Finance Report
`2018
`
`P A T I E N T S
`In cancer, modern care helps
`where no effective treatments were
`available previously. Innovative
`therapies allow this woman on
`the cover picture to carry on with
`her life. See back cover for more.
`
`I N N O V A T I O N
`Advanced analytics enable us to
`create a wealth of new data insights
`and opportunities across
`the
`entire  product lifecycle and R&D
`value chain to ultimately improve
`outcomes for patients.
`
`P A R T N E R S
`Roche is expanding its colla b-
`orations, combining
`its own
`strengths with the unique tools of
`its partners to elevate personalised
`healthcare to a new level for many
`more patients.
`
`Roche | Finance Report 2018
`
`E
`
`Novartis Exhibit 2028.001
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Finance in Brief
`
`Sales
`CER growth %
`
`Core operating profit margin
`% of sales
`
`Key results
`
`Pharmaceuticals
`
`Diagnostics
`
`Group
`
`2018
`2017
`
`2018
`2017
`
`2018
`2017
`
`IFRS results
`Sales
`Operating profit
`Net income
`Net income attributable to Roche shareholders
`Diluted EPS (CHF)
`Dividend per share (CHF)
`
`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.
`
`+7.2
`+5.3
`
`+7.0
`+5.0
`
`+7.1
`+5.2
`
`
`
`
`43.1
`42.7
`
`15.9
`15.8
`
`36.1
`35.7
`
`% of sales
`2017
`
`
`24.4
`16.6
`16.2
`
`
`
`
`19.5
`35.7
`
`
`
`33.4
`25.2
`
`% change
`(CER)
`–19
`
`+4
`–1
`+6
`
`2018
`(CHF m)
`
`56,846
`14,769
`10,865
`10,500
`12.21
`8.701)
`
`
`11,047
`20,505
`18.14
`
`
`18,741
`14,811
`
`2017
`(CHF m)
`
`53,299
`13,003
`8,825
`8,633
`10.04
`8.30
`
`
`10,392
`19,012
`15.34
`
`
`17,827
`13,420
`
`(CHF)
`
`+7
`+14
`+23
`+22
`+22
`+5
`
`
`+6
`+8
`+18
`
`
`+5
`+10
`
`2018
`(CHF m)
`(5,652)
`
`49,136
`18,770
`30,366
`
`% change
`(CER)
`
`+7
`+15
`+24
`+23
`+23
`
`
`
`+6
`+9
`+19
`
`
`+5
`+11
`
`2017
`(CHF m)
`(6,963)
`
`47,967
`18,960
`29,007
`
`2018
`
`
`26.0
`19.1
`18.5
`
`
`
`
`19.4
`36.1
`
`
`
`33.0
`26.1
`
`(CHF)
`–19
`
`+2
`–1
`+5
`
`CER (Constant Exchange Rates): The percentage changes at constant exchange rates are calculated using simulations by reconsolidating both the 2018 and 2017 results at constant
`exchange rates (the average rates for the year ended 31 December 2017). For the definition of CER see page 162.
`
`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 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
`are shown on both an IFRS and core basis. The core concept is fully described on pages 155–158 and reconciliations between the IFRS and core results are given there.
`
`Free cash flow is used to assess the Group’s ability to generate the cash required to conduct and maintain its operations. It also indicates the Group’s ability to generate cash
`to finance dividend payments, repay debt and to undertake merger and acquisition activities. The free cash flow concept is used in the internal management of the business.
`The free cash flow concept is fully described on pages 158–160 and reconciliations between the IFRS cash flow and free cash flow are given there.
`
`Novartis Exhibit 2028.002
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Finance – 2018 in Brief
`
`Roche in 2018
`
`The Roche Group reported very strong overall results in 2018. Sales grew by 7% at constant exchange rates (CER). IFRS net income increased
`by 24% (CER) and core earnings per share increased by 19% (CER). A major driver was the US tax reform and, excluding this, core earnings
`per share grew by 8%.
`
`Sales
`
`Group sales increased by 7% (CER) to CHF 56.8 billion (7% growth in CHF terms).
`Pharmaceuticals sales growth was 7% (CER) due to the new medicines Ocrevus, Perjeta, Tecentriq, Alecensa and Hemlibra. In oncology
`there was continued growth in the HER2 franchise and Avastin. MabThera/Rituxan sales fell following biosimilar launches in Europe while
`biosimilar entry in the US was delayed. Immunology sales increased, led by Actemra/RoActemra and Xolair.
`Diagnostics sales showed growth of 7% (CER) with the immunodiagnostics business being the major contributor.
`
`Operating results
`
`Core operating profit increased by 9% (CER) to CHF 20.5 billion (8% increase in CHF terms).
`Research and development expenditure grew by 6% (CER) to CHF 11.0 billion on a core basis, with focus on the oncology, neuroscience
`and immunology therapeutic areas. Research and development costs represented 19.4% of Group sales.
`IFRS operating results include non-core expenses (pre-tax) of CHF 5.7 billion. The major factors were CHF 3.3 billion for the impairment of
`goodwill and intangible assets, notably CHF 1.8 billion relating to the InterMune acquisition.
`
`Non-operating results
`
`Financing costs (IFRS) decreased by 8% to CHF 0.8 billion due to the base effect of 2017 debt redemption losses.
`Income tax expenses (IFRS) decreased by 3% at CER to CHF 3.3 billion. The effective core tax rate for 2018 was 19.7%, with the US tax reform
`decreasing this rate by more than 7 percentage points.
`
`Net income
`
`IFRS net income increased by 24% at CER to CHF 10.9 billion (23% increase in CHF terms).
`Core earnings per share increased by 19% at CER (+18% in CHF terms).
`
`Cash flows
`
`Operating free cash flow increased to CHF 18.7 billion. The underlying cash generation in both divisions led to an increase of operating free
`cash flow of 5% at CER and in CHF terms.
`Free cash flow increased by 11% at CER (+10% in CHF terms) to CHF 14.8 billion, driven by the higher operating free cash flow and lower
`income tax payments.
`
`Financial position
`
`Net working capital decreased by 10% (CER), driven by lower inventories in the Pharmaceuticals Division.
`Net debt decreased to CHF 5.7 billion, the free cash flow more than covered the dividends and payments for mergers and acquisitions.
`Net debt as a percentage of total assets was 7.2%.
`Credit ratings strong: Moody’s at Aa3 and Standard & Poor’s at AA.
`
`Shareholder return
`
`Dividends. A proposal will be made to increase dividends by 5% to CHF 8.70 per share. This will represent the 32nd consecutive year of dividend
`growth and will result in a pay-out ratio of 48.0%, subject to AGM approval.
`Total Shareholder Return (TSR) was 2% representing the combined performance of share and non-voting equity security.
`
`Novartis Exhibit 2028.003
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Roche Group
`
`Finance in Brief
`
`Finance – 2018 in Brief
`
`Financial Review
`
`Roche Group Consolidated Financial Statements
`
`Notes to the Roche Group Consolidated Financial Statements
`
`Inside cover
`
`1
`3
`40
`46
`
`1. General accounting principles
`2. Operating segment information
`3. Revenue
`4. Net financial expense
`5.
`Income taxes
`6. Mergers and acquisitions
`7. Global restructuring plans
`8. Property, plant and equipment
`9. Goodwill
`10.
`Intangible assets
`11.
`Inventories
`12. Accounts receivable
`13. Marketable securities
`14. Cash and cash equivalents
`15. Other non-current assets
`16. Other current assets
`17. Accounts payable
`
`46
`48
`51
`54
`55
`58
`62
`65
`68
`72
`75
`76
`76
`77
`77
`78
`78
`
`18. Other non-current liabilities
`79
`19. Other current liabilities
`79
`20. Provisions and contingent liabilities
`80
`21. Debt
`85
`22. Equity attributable to Roche shareholders
`89
`23. Subsidiaries and associates
`92
`24. Non-controlling interests
`95
`25. Employee benefits
`96
`26. Pensions and other post-employment benefits
`96
`27. Equity compensation plans
`103
`28. Earnings per share and non-voting equity security 106
`29. Statement of cash flows
`107
`30. Risk management
`109
`31. Related parties
`120
`32. List of subsidiaries and associates
`122
`33. Significant accounting policies
`127
`
`Report of Roche Management on Internal Control over Financial Reporting
`
`Statutory Auditor’s Report to the General Meeting of Roche Holding Ltd, Basel
`
`Independent Reasonable Assurance Report on Internal Control over Financial Reporting
`
`Multi-Year Overview and Supplementary Information
`
`Roche Securities
`
`Roche Holding Ltd, Basel
`
`Financial Statements
`
`Notes to the Financial Statements
`
`Appropriation of Available Earnings
`
`Statutory Auditor’s Report to the General Meeting of Roche Holding Ltd, Basel
`
`141
`142
`150
`152
`163
`
`166
`168
`173
`174
`
`Novartis Exhibit 2028.004
`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
`
`2018
`2017
`2016
`
`+ 7.1
`+5.2
`+4.0
`
`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
`
`2018
`2017
`2016
`
`10.5
`8.6
`9.6
`
`% of sales
`
`36.1
`35.7
`36.4
`
`18.14
`15.34
`14.53
`
`In 2018 the Roche Group reported sales growth of 7% at constant exchange rates (CER) and core operating profit growth of 9%. IFRS net
`income increased by 24% and Core EPS increased by 19% due to the growth of the business and the impact of the 2017 US tax reform.
`The sales growth was driven by the new Pharmaceuticals medicines, which more than compensated for the growing impacts of biosimilar
`competition in Europe, and by the immunodiagnostics business in the Diagnostics Division. The Group improved its operating profitability
`through various productivity initiatives, while supporting the launch of new products and continuing its investments in research and
`development. Operating free cash flow was CHF 18.7 billion, an increase of 5%, due to higher cash generated by the business partly offset
`by higher capital expenditure.
`
`Divisional operating results for 2018
`
`Sales
`Core operating profit
` – margin, % of sales
`Operating profit
` – margin, % of sales
`Operating free cash flow
` – margin, % of sales
`
`
`
`Pharmaceuticals
`(CHF m)
`43,967
`18,942
`43.1
`14,788
`33.6
`17,851
`40.6
`
`Divisional operating results – Development of results compared to 2017
`
`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
`
`
`
`Pharmaceuticals
`
`+7
`
`+8
`+0.5
`
`+13
`+1.6
`
`+6
`–0.3
`
`Diagnostics
`(CHF m)
`12,879
`2,046
`15.9
`617
`4.8
`1,416
`11.0
`
`Diagnostics
`
`+7
`
`+9
`+0.3
`
`+115
`+2.6
`
`–8
`–1.8
`
`Corporate
`(CHF m)
`–
`(483)
`–
`(636)
`–
`(526)
`–
`
`Corporate
`
`–
`
`–4
`–
`
`+16
`–
`
`–3
`–
`
`Group
`(CHF m)
`56,846
`20,505
`36.1
`14,769
`26.0
`18,741
`33.0
`
`Group
`
`+7
`
`+9
`+0.5
`
`+15
`+1.7
`
`+5
`–0.5
`
`Roche Finance Report 2018 | 3
`
`Novartis Exhibit 2028.005
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Roche Group | Financial Review
`
`Sales in the Pharmaceuticals Division were CHF 44.0 billion (2017: 41.2 billion). New products were the major growth driver, with Ocrevus,
`Perjeta, Tecentriq, Alecensa and Hemlibra together contributing an additional CHF 2.9 billion (CER) of new sales. Ocrevus in particular
`continued its strong performance with total sales now reaching CHF 2.4 billion due to continuing growth in the US and launches in most
`major European markets in 2018. Perjeta sales were CHF 2.8 billion, an increase of 27%, with higher demand in early-stage adjuvant
`settings in the US. New product sales more than compensated for the initial impacts of biosimilar entry in Europe and Japan, where sales
`of MabThera/Rituxan and Herceptin fell by CHF 1.3 billion (CER) during 2018. The first biosimilar versions of MabThera/Rituxan were
`anticipated to come to market in the US in mid- to end-2018. The first biosimilar versions of MabThera/Rituxan, Herceptin and Avastin are
`now anticipated to come to market in the US in the second half of 2019. Avastin sales were 3% higher mainly due to growth in China.
`Sales growth in immunology was 8%, with sales of Actemra/RoActemra, Xolair and Esbriet all increasing by over 10%. Lucentis sales grew
`18% in the US with increased market share across all indications. Competitive pressure in the US led to a 36% fall in Tarceva sales.
`
`The Diagnostics Division reported sales of CHF 12.9 billion, an increase of 7% at CER. The major growth area was Centralised and
`Point of Care Solutions, which represented more than half of the division’s sales and which grew by 8%, led by the immunodiagnostics
`business. Molecular Diagnostics sales increased by 5%, with growth from the cobas Liat system, blood screening and virology
`businesses, while Diabetes Care sales increased by 2%.
`
`IFRS operating profit increased by 13% in the Pharmaceuticals Division and by 115% in the Diagnostics Division, with the results of
`both divisions impacted by impairments of goodwill and intangible assets in both the current year and the comparative period. The 2018
`results include CHF 3.3 billion for the impairment of goodwill and intangible assets, with the largest items being CHF 1.8 billion relating
`to the InterMune acquisition. Impairments of goodwill and intangible assets in 2017 were CHF 3.5 billion. Amortisation of intangible assets
`was CHF 1.3 billion and there were CHF 0.9 billion of expenses from global restructuring plans.
`
`The Pharmaceuticals Division’s core operating profit increased by 8% at CER, which was above the 7% sales increase. Cost of sales
`increased by 10%, due to volume-driven growth in manufacturing costs and increased royalty expenses, notably for Ocrevus. Marketing
`and distribution grew by 4% due to product launches including Ocrevus and Tecentriq. Research and development costs grew by 6%,
`especially in the oncology, neuroscience and immunology therapeutic areas. Operating profitability benefited from various productivity
`initiatives. IFRS operating profit grew ahead of the core operating profit due to lower restructuring charges and also due to lower
`amortisation charges for intangible assets. Operating free cash flow grew with the underlying business partly offset by higher capital
`expenditure, notably at Chugai.
`
`In the Diagnostics Division core operating profit increased by 9% at CER, which was also above the increase in sales of 7%. Cost of
`sales grew by 6% due to increased sales volumes partially offset by favourable instrument and reagent mixes. Research and development
`increased by 7% due to higher spending on high/mid-volume systems in Centralised and Point of Care Solutions and development of
`digital clinical decision support products. IFRS operating profit grew by more than core operating profit as a result of lower amortisation
`charges for intangible assets. Operating free cash flow was 11% of sales, but decreased due to the higher net working capital.
`
`The Group’s operating free cash flow was CHF 18.7 billion, an increase of 5% at CER, due to the high cash generation of the business,
`partly offset by higher capital expenditure. The free cash flow was CHF 14.8 billion, an increase of CHF 1.4 billion, due to the higher
`operating free cash flow and lower income tax payments.
`
`Financing costs were 8% lower on an IFRS basis at CHF 0.8 billion due to the base impact of the losses on debt redemption in the prior
`year. Income tax expenses were lower, with the Group’s effective core tax rate at 19.7% compared to 26.6% in 2017. This was largely due
`to the impact from the US tax reform which decreased the effective core tax rate by more than 7 percentage points.
`
`Net income increased by 24% at CER on an IFRS basis and by 20% on a core basis, driven in both cases by the operating results and
`the impact of the US tax reform. Excluding the impact of the US tax reform Core EPS increased by 8%.
`
`The results expressed in Swiss francs were negatively impacted by the appreciation of the Swiss franc against the US dollar and the
`Brazilian real, partly offset by the depreciation of the Swiss franc against the euro. The net impact on the results expressed in Swiss francs
`compared to constant exchange rates was negligible on sales and a 1 percentage point impact on core operating profit and on Core EPS.
`
`4 | Roche Finance Report 2018
`
`Novartis Exhibit 2028.006
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Income statement
`
`IFRS results
`Sales
`Royalties and other operating income
`Revenue
`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 1)
`Sales
`Royalties and other operating income
`Revenue
`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)
`
`1) See pages 155–158 for the definition of core results and Core EPS.
`
`Financial Review | Roche Group
`
`2018
`(CHF m)
`
`56,846
`2,651
`59,497
`(17,269)
`(10,109)
`(12,092)
`(5,258)
`14,769
`
`(770)
`149
`14,148
`
`(3,283)
`10,865
`
`
`10,500
`365
`
`12.29
`12.21
`
`
`56,846
`2,635
`59,481
`(15,464)
`(9,905)
`(11,047)
`(2,560)
`20,505
`
` (744)
`149
`19,910
`
`(3,929)
`15,981
`
`
`15,593
`388
`
`18.25
`18.14
`
`2017
`(CHF m)
`
`53,299
`2,447
`55,746
`(18,179)
`(9,847)
`(11,292)
`(3,425)
`13,003
`
`(839)
`84
`12,248
`
`(3,423)
`8,825
`
`
`8,633
`192
`
`10.12
`10.04
`
`
`53,299
`2,447
`55,746
`(14,366)
`(9,512)
`(10,392)
`(2,464)
`19,012
`
`(819)
`75
`18,268
`
`(4,864)
`13,404
`
`
`13,192
`212
`
`15.47
`15.34
`
`% change
`(CHF)
`
`+7
`+8
`+7
`–5
`+3
`+7
`+54
`+14
`
`–8
`+77
`+16
`
`–4
`+23
`
`
`+22
`+90
`
`+21
`+22
`
`
`+7
`+8
`+7
`+8
`+4
`+6
`+4
`+8
`
`–9
`+99
`+9
`
`–19
`+19
`
`
`+18
`+83
`
`+18
`+18
`
`% change
`(CER)
`
`+7
`+9
`+7
`–5
`+3
`+7
`+54
`+15
`
`–8
`+73
`+17
`
`–3
`+24
`
`
`+23
`+88
`
`+23
`+23
`
`
`+7
`+8
`+7
`+8
`+4
`+6
`+4
`+9
`
`–9
`+94
`+10
`
`–18
`+20
`
`
`+19
`+82
`
`+19
`+19
`
`Roche Finance Report 2018 | 5
`
`Novartis Exhibit 2028.007
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Roche Group | Financial Review
`
`Mergers and acquisitions
`
`The Group has implemented the amendments to IFRS 3 ‘Business Combinations’ issued in October 2018. The amendments further
`clarify the definition of a business. The effect of the amendments is particularly applicable for many of the acquisitions carried out by
`the Roche Group, since the value in the acquired companies often consists of the rights to a single product or technology. From 2018
`such transactions will be accounted for as asset acquisitions rather than as business combinations. As a result the acquisition of Ignyta
`has been reassessed and accounted for as an asset acquisition in the 2018 Annual Financial Statements rather than as a business
`combination as disclosed in the 2018 Interim Financial Statements. Further details are given in Note 6 to the Annual Financial Statements.
`
`Business combinations. On 5 April 2018 the Pharmaceuticals Division acquired a 100% controlling interest in Flatiron Health, Inc.
`(‘Flatiron Health’) for CHF 1.6 billion. Flatiron Health is a market leader in the curation and development of real-world evidence for cancer
`research as well as oncology-specific electronic health record software.
`
`Asset acquisitions. On 8 February 2018 the Pharmaceuticals Division acquired a 100% controlling interest in Ignyta, Inc. (‘Ignyta’)
`for CHF 1.8 billion. With the acquisition, the Group obtained rights to Ignyta’s lead product candidate, entrectinib, an orally bioavailable,
`CNS-active tyrosine kinase inhibitor for patients who have tumours that harbour ROS1 or NTRK fusions. The Pharmaceuticals Division
`also completed the acquisitions of Tusk Therapeutics Ltd and Jecure Therapeutics, Inc. for a total cash consideration of CHF 0.2 billion.
`
`Other transactions. On 18 June 2018 the Group entered into a merger agreement with Foundation Medicine, Inc. (‘FMI’) to acquire
`the outstanding shares of FMI’s common stock not already owned by the Group at a price of USD 137.00 per share in cash. FMI has
`been a fully consolidated subsidiary of the Group since 2015. On 31 July 2018 the transaction closed and FMI became a 100% owned
`subsidiary of the Group. The cash consideration for the purchase of all public shares, including shares issuable on FMI’s outstanding
`stock incentive plans and payment of related fees and expenses, amounted to CHF 2.3 billion. These amounts have been recorded to
`equity as a change in ownership interest in subsidiaries.
`
`Further details are given in Notes 6 and 30 to the Annual Financial Statements.
`
`Global restructuring plans
`
`During 2018 the Group continued with the implementation of various resourcing flexibility plans in its Pharmaceuticals Division to address
`various future challenges including biosimilar competition. The focus areas of the plans include biologics manufacturing, commercial
`operations and product development/strategy. The Group also continued with the implementation of several major global restructuring
`plans initiated in prior years, notably the strategic realignment of the Pharmaceuticals Division’s manufacturing network, and programmes
`to address long-term strategy in the Diagnostics Division.
`
`Global restructuring plans: costs incurred in 2018 in millions of CHF
`
`Global restructuring costs
` – Employee-related costs
` – Site closure costs
` – Divestment of products and businesses
` – Other reorganisation expenses
`Total global restructuring costs
`
`Additional costs
` – Impairment of goodwill
` – Impairment of intangible assets
` – Legal and environmental cases
`
`Total costs
`
`
`
`Diagnostics1)
`
`105
`49
`8
`73
`235
`
`
`0
`0
`7
`
`242
`
`Site consolidation2)
`
`153
`173
`0
`1
`327
`
`
`0
`0
`12
`
`339
`
`Other plans3)
`
`202
`5
`0
`138
`345
`
`
`0
`0
`0
`
`345
`
`Total
`
`460
`227
`8
`212
`907
`
`
`0
`0
`19
`
`926
`
`1)
`2)
`3)
`
`Includes strategy plans in the Diagnostics Division.
`Includes the Pharmaceuticals Division’s strategic realignment of its manufacturing network and resourcing flexibility in biologics manufacturing network.
` Includes plans for outsourcing of IT and other functions to shared service centres and external providers and for resourcing flexibility in the Pharmaceuticals Division’s
`commercial operations and global product development/strategy organisations.
`
`6 | Roche Finance Report 2018
`
`Novartis Exhibit 2028.008
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Financial Review | Roche Group
`
`Diagnostics Division. Strategy plans in the Diagnostics Division incurred costs of CHF 87 million mainly for employee-related matters.
`Costs of CHF 36 million are included for the divestment of subsidiary in Germany and costs related to a reorganisation in the Molecular
`Diagnostics business were CHF 27 million. Spending on other plans within the division was CHF 92 million.
`
`Site consolidation. Costs from the Pharmaceuticals Division’s strategic realignment of its manufacturing network were CHF 117 million
`and mainly related to the exit from the manufacturing site at Clarecastle, Ireland. The resourcing flexibility plan in the biologics
`manufacturing network incurred costs of CHF 215 million, mainly relating to asset impairment and severance costs. Integration costs
`following the Ignyta acquisition were CHF 46 million.
`
`Other global restructuring plans. Resourcing flexibility initiatives in the Pharmaceuticals Division incurred costs of CHF 146 million,
`mainly employee-related. The other major item was CHF 111 million for plans for outsourcing to shared service centres and external
`providers. Other plans include IT plans totalling CHF 88 million.
`
`In 2017 total global restructuring costs were CHF 1.2 billion. Further details are given in Note 7 to the Annual Financial Statements.
`
`Impairment of goodwill and intangible assets
`
`Pharmaceuticals Division. There were impairment charges of CHF 2.4 billion, with the major item being net expenses of CHF 1.8 billion
`relating to the goodwill and intangible assets from the InterMune acquisition in 2014.
`
`During 2018 the Group made a comprehensive reassessment of the cash-generating units used for allocating goodwill in the
`Pharmaceuticals Division, as detailed in Note 9 to the Annual Financial Statements. This reassessment was made in light of the following
`factors:
` • Ongoing business transformations within the Pharmaceuticals Division during 2018.
` • The acquisition of Flatiron Health effective April 2018 and the transaction to fully acquire Foundation Medicine effective July 2018.
` • The early adoption of the amendments to IFRS 3 ‘Business Combinations’ that were issued in October 2018. These amendments further
`clarify the definition of a business and whether a transaction represents in substance the purchase of a business or a single asset or
`group of similar assets.
`
`The Group reviewed the assets and liabilities that were acquired in 2014 from the InterMune transaction in detail including the initial
`valuations, the reports made for the purposes of the acquisition accounting and subsequent integration process. The conclusion of this
`review was that, apart from the intangible asset representing the acquired rights to Esbriet and the related deferred taxation liabilities,
`there were no other assets or liabilities recorded on the Group’s balance sheet, no other revenue streams and no other parts of the
`acquired company that had any synergistic benefits for the continued operations of the Roche Group.
`
`In substance, as at 31 December 2018, the remaining value to the Group from the InterMune acquisition is estimated at CHF 2.4 billion.
`This solely relates to the acquired rights to Esbriet and should be reported in the Group’s balance sheet as a product intangible asset
`in use. Therefore the previously recorded impairment on the Esbriet product intangible asset in use was partially reversed and the asset
`concerned was written up to its estimated recoverable value of CHF 2.4 billion. An income of CHF 0.3 billion was recorded for this.
`The main factor leading to this was an increase in forecasted cash flows relative to the previous year’s long-term forecast due to an
`improvement in sales expectations.
`
`A full impairment of CHF 2.0 billion was recorded for the goodwill from the InterMune acquisition. There is no surplus from Esbriet
`revenues to support the carrying value of the goodwill, neither are there any synergistic benefits to other products in the same
`therapeutic area. Accordingly the separable recoverable value of this goodwill is estimated to be zero and it has been fully impaired.
`
`This reassessment of the cash-generating units used for allocating goodwill in the Pharmaceuticals Division, and the resulting impairment
`entries recorded, aligns historic transactions with transactions from 2018 onwards, which will use the revised IFRS 3 definition of
`a business that was detailed above in the section on ‘Mergers and acquisitions’.
`
`Other impairments in the Pharmaceuticals Division totalled CHF 0.6 billion, of which the largest were impairment charges of CHF 0.2 billion
`related to the Trophos acquisition from 2015. This follows from the decision to stop the development of the compound acquired. There
`was a decrease in the contingent consideration provisions, mainly due to the reversal of the remaining provision related to the Trophos
`acquisition, which contributed to the income of CHF 0.1 billion.
`
`Roche Finance Report 2018 | 7
`
`Novartis Exhibit 2028.009
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`Roche Group | Financial Review
`
`Diagnostics Division. The Diagnostics Division recorded impairment charges of CHF 1.0 billion. The major part of this was in the
`sequencing business with impairment charges of CHF 0.6 billion. These impairments are due to a change in the commercialisation
`strategy for related products, a change in timelines for future product development and a decrease in forecasted cash flows from revised
`sales assumptions. In addition, in the Centralised and Point of Care Solutions business, a full impairment of CHF 0.4 billion was recorded
`against the goodwill and product intangible assets acquired as part of the Constitution Medical Investors acquisition from 2013. This was
`due to a decision to change the commercialisation strategy for diagnostics instruments used in haematology testing.
`
`In 2017 there were impairment charges of CHF 2.6 billion in the Pharmaceuticals Division. The largest item was a charge of CHF 1.7 billion
`for the partial impairment of the Esbriet product intangible acquired as part of the InterMune acquisition. The Diagnostics Division
`recorded impairment charges of CHF 0.9 billion. The major part of this was in the sequencing business.
`
`Further details are given in Notes 9 and 10 to the Annual Financial Statements.
`
`Legal and environmental cases
`
`There were no significant developments in 2018. In 2017, based on the development of the various litigations, notably the Accutane case,
`some of the provisions previously held were released, resulting in income of CHF 219 million in 2017. Further details are given in Note 20
`to the Annual Financial Statements.
`
`Net income and earnings per share
`
`IFRS net income increased by 23% in CHF terms and by 24% at CER, while the diluted EPS increased by 22% in CHF terms and by 23%
`at CER. Core net income increased by 20% at CER and Core EPS increased by 19%. The core basis excludes non-core items such as
`global restructuring costs, amortisation and impairment of goodwill and intangible assets, and income and impacts from the accounting
`for merger and acquisition transactions and alliance arrangements. Core EPS increased by 8% at CER when excluding the impact of
`the 2017 changes to the US tax rates effective from 1 January 2018.
`
`Net income
`
`IFRS net income
`
`Reconciling items (net of tax)
` – Global restructuring plans
` – Intangible asset amortisation
` – Goodwill and intangible asset impairment
` – Mergers and acquisitions and alliance transactions
` – Legal and environmental cases
` – Pension plan settlements
` – Transitional effect of changes in US tax rates
` – Normalisation of equity compensation plan tax benefit
`Core net income
`
`
`
`2018
`(CHF m)
`10,865
`
`
`759
`1,110
`3,107
`21
`131
`4
`(35)
`19
`15,981
`
`2017
`(CHF m)
`8,825
`
`
`962
`1,178
`2,651
`(347)
`(30)
`18
`116
`31
`13,404
`
`% change
`(CHF)
`+23
`
`
`–21
`–6
`+17
`–
`–
`–78
`–
`–39
`+19
`
`% change
`(CER)
`+24
`
`
`–22
`–6
`+18
`–
`–
`–79
`–
`–38
`+20
`
`Supplementary net income and EPS information is given on pages 155 to 158. This includes calculations of Core EPS and reconciles
`the core results to the Group’s published IFRS results.
`
`8 | Roche Finance Report 2018
`
`Novartis Exhibit 2028.010
`Regeneron v. Novartis, IPR2020-01318
`
`

`

`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
`
`Financial Review | Roche Group
`
`
`
`2018
`(CHF m)
`
`2,472
`25,215
`
`2,697
`11,625
`
`(214)
`(44)
`41,751
`
`(5,652)
`(6,140)
`(89)
`496
`30,366
`
`2017
`(CHF m)
`
`3,420
`23,539
`
`2,594
`12,849
`
`(119)
`(178)
`42,105
`
`(6,963)
`(6,620)
`21
`464
`29,007
`
`% change
`(CHF)
`
`–28
`+7
`
`+4
`–10
`
`+80
`–75
`–1
`
`–19
`–7
`–
`+7
`+5
`
`% change
`(CER)
`
`–23
`+7
`
`+12
`–8
`
`+79
`–76
`0
`
`–19
`–5
`–
`+6
`+6
`
`Compared to the start of the year the Swiss franc appreciated against many currencies, notably the euro and, to a lesser extent,
`the Brazilian real. This was partly offset by the depreciation of the Swiss franc against the Japanese yen and the US dollar.
`Overall this had a negative translation impact on total net assets. The exchange rates used are given on page 29.
`
`In the Pharmaceuticals Division net working capital decreased by 23% at CER. This mainly arose from lower inventories due to write-
`offs, lower inventory levels for certain mature products and strong sales. Long-term net operating assets increased by 7% mainly as a
`result of the Ignyta and Flatiron Health acquisitions, which more than offset goodwill impairment charges. In the Diagnostics Division the
`increase in net working capital of 12% at CER was driven by increases in trade receivables, due to business growth especially in China
`and Japan, and an increase in inventories of instruments pending installation. Long-term net operating assets in the Diagnostics Division
`decreased by 8% following impairment charges to goodwill and intangible assets.
`
`The decrease in net debt was due to the free cash flow of CHF 14.8 billion, partly offset by the dividend payments of CHF 7.3 billion. In
`addition there were payments of CHF 3.