Finance Report
`2016
`
`Roche | Finance Report 2016
`
`E
`
`F. Hoffmann-La Roche Ltd
`4070 Basel, Switzerland
`
`© 2017
`
`All trademarks are legally protected.
`
`www.roche.com
`
`7 000 992
`
`Novartis Exhibit 2027.001
`Regeneron v. Novartis, IPR2020-01317
`
`

`

`Total Shareholder Return (TSR) was minus 13% representing the combined performance of share and non-voting equity security.
`growth and will result in a pay-out ratio of 56.4%, subject to AGM approval.
`Dividends. A proposal will be made to increase dividends by 1% to CHF 8.20 per share. This will represent the 30th consecutive year of dividend
`
`Shareholder return
`
`Credit ratings strong: Moody’s at A1 and Standard & Poor’s at AA.
`of total assets was 17%.
`Net debt decreased to CHF 13.2 billion, as the generated free cash flow more than offset the dividends paid. Net debt as a percentage
`This was partly offset by higher payables.
`Net working capital increased by 4% (CER), due to an increase in receivables driven by increased sales and due to higher inventories.
`
`Financial position
`
`contributions.
`Free cash flow decreased by 14% at CER (11% in CHF terms) to CHF 9.1 billion, driven by the lower operating free cash flow and higher pension
`(5% in CHF terms).
`higher capital expenditure, an increase in net working capital and higher investments in intangible assets, which led to a decrease of 7% at CER
`Operating free cash flow remained strong at CHF 14.1 billion. The underlying growth in operating cash generation was more than offset by
`
`Cash flows
`
`Core earnings per share increased by 5% at CER (+8% in CHF terms).
`IFRS net income increased by 7% at CER to CHF 9.7 billion (7% increase in CHF terms).
`
`Net income
`
`IFRS net financial expenses in 2015 included a loss of CHF 0.4 billion from a major debt restructuring.
`IFRS net financial expenses decreased by CHF 0.8 billion to CHF 1.1 billion as a result of the decrease in core net financial expenses.
`partially offset by higher losses on bond redemptions.
`Core net financial expenses decreased by CHF 0.4 billion to CHF 1.0 billion, driven by lower foreign exchange losses, lower interest expenses,
`
`Non-operating results
`
`the Pharmaceuticals Division’s strategic realignment of its manufacturing network.
`intangible assets, CHF 1.5 billion for the impairment of goodwill and intangible assets and CHF 1.2 billion from global restructuring plans, notably
`IFRS operating results include non-core expenses (pre-tax) of CHF 4.4 billion. The major factors were CHF 1.8 billion for the amortisation of
`therapeutic areas. Research and development costs represented 19.6% of Group sales.
`Research and development expenditure grew by 5% (CER) to CHF 9.9 billion on a core basis, with the focus on the oncology and immunology
`Core operating profit increased by 4% (CER) to CHF 18.4 billion (5% increase in CHF terms).
`
`Operating results
`
`Diagnostics sales showed growth of 7% (CER) with the Centralised and Point of Care Solutions business being the major contributor.
`decreased due to competitive pressure.
`In immunology, sales of Actemra/RoActemra, Esbriet and Xolair increased. Avastin sales were stable. Sales of Pegasys, Tarceva and Lucentis
`Pharmaceuticals sales growth was 3% (CER) due to continued growth in the HER2 franchise and MabThera/Rituxan in the oncology portfolio.
`Group sales increased by 4% (CER) to CHF 50.6 billion (5% growth in CHF terms).
`
`Sales
`
`by 7% and core earnings per share by 5%.
`The Roche Group reported good overall results in 2016. Sales grew by 4% at constant exchange rates (CER) while IFRS net income increased
`
`Roche in 2016
`
`Finance – 2016 in brief
`
`+11
`–6
`+3
`
`
`
`–9
`(CER)
`% change
`
`21.4
`30.9
`
`
`
`
`
`
`
`36.4
`19.4
`
`
`
`
`
`
`
`
`
`18.4
`18.8
`28.7
`
`
`
`
`
`2015
`% of sales
`
`36.4
`36.4
`
`18.0
`16.7
`
`43.0
`43.2
`
`+13
`–4
`+5
`
`
`
`–6
`(CHF)
`
`18.1
`27.9
`
`
`
`
`
`
`
`36.4
`19.6
`
`
`
`
`
`
`
`
`
`18.9
`19.2
`27.8
`
`
`
`
`
`2016
`
`
`
`
`
`
`
`+5
`+4
`+5
`
`
`
`
`
`
`
`+5
`+8
`+7
`+1
`+4
`
`
`
`a detailed breakdown see pages 140–142.
