(Mark One)
`(cid:133)
`
`(cid:95)
`
`(cid:133)
`
`Page 1 of 231
`
`SECURITIES AND EXCHANGE COMMISSION
`Washington, D.C. 20549
`
`FORM 20-F
`
`REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g)
`OF THE SECURITIES EXCHANGE ACT OF 1934
`or
`ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE(cid:3)
`SECURITIES EXCHANGE ACT OF 1934(cid:3)
`For the fiscal year ended December 31, 2003(cid:3)
`or(cid:3)
`TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE(cid:3)
`SECURITIES EXCHANGE ACT OF 1934(cid:3)
`
`Commission File Number: 1-15096(cid:3)
`_____________________________
`SERONO S.A.
`(Exact name of Registrant as specified in its charter)
`
`Switzerland
`Not Applicable
`(Translation of Registrant’s name into English)
`(Jurisdiction of incorporation or organization)
`_____________________________
`15 bis, Chemin des Mines
`Case Postale 54
`CH-1211 Geneva 20
`Switzerland
`(Address of principal executive offices)
`
`Title of each class:
`Bearer Shares, nominal value CHF25 per share
`
`Securities registered pursuant to Section 12(b) of the Act:
`Name of each exchange on which registered:
`New York Stock Exchange*
`
`American Depositary Shares (as evidenced by American Depositary
`Receipts), each representing one fortieth of a Bearer Share
`_______________
`*Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange
`Commission.
`
`New York Stock Exchange
`
`_____________________________
`Securities registered pursuant to Section 12(g) of the Act:
`None
`_____________________________
`Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
`None
`_____________________________
`
`Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2003.
`
`Bearer Shares, nominal value CHF 25 per share:
`Registered Shares, nominal value CHF 10 per share:
`
`11,406,887 outstanding
`11,013,040 outstanding
`
`Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
`1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
`requirements for the past 90 days.
`
`Indicate by check mark which financial statement item the registrant has elected to follow.
`
`(cid:95) Yes
`
`(cid:133)
`
`No
`
`(cid:133)
`
`Item 17
`
`(cid:95) Item 18
`Merck 2031
`TWi v Merck
`IPR2023-00050
`
`

`

`Page 2 of 231
`Page 2 of 231
`
`

`

`Page 3 of 231
`
`Serono S.A.
`Annual Report on Form 20-F
`for the year ended
`December 31, 2003
`
`TABLE OF CONTENTS
`
`Item
`
`
`1.
`
`2.
`
`3.
`
`4.
`
`5.
`
`6.
`
`7.
`
`8.
`
`9.
`
`10.
`
`11.
`
`12.
`
`
`
`
`Identity of Directors, Senior Management and Advisers
`
`PART I
`
`Offer Statistics and Expected Timetable
`
`Key Information
`
`Information on the Company
`
`Operating and Financial Review and Prospects
`
`Directors, Senior Management and Employees
`
`Major Shareholders and Related Party Transactions
`
`Financial Information
`
`The Offer and Listing
`
`Additional Information
`
`Quantitative and Qualitative Disclosures about Market Risk
`
`Description of Securities Other than Equity Securities
`
`- i -
`
`Page No.
`
`1
`
`1
`
`1
`
`13
`
`36
`
`52
`
`60
`
`61
`
`64
`
`64
`
`72
`
`75
`
`

`

`Page 4 of 231
`
`Item
`
`
`13.
`
`14.
`
`15.
`
`16A.
`
`16B.
`
`16C.
`
`17.
`
`18.
`
`19.
`
`
`
`
`Defaults, Dividend Arrearages and Delinquencies
`
`PART II
`
`Material Modifications to the Rights of Security Holders and Use of Proceeds
`
`Controls and Procedures
`
`Audit Committee Financial Expert
`
`Code of Ethics
`
`Principal Accountant Fees and Services
`
`Financial Statements
`
`Financial Statements
`
`Exhibits
`
`Signatures
`
`Financial Statements and Auditors’ Reports
`
`PART III
`
`SIGNATURES
`
`Page No.
`
`76
`
`76
`
`76
`
`76
`
`76
`
`76
`
`78
`
`78
`
`78
`
`79
`
`F-1
`
`The registered (®) and the filed (™) trademarks and the filed service marks (SM) Cetrotide™, click.easy®, cool.click®, Crinone®, EasyJect®, Ferti.net®,
`Fertinex®, Geref®, Gonal-f®, GHMonitorSM, HowkidsgrowSM, Luveris®, Metrodin HP®, MSLifelinesSM Novantrone™, one.click®, Ovidrel®, Ovitrelle®,
`Pergonal®, Profasi®, Raptiva™, Rebif®, Rebiject®, Rebiject II®, Reliser®, Saizen®, SeroJet™, Serono®, Serophene®, Serostim®, Stilamin® and
`Zorbtive™, as well as the filed trademarks (™) for the “S” symbol, used alone or with the words “Serono” or “Serono biotech and beyond,” are trademarks of,
`or are licensed to a subsidiary of, Serono S.A. Trade names and trademarks of other companies appearing in this report are the property of their respective
`owners.
`
`- ii -
`
`

`

`Page 5 of 231
`
`PART I
`
`Item 1.
`
`IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
`
`Not applicable.
`
`Item 2.
`
`OFFER STATISTICS AND EXPECTED TIMETABLE
`
`Not applicable.
`
`Item 3.
`
`KEY INFORMATION
`
`Selected Consolidated Historical Financial Data
`
`We have derived our selected consolidated historical financial data from our consolidated financial statements. We prepare and present our
`consolidated financial statements in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting
`Standards Board, or IASB, and its predecessor organization, the International Accounting Standards Committee. IFRS differ in significant respects from
`United States Generally Accepted Accounting Principles, or U.S. GAAP. You can find a reconciliation of our audited consolidated financial statements to
`U.S. GAAP in Note 34 to our audited consolidated financial statements included in this Annual Report. Since the information we present below is only a
`summary and does not provide all of the information contained in our consolidated financial statements, you should read our consolidated financial
`statements and the notes to the consolidated financial statements included in this Annual Report.
`
`Income Statement Data:
`Product sales
`Royalty and license income
`
`Total revenues
`Operating expenses:
`Cost of product sales
`Selling, general and administrative
`Research and development, net
`Restructuring
`Other operating expense, net
`
`Total operating expenses
`
`Operating income
`Financial income, net
`Other expense, net
`
`Total non-operating income, net
`
`Income before taxes and minority interests
`Taxes
`
`Income before minority interests
`Minority interests
`
`Net income
`
`Per Share Data:
`Basic income per share (1)(2):
`Bearer shares
`Registered shares
`American depositary shares (3)
`Diluted income per share (1)(2):
`Bearer shares
`
`Year ended December 31,
`
`2003
`
`2002
`
`
`
`2001
`
`
`
`2000
`
`1999
`
`
`
`(U.S. dollars in thousands, except per share data)
`
`
`$ 1,858,009 $ 1,423,130 $ 1,249,405 $ 1,146,998 $ 1,054,144
`160,608
`114,705
`127,065
`92,656
`78,400
`
`2,018,617
`
`1,537,835
`
`1,376,470
`
`1,239,654
`
`1,132,544
`
`279,619
`636,823
`467,779
`—
`199,476
`
`223,751
`504,248
`358,099
`16,303
`85,811
`
`213,160
`446,945
`308,561
`—
`70,152
`
`229,907
`393,716
`263,152
`—
`31,147
`
`260,748
`369,747
`221,629
`—
`58,718
`
`1,583,697
`
`1,188,212
`
`1,038,818
`
`917,922
`
`910,842
`
`434,920
`44,018
`19,743
`
`349,623
`36,476
`1,658
`
`337,652
`51,381
`2,548
`
`321,732
`52,277
`2,411
`
`221,702
`2,458
`1,078
`
`24,275
`
`34,818
`
`48,833
`
`49,866
`
`1,380
`
`459,195
`68,905
`
`390,290
`327
`
`384,441
`63,127
`
`321,314
`536
`
`386,485
`69,816
`
`316,669
`(52)
`
`371,598
`70,384
`
`301,214
`174
`
`223,082
`39,778
`
`183,304
`8
`
`$
`
`389,963 $
`
`320,778 $
`
`316,721 $
`
`301,040 $
`
`183,296
`
`$
`
`24.63 $
`9.85
`0.62
`
`20.07 $
`8.03
`0.50
`
`19.72 $
`7.89
`0.49
`
`19.50 $
`7.80
`0.49
`
`24.59
`
`20.04
`
`19.68
`
`19.46
`
`12.23
`4.89
`0.31
`
`12.23
`
`

`

`Registered shares
`American depositary shares (3)
`Cash dividends paid (1)(4):
`Bearer shares
`Registered shares
`American depositary shares (3)
`
`Supplemental Per Equivalent Bearer Share Data:
`Net income, basic (1)(5)
`Net income, diluted (1)(5)
`
`Page 6 of 231
`
`9.84
`0.61
`
`5.42
`2.17
`0.14
`
`8.02
`0.50
`
`4.02
`1.61
`0.10
`
`7.87
`0.49
`
`3.35
`1.34
`0.08
`
`7.78
`0.49
`
`1.15
`0.46
`0.03
`
`4.89
`0.31
`
`1.29
`0.52
`0.03
`
`$
`
`24.63 $
`24.59
`
`20.07 $
`20.04
`
`19.72 $
`19.68
`
`19.50 $
`19.46
`
`12.23
`12.23
`
`- 1 -
`
`

`

`Balance Sheet Data:
`Cash, cash equivalents and short-term investments
`Working capital (6)
`Property, plant and equipment
`Total assets
`Outstanding share capital(4)
`Short-term debt
`Long-term debt
`Shareholders’ equity
`
`Amounts in Accordance with U.S. GAAP:
`Net income
`Basic income per share (1)(7):
`Bearer shares
`Registered shares
`Diluted income per share (1)(7):
`Bearer shares
`Registered shares
`Total shareholders’ equity
`Total assets
`
`Margins and Other Data:
`Gross margin (8)(9)
`Operating margin (8)(10)
`Net margin (8)(11)
`Cash dividends paid (4)
`Cash flows provided from operating activities
`Depreciation and amortization
`Additions to plant, property and equipment
`Average number of employees
`
`Page 7 of 231
`
`As of December 31,
`
`2003
`
`2002
`
`2001
`
`
`
`2000
`
`1999
`
`
`
`
`$ 1,438,782
`1,543,933
`701,453
`4,571,603
`253,895
`51,224
`532,022
`2,880,190
`
`(U.S. dollars in thousands, except per share data)
`
`
`$ 1,064,898
`$ 1,475,504
`1,139,848
`1,527,359
`554,509
`460,767
`3,484,278
`3,018,769
`253,416
`253,137
`93,598
`173,254
`25,857
`37,325
`2,461,198
`2,218,914
`
`$ 1,438,485
`1,505,534
`462,425
`2,794,777
`253,072
`238,585
`56,626
`2,006,416
`
`$
`
`398,812
`405,721
`460,712
`1,591,298
`236,978
`238,738
`116,381
`826,785
`
`398,346
`
`280,176
`
`291,470
`
`304,389
`
`170,952
`
`25.16
`10.06
`
`17.53
`7.01
`
`18.15
`7.26
`
`19.72
`7.89
`
`11.41
`4.56
`
`25.12
`10.05
`2,855,473
`4,561,583
`
`17.51
`7.00
`2,456,683
`3,483,295
`
`18.11
`7.24
`2,239,711
`3,069,873
`
`19.68
`7.87
`2,015,860
`2,794,465
`
`11.40
`4.56
`862,634
`1,623,385
`
`85.0%
`21.5%
`19.3%
`85,709
`542,859
`135,607
`185,045
`4,597
`
`$
`$
`$
`$
`
`84.3%
`22.7%
`20.9%
`64,238
`531,982
`100,552
`125,324
`4,559
`
`$
`$
`$
`$
`
`82.9%
`24.5%
`23.0%
`53,759
`404,950
`98,906
`97,131
`4,384
`
`$
`$
`$
`$
`
`80.0%
`26.0%
`24.3%
`17,755
`255,443
`86,266
`67,080
`4,117
`
`$
`$
`$
`$
`
`75.3%
`19.6%
`16.2%
`19,310
`274,632
`71,960
`66,420
`4,022
`
`$
`$
`$
`$
`
`- 2 -
`
`

`

`
`
`
`
`Product sales by Region:
`Europe
`North America
`Latin America
`Other regions
`
`Total product sales
`
`
`
`Product sales by Therapeutic Area:
`Neurology:
`Rebif
`Novantrone
`
`Total
`
`Page 8 of 231
`
`
`
`
`
`
`$
`
`2003
`
`Year ended December 31,
`2002
`
`2001
`
`Sales
`
`% Total
`
`Sales
`
`% Total
`
` Sales
`
`% Total
`
`
`813.8
`694.3
`98.8
`251.1
`
`
`43.8% $
`37.4
`5.3
`13.5
`
`(U.S. dollars in millions)
`
`620.4
`479.6
`109.2
`213.9
`
`
`43.6% $
`33.7
`7.7
`15.0
`
`542.2
`390.6
`130.9
`185.7
`
`43.4%
`31.2
`10.5
`14.9
`
`$
`
`1,858.0
`
`100.0% $
`
`1,423.1
`
`100.0% $
`
`1,249.4
`
`100.0%
`
`
`
`
`
`$
`
`2003
`
`Year ended December 31,
`2002
`
`2001
`
`Sales
`
`% Total
`
`Sales
`
`% Total
`
` Sales
`
`% Total
`
`
`
`819.3
`30.9
`
`850.2
`
`(U.S. dollars in millions)
`
`
`
`
`
`
`44.1% $
`1.7
`
`45.8
`
`548.8
`0.3
`
`549.1
`
`450.4
`18.4
`10.9
`5.7
`6.6
`
`38.6% $
`0.0
`
`38.6
`
`31.6
`1.3
`0.8
`0.4
`0.5
`
`379.6
`-
`
`379.6
`
`410.5
`10.6
`2.4
`2.7
`0.9
`
`30.4%
`-
`
`30.4
`
`32.9
`0.9
`0.2
`0.2
`0.0
`
`Reproductive Health:
`Gonal-f
`Cetrotide
`Crinone
`Ovidrel
`Luveris
`
`Core Infertility Portfolio
`
`Pergonal
`Metrodin HP
`Profasi
`Other products
`
`Total Reproductive Health
`
`Growth and Metabolism:
`Saizen
`Serostim
`
`Total
`
`Other products
`
`526.1
`24.8
`20.8
`12.3
`9.6
`
`593.6
`
`45.8
`24.8
`15.4
`13.3
`
`692.9
`
`151.4
`88.8
`
`240.2
`
`74.7
`
`28.3
`1.3
`1.1
`0.7
`0.5
`
`31.9
`
`2.5
`1.3
`0.9
`0.7
`
`37.3
`
`8.1
`4.8
`
`12.9
`
`4.0
`
`492.0
`
`46.0
`50.1
`19.8
`14.0
`
`621.9
`
`124.0
`95.1
`
`219.1
`
`33.1
`
`34.6
`
`3.2
`3.5
`1.4
`1.0
`
`43.7
`
`8.7
`6.7
`
`15.4
`
`2.3
`
`427.1
`
`38.1
`67.1
`23.8
`18.2
`
`574.3
`
`107.3
`125.3
`
`232.6
`
`62.9
`
`34.2
`
`3.0
`5.4
`1.9
`1.5
`
`46.0
`
`8.6
`10.0
`
`18.6
`
`5.0
`
`Total product sales
`
`$
`
`1,858.0
`
`100.0% $
`
`1,423.1
`
`100.0% $
`
`1,249.4
`
`100.0%
`
`_________________________
`(1)
`Basic and diluted per share data have been calculated net of treasury shares held on the following basis:
`
`Basic per share:
`
`
`
`
`
`
`
`
`
`Year ended December 31,
`
`2003
`
`2002
`
`2001
`
`2000
`
`1999
`
`

