| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 4 |
Schering AG is a stock corporation under German law with its registered office in Berlin. It is registered in the Commercial Register of the Local Court Charlottenburg, Berlin, under HRB 283 B.
The share capital of Schering AG is € 194,000,000 and is divided into 194,000,000 shares. As of 1 December 2006 the company held 3,124,300 treasury shares.
The purpose of the Company is according to the Articles of Association:
| - | the research and development of, the purchase and sale of chemical and biotechnological products; these products include especially pharmaceuticals, pharmaceutical ingredients, diagnostics and vaccines for human and veterinary medicine as well as fine chemicals, radioactive substances, and intermediate products; |
| - | the research of, the development of, the manufacture and sales of medicines and equipment for medical and laboratory purposes and |
| - | the preparation, acquisition, and utilization of chemical, biological, and technical procedures and facilities. |
The Articles of Association of Schering AG are valid in the version dated 27 October 2006. The fiscal year is the calendar year.
As of 30 June 2006, Schering AG has more than 150 subsidiaries worldwide. Of particular importance are the wholly owned subsidiaries Schering Oy with its registered office in Helsinki, Finland, Berlex Inc. with its registered office in Monteville, USA (hereinafter, "Berlex"), Medrad Inc. with its registered office in Indianola, USA (hereinafter, "Medrad"), Schering S.p.A. Italy with its registered office in Milan, Italy, Schering do Brasil Químíca e Farmacéutica Ltda, São Paolo/SP, Brazil, Nihon Schering K.K., Osaka, Japan, Schering Mexicana S.A. de C.V., México, D.F., Mexico. Schering AG has received in the instruction from BSG under the applicable Domination and Profit and Loss Transfer Agreement to sell the majority of the subsidiaries and companies in which there are shareholdings to companies in the Bayer Group by the end of the year 2006 or the beginning of the year 2007. For purposes of this report, which represents the situation without the effects of the Domination and Profit and Loss Transfer Agreement, Schering is valued without change as a corporate group, including all subsidiaries and companies in which there are shareholdings.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 5 |
Schering AG and its affiliates are shown as fully consolidated in the Schering Group for purposes of reporting and planning in accordance with the International Financial Reporting Standards (IFRS).
BSG has acquired a shareholding in Schering AG (without treasury shares) of more than 95 % by way of a voluntary public takeover offer dated 13 April 2006, including the change dated 30 May 2006, as well as supplemental purchases of shares on the stock exchange and outside of the stock exchange.
Schering AG signed a Domination and Profit and Loss Transfer Agreement with BSG as dominating company on 31 July 2006.
The extraordinary shareholders meeting of Schering AG on 13 September 2006 approved the Domination and Profit and Loss Transfer Agreement with BSG which provides for cash compensation of the minority shareholders under § 305 AktG in the amount of € 89 and a fixed guaranteed dividend under § 304 AktG in an amount of € 4.60 (gross portion of profit per share).
The corporate income tax including the solidarity surcharge which must be paid by Schering AG out of the gross portion of profits subject to corporate income tax in the amount of € 3.70 contained in the gross profit per share must be deducted. The Domination and Profit and Loss Transfer Agreement with BSG took effect upon registration in the commercial register at the registered office of Schering AG on 27 October 2006.
BSG did, as announced at the extraordinary shareholder meeting of the Schering AG on the 13 September 2006, raise the cash compensation to the Federal Financial Supervisory Authority (“Bundestanstalt für Finanzdienstleistungsaufsicht” (BaFin)) calculated three month weighted average share price of the Schering AG in the amount of € 89.36 per share, with the three month ending on the 13 September 2006.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 6 |
Schering is active in all important regional markets for pharmaceutical products. The business operations of Schering AG are organized in the form of a matrix with the regions being the primary segment and the business areas being the second criterion. The business areas are responsible for research and development of medications and therapeutic applications and therefore share the profit responsibility with the regions. The primary responsibility for the ongoing business lies with the segments. The segments have the responsibility for adapting these to regional peculiarities and distributing them in the respective markets. Schering AG's pharmaceutical business is specialized into the business areas Gynecology & Andrology, Diagnostic Imaging, Special Therapeutics, and Oncology. Schering AG's worldwide pharmaceutical business is further divided on a geographical basis. The pharmaceutical business has five geographic segments: Europe Region, USA, Japan, Latin America/Canada, and Asia/Pacific. The 2005 sales distributions per segment and business area (calculated without the interest in ALK-Scherax, (hereinafter "ALK"), and the radiopharmaceutical business as well as the change of the business responsibility for the product Mittoval from the business area of oncology to the area of gynecology and andrology) are shown in the following table:
Adjusted for the divestiture of the radiopharmaceutical and ALK-Scherax-business and the reallocation of Mittoval
Since 1 January 2006, Other Activities include the business of the Medrad with application technologies for contrast agents, which in fiscal year 2005 were accounted for in the segment USA.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 7 |
The business areas and segments are supported by central departments in which overlapping resources in marketing, distribution, technology and administration as well as research and development are bundled.
The number of employees in the Schering Group as of 30 September 2006 was 23,050 (on a full-time basis). As shown in the following graph, these were primarily employed at Schering AG in Germany and in the European segment.
The process of researching, discovering a substance, development, approval and market introduction of a (patented) medication is of central importance for the success of a pharmaceutical company engaged in research. The discovery of a substance is followed by a complex development process in which comprehensive clinical studies prove the effectiveness and safety of the substance. Assuming that these studies run successfully and all regulatory conditions are satisfied, an innovative medication can be approved. As a result of these requirements, pharmaceutical companies engaged in research normally only have a few years in order to achieve pioneering profits. The following graph illustrates the process of research, development and market introduction of innovative medicines:
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 8 |
The effective patent protection lasts for a period of less then ten years1 in which successful product innovations must cover the expenses of their own research projects and those of less successful research projects. Accordingly, the duration of the effective patent protection is of particular importance for the economic development of Schering. Therefore, pharmaceutical companies engaged in research try to extend the period of effective patent protection by applying for formulation and process patents to protect themselves against generic competition.
The following table shows the expiration dates for the main Schering products and/or production processes.
| | Gynecology & Andrology | Diagnostic Imaging | Specialized Therapeutics | Oncology |
| | Yasmin | Mirena | Femovan | Magnevist | Ultravist | Betaferon1 | Campath | Leukine |
| Patent on | Formulation | Device (Inserter) | Process | Process | Product | Formulation | Method of Use | Product | Product | Product | Product |
Europe | | | | | | | | | | | |
| Germany | 2020*** | 2015 | 2013 | 2006 | - | 2007 | - | - | 2008 | 2009 | 2006 |
| France | 2020*** | 2015 | 2013 | 2006 | - | 2007 | - | - | 2008 | 2009 | 2006 |
| Italy | 2020*** | 2015 | 2013 | 2006 | 2007 | 2007 | - | 2009 | 2008 | 2009 | 2006 |
| Great Britain | 2020*** | 2015 | 2013 | 2006 | - | 2007 | - | - | 2008 | 2009 | 2006 |
United States | 2020*** | 2015 | 2013 | - | 2011 | 2009 | 2013 | - | 2007 | 2015 | 2012 |
Japan | 2020*/*** | - | 2013 | 2006 | - | 2007 | - | - | 2003** | 2009 | 2006 |
1 In the USA and in the countries outside of Europe the multiple sclerosis-medicament Betaferon is marketed under the brand name Betaseron.
* Patent pending
** Appeal against rejection of patent term extension pending
*** Composition comprising micronized drospirenone together with ethinylestradiol
____________________________
1 BPI Pharmadaten 2005, p. 15.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 9 |
The earnings position of Schering Group in the fiscal years 2003 through 2005 can be shown as follows:
Schering Group - Income Statement |
| | 2003* €m | 2004* €m | 2005 €m |
| Net sales | 4,828 | 4,907 | 5,308 |
| Cost Sales | 1,233 | 1,206 | 1,256 |
Gross profit | 3,595 | 3,701 | 4,052 |
in % of net sales | 74.5% | 75.4% | 76.3% |
| Cost of | | | |
| | marketing and selling | 1,519 | 1,544 | 1,687 |
| | research and development | 923 | 918 | 982 |
| | engineering and administration | 563 | 522 | 522 |
| Other operating income | 399 | 362 | 432 |
| Other operating expenses | 293 | 311 | 365 |
Operating profit | 696 | 768 | 928 |
in % of net sales | 14.5% | 15.7% | 17.5% |
| Financial result | 15 | -9 | 42 |
| Income taxes | 259 | 252 | 346 |
Profit for the period | 452 | 507 | 624 |
| Minority interest | -3 | -3 | -5 |
Net profit | 449 | 504 | 619 |
in % of net sales | 9.3% | 10.3% | 11.7% |
| |
*previous year's figures adjusted in accordance with the amendment "Actual Gains and Losses, Group Plans and Disclosures" to IAS 19
After a small increase in sales in the fiscal year 2004, Schering was able to realize an 8 % increase in net sales and a 9 % increase in profits growth in the year 2005. Economies of scale and clear savings in the area of costs were the reason for the 21 % improvement in net income. In addition, financial results in the fiscal year 2005 improved. After a 12 % increase in 2004 the corporate group profit increased by 23 % in the year 2005.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 10 |
The following overview shows the Schering Group's financial statement for the fiscal years 2003 through 2005:
Consolidated Balance Sheet of the Schering Group |
| | 2003* €m | 2004* €m | 2005 €m |
Assets | | | |
| Intangible Assets | 723 | 678 | 694 |
| Property, plant equipment | 1,213 | 1,176 | 1,161 |
| Financial assets | 262 | 334 | 309 |
| Other non-current assets | 289 | 350 | 355 |
Non-current assets | 2,487 | 2,538 | 2,519 |
| | | | |
| Inventories | 996 | 992 | 959 |
| Trade receivables | 1,430 | 1,402 | 1,752 |
| Cash and cash equivalents | 566 | 785 | 776 |
| Assets classified as held for sale | 0 | 0 | 97 |
Current assets | 2,992 | 3,179 | 3,584 |
| | | | |
| Total assets | 5,479 | 5,717 | 6,103 |
| | | | |
Equity and Liabilities | | | |
| Issued capital | 194 | 194 | 194 |
| Share premium account | 334 | 334 | 334 |
| Retained earnings | 2,239 | 2,292 | 2,741 |
| Treasury shares | 0 | -4 | -4 |
| Equity before minority interest | 2,767 | 2,816 | 3,265 |
| Minority interest | 16 | 17 | 18 |
Total equity | 2,783 | 2,833 | 3,283 |
| | | | |
| Non-current provisions | 1,290 | 1,380 | 900 |
| Non-current borrowings | 36 | 199 | 228 |
| Other non-current liabilities | 24 | 30 | 32 |
Non-current liabilities | 1,350 | 1,609 | 1,160 |
| | | | |
| Current provisions | 656 | 713 | 863 |
| Trade payables | 354 | 304 | 375 |
| Current borrowings | 74 | 39 | 27 |
| Other current liabilities | 262 | 219 | 236 |
| Liabilities directly associated with assets classified as held for sale | 0 | 0 | 159 |
Current liabilities | 1,346 | 1,275 | 1,660 |
| | | | |
Total equity and liabilities | 5,479 | 5,717 | 6,103 |
| *previous year's figures adjusted in accordance with the amendment "Actual Gains and Losses, Group Plans and Disclosures" to IAS 19; the figures were also restated to give effect to changes in the presentation of Total equity (IAS 1) and in the accounting for employee share purchase plans (IFRS 2) |
The assets of the balance sheet for the year 2005 is characterized by an increase in the short term assets which has its basis primarily in the increase in assets, accounts receivable, and other investments. The securities relate primarily to fixed interest securities having a remaining term
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 11 |
of less than one year. The increase of these assets by € 196 million is substantially a consequence of the increase in liquidity as a result of retained earnings from the previous years. In addition, € 450 million were used to finance the Schering Altersversorgung Treuhand Verein (Schering pension organization). The increase in accounts receivable for goods and services is a result of the increased sales volume of fiscal year 2005.
The assets for the sale of the radiopharmaceuticals business in 2006 were accounted for under the assets classified as held for sale in fiscal year 2005.
The development of the fixed assets in the fiscal year 2005 was influenced by the extraordinary depreciation of assets in the radiopharmaceuticals business and investments such as the new construction of the laboratory building S116 in Berlin. Furthermore, the production site Lys-Lez-Lannoy in France has been sold.
The increase in profit reserves had its basis in the retention of substantial portions of the annual net profit.
The long term provisions include provisions for pensions and similar obligations have been reduced in the fiscal year 2005 primarily as a result of funding the Schering Altersversorgung Treuhand Verein in the amount of € 450 million. This was offset in part by an increase of existing pension reserves resulting from the lowering of the calculatory interest rate.
The increase in current liabilities essentially has its correspondent base to business development in the form of increases in the items trade payables and current provisions.
The worldwide pharmaceutical market has grown during the period from 2000 through 2005 at an annual average rate of 11%.2 This growth had different strengths in various regional markets, as will be explained below - especially in the most important pharmaceutical markets of USA, Europe and Japan. The market growth and the growth of Schering AG are especially dependent on the following factors:
| - | Development of the structure of the population |
| - | (State) regulation of the health market |
| - | Portion of sales of generics of the pharmaceutical market |
________________________
| 2 | IMS Health, Global pharmaceutical sales 2005; IMS-Data reports no information on contrasting agents, which Schering's Diagnostic Imaging division develops and sells. |
| | |
| | |
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 12 |
The pharmaceutical market is characterized by six multi-national corporate groups which together achieved approximately 30 % of worldwide sales.3 These corporate groups are characterized in each case by a portfolio of patent protected medicines. If a medication achieves more than USD 1 billion per year, this is referred to as a "blockbuster". The prerequisites for this success are research, development and market introduction of medications whose effective substances normally have an innovative nature with regard to effectiveness and safety. The importance of the few introductions of new products satisfying these requirements is of particular relevance for the earnings power of a pharmaceutical company engaged in research because the research and development costs of all projects must be covered by the few successful product innovations.
Producers of generics are clearly different from pharmaceutical enterprises engaged in research because the producers of generics put pharmaceuticals based on formerly patented substances on the market without any substantial research. Since these chemically equivalent medicines are offered normally much cheaper than the original medication, the sales and margins of the original medication rapidly fall upon market introduction of generic competitive products.
Generic producers achieve approximately 50 % of the sales in the generic pharmaceutical market. The producers of generics worldwide share of sales for pharmaceuticals were 10 %4 in the year 2005.
As a consequence of the savings of public organizations (social insurance) on the spending side, generics will continue to gain in importance. These savings in benefit cuts result in price pressure on the original medications. This price pressure in a market which is subject to generics could also lead to an increasing substitution of original products by generics. This development is also promoted by the fact that patients with health insurance must in the future themselves bear a greater portion of their health costs. Finally, pharmaceutical enterprises engaged in research can only protect themselves against generic competition after expiration of the patent protection by establishing strong (product) brands.
As a result of the planned product introductions and the demographic developments, it is anticipated that the worldwide pharmaceutical market, starting at a base of USD 602 billion in the year 2005, will grow in the next 5 years annually at rates of 5 to 8 %.5 This market growth is expected to have its basis in innovative products, therapeutic progress and new applications for existing products.
________________________
| 3 | Pharmaceuticals & Biotechnology, Datamonitor May 2005, p. 13. The six companies are Pfizer, Sanofi-Aventis, GlaxoSmithKline, Merck & Co., J & J, AstraZeneca. |
| 4 | Global Generics Guide: Part 2, Datamonitor June 2006, p. 11. |
| 5 | IMS Global Pharmaceutical market 2005. |
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 13 |
The increased sale of medicines is also attributed to two additional factors. In the first place, the increasing average age of the population and the observation that older people require more medicines. Secondly, increasing purchasing power worldwide enables patients in developing countries to increasingly resort to modern therapies.6
Schering’s most important markets continue to be in Europe, despite Schering's worldwide presence. The segments Europe, USA and Japan represent 80.1 % of the net sales of Schering. The following graph summarizes Schering net sales according to segments in the fiscal year 2005, adjusted for the net sales of the radiopharmaceuticals business and the ALK-participation. To clarify, we would like to point out that the European segment contains regions outside the EU and that the USA segment also includes net sales of Medrad outside the USA.
Segment Europe Region
Segment Europe is the most important region for Schering, representing 44.7 % of the Group sales in the fiscal year 2005. It includes the countries in the European Union and the other European countries including Russia and Turkey. In addition, this segment includes the countries in the Caucasus, Central Asia and the Middle East, the Indian sub-continent and the entire African Continent. This segment also includes the business activities of Schering Oy, Helsinki, Finland, Jenapharm GmbH & Co. KG, Jena, Cis bio Int., Gif/Yvette, France, (hereinafter "Cis bio Int.") as well as Justesa Imagen, Madrid, Spain.
The strongest pharmaceutical markets in terms of net sales in Europe are Germany, France and Italy, representing 47 % of the net sales in the segment Europe.
________________________
| 6 | Pharmaceuticals industry pulse, SG Cowen, March 2006, p. 16. |
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 14 |
The tension between innovation and ability to finance is approached in different manners in the individual countries in Europe: There are binding price negotiations in France for all pharmaceuticals; Sweden is characterized by clear regulations on reimbursement, while in The Netherlands, the regulation of prices by the state is delegated mostly to the insurers.
Positive developments in the pharmaceutical markets are seen in the progress of medicine and technology for developments relating to diseases which are not yet subject to therapy. In addition, the expansion of the European market influences the growth potential: Ten countries joining the EU represented only 7 % of the European pharmaceutical market in 2005 and are expected to grow in the following five years in high one digit or low two digit percentage rates.7
As a result of this development, the European pharmaceutical market grew in 2005 by 7.1 % to USD 169.5 billion.8 In the European segment, Schering had growth in net sales in the fiscal year 2005 of 5 %.
Segment USA Region
This segment includes the pharmaceutical activities in the geographic region of the United States of America as well as Puerto Rico. Additionally, included in the USA segment until 2005 are the foreign sales of application systems (injection systems and accessories) for contrast agents sold by the Medrad.9 The rights to the name Schering are held by the independent American pharmaceutical company Schering-Plough, Corporation, Kenilworth, USA (hereinafter "Schering-Plough"), due to historic reasons.
The USA segment is the second most important segment for Schering AG providing 27.0 % of group sales in fiscal year 2005. The enormous importance of the American pharmaceutical market (world market share in year 2005: 44 %10) is not reflected in the sales distribution of Schering. At the same time, this market grew 10 % per year from 2001 to 2005.11 Producers of generic pharmaceuticals participated strongly in the growth of this market (CAGR 2001 to 2005 16.1 %).12 In fiscal year 2005, it achieved growth in net sales in the amount of 13 % after adjustment for currency exchange effects (unadjusted 14 %).
________________________
| 7 | BPI: Pharmadaten, August 2006 p. 27, 29, KPMG calculation. |
| 8 | IMS Health Reports dated 20 June 2006. |
| 9 | Since 1 January 2006 the sales of the Medrad have been included under Other Activities. |
| 10 | Arzneimittelmarkt, VFA Statistics 2006; Umsatz zu Herstellabgabepreisen im Apothekenmarkt. |
| 11 | IMS, U.S. Purchae Activity by Chanel, 2001; IMS, U.S. Purchase Activity by Chanel, 2005; KPMG calculation. |
| 12 | Global Generics Guide: Part 2, Datamonitor, June 2006, p. 15; Generics in the United States, Datamonitor, August 2005, p. 9; KPMG calculation. |
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 15 |
National approval for pharmaceuticals is carried out in the USA by the Food and Drug Administration (hereinafter, the "FDA"). The FDA controls the safety and effectiveness of medical products, human and veterinary pharmaceuticals. The approval of a medication in the US market requires compliance with certain requirements for production facilities and production processes, which are formulated and controlled by the FDA.
Segment Japan
Schering AG achieved 8.4 % of their net sales in the Japanese pharmaceutical market. This high priced market is characterized by very restrictive approval processes. The public health authority (National Health Insurance, NHI) has taken steps to enact a two year cycle of price reductions for approved medicines. Due to these regulatory actions, Schering expects regular future price reductions.
However, Schering had growth in net sales in the local currency of 1 % as a result of increased sales volume.
Segment Latin America / Canada Region
The segment Latin America / Canada is managed by the regional center in Mexico and is responsible for distribution through more than 15 subsidiaries in Latin America, Canada as well as in the Caribbean region 9.0 % of the net sales of Schering AG were achieved in this segment in the fiscal year 2005. The strongest markets in terms of sales are Brazil, Mexico and Canada.
The market environment in Latin American is characterized by a strong presence of generic pharmaceuticals and the distribution of black market products. This is enabled by the lack of reimbursement of pharmaceuticals, very limited enforcement of patent legislation as well as the approval policy of the regulating authorities.
Yasmin is the strongest product in terms of sales in virtually all countries in this segment. Contraceptives in general achieve 70 % of the net sales proceeds of Schering AG in this segment.
The development in the Latin American segment is strongly dependent on the rate of exchange compared to the Euro. Adjusted for these effects, Schering achieved a 9 % growth rate in fiscal year 2005 (unadjusted 19 %).
Segment Asia/Pacific Region
The Asian/Pacific segment contributed 4.8 % of Schering Group sales in fiscal year 2005.
The segment includes the countries in Southeast Asia and Eastern Asia (without Japan) as well as Australia and New Zealand. In the fiscal year 2005, Australia, South Korea and China were the strongest markets in terms of sales which achieved 74 % of the net sales in this segment.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 16 |
A common characteristic in all sub-markets is the lack of reimbursement of costs which has the consequence of less value being placed on brands and a preference for generic products. An exception is China where the pharmaceutical market is dominated by individual products. Therefore, the focus on strong (product) brands represents a good marketing strategy there.
Taiwan, South Korea, Hong Kong and Singapore are characterized by an advanced development of the pharmaceutical market. Contrary to this, China and Indonesia have great potential for growth as a result of the interplay between a strong economy and increasing rates of diagnosis and treatment.
The Chinese pharmaceutical market in 2005 was USD 11.7 billion. China will be the seventh largest pharmaceutical market in the world in 2009 as the result of anticipated two digit growth rates.13
The Gynecology & Andrology business area consists of four indication areas: hormonal contraception, menopause management, gynecological therapy and andrology. The net sales in the fiscal year 2005 in these indications are shown as follows:
Fiscal Year 2005
adjusted*
*adjustments of the net sales in the indication area Andrology for Mittoval
The relevant genital-urinary market for the division Gynecology & Andrology generated a worldwide sales volume of € 15.3 billion in the year 2005. A market volume of € 19.1 billion is anticipated for the year 2010 based on moderate growth rates averaging 4.6 %.14 In the fiscal year 2005, the Gynecology and Andrology business area achieved net sales of € 2,001 million. The strongest segment in terms of growth was Europe with a net sales share of 54.2 %, followed by the segment USA with 22.1 % and the segment Latin America / Canada with 16.6 %. The strongest field in terms of sales was hormonal contraception with a net sales share of 84.0 %, followed by menopause management with 8.5 % of business area net sales.
________________________
| 13 | IMS Health Reports, 20 June 2006. |
| 14 | Evaluate Pharma, 9 November 2006. |
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 17 |
Hormonal Contraception
Oral and non-oral contraceptive medications for women are developed and marketed in the field relating to hormonal contraception. Since the year 2005, Schering has been the market leader in this indication area with a share of the global market of approximately 27 %. The market share in the segment Europe was 47 % in the fiscal year 2005. The market share of Schering, in the segment USA, in which the highest rate of growth is anticipated in the future, was 14 % as a result of the active appearance on the market which only occurred recently. In addition to pure contraception, the product focus is on health relevant additional uses for the treatment of pre-menstrual disphory, dysmenorrhorea and acne.
The three strongest products of the gynecology and andrology business area in terms of sales involve the indication area of hormonal contraception and make up more than 50 % of the net sales in this business area.
The strongest product in terms of sales in the fiscal year 2005 was Yasmin with net sales of € 586 million, making up 29.3 % of the net sales of the business area. This product was introduced into the market in the year 2000 and has patent protection until the year 2020. It is based on the innovative progestin drospirenone developed by Schering AG itself and is, at the present time, the most successful oral contraceptive worldwide. Yasmin had growth in net sales of 36.4 % in the fiscal year 2005 representing a worldwide market share of more than 13 % and, thus, contributed substantially to securing the market leadership in this indication area. The largest portion of net sales of Yasmin was in the USA with 48.2 %.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 18 |
Schering has an additional innovative product in Mirena, which was introduced into the market in 199015 and achieved in the fiscal year 2005 net sales of € 243 million. This corresponds to 12.1 % of the net sales in the business area and a growth in net sales of 22.1 % compared to the year 2004. The largest portion of net sales of Mirena was 52.7 % in Europe. Mirena is a progestin releasing intra-uterine system and is a medication in the indication area of non-oral contraceptives which guarantees an effective contraception for five years after being placed in the uterus. At the present time, more than seven million women worldwide use this system. The patent protection for the device for Mirena continues until the year 2015, and the patent protection for the production process lasts until the year 2013.
The third strongest product in terms of sales in the fiscal year 2005 was Diane, a no longer patent protected therapy for acne having additionally a contraceptive effect, which made a contribution of € 172 million or 8.6 % to the net sales in this business area while having a reduction in net sales of -8.0 %. The reduction in net sales was primarily the result of the increasing competition from generics. They threaten as a general rule the sales of the product portfolio as when the patent protection expires they offer much cheaper medications.
The company has the strategic goal of concentrating on patent protected, innovative products and substances in order to secure the future growth in net sales of the business area and its market leadership. In the self developed progestin drospirenone, Schering has a patent protected product as the basis for the further expansion of a broad product family with blockbuster potential (the Yasmin family).
Yasminelle, a low dosage variety of Yasmin which received approval in The Netherlands as the reference country for the EU in August 2005 and European wide approval in May 2006, as well as YAZ, a low-dosage oral contraceptive with an innovative dosage scheme and positive effects on premenstrual dysphory (PMDD), provides the company with two medications which are intended to continue the positive trend in the sales of Yasmin in the future. The expanded approval of YAZ for the treatment of premenstrual dysphory was issued by the U.S. American Food and Drug Administration (FDA) in October 2006.
A moderate, average growth of 2.9 % annually in the period up to 2010 is anticipated in the market for hormonal contraceptives.16 The main competitors for the Company are Johnson&Johnson, New Brunswick, USA (hereinafter "J&J"), having a market share of approximately 21 %, Barr Pharmaceutical Inc., Pomona, USA (hereinafter "Barr") with a market share of approximately 10 %, Akzo Nobel NV, Arnhem, The Netherlands with a market share of approximately 11 %, Watson Pharmaceutical Inc., Corona, USA with a market share of approximately 7 % and Wyeth Pharmaceuticals, Madison, USA (hereinafter "Wyeth") with a market share of approximately 9 %.
________________________
| 15 | Market introduction in Finland by Leiras, Helsinki, Finland. |
| 16 | Evaluate Pharma, 9 November 2006. |
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 19 |
The market in developed segments such as Europe and the USA is increasingly saturated and overall characterized by a high concentration of competitors, an existing broad range of products and the increased entry of suppliers of generic products. In addition, the demographic development in these segments indicates that there will be an additional flattening of market growth. Growth above market average will only be possible in the future for companies having unique characteristics as a result of innovative and patented products and by increasing the application rate, especially in the USA. Over the mid-term, future growth is anticipated as a result of the expansion of the product range in products with lower dosages of effective substances, new types of dosage regimens, additional medical uses and forms of applications. Thus, research and development activities are focusing on the development of low dosage oral and alternative contraceptives (e.g. contraceptive patches, vaginal rings). In addition, emphasis is currently being placed in the field of non-hormonal medications. The product pipeline of Schering AG with DUB OC, LCS and FC patch contains future products with the above described characteristics which correspond to the developing trends in the case of contraceptive products and are able to generate future growth potential in excess of market growth.
Menopause Management
The Menopause Management indication area is concentrated on medications for the hormonal treatment of menopause symptoms. After the collapse of the market as a result of a Woman's Health Initiative study of the FDA in the year 2003, which involved the negative after-effects of hormonal applications, the market is now in a slow recovery phase. The competitive environment in the Menopause Management market is characterized by the market leadership of Wyeth having a market share of approximately 40 %.
Approximately half of the net sales in the field were achieved in the fiscal year 2005 with products whose patent protection already expired. With Angeliq, Schering has introduced into the worldwide market a hormonal medication which was approved in July 2003 in Europe and in September 2005 in the USA and which should be a future driver of growth in this field. Angeliq contributed 0.6 % to the net sales of the business area with net sales of around almost € 11 million in the fiscal year 2005, whereby the net sales compared to the previous year were almost six times higher. Angeliq contains the progestin drospirenone in addition to estradiol, which emphasizes the strategy of Schering in expanding a portfolio of patented drospirenone based products. Schering's strategic goal is a significant increase in the market share in the menopause management market which is intended to be supported by the worldwide product introduction of Angeliq as well as the expansion of the Angeliq family.
The market for menopause management in the year 2005 had a moderate average growth worldwide sales volume of approximately € 2.3 billion, which is supposed to increase to approximately € 2.7 billion in the year 2010 with moderate annual average growth of 3.3 % annually.17 The anticipated growth in the market for menopause products will be strengthened by 2 % annual growth in the target group of women between the ages of 45 and 64 in the USA.18 The long term oriented trend towards non-hormonal medications also indicates that there will be a further increase in the rate of acceptance.
______________________________
| 17 | Wood Mackenzie's Productview, March 2006. |
| 18 | |
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 20 |
Gynecological Therapy
The indication area of Gynecological Therapy achieves at the present time low net sales with old products which are solely advertised as low value sales and only contribute to a minor degree to the net sales of the business area. The future importance of this field consists in the expansion of a new platform for products for the treatment of uterine fibroids and endometriosis. In the case of the treatment of uterine fibroids, medications are involved which relate to the treatment of benign tumors in the uterine musculature which until now have normally had to be surgically removed. Endometriosis treatment involves medications to ease the symptoms arising as a consequence of the collection of uterine mucus membrane outside of the inner part of the uterus. Future products are still in an early development phase.
Andrology
The indication area of Andrology involves the indication of hypogonadism (deficiency in the function of the testicles) (treatment for testosterone deficiency) and fertility control (development of reliable, reversible methods to control fertility in men). Schering AG is the market leader in Europe in the field of testosterone therapy with the products Nebido (net sales in 2005, € 7 million) and Testogel (net sales in 2005, € 12 million); Testogel is licensed for 15 European countries. Nebido is a depository testosterone medication for the treatment of male testosterone deficiency which only has to be injected four times annually and, thus, is user friendly. Nebido was approved in Europe in July 2004. Testogel is another testosterone product but as a gel it has another method of application for short-term treatment. Testogel is marketed by Solvay SA, Brussels, Belgium (hereinafter "Solvay" and in the USA by Icos Corp., Bothell, USA and is known as Androgel).
The market for hypogonadism therapy (HGT) in the regions of the USA, Europe, Latin America, and Asia is different. Solvay is the market leader in the USA with the project Androgel having 67 % of the market share. The total market in the USA has a volume of € 384 million. Schering will not be represented in this market during the planning period. The HGT market in Europe is much smaller as a result of the lower price level compared to the USA, and has a total volume of € 57 million. Schering achieved a market share in the fiscal year 2005 in Europe of 46 %.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 21 |
Schering has the goal of continuing to expand the market leadership position in Europe with Testogel as the primary (short-term therapy) and Nebido as the secondary therapy (mid-term application). In addition, expansion in the treatment field of hypogonadism for aging men will strengthen the growth of sales over the mid-term. The demographic changes in recent years have been leading to an increased number of men over the age of 40 years who are potential users. The increased life expectancy for men and an increasingly higher acceptance rate can positively influence the moderate future market growth.
The business area Diagnostic Imaging is divided into the fields x-ray contrast agents, magnetic resonance imaging contrast agents and application technologies. The radiopharmaceuticals business mainly of CIS bio Int. was sold by Schering in the first half of 2006 to a Belgium syndicate.
