ANNUAL REPORT 2006 WE IMPROVE THE

Transcription

1 ANNUAL REPORT 2006 WE IMPROVE THE QUALITY OF LIFE...

2 FOR PEOPLE SUFFERING FROM PSYCHIATRIC AND NEUROLOGICAL DISORDERS

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4 LUNDBECK AT A GLANCE H. Lundbeck A/S is an international pharmaceutical company with more than 50 years of experience in research, development, production, marketing and sale of pharmaceuticals for the treatment of diseases of the central nervous system (CNS). Pharmaceuticals developed by Lundbeck have been used in more than 200 million treatments worldwide. Lundbeck aims to continue to develop new and innovative pharmaceuticals to help people who suffer from CNS diseases. Lundbeck worldwide More than 5,300 employees represent Lundbeck in 58 countries. Research Production Sales

5 See page 26 for further information about Lundbeck s marketed pharmaceuticals ALZHEIMER S DEPRESSION PARKINSON S SCHIZOPHRENIA Development pipeline In 2006, Lundbeck pursued clinical development activities for the treatment of: Alcohol dependence Depression Mood disorders Schizophrenia and other psychotic disorders Sleep disorders Stroke See page 36 for further information about Lundbeck s development projects. Ebixa (memantine) for the treatment of moderate to severe Alzheimer s disease is marketed in cooperation with Lundbeck s partner Merz Pharmaceuticals GmbH and was launched in According to the WHO 23 million cases of Alzheimer s disease and other dementia are reported every year. Cipralex (escitalopram) is one of the world s leading pharmaceuticals to treat depression and anxiety. Cipralex was invented by Lundbeck in 1988, launched in 2002, and is currently marketed globally by Lundbeck and its partners. In the USA, Cipralex is marketed under the Lexapro brand by Lundbeck s partner of many years, Forest Laboratories, Inc. According to the WHO 154 million cases of depression are reported every year. Azilect (rasagiline) for the treatment of Parkinson s disease was developed in collaboration with Teva Pharmaceutical Industries Ltd. and launched in the first market in Europe in According to the WHO five million cases of Parkinson s disease are reported every year. Serdolect (sertindole) for the treatment of schizophrenia was invented and developed by Lundbeck and belongs to the group of so-called atypical antipsychotics, which is the latest generation of pharmaceuticals used in the treatment of schizophrenia. According to the WHO 25 million cases of schizophrenia are reported every year.

6 CONTENTS MANAGEMENT REPORT Strong growth of the Group s new pharmaceuticals and progress in the pipeline Financial highlights Financial performance Strategy Lundbeck s business Risk management Corporate governance The Lundbeck share Marketed pharmaceuticals Alzheimer s disease Depression Parkinson s disease Schizophrenia Innovation An attractive workplace Environmental initiatives Research and knowledge sharing 4

7 FINANCIAL REPORT Revenue DKK 9,221 million Profit from operations DKK 1,784 million Net profit for the year DKK 1,107 million Summary for the Group Income statement Balance sheet Statement of changes in equity Cash flow statement Notes to the financial statements Management statement Independent auditors report Supervisory Board Executive Management 5

8 FINANCIAL HIGHLIGHTS Revenue DKK 9,221 million Research and development costs DKK 1,958 million Profit from operations DKK 1,784 million Net profit for the year DKK 1,107 million Group financial highlights DKKm DKKm DKKm DKKm DKKm EURm 1 Revenue 9,488 9,941 9,733 9,070 9,221 1,236 Research and development costs 1,575 1,931 1,776 1,782 1, Profit from operations 2,345 2,147 2,554 2,170 1, Net financials (286) (76) (64) (9) Net profit for the year 1,259 1,384 1,689 1,574 1, Total assets 9,289 11,070 11,509 11,628 11,631 1,560 Equity 5,790 6,901 7,839 7,492 6, Cash flows from operating and investing activities ,434 1, Property, plant and equipment investments, gross % % % % % % EBIT margin Return on capital employed Return on equity Solvency ratio DKK DKK DKK DKK DKK EUR 1 Earnings per share (EPS) 2, Diluted earnings per share (DEPS) 2, Proposed dividend per share Cash flow per share Net asset value per share Average number of employees 4,534 5,223 5,155 5,022 5,111 1) Income statement items are translated using the average EUR exchange rate for the year (745.90). Balance sheet items are translated at the EUR exchange rate on 31 December 2006 (745.60). 2) Calculation is based on a share denomination of DKK 5. 3) Calculated according to IAS 33. Comparative figures involving number of shares have been adjusted by an adjustment factor of for the effect of employees exercising warrants. The comparative figures for 2005 have been restated due to an amendment to IAS 39 Financial instruments: recognition and measurement.

9 FINANCIAL IAL PERFORMANCE RMAN The Group s new pharmaceuticals posted strong growth in all markets in 2006 and advances were also made in our development pipeline. Revenue for the year amounted to DKK 9,221 million, and the profit from operations of DKK 1,784 million was in line with the Group s financial guidance for Revenue increased by two per cent and amounted to DKK 9,221 million in 2006, of which 75 per cent derived from Lundbeck s new pharmaceuticals Cipralex /Lexapro, Ebixa, Azilect and Serdolect. In local currencies revenue also increased by two per cent. Sales of the Group s new pharmaceuticals increased by nine per cent relative to 2005, more than compensating for the decline in revenue from the Group s mature pharmaceuticals and the lower income from Forest Laboratories, Inc., which in 2006 resolved to reduce its US inventories of Lexapro. Lundbeck recorded a profit from operations of DKK 1,784 million in Lundbeck s financial performance was positively affected by the initial public offering of LifeCycle Pharma (LCP). Lundbeck recorded income totalling DKK 155 million from the IPO. Excluding the income from LCP, profit from operations was DKK 1,629 million, and the Group thus met the financial guidance provided in connection with the presentation of the annual report for the 2005 financial year Forecasts**, DKK Realised, DKK Profit from operations* Approx. 1.6bn 1,629m Cash flow from operating and investing activities Approx. 900m 624m Investments Approx. 650m 762m * Excluding income from the IPO of LCP ** Guidance at the presentation of the annual report for 2005 Current cash flows from operating and investing activities were lower than forecast, primarily due to higher than expected investments, higher tax payments and an increase in net financial expenses. The Group incurred costs totalling DKK 7,437 million in 2006, an increase of eight per cent relative to Lundbeck retained a high level of research and development activities in 2006 with costs totalling DKK 1,958 million equal to 21 per cent of the Group s revenue. Costs incurred for sales and distribution rose by four per cent to DKK 2,419 million, whilst administrative expenses were up by nine per cent to DKK 1,419 million. Lundbeck s cost of sales increased by 11 per cent to DKK 1,646 million. Net profit for the year amounted to DKK 1,107 million corresponding to a decline of 30 per cent relative to The decline is due to the decrease in the income from Forest. In 2006 Lundbeck bought back own shares amounting to DKK 1.6 billion. It is proposed to the Annual General Meeting that a dividend of 30 per cent of net profit for the year is paid, corresponding to DKK 333 million. Market position strengthened In 2006, the Group s core product Cipralex / Lexapro became the most frequently prescribed branded pharmaceutical for the treatment of depression, both in Europe and the USA and thus became a leading pharmaceutical for the treatment of depression worldwide. In Europe, the positive trends for Cipralex continued despite a value decline in the overall antidepressants market in Europe as a result of greater generic competition and health authorities squeezing the prices of branded pharmaceuticals. By the end of 2006, Cipralex held a market share of 12.9 per cent in Europe. Cipralex revenue in Europe amounted to DKK 2,766 million in 2006, a 30 per cent increase over last year. In 2006, the number of prescriptions in the US market increased once again, after a downturn last year. The Group posted income from Lexapro of DKK 1,923 million. In the USA, Lexapro successfully increased its value market share. At the end of 2006, Lexapro held a market share of 18.0 per cent of the US market for newer antidepressants, corresponding to a growth of ten per cent on the year before. Cipralex sales in International Markets, i.e. markets outside Europe and the USA, climbed 50 per cent to DKK 743 million, and Cipralex commanded a market share of 7.2 per cent at the end of Lundbeck consolidated the market position for Cipralex by filing a registration application in the EU for approval of Cipralex for the treatment of Obsessive-Compulsive Disorder (OCD). At the beginning of 2007, the health authorities in the EU approved Cipralex for the treatment of OCD. In addition, positive clinical data demonstrating therapeutic benefits from using Cipralex compared to both Cymbalta and Paxil in the treatment of depression were published in Like Cipralex /Lexapro, Ebixa recorded growth in 2006 with revenue of DKK 1,361 million, a 23 per cent increase on Memantine, the active ingredient in Ebixa, was used in more than one in five treatments in Europe in 2006, making it the second-most prescribed pharmaceutical for the treatment of Alzheimer s disease in Europe. 7

