Finance Report
`2014
`
`Roche | Finance Report 2014
`
`E
`
`F. Hoffmann-La Roche Ltd
`4070 Basel, Switzerland
`
`© 2015
`
`All trademarks are legally protected.
`
`www.roche.com
`
`7 000 977
`
`Novartis Exhibit 2162.001
`Regeneron v. Novartis, IPR2021-00816
`
`

`

`Finance in brief
`
`Key results
`
`Sales
`CER growth %
`
`Core operating profit margin,
`% of sales
`
`+4.5
`+6.7
`
`+6.4
`+4.3
`
`+4.9
`+6.2
`
`
`
`
`Pharmaceuticals
`
`Diagnostics
`
`Group
`
`2014
`2013
`
`2014
`2013
`
`2014
`2013
`
`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.
`
`43.6
`44.4
`
`19.5
`20.8
`
`37.2
`38.3
`
`% of sales
`2013
`
`
`
`35.0
`24.3
`23.9
`
`
`
`
`18.6
`38.3
`
`
`
`35.0
`11.5
`
`% change
`(CER)
`+77
`
`+14
`+27
`+3
`
`2014
`(mCHF)
`
`
`47,462
`14,090
`9,535
`9,332
`10.81
`8.00
`
`
`8,913
`17,636
`14.29
`
`
`15,778
`5,322
`
`2013
`(mCHF)
`
`
`46,780
`16,376
`11,373
`11,164
`12.93
`7.80
`
`
`8,700
`17,904
`14.27
`
`
`16,381
`5,403
`
`(CHF)
`
`% change
`(CER)
`
`
`+1
`–14
`–16
`–16
`–16
`+3
`
`
`+2
`–1
`0
`
`
`–4
`–1
`
`
`+5
`–9
`–10
`–11
`–11
`
`
`
`+4
`+3
`+5
`
`
`–2
`+1
`
`2014
`(mCHF)
`(14,011)
`
`47,272
`25,714
`21,558
`
`2013
`(mCHF)
`(6,708)
`
`39,884
`18,643
`21,241
`
`2014
`
`
`
`29.7
`20.1
`19.7
`
`
`
`
`18.8
`37.2
`
`
`
`33.2
`11.2
`
`(CHF)
`+109
`
`+19
`+38
`+1
`
`CER (Constant Exchange Rates): The percentage changes at Constant Exchange Rates are calculated using simulations by reconsolidating both the 2014 and 2013 results at constant
`exchange rates (the average rates for the year ended 31 December 2013).
`
`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 132–135 and reconciliations between the IFRS and Core results are given there.
`
`Novartis Exhibit 2162.002
`Regeneron v. Novartis, IPR2021-00816
`
`

`

`Finance – 2014 in brief
`
`Roche in 2014
`
`The Roche Group reported solid overall results in 2014. Sales grew by 5% at constant exchange rates (CER) while core earnings per share also
`increased by 5%. Excluding the impact of a double charge of 202 million Swiss francs related to the US Branded Prescription Drug fee, underlying
`earnings grew at 7%.
`
`Sales
`
`Group sales increased by 5% (CER) to 47.5 billion Swiss francs (1% growth in Swiss franc terms).
`Pharmaceuticals sales growth was 4% (CER). There was continued growth in the HER2 franchise and Avastin in the oncology portfolio as well
`as for Tamiflu, Actemra/RoActemra and Xolair. Sales of Xeloda and Pegasys decreased.
`Diagnostics sales showed growth of 6% (CER) with Professional Diagnostics being the major contributor.
`
`Operating results
`
`Core operating profit increased by 3% (CER) to 17.6 billion Swiss francs (1% decline in Swiss franc terms). Excluding the double charge
`for the US Branded Prescription Drug fee, underlying operating profit grew at 5%.
`Research and development expenditure grew by 4% (CER) to 8.9 billion Swiss francs on a core basis, with focus on the oncology,
`neuroscience and immunology therapeutic areas. Research and development costs were 18.8% of Group sales.
`IFRS operating results include non-core expenses of 3.5 billion Swiss francs. This includes 2.6 billion Swiss francs for the amortisation and
`impairment of goodwill and intangible assets as well as 0.7 billion Swiss francs from global restructuring plans and business combinations.
`
`Non-operating results
`
`Core net financial expenses decreased by 0.6 billion Swiss francs to 1.1 billion Swiss francs, driven by income from divestments of equity
`securities and lower interest expenses.
`IFRS net financial expenses additionally includes a loss of 0.4 billion Swiss francs from a non-core major debt restructuring.
`
`Net income
`
`IFRS net income decreased by 10% at CER to 9.5 billion Swiss francs (16% decline in Swiss franc terms), due to higher impairments of goodwill
`and intangible assets and higher global restructuring charges including a base effect of income of 0.5 billion Swiss francs from the reversal of
`impairment charges in the 2013 results.
`Core earnings per share increased by 5% at CER (0% in Swiss francs terms). Excluding the impact of the double charge of the US Branded
`Prescription Drug fee, underlying earnings grew at 7%.
`
`Cash flows
`
`Operating free cash flow was 15.8 billion Swiss francs, a decrease of 2% at CER. The underlying growth in the operating business was offset
`by higher capital expenditure.
`Free cash flow increased by 1% at CER to 5.3 billion Swiss francs, driven by sales of equity securities and lower interest payments.
`Mergers and acquisitions, notably the InterMune acquisition, utilised 9.6 billion Swiss francs of cash. 5.75 billion US dollars of this was
`financed through new debt issuances.
`Repayment of debt is ahead of schedule with 74% of the notes and bonds issued in 2009 to finance the Genentech transaction being repaid
`by the end of 2014.
`
`Financial position
`
`Net working capital increased by 4% (CER ), due to higher levels of inventories from the InterMune inventory fair value adjustment,
`for launches and growth of key products, higher safety stock levels and increased demand in key markets.
`Net debt increased by 7.3 billion Swiss francs to 14.0 billion Swiss francs, mainly due to the InterMune acquisition. 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 3% to 8.00 Swiss francs per share. This will represent the 28th consecutive year
`of dividend growth and will result in a pay-out ratio of 56.0%, subject to AGM approval.
`Total Shareholder Return (TSR) was 12% representing a combined performance of share and non-voting equity security.
`
`Novartis Exhibit 2162.003
`Regeneron v. Novartis, IPR2021-00816
`
`

`

`Roche Group
`
`Finance in brief
`
`Finance – 2014 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. 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
`17. Other non-current liabilities
`
`46
`48
`51
`52
`54
`59
`62
`65
`67
`70
`70
`71
`71
`72
`72
`73
`73
`
`18. Other current liabilities
`73
`19. Provisions and contingent liabilities
`74
`20. Debt
`79
`21. Equity attributable to Roche shareholders
`84
`22. Chugai
`87
`23. Non-controlling interests
`89
`24. Employee benefits
`89
`25. Pensions and other post-employment benefits
`90
`26. Equity compensation plans
`96
`27. Earnings per share and non-voting equity security 100
`28. Statement of cash flows
`101
`29. Risk management
`102
`30. Related parties
`111
`31. Subsidiaries and associates
`113
`32. Significant accounting policies
`117
`33. Subsequent events
`124
`
`Report of Roche Management on Internal Control over Financial Reporting
`
`Report of the Statutory Auditor on the Consolidated Financial Statements
`
`Report of the Independent Auditor 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
`
`Report of the Statutory Auditor on the Financial Statements
`
`125
`126
`127
`128
`138
`
`141
`143
`148
`149
`
`Novartis Exhibit 2162.004
`Regeneron v. Novartis, IPR2021-00816
`
`

`

`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
`
`2014
`2013
`2012
`
`+ 4.9
`+6.2
`+4.5
`
`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
`
`2014
`2013
`2012
`
`9.3
`11.2
`9.4
`
`% of sales
`
`37.2
`38.3
`37.7
`
`14.29
`14.27
`13.49
`
`The Roche Group’s results for 2014 showed growth in its core operating activities, with sales up by 5% and core operating profit up
`by 3% at constant exchange rates. Sales increased driven by the oncology portfolio, especially the medicines for HER2-positive breast
`cancer, and by the Professional Diagnostics business. Core operating profit grew below the rate of the sales increase due to a double
`charge of 202 million Swiss francs related to the US Branded Prescription Drug fee. The solid operating performance, combined with
`higher income from sales of equity securities and lower financing costs, lead to an increase in Core EPS of 5% at constant exchange
`rates. Excluding the double charge underlying earnings grew at 7%. Operating free cash flow was 15.8 billion Swiss francs or 33% of
`sales.
`
`Sales in the Pharmaceuticals Division rose by 4% to 36.7 billion Swiss francs. This was driven by the oncology portfolio, especially by
`the HER2 franchise which grew by 20%. There was also strong demand for Actemra/RoActemra and Xolair, with sales increasing by 23%
`and 25%, respectively. Sales of Xeloda were lower as it is now off-patent in the US and Europe. Regional growth was most significant in
`the US, Europe and Latin America. Diagnostics sales grew at 6%, consolidating the Division’s leading market position. The major growth
`area was Professional Diagnostics, while sales in Diabetes Care increased slightly.
`
`Core operating profit increased by 3%, with the Pharmaceuticals Division growing at 4% and the Diagnostics Division at 2%. Profit in
`Pharmaceuticals grew due to the good sales growth. Marketing and distribution costs included the launch and rollout of new products,
`notably for the newly acquired product Esbriet, and investments in emerging markets, as well as increasing patient access to medicines.
`In research and development there were continued investments in the oncology, neuroscience and immunology therapeutic areas.
`In July 2014, the US Internal Revenue Service (IRS) issued the final regulations related to the Branded Prescription Drug fee which
`fundamentally changed a key assumption about the triggering event for liability recognition. As a result there was a one-time double
`charge with an operating profit impact of 202 million Swiss francs. In Diagnostics core operating profit grew due to the sales growth,
`offset by the base effect of pension plan changes in 2013. Excluding the double charge, the Group’s core operating profit grew at 5%.
`
`Operating free cash flow was 15.8 billion Swiss francs, a decrease of 2%. The strong cash generation of the underlying operations was
`offset by higher capital investments in manufacturing facilities and other site development projects. The free cash flow increased by 1% at
`constant exchange rates to 5.3 billion Swiss francs, driven by sales of equity securities and lower interest and tax payments which more
`than offset the higher annual dividend payments.
`
`Roche Finance Report 2014 | 3
`
`Novartis Exhibit 2162.005
`Regeneron v. Novartis, IPR2021-00816
`
`

`

`During 2014 the Group continued with the implementation of several major global restructuring plans initiated in prior years, notably
`the programme to address long-term profitability in the Diabetes Care business in the Diagnostics Division. The total costs of the Group’s
`restructuring activities in 2014 were 0.7 billion Swiss francs. Impairment charges of 1.9 billion Swiss francs were recorded for goodwill
`and intangible assets, mainly in the Tissue Diagnostics business. A major debt restructuring to refinance some of the Group’s long-term
`debt resulted in a loss of 0.4 billion Swiss francs. These negative factors, combined with a base effect of income of 0.5 billion Swiss francs
`from the reversal of impairment charges in the 2013 results, in total turned the 6% increase in core net income to a 10% decrease in net
`income on an IFRS basis.
`
`Comparing average exchange rates in 2014 with average exchange rates during 2013, the Swiss franc was stronger against many major
`currencies, in particular the Japanese yen, the US dollar, the euro and major Latin American currencies. The overall impact is strongly
`negative on the results expressed in Swiss francs compared to constant exchange rates, with a 4–5 percentage point impact on sales,
`core operating profit and Core EPS.
`
`On 15 January 2015 the Swiss National Bank (SNB) announced that it was discontinuing the minimum exchange rate of 1.20 Swiss francs
`per euro. As a consequence, stock markets in Switzerland fell significantly and the value of the Swiss franc increased dramatically.
`For the Roche Group, no fundamental impact is foreseen. For example, the Group incurs less than 20% of its overall costs in Switzerland.
`By the same token, key markets such as the US, Europe and Japan have complete value chains, meaning that costs are incurred in local
`currencies, not in Swiss francs. The amounts reported in this Financial Report do not reflect changes in exchange rates after 31 December
`2014. Since the Group uses the Swiss franc as the presentation currency in its consolidated financial statements, then a weakening of
`foreign currencies against the Swiss franc will have a negative currency translation impact on the Group’s consolidated results when
`reported in Swiss francs. The currency translation sensitivity of the Group’s results to movements in foreign currency exchange rates is
`included on pages 29 to 30.
`
`4 | Roche Finance Report 2014
`
`Roche Group | Financial Review
`
`Novartis Exhibit 2162.006
`Regeneron v. Novartis, IPR2021-00816
`
`

`

`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)
`
`2014
`(mCHF)
`
`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
`
`2013
`(mCHF)
`
`46,780
`1,832
`(11,948)
`(8,373)
`(9,270)
`(2,645)
`16,376
`
`(1,580)
`(119)
`14,677
`
`(3,304)
`11,373
`
`
`11,164
`209
`
`13.16
`12.93
`
`
`46,780
`1,832
`(11,892)
`(8,241)
`(8,700)
`(1,875)
`17,904
`
`(1,580)
`(119)
`16,205
`
`(3,679)
`12,526
`
`
`12,316
`210
`
`14.52
`14.27
`
`% change
`(CHF)
`
`+1
`+31
`+12
`+3
`+7
`+45
`–14
`
`+15
`–
`–15
`
`–10
`–16
`
`
`–16
`–3
`
`–16
`–16
`
`
`+1
`+31
`+4
`+2
`+2
`+35
`–1
`
`–14
`–
`+2
`
`+8
`0
`
`
`0
`–3
`
`0
`0
`
`% change
`(CER)
`
`+5
`+33
`+15
`+7
`+8
`+48
`–9
`
`+18
`–
`–9
`
`–6
`–10
`
`
`–11
`+6
`
`–11
`–11
`
`
`+5
`+33
`+6
`+6
`+4
`+38
`+3
`
`–12
`–
`+7
`
`+12
`+6
`
`
`+6
`+6
`
`+5
`+5
`
`Roche Finance Report 2014 | 5
`
`Financial Review | Roche Group
`
`Novartis Exhibit 2162.007
`Regeneron v. Novartis, IPR2021-00816
`
`

`

`Sales
`
`In 2014 sales increased by 5% at constant exchange rates (+1% in Swiss francs; +3% in US dollars) to 47.5 billion Swiss francs.
`Sales in the Pharmaceuticals Division rose 4% to 36.7 billion Swiss francs, driven by strong growth in the HER2 franchise, as well as
`by Avastin, Tamiflu, Actemra/RoActemra, Xolair and MabThera/Rituxan. Sales grew in all regions, and particularly in the US where the
`HER2 franchise grew by 27%. Xeloda and Pegasys sales both declined. Xeloda is now off-patent in the US and Europe and subject to
`generic competition in these markets, while Pegasys is subject to increased competition from new therapies. The Diagnostics Division
`recorded sales of 10.8 billion Swiss francs, an increase of 6% at constant exchange rates, consolidating 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. Diabetes Care sales increased by 1% despite continued US reimbursement cuts and pricing pressure.
`
`Divisional operating results for 2014
`
`Sales
`Core operating profit
` – margin, % of sales
`Operating profit
` – margin, % of sales
`Operating free cash flow
` – margin, % of sales
`
`
`
`Pharmaceuticals
`(mCHF)
`36,696
`16,001
`43.6
`14,304
`39.0
`14,821
`40.4
`
`Divisional operating results – Development of results compared to 2013
`
`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
`
`+4
`
`+4
`–0.2
`
`–4
`–3.4
`
`0
`–1.7
`
`Diagnostics
`(mCHF)
`10,766
`2,096
`19.5
`245
`2.3
`1,417
`13.2
`
`Diagnostics
`
`+6
`
`+2
`–0.9
`
`–72
`–8.7
`
`–24
`–5.3
`
`Corporate
`(mCHF)
`–
`(461)
`–
`(459)
`–
`(460)
`–
`
`Corporate
`
`–
`
`+21
`–
`
`–8
`–
`
`–17
`–
`
`Group
`(mCHF)
`47,462
`17,636
`37.2
`14,090
`29.7
`15,778
`33.2
`
`Group
`
`+5
`
`+3
`–0.5
`
`–9
`–4.6
`
`–2
`–2.4
`
`Currency translation had a significant impact on the operating results, with a negative effect of 0.6 percentage points on the development
`of the Group and Pharmaceuticals Division core operating margins, and a negative effect of 0.4 percentage points on the core operating
`margin of the Diagnostics Division.
`
`Pharmaceuticals Division. The Division increased its core operating profit by 4% at constant exchange rates, driven by sales growth
`of 4%. There were continued marketing activities for new products and in emerging markets, including patient access programmes.
`Research and development costs increased by 4%, with the focus being on the oncology, neuroscience and immunology therapeutic
`areas. General and administration costs increased by 50% due to the US Branded Prescription Drug fee double charge and the base
`effect of income from changes to the Group’s pension plans in the 2013 results. There was additional one-off income from the divestment
`of the filgrastim franchise rights. Excluding the double charge, the Division’s core operating profit grew at 5%.
`
`Diagnostics Division. Core operating profit was up by 2% driven by sales growth of 6%. The operating profit was negatively impacted
`by the base effect of the pension plan changes in 2013. There was also a negative impact on cost of sales development from the base
`effect of a VAT refund of 45 million Swiss francs in 2013. Excluding these factors core operating profit grew by 8%, ahead of sales, due
`to contained marketing and distribution and research and development costs. The Division has continued the implementation of global
`restructuring plans in the Diabetes Care business and has also continued the implementation of various IT projects.
`
`6 | Roche Finance Report 2014
`
`Roche Group | Financial Review
`
`Novartis Exhibit 2162.008
`Regeneron v. Novartis, IPR2021-00816
`
`

`

`Mergers and acquisitions
`
`During 2014 the Roche Group completed the acquisition of several companies. The total cost of the acquired assets was 9.9 billion Swiss
`francs in cash and 0.7 billion Swiss francs from the fair value of contingent consideration arrangements.
`
`On 29 September 2014 the Pharmaceuticals Division acquired a 100% controlling interest in InterMune for 8.8 billion Swiss francs.
`The acquisition adds a new medicine for idiopathic lung fibrosis, Esbriet, to the Roche portfolio. Esbriet sales of 44 million Swiss francs
`were recorded in the three months following the InterMune acquisition. There was a net negative impact of 72 million Swiss francs on
`the 2014 core operating profit due to the post-acquisition operating expenses for InterMune, notably for Esbriet launch costs. The Group
`issued 5.75 billion US dollars of debt to finance the transaction.
`
`The Pharmaceuticals Division also completed the acquisitions of Seragon Pharmaceuticals and Santaris Pharma. In Diagnostics the
`Division completed the acquisitions of Genia Technologies and Bina Technologies in the sequencing business and IQuum in the Molecular
`Diagnostics business. The Ariosa Diagnostics acquisition closed in January 2015 and the Trophos acquisition is expected to close in the
`first quarter of 2015. The transaction with Foundation Medicine is expected to close in the second quarter of 2015.
`
`Further details are given in Notes 5 and 20 to the Consolidated Financial Statements.
`
`Global restructuring plans
`
`During 2014 the Group continued with the implementation of several major global restructuring plans initiated in prior years, notably
`the programme to address the long-term profitability in the Diabetes Care businesses in the Diagnostics Division. Total costs in 2014
`of 794 million Swiss francs were considerably higher than the 2013 costs, which totalled 163 million Swiss francs. This is due to the
`2013 results including an income of 531 million Swiss francs from the reversal of previously incurred impairment charges for a bulk drug
`production unit at the Vacaville site in California.
`
`Global restructuring plans: costs incurred for 2014 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
`
`
`
`Diagnostics 1)
`
`52
`16
`178
`246
`
`
`–
`–
`–
`
`246
`
`Site consolidation 2)
`
`15
`80
`17
`112
`
`
`–
`–
`–
`
`112
`
`Other plans 3)
`
`248
`1
`48
`297
`
`
`139
`–
`–
`
`436
`
`Total
`
`315
`97
`243
`655
`
`
`139
`–
`–
`
`794
`
`The split of plans in this table has been reformatted from prior years to reflect the relative development of the various plans.
`1)
`Includes the Diabetes Care ‘Autonomy and Speed’ restructuring plan.
`2)
`Includes closure of the Nutley site and associated infrastructure and environmental remediation costs.
`3)
`Includes plans for Pharmaceuticals Division research and development strategic realignment, InterMune integration and Specialty Care field force in Europe.
`
`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 specific requirements, speed up processes and decision-making and drive efficiencies. In 2014
`total costs of 118 million Swiss francs were incurred, mainly for employee-related costs and IT and consultancy costs. Spending on other
`smaller plans within the Division was 128 million Swiss francs, and included costs related to IT projects and the restructuring of the
`former Applied Science business.
`
`Site consolidation. The operational closure of the US site in Nutley, New Jersey, was completed on schedule by the end of 2013 and
`the Group is currently in the process of divesting the site. Work on remediating the Nutley site is continuing, but no significant additional
`restructuring expenses were incurred in 2014. Other site consolidation costs include those related to the closure of Toluca, Mexico
`(Pharmaceuticals) and Graz, Austria (Diagnostics) sites.
`
`Roche Finance Report 2014 | 7
`
`Financial Review | Roche Group
`
`Novartis Exhibit 2162.009
`Regeneron v. Novartis, IPR2021-00816
`
`

`

`Other global restructuring plans. Total costs were 436 million Swiss francs, with one major item being an impairment of the goodwill
`arising from Marcadia acquisition of 139 million Swiss francs following the exit from cardiovascular and metabolic diseases. Other
`significant costs included 121 million Swiss francs relating to field force reductions across Europe in the Pharmaceuticals Division’s
`Specialty Care unit. InterMune integration costs were 79 million Swiss francs and costs of 46 million Swiss francs arose from the
`implementation of the global outsourcing of clinical trial monitoring in the Pharmaceuticals Division. The remaining minor plans totalled
`51 million Swiss francs.
`
`Impairment of goodwill and intangible assets
`
`Total impairment charges recorded against goodwill and intangible assets in 2014 were 1,908 million Swiss francs, compared to 650 million
`Swiss francs in 2013. The major part of this was in the Tissue Diagnostics business with impairment charges of 552 million Swiss francs
`against goodwill and 643 million Swiss francs against product intangible assets. The impairment of product intangible assets represents the
`reassessment of a late-stage product development which has been returned to a pre-design phase to demonstrate feasibility and quality
`improvement. The impairment of goodwill reflects the decrease in the forecasted cash flows following this reassessment, combined with
`reduced revenue expectations in the US following additional reimbursement cuts and a change in the discount rate used for the impairment
`testing.
`
`As mentioned above there was goodwill impairment in the Pharmaceuticals Division of 139 million Swiss francs included in global
`restructuring plans. In addition to this the Pharmaceuticals Division also recorded goodwill impairment charges of 183 million Swiss
`francs related to certain other previous acquisitions. There were also other impairment charges in both divisions totalling 391 million
`Swiss francs, resulting mainly from decisions to stop development on various compounds. Further details are given in Notes 8 and 9
`to the Consolidated Financial Statements.
`
`Pensions and other post-employment benefits
`
`As disclosed in the financial report in 2013, there was a base effect in operating income of 302 million Swiss francs in 2013 for past
`service costs from changes to the Group’s pension plans in Switzerland, the United Kingdom and Germany. Of this amount, 131 million
`Swiss francs were recorded in the Pharmaceuticals Division and 67 million Swiss francs in the Diagnostics Division. The remaining
`104 million Swiss francs of income were allocated to Corporate, mainly attributable to previously divested businesses. Further details
`are given in Note 25 to the Consolidated Financial Statements.
`
`Legal and environmental settlements
`
`On 5 March 2014 the Italian Antitrust Authority (‘AGCM’) issued a verdict that alleges that Roche and Novartis colluded to artificially
`differentiate Avastin and Lucentis in order to foster the sales of Lucentis in Italy. The AGCM fined Roche with 90.5 million euros and
`Novartis with 92 million euros. On 2 December 2014 the Administrative Tribunal of Lazio upheld the decision by the AGCM. Roche
`strongly disagrees with the verdict and will appeal. In July 2014 Roche paid the fine under protest to avoid additional penalty fees prior
`to the appeal hearing and recorded a provision for this amount in the Consolidated Financial Statements and a corresponding expense
`of 110 million Swiss francs within general and administration. The fine and related interest will be reimbursed if Roche wins the case.
`Further details are given in Note 19 to the Consolidated Financial Statements.
`
`Major debt restructuring
`
`As a result of low interest rates on capital markets the Group decided in November 2014 to restructure part of its debt. This consisted
`of the refinancing of 1 billion US dollars of notes with coupons of 5.25%–7.00% originally due in 2035–2039 with the issuance of 1 billion
`US dollars of notes due in 2024 and 2044 with coupons of 3.35%–4.00%. This major debt restructuring resulted in a loss on repurchase
`of 429 million Swiss francs. Further details are given in Note 20 to the Consolidated Financial Statements.
`
`8 | Roche Finance Report 2014
`
`Roche Group | Financial Review
`
`Novartis Exhibit 2162.0010
`Regeneron v. Novartis, IPR2021-00816
`
`

`

`Treasury and taxation
`
`Core financing costs were 1.4 billion Swiss francs, a decrease of 12% at constant exchange rates, with interest expenses and
`amortisation of debt discounts and issue costs being 10% lower as debt was repaid. Other financial income included 330 million Swiss
`francs of income from equity securities, notably a gain of 239 million Swiss francs from the sale of an equity security position in late 2014.
`Core tax expenses increased by 12% to 4.0 billion Swiss francs and the Group’s effective core tax rate increased to 24.1% compared
`to 22.7% in 2013. This was mainly due to the higher percentage of core profit contribution coming from tax jurisdictions with relatively
`higher local tax rates than the average Group tax rate, notably in the US. In addition the effective tax rate in 2013 was favourably
`impacted by the retrospective re-enactment of the 2012 US research and development tax credits in January 2013, which means that
`the 2013 results included two years of these credits in respect of 2012 and 2013.
`
`Net income and earnings per share
`
`Net income and diluted EPS decreased respectively by 10% and 11% at constant exchange rates driven by the costs of the Group’s
`restructuring activities of 0.7 billion Swiss francs and impairment charges of 1.9 billion Swiss francs, combined with a base effect of income
`of 0.5 billion Swiss francs from the reversal of impairment charges in the 2013 results.
`
`In contrast core net income and Core EPS increased respectively by 6% and 5%. The core basis excludes non-core items such as global
`restructuring costs, amortisation and impairment of goodwill and intangible assets and loss on major debt restructuring. Excluding the
`impact of the double charge of 202 million Swiss francs related to the US Branded Prescription Drug fee, underlying earnings grew at 7%.
`
`Supplementary net income and EPS information is given on pages 132 to 135. 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
`
`
`
`2014
`(mCHF)
`
`5,888
`25,122
`
`2,742
`11,417
`
`(96)
`(418)
`44,655
`
`(14,011)
`(8,303)
`(148)
`(635)
`21,558
`
`2013
`(mCHF)
`
`5,451
`12,952
`
`2,782
`11,250
`
`(58)
`(443)
`31,934
`
`(6,708)
`(5,426)
`1,838
`(397)
`21,241
`
`% change
`(CHF)
`
`+8
`+94
`
`% change
`(CER)
`
`+7
`+81
`
`–1
`+1
`
`+66
`–6
`+40
`
`+109
`+53
`–
`+60
`+1
`
`–1
`–3
`
`+66
`–10
`+33
`
`+77
`+51
`–
`+39
`+3
`
`Compared to the start of 2014 the Swiss franc strengthened against the Japanese yen, the Russian rouble and the euro resulting overall
`in a negative translation impact by the end of 2014 on balance sheet positions at a Group level. The weakening of the Swiss franc
`against the US dollar during the year led to a positive translation impact on the net operating assets, which was offset at Group level by
`the natural hedge from the Group’s US dollar-denominated debt. The exchange rates used are given on pages 29 to 30. The impacts of
`changes in exchange rates after 31 December 2014 are not reflected in these numbers. See also Note 33 to the Consolidated Financial
`Statements.
`
`Roche Finance Report 2014 | 9
`
`Financial Review | Roche Group
`
`Novartis Exhibit 2162.0011
`Regeneron v. Novartis, IPR2021-00816
`
`

`

`In the Pharmaceuticals Division net working capital increased by 7% at constant exchange rates. Trade receivables decreased despite
`higher sales with strong collections, forfaiting activities and decreased payment terms. In addition to the inventory fair value adjustment
`resulting from the InterMune acquisition, underlying inventory levels increased to ensure patient supply given increasing demand for
`established products in expanding markets in addition to new approvals for recently launched products such as the Actemra/RoActemra
`subcutaneous formulation and Kadcyla. Trade payables increased as a result of improving payment terms with suppliers. Long-term
`net operating assets increas