e20vf
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
o 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, 2005
OR
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
o SHELL COMPANY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number:
ALTANA Aktiengesellschaft
(Exact Name of Registrant as Specified in Its Charter)
Federal Republic of Germany
(Jurisdiction of Incorporation or Organization)
Am Pilgerrain 15
D-61352 Bad Homburg v. d. Höhe
Federal Republic of Germany
(Address of Principal Executive Offices)
Securities
registered or to be registered pursuant to Section 12(b) of
the Act:
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Name of each exchange |
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Title of each class |
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on which registered |
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American Depositary Shares, each representing 1 Ordinary
Share, no par value |
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New York Stock Exchange |
Ordinary Shares, no par value*
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New York Stock Exchange |
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* |
Listed, not for trading or quotation purposes, but only in
connection with the listing of American Depositary Shares,
pursuant to the requirements of the 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
The number of issued and outstanding shares of each of the
issuers classes of capital or common stock as of
December 31, 2005 was 135,760,592 no par value.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes
x No
o
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Yes
o No
x
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
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.
(Check one).
Large Accelerated Filer
x Accelerated
Filer
o Non-Accelerated
Filer o
Indicate by check mark which financial statement item the
registrant has elected to follow.
Item 17
o Item 18
x
TABLE OF CONTENTS:
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PART I |
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4 |
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Identity of Directors, Senior Management and Advisers |
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4 |
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Offer Statistics and Expected Timetable |
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4 |
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Key Information |
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5 |
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Information on the Company |
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19 |
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Unresolved Staff Comments |
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55 |
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Operating and Financial Review and Prospects |
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56 |
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Directors, Senior Management and Employees |
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84 |
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Major Shareholders and Related Party Transactions |
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94 |
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Financial Information |
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95 |
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The Offer and Listing |
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96 |
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Additional Information |
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99 |
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Quantitative and Qualitative Disclosure About Market Risk |
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114 |
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Description of Securities Other Than Equity Securities |
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120 |
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PART II |
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121 |
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Defaults, Dividend Arrearages and Delinquencies |
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121 |
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Material Modifications to the Rights of Security Holders and Use
of Proceeds |
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121 |
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Controls and Procedures |
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121 |
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Audit Committee Financial Expert |
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121 |
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Code of Ethics |
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121 |
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Principal Accountant Fees and Services |
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122 |
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Exemptions from the Listing Standards for Audit Committees |
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123 |
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Purchases of Equity Securities by the Issuer and Affiliated
Purchasers |
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123 |
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PART III |
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124 |
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Financial Statements |
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124 |
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Financial Statements |
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125 |
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Exhibits |
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126 |
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Exhibit 12.1 |
Exhibit 12.2 |
Exhibit 13.1 |
Exhibit 13.2 |
Exhibit 14.1 |
- 2 -
FORWARD-LOOKING STATEMENTS
This annual report contains certain forward-looking statements,
i.e., current expectations or estimates of future events
or future results. When used in this document, the words
anticipate, believe,
estimate, expect, intend,
plan and project, and similar
expressions, as they relate to us or our management, identify
forward-looking statements. These statements are based on
beliefs of our management as well as assumptions made by and
information currently available to us. Such statements reflect
our current views with respect to future events and are subject
to various risks, uncertainties and assumptions. Many factors
could cause our actual results, performance or achievements to
be materially different from those which may be expressed or
implied by such forward-looking statements. The accompanying
information contained in this annual report, including the
information under Item 3: Key Information
Risk Factors, Item 4: Information on the
Company and Item 5: Operating and Financial
Review and Prospects identifies important factors that
could cause such differences. These factors include our ability
to develop, obtain regulatory approval for and launch new and
innovative pharmaceutical and chemical products, price
regulations for pharmaceuticals and budgeting decisions of local
governments and health care providers, the level of our
investment in pharmaceuticals-related R&D in any given
period, the sales and marketing methods that we use to
distribute our pharmaceuticals, the composition of our
pharmaceuticals portfolio, our ability to maintain close ties
with our chemicals customers, the business cycles experienced by
our chemicals customers and the prices of the raw materials that
we use in our chemicals business. Forward-looking statements
speak only as of the date they are made. We do not intend, and
do not assume any obligation, to update forward-looking
statements to reflect facts, circumstances or events that have
occurred or changed after such statements have been made.
- 3 -
PART I
ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS
Not applicable.
ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
- 4 -
ITEM 3: KEY INFORMATION
Selected Consolidated Financial Data
The selected consolidated financial data as of and for the years
ended December 31, 2001, 2002, 2003, 2004 and 2005 set
forth below are derived from our consolidated financial
statements.
We prepare our consolidated financial statements in accordance
with International Financial Reporting Standards (IFRS). IFRS
differ in certain significant respects from U.S. Generally
Accepted Accounting Principles (U.S. GAAP). For a
description of the significant differences between IFRS and
U.S. GAAP and a reconciliation of net income and
shareholders equity to U.S. GAAP, see Notes 32
and 33 to our consolidated financial statements.
You should read the information below in conjunction with our
consolidated financial statements and the other financial
information that we have included elsewhere in this annual
report. For our consolidated financial statements as of and for
each of the three years ended December 31, 2005, see the
discussion beginning on page F-1.
- 5 -
Selected Consolidated Financial Data as of and for the Five
Years Ended December 31, 2005
The following table presents selected consolidated financial
information as of and for the five years ended December 31,
2005:
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As of and for the year ended December 31,(1) | |
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2001 | |
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2002 | |
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2003 | |
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2004 | |
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2005 | |
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( in millions, except per share/ADS amounts) | |
Selected income statement data
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Amounts in accordance with IFRS
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Net sales
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2,308 |
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2,609 |
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2,735 |
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2,963 |
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3,272 |
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Gross profit
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1,414 |
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1,681 |
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1,787 |
(2) |
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1,947 |
(2) |
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2,184 |
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Research and development expenses
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(285 |
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(369 |
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(413 |
)(2) |
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(448 |
)(2) |
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(465 |
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Operating income
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520 |
(3) |
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538 |
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558 |
(2) |
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604 |
(2) |
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676 |
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Financial income
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24 |
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(12 |
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10 |
(2) |
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7 |
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8 |
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Income before taxes
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544 |
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527 |
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568 |
(2) |
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611 |
(2) |
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684 |
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Net income
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328 |
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324 |
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333 |
(2) |
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379 |
(2) |
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438 |
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Weighted average number of shares outstanding during period
(in millions)
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137.5 |
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136.6 |
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136.3 |
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135.9 |
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135.6 |
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Basic earnings per share/ADS(4)
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2.38 |
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2.37 |
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2.44 |
(2) |
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2.78 |
(2) |
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3.23 |
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Diluted earnings per share/ADS(5)
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2.37 |
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2.36 |
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2.44 |
(2) |
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2.78 |
(2) |
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3.23 |
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Dividends per share/ADS(6)
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0.60 |
(7) |
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0.75 |
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0.83 |
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0.95 |
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1.10 |
(8) |
Amounts in accordance with U.S. GAAP
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Net income
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314 |
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338 |
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337 |
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385 |
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428 |
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Basic earnings per share/ADS(4)
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2.28 |
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2.47 |
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2.47 |
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2.83 |
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3.16 |
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Diluted earnings per share/ADS(5)
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2.26 |
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2.46 |
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2.47 |
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2.83 |
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3.16 |
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Selected balance sheet data
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Amounts in accordance with IFRS
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Property, plant & equipment
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579 |
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610 |
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687 |
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763 |
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1,048 |
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Cash & cash equivalents and marketable securities
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552 |
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584 |
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580 |
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580 |
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604 |
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Total assets
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2,127 |
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2,269 |
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2,532 |
(2) |
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2,706 |
(2) |
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3,633 |
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Debt
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127 |
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117 |
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96 |
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58 |
(2) |
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389 |
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Total liabilities
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426 |
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448 |
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527 |
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471 |
(2) |
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885 |
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Total provisions
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522 |
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563 |
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553 |
(2) |
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585 |
(2) |
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734 |
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Total shareholders equity
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1,170 |
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1,250 |
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1,452 |
(2) |
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1,650 |
(2) |
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2,014 |
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Number of shares outstanding at period end (in millions)
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137.2 |
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136.5 |
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136.3 |
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135.3 |
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135.8 |
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Amounts in accordance with U.S. GAAP
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Total shareholders equity
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1,159 |
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1,261 |
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1,470 |
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1,683 |
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2,048 |
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Selected cash flow statement data
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Amounts in accordance with IFRS
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Net cash flow provided by operating activities
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309 |
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442 |
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425 |
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427 |
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645 |
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Net cash flow used in investing activities
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(113 |
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(204 |
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(298 |
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(192 |
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(637 |
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Net cash flow used in financing activities
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(116 |
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(154 |
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(152 |
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(201 |
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130 |
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(1) |
Columns may not add due to rounding. |
- 6 -
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(2) |
2003 and 2004 figures have been adjusted to reflect the
retroactive application of IFRS 2, revised IAS 1, an amendment
to IAS 19 and IAS 39. For further details regarding these
accounting standards see Notes 2 and 32 to our consolidated
financial statements as of and for the year ended
December 31, 2005. No adjustments have been made to our
2001 and 2002 consolidated financial statements. |
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(3) |
Includes a one-time gain in the amount of
110 million
resulting from the sale of our interest in a joint venture and a
special donation of
15 million to a charitable endowment. |
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(4) |
Basic earnings per share is computed by dividing net income by
the weighted average number of shares outstanding during the
relevant period. As from December 31, 2003, the weighted
average number of shares includes shares issuable in connection
with the legal proceedings surrounding Deutsch-Atlantische
Telegraphen AG (DAT). See Item 4:
Information on the Company Legal Proceedings
for more information on these proceedings. |
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(5) |
Diluted earnings per share is computed by dividing net income by
the sum total of the weighted average number of shares
outstanding during the relevant period, adjusted for shares
issuable upon the exercise of options under stock option plans
and, for years ended on or before December 31, 2002, shares
issuable in connection with the DAT litigation. |
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(6) |
Dividends are presented in the column of the year in respect of
which they are declared. Dividends are paid in the year
following the year in respect of which they are declared. |
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(7) |
Does not include a one-time bonus dividend in the amount of
0.10 per share. |
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(8) |
Management proposal to be submitted to our shareholders for
approval at the annual general meeting to be held on May 2,
2006. |
- 7 -
Dividends
The following table sets forth the dividends per share paid in
respect of each of the five years in the period ended
December 31, 2005 in euro and U.S. dollars. We declare
dividends in euro. For purposes of the table below, we have
converted the amounts paid as dividends into U.S. dollars
using the noon buying rate on the date of the shareholders
meeting at which the relevant dividends were approved. The table
does not reflect the related tax credits that were available to
German taxpayers in respect of dividend payments prior to 2002.
Owners of our shares who are U.S. residents should be aware
that they will be subject to German withholding tax on any
dividends that they receive. See Item 10: Additional
Information Taxation.
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Year ended December 31, |
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Dividend per share | |
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() | |
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($) | |
2001(1)
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0.60 |
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0.54 |
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2002
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0.75 |
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0.85 |
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2003
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0.83 |
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1.00 |
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2004
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0.95 |
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1.23 |
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2005
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1.10(2 |
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(1) |
Does not include a one-time bonus dividend in the amount of
0.10 per share. |
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(2) |
Management proposal to be submitted to our shareholders for
approval at the annual general meeting to be held on May 2,
2006. |
Both net income distributable as dividends and net income
subject to German tax are determined on the basis of the
stand-alone unconsolidated financial statements of our holding
company, ALTANA Aktiengesellschaft, prepared in accordance with
German GAAP. German GAAP differ in a number of important
respects from both IFRS and U.S. GAAP. In 2005, our holding
companys net income calculated on an unconsolidated basis
in accordance with German GAAP was
217 million,
compared with
164 million
in 2004 and
276 million in 2003.
Exchange Rate Information
We publish our consolidated financial statements in euro. As
used in this annual report, euro, EUR or
means the single unified currency of the European
Monetary Union. U.S. dollar, USD,
U.S.$ or $ means the lawful currency of
the United States of America. As used in this annual report, the
term noon buying rate refers to the exchange rate
for euro, expressed in U.S. dollars per euro, as announced
by the Federal Reserve Bank of New York for customs purposes as
the rate in the city of New York for cable transfers in foreign
currencies.
To enable you to ascertain how the trends in our financial
results would have appeared had they been expressed in
U.S. dollars, the table below shows the average noon buying
rates for U.S. dollars per euro for the five years ended
December 31, 2005. The averages set forth in the table
below have been computed using the noon buying rate on the last
business day of each month during the periods indicated.
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Year ended December 31, |
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Average | |
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2001
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0.8909 |
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2002
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0.9495 |
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2003
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1.1411 |
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2004
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1.2478 |
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2005
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1.2400 |
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- 8 -
The following table shows the noon buying rates for
U.S. dollars per euro for the six months ended
March 31, 2006:
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Month |
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High | |
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Low | |
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October 2005
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1.2148 |
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1.1914 |
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November 2005
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1.2067 |
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1.1667 |
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December 2005
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1.2041 |
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1.1699 |
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January 2006
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1.2287 |
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1.1980 |
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February 2006
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1.2100 |
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1.1860 |
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On March 20, 2006, the noon buying rate was $1.2168 per
1.00.
Since the beginning of 1999, our shares have traded on the
Frankfurt Stock Exchange in euro. We expect that 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 on the Frankfurt Stock Exchange and as a result are
likely to affect the market price of our American Depositary
Shares (ADSs) on the New York Stock Exchange. In
addition, you should note that any cash dividends that we may
declare in the future will be denominated in euro. Therefore,
exchange rate fluctuations between the euro and the
U.S. dollar will affect the U.S. dollar amounts that
the holders of our ADSs will receive upon the conversion of any
cash dividends that we may pay out on the shares represented by
these ADSs.
A substantial portion of our assets, liabilities, revenues and
expenses are denominated in currencies other than the euro.
Accordingly, fluctuations in the value of the euro relative to
other currencies have had a significant effect on the
translation into euro of our non-euro assets, liabilities,
revenues and expenses, and may continue to do so in the future.
For further information on the impact of fluctuations in
exchange rates on our operations, see
Risk Factors Risks Related to each
of our Businesses and
Item 11: Quantitative and Qualitative
Disclosures About Market Risk.
Risk Factors
Our business, financial condition and results of operations may
suffer material adverse effects due to any of the following
risks. Additional risks not known to us or that we now consider
immaterial also may adversely affect our business.
Risks Related to each of our Businesses
Because the industries in which we operate are
characterized by constant innovation and technological change,
our success depends upon our continued ability to develop and
market innovative products on a cost-effective basis. If we fail
to do so, we may be unable to capture additional market share or
may lose market share.
We operate in the pharmaceuticals and the specialty chemicals
industries, both of which are highly competitive and are
characterized by intensive research and development efforts and
rapid technological change. Our success is highly dependent on
our ability to discover, develop and manufacture new and
innovative products on a cost-effective basis and to market them
successfully. In doing so, we face and will continue to face
intense competition from a variety of competitors, ranging from
small niche companies to large national and international
conglomerates. Based on total assets and annual revenues, we are
significantly smaller than many of our competitors, which often
have substantially greater financial, R&D and sales and
marketing resources than we do. In addition, we may have fewer
drug candidates in our pipeline than our larger competitors. As
a result, our competitors may succeed in developing and
manufacturing products that are superior to our own products or
that the market perceives to be more attractive. If this
happens, our products may become uncompetitive and we may be
unable to capture additional market share or may lose market
share. In light of the ongoing consolidation of the industries
in which we operate, we expect that the competitive pressures to
which we are subject will increase in the future.
- 9 -
We operate in many different countries around the world.
As a result, fluctuations in the exchange rates between the euro
and other currencies could adversely affect our results of
operations and reduce our ability to price our products
competitively.
Due to the international scope of our operations, our net sales
and net income may be affected by fluctuations in exchange
rates, particularly between the euro and the U.S. dollar.
An increasing portion of our sales is made in markets outside
the euro zone by our local subsidiaries or through distribution
arrangements. As a result, fluctuations between the euro and the
currencies in these markets may cause our reported revenues to
vary significantly from period to period. For example, the
devaluation of the U.S. dollar against the euro that in
2003 and 2004 had a negative impact on our net sales, especially
our reported sales of Pantoprazole, which is currently our most
important product, in the United States. Although the effect of
this devaluation was in part offset by the appreciation of the
U.S. dollar against the euro in the course of 2005, there
can be no assurance that the U.S. dollar will not
depreciate further in the future. At the same time, a
substantial proportion of our operating costs continues to be
linked to the euro. Accordingly, exchange rate fluctuations have
affected our profitability, and they may continue to do so in
the future.
You should note that in the past each of our subsidiaries was
responsible for managing its own foreign exchange rate exposure.
In 2003, we introduced a uniform hedging strategy for our main
currency exposures, especially our exposure to the
U.S. dollar and currencies linked to the U.S. dollar,
by expanding the time frame for our hedging transactions and the
range of instruments that we use in structuring them. We believe
that this revised strategy has assisted us in better forecasting
our operating results and in limiting our exposure to volatile
exchange rates. Nevertheless, fluctuations in the exchange rates
between the euro and other currencies, particularly the
U.S. dollar, may continue to influence our revenues and
profitability.
In addition to influencing our reported net sales and net
income, exchange rate fluctuations may also impact our
competitive position in countries whose currencies fluctuate
against the euro. In 2004, the strengthening of the euro
relative to the U.S. dollar benefited our U.S.-based
competitors, including in respect of their activities in the
euro zone, and reduced our own pricing flexibility, which
adversely affected the reported revenues and profitability of
each of our segments. While the euro weakened relative to the
U.S. dollar in 2005, it remained relatively strong, and any
further strengthening would reinforce this adverse effect on our
revenue and profitability.
Because we depend on key management, scientific and
technical personnel, our ability to compete would suffer if we
were unable to hire and retain qualified employees.
Our success depends upon the continued contributions of our key
management, scientific and technical personnel, many of whom
have substantial experience with our company and would be
difficult to replace. Competition for qualified personnel is
intense in the industries in which we operate, and we may be
unable to attract the highly qualified employees that our
business requires. If we lose the services of our key management
or scientific and technical personnel or do not succeed in
attracting highly qualified personnel in the future, our
business may be hurt by a reduced ability to compete in the
rapidly evolving markets in which we operate.
Our business will suffer if we are unable to obtain and
defend intellectual property rights or if we do not gain access
to, or are accused of infringing, the intellectual property
rights of others.
Our ability to remain competitive and to capture additional
market share, particularly with respect to our pharmaceuticals
segment, depends in part on our ability to obtain and defend
patents, trademarks and other forms of intellectual property
protection for our products, and on our development and
manufacturing processes and our know-how. While we intend to
prosecute patents vigorously, the process of obtaining patents
is lengthy and expensive. There can be no assurance that patents
will be granted in connection with any of our currently pending
or future applications or that such patents will be valid and of
sufficient scope and strength to provide us with meaningful
legal protection or any commercial advantage. In 2004, generic
drug companies filed Abbreviated New Drug Applications
(ANDAs) with the U.S. Food and Drug
Administration (FDA) in the United States
challenging our Pantoprazole substance patent with a view to
- 10 -
manufacturing and distributing generic versions of Pantoprazole.
In response to one of these challenges, we filed a patent
infringement suit in May 2004 in the U.S. District Court
for the District of New Jersey. Several companies have also
filed ANDAs challenging our Pantoprazole oral formulation
patent. Because Pantoprazole enjoys protection in the United
States under our substance patent until 2010 (and our oral
formulation patent is therefore irrelevant for the time being),
we have decided not to take any immediate action with regard to
these ANDAs. However, in 2005, one of the challengers of our
Pantoprazole oral formulation patent, amended its ANDA to
include a paragraph IV certification relating to our
Pantoprazole substance patent and in addition filed an ANDA
regarding our Pantoprazole intravenous (IV)
formulation patent. As a result, we filed complaints in the
U.S. Federal District Court for the District of New Jersey.
In these complaints, we claim that this competitor is infringing
our substance patent, but consistent with our approach to the
other attacks on our oral formulation patents, do not claim that
our IV formulation patent has been infringed. While we believe
that our U.S. patents relating to Pantoprazole are valid
and enforceable and of sufficient scope and strength to prevent
the entities that have made the filings and any other third
party from manufacturing and distributing Pantoprazole-based
generics at this time, there can be no assurance that we will be
successful in defending our patents. For more information, see
Item 4: Information on the Company
Pharmaceuticals Intellectual Property and
Item 4: Information on the Company Legal
Proceedings.
In addition, intellectual property protection may be unavailable
or limited in some of the countries in which we do business.
Furthermore, a substantial portion of our know-how is not
eligible for patent or comparable forms of intellectual property
protection. To protect this type of information against access
by competitors, we rely on trade secret law and frequently enter
into confidentiality agreements with our employees, customers
and partners. These agreements may be unenforceable, however,
and the remedies available to us for breaches may be inadequate.
Likewise, our competitors may gain access to our know-how by
lawful means, for example, by reverse engineering or by
independently developing the same know-how, which would destroy
any advantage that our know-how may afford us.
Our competitive position may also suffer if competitors come up
with products, development or manufacturing processes or
know-how that is protected by patents, trademarks, licenses or
other forms of intellectual property protection. Technologies
over which our competitors hold intellectual property rights may
either be unavailable to us or be available to us only on
unfavorable terms. To gain access to such technologies, we
sometimes enter into licensing arrangements with third parties.
If our licensing partners were to terminate the licenses that we
have obtained from them or if we are unable to obtain licenses
on commercially favorable terms in the future, our ability to
develop, manufacture and market our present and future products
may be impaired.
While we seek to protect our trademarks, which include the names
of many of our key products, by filing for trademark protection
in most of the countries where we sell these products, you
should note that trademark protection consists primarily of a
right to sue against infringing uses of a mark and, in order to
be effective, requires extensive policing. If we fail to detect
instances of infringement or if we do not succeed in defending
our trademarks in court, our reputation with our customers and
our ability to protect our trademarks in the future may be
harmed.
It may become necessary for us to seek to enforce our patents,
trademarks, licenses and other forms of intellectual property
protection and to protect our trade secrets by taking legal
action or to engage in litigation in order to defend ourselves
against claims of alleged infringement of someone elses
intellectual property brought against us by third parties. There
can be no assurance that we will be able to successfully settle
or otherwise resolve claims that may be brought against us by
third parties in the future. If we are unable to successfully
settle future claims on terms acceptable to us, we may be
required to engage in costly and time-consuming litigation and
may be prevented from, or experience substantial delays in,
marketing our existing pharmaceuticals and launching new ones.
Any of these events could require us to divert substantial
financial and management resources that we would otherwise be
able to devote to our business.
- 11 -
Because our operations are subject to numerous
environmental laws and regulations, we could become exposed to
liability and be required to spend substantial amounts in
connection with environmental compliance or remediation
proceedings.
Our operations are subject to numerous environmental laws and
regulations in the jurisdictions in which we operate. These laws
and regulations govern, among other things, air emissions,
wastewater discharges, the use and handling of hazardous
substances, waste disposal and the investigation and remediation
of soil and groundwater contamination. As with other companies
engaged in activities similar to ours, we face a risk of
environmental liability inherent in our current and historical
manufacturing activities. While we do not believe that any
currently anticipated environmental compliance and remediation
requirements are likely to have a material adverse effect on our
business, financial condition or results of operations, we may
be forced to incur substantial expenses in connection with
future environmental compliance or remediation proceedings, in
which case our results of operations and financial condition may
be materially adversely affected.
We may be faced with product liability claims, which could
impair our reputation in the marketplace and hurt our
profitability.
Although we maintain a comprehensive quality assurance program,
there remains a risk that defects may occur in any of our
products. The occurrence of such defects could give rise to
liability for damages, including consequential and punitive
damages, and could, by impairing our reputation, reduce the
markets acceptance of our products. This risk exists in
each of our segments.
To reduce our exposure to the aforementioned risks, we maintain
an insurance policy covering product liability claims. There can
be no assurance, however, that our insurance policy will be
adequate and sufficient to cover all product liability claims
that may be brought against us or that we will be able to obtain
adequate insurance coverage on commercially reasonable terms in
the future. A successful product liability claim in excess of
our coverage could require us to pay substantial amounts in
damages. In addition, our insurance policy does not protect us
against reputational harm that we may suffer if the market
perceives our products as unsafe or ineffective.
Our business may suffer as a result of volatility in
different parts of the world.
We operate on a global basis. Our business is therefore subject
to a variety of risks inherent in conducting international
operations, each of which could adversely affect our business
and results of operations. These risks include:
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Wars, terrorist attacks and other hostilities; |
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Instability of foreign governments; |
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Changes in domestic or foreign laws or policies affecting
international trade and foreign investment; and |
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Varying practices of the regulatory, tax, judicial and
administrative bodies in the jurisdictions in which we operate. |
Risks Related to our Pharmaceuticals Business
Because we depend on the sale of a limited number of key
products to generate a substantial portion of our revenues,
factors adversely affecting the sale of these products could
materially harm our revenues and results of operations.
Like other companies in the pharmaceuticals industry, our
pharmaceuticals division depends on sales of certain key
products that account for a substantial portion of its revenues.
For example, in 2005, our net sales of Pantoprazole, a proton
pump inhibitor (PPI) that we offer for the treatment
of ulcers and reflux disease, accounted for 57.6% of the net
sales of our pharmaceuticals division, or 41.6% of our overall
revenues. Pantoprazole has been a key revenue driver of our
pharmaceuticals division for several years, and we expect that
it will continue to account for a substantial portion of our
revenues in future periods. Despite the launch
- 12 -
of Ciclesonide under the brand name
Alvesco®
in 2005, we expect to continue to depend on a limited number of
key products for the foreseeable future, particularly following
the termination of our collaboration with Pfizer, Inc.
(Pfizer) and the withdrawal of our European
Marketing Authorization Application (MAA) for
Roflumilast, a drug we are continuing to develop and intend to
market under the brand name
Daxas®.
As a result of our dependence on key products, particularly
Pantoprazole, factors adversely affecting the sale of any of
these products could materially adversely affect our revenues
and results of operations. These factors include:
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Competition from other branded pharmaceuticals that may be
equivalent or superior to our own products or that the market
perceives to be more attractive; |
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Competition from generic versions of branded pharmaceuticals,
irrespective of the way they are marketed, once the term of
patent protection for the original branded pharmaceuticals has
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Technological advances; |
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The marketing strategies of our competitors; |
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Supply chain interruptions; |
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Work stoppages; |
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Changes in prescription practices; |
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Changes in the reimbursement policies of third-party payers; and |
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Product liability claims. |
Pantoprazole in particular faces competition from various other
branded PPIs. Most notably, these competitors include
AstraZenecas Esomeprazole and Takedas Lansoprazole.
If our competitors continue to invest heavily in marketing these
products, the ability of Pantoprazole to capture market share or
maintain its current market share could be adversely affected.
In addition, Pantoprazole and other branded PPIs face
competition from generic PPIs, in particular generic PPIs based
on a substance called Omeprazole. A variety of companies are
marketing Omeprazole-based generics in Europe and the United
States at prices that tend to be significantly lower than the
price of Pantoprazole and other branded PPIs. Further
competition may result from the launch of generic PPIs based on
substances other than Omeprazole once the relevant patents have
expired. Pantoprazole also competes with over-the-counter
(OTC) PPIs. Unlike Pantoprazole, these PPIs are
available to patients without a prescription. Various
Omeprazole-based OTC PPIs have been launched in the United
States and several European countries and are being marketed
with increasing success. While generic and OTC PPIs have so far
had a limited impact on the market for branded PPIs, including
Pantoprazole, in Europe, we are experiencing stronger pricing
pressure in the U.S. market with respect to Pantoprazole.
From Pantoprazoles introduction in 2000 until the fall of
2004, the drugs market share in the United States grew,
with temporary interruptions. However, in 2005 as a result of
factors including those described above, Pantoprazoles
share of PPI prescriptions stabilized. Given the increasing
competition from generic and OTC PPIs, there can be no assurance
that Pantoprazoles market share, prescription rates and
net sales contribution will remain at their current levels in
future periods.
Following the expiration of our Pantoprazole substance patent in
most European countries, as extended by supplementary protection
certificates, and the United States in 2009 and 2010,
respectively, we expect our Pantoprazole sales to decrease
substantially.
We depend on Wyeth, Inc. (Wyeth) for the
marketing and distribution of Pantoprazole in the United States.
If Wyeth were to devote insufficient resources to the marketing
of Pantoprazole or if we were to lose Wyeth as a partner, our
sales of Pantoprazole would be adversely affected.
Until June 2003, we marketed Pantoprazole in the United States
exclusively through Wyeth Pharmaceuticals, the pharmaceuticals
division of Wyeth. Since July 2003, our own dedicated sales
force for
- 13 -
the U.S. market has been co-promoting Pantoprazole
alongside Wyeth. While this arrangement has afforded us greater
influence with respect to the marketing of Pantoprazole in the
United States, the revenues that we derive from this drug in the
U.S. market continue to materially depend on the resources
that Wyeth devotes to the marketing of this therapeutic. While
our distribution arrangement with Wyeth requires Wyeth to use
commercially reasonable efforts to sell Pantoprazole, there can
be no assurance that Wyeths marketing efforts will
continue to be successful. In addition, Wyeth is entitled to
terminate its distribution agreement with us under certain
circumstances, including when a third party commences legal
action against Wyeth alleging patent infringement, as well as
without cause upon one years prior written notice. If
Wyeth terminates the contract for reasons other than because we
become insolvent or commit a material breach of the agreement,
it is required to transfer all of its rights pertaining to
Pantoprazole and to products based on this substance, including
any regulatory approvals that it has obtained, to us. See
Item 10: Additional Information Material
Contracts for a summary of the terms of our agreement with
Wyeth. If we were to lose Wyeth as a distribution partner, we
would be forced to find a suitable replacement. If we experience
delays in finding such a replacement, our ability to sell
Pantoprazole in the United States, which accounts for a
substantial portion of our Pantoprazole sales worldwide, would
suffer, and, accordingly, our results of operations would be
adversely affected.
Due to the inherent unpredictability of the process
underlying the development of new pharmaceuticals, there can be
no assurance that we will be able to successfully and timely
launch new drugs and other pharmaceutical products.
A critical element of our future success is the successful and
timely commercial launch of new products. To this end, we devote
substantial resources to research and development and have a
number of promising candidates for new therapeutics in our
pipeline, including a potential next-generation drug for
indications similar to those of Pantoprazole and several
candidates for the treatment of asthma and chronic obstructive
pulmonary diseases (COPD). Because of the
complexities and uncertainties associated with pharmaceutical
research, however, we cannot be certain that any of these drug
candidates will survive the development process and ultimately
obtain the regulatory approvals needed in order to be launched
commercially. Even if the initial results of the development of
a drug candidate are positive, adverse or otherwise
unsatisfactory results remain possible at any time. For example,
in the case of Roflumilast we decided in 2005 to withdraw our
MAA after consulting with the European Medicines Agency
(EMEA) because the clinical record we had
established at the time was less compelling than we had expected.
We may be unable to continue our expansion into the
U.S. market, or our expansion may be delayed, each of which
would limit our growth opportunities.
A key element of the growth strategy of our pharmaceuticals
division is our plan to expand into the United States. The
United States is the biggest pharmaceuticals market in the world
and offers the greatest growth opportunities for our business.
We plan to continue our expansion into the U.S. market with
the assistance of experienced co-promotion partners and by
exploiting the launch of Ciclesonide, which is aimed at the
treatment of respiratory indications, to gradually expand our
own sales and marketing organization for innovative therapeutics
in the United States. This sales and marketing organization
operates separately from our existing U.S. operations for
facial topics and certain other types of pharmaceuticals. While
we made progress in this area in 2005, if Ciclesonide fails to
make it to the U.S. market or to generate sufficient demand
in the United States, or if we were to lose our co-promotion
partner for this drug and were unable to find a suitable
replacement or experience delays in finding a replacement, we
may be unable to continue our expansion in the U.S. market
or may experience delays in doing so. For example, in 2002, we
entered into an agreement with Pharmacia Corporation, which
subsequently was acquired by Pfizer, to co-develop and market
Roflumilast in the United States, which would have enabled us to
further expand our U.S. sales and marketing organization.
However, we mutually agreed in 2005 to terminate this agreement
and, accordingly, will not be able to collaborate with Pfizer in
establishing a sales and marketing organization in regard to
this product. If we do not succeed in securing a strategic
position in this or other international markets, the growth of
our business may be adversely affected. In addition, we may be
unable to recover investments that we have already made in these
markets.
- 14 -
Because our business is subject to extensive governmental
regulation, including price controls, our ability to market our
products is subject to administrative constraints over which we
have only limited influence.
The development, manufacture and marketing of pharmaceuticals
are subject to extensive governmental regulation. Regulatory
approval is required in each jurisdiction in which we operate
before any dosage form of any new pharmaceutical, including an
off-patent equivalent of a previously approved pharmaceutical,
may be marketed in that jurisdiction. The process for obtaining
governmental approval to market pharmaceuticals is rigorous,
time-consuming and costly, and it is impossible to predict the
extent to which this process may be affected by legislative and
regulatory developments. We currently have several projects in
various stages of the approval process in the United States, the
European Union and Japan. If we fail to obtain, or experience
delays in obtaining, regulatory clearance to market new
pharmaceuticals or existing pharmaceuticals for new indications
or if we experience any other regulatory impediments, our
results of operations may be adversely affected. Even after a
pharmaceutical has been approved, it may be subject to
regulatory action based on newly discovered facts concerning its
safety or efficacy. Any such regulatory action may adversely
affect the marketing of our pharmaceutical products, require
changes to their labeling or even force us to withdraw them from
the market altogether.
In addition to the need for obtaining regulatory approval to
market new products, we are subject to price controls imposed by
local governments and health care providers and in some markets
need to obtain special approval before patients are entitled to
be reimbursed for purchasing our products. The existence of
price controls can limit the revenues that we earn from our
products and thus could also have an adverse effect on our
results of operations. The way in which price controls operate
varies by country and can cause substantial disparities in the
price levels prevailing in different markets. Many governments
and private medical care providers, such as Health Maintenance
Organizations (HMOs) and social security
organizations, have introduced or are currently in the process
of introducing reimbursement schemes that favor the replacement
of branded pharmaceuticals by cheaper generic pharmaceuticals.
Since January 1, 2003, the pharmaceuticals industry in
Germany has been required to grant the German public health care
insurance companies (which are the main purchasers of drugs in
the German health care market) fixed mandatory rebates
(Kassenrabatte) for most ethical therapeutics. These
rebates, which were increased from 6% in 2003 to 16% in 2004
before again being decreased to 6% in 2005, have, especially in
2004, negatively influenced our pharmaceuticals sales in Germany
when compared to a regulatory environment without such mandatory
rebates. At present, it is unclear to what extent proposed new
legislation, which is aimed at a two-year price moratorium for
all drugs paid for by the statutory health care insurance scheme
(gesetzliche Krankenversicherung), will impact our sales
in Germany in the future. In addition, in 2004, new legislation
took effect which provides for the possibility to include
patent-protected drugs in the system of statutory fixed
reference prices certain classes of active ingredients. Drugs
included in the statutory fixed reference price system are not
subject to the fixed mandatory rebates. On January 1, 2005,
Pantoprazole was included in the statutory fixed reference price
system. The association of the German health care insurance
providers has included Pantoprazole in a reference price group
along with other branded PPIs and cheaper Omeprazole-based
generics. In our view, this classification ignores the
substantial therapeutic advantages offered by Pantoprazole
compared with Omeprazole (for example, the fact that
Pantoprazole has less clinically relevant potential for
metabolic interaction with other drugs). While we have lowered
our prices for Pantoprazole in Germany to match the statutory
fixed reference price for this drug so that German patients
insured under the statutory health care insurance scheme
(gesetzliche Krankenversicherung) and wishing to purchase
Pantoprazole do not have to pay more than the amount covered by
their respective health insurance policies, we have also filed
suit against the associations decision before the Social
Court in Berlin, Germany. However, there can be no assurance
that we will prevail in this lawsuit.
As a result of these developments, we anticipate that German
regulations will continue to have a negative impact on our
business in Germany. We are also subject to further price
regulations in various other countries, particularly in Europe.
In the United States, generic substitution statutes, which aim
to promote the substitution of original ethical drugs by less
expensive generic drugs, have been adopted in virtually all
states. In addition, the reform of the Medicare system, which
was put in place at the end of 2003, has introduced
pharmaceutical coverage for eligible beneficiaries. While demand
for pharmaceuticals in the U.S. market
- 15 -
could therefore increase significantly, the U.S. government
could use its purchasing power to demand discounts from
pharmaceuticals companies, thereby creating de facto
price controls on prescription drugs. As a result, we expect
that we will continue to experience pricing pressures, which
could adversely affect our revenues and operating results.
As part of our plans to expand our pharmaceuticals
business, we expect to make substantial investments in
therapeutic areas in which we have limited experience, such as
oncology. If we are unable to develop new drugs in these areas,
we may be unable to recoup our investments.
Our medium- to long-term goal is to expand our pharmaceuticals
business by entering markets in which we are currently not
active. One such market that we may enter is the oncology
market, which we expect will grow substantially in the future.
We have commenced basic oncological research and entered into
R&D collaborations with third parties, and we intend to make
further investments related to oncology over the next several
years. In addition, we may decide to enter other therapeutics
markets, which may require us to make similar investments.
Investments of this sort frequently involve significant cash
expenditures, for example in connection with hiring qualified
scientists, conducting R&D projects and making desirable
acquisitions. In addition, you should note that we have limited
experience with respect to therapeutics that we do not currently
offer. As a result, there can be no assurance that we will be
successful in developing, manufacturing and marketing
therapeutics for new markets or integrating them with our
existing portfolio at all or within a time frame that will
enable us to recoup our initial investments. Any of these risks
may ultimately have an adverse impact on our business, financial
condition and results of operations.
Our R&D strategy involves creating and maintaining
alliances and other collaborative arrangements with third
parties, and any inability to find or retain suitable
collaborators may adversely affect our ability to develop new
pharmaceuticals.
Our continued success will in part depend on our ability to
establish new and to maintain existing collaborations, alliances
and licensing arrangements with third parties, especially with
biotech companies. Collaborations with companies and other
entities that have expertise in biotechnology and genetic
research are of particular importance to our plans to supplement
the existing franchises of our pharmaceuticals business with
therapeutics for oncological indications. We may not be able,
however, to establish and maintain such collaborations on terms
that are acceptable to us or at all. For example, in 2005, we
mutually agreed with Pfizer to terminate our collaboration
agreement with regard to Roflumilast. Moreover, in view of the
ongoing consolidation of the biotech industry, we may experience
greater difficulty finding suitable partners in the future, as a
number of smaller companies, which would be candidates for
collaborations, become part of larger conglomerates that compete
with us and that may be unwilling to grant us access to
attractive technologies on commercially favorable terms or at
all. In addition, we have no control over the amount and timing
of resources that our partners devote to our programs. If we are
unable to form or maintain alliances or our partners fail to
assist us with our R&D efforts, our business may be harmed
and our results of operations may be adversely affected.
Risks Related to our Chemicals Business
Demand for our products could suffer as result of periodic
downturns.
Because the specialty chemicals that we offer are used in a wide
variety of downstream industries served directly or indirectly
by us, including the automotive, construction, electrical
appliances and packaging industries, our results are affected by
the business cycles experienced by these industries. While we
seek to reduce our exposure to these cycles by focusing on
complementary geographic and product markets, there is no
assurance that we will be successful in insulating our chemicals
business from downturns experienced by the industries that it
serves. In addition, we are not immune to negative economic
developments affecting more than one of these industries.
Economic downturns can lead to overcapacity, oversupply, price
pressure, reduced growth and lower margins, each of which could
adversely affect our business and results of operations.
- 16 -
Our results may suffer if we are unable to offset
increases in raw material prices or pass them on to our
customers.
Raw material costs account for a significant portion of the cost
of sales of our chemicals business. The prices and availability
of the raw materials that we use in our chemicals business vary
with market conditions and can be highly volatile. If we are
unable to compensate for increasing raw material prices by
achieving cost savings in other areas or to pass such increases
on to our customers, or if the prices for our products decrease
faster than raw material prices, our profitability may be hurt.
Our ability to pass on raw material price increases depends on a
variety of factors, including the degree to which we are able to
distinguish our products from those of our competitors. In 2005,
we continued to experience high raw material prices, especially
for oil and oil-related products. We continue to attempt to
protect ourselves against these developments by streamlining our
production processes, centralizing our procurement efforts and
substituting more expensive raw materials for cheaper ones.
Nevertheless, we have historically not always been successful in
offsetting the impact of rising raw material prices, and there
can be no assurance that we will be in the future. Even if we
manage to pass on increases in raw material costs to our
customers further increases in raw material prices may have an
overcompensating effect. Therefore, you should be aware that any
movements in the level of the raw material prices that we use in
our chemicals business may have a material impact on our
business, results of operations and financial condition.
Our growth depends in part on our ability to acquire and
successfully integrate companies into our existing
organization.
A key element of the growth strategy of our chemicals division
is to supplement our internal growth with strategic acquisitions
of businesses and technologies that we consider capable of
complementing or enhancing our existing products or of providing
us with access to new markets. As a result, if we are unable to
identify suitable acquisition targets, our growth prospects may
suffer. In addition, in pursuing acquisitions, we may face
competition from other companies operating in the specialty
chemicals and related industries. Our ability to make
acquisitions may be limited also by applicable antitrust,
anti-takeover and other regulations in the United States, the
European Union and any of the other jurisdictions in which we do
business. If any of these risks materializes, we may be unable
to make desirable acquisitions or to complete them on terms
attractive to us. If that occurs, our ability to grow in certain
of our business areas may be adversely affected.
To the extent that we are successful in making acquisitions, we
may have to expend substantial amounts of cash, incur debt,
assume loss-making divisions and incur other types of expenses.
We may also face challenges in successfully integrating acquired
companies into our existing organization. For example, in 2005,
we acquired ECKART GmbH & Co. KG (the ECKART
Group). The acquisition of the ECKART Group was
significantly larger than the acquisitions we had made
previously, and accordingly we may not be as successful in
integrating this business as we have been in similar situations
in the past. Each of these risks may have an adverse effect on
our business, financial condition and results of operations.
Risks Related to Investments in our Company
Because we and our directors and officers are located in
Germany, it may be difficult for you to sue these persons in the
United States or to enforce judgments by U.S. courts
against them.
We are a corporation organized under the laws of the Federal
Republic of Germany, and certain of our directors and executive
officers are residents of Germany. In addition, a substantial
portion of the assets owned by us and the aforesaid individuals
is located outside the United States. As a result, it may be
difficult or impossible for you to effect service of process
upon us or any of the aforesaid persons within the United States
with respect to matters arising under the U.S. federal
securities laws or to enforce against us or any of such persons
judgments of U.S. courts predicated upon the civil
liability provisions of the U.S. federal securities laws.
We have been advised by counsel that it is doubtful as to
whether original actions of liabilities predicated on the
U.S. federal securities laws may be enforced in Germany and
that in Germany both recognition and enforcement of court
judgments with respect to the civil liability provisions of the
- 17 -
U.S. federal securities laws are solely governed by the
provisions of the German Civil Procedure Code
(Zivilprozessordnung or ZPO). In some cases,
especially when the relevant statutory provisions of German law
do not recognize the international jurisdiction of a
U.S. court or the judgment conflicts with certain basic
principles of German law (for example, the prohibition of
punitive damages and limited pre-trial discovery), a
U.S. judgment might not be recognized by a German court.
Service of process in U.S. proceedings on persons in
Germany, however, is regulated by a multilateral treaty
guaranteeing service of writs and other legal documents in civil
cases if the current address of the defendant is known.
- 18 -
ITEM 4: INFORMATION ON THE COMPANY
Introduction
We are a globally operating company that develops, manufactures
and markets innovative pharmaceutical and chemical products for
a range of targeted, highly specialized applications. In 2005,
we reported net sales of
3,272 million,
82% of which were generated outside of our home market Germany,
and operating income of
676 million.
In each of the last five years, we were able to significantly
increase our revenues and operating income, although the growth
rate has flattened in recent years. Much of this development has
been driven by Pantoprazole, our main therapeutic, which we
offer for the treatment of reflux disease as well as gastric and
duodenal ulcers, but increasingly also from growth of our
chemicals business. We expect further growth of our Pantoprazole
sales but, given the market position that Pantoprazole has
achieved to date, we expect this growth to slow in the coming
years. The following table provides a breakdown of our net sales
and shows our operating income for the three years ended
December 31, 2005:
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2004 | |
|
2005 | |
|
CAGR(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
|
( in millions, except %) | |
|
(%) | |
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceuticals
|
|
|
1,980 |
|
|
|
2,109 |
|
|
|
2,365 |
|
|
|
8.3 |
|
|
Chemicals
|
|
|
755 |
|
|
|
854 |
|
|
|
907 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,735 |
|
|
|
2,963 |
|
|
|
3,272 |
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
558 |
(2) |
|
|
604 |
(2) |
|
|
676 |
|
|
|
7.9 |
|
|
As % of net sales
|
|
|
20.4 |
(2) |
|
|
20.4 |
(2) |
|
|
20.7 |
|
|
|
|
|
|
|
(1) |
The Compound Annual Growth Rate (CAGR) measures the
average annual growth of a line item over the period for which
data is shown in the table. |
|
(2) |
2003 and 2004 figures have been adjusted to reflect the
retroactive application of IFRS 2. For further details see
Note 2 to our consolidated financial statements as of and
for the year ended December 31, 2005. |
For a description of our principal capital expenditures over the
last three years, see Item 5: Operating and Financial
Review and Prospects Liquidity and Capital
Resources.
Our pharmaceuticals division is committed to developing
innovative therapeutics for the global pharmaceuticals markets
with a strategic focus on unmet medical needs in the
gastrointestinal and respiratory areas. Our pharmaceuticals
business is currently mainly driven by Pantoprazole. We market
Pantoprazole in virtually all regions of the world with the
exception of Japan. The main markets for the drug are the United
States and Europe. Pantoprazole has been chiefly responsible for
the growth of our pharmaceuticals division in recent periods,
and we expect that it will continue to be a key revenue driver
in the coming year.
In addition, after successfully completing the Mutual
Recognition Procedure (MRP) in most European
countries, we started marketing Ciclesonide, an innovative
product for the treatment of asthma, as a metered dose inhaler
(MDI) device under the brand name
Alvesco®.
We initially launched this product in two European markets,
Germany and the United Kingdom. As of mid-March 2006, we had
received regulatory approval for Ciclesonide in 35 countries and
had launched it in 17 countries. In October 2004, our
collaborative partner in the United States, Sanofi-Aventis S.A.
(Sanofi-Aventis), received an approvable
letter for Ciclesonide from the FDA.
- 19 -
We are also developing Roflumilast, a drug candidate for the
treatment of asthma and chronic obstructive pulmonary diseases
(COPD) which we intend to market under the brand
name
Daxas®.
Following the termination of our cooperation with Pfizer, Inc.
(Pfizer) and withdrawing our European Marketing
Authorization Application (MAA) with respect to Roflumilast in
2005, we are conducting further clinical studies to obtain more
data. The submission of a new MAA will be pursued if we view the
clinical data obtained in the ongoing clinical trials as
sufficiently strong for this purpose.
In addition to our portfolio of prescription therapeutics, we
offer imaging reagents and an assortment of over-the-counter
(OTC) drugs, which are drugs that are available to
patients without prescription.
Our chemicals division offers a portfolio of innovative high
quality specialty chemicals, including additives and measuring
instruments, metallic effect pigments and printing inks,
coatings and sealing compounds, and electrical insulation
coatings for use in a wide range of downstream applications. In
light of the highly application-specific nature of the specialty
chemicals that we offer, we maintain close contact with our
customers and constantly aim to develop, manufacture and market
products that respond to their specific requirements. We believe
that our customer-oriented approach has enabled us to achieve
leading positions in the selected markets that we serve as well
as revenue growth and margins above the average of our peers.
At December 31, 2005, we had operating subsidiaries in over
25 countries, which marketed our products on a worldwide
basis. At that date we employed almost 13,300 people, of whom
18% worked in research and development. We believe that our
commitment to the international expansion of our business and to
R&D will enable us to capture future growth opportunities in
the pharmaceuticals and specialty chemicals industries in our
various targeted markets.
We are incorporated as a stock corporation under the laws of the
Federal Republic of Germany and began operations as a separate
legal entity in 1977 following our spin-off by VARTA AG. The
legal name of our company is ALTANA Aktiengesellschaft. Our
principal executive offices are located at Am
Pilgerrain 15,
D-61352 Bad Homburg
v.d. Höhe, Germany, and our telephone number is ++49
(0) 6172-1712-0.
Strategy
Our group mission, which serves as a guiding principle for both
our divisions, is to increase our value through sustained
profitable growth by developing, manufacturing and marketing
innovative products in selected high-margin areas and expanding
our operations internationally. We are committed to fully
exploiting the opportunities of emerging technologies by
investing a substantial amount of our annual earnings in R&D
and to enlarging our presence in all important international
markets, particularly the United States and Asia.
We measure our success in creating value by reference to
sustained levels of growth in earnings, annual dividends and
market capitalization. To focus our efforts on these criteria,
we have sought to align the interests of our management and
employees with those of our shareholders by implementing
stock-based compensation programs. Accordingly, we operate
annual stock option plans that are open to our management board,
senior executives and other key and high-potential employees. We
also offer an annual share ownership plan for those of our
employees who are not eligible to participate in our stock
option plans. For more information on these plans, see
Item 6: Directors, Senior Management and
Employees Share Ownership Stock Option
Plans and Item 6: Directors, Senior
Management and Employees Share Ownership
ALTANA Investment Program.
In 2005, we announced our intention to dissolve our present
group structure and to achieve an independent operation of our
two divisions in the course of 2006. With respect to our
pharmaceuticals division we are analyzing potential strategic
partnerships with the aim to examine various options for the
long-term future development of our pharmaceuticals business. We
also intend to pursue the independent operation of our chemicals
business as a listed company. No final decision regarding these
projects has yet been made.
In addition to our overall group strategy, we have also
formulated more detailed strategies for each of our two
divisions.
- 20 -
In our pharmaceuticals division, our strategy is to:
|
|
|
|
|
Develop innovative therapeutics in high-growth areas. To
capitalize on opportunities in the worldwide pharmaceuticals
markets, we concentrate our efforts on the discovery and
development of innovative therapeutics in those areas that we
believe offer the highest growth potential. Our current focus is
on expanding our successful gastrointestinal franchise by
exploiting the expertise that we have gained through the
development of Pantoprazole, while strengthening our respiratory
franchise. To this end, we are actively developing
next-generation therapeutics for the treatment of ulcers and
acid reflux disease, including Soraprazan, which is a potassium
competitive acid blocker in Phase II clinical development. We
have launched a metered dose inhaler (MDI)
application of Ciclesonide, an innovative drug for the treatment
of asthma, under the brand name
Alvesco®
in 17 markets, including Germany, the United Kingdom, The
Netherlands, Brazil, Australia and other countries, and are in
the process of obtaining more clinical data regarding an
innovative drug for the treatment of asthma and COPD,
Roflumilast, which we intend to market under the brand name
Daxas®,
provided we manage to obtain regulatory approval. Our medium- to
long-term goal is to supplement our existing franchises by
entering the oncology market, which we expect will grow
substantially in the future. |
|
|
|
Expand our business internationally, particularly in the
United States, to capture growth opportunities in the global
pharmaceuticals markets. International markets already
account for more than 80% of the net sales of our
pharmaceuticals division. We consider the further
internationalization of our business a key element of our growth
strategy. The strong market position of Pantoprazole in the
United States has enabled us to achieve substantial sales
increases over the past years. In 2005, our
U.S. pharmaceutical sales amounted to
651 million, representing 27.5% of the total
net sales of our pharmaceuticals division in this period. To
solidify and expand our position in this and other important
international markets, we aim to increase our visibility by
entering into co-promotion arrangements with partners that have
established marketing and sales organizations and by exploiting
the launch of our pipeline drugs to gradually expand our own
sales and marketing organizations for innovative pharmaceuticals
in the United States and other overseas markets. In addition, we
plan to create and expand our own research, clinical development
and regulatory affairs facilities in overseas locations,
especially in the United States and Japan. |
|
|
|
Focus on R&D. We believe that the foundation of our
long-term growth strategy is our continued emphasis on R&D
with a special focus on therapeutics, the strategic core of our
pharmaceuticals business. In addition, we intend to expand the
depth and scope of our R&D activities by entering into
strategic collaborations with third parties active in
biotechnology and molecular science with a view to enhancing our
R&D efforts in the areas of genomics and proteomics. To
fully exploit the fruits of our research, we complement our own
efforts by entering into co-development arrangements with third
parties. We also develop drugs on the basis of technologies
licensed from third parties. See
Pharmaceuticals Research and
Development R&D strategy for more
information on our R&D strategy. |
In our chemicals division, we seek to:
|
|
|
|
|
Market comprehensive customer-oriented solutions. In our
chemicals business, we provide our customers with comprehensive
solutions that combine specialized chemical products with
technical advice and assistance regarding their adaptation and
integration into our customers manufacturing processes. To
this end, we typically market our products on a decentralized
basis and maintain customer service facilities in proximity to
our customers premises. We believe that this strategy
enables us to add substantial value to our customers
products and their manufacturing efforts. Our customer-driven
philosophy has enabled us to achieve leading positions in terms
of innovation, quality and service in a number of selected
markets. In addition, because our customers pay us primarily for
the performance of our products, rather than the chemical
substances of which they |
- 21 -
|
|
|
|
|
consist, we believe that our ability to offer comprehensive
solutions has allowed us to attain higher profit margins than
many of our peers. |
|
|
|
Maintain an innovative portfolio of technologically superior
products. We believe that our focus on developing innovative
products has earned us an industry-wide reputation as a supplier
of technologically advanced specialty chemicals. We intend to
build upon this reputation by continuing to spend substantial
resources on R&D. To ensure that our R&D efforts are at
all times geared towards improving the performance of our
products, all our R&D projects are carried out in close
cooperation with our sales and service organization. This
approach, which we believe distinguishes us from our
competitors, enables us to collaborate with our customers and to
constantly adapt the focus of our efforts in response to their
needs. |
|
|
|
Focus on selected markets. We seek to achieve a leading
position in each of our targeted markets through innovation,
quality and service. A key element of our strategy is to focus
on markets that are too small to form a core business of our
larger competitors and yet too complex to be serviced by smaller
companies, which typically have insufficient resources to meet
the markets expectations in terms of R&D and
international scope. In selecting markets to enter, we aim to
maintain a strategic portfolio of downstream markets that allows
us to supply a wide array of complementary industries. We
believe that this approach enables us to diversify our risk by
reducing our exposure to the business cycles of individual
markets. In line with this strategy, we have divested almost all
of our industrial coatings business, which did not meet our
criteria with respect to innovation and high demand for
technical support, and have decided to focus increasingly on
solutions for flexible packaging within our Coatings &
Sealants business. |
|
|
|
Supplement organic growth with acquisitions of selected
targets. In furtherance of our strategic goal to maintain
and expand our leading position in selected markets of the
specialty chemicals industry, we have historically relied on a
combination of organic growth and selective acquisitions, and we
intend to continue to pursue this strategy in the future. In
selecting acquisition targets, we focus on the potential for
synergies, the availability of experienced and competent
management and the willingness and ability of the target to
accept our corporate culture and our focus on serving our
customers. In the fourth quarter of 2005, we acquired ECKART
GmbH & Co. KG (the ECKART Group), a leading
supplier of metallic effect pigments, which now represents our
Effect Pigments business. In the fourth quarter of 2005, we also
acquired Kelstar International Inc. (Kelstar
International), a company active in the market of
packaging coatings, particularly in the United States. |
Pharmaceuticals
Overview
We develop, manufacture and market a wide range of
pharmaceutical products, with a focus on innovative
therapeutics. In addition, we offer imaging reagents and OTC
drugs. We benefit from an extensive product portfolio, with
particular strengths in the area of gastrointestinal therapies,
and market our pharmaceuticals internationally, mainly in the
United States, Germany and other countries in Europe, as well as
in Latin America. The strength of our portfolio has enabled our
pharmaceuticals division to increase its net sales substantially
in recent years.
- 22 -
In 2005, our pharmaceuticals division generated net sales of
2,365 million, an increase of 12.1% compared
with 2004. The chart below provides a breakdown of our
pharmaceuticals net sales by geographic region for the three
years ended December 31, 2005:
Pharmaceutical Net Sales by Geographic Region
A substantial portion of our growth is attributable to the
successful marketing of Pantoprazole in all key markets for
branded proton pump inhibitors (PPIs) with the
exception of Japan. While we have experienced strong double
digit growth in the European markets, growth in North America
has recently slowed down due to increased competition in the
U.S. market, including from generics and OTC products. We
expect that the proportion of our net sales accounted for by
sales to Europe and North America will continue to increase in
future years due to the continued commercialization of
Pantoprazole and the introduction of new pharmaceuticals, such
as Ciclesonide, an MDI version of which we are marketing in
17 markets (as of mid-March 2006), including Germany, the
United Kingdom, The Netherlands, Brazil, Australia and other
countries. This trend may, however, be less pronounced than it
has been in the past. The increase in net sales in Latin America
in 2005 was due primarily to growing sales of Pantoprazole and
Neosaldina®.
As a result of the international dimension of our business, our
results of operations are materially affected by exchange rate
fluctuations in any given period, especially by changes in the
exchange rate between the euro on the one hand, and the
U.S. dollar and currencies linked to the U.S. dollar
on the other hand. See Item 3: Key
Information Risk Factors Risks Related
to each of our Businesses and Item 11:
Quantitative and Qualitative Disclosure About Market Risk
for more information on our exchange rate exposure.
In 2005, our pharmaceuticals division comprised three principal
business areas:
|
|
|
|
|
Therapeutics, comprising prescription drugs for gastrointestinal
and respiratory indications as well as a variety of other
therapeutics; |
|
|
|
OTC, comprising drugs, tonics, vitamins and medical accessories
that patients may purchase over-the-counter without the need to
obtain a prescription; and |
|
|
|
Imaging, comprising diagnostic reagents, such as contrast media,
for in vivo applications. |
In addition, we generate limited revenues from other sources,
mainly from contract manufacturing on behalf of third parties.
- 23 -
The following chart provides a breakdown of our pharmaceutical
net sales by business area for the three years ended
December 31, 2005:
Pharmaceutical Net Sales by Business Area
The growth of our pharmaceuticals division is driven primarily
by our therapeutics business and especially by our acid
suppressant Pantoprazole, which due to increased sales in most
European countries (including Germany) continued to be the
primary growth driver for the division, accounting for 57.6% of
its net sales in 2005.
Products
Therapeutics
Overview. In our therapeutics business, we develop,
manufacture and market prescription drugs, commonly referred to
as ethical therapeutics, primarily for gastrointestinal and
respiratory indications. In addition, we market therapeutics for
cardiovascular and a variety of other indications. In 2005, our
therapeutics business generated net sales of
2,071 million.
The following table shows a breakdown of our therapeutics net
sales by franchise for the three years ended December 31,
2005:
Therapeutics Net Sales by Franchise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
( in millions) | |
Gastrointestinal
|
|
|
1,241 |
|
|
|
1,367 |
|
|
|
1,536 |
|
Respiratory
|
|
|
59 |
|
|
|
59 |
|
|
|
69 |
|
Other
|
|
|
424 |
|
|
|
413 |
|
|
|
466 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,724 |
|
|
|
1,839 |
|
|
|
2,071 |
|
|
|
|
|
|
|
|
|
|
|
In the medium- to long-term, we intend to expand our
therapeutics business by entering the oncology market. We have
already commenced basic research related to oncology and entered
into a number of collaborations with biotech companies through
which we seek to enhance our R&D expertise in this area. See
Research and Development R&D
strategy for more information on our R&D strategy.
- 24 -
Gastrointestinal franchise. In our gastrointestinal
franchise, we market drugs for the treatment of diseases
affecting the human esophagus, stomach and intestine. In 2005,
our gastrointestinal business achieved net sales of
1,536 million.
The most important product in our gastrointestinal portfolio is
our patent-protected therapeutic Pantoprazole. In 2005,
Pantoprazole accounted for net sales of
1,361 million, or 88.6%, of the revenues of
our gastrointestinal franchise.
Pantoprazole is an acid suppressant drug that belongs to the
family of so-called proton pump inhibitors (PPIs).
Over the past decade, the worldwide market for PPIs has
experienced rapid growth, and the number of PPIs and their
labeled indications has expanded. Doctors typically use
Pantoprazole for the short- and long-term treatment of patients
with gastroesophageal reflux disease (GERD), a
chronic condition caused by the reflux of stomach acid into the
esophagus. Medscape estimates that more than 40% of adults
experience GERD symptoms at least twice a week. If left
untreated, esophageal damage caused by GERD can lead to even
more serious complications, including a precancerous condition
known as Barretts esophagus and esophageal cancer.
Pantoprazole blocks the enzyme responsible for producing acid in
the gastric mucosa, thereby restricting the flow of acid into
the stomach. Pantoprazole has also received approval in the
United States and Europe for the long-term treatment of GERD and
recently in some European countries for the on
demand treatment of GERD. These developments have expanded
its use. In addition, Pantoprazole has also received regulatory
approval in many countries outside the United States for the
treatment of gastric and duodenal ulcers as well as the
prevention of ulcers caused by non-steroidal anti-inflammatory
drugs (NSAIDs). Ulcers result from the digestive
action of the gastric juice on the mucous membrane when the
latter is rendered susceptible to its action, for example, by
certain drugs or local factors, including the Helicobacter
pylori infection. Helicobacter pylori is the bacterium chiefly
responsible for peptic ulcers. In addition, Pantoprazole has
received approval in the United States, Europe and various other
countries for application in an intravenous formulation.
Pantoprazole intravenous has important therapeutic benefits for
the treatment of patients who are unable to receive a PPI by
other routes and who need an intravenous (IV) agent
for the short term. In some countries, we also offer
Pantoprazole in combination with two antibiotics for the
eradication of Helicobacter pylori.
We believe that Pantoprazole enjoys therapeutic advantages
vis-à-vis its competitors. First, clinical studies we have
conducted on Pantoprazole suggest that Pantoprazole has less
clinically relevant potential for metabolic interaction with
other drugs. This feature distinguishes Pantoprazole from
competing PPIs. Our studies have also shown that Pantoprazole
has a higher bioavailability than other PPIs. Bioavailability is
a measure for the degree and rate at which a substance is
absorbed into the body.
Pantoprazole enjoyed substance patent protection in Europe until
June 2005 and enjoys protection based on supplementary
protection certificates (SPCs) in a majority of
European countries until May 2009 and enjoys patent protection
in the United States until July 2010 with a possible further
expansion of six months in the United States due to a pediatric
indication. In 2004, a third party submitted an Abbreviated New
Drug Application (ANDA) for approval of a generic
version of Pantoprazole challenging our Pantoprazole substance
patent to the U.S. Food and Drug Administration
(FDA). In response to this patent challenge, we
filed a patent infringement suit against the applicant in the
United States in May 2004. We are confident that our
U.S. patent relating to Pantoprazole is valid and
enforceable and of sufficient scope and strength to prevent the
company that submitted the ANDA or any other third party from
manufacturing and distributing Pantoprazole-based generics
during the remaining life of this patent. In 2004, we also
received notices regarding two ANDAs challenging our
Pantoprazole oral formulation patent. Because the earliest date
that patent infringement with respect to any of our formulation
patents for Pantoprazole could pose a threat to our business is
2010 (until which date we believe we will continue to enjoy
protection under our substance patent), we decided not to take
any immediate steps with regard to these two ANDAs. At the
beginning of March 2005, we received a notification from one of
the challengers of our Pantoprazole oral formulation patent,
informing us about an amendment of the ANDA to include a
paragraph IV certification relating to our Pantoprazole
substance patent. In view of this amended ANDA, we filed a
patent infringement suit against the applicant in April 2005. At
the end of May 2005, we received an additional notice on another
ANDA challenging our Pantoprazole oral formulation patent. As in
the case of former challenges of our oral
- 25 -
formulation patent, we decided not to take any immediate action
with regard to this new ANDA. At the end of June 2005, we
received an additional notice regarding an ANDA for our
Pantoprazole IV formulation patent, again challenging our
Pantoprazole substance patent and additionally alleging
non-infringement of our Pantoprazole IV formulation patent
listed in the Orange Book. In view of this new ANDA,
we filed a complaint in the U.S. Federal District Court for
the District of New Jersey on August 5, 2005. In this
complaint we claim infringement of our substance patent, but in
line with the attacks on our oral formulation patents, do not
claim that our IV formulation patent has been infringed. For
additional information, see Intellectual
Property, Regulation United
States, Legal Proceedings and
Item 3: Key Information Risk
Factors Risks Related to our Pharmaceuticals
Business.
We have offered Pantoprazole in our home market, Germany, under
the name
Pantozol®,
since 1994 and in the United States, under the name
Protonix®,
since 2000. As a result, we currently offer the drug in
virtually all regions of the world with the exception of Japan.
According to our internal records and data provided to us by our
co-marketing partners, co-promotion partners and licensees,
global market sales of Pantoprazole amounted to
2,768 million in 2005. Market sales include
our own direct sales to the market as well as the sales of our
licensees and co-marketing and co-promotion partners. See
Sales and Marketing for a description of
our sales and marketing organization.
Pantoprazole has experienced rapid growth in almost every market
in which it has been launched, although the growth rates have
tended to flatten over the years, as Pantoprazole has achieved
an established market position. Based on data available to us,
total market sales of Pantoprazole in 2005 totaled
1,531 million
in North America,
292 million
in Germany,
757 million
in Europe excluding Germany,
52 million
in Latin America, and
136 million
elsewhere. These figures yield total market sales of
Pantoprazole of
2,768 million
in 2005, compared with
2,481 million
in 2004 and
2,350 million in 2003. The growth in total
market sales of Pantoprazole in each of the three years reflects
the strong growth in demand for this product in many regions of
the world, including the U.S. market.
Our launch of Pantoprazole in the United States benefited from
our marketing collaboration with Wyeth Pharmaceuticals, the
pharmaceuticals division of Wyeth, Inc. (Wyeth).
According to IMS Health, as of the week ending February 24,
2006, Pantoprazoles share of new U.S. prescriptions
for PPIs was 19.7%, while our total prescription share amounted
to 19.8%.
We expect Pantoprazole to continue to be a key revenue driver
for our business for at least the next several years, although
we expect the growth rate to flatten given that the drug has
already achieved a substantial position in all markets in which
it has been launched and as a result of the impact of increasing
competition. Pantoprazole faces competition from various other
branded PPIs, including Takeda Pharmaceutical Company
Limiteds (Takeda) Lansoprazole and
AstraZenecas Esomeprazole. If our competitors continue to
invest heavily in marketing these products, the ability of
Pantoprazole to capture market share or maintain its current
market share could be adversely affected. In addition,
Pantoprazole faces increasing competition from generic PPIs, in
particular generic PPIs based on a substance called Omeprazole.
A variety of companies, including Schwarz Pharma AG
(Schwarz Pharma), Mylan Laboratories Inc.
(Mylan), Novartis AG (Novartis), TEVA
Pharmaceutical USA, Inc. (TEVA) and Torpharm Inc.
(Torpharm), are marketing Omeprazole-based generics
in Europe and the United States at prices that tend to be lower
than the price of Pantoprazole and other branded PPIs. Further
competition may result from the launch of generic versions of
PPI molecules other than Omeprazole once the relevant patents
have expired. In addition, Pantoprazole competes with OTC PPIs.
Unlike Pantoprazole, these PPIs are available to patients
without a prescription. Various Omeprazole-based OTC PPIs have
been launched in the United States and several European
countries and are being marketed with increasing success. While
generic and OTC PPIs have so far had a limited impact on the
market for branded PPIs, including Pantoprazole, in Europe and
the United States, we have started to experience stronger
pricing pressure in the U.S. market.
Factors that we believe should limit Pantoprazoles ongoing
exposure to competition include Wyeths branding
experience, which we believe should enable us to continue to
convey the therapeutic benefits of Pantoprazole to the market,
and the pricing of Pantoprazole at a substantial discount to
other PPIs, including AstraZeneca plcs
(AstraZeneca) Esomeprazole. However, there can be no
assurance that we will be able
- 26 -
to raise or maintain Pantoprazoles market share in future
periods. See Item 3: Key Information Risk
Factors Risks Related to our Pharmaceuticals
Business and Competition for more
information on the competitors of Pantoprazole.
Our continued commitment to the development of innovative
gastrointestinal therapeutics has yielded Soraprazan, a
potential next-generation drug for indications similar to those
of Pantoprazole. Soraprazan is currently in Phase II clinical
development. See Research and
Development Pipeline for more information on
Soraprazan and its therapeutic profile and on our R&D
efforts in the area of gastrointestinal therapeutics generally.
Respiratory franchise. In our respiratory franchise, we
offer drugs to treat chronic obstructive lung diseases, such as
asthma and chronic obstructive pulmonary disease
(COPD), and respiratory infections. Asthma is a
chronic inflammation of the airways, often of allergic origin,
that is marked by continuous labored breathing accompanied by
wheezing, breathlessness, a sense of constriction in the chest,
and often by attacks of coughing or gasping. According to the
Global Initiative for Asthma (GINA), more than
300 million people worldwide suffer from asthma. The
prevalence of asthma is increasing by approximately 50% every
decade, and worldwide deaths from asthma total more than 180,000
annually. COPD is a pulmonary disease that is characterized by
chronic, typically irreversible airway obstruction resulting in
a slowed rate of exhalation. The airflow limitation is typically
associated with an abnormal inflammatory response of the lungs
to noxious particles or gases. COPD is often, though not always,
caused by smoking. Over time, greater airway damage occurs, and
patients eventually die due to lung failure. COPD affects
600 million people worldwide and deaths total more than
2.75 million people each year, according to estimates by
the World Health Organization. Our respiratory business
generated net sales of
69 million in 2005. We expect the sales of our
respiratory business to show above average growth in the next
years.
Currently, the principal drug of our respiratory franchise is
theophyllin, which we market under the brand names
Euphyllin®/Euphylong®.
Theophyllin is used for the treatment of asthma and COPD.
As of mid-March 2006 we had received approval for another
respiratory drug, Ciclesonide, in 35 countries and launched
the MDI application of Ciclesonide under the brand name
Alvesco®
in 17 markets, including Germany, the United Kingdom, The
Netherlands, Brazil, Australia and other countries. In February
2006, the indication of
Alvesco®
has been extended to treat mild to severe persistent asthma in
adolescent patients aged 12 and older. The United Kingdom was
the MRP reference member state for marketing approval across a
number of EU countries. We intend to obtain approvals in the
remaining European countries based on the MRP as soon as
practicable. For more information on the MRP see
Regulation European Union.
Starting in 2002, we filed applications for regulatory approval
of Ciclesonide in many other countries, including in the United
States at the end of 2003. Our collaborative partner in Japan,
Teijin Ltd., filed for regulatory approval of Ciclesonide in
January 2004. In October 2004, our collaborative partner in the
United States, Sanofi-Aventis, received an approvable letter for
Ciclesonide from the FDA. An approvable letter outlines specific
issues that must be resolved before the FDA will approve a drug
for marketing. Sanofi-Aventis is working closely with the FDA to
address the requests outlined in the letter.
We have an additional innovative respiratory drug candidate,
Roflumilast, at an advanced stage of clinical development. After
withdrawing the MAA for Roflumilast in November 2005 we will
complete the ongoing clinical trials and conduct further
clinical studies to obtain more data with a view to submitting a
new MAA. The submission of a new MAA will be pursued if clinical
data are considered sufficient. We also intend to submit an
application for regulatory approval for
Daxas®
in the United States as soon as we have obtained the necessary
data. See Research and Development
Pipeline for more information on our R&D pipeline in
the respiratory area and Item 3: Key
Information Risk Factors Risks Related
to our Pharmaceuticals Business for risks associated with
the regulatory approval of pharmaceuticals under development.
For respiratory indications, we also offer
Broncho-Vaxom®,
an oral drug used principally for the treatment of recurrent
respiratory tract infections.
Broncho-Vaxom®
consists of fractions of eight different strains of bacteria
whose application stimulates the natural defenses of the body.
As a result, the drug can reduce the severity of symptoms and
help patients develop a greater resistance to respiratory tract
infections,
- 27 -
thereby reducing the incidence and duration of such infections
in adults and children. We license
Broncho-Vaxom®
from OM PHARMA SA, a company located in Switzerland.
Other therapeutics. In our other therapeutics business,
we market a variety of therapeutics for indications outside of
our two main franchises, including therapeutics to treat
cardiovascular diseases. In 2005, our other therapeutics
business had net sales of
466 million.
Our main product offerings in the cardiovascular area is
Ebrantil®,
a drug based on a substance called urapidil, which is available
as both an oral and an IV formulation.
Ebrantil®
is used for the treatment of hypertension. Hypertension is
characterized by an increase in blood pressure above normal
levels over a prolonged period of time. The condition can cause
damage to the heart and blood vessels, creating an increased
risk of heart attack, heart failure and stroke.
Ebrantil®
is a so-called selective alpha-1 receptor antagonist with
central anti-hypertensive action. Alpha receptors are cellular
entities that exist on the surfaces of cells and are stimulated
by the sympathetic nervous system. Alpha receptor antagonists
reduce stress symptoms by inhibiting the effects of the
sympathetic nervous system, thereby preventing cardiovascular
damage.
Ebrantil®
is a result of our own cardiovascular R&D efforts. Apart
from cardiovascular products, our main products in this area are
drugs for the treatment of rheumatism and for urological and
gynecological indications, as well as iron supplements and
facial topicals. In 2005, we acquired the rights to certain
dermatology products in the United States from GlaxoSmithKline
plc (GlaxoSmithKline).
OTC
In our OTC business, we market a variety of non-prescription
drugs directly to the consumer. Our portfolio includes
gastrointestinal drugs, pain killers, tonics and vitamins.
Unlike ethical therapeutics, patients may purchase OTC drugs
without a prescription. The OTC market has grown considerably in
importance in recent years, as health insurance companies have
become more cost-sensitive and refuse to refund the costs of
certain categories of therapeutics (especially drugs used to
treat trivial complaints). Therefore, we have
switched several products from prescription to self-medication.
We achieve approximately 30% of our OTC revenues in Germany. We
also distribute OTC drugs through our subsidiaries in a number
of other regions of the world, most notably in other parts of
Western Europe and in Latin America. In December 2003, we
acquired
Neosaldina®,
an OTC product for pain treatment, in Brazil. In 2005, our OTC
business generated net sales of
131 million.
The most important products in our comprehensive OTC portfolio
are
Buerlecithin®,
Neosaldina®,
Riopan®
and
Sanostol®.
Buerlecithin®
is a tonic based on lecithin, a substance found in soy plants,
and is used to increase mental productivity.
Neosaldina®
is a pain killer that is widely used for the treatment of
headaches and is well-established in Brazil, where it is the
best-selling pain treatment drug in pharmacies.
Riopan®
is an antacid for the treatment of GERD, duodenal and gastric
ulcers, and stress-related mucosal damage. Antacids are agents
that neutralize acidity and are used as an adjunct to other
drugs to relieve ulcer pain and as self-medication against acid
indigestion, heartburn, dyspepsia and sour stomach. The
therapeutic importance of antacids has been declining in recent
years in view of the better clinical efficacy of PPIs, such as
Pantoprazole. We currently market
Riopan®
as an ethical therapeutic in some markets but mainly offer it as
an OTC drug.
Sanostol®
is a widely recognized vitamin preparation for children in
Germany and many other countries.
Imaging
In our imaging business, we offer a variety of in vivo
diagnostic applications, which are applications for diagnosing
medical conditions in the living body of a human. Imaging is a
term that covers a range of diagnostic techniques for creating
images of parts of the human body. Our portfolio comprises
contrast media for x-ray imaging, magnetic resonance imaging
(MRI) and ultrasonic imaging. MRI is an increasingly
important noninvasive diagnostic technique that produces
computerized images of internal body tissues and is based on
nuclear magnetic resonance of atoms within the body induced by
applying radio waves. In 2005, our imaging business generated
net sales of
108 million. We offer our imaging portfolio in
cooperation with Bracco S.p.A. (Bracco), an Italian
company active in contrast media. Under the terms of our
collaboration
- 28 -
with Bracco, we manufacture a variety of contrast media
developed by Bracco and market them in Germany and in parts of
Central Europe. We believe that as a result of our collaboration
with Bracco, we are among the leading providers of contrast
media in Europe.
Research and Development
R&D strategy
We consider R&D to be the foundation of the long-term growth
of our pharmaceuticals division and are committed to maintaining
a high level of investment in R&D in the future. The table
below provides information regarding our pharmaceutical R&D
expenditures for the three years ended December 31, 2005:
R&D Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003(1) | |
|
2004(1) | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
( in millions, except %) | |
R&D expenditures
|
|
|
376 |
|
|
|
410 |
|
|
|
418 |
|
|
% of pharmaceuticals net sales
|
|
|
19.0 |
|
|
|
19.4 |
|
|
|
17.7 |
|
|
% of therapeutics net sales
|
|
|
21.8 |
|
|
|
22.3 |
|
|
|
20.2 |
|
|
|
(1) |
2003 and 2004 figures have been adjusted to reflect the
retroactive application of IFRS 2. For further details see
Note 2 to our consolidated financial statements as of and
for the year ended December 31, 2005. |
We believe that our current level of R&D expenditures
positions us well vis-à-vis our peers. Our goal is to
continue to spend approximately 20% of our therapeutics net
sales on R&D in the future. We intend to allocate
approximately 20% of our R&D expenditures in any given year
to basic research and drug discovery.
The main focus of our R&D expenditures in recent years has
been therapeutics, which is the single most important
contributor to our pharmaceuticals revenues and which we expect
to increase in importance in the future. Within therapeutics, we
concentrate on the development of innovative drugs for
gastrointestinal and respiratory indications. We have identified
oncology as a further focal point of our R&D efforts. To
this end, we have commenced basic oncological research and
entered into a variety of collaborations with biotech companies.
In addition, we also conduct R&D related to molecular
diagnostics.
Our current R&D facilities are located in Constance,
Germany; Hamburg, Germany; Bromma, Sweden; Florham Park, New
Jersey; and Waltham, Massachusetts. In addition, we recently
established a new research institute in Mumbai, India. This new
institute is intended to enhance our research capacity in the
field of medicinal chemistry and focuses on discovery research
into small molecules, new targets and new chemical entities as
well as data management of clinical study results and clinical
development activities. We expect that this institute will
significantly increase our ability to synthesize new chemical
compounds in our core indication areas and will be part of our
global clinical development program.
In addition to carrying out R&D projects internally, we
continuously seek to enhance the scope and depth of our research
portfolio by obtaining access to outside knowledge, mainly
through collaborations with companies in the biotech field. Our
immediate goal is to intensify our activities in the areas of
genomics, proteomics and high-throughput screening
(HTS) by acquiring equity holdings in biotech
companies, sponsoring research projects and facilitating
collaborations that we believe will yield results which may
assist us with the development of innovative new therapeutics.
In addition to collaborating with third parties in the area of
basic research, we also enter into co-development arrangements
with third parties. By supplementing our own development efforts
with the resources of third parties, we believe that we can
enhance the commercial potential of our research results.
We believe that our scientific staff is a key to our success. At
December 31, 2005, 1,764 of our employees about
20% of the workforce of our pharmaceuticals division
worked in our pharmaceutical
- 29 -
R&D laboratories and offices. Our goal is to attract and
retain the best-qualified scientists for our R&D activities.
To this end, we offer our employees a competitive compensation
package, which includes the ability to participate in our
various employee incentive plans. See Item 6:
Directors, Senior Management and Employees Share
Ownership Stock Option Plans for additional
information on our stock option plans.
Pipeline
Overview. We currently have several therapeutics in
various stages of our R&D pipeline. For each project, we are
required to conduct a number of pre-clinical and clinical
studies. In the pre-clinical project phase, we typically conduct
a number of in vitro and in vivo studies on animals to test the
molecular and physiological effects of a drug candidate on
cellular systems and its mechanisms of action. If these tests
yield positive results, we then conduct Phase I, Phase II and
Phase III clinical studies on humans to test the safety and
clinical efficacy of the drug candidate. For more information on
the regulatory approval process, see
Regulation Overview of the
clinical trial process.
While regulators in the United States and the European Union
require that we conduct comprehensive pre-clinical and clinical
studies before applying for authorization to market a drug, we
typically need not conduct all requisite studies in each of the
two jurisdictions. Instead, we are usually able to apply to the
regulator of one jurisdiction to give us credit for studies
conducted in other jurisdictions. Sometimes, a regulator will
require us to supplement our existing studies with additional
trials in order to satisfy all applicable requirements. As a
result, we often manage to use, for example, the results of
Phase I trials conducted in the European Union in order to
qualify for Phase II trials in the United States and vice versa.
Historically, we used to first test our drug candidates in the
European Union and subsequently transfer the results of these
tests to the United States, subject to any additional testing
required by the FDA. More recently, in connection with the
international expansion of our business, we started to conduct
trials in the European Union and United States in parallel. In
doing so, we rely partly on our own resources and partly on
collaborations with third parties.
Consistent with our R&D strategy, we focus our development
efforts on innovative drug candidates for gastrointestinal and
respiratory indications.
Gastrointestinal franchise. In the gastrointestinal area,
we focus our R&D efforts on a new class of therapeutics
known as potassium competitive acid blockers
(P-CABs). Our main drug candidate in this area is
Soraprazan, which we are developing for the treatment of GERD
and other acid related diseases. P-CABs are widely considered
the next generation of acid suppressants. Like PPIs, P-CABs
restrict the flow of acid into the stomach. They differ from
PPIs, however, in the way they operate. Whereas PPIs must be
converted in the body before they can bind to the proton pump,
P-CABs act directly via an ionic inhibition of the pump. As a
result of this difference, Soraprazan displays a faster and more
pronounced onset of action and disconnects much more easily from
the pump, which we believe should lead to significant
therapeutic benefits compared with currently available
treatments for GERD and ulcers, such as better symptom relief.
This characteristic should make Soraprazan more suitable for
treating the symptoms of various gastrointestinal diseases.
Soraprazan is currently in Phase II development. Initial data
from early Phase II studies indicate that Soraprazan is
effective and well-tolerated.
Respiratory franchise. Our pipeline for respiratory
indications contains a series of innovative drug candidates for
the treatment of asthma, COPD and rhinitis. Rhinitis is a
disease that causes inflammation of the mucous membrane of the
nose.
- 30 -
The table below provides an overview of our respiratory pipeline
along with the respective development stages of each drug:
|
|
|
|
|
Drug candidate |
|
Indication |
|
Current project phase |
|
|
|
|
|
Ciclesonide metered dose inhaler
|
|
Asthma |
|
Phase III/IV(1)(2) |
Ciclesonide nasal
|
|
Rhinitis |
|
Phase III/filed in the United States and Canada |
Ciclesonide combined with formoterol(3)
|
|
Asthma |
|
Phase II |
Roflumilast oral
|
|
Asthma |
|
Phase III EU/United States |
Roflumilast oral
|
|
COPD |
|
Phase III EU/United States |
|
|
(1) |
In conducting Phase III studies with respect to this project in
the United States, we collaborate with Sanofi-Aventis. |
|
(2) |
Already launched in 17 and registered in 35 countries as of
mid-March 2006. |
|
(3) |
Formoterol is a long-acting beta agonist that acts as an acute
bronchodilator. |
As part of the regulatory approval process, a New Drug
Application (NDA) must be submitted to the FDA in
the United States. In the European Union, a Marketing
Authorization Application (MAA), has to be submitted
to the EMEA. For more information on the regulatory approval
process, see Regulation. In light of the
inherent unpredictability of the regulatory process, you should
be aware that there can be no assurance that an MAA or NDA with
respect to any of the drug candidates listed in the table above
will be filed by any particular time or at all.
Ciclesonide, which we have started to market under the name
Alvesco®,
is an inhaled corticosteroid for the treatment of asthma.
Because asthma is a global and widespread disease, there is a
substantial need for further effective therapeutics in addition
to those which are already on the market. Corticosteroids are
powerful anti-inflammatory drugs that prevent asthma attacks by
reducing airway hyper-responsiveness and inflammatory reactions,
such as edema and mucous secretion. Inhaled steroids are
considered the current drug of choice for the treatment of
asthma, as they offer the best overall therapeutic profile. The
inhaled steroids currently available on the market, however,
have two main side effects. First, when administered via
inhalers, portions of the drugs active ingredients are
deposited not only in the lung but also in the mouth and throat,
which can cause local side effects such as hoarseness and fungal
infections. Second, once spread throughout the body following
absorption and distribution via the blood, the systemic
availability of these ingredients can lead to serious systemic
effects. Of these systemic effects, diabetes, osteoporosis and
slowed growth in children are the most important. In contrast,
Ciclesonide is activated predominantly in the lung. This feature
of Ciclesonide reduces the systemic effects that characterize
existing inhaled steroids and may provide the drug with a
significant therapeutic advantage over present treatments. In
clinical trials, patients treated with Ciclesonide have
experienced significantly fewer mouth and throat side effects,
while benefiting from improved lung function, effective symptom
control and reduced use of rescue medications.
We are developing Ciclesonide for use in connection with MDIs,
nasal applicators and as a dry powder inhaler (DPI)
in combination with formoterol, which is a compound acting as an
acute bronchodilator.
As of February 2006, we had received approval for an MDI version
of Ciclesonide, for which we use a CFC-free environmentally
friendly device, in 35 countries and had launched it under
the brand name
Alvesco®
in 17 markets. In October 2004, our collaborative partner
in the United States, Sanofi-Aventis, received an
approvable letter for the MDI version of Ciclesonide
from the FDA. Phase II studies with respect to a DPI version of
Ciclesonide in combination with formoterol for oral inhalation
are ongoing. With respect to the nasal applicator version of
Ciclesonide, we have completed several Phase III studies. In
December 2005, we submitted a New Drug Application (NDA) for
marketing approval in the United States, and filed for
registration of the nasal applicator version of Ciclesonide in
Canada in January 2006.
Roflumilast, which we intend to market under the name
Daxas®,
is a selective phosphodiesterase (PDE) 4 inhibitor
for the treatment of asthma and COPD. In the United States, COPD
is second only to cardiovascular disease as a cause of
disability, according to U.S. Social Security statistics,
which speaks to
- 31 -
the substantial need for an effective treatment. PDE 4
inhibitors are substances that have anti-inflammatory and
immuno-modulatory effects and are effective against various
inflammatory diseases. We refer to Roflumilast as a
selective PDE 4 inhibitor because it
selectively inhibits one form of the PDE enzyme family, namely
the PDE 4 enzyme. As a result of its special molecular
interaction with this enzyme, we expect that Roflumilast will
have an improved side-effect profile compared with other
PDE 4 inhibitors. Unlike most existing therapies for asthma
and COPD, Roflumilast can be administered orally.
For both the asthma and the COPD indications of Roflumilast, we
have completed a number of Phase III studies and are currently
in the process of conducting several additional studies.
Effective June 30, 2005, we mutually agreed to terminate
our collaboration with Pfizer regarding Roflumilast, and in
November 2005 we withdrew the MAA for this drug candidate after
consulting with the EMEA because the clinical record we had
established at that time was less compelling than we had
expected. The submission of a new MAA will be pursued if we view
the clinical data obtained in the ongoing clinical trials as
sufficiently strong for this purpose.
While clinical trials of the various pipeline drugs described
above have so far shown promising results, given the nature of
the drug development process, there can be no assurance that any
of these drugs will reach the market. There is always a
significant risk that adverse results with respect to a drug
will become apparent in the future, which may result in
substantial delays in the launch of the drug and possibly force
us to abandon the drug altogether.
Oncological franchise. Since 2001, we have systematically
built up research structures for oncology and a research network
with experienced partners. We have made progress in our
discovery research activities and intend to identify our first
clinical project candidates in the coming years. We are focusing
on a portfolio of synthetic small molecules, which are
anti-cancer drugs targeting processes in tumor cells that have
been proven to be important for the oncogenic phenotype.
Furthermore, we are evaluating in-licensing projects in oncology
with a strategic and content-wise fit to our own research.
R&D collaborations
Overview. The table below provides an overview of some of
our more important current R&D collaborations, including a
brief description of the scope and objectives of each:
R&D Collaborations
|
|
|
Partner |
|
Scope |
|
|
|
Research collaborations
|
|
|
GeneData AG
|
|
Bioinformatics and genomics information management and analysis
systems |
|
|
Data storage and analysis of high-throughput screening assays |
|
GPC Biotech AG
|
|
Collaboration in the area of pathway mapping and kinases |
|
Atugen AG
|
|
Antisense target validation, i.e., validation of drug
targets by using a complementary sequence to a given segment of
genetic material with a special technology we have licensed from
Atugen AG |
|
Evotec OAI AG
|
|
Technical collaboration in the field of confocal laser detection
in high throughput screening |
- 32 -
|
|
|
Partner |
|
Scope |
|
|
|
Proteros Biostructures GmbH
|
|
Crystallization and x-ray analysis of drug target complexes in
order to obtain three-dimensional information on the binding
geometry of drug molecules and their biological target |
|
BIOCRATES Life Sciences GmbH
|
|
Exploitation of (novel) metabolomics technologies for biomarker
discovery in COPD and other respiratory diseases |
|
Development collaborations
|
|
|
Sanofi-Aventis S.A. (formerly Aventis S.A.)
|
|
Co-development and co-promotion of the MDI and DPI versions of
Ciclesonide as well as a combination product with formoterol in
the United States |
|
Teijin Ltd.
|
|
Development and marketing of Ciclesonide under the brand name
Alvesco®
in Japan; co-development of the nasal application of Ciclesonide
and marketing in Japan. |
|
Tanabe Seiyaku Co. Ltd.
|
|
Co-development and co-promotion of Roflumilast under the brand
name
Daxas®
in Japan |
Research collaborations. In 2000, we entered into an
alliance with GeneData AG (GeneData), a Swiss
company that is a leading provider of bioinformatics and
genomics information management and analysis systems used in
various genomic R&D applications. Our collaboration with
GeneData has put us in a position to manage the huge amounts of
data involved in functional genome analysis, thereby
significantly enhancing our capabilities in this important area
of pharmaceutical R&D. In 2002, we expanded the scope of our
collaboration with GeneData to develop a high-throughput
screening (HTS) data storage and analysis system.
HTS is an automated process that is used to select the best drug
candidate from among hundreds of thousands of candidate
molecules.
We are engaged in a research alliance with GPC Biotech AG
(GPC), which includes different research programs
and collaboration agreements. In 1998, we entered into our first
collaboration, under which we cooperated to investigate new
genomic targets for the control of infections. In December 2000,
we entered into a research alliance with GPC in the area of
tumor research. Under the terms of this agreement, we
collaborated in the identification of tumor-specific targets,
i.e., targets whose inhibition selectively eradicates
cancer cells (but not normal cells). Both research programs have
been completed. In addition to research, we are also entitled to
have target validation, assay development and screening carried
out by GPC. In 2001, we entered into an agreement with GPC,
pursuant to which the company provides us with technology for
our research unit in Waltham near Boston, Massachusetts, which
specializes in functional genomics and proteomics. In addition,
under the terms of the agreement, we collaborate with GPC in the
area of pathway mapping and kinases. Kinases are enzymes that
catalyze the transfer of phosphate groups and play an important
role in the cell cycle and for the regulation of biochemical
pathways in living cells.
In July 2001, we entered into a three-year arrangement with
Atugen AG (Atugen) pursuant to which Atugen will
carry out target validation for us, including the validation of
tumor-specific targets. The agreement was partially renewed
until the end of September 2006. Target validation constitutes
an essential step in the process of turning new target proposals
identified with genomic technologies, which is the
subject-matter of our agreement with GPC, into new drugs. The
agreement will help us determine whether a target is critically
involved in a disease process and whether drugs that modulate
the target are likely to have a beneficial therapeutic effect.
Since 2001, we have collaborated with Evotec OAI AG
(Evotec) in the field of HTS technologies. As part
of this collaboration, Evotec develops specialized equipment for
the detection of fluorescence signals in cellular HTS assays,
which constitutes a core capability for the high content
screening of bioactive
- 33 -
compounds and which we believe will provide us with a
competitive advantage. The collaboration entitles us to a
non-exclusive license to this technology. In October 2004, we
signed an agreement with Evotec to advance the discovery of one
of its kinase assays. Applying Evotecs drug discovery
engine from target to clinic, we aim to identify and optimize
novel lead compounds that interact with the target in the
research program.
In October 2001, we entered into a collaboration with Proteros
Biostructures GmbH (Proteros), a company
specializing in x-Ray crystallography of proteins. Under this
collaboration, Proteros develops crystallization protocols for
target proteins, 3D-structure elucidation of these proteins as
well as protein-ligand complexes that permit the further
optimization of our lead structures. The collaboration gives us
an exclusive right to use the data generated by Proteros in our
own R&D efforts, for example, in connection with the
development of biological targets and bioactive compounds.
In October 2005, we entered into an agreement with BIOCRATES
Life Sciences GmbH (Biocrates) to conduct a
placebo-controlled preclinical study which is intended to
characterize the effects of a novel drug in a mouse model for a
major metabolic ailment. As part of this collaboration,
Biocrates develops specialized assays based on mass spectrometry
for the quantitative analysis of metabolites in biological
samples. By analyzing the changes of metabolites and their
concentration in body fluids as a response to the effects of a
substance in a biological system, the metabolomics technology is
intended to speed up drug discovery processes, reduce late-stage
drug development failures due to adverse side effects and
discover new biomarkers for monitoring drug response in patients.
Development collaborations. We are currently party to
three development collaborations. In 2001, we entered into an
agreement with Aventis Pharmaceuticals Inc., the
U.S. pharmaceuticals subsidiary of Aventis S.A., now
Sanofi-Aventis, pursuant to which we cooperate with
Sanofi-Aventis in connection with the ongoing Phase III
clinical trials for the MDI version of Ciclesonide carried out
in the United States and share the costs of these trials. In
addition, we agreed with Sanofi-Aventis that if we obtain
regulatory approval to launch the MDI version of Ciclesonide in
the United States, we will distribute the drug in the
U.S. market in collaboration with Sanofi-Aventis.
Additionally, we co-develop the DPI version of Ciclesonide in
combination with formoterol together with Sanofi-Aventis. If we
obtain regulatory approval we will launch the combination
product in the United States in collaboration with
Sanofi-Aventis. In 1998, we entered into a contract in relation
to Ciclesonide with Teijin Ltd. (Teijin), a Japanese
conglomerate, pursuant to which we granted Teijin the right to
develop and market Ciclesonide in Japan. Our collaboration with
Teijin will enable us to gain access to the Japanese market,
which operates substantially differently from the U.S. and
EU markets, through an experienced partner. In addition, we
agreed with Teijin to collaborate in the development of the
nasal application of Ciclesonide.
In 2002, we entered into an agreement with Tanabe Seiyaku Co.
Ltd., a Japanese company, for the co-development and
co-promotion of Roflumilast in Japan.
Effective June 30, 2005, we mutually agreed to terminate
our collaboration with Pfizer Inc. (Pfizer)
regarding the co-development and marketing of Roflumilast. Under
the terms of the termination agreement, Pfizer returned all of
its rights in Roflumilast to us. We have assumed sole
responsibility for the further development of Roflumilast and in
particular further clinical studies.
Supplies and Raw Materials
We purchase our supplies and raw materials on a worldwide basis
from a number of third-party providers. In those instances where
there is only a single supplier, we seek to reduce our
dependence on that supplier by accumulating and maintaining
strategic reserves of the supplies and raw materials that we
need for the manufacture of our products. We may also seek to
qualify new suppliers, and, to the extent feasible, develop
production processes in our own facilities. We typically attempt
to secure strategic materials through medium- and long-term
supply contracts and to ensure that in case of an outage,
alternative sources would be readily available to us without
undue expense and delay. We have not experienced significant
difficulties in obtaining sufficient amounts of supplies and raw
materials in recent years, and we do not expect to encounter
such difficulties in the foreseeable future.
- 34 -
We have several sources for the most important raw materials of
Pantoprazole, i.e., the active ingredient of the drug and
a freeze-dried IV formulation. We source the active ingredient
of Pantoprazole from our FDA-approved Singen facility and from
two suppliers, one of which has received FDA approval. The IV
formulation is sourced internally from our Singen facility and
from two external contract manufacturers as back-up sources, one
of which has received FDA approval.
Our product Ciclesonide is sourced from our partner 3M in the
United Kingdom based on a long-term supply and collaboration
contract. 3Ms manufacturing site has already passed
pre-approval inspection by the FDA.
Production
In the area of production, our goal is to ensure consistent
quality and to minimize costs by creating facilities that
specialize in discrete manufacturing tasks. We concentrate the
manufacture of most of our products for the supply of the
worldwide pharmaceuticals markets in Europe. Our manufacturing
facility in Singen, Germany, has sole responsibility for all
sterile application forms, including Pantoprazole IV, and also
produces non-sterile semi-solid and liquid application forms as
well as active pharmaceutical ingredients, predominantly
Pantoprazole. Our facility in Oranienburg, Germany, which we
have recently expanded, is engaged in the production of solid
dosage forms, primarily Pantoprazole tablets. In June 2005, we
opened an expansion unit at our Oranienburg facility, which
increased our production capacity at that facility. Our facility
in Lyszkowice, Poland, specializes in solid and liquid OTC
formulations. We started the construction of a new manufacturing
facility for Pantoprazole and Roflumilast tablets in
Carrigtohill, Ireland, in the fourth quarter of 2003 and expect
to complete this facility in 2006. In Latin America, our
facility in Jaguariuna, Brazil serves predominantly the local
market with various technologies, whereas the site in Mexico
City supplies Mexico and other countries in Central America. All
of our sites comply with current Good Manufacturing Practice
(cGMP) standards, which are a set of officially
recognized scientifically sound methods, practices and
principles for the development and manufacture of
pharmaceuticals. In addition, certain of our sites, including
Singen and Oranienburg, have been inspected and have received
approvals by the FDA and the relevant EU authorities.
We currently operate ten production facilities around the world.
We source the active ingredient for Pantoprazole principally
from our manufacturing facility located in Singen, Germany, and
Isochem S.A., a French company that performs contract
manufacturing for us. Pantoprazole tablets are manufactured at
our facilities in Oranienburg, Germany, and Jaguariuna, Brazil.
While we procure key starting materials for Pantoprazole from
our facility in Mumbai, India, we also use external sources. For
the construction of our Mumbai facility we have entered into a
50% joint venture with a third party. We own all of our
principal production facilities and, with the exception of our
facility in Ireland, substantially all of the land on which they
are located.
- 35 -
The following table shows selected key information with respect
to our principal current manufacturing facilities as well as our
facilities under construction:
Production Facilities
|
|
|
|
|
|
|
Location |
|
Function |
|
Size (m2) | |
|
|
|
|
| |
Singen, Germany
|
|
Pharma (sterile, liquid and semi-solid dosage forms and active
pharmaceutical ingredients) |
|
|
167,000 |
|
Oranienburg, Germany
|
|
Pharma (solid dosage forms) |
|
|
64,300 |
|
Lyszkowice, Poland
|
|
Pharma (solid and liquid dosage forms) |
|
|
25,000 |
|
Melville, New York
|
|
Pharma (semi-solid and liquid dosage forms) |
|
|
52,000 |
|
Hicksville, New York
|
|
Pharma (semi-solid dosage forms) |
|
|
23,200 |
|
Mexico City, Mexico
|
|
Pharma (solid, semi-solid and liquid dosage forms) |
|
|
11,900 |
|
Jaguariuna, Brazil
|
|
Pharma (solid, semi-solid and liquid dosage forms) |
|
|
214,000 |
|
Mumbai, India
|
|
Key starting materials for Pantoprazole |
|
|
25,100 |
|
Carrigtohill, Ireland(1)
|
|
Under construction; Pharma (solid dosage forms) |
|
|
119,000 |
|
Bromma, Sweden
|
|
Diagnostics |
|
|
2,785 |
|
|
|
(1) |
The land on which this facility is located is held under a
long-term lease. |
Sales and Marketing
We use the ALTANA brand to market products of our
pharmaceuticals division on a worldwide basis. In doing so, we
use sales and marketing methods customary in the pharmaceuticals
industry. In addition to advertising our drugs, we maintain a
network of sales representatives, collaborate with third parties
and use our companys website to provide information about
our pharmaceuticals. We also grant rebates to our customers. Our
rebate practices vary widely among the countries in which we are
active, depending on the respective countrys regulatory
framework and our position in the relevant market. The amount of
control that we have over the sales mix used by our partners in
any given market depends on the distribution arrangements we use
in that market.
We have sales and marketing organizations in most European
markets. Like other pharmaceuticals companies, however, we do
not distribute our products exclusively through our own sales
and marketing organization but also use collaborations with
third parties. For example, while we supply a number of
hospitals directly, we frequently rely on wholesalers to
distribute our products to retailers, such as pharmacies.
Following the establishment of an additional sales force in the
United States in 2003, which co-promotes Pantoprazole in the
U.S. market under the name
Protonix®
alongside Wyeth, our sales force in the United States now
comprises approximately 600 individuals. We expect that our
U.S. sales organization will assume a significant role in
the distribution of any new drugs launched in the
U.S. market. For the time being, our staff co-promotes
Pantoprazole and several drugs of Pfizer in the United States.
In Japan, we established our own operating subsidiary in January
2004, which together with our Japanese partner Tanabe Seiyaku
Co. Ltd. focuses on the development and, following approval, the
marketing of Roflumilast in the Japanese market.
With respect to Pantoprazole, we have found it desirable to
supplement our own sales and marketing efforts with the branding
experience and marketing capabilities of external partners,
particularly in the United States.
Among our third-party partners, we distinguish between
licensees, co-marketing partners and co-promotion partners.
Licensee partners are typically used in markets that we do not
serve ourselves. By
- 36 -
contrast, co-marketing and co-promotion partners are
distributors that we use in markets where we have a sales and
marketing organization of our own. We use co-marketing partners
to sell a product under more than one brand in the same market.
Although we typically coordinate our efforts with our
co-marketing partners, particularly in terms of dealing with
regulators and drug safety, we and our co-marketing partners
each manage a separate brand and use distinct distribution
channels. Typically, we charge our co-marketing partners a fee
in an amount tied to the price that they charge their customers.
By contrast, when we use co-promotion partners to market a
product under a single brand, either we or our co-promotion
partners take sole responsibility for distributing the product,
although we cooperate with our co-promotion partners in
promoting the brand under which the product is marketed.
The type of arrangement we use in any given situation depends on
the particular product and the requirements of the targeted
market. For example, our licensing agreement with Wyeth to
distribute Pantoprazole in the United States has been expanded
by a co-promotion agreement when we began to build a sales and
marketing organization of our own in 2003. Pursuant to the
license agreement, Wyeth is required to use commercially
reasonable efforts to distribute Pantoprazole in the
U.S. market and to bill its customers for the drug
directly. Wyeth is free to set the retail price at its
discretion, which affords it the flexibility necessary to adapt
its distribution strategy to the prevailing market conditions.
In return, Wyeth is required to pay us a fixed percentage of its
net sales, subject to a minimum price. Since July 2003, our own
dedicated sales force for the U.S. market has been
co-promoting Pantoprazole together with Wyeth in accordance with
a separate co-promotion agreement entered into in April 2003.
While this arrangement has afforded us a better understanding of
the marketing of Pantoprazole in the United States, the revenues
that we derive from this drug continue to materially depend on
the resources that Wyeth devotes to its marketing. We currently
use co-marketing partners for the distribution of Pantoprazole
in many European countries, Latin America and Asia. In Australia
and Canada, we distribute Pantoprazole in collaboration with a
co-promotion partner.
Going forward, we intend to use licensees primarily in markets
that we do not consider a strategic focus or where we believe
that the costs of building and maintaining the necessary
infrastructure and expertise outweigh the benefits of having a
sales and marketing organization of our own. In strategically
important markets that offer a substantial growth potential for
our pharmaceuticals business, especially the United States, our
goal is to rely less on licensees and instead to use experienced
local companies as co-marketing and co-promotion partners. We
believe that this approach will enable us to gradually build our
own sales forces in these markets and to reduce our dependence
on partners. We have already entered into a co-promotion
agreement with Aventis, now Sanofi-Aventis, for the distribution
of the MDI and DPI versions of our drug Ciclesonide in the
United States.
At December 31, 2005, Wyeth, the U.S. company through
which we distribute Pantoprazole in the United States, accounted
for 2.5% of our accounts receivable, compared with 7.8% at
December 31, 2004. In 2005 and 2004, Wyeth accounted for
11.4% and 14.2% of our net sales, respectively.
Competition
For the most part, our pharmaceuticals division operates in
markets characterized by intense competition. Our competitors
include a wide variety of companies, ranging from small
pharmaceuticals companies to large national and international
pharmaceuticals groups and from off-patent manufacturers of
generic pharmaceuticals to owners of preeminent brands.
The global therapeutics markets are highly competitive and are
targeted both by large companies and by small niche players. The
main competitive factors include product efficacy and safety and
distribution capabilities. In addition, price has become
increasingly important almost everywhere in the world. Our main
competitors for drugs in the gastrointestinal area are various
other branded PPIs, including Takedas Lansoprazole and
AstraZenecas Esomeprazole. If our competitors continue to
invest heavily in marketing these drugs, the ability of
Pantoprazole to capture market share or maintain its current
market share could be adversely affected. In addition,
Pantoprazole faces increasing competition from generic PPIs. A
variety of companies, including Schwarz Pharma, Mylan, Novartis,
TEVA and Torpharm, are marketing Omeprazole-based generics in
Europe and the United States at prices that tend to be lower
than the price of Pantoprazole
- 37 -
and other branded PPIs. Further competition may result from the
launch of generic versions of PPI molecules other than
Omeprazole once their respective patents expire and from OTC
versions of PPIs in the United States and certain European
countries, which, unlike Pantoprazole, are available to patients
without a prescription. While generic and OTC versions of PPIs
have so far had a limited impact on the market for branded PPIs,
including Pantoprazole, in Europe, pricing pressure in the
U.S. market has grown stronger as a result of an increase
in the rebates provided by all market participants. See
Item 3: Key Information Risk
Factors Risks Related to our Pharmaceuticals
Business for a discussion of the risks resulting from
competition by other PPI brands, generic and OTC versions of
Omeprazole-based PPIs and Products
Therapeutics for more information on Pantoprazole. In the
highly competitive respiratory market, we compete primarily with
AstraZeneca, GlaxoSmithKline, Merck & Co. and Boehringer
Ingelheim Pharma GmbH & Co. KG.
In the OTC area, the key competitive factors are price and
branding. The OTC market is highly fragmented, and we face
competition not only from other pharmaceuticals companies but
also from distributors of homeopathic remedies and medical
accessories.
The imaging markets are highly competitive. The key competitive
factors include price (especially with respect to x-ray contrast
media), product efficacy, safety, and sales and marketing
capabilities. As far as new diagnosing techniques are concerned,
technological innovation is also an important factor. Our
competitors include Guerbet, Schering AG, Tyco Inc. and GE
Healthcare, formerly Amersham plc.
Intellectual Property
Intellectual property and especially patent protection are of
critical importance to our pharmaceuticals business. At
December 31, 2005, we held 118 U.S., 67 European and
23 Japanese patents for various pharmaceutical inventions. In
addition, we have 116 patent applications pending at the
U.S. Patent and Trademark Office, 189 at the European
Patent Office and 173 in Japan. Our most important patents are
those covering Pantoprazole, Ciclesonide and Roflumilast as well
as the patents for which we have applied and which have been
granted in connection with our various pipeline drugs.
Pantoprazole enjoyed substance patent protection in Europe until
June 2005 and, by virtue of an extension granted by the
U.S. Patent and Trademark Office in July 2003, enjoys
patent protection in the United States until July 2010 with a
possible further extension of six months in the United States
due to a pediatric indication. In addition, Pantoprazole
benefits from SPCs, which have an effect similar to that of an
extension of original patents, in the majority of European
countries until the end of May 2009.
In 2004, generic drug companies filed ANDAs with the FDA in the
United States challenging our Pantoprazole substance patent with
a view to manufacturing and distributing generic versions of
Pantoprazole. In response to one of these challenges, we filed a
patent infringement suit in May 2004 against TEVA and its parent
company TEVA Pharmaceutical Industries, Ltd. in the
U.S. District Court for the District of New Jersey. Several
companies have also filed ANDAs challenging our Pantoprazole
oral formulation patent. Because Pantoprazole enjoys protection
in the United States under our substance patent until 2010 (and
our oral formulation patent is therefore irrelevant for the time
being), we have decided not to take any immediate action with
regard to these ANDAs. However, in 2005, Sun Pharmaceuticals
Advanced Research Centre (Limited) (Sun), one of the
challengers of our Pantoprazole oral formulation patent, amended
its ANDA to include a paragraph IV certification relating
to our Pantoprazole substance patent and in addition filed an
ANDA regarding our Pantoprazole IV formulation patent. As a
result, we filed complaints against Sun in the U.S. Federal
District Court for the District of New Jersey. In these
complaints, we claim that Sun is infringing our substance
patent, but consistent with our approach to the other attacks on
our oral formulation patents, do not claim that our IV
formulation patent has been infringed. While we believe that our
U.S. patents relating to Pantoprazole are valid and
enforceable and of sufficient scope and strength to prevent the
entities that have made the filings and any other third party
from manufacturing and distributing Pantoprazole-based generics
at this time, there can be no assurance that we will be
successful in defending our patents. For more information, see
Pharmaceuticals Intellectual
Property and Legal Proceedings.
- 38 -
Drug companies are required to include a certification in their
ANDA filings when they intend to manufacture and distribute a
generic version of a patent-protected drug listed in the Orange
Book, which is a list of proprietary drugs together with
pertinent patent information maintained by the FDA. Inclusion of
a paragraph IV certification in an ANDA implies that the
applicant is asserting that the patents listed in the Orange
Book are either invalid or unenforceable or will not be
infringed by the manufacture and distribution of a generic
version of that drug. The applicant is required to notify the
innovator company that it has filed an ANDA with the FDA, and
must describe the reasons it believes the listed patents will
not be infringed or are invalid or unenforceable. Once the
innovator drug company has received notice that a generic
application has been filed and its patent is being challenged,
it may file a lawsuit claiming patent infringement based on its
review of the generic drug companys notice. If a lawsuit
is brought within 45 days of receiving the applicants
notice, the FDAs approval is stayed for 30 months.
The 30-month period starts at the later of five years after the
approval of the drug or after receipt of the applicants
notice. If the patent court determines that the patent is valid,
enforceable and would be infringed by the product proposed in
the ANDA, the FDA will not approve the application until the
patent expires. If the court decides that the patent will not be
infringed or is invalid or unenforceable, the FDA may approve
the generic application when that decision occurs. The FDA may
approve the application at the end of the 30-month period, even
if the litigation is ongoing. A generic applicant who is the
first to challenge a listed patent using a paragraph IV
certification is granted a 180-day exclusivity period with
respect to other generic applicants. This exclusivity period
provides generic applicants with an incentive to challenge
listed patent for innovative drug products.
Other patents and pending patent applications that are material
to our business include those set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent Expiration Year | |
|
|
Europe(1) | |
|
United States | |
|
Japan | |
|
|
| |
|
| |
|
| |
Ciclesonide (substance)
|
|
|
2011 |
(2) |
|
|
2013 |
(3) |
|
|
2011 |
(3) |
Ciclesonide (key intermediate)
|
|
|
2014 |
|
|
|
2015 |
|
|
|
2014 |
|
Ciclesonide (purification process)
|
|
|
2017 |
|
|
|
2019 |
|
|
|
2017 |
|
Ciclesonide (aerosol)
|
|
|
2018 |
|
|
|
2018 |
|
|
|
2018 |
|
Ciclesonide (nasal formulation)
|
|
|
2020 |
|
|
|
2020 |
|
|
|
2020 |
|
Roflumilast (substance)
|
|
|
2014 |
(3) |
|
|
2015 |
(3) |
|
|
2014 |
(3) |
Roflumilast (formulation)
|
|
|
2023 |
|
|
|
2023 |
|
|
|
2023 |
|
Soraprazan (substance)
|
|
|
2019 |
(3) |
|
|
2019 |
(3) |
|
|
2019 |
(3) |
|
|
(1) |
Includes European patents or national patents in major European
countries. |
|
(2) |
SPCs for the extension of protection until 2016 have been
granted or applied for in Europe. |
|
(3) |
Does not reflect a possible extension of the term of patent
protection or the grant of supplementary protection certificates
for up to five additional years. |
We rely on intellectual property that we obtain through
cross-licensing arrangements with third parties to develop,
manufacture and market pharmaceuticals. For example, we have
entered into licensing arrangements with Hoffmann-La Roche and
Invitrogen to obtain access to technologies that we consider
critical to the R&D projects carried out in our molecular
diagnostics unit. If we are unable to obtain licenses on
commercially reasonable terms in the future, we may be limited
in our ability to develop, manufacture and market new products.
We depend on our ability to obtain and, if challenged,
successfully defend our patents, licenses, trademarks, trade
secrets and other forms of intellectual property protection.
Although we intend to continue to file and prosecute patent
applications vigorously, we may not be able to obtain patents
for all our inventions. In addition, the process of seeking
patent protection is lengthy and expensive, and the issuance of
a patent is conclusive neither of its validity nor of its scope.
Therefore, there is no assurance that our currently pending or
future patent applications will result in patents being granted
or that, if patents are issued, they will be valid or of
sufficient scope or strength to provide us with meaningful legal
protection or a commercial advantage in the marketplace. In
addition, if our competitors develop technologies that are
- 39 -
themselves protected by patents or other forms of intellectual
property protection, the underlying technologies may be
unavailable to us or available to us only on unfavorable terms.
A significant part of our intellectual property consists of
registered trademarks. We are continuously engaged in developing
brand names for new products, securing trademark protection for
our new brand names, policing our existing trademarks and
enforcing our legal entitlements in situations where third
parties infringe upon any of these rights. Before we start to
advertise and sell a product under a new brand name, we seek to
minimize the risks of infringing upon the trademark rights of
others by filing for trademark protection and by conducting
trade and service mark searches and other inquiries.
As with other pharmaceuticals companies, a portion of our
know-how is not patent-protected. To protect this information,
we rely on trade secret law and frequently enter into
confidentiality agreements with our employees, customers and
partners. These agreements may be unenforceable, however, and
the remedies that are available to us for breaches may be
inadequate. Likewise, our competitors may gain access to our
know-how by lawful means, for example, by reverse engineering,
or may independently develop the same know-how, which may
destroy any competitive edge that we may have.
As a result of the key role that intellectual property plays in
the pharmaceuticals industry, we may from time to time become
involved in litigation as either plaintiff or defendant. There
can be no assurance that we will be able to successfully settle
or otherwise resolve claims that may be brought against us by
third parties in the future. If we are unable to successfully
settle future claims on terms acceptable to us, we may be
required to engage in costly and time-consuming litigation and
may be prevented from, or experience substantial delays in,
marketing our existing pharmaceuticals and launching new ones.
Each of these events could materially adversely affect our
business, financial condition or results of operations or halt
the sales of our existing products. For more information
concerning the types of litigation that we face in our business,
see Legal Proceedings and
Item 3: Key Information Risk
Factors Risks Related to each of our
Businesses.
Regulation
All companies developing, manufacturing and marketing
pharmaceuticals are subject to extensive, complex and evolving
regulations in the United States, Europe and Japan. We are
working within the framework of the International Conference on
Harmonisation of Technical Requirements for Registration of
Pharmaceuticals for Human Use (ICH) guidelines. The
ICH is a collaborative effort among regulators in Europe, Japan
and the United States and experts from the pharmaceuticals
industry in the three regions with the goal of streamlining the
development and regulatory approval of medicinal products by
harmonizing the applicable procedures. Our compliance with the
ICH guidelines assists us in obtaining regulatory approval for
our drug candidates in as many jurisdictions as possible.
Overview of clinical trial process
Preclinical tests encompass the laboratory evaluation of a new
pharmaceutical, its chemistry, formulation and stability, as
well as animal studies to assess its potential safety and
efficacy. Following the conclusion of preclinical tests, the
results of these studies, which have to demonstrate that the
pharmaceutical delivers sufficient quantities of the drug to the
bloodstream to create the desired therapeutic results, are
submitted to the relevant regulatory authority, which must
approve before human clinical trials may begin.
Human clinical trials are typically conducted in three
sequential phases:
|
|
|
|
|
Phase I. During this phase, the drug is initially
introduced into a relatively small number of healthy humans or
patients and is tested for safety, dosage tolerance, absorption,
metabolism, distribution and excretion. |
|
|
|
Phase II. This phase involves studies in a limited
patient population to identify possible adverse effects and
safety risks, to determine the efficacy of the drug for specific
targeted diseases or conditions, and to determine dosage
tolerance and optimal dosage. |
- 40 -
|
|
|
|
|
Phase III. When Phase II evaluations demonstrate that a
dosage range of the drug is effective and has an acceptable
safety profile, Phase III trials are undertaken to further
evaluate dosage, clinical efficacy and test for safety in an
expanded patient population at geographically dispersed clinical
sites. |
United States
The principal U.S. regulators relevant to the business of
our pharmaceuticals division are the U.S. Food and Drug
Administration (FDA) and to a lesser extent the
U.S. Drug Enforcement Agency (DEA) and state
government agencies. The Federal Food, Drug and Cosmetic Act,
the Controlled Substances Act and other federal statutes and
regulations all govern or influence the development, testing,
manufacture, packaging, labeling, storage, record keeping,
safety, approval, advertising, promotion, marketing, sale and
distribution of our pharmaceuticals.
FDA approval is required before any dosage form of any new
pharmaceutical, including any off-patent equivalent of a
previously approved pharmaceutical, may be marketed. The process
for obtaining governmental approval to market pharmaceuticals in
the United States is rigorous, time-consuming and costly, and it
is difficult to predict the extent to which this process may be
affected by legislative and regulatory developments. Like all
pharmaceuticals companies, we are dependent on receiving FDA and
other types of governmental approvals prior to producing and
marketing virtually all of our new pharmaceuticals in the United
States. Consequently, there is always a chance that the FDA or
another agency will not approve our new pharmaceuticals, or that
the rate, timing and cost of such approvals will adversely
affect our launch plans and ultimately our results of
operations. See Item 3: Key Information
Risk Factors Risks Related to our Pharmaceuticals
Business for a discussion of these risks.
All applications for FDA approval are required to contain
information relating to formulation, raw materials, stability,
manufacturing, packaging, labeling and quality control. There
are three types of applications for FDA approval:
|
|
|
|
|
New Drug Application (NDA). An NDA is filed
whenever approval is sought for drugs with active ingredients
and/or with dosage strengths, dosage forms, delivery systems or
pharmacokinetic profiles that have not previously been approved
by the FDA. A drugs pharmacokinetic profile relates to the
characteristic interactions of the drug with the human body in
terms of absorption, distribution, metabolism, and excretion.
NDAs are typically filed for newly developed branded
pharmaceuticals as well as for new dosage forms of existing
drugs that have been approved previously. |
|
|
|
Abbreviated New Drug Application (ANDA). An
ANDA is filed whenever approval is sought for generic
equivalents of previously approved drugs or unapproved dosage
forms of such drugs. The FDA will accept the filing of an ANDA
before the expiration of the exclusivity period of the relevant
patent only if the applicant simultaneously challenges that
patent. For a description of the recent ANDA filings challenging
the patents underlying Pantoprazole, see
Intellectual Property. |
|
|
|
Supplemental New Drug Application (sNDA).
Companies intending to make changes to drugs or their labels
after they have been approved, must submit an sNDA. The
supplement type refers to the kind of change that was approved
by the FDA. This includes changes in manufacturing, patient
population, strength and formulation. |
The process mandated by the FDA before a previously unapproved
pharmaceutical may be marketed in the United States essentially
involves the following steps:
|
|
|
|
|
Preclinical laboratory and animal tests; |
|
|
|
Submission of an Investigational New Drug Application
(IND), which must become effective before clinical
trials may begin; |
- 41 -
|
|
|
|
|
Adequate and well-controlled human clinical trials to establish
the safety and efficacy of the proposed drug for its intended
use; |
|
|
|
Submission of an NDA containing the results of the preclinical
and clinical trials establishing the quality, safety and
efficacy of the proposed drug for its intended use; and |
|
|
|
FDA approval of the NDA. |
An IND automatically becomes effective 30 days after
receipt by the FDA unless the FDA, during that 30-day period,
raises concerns or questions about the conduct of the trials as
outlined in the IND. In such cases, the IND sponsor and the FDA
must resolve any outstanding concerns before clinical trials can
begin. In addition, an independent Institutional Review Board at
the medical center that proposes to conduct the clinical trials
must review and approve any clinical study before it commences.
Following completion of Phase I, Phase II and Phase III clinical
trials, the results of the internal development processes and
the mandatory preclinical and clinical studies along with
documentation evidencing compliance with applicable Chemistry,
Manufacturing and Controls (CMC) requirements as
part of an NDA are submitted to the FDA. The drug development
and NDA approval process averages approximately eight to twelve
years.
FDA approval of an ANDA is required before a generic equivalent
of a drug that previously has been approved under an NDA or a
previously unapproved dosage form of a drug that has been
approved under an NDA may be marketed. The ANDA approval process
differs from the NDA approval process in that it does not
require new preclinical and clinical studies; instead, it relies
on the clinical studies establishing safety and efficacy
conducted for the previously approved drug. The ANDA process,
however, requires the generation of data that show that the ANDA
drug is bioequivalent (i.e., therapeutically equivalent)
to the previously approved drug. Bioequivalence
compares the bioavailability of one drug with another and, if
established, indicates that the rate and extent of absorption of
an off-patent drug in the body are substantially equivalent to
the previously approved drug. Bioavailability
establishes the rate and extent of absorption, as determined by
the time-dependent concentrations of a drug in the bloodstream
needed to produce a therapeutic effect. Supplemental NDAs or
ANDAs are required for, among other things, approval to transfer
products from one development site to another. Such applications
may be under review by the FDA for a year or more. In addition,
certain drugs may be approved for transfer only once new
bioequivalence studies have been conducted or certain other
requirements have been satisfied.
To obtain FDA approval of both NDAs and ANDAs, a pharmaceuticals
companys procedures and operations must conform to FDA
quality system and control requirements generally referred to as
current Good Manufacturing Practices (cGMP), as
defined in Title 21 of the U.S. Code of Federal
Regulations. These regulations cover all aspects of the
development, manufacturing and marketing process from receipt
and qualification of components to distribution procedures for
finished products. Since they are evolving standards, we have to
continue to expend time, money and effort in all production and
quality control areas to maintain compliance. The evolving and
complex nature of regulatory requirements, the broad authority
and discretion of the FDA, and the high level of regulatory
oversight results in the continuing possibility that we may be
adversely affected by regulatory actions despite our efforts to
maintain compliance with the applicable regulatory requirements.
See Item 3: Key Information Risk
Factors Risks Related to our Pharmaceuticals
Business for a discussion of these risks.
In addition, we are subject to periodic inspections of our
facilities, procedures and operations and/or the testing of our
pharmaceuticals by the FDA, the DEA and certain other
authorities that conduct periodic inspections to assess our
compliance with applicable regulations. The FDA also conducts
pre-approval and post-approval reviews and plant inspections in
connection with its review of our applications for new products
to determine whether our systems and processes comply with GMP
and other applicable FDA regulations. If the FDA determines that
deficiencies have occurred at any of our facilities, it may,
among other things, withhold approval of any NDAs, ANDAs or
other applications that we have submitted. Our vendors that
provide us with finished products or components used to
manufacture, package and label pharmaceuticals are subject to
similar regulations and periodic inspections. Following its
inspections, the FDA may issue notices on Form 483 and
Warning Letters that may cause us to modify certain activities
identified during the inspection. A Form 483 notice
(inspectional observations) is typically issued at
the conclusion of an FDA
- 42 -
inspection and lists conditions that the FDA investigators
believe may violate cGMP or good clinical practice
(GCP) or other FDA regulations. FDA guidelines
specify that a Warning Letter be issued only for violations of
regulatory significance for which the failure to
adequately and promptly achieve correction may be expected to
result in an enforcement action.
Failure to comply with FDA and other governmental regulations
may result in fines, unanticipated compliance expenditures,
recall or seizure of pharmaceuticals, total or partial
suspension of production and/or distribution, suspension of the
FDAs review of NDAs, ANDAs or other applications,
enforcement actions, injunctions and criminal prosecution. Under
certain circumstances, the FDA also has the authority to revoke
previously granted approvals. Although we have internal
compliance programs, if these programs do not meet the
applicable standards or if our compliance is deemed deficient in
any significant way, our business may be materially adversely
affected. See Item 3: Key Information
Risk Factors Risks Related to our Pharmaceuticals
Business for a further discussion of risks in connection
with FDA regulations.
The Generic Drug Enforcement Act of 1992 established penalties
for wrongdoing in connection with the development or submission
of ANDAs. Under this act, the FDA has the authority to
permanently or temporarily bar companies or individuals from
submitting or assisting in the submission of ANDAs and to
temporarily deny approval and suspend applications to market
off-patent drugs. The FDA may also suspend the distribution of
all drugs approved or developed in connection with certain
wrongful conduct and/or withdraw approval of ANDAs and seek
civil penalties. The FDA may also significantly delay the
approval of any pending NDA, ANDA or other regulatory
applications under the Fraud, Untrue Statements of Material
Facts, Bribery and Illegal Gratuities Policy Act.
In recent years, there has been enhanced political attention and
governmental scrutiny at the federal and state levels of the
prices paid or reimbursed for pharmaceuticals under Medicaid,
Medicare and similar programs. The U.S. Federal Trade
Commission (FTC) has announced its intention to
conduct a study of whether brand-name and generic drug providers
have entered into agreements, or have used other strategies, to
delay competition from generic versions of patent-protected
drugs. The FTCs announcement could affect the manner in
which generic drug providers resolve intellectual property
litigation with branded pharmaceuticals companies, and may
result in an increase in private-party litigation against
pharmaceuticals companies. See Item 3: Key
Information Risk Factors Risks Related
to our Pharmaceuticals Business for a discussion of
government regulation in connection with third-party
reimbursement programs.
European Union
Much of what has been said with respect to the approval process
applicable to new drugs in the United States also applies to the
European Union. In the European Union, however, several
different procedures are available: a centralized approval
procedure, a Mutual Recognition Procedure (MRP), a
Decentralized Procedure (DCP) and the common
national procedures. The London-based European Medicines Agency
(EMEA) governs the centralized drug registration and
approval process. The respective scientific committees, the
committee for medicinal products for human use
(CHMP) and the committee for veterinary medicinal
products (CVMP), make recommendations based on
reviews by appointed rapporteurs and co-rapporteurs, who are
part of the CHMP/CVMP. Following the committees
recommendation, the European Commission issues a formal
decision, which is valid throughout the entire European Union.
Upon completion of the approval process, the drug may be
marketed within all member states. An alternative procedure is
the MRP. Pursuant to this procedure, one Reference Member State
(RMS) carries out the primary evaluation. The other
Concerned Member States (CMS) then have 90 days
to decide whether they accept or reject the decision made by the
RMS. If a member state does not follow the decision of the
reference country, then the issue is referred to the CHMP for
arbitration. Based on the CHMPs determination, a formal
decision is made by the European Commission. The new DCP is in
effect since the end of 2005 and operates similarly to the MRP.
It will be used mainly where an authorization does not yet exist
in any of the member states. The CMS are involved at an earlier
stage of the evaluation than under the MRP in an effort to
minimize disagreements and to facilitate the application for
marketing authorization in as many markets as possible. Generics
of medicinal products authorized through the centralized
procedure will have the option of applying through either the
centralized procedure or the DCP or MRP.
- 43 -
Japan
In Japan, two issues make the approval process difficult for
drugs developed outside of that country. First, the Japanese
approval agency recognizes only a limited number of the
documents used in registration procedures in other countries.
Second, the Japanese approval agency requires that tests to
determine appropriate dosages for Japanese patients be conducted
on Japanese subjects and patients. As a result of these issues,
parts of Phase II and Phase III clinical trials carried out in
the United States or Europe typically need to be repeated in
Japan. These regulatory requirements may cause delays of two to
three years in introducing drugs developed outside of Japan to
the Japanese market.
Chemicals
Overview
We develop, manufacture and market a wide range of specialty
chemicals targeted at selected markets. Specialty chemicals are
high value-added products used in the manufacture of a wide
array of applications. Compared with commodity chemicals,
specialty chemicals are typically produced in smaller volumes.
We offer our specialty chemicals together with support and
comprehensive customer service regarding the use of our products
and their adaptation to the specific manufacturing requirements
of individual customers. The highly application-specific nature
of specialty chemicals impedes product substitution, which
fosters close relationships between suppliers and customers.
In 2005, our chemicals division generated net sales of
907 million, an increase of 6.2% compared with
2004. The chart below provides a breakdown of our chemicals net
sales by geographic region for the three years ended
December 31, 2005:
Chemicals Net Sales by Geographic Region
In 2005, our chemicals net sales increased in all regions due to
increased demand and the net effect of acquisitions and
dispositions, with the exception of Europe (excluding Germany),
where our net sales declined due primarily to various
dispositions. As a result of the international dimension of our
business, our results of operations are materially affected by
exchange rate fluctuations in any given period, especially by
changes in the exchange rate between the euro, on the one hand,
and the U.S. dollar, Chinese renminbi yuan and the Japanese
yen, on the other hand. See Item 3: Key
Information Risk Factors Risks Related
to each of our Businesses and Item 11:
Quantitative and Qualitative Disclosure about Market Risk
for more information on our exchange rate exposure.
- 44 -
Our chemicals division comprises four business areas:
|
|
|
|
|
Additives & Instruments, which comprises paint additives,
plastic additives and wax additives as well as paint testing
instruments, including gloss and color meters; |
|
|
|
Effect Pigments, which comprises metallic and pearlescent effect
pigments for applications such as paints, plastics and cosmetics
as well as metallic printing inks; |
|
|
|
Electrical Insulation, which comprises electrical insulation
coatings for copper and aluminum wires, electrical insulation
systems for use in electrical and electronic components, and
compounds for a variety of other applications; and |
|
|
|
Coatings & Sealants, which comprises coatings for packaging
and general industry applications, sealing compounds, and,
increasingly, solutions for flexible packaging. |
Our chemicals division has grown steadily over the past several
years both organically and as a result of strategic
acquisitions. We expect to continue to rely on a combination of
organic growth and acquisitions for the expansion of our
operations in the future. In identifying suitable targets for
acquisitions, we seek majority interests in companies that
present a clear strategic fit, have potential for net income
contribution and whose management is both experienced and
competent.
The chart below provides a breakdown of our chemicals net sales
by business area for the three years ended December 31,
2005:
Chemicals Net Sales by Business Area
|
|
(1) |
We formed our Effect Pigments business in the fourth quarter of
2005 in connection with the acquisition of the ECKART Group. |
Because chemicals are used in a variety of industries,
manufacturers of specialty chemical products are typically
affected by the business cycles experienced by the industries
that they serve. By targeting selected markets in complementary
industries all over the world, we seek to diversify our risk and
reduce our exposure to these cycles.
Products
Additives & Instruments
We provide a wide range of innovative, high-quality additives
and related measuring and testing instruments. In 2005, net
sales generated by our Additives & Instruments business
totaled
364 million.
- 45 -
We offer a comprehensive portfolio of paint additives, plastic
additives and wax additives, which we develop for the specific
requirements of our customers in the coatings, plastics and
printing ink industries and which we market under our global
brand BYK-Chemie. Additives are substances that have essentially
two applications: first, they facilitate manufacturing
processes, for example, by reducing viscosities and shortening
processing times, and second, they substantially improve the
quality of products, especially their mechanical properties and
appearance. Because additives can achieve effects that otherwise
would not be possible, additives have become an integral and
indispensable part of modern paint and plastics formulations.
Due to their high effectiveness, they are usually applied in
small dosages.
Our additives portfolio comprises wetting and dispersing
additives for pigments and fillers, additives to improve surface
properties, defoamers and air release agents, rheological
additives, wax emulsions, dispersions and micronized waxes. Our
additives are used in a variety of downstream applications, such
as architectural and industrial coatings, automotive finishes,
wood, can and coil coatings, printing inks, vinyl floorings,
polyester, epoxy or acrylic resin systems and polishes.
As a complement to our additives portfolio, we also offer
measuring and testing instruments that may be used to measure
the surface characteristics of plastics and paints, including
their color and gloss attributes. We market our instruments
under our global brand BYK-Gardner. By enabling our customers to
adjust their selection and dosage of additives based on the
surface characteristics of the raw materials that they use, our
instruments portfolio naturally complements our additives
offering. We believe that our ability to offer complete
solutions consisting of additives and instruments affords us a
competitive edge.
We manage our additives business from the headquarters of our
chemicals division, which are located in Wesel, Germany, and
which are responsible for our worldwide R&D, manufacturing
and marketing efforts. In contrast, sales and customer service
are the responsibility of our local operating companies, which
operate in proximity to our customers. We believe that this dual
approach enables us to achieve operational synergies, while
staying in touch with our customers.
Our Additives & Instruments business has expanded
continuously over the past several years, almost entirely as a
result of organic growth.
Effect Pigments
In our Effect Pigments business we offer metallic effect
pigments, pearlescent pigments and metallic printing inks. Our
Effect Pigments business comprises the activities of the ECKART
Group, which we acquired in October 2005. Net sales generated by
our Effect Pigments business in the three-month period following
the completion of the acquisition totaled
75 million. Effect pigments are widely used to
provide paints and varnishes producing different, mainly visual,
effects. Our products are used in coatings, graphic arts,
plastics, cosmetics and various other technical applications.
Important application areas are the automotive sector and other
industrial areas. Metallic pigments consist of small aluminum,
copper or zinc particles which lead to a certain surface gloss.
Pearlescent pigments, which are based on minerals, are
semitransparent and are characterized by a deep gloss similar to
the gloss of real pearls.
We intend to expand our Effect Pigments business mainly by
targeting markets outside Germany, the development of new
innovative products and, to a lesser degree, the acquisition of
selected targets.
Our Effect Pigments business is headquartered in Fuerth, Germany.
- 46 -
Electrical Insulation
In our Electrical Insulation business, we offer a comprehensive
range of wire enamels, impregnating resins, coatings and other
compounds used for electrical insulation in a variety of
applications. All of the products in our Electrical Insulation
portfolio are formulated to fulfill various performance
requirements in addition to electrical insulation, such as
mechanical and chemical resistance and thermal endurance even
under severe operating conditions. Our Electrical Insulation
portfolio comprises:
|
|
|
|
|
Enamels for the electrical insulation of copper and aluminum
wires used in a variety of electrical applications, including
electrical motors, transformers, household appliances and
consumer electronics; |
|
|
|
Resins for the impregnation of electrical windings in motors,
generators and other coils; |
|
|
|
Compounds for the potting, encapsulation and embedding of
electrical and electronic components such as transformers,
printed circuit boards and capacitors; and |
|
|
|
Coatings and compounds for specialized applications, including
tooling, rapid prototyping and magnetic materials. |
In 2005, our Electrical Insulation business generated net sales
of
293 million. In January 2006, we agreed with
INVEX S.p.A., Italy, to buy its captive production of resins for
insulating magnetwire in Cerquilho, Brazil in order to further
extend our global coverage of this sector. We intend to expand
the production capacity of the plant and to integrate our
existing South American insulation business, which is currently
operated by a licensee.
Coatings & Sealants
In the area of Coatings & Sealants, we offer coatings as
well as compounds and sealants. In 2005, our Coatings &
Sealants business generated net sales of
175 million. Our coatings are used, among
other things, to coat steel and aluminum sheets, plastic, paper
and board. An important downstream application of our coatings
portfolio are packaging materials that are used in the food
industry, including cans, drums, tubes and closures as well as
aluminum, plastic and paper foils for flexible packaging. Our
compounds and sealants portfolio comprises sealing compounds for
use in beverage cans and metal as well as plastic closures and
jar lids.
We believe that we offer a comprehensive portfolio of coatings
and sealants. This is especially true of packaging applications,
for which we are able to provide our customers with complete
solutions. Our position in the coatings market is particularly
strong in Europe. In the area of closure compounds and can
sealants, we consider ourselves to be among the leading
providers worldwide. Our declared goal is to be the best in
class with respect to every type of product that we offer and
every market that we are active in.
In the first quarter of 2005, we sold our Austrian subsidiary
Rembrandtin Lack Ges.m.b.H. In October 2005, we acquired Kelstar
International, a leading U.S. producer of water-based and
UV curable overprint coatings for the paper and board packaging
sector. In January 2006, we signed an agreement to acquire
Rad-Cure Corp., a company specializing in the fields of
overprint UV curable coatings and adhesives for the paper and
board packaging sector. These transactions reflect our strategic
decision to realign our Coatings & Sealants business by
reducing our activities in the industrial coatings sector and
concentrating on high-potential niches of the specialty
chemicals markets, such as chemical solutions for flexible
packaging. As with Electrical Insulation, our growth strategy in
our Coatings & Sealants division includes the expansion and
strengthening of our market position by making selected
acquisitions.
Research and Development
We consider the development of innovative specialty chemicals
that are capable of satisfying our customers needs a key
prerequisite for the success of our business. The overarching
goal of our R&D efforts is to create customized solutions
that add value to our customers manufacturing processes
and the products that they market. In doing so, we seek to
distinguish ourselves from our competitors in terms of quality
and
- 47 -
innovation. In order to be in a position to employ
state-of-the-art technology in all aspects of our dealings with
customers, we supplement our development processes with basic
research in selected areas.
In our Additives & Instruments business, we manage most
aspects of our R&D efforts on a centralized basis. Virtually
all research related to additives is carried out at the
headquarters of our chemicals division, which are located in
Wesel, Germany. While we also maintain laboratories for these
products in close proximity to our customers in all major
markets, none of them is engaged in research activities.
Instead, the function of these laboratories is to provide our
customers with technical assistance and to solve their problems
on-site. In our Effect Pigments business we maintain large
R&D facilities in Güntersthal, Germany. Further R&D
activities are carried out in the United States and Switzerland.
In our Electrical Insulation business, we carry out basic
research projects at our facilities in Hamburg, Germany,
particularly in the area of wire enamels. In addition, we
maintain R&D laboratories at selected local manufacturing
sites. These laboratories develop and produce region-specific
formulations in close contact with our customers and provide
them with technical service and support. In our Coatings &
Sealants business, we manage our entire R&D process on a
decentralized basis, with our R&D laboratories being located
at our local plants. To avoid overlaps and redundancies, our
management promotes close collaboration and the mutual exchange
of information between R&D facilities within each of our
business areas.
As far as new technologies are concerned, such as UV-curing and
nano technologies, which we expect to play an increasingly
important role in the specialty chemicals industry, each of our
business areas conducts its own R&D efforts. Because the
value of new technologies to our business is highly
application-specific, our management considers this approach
preferable to concentrating all R&D in one location. To
ensure that know-how built up in one business area becomes
available to other business areas, we actively manage
cooperation between our various R&D facilities involved in
similar technology projects.
As of December 31, 2005, 597 people worldwide
13.6% of the workforce of our chemicals division
were employed in our laboratories. Our R&D expenditures in
this division totaled
47 million in 2005, representing 5.1% of total
sales.
Supplies and Raw Materials
We purchase our supplies and raw materials from third parties
and typically seek to diversify our sources so as to minimize
the risk of supply chain outages. We do not believe that the
loss of any one of our providers would have a material adverse
effect on our business. In addition, we believe that alternative
sources for all supplies and raw materials that we need in our
business would be readily available to us without undue expense
and delay. We have not experienced significant difficulties in
obtaining supplies and raw materials of sufficient amounts and
quality in recent years, and we do not expect to encounter such
difficulties in the foreseeable future.
Like other companies in the chemicals industry, we are exposed
to raw material price increases. While historically we have
mostly been able to pass such increases on to our customers, our
ability to pass raw material price increases on to our customers
is generally subject to a time lag. This situation has created
pressure on our margins. To reduce this pressure, we attempt to
secure important raw materials by entering into long-term
contracts and continuously monitor our raw material prices on a
centralized basis. In addition, we limit our exposure to high
raw material prices by substituting cheaper raw materials for
more expensive ones.
Production
Our production strategy is to minimize costs by streamlining our
manufacturing processes and by creating facilities that
specialize in discrete product groups, thereby achieving
economies of scale and scope. In implementing this strategy, we
focus on capacity and process improvements with respect to our
existing facilities. To the extent necessary, we also construct
new facilities. As a rule, we seek to promote close
collaboration between our production facilities and our sales
and service organizations so as to be able to adapt our
manufacturing processes according to our customers needs.
We consider this approach especially important in the areas of
Coatings & Sealants and Electrical Insulation. The
manufacturing activities of our
- 48 -
Additives & Instruments and Effect Pigments businesses are
largely centralized at the main production facilities of these
businesses, which are located at the respective headquarters.
We own substantially all of our manufacturing facilities and
substantially all of the land on which they are located. Our
most important production facilities in the chemicals division
are located in Wesel, Germany, where we manufacture the majority
of the products of our additives business and Güntersthal,
Germany, where most of our Effect Pigments products are
manufactured. We lease our facilities in Collecchio, Italy, and
Fort Wayne, Indiana.
The following table shows selected key information with respect
to our current manufacturing facilities as well as our
facilities under construction:
Production Facilities
|
|
|
|
|
|
|
Location |
|
Function |
|
Size (m2) | |
|
|
|
|
| |
Wesel, Germany
|
|
Additives |
|
|
98,810 |
|
Güntersthal, Germany
|
|
Aluminum and bronze pigments, inks, bondings |
|
|
682,489 |
|
Wackersdorf, Germany
|
|
Aluminum pigments |
|
|
278,666 |
|
Kempen, Germany
|
|
Wire enamels |
|
|
36,713 |
|
Hamburg, Germany
|
|
Impregnating resins and compounds |
|
|
34,711 |
|
Grevenbroich, Germany
|
|
Coatings |
|
|
25,219 |
|
Bremen, Germany
|
|
Closure compounds |
|
|
13,719 |
|
Lehrte, Germany
|
|
Coatings |
|
|
24,719 |
(1) |
Geretsried, Germany
|
|
Measuring and testing instruments |
|
|
10,323 |
|
Tongling City, China
|
|
Additives and wire enamels |
|
|
40,634 |
|
Shunde, China
|
|
Coatings |
|
|
9,754 |
|
Zhuhai, China
|
|
Wire enamels, impregnating resins and compounds |
|
|
70,000 |
|
Sedan, France
|
|
Coatings |
|
|
20,000 |
|
Rivanazzano, Italy
|
|
Aluminum pigments |
|
|
101,824 |
|
Porta Margera, Italy
|
|
Aluminum pigments |
|
|
11,450 |
|
Quattordio, Italy
|
|
Wire enamels, impregnating resins |
|
|
40,096 |
(2) |
Ascoli Piceno, Italy
|
|
Wire enamels, impregnating resins |
|
|
17,499 |
|
Collecchio, Italy
|
|
Compounds |
|
|
8,000 |
|
Deventer, The Netherlands
|
|
Additives |
|
|
18,850 |
|
Vigo, Spain
|
|
Can sealants |
|
|
20,637 |
|
Vetroz, Switzerland
|
|
Zinc pigments |
|
|
30,349 |
|
Pori, Finland
|
|
Pearlescent pigments |
|
|
3,390 |
(3) |
Louisville, Kentucky
|
|
Aluminum and zinc pigments, bondings |
|
|
106,433 |
|
Painesville, Ohio
|
|
Bronze pigments, inks |
|
|
47,874 |
|
Cinnaminson, Pensylvania
|
|
Coatings |
|
|
12,077 |
(4) |
Manchester, United Kingdom
|
|
Impregnating resins |
|
|
8,500 |
|
St. Louis, Missouri
|
|
Wire enamels, impregnating resins and compounds |
|
|
70,000 |
|
Wallingford, Connecticut
|
|
Additives |
|
|
75,366 |
|
Fort Wayne, Indiana
|
|
Wire enamels |
|
|
3,345 |
|
Ankleshwar, India
|
|
Wire enamels, impregnating resins |
|
|
116,655 |
|
Pune, India
|
|
Wire enamels, impregnating resins and compounds |
|
|
96,536 |
|
|
|
(1) |
14,104 m2
owned and
10,615 m2
leased. |
|
(2) |
36,030 m2
owned and
14,066 m2
leased. |
|
(3) |
906 m2
owned and
2,484 m2
leased. |
|
(4) |
Completely leased. |
- 49 -
Customers, Sales and Marketing
We sell our specialty chemical products in more than 100
countries worldwide. Our customer focus and our commitment to
quality and service have enabled us to achieve leading market
positions. We seek to maintain close links between our
manufacturing facilities and our sales and marketing
organization in order to be able to respond quickly to our
customers changing needs. In addition, this approach
enables us to ship products directly from our manufacturing
facilities to our customers, which reduces both our and their
inventories.
Each of the specialty chemicals business areas has its own
centralized management, which coordinates the business
areas sales and marketing strategy and which is
responsible for dealing with its key customers. The actual sales
and marketing, however, is carried out at the local level by our
operating companies. In addition, to the extent that we do not
serve a particular market through our own local organization, it
is carried out either by way of direct sales made by us or
through external agents, whom we remunerate on a commission
basis.
Our main customers in the area of Additives & Instruments
are in the paint and plastics industry. We offer our Additives
& Instruments portfolio worldwide under our global brands
BYK-Chemie and
BYK-Gardner. Our
marketing efforts are coordinated by our headquarters in Wesel,
Germany, and are supported by our global sales and marketing
organization, which consists of marketing companies in the
United States, Singapore and Japan and sales offices in Korea
and China. In those areas of the world where it does not make
sense for us to maintain sales and marketing organizations of
our own, we rely on distributors with whom we have long-term
relationships and whom we typically remunerate on a commission
basis. We do not depend on any one of our distributors, and none
accounts for a material portion of our revenues. In addition, we
employ technical consultants who provide technical advice and
service to our customers in all major markets.
We market our Effect Pigments to customers in the paint, graphic
arts, plastics and cosmetics industries. Many of our Effect
Pigments customers are also customers of our Additives &
Instruments business. We intend to maintain ECKART as an
established brand in its markets.
The principal customers of our Electrical Insulation business
are large manufacturers of magnet wires and various producers of
electrical and electronic components. Because electrical and
electronic devices are used in a wide variety of applications of
everyday life, our customer base for impregnating resins and
compounds is large and diverse. As far as Electrical Insulation
is concerned, we use our own sales operations in all major
markets worldwide.
In the area of Coatings & Sealants, our customers comprise a
small number of globally operating companies in the packaging
and certain other industries. For sales and marketing purposes,
we rely on our own organizations in Germany, most other major
European markets, the United States and China.
Competition
Because specialty chemicals are frequently critical components
of the manufacturing processes or end products in which they are
used, they are typically offered together with support and
customer service regarding their use and adaptation to the
manufacturing requirements of individual customers. Therefore,
the key competitive factors in all our business areas are the
ability to respond to customers needs and the commitment
to constantly introducing new products and providing consistent
quality and service.
- 50 -
The specialty chemicals industry is a highly fragmented
industry, and there is no company that competes with us across
all our business areas. The following table provides an overview
of our principal competitors by business area:
Competitors
|
|
|
|
Additives & Instruments
|
|
Air Products, Ciba Specialty Chemicals, Cognis, Cytec,
Degussa-Tego and Lubrizol |
Effect Pigments
|
|
Engelhard, Merck, Schlenk, Silberline and Toyal |
Electrical Insulation
|
|
|
|
Wire enamels
|
|
Du Pont, Nexans, Fupao Chemical and Hitachi |
|
Impregnating resins and compounds |
|
Huntsman Advanced Materials, Du Pont, Hitachi and Von Roll Isola |
Coatings & Sealants
|
|
|
|
Can coatings
|
|
ICI, PPG and Valspar |
|
Coil coatings
|
|
Akzo Nobel Nippon Paint, BASF, Becker Industrial Coatings,
Sigma-Kalon and Tikkurila |
|
Can sealants and closure compounds |
|
W.R. Grace |
Regulation
The development, manufacture and marketing of chemical
substances is regulated by national and international laws.
Almost every country has its own legal procedures for
manufacturing, registration and import. Of all countries, the
laws and regulations of the European Union, the United States,
China and Japan, however, are those which are most significant
to our business. These regulations include the European
inventory of existing commercial chemical substances, the
European list of notified chemical substances, the United States
Toxic Substances Control Act and the chemicals list of the
Japanese Ministry of Trade and Industry. Chemicals that are
contained in one or more of these lists can usually be
registered and imported without additional testing into any
other country, although additional administrative requirements
may exist.
In December 2005, the European Council of Ministers agreed upon
a new EU regulatory framework for chemicals. Under the agreed
new system called REACH (Registration, Evaluation and
Authorization of CHemicals), which aims to improve the
protection of human health and the environment by providing more
safety information on chemical substances, enterprises that
manufacture or import more than one metric tonne of a chemical
substance per year would be required to register it in a central
database. Nevertheless, the agreement of the European Council of
Ministers is not equivalent to the adoption of a final
regulation. Adoption of a final regulation is subject to
co-decision rights by the European Parliament and is currently
not expected prior to the end of 2006. While we are currently
unable to assess the full impact of this proposed new system on
our business, we expect that it will very likely require the
deployment of additional resources and thus result in increased
costs, which could have a negative impact on our results of
operations.
Employees
See Item 6: Directors, Senior Management and
Employees Employees for information on our
employees.
Environmental Matters
Our operations are subject to a number of environmental laws and
regulations in each of the jurisdictions in which we operate
governing, among other things, air emissions, wastewater
discharges, the use, handling and disposal of hazardous
substances and wastes, soil and groundwater contamination, as
well as employee health and safety. Environmental compliance
obligations and liability risks are inherent in many of our
manufacturing activities. In the United States, certain
environmental remediation laws, such as the federal
- 51 -
Superfund law, can impose joint and several
liability for site cleanup, regardless of fault, upon certain
statutory categories of parties, including companies that sent
waste to a site. We are subject to potential liability at a
number of owned and third party sites in the United States.
We believe that our operations are currently in material
compliance with all applicable environmental laws and
regulations. In many jurisdictions, environmental requirements
may be expected to become more stringent in the future, which
could affect our ability to obtain or maintain necessary
authorizations and approvals and result in increased
environmental compliance costs.
While our management does not believe that environmental
compliance or remedial requirements are likely to have a
material effect on us, there is no assurance that future
material environmental compliance or remedial obligations will
not arise in connection with our operations or facilities or
that such obligations will not have a material adverse effect on
our business, financial condition or results of operations.
We have established and continue to establish accruals for
environmental remediation liabilities where the amount of such
liability can be reasonably estimated. As a rule, investigations
into potential contamination and subsequent cleanup are required
only when a site is closed and the existing production
facilities dismantled. Accordingly, it is not possible to
reasonably estimate the ultimate liability for investigation and
cleanup at sites that are still in operation. Likewise, given
the uncertainty inherent in such estimates, any accruals that we
have established may be subject to change.
Organizational Structure
We have subsidiaries that operate in a number of countries
throughout the world. The following table provides information
as of December 31, 2005, with respect to our current
significant subsidiaries:
Significant Subsidiaries
|
|
|
|
|
|
|
Corporate name, location and country of |
|
|
|
|
|
Ownership |
incorporation |
|
Field of activity |
|
Equity(1) |
|
interest(2) |
|
|
|
|
|
|
|
|
|
|
|
( in millions) |
|
(%) |
Pharmaceuticals
|
|
|
|
|
|
|
ALTANA Pharma AG, Constance, Germany
|
|
Administration, R&D,
Production, Distribution |
|
55 |
|
100 |
ALTANA Pharma Deutschland GmbH, Constance, Germany
|
|
Distribution |
|
(4) |
|
100 |
ALTANA Pharma Oranienburg GmbH, Oranienburg, Germany
|
|
Production |
|
33 |
|
100 |
ALTANA Pharma B.V., Hoofddorp, The Netherlands
|
|
Distribution |
|
10 |
|
100 |
ALTANA Pharma N.V. /S.A., Diegem, Belgium
|
|
Distribution |
|
11 |
|
100 |
ALTANA Pharma S.A.S., Le Mée-sur-Seine, France
|
|
Distribution |
|
18 |
|
100 |
ALTANA Pharma GmbH, Vienna, Austria
|
|
Distribution |
|
11 |
|
100 |
ALTANA Pharma S.p.A., Milan, Italy
|
|
Distribution |
|
31 |
|
100 |
ALTANA Pharma S.A., Madrid, Spain
|
|
Distribution |
|
21 |
|
100 |
ALTANA Pharma Sp.z.o.o., Warsaw, Poland
|
|
Production |
|
11 |
|
100 |
ALTANA Inc., Melville, New York
|
|
Production, Distribution |
|
68 |
|
100 |
ALTANA Pharma Inc., Oakville, Ontario, Canada
|
|
Distribution |
|
42 |
|
100 |
ALTANA Pharma S.A. de C.V., Mexico City, Mexico
|
|
Production, Distribution |
|
76 |
|
100 |
ALTANA Pharma Ltda., São Paulo, Brazil
|
|
Production, Distribution |
|
77 |
|
100 |
ALTANA Pharma AG, Kreuzlingen, Switzerland
|
|
Distribution |
|
8 |
|
100 |
ALTANA Madaus (Pty.), Midrand, South Africa
|
|
Distribution |
|
17 |
|
50 |
ALTANA Pharma Ltd., Marlow, Great Britain
|
|
Distribution |
|
6 |
|
100 |
Zydus ALTANA Healthcare Private Ltd., Vashi, India
|
|
Production |
|
13 |
|
50 |
- 52 -
|
|
|
|
|
|
|
Corporate name, location and country of |
|
|
|
|
|
Ownership |
incorporation |
|
Field of activity |
|
Equity(1) |
|
interest(2) |
|
|
|
|
|
|
|
|
|
|
|
( in millions) |
|
(%) |
ALTANA Pharma US, Florham Park, New Jersey
|
|
Distribution |
|
19 |
|
100 |
Chemicals
|
|
|
|
|
|
|
ALTANA Chemie AG, Wesel, Germany
|
|
Administration |
|
1,411 |
|
100 |
BYK-Chemie GmbH, Wesel, Germany
|
|
Production, Distribution |
|
100 |
|
100 |
ECKART GmbH & Co. KG, Fuerth, Germany
|
|
Production, Distribution |
|
559 |
|
100 |
Rhenania Coatings GmbH, Grevenbroich, Germany
|
|
Production, Distribution |
|
8 |
|
100 |
DS-Chemie GmbH, Bremen, Germany
|
|
Production, Distribution |
|
7 |
|
100 |
Terra Lacke GmbH, Lehrte, Germany
|
|
Production, Distribution |
|
6 |
|
100 |
Beck Electrical Insulation GmbH, Hamburg, Germany
|
|
Production, Distribution |
|
31 |
|
100 |
BYK-Cera B.V., Deventer, The Netherlands
|
|
Production, Distribution |
|
26 |
|
100 |
Deatech s.r.l., Ascoli Piceno, Italy
|
|
Production, Distribution |
|
34 |
|
100 |
The P.D. George Company Inc., St. Louis, Missouri
|
|
Production, Distribution |
|
21 |
|
100 |
BYK-Chemie USA, Wallingford, Connecticut
|
|
Production, Distribution |
|
61 |
|
100 |
Kelstar International Inc., Cinnaminson, New Jersey
|
|
Production, Distribution |
|
21 |
|
100 |
BYK-Chemie Japan KK, Osaka, Japan
|
|
Distribution |
|
6 |
|
100 |
Tongling SIVA Insulating Materials Co. Ltd., Tongling City,
Peoples Republic of China
|
|
Production, Distribution |
|
28 |
|
100 |
Other subsidiaries
|
|
|
|
|
|
|
ALTANA Technology Projects GmbH, Bad Homburg v.d.H., Germany
|
|
Investments in and collaborations with biotech companies |
|
61 |
|
100 |
|
|
(1) |
Figures calculated in accordance with IFRS. |
|
(2) |
Portion of ownership interest equals portion of voting power
held. |
Property, Plants and Equipment
We own approximately 3.4 million square meters of property
at our production, distribution and administrative facilities
around the world and nearly all of the land that they occupy.
See Pharmaceuticals Production and
Chemicals Production for more
information on our production facilities. Virtually all of our
facilities are either owned by us or available to us under
long-term leases. We believe that our current facilities and
those of our consolidated subsidiaries are in good condition and
adequate to meet the requirements of our present and foreseeable
future operations.
Legal Proceedings
As is the case with many companies in the pharmaceuticals and
specialty chemicals industries, we are and may from time to time
become a party to claims and lawsuits incidental to the ordinary
course of our business. We are not currently involved in any
legal or arbitration proceedings that we expect to have a
material adverse effect on our financial position, and, to our
knowledge, no such legal or arbitration proceedings are
currently threatened.
In 1988, we held 91% of Deutsch-Atlantische Telegraphen AG
(DAT). In connection with the execution of a profit
transfer and control agreement with DAT, which provided that all
of DATs profits and losses had to be transferred to us, we
made, based on a valuation of DAT, a mandatory exchange offer to
the minority shareholders offering them 1.3 shares of our
company for each DAT share held by them. After protracted
litigation, the German Federal Supreme Court
(Bundesgerichtshof) decided that the exchange ratio
- 53 -
had to be based on the average share price during the three
months preceding the shareholders meeting that approved
the profit transfer and control agreement. The case was
subsequently remanded. Based on the final decision of the
appellate court of Dusseldorf (Oberlandesgericht
Düsseldorf) rendered in 2003, our total liability
amounted to
19.3 million
to be settled in cash and shares. At December 31, 2005, we
recorded the outstanding obligation in an amount of
8.2 million under other liabilities.
In 2004, generic drug companies filed ANDAs with the FDA in the
United States challenging our Pantoprazole substance patent with
a view to manufacturing and distributing generic versions of
Pantoprazole. In response to one of these challenges, we filed a
patent infringement suit in May 2004 against TEVA and its parent
company TEVA Pharmaceutical Industries, Ltd. in the
U.S. District Court for the District of New Jersey. Several
companies have also filed ANDAs challenging our Pantoprazole
oral formulation patent. Because Pantoprazole enjoys protection
in the United States under our substance patent until 2010 (and
our oral formulation patent is therefore irrelevant for the time
being), we have decided not to take any immediate action with
regard to these ANDAs. However, in 2005, Sun, one of the
challengers of our Pantoprazole oral formulation patent, amended
its ANDA to include a paragraph IV certification relating
to our Pantoprazole substance patent and in addition filed an
ANDA regarding our Pantoprazole IV formulation patent. As a
result, we filed complaints against Sun in the U.S. Federal
District Court for the District of New Jersey. In these
complaints, we claim that Sun is infringing our substance
patent, but consistent with our approach to the other oral
formulation attacks, do not claim that our IV formulation patent
has been infringed. While we believe that our U.S. patents
relating to Pantoprazole are valid and enforceable and of
sufficient scope and strength to prevent the entities that have
made the filings and any other third party from manufacturing
and distributing Pantoprazole-based generics at this time, there
can be no assurance that we will be successful in defending our
patents.
- 54 -
ITEM 4A: UNRESOLVED STAFF COMMENTS
None.
- 55 -
ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion includes forward-looking statements
based on assumptions about our future business. Our actual
results could differ materially from those contained in the
forward-looking statements.
You should read the following discussion of our financial
condition and results of operations in conjunction with our
consolidated financial statements, including the related notes,
and the other financial information that we have included
elsewhere in this annual report. For our consolidated financial
statements as of and for the three years ended December 31,
2005, see the discussion beginning on page F-1. We have
prepared our consolidated financial statements in accordance
with IFRS, which differ in certain significant respects from
U.S. GAAP. For a description of the significant differences
between IFRS and U.S. GAAP and a reconciliation of net
income and shareholders equity to U.S. GAAP, see
Notes 32 and 33 to our consolidated financial
statements.
Overview
We are a globally operating company that develops, manufactures
and markets innovative pharmaceutical and specialty chemical
products for a range of targeted, highly specialized
applications. In each of the last five years, we were able to
significantly increase our revenues and operating income,
although the growth rate has flattened in recent years. Much of
this development has been driven by Pantoprazole. The following
table indicates the growth of our business in recent years in
terms of our net sales and our operating income for each of the
last five years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 | |
|
2002 | |
|
2003(1) | |
|
2004(1) | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
( in millions) | |
Net sales
|
|
|
2,308 |
|
|
|
2,609 |
|
|
|
2,735 |
|
|
|
2,963 |
|
|
|
3,272 |
|
Operating income
|
|
|
520 |
(2) |
|
|
538 |
|
|
|
558 |
(1) |
|
|
604 |
(1) |
|
|
676 |
|
Net income
|
|
|
328 |
|
|
|
324 |
|
|
|
333 |
(1) |
|
|
379 |
(1) |
|
|
438 |
|
|
|
(1) |
2003 and 2004 figures have been adjusted to reflect the
retroactive application of IFRS 2 and IAS 39. For further
details regarding the new accounting principles see Notes 2
and 32 to our consolidated financial statements as of and for
the year ended December 31, 2005. |
|
(2) |
Includes a one-time gain in the amount of
110 million
resulting from the sale of our interest in a joint venture with
H. Lundbeck A/S, a Danish company active in the treatment of
diseases of the central nervous system and a special donation of
15 million
to the Herbert Quandt endowment. Excluding these items, our
operating income in 2001 would have been
424 million. |
The following discussion highlights the main factors driving the
revenues and results of operations of each of our two segments
from 2003 to 2005.
Pharmaceuticals
The net sales of our pharmaceuticals segment rose by 19.5%, from
1,980 million
in 2003 to
2,109 million
in 2004 and
2,365 million
in 2005. During the same period, the segments operating
income grew by 19.9%, from
504 million
in 2003 to
523 million
in 2004 and
604 million in 2005. The results of operations
of our pharmaceuticals segment are driven by:
|
|
|
|
|
Our ability to develop and launch new and innovative
therapeutics. Our pharmaceuticals segment derives most of
its revenues from the sale of therapeutic drugs, and its ability
to develop and launch new and innovative drugs materially
influences its results of operations. The launch of new drugs,
however, requires the successful completion of a regulatory
approval process that is complex and burdensome and the outcome
of which is uncertain. Currently, the main revenue driver of our
pharmaceuticals segment is our gastrointestinal therapeutic
Pantoprazole, whose net sales have risen by 22.3% over the past
three years, from
1,113 million
in 2003 to
1,216 million
in 2004 and further to
1,361 million in 2005. Pantoprazole accounted
for 57.6% of our pharmaceuticals |
- 56 -
|
|
|
|
|
net sales in 2005, compared with a contribution of 57.6% in 2004
and 56.2% in 2003. In 2005, Pantoprazole continued to be the
primary growth driver of the segments net sales. However,
increasing competition in the U.S. market, our most
important market, by other branded proton pump inhibitors
(PPIs), in particular Takedas Lansoprazole and
AstraZenecas Esomeprazole, by various generic PPIs, in
particular those based on Omeprazole, as well as by
over-the-counter (OTC) versions of Omeprazole-based
PPIs has led to increased pressure on Pantoprazole, which may
result in reduced growth and potentially even a decline in our
Pantoprazole net sales in future periods. To reduce our reliance
on sales and earnings of Pantoprazole, we are in the process of
developing several respiratory drugs, including Ciclesonide and
Roflumilast, which we hope will become revenue drivers of our
pharmaceuticals segment in the future. We started marketing the
metered dose inhaler (MDI) application of
Ciclesonide under the brand name
Alvesco®
in mid-March 2006 in 17 countries, including Germany, the
United Kingdom, The Netherlands, Brazil, Australia and other
countries. We plan to launch Ciclesonide in additional
territories and to launch Roflumilast under the brand name
Daxas®
over the next several years. |
|
|
|
Price regulations and budgeting decisions of local
governments and health care providers. The sale of
pharmaceuticals is subject to extensive price controls, which
not only limit the amount of revenues that we can earn from our
products but also influence the purchasing patterns of
hospitals, doctors and patients. For example, after a period in
which health care providers in Germany were afforded greater
flexibility in their budgeting decisions and during which we
were able to increase our sales of ethical therapeutics in the
German market, the legislature provided a framework for the
introduction of reference prices which is likely to have the
opposite effect. Since January 1, 2003, the pharmaceuticals
industry in Germany is required to grant German public health
care insurance companies fixed mandatory rebates
(Kassenrabatte) off the list price for most ethical
products. These fixed mandatory rebates were increased from 6%
to 16% in 2004 before being again decreased to 6% in 2005. The
introduction of the fixed mandatory rebate system and the
increases in the levels of these rebates have, especially in
2004, negatively influenced our pharmaceuticals sales in
Germany. For more information on the accounting impact of the
fixed mandatory rebate system, see Critical Accounting
Policies Revenue Recognition. In addition, in
2004, new legislation took effect which provided for the
possibility to include patent-protected drugs in the system of
statutory fixed reference prices for generic drugs containing
certain classes of active ingredients. Drugs included in the
statutory fixed reference price system are not subject to the
fixed mandatory rebates. On January 1, 2005, Pantoprazole
was included in the statutory fixed reference price system. The
association of the German health care insurance providers has
included Pantoprazole in a reference price group along with
other branded PPIs and cheaper Omeprazole-based generics.
We have lowered our prices for Pantoprazole in Germany so that
German patients wishing to purchase Pantoprazole do not have to
pay more than the statutory fixed reference price, but we have
also filed suit against the associations decision in the
Social Court (Sozialgericht) in Berlin, Germany. As a
result of these developments, we anticipate the negative impact
of German regulation on our business in Germany to persist. In
February 2006, new legislation was proposed in Germany, which is
aimed at a two-year price moratorium for all drugs paid for by
the statutory health care insurance scheme (gesetzliche
Krankenversicherung). The impact of this legislation on the
sales of our pharmaceuticals in Germany cannot be predicted at
this stage. |
|
|
|
The level of our investment in R&D in any given
period. The development of new and innovative therapeutics
involves substantial investments in R&D. Thus, the level of
our R&D spending in any given period has a material impact
on the results of operations of our pharmaceuticals segment in
that period. To maintain our high level of innovation, we seek
to invest approximately 20% of the annual revenues of our
therapeutics business in R&D. Basic research, the initial
development of new drug candidates, the establishment of
production facilities and the launch of new therapeutics
typically require high levels of cash expenditures, whereas the
marginal costs of producing additional units of the therapeutic
is low. As a result, our ability to recover our R&D
expenditures and to generate a profit from our drugs depends on
our ability to obtain patent and other forms of |
- 57 -
|
|
|
|
|
intellectual property protection for these drugs to shield us
from competition by manufacturers of generic equivalents. |
|
|
|
The sales and marketing methods we use for our
therapeutics. The results of operations of our
pharmaceuticals segment depend substantially on the selling and
distribution expenses that we incur in marketing our
therapeutics. The amount of selling and distribution expenses
incurred with respect to any given drug depends on a variety of
factors. One principal factor is the stage of the drugs
life cycle. When we launch a new therapeutic, we typically incur
substantial selling and distribution expenses to support its
introduction to the worldwide pharmaceuticals markets. As the
drug becomes established in its markets, these costs decline. |
|
|
|
Another key factor influencing the level of selling and
distribution expenses of our therapeutics and the revenues
generated by them is the method that we use to distribute them.
While we record selling and distribution expenses in markets
where we sell our drugs directly, we at times use arrangements
under which a local distributor purchases therapeutics from us
at a price specified in the relevant distribution agreement and
then assumes sole responsibility for selling and distributing
these drugs in its local market. All expenses incurred in
connection with the sale and distribution of the drugs are the
distributors responsibility. An example of this type of
distribution arrangement is our agreement with Wyeth
Pharmaceuticals, the pharmaceuticals division of Wyeth, Inc.,
(Wyeth) to distribute Pantoprazole in the United
States. See Item 10: Additional
Information Material Contracts for a summary
of the material terms of our distribution arrangement with Wyeth. |
|
|
|
|
|
The composition of our portfolio of pharmaceuticals. The
manufacturing costs of the various products sold by our
pharmaceuticals segment vary considerably relative to their
prices. Therefore, the results of operations of our
pharmaceuticals segment depend in part on the mix of
pharmaceuticals that we ship in any given period. For example,
because Pantoprazole has lower manufacturing costs relative to
its price than many other products in our portfolio, our cost of
sales as a percentage of net sales are lower in periods in which
we ship higher volumes of Pantoprazole. |
Chemicals
The net sales of our chemicals segment increased by 20.1% from
755 million
in 2003 to
854 million
in 2004 and
907 million
in 2005. Over the same period, its operating income rose by
25.8% from
90 million
in 2003 to
118 million
in 2004 and declined slightly to
113 million in 2005. The results of operations
of our chemicals segment are driven by:
|
|
|
|
|
Our ability to constantly launch new and innovative
products. The longer a successful product is on the market,
the more time competitors have to develop products with similar
features, leading to increased competition and downward price
pressure. As a result, a key driver of the revenues and results
of operations of our chemicals segment is our ability to
constantly develop, manufacture and sell new and innovative
specialty chemical products with advanced technical features and
to ensure that such products account for a substantial share of
our product portfolio. |
|
|
|
Our ability to maintain close ties with our customers. In
the specialty chemicals industry, it is important to be able to
offer customers complete solutions consisting not only of
products but also of comprehensive technical advice and services
in connection with these products. Because the relationship
aspect is an integral part of our product offering, our ability
to maintain close ties with our customers affects the prices
that our customers are willing to pay us and ultimately our
revenues and results of operations. |
|
|
|
The business cycles experienced by our customers.
Although our products are targeted at specialized applications,
our chemicals segment is subject to the business cycles
experienced by our customers. While we find it difficult to
insulate our business from the impact of economic downturns that
affect all of our customers, we attempt to reduce our exposure
to the business |
- 58 -
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|
cycles of the industries that we serve by focusing on
complementary industry segments and discrete geographic regions. |
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|
The level of raw material prices. Another driver of the
results of operations of our chemicals segment is the level of
raw material prices prevailing at any given point. Historically,
we have at times found it difficult to pass such increases on to
our customers, and we may experience similar difficulties in the
future. In each of the last several years, the results of
operations of our chemicals segment were materially influenced
by rising raw material prices. In 2005, we continued to
experience high raw material prices but were able to limit their
impact on our business by increasing the prices of our products
and, to a lesser extent, by substituting cheaper raw materials
for more expensive ones. |
Each of our two segments results of operations have been
and continue to be materially influenced by exchange rate
movements. At the group level, our results are influenced by, in
particular, exchange rate fluctuations between the euro and each
of the U.S. dollar, the Japanese yen, the Chinese renminbi
yuan and major Latin American currencies such as the Mexican
peso and the Brazilian real. For example, in 2005, net sales of
our pharmaceuticals segment were increased by two percentage
points due to the favorable exchange rate movements of the euro
vis-à-vis Latin American currencies, particularly the
Brazilian real, and the Canadian dollar. With respect to our
chemicals segment, exchange rate fluctuations had no material
net effect on our net sales in 2005.
In addition, the revenues of each of our two segments in any
given period may be influenced by acquisitions and dispositions
made by that segment during that period. This is particularly
true of our chemicals segment, whose growth strategy
contemplates the acquisition of suitable targets. For example,
in October 2005 we acquired ECKART GmbH & Co. KG (the
ECKART Group) and Kelstar International Inc.
(Kelstar International), which together contributed
84 million
to our net sales in 2005. In addition to acquiring suitable
targets, we dispose of selected parts of our portfolio which do
not constitute a part of our core business. For example, in the
first quarter of 2005, we sold our Austrian subsidiary
Rembrandtin Lack Ges.m.b.H., which contributed
33 million to our net sales in 2004.
To promote comparability across reporting periods, the following
discussion of our results of operations breaks out acquisition,
disposition and currency effects.
We present segment information in accordance with IAS 14. The
basis for our segment reporting is our two divisions:
pharmaceuticals and chemicals. This reporting system reflects
the management structure of our organization, pursuant to which
our holding company is responsible for making strategic
decisions with respect to our two divisions, whereas the
implementation of these decisions at the division level is the
responsibility of the heads of the respective divisions, who
manage them on a day-to-day basis. The reporting system also
reflects our internal financial reporting and the predominant
sources of risks and returns in our business. During the periods
under review, there have not been significant sales between our
pharmaceuticals segment and our chemicals segment.