The contrast agents business includes diagnostics for imaging procedures such as x-rays, computer tomography (CT) scan and magnetic resonance imaging (MRI). Schering is one of the world's leading suppliers in the field of in-vivo diagnostics. The business with applications systems (injection systems and accessories) for contrast agents is conducted by Medrad group. This company is the worldwide market leader in its field of business, having a market share of currently more than 70 % in the USA and more than 50 % in Europe.
The net sales in the amount of € 1.287 million of the fiscal year 2005, adjusted for the 2006 divestiture of the radiopharmaceuticals business (net sales 2005: € 117 million), were allocated as follows:
Fiscal Year 2005
adjusted*
*adjusted for the divestiture of the radiopharmaceuticals business
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 22 |
The business with x-ray contrast agents involved primarily the products Ultravist and Iopamiron, licensed from Bracco S.p.A, Milan, Italy, (hereinafter also "Bracco"). The MRI contrast agents business was based primarily on the sale of the product Magnevist which was the first MRI contrast agent on the market. The distribution of the sales of these three contrast agent products in the segments in the fiscal year 2005 was as follows:
On 31 July 2006, Schering voluntarily recalled the x-ray contrast agent Ultravist 370 because of an increased number of customer complaints about crystallizations in the Ultravist 370 vials. Ultravist is produced and distributed in various concentrations (150/240/300/370 mgl/ml). The recall only affected the variety with the highest concentration of iodine, Ultravist 370, and then only the vials produced in Berlin. Schering believes that the production in China and South Korea is not affected. Schering assumes that they can start resupplying the first markets in the first half of 2007 in accordance with the regulatory steps needed to reintroduce the product which are different for each country.
The share of Ultravist 370 in the total sales of Ultravist was 43.1 % in the fiscal year 2005. The share of sales for Ultravist 370 produced at the production site in Berlin was 86.0 % in the fiscal year 2005.
MRI Contrast Agents
The commercial situation in the MRI contrast agent field is currently characterized by the product Magnevist. Magnevist is an extra cellular contrast agent for the diagnosis in the central nervous system and throughout the body. It contributed € 328 million net sales in the fiscal year 2005 which was 90.6 % of the net sales in the field of MRI contrast agents. The net sales are made primarily in the Region USA, Europe and Japan. The product portfolio in the field of MRI contrast agents also includes: Primovist and Resovist for liver specific imaging, Gadovist for imaging of the brain and the spinal cord as well as Vasovist (not yet approved for use in the USA) for imaging the circulatory system. These products in the contrast agents market are supposed to create the basis in order to satisfy the increasing demand for organ specific MRI contrast agents and in order to secure sales even after expiration of the patents for Magnevist in the year 2007 in Europe and Japan as well as in the year 2013 in the USA.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 23 |
X-ray Contrast Agents
The primary products in the field of x-ray contrast agents are Ultravist and Iopamiron. Ultravist and Iopamiron are approved for all common x-ray examinations including CT scans.
Net sales of the x-ray contrast agent Ultravist in the fiscal year 2005 were € 248 million or 42.5 % of the net sales of the x-ray contrast agent's field. The net sales of Ultravist were primarily in Europe and Asia. As a result of the late market entry of Schering into the market in the USA, only below average net sales are achieved there compared to the other segments.
The x-ray contrast agent Iopamiron is produced by Schering under a license from Bracco, and is distributed mostly in Japan as well as in Latin America and France. Accordingly, there are only sales with this product in the segments Europe, Japan and Latin America / Canada, whereby approximately 85.5 % of the net sales were realized in Japan in the fiscal year 2005. Iopamiron had net sales of € 242 million in the fiscal year 2005 or 18.8 % of the total net sales in the field of Diagnostic Imaging, as well as 41.5 % in the field of x-ray contrast agents.
The contrast agents market (x-ray and MRI contrast agents) is dominated by six market participants. In addition to Schering, these are Bracco, General Electric Company, Fairfield, USA, Daiichi Pharmaceuticals, Tokyo, Japan, Guerbet S.A., Villepinte, France and Tyco/Mallinckrodt, St. Louis, USA. The market for diagnostic imaging will grow in the next five years at an average annual rate of 4.1 % according to estimates by EvaluatePharma. The growth will be primarily influenced by MRI contrast agents with an average growth of 5.9 % annually.19 The growth in the contrast agents market is driven by the increasing number of examinations with imaging procedures as a result of the increased number of installed devices and the increasingly aging population because typically diseases relating to age such as heart disease are examined by imaging procedures. This quantity related growth will be partially offset in markets with currently above average price levels by the ongoing price competition between original suppliers and, to a limited degree, by generic suppliers, as well as by increasing measures to slow down costs in the field of health services, such as by state ordered price reductions, especially in Japan.
Application Technologies
The Medrad group distributes as a supplier of application technologies primarily injection systems and accessories for contrast agents which, for example, enable a precise application of contrast agents in the fields of CT scans and MRI. In addition to this, infusion pumps are distributed which secure a continuous application of the medication even in the strong magnetic field of a nuclear spin tomography. In addition, Medrad generates net sales from services for the installation and maintenance of its own and third party injection systems.
________________________
| 19 | EvaluatePharma 9 November 2006. |
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 24 |
Medrad group achieved 68.3 % of its net sales in the USA in the fiscal year 2005 and 18.2 % in Europe. Medrad had growth in net sales in the fiscal year 2005 of 21.4 %. The growth of Medrad is driven by the increasing number of examinations with imaging procedures supported by contrast agents, the switch to injection systems from one-head to two-head injection systems and the resulting additional need for sterile consumables (cartridges, tubes, etc.) as well as the increasing installation of computer imaging machines and magnetic resonance imaging machines in Medrad's markets which include the installation of an injection systems.
The business area Specialized Therapeutics includes the indication areas central nervous system, cardiovascular system and gastrointestinal disease.
The main part of the business is the indication area central nervous system. This includes products for the disease multiple sclerosis, in which Schering is a worldwide leading supplier, as well as Parkinson's disease.
The following graph illustrates the share of net sales in the business area in the year 2005 after adjustment for the 2006 sale of the investment in ALK-Scherax (net sales in 2005: € 34 million):
Fiscal Year 2005
adjusted*
*adjusted for the divestiture of the ALK-participation
The net sales in the year 2005 for the six strongest products of the division in terms of net sales can be shown when subdividing according to segments as follows:
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 25 |
The multiple sclerosis medication Betaferon20 was in 2005 Schering's only blockbuster, with € 867 million net sales or a 16.8 % portion of the Group sales. The net sales of the top 2 to the top 6 products of the business area are allocated in an amount of 66.8 % to Europe in fiscal year 2005, despite products with a strong regional relation such as Refludan (USA) and Aspenon (Japan).
Central Nervous System
As a result of the dominance of Betaferon in the Specialized Therapeutics business area with a share of 92.6 % of net sales in the Central Nervous System indication area in the year 2005, the commercial development of the business area primarily depends on this product. The primary sales markets for Betaferon are the segments Europe and USA which had 85.9 % of the net sales of Betaferon in the year 2005. Multiple sclerosis (MS) is a chronic inflammatory progressive disease of the central nervous system for which the treatment involves high recurring costs. Worldwide, approximately 1.5 million people are affected.
Betaferon is based on the protein inferon BETA-1b which was developed in cooperation with Cetus and which was approved in 1993 as the first medication for treatment of MS with recurring symptoms and was introduced into the market. This pioneering work enabled Schering to conduct long term studies on the effectiveness and safety and established the basis for the high customer loyalty of the patients. As a protein, Betaferon in the original form of dosage had to be permanently cooled both in storage and transport. Since 2003, Schering offers an improved formula with which patients can also inject uncooled Betaferon.
