As filed with the Securities and Exchange Commission on March 18, 2005
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 001-16143
_________________________
SCHERING AKTIENGESELLSCHAFT
(Exact name of Registrant as specified in its charter)
Not Applicable (Translation of Registrant's name into English) | Federal Republic of Germany (Jurisdiction of incorporation or organization) |
Muellerstrasse 178
13353 Berlin
Federal Republic of Germany
(Telephone: (+49-30) 468-1111)
(Address and telephone number of principal executive offices)
_________________________
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class American Depositary Shares, evidenced by American Depositary Receipts, each representing one Ordinary Share Ordinary Shares, no par value* | Name of each exchange on which registered New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of December 31, 2004:
190,000,000 Ordinary Shares
_________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark which financial statements item the registrant has elected to follow.
ITEM 17 [ ] ITEM 18 [X]
* Not for trading but only in connection with the registration of the American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
OUR USE OF TERMS AND CONVENTIONS
Schering Aktiengesellschaft is incorporated as a stock corporation under the laws of the Federal Republic of Germany. Unless otherwise specified or the context requires otherwise:
references to "Schering AG" are to Schering Aktiengesellschaft, the ultimate parent company of the Schering AG Group;
references to the "Schering AG Group", "the Group", "we", "us" and "our" are to Schering Aktiengesellschaft together with its consolidated subsidiaries;
references to "euro", "€" and "cents" are to the currency introduced at the start of the third stage of the European Economic and Monetary Union pursuant to the Treaty establishing the European Economic Community, as amended by the Treaty on the European Union; and
references to "U.S. dollars", "USD", "$" and "U.S. cents" are to the United States dollar and cents, the legal currency of the United States of America.
ACCOUNTING PERIODS AND PRINCIPLES
Unless otherwise specified, all references in this annual report to a "fiscal year" or "year" of Schering AG refer to a twelve month financial period ended December 31.
We prepared our Consolidated Financial Statements in accordance with the International Financial Reporting Standards (IFRSs) of the International Accounting Standards Board, formerly known as International Accounting Standards (IAS). IFRSs differ in certain material respects from United States Generally Accepted Accounting Principles. You can read about some of the principal differences in Note 37 to our Consolidated Financial Statements. Note 37 to our Consolidated Financial Statements also provides a reconciliation of our Consolidated Financial Statements to United States Generally Accepted Accounting Principles.
Unless otherwise specified, all shares and share-related information (such as per share information and share price information) have been adjusted to give effect, retroactively, to Schering AG's three-for-one share split effective June 1, 2000.
We have five geographic reporting segments. As described in Note 33 to our Consolidated Financial Statements, as of January 1, 2004, we changed the name of our former Asia/Middle East Region reporting segment to the Asia/Pacific Region and reallocated certain countries between this Region and the Europe Region. We have restated the segment financial data for 2003 and 2002 to reflect these changes.
THE SCHERING NAME
Schering AG and Schering-Plough Corporation are unaffiliated companies that have been totally independent of each other for many years. For a brief description of the historical relationship between the two companies, see "Item 4 – Information on the Company – The Schering AG Group – History". Schering AG and Schering-Plough Corporation have entered into an agreement relating to their respective use of the name "Schering". Subject to certain limited exceptions, Schering AG and the Group may not use the Schering name for commercial purposes relating to their healthcare business in the United States and Canada. Schering AG operates its pharmaceutical business in the United States and Canada under the Berlex trade name. See "Item 4 – Information on the Company – Patents and Other I ntellectual Property" for a description of this agreement between Schering AG and Schering-Plough Corporation.
FORWARD-LOOKING STATEMENTS
Some statements contained in this annual report constitute forward-looking statements. The words "believe", "anticipate", "expect", "intend", "estimate", "plan", "assume", "will", "may", "should", "risk" and other similar expressions are predictions of or indicate future events and future trends which do not relate to historical matters but identify forward-looking statements. In addition, this annual report includes forward-looking statements relating to our potential exposure to various types of market risks, such as foreign exchange rate risk, interest rate and other risks related to financial assets and liabilities and equity price risk. You should not rely on forward-looking statements because they involve known an d unknown risks, uncertainties and other factors which are, in many cases, beyond our control and may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by the forward-looking statements and from past results, performance or achievements. Certain factors that may cause such differences include but are not limited to the following:
governmental factors, including legislative and regulatory changes;
difficulties and uncertainties related to new product development;
delays and uncertainties in the product approval process;
factors affecting our ability to obtain or maintain patent or trademark protection for our key products and processes;
factors adversely affecting the sale of our key products, including safety or efficacy concerns, increased competition from other products or manufacturing or supply disruptions;
competitive factors, including pricing and product initiatives of our competitors;
legal factors, including product liability or other liability claims;
factors relating to the implementation of strategic, operational and organizational initiatives;
human resources factors, including our ability to attract and retain qualified personnel;
economic factors over which we have no control, including changes in inflation, interest rates and foreign currency exchange rates, and overall economic conditions particularly in areas such as Asia, Eastern Europe and Latin America;
adverse developments in our relationships with our development, manufacturing and marketing partners;
the impact of future investments, acquisitions and dispositions, and any delays, unexpected costs or other problems experienced in connection with such transactions, including any liabilities associated with the sale of our minority interest in Aventis CropScience;
changes in environmental laws and regulations, which could cause us to incur significant costs in connection with ongoing compliance or liability for remediation; and
other risks, uncertainties and factors inherent in our business.
For further discussion of these factors, see "Item 3 – Key Information – Selected Financial Data" and "– Risk Factors", "Item 4 – Information on the Company", "Item 5 – Operating and Financial Review and Prospects", and "Item 11 – Quantitative and Qualitative Disclosures about Market Risk".
You are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of this registration statement and are not intended to give any assurance as to future results.
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
RISK FACTORS
You should carefully consider the risks described below before deciding whether to invest in the American Depositary Receipts (ADRs). Additional risks not currently known to us or that we now consider immaterial may also harm our business, financial condition or results of operations and the value of your investment.
If any of these risks actually occur, our business, financial condition or results of operations could be negatively affected. In that case, the trading price of our ADRs could decline and you may lose all or a part of your investment in the ADRs.
Our business is subject to extensive governmental regulation including price controls
The research, development, testing, manufacturing and marketing of our products are subject to extensive governmental regulation. Governmental regulation includes inspection of and controls over testing, manufacturing, safety and environmental controls, efficacy, labeling, record keeping, sale and distribution of pharmaceutical products. Governmental regulation substantially increases the cost of developing, manufacturing and selling our products.
The approval process for new products is generally lengthy, expensive and subject to unanticipated delays. Currently, we are actively pursuing marketing approval for a number of our products from regulatory authorities in a number of countries, including the European Union, the United States and Japan. Continued growth in our revenues and profits will depend, in part, on the timely and successful introduction and marketing of some or all of such products. We cannot give you any assurance as to when or whether such approvals from regulatory authorities will be received. Failure to obtain, or delays in obtaining, regulatory clearance to market new products or existing products for new indications, as well as other regulatory actions, could adversely affect our results of operations. Even after a product is approved, it may be sub ject to regulatory action based on newly discovered facts about the safety or effectiveness of the product, on any activities which regulatory authorities consider to be improper or on changes in regulatory policy. Regulatory action may adversely affect the marketing of the product, require changes in the product's labeling or even lead to withdrawal of regulatory approval.
In addition, in order to obtain (and maintain) marketing authorizations for our products, we must comply with a variety of governmental requirements and we are subject to governmental price-related interventions. These include the requirement to present, in addition to clinical studies proving efficacy, quality and safety of products, studies demonstrating health economic advantages including quality of life, studies proving so-called clinical excellence and submission to price and reimbursement negotiations for already marketed products as well as newly launched products. Governments and major healthcare providers in particular markets are able to exert substantial pressure on market prices. Some governments in Europe, for instance, are exerting strong downward pressure on the prices of the manufacturers by influencing doctors by way of incentives or sanctions to prescribe low cost medicines. The European Commission's efforts to harmonize the disparate national health systems has so far proven not to be successful, leaving the industry exposed to ad hoc national cost containment measures. These measures particularly target manufacturers' prices. As a consequence, parallel trading of products is encouraged as arbitrageurs take advantage of the price differential between those countries where governmental interventions have succeeded in depressing prices and those countries where competitive forces are allowed. Furthermore, central government control of market prices exists in major markets such as Japan and Brazil through limits on the opportunities for financial return and growth in these markets as well as the introduction of new products.
In the United States, the products marketed by the Group’s subsidiaries are subject to a variety of programs with respect to the reimbursement by federal, state and local government entities for drugs and related products purchased by individuals, who are eligible for certain governmental health benefits. From time to time, proposals are made calling for substantial changes to the U.S. healthcare system; additionally, federal, state and local government entities have pursued methods to reduce the cost of drugs and related products for which they pay. Changes to existing governmental programs could have an impact on government reimbursement for the Group’s products in the U.S. In addition, U.S. drug companies are periodically named as defendants in lawsuits brought by government entities and other groups regarding the pricing of their products for the purpose of government reimbursement.
Exchange rate fluctuations could affect our operating result and our ability to price our products competitively
Our operations are conducted by entities in many countries and, accordingly, a substantial portion of our sales and production costs are denominated in currencies other than the euro. As a result, fluctuations between the value of the euro and other major currencies, in particular the U.S. dollar, the Japanese yen and the British pound sterling, may affect our operating results. For example, the depreciation of the U.S. dollar against the euro had a negative impact on the reported sales of our U.S. subsidiaries for inclusion in the Schering AG Group's Consolidated Financial Statements in 2002, 2003 and 2004. Moreover, some entities in our Group import and export goods and services in currencies other than their own functional currencies. The results of such entities could therefore be affected by currency fluctuations arising b etween the transaction dates and the settlement dates for these transactions. We currently hedge part of these exposures through financial instruments in the form of forward contracts and currency swaps and options. We cannot assure you that exchange rate fluctuations will not adversely affect our business, financial condition or results of operations in the future.
In addition, many of our competitors are based in Japan, the United States and other countries whose currencies fluctuate against the euro. Our business will suffer if we are unable to compensate for any competitive advantage others may derive from having a substantial portion of their costs based in a weaker currency. If our competitors benefit from weaker currencies by offering their products at prices that are lower than ours, we may need to reduce our prices to make our products competitive, lowering our profit margins.
A decline in the value of the euro could reduce the value of your investment and any dividends you receive
Fluctuations in the exchange rate between the U.S. dollar and the euro will affect the U.S. dollar equivalent of the euro price per ADR and the U.S. dollar value of any cash dividends. If the value of the euro relative to the U.S. dollar declines, the market price of the ADRs is likely to be adversely affected. Any decline in the value of the euro would also adversely affect the U.S. dollar amounts received by shareholders on the conversion of any cash dividends paid in euro on the ADRs.
Resources devoted to research and development may not yield new products that achieve commercial success
Like other pharmaceutical companies, we devote substantial resources to research and development. In the pharmaceutical industry, research and development is both expensive and time-consuming and entails considerable uncertainty. The process of developing a new pharmaceutical product from discovery through testing and registration to initial product launch typically takes between eight and twelve years, but this period varies considerably from product to product and country to country. Because of the complexities and uncertainties associated with pharmaceutical research, we cannot assure you that products currently under development by us will survive the development process and ultimately obtain the regulatory approvals needed to market such products successfully. There can be no assurances regarding the development of and com mercial success of any of the products in our current pipeline. Moreover, even after a product has received regulatory approval and has been launched, the profile of the product may exhibit unanticipated side effects which could lead to its withdrawal from the market or a significant decrease in the product's sales.
We depend on our patents and proprietary rights; several of our patents will expire
Our success depends, in large part, on our ability to protect our current and future products and to defend our intellectual property rights. We have been issued numerous patents covering our active substances, pharmaceutical formulations and combinations, manufacturing processes, technologies and products, and have filed, and expect to continue to file, patent applications seeking to protect such newly developed technologies and products. Since many of the products that we sell are licensed to us by third parties, we also rely on the patents held by such third parties. We cannot be sure that patents will be issued with respect to any of our patent applications or that any existing or future patents issued to or licensed by us will provide us with competitive advantages or will not be challenged, invalidated or circumvented by competitors.
We also rely on trade secrets, unpatented proprietary know-how and continuing technological innovation that we seek to protect, in part by confidentiality agreements with licensees, suppliers, employees and consultants. We cannot assure you that these agreements will not be breached. We also cannot be certain that we will have adequate remedies for any breach. Furthermore, we cannot be sure that our trade secrets and proprietary technology will not otherwise become known or be independently developed by our competitors or, if patents are not issued with respect to products arising from research, that we will be able to maintain the confidentiality of information relating to such products.
We may be required to defend ourselves against charges of infringement of patent or proprietary rights of third parties. Such defense could require us to incur substantial expenses and to divert significant efforts of our technical and management personnel, and could result in our loss of rights to develop or make certain products or require us to pay monetary damages or royalties to license proprietary rights from third parties. Although patent and intellectual property disputes in the pharmaceutical product area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. Furthermore, we cannot be certain that the necessary licenses would be available to us on terms we believe to be acceptable. We cannot assure you that an ad verse outcome of any dispute with respect to patents or other proprietary rights will not adversely affect our competitive position, financial condition or results of operations.
During the period of patent protection, a product is normally only subject to competition from alternative products. We routinely monitor the activities of our competitors and other third parties with respect to their use of intellectual property. For example, on March 15, 2005, we became aware of a posting on the FDA's website regarding an abbreviated new drug application (ANDA) by a third party with respect to our oral contraceptive Yasmin® , one of our best-selling products. We have not been provided to date by the third party with a statement of the basis as to why our FDA-listed patents for Yasmin® would not be valid or would not be infringed by such an application, and in any case, we are prepared to defend vigorously our patent and regulatory position with respect to Yasmin® .
Following patent expiration, the manufacturer of the patented product is likely to face increased competition through the entry of generic products into the market and a subsequent decline in market share and sales revenues. For example, the patent protection for Fludara® in the United States expired in 2003, and we have experienced a decrease in sales. Certain of our key products are no longer protected by patents (or other regulatory exclusivity measures) in our major markets, or protection for these products will expire in the near future. Many of our fertility control products have no patent protection remaining. The expiration of certain patents could adversely affect the pricing and sales with respect to these products and, consequently, could adversely affect our business, financial condition or results o f operations.
Our industry is competitive and experiences rapid technological change
We compete in the pharmaceutical industry, which is characterized by intense competition and rapid technological change. We compete with companies around the world, including large, well-established pharmaceutical and chemical companies, research and development firms, universities and other research institutions. Many of our competitors have significant financial, marketing, sales, development and technical resources. Our competitors may succeed in developing technologies and products that are more effective or cheaper than the ones which we may develop. In addition, the continuing consolidation of companies in the pharmaceutical industry might increase competitive pressures as larger suppliers are able to offer a broader product line. We cannot assure you that these developments will not render our technologies and products o bsolete and uncompetitive. Delays or unanticipated increases in the costs of development or our failure to obtain regulatory approval or market acceptance for new products and technologies could further adversely affect our competitive position and results of operations.
We depend on sales of key products
We derived approximately 36% of our net sales in 2004 from sales of four key products: Betaferon® (which is sold in the United States and Canada under the Betaseron® trademark) (16% of net sales), Yasmin® (9%), Magnevist® (6%) and Iopamiron® (5%). We believe that these key products will constitute a significant portion of net sales for the foreseeable future. Accordingly, any factor adversely affecting the sale of these key products individually or collectively could have a material adverse effect on our results of operations. The sale of these key products could be adversely affected by a number of factors, including manufacturing or supply interruptions, the development of new competitive pharmaceuticals to treat the conditions addressed by the ke y products, technological advances, factors affecting the cost of production, marketing or pricing actions by one or more of our competitors, changes in prescribing practices, changes in the reimbursement policies of third-party payors, product liability claims or other factors.
We may incur significant liabilities relating to the sale of our minority interest in Aventis CropScience
We may be subject to potential liabilities under the stock purchase agreement for the sale of our minority interest in Aventis CropScience for claims made by Bayer CropScience AG with respect to certain indemnities and representations and warranties, relating mainly to financial statement guarantees, environmental matters, tax liabilities, social contributions and product liabilities. Bayer CropScience has initiated arbitration proceedings alleging the violation of a financial statement guarantee for which Bayer CropScience is demanding payments of damages. Bayer CropScience has further notified Schering AG in several other cases about potential violations of provisions of the Aventis CropScience Stock Purchase Agreement that might lead to damages. Our liabilities under these claims and other future claims may be significant.
Existing insurance coverage may turn out to be inadequate
We aim to adequately cover foreseeable risks by insurance. Such insurance coverage, however, may turn out to not fully cover the risks to which the company is exposed. For certain risks, including certain products and product groups, adequate insurance coverage is not available on the market or not at acceptable conditions.
Our industry is susceptible to product-related liabilities
Like all pharmaceutical companies, we face potential significant risk of loss related to the use of products we market in the United States and in other regions from actions such as lawsuits. We cannot assure you that we can avoid such claims. We also cannot be sure that our product liability insurance will be adequate to cover such claims or that we will be able to get adequate insurance coverage in the future at acceptable costs. A successful product liability claim in excess of our coverage could require us to pay substantial sums. Even unsuccessful product liability claims could result in the expenditure of funds in litigation and the diversion of management time and resources and could damage our reputation and impair the marketability of our products. We are currently involved in a number of product liability cases claimi ng damages as a result of the use of our products. We do not believe, however, that the potential costs and liabilities associated with such matters are likely to have a material adverse effect on our results of operations or liquidity.
We depend on the services of our key managerial and scientific personnel
Our success depends upon the continued contributions of our key managerial and scientific personnel, many of whom have many years of experience at the Schering AG Group and would be difficult to replace. Competition for qualified personnel is intense in our industry, and we may not be successful in hiring and retaining people. If we lose the services of any key managerial or scientific personnel or cannot attract and retain other qualified personnel, our business could suffer.
ADR holders may not be able to vote or to participate in offerings of new shares
If you hold our ordinary shares in the form of ADRs, you generally can exercise your voting rights for the shares which underlie your ADRs only by instructing the depositary how to exercise these voting rights. You may not receive voting materials in time to instruct the depositary how to vote your ADRs, and as a result you may not have the opportunity to exercise a right to vote.
U.S. holders of ADRs also may not be able to participate in any offer of new shares to existing shareholders on the basis of their subscription rights because of restrictions on the offer and sale of securities in the United States under U.S. securities laws and regulations.
SELECTED FINANCIAL DATA
The selected consolidated financial data for each of the years in the three-year period ended December 31, 2004, has been derived from our Consolidated Financial Statements and the related Notes appearing elsewhere in this annual report. The selected consolidated financial data at year end and for each of the years in the two-year period ended December 31, 2001, has been derived from our Consolidated Financial Statements not included in this annual report.
We prepared our Consolidated Financial Statements in accordance with the International Financial Reporting Standards (IFRSs) of the International Accounting Standards Board, formerly known as International Accounting Standards (IAS). IFRSs differ in certain material respects from United States Generally Accepted Accounting Principles. You can read about some of the principal differences in Note 37 to our Consolidated Financial Statements. Note 37 to our Consolidated Financial Statements also provides a reconciliation of our Consolidated Financial Statements to United States Generally Accepted Accounting Principles.
You should read these selected consolidated financial data together with "Item 5 – Operating and Financial Review and Prospects" and our Consolidated Financial Statements appearing elsewhere in this annual report.
Consolidated Income Statement Data | |
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| Year ended December 31, |
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| 2004 | 2004 | 2003 | 2002 | 2001 | 2000 |
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| $(3) | € | € | € | € | € |
|---|
| (in millions, except per share data) |
|---|
IFRSs: | | | | | | |
Net sales | 6,643 | 4,907 | 4,828 | 5,023 | 4,842 | 4,493 |
Operating profit | 1,030 | 761 | 686 | 741 | 668 | 640 |
Financial result | (12) | (9) | 15 | (23) | 30 | (5) |
Profit before taxes | 1,018 | 752 | 701 | 1,145 | 698 | 635 |
Income taxes | (337) | (249) | (255) | (276) | (270) | (290) |
Profit for the period | 681 | 503 | 446 | 869 | 428 | 345 |
Attributable to: | | | | | | |
Net profit | 677 | 500 | 443 | 867 | 418 | 336 |
Minority interest | 4 | 3 | 3 | 2 | 10 | 9 |
Weighted average number of shares outstanding(1) | 191.21 | 191.21 | 194.41 | 197.30 | 198.00 | 198.00 |
Earnings per share (basic)/ADS(1) | 3.53 | 2.61 | 2.28 | 4.39 | 2.11 | 1.70 |
Earnings per share (diluted)/ADS(1) | 3.53 | 2.61 | 2.28 | 4.38 | 2.10 | 1.68 |
Dividends per share/ADS(1)(2) | 1.35 | 1.00 | 0.93 | 0.93 | 0.83 | 1.00 |
United States GAAP: | | | | | | |
Net profit | 637 | 471 | 489 | 848 | 403 | 306 |
Earnings per share (basic)/ADS(1) | 3.33 | 2.46 | 2.52 | 4.30 | 2.04 | 1.55 |
Earnings per share (diluted)/ADS(1) | 3.33 | 2.46 | 2.51 | 4.29 | 2.03 | 1.53 |
Consolidated Balance Sheet Data
(at period end date) | |
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| As of December 31, |
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| 2004 | 2004 | 2003 | 2002 | 2001 | 2000 |
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| $(3) | € | € | € | € | € |
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| (in millions, except per share data) |
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IFRSs: | | | | | | |
Total assets | 7,568 | 5,590 | 5,389 | 5,392 | 5,263 | 5,206 |
Cash, cash equivalents and marketable securities | 1,378 | 1,018 | 742 | 660 | 298 | 654 |
Non-current borrowings | 269 | 199 | 36 | 38 | 45 | 43 |
Provisions for pensions and similar obligations | 778 | 575 | 576 | 560 | 1,035 | 1,278 |
Equity before minority interest | 4,074 | 3,009 | 2,906 | 2,940 | 2,563 | 2,298 |
Minority interest | 23 | 17 | 16 | 15 | 15 | 92 |
Total equity(4) | 4,097 | 3,026 | 2,922 | 2,955 | 2,578 | 2,390 |
United States GAAP: | | | | | | |
Total shareholders' equity | 3,886 | 2,870 | 2,831 | 2,800 | 2,464 | 2,305 |
(1) All share and per share data for 2000 have been adjusted to give effect, retroactively, to Schering AG's three-for-one share split effective June 1, 2000.
(2) Includes bonus dividends of €0.33 per share declared with respect to 2000. The dividend with respect to 2004 is subject to approval at the Annual General Meeting to be held on April 14, 2005.
(3) The 2004 figures have been translated solely for the convenience of the reader at an exchange rate of $1.3538 to €1.00, the noon buying rate for the euro in the City of New York as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2004.
(4) The 2000 to 2003 figures were restated to give effect to the changes in the presentation of Total equity (IAS 1) and in the accounting for employee share purchase plans (IFRS 2).
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EXCHANGE RATES
Schering AG pays any dividends on its shares in euro. Furthermore, prices for Schering AG's shares on the Frankfurt Stock Exchange are quoted in euro. Fluctuations in the exchange rate between the euro and the U.S. dollar will affect:
the U.S. dollar equivalent of the euro price of our shares listed on the Frankfurt Stock Exchange and, as a result, the market price of the ADRs in the United States;
the U.S. dollar equivalent of cash dividends on the shares paid in euro; and
our earnings.
The noon buying rate for the euro in The City of New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York on March 1, 2005, was $1.3189 per €1.00.
The following table sets forth the average noon buying rate for the euro for each of the previous five years:
Year | Average(1)
(Dollar per €1.00) |
|---|
| |
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2000 | 0.9207 |
2001 | 0.8909 |
2002 | 0.9496 |
2003 | 1.1360 |
2004 | 1.2478 |
(1) Average of the noon buying rates on the last day of each month during the year.
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The following table sets forth the high and low noon buying rate for the euro for each of the previous six months:
| High | Low |
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2004 | (Dollar per €1.00) |
| | |
September | 1.2417 | 1.2052 |
October | 1.2783 | 1.2271 |
November | 1.3288 | 1.2703 |
December | 1.3625 | 1.3224 |
2005 | | |
January | 1.3476 | 1.2954 |
February | 1.3274 | 1.2773 |
For a more complete discussion of exchange rate fluctuations and the hedging techniques we use to manage our exposure to these fluctuations, please see "– Risk Factors", "Item 5 – Operating and Financial Review and Prospects" and "Item 11 – Quantitative and Qualitative Disclosures about Market Risk".
DIVIDENDS
Schering AG has paid the following cash dividends in respect of its ordinary shares for the periods indicated. Euro amounts with respect to dividends are translated by the ADR depositary into U.S. dollars on the date of payment April 28, 2000 ($0.9089 per €1.00; noon buying rate); April 27, 2001 ($0.8895 per €1.00; exchange rate set by the ADR depositary); April 15, 2002 ($0.8789 per €1.00; exchange rate set by the ADR depositary); April 11, 2003 ($1.0692 per €1.00; exchange rate set by the ADR depositary); and April 19, 2004 ($1.2004 per €1.00; exchange rate set by the ADR depositary). The translation of the proposed 2004 dividend amount into dollar was performed using the noon buying rate for the € on December 31, 2004 ($1.3538 per €1.00).
| Year ended December 31, |
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| 2004(3) | 2003 | 2002 | 2001 | 2000(1)(2) |
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| € | $ | € | $ | € | $ | € | $ | € | $ |
Total dividend | 1.00 | 1.35 | 0.93 | 1.12 | 0.93 | 0.99 | 0.83 | 0.74 | 1.00 | 0.89 |
(1) Adjusted to give effect, retroactively, to Schering AG's three-for-one share split effective June 1, 2000.
(2) The dividend with respect to 2000 consisted of a regular dividend of €0.67 per share and a bonus dividend of €0.33 per share.
(3) The dividend with respect to 2004 is subject to approval at the Annual General Meeting to be held on April 14, 2005.
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Holders of ADRs on the relevant record date will be entitled to receive any dividends payable with respect to the ordinary shares underlying the ADRs, subject to the terms of the deposit agreement under which the ADRs are issued. Subject to exceptions provided in the deposit agreement, cash dividends paid in euro will be converted by the depositary to U.S. dollars and paid by the depositary to holders of ADRs, net of conversion expenses of the depositary, and in accordance with the deposit agreement. The rights of holders of ADRs with respect to any dividends or other distributions on the ordinary shares underlying the ADRs will be governed by the deposit agreement and may be different from the rights of holders of ordinary shares.
For a discussion of the material German and U.S. Federal income tax provisions regarding the taxation of dividends on the ordinary shares and the ADRs, see "Item 10 – Additional Information – Taxation".
Item 4. Information on the Company
THE SCHERING AG GROUP
INTRODUCTION
We are a global research-based company engaged in the discovery, development, manufacture, marketing and sale of pharmaceutical products. We currently operate eight research and development centers in Europe, the United States and Japan, produce products in facilities located in Europe, the United States, Latin America and Asia, and market and sell our products in over 100 countries worldwide.
Our research and development efforts are primarily concentrated on the commercialization of novel technologies for unmet medical needs in our four core business areas: Gynecology&Andrology, Oncology, Diagnostic Imaging and Specialized Therapeutics. During 2004 and 2003, our research and development expenditures totaled €919m (19% of our total net sales) and €924m (19% of our total net sales), respectively.
As a global pharmaceutical company with extensive worldwide operations, we manage our businesses on a geographic basis. Our pharmaceutical business consists of five geographic reporting segments: Europe, the United States, Latin America/Canada, Japan and Asia/Pacific (formerly Asia/Middle East). Other Activities (mainly our pharmaceutical chemicals business) are managed on a worldwide basis and are therefore presented as a separate segment.
For the year ending December 31, 2004, we achieved net sales of €4,907m, operating profit of €761m, and net profit of €500m.
The Group comprises over 140 subsidiaries worldwide with a workforce of over 25,000 employees at the end of December 2004.
Schering Aktiengesellschaft is incorporated as a stock corporation under the laws of the Federal Republic of Germany. Schering AG was incorporated in 1871. Schering AG's principal executive office is at Muellerstrasse 178, 13353 Berlin, Federal Republic of Germany, and its telephone number is (+49 30) 468-1111.
STRATEGY
We are committed to expanding our pharmaceuticals business by aiming at market leadership with innovative products in specialized areas
Our core mission is to make a recognized contribution to medical progress and to improve the quality of life of those who use our products. We have established a leading market position in female contraception, multiple sclerosis, and in-vivo diagnostics and aim at leadership in menopause management, gynecological therapy and a strong global position in oncology.
In order to assess the effectiveness of our efforts to attain our strategic objectives, we recently performed a comprehensive review of the strategic, operational and organizational aspects of the company, called the FOCUS Initiative. We announced the initial results from this review in June 2004.
As a result of the FOCUS Initiative, with effect from January 1, 2005, we have decided to focus our activities on four core business areas: Gynecology&Andrology, Oncology, Diagnostic Imaging and Specialized Therapeutics. In order to fully exploit the underlying potential in each of our business areas, we also shifted our research and development resources from non-core fields into core portfolio areas with the highest growth opportunities. Therefore, all research and development activities in the area of Cardiovascular and Central Nervous System diseases (with the exception of Multiple Sclerosis and Spheramine® in Parkinson’s disease) will be terminated. The formation of the Oncology core business area, which was formerly part of the Specialized Therapeutics business area, h ighlights our commitment to achieving a strong global position in this field. Another result of the FOCUS Initiative is our decision to operate our dermatology business, which had formerly been a core business area, through a newly-formed company, Intendis GmbH. We believe that this stand-alone company will have the flexibility to achieve critical mass by actively pursuing cooperations and partnerships with third parties. Since January 1, 2005, Intendis is responsible for our worldwide dermatology business and is operating primarily through its own subsidiaries in Europe, Japan and North and South America. As a result of our operational review, we will continue to consolidate our production network, streamline our administrative processes and improve overall efficiency. We believe that the successful implementation of the FOCUS Initiative will enhance our competitive position and our ability to achieve profitable growth in our core business areas.
We are committed to the creation of shareholder value. We believe that the keys to building shareholder value are demonstrable profitable growth over the next several years and the longer term (in part through the successful implementation of the FOCUS Initiative), measures such as share repurchases and dividend growth, and, where appropriate, value creation through strategic acquisitions and spin-offs and equity carve-outs of non-core businesses. We capitalized on our cash position with share repurchase programs since 1998. Four million shares were repurchased during 2004. Dividend growth, management's focus on constant earnings growth, and the use of stock-based compensation programs to align the interests of our employees and shareholders emphasize our commitment.
Growth strategy
We are pursuing growth in all major pharmaceutical markets. By focusing our research, development and marketing resources on our four core business areas, we believe that we have further increased our capability to compete successfully. Specifically, our growth strategy aims at achieving the following objectives:
Leadership position in gynecology and andrology
Schering AG is the major global player in female healthcare. We are the world market leader in fertility control in both volume terms and value terms. The most prominent products are the oral contraceptive Yasmin®, which has become the leading hormonal contraceptive worldwide, and the intrauterine hormone delivery system Mirena®. In menopause management, the key success drivers will be Angeliq®, Menostar® and the Climara® product family. We also offer a range of products for the treatment of hormone-related disorders in women, including Diane®-35 and Androcur®-10. We are currently developing innovative therapy options for uterine fibroids and endometriosis. In andrology, we offer successful preparations for the treatm ent of male hypogonadism (impaired function of the testes), including Nebido™ and Testogel®. Schering AG’s product pipeline is rich with innovative and unique products that meet women’s and men’s individual needs in our indication fields and allow us to further consolidate our unique position and expertise in gynecology and andrology.
Expand and exploit the full potential of our oncology franchise and pipeline
We aim to achieve growth with our products in the field of oncology. Our recognition of the importance of the oncology franchise is reflected by our decision, as part of the FOCUS Initiative, to form a separate core business area dedicated to oncology. In oncology, we are developing a leading position in hematology and a significant presence in the field of solid tumors. Our key near-term opportunities for building our presence in solid tumor oncology include the anti-angiogenic compound, PTK/ZK, which we are developing in collaboration with Novartis International AG. PTK/ZK is in Phase III of clinical development for the treatment of colorectal cancer and will be marketed in collaboration with Novartis. Our bisphosphonate, Bonefos®, which we want to register for the prevention of bo ne metastases in breast cancer patients, shall deliver near term growth.
Achieve significant business growth in specialized therapeutics through a leading role in multiple sclerosis
In therapeutics, we are a leading company in the field of multiple sclerosis (MS) with our product Betaferon®/Betaseron® and we are aiming to develop this indication area further through new ways of treatment. Betaferon®/Betaseron® was the first therapy to offer more than just symptom relief; it suppresses disease activity in patients with relapsing-remitting MS. It reduces the relapse rate by one third, and severe and moderate relapses are reduced by 50%. A new pre-filled diluent syringe has been launched in Europe and Japan in 2003 and in the U.S. in 2004. Designed with patient comfort in mind, the new innovation shortens preparation time, helping to simplify injections. This adds another level of convenience for Betaferon®/Betaseron® users. We are stepping up life-cycle activities and marketing efforts on Betaferon®/Betaseron®, and developing alternative treatment options and application methods.
We are also developing Leukine®, an infection-fighting, white-blood cell stimulant, which is used in hematological oncology, for the use in Crohn's disease. The development of Leukine® for Crohn’s disease, which is currently in Phase III, offers significant sales potential.
Expand our business in diagnostic imaging
In our diagnostics and radiopharmaceuticals business, we are a global leader in the X-ray contrast media and MRI contrast media fields. We aim to increase sales of contrast media for MRI and to secure our X-ray business. In the X-ray contrast media market, we are a leading company worldwide. In the MRI contrast media market, we are the leader in terms of global market share. We aim to sustain this leadership and to continue growth through innovative products for new applications of MRI contrast media, such as Primovist®, a liver-specific MRI contrast agent, which was approved in Europe in 2004. We also aim to extend the use of our key marketed MRI contrast media, Magnevist® and Gadovist®, by obtaining approval for additional indications. In addition to imaging agents, we develop, manufacture and market injection systems and disposable products through our U.S. subsidiary Medrad, Inc., which is a worldwide market leader in vascular injection systems for the application of contrast agents in computed tomography (CT), angiography and MRI.
In the medium to long term, we believe that a significant growth opportunity exists in molecular imaging using innovative imaging agents, one example being our radiopharmaceutical product Flucis® for positron emission tomography (PET). We are pursuing innovative molecular imaging agents through in-house research and development as well as in-licensing. The field of oncological radiopharmaceuticals presents a particularly attractive opportunity given our expertise in oncology and the potential for synergies between our diagnostics and oncology businesses. In addition, we see a high potential in the market of neuro-imaging agents.
Developing our business in the United States into a growth engine
As the world's largest and one of the fastest growing markets, the United States is a high strategic priority for us. The United States offers pricing flexibility, broader marketing opportunities, such as direct-to-consumer advertising, and a business environment that nurtures pharmaceutical innovation. We expect growth to be achieved through increasing our presence in the areas of female contraception, menopause management, contrast media, oncology, as well as in the area of vascular injection systems for the application of contrast media.
Broaden our business in Japan
In Japan, where we traditionally have been strong in diagnostics, we are building a basis for sales growth in other business areas. Our future business expansion plans in Japan, the second-largest individual pharmaceutical market in the world, center on broadening our portfolio in the areas of oncology, specialized therapeutics and female healthcare. We have established a leading market position in the Japanese oral contraceptive market. In the next years, we expect to introduce Mirena®. It is our aim to attain market leadership in female healthcare. In X-ray and MRI, we seek to remain a market leader and to introduce further products in MRI. In therapeutics, we created a new market through the launch of Betaferon® for the treatment of MS. We are also establishing a position in hematological onco logy with Fludara® and strive to gain a strong position in solid tumors.
Long term growth through internal discovery and collaboration efforts
The foundation of our long term growth is to continue our strong emphasis on research and development, with a special emphasis on reducing the time from discovery to product launch. We intend to defend and build upon our market position in our core business areas by commercializing and marketing novel products that benefit from advances in biotechnology and molecular science, discovered and developed through our internal efforts and our network of collaboration partners or obtained through in-licensing or acquisitions. In 2004, we invested approximately 19% of our net sales in research and development activities. We complement our internal research and development efforts, presently being carried out by approximately 4,400 employees at eight research and development centers, with a network of collaboration arrangements.
One of our strategic objectives in research and development is to build a strong global position in oncology. We are focusing both on hematological oncology and on novel technologies for the treatment of solid tumors. Our research, development and collaboration efforts in this field are concentrated in the area of biotechnology, including anti-angiogenesis, gene discovery and new tumor markers. To respond to the challenges of modern drug discoveries such as effective research information sciences and a growing pressure to deliver drug candidates in the development pipeline, we are globalizing discovery and making better use of organizational synergies. To operationalize these goals, we have integrated our worldwide research activities into a Corporate Research business area. This business area ensures the effective utilization of state-of-the-art technology platforms thereby contributing to an efficient and high-quality drug discovery process. Research information sciences have been given particular emphasis as a strategically important capability for drug discovery.
There can be no assurance as to our success in implementing our strategy or achieving some or all of our strategic objectives. We also may not be successful in the implementation of the strategic, operational and organizational changes that we have adopted as part of the FOCUS Initiative, or achieving the results contemplated by the FOCUS Initiative.
Competitive Strengths
We believe that our competitive strengths include the following:
Focused product portfolio and research and development efforts. Our product portfolio and research and development efforts are focused on specialized areas. We have established a leading market position in female contraception, multiple sclerosis, and in-vivo diagnostics and aim at leadership in menopause management, gynecological therapy and a strong position in oncology. We believe that this specialization results in a more efficient utilization of our resources in research and development as well as marketing. Our technological expertise and reputation for high quality products and customer service in these areas assist us in our efforts to establish and defend leading market positions around the world.
Strong position in gynecology and andrology. A commitment to gynecological healthcare is one of our traditional strengths. Our female healthcare business is concentrated in the areas of female contraception, menopause management and gynecological therapy, for example, the treatment of uterine fibroids. Our gynecological therapy business is designed to meet the lifetime needs of women. We are one of the major global players in this area of gynecology. In andrology, we are focusing on the area of male hypogonadism.
Competence in commercializing and marketing new technologies and products. We have a demonstrated competence in identifying, commercializing and marketing new technologies and products first developed by niche companies in the pharmaceutical and biotechnology industries. This ability will become increasingly important as the cost of developing new drugs continues to increase and a premium is placed on the speed of bringing new products to market.
Leadership in diagnostics. We continue to be a global leader in the discovery, development and marketing of in-vivo diagnostic products. We are the leading company worldwide in terms of sales and market share in MRI contrast media and hold a leading position in X-ray contrast media. Our discovery efforts in diagnostics also distinguish us from our competitors. We believe that our activities in the field of radiopharmaceuticals will both benefit from and contribute to our competence in diagnostics.
High quality sales and marketing staff and proprietary distribution network. We have a worldwide marketing and sales staff of over 8,500 dedicated employees. We appreciate that a commitment to the initial and continuing training and retention of our sales force is an important competitive factor. Our representatives are dedicated exclusively to the marketing of our products and we believe they enjoy an excellent reputation for their specialized knowledge of our products and therapies and their dedication to customer service. We believe this contributes to our objective of providing a superior level of customer service.
History
We have been engaged in the pharmaceuticals business for over 130 years. Our founder, Ernst Schering, established a pharmacy in Berlin, Germany, in 1851, and on October 23, 1871, formed our predecessor company under the name "Chemische Fabrik auf Actien (vorm. E. Schering)". During the course and in the aftermath of World War II, substantially all of Schering AG's subsidiaries, patents, trademarks and other properties located outside of Germany were liquidated, confiscated or expropriated. Following the entry of the United States in World War II, the United States government confiscated the assets of German companies in the United States, including Schering AG's subsidiary Schering Corporation. This subsidiary was operated by a guardian appointed by the United States government for the next decade and, in 1952, was di vested by the United States government to an investment group. Following a merger, the company became known as Schering-Plough Corporation in 1971. Schering AG and Schering-Plough Corporation have been totally independent of each other for many years, and have an agreement relating to the use of the name "Schering". See "– Patents and Other Intellectual Property" for a description of this agreement. Schering AG operates its pharmaceutical business in the United States and Canada under the Berlex trade name.
The Schering AG Group significantly restructured its operations over the past decade to concentrate on its pharmaceutical business. We also have expanded our pharmaceutical product portfolio and obtained promising new technologies through a number of small- to mid-sized acquisitions and licensing as well as research and development collaboration relationships including, most recently, our acquisition of Leukine® from Immunex in 2003.
For a description of certain of our more significant licensing and collaboration relationships, see "– Products" and "– Research and Development – Collaboration Efforts".
PRODUCTS
As part of the FOCUS Initiative, a strategic realignment for leveraging long term profitable growth, we are concentrating on those product areas within our core competence that we believe have the most attractive growth potential. Starting January 1, 2005, Schering AG will focus its activities on the following four business areas: Gynecology&Andrology, Oncology, Diagnostic Imaging and Specialized Therapeutics. However, sales of 2004 were still recorded under the previous business structure, which comprised products from the business areas Gynecology&Andrology, Specialized Therapeutics, Diagnostics&Radiopharmaceuticals and Dermatology. For a discussion of certain products and processes which we are currently developing, see "– Research and Development".
In addition to net sales of products from our four core business areas, we derive net sales from certain other sources comprised of third party businesses (sales cooperations and toll manufacturing principally of pharmaceutical chemicals for third parties) and curtailments of sales (granted bonuses, sales discounts and cash discounts). These net sales are referred to as net sales from "Other Sources" in this annual report.
Gynecology&Andrology
The following table sets forth selected Gynecology&Andrology products presently marketed by the Group.
| | | Net sales |
|---|
Product | Active ingredient(s) | Indication | 2004 | 2003 |
|---|
| | | (€million) |
|---|
Yasmin® | Drospirenone/ethinylestradiol | Combined oral contraceptive | 429 | 290 |
Mirena® | Levonorgestrel | Intrauterine hormonal
contraceptive | 199 | 164 |
Diane® | Cyproterone acetate/
ethinylestradiol | Androgen dependent disorders in women
(including acne, seborrhea, hirsutism) | 186 | 202 |
Microgynon®/Levlen® | Levonorgestrel/
ethinylestradiol | Combined oral contraceptive | 128 | 124 |
Meliane® | Gestodene/ethinylestradiol | Combined oral contraceptive | 120 | 119 |
Femovan® | Gestodene/ethinylestradiol | Combined oral contraceptive | 76 | 84 |
Climara® | Estradiol | Hormone therapy (patch) | 60 | 69 |
Valette® | Dienogest/ethinylestradiol | Monophasic oral contraceptive | 58 | 47 |
Our comprehensive female healthcare program develops preparations in the areas of female contraception, menopause management and gynecological therapy.
In our male healthcare program, we are engaging in the research and development of products for male fertility control, age-related diseases and sexual disorders. Products for the treatment of hypogonadism (suppressed function of the testes with reduced testosterone production) are part of the Group's range of healthcare products for men.
Female contraception
Hormonal contraceptives are a particularly effective, convenient and fully reversible form of contraception.
Hormonal contraceptives can be distinguished according to their composition into combined products (estrogen plus progestin) and progestin-only products. Hormonal contraceptives are available as either tablets, non-oral formulations or long-lasting preparations, including intrauterine systems (IUS), injectables or implants.
Oral contraceptives
Combined oral contraceptives are the most commonly used form of oral contraception. They contain estrogen and progestin.
Combined oral contraceptives generally can be subdivided into monophasic, biphasic and triphasic preparations. Monophasic preparations contain a dosage of an estrogen and a progestin and deliver a constant daily dose of active substances throughout the month. In biphasic and triphasic preparations, the hormone doses vary during the treatment cycle, in order to mimic the variable hormone production of the physiological cycle, while keeping the total dosage of exogenous steroids as low as possible.
Over the years, the estrogen content has been gradually reduced. The standard dose today is 0.03 mg ethinylestradiol per day (so-called low dose oral contraceptives). However, there are also preparations with an ethinylestradiol dose as low as 0.02 mg or 0.015 mg per day.
The dose of progestin in oral contraceptives has also been reduced over time and new progestins with improved pharmacological properties have been developed. Depending on their chemical origin, progestins can display various effects beyond their progestational (contraceptive) efficacy, e.g. beneficial effects on skin and hair.
Our portfolio of oral contraceptives includes:
Yasmin®. Yasmin® is a low dose monophasic oral contraceptive containing the progestin drospirenone. The anti-mineralocorticoid activity of drospirenone counterbalances potential estrogen-induced fluid retention. Clinical studies have shown that Yasmin® can improve the general well-being of women and has positive effects on symptoms of premenstrual syndrome (PMS). Due to drospirenone's anti-androgenic properties, positive effects on mild to moderate acne and seborrhea were also observed. Yasmin® was launched in the United States as well as in a number of European countries in 2001. At the end of 2004, Yasmin® was marketed in more than 70 countries worldwide.
Microgynon® (marketed in the United States as Levlen®). Microgynon® is a monophasic oral contraceptive containing levonorgestrel and is available in the United States, Europe, Latin America and Asia.
Meliane®. Meliane® is a low dose monophasic oral contraceptive containing gestodene. The product exhibits high contraceptive reliability, cycle control and tolerability. Meliane® was first launched in France in 1995 and is available in Europe, Latin America and Asia.
Femovan®. Femovan® is a monophasic oral contraceptive containing gestodene. The product shows an excellent tolerability, contraceptive reliability and cycle control. Femovan® was first launched in 1987 and is available in Europe, Latin America and Asia.
Valette®. Valette® is a low dose monophasic oral contraceptive containing dienogest. Valette® demonstrates high contraceptive reliability, excellent tolerability and a stabilizing effect on irregular menstrual periods. The anti-androgenic activity of dienogest has beneficial effects on acne and seborrhea. Valette® was first launched in Germany in 1995. Today, Valette® is available in a number of European countries.
Triquilar® (marketed in the United States as Tri-Levlen®). Triquilar® is an oral contraceptive containing levonorgestrel in a triphasic dosage regime, mimicking the variable hormone production of the menstrual cycle while keeping the total dose of exogenous steroids as low as possible. Triquilar® was first launched in 1979 and is available in Europe, Latin America, Asia, the United States and, since 1999, in Japan.
Miranova® (marketed in the United States as Levlite®). Miranova® is a low dose monophasic oral contraceptive containing levonorgestrel. In addition to high contraceptive reliability, Miranova® provides good cycle control with a low frequency of intermenstrual bleedings and a low incidence of side effects. Miranova® was launched in Germany in 1996, while Levlite® was launched in the United States in 1998.
Non-oral contraceptives
Mirena®, an intrauterine progestin-containing delivery system, is a non-oral alternative in contraception, and one of our fastest growing products as measured by net sales. Mirena® combines the advantages of local hormonal and intrauterine contraception. Mirena® is inserted into the uterus, where it releases low doses of levonorgestrel for a period of five years. Due to its anti-proliferative effect on the endometrium, Mirena® also leads to a significant reduction in both the amount and duration of menstrual bleeding. Therefore, Mirena® is increasingly recognized as the therapy of choice in cases of abnormally heavy and prolonged menstruation. Mirena® was first launched in Europe in 1990 and in the United States in 2001. It is also a vailable in Asia and Latin America.
Hormonal contraception can also be achieved using intramuscular injections, which ensure a long-lasting effect. Our injectable contraceptive, Norigynon® (Mesigyna®), contains an estrogen and progestin derivative and is injected once a month, while Noristerat® relies on a progestin-only effect and is administered once every three months.
We also offer levonorgestrel-containing contraceptive implants. These implants are placed under the skin where they release low doses of hormone for 5 years.
Menopause Management
Menopause is part of a woman’s natural aging process. During menopause, the woman’s ovaries produce lower levels of the hormones estrogen and progestin and she is no longer able to become pregnant. Strictly speaking, menopause means cessation of menstruation. However, the term is also used to describe the years leading up to and following this event.
Hormonal changes in the menopause can be related to a variety of disorders and health risks, and can seriously impair quality of life. The loss of ovarian hormones, particularly estrogen, may lead to menopausal symptoms such as hot flashes, sweating attacks, sleep disorders, depressed moods, nervousness and vaginal dryness. In addition, lower estrogen levels may lead to a reduction of bone mineral density and osteoporosis.
Menopause management is a holistic approach to maintaining health and quality of life during menopause and comprises a healthy lifestyle as well as appropriate and individualized medical intervention. The use of hormones in menopausal women is an important aspect of menopause management. Hormone preparations are the most effective option for the treatment of menopausal symptoms. Estrogen therapy is the most physiological option to prevent postmenopausal osteoporosis. It is essential that decisions with regard to dose, duration and form of hormone application are based on the individual woman’s medical profile. The lowest effective dose should be considered according to individual patient needs and therapy decisions should be reviewed on a regular basis.
We offer hormone preparations for individualized menopause management.
Angeliq®(estradiol 1.0 mg + drospirenone 0.5 or 2.0 mg). Angeliq® is the first low dose preparation for hormone therapy with the novel progestin drospirenone and natural estrogen. Angeliq® provides relief of menopausal symptoms such as hot flashes, sweating attacks and vaginal dryness, and protects against post-menopausal osteoporosis by increasing bone mineral density. Drospirenone provides additional health benefits, such as the unique property of reducing water retention, which is often associated with the use of estrogen and other synthetic progestins. Angeliq® has been marketed since 2004 in a number of countries in Europe as well as Latin America and Asia and will be launched in more countries throughout 2005. In September 2004, we received an approvable letter from the FDA for Ang eliq®. Recent clinical data has shown positive effects of Angeliq® on blood pressure. The product is currently in Phase III clinical trials to test its benefits in the treatment of hypertension.
Climen®. Climen® is a sequentially combined oral preparation. It contains estradiol valerate and cyproterone acetate. Climen® effectively reduces climacteric complaints and prevents postmenopausal osteoporosis. In addition, Climen® has a positive influence on androgen-related skin disorders like acne, seborrhea and androgenic hair loss.
Menostar®. With Menostar®, Schering AG offers a completely new form of therapy. Menostar® is a micro-dose estradiol patch, specifically developed for the prevention of osteoporosis in postmenopausal women. It is designed to help return estrogen levels to the lowest physiological level proven to prevent bone loss. With only 14 micrograms of estrogen per day, Menostar® represents the lowest dose of transdermal estrogen. Menostar® is a convenient thumbnail-sized, once a week patch. Menostar® is available in the U.S. since 2004. In the European Union, Menostar® has been submitted for registration in 2004. An oral version of Menostar® is currently being developed and is in Phase II/III of clinical studies.
Climara®. Climara® is a transdermal patch of estrogen replacement. Climara® delivers estrogen directly into the blood stream in the same manner as when it is naturally produced in a woman’s body. Climara® is indicated for the treatment of moderate to severe vasomotor symptoms such as hot flashes and night sweats. Climara® was first launched in the United States in 1995. In 1999, Climara® received FDA approval for the prevention of osteoporosis. Climara® is available worldwide.
Climara Pro™(estradiol/levonorgestrel transdermal system), a thin, translucent patch, is the first once a week, combined hormone therapy for the relief of moderate to severe vasomotor symptoms associated with menopause. With the addition of levonorgestrel, Climara Pro™ is indicated for use by women with an intact uterus, whereas Climara® is appropriate for women who have had a hysterectomy. The product was approved in the United States in November 2003.
Climodien®. Climodien® contains estradiol valerate combined with dienogest in a continuously combined regimen for oral treatment of climacteric symptoms. No cyclical bleeding is induced in the majority of users, thus providing a therapeutic option for women not wishing to return to regular menstrual bleeding. Climodien® was first launched in Germany in 2001. Today, Climodien® is available in a number of European countries. Climodien® ½, the low dose variation of Climodien®, contains 1 mg estradiol valerate combined with 2 mg dienogest in a continous combined regimen for the treatment of climacteric symptoms in the postmenopause and was approved in Europe in February 2005.
Gynecological therapy
We offer a range of products for the treatment of certain hormone-related gynecological disorders, including Diane®, Androcur® and Progynon® C.
Diane® is labeled for the treatment of acne but exerts the same contraceptive reliability as combined oral contraceptives. Androcur® is an anti-androgen used, in certain cases in combination with Diane®, for the treatment of hirsutism (symptoms of masculine hair growth in women), acne and seborrhea caused by increased androgen levels.
Progynon® C is an estrogen for the treatment of primary and secondary amenorrhea.
Andrology
Our male healthcare program includes products for the treatment of male hypogonadism (testosterone deficiency):
Nebido™ (testosterone undecanoate). In November 2003, we received a registration in Finland for Nebido™, the first long-acting testosterone injection. It has two major advantages compared to previously available preparations. Firstly, the release pattern is well controlled so that the blood concentrations will stay within the desired physiological range. Secondly, the duration of action could be extended considerably. Nebido™ needs to be injected only four times per year instead of approximately 20 injections of testosterone enanthate, the current standard therapy. Nebido™ has been launched in Europe in the second half of 2004. The product has been submitted for registration in Latin America and Asia.
Testogel®. Testogel® is a transdermal gel formulation containing native testosterone for daily application. In 2003, we launched Testogel® in the majority of European countries including Germany, Austria, Finland, the United Kingdom and Portugal. Testogel® was licensed from Besins International in 2002 for the markets of the European Union (excluding France), Switzerland, Australia, Turkey and New Zealand.
Testoviron®-Depot 250. Testoviron®-Depot 250 contains testosterone enanthate (TE) in an oily formulation for injection every two to four weeks for the treatment of hypogonadism (underfunction of the testes with reduced testosterone production). TE is a testosterone ester which, after injection, is quickly broken down to release the active ingredient testosterone.
We have also developed cyproterone acetate (Androcur®) – the first anti-androgen for the treatment of inoperable prostatic carcinoma.
Specialized Therapeutics
The following table sets forth selected therapeutic products presently marketed by the Group.
| | | Net sales |
|---|
Product | Active ingredient(s) | Indication | 2004 | 2003 |
|---|
| | | (€million) |
|---|
Betaferon®/Betaseron® | Interferon β-1b | Multiple sclerosis (for relapsing-remitting and secondary progressive forms
in Europe, Australia and Canada; for relapsing forms of MS in the U.S.) | 782 | 770 |
Fludara® | Fludarabine phosphate | Chronic lymphocytic leukemia | 103 | 140 |
Androcur® | Cyproterone acetate | Prostate cancer | 93 | 93 |
Campath®/
MabCampath® | Alemtuzumab | Chronic lymphocytic leukemia | 63 | 63 |
Leukine® | Sargramostim | Hematological oncology | 61 | 64 |
Noctamid® | Lormetazepam | Sleep disorders | 47 | 44 |
Ilomedin® | Iloprost | Peripheral Arterial Occlusive Disease (PAOD) stages III/IV | 45 | 47 |
Ventavis® | Iloprost | Primary pulmonary hypertension | 12 | * |
* Product launched in 2003 |
We develop novel therapeutics and offer innovative products for the treatment of selected disabling and life threatening conditions, including multiple sclerosis and Crohn’s disease.
Central nervous system
Our portfolio of therapeutic products for the treatment of diseases of the central nervous system includes Betaferon®/Betaseron® and Noctamid®.
Betaferon® (interferon b-1b). Betaferon® (which is marketed in the United States and Canada under the trademark Betaseron®) has been the Group's leading product in terms of net sales for the past six years. Betaferon® was the first beta interferon developed for the treatment of multiple sclerosis (MS). The product was approved for relapsing-remitting MS in the United States in 1993, in Europe in 1996 and was approved in Japan in September 2000. Betaferon® is also marketed in all major Latin American markets. Betaferon® was approved for the treatment of secondary progressive MS in Europe, Australia and Canada in 1999. In 2003, the FDA expanded Betaferon®’s indication for the United States to treat all rela psing forms of MS to reduce the frequency of clinical exacerbations. Relapsing forms of MS include relapsing-remitting MS, the most common form, and secondary progressive MS with relapses. A new room-temperature stable formulation of Betaferon® was approved in the United States in January 2002 and was launched in May 2002. In Europe, the authorities have approved the room-temperature stable storage of Betaferon® for a period of up to three months. A new pre-filled diluent syringe has been launched in Europe and Japan in 2003 and in the United States in 2004. Betaferon® is manufactured for the markets in North America, Japan and certain other countries by Chiron Corporation. In Europe, Betaferon® is manufactured by Boehringer Ingelheim.
Noctamid® (lormetazepam). Noctamid® is a short-acting benzodiazepine, which has been developed and marketed for the treatment of sleep disorders.
Cardiovascular system
Our portfolio of therapeutic products for the treatment of diseases of the cardiovascular system includes Ilomedin® and Ventavis®.
Ilomedin® (iloprost). Ilomedin® is a stable prostacyclin analogue used for the intravenous treatment of severe forms of peripheral arterial disease (peripheral arterial occlusive disease (PAOD) stages III and IV) and thromboangiitis obliterans. The product increases the microcirculatory perfusion and has been shown to reduce rest pain, improve ulcer healing and reduce the need for amputation. Ilomedin®, which was first launched in 1992, is marketed in all major European markets and several additional countries including New Zealand.
Ventavis® (iloprost). Ventavis® contains iloprost as the active ingredient and is an inhalation treatment for patients with primary pulmonary hypertension, a disease with a high need for an acute and effective treatment. Ventavis® is the only prostacyclin product that targets the pulmonary vessels more directly by inhalation. Ventavis® has been approved by the European Commission in 2003 and is marketed in Europe. We have entered into an agreement with CoTherix, Inc., for the U.S. development and marketing of the product.
Oncology
We presently market six therapeutic products in the area of oncology: Androcur®, Leukine®, Fludara®, Bonefos®, Campath®/MabCampath® and Zevalin®. In addition, we have recently obtained rights to a number of promising products and processes in the field of oncology, as discussed under "-Research and Development-Specialized Therapeutics".
Androcur® (cyproterone acetate). Androcur® is an anti-androgen used for the palliative treatment of advanced prostate cancer. Androcur® reduces testosterone serum levels and blocks androgen receptors mediating cancer growth. The drug combines progestinic and anti-androgenic activities.
Leukine® (sargramostim). Leukine® is an infection-fighting, white-blood cell stimulant, granulocyte-macrophage colony-stimulating factor (GM-CSF), which is used in hematological oncology. Leukine® is the only CSF indicated for use following induction chemotherapy in older adults with acute myelogenous leukemia to shorten time to neutrophil recovery and reduce the incidence of severe and life-threatening infections. Additional indications include the use of Leukine® in myeloid reconstitution following allogeneic and autologous bone marrow transplantation (BMT), for peripheral blood stem cell (PBSC) mobilization and subsequent myeloid reconstitution in patients undergoing PBSC transplantation, and in bone marrow transplantation or engraftment delay. Leukine® was first ap proved in 1991.
Fludara® (fludarabine phosphate). Fludara® is currently marketed in the field of hematological oncology. Fludara®, which was launched in the United States in 1991 and in Europe in 1994, is also marketed in all major Latin American markets and in Japan. It is a purine analogue acting as an anti-metabolite and has been approved for the treatment of patients with relapsed or refractory chronic lymphocytic leukemia (CLL). Due to high response rates and a significant proportion of complete remissions, Fludara® has been established as a standard treatment for this group of patients. The drug is approved as second and third-line monotherapy for CLL and was approved for first-line therapy in 2003. An oral formulation of Fludara® has been approved in all of Europe except Germany, Belg ium and Portugal. It is also approved in 16 additional countries including Canada and Australia. Patent protection for Fludara® in the United States expired in 2003, and we experienced a decrease in sales due to competition from generic products.
Bonefos® (clodronate). Bonefos® is a second generation bisphosphonate for the treatment of hypercalcemia and osteolysis due to malignancies. The product is available as an intravenous or an oral formulation. We market Bonefos® in several countries in Europe, the Middle East and Asia. On January 7, 2005 we received an approvable letter from the FDA in the indication as an adjuvant oral treatment for reducing the occurrence of bone metastases in stage II/III breast cancer patients.
Campath®/MabCampath®(alemtuzumab). Campath® is the first and only monoclonal antibody approved for treatment of chronic lymphocytic leukemia (B-CLL). It represents the first specific therapy indicated for CLL patients refractory (not responding) to Fludara® treatment. The mechanism of action of this biologic is the binding to the CD52 antigen of the surface of B-cells. By binding and the activation of the complement system, the B-cells are killed. Clinical development has been completed in patients who previously received alkylating agents and did not respond to Fludara® therapy. Campath® has been launched in the United States and Europe (trademark in Europe: MabCampath®). In June 2003, the European Committee for Proprietary Medicinal Pr oducts (CPMP) has granted a positive opinion on the addition of survival data to the label for the drug. After recently acquiring the rights for Japan, China and the Asian-Pacific Basin, we now have worldwide marketing rights to Campath® under a distribution and development agreement with Genzyme Corporation. As a line extension, a clinical Phase III study in first-line CLL is ongoing.
Zevalin®. In addition to our Fludara® line extensions and Campath® within the field of hematological oncology, our primary development effort in the field of hematological oncology is Zevalin®. Zevalin® is an yttrium-labeled monoclonal antibody targeting the CD20 antigen and was developed as a radioimmunotherapy of relapsed, refractory low-grade non-Hodgkin's lymphoma (NHL). The mechanism of action is b-radiation by yttrium-90, which is linked to the antibody. The antibody carries the radioactivity to the tumor sites by binding to the CD20 antigen of B-cells. Prior to Zevalin® therapy, peripheral B-cells need to be cleared by a low dose of rituximab (produced by Genentech/La Roche). Zevalin® shows significantly higher clinical efficacy compared to non-radioactive anti-CD20 monoclonal antibodies and also for patients refractory to rituximab. In February 2002, the FDA has approved Zevalin® for follicular, B-cell low-grade NHL patients no longer responding to rituximab. In January 2004, we received approval to launch Zevalin® in the EU. It is the first radioimmunotherapy approved in the United States and Europe. The Group has worldwide rights to Zevalin®, excluding the United States.
As discussed under “– Strategy”, effective January 1, 2005, Oncology was separated from the Specialized Therapeutics business area and became an independent core business area.
Diagnostics&Radiopharmaceuticals
The following table sets forth selected products from our Diagnostics&Radiopharmaceuticals business area presently marketed by the Group.
| | | Net sales |
|---|
Product | Active ingredient(s) | Indication/description | 2004 | 2003 |
|---|
| | | (€million) |
|---|
Magnevist® | Gadopentetate dimeglumine | MRI contrast medium | 303 | 300 |
Iopamiron® | Iopamidol | X-ray contrast medium | 241 | 263 |
Ultravist® | Iopromide | X-ray contrast medium | 236 | 236 |
We are focused on the research, development and commercialization of imaging agents for the diagnosis of diseases and disorders. The Group's principal products in the Diagnostics&Radiopharmaceuticals business area include contrast media for use in X-ray, magnetic resonance imaging (MRI), radiopharmaceuticals for use in nuclear medicine as well as contrast medium application technologies.
We have engaged in the research and development of contrast agents for over 70 years. Contrast media are used by radiologists, cardiologists and other physicians to improve the outcomes of diagnostic imaging procedures. The contrast agent is generally administered to the patient by injection.
In addition to imaging agents, we develop, manufacture and market injection systems and disposable products through our U.S. subsidiary Medrad, Inc., We acquired Medrad in 1995 to enhance and strengthen the Group's expertise and capabilities with regard to contrast media application and other imaging related technologies. Medrad is a worldwide market leader in vascular injection systems for the application of contrast media in computed tomography (CT), angiography and MRI.
X-ray contrast media
Iopamiron® (iopamidol). Iopamiron® is an extracellular non-ionic monomeric X-ray contrast medium primarily for intravascular use. We distribute Iopamiron® in Japan, France and Latin America under a license from Bracco S.p.A.
Ultravist® (iopromide). Ultravist® is an extracellular non-ionic monomeric X-ray contrast medium for intravascular use.
MRI contrast media
Magnevist® (gadopentetate dimeglumine). Magnevist® is an extracellular MRI contrast medium for cranial, spinal and body applications for patients of all age groups. The product was the first MRI contrast agent marketed.
Gadovist® 1.0 (gadobutrol). Gadovist® 1.0 is an extracellular MRI contrast agent. It has been marketed since 1999 for MRI of brain and spine in Europe and numerous other countries. In November 2003, Gadovist® 1.0 was approved in Europe in the indication magnetic resonance angiography. Gadovist® 1.0 is also being developed for body indications for which Phase III clinical studies have been completed. Gadovist® 1.0 is particularly suited for such applications as perfusion imaging and high-dose studies.
Resovist® (ferucarbotran). Resovist® is an MRI contrast agent for liver-specific imaging, primarily used for the detection of small liver lesions, such as for pre-surgical examinations. It is marketed in Europe and Japan.
Primovist® (gadoxetic acid). Primovist® is our most optimized contrast agent for liver-specific imaging. Its strength lies particularly in the combination of parenchymal and dynamic imaging, the latter providing useful information for the improved characterization of focal liver lesions. In 2004, Primovist® was approved in Europe and submitted for registration in Japan.
Radiopharmaceuticals for nuclear medicine
Quadramet® (Sm-153 Lexidronam injection). Quadramet® is a therapeutic agent for the relief of bone pain in patients with metastatic bone lesions. Quadramet® consists of a radioactive isotope, Samarium-153, which emits beta radiation, and a chelating agent, EDTMP, which targets the drug to sites of new bone formation. We market the product in Europe and are pursuing clinical development in Japan.
Flucis® (fludeoxyglucose). Flucis® is a diagnostic agent for the expanding market segment of positron emission tomography (PET), particularly PET-CT as a combined examination. Flucis® shows increased glucose consumption in the body and is used in a very broad spectrum of diagnostic processes such as diagnosis, staging, monitoring and the detection of recurrences of several oncologic indications including head and neck cancer, lung cancer and malignant lymphomas. Flucis® is marketed in Europe.
Dermatology
As a result of the implementation of the FOCUS Initiative (see “– Strategy”), with effect from January 1, 2005, a separate legal entity for our dermatology business was created under the name of Intendis GmbH. Intendis is now responsible for managing and operating our global dermatology business and operates primarily through its own subsidiaries in Europe, Japan, and North and South America.
The following table sets forth selected dermatology products marketed by the Group.
Product | Active ingredient(s) | Indication | Net sales |
|---|
| | | 2004 | 2003 |
|---|
| | | (€million) |
|---|
Advantan® | Methylprednisolone aceponate | Eczema | 35 | 35 |
Skinoren®/
Finacea® | Azelaic acid cream/Azelaic acid gel | Mild to moderate acne/Rosacea | 30 | 20 |
Principal products in the Dermatology area are:
Advantan® (methylprednisolone aceponate). Advantan® is a topical corticosteroid for the treatment of eczema.
Skinoren® (azelaic acid cream). Skinoren® is used to treat mild to moderate inflammatory acne vulgaris. Skinoren® was launched in Europe in 1989 and in Latin America in 1995.
Finacea® (azelaic acid gel). Finacea® is a treatment for rosacea, a common skin disease marked by red eruptions, usually on the cheeks and nose. Rosacea represents an underserved market with currently limited therapy options. In the United States, it was approved for the treatment of rosacea and was launched in March 2003 in a co-promotion arrangement with Allergan, Inc., In December 2003, Finacea® received marketing approval for 15 European countries. In the meantime, it has been introduced in several of these countries, for example, Denmark, Sweden, France, Germany and Russia.
RESEARCH AND DEVELOPMENT
Overview
Our research and development activities are focused on selected fields with a high degree of unmet medical needs. We are concentrating on the exploitation of novel approaches resulting in the development of:
gynecological and andrological products.
therapy options for various types of cancer.
therapy of selected disabling diseases.
sensitive and highly specific diagnostics.
regenerative medicine.
In our drug and target discovery efforts, we are committed to the application of cutting edge technologies, including cell therapy, gene therapy, gene discovery, functional genetics and pharmacogenomics, functional target validation, state-of-the-art combinatorial chemistry and high throughput screening methods, as well as recombinant antibody technologies.
Through Corporate Research Business Areas, we advance the global responsibilities in our worldwide research organization with the aim of linking knowledge, abilities and the promotion of innovation all over the world. These functional units ensure that pharmaceutical research optimizes synergies between the scientific disciplines and technologies involved to enhance the discovery of drug development candidates. Additionally, we have Research Centers in Europe, the United States and Japan. These centers provide for state-of-the-art drug discovery technologies for our research business areas.
Collaboration efforts
Besides our internal research and development efforts, we have made a strategic decision to engage in efficient collaborations. Thus, we continuously monitor drug and target discovery and new therapeutic principles in our four business areas and beyond for opportunities to enrich our product portfolio and to broaden our technology platform. We enter into licensing arrangements or otherwise acquire synergistic or value-added drugs and technologies. We have established a number of research and development cooperation networks with leading international academic and industrial partners, including biotechnology companies and major pharmaceutical companies.
The following table describes certain of our principal collaboration partners and collaboration objectives:
Partner | Objective |
|---|
Asahi Kasei Corporation | Treatment of chronic stable angina pectoris |
Astex Technology, Ltd. | Discovery of novel drugs principally focusing on drugs targeting solid tumors |
Atugen AG | Genomics-antisense technology for target validation |
Besins International | Testosterone gel for treatment of male hypogonadism (Testogel®) |
Biogen Idec, Inc. | Radioimmunotherapy in hematological oncology (radiolabeled mAB) |
Chiron Corporation | Dosage and application of beta interferon |
EPIX Medical, Inc. | MRI contrast media |
ETH Zürich | Innovative approaches for diagnostic imaging |
Genzyme Corporation | Immunotherapy in hematological oncology (mAB) |
INCYTE Pharmaceuticals, Inc. | Genomics-access to EST/gene database |
Medarex, Inc. | Fully human monoclonal antibody technology |
Monash University | New targets for gender health |
MorphoSys AG | Antibody diagnostics and therapeutics for cancer and other life threatening diseases |
3M Company | Hormone therapy patches for menopausal women |
Neurosciences Victoria Ltd. | Treatment of neurodegenerative disorders |
NexMed, Inc. | Topical alprostadil for male erectile dysfunction |
Novartis Pharma AG | Joint development of angiogenesis inhibitors (therapy of solid tumors) |
Peregrine Pharmaceuticals, Inc. | Selective cancer diagnostics (vascular targeting agents) |
Philogen S.r.l. | Diagnosis and therapy of solid tumors |
Praecis Pharmaceuticals, Inc. | Gonadotropin releasing hormone (GnRH) antagonist for prostate cancer |
TAP Pharmaceutical Products, Inc. | Asoprisnil for the treatment of fibroids |
The Population Council | Synthetic androgen for treatment of hypogonadism |
Titan Pharmaceuticals, Inc. | Development of injectable cells producing dopamine for treatment of Parkinson's |
University of Virginia | Identification of a new target for male fertility control |
Vertex Pharmaceutical (Europe) Ltd. | Development of small molecules for the treatment of neurodegenerative diseases |
Research and development efforts
Expenditures on research and development decreased by 1% to €919m in 2004 from €924m in 2003. In 2003, expenditures on research and development decreased by 2% to €924m compared to €947m in 2002.
In 2004, €745m (81%) of our R&D expenses can be attributed to specific projects, and can be allocated by Business Area as follows: Gynecology&Andrology (23%); Specialized Therapeutics (44%); Diagnostics&Radiopharmaceuticals (17%); Dermatology (5%). R&D expenses which cannot be allocated to specific projects primarily relate to pre-clinical research, administration, infrastructure, international project management and indirect costs incurred in order to comply with regulations for registration. The following table sets forth, by Business Area, the research and development expense allocable to projects for fiscal years 2004, 2003 and 2002:
Research and development expense allocable to projects by Business Area: | 2004 | 2003 | 2002 |
|---|
| (€million) |
|---|
Gynecology&Andrology | 170 | 162 | 175 |
Specialized Therapeutics | 330 | 354 | 327 |
Diagnostics&Radiopharmaceuticals | 125 | 134 | 137 |
Dermatology | 40 | 48 | 57 |
Other research projects | 80 | 76 | 59 |
Total | 745 | 774 | 755 |
As part of our FOCUS Initiative (see “– Strategy”), we are focusing our activities on the following four core business areas starting January 1, 2005: Gynecology&Andrology, Oncology, Diagnostic Imaging and Specialized Therapeutics. In order to fully exploit the underlying potential in each of our business areas, we also shifted our research and development resources from non-core fields into core portfolio areas with the highest growth opportunities. Therefore, all research and development activities in the area of Cardiovascular and Central Nervous System diseases (with the exception of Multiple Sclerosis and Spheramine® in Parkinson’s disease) will be terminated.
Gynecology&Andrology
In Gynecology, we have set highest quality standards with products for female contraception, menopause management and the therapy of gynecological diseases. We believe that the possibilities for optimizing hormonal contraceptives are by no means exhausted. We are maximizing our drospirenone franchise as well as introducing estradiol to female contraception. We will also broaden the choices in alternative application forms, for example, by providing an innovative contraceptive patch. In menopause management, we aim at widening the choice of preparations to even better meet women’s individual needs. We are building the Angeliq® product family and the Menostar® product family. We benefit from our experience in the intrauterine technology of Mirena®. In gynecological therapy, we are developing innovative treatment options for uterine fibroids and endometriosis.
Our expertise in the field of andrology is used in a Research and Development program that focuses on improved preparations for the treatment of male hypogonadism (impaired function of the testes). Furthermore, we are investigating methods of male fertility control, a hormonal approach being the most advanced project.
The following table lists the principal products from the Gynecology&Andrology business area currently under development by the Group, their composition and current development status:
Product/project | Composition | Status |
|---|
Gynecology | | |
Oral contraceptives | | |
E2/DNG pill | Estradiol valerate/dienogest | Phase III |
YAZ™ | Ethinylestradiol/drospirenone | U.S.: approvable letter received in November 2004 |
Non-oral contraceptives | | |
Contraceptive patch | Gestodene/ethinylestradiol | EU: submitted |
Menopause management | | |
Menopausal levonorgestrel intrauterine system | Levonorgestrel intrauterine system (IUS) | Phase III |
Gynecological therapy | | |
Asoprisnil | Treatment of fibroids | Phase III |
Endometrion® | Therapy of endometriosis
Dienogest (oral) | Phase III |
Andrology | | |
Male fertility control | Progestin/androgen | Phase II |
The following description provides further information regarding each of the pharmaceutical product development candidates listed in the preceding table:
Oral contraceptives
E2/DNG Pill (Estradiol plus Dienogest Pill). The E2/DNG Pill will be the first global oral contraceptive that contains natural estrogen (estradiol). Application of the physiological estradiol (E2) instead of ethinylestradiol (EE) is an innovative approach. E2 is combined with dienogest (DNG) in a patent-protected regimen. Good cycle control is expected, which is a novelty in an oral contraceptive containing estradiol and attributed to the endometrial effect of DNG. The E2/DNG Pill is currently undergoing Phase III studies.
YAZ™. YAZ™ is Schering AG’s new oral contraceptive with drospirenone. YAZ™ is designed with a unique 24 day regimen and shortened hormone free interval (4 days) that prevents hormone withdrawal symptoms commonly seen with conventional regimens (21 days of active pills plus 7 days of placebo or pill break). Furthermore, YAZ™ is the first oral contraceptive with unique positive effects on symptoms of premenstrual dysphoric disorder (PMDD), a more severe form of premenstrual syndrome (PMS). It also has a favorable effect on acne and seborrhea. In November 2004, we obtained an approvable letter from the FDA.
Non-oral contraceptives
Contraceptive Patch. The Contraceptive patch offers Schering AG the essential entrance into the sub-segment of patches within the fertility control market. This monophasic combined patch has a daily release rate of 17 mg ethinylestradiol and 50 mg gestodene. The patch is very small (diameter of 3.5 cm) and transparent and has to be applied only once a week. After the application of three patches (for 21 days), women take a one week break during which a withdrawal bleeding occurs. The Contraceptive patch combines ultra-low dosing with excellent cycle control. The transdermal route of hormone administration results in excellent tolerability. The patch has been submitted for registration in France.
Menopause Management
Menopausal levonorgestrel intrauterine system (MLS). The MLS is an Intrauterine System (IUS), that is inserted into the uterus where it releases small amounts of the progestin levonorgestrel. It is being developed for menopausal women, who use estrogen therapy for the relief of menopausal symptoms or osteoporosis prevention. The reason for adding progestin to the estrogen is to protect the endometrium, or uterine lining, from excessive growth. Therefore, local administration of progestin directly to the endometrium is a logical choice. In addition, the estrogen component can be individually tailored to a woman’s needs with regard to dose and mode of administration (oral, patch, gel). With the MLS, we benefit from our experience with our successful Intrauterine System for contraception, Mirena®. However, the T-frame of MLS is smaller than that of M irena®, since the uterus shrinks after menopause. The project is in Phase III of clinical development.
Gynecological therapy
Asoprisnil. Asoprisnil is a selective progesterone receptor modulator. This new substance class is in clinical development for the treatment of uterine fibroids, i.e. benign tumors of the uterine muscle. This common disease in women is associated with symptoms that can seriously impair the quality of life. Women can suffer from painful, heavy and prolonged menstrual periods. Fibroids can lead to pressure-related symptoms in the uro-genital tract and are also known to cause pelvic pain that is not related to the menstrual cycle. Asoprisnil is being investigated in the regulation of dysfunctional bleeding associated with fibroids. Preliminary results suggest that asoprisnil could also reduce tumor size. Clinical trials to demonstrate that this therapy can also postpone or even eliminate the need for surgery are ongoing. Asoprisnil has the potential to become the fir st long-term oral medication for the treatment of fibroids. The project is currently in clinical Phase III. Submission of asoprisnil for registration is planned for 2006.
Endometrion®. Endometrion® is a product specifically targeted for the convenient oral treatment of endometriosis. Each tablet contains 2 mg dienogest, a progestin with no estrogenic activity and a track record of excellent tolerance and acceptability. This new preparation is expected to be as effective as GnRH-agonists but with a lower incidence of progestin deficiency-related side effects. Endometrion submission was withdrawn by Schering AG to include new supportive clinical data available for refiling in 2005. Endometrion® is in clinical Phase III.
In 2004, Schering AG transferred its worldwide marketing and sales rights for the oxybutynin releasing ring, a treatment for urinary incontinence, to Barr Laboratories, Inc., a subsidiary of Barr Pharmaceuticals, Inc. Barr will pay Schering AG a milestone payment upon final FDA approval as well as an ongoing royalty based on product sales upon commercialization of the product.
Andrology
Male fertility control. For years, we have been researching approaches to hormonal and non-hormonal contraception for men. The most advanced project is male hormonal fertility control. In November 2002, we signed a co-development agreement with Organon International. In 2003, the design of a clinical trial was defined. The trial medication and modes of administration are based on results from earlier studies showing that sperm concentrations can be suppressed to contraceptive levels by the progestin etonogestrel. In the trial, the progestin, developed by Organon, is given in implant form. As this hormone inhibits the body’s testosterone production, the test persons are injected with a long-acting testosterone undecanoate developed by Schering AG, which maintains testosterone levels in the blood within the normal range. The Phase II study started in 2004.
We are currently also pursuing additional non-hormonal possibilities of male fertility control in early basic research.
Specialized Therapeutics
In order to fully exploit the underlying potential in the Specialized Therapeutics business area, we shifted our research and development resources from non-core fields into core portfolio areas with the highest growth opportunities. Therefore, all research and development activities in the area of Cardiovascular and Central Nervous System diseases (with the exception of Multiple Sclerosis and Spheramine® in Parkinson’s disease) will be terminated.
The following table lists the principal products from the Specialized Therapeutics business area currently under development by the Group, their composition and current development status:
Product/project | Indication/description | Status |
|---|
Central nervous system | | |
Spheramine® | Advanced stages of Parkinson’s disease | Phase II |
Cardiovascular system | | |
Betaferon® | Viral cardiomyopathy | Phase II |
Oncology | | |
PTK/ZK | Colon cancer and various solid tumors | Phase III |
MS-275 | Melanoma | Phase II |
Crohn’s disease | | |
Leukine® (sargramostim) | Crohn’s disease | Phase III |
The following description provides further information regarding each of the pharmaceutical product development candidates listed in the preceding table:
Central nervous system
Spheramine®. In cooperation with Titan Pharmaceuticals, we are developing Spheramine® in Phase II for the treatment of patients with advanced Parkinson’s disease. Spheramine® represents an innovative cell therapy consisting of retinal pigment epithelial cells that are administered via surgical injection into the brain. It is designed to deliver dopamine to the regions of the brain affected by Parkinson’s disease.
The development of Mesopram™ for the oral treatment of multiple sclerosis has been discontinued because other priorities required a shift in resources.
CCR-1 development in MS has been discontinued due to lack of efficacy in Phase II.
Cardiovascular system
Betaferon® in viral cardiomyopathy. Acute viral infection of the myocardium may turn into chronic viral infection, leading to progressive myocardial damage and is considered to be an essential cause for the development of cardiomyopathy. Betaferon® is investigated in a Phase II study in patients with chronic viral cardiomyopathy with the aim to show improvement of the patients' clinical condition and to achieve a significant or complete reduction of virus load from the myocardium.
The clinical development of fasudil for the treatment of angina pectoris has been discontinued because other priorities required a shift in resources.
Oncology
PTK/ZK. PTK/ZK is a novel oral angiogenesis inhibitor that potently inhibits vascular endothelial growth factor (VEGF) receptor tyrosine kinases, important enzymes in the formation of new blood vessels that contribute to tumor growth and metastasis. It has the potential to be the first orally active angiogenesis inhibitor to be used long-term in combination with standard chemotherapy for the treatment of patients with metastatic colorectal cancer. This product is in Phase III of clinical development for the treatment of solid tumors, e.g. colon cancer. We will co-promote this product for all oncology indications together with Novartis Pharma AG in Europe, North America and Japan. In 2005 we initiated recruitment for a Phase II clinical trial of PTK/ZK in the treatment of lung cancer.
Leukine® (sargramostim). Leukine® is an infection-fighting, white-blood cell stimulant based on a granulocyte-macrophage colony-stimulating factor (GM-CSF), which is used in hematological oncology. Leukine® is currently being studied in Phase III for use in treating Crohn’s disease. Crohn’s disease is a chronic and serious inflammatory disease of the gastrointestinal tract. It can affect any part of the digestive tract from the mouth to the anus. The inflammation extends deep into the lining of the affected organ, which can cause pain and frequent bowel movements. Leukine® is believed to stimulate specific immune system cells in the gastrointestinal tract that might be impaired in patients with Crohn’s disease.
MS-275. MS-275 is a member of a novel class of compounds known as Histone deacytelators or HDACS. It is currently in Phase II development for melanoma.
Crohn’s disease
Leukine® (sargramostim). Leukine® is an infection-fighting, white-blood cell stimulant based on a granulocyte-macrophage colony-stimulating factor (GM-CSF), which is used in hematological oncology. Leukine® is currently being studied in Phase III for use in treating Crohn’s disease. Crohn’s disease is a chronic and serious inflammatory disease of the gastrointestinal tract. It can affect any part of the digestive tract from the mouth to the anus. The inflammation extends deep into the lining of the affected organ, which can cause pain and frequent bowel movements. Leukine® is believed to stimulate specific immune system cells in the gastrointestinal tract that might be impaired in patients with Crohn’s disease.
The development of MS-209, a multidrug resistant modulator for patients with breast and non-small lung cancer, has been discontinued because other priorities required a shift in resources.
Effective January 1, 2005, Oncology was separated from the Specialized Therapeutics business area to form an independent core business area (see “ – Strategy”).
Diagnostics&Radiopharmaceuticals
We are a world leader in the field of in-vivo diagnostic imaging, providing innovative X-ray and magnetic resonance imaging products. Our current research and development projects are directed towards disease specific and functional imaging products that provide an even more accurate and earlier detection of tumors, central nervous system disorders and cardiovascular diseases (sensitive perfusion imaging) as well as molecular imaging of inflammatory and proliferative processes.
The following table lists the principal diagnostic and radiopharmaceutical products currently under development, their indications or area of use and current status:
Product | Indication/description | Status |
|---|
| | |
SHU 555 C | MRI contrast agent/cardiovascular | Phase III |
MS-325 | MRI contrast agent/cardiovascular | U.S.: approvable letter |
Scintimun® Granulocyte | Radiopharmaceutical/infection imaging | EU: submitted |
The following description provides further information regarding each of the pharmaceutical product development candidates listed in the preceding table:
SHU 555 C (ferucarbotran). SHU 555 C (formerly known as Supravist®) is an MRI contrast agent which is being developed for diagnosing diseases of the vasculature.
MS-325 (gadofosveset trisodium). MS-325 is a gadolinium-based magnetic resonance imaging (MRI) blood pool contrast agent optimized for prolonged vascular enhancement. After intravenous injection, MS-325 binds reversibly to human serum albumin in plasma thus providing an extended imaging time window in addition to a higher relaxivity (efficacy) over currently available contrast agents. MS-325 is designed to provide more flexibility and versatility, including high resolution scans in the clinical practice of MRA. The product was developed in cooperation with EPIX Medical, Inc. We own the exclusive sales and marketing rights for MS-325 worldwide. Following the submission for approval in the U.S. in December 2003, the product was submitted for approval in Europe in June of 2004. In January 2005, EPIX Pharmaceuticals, Inc., received an approvable letter from the FDA.
Scintimun® Granulocyte (Tc99m-labeled monoclonal antibody BW 250/183). Scintimun® Granulocyte is a radio-labeled antibody for the detection of infections and inflammatory lesions in the body, including bone marrow imaging. It supports therapy management decisions, e.g. in patients with bone inflammations and fever of unknown origin. The product was submitted for registration in Europe in 2004.
Development activities for b-CIT (Dopascan®), a diagnostic radiopharmaceutical for Parkinson’s disease, were discontinued and the license agreement was terminated.
Effective January 1, 2005, the Diagnostics&Radiopharmaceuticals business area was renamed Diagnostic Imaging.
Dermatology
Our current research efforts in the Dermatology are focused on future therapy options for the treatment of psoriasis, atopic dermatitis and eczema.
As discussed under “–Strategy“, starting January 1, 2005, we have created a separate legal entity for our dermatology business under the name of Intendis GmbH. Research and development activities will be undertaken independently by Intendis.
Research and development centers
The Group operates eight research and development centers in Europe, the United States and Japan, employing over 4,400 people. The following table sets forth the location and principal areas of research for the Group's research and development centers:
Location | Research and development areas |
|---|
Berlin, Germany | Diagnostics&Radiopharmaceuticals |
| Gynecology&Andrology |
| Specialized Therapeutics (oncology and neuro-degenerative diseases) |
| Dermatology (inflammatory skin disorders, including eczema and psoriasis) |
Jena, Germany | Gynecology&Andrology |
Turku, Finland | Gynecology&Andrology (new modes of application) |
Saclay, France | Radiopharmaceuticals |
Richmond, California | Oncology, Neurology/Immunology (including MS) and Dermatology |
Seattle, Washington | Oncology, Crohn’s disease |
Indianola, Pennsylvania | Medical devices for diagnostic applications (including vascular injection systems) |
Kobe, Japan | Oncology, gene therapy |
GROUP ORGANIZATION
Business Areas
As part of the FOCUS Initiative (see “– Introduction”), we have reorganized our business areas as follows: Gynecology&Andrology, Oncology, Diagnostic Imaging and Specialized Therapeutics. These business areas coordinate the development of our product portfolio and generally have the following objectives:
establish overall portfolio strategy.
establish targets and direction of in-house research.
sponsor and guide pre-clinical drug development activities.
actively develop products through clinical Phases I, II and III.
monitor the product approval process in Europe, the United States and Japan.
outline the strategy for the introduction of the product in the market.
stay abreast of new trends in medical research, molecular biology and biopharmacy in order to identify potential new areas for development or potential products for acquisition.
develop an international network of opinion leaders in the medical field to assist in the development of new products.
Group segments
The Group's businesses are comprised of five geographic segments and an Other Activities (primarily pharmaceutical chemicals) segment, as set forth in the following chart:
Schering AG Group
|
Europe
Region | | United
States
Region | | Japan
Region | | Latin America/
Canada
Region | | Asia/
Pacific
Region | | Other
Activities |
See Note 33 to our Consolidated Financial Statements included elsewhere in this annual report setting forth the net sales, segment performance and segment results, assets and other information for the Group's segments for 2004, 2003 and 2002. See "Item 5 – Operating and Financial Review and Prospects" for a discussion of the net sales, segment performance and segment results for the Group's segments for 2004, 2003 and 2002.
The following table sets forth the net sales for each of the Group's five geographic segments and the Other Activities segment for the three years ended December 31, 2004, 2003 and 2002:
| Year ended December 31, |
|---|
| 2004 | 2003 | 2002 |
|---|
| (€million) |
|---|
Net sales by segment: | | | |
Europe Region | 2,472 | 2,372 | 2,349 |
United States Region | 1,242 | 1,203 | 1,282 |
Japan Region | 468 | 517 | 579 |
Latin America/Canada Region | 411 | 383 | 430 |
Asia/Pacific Region | 234 | 214 | 232 |
Other Activities | 80 | 139 | 151 |
Total | 4,907 | 4,828 | 5,023 |
Europe Region
Overview
The geographic segment referred to in this annual report as the Europe Region comprises the member states of the European Union, all other countries in continental Europe, Turkey, the Commonwealth of Independent States, and the whole African continent. Since January 1, 2004 the countries belonging to the Middle East, as well as India, Sri Lanka, Pakistan, Iran, and Bangladesh have become part of the Europe Region, whereas Australia and New Zealand have been reallocated to the Asia/Pacific Region. The previous year’s figures have been adjusted accordingly. The headquarters of the Europe Region are located in Berlin, Germany.
The Europe Region accounted for approximately 50% of the Group's net sales in 2004. As of December 31, 2004, the Europe Region employed 7,890 persons.
The following table sets forth net sales by business area of the Europe Region for the years ended December 31, 2004, 2003 and 2002:
| Year ended December 31, |
|---|
| 2004 | 2003 | 2002 |
|---|
| (€million) |
|---|
Net sales Europe Region by business area: | | | |
Gynecology&Andrology | 1,003 | 969 | 927 |
Specialized Therapeutics | 865 | 820 | 827 |
Diagnostics&Radiopharmaceuticals | 463 | 450 | 452 |
Dermatology | 130 | 127 | 134 |
Other sources | 11 | 6 | 9 |
Total | 2,472 | 2,372 | 2,349 |
Among the factors that have affected, or may affect, the business of the Europe Region are:
Healthcare cost containment measures effected by governments, institutions and managed care organizations.
Intense price competition for diagnostic products.
Market entry of generic products, particularly in diagnostics and female contraception and menopause management.
Exchange rate effects in countries outside the euro territory.
We believe that the key competitive strengths of the European business are our subsidiaries and their sales forces, strong presence and market leadership in strategic product fields, the excellent reputation of the Schering AG brand, and good synergies among the countries in the Europe Region through regional business processes and the exchange of country-specific know-how.
Products
The following table sets forth our top-selling products in 2004 and in 2003 in the Europe Region. These products represented 55% of the total net sales for the Europe Region in 2004 (54% in 2003).
| Net sales 2004 (€million) | Percentage change from 2003 | Net sales 2003 (€million) | Percentage change from 2002 |
|---|
1. Betaferon® | 393 | 1 | 389 | 9 |
2. Yasmin® | 171 | 47 | 116 | 110 |
3. Ultravist® | 146 | 0 | 146 | (1) |
4. Diane® | 119 | (13) | 136 | (10) |
5. Mirena® | 119 | 12 | 106 | 15 |
6. Magnevist® | 100 | 5 | 95 | 2 |
7. Meliane® | 97 | 5 | 93 | 1 |
8. Androcur® | 72 | (1) | 73 | 2 |
9. Fludara® | 68 | 12 | 61 | 20 |
10. Microgynon® | 65 | 3 | 63 | 9 |
Total | 1,350 | | 1,278 | |
Marketing and distribution
Marketing functions for the Europe Region are centralized at regional headquarters in Berlin, Germany.
The following table sets forth the main target groups for the marketing of our products in the Europe Region:
Gynecology&Andrology | gynecologists, general practitioners |
Specialized Therapeutics | neurologists, oncologists, hematologists, hospitals, urologists |
Diagnostics&Radiopharmaceuticals | radiologists, nuclear physicians, urologists, cardiologists, hospitals |
Dermatology | dermatologists, general practitioners |
Our products are marketed by 2,254 sales representatives located in each of the countries in the Europe Region. Each country has its own sales force and marketing organization. Promotion of our products is supplemented by scientific seminars, advertising in medical and other journals and innovative marketing tools such as the internet.
We generally distribute our products through wholesalers, pharmacies or directly to the target groups.
In the Middle Eastern countries, we are, for the most part, represented by agents who import and distribute our products through their organizations.
We actively seek, where appropriate, to supplement the efforts of our sales force through co-promotion arrangements and co-marketing arrangements. We have a co-marketing agreement with Wyeth, Inc., for the oral contraceptive substance gestodene for the Europe Region (except South Africa). We also have several co-promotion agreements for specific countries, including iloprost in Italy and contrast media products in Spain.
Production
In Europe, we produce active pharmaceutical substances and intermediate products at our primary facility in Bergkamen, Germany, and three smaller facilities in Germany, Finland and Spain. These European production facilities produce much of the requirements for all of the Group's Regions.
In addition to our active pharmaceutical ingredient production operations, we operate production facilities for the formulation and packaging of pharmaceutical products. The following table sets forth, as of December 31, 2004, the location of, and dosage form produced at, our production facilities in the Europe Region:
Dosage Form | Location |
|---|
Solids | Weimar, Berlin, Germany; Lys-Lez-Lannoy, France; Turku, Finland |
Semisolids | Milan, Italy |
Liquids/parenterals | Berlin, Germany; Alcalá de Henares, Spain; Milan, Italy |
Radiopharmaceuticals | Saclay and Marcoule, France |
Others(1) | Turku, Finland |
(1) Implants, intrauterine systems
|
For a discussion of certain rationalization measures involving our European production and packaging facilities, see "Item 5 – Operating and Financial Review and Prospects – Liquidity and Capital Resources-Restructuring Program".
Capital expenditures
Capital expenditures for the Europe Region were €201m in 2002, €171m in 2003 and €134m in 2004. We spent these expenditures mainly in the areas of production facilities and distribution facilities and to modernize information technology. Capital expenditures are expected to total €168m in 2005 and are being used to upgrade and modernize manufacturing facilities as well as research and development and administrative functions in order to meet regulatory, health, safety and environmental requirements and to improve processes.
United States Region
Overview
The geographic segment referred to in this annual report as the United States Region comprises the United States of America and Puerto Rico. We market pharmaceutical products in the United States under the trade name Berlex, Inc. (in 2004, Berlex Laboratories, Inc., changed its name to Berlex, Inc.), as well as injection systems and disposable products through our subsidiary Medrad, Inc., As discussed under "Patents and Other Intellectual Property", we generally are not permitted to market healthcare products in the United States Region under the Schering name.
Schering Berlin Inc. is the management holding company for the United States interests of Schering AG. Through its operating subsidiaries, Schering Berlin supports Schering AG's strategic global interests in pharmaceuticals and medical devices. Located in Montville, New Jersey, Schering Berlin provides specialized management expertise and develops long range plans for its United States subsidiaries. Schering Berlin has two principal subsidiaries:
Berlex, Inc. consists of Berlex Laboratories and Berlex Pharmaceuticals with locations in Wayne and Montville, New Jersey, Richmond, California as well as Seattle and Bothell, Washington. Berlex Laboratories is committed to marketing products from the business areas of Diagnostics&Radiopharmaceuticals, Gynecology&Andrology and Specialized Therapeutics in the United States. Additionally, Berlex Pharmaceuticals centralizes various U.S. operations, which provide services to Schering AG with respect to aspects of Schering AG’s global business including areas such as Specialized Therapeutics, Global Patents and Corporate Business Development.
Medrad, Inc. focuses on innovative products for diagnostic imaging and specializes in vascular injection systems for contrast media. Medrad is a market leader in the development, manufacturing and sale of injectors, syringes and disposable products in this area. Medrad, with headquarters in Indianola, Pennsylvania, has developed an international market presence. We acquired Medrad in 1995. Medrad received the 2003 Malcolm Baldrige National Quality Award in recognition of achievements in quality and business excellence in the manufacturing category.
The United States Region accounted for approximately 25% of the Group's net sales in 2004. As of December 31, 2004, the United States Region had 3,811 employees (including 1,231 sales representatives).
The following table sets forth net sales by business area of the United States Region for the years ended December 31, 2004, 2003 and 2002:
| Year ended December 31, |
|---|
| 2004 | 2003 | 2002 |
|---|
| (€million) |
|---|
Net sales United States Region by business area: | | | |
Gynecology&Andrology | 356 | 271 | 252 |
Specialized Therapeutics | 432 | 500 | 561 |
Diagnostics&Radiopharmaceuticals | 437 | 423 | 460 |
Dermatology | 17 | 9 | 9 |
Total | 1,242 | 1,203 | 1,282 |
Among the factors that have affected, or may affect, the business of the United States Region are:
Competition from large pharmaceutical companies in the United States market with substantial resources for research, product development and promotion.
Increasingly competitive price pressures as managed care groups, institutions, government agencies and other purchaser groups seek price discounts and rebates for pharmaceutical products.
Intense price competition for diagnostic products.
Impact of market entry of competing generic products, particularly in the Gynecology&Andrology business area (including oral contraceptives and Climara®) and in the Specialized Therapeutics business area (including Fludara® ).
Adverse currency effects.
We believe that the key competitive strengths of the United States business are our know-how in building new markets and high-quality customer service.
Products
During 2004, approximately 70% of our net sales in the United States Region were generated from sales of products from the Specialized Therapeutics and Diagnostics&Radiopharmaceuticals business areas. Sales of products from the Gynecology&Andrology business area generated 29% of net sales in this Region. One of the Group's key strategic objectives is to broaden the product lines in the United States in the areas of female contraception, menopause management, contrast media and specialized therapeutics.
The following table sets forth our top-selling pharmaceutical products in 2004 and in 2003 in the United States Region. These products represented 61% of the total net sales for this segment in 2004 (58% in 2003).
| Net sales
2004 (€million) | Percentage
change
from 2003 | Net sales
2003 (€million) | Percentage
change
from 2002 |
|---|
1. Betaseron® | 284 | (1) | 286 | (15) |
2. Yasmin® | 211 | 39 | 152 | 60 |
3. Magnevist® | 133 | (2) | 131 | (9) |
4. Mirena® | 63 | 40 | 45 | 25 |
5. Leukine® | 61 | (4) | 64 | 93 |
Total | 752 | | 678 | |
|
Medrad's principal product line is vascular injection systems (equipment, related disposables, and equipment service) for angiography, computed axial tomography (CT), magnetic resonance imaging and ultrasound. Medrad had net sales of €271m in 2004.
Marketing and distribution
The following table sets forth the main target groups for the marketing of our products in the United States Region:
Specialized Therapeutics | neurologists, oncologists, cardiologists, hematologists, hospitals |
Diagnostics&Radiopharmaceuticals | radiologists, hospitals, free standing imaging centers |
Gynecology&Andrology | gynecologists, selected primary care physicians |
Dermatology | dermatologists |
Medrad | radiologists, hospitals |
Our pharmaceutical products are marketed by our 1,231 sales representatives. Promotion of our products is supplemented by physician training, scientific seminars, advertising in medical and other journals, samples and direct-to-consumer campaigns to increase awareness in the market.
We generally distribute pharmaceutical products through wholesalers and pharmacies or directly to end-consumer groups. We have contract arrangements with hospital groups and managed care groups that in turn receive our products at contract prices through wholesalers.
Medrad markets its products to target groups through its own sales force located in its major markets. Products are also marketed to end-customer groups indirectly through original equipment manufacturers (OEMs), group purchasing organizations (GPOs) and managed care groups. Third-party distributors serve Medrad's smaller markets.
Production
The pharmaceutical products we market in the United States Region are generally manufactured by the Group's European facilities or under various manufacturing agreements with third parties. We operate two pharmaceutical production plants in the United States Region. One plant, located in Wayne, New Jersey, packages solid and special dosage forms. A second plant located in Seattle, Washington, produces Leukine®.
Medrad develops and manufactures its products at its facilities in Indianola and Pittsburgh, Pennsylvania.
Capital expenditures
Capital expenditures for the United States Region were €44m in 2002, €36m in 2003 and €56m in 2004. Capital expenditures are expected to total €51m in 2005.
In addition to information technology and research equipment purchases, capital projects currently in progress include the construction of a biotech production facility for Leukine® in the Seattle, Washington area. Expenditures for Medrad include an expansion of its manufacturing facilities in Indianola and Pittsburgh, Pennsylvania.
Japan Region
Overview
The geographic segment referred to in this annual report as the Japan Region comprises the geographical territory of Japan and the business of Nihon Schering K.K. in Japan and direct sales by Schering AG to Tanabe Seiyaku Co., Ltd. of an X-ray contrast medium. The Japan Region accounted for approximately 10% of the Group's net sales in 2004. As of December 31, 2004, the Japan Region had 1,465 employees (including 707 field staff).
The following table sets forth the net sales by business area of the Japan Region for the years ended December 31, 2004, 2003 and 2002:
| Year ended December 31, |
|---|
| 2004 | 2003 | 2002 |
|---|
| (€million) |
|---|
Net sales Japan Region by business area: | | | |
Gynecology&Andrology | 26 | 28 | 30 |
Specialized Therapeutics | 108 | 117 | 129 |
Diagnostics&Radiopharmaceuticals | 306 | 342 | 386 |
Dermatology | 28 | 30 | 34 |
Total | 468 | 517 | 579 |
Among the factors that have affected, or may affect, the business of the Japan Region are:
Adverse exchange-rate effects.
The regulation of pharmaceutical prices and mandatory price reductions by the Japanese Ministry of Health, Labour and Welfare.
Extensive periods of time required for the development of new drug applications and the approval by the Japanese Ministry of Health, Labour and Welfare.
Increasing competition from generics.
We believe the key competitive strengths of the Japan Region are the increasing specialization of our field force in our four business areas, our strong market presence and reputation in diagnostics, and our proven ability to develop our pipeline of diagnostics, specialized therapeutics, oncology, female contraception and menopause management products.
Products
The following table sets forth our top-selling products in 2004 and in 2003 in the Japan Region. These products represented 68% of the total net sales for this segment in 2004 (67% in 2003).
| Net sales
2004 (€million) | Percentage
change
from 2003 | Net sales
2003 (€million) | Percentage
change
from 2002 |
|---|
1. Iopamiron® | 206 | (10) | 227 | (13) |
2. Magnevist® | 49 | (10) | 55 | (13) |
3. Betaferon® | 28 | 11 | 25 | 10 |
4. Aspenon® | 21 | (3) | 21 | (12) |
5. Neriproct® | 14 | (10) | 16 | (11) |
Total | 318 | | 344 | |
Marketing and distribution
The following table sets forth the main target groups for the marketing of our products in the Japan Region:
Diagnostics&Radiopharmaceuticals | hospital and general practitioner radiologists, urologists, neurosurgeons, cardiologists; clinical laboratories |
Specialized Therapeutics | hospital internists, surgeons, neurosurgeons, neurologists, cardiologists, urologists, gynecologists; oncologists, hematologists, general practitioner internists and surgeons |
Dermatology | hospital and general practitioner dermatologists, surgeons |
Gynecology&Andrology | hospital gynecologists; general practitioner gynecologists and internists |
Our products are marketed by our 707 sales representatives. Our sales and marketing efforts in the Japan Region are directed by our head office in Osaka. Promotion of our products is supplemented by scientific seminars, trade congresses and advertising in medical journals. We distribute our products through wholesalers.
We have marketed with Tanabe Seiyaku Co., Ltd. the ACE-inhibitor Novarok® (cardiovascular) and with Yamanouchi Pharmaceutical Co., Ltd. the low-dose oral contraceptive Libian® (the trademark under which Triquilar® is marketed in Japan). We have terminated our co-promotion agreement with Tanabe Seiyaku K.K. in 2004, with each party returning to the other their rights for the ACE-inhibitor Novarok® (to Tanabe) and the ultrasound contrast agent Levovist® (to Schering AG). We continue to distribute Proscope®, the Japanese brand name for the X-ray contrast medium Ultravist®, through Tanabe.
Production
We mostly distribute products in Japan that are manufactured by the Group's European facilities. The packaging of these products takes place at our site in Osaka. Furthermore, we operate a production plant in Mobara, which is engaged in manufacturing and packaging of certain therapeutic products. The packaging and distribution of in-vitro diagnostics is carried out at a smaller site in Sakura.
We produce and distribute Iopamiron®, our top selling product in the Japan Region, under a license from Bracco S.p.A. Changes in the contractually determined price of iopamidol, the active ingredient of Iopamiron®, have significantly affected the results of operations of the Japan Region in prior periods. See "Item 5 – Operating and Financial Review and Prospects – Results of Operations – 2004 Compared to 2003 – Results of Operations by Segment – Japan Region" and "– 2003 Compared to 2002 – Results of Operations by Segment – Japan Region".
Capital expenditures
Capital expenditures for the Japan Region were €7m in 2002, €5m in 2003 and €8m in 2004. Capital expenditures are expected to total €7m in 2005.
Expenditures were spent mainly on the transfer of our research activities from Mobara and Osaka to Kobe, in the areas of production facilities, and the modernization of information technology.
Latin America/Canada Region
Overview
The Group's geographic segment for Latin America and Canada, referred to in this annual report as the Latin America/Canada Region, consists of the countries of Central America, South America, the Caribbean and Canada. Schering AG has had a presence in this Region since the 1920s. The headquarters of the Latin America/Canada Region (known as CECLA-Centro Estrategico Canada Latinoamerica) are located in Mexico City, Mexico, and manage the activities of 15 subsidiaries in the major countries of the Region. The Latin America/Canada Region accounted for approximately 8% of the Group's net sales in 2004. As of December 31, 2004, the Latin America/Canada Region had 2,441 employees (including 975 sales representatives).
The following table sets forth the net sales by business area of the Latin America/Canada Region for the years ended December 31, 2004, 2003 and 2002:
| Year ended December 31, |
|---|
| 2004 | 2003 | 2002 |
|---|
| (€million) |
|---|
Net sales Latin America/Canada Region by business area: | | | |
Gynecology&Andrology | 273 | 254 | 292 |
Specialized Therapeutics | 80 | 73 | 73 |
Diagnostics&Radiopharmaceuticals | 29 | 29 | 33 |
Dermatology | 22 | 22 | 26 |
Other sources | 7 | 5 | 6 |
Total | 411 | 383 | 430 |
Among the factors that have affected, or may affect, the business of the Latin America/Canada Region are:
Adverse exchange-rate effects in all major markets in Latin America.
Impact of competing generic products and copies, which is encouraged by the governments of the Region.
Direct and indirect price controls imposed by regulatory authorities.
Factors generally associated with operating in developing countries, including the risk of political and economic instability, such as the recent economic crises in Argentina, Brazil, Venezuela and Uruguay, some of our major markets in Latin America.
Fierce competition by local and regional companies concentrating in our specialized market segments.
We believe that the key competitive strengths of our business in the Latin America/Canada Region are:
In the area of female contraception, our specialized sales force, franchise and expertise.
In Latin America, our leadership position in female contraception and diagnostics, and our strong market position in menopause management as well as our expertise in specialized therapeutics.
In Canada, our strong market position in specialized therapeutics, particularly the treatment of multiple sclerosis and oncology, and our recognized strong position in female contraception and menopause management.
Products
The following table sets forth our top-selling products in 2004 and in 2003 in the Latin America/Canada Region. These products represented 46% of the total net sales for this segment in 2004 (43% in 2003).
| Net sales
2004 (€million) | Percentage change from 2003 | Net sales
2003 (€million) | Percentage change from 2002 |
|---|
1. Betaferon® | 51 | 13 | 45 | 4 |
2. Diane® | 43 | (1) | 43 | (15) |
3. Microgynon® | 38 | 3 | 37 | (16) |
4. Yasmin® | 38 | 135 | 16 | launched |
5. Mesigyna® | 21 | 25 | 17 | (6) |
Total | 191 | | 158 | |
Marketing and distribution
The following table sets forth the main target groups for the marketing of our products in the Latin America/Canada Region:
Gynecology&Andrology | gynecologists, obstetricians, general practitioners, endocrinologists, hospitals |
Specialized Therapeutics | oncologists, hematologists, urologists, neurologists, hospitals |
Diagnostics&Radiopharmaceuticals | radiologists, cardiologists, selected hospitals |
Dermatology | dermatologists |
Our products are marketed by 975 sales representatives in almost all of the countries of the Latin America/Canada Region. Each of our 15 subsidiaries has its own marketing organization, which is supported by regional headquarters in the areas of strategy development, the coordination of new product introductions as well as in-licensing activities. Promotion of our products is supplemented by scientific seminars, advertising in medical and other journals and innovative marketing tools such as the internet, Customer Relationship Management (CRM) tools such as call centers, service hotlines for our customers and a direct-to-consumer campaign in Canada.
We generally distribute our products through wholesalers, pharmacies, hospitals, clinics and, in some cases, directly to the target groups. We maintain a distribution center in Colon, Panama, to serve as a regional hub for the distribution of products among our companies in Latin America.
Production
Certain of the pharmaceutical products we market in the Latin America/Canada Region are manufactured by the Group's European facilities. At our facility in Orizaba, Veracruz, Mexico, we produce active pharmaceutical substances and intermediate products for the requirements of all of the Group's Regions.
The following table sets forth, as of December 31, 2004, the location of, and dosage forms produced by, our four production facilities in the Latin America/Canada Region:
Dosage form | Location |
|---|
Solids | São Paulo, Brazil
Santafé de Bogotá, Colombia
Orizaba, Mexico |
Semisolids | Buenos Aires, Argentina
Santafé de Bogotá, Colombia
Orizaba, Mexico |
Liquids | Buenos Aires, Argentina
Orizaba, Mexico |
Capital expenditures
Capital expenditures for the Latin America/Canada Region were €23m in 2002, €14m in 2003 and €9m in 2004. Capital expenditures are expected to total €11m in 2005.
Expenditures were spent mainly in the areas of production facilities and distribution facilities and modernization of information technology.
Asia/Pacific Region
Overview
The geographic segment referred to in this annual report as the Asia/Pacific Region comprises the countries of Asia (with exception of Japan), Australia and New Zealand. Turkey and the countries of Central Asia (including the Commonwealth of Independent States) are not included in the Asia/Pacific Region. The headquarters of the Asia/Pacific Region have moved to Singapore (Schering Asia-Pacific Private Limited) and began operations as of October 1, 2004. They manage the operations of our subsidiaries in Australia, China, Indonesia, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Taiwan and Thailand, as well as our branch offices and distributors in all the other major countries of the Region. The Asia/Pacific Region also operates production facilities in South Korea, China and Indonesia. The Asia/Pacific Region accounted for approximately 5% of the Group's net sales in 2004. As of December 31, 2004, the Asia/Pacific Region had 1,444 employees (including 630 sales representatives).
The following table sets forth the net sales by business area of the Asia/Pacific Region for the years ended December 31, 2004, 2003 and 2002:
| Year ended December 31, |
|---|
| 2004 | 2003 | 2002 |
|---|
| (€million) |
|---|
Net sales Asia/Pacific Region by business area: | | | |
Gynecology&Andrology | 95 | 88 | 88 |
Specialized Therapeutics | 57 | 47 | 46 |
Diagnostics&Radiopharmaceuticals | 73 | 68 | 76 |
Dermatology | 9 | 11 | 12 |
Other sources | 0 | 0 | 10 |
Total | 234 | 214 | 232 |
Among the factors that have affected, or may affect, the business of the Asia/Pacific Region are:
Exchange-rate effects.
Factors generally associated with operating in developing countries, including the risk of political and economic instability.
Certain of our fertility control products are purchased by institutional clients (including governments and non-government organizations) with unpredictable purchasing patterns, which can result in fluctuations in net sales and profitability from period to period.
We believe that the key competitive strengths of our business in the Asia/Pacific Region are:
Our specialized product portfolio, particularly in diagnostics as well as fertility control and hormone therapy.
Our strong market presence and high market share in diagnostics as well as fertility control and hormone therapy.
Products
The following table sets forth our top selling products in 2004 and in 2003 in the Asia/Pacific Region. These products represented 58% of the total net sales for this segment in 2004 (52% in 2003).
| Net sales
2004 (€million) | Percentage
change
from 2003 | Net sales
2003 (€million) | Percentage
change
from 2002 |
|---|
1. Ultravist® | 55 | 9 | 51 | 9 |
2. Betaferon® | 26 | 5 | 24 | 7 |
3. Diane® | 24 | 5 | 23 | 3 |
4. Microgynon® | 17 | 6 | 16 | 2 |
5. Magnevist® | 13 | 6 | 13 | (4) |
Total | 135 | | 127 | |
Marketing and distribution
The following table sets forth the main target groups for the marketing of our products in the Asia/Pacific Region:
Gynecology&Andrology | gynecologists, general practitioners, hospitals |
Diagnostics&Radiopharmaceuticals | radiologists, cardiologists, hospitals |
Specialized Therapeutics | general practitioners, oncologists, hematologists, hospitals |
Our products are marketed by 630 sales representatives located in all of the major markets of the Asia/Pacific Region. Our local sales and marketing organizations receive support from our Asia/Pacific Region headquarters in Singapore. Promotion of our products is supplemented by scientific seminars, workshops and advertising in medical journals.
In Taiwan, Thailand, Indonesia, the Philippines, Hong Kong, Malaysia and Singapore, we distribute our products through an exclusive distributor. In Australia, South Korea and China, we generally distribute our products through various wholesalers and pharmacies and, in some cases, directly to hospitals.
Production
Certain of the pharmaceutical products we market in the Asia/Pacific Region are manufactured by the Group's European facilities.
The following table sets forth, as of December 31, 2004, the location of, and dosage forms produced by our four production facilities in the Asia/Pacific Region:
Dosage form | Location |
|---|
Solids | Jakarta, Indonesia
|
Semisolids | Ansung, South Korea |
Liquids | Guangzhou, China
Ansung, South Korea |
In 2004, we closed our intrauterine system production in Guangzhou, China. In addition, we sold our production site in Nanjing, China, in December 2004.
Capital expenditures
Capital expenditures for the Asia/Pacific Region were €5m in 2002, €5m in 2003 and €5m in 2004. Capital expenditures are expected to total €3m in 2005.
Expenditures were mainly spent for upgrading of production facilities and the modernization of information technology.
Other Activities
The Other Activities segment is comprised of activities that are not of sufficient significance to require independent segment reporting. The Other Activities segment primarily consists of Pharmaceutical chemicals. The Other Activities segment accounted for approximately 2% of the Group's net sales in 2004.
The following table sets forth the net sales by business of the Other Activities segment for the years ended December 31, 2004, 2003 and 2002:
| Year ended December 31, |
|---|
| 2004 | 2003 | 2002 |
|---|
| (€million) |
|---|
Net sales by sub-segment: | | | |
Pharmaceutical chemicals | 58 | 118 | 121 |
Other | 22 | 21 | 30 |
Total | 80 | 139 | 151 |
Pharmaceutical chemicals is a small sales- and profit-oriented business unit with headquarters in Berlin, Germany. Pharmaceutical chemicals engages in the sale to third parties of intermediates and active pharmaceutical substances produced by the Group worldwide, particularly the Group's manufacturing facilities in Bergkamen, Germany, and Orizaba, Mexico. Pharmaceutical chemicals also is active in tailor-made chemistry. The pharmaceutical chemicals marketed include estrogens, progestins, androgens, corticosteroids, intermediates and tailor-made chemistry compounds. Sales to customers in Europe and the United States accounted for approximately 52% and 43%, respectively, of Pharmaceutical chemicals' net sales during 2004.
COMPETITION
We operate in a competitive global market. We encounter competition in all of our geographical markets from large national and international competitors. Important competitive factors include:
product characteristics and dependability (including safety, efficacy, range of indications, dosage form and convenience).
product price and demonstrated cost-effectiveness.
customer training and support.
sales force size and expertise.
advertising and promotion.
production and manufacturing costs.
research and development of new products and processes.
Gynecology&Andrology
Our principal competitors in the markets for female contraception and menopause management products are Wyeth, Inc., Johnson & Johnson's Ortho division, Novartis International AG, the Organon division of Akzo Nobel nv as well as Barr Laboratories, Inc., and Watson Pharmaceuticals, Inc.
Our principal competitors in male healthcare are Pfizer, Inc., the Organon division of Akzo Nobel nv and Bristol-Myers Squibb Company.
Specialized Therapeutics
The global markets for our specialized therapeutics products are highly competitive and include large as well as smaller niche competitors. Our major competitors include Biogen Idec, Inc., Serono International S.A., Pfizer, Inc. and Sanofi-Aventis, Teva Pharmaceutical Industries Limited in the field of multiple sclerosis therapeutics; Actelion and Pfizer, Inc., in the area of cardiovascular products; and Schering-Plough Corporation, Johnson & Johnson and Tanabe in Crohn’s disease; and F. Hoffmann-La Roche Ltd. and its subsidiary Genentech, Inc., Bristol-Myers Squibb Company, AstraZeneca PLC, Amgen, Inc., Novartis AG, Bayer AG, Merck KgaA, Imdrone and Schering-Plough in oncology.
