Strong Operating Margin of 29.0% of Revenues GENEVA, Switzerland, July 26 /PRNewswire-FirstCall/ -- Serono (virt-x: SEO and NYSE: SRA), today reported its second quarter results for the period ended June 30, 2006. Key Points for Second Quarter 2006 - Record total revenues of $699.2m with product sales of $628.7m - Rebif(R) worldwide sales up 10.9% (+11.4% in local currencies) to $361.6m - Reported net income of $189.2m up 25.9% on an adjusted(1) basis - Basic EPS of $12.92 per bearer share and $0.32 per ADS - H1 2006 product sales growth of 8.0% in local currencies, in line with full-year guidance of high single-digit growth - 2006 EPS guidance of $45.00 per bearer share reiterated - Decision to move atacicept (TACI-Ig) into Phase 2 in rheumatoid arthritis and preliminary positive Phase 1b results in systemic lupus erythematosus "We have a solid business platform generating strong cash flow, as well as the financial strength and capability to execute value-creating transactions," said Ernesto Bertarelli, Chief Executive Officer. "We are entering an exciting, new chapter at Serono and I am confident that we will achieve our strategy for growth." "Given our financial performance in the first half of 2006, we are on track to achieve our EPS guidance of $45.00," said Stuart Grant, Chief Financial Officer. "Our EPS growth is driven by the strength of our operating margin which increased by an impressive eight percentage points in the first half of the year to 29.5% of total revenues." Financial Performance Total revenues increased by 3.3%, or 3.9% in local currencies, to $699.2m in the second quarter of 2006 (Q2 2005: $676.8m). Product sales grew 2.8%, or 3.3% in local currencies, to $628.7m compared to a strong quarter last year (Q2 2005: $611.5m). Excluding the impact on sales of the Bourn Hall clinic management buyout and the sale of a non-core business, TerraCell S.A., in 2005, as well as the introduction of generics of Novantrone(R) in early April 2006, sales growth was 7.0% in local currencies in the second quarter of 2006. Royalty and license income increased by 8.0% to $70.5m (Q2 2005: $65.3m). Gross margin was strong at 88.2% of product sales (Q2 2005: 87.8%). Selling, General and Administrative expenses were up 5.1% to $233.7m (Q2 2005: $222.5m). Research and Development expenses were down 10.6% to $130.3m (Q2 2005: $145.8m) reflecting the completion of a number of Phase 3 trials last year, the transfer of the Serono Genetics Institute and the Bourn Hall clinic management buyout. Other operating expenses were down 12.2% to $58.2m (Q2 2005: $66.3m), largely due to lower royalty expense related to Novantrone(R). Operating income in the second quarter of 2006 was up 21.1% to $203.0m (Q2 2005: $167.7m) with an operating margin of 29.0% of total revenues (Q2 2005: 24.8% of total revenues). Financial income was $18.5m (Q2 2005: $43.7m) and financial expense was $6.1m (Q2 2005: $10.0m). The second quarter of 2005 included an exceptional gain of $30.0m resulting from the sale of an equity holding in Celgene, Inc. and a write-down of $3.7m related to impairment in value of an equity stake in CancerVax. Net income in the second quarter of 2006 was $189.2m up 8.1% or 25.9% on adjusted(2) basis (Q2 2005: $175.1m reported, $150.3m adjusted(2)). Basic earnings per share in the second quarter of 2006 were up 7.5%, or 25.2% on adjusted(2) basis, to $12.92 per bearer share (Q2 2005: $12.02, $10.32 adjusted(2) and $0.32 per American Depositary Share (Q2 2005: $0.30, $0.26 adjusted(2)). For the first six months, net cash flow from operating activities before change in working capital was $495.3m (H1 2005: $354.1m), or $355.3m after change in working capital (H1 2005: $177.1m). The company's liquid financial assets were $1.8 billion at the end of the second quarter 2006. As of June 30, 2006, there were 14,647,162 outstanding equivalent bearer shares of Serono S.A., net of treasury shares. The total weighted average number of equivalent bearer shares of Serono S.A. was 14,645,802 for the three months ending June 30, 2006. Key Product Sales In the second quarter of 2006, Rebif(R) had a solid performance with sales of $361.6m, up 10.9%, or 11.4% in local currencies (Q2 2005: $326.0m). Rebif(R) continues to be the best-selling therapy for multiple sclerosis outside the US, with sales of $242.5m, growing 5.5%, or 6.0% in local currencies (Q2 2005: $229.8m). Four years after launch in the US, Rebif(R) maintains its strong growth and reached US sales of $119.0m, up 23.7% (Q2 2005: $96.2m). In July 2006, Serono announced that the European Commission has approved an update of the Summary of Product Characteristics of Rebif(R) in order to align it with current medical practice. Throughout Europe, Rebif(R) is now approved for use after the diagnosis of multiple sclerosis has been confirmed based on one attack and subsequent positive magnetic resonance imaging scans. Sales of Gonal-f(R) were $139.3m (Q2 2005: $149.9m), in line with the first quarter of 2006. Global sales of supporting products (Ovidrel(R), Cetrotide(R), Crinone(R) and Luveris(R)) were up 6.9%, or 7.5% in local currencies to $23.8m (Q2 2005: $22.2m). Saizen(R) sales were $53.8m (Q2 2005: $53.6m), a growth of 7.6% over the first quarter of 2006. Serostim(R) sales were stable at $17.3m (Q2 2005: $17.3m). In Q2 2006, Serono submitted a Supplemental New Drug Application to the U.S. Food and Drug Administration for recombinant human growth hormone in HIV-associated adipose redistribution syndrome. Sales of Raptiva(R), the only biological therapy specifically developed for the treatment of psoriasis, were $17.0m in the second quarter 2006 (Q2 2005: $7.4m), a growth of 24.3% over the first quarter of 2006. The focus for 2006 is on increasing market penetration by leveraging the strong clinical data including the recently published CLEAR study and differentiating Raptiva(R) from TNF blockers. In July the first large-scale pharmaco-epidemiological study in psoriasis in Europe, CLEARESTTM, was initiated. This prospective, seven-year study in 7,000 patients with moderate-to-severe plaque psoriasis is further assessing the long-term safety of Raptiva in clinical practice. Novantrone(R) sales in the second quarter of 2006 were $5.4m, down 70.4%, consequent to the introduction of generics of mitoxantrone in the US in April 2006 (Q2 2005: $18.3m). R&D News In June, favorable results from a Phase 1b clinical trial with atacicept (TACI-Ig) in rheumatoid arthritis were presented at the 7th Annual European Congress of Rheumatology. Atacicept was well tolerated across the full range of dose levels and schedules tested, and clear biologic effect was observed. Based on these promising results, Serono and ZymoGenetics expect to begin the Phase 2 clinical program of atacicept in patients with rheumatoid arthritis in the second half of 2006. In July, preliminary results of two Phase 1b studies in systemic lupus erythematosus indicate that atacicept demonstrated a favorable tolerability profile and that biological activity consistent with the mode of action was observed. Full results of these studies are planned to be presented at a medical meeting later this year. Lastly, during the quarter it was announced that the novel fully human anti-CD3 monoclonal antibody, NI-0401, being developed in collaboration with NovImmune, has moved into a proof-of-concept trial in patients suffering from moderate-to-severe Crohn's Disease. This study is looking at the safety, tolerability and pharmacokinetics of intravenously administered NI-0401. Conference Call and Webcast Serono will hold a conference call on July 27, 2006, starting at 11:00 am US Eastern Time (17:00 Central European Time) during which Serono Management will present the Company's Second Quarter 2006 Results. To join the telephone conference please dial 1-412-858-4600 (from the US), 091-610-5600 (from Switzerland), 0207-107-0611 (from the UK) and +41-91-610-5600 (from elsewhere). The event will also be relayed by live audio webcast, which interested parties may access via Serono's Corporate home page, http://www.serono.com/. A link to the webcast will be provided immediately prior to the event and will be available for replay following the event. Additionally, the webcast will be available for replay until close of business on August 31, 2006. Forward-looking statements Some of the statements in this press release are forward looking. Such statements are inherently subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Serono S.A. and affiliates to be materially different from those expected or anticipated in the forward-looking statements. Forward-looking statements are based on Serono's current expectations and assumptions, which may be affected by a number of factors, including those discussed in this press release and more fully described in Serono's Annual Report on Form 20-F filed with the U.S. Securities and Exchange Commission on February 28, 2006. These factors include any failure or delay in Serono's ability to develop new products, any failure to receive anticipated regulatory approvals, any problems in commercializing current products as a result of competition or other factors, our ability to obtain reimbursement coverage for our products, the outcome of any government investigations and litigation. Serono is providing this information as of the date of this press release, and has no responsibility to update the forward-looking statements contained in this press release to reflect events or circumstances occurring after the date of this press release. About Serono Serono is a global biotechnology leader. The Company has eight biotechnology products, Rebif(R), Gonal-f(R), Luveris(R), Ovidrel(R )/Ovitrelle(R), Serostim(R), Saizen(R), Zorbtive(TM) and Raptiva(R). In addition to being the world leader in reproductive health, Serono has strong market positions in neurology, metabolism and growth and has recently entered the psoriasis area. The Company's research programs are focused on growing these businesses and on establishing new therapeutic areas, including oncology and autoimmune diseases. In 2005, Serono, whose products are sold in over 90 countries, achieved worldwide revenues of US$2,586.4 million. Reported net loss in 2005 was US$106.1 million, reflecting a charge of US$725 million taken relating to the settlement of the US Attorney's Office investigation of Serostim. Excluding this charge as well as other non-recurring items, adjusted net income grew 28.4% to US$565.3 million in 2005. Bearer shares of Serono S.A., the holding company, are traded on the virt-x (SEO) and its American Depositary Shares are traded on the New York Stock Exchange (SRA). For more information, please contact: Serono in Geneva, Switzerland: Media Relations: Tel: +41-22-739-36-00 Fax: +41-22-739-30-85 http://www.serono.com/ Serono, Inc., Rockland, MA Media Relations: Tel. +1-781-681-2340 Fax: +1-781-681-2935 http://www.seronousa.com/ Investor Relations: Tel: +41-22-739-36-01 Fax: +41-22-739-30-22 Reuters: SEO.VX / SRA Bloomberg: SEO VX / SRA US Investor Relations: Tel. +1-781-681-2552 Fax: +1-781-681-2912 On the following pages, there are: - Tables detailing sales in dollars by therapeutic area, geographic region and the top 10 products for the 3 and 6 months ended June 30, 2006 and 2005. - Consolidated income statements for the 3 and 6 months ended June 30, 2006 and 2005; adjusted net income and adjusted earnings per share for the 3 and 6 months ended June 30, 2006 and 2005; the consolidated balance sheets as of June 30, 2006 and December 31, 2005; the consolidated statements of changes in equity as of June 30, 2006 and 2005; the consolidated statements of cash flows for the 6 months ended June 30, 2006 and 2005; the selected explanatory notes to the consolidated financial statements. These consolidated financial statements have been prepared on the basis of International Financial Reporting Standards. A full version of this release, including tables, is available at http://www.serono.com/. (1) Non-IFRS financial measures included in order to permit assessment of the performance of the company's underlying business for the quarter were a $30.0m ($28.5m after-tax) gain on sale of investment in Celgene and a $3.7m write-down of investment in CancerVax in Q2 2005. (2) Non-IFRS financial measures included in order to permit assessment of the performance of the company's underlying business for the quarter were a $30.0m ($28.5m after-tax) gain on sale of investment in Celgene and a $3.7m write-down of investment in CancerVax in Q2 2005. DATASOURCE: Serono International S.A. CONTACT: For more information, please contact: Serono in Geneva, Switzerland: Media Relations: Tel: +41-22-739-36-00, Fax: +41-22-739-30-85, http://www.serono.com/. Serono, Inc., Rockland,, MA, Media Relations: Tel. +1-781-681-2340, Fax: +1-781-681-2935, http://www.seronousa.com/. Investor Relations: Tel: +41-22-739-36-01, Fax: +41-22-739-30-22, Reuters: SEO.VX

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