________________________
| 20 | The multiple sclerosis medication marketed in the USA and the countries outside of Europe under the name Betaseron. |
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 26 |
In addition to Schering, three other substantial competitors supply medications for the treatment of multiple sclerosis. These are Biogen Idec, Inc., Cambridge, USA (hereinafter "Biogen Idec"), with the medication Avonex, Serono S.A., Geneva, Switzerland, with Rebif as well as jointly Sanofi-Aventis S.A., Paris, France (hereinafter "Sanofi-Aventis") and Teva Pharmaceutical Industries Ltd., Jerusalem, Israel, with Copaxone. Biogen Idec. had also obtained approval from the FDA for Tysabri in the year 2004, but this approval was withdrawn again in 2005 due to safety concerns. In June 2006, Tysabri was again approved by the EMEA as well as by the FDA for a limited group of patients. This medication, which was previously known as Antegren, is based on the substance Natalizumab; it is anticipated that this medication will be primarily used for patients who do not react to treatment with Beta-Interferonen or Copaxone.
The following graph shows the market shares of the main medications in the MS treatment21 according to net sales in the year 2005:
With a market share of approximately 24.3 % in the year 2005 in Europe,22 which represents the most important market in terms of sales, Betaferon is almost at the level of the market leader Rebif.
________________________
| 21 | Furthermore, medication made with Mitoxantrone had sales of € 44.5 million and Natalizumab had sales of € 21.9 million in 2005. |
| 22 | According to Decision Resources, Multiple Sclerosis, p. 200. |
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 27 |
EvaluatePharma estimates that the market for multiple sclerosis medications will grow at an annual rate of 11.2 % from 2005 to 2009 as a result of increased income (for example, in Eastern Europe and Asia) and increasing spread of health insurance.23
The indication area central nervous system also includes Noctamid, with which net sales in the amount of € 45 million were achieved in the year 2005. This corresponds to 4.8 % of the net sales in the indication area of the central nervous system. Noctamid is used as a sleep agent and as initial medication for anesthesia and is distributed with a share of 87.5 % of the net sales primarily in the segment Europe, but not in the USA.
Furthermore, Schering intends to expand the product portfolio in the Specialized Therapeutics business area in the indication area central nervous system by products for Parkinson's disease as well as new treatment methods for multiple sclerosis.
Cardiovascular system
Schering offers in the cardiovascular system indication area, among others, Ilomedin for the treatment of thrombosis and Ventavis for improving physical activity in the case of pulmonary hypertonia. These products had net sales in the year 2005 amounting to 47.2 % of the net sales in the indication area cardiovascular system. Of the net sales of these products, 92.0 % were achieved in the segment Europe.
Schering's product portfolio also contains the medicine Aspenon, which is only marketed in Japan. This drug seeks to restore heart rhythms and produced despite its regional limitations net sales of € 21 million in fiscal year 2005.
Beyond maintaining the existing assortment of products, Schering is not devoting any further funds for development in this field.
In July 2006, Schering announced the results of the n.o.v.e.l. 2 and n.o.v.e.l. 4 studies on Sargramostim. The results of the phase III induction study n.o.v.e.l. 4 shows no superiority on the two primary endpoints, response and/or remission after eight weeks compared to a placebo. The further use and development of Sargramostim is currently being discussed. This is leading to a delay in the time of the originally planned market introduction.
________________________
| 23 | EvaluatePharma, 9 November 2006. |
| | |
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 28 |
The business area Oncology is divided into two indication areas: hematological oncology and solid tumors.
Hematological oncology includes products for therapies for the targeted treatment of various forms of leukemia and lymphoma. Solid tumors include all types of cancer in the tissue of the body except for the blood, the bone marrow and the lymphatic system. This includes prostate cancer as the most common type of cancer in men as well as breast cancer in women. Other solid tumors are, among others, lung cancer, brain tumors or colorectal cancer.
The current product portfolio of Schering in the indication area of oncology is primarily in the indication area of hematological oncology. Schering has two products in the market in the field of therapies for solid tumors. Schering wants to further expand this existing presence in the field of solid tumors.
The following graph shows the portions of net sales in the indication areas in the year 2005:
Fiscal Year 2005
adjusted*
*adjustment of the net sales in the indication area Solid Tumors for Mittoval
Hematological oncology involves primarily the products Fludara, Campath, Zevalin in Europe and Leukine in the USA. In the year 2004, the product Zevalin was approved and introduced into the first markets in Europe. The products Androcur and Bonefos were the main products distributed for therapy for the treatment of solid tumors in the fiscal year 2005. Bonefos is currently approved for the treatment of hypercalcaemia and osteolysis which are caused by malignant breast cancers and multiple myelomes.
The allocation of net sales to these products in the segments in the fiscal year 2005 can be shown as follows:
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 29 |
Hematological Oncology
The product Fludara is used as a first line therapy and as a second line therapy for the treatment of patients with chronic lymphocytic leukemia (CLL). Fludara is approved in Europe, Canada and many other countries both as an intravenous injection as well as in the form of tablets. Fludara contributed € 105 million in net sales in the fiscal year 2005 which was 42.8 % of the net sales in hematological oncology. The net sales of Fludara are achieved primarily in the segments Europe and the USA as well as Latin America/Canada. Fludara (intravenous injection) is subject to competition from generics in the USA, and also only approved for second line therapy.
In addition the product Campath (Mabcampath in Europe) is approved as the first antibody for the treatment of patients with CLL. Campath is the only approved medication for patients who have been previously treated with Alkylanzien and Fludara and also for patients who are no longer responding to treatment with Fludara. CLL normally appears after the age of 50 and is the most common form of leukemia in adults with approximately 180,000 new cases annually worldwide. Additional studies are examining the role of Campath both as a mono-therapy as well as in combination with Fludara, taking into account first line and second line therapeutic approach. These studies are being conducted in cooperation with Genzyme Corp., Cambridge, USA (hereinafter "Genzyme"). The product Campath contributed € 69 million in net sales in the fiscal year 2005 which was 28.2 % of the net sales in the field of hematological oncology. The net sales were realized primarily in the segments USA and Europe.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 30 |
Leukine is a growth factor protein (GM-CSF) produced using genetic engineering. It is used in hematological oncology to strengthen and rebuild the immune system, for example, after chemotherapy or a bone marrow transplant (immune system activator). The medication is the only colony stimulating factor which is approved in the USA for the treatment after initial chemotherapy in older patients with acute myeloisic leukemia (AML). The net sales are realized exclusively in the USA. The product Leukine contributed 23.9 % to the net sales in hematological oncology in the fiscal year 2005.
Zevalin was introduced into the market in the fiscal year 2004 for the treatment of adult patients with follicular non-Hodgkins lymphoma (NHL) who do not respond to the treatment with Rituximab or have a relapse after such a treatment. Zevalin is the first approved radio-immuno therapy, a special anti-body directed against lymphocytes which is attached to a radio-nuclide and can target the tumor cells by attacking them in a combination of radiation and immuno therapy.
NHL is a tumor of the lymphatic system and is the fifth most common form of cancer after breast cancer, prostate cancer, lung cancer and colorectal cancer. NHL occurs in the lymphocytes, a form of white blood cells. The share of net sales of Zevalin was approximately 3.8 % of the hematological oncology net sales in the fiscal year 2005 after being introduced in the market in the previous year. The product is distributed in Europe by Schering AG; Biogen Idec holds the marketing rights for this product in the USA.
The main competitors in the hematology market are Roche Holding Ltd., Basel, Switzerland (hereinafter "Roche"), Amgen Inc., Thousand Oaks, USA (hereinafter "Amgen"), Novartis AG, Basel, Switzerland (hereinafter "Novartis"), J & J, Schering-Plough and Pfizer.
Solid Tumors
The product Androcur is used in the indication area of solid tumors for the treatment of prostate cancer if the carcinoma can no longer be surgically removed. Androcur has been subject to competition from generics after the patent protection expired a long time ago. The product contributed net sales of € 87 million or 53.3 % to the net sales in the indication area of solid tumors. The sales are allocated to Europe, Asia as well as Latin America/Canada.
Bonefos is a bisphosphonate which is used for the treatment of breast cancer patients with bone metastases. Bonefos reduces the accompanying symptoms caused by such malignant breast cancer diseases, such as hypercalcaemia and osteolysis. Net sales of € 58 million and, thus, 35.3 % of the net sales in the indication area of solid tumors were realized in the fiscal year 2005 with the product Bonefos. The product is distributed primarily in Europe.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 31 |
The main competitors in the indication area of solid tumors are Roche Holding Ltd., Sanofi-Aventis, Amgen, Astra Zeneca, Novartis AG, J&J, Bristol-Myers Squibb Company, New York, USA, Schering-Plough and Pfizer.