10 12.9% By 2.9% By 15.1% By the end of 2006, Cipralex held a market share of 12.9 per cent in Europe. the end of 2006, Azilect held a market share of 2.9 per cent in Europe. the end of 2006, Ebixa held a market share of 15.1 per cent in Europe. New product launches In 2006, the Supervisory Board was pleased to see Lundbeck relaunch Serdolect, which had been absent from the market for eight years. In January, Serdolect was launched in the first market in Europe, and by the end of the year had been launched in 14 markets. The launch of Serdolect is progressing as planned and will be extended to a number of new markets in In 2006, Azilect was launched in a further 12 countries and is now available through Lundbeck in 22 markets. Sales of Azilect amounted to DKK 71 million in 2006, and the product held 2.9 per cent of the European market for pharmaceuticals to treat Parkinson s disease. Development pipeline advances In 2006, the Group presented a large number of important clinical data from projects in its development pipeline, especially data from phase II clinical studies of gaboxadol and data from phase III clinical trials with bifeprunox. Towards the end of the year, Lundbeck and Finnish BioTie Therapies Corp. formed an alliance concerning the pharmaceutical nalmefene, which is now a component of the Group s portfolio of late-stage projects. Furthermore, Lundbeck initiated phase I clinical studies of two new pharmaceutical candidates from its in-house discovery process and commenced phase II clinical studies of Lu AA21004, a pharmaceutical candidate for the treatment of depression also from its in-house research. Protection of intellectual property rights In July 2006, Lundbeck and Forest announced that the U.S. District Court for the District of 8 Delaware had determined that the U.S. patent covering escitalopram, the active ingredient in Lexapro, is valid, enforceable and infringed by IVAX Corporation/Teva Pharmaceutical Industries Ltd. s proposed generic product. The ruling confirms Lundbeck s and Forest s patent rights in the USA, which expire in March In November, the U.S. District Court for the District of Delaware issued the ruling, and IVAX/ Teva filed an appeal of the court s ruling. Also in July, Lundbeck and Forest and Forest Laboratories Holdings, Ltd. announced that they had filed a lawsuit in the U.S. District Court for the Eastern District of Michigan against Caraco Pharmaceutical Laboratories, Ltd. also for violation of U.S. Patent Re. No. 34,712, which relates to Lexapro. Lundbeck is involved in other pending patent trials in Great Britain, Australia, Canada and Germany. Efforts in Europe to protect intellectual property rights and patents have gradually been improved in recent years. As a result of these efforts, there are now more uniform guidelines for the issuance of exclusivity periods in the European countries, and the rules for issuing patents have also been harmonised. When Lundbeck took out a patent for Cipralex, the rules were not harmonised to the same extent, and for this reason the patent situation for the primary patent for Cipralex is different than it would have been under the present rules. In most of the European countries, Cipralex is protected by a primary patent until 2014, while in other European countries, including Denmark, protection is based on patents for the manufacture of Cipralex. Lundbeck expects that sales of Cipralex in Europe will continue to grow until the patents expire in most markets in In addition to the primary patent, Cipralex is subject to a number of patents that expire in 2014 or later in all countries. Lundbeck firmly believes that the Group s intellectual property rights are valid and enforceable, and it is our policy to defend our intellectual property rights energetically, wherever they may be violated. Events reported after the end of the financial year Lundbeck announced on 12 January 2007 that Cipralex has been approved in the EU for the treatment of OCD. The approval is based on clinical studies involving more than 750 patients, which demonstrate that Cipralex is an effective and well-tolerated drug in the treatment of OCD with the added benefit of significantly reducing the risk of relapse in OCD patients. Lundbeck announced a change to Executive Management on 22 January Executive Vice President, CFO Hans Henrik Munch- Jensen has decided to leave his position in connection with the presentation of the company s annual report for Furthermore, Lundbeck s marketing and sales activities will be concentrated under one member of Executive Management. As a consequence, Ole Chrintz will withdraw from Lundbeck Executive Management, but will continue his current responsibilities within the company, including responsibility for establishing a Lundbeck sales organisation in the US. Recruitment of a new CFO has been initiated. Steen Juul Jensen, who is already a Lundbeck Vice President, will be interim CFO until a new CFO has been appointed.

