VALUE CREATION: THE ACTELION WAY
`
`CORPORATE GOVERNANCE AND CSR REPORT
`
`COMPENSATION REPORT
`
`FINANCIAL REPORT
`
`Annual Report 2014
`
`FINANCIAL
`REPORT.
`
`THIS IS AN INTERACTIVE PDF
`– PRESS BUTTON TO BEGIN
`
`www.actelion.com
`
`WATSON LABORATORIES, INC. , IPR2017-01622, Ex. 1071, p. 1 of 44
`
`

`

`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 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.
`
`PREVIOUS
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`
`Actelion Annual Report 2014
`
`CONTENTS
`
`Actelion ensures financial
`integrity by complying with
`all applicable laws and
`accounting standards,
`using the highest internal
`standards and proper
`reporting of Actelion’s
`results.
`
`For the ninth consecutive year the Company’s
`internal controls over financial reporting were
`certified as meeting the requirements of SOX
`404 (Sarbanes-Oxley Act 2002, section 404) at
`31 December 2014.
`
`04 Finance in Brief
`
`06 Financial Review
`
`14 Consolidated
`Financial Statements
`
`
`60 Holding Company
`
`Statements
`
`FINANCIAL REPORT.
`
`3
`
`WATSON LABORATORIES, INC. , IPR2017-01622, Ex. 1071, p. 2 of 44
`
`

`

`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING
`COMPANY FINANCIAL
`STATEMENTS
`
`PREVIOUS
`
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`Actelion Annual Report 2014
`
`FINANCE IN BRIEF
`
`2013
`
`100%
`27%
`25%
`
`100%
`35%
`29%
`
`Actelion in 2014
`
`Product Sales
`
`Operating results
`
`Actelion delivered a strong operational performance in 2014. Operating income grew
`almost twice as fast as sales, demonstrating the organization’s earnings power, as well
`as Actelion’s commitment to optimize short-term profitability while carefully balancing
`investment in R&D programs to ensure mid- to long-term growth.
`
`Product sales rose 12% at constant exchange rates (CER) to CHF 1,956 million.
`Excluding the impact of US rebate reversals, product sales increased by 10% at CER,
`mainly driven by the strong uptake of Opsumit, the roll-out of Veletri and the solid
`performance of all other products around the globe – including Tracleer, which is still
`growing in countries where Opsumit has not yet been launched.
`
`Core operating income increased by 25% at CER to CHF 743 million. Excluding the
`impact of US rebate reversals, core operating income reached CHF 677 million, an
`increase of 20% at CER. The strong sales performance was supported by increased
`investment, as the commercial organization launched Opsumit and Valchlor and
`continued the roll-out of Veletri. R&D expenses increased by 4%, with several exciting
`early- and late-stage compounds advancing through the pipeline, while G&A expenses
`remained flat.
`
`US GAAP operating income increased by 24% at CER to CHF 570 million. This was driven
`by the core operating performance but was impacted by higher amortization expenses
`relating to the acquisition of Valchlor and by a milestone payment relating to the filing of
`Selexipag with European and US regulators for marketing authorization.
`
`Net results and EPS
`
`Core net income increased by 34% at CER to CHF 648 million, reflecting the strong
`operating performance. Core diluted earnings per share (EPS) rose to CHF 5.58.
`
`US GAAP net income increased by 38% at CER to CHF 594 million, driven by the strong
`operating performance, lower financing costs due to a litigation settlement, and the
`release of a valuation allowance on deferred tax assets. US GAAP diluted earnings per
`share rose to CHF 5.11.
`
`Operating cash flow
`
`Operating free cash flow (excluding a litigation settlement of CHF 458 million) amounted
`to CHF 584 million, driven by the strong operating performance, limited capital
`expenditure and the absence of acquisitions in 2014.
`
`Free cash flow and
`cash position
`
`Free cash flow for 2014 amounted to CHF 327 million and the company’s net cash
`position at 31 December 2014 increased to CHF 970 million.
`
`The litigation settlement of CHF 458 million was funded by the release of the bail bond of
`CHF 609 million. Actelion paid an increased dividend of CHF 133 million and acquired
`treasury shares for a cash consideration of CHF 546 million in order to manage dilution
`arising from stock-based compensation. Cash proceeds resulting from employee stock
`option exercises amounted to CHF 249 million.
`
`Total shareholder return
`
`Actelion’s share price rose by 53%, resulting in a total shareholder return (including
`dividend payment) of 55% in 2014.
`
`
`
`
`
`
`(in CHF millions, except % variance)
`
`
`US GAAP results
`Net revenue
`Operating results
`Net results
`Diluted EPS
`Dividend per share2
`
`
`Core3 results
`Product sales
`Operating results
`Net results
`Diluted EPS
`
`
`Cash flow
`592
`616
`Operating cash flow4
`(258)
`(32)
`Capital expenditure
`(245)
`327
`Free cash flow
`643
`970
`Net cash position - unrestricted
`613
`-
`Net cash position - restricted
`1 Constant exchange rates (“CER”) constitutes percentage changes calculated by reconsolidating both the 2014 and 2013 results at constant currencies (the average monthly
`exchange rates for the year 2013).
`2 Dividend proposal by the Board of Directors subject to shareholders’ approval.
`3 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. A full reconciliation between US GAAP and core results is available on page 21 of this report.
`4 Operating cash flow excluding a litigation settlement.
`(cid:3)
`
`2014
`
`2013
`
`variance
`CHF %
`
`
`CER %1
`
`in % of sales
`2014
`
`1,958
`570
`594
`5.11
`1.30
`
`1,956
`743
`648
`5.58
`
`1,786
`482
`453
`3.92
`1.20
`
`1,784
`619
`509
`4.41
`
`10%
`18%
`31%
`30%
`
`10%
`20%
`27%
`27%
`
`
`12%
`24%
`38%
`37%
`
`
`
`12%
`25%
`34%
`33%
`
`
`100%
`29%
`30%
`
`
`
`
`100%
`38%
`33%
`
`
`
`
`
`
`
`
`
`
`
`
`
`4
`
`FINANCIAL REPORT.
`
`5
`
`WATSON LABORATORIES, INC. , IPR2017-01622, Ex. 1071, p. 3 of 44
`
`

`

`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING
`COMPANY FINANCIAL
`STATEMENTS
`
`PREVIOUS
`
`NEXT
`
`Actelion Annual Report 2014
`
`FINANCIAL REVIEW
`
`2014 was an outstanding year for Actelion: the company delivered value for shareholders, continued to serve more
`patients and positioned itself for long-term growth.
`
`In 2012, Actelion made a commitment to return significant capital to shareholders. The company has delivered on that
`promise, with almost CHF 1.1 billion being returned to shareholders in the form of dividends and share buybacks over
`the past three years.
`
`In keeping with this commitment, the Board of Directors authorized in principle a new share repurchase program of up
`to 10 million shares of Actelion’s common stock subject to approval by the relevant authorities; this share repurchase
`program would be carried out via a new second trading line at the SIX Swiss Exchange over a period of three years and
`the Board will propose the cancelation of these repurchased shares at subsequent Annual General Meetings. The Board
`of Directors will also propose an increased annual dividend payment of CHF 1.30 for approval by shareholders at the
`upcoming Annual General Meeting in May.
`
`The share price rose by 53%, resulting in a total shareholder return (including dividend payment) of 55% in 2014. The
`company’s performance reflects strong commercial execution coupled with a continued commitment to operational
`efficiency.
`
`Product sales rose 12% at CER to CHF 1,956 million. Core earnings increased by 25% to CHF 743 million, while core
`earnings per share rose 33% to CHF 5.58.
`
`Operating cash flow amounted to CHF 616 million (excluding a litigation settlement of CHF 458 million), reflecting the
`strong operating performance. Free cash flow reached CHF 327 million, resulting in a net cash position at the end of
`2014 of CHF 970 million, ensuring financial flexibility.
`
`The foreign exchange environment in 2014 continued to negatively impact both sales and core operating income:
`compared to 2013, the average Swiss franc exchange rate in 2014 was stronger against all major currencies, in
`particular the Japanese yen and the US dollar.
`
`On 15 January 2015, the Swiss National Bank announced that it was discontinuing the minimum exchange rate of
`CHF 1.20 per euro. This announcement resulted in an immediate appreciation of the Swiss franc against all currencies
`and a sharp drop in the Swiss stock market. The SNB decision has no impact on the Financial Statements for the full
`year 2014 since the figures reported do not reflect changes in exchange rates after 31 December 2014. Because Actelion
`reports and presents its consolidated results in Swiss francs, a persistent weakening of foreign currencies against the
`Swiss franc would negatively impact Actelion’s future sales and core operating results. The currency translation
`sensitivity of Actelion’s consolidated results and gross cash position is presented on pages 14, 15, 18 and 19 of the
`Financial Review.
`
`Despite this unfavorable foreign exchange environment, Actelion is confident that its long-term strategy, coupled with
`tight financial oversight, will result in continued shareholder value creation.
`
`
`
`
`
`6
`
`FINANCIAL REPORT.
`
`7
`
`WATSON LABORATORIES, INC. , IPR2017-01622, Ex. 1071, p. 4 of 44
`
`