Critical Accounting Policies
Revenue Recognition
As described in Notes 2 and 32 to our consolidated
financial statements, we recognize revenue if the revenue can be
reliably measured, it is probable that we will realize the
economic benefits of the underlying transaction, and all costs
to be incurred in connection with the transaction can be
reliably measured. Accordingly, we recognize revenue in
connection with the sale of a product at the moment the product
is shipped and title passes to the customer.
- 59 -
We make provisions for discounts, allowances, rebates,
chargebacks and product returns by customers in the same period
in which we recognize the related revenue. Such provisions
primarily relate to potential revenue reductions in our
pharmaceuticals business as a result of:
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|
Fixed mandatory rebates on ethical pharmaceuticals granted to
the German public health care insurance companies as required by
German law (Kassenrabatt). In the case of ethical
pharmaceutical products, these rebates amounted to 6%, 16% and
6% of the products retail price in 2003, 2004 and 2005,
respectively. We calculate such rebates based on the sales
volume shipped to our wholesale dealers. Additionally, we rely
on market data provided by external sources to estimate the
amounts sold by these dealers to patients insured under the
German public health care system. The final rebate is determined
and invoiced to us by the pharmacies centralized service
centers on a regular basis. Generally, the settlement occurs two
months after shipping. Historically, our estimates have not
deviated significantly from the ultimate rebate granted.
Accordingly, we believe that we are able to determine the
aggregate amount of rebates on our pharmaceutical products with
a high degree of certainty at the time of shipment. Effective
January 1, 2005, Pantoprazole became subject to a statutory
fixed price in Germany, therefore the uncertainty related to the
estimation of rebates has substantially decreased. |
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|
Volume-based customer loyalty rebates that relate almost
exclusively to our sales activities in Brazil and the United
States. These rebates are offered to our key customers to
promote customer loyalty and encourage greater product sales.
Our rebate programs provide that upon the attainment of
pre-established volumes or the attainment of revenue milestones
in a specified period, the customer receives credit against
purchases. Other promotional programs are incentive programs
periodically offered to our customers. We estimate provisions
for rebates and other promotional programs based on the specific
terms of each agreement and historical experience at the time of
shipment. |
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|
Merchandise returns with regard to returns of expired ethical
pharmaceutical products. Consistent with industry practice,
we maintain a return goods policy that allows our customers to
return products within a specified period prior to and
subsequent to the expiration date. The majority of returns occur
from six months before expiration to twelve months after
expiration of the products. We base our accruals for product
returns on our historical return experience. Due to high
customer demand, customer returns due to product expiration
historically have not been significant. |
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|
Chargebacks that relate to wholesale dealers in the US who
are supplying our products to indirect customers. The
provisions for chargebacks are determined in light of expected
sell-through levels by wholesale customers to indirect customers
based upon past history. Direct customer rebate arrangements in
the United States are typically related to the Medicaid Drug
Rebate Program. These direct customer rebates are not a
significant element of our normal sales terms and conditions and
therefore do not materially impact our net sales. |
Reductions of gross revenues for our pharmaceuticals business
amounted to
211 million
in 2004 and
220 million
in 2005. There have been no material changes in estimates for
prior year revenue reductions included in these amounts.
Additionally, we offer volume based rebates and cash discounts
to customers in our chemicals segment. Revenue reductions
related to the chemicals segment were
10 million
in 2004 and
11 million
in 2005. Accrued liabilities for these reductions amounted to
60 million
for 2004 and
65 million for 2005.
We generate a substantial portion of our revenues from licensing
agreements under which we grant third parties rights to certain
of our products and technologies. We record non-refundable
upfront payments received under these agreements as deferred
revenue and recognize them in income over the estimated
performance period stipulated in the agreement. An example of
such a licensing agreement is our contract with Wyeth to
distribute Pantoprazole in the United States. See
Item 10: Additional Information Material
Contracts for more information on this contract.
- 60 -
Currently, Wyeth is our single largest customer. Under our
agreement with Wyeth related to the distribution of
Pantoprazole, we have granted Wyeth an exclusive license to sell
Pantoprazole-based products in the U.S. market. Under the
agreement, Wyeth pays us a specified percentage of its
Pantoprazole-related net sales, subject to a minimum price.
Because our net sales from this arrangement are directly
dependent on the price that Wyeth charges to the final consumer,
our revenue from products that we have delivered to Wyeth but
that have not yet been sold to the final consumer as of the
balance sheet date are accounted for at the minimum price. We
use what we believe is a reasonable system for estimating the
number of unsold products held by Wyeth as of each relevant
balance sheet date. The difference between the minimum price and
the price invoiced by us to Wyeth is treated as deferred income
until such time as the product is actually sold to the final
consumer. Additionally, under this licence agreement we ship
semi finished-products to Wyeth, who then completes the
manufacturing process and sells the finished products to the
final consumer. Under the terms of the contract, any yield
adjustment resulting from the completion of the manufacturing
process by Wyeth results in an adjustment, or allowance, to the
original price.
We also generate revenues from our collaborative research and
development arrangements. Examples of such arrangements include
our agreement with Aventis, now Sanofi-Aventis, with respect to
the co-development of
Ciclesonide, which we have started to market in 17 European
markets under the brand name of
Alvesco®.
See Item 4: Information on the Company
Pharmaceuticals Research and Development for
more information on these arrangements. We enter into
co-development and
co-promotion agreements
to enhance the scope and depth of our research portfolio. Such
agreements consist of multiple elements and provide for varying
consideration terms, such as upfront, milestone and similar
payments, which are complex and require significant analysis by
management in order to determine the most appropriate method of
revenue recognition. We analyze collaborative arrangements to
determine if multiple elements can be divided into separate
units of accounting and how the arrangement consideration should
be recognized. Where an arrangement can be divided into separate
units, the arrangement consideration is allocated amongst those
varying units and recognized over the respective performance
period. Where the arrangement cannot be divided into separate
units, the total arrangement consideration is allocated on a
straight-line basis over the estimated collaboration period.
Such determinations require management to make certain
estimates. For each new drug candidate, we establish a detailed
timetable in close consultation with our partners. We base these
timetables on, among other things, our past experience. We
believe that our current estimates are based on sound
assumptions.
With respect to the agreements we have entered into to date,
upfront payments and other similar non-refundable payments
received that relate to the sale or licensing of products or
technologies are reported as deferred income and recognized as
other income over the collaboration periods on a straight-line
basis.
It is important to emphasize that given the complex nature of
our development projects, our collaborative arrangements and the
uncertainties inherent in the research and development and
regulatory approval processes, any estimate of dates on which we
expect to advance further in research and development or obtain
regulatory approval involves uncertainty and the exercise of
significant management judgment. Any change in any of these
dates has an impact on the corresponding collaboration periods
and as such on the amount recorded in the balance sheet and our
results of operations.
Employee Incentive Plans
As described in greater detail in this annual report and in
Notes 2, 13 and 32 to our consolidated financial
statements, we offer various share-based employee incentive
plans. See Item 6: Directors, Senior Management and
Employees Share Ownership Stock Option
Plans and Item 6: Directors, Senior Management
and Employees Share Ownership ALTANA
Investment Program for additional information on these
plans. As of January 1, 2005 IFRS 2 became effective.
Before the application of IFRS 2, the Company measured
expenses for share-based payments as the excess of the average
cost of treasury shares acquired by the Company over the
exercise price of the option. IFRS 2 introduces a
fair-value based model for the accounting for share-based
compensation. It requires management to record the fair value of
an option as an expense. Options granted under employee
incentive plans settled in equity instruments are measured at
their fair market value based on a Binomial option pricing model
at the date of grant while cash-
- 61 -
settled plans are initially measured at their grant date fair
value based on a Black Scholes pricing model and are remeasured
at fair value at the end of each reporting period. Compensation
expense for both types of plans are ratably recognized over the
relevant service period.
In accordance with the transitional provisions of IFRS 2,
the Company restated its prior year financial statements to
reflect the cost of grants awarded after November 7, 2002
and not yet vested by January 1, 2005. Employee incentive
plans initiated since 2003 fall within the scope of this
standard.
The level of compensation costs that we have historically
recorded under IFRS is not necessarily indicative of the level
of compensation costs that we may record in the future.
Furthermore, fair value measurements are based on parameters
such as volatility, interest rate, share price, duration of the
option and expected dividend. Vesting conditions are not taken
into account when estimating the fair value, unless these
conditions are market-based. Instead, the total expense incurred
is adjusted for the number of options that eventually vest.
Compensation expense and liabilities could materially differ
from estimated amount on the balance sheet date if the
parameters used change.
Pension Plans
We provide various pension plans and other retirement benefit
plans for our employees both in Germany and abroad. While some
of these plans are funded by separate plan assets, most of them
are not. We value our exposure under each of these plans using
the projected unit credit method set forth in IAS 19. In
performing valuations, we rely on the advice of actuarial
consultants. The methodologies used by us require that we make
estimates for some parameters, including the expected discount
rate, the expected rate of compensation increase, the expected
rate of pension increase and, in the case of plans covered by
plan assets, the expected return on these assets. Furthermore,
our actuarial consultants use statistical-based assumptions
covering future withdrawals of participants from the plan and
estimates of life expectancy. The actuarial assumptions used may
differ materially from actual results due to changes in market
and economic conditions, higher or lower withdrawal rates or
longer or shorter life spans of participants. These differences
could significantly impact the defined benefit obligation and
the resulting pension liability. See Note 14 and
Note 32 to our consolidated financial statements for
further details with regard to the change in pension obligations
and financing status.
Research and Development
We invest significant financial resources in our research and
development activities on an ongoing basis. This is necessary to
maintain continued success in the highly competitive and
research/technology intensive markets in which we are active. In
addition to our in-house research and development activities, we
maintain various research and development collaborations and
alliances with third parties, under which we are required to
fund costs and/or pay for the achievement of performance
milestones. For accounting purposes, research expenses are
defined as costs incurred for original and planned
investigations undertaken to gain new scientific or technical
knowledge and understanding. Development expenses are defined as
costs incurred to achieve technical and commercial feasibility
of products under development. Our research and development
expenses typically consist of salaries and benefits, allocated
overhead costs, occupancy costs, clinical trial and related
manufacturing costs, as well as milestone-based payments,
contract manufacturing and other outside costs.
We expense all research costs as incurred. Further, given the
regulatory approval process and other uncertainties inherent in
the development of our products, the conditions set forth in
IAS 38 for capitalizing development costs are not
satisfied, therefore development costs are also expensed as
incurred. Significant management judgment is required when
assessing the possible outcome of development activities.
In the case of collaborations and alliances with third parties,
considerable judgment can be involved in assessing whether
milestone based payments simply reflect the funding of research,
in which case expensing would always be required, or whether, by
making a milestone payment, we acquire an asset which has
alternative uses in our own on-going research efforts and which
may therefore be expensed over one or more future periods.
- 62 -
Impairment
Goodwill and intangible assets with indefinite lives.
Since January 1, 2004, goodwill and intangible assets with
indefinite lives are no longer amortized but instead must be
tested for impairment annually or more frequently if events and
circumstances indicate that the carrying amount is not
recoverable. These impairment tests are based on recent
financial budgets, which are based on historical experience, are
subject to change and represent managements current best
estimates regarding future developments. For a more detailed
description of our impairment tests, see Notes 5 and 32 of
our consolidated financial statements.
Tangible and intangible assets with definite lives. A
significant percentage of our assets is comprised of long-lived
assets. We record these long-lived assets at cost and amortize
or depreciate them, as the case may be, on a straight-line basis
over the shorter of the term of the underlying contract, if
applicable, or their estimated useful lives. As shown in
Note 5 and discussed in Note 32 to our consolidated
financial statements, we hold various intangible assets with
definite lives. The useful life of an intangible asset, which is
the period over which the asset is expected to contribute
directly or indirectly to future cash flows, can be influenced
by various factors, including legal, regulatory, contractual,
competitive, economic and other factors. While many of our
intangibles have a known contractual or legal life, determining
the impact of other factors can involve considerable uncertainty
and therefore requires management to exercise significant
judgment in estimating the period over which the cost of an
asset should be expensed. Similar estimates are required for our
tangible fixed assets.
The carrying value of all long-lived assets is subject to
possible impairment. If facts and circumstances indicate that
the carrying amount of an asset may not be recoverable in full,
we estimate the fair value of the asset by discounting the
expected future cash flows generated by it during its remaining
estimated useful life plus any salvage value at the end of that
period. If the estimated fair value of the asset is lower than
its carrying amount, we record an impairment charge and adjust
the carrying amount accordingly. Fair value estimates involve
uncertainty and often require the exercise of significant
management judgment. Although our management is confident that
its estimates rest on sound assumptions, the actual cash flows
generated by an asset in any given period and its actual salvage
value could be materially different than that estimated, which
could require us to record an unexpected impairment charge.
Marketable securities and certain long-term investments.
We hold marketable securities and certain long-term investments
classified as available-for-sale and, therefore, carried at fair
value with unrealized gains and losses recorded in equity
(revaluation reserve), net of tax. These securities are tested
for impairment at each balance sheet date. Our policy to
determine if an impairment of a security exists is based on a
two-step approach, which takes into account both the fact
whether the difference between the fair market value of the
security and its book value is significant as well as for how
long this difference exists. Impairment losses are recognized in
other financial expenses when realized and are determined on a
security-by-security basis. Because market prices are available
for most of the securities we hold in our portfolio, there is no
need for estimates to determine the fair market value. Our
management monitors our securities portfolio closely and
believes the impairment procedures set out above are adequate to
determine whether an impairment is necessary with respect to a
particular security. However, there might be market effects
which cannot be anticipated by management and would therefore
cause unexpected impairment charges.
Business Combinations
We account for acquired businesses using the purchase method of
accounting in accordance with IFRS 3. In accordance with
those standards, assets and liabilities acquired are recorded at
the respective fair values at the date of acquisition. The
application of the purchase method requires management to make
certain estimates and judgments. The judgments made in
determining the estimated fair value assigned to each class of
assets acquired and liabilities assumed, as well as asset useful
lives, can materially impact our results of operations. One of
the most significant estimates relates to the determination of
the fair value of assets and liabilities acquired. For other
than intangible assets acquired, management determines the fair
value and useful life based on the nature of the asset. For
example, marketable securities and other investments are valued
at the market rate on the date of acquisition, while an
independent appraisal is often obtained for land,
- 63 -
buildings and equipment. Management also assesses whether any
significant intangible assets arise from contractual or other
legal rights of the acquired entity or are separable from the
acquired entity. If any intangible assets are identified,
management must determine the value of these intangibles.
Valuations are based on the best information available near the
acquisition date and are based on expectations and assumptions
that have been deemed reasonable by management. Depending on the
type of intangible asset and the complexity of determining its
fair value, management often consults with independent external
valuation experts. Determining the useful life of an intangible
asset also requires judgment as different types of intangible
assets will have different useful lives and certain assets may
even be considered to have indefinite useful lives. For example,
the useful life of the rights associated with a patent will be
finite and will result in amortization expense being recorded in
our results of operations over a determinable period. However,
the useful life associated with a brand that has, and is
expected to retain, a distinct market identity could be
considered to be indefinite and, accordingly, would not be
amortized. Any residual amount remaining after allocation of the
purchase price to the fair value of all assets and liabilities
acquired is recorded as goodwill.
Results of Operations
Group
The following table sets forth selected items of our
consolidated income statement for the three years ended
December 31, 2005 both in absolute terms and as percentages
of net sales:
Results of Operations(1)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
2003(2) | |
|
2004(2) | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
( in | |
|
(% of | |
|
( in | |
|
(% of | |
|
( in | |
|
(% of | |
|
|
millions) | |
|
net sales) | |
|
millions) | |
|
net sales) | |
|
millions) | |
|
net sales) | |
Amounts in accordance with IFRS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
2,735 |
|
|
|
100.0 |
|
|
|
2,963 |
|
|
|
100.0 |
|
|
|
3,272 |
|
|
|
100.0 |
|
Cost of sales
|
|
|
(948 |
) |
|
|
(34.7 |
) |
|
|
(1,016 |
) |
|
|
(34.3 |
) |
|
|
(1,088 |
) |
|
|
(33.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,787 |
|
|
|
65.3 |
|
|
|
1,947 |
|
|
|
65.7 |
|
|
|
2,184 |
|
|
|
66.8 |
|
Selling and distribution expenses
|
|
|
(711 |
) |
|
|
(26.0 |
) |
|
|
(779 |
) |
|
|
(26.3 |
) |
|
|
(926 |
) |
|
|
(28.3 |
) |
Research and development expenses
|
|
|
(413 |
) |
|
|
(15.1 |
) |
|
|
(448 |
) |
|
|
(15.1 |
) |
|
|
(465 |
) |
|
|
(14.2 |
) |
General administrative expenses
|
|
|
(122 |
) |
|
|
(4.4 |
) |
|
|
(151 |
) |
|
|
(5.1 |
) |
|
|
(173 |
) |
|
|
(5.3 |
) |
Other operating income
|
|
|
91 |
|
|
|
3.3 |
|
|
|
69 |
|
|
|
2.3 |
|
|
|
88 |
|
|
|
2.7 |
|
Other operating expenses
|
|
|
(74 |
) |
|
|
(2.7 |
) |
|
|
(34 |
) |
|
|
(1.2 |
) |
|
|
(31 |
) |
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
558 |
|
|
|
20.4 |
|
|
|
604 |
|
|
|
20.4 |
|
|
|
676 |
|
|
|
20.7 |
|
Financial income (expense)
|
|
|
10 |
|
|
|
0.4 |
|
|
|
7 |
|
|
|
0.2 |
|
|
|
8 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
568 |
|
|
|
20.8 |
|
|
|
611 |
|
|
|
20.6 |
|
|
|
684 |
|
|
|
20.9 |
|
Income tax expense
|
|
|
(235 |
) |
|
|
(8.6 |
) |
|
|
(233 |
) |
|
|
(7.8 |
) |
|
|
(246 |
) |
|
|
(7.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
333 |
|
|
|
12.2 |
|
|
|
379 |
|
|
|
12.8 |
|
|
|
438 |
|
|
|
13.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts in accordance with U.S. GAAP
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
337 |
|
|
|
|
|
|
|
385 |
|
|
|
|
|
|
|
428 |
|
|
|
|
|
|
|
(1) |
Columns may not add due to rounding. |
|
(2) |
2003 and 2004 figures have been adjusted to reflect the
retroactive application of IFRS 2 and IAS 39. For
further details regarding the new accounting principles see
Notes 2 and 32 of our consolidated financial statements as
of and for the year ended December 31, 2005. |
- 64 -
Retroactive adoption of IFRS 2 Share-based
Payment and IAS 39 Financial
Instruments
In February 2004, the International Accounting Standards Board
(IASB) issued IFRS 2 Share-based
Payment regarding grants of shares and share options to
employees. IFRS 2 applies to fiscal years beginning on or
after January 1, 2005. In accordance with the transitional
provisions of IFRS 2, we have restated our prior-year
financial statements to reflect the cost of grants of shares and
share options to employees after November 7, 2002, which
had not vested by January 1, 2005. All of our employee
incentive plans launched since 2003 are covered by this
standard. For more information see Critical
Accounting Policies Employee Incentive Plans.
The following table describes the retroactive adjustments we
made to several line items of our income statement for the year
ended December 31, 2004 and reconciles the amounts
previously reported to those resulting from the retroactive
application of IFRS 2 as of January 1, 2004:
Retroactive Adjustments for the Year Ended December 31,
2004(1)
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|
|
|
|
|
|
|
|
|
|
2004 (as reported) | |
|
Adjustment (IFRS 2) | |
|
2004 (adjusted) | |
|
|
| |
|
| |
|
| |
|
|
( in millions) | |
|
( in millions) | |
|
( in millions) | |
Amounts in accordance with IFRS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
(1,014 |
) |
|
|
(2 |
) |
|
|
(1,016 |
) |
Gross profit
|
|
|
1,949 |
|
|
|
(2 |
) |
|
|
1,947 |
|
Selling and distribution expenses
|
|
|
(777 |
) |
|
|
(2 |
) |
|
|
(779 |
) |
Research and development expenses
|
|
|
(445 |
) |
|
|
(3 |
) |
|
|
(448 |
) |
General administrative expenses
|
|
|
(145 |
) |
|
|
(6 |
) |
|
|
(151 |
) |
Operating income
|
|
|
617 |
|
|
|
(13 |
) |
|
|
(604 |
) |
Income before taxes
|
|
|
624 |
|
|
|
(13 |
) |
|
|
611 |
|
Income tax expense
|
|
|
(233 |
) |
|
|
0 |
|
|
|
(233 |
) |
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
391 |
|
|
|
(13 |
) |
|
|
379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Columns may not add due to rounding. |
- 65 -
The following table describes the retroactive adjustments we
made to several line items of our income statement for the year
ended December 31, 2003 and reconciles the amounts
previously reported to those resulting from the retroactive
application of IFRS 2 and IAS 39 as of January 1, 2003:
Retroactive Adjustments for the Year Ended December 31,
2003(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 (as reported) | |
|
Adjustment | |
|
2003 (adjusted) | |
|
|
| |
|
| |
|
| |
|
|
|
|
IFRS 2 | |
|
IAS 39 | |
|
|
|
|
|
|
( in | |
|
( in | |
|
|
|
|
( in millions) | |
|
millions) | |
|
millions) | |
|
( in millions) | |
Amounts in accordance with IFRS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
(947 |
) |
|
|
(1 |
) |
|
|
0 |
|
|
|
(948 |
) |
Gross profit
|
|
|
1,788 |
|
|
|
(1 |
) |
|
|
0 |
|
|
|
1,787 |
|
Selling and distribution expenses
|
|
|
(710 |
) |
|
|
(1 |
) |
|
|
0 |
|
|
|
(711 |
) |
Research and development expenses
|
|
|
(412 |
) |
|
|
(1 |
) |
|
|
0 |
|
|
|
(413 |
) |
General administrative expenses
|
|
|
(120 |
) |
|
|
(2 |
) |
|
|
0 |
|
|
|
(122 |
) |
Operating income
|
|
|
563 |
|
|
|
(4 |
) |
|
|
0 |
|
|
|
558 |
|
Income before taxes
|
|
|
580 |
|
|
|
(4 |
) |
|
|
(8 |
) |
|
|
568 |
|
Income tax expense
|
|
|
(235 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
(235 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
345 |
|
|
|
(4 |
) |
|
|
(8 |
) |
|
|
333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Columns may not add due to rounding. |
2005 compared with 2004
Net sales. Net sales increased by 10.4%, from
2,963 million
in 2004 to
3,272 million in 2005. As in prior periods,
the increase in 2005 was once again driven by our
pharmaceuticals segment, with net sales rising by 12.1%. This
growth was due primarily to revenue growth in the segments
therapeutics business, reflecting the continued growth of
Pantoprazole, particularly in Europe. Net sales of our chemicals
segment experienced an increase of 6.2%. A major part of this
growth is attributable to the acquisition of the ECKART Group in
October 2005. In 2005, the net effect of acquisitions and
dispositions to our net sales growth was a contribution of 0.8%.
Currency effects contributed 1.3% to our net sales growth.
Excluding the effects of acquisitions, dispositions and foreign
exchange movements, our net sales in 2005 would have increased
by 8.3%.
Cost of sales. Cost of sales includes the manufacturing
costs of products sold. In addition to directly attributable
costs, such as material costs, staff costs and energy costs,
this line item also covers indirect costs, including directly
attributable depreciation charges. Cost of sales rose by 7.1%,
from
1,016 million
in 2004 to
1,088 million in 2005. As a percentage of net
sales, cost of sales decreased from 34.3% to 33.2% during the
same period. The absolute increase in cost of sales was due to
an increase of cost of sales in both segments but primarily
driven by our chemicals segment.
Selling and distribution expenses. Selling and
distribution expenses are costs incurred by our sales and
marketing organization as well as advertising and logistics
costs. In absolute terms our selling and distribution expenses
rose by 18.9%, from
779 million
in 2004 to
926 million in 2005. As a percentage of net
sales, selling and distribution expenses increased from 26.3% to
28.3%. This development was due to an increase in selling and
distribution expenses in our pharmaceuticals segment, whereas
selling and distribution expenses in our chemicals segment
remained flat.
Research and development expenses. Research expenses
comprise costs incurred for original and planned investigations
undertaken to gain new scientific or technical knowledge and
understanding. Development expenses include costs incurred to
achieve technical and commercial feasibility of products under
development. Our research and development expenses typically
consist of salaries and benefits, allocated
- 66 -
overhead costs, occupancy costs, clinical trial and related
manufacturing costs, as well as milestone payments and other
outside costs.
Research and development expenses increased by 3.9%, from
448 million
in 2004 to
465 million in 2005. As a percentage of net
sales, research and development expenses decreased from 15.1% to
14.2%. The increase in absolute terms equally reflects increased
levels of R&D expenditures in each of our segments.
General administrative expenses. General administrative
expenses include overhead, administrative expenses and personnel
and non-personnel costs incurred by management to the extent
that they are not charged to other cost centers. General
administrative expenses increased by 14.6% from
151 million
in 2004 to
173 million in 2005. As a percentage of net
sales, they increased from 5.1% to 5.3%. This increase is
attributable to both of our segments, reflecting increased
business activities and, with respect to our chemicals segment,
the effect of two recent acquisitions.
Other operating income. Other operating income primarily
consists of gains realized on the sale of assets, income from
milestone payments, income from licensees and co-marketing
partners. Other operating income increased by 27.4%, from
69 million
in 2004 to
88 million
in 2005. This increase is mainly attributable to previously
deferred revenues recognized as income in connection with the
termination of our
co-development and
co-marketing agreement
with Pfizer.
Other operating expenses. Other operating expenses
decreased by 9.2%, from
34 million
in 2004 to
31 million in 2005. While other operating
expenses remained flat in each of our segments, they declined at
the group level due to reduced negative currency effects at the
group level.
Financial income, net. In 2005, financial income, net
increased slightly from
7 million
in 2004 to
8 million in 2005. In relative terms, the
financial result increased by 13.6%. The increase was driven by
higher interest income and increased gains from the sale of
securities, the effects of which were partially offset by higher
expenses incurred in connection with derivative instruments, the
impairment of securities and increased interest expenses.
Income tax expense. Income tax expense includes corporate
income and trade taxes, similar foreign taxes and changes in
deferred taxes, each calculated on the basis of the income of
our company and its subsidiaries. Income tax expense increased
by 5.6%, from
233 million
in 2004 to
246 million in 2005. Our effective tax rate
decreased from 38.0% to 35.9%. This decrease is attributable to
lower non-deductible expenses and higher tax-free earnings.
2004 compared with 2003
Net sales. Net sales increased by 8.3%, from
2,735 million
in 2003 to
2,963 million
in 2004. As in prior periods, the increase in 2004 was once
again driven by our pharmaceuticals segment, with net sales
rising by
129 million
in absolute terms and by 6.5% in relative terms, primarily due
to revenue growth in the segments therapeutics business as
a result of the continued growth of Pantoprazole, particularly
in Europe. Given the position that Pantoprazole has achieved in
most major markets to date and recent market data suggesting a
stabilization of its market share in some major markets, we
expect the overall growth of the drug to slow in the future. The
positive impact of Pantoprazole on our pharmaceuticals segment
was partially offset by unfavorable exchange rate movements,
greater pricing pressure resulting from increased competition in
the U.S. market and unfavorable regulatory developments,
particularly the impact of the fixed mandatory rebate system
(Kassenrabatte) in Germany. Net sales of our chemicals
segment experienced a strong increase of
99 million in absolute terms and 13.1% in
relative terms, on account of revenue growth of our Additives
& Instruments and Electrical Insulation business areas in
all regions. Part of this growth is attributable to an
acquisition made in August 2003. Adjusted for acquisition,
disposition and currency effects, our net sales would have risen
by approximately 9%. You should note that net sales reflect the
reduction of gross sales by certain deductions. For more
information on gross sales and related deductions as well as on
the German fixed mandatory rebate system, see Critical
Accounting Policies Revenue Recognition.
Cost of sales. Cost of sales rose by 7.2%, from
948 million
in 2003 to
1,016 million in 2004. As a percentage of net
sales, cost of sales remained virtually unchanged, decreasing
only slightly from 34.7% to
- 67 -
34.3% during the same period. The absolute increase in cost of
sales was primarily driven by our chemicals segment and reflects
higher levels of net sales in that segment. The slight decrease
in cost of sales as a percentage of sales is almost exclusively
attributable to our pharmaceuticals segment, reflecting higher
shipped volumes of Pantoprazole, which has relatively low
manufacturing costs relative to its price, compared with our
other products.
Selling and distribution expenses. In absolute terms our
selling and distribution expenses rose by 9.6%, from
711 million
in 2003 to
779 million
in 2004. As a percentage of net sales, selling and distribution
expenses increased slightly from 26.0% to 26.3%. This
development was due to an increase in selling and distribution
expenses in both of our segments. Pharmaceutical selling and
distribution expenses increased in connection with the
preparation of the launch of the MDI application of Ciclesonide,
marketed under the brand name
Alvesco®,
and the expected launch of our pipeline drug Roflumilast. The
increase of selling and distribution costs in our chemicals
segment reflects the growth of the underlying business.
Research and development expenses. Research and
development expenses increased by 8.4%, from
413 million
in 2003 to
448 million in 2004. As a percentage of net
sales, research and development expenses remained stable at
approximately 15%. The increase in absolute terms reflects
increased levels of R&D expenditures in our pharmaceuticals
segment, mainly in connection with clinical trials for
Ciclesonide and Roflumilast.
General administrative expenses. General administrative
expenses increased by 24.3% from
122 million
in 2003 to
151 million in 2004. As a percentage of net
sales, they increased from 4.4% to 5.1%. This increase is mainly
attributable to our pharmaceuticals segment, reflecting an
industry-wide rise in insurance fees and the recruitment of
additional employees, mainly to strengthen the corporate
function at the ALTANA Pharma headquarters.
Other operating income. Other operating income declined
by 23.9%, from
91 million
in 2003 to
69 million
in 2004. This decline reflects a decrease of earnings from
20 million
in 2003 to
4 million
in 2004 due to the sale of product lines, lower income from
milestone payments, which decreased from
20 million
in 2003 to
16 million
in 2004, and the absence of the release of accruals relating to
the satisfactory resolution of a potential dispute regarding
import prices in one of our subsidiaries, which bolstered other
operating income in 2003. These effects are partially offset by
net foreign currency gains of
5 million compared with net foreign currency
losses in 2003.
Other operating expenses. Other operating expenses
comprise foreign currency exchange losses and expenses that are
not allocable to any of the expense items discussed above. Until
2003, operating expenses also consisted of goodwill
amortization. As a result of the adoption of IFRS 3 in
2004, however, goodwill is no longer amortized on a
straight-line basis, but is subject to an annual impairment
test. No impairment was necessary in 2004. Other operating
expenses decreased by 53.7% from
74 million
in 2003 to
34 million
in 2004. This decrease mainly reflects the change in accounting
for goodwill (2003:
17 million)
and the absence of net foreign currency losses, which accounted
for
12 million in 2003.
Financial income, net. In 2004, financial income, net
decreased by 26.1%, from
10 million
in 2003 to
7 million
in 2004. The decline of financial income is mainly attributable
to a decrease in net interest income from
13 million
in 2003 to
9 million in 2004.
Income tax expense. Income tax expense decreased by 1.1%,
from
235 million
in 2003 to
233 million in 2004. Our effective tax rate
decreased from 41.4% to 38.0%. This decrease reflects lower
effective tax rates in Germany as well as abroad and higher
foreign earnings contributions, the effective tax rates of which
are substantially lower than the domestic tax rate.
- 68 -
Pharmaceuticals
The following table sets forth selected information for our
pharmaceuticals segment for the three years ended
December 31, 2005:
Pharmaceuticals Results of Operations(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
2003(2) | |
|
2004(2) | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
( in | |
|
(% of | |
|
( in | |
|
(% of | |
|
( in | |
|
(% of | |
|
|
millions) | |
|
net sales) | |
|
millions) | |
|
net sales) | |
|
millions) | |
|
net sales) | |
Net sales
|
|
|
1,980 |
|
|
|
100.0 |
|
|
|
2,109 |
|
|
|
100.0 |
|
|
|
2,365 |
|
|
|
100.0 |
|
Cost of sales
|
|
|
(487 |
) |
|
|
(24.6 |
) |
|
|
(495 |
) |
|
|
(23.5 |
) |
|
|
(521 |
) |
|
|
(22.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,493 |
|
|
|
75.4 |
|
|
|
1,614 |
|
|
|
76.5 |
|
|
|
1,844 |
|
|
|
78.0 |
|
Selling and distribution expenses
|
|
|
(597 |
) |
|
|
(30.2 |
) |
|
|
(645 |
) |
|
|
(30.6 |
) |
|
|
(793 |
) |
|
|
(33.5 |
) |
Research and development expenses
|
|
|
(376 |
) |
|
|
(19.0 |
) |
|
|
(410 |
) |
|
|
(19.4 |
) |
|
|
(418 |
) |
|
|
(17.7 |
) |
General administrative expenses
|
|
|
(48 |
) |
|
|
(2.4 |
) |
|
|
(67 |
) |
|
|
(3.2 |
) |
|
|
(77 |
) |
|
|
(3.3 |
) |
Other operating income
|
|
|
84 |
|
|
|
4.2 |
|
|
|
58 |
|
|
|
2.7 |
|
|
|
75 |
|
|
|
3.2 |
|
Other operating expenses
|
|
|
(51 |
) |
|
|
(2.6 |
) |
|
|
(27 |
) |
|
|
(1.2 |
) |
|
|
(26 |
) |
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
504 |
|
|
|
25.4 |
|
|
|
523 |
|
|
|
24.8 |
|
|
|
604 |
|
|
|
25.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Columns may not add due to rounding. |
|
(2) |
2003 and 2004 figures have been adjusted to reflect the
retroactive application of IFRS 2. For further details regarding
the new accounting principles see Note 2 of our
consolidated financial statements as of and for the year ended
December 31, 2005. |
2005 compared with 2004
Net sales. Net sales of our pharmaceuticals segment
increased by 12.1% from
2,109 million
in 2004 to
2,365 million
in 2005. As in prior years, this development was almost
exclusively driven by a significant increase in the net sales of
Pantoprazole. In the period under review, net sales of
Pantoprazole rose by 12.0%, from
1,216 million
in 2004 to
1,361 million in 2005, which corresponds to a
revenue contribution to the segment of 57.6% in 2005. In 2005,
Pantoprazole again achieved substantial net sales growth in
local currencies in most parts of the world. Given the position
that Pantoprazole has achieved in most major markets to date and
recent market data suggesting a stabilization of its market
share in some of these markets, we expect the overall growth of
the drug to slow in the future. The positive development in 2005
was in part reinforced by favorable exchange rate movements of
the euro vis-à-vis several currencies, particularly the
Brazilian real and the Canadian dollar, which increased the
segments net sales by two percentage points. Dispositions
and acquisitions, including the acquisition of rights to certain
dermatology products in the United States, did not have a
material net effect on the increase in net sales. Excluding
acquisitions, dispositions and currency effects the net sales of
our pharmaceuticals segment would have grown by approximately
10.2% in 2005.
- 69 -
The following table breaks down the net sales of our
pharmaceuticals segment by geographic region for the two years
ended December 31, 2004 and 2005:
Net Sales by Geographic Region(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
|
|
2004 | |
|
2005 | |
|
Increase (decrease) | |
|
|
| |
|
| |
|
| |
|
|
( in millions) | |
|
(%) | |
Germany
|
|
|
371 |
|
|
|
439 |
|
|
|
18.2 |
|
Europe (excl. Germany)
|
|
|
679 |
|
|
|
780 |
|
|
|
15.0 |
|
U.S.A.
|
|
|
647 |
|
|
|
651 |
|
|
|
0.7 |
|
North America (excl. U.S.A.)
|
|
|
102 |
|
|
|
119 |
|
|
|
16.1 |
|
Latin America
|
|
|
235 |
|
|
|
279 |
|
|
|
18.8 |
|
Other
|
|
|
75 |
|
|
|
97 |
|
|
|
28.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,109 |
|
|
|
2,365 |
|
|
|
12.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
By location of customers. |
|
(2) |
Columns may not add due to rounding. |
In 2005, net sales of our pharmaceuticals segment increased in
all geographic regions in which we are active. As of
January 1, 2005, Pantoprazole ceased to be subject to the
German fixed mandatory rebate system and instead became subject
to a statutory fixed price. Nonetheless, our sales in Germany
increased by 18.2%, due mainly to an increase in Pantoprazole
sales. In Europe (excluding Germany), marketing activities led
to double-digit growth in net sales in almost all markets. In
the United States, we experienced only a moderate rise in net
sales, reflecting increased demand for Pantoprazole, the effect
of which was offset by both the fact that Wyeth served this
demand in part by utilizing its existing Pantoprazole stocks and
a decline in volumes caused by a shift in Wyeths marketing
strategy from the highly discounted medicaid sector to the more
profitable managed-care sector in 2005. In Latin America, we
achieved double-digit net sales growth due to the performance of
our Mexican and Brazilian subsidiaries including the successful
marketing of
Neosaldina®.
Net sales growth in Latin America was also supported by
favorable exchange rates.
The following table breaks down the net sales of our
pharmaceuticals segment by business area for the two years ended
December 31, 2004 and 2005:
Net Sales by Business Area(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
|
|
2004 | |
|
2005 | |
|
Increase (decrease) | |
|
|
| |
|
| |
|
| |
|
|
( in millions) | |
|
(%) | |
Therapeutics
|
|
|
1,839 |
|
|
|
2,071 |
|
|
|
12.6 |
|
OTC
|
|
|
115 |
|
|
|
131 |
|
|
|
13.2 |
|
Imaging
|
|
|
109 |
|
|
|
108 |
|
|
|
(0.3 |
) |
Other
|
|
|
46 |
|
|
|
55 |
|
|
|
19.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,109 |
|
|
|
2,365 |
|
|
|
12.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Columns may not add due to rounding. |
In 2005, our net sales growth, as in prior years, was driven by
our therapeutics franchise, mainly as a result of the growth of
our gastrointestinal franchise, which grew by 12.4% and
accounted for 74.2% of our overall therapeutics revenues in
2005. The main growth driver within our gastrointestinal
franchise continued
- 70 -
to be Pantoprazole. Net sales of Pantoprazole rose from
1,216 million
in 2004 to
1,361 million
in 2005, contributing 65.7 percentage points to
therapeutics net sales. Despite competition from a variety of
other PPIs, both branded and generic, and from OTC versions of
Omeprazole-based PPIs, Pantoprazoles share of
prescriptions of the U.S. PPI market remained at about 20%.
Given that Pantoprazole has meanwhile achieved a significant
share in most markets and based on recent market data, we expect
the growth of our net sales of this drug to slow in the coming
years. Our respiratory net sales grew to
69 million.
Net sales from other therapeutics, which mainly comprises
cardiovascular therapeutics, grew from
413 million
in 2004 to
466 million in 2005.
Net sales of our OTC business increased by 13.2% from
115 million
in 2004 to
131 million
in 2005. This increase is mainly attributable to higher sales of
Neosaldina®
in Latin America and favorable changes in exchange rates.
Net sales of our imaging business remained flat at
108 million in 2005.
Operating income
Cost of sales. In our pharmaceuticals segment, cost of
sales rose by 5.2%, from
495 million
in 2004 to
521 million in 2005. As a percentage of net
sales, cost of sales decreased from 23.5% to 22.0% over the same
period. The relative decrease in cost of sales was mainly driven
by the shipment of higher volumes of Pantoprazole, which has
lower manufacturing costs relative to its selling price than
most products in our portfolio. The increase in Pantoprazole
shipments also led to a higher utilization in our production
sites, which positively influenced our cost of sales as a
percentage of net sales.
Selling and distribution expenses. Selling and
distribution expenses of our pharmaceuticals segment increased
by 23.0%, from
645 million
in 2004 to
793 million
in 2005. As a percentage of net sales, selling and distribution
expenses increased from 30.6% to 33.5% over the same period.
This development mainly reflects increased selling and
distribution expenses incurred in connection with the launch of
Alvesco®,
our increased efforts to maximize the market potential of
Pantoprazole, mainly in Europe, and the marketing of our topical
products in the United States.
Research and development expenses. Research and
development expenses of our pharmaceuticals segment rose by 2.2%
from
410 million
in 2004 to
418 million in 2005. As a percentage of
pharmaceuticals net sales research and development expenses
decreased from 19.4% to 17.7% during the period under review.
Our strategy is to allocate approximately 20% of our
therapeutics net sales in any given year to R&D projects. In
2005, research and development expenses, expressed as a
percentage of therapeutics net sales, remained within the
targeted range, decreasing from 22.3% to 20.2%. The increase in
the absolute level of our research and development expenses is
mainly attributable to higher development costs for Ciclesonide.
In 2005, we allocated approximately 25% of our research and
development expenses to basic research and drug discovery and
spent approximately 75% on development, particularly the
development of Ciclesonide and Roflumilast.
General administrative expenses. General administrative
expenses of our pharmaceuticals segment increased by 14.6%, from
67 million
in 2004 to
77 million in 2005. As a percentage of net
sales, general administrative expenses increased slightly from
3.2% to 3.3% over the same period. This increase was due to
higher compliance costs in connection with the Sarbanes-Oxley
Act of 2002 and increased IT expenses incurred in 2005.
Other operating income and expenses. Other operating
income of our pharmaceuticals segment increased significantly by
32.0% from
58 million
in 2004 to
75 million
in 2005. This increase is mainly attributable to previously
deferred revenues recognized as income in connection with the
termination of our co-development and co-marketing agreement
with Pfizer, and also to higher gains from the disposal of
assets. Other operating expenses remained flat at
26 million in 2005.
- 71 -
2004 compared with 2003
Net sales. Net sales of our pharmaceuticals segment
increased by 6.5% from
1,980 million
in 2003 to
2,109 million
in 2004. As in prior years, this development was almost
exclusively driven by a significant increase in the net sales of
Pantoprazole. In the period under review, net sales of
Pantoprazole rose by 9.2%, from
1,113 million
in 2003 to
1,216 million
in 2004, which corresponds to a revenue contribution to the
segment of 57.6% in 2004. In 2004, Pantoprazole again achieved
double-digit net sales growth in local currencies in most parts
of the world. This positive trend was partially offset by a
decrease in net sales resulting from unfavorable exchange rate
movements of the euro vis-à-vis the U.S. dollar and
currencies linked to the U.S. dollar, which reduced the
segments net sales by two percentage points, and adverse
regulatory changes, particularly in Germany. Dispositions and
acquisitions, including the acquisition of the OTC drug
Neosaldina®
in 2003, accounted for one percentage point of the increase in
our pharmaceuticals net sales. Excluding acquisitions,
dispositions and currency effects the net sales of our
pharmaceuticals segment would have grown by approximately 8% in
2004.
The following table breaks down the net sales of our
pharmaceuticals segment by geographic region for the two years
ended December 31, 2003 and 2004:
Net Sales by Geographic Region(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
|
|
2003 | |
|
2004 | |
|
Increase (decrease) | |
|
|
| |
|
| |
|
| |
|
|
( in millions) | |
|
(%) | |
Germany
|
|
|
375 |
|
|
|
371 |
|
|
|
(1.0 |
) |
Europe (excl. Germany)
|
|
|
597 |
|
|
|
679 |
|
|
|
13.7 |
|
U.S.A.
|
|
|
638 |
|
|
|
647 |
|
|
|
1.4 |
|
North America (excl. U.S.A.)
|
|
|
94 |
|
|
|
102 |
|
|
|
9.5 |
|
Latin America
|
|
|
213 |
|
|
|
235 |
|
|
|
10.4 |
|
Other
|
|
|
63 |
|
|
|
75 |
|
|
|
18.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,980 |
|
|
|
2,109 |
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
By location of customers. |
|
(2) |
Columns may not add due to rounding. |
In 2004, net sales of our pharmaceuticals segment increased in
most geographic regions in which we are active. The only
exception was Germany, where net sales were affected by
increased fixed mandatory rebates (Kassenrabatte) imposed
by the German government on the prices for most ethical
therapeutics. As from January 1, 2005, Pantoprazole ceased
to be subject to the German fixed mandatory rebate system and
instead became subject to a statutory fixed price in Germany.
For more information on the accounting impact of the mandatory
rebate system, see Critical Accounting
Policies Revenue Recognition. We experienced
the strongest growth in Europe (excluding Germany) due to
increased Pantoprazole sales in almost all relevant markets. In
the United States we experienced only a moderate rise in net
sales mainly due to unfavorable currency exchange developments
and increased competition on the U.S. PPI market. In Latin
America, we achieved double-digit net sales growth despite
unfavorable currency exchange rate effects, primarily due to the
economic upturn as well as additional revenues resulting from
the acquisition of
Neosaldina®.
- 72 -
The following table breaks down the net sales of our
pharmaceuticals segment by business area for the two years ended
December 31, 2003 and 2004:
Net Sales by Business Area(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
|
|
2003 | |
|
2004 | |
|
Increase (decrease) | |
|
|
| |
|
| |
|
| |
|
|
( in millions) | |
|
(%) | |
Therapeutics
|
|
|
1,724 |
|
|
|
1,839 |
|
|
|
6.6 |
|
OTC
|
|
|
104 |
|
|
|
115 |
|
|
|
10.7 |
|
Imaging
|
|
|
106 |
|
|
|
109 |
|
|
|
3.3 |
|
Other
|
|
|
46 |
|
|
|
46 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,980 |
|
|
|
2,109 |
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Columns may not add due to rounding. |
In 2004, our net sales growth, as in prior years, was driven by
our therapeutics franchise, mainly as a result of the growth of
our gastrointestinal franchise, which grew by 10.1% and
accounted for 74% of our overall therapeutics revenues in 2004.
The main growth driver within our gastrointestinal franchise
continued to be Pantoprazole. Net sales of Pantoprazole rose
from
1,113 million
in 2003 to
1,216 million
in 2004, contributing 66.1 percentage points to
therapeutics net sales. Despite competition from a variety of
other PPIs, both branded and generic, and from OTC versions of
Omeprazole-based PPIs, Pantoprazoles share of
prescriptions of the U.S. PPI market continued to rise
until autumn 2004 and then stabilized. Given that Pantoprazole
has meanwhile achieved a significant share in most markets and
based on recent market data, we expect the growth of our net
sales of this drug to slow in the coming years. Our respiratory
net sales remained flat at
59 million.
Net sales from other therapeutics, which mainly comprises
cardiovascular therapeutics, experienced a modest decline from
424 million
in 2003 to
413 million in 2004 due to the loss of
exclusivity for an in-licensed cardiovascular product.
Net sales of our OTC business increased by 10.7% mainly as a
result of the acquisition of
Neosaldina®
in December 2003.
Net sales of our imaging business experienced a moderate
increase of 3.3% in 2004, due primarily to increased net sales
of our magnetic resonance imaging portfolio in Europe (excluding
Germany).
Operating income
Cost of sales. In our pharmaceuticals segment, cost of
sales rose by 1.6%, from
487 million
in 2003 to
495 million in 2004. As a percentage of net
sales, cost of sales decreased from 24.6% to 23.5% over the same
period. The relative decrease in cost of sales was mainly driven
by the shipment of higher volumes of Pantoprazole.
Selling and distribution expenses. Selling and
distribution expenses of our pharmaceuticals segment increased
by 8.0%, from
597 million
in 2003 to
645 million in 2004. As a percentage of net
sales, selling and distribution expenses increased slightly from
30.2% to 30.6% over the same period. This development mainly
reflects increased selling and distribution expenses incurred in
connection with preparations for the expected launch of our
pipeline drugs Ciclesonide and Roflumilast, especially in the
United States and Germany.
Research and development expenses. Research and
development expenses of our pharmaceuticals segment rose by 8.8%
from
376 million
in 2003 to
410 million in 2004. As a percentage of
pharmaceuticals net sales research and development expenses
increased slightly from 19.0% to 19.4% in 2004. Expressed as a
percentage of therapeutics net sales, research and development
expenses increased slightly from 21.8% to 22.3% in the same
period, which is in line with our strategy to allocate
approximately
- 73 -
20% of our therapeutics net sales in any given year to R&D
projects. The majority of our research and development expenses
in 2004 were due to R&D activities related to clinical
trials and regulatory filings in connection with the expected
launch of Roflumilast and Ciclesonide, for which we received
approval in some major European markets in 2004. In 2004, we
allocated approximately 25% of our research and development
expenses to basic research and drug discovery and spent
approximately 75% on development.
General administrative expenses. General administrative
expenses of our pharmaceuticals segment increased by 40.9%, from
48 million
in 2003 to
67 million in 2004. As a percentage of net
sales, general administrative expenses increased from 2.4% to
3.2% over the same period. This increase was due to higher
insurance fees and the recruitment of additional employees,
mainly to strengthen the corporate function of the ALTANA Pharma
headquarters.
Other operating income and expenses. Other operating
income of our pharmaceuticals segment decreased significantly by
30.8% from
84 million
in 2003 to
58 million
in 2004. This decrease primarily reflects the absence of the
sale of certain product lines which contributed
20 million
to other operating income in 2003 and lower income from
milestone payments, which decreased from
20 million
in 2003 to
16 million
in 2004. In addition, it reflects the absence of the release of
accruals relating to the satisfactory resolution of a potential
dispute regarding import prices in one of our subsidiaries,
which bolstered other operating income in 2003. These effects
were partially offset by net currency gains in 2004. Other
operating expenses declined by 48.4%, from
51 million
in 2003 to
27 million in 2004, mainly due to the absence
of foreign currency exchange losses and the change in the
accounting for goodwill resulting from the adoption of
IFRS 3.
Chemicals
The following table sets forth selected information for our
chemicals segment for the three years ended December 31,
2005:
Chemicals Results of Operations(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
2003(2) | |
|
2004(2) | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
( in | |
|
(% of | |
|
( in | |
|
(% of | |
|
( in | |
|
(% of | |
|
|
millions) | |
|
net sales) | |
|
millions) | |
|
net sales) | |
|
millions) | |
|
net sales) | |
Net sales
|
|
|
755 |
|
|
|
100.0 |
|
|
|
854 |
|
|
|
100.0 |
|
|
|
907 |
|
|
|
100.0 |
|
Cost of sales
|
|
|
(461 |
) |
|
|
(61.1 |
) |
|
|
(520 |
) |
|
|
(61.0 |
) |
|
|
(567 |
) |
|
|
(62.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
294 |
|
|
|
38.9 |
|
|
|
333 |
|
|
|
39.0 |
|
|
|
340 |
|
|
|
37.5 |
|
Selling and distribution expenses
|
|
|
(113 |
) |
|
|
(15.0 |
) |
|
|
(134 |
) |
|
|
(15.7 |
) |
|
|
(133 |
) |
|
|
(14.7 |
) |
Research and development expenses
|
|
|
(36 |
) |
|
|
(4.8 |
) |
|
|
(38 |
) |
|
|
(4.4 |
) |
|
|
(47 |
) |
|
|
(5.1 |
) |
General administrative expenses
|
|
|
(42 |
) |
|
|
(5.5 |
) |
|
|
(49 |
) |
|
|
(5.7 |
) |
|
|
(58 |
) |
|
|
(6.4 |
) |
Other operating income
|
|
|
5 |
|
|
|
0.8 |
|
|
|
9 |
|
|
|
1.1 |
|
|
|
14 |
|
|
|
1.6 |
|
Other operating expenses
|
|
|
(18 |
) |
|
|
(2.4 |
) |
|
|
(4 |
) |
|
|
(0.5 |
) |
|
|
(4 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
90 |
|
|
|
11.9 |
|
|
|
118 |
|
|
|
13.8 |
|
|
|
113 |
|
|
|
12.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Columns may not add due to rounding. |
|
(2) |
2003 and 2004 figures have been adjusted to reflect the
retroactive application of IFRS 2. For further details
regarding the new accounting principles see Note 2 of our
consolidated financial statements as of and for the year ended
December 31, 2005. |
- 74 -
2005 compared with 2004
Net Sales. Net sales of our chemicals segment increased
in 2005 by 6.2%, from
854 million
in 2004 to
907 million
in 2005. This increase reflects the acquisitions of the ECKART
Group and Kelstar International, which led to an increase of
84 million, as well as organic growth of our
business, mainly in our Additives & Instruments and our
Coatings & Sealants businesses, the effects of which were
partially offset by dispositions in our Coatings & Sealants
business. Changes in exchange rates did not have a material
effect on the net sales of our chemicals segment. The net effect
of acquisitions and dispositions contributed three percentage
points to the net sales of the segment. Excluding acquisitions,
dispositions and exchange rate effects, our chemicals net sales
would have increased by 3.1%.
The following table breaks down the net sales of our chemicals
segment by geographic region for the two years ended
December 31, 2004 and 2005:
Net Sales by Geographic Region(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
|
|
2004 | |
|
2005 | |
|
Increase (decrease) | |
|
|
| |
|
| |
|
| |
|
|
( in millions) | |
|
(%) | |
Germany
|
|
|
120 |
|
|
|
142 |
|
|
|
18.6 |
|
Europe (excl. Germany)
|
|
|
334 |
|
|
|
313 |
|
|
|
(6.6 |
) |
U.S.A.
|
|
|
122 |
|
|
|
144 |
|
|
|
17.8 |
|
North America (excl. U.S.A.)
|
|
|
9 |
|
|
|
13 |
|
|
|
36.2 |
|
Asia
|
|
|
195 |
|
|
|
214 |
|
|
|
9.9 |
|
Other
|
|
|
74 |
|
|
|
81 |
|
|
|
11.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
854 |
|
|
|
907 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
By location of customers. |
|
(2) |
Columns may not add due to rounding. |
The increase in net sales in almost all regions of the world was
driven by the net sales contributions of the ECKART Group, which
we acquired in October 2005. In Europe (excluding Germany) the
disposition of a subsidiary led to a decrease in net sales. The
robust economic development and net sales attributable to our
recent acquisitions of the ECKART Group and Kelstar
International led to an increase of net sales in the United
States by 36.2%.
- 75 -
The following table sets forth the net sales of our chemicals
segment by business area for the two years ended
December 31, 2004 and 2005:
Net Sales by Business Area(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
|
|
2004 | |
|
2005 | |
|
Increase (decrease) | |
|
|
| |
|
| |
|
| |
|
|
( in millions) | |
|
(%) | |
Additives & Instruments
|
|
|
348 |
|
|
|
364 |
|
|
|
4.5 |
|
Effect Pigments
|
|
|
|
|
|
|
75 |
|
|
|
|
|
Electrical Insulation
|
|
|
291 |
|
|
|
293 |
|
|
|
0.8 |
|
Coatings & Sealants
|
|
|
215 |
|
|
|
175 |
|
|
|
(18.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
854 |
|
|
|
907 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Columns may not add due to rounding. |
In 2005, all business areas of our chemicals segment,
particularly our Additives & Instruments and our Coatings
& Sealants businesses, achieved operating growth. Our Effect
Pigments business comprises the business of the ECKART Group,
which we acquired in the fourth quarter of 2005. Net sales of
our Electrical Insulation business remained flat as price
increases were offset by a decrease in volumes. The decline in
the net sales of our Coatings & Sealants business primarily
reflects the net effect of various acquisitions and dispositions
in 2005. Excluding these effects, net sales would have increased
by 4.6%.
Cost of sales. Cost of sales of our chemicals segment
increased by 8.9%, from
520 million
in 2004 to
567 million in 2005. As a percentage of net
sales, cost of sales increased from 61.0% to 62.5% during the
same period. The absolute and relative increase of the
segments cost of sales is attributable to contributions of
businesses acquired and accelerated increases in raw material
prices.
Selling and distribution expenses. Selling and
distribution expenses of our chemicals segment decreased
slightly by 0.6% from
134 million
in 2004 to
133 million in 2005. In relative terms,
selling and distribution expenses decreased from 15.7% to 14.7%.
The absolute decrease in selling and distribution expenses
despite the acquisitions of the ECKART Group and Kelstar
International reflects our efforts to streamline our selling and
distribution processes in all our business areas of our
chemicals segment. The relative decrease in selling and
distribution expenses is due to the fact that the selling and
distribution expenses of our recently acquired businesses were
significantly lower than those of our existing businesses.
Research and development expenses. The level of research
and development expenses incurred by our chemicals segment is
driven by the requirements of our customers and typically
amounts to around 5% of the segments net sales. Research
and development expenses of our chemicals segment increased by
22.5% from
38 million
in 2004 to
47 million in 2005. As a percentage of net
sales, research and development expenses increased from 4.4% to
5.1% in the same period.
General administrative expenses. General administrative
expenses of our chemicals segment increased by 18.4% from
49 million
in 2004 to
58 million in 2005. As a percentage of net
sales, general administrative expenses increased from 5.7% in
2004 to 6.4% in 2005. The increase in general administrative
expenses in both absolute and relative terms mainly reflects two
acquisitions completed in the fourth quarter of 2005.
Other operating income and expenses. Other operating
income of our chemicals segment increased from
9 million
in 2004 to
14 million
in 2005, primarily reflecting higher gains on the sale of
businesses compared to 2004. Other operating expenses remained
flat at
4 million in 2005.
- 76 -
2004 compared with 2003
Net Sales. Net sales of our chemicals segment increased
strongly in 2004 by 13.1%, from
755 million
in 2003 to
854 million
in 2004. This increase reflects organic growth of our business
as well as the effect of acquisitions, especially the
acquisition of the electrical insulation business of Schenectady
International Inc. in August 2003, which led to an increase of
44 million, the effects of which more than
offset unfavorable exchange rate movements resulting from the
continuing appreciation of the euro vis-à-vis the
U.S. dollar and other currencies such as the Chinese
renminbi yuan. Exchange rate effects resulted in a reduction of
the segments net sales by three percentage points. The net
effect of acquisitions and dispositions contributed four
percentage points to the net sales of the segment. Excluding
acquisition, disposition and exchange rate effects, our
chemicals net sales would have increased by 12%.
The following table breaks down the net sales of our chemicals
segment by geographic region for the two years ended
December 31, 2003 and 2004:
Net Sales by Geographic Region(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
|
|
2003 | |
|
2004 | |
|
Increase (decrease) | |
|
|
| |
|
| |
|
| |
|
|
( in millions) | |
|
(%) | |
Germany
|
|
|
107 |
|
|
|
120 |
|
|
|
12.4 |
|
Europe (excl. Germany)
|
|
|
306 |
|
|
|
334 |
|
|
|
9.0 |
|
U.S.A.
|
|
|
117 |
|
|
|
122 |
|
|
|
4.7 |
|
North America (excl. U.S.A.)
|
|
|
8 |
|
|
|
9 |
|
|
|
12.8 |
|
Asia
|
|
|
154 |
|
|
|
195 |
|
|
|
26.1 |
|
Other
|
|
|
63 |
|
|
|
74 |
|
|
|
17.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
755 |
|
|
|
854 |
|
|
|
13.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
By location of customers. |
|
(2) |
Columns may not add due to rounding. |
The increase in net sales in all regions of the world,
especially in Asia and Germany, was driven by the net sales
contributions of a business that we acquired in August 2003. Net
sales in Asia, which increased by 26.1%, from
154 million
in 2003 to
195 million in 2004, benefited from the
continuous economic boom in that region, in particular in China.
Our sales outside Europe suffered from the increasing strength
of the euro vis-à-vis most major currencies. The economic
recovery in the United States led to the increase of net sales
there.
- 77 -
The following table sets forth the net sales of our chemicals
segment by business area for the two years ended
December 31, 2003 and 2004:
Net Sales by Business Area(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
|
|
2003 | |
|
2004 | |
|
Increase (decrease) | |
|
|
| |
|
| |
|
| |
|
|
( in millions) | |
|
(%) | |
Additives & Instruments
|
|
|
308 |
|
|
|
348 |
|
|
|
13.0 |
|
Electrical Insulation
|
|
|
225 |
|
|
|
291 |
|
|
|
29.2 |
|
Coatings & Sealants
|
|
|
222 |
|
|
|
215 |
|
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
755 |
|
|
|
854 |
|
|
|
13.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Columns may not add due to rounding. |
In 2004, the net sales of all business areas of our chemicals
segment continued to be negatively affected by unfavorable
exchange rates, even as the economic environment recovered. The
growth of our Additives & Instruments business was mainly
attributable to organic growth of this business in all regions
of the world. The growth of our Electrical Insulation business
includes the effects of an acquisition, which contributed
44 million to net sales in 2004. Excluding
acquisition, disposition and currency effects, our Electrical
Insulation business would have experienced an increase in net
sales of 12%. Our Coatings & Sealants business suffered a
decline due to several dispositions in 2004. Excluding these
effects, net sales would have increased by 7%.
Cost of sales. Cost of sales of our chemicals segment
increased by 12.9%, from
461 million
in 2003 to
520 million in 2004. As a percentage of net
sales, cost of sales decreased from 61.1% to 61.0% during the
same period. The growth of the segments cost of sales is
in line with its increased business volume, which is
substantially attributable to an acquisition made in August
2003. The modest decline in cost of sales as a percentage of net
sales, despite rising raw material prices, is attributable to
the fact that we started to manufacture certain of our products,
which were formerly produced by contractors, ourselves.
Selling and distribution expenses. Selling and
distribution expenses of our chemicals segment increased by
18.1% from
113 million
in 2003 to
134 million in 2004. In relative terms,
selling and distribution expenses increased from 15.0% to 15.7%.
The increase in selling and distribution expenses was due to the
expanded business volume resulting in higher freight, shipping
and storage costs and to a lesser degree to an acquisition we
made in August 2003.
Research and development expenses. The level of research
and development expenses incurred by our chemicals segment is
determined by the requirements of our customers and, in any
year, typically amounts to around 5% of the segments net
sales. Research and development expenses of our chemicals
segment increased by 4.2% from
36 million
in 2003 to
38 million in 2004. As a percentage of net
sales, research and development expenses decreased slightly from
4.8% to 4.4% in the same period.
General administrative expenses. General administrative
expenses of our chemicals segment increased by 17.0% from
42 million
in 2003 to
49 million in 2004. The increase in general
administrative expenses is mainly due to an acquisition
completed in August 2003. As a percentage of net sales, general
administrative expenses increased slightly from 5.5% in 2003 to
5.7% in 2004.
Other operating income and expenses. Other operating
income of our chemicals segment increased from
5 million
in 2003 to
9 million
in 2004, whereas other operating expenses decreased from
18 million
in 2003 to
4 million in 2004, primarily reflecting the
change in the accounting for goodwill resulting from the
adoption of IFRS 3.
- 78 -
Liquidity and Capital Resources
Cash Flow
The following table highlights selected cash flow data for each
of the three years ended December 31, 2005:
Cash Flow(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
( in millions) | |
Net cash flow provided by operating activities
|
|
|
425 |
|
|
|
427 |
|
|
|
645 |
|
Net cash flow used in investing activities
|
|
|
(298 |
) |
|
|
(192 |
) |
|
|
(637 |
) |
Net cash flow (used in)/provided by financing activities
|
|
|
(152 |
) |
|
|
(201 |
) |
|
|
130 |
|
Cash and cash equivalents, year end(2)
|
|
|
288 |
|
|
|
317 |
|
|
|
469 |
|
|
|
(1) |
Columns may not add due to rounding. |
|
(2) |
Excluding marketable securities. |
2005 compared with 2004
Net cash flow provided by operating activities. Net cash
flow provided by operating activities increased by 51.1%, from
427 million
in 2004 to
645 million
in 2005. This increase was due to increased operating profits,
which led to a rise in net cash flow provided by operating
activities before changes in working capital of 14.5% to
583 million. The increase was supported by
lower volumes of cash utilized in working capital compared with
2004.
Net cash flow used in investing activities. Net cash used
in investing activities increased significantly by 231.2%, from
192 million
in 2004 to
637 million in 2005. This increase primarily
reflects acquisitions in our chemicals segment. The 2005 figure
reflects the net cash effect of:
|
|
|
|
|
A
579 million cash outflow resulting from
acquisitions we made in our chemicals segment. |
|
|
|
A
246 million cash outflow primarily reflecting
investments in property, plant and equipment and intangible
assets. |
|
|
|
A
146 million
cash inflow reflecting the net effect of a
273 million
cash inflow resulting from sales of marketable securities and a
127 million cash outflow due to purchases of
marketable securities. |
- 79 -
The following table sets forth our capital expenditures
(excluding goodwill) for the years ended December 31, 2004
and 2005:
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
|
( in millions) | |
Pharmaceuticals
|
|
|
165 |
|
|
|
201 |
|
Chemicals
|
|
|
60 |
|
|
|
44 |
|
Holding Company
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
226 |
|
|
|
246 |
|
|
|
|
|
|
|
|
Net cash flow provided by financing activities. Financing
activities led to a cash inflow of
130 million
in 2005 compared to a cash outflow of
201 million in 2004. This change reflects cash
inflows due to debt incurred to finance acquisitions we made in
our chemicals segment in 2005 and the fact that in 2005 we did
not purchase treasury shares. The 2005 figure reflects the net
cash effects of, among other things:
|
|
|
|
|
A
240 million cash inflow mainly attributable to
the debt we incurred, mainly in connection with acquisitions we
made in our chemicals segment. |
|
|
|
A
129 million
cash outflow reflecting the payment of a dividend in the amount
of
0.95 per share in respect of 2004. |
|
|
|
A
22 million cash inflow resulting from the sale
of treasury shares, primarily in connection with our stock
option plans. |
Net financial position. At December 31, 2005, we had
cash and cash equivalents that is, cash on hand and
in bank accounts as well as highly liquid investments with
original maturities of three months or less in the
amount of
469 million,
compared with cash and cash equivalents of
317 million
at December 31, 2004, corresponding to an increase of
152 million during the period under review.
The increase in cash and cash equivalents at December 31,
2005 compared with December 31, 2004 mainly reflects the
high net cash inflow provided by operating activities, which was
almost completely offset by net cash flow used in investing
activities and positive cash flow from financing activities in
the period under review.
At December 31, 2005, we had marketable securities in the
amount of
134 million,
compared with marketable securities of
263 million
at December 31, 2004, corresponding to a decrease of
129 million. The decrease in marketable
securities at December 31, 2005 compared with
December 31, 2004 primarily reflects the sale of marketable
securities, the proceeds of which we used to finance
acquisitions we made in our chemicals segment.
We had debt in the amount of
389 million
at December 31, 2005, compared with debt of
58 million
at December 31, 2004, corresponding to an increase of
331 million during the period under review.
The increase in debt was mainly attributable to debt incurred to
finance acquisitions we made in our chemicals segment. For the
years ended December 31, 2005 and 2004, weighted average
interest rates for borrowings from banks were 2.7% and 2.0%,
respectively.
2004 compared with 2003
Net cash flow provided by operating activities. Net cash
flow provided by operating activities increased slightly by
0.4%, from
425 million
in 2003 to
427 million
in 2004. This slight increase was mainly due to increased
operating profits, which led to a rise in net cash flow provided
by operating activities before changes in working capital of
17.1% to
509 million. This increase was almost
completely offset by higher
- 80 -
volumes of cash bound in working capital, mainly due to an
increase in accounts receivable in our pharmaceuticals segment.
Net cash flow used in investing activities. Net cash used
in investing activities decreased by 35.5%, from
298 million
in 2003 to
192 million in 2004. This decline was
primarily due to an acquisition in our chemicals segment in
August 2003. The 2004 figure primarily reflects the net cash
effect of:
|
|
|
|
|
A
226 million cash outflow primarily reflecting
investments in property, plant and equipment and intangible
assets. |
|
|
|
A
33 million
cash inflow reflecting the net effect of a
218 million
cash inflow resulting from sales of marketable securities and
185 million cash outflow due to purchases of
marketable securities. |
|
|
|
A
22 million cash inflow stemming from the sale
of property, plant and equipment, intangible assets and
financial assets, and certain product lines. |
The following table sets forth our capital expenditures
(excluding goodwill) for the years ended December 31, 2003
and 2004:
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
|
December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
|
( in millions) | |
Pharmaceuticals
|
|
|
141 |
|
|
|
165 |
|
Chemicals
|
|
|
86 |
|
|
|
60 |
|
Holding Company
|
|
|
10 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
237 |
|
|
|
226 |
|
|
|
|
|
|
|
|
Net cash flow used in financing activities. Net cash used
in financing activities increased by 32.4%, from
152 million
in 2003 to
201 million in 2004. This increase reflects
higher cash outflows due to higher dividend payments in 2004,
the amortization of long term financial debt and lower proceeds
from the sale of treasury shares used in connection with our
stock option plans. For more information on our stock option
plans see Item 6: Directors, Senior Management and
Employees Share Ownership Stock Option
Plans. The 2004 figure reflects the net cash effect of,
among other things:
|
|
|
|
|
A
113 million
cash outflow reflecting the payment of a dividend in the amount
of
0.83 per share in respect of 2003. |
|
|
|
A
76 million
cash outflow resulting from the purchase of treasury shares,
primarily in connection with our stock option plans, which was
partially offset by the
18 million cash inflow resulting from the sale
of treasury shares. |
|
|
|
A
35 million cash outflow mainly attributable to
the repayment of long-term debt related to our pharmaceuticals
segment. |
Net financial position. At December 31, 2004, we had
cash and cash equivalents in the amount of
317 million,
compared with cash and cash equivalents of
288 million
at December 31, 2003, corresponding to an increase of
29 million during the period under review. The
increase in cash and cash equivalents at December 31, 2004
compared with December 31, 2003 mainly reflects the high
net cash flow
- 81 -
provided by operating activities, which was almost completely
offset by net cash flow used in investing and financing
activities in the period under review.
At December 31, 2004, we had marketable securities in the
amount of
263 million,
compared with marketable securities of
292 million
at December 31, 2003, corresponding to a decrease of
29 million during the period under review. The
decrease in marketable securities at December 31, 2004
compared with December 31, 2003 primarily reflects the sale
of marketable securities over the course of 2004 to expand our
short term financial flexibility.
The high level of net income in 2004 did not result in an
increase in our cash balances and portfolio of marketable
securities taken as a whole on account of the high level of
capital expenditures made during the year and the increase in
working capital as well as on account of the financing
activities discussed above.
We had debt in the amount of
58 million
at December 31, 2004, compared with debt of
96 million
at December 31, 2003, corresponding to a decline of
38 million during the period under review. The
decline in debt was mainly attributable to repayments of
financial debt by our pharmaceuticals segment. For the years
ended December 31, 2004 and 2003, weighted average interest
rates for borrowings from banks were 2.0% and 6.5%, respectively.
Liquidity Commitments and Capital Requirements
Special purpose entities, irrespective of their legal structure,
are included in our consolidated financial statements when we
have the power to govern their financial and operating policies.
We have no special purpose entities that are not consolidated in
our financial statements. Moreover, we have no material
off-balance sheet arrangements that are reasonably likely to
have a material effect on our financial condition, changes in
financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
The following table provides a maturity analysis of our
contractual obligations as of December 31, 2005:
Contractual Obligations(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 | |
|
|
|
|
| |
|
|
|
|
Payments due by period | |
|
|
Total | |
|
<1 year | |
|
1-3 years | |
|
4-5 years | |
|
>5 years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
( in millions) | |
Debt(2)
|
|
|
394 |
|
|
|
327 |
|
|
|
31 |
|
|
|
12 |
|
|
|
23 |
|
Capital leases
|
|
|
7 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
4 |
|
Operating leases
|
|
|
104 |
|
|
|
22 |
|
|
|
31 |
|
|
|
20 |
|
|
|
31 |
|
R&D obligations(3)
|
|
|
32 |
|
|
|
29 |
|
|
|
3 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(1) |
Columns and rows may not add due to rounding. |
|
(2) |
Amounts include interest payments. Because a significant portion
of our debt is subject to variable interest rates, we calculated
interest payments based on the weighted average interest rate
for bank borrowings at December 31, 2005. |
|
(3) |
Includes minimum and estimated milestone payments under our
various R&D agreements. |
As of December 31, 2005, we had commitments for investments
in property, plant and equipment in the amount of
51 million,
most of which expire in the short term, guarantees for pension
commitments in the amount of
15 million
and other commercial commitments in the amount of
4 million. See Note 27 to our
consolidated financial statements for additional information on
our commitments and contingencies as of December 31, 2005.
- 82 -
As of December 31, 2005, we had recorded provisions for our
pension benefit and other post-retirement obligations in the
amount of
358 million. For more information on our
accounting for our pension obligations, see Critical
Accounting Policies Pension Plans and
Note 14 of our consolidated financial statements.
We typically fund our capital expenditures with our cash flow
from operations and, if such funds are not sufficient, liquid
funds, including cash, cash equivalents and marketable
securities.
On May 4, 2005, our shareholders meeting approved a
proposal by our management and supervisory boards to pay a
dividend of
0.95 per no-par value share in respect of 2004,
with the amount attributable to treasury shares to be allocated
to retained earnings.
We believe that cash flows from operating activities along with
available cash and cash equivalents and marketable securities
will be sufficient to fund all of our regular operating needs in
the coming 18 months, including capital expenditures,
research and development projects and dividends.
U.S. GAAP Reconciliation
We prepare our financial statements in accordance with IFRS,
which differ in certain respects from U.S. GAAP. See
Notes 32 and 33 to our consolidated financial statements
for a reconciliation of our net income for the three years ended
December 31, 2005 and shareholders equity as of
December 31, 2004 and 2005 as well as for additional
details on the reconciliation from IFRS to U.S. GAAP.
Changes in Accounting Policies
We have retroactively applied IFRS 2, the amendment to IAS 19
and IAS 39 (revised) and adjusted several items in our
consolidated financial statements for the years ended
December 31, 2003 and 2004 accordingly. For additional
information, see Note 2 to our consolidated financial
statements.
New Accounting Standards
For a discussion of new IFRS and U.S. GAAP accounting
standards, see Notes 2 and 33 to our consolidated financial
statements.
- 83 -
ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Management
Overview
As required by the German Stock Corporation Act
(Aktiengesetz), we have a management board
(Vorstand) and a supervisory board (Aufsichtsrat).
The two boards are entirely separate, and, subject to a limited
exception not currently applicable to us, no individual may
simultaneously be a member of both boards. Our management board
is responsible for managing our business in accordance with
applicable laws, our Articles of Association and its rules of
procedure. In addition, it represents us in our dealings with
third parties. Our supervisory board appoints and removes the
members of our management board and oversees their management of
our company but does not make management decisions itself.
In carrying out their duties, the members of our management and
our supervisory boards are required to exercise the standard of
care of a prudent and diligent businessperson. If they fail to
observe the appropriate standard of care, they may become liable
to us. In carrying out their duties, both boards have to take
into account a broad range of considerations, including our
companys interests as well as the interests of our
shareholders, employees, creditors and, to some extent, the
public interest. Our management board is also required to
respect the rights of our shareholders to be treated on equal
terms. In addition, it is responsible for implementing an
internal monitoring system for risk management purposes.
Our supervisory board has comprehensive oversight
responsibilities. To ensure that our supervisory board can carry
out these functions properly, our management board must, among
other things, regularly submit reports to our supervisory board
in relation to the current state of our companys business
and future business planning. In addition, our supervisory board
is entitled to request special reports at any time.
Under German law, our shareholders have no direct recourse
against the members of our management board or the members of
our supervisory board in the event of a breach of duty. Apart
from insolvency and other special circumstances, only we have
the right to claim damages from the members of our two boards.
We may waive or settle claims only if at least three years have
passed since any violation of a duty occurred and only if our
shareholders approve the waiver or settlement at a
shareholders meeting with a simple majority of the votes
cast, provided that no shareholders who in the aggregate hold
one-tenth or more of our share capital oppose the waiver or
settlement and have their opposition formally recorded in the
minutes. See Item 10: Additional
Information Rights, Preferences and Restrictions
Attaching to our Shares for more information on individual
shareholders ability to institute a legal action against
our board members.
Supervisory Board
As required by applicable German law and our Articles of
Association, our supervisory board consists of twelve members.
Six of these members are elected by our shareholders and six are
elected by our German employees. One of the employee
representatives is member of the management staff (leitende
Angestellte) and two are elected pursuant to proposals of
unions.
Our shareholders may remove any member of our supervisory board
whom they have elected by adopting a resolution at a general
meeting with a simple majority of the votes cast. Our German
employees may remove any supervisory board member whom they have
elected by adopting a resolution with a majority of three
quarters of the votes cast. Our supervisory board elects a
chairman and at least one deputy chairman from among its
members. The election of the chairman and the first deputy
chairman requires a two-thirds majority vote of the full
supervisory board. If no candidate for chairman or first deputy
chairman receives the required two-thirds majority, the
shareholder representatives elect the chairman and the employee
representatives elect the first deputy chairman. If our
supervisory board chooses to elect a second deputy chairman, it
does so by a simple majority of the votes cast.
Resolutions of our supervisory board require a simple majority
of the votes cast unless the law requires otherwise, with the
chairman having a deciding vote in the event of a deadlock.
- 84 -
Our supervisory board meets at least twice every half year. In
2005, our supervisory board met five times. The main functions
of our supervisory board are:
|
|
|
|
|
To monitor and oversee the management of our company; |
|
|
|
To appoint and remove members of our management board; |
|
|
|
To represent our company in matters concerning our management
board; |
|
|
|
To enter into contracts with independent auditors on behalf of
our company; and |
|
|
|
To approve matters that the Articles of Association or the
supervisory board have made subject to such approval. |
Each member of our supervisory board is appointed for a maximum
term of five years. A supervisory board members term of
office expires at the end of the general meeting of our
shareholders at which our shareholders discharge the respective
member for the fourth fiscal year following the fiscal year in
which that member was elected. Supervisory board members may be
re-elected.
Our supervisory board has established a remuneration committee
(Personalausschuss) and an audit committee
(Prüfungsausschuss). The remuneration committee is
responsible for reviewing and approving the terms of contracts
between us and the members of our management board. The audit
committee is responsible for engaging the auditor and
determining the audit fee following the appointment of the
auditor by our shareholders meeting. The audit committee
also determines the areas on which the auditor should put the
emphasis when auditing our financial statements, monitors the
auditors independence and reviews our financial statements
before they are presented to our supervisory board. In addition,
the audit committee oversees the operation of the internal
monitoring system for risk management purposes that has been
implemented by our management board. In 2005, our audit
committee adopted procedures for the receipt, retention and
treatment of complaints regarding accounting, internal
accounting controls and auditing matters.
The following table sets forth the names and functions of the
current members of our supervisory board, their ages at
December 31, 2005, the year in which their current terms
expire and their principal business activities outside of our
company.
Supervisory Board Members
|
|
|
|
|
|
|
Name |
|
Age |
|
Term expires |
|
Principal business activities outside of our company |
|
|
|
|
|
|
|
Shareholder Representatives: |
Justus Mische(1)
|
|
67 |
|
2008 |
|
Member of the supervisory boards of B. Braun |
Chairman
|
|
|
|
|
|
Melsungen AG (chairman), Software AG |
Susanne Klatten(1)
|
|
43 |
|
2008 |
|
Honorary Senator of the Technical University Munich |
Second deputy
|
|
|
|
|
|
(Technische Universität München), member of the |
chairwoman
|
|
|
|
|
|
supervisory boards of Bayerische Motoren Werke AG, ALTANA Pharma
AG, member of the advisory board of UnternehmerTUM GmbH,
non-executive director of the university council of Technical
University Munich (Technische Universität
München) |
Dr. Uwe-Ernst Bufe(2)
|
|
61 |
|
2006 |
|
Member of the supervisory boards of Air Liquide Deutschland
GmbH, Cognis Verwaltungs-GmbH, Frankfurter Versicherungs AG, UBS
Deutschland AG, Solvay S.A., Akzo Nobel N.V., Umicore S.A. |
- 85 -
|
|
|
|
|
|
|
Name |
|
Age |
|
Term expires |
|
Principal business activities outside of our company |
|
|
|
|
|
|
|
Prof. Dr. Dr. h.c.
mult. Wolfgang A.
Herrmann |
|
57 |
|
2008 |
|
President of the Technical University Munich (Technische
Universität München); member of the supervisory
boards of Degussa AG, TUM-Tech GmbH |
Prof. Dr. Heinz
Riesenhuber |
|
70 |
|
2006 |
|
Member of the supervisory boards of Evotec AG (chairman),
Frankfurter Allgemeine Zeitung GmbH, HBM BioVentures AG, Henkel
KGaA, Vodafone Deutschland GmbH, VfW AG, Kabel Deutschland GmbH
(chairman) |
Dr. Klaus-Jürgen
Schmieder(2) |
|
57 |
|
2006 |
|
Member of the management board of LAir Liquide S.A.;
member of the supervisory boards of Air Liquide Deutschland
GmbH, Air Liquide Italia S.r.l., AL Air Liquide España S.A. |
Employee Representatives: |
Marcel Becker(1)
|
|
57 |
|
2008 |
|
Full-time member of works council; chairman of |
First deputy chairman |
|
|
|
|
|
groups works council |
Yvonne DAlpaos-
Götz(2) |
|
52 |
|
2008 |
|
Full-time member of works council; chairwoman of the central
works council of ALTANA Pharma AG, member of the supervisory
board of ALTANA Pharma AG |
Dr. Rango Dietrich
|
|
54 |
|
2008 |
|
None |
Ulrich Gajewiak(1)
|
|
42 |
|
2008 |
|
None |
Ralf Giesen(2)
|
|
42 |
|
2008 |
|
Secretary of the board of Mining, Chemical and Energy Industrial
Union (IG Bergbau, Chemie, Energie); member of the
supervisory boards of Bayer Material Science AG, Vattenfall
Europe Mining AG, RAG Aktiengesellschaft |
Dr. Thomas Martin
|
|
41 |
|
2008 |
|
Chairman of the VAA works group of ALTANA Pharma AG |
|
|
(1) |
Member of the remuneration committee. |
|
(2) |
Member of the audit committee. |
The business address of the members of our supervisory board is
the same as our business address: Am Pilgerrain 15, D-61352 Bad
Homburg v.d. Höhe, Germany.
Management Board
Pursuant to our Articles of Association, our supervisory board
determines the size of our management board, subject to the
condition that our management board has at least two members.
Our management board currently consists of four members. Under
German law, our management board is responsible for the
management of our company, including the following matters:
|
|
|
|
|
The preparation of the annual financial statements; |
- 86 -
|
|
|
|
|
The calling of shareholders meetings and the preparation
and execution of shareholders resolutions; and |
|
|
|
The submission of reports to our supervisory board. |
Our management board has adopted rules of procedure that govern
the conduct of its affairs. Pursuant to the currently applicable
rules of procedure of our management board, while each board
member is responsible for a discrete business area, certain
matters enumerated in the rules of procedure have to be managed
jointly. The rules of procedure also provide that our management
board should make all decisions by consensus. In the event of a
deadlock, the chairman of our management board casts the
deciding vote.
Our supervisory board appoints the members of our management
board for a maximum term of five years. Members may be
re-appointed. Our supervisory board may remove any member of our
management board prior to the expiration of his or her term for
cause.
The table below gives an overview of the present members of our
management board, their ages at December 31, 2005, the year
in which their current terms expire and their positions within
our company:
Management Board Members
|
|
|
|
|
|
|
|
|
|
|
Name |
|
Age | |
|
Term expires | |
|
Position |
|
|
| |
|
| |
|
|
Dr. Nikolaus Schweickart
|
|
|
62 |
|
|
|
2007 |
|
|
Chairman and Chief Executive Officer |
Dr. Hermann Küllmer
|
|
|
62 |
|
|
|
2007 |
|
|
Chief Financial Officer |
Dr. Hans-Joachim Lohrisch
|
|
|
56 |
|
|
|
2007 |
|
|
Head of Pharmaceuticals |
Dr. Matthias L. Wolfgruber
|
|
|
51 |
|
|
|
2010 |
|
|
Head of Chemicals |
The business address of the members of our management board is
the same as our business address: Am Pilgerrain 15, D-61352 Bad
Homburg v.d. Höhe, Germany.
Dr. Nikolaus Schweickart has been a member of our
management board since 1987. In 1990, he was appointed chairman
of our management board and chief executive officer of our
company. Prior to serving on our management board,
Dr. Schweickart worked as a personal assistant to
Dr. Herbert Quandt and as a general representative
(Generalbevollmächtigter) of our company.
Dr. Schweickart holds a law degree and two honorary doctor
titles.
Dr. Hermann Küllmer has been a member of our
management board and the chief financial officer of our company
since 1990. Until 1990, he served in various finance and general
management positions within our company and its predecessor
entity, where he began to work in 1975. Dr. Küllmer
holds a Ph.D. in economics.
Dr. Hans-Joachim Lohrisch has been a member of our
management board since 1999 and also serves as the head of our
pharmaceuticals division. Before joining our company,
Dr. Lohrisch held various executive positions in the areas
of therapeutics and generic drugs within Merck KGaA, where he
became the head of the companys worldwide ethical
pharmaceuticals business in 1998. Dr. Lohrisch holds a
Ph.D. in chemistry.
Dr. Matthias L. Wolfgruber has been a member of our
management board since July 1, 2002 and, since
October 1, 2002, also serves as the head of our chemicals
division. Before joining our company, Dr. Wolfgruber held a
variety of marketing, production, R&D and general management
positions within the Wacker group, a multinational chemicals
company. Dr. Wolfgruber holds a Ph.D. in chemistry.
Compensation
Supervisory board
The members of our supervisory board receive annual compensation
in an amount that is determined by our Articles of Association,
which may only be amended by our shareholders meeting.
Their compensation consists of a fixed portion of
20,000,
10,000 of which is payable in shares of our
company, and a
- 87 -
variable portion the amount of which depends on the relationship
that our annual dividend bears to our share capital. The
chairman of the supervisory board receives twice this amount and
the deputy chairpersons one and a half times this amount. In
addition, our supervisory board members are entitled to be
reimbursed for their out-of-pocket expenses. The chairpersons of
the remuneration and the audit committees each receive an
additional
40,000 per
year, while ordinary members of these committees receive an
additional
20,000 per
year. Provided that the proposal regarding the dividend to be
distributed in respect of 2005 is approved at the annual
shareholders meeting, the compensation paid to our
supervisory board members in respect of 2005 totals
1.5 million,
of which
1.0 million
is variable and
0.2 million is remuneration for supervisory
board committee work. In addition, we reimburse the members of
our supervisory board for all expenses incurred in connection
with their activities as supervisory board members, including
any VAT paid in respect of compensation received.
The table below provides a breakdown of the compensation paid to
each member of our supervisory board for 2005:
Supervisory Board Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2005 | |
|
|
|
|
Fixed(1) | |
|
Variable | |
|
Committee | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
( in thousands) | |
|
|
Justus Mische
|
|
|
40 |
|
|
|
149 |
|
|
|
40 |
|
|
|
229 |
|
Marcel Becker
|
|
|
30 |
|
|
|
112 |
|
|
|
20 |
|
|
|
162 |
|
Susanne Klatten
|
|
|
30 |
|
|
|
112 |
|
|
|
20 |
|
|
|
162 |
|
Dr. Uwe-Ernst Bufe
|
|
|
20 |
|
|
|
74 |
|
|
|
20 |
|
|
|
114 |
|
Yvonne DAlpaos-Götz
|
|
|
20 |
|
|
|
74 |
|
|
|
20 |
|
|
|
114 |
|
Dr. Rango Dietrich
|
|
|
20 |
|
|
|
74 |
|
|
|
0 |
|
|
|
94 |
|
Ulrich Gajewiak
|
|
|
20 |
|
|
|
74 |
|
|
|
20 |
|
|
|
114 |
|
Ralf Giesen
|
|
|
20 |
|
|
|
74 |
|
|
|
20 |
|
|
|
114 |
|
Prof. Dr. Dr. h.c. mult. Wolfgang
|
|
|
20 |
|
|
|
74 |
|
|
|
0 |
|
|
|
94 |
|
A. Herrmann
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Thomas Martin
|
|
|
20 |
|
|
|
74 |
|
|
|
0 |
|
|
|
94 |
|
Prof. Dr. Heinz Riesenhuber
|
|
|
20 |
|
|
|
74 |
|
|
|
0 |
|
|
|
94 |
|
Dr. Klaus-Jürgen Schmieder
|
|
|
20 |
|
|
|
74 |
|
|
|
40 |
|
|
|
134 |
|
|
Total
|
|
|
280 |
|
|
|
1,039 |
|
|
|
200 |
|
|
|
1,519 |
|
|
|
(1) |
50% of this amount was paid in shares of our company at the
closing price of
46.00 on Xetra on December 30, 2005. |
Management board
The remuneration committee of the supervisory board is
responsible for determining the remuneration of members of the
management board. The committee comprises Mr. Justus Mische
(chairman of the supervisory board), Ms. Susanne Klatten,
Mr. Marcel Becker (both deputy chairpersons of the
supervisory board) and Mr. Ulrich Gajewiak.
The remuneration of the members of our management board is based
on our size and economic and financial results, and the level
and structure of management board compensation at comparable
companies in and outside Germany. In addition, the compensation
for each board member reflects his or her responsibilities and
performance. The level of compensation is designed to be
competitive in the international market for highly qualified
executives in a high-performance culture.
Remuneration for the members of the management board is to a
significant extent performance-related. In fiscal year 2005, it
had three components: a fixed salary, a variable bonus and
stock-based compensation. The fixed salary and the bonus are
based on a target compensation comprising approximately
one-third fixed and two-thirds variable remuneration. The amount
of the variable compensation is based on our operating
- 88 -
income before interest, taxes and amortization/impairment of
goodwill (EBITA) and our return on capital employed
(ROCE).
The remuneration of the management board members is composed as
follows:
|
|
|
|
|
Fixed compensation is paid as a monthly salary. |
|
|
|
Variable compensation for Dr. Schweickart and
Dr. Küllmer is based on the groups, and for
Dr. Lohrisch and Dr. Wolfgruber on our
divisions, achievement of certain ROCE and EBITA targets.
These targets are set at the beginning of each fiscal year by
the remuneration committee on the basis of the most recent
internal plan data approved by the supervisory board. The target
of the variable compensation is associated with a defined
compensation amount. The bonus may range from 0% to 150%. In
2005, the members of our management board achieved target values
within the range of 82% to 131%. |
|
|
|
Stock-based compensation is determined by the remuneration
committee. In 2005, we granted our management board members a
total of 117,000 options under the stock option plan 2005, each
option being exercisable for one share at an exercise price of
47.49 subject to certain conditions. For more
information see Share Ownership Stock Option
Plans. |
The remuneration committee determines the amount of the fixed
compensation and the target value of the variable compensation.
At its meeting on November 17, 2004, the remuneration
committee determined the target value of the variable
compensation for 2005. On May 4, 2005, the remuneration
committee determined the number of stock options granted to the
members of the management board under the stock option plan 2005.
As a result, cash compensation in 2005 amounted to
5.1 million,
compared with
4.7 million in 2004, representing an increase
of 8.8%.
The following table describes the details of cash compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed | |
|
Variable | |
|
|
|
|
compensation | |
|
compensation | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
( in thousands) | |
Dr. Nikolaus Schweickart
|
|
|
500 |
|
|
|
1,536 |
|
|
|
2,036 |
|
Dr. Hermann Küllmer
|
|
|
342 |
|
|
|
691 |
|
|
|
1,033 |
|
Dr. Hans-Joachim Lohrisch
|
|
|
375 |
|
|
|
914 |
|
|
|
1,289 |
|
Dr. Matthias L. Wolfgruber
|
|
|
319 |
|
|
|
459 |
|
|
|
778 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,536 |
|
|
|
3,600 |
|
|
|
5,136 |
|
|
|
|
|
|
|
|
|
|
|
At its meeting on November 24, 2005, the remuneration
committee determined the target value of the variable
compensation for 2006.
- 89 -
The number of the stock options, their fair value and their
value at December 31, 2005 are shown in the following
table. Cash proceeds from the exercise of stock options may
differ significantly from the amounts stated in the table below.
In total, members of the management board held 529,500 options
at December 31, 2005 compared with 412,500 options at
December 31, 2004 granted under various stock option plans.
Number of outstanding options(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan 2001 | |
|
Plan 2002 | |
|
Plan 2003 | |
|
Plan 2004 | |
|
Plan 2005 | |
|
|
|
|
|
|
Fair | |
|
|
|
Fair | |
|
|
|
Fair | |
|
|
|
Fair | |
|
|
|
Fair | |
|
Total | |
|
|
Number | |
|
value at | |
|
Number | |
|
value at | |
|
Number | |
|
value at | |
|
Number | |
|
value at | |
|
Number | |
|
value at | |
|
Number | |
|
Fair value | |
|
|
of | |
|
the date | |
|
of | |
|
the date | |
|
of | |
|
the date | |
|
of | |
|
the date | |
|
of | |
|
the date | |
|
of | |
|
December 31, | |
|
|
Options | |
|
of grant | |
|
Options | |
|
of grant | |
|
Options | |
|
of grant | |
|
Options | |
|
of grant | |
|
Options | |
|
of grant | |
|
Options | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
( in thousands) | |
Dr. Nikolaus Schweickart (chairman)
|
|
|
30,000 |
|
|
|
502 |
|
|
|
40,000 |
|
|
|
1,080 |
|
|
|
40,000 |
|
|
|
547 |
|
|
|
40,000 |
|
|
|
461 |
|
|
|
36,000 |
|
|
|
203 |
|
|
|
186,000 |
|
|
|
1,137 |
|
Dr. Hermann Küllmer
|
|
|
0 |
|
|
|
0 |
|
|
|
30,000 |
|
|
|
810 |
|
|
|
30,000 |
|
|
|
410 |
|
|
|
30,000 |
|
|
|
346 |
|
|
|
27,000 |
|
|
|
152 |
|
|
|
117,000 |
|
|
|
726 |
|
Dr. Hans-Joachim Lohrisch
|
|
|
22,500 |
|
|
|
376 |
|
|
|
30,000 |
|
|
|
810 |
|
|
|
30,000 |
|
|
|
410 |
|
|
|
30,000 |
|
|
|
346 |
|
|
|
27,000 |
|
|
|
152 |
|
|
|
139,500 |
|
|
|
853 |
|
Dr. Matthias L. Wolfgruber
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
30,000 |
|
|
|
410 |
|
|
|
30,000 |
|
|
|
346 |
|
|
|
27,000 |
|
|
|
152 |
|
|
|
87,000 |
|
|
|
457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
52,500 |
|
|
|
878 |
|
|
|
100,000 |
|
|
|
2,700 |
|
|
|
130,000 |
|
|
|
1,777 |
|
|
|
130,000 |
|
|
|
1,499 |
|
|
|
117,000 |
|
|
|
659 |
|
|
|
529,500 |
|
|
|
3,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value December 31, 2005
|
|
|
|
|
|
|
296 |
|
|
|
|
|
|
|
896 |
|
|
|
|
|
|
|
630 |
|
|
|
|
|
|
|
498 |
|
|
|
|
|
|
|
853 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
The fair value of the options at the date of grant is calculated
based on the Binomial option pricing model. |
Pension commitments up to and including fiscal year 2005 were
made on a defined benefit basis.
We cover pension commitments for current members of our
management board and for former members of the management board
and their surviving dependents. At December 31, 2005, the
total amount that we had accrued for the payment of pensions to
the current members of our management board equaled
5.5 million
(2004:
4.4 million),
and the total amount that we had accrued for former management
board members and their surviving dependents amounted to
6.8 million
(2004:
6.9 million).
We did not grant any loans to the members of the management
board in 2005.
We have provided and will continue to provide insurance for the
indemnification of our directors and officers against any
general civil liability they may incur in connection with their
activities on our behalf, subject to certain limitations and a
deductible, as well as against liabilities under the Securities
Act.
Employees
At December 31, 2005, we employed 13,276 people, compared
with 10,783 employees and 10,402 employees at December 31,
2004 and 2003, respectively.
The following table provides a breakdown of the number of our
employees by main category of activity and location for each of
the three years ended December 31, 2003, 2004 and 2005,
respectively:
- 90 -
Employees by Main Category of Activity and Location
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
By division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceuticals
|
|
|
7,702 |
|
|
|
8,200 |
|
|
|
8,832 |
|
|
Chemicals
|
|
|
2,634 |
|
|
|
2,521 |
|
|
|
4,384 |
|
|
Holding company
|
|
|
66 |
|
|
|
62 |
|
|
|
60 |
|
By main category of activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D
|
|
|
2,000 |
|
|
|
2,125 |
|
|
|
2,361 |
|
|
Production and logistics
|
|
|
3,651 |
|
|
|
3,571 |
|
|
|
4,821 |
|
|
Marketing and distribution
|
|
|
3,377 |
|
|
|
3,592 |
|
|
|
4,228 |
|
|
Administration
|
|
|
1,374 |
|
|
|
1,495 |
|
|
|
1,866 |
|
By location
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
4,816 |
|
|
|
4,958 |
|
|
|
6,341 |
|
|
Europe (excl. Germany)
|
|
|
2,363 |
|
|
|
2,315 |
|
|
|
2,536 |
|
|
North America
|
|
|
1,332 |
|
|
|
1,416 |
|
|
|
2,055 |
|
|
Latin America
|
|
|
1,300 |
|
|
|
1,439 |
|
|
|
1,500 |
|
|
Other
|
|
|
591 |
|
|
|
655 |
|
|
|
844 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,402 |
|
|
|
10,783 |
|
|
|
13,276 |
|
|
|
|
|
|
|
|
|
|
|
A significant percentage of our employees, especially those
located in Germany, are covered by collective bargaining
agreements that determine such matters as compensation, working
hours and other conditions of employment, and some of our
employees are represented by works councils. Works councils are
employee-elected bodies, which exist in our company both at the
group level for our German employees (Konzernbetriebsrat)
and in certain of our subsidiaries. Works councils have a number
of notification and codetermination rights in personnel, social
and economic matters. Under the German Works Constitution Act
(Betriebsverfassungsgesetz), they are entitled to receive
advance notification of any proposed termination of an employee,
to confirm hirings, relocations and similar matters, and to
codetermine a variety of so-called social matters,
such as work schedules and rules of conduct. Our management
considers itself to be on good terms with the works councils of
our company.
We offer our German employees a special investment program
called Altersvorsorge Aktiv mit ALTANA
(AAA). Participating employees may designate a
defined amount of their gross salary or wages to be deposited in
investment funds, subject to an annual minimum interest rate
guaranteed by us.
During the last three years, we have not experienced any
material labor disputes resulting in work stoppages.
Share Ownership
At March 15, 2006, Ms. Klatten owned 70,332,974
shares, or 50.1%, of our issued share capital or 51.8% of our
outstanding share capital. The shares and options held by the
other members of our supervisory board and our management board
members represent less than 1% of our issued share capital. See
Item 7: Major Shareholders and Related Party
Transactions.
In order to better align the interests of our employees and our
management board members with those of our shareholders, we have
implemented a number of plans to involve our employees and the
members of our management board in the capital of our company.
These plans include various stock option plans, first introduced
in 1999, in which our management board members, senior
executives and certain other key employees may participate, and
the ALTANA Investment Program, an annual share ownership plan
that we launched for the first time in 2000 in which most of our
employees are eligible to participate.
- 91 -
To be able to meet our obligations under our various stock
option plans, we maintain approximately the same number of
shares in treasury as we grant in options under our plans,
including the ALTANA Investment Program. Each year, we determine
the number of additional treasury shares required to be
purchased and make the necessary adjustments.
In connection with the acquisition of treasury shares for
delivery upon exercise of options under our various employee
incentive plans, we recognize compensation expense over the
vesting period in an amount equal to the difference between the
exercise price of the options and the average price of the
treasury shares purchased. See Note 13 to our consolidated
financial statements for additional information.
Stock Option Plans
With our stock option plans, we aim to align the interests of
our management board members, senior executives and selected key
employees with the interests of our company and our shareholders.
In 1999, we launched for the first time a stock option plan,
which was open to the members of our management board, senior
executives and certain other key employees. In July 2000 and
July 2001, we launched similar plans. Starting with the 2001
plan, we extended the eligibility criteria to include other
employees who we consider to have high potential. In 2002, we
offered two different plans. One of them (Plan A)
was open to the members of our management board and certain
executives of our two divisions, whereas the other plan
(Plan B) was open to other key members of
management. In 2003, we adopted a new stock option plan for the
members of our management board, the top management of our
divisions, the managing directors and certain senior executives
of certain of our subsidiaries and certain junior executives.
Similar plans were launched in 2004 and 2005. The 2003 plan
provides that the remuneration committee may cap the gains
realizable upon the exercise of the options granted to our
management board members if unforeseen extraordinary
developments led to a disproportionate increase in the price of
our shares. Under the 2004 and 2005 plans, this provision
applies to all plan participants. Under the 2005 plan, profits
from exercise of each option are capped at the amount of the
exercise price of each option.
Under the 1999, 2000, 2001, 2003, 2004 and 2005 plans,
participants were required to make an initial investment in our
shares in an amount between
5,000 and
150,000, depending on their position in our group.
Half of this initial investment had to be paid up immediately.
The other half could be paid through future profits realized
upon the exercise of options. In 2002, only under Plan A an
initial investment in our shares was required.
Under our various stock option plans, each option granted is
exercisable for one share of our company at an exercise price
that we determined on the basis of the average closing prices of
our shares, as reported on the Xetra trading system of the
Frankfurt Stock Exchange, during a 20-trading day reference
period prior to the date on which each plan was launched.
Options granted cannot be exercised until the expiry of a
two-year lockup period from the date of the grant.
Options granted under our 2001 plan are exercisable only if our
earnings per share in 2002 exceed our earnings per share in 2000
by at least 20%. Likewise, options granted under our 2002 Plan A
become exercisable if our earnings per share in 2003 exceed our
earnings per share in 2001 by at least 20%. There are no
performance conditions under Plan B. To create appropriate
incentives, we have set the exercise price for Plan B at a level
that is 10% above the exercise price for Plan A. Options granted
under our 2003 plan vest if our earnings per share in 2004 are
20% higher than in 2002. Options granted under our 2004 and 2005
plans vest if our share price outperforms a mixed index
comprised of the Dow Jones STOXX Healthcare and Dow Jones STOXX
Chemicals indices during certain target periods in 2006, 2007 or
2008 or 2007, 2008 or 2009, respectively.
Options granted under the 2001, 2002, 2003, 2004 and 2005 plans
are exercisable only for shares and expire five years after the
date on which they were granted, except that options granted
under the 2002 plan expire ten years after the grant date.
Under the 2001 plan, the members of our management board and
executive officers are entitled to receive additional options if
they make an additional investment in our shares. The 2001,
2002, 2003, 2004
- 92 -
and 2005 plans also envisage the grant of additional options to
certain eligible individuals, taking into account their roles
and responsibilities in our company. Our supervisory board is
responsible for making such grants with respect to members of
our management board, and our management board is responsible
for making such grants to other eligible participants.
The following table provides details regarding the options
outstanding under our various stock option plans:
Stock Option Plans
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Title of | |
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Number of | |
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Date on | |
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|
securities | |
|
options | |
|
which | |
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issuable | |
|
outstanding | |
|
options | |
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Date on | |
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upon | |
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as of | |
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become or | |
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which | |
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|
|
exercise of | |
|
December 31, | |
|
became | |
|
options | |
|
Exercise | |
Name |
|
options | |
|
2005 | |
|
exercisable | |
|
expire | |
|
price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
2001 plan
|
|
|
shares |
|
|
|
453,500 |
|
|
|
July 1, 2003 |
|
|
|
June 30, 2006 |
|
|
|
42.41 |
|
2002 plan
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|
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|
|
|
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|
|
|
|
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|
Executives
|
|
|
shares |
|
|
|
255,000 |
|
|
|
July 1, 2004 |
|
|
|
June 30, 2012 |
|
|
|
51.58 |
|
|
Key management
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|
|
shares |
|
|
|
919,050 |
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|
|
July 1, 2004 |
|
|
|
June 30, 2012 |
|
|
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56.74 |
|
2003 plan
|
|
|
shares |
|
|
|
1,139,200 |
|
|
|
July 1, 2005 |
|
|
|
June 30, 2008 |
|
|
|
54.65 |
|
2004 plan
|
|
|
shares |
|
|
|
1,190,950 |
|
|
|
July 1, 2006 |
|
|
|
June 30, 2009 |
|
|
|
51.01 |
|
2005 plan
|
|
|
shares |
|
|
|
1,175,700 |
|
|
|
July 1, 2007 |
|
|
|
June 30, 2010 |
|
|
|
47.49 |
|
For more information on our stock option plans, see Note 13
to our consolidated financial statements.
ALTANA Investment Program
The ALTANA Investment Program is an employee share ownership
plan that we first launched in 2000. In 2001, 2002, 2003, 2004
and 2005, we launched new editions of the plan. Participation in
the plan is open to employees who are not eligible to
participate in any of our stock option plans, subject to certain
conditions. Each plan consists of two components. The first
component entitles participants to purchase a specific number of
shares based on their salary or wages at a fixed price per share
that corresponds to the lowest market price of our shares on the
Frankfurt Stock Exchange on the date at which our management
board approves the relevant plan edition. Plan participants are
entitled to a discount on a portion of the shares that they
purchase. Employees who are unable to receive shares for reasons
of statutory law are paid the cash equivalent of the benefit
that they would otherwise have received. Under the second
component, participants receive one stock appreciation right
(SAR) for each share that they purchase. The SARs
become exercisable two years after the date of grant and entitle
their holders to receive cash in an amount equal to the
difference between a predetermined exercise price and the market
price of our shares on the date on which the SARs are exercised.
The SARs expire two years after the date they first become
exercisable and, if not previously exercised and in the money,
are deemed exercised on such date. If a participant sells shares
purchased under the plan during the lock-up period, he or she
must repay the subsidy and forfeits the SARs received. At
December 31, 2005, our employees held 496,892 SARs under
the four share ownership plans, of which 238.231 SARs were
exercisable.
Profit-sharing Certificates
From 1980 to 2000, we issued profit-sharing certificates
(Genussscheine) to our German employees. Holders of these
certificates are entitled to receive interest at a rate equal to
the higher of the dividend rate on our shares in any given year
and 7% of the certificates face value. At
December 31, 2005, 311,174 profit sharing certificates with
a nominal value of
25.60 per profit sharing certificate were
outstanding.
- 93 -
ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
The table below identifies all persons who, to our knowledge,
beneficially owned more than 5% of our shares as of
March 15, 2006. Under German law, our shareholders are
required to notify us in case their holdings reach or fall below
certain thresholds, and the information presented in the table
is based on notifications that we have received. Since our
shares are in bearer form, however, we are unable to determine
precisely how many shareholders we have at any given point and
how many shares a particular shareholder owns. For more
information on these notification requirements, see
Item 10: Additional Information Articles
of Association and Relevant Provisions of German Law.
|
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Name |
|
Number of shares owned | |
|
Ownership interest | |
|
|
| |
|
| |
|
|
|
|
of issued shares | |
|
of outstanding shares | |
Susanne Klatten
|
|
|
70,332,974 |
|
|
|
50.1% |
|
|
|
51.8% |
|
Except as set forth in the table, we are not aware of any
holders of more than 5% of our shares. Nor are we aware of any
significant changes in the percentage ownership of our major
shareholder over the course of the past three years. To our
knowledge, no arrangements are currently in place that could
lead to a change of control of our company.
Ms. Klatten is the beneficial owner of the majority of our
share capital. Ms. Klattens share ownership could
discourage third parties from initiating merger, takeover or
other change of control transactions. As the owner of the
majority of our shares, Ms. Klatten has the ability to
control the outcome of all matters requiring the approval of a
majority of our shareholders, including the election and removal
of members of our supervisory board.
Related Party Transactions
The Herbert Quandt Foundation is a not-for-profit charitable
endowment established in 1980. The endowment promotes scientific
and cultural research activities. Ms. Klatten, the second
deputy chairwoman of our supervisory board, is chairwoman of the
board of counselors of the endowment, and Dr. Nikolaus
Schweickart, the chairman of our management board and chief
executive officer of our company, serves as the chairman of the
endowments management board.
Ms. Klatten is also a shareholder and member of the
supervisory board of Bayerische Motoren Werke AG
(BMW). In recent years, we purchased company cars
from BMW. These transactions are immaterial both to us and to
BMW and are carried out at customary arms length terms and
conditions.
For information on balances between us and our affiliated and
associated companies as of December 31, 2005, see
Note 27 to our consolidated financial statements.
- 94 -
ITEM 8: FINANCIAL INFORMATION
Consolidated Financial Statements and Other Financial
Information
See Item 18: Financial Statements.
Legal Proceedings
See Item 4: Information on the Company
Legal Proceedings.
Dividend Policy
Our management and supervisory boards may, based on our annual
financial statements, propose the payment of dividends to our
shareholders. Our shareholders vote on these proposals at the
annual shareholders meeting, which is usually convened
during the second quarter of each year. See Item 10:
Additional Information Articles of Association and
Relevant Provisions of German Law Rights,
Preferences and Restrictions Attaching to Our Shares
Dividend rights for further information. We expect to
continue to pay dividends in the future, although there can be
no assurance as to the exact amounts, if any, that we may pay in
any given period. The payment of future dividends will depend on
our results of operations and financial condition. See
Item 5: Operating and Financial Review and
Prospects. Our management board intends to submit a
proposal for a dividend of
1.10 for 2005 to the annual general meeting to be
held on May 2, 2006.
- 95 -
ITEM 9: THE OFFER AND LISTING
Our ordinary shares are in bearer form and have no par value.
Each of our ordinary shares has a notional value of
1.00. The principal trading market for our ordinary
shares is the Frankfurt Stock Exchange. In addition, our
ordinary shares are traded on the stock exchanges of
Berlin-Bremen, Dusseldorf, Hamburg, Hanover, Munich and
Stuttgart. Our American Depositary Shares (ADSs),
each representing one ordinary share, are listed on the New York
Stock Exchange (NYSE). For more information on our
shares, see Item 10: Additional
Information Articles of Association and Relevant
Provisions of German Law Rights, Preferences and
Restrictions Attaching to Our Shares.
Based on turnover statistics supplied by Bloomberg, the average
daily volume of our shares traded on the Frankfurt Stock
Exchange was 596,899 in 2003, 564,955 in 2004 and 743,671 in
2005. The average daily volume of shares traded on all German
stock markets was 616,318 in 2003, 582,689 in 2004 and 775,165
in 2005.
Market Price Information
The tables below set forth, for the periods indicated, the high
and low closing sales prices for our shares on the Xetra trading
system of the Frankfurt Stock Exchange.
Trading on the Frankfurt Stock Exchange
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|
Year |
|
High | |
|
Low | |
|
|
| |
|
| |
|
|
() | |
2001
|
|
|
58.99 |
|
|
|
34.33 |
|
2002
|
|
|
64.60 |
|
|
|
36.66 |
|
2003
|
|
|
59.39 |
|
|
|
35.49 |
|
2004
|
|
|
53.84 |
|
|
|
39.61 |
|
2005
|
|
|
53.58 |
|
|
|
39.90 |
|
|
|
|
|
|
|
|
|
|
Year |
|
High | |
|
Low | |
|
|
| |
|
| |
|
|
() | |
2004
|
|
|
|
|
|
|
|
|
January through March
|
|
|
53.71 |
|
|
|
45.20 |
|
April through June
|
|
|
53.84 |
|
|
|
49.23 |
|
July through September
|
|
|
49.25 |
|
|
|
42.45 |
|
October through December
|
|
|
48.22 |
|
|
|
39.61 |
|
|
|
|
|
|
|
|
|
|
Year |
|
High | |
|
Low | |
|
|
| |
|
| |
|
|
() | |
2005
|
|
|
|
|
|
|
|
|
January through March
|
|
|
49.19 |
|
|
|
43.59 |
|
April through June
|
|
|
53.58 |
|
|
|
46.04 |
|
July through September
|
|
|
47.19 |
|
|
|
39.90 |
|
October through December
|
|
|
48.25 |
|
|
|
44.70 |
|
- 96 -
|
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|
|
Month |
|
High | |
|
Low | |
|
|
| |
|
| |
|
|
() | |
October 2005
|
|
|
47.36 |
|
|
|
45.00 |
|
November 2005
|
|
|
48.25 |
|
|
|
44.70 |
|
December 2005
|
|
|
46.22 |
|
|
|
44.90 |
|
January 2006
|
|
|
46.53 |
|
|
|
43.70 |
|
February 2006
|
|
|
45.69 |
|
|
|
44.87 |
|
Official trading of our ADSs commenced on May 22, 2002. The
tables below set forth, for the periods indicated, the high and
low closing sale prices for our ADSs on the New York Stock
Exchange:
Trading on the New York Stock Exchange
|
|
|
|
|
|
|
|
|
Year |
|
High | |
|
Low | |
|
|
| |
|
| |
|
|
($) | |
2003
|
|
|
69.65 |
|
|
|
38.75 |
|
2004
|
|
|
65.90 |
|
|
|
50.53 |
|
2005
|
|
|
68.85 |
|
|
|
48.05 |
|
|
|
|
|
|
|
|
|
|
Year |
|
High | |
|
Low | |
|
|
| |
|
| |
|
|
($) | |
2004
|
|
|
|
|
|
|
|
|
January through March
|
|
|
65.90 |
|
|
|
56.70 |
|
April through June
|
|
|
65.35 |
|
|
|
59.53 |
|
July through September
|
|
|
60.50 |
|
|
|
52.25 |
|
October through December
|
|
|
63.45 |
|
|
|
50.53 |
|
2005
|
|
|
|
|
|
|
|
|
January through March
|
|
|
65.57 |
|
|
|
56.40 |
|
April through June
|
|
|
68.85 |
|
|
|
56.98 |
|
July through September
|
|
|
58.85 |
|
|
|
48.05 |
|
October through December
|
|
|
57.94 |
|
|
|
52.36 |
|
|
|
|
|
|
|
|
|
|
Month |
|
High | |
|
Low | |
|
|
| |
|
| |
|
|
($) | |
October 2005
|
|
|
57.01 |
|
|
|
54.02 |
|
November 2005
|
|
|
57.94 |
|
|
|
52.36 |
|
December 2005
|
|
|
55.55 |
|
|
|
52.60 |
|
January 2006
|
|
|
56.30 |
|
|
|
53.99 |
|
February 2006
|
|
|
54.89 |
|
|
|
53.26 |
|
Trading on the Frankfurt Stock Exchange
The Frankfurt Stock Exchange, which is operated by the Deutsche
Börse AG, is the most significant of the eight German stock
exchanges. The Frankfurt Stock Exchange, including the Xetra
trading system described below, accounted for approximately
89.9% of the turnover in exchange-traded shares in Germany in
2005. As of December 31, 2005, the shares of 6,823
companies traded on the official, regulated and unregulated
markets of the Frankfurt Stock Exchange. Of these, 835 were
German companies and 5,988 were foreign companies.
Trading on the floor of the Frankfurt Stock Exchange begins
every business day at 9:00 a.m. and ends at 8:00 p.m.,
Central European Time. Securities listed on the Frankfurt Stock
Exchange are generally traded in the auction market, but also
change hands in interbank dealer markets. Prices are noted by
publicly
- 97 -
commissioned stockbrokers who are members of the Frankfurt Stock
Exchange but who do not, as a rule, deal with the public. The
prices of actively traded securities, including the shares of
large corporations, are continuously quoted during trading
hours. For all securities, a fixed price is established around
mid-session on each day on which the Frankfurt Stock Exchange is
open for business. Deutsche Börse publishes an official
daily list of quotations (Amtliches Kursblatt) containing
the fixed prices (Einheitskurse) as well as the yearly
high and low prices for all traded securities. The list is
available on the Internet at http://www.exchange.de under the
heading Market Data.
Our shares are traded on Xetra (Exchange Electronic Trading) in
addition to being traded on the auction market. Xetra is
available daily from 9:00 a.m. to 5:30 p.m. Central
European Time to brokers and banks that have been admitted to
Xetra by the Frankfurt Stock Exchange. Securities traded through
this system include liquid stocks, warrants and bonds traded on
the floor of the Frankfurt Stock Exchange. There have been no
significant trading suspensions with respect to our shares in
the past three years.
Transactions on the Frankfurt Stock Exchange (including
transactions through the Xetra system) are settled on the second
business day following the day on which the trade takes place.
Transactions off the Frankfurt Stock Exchange (which may occur
for large trades or if one of the parties is foreign) are
generally also settled on the second business day following the
trade, although a different period may be agreed by the parties.
Under standard terms and conditions for securities transactions
employed by German banks, customers orders for listed
securities must be executed on a stock exchange unless the
customer gives specific instructions to the contrary.
Trading activities on the German stock exchanges are monitored
by the Federal Financial Supervisory Authority (Bundesanstalt
für Finanzdienstleistungsaufsicht). A quotation can be
suspended by the Frankfurt Stock Exchange if orderly trading is
temporarily endangered or a suspension is deemed to be necessary
to protect the public at large.
- 98 -
ITEM 10: ADDITIONAL INFORMATION
Articles of Association and Relevant Provisions of German
Law
This section summarizes the material provisions of our articles
of association and German law to the extent that they affect the
rights of our shareholders. The information set forth below is
only a summary and does not provide a complete description of
all relevant provisions.
Organization
We are a stock corporation organized in the Federal Republic of
Germany under the German Stock Corporation Act
(Aktiengesetz). We are registered in the commercial
register (Handelsregister) maintained by the local court
(Amtsgericht) in Bad Homburg, Germany, under the docket
number HRB 1933. Copies of our articles of association may be
obtained from the commercial register. In addition, an English
translation is available from the U.S. Securities and
Exchange Commission.
Corporate Governance
Overview of the corporate governance system in
Germany
In contrast to corporations organized under the laws of the
United States, German stock corporations are governed by three
separate bodies: the shareholders meeting, the supervisory
board and the management board. Their respective roles and
responsibilities are defined by German law and the
corporations articles of association (Satzung) and
may be summarized as follows:
A corporations shareholders meeting discharges the
actions of the corporations supervisory and management
boards. It determines the amount of the annual dividend, the
appointment of an independent auditor and certain significant
corporate transactions. It also elects the members of the
supervisory board. Under the concept of co-determination
(unternehmerische Mitbestimmung), in corporations with
more than 2,000 German employees, the shareholders and employees
based in Germany elect an equal number of members of the
supervisory board. The law requires that an annual general
meeting of shareholders be held during the first eight months of
a fiscal year.
The supervisory board appoints and removes the members of the
management board and oversees the management of the corporation.
Although prior approval by the supervisory board may be required
in connection with certain corporate matters, the law normally
does not entitle the supervisory board to make management
decisions.
The management board manages the business of the corporation and
represents it in dealings with third parties. The management
board regularly submits reports to the supervisory board about
the corporations operations and business strategies, and
prepares special reports upon request. No one may serve
simultaneously on the management and supervisory boards of the
same corporation, subject to a limited exception not currently
applicable to us.
In February 2002, a commission appointed by the government of
the Federal Republic of Germany promulgated the German Corporate
Governance Code, which contains a set of best-practice
guidelines of corporate governance for companies listed on a
stock exchange in Germany, which are referred to below as
covered companies. The German Corporate Governance Code was
updated in May 2003 and June 2005. The full text of the German
Corporate Governance Code, including an English convenience
translation, is available at
http://www.corporate-governance-code.de. In addition to
restating provisions of the German Stock Corporation Act, the
German Corporate Governance Code contains approximately 60
recommendations that reflect widely recognized and
well-established standards of corporate governance and more than
10 suggestions for sound and responsible
management and supervision.
Topics covered by the recommendations and suggestions include
|
|
|
|
|
Responsibilities of the shareholders meeting; |
- 99 -
|
|
|
|
|
Responsibilities, composition and compensation of the management
board, as well as procedures for the handling of conflicts of
interest; |
|
|
|
Responsibilities, composition and compensation of the
supervisory board and its chairman, responsibilities and
composition of committees, as well as procedures for the
handling of conflicts of interest; |
|
|
|
Relationship between the management board and the supervisory
board; |
|
|
|
Transparency and disclosure in periodic reports; and |
|
|
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Reporting and auditing of annual financial statements. |
Compliance with the German Corporate Governance Code is
voluntary. Section 161 of the German Stock Corporation Act,
however, requires that the management board and supervisory
board of a covered company annually declare that the
recommendations set forth in the German Corporate Governance
Code have been complied with, or which recommendations have not
been complied with. In addition, the management board and
supervisory board are required to annually declare whether the
company is going to comply with the recommendations or which
recommendations it is not going to comply with. On
November 24, 2005, our management board and supervisory
board have declared that we have fully complied with all of the
recommendations in the German Corporate Governance Code in the
version of May 2003 and are going to fully comply with all of
the recommendations set forth in the German Corporate Governance
Code in the version of June 2005. Some of the new
recommendations, for example, the publication of a corporate
governance report and the individual election of our supervisory
board members, can only be complied with by our annual report
for 2005 and our general shareholders meeting to be held
on May 2, 2006. Our management board and supervisory board
are not required to declare whether we also comply with the
suggestions contained in the German Corporate Governance Code.
However, we follow all of these suggestions voluntarily.
Summary of significant differences between German
corporate governance practices and the New York Stock Exchange,
Inc.s (NYSEs) corporate governance
standards
The following paragraphs provide a brief, general summary of
significant differences between the corporate governance
practices followed by us as a German company, and those required
by the listing standards of the NYSE of U.S. companies that
have common stock listed on the NYSE. The NYSE listing standards
are available on the NYSEs website at http://www.nyse.com.
Composition of board of directors; independence; conflicts of
interest. The NYSE listing standards provide that the board
of directors of a U.S. listed company must consist of a
majority of independent directors and that certain committees
must consist solely of independent directors. A director
qualifies as independent only if the board affirmatively
determines that the director has no material relationship with
the company, either directly or indirectly. In addition, the
listing standards enumerate a number of relationships which
preclude independence, including employment of the director by
the company, or employment of an immediate family member of the
director as an executive officer by the company. The listing
standards do not specifically deal with the avoidance of
conflicts of interest and related party transactions. These
matters are typically governed by the laws of the state in which
the listed company is incorporated. Moreover, the absence of
such rules reflects the NYSEs belief that the oversight of
related party transactions is best left to the companys
discretion.
There is no requirement under German law that the members of our
management board must be independent. Instead, the focus of the
independence requirements is on the supervisory board. Although
German law does not explicitly require that our supervisory
board members must be independent, a certain degree of
independence of our supervisory board members is assured by the
fact that, subject to a limited exception currently not
applicable to us, no person may concurrently serve on the
management board and the supervisory board of the same company.
See Item 6: Directors, Senior Management and
Employees Overview and Item 6:
Directors, Senior Management and Employees
Supervisory Board for more information on our practice. In
addition, the German Corporate Governance Code recommends that
proposals
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for the election of supervisory board members of covered
companies, such as ourselves, make sure that, at any time, a
sufficient number of the supervisory board are independent,
i.e., do not entertain personal or business relations
with the company or the companys management board that
would lead to a conflict of interests. Under the German concept
of co-determination five out of the six employee representatives
on our supervisory board are employees of our company or one of
our domestic subsidiaries.
Furthermore, German law and the German Corporate Governance Code
establish a number of principles of general applicability
designed to strengthen the independence of supervisory board
members, and, with respect to both management board and
supervisory board members, to avoid conflicts of interest and to
establish procedures and standards for related party
transactions. Specifically, German law subjects loans from us to
members of our management board or supervisory board and their
close family members to the supervisory boards approval.
In addition, the German Corporate Governance Code recommends,
and, where indicated, the charters of our management board and
supervisory board provide, that:
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Our supervisory board should not include more than two former
members of our management board; |
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No supervisory board member should serve on a governing body of,
or provide consulting services to, a major competitor of us; |
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When making business decisions for us, our supervisory board
members may not pursue personal interests or exploit business
opportunities that belong to us; |
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Advisory and other service contracts between us and members of
our supervisory board should be entered into only with our
supervisory boards approval; |
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The members of our management and supervisory boards should
disclose conflicts of interest; a similar obligation is
stipulated in the charters of our management and supervisory
boards; |
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The members of our management board should not, during the term
of their office (1) compete with us, (2) in connection
with their office, demand or accept special benefits or grant
unjustified benefits to third parties, or (3) when making
business decisions on our behalf, pursue personal interests or
exploit business opportunities that belong to us; |
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All transactions between us on the one hand and the members of
our management board and persons and companies closely related
to them on the other hand should be entered into on market terms
and conditions; the charter of our management board provides
that such transactions, if material, require the supervisory
boards approval; and |
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The members of our management board should not engage in
side-line activities outside the company, including the
assumption of seats on the governing bodies of other companies,
without the supervisory boards approval; the charter of
our management board contains a similar provision. |
Committees. The NYSE listing standards require that a
U.S. listed company must have an audit committee, a
nominating/corporate governance committee and a compensation
committee. Each of these committees must consist solely of
independent directors and must have a written charter that
addresses certain matters specified in the listing standards. In
addition, the NYSE listing standards contain detailed
requirements for the audit committees of U.S. listed
companies. Since July 31, 2005, some but not all of these
requirements also apply to non-U.S. listed companies, such
as ourselves. However, the NYSE listing standards do not require
that non-U.S. listed companies, such as ourselves, have an
audit committee.
Under German law, the only committee required by law is the
mediation committee, which is a supervisory board committee that
must be formed in all companies subject to the principle of
co-determination. Our mediation committee consists of the
chairman of the supervisory board, the first deputy chairman,
one shareholder representative and one employee representative.
The committee convenes when the supervisory board as a whole is
unable to reach the required supermajority of votes for the
appointment or removal of members of the management board.
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In addition, the German Corporate Governance Code recommends
that covered companies, such as ourselves, form additional
committees at the supervisory board level depending on, among
other things, the number of supervisory board members.
Specifically, the German Corporate Governance Code recommends
that covered companies, such as ourselves, should have an audit
committee that is responsible for, among other things, questions
of accounting and risk management, ensuring the independence of
the companys auditor, engaging the auditor for the audit
of the companys financial statements, determining the
focus of the audit, and agreeing the audit fees. In addition, it
suggests that specific issues, such as the companys
strategy, the remuneration of the members of the management
board, and investment and financing questions, may be delegated
to committees. Moreover, the German Corporate Governance Code
recommends that the chairman of the audit committee should have
specialist knowledge and experience in the application of
accounting principles and internal control processes. Our
supervisory board has established an audit committee and a
remuneration committee. Each of these committees includes four
members of our supervisory board, two of which are employee
representatives.
The audit committee responsibilities stipulated in the charters
of our supervisory board and of our audit committee are in line
with the recommendations of the German Corporate Governance
Code. Although the audit committee related provisions of the
German Corporate Governance Code are less detailed than those
contained in the NYSE listing standards, the NYSE listing
standards and the German Corporate Governance Code share the
goal of establishing a system for overseeing the companys
accounting that is independent from management and of ensuring
the auditors independence. As a result, they both address
similar topics, and there is some overlap.
One structural difference between the legal status of the audit
committee of a U.S. listed company and our audit committee
concerns the degree of the committees involvement in
managing the relationship between the company and its auditor.
While the NYSE listing standards require that the audit
committee of a U.S. listed company must have direct
responsibility for the appointment, compensation, retention, and
oversight of the work of the auditor, under German law, this
responsibility is shared between our shareholders meeting
and our supervisory board. Our shareholders meeting is
responsible for electing our auditor (in doing so, it may rely
on proposals submitted to it by our supervisory board and, if an
audit committee exists, the audit committee). Under certain
circumstances, a court could, upon a motion by our management
board, our supervisory board or a minority of our shareholders
remove our auditor and replace it with another auditor. Our
supervisory board is responsible for engaging the auditor,
setting the terms of the engagement and administering the
engagement on a day-to-day basis. As discussed above, our
supervisory board has delegated these responsibilities to our
audit committee.
Our remuneration committee negotiates management service
agreements with the members of our management board and
determines, among other things, whether to approve side-line
activities of members of our management board outside the
company, including the assumption of seats on the governing
bodies of other companies.
We are in compliance with the committee requirements under
German law. For more information, see Overview
of the corporate governance system in Germany and
Item 6: Directors, Senior Management and
Employees Supervisory Board.
Disclosure regarding corporate governance. The NYSE
listing standards require U.S. listed companies to adopt,
and post on their websites, a set of corporate governance
guidelines. The guidelines must address, among other things:
director qualification standards, director responsibilities,
director access to management and independent advisers, director
compensation, director orientation and continuing education,
management succession, and the boards annual performance
evaluation of itself. In addition, the CEO of a U.S. listed
company must certify to the NYSE annually that he or she is not
aware of any violations by the company of the NYSEs
corporate governance listing standards. The certification must
be disclosed in the companys annual report to shareholders.
Under German law, as discussed, our management and supervisory
boards are required to declare annually either that they have
complied, and are going to comply, with the recommendations set
forth in the German Corporate Governance Code or, alternatively,
which recommendations they have not complied, or are
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not going to comply, with. German law requires that we make this
declaration permanently accessible to our shareholders. Our
current declaration dated November 24, 2005 is posted on
our website. For more information on our compliance with the
German Corporate Governance Code, see Overview
of the corporate governance system in Germany.
Code of business conduct and ethics. The NYSE listing
standards require each U.S. listed company to adopt, and
post on its website, a code of business conduct and ethics for
its directors, officers and employees. There is no similar
requirement under German law or the German Corporate Governance
Code. However, under the SECs rules and regulations, all
companies required to submit periodic reports to the SEC,
including ourselves, must disclose in their annual reports
whether they have adopted a code of ethics for their senior
financial officers. In addition, they must file a copy of the
code with the SEC, post the text of the code on their website or
undertake to provide a copy upon request to any person without
charge. There is significant, though not complete, overlap
between the code of business conduct and ethics required by the
NYSE listing standards and the code of ethics for senior
financial officers required by the SECs rules. Both our
Code of Conduct and our Code of Ethics
are available on our website at http://www.altana.com. See
Item 16B: Code of Ethics for information on our
code of ethics.
Objects and Purposes
The objects and purposes of our company are to found or to
acquire and to hold directly or indirectly equity interests in
commercial enterprises, particularly enterprises that are active
in the manufacture and marketing of pharmaceutical, dietetic or
chemical products and reagents as well as testing and measuring
instruments. Our articles of association authorize us to take
all measures incident to these purposes.
Directors
The members of our management and supervisory boards owe duties
of loyalty and care to our company. Pursuant to these duties,
each of our board members is required to act in our
companys best interest. In fulfilling their duties, our
board members are required to exercise the standard of care of a
prudent and diligent businessperson and, if their actions are
contested, bear the burden of proof that they have done so. The
relevant standard is not customary but
necessary diligence, which is an objective test that
does not depend on the subjective knowledge and abilities of any
particular board member. In fulfilling their duties, both boards
are required to observe the interests of our shareholders,
employees, creditors and, to some extent, the public interest.
Board members who violate their duties are jointly and severally
liable to our company for any monetary damage that their
violations have caused unless they acted pursuant to a lawful
resolution of our shareholders meeting passed with a
simple majority of the votes cast. Under German law, however, a
business judgment rule applies. If a member of our management or
supervisory board made a business decision and he or she
reasonably believed that this decision was based on adequate
information and in the companys best interest he or she
will not be liable. As a general rule, only we, but not
individual shareholders, may bring an action against a board
member who defaults on his or her fiduciary duties. In special
circumstances, however, our shareholders may appeal to the court
for assistance. See Rights, Preferences and
Restrictions Attaching to our Shares for more information
on individual shareholders ability to institute a legal
action against our board members.
Board members may typically not vote on matters in which they
have an interest.
There is no mandatory legal retirement age and no share
ownership requirement for the members of either of our boards.
However, the rules of procedure of our supervisory board provide
that the term of office of a supervisory board member ends at
the latest upon the close of the first shareholders
meeting following that members 70th birthday.
Historically, the members of our management board have retired
on or before their 65th birthday.
See Item 6: Directors, Senior Management and
Employees for additional information about the members of
our supervisory and management boards.
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Rights, Preferences and Restrictions Attaching to our
Shares
Information rights
The principal means by which our shareholders may obtain
information on our company is through our audited annual
financial statements (Jahresabschluss), a report prepared
by our management board discussing these financial statements,
certain risk factors and business trends (Lagebericht), a
report by our supervisory board and a recommendation by our
management board regarding the distribution of our earnings. We
are required to make these materials available for inspection at
our principal offices starting on the date when the annual
shareholders meeting is convened. In addition, each
shareholder is entitled to receive a copy of the aforesaid
materials upon request.
Furthermore, each shareholder attending a shareholders
meeting is entitled to ask questions, which members of our
management board, who are required to attend the meeting, are
obliged to answer. The questions may cover any economic or
financial matters necessary to properly evaluate the items on
the agenda of the relevant shareholders meeting. By
contrast, our shareholders have no right to inspect the books
and records of our company. Under German law, the
shareholders meeting may resolve with majority of at least
75% of the share capital present at the meeting to authorize the
chairperson to set reasonable time limits for shareholders
asking question at the shareholders meeting.
Voting rights
Our shareholders vote at shareholders meetings. By
contrast, German corporate law does not allow shareholders to
approve matters by written consent. A shareholders meeting
may be called by either our management board or our supervisory
board. The annual general meeting of our shareholders is
required to take place within the first eight months of each
fiscal year. In addition, shareholders who in the aggregate hold
5% or more of our share capital may require our management board
to call an extraordinary shareholders meeting.
Shareholders holding shares with an aggregate nominal value of
at least
500,000 may require that particular items be placed
on the agenda of the shareholders meeting.
Under German law, we are required to publish a notice of each
ordinary or extraordinary shareholders meeting in the
electronic Federal Gazette (elektronischer
Bundesanzeiger) at least 30 days prior to the
registration deadline set by such notice. In order to be
entitled to participate in, and to vote at, shareholders
meetings, shareholders have to register in writing, by telefax
or in text form (including email) with us or with the
organization designated by us in the invitation. The
registration must be in German or English. Shareholders are also
required to prove their entitlement to participate at the
shareholders meeting and to exercise voting rights. For
that purpose, a statement in writing or in text form (including
email) by the bank where the shareholder has his or her
securities deposit account is required to confirm the ownership
of the shares as of the day twenty-one days preceding the
shareholders meeting occurs. Our articles of association
provide that our shareholders are no longer entitled to receive
share certificates.
At our shareholders meetings, each share carries one vote.
In certain cases, a shareholders right to cast a vote is
excluded. This rule applies, for example, to waivers or if we
assert claims against one of our shareholders. Resolutions are
normally passed with a simple majority of the votes cast at the
meeting. Under the German Stock Corporation Act, a number of
significant resolutions requires a vote with a majority of at
least 75% of the share capital present at the meeting. This 75%
majority requirement applies in the following instances:
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Amendments to our articles of association (except amendments
that would change the rights and obligations attaching to our
shares, which in addition require the approval of all
shareholders concerned); |
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Capital increases and decreases; |
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Exclusion of preemptive rights in connection with a capital
increase; |
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The creation of authorized or conditional capital and the issue
of convertible bonds and bonds with warrants attached; |
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The dissolution of our company; |
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Mergers or consolidations of our company with another company
and certain other corporate transformations; |
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Transfers of all or virtually all of our assets; and |
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The approval of domination, profit and loss transfer or similar
intercompany agreements. |
Dividend rights
We may declare and pay dividends only from our annual net
profits calculated on an unconsolidated basis in accordance with
German GAAP, as they are shown on our balance sheet. Our
shareholders participate in profit distributions in proportion
to the number of shares that they hold. The payment of dividends
requires a proposal by our management board and the approval of
that proposal by our supervisory board and our
shareholders meeting. We may not allocate more than half
of our companys annual surplus to reserves. In determining
the amount of net profits to be distributed as dividends,
however, our shareholders may allocate additional amounts to
reserves and may even decide to carry forward our annual net
income in part or in full.
Liquidation rights
In case we are liquidated, any liquidation proceeds remaining
after our liabilities have been paid off are distributed among
our shareholders in proportion to the number of shares held by
them.
Preemptive rights
Under the German Stock Corporation Act, our shareholders have
preemptive rights. Preemptive rights are preferential rights to
subscribe for issues of new shares in proportion to the number
of shares already held by the relevant shareholder. These rights
do not apply to shares issued out of our conditional capital or
if a capital increase has occurred and our shareholders have
waived their preemptive rights in connection with that increase.
Preemptive rights also apply to securities other than shares if
they may be converted into shares, such as options, securities
with warrants, profit-sharing certificates and other securities
with dividend rights. The German Stock Corporation Act allows
exclusions or restrictions of preemptive rights in connection
with capital increases only in limited circumstances and only in
the same shareholders resolution that authorizes the
capital increase: At least 75% of the share capital represented
at the shareholders meeting that is to approve a capital
increase has to vote for the exclusion or restriction of
preemptive rights in connection with that increase. In addition
to being approved by the shareholders meeting, any
exclusion or restriction of preemptive rights requires a
justification, which our management board has to set forth in a
written report to our shareholders. The justification requires
showing that our interest in excluding or restricting preemptive
rights outweighs the shareholders interest in exercising
these rights. If our management board increases our share
capital in accordance with our articles of association, it may,
for example, exclude preemptive rights:
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If the newly issued shares are issued against a contribution in
kind; |
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If the newly issued shares represent 10% or less of our existing
share capital at the time we register the authorized capital or
issue the new shares, and the issue price of the new shares is
not substantially less than the stock exchange price as defined
under German law; or |
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To the extent necessary to avoid fractional amounts that may
arise in the case of share issuances upon the exercise of
preemptive rights. |
Under German law, preemptive rights may be transferred
separately from the underlying shares and may be traded on any
of the German stock exchanges on which our shares are traded
until a certain number of days prior to the last date on which
the preemptive rights may be exercised.
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Derivative suits
Under German corporate law, individual shareholders are
generally not entitled to bring derivative actions on behalf of
or in the interest of our company in case a member of our
management or supervisory board violates his or her fiduciary
duties. A majority of the votes represented at a
shareholders meeting or a minority representing at least
10% of our companys share capital, however, may demand
that an action be brought by the management or the supervisory
board against a member who has allegedly violated his or her
duties. In addition, the shareholders meeting may, with a
simple majority of the votes cast, appoint special
representatives to bring an action. At the request of
shareholders representing at least 1% of our companys
share capital or shares with a nominal value of
100,000, a
court may allow those shareholders to pursue an action in their
own names and on behalf of the company upon the
shareholders showing that they, or their predecessors,
acquired the shares before the alleged violation became public,
that they demanded from the company to bring an action, that a
member of our management board or supervisory board acted with
gross negligence, and that their interest in pursuing a claim on
behalf of the company is not outweighed by the companys
interest in not doing so. In order to meet the thresholds
mentioned above shareholders intending to bring an action may
publish a notice in the so-called shareholders forum
(Aktionärsforum) in the electronic Federal Gazette
(elektronischer Bundesanzeiger).
Disclosure Requirements
Under Section 21 of the German Securities Trading Act
(Wertpapierhandelsgesetz), holders of voting securities
of German corporations admitted to official trading on a stock
exchange within the European Union or the European Economic Area
are obliged to notify promptly and in writing the company in
which they hold these securities as well as the German Federal
Financial Supervisory Authority 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 companys outstanding shares with voting rights.
If a shareholder fails to notify the company as required, he or
she is disqualified from exercising the voting rights associated
with the shares held by him or her for so long as the default
continues.
In July 2002 and October 2004, the German Securities Trading Act
was amended to require the reporting of dealings by certain
persons carrying managerial responsibilities and other persons
close to them. Members of the management and supervisory boards
and certain other executives with managerial responsibilities of
an issuer whose securities are admitted for trading on a German
stock exchange, or of an entity controlling the issuer, must
notify both the issuer and the German Federal Financial
Supervisory Authority of any acquisitions and sales of shares of
the issuer or related financial instruments. Transactions are
exempt from the notification obligations if the value of the
shares or related financial instruments acquired or sold does
not exceed in the aggregate
5,000 per
calendar year. This obligation also applies to certain relatives
of board members, such as spouses, registered life partners
(eingetragene Lebenspartner), dependent children and
other relatives who have been living in the same household for
at least one year. In addition, the issuer must publish on its
website all notifications it has received and keep them posted
for at least a period of one month. In July 2005, the German
Federal Financial Supervisory Authority published guidelines
regarding the interpretation of various provisions of the German
Securities Trading Act.
In addition, the German Takeover Act (Wertpapiererwerbs- und
Übernahmegesetz) provides that a person who has
acquired 30% or more of the voting rights of an issuer whose
securities are admitted for trading on a German stock exchange
is deemed to have gained control of the issuer and
is required to publish this fact and to launch a public tender
offer for the outstanding shares.
Share Repurchases
We may not repurchase our own shares unless so authorized by a
resolution duly adopted by our shareholders at a general meeting
or in other very limited circumstances set forth in the German
Stock Corporation Act, including for example in order to satisfy
obligations under employee participation plans, such as our
ALTANA Investment Plan. Any shareholders resolution that
authorizes us to repurchase shares may not be in effect for a
period longer than 18 months. The German Stock Corporation
Act limits share
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repurchases to 10% of our share capital. Any resale of
repurchased shares must be effected on a stock exchange or in a
manner that treats all shareholders equally, unless otherwise
approved by the shareholders meeting that authorized the
repurchase of the shares. On May 4, 2005, our
shareholders meeting authorized our management board to
repurchase up to 14,040,000 shares on or before October 31,
2006. Under this authorization, we may transfer repurchased
shares to third parties in connection with our acquisition of or
participation in a business. Moreover, repurchased shares may be
used to satisfy obligations under our various stock option plans
or as part of the supervisory board members compensation.
Anti-takeover Defenses
The German Takeover Act provides that, while a tender offer for
the shares of a company is underway, the companys
management board may not take any action that may have the
effect of thwarting the success of the tender offer. Certain
defenses, however, are permitted. In particular, the
companys management board may: (i) search for a
white knight (i.e., a third party that is
willing to make a tender offer for the shares);
(ii) perform any acts that a diligent and conscientious
manager would perform in the absence of a tender offer;
(iii) perform any acts that have been approved by the
companys supervisory board. In addition, the German
Takeover Act permits the shareholders meeting of the
company, provided no tender offer is currently underway, to
authorize the companys management board to take any
actions that may have the effect of frustrating the success of a
future tender offer, so long as the authorization is
sufficiently specific and falls within the competence of the
shareholders meeting. Any such authorization may remain in
effect for a maximum of 18 months. At the date of this
annual report, our shareholders have not authorized our
management board to take any actions that could delay or prevent
a tender offer for the shares of our company.
Material Contracts
On January 22, 1997, ALTANA Pharma AG (ALTANA
Pharma), formerly known as Byk Gulden Lomberg Chemische
Fabrik GmbH, a wholly owned subsidiary of ours, entered into a
License Agreement with Wyeth, Inc., which was then called
American Home Products, acting through its pharmaceuticals
division, which was then called Wyeth-Ayerst Laboratories
(WA). For a copy of the full text of the agreement,
see Exhibit 4.1 to this annual report.
Under the terms of the agreement, WA and ALTANA Pharma
originally collaborated in obtaining regulatory approval for
Pantoprazole from the U.S. Food and Drug Administration
(FDA), the costs of which were borne by WA.
The agreement also provided for the grant by ALTANA Pharma to WA
of an exclusive license under its patents and know-how relating
to Pantoprazole, which includes the right to carry out certain
manufacturing tasks with respect to semi-finished
Pantoprazole-based products supplied by ALTANA Pharma and to
distribute the resulting drugs, either alone or in combination
with other active ingredients, in the U.S. market as
ethical therapeutics. In addition, it granted WA an option to
license Pantoprazole for non-prescription purposes once the
period of exclusivity has expired. In return, WA agreed to use
commercially reasonable efforts to market the finished products
and to pay ALTANA Pharma a fixed percentage of WAs net
sales of these products, subject to a minimum price specified in
the agreement. The agreement defines net sales as the amount
billed by WA to third parties for sales of the products less
customary cash discounts, trade discounts, sales and other
excise taxes as well as allowances or credits to customers on
account of settlements of complaints and returns. The parties
further agreed that in September of each year, the consideration
payable from WA to ALTANA Pharma in the following year would be
adjusted in light of exchange rate movements between the
Deutsche Mark or its successor currency, the euro, on the one
hand, and the U.S. dollar, on the other hand. The amount of
the consideration is subject to adjustments in certain other
cases as well, for example, upon expiration of the substance
patent for Pantoprazole in the United States. In addition, WA
undertook not to compete with ALTANA Pharma during the term of
the agreement. WA is free, however, to market generic Omeprazole
in the United States after the expiry of the U.S. substance
patent for Omeprazole.
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The agreement initially runs for a term of 15 years from
the first commercial sale by WA of
Protonix®
or the expiration of the substance patent covering Pantoprazole,
whichever occurs later. Both parties may mutually agree to
extend the initial term of the agreement for successive
three-year periods. Each party has the right to terminate the
agreement, among other things, upon insolvency or
non-performance by the other party. In addition, WA has the
right to terminate the agreement, among other things, if there
is a final decision by the FDA preventing the use of
Pantoprazole by humans, if third parties initiate a patent
infringement suit against WA or ALTANA Pharma and, following the
fifth anniversary of the date of approval of the first product
based on Pantoprazole, upon one years prior written
notice. ALTANA Pharma in turn is entitled to terminate the
agreement, among other things, if WA fails to achieve certain
sales targets. If WA terminates the contract for a reason other
than ALTANA Pharma becoming insolvent or committing a material
breach of the agreement, it is required to transfer all of its
rights pertaining to Pantoprazole and to products based on this
substance, including any regulatory approvals that it has
obtained, to ALTANA Pharma.
In April 2003, we have entered into a co-promotion agreement
with Wyeth that allows us to co-promote
Protonix®
in the United States alongside Wyeth. For more information on
this co-promotion agreement, you should read Item 4:
Information on the Company
Pharmaceuticals Sales and Marketing.
Exchange Controls
At present, Germany does not restrict the transfer of capital
between Germany and other countries or persons except for
persons and entities associated with Osama bin Laden, the
Al-Qaeda network and the Taliban as well as certain other
countries and persons subject to embargoes. These restrictions
were established in accordance with resolutions adopted by the
United Nations and the European Union.
For statistical purposes, with some 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 in the aggregate
5 million
(or the equivalent in a foreign currency) in any calendar month.
Resident corporations and individuals are also required to
report annually to the German Central Bank any stakes of 10% or
more that they hold in corporations incorporated outside of
Germany with total assets of more than
3 million.
Corporations residing in Germany with assets in excess of
3 million must report annually to the German
Central Bank any stake of 10% or more in the company held by an
individual or a corporation located outside Germany.
Neither German law nor our Articles of Association restrict the
right of non-resident or foreign shareholders to hold or vote
their shares.
Taxation
German Taxation
The following discussion is a summary of the material German tax
consequences for beneficial owners of our shares or ADSs
(i) who are not German residents for German income tax
purposes (i.e., persons whose residence, habitual abode,
statutory seat or place of management and control is not located
in Germany) and (ii) whose shares do not form part of the
business property of a permanent establishment or fixed base in
Germany. Throughout this section we refer to these owners as
Non-German Holders. This summary is mainly based on
German tax laws, German double taxation treaties in line with
OECD standards and the U.S.-German Income Tax Treaty (the
Treaty) as they are in effect on the date hereof. In
these areas, the law may change and such changes may have
retroactive effect.
The following discussion does not purport to be a
comprehensive discussion of all German tax consequences that may
be relevant for Non-German Holders. You should consult your tax
advisors about the tax consequences of the purchase, holding,
disposal, gratuitous transfer and bequest of our
- 108 -
shares or ADSs and the rules for obtaining a possible refund
of German withholding tax paid (Kapitalertragsteuer).
Taxation of our company in Germany
German corporations are generally subject to German corporate
income tax (Körperschaftsteuer) at a rate of 25%
plus a 5.5% solidarity surcharge
(Solidaritätszuschlag) thereon. Accordingly, the
corporate income tax and the solidarity surcharge amount to
26.375% in the aggregate. For fiscal 2003 only, the corporate
income tax rate was increased from 25% to 26.5%, so that for
fiscal 2003 the corporate income tax and the solidarity
surcharge amounted to 27.958% in the aggregate.
German corporations are also subject to trade tax
(Gewerbesteuer). The trade tax rate depends on the
municipalities in which the corporation maintains business
establishments. The trade tax is deductible as a business
expense for corporate income tax and trade tax purposes.
Effective January 1, 2004, the deduction of loss carry
forwards exceeding the amount of
1 million is limited to 60% of the annual
taxable income for corporate income and trade tax purposes.
Unused loss carry forwards can be carried forward indefinitely,
and may be used to offset future taxable income, subject to the
minimum taxation described in the preceding sentence.
Taxation of investors
Investors are subject to German tax, in particular, in
connection with their ownership of shares (taxation of
dividends), their disposal of shares (taxation of capital gains)
and their gratuitous transfer of shares (inheritance and gift
tax).
Taxation of dividends
German corporate tax law generally provides for an exemption for
inter-corporate dividends received by a German resident
corporate shareholder. For dividend income received in tax years
beginning after December 31, 2003, 5% of tax exempt
dividend income received from both resident and non resident
corporations, is deemed to be a non deductible expense and is
therefore taxed. Corporate Non-German Holders are generally
taxed as described in the preceding sentence. Individual
Non-German Holders must generally recognize 50% of the dividends
as taxable income. However, an applicable double taxation treaty
may provide a tax exemption for the dividends received by
corporate and individual Non-German Holders and assign the right
to levy taxes on the dividends to the country of residence.
Irrespective of such assignment of taxation rights, German
withholding tax might be levied.
Withholding Tax. According to German domestic tax law, we
must withhold taxes on the gross dividend at a rate of 20% plus
solidarity surcharge on such withholding tax at a rate of 5.5%
resulting in a total withholding from dividends of 21.1%. Under
certain conditions no withholding tax is levied for corporate
investors resident in another EU member state that are eligible
for the participation exemption under the EU Parent-Subsidiary
Directive.
Dividend payments to Non-German Holders are subject to a reduced
withholding tax rate under most double taxation treaties. The
reduced withholding tax rate according to OECD standards
generally amounts to 15%. The reduction is granted by way of a
refund of the excess of the amount of tax withheld (including
the solidarity surcharge) over the applicable treaty rate
(generally 15%). To receive this refund, an investor must apply
to the German Federal Office of Finance (Bundesamt für
Finanzen, Friedhofstrasse 1, 53225 Bonn, Germany;
http://www.bff-online.de). Refund forms can be obtained from the
German Federal Office of Finance as well as at German embassies
and consulates.
Special tax rules for U.S. holders. Under the
Treaty, the withholding tax rate is reduced to 15% of the gross
amount of the dividends.
According to German domestic tax law, our dividends are subject
to a 20% withholding tax plus a solidarity surcharge of 5.5% on
the withholding tax, resulting in an aggregate withholding of
21.1% of the
- 109 -
gross dividend. Applying the Treaty, eligible U.S. holders
are entitled to receive a payment from the German tax
authorities equal to 6.1% of the gross dividend. Accordingly,
for a gross dividend of 100, an eligible U.S. holder
initially will receive 78.9 (100 minus the 21.1% withholding
tax). The eligible U.S. holder is then entitled to a refund
from the German tax authorities of 6.1 and will, as a result,
effectively receive a total of 85 (i.e., 85% of the gross
dividend). Thus, the eligible U.S. holder will be deemed to
have received a dividend of 100, subject to German withholding
tax of 15.
Refund procedure for U.S. holders. For shares and
ADSs kept in custody with The Depository 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 dividend withholding tax and the solidarity
surcharge thereon on a trial basis. Under this procedure, The
Depository Trust Company may submit claims for refunds
payable to eligible U.S. holders under the Treaty
collectively to the German tax authorities on behalf of these
eligible U.S. holders. The German Federal Office of Finance
will pay the refund amounts on a preliminary basis to The
Depository Trust Company, which will redistribute these
amounts to the eligible U.S. holders according to the
regulations governing the procedure. The German Federal Office
of Finance may review whether the refund was made in accordance
with the law within four years after making the payment to The
Depository Trust Company. Details of this collective
procedure are available from The Depository Trust Company
at +1 212 855 2700 or
+44 20 7444 0000.
Individual claims for refunds may be made on a special German
form which must be filed with the German Federal Office of
Finance at the address noted above. Copies of this form may be
obtained from the German Federal Office of Finance at the same
address or from the Embassy of the Federal Republic of Germany,
4645 Reservoir Road, N.W., Washington, D.C.
200071998. Claims must be filed within a four-year period
from the end of the calendar year in which the dividend was
received.
As part of the individual refund claim, an eligible
U.S. holder must submit to the German tax authorities the
original bank voucher (or a certified copy thereof) issued by
the paying agent documenting the tax withheld, and an official
certification on IRS Form 6166 of its most recent United
States federal income tax return. IRS Form 6166 may be
obtained by filing a request with the Internal Revenue Service
Center in Philadelphia, Pennsylvania, Foreign Certification
Request, P.O. Box 16347, Philadelphia, PA 191140447.
Requests for certification must include the eligible
U.S. holders name, Social Security or Employer
Identification Number, tax return form number, and tax period
for which the certification is requested. Requests for
certifications can include a request to the Internal Revenue
Service to send the certification directly to the German tax
authorities. If no such request is made, the Internal Revenue
Service will send a certification on IRS Form 6166 to the
eligible U.S. holder, who then must submit this document
with his or her refund claim.
Taxation of capital gains
Capital gains realized on the disposition of shares or ADSs by a
Non-German Holder are subject to German income taxation if the
Non-German Holder or, in case of a gratuitous transfer, the
legal predecessor has held, directly or indirectly, at any time
during the five years preceding the disposition at least 1% of
our registered share capital. In the case of a corporate
Non-German Holder, capital gains realized in fiscal years
beginning after December 31, 2003 are generally tax exempt.
5% of the capital gains, however, are deemed to be
non-deductible expense and, thus, subject to corporate income
tax plus the solidarity surcharge. In the case of an individual
Non-German Holder, 50% of the capital gains are subject to
German tax.
Most double taxation treaties, however, provide for complete
exemption from German taxation in this respect and assign the
right to levy tax to the country of residence. U.S. holders
that qualify for benefits under the Treaty are exempt from
taxation in Germany on capital gains derived from the sale or
disposition of shares or ADSs.
- 110 -
Inheritance and gift tax
The transfer of shares by way of inheritance or gift is subject
to German inheritance and gift tax only if one of the following
circumstances applies:
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the testator, donor, heir, donee or any other beneficiary has
his or her residence or habitual abode in Germany at the time of
the transfer; |
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the testator, donor, heir, donee or any other beneficiary is a
citizen of Germany, is not a resident in Germany, but has not
been continuously outside of Germany for a period of more than
five years; or |
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the testator or donor, either alone or together with another
related party, held, directly or indirectly, at least 10% of our
share capital at the time of the inheritance or donation. |
The right of the German government to impose inheritance or gift
tax on a Non-German Holder may be further limited by an
applicable inheritance and estate tax treaty (such as the
U.S.-German Inheritances and Gifts Tax Treaty of
December 3, 1980).
Other German taxes
No German stock exchange transfer tax, value added tax or stamp
duty is levied on the acquisition, the sale or other disposition
of shares. Under certain circumstances an entrepreneur may opt
to have value added tax levied on a transaction involving the
disposition of shares, when such transaction is executed for the
enterprise of another entrepreneur. Net wealth tax
(Vermögensteuer) is, at present, not levied in
Germany.
U.S. Taxation
This section describes the material United States federal income
tax consequences of owning and disposing of shares or ADSs to
U.S. holders, as defined below. It applies to you only if
you hold your shares or ADSs as capital assets for tax purposes.
This section does not address all material tax consequences of
owning and disposing of shares or ADSs. It does not address
special classes of holders, some of whom may be subject to other
rules, including:
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tax-exempt entities, |
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certain insurance companies, |
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broker-dealers, |
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traders in securities that elect to mark to market, |
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investors liable for alternative minimum tax, |
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investors that actually or constructively own 10% or more of our
voting stock, |
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investors that hold shares or ADSs as part of a straddle or a
hedging or conversion transaction, or |
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investors whose functional currency is not the U.S. dollar. |
This section is based on 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. In addition,
this section is based in part upon the representations of The
Bank of New York, Inc., the depositary for the American
Depositary Receipt (or ADR) program, and the assumption that
each obligation in the deposit agreement and any related
agreement will be performed in accordance with its terms. Based
on this assumption, 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 ADRs. Exchanges
of shares for ADRs, and ADRs for shares, generally will not be
subject to United States federal income tax.
- 111 -
You are a U.S. holder if you are a beneficial
owner of shares or ADSs and you are for United States federal
income tax purposes:
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a citizen or resident of the United States, |
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a domestic corporation, |
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an estate whose income is subject to United States federal
income tax regardless of its source, or |
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a trust if a United States court can exercise primary
supervision over the trusts administration and one or more
United States persons are authorized to control all substantial
decisions of the trust. |
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 that you are
eligible for the benefits under the Treaty with respect to
income and gain from the shares or ADSs.
Taxation of dividends
Under the United States federal income tax laws and subject to
the passive foreign investment company rules discussed below, if
you are a U.S. holder, the gross amount of any dividend we
pay out of our current or accumulated earnings and profits (as
determined for United States federal income tax purposes) is
subject to United States federal income taxation. If you are a
non-corporate U.S. holder, dividends paid to you in taxable
years beginning before January 1, 2009 that constitute
qualified dividend income will be taxable to you at a maximum
tax rate of 15%, provided that you hold the shares or ADSs for
more than 60 days during the 121-day period beginning
60 days before the ex-dividend date and meet other holding
period requirements. Dividends we pay with respect to the shares
or ADSs generally will be qualified dividend income.
You must include any German tax withheld from the dividend
payment in this gross amount even though you do not in fact
receive it. You must include the dividend in income when you, in
the case of shares, or the depositary, in the case of ADSs,
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. 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 the date the dividend distribution
is includible 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 and will not be eligible
for the special tax rate applicable to qualified dividend
income. The gain or loss generally will be income or loss 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
non-taxable return of capital to the extent of your basis in the
shares or ADSs and thereafter as capital gain.
Subject to certain limitations, the German tax withheld in
accordance with the Treaty and paid over to Germany will be
creditable against your United States federal income tax
liability. Special rules apply in determining the foreign tax
credit limitation with respect to dividends that are subject to
the maximum 15% tax rate. To the extent a refund of the tax
withheld is available to you under German law or under the
Treaty, the amount of tax withheld that is refundable will not
be eligible for credit against your United States federal income
tax liability. See German Taxation Taxation of
dividends Refund procedure for
U.S. holders, above, for the procedures for obtaining
a tax refund. Dividends will likely be income from sources
outside the United States, but generally will be passive
income or financial services income, which is
treated separately from other types of income for purposes of
computing the foreign tax credit allowable to you.
- 112 -
Taxation of capital gains
Subject to the passive foreign investment company rules
discussed below, if you are a U.S. holder and you 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 that is recognized
before January 1, 2009 is generally taxed at a maximum rate
of 15% where the holder has a holding period greater than one
year. The gain or loss generally will be income or loss from
sources within the United States for foreign tax credit
limitation purposes.
Passive foreign investment company rules
We believe that our shares and ADSs should not be treated as
stock of a passive foreign investment company (PFIC)
for United States federal income tax purposes, but this
conclusion is a factual determination that is made annually and
thus may be subject to change. If we were to be treated as a
PFIC, unless a U.S. holder elects to be taxed annually on a
mark-to-market basis with respect to the shares or ADSs, gain
realized on the sale or other disposition of your shares or ADSs
would in general not be treated as capital gain. Instead, if you
are a U.S. holder, you would be treated as if you had
realized such gain and certain excess distributions
ratably over your holding period for the shares or ADSs and
would be taxed at the highest tax rate in effect for each such
year to which the gain was allocated, together with an interest
charge in respect of the tax attributable to each such year.
With certain exceptions, your shares or ADSs will be treated as
stock in a PFIC if we were a PFIC at any time during your
holding period in your shares or ADSs. In addition, dividends
that you receive from us will not be eligible for the special
tax rates applicable to qualified dividend income if we are
treated as a PFIC with respect to you either in the taxable year
of distribution or the preceding taxable year, but instead will
be taxable at rates applicable to ordinary income.
Documents on Display
We are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended. In accordance with
these requirements, we file reports and other information with
the Securities and Exchange Commission. These materials,
including this annual report and the exhibits thereto, may be
inspected and copied at the Commissions Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the materials may be obtained from the Public
Reference Room of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The public may
obtain information on the operation of the Commissions
Public Reference Room by calling the Commission in the United
States at 1-800-SEC-0330. Our Securities and Exchange Commission
filings made after November 4, 2002 are also available over
the Internet at the Securities and Exchange Commissions
website at http://www.sec.gov. In addition, material filed by us
may be inspected at the offices of the New York Stock Exchange
at 20 Broad Street, New York, New York 10005.
- 113 -
ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
We are exposed to market risks resulting from changes in foreign
currency exchange rates, interest rates and equity prices that
may adversely affect our results of operations and financial
condition. We seek to minimize these risks within the framework
of our regular operating and financial activities and, to the
extent we consider it appropriate, by using derivative
instruments.
Generally, each of our subsidiaries is responsible for managing
its own risks. Within each subsidiary, the responsibility is
centralized within a committee that determines that
subsidiarys general hedging strategy. Long-term hedging
transactions, however, are agreed with our group headquarters.
In 2003, we introduced a uniform hedging strategy for our main
currency exposures. Decisions taken by a subsidiarys
hedging committee are implemented by the respective
subsidiarys corporate treasury department. Corporate
treasury is responsible for assessing, consolidating and
managing the risk exposure through transactions with banks and
other international financial institutions. The management board
of each of our subsidiaries regularly receives updates on
decisions taken by the respective subsidiarys committee as
well as on the actions taken by corporate treasury to implement
these decisions. In most of our subsidiaries, liquidity reports
are prepared on a daily basis, and risk reports are made
available monthly. Consolidated risk reports for our
pharmaceuticals and chemicals divisions are compiled monthly.
Guidelines for risk assessment procedures and controls for the
use of derivative financial instruments are established on a
group-wide basis. These guidelines provide for a clear
segregation of duties with regard to execution on the one hand
and administration, accounting and controlling on the other.
Transaction Risk and Currency Risk Management
As a result of the global nature of our business, our
operations, our reported financial results and our cash flows
are exposed to risks associated with fluctuations in the
exchange rates of the euro, the U.S. dollar and other major
currencies. We are exposed to transaction risk whenever we
achieve revenues that are denominated in a currency other than
the currency in which we incur the costs associated with these
revenues. This risk exposure affects both our pharmaceuticals
and chemicals divisions. Each of our divisions revenues
are typically denominated in the currencies of the countries in
which these divisions sell their products, whereas their
manufacturing costs are partially denominated in euro. Cash
inflows and outflows of transactions are netted if they are
denominated in the same currency. Therefore, only the unmatched
amounts are subject to hedging transactions. Our exposure to
transaction and currency risk is essentially confined to our
overseas business, as transaction risk with respect to
currencies of participating EU member states was eliminated
following the introduction of the euro on January 1, 1999.
The principal derivative financial instruments that we use in
order to hedge foreign currency denominated assets, liabilities,
firm commitments and forecasted transactions are forward foreign
exchange contracts. In 2003, we complemented our hedging
strategy using currency options. We determine the maturity dates
of these forward contracts in light of our anticipated cash
flows.
As of December 31, 2003, 2004 and 2005, we were party to
forward foreign exchange contracts with nominal values of
444.6 million,
359.1 million
and
387.4 million,
respectively. The nominal value of our currency options at
December 31, 2004 and 2005 was
206.0 million
and
82.5 million, respectively.
We enter into derivative financial instruments denominated in
the currencies of the markets with respect to which we are
subject to transaction risk. The following table sets forth
information relating to our foreign currency exchange contracts
for 2003, 2004 and 2005. For the reasons stated above, only the
risks arising from the exchange rates of the major currencies,
for which we enter into foreign currency exchange contracts to
hedge our transaction risk, are listed.
- 114 -
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Effective | |
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hedge | |
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Market | |
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Year end | |
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2003 |
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rate(1) | |
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Change(2) | |
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average(3) | |
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Change(2) | |
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spot rate(3) | |
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Change(2) | |
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(%) | |
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(%) | |
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(%) | |
U.S. dollar
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1.099 |
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21.6 |
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1.128 |
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19.9 |
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1.263 |
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20.4 |
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British pound
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0.675 |
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9.7 |
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0.692 |
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10.0 |
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0.705 |
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8.3 |
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Japanese yen
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128.8 |
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12.7 |
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130.8 |
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10.8 |
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135.0 |
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8.6 |
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Effective | |
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hedge | |
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Market | |
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Year end | |
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2004 |
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rate(1) | |
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Change(2) | |
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average(3) | |
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Change(2) | |
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spot rate(3) | |
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Change(2) | |
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(%) | |
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(%) | |
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(%) | |
U.S. dollar
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1.192 |
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8.4 |
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1.242 |
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10.1 |
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1.362 |
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7.8 |
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British pound
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0.694 |
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2.8 |
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0.678 |
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(1.9 |
) |
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0.705 |
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0.0 |
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Japanese yen
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120.4 |
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(6.5 |
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134.4 |
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2.7 |
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139.6 |
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3.4 |
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Effective | |
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hedge | |
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Market | |
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Year end | |
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2005 |
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rate(1) | |
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Change(2) | |
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average(3) | |
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Change(2) | |
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spot rate(3) | |
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Change(2) | |
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| |
|
| |
|
| |
|
|
|
|
(%) | |
|
|
|
(%) | |
|
|
|
(%) | |
U.S. dollar
|
|
|
1.241 |
|
|
|
4.1 |
|
|
|
1.243 |
|
|
|
0.1 |
|
|
|
1.180 |
|
|
|
(13.4 |
) |
British pound
|
|
|
0.698 |
|
|
|
0.6 |
|
|
|
0.6839 |
|
|
|
0.8 |
|
|
|
0.6853 |
|
|
|
(2.8 |
) |
Japanese yen
|
|
|
133.5 |
|
|
|
10.9 |
|
|
|
136.9 |
|
|
|
1.9 |
|
|
|
138.9 |
|
|
|
(0.5 |
) |
|
|
(1) |
The effective rates set forth in the table represent the average
of all hedging transactions that matured during the periods
indicated. |
|
(2) |
The percentage changes indicate the differences between the
figures set forth in the respective column of each table and the
figures stated in the corresponding columns of the previous
years table. |
|
(3) |
The rates for the foreign currencies shown are consistent with
the rates used for the preparation of ALTANA Aktiengesellschaft
financial statements as described in this report. See
Item 3: Key Information. |
We recognize all financial assets and liabilities, as well as
all derivative instruments, as assets or liabilities in the
balance sheet and, generally, measure all financial instruments
at fair value, regardless of our intent. Changes in the fair
value of derivative instruments are recognized in income or
shareholders equity (as a revaluation reserve), depending
on whether the relevant derivative instrument is designated as a
fair value or cash flow hedge. For derivative instruments
designated as fair value hedges, changes in fair value of the
hedged item and the derivative instrument are recognized
currently in the income statement. For derivatives designated as
a cash flow hedge, changes in the fair value of the effective
portion of the hedging instrument are recognized in equity (the
revaluation reserve) until the hedged item is recognized in the
income statement. The ineffective portion of the fair value
changes of cash flow hedges, fair value changes of fair value
hedges and fair value changes of derivative instruments that do
not qualify for hedge accounting are recognized in the income
statement immediately. In 2003, we expanded the scope of our
hedging strategy by starting to hedge forecasted foreign
currency transactions. As a result, the degree to which we
recognize unrealized gains and losses in a special revaluation
reserve increased compared with prior periods. At
December 31, 2003, 2004 and 2005 we recorded a revaluation
reserve before deferred taxes of
23.1 million,
28.7 million
and a negative
6.7 million, respectively.
- 115 -
The following table provides an overview of our foreign currency
hedging contracts, which we entered into to hedge our
transaction risk, at December 31, 2003, 2004 and 2005:
Foreign Currency Risk
|
|
|
|
|
|
|
|
|
|
December 31, |
Derivative financial instruments(1) |
|
2003 |
|
2004 |
|
2005 |
|
|
|
|
|
|
|
Sales of currencies against euro
|
|
|
|
|
|
|
U.S. dollar
|
|
|
|
|
|
|
|
Notional amount(2)
|
|
571.63 |
|
504.31 |
|
405.19 |
|
Average contract rate (currency/euro)(3)
|
|
1.178 |
|
1.238 |
|
1.227 |
|
Fair value(2)
|
|
37.40 |
|
47.854 |
|
(7.057) |
Japanese yen
|
|
|
|
|
|
|
|
Notional amount(2)
|
|
12.96 |
|
11.65 |
|
16.07 |
|
Average contract rate (currency/euro)(3)
|
|
129.59 |
|
129.65 |
|
135.85 |
|
Fair value(2)
|
|
0.345 |
|
0.498 |
|
(1.150) |
British pound
|
|
|
|
|
|
|
|
Notional amount(2)
|
|
8.596 |
|
16.855 |
|
7.131 |
|
Average contract rate (currency/euro)(3)
|
|
0.70 |
|
0.706 |
|
0.687 |
|
Fair value(2)
|
|
0.005 |
|
(0.267) |
|
0.020 |
|
|
(1) |
Comprises foreign currency forward contracts and foreign
currency options. |
|
(2) |
Euro equivalent in millions of euro. |
|
(3) |
The effective rates shown represent the average of all hedging
transactions for each specific currency entered into in the year
shown. |
Exchange Rate Sensitivity
Because we enter into derivative foreign exchange transactions
for our contracted foreign exchange exposure, fluctuations in
the exchange rates of the euro relative to other major
currencies should not, in the short term, materially affect our
cash flows. However, if we are unable to reflect the effect of
exchange rate movements in the pricing of our products, our cash
flows could be materially affected in the long term. An
appreciation of the euro relative to other currencies would have
an adverse effect on our reported revenues and results, whereas
a devaluation of the euro should have a positive effect.
Effects of Currency Translation
Since our financial reporting currency is the euro, we translate
the income statements of those of our subsidiaries that are
located outside the euro zone before including them in our
consolidated financial statements. Thus, period-to-period
changes in average exchange rates can significantly affect the
translation into euro of both revenue and operating income
denominated in foreign currencies. Unlike the effect of exchange
rate fluctuations on transaction exposure, the effect of
exchange rate fluctuations on translation exposure does not
affect our local currency cash flows. In 2004, we complemented
our hedging strategy and entered into a foreign currency option
to protect our operating income against adverse exchange rate
fluctuations with respect to the translation of the operating
income of one of our subsidiaries located outside the euro zone.
In 2005, we hedged operating results at a notional nominal
amount of
42.5 million at an exchange rate of 12.92
Mexican pesos per euro. This hedge did not qualify as cash flow
hedge under IAS 39. Therefore, we recognized gains and
losses resulting from changes in the fair value of this option
immediately in our income statement.
- 116 -
While we have assets and operations outside of Germany, which
are denominated in local currencies, the foreign currency risk
arising from foreign investments is partially offset by related
liabilities denominated in the same local currency.
Interest Rate Exposure and Equity Price Risk
We hold a variety of interest rate-sensitive financial
instruments, mainly as financial investments, some of which we
use to manage the liquidity and daily cash needs of our
business. Responsibility for assessing, consolidating and
managing our financial investments is centralized within a
committee at the holding company level. We manage the interest
rate risk arising from these financial instruments through risk
management and controlling functions in cooperation with banks
and other financial institutions. The reporting process that we
use for this purpose functions independently of our corporate
treasury department. In order to finance acquisitions we made in
our chemicals segment in 2005, we sold our investments in
special funds and used the proceeds to finance our acquisitions.
On September 27, 2005, we received lines of credit of a
total amount of
500 million
from a banking syndicate. The lines of credit are granted until
September 2007. As of December 31, 2005, we had drawn
250 million.
The tables below provide information concerning our principal
financial instruments that are sensitive to changes in interest
rates and equity price risk. They do not include information on
short-term liabilities. Furthermore, unlike the presentation in
our consolidated financial statements, where the individual
assets of our wholly-owned funds have been consolidated, the
presentation below shows these funds on an unconsolidated basis
since the fund management is outsourced. The table below
presents notional amounts and the principal cash flows by
expected maturity dates in 2003, 2004 and 2005, respectively.
Since the euro is our reporting currency, the numbers are
presented in euro equivalents.
As of December 31, 2003