FINANCIALREPORT. Annual Report 2014

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(1)VALUE CREATION: THE ACTELION WAY. CORPORATE GOVERNANCE AND CSR REPORT. COMPENSATION REPORT. Annual Report 2014. FINANCIAL REPORT. FINANCIAL REPORT.. www.actelion.com. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. THIS IS AN INTERACTIVE PDF – PRESS BUTTON TO BEGIN.

(2) PREVIOUS. NEXT. Actelion Annual Report 2014. CONTENTS 04 Finance in Brief. 06 Financial Review. For the ninth consecutive year the Company’s internal controls over financial reporting were certified as meeting the requirements of SOX 404 (Sarbanes-Oxley Act 2002, section 404) at 31 December 2014.. Actelion Ltd. is a leading biopharmaceutical company focused on the discovery, development and commercialization of innovative drugs for diseases with significant unmet medical needs.. 14 Consolidated Financial Statements. 60 Holding Company Statements WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. Actelion is a leader in the field of pulmonary arterial hypertension (PAH). Our portfolio of PAH treatments covers the spectrum of disease, from WHO Functional Class (FC) II through to FC IV, with oral, inhaled and intravenous medications. Although not available in all countries, Actelion has treatments approved by health authorities for a number of specialist diseases including Type 1 Gaucher disease, Niemann-Pick type C disease, Digital Ulcers in patients suffering from systemic sclerosis, and mycosis fungoides type cutaneous T-cell lymphoma.. Actelion ensures financial integrity by complying with all applicable laws and accounting standards, using the highest internal standards and proper reporting of Actelion’s results.. FINANCIAL REPORT.. 3.

(3) CONTENTS. FINANCE IN BRIEF. CONSOLIDATED FINANCIAL STATEMENTS. FINANCIAL REVIEW. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. NEXT. Actelion Annual Report 2014. 5. variance CHF %. (in CHF millions, except % variance). 2014. 2013. US GAAP results Net revenue Operating results Net results Diluted EPS Dividend per share2. 1,958 570 594 5.11 1.30. 1,786 482 453 3.92 1.20. 10% 18% 31% 30%. Core3 results Product sales Operating results Net results Diluted EPS. 1,956 743 648 5.58. 1,784 619 509 4.41. 10% 20% 27% 27%. 616 (32) 327 970 -. 592 (258) (245) 643 613. Cash flow Operating cash flow4 Capital expenditure Free cash flow Net cash position - unrestricted Net cash position - restricted. in % of sales 2014. 2013. 12% 24% 38% 37%. 100% 29% 30%. 100% 27% 25%. 12% 25% 34% 33%. 100% 38% 33%. 100% 35% 29%. CER %1. 1. Constant exchange rates (“CER”) constitutes percentage changes calculated by reconsolidating both the 2014 and 2013 results at constant currencies (the average monthly exchange rates for the year 2013).. 2. Dividend proposal by the Board of Directors subject to shareholders’ approval.. 3. Actelion continues to measure, report and issue guidance on its core operating performance, which management believes more accurately reflects the underlying business performance. The Group believes that these non-GAAP financial measurements provide useful supplementary information to investors. These non-GAAP measures are reported in addition to, not as a substitute for US GAAP financial performance. A full reconciliation between US GAAP and core results is available on page 21 of this report.. 4. Operating cash flow excluding a litigation settlement.. Actelion delivered a strong operational performance in 2014. Operating income grew almost twice as fast as sales, demonstrating the organization’s earnings power, as well as Actelion’s commitment to optimize short-term profitability while carefully balancing investment in R&D programs to ensure mid- to long-term growth.. Product Sales. Product sales rose 12% at constant exchange rates (CER) to CHF 1,956 million. Excluding the impact of US rebate reversals, product sales increased by 10% at CER, mainly driven by the strong uptake of Opsumit, the roll-out of Veletri and the solid performance of all other products around the globe – including Tracleer, which is still growing in countries where Opsumit has not yet been launched.. Operating results. Core operating income increased by 25% at CER to CHF 743 million. Excluding the impact of US rebate reversals, core operating income reached CHF 677 million, an increase of 20% at CER. The strong sales performance was supported by increased investment, as the commercial organization launched Opsumit and Valchlor and continued the roll-out of Veletri. R&D expenses increased by 4%, with several exciting early- and late-stage compounds advancing through the pipeline, while G&A expenses remained flat. US GAAP operating income increased by 24% at CER to CHF 570 million. This was driven by the core operating performance but was impacted by higher amortization expenses relating to the acquisition of Valchlor and by a milestone payment relating to the filing of Selexipag with European and US regulators for marketing authorization.. Net results and EPS. US GAAP net income increased by 38% at CER to CHF 594 million, driven by the strong operating performance, lower financing costs due to a litigation settlement, and the release of a valuation allowance on deferred tax assets. US GAAP diluted earnings per share rose to CHF 5.11. Operating cash flow. Operating free cash flow (excluding a litigation settlement of CHF 458 million) amounted to CHF 584 million, driven by the strong operating performance, limited capital expenditure and the absence of acquisitions in 2014.. Free cash flow and cash position. Free cash flow for 2014 amounted to CHF 327 million and the company’s net cash position at 31 December 2014 increased to CHF 970 million. The litigation settlement of CHF 458 million was funded by the release of the bail bond of CHF 609 million. Actelion paid an increased dividend of CHF 133 million and acquired treasury shares for a cash consideration of CHF 546 million in order to manage dilution arising from stock-based compensation. Cash proceeds resulting from employee stock option exercises amounted to CHF 249 million.. ACTELION FINANCIAL REPORT 2014. Total shareholder return. 4. Core net income increased by 34% at CER to CHF 648 million, reflecting the strong operating performance. Core diluted earnings per share (EPS) rose to CHF 5.58.. Actelion’s share price rose by 53%, resulting in a total shareholder return (including dividend payment) of 55% in 2014.. FINANCIAL REPORT.. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. FINANCE IN BRIEF. Actelion in 2014. 5.

(4) CONTENTS. FINANCE IN BRIEF. FINANCIAL REVIEW. CONSOLIDATED FINANCIAL STATEMENTS. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. NEXT. Actelion Annual Report 2014. 7. 2014 was an outstanding year for Actelion: the company delivered value for shareholders, continued to serve more patients and positioned itself for long-term growth. In 2012, Actelion made a commitment to return significant capital to shareholders. The company has delivered on that promise, with almost CHF 1.1 billion being returned to shareholders in the form of dividends and share buybacks over the past three years.. FINANCIAL REVIEW. In keeping with this commitment, the Board of Directors authorized in principle a new share repurchase program of up to 10 million shares of Actelion’s common stock subject to approval by the relevant authorities; this share repurchase program would be carried out via a new second trading line at the SIX Swiss Exchange over a period of three years and the Board will propose the cancelation of these repurchased shares at subsequent Annual General Meetings. The Board of Directors will also propose an increased annual dividend payment of CHF 1.30 for approval by shareholders at the upcoming Annual General Meeting in May. The share price rose by 53%, resulting in a total shareholder return (including dividend payment) of 55% in 2014. The company’s performance reflects strong commercial execution coupled with a continued commitment to operational efficiency. Product sales rose 12% at CER to CHF 1,956 million. Core earnings increased by 25% to CHF 743 million, while core earnings per share rose 33% to CHF 5.58. Operating cash flow amounted to CHF 616 million (excluding a litigation settlement of CHF 458 million), reflecting the strong operating performance. Free cash flow reached CHF 327 million, resulting in a net cash position at the end of 2014 of CHF 970 million, ensuring financial flexibility. The foreign exchange environment in 2014 continued to negatively impact both sales and core operating income: compared to 2013, the average Swiss franc exchange rate in 2014 was stronger against all major currencies, in particular the Japanese yen and the US dollar.. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. On 15 January 2015, the Swiss National Bank announced that it was discontinuing the minimum exchange rate of CHF 1.20 per euro. This announcement resulted in an immediate appreciation of the Swiss franc against all currencies and a sharp drop in the Swiss stock market. The SNB decision has no impact on the Financial Statements for the full year 2014 since the figures reported do not reflect changes in exchange rates after 31 December 2014. Because Actelion reports and presents its consolidated results in Swiss francs, a persistent weakening of foreign currencies against the Swiss franc would negatively impact Actelion’s future sales and core operating results. The currency translation sensitivity of Actelion’s consolidated results and gross cash position is presented on pages 14, 15, 18 and 19 of the Financial Review. Despite this unfavorable foreign exchange environment, Actelion is confident that its long-term strategy, coupled with tight financial oversight, will result in continued shareholder value creation.. 6. FINANCIAL REPORT.. 7.

(5) FINANCIAL REVIEW. CONSOLIDATED FINANCIAL STATEMENTS. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. Actelion Annual Report 2014. NEXT. 9. 8. SALES. (in CHF millions, except % variance). Product sales Opsumit Tracleer Veletri Ventavis Valchlor Zavesca Others Total product sales 1. 2014. 2013. 180 1,481 64 112 11 103 5 1,956. 5 1,532 37 110 0 96 4 1,784. variance1 CHF %. nm -3% 76% 2% nm 8% nm 10%. CER %. nm -1% 84% 3% nm 11% nm 12%. nm = not meaningful. Actelion’s commercial performance during 2014 was very strong across all regions, with excellent demand for key assets. In the US, despite unabated competitive pressures, sales increased by 16% at CER, driven by a successful Opsumit launch, price increases across the portfolio and a net impact of CHF 42 million (at CER) in reversals of rebate accruals relating to patient support programs. European sales increased by 10% at CER, driven by the launches of Opsumit and Veletri in various European markets, as well as the digital ulcer indication for Tracleer, despite a persistently negative pricing environment. Sales in Japan grew by 9%, driven by the strong uptake of Veletri and solid sales for Tracleer. Sales in the rest of the world increased by 8% at CER, driven by new product launches (Opsumit, Veletri) in Australia and by strong growth in emerging PAH markets such as China, Taiwan, Russia and Mexico. Comparing average exchange rates in 2014 with average exchange rates during 2013, the Swiss franc was stronger against major currencies, in particular the Japanese yen and the US dollar. The overall impact resulted in a negative currency variance of CHF 51 million.. (in CHF millions, except % variance). Product sales by region United States Europe Japan Rest of the world Total product sales. 2014. 2013. 879 717 185 175 1,956. 768 660 188 169 1,784. variance CHF %. 14% 9% -1% 4% 10%. CER %. 16% 10% 9% 8% 12%. PAH FRANCHISE Opsumit® (in CHF millions, except % variance). Sales by region United States Europe Japan Rest of the world Total. 8. 2014. 2013. 133 42 5 180. 5 5. variance CHF %. nm nm nm nm nm. CER %. nm nm nm nm nm. Sales of Opsumit (macitentan) for 2014 amounted to CHF 180 million, reflecting a highly successful launch in various regions, countries and healthcare systems. The robust SERAPHIN long-term outcome data is perceived as clinically relevant, differentiating Opsumit from other endothelin receptor antagonists (ERAs), and the product is rapidly gaining market share. At the end of 2014, over 6,300 patients were benefiting from Opsumit. Additional important clinical data, further documenting the clinical utility of Opsumit, was presented at various medical congresses throughout the year. By the end of 2014, Opsumit had been successfully launched in the US, Germany, Austria, Switzerland, the UK, Ireland, Denmark, Sweden, the Netherlands, Australia, Italy, Belgium, Luxembourg, Canada, Finland, Mexico (private market), Norway and Iceland. The regulatory process for reimbursement is proceeding well in other European countries, such as Spain and France, where Opsumit should be launched during 2015. In Japan, where the registration dossier was filed in June 2014, the regulatory process is proceeding well. The company has also filed for marketing authorization in Russia, Turkey, China, Brazil and other Asian and Latin American markets.. Tracleer® (in CHF millions, except % variance). Sales by region United States Europe Japan Rest of the world Total. 2014. 2013. 562 612 164 143 1,481. 595 610 180 147 1,532. variance CHF %. CER %. -6% 0% -9% -3% -3%. -4% 2% 1% 1% -1%. Sales of Tracleer (bosentan) amounted to CHF 1,481 million for 2014, a decrease of 1% at CER compared to 2013 due to erosion in markets where Opsumit is available, as well as market price pressures and increased generic competition. Sales were supported by the digital ulcer indication in Europe, as well as continued strong demand for Tracleer in markets where Opsumit is not yet available. US rebate reversals related to patient assistance programs and US price increases mitigated the decline. Underlying units sold decreased by 2%. Amidst increased generic competition, Actelion is successfully defending Tracleer in markets such as Canada, Turkey and Mexico. The company also introduced a generic bosentan in Brazil in 2012 and launched branded generic bosentan under the name of Stayveer® in Poland and the Czech Republic to compete with generics, as well as to protect EU Tracleer pricing.. Veletri® (in CHF millions, except % variance). Sales by region United States Europe Japan Rest of the world Total. 2014. 2013. 36 7 19 2 64. 30 0 6 0 37. variance CHF %. CER %. 20% nm nm nm 76%. 22% nm nm nm 84%. Sales of Veletri (epoprostenol for injection) reached CHF 64 million for the full year 2014, an increase of 84% at CER compared to 2013, driven by successful launches in additional markets (such as Australia, the Netherlands, Spain). Veletri continues to perform well in Japan, despite a 5% price cut on 1 March 2014. Veletri is well adopted, approaching an 80% share of new i.v. epoprostenol patients. At the end of 2014, Veletri was available in the US, Japan, the UK, Spain, Italy, the Netherlands, Australia, New Zealand, Portugal, Poland, Belgium, Canada, the Czech Republic and Switzerland.. FINANCIAL REPORT.. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. CONTENTS. FINANCE IN BRIEF. 9.

(6) FINANCIAL REVIEW. CONSOLIDATED FINANCIAL STATEMENTS. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. Actelion Annual Report 2014. NEXT. 10. 11. Ventavis® (in CHF millions, except % variance). Sales by region United States Europe Japan Rest of the world Total. 2014. 2013. variance CHF %. 112 112. 110 110. 2% 2%. OPERATING EXPENSES CER %. 3% 3%. During 2014, Ventavis (iloprost) had sales in the US of CHF 112 million, an increase of 3% at CER. This growth was driven entirely by price increases and rebate reversals, as underlying units sold were eroded by 17% due to competitive pressures. These pressures are expected to intensify during 2015 as a consequence of a potential generic entry.. SPECIALTY PRODUCTS Valchlor® (in CHF millions, except % variance). Sales by region United States Europe Japan Rest of the world Total. 2014. 2013. 10 1 11. 0 0. variance CHF %. nm nm nm nm nm. nm nm nm nm nm. Zavesca® (in CHF millions, except % variance). Sales by region United States Europe Japan Rest of the world Total. 2014. 2013. 26 55 2 20 103. 26 50 2 18 96. 0% 11% 8% 10% 8%. (in CHF millions, except % variance). Operating expenses Core cost of sales Core research and development Core selling, general and administration Core operating expenses Depreciation of assets Amortization of acquired intangible assets Stock-based compensation Milestone payments Doubtful debt movements Accretion expenses Litigation or arbitration results Other expenses Non-core operating expenses Operating expenses US GAAP. CER %. 2% 12% 19% 17% 11%. Sales of Zavesca (miglustat) amounted to CHF 103 million for 2014, an increase of 11% at CER compared to 2013. This performance was mainly driven by continued strong patient demand outside the US in the Niemann-Pick type C indication. In the type 1 Gaucher disease market, the performance of Zavesca remained strong, with relatively stable demand and positive price movement in the US. Underlying units sold increased by 14%. The company is anticipating competitive pressures in early 2015, as generic miglustat has been approved (for type 1 Gaucher disease only) in selected European markets.. 2013. 212 369 631 1,213 38 63 53 19 (1) 3 175 1,388. 208 356 601 1,165 39 45 50 (12) 2 13 1 138 1,303. 2014. 2013. 156 57 212 3 215. 156 51 208 2 209. variance CHF %. CER %. 2% 4% 5% 4% -3% 39% 6% nm 90% 74% nm nm 27% 7%. 4% 4% 7% 6% -3% 41% 6% nm 90% 77% nm nm 27% 8%. Cost of sales (in CHF millions, except % variance). Cost of sales Royalty expenses Cost of goods sold Core cost of sales Non-core cost of sales Cost of sales US GAAP. variance CHF %. CER %. 0% 10% 2% 74% 3%. 2% 11% 4% 77% 5%. Royalty expenses relate to net sales of our main products. Despite higher sales in 2014, the royalty expenses remained flat; this was mainly due to the mix of product sales, as the company pays a low single-digit royalty rate on sales of Opsumit and a high single-digit rate for Tracleer. Cost of goods sold include all manufacturing costs, internal costs and distribution costs relating to the supply of products to our affiliates.. Non-core cost of sales relates to the accretion expense for contingent consideration for Valchlor. Non-core cost of sales does not include any depreciation or amortization since all goods are manufactured by third parties.. Research and development (“R&D”) expenses (in CHF millions, except % variance). 2014. 2013. 369 27 22 19 437 2 440. 356 27 21 1 405 3 408. Research and development expenses Core research and development expenses Depreciation Stock-based compensation Milestone payments Restructuring expenses Research and development expenses US GAAP1 Amortization of acquired intangible assets Research and development expenses US GAAP 1. 10. 2014. CER %. Sales of Valchlor (mechlorethamine) for the full year 2014 amounted to CHF 11 million. Valchlor was launched in the US in November 2013 for stage IA and IB mycosis fungoides-type cutaneous T-cell lymphoma (MF-CTCL) in patients who have received prior skin-directed therapy. In March 2014, expansion of the sales team was completed, and the company is now working with dermatologists beyond the CTCL centers of excellence. We are making progress in establishing Valchlor as an option in the treatment algorithm for early-stage MF-CTCL.. variance CHF %. Operating expenses break down as follows:. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. CONTENTS. FINANCE IN BRIEF. variance CHF %. CER %. 4% -1% 6% nm nm 8% -11% 8%. As reported in the consolidated income statements, excluding amortization of acquired intangible assets.. FINANCIAL REPORT.. 4% -1% 6% nm nm 9% -9% 9%. 11.

(7) CONTENTS. FINANCE IN BRIEF. FINANCIAL REVIEW. CONSOLIDATED FINANCIAL STATEMENTS. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. Actelion Annual Report 2014. NEXT. 13. 12. Core R&D expenses for 2014 increased by 4% at CER compared to the prior year, as investment in the earlier-stage pipeline and clinical trial expenses increased. Core R&D expenditure represented 19% of product sales in 2014. This level may increase going forward, as several promising compounds are advancing through the pipeline. However, Actelion will continue to focus on carefully balancing investments so as to ensure future growth and delivery of appropriate shareholder returns.. Core operating income increased by 25% at CER to CHF 743 million. Excluding the impact of US rebate reversals (see page 15), operating performance remains robust, with an increase of 20% at CER driven by sales growth, which required additional marketing and selling expenses (mainly for the launch of Opsumit and Valchlor). R&D efforts also increased to advance a number of promising compounds in various stages of development. G&A remained almost flat.. US GAAP R&D includes depreciation expenses relating to the research building and laboratory equipment of CHF 27 million, stock-based compensation expenses of CHF 22 million and a milestone payment to Nippon Shinyaku of CHF 19 million relating to the filing of Selexipag with the US Food and Drug Administration (FDA) and the European Medicines Agency (EMA) for marketing authorization.. US GAAP operating income grew by 24% at CER to CHF 570 million, despite higher non-core operating expenses due to higher amortization of acquired intangible assets (driven by the acquisition of Valchlor) and the milestone payment to Nippon Shinyaku.. Selling, general and administrative (“SG&A”) expenses. NET RESULTS 2014. (in CHF millions, except % variance). CER % (in CHF millions, except % variance). Selling, general and administrative expenses Marketing, selling and distribution expenses General and administrative expenses Core selling, general and administrative expenses Depreciation Stock-based compensation Doubtful debt provision Restructuring expenses Selling, general and administrative expenses US GAAP1 Amortization of acquired intangible assets Arbitration settlement Selling, general and administrative expenses US GAAP 1. 2013. variance CHF %. 450 182 631 11 31 (1) 672 61 733. 417 184 601 12 28 (12) 0 631 43 13 686. 8% -1% 5% -7% 7% -90% nm 7% 42% nm 7%. 11% 0% 7% -6% 7% -90% nm 9% 44% nm 9%. As reported in the consolidated income statements, excluding amortization of acquired intangible asstes and arbitration settlement.. Net results Core operating results Core financial results Core income tax Core net results. 2014. 2013. 743 (18) (77) 648. 619 (13) (97) 509. variance CHF %. CER %. 20% -38% 21% 27%. 25% -38% 24% 34%. The core financial expense of CHF 18 million includes the interest expense of the straight bond (4.875% or CHF 12 million) and CHF 6 million related to the company’s hedging programs. The core tax expense of CHF 77 million represents an effective tax rate of 11% on the core results before tax in the various countries where Actelion conducts its business.. Core SG&A increased by 7% at CER to CHF 631 million in 2014. This increase was driven entirely by costs related to the launches of Opsumit, Valchlor and Veletri in various markets around the globe. The G&A portion continues to remain flat, as Actelion carefully manages operating expenses.. Core net income grew by 34% at CER to CHF 648 million, mainly driven by the strong operating performance and lower core tax expense.. US GAAP SG&A includes depreciation expenses of CHF 11 million; stock-based compensation expenses of CHF 31 million; a CHF 1 million reversal of doubtful debt allowance, as collection in Southern European countries continued to improve (after a CHF 12 million reversal in 2013); and the amortization of acquired intangible assets of CHF 61 million, a significant increase due to the amortization of Valchlor.. (in CHF millions, except % variance). (in CHF millions, except % variance). 2014. 2013. Operating results Net sales Core operating expenses Core operating results Contract revenue Non core operating expenses Operating results US GAAP. 1,956 (1,213) 743 2 (175) 570. 1,784 (1,165) 619 2 (138) 482. 12. variance CHF %. 10% 4% 20% nm 26% 18%. CER %. 12% 6% 25% nm 27% 24%. 2013. 570 (33) 57 594. 482 (53) 23 453. variance CHF %. CER %. 18% -37% 150% 31%. 24% -37% 164% 38%. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. OPERATING RESULTS. Net results Operating results Financial results Income tax Net results US GAAP. 2014. The US GAAP financial expense of CHF 33 million includes non-core financial expenses mainly relating to an interest expense (CHF 10 million) in connection with the Asahi litigation award, which was paid in March 2014, as well as the impairment of a financial asset (CHF 5 million).. The US GAAP tax income of CHF 57 million includes one-time deferred tax benefits of CHF 115 million, mainly relating to the release of a valuation allowance on US deferred tax assets.. FINANCIAL REPORT.. 13.