`

`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING
`COMPANY FINANCIAL
`STATEMENTS
`
`PREVIOUS
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`
`Actelion Annual Report 2014
`
`Sales of Opsumit (macitentan) for 2014 amounted to CHF 180 million, reflecting a highly successful launch in various
`regions, countries and healthcare systems. The robust SERAPHIN long-term outcome data is perceived as clinically
`relevant, differentiating Opsumit from other endothelin receptor antagonists (ERAs), and the product is rapidly gaining
`market share. At the end of 2014, over 6,300 patients were benefiting from Opsumit. Additional important clinical data,
`further documenting the clinical utility of Opsumit, was presented at various medical congresses throughout the year.
`
`By the end of 2014, Opsumit had been successfully launched in the US, Germany, Austria, Switzerland, the UK, Ireland,
`Denmark, Sweden, the Netherlands, Australia, Italy, Belgium, Luxembourg, Canada, Finland, Mexico (private market),
`Norway and Iceland. The regulatory process for reimbursement is proceeding well in other European countries, such as
`Spain and France, where Opsumit should be launched during 2015.
`
`In Japan, where the registration dossier was filed in June 2014, the regulatory process is proceeding well. The company
`has also filed for marketing authorization in Russia, Turkey, China, Brazil and other Asian and Latin American markets.
`
`SALES
`
`
`(in CHF millions, except % variance)
`
`
`Product sales
`Opsumit
`Tracleer
`Veletri
`Ventavis
`Valchlor
`Zavesca
`Others
`Total product sales
`1 nm = not meaningful
`
`
`
`
`
`
`
`
`
`2014
`
`180
`1,481
`64
`112
`11
`103
`5
`1,956
`
`2013
`
`5
`1,532
`37
`110
`0
`96
`4
`1,784
`
`variance1
`CHF %
`
`CER %
`
`
`nm
`-3%
`76%
`2%
`nm
`8%
`nm
`10%
`
`nm
`-1%
`84%
`3%
`nm
`11%
`nm
`12%
`
`Actelion’s commercial performance during 2014 was very strong across all regions, with excellent demand for key
`assets.
`
`In the US, despite unabated competitive pressures, sales increased by 16% at CER, driven by a successful Opsumit
`launch, price increases across the portfolio and a net impact of CHF 42 million (at CER) in reversals of rebate accruals
`relating to patient support programs.
`
`European sales increased by 10% at CER, driven by the launches of Opsumit and Veletri in various European markets, as
`well as the digital ulcer indication for Tracleer, despite a persistently negative pricing environment. Sales in Japan grew
`by 9%, driven by the strong uptake of Veletri and solid sales for Tracleer.
`
`Sales in the rest of the world increased by 8% at CER, driven by new product launches (Opsumit, Veletri) in Australia and
`by strong growth in emerging PAH markets such as China, Taiwan, Russia and Mexico.
`
`Comparing average exchange rates in 2014 with average exchange rates during 2013, the Swiss franc was stronger
`against major currencies, in particular the Japanese yen and the US dollar. The overall impact resulted in a negative
`currency variance of CHF 51 million.
`
`
`(in CHF millions, except % variance)
`
`
`Product sales by region
`United States
`Europe
`Japan
`Rest of the world
`Total product sales
`
`
`
`PAH FRANCHISE
`
`Opsumit®
`
`(in CHF millions, except % variance)
`
`
`Sales by region
`United States
`Europe
`Japan
`Rest of the world
`Total
`
`8
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`2014
`
`879
`717
`185
`175
`1,956
`
`2014
`
`133
`42
`-
`5
`180
`
`2013
`
`768
`660
`188
`169
`1,784
`
`2013
`
`5
`-
`-
`-
`5
`
`variance
`CHF %
`
`
`14%
`9%
`-1%
`4%
`10%
`
`CER %
`
`16%
`10%
`9%
`8%
`12%
`
`variance
`CHF %
`
`CER %
`
`
`nm
`nm
`nm
`nm
`nm
`
`nm
`nm
`nm
`nm
`nm
`
`
`
`
`
`
`
`
`
`2014
`
`562
`612
`164
`143
`1,481
`
`2013
`
`595
`610
`180
`147
`1,532
`
`Tracleer®
`
`(in CHF millions, except % variance)
`
`
`Sales by region
`United States
`Europe
`Japan
`Rest of the world
`Total
`
`
`Sales of Tracleer (bosentan) amounted to CHF 1,481 million for 2014, a decrease of 1% at CER compared to 2013 due to
`erosion in markets where Opsumit is available, as well as market price pressures and increased generic competition.
`Sales were supported by the digital ulcer indication in Europe, as well as continued strong demand for Tracleer in
`markets where Opsumit is not yet available. US rebate reversals related to patient assistance programs and US price
`increases mitigated the decline. Underlying units sold decreased by 2%. Amidst increased generic competition, Actelion
`is successfully defending Tracleer in markets such as Canada, Turkey and Mexico. The company also introduced a
`generic bosentan in Brazil in 2012 and launched branded generic bosentan under the name of Stayveer® in Poland and
`the Czech Republic to compete with generics, as well as to protect EU Tracleer pricing.
`
`variance
`CHF %
`
`
`-6%
`0%
`-9%
`-3%
`-3%
`
`CER %
`
`-4%
`2%
`1%
`1%
`-1%
`
`Veletri®
`
`(in CHF millions, except % variance)
`
`
`Sales by region
`United States
`Europe
`Japan
`Rest of the world
`Total
`
`
`
`
`
`
`
`
`
`2014
`
`2013
`
`36
`7
`19
`2
`64
`
`30
`0
`6
`0
`37
`
`variance
`CHF %
`
`
`20%
`nm
`nm
`nm
`76%
`
`CER %
`
`22%
`nm
`nm
`nm
`84%
`
`Sales of Veletri (epoprostenol for injection) reached CHF 64 million for the full year 2014, an increase of 84% at CER
`compared to 2013, driven by successful launches in additional markets (such as Australia, the Netherlands, Spain).
`Veletri continues to perform well in Japan, despite a 5% price cut on 1 March 2014. Veletri is well adopted, approaching
`an 80% share of new i.v. epoprostenol patients. At the end of 2014, Veletri was available in the US, Japan, the UK, Spain,
`Italy, the Netherlands, Australia, New Zealand, Portugal, Poland, Belgium, Canada, the Czech Republic and Switzerland.
`
`FINANCIAL REPORT.
`
`9
`
`WATSON LABORATORIES, INC. , IPR2017-01622, Ex. 1071, p. 5 of 44
`
`