The market for cancer medications is estimated by EvaluatePharma to grow at an average annual rate of 17 % in the next five years.24 The basis for this forecast is a market volume of € 24.4 billion in the year 2005. The growth is driven primarily by new and further developed therapeutic approaches based on antineoplastics, cytostatics as well as innovative targeted therapies. These new therapies use new knowledge about the regulation of tumor growth and the causes of tumors, for example, by targeted inhibition of receptors for certain growth or message substances, prevention of the growth of blood vessels which are necessary for tumor growth, etc.
The market volume of antineoplastics and cytostatics is growing of an above average annual rate of approximately 28 % and 31 % respectively, which is clearly above the anticipated rate of growth of the other therapeutic approaches in the oncology market. EvaluatePharma anticipates that the growth of these cancer medications in the oncology market will increase from almost two fifths to three fifths.
Additional growth in the oncology market is expected as a result of the increased number of cases of cancer worldwide. This is, in turn, the result of higher life expectancy and the increased number of old people in the general population because most cases of cancer occur in older people. The targeted new therapeutic approaches continue to make it possible to treat patients for whom the current therapeutic forms (chemotherapy) are too toxic. Finally, higher periods of survival of the patients, especially in the case of tumors which were difficult to treat until now, and which result from the new forms of therapy, contribute to market growth.
As a result of the anticipated market growth, oncology constitutes the largest portion of the present development activities in the pharmaceutical industry and has the most development projects in later phases.25 The main emphasis of the development projects is directed towards instances of colorectal tumors, lung cancer, breast cancer and ovarian cancer. As a result of the focus of the emphasis in research of the pharmaceutical industry on oncology, it can be assumed that there will be stronger competition in the future. Since in part considerably higher costs for treatment can be assumed for new forms of therapy compared to the present price level, stricter regulatory measures, e.g. restrictions on approvals and price controls, can be anticipated. It can be assumed that the institutions in the health market will establish high requirements for the innovative level of new oncology products. This applies especially with regard to their improved effectiveness compared to competitive products.
________________________
| 24 | EvaluatePharma, 9 November 2006. |
| 25 | Fox-Tucker, James, 2005, The Cancer Market Outlook to 2010, p.13 |
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 32 |
In recent years, Schering has considerably strengthened its research and development activities for the resolved strategic expansion of the presence in the indication areas of solid tumors. The development projects are in medium to late development phases (phase II and phase III projects). The approaches in research and development indicate a high potential for innovation from the point of view of the company, among other indication areas, in the field of inhibiting the growth of blood vessels and tumors (antiangiogenesis), targeted cell cycle inhibition of tumor cells with possible protection of surrounding healthy tissue, modern immuno therapies as well as endocrinal therapies.
The Other Sources of Schering consist of the dermatology business, the pharmaceutical chemicals business with other pharmaceutical producers as well as the remaining Other Activities.
Dermatology includes products for the treatment of non-infectious and infectious diseases of the skin, including eczema, psoriasis, acne, rosacea, hemorrhoids and fungal infections.
The pharmaceutical chemicals business involves the production of basic pharmaceutical chemicals and substances for the own fields of business and other pharmaceutical producers.
The remaining Other Activities involve cooperation in the field of distribution, insurance and publications.
The following chart shows the net sales of the Other Activities for the year 2005:
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 33 |
The dermatology business has been conducted by the subsidiary Intendis GmbH with its registered office in Berlin (hereinafter referred to as "Intendis"). Intendis contributed € 223 million or 70.3 % net sales in the fiscal year 2005 to the Other Sources. The strongest products in the dermatology business in terms of sales are Advantan with € 41 million net sales and Skinoren with € 40 million net sales. Advantan is a topical corticoid for the treatment of eczema, and Skinoren26 is a topical product for the treatment of rosacea.
________________________
| 26 | The trade name in the USA is Finacea. |
| | |
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 34 |
The valuation principles described below are considered today, both in theory and in practice, as well-established and are reflected in professional journals and in the official bulletins published by the German Institute of Certified Public Accountants (IDW) and specifically in the IDW standard “Principles for performing company valuations” (Grundsätze zur Durchführung von Unternehmensbewertungen, “IDW S 1”).
We have derived the equity value of Schering on the basis of the future earnings potential and the cash flows derived from this. The valuation of Schering in this context is on a stand-alone basis without considering possibilities arising out of business restructuring which are only possible due to the existence of the Domination and Profit and Loss Transfer Agreement. All positive and negative synergies which can only realized as a result of the Domination and Profit and Loss Transfer Agreement are not considered. This also applies for all positive and negative synergies which can be realized after the exclusion of the minority shareholders. Synergies which could be realized at Schering in the context of a so-called de facto corporate group relationship, prior to the Domination and Profit and Loss Transfer Agreement taking effect, were taken into account when deriving the value.
In business management academia, case law and valuation practice, it is generally recognized that the discounted earnings value is a reliable criterion for establishing the value of a company.
According to IDW S 1, Section 2.1, an equity value may be determined according to the discounted earnings methodology or the discounted cash flow method. In the present case, the equity value was calculated using the discounted earnings methodology, the most widely used approach in German valuation practice and according to German case law. Since both methods — relying on the same assumption, particularly concerning the financing (see IDW S 1, Section 7.1) — lead to the same equity values, a presentation of the equity values according to the discounted cash flow method has not been provided in this report.
The discounted earnings value of a company assumes that a company seeks purely financial goals and is based on the present value of the company owner's incoming net cash flow as a result of owning the company (present value of future earnings). In order to derive the present value of such net income, a discount rate is used, which represents the return on an alternative investment that is equivalent to an investment in the valued company (see, IDW S 1, section 2.1).
The company owners' discounted net income, which is the basis for determining the discounted earnings value, is derived primarily from the dividends paid out from the financial net income generated by the company. Thus, a company valuation requires a projection of the company's future distributable financial net income. In order to determine the net income distributable to the company owners, it must be taken into account that some of the company's financial net income will be retained and that the undistributed net income will be used for other purposes. These amounts may be used to make investments, for repaying debt capital or for returning equity capital to the owners (such as by redeeming shares) (see, IDW S 1, Section 4.4.1.1).
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 35 |
In calculating an objective equity value, the distribution of the financial net income that is available must be considered, taking into account the documented corporate strategy. If the financial planning is divided into two phases, then the budget itself will indicate any dividend payments and use of retained earnings in the first phase (the so-called "detailed financial planning phase"). In connection with the second phase (the so-called "sustainable earnings phase"), an assumption is typically made that in general the dividend policy of the valued company will be the equivalent of the dividend policy of an alternative investment. For purposes of calculating how any retained earnings are reinvested, it is assumed that either the amounts will yield an amount equal to the discount rate (before taxes on income at company level) — ensuring that their nominal value equals their net present value — or is equal in value to a fictitious value attributing those retained earnings directly to the shareholders who would ultimately benefit from any share price gains (see IDW S 1, Section 4.4.2.3) For this reason, a shareholder's net income for purposes of this report includes the dividends which are payable to them as well as the retained earnings directly attributable to them.
Since an equity value is to be calculated from the perspective of the company owners, the shareholders' personal income taxes on any dividends paid to them by the company must be taken into account (unlike the tax exempt imputation of retained earnings). Applying an average typified tax rate of 35 % avoids linking an objective equity value to the individual tax situation of a given company owner. Since the half-credit method must be factored into the valuation of corporations, a typified personal tax rate of 17.5 % on any distributed profits is applied in calculating the financial net income, whereas the retained earnings do not trigger any personal income taxes (see, IDW S 1, Section 4.4.2.5).
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 36 |
Any matters, which cannot be factored into the calculation of the discounted earnings value, either in whole or in part, will generally be assessed separately and added to the discounted earnings value. These special items include not only non-operating assets, but also certain financial assets and real estate. Non-operating assets are any assets which may be sold without affecting the actual business operations of the company (please refer to section 7.2).