(8) CONSOLIDATED FINANCIAL STATEMENTS. FINANCIAL REVIEW. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. Actelion Annual Report 2014. NEXT. 15. 14. EARNINGS PER SHARE (“EPS”). For 2014, Actelion reported core operating income of CHF 743 million, with: variance CHF %. 2014. 2013. 648 594. 509 453. 27% 31%. 34% 38%. Basic earnings per share Weighted number of shares (in millions) Basic EPS - Core (in CHF) Basic EPS - US GAAP (in CHF). 111.2 5.83 5.34. 111.5 4.56 4.06. nm 28% 32%. nm 34% 39%. Diluted earnings per share Weighted number of shares (in millions) Diluted EPS - Core (in CHF) Diluted EPS - US GAAP (in CHF). 116.2 5.58 5.11. 115.4 4.41 3.92. nm 27% 30%. nm 33% 37%. (in CHF millions, unless otherwise indicated). Net results Net results - Core Net results - US GAAP. CER %. •. net sales of CHF 1,956 million, of which 98% are denominated in foreign currencies converted at the average exchange rates shown above (47% in US dollars, 32% in euros, 9% in Japanese yen and 10% in other foreign currencies) and. •. core operating expenses of CHF 1,213 million, of which 27% are incurred in Swiss francs at our headquarters (mainly R&D organization, headquarter activities with strategic and support functions) and 73% in foreign currencies at our affiliates in the US, Europe, Japan and the rest of the world.. The organization of Actelion, with 98% of sales and 73% of core operating expenses for 2014 in foreign currencies, gives a natural hedge against adverse impacts of foreign currency movements against the Swiss franc. The table below shows the currency translation sensitivity for each 1% adverse change in average exchange rates against the Swiss franc:. Basic EPS for 2014 was CHF 5.34, compared to CHF 4.06 in the prior year. Diluted EPS was CHF 5.11, up 37% at CER over 2013. The increase in EPS was driven mostly by the higher net income. The share count for basic EPS was slightly reduced due to the share buyback program completed in August 2013, which was fully weighted in 2014. The dilutive share count increased, as the higher share price resulted in an increased share count for the diluted EPS calculation despite a decreased nominal number of outstanding equity instruments.. IMPACT OF FOREIGN EXCHANGE RATES ON SALES AND OPERATING RESULTS. Reported growth versus prior year Product sales Core operating results Operating results - US GAAP Core net results Net results - US GAAP. Exchange rates against Swiss franc US dollar Euro Japanese yen. 2014 CHF %. 10% 20% 18% 27% 31%. 1 USD 1 EUR 100 JPY. 2014 CHF. CER %. 12% 25% 24% 34% 38%. 172 124 87 139 141. CER. 2013 CHF %. 223 154 116 173 173. 4% 15% 14% 13% 49%. CER %. 6% 20% 20% 17% 57%. 2013 CHF. 62 82 61 59 149. CER. 112 105 83 77 172. December 31, 2014. Average rate 2014. December 31, 2013. Average rate 2013. 0.990 1.202 0.828. 0.915 1.215 0.866. 0.890 1.228 0.848. 0.927 1.231 0.953. On 15 January 2015, the Swiss National Bank announced that it was discontinuing the minimum exchange rate of CHF 1.20 per euro. This announcement resulted in an immediate appreciation of the Swiss franc against all currencies and a sharp drop in the Swiss stock market. The SNB decision has no impact on the Financial Statements for the full year 2014 since the figures reported do not reflect changes in exchange rates after 31 December 2014. Because Actelion reports and presents its consolidated results in Swiss francs, a persistent weakening of foreign currencies against the Swiss franc would negatively impact Actelion’s future sales and core operating results.. 14. Net sales CHF. Core operating expenses. Core operating results. 0.906 1.203 0.857. (9) (6) (2) (2) (19) -1.0%. 4 2 1 1 8 0.7%. (5) (4) (1) (1) (11) -1.4%. 1 USD 1 EUR 100 JPY. IMPACT OF OTHER EVENTS ON SALES AND OPERATING RESULTS. Actelion’s exposure to foreign currency movements affecting its sales and operating results as expressed in Swiss francs is summarized in the following tables and comments. (in CHF millions, except % variance). Exchange rates against Swiss franc US dollar Euro Japanese yen All other foreign currencies Total impact. Average rate 2014 minus 1 %. The Group recognizes revenue from product sales when there is persuasive evidence that a sales arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. Provisions for rebates and discounts granted to government agencies, wholesalers, retail pharmacies, managed care organizations and other customers are recorded as a reduction of revenue at the time the related revenues are recognized or when the incentives are offered. They are calculated on the basis of historical experience and the specific terms in the individual agreements. Estimating such rebate accruals is a complex process and requires significant judgment, especially for rebates granted in the context of US reimbursement programs (mainly governmental programs such as Medicaid and Managed Medicaid), due to the time lag between the date of sale and the actual settlement of the liability, changes in regulations for the various rebate programs, and changing utilization rates and patient populations. Actelion has been adjusting its estimates by reversing US rebate accruals during 2013 and 2014, which had a positive impact both on sales and on core operating income. The table below shows Actelion’s performance excluding US rebate reversals: (in CHF millions, except % variance). Product sales performance Product sales – as reported Impact of US rebate reversals Product sales excluding US rebate reversals Core operating performance Core operating results – as reported Impact of US rebate reversals Core operating results excluding US rebate reversals. 2014. 2013. variance CHF. 1,956 (73) 1,883. 1,784 (35) 1,749. 172 (38) 134. 10% 8%. 223 (42) 181. 12% 10%. 743 (66) 677. 619 (32) 588. 124 (35) 89. 20% 15%. 154 (38) 116. 25% 20%. CHF %. variance CER. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. CONTENTS. FINANCE IN BRIEF. CER %. FINANCIAL REPORT.. 15.

(9) CONTENTS. FINANCE IN BRIEF. FINANCIAL REVIEW. CONSOLIDATED FINANCIAL STATEMENTS. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. Actelion Annual Report 2014. NEXT. 17. 16. CASH FLOW AND CASH POSITION. The company purchased 5.7 million shares for a cash consideration of CHF 546 million on the first line of the Swiss Exchange, at an average stock price of CHF 96.25. Actelion initiated a 10 million share purchase program in December 2013 in order to mitigate dilution arising from employee stock compensation programs.. Operating cash flow (in CHF millions)1. Operating cash flow Net results Depreciation and amortization Stock-based compensation Other non cash items Funds from operations2 Net change in trade and other receivables Net change in trade and other payables Net change in deferred tax assets and liablilites Net change in other operating assets and liabilities Decrease (increase) in operating working capital Operating cash flow2 1. Rounding differences may occur.. 2. Excluding litigation settlement.. 2014. 2013. 594 101 54 54 803. 453 84 51 35 623. 10 (29) (87) (81) (187) 616. (9) 11 (93) 60 (31) 592. The company continues to be pleased with cash collection in Southern Europe (particularly Italy and Spain), with days sales outstanding (DSO) at a record low of 63 days.. Actelion employees exercised 4.8 million stock options during 2014, resulting in proceeds of CHF 249 million. Free cash flow for 2014 amounted to CHF 327 million, resulting in a gross cash position of CHF 1.2 billion at year end.. BALANCE SHEET December 31, 2014. December 31, 2013. variance. 1,205 400 121 368 441 134 78 2,748. 878 613 406 123 381 465 126 38 3,030. 327 (613) (6) (2) (13) (24) 8 41 (282). 429 235 163 827. 456 516 235 114 1,321. (456) (86) 49 (493). Share capital and accumulated reserves Treasury shares Total shareholders' equity. 2,208 (288) 1,920. 2,252 (543) 1,709. (44) 255 211. Total liabilities and shareholders' equity. 2,748. 3,030. (282). (in CHF millions)1. Assets Gross cash position - unrestricted2 Gross cash position - restricted Trade and other receivables, net Other current assets Tangible assets Intangible assets Goodwill Other non-current assets Total assets. Free cash flow (in CHF millions)1. Free cash flow Operating cash flow Acquisition of tangible, intangible and other assets Acquisition of businesses Operating free cash flow Litigation settlement Cash released from (restricted for) litigation Dividend paid Acquisition of shares from the second line repurchase program Acquisition of shares from the first line purchase program Sale of treasury shares Proceeds from exercise of stock options, net of expense Other items Free cash flow 1. 2014. 2013. 616 (31) (1) 584. 592 (27) (231) 334. (458) 609 (133) (546) 249 22. (250) (113) (417) (155) 97 269 (10). 327. (245). Litigation provision Other current liabilities Financial debt Other non-current liabilities Total liabilities. 1. Rounding differences may occur.. 2. Gross cash position includes cash, cash equivalents and short-term deposits.. The significant changes in the balance sheet can be explained as follows: •. The judgment by the Supreme Court of California on the litigation with Asahi Kasei Corporation led to the reversal of the litigation provision of CHF 456 million and the full release of the restricted cash position of CHF 613 million.. •. The reversal of US rebate accruals is the main driver for the decrease of CHF 86 million in “other current liabilities”.. Rounding differences may occur.. The free operating cash flow of CHF 584 million (excluding the litigation settlement of CHF 458 million) results from the strong underlying business performance, limited capital expenditure (the Group has already built its headquarter infrastructure) and the absence of acquisitions in 2014 (the US company Ceptaris Therapeutics Inc., with its main drug Valchlor, was acquired in 2013). The company paid a litigation settlement of CHF 458 million in March 2014 out of its restricted cash of CHF 609 million, resulting in a net release of CHF 151 million. The company returned CHF 133 million to its shareholders on 15 May 2014 by paying a dividend of CHF 1.20 per share, an increase of CHF 0.20 over 2013.. 16. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. Liabilities and shareholders' equity. FINANCIAL REPORT.. 17.

(10) CONTENTS. FINANCE IN BRIEF. FINANCIAL REVIEW. CONSOLIDATED FINANCIAL STATEMENTS. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. Actelion Annual Report 2014. NEXT. 18. The decrease of treasury shares by CHF 255 million is explained in the table below: Treasury shares (in thousands). Average price (in CHF). Treasury shares (in CHF million). First line treasury shares December 31, 2013 Purchase of treasury shares Exercise of options by employees Vesting of Restricted Stock Units Other share allocations December 31, 2014. 3,000 5,675 (4,784) (882) (9) 3,000. 64.50 96.25 80.87 72.97 81.73 95.90. 193 546 (387) (64) (1) 288. Second-line treasury shares December 31, 2013 Cancellation of shares after AGM approval December 31, 2014. 6,148 (6,148) -. 56.78 56.78 -. 349 (349) -. Treasury shares - total December 31, 2013 Change in first-line treasury shares Change in second-line treasury shares December 31, 2014. 9,148 (6,148) 3,000. 59.31 nm 56.78 95.90. 543 94 (349) 288. The table below shows how foreign currency fluctuations would affect the gross cash position before and after derivative instruments, should the Swiss franc continue to be traded at the sharply increased levels against all currencies seen after the Swiss National Bank’s announcement on 15 January 2015 that it was discontinuing the minimum exchange rate of CHF 1.20 per euro.. (CHF millions unless otherwise indicated). Currency rate sensitivity analysis Swiss franc US dollar Euro Japanese yen Other foreign currencies Gross cash position excluding derivative instruments Derivative instruments Gross cash position including derivatie instruments. QUARTERLY RESULTS. The net cash position at the end of 2014 is CHF 970 million, taking into account the straight bond of CHF 235 million repayable in December 2015.. (in CHF millions, except % variance). Gross cash position by currency Swiss franc US dollar Euro Japanese yen Other foreign currencies (FX) Total gross cash position. December 31, 2014 CHF million. in %. Closing rate against CHF. 786 164 184 27 43 1,205. 65% 14% 15% 2% 4% 100%. 1 USD = 0.99 1 EUR = 1.20 100 JPY = 0.83 -. Actelion has been consistently applying a hedging policy by using derivative instruments (mainly forward contracts) in order to limit volatility in its financial results. Such derivative instruments aim to compensate for the unrealized potential gains or losses on the assets and liabilities denominated in foreign currencies held by Swiss entities of Actelion. At the end of 2014, the derivative instruments had a negative value of CHF 32 million, which would reduce the gross cash position accordingly.. 18. 786 164 184 27 43 1,205 (32) 1,173. Closing rate against CHF. Pro forma rate against CHF. 1 USD = 0.99 1 EUR = 1.20 100 JPY = 0.83. 1 USD = 0.88 1 EUR = 1.00 100 JPY = 0.77. Variance. Pro forma December 31, 2014. -11% -17% -7% -10% (57) 52 (5). 786 145 153 25 39 1,148 20 1,168. Actelion’s hedging policy significantly reduced the impact of the sharp increase in the value of the Swiss Franc on our gross cash position.. The gross cash position increased by CHF 327 million, as explained above in the cash flow analysis, to reach CHF 1,205 million.. The gross cash position at 31 December 2014 breaks down by currency as follows:. Actual December 31, 2014. Q1 2014 3 months. Q2 2014 3 months. Q3 2014 3 months. Q4 2014 3 months. 2014 12 months. Core operating results Product sales Operating expenses Operating results Financial results Income tax results Net results. 469 (280) 189 (1) (18) 170. 524 (291) 233 (1) (25) 207. 496 (287) 209 (8) (24) 176. 468 (355) 113 (8) (10) 94. 1,956 (1,213) 743 (18) (77) 648. Operating results – US GAAP Net revenue Operating expenses Operating results Financial results Income tax results Net results. 469 (316) 153 (10) (15) 128. 524 (330) 194 (1) 99 293. 496 (324) 172 (8) (18) 146. 468 (417) 51 (14) (9) 28. 1,958 (1,388) 570 (33) 57 594. FINANCIAL REPORT.. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. •. 19. 19.

(11) CONTENTS. FINANCE IN BRIEF. FINANCIAL REVIEW. CONSOLIDATED FINANCIAL STATEMENTS. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. Actelion Annual Report 2014. NEXT. 20. 21. ACTELION’S COMMITMENT TO CREATING VALUE FOR SHAREHOLDERS. RECONCILIATION US GAAP TO CORE RESULTS FOR THE 12 MONTHS ENDED DECEMBER 31, 2014. Actelion has made significant progress in delivering on its strategy for value creation. The year’s highlights include successfully launching Opsumit® (macitentan) and submitting data from the pivotal selexipag (Uptravi®) study to European and US regulators for marketing authorization. A strong commercial performance, combined with rigorous financial discipline, was reflected in Actelion’s share price: with an increase of 53%, the company was once again the top performer on the Swiss Market Index (SMI). Market capitalization at the end of 2014 was just over CHF 13 billion, up 45%. During 2014, the company canceled 6.1 million shares (purchased through a second-line share buyback program), resulting in a lower share count. Variance Share price (CHF) Market capitalization (CHF millions). 2014 115.3 13,159. 2013 75.4 9,063. in % 53% 45%. In 2012, Actelion made a commitment to return significant capital to shareholders. The company has delivered on that promise, with almost CHF 1.1 billion being returned to shareholders in the form of dividends and share repurchase programs over the past three years. In keeping with this commitment, the Board of Directors authorized in principle a new share repurchase program of up to 10 million shares of Actelion’s common stock subject to approval by the relevant authorities; this share repurchase program would be carried out via a new second trading line at the SIX Swiss Exchange over a period of three years and the Board will propose the cancelation of these repurchased shares at subsequent Annual General Meetings. The Board of Directors will also propose an increased annual dividend payment of CHF 1.30 for approval by shareholders at the upcoming Annual General Meeting in May.. Actelion 2014 share price performance. (in CHF millions, except per share amounts)1. Net revenue Product sales Contract revenue Total net revenue. Depreciation, US GAAP amortization and Stock-based Doubtful debt Milestones or results impairment compensation movements contract. Litigation or arbitration. Accretion expense. Other. Core results. 1,956 2 1,958. -. -. -. (2) (2). -. -. -. 1,956 1,956. (215) (437) (672). 27 11. 22 31. (1). 19 -. -. 3 -. -. (212) (369) (632). (63) (1,388) 570. 63 101 101. 53 53. (1) (1). 19 18. -. 3 3. -. (1,213) 743. Total financial income (expense). (33). 6. -. -. -. 10. -. -. (18). Income before income tax benefit (expense). 537. 106. 53. (1). 18. 10. 3. -. 725. Income tax benefit (expense) Net income (loss). 57 594. (14) 92. (4) 49. (1). (1) 17. 10. 3. (115) (115). (77) 648. Diluted net income (loss) per share Weighted-average number of common shares (in thousands). 5.11. 0.80. 0.42. (0.01). 0.14. 0.08. 0.03. (0.99). 5.58. 116,228. -. -. -. -. -. -. -. 116,228. Operating (expenses) Cost of sales Research and development Selling, general and administration Amortization of acquired intangible assets Total operating (expenses) Operating income. Rounding differences may occur.. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. 1. 20. FINANCIAL REPORT.. 21.

(12) CONTENTS. FINANCE IN BRIEF. FINANCIAL REVIEW. CONSOLIDATED FINANCIAL STATEMENTS. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. Actelion Annual Report 2014. NEXT. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. CONSOLIDATED FINANCIAL STATEMENTS. 22. FINANCIAL REPORT.. 23.

(13) FINANCE IN BRIEF. CONTENTS. FINANCIAL REVIEW. CONSOLIDATED FINANCIAL STATEMENTS. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. NEXT. Actelion Annual Report 2014. 24. 25. CONSOLIDATED FINANCIAL STATEMENTS. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME. (in CHF thousands). CONSOLIDATED INCOME STATEMENTS. (in CHF thousands, except per share amounts). Net revenue Product sales Contract revenue Total net revenue. Notes. 23 4/23. Operating (expenses) Cost of sales2 Research and development Selling, general and administration Amortization of acquired intangible assets Arbitration settlement Total operating (expenses) Operating income. Twelve months ended December 31, 2014 2013. 1,956,333 1,542 1,957,875. 1,784,198 1,542 1,785,740. (215,465) (437,442) (672,141) (62,896) (1,387,944) 569,931. (209,444) (405,286) (630,521) (45,135) (12,881) (1,303,267) 482,473. (9,814) (11,768) (11,601) (33,183). (39,235) (9,514) (3,983) (52,732). 536,748. 429,741. Net income (loss) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments Change of unrecognized components of net periodic benefit costs Reclassification to net income due to settlement of pension plans Amortization of components of net periodic benefit costs Other comprehensive income (loss), net of tax Comprehensive income (loss). Twelve months ended December 31, 2014 2013 593,796. 452,542. 8,539 (28,340) 2,633 (17,168) 576,628. (4,223) 10,970 971 7,718 460,260. The accompanying notes form an integral part of these consolidated financial statements.. Interest on litigation Interest income (expense), net Other financial income (expense), net Total financial income (expense). 12. 17 8/15 1/8. Income before income tax benefit (expense) Income tax benefit (expense) Net income (loss). 5. 57,048 593,796. 22,801 452,542. Basic net income (loss) per share Weighted-average number of common shares (in thousands). 6. 5.34 111,208. 4.06 111,537. Diluted net income (loss) per share Weighted-average number of common shares (in thousands). 6. 5.11 116,228. 3.92 115,377. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. 1. Includes stock-based compensation as follows:. 1. Research and development. (22,470). (21,290). Selling, general and administration. (30,258). (28,331). Total stock-based compensation. (52,728). (49,621). 2. Excludes amortization of intangible assets as presented separately.. The accompanying notes form an integral part of these consolidated financial statements.. 24. FINANCIAL REPORT.. 25.

(14) CONTENTS. FINANCE IN BRIEF. FINANCIAL REVIEW. CONSOLIDATED FINANCIAL STATEMENTS. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. NEXT. Actelion Annual Report 2014. 27. 26. CONSOLIDATED STATEMENTS OF CASH FLOWS. (in CHF thousands, except number of shares). Notes. December 31, 2014. December 31, 2013. Assets Current assets Cash and cash equivalents Cash and investments restricted for litigation Short-term deposits Derivative instruments Trade and other receivables, net Inventories Other current assets Total current assets Non-current assets Property, plant and equipment, net Intangible assets, net Goodwill Deferred tax assets Other non-current assets Total non-current assets Total assets. 7/8 8 8 9 10 5/11. 13 12 12 5. 1,204,958 2,894 400,291 60,879 57,316 1,726,338. 627,640 612,537 250,747 10,546 405,915 53,241 58,937 2,019,563. 367,755 440,899 134,497 62,648 15,684 1,021,483 2,747,821. 381,092 465,224 126,392 16,931 20,599 1,010,238 3,029,801. Liabilities and shareholders' equity Current liabilities Trade and other payables Accrued expenses Short-term financial debt Litigation provision Other current liabilities Total current liabilities Non-current liabilities Long-term financial debt Pension liability Contingent consideration Other non-current liabilities Total non-current liabilities Total liabilities Shareholders' equity Common shares (par value CHF 0.50 per share, authorized 154,125,927 and 173,901,764 shares; issued 114,128,427 and 120,275,927 shares in 2014 and 2013, respectively) Additional paid-in capital Accumulated profit Treasury shares, at cost Accumulated other comprehensive income (loss) Total shareholders' equity Total liabilities and shareholders' equity The accompanying notes form an integral part of these consolidated financial statements.. 26. 14 15 17 2/5/8. 18 2 5. 74,140 302,360 235,137 52,950 664,587. 61,807 87,007 13,997 162,811 827,398. 103,614 401,399 456,118 10,874 972,005. 235,284 28,685 76,776 8,048 348,793 1,320,798. 19. 21. (in CHF thousands). Cash flow from operating activities Net income (loss) Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization Stock-based compensation, incl. treasury shares to members of Board of Directors Excess tax benefits from share-based payment arrangements Deferred revenue Deferred taxes (Gains) Losses on derivative instruments and marketable securities Interest expense on bonds and litigation Accretion expense on contingent considerations Changes in operating assets and liabilities: Litigation provision Trade and other receivables Inventories Trade and other payables Accrued expenses Changes in other operating cash flow items Net cash flow provided by (used in) operating activities. 593,796. 452,542. 101,081 53,608 (12,417) (1,552) (86,570) 42,618 10,398 3,061. 84,460 50,589 (3,353) (1,879) (89,592) (3,225) 38,397 1,965. (457,700) 9,958 (7,407) (28,966) (67,776) 6,445 158,577. (9,374) 3,375 11,155 61,095 (4,174) 591,981. Cash flow from investing activities Cash and investments released from (restricted for) litigation Purchase of short-term and long-term deposits Proceeds from short-term and long-term deposits Purchase of property, plant and equipment Purchase of intangible assets Purchase of other non-current assets Acquisition of a business, incl. deferred and contingent consideration payments Net cash flow provided by (used in) investing activities. 608,698 (200,000) 450,747 (25,039) (4,198) (1,794) (895) 827,519. (250,000) (250,000) 100,000 (21,396) (6,025) (230,779) (658,200). Cash flow from financing activities Dividend payment Payments on capital leases Proceeds from exercise of stock options, net of expense Purchase of treasury shares Proceeds from sale of treasury shares Excess tax benefits from share-based payment arrangements Net cash flow provided by (used in) financing activities. (133,389) (61) 248,710 (546,145) 12,417 (418,468). (113,297) (61) 269,169 (570,943) 96,734 3,353 (315,045). 9,690 577,318. (13,368) (394,632). 627,640 1,204,958. 1,022,272 627,640. 112,491. 13,004. 40,395. 48,717. Net effect of exchange rates on cash and cash equivalents Net change in cash and cash equivalents 57,064 2,359,573 (287,701) (208,513) 1,920,423 2,747,821. 60,138 500,502 1,882,266 (542,558) (191,345) 1,709,003 3,029,801. Twelve months ended December 31, 2014 2013. Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. CONSOLIDATED BALANCE SHEETS. Supplemental disclosures of cash flow information Cash paid during the year for: Interest Taxes The accompanying notes form an integral part of these consolidated financial statements.. FINANCIAL REPORT.. 27.

