Serono's Third Quarter 2005 Adjusted EPS Increased by 37.6%
October 25 2005 - 2:00AM
PR Newswire (US)
On Track to Achieve Upper end of 2005 Adjusted net Income Guidance
Range GENEVA, Switzerland, October 25 /PRNewswire-FirstCall/ --
Serono (virt-x: SEO and NYSE: SRA) today reported its third quarter
results for the period ended September 30, 2005. Key Points for
Third Quarter 2005 - Total revenues of $638.3m, up 12.7% excluding
a one-time payment of $67m from a licensing agreement in Q3 2004
and up 0.7% on a reported basis - Product sales up 10.3% to
$571.5m, driven primarily by Rebif(R) sales up 19.8% to $315.6
million - Adjusted net income* up 32.8% to $158.9m and adjusted
basic EPS* up 37.6% to $10.91 per bearer share and $0.27 per ADS -
Reported net income of $142.4m down 10.3% and reported basic EPS of
$9.77 per bearer share and $0.24 per ADS down 7.0% including a
charge of $18.3m for the transfer of the Serono Genetics Institute
(SGI) - Primary endpoint met in multicentre phase 3 study of
interferon-beta-1a monotherapy for the treatment of chronic
hepatitis C in Asian patients - New R&D collaborations -
HuMax-CD4(TM) (zanolimumab) from Genmab and Aurora kinase inhibitor
from Rigel Pharmaceuticals - Final settlement of the previously
reported U.S. Attorney's investigation of Serostim(R) "We continue
to deliver robust earnings growth and to generate strong cash
flows, enabling us to advance and expand our new product pipeline,"
said Ernesto Bertarelli, Chief Executive Officer. "Over the next
eighteen months, we expect to complete four Phase 3 and three Phase
2 clinical trials including today's positive outcome of the study
of interferon-beta-1a in chronic hepatitis C in Asian patients."
"We remain focused on maximizing the potential of our marketed
products," said Stuart Grant, Chief Financial Officer. "Our gross
margin is best-in-class and we continue to seek sustained
improvement in operating margin. Given our momentum, we are
confident that we will reach the upper end of our adjusted net
income guidance for the full year." Financial Performance In the
third quarter 2005, total revenues grew by 12.7% on an adjusted
basis. Revenues for the third quarter 2004 included a one-time
payment of $67m from a licensing agreement. On a reported basis,
total revenues grew by 0.7% to $638.3m (Q3 2004: $633.6m) and
decreased by 0.5% in local currencies in the recent quarter.
Product sales rose 10.3% to $571.5m (Q3 2004: $518.1m), or 9.4% in
local currencies. Gross margin for the third quarter 2005 was 88.6%
(Q3 2004: 83.9%). Excluding a charge of $20.5m related to the
closure of an obsolete manufacturing site, gross margin in the
third quarter 2004 was 87.9%. Selling, general and administrative
expenses were $201.3m or 31.5% of total revenues (Q3 2004:
$196.4m). SG&A expenses increased 2.5% compared to the prior
year. Research and development expenses were $146.9m (Q3 2004:
$124.2m) and included an $18.3m charge related to the transfer of
SGI. Excluding this charge, R&D expenses for the third quarter
2005 were $128.5m or 20.1% of total revenues and 3.5% higher than
the prior year period. Other operating expenses were $65.9m (Q3
2004: $56.0m), including expenses of $5.0m related to stock options
in accordance with the IFRS 2 accounting change effective since
January 1, 2005. Reported net income for the third quarter of 2005
decreased 10.3% to $142.4m (Q3 2004: $158.7m), or 14.1% in local
currencies. Reported basic earnings per share (EPS) decreased 7.0%
to $9.77 per bearer share (Q3 2004: $10.51) and $0.24 per American
Depositary Share (ADS) (Q3 2004: $0.26). Adjusted net income*
increased 32.8% to $158.9m from $119.7m in the prior year,
resulting in an adjusted net margin of 24.9% of total revenues
compared to 21.1% in the prior year. Adjustments for the third
quarter 2005 included an $18.3m charge related to the transfer of
SGI, and for third quarter 2004 a one-time payment of $67m from a
licensing agreement and a $20.5m charge related to the closure of a
manufacturing facility. For the first nine months, net cash flow
from operating activities before change in working capital was