`

`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING
`COMPANY FINANCIAL
`STATEMENTS
`
`PREVIOUS
`
`NEXT
`
`Actelion Annual Report 2014
`
`Ventavis®
`
`(in CHF millions, except % variance)
`
`
`Sales by region
`United States
`Europe
`Japan
`Rest of the world
`Total
`
`
`
`
`
`
`
`
`
`2014
`
`112
`-
`-
`-
`112
`
`2013
`
`110
`-
`-
`-
`110
`
`variance
`CHF %
`
`CER %
`
`
`2%
`-
`-
`-
`2%
`
`3%
`-
`-
`-
`3%
`
`During 2014, Ventavis (iloprost) had sales in the US of CHF 112 million, an increase of 3% at CER. This growth was driven
`entirely by price increases and rebate reversals, as underlying units sold were eroded by 17% due to competitive
`pressures. These pressures are expected to intensify during 2015 as a consequence of a potential generic entry.
`
`
`
`SPECIALTY PRODUCTS
`
`
`
`
`
`
`
`
`
`Valchlor®
`
`(in CHF millions, except % variance)
`
`
`Sales by region
`United States
`Europe
`Japan
`Rest of the world
`Total
`
`Sales of Valchlor (mechlorethamine) for the full year 2014 amounted to CHF 11 million. Valchlor was launched in the US
`in November 2013 for stage IA and IB mycosis fungoides-type cutaneous T-cell lymphoma (MF-CTCL) in patients who
`have received prior skin-directed therapy. In March 2014, expansion of the sales team was completed, and the company
`is now working with dermatologists beyond the CTCL centers of excellence. We are making progress in establishing
`Valchlor as an option in the treatment algorithm for early-stage MF-CTCL.
`
`2014
`
`2013
`
`variance
`CHF %
`
`CER %
`
`10
`1
`-
`-
`11
`
`0
`-
`-
`-
`0
`
`
`nm
`nm
`nm
`nm
`nm
`
`nm
`nm
`nm
`nm
`nm
`
`
`
`
`
`
`
`
`
`2014
`
`26
`55
`2
`20
`103
`
`2013
`
`26
`50
`2
`18
`96
`
`variance
`CHF %
`
`
`0%
`11%
`8%
`10%
`8%
`
`CER %
`
`2%
`12%
`19%
`17%
`11%
`
`Zavesca®
`
`(in CHF millions, except % variance)
`
`
`Sales by region
`United States
`Europe
`Japan
`Rest of the world
`Total
`
`Sales of Zavesca (miglustat) amounted to CHF 103 million for 2014, an increase of 11% at CER compared to 2013. This
`performance was mainly driven by continued strong patient demand outside the US in the Niemann-Pick type C
`indication. In the type 1 Gaucher disease market, the performance of Zavesca remained strong, with relatively stable
`demand and positive price movement in the US. Underlying units sold increased by 14%. The company is anticipating
`competitive pressures in early 2015, as generic miglustat has been approved (for type 1 Gaucher disease only) in
`selected European markets.
`
`
`10
`
`OPERATING EXPENSES
`
`Operating expenses break down as follows:
`
`
`(in CHF millions, except % variance)
`
`
`Operating expenses
`Core cost of sales
`Core research and development
`Core selling, general and administration
`Core operating expenses
`Depreciation of assets
`Amortization of acquired intangible assets
`Stock-based compensation
`Milestone payments
`Doubtful debt movements
`Accretion expenses
`Litigation or arbitration results
`Other expenses
`Non-core operating expenses
`Operating expenses US GAAP
`
`
`
`Cost of sales
`
`(in CHF millions, except % variance)
`
`
`Cost of sales
`Royalty expenses
`Cost of goods sold
`Core cost of sales
`Non-core cost of sales
`Cost of sales US GAAP
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`2014
`
`212
`369
`631
`1,213
`38
`63
`53
`19
`(1)
`3
`-
`-
`175
`1,388
`
`2014
`
`156
`57
`212
`3
`215
`
`2013
`
`208
`356
`601
`1,165
`39
`45
`50
`-
`(12)
`2
`13
`1
`138
`1,303
`
`2013
`
`156
`51
`208
`2
`209
`
`variance
`CHF %
`
`CER %
`
`
`2%
`4%
`5%
`4%
`-3%
`39%
`6%
`nm
`90%
`74%
`nm
`nm
`27%
`7%
`
`variance
`CHF %
`
`
`0%
`10%
`2%
`74%
`3%
`
`4%
`4%
`7%
`6%
`-3%
`41%
`6%
`nm
`90%
`77%
`nm
`nm
`27%
`8%
`
`CER %
`
`2%
`11%
`4%
`77%
`5%
`
`Royalty expenses relate to net sales of our main products. Despite higher sales in 2014, the royalty expenses remained
`flat; this was mainly due to the mix of product sales, as the company pays a low single-digit royalty rate on sales of
`Opsumit and a high single-digit rate for Tracleer.
`
`Cost of goods sold include all manufacturing costs, internal costs and distribution costs relating to the supply of
`products to our affiliates.
`
`Non-core cost of sales relates to the accretion expense for contingent consideration for Valchlor. Non-core cost of sales
`does not include any depreciation or amortization since all goods are manufactured by third parties.
`
`
`Research and development (“R&D”) expenses
`
`(in CHF millions, except % variance)
`
`
`Research and development expenses
`Core research and development expenses
`Depreciation
`Stock-based compensation
`Milestone payments
`Restructuring expenses
`Research and development expenses US GAAP1
`Amortization of acquired intangible assets
`Research and development expenses US GAAP
`1 As reported in the consolidated income statements, excluding amortization of acquired intangible assets.
`(cid:3)
`
`
`2014
`
`369
`27
`22
`19
`-
`437
`2
`440
`
`
`2013
`
`variance
`CHF %
`
`CER %
`
`
`356
`27
`21
`-
`1
`405
`3
`408
`
`
`4%
`-1%
`6%
`nm
`nm
`8%
`-11%
`8%
`
`4%
`-1%
`6%
`nm
`nm
`9%
`-9%
`9%
`
`FINANCIAL REPORT.
`
`11
`
`WATSON LABORATORIES, INC. , IPR2017-01622, Ex. 1071, p. 6 of 44
`
`

`

`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING
`COMPANY FINANCIAL
`STATEMENTS
`
`PREVIOUS
`
`NEXT
`
`Actelion Annual Report 2014
`
`Core R&D expenses for 2014 increased by 4% at CER compared to the prior year, as investment in the earlier-stage
`pipeline and clinical trial expenses increased. Core R&D expenditure represented 19% of product sales in 2014. This
`level may increase going forward, as several promising compounds are advancing through the pipeline. However,
`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 includes depreciation expenses relating to the research building and laboratory equipment of CHF 27
`million, stock-based compensation expenses of CHF 22 million and a milestone payment to Nippon Shinyaku of CHF 19
`million relating to the filing of Selexipag with the US Food and Drug Administration (FDA) and the European Medicines
`Agency (EMA) for marketing authorization.
`
`2013
`
`2014
`
`Selling, general and administrative (“SG&A”) expenses
`
`(in CHF millions, except % variance)
`
`
`Selling, general and administrative expenses
`417
`450
`Marketing, selling and distribution expenses
`184
`182
`General and administrative expenses
`601
`631
`Core selling, general and administrative expenses
`12
`11
`Depreciation
`28
`31
`Stock-based compensation
`(12)
`(1)
`Doubtful debt provision
`0
`-
`Restructuring expenses
`631
`672
`Selling, general and administrative expenses US GAAP1
`43
`61
`Amortization of acquired intangible assets
`13
`-
`Arbitration settlement
`686
`733
`Selling, general and administrative expenses US GAAP
`1 As reported in the consolidated income statements, excluding amortization of acquired intangible asstes and arbitration settlement.
`
`variance
`CHF %
`
`CER %
`
`
`8%
`-1%
`5%
`-7%
`7%
`-90%
`nm
`7%
`42%
`nm
`7%
`
`11%
`0%
`7%
`-6%
`7%
`-90%
`nm
`9%
`44%
`nm
`9%
`
`Core SG&A increased by 7% at CER to CHF 631 million in 2014. This increase was driven entirely by costs related to the
`launches of Opsumit, Valchlor and Veletri in various markets around the globe. The G&A portion continues to remain flat,
`as Actelion carefully manages operating expenses.
`
`US GAAP SG&A includes depreciation expenses of CHF 11 million; stock-based compensation expenses of CHF 31
`million; a CHF 1 million reversal of doubtful debt allowance, as collection in Southern European countries continued to
`improve (after a CHF 12 million reversal in 2013); and the amortization of acquired intangible assets of CHF 61 million, a
`significant increase due to the amortization of Valchlor.
`
`
`
`
`
`
`
`
`
`
`
`
`2014
`
`1,956
`(1,213)
`743
`2
`(175)
`570
`
`2013
`
`1,784
`(1,165)
`619
`2
`(138)
`482
`
`variance
`CHF %
`
`CER %
`
`
`10%
`4%
`20%
`nm
`26%
`18%
`
`12%
`6%
`25%
`nm
`27%
`24%
`
`OPERATING RESULTS
`
`
`(in CHF millions, except % variance)
`
`
`Operating results
`Net sales
`Core operating expenses
`Core operating results
`Contract revenue
`Non core operating expenses
`Operating results US GAAP
`
`
`
`12
`
`Core operating income increased by 25% at CER to CHF 743 million.
`
`Excluding the impact of US rebate reversals (see page 15), operating performance remains robust, with an increase of
`20% at CER driven by sales growth, which required additional marketing and selling expenses (mainly for the launch of
`Opsumit and Valchlor). R&D efforts also increased to advance a number of promising compounds in various stages of
`development. G&A remained almost flat.
`
`US GAAP operating income grew by 24% at CER to CHF 570 million, despite higher non-core operating expenses due to
`higher amortization of acquired intangible assets (driven by the acquisition of Valchlor) and the milestone payment to
`Nippon Shinyaku.
`
`NET RESULTS
`
`
`(in CHF millions, except % variance)
`
`
`Net results
`Core operating results
`Core financial results
`Core income tax
`Core net results
`
`
`
`
`
`
`
`
`
`2014
`
`2013
`
`743
`(18)
`(77)
` 648
`
`619
`(13)
`(97)
` 509
`
`variance
`CHF %
`
`
`20%
`-38%
`21%
`27%
`
`CER %
`
`25%
`-38%
`24%
`34%
`
`The core financial expense of CHF 18 million includes the interest expense of the straight bond (4.875% or
`CHF 12 million) and CHF 6 million related to the company’s hedging programs.
`
`The core tax expense of CHF 77 million represents an effective tax rate of 11% on the core results before tax in the
`various countries where Actelion conducts its business.
`
`Core net income grew by 34% at CER to CHF 648 million, mainly driven by the strong operating performance and lower
`core tax expense.
`
`
`(in CHF millions, except % variance)
`
`
`Net results
`Operating results
`Financial results
`Income tax
`Net results US GAAP
`
`
`
`
`
`
`
`
`
`2014
`
`2013
`
`570
`(33)
`57
` 594
`
`482
`(53)
`23
` 453
`
`variance
`CHF %
`
`
`18%
`-37%
`150%
`31%
`
`CER %
`
`24%
`-37%
`164%
`38%
`
`The US GAAP financial expense of CHF 33 million includes non-core financial expenses mainly relating to an interest
`expense (CHF 10 million) in connection with the Asahi litigation award, which was paid in March 2014, as well as the
`impairment of a financial asset (CHF 5 million).
`
`The US GAAP tax income of CHF 57 million includes one-time deferred tax benefits of CHF 115 million, mainly relating to
`the release of a valuation allowance on US deferred tax assets.
`
`(cid:3)
`
`
`
`FINANCIAL REPORT.
`
`13
`
`WATSON LABORATORIES, INC. , IPR2017-01622, Ex. 1071, p. 7 of 44
`
`

`

`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING
`COMPANY FINANCIAL
`STATEMENTS
`
`PREVIOUS
`
`NEXT
`
`Actelion Annual Report 2014
`
`EARNINGS PER SHARE (“EPS”)
`
`
`(in CHF millions, unless otherwise indicated)
`
`
`Net results
`Net results - Core
`Net results - US GAAP
`
`
`Basic earnings per share
`Weighted number of shares (in millions)
`Basic EPS - Core (in CHF)
`Basic EPS - US GAAP (in CHF)
`
`
`Diluted earnings per share
`Weighted number of shares (in millions)
`Diluted EPS - Core (in CHF)
`Diluted EPS - US GAAP (in CHF)
`
`
`
`
`
`
`
`
`
`
`
`
`2014
`
`648
`594
`
`111.2
`5.83
`5.34
`
`116.2
`5.58
`5.11
`
`2013
`
`509
`453
`
`111.5
`4.56
`4.06
`
`115.4
`4.41
`3.92
`
`variance
`CHF %
`
`CER %
`
`
`27%
`31%
`
`
`nm
`28%
`32%
`
`
`nm
`27%
`30%
`
`34%
`38%
`
`nm
`34%
`39%
`
`nm
`33%
`37%
`
`Basic EPS for 2014 was CHF 5.34, compared to CHF 4.06 in the prior year. Diluted EPS was CHF 5.11, up 37% at CER over
`2013.
`
`The increase in EPS was driven mostly by the higher net income. The share count for basic EPS was slightly reduced due
`to the share buyback program completed in August 2013, which was fully weighted in 2014. The dilutive share count
`increased, as the higher share price resulted in an increased share count for the diluted EPS calculation despite a
`decreased nominal number of outstanding equity instruments.(cid:3)
`
`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 following tables and comments.
`
`CER
`
`For 2014, Actelion reported core operating income of CHF 743 million, with:
`
`•(cid:3)
`
`•(cid:3)
`
`net sales of CHF 1,956 million, of which 98% are denominated in foreign currencies converted at the average
`exchange rates shown above (47% in US dollars, 32% in euros, 9% in Japanese yen and 10% in other foreign
`currencies) and
`
`core operating expenses of CHF 1,213 million, of which 27% are incurred in Swiss francs at our headquarters
`(mainly R&D organization, headquarter activities with strategic and support functions) and 73% in foreign currencies
`at our affiliates in the US, Europe, Japan and the rest of the world.
`
`The organization of Actelion, with 98% of sales and 73% of core operating expenses for 2014 in foreign currencies, gives
`a natural hedge against adverse impacts of foreign currency movements against the Swiss franc.
`
`The table below shows the currency translation sensitivity for each 1% adverse change in average exchange rates
`against the Swiss franc:
`
`
`
`
`Exchange rates against Swiss franc
`US dollar
`Euro
`Japanese yen
`All other foreign currencies
`Total impact
`
`
`
`
`
`
`
`
`
`
`
`Average rate
`2014 minus 1 %
`
`Net sales
`CHF
`
`Core operating
`expenses
`
`Core operating
`results
`
`1 USD
`1 EUR
`100 JPY
`
`0.906
`1.203
`0.857
`
`(9)
`(6)
`(2)
`(2)
`(19)
`-1.0%
`
`
`4
`2
`1
`1
`1
`0.7%
`
`(5)
`(4)
`(1)
`(1)
`(11)
`-1.4%
`
`
`IMPACT OF OTHER EVENTS ON SALES AND OPERATING RESULTS
`
`
`(in CHF millions, except % variance)
`
`
`Reported growth versus prior year
`Product sales
`Core operating results
`Operating results - US GAAP
`Core net results
`Net results - US GAAP
`
`2014
`CHF %
`
`CER %
`
`2014
`CHF
`
`
`10%
`20%
`18%
`27%
`31%
`
`12%
`25%
`24%
`34%
`38%
`
`172
`124
`87
`139
`141
`
`CER
`
`223
`154
`116
`173
`173
`
`2013
`CHF %
`
`
`CER %
`
`2013
`CHF
`
`4%
`15%
`14%
`13%
`49%
`
`
`6%
`20%
`20%
`17%
`57%
`
`
`62
`82
`61
`59
`149
`
`112
`105
`83
`77
`172
`
`
`
`
`
`
`Exchange rates against Swiss franc
`US dollar
`Euro
`Japanese yen
`
`
`
`
`December 31,
`2014
`
`Average rate
`2014
`
`December 31,
`2013
`
`Average rate
`2013
`
`
`1 USD
`1 EUR
`100 JPY
`
`0.990
`1.202
`0.828
`
`0.915
`1.215
`0.866
`
`
`0.890
`1.228
`0.848
`
`0.927
`1.231
`0.953
`
`On 15 January 2015, the Swiss National Bank announced that it was discontinuing the minimum exchange rate of
`CHF 1.20 per euro. This announcement resulted in an immediate appreciation of the Swiss franc against all currencies
`and a sharp drop in the Swiss stock market. The SNB decision has no impact on the Financial Statements for the full
`year 2014 since the figures reported do not reflect changes in exchange rates after 31 December 2014. Because Actelion
`reports and presents its consolidated results in Swiss francs, a persistent weakening of foreign currencies against the
`Swiss franc would negatively impact Actelion’s future sales and core operating results.
`
`(cid:3)
`
`14
`
`
`
`The Group recognizes revenue from product sales when there is persuasive evidence that a sales arrangement exists,
`delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. Provisions for rebates
`and discounts granted to government agencies, wholesalers, retail pharmacies, managed care organizations and other
`customers are recorded as a reduction of revenue at the time the related revenues are recognized or when the
`incentives are offered. They are calculated on the basis of historical experience and the specific terms in the individual
`agreements. Estimating such rebate accruals is a complex process and requires significant judgment, especially for
`rebates granted in the context of US reimbursement programs (mainly governmental programs such as Medicaid and
`Managed Medicaid), due to the time lag between the date of sale and the actual settlement of the liability, changes in
`regulations for the various rebate programs, and changing utilization rates and patient populations. Actelion has been
`adjusting its estimates by reversing US rebate accruals during 2013 and 2014, which had a positive impact both on sales
`and on core operating income.
`
`The table below shows Actelion’s performance excluding US rebate reversals:
`
`
`(in CHF millions, except % variance)
`Product sales performance
`Product sales – as reported
`Impact of US rebate reversals
`Product sales excluding US rebate reversals
`
`
`Core operating performance
`Core operating results – as reported
`Impact of US rebate reversals
`Core operating results excluding US rebate reversals
`
`
`(cid:3)
`
`
`
`2014
`
`1,956
`(73)
`1,883
`
`743
`(66)
`677
`
`2013
`
`1,784
`(35)
`1,749
`
`619
`(32)
`588
`
`variance
`CHF
`
`172
`(38)
`134
`
`124
`(35)
`89
`
`
`CHF %
`
`10%
`-
`8%
`
`
`20%
`-
`15%
`
`variance
`CER
`
`CER %
`
`223
`(42)
`181
`
`154
`(38)
`116
`
`12%
`-
`10%
`
`25%
`-
`20%
`
`FINANCIAL REPORT.
`
`15
`
`WATSON LABORATORIES, INC. , IPR2017-01622, Ex. 1071, p. 8 of 44
`
`

`

`CONTENTS
`
`FINANCE
`IN BRIEF
`
`FINANCIAL
`REVIEW
`
`CONSOLIDATED
`FINANCIAL
`STATEMENTS
`
`HOLDING
`COMPANY FINANCIAL
`STATEMENTS
`
`PREVIOUS
`
`NEXT
`
`Actelion Annual Report 2014
`
`CASH FLOW AND CASH POSITION
`
`Operating cash flow
`
`(in CHF millions)1
`
`
`Operating cash flow
`Net results
`Depreciation and amort