`in an increase of CHF 6,954 million to the free cash flow for that period. There was no impact on the operating free cash flow from this change. For the definition of free cash flow and
`The Group has refined the calculation of free cash flow in 2016 to exclude dividends, in line with its peer group. The free cash flow for 2015 has been restated accordingly, resulting
`
`are shown on both an IFRS and core basis. The core concept is fully described on pages 137–140 and reconciliations between the IFRS and Core results are given there.
`This allows an assessment of both the actual results and the underlying performance of the business. A full income statement for the Group and the operating results of the divisions
`Core results and Core EPS (earnings per share): These exclude non-core items such as global restructuring plans and amortisation and impairment of goodwill and intangible assets.
`
`exchange rates (the average rates for the year ended 31 December 2015). For the definition of CER see page 144.
`CER (Constant Exchange Rates): The percentage changes at Constant Exchange Rates are calculated using simulations by reconsolidating both the 2016 and 2015 results at constant
`
`23,300
`23,251
`46,551
`
`(14,080)
`(CHF m)
`2015
`
`–14
`–7
`
`26,402
`22,355
`48,757
`
`
`
`(13,248)
`(CHF m)
`2016
`
`–11
`–5
`
`
`
`
`
` +8
`+5
`+6
`
`
`
`
`
`+1
`+8
`+8
`+7
`+2
`+5
`
`
`
`(CER)
`% change
`
`(CHF)
`
`10,306
`14,872
`
`
`
`
`
`13.49
`17,542
`9,332
`
`
`
`
`
`8.10
`10.28
`8,863
`9,056
`13,821
`48,145
`
`
`
`(CHF m)
`2015
`
`9,130
`14,086
`
`
`
`
`
`14.53
`18,420
`9,915
`
`
`
`
`
`8.20
`11.13
`9,576
`9,733
`14,069
`50,576
`
`
`
`(CHF m)
`2016
`
`
`
`
`
`+5.3
`+4.0
`
`+5.9
`+6.5
`
`+5.1
`+3.3
`
`1) Proposed by the Board of Directors.
`
` –Equity
` –Debt
`Capitalisation
`
`
`
`Net debt
`
`Free cash flow
`Operating free cash flow
`Free cash flow
`
`
`
`Core EPS (CHF)
`Core operating profit
`Research and development
`Core results
`
`
`
`Dividend per share (CHF) 1)
`Diluted EPS (CHF)
`Net income attributable to Roche shareholders
`Net income
`Operating profit
`Sales
`IFRS results
`
`2015
`2016
`
`2015
`2016
`
`2015
`2016
`
`Group
`
`Diagnostics
`
`Pharmaceuticals
`
`Key results
`
`% of sales
`Core operating profit margin,
`
`CER growth %
`Sales
`
`Finance in brief
`
`Novartis Exhibit 2027.002
`Regeneron v. Novartis, IPR2020-01317
`
`

`

`Roche Finance Report 2016 | 3
`
`The Group’s effective tax rates were higher due to the deferred tax impact arising from tax rate changes.
`basis they were additionally lower due to the comparative 2015 results including a loss of CHF 0.4 billion from a major debt restructuring.
`On a core basis net financial expenses were lower due to reductions in foreign exchange losses and lower interest expenses. On an IFRS
`
`cash flow was CHF 9.1 billion, a decrease due to the lower operating free cash flow and higher pension contributions.
`spending for launch preparations. These factors combined to give a decrease of 7% at CER (5% in CHF terms) relative to 2015. The free
`and at the South San Francisco campus. The increase in net working capital in 2016 came from inventories where there was increased
`manufacturing investments in the US, Switzerland, Germany and at Chugai. There were also site development activities in Switzerland
`higher capital expenditure, an increase in net working capital and higher investments in intangible assets. Capital expenditure included
`Operating free cash flow was CHF 14.1 billion and remained strong. The growth in the cash generation of the businesses was offset by
`
`were positively impacted by the accounting effects of changes to the Group’s Swiss pension plans.
`Research and development expenses increased in the sequencing and molecular diagnostics businesses. The results of both divisions
`in immunology. Cost of sales in the Diagnostics Division grew due to an unfavourable product mix and higher costs from external suppliers.
`Ocrevus. In research and development, there were continued investments in oncology, especially in the cancer immunotherapy field, and
`offset by lower royalty expenses. Marketing and distribution costs grew driven by launch costs for new products, notably for Tecentriq and
`core operating profit were 4% and 1% respectively. The Pharmaceuticals Division’s cost of sales increased manufacturing costs were
`IFRS operating profit increased by 1% in the Pharmaceuticals Division and was down by 1% in the Diagnostics Division. The increases in
`
`7% and 14% respectively, while sales in Diabetes Care decreased by 4% due to continuing challenging market conditions in the US.
`Centralised and Point of Care Solutions, with sales increasing by 9%. Molecular Diagnostics and Tissue Diagnostics sales increased by
`in the US and Europe. Diagnostics sales grew at 7%, consolidating the division’s leading market position. The major growth area was
`respectively while sales of Pegasys, Tarceva and Lucentis declined under competitive pressure. Regional growth was most significant
`HER2 franchise which grew by 8%. Sales in immunology grew by 10%, with Actemra/RoActemra and Xolair increasing by 16% and 15%
`Sales in the Pharmaceuticals Division rose by 3% to CHF 39.1 billion. This increase was driven by the oncology portfolio, especially the
`
`working capital and increased investments in intangible assets.
`Operating free cash flow was CHF 14.1 billion or 27.9% of sales, a decrease of 7% due to higher capital expenditure, an increase in net
`Group’s Swiss pension plans. Additionally costs grew in the Diagnostics Division due to the expansion of the sequencing business.
`increased expenditure in research and development and in launch expenses for new products, offset by income from changes to the
`especially the HER2 franchise, and by the Centralised and Point of Care Solutions business in the Diagnostics Division. There was
`core operating profit by 4% and core EPS by 5%. The sales increase was driven by the Pharmaceuticals Division’s oncology portfolio,
`The Roche Group’s results for 2016 showed sales growth of 4% at constant exchange rates (CER), with IFRS operating profit up by 1%,
`
`14.29
`13.49
`14.53
`
`37.2
`36.4
`36.4
`
`% of sales
`
`15
`
`10
`
`5
`
`0
`
`12
`
`10
`
`8
`
`6
`
`4
`
`2
`
`0
`
`Core EPS in CHF
`
`Net income attributable to Roche shareholders in billions of CHF
`
`9.3
`8.9
`9.6
`
`2014
`2015
`2016
`
`20
`
`15
`
`10
`
`5
`
`0
`
`50
`
`40
`
`30
`
`20
`
`10
`
`0
`
`% CER growth
`
`+4.9
`+5.3
`+4.0
`
`2014
`2015
`2016
`
`Core operating profit in billions of CHF
`
`Sales in billions of CHF
`
`
`
`Roche Group results
`
`Financial Review
`
`Financial Review | Roche Group
`
`156
`155
`150
`148
`
`145
`134
`133
`125
`124
`
`Statutory Auditor’s Report to the General Meeting of Roche Holding Ltd, Basel
`
`Appropriation of Available Earnings
`
`Notes to the Financial Statements
`
`Financial Statements
`
`Roche Holding Ltd, Basel
`
`Multi-Year Overview and Supplementary Information
`
`Roche Securities
`
`to the Board of Directors of Roche Holding Ltd, Basel
`Report of the Independent Auditor on Internal Control over Financial Reporting
`
`Statutory Auditor’s Report to the General Meeting of Roche Holding Ltd, Basel
`
`Report of Roche Management on Internal Control over Financial Reporting
`
`32.Significant accounting policies
`116
`31.Subsidiaries and associates
`111
`30.Related parties
`109
`29.Risk management
`100
`28.Statement of cash flows
`98
`27.Earnings per share and non-voting equity security97
`26.Equity compensation plans
`93
`25.Pensions and other post-employment benefits
`87
`24.Employee benefits
`86
`23.Non-controlling interests
`86
`22.Subsidiaries
`84
`21.Equity attributable to Roche shareholders
`81
`20.Debt
`76
`19.Provisions and contingent liabilities
`72
`18.Other current liabilities
`71
`17.Other non-current liabilities
`71
`
`71
`70
`70
`69
`69
`68
`68
`65
`63
`60
`57
`54
`51
`50
`46
`44
`
`16.Accounts payable
`15.Other current assets
`14.Other non-current assets
`13.Cash and cash equivalents
`12.Marketable securities
`11.Accounts receivable
`10.
`9.
`8.Goodwill
`7.
`6.Global restructuring plans
`5.
`4.
`3.Net financial expense
`2.Operating segment information
`1.General accounting principles
`
`Inventories
`Intangible assets
`
`Property, plant and equipment
`
`Business combinations
`Income taxes
`
`44
`38
`
`
`
`13
`
`Inside cover
`
`Notes to the Roche Group Consolidated Financial Statements
`
`Roche Group Consolidated Financial Statements
`
`Financial Review
`
`Finance – 2016 in brief
`
`Finance in brief
`
`Roche Group
`
`Novartis Exhibit 2027.003
`Regeneron v. Novartis, IPR2020-01317
`
`

`

`Roche Finance Report 2016 | 5
`
`development costs increased due to the sequencing business. These were partly offset by the income from the Swiss pension plan changes.
`of an unfavourable product mix due to higher instrument placements and because of higher costs from external suppliers. Research and
`Diagnostics Division. Core operating profit increased by 1% at CER, below the 7% increase in sales. Cost of sales were higher because
`
`the Swiss pension plan changes.
`immunology, as well as launch expenses for Tecentriq and Ocrevus and other new products. This was partly offset by the income from
`decreased due to the expiry of some patents. There was increased expenditure in research and development, especially in oncology and
`costs of sales grew as a result of the investments in the internal and external biologics manufacturing network, while royalty expenses
`Pharmaceuticals Division. The division’s core operating profit increased 4% at CER, ahead of the 3% sales increase. Manufacturing
`
`grew by 2% for the Group and for the Pharmaceuticals Division, while it declined by 2% in the Diagnostics Division.
`points for the Pharmaceuticals Division and 0.7 percentage points for the Diagnostics Division. Excluding this item, core operating profit
`Switzerland (CHF 341 million after tax). At CER this had a positive margin impact of 0.8 percentage points for the Group, 0.9 percentage
`In 2016 there was a significant income item in the core results of CHF 426 million from changes to the Group’s pension plans in
`
`–3.4
`–7
`
`
`
`–0.8
`+1
`
`
`
`+0.1
`+4
`
`
`
`+4
`
`
`
`Group
`
`27.9
`14,086
`27.8
`14,069
`36.4
`18,420
`50,576
`(CHF m)
`Group
`
`–
`–14
`
`
`
`–
`–9
`
`
`
`–
`–11
`
`
`
`–
`
`
`
`–3.1
`–30
`
`
`
`–0.8
`–1
`
`
`
`–0.8
`+1
`
`
`
`+7
`
`
`
`–3.5
`–6
`
`
`
`–0.7
`+1
`
`
`
`+0.4
`+4
`
`
`
`+3
`
`
`
`Corporate
`
`Diagnostics
`
`Pharmaceuticals
`
`
`
`Core operating results
`
` –margin: percentage point increase
` –% increase at CER
`Operating free cash flow
` –margin: percentage point increase
` –% increase at CER
`Operating profit
` –margin: percentage point increase
` –% increase at CER
`Core operating profit
` –% increase at CER
`Sales
`
`Divisional operating results – Development of results compared to 2015
`
`–
`
`(493)
`
`–
`
`(429)
`
`–
`
`(410)
`
`–
`
`(CHF m)
`Corporate
`
`6.3
`720
`10.6
`1,213
`16.7
`1,921
`11,473
`(CHF m)
`Diagnostics
`
`35.4
`13,859
`34.0
`13,285
`43.2
`16,909
`39,103
`(CHF m)
`Pharmaceuticals
`
`
`
` –margin, % of sales
`Operating free cash flow
` –margin, % of sales
`Operating profit
` –margin, % of sales
`Core operating profit
`Sales
`
`Divisional operating results for 2016
`
`in North America.
`increased by 7% and 14% respectively. Diabetes Care sales decreased by 4%, impacted by continuing challenging market conditions
`of the division’s sales. This growth was led by the immunodiagnostics business. Sales in Molecular Diagnostics and Tissue Diagnostics
`growth area was in Centralised and Point of Care Solutions (formerly Professional Diagnostics), which represents more than half
`Sales in the Diagnostics Division were CHF 11.5 billion, an increase of 7% at CER, consolidating its leading market position. The major
`
`Cotellic added CHF 0.4 billion of sales.
`Lucentis declined under competitive pressure by a total of CHF 0.6 billion. The recently launched products Alecensa, Tecentriq and
`sales remained stable with a decrease in the US offset by higher sales in the International region. Sales of Pegasys, Tarceva and
`Sales grew in all regions, particularly in the US and Europe where the HER2 franchise grew by 4% and 8% respectively. Overall Avastin
`CHF 39.1 billion, driven by growth in the HER2 franchise, as well as by Actemra/RoActemra, MabThera/Rituxan, Esbriet and Xolair.
