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