`15
`Europe
`2%
`15%
`7
`6
`2%
`16%
`26
`23
`Japan
`52%
`54%
`3
`2
`
`22%
`22%
`7
`6
`
`Rest of the world
`9%
`12%
`26
`23
`
`12%
`17%
`97
`83
`
`Total
`
`
`
`
`
`
`
`
`
`Sales of Veletri (epoprostenol for injection) amounted to 97 million Swiss francs for 2016, an increase of 12 % at CER
`compared to 2015. This increase was mostly driven by France, Italy, Spain and the UK. Demand in Japan, where it is
`marketed as Epoprostenol ACT, remained strong, however sales growth was mitigated by a 12% price cut effective
`March 1, 2016.
`
`
`
`
`
`
`
`
`
`Ventavis®
`
`(in CHF millions, except % variance)
`
`Sales by region
`United States
`Europe
`Japan
`Rest of the world
`Total
`
`
`
`
`
`
`
`
`
`
`
`
`
`Twelve Months
`2016
`2015
`
`
`
`
`73
`105
`-
`-
`-
`-
`-
`-
`73
`105
`
`
`
`
`variance
`CHF
`
`
`-30%
`
`
`
`-30%
`
`
`
`
`CER
`
`
`-32%
`
`
`
`-32%
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`
`
`15
`24
`-
`-
`-
`-
`-
`-
`15
`24
`
`
`
`
`variance
`CHF
`
`
`-37%
`
`
`
`-37%
`
`
`CER
`
`
`-38%
`
`
`
`-38%
`
`Sales of Ventavis (iloprost) amounted to 73 million Swiss francs for 2016, a decrease of 32% at CER compared to 2015 due
`to competitive environment, including the availability of Uptravi. Underlying units decreased by 37%.
`
`
`
`FINANCIAL
`REPORT.
`
`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING COMPANY
`FINANCIAL
`STATEMENTS
`
`11
`
`WATSON LABORATORIES, INC. , IPR2017-01621, Ex. 1073, p. 11 of 92
`
`

`

`SPECIALTY PRODUCTS
`
`Valchlor®
`
`(in CHF millions, except % variance)
`
`Sales by region
`United States
`Europe
`Japan
`Rest of the world
`Total
`
`
`
`
`
`
`
`
`
`
`
`
`
`Twelve Months
`2016
`2015
`
`
`
`
`33
`25
`2
`2
`-
`-
`0
`-
`35
`27
`
`
`
`
`variance
`CHF
`
`
`33%
`-13%
`
`nm
`30%
`
`
`
`
`CER
`
`
`30%
`-15%
`
`nm
`27%
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`
`
`9
`7
`0
`1
`-
`-
`0
`-
`10
`8
`
`
`
`
`variance
`CHF
`
`
`21%
`-17%
`
`nm
`20%
`
`
`CER
`
`
`20%
`-17%
`
`nm
`19%
`
`Sales of Valchlor (mechlorethamine) amounted to 35 million Swiss francs for 2016, an increase of 27% at CER compared to
`2015. In the US, the company has made good progress in establishing Valchlor as a valuable option in the treatment
`algorithm for early-stage mycosis fungoides, a type of Cutaneous T-Cell Lymphoma (MF-CTCL).
`
`In December 2016, the Committee for Medicinal Products for Human Use (CHMP), the scientific committee of the European
`Medicines Agency (EMA), issued a positive opinion for the use of chlormethine gel 160 micrograms/g (Ledaga®) for the
`treatment of mycosis fungoides-type cutaneous T-cell lymphoma (MF-CTCL) in adult patients and recommended that the
`European Commission approves the product. The European Commission is expected to issue a final decision by the end of
`February 2017.
`
`Zavesca®
`
`(in CHF millions, except % variance)
`
`Sales by region
`United States
`Europe
`Japan
`Rest of the world
`Total
`
`
`
`
`
`
`
`
`
`
`
`
`
`Twelve Months
`2016
`2015
`
`
`
`
`34
`25
`47
`46
`4
`3
`20
`18
`104
`92
`
`
`
`
`variance
`CHF
`
`
`40%
`0%
`28%
`9%
`13%
`
`
`
`
`CER
`
`
`36%
`-0%
`12%
`10%
`12%
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`
`
`10
`7
`11
`11
`1
`1
`5
`5
`26
`24
`
`
`
`
`variance
`CHF
`
`
`36%
`2%
`16%
`-10%
`10%
`
`
`CER
`
`
`34%
`4%
`3%
`-12%
`10%
`
`Sales of Zavesca (miglustat) amounted to 104 million Swiss francs for 2016, an increase of 12% at CER compared to 2015.
`
`Sales in the US were strong due to a relatively low prior year base as a consequence of an inventory adjustment. In Europe,
`sales were flat due to the launch of generic miglustat (for the type 1 Gaucher disease indication only), which mitigated the
`continued strong, double-digit growth in the Niemann-Pick type C (NP-C) indication. Globally patients receiving Zavesca
`grew by 6% compared to 2015, driven by a 13% increase in the treatment of patients with NP-C.
`
`
`
`
`
`FINANCIAL
`REPORT.
`
`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING COMPANY
`FINANCIAL
`STATEMENTS
`
`12
`
`WATSON LABORATORIES, INC. , IPR2017-01621, Ex. 1073, p. 12 of 92
`
`

`

`Operating expenses break down as follows:
`
`
`
`
`OPERATING EXPENSES
`
`
`(in CHF millions, except % variance)
`
`Operating expenses
`Core cost of sales
`Core research and development
`Core SG&A
`Core operating expenses
`Depreciation of assets
`Amort. of acquired intangible assets
`Stock-based compensation
`Milestone payments
`Doubtful debt movements
`Accretion expenses (benefits)
`Other expenses
`Non-core operating expenses
`US GAAP operating expenses
`
`Cost of sales
`
`(in CHF millions, except % variance)
`
`Cost of sales
`Royalty expenses on sales
`Royalty expenses on profit sharing
`Cost of goods sold
`Core cost of sales
`Non-core cost of sales
`US GAAP cost of sales
`
`
`
`Twelve Months
`2016
`2015
`
`
`
`
`209
`176
`509
`404
`703
`648
`1,420
`1,228
`32
`36
`55
`53
`65
`57
`10
`11
`3
`4
`37
`0
`6
`0
`209
`162
`1,629
`1,389
`
`
`
`
`
`Twelve Months
`2016
`2015
`
`
`
`
`108
`113
`20
`2
`80
`61
`209
`176
`37
`0
`246
`176
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`variance
`CHF
`
`
`19%
`26%
`9%
`16%
`-10%
`4%
`15%
`nm
`nm
`nm
`nm
`29%
`17%
`
`
`
`variance
`CHF
`
`
`-4%
`nm
`31%
`19%
`nm
`40%
`
`
`
`
`CER
`
`
`17%
`25%
`6%
`14%
`-10%
`3%
`15%
`nm
`nm
`nm
`nm
`29%
`16%
`
`
`
`
`CER
`
`
`-7%
`nm
`31%
`17%
`nm
`38%
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`
`
`64
`42
`148
`120
`204
`195
`416
`357
`8
`9
`14
`13
`17
`15
`8
`0
`1
`(0)
`27
`4
`6
`0
`82
`41
`498
`397
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`
`
`29
`25
`10
`2
`25
`15
`64
`42
`27
`4
`91
`45
`
`
`
`
`variance
`CHF
`
`
`54%
`23%
`5%
`17%
`-5%
`5%
`16%
`nm
`nm
`nm
`nm
`nm
`25%
`
`
`
`variance
`CHF
`
`
`18%
`nm
`69%
`54%
`nm
`nm
`
`
`CER
`
`
`53%
`22%
`3%
`15%
`-6%
`4%
`16%
`nm
`nm
`nm
`nm
`nm
`24%
`
`CER
`
`
`16%
`nm
`69%
`53%
`nm
`nm
`
`Core cost of sales for 2016 increased by 17% at CER to 209 million Swiss francs.
`
`Royalty expenses on sales for 2016 were 7% lower compared to 2015 at CER. This decrease was mainly due to ceased
`royalty obligations, following the patent expiry of Tracleer in the US (late November 2015) and Ventavis (mid-March 2015)
`and 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. This decrease was partially offset by mid-
`teen royalty payments to Nippon Shinyaku related to Uptravi sales outside of Japan.
`
`Royalty expenses on profit sharing relate to the collaboration with Nippon Shinyaku for the commercialization of Opsumit in
`Japan and amounted to 20 million Swiss francs for 2016 as Opsumit sales in Japan increased strongly.
`
`Cost of goods sold increased by 31% in 2016. The increase was driven by higher sales along with a different product mix and
`some one-off Uptravi launch inventory write-offs.
`
`Non-core cost of sales relate to the accretion expense for the contingent consideration for Valchlor related to adjusted
`sales projections as well as the upcoming European launch, subject to EMA approval.
`
`
`
`FINANCIAL
`REPORT.
`
`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING COMPANY
`FINANCIAL
`STATEMENTS
`
`13
`
`WATSON LABORATORIES, INC. , IPR2017-01621, Ex. 1073, p. 13 of 92
`
`

`

`Research and development (“R&D”) expenses
`
`
`
`
`variance
`
`Twelve Months
`
`CHF
`
`2016
`2015
`(in CHF millions, except % variance)
`
`
`
`26%
`509
`404
`Core R&D expenses
`-10%
`23
`25
`Depreciation
`15%
`27
`24
`Stock-based compensation
`nm
`10
`11
`Milestone payment
`23%
`569
`464
`US GAAP R&D expenses1
`nm
`6
`2
`Amort. of acquired intangible assets
`23%
`574
`466
`
`US GAAP R&D expenses
`
`
`
`
`1As reported in the consolidated income statements, excluding amortization of acquired intangible assets.
`
`
`
`
`
`
`
`CER
`
`25%
`-10%
`15%
`nm
`22%
`nm
`22%
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`148
`120
`6
`6
`7
`6
`8
`-
`169
`133
`1
`1
`170
`133
`
`
`
`
`variance
`CHF
`
`23%
`-9%
`17%
`nm
`27%
`nm
`28%
`
`
`CER
`
`22%
`-9%
`17%
`nm
`26%
`nm
`27%
`
`The excellent commercial performance enabled Actelion to advance both the late and earlier stage pipeline resulting in
`increased R&D expenditure which translates into a ratio of R&D core operating expenses to sales of 21%, slightly higher
`than in 2015.
`
`Core R&D expenses amounted to 509 million Swiss francs, an increase of 25% 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),
`as well as costs related to the preparation and initiation for Phase II studies for DORA in insomnia and Actelion’s new
`endothelin receptor antagonist in specialty cardiovascular disorders.
`
`US GAAP R&D expenses included depreciation of 23 million Swiss francs (relating to the research building and laboratory
`equipment) and stock-based compensation expenses of 27 million Swiss francs. The milestone payment of 10 million Swiss
`francs related to an exclusive option Actelion obtained in November 2016 to in-license vamorolone for the treatment of
`Duchenne Muscular Dystrophy from ReveraGen.
`
`Selling, general and administrative (“SG&A”) expenses
`
`
`
`
`variance
`
`Twelve Months
`
`CHF
`
`2016
`2015
`(in CHF millions, except % variance)
`
`
`
`
`
`SG&A expenses
`
`
`9%
`Marketing, selling and distribution
`501
`459
`7%
`General and administrative
`202
`189
`9%
`Core SG&A expenses
`703
`648
`-9%
`Depreciation
`10
`11
`14%
`Stock-based compensation
`38
`33
`nm
`Doubtful debt movements
`3
`4
`nm
`Other
`6
`0
`9%
`US GAAP SG&A expenses1
`760
`697
`-3%
`Amort. of acquired intangible assets
`49
`51
`8%
`
`US GAAP SG&A expenses
`810
`748
`
`
`
`
`1 As reported in the consolidated income statements, excluding amortization of acquired intangible assets.
`
`
`
`
`
`
`
`
`
`CER
`
`
`7%
`6%
`6%
`-10%
`14%
`nm
`nm
`7%
`-3%
`6%
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`
`
`144
`139
`60
`56
`204
`195
`3
`3
`10
`9
`1
`(0)
`6
`0
`224
`206
`12
`13
`237
`219
`
`
`
`
`variance
`CHF
`
`
`4%
`8%
`5%
`7%
`15%
`nm
`nm
`9%
`-2%
`8%
`
`
`CER
`
`
`2%
`7%
`3%
`5%
`15%
`nm
`nm
`7%
`-2%
`7%
`
`Core marketing, selling and distribution expenses amounted to 501 million Swiss francs, an increase of 7% at CER. This
`increase was driven mostly by costs relating to launch activities of Uptravi in the United States, Germany and other
`geographies. Additionally, the company continued the roll-out of Opsumit and Veletri in various markets around the globe.
`G&A expenses increased by 6% to 202 million Swiss francs as the company is expanding its global footprint.
`
`US GAAP SG&A expenses included depreciation of 10 million Swiss francs, stock-based compensation expenses of
`38 million Swiss francs as well as some legal expenses related to ongoing strategic discussions.
`
`
`FINANCIAL
`REPORT.
`
`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING COMPANY
`FINANCIAL
`STATEMENTS
`
`14
`
`WATSON LABORATORIES, INC. , IPR2017-01621, Ex. 1073, p. 14 of 92
`
`