`In 2016 sales increased by 4% at CER (+5% in CHF; +3% in USD) to CHF 50.6 billion. Sales in the Pharmaceuticals Division rose 3% to
`
`Sales
`
`Financial Review | Roche Group
`
`+5
`+5
`
`
`
`–25
`+7
`
`
`
`
`
`+7
`+9
`
`
`
`+7
`
`–
`
`–10
`
`
`
`+4
`–19
`+5
`+4
`+5
`–11
`+4
`
`
`
`
`
`+5
`+5
`
`
`
`–30
`+8
`
`
`
`
`
`+7
`+10
`
`
`
`+8
`
`–
`
`–31
`
`
`
`+1
`–38
`+19
`+3
`+3
`–11
`+4
`
`
`
`(CER)
`% change
`
`–
`
`
`
`–
`
`
`
`
`
`
`
`+8
`+7
`
`–14
` +8
`
`
`
`+7
` +10
`
`+8
`
`–9
`
`+5
`–18
`+6
`+5
`+6
`–9
`+5
`
`
`
`
`
`+8
`+8
`
`
`
`–19
`+8
`
`
`
`
`
`+7
`+12
`
`
`
`+9
`
`–30
`
`
`
`+2
`–37
` +20
`+4
`+5
`–9
`+5
`
`
`
`(CHF)
`% change
`
`13.49
`13.66
`
`
`
`211
`11,626
`
`
`
`
`
`11,837
`(4,289)
`
`
`
`16,126
`
`(276)
`(1,140)
`
`
`
`17,542
`(2,213)
`(9,332)
`(8,610)
`(12,706)
`2,258
`48,145
`
`
`
`
`
`10.28
`10.42
`
`
`
`193
`8,863
`
`
`
`
`
`9,056
`(2,931)
`
`
`
`11,987
`(260)
`(1,574)
`
`
`
`13,821
`(2,727)
`(9,581)
`(8,814)
`(15,460)
`2,258
`48,145
`
`
`
`(CHF m)
`2015
`
`14.53
`14.68
`
`
`
`181
`12,507
`
`
`
`
`
`12,688
`(4,735)
`
`
`
`17,423
`37
`(1,034)
`
`
`
`18,420
`(1,825)
`(9,915)
`(9,007)
`(13,469)
`2,060
`50,576
`
`
`
`
`
`11.13
`11.24
`
`
`
`157
`9,576
`
`
`
`
`
`9,733
`(3,274)
`
`
`
`13,007
`37
`
`(1,099)
`
`
`
`14,069
`(1,715)
`(11,532)
`(9,140)
`(16,180)
`2,060
`50,576
`
`
`
`(CHF m)
`2016
`
`4 | Roche Finance Report 2016
`
`Core EPS – Diluted (CHF)
`Core EPS – Basic (CHF)
`
`
`
` –Non-controlling interests
` –Roche shareholders
`Attributable to
`
`
`
`Net income
`Income taxes
`
`
`
`Profit before taxes
`Other financial income (expense)
`Financing costs
`
`
`
`Operating profit
`General and administration
`Research and development
`Marketing and distribution
`Cost of sales
`Royalties and other operating income
`Sales
`Core results
`
`
`
`EPS – Diluted (CHF)
`EPS – Basic (CHF)
`
`
`
` –Non-controlling interests
` –Roche shareholders
`Attributable to
`
`
`
`Net income
`Income taxes
`
`
`
`Profit before taxes
`Other financial income (expense)
`Financing costs
`
`
`
`Operating profit
`General and administration
`Research and development
`Marketing and distribution
`Cost of sales
`Royalties and other operating income
`Sales
`IFRS results
`
`Income statement
`
`a 1 percentage point impact on sales and core operating profit and 3 percentage points on Core EPS.
`and the euro. The overall impact is positive on the results expressed in Swiss francs compared to constant exchange rates, with
`In 2016 compared to 2015, the Swiss franc was weaker against most major currencies, in particular the Japanese yen, the US dollar
`
`consideration provisions.
`the IFRS results reflect impacts from higher intangible asset impairment and amortisation than in 2015, offset by releases from contingent
`Net income increased by 7% at CER on both an IFRS basis and a core basis. In addition to the items described above in the core results,
`
`Roche Group | Financial Review
`
`Novartis Exhibit 2027.004
`Regeneron v. Novartis, IPR2020-01317
`
`

`

`Roche Finance Report 2016 | 7
`
`6 | Roche Finance Report 2016
`
`Further details are given in Note 6 to the Annual Financial Statements.
`
`providers.
`strategic realignment and CHF 90 million in informatics mainly for the outsourcing of IT functions to shared service centres and external
`Other global restructuring plans. The major items were CHF 74 million from the Pharmaceuticals Division research and development
`
`remediation.
`the Nutley site in the US was completed in the second half of 2016 and resulted in an increase in provisions for environmental
`equipment and CHF 396 million were related to other site closures costs, reorganisation costs and employee costs. The divestment of
`were CHF 733 million, of which CHF 337 million were non-cash write-downs and accelerated depreciation of property, plant and
`exiting from the manufacturing sites at Clarecastle, Ireland; Leganés, Spain; Segrate, Italy; and Florence, US. Costs from this plan in 2016
`Site consolidation. In 2015 the Pharmaceuticals Division announced a strategic realignment of its manufacturing network including
`
`included costs related to certain IT projects.
`of CHF 106 million related to site closures and employees. Spending on other smaller plans within the division was CHF 74 million and
`consultancy and IT-related matters as well as employee-related costs. New strategy plans in Diagnostics and Diabetes Care incurred costs
`Diagnostics Division. In 2016 costs from the Roche Diabetes Care ‘Autonomy and Speed’ initiative were CHF 132 million, mainly for
`
`Includes plans for Pharmaceuticals Division research and development strategic realignment and IT outsourcing.