The value of these special items is not reduced by typified shareholder income tax, as the value contribution of the special items is part of retained earnings due to the actually planned dividends.
If it seems generally more advantageous for the company to separately sell its individual assets or its self-contained operating units than to continue operating the business, then the sum of any realizable net proceeds from such sale — the liquidation value — must be taken into account.
Since the company being valued in the present stand-alone case will continue to be operated indefinitely and since it may also be assumed that, given the costs connected with any liquidation (e.g., redundancy programs, employee severance packages) and a high share of intangible assets, the discounted earnings value should be higher than the relevant liquidation value in the event assets are stripped, the calculation of the liquidation values was waived for the purposes of this report. A rough approximation of the liquidation value yielded the result that the liquidation value is lower than the discounted earnings value.
The valuation of net assets from a repurchasing viewpoint yields the so-called net asset value (Rekonstruktionswert) of the company, which is merely a partial net asset value because intangible assets are generally not included. This valuation has no independent significance for calculating the overall value of an ongoing company. Thus, no net asset value was computed in the present case.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 37 |
The general valuation principles explained in the section above represent merely abstract parameters which must now be more specifically defined for their application to the specific objective of the valuation. Accordingly, the modification of the general valuation principles into a specific methodical approach for valuing Schering, is explained below.
The object of the valuation is Schering AG on a stand-alone basis without considering possibilities arising out of business restructuring which are only possible due to the existence of the Domination and Profit and Loss Transfer Agreement. Schering AG was valued on the basis of its consolidated planned accounts. The planned accounts of Schering are presented and explained in chapter 5.
The planned accounts include all consolidated affiliated companies. Associated companies or companies for which there was no plan data in the planned accounts because they are not operative or which are of minor importance as well as participations which are not necessary for the business were taken into account as special items. Furthermore, Schering’s available cash and cash equivalents and non-operating real estate, as well as the dilution effects of stock options were taken into account as additional special items.
The value of Schering AG is computed from the discounted earnings value plus the special items.
The valuation date for the equity value of Schering AG is 17 January 2007, the intended date of the extraordinary shareholders meeting of Schering AG in which the resolution on the transfer under § 327b para. 1 AktG shall be adopted.
1 January 2007 has been set as the technical effective date of the valuation. All projected future earnings for the years 2007 et seq. were discounted to this date. The forecast earnings for the year 2006 were completely taken into account in the equity value as of 1 January 2007. The equity value established as of 1 January 2007 was compounded to 17 January 2007.
When estimating the future earnings, the uncertainty of the future earnings forecasts must be taken into account. Both risks and opportunities must be evaluated equally. Actual historical earnings serve here as an initial guideline.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 38 |
The analysis of past financial years, which was conducted in connection with calculating the equity value of Schering AG applying the discounted earnings methodology, along with the adjustments of selected items in the company’s income statement, serve the purpose of allowing — as a first step — a more accurate assessment of the basis for the respective planning.
The adjustments carried out in connection with the historical analysis (adjustment of one-time nonrecurring influences, elimination of activities sold in the meanwhile) do not affect the calculation of the equity value since the respective equity value computations are based on the results of future financial years. Thus, any adjustments made to historical results serve merely plausibility purposes. Therefore, only the major extraordinary effects are taken into account when making adjustments for the past.
The planned accounts consist of projected income statements and projected balance sheets. The detailed financial planning phase covers the forecast for the year 2006 as well as the planned accounts for the years 2007 through 2009. The sustainable earnings period covers the financial years 2010 and thereafter.
The planned accounts have been prepared according to the International Financial Reporting Standards (IFRS). As a result of the strategic new focus of Schering AG completed in the fiscal year 2005 and the related change in the definition of business areas and indication areas, the adjusted presentation covers only the past years 2004 and 2005.
The preparation of the planned accounts is part of the regular internal financial planning and reporting procedure within Schering AG. This also serves as the basis for performance based salaries in the Schering Group. The planned accounts used for the valuation are based on the planning prepared in fall 2006 and were passed by the Management Board in November 2006. The operational planning of Schering takes account of the explicitly expected changes concerning prices and costs. It is a nominal planning.
The planning process took place on a stand-alone basis and does not reflect the integration measures intended after the completed registration of the Domination and Profit and Loss Transfer Agreement, especially not the planned transfer and combination of subsidiaries of Schering and companies in which Schering has participations to companies in the Bayer Group, no effects under the already announced closure of locations and no further intended and/or possible measures in the context of the Domination and Profiting Loss Transfer Agreement. However, the synergies which can be realized at Schering as a result of the successful takeover offer by BSG as a member of the Bayer Group in the so-called de facto corporate group relationship were taken into account.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 39 |
Based on the business development in the first three quarters of the fiscal year 2006, a forecast for the fiscal year 2006 was made by the company which was completely taken into account in the planning period. In the course of the forecast, the effects of a slightly more positive estimation of the business development as well as the nonrecurring expenses due to take over bids for Schering AG were also taken into account. In this context, the effects of the divestments of the participation in ALK-Scherax and the radiopharmaceutical business were considered.
The planning of the activities of Schering AG related to the US dollar is based on a constant rate of exchange of the € 1.30 to the US dollar during the planning period. In order to take into account the anticipated changes in the level of the exchange rate, adjustments in the operating net income were made for activities in the regions affected by the US dollar (primarily in regard to USA, Latin America and Canada). The basis for the anticipated change in the level of the exchange-rate was provided by the current €/USD forward rates.
In connection with the valuation of Schering AG, the planned profits in the detailed planning phase are directly attributable to the shareholders in the amounts of the dividend payments and retained earnings expected.
The determination of sustainable earnings is of considerable importance when evaluating a pharmaceutical company because the dependency of the company on individual products, especially their phase in the life cycle, as well as the estimate of the products in the process of being developed (pipeline) determine the future development to a substantial degree.
In order to estimate the development of Schering AG after the end of the planning horizon of the operative plan, we have therefore developed a forecast model to represent the further development of Schering AG, taking into account both existing products but also the products currently in the course of development for the period up to the year 2015.
The forecast model reflects the development of net sales and contribution margins (as to the definition of “contribution margin” cf. section 5.1) for all essential products in the business area and, thus, enables a long term estimate of net sales and profitability for the business area. The contribution margins have been transferred to the gross profit (cf. section 5.1.6).
With regard to the product related analysis, the effects on quantities and prices, resulting from the expiration of patent protection and the anticipated generic competition, were reflected. The potential of the products in the pipeline were included in the total estimate for the respective business areas using a probability model with probabilities for realization based on the phase of development.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 40 |
In addition to the analysis of the expectations for net sales, the influence of a change in the product mix during the forecast period within the business areas on the anticipated gross profit and, thus, the observable changes in profitability were individually taken into account.
In order to estimate the development of the other functional costs, we analyzed the cost ratios of the individual types of costs in the past and in the planning period of the operative planning, taking into account the factors exercising influence at that time. These ratios establish the basis for estimating the future development of cost ratios. In doing this, influences from the forecast development of the company, structural changes and economies of scale as well as price increases were taken into account. The results were also checked for plausibility using current estimates by analysts for Schering.
Our forecast is based on the company’s internal information and external data. A major basis for estimating net sales and profitability at the product level consisted of the results of the strategic process which regularly takes place at Schering as well as the commercial evaluation process and which compare the opportunities and risks of existing and future products in a qualitative and partly quantitative manner, as well as the net present value models for important development projects prepared by Schering. Finally, we also referred to market studies and estimates by analyst for the forecast.
Finally, for purposes of this valuation we computed present values equivalent sustainable earnings for the years 2010 et seq. on the basis of this forecast taking into account the projected sustainable growth rate (please refer to section 6.3) which represent a present value equivalent amount.
| | | Schering AG |
Unauthorized translation | | Update of the Independent Expert Opinion for the determination |
of the legally binding | | of the equity value from 13 September 2006 as of 17 January 2007 |
German original | | Page 41 |
The planned consolidated income statement of the Schering Group for the fiscal years 2007 through 2009 is, including a comparison of the adjusted results for the fiscal years 2004 through 2005 as well as the forecast for the fiscal year 2006 shown in the following spreadsheet. The transfer from adjusted to unadjusted results is explained in Annex 1 to this report:
