Significant Progress in Late-Stage R&D Programs

    GENEVA, Switzerland, February 6 /PRNewswire-FirstCall/ -- Serono (virt-x:
SEO and NYSE: SRA) today reported its fourth quarter and full year results
for the period ended December 31, 2005.
    Key Points for Full Year 2005
    - Adjusted(i) net income up 28.4% to $565.3m and adjusted basic EPS(i) up
34.6% to $38.80 per bearer share and $0.97 per ADS
    - Significant improvement in adjusted(i) operating margin to 24.0% of
revenues
    - Reported net loss of $106.1m and $7.28 per bearer share and $0.18 per
ADS
    - Total revenues of $2,586.4m and product sales of $2,338.9m
    - Global Rebif(R) sales up 16.4% to $1,269.8m with US sales up 31.8% to
$389.5m
    - Progress in key MS clinical trials - REGARD 1st year of treatment
completed in Rebif(R) vs Copaxone head-to-head study - CLARITY: oral
cladribine Phase III study enrolling
    - Positive outcomes in two phase III programs - r-hGH in HIV-associated
adipose redistribution syndrome (HARS) - IFN-beta 1a with or without
ribavirin in chronic hepatitis C in Asian patients
    - R&D pipeline expanded through new collaborations with Biomarin, Genmab,
NovImmune and Rigel
    - 2006 outlook for high single-digit product sales growth and EPS between
$42.00 and $43.40 per bearer share
    "2005 was a year of continued growth and business expansion. Our improved
operating leverage led to higher adjusted profit, while our aggressive
business development strategy resulted in a stronger pipeline," said Ernesto
Bertarelli, Chief Executive Officer. "During 2006, we will maintain our focus
on maximizing the potential of our marketed products, the efficiency of our
business operations and the advancement of our most promising clinical
programs."
    Fourth Quarter And Full Year Financial Performance
    Product sales were up 7.4% to $2,338.9m in 2005 (2004: $2,177.9m), and
were unchanged in the fourth quarter 2005 (2004: $604.5m) adversely
influenced by the strengthening of the US dollar versus the Euro. Product
sales in local currencies grew by 6.7% in 2005 and by 3.3% in the fourth
quarter. During 2005, Western European sales increased by 11.4% to $1,038.3m
(2004: $931.6m), while North American sales grew by 1.2% to $848.2m (2004:
$837.9m). In the rest of the world, sales grew by 10.8% in 2005 to $452.4m
(2004: $408.4m).
    Royalty and licensing income was $247.5m in 2005, representing 9.6% of
total revenues (2004: $280.1m), and was $65.4m in the fourth quarter (2004:
75.3m). The decrease from the prior year reflects a one-time payment of $67m
from a licensing agreement in the third quarter 2004 and an additional
license income totaling $11.0m for the grant of technology licenses to third
parties in the fourth quarter 2004.
    Total revenues increased by 5.2% (+4.5% in local currencies) to $2,586.4m
in the full year 2005 (2004: $2,458.1m), and decreased by 1.4% (+1.7% in
local currencies) to $669.9m in the fourth quarter 2005 (2004: $679.7m).
Excluding the one-time payment of $67m from a licensing agreement in the
third quarter 2004, total revenues grew by 8.2% in 2005.
    Gross margin increased to 88.6% of product sales in 2005 (2004: 86.0%),
reflecting continuing manufacturing efficiency gains and a charge of $20.5m
for the closure of an obsolete manufacturing site in the third quarter 2004.
In the fourth quarter 2005, gross margin of product sales reached 88.9%
(2004: 87.9%).
    Selling, general and administrative expenses increased 6.7% to $862.3m in
2005 (2004: $807.9m), including the launch of Raptiva(R). In the fourth
quarter 2005, SG&A expenses decreased 4.5% to $223.9m (2004: $234.3m),
reflecting our focus on operational efficiency.
    Research and development expenses were flat at $593.6m in 2005 (2004:
$594.8m). In the fourth quarter 2005, R&D expenses were $144.6m (2004:
$221.3m) and included an additional $5.5m charge related to the transfer of
Serono Genetics Institute, while in the fourth quarter 2004, R&D expenses
included payments totaling $66.3m related to collaborations with
ZymoGenetics, Micromet and CancerVax.