11 14 Serdolect was launched in 14 markets in DKKm DKKm Growth Total revenue 9,221 9,070 2% Cipralex 3,508 2,625 34% Income from Lexapro 1,923 2,552-25% Ebixa 1,361 1,105 23% Azilect ,068% Serdolect 10 - nm. Other pharmaceuticals 1,973 2,550-23% Other revenue % Profit from operations 1,784 2,170-18% Net profit for the year 1,107 1,574-30% Lundbeck announced on 7 March 2007 that a decision had been made to initiates phase II clinical trials with the antipsychotic project Lu The studies will encompass 210 patients suffering from schizophrenia. The decision to initiate phase II trials is based on positive pre-clinical results as well as a positive conclusion of the phase I trials in healthy individuals. Lu is expected to show beneficial effects on positive and negative symptoms as well as display a favourable balance between efficacy and safety. Outlook for 2007 In 2006, revenue from new pharmaceuticals accounted for 75 per cent of total consolidated revenue, corresponding to an average annual growth of 67 per cent in the pharmaceuticals since 2002 when both Cipralex and Ebixa were launched. The Group is currently in a favourable position and expects a consistently positive trend for its new pharmaceuticals in 2007, contributing to Lundbeck s overall growth. Being a research-based business, Lundbeck must continuously seek to develop new projects to complement its existing operations. Lundbeck is in a special position as the continued development initiatives or potential commercial activities for all four late-stage clinical projects in its development pipeline may be clarified already before the end of Moreover, data from ongoing phase II clinical trials with Lu AA21004 will determine how quickly Lundbeck will be able to advance this project to pivotal clinical trials. Finally Lundbeck expect to initiate additional studies of pharmaceutical candidates from its in-house research during Financial forecast for 2007 As described earlier in this report and in greater detail in the annual report for 2005, Forest opted to reduce its escitalopram inventories in 2006 from 16 months of commercial supply at the end of 2005 to ten months of commercial supply at the end of This extraordinary reduction of Forest s inventories of escitalopram had significant adverse effect on Lundbeck s financial performance in This adverse effect was only to a lesser extent balanced out by positive sales trends for Lexapro in the US market. At the end of 2006, inventories had been reduced to approximately nine months of commercial supply, a level which is expected to be maintained throughout As a result, Lundbeck s financial performance in 2007 will again reflect the actual trend in the US market. Lundbeck management forecasts strong growth in consolidated profit for 2007 relative to Lundbeck expects a nominal profit from operations of more than DKK 2.5 billion, which represents an increase of 50 per cent compared with 2006 exclusive of extraordinary items. In addition, Lundbeck expects to improve its profitability by achieving an EBIT margin of 25 per cent for Investments in 2007 are expected to amount to DKK 650 million forecast Profit from operations (EBIT) EBIT margin Investments More than DKK 2.5bn 25 per cent Approx. DKK 650m The financial forecasts for 2007 are exclusive of a potential milestone payment of USD 75 million from Merck & Co, Inc. in connection with the filing of a registration application in the USA for gaboxadol for the treatment of sleep disorders. Share buyback programme Lundbeck continues the ongoing share buyback programme, under which the Group will buy back shares of up to DKK 6 billion until the Annual General Meeting for the 2007 financial year. Lundbeck has previously announced that it is entitled to terminate the share buyback programme at any time as a consequence of changes to the company s financial position or changes in the market, including acquisition or inlicensing opportunities. Dividend policy In the years ahead, the Group also intends to pay dividends of per cent of the net profit for the year. The Supervisory Board believes that the Group s dividend policy is in line with industry practice. Forward-looking statements Forward-looking statements are subject to risks, uncertainties and inaccurate assumptions. This may cause actual results to differ materially from expectations. Factors that may affect future results include interest rate and exchange rate fluctuations, delay or failure of development projects, production problems, unexpected contract breaches or terminations, governmentmandated or market-driven price decreases for Lundbeck s products, introduction of competing products, Lundbeck s ability to successfully market both new and existing products, exposure to product liability and other lawsuits, changes in reimbursement rules and governmental laws and related interpretation thereof and unexpected growth in costs and expenses. 9

12 DECISIVE Lundbeck has defined a clear-cut strategy and business model for the Group s long-term development. At the same time, being a relatively small pharmaceutical enterprise, Lundbeck is able to maintain short decision-making processes and thereby an ability to respond quickly in a highly competitive market. Lundbeck has set up control systems to ensure a reasonable balance between the Group s anticipated value-generating initiatives and the overall risk exposure. Also, Lundbeck has defined policies and procedures for good corporate governance and responsible business ethics. Trust between the Supervisory Board and the employees provides the drive for implementing innovative strategies and exploiting market opportunities. = Countries where Lundbeck s pharmaceuticals have been registered

13 NICHE PLAYER Through its extensive and dedicated operations as a specialist business, Lundbeck has built a strong foundation of resources. Lundbeck pursues a strategy of optimising the Group s commercial value and growth by retaining and expanding its current business, streamlining and simplifying processes and business procedures and creating a platform for long-term growth. To be successful in a global pharmaceuticals market characterised by intense competition, Lundbeck has developed a business model aimed at providing sufficient innovative capacity whilst maintaining a competitive cost structure. Lundbeck s business builds on retaining its focus as a specialist and on ensuring integration of the entire value chain, acting globally and entering into partnerships. 11

14 How will Lundbeck achieve its vision? STRATEGY Through development and growth Lundbeck s vision is to become one of the world s leading psychiatry and neurology businesses by developing pharmaceuticals for the treatment of central nervous system (CNS) disorders. Future development and growth will be based on the maintenance and expansion of the existing business, streamlining and simplifying and creating a platform for long-term growth. Source: IMS World Review 2006 Lundbeck s pharmaceuticals offer major benefits for patients suffering from CNS disorders. The coming years will see a steadily increasing need for innovative pharmaceuticals to treat diseases of the central nervous system. We have defined a strategy for Lundbeck s long-term development to ensure optimisation of the value of the pharmaceuticals we have launched and to ensure that Lundbeck utilises its benefits as a small specialist business to meet the challenges in the pharmaceuticals market. In this way, we can safeguard the Group s ability to launch competitive and innovative pharmaceuticals that also offer long-term value generation and growth. Attractive market The global market for pharmaceuticals to treat CNS disorders is one of the largest pharmaceutical therapeutic areas, and today represents a value of more than DKK 500 billion. Lundbeck s activities in the form of marketed pharmaceuticals and late-stage projects in clinical development target therapeutic areas that represent about half of the CNS market. There continue to be a number of unmet needs in connection with the treatment of patients suffering from psychiatric and neurological diseases. Furthermore, a number of CNS disorders are under-diagnosed in many parts of the world. Challenges in the pharmaceuticals market In recent years, greater therapeutic needs combined with improved treatment alternatives have pushed up healthcare costs in many parts of the world. In response to the rising healthcare costs, authorities especially in Europe have taken a number of steps that make it more difficult for pharmaceutical companies to obtain an acceptable price, gain acceptance for new pharmaceuticals and obtain sufficiently long exclusivity periods to ensure a return on their invested capital. It is no longer enough for a pharmaceutical company to develop safe and effective pharmaceuticals. To achieve success in the pharmaceuticals market of the future, it is imperative that pharmaceutical companies are able to handle the health authorities increasing demand for economic documentation and new access barriers. Lundbeck s strengths Management believes that Lundbeck, through its extensive and dedicated operations as a specialist business, has built a strong foundation of resources that offers a number of competitive benefits. 12

15 70% + 30%= 1 Own research In-licencing New pharmaceutical every 3-5 years Lundbeck has: a solid position in the CNS market, enjoying more than 50 years experience and clinical insight skilful and highly specialised employees with competencies across the value chain a competitive research organisation with access to innovation based on in-depth understanding of patients and unmet treatment needs within CNS a strong pipeline broad and dedicated market coverage and sales companies with a strong local presence the ability to form and extensive experience in forming partnerships with large and small companies. A focused niche strategy Lundbeck s strategy is to continue as a dedicated specialist company and base its future development and growth on three focus areas: maintain and expand existing business streamline and simplify operations create a foundation for long-term growth. Management believes that a dedicated effort in these three areas would optimise the Group s commercial value and growth by safeguarding Lundbeck s organisational effectiveness and flexibility, utilising the potential of our launched pharmaceuticals and ensuring development and the optimum distribution of new and innovative pharmaceuticals. Maintain and expand existing business Lundbeck derives 75 per cent of its revenue from the Group s new and patented pharmaceuticals Cipralex /Lexapro, Ebixa, Azilect and Serdolect. Lundbeck aims to ensure that these four pharmaceuticals are distributed in all relevant markets and developed so as to optimise their potential. Streamline and simplify operations Lundbeck aims to ensure a competitive cost structure and to optimise the company s flexibility and the fast response times that a small pharmaceutical company is capable of providing. For this reason, Lundbeck will constantly seek to simplify and streamline its organisation so as to optimise consumption of resources and ensure that they are allocated to the areas where they generate the highest value. Create a foundation for long-term growth Lundbeck will capitalise on the Group s favourable financial position by creating a platform for long-term growth and value creation. The Group will continue to plough back approximately 20 per cent of its revenue into the development of innovative pharmaceuticals to ensure a strong development pipeline based on in-house research and in-licensing activities. Moreover, Lundbeck will ensure optimum distribution of its pharmaceuticals by gaining access to all relevant markets through its own sales organisation or through partnerships. Lundbeck s long-term growth will be driven by the development and distribution of new and innovative pharmaceuticals and a competitive and flexible organisation. 13

16 How does a small pharmaceutical company achieve success? LUNDBECK S BUSINESS Through a clearly defined business model Lundbeck is a specialist pharmaceutical company. To be successful in a global pharmaceuticals market characterised by much larger companies and intense competition, Lundbeck has developed a business model aimed at providing sufficient innovative capacity whilst at the same time maintaining a competitive cost structure. Organisation as of 7 March 2007 President & CEO Claus Bræstrup Corporate Finance Steen Juul Jensen, Interim CFO Supply Operations, Engineering & IT Lars Bang Commercial Operations Stig Løkke Pedersen = Countries where Lundbeck s pharmaceuticals have been registered =Lundbeck s sales entities Human Resources Nils L. Munck Drug Development Anders Gersel Pedersen Research Peter Høngaard Andersen Lundbeck s business is rooted in a focused niche strategy, integration and control of the entire value chain, global market coverage and partnering. Specialised Management believes that Lundbeck s focused niche strategy has been and will continue to be instrumental in the Group s success. A focused approach offers obvious benefits in terms of research and development, but it also means that our medical representatives can communicate knowledge about diseases and pharmaceuticals at a high technical level to specialists and general practitioners. Integration All links of the pharmaceutical value chain are important if success is to be achieved in the pharmaceuticals market. Lundbeck is a fully integrated pharmaceutical company, and management believes that knowledge and control of research into and development of new pharmaceuticals, of production, of marketing and of sales provide Lundbeck with a number of competitive benefits. A fully integrated pharmaceutical value chain does not mean that our interests are best served by owning or performing all the activities ourselves. In all parts of our operations, we evaluate which activities we can best and most cost-effectively perform ourselves, and which activities we can benefit from outsourcing. Global Lundbeck wishes to optimise the value of its pharmaceuticals by ensuring their availability in all relevant markets. Lundbeck currently has registered pharmaceuticals in over 90 countries. For each market, Lundbeck evaluates whether the Group should be present with its own organisation or whether it should market its products through partnerships. Today, Lundbeck has its own sales units in 58 countries and collaborates with business partners across the globe. Even though Lundbeck s headquarters are located in Denmark and Lundbeck expects to continue to carry out large parts of its activities here in the future, the Group will site new activities in the locations that are most appropriate with respect to quality, price and access to commodities and labour. Partnering Developing new pharmaceuticals today is a process more difficult and resource-consuming than ever before. In addition, companies have less time in which to earn back their investment. In order to face these challenges, network agreements and partnering have become more common in the pharmaceutical industry. As a specialist pharmaceutical company, Lundbeck has pursued a partnering strategy for years, and this has allowed us to compensate for the Group s limited size and financial resources. Also, partnerships allow Lundbeck access to the competencies, know-how and resources important for research and commercialisation of pharmaceuticals. Partnerships have enabled us to maintain a research and development portfolio on a level with much larger enterprises in the industry. By sharing development costs and risk with partners, we have facilitated a substantial increase in the number of research projects and, by extension, increased our chances of success. Furthermore, partner competencies help us to 14

17 Partnerships enable Lundbeck to maintain a research and development portfolio on a level with much larger enterprises. Read more about Lundbeck s partnerships in the Lundbeck Magazine 2007 page 21. avoid unnecessary delays, which in turn minimises the time to market and ensures better distribution once the pharmaceuticals are launched. Lundbeck currently enjoys a reputation as a solid and reliable partner in the field of CNS. Major partnerships Company Compound Indication Forest Laboratories, Inc. Escitalopram Depression Teva Pharmaceutical Industries Ltd. Rasagiline Parkinson s disease Merz Pharmaceuticals GmbH Memantine Alzheimer s disease Merck & Co., Inc. Gaboxadol Sleep disorders PAION AG Desmoteplase Stroke Solvay Pharmaceuticals B.V. Bifeprunox Schizophrenia BioTie Therapies Corp. Nalmefene Alcohol dependence 15

18 How does Lundbeck manage the Group s risks? RISK MANAGEMENT NT Through balanced risk exposure In the individual business units, Lundbeck takes a systematic approach to monitoring, identifying and acting in terms of risk. The goal is to ensure a reasonable balance between the Group s anticipated value-generating initiatives and the overall risk exposure. To a company conducting research and international operations such as Lundbeck, avoiding risk is neither possible, nor is it a defined goal. Rather, one of our goals is to handle such risk by maintaining a reasonable balance between the Group s overall risk exposure and the anticipated value generation. Professional risk management requires unambiguous communication channels, horizontal as well as vertical, that such channels are used and that practical routines and procedures are in place for day-to-day risk management. The fundamental principle is that the Group pursues decentralised risk management in those parts of the organisation that have the most extensive knowledge of the specific risks and, by extension, the best possibility of minimising such exposure. The individual business units take a systematic approach to monitoring, identifying and quantifying and responding to risks relative to their activities. Furthermore, we have defined reporting, decision-making and follow-up procedures and routines. Lundbeck s risk management systems are consistently updated and adapted to external and intra-group requirements and needs. Such revisions help provide Group management with a solid foundation from which to decide on Lundbeck s overall risk exposure and an overview over the activities and resources available to handle specific risks. The pharmaceutical industry is characterised by a high number of risks which a group such as Lundbeck must handle. The general risks found in a pharmaceutical business are illustrated in the figure below. Risks in the pharmaceutical value chain Risks associated with corporate governance, business ethics and public reputation Y Risks associated with mergers and acquisitions Financials risks Risks associated with employees and organisation Research DevelopmentY Production Y Sales & Marketing Portfolio risk In-licensing risk Out-licensing risk Technology risk Protection of intellectual property rights Partnership risk Portfolio risk Study and product approval risk Supply of materials for clinical trials In-licensing risk Out-licensing risk Partnership risk Regulatory risk Risk related to reliability of supply Supplier risk Distribution risk Protection of intellectual property rights Generic competition Adherence to Sales & Marketing guidelines Product liability risk Product recall Risk in connection with price decrease and market access restrictions Partnership risk 16

19 Particularly critical risks Based on reports received by its business units, Lundbeck management has identified the five following risks as being particularly relevant: 1. Risks associated with the Group s research and development portfolio Lundbeck s future success depends on its ability to identify, develop and market new innovative pharmaceuticals. Prior to obtaining regulatory approval for the sale of a product, Lundbeck must demonstrate for each specific indication the safety and efficacy of the drug candidate for the treatment of humans by conducting preclinical studies and clinical trials. Preclinical study results are not necessarily predictive of the results that will subsequently be achieved in clinical trials, and the results of early clinical trials are not necessarily predictive of the results that will be achieved in subsequent, more extensive controlled trials. 2. Risks associated with intellectual property rights and generic competition Lundbeck s continued success also hinges on its ability to protect intellectual rights for new pharmaceuticals and to operate the business without infringing on other s rights. However, patents and the patent application process in pharmaceutical companies such as Lundbeck are legally and scientifically complicated processes and may be subject to uncertainty. Patents are considered a prerequiste for the Group s business, and Lundbeck has a policy of patenting all inventions to optimise the value of its pharmaceuticals and energetically defending its intellectual property rights, wherever they may be violated. 3. Financial risks The bulk of the Group s commercial transactions are settled in foreign currency. The foreign currency exposure is reduced by hedging positions in the most important foreign currencies through forward and option contracts and, to a minor extent, by raising foreign currency loans. The interest rate risk related to the Group s bond portfolio, debt portfolio and cash holdings is reduced by seeking short duration on both the asset side and the liabilities side. The credit risk that arises in connection with the sale of goods, the Group s bond portfolio and cash holdings is reduced by avoiding credit risk concentration and by diversifying receivables on a large number of creditworthy trading partners. In addition, the Group exclusively deals with banks that have a high credit rating. 4. Risks associated with price pressure and restricted market access The pharmaceutical market is characterised by the aim of the authorities to reduce prices and restrict access to the market in order to minimise increases in government healthcare budgets. Unexpected market changes such as price reductions may have a material impact on the earnings potential of each individual pharmaceutical. In 2006, UK-based authority NICE (National Institute of Health and Clinical Excellence), which acts as counsel to the National Health Service in England and Wales, published its final recommendation for use of pharmaceuticals to treat Alzheimer s disease. NICE recommended against the use of memantine for the treatment of patients with Alzheimer s disease. It is expected that a number of healthcare reforms will have an impact on Lundbeck s antidepressants in 2007, including the evaluation performed by the IQWIG (Institut für Qualität und Wirtschaftlichkeit im Gesundheitswesen) in Germany. Lundbeck has established functions to ensure systematic and coordinated monitoring and response with a view to maintaining pharmaceutical prices as well as market access. 5. Risks associated with reliability of supply Managing reliability of supply is pivotal for Lundbeck, enabling the Group to secure patient s access to Lundbeck s pharmaceuticals. To handle the risk associated with reliability of supply, we carefully monitor the supply situation, and in principle we aim to maintain an inventory level that will help us overcome a production breakdown. In addition, we have prepared plans for accessing alternative production facilities. Conversely, having too high an inventory level may entail a financial risk, which the Group takes into account when evaluating the size of the inventories. It sometimes happens that pharmaceutical companies have to recall a product from the market due to the safety or quality of the pharmaceutical. Fortunately, pharmaceuticals are seldom recalled because the health of the patients is in jeopardy. However, due to the serious consequences that such situations may have, it is paramount that pharmaceutical companies thoroughly monitor the safety and quality of their pharmaceuticals. At Lundbeck, quality and safety is a key concern, and we have procedures and systems to ensure the quality and safety of our pharmaceuticals. If, despite our high levels of quality and safety, Lundbeck should be faced with a situation in which we have to recall a product, we have set up procedures to ensure a swift and efficient response and have launched risk-reducing measures to minimise the impact of a product recall. 17

20 How does Lundbeck ensure good corporate governance and responsible business ethics? CORPORATE RATE GOVERNANCE Through trust and control Over the past few years, Lundbeck has established a number of control mechanisms in respect of corporate governance and responsible business ethics. However, trust between the Supervisory Board, Executive Management and employees is still the key prerequisite for implementing innovative strategies and exploiting market opportunities. Flemming Lindeløv Chairman of the Supervisory Board Lundbeck s Supervisory Board and Executive Management consistently seek to ensure that Lundbeck pursues adequate policies and procedures to ensure good corporate governance and strong business ethics. CSE recommendations The revised corporate governance recommendations of the Copenhagen Stock Exchange (CSE) entered into force for the 2006 financial year. However, Lundbeck s Supervisory Board opted for implementation of the recommendations already for the 2005 financial year. A detailed description of the Supervisory Board s considerations in respect of the CSE recommendations is available on Lundbeck s website (lundbeck.com/aboutus). The Supervisory Board believes that the Group meets the CSE recommendations, except the one dealing with remuneration and pension information for Executive Management on an individual level. Lundbeck has opted not to disclose the remuneration paid to each individual member of Executive Management but only the remuneration paid to the President & CEO and the combined remuneration paid to the other members of the Group s Executive Management. The individual members of Executive Management basically receive the same remuneration, and the Supervisory Board believes that disclosing differences in the overall remuneration that result from individual bonus schemes, etc. would not provide additional value. Board practice Lundbeck s Supervisory Board held seven ordinary board meetings in In addition, the Supervisory Board held a constitutive board meeting following the Annual General Meeting. Furthermore, the Supervisory Board and Executive Management held a joint two-day strategy seminar. During 2006, the chairman and deputy chairman held seven meetings. Competencies The Supervisory Board must define Lundbeck s overall strategy and set clear goals for the Group s Executive Management. In order to carry out these assignments effectively and successfully, it is appropriate that the Supervisory Board possesses the required competencies. The chairman and deputy chairman find that the existing board members possess the required financial, pharmaceutical, information technology and production competencies required to serve on the board of an international group such as Lundbeck. To ensure that the Supervisory Board retains the necessary competencies, and in order to review strengths and weaknesses of the work performed by the board, the Group s chairman conducts an evaluation of the board s work and competencies every year. In 2006, the evaluation was based on a questionnaire filled in anonymously by members of the Supervisory Board and Executive Management. The questionnaire was designed in collaboration with external advisers and contains an extensive review of the board structure and composition, processes, players and procedures as well as the setting in which individual board members operate. The results of the questionnaire were subsequently discussed by the Supervisory Board. Independence The CSE recommends that half of a company s board member be independent persons. The issue of board member independence is particularly relevant for companies that, like Lundbeck, have a single principal shareholder holding more than half of the Group s shares. Based on the Copenhagen Stock Exchange s definition of independence, the Supervisory Board believes that at least half of the board members elected at the Annual General Meeting are independent. Two of the six members, Thorleif Krarup, the deputy chairman, and Jes Østergaard, are not independent due to their close ties with the Group s principal shareholder. The same applies to the three board members elected by the Group s Danish employees. Committees The Supervisory Board has set up a remuneration committee and an audit committee. Remuneration Committee The purpose of the Remuneration Committee is to provide the members of the Supervisory Board with the best possible decision-making basis concerning the total remuneration provided to the members of Executive Management. The Group pursues a policy of offering the Group s management a fee equal to that offered by industry peers in Denmark and neighbouring regions and which ensures that Lundbeck is able to retain and attract competent management members. 18

21 The committee prepares its recommendation to the Supervisory Board on the basis of general trends among industry peers in Denmark and neighbouring regions. The Remuneration Committee set up by the Supervisory Board consists of Flemming Lindeløv (chairman), Mats Pettersson and Jes Østergaard. In 2006, the committee held two meetings. Remuneration Members of the Group s Supervisory Board receive a fixed remuneration and are not included in the Group s other bonus and incentive programmes. In addition, the members of the board s audit and remuneration committees receive a fee for their committee work. The Supervisory Board aims to ensure a consistently competitive remuneration of the members of Executive Management, also in a regional perspective, and to ensure a reasonable balance between remuneration and performance. The remuneration of Executive Management and the Group s executives consists of a combination of a fixed salary, bonus and warrants. The Supervisory Board believes that this division of the remuneration into three components helps to ensure that the Group s management retains its focus on the Group s operations in the short term as well as the longer term strategies. This will in turn ensure that management endeavours to optimise shareholder value. The bonus targets defined for 2006 are a combination of Group strategic and individual targets, the combination of which is intended to motivate the Group s Executive Management to optimise short-term operations and longterm value creation. The members of the Group s Executive Management are included in a defined contribution pension scheme and do not have unusual severance packages. Audit Committee In October 2006, the Danish Audit Commission published its report on the EU s eighth Group Directive, including a proposal for a new provision in the Danish Public Companies Act on audit committees in listed companies. The provision is to be implemented in Danish legislation by July Lundbeck s Supervisory Board has already set up an audit committee that consists of Peter Kürstein (chairman), Flemming Lindeløv and Thorleif Krarup. The Audit Committee held three meetings in The duties of the Audit Committee are advisory to the Supervisory Board and comprise: the review of the Group s financial reporting procedures, including the procedures for reviewing interim and annual reports the evaluation of the Group s financial reporting and other financial information published by the Group, including information about related parties performing internal controls in relation to financial reporting to ensure consistency and transparency reviewing the reports submitted by the auditors and communicating with the auditors submitting recommendations to the Supervisory Board for use by the board in its recommendation at the Annual General Meeting concerning the appointment of external auditors. Lundbeck s Supervisory Board will during 2007 evaluate whether the new regulations in connection with EU s eighth Group Directive will give grounds for alterations in the operations of the Supervisory Board, including the Audit Committee. Policies and procedures for business ethics Lundbeck aims to run its operations on the basis of integrity and responsibility. Lundbeck s corporate values and rules of conduct represent our overall management tool for ensuring that we achieve our business goals in an ethically responsible manner. The pharmaceutical market is subject to strict regulation. Lundbeck s management believes that it is pivotal for the Group s operations that we comply with all relevant national and international legislation. In this context, the Group must incontestably adhere to the rules and guidelines issued by public institutions such as the U.S. Food and Drug Administration (FDA) and the European Agency for the Evaluation of Medicinal Products (EMEA). In a number of specific areas, Lundbeck has established additional policies and procedures to ensure responsible business ethics. This applies to areas in which Lundbeck intends to ensure higher ethical standards than those required by local legislation. For example, Lundbeck has defined special rules on marketing of pharmaceuticals, business intelligence, corruption and areas such as animal ethics and health, safety and environmental aspects. At the Group s headquarters, we have appointed a person to be in charge of ensuring compliance with good marketing practice in Lundbeck s international marketing activities. Similarly, each sales entity employs a person responsible for ensuring that Lundbeck complies with local legislation and industrial codes on good marketing practice. As a member of The European Federation of Pharmaceutical Industries and Associations (EFPIA), Lundbeck also complies with the EFPIA code on the promotion of pharmaceuticals. Lundbeck s policy on business ethics explicitly states that Lundbeck does not accept corruption, including bribery, kickbacks or similar illegal methods of any kind. Lundbeck has established an in-house audit function that reports to the Audit Committee under the Supervisory Board. As part of its duties, Internal Audit must ensure compliance with Lundbeck s business ethics policies. Furthermore, we have established a whistleblower system which all employees may use via the Group s intranet if they experience non-compliance with Lundbeck s business ethics policies. Reporting of non-compliance may be made anonymously. European Commission inspection In 2005, representatives from the European Commission conducted an inspection of Lundbeck s premises. The purpose was to identify whether Lundbeck had misused a dominant position or had been involved in anticompetitive agreements in the markets for antidepressant pharmaceuticals. Lundbeck is cooperating fully with the European Commission and has responded to the follow-up questions made by the Commission during Lundbeck is confident that the Group has complied with all relevant national and international competition legislation, and expects the European Commission to reach the same conclusion. 19

22 THE LUNDBECK SHARE Lundbeck s shares are listed on the Copenhagen Stock Exchange. The price of the shares rose by 19 per cent in During the same period, the OMXC20 index rose by 12 per cent, and the CX35PI the CSE s index for the pharmaceutical industry rose by 34 per cent. Facts about Lundbeck s shares on the Copenhagen Stock Exchange: ISIN number DK Ticker symbol Reuters (LUN.CO) Bloomberg (LUN.DC) Facts about the unsponsored ADR Program via Bank of New York: CUSIP number 40422M107 ADR ticker symbol HLUKY Since they were listed on the Copenhagen Stock Exchange in the summer of 1999, Lundbeck s shares have provided shareholders with a combined return, including re-invested dividends and compound interest, of 236 per cent. For the third year running, Lundbeck s shares have given the Group s shareholders a positive return on their investment. Trading of shares Total trading in Lundbeck shares on the Copenhagen Stock Exchange amounted to DKK 22.8 billion in 2006 corresponding to a total of million shares, an increase of 16 per cent on At year-end 2006, the market capitalisation of Lundbeck was DKK 33 billion, making Lundbeck the fifth largest company on the Copenhagen Stock Exchange. This was an increase of 12 per cent relative to the market capitalisation at year-end At the end of 2006, the weighting of the Lundbeck share in the OMXC20 index was 4.0 per cent compared with a 3.3 per cent weighting at the same time in Dividend For the 2006 financial year, the company s Supervisory Board proposes payment of a dividend of DKK 1.57 per share, corresponding to 30 per cent of the net profit for the year. The dividend for the year will be paid automatically via the Danish Securities Centre no later than five days after Lundbeck has held its Annual General Meeting. Share capital The denomination of each share is DKK 5 nominal value. The number of shares is 212,155,154, corresponding to a nominal share capital of DKK 1,060,775,770. The company has only one class of shares, and all shares rank equally. The shares are negotiable instruments with no restrictions on their transferability. The company s shares are registered by name and entered in the register of shareholders. 20

23 Lundbeck s Annual General Meeting will be held on 24 April 2007 at 4pm at Radisson SAS Falconer Center, Falkoner Allé 9, DK-2000 Frederiksberg. Prior to the Annual General Meeting there will be a shareholders meeting at 3pm at the same address. The Annual General Meeting will be transmitted live in Danish and English and may also be downloaded from lundbeck.com/investor after the meeting. +19% The Lundbeck share increased by 19% in The company s share capital was increased on several occasions in 2006 in connection with employees exercising warrants. In 2006, 505,609 shares were issued for this purpose. On 26 July, Lundbeck s share capital was reduced by 15,571,908 shares, corresponding to DKK 77,859,540, in connection with the cancellation of treasury shares acquired. At the end of 2006, Lundbeck held treasury shares equivalent to 1.87 per cent of the total number of shares issued. Buyback programme Lundbeck continues the ongoing share buyback programme, under which the Group will buy back shares of up to DKK 6 billion until the Annual General Meeting for the 2007 financial year. In 2006, Lundbeck bought shares for DKK 1.6 billion, corresponding to approximately 27 per cent of the combined programme of up to DKK 6 billion. At the end of 2006, approximately 39 per cent of the programme had been completed. Share capital Share Cancellation 2005, Share- capital of shares 2006, year-end buyback increase bought back year-end Shares issued 227,221, ,609 (15,571,908) 212,155,154 Treasury shares 7,523,399 12,011,862 (15,571,908) 3,963,353 Share capital 3.31% 1.87% Share buyback, Number of shares Value, DKK Average price, DKK Q3 93,458 14,929, Q4 5,147, ,030, Total ,240, ,960, Q1 8,048,509 1,064,656, Q2 1,688, ,924, Q3 1,843, ,739, Q4 431,093 60,733, Total ,011,862 1,591,054, Accumulated 17,252,496 2,318,014, The Lundbeck Foundation will through its wholly owned subsidiary LFI a/s participate in the buyback on a pro rata basis in order to maintain the free float at approximately 30 per cent. See release no. 166 to the Copenhagen Stock Exchange at lundbeck.com/investor/releases. 21

24 Composition of shareholders At the end of 2006, the 27,098 shareholders registered in the company s register of shareholders held in aggregate about 97 per cent of the share capital. Through its wholly owned company LFI a/s, the Lundbeck Foundation, which is the company s largest shareholder, held 146,532,467 shares at the end of 2006, corresponding to 69.1 per cent of the shares and votes in H. Lundbeck A/S. LFI a/s is the only shareholder who has notified the company that it holds more than five per cent of the share capital. During the year, Danish institutional investors reduced their pro rata holdings of Lundbeck shares by about 24 per cent. The reduction of this stake was primarily offset by an increase in the holdings of institutional investors in the rest of Europe, where the portfolio increase occurred mainly among a number of UK institutions and a few large institutions in Belgium, Sweden, the Netherlands and Germany. Institutional investors in the USA reduced their holdings of Lundbeck shares to hold about eight per cent of the free flow at 31 December The number of Lundbeck shares held by private investors decreased to about 21 per cent of the free flow at 31 December At the end of 2006, members of Lundbeck s Supervisory Board and Executive Management held a total of 73,446 Lundbeck shares. 22 Share ratios Ratios per share, DKK Earnings (EPS)* Diluted earnings (DEPS)** Cash flow Net asset value Dividend Dividend pay-out ratio 30% 30% Price-related data, DKK Market price, year-end High market price Low market price Average price H. Lundbeck A/S, growth 19.5% 6.9% OMXC20, growth 12.2% 37.3% CX35PI, growth 34.4% 19.8% Price/Earnings Price/Cash flow Price/Net asset value Market capitalisation, year-end, DKKbn Annual trading, million of shares * Number of shares used for EPS calculation: 211,093,160 ** Number of shares used for DEPS calculation: 211,438,807

25 Analyst coverage Company Name Website ABG Sundal Collier Alexander Lindström Morten Larsen ABN AMRO/Alfred Berg Mattias Häggblom Blue Oak Capital John Reeve Carnegie Bank Annette Lykke CSFB Andrew Sinclair Dansk Aktie Analyse Peter Falk-Sørensen Danske Equities Martin Parkhøi Deutsche Bank Brian White Dresdner Kleinwort Wasserstein Tero Weckroth Goldman Sachs Dani Saurymper Gudme Raaschou Annette Rye Larsen Handelsbanken Michael Novod ING Max Herrmann Tim Race JP Morgan Annie J. Cheng Jyske Bank Peter B. Andersen Merrill Lynch Erica Whittaker Brigitte de Lima Morgan Stanley Andrew Swift Lara Lambert Oppenheim Peter A. Düllmann Redburn Partners Paul Major SEB Enskilda Henrik D. Simonsen Societe Generale Susie Jana Standard & Poors David Seemungal Sydbank Rune Majlund Dahl UBS Brian Dourant Investor Relations contacts Steen Juul Jensen Vice President Tel Fax Jacob Tolstrup Investor Relations Manager, North America Tel Fax Financial calendar 2007 Date Event 7 March Announcement of financial results for the period 1 January-31 December April Annual General Meeting May Interim report for the first quarter of 2007 (January-March) 15 August Interim report for the second quarter of 2007 (April-June) 14 November Interim report for the third quarter of 2007 (July-September) 23

26 CNS Lundbeck is dedicated to the development of pharmaceuticals for the treatment of diseases of the central nervous system. The global market for CNS pharmaceuticals is one of the largest pharmaceutical therapeutic areas. The market is currently valued at more than DKK 500 billion. Lundbeck s CNS activities are directed at pharmaceuticals for the treatment of diseases such as depression, schizophrenia, Parkinson s disease, Alzheimer s disease, sleep disorders, stroke and alcohol dependence.

27 WORLD LEADER Lundbeck s vision is to become one of the world s leading companies in the field of diseases of the central nervous system. Lundbeck has more than 50 years of experience in developing pharmaceuticals to treat CNS disorders. Based on in-depth understanding of the patients unmet treatment needs, Lundbeck aims to develop new and innovative pharmaceuticals that will be considered the preferred treatment regime by doctors as well as patients. The first pharmaceutical in the world for the treatment of severe Alzheimer s disease A safe, simple and effective treatment for Parkinson s disease An efficacious non-sedative pharmaceutical for the treatment of schizophrenia The most prescribed branded antidepressant in the world

28 MARKETED PHARMACEUTICALS ALS In 2006, Lundbeck marketed a total of 14 different pharmaceuticals for the treatment of Alzheimer s disease, depression, Parkinson s disease and schizophrenia. Revenue The Group generated consolidated revenue of DKK 9,221 million in 2006, which is an increase of two per cent relative to the previous year. Sales in Europe amounted to DKK 5,537 million in 2006, representing 60 per cent of total revenue and a nine per cent increase relative to Income from Lexapro amounted to DKK 1,923 million, which was 25 per cent less than in Forest Laboratories, Inc. s inventory reduction, which caused the income decline for 2006, was completed at the end of the year. At the end of 2006, the inventories had been reduced to nine months of commercial supply. Revenue from International Markets amounted to DKK 1,379 million, corresponding to 15 per cent of total revenue and an increase of 21 per cent on the previous year. Revenue from Cipralex was DKK 3,508 million, which is an increase of 34 per cent relative to The revenue growth recorded in Europe accounted for about 70 per cent of this combined increase, corresponding to an increase in sales of DKK 635 million relative to the year before. Ebixa sales in 2006 amounted to DKK 1,361 million, a 23 per cent increase over last year. Approximately 80 per cent of the combined revenue increase for Ebixa derived from stronger sales in Europe. Sales of Azilect increased more than tenfold in 2006 to DKK 71 million, accounting for approximately 14 per cent of the combined revenue increase in Europe. Serdolect is in the early launch phase, and revenue derived from this pharmaceutical amounted to DKK 10 million in Sales of the Group s other pharmaceuticals are divided between revenue from citalopram and a number of mature antidepressants and antipsychotics. During the past eight quarters, revenue from citalopram has dropped by about DKK million per quarter, while revenue derived from the Group s other pharmaceuticals, other than citalopram, has been stable. Generic erosion of citalopram and price reductions on branded products are expected to continue also in Foreign currency exposure Foreign currency management is handled centrally by the parent company. The Group hedges a substantial part of its cash flow for a period of approximately 12 months. The company s USD income derives primarily from invoices to Forest. Revenue per product per region International Group, total Europe USA Markets DKKm Consolidated revenue 9,221 9,070 5,537 5,076 1,930 2,618 1,379 1,143 Growth, % 2% 9% -26% 21% Cipralex 3,508 2,625 2, Growth, % 34% 30% 50% Income from Lexapro 1,923 2, ,923 2, Growth, % -25% -25% Ebixa 1,361 1,105 1,214 1, Growth, % 23% 21% 44% Azilect Growth, % 1,068% 1,068% Serdolect Growth, % n.m. n.m. Other pharmaceuticals 1,973 2,550 1,476 1, Growth, % -23% -24% -89% -11% Other revenue Growth, % 61% 26

29 Launched pharmaceuticals in the market Mechanism of First Approved, no. Compound action Indication Trademark registration of countries Escitalopram ASRI Depression, generalised anxiety disorder, Cipralex, Lexapro, Sipralexa, Sipralex panic disorder, social anxiety disorder, OCD Citalopram SSRI Depression, panic disorder, OCD Cipramil, Seropram, Cipram, Celexa Memantine NMDA-antagonist Moderate to severe Alzheimer s disease Ebixa, Ebix Rasagiline MAO-B-inhibitor Parkinson s disease Azilect Sertindole Atypical antipsychotic Schizophrenia Serdolect Flupentixol Typical antipsychotic Mild depression Deanxit melitracene + TCA Nortriptyline TCA Depression Noritren, Nortrilen, Sensaval Amitriptyline TCA Depression Saroten, Sarotex, Redomex Zuclopenthixol Typical antipsychotic Schizophrenia and other psychotic disorders, Cisordinol, Clopixol anxiety, restlessness and insomnia Zuclopenthixol- Depot antipsychotic Maintenance treatment of chronic Cisordinol Depot, Clopixol Depot, decanoate psychotic disorders Ciatyl-Z Depot Zuclopenthixol- Typical antipsychotic Acute psychotic episodes, exacerbation Cisordinol-Acutard, Clopixol-Acutard, acetate of psychotic disorders Clopixol-Acuphase, Ciatyl-Z-Acuphase Flupentixol Typical antipsychotic Schizophrenia and other psychotic disorders Fluanxol, Fluanxol Mite, Depixol and mild depression Cis(Z)- Depot antipsychotic Maintenance treatment of chronic Fluanxol Depot, Depixol flupentixoldecanoate psychotic disorders Chlorprothixene Typical antipsychotic Schizophrenia and other psychotic disorders Truxal, Truxaletten anxiety and restlessness, withdrawal symptoms in drug addicts In 2006, 67 per cent of our sales in Europe were exposed to the euro as compared with 62 per cent in The second-highest exposure in Europe in 2006 was vis-à-vis the British pound. In International Markets, more than 81 per cent of revenue in 2006 was exposed to US dollars, Canadian dollars and Australian dollars. At the end of 2006, forward exchange contracts had been entered into to hedge foreign currency cash flows in 2007, primarily in USD, equivalent to a value of approx. DKK 2.7 billion. The average forward rate for USD in 2007 is 5.78 DKK/USD. 27

30 ALZHEIMER S DISEASE Alzheimer s disease is the most common form of dementia. According to WHO, about 23 million cases of Alzheimer s disease and other dementia disorders are reported worldwide every year. Source: Warner J, Butler R. Alzheimer s disease. Clinical Evidence 2000; 3: Alzheimer s disease is a progressive deterioration of human mental faculties. The disease affects a person s memory, language and logical thinking, and it also has an impact on the ability to perform everyday activities and changes the patient s behaviour. The disease usually sets in after the age of 60. Certain nerve cells die, causing a gradual deterioration of the function in the affected areas of the brain. Alzheimer s patients normally live between seven to ten years after being diagnosed. Alzheimer s disease is divided into three stages: mild, moderate and severe. In the late stages of the disease, sufferers will no longer be able to live an independent life and will require nursing care, either at home, in a sheltered home or a nursing home. As the disease progresses, various symptoms appear. In the mild stages, the cognitive symptoms are most noteworthy. In the late stages, the patient will also have functional and behavioural symptoms. Treatment of Alzheimer s disease The treatment of Alzheimer s disease is relatively under-developed in most countries. Only about half of all Alzheimer s patients are correctly diagnosed, and most are not diagnosed correctly until in the moderate and severe stages of the disease. In addition, a large proportion are not treated with the right medication. In some countries, health policy initiatives and reimbursement restrictions reduce the number of patients receiving correct treatment. The treatment alternatives consist of two classes of pharmaceuticals. The acetylcholine esterase inhibitors (AChEI) were the first pharmaceuticals approved for symptomatic treatment of mild to moderate Alzheimer s disease. Ebixa (memantine) belongs to the other class of NMDA (N-methyl-D-aspartate) receptor antagonists, and until the end of 2006, it was the only pharmaceutical approved to treat patients in the severe stages of the disease. The most important unmet need in terms of treatment alternatives is the ability to halt or change disease progression. Due to lack of such treatments, activities are focused on symptomatic treatments. The global market for pharmaceuticals to treat Alzheimer s disease posted average annual growth of approximately 37 per cent during the period from 1999 to 2005 (IMS Global Review 2006), making it the fastest growing therapeutic area in CNS diseases. In 2006, the Current medical treatments for Alzheimer s disease Mechanism of action Active ingredient Brand name Inventor Marketing partner N-methyl-D-aspartate-receptor antagonist Memantine Ebixa Merz Lundbeck/Forest Acetylcholine esterase inhibitor Donepezile Aricept Pfizer Acetylcholine esterase inhibitor Galantamine Reminyl Johnson & Johnson Acetylcholine esterase inhibitor Rivastigmine Exelon Novartis 28

31 DementiaNet.com DementiaNet.com An online community and information website for people affected by dementia and their relatives. Alzheimer s disease causes degeneration of the brain which seriously affects patients and their relatives. Read more about Alzheimer s disease at lundbeck.com/products European market grew 15 per cent in terms of the number of treatments, and 13 per cent in terms of value. Ebixa an effective and safe treatment Ebixa was the first pharmaceutical in the world for the treatment of severe Alzheimer s disease. In 2006, Ebixa represented 15 per cent of Lundbeck s total revenue, making it our second-largest pharmaceutical in terms of revenue. In-licensed from Merz Pharmaceuticals GmbH in Germany, