Finance Report
`2015
`
`Roche | Finance Report 2015
`
`E
`
`F. Hoffmann-La Roche Ltd
`4070 Basel, Switzerland
`
`© 2016
`
`All trademarks are legally protected.
`
`www.roche.com
`
`0 000 000
`
`Novartis Exhibit 2026.001
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Finance in brief
`
`Sales
`CER growth %
`
`Core operating profit margin,
`% of sales
`
`Key results
`
`Pharmaceuticals
`
`Diagnostics
`
`Group
`
`2015
`2014
`
`2015
`2014
`
`2015
`2014
`
`IFRS results
`Sales
`Operating profit
`Net income
`Net income attributable to Roche shareholders
`Diluted EPS (CHF)
`Dividend per share (CHF) 1)
`
`Core results
`Research and development
`Core operating profit
`Core EPS (CHF)
`
`Free cash flow
`Operating free cash flow
`Free cash flow
`
`Net debt
`
`Capitalisation
` – Debt
` – Equity
`
`1) Proposed by the Board of Directors.
`
`+5.1
`+4.5
`
`+5.9
`+6.4
`
`+5.3
`+4.9
`
`
`
`
`43.0
`43.6
`
`18.0
`19.5
`
`36.4
`37.2
`
`% of sales
`2014
`
`
`29.7
`20.1
`19.7
`
`
`
`
`18.8
`37.2
`
`
`
`33.2
`11.2
`
`% change
`(CER)
`–1
`
`+3
`–8
`+14
`
`2015
`(CHF m)
`
`48,145
`13,821
`9,056
`8,863
`10.28
`8.10
`
`
`9,332
`17,542
`13.49
`
`
`14,872
`3,352
`
`2014
`(CHF m)
`
`47,462
`14,090
`9,535
`9,332
`10.81
`8.00
`
`
`8,913
`17,636
`14.29
`
`
`15,778
`5,322
`
`(CHF)
`
`+1
`–2
`–5
`–5
`–5
`+1
`
`
`+5
`–1
`–6
`
`
`–6
`–37
`
`2015
`(CHF m)
`(14,080)
`
`46,551
`23,251
`23,300
`
`% change
`(CER)
`
`+5
`+5
`+4
`+4
`+7
`
`
`
`+5
`+5
`+4
`
`
`–7
`–41
`
`2014
`(CHF m)
`(14,011)
`
`47,272
`25,714
`21,558
`
`2015
`
`
`28.7
`18.8
`18.4
`
`
`
`
`19.4
`36.4
`
`
`
`30.9
`7.0
`
`(CHF)
`0
`
`–2
`–10
`+8
`
`CER (Constant Exchange Rates): The percentage changes at Constant Exchange Rates are calculated using simulations by reconsolidating both the 2015 and 2014 results at constant
`exchange rates (the average rates for the year ended 31 December 2014).
`
`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.
`This allows a transparent 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 are shown on both an IFRS and core basis. The core concept is fully described on pages 131–134 and reconciliations between the IFRS and Core results are given there.
`
`On the cover
`
`By running the most stringent controls for our medicines we ensure that products which are provided to patients
`meet all the respective production criteria. Here, Stefan Kamber, an in-process-control expert at the Roche Solids
`Production unit in Basel, conducts one of the multiple checks of Cotellic, our new cancer medicine which was
`approved by the FDA and the European Commission in November 2015.
`
`Novartis Exhibit 2026.002
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Finance – 2015 in brief
`
`Roche in 2015
`
`The Roche Group reported strong overall results in 2015. Sales grew by 5% at constant exchange rates (CER) while core earnings per share
`increased by 4%. Excluding the impact of the one-time income in 2014 from the divestment of the filgrastim franchise rights, underlying core
`earnings grew at 7%.
`
`Sales
`
`Group sales increased by 5% (CER) to CHF 48.1 billion (1% growth in CHF terms).
`Pharmaceuticals sales growth was 5% (CER) due to continued strong growth in the HER2 franchise and Avastin in the oncology portfolio.
`In immunology sales of Esbriet and Actemra/RoActemra increased. Sales of Pegasys decreased due to competition from a new generation
`of treatments and Valcyte/Cymevene and Xeloda decreased due to generic competition.
`Diagnostics sales showed growth of 6% (CER) with Professional Diagnostics being the major contributor.
`
`Operating results
`
`Core operating profit increased by 5% (CER) to CHF 17.5 billion (1% decline in CHF terms). Excluding the one-time income in 2014 from
`the divestment of the filgrastim franchise rights, underlying core operating profit grew at 7%.
`Research and development expenditure grew by 5% (CER) to CHF 9.3 billion on a core basis, with focus on the oncology, immunology
`and neuroscience therapeutic areas. Research and development costs were 19.4% of Group sales.
`IFRS operating results include non-core expenses of CHF 3.7 billion. The major factors are CHF 1.7 billion for the amortisation of intangible
`assets, and CHF 1.2 billion from global restructuring plans, notably the Pharmaceuticals Division’s strategic realignment of its manufacturing
`network.
`
`Non-operating results
`
`Core net financial expenses increased by CHF 0.3 billion to CHF 1.4 billion, driven by lower income from divestments of equity securities.
`IFRS net financial expenses additionally includes a loss of CHF 0.4 billion from a major debt restructuring.
`
`Net income
`
`IFRS net income increased by 4% at CER to CHF 9.1 billion (5% decline in CHF terms).
`Core earnings per share increased by 4% at CER (–6% in CHF terms). Excluding the one-time income in 2014 from the divestment of
`the filgrastim franchise rights, underlying earnings per share grew at 7%.
`
`Cash flows
`
`Operating free cash flow was CHF 14.9 billion, a decrease of 7% at CER (–6% in CHF terms). The growth in the operating profit was offset
`by higher capital investments and a lower increase in accounts payable.
`Free cash flow decreased by 41% at CER (–37% in CHF terms) to CHF 3.4 billion, driven by the operating free cash flow decline and higher tax
`and dividend payments.
`Acquisitions, notably the majority stake in Foundation Medicine and the Ariosa and Kapa acquisitions in the Diagnostics sequencing business,
`utilised in total CHF 2.1 billion of cash.
`
`Financial position
`
`Net working capital decreased by 11% (CER), due to an increase in payables since the end of 2014.
`Net debt was stable at CHF 14.1 billion, as the free cash flow was largely absorbed by acquisitions. Net debt as a percentage of total assets
`was 19%.
`Credit ratings strong: Moody’s at A1 and Standard & Poor’s at AA.
`
`Shareholder return
`
`Dividends. A proposal will be made to increase dividends by 1% to CHF 8.10 per share. This will represent the 29th consecutive year of dividend
`growth and will result in a pay-out ratio of 60.0%, subject to AGM approval.
`Total Shareholder Return (TSR) was 6% representing a combined performance of share and non-voting equity security.
`
`Novartis Exhibit 2026.003
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Roche Group
`
`Finance in brief
`
`Finance – 2015 in brief
`
`Financial Review
`
`Roche Group Consolidated Financial Statements
`
`Notes to the Roche Group Consolidated Financial Statements
`
`Inside cover
`
`1
`3
`36
`42
`
` 1. General accounting principles
` 2. Operating segment information
` 3. Net financial expense
` 4.
`Income taxes
` 5. Business combinations
` 6. Global restructuring plans
` 7. Property, plant and equipment
` 8. Goodwill
` 9.
`Intangible assets
`10.
`Inventories
`11. Accounts receivable
`12. Marketable securities
`13. Cash and cash equivalents
`14. Other non-current assets
`15. Other current assets
`16. Accounts payable
`
`42
`44
`47
`48
`51
`58
`61
`64
`66
`69
`69
`70
`70
`71
`71
`72
`
`17. Other non-current liabilities
`72
`18. Other current liabilities
`72
`19. Provisions and contingent liabilities
`73
`20. Debt
`77
`21. Equity attributable to Roche shareholders
`82
`22. Subsidiaries
`85
`23. Non-controlling interests
`87
`24. Employee benefits
`87
`25. Pensions and other post-employment benefits
`88
`26. Equity compensation plans
`94
`27. Earnings per share and non-voting equity security 98
`28. Statement of cash flows
`99
`29. Risk management
`101
`30. Related parties
`110
`31. Subsidiaries and associates
`113
`32. Significant accounting policies
`117
`
`Report of Roche Management on Internal Control over Financial Reporting
`
`Report of the Statutory Auditor to the General Meeting of Shareholders
`of Roche Holding Ltd, Basel
`
`Report of the Independent Auditor on Internal Control over Financial Reporting
`to the Board of Directors of Roche Holding Ltd, Basel
`
`Multi-Year Overview and Supplementary Information
`
`Roche Securities
`
`Roche Holding Ltd, Basel
`
`Financial Statements
`
`Notes to the Financial Statements
`
`Appropriation of Available Earnings
`
`Report of the Statutory Auditor to the General Meeting of Shareholders
`of Roche Holding Ltd, Basel
`
`125
`126
`127
`128
`138
`
`141
`143
`148
`149
`
`Novartis Exhibit 2026.004
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Financial Review | Roche Group
`
`Financial Review
`
`Roche Group results
`
`
`Sales in billions of CHF
`
`Core operating profit in billions of CHF
`
`0
`
`10
`
`20
`
`30
`
`40
`
`50
`
`0
`
`5
`
`10
`
`15
`
`20
`
`% CER growth
`
`2015
`2014
`2013
`
`+5.3
`+4.9
`+6.2
`
`Net income attributable to Roche shareholders in billions of CHF
`
`Core EPS in CHF
`
`0
`
`2
`
`4
`
`6
`
`8
`
`10
`
`12
`
`0
`
`5
`
`10
`
`15
`
`2015
`2014
`2013
`
`8.9
`9.3
`11.2
`
`% of sales
`
`36.4
`37.2
`38.3
`
`13.49
`14.29
`14.27
`
`The Roche Group’s results for 2015 showed sales growth and core operating profit growth of 5% at constant exchange rates (CER).
`Sales increased driven by the oncology and immunology portfolios, especially the medicines for HER2-positive breast cancer, and by
`the Professional Diagnostics business. Core EPS grew at a lower rate than sales due to the base effect of the one-time income in 2014
`from the divestment of the filgrastim franchise rights. Excluding this item, core operating profit and core EPS both grew ahead of sales
`at 7%. Operating free cash flow was CHF 14.9 billion or 30.9% of sales, a decrease of 7% at CER due to increased capital expenditure,
`investments in intangible assets as well as a higher increase in net working capital.
`
`Sales in the Pharmaceuticals Division rose by 5% to CHF 37.3 billion. This increase was driven by the oncology portfolio, especially by
`the HER2 franchise which grew by 19%. Avastin sales were 9% higher with increased use in recently launched indications. Sales in
`immunology grew by 24%, with Actemra/RoActemra and Xolair increasing by 23% and 25% respectively. There was a strong uptake for
`Esbriet following its US launch. Sales of Pegasys declined due to competition from a new generation of treatments and sales of Valcyte/
`Cymevene and Xeloda fell due to generic competition. Tamiflu sales fell due to a relatively mild influenza season. All regions showed
`growth in Pharmaceuticals sales, with the US being most significant. Diagnostics sales grew at 6% to CHF 10.8 billion, further securing
`the Division’s leading market position. The major growth area was Professional Diagnostics, with sales increasing by 8% led by the
`immunodiagnostics business. Molecular Diagnostics and Tissue Diagnostics increased by 10% and 12% respectively while sales in
`Diabetes Care decreased by 3% due to the continued challenging market environment in the US.
`
`Core operating profit increased by 5% in the Pharmaceuticals Division and fell by 2% in the Diagnostics Division. In the Pharmaceuticals
`Division growth in the underlying business more than compensated for the base effect of the divestment income of CHF 428 million from
`the filgrastim franchise rights in 2014. Excluding this item, core operating profit in Pharmaceuticals increased by 8%. Manufacturing
`costs were higher due to capacity expansion and sourcing strategy in biologics, together with higher inventory write-offs. Marketing and
`distribution costs grew by 4% due to the launch and rollout of new products, notably the recently acquired product Esbriet. In research
`and development there were continued investments in oncology and the immunology, inflammation and respiratory therapeutic areas.
`In Diagnostics core operating profit was lower by 2% mainly due to the higher sales being more than offset by costs from the sequencing
`business and increased research and development costs in Professional Diagnostics. Diabetes Care performance was impacted by
`further price erosion in major markets such as the US.
`
`Operating free cash flow was CHF 14.9 billion, a decrease of 7% at CER and 6% in CHF terms. The continuous strong operating cash
`generation was offset by capital investments in manufacturing facilities and other site development projects, notably in Switzerland,
`the US and Germany, by an increased level of in-licensing activities and a lower increase in accounts payable. The free cash flow was
`CHF 3.4 billion with the decrease relative to 2014 mainly driven by the lower operating free cash flow, higher tax payments and higher
`annual dividend payments.
