Increasing profitability while expanding both sales infrastructure and R&D
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The 2005 operating profit of CHF 152.3 million and a net profit after tax of CHF 125.5 million compares to an operating profit for 2004 of CHF 85.6 million and a net profit of CHF 87.2 million (includes CHF 9.6 million income for discontinued operations). The improvement in profitability was achieved as a result of stronger than initially foreseen growth in sales revenues, from CHF 455.3 million in 2004 to CHF 647.6 million in 2005.
Revenue growth fueled by Tracleer® sales performance
Net revenue for 2005 totaled CHF 663.6 million, compared to total net revenue in 2004 of CHF 471.9 million, an increase of CHF 191.7 million or 41%. Tracleer® continues to be the main contributor to both total revenue and revenue growth, as the product continued to build on its position as market leader and cornerstone therapy in pulmonary arterial hypertension (PAH). During 2005, Tracleer® was launched in several new markets, including Japan.Zavesca® sales in 2005 – in a market dominated by enzyme replacement therapy introduced 14 years ago – continued steadily, with sales increasing to CHF 14.4 million from CHF 6.1 million in 2004. Zavesca® is commercially available in the United States and in several markets in the European Union.
Contract revenues were CHF 16.0 million compared to CHF 16.5 million in 2004. Most of this revenue stems from the global collaboration in the field of renin inhibition with Merck, Inc. . During 2005, Actelion received a further milestone payment of USD 5 million from this collaboration, and, due to a contractual change, the period over which milestones are being recognized was extended from the end of 2006 to the end of 2007.
Overall, we continued to see revenue growth in all markets in which we sell our products. The year 2005 saw a slightly higher proportion of revenues coming from the United States, 46% in 2005 compared to 44% in 2005. This increase in the relative proportional of income denominated in USD can be partially attributed to a net positive price movement in the United States relative to a net negative price movement in some European markets. An additional factor was the decrease in the proportion of non-paying patients due to some positive changes in the reimbursement environment, providing more patients with paid access to the drug rather than compassionate access.
We continued to benefit through 2005 from the increase in sales force that started to become effective in late 2004. To date, our continued investment in sales force and related marketing efforts has translated into higher absolute growth and margin improvement.
Cost of sales in 2005 was CHF 65.6 million or 10% of sales revenues. The absolute increase in cost of sales is attributable to the growth in sales revenues from both Tracleer® and Zavesca®.
Operating expenses – fully funding future growth
Strategically, the company is committed to maintaining a balance between short-term growth in profitability and the long-term need of investing in our pipeline to deliver innovative products that meet unmet medical needs. In 2005, this strategy saw operating expenses increase to CHF 511.3 million from 386.3 million in 2004, an increase of 32%. This compares favorably to the increase in net revenues of 41% in the same period.Research and Development expenses in 2005 increased to CHF 171.5 million, from CHF 136.3 million, an increase of CHF 35.2 million or 25.8%.
This increase was the result of both expanding research efforts and multiple clinical trials finalizing or continuing enrollment. From our research efforts, several compounds have either entered into full pre-clinical development or have advanced to the point that they might do so in the near future. In the clinic, costs were mostly driven by the large-scale clinical trial CONSCIOUS-1 that finalized enrollment of 400 patients with non-traumatic subarachnoid hemorrhage at the end of 2005.
Significant progress was also made in regard to infrastructure with our new research facility nearing completion. This new state-of-the-art facility will provide us with the springboard to further leverage the benefits of our highly productive discovery engine. Also in 2005, work has started on the new development building, as our expanding clinical pipeline is also demanding more infrastructure for our development staff.
Marketing and advertising expenses in 2005 increased to CHF 140.0 million from CHF 101.7 million in 2004, an increase of CHF 38.3 million. This increase can be attributed to a number of factors such as the launch of Tracleer® in Japan, the increased participation of Actelion at major congresses worldwide, a continued focus on increasing the awareness of the disease in the medical community through increasing medical education, as well as the commencement of COMPASS, evaluating the safety and efficacy of the combination of bosentan (Tracleer®) and sildenafil in PAH patients.
Selling, general and administrative expenses in 2005 increased to CHF 132.1 million from CHF 95.7 million in 2004, an increase of 38%. This increase was mostly the result of our increase in sales force to reach out to even more physicians likely to diagnose and treat PAH.
As of 1 July 2005, Actelion adopted – as required under US GAAP – the accounting standard FAS 123R, which resulted in a non-cash charge of CHF 13.6 million, which is included in all expense lines of the Profit and Loss Statement.
Overall, with net revenues of CHF 663.6 million and operating expenses at CHF 511.3 million, the resulting operating profit for 2005 was CHF 152.3 million. These numbers not only document a very satisfying financial result for the year, but they also highlight the remarkable strength of an organization that can be leveraged in the years to come in multiple ways. The effort supporting Tracleer® in the marketplace will continue to both expand the PAH market and address any potential competitive activity. Additionally, our global marketing and sales infrastructure could rapidly be expanded if we believe that further momentum can be generated in some or all markets worldwide.
Non operating income impacted by insurance hedging
Interest income in 2005 amounted to CHF 3.0 million, while interest expense was CHF 0.2 million. This compares to interest expense in 2004 of 0.4 million and interest income of CHF 1.0 million. The increase in income is attributable to both enhanced returns and higher amounts of invested cash.A full year’s amortization of debt discount and bond issuance costs in 2005 resulted in a non cash expense of CHF 7.8 million compared to CHF 7.4 million in 2004.
Other financial expense in 2005 was CHF 11.3 million, compared to an income of CHF 3.0 million in 2004. This expense is mostly due to foreign exchange losses from hedging operation. An increase in the US dollar value relative to the Swiss franc has resulted in negative valuations of outstanding hedge positions throughout the year and at year-end. The positive impact of the increased value of the US dollar is reflected in higher operating profit.
Income tax expense in 2005 was CHF 10.5 million, compared to CHF 4.3 million in 2004, mostly due to increased profitability across our operations.
Net profit and earnings per share
Net profit for 2005 was CHF 125.5 million, compared to CHF 87.2 million in 2004. Non-diluted earnings per share increased in 2005 to CHF 5.62 per share compared to 3.96 in 2004. On a fully diluted basis, earnings per share in 2005 were CHF 5.54.Balance sheet – improved working capital management
With a strong operational performance in terms of net profit and careful management of working capital, the major impact on the balance sheet was an improvement in net equity and a general strengthening of the financial position of the company.Our gross cash increased markedly due predominantly to better operating results. Trade and other receivables increased to CHF 157.2 million at the end of December 2005 from CHF 109.6 million. This increase in trade and other receivables is due to higher sales. Importantly, the higher sales have not resulted in an increase in days sales outstanding (DSO) with DSO remaining virtually unchanged at December 2005 compared to December 2004.
Investment in Property, Plant and Equipment was substantially higher in 2005, CHF 50.2 million compared to 35.2 million in 2004. This increase can be attributed to both the completion of the new research building and the commencement of a new building in Allschwil as previously mentioned.
Continued cash generation at the operational level
We continued to generate strong cash from operations. In 2005, the company was able to generate cash from operations of CHF 138.4 million compared to CHF 91.7 million during 2004, an increase of CHF 46.7 million. This increase in cash is obviously predominantly driven by increased profitability.Concluding remarks and outlook
I would like to take this opportunity to thank the entire finance team at Actelion for their tireless dedication shown throughout the year. I also would like to express my gratitude to the Finance and Audit Committee for their commitment and active involvement in overseeing the finance function.I look forward to documenting our progress throughout the year.
Andrew J. Oakley
Andrew J. Oakley
Chief Financial Officer