`Includes the Pharmaceuticals Division strategic realignment of its manufacturing network.
`Includes the Diabetes Care ‘Autonomy and Speed’ restructuring plan.
`
`3)
`2)
`1)
`
`when excluding the positive impact from the changes to the Group’s Swiss pension plans.
`amortisation and impairment of goodwill and intangible assets, and alliance and business combination costs. Core EPS increased by 2%
`net income increased by 7% and Core EPS by 5% at CER. The core basis excludes non-core items such as global restructuring costs,
`IFRS net income increased by 7% in CHF terms and in CER while diluted EPS increased by 8% in CHF terms and by 5% at CER. Core
`
`Net income and earnings per share
`
`tax impact arising from tax rate changes.
`to CHF 4.7 billion and the Group’s effective core tax rate was 27.2% compared to 26.6% in 2015. This was largely due to the deferred
`exchange losses of CHF 124 million. IFRS tax expenses were CHF 3.3 billion, an increase of 10%. Core tax expenses increased by 9%
`income was CHF 37 million including net income from equity securities of CHF 154 million which was mostly offset by the net foreign
`restructuring. On a core basis financing costs were down by 10% at CHF 1.0 billion, driven by lower interest expenses. Other financial
`Financing costs were 31% lower on an IFRS basis due to a loss in the comparative period of CHF 381 million from a major debt
`
`Treasury and taxation
`
`Statements.
`of the Nutley site. There were no other significant developments in 2016. Further details are given in Note 19 to the Annual Financial
`The legal and environmental cases include an increase in provisions of CHF 24 million for environmental matters following the divestment
`
`Legal and environmental cases
`
`employment benefits is given in Note 25 to the Annual Financial Statements.
`additional contributions to the plans in Switzerland, the US and Ireland. Further information on the Group’s pensions and other post-
`and CHF 39 million in Corporate. The after-tax impact was CHF 341 million. Pension contributions were higher in 2016 due to
`changes. Of this amount, CHF 310 million was recorded in the Pharmaceuticals Division, CHF 77 million in the Diagnostics Division
`in Switzerland that were announced in June 2016. This represents the impact of the adjustment of the pension liability for the plan
`During 2016 operating income of CHF 426 million was recorded for past service costs from changes to the Group’s pension plans
`
`1,257
`
`197
`
`
`
`24
`–
`–
`
`
`
`
`
`1,233
`527
`403
`303
`
`
`
`Total
`
`
`
`–
`–
`–
`
`
`
`
`
`197
`67
`3
`127
`
`
`
`748
`
`
`
`24
`–
`–
`
`
`
`
`
`724
`271
`367
`86
`
`
`
`312
`
`
`
`–
`
`–
`
`–
`
`
`
`
`
`312
`189
`33
`90
`
`
`
`Total costs
`
`
`
` –Legal and environmental cases
` –Impairment of intangible assets
` –Impairment of goodwill
`Additional costs
`
`
`
`Total global restructuring costs
` –Other reorganisation expenses
` –Site closure costs
` –Employee-related costs
`Global restructuring costs
`
`Other plans3)
`
`Site consolidation2)
`
`Diagnostics1)
`
`
`
`Pensions and other post-employment benefits
`
`Global restructuring plans: costs incurred for 2016 in millions of CHF
`
`Further details are given in Notes 8 and 9 to the Annual Financial Statements.
`
`agreement with an alliance partner.
`product intangibles in use of CHF 63 million as a result of a decision to stop the product development, commercialisation and licence
`The Diagnostics Division recorded impairment charges of CHF 70 million with the largest item being the impairment of sequencing
`
`item was an impairment charge of CHF 162 million for one compound following a portfolio reassessment.
`two acquisitions which increased income by a total of CHF 389 million, noted above in the ‘Acquisitions’ commentary. The other major
`of the Trophos acquisition following regulatory feedback. There were related releases of contingent consideration provisions for these
`Additionally in the first half of 2016 there was CHF 187 million related to a delay in the development of the compound acquired as part
`a decision to stop development of one compound acquired as part of the Seragon acquisition following a clinical data assessment.
`There were impairment charges of CHF 1,438 million in the Pharmaceuticals Division. The largest item was CHF 885 million related to
`
`Impairment of goodwill and intangible assets
`
`Financial Review | Roche Group
`
`the Diagnostics Division.
`the strategic realignment of the Pharmaceuticals Division’s manufacturing network, and programmes to address long-term strategy in
`During 2016 the Group continued with the implementation of several major global restructuring plans initiated in prior years, notably
`
`Global restructuring plans
`
`adjustment, which is now fully unwound. Further details are given in Notes 5 and 29 to the Annual Financial Statements.