`

`OPERATING RESULTS
`
`
`(in CHF millions, except % variance)
`
`Operating results
`Product sales
`Core operating expenses
`Core operating income
`Contract revenue
`Non-core operating expenses
`US GAAP operating income
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Twelve Months
`2016
`2015
`
`
`
`
`2,412
`2,042
`(1,420)
`(1,228)
`992
`814
`6
`4
`(209)
`(162)
`789
`656
`
`
`
`
`variance
`CHF
`
`
`18%
`16%
`22%
`nm
`29%
`20%
`
`
`
`
`CER
`
`
`15%
`14%
`17%
`nm
`29%
`14%
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`
`
`627
`519
`(416)
`(357)
`211
`163
`0
`0
`(82)
`(41)
`129
`122
`
`
`
`
`variance
`CHF
`
`
`21%
`17%
`30%
`nm
`nm
`5%
`
`
`CER
`
`
`19%
`15%
`27%
`nm
`nm
`1%
`
`Core operating income amounted to 992 million Swiss francs, an increase of 17% or 135 million Swiss francs at CER. The
`weakening of the Swiss franc against the major currencies affecting Actelion’s performance had a positive impact of
`43 million Swiss francs on core operating income.
`
`US GAAP operating income amounted to 789 million Swiss francs, an increase of 14% at CER. Contract revenue related to
`the return of the Xiaflex rights in Canada. Non-core operating expenses (excluding accretion effects and milestone
`payments) were slightly higher due to stock-based compensation expenses.
`
`
`
`NET RESULTS
`
`
`(in CHF millions, except % variance)
`
`Core net results
`Operating income
`Financial results
`Income tax
`Core net results
`
`
`
`
`
`
`
`
`
`
`
`
`
`Twelve Months
`2016
`2015
`
`
`
`
`992
`814
`4
`(20)
`(114)
`(100)
`881
`693
`
`
`
`
`variance
`CHF
`
`
`22%
`nm
`nm
`27%
`
`
`
`
`CER
`
`
`17%
`nm
`nm
`22%
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Fourth Quarter
`2016
`2015
`
`
`
`
`211
`163
`(0)
`(1)
`(20)
`(28)
`190
`133
`
`
`
`
`variance
`CHF
`
`
`30%
`nm
`nm
`43%
`
`
`CER
`
`
`27%
`nm
`nm
`40%
`
`Core net income amounted to 881 million Swiss francs, an increase of 22% at CER.
`
`Core financial result amounted to 4 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 114 million Swiss francs, which translates into an effective core tax rate of 11.5%.
`
`
`
`
`
`
`
`
`
`variance
`Twelve Months
`variance
`
`Fourth Quarter
`
`
`2016
`2015
`CHF
`
`2016
`2015
`CHF
`
`
`
`
`
`
`
`
`
`
`
`
`789
`656
`20%
`129
`122
`5%
`4
`(20)
`nm
`(0)
`(1)
`nm
`(98)
`(88)
`nm
`(14)
`(22)
`nm
`695
`548
`27%
`115
`99
`16%
`2
`4
`nm
`0
`1
`nm
`696
`552
`26%
`115
`100
`15%
`
`
`
`
`
`
`
`
`(in CHF millions, except % variance)
`
`US GAAP net results
`Operating results
`Financial results
`Income tax
`Net results
`Net loss attr. to the nonctrl. interests
`US GAAP net results
`
`
`
`
`
`
`
`
`
`CER
`
`
`14%
`nm
`nm
`20%
`nm
`19%
`
`
`
`
`
`
`
`
`
`
`CER
`
`
`1%
`nm
`nm
`12%
`nm
`11%
`
`Below the operating line, US GAAP financial result and income tax do not materially differ from the core results.
`
`
`
`FINANCIAL
`REPORT.
`
`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FIN