Diagnostics&Radiopharmaceuticals
Our principal competitors in the X-ray and MRI contrast media field include GE Healthcare, Bracco S.p.A., Mallinckrodt, Inc., Tyco Healthcare Group LP., and, in Japan, Daiichi Pharmaceutical Co., Ltd. Other significant competitors include Guerbet S.A. in Europe, Latin America and Asia (other than Japan), Altana Pharma AG in Europe and Eisai Co. Ltd. in Japan. Generic X-ray and MRI contrast agents have not had a significant impact on our contrast media sales. However, we consider generic X-ray and MRI extracellular agents a potential risk to sales and market share in the future.
The radiopharmaceuticals market is dominated by a small number of companies. As we expand our business in this field, our main competitors are expected to include GE Healthcare, the Bristol-Myers Squibb Company and Mallinckrodt, Inc., in the United States and Europe and Nihon Medi-Physics Co., Ltd. and Daiichi Radioisotope Laboratories, Ltd. in Japan.
In the market for contrast media application technologies, Medrad's main competitors are the Liebel-Flarsheim unit of Mallinckrodt, Inc., particularly in the United States and Europe, and Nemoto Kyorindo Co., Ltd., particularly in Japan.
PATENTS AND OTHER INTELLECTUAL PROPERTY
We strive to protect our investment in research, development, manufacturing and marketing through the use of patents, trademarks and copyrights.
We believe that our patents are important to our business, but no one patent (or group of related patents) currently is of material importance in relation to our business as a whole. Patent protection for new active substances of pharmaceuticals, pharmaceutical formulations and combinations, manufacturing processes, intermediates useful in the manufacture of products and new uses of products is available in our major markets. Patents for individual products extend for varying periods according to the date a patent application is filed or a patent is granted and the legal term of patents in the jurisdiction where the patent is obtained. The actual protection provided by a patent, which can vary significantly from country to country, depends upon:
the type of granted claim.
the scope of coverage of the claim.
the availability of legal remedies in the country for enforcing a patent.
Our policy is to develop patent portfolios for our research and development projects in order to obtain market exclusivity for our products in our major markets. We also attempt to obtain patents on drug targets such as specific DNA sequences encoding for proteins and various uses of such subject matter in drug research.
Although the expiration of a patent for an active ingredient normally results in the loss of market exclusivity, we may continue to derive commercial benefits from:
later-granted patents on processes and intermediates related to the most economical method of manufacture of the active substance of such product.
patents relating to the use of such active ingredient.
patents relating to novel compositions and formulations.
in certain markets (including the United States), market exclusivity that may be available under applicable law.
Such commercial benefits strongly depend on the actual scope of protection.
In addition, the effect that the expiration of a patent has on the market position of a product can depend on many other factors, including:
the nature of the market and the position of the product covered by the patent in the market.
the growth of the market.
the complexities and economics of the manufacture of the product covered by the patent.
the requirements of new drug laws and regulations relating to the introduction of generic drugs.
The European Union, the United States, Japan and certain other countries provide for the extension or restoration of patent terms or supplementary protection certificates to compensate for patent term loss due to the regulatory review process and the substantial investment made for product research and development and regulatory approval. Our policy is to obtain these extensions where possible.
In the United States, new chemical entities approved by the FDA receive a period of five years exclusivity from the date of approval of the New Drug Application (NDA), during which time an abbreviated “NDA" or "paper NDA" may not be submitted to the FDA. Similarly, in the case of non-new chemical entities, no abbreviated NDA or paper NDA may become effective before three years from the time of NDA approval, if the application included new data of clinical investigations conducted or sponsored by the applicant. In addition, a pediatric exclusivity provision that provides for an additional six months of market exclusivity in the United States for indications of new or currently marketed drugs may be available if certain agreed upon pediatric studies are completed by the applicant.
The Orphan Drug Act in the United States is intended to provide incentives to manufacturers to develop and market drugs for rare diseases or conditions affecting fewer than 200,000 persons in the United States at the time of application for orphan drug designation. The first applicant who has obtained designation of a drug for a particular use as an orphan drug and then obtains approval of a marketing application for such drug for a particular use is entitled to marketing exclusivity for a period of seven years, subject to certain limitations. However, a drug that is considered by the FDA to be different from a particular orphan drug is not barred from sale in the United States during such seven-year exclusive marketing period even if it receives marketing approval for the same product claim.
The European Union also implemented an incentive program for the development of drugs for rare diseases which became effective in January 2000. Under these rules, a drug will be designated as an orphan medicinal product if its sponsor establishes at the time of application that the drug is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting not more than five in 10,000 persons in the European Community, or that without incentives, it is unlikely that the marketing of the drug would generate sufficient return to generate the necessary investment. The sponsor must also establish that there is no existing satisfactory method for the diagnosis, prevention or treatment of the condition in the European Community. A sponsor who receives designation of a drug as an o rphan drug is generally entitled to marketing exclusivity for a period of ten years (which period may be reduced to six years if the criteria for orphan drug status are no longer met). A marketing authorization may be granted for the same therapeutic indication to a similar drug within the exclusivity period if the holder of the authorization for the original orphan drug is unable to supply sufficient quantities of the drug or if an applicant can establish that its drug is safer, more effective or otherwise clinically superior to the original orphan drug.
Certain of our key products are no longer protected by patents (or other regulatory exclusivity measures) in our major markets, or protection for these products will expire in the near future. Many of our fertility control products have no patent protection remaining.
The following table sets forth the patent expiration dates of certain of our top selling products in certain of our major markets:
| Expiration date |
|---|
Product | Germany | France | Italy | Great
Britain | United
States | Japan |
|---|
Betaferon® (Betaseron®) | | | | | | |
Product | 2008* | 2008* | 2008* | 2008* | 2007+ | 2003**** |
Yasmin® | | | | | | |
Formulation | 2020### | 2020### | 2020### | 2020### | 2020### | 2020###** |
Magnevist® | | | | | | |
Product | — | 2005* | 2007# | — | 2011 | — |
Formulation | 2007 | 2007 | 2007 | 2007 | 2009 | 2007 |
Method of use | — | — | — | — | 2013 | — |
Ultravist® | | | | | | |
Product | — | 2005* | 2009# | — | 2005* | 2005* |
Mirena® | | | | | | |
Device (Inserter) | 2015 | 2015 | 2015 | 2015 | 2015 | — |
Process | 2013 | 2013 | 2013 | 2013 | 2013 | 2013 |
Fludara® | | | | | | |
Product | 2018## | 2018## | 2018## | 2018## | 2018##** | 2018##** |
Femovan® | | | | | | |
Product | — | — | 2005# | — | — | — |
Process | 2006 | 2006 | 2006 | 2006 | 2005*** | 2006 |
Campath® | | | | | | |
Product | 2009 | 2009 | 2009 | 2009 | 2015 | 2009 |
Leukine® | | | | | | |
Product | 2006 | 2006 | 2006 | 2006 | 2012 | 2006 |
* Patent term extension
** Patent pending
*** Product not sold in the United States
**** Appeal against rejection of patent term extension pending
# Action against administrative recalculation pending
## Fludarabine Phosphate (active substance of Fludara®) of purity > 99,5%
### Composition comprising micronized drospirenone together with eythinylestradiol
+ Schering AG has contractual options to product patent rights which may confer exclusivity until at least 2011. |
We monitor the patent applications and related activities of our competitors and other third parties. In cases where we believe that patents granted do not meet the standards of patentability and such patents may potentially have an adverse impact on our current or future business, we oppose the grant of such patents in countries where such opposition is feasible, particularly through oppositions in the European Patent Office, and nullity proceedings in front of various national courts. Similarly, third parties may commence proceedings to oppose or nullify the grant of patents to the Group. These proceedings may result in the revocation of any of our existing or future patents.
We routinely monitor the activities of our competitors and other third parties with respect to their use of intellectual property. For example, on March 15, 2005, we became aware of a posting on the FDA's website regarding an abbreviated new drug application (ANDA) by a third party with respect to our oral contraceptive Yasmin®, one of our best-selling products. We have not been provided to date by the third party with a statement of the basis as to why our FDA-listed patents for Yasmin® would not be valid or would not be infringed by such an application, and in any case, we are prepared to defend vigorously our patent and regulatory position with respect to Yasmin®.
In cases where we believe our patents have been infringed, we generally file patent infringement suits with the appropriate courts. We may not be successful in these patent infringement suits. Likewise, we may be exposed to litigation by competitors or other third parties that consider their patents to be infringed by our activities. Patent litigation is often time-consuming and expensive. If we do not prevail in patent litigation, we may have to pay substantial damages or royalties to a competitor or other third party. We may also be enjoined from selling a product in one or more markets or from conducting research and development activities in a specific area. For a discussion of certain patent-related litigation in which we are involved, see "Item 8 – Financial Information – Legal Proceedings".
Worldwide, all of our major products are sold under trademarks that we consider in the aggregate to be important to the Group. Trademark protection varies widely throughout the world. In some countries, trademark protection continues as long as the trademark is used. Other countries require registration of trademarks. Registrations are generally for fixed but renewable terms.
Like other major pharmaceutical companies, we grant licenses under patents and know-how developed by us and we manufacture and sell products and use technology and know-how under licenses from others.
Schering AG and Schering-Plough Corporation have entered into an agreement relating to their respective use of the name "Schering". Under this agreement, subject to certain limited exceptions, Schering AG may not use the Schering name for commercial purposes relating to its healthcare business (including pharmaceutical products) in the United States and Canada where we operate our pharmaceutical business under the Berlex trade name, while in the rest of the world our use of the Schering name is unrestricted.
SUPPLIES AND RAW MATERIALS
We purchase raw materials and supplies on a worldwide basis from numerous suppliers. In those cases where only a single supplier is available, we seek to accumulate and maintain a strategic reserve inventory of raw materials and supplies, qualify new suppliers, and develop production processes in our own facilities. We undertake to secure strategic materials through medium- and long-term contracts. We have not experienced difficulties in obtaining sufficient amounts of raw materials and supplies in recent years and we anticipate that we will be able to do so in the future. The price of raw materials and supplies may vary substantially in the future.
The Group's European facilities produce a substantial portion of the active substances used for the production of our products in the Europe, United States, Latin America/Canada, Japan and Asia/Pacific Regions. In addition, a number of the active pharmaceutical substances of our top-selling products, including Betaferon® (Betaseron®) and Iopamiron®, are manufactured by third parties under long term contracts.
REGULATION
Like other pharmaceutical companies, we are subject to comprehensive government controls on the research, clinical and non-clinical development, manufacture, labeling, advertising, safety reporting, distribution and marketing of our products in all countries of the world. These controls include various and detailed government inspections. We are required to obtain regulatory approval for pharmaceutical products and medical devices before we can market the products in a particular country, according to the applicable national regulations. These approvals must be maintained in order to continue marketing the product. We are in material compliance with applicable governmental regulations in the jurisdictions in which we operate.
For the registration of a pharmaceutical product, evidence establishing the quality, safety and efficacy of the product must be submitted together with information about its identification and the texts for physician and patient information. The evidence of quality is included in the chemical-pharmaceutical documentation and the evidence of safety and efficacy in the pharmacological-toxicological and clinical documentation, all of which is gathered into a registration dossier. A pharmaceutical product generally must be registered in each country in which it will be sold.
The submission of an application to a regulatory authority does not guarantee that approval to market the product will be granted. Although the above-mentioned criteria for the registration of therapeutic and diagnostic products are similar in all countries, the formal structure of the necessary documentation for registration and the attitude of the regulatory authorities to the review of such documents vary significantly from country to country. It is possible that a pharmaceutical product can be registered and marketed in one country and that the registration authority in a neighboring country prior to registration will request additional documents from the pharmaceutical company or even reject the product. The registration process takes between six months and several years depending on the nature of the product, the quality of the data produced, the country-specific legislation and the registration authority. Innovative products of particular therapeutic interest (e.g., treatment of life threatening or disabling diseases) may be processed on an accelerated basis in many countries. The FDA, the Japanese Ministry of Health, Labour and Welfare (Koseirodosho) and the EU authorities have successfully shortened review times and adhere to preset timelines thereby approaching approval times in the range of 12 months. The pharmaceutical development and registration process is typically intensive, lengthy and rigorous. Once a new compound has been identified in the laboratory as a potential candidate drug through a screening process, it undergoes broad pre-clinical testing. During pre-clinical testing, test tube and animal studies are conducted to show biological activity of the compound against the targeted disease, and on (other) body systems to evaluate the whole efficacy and safety range. To begin clinical trials (i.e., tests of the drug in humans) in the United States, an investigational new drug application (IND) is filed with the FDA; the IND becomes effective, if the FDA does not disapprove it within 30 days. In other countries, there are varying but similar requirements before beginning clinical trials. Clinical testing is usually done in three Phases which can be followed by Phase IV after approval. The size and the duration of clinical trials depend very much on the targeted disease. Following the completion of all three Phases of clinical trials, all of the data is analyzed and a new drug application (NDA) for drugs or a biologic license application (BLA) for biologics is filed with the FDA (or its equivalent in other countries), if the data successfully demonstrates safety and efficacy. In the United States, the FDA is required to review and make a recommendation for approval of new drugs within 12 months. For drugs designated as "priority" drugs, the review time is six months.
Once the FDA (or the respective agency in another country) approves the application, the new pharmaceutical becomes available for physicians to prescribe. The pharmaceutical company must continue to submit periodic reports to the agency, including any cases of adverse reactions and appropriate quality-control records. For some medications, additional studies (Phase IV) are required to evaluate long-term effects.
The duration of trials and the vast amount of data that must be collected and evaluated makes clinical testing the most time-consuming and expensive part of new drug development. We have instituted a global system for coordinating this process in order to increase speed and reduce costs.
Marketed products are reviewed continuously for quality, safety and efficacy. For this, we have established an internal review board. From time to time, we may elect or be required, upon consultation with or at the direction of governmental regulators, to take certain action (e.g., change of product information, recall). In the past, such action was required only rarely and has been limited to individual products, and the effect on the Group has not been material.
In addition to the regulations enforced by the FDA (and the respective government agencies in other countries), we are subject to laws regarding environmental protection and hazardous substances that govern our use, handling and disposal of various biological, chemical and radioactive substances used in, and wastes generated by, our operations.
Certain of the products that we market and are developing may be considered biotechnology products. Ethical, social and legal concerns about gene therapy, genetic testing and genetic research could also result in additional regulations restricting or prohibiting the processes we or our suppliers may use. Various governments have expressed interest in further regulating biotechnology. More restrictive regulations or claims that such products are unsafe or pose a hazard could prevent or delay the continued sale or commercialization of such products.
In addition to the normal competitive forces that affect the level of pharmaceuticals prices, a further constraint exists in the form of governmental intervention such as price or profit controls, budgets or patient contribution requirements in most countries in which the Group sells its products. These controls arise either by law or because the government or other healthcare providers in a particular jurisdiction are the principal purchasers of the product or reimburse purchasers of the product for all or a portion of the cost of the product. Price control mechanisms operate differently from jurisdiction to jurisdiction and can result in large price differentials between markets. These differentials may be increased by currency fluctuations and the intensity of competition in specific markets, since not all drugs are authoriz ed in every market.
We cannot predict with certainty what future effects various pharmaceutical cost control efforts will have on our business. These efforts could have significant adverse consequences for the pharmaceutical industry as a whole and consequently also for the Group. Increasing budgeting and price controls, the inclusion of patent protected drugs in a fixed price system and lists for the rational use of drugs as well as legislation permitting or requiring a dispensing pharmacist to substitute another version of the pharmaceutical product for the one prescribed may occur in the future.
ORGANIZATIONAL STRUCTURE
Schering AG is the parent company of the Schering AG Group. The Group is comprised of over 140 subsidiaries worldwide.
The following table sets forth, by geographic segment, as of December 31, 2004, the name, jurisdiction of incorporation, and direct or indirect ownership interest and voting interest held in, of Schering AG's principal operating subsidiaries.
Europe Region: | | |
|---|
Company | Jurisdiction | Percentage of
ownership and
voting interest |
|---|
Jenapharm GmbH & Co. KG | Germany | 100.0 |
Schering Deutschland GmbH | Germany | 100.0 |
N.V. Schering S.A. | Belgium | 100.0 |
Schering Oy | Finland | 100.0 |
CIS bio international S.A. | France | 100.0 |
Schering S.A. | France | 99.9 |
Schering Health Care Ltd. | Great Britain | 100.0 |
Schering S.p.A. | Italy | 100.0 |
Schering Nederland B.V. | Netherlands | 100.0 |
Schering Austria Ges. m.b.H. | Austria | 100.0 |
Schering Lusitana Lda. | Portugal | 100.0 |
Schering (Schweiz) AG | Switzerland | 100.0 |
Schering España S.A. | Spain | 99.9 |
Schering Alman Ilaç ve Ecza Ticaret Ltd. | Turkey | 100.0 |
Schering (Pty.) Ltd. | South Africa | 100.0 |
United States Region: | | |
Company | Jurisdiction | Percentage of
ownership and
voting interest |
Schering Berlin Inc. | United States | 100.0 |
Berlex, Inc. | United States | 100.0 |
Medrad, Inc. | United States | 100.0 |
Japan Region: | | |
Company | Jurisdiction | Percentage of
ownership and
voting interest |
Nihon Schering K.K. | Japan | 100.0 |
Latin America/Canada Region: | | |
Company | Jurisdiction | Percentage of
ownership and
voting interest |
Schering Argentina S.A.I.C. | Argentina | 100.0 |
Schering do Brasil Ltda. | Brazil | 100.0 |
Schering Colombiana S.A. | Colombia | 100.0 |
Schering Mexicana S.A. | Mexico | 100.0 |
Berlex Canada, Inc. | Canada | 100.0 |
Asia/Pacific Region: | | |
Company | Jurisdiction | Percentage of
ownership and
voting interest |
Schering Pharmaceutical Ltd. | China | 100.0 |
P.T. Schering Indonesia | Indonesia | 85.0 |
Schering (Korea) Ltd. | South Korea | 100.0 |
Schering Taiwan Ltd. | Taiwan | 100.0 |
Schering (Bangkok) Ltd. | Thailand | 100.0 |
Schering Pty. Ltd. | Australia | 100.0 |
PROPERTY, PLANTS AND EQUIPMENT
Schering AG's principal executive offices are located in Berlin, Germany.
We produce active pharmaceutical substances at three locations in three countries, including our primary facility in Bergkamen, Germany, and two smaller facilities in Spain and Mexico.
In addition to these chemical production operations, we presently operate 19 principal production facilities in 14 countries for the formulation and packaging of pharmaceutical, radiopharmaceutical and biotechnological products. We believe that our current and projected future manufacturing and production facilities have and will have capacities adequate for our current and projected needs. As described under “Item 5-Operating and Financial review and Prospects-Liquidity and Capital Resources-Restructuring Program”, as part of our MORE program, we aim to reduce the number of our worldwide pharmaceutical production sites to 12.
We also own or lease other properties used for administration, research and development, marketing and sales, and warehouses.
For information regarding our capital expenditure program, see "Group Organization – Group Segments – Europe Region-Capital Expenditures", "– United States Region – Capital Expenditures", "– Latin America/Canada Region – Capital Expenditures",
"– Japan Region – Capital Expenditures" and "– Asia/Pacific Region – Capital Expenditures", and "Item 5 – Operating and Financial Review and Prospects – Liquidity and Capital Resources – Capital Expenditures".
The following table sets forth, by segment, the location, approximate size and use of our production, distribution and other facilities. These facilities are owned unless otherwise indicated. Administration offices comprise functions such as finance, marketing, sales and medical departments.
Location | Size (square meters)(1) | | Principal uses |
|---|
Europe Region: | | | |
Berlin-Wedding, Germany | 184,000 | | Production, research and development and offices |
Berlin-Charlottenburg, Germany(2)(4) | 32,800 | | Production |
Bergkamen, Germany | 958,000 | | Production and offices |
Hamburg, Germany | 8,000 | | Production and offices |
Jena, Germany | 16,500 | | Research and development and offices |
Weimar, Germany | 63,800 | | Production and warehousing |
Saclay, France | 63,000 | | Production and research and development |
Marcoule, France | 46,000 | | Production and offices |
Lys-Lez-Lannoy, France(3) | 60,000 | | Production, warehousing and offices |
Madrid, Spain | 13,000 | | Offices |
Alcalá de Henares, Spain | 30,000 | | Production and offices |
Milan, Italy | 39,000 | | Production and offices |
Turku, Finland(2) | 155,000 | | Production and research and development |
Tikkakoski, Finland | 1,100 | | Production and offices |
United States Region: | | | |
Montville, New Jersey(4) | 21,000 | | Offices |
Wayne, New Jersey(4) | 24,000 | | Production, development, warehousing and offices |
Richmond, California(4) | 31,000 | | Research and development, warehousing and offices |
Indianola, Pennsylvania(4) | 38,600 | | Production, research and development, warehousing and offices |
Pittsburgh, Pennsylvania(4) | 14,400 | | Production, warehousing and offices |
Bedford, Massachusetts(4) | 3,500 | | Production, development and offices |
Seattle, Washington(2)(4) | 3,100 | | Production and offices |
Bothell, Washington(2)(4) | 7,900 | | Production, warehouse, offices |
South Snohomish County, Washington | 65,000 | | Property (unimproved land) |
Japan Region: | | | |
Osaka City, Japan | 26,000 | | Production, development, warehousing and offices |
Mobara City, Japan | 39,800 | | Production, warehousing |
Sakura City, Japan | 10,000 | | Production, development |
Latin America/Canada Region: | | | |
Orizaba, Veracruz, Mexico | 152,100 | | Production, development, warehousing and offices |
Bogotá, Colombia | 9,300 | | Production, warehousing and offices |
São Paulo, Brazil | 10,700 | | Production, warehousing and offices |
Buenos Aires, Argentina | 10,200 | | Production, warehousing and offices |
Asia/Pacific Region: | | | |
Ansung, South Korea | 17,000 | | Production |
Jakarta, Indonesia | 19,000 | | Production, warehousing and offices |
Guangzhou, China | 20,000 | | Production |
(1) This measure corresponds to the size of the land, if not indicated otherwise.
(2) Subject to a lease.
(3) A portion of this facility is subject to a lease.
(4) Floor space/office space.
| |
ENVIRONMENTAL AND SAFETY MATTERS
The highest possible requirements for quality, environmental protection and safety are critical success factors for Schering AG. The Company’s policy in this area is characterized by stability and continuity. We adhere to the concept of Sustainable Development that meets the needs of today's generation while ensuring that future generations have something to inherit. Therefore our goal is to recognize today the economic, ecological, and social requirements of tomorrow. In this way, we intend to lay the foundations for a competitive future business.
We are pursuing our goal of further enhancing our already high product quality and the effectiveness of our procedures, and continuously improving our performance in the areas of health and safety and environmental protection, based on Group-wide principles and an Integrated Management System (IMS) for quality, environmental protection and safety.
The IMS is designed to ensure the implementation of and compliance with our own high standards – critical success factors for Schering AG. The Group-wide IMS describes all relevant requirements resulting from internal quality, environmental protection and safety standards. It takes into account not only international standards such as ISO 9001 (for quality) and ISO 14001 (for environmental protection), but also national differences and site-specific issues. The IMS also covers the statutory requirements for drug safety and international Good Manufacturing Practice. All production locations are involved in the continuous update process for these internal regulations to ensure a common, Group-wide understanding of our standards.
To guarantee these high standards in our production facilities worldwide, we perform regular audits on quality, environmental protection and safety. This systematic, documented review of the management systems in our organizational units enforces compliance with internal and statutory requirements for quality, environmental protection and safety. At the same time, we can identify weaknesses and opportunities for improvement.
At certain sites we are responsible for cleaning up the contamination caused by the release or disposal of pollutants from former operations. In some cases, this liability is shared with other parties who are also responsible for the contamination, or their legal successors. Given our long history as a manufacturing enterprise, there may be other sites where we will be obliged to take over part or all of the clean up costs.
We are confident that we have set up adequate reserves for those remediation obligations currently known to us, and that these activities will not have a material adverse effect on our operating profit, our liquidity, or the Group's overall financial position.
We have spent substantial amounts on environmental protection and safety measures up to now, and anticipate having to spend similar sums in 2005 and subsequent years.
In 2004, our operating and maintenance costs in the field of environmental protection and safety totaled €74m (2003: €76m). Our capital expenditure on environmental protection projects and other ecologically beneficial projects totaled €4m (2003: €15m).
We estimate that our annual operating and maintenance costs for safety and environmental measures will increase to between €76m and €80m annually by 2009. We expect capital expenditure on environmental projects and other ecologically beneficial projects to be between €5m and €15m annually over the same period.
Item 5. Operating and Financial Review and Prospects
You should read the following operating and financial review of our results of operations and financial condition together with our Consolidated Financial Statements included elsewhere in this annual report.
INTRODUCTION
Accounting Policies
We prepared our Consolidated Financial Statements in accordance with the International Financial Reporting Standards (IFRSs) of the International Accounting Standards Board. Standards which were issued before April 1, 2001, are designated as International Accounting Standards (IAS). IFRSs differ in certain material respects from United States Generally Accepted Accounting Principles. You can read about some of the principal differences in Note 37 to our Consolidated Financial Statements. Note 37 to our Consolidated Financial Statements also provides a reconciliation of our Consolidated Financial Statements to United States Generally Accepted Accounting Principles.
We do not utilize commodity contracts. For a detailed discussion of our use of exchange-traded and over-the-counter derivative financial instruments to reduce currency and interest-rate risk resulting from anticipated transactions and from existing assets and liabilities, see “Item 11 – Quantitative and Qualitative Disclosures about Market Risk" and Note 31 to our Consolidated Financial Statements.
Segment reporting
The segment information reported in Note 33 to our Consolidated Financial Statements is presented in accordance with IAS 14 (revised). As required by IAS 14 (revised), our primary basis of segment reporting is geographic, which reflects the management structure of our sales organization, our system of internal financial reporting and what we believe to be the predominant source and nature of risks and returns of our business. Our segment reporting is comprised of five geographic segments: Europe Region, United States Region, Japan Region, Latin America/Canada Region, and Asia/Pacific Region. Other Activities (primarily our pharmaceutical chemicals business) are managed and reported on a worldwide basis and are therefore presented as a separate segment.
EXECUTIVE SUMMARY
The following table informs about our perspective on business transactions which had a material effect (positive +; negative –) on the Operating profit, Financial result and Income taxes in 2004 compared to 2003:
Business transaction | Effect |
1. Operating profit: (2004: €761m; 2003: €686m) | |
• Strong growth of high-margin products Yasmin® and Mirena® in 2004. | + |
• Double-digit sales growth in the United States Region after adjustment of currency effects. | + |
• Reduced production license fees. | + |
• Restrictive cost alignment measures particularly in production and the production-related areas of engineering and administration. | + |
• Discontinuation of goodwill amortization following the application of IFRS 3 since January 1, 2004. | + |
• Reversal of provisions relating to the sale of the Industrial Chemicals and Natural Substances division in 1992. | + |
• Appreciation of the euro against the dollar and other currencies as well as reduced gains from cash flow hedges. | – |
• Further generic competiton for Fludara® after loss of patent protection in the U.S. in 2003. | – |
• Government imposed price reductions in Japan since April 1, 2004. | – |
• Government imposed rebates of 16% (2003: 6%) on sales of products refunded by health insurance in Germany. | – |
• Expenses following the redesign of pension plans in Japan. | – |
• Expenses for restructuring following the FOCUS Initiative. | – |
2. Financial result (2004: €(9)m; 2003: €15m) | |
• Non-recurring gain of €22m in 2003 from the sale of our interest in Oy Leiras Finland AB. | – |
3. Income taxes (2004: €(249); 2003: €(255)m) | |
• Tax expenses of €13m relating to other accounting periods in 2003. | + |
• Tax income of €21m relating to other accounting periods in 2004, especially resulting from the reversal of a provision after completed tax audit at a subsidiary. | + |
• Reduced tax rate in Germany due to the absence of a surcharge levied only for 2003 under legislation for the assistance for the flood victims in Germany in 2002. | + |
• Cancelled tax credits on dividends. | – |
RESULTS OF OPERATIONS
Overview
The following table sets forth the net sales, net sales expressed as a percentage of total net sales, and percentage change in net sales from the prior year, the segment performance, segment performance expressed as a percentage of total segment performance and percentage change in segment performance from the prior year, and the segment result, segment result expressed as a percentage of total segment result and percentage change in segment result from the prior year, for each of the Group's segments for the three years ended December 31, 2004, 2003 and 2002. As discussed in Note 33 to our Consolidated Financial Statements:
Segment performance is an internal financial reporting measurement utilized by our management. Transfers from our centralized production facilities in Europe are charged to segments at standard production cost. Research and development expenses are not included in segment performance because research and development activities are managed on a worldwide basis.
To determine segment result for a segment, we subtract an allocation of research and development expenses and central production overhead and production variances from segment performance.
To determine total operating profit for the Group, we subtract certain items (such as costs of corporate functions and other operating income and expenses) from the total segment result.
| Year ended December 31, |
|---|
| 2004 | | 2003 | | 2002 |
|---|
| € | % of
segment
total | Percentage
change
from 2003 | € | % of
segment
total | Percentage
change
from 2002 | € | % of
segment
total |
|---|
| (in million, except percentages) |
|---|
Net Sales: | | | | | | | | |
Europe Region* | 2,472 | 50 | 4 | 2,372 | 49 | 1 | 2,349 | 47 |
United States Region | 1,242 | 25 | 3 | 1,203 | 25 | (6) | 1,282 | 25 |
Japan Region | 468 | 10 | (10) | 517 | 11 | (11) | 579 | 12 |
Latin America/Canada Region | 411 | 8 | 7 | 383 | 8 | (11) | 430 | 9 |
Asia/Pacific Region* | 234 | 5 | 9 | 214 | 4 | (8) | 232 | 4 |
Other Activities | 80 | 2 | (42) | 139 | 3 | (8) | 151 | 3 |
Total net sales | 4,907 | 100 | 2 | 4,828 | 100 | (4) | 5,023 | 100 |
Segment performance: | | | | | | | | |
Europe Region* | 1,116 | 56 | 10 | 1,018 | 54 | (1) | 1,030 | 53 |
United States Region | 446 | 23 | 13 | 394 | 21 | 8 | 366 | 19 |
Japan Region | 133 | 7 | (34) | 202 | 11 | (12) | 229 | 12 |
Latin America/Canada Region | 155 | 8 | 13 | 137 | 7 | (4) | 143 | 7 |
Asia/Pacific Region* | 90 | 4 | 11 | 81 | 4 | (12) | 92 | 5 |
Other Activities | 39 | 2 | (32) | 57 | 3 | (24) | 75 | 4 |
Total segment performance | 1,979 | 100 | 5 | 1,889 | 100 | (2) | 1,935 | 100 |
Central production overhead/variances | (153) | | (6) | (162) | | 14 | (142) | |
Research and development | (919) | | (1) | (924) | | (2) | (947) | |
Segment result | 907 | | 13 | 803 | | (5) | 846 | |
Segment result: | | | | | | | | |
Europe Region* | 580 | 64 | 12 | 519 | 65 | (4) | 538 | 64 |
United States Region | 154 | 17 | 23 | 125 | 16 | 20 | 104 | 12 |
Japan Region | 42 | 5 | (52) | 88 | 11 | (17) | 106 | 12 |
Latin America/Canada Region | 82 | 9 | 64 | 50 | 6 | 16 | 43 | 5 |
Asia/Pacific Region* | 40 | 4 | 48 | 27 | 3 | (31) | 39 | 5 |
Other Activities | 9 | 1 | – | (6) | (1) | (138) | 16 | 2 |
Total segment result | 907 | 100 | 13 | 803 | 100 | (5) | 846 | 100 |
Other | (146) | | 25 | (117) | | 11 | (105) | |
Total operating profit | 761 | | 11 | 686 | | (7) | 741 | |
* As of January 1, 2004 we have reassigned certain countries between the Europe Region and the Asia/Middle East Region and have renamed the Asia/Middle East Region the Asia/Pacific Region. Among others, the countries of the Middle East are now part of the Europe Region, while Australia and New Zealand are now part of the Asia/Pacific Region. The previous year’s figures in our segment reporting have been adjusted accordingly. |
The following table sets forth the net sales, net sales expressed as a percentage of total net sales, and percentage change in net sales from the prior period for the Group's business areas for the three years ended December 31, 2004, 2003 and 2002. In 2002, the business area Fertility Control&Hormone Therapy was renamed Gynecology&Andrology to reflect our focus on specific healthcare solutions for women and men.
| Year ended December 31, |
|---|
| | 2004 | | | 2003 | | | 2002 |
|---|
| € | Percentage
of net sales | Percentage
change
from 2003 | € | Percentage
of net sales | Percentage
change
from 2002 | € | Percentage
of net sales |
|---|
| (in million, except percentages) |
|---|
Net sales by Business Area: | | | | | | | | |
Gynecology&Andrology | 1,768 | 36 | 9 | 1,622 | 34 | 1 | 1,613 | 32 |
Specialized Therapeutics | 1,542 | 31 | (1) | 1,560 | 32 | (5) | 1,637 | 33 |
Diagnostics&Radiopharmaceuticals | 1,308 | 27 | 0 | 1,312 | 27 | (7) | 1,406 | 28 |
Dermatology | 207 | 4 | 4 | 200 | 4 | (7) | 217 | 4 |
Other sources | 82 | 2 | (40) | 134 | 3 | (10) | 150 | 3 |
Total | 4,907 | 100 | 2 | 4,828 | 100 | (4) | 5,023 | 100 |
2004 Compared to 2003
Group
Consolidated Income Statements | 2004 | 2003 |
|---|
| € | % of net sales | € | % of net sales |
|---|
| (in million, except percentages) |
|---|
Net sales | 4,907 | 100 | 4,828 | 100 |
Cost of sales | (1,206) | 25 | (1,233) | 26 |
Gross profit | 3,701 | 75 | 3,595 | 74 |
Marketing and selling costs | (1,548) | 32 | (1,525) | 32 |
Engineering and administration costs | (524) | 11 | (566) | 12 |
Research and development costs | (919) | 19 | (924) | 19 |
Other operating income | 362 | | 399 | |
Other operating expenses | (311) | | (293) | |
Operating profit | 761 | 16 | 686 | 14 |
Financial result | (9) | | 15 | |
Profit before taxes | 752 | 15 | 701 | 15 |
Income taxes | (249) | 5 | (255) | 5 |
Profit for the period | 503 | 10 | 446 | 9 |
Attributable to: | | | | |
Net profit | 500 | 10 | 443 | 9 |
Minority interest | 3 | | 3 | |
The following table sets forth our top-selling products during 2004. These products represented approximately 56% of the total net sales for the Group in 2004:
Top-selling products | Net sales | Percentage
change
from 2003 |
|---|
| (€million) | total | currency adjusted |
|---|
1. Betaferon® (Betaseron®) (therapeutics) | 782 | 2 | 5 |
2. Yasmin® (fertility control) | 429 | 48 | 56 |
3. Magnevist® (diagnostics) | 303 | 1 | 6 |
4. Iopamiron® (diagnostics) | 241 | (8) | (6) |
5. Ultravist® (diagnostics) | 236 | 0 | 3 |
6. Mirena® (fertility control) | 199 | 21 | 25 |
7. Diane® (gynecology) | 186 | (8) | (6) |
8. Microgynon® (Levlen®) (fertility control) | 128 | 3 | 7 |
9. Meliane® (fertility control) | 120 | 2 | 4 |
10. Fludara® (therapeutics) | 103 | (26) | (25) |
Total | 2,727 | 5 | 8 |
Net sales
The following table sets forth our net sales by geographic segment during 2004 and 2003, the total change in net sales for each of the geographic segments and the Group reported in the Consolidated Financial Statements and an allocation of such changes among volume/price effects, currency effects and structure effects (effects from acquisitions and divestitures of businesses and products). In the accompanying discussion of net sales of the Group and by geographic segment, in addition to providing net sales figures reported in euro in accordance with IFRSs, we sometimes provide net sales figures for a region, country, business area or product in local currencies or on an organic basis. This disclosure is provided in order to assist investors in making comparisons from period to period and to understand underlying trends in our n et sales that may not be apparent.
Net sales by Region | € | Percentage change from 2003 | % of net sales |
|---|
| 2004 | 2003 | total | volume/price | currency | structure* | 2004 | 2003 |
|---|
| (in million, except percentages) |
|---|
Europe Region** | 2,472 | 2,372 | 4 | 5 | 0 | (1) | 50 | 49 |
United States Region | 1,242 | 1,203 | 3 | 13 | (10) | 0 | 25 | 25 |
Japan Region | 468 | 517 | (10) | (8) | (2) | 0 | 10 | 11 |
Latin America/Canada Region | 411 | 383 | 7 | 16 | (9) | 0 | 8 | 8 |
Asia/Pacific Region** | 234 | 214 | 9 | 13 | (4) | 0 | 5 | 4 |
Other Activities | 80 | 139 | (42) | (41) | (1) | 0 | 2 | 3 |
Total | 4,907 | 4,828 | 2 | 5 | (3) | 0 | 100 | 100 |
* Effects from acquisitions and divestitures
** Reallocation of individual countries to Regions indicated; previous year’s figures adjusted accordingly |
Net sales represents the gross inflow of economic benefits received and receivable by the Group on its own account from the sales of goods and services. Sales rebates and discounts as well as amounts collected on behalf of third parties such as sales taxes and goods and services taxes are excluded from net sales.
In 2004, the Schering AG Group generated organic net sales growth of 5%, mainly due to increased sales volumes. The continuing strength of the euro negatively affected net sales by 3%. In total, net sales in fiscal year 2004 rose by 2% to €4,907m.
Net sales in the Gynecology&Andrology business area rose by 13% currency adjusted, based on the strong growth of 15% (total +12%) in the field of fertility control. This was due in particular to the ongoing strong increase in net sales of Yasmin® (+56% currency adjusted, total +48%). With total net sales of €429m, Yasmin® is now the Schering AG Group’s number two product. In addition, Mirena® recorded an above-average increase in net sales of 25% in local currencies (total +21%). Our hormone therapy business stabilized (total –4%), with positive price effects (+4%) offsetting a decline in volumes (–4%). Total net sales in the Gynecology&Andrology business area increas ed by 9% to €1,768, despite negative currency effects (–4%).
The Specialized Therapeutics business area recorded an organic growth of 3%. After adjustment for negative currency and structure effects, net sales declined slightly overall by 1% to €1,542m. The structure effect (–1%) was related to the streamlining of our product range as a result of the sale of non-core products by our German subsidiary, Jenapharm GmbH & Co. KG. Organic growth in the Specialized Therapeutics business area was primarily due to a rise in net sales of Betaferon®, Campath® (marketed outside U.S. as MabCampath®), Leukine®, and Bonefos®. As expected, net sales of Fludara®, which lost its patent protection in the U.S. in August of 2003, declined further due to the resulting competition from generic products. Net sales of Betaferon® amounted to €782m (+5% currency adjusted, total +2%). This healthy growth was helped by ongoing product enhancements, facilitating the application of Betaferon®. Our cancer therapy Campath® generated an increase in net sales growth of 7% currency adjusted (total +1%) in 2004.
Net sales in the Diagnostics&Radiopharmaceuticals business area rose by 4% currency adjusted in 2004. As a result, net sales amounted to €1,308m, remaining at the previous year’s level despite negative currency effects (–4%). Net sales of contrast agents for magnetic resonance imaging (MRI) rose after adjustment for currency effects by 8% (total +3%). This increase was primarily due to an encouraging rise in net sales of Magnevist®, as well as to strong rates of increase on the part of our new products, Gadovist® and Resovist®. In contrast, currency adjusted net sales of X-ray contrast media fell slightly by 2% (total –4%) as a result of negative price trends (–4%), which were only partially offset by higher sales volumes (+2%). Net sales of our application technologies for contrast agents, marketed by our U.S. subsidiary Medrad, Inc., rose by 17% currency adjusted (total +7%) in 2004. Since our application technologies business is managed centrally from the United States, we allocate global net sales by the Medrad Group to the United States Region. Translation of the relevant amount into euros led to negative currency effects of 10%.
The Dermatology business area recorded solid organic growth of 6%, with our top-selling products – Advantan® and Skinoren® – making a disproportionately large contribution. After adjustment for currency effects (–2%), total net sales rose by 4% to €207m.
Gross profit
Gross profit represents net sales after cost of sales. Cost of sales includes the production costs of goods sold including expenses relating to unutilized capacity (see also Note 4 to our Consolidated Financial Statements) and the purchased cost of goods for resale.
Gross profit increased by 3% to €3,701m in 2004. The gross margin improved by 0.9 percentage points to 75.4%, due in particular to the increased proportion of high-margin products and lower production royalties.
Operating profit
Operating profit represents gross profit after marketing and selling costs, engineering and administration costs, research and development costs, and other operating income and expenses. Engineering and administration costs include costs of production management and planning, factory safety and administration, environmental protection, technology cost centers such as workshops, energy production, services and waste disposal (only to the extent that these costs are not internally reallocated to the consuming functions), training, and general administration such as human resources, purchasing, controlling and accounting.
Operating profit was €761m, 11% up on the previous year’s figure. Marketing and selling costs increased by 2% in line with net sales. Engineering and administration costs declined by 7% to €524m. Research and development costs decreased by 1% to €919m. Their ratio to net sales remained stable, at 19%. The development of the costs of operating functions reflects favorable exchange rate effects and strict cost management.
Net Other operating income and expenses decreased by €55m. Key negative effects here were lower year-on-year gains from currency hedges, expenses from the implementation of our FOCUS Initiative and one-time charges relating to pension plans in Japan. These charges were only partially offset by individual positive effects, in particular the absence of goodwill amortization and one-time income from the reversal of a provision for guarantees regarding the sale of our Industrial Chemicals and Natural Substances division in 1992.
Financial result
Financial result represents result from investments, interest result and other financial result.
The financial result decreased by €24m compared with 2003. This was mainly due to an income from the sale of our interest in Oy Leiras Finland AB (€22m) included in the financial result of 2003.
Income taxes
Income taxes decreased from €255m in 2003 to €249m in 2004. Despite the absence of the dividend-related reduction in corporation tax in Germany, the effective tax rate fell by three percentage points to 33%. Along with lower earnings in Japan, where the tax rate is above average, and a lower tax rate in Germany due to the absence of a surcharge levied only for 2003 under legislation for the assistance for the flood victims in Germany in 2002, one-time income from the reversal of a tax provision following the completion of a tax audit at a subsidiary also had an effect.
Net profit
Net profit increased by 13% to €500m in 2004. Earnings per share were 14% above the previous year at €2.61, as the average number of outstanding shares declined in 2004 as a result of our share buy-back program.
Results of Operations by Segment
Net sales, segment performance and segment result of each of our geographic segments and our Other Activities segment are presented in Note 33 to our Consolidated Financial Statements and in accordance with IAS 14 (revised).
Europe Region
The geographic segment referred to in this annual report as the Europe Region comprises the member states of the European Union, all other countries in continental Europe, Turkey, the countries making up the Commonwealth of Independent States, and the whole African continent. Since January 1, 2004, the countries belonging to the Middle East, as well as India, Sri Lanka, Pakistan, Iran, and Bangladesh have become part of the Europe Region, whereas Australia and New Zealand have been reallocated to the Asia/Pacific Region. The previous year’s figures have been adjusted accordingly. Net segment sales for the Europe Region also include global net sales by the Group companies Schering Oy (formerly Leiras Oy), Jenapharm, CIS bio international, and the Justesa Imagen Group. Germany, France and Italy were the three strongest sa les markets in this Region in the period under review, accounting for 48% of net sales generated in this segment in 2004.
The following table sets forth the net sales by business area, and net sales by business area expressed as a percentage of total net sales, of the Europe Region for the years ended December 31, 2004 and 2003:
Net sales in the Europe Region by business area: | Year ended December 31, |
|---|
| 2004 | 2003 | Percentage change from 2003 | 2004 | 2003 |
|---|
| € | | Percentage of net sales |
|---|
| (in million, except percentages) |
|---|
Gynecology&Andrology | 1,003 | 969 | 3 | 41 | 41 |
Specialized Therapeutics | 865 | 820 | 6 | 35 | 35 |
Diagnostics&Radiopharmaceuticals | 463 | 450 | 3 | 19 | 19 |
Dermatology | 130 | 127 | 2 | 5 | 5 |
Other sources | 11 | 6 | 83 | 0 | 0 |
Total | 2,472 | 2,372 | 4 | 100 | 100 |
Net sales
Net sales in the Europe Region increased in 2004 by 4% to €2,472m. The rise was due to positive volume effects (+5%) at overall stable prices being partly offset by a negative divestiture effect (–1%) in Germany. In total, net sales in the Europe Region were impacted by increasing governmental price control and intensified competition from generic products, especially in Germany and France.
Net sales increased in our major markets, with the exception of Germany. Strong growth was recorded in particular in our key markets Italy (+15%) and Spain (+11%). In Germany, in contrast, net sales declined slightly (–2%). This was due in particular to the divestiture of non-core products at our subsidiary Jenapharm. We were able to offset the negative price effect in Germany on the increase in the government-imposed manufacturers' rebate from 6% to 16%, due to higher sales volumes.
The Gynecology&Andrology business area contained a number of key growth products: Yasmin® (+47%), Mirena® (+12%) and Valette® (+24%). In contrast, net sales of Diane® declined in volume terms by 13% due to strong competition from generic products. In the Specialized Therapeutics business area, net sales of Betaferon® climbed only slightly overall by 1%. Solid increases in net sales of Betaferon® in Great Britain (+9% currency adjusted, total +11%) and Italy (+9%), for example, were offset by negative price developments in other countries, for instance, i n Germany due to the government-imposed rebate. Fludara® also recorded strong growth (+12%), as this product was increasingly being used by physicians in combination with MabCampath®. In the Diagnostics&Radiopharmaceuticals business area, net sales of Magnevist® grew by an encouraging 5%, despite negative price effects. Lower prices for Ultravist® were more than offset by higher sales volumes. With a total net sales ratio of 53%, Magnevist® and Ultravist® were the top-selling products in this business area.
Segment performance/Segment result
Segment performance increased by 10% to €1,116m in 2004. Based on a solid gross profit, where the impact of the German healthcare reform was offset by an improved product mix, the reduction in overheads, especially a reduction in marketing and selling costs as well as administration costs, was effective. Furthermore, we profited from the absence of goodwill amortization as well as the income from the sale of non-core products of our German subsidiary Jenapharm.
After allocation of €459m of research and development costs and €77m of central production overhead and production variances, the segment result in 2004 was €580m, representing a higher segment result as compared to €519m in 2003. This increase was mainly due to the increased segment performance.
United States Region
The geographic segment referred to in this annual report as the United States Region comprises the United States of America and Puerto Rico. The segment is divided into two subsegments. The Berlex subsegment covers all sales of pharmaceutical products in the United States Region. The second subsegment covers the business activities of the Medrad Group, which is active in the field of application technologies for contrast agents. Since Medrad is responsible for the global marketing of its products, this subsegment represents global net sales by Medrad and its subsidiaries.
The following table sets forth the net sales by sub-segment, and net sales by sub-segment expressed as a percentage of total net sales, of the United States Region for the years ended December 31, 2004 and 2003:
Net sales for United States Region by sub-segment: | Year ended December 31, |
|---|
| 2004 | 2003 | Percentage change from 2003 | 2004 | 2003 |
|---|
| € | | Percentage of net sales |
|---|
| (in million, except percentages) |
|---|
Berlex | 971 | 951 | 2 | 78% | 79% |
Medrad | 271 | 252 | 7 | 22% | 21% |
Total | 1,242 | 1,203 | 3 | 100% | 100% |
The following table sets forth the net sales by business area, and net sales by business area expressed as a percentage of total net sales, of the United States Region, for the years ended December 31, 2004 and 2003:
Net sales for United States Region by business area: | Year ended December 31, |
|---|
| 2004 | 2003 | Percentage change from 2003 | 2004 | 2003 |
|---|
| € | | Percentage of net sales |
|---|
| (in million, except percentages) |
|---|
Gynecology&Andrology | 356 | 271 | 31 | 29% | 23% |
Specialized Therapeutics | 432 | 500 | (14) | 35% | 41% |
Diagnostics&Radiopharmaceuticals | 437 | 423 | 3 | 35% | 35% |
Dermatology | 17 | 9 | 90 | 1% | 1% |
Total | 1,242 | 1,203 | 3 | 100% | 100% |
Net sales
Net sales in the United States Region increased by 3% in 2004 to €1,242m. The ongoing depreciation of the U.S. dollar against the euro led to a negative currency effect of 10%. After adjustment for currency effects, net sales rose sharply (+13%). While prices increased by 4%, the rise was mainly due to a substantial increase in volumes (+9%).
Berlex accounted for €971m or 78% of total net sales in the United States Region in 2004, while Medrad contributed €271m, or 22%. After adjustment for currency effects, Medrad’s net sales rose by 17% (total +7%) in 2004 as compared to 2003, due to increased sales of CT injection systems (+31%, total +21%) and services (+14%, total +4%).
In the Gynecology&Andrology business area, key growth drivers included the fertility control products Yasmin® (+52% currency adjusted, total +39%) and Mirena® (+52% currency adjusted, total +39%). In the case of Climara® (total –11%), positive price adjustments (+10%) largely offset lower sales volumes (–12%). In the Specialized Therapeutics business area, Betaseron® developed well despite its highly competitive environment, increasing net sales by 9% currency adjusted (total –1%). Net sales of Campath® (+4% currency adjusted, total –5%) and Leukine® (+5% currency adjusted, total –4%) also rose as a result of increased sales volumes. In contrast, the currency adjusted decline in net sales of Fludara® of 78% (total –80%) was due to the expiration of our patent in August 2003 and the resulting competition from generic products. The Diagnostics&Radiopharmaceuticals business area recorded clear increases in net sales of Magnevist® (+11% currency adjusted, total +2%) and Ultravist® (+21% currency adjusted, total +11%), despite a slight decrease in prices. Net sales in the Dermatology business area, which was recently set up in this Region, amounted to €17m in the year under review, compared to €9m in 2003. The main reason for this growth was the promising development in net sales of Finacea®, a product used in the treatment of rosacea.
Segment performance/Segment result
Segment performance improved by 13% to €446m in 2004. The gross margin increased slightly, despite negative exchange rate effects, because, aside from lower royalty payments for Betaseron®, we recorded an increase in net sales with higher margin products – in particular, Yasmin®. In fiscal year 2004, overheads declined due to positive exchange rate effects. Currency adjusted, we recorded a mid-single digit increase in percentage terms in the marketing and selling costs, whereby the increase in costs was clearly below net sales growth in local currency. Another positive effect resulted from the absence of goodwill amortization.
After allocation of €274m of research and development costs and €18m of central production overhead/production variances, segment result in 2004 increased by 23% to €154m in 2004, compared to €125m in 2003. This sharp increase was primarily driven by the improved segment performance. Due to our strategic commitment to significantly expand our business in the United States, research and development expense as a percentage of net sales was above the average percentage for the Schering AG Group.
Japan Region
The geographic segment referred to in this annual report as the Japan Region covers the geographical territory of Japan, including the business generated by our Japanese subsidiaries and direct sales by Schering AG to Japanese pharmaceutical companies.
The following table sets forth the net sales by business area, and net sales by business area expressed as a percentage of total net sales, of the Japan Region for the years ended December 31, 2004 and 2003:
Net sales for Japan Region by business area: | Year ended December 31, |
|---|
| 2004 | 2003 | Percentage change from 2003 | 2004 | 2003 |
|---|
| € | | Percentage of net sales |
|---|
| (in million, except percentages) |
|---|
Gynecology&Andrology | 26 | 28 | (5) | 6 | 5 |
Specialized Therapeutics | 108 | 117 | (8) | 23 | 23 |
Diagnostics&Radiopharmaceuticals | 306 | 342 | (11) | 65 | 66 |
Dermatology | 28 | 30 | (7) | 6 | 6 |
Total | 468 | 517 | (10) | 100 | 100 |
Net sales
Net sales in the Japan Region declined by 10% in 2004 to €468m, or 8% after adjustment for currency effects. This was due both to a decline in sales volumes (–4%) and negative price effects (–4%) caused by government-imposed price reductions taking effect in April 2004, which were in average 5%.
The Diagnostics&Radiopharmaceuticals business area, which accounted for 65% of net sales in the Region in the year under review, recorded a decline in net sales of 8% in local currencies (total –11%). This was due in particular to government-imposed price reductions. As a result, net sales of Iopamiron®, our key product in the Region, declined by 8% currency adjusted (total –10%). This X-ray contrast medium generated net sales of €206m, or 67% of total net sales for this business area. Net sales of Magnevist®, our second-strongest product in the Region, decreased by 9% after adjustment for currency effects (total –10%); currency adjusted net sales of Ultravist® also decli ned. In the Specialized Therapeutics business area, in contrast, net sales of Betaferon®, our third-strongest product in this Region in 2004, continued to be extremely encouraging, rising to €28m (+13% after adjustment for currency effects, total +11%).
Segment performance/Segment result
Segment performance declined by 34% to €133m in 2004. Consequently, segment performance declined in percentage terms clearly more than net sales. This was primarily due to one-time effects resulting from the change in pension plan obligations of our Japanese subsidiary. Furthermore, we recorded higher purchase prices of iopamidol, the active substance in Iopamiron®. In addition, we slightly improved the gross margin by means of a better product mix.
After allocation of €79m of research and development costs and €12m of central production overhead/production variances, segment result in 2004 was €42m, compared to €88m in 2003. This decline is mainly due to the reduced segment performance.
Latin America/Canada Region
The geographic segment referred to in this annual report as the Latin America/Canada Region comprises the countries of Latin America, the Caribbean, and Canada. Brazil, Mexico, and Canada were our three strongest sales markets in this Region in the period under review. We generated 61% of net sales for the segment in these countries in 2004.
The following table sets forth the net sales by business area, and net sales by business area expressed as a percentage of total net sales, of the Latin America/Canada Region for the years ended December 31, 2004 and 2003:
Net sales for Latin America/Canada Region by business area: | Year ended December 31, |
|---|
| 2004 | 2003 | Percentage change from 2003 | 2004 | 2003 |
|---|
| € | | Percentage of net sales |
|---|
| (in million, except percentages) |
|---|
Gynecology&Andrology | 273 | 254 | 8 | 67 | 66 |
Specialized Therapeutics | 80 | 73 | 10 | 19 | 19 |
Diagnostics&Radiopharmaceuticals | 29 | 29 | 0 | 7 | 8 |
Dermatology | 22 | 22 | 1 | 5 | 6 |
Other sources | 7 | 5 | 16 | 2 | 1 |
Total | 411 | 383 | 7 | 100 | 100 |
Net sales
Net sales in the Latin America/Canada Region increased by 7% in 2004 to €411m. Developments in the Region continued to be dominated by weaker exchange rates against the euro in almost all countries. In local currencies, however, we generated our highest increase in net sales of all Regions in 2004 (+16%). This was due both to improved sales volumes (+9%) and to positive price effects (+7%). We were able to boost net sales in local currencies in our two main markets in the Region, Brazil (+19%, total +14%) and Mexico (+16%, total +2%).
This strong sales growth was mainly due to Yasmin®, which has now been launched in almost all countries and is one of the three top-selling products in this Region. Net sales of Yasmin® in local currencies more than doubled. We also recorded increases in net sales of Diane® (+5% currency adjusted, total –1%) and Microgynon® (+13% currency adjusted, total +3%). In the Specialized Therapeutics business area, Betaferon®, our top-selling product in this Region, generated strong currency adjusted growth of 18% (total +13%), with business benefiting from an increase in the number of sales consultants, as wel l as from the deployment of specially trained nurses to support patients. In the Diagnostics&Radiopharmaceuticals business area, net sales of Iopamiron® rose by 11% in local currencies (total +2%) compared to 2003, due in particular to volume increases (+7%).
Segment performance/Segment result
Segment performance rose by 13% to €155m in 2004. This increase, at a nearly constant gross margin, turned out clearly higher than the percentage increase in net sales, due to the positive impact of stable administration costs. Overall, the selling and administration costs remained almost the same and therefore clearly decreased in relation to net sales.
After allocation of €62m of research and development costs and €11m of central production overhead/production variances, segment result in 2004 was €82m, compared to €50m in 2003. This increase was mainly due to the increase in segment performance as well as to the decline of allocated research and development expenses.
Asia/Pacific Region
The geographic segment referred to in this annual report as the Asia/Pacific Region comprises the Asian countries (with the exception of Japan). Since January 1, 2004 Australia and New Zealand have been reallocated to the Asia/Pacific Region. The previous year’s figures have been adjusted accordingly. In the period under review, Australia, South Korea, and China were our three best-performing markets in the Region, accounting for 73% of segment sales.
The following table sets forth the net sales by business area, and net sales by business area expressed as a percentage of total net sales, of the Asia/Pacific Region for the years ended December 31, 2004 and 2003:
Net sales for Asia/Pacific Region by business area: | Year ended December 31, |
|---|
| 2004 | 2003 | Percentage change from 2003 | 2004 | 2003 |
|---|
| € | | Percentage of net sales |
|---|
| (in million, except percentages) |
|---|
Gynecology&Andrology | 95 | 88 | 8 | 41 | 41 |
Specialized Therapeutics | 57 | 47 | 19 | 24 | 22 |
Diagnostics&Radiopharmaceuticals | 73 | 68 | 7 | 31 | 32 |
Dermatology | 9 | 11 | (14) | 4 | 5 |
Total | 234 | 214 | 9 | 100 | 100 |
Net sales
Net sales in the Asia/Pacific Region rose by 9% in 2004 to €234m. This Region was also affected by negative currency effects (–4%), which impacted almost all Asian countries. After adjustment for currency effects, we recorded a rise in net sales (+13%), which was entirely due to volume increases. Roughly one third of net sales was attributable to the largest single market in the Region, Australia (currency adjusted increase: +4%, total: +7%). The countries with the strongest growth in net sales were China (+53% currency adjusted, total +40%), Taiwan (+13% currency adjusted, total +7%) and Thailand (+13% currency adjusted, total +6%).
In the Gynecology&Andrology business areas, the launch of Yasmin® is also proving successful in this Region: net sales increased from €5m in 2003 to €9m in 2004. Additionally, in the field of fertility control, we were able to substantially improve net sales in local currencies of Diane® (+8%, total +5%) and Microgynon® (+9%, total +6%), due in particular to higher sales volumes. In the Specialized Therapeutics business area, net sales of Betaferon® in this Region rose by 3% in local currencies (total +5%) based solely on volume increases. The main sales driver for the Region was Ultravist®, w hich accounted for 24% of total net sales for the Region. After adjustment for currency effects, net sales of this product climbed 15% (total +9%), with a slightly negative price effect (–3%) being more than offset by a pronounced volume increase.
Segment performance/Segment result
In 2004, segment performance increased by 11% to €90m. This increase was therefore slightly above the increase in net sales, due to decreased administration costs. The gross margin mostly remained stable, since a deterioration due to exchange rate effects resulting from euro-based manufacturing costs was offset by positive effects from the product mix.
After allocation of €38m of research and development costs and €12m of central production overhead/production variances, the segment result was €40m in 2004 compared to €27m in 2003. The increase in segment result compared to 2003 is primarily caused by the increased segment performance.
Other Activities
The Other Activities segment primarily consists of our pharmaceutical chemicals business with other pharmaceutical companies.
The following table sets forth the net sales by sub-segment, and net sales as a percentage of total net sales, for the Other Activities segment for the years ended December 31, 2004 and 2003:
Net sales of Other activities: | Year ended December 31, |
|---|
| 2004 | 2003 | Percentage change from 2003 | 2004 | 2003 |
|---|
| € | | Percentage of net sales |
|---|
| (in million, except percentages) |
|---|
Pharmaceutical chemicals | 58 | 118 | (51) | 73 | 85 |
Other | 22 | 21 | 5 | 27 | 15 |
Total | 80 | 139 | (42) | 100 | 100 |
Net sales
Net sales by the Other Activities segment fell by 42% in 2004 to €80m. This negative development was largely due to our pharmaceutical chemicals business, which decreased 51% to €58m, primarily as a result of the discontinuation of orders in the hormone therapy area. Currency effects (–1%) did not play a major role.
Segment performance/Segment result
Segment performance declined by 32% to €39m in 2004. This decline was primarily due to lower net sales in percentages from the pharmaceutical chemicals business.The gross margin increased, due to the increase in the higher-margined cooperation business resulting from the strong decrease in the pharmaceutical chemicals business. In addition, administration costs declined significantly.
After allocation of €7m of research and development costs and €23m of central production overhead/production variances, segment result in 2004 was €9m as compared to €(6)m in 2003. This increase primarily resulted from lower allocations of research and development costs and lower allocations of central production overhead/production variances.
2003 Compared to 2002
Group
Consolidated Income Statements | 2003 | 2002 |
|---|
| € | % of net sales | € | % of net sales |
|---|
| (in million, except percentages) |
|---|
Net sales | 4,828 | 100 | 5,023 | 100 |
Cost of sales | (1,233) | 26 | (1,212) | 24 |
Gross profit | 3,595 | 74 | 3,811 | 76 |
Marketing and selling costs | (1,525) | 32 | (1,629) | 32 |
Engineering and administration costs | (566) | 12 | (566) | 11 |
Research and development costs | (924) | 19 | (947) | 19 |
Other operating income | 399 | | 370 | |
Other operating expenses | (293) | | (298) | |
Operating profit | 686 | 14 | 741 | 15 |
Financial result | 15 | | (23) | |
Income from disposal of Aventis CropScience | – | | 689 | |
Acquisition-related expenses | – | | (262) | |
Profit before taxes | 701 | 15 | 1,145 | 23 |
Income taxes | (255) | 5 | (276) | 5 |
Profit for the period | 446 | 9 | 869 | 17 |
Attributable to: | | | | |
Net profit | 443 | 9 | 867 | 17 |
Minority interest | 3 | | 2 | |
The following table sets forth our top-selling products during 2003. These products represented approximately 51% of the total net sales for the Group in 2003:
| Net sales | Percentage
change
from 2002 |
|---|
| (€million) | |
|---|
1. Betaferon® (Betaseron®) (therapeutics) | 770 | (2) |
2. Magnevist® (diagnostics) | 300 | (7) |
3. Yasmin® (fertility control) | 290 | 91 |
4. Iopamiron® (diagnostics) | 263 | (12) |
5. Ultravist® (diagnostics) | 236 | (2) |
6. Diane® (gynecology) | 202 | (10) |
7. Mirena® (fertility control) | 164 | 20 |
8. Fludara® (therapeutics) | 140 | (6) |
9. Microgynon® (Levlen®) (fertility control) | 122 | (6) |
10. Meliane® (fertility control) | 119 | (6) |
Total | 2,606 | 2 |
Net sales
In 2003, the Schering AG Group generated organic sales growth of 6%, mainly due to increased sales volumes. Net sales were negatively impacted by the continued strength of the euro of 9% and by structure effects of 1%. In euros, net sales therefore decreased by 4% to €4,828m.
Net sales in the Gynecology&Andrology business area increased by 11% in local currencies. This was particularly due to the increase of 16% (total +6%) in the field of fertility control, with Yasmin® sales more than doubling in 2003 in local currencies. Reaching total net sales of €290m, Yasmin® is now the Group’s third-largest product. In addition, Mirena® recorded an above-average increase in net sales of 29% in local currencies (total +20%). In contrast, net sales in our hormone therapy business decreased by 8% currency adjusted (total –18%). Despite negative exchange rate effects (–10%), total net sales in the Gynecology&Andrology business area rose by 1% to € 1,622m.
Specialized Therapeutics business area recorded an organic sales growth of 5%. Considering negative exchange rate and structure effects, total net sales decreased by 5% to €1,560m. The net structure effect includes Leukine® sales in the first half of 2003 (€32m) and the sale of non-core products (€–50m). Organic growth in the Specialized Therapeutics business area was primarily driven by the increase in net sales of Betaferon®, Campath® (marketed outside of the U.S. under the trade name MabCampath®), and Fludara®. Net sales of Betaferon® amoun ted to €770m (+ 8% currency adjusted; total –2%). This solid growth was facilitated by the continuous improvement of Betaferon®, increasing user-friendliness for patients. In 2003, our cancer therapy Campath® recorded an increase in net sales to €63m compared with €46m in 2002. This positive effect was partly due to combining Campath® and Fludara® as a new therapy option. In the case of Fludara®, which lost its patent protection in the U.S. in August 2003, positive volume/price effects resulted in a net sales increase of 5% in local currencies (total –6%).
In the Diagnostics&Radiopharmaceuticals business area, net sales in 2003 increased by 4% in local currencies. Negative currency effects of 11% led to a decline in euro terms in net sales of 7% to €1,312m. In the field of X-ray contrast media, lower prices (–4%) were compensated by an increase in sales volume of 4%. Net sales in the field of magnetic resonance imaging (MRI) contrast agents increased by 8% in local currencies (total –4%). This was driven by increased net sales of Magnevist® and substantial gains on our new products Gadovist® and Resovist®. In 2003, we recorded a currency adjusted growth rate of 15% (total –4%) in application technologies for contrast agents . Since our application technologies business is managed centrally from the United States, we allocate global sales of the Medrad Group to the United States Region. Due to the translation to euro, this led to a negative exchange rate effect of 19%.
In the Dermatology business area, we recorded an organic growth of 3%. Our top-selling products in this Business Area – Advantan®, Skinoren®, and Travocort® – made an above-average contribution to this increase. Currency effects and the divestiture of the general practitioner business of former Asche AG in 2002 resulted in an overall decrease in net sales of 7% to €200m.
Gross profit
Gross profit declined by 6% from €3,811m in 2002 to €3,595m in 2003. This decline exceeded the decrease in net sales of 4%. This was mainly due to the fact that a large portion of our production is accounted for in euro. The negative impact of the continuing strength of the European currency on net sales is therefore stronger than the currency-related decrease in production costs, occurring outside the euro zone.
Operating profit
At €686m, operating profit was down 7% on the previous year’s figure. Marketing and selling costs declined to a greater extent (–6%) than net sales. Engineering and administration costs were flat year-on-year at €566m. Research and development costs decreased by 2% to €924m (2002: €947m). Their ratio to net sales remained stable, at 19%. The improvement in net Other operating income and expenses in the amount of €34m was mainly due to greater gains from exchange rate hedges.
Financial result
The financial result improved by €38m compared to 2002. This was due, among other things, to lower write-downs on investments (€7m) as compared to the previous year (€26m). In addition, the absence of income from our share in the result of Aventis CropScience (2002: €45m) was partially offset by the profit from the sale of our interest in Oy Leiras Finland AB (€22m).
Income taxes
Income taxes declined from €276m to €255 in fiscal year 2003. The increase in the effective tax rate to 36%, up from 24% in 2002, is primarily due to tax-free income from the disposal of our interest in Aventis CropScience in 2002.
Net profit
Net profit decreased from €867m in 2002 to €443m in 2003. Basic earnings per share amounted to €2.28, down from €4.39 in 2002. As described below, the decrease in net profit and basic earnings per share is primarily due to the one-time effects in 2002 of the disposal of our 24% interest in Aventis CropScience, acquisition-related expenses of €262m and tax-related effects.
We believe that our net profit and basic earnings per share for 2002 were impacted by several significant non-recurring items, the effect of which may impair the ability of investors to make comparisons of such figures for 2002 with net profit and basic earnings per share for 2003. In order to improve the ability of investors to make a comparison of these figures for 2002 and 2003, set forth below is a table that includes (i) net profit and basic earnings per share for 2002 and 2003 as reported under IFRSs, (ii) net profit and basic earnings per share for 2002 after being adjusted for these non-recurring items, and (iii) a reconciliation of net profit and basic earnings per share from an as reported under IFRSs basis to an adjusted basis for 2002.
| 2003 | 2002 | Percentage
change |
|---|
| (€million; per share amounts in €) |
|---|
Net profit (IFRSs) | 443 | 867 | (49) |
Income from disposal of Aventis CropScience | – | (689) | – |
Acquisition-related expenses | – | 262 | – |
One-time tax effects | – | 24 | – |
Net profit on a comparable basis | 443 | 464 | (5) |
Basic earnings per share (IFRSs) | 2.28 | 4.39 | (48) |
Basic earnings per share on a comparable basis | 2.28 | 2.35 | (3) |
The €689m of income from the disposal of our 24% interest in Aventis CropScience relates to the €1,500m of proceeds less the carrying amount of €526m and indemnities of €285m.
The acquisition-related expenses of €262m in 2002 related to €224m for the acquisition of the rights to the Phase II-development project for the use of Leukine® in Crohn's disease, to €20m for the formation of the Schering Stiftung (a foundation under German law) for the promotion of science and culture, and to €18m for adjustments of the carrying amounts of assets and liabilities in connection with the acquisition of the 60% interest in CIS bio international in 2000. One-time tax effects of €24m in 2002 related to the income from the disposal of Aventis CropScience and the acquisition-related expenses as well as tax risks.
Results of Operations by Segment
Net sales, segment performance and segment result of each of our geographic segments and our Other Activities segment are presented in Note 33 to our Consolidated Financial Statements and in accordance with IAS 14 (revised).
Europe Region
The following table sets forth the net sales by business area, and net sales by business area expressed as a percentage of total net sales, of the Europe Region for the years ended December 31, 2003 and 2002:
Net sales in the Europe Region by business area: | Year ended December 31, |
|---|
| 2003 | 2002 | Percentage change from 2002 | 2003 | 2002 |
|---|
| € | | Percentage of net sales |
|---|
| (in million, except percentages) |
|---|
Gynecology&Andrology | 969 | 927 | 4 | 41 | 39 |
Specialized Therapeutics | 820 | 827 | (1) | 35 | 36 |
Diagnostics&Radiopharmaceuticals | 450 | 452 | (1) | 19 | 19 |
Dermatology | 127 | 134 | (5) | 5 | 6 |
Other sources | 6 | 9 | (22) | 0 | 0 |
Total | 2,372 | 2,349 | 1 | 100 | 100 |
Net sales
Net sales in the Europe Region increased by 1% to €2,372m in 2003. The rise was due to positive price and volume effects (+6%), compared to negative structure effects (–3%) and exchange rate effects (–2%). The structure effects include the divestiture of the general practitioner division of AWAG Arzneimittelwerke Altona AG (formerly Asche AG) in Germany in 2002, as well as the sale of the non-strategic domestic portion of our Finnish operations. Overall, net sales in the Europe Region were impacted by increasing governmental price control and intensified competition from generic products, especially in Germany, France and Italy.
Net sales increased in our major markets, with the exception of Germany. In Germany, net sales declined by 5% to €544m in 2003, primarily as a result of the divestiture (–2%) as well as negative price effects due to cost-cutting measures in the healthcare sector (–2%). In contrast, net sales in Great Britain rose by 4% (+14% currency adjusted), mainly due to substantial increases in volumes of Yasmin®, Diane® and Betaferon®. Net sales in Spain rose by 3% (+4% currency adjusted) due to the launch of Yasmin® and increased sales volumes of Betaferon®. The growth in net sales in France and Italy (+4% each) was also due to increased sales of Yasmin®. In Italy, Yasmin®, within a year of its launch, generated net sales of €19m, or 7% of total net sales for this country. In addition to Great Britain, we recorded double-digit increases in net sales in local currencies for the following European markets: Belgium (+12%; total +12%), Turkey (+21%; total +14%) and Russia (+33%; total +20%) as well as the majority of other Eastern European countries.
In the Gynecology&Andrology business area, we achieved net sales growth of 6% after adjustment for exchange rate effects (total +4%). This was based on increased volumes (+5%), and slightly higher prices (+2%), taking divestiture effects in Germany and Finland (totaling –1%) into account. The positive development in our fertility control business (+11% currency adjusted; total +9%) more than compensated for a decline in sales of our hormone therapy business. Particularly noteworthy are Yasmin®, sales of which more than doubled in 2003 to €116m, and the double-digit increases in net sales in local currencies recorded by Mirena® (+17%; total +15%) and Microgynon® (+13%; total +8%).
After adjustment for exchange rate effects, net sales in the Specialized Therapeutics business area remained at last year’s level (total –1%). Sales volumes increased by 11% in 2003, but were offset by negative price effects (–5%) and divestiture effects in Germany and Finland (totaling –6%). The increase in net sales in local currencies was due particularly to Betaferon® (+10%; total +9%), Fludara® (+23%; total +20%), and MabCampath® (+22%; total +19%). Net sales of Bonefos® decreased by 5% currency adjusted (total –7%), due to the sharp decline in prices caused by competition from generic products.
Net sales in the Diagnostics&Radiopharmaceuticals business area increased by 1% in 2003 after adjustment for exchange rate effects (total –1%). Higher sales volumes (+4%) more than offset lower prices (–3%). This was due above all to developments of our two core products – Magnevist® and Ultravist® – which jointly accounted for 54% of net sales in this Business Area. Net sales of Ultravist® climbed 1% after adjustment for exchange rate effects (total –1%), while we recorded a 3% rise in net sales of Magnevist®, also currency adjusted (total +2%). Net sales of radiopharmaceuticals increased by 2% after adjustment for exchan ge rate effects (total +2%).
The Dermatology business area recorded a decrease in net sales of 3% in local currencies (total –5%) in 2003. This was due to divestiture effects in Germany, which impacted this Business Area by 4%. Organic growth of 1% was the result of positive developments of Advantan® and Travocort®, which compensated the decline of Psorcutan®.
Segment performance/Segment result
Segment performance declined by 1% to €1,018m in 2003. This was due to a decrease in gross profit, which was mainly the result of the impact of the German healthcare reform. This negative effect was offset by a reduction in overheads, especially a reduction in marketing and selling costs as well as administration costs.
After allocation of €426m of research and development costs and €73m of central production overhead/production variances, the segment result in 2003 was €519m, representing a lower segment result as compared to €538m in 2002. This decrease was mainly due to the reduced segment performance as well as to higher allocated production overheads.
United States Region
The following table sets forth the net sales by sub-segment, and net sales by sub-segment expressed as a percentage of total net sales, of the United States Region for the years ended December 31, 2003 and 2002:
Net sales for United States Region by sub-segment: | Year ended December 31, |
|---|
| 2003 | 2002 | Percentage change from 2002 | 2003 | 2002 |
|---|
| € | | Percentage of net sales |
|---|
| (in million, except percentages) |
|---|
Berlex | 951 | 1,019 | (7) | 79 | 79 |
Medrad | 252 | 263 | (4) | 21 | 21 |
Total | 1,203 | 1,282 | (6) | 100 | 100 |
The following table sets forth the net sales by business area, and net sales by business area expressed as a percentage of total net sales, of the United States Region, for the years ended December 31, 2003 and 2002:
Net sales for United States Region by business area: | Year ended December 31, |
|---|
| 2003 | 2002 | Percentage change from 2002 | 2003 | 2002 |
|---|
| € | | Percentage of net sales |
|---|
| (in million, except percentages) |
|---|
Gynecology&Andrology | 271 | 252 | 8 | 23 | 19 |
Specialized Therapeutics | 500 | 561 | (11) | 41 | 44 |
Diagnostics&Radiopharmaceuticals | 423 | 460 | (8) | 35 | 36 |
Dermatology | 9 | 9 | 3 | 1 | 1 |
Total | 1,203 | 1,282 | (6) | 100 | 100 |
Net sales
Net sales in the United States Region declined by 6% to €1,203m in 2003, due to the sharp drop in the U.S. dollar compared to 2002. However, net sales rose by 13% after adjustment for exchange rate effects. Besides an increase in prices (+3%), this growth was particularly due to strong volume growth. In addition, 3% of the increase relates to sales of Leukine® in the first half of 2003 that are reported as structure effect.
Berlex accounted for €951m or 79% of total net sales in the United States Region in 2003, while Medrad contributed €252m, or 21%. After adjustment for exchange rate effects, Medrad’s net sales rose by 15% (total –4%), due to increased sales volumes of CT injection systems (+20%) and services (+24%). The United States Region generated €173m (69%) of Medrad’s global sales in 2003, up from 68% in 2002.
Net sales in the Specialized Therapeutics business area, which accounted for approximately 53% of Berlex’s net sales, rose by 7% in local currency (total –11%) in the year under review. This increase is due in particular to an increase in net sales of Leukine® from €33m in 2002 to €64m in 2003. Betaseron®, our best-selling product in this Region (€286m), recorded net sales growth of 2% after adjustment for exchange rate effects (total –15%). Net sales of Campath® amounted to €47m in 2003, up from €33m in 2002 (+69% currency adjusted; total +41%). This is due to the fact that Campath® is being used more often and at an earlier stage in the treatment of chronic lymphocytic leukemia. However, net sales of Fludara®, another cancer therapy, declined by 10% after adjustment for exchange rate effects (total –25%), following the expiration of our patent for fludarabine phosphate in the U.S. in August 2003. Net sales of Betapace®, the market exclusivity of which expired in the United States in April 2000, continued to decline, decreasing to €26m in 2003.
Net sales in the Diagnostics&Radiopharmaceuticals business area increased by 10% in 2003 after adjustment for exchange rate effects (total –8%). Excluding Medrad, net sales rose by 4% after adjustment for exchange rate effects (total –13%). Negative price effects of 3% were overcompensated by volume increases of 7%. The crucial factor for this increase in net sales was the development of Magnevist® (+9% currency adjusted, total –9%). The increased use of Magnevist® in MRI scans clearly could be seen from the rise in volumes (+12%).
Our Gynecology&Andrology business area recorded strong sales growth of 30% after adjustment for exchange rate effects (total +8%). This increase was primarily due to the continued excellent development of Yasmin®: net sales of this product almost doubled in local currency (total +60%) and accounted for €152m of net sales. Therefore, Yasmin® is our second strongest product in this Region. Mirena® generated net sales of €45m in 2003, up 54% after adjustment for exchange rate effects (total +28%). This positive development is partly due to its inclusion in additional reimbursement support programs. In our hormone therapy business, in contrast, positive price effects for Climara ® (+4%) only partially offset lower sales volumes (–14%).
Net sales in the Dermatology business area, which we are further developing in this Region, amounted to €9m in the year under review, an increase of 24% after adjustment for exchange rate effects (total +3%). This growth was due to the market launch of Finacea™, a product used in the treatment of rosacea.
Segment performance/Segment result
Segment performance improved by 8% to €394m in 2003. Negative currency effects, that lead to a decline in net sales, were partly offset by positive currency effects concerning overhead costs. In local currency, marketing and selling costs showed a single-digit percentage increase, whereby this increase remained below the net sales growth in local currency. Gross profit slightly decreased in percentage, because part of the production costs are accrued in euro. Products with higher gross profits, such as Yasmin®, could partially compensate for this currency related deterioration.
After allocation of €254m of research and development costs and €15m of central production overhead/production variances, segment result in 2003 increased by 20% to €125m in 2003, compared to €104m in 2002. This sharp increase was primarily driven by the improved segment performance. Due to our strategic commitment to significantly expand our business in the United States, research and development expense as a percentage of net sales, was above the average percentage in the Schering AG Group.
Japan Region
The following table sets forth the net sales by business area, and net sales by business area expressed as a percentage of total net sales, of the Japan Region for the years ended December 31, 2003 and 2002:
Net sales for Japan Region by business area: | Year ended December 31, |
|---|
| 2003 | 2002 | Percentage change from 2002 | 2003 | 2002 |
|---|
| € | | Percentage of net sales |
|---|
| (in million, except percentages) |
|---|
Gynecology&Andrology | 28 | 30 | (8) | 5 | 5 |
Specialized Therapeutics | 117 | 129 | (9) | 23 | 22 |
Diagnostics&Radiopharmaceuticals | 342 | 386 | (11) | 66 | 67 |
Dermatology | 30 | 34 | (11) | 6 | 6 |
Total | 517 | 579 | (11) | 100 | 100 |
Net sales
Net sales in the Japan Region declined in 2003 by 11% to €517m, due in particular to the strength of the euro against the yen. After adjustment for exchange rate effects, net sales declined by 1%, with increased sales volumes (+2%) almost offsetting government imposed price reductions (–3%).
Net sales in the Diagnostics&Radiopharmaceuticals business area, which accounted for 66% of net sales in this Region in the year under review, declined by 2% currency adjusted (total –11%). The primary reason for this decrease was a decline in net sales of the X-ray contrast medium Iopamiron® (–3%; total –13%), related to a price decrease. This product accounted for €227m (66%) of net sales in this Business Area in 2003. In the case of Ultravist®, the drop in prices (–15%) was almost compensated by increased sales volumes (+14%).
The Specialized Therapeutics business area recorded a slight increase in net sales of 1% after adjustment for exchange rate effects (total –9%), with volume growth (+2%) overcompensating the slight negative price effect (–1%). Net sales of Betaferon®, our third-strongest product in Japan in 2003, increased to €25m (+23% currency adjusted; total +10%).
The Gynecology&Andrology business area recorded sales growth of 3% currency adjusted (total –8%). Triquilar® further expanded our market leadership position in the field of fertility control with an increase in sales volumes of €2m in 2003.
In the Dermatology business area, net sales in local currency remained at previous year’s level (total –11%), with stable prices and almost constant sales volumes for our top-selling products, Neriproct® and Nerisona®.
Segment performance/Segment result
Segment performance declined by 12% to €202m in 2003. Consequently, the percentage decrease of the segment performance was slightly higher than the decline in net sales. This was due to the slightly decreased gross profit in percentages, which was the result of production costs partly being accrued in euro. Restrictive cost management and a decrease in production costs, which resulted in more favorable purchase prices for iopamidol, the active ingredient in Iopamiron®, compensated for these negative currency effects.
After allocation of €101m of research and development costs and €13m of central production overhead/production variances, segment result in 2003 was €88m, compared to €106m in 2002. This decline is mainly due to the reduced segment performance.
Latin America/Canada Region
The following table sets forth the net sales by business area, and net sales by business area expressed as a percentage of total net sales, of the Latin America/Canada Region for the years ended December 31, 2003 and 2002:
Net sales for Latin America/Canada Region by business area: | Year ended December 31, |
|---|
| 2003 | 2002 | Percentage change from 2002 | 2003 | 2002 |
|---|
| € | | Percentage of net sales |
|---|
| (in million, except percentages) |
|---|
Gynecology&Andrology | 254 | 292 | (13) | 66 | 68 |
Specialized Therapeutics | 73 | 73 | 0 | 19 | 17 |
Diagnostics&Radiopharmaceuticals | 29 | 33 | (12) | 8 | 8 |
Dermatology | 22 | 26 | (14) | 6 | 6 |
Other sources | 5 | 6 | (15) | 1 | 1 |
Total | 383 | 430 | (11) | 100 | 100 |
Net sales
Net sales in the Latin America/Canada Region declined by 11% to €383m in 2003. This development was mainly caused by the sharp drop in exchange rates against the euro in nearly all countries in the Region. However, currency adjusted net sales increased by 15%. This was due both to increased sales volumes (+5%) and to positive price effects (+10%). We recorded an increase in net sales in local currencies in the Region’s three largest markets: Brazil (+8%; total –16%), Mexico (+16%; total –13%), and Canada (+3%; total –3%). Net sales growth in local currencies was particularly strong in Argentina (+48%; total +22%), where the market is recovering from its economic crisis, and in Venezuela (+50%; total –12%).
Gynecology&Andrology was by far the strongest Business Area in this Region, generating net sales of €254m in 2003. We recorded a currency adjusted growth in net sales of 13% (total –13%) in this Business Area. The launch of Yasmin® was a particular success: by the end of 2003, this contraceptive was established in all major Latin American markets, with net sales up €16m. In the case of Diane®, our top-selling Gynecology&Andrology product in the Latin America/Canada Region, negative volume developments (–4%) were more than offset by price increases (+10%).
In the Specialized Therapeutics business area, net sales in local currencies rose by 18% (total 0%) in 2003. This was due to an increase in net sales of Betaferon®, which was the best-selling product in this Region in the year under review, with net sales of €45m (+19% currency adjusted; total +4%).
Net sales in the Diagnostics&Radiopharmaceuticals business area rose by 14% in local currencies (total –12%) compared to 2002. This positive development was due to volume growth of Iopamiron®.
Segment performance/Segment result
Segment performance declined by 4% to €137m in 2003. This reduction was therefore clearly lower than the percentage decline in the Region’s net sales, since currency effects positively affected overhead costs. Overall, the relation of marketing and selling costs to net sales decreased.
After allocation of €79m of research and development costs and €8m of central production overhead/production variances, segment result in 2003 was €50m, compared to €43m in 2002. This increase was mainly due to the decline in research and development expenses.
Asia/Pacific Region
The following table sets forth the net sales by business area, and net sales by business area expressed as a percentage of total net sales, of the Asia/Pacific Region for the years ended December 31, 2003 and 2002:
Net sales for Asia/Pacific Region by business area: | Year ended December 31, |
|---|
| 2003 | 2002 | Percentage change from 2002 | 2003 | 2002 |
|---|
| € | | Percentage of net sales |
|---|
| (in million, except percentages) |
|---|
Gynecology&Andrology | 88 | 88 | (1) | 41 | 38 |
Specialized Therapeutics | 47 | 46 | 3 | 22 | 20 |
Diagnostics&Radiopharmaceuticals | 68 | 76 | (8) | 32 | 32 |
Dermatology | 11 | 12 | (11) | 5 | 5 |
Other sources | 0 | 10 | n/a | 0 | 5 |
Total | 214 | 232 | (8) | 100 | 100 |
Net sales
Net sales in the Asia/Pacific Region declined by 8% to €214m in 2003. This decline was due to negative exchange rate effects (–9%) as well as negative price effects (–2%). Despite a decline in net sales of €10m in Indonesia, due to the termination of a sales partnership, sales volumes increased by 3%. We recorded an increase in net sales in local currencies in the Region’s three largest markets: Australia (+8%, total +8%), South Korea (+6%; total –9%) and China (+18%; total –1%).
Net sales in local currency in the Gynecology&Andrology business area increased by 8% (total –1%). The increase in net sales (currency adjusted as well as total) of Yasmin® and Microgynon® compensated for the decline in other products, particularly in the hormone therapy business.
Net sales in the Specialized Therapeutics business area rose by €1m (+8% currency adjusted; total +3%). This increase is due in particular to volume growth of Betaferon® and Fludara®.
Net sales in the Diagnostics&Radiopharmaceuticals business area rose by 5% in 2003 after adjustment for exchange rate effects (total –8%). Volume increases (+9%) were mainly offset by adverse price developments (–4%). Net sales of Ultravist®, which accounted for approximately 74% of net sales by this Business Area in this Region, rose by 1% after adjustment for exchange rate effects (total –1%).
Segment performance/Segment result
In 2003, segment performance declined by 12% to €81m. Aside from the net sales decline of 8% due to currency effects, gross profit slightly decreased because production costs were partly accrued in euro. In addition, marketing and selling costs increased relative to net sales.
After allocation of €39m of research and development costs and €15m of central production overhead/production variances, the segment result was €27m in 2003. The decline in segment result compared to 2002 is primarily caused by the reduced segment performance.
Other Activities
The following table sets forth the net sales by sub-segment, and net sales as a percentage of total net sales, for the Other Activities segment for the years ended December 31, 2003 and 2002:
Net sales of Other Activities: | Year ended December 31, |
|---|
| 2003 | 2002 | Percentage change from 2002 | 2003 | 2002 |
|---|
| € | | Percentage of net sales |
|---|
| (in million, except percentages) |
|---|
Pharmaceutical chemicals | 118 | 121 | (2) | 85 | 80 |
Other | 21 | 30 | (32) | 15 | 20 |
Total | 139 | 151 | (8) | 100 | 100 |
Net sales
Net sales of the Other Activities segment decreased by 8% in 2003 to €139m. Net sales of pharmaceutical chemicals declined slightly by 2% to €118m. This was primarily due to negative exchange rate effects (–4%), which were almost offset by volume increases (+3%) for a number of active substances and intermediates.
Net sales of the Other subsegment declined to €21m, down 32% from previous year’s figure. This was primarily due to lower net sales from sales partnerships and the discontinuation of toll manufacturing.
Segment performance/Segment result
Segment performance declined by 24% to €57m in 2003. This decline was primarily due to lower net sales from cooperation businesses. In addition, due to price and currency effects, gross profit of the pharmaceutical chemical business declined slightly despite lower production costs.
After allocation of €25m of research and development costs and €38m of central production overhead/production variances, segment result in 2003 was €(6)m as compared to €16m in 2002. This decrease primarily resulted from a lower segment performance.
Changes in Accounting Policies
IFRSs
We have applied IFRSs since 1994. The IASB has issued a number of new standards as part of its project to develop a core set of International Financial Reporting Standards. Accordingly, we have adopted a number of new or revised International Financial Reporting Standards as described below.
As of January 1, 2004, we opted for early adoption of the revisions of the existing standards under the IASB's Improvement Project as well as IFRS 2 "Share-based Payment" and IFRS 3 "Business Combinations", and, as a consequence, also IAS 36 "Impairment of Assets" (revised 2004) and IAS 38 "Intangible Assets" (revised 2004). The changes in accounting policies were made in accordance with the transitional provisions in the new accounting standards.
As a consequence of applying IFRS 3, we no longer amortize goodwill from business combinations as from January 1, 2004, but test goodwill for impairment annually. The negative goodwill from the acquisition of CIS bio international was eliminated against retained earnings. The effects of first-time adoption of the standard on the Profit before taxes, Net profit and Earnings per share (basic and diluted) for 2004 are reported under Note 1 to our Consolidated Financial Statements. The consolidated financial statements for 2003 were not affected as IFRS 3 applies prospectively from January 1, 2004.
As a consequence of applying IAS 38 (revised 2004), the criterion for recognition is always considered to be satisfied for acquired intangible assets since January 1, 2004. Until December 31, 2003, product rights in particular were recognized only upon regulatory approval. For the effect on earnings per share (basic and diluted) that the recognition of payments for pre-approval development projects had in 2004, please refer to Note 1 to our Consolidated Financial Statements.
In accordance with revised IAS 1, "Presentation of Financial Statements", assets and liabilities are classified in the balance sheet by maturity with retrospective effect from December 31, 2003.
The other changes in accounting policies had no material effect on the Group's net assets, financial position and results of operations.
U.S. GAAP
We apply SFAS No. 141 “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets” since January 1, 2002. SFAS No. 141 requires the use of the purchase method of accounting for all business combinations. In addition, it establishes criteria for the separate recognition of intangible assets from goodwill. The estimated remaining useful lives of existing intangible assets were reviewed effective January 1, 2002. Under SFAS No. 142, goodwill and intangibles with indefinite lives are no longer subject to amortization, but must be tested for impairment annually using a defined procedure, resulting in the recognition of an impairment loss if appropriate.
Critical Accounting Policies
The preparation of our Consolidated Financial Statements in conformity with IFRSs requires management to make estimates and assumptions. This is affecting the reported amounts of assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities. Some of those judgements can be subjective in nature and complex, and consequently actual results could differ from those estimates. For any given individual estimate or assumption made by the company, there may also be other estimates or assumptions that the company reasonably could have used. If the accounting estimate required to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and if different estimates that reasonably could have been used would have a material impact on the presentation of th e financial condition, changes in financial condition or results of operations, the accounting estimate would constitute a critical accounting policy. In the following we provide descriptive information on the accounting policies we regard critical. We also provide an analysis of the sensitivity of critical accounting estimates. Please also refer to Note 5 to our Consolidated Financial Statements.
In addition to our Consolidated Financial Statements in accordance with IFRSs we provide a reconciliation to U.S. GAAP in Note 37 to our Consolidated Financial Statements which differs in certain respects from IFRSs.
Senior management has discussed the critical accounting estimates with the audit committee.The Group does not consider any specific accounting policy to be critical to the economic success of the Group.
Critical accounting policies under IFRSs
Our critical accounting policies include inventories, the impairment of long lived assets and goodwill, the recoverability of deferred tax assets, provisions, accounting for expected third-party claims and the accounting for pension plans.
Inventories
Inventories are written down to the expected net realizable value (estimated selling price less the estimated costs of completion and the estimated cost necessary to make the sale). The actual selling prices and the costs still to be incurred may differ from the expected amounts.
Impairment of long-lived assets and goodwill
We test our long-lived assets for impairment whenever events or changes in circumstances indicate (triggering event) that the carrying amount of the asset may not be recoverable. Goodwill and other intangible assets not yet available for use are tested for impairment annually. In order to assess if an asset or a cash-generating unit is impaired, we estimate the recoverable amount of the asset or the cash-generating unit by the higher of either the present value of future cash flows expected to result from the use of the asset or cash-generating unit (value in use) or its fair value less costs. If the recoverable amount is less than the carrying amount of the asset or cash-generating unit, we will recognize an impairment loss for the amount by which the asset’s or cash-generating unit’s carrying amount exceeds its reco verable amount. For estimating future cash flows, we use our internal budgets. Thereby, considerable management judgement is necessary to identify a triggering event and to estimate future sales and cost of sales which underlie the present value of future cash flows. Accordingly, actual outcomes could vary significantly from such estimates.
Goodwill is tested annually for impairment by geographical segment on the basis of our operational three-year planning and assuming segment-specific growth rates for the years thereafter. A decrease in the growth rates by one percentage point would reduce the estimated fair value of the segments by a total of €500m. No impairment losses on allocated goodwill would be necessary in any segment. An increase in the discount rate by two percentage points would reduce the estimated fair value of the segments by a total of €1,300m. No impairment losses on the goodwill allocated would be required in any of the segments.
Deferred tax assets
Deferred tax assets are only recognized to the extent that the realization is probable, i.e., if a tax benefit is expected in future periods. The actual tax results in future periods may differ from the estimate made at the time the deferred taxes are recognized.
Provisions
Provisions for tax, environmental, warranty and litigation risks, product returns, and restructurings are recognized and measured by reference to an estimate of the probability of future outflow of benefits as well as to historical data based on the facts and circumstances known at the reporting date. The actual liability may differ from the amounts recognized.
Accounting for expected third-party claims
Provisions for third-party claims include mainly indemnities relating to the sale of business activities.
During fiscal year 2002, we completed the sale of our 24% ownership interest in Aventis CropScience to Bayer AG. The purchase agreement contained a range of indemnities and representations and warranties, relating mainly to financial statement guarantees, environmental matters, tax liabilities, social contributions and product liabilities. The possible indemnities, representations and warranties are uncertain in nature. Therefore, the estimation of the amount of expected claims requires subjective assumptions and management judgement. The actual outcome regarding the filing of claims as well as the actual amount attributable to a filed claim might differ significantly from management’s expectations.
Pension plans
We account for pensions in accordance with actuarial valuations, which rely on statistical and other factors in order to anticipate future events (see Note 4 to our Consolidated Financial Statements). These factors include key actuarial assumptions about the discount rate and rate of future compensation increases. In addition, our actuarial consultants also make use of subjective assumptions such as fluctuations and mortality rates. These actuarial assumptions may differ materially from actual developments due to changing market and economic conditions, changes in fluctuation rates or changes in life expectancy of participants, thereby resulting in a significant increase of the projected benefit obligation (PBO).
Also, the calculation of pension expenses is partly based on an expected long-term rate of return on plan assets and the market related value of plan assets. The expected rate-of-return of 7% for German plans and 4.8% for Other plans is based on historical and expected future averages for risk premiums and absolute returns of the considered asset categories. They are also cross-checked with market expectations of external sources. We consider the resulting return assumptions as realistic within the long-term investment horizon of the pension trust. The market-related value of plan assets for the Schering Pension Trust is based upon the fair value of plan assets at the measurement date. Actual return on plan assets may differ significantly from the expected amounts.
Obligations from the defined-benefit pension plans and the pension costs for the following year are calculated on the basis of the parameters given in Note (4) to our Consolidated Financial Statements. An increase or decrease of the discount rate by 0.5 percentage points would reduce the pension obligation by €125m or increase it by €141m. The amortization expense for unrecognized actuarial losses in the following year would decline by €5m or increase by €9m. An increase or decrease in salary trends by 0.5 percentage points would increase the defined benefit obligation by €85m or reduce it by €74m. The amortization expense for unrecognized actuarial losses in the following year would increase by €5m or decrease by €5m. An increase or decrease in the expected return on plan assets of one h alf percentage point would decrease or increase the net periodic pension costs by €6m.
The estimated effect of net unrealized losses on future pension expenses amounts to €9m per year (estimated effect for 2004: €5m).
Critical Accounting Policies under U.S. GAAP deviating from IFRSs
Goodwill
Since January 1, 2002, goodwill arising from acquisitions is not amortized under U.S. GAAP. Instead, SFAS No. 142 requires that goodwill be tested for impairment at least annually using a two-step approach at the reporting unit level. The reporting units are our primary segments, which are geographical. In the first step, the fair value of the reporting unit is compared to its book value (carrying amount) including goodwill. In order to determine the fair value of the reporting unit, significant management judgement is applied in order to estimate the underlying discounted future free cash flows. In the case, that the fair value of the reporting unit is less than its book value, a second step needs to be performed which compares the fair value of the reporting unit’s goodwill to the book value of its goodwill. The fair val ue of goodwill is determined based upon the difference between the fair value of the reporting unit and the net of the fair values of the identifiable assets and liabilities of the reporting unit. If the fair value of goodwill is less than the book value, the difference is recorded as an impairment. Impairment testing, which was performed on the basis of the present value of estimated future cash flows, did not result in an impairment of goodwill in 2004.
The future actual cash flows may differ significantly from estimated cash flows, thereby requiring an impairment in later periods.
New Accounting Standards
IFRSs
In February 2004, the IASB issued IFRS 2 “Share-based Payment”. IFRS 2 prescribes the financial reporting by an entity when it undertakes a share-based payment transaction. It applies to grants of shares, share options or other equity instruments made after November 7, 2002 that had not yet vested at the effective date of the IFRSs. IFRS 2 applies retrospectively to liabilities arising from share-based payment transactions existing at the effective date. IFRS 2 requires an entity to reflect in its profit and loss and financial position the effects of share-based payment transactions, including expenses associated with share options granted to employees. IFRS 2 applies to annual periods beginning on or after January 1, 2005; earlier application is encouraged. We elected to apply IFRS 2 beginning with January 1, 2004.
In March 2004, the IASB issued IFRS 3 “Business Combinations”. IFRS 3 prescribes the financial reporting by an entity when it undertakes a business combination. All business combinations are accounted for by applying the purchase method. Goodwill is recognised as an asset and is subsequently carried at cost less any accumulated impairment losses in accordance with IAS 36 “Impairment of Assets”. Accordingly goodwill is no longer amortized. We have adopted IFRS 3 since January 1, 2004. For information regarding the effect the application of IFRS 3 had on our Consolidated Financial Statements for the year 2004 please refer to Note 1 to our Consolidated Financial Statements.
In March 2004, the IASB issued IFRS 4 “Insurance Contracts”. IFRS 4 prescribes the financial reporting for insurance contracts by any entity that issues such contracts. It applies to insurance contracts issued, reinsurance contracts held and financial instruments issued with a discretionary participation feature. IFRS 4 is applicable for annual periods beginning on or after January 1, 2005. We did not apply this standard for fiscal year 2004. We do not expect a material effect on our Consolidated Financial Statements from the application of IFRS 4.
In March 2004, the IASB issued IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”. IFRS 5 prescribes the accounting for assets held for sale, and the presentation and disclosure of discontinued operations. A non-current asset (or disposal group) is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. That is, the asset (or disposal group) is available for immediate sale and its sale is highly probable. A non-current asset (or disposal group) classified as held for sale is measured at the lower of fair value less costs to sell and its carrying amount. A discontinued operation is a component of an entity that either has been disposed of or is held for sale. IFRS 5 applies to annual periods beginning on or after January 1, 2005. We did not apply the standard for fiscal year 2004. We do not expect a material effect on our Consolidated Financial Statements from the first-time application of IFRS 5.
During 2004, the IASB issued an amendment “Actuarial Gains and Losses, Group Plans and Disclosure” to IAS 19 “Employee Benefits”. This amendment introduces an additional recognition option for actuarial gains and losses arising in post-employment defined benefit plans and redefines disclosure requirements. The amendment is effective for annual periods beginning on or after January 1, 2006. We did not apply the amendment for fiscal year 2004. We are currently in the process of analyzing the additional recognition option.
U.S. GAAP
On April 30, 2003, the Financial Accounting Standards Board issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. This Standard amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments and derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The application of this standard had no material impact on our U.S. GAAP reconciliation.
On May 15, 2003, the Financial Accounting Standards Board issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. Under SFAS No. 150, certain financial instruments, previously classified as equity, are now required to be classified as a liability by the issuer. SFAS No. 150 primarily affects accounting for financial instruments that embody an obligation to repurchase equity instruments that have been issued by the company. SFAS No. 150 is effective for transactions entered into or modified after May 31, 2003. The application of this standard had no impact on our U.S. GAAP reconciliation.
In December 2003, the Financial Accounting Standards Board issued SFAS No. 132 (revised 2003) “Employers' Disclosures about Pensions and Other Postretirement Benefits”. SFAS No. 132 (revised 2003) is effective for fiscal years ending after December 15, 2003. The Standard requires companies to provide more detailed disclosures about pensions and other postretirement benefit plans. Among other things, companies are required to describe investment policies and strategies and to provide a description of the basis used to determine the overall expected long-term rate of return on assets together with a classification of the plan assets by investment classes. The disclosures required are reported in Notes 24 and 38 to our Consolidated Financial Statements.
Under SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, qualifying special purpose entities are exempted from consolidation under certain circumstances. In January 2003, the FASB published FIN No. 46 “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51”, which clarifies the application of the consolidation rules to certain variable interest entities which do not qualify as qualifying special purpose entities. FIN No. 46 applies immediately for variable interest entities created after January 31, 2003. By issuing FASB Staff Position (FSP) FIN 46-6 “Effective Date of FASB's Interpretation No. 46, Consolidation of Variable Interest Entities”, the Financial Accounting Standards Board deferred the effective date f or initial application of FIN No. 46 for VIEs created before February 1, 2003 to December 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003). According to FIN 46 (revised December 2003), the provisions of FIN 46 or FIN 46 (revised December 2003) must be applied to all variable interest entities no later than the end of the first reporting period that ends after March 31, 2004. Our U.S. GAAP reconciliation is not affected by the FASB rules, since we hold no investment that is classified as a qualifying special purpose entity or a variable interest entity.
In November 2004, the Financial Accounting Standards Board issued SFAS No. 151 “Inventory Costs – an amendment of ARB No. 43, Chapter 4”. This Statement addresses the accounting for amounts of idle facility expenses. Under SFAS No. 151, idle facility expenses are required to be treated as a current period charge. Presently, idle facility expenses are allocated between cost of sales and inventories under U.S. GAAP. Under IFRSs, the allocation of fixed production overheads to the cost of inventories is based on the normal capacity of the production facilities. Idle facility expenses are treated as a current period charge. The effect of this accounting difference on our U.S. GAAP reconciliation for 2004, 2003 and 2002 is reported under Note 37 to our Consolidated Financial Statements. SFAS No. 151 is effective for f iscal years beginning after June 15, 2005. We expect the application of SFAS No. 151 to affect our reconciliation for 2006, when capitalized costs will be reversed as an expense.
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004) “Share-Based Payment”. This Statement is a revision of SFAS No. 123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees”. According to SFAS No. 123 (revised 2004), the compensation costs relating to share-based payment transactions must be accounted for using the fair-value-based method and must be recognized in the financial statements. The effect of applying the fair-value-based method on net profit under U.S. GAAP for 2004, 2003 and 2002 is reported under Note 38 to our Consolidated Financial Statements. SFAS No. 123 (revised 2004) is effective for fiscal years beginning after June 15, 2005.
In December 2004, the Financial Accounting Standards Board issued SFAS No. 152 “Accounting for Real Estate Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67”. SFAS No. 152 is effective for fiscal years beginning after June 15, 2005. We do not expect an impact on our U.S. GAAP reconciliation from the application of this standard.
In December 2004, the Financial Accounting Standards Board issued SFAS No. 153 “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29”. SFAS No. 153 is effective for fiscal years beginning after June 15, 2005. According to SFAS No. 153, exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. We do not expect an impact on our U.S. GAAP reconciliation from the application of this standard.
United States GAAP Reconciliation
As discussed elsewhere in this annual report, we prepared our Consolidated Financial Statements in accordance with IFRSs. IFRSs differ in certain material aspects from United States Generally Accepted Accounting Principles. A comparison of net profit, earnings per share (basic) and equity at, or for the year ended, December 31, 2004, 2003 and 2002 determined under IFRSs and after reflecting the material adjustments which would arise if United States Generally Accepted Accounting Principles were to be applied instead of IFRSs is shown below.
| December 31, |
|---|
| 2004 | 2003 | 2002 |
|---|
| $ | € | € | € |
|---|
| (in millions, except per share data) |
|---|
Net Profit under IFRSs | 677 | 500 | 443 | 867 |
Net Profit under United States GAAP | 637 | 471 | 489 | 848 |
Earnings per share (basic) under IFRSs | 3.53 | 2.61 | 2.28 | 4.39 |
Earnings per share (basic) under United States GAAP | 3.33 | 2.46 | 2.52 | 4.30 |
Total equity under IFRSs | 4,097 | 3,026 | 2,922 | 2,955 |
Shareholders`equity under United States GAAP | 3,886 | 2,870 | 2,831 | 2,800 |
As more fully described and quantified in Note 37 to our Consolidated Financial Statements, the major differences between IFRSs and U.S. GAAP relate to accounting for business combinations (research-in-process charges; amortization of goodwill), acquired R&D, compensation costs for early retirement programs, provisions for pensions and stock option plans, the accounting of inventories and the capitalization of interest costs.
In 2004, net profit under U.S. GAAP is lower by 6% as compared to net profit under IFRSs whereas it was higher by 10% in 2003. In 2002, net profit under U.S. GAAP was lower by 2% as compared to net profit under IFRSs.
In 2004, the primary reasons for a lower net profit under U.S. GAAP were amortization charges on intangibles that became capitalized in the context of business combinations whereas the corresponding goodwill is no longer amortized under IFRSs since January 1, 2004 following the adoption of IFRS 3 "Business Combinations". Further, compensation costs following the accounting of stock option plans adversly affected our reconciliation. Also, under IFRSs milestone payments for R&D activities became capitalized during 2004 following the adoption of IAS 38 "Intangible Assets" (revised 2004); under U.S. GAAP however R&D costs shall not be capitalized. Finally, the redesign of our pension plans in Japan also adversely affected the reconciliation of net profit under U.S. GAAP. The recognition of a minimum pens ion liability adversley affected the reconciliation of shareholders`equity under U.S. GAAP; net profit under U.S. GAAP was not affected since the corresponding contra item was recognized directly in Accumulated other comprehensive income.
In 2003, the primary reasons for a higher net profit under U.S. GAAP were adjustments resulting from the discontinuation (from January 1, 2002) of the amortization of goodwill arising from acquisitions under U.S. GAAP as well as from new agreements on early retirement during 2003 (see Note 37 to our Consolidated Financial Statements).
In 2002, the primary reason for a lower net profit under U.S. GAAP were expenses for acquired research-in-process which are especially related to our acquisition of Collateral Therapeutics, Inc., and which are capitalized as part of goodwill under IFRSs. A positive effect on net profit under U.S. GAAP resulted from the suspension of amortizing goodwill in accordance with SFAS No. 142 as well as from the divestment of our interest in Aventis CropScience.
A classification difference also arises in presenting interest relating to the pension obligations not transferred to external funds. Under IFRSs, interest relating to the unfunded pension obligation is classified in financial result (see Note 10 to our Consolidated Financial Statements). Under U.S. GAAP, interest on pension obligations is considered a component of compensation expense. Accordingly, operating profit under U.S. GAAP would be lower and financial result higher by €29m in 2004, €35m in 2003 and €44m in 2002.
Inflation
During the past three years, the effects of inflation on our operations have not been material.
LIQUIDITY AND CAPITAL RESOURCES
For a discussion of our use of exchange-traded and over-the-counter derivative financial instruments to reduce currency and interest-rate risk resulting from anticipated transactions and from existing assets and liabilities, see "Item 11 – Quantitative and Qualitative Disclosures about Market Risk" and Note 31 to our Consolidated Financial Statements. We do not utilize commodity contracts.
Cash Flow Analysis
2004 compared to 2003
Operations
Cash flows from operating activities increased by 29% from €581m in 2003 to €751m in 2004. The improved cash flow from operating activities is due to a higher profit for the period. In addition, after a sharp increase of working capital in 2003, inventories and receivables increased in line with our underlying business in 2004; these positive effects were partly offset by a decrease in operating liabilities.
Investing
Cash flows used in investing activities amounted to €311m in 2004 compared to €161m in 2003. The cash outflows in the year under review were mainly due to the purchase of non-current assets in the amount of €290m (2003: €318m). Proceeds from the disposal of non-current assets amounted to €51m. In the previous year, proceeds from the disposal of non-current assets of €123m included €43m from the sale of our remaining 49% stake in Oy Leiras Finland AB. Furthermore, €72m were used for the purchase of securities during 2004, whereas 2003 €36m were realized from the sale of securities.
Financing
Cash flows used in financing activities amounted to €217m in 2004, as compared to €247m in the previous year. These cash flows mainly related to the distribution of dividends of €180 paid in 2004 for the previous year (2003: €182m) as well as the purchase of treasury shares in the amount of €167m (2003: €90m). A positive effect resulted from the increase in borrowings by €130m during 2004 (2003: €25m).
2003 compared to 2002
Operations
Cash flows before working capital changes totaled €766m, up 2% on the 2002 figure (€749m), whereas the underlying profit of the period declined from €869m in 2002 to €446m in 2003. These contrary trends are due to the fact that material amounts contained in the profit of the period last year were attributable to cash flows from investing activities, not to cash flows before working capital changes (disposal of Aventis CropScience and acquisition of the Leukine® development project). In addition, our share in the profit of Aventis CropScience in 2002 did not impact cash flows.
In 2003, working capital increased by €185m (2002: €165m). This increase was mainly driven by inventory increases relating to the supply chain of drospirenone, an active substance in Yasmin®, as well as to an increase in receivables due to a strong business in local currencies during the fourth quarter as compared with 2002. As a result, cash flows from operating activities totaled €581m (2002: €584m).
Investing
Cash flows used in investing activities amounted to €161m in 2003, compared with cash flows from investing activities of €685m in 2002. The cash outflows in the year under review were mainly due to the purchase of non-current assets. Proceeds from the disposal of non-current assets contained €43m from the sale of our remaining 49% stake in Oy Leiras Finland AB. The cash flows from investing activities reported in 2002 were mainly due to the proceeds from the disposal of our 24% interest in Aventis CropScience for €1.5bn. Purchases of non-current assets in 2002 included the cost of the manufacturing and marketing rights to Leukine® in its approved indications.
Financing
Cash flows used in financing activities amounted to €247m in 2003, as compared to €1,031m in the previous year. These cash flows mainly related to the distribution of dividends of €182m paid in 2003 for the previous year (2002: €165m) as well as the purchase of treasury shares in the amount of €90m (2002: €234m). In addition, the decline in the cash flows used in financing activities was primarily due to a one-time contribution of €500m to the Schering Pension Trust in 2002.
Capital Resources
Net Cash Position
The Schering AG Group's cash and cash equivalents as of December 31, 2004, 2003 and 2002 amounted to €785m, €566m, and €408m respectively. As of December 31, 2004, the Group had a positive net cash position (which it defines as cash and cash equivalents and marketable securities less borrowings) of €780m, compared with €632m as of December 31, 2003, and €569m as of December 31, 2002. This positive net cash position was partially due to pension liabilities from German retirement benefit plans, which are financial resources for the Group, and as of December 31, 2004, 2003, 2002, amounted to €468m, €458m and €439m, respectively. As pension obligations in Germany usually remain unfunded, the Group, like most German companies, considers its unfunded pension obligations as long-term financ ing obligations. In 2001, Schering AG founded the Schering Altersversorgung Treuhand Verein (Schering Pension Trust). One-time contributions amounting to €500m in 2002 and €300m in 2001 were transferred to the Schering Pension Trust; the provisions for pension obligations were reduced accordingly.
We hold our cash and cash equivalents primarily in euros. As of December 31, 2004, euro denominated liquid assets represented 84% of total cash and cash equivalents. U.S. dollar denominated liquid assets represented 6% of total cash and cash equivalents.
We expect that cash flows from operating activities, along with available cash and cash equivalents and marketable securities, will be sufficient to fund all of our anticipated operating needs in 2005, including capital expenditures, research cooperation projects, debt service and dividends.
Credit Lines
On December 31, 2004, the Schering AG Group had aggregate unused committed lines of credit of €43m (2003: €81m; 2002: €192m).
Borrowings
Borrowings are reflected in our Consolidated Financial Statements as non-current borrowings and current borrowings. Borrowings as of December 31, 2004, amounted to €238m, compared with €110m as of December 31, 2003, and €91m as of December 31, 2002. €39m of these liabilities have a maturity of less than one year (December 31, 2003: €74m; December 31, 2002: €53m).
In December 2004 a long-term loan amounting to $263m was raised to improve our liquidity reserves. The loan is a term-loan that matures in 2009; the interest rate is based on short term U.S. dollar-rates and is adjusted every three months.
Share repurchase program
In 2004, we repurchased 4,249,083 own shares (including ADSs) of which 249,083 shares were designated for and used in our worldwide Employee Share Ownership Programs (ESOPs) and transferred to employees. The remaining 4 million shares were purchased within the Share Buyback Programs authorized by the Annual General Meetings (AGM) in 2003 and 2004. The authorizations given by the AGM amounted to 19.4 million shares in 2004 and 15 million shares in 2003. In 2003, 2.5 million shares were repurchased within the Share Buyback Program in addition to approximately 0.4 million shares purchased in the context of ESOPs.
The current AGM Authorization for the Share Buyback Program will expire on September 30, 2005, unless renewed at the next AGM on April 14, 2005.
For additional information regarding share repurchases by Schering AG and its subsidiaries, please refer to “Item 16E – Purchase of Equity Securities by the Issuer and Affiliate Purchasers”.
Recent acquisitions and dispositions
As part of our strategy, we seek to acquire both product rights and small to medium-sized enterprises in order to
expand our product portfolio,
acquire promising technical innovations, and
strengthen our presence on key geographical markets.
From time to time, we dispose of assets or businesses that we decide do not belong to our core business.
Acquisitions
In the area of hematological oncology, we acquired exclusive rights to develop, sell and distribute MabCampath® in Japan, China and the Asian Pacific Basin from the U.S. biopharmaceutical company ILEX Oncology, Inc., in February 2003. We now have the worldwide marketing rights for this product which we have been marketing in the United States and Europe since 2001.
In July 2002, we acquired the marketing and production rights for Leukine®, a product used in hematological oncology. At the same time, we took over the rights to the Phase II-development project for the use of Leukine® in Crohn’s disease. The acquisition cost for the entire transaction amounted to approximately €415m.
In July 2002, we acquired the U.S. biotech company Collateral Therapeutics, Inc., using our ADRs traded on the New York Stock Exchange as payment for the first time. The total value of ADRs issued on July 2, 2002, the date on which the shareholders of Collateral Therapeutics approved the offer, amounted to €148m.
In July 2002, we also acquired the Finnish company MAP Medical Technologies Oy. MAP specializes in the development, manufacture and marketing of radiopharmaceuticals for improving the diagnosis and therapy of cancer, as well as neurodegenerative diseases.
Dispositions
In December 2004 we sold our 80% stake in Schering (Nanjing) Pharmaceutical Limited to Nanjing Xingang Medicine Co. Ltd., in order to consolidate our China business.
In August 2004, we sold the largely generic therapeutics product line of our subsidiary Jenapharm GmbH&Co. KG to a subsidiary of Dermapharm AG, Grünwald.
In the course of further focusing our business on core competencies, we sold the remaining 49% of Oy Leiras Finland AB to the Nycomed Group for €43m in May 2003. This transaction completed the divestiture of the domestic business of former Leiras Oy, which merged with our Finnish subsidiary Schering Oy in 2003. We had earlier reduced our interest in Oy Leiras Finland AB to 49% in 2002.
At the beginning of June 2002, we sold our 24% stake in Aventis CropScience to Bayer AG for €1.5 billion.
In May 2002, we sold the general practitioner division of our subsidiary Asche AG to the Italian company Chiesi Farmaceutici S.p.A. as part of the strategic reorganization of the Schering AG Group’s German companies. In connection with this disposal, Asche AG was renamed AWAG Arzneimittelwerk Altona AG.
Capital expenditures
We generally fund capital expenditures out of cash flows from operating activities.
Capital expenditures on property, plant, and equipment totaled €212m in 2004, compared with €231m in 2003 and €281m in 2002. The year-on-year decrease is due to exchange rate effects as well as measures connected to our FOCUS Initiative, which was introduced in 2003 and continued in 2004.
In the year under review, 43% of expenditures related to Germany, 19% to other countries in the European Union, 26% to the United States, and 4% to Japan. 49% of our total capital budget was spent on production, quality assurance, and environmental protection, and 28% on research and development. Marketing and selling and Other functions accounted for 23% of our investment budget.
In 2004, we continued the construction of our new research building at our Berlin site. In production, we made investments to adapt our facilities to changes in market demands, such as packaging lines for Specialized Therapeutics or filling lines for contrast media cartridges. We reduced capital expenditures considerably at our Bergkamen site in 2004, in order to adapt our production capacity as a supplier for pharmaceutical intermediates to the reduced volume of demand. Further investments were made in the modernization of our radiopharmaceuticals production facility in Saclay, France.
Capital expenditures for 2005 are expected to reach €240m. We will continue with the construction of the new research building at our Berlin site. In Bergkamen, we will invest in measures that will allow us to further improve our cost structures in active substance production.
In Seattle, USA, we will continue with the construction of our biotechnological production facilities for the manufacturing of Leukine®.
In addition, we are expecting to incur capital expenditures relating to the implementation of our production strategy to reduce the number of production sites.
Based on the ongoing projects to alter the production structure within the Schering AG Group, we expect capital expenditures in 2006/2007 to remain at the same level as in 2005.
Contractual Obligations
The following table provides a maturity analysis of our on- and off-balance sheet contractual obligations as of December 31, 2004:
Contractual Obligations | Payments due by period |
Total | Less than 1 year | 1–3 years | 4–5 years | More than 5 years |
| (in € million) |
Bank loans and overdrafts | 269 | 46 | 18 | 205 | 0 |
Operating Leases | 182 | 50 | 50 | 51 | 31 |
Purchase Obligations | 319 | 156 | 70 | 62 | 31 |
Long-term research and other agreements | 117 | 33 | 82 | 2 | – |
Other Long-Term Liabilities reflected on the balance sheet under IFRSs including present value of expected payments to employees for unfunded pension obligations | 1,074 | 29 | 198 | 160 | 687 |
Total | 1,961 | 314 | 418 | 480 | 749 |
Contractual Obligations under Bank loans and overdrafts also include interest payments.
Contractual Obligations under Operating Leases, Purchase Obligations and Long-term research and other agreements are not recognized in the balance sheet. Purchase Obligations mainly arise from contractual agreements with various suppliers on minimum purchase quantities.
For further information on contingent liabilities, other financial commitments as well as commitments arising from research and other agreements see Note 32 to our Consolidated Financial Statements.
Dividends
In 2004, Schering AG paid a cash dividend of €0.93 per share for the financial year 2003 (in total €177m) and in 2003, a cash dividend of €0.93 per share for the financial year 2002 (in total €180m). The cash dividend paid in 2002 was €164m (€0.83 per share). The Executive Board will propose to the Annual General Meeting a dividend of €1.00 per share for the financial year 2004.
Restructuring Program
Within the FOCUS Initiative Schering AG has started a restructuring program called MORE (Manufacturing and Organizational Restructuring for higher Efficiency) which aims at creating a more efficient, more flexible, more market-demand driven and thus more competitive manufacturing network within our global supply chain. The program is an extension of our global production strategy. It is composed of several projects, which are focused on improving productivity in our production of active substances and of pharmaceutical products. With respect to pharmaceutical production MORE is aimed at creating a network of 12 pharmaceutical production sites worldwide, nearly all of them being specialized in one single dosage form (e.g. liquids, solids).
We have set up provisions totaling €37m for restructuring measures already initiated within the framework of MORE. Provisions for restructuring largely include severance obligations to employees and other costs related to capacity reductions.
Foreign Currency
Effective as of January 1, 1999, we adopted the euro as our reporting currency.
Sales made, and expenses incurred, by our subsidiaries located outside of Germany (and the other member countries of the European Union that have adopted the euro as their common currency) are generally denominated in local currency. As a consequence, a significant amount of our sales have been generated, and our costs have been incurred, in currencies other than the euro.
We made sales in a range of currencies during 2002, 2003 and 2004 as follows:
| Year ended December 31, |
|---|
| 2004 | 2003 | 2002 |
|---|
| (percentage of net sales) |
|---|
Euro | 42 | 44 | 39 |
U.S. dollar | 26 | 26 | 27 |
UK pound sterling | 4 | 3 | 3 |
Japanese yen | 10 | 11 | 12 |
Brazilian real | 3 | 2 | 3 |
Other | 15 | 14 | 16 |
| 100 | 100 | 100 |
We translate the balance sheets of our subsidiaries that do not use the euro as their functional currency into euro at the mid-market rate on the balance sheet date. Income and expenses are translated at the average rate of exchange for the period. Comparability of our performance between financial periods can be significantly affected by fluctuations in the value of the euro against other currencies. Moreover, our financial condition and results of operations may be materially affected by movements in the exchange-rate between foreign currencies to which the Group is exposed and the euro. In general, due to translation effects, appreciation of the euro relative to a foreign currency has a negative effect on our reported consolidated net sales, operating profit and net profit. The depreciation of the euro relative to a foreign currency generally has a positive effect on our reported consolidated net sales, operating profit and net profit. The U.S. dollar, Japanese yen, British pound sterling and Brazilian real are the most significant sources of this currency translation risk. Please refer also to Note 6 to our Consolidated Financial Statements.
Net sales in 2004 increased by 5% in local currency terms as compared to 2003. In euro terms, net sales increased by 2% as compared to 2003. The negative translation effect was essentially due to the strengthening of the euro relative to the U.S. dollar and other currencies during 2004.
Net sales in 2003 increased by 6% in local currency terms as compared to 2002. In euro terms, net sales decreased by 4% as compared to 2002. The negative translation effect was essentially due to the strengthening of the euro relative to the U.S. dollar and other currencies during 2003.
For a discussion of the significant effects of foreign currency on our results of operations, see "– Results of Operations – 2004 Compared with 2003 – Results of Operations by Segment – United States Region", “– Latin America/Canada Region", "– Japan Region" and "– Asia/Pacific Region","– Results of Operations – 2003 Compared with 2002 – Results of Operations by Segment – United States Region”, “– Latin America/Canada Region", "– Japan Region" and "– Asia/Pacific Region".
Environmental Matters
Environmental laws and regulations impose stringent limitations on emissions and discharges to the environment from various manufacturing operations. In 2003 and 2004, we incurred capital expenditures of €15m and €4m, respectively, for environmental protection projects and other projects resulting in environmental benefits. Capital expenditures for environmental protection and other projects resulting in environmental benefits are forecasted to be between €5m and €15m for each of the years 2005 through 2008. In addition, our operation and maintenance costs for safety and environmental measures were €76m in 2003 and €74m in 2004. Operation and maintenance costs for each of the years 2005 through 2008 are forecasted to be between €76m and €80m.
We believe that the expenditures required to comply with applicable laws and regulations concerning environmental protection, including ongoing clean-up matters, will not have a material adverse effect on the Group's financial condition, cash flows or results of operations.
Risk Management
The information provided in this section contains forward-looking statements that involve inherent risks and uncertainties, principally with respect to unanticipated changes in foreign exchange or interest rates and changes in the level of our exposure to such market risks. Actual results may differ from those set forth in these forward-looking statements.
Market risk represents the risk of an adverse price change of a financial instrument, derivative or nonderivative, caused by fluctuations in interest rates, currency exchange rates, and equity prices. We have policies for managing potential exposures related to these risks. See Note 31 to our Consolidated Financial Statements.
We use exchange-traded and over the counter (OTC) derivative financial instruments to manage currency and interest rate risks resulting from business transactions and from interest rate and price changes on our portfolio. Transactions in derivative instruments are concluded with high-rated banks within fixed risk limits. Taking into account the hedged positions, we do not anticipate any material adverse effect on the Group's financial position, results of operations, liquidity or cash flows resulting from our use of derivative financial instruments.
Foreign exchange risk management
We have receivables and payables denominated in currencies other than the euro and the functional currencies of our foreign subsidiaries, which creates foreign exchange risk. Our most significant sources of currency risk are presently the U.S. dollar, Japanese yen and British pound sterling. We enter into foreign currency forward and option contracts to reduce our exposure to foreign currency fluctuations. Our currency risk includes balance-sheet assets denominated in foreign currencies and expected future net cash flows in foreign currencies for 12 months on a rolling basis.
See "Item 11 – Quantitative and Qualitative Disclosure about Market Risk".
Legal Matters
The Group is involved in a number of legal proceedings and claims incidental to the normal conduct of its business, relating to such matters as product liability, patent infringement, tax assessments, competition, past waste disposal practices and release of chemicals into the environment. Although the outcome of these proceedings and claims cannot be predicted with certainty, Schering AG believes that any resulting liabilities, net of amounts recoverable from insurance or otherwise, will not, in the aggregate, have a material adverse effect on the Group's consolidated results of operations, financial condition and cash flows. For a discussion of certain legal proceedings in which we are involved, see "Item 8 – Financial Information – Legal Proceedings."
RESEARCH AND DEVELOPMENT, PATENTS AND LICENCES
Our research and development activities are focused on selected fields with a high degree of unmet medical needs. We are concentrating on the exploitation of novel approaches resulting in the development of:
gender specific health care products.
therapy of life threatening diseases
therapy options for various types of cancer.
therapy of selected disabling diseases.
sensitive and highly specific diagnostics.
regenerative medicine.
For a discussion of our research and development activities and expenses, refer to “Item 4 – Information on the Company – Research and Development”. For a discussion of patents and other intellectual property, refer to “Item 4 – Information on the Company – Patents and Other Intellectual Property”.
OFF-BALANCE SHEET ARRANGEMENTS
We do not use "off-balance sheet financing arrangements", such as securization of receivables or access to assets through special purpose entities or variable interest entities. For a discussion of our accounting policy with respect to special purpose entities, refer to “Results of Operations – New Accounting Standards – U.S. GAAP”.
As of December 2004, we had issued financial guarantees and warranties of €28m (2003: €27m; 2002: €23m) which are related to transactions arising from the normal course of business.
Off-balance sheet contractual obligations are reported under “- Contractual Obligations”.
Item 6. Directors, Senior Management and Employees
CORPORATE GOVERNANCE, DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Corporate Governance
German corporate governance standards differ from the corporate governance listing standards applicable to U.S. domestic companies which have been adopted by the New York Stock Exchange (NYSE). A brief, general summary of such principal differences as it applies to Schering AG follows.
As required by the German Stock Corporation Act (Aktiengesetz), Schering AG has a two-tier board system consisting of a Supervisory Board (Aufsichtsrat) and an Executive Board (Vorstand). No person can be a member of the Supervisory Board and the Executive Board at the same time.
The shareholders exercise their rights in a shareholders meeting where one share entitles the holder to one vote. Shareholders have the option to exercise their voting right in person or via a proxy of their choice, which may also be a shareholders’ association. Appointments of proxies must be submitted in writing. By providing proxies, Schering AG enables shareholders not attending the meeting to exercise their rights. This option is open to all shareholders who do not wish to commission their custodian bank or another third party to exercise their voting rights.
The Executive Board is responsible for managing the business of Schering AG in accordance with the German Stock Corporation Act and the Articles of Association (Satzung) of Schering AG.
The principal function of the Supervisory Board is to supervise the Executive Board and to appoint and to remove the members of the Executive Board. The Supervisory Board may not make management decisions, but certain types of transactions require its prior consent. These include the annual budget and significant financial and M&A transactions.
In carrying out their duties, the members of the Supervisory Board and the Executive Board must exercise the standard of care of a diligent and prudent business person. In complying with this standard of care, the members must take into account a broad range of considerations, including the interests of Schering AG and our shareholders, employees and creditors. The members of the Supervisory Board and the Executive Board may be personally liable for violation of their duties.
The Executive Board and the Supervisory Board have determined that the company complies with all recommendations of the German Code of Corporate Governance, and such determination has been publicly disclosed. These requirements are not legally binding but are intended to establish a standard of good corporate governance for German stock corporations. Compliance or non-compliance with the Code must be disclosed by each publicly traded company. Under the Code, each member of the Supervisory Board and the Executive Board must disclose a conflict of interest arising in their person. No such disclosure was received in 2004.
The company has purchased D&O liability insurance for the members of its Supervisory Board and the Executive Board, which provides for an appropriate deductible for members of the Executive Board and Supervisory Board.
The ordinary shares (in the form of American Depositary Shares) of Schering AG are listed on the New York Stock Exchange. Schering AG is subject to the listed company rules of the NYSE and the requirements of the U.S. Securities Exchange Act of 1934 that are applicable to foreign private issuers.
Supervisory Board
Our present Supervisory Board consists of 16 members, 8 of whom are elected by our shareholders by a simple majority of the votes cast at a shareholder meeting in accordance with the provisions of the German Stock Corporation Act, and 8 of whom are elected by our German employees in accordance with the German Co-Determination Act (Mitbestimmungsgesetz).
A member of our Supervisory Board elected by our shareholders may be removed by our shareholders by a majority of the votes cast at a meeting of shareholders. A member of the Supervisory Board elected by our employees may be removed by three-quarters of the votes cast by the relevant class of employees. The Supervisory Board appoints a Chairman and a Vice-Chairman from among its members. At least half the total required number of members of the Supervisory Board must be present or participate in the decision making to constitute a quorum. Unless otherwise provided for by law, resolutions are passed by a simple majority of the votes cast. In the event of a repeated tie, the Chairman (who is, in practice, a representative of the shareholders) then has a casting vote.
The members of our Supervisory Board are each elected for the same fixed term of approximately five years. If a member is elected to replace a retired member, its term will expire at the same time. The term of our current members of the Supervisory Board will expire at the end of the Annual General Meeting 2009. Re-election is possible.
The remuneration of the members of the Supervisory Board is determined by the shareholders meeting and stipulated in our Articles of Association.
In proposing to the shareholders meeting candidates for election as Supervisory Board members, the Supervisory Board has put emphasis on selecting candidates with expertise and experience in different relevant fields and from various nations.
The current members of our Supervisory Board, their respective ages as of February 28, 2005, their principal occupation and the year in which they were first elected to our Supervisory Board and by whom they were elected are as follows:
Name | Age | Principal occupation | Year first elected by shareholders (S)
employees (E) |
|---|
Dr. Giuseppe Vita
Chairman of the Supervisory Board | 69 | | 2001 (S) |
Norbert Deutschmann
Vice-Chairman of the Supervisory Board | 53 | Chairman of the Berlin Works Council, Schering AG, Berlin | 1999 (E) |
Dr. rer. oec. Karl-Hermann Baumann | 69 | | 1994 (S) |
Hans-Georg Bleeck,
Dipl.-Volkswirt | 53 | Member of the Works Council, Schering AG, Berlin | 2004 (E) |
Prof. Dr. med. Piet Borst | 70 | Professor of Clinical Biochemistry, University of Amsterdam, Amsterdam | 2000 (S) |
Dr. Mathias Döpfner | 42 | Chairman of the Executive Board of Axel Springer Verlag AG, Berlin | 2001 (S) |
Professor John A. Dormandy | 67 | Emeritus Professor of Vascular Sciences, University of London, London; Director, Vascular Clinical Research Unit, St.George’s Hospital, London | 1996 (S) |
Dr. rer. pol. Reiner Hagemann | 57 | Chairman of the Executive Board of Allianz Versicherungs-AG, Munich | 1997 (S) |
Johannes Heitbaum | 41 | Vice Chairman of the Bergkamen Works Council, Schering AG, Berlin | 1999 (E) |
Dr. h.c. Martin Kohlhaussen | 69 | Chairman of the Supervisory Board of Commerzbank AG, Frankfurt/Main | 1996 (S) |
Hermann-Josef Lamberti | 49 | Member of the Executive Board of Deutsche Bank AG, Frankfurt/Main | 2001 (S) |
Dr. med. Hans-Peter Niendorf | 58 | Senior Medical Advisor, Diagnostic Imaging, Schering AG, Berlin | 1999 (E) |
Detlef Pfotenhauer | 48 | Chairman of the Groups Works Council, Schering AG, Berlin | 2004 (E) |
Dr. rer. oec. Ulrich Sommer | 57 | Area Manager Marketing Europe Region, ScheringAG, Berlin | 1999 (E) |
Sabine Süpke | 41 | District manager, IG BCE for the Berlin-Mark Brandenburg district | 2004 (E) |
Heinz-Georg Webers | 45 | Chairman of the Central Works Council of Schering AG; Chairman of the Bergkamen Works Council, Schering AG, Berlin | 1999 (E) |
In addition, Mr. Joachim Elsholz, Mr. Hans-Jürgen Scheel and Mr. Günter Schmitt served on our Supervisory Board during 2004 until the completion of the Annual General Meeting on April 16, 2004. Ms. Sabine Süpke, Mr. Hans-Georg Bleeck and Mr. Detlef Pfotenhauer were elected by our employees to serve on the Supervisory Board effective as of the Annual General Meeting in 2004.
Executive Board
Our Executive Board currently consists of seven members. Under our Articles of Association, our Supervisory Board determines the size of the Executive Board, although it must have at least two members.
Any two members of the Executive Board or one member of the Executive Board together with the holder of a special power of attorney (Prokura) may legally represent Schering AG towards third parties.
The Executive Board reports regularly to the Supervisory Board, including with respect to proposed business policy and strategy, profitability, the current business of Schering AG, deviations from plan, risk management, business transactions that may affect the profitability or liquidity of Schering AG, and any exceptional matters which arise from time to time. The Supervisory Board may also request special reports from the Executive Board.
The Supervisory Board appoints each member of the Executive Board for a maximum term of five years. Executive Board members may be reappointed or have their term extended for one or more terms of up to five years each. The Supervisory Board may remove a member of the Executive Board prior to the expiration of his/her term if he/she commits a serious breach of duty or is incapable of carrying out his/her duties or if there is a bona fide vote of no confidence by a majority of the votes cast at a general meeting.
A member of the Executive Board may not vote on matters relating to certain contractual arrangements between the member and the Schering AG Group. He/she may be liable to Schering AG if he/she has a material interest in any contractual agreement between the Schering AG Group and a third party which was not disclosed to, and approved by, the Supervisory Board.
The current members of our Executive Board, their respective ages as of February 28, 2005, their positions, the years in which they were first appointed to our Executive Board and the years in which their terms expire, respectively, are as follows:
Name | Age | Position | Term of office |
|---|
Dr. Hubertus Erlen | 61 | Chairman of the Executive Board;
responsibilities: strategy and business development, corporate communication, senior executives, corporate auditing | 1985 - 2008 |
Dr. Karin Dorrepaal | 43 | Member of the Executive Board;
responsibilities: Diagnostics&Radiopharmaceuticals, procurement, supply chain and environment | 2004 - 2007 |
Dr. Ulrich Köstlin | 52 | Member of the Executive Board;
responsibilities: marketing and sales, Europe Region, Japan Region, Latin America/Canada Region, Asia/Pacific Region | 1994 - 2009 |
Lutz Lingnau | 61 | Member of the Executive Board;
responsibilities: Specialized Therapeutics, Dermatology, United States Region | 2001 - 2005 |
Marc Rubin, MD | 50 | Member of the Executive Board;
responsibilities: development and Oncology | 2003 - 2006 |
Dr. Jörg Spiekerkötter | 46 | Member of the Executive Board;
responsibilities: finance and administration, information technology, human resources | 2002 - 2007 |
Prof. Dr. Dr. h.c. Günter Stock | 61 | Member of the Executive Board;
responsibilities: research, Gynecology&Andrology, | 1989 - 2005 |
Dr. Hubertus Erlen began his career with Schering AG in 1972 in a pharmaceutical manufacturing function. In 1978 he joined the central office of the Executive Board, which he later headed. Subsequently, he served as a member of the former Electroplating Divisional Board, including in the United States. In 1985, Dr. Erlen was appointed as a member of the Executive Board of Schering AG, and his responsibilities included the region North America as well as Production and Human Resources. In April 2001, Dr. Erlen became Chairman of the Executive Board.
Dr. Karin Dorrepaal joined Schering AG in 2004. Prior to joining the company, she worked for Booz Allen Hamilton, a management consultancy, where she specialized in the pharmaceutical industry. She received her Ph.D. in medicine from the Free University of Amsterdam. Dr. Karin Dorrepaal was appointed as a member of the Executive Board of Schering AG on September 1, 2004, and is responsible for Diagnostic Imaging, Supply Chain and Environment, as well as Procurement.
Dr. Ulrich Köstlin began his career with Schering AG in 1982 as a management trainee. He served as general manager for several subsidiaries of Schering AG in Latin America from 1983 to 1986. Subsequently he was appointed the head of the pharma division for Latin America and Canada. Prior to his appointment as a member of the Executive Board of Schering AG in 1994, he served from 1990 to 1993 as vice president of Berlex Laboratories, Inc., USA, and as a member of the Pharma Executive Committee of Schering AG from 1993 to 1994.
Mr. Lutz Lingnau joined Schering AG's business trainee program in 1966. From 1968 to 1989, he served in various capacities at Schering AG and in a number of subsidiaries in South America and the United States, including as president of Berlex Laboratories, Inc., from 1983 to 1985. Since 1989, Mr. Lingnau is the president and Chief Executive Officer of Schering Berlin Inc., USA. He was appointed as a member of the Executive Board of Schering AG effective January 1, 2001.
Marc Rubin, MD, joined Schering AG from GlaxoSmithKline in 2003. He started his career at the National Institutes of Health, on the senior staff of the National Cancer Institute. He joined Glaxo, Inc., in 1990 as Director of Infectious Diseases Clinical Research in the USA. In his time at GlaxoSmithKline, Mr. Rubin held positions of responsibility in global clinical and commercial development overseeing programs in the USA, Europe, Asia and Latin America. In 2001, he was Senior Vice President of Global Clinical Pharmacology & Discovery Medicine. Mr. Rubin was appointed as a member of the Executive Board of Schering AG on October 1, 2003 and is responsible for development, leading Schering AG's Preclinical and Clinical Development as well as Global Regulatory Affairs.
Dr. Jörg Spiekerkötter joined Schering AG in 1999 as head of Finance. Prior to joining Schering AG, Dr. Spiekerkötter was head of Legal, Trade Mark, Insurance at Hoechst Schering AgrEvo GmbH, Berlin, from 1994 to 1999. Dr. Spiekerkötter was appointed as a Deputy Member of the Executive Board of Schering AG in April 2002. In April of 2003, Dr. Spiekerkötter was appointed Chief Financial Officer and member of the Executive Board.
Prof. Dr. Dr. h.c. Günter Stock joined Schering AG in 1983 as head of the former Cardiovascular Pharmacology Department. From 1987 to 1989, he served as head of the Institute for Pharmacology. Prof. Dr. Stock was appointed as a member of the Executive Board of Schering AG in 1989.
Other Senior Management
Mr. José E. Martino Alba joined Schering AG in1983. From 1983 to 1989, he held several positions with Schering AG in Spain and South America, including plant manager in Venezuela and Colombia. From 1989 to 1991, he served as a project manager for the European production subsidiaries of Schering AG. From 1991 to 2002, he was chairman of the board and managing director of Schering AG’s subsidiaries in China and Hong Kong. In September 2002, Mr. Martino was appointed as the representative director and president of Nihon Schering K.K.
Mr. Reinhard Franzen joined Schering AG in 1983 and has managed a variety of marketing, medical affairs and operational departments. He has gained experience working in many countries including Thailand, the Phillipines, Germany and the United States. Most recently, Mr. Franzen served as Vice President and General Manager of the female health care business unit in the United States. In 2003, he became president and Chief Operating Officer of Berlex Laboratories, an operating unit of Berlex, Inc.
Dr. med. habil. Joachim-Friedrich Kapp joined Schering AG in 1975 as a scientist. From 1975 to 1983, Dr. Kapp served in various capacities at the Schering AG Group, including as vice president of research and development of Berlex Laboratories, Inc. From 1984 to 1991, he was employed by Gödecke AG where he held several positions, including head of research and development. In 1991, Dr. Kapp returned to the Schering AG Group where he currently serves as head of Specialized Therapeutics.
Prof. Dr. Wolfgang Kehr joined Schering AG in 1970 as a research scientist. In 1985 he became head of Schering AG’s pharmaceutical research and served as a member of the executive committee of its pharma division. In 1988, he became a member of the board of Berlex Laboratories, Inc. Since 1991, he served as head of Schering AG’s dermatology and oncology business unit and later as Vice President and General manager of Berlex’s Therapeutics East business unit. In May 2003, Prof. Kehr was appointed managing director of the Center of Dermatology, Schering AG. As of January 1, 2005, Prof. Kehr became the Managing Director of the newly separated global dermatology subsidiary, Intendis GmbH.
Mr. Carlo Montagner joined Schering AG in the beginning of 2005 from Sanofi-Aventis Pharma in Japan, where he headed the Oncology and Speciality Cardiovascular Business Unit. Prior to this role he served as the global corporate marketing head of the Taxanes franchise at Sanofi-Aventis Pharma based in the USA. As the head of Schering AG's Oncology Business Area he is responsible for managing the product and project portfolio of our global oncology business.
Mr. Hans-Michael Rook began his career at Schering AG in 1967 as a business trainee. He served in numerous capacities within the Schering AG Group, including from 1979 to 1985 as head of pharma portfolio and marketing planning of Nihon Schering K.K. and from 1991 to 1997 as head of marketing and business development for the Europe Region at Schering AG. Mr. Rook currently serves as head of Diagnostics&Radiopharmaceuticals.
Mr. Stefan Seeger began his career at Schering AG in 1970 as a business trainee. In 1995, he was appointed as Managing Director Pharma Operations of Nihon Schering K.K. and in 2000 as General Manager of Schering Deutschland GmbH. In July 2004, he became head of the Europe Region.
Philip Smits, MD, joined Schering AG in the beginning of 2003 as head of the Gynecology&Andrology business area. He has served for over thirteen years in various clinical research and medical management functions at Eli Lilly and Company in Europe and North America as well as at Aventis Pharmaceuticals, Inc., Bridgewater, New Jersey and has a technical track record in endocrinology, infectious diseases and osteoporosis.
COMPENSATION
In addition to reimbursement of out-of-pocket expenses, the members of the Supervisory Board receive an aggregate fixed annual payment of €50,000 plus a remuneration based on both short-term and long-term performance. The short-term remuneration reflects the earnings per share of a given calendar year. The long-term remuneration is based on the increase in the value of Schering AG’s stock over a period of three years. The Chairman of the Supervisory Board receives two-and-a-half times the remuneration of other members, the Vice Chairman receives one-and-a-half times of such remuneration. In addition, the Supervisory Board receives €470,000 annually to remunerate its members for their service on committees. The Supervisory Board decides from time to time how to distribute these funds. A member of the Supervisory B oard also has received an annual fee for consultancy services, see "Item 7 – Related Party Transactions". A proposal will be made to the General Meeting of the Company to modify the compensation granted to the members of the Supervisory Board.
The aggregate remuneration (including compensation, benefits in kind and contingent or deferred compensation accrued) of all members for their service on the Supervisory Board for 2004 amounted to €2,789,000 and is comprised of the following components:
Name | | | | | |
|---|
€ thousand | Fixed compensation | Committee functions | Variable compensation | Long-term compensation* | Total |
|---|
Dr. Giuseppe Vita (Chairman of the Supervisory Board) | 100 | 95 | 101 | 72 | 368 |
Norbert Deutschmann (Vice Chairman) | 50 | 95 | 50 | 36 | 231 |
Dr. Karl-Hermann Baumann | 50 | 75 | 50 | 36 | 211 |
Hans-Georg Bleeck (as of April 16, 2004) | 35 | 0 | 36 | 26 | 97 |
Prof. Dr. Piet Borst | 50 | 20 | 50 | 36 | 156 |
Dr. Matthias Döpfner | 50 | 0 | 50 | 36 | 136 |
Prof. John A. Dormandy | 50 | 20 | 50 | 36 | 156 |
Joachim Elsholz (until April 16, 2004) | 15 | 0 | 15 | 11 | 41 |
Dr. Reiner Hagemann | 50 | 50 | 50 | 36 | 186 |
Johannes Heitbaum | 50 | 0 | 50 | 36 | 136 |
Dr. Martin Kohlhaussen | 50 | 0 | 50 | 36 | 136 |
Hermann-Josef Lamberti | 50 | 0 | 50 | 36 | 136 |
Dr. Hans-Peter Niendorf | 50 | 20 | 50 | 36 | 156 |
Detlef Pfotenhauer (as of April 16, 2004) | 35 | 0 | 36 | 26 | 97 |
Hans-Jürgen Scheel (until April 16, 2004) | 15 | 6 | 15 | 11 | 47 |
Günter Schmitt (until April 16, 2004) | 15 | 0 | 15 | 11 | 41 |
Dr. Ulrich Sommer | 50 | 20 | 50 | 36 | 156 |
Sabine Süpke (as of April 16, 2004) | 35 | 21 | 36 | 26 | 118 |
Heinz-Georg Webers | 50 | 48 | 50 | 36 | 184 |
Total | 850 | 470 | 854 | 615 | 2,789 |
| * linked to the share price performance over a period of three years |
The aggregate remuneration (including compensation, benefits in kind and contingent or deferred compensation accrued) of all members of the Executive Board for 2004 amounted to €13,670,000 and is comprised of the following components:
Name | | | | | |
|---|
€ thousand | Fixed compensation | Variable compensation | Option rights granted1 | Others2 | Total |
|---|
Dr. Hubertus Erlen (Chairman) | 720 | 1,668 | 148 | 23 | 2,559 |
Dr. Karin Dorrepaal (as of September 1, 2004) | 180 | 415 | 148 | 7 | 750 |
Dr. Ulrich Köstlin | 540 | 1,246 | 148 | 23 | 1,957 |
Lutz Lingnau | 540 | 1,246 | 148 | 245 | 2,179 |
Marc Rubin, MD | 540 | 1,246 | 148 | 369 | 2,303 |
Dr. Jörg Spiekerkötter | 540 | 1,246 | 148 | 24 | 1,958 |
Prof. Dr. Günter Stock | 540 | 1,246 | 148 | 30 | 1,964 |
Total | 3,600 | 8,313 | 1,036 | 721 | 13,670 |
1 In 2004, 14,000 options were granted to each member of the Executive Board 2Non-cash benefits in the form of company cars, subsidies for insurance and relocation expenses. Members of the Executive Board based in the U.S. receive benefits for dual housekeeping and a compensation for increased cost of living. 2Non-cash benefits in the form of company cars, subsidies for insurance and relocation expenses. Members of the Executive Board based in the U.S. receive benefits for dual housekeeping and a compensation for increased cost of living. |
The maximum number of shares that can be received by the members of the Executive Board under the provisions of the stock-based compensation plans amounts to 474,900; of which Dr. Hubertus Erlen (Chairman) can receive up to 96,500.
Employees who are elected as members of the Supervisory Board in accordance with the German Co-Determination Act maintain their pension, retirement and similar benefits while serving on the Board. The aggregate amount set aside or accrued by the Schering AG Group to provide pension, retirement or similar benefits to the employees who are currently members of the Supervisory Board amounted to €1,710,686. As of December 31, 2004, the total amount set aside or accrued by the Schering AG Group to provide pension, retirement or similar benefits to current and retired members of the Executive Board amounted to €38,778,766.
Stock-Based Compensation Plans
The Long Term Incentive Plan 2004
In 2004 we implemented the Long Term Incentive Plan 2004. The plan has a duration of seven years and the share options vest over three years.
The grants were made in May 2004 to approximately 910 participants worldwide in two categories: a Top Executives group of approximately 60 participants and a Key Managers group of approximately 850 participants.
Participants in the Top Executives group received share options with an exercise price of €43.76 per share (average share price on the date of grant). The options can only be exercized if, at the time of exercise, the share price has increased by at least 30% or has outperformed the MSCI World Pharmaceutical & Biotechnology Index since the inception of the plan. Participants in the Top Executives group are required to make a personal investment in, and hold until the time of exercise, one share for every ten share options they are granted.
Participants in the Key Managers group received share options with an exercise price of €48.14 per share (a 10% premium over the average share price on the date of grant). Participants are not required to make a personal investment in shares. Other than for the three-year vesting period, there are no other conditions to exercise of the share options by participants in the Key Managers group.
All options of the Long Term Incentive Plan 2004 will be cash-settled. As a hedge, we purchased 289,600 call options of Schering AG shares with a strike price of €44.29 and 842,700 call options with a strike price of €48.72.
The Long Term Incentive Plan 2001
In 2001, we established the Long Term Incentive Plan 2001. The program is comprised of up to three annual tranches. The plan has a duration of seven years, and share options awarded under the plan vest over three years.
In May 2001 we made grants of share options (LTI Plan 2001/I) to approximately 650 participants worldwide in two categories: a Top Executives group of approximately 60 participants and a Key Managers group of approximately 590 participants.
Participants in the Top Executives group received share options with an exercise price of €54.66 per share (average share price on the date of grant). The options can only be exercised if, at the time of exercise, the share price has increased by at least 30% or has outperformed the MSCI World Pharmaceutical & Biotechnology Index since the inception of the tranche for 2001. Participants in the Top Executives group are required to make a personal investment in, and hold until the time of exercise, one share for every ten share options that they are granted.
Participants in the Key Managers group received share options with an exercise price of €60.13 per share (a 10% premium over the average share price on the date of grant). Participants are not required to make a personal investment in shares. Other than for the three-year vesting period, there are no other conditions to exercise of the share options by participants in the Key Managers group.
In May 2002 the second tranche of the long term incentive program 2001 (LTI Plan 2001/II) was established, with approximately 60 participants in the Top Executives group and approximately 770 participants in the Key Managers group. The exercise price of the options of the second tranche are €66.48 (Top Executives) and €73.13 (Key Managers).
In May 2003, the third tranche of the long term incentive program 2001 (LTI Plan 2001/III) was established with approximately 60 participants in the Top Executives group and approximately 850 participants in the Key Managers group. The exercise price of the options of this tranche are €40.18 (Top Executive) and €44.20 (Key Managers).
All options granted in May 2003 will be cash-settled. As a hedge, we purchased 420,000 call options on Schering AG shares with a strike price of €42.44 and 1,130,000 call options with a strike price of €46.69.
The Annual General Meeting of Shareholders approved a resolution on April 26, 2001 authorizing a €5m conditional increase in our share capital in order to provide newly issued shares for exercises of share options under the Long Term Incentive Plan 2001.
The Long Term Incentive Plan 2000
In 1999, we established the Long Term Incentive Plan 2000. We offered approximately 270 eligible key executives worldwide the opportunity to participate in the plan. Eligibility was based on the position and expected long term individual performance of the participant and prospective continued employment with us for the next two years. The plan has a duration of seven years and expires on December 31, 2006.
Under this plan, participants who make a personal investment in our shares and hold these shares for a minimum of three years are entitled to receive one option right for each eighteen shares purchased. A minimum of five option rights, requiring the purchase of ninety shares, is needed to participate in the plan. A maximum number of option rights has been determined for each eligible plan participant.
Option rights cannot be exercised within the first three years of the effective date of the plan. Option rights can be exercised from the first trading day in 2003 until the last trading day in 2006. Option rights cannot be exercised during a three-week period prior to the release of corporate earnings information. Any option rights that have not been exercised at the end of the exercise period will be exercised automatically on the last trading day in 2006. Upon exercise of the option rights, the participant is entitled to receive award shares. The award shares that the Company provides to the participants are purchased in the open market.
The number of award shares that a participant receives upon the exercise of option rights depends on certain performance measures. One option right entitles the participant to receive three award shares for each 2% increase in the value of the shares (for this purpose this includes absolute stock price changes plus dividends paid) over the opening stock price on the effective date of the plan. Members of the Executive Board can receive award shares due to this performance measure only if, at the time of exercise, the value of the shares has increased at least by 30%. In addition, one option right entitles the participant to receive three award shares for each 1% by which the shares outperform the STOXX Healthcare over the relevant period. STOXX Healthcare is a European industry stock index which measures the performance of 34 p harmaceutical companies, including Schering AG. The maximum number of award shares that a participant can receive for each option right under either performance category is ninety shares. Therefore, a participant can receive a maximum of 180 award shares for one option right or eighteen shares of personal investment.
In connection with the plan, we have purchased 814,860 call options on Schering AG's shares at a strike price of €39.40 per share. As of December 31, 2004, 356,530 of these purchased options were remaining in our portfolio.
The following table sets forth, as of December 31, 2004, certain information relating to the Long Term Incentive Plan 2000:
Plan | Initial
exercise date | Expiration date | Number of
options
outstanding | Maximum
number
of award shares |
|---|
2000 Plan | January 1, 2003 | December 31, 2006 | 1,795 | 323,100 |
The following table summarizes certain information relating to the Long Term Incentive Plan 2001 and Long Term Incentive Plan 2004:
Plan | Initial exercise date | Expiration date | Exercise price
€ | Number of options granted/remaining |
|---|
LTI Plan 2001/I | May 2, 2004 | May 1, 2008 | | |
-"Top Executives" group | | | 54.66 | 413,500/332,000 |
-"Key Managers" group | | | 60.13 | 812,100/734,800 |
LTI Plan 2001/II | May 2, 2005 | May 1, 2009 | | |
-"Top Executives" group | | | 66.48 | 411,000/395,000 |
-"Key Managers" group | | | 73.13 | 1,040,500/961,500 |
LTI Plan 2001/III | May 2, 2006 | May 1, 2010 | | |
-“Top Executives” group | | | 40.18 | 420,700/413,700 |
-"Key Managers" group | | | 44.20 | 1,173,000/1,121,000 |
LTI Plan 2004 | May 2, 2007 | May 1, 2011 | | |
-“Top Executives” group | | | 43,76 | 333,300/333,300 |
-"Key Managers" group | | | 48,14 | 932,400/925,500 |
BOARD PRACTICES
Upon the occurrence of certain events of that are deemed to constitute a change of control of Schering AG, if the employment of a member of the Executive Board should be terminated or should not be extended or should be substantially affected, then such Executive Board member may be entitled to continued payments for a defined period of time. Such continued payments would be determined based on the annual compensation of such Executive Board member. Otherwise, the employment agreements of the members of the Executive Board do not provide for benefits upon termination of employment.
The Supervisory Board has established a number of committees, including an executive committee (Geschäftsausschuss), an audit committee, a research and development committee, and a nomination and compensation committee (Personalausschuss). Each of these committees comprises an equal number of shareholder representatives and employees representatives. The Company is not required to have these committees under German law. They do not necessarily apply all corporate governance requirements of the New York Stock Exchange that would apply to U.S. domestic companies.
The members of the executive committee are Dr. Giuseppe Vita (chairman), Norbert Deutschmann, Dr. Reiner Hagemann, and Sabine Süpke. The executive committee prepares meetings of the Supervisory Board and acts on urgent matters in between the sessions of the full Supervisory Board.
The members of the audit committee are Dr. Karl-Hermann Baumann (chairman), Norbert Deutschmann, Dr. Giuseppe Vita and Heinz-Georg Webers. It comprises a financial expert within the meaning of that rule. The audit committee prepares the Supervisory Board’s recommendation on the auditor to be elected by the Annual General Meeting and enters into the contract with such auditor. As described under “Item 16.C - Principal Accountant Fees and Services” -, the audit committee also approves the engagement of the auditor to perform any non-audit services. It reviews the quarterly financial statements and the risk management system of the company. It reviews annual financial statements and issues a recommendation to the full Supervisory Board as to their adoption.
The members of the research and development committee are Dr. Giuseppe Vita (chairman), Prof. Piet Borst, Norbert Deutschmann, Prof. John A. Dormandy, Dr. Hans-Peter Niendorf and Dr. Ulrich Sommer. The research and development committee regularly reviews key research and development issues, in particular regarding objectives, priorities and organization.
The members of the nomination and compensation committee are Dr. Giuseppe Vita (chairman), Norbert Deutschmann, Dr. Reiner Hagemann and Heinz-Georg Webers. The nomination and compensation committee is responsible for preparing succession on the Executive Board and searching and reviewing candidates for election to the Executive Board. It reviews and approves the salaries and other terms and conditions of employment of the members of the Executive Board, as well as all other contracts with members of the Executive Board and the Supervisory Board.
EMPLOYEES
The annual average of employees by the Group during 2002, 2003 and 2004 was 26,245, 26,561 and 26,131, respectively. As of December 31, 2004, we employed 25,593 persons. The following tables set forth, as of December 31, 2004, a breakdown of our employees by the main category of activity and by geographic area:
Category of activity: | Number |
|---|
Administration | 4,048 |
Research and development | 4,434 |
Production | 8,515 |
Marketing and sales | 8,596 |
Total | 25,593 |
Geographic areas: | Number |
Schering AG | 7,856 |
Europe Region | 7,890 |
United States Region | 3,811 |
Japan Region | 1,465 |
Latin America/Canada Region | 2,441 |
Asia/Pacific Region | 1,444 |
Other employees | 686 |
Total | 25,593 |
The decrease in the number of persons employed by the Group in 2004 was mainly due to the first results of the FOCUS Initiative, the ongoing consolidation of our world wide production sites and the simultaneous consolidation of our global development functions. We do not employ a significant number of temporary employees.
Labor Relations
Europe Region
We believe that a significant number of our employees in the Europe Region are presently represented by trade unions. Labor relations in the Europe Region have been good and we have not experienced any material work stoppages in recent years.
Wages and general working conditions are generally the subject of centrally negotiated collective bargaining agreements. Within the limits established by these agreements, the operating companies of the Group negotiate directly with unions and other labor organizations representing our employees. Collective bargaining agreements relating to remuneration typically have a term of one year.
In addition to trade unions, we also consult from time to time with various local, national and European work councils. Employees generally elect the members of work councils. These work councils primarily serve an advisory role. However, under certain circumstances, we may be required to consult with one or more of the work councils before proceeding with a course of action. Furthermore, we are obliged to inform the work councils of activities which affect our workforce in Europe.
Other Regions
Our employees in the United States, Latin America/Canada and Asia/Pacific Regions are generally not either represented by trade unions or employed pursuant to collective bargaining agreements. In the Japan Region, approximately half of our employees are represented by company labor unions. Labor relations in these Regions have been good and we have not experienced any material work stoppages in recent years.
SHARE OWNERSHIP
Employee Share Program
Schering AG and many of its subsidiaries have established an Employee Share Program and offer Schering AG shares to the employees at subsidized prices. The scope of this program includes many of the subsidiaries worldwide. The program was continued in 2004 with approximately 0.2 million shares being bought by employees.
Share Ownership by Directors
No member of the Supervisory Board or the Executive Board beneficially owns 1% or more of our outstanding shares.
Dr. Reiner Hagemann, a member of our Supervisory Board, is the Chairman of the Executive Board of Allianz Versicherungs-AG, which is an affiliate of Allianz AG (which Schering AG has been informed holds approximately 12.5% of our outstanding shares). Dr. Hagemann disclaims beneficial ownership of such shares.
Hermann-Josef Lamberti, a member of the Supervisory Board, is a member of the Executive Board of Deutsche Bank AG (which Schering AG has been informed holds approximately 3.4% of our outstanding shares). Mr. Lamberti disclaims beneficial ownership of such shares.
Item 7. Major Shareholders and Related Party Transactions
MAJOR SHAREHOLDERS
As of February 20, 2005, Schering AG had an aggregate of 190,000,000 shares outstanding and an additional 4,000,000 shares were held as treasury shares.
The shares are issued only in bearer form. Therefore, we are unable to determine how many shareholders we have and how many shares a particular shareholder owns. Although we are unable to determine the exact number of our shares held in the United States, we believe that as of February approximately 19% of the shares were held in the United States. As of February 18, 2005 there were 1,476 registered holders of American Depositary Receipts (ADRs) under our sponsored program with JP Morgan Chase Bank. The ADRs are listed on the New York Stock Exchange, and each ADR represents one share. One of the registered holders is the Depository Trust Company, which represents the total number of ADRs held in book-entry-form. The ADR holders collectively held 8,271,803 ADRs, or approximately 4.3% of the total issued shares as of February 18, 2005.
Under Section 21 of the German Securities Trading Act (Wertpapierhandelsgesetz), holders of voting securities of a German company (including Schering AG) admitted to official trading on a stock exchange within the European Union or the European Economic Area are obliged to notify promptly in writing the company and the German Federal Supervisory Authority for Financial Services (Bundesanstalt für Finanzdienstleistungsaufsicht) of the level of their holdings whenever such holdings reach, exceed or fall below certain thresholds. These thresholds are set at 5%, 10%, 25%, 50% and 75% of a company's outstanding voting rights. If a shareholder fails to notify the company as required, the shareholder will be disqualified from exercising the voting rights attached to its shares, for so long as such failure continues. The German Securities Trading Act contains various rules designed to ensure the attribution of shares to the person who has effective control over the shares.
From January 1, 2004, until January 31, 2005, Schering AG received two notifications according to Section 21 of the German Securities Trading Act. In May 2004, Brandes Investment Partners, LLC, San Diego/USA (“Brandes”), notified Schering AG that it had crossed the threshold of 5% and, for the purpose of the Act, was interested in 5.19% of Schering AG’s total outstanding shares and ADR’s as of April 28, 2004. In September 2004, Schering AG received a further notification by the same shareholder specifiying that Brandes had crossed the threshold of 5% again and held 4.90% as of September 15, 2004.
In addition to the aforementioned notifications under German securities laws, Schering AG has been informed that as of February 14, 2005, Allianz AG filed a 13-G statement reporting direct or indirect share holdings representing approximately 12.5% of the outstanding shares. Major shareholders do not have different voting rights.
To the extent known to us, the Schering AG Group is not owned or controlled directly or indirectly by any corporation, foreign government or any person, jointly or severally.
RELATED PARTY TRANSACTIONS
Shareholders
Allianz Versicherungs-AG currently provides insurance services to the Schering AG Group in a number of different areas such as liability and property insurance including business interruption, directors' and officers' liability as well as marine, personal accident and automobile insurance. Deutsche Bank AG provides us with a variety of financial services in the ordinary course of business. We believe that these services are provided on an arm's length basis.
Directors
Certain members of the Supervisory and Executive Boards are members of the executive boards or the supervisory boards of various financial institutions or insurance companies with which we engage in transactions in the ordinary course of business.
Professor John A. Dormandy, a member of the Supervisory Board, has provided consultancy services to Schering AG in connection with research in the field of Specialized Therapeutics since June of 1996. For these services Prof. Dormandy has received a fee of €56 thousand plus expenses of €8 thousand in 2004. Prof. Dormandy has further received €2 thousand plus expenses for giving a laudatio at a Schering AG symposium.
Professor Dr. Piet Borst and Professor John A. Dormandy are members of the Curatorium of Schering Forschungsgesellschaft mbH, a 100% subsidiary of Schering AG. In such capacity, in 2004 they each received €2,000 as fees for attending meetings.
A loan that had been granted to a member of the Supervisory Board prior to July 29, 2002 was repaid in full in 2004. The loan, which had a balance of €30 thousand during the period and at the time of repayment and accrued interest at an annual rate of 6%, had been made for the purposes of financing a home purchase. A relocation loan originally made in the amount of €46 thousand that had been made in 1993 to an employee that subsequently became a member of our Executive Board remains oustanding. As of December 31, 2004, the balance of such loan, which is non-amortizing and bears interest at a compounded semi-annual rate of 6%, was $ 92 thousand. An interest free relocation loan in the amount of $1 million was granted to a member of our Executive Board in May 2004 and repaid in August 2004. The granting of such loan, which did not comply wit h the requirements of Section 13(k) of the U.S. Securities Exchange Act of 1934, was reported to the Schering AG Audit Committee and to our external auditors. We have modified our internal compliance procedures in an effort to ensure that future loans are made only in compliance with our internal policies and all applicable laws.
According to section 15a of the German Securities Trading Act (”Wertpapierhandelsgesetz”), the members of the Executive Board and of the Supervisory Board of Schering AG have to notify transactions in securities of Schering AG. Until October 29, 2004, this applied to transactions of a Board member only if the aggregate value of the transactions of such Board member within any 30 days’ period exceeded €25,000. The same obligation applied to transactions of close relatives. Effective as of October 30, 2004, the de minimis threshold was decreased by the legislature from €25,000 within 30 days to €5,000 per year. In addition, companies legally or economically related to a Board member or to a relative of a Board member were added to the list of related parties with their own obligation to disclose thei r Schering AG securities’ dealings. During 2004, Schering AG has been notified of a total of 8 transactions. In accordance with section 15a of the German Securities Trading Act, Schering AG has promptly disclosed these transactions on its web site. Members of the Executive Board have purchased 7,700 Schering AG shares. One member of the Executive Board has exercised 2,640 call options on Schering AG shares. Schering AG has not been notified of any such transactions by members of the Supervisory Board. A complete list with all details of the notified transactions is available on the website of the German Federal Authority for Financial Services Supervision (Bundesanstalt für Finanzdienstleistungsaufsicht) under www.bafin.de.
Item 8. Financial Information
LEGAL PROCEEDINGS
The Group is involved in a number of legal proceedings and claims incidental to the normal conduct of its business, relating to such matters as product liability, patent infringement, tax assessments, competition, past waste disposal practices and the release of chemicals into the environment. Although the outcome of these proceedings and claims cannot be predicted with certainty, Schering AG believes that any resulting liabilities, net of amounts recoverable from insurance or otherwise, will not, in the aggregate, have a material adverse effect on the Group's consolidated results of operations, financial condition and cash flows. What we believe to be the most significant of these proceedings and claims are described below.
The Group's Brazilian subsidiary is a defendant in approximately 460 civil actions brought in courts in Brazil by women, suing individually and claiming that they became unintentionally pregnant. Most of them claim that they became unintentionally pregnant after taking placebo pills packaged by the subsidiary in connection with test runs of a new packaging machine between January and April 1998. Most of these claims are still pending. In the majority of the judgments obtained to date, the claims were rejected by the Brazilian courts.
In November 1998, Medrad, Inc., one of the Group’s subsidiaries in the United States, was sued by Liebel-Flarsheim Company, which alleged patent infringement, antitrust violations and tortious interference with contractual relations. In October 2001 and February 2002, the U.S. District Court for the Southern District of Ohio, on summary judgement motions, decided in favor of Medrad regarding Liebel-Flarsheim’s patent infringement claims. Liebel-Flarsheim appealed the decision of the U.S. District Court and the Federal Circuit Court of Appeals reversed the District Court’s decision and remanded it back to the District Court in February 2004. All claims other than the patent claims were withdrawn by Liebel-Flarsheim in connection with a settlement reached in October 2002. In September 2004, Liebel-Flarsheim Company and its parent Mallinckrodt, Inc., filed a new patent infringement action in the same court against Medrad in relation to an additional injector product relating to the same family of patents at issue in the first lawsuit.
Another of the Group’s subsidiaries in the United States, Berlex, Inc., has been named as a defendant with 30 other pharmaceutical companies in cases filed by Suffolk County, Westchester County, Nassau County, Rockland County, Onondaga County and Erie County (all counties in the State of New York). The cases were served in January 2003, August 2003, November 2004, February 2005 and March 2005, respectively. In addition, in February 2005 Berlex was named as a defendant with 50 other pharmaceutical companies in a case filed by the City of New York. These seven lawsuits contain virtually identical allegations that pharmaceutical companies have overcharged each county for prescription medications paid for by New York State’s Medicaid program by reporting artificially inflated “average wholesale prices” for their drug products for the purpose of government reimbursement. Each county seeks a variety of unspecified damages from the various pharmaceutical companies. The cases have been consolidated into a multidistrict litigation in the Federal District of Massachusetts In Re Pharmaceutical Industry Average Wholesale Price Litigation (MDL 1456). Berlex intends to vigorously defend itself against the allegations made in the lawsuits.
Following the sale of Schering AG’s share in Aventis CropScience to Bayer AG in 2003, Bayer CropScience AG has initiated arbitration proceedings against Schering AG, SCIC Holdings LLC, Aventis Agriculture and Hoechst AG alleging the violation of a financial statement guarantee for which Bayer CropScience AG is demanding payments of damages. Bayer CropScience AG has further notified Schering AG in several other cases about potential violations of provisions of the Aventis CropScience Stock Purchase Agreement that might lead to damages. With respect to the claims, it cannot be estimated whether and to what extent the Group would be liable.
A U.S. citizen has filed an action against Schering AG and Bayer AG in the United States District court for the Eastern District of New York. The case was transferred to the District Court for the District of New Jersey. The plaintiff claims damages for forced sterilization and cruel treatment suffered at the Auschwitz concentration camp during World War II. To our knowledge and belief, there is no factual information suggesting that Schering AG could in any way have been involved in this matter. Schering AG also believes that this claim cannot be asserted against an individual company, but should be addressed to the “Remembrance, Responsibility and the Future” Foundation. This foundation has been endowed with funds of more than 5 billion euros by German companies (including Schering AG) and the German Federal Governm ent. The beneficiaries of compensation grants paid by the foundation include victims of human experiments in concentration camps. Schering AG considers the claims asserted to be unjustified. In September of 2004, this case was dismissed; however, the plaintiff has appealed that decision.
One of the Group's German subsidiaries, Jenapharm GmbH & Co. KG, faces claims before an arbitration board from about 160 former East German athletes for damages covering personal injuries such as infertility, liver damage and cancer allegedly resulting from drugs received under a doping program organized and controlled by the former German Democratic Republic. Jenapharm believes that the athletes will allege that VEB Jenapharm, the predecessor of the Jenapharm GmbH & Co. KG, was responsible for their damages due to its involvement in the doping program by producing and supplying the drugs and performing certain scientific activities. Jenapharm, which was acquired by Schering AG in 1996, will dispute the allegations and considers the claims to be unjustified. Jenapharm cannot be responsible for the abuse of drugs by the former German Democratic Republic or any organs of that state and to the Group‘s knowledge and belief, VEB Jenapharm was not involved in the application of the drugs in doping studies with athletes.
In May 2004, TAP Pharmaceutical Products, Inc., has initiated an Alternative Dispute Resolution procedure against Schering AG pursuant to an agreement which regulates the development and marketing of asoprisnil in the USA and Canada by TAP and the supply of the product by Schering AG. The claims raised by TAP relate to the interpretation of the agreement regarding Schering AG’s obligation to supply asoprisnil to TAP. TAP requests to be initially supplied with asoprisnil from a certain manufacturing facility and asks for a certain commitment regarding the supply with asoprisnil. Schering AG disputes the claims and is defending itself against these in the arbitration.
Berlex, Inc., together with several other pharmaceutical companies, has been named in several lawsuits filed in various U.S. courts by plaintiffs who used hormone replacement therapy (“HRT”) products. A total of fourteen plaintiffs have made allegations that they had used Berlex HRT products together with other HRT products and suffered injuries, including breast cancer, ovarian cancer, strokes and pulmonary embolism. The lawsuits of twelve of these plaintiffs have been removed to a multidistrict litigation in the Eastern District of Arkansas – Western Division (In Re: Prempro Products Liability Litigation. MDL Docket No. 1507) where the cases of hundreds of other HRT plaintiffs directed at other pharmaceutical companies have been consolidated. One lawsuit is proceeding in the Court of Common Pleas of Philadelphi a County (In Re: Hormone Therapy Litigation) and one other in the Superior Court of New Jersey Atlantic County (In Re: Hormone Replacement Therapy Litigation. Case Code No. 266). Berlex is vigorously defending itself against the allegations in the lawsuits.
SIGNIFICANT CHANGES
Except as otherwise disclosed in this annual report, there has been no material adverse change in the financial position of Schering AG since December 31, 2004.
Item 9. The Listing
LISTING DETAILS
Stock Price History
The table below sets forth, for the periods indicated, the high and low intraday prices for the shares on the Xetra trading system of the Frankfurt Stock Exchange, as reported by the Frankfurt Stock Exchange, and as adjusted to give effect, retroactively, to Schering AG's three-for-one share split effective on June 1, 2000, and the high and low prices of the American Depositary Receipts (ADRs), each representing one share, which were listed on the New York Stock Exchange (NYSE) on October 12, 2000. See the discussion under "Item 3 – Key Information-Exchange – Rates" with respect to rates of exchange between the U.S. dollar and the euro applicable during the periods set forth below. While Schering AG's shares are also listed on the Zurich stock exchange, the trading volume of the shares there is negligible. T herefore, providing stock price information for this trading market would not be meaningful.
| New York
Stock Exchange
price per ADS | Frankfurt
Stock Exchange
price per share |
|---|
| High | Low | High | Low |
|---|
| ($) | (€) |
|---|
2000 | | | | |
Annual | 60.50 | 50.25 | 75.80 | 37.40 |
2001 | | | | |
Annual | 58.38 | 43.50 | 66.60 | 46.61 |
2002 | | | | |
First Quarter | 61.25 | 50.24 | 69.58 | 55.69 |
Second Quarter | 63.60 | 55.49 | 68.88 | 57.78 |
Third Quarter | 62.99 | 43.55 | 64.35 | 42.96 |
Fourth Quarter | 52.55 | 40.31 | 53.69 | 40.40 |
Annual | 63.60 | 40.31 | 69.58 | 40.40 |
2003 | | | | |
First Quarter | 46.80 | 34.16 | 44.52 | 31.60 |
Second Quarter | 54.67 | 41,76 | 46.40 | 37.10 |
Third Quarter | 49.50 | 38.88 | 44.00 | 35.22 |
Fourth Quarter | 52.60 | 43.40 | 43.45 | 37.00 |
Annual | 54.67 | 34.16 | 46.40 | 31.60 |
2004 | | | | |
First Quarter | 58.50 | 45.72 | 46.30 | 37.15 |
Second Quarter | 59.34 | 45.80 | 48.68 | 38.35 |
Third Quarter | 63.20 | 54.00 | 51.30 | 44.25 |
August | 57.47 | 54.00 | 47.47 | 44.25 |
September | 63.20 | 55.36 | 51.30 | 45.56 |
October | 64.97 | 59.72 | 52.03 | 48.51 |
November | 72.45 | 62.80 | 55.32 | 48.53 |
December | 75.36 | 70.60 | 56.05 | 53.25 |
Fourth Quarter | 75.36 | 59.72 | 56.05 | 48.51 |
Annual | 75.36 | 45.72 | 56.05 | 37.15 |
2005 | | | | |
January | 75.91 | 67.40 | 56.76 | 51.61 |
February | 75.02 | 66.92 | 57.47 | 51.36 |
Share Capital
The share capital of Schering AG consists of ordinary shares. All the issued ordinary share capital of Schering AG is in bearer form and is freely transferable. On December 31, 2004, there were 194,000,000 shares without par value issued, of which 4,000,000 shares were held as treasury shares. There are also American Depositary Receipts (ADRs) issued under our sponsored ADR program with JP Morgan Chase Bank. Each ADR evidences an American Depositary Share (ADS) which represents one share. On January 31, 2005, there were 8,266,803 issued and outstanding ADRs.