$555.0m (YTD 2004: $561.7m), or $439.5m after change in working
capital (YTD 2004: $424.1m). As of September 30, 2005, there were
14,573,281 outstanding equivalent bearer shares of Serono SA, net
of treasury shares. Settlement of Serostim(R) Investigation In
April 2005, the company announced that it had taken a $725.0m
provision to cover the settlement and related costs of an
investigation led by the U.S. Attorney's office in Massachusetts
into commercial practices related to Serostim(R). On October 17,
2005, Serono announced that its U.S. affiliates agreed to settle
the government investigation. The provision, which was recorded as
an exceptional charge in the company's earnings report for the
first quarter of 2005, will be sufficient to cover the
comprehensive settlements and related costs. "This settlement
concludes a four-year investigation into commercial practices
related to Serostim(R), and we are pleased to put the matter behind
us," said Thomas G. Gunning, Vice President and General Counsel of
Serono US Operations. All Serono branded products, including
Serostim(R), remain available to all patients in the United States,
including Medicaid, Medicare and other Federal health care program
patients. Full Year 2005 Outlook In 2005, adjusted net income is
now expected to reach the upper end of the initial $520m - $540m
guidance range based on currency exchange rates prevailing when
guidance was initially issued on February 1st 2005. This outlook
does not include expenses related to any new business development
transactions or other non-recurring items in 2005. To date, known
adjustments include a charge of $725.0m ($660.5m after-tax) related
to resolution of the US Attorney's Office investigation of
Serostim(R), a $30.0m ($28.5m after-tax) gain on sale of investment
in Celgene, an $8.4m write-down of investment in CancerVax and an
$18.3m ($16.6m after tax) charge related to the transfer of SGI.
Therefore the 2005 IFRS earnings guidance is now expected to be a
net loss at the lower end of the $117m - $137m range. Serono
continues to expect that product sales will grow between 10% and
15%, leading to total revenues of at least $2.6 billion for the
full year, based on currency exchange rates prevailing on February
1st 2005, when guidance was issued. Therapeutic Areas Review In the
third quarter of 2005, total neurology sales increased by 18.4% to
$321.9m (Q3 2004: 271.8m). Rebif(R)'s performance continues to be
strong with worldwide sales up 19.8% to $315.6m, or 18.5% in local
currencies (Q3 2004: $263.5m). Outside the USA, Rebif(R) sales grew
by 14.5% to $213.2m (Q3 2004: $186.2m). In the USA, Rebif(R) sales
increased by 32.6% to $102.5m (Q3 2004: $77.3m), reaching quarterly
sales above $100m for the first time. Sales of GONAL-f(R) decreased
by 5.8%, or 6.6% in local currencies, to $125.6m (Q3 2004:
$133.3m). In late June 2005, a strategic alliance with Priority
Healthcare in the Reproductive Health area in the USA was rolled
out. Saizen(R) sales increased by 15.2% (13.9% in local currencies)
to $50.8m (Q3 2004: $44.1m) in the third quarter, while Serostim(R)
sales were $17.8m (Q3 2004: $21.2m), consistent with the previous
two quarters. Sales of Raptiva(R), the first-to-market biological
treatment for psoriasis in the European Union, reached $10.0m in
the third quarter (Q3 2004: $1.0m). Raptiva(R) is now approved in
44 countries and major European countries have granted
reimbursement. Raptiva(R) was launched in France in the third
quarter, has just been approved in Canada and will be fully
rolled-out in Italy in the fourth quarter. R&D News Serono
reports today that a multicenter phase 3 study of
interferon-beta-1a monotherapy for the treatment of chronic
hepatitis C (HCV) in Asian patients met its primary endpoint. The
proportion of patients who achieved sustained virological response
(SVR), defined as an absence of detectable HCV RNA in serum after
24 weeks of treatment and 24 weeks of observation, was 26.6% in the
interferon-beta-1a group (n=128) versus no responder in the placebo
group (n=129), a statistically significant result (p