`

`Bearer shares
`Registered shares
`Equivalent bearer shares
`Diluted per share:
`Bearer shares
`Registered shares
`Equivalent bearer shares
`
`Page 9 of 231
`11,427,194
`11,013,040
`15,832,410
`
`11,452,890
`11,013,040
`15,858,106
`
`11,580,611
`11,013,040
`15,985,827
`
`11,598,155
`11,013,040
`16,003,371
`
`11,658,108
`11,013,040
`16,063,324
`
`11,687,609
`11,013,040
`16,092,825
`
`11,032,835
`11,013,040
`15,438,051
`
`11,063,889
`11,013,040
`15,469,105
`
`10,581,187
`11,013,040
`14,986,403
`
`10,584,790
`11,013,040
`14,990,006
`
`(2)
`
`
`
`
`
`
`(3)
`
`(4)
`
`The portion of net income allocated to bearer and registered shares was $281,459 and $108,504, respectively for the year ended December 31,
`2003, $232,381 and $88,397, respectively, for the year ended December 31, 2002, and $229,863 and $86,858, respectively, for the year ended
`December 31, 2001. On a diluted basis, the portion of net income allocated to bearer shares and registered shares was $281,635 and $108,328,
`respectively for the year ended December 31, 2003, $232,478 and $88,300, respectively, for the year ended December 31, 2002, and $230,022 and
`$86,699, respectively, for the year ended December 31, 2001.
`
`Per share data for American depositary shares is equal to one-fortieth of the amount shown for bearer shares.
`
`Dividends for any fiscal year are generally declared and paid in the following year, after approval at the annual shareholders’ meeting. For fiscal year
`1999, the share dividend paid by us in May 2000 and our related payment of Swiss withholding tax totaling $59.8 million on these new shares, as
`more fully described in Item 8 under the caption ‘‘Dividends and Dividend Policy,’’ was accounted for in fiscal year 2000. However, we have complied
`with Topic 4-C of the SEC Staff Accounting Bulletins by restating our share capital to reflect the free share dividend distributed effective May 26,
`2000 for all periods presented.
`
`- 3 -
`
`

`

`Page 10 of 231
`
`(5)
`
`
`(6)
`
`(7)
`
`
`(8)
`
`
`(9)
`
`(10)
`
`(11)
`
`
`
`
`
`
`
`
`
`
`
`
`
`Supplemental per equivalent bearer share data have been calculated on the basis of that number of total equivalent bearer shares outstanding
`during the applicable period, as set forth in footnote (1) above. Per equivalent bearer share information assumes the conversion of all of our
`outstanding registered shares into bearer shares. We believe the per equivalent bearer share information may be useful to investors in analyzing our
`financial results on a per share basis. Because our bearer shares and registered shares have different dividend rights, we believe that per equivalent
`bearer share information should be considered in conjunction with our other reported per share data in order to obtain a clear understanding of our
`consolidated historical per share information.
`
`Working capital means current assets less current liabilities.
`
`The portion of net income in accordance with U.S. GAAP allocated to bearer shares and registered shares was $287,510 and $110,836,
`respectively, for the year ended December 31, 2003, $202,968 and $77,208, respectively, for the year ended December 31, 2002, and $211,537 and
`$79,933, respectively, for the year ended December 31, 2001. On a diluted basis, the portion of net income allocated to bearer shares and registered
`shares was $287,689 and $110,657, respectively, for the year ended December 31, 2003, $203,053 and $77,123, respectively, for the year ended
`December 31, 2002, and $211,684 and $79,786, respectively, for the year ended December 31, 2001.
`
`These measures are not defined in IFRS or U.S. GAAP and should not be considered as an alternative to any IFRS and U.S. GAAP data. The
`method of calculating these measures may be different from methods used by other companies.
`
`Gross profit means product sales less cost of product sales. Gross margin means gross profit divided by product sales.
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`Operating margin means operating income divided by total revenues.
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`Net margin means net income divided by total revenues.
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`Risk Factors
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`We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. You should carefully consider
`each of the risks and uncertainties we describe below and all of the other information in this Annual Report before deciding to invest in our bearer shares or
`ADSs. The risks and uncertainties we describe below are not the only ones facing our company. Additional risks and uncertainties that we do not currently
`know or that we currently believe to be immaterial may also adversely affect our business.
`
`Risks Related to Technological Change and Research and Development
`
`If technological change makes our products obsolete, we will no longer be able to sell our products and our revenues will decline
`
`Pharmaceutical and biotechnology development is characterized by significant and rapid technological change. Research and discoveries by others,
`including developments of which we are not currently aware, may make our products and those from which we derive royalty income obsolete. If
`technological changes make our products obsolete, doctors will be less likely to prescribe our products, and sales of our products will be reduced. If sales of
`our products are reduced, our results of operations could be adversely affected.
`
`If we are not able to develop and realize the full market potential of our current and new products, we may not be able to maintain our current
`level of sales growth and our stock price could decline
`
`Our long-term growth will depend on our ability to realize the full market potential of our current products and to develop and commercialize new
`products. Successful biotechnology product development is highly uncertain and depends on numerous factors, many of which are beyond our control. We
`currently have over 30 post-discovery projects in preclinical or clinical development. Products that appear promising in the early phases of development may
`fail to reach the market for numerous reasons, including, but not limited to:
`
`(cid:122)(cid:3)
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`development of products may be stopped due to a variety of reasons, such as lack of efficacy, harmful side effects and evolution in
`the competitive enviroment. For example, in December 2002, the development of onercept in rheumatoid arthritis was stopped due to inadequate
`efficacy at the low dose at which we tested the product;
`
`
`(cid:122)(cid:3) we may not successfully complete clinical trials for our products within any specific time period, or at all, for a variety of reasons, such as our
`inability to attract a sufficient number of investigators, our inability to enroll and maintain a sufficient number of patients in the clinical trials and
`suspension of the trials by regulatory authorities;
`
`(cid:122)(cid:3)
`
`
`(cid:122)(cid:3)
`
`products may fail to receive necessary regulatory approvals. For example, in April 2003 the Committee for Proprietary Medicinal Products
`recommended not granting initial marketing authorization for our high-dose recombinant human growth hormone product, Serostim, for the
`treatment of AIDS wasting in the European Union; and
`
`products may turn out to be uneconomical to commercialize because of manufacturing costs or other factors.
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`
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`
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`These factors are important, not only with respect to new drugs, but also with respect to new indications for existing drugs, because we must obtain
`regulatory approval for each indication and market acceptance for various indications may vary. These factors may also lead to gaps in the product
`development pipeline and delays between the approval of one product and approval of the next new product.
`
`Potential regulation of the use of biological materials could make production of our products more expensive or not possible
`
`We use biological materials, in particular animal-derived materials, in the development and manufacture of our products. Some interest groups in the
`European Union and the United States are seeking to ban or regulate the use of animal-derived materials generally, including their use in biotechnology
`products and for research and development. Although we are developing manufacturing processes for our major molecules that will be free of animal-
`derived components, we may not be
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`successful in that development and we cannot be certain that regulatory authorities will approve the new processes. If a government were to ban or regulate
`our use of animal-derived materials, we would incur additional costs that could make the production of our products less profitable or economically
`impractical, or we could have to cease production of certain of our products.
`
`Risks Related to Our Products and Markets
`
`If we encounter problems with any of our key suppliers or service providers, we could experience higher costs of sales, delays in our
`manufacturing or loss of revenues
`
`Other companies produce raw materials necessary for the manufacture of some of our products, as well as some of our products themselves. As a
`result, we are subject to the risk that some of the products we sell may have manufacturing defects that we cannot control. For example, we obtain Crinone
`exclusively from Columbia Laboratories. In April 2001, we announced a voluntary recall of batches of Crinone due to a manufacturing defect and suspended
`sales for the remainder of 2001 and the first part of 2002.
`
`In some cases, we cite our third party sources specifically in our drug applications with regulatory authorities and accordingly we must obtain those
`materials or products as specified. We also use subcontractors for certain services, and in some cases the subcontracts are with sole- or limited-source
`suppliers. For example, Owen Mumford is the exclusive provider of the injection device Rebiject for use with Rebif, our largest product. Our subcontractors,
`including Owen Mumford, may also be registered with the regulatory authorities, so we would have to obtain regulatory approval in order to use a different
`subcontractor. If such services were no longer available at a reasonable cost from those suppliers, we would need to find new subcontractors.
`
`If our suppliers experience manufacturing defects or if we have to find and register alternative raw material, product or service suppliers, we may
`experience significant delays in our ability to manufacture or sell our products and incur significant expense or fail to realize significant revenues.
`
`We may encounter unexpected difficulties in the design and construction of production facilities and the scale-up of production to viable
`commercial levels
`
`In order to manufacture a product candidate commercially, we require access to large-scale production facilities. We may encounter unexpected
`difficulties in the design and construction or adaptation of production facilities and the scale-up of production to viable commercial levels. These difficulties
`could result in substantial additional costs or affect the commercial viability of a product candidate. We are particularly at risk of encountering these
`difficulties in the manufacture of biological products, which are inherently more difficult to produce than chemical compounds.
`
`We face growing and new competition that may reduce our likelihood of market success
`
`We operate in a highly competitive environment. This competition may become more intense as commercial applications for biotechnology products
`increase. Our principal competitors are pharmaceutical companies, pharmaceutical divisions of chemical companies and biotechnology companies. Some of
`our competitors have greater clinical, research, regulatory, financial and marketing resources than we do and may be able to market competing products
`earlier than we do or market products with greater efficacy, fewer side effects or lower cost than ours. For example, the roll-out by Teva Pharmaceuticals in
`2002 and 2003 of its product Copaxone in Europe is an indication of increasing competition in the field of multiple sclerosis.
`
`Small biotechnology companies, academic institutions, governmental agencies and other public and private research organizations conduct a
`significant amount of research and development in the biotechnology field. These entities may seek patent protection and enter into licensing arrangements
`to collect royalties for the use of technology they have developed. We face competition in licensing activities from pharmaceutical companies,
`pharmaceutical divisions of chemical companies and biotechnology companies that also seek to acquire technologies from the same entities. If we are not
`able to compete effectively with these entities to acquire the technology we need to develop new products, we may not be able to maintain our current level
`of sales growth and our stock price could decline.
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`Resale of our biotechnology products within the European Union may cause our sales and gross profit margin to decline
`
`In an effort to create a single economic sphere and reduce barriers to the mobility of commercial products, the European Union has interpreted its
`competition and patent laws to permit the resale of various products, including biotechnology products. In 2003, $813.8 million (43.8%) of our sales were in
`Europe. Once we place our products in the stream of commerce in the European Union, we have limited ways of preventing third-party distributors from re-
`packaging, and then reselling, our products in any other country of the European Union. However, our prices vary across the European Union, principally as
`a function of different government policies regarding product pricing and reimbursement. Third-party distributors may purchase our products in markets
`within the European Union where our prices are lower, and then re-sell our products in countries where prices are higher. As a result, we face competition
`from third-party distributors that resell our products into these latter countries. We do not have the right to be the exclusive seller of our products within the
`European Union, nor do our patent rights protect us from third-party distributors re-selling our products in this manner. As a result, we cannot prevent a shift
`in sales to markets in which we realize lower unit sales prices for our products. If we sell a larger percentage of our products into these markets, our sales
`and gross profit margin will decline.
`
`Competition from non-approved uses and generic drugs could reduce our sales growth
`
`We face competition from generic products and products sold for non-approved uses. For example, Serostim faces competition from drugs
`prescribed for non-approved indications. Physicians may prescribe anabolic steroids or competing human growth hormone products to treat AIDS wasting
`although, as indicated by their labeling, regulators have not approved these products for this indication. In addition, producers of generic products may
`receive approval for the sale of their drugs by relying on the registration files of products already granted regulatory approval. Competitors market a number
`of generic urine-derived follicle stimulating hormone, or FSH, products in competition with our urine-derived and recombinant FSH products. Because
`producers of generic products do not have to incur the costs necessary to go through the full drug development process to prove that their products are safe
`and effective for these indications, they can afford to sell their products at lower prices than products like ours which have gone through that process. It is
`possible that our products will lose market share to these alternative therapies and that therefore we may not be able to maintain our current level of sales
`growth and our stock price could decline.
`
`Sales of counterfeit products may damage our reputation and cause customers to lose faith in our products
`
`As a manufacturer of biotechnology products, we are subject to the risk that third parties will attempt to create counterfeit versions of our products
`and sell the counterfeits as our products. For example, in January 2001 and again in May 2002, we announced that a counterfeit product was being sold as
`Serostim in the United States. Counterfeit products are not approved by regulatory authorities and may not be safe for use. If any counterfeit products are
`sold as ours, our reputation could suffer and patients could lose faith in our products. In addition, our products could be subject to recall in the event of
`counterfeit sales. If patients lose faith in our products or we are forced to recall any of our products as a result of the counterfeiting of those products, our
`sales could decline.
`
`If our sales of any of our major products decline, our profitability would be reduced
`
`Risks Related to Our Sources of Revenue
`
`For example in 2003, Rebif, our recombinant beta interferon, accounted for 44.1% ($819.4 million) of our total sales. Rebif faces competition from
`Avonex and Betaseron, other recombinant beta interferon products, as well as from Copaxone (glatarimer acetate), another drug used in multiple sclerosis.
`Because our business is highly dependent on Rebif, a reduction in revenue from sales of Rebif would have a significant impact on our overall profitability.
`Further in 2002, Gonal-f, our recombinant follicle stimulating hormone, accounted for 28.3% ($526.1 million) of our total sales. Gonal-f faces competition
`from Puregon, another recombinant product, and a variety of other FSH products. Because our business is highly dependent on Gonal-f, a reduction in
`revenue from sales of Gonal-f would have a significant impact on our overall profitability.
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`Our revenues are dependent on reimbursement from third-party payers who could reduce their reimbursement rates
`
`In most of our markets, sales of our products are or may be dependent, in part, on the availability of reimbursement from third-party payers. These
`payers include state and national governments, such as the health systems in many European Union countries and Medicaid programs in the United States,
`and private insurance plans. When a new product is approved, the reimbursement status and rate for the product is uncertain and must be negotiated with
`third-party payers in each European country, a process that can take up to several years. In addition reimbursement policies for existing products may
`change at any time. Changes in reimbursement rates or our failure to obtain and maintain reimbursement for our products may reduce the demand for, or
`the price of, our products and result in lower product sales or revenues. For example, in January 2004 the Federal Republic of Germany, Europe’s largest
`pharmaceutical market, announced an across-the-board reduction of 10% in reimbursement rates for all pharmaceuticals, including our products.
`
`In certain markets, the pricing and reimbursement of our products are subject to government controls. In Europe, some third-party payers link the
`reimbursement price to maximum quantities of the product sold in a given year. Single payer medical insurance systems, which are predominant in Europe,
`are under increasing financial strain, which creates an incentive to decrease the amount that such systems will pay to reimburse the cost of drugs. In the
`United States, there have been, and we expect there will continue to be, a number of state and federal proposals that limit the amount that state or federal
`governments will pay to reimburse the cost of drugs, and we believe the increasing emphasis on managed care will put pressure on the price and usage of
`our products, which may impact product sales. For example, in 2001 and 2002 many states in the U.S. imposed prior authorization requirements for the
`purchase of certain drugs under Medicaid, including Serostim. Not all jurisdictions recognize the importance of infertility treatment and accordingly do not
`offer reimbursement coverage for such treatment. In addition, in some countries the extent of reimbursement may be affected by local public policy and
`ethical concerns about certain therapies, such as in vitro fertilization.
`
`Third-party insurance coverage may not be available to patients for products we discover and develop. If third-party payers do not provide adequate
`coverage and reimbursement levels for our products, the market acceptance of these products may be significantly reduced.
`
`We may have difficulty successfully integrating acquired businesses with our operations
`
`From time to time, we may acquire businesses. We may not be able to successfully implement integration plans, dispose of certain non-core
`businesses, or profitably manage those businesses. We may not realize the expected synergies of acquisitions.
`
`A significant percentage of our net income is dependent on royalty and license payments that are beyond our control
`
`We derive a significant percentage of our net income from royalty and license income. Our royalty and license income was $160.6 million in 2003
`and $114.7 million in 2002, relating primarily to royalties received from Biogen Idec on its sales of Avonex, Organon on its sales of Puregon, Amgen
`(formerly Immunex) on its sales of Enbrel, and Abbott on its sales of Humira. In addition t