MARKETS
General
The principal trading market for the shares is the Frankfurt Stock Exchange. The shares are also listed on other German stock exchanges, namely Berlin, Bremen, Dusseldorf, Hamburg, Hanover, Munich and Stuttgart. In addition, the shares are listed on the Zurich stock exchange. Options on shares are traded on the German options exchange (Eurex).
ADRs, each representing one share, were listed on the New York Stock Exchange (NYSE) on October 12, 2000 and trade under the symbol "SHR".
Item 10. Additional Information
ARTICLES OF ASSOCIATION
Following is a description of the material provisions of our articles of association pertaining to the rights and restrictions applicable to our shares. This description is only a summary and does not purport to be complete. This summary is qualified in its entirety by reference to our articles of association, an English translation of which is filed as an exhibit to this annual report, and to German law.
General
Our registered name is Schering Aktiengesellschaft and our registered office is in Berlin. Schering AG’s corporate purposes are to research, develop, buy, and sell all types of chemical and biotechnology products, including in particular pharmaceuticals, pharmaceutical substances, diagnostics and vaccines for human and veterinary medicine, as well as fine chemicals, radioactive substances and intermediates. A more detailed description of Schering AG's corporate purposes can be found in Article 2 of Schering AG's articles of association.
Members of Supervisory Board
Under the by-laws of the Supervisory Board of Schering AG, the members of the supervisory board should possess the knowledge, ability and specialized experience required to fulfill their obligations and should be independent. Each member of the supervisory board is obliged to act in the best interests of the Schering AG Group. He or she may not pursue personal interests in performing his or her own duties, nor exploit any business opportunities available to the Group to his or her own personal advantage. Members of the supervisory board should not be members of executive bodies at or act as consultants for key competitors of the Group. Each supervisory board member must disclose any conflict of interest to the chairman of the supervisory board, in particular those arising as a result of advisory activities for or the membership of executive bodies with customers, suppliers, creditors or other business parties of the Group. The chairman must disclose his or her conflicts to the executive committee. The compensation for members of the supervisory board is established by Article 13 of Schering AG's articles of association. The by-laws provide that members of the supervisory board should not be more than 72 years old. Members of the supervisory board are not required to own shares of Schering AG in order to act in such capacity.
Share Capital
The share capital of Schering AG consists of Schering AG ordinary shares, all of which have been issued in bearer form. As of the date of this annual report, the issued share capital (Grundkapital) of Schering AG was euro 194,000,000, divided into 194,000,000 no par value shares (Stueckaktien), of which euro 190,000,000 were outstanding and euro 4,000,000 were treasury shares. The Schering AG ordinary shares have a calculated nominal value (rechnerischer Wert -- amount of the share capital proportionally attributed to one no par value share) of euro 1.00 each. Schering AG has not issued any preference shares.
Under the German Stock Corporation Act and Schering AG’s articles of association, Schering AG’s share capital may be increased by issuing new shares for cash or non-cash consideration or out of Schering AG’s reserves. A resolution passed by a majority of the share capital represented at the annual general shareholders’ meeting is required to effect such share capital increases.
Authorized Capital
Pursuant to the German Stock Corporation Act and Schering AG’s articles of association, the creation of authorized capital (Genehmigtes Kapital) requires a resolution passed by three quarters of the share capital represented at the general shareholders’ meeting at which the resolution is passed. The creation of authorized capital authorizes the executive board, with the approval of the supervisory board, to increase the share capital by issuing new shares for cash or non-cash consideration for a period of up to five years.
Schering AG has currently authorized but unissued capital of euro 97,000,000 which may be issued at any time through April 15, 2009. Any shares to be issued on the basis of this authorized capital will be subject to the statutory subscription rights of Schering AG’s shareholders. Subject to the approval of the supervisory board, the executive board may, however, increase Schering AG’s share capital without offering subscription rights to its shareholders, (a) if the capital increase from cash consideration does not exceed a total amount of 10% of nominal share capital (less the amount of conditional capital issued under the exclusion of subscription rights and required to be used for conversion or option rights) and the issue price of the new shares is not significantly less than the price of the shares on the Frankfu rt Stock Exchange at the time when the issue price is determined by the executive board; (b) if the capital increase is effected for non-cash consideration (such as shares issued in connection with the acquisition of another company); or (c) to the extent necessary to allow holders of convertible bonds or option certificates of Schering AG or its wholly owned subsidiaries to subscribe to the new shares to which they are entitled after exercise of their conversion or option rights. The Schering AG executive board, with the consent of the Schering AG supervisory board, is authorized to determine the terms and conditions upon which shares will be issued on the basis of this authorized capital.
Conditional Capital
Pursuant to the German Stock Corporation Act and Schering AG’s articles of association the creation of conditional capital (Bedingtes Kapital) requires a resolution passed by three quarters of the share capital represented at the general shareholders’ meeting at which the resolution is passed. The creation of conditional capital authorizes the executive board to increase the share capital for certain purposes to be listed in the shareholder resolution, including purposes involving employee stock options plans, mergers and the issuance of shares to holders of option bonds and convertible bonds.
The shareholders of Schering AG have created conditional capital in an aggregate amount of up to euro 10,000,000 (Bedingtes Kapital I). This conditional capital is divided into up to 10,000,000 shares without par value and will become unconditional if Schering AG’s convertible bondholders exercise their conversion rights or if Schering AG’s holders of option debentures exercise their subscription rights. Schering AG has not issued any convertible bonds or option debentures in the last three years and none are currently outstanding.
Further, the shareholders of Schering AG have authorized conditional capital in an aggregate amount of up to euro 5,000,000 (Bedingtes Kapital II) for the purpose of issuing shares with respect to stock options granted under employee stock option plans. The new shares will have the same rights as previously issued shares.
Disclosure Requirement
The German Securities Trading Act (Wertpapierhandelsgesetz) requires each person whose share holding reaches, exceeds or, after exceeding, falls below the 5%, 10%, 25%, 50% or 75% voting right thresholds of a listed company to notify such listed company and the Federal Financial Supervisory Authority (Bundesanstalt fuer Finanzdienstleistungsaufsicht) in writing not later than seven calendar days after such person has reached, exceeded or fallen below such threshold. In their notification, such person must also state the number of shares they hold. Holders are not entitled to any rights from those shares (including voting and dividend rights) until they have satisfied this disclosure requirement. In addition, the German Securities Trading Act contains various rules designed to ensure the attribution of shares to the person who h as effective control over the exercise of the voting rights attached to those shares.
Shareholders' Meetings
The annual general meeting of the shareholders of Schering AG may be called by the executive board or the supervisory board. The annual general meeting must take place within the first eight months of the fiscal year (which for Schering AG is the calendar year). The executive board is required to call the annual general meeting promptly upon the receipt of the supervisory board’s report on the annual financial statements. In addition, under the German Stock Corporation Act, an extraordinary meeting of the shareholders of Schering AG may be called by Schering AG’s executive board or the supervisory board or by shareholders holding in the aggregate at least 5% of the issued share capital.
Under German law and Schering AG’s articles of association, Schering AG must publish notices of shareholders’ meetings in the electronic version of the German Federal Gazette (Elektronischer Bundesanzeiger) at least one month before the last day on which shares must be deposited as set forth below. The day on which notice of the meeting of shareholders is issued and the last day on which shares can be deposited are not taken into account for purposes of determining this one-month period.
In order to participate and vote at a shareholders’ meeting, shareholders must provide a blocking notice to their depositary bank at least seven days prior to the shareholders’ meeting blocking any trading in their shares. If the seventh day prior to the meeting is a Saturday, Sunday or public holiday at the registered office of Schering AG, the shares must be deposited by the end of the next business day. Such shares will be blocked until the end of the shareholders’ meeting. Shareholders must provide evidence that their shares have been blocked to a financial institution nominated by Schering AG no later than the first business day following the date by which the shares must be blocked at the latest. If a shareholder acquires shares prior to the shareholders’ meeting but such acquired shares have not yet b een credited to such shareholder’s account by the seventh day prior to the shareholders’ meeting, such shareholder must provide Schering AG with documentation evidencing ownership of the subject shares on or prior to the date that is seven days prior to the shareholders’ meeting.
Voting Rights
Each Schering AG ordinary share entitles the holder to one vote at meetings of the shareholders. Shareholders may appoint proxies to represent them at a shareholders’ meeting. Shareholder resolutions are generally passed with a simple majority of the votes cast, unless statutory law or Schering AG’s articles of association require otherwise.
Holders of Schering AG ordinary shares in the form of American Depositary Receipts will generally need to provide the depositary with instructions in order to exercise voting rights for the Schering AG ordinary shares that underlie the Schering AG ADSs.
For a number of significant resolutions, the German Stock Corporation Act requires the vote of at least three-quarters of the share capital present or represented at the meeting at which the vote is taken. Among such resolutions are share capital increases exempt from shareholders’ subscription rights, the creation of authorized or conditional capital, a decrease of capital, a change of Schering AG’s articles of association, modifying Schering AG’s corporate purpose, the authorization of domination and profit transfer agreements, mergers and similar transactions and the dissolution of Schering AG.
Neither the German Stock Corporation Act nor Schering AG’s articles of association have any minimum quorum requirement applicable to shareholders’ meetings.
Dividends and other Distributions
For each fiscal year, the executive board prepares the annual financial statements and submits them to Schering AG’s auditors. The auditor’s report, the annual financial statements and the executive board’s proposal as to the disposition of the annual profit (either payment as dividends, transfer to reserves or carry forward to the next fiscal year) are submitted to the supervisory board. Upon final approval by the supervisory board, the executive board submits its proposal as to the disposition of the annual profits to the shareholders at the shareholders’ meeting. Shareholders participate in profit distributions in proportion to the number of shares they hold. Dividends approved at a shareholders’ meeting are payable promptly after such meeting, unless otherwise decided at the shareholders’ meeti ng.
Subscription Rights
Under the German Stock Corporation Act, an existing shareholder in a stock corporation has a preferential right to subscribe for issues of new shares by that corporation (as well as bonds convertible into shares, bonds with warrants to purchase shares, profit participating bonds and profit participating rights) in proportion to the number of shares such shareholder holds in the corporation’s existing share capital. The German Stock Corporation Act allows companies to exclude this preferential subscription right in limited circumstances and only if so provided in the same shareholder resolution that authorizes the accompanying capital increase or share issuance. At least three quarters of the share capital represented at the meeting must vote to authorize the exclusion of subscription rights. Prior to approval by the shareh olders, exclusion of subscription rights requires the executive board to report the reasons for the exclusion to the shareholders in writing. With regard to the authorized capital, the Schering AG executive board may increase Schering AG’s share capital without offering subscription rights with the approval of the supervisory board, in the circumstances described under “Authorized Capital.” Shareholders do not have any subscription rights with respect to ordinary shares issued using conditional capital. See “Conditional Capital.”
U.S. holders of Schering AG ADSs may not be able to participate in any offer of new shares to existing shareholders on the basis of their subscription rights because of the restrictions on the offer and sale of securities in the United States under U.S. securities laws and regulations.
Liquidation Rights
In accordance with the German Stock Corporation Act, if Schering AG is liquidated, any liquidation proceeds remaining after all Schering AG’s liabilities have been paid off would be distributed among Schering AG’s shareholders in proportion to their holdings.
Share Repurchases by Schering AG
Schering AG may not acquire its own shares unless authorized by the shareholders or in other very limited circumstances set forth in the German Stock Corporation Act. Shareholders may not grant a share repurchase authorization lasting for more than 18 months. The German Stock Corporation Act generally limits the amount of repurchases authorized at any particular time to 10% of the share capital and resales must be made either on the stock exchange, in a manner that treats all shareholders equally or in accordance with the rules that apply to subscription rights relating to a capital increase.
MATERIAL CONTRACTS
Not applicable.
EXCHANGE CONTROLS
The euro is a fully convertible currency. There are, except in limited embargo circumstances, no legal restrictions in Germany on international capital movements and foreign exchange transactions. For statistical purposes only, with certain exceptions, every corporation or individual residing in Germany must report to the German Central Bank (Deutsche Bundesbank) any payment received from or made to a non-resident corporation or individual if the payment exceeds €12,500 (or the equivalent in a foreign currency). Additionally, corporations and individuals residing in Germany must report to the German Central Bank any claims of a resident corporation or individual against, or liabilities payable to, a non-resident corporation or individual exceeding an aggregate of €5m (or the equivalent in a foreign currency) at the en d of any calendar month.
Neither German law nor our Articles of Association restrict the right of non-resident or non-German owners to hold or vote the shares.
TAXATION
German Taxation
The following discussion describes the material German tax consequences of owning shares or American Depositary Shares (ADSs). It applies to you if you are a "Non-German Holder". You are a Non-German Holder if you:
This summary is based on German law and tax and other treaties between Germany and other countries as they are in effect as of the date hereof, and is subject to changes in German law or such treaties. This section is not a comprehensive discussion of all of the German tax consequences that may be relevant for Non-German Holders. You should consult your tax advisor regarding the German federal, state and local tax consequences of the purchase, ownership and disposition of shares or ADSs and the procedures for the refund of German taxes withheld from dividends.
Dividends
Under German law, German corporations must withhold tax on dividends in an amount equal to 20% of the gross amount paid to resident and non-resident holders. An applicable tax treaty may reduce the rate of withholding tax on dividend distributions paid to Non-German Holders. Most tax treaties to which Germany is party, including the treaty between Germany and the United States (the "Treaty"), reduce the withholding tax rate to 15%. You would receive this reduction by applying for a refund of the difference between the tax withheld at the statutory rate of 20% and the applicable treaty rate to the German tax authorities, located at the Bundesamt für Finanzen, Friedhofstrasse 1, D-53225 Bonn, Germany. If you are entitled to benefits under the Treaty, a special refund procedure may apply, which we describe below und er the heading " -Dividend refund procedure for U.S. holders".
A surtax on the German withholding tax is currently levied on dividend distributions paid by a German resident company at a rate of 5.5% of the basic 20% withholding . At this rate, the surtax amounts to 1.1% (5.5 x 20%) of the gross amount of the dividend paid by Schering AG. The Treaty entitles qualifying U.S. shareholders to a full refund of this surtax.
As a result, a qualifying U.S. shareholder entitled to a gross dividend of €100 from Schering AG will, after applicable refunds of German withholding tax, receive a cash payment of €85 (€100 gross dividend from Schering AG minus €15 German withholding tax [€21.1 basic withholding tax and surtax on the gross dividend minus applicable Treaty refund of €6.1]).
Dividend Refund Procedure For U.S. Holders
For shares and ADSs that are kept in custody with the Depositary Trust Company in New York or one of its participating banks, the German tax authorities have introduced a collective procedure for the refund of German withholding tax and surtax, on a trial basis. Under this procedure, the Depositary Trust Company may submit claims for refunds payable to U.S. holders as defined below under the heading “ -U.S. Taxation” under the Treaty collectively to the German tax authorities on behalf of these U.S. holders. The German Federal Tax Office (Bundesamt für Finanzen) will pay the refund amounts on a preliminary basis to the Depositary Trust Company, which will redistribute these amounts to you and other U.S. holders according to the regulations governing the procedure. The Federal Tax Office may review whether the ref und conforms with the law within four years after making the payment to the Depositary Trust Company. Details of this collective refund procedure are available from the Depositary Trust Company.
If you are not eligible for the special refund procedure described in the preceding paragraph, you must make an individual claim for refund. Individual claims for refund are made on Form "Claim for refund of German withholding taxes on dividends and/or interest", which you must file with the German authorities at the Bundesamt für Finanzen, Friedhofstrasse 1, D-53225 Bonn, Germany. You can obtain copies of the required form from the German tax authorities at the same address or from the Embassy of the Federal Republic of Germany, 4645 Reservoir Road, N.W., Washington D.C. 20007-1998. The required form can be found on the internet under www.bff-online.de.
As part of the individual refund claim, you must submit to the German tax authorities the original bank voucher (or certified copy thereof) issued by the paying entity documenting the tax withheld, and an official certification on IRS Form 6166 of your last United States Federal income tax return. You can obtain IRS Form 6166 by filing a request via Form 8802 with the Internal Revenue Service, Philadelphia Service Center, U.S. Residency Certification Request, P.O. Box 16347, Philadelphia, PA 19114-0447. You can obtain Form 8802 and Instructions to Form 8802 on the on the internet at www.irs.gov in the section titled “Forms and Publications.” You may also call 800-829-3676 to obtain the Form and Instructions by U.S. mail.
Capital Gains
Under German domestic tax law, capital gains you derive from the sale or other disposition of shares or ADSs are subject to tax in Germany only if you have held, directly or indirectly, shares or ADSs representing 1% or more of the registered share capital of Schering AG at any time during the five-year period immediately preceding the disposition. Most German tax treaties, including the Treaty, provide that Non-German Holders are not subject to German tax even in that case.
Inheritance And Gift Tax
Under German law, German gift or inheritance tax will generally be imposed on transfers of shares or ADSs by a gift or on the death of a Non-German Holder only in the following situations:
if you or another transferor, or your heir, donee or other beneficiary, was domiciled in Germany at the time of the transfer or, if you are a German citizen who is not domiciled in Germany, if you, another transferor or your beneficiary has not been continuously outside of Germany for a period of more than 5 years; or
if your shares or ADSs are subject to such a transfer and form part of a portfolio which represents 10% or more of the registered share capital of the company and you have held such shares directly or indirectly yourself or together with a related person.
The few German estate tax treaties currently in force, including the treaty with the United States, usually provide that German gift or inheritance tax may only be imposed in situations falling under the first condition above. The treaty with the United States extends the 5 years period to 10 years.
Other Taxes
No German transfer, stamp or other similar taxes apply to your purchase, sale or other disposition of shares or ADSs.
U.S. Taxation
This section describes the material United States Federal income tax consequences of owning shares or ADSs. It applies to you only if you hold your shares or ADSs as capital assets for tax purposes. This section does not address special classes of holders, some of whom may be subject to other rules, including:
tax-exempt entities;
certain insurance companies;
broker-dealers;
traders in securities that elect to mark to market;
investors liable for alternative minimum tax, investors that actually or constructively own 10% or more of the voting stock of Schering AG, investors that hold shares or ADSs as part of a straddle or a hedging or conversion transaction; or
investors whose functional currency is not the U.S. dollar.
This section is based on the tax laws of the United States, including the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, and published rulings and court decisions, as currently in effect, as well as on the Treaty. These laws are subject to change, possibly on a retroactive basis.
You are a "U.S. holder" if you are a beneficial owner of shares or ADSs and you are:
a citizen or resident of the United States;
a United States corporation or other entity taxable as a corporation in the United States; or
an estate whose income is subject to United States Federal income tax regardless of its source, or a trust if a United States court can exercise primary supervision over the trust's administration and one or more United States persons are authorized to control all substantial decisions of the trust.
You are an "eligible U.S. holder" if you are a U.S. holder and you are:
a resident of the United States for purposes of the Treaty, do not maintain a permanent establishment or fixed base in Germany to which the shares or ADSs are attributable and through which you carry on or have carried on business or, if you are an individual, perform or have performed independent personal services; and
otherwise eligible for benefits under the Treaty with respect to income and gain from the shares or ADSs.
You are a "non-U.S. holder" if you are a beneficial owner of shares or ADSs and you are not a U.S. holder (as described above).
This discussion addresses only United States Federal income taxation. You should consult your own tax advisor regarding the United States Federal, state, local and other tax consequences of owning and disposing of shares and ADSs in your particular circumstances. In particular, you should confirm your status as an eligible U.S. holder with your advisor and should discuss any possible consequences of failing to qualify as an eligible U.S. holder.
In general, for United States Federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares represented by those ADSs. Exchanges of shares for ADSs, and ADSs for shares, generally will not be subject to United States Federal income tax.
Taxation of Dividends
U.S. Holders
If you are a U.S. holder, you must include in your gross income the gross amount of any dividend including any German tax witheld on the dividend paid by Schering AG out of its current or accumulated earnings and profits, as these amounts are determined for United States Federal income tax purposes.
The dividend is ordinary income that you must include in income when you receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. Dividends received by individuals from January 1, 2003 through December 31, 2008 will be taxed at a maximum rate of 15% provided that such individual has owned the shares or ADSs, as the case maybe, for more than 60 days in the 121 day period beginning 60 days before the date on which the shares or ADSs became ex-dividend. The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the euro payments made, determined at the spot euro/U.S. dollar rate on t he date the dividend distribution is includable in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss. The gain or loss generally will be income from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States Federal income tax purposes, will be treated as a return of capital to the extent of your basis in the shares or ADSs and thereafter as capital gain.
Dividends will constitute income from sources outside the United States, but generally will be "passive income" (or “passive category income” for taxable years beginning after December 31, 2006) or "financial services income" (which will be treated as “general category income” for taxable years beginning after December 31, 2006) which are treated separately from other types of income for purposes of computing the foreign tax credit allowable to you.
Subject to certain limitations, you may credit against your United States Federal tax liability the net amount (after applicable refunds) of any German tax withheld in accordance with German law or the Treaty. For United States tax purposes, you generally will be treated as paying German withholding taxes of €15 on every €100 of gross dividend paid by Schering AG (€21.1 basic withholding tax and surtax on the gross dividend minus applicable Treaty refund of €6.1). If you are eligible for the reduced 15% tax rate on dividends, certain adjustments have to be made to the determination of the maximum amount of foreign tax that may be credited against your U.S. Federal tax liability. These adjustments reduce the maximum amount of foreign tax credits. Therefore in most cases the German withholding might not be ful ly credited against your U.S. Federal tax liability. The impact of the effective tax rate on dividends resulting from the dividend rate deduction together with the adjustment to the foreign tax credit limitations depends on each individual’s tax situation. If you cannot or choose not to use the German withholding tax as a credit, you may generally treat that tax as an itemized deduction for United States Federal income tax purposes.
Non-U.S. Holders
If you are a non-U.S. holder, dividends paid to you in respect of shares or ADSs will not be subject to United States Federal income tax unless effectively connected with your conduct of a trade or business within the United States (and if a taxtreaty applies, unless attributable to a permanent establishment that you maintain in the United States). In such cases you will be taxed in the same manner as a U.S. holder. If you are a corporate non-U.S. holder, effectively connected dividends may, under certain circumstances, be subject to an additional branch profits tax at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.
Taxation Of Capital Gains
U.S. Holders
If you are a U.S. holder and sell or otherwise dispose of your shares or ADSs, you will recognize capital gain or loss for United States Federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your shares or ADSs. Capital gain of a non-corporate U.S. holder is generally taxed at a maximum rate of 15% from January 1, through December 31, 2008, for property held more than one year. Additionally, gain or loss will generally be income from sources within the United States for foreign tax credit limitation purposes.
Non-U.S. Holders
If you are a non-U.S. holder, you will not be subject to United States Federal income tax on gain recognized on the sale or other disposition of your shares or ADSs unless:
the gain is effectively connected with your conduct of a trade or business in the United States; the gain must also be attributable to a permanent establishment that you maintain in the United States, if that is required by an applicable income tax treaty as a condition for subjecting you to United States taxation on a net profit basis; or
you are an individual, you are present in the United States for 183 or more days in the taxable year of the sale and certain other conditions exist.
If you are a corporate non-U.S. holder, effectively connected gains that you recognize may also, under certain circumstances, be subject to an additional branch profits tax at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.
Backup Withholding And Information Reporting
In general, dividend payments, or other taxable distributions, made within the United States to you will be subject to information reporting requirements and backup withholding tax at a rate that is currently 28% if you are a non-corporate United States person and, you:
fail to provide an accurate taxpayer identification number;
are notified by the Internal Revenue Service that you have failed to report all interest or dividends required to be shown on your Federal income tax returns; or
in certain circumstances, fail to comply with applicable certification requirements.
Certain corporations and persons that are not United States persons may be required to establish their exemption from information reporting and backup withholding by certifying their status on Internal Revenue Service Forms W-8BEN, W-8ECI or W-9.
If you sell your shares or ADSs to or through a United States office of a broker, the payment of the proceeds is subject to both United States backup withholding and information reporting unless you certify that you are a non-U.S. person, under penalties of perjury, or you otherwise establish an exemption. If you sell your shares or ADSs through a non-U.S. office of a non-U.S. broker and the sale proceeds are paid to you outside the United States then information reporting and backup withholding generally will not apply to that payment. However, United States information reporting requirements, but not backup withholding, will apply to a payment of sales proceeds, even if that payment is made to you outside the United States, if you sell your shares or ADSs through a non-U.S. office of a broker that is a U.S. person or has cert ain other contacts with the United States.
You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the United States Internal Revenue Service.
DOCUMENTS ON DISPLAY
Schering AG is subject to the informational reporting requirements of the Securities Exchange Act of 1934 and files reports and other information with the Securities and Exchange Commission. You may examine the reports and other information filed by Schering AG at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C., 20549. You may also receive copies of these materials by mail from the SEC's Public Reference Branch at 450 Fifth Street, N.W., Washington, D.C., 20549. For more information on the public reference room, call the SEC at 1-800-SEC-0330. Our reports and other information filed with the SEC are also available to the public from commercial document retrieval services and the website maintained by the SEC at http://www.sec.gov. The ADRs are traded on the New York S tock Exchange, and the materials filed by us are available for inspection and copying at their offices at 20 Broad Street, New York, New York, 10005.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Due to our global business and existing current assets, we are exposed to various market risks (i.e., the risk of loss arising from adverse changes in market rates and prices). Our principal market risks are:
foreign exchange-rates, generating translation and transaction gains and losses.
interest rate and other risks related to financial assets and liabilities.
equity price risks relating to the equity securities we hold of certain of our collaboration partners.
Our central treasury function located at Schering AG's headquarters is responsible for market risk management. The Schering AG central treasury enters into virtually all derivatives contracts utilized by the Group. Derivative instruments are used only for non-trading purposes such as hedging. Subsidiaries are permitted to enter into derivative contracts only in exceptional situations after obtaining the prior consent of Schering AG central treasury.
Risk management transactions are executed within the common framework of limits, segregation of duties, and position and result reporting by an experienced staff with selected banks with a minimum long-term rating of "A-". The positions are valued mark-to-market on a regular (mainly daily) basis.
The risks involved with cash and derivative positions in foreign exchange and asset- liability risk management are measured and limited with an in-house risk management system based on historical simulation. The simulation system calculates the worst case results for given single positions and whole portfolios within the last ten years. The time bracket to calculate the worst case adverse market movements can be flexibly determined and is normally set to one-month and one-year periods.
FOREIGN EXCHANGE RISK MANAGEMENT
Approximately 58% of our net sales in 2004 were made in currencies other than the euro, including the U.S. dollar, the Japanese yen, the British pound sterling and the Brazilian real. See "Item 5 – Operating and Financial Review and Prospects – Liquidity and Capital Resources – Foreign Currency" for information on the range of currencies in which we made sales in 2002, 2003 and 2004. We therefore face considerable foreign exchange risks regarding our balance-sheet exposure (current assets minus current liabilities in foreign currencies) and our future anticipated exposure (future sales minus future costs in non-euro currencies). In accordance with our risk management policy, balance-sheet exposure is fully hedged and our future anticipated exposure for a rolling twelve-month period is in general 50% hed ged. The hedge level of our anticipated exposure may be varied between 0% and 100% of this anticipated exposure in accordance with our market expectations. As of December 31, 2004, the maximum term of our foreign exchange contracts was less than six months.
Hedges for Balance-Sheet Exposure
The following table sets forth, as of December 31, 2004, information about foreign currency forward exchange contracts entered into to hedge our balance-sheet exposure:
Foreign currency forward exchange agreements |
|---|
| | Exchange
rate | Contract amount
buy (sell) | Fair value |
|---|
Currency pairs | | | (€million) |
|---|
| | | | |
Australian dollar | euro | 1.7718 | (5.4) | (0.1) |
British pound | euro | 0.6897 | (19.1) | 0.4 |
| | | | |
Canadian dollar | euro | 1.5800 | 3.5 | (0.1) |
Czech krona | euro | 30.9145 | (3.9) | (0.1) |
Euro | South Korean won | 1405.25 | 8.2 | 0.0 |
Euro | Taiwanese dollar | 42.6500 | 3.7 | 0.0 |
| | | | |
Japanese yen | euro | 138.29 | (153.2) | 1.5 |
Japanese yen | euro | 140.62 | 5.7 | 0.0 |
Mexican peso | euro | 14.9900 | (11.2) | 0.2 |
Polish zloty | euro | 4.1934 | (12.5) | (0.3) |
South African rand | euro | 7.7736 | (9.6) | (0.1) |
| | | | |
| | | | |
Swiss franc | euro | 1.5187 | (2.3) | 0.0 |
Thailand bath | euro | 52.6150 | (4.5) | 0.0 |
U.S. dollar | euro | 1.3513 | (21.0) | 0.2 |
U.S. dollar | euro | 1.3374 | 266.7 | (4.9) |
U.S. dollar | Indonesian rupiah | 9358.00 | 0.1 | 0.0 |
| | | | |
Hedges for Anticipated Exposure
The following table sets forth, as of December 31, 2004, information about foreign currency forward exchange contracts entered into to hedge our anticipated exposure:
Foreign currency forward exchange agreements |
|---|
| | Exchange
rate | Contract amount
buy (sell) | Fair value |
|---|
Currency pairs | | | (€million) |
|---|
Australian dollar | euro | 1.7718 | (29.2) | (0.4) |
British pound | euro | 0.6922 | (55.3) | 1.0 |
Canadian dollar | euro | 1.5800 | (14.6) | 0.6 |
| | | | |
Czech krona | euro | 30.9145 | (12.6) | (0.2) |
Hungarian forint | euro | 247.07 | (5.9) | 0.0 |
| | | | |
Japanese yen | euro | 140.5215 | 23.6 | 0.1 |
Japanese yen | euro | 138.0641 | (64.4) | 0.7 |
Mexican peso | euro | 14.9900 | (25.7) | 0.4 |
Mexican peso | euro | 14.9900 | 6.6 | (0.1) |
Polish zloty | euro | 4.1934 | (11.9) | (0.3) |
South African rand | euro | 7.7828 | (12.2) | (0.1) |
| | | | |
Swedish krona | euro | 8.9343 | (24.5) | 0.2 |
Swiss franc | euro | 1.5187 | (19.8) | 0.3 |
| | | | |
Thailand bath | euro | 52.6150 | (5.0) | 0.0 |
U.S. dollar | euro | 1.3399 | (234.5) | 3.9 |
Foreign currency option contracts |
|---|
| Option type | Strike price | Contract
amount | Fair value |
|---|
AUD dollar/U.S.dollar | long put | 0.7550 | 5.7 | 0.1 |
Japanese yen/euro | long call | 134.00 | 7.2 | 0.0 |
U.S. dollar/euro | long put | 1.2860 | 7.3 | 0.5 |
U.S. dollar/euro | long put | 1.3060 | 7.3 | 0.4 |
U.S. dollar/euro | long put | 1.2500 | 14.7 | 1.3 |
U.S. dollar/euro | short put | 1.2500 | 7.3 | (0.7) |
2004 Compared to 2003
The foreign currency hedge for our balance-sheet exposure increased from a total nominal amount of €251m as of December 31, 2003 to €477m as of December 31, 2004. The primary reason for this increase was the drawing of a USD denominated bank loan.
The foreign currency hedge for our anticipated exposure increased from €479m as of December 31, 2003 to €500m as of December 31, 2004 mainly due to growing business volume.
ASSET-LIABILITY RISK MANAGEMENT
Asset-Liability Risk Management encompasses the interest rate and other risks related to financial assets and liabilities. As of December 31, 2004, our cash and securities classified as current assets amounted to €1,018m. Our short-term cash deposits are mainly euro-denominated. Our total bank liabilities as of December 31, 2004 amounted to €238m. A 5-year bank loan in U.S. dollar comprises the main part of these liabilities.
As of December 31, 2004, our positive net cash position (which we define as marketable securities and cash and cash equivalents less bank loans and overdrafts) was €780m. The portfolio is diversified in a range of cash assets which are supplemented by derivative instruments in order to generate the intended asset profile for the whole portfolio. Apart from risk limits, the short- term and mid-term liquidity requirements of the Group are also taken into account in the management of the maturity profile of cash assets. As is discussed under "-Foreign Exchange Risk Management", currency risk caused by cash and derivative positions of Asset-Liability Risk Management is hedged as a balance-sheet exposure.
The following tables set forth the nominal and fair values, maturity and contract terms of the interest rate sensitive financial instruments that were held by the Group as of December 31, 2004.
Assets and liabilities |
|---|
| 2005 | 2006 | 2007 | 2008 | 2009 | There-
after | Total | Fair
value |
|---|
Euro: | (€million) |
|---|
Fixed income | | | | | | | | |
Cash/Deposits | 652 | | | | | | 652 | 652 |
Average yield (%) | 2.1 % | | | | | | 2.1% | |
Fixed income securities | 12 | 41 | 10 | 5 | | 2 | 70 | 73 |
Average yield (%) | 2.3% | 2.7% | 3.2% | 3.8% | | 3.2% | 2.8% | |
Liabilities | (7) | (5) | | (1) | | | (13) | (13) |
Average yield (%) | 2.2% | 2.9% | | 9.0% | | | 3.0% | |
Other: | | | | | | | | |
Equity securities (mainly euro) | | | | | | | 10 | 11 |
U.S. dollar | | | | | | | | |
Fixed income | | | | | | | | |
Cash/Deposits | 39 | | | | | | 39 | 39 |
Average yield (%) | 2.5% | | | | | | 2.5% | |
Fixed income securities* | | | | | | 64 | 64 | 64 |
Average yield | | | | | | 2.9% | 2.9% | |
Liabilities | (9) | | | | (193) | | (202) | (202) |
Average yield (%) | 2.8% | | | | 2.8% | | 2.8% | |
Other | | | | | | | | |
Equity securities | | | | | | | 25 | 25 |
Real Estate Fund | | | | | | | 18 | 18 |
Alternative Investments | | | | | | | 46 | 46 |
Other currencies: | | | | | | | | |
Fixed income | | | | | | | | |
Cash/deposits | 94 | | | | | | 94 | 94 |
Liabilities | (23) | | | | | | (23) | (23) |
*invested in Mutual Bond Funds |
Derivative positions |
|---|
| 2005 | 2006 | 2007 | 2008 | 2009 | There-
after | Total | Fair
Value |
|---|
Euro: | (€million) |
|---|
Fixed income | | | | | | | | |
German Bund Futures | | | | | | 9 | 9 | 0 |
Yield (%) | | | | | | 3.6% | 3.6% | |
German Bobl Futures | | | | | 6 | | 6 | 0 |
Yield (%) | | | | | 3.1% | | 3.1% | |
Japanese yen: | | | | | | | | |
Japanese government bond futures | | | | | | 4 | 4 | 0 |
Yield (%) | | | | | | 1.0% | 1.0% | |
Other derivatives: | | | | | | | | |
Euro: | | | | | | | | |
Long call options on Schering AG shares | 6 | 14 | 30 | 49 | 49 | 19 | 167 | 44 |
U.S. Dollar: | | | | | | | | |
Long equity swap on S&P 500 | 8 | | | | | | | 2 |
2004 Compared to 2003
Our net cash position as described above increased by €151m to €780m at December 31, 2004 from €629m at December 31, 2003.
EQUITY PRICE RISK IN RESEARCH COLLABORATION PARTNERS
As part of our research and development activities, we from time to time enter into research collaboration efforts with various companies in the pharmaceutical sector. In connection with these research collaboration efforts, we acquire equity investments in our collaboration partners from time to time. In most cases, the transfer and sale of these equity investments are subject to contractual and regulatory restrictions. Equity investments subject to such restrictions are shown in the Balance Sheet in our Consolidated Financial Statements under "Financial assets/ Other Investments". The book value of these equity investments (of which only some are publicly traded securities) amounted to approximately €28m as of December 31, 2004. The market value of certain of these equity investments can fluctuate significantly . We do not have any derivative financial instruments to mitigate the fluctuation in the value of the investments. In 2004, no material impairment charges have been recognized for these equity investments.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Not applicable.
Item 15. Controls and Procedures
(a) Disclosure Controls and Procedures: As of December 31, 2004 (the “Evaluation Date“), Schering Aktiengesellschaft (the “Company“) conducted an evaluation (under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer), pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act“), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of the Evaluation Date such disclosure controls and procedures were reasonably designed to ensure that information required to be disclosed by the Company in reports it files or sub mits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
(b) Report of Schering's Management on Internal Control Over Financial Reporting: Schering AG’s Executive Board and management of the Group are responsible for establishing and maintaining adequate internal control over financial reporting as of December 31, 2004. The Schering AG Group’s internal control system was designed to provide reasonable assurance to the Schering AG Group’s management and Executive Board regarding the reliability of financial reporting and the preparation and fair presentation of its published consolidated financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Schering AG Group management assessed the effectiveness of the Group’s internal control over financial reporting as of December 31, 2004. In making this assessment, it used the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the evaluation under these criteria, management has concluded that, as of December 31, 2004, Schering AG Group’s internal control over financial reporting is effective.
Management’s assessment as well as the effectiveness of internal control over financial reporting as of December 31, 2004 have been audited by BDO Deutsche Warentreuhand Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, an independent registered public accounting firm, as stated in their report which is included under Item 18.
(c) Attestation of the registered public accounting firm: See report of BDO, an independent registered public accounting firm, included under Item 18 on page F-2.
(d) Changes in internal control over financial reporting: There were no changes to our internal control over financial reporting that occurred during the period covered by this Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 16.A. Audit Committee Financial Expert
The Supervisory Board has determined that Dr. Karl-Hermann Baumann, chairman of the Audit Committee, qualifies as an Audit Committee Financial Expert in accordance with the terms of Item 16.A of Form 20-F. See “Item 6 – Directors, Senior Management and Employees – Board Practices”.
Item 16.B. Code of Ethics
We have adopted a written code of ethics that applies to, among others, the principal executive officer, principal financial officer and principal accounting officer of Schering Aktiengesellschaft. It describes the values, principles and practices that guide business conduct in the Schering AG Group. It is applicable to all employees worldwide as well as to members of the Executive Board and of the Supervisory Board.
The Code reflects the objective of management to reinforce company-wide ethical standards and to promote a work environment that fosters integrity, respect and fairness. It represents a binding framework for all employees worldwide and defines conduct in international business activities, the management of conflicts of interest, questions of equality, the role of internal control systems, and the aim of the Company to comply with legal standards and other internal and external rules. It is the conviction of the Executive Board and the Supervisory Board that the long-term interests of the Company are best served by a policy of strict adherence to the law and to principles, as well as social responsibility in all business activities.
The company-wide implementation of the Code was completed in 2004. Schering AG Group employees were informed by their supervisors of the importance of the Code.
The code of ethics is incorporated by reference as an exhibit to this Form 20-F Annual Report.
Item 16.C. Principal Accountant Fees and Services
BDO has served as Schering AG Group’s principal independent auditor for each of the fiscal years in the three-year period ended December 31, 2004. Fees billed by BDO for professional services in each of the last two fiscal years were as follows:
| Year ended December 31, |
|---|
| 2004 | | 2003 | |
|---|
| € | | € | |
|---|
| (in millions) |
|---|
Audit fees | 5.7 | | 3.5 | |
Audit-related fees | 0.1 | | 0.1 | |
Tax fees | 0.4 | | 0.3 | |
All other fees | 0.0 | | 0.0 | |
Total | 6.2 | | 3.9 | |
“Audit Fees” are the aggregate fees billed by BDO for professional services in connection with the audit of the Company’s consolidated annual financial statements, reviews of interim financial statements, as well as audits of statutory financial statements of Schering AG and its affiliates. Also included in “Audit Fees” are amounts billed for attestation services in relation to management’s assessment of internal control over financial reporting as well as regulatory filings and other compliance requirements.
“Audit-Related Fees” are fees billed by BDO for attestation regarding compliance with certain agreements, the audit of employee benefit plans and pension schemes, and other agreed-upon procedures.
“Tax Fees” comprise fees for tax declarations, advice on actual or contemplated transactions, and expatriate employee tax services.
Subsequent to the auditor’s appointment, the Audit Committee awards the contract and in its sole authority approves the terms and scope of the audit and monitors the auditors’ independence. In order to assure the independence of the auditors, the Audit Committee established a policy of ongoing supervision and pre-approval of permissible audit-related and tax services provided by the independent auditors. According to this policy, permissible audit-related and tax services are pre-approved under the provision that the accumulated fees for such services do not exceed 5% of the total fees and the Audit Committee is notified of such services before they are completed. All other services require pre-approval on a case-by-case basis.
In 2004, all audit-related services, tax services and all other services were approved by the Audit Committee either on a case by case basis or pre-approved under the provision that the accumulated fees for such services do not exceed 5% of the total fees and the Audit Committee is notified of such services before they are completed.
Item 16.D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16.E. Purchase of Equity Securities by the Issuer and Affiliate Purchasers
| (a) Total number of Shares purchased | (b) Average Price Paid Per Share (€) | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
|---|
January 2004 | 6,265 | 43.09 | | |
February 2004 | 956,291 | 39.43 | 800,000 | |
March 2004 | 1,059,635 | 38.08 | 1,040,000 | |
April 2004 | 981,565 | 39.12 | 960,000 | |
May 2004 | 15,910 | 45.46 | | |
June 2004 | 2,471 | 44.88 | | |
July 2004 | 1,202,137 | 48.36 | 1,200,000 | |
August 2004 | 2,441 | 46.98 | | |
September 2004 | 14,256 | 49.31 | | |
October 2004 | 2,156 | 50.30 | | |
November 2004 | 4,275 | 49.16 | | |
December 2004 | 1,681 | 55.00 | | |
Total 2004 | 4,249,083 | 41.64 | 4,000,000 | |
In 2004, we repurchased 4,249,083 of our own shares (including ADSs) of which 249,083 shares were designated for and used in our worldwide Employee Share Ownership Programs (ESOPs) and transferred to employees. The remaining 4 million shares were purchased within Share Buyback Programs authorized by the Annual General Meetings (AGM) in 2003 and 2004. The repurchases were made in open-market transactions. The Share Buyback Program in 2004 was decided by the Executive Board on February 11, 2004. No special announcements regarding Share Buyback Programs were made. The authorizations given by the AGM amounted to 15 million shares in 2003 and 19.4 million shares in 2004. In 2003, 2.5 million shares were repurchased within the Share Buyback Program in addition to approximately 0.4 million shares purchased for ESOPs. The current AGM a uthorization for the Share Buyback Program will expire on September 30, 2005, unless renewed at the next AGM on April 14, 2005. As of December 31, 2004, 15.4 million shares may still be purchased under the Share Buyback Program authorized by the AGM. As per March 15, 2005, no decisions were taken yet for further allotments within the Share Buyback Program. In 2005, Schering AG will continue offering ESOPs to its employees. The exact number of the shares to be purchased is unknown until completion of the programs.
PART III
Item 17. Financial Statements
Schering AG is furnishing financial statements pursuant to the instructions of Item 18 of Form 20-F.
Item 18. Financial Statements
See our Consolidated Financial Statements beginning at F-1.
Item 19. Exhibits
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
Schering AKTIENGESELLSCHAFT
By: /s/ JÖRG SPIEKERKÖTTER
Name: Dr. Jörg Spiekerkötter
Title: Chief Financial Officer
Date: March 17, 2005
Schering AG
Index to Consolidated Financial Statements
Report of Registered Independent Auditors
Consolidated financial statements
We have audited the consolidated balance sheets of Schering Aktiengesellschaft (Schering AG) as of December 31, 2004 and 2003, and the consolidated statements of income, cash flows and changes in equity for each of the years in the three-year period ending December 31, 2004. The preparation and the content of these consolidated financial statements are the responsibility of the Company’s Executive Board. Our responsibility is to express an opinion on whether these consolidated financial statements comply with International Financial Reporting Standards (IFRS), based on our audit.
We conducted our audit in accordance with the International Standards on Auditing issued by the International Federation of Accountants (IFAC) and with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly the net assets and financial position as of December 31, 2004 and 2003 and the results of operations and cash flows of the Group for each of the years in the three-year period ended December 31, 2004 in accordance with IFRS.
Application of accounting principles generally accepted in the United States (U.S. GAAP) would have affected equity as of December 31, 2004, 2003 and 2002 and net profit for each of the years in the three-year period ended December 31, 2004 to the extent summarized in Notes (37) and (38) to the consolidated financial statements.
Internal Control over Financial Reporting
In addition we have audited management's assessment included in Item 15, Report of Schering AG’s Management on Internal Control Over Financial Reporting that Schering Aktiengesellschaft maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The management of Schering Aktiengesellschaft is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Schering Aktiengesellschaft maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria issued by COSO established in Internal Control – Integrated Framework. Also in our opinion, Schering Aktiengesellschaft maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria issued by COSO established in Internal Control – Integrated Framework.
Berlin, Germany
February 24, 2005
BDO Deutsche Warentreuhand
Aktiengesellschaft
Wirtschaftsprüfungsgesellschaft | |
Index to Consolidated Financial Statements
Schering AG
CONSOLIDATED INCOME STATEMENTS
Consolidated Income Statements for the Years Ended December 31, 2004, 2003 and 2002
(in Millions Except per Share Data)
| See Notes | 2004 | 2004 | 2003 | 2002 |
|---|
| | $(1) | € | € | € |
|---|
Net sales | | 6,643 | 4,907 | 4,828 | 5,023 |
Cost of sales | | (1,633) | (1,206) | (1,233) | (1,212) |
Gross profit | | 5,010 | 3,701 | 3,595 | 3,811 |
Marketing and selling costs | | (2,096) | (1,548) | (1,525) | (1,629) |
Engineering and administration costs | (7) | (709) | (524) | (566) | (566) |
Research and development costs | | (1,244) | (919) | (924) | (947) |
Other operating income | (8) | 490 | 362 | 399 | 370 |
Other operating expenses | (9) | (421) | (311) | (293) | (298) |
Operating profit | | 1,030 | 761 | 686 | 741 |
Financial result | (10) | (12) | (9) | 15 | (23) |
Income from disposal of Aventis CropScience | (11) | — | — | — | 689 |
Acquisition-related expenses | (12) | — | — | — | (262) |
Profit before taxes | | 1,018 | 752 | 701 | 1,145 |
Income taxes | (13) | (337) | (249) | (255) | (276) |
Profit for the period | | 681 | 503 | 446 | 869 |
Attributable to: | | | | | |
Net profit | | 677 | 500 | 443 | 867 |
Minority interest | | 4 | 3 | 3 | 2 |
EARNINGS PER SHARE (basic) | (14) | 3.53 | 2.61 | 2.28 | 4.39 |
EARNINGS PER SHARE (diluted) (2) | (14) | 3.53 | 2.61 | 2.28 | 4.38 |
(1) The 2004 figures have been translated solely for the convenience of the reader at an exchange rate of $1.3538 to €1.00, the noon buying rate on December 31, 2004.
(2) Potential Dilution from stock options issued as part of Long Term Incentive Plans
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
Index to Consolidated Financial Statements
Schering AG
CONSOLIDATED BALANCE SHEETS
Consolidated Balance Sheets as of December 31, 2004 and 2003
| See
Notes | 2004 | 2004 | 2003 |
|---|
| | $ million(1) | € million | € million |
|---|
ASSETS | | | | |
Intangible assets | (16) | 918 | 678 | 723 |
Property, plant and equipment | (17) | 1,592 | 1,176 | 1,213 |
Marketable securities | (19) | 315 | 233 | 176 |
Other financial assets | (18) | 137 | 101 | 86 |
Deferred taxes | | 211 | 156 | 173 |
Other non-current assets | | 91 | 67 | 26 |
Total non-current assets | | 3,264 | 2,411 | 2,397 |
Inventories | (20) | 1,343 | 992 | 996 |
Trade receivables | (21) | 1,497 | 1,106 | 1,088 |
Current tax receivables | | 161 | 119 | 178 |
Other receivables and other assets | | 240 | 177 | 164 |
Total receivables and other assets | | 1,898 | 1,402 | 1,430 |
Cash and cash equivalents | | 1,063 | 785 | 566 |
Total current assets | | 4,304 | 3,179 | 2,992 |
TOTAL ASSETS | | 7,568 | 5,590 | 5,389 |
EQUITY AND LIABILITIES | | | | |
Issued capital(2) | | 263 | 194 | 194 |
Share premium account | | 452 | 334 | 334 |
Paid-up capital | (22) | 715 | 528 | 528 |
Retained earnings | (23) | 3,364 | 2,485 | 2,378 |
Treasury shares | | (5) | (4) | — |
Equity before Minority interest | | 4,074 | 3,009 | 2,906 |
Minority interest | | 23 | 17 | 16 |
Total Equity | | 4,097 | 3,026 | 2,922 |
Provisions for pensions and similar obligations | (24) | 778 | 575 | 576 |
Other non-current provisions | (25) | 657 | 485 | 485 |
Non-current borrowings | | 269 | 199 | 36 |
Other non-current liabilities | (26) | 41 | 30 | 24 |
Total non-current liabilities | | 1,745 | 1,289 | 1,121 |
Current provisions | (25) | 965 | 713 | 656 |
Trade payables | | 412 | 304 | 354 |
Current borrowings | | 53 | 39 | 74 |
Other current liabilities | (26) | 296 | 219 | 262 |
Total current liabilities | | 1,726 | 1,275 | 1,346 |
TOTAL EQUITY AND LIABILITIES | | 7,568 | 5,590 | 5,389 |
(1) The 2004 figures have been translated solely for the convenience of the reader at an exchange rate of $ 1.3538 to €1.00, the noon buying rate on December 31, 2004.
(2) Number of shares according to articles of association on Dec. 31, 2004: 194 million, thereof 4 million held as treasury shares; Contingent capital: €15m, [see note (22)] |
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
Index to Consolidated Financial Statements
Schering AG
CONSOLIDATED CASH FLOW STATEMENTS
Consolidated Cash Flow Statements for the years ended December 31, 2004, 2003 and 2002
| See Notes | 2004 | 2004 | 2003 | 2002 |
|---|
| | $ million(1) | € million | € million | € million |
|---|
Profit for the period | | 681 | 503 | 446 | 869 |
Depreciation and amortization expense | | 413 | 305 | 312 | 318 |
Increase in non-current provisions | | 3 | 2 | 24 | 29 |
Other non-cash income and expense | | 3 | 2 | 26 | (40) |
Result from disposal of non-current assets | | -12 | (9) | (42) | (651) |
Purchase of Leukine® development project | | — | — | — | 224 |
Cash flows before working capital changes | | 1,088 | 803 | 766 | 749 |
Change in inventories and receivables | | (56) | (41) | (256) | (251) |
Change in liabilities and current provisions | | (15) | (11) | 71 | 86 |
Cash flows from operating activities | (29) | 1,017 | 751 | 581 | 584 |
Purchase of non-current assets | | (393) | (290) | (318) | (559) |
Proceeds from disposal of non-current assets | | 69 | 51 | 123 | 1,601 |
Purchase and sale of marketable securities | | (97) | (72) | 36 | (165) |
Purchase of Leukine® development project | | — | — | — | (224) |
Acquisitions, net of cash acquired | | — | — | (2) | 8 |
Proceeds from disposal of subsidiaries, net of cash disposed | | 0 | 0 | — | 24 |
Cash flows used in/from investing activities | (30) | (421) | (311) | (161) | 685 |
Dividend payments | | (244) | (180) | (182) | (165) |
Change in borrowings | | 176 | 130 | 25 | (132) |
Funding of Schering Pension Trust | | — | — | — | (500) |
Purchase of treasury shares | | (226) | (167) | (90) | (234) |
Cash flows used in financing activities | | (294) | (217) | (247) | (1,031) |
Net change in cash and cash equivalents | | 302 | 223 | 173 | 238 |
Effect of exchange rate movements on cash and cash equivalents | | (5) | (4) | (15) | (22) |
Cash and cash equivalents as of January 1 | | 766 | 566 | 408 | 192 |
Cash and cash equivalents as of December 31 | (28) | 1,063 | 785 | 566 | 408 |
(1) The 2004 figures have been translated solely for the convenience of the reader at an exchange rate of $ 1.3538 to € 1.00, the noon buying rate on December 31, 2004. |
The accompanying Notes are an integral part of these Consolidated Financial Statements.
Index to Consolidated Financial Statements
Schering AG
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2004, 2003 and 2002
| Paid-up capital | Retained earnings | Treasury shares | Minority interest | Total equity |
|---|
| | | | Accumulated other comprehensive income | | | |
|---|
| Issued capital | Share premium account | Other retained earnings | Currency transla-tion ad-justment | Derivat-ive hed-ging ins-truments | Available for sale securities | | | |
|---|
| € million |
|---|
January 1, 2002 | 198 | 330 | 1,902 | 101 | 4 | 28 | — | 14 | 2,577 |
Change in fair value | — | — | — | — | 41 | (45) | — | — | (4) |
Realized gains/losses | — | — | — | — | (21) | 21 | — | — | 0 |
Translation adjustments | — | — | — | (234) | — | (1) | — | 0 | (235) |
Other comprehensive income | — | — | — | (234) | 20 | (25) | — | 0 | (239) |
Profit for the period | — | — | 867 | — | — | — | — | 2 | 869 |
Expenses for employee shares | — | — | 6 | — | — | — | — | — | 6 |
Purchase of treasury shares and issue to employees | — | — | (7) | — | — | — | — | — | (7) |
Dividend payments | — | — | (164) | — | — | — | — | (1) | (165) |
Purchase of treasury shares for acquisitions | — | — | (156) | — | — | — | (2) | — | (158) |
Issue of treasury shares for acquisitions | — | — | 146 | — | — | — | 2 | — | 148 |
Purchase of treasury shares | — | — | (75) | — | — | — | (1) | — | (76) |
Redemption of treasury shares | (1) | 1 | (1) | — | — | — | (1) | — | — |
December 31, 2002 | 197 | 331 | 2,518 | (133) | 24 | 3 | — | 15 | 2,955 |
Change in fair value | — | — | — | — | 31 | 5 | — | — | 36 |
Realized gains/losses | — | — | — | — | (40) | (7) | — | — | (47) |
Translation adjustments | — | — | — | (194) | — | 0 | — | 0 | (194) |
Other comprehensive income | — | — | — | (194) | (9) | (2) | — | 0 | (205) |
Profit for the period | — | — | 443 | — | — | — | — | 3 | 446 |
Expenses for employee shares | — | — | 4 | — | — | — | — | — | 4 |
Dividend payments | — | — | (180) | — | — | — | — | (2) | (182) |
Purchase of treasury shares | — | — | (87) | — | — | — | (3) | — | (90) |
Redemption of treasury shares | (3) | 3 | (3) | — | — | — | 3 | — | — |
Purchase of treasury shares and issue to employees | — | — | (6) | — | — | — | — | — | (6) |
December 31, 2003 | 194 | 334 | 2,689 | (327) | 15 | 1 | — | 16 | 2,922 |
Change in fair value | — | — | — | — | 8 | 12 | — | — | 20 |
Realized gains/losses | — | — | — | — | (10) | 3 | — | — | (7) |
Translation adjustments | — | — | — | (76) | — | 0 | — | 0 | (76) |
Other comprehensive income | — | — | — | (76) | (2) | 15 | — | 0 | (63) |
Profit for the period | — | — | 500 | — | — | — | — | 3 | 503 |
Expenses for employee shares | — | — | 5 | — | — | — | — | — | 5 |
Dividend payments | — | — | (178) | — | — | — | — | (2) | (180) |
First time application of IFRS 3 “Business Combinations” | — | — | 10 | — | — | — | — | — | 10 |
Purchase of treasury shares | — | — | (163) | — | — | — | (4) | — | (167) |
Purchase of treasury shares and issue to employees | — | — | (4) | — | — | — | — | — | (4) |
December 31, 2004 | 194 | 334 | 2,859 | (403) | 13 | 16 | (4) | 17 | 3,026 |
The accompanying Notes are an integral part of these Consolidated Financial Statements.
Index to Consolidated Financial Statements
Schering AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
(1) General principles/New Accounting Standards
The consolidated financial statements of Schering Aktiengesellschaft (Schering AG) have been prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) effective at the balance sheet date.
In addition, as of January 1, 2004, we opted for early adoption of the revisions of the existing standards under the IASB's Improvement Project as well as IFRS 2 "Share-based Payment" and IFRS 3 "Business Combinations", and hence also IAS 36 "Impairment of Assets" (revised 2004) and IAS 38 "Intangible Assets" (revised 2004). The changes in accounting policies were made in accordance with the transitional provisions in the new accounting standards.
As a consequence of applying IFRS 3, we no longer amortize goodwill from business combinations as from January 1, 2004, but test it for impairment annually. The negative goodwill from the acquisition of CIS bio international was eliminated against retained earnings. The effects of first-time application of the standard on the consolidated financial statements for 2004 are shown below. The consolidated financial statements for 2003 were not affected, as IFRS 3 applies prospectively from January 1, 2004.
Consolidated Income Statement | |
Decrease in Other operating expenses | €47m |
Decrease in Other operating income | €4m |
Increase in Result from investments in associates | €3m |
Increase in Income taxes | €5m |
Increase in Net profit | €41m |
Increase in Earnings per share basic and diluted | €0.21 |
Consolidated balance sheet | |
Derecognition of Negative Goodwill from the acquisition of CIS bio international | €6m |
Increased carrying amount of goodwill | €47m |
Increased carrying amount of investments in associates | €3m |
Increased Retained Earnings through | |
- Increase in Net profit | €41m |
- Elimination of Negative Goodwill | €10m |
Increased provisions for Deferred Taxes | €5m |
As a consequence of applying IAS 38 (revised 2004), since January 1, 2004, the criterion for recognition is always considered to be satisfied for acquired intangible assets. Until December 31, 2003 product rights in particular were recognized only upon regulatory approval. In 2004, payments for pre-approval development projects of €9m were recognized as assets (effect on earnings per share (basic and diluted): +0.03€).
In accordance with revised IAS 1, "Presentation of Financial Statements", assets and liabilities are classified in the balance sheet by maturity with retrospective effect from December 31, 2003.
The other changes in accounting policies had no material effect on the Group's net assets, financial position, and results of operations.
(2) Companies included in the consolidated financial statements
In addition to Schering AG, the consolidated financial statements include all companies in which Schering AG controls a majority of the members' voting rights.
34 domestic companies and 115 foreign companies are consolidated. A total of 12 companies were consolidated for the first time in 2004. 6 companies are no longer consolidated. Comparability with previous years is not affected by these changes.
Joint ventures are proportionately consolidated. Associates – investments where we have the ability to exercise significant influence – are accounted for using the equity method.
The principal companies included in the consolidated financial statements are listed in Note (34). The complete list of Group ownership interests is filed with the Commercial Register of the Amtsgericht Charlottenburg (Charlottenburg Local Court), Berlin.
(3) Consolidation principles
Investments in subsidiaries are consolidated by eliminating the Group's costs against the fair value of the assets and liabilities acquired. Any excess of acquisition cost over the fair value of net assets acquired is recognized as goodwill. Any excess of the fair value of assets and liabilities acquired over acquisition cost is recognized in income after reassessment of the fair values of the assets and liabilities acquired. If less than 100% of shares are acquired, the cost of an investment is eliminated against the proportionate fair values of the assets and liabilities acquired. Minority interests are presented in equity in the amount of the residual fair values.
Differences contained in the carrying amounts of investments in joint ventures and associates are calculated using the same principles; where appropriate, the financial statements of joint ventures and associates are adjusted to the uniform Group accounting policies set out below.
Intercompany profits and losses, sales, income and expenses, and receivables and liabilities between consolidated companies are eliminated. Intercompany profits relating to joint ventures and associates are also eliminated in proportion to our ownership interest.
(4) Accounting policies
Intangible assets
Goodwill is recognized at cost less impairment losses if necessary. For business combinations until December 31, 2003, the carrying amount of goodwill as of that date is treated as acquisition cost.
Other intangible assets (in particular software, acquired product rights and acquired development projects) are measured at cost (internally developed software at the cost of conversion), less accumulated straight-line amortization upon availability for use. For acquired intangible assets, the criterion for recognition is always considered to be satisfied. Other intangible assets generally have a useful life of 4 to 8 years unless a different period is indicated (e.g. periods based on the life of a patent). Amortization of intangible assets is allocated to the expenses of the appropriate consuming functions.
Property, plant and equipment
Property, plant and equipment are carried at cost less accumulated depreciation for normal wear and tear. In addition to direct costs, the cost of conversion of internally manufactured assets includes proportionate production overheads and depreciation. Grants by third parties reduce the cost of acquisition or conversion. Interest on third-party borrowings is not included in the cost of conversion. Repair costs are expensed as incurred. Obligations to restore a previous condition are included in the cost of acquisition or conversion and at the same time recognized as provision. Buildings are depreciated on a straight-line basis over a useful life of no more than 40 years. Machinery and technical equipment are generally depreciated over a useful life of 3 to 20 years, and factory, office and other equipment over a useful life of 3 to 10 years using the straight-line method. Movable assets used for the production of active substances and intermediate products are reduced by diminishing balance depreciation due to the specialized nature of equipment and associated business risks. Fully depreciated assets are retained in property, plant and equipment, and accumulated depreciation accounts, until they are removed from service. In the case of disposals, assets and related depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged to the income statement under Other operating income and Other operating expenses. Depreciation of property, plant and equipment is allocated to the expenses of the appropriate consuming functions.
Impairment of intangible assets and property, plant and equipment
If the carrying amount of an intangible asset or an item of property, plant and equipment calculated in accordance with these policies exceeds the recoverable amount at the reporting date, the carrying amount is reduced to the recoverable amount. The recoverable amount is measured as the higher of the net selling price and the value in use determined by the present value of estimated future cash flows. Impairment losses are recorded in Other operating expenses.
Goodwill and other intangible assets not yet available for use are tested for impairment annually. Goodwill is tested for impairment by geographical segments, the primary reporting format for our segment reporting. Impairment reviews are also made for assets or groups of assets affected by events and circumstances warranting a review.
If the reasons for the impairment loss no longer apply, it is reversed. Gains from such reversals are recorded in Other operating income. Goodwill impairment is not reversed.
Marketable Securities and Other financial assets
Investments in companies where we can exercise significant influence are carried as Investments in associates. Investments in companies that we expect to hold for the long term without exercising significant influence are carried as Other investments. Investments in companies, shares in equity and bond funds, and interest-bearing securities are carried as Marketable securities.
Investments in associates are accounted for using the equity method, and are therefore carried at cost, plus or minus impairments and goodwill amortization recognized until December 31, 2003, profit distributions, and our share of the retained profits or losses of the company concerned. Our share of Other comprehensive income is recognized proportionately.
Other investments and marketable securities are classified as "available for sale" and thus recognized at their fair values. Unrealized gains and losses resulting from changes in fair value are recognized net of deferred taxes directly in a separate account in equity. Changes in fair value are recognized in income, if the financial asset is disposed of or is determined to be impaired. Increases in fair value of equity instruments are always recognized directly in equity, even if a write-down was previously recognized in the income statement.
Loans are measured at amortized cost; interest-free and low-interest loans are recognized at their net present value.
Inventories
Inventories are recognized at the lower of cost, which is determined using the weighted average cost method, or net realizable value. The costs of conversion include direct costs, factory overheads and depreciation. The allocation of fixed production overheads to the cost of inventories is based on the normal capacity of the production facilities. Expenses relating to unutilized capacity are included in the income statement under Cost of sales. Write-downs are recognized where the cost of inventories exceeds the expected net proceeds from disposal.
Trade receivables
Trade receivables are recognized net of an allowance for doubtful accounts.
Provisions for defined benefit pension plans
Provisions for defined benefit pension plans are calculated using the projected unit credit method and reflect future increases in salaries and pensions. The current service cost arises from the change in the provision for projected benefits. Actuarial gains and losses are deferred and recognized over the expected remaining service period of the employees participating in those plans, to the extent to which such gains and losses exceed 10% of the obligation.
Assumptions | German pension plans | Other pension plans(1) |
|---|
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 |
|---|
Discount rate | 5.0% | 5.5% | 5.75% | 3.7% | 4.5% | 5.0% |
Increase in salaries | 2.5% | 2.5% | 3.0% | 2.9% | 3.7% | 4.1% |
Increase in pensions | 1.25% | 1.25% | 1.25% | 0.5% | 0.8% | 0.7% |
Expected return on plan assets | 7.0% | 7.0% | 7.0% | 4.8% | 5.4% | 5.75% |
(1) weighted average of the individual plans |
The defined benefit obligation for German plans is based on Prof. Dr. Klaus Heubeck's 1998 mortality tables.
Assumptions for defined benefit pension plans outside Germany are based on the respective local conditions.
The provision for pensions is determined by calculating the net of the projected benefit obligation and the fair value of plan assets (funded status), less unrecognized actuarial gains/losses.
Obligations relating to share-based payment (stock option plans and employee share programs)
Costs for stock option plans are expensed with the exception of the LTI plans 2001/I “Key Managers” and 2001/II “Key Managers”. All stock option plans are described in Note (36).
At the time the commitment is made to issue shares to staff at a discount, the difference between the fair value and the issue price of the shares is recorded as an expense and a corresponding amount is transferred to retained earnings.
Other provisions
Other provisions are recognized when it is probable that a liability has been incurred and the amount can be reliably estimated. Non-current provisions are reported at their discounted value.
Deferred taxes
Deferred taxes are recognized for temporary differences between the carrying amount of assets or liabilities in the financial statements and their associated tax bases. Deferred taxes relating to consolidation adjustments and tax loss carryforwards are calculated according to the same principle. The recognition of deferred taxes is based on the tax rates enacted or substantively enacted for the subsequent periods when the temporary differences are expected to reverse. Deferred tax assets are recognized only when it is probable that the future economic benefit will be realized. Deferred tax assets and deferred tax liabilities are offset only if they relate to income taxes levied by the same tax authority and the enterprise has a legally enforceable right to offset tax assets against tax liabilities.
Derivative financial instruments
Derivative financial instruments are measured at fair value. Deferred gains and losses resulting from the hedging of anticipated sales and expenses are recognized net of deferred taxes directly in Other comprehensive income. Gains and losses are only recognized in the income statement after the hedged underlying transactions have been realized.
The management of financial risks (in particular currency risks) using derivative financial instruments is described in Note (31).
Commitments and contingencies
Commitments and contingencies are not recognized in the balance sheet. Unrecognized commitments and contingencies as of December 31, 2004, are explained in Note (32).
Revenue recognition
Revenue from the sale of products, merchandise, and services is recognized when delivery has taken place, transfer of risk has been completed, the price is fixed or determinable, and collectibility is reasonably assured.
Revenues are recorded net of applicable allowances for product returns, rebates, and discounts, as well as amounts collected on behalf of third parties, such as sales taxes, and goods and service taxes. Estimates for allowances are primarily based on historical experience updated for changes in facts and circumstances, as appropriate. Product returns were insignificant in the period under review.
(5) Management judgments and key sources of estimation uncertainty
Management judgments in the application of accounting policies
Provided that certain criteria are met, development costs are capitalized as intangible assets. Among other things, it must be probable that the development project will generate future economic benefits. In our opinion, sufficient probability that future economic benefits will be generated in the development of pharmaceutical products only arises once regulatory approval for a development project has been granted. Consequently all development costs for pharmaceutical products incurred up to the time of approval are expensed immediately. However, the criterion for recognition is considered satisfied for acquired development projects, which are recognized as intangible assets [see Note (4)].
Actuarial gains and losses relating to defined benefit pension plans are allocated over the average remaining service period of the beneficiaries, to the extent that they exceed 10% of the total obligation. If all actuarial gains and losses had been recognized immediately in the period to which they relate, provisions for pensions would have been €320m higher as of December 31, 2004 (December 31, 2003: €229m).
All securities have been classified as "available for sale". As a consequence, changes in fair value are recognized directly in a separate account in equity [see Note (4)]. If they had been classified as "financial assets at fair value through profit and loss", changes in fair value would have been recognized immediately in the income statement.
Key sources of estimation uncertainty in the application of accounting policies
Preparation of the consolidated financial statements in accordance with IFRSs requires management to make estimates and assumptions affecting recognition and measurement in the Consolidated Balance Sheet and Income Statement, as well as the disclosure of contingent assets and liabilities. Actual results could differ from these estimates. In particular, estimates are required when:
- Assessing the need for and measurement of impairment losses
- Accounting for pension obligations
- Recognizing and measuring provisions for tax, environmental, warranty and litigation risks, product returns, and restructurings
- Determining inventory write-downs
- Assessing the extent to which deferred tax assets will be realized.
Goodwill is tested annually for impairment by geographical segment on the basis of our operational three-year planning and assuming segment-specific growth rates for the years thereafter. A decrease in the growth rates by one percentage point would reduce the estimated fair value of the segments by a total of €500m. No impairment losses on allocated goodwill would be necessary in any segment. An increase in the discount rate by two percentage points would reduce the estimated fair value of the segments by a total of €1,300m. No impairment losses on the goodwill allocated would be required in any of the segments.
Obligations from the defined-benefit pension plans and the pension costs for the following year are calculated on the basis of the parameters given in Note (4). An increase or decrease of the discount rate by 0.5 percentage points would reduce the pension obligation by €125m or increase it by €141m. The amortization expense for unrecognized actuarial losses in the following year would decline by €5m or increase by €9m. An increase or decrease in salary trends by 0.5 percentage points would increase the defined benefit obligation by €85m or reduce it by €74m. The amortization expense for unrecognized actuarial losses in the following year would increase by €5m or decrease by €5m. An increase or decrease in the expected return on plan assets of 0.5 percentage points would decrease or increa se the net periodic pension costs by €6m.
Provisions for tax, environmental, warranty and litigation risks, product returns, and restructurings are recognized and measured by reference to an estimate of the probability of future outflow of benefits as well as to historical data based on the facts and circumstances known at the reporting date. The actual liability may differ from the amounts recognized.
Inventories are written down to the expected net realizable value (estimated selling price less the estimated costs of completion and the estimated cost necessary to make the sale). The actual selling prices and the costs still to be incurred may differ from the expected amounts.
Deferred tax assets are only recognized to the extent that their realization is probable, i.e. if a tax benefit is expected in future periods. The actual tax results in future periods may differ from the estimate made at the time the deferred taxes are recognized.
(6) Currency translation
The group companies prepare their financial statements in the currency of the primary economic environment in which they operate (functional currency). Foreign currency transactions are translated into the relevant functional currency at the time of the transaction. Exchange differences arising on the settlement of foreign currency items during the period and from the measurement of unsettled foreign currency items using the closing rate on the balance sheet date are expensed.
The financial statements of Group companies located outside the euro zone are converted to the Group presentation currency (the euro) as follows:
- The assets and liabilities of Group companies, as well as the Group's share of the equity of foreign associates, are translated at the closing rate on the balance sheet date
- Income and expenses are translated at the annual average rate.
- Exchange differences are recognized directly in Other comprehensive income.
Goodwill arising on the acquisition of an entity located outside the euro zone, and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of such an entity, are treated as assets and liabilities of that entity and translated at the closing rate on the balance sheet date.
Currencies that are of particular importance to the Group have experienced the exchange rate fluctuations shown below:
| Closing rate
(basis 1€) | Annual average rate
(basis 1€) |
|---|
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 |
|---|
U.S. dollar | 1.36 | 1.26 | 1.05 | 1.24 | 1.14 | 0.95 |
Pound sterling | 0.71 | 0.70 | 0.65 | 0.68 | 0.69 | 0.63 |
Brazilian real | 3.62 | 3.66 | 3.71 | 3.64 | 3.48 | 2.71 |
Japanese yen | 139.65 | 135.05 | 124.39 | 134.04 | 131.62 | 118.02 |
B. INCOME STATEMENT DISCLOSURES
(7) Engineering and administration costs
Engineering and administration costs include costs of production management and planning, factory safety and administration, environmental protection, technology cost centers such as workshops, energy production, services and waste disposal (only to the extent that these costs are not reallocated internally to the consuming functions), training, and general administration, such as human resources, purchasing, controlling, and accounting.
(8) Other operating income
| 2004 | 2003 | 2002 |
|---|
| €m | €m | €m |
|---|
Income from foreign currency hedges and monetary transactions | 98 | 188 | 133 |
License and commission income | 42 | 42 | 41 |
Income from providing services to third parties | 44 | 51 | 41 |
Reversal of provisions | 62 | 31 | 31 |
Miscellaneous | 116 | 87 | 124 |
| 362 | 399 | 370 |
Income from providing services to third parties relates to fees from third parties for the supply of technical infrastructure as well as to income from other services provided to third parties. The related expenses are included in Other operating expenses.
Reversal of provisions includes €25m relating to the sale of the Industrial Chemicals and Natural Substances division in 1992. The warranty assumed in relation to the sale expired in the reporting period.
(9) Other operating expenses
| 2004 | 2003 | 2002 |
|---|
| €m | €m | €m |
|---|
Expenses from foreign currency hedges and monetary transactions | 80 | 115 | 125 |
Expenses related to the FOCUS initiative | 41 | — | — |
Goodwill amortization | — | 47 | 46 |
Costs of providing services to third parties | 40 | 46 | 38 |
Miscellaneous | 150 | 85 | 89 |
| 311 | 293 | 298 |
The net amount of Income and Expenses from foreign currency hedges and monetary transactions includes gains of €17m (2003: €66m, 2002: €35m) from cash flow hedges.
The Miscellaneous item contains expenses of €31m resulting from changes to the pension plans of our Japanese subsidiary in 2004 [see Note (24)].
(10) Financial result
| 2004 | 2003 | 2002 |
|---|
| €m | €m | €m |
|---|
Result from investments | | | |
Result from investments in associates | 10 | 0 | 44 |
Impairment of investments | 0 | (7) | (26) |
Disposal of investments | 5 | 30 | 1 |
| 15 | 23 | 19 |
Interest result | | | |
Income from long-term loans | 2 | 2 | 2 |
Other interest and similar income | 23 | 21 | 25 |
Other interest and similar expenses | (11) | (10) | (8) |
Net interest income | 14 | 13 | 19 |
Interest component of additions to provisions for pensions | (29) | (35) | (44) |
| (15) | (22) | (25) |
Other financial result | | | |
Write-downs of loans and marketable securities | (11) | 0 | (4) |
Other financial income | 5 | 17 | 13 |
Other financial expenses | (3) | (3) | (26) |
| (9) | 14 | (17) |
Financial result | (9) | 15 | (23) |
The increase in the Result from investments in associates includes €3m relating to the termination of the amortization of goodwill from the acquisition of our share in Medac GmbH. In addition, the previous year’s figure included a pro-rata loss of €3m from our investment in metaGen Pharmaceuticals GmbH.
Impairment of investments in 2002 is related to impairment charges on shares in companies in the United States and Europe.
In the previous year, Disposal of Investments contained a gain of €22m resulting from the sale of our remaining 49% interest in Oy Leiras Finland AB. In 2002, the Result from investments in associates included a profit of €45m from our 24% interest in Aventis CropScience Holding S.A., Lyon (Aventis CropScience). We sold this investment at the beginning of June 2002.
Other financial income and Other financial expenses include gains and losses from the sale of loans and marketable securities, and gains and losses from interest-rate derivative transactions. In 2002, Other financial expenses included exchange rate losses of €6m caused by the monetary crisis in Argentina.
(11) Income from disposal of Aventis CropScience
The income from the disposal of our 24% interest in Aventis CropScience in fiscal 2002 was composed of the following items:
| €m |
|---|
Proceeds from disposal | 1,500 |
Carrying amount* | (526) |
Indemnities | (285) |
Income | 689 |
* After deducting items that had been included in Other comprehensive income |
The indemnities amounting to €285m relate in particular to environmental, tax and product liability risks. The Schering AG Group has entered into a contractual undertaking to the buyer to assume these risks.
(12) Acquisition-related expenses
The Acquisition-related expenses in fiscal 2002 contained one-time effects, primarily expenses of €224m for the acquisition of the rights to the development project for the use of Leukine® in Crohn’s disease, and a further €20m resulting from the establishment of the Schering Stiftung (a foundation under German law) for the promotion of science and culture.
(13) Income taxes
Income before taxes is as follows:
| 2004 | 2003 | 2002 |
|---|
| €m | €m | €m |
|---|
Domestic | 377 | 280 | 567 |
Foreign | 375 | 421 | 578 |
Total | 752 | 701 | 1,145 |
The respective tax expenses are:
| 2004 | 2003 | 2002 |
|---|
| €m | €m | €m |
|---|
Domestic | (134) | (60) | (32) |
Foreign | (115) | (195) | (244) |
Total | (249) | (255) | (276) |
The reconciliation of notional tax expenses based on the statutory tax rate applicable to Schering AG of 39.1% (2003: 40.5%; 2002: 39.1%) to tax expenses at the effective tax rate is as follows:
| 2004 | 2003 | 2002 |
|---|
| €m | €m | €m |
|---|
Income before taxes | 752 | 701 | 1,145 |
Notional tax expenses (at the statutory rate applicable to Schering AG) | (294) | (284) | (448) |
Tax reduction relating to dividends | — | 30 | 27 |
| (294) | (254) | (421) |
Tax effect of non-deductible expenses and tax-free receipts | 5 | (6) | 189 |
Prior-period taxes | 21 | (13) | (69) |
Tax effect of recognizing income from associates net of tax | 4 | 0 | 18 |
Effects of lower tax rates abroad | 15 | 18 | 7 |
Income taxes | (249) | (255) | (276) |
Tax rate | 33.1% | 36.4% | 24.1% |
Current tax expenses | (231) | (207) | (360) |
Deferred tax expenses/income | (18) | (48) | 84 |
Income taxes | (249) | (255) | (276) |
The prior-period taxes resulted from the reversal of a tax provision after completion of a tax audit at a group company.
In the previous year, the dividend payment for 2002 reduced the tax expense by €30m.
The utilization of tax loss carryforwards reduced tax expenses in 2004 by €1m (2003: €1m; 2002: €2m). Deferred tax assets of €15m relating to tax loss carryforwards were recognized as of December 31, 2004 (December 31, 2003: €14m). As of December 31, 2004, unrecognized tax loss carryforwards totaled €20m (December 31, 2003: €19m). Of these amounts, €14m have no expiration date, while the remainder expires within ten years.
The tax effect of non-deductible expenses and tax-free receipts in fiscal 2002 was primarily driven by tax-free receipts from the disposal of Aventis CropScience.
The deferred tax assets and liabilities relate to the following balance sheet items:
| December 31, 2004 | December 31, 2003 |
|---|
| Assets | Liabilities | Assets | Liabilities |
|---|
| €m | €m | €m | €m |
|---|
Intangible assets | 33 | 5 | 66 | 2 |
Property, plant and equipment | (116) | 0 | (113) | 1 |
Inventories | 89 | 6 | 103 | 6 |
Provisions for pensions | 44 | (1) | 39 | 0 |
Other provisions | 69 | (2) | 42 | (1) |
Other | 37 | 8 | 36 | 5 |
| 156 | 16 | 173 | 13 |
Other includes deferred tax assets relating to tax loss carryforwards. It also includes deferred tax liabilities of €12m (2003: €10m) that relate to items credited directly to equity. These have been offset against deferred tax assets.
Deferred taxes on property, plant and equipment relate principally to lower tax bases resulting from special tax allowances for assets in certain regions of Germany.
Deferred tax liabilities were not recognized for withholding tax on retained earnings of foreign subsidiaries in the reporting period, because management considers such amounts to be permanently reinvested. Retained earnings of subsidiaries in countries where a withholding tax would be levied in the event of dividend payments totaled €756m (2003: €542m). If such earnings were distributed, withholding tax of €39m (2003: €34m) would be due based on tax rates in effect at the balance sheet date.
(14) Earnings per share
Basic earnings per share are calculated by dividing net profit by the weighted average number of shares outstanding.
| 2004 | 2003 | 2002 |
|---|
Net profit (€m) | 500 | 443 | 867 |
Weighted average number of shares outstanding | 191,209,851 | 194,413,614 | 197,296,507 |
Basic earnings per share (€) | 2.61 | 2.28 | 4.39 |
To calculate diluted earnings per share, the weighted average number of shares outstanding is adjusted for all potential dilutive shares. Certain of the Group’s stock option plans (LTI Plan 2000 and the first and second tranches of the LTI 2001 “Key Managers” Plan) represent a potential dilution of earnings per share. Exercise of the options granted under these plans depends on certain performance criteria relating to the Schering AG share price that are defined in the stock option plans [see Note (36)].
| 2004 | 2003 | 2002 |
|---|
Net profit (€m) | 500 | 443 | 867 |
Weighted average number of shares outstanding | 191,209,851 | 194,413,614 | 197,296,507 |
Adjustment for potential dilutive shares | 254,541 | 296,295 | 573,200 |
Weighted average number of shares
(including potential dilutive shares) | 191,464,392 | 194,709,909 | 197,869,707 |
Diluted earnings per share (€) | 2.61 | 2.28 | 4.38 |
The terms of the stock option plans entitle Schering AG to settle claims relating to the exercise of option rights in the form of cash payments instead of issuing shares.
(15) Personnel costs/employees
| 2004 | 2003 | 2002 |
|---|
Personnel costs (€m) | | | |
Wages and salaries | 1,243 | 1,245 | 1,278 |
Social security and support payments | 231 | 241 | 236 |
| 1,474 | 1,486 | 1,514 |
Pensions | 83 | 88 | 81 |
| 1,557 | 1,574 | 1,595 |
Number of employees by function (annual average) | | | |
Production | 8,804 | 9,093 | 9,023 |
Marketing and selling | 8,673 | 8,642 | 8,629 |
Research and development | 4,520 | 4,692 | 4,560 |
Administration | 4,134 | 4,134 | 4,033 |
| 26,131 | 26,561 | 26,245 |
Number of employees by Region (annual average) | | | |
Schering AG | 8,069 | 8,320 | 8,223 |
Europe Region* | 8,074 | 8,194 | 8,158 |
United States Region | 3,729 | 3,681 | 3,389 |
Japan Region | 1,515 | 1,572 | 1,621 |
Latin America/Canada Region | 2,469 | 2,478 | 2,517 |
Asia/Pacific Region* | 1,511 | 1,439 | 1,518 |
Other employees | 764 | 877 | 819 |
| 26,131 | 26,561 | 26,245 |
* Change in allocation of certain countries to the Regions indicated, Asia/Middle East Region renamed Asia/Pacific Region, previous year’s figures have been adjusted accordingly |
C. BALANCE SHEET DISCLOSURES
(16) Intangible assets
| Internally developed software | Patents, licenses, trademarks,
and similar assets | Goodwill | Negative goodwill | Total |
|---|
| €m | €m | €m | €m | €m |
|---|
Cost | | | | | |
January 1, 2003 | 51 | 534 | 671 | (23) | 1,233 |
Change in consolidated companies | — | 0 | — | — | 0 |
Additions | 23 | 24 | 2 | — | 49 |
Disposals | 0 | (36) | — | — | (36) |
Translation adjustments | (2) | (16) | (33) | — | (51) |
December 31, 2003 | 72 | 506 | 640 | (23) | 1,195 |
Change in consolidated companies | — | 0 | — | — | 0 |
Additions | 14 | 39 | — | — | 53 |
Disposals | 0 | (13) | (275) | 23 | (265) |
Translation adjustments | 0 | (7) | (9) | — | (16) |
December 31, 2004 | 86 | 525 | 356 | — | 967 |
Accumulated amortization,
impairments and reversals | | | | | |
January 1, 2003 | 7 | 158 | 231 | (9) | 387 |
Change in consolidated companies | — | 0 | — | — | 0 |
Additions | 11 | 69 | 47 | (4) | 123 |
Disposals | 0 | (26) | — | — | (26) |
Translation adjustments | 0 | (8) | (4) | — | (12) |
December 31, 2003 | 18 | 193 | 274 | (13) | 472 |
Change in consolidated companies | — | 0 | — | — | 0 | |
Additions | 16 | 75 | — | — | 91 | |
Disposals | 0 | (8) | (274) | 13 | (269) | |
Translation adjustments | (1) | (4) | — | — | (5) | |
December 31, 2004 | 33 | 256 | — | — | 289 | |
Carrying amount as of December 31, 2003 | 54 | 313 | 366 | (10) | 723 | |
Carrying amount as of December 31, 2004 | 53 | 269 | 356 | — | 678 | |
We discontinued goodwill amortization on January 1, 2004. The accumulated amortization of €274m has been eliminated with a corresponding reduction in cost.
The negative goodwill as of January 1, 2004 has been recognized in retained earnings.
(17) Property, plant and equipment
| Land and
buildings | Machinery and
technical equipment | Other factory and
office equipment | Construction in
progress and
advance payments | Total |
|---|
| €m | €m | €m | €m | €m |
|---|
Cost | | | | | |
January 1, 2003 | 1,321 | 1,281 | 780 | 91 | 3,473 |
Change in consolidated companies | (1) | 0 | 0 | — | (1) |
Additions | 14 | 72 | 76 | 69 | 231 |
Disposals | (11) | (38) | (71) | (1) | (121) |
Transfers | 12 | 51 | 16 | (79) | — |
Translation adjustments | (52) | (22) | (31) | (7) | (112) |
December 31, 2003 | 1,283 | 1,344 | 770 | 73 | 3,470 |
Change in consolidated companies | (1) | (1) | 0 | — | (2) |
Additions | 22 | 44 | 62 | 84 | 212 |
Disposals | (30) | (44) | (65) | (2) | (141) |
Transfers | 26 | 29 | 14 | (69) | — |
Translation adjustments | (17) | (7) | (11) | (4) | (39) |
December 31, 2004 | 1,283 | 1,365 | 770 | 82 | 3,500 |
Accumulated depreciation | | | | | |
January 1, 2003 | 698 | 990 | 555 | — | 2,243 |
Change in consolidated companies | 0 | 0 | 0 | — | 0 |
Additions | 42 | 60 | 77 | — | 179 |
Disposals | (8) | (34) | (64) | — | (106) |
Reversal of impairments | — | — | — | — | — |
Transfers | 0 | 0 | 0 | — | — |
Translation adjustments | (21) | (15) | (23) | — | (59) |
December 31, 2003 | 711 | 1,001 | 545 | — | 2,257 |
Change in consolidated companies | 0 | 0 | 0 | — | 0 |
Additions | 49 | 86 | 73 | — | 208 |
Disposals | (21) | (41) | (58) | — | (120) |
Reversal of impairments | (1) | — | — | — | (1) |
Transfers | 0 | 0 | 0 | — | — |
Translation adjustments | (7) | (5) | (8) | — | (20) |
December 31, 2004 | 731 | 1,041 | 552 | — | 2,324 |
Carrying amount as of December 31, 2003 | 572 | 343 | 225 | 73 | 1,213 |
Carrying amount as of December 31, 2004 | 552 | 324 | 218 | 82 | 1,176 |
Additions to Property, plant and equipment decreased by 8% to €212m in 2004. 43% of this expenditure related to Germany, 19% to other countries of the European Union, 26% to the United States, and 4% to Japan. 28% of capital expenditure related to research and development, and 49% to production, quality assurance and environmental protection. 23% was allocated to marketing and selling, and other functions.
Additions to depreciation include impairment charges of €23m (2003: €0m).
(18) Other financial assets
| Investments in associates | Other investments | Long-term loans | Total |
|---|
| €m | €m | €m | €m |
|---|
Cost | | | | |
January 1, 2003 | 78 | 86 | 39 | 203 |
Change in consolidated companies | — | — | — | — |
Additions | 10 | 10 | 26 | 46 |
Disposals | (48) | (29) | (12) | (89) |
Change in fair value | — | 3 | — | 3 |
Translation adjustments | 0 | (8) | (1) | (9) |
December 31, 2003 | 40 | 62 | 52 | 154 |
Change in consolidated companies | — | — | — | — |
Additions | 12 | 1 | 24 | 37 |
Disposals | (15) | 0 | (11) | (26) |
Change in fair value | — | 0 | — | 0 |
Translation adjustments | 0 | (2) | (1) | (3) |
December 31, 2004 | 37 | 61 | 64 | 162 |
Accumulated write-downs | | | | |
January 1, 2003 | 19 | 61 | 6 | 86 |
Change in consolidated companies | — | — | — | — |
Additions | 7 | 7 | 3 | 17 |
Disposals | (7) | (18) | (3) | (28) |
Reversals | — | — | (1) | (1) |
Translation adjustments | — | (6) | 0 | (6) |
December 31, 2003 | 19 | 44 | 5 | 68 |
Change in consolidated companies | — | — | — | — |
Additions | 1 | 0 | 6 | 7 |
Disposals | (2) | — | (1) | (3) |
Change in fair value | — | (10) | — | (10) |
Translation adjustments | 0 | (1) | 0 | (1) |
December 31, 2004 | 18 | 33 | 10 | 61 |
Carrying amount as of December 31, 2003 | 21 | 18 | 47 | 86 |
Carrying amount as of December 31, 2004 | 19 | 28 | 54 | 101 |
Disposals of Investments in associates in 2003 included €21m from the sale of our 49% interest in Oy Leiras Finland AB.
In the reporting year, fair value changes in marketable investments of €10m (2003: €3m; 2002: €(31)m) were recognized directly in Other comprehensive income net of deferred taxes. Other investments that were considered to be impaired resulted in impairment charges of €7m in 2003 (2002: €26m).
Long-term loans include €17m (December 31, 2003: €20m) relating to mortgage loans to employees.
(19) Marketable securities
Marketable securities are accounted for at fair value. Fair values as of December 31, 2004 included unrealized gains of €9m (December 31, 2003: €1m) that are recognized net of deferred taxes in Accumulated other comprehensive income.
(20) Inventories
| Dec. 31,
2004 | Dec. 31,
2003 |
|---|
| €m | €m |
|---|
Raw materials and supplies | 211 | 212 |
Work in process | 441 | 429 |
Finished goods and goods for resale | 337 | 352 |
Payments on account | 3 | 3 |
| 992 | 996 |
Write-downs of inventories in 2004 and 2003 were not material.
(21) Trade receivables
Trade receivables as of December 31, 2004 include €13m with a remaining term of more than one year (December 31, 2003: €21m). Allowances for doubtful accounts on trade receivables as of December 31, 2004 amounted to €29m (December 31, 2003: €25m).
(22) Paid-up capital
Issued capital amounts to €194,000,000 and is composed of 194,000,000 no-par value shares, with each share representing €1.00 of the issued capital.
During the reporting period, 4,000,000 treasury shares were purchased for a total of €167m; these are reported as treasury shares. In 2003, 2,5000,000 treasury shares were purchased and redeemed for a total of €90m.
In 2004, Schering AG and other group companies purchased 249,083 treasury shares for an average price of €41.75 per share for the issuance of employee shares. The shares were offered to qualified employees at an average price of €23.17 per share.
The Executive Board is authorized to purchase treasury shares until September 30, 2005 for purposes permitted under section 71(1) no. 8 of the German Stock Corporation Act. In total, up to €19,400,000 in issued capital may be acquired under this authorization.
Furthermore, the Executive Board is authorized until April 15, 2009, to increase issued capital with the approval of the Supervisory Board on one or on several occasions by issuing new shares for cash or non-cash consideration, provided that the overall increase in issued capital does not exceed a total amount of €97,000,000 and that the shareholders are granted preemptive rights. However, with the agreement of the Supervisory Board, the Executive Board is authorized to issue shares and disapply shareholders’ preemptive rights:
(a) if the capital increase against cash consideration does not exceed a total amount of 10% of the issued capital and the issue price of the new shares is not substantially below the quoted market price for the shares at the time the issue price is determined by the Executive Board; or
(b) if the capital increase is effected for the purpose of acquiring companies, equity interests, parts of companies, intellectual property rights, or other product rights against non-cash contributions; or
(c) to the extent necessary to allow holders of convertible bonds or bonds with warrants of Schering AG to subscribe for the new shares; or
(d) to the extent necessary to settle fractions.
The Executive Board is also authorized, with the agreement of the Supervisory Board, to issue convertible bonds and/or bonds with warrants on one or on several occasions in the period up to April 15, 2009. The total nominal value of such bond issues may not exceed €600,000,000. Conversion rights or options on Schering AG shares may be issued up to a total of €10,000,000 of issued capital. Accordingly, the issued capital of Schering AG may be increased by up to €10,000,000 through the issue of up to 10,000,000 shares (Contingent capital I). This contingent increase in issued capital serves solely to exercise conversion rights and options.
Furthermore, the issued capital of Schering AG may be increased by up to €5,000,000 (Contingent capital II). This contingent increase in issued capital will only be implemented to the extent that holders of options that have been issued until September 30, 2003, on the basis of the Annual General Meeting’s authorization of April 26, 2001, exercise their options and that claims are not settled by the transfer of treasury shares or cash payments.
(23) Retained earnings
Retained earnings comprise Other retained earnings and Accumulated other comprehensive income. The Executive Board will propose to the General Meeting a dividend of € 1.00 per share (totaling €194m less the portion relating to treasury shares not carrying dividend rights) for fiscal year 2004.
(24) Provisions for pensions and similar obligations
| Dec. 31, 2004 | Dec. 31, 2003 |
|---|
| €m | €m |
|---|
Provisions for retirement benefit obligations in Germany | 468 | 458 |
Provisions for retirement benefit obligations outside Germany | 60 | 72 |
Provisions for similar obligations | 47 | 46 |
| 575 | 576 |
Pension benefits in Germany for employees joining until December 31, 2003 are primarily determined by years of service and average remuneration in the final five years prior to retirement. For employees joining after December 31, 2003, a new employer-financed pension system has been introduced. Schering AG pays a monthly contribution into a fund established for this purpose which builds up pension capital by purchasing securities. The level of pension benefits payable depends upon the pension capital at the time of retirement. Since Schering AG guarantees that, at least, the total amount of contributions paid in will be available as pension capital at the time of retirement, this plan also has to be accounted for as a defined benefit plan.
Defined benefit plans of Schering AG are funded to a substantial extent by a pension trust (Schering Altersversorgung Treuhand Verein). Defined benefit plans of foreign subsidiaries, which are service-related, are generally funded. There are also defined contribution plans at several foreign subsidiaries.
We consider projected service costs, interest costs and the expected return on plan assets when calculating the net periodic pension costs for defined benefit plans. Changes in the projected benefit obligation (PBO) and the fair value of plan assets were as follows:
| German plans | Other plans |
|---|
| 2004 | 2003 | 2004 | 2003 |
|---|
| €m | €m | €m | €m |
|---|
Change in projected benefit obligation | | | | |
PBO at beginning of the year | 1,414 | 1,345 | 376 | 309 |
Service cost | 31 | 30 | 25 | 25 |
Interest cost | 76 | 76 | 14 | 17 |
Gains from retroactive plan adjustments | — | — | (15) | — |
Actuarial (gains) and losses | 103 | 22 | 37 | 74 |
Benefits paid | (64) | (60) | (23) | (14) |
Contributions by plan participants | — | — | 1 | 1 |
Transfer of obligations | 3 | 1 | (11) | — |
Translation adjustments | — | — | (15) | (36) |
PBO at end of year | 1,563 | 1,414 | 389 | 376 |
Change in plan assets | | | | |
Fair value of plan assets at beginning of the year | 838 | 730 | 193 | 182 |
Expected return on plan assets | 58 | 50 | 10 | 10 |
Difference actual / expected return plan assets | 30 | 78 | 1 | 4 |
Employer contribution | 18 | 18 | 34 | 26 |
Employer contribution (one time) | — | — | 31 | — |
Contributions by plan participants | — | — | 1 | 1 |
Benefits paid | (40) | (38) | (20) | (11) |
Translation adjustments | — | — | (9) | (19) |
Transfer of Assets | — | — | (11) | — |
Fair value of plan assets at end of year | 904 | 838 | 230 | 193 |
Funded status | 659 | 576 | 159 | 183 |
Unrecognized actuarial losses | (191) | (118) | (129) | (111) |
Carrying amount | 468 | 458 | 30 | 72 |
- thereof provisions | 468 | 458 | 60 | 72 |
- thereof prepaid pension costs | — | — | 30 | — |
An amount of €1,809m of the projected benefit obligation relates to pension plans that are fully or partly funded, and €143m relate to unfunded pension plans.
Net periodic pension costs of defined benefit plans and total pension costs were as follows:
| 2004 | 2003 | 2002 |
|---|
| €m | €m | €m |
|---|
Service cost | 56 | 55 | 58 |
Interest cost | 90 | 93 | 95 |
Expected return on plan assets | (68) | (60) | (52) |
Gains from retroactive plan adjustments | (15) | — | — |
Losses from plan reductions | 6 | — | — |
Amortization of unrecognized actuarial gains and losses | 7 | 10 | 3 |
Net periodic pension costs of defined benefit plans | 76 | 98 | 104 |
Costs of defined contribution plans and other pension costs | 67 | 25 | 21 |
Total pension costs | 143 | 123 | 125 |
In 2004 the pension benefits resulting from a defined benefit plan in Japan were reduced. The reduction of the entitlements already earned resulted in a gain of €15m. Following the reduction of future benefits, a proportionate share of unrecognized actuarial losses amounting to €6m was recognized as an expense in 2004. The employees in Japan were also entitled to benefits from a multi-employer defined benefit plan. As the necessary information to account for the plan as a defined benefit plan was not available to us at the preparation date of the financial statements, this plan has been accounted for as a defined contribution plan. All obligations from this multi employer defined benefit plan have been satisfied by way of a one-time payment of €40m.
The one-time expenses and gains resulting from the changes to the pension plans in Japan are included in Other operating expenses [see Note (9)]. The interest cost on pension obligations not transferred to external funds is reported under the Interest result [see Note (10)]. The other pension expenses are charged as personnel expenses to the costs of the operating functions [see Note (15)].
The measurement date for the fair value of plan assets and the projected benefit obligation is December 31. The parameters and assumptions described in Note (4) were applied. These parameters are also applied in the following year in determining interest cost, service cost and the expected return on plan assets. The basis for the interest cost added back to discounted pension obligations is the projected benefit obligation on January 1. The basis for the expected return on plan assets is the fair value on January 1; allocations during the year are included ratably. The basis for the amortization of actuarial gains and losses is the amount calculated as of January 1, to the extent to which such amounts exceed 10% of the obligation.
The portfolio structure of German plan assets at the balance sheet date and the target structure are as follows:
Asset class | Portfolio structure of German plan assets |
|---|
| Target structure | December 31, 2004 | December 31, 2003 |
|---|
Equities | 45% | 48% | 46% |
|---|
Hedge funds | 20% | 16% | 13% |
Bonds | 35% | 35% | 31% |
Others | 0% | 1% | 10% |
| 100% | 100% | 100% |
The differences between the actual and target allocations are due in part to market price developments, and in part to risk management efforts based on expected market developments. During 2004, investments in corporate and emerging market bonds were further reduced due to a fall in spreads and yields. In contrast, positions in government bonds were increased.
The use of derivatives is allowed, as currency risks are fully hedged and also the interest rate exposure in other currencies is transformed into the euro interest curve. The fund employs a risk management system to calculate historical worst-case scenarios of given portfolios.
The expected rate of return of 7% is based on historical and expected future averages for risk premiums and absolute returns of the asset classes analyzed. They are also cross-checked against market expectations of external sources. We consider the resulting return assumptions as realistic within the long-term investment horizon of the pension trust. Since its inception, the compounded annual average rate of return of the assets in our German pension trust was approximately 7.0 % (2004: 10.5%; 2003; 17.5%).
The expected contributions to German plan assets in 2005 amount to €21m.
The portfolio structure of the other plan assets (plans outside Germany) at the balance sheet date and the target structure are as follows:
Asset class | Portfolio structure of Other plan assets |
|---|
| Target structure | December 31, 2004 | December 31, 2003 |
|---|
Equities | 60% | 64% | 56% |
|---|
Bonds | 40% | 34% | 20% |
Others | 0% | 2% | 24% |
| 100% | 100% | 100% |
The expected average return on plan assets of 4.8% reflects in particular the very low returns currently expected for the plan assets in Japan. The actual return was 6.0% in 2004 and 7.5% in 2003.
The expected contributions to other plan assets in 2005 amount to €33m.
The projected benefit obligation, plan assets, funded status and unrecognized actuarial losses developed in the past five years as follows:
| 2004 | 2003 | 2002 | 2001 | 2000 |
|---|
| €m | €m | €m | €m | €m |
|---|
Projected benefit obligation | 1,952 | 1,790 | 1,654 | 1,618 | 1,440 |
Plan assets | 1,134 | 1,031 | 912 | 514 | 215 |
Funded status | 818 | 759 | 742 | 1,104 | 1,225 |
Unrecognized actuarial losses on December 31 | 320 | 229 | 233 | 121 | 1 |
The following table contains the actuarial gains and losses in the projected benefit obligation during the period and the difference between the actual and expected return on plan assets for the past five years:
| 2004 | 2003 | 2002 | 2001 | 2000 |
|---|
| €m | €m | €m | €m | €m |
|---|
Actuarial gains and (losses) | | | | | |
German plans | (103) | (22) | 17 | (88) | 26 |
Other plans | (37) | (74) | (2) | (17) | 16 |
Total | (140) | (96) | 15 | (105) | 42 |
Difference between actual and expected return on plan assets | | | | | |
German plans | 30 | 78 | (104) | 4 | — |
Other plans | 1 | 4 | (30) | (24) | (8) |
Total | 31 | 82 | (134) | (20) | (8) |
The actuarial losses in the projected benefit obligation are predominantly due to the declining interest rate levels. As a result, the discount rate has been reduced from 6.5% to 5.0% for German obligations and from 5.5% to 3.7% for other obligations during the period shown.
The following table shows the benefits expected to be paid in the next five years as well as the aggregate expected payments during the five years thereafter (not discounted):
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010-2014 |
|---|
| €m | €m | €m | €m | €m | €m |
|---|
German plans | 68 | 73 | 77 | 81 | 84 | 469 |
Other plans | 18 | 17 | 18 | 19 | 20 | 112 |
Total | 86 | 90 | 95 | 100 | 104 | 581 |
Of the above-mentioned payments, around two-thirds will be made from the plan assets.
(25) Other provisions
| January 1, 2004 | | December 31, 2004 |
|---|
| Current | Total | Additions | Use | Reversals | Change in consolidated companies | Translation adjustment | Total | Current |
|---|
Provisions for | €m | €m | €m | €m | €m | €m | €m | €m | €m |
|---|
Current tax | 249 | 249 | 129 | (86) | (22) | — | (1) | 269 | 269 |
Deferred tax | — | 13 | 9 | (5) | — | — | (1) | 16 | — |
Personnel costs | 225 | 328 | 251 | (223) | (6) | — | (7) | 343 | 226 |
Third-party claims | 40 | 317 | 10 | (11) | (39) | — | (3) | 274 | 16 |
Environmental matters | 11 | 77 | 16 | (2) | (2) | — | 0 | 89 | 14 |
Restructuring | 11 | 20 | 28 | (10) | (1) | — | 0 | 37 | 35 |
Other | 120 | 137 | 144 | (94) | (12) | — | (5) | 170 | 153 |
| 656 | 1,141 | 587 | (431) | (82) | — | (17) | 1,198 | 713 |
| January 1, 2003 | | December 31, 2003 |
|---|
| Current | Total | Additions | Use | Reversals | Change in
consolidated companies | Translation
adjustment | Total | Current |
|---|
Provisions for | €m | €m | €m | €m | €m | €m | €m | €m | €m |
|---|
Current tax | 239 | 239 | 98 | (67) | (16) | — | (5) | 249 | 249 |
Deferred tax | — | 17 | 47 | (48) | — | — | (3) | 13 | — |
Personnel costs | 237 | 336 | 235 | (215) | (9) | 0 | (19) | 328 | 225 |
Third-party claims | 9 | 318 | 9 | (2) | (1) | — | (7) | 317 | 40 |
Environmental matters | 11 | 79 | 5 | (5) | 0 | — | (2) | 77 | 11 |
Restructuring | 10 | 26 | 6 | (5) | (7) | — | 0 | 20 | 11 |
Other | 137 | 141 | 117 | (95) | (13) | — | (13) | 137 | 120 |
| 643 | 1,156 | 517 | (437) | (46) | 0 | (49) | 1,141 | 656 |
Provisions for personnel costs include accrued salaries (vacation and holiday, bonuses, and jubilee benefits), as well as early retirement benefits. Provisions for third-party claims include indemnities relating to the sale of investments and business activities as well as expected costs in the event of patent infringement litigation. Provisions for environmental expenses include clean up obligations in Germany, France, and the United States. Provisions for restructuring largely relate to severance obligations to employees.
(26) Liabilities
| Dec. 31, 2004 | Dec. 31, 2003 |
|---|
| Current | Total | Current | Total |
|---|
| €m | €m | €m | €m |
|---|
Taxes payable | 51 | 51 | 74 | 75 |
Social security costs payable | 35 | 35 | 34 | 34 |
Payables to employees | 34 | 37 | 28 | 38 |
Miscellaneous | 99 | 126 | 126 | 139 |
| 219 | 249 | 262 | 286 |
(27) Total amount of collateralized loans
The total amount of collateralized loans as of December 31, 2004 (all collateralized by mortgages) was €3m (December 31, 2003: €33m).
D. CASH FLOW STATEMENT DISCLOSURES
(28) Cash and cash equivalents
Cash and cash equivalents comprise bank deposits and cash on hand.
(29) Cash flows from operating activities
Cash flows from operating activities included interest received of €21m (2003: €22m; 2002: €28m) and interest paid of €8m (2003: €10m; 2002: €8m). Payments of income taxes amounted to €176m (2003: €259m; 2002: €274m).
In the previous year, the result from disposal of non-current assets included a gain of €22m on the sale of our remaining 49% interest in Oy Leiras Finland AB. In 2002, this item mainly included income from the disposal of Aventis CropScience.
In 2002, Other non-cash expenses and income included our share of the profit from Aventis CropScience of €45m.
(30) Cash flows used in/from investing activities
Purchase of non-current assets in 2002 included the acquisition cost of the manufacturing and marketing rights to Leukine® in its approved indications. The part of the acquisition cost relating to the project to develop Leukine® in the indication of Crohn’s disease has been recognized separately.
In 2003, the Proceeds from disposal of non-current assets included €43m from the sale of our remaining 49% interest in OY Leiras Finland AB. In 2002, this position included €1.5bn relating to the sale of our interest in Aventis CropScience.
The amount disclosed under purchase and sale of marketable securities comprises purchases of €152m (2003: €103m; 2002: €196m) and sales of securities of €80m (2003: €139m; 2002: €31m).
Payments for Acquisitions net of cash acquired in 2003 related to the acquisition of minority interests in two group companies.
In 2002, this item essentially related to the acquisition of the remaining 88.1% interest in Collateral Therapeutics.
E. SUPPLEMENTAL DISCLOSURES
(31) Derivative financial instruments
As we operate on a global basis, the Schering AG Group is exposed to various market risks. We make use of exchange-traded and over-the-counter derivative financial instruments to reduce currency and interest-rate risks resulting from anticipated transactions and from existing assets and liabilities. We use derivative financial instruments to manage the asset and maturity profile of our investment portfolio.
Market risks resulting from open derivative positions are estimated by a risk assessment system using a simulation of historical data. Various measures have been put in place to manage the risks. These include the definition of limits for individual classes of instruments, the organizational segregation of dealing, settlement and accounting as well as supervision, and regular reporting on open positions and results based on mark-to-market valuations. The following derivative positions were open at the balance sheet date:
| | Notional amount
December 31, | Fair value
December 31, |
|---|
| | 2004 | 2003 | 2004 | 2003 |
|---|
| | €m | €m | €m | €m |
|---|
Currency hedging of anticipated sales and expenses | | | | | |
Currency forwards | Purchase | 30 | 27 | 0 | 0 |
| Sale | 516 | 498 | 6 | 10 |
Options | Purchase | 15 | 8 | (1) | (1) |
| Sale | 35 | 16 | 2 | 1 |
| | | | | |
Currency hedging of assets and liabilities | | | | | |
Currency forwards | Purchase | 288 | 32 | (5) | 0 |
| Sale | 243 | 237 | 2 | 5 |
Asset and liability management | | | | | |
Options | | 167 | 83 | 44 | 14 |
Swaps | | 8 | 5 | 2 | 2 |
Interest-rate futures | | 23 | 76 | 0 | 0 |
| | 198 | 164 | 46 | 16 |
The underlying exposure in each currency is defined as the net amount of receivables and liabilities on the balance sheet date on the one hand and anticipated sales and expenses for the next 12 months on the other hand. Balance sheet items are generally hedged at 100%. The underlying exposure with respect to anticipated sales and expenses amounted to approximately €0.9bn as of December 31, 2004 (December 31, 2003: €0.9bn), of which 54% (December 31, 2003: 56%) was hedged at the balance sheet date. Yen and U.S. dollar amounts accounted for approximately 57% (December 31, 2003: 57%) of currency hedging.
The measurement of hedging instruments at fair value is based on quoted market prices or reference rates such as the ECB reference rates, or on the application of established valuation models such as the Black-Scholes option pricing model. Changes in fair values are recognized in Other receivables and other assets and Other provisions.
In order to properly match gains and losses on hedging instruments, hedge gains and losses attributable to anticipated sales and expenses are deferred until the underlying hedged transaction is realized. Gains and losses on hedging instruments are recognized net of tax as Other comprehensive income. They are reversed to income when the underlying hedged transactions are realized. These gains or losses are then recognized in Other operating income and expenses.
As of December 31, 2004, we recognized gains of €22m (net of tax: €13m) resulting from 2004 hedging contracts in Accumulated other comprehensive income, since they are attributable to sales and expenses in 2005 (December 31, 2003: €24m; net of tax €15m).
Accordingly, in 2004 we recognized gains of €24m (net of tax: €15m) resulting from 2003 hedging contracts in Other operating income, since these gains are attributable to sales and expenses realized in 2004 (December 31, 2003: €39m; net of tax €24m).
Changes in fair values resulting from currency hedging of existing assets and liabilities are recognized in Other operating income and expenses. These gains and losses generally correspond to changes in the hedged balance sheet items.
Changes in fair values relating to Schering AG call options acquired for the hedging of stock option plans are included in personnel expenses.
Changes in fair values of derivatives relating to asset and liability management are included in the Financial result.
At the balance sheet date, our net financial position based on cash and cash equivalents, marketable securities and borrowings was €780m (December 31, 2003: €632m). The average maturity of fixed-rate interest bearing securities and fixed-rate deposits including financial derivatives was approximately 0.7 years (December 31, 2003: approximately 1.4 years).
The credit risks arising from derivative financial instruments are limited to the positive fair values of these derivatives. In order to minimize those credit risks, investments and transactions in derivative instruments are entered into only with prime-rated debtors and banks within fixed risk limits.
(32) Contingent liabilities and other financial commitments
| Dec. 31, 2004 | Dec. 31, 2003 |
|---|
| €m | €m |
|---|
Contingent liabilities | | |
Financial guarantees | 28 | 27 |
| 28 | 27 |
Other financial commitments | | |
Liabilities under operating leases | | |
due within 1 year | 50 | 49 |
due in 1 to 5 years | 101 | 101 |
due after 5 years | 31 | 43 |
Authorized capital expenditure | 240 | 285 |
| 422 | 478 |
As of December 31, 2004 we had issued financial guarantees of €28m (December 31, 2003: €27m) relating to transactions arising from the normal course of business.
The Schering AG Group has entered into long-term agreements with various third parties, under which the Group makes payments in connection with various research and development projects based upon the achievement of certain milestones or other specific conditions. In return, the Group obtains product rights or licenses to market the developed products, such as Campath®/MabCampath®, Zevalin® and Leukine®. The estimated payments to these third parties, assuming the agreed milestones and other conditions are met, will be as follows:
| €m |
|---|
2005 | 33 |
2006 | 20 |
2007 | 62 |
Thereafter | 2 |
| 117 |
(33) Segment reporting
| Segment
net sales | Internal
net sales | External
net sales | Change from
last year |
|---|
| €m | €m | €m | |
|---|
2004 | | | | |
Europe Region(1) | 3,433 | 961 | 2,472 | 4% |
United States Region | 1,247 | 5 | 1,242 | 3% |
Japan Region | 468 | — | 468 | (10%) |
Latin America/Canada Region | 471 | 60 | 411 | 7% |
Asia/Pacific Region(1) | 244 | 10 | 234 | 9% |
Other Activities | 111 | 31 | 80 | (42%) |
Segment total | 5,974 | 1,067 | 4,907 | 2% |
Other | — | — | — | — |
Schering AG Group | 5,974 | 1,067 | 4,907 | 2% |
2003 | | | | |
Europe Region(1) | 3,323 | 951 | 2,372 | 1% |
United States Region | 1,209 | 6 | 1,203 | (6%) |
Japan Region | 517 | 0 | 517 | (11%) |
Latin America/Canada Region | 454 | 71 | 383 | (11%) |
Asia/Pacific Region(1) | 226 | 12 | 214 | (8%) |
Other Activities | 183 | 44 | 139 | (8%) |
Segment total | 5,912 | 1,084 | 4,828 | (4%) |
Other | — | — | — | — |
Schering AG Group | 5,912 | 1,084 | 4,828 | (4%) |
2002 | | | | |
Europe Region(1) | 3,314 | 965 | 2,349 | 8% |
United States Region | 1,288 | 6 | 1,282 | 15% |
Japan Region | 580 | 1 | 579 | (13%) |
Latin America/Canada Region | 480 | 50 | 430 | (16%) |
Asia/Pacific Region(1) | 243 | 11 | 232 | 5% |
Other Activities | 206 | 55 | 151 | (4%) |
Segment total | 6,111 | 1,088 | 5,023 | 4% |
Other | — | — | — | — |
Schering AG Group | 6,111 | 1,088 | 5,023 | 4% |
(1) As of January 1, 2004 we have reassigned certain countries between the Europe Region and the Asia/Middle East Region and have renamed the Asia/Middle East Region the Asia/Pacific Region. Among others, the countries of the Middle East are now part of the Europe Region, while Australia and New Zealand are now part of the Asia/Pacific Region. The previous year’s figures in our segment reporting have been adjusted accordingly. |
Our primary segment reporting format is geographic, based on the location of our customers. This reflects the management structure of our sales organization, our system of internal financial reporting, and the predominant source of risks and returns in our business. Segment reporting is therefore divided into five geographic segments. Other Activities (mainly our pharmaceutical chemicals business) are managed on a worldwide basis and are therefore also presented as a separate segment.
Segment net sales include both sales to third parties (external net sales) and sales to group companies belonging to a different Region (internal net sales). Inter-segment sales are determined on an arm's length basis.
Information on external net sales is generally based on the location of our customers. However, based on our management reporting format, net sales figures of the Europe Region also include the net sales of the subsidiaries Schering Oy, Jenapharm, CIS bio international, and Justesa Imagen Group that are generated outside Europe. Net sales reported for the United States Region also include net sales of the Medrad Group generated outside the United States.
| Segment
performance | Change from
last year | Central production
overhead/ variances | Research
and
development
expenses | Segment
result | Change from
last year |
|---|
| €m | | €m | €m | €m | |
|---|
2004 | | | | | | |
Europe Region(1) | 1,116 | 10% | (77) | (459) | 580 | 12% |
United States Region | 446 | 13% | (18) | (274) | 154 | 23% |
Japan Region | 133 | (34%) | (12) | (79) | 42 | (52%) |
Latin America/Canada Region | 155 | 13% | (11) | (62) | 82 | 64% |
Asia/Pacific Region | 90 | 11% | (12) | (38) | 40 | 48% |
Other Activities | 39 | (32%) | (23) | (7) | 9 | — |
Segment total | 1,979 | 5% | (153) | (919) | 907 | 13% |
Other | (1,218) | 1% | 153 | 919 | (146) | 25% |
Schering AG Group | 761 | 11% | — | — | 761 | 11% |
2003 | | | | | | |
Europe Region(1) | 1,018 | (1%) | (73) | (426) | 519 | (4%) |
United States Region | 394 | 8% | (15) | (254) | 125 | 20% |
Japan Region | 202 | (12%) | (13) | (101) | 88 | (17%) |
Latin America/Canada Region | 137 | (4%) | (8) | (79) | 50 | 16% |
Asia/Pacific Region | 81 | (12%) | (15) | (39) | 27 | (31%) |
Other Activities | 57 | (24%) | (38) | (25) | (6) | (138%) |
Segment total | 1,889 | (2%) | (162) | (924) | 803 | (5%) |
Other | (1,203) | 1% | 162 | 924 | (117) | 11% |
Schering AG Group | 686 | (7%) | — | — | 686 | (7%) |
2002 | | | | | | |
Europe Region(1) | 1,030 | 13% | (62) | (430) | 538 | 19% |
United States Region | 366 | 16% | (11) | (251) | 104 | 44% |
Japan Region | 229 | (6%) | (14) | (109) | 106 | (1%) |
Latin America/Canada Region | 143 | (16%) | (7) | (93) | 43 | (55%) |
Asia/Pacific Region | 92 | 14% | (13) | (40) | 39 | (19%) |
Other Activities | 75 | (6%) | (35) | (24) | 16 | (52%) |
Segment total | 1,935 | 7% | (142) | (947) | 846 | 5% |
Other | (1,194) | 5% | 142 | 947 | (105) | (22%) |
Schering AG Group | 741 | 11% | — | — | 741 | 11% |
(1) Incl. Africa, Australia and New Zealand |
Segment performance and segment result are presented on a consolidated basis to ensure comparability with external net sales. Segment performance is an internal financial reporting measure utilized by our management. Under this approach, transfers from our centralized production facilities in Europe are charged to the segments at standard production cost. Research and development expenses are not included in segment performance, as these functions are managed on a worldwide basis.
The Segment result comprises Segment performance less an allocation of research and development expenses and central production overhead and production variances. Research and development expenses specifically attributable to individual segments are allocated directly, while all other expenses incurred by our corporate research and development organizations (such as general research, global development activities, and infrastructure) are allocated to the segments on the basis of sales. Central production overhead and production variances are allocated on the basis of the production supplied from our central production facilities to the individual segments.
Total segment results are reconciled to the consolidated Operating profit as follows:
| 2004 | 2003 | 2002 |
|---|
| €m | €m | €m |
|---|
Total segment results | 907 | 803 | 846 |
Cost of corporate functions | (171) | (198) | (198) |
Other income/expenses | 25 | 81 | 93 |
Total other | (146) | (117) | (105) |
Operating profit | 761 | 686 | 741 |
The Cost of corporate functions comprises costs of engineering and administration as well as marketing and selling of Schering AG. Income and expenses that were not incurred by the segments and/or arose in the course of unusual transactions are summarized in Other income/expenses. In the reporting period, expenses of €19m were allocated to segment result which were included in the cost of corporate functions in previous years. Adjusting the figures for the previous years would have no material impact on the segment performance of 2003 and 2002. After adjustment, the increase in segment result was 16% compared to the previous year.
Depreciation by segment includes amortization of intangible assets and depreciation of property, plant and equipment. Other significant non-cash expenses principally contain pension expenses for unfunded pension obligations reported within Operating profit. Segment assets include all assets with the exception of assets relating to corporate functions, marketable securities and other financial assets, other receivables and other assets, and cash and cash equivalents. Segment liabilities include all liabilities with the exception of liabilities allocated to corporate functions, financial liabilities, and tax liabilities, which are included under Other. Financial liabilities mainly consist of €468m (December 31, 2003: €458m) pension obligations from German retirement benefit plans. The corresponding €29m (2003: €35m) in interest cos ts is included in the Financial result.
| Depreciation | Other
significant
non-cash
expenses | Segment
assets | Segment
liabilities | Investments in
intangibles
and property,
plant and
equipment | Segment
assets by
geographical
location | Investments
by
geographical
location |
|---|
| €m | €m | €m | €m | €m | €m | €m |
|---|
2004 | | | | | | | |
Europe Region | 98 | 6 | 2,184 | 822 | 103 | 2,557 | 141 |
United States Region | 85 | 0 | 811 | 220 | 80 | 601 | 63 |
Japan Region | 28 | 0 | 326 | 50 | 14 | 279 | 8 |
Latin America/Canada Region | 17 | 0 | 190 | 27 | 14 | 155 | 10 |
Asia/Pacific Region | 11 | 1 | 129 | 12 | 10 | 93 | 5 |
Other Activities | 9 | — | 75 | 5 | 8 | 30 | 2 |
Segment total | 248 | 7 | 3,715 | 1,136 | 229 | 3,715 | 229 |
Other | 51 | 1 | 1,875 | 1,428 | 36 | 1,875 | 36 |
Schering AG Group | 299 | 8 | 5,590 | 2,564 | 265 | 5,590 | 265 |
2003 | | | | | | | |
Europe Region | 105 | 7 | 2,098 | 812 | 105 | 2,482 | 158 |
United States Region | 101 | 1 | 819 | 228 | 53 | 623 | 41 |
Japan Region | 19 | 6 | 386 | 62 | 15 | 334 | 7 |
Latin America/Canada Region | 14 | — | 175 | 27 | 21 | 145 | 16 |
Asia/Pacific Region | 10 | 1 | 126 | 7 | 15 | 92 | 7 |
Other Activities | 13 | — | 111 | 5 | 22 | 39 | 2 |
Segment total | 262 | 15 | 3,715 | 1,141 | 231 | 3,715 | 231 |
Other | 40 | 2 | 1,674 | 1,330 | 49 | 1,674 | 49 |
Schering AG Group | 302 | 17 | 5,389 | 2,471 | 280 | 5,389 | 280 |
2002 | | | | | | | |
Europe Region | 101 | 10 | 2,019 | 801 | 193 | 2,413 | 386 |
United States Region | 108 | 5 | 927 | 263 | 287 | 719 | 162 |
Japan Region | 21 | — | 441 | 53 | 31 | 383 | 9 |
Latin America/Canada Region | 16 | — | 168 | 31 | 42 | 135 | 29 |
Asia/Pacific Region | 5 | — | 131 | 8 | 16 | 99 | 5 |
Other Activities | 10 | — | 134 | 6 | 28 | 71 | 6 |
Segment total | 261 | 15 | 3,820 | 1,162 | 597 | 3,820 | 597 |
Other | 31 | 4 | 1,572 | 1,281 | 49 | 1,572 | 49 |
Schering AG Group | 292 | 19 | 5,392 | 2,443 | 646 | 5,392 | 646 |
|
Our secondary segment reporting format is based on the Business areas:
| External
net sales | Change from
last year | Segment
assets | Investments in
intangibles
and property,
plant and
equipment |
|---|
| €m | | €m | €m |
|---|
2004 | | | | |
Gynecology&Andrology | 1,768 | 9% | 1,268 | 68 |
Specialized Therapeutics | 1,542 | (1%) | 1,184 | 85 |
Diagnostics&Radiopharmaceuticals | 1,308 | 0% | 1,026 | 59 |
Dermatology | 207 | 4% | 167 | 9 |
Other Sources | 82 | (40%) | 70 | 8 |
Segment total | 4,907 | 2% | 3,715 | 229 |
Other | — | — | 1,875 | 36 |
Schering AG Group | 4,907 | 2% | 5,590 | 265 |
2003 | | | | |
Gynecology&Andrology | 1,622 | 1% | 1,163 | 76 |
Specialized Therapeutics | 1,560 | (5%) | 1,202 | 59 |
Diagnostics&Radiopharmaceuticals | 1,312 | (7%) | 1,056 | 63 |
Dermatology | 200 | (7%) | 180 | 14 |
Other Sources | 134 | (10%) | 114 | 19 |
Segment total | 4,828 | (4%) | 3,715 | 231 |
Other | — | — | 1,674 | 49 |
Schering AG Group | 4,828 | (4%) | 5,389 | 280 |
2002 | | | | |
Gynecology&Andrology | 1,613 | 7% | 1,131 | 102 |
Specialized Therapeutics | 1,637 | 10% | 1,262 | 373 |
Diagnostics&Radiopharmaceuticals | 1,406 | (3%) | 1,109 | 83 |
Dermatology | 217 | (5%) | 191 | 18 |
Other Sources | 150 | (7%) | 127 | 21 |
Segment total | 5,023 | 4% | 3,820 | 597 |
Other | — | — | 1,572 | 49 |
Schering AG Group | 5,023 | 4% | 5,392 | 646 |
(34) Information on principal companies included in the consolidated financial statements
The table below contains information on principal companies included in the consolidated financial statements as of and for the year ended December 31, 2004 [the complete list of the Group's ownership interests is filed with the Commercial Register of the Amtsgericht Charlottenburg (Charlottenburg Local Court), Berlin]:
Name and location of company | % of Equity | Equity | Result | Sales | Employees |
|---|
| | €m(1) | €m(1) | €m(1) | |
|---|
Germany | | | | | |
Schering AG, Berlin(2) | | 1,607 | 221 | 2,402 | 7,856 |
Schering Deutschland Holding AG, Hamburg(3) | 100.0 | 279 | 3 | 397 | 622 |
Jenapharm GmbH&Co. KG, Jena(3) | 100.0 | 95 | 48 | 171 | 995 |
Europe (excluding Germany) | | | | | |
N.V. Schering S.A., Diegem/Belgium | 100.0 | 26 | 2 | 74 | 149 |
Schering Oy, Turku/Finland(3) | 100.0 | 246 | 67 | 232 | 791 |
Schering S.A., Lys-Lez-Lannoy/France(3) | 99.9 | 206 | 13 | 387 | 1,521 |
Schering Holdings Ltd., Burgess Hill/UK(3) | 100.0 | 28 | 4 | 165 | 321 |
Schering S.p.A., Milan/Italy(3) | 100.0 | 109 | 17 | 350 | 860 |
Schering Nederland B.V., Weesp/Netherlands | 100.0 | 40 | 3 | 65 | 90 |
Schering Austria Ges.m.b.H., Vienna/Austria | 100.0 | 304 | 7 | 56 | 100 |
Schering Lusitana Lda., Mem Martins/Portugal | 100.0 | 18 | 2 | 59 | 125 |
Schering (Schweiz) AG, Baar/Switzerland | 100.0 | 13 | 2 | 65 | 77 |
Schering España S.A., Madrid/Spain(3) | 99.9 | 107 | 15 | 238 | 695 |
Schering Alman Ilac ve Ecza Ticaret Ltd., Sirketi,
Istanbul/Turkey | 100.0 | 11 | -1 | 62 | 166 |
North America | | | | | |
Schering Berlin Inc., Wilmington, Del./USA(3) | 100.0 | 712 | 17 | 1,242 | 3,811 |
Berlex Canada, Inc., Pointe-Claire/Canada | 100.0 | 15 | 3 | 64 | 216 |
Latin America | | | | | |
Schering Argentina S.A.I.C., Buenos Aires/Argentina | 100.0 | 14 | 2 | 45 | 207 |
Schering do Brasil Ltda., São Paulo/Brazil | 100.0 | 45 | 3 | 125 | 770 |
Schering Colombiana S.A., Bogotá/Colombia | 100.0 | 31 | 4 | 61 | 289 |
Schering Mexicana S.A., Mexico City/Mexico | 100.0 | 43 | 4 | 88 | 274 |
Asia/Australia | | | | | |
P.T. Schering Indonesia, Jakarta/Indonesia | 85.0 | 7 | 0 | 15 | 333 |
Nihon Schering K.K., Osaka/Japan | 100.0 | 117 | (17) | 455 | 1,465 |
Schering Pty. Ltd., Sydney/Australia | 100.0 | 13 | 5 | 83 | 116 |
Schering (Korea) Ltd., Seoul/Korea | 100.0 | 25 | 1 | 58 | 249 |
Schering (Bangkok) Ltd., Bangkok/Thailand(3) | 100.0 | 6 | 1 | 18 | 122 |
Africa | | | | | |
Schering (Pty.) Ltd., Midrand/South Africa | 100.0 | 14 | 4 | 32 | 97 |
(1) In the case of companies outside the euro zone, equity and annual results were translated from local currency amounts into € at the exchange rate in effect on December 31, 2004. Sales were translated into € at the annual average rate of exchange.
(2) Most of Schering AG’s sales originate from sales to subsidiaries; these sales are not included in the consolidated financial statements.
(3) Subgroup figures. |
(35) Total remuneration of the Supervisory Board and the Executive Board; loans granted
The total remuneration of the members of the Supervisory Board is broken down as follows:
| Fixed compensation | Committee
functions | Variable compensation | Long term compensation* | Total |
|---|
| € thousand | € thousand | € thousand | € thousand | € thousand |
|---|
Dr. Giuseppe Vita (Chairman) | 100 | 95 | 101 | 72 | 368 |
Norbert Deutschmann (Deputy chairman) | 50 | 95 | 50 | 36 | 231 |
Dr. Karl-Hermann Baumann | 50 | 75 | 50 | 36 | 211 |
Hans-Georg Bleeck (from April 16, 2004) | 35 | 0 | 36 | 26 | 97 |
Prof. Dr. Piet Borst | 50 | 20 | 50 | 36 | 156 |
Dr. Mathias Döpfner | 50 | 0 | 50 | 36 | 136 |
Prof. John A. Dormandy | 50 | 20 | 50 | 36 | 156 |
Joachim Elsholz (until April 16, 2004) | 15 | 0 | 15 | 11 | 41 |
Dr. Reiner Hagemann | 50 | 50 | 50 | 36 | 186 |
Johannes Heitbaum | 50 | 0 | 50 | 36 | 136 |
Dr. Martin Kohlhaussen | 50 | 0 | 50 | 36 | 136 |
Hermann-Josef Lamberti | 50 | 0 | 50 | 36 | 136 |
Dr. Hans-Peter Niendorf | 50 | 20 | 50 | 36 | 156 |
Detlef Pfotenhauer (from April 16, 2004) | 35 | 0 | 36 | 26 | 97 |
Hans-Jürgen Scheel (until April 16, 2004) | 15 | 6 | 15 | 11 | 47 |
Günter Schmitt (until April 16, 2004) | 15 | 0 | 15 | 11 | 41 |
Dr. Ulrich Sommer | 50 | 20 | 50 | 36 | 156 |
Sabine Süpke (from April 16, 2004) | 35 | 21 | 36 | 26 | 118 |
Heinz-Georg Webers | 50 | 48 | 50 | 36 | 184 |
| 850 | 470 | 854 | 615 | 2,789 |
* linked to the share price performance over a period of three years |
A member of the Supervisory Board has received an annual fee for consultancy services [see section "Related Party Transactions"].
The total remuneration of the members of the Executive Board is broken down as follows:
| Fixed compensation | Variable compensation | Stock options granted | Other* | Total |
|---|
| € thousand | € thousand | € thousand | € thousand | € thousand |
|---|
Dr. Hubertus Erlen (Chairman) | 720 | 1,668 | 148 | 23 | 2,559 |
Dr. Karin Dorrepaal (from September 1, 2004) | 180 | 415 | 148 | 7 | 750 |
Dr. Ulrich Köstlin | 540 | 1,246 | 148 | 23 | 1,957 |
Lutz Lingnau | 540 | 1,246 | 148 | 245 | 2,179 |
Marc Rubin, MD | 540 | 1,246 | 148 | 369 | 2,303 |
Dr. Jörg Spiekerkötter | 540 | 1,246 | 148 | 24 | 1,958 |
Prof. Dr. Günter Stock | 540 | 1,246 | 148 | 30 | 1,964 |
| 3,600 | 8,313 | 1,036 | 721 | 13,670 |
* Non-cash benefits in the form of company cars, and subsidies for insurance and relocation expenses. Members of the Executive Board based in the U.S. receive benefits for dual housekeeping and a compensation for increased cost of living. |
A provision of €23m has been recognized for the pensions of former members of the Executive Board and their dependents; the benefits paid for the year ended December 31, 2004 amounted to €2m.
A loan granted to a member of the Executive Board is reported under “Related Party Transactions”.
A directors’ and officers’ liability insurance policy (D&O) has been taken out. The deductible is €25 thousand for members of the Supervisory Board and €50 thousand for members of the Executive Board.
The members of the Supervisory Board and the Executive Board are listed under “Item 6 – Directors, senior Management and Employees".
(36) Stock option plans
In 2000, 2001, and 2004, Schering AG introduced stock option plans (“Long Term Incentive Plans” or “LTI Plans”) granting stock options to members of the Executive Board, officers and other eligible employees. Participants in the LTI Plan 2000 who invested in Schering AG shares received options entitling them to subscribe for additional Schering AG shares free of charge. The number of options granted depended on the number of shares purchased: for every 18 shares, participants received one option entitling them to receive up to a maximum of 180 shares. The options can be exercised during the exercise period provided that the participants still hold the original shares at the beginning of this period. The number of shares that can be subscribed depends on the performance of Schering AG shares in absolute terms (performance) and compared with a benchmark index (outperformance). The performance exercise hurdle for members of the Executive Board is 30%.
The first tranche of the LTI Plan 2001 (LTI Plan 2001/I) was introduced in 2001, the second tranche (LTI Plan 2001/II) was introduced in 2002 and the third tranche (LTI Plan 2001/III) was introduced in 2003. In 2004, the LTI Plan 2004 was introduced. All three tranches of the LTI Plan 2001 as well as the LTI Plan 2004 distinguish between two groups of beneficiaries: “Top Executives” and “Key Managers”. “Top Executives” participating in the LTI Plans 2001/I, 2001/II, 2001/III and 2004 invested in Schering AG shares and received stock appreciation rights. Upon exercise of these rights, beneficiaries receive a cash payout in the amount of the difference between the defined strike price and the price of the Schering AG share on the exercise date. The strike price for “Top Executives” was fixe d at the share price at the date of grant of the options (LTI Plan 2001/I: €54.66; LTI Plan 2001/II: €66.48; LTI Plan 2001/III: €40.18; LTI Plan 2004: €43.76). For these beneficiaries, exercise of the options is tied either to a 30% increase in the price of Schering AG shares or to the performance of the shares against a benchmark index (outperformance).
“Key Managers” participating in the LTI Plans 2001/I and 2001/II were granted options entitling them to subscribe for shares when the options are exercised. “Key Managers” participating in the LTI Plans 2001/III and 2004 received stock appreciation rights. The strike price of the “Key Managers” options was fixed at 110% of the share price at the date of grant (LTI Plan 2001/I: €60.13; LTI Plan 2001/II: €73.13; LTI Plan 2001/III: €44.20; LTI Plan 2004: €48.14). This group was not required to invest in Schering AG shares in order to participate, and exercise of the options is not tied to specific exercise hurdles.
The fair value of one option of the LTI Plan 2000 at the grant date was calculated at €6,374 (€32m for all options) based on a Monte-Carlo simulation. The fair values of the LTI Plans 2001 and 2004 at the grant date have been calculated based on the Black-Scholes option pricing model using the following assumptions:
LTI Plan 2001/I | Top Executives | Key Managers |
Expected life | 5 years | 5 years |
Dividend yield | 1.2% | 1.2% |
Risk-free interest rate | 4.8% | 4.8% |
Volatility | 25% | 25% |
Fair value of one option | €15.37 | €13.34 |
Fair value of all options | €6m | €11m |
LTI Plan 2001/II | Top Executives | Key Managers |
Expected life | 5 years | 5 years |
Dividend yield | 1.2% | 1.2% |
Risk-free interest rate | 4.75% | 4.75% |
Volatility | 27.2% | 27.2% |
Fair value of one option | €19.15 | €16.73 |
Fair value of all options | €8m | €17m |
LTI Plan 2001/III | Top Executives | Key Managers |
Expected life | 5 years | 5 years |
Dividend yield | 2.3% | 2.3% |
Risk-free interest rate | 3.21% | 3.21% |
Volatility | 37.7% | 37.7% |
Fair value of one option | €12.25 | €11.10 |
Fair value of all options | €5m | €13m |
LTI Plan 2004 | Top Executives | Key Managers |
Expected life | 5 years | 5 years |
Dividend yield | 2.13% | 2.13% |
Risk-free interest rate | 3.4% | 3.4% |
Volatility | 27.82% | 27.82% |
Fair value of one option | €10.55 | €8.80 |
Fair value of all options | €4m | €8m |
The fair value of the stock option plans is determined at each balance sheet date on the basis of the performance of Schering AG shares and the relevant benchmark index used, or by using valuation models. The fair value of the options of the LTI Plan 2000 is determined based on the number of qualifying shares at the end of the period. The options of the LTI Plans 2001/I, 2001/II, 2001/III and 2004 are valued using the Black-Scholes option pricing model.
The volatility applied in the option pricing models conforms to market volatilities of comparable call options. The pricing models do not consider exercise hurdles.
The costs of the LTI plans 2000, 2001/I „Top Executives“ and 2001/II „Top Executives“ are accrued over the three-year vesting period based on the actual fair values of the options. The costs of the LTI Plans 2001/III and 2004 have been hedged by the purchase of Schering AG call options. Due to the hedging, changes in fair value are recognized as gain or loss, while the costs calculated at the date of grant are accrued over the three-year vesting period.
By contrast, no compensation expense is recognized for the “Key Managers” component of the LTI Plans 2001/I and 2001/II due to the conditions mentioned above, as these were designed as fixed stock option plans.
Provisions for LTI plans amount to €43m as of December 31, 2004. The total intrinsic value as of December 31, 2004 for LTI-Plans for which the participants’ right to cash had vested by the end of the period is €16m.
| | LTI Plan 2000 |
|---|
Number of options outstanding as of January 1, 2004 | | 2,840 |
Granted | | — |
Forfeited in 2004 | | — |
Exercised in 2004 | | 1,045 |
Number of options outstanding as of December 31, 2004 | | 1,795 |
Number of exercisable options | | 1,795 |
Average share price upon exercise in 2004 (€ ) | | 47,71 |
Maximum number of award shares | | 280,020 |
Exercise price per share (€) | | 0 |
Compensation costs in 2004 (€m) | | 3 |
Compensation costs in 2003 (€m) | | (2) |
Benchmark index | | STOXX Healthcare |
Date of grant | | Jan. 1, 2000 |
Exercise period | | Jan. 1, 2003
until Dec. 31, 2006 |
| LTI Plan 2001/I |
|---|
| Top Executives | Key Managers |
|---|
Number of options outstanding as of January 1, 2004 | 406,500 | 764,400 |
Granted | — | — |
Forfeited in 2004 | 74,500 | 29,600 |
Exercised in 2004 | — | — |
Number of options outstanding as of December 31, 2004 | 332,000 | 734,800 |
Number of exercisable options | 332,000 | 734,800 |
Maximum number of award shares | — | 734,800 |
Exercise price per share (€) | 54.66 | 60.13 |
Compensation costs in 2004 (€m) | 1 | — |
Compensation costs in 2003 (€m) | 0 | — |
Benchmark index | MSCI World Pharma&Biotech | — |
Date of grant | May 2, 2001 | May 2, 2001 |
Exercise period | May 2, 2004 until
May 1, 2008 | May 2, 2004 until
May 1, 2008 |
| LTI Plan 2001/II |
|---|
| Top Executives | Key Managers |
|---|
Number of options outstanding as of January 1, 2004 | 398,000 | 1,000,800 |
Granted | — | — |
Forfeited in 2004 | 3,000 | 39,300 |
Exercised in 2004 | — | — |
Number of options outstanding as of December 31, 2004 | 395,000 | 961,500 |
Number of exercisable options | 0 | 0 |
Maximum number of award shares | — | 961,500 |
Exercise price per share (€) | 66.48 | 73.13 |
Compensation in costs 2004 (€m) | 1 | — |
Compensation in costs 2003 (€m) | 0 | — |
Benchmark index | MSCI World Pharma&Biotech | — |
Date of grant | May 2, 2002 | May 2, 2002 |
Exercise period | May 2, 2005 until
May 1, 2009 | May 2, 2005 until
May 1, 2009 |
| LTI Plan 2001/III |
|---|
| Top Executives | Key Managers |
|---|
Number of options outstanding as of January 1, 2004 | 417,700 | 1,160,400 |
Granted | — | — |
Forfeited in 2004 | 4,000 | 39,400 |
Exercised in 2004 | — | — |
Number of options outstanding as of December 31, 2004 | 413,700 | 1,121,000 |
Number of exercisable options | 0 | 0 |
Maximum number of award shares | — | — |
Exercise price per share (€) | 40.18 | 44.20 |
Compensation costs in 2004 (€m) | 2 | 5 |
Compensation costs in 2003 (€m) | 1 | 3 |
Benchmark index | MSCI World Pharma&Biotech | — |
Date of grant | May 2, 2003 | May 2, 2003 |
Exercise period | May 2, 2006 until
May 1, 2010 | May 2, 2006 until
May 1, 2010 |
| LTI Plan 2004 |
|---|
| Top Executives | Key Managers |
|---|
Number of options outstanding as of January 1, 2004 | — | — |
Granted | 333,300 | 932,400 |
Forfeited in 2004 | — | 6,900 |
Exercised in 2004 | — | — |
Number of options outstanding as of December 31, 2004 | 333,300 | 925,500 |
Number of exercisable options | 0 | 0 |
Maximum number of award shares | — | — |
Exercise price per share (€) | 43.76 | 48.14 |
Compensation costs in 2004 (€m) | 1 | 2 |
Benchmark index | MSCI World Pharma&Biotech | — |
Date of grant | May 3, 2004 | May 3, 2004 |
Exercise period | May 3, 2007 until
May 2, 2011 | May 3, 2007 until
May 1, 2011 |
F. SIGNIFICANT DIFFERENCES BETWEEN IFRSs AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP)
(37) Reconciliation to U.S. GAAP
The Group’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs), which, as applied by the Group, differ in certain material respects from U.S. GAAP. The effects of the application of U.S. GAAP to net profit and shareholders’ equity are set out in the tables below:
Reconciliation of Net Profit to U.S. GAAP (in € Millions Except per Share Data)
| Note | 2004 | 2003 | 2002 |
|---|
Net profit under IFRSs | | 500 | 443 | 867 |
U.S. GAAP adjustments | | | | |
Business combinations | | | | |
- Acquired in-process R&D | (a) | — | 14 | (119) | |
- Other differences | (a) | (11) | 15 | 13 | |
Acquired R&D | (b) | (9) | — | — | |
Property, plant and equipment | | | | |
- Capitalization of interest costs | (c) | (1) | (1) | (1) |
- Reversal of impairment losses | (c) | (1) | 0 | 1 |
Internal-use software | (d) | — | — | (3) |
Equity investment (Aventis CropScience) | (e) | — | — | 71 |
Inventories | (f) | 5 | 4 | 6 |
Provisions for pensions | (g) | (9) | 2 | 2 |
Other provisions | (h) | (4) | 15 | (2) |
Stock option plans | (j) | (9) | 3 | 14 |
Tax effect on U.S. GAAP adjustments | (k) | 10 | (6) | (1) |
Net profit under U.S. GAAP | | 471 | 489 | 848 |
Earnings per share under U.S. GAAP | | | | |
- basic (€) | | 2.46 | 2.52 | 4.30 |
- diluted (€) | | 2.46 | 2.51 | 4.29 |
Reconciliation of shareholders' equity to U.S. GAAP (in € millions)
| Note | 2004 | 2003 | 2002 |
|---|
Total equity under IFRSs | | 3,026 | 2,922 | 2,955 |
Minority Interest | (l) | (17) | (16) | (15) |
Equity before minority interest | | 3,009 | 2,906 | 2,940 |
U.S. GAAP adjustments | | | | |
Business combinations | | | | |
- Acquired in-process R&D | (a) | (135) | (141) | (175) |
- Other differences | (a) | 20 | 42 | 28 |
Acquired R&D | (b) | (9) | — | — |
Property, plant and equipment | | | | |
- Capitalization of interest costs | (c) | 15 | 16 | 17 |
- Reversal of impairment losses | (c) | (4) | (3) | (3) |
Inventories | (f) | 27 | 22 | 18 |
Provisions for pensions | (g) | (104) | (33) | (54) |
Other provisions | (h) | 14 | 18 | 3 |
Schering AG call options | (i) | (5) | (7) | (10) |
Stock option plans | (j) | 19 | 22 | 34 |
Tax effect on U.S. GAAP adjustments | (k) | 23 | (11) | 2 |
Shareholders' equity under U.S. GAAP | | 2,870 | 2,831 | 2,800 |
|
a.) Business combinations
Until 2003, acquired in-process R&D was not recognized as an acquired asset under IFRSs during the course of purchase price allocation, but was capitalized as goodwill and amortized over its expected useful life. Since January 1, 2004, we have applied IFRS 3 “Business Combinations”. Accordingly, since January 1, 2004, R&D projects that are acquired as part of a business combination are now required to be included in the purchase price allocation and amortized over their useful life upon availability for use. Under U.S. GAAP, acquired in-process R&D must be identified and included as a separate component of purchase price allocation. The amounts ascertained must be recognized as expenses at the time of the acquisition. In addition, certain identifiable intangible assets recognized under U.S. GAAP were inclu ded in goodwill under IFRSs. The adjustments relate to the acquisitions of Medrad Group (1995), Leiras (1996), Jenapharm Group (1996: 74.9%; 2001: 25.1%), Diatide (1999), and Collateral Therapeutics (2002).
Since January 1, 2004, goodwill resulting from business combinations is no longer amortized under IFRSs but is tested for impairment annually. Under U.S. GAAP, goodwill does not become amortized since January 1, 2002 but is also tested for impairment annually. During 2004, no goodwill was impaired under either IFRSs or U.S. GAAP.
Under U.S. GAAP, negative goodwill arising on the acquisition of CIS bio international (2000: 60%; 2001: 40%) was deducted proportionately from non-current assets, excluding securities. Under IFRSs, negative goodwill was recognized as income on a systematic basis. As a result of the application of IFRS 3 “Business Combinations”, the remaining carrying amount of negative goodwill was recognized in retained earnings as of January 1, 2004 without affecting the income statement.
b.) Acquired R&D
As a consequence of applying IAS 38 “Intangible assets” (revised 2004), the criterion for recognition of acquired intangible assets is always considered to be satisfied since January 1, 2004. Until December 31, 2003 product rights in particular were recognized only upon regulatory approval. Under U.S. GAAP, acquired R&D activities must be recognized as an expense at the time of acquisition.
c.) Property, plant and equipment
The Group does not capitalize interest costs on self-constructed assets under IFRSs. Under U.S. GAAP, interest costs incurred during the construction period must be capitalized and amortized. Interest of €3m (2003: €3m; 2002: €4m) was capitalized under U.S. GAAP. Total capitalized interest under U.S. GAAP as of December 31, 2004 was €15m (2003: €16m; 2002: €17m). The reduction relates to depreciation.
U.S. GAAP prohibits the reversal of impairment losses on items of property, plant and equipment.
d.) Internal-use software
As of January 1, 1999, we adopted Statement of Position (SOP) 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” under U.S. GAAP. This statement requires the capitalization of certain costs incurred in the development of software for internal use, including payroll and payroll-related costs. Under IFRSs, these costs are capitalized starting on January 1, 2000. The reconciliation item relates to costs for the year 1999, which were capitalized under U.S. GAAP, but expensed under IFRSs.
e.) Equity investment (Aventis CropScience)
The application of U.S. GAAP in the consolidated financial statements of Aventis CropScience reduced the carrying amount of our equity investment. The most significant differences related to acquired in-process R&D from certain prior AgrEvo acquisitions and the timing of recognition and use of restructuring provisions in connection with the merger of the agribusiness of AgrEvo and Rhône-Poulenc Agro. The investment was disposed of at the beginning of June 2002. Due to the lower book value under U.S. GAAP, the sale of our investment in 2002 resulted in a higher profit.
f.) Inventories
Under IFRSs, the allocation of fixed production overheads to the cost of inventories is based on the normal capacity of the production facilities. Idle facility expenses are treated as a current period charge. Under U.S. GAAP, idle facility expenses are allocated between cost of sales and inventories.
g.) Provisions for pensions
Under U.S. GAAP, pension costs and similar obligations are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 87 “Employers' Accounting for Pensions”. Companies located outside the U.S. were required to adopt the provisions of SFAS No. 87 for the first time for fiscal years beginning on or after December 15, 1988. Due to the long period of time between the effective date and the time when the Group first prepared U.S. GAAP information, adoption of the provisions of SFAS No. 87 as of January 1, 1989 was not feasible. The Group adopted SFAS No. 87 as of January 1, 1998 and recognized a transition obligation of €13m. On January 1, 1998, the average remaining service period of active employees was 20 years. An amount of €6m was deducted directly from equity (for the period 19 89 to 1997). €1m (5% of the transition obligation) will be recognized as expense each year through 2008.
Until 2003 the amortization of actuarial gains/losses [see Note (24)] was partly related to the first-time application of IAS 19 “Employee Benefits (revised)” in 1999. This required amortization in 2003 amounting to €3m to be eliminated in the reconciliation (2002: €3m).
One of our defined benefit plans for employees was modified in 2004. Accordingly, under IFRSs the reduction in vested benefits payable (negative past service costs) was recognized as a one-time charge to income. Following the reduction in future benefits (curtailment), IFRSs require the one-time recognition of a proportionate share of unrecognized actuarial losses as an expense in 2004. Under U.S. GAAP, an income from the reduction in vested benefits payable is recognized over the average remaining service period of employees. The expense resulting from the proportionate share of unrecognized actuarial losses is also recognized over the average remaining service period of employees.
Where the Accumulated Benefit Obligation (ABO) exceeds the fair value of plan assets at the measurement date, after considering prepaid pension costs, SFAS No. 87 requires the recognition of a minimum pension liability equaling the underfunding. In 2004, an additional liability amounting to €97m (2003: €36m) was therefore recognized under U.S. GAAP to reflect the difference between the pension liabilities already accrued and the minimum pension liability. A corresponding contra item amounting to €59m after deferred taxes (2003: €22m after deferred taxes) was recognized directly in Accumulated other comprehensive income in 2004.
h.) Other provisions
The reconciliation item relates to liabilities arising from our early retirement program, under which an employee older than 54 is offered the opportunity to work half-time for up to six years for 85% of pay. Under IFRSs, the (discounted) incremental costs are recognized in full once a binding contractual arrangement has been entered into. Under U.S. GAAP, such amounts are accrued over the employees' remaining service period (on an undiscounted basis).
i.) Schering AG call options
Schering AG call options acquired to hedge the LTI 2000 stock option plan are recognized as an asset under IFRSs. Under U.S. GAAP, the Schering AG call options are deducted from equity.
j.) Stock option plans
Refer to Note (36) of the consolidated financial statements for a description of our stock option plans. Under U.S. GAAP, we make use of Accounting Principles Board Opinion (APB) No. 25 “Accounting for Stock Issued to Employees” and provide additional disclosures in Note (38) as required by SFAS No. 123 “Accounting for Stock Based Compensation”.
LTI Plan 1998 and LTI Plan 2000:
The LTI 1998 and LTI 2000 stock option plans are variable award plans. Compensation costs under IFRSs are measured on the basis of the estimated performance of the Schering AG share price and the performance of a benchmark index (DAX and STOXX Healthcare). The costs of the LTI Plans 1998 and 2000 have been largely hedged by the purchase of Schering AG call options. Under U.S. GAAP, compensation costs are recognized over the three-year vesting period on the basis of the fair value of Schering AG shares and the benchmark index at the respective balance sheet dates. Under U.S. GAAP, the acquisition costs of the Schering AG call options are deducted from equity, and the proceeds from the sale of the options are credited directly to equity. Under IFRSs, the accumulated compensation costs are shown as a liability. Under U.S. GAAP, th ese costs are part of equity.
LTI Plans 2001/I and II:
The “Top Executives” plans are designed as variable award plans. Compensation costs under IFRSs are measured on the basis of an estimate of the outcome of the performance conditions at each balance sheet date by utilizing option pricing models. Under U.S. GAAP, compensation costs are measured at the fair value of Schering AG shares at the respective balance sheet dates. The plans are designed as stock appreciation right plans. At exercise, the award will be settled by a cash payment amounting to the difference between the market price of Schering AG shares at the date of exercise and the exercise price. Compensation costs are therefore accrued as a liability under both IFRSs and U.S. GAAP.
“Key Managers” plans are fixed award plans. No costs are recognised under both IFRSs and U.S. GAAP.
LTI Plans 2001/III and 2004:
The costs of the plans have been hedged by the purchase of Schering AG call options. Under both IFRSs and U.S. GAAP, changes in fair value are recognized as gain or loss, while the costs calculated at the date of grant are accrued over the three-year vesting period.
k.) Tax effect on U.S. GAAP adjustments
This reconciliation item includes all tax effects due to the aforementioned reconciling items, except the adjustment relating to the equity method (Aventis CropScience), which is presented net of tax.
l.) Minority Interest
According to IAS 1 “Presentation of Financial Statements”, a minority interest must be presented within equity. Under U.S. GAAP, a minority interest is not part of equity.
(38) Additional U.S. GAAP information
SFAS No. 130 "Reporting Comprehensive Income"
SFAS No. 130 “Reporting Comprehensive Income” requires the reporting of all changes in shareholders’ equity except those resulting from investments by or distributions to shareholders.
Statement of comprehensive income for the years ended December 31
| 2004 | 2003 | 2002 |
|---|
| €m | €m | €m |
|---|
U.S. GAAP net profit [see Note (37)] | 471 | 489 | 848 |
Currency translation adjustments | | | |
IFRSs accounts | (76) | (194) | (234) |
Reconciliation to U.S. GAAP | 7 | 19 | 8 |
Available-for-sale securities | | | |
Unrealized gains and losses (after deferred taxes of €(2)m; 2003: €(4)m; 2002: €14m) | 12 | 5 | (45) |
Less realized (gains) and losses recognized in net profit (after tax expense of €(1)m; 2003: €5m; 2002: €(4)m) | 3 | (7) | 21 |
Less (gains) and losses resulting from currency translation adjustments (after deferred taxes of €0m; 2003: €0m; 2002: €1m) | 0 | 0 | (1) |
Cash flow hedges | | | |
Unrealized gains and losses (after deferred taxes of €(5)m; 2003: €(20)m; 2002: €(27)m) | 8 | 31 | 41 |
Less realized (gains) and losses recognized in net profit (after tax expense of €6m; 2003: €26m; 2002: €14m) | (10) | (40) | (21) |
Minimum pension liability (after deferred taxes of €24m; 2003: €(7)m; 2002: €21m) | (37) | 11 | (33) |
Other comprehensive income, net of tax | (93) | (175) | (264) |
Comprehensive income, net of tax | 378 | 314 | 584 |
Accumulated other comprehensive income balances as of December 31
| Currency
translation
adjustment | Available-
for-sale securities | Derivative hedging
instruments | Minimum pension
liability | Accumulated
other com-
prehensive
income |
|---|
| €m | €m | €m | €m | €m |
|---|
January 1, 2002 | 98 | 28 | 4 | — | 130 |
Other comprehensive income 2002 | (226) | (25) | 20 | (33) | (264) |
December 31, 2002 | (128) | 3 | 24 | (33) | (134) |
Other comprehensive income 2003 | (175) | (2) | (9) | 11 | (175) |
December 31, 2003 | (303) | 1 | 15 | (22) | (309) |
Other comprehensive income 2004 | (69) | 15 | (2) | (37) | (93) |
December 31, 2004 | (372) | 16 | 13 | (59) | (402) |
Statement of U.S. GAAP shareholders’ equity as of December 31
| 2004 | 2003 | 2002 |
|---|
| €m | €m | €m |
|---|
Equity according to U.S. GAAP before Accumulated other comprehensive income | 3,272 | 3,140 | 2,934 |
Accumulated other comprehensive income | (402) | (309) | (134) |
Shareholders’ equity under U.S. GAAP | 2,870 | 2,831 | 2,800 |
Available-for-sale securities:
| Carrying amount | Gross
unrealized
gains | Gross
unrealized
losses | Fair
value |
|---|
As of December 31, 2004 | €m | €m | €m | €m |
Marketable securities | 233 | 9 | — | 233 |
Other Investments | 28 | 10 | — | 28 |
| 261 | 19 | — | 261 |
As of December 31, 2003 | | | | |
Marketable securities | 176 | 1 | — | 176 |
Other Investments | 18 | 0 | — | 18 |
| 194 | 1 | — | 194 |
As of December 31, 2002 | | | | |
Marketable securities | 252 | 6 | — | 252 |
Other Investments | 25 | 2 | 5 | 25 |
| 277 | 8 | 5 | 277 |
Proceeds from available-for-sale securities in 2004 amounted to €80m (2003: €160m, 2002: €31m). Gross Gains of €1m were realized in 2004 (2003: €14m). Gross losses in 2004 were immaterial (2003: €3m). In 2002, gross gains as well as gross losses in on such sales were immaterial. In 2004, impairment losses of €4m were recognized (2003: €7m; 2002: €26m).
Maturities of fixed-term marketable securities as of December 31, 2004 are as follows:
| Carrying amount | Fair value |
|---|
| €m | €m |
|---|
Less than 1 year | 0 | 0 |
Between 1 and 5 years | 62 | 62 |
More than 5 years | 2 | 2 |
As of December 31, 2004, the Group also held an investment in a fixed-income fund of €64m (2003: €155m).
Impairment of long-lived assets
We test our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Goodwill and other intangible assets not yet available for use are tested for impairment annually. The determination of the impairment charge under IFRSs is described in Note (4). Under U.S. GAAP, the carrying amount of a long-lived asset is considered to be impaired when the anticipated undiscounted and probability-weighted cash flow from such an asset is separately identifiable and is less than its carrying amount. In such event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived asset. If no market prices are available, fair value is determined primarily using anticipated cash flows discounted at a rate comme nsurate with the risk involved. As of December 31, 2004, 2003 and 2002, there was no reconciliation item arising from different policies for recognizing impairment of long-lived assets under IFRSs and U.S. GAAP.
Corporate debt
As of December 31, 2004, the Schering AG Group had aggregate unused committed lines of credit of €43m (December 31, 2003: €81m).
In December 2004 a long-term loan amounting to $263m was raised. The loan matures in 2009; the interest rate is oriented on 3-month-USD-Libor and is adjusted on a quarterly basis.
Employee benefit plans
The information required by SFAS No. 132 (revised 2003) “Employers` Disclosures about Pensions and Other Postretirement Benefits” is included in Note (4) and Note (24) to the consolidated financial statements.
For our defined pension plans, the accumulated benefit obligation as of December 31, 2004 amounts to €1,713m (December 31, 2003: €1,569m).
With respect to plans that have projected benefit obligations in excess of plan assets after consideration of provisions for pensions as well as prepaid pension costs the benefit obligation as of December 31, 2004 amounts to €1,952m (December 31, 2003: €1,790m). The total of the fair value of plan assets and provisions for pensions as of December 31, 2004 amount to €1,662m (December 31, 2003: €1,561m); prepaid pension costs as of December 31, 2004 amount to €30m (December 31, 2003: €0m).
The following table provides information for pension plans with an accumulated benefit obligation in excess of plan assets after considering provisions for pensions as well as prepaid pension costs:
| December 31, |
|---|
| 2004 | 2003 |
|---|
Projected benefit obligation | 1,688 | 211 |
Accumulated benefit obligation | 1,504 | 182 |
Fair value of plan assets | 1,059 | 123 |
Provisions for pensions | 378 | 23 |
Prepaid pension costs | (30) | — |
Pension obligations and expenses determined under SFAS No. 87 were based on the same assumptions as under IFRSs [see Note (4)].
Under IFRSs, interest relating to the pension obligations not transferred to external funds is presented in the Financial result [see Note (10)]. Under U.S. GAAP, interest on pension obligations is considered a component of compensation expenses. Accordingly, Operating profit under U.S. GAAP would be lower and the Financial result higher by €29m (2003: €35m; 2002: €44m).
Stock option plans
As required under SFAS No. 123, amended by SFAS No. 148, we provide additional information for the stock option plans which are accounted for according to APB Opinion No. 25:
| 2004 | 2003 | 2002 |
|---|
Net profit, as reported (U.S. GAAP) | 471 | 489 | 848 |
Add: Stock-based employee
compensation expense determined
under APB No. 25 | 22 | 0 | (10) |
Deduct: Stock-based employee
compensation expense determined
under SFAS No. 123 | (18) | (14) | (22) |
Pro forma net profit (U.S. GAAP) | 475 | 475 | 816 |
Earnings per share (basic): | | | |
- as reported (€) | 2.46 | 2.52 | 4.30 |
- pro forma (€) | 2.48 | 2.44 | 4.14 |
Earnings per share (diluted): | | | |
- as reported (€) | 2.46 | 2.51 | 4.29 |
- pro forma (€) | 2.48 | 2.44 | 4.12 |
Intangible assets
Expected amortization on intangible assets:
| IFRSs | U.S. GAAP |
|---|
| €m | €m |
|---|
2005 | 78 | 94 |
2006 | 69 | 78 |
2007 | 63 | 70 |
2008 | 48 | 56 |
2009 | 36 | 43 |
Goodwill
Allocation of goodwill to the primary segments:
| IFRSs | U.S. GAAP |
|---|
| 2004 | 2003 | 2004 | 2003 |
|---|
| €m | €m | €m | €m |
|---|
Europe Region | 266 | 271 | 144 | 147 |
United States Region | 71 | 75 | 39 | 40 |
Japan Region | 11 | 12 | 5 | 5 |
Latin America/Canada Region | 4 | 4 | 0 | 0 |
Asia/Pacific Region | 4 | 4 | 3 | 3 |
Other Activities | 0 | 0 | 0 | 0 |
| 356 | 366 | 191 | 195 |
Under IFRSs, acquired in-process R&D was capitalized as goodwill until December 31, 2003. U.S. GAAP requires such amounts to be recognized as expenses at the time of the acquisition. In addition, certain identifiable intangible assets recognized under U.S. GAAP are included in goodwill under IFRSs. The change in goodwill between 2003 and 2004 is related to currency translation adjustments as well as to a disposal in the Europe Region amounting to €1m.
Legal proceedings
The Group is involved in a number of legal proceedings and claims incidental to the normal conduct of its business, relating to such matters as product liability, patent infringement, tax assessments, competition, past waste disposal practices and the release of chemicals into the environment. Although the outcome of these proceedings and claims cannot be predicted with certainty, Schering AG believes that any resulting liabilities, net of amounts recoverable from insurance or otherwise, will not, in the aggregate, have a material adverse effect on the Group's consolidated results of operations, financial condition and cash flows. To the extent that these legal proceedings and claims meet the criteria laid down in SFAS No. 5 “Accounting for Contingencies”, provisions have been set up for them in the consolidated finan cial statements.
What we believe to be the most significant of these proceedings and claims are described below.
The Group's Brazilian subsidiary is a defendant in approximately 460 civil actions brought in courts in Brazil by women, suing individually and claiming that they became unintentionally pregnant. Most of them claim that they became unintentionally pregnant after taking placebo pills packaged by the subsidiary in connection with test runs of a new packaging machine between January and April 1998. Most of these claims are still pending. In the majority of the judgments obtained to date, the claims were rejected by the Brazilian courts.
In November 1998, Medrad, Inc., one of the Group’s subsidiaries in the United States, was sued by Liebel-Flarsheim Company, which alleged patent infringement, antitrust violations and tortious interference with contractual relations. In October 2001 and February 2002, the U.S. District Court for the Southern District of Ohio, on summary judgement motions, decided in favor of Medrad regarding Liebel-Flarsheim’s patent infringement claims. Liebel-Flarsheim appealed the decision of the U.S. District Court and the Federal Circuit Court of Appeals reversed the District Court’s decision and remanded it back to the District Court in February 2004. All claims other than the patent claims were withdrawn by Liebel-Flarsheim in connection with a settlement reached in October 2002. In September 2004, Liebel-Flarsheim Company and its parent Mallinckrodt, Inc., filed a new patent infringement action in the same court against Medrad in relation to an additional injector product relating to the same family of patents at issue in the first lawsuit.
Another of the Group’s subsidiaries in the United States, Berlex, Inc., has been named as a defendant with 30 other pharmaceutical companies in cases filed by Suffolk County, Westchester County, Nassau County, Rockland County, Onondaga County and Erie County (all counties in the State of New York). The cases were served in January 2003, August 2003, November 2004, February 2005 and March 2005, respectively. In addition, in February 2005, Berlex was named as a defendant with 50 other pharmaceutical companies in a case filed by the City of New York. These seven lawsuits contain virtually identical allegations that pharmaceutical companies have overcharged each county for prescription medications paid for by New York State’s Medicaid program by reporting artificially inflated ��average wholesale prices” for thei r drug products for the purpose of government reimbursement. Each county seeks a variety of unspecified damages from the various pharmaceutical companies. The cases have been consolidated into a multidistrict litigation in the Federal District of Massachusetts In Re Pharmaceutical Industry Average Wholesale Price Litigation (MDL 1456). Berlex intends to vigorously defend itself against the allegations made in the lawsuits.
Following the sale of Schering AG’s share in Aventis CropScience to Bayer AG in 2003, Bayer CropScience AG has initiated arbitration proceedings against Schering AG, SCIC Holdings LLC, Aventis Agriculture and Hoechst AG alleging the violation of a financial statement guarantee for which Bayer CropScience AG is demanding payments of damages. Bayer CropScience AG has further notified Schering AG in several other cases about potential violations of provisions of the Aventis CropScience Stock Purchase Agreement that might lead to damages. With respect to the claims, it cannot be estimated whether and to what extent the Group would be liable.
A U.S. citizen has filed an action against Schering AG and Bayer AG in the United States District court for the Eastern District of New York. The case was transferred to the District Court for the District of New Jersey. The plaintiff claims damages for forced sterilization and cruel treatment suffered at the Auschwitz concentration camp during World War II. To our knowledge and belief, there is no factual information suggesting that Schering AG could in any way have been involved in this matter. Schering AG also believes that this claim cannot be asserted against an individual company, but should be addressed to the “Remembrance, Responsibility and the Future” Foundation. This foundation has been endowed with funds of more than 5 billion euros by German companies (including Schering AG) and the German Federal Go vernment. The beneficiaries of compensation grants paid by the foundation include victims of human experiments in concentration camps. Schering AG considers the claims asserted to be unjustified. In September of 2004, this case was dismissed; however, the plaintiff has appealed that decision.
One of the Group's German subsidiaries, Jenapharm GmbH & Co. KG, faces claims before an arbitration board from about 160 former East German athletes for damages covering personal injuries such as infertility, liver damage and cancer allegedly resulting from drugs received under a doping program organized and controlled by the former German Democratic Republic. Jenapharm believes that the athletes will allege that VEB Jenapharm, the predecessor of the Jenapharm GmbH & Co. KG, was responsible for their damages due to its involvement in the doping program by producing and supplying the drugs and performing certain scientific activities. Jenapharm, which was acquired by Schering AG in 1996, will dispute the allegations and considers the claims to be unjustified. Jenapharm cannot be responsible for the abuse of drugs by the former German Democratic Republic or any organs of that state and to the Group‘s knowledge and belief, VEB Jenapharm was not involved in the application of the drugs in doping studies with athletes.
In May 2004, TAP Pharmaceutical Products, Inc., has initiated an Alternative Dispute Resolution procedure against Schering AG pursuant to an agreement which regulates the development and marketing of asoprisnil in the USA and Canada by TAP and the supply of the product by Schering AG. The claims raised by TAP relate to the interpretation of the agreement regarding Schering AG’s obligation to supply asoprisnil to TAP. TAP requests to be initially supplied with asoprisnil from a certain manufacturing facility and asks for a certain commitment regarding the supply with asoprisnil. Schering AG disputes the claims and is defending itself against these in the arbitration.
Berlex, Inc., together with several other pharmaceutical companies, has been named in several lawsuits filed in various U.S. courts by plaintiffs who used hormone replacement therapy (“HRT”) products. A total of fourteen plaintiffs have made allegations that they had used Berlex HRT products together with other HRT products and suffered injuries, including breast cancer, ovarian cancer, strokes and pulmonary embolism. The lawsuits of twelve of these plaintiffs have been removed to a multidistrict litigation in the Eastern District of Arkansas – Western Division (In Re: Prempro Products Liability Litigation. MDL Docket No. 1507) where the cases of hundreds of other HRT plaintiffs directed at other pharmaceutical companies have been consolidated. One lawsuit is proceeding in the Court of Common Pleas of Philadelphi a County (In Re: Hormone Therapy Litigation) and one other in the Superior Court of New Jersey Atlantic County (In Re: Hormone Replacement Therapy Litigation. Case Code No. 266). Berlex is vigorously defending itself against the allegations in the lawsuits.
Dividends
Under the German Commercial Code (HGB), dividends can be paid from the unappropriated profit of the parent company, Schering AG. At December 31, 2004, the unappropriated profit of Schering AG totaled €194m, resulting from 2004 net profit of €221m, less a transfer of €30m to Retained earnings, as determined by the Executive Board and the Supervisory Board, and an additional €3m profit brought forward from 2003.
Related Party Transactions
Shareholders: Allianz Versicherungs-AG currently provides insurance services to the Schering AG Group in a number of different areas such as liability and property insurance including business interruption, directors’ and officers’ liability as well as marine, personal accident and automobile insurance. Deutsche Bank AG provides us with a variety of financial services in the ordinary course of business. We believe that these services are provided on an arm’s length basis.
Directors: Certain members of the Supervisory and Executive Boards are members of the executive boards or supervisory boards of various financial institutions or insurance companies with which we engage in transactions in the ordinary course of business.
Professor John A. Dormandy, a member of the Supervisory Board, has provided consultancy services to Schering AG in connection with research in the field of Specialized Therapeutics since June of 1996. For these services Prof. Dormandy has received a fee of €56 thousand plus expenses of €8 thousand in 2004. Prof. Dormandy has further received €2 thousand as expenses for giving a laudatio at a Schering symposium.
Professor Dr. Piet Borst and Professor John A. Dormandy are members of the Curatorium of Schering Forschungsgesellschaft mbH, a 100% subsidiary of Schering AG. In such capacity, they have received in 2004 €2 thousand each as fees for attending meetings.
A loan that had been granted to a member of the Supervisory Board prior to July 29, 2002 was repaid in full in 2004. The loan, which had a balance of €30 thousand during the period and at the time of repayment and accrued interest at an annual rate of 6%, had been made for the purposes of financing a home purchase. A relocation loan originally made in the amount of €46 thousand that had been made in 1993 to an employee that subsequently became a member of our Executive Board remains oustanding. As of December 31, 2004, the balance of such loan, which is non-amortizing and bears interest at a compounded semi-annual rate of 6%, was $ 92 thousand. An interest free relocation loan in the amount of $1 million was granted to a member of our Executive Board in May 2004 and repaid in August 2004. The granting of such loan, which did not comply wit h the requirements of Section 13(k) of the U.S. Securities Exchange Act of 1934, was reported to the Schering AG Audit Committee and to our external auditors. We have modified our internal compliance procedures in an effort to ensure that future loans are made only in compliance with our internal policies and all applicable laws.
According to section 15a of the German Securities Trading Act (”Wertpapierhandelsgesetz”), the members of the Executive Board and of the Supervisory Board of Schering AG must notify transactions in securities of Schering AG. Until October 29, 2004, this applied to transactions of a Board member only if the aggregate value of the transactions of such Board member within any 30 day period exceeded €25 thousand. The same obligation applied to transactions of close relatives. Effective as of October 30, 2004, the de minimis threshold was decreased by the German parliament from €25 thousand within 30 days to €5 thousand per year. In addition, companies legally or economically related to a Board member or to a relative of a Board member were added to the list of related parties with a separate obligation to d isclose their dealings in Schering AG securities. During fiscal year 2004, Schering AG has been notified of a total of 8 transactions. In accordance with section 15a of the German Securities Trading Act, Schering AG promptly disclosed these transactions on its website. Members of the Executive Board purchased 7,700 Schering AG shares. One member of the Executive Board has sold 2,640 call options on Schering AG shares. Schering AG has not been notified of such transactions of members of the Supervisory Board. A complete list with all details of the notified transactions is available in the data bases of the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) under www.bafin.de.
New Accounting Standards under U.S. GAAP
On April 30, 2003, the Financial Accounting Standards Board issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. This Standard amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments and derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The application of this standard had no material impact on our U.S. GAAP reconciliation.
On May 15, 2003, the Financial Accounting Standards Board issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. Under SFAS No. 150, certain financial instruments, previously classified as equity, are now required to be classified as a liability by the issuer. SFAS No. 150 primarily affects accounting for financial instruments that embody an obligation to repurchase equity instruments that have been issued by the company. SFAS No. 150 is effective for transactions entered into or modified after May 31, 2003. The application of this standard had no impact on our U.S. GAAP reconciliation.
In December 2003, the Financial Accounting Standards Board issued SFAS No. 132 (revised 2003) “Employers' Disclosures about Pensions and Other Postretirement Benefits”. SFAS No. 132 (revised 2003) is effective for fiscal years ending after December 15, 2003. The Standard requires companies to provide more detailed disclosures about pensions and other postretirement benefit plans. Among other things, companies are required to describe investment policies and strategies and to provide a description of the basis used to determine the overall expected long-term rate of return on assets together with a classification of the plan assets by investment classes. The disclosures required are reported in Notes (24) and (38).
Under SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, qualifying special purpose entities are exempted from consolidation under certain circumstances. In January 2003, the FASB published FIN No. 46 “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51”, which clarifies the application of the consolidation rules to certain variable interest entities which do not qualify as qualifying special purpose entities. FIN No. 46 applies immediately for variable interest entities created after January 31, 2003. By issuing FASB Staff Position (FSP) FIN 46-6 “Effective Date of FASB's Interpretation No. 46, Consolidation of Variable Interest Entities”, the Financial Accounting Standards Board deferred the effective date f or initial application of FIN No. 46 for VIEs created before February 1, 2003 to December 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003). According to FIN 46 (revised December 2003), the provisions of FIN 46 or FIN 46 (revised December 2003) must be applied to all variable interest entities no later than the end of the first reporting period that ends after March 31, 2004. Our U.S. GAAP reconciliation is not affected by the FASB rules, since we hold no investment that is classified as a qualifying special purpose entity or a variable interest entity.
In November 2004, the Financial Accounting Standards Board issued SFAS No. 151 “Inventory Costs – an amendment of ARB No. 43, Chapter 4”. This Statement addresses the accounting for idle facility expenses. Under SFAS No. 151, idle facility expenses are required to be treated as a current period charge. So far, idle facility expenses are allocated between cost of sales and inventories under U.S. GAAP. Under IFRSs, the allocation of fixed production overheads to the cost of inventories is based on the normal capacity of the production facilities. Idle facility expenses are treated as a current period charge. The effect of this accounting difference on our reconciliation for the reporting periods 2004, 2003 and 2002 is reported under Note (37). SFAS No. 151 is effective for fiscal years beginning after June 15, 2005 . We expect the application of SFAS No. 151 to affect our reconciliation for 2006, when capitalized costs will be reversed as an expense.
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004) “Share-Based Payment”. This Statement is a revision of SFAS No. 123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees”. According to SFAS No. 123 (revised 2004), the compensation costs relating to share-based payment transactions must be accounted for using the fair-value-based method and must be recognized in the financial statements. The effect of applying the fair-value-based method on net profit under U.S. GAAP for 2004, 2003 and 2002 is reported under Note (38). SFAS No. 123 (revised 2004) is effective for fiscal years beginning after June 15, 2005.
In December 2004, the Financial Accounting Standards Board issued SFAS No. 152 “Accounting for Real Estate Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67”. SFAS No. 152 is effective for fiscal years beginning after June 15, 2005. We do not expect an impact on our U.S. GAAP reconciliation from the application of this standard.
In December 2004, the Financial Accounting Standards Board issued SFAS No. 153 “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29”. SFAS No. 153 is effective for fiscal years beginning after June 15, 2005. According to SFAS No. 153, exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. We do not expect an impact on our U.S. GAAP reconciliation from the application of this standard.