    Reported other operating expenses in 2005 were $992.1m (2004: $239.8m)
and $70.8m (2004: $70.5m) in the fourth quarter. Adjusted other operating
expenses were $267.1m in the full year, excluding the $725.0m charge reported
in the first quarter 2005 related to the Serostim(R) settlement.
    Full year 2005 operating loss was $127.5m (2004: $511.4m or 20.8% of
total revenues). Adjusted(ii) operating income was up 33.6% to $621.3m in
2005.This significant improvement in adjusted operating margin to 24.0% of
total revenues reflected steady underlying revenue growth, tight control over
SG&A and R&D expenses and improvement in gross margin. In the fourth quarter,
operating income was $163.6m or 24.4% of total revenues (2004: $80.6m or
11.9% of total revenues).
    Net financial income was $40.3m in 2005 (2004: $63.3m) and $12.7m in the
fourth quarter 2005 (2004: $20.7m) reflecting lower foreign exchange gains in
2005 and an unrealized gain of $8.6m in the fourth quarter 2004 related to
the acquisition of ZymoGenetics' shares.
    In the fourth quarter 2005, unrealized losses of $8.0m and $1.5m were
recorded in other expense, in accordance with IAS 39 revised to reflect the
impairment in value of our equity stakes in Rigel and CancerVax respectively.
    The reported net loss for 2005 was $106.1m compared with reported net
income of $479.7m[1] in 2004. Adjusted(ii) net income for 2005 increased
28.4% to $565.3m. In the fourth quarter 2005, reported net income increased
72.2%, or 70.1% in local currencies, to $144.1m (2004: $83.7m).
    Basic loss per share for 2005 was $7.28 per bearer share (2004 EPS:
$31.40) and $0.18 per American Depositary Share (ADS) (2004 EPS: $0.78).
Adjusted(ii) basic earnings per share were up 34.6% to $38.80 per bearer
share and $0.97 per ADS.
    On April 25, 2006, the Board of Directors will propose to the Annual
General Meeting a cash dividend of CHF10.0 per bearer share, CHF4.0 per
registered share, and CHF 0.25 per ADS, representing an increase of 11.1%
over the 2004 dividend.
    For the full year ended 2005, net cash flows used for operating
activities were $126.5m (2004: net cash flows from operating activities
$471.7m). The company's liquid financial assets were $1.5 billion at the end
of 2005 (2004: $1.8 billion). As of December 31, 2005 there were 14,596,253
equivalent bearer shares of Serono S.A. issued and 14,571,273 equivalent
bearer shares of Serono S.A. outstanding. At the Annual General Meeting on
April 26, 2005 shareholders approved the cancellation of 962,435 bearer
shares purchased by Serono under its Share Buy Back Plan.
    Full Year 2006 Outlook
    In 2006, Serono expects high single-digit product sales growth based on
2005 average currency exchange rates and earnings per bearer share between
$42.00 and $43.40. This outlook does not include expenses related to any new
business development transactions or other non-recurring items in 2006.
    Key Product Review
    Rebif(R) full year 2005 worldwide sales were up 16.4% (15.4% in local
currencies) to $1,269.8m (2004: $1,090.6m). In the fourth quarter 2005, sales
of Rebif(R) increased by 8.2% (11.9% in local currencies) to $335.3m (2004:
$310.0m). In 2005, Rebif(R) was the fastest growing multiple sclerosis (MS)
therapy in the US, with sales up 31.8% to $389.5m for the full year (2004:
$295.6m), and up 32.6% to $114.0m in the fourth quarter (2004: $86.0m).
Rebif(R) continues its market leadership outside the US with 2005 sales
increasing by 10.7% to $880.3m (2004: $795.0m). Sales ex-US were $221.3m in
the fourth quarter 2005 (2004: $224.0m) and increased 4.0% in local
currencies.
    Two key clinical trials in multiple sclerosis have made significant
progress. All patients in the REGARD (REbif vs Glatiramer Acetate in
Relapsing MS Disease) study of Rebif(R) vs Copaxone have recently completed
their first year of treatment. The Phase III CLARITY (CLAdRIbine Tablets
Treating MS OrallY) study of oral cladribine is enrolling patients.
    In 2005, sales of Gonal-f(R) decreased by 4.5% (-5.2% in local
currencies) to $547.0m (2004: $572.7m) and by 11.7% (-9.0% in local
currencies) to $133.5m in the fourth quarter 2005 (2004: $151.1m), due to
continued competitive pressure in the United States. In December, Serono
achieved the milestone of one million Gonal-f(R) pens sold.
    On January 24, 2006, Serono announced that the Japanese Ministry of
Health, Labour and Welfare has approved Gonal-f(R) for co-administration with
Profasi(R) for the induction of spermatogenesis in men with hypogonadotropic
hypogonadism. Gonal-f(R) will be marketed in Japan under the brand name of
GONALEF(R) and launch is anticipated in the second quarter 2006.
    Saizen(R) sales increased by 13.4% (12.5% in local currencies) to $206.5m
(2004: $182.1m) in 2005, and were up 2.1% (5.9% in local currencies) to
$54.3m (2004: $53.2m) during the fourth quarter. In 2005, Saizen(R) was
approved by the FDA in Adult Growth Hormone Deficiency and successfully
completed the European mutual recognition procedure leading to marketing
approval for the treatment of children born Small for Gestational Age (SGA)
in 15 EU countries.
    Serostim(R) sales decreased to $70.4m for the full year 2005 (2004:
$86.8m) and $17.0m (2004: $22.6m) in the fourth quarter.
    Sales of Raptiva(R) were $33.4m for the full year 2005 (2004: $4.9m), and
$11.6m in the fourth quarter 2005 (2004: $3.7m). Raptiva(R) is now approved
in 49 countries and available in over 40 countries. Raptiva(R), the first
biological to market in the European Union for the treatment of moderate to
severe psoriasis provides a safe and effective alternative to conventional
systemic therapies.
    Company Update
    Serono announced on November 8, 2005, that Goldman Sachs has been
retained to explore various strategic alternatives for the company. This
process is on-going. However, there is no assurance that any transaction will
be consummated.
    R&D News
    Serono reports today the positive outcome of the combination phase of a
study evaluating the effect of interferon-beta-1a with ribavirin for the
treatment of chronic hepatitis C (HCV) in Asian patients. The proportion of
patients who achieved sustained virological response, defined as an absence
of detectable HCV RNA in serum after 24 weeks treatment with
interferon-beta-1a in combination with ribavirin followed by 24 weeks of
observation, was 57.5% (n=127).
    On January 9, 2006, Serono announced the successful completion of a
pivotal Phase III double-blind, placebo-controlled trial of its recombinant
human growth hormone (rC"b,b
Redistribution Syndrome (HARS). This trial met all pre-specified primary and
major secondary endpoints. Serono plans to submit the file to the FDA in the
first half of 2006 and expects that the data will be presented at upcoming
scientific meetings.
    On January 10, 2006, encouraging preliminary results from a Phase 1b
clinical trial of TACI-Ig in rheumatoid arthritis were announced. TACI-Ig
appeared to be safe and well tolerated, and clear biologic and clinical
responses which appear to correlate with clinical benefit were observed. Full
details from this study will be presented at a medical meeting later in the
year. In addition, a Phase 1b trial of TACI-Ig in systemic lupus
erythematosus is expected to finish mid-2006, and further updates related to
TACI-Ig as a potential treatment for B-cell malignancies are anticipated
during the second half of 2006.
    In 2005 Serono added seven new projects to its R&D pipeline through new
collaborations with Biomarin for Phenoptin and Phenylase, Genmab for
HuMaxC"b,b
antibodies, NI-0401 (anti-CD3) and NI-0501 (anti-IFN-gamma) and Rigel for the
product candidates from its Aurora kinase inhibitor program, including R763.
    Conference Call and Webcast
    Serono will hold a conference call today, February 6, 2006, starting at
15:00 Central European Time (9:00 am Eastern Time) during which Serono
Management will present the Company's Fourth Quarter and Full Year 2005
Results. To join the telephone conference please dial 1 866 291 4166 (from
the US), 091 610 5600 (from Switzerland), 0207 107 0611 (from the UK) and +41
91 610 5600 (from elsewhere). The event will also be relayed by live audio
webcast, which interested parties may access via Serono's Corporate home
page, http://www.serono.com. A link to the webcast will be provided immediately
prior to the event. Additionally, the webcast will be available for replay
until close of business on March 10, 2006.
    Some of the statements in this press release are forward looking. Such
statements are inherently subject to known and unknown risks, uncertainties
and other factors that may cause actual results, performance or achievements
of Serono and affiliates to be materially different from those expected or
anticipated in the forward-looking statements. Forward-looking statements are
based on Serono's current expectations and assumptions, which may be affected
by a number of factors, including those discussed in this press release and
more fully described in Serono's Annual Report on Form 20-F filed with the US
Securities and Exchange Commission on March 16, 2005. These factors include
any failure or delay in Serono's ability to develop new products, any failure
to receive anticipated regulatory approvals, any problems in commercializing
current products as a result of competition or other factors, our ability to
obtain reimbursement coverage for our products, the outcome of government
investigations and litigation and government regulations limiting our ability
to sell our products. Serono has no responsibility to update the
forward-looking statements contained in this press release to reflect events
or circumstances occurring after the date of this press release.
    About Serono
    Serono is a global biotechnology leader. The Company has eight
biotechnology products, Rebif(R), Gonal-f(R), Luveris(R), Ovidrel(R
)/Ovitrelle(R), Serostim(R), Saizen(R), Zorbtive(TM) and Raptiva(R). In
addition to being the world leader in reproductive health, Serono has strong
market positions in neurology and growth & metabolism and has recently
entered the psoriasis area. The Company's research programs are focused on
growing these businesses and on establishing new therapeutic areas, including
oncology and autoimmune diseases. Currently, there are more than 25 ongoing
preclinical and clinical development projects. In 2005, Serono, whose
products are sold in over 90 countries, achieved worldwide revenues of
US$2,586.4 million. Bearer shares of Serono S.A., the holding company, are
traded on the virt-x (SEO) and its American Depositary Shares are traded on
the New York Stock Exchange (SRA).
    On the following pages, there are:
    - Tables detailing sales in dollars by therapeutic area, geographic
region and the top 10 products for the 3 and 12 months ended December 31,
2005 and 2004.
    - Fourth Quarter Consolidated Income Statements and Full Year
Consolidated Income Statements ended December 31, 2005 and 2004; the Adjusted
Net Income and Adjusted Earnings per Share for the 3 and 12 months ended
December 31, 2005; the Consolidated Balance Sheets as of December 31, 2005
and 2004; the Consolidated Statement of Changes in Equity as of December 31,
2005 and 2004; as well as the Consolidated Statements of Cash Flows for the
12 months ended December 31, 2005 and 2004. These consolidated financial
statements have been prepared on the basis of International Financial
Reporting Standards. The accompanying notes to these 2005 full-year
consolidated financial statements will be available upon the release of
Serono's 2005 Annual Report.
    A full version of this release, including tables, is available at
http://www..serono.com/
    (i) Non-IFRS financial measures are included in order to permit
assessment of the performance of the company's underlying business and
include: In Q4 2005 an additional charge of $5.5m ($5.0m after-tax) for the
transfer of research activities conducted at the Serono Genetics Institute
(SGI) reported in Q3 2005, a $8.0m write-down of investment in Rigel and a
$1.5m write-down of investment in Cancervax. In Q3 2005 a charge of $18.3m
($16.6m after-tax) for the transfer of the research activities conducted at
the SGI from Evry, France to Geneva, Switzerland. In Q2 2005 a $30m ($28.5m
after-tax) gain on sale of investment in Celgene and a $3.7m write-down of
investment in CancerVax. In Q1 2005 a charge of $725.0m ($660.5m after=tax)
related to previously reported US Attorney's Office investigation of
SerostimB. and a $4.7m write-down of investment in CancerVax. In Q3 2004 a
one-time payment of $67m ($56.6m after-tax) from a licensing agreement as
well as a charge of $20.5m ($17.3m after-tax) related to the closure of a
manufacturing facility. Please refer to "Adjusted net income and adjusted
earnings per share" table.
    [1] Previously reported amounts have been restated to reflect the
adoption of new IFRS accounting standards that became effective on January 1,
2005
    (ii) Non-IFRS earnings measures which exclude the elements set forth in
the "Adjusted net income and adjusted earnings per share" table.

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