(15) CONTENTS. FINANCE IN BRIEF. CONSOLIDATED FINANCIAL STATEMENTS. FINANCIAL REVIEW. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. NEXT. Actelion Annual Report 2014. 29. 28. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY. (CHF thousands, except share and per share amounts). Common shares. (in CHF thousands, except number of shares). At January 1, 2013. Shares. Amount. Additional paid-in capital. 112,930,722. 63,387. 943,580. Accum. profit. Treasury shares. Accum. other comprehensive income (loss). 1,429,724. (718,984). (199,063). Shareholders’ equity 1,518,644. Comprehensive income (loss), net of tax: Net income (loss) Other comprehensive income (loss) Comprehensive income (loss), net of tax. -. -. -. 452,542 452,542. -. 7,718 7,718. 452,542 7,718 460,260. Excess tax benefits and underrealization from share-based payment arrangements Transactions in treasury shares Stock-based compensation expense Cancelation of treasury shares Dividend payment At December 31, 2013. (1,802,295) 111,128,427. (3,249) 60,138. (2,498) (93,732) 49,966 (283,517) (113,297) 500,502. 1,882,266. (110,340) 286,766 (542,558). (191,345). (2,498) (204,072) 49,966 (113,297) 1,709,003. Comprehensive income (loss), net of tax: Net income (loss) Other comprehensive income (loss) Comprehensive income (loss), net of tax. -. -. -. 593,796 593,796. -. (17,168) (17,168). 593,796 (17,168) 576,628. Excess tax benefits and underrealization from share-based payment arrangements Transactions in treasury shares Stock-based compensation expense Cancelation of treasury shares Dividend payment At December 31, 2014. 111,128,427. (3,074) 57,064. 12,403 (202,349) 52,334 (229,501) (133,389) -. (116,489) 2,359,573. (94,207) 349,064 (287,701). (208,513). 12,403 (296,556) 52,334 (133,389) 1,920,423. Actelion Ltd (“Actelion” or the “Group”), a biopharmaceutical company headquartered in Allschwil, Switzerland, discovers, develops and commercializes innovative low molecular weight drugs for high unmet medical needs. Basis of presentation The Group’s consolidated financial statements have been prepared under Generally Accepted Accounting Principles in the United States (“US GAAP”). All US GAAP references relate to the Accounting Standards Codification (“ASC” or “Codification”) established by the Financial Accounting Standards Board (“FASB”) as the single authoritative source of US GAAP to be applied by non-governmental entities. All amounts are presented in Swiss francs (“CHF”), unless otherwise indicated. In addition, certain prior period amounts within the consolidated financial statements and related notes have been reclassified to conform to the current presentation. Scope of consolidation The consolidated financial statements include the accounts of the Group and its wholly-owned affiliated companies in which the Group has a direct or indirect controlling financial interest and exercises control over their operations (generally more than 50% of the voting rights). Investments in common stock of entities other than subsidiaries where the Group has the ability to exercise significant influence over the operations of the investee (generally between 20%50% of the voting rights) are accounted for under the equity method. Variable interest entities (“VIE”), irrespective of their legal structure, are consolidated if the Group has determined to be the primary beneficiary as defined in the Variable Interest Entities Subsection of FASB ASC (“ASC 810-10-25-20 to 59”) and thus has the power to direct the activities that most significantly impact the VIE’s economic performance and will also absorb the majority of the VIE’s expected losses or receive the majority of the VIE’s expected residual returns, or both. For determination whether or not an entity is a VIE, the Group considers if the equity at risk for the entity is sufficient to support its operations, if the voting rights of the equity holders are in disproportion to their risk and rewards or if substantially all of the entity’s activities are conducted on behalf of the Group.. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. The accompanying notes form an integral part of these consolidated financial statements.. NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Principles of consolidation Businesses acquired or disposed of during the year are included in the consolidated financial statements from the date of acquisition or until the date of disposal. The acquisition method of accounting follows the guidance codified in the Business Combinations Topic of the FASB ASC (“ASC 805”). Intercompany transactions and balances are eliminated.. Use of estimates The preparation of financial statements in conformity with US GAAP requires management to make judgments, assumptions and estimates that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. On an on-going basis, management evaluates its estimates, including those related to revenue recognition for contract revenue, allowance for doubtful accounts, stock-based compensation, intangible assets, clinical trial and rebate accruals, impairment of indefinite lived intangibles including goodwill, provisions, contingent considerations arising from acquisitions, loss contingencies and income taxes. The Group bases its estimates on historical experience and on various market-specific and other relevant assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates.. 28. FINANCIAL REPORT.. 29.

(16) CONTENTS. FINANCE IN BRIEF. FINANCIAL REVIEW. CONSOLIDATED FINANCIAL STATEMENTS. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. NEXT. Actelion Annual Report 2014. 31. 30. Revenue recognition. Product sales The Group recognizes revenue from product sales when there is persuasive evidence that a sales arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. If collectibility is not reasonably assured, revenue is deferred and only recognized upon cash receipt. Provisions for rebates and discounts granted to government agencies, wholesalers, retail pharmacies, managed care organizations and other customers are recorded as a reduction of revenue at the time the related revenues are recognized or when the incentives are offered. They are calculated on the basis of historical experience and the specific terms in the individual agreements. Cash discounts offered to customers to encourage prompt payment are recorded as revenue deductions based on contractual terms, historical utilization rates and Group’s expectation regarding future utilization rates. Accruals for product returns are recorded as deductions from revenue if the products are damaged or defective when received by the customer. Estimates on expected returns are based primarily on an ongoing analysis of historical return patterns. Taxes collected from customers and remitted to governmental authorities such as sales taxes and VAT are deducted directly from gross sales without recording them in revenue.. Multiple-Deliverable Revenue Arrangements The Group’s revenue arrangements with multiple elements generally relate to collaborative agreements with third parties, which are typical transactions in the biopharmaceutical industry and usually include multiple elements such as product licensing, research and development activities, manufacturing and supply, royalty payments etc. At inception, the arrangement's consideration is allocated to all deliverables based on their relative selling price. The selling price for each deliverable is determined using vendor specific objective evidence of that price, if it exists; otherwise third-party evidence of the selling price is used. If neither exists for a deliverable, the Group applies its best estimate of the selling price for that deliverable.. Contract revenue Contract revenue includes license fees and milestone payments associated with collaborative agreements with third parties. Collaborative agreements with third parties represent the Group’s major agreements with multiple elements. The significant deliverables generally include license fees and milestone payments, which are recognized as contract revenue when the services are performed and collectibility is reasonably assured. License fees are treated as separate units of accounting only if upon careful evaluation of the facts and circumstances in the individual contracts it has been determined that they have a standalone value to the customer. The assessment of standalone value depends on the customer’s ability to recover a substantial portion of the consideration paid to the Group either through resale or use. Revenue from non-refundable, upfront license fees and performance milestones where the Group has continuing involvement is recognized ratably over the estimated performance or agreement period, depending on the terms of the agreement. The recognition of revenue is prospectively adjusted for subsequent changes in the development or agreement period. Revenue associated with performance milestones where the Group has no continuing involvement or 30. service obligation is recognized upon achievement of the milestone. Payments received in excess of amounts earned are classified as deferred revenue until earned. Following the guidance codified in the Collaborative Arrangements Topic of FASB ASC (“ASC 808”), the Group presents the result of activities for which it acts as the principal on a gross basis and reports any payments received from (made to) other collaborators based on other applicable GAAP. The Group’s accounting policy for its qualifying collaborative agreements (See Note 4. Collaborative agreements) is to evaluate amounts due from (owed to) other collaborators based on the nature of each separate activity. Shipping and handling costs The Group recognizes expenses relating to shipping and handling costs in cost of sales. Research and development (“R&D”) R&D expense consists primarily of compensation and other expenses related to R&D personnel; costs associated with pre-clinical testing and clinical trials of the Group’s product candidates, including the costs of manufacturing the product candidates; expenses for research and services rendered under co-development agreements; and facilities expenses. All R&D costs are charged to expense when incurred following the guidance codified in the Research and Development Topic of FASB ASC (“ASC 730”). Payments made to acquire individual R&D assets, including those payments made under licensing agreements, that are deemed to have an alternative future use or are related to proven products are capitalized as intangible assets. Payments made to acquire individual R&D assets that do not have an alternative future use, are expensed as R&D costs. R&D costs for services rendered under collaborative agreements are charged to expense when incurred. Reimbursements for R&D activities received from other collaborators are classified as reduction of the Group’s R&D expense (See Note 4. Collaborative agreements). Advertising and promotional costs The Group expenses the costs of advertising, including promotional expenses, as incurred. Advertising and promotional costs were CHF 146.7 million in 2014 (2013: CHF 138.5 million). Legal fees Legal fees related to loss contingencies are expensed as incurred and included in selling, general and administration expenses.. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. Business Combinations The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition. The excess of the consideration transferred over the fair value of the Group’s share of the identifiable acquired net assets is recorded as goodwill. Acquired in-process research and development projects (“IPR&D”), regardless of whether they have an alternative future use, are recognized as indefinite-lived intangible assets. Contingent liabilities assumed in a business combination are recognized on the basis of information known at the time of the initial purchase price allocation. If the fair value of the contingencies is not determinable at the date of acquisition and till the end of the allocation period, the Group follows the guidance of the Contingencies Topic of FASB ASC (“ASC 450”) in respect to these liabilities. Adjustments after the expiration of the allocation period are recognized as an element of net income. Payments related to settlements of contingent considerations are classified as cash used in investing activities in the consolidated statements of cash flows. Acquisition-related costs, except costs related to the issuance of debt or equity securities, are expensed in the periods in which they are incurred and the services are received. Pro forma disclosures include revenue and earnings of the combined entity as of the beginning of the comparable prior annual reporting period.. Patents and trademarks Costs associated with the filing and registration of patents and trademarks are expensed in the period in which they occur, and included in R&D expenses.. Stock-based compensation Stock-based compensation expense is recognized and measured based on the guidance codified in the Compensation – Stock Compensation Topic of FASB ASC (“ASC 718”). Consequently, costs for awards granted after July 1, 2005, are recognized in earnings over the requisite service period based on the grant-date fair value of these options and awards.. The fair values of awards granted under share option plans until December 2004 were estimated at grant or purchase dates using a Black-Scholes option pricing model. The fair values of options granted between December 2004 and December 2012 were estimated by use of a Binomial Lattice option pricing model. The model input assumptions were determined based on available internal and external data sources. The risk free rate used in the model was based on the 10 year Swiss zero coupon rate. The probability of death was derived from data of the Swiss Federal Statistical Office. The expected volatility was based on equal weighting of historic and forward looking data which included the Group’s historic volatility of a period equal to the options' contractual life and implied volatility on the longest outstanding warrants, convertible debt and traded options issued by the Group, if available. The dividend yield was based on the expected dividend yield over the expected term of the awards granted. Resignation, redundancy, retirement and early. FINANCIAL REPORT.. 31.

(17) CONTENTS. FINANCE IN BRIEF. FINANCIAL REVIEW. CONSOLIDATED FINANCIAL STATEMENTS. HOLDING COMPANY FINANCIAL STATEMENTS. PREVIOUS. NEXT. Actelion Annual Report 2014. 32. The fair value of performance stock units (“PSUs”) granted under the Performance Share Plan (“the PSP”) is estimated using the Monte Carlo simulation methodology. The Monte Carlo simulation approach is preferable to the Binomial Lattice model for stock-based awards with market conditions that are measured against a peer group because it allows for the modeling of the correlation between stock prices of multiple companies. The Monte Carlo simulation input assumptions are determined based on available internal and external data sources. The risk-free rate is interpolated from country-specific government sovereign debt yields derived from Bloomberg as of the valuation date for each of the companies of the peer group for a maturity matching the measurement period. The expected volatility of the share price returns is based on the historic volatility of daily share price returns of the Group and the peer companies, derived from Bloomberg and measured over a historical period matching the performance period of the awards. The covariance between Actelion and the peer group companies is measured in a similar way, using daily share price data over the same period and derived from the same data source. The dividend yield is based on the expected dividend yield over the expected term of the awards granted. The Group recognizes stock-based compensation costs considering estimated future forfeiture rates. The latter are reviewed annually or whenever indicators are present that actual forfeitures may differ materially from previously established estimates. Amortization of total compensation costs for the PSP, for the Standard Share Option Plans ("the SSOP"), for the Restricted Stock Plan (“the RSP”) and for the Employee Share Plan ("the ESP") is recognized on a straight-line basis over the requisite service period for the entire award (See Note 20. Stock-based compensation). Expenses related to performance based awards are recognized ratably over the requisite service period for each separately vesting portion of such awards. Stock-based compensation costs related to employees engaged in the production process are not capitalized as part of inventory due to the immateriality of such cost in the periods presented. Stock option exercises are settled out of the conditional capital or with the treasury shares, which the Group purchases on the market. Realized excess tax benefits upon exercise are recorded as an adjustment to current income taxes. Payroll taxes in all jurisdictions are recognized only upon exercise or vesting of the respective stock-based compensation awards. Taxes The Group accounts for income taxes in accordance with the Income Taxes Topic of FASB ASC (primarily codified in “ASC 740”). Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rules and laws that will be in effect when differences are expected to reverse. The Group performs periodic evaluations of recorded tax assets and liabilities and maintains a valuation allowance if deemed necessary. Uncertain tax positions are evaluated for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on tax audit, including resolution of related appeals or litigation processes, if any. The recognized tax benefits are measured as the largest benefit of having a greater than fifty percent likelihood of being sustained upon settlement. Significant estimates are required in determining income tax expense and benefits. Various internal and external factors may have favorable or unfavorable effects on the future effective tax rate, which would directly impact the Group’s financial position or results of operations. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, future levels of capital expenditures, and changes in overall levels of pre-tax earnings. Interest and penalties related to uncertain tax positions are recognized as income tax expense. In 2014, the Group adopted prospectively the requirements of ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, (“ASU 2013-11”), an update to the Income Taxes Topic of FASB ASC (“ASC 740”). ASU 2013-11 requires an entity to present unrecognized tax benefits as a decrease in a net operating loss, similar tax loss or tax credit carryforward if certain criteria are met. The determination of whether a deferred tax asset is available is based on the unrecognized tax benefit and the deferred tax asset that exists at the reporting date and presumes disallowance of the tax position at the reporting date. ASU 2013-11 became effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after 32. December 15, 2013. As the amended guidance only clarified the presentation of such items but did not change their nature, recognition or measurement requirements, the adoption did not have an impact on the Group’s financial position, results of operations and cash flows (See Note 5. Income taxes). Earnings per share (“EPS”) In accordance with the Earnings per Share Topic of FASB ASC (“ASC 260”), basic EPS are computed by dividing net income available to common shareholders by the weighted-average common shares outstanding for the fiscal year. Diluted EPS reflect the potential dilution that could occur if dilutive securities, such as share options, restricted stock units or convertible debt, were exercised, vested or converted into common shares or resulted in the issuance of common shares that would participate in net income. Basic and diluted EPS exclude common shares equivalents that would have had an anti-dilutive effect would they have been included in the calculation of weighted-average common shares for the periods presented. In accordance with ASC 260-10-45-19, the Group does not consider any potential common shares in the computation of diluted EPS if there is a loss from continuing operations (See Note 6. Earnings per share). Dividends The Group may declare dividends upon the recommendation of the Board of Directors and the approval of shareholders at their Annual General Meeting. Under Swiss corporate law, the Holding Company’s right to pay dividends may be limited in specific circumstances (See Note 19. Shareholders' equity). Cash and cash equivalents The Group considers all highly liquid investments with a contractual maturity of three months or less to be cash equivalents. Additionally, the Group includes all amounts held in money market funds as cash equivalents. Short-term deposits Short-term deposits with contractual maturities greater than three months are separated from cash and cash equivalents and reported in a separate line in the consolidated balance sheets. Debt and equity securities The Group classifies investments in securities in accordance with the guidance primarily codified in the Investments – Debt and Equity Securities Topic of FASB ASC (“ASC 320”) as either available-for-sale (“AFS”), held-to-maturity (“HTM”) or trading. AFS securities are carried at fair value with unrealized gains and losses recorded as a separate component of other comprehensive income. HTM securities are carried at amortized cost. Dividends and interest income are accrued as earned. Realized gains and losses are determined on an average cost basis. Trading securities are carried at fair value with unrealized holding gains and losses reported in other financial income (expense), net.. WorldReginfo - 9bbb9a4e-d5a7-46c4-92c2-dc783227bda7. exercise behavior assumptions were based on the Group’s historical headcount data and analyses of historical early exercises of the Group’s employees, respectively.. 33. The Group reviews investments in securities for impairment whenever circumstances indicate that a decline in the fair value of the security below its cost may be other than temporary (“other-than-temporary-impairment” or “OTTI”). Debt securities with a fair value below their amortized cost are considered impaired. Such impairments are considered other than temporary if the Group has the intent or can be required to sell the investment or it does not expect recovery of the entire cost basis of the security till maturity. If it is unlikely that the Group can be forced to sell the debt security, OTTI is split between a credit loss, which relates to collectibility of estimated cash flows to be received and is immediately recognized in net income, and other losses, not related to collectibility and recognized in other comprehensive income (loss). Equity securities are considered other than temporarily impaired upon analyses of certain indicators, like the length of time and the extent to which the market or fair value of the investment has been less than its cost; the financial conditions and the long-term prospects of the issuer as well as Group’s intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in market or fair value. OTTIs on equity securities are immediately recognized in net income.. FINANCIAL REPORT.. 33.