`Non-core costs also include expenses of CHF 167 million (2015: CHF 552 million) from the release of the Esbriet inventory fair value
`respectively which offset this provision reversal as noted below in the ‘Impairment of goodwill and intangible assets’ commentary.
`acquisitions. There were two intangible asset impairment charges of CHF 885 million and CHF 187 million related to Seragon and Trophos
`the release of contingent consideration provisions, mainly due to the partial reversal of the provisions related to the Seragon and Trophos
`The Roche Group did not complete any business combinations in 2016. During 2016 there was CHF 408 million of non-core income from
`
`Acquisitions
`
`Roche Group | Financial Review
`
`Novartis Exhibit 2027.005
`Regeneron v. Novartis, IPR2020-01317
`
`

`

`Roche Finance Report 2016 | 9
`
`8 | Roche Finance Report 2016
`
`from this change.
`group. Comparative 2015 free cash flow information has been restated accordingly. There was no impact on the operating free cash flow
`higher pension contributions. The Group has refined the calculation of the free cash flow in 2016 to exclude dividends, in line with its peer
`in intangible assets. The free cash flow was CHF 9.1 billion, a decrease compared to 2015, due to the lower operating free cash flow and
`in cash generation of the business was offset by higher capital expenditures, an increase in net working capital and higher investments
`The Group’s operating free cash flow for 2016 remained strong at CHF 14.1 billion. The decrease relative to 2015 occurred as the growth
`
`For the definition of free cash flow and a detailed breakdown see pages 140–142.
`
`–14
`–1
`+41
`–7
`–14
`–30
`–6
`(CER)
`% change
`
`–11
` +1
` +40
`–5
`–14
`–25
`–4
`(CHF)
`% change
`
`10,306
`(3,696)
`(870)
`14,872
`(573)
`963
`14,482
`(CHF m)
`2015
`
`9,130
`(3,738)
`(1,218)
`14,086
`(493)
`720
`13,859
`(CHF m)
`2016
`
`
`
`Free cash flow
`Taxes paid
`Treasury activities
`Operating free cash flow
`Corporate
`Diagnostics
`Pharmaceuticals
`
`Free cash flow
`
`Free cash flow
`
`equity compensation plans that are variable according to the price of the underlying equity.
`the main factors being the deferred tax effects from the impairment of intangible assets, from decreased net pension liabilities and from
`pension contributions, which more than offset the impact of lower discount rates in all regions. The net tax liabilities decreased with
`payments of CHF 7.0 billion. The net pension liability decreased to CHF 6.9 billion due to improved asset performance and additional
`Net debt was CHF 13.2 billion, a decrease of CHF 0.8 billion, with the free cash flow of CHF 9.1 billion being largely used for the dividend
`
`Financial Review | Roche Group
`
`optimisation measures. Long-term net operating assets increased mainly due to continued capital expenditure.
`increased due to sales growth in the Asia-Pacific and Latin America regions. Payables increased since the end of 2015 as a result of
`driven by an increase in inventories due to higher demand in emerging markets and the preparation for new launches. Trade receivables
`of one compound acquired as part of the Seragon acquisition. In Diagnostics the increase in net working capital of 10% at CER was
`vendors to extended payment terms. Long-term net operating assets were lower mainly due to amortisation and due to an impairment
`in inventories for launch preparations was offset by inventory write-downs. Payables increased as a result of further conversion of
`Underlying inventory levels remained stable overall, excluding the final unwind of the Esbriet inventory fair value adjustment. An increase
`In the Pharmaceuticals Division net working capital was stable at CER. There was an increase in trade receivables in line with sales growth.
`
`used are given on page 27.
`net operating assets was offset at Group level by the natural hedge from the Group’s US dollar-denominated debt. The exchange rates
`the Brazilian real, which resulted in a positive translation impact on balance sheet positions. The positive US dollar translation impact on
`Compared to the start of the year the Swiss franc depreciated significantly against the Japanese yen and also against the US dollar and
`
`+11
`–
`–38
`–10
`–9
`
`0
`
`–19
`–4
`
`+2
`+10
`
`–2
`
`
`
`0
`
`+13
`–
`–25
`–10
`–6
`
`+2
`–17
`–4
`
`+4
`+10
`
`0
`
`+3
`
`
`
`(CER)
`% change
`
`(CHF)
`% change
`
`23,300
`
`(80)
`(523)
`(7,699)
`(14,080)
`
`
`
`45,682
`
`(258)
`(108)
`
`
`
`12,899
` 2,533
`
`
`
`26,179
`4,437
`
`
`
`(CHF m)
`2015
`
`26,402
`353
`(390)
`(6,940)
`(13,248)
`
`
`
`46,627
`(213)
`(104)
`
`13,392
`2,796
`
`26,174
`4,582
`
`
`
`(CHF m)
`2016
`
`
`
`Total net assets
`Other non-operating assets, net
`Income taxes
`Pensions
`Net debt
`
`
`
`Net operating assets
`Long-term net operating assets
`Net working capital
`Corporate
`Long-term net operating assets
`Net working capital
`Diagnostics
`Long-term net operating assets
`Net working capital
`Pharmaceuticals
`
`Financial position
`
`Financial position
`
`the core results to the Group’s published IFRS results.
`Supplementary net income and EPS information is given on pages 137 to 140. This includes calculations of core EPS and reconciles
`
`+7
`+252
`+209
`–100
`–61
`–
`Over +500
`+5
`+10
`
`
`
`
`
`+7
`(CER)
`% change
`
`+7
`+260
`+175
`–100
`–60
`
`–
`
`Over +500
`+7
`+11
`
`
`
`
`
` +7
`(CHF)
`% change
`
`11,837
`30
`(4)
`248
`142
`594
`49
`854
`868
`
`
`
`
`
`9,056
`(CHF m)
`2015
`
`12,688
`108
`(11)
`0
`57
`
`(222)
`1,146
`912
`965
`
`
`
`
`
`9,733
`(CHF m)
`2016
`
`
`
`Core net income
` –Normalisation of equity compensation plan tax benefit
` –Pension plan settlements
` –Major debt restructuring
` –Legal and environmental cases
` –Alliances and business combinations
` –Goodwill and intangible asset impairment
` –Intangible asset amortisation
` –Global restructuring plans
`Reconciling items (net of tax)
`
`
`
`IFRS net income
`
`Net income
`
`Roche Group | Financial Review
`
`Novartis Exhibit 2027.006
`Regeneron v. Novartis, IPR2020-01317
`
`

`

`1) Total MabThera/Rituxan sales of CHF 7,300 million (2015: CHF 7,045 million) split between oncology and immunology franchises.
`
`39,103
`
`3,456
`1,508
`328
`512
`1,108
`
`
`
`
`
`657
`367
`290
`
`1,406
`1,406
`
`
`
`1,773
`116
`259
` 298
`306
`794
`
`
`
`
`
`6,970
`104
`685
`741
`768
`1,477
`1,498
`1,697
`
`
`
`24,841
`1,050
`196
`506
`831
`1,024
`1,846
`5,823
`6,782
`6,783
`
`(CHF m)
`2016
`
`Total sales
`
`Total other therapeutic areas
`Others
`NeoRecormon/Epogin
`Mircera
`Activase/TNKase
`Other therapeutic areas
`
`Total Neuroscience
`Others
`Madopar
`Neuroscience
`
`
`
`Total Ophthalmology
`Lucentis
`Ophthalmology
`
`
`
`Total Infectious diseases
`Others
`Pegasys
`Rocephin
`Valcyte/Cymevene
`Tamiflu
`Infectious diseases
`
`Total Immunology
`Others
`Pulmozyme
`CellCept
`Esbriet
`MabThera/Rituxan 1)
`Xolair
`Actemra/RoActemra
`Immunology
`
`
`
`Total Oncology
`Others
`Gazyva/Gazyvaro
`Xeloda
`Kadcyla
`Tarceva
`Perjeta
`MabThera/Rituxan 1)
`Herceptin
`Avastin
`Oncology
`
`
`
`Pharmaceuticals Division – Sales
`
`Product sales
`
`Discount Program.
`Rituxan and Herceptin, were negatively impacted by an increase in reserves for mandatory discounts to hospitals under the 340B Drug
`were stable with the lower US sales offset by growth in the International region, particularly in China. Sales in the US, notably of MabThera/
`from Xolair and Esbriet sales in the US. MabThera/Rituxan sales continued to grow, especially in the US, China and Germany. Avastin sales
`uptake of Kadcyla. Sales increases in immunology mainly came from increasing use of Actemra/RoActemra in Europe and the US, and
`The growth of 8% in the HER2 franchise resulted from increased demand for Perjeta and Herceptin in combination therapy and continued
`
`100
`9
`2
`4
`5
`17
`63
`(2015)
`% of sales
`
`100
`7
`
`2
`
`–3.5
`–6
`
`
`
`
`
`–2
`–2
`
`0
`
`
`
`
`
`+0.4
`+4
`–23
`+4
`+3
`+1
`–10
`+3
`
`
`
`
`
`–0.7
`+1
`–52
`+20
`+2
`–1
`–10
`+3
`
`
`
`(CER)
`% change
`
`
`
`
`
`
`
`0
`
`0
`
`
`
`
`
`10 | Roche Finance Report 2016
`
`Alecensa, Tecentriq and Cotellic added C