`
`Roche Finance Report 2015 | 3
`
`Novartis Exhibit 2026.005
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Roche Group | Financial Review
`
`IFRS net income grew by 4% at CER compared to the increase of 1% in core net income. In addition to the items described above
`in the core results, the 2014 IFRS results include a base effect from the impairment of goodwill and intangible assets in that year of
`CHF 1.6 billion, net of tax.
`
`In 2015 the Swiss franc appreciated against a number of currencies, in particular against the euro, the Japanese yen and against most
`Latin American and European currencies. These effects were partly offset by the stronger US dollar relative to the average rate in 2014.
`The overall impact is negative on the growth rates expressed in Swiss francs compared to constant exchange rates, with a 4 percentage
`point impact on sales, a 6 percentage point impact on core operating profit and a 10 percentage point impact on Core EPS. The currency
`translation sensitivity of the Group’s results to movements in foreign currency exchange rates is included on page 26.
`
`Income statement
`
`IFRS results
`Sales
`Royalties and other operating income
`Cost of sales
`Marketing and distribution
`Research and development
`General and administration
`Operating profit
`
`Financing costs
`Other financial income (expense)
`Profit before taxes
`
`Income taxes
`Net income
`
`Attributable to
` – Roche shareholders
` – Non-controlling interests
`
`EPS – Basic (CHF)
`EPS – Diluted (CHF)
`
`Core results
`Sales
`Royalties and other operating income
`Cost of sales
`Marketing and distribution
`Research and development
`General and administration
`Operating profit
`
`Financing costs
`Other financial income (expense)
`Profit before taxes
`
`Income taxes
`Net income
`
`Attributable to
` – Roche shareholders
` – Non-controlling interests
`
`Core EPS – Basic (CHF)
`Core EPS – Diluted (CHF)
`
`4 | Roche Finance Report 2015
`
`2015
`(CHF m)
`
`48,145
`2,258
`(15,460)
`(8,814)
`(9,581)
`(2,727)
`13,821
`
`(1,574)
`(260)
`11,987
`
`(2,931)
`9,056
`
`
`8,863
`193
`
`10.42
`10.28
`
`
`48,145
`2,258
`(12,706)
`(8,610)
`(9,332)
`(2,213)
`17,542
`
`(1,140)
`(276)
`16,126
`
`(4,289)
`11,837
`
`
`11,626
`211
`
`13.66
`13.49
`
`2014
`(CHF m)
`
`47,462
`2,404
`(13,381)
`(8,657)
`(9,895)
`(3,843)
`14,090
`
`(1,821)
`246
`12,515
`
`(2,980)
`9,535
`
`
`9,332
`203
`
`10.99
`10.81
`
`
`47,462
`2,404
`(12,341)
`(8,436)
`(8,913)
`(2,540)
`17,636
`
`(1,362)
`246
`16,520
`
`(3,987)
`12,533
`
`
`12,329
`204
`
`14.53
`14.29
`
`% change
`(CHF)
`
`+1
`–6
`+16
`+2
`–3
`–29
`–2
`
`–14
`–
`–4
`
`–2
`–5
`
`
`–5
`–5
`
`–5
`–5
`
`
`+1
`–6
`+3
`+2
`+5
`–13
`–1
`
`–16
`–
`–2
`
`+8
`–6
`
`
`–6
`+3
`
`–6
`–6
`
`% change
`(CER)
`
`+5
`–10
`+19
`+5
`–3
`–28
`+5
`
`–16
`–
`+3
`
`+1
`+4
`
`
`+4
`+4
`
`+7
`+7
`
`
`+5
`–10
`+7
`+5
`+5
`–12
`+5
`
`–17
`–
`+3
`
`+9
`+1
`
`
`+1
`+12
`
`+3
`+4
`
`Novartis Exhibit 2026.006
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Financial Review | Roche Group
`
`Sales
`
`In 2015 sales increased by 5% at CER (+1% in CHF; –2% in USD) to CHF 48.1 billion. Sales in the Pharmaceuticals Division rose 5%
`to CHF 37.3 billion, driven by growth in medicines for HER2-positive breast cancer, as well as by Avastin, Esbriet, MabThera/Rituxan
`and Actemra/RoActemra. Avastin sales grew by 9% driven by increased use in recently launched indications. In immunology there
`was a strong uptake of Esbriet following its US launch in late 2014 and also for the subcutaneous formulation of Actemra/Roactemra.
`Sales of Xolair increased by 25%. Pharmaceuticals sales increased in all regions, and particularly in the US where the HER2 franchise
`grew by 19%. Sales of Pegasys declined due to competition from a new generation of treatments, while Valcyte/Cymevene and Xeloda
`sales declined as both products are now off-patent in the US, with Xeloda additionally off-patent in Europe. Tamiflu sales fell due to the
`relatively mild influenza season in late 2015 compared to the severe influenza season in the comparative period of 2014. Sales of Lucentis
`declined due to strong competition. The Diagnostics Division sales were CHF 10.8 billion, an increase of 6% at CER, and the Division
`retains its leading market position. The major growth area was Professional Diagnostics, which represents more than half of the Division’s
`sales and grew by 8%, led by the immunodiagnostics business. Sales in Molecular Diagnostics and Tissue Diagnostics increased by 10%
`and 12% respectively. Diabetes Care sales decreased by 3% due to continuing US reimbursement cuts and pricing pressure.
`
`Divisional operating results for 2015
`
`Sales
`Core operating profit
` – margin, % of sales
`Operating profit
` – margin, % of sales
`Operating free cash flow
` – margin, % of sales
`
`
`
`Pharmaceuticals
`(CHF m)
`37,331
`16,055
`43.0
`13,003
`34.8
`14,482
` 38.8
`
`Divisional operating results – Development of results compared to 2014
`
`Sales
` – % increase at CER
`Core operating profit
` – % increase at CER
` – margin: percentage point increase
`Operating profit
` – % increase at CER
` – margin: percentage point increase
`Operating free cash flow
` – % increase at CER
` – margin: percentage point increase
`
`Core operating results
`
`
`
`Pharmaceuticals
`
`+5
`
`+5
`+0.2
`
`–3
`–3.1
`
`–5
`–4.1
`
`Diagnostics
`(CHF m)
`10,814
`1,947
`18.0
`1,289
`11.9
`963
`8.9
`
`Diagnostics
`
`+6
`
`–2
`–1.4
`
`+465
`+9.8
`
`–12
`–2.2
`
`Corporate
`(CHF m)
`–
`(460)
`–
`(471)
`–
`(573)
`–
`
`Corporate
`
`–
`
`0
`–
`
`+3
`–
`
`+24
`–
`
`Group
`(CHF m)
`48,145
`17,542
`36.4
`13,821
`28.7
`14,872
`30.9
`
`Group
`
`+5
`
`+5
`–0.2
`
`+5
`–0.2
`
`–7
`–3.8
`
`Pharmaceuticals Division. The Division’s core operating profit increased 5% at CER, in line with the 5% sales increase, as cost growth
`was contained in line with the increased sales. The lower royalties and other operating income were driven by the one-off income of
`CHF 428 million in 2014 for the divestment of the filgrastim franchise rights. Excluding this income, the Division’s core operating profit
`grew at 8%.
`
`Diagnostics Division. Core operating profit was down by 2% at CER, compared to the 6% sales increase. The increased costs from
`the recently acquired companies in the sequencing business more than offset the growth of the underlying business. Diabetes Care was
`impacted by price erosion in major markets like the US.
`
`Roche Finance Report 2015 | 5
`
`Novartis Exhibit 2026.007
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Roche Group | Financial Review
`
`Acquisitions
`
`During 2015 the Roche Group completed the acquisition of several companies, including some previously announced in 2014. The
`total cost of the acquired net assets was CHF 2.3 billion in cash and CHF 0.6 billion from the fair value of contingent consideration
`arrangements.
`
`On 7 April 2015 the Pharmaceuticals Division acquired a 61.3% controlling interest in Foundation Medicine (‘FMI’) for USD 1.0 billion.
`The transaction further advances FMI’s market-leading position in molecular information and genomic analysis while providing the
`Group with a unique opportunity to optimise the identification and development of novel treatment options for cancer patients. The
`Pharmaceuticals Division also completed the acquisition of Trophos. In Diagnostics the Division acquired GeneWeave Biosciences in
`Molecular Diagnostics and, in the sequencing business, Ariosa Diagnostics, Signature Diagnostics, CAPP Medical and Kapa Biosystems.
`
`On 29 September 2014 the Pharmaceuticals Division acquired a 100% controlling interest in InterMune for USD 8.8 billion. The acquisition
`added a new medicine for idiopathic pulmonary fibrosis, Esbriet, to the Roche portfolio. Non-core costs in 2015 relating to InterMune
`included intangible asset amortisation of CHF 1.1 billion and an expense of CHF 552 million from the release of the inventory fair value
`adjustment. The Group issued USD 5.75 billion of debt in 2014 to finance the transaction.
`
`In the 2014 Annual Financial Statements the accounting for the InterMune, Dutalys and Bina acquisitions was provisional based on
`preliminary information and valuations of the assets and liabilities. These valuations were finalised in 2015 and as a result the comparative
`balance sheet information at 31 December 2014 has been restated.
`
`Contingent consideration provisions have increased by CHF 677 million to CHF 1.5 billion in 2015, mainly due to new provisions of
`CHF 567 million arising from the 2015 acquisitions. In addition there was a net increase in provisions of CHF 192 million, which was
`recorded as a general and administration expense, mainly due to the progression of the lead product candidate from the Seragon
`acquisition. This was partially offset by payments of CHF 119 million, mainly related to the IQuum acquisition.
`
`Further details are given in Notes 5, 20 and 29 to the Annual Financial Statements.
`
`Global restructuring plans
`
`During 2015 the Group continued with the implementation of several major global restructuring plans initiated in prior years, notably
`the programme in the Diagnostics Division’s Diabetes Care business. On 12 November 2015 the Pharmaceuticals Division announced
`a strategic realignment of its manufacturing network, including exiting from four sites. Total costs in 2015 of CHF 1.2 billion were
`considerably higher than the 2014 costs of CHF 0.8 billion. This is due to the strategic realignment of the Pharmaceuticals Division’s
`manufacturing network with costs of CHF 0.6 billion in 2015.
`
`Global restructuring plans: costs incurred for 2015 in millions of CHF
`
`Global restructuring costs
` – Employee-related costs
` – Site closure costs
` – Other reorganisation expenses
`Total global restructuring costs
`
`Additional costs
` – Impairment of goodwill
` – Impairment of intangible assets
` – Legal and environmental costs
`
`Total costs
`
`
`
`Diagnostics1)
`
`71
`22
`208
`301
`
`
`–
`–
`–
`
`301
`
`Site consolidation2)
`
`198
`317
`66
`581
`
`
`–
`–
`107
`
`688
`
`Other plans3)
`
`89
`2
`89
`180
`
`
`–
`–
`–
`
`180
`
`Total
`
`358
`341
`363
`1,062
`
`
`–
`–
`107
`
`1,169
`
`1)
`2)
`3)
`
`Includes the Diabetes Care ‘Autonomy and Speed’ restructuring plan.
`Includes the Pharmaceuticals Division strategic realignment of its manufacturing network.
`Includes plans for Pharmaceuticals Division research and development strategic realignment and field force reductions in Europe and Asia-Pacific.
`
`6 | Roche Finance Report 2015
`
`Novartis Exhibit 2026.008
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Financial Review | Roche Group
`
`Diagnostics Division. On 26 September 2013 Roche Diabetes Care announced the ‘Autonomy and Speed’ initiative which will enable
`the business to focus on Diabetes Care’s specific requirements, speed up processes and decision-making and drive efficiencies. In 2015
`costs of CHF 175 million were incurred, mainly for consultancy and IT-related costs as well as employee-related costs. Spending on other
`smaller plans within the Division was CHF 126 million and included costs related to certain IT projects and the restructuring of the former
`Applied Science business.
`
`Site consolidation. On 12 November 2015 the Pharmaceuticals Division announced a strategic realignment of its manufacturing network
`including exiting from the manufacturing sites at Clarecastle, Ireland; Leganés, Spain; Segrate, Italy; and Florence, US. Costs for this
`plan are expected to be in the order of CHF 1.6 billion, of which up to CHF 0.6 billion will be in cash. The plan is expected to run until
`2021 and approximately 1,200 positions will be affected. Costs from this plan in 2015 were CHF 602 million, of which CHF 182 million
`were non-cash write-downs and accelerated depreciation of property, plant and equipment. Additional costs were recorded in the
`Pharmaceuticals Division for the outsourcing of logistics at the Rosny site in France and the closure of the manufacturing site at Toluca,
`Mexico. The divestment plans for the Nutley site are on track.
`
`Other global restructuring plans. The major items were CHF 62 million from the Pharmaceuticals Division research and development
`strategic realignment and CHF 55 million from various initiatives to reduce the field force in the Europe and Asia-Pacific regions.
`
`Further details are given in Note 6 to the Annual Financial Statements.
`
`Impairment of goodwill and intangible assets
`
`There were only minor impairments in 2015. In the Pharmaceuticals Division impairment charges totalled CHF 69 million relating to
`decisions to stop development of various compounds and a collaboration project with different alliance partners. There were no
`impairments in the Diagnostics Division.
`
`Total impairment charges recorded against goodwill and intangible assets in 2014 were CHF 1.9 billion. The major part of this was in the
`Tissue Diagnostics business with impairment charges of CHF 552 million against goodwill and CHF 643 million against product intangible
`assets.
`
`Further details are given in Notes 8 and 9 to the Annual Financial Statements.
`
`Legal and environmental settlements
`
`The legal and environmental settlements include the provision of CHF 107 million for the remediation costs at the Clarecastle production
`site in Ireland following the strategic realignment of the Pharmaceuticals Division’s manufacturing network. There were no other
`significant developments in 2015. Further details are given in Note 19 to the Annual Financial Statements.
`
`Major debt restructuring
`
`As a result of attractive financing conditions on capital markets the Group decided in September 2015 to restructure part of its debt.
`This consisted of the refinancing of USD 0.9 billion of notes with coupons of 5.25%–7.00% originally due in 2019–2039 and EUR 0.4 billion
`of notes with coupons of 6.50% originally due in 2021 with the issuance of USD 1.0 billion of notes due in 2025 with coupons of 3.00%.
`This major debt restructuring resulted in a loss of CHF 381 million. Further details are given in Note 20 to the Annual Financial
`Statements.
`
`Treasury and taxation
`
`Core financing costs were CHF 1.1 billion, a decrease of 17%, mainly due to losses on debt redemption and interest costs being lower
`than in 2014. Core other financial expenses were CHF 276 million, reflecting a net foreign exchange loss of CHF 386 million mainly arising
`from Venezuela and Argentina, partially offset by CHF 118 million of net income from equity securities. Core tax expenses increased by
`9% to CHF 4.3 billion and the Group’s effective core tax rate increased to 26.6% compared to 24.1% in 2014. This was mainly due to the
`higher percentage of core profit contribution coming from tax jurisdictions with higher local tax rates than the average Group tax rate,
`notably in the US.
`
`Roche Finance Report 2015 | 7
`
`Novartis Exhibit 2026.009
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Roche Group | Financial Review
`
`Net income and earnings per share
`
`IFRS net income and diluted EPS both decreased by 5% in CHF terms. At CER the IFRS income increased by 4% and diluted EPS increased
`by 7%. Core net income increased by 1% and Core EPS increased by 4% at CER. The core basis excludes non-core items such as global
`restructuring costs, amortisation and impairment of goodwill and intangible assets, and alliance and business combination costs. Excluding
`the income in 2014 from the divestment of the filgrastim franchise rights of CHF 428 million and the related tax effects of CHF 93 million,
`underlying Core EPS grew at 7% at CER.
`
`Net income
`
`IFRS net income
`
`Reconciling items (net of tax)
` – Global restructuring
` – Intangible asset amortisation
` – Goodwill and intangible asset impairment
` – Alliances and business combinations
` – Legal and environmental settlements
` – Major debt restructuring
` – Pension plan settlements
` – Normalisation of tax benefits for equity compensation plans
`Core net income
`
`
`
`2015
`(CHF m)
`9,056
`
`
`868
`854
`49
`594
`142
`248
`(4)
`30
`11,837
`
`2014
`(CHF m)
`9,535
`
`
`416
`469
`1,580
`32
`190
`279
`–
`32
`12,533
`
`% change
`(CHF)
`–5
`
`
`+109
`+82
`–97
`Over +500
`–25
`–11
`–
`–6
`–6
`
`% change
`(CER)
`+4
`
`
`+124
`+77
`–97
`Over +500
`–19
`–16
`–
`–10
`+1
`
`Supplementary net income and EPS information is given on pages 131 to 134. This includes calculations of core EPS and reconciles
`the core results to the Group’s published IFRS results.
`
`Financial position
`
`Financial position
`
`Pharmaceuticals
`Net working capital
`Long-term net operating assets
`Diagnostics
`Net working capital
`Long-term net operating assets
`Corporate
`Net working capital
`Long-term net operating assets
`Net operating assets
`
`Net debt
`Pensions
`Income taxes
`Other non-operating assets, net
`Total net assets
`
`
`
`2015
`(CHF m)
`
`4,437
`26,179
`
` 2,533
`12,899
`
`(108)
`(258)
`45,682
`
`(14,080)
`(7,699)
`(523)
`(80)
`23,300
`
`20141)
`(CHF m)
`
`5,888
`25,060
`
`2,742
`11,378
`
`(96)
`(418)
`44,554
`
`(14,011)
`(8,303)
`(47)
`(635)
`21,558
`
`% change
`(CHF)
`
`–25
`+4
`
`–8
`+13
`
`+13
`–38
`+3
`
`0
`–7
`Over +500
`–87
`+8
`
`% change
`(CER)
`
`–18
`+6
`
`+4
`+17
`
`+12
`–31
`+6
`
`–1
`–2
`–
`–90
`+14
`
`1)
`
` As disclosed in Note 5 to the Annual Financial Statements, the balance sheet at 31 December 2014 has been restated following the finalisation of the net assets acquired related
`to the InterMune, Dutalys and Bina acquisitions in 2014. A reconciliation to the previously published balance sheet is provided in Note 5.
`
`8 | Roche Finance Report 2015
`
`Novartis Exhibit 2026.010
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Financial Review | Roche Group
`
`Compared to the start of 2015 the Swiss franc appreciated against most currencies, notably the euro and the Brazilian real, which resulted
`overall in a negative translation impact on balance sheet positions. The US dollar ended the year at the same rate against the Swiss franc
`as at the beginning of the year and therefore had little translation impact on balance sheet positions. The exchange rates used are given on
`page 26.
`
`In the Pharmaceuticals Division net working capital decreased by 18% at CER due to an increase in other payables since the end of 2014
`due to the exercise of a purchase option for offices in South San Francisco. In addition trade receivables decreased, mainly in the US,
`as a consequence of lower Tamiflu sales at the end of 2015 and good collections. Inventory levels rose by 2% due to the expansion of
`production capacities including deliveries from external manufacturing partners and also due to higher sales volumes in both new and
`established products. Long-term net operating assets increased as a result of the goodwill and intangible assets from the Foundation
`Medicine and Trophos acquisitions and higher capital expenditure as well as for the purchase option exercise for offices in South
`San Francisco. In Diagnostics the increase in net working capital of 4% was a result of the strong sales performance in 2015 as well
`as challenging political and economic situations which resulted in an increase of 9% in inventories and 9% in account receivables.
`Long-term net operating assets increased due to the intangible assets and goodwill from the various acquisitions in 2015.
`
`Net debt was stable at CHF 14.1 billion as the free cash flow was largely absorbed by acquisitions. The net pension liability decreased
`by CHF 0.6 billion with the main driver being the translation of the euro-denominated unfunded plans in Germany into Swiss francs on
`consolidation. The net tax liabilities increased mainly due to the deferred tax effects from the acquisition accounting.
`
`Free cash flow
`
`Free cash flow
`
`Pharmaceuticals
`Diagnostics
`Corporate
`Operating free cash flow
`Treasury activities
`Taxes paid
`Dividends paid
`Free cash flow
`
`
`
`2015
`(CHF m)
`14,482
`963
`(573)
`14,872
`(870)
`(3,696)
`(6,954)
`3,352
`
`2014
`(CHF m)
`14,821
`1,417
`(460)
`15,778
`(756)
`(2,982)
`(6,718)
`5,322
`
`% change
`(CHF)
`–2
`–32
`+25
`–6
`+15
`+24
`+4
`–37
`
`% change
`(CER)
`–5
`–12
`+24
`–7
`+13
`+25
`+4
`–41
`
`The Group’s operating free cash flow for 2015 was CHF 14.9 billion, a decrease of 7% at CER and 6% in CHF terms. The operating cash
`generation was absorbed by higher investments in property, plant and equipment for site infrastructure and office development projects
`and expansion of manufacturing facilities and by the increased in-licensing arrangements in the Pharmaceuticals Division. The free cash
`flow of CHF 3.4 billion decreased significantly compared to 2014, due to the relatively lower operating free cash flow, higher tax payments
`and the increase in the annual dividend.
`
`Roche Finance Report 2015 | 9
`
`Novartis Exhibit 2026.011
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Roche Group | Financial Review
`
`Pharmaceuticals Division operating results
`
`Pharmaceuticals Division operating results
`
`
`
`IFRS results
`Sales
`Royalties and other operating income
`Cost of sales
`M