Strong Operating Margin of 29.0% of Revenues

    GENEVA, Switzerland, July 26 /PRNewswire-FirstCall/ -- Serono (virt-x:
SEO and NYSE: SRA), today reported its second quarter results for the
period ended June 30, 2006.
    Key Points for Second Quarter 2006
    - Record total revenues of $699.2m with product sales of $628.7m
    - Rebif(R) worldwide sales up 10.9% (+11.4% in local currencies) to
$361.6m
    - Reported net income of $189.2m up 25.9% on an adjusted(1) basis
    - Basic EPS of $12.92 per bearer share and $0.32 per ADS
    - H1 2006 product sales growth of 8.0% in local currencies, in line
with full-year guidance of high single-digit growth
    - 2006 EPS guidance of $45.00 per bearer share reiterated
    - Decision to move atacicept (TACI-Ig) into Phase 2 in rheumatoid
arthritis and preliminary positive Phase 1b results in systemic lupus
erythematosus
    "We have a solid business platform generating strong cash flow, as well
as the financial strength and capability to execute value-creating
transactions," said Ernesto Bertarelli, Chief Executive Officer. "We are
entering an exciting, new chapter at Serono and I am confident that we will
achieve our strategy for growth."
    "Given our financial performance in the first half of 2006, we are on
track to achieve our EPS guidance of $45.00," said Stuart Grant, Chief
Financial Officer. "Our EPS growth is driven by the strength of our
operating margin which increased by an impressive eight percentage points
in the first half of the year to 29.5% of total revenues."
    Financial Performance
    Total revenues increased by 3.3%, or 3.9% in local currencies, to
$699.2m in the second quarter of 2006 (Q2 2005: $676.8m). Product sales
grew 2.8%, or 3.3% in local currencies, to $628.7m compared to a strong
quarter last year (Q2 2005: $611.5m). Excluding the impact on sales of the
Bourn Hall clinic management buyout and the sale of a non-core business,
TerraCell S.A., in 2005, as well as the introduction of generics of
Novantrone(R) in early April 2006, sales growth was 7.0% in local
currencies in the second quarter of 2006. Royalty and license income
increased by 8.0% to $70.5m (Q2 2005: $65.3m).
    Gross margin was strong at 88.2% of product sales (Q2 2005: 87.8%).
Selling, General and Administrative expenses were up 5.1% to $233.7m (Q2
2005: $222.5m). Research and Development expenses were down 10.6% to
$130.3m (Q2 2005: $145.8m) reflecting the completion of a number of Phase 3
trials last year, the transfer of the Serono Genetics Institute and the
Bourn Hall clinic management buyout. Other operating expenses were down
12.2% to $58.2m (Q2 2005: $66.3m), largely due to lower royalty expense
related to Novantrone(R).
    Operating income in the second quarter of 2006 was up 21.1% to $203.0m
(Q2 2005: $167.7m) with an operating margin of 29.0% of total revenues (Q2
2005: 24.8% of total revenues).
    Financial income was $18.5m (Q2 2005: $43.7m) and financial expense was
$6.1m (Q2 2005: $10.0m). The second quarter of 2005 included an exceptional
gain of $30.0m resulting from the sale of an equity holding in Celgene,
Inc. and a write-down of $3.7m related to impairment in value of an equity
stake in CancerVax.
    Net income in the second quarter of 2006 was $189.2m up 8.1% or 25.9%
on adjusted(2) basis (Q2 2005: $175.1m reported, $150.3m adjusted(2)).
Basic earnings per share in the second quarter of 2006 were up 7.5%, or
25.2% on adjusted(2) basis, to $12.92 per bearer share (Q2 2005: $12.02,
$10.32 adjusted(2) and $0.32 per American Depositary Share (Q2 2005: $0.30,
$0.26 adjusted(2)).
    For the first six months, net cash flow from operating activities
before change in working capital was $495.3m (H1 2005: $354.1m), or $355.3m
after change in working capital (H1 2005: $177.1m). The company's liquid
financial assets were $1.8 billion at the end of the second quarter 2006.
    As of June 30, 2006, there were 14,647,162 outstanding equivalent
bearer shares of Serono S.A., net of treasury shares. The total weighted
average number of equivalent bearer shares of Serono S.A. was 14,645,802
for the three months ending June 30, 2006.
    Key Product Sales
    In the second quarter of 2006, Rebif(R) had a solid performance with
sales of $361.6m, up 10.9%, or 11.4% in local currencies (Q2 2005:
$326.0m). Rebif(R) continues to be the best-selling therapy for multiple
sclerosis outside the US, with sales of $242.5m, growing 5.5%, or 6.0% in
local currencies (Q2 2005: $229.8m). Four years after launch in the US,
Rebif(R) maintains its strong growth and reached US sales of $119.0m, up
23.7% (Q2 2005: $96.2m).
    In July 2006, Serono announced that the European Commission has
approved an update of the Summary of Product Characteristics of Rebif(R) in
order to align it with current medical practice. Throughout Europe,
Rebif(R) is now approved for use after the diagnosis of multiple sclerosis
has been confirmed based on one attack and subsequent positive magnetic
resonance imaging scans.
    Sales of Gonal-f(R) were $139.3m (Q2 2005: $149.9m), in line with the
first quarter of 2006. Global sales of supporting products (Ovidrel(R),
Cetrotide(R), Crinone(R) and Luveris(R)) were up 6.9%, or 7.5% in local
currencies to $23.8m (Q2 2005: $22.2m).
    Saizen(R) sales were $53.8m (Q2 2005: $53.6m), a growth of 7.6% over
the first quarter of 2006. Serostim(R) sales were stable at $17.3m (Q2
2005: $17.3m). In Q2 2006, Serono submitted a Supplemental New Drug
Application to the U.S. Food and Drug Administration for recombinant human
growth hormone in HIV-associated adipose redistribution syndrome.
    Sales of Raptiva(R), the only biological therapy specifically developed
for the treatment of psoriasis, were $17.0m in the second quarter 2006 (Q2
2005: $7.4m), a growth of 24.3% over the first quarter of 2006. The focus
for 2006 is on increasing market penetration by leveraging the strong
clinical data including the recently published CLEAR study and
differentiating Raptiva(R) from TNF blockers. In July the first large-scale
pharmaco-epidemiological study in psoriasis in Europe, CLEARESTTM, was
initiated. This prospective, seven-year study in 7,000 patients with
moderate-to-severe plaque psoriasis is further assessing the long-term
safety of Raptiva in clinical practice.
    Novantrone(R) sales in the second quarter of 2006 were $5.4m, down
70.4%, consequent to the introduction of generics of mitoxantrone in the US
in April 2006 (Q2 2005: $18.3m).
    R&D News
    In June, favorable results from a Phase 1b clinical trial with
atacicept (TACI-Ig) in rheumatoid arthritis were presented at the 7th
Annual European Congress of Rheumatology. Atacicept was well tolerated
across the full range of dose levels and schedules tested, and clear
biologic effect was observed. Based on these promising results, Serono and
ZymoGenetics expect to begin the Phase 2 clinical program of atacicept in
patients with rheumatoid arthritis in the second half of 2006.
    In July, preliminary results of two Phase 1b studies in systemic lupus
erythematosus indicate that atacicept demonstrated a favorable tolerability
profile and that biological activity consistent with the mode of action was
observed. Full results of these studies are planned to be presented at a
medical meeting later this year.
    Lastly, during the quarter it was announced that the novel fully human
anti-CD3 monoclonal antibody, NI-0401, being developed in collaboration
with NovImmune, has moved into a proof-of-concept trial in patients
suffering from moderate-to-severe Crohn's Disease. This study is looking at
the safety, tolerability and pharmacokinetics of intravenously administered
NI-0401.
    Conference Call and Webcast
    Serono will hold a conference call on July 27, 2006, starting at 11:00
am US Eastern Time (17:00 Central European Time) during which Serono
Management will present the Company's Second Quarter 2006 Results. To join
the telephone conference please dial 1-412-858-4600 (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 and will be available for replay following
the event. Additionally, the webcast will be available for replay until
close of business on August 31, 2006.
    Forward-looking statements
    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 S.A. 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 U.S. Securities and Exchange Commission
on February 28, 2006. 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 any government
investigations and litigation. Serono is providing this information as of
the date of this press release, and 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, metabolism and growth 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.
    In 2005, Serono, whose products are sold in over 90 countries, achieved
worldwide revenues of US$2,586.4 million. Reported net loss in 2005 was
US$106.1 million, reflecting a charge of US$725 million taken relating to
the settlement of the US Attorney's Office investigation of Serostim.
Excluding this charge as well as other non-recurring items, adjusted net
income grew 28.4% to US$565.3 million in 2005. 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).
    For more information, please contact:

    Serono in Geneva, Switzerland:
    Media Relations:
    Tel: +41-22-739-36-00
    Fax: +41-22-739-30-85
    http://www.serono.com

    Serono, Inc., Rockland,
    MA
    Media Relations:
    Tel. +1-781-681-2340
    Fax: +1-781-681-2935
    http://www.seronousa.com

    Investor Relations:
    Tel: +41-22-739-36-01
    Fax: +41-22-739-30-22
    Reuters: SEO.VX / SRA
    Bloomberg: SEO VX / SRA US

    Investor Relations:
    Tel. +1-781-681-2552
    Fax: +1-781-681-2912


    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 6 months ended June 30, 2006
and 2005.
    - Consolidated income statements for the 3 and 6 months ended June 30,
2006 and 2005; adjusted net income and adjusted earnings per share for the
3 and 6 months ended June 30, 2006 and 2005; the consolidated balance
sheets as of June 30, 2006 and December 31, 2005; the consolidated
statements of changes in equity as of June 30, 2006 and 2005; the
consolidated statements of cash flows for the 6 months ended June 30, 2006
and 2005; the selected explanatory notes to the consolidated financial
statements. These consolidated financial statements have been prepared on
the basis of International Financial Reporting Standards.
    A full version of this release, including tables, is available at
http://www.serono.com/.
    (1) Non-IFRS financial measures included in order to permit assessment
of the performance of the company's underlying business for the quarter
were a $30.0m ($28.5m after-tax) gain on sale of investment in Celgene and
a $3.7m write-down of investment in CancerVax in Q2 2005.
    (2) Non-IFRS financial measures included in order to permit assessment
of the performance of the company's underlying business for the quarter
were a $30.0m ($28.5m after-tax) gain on sale of investment in Celgene and
a $3.7m write-down of investment in CancerVax in Q2 2005.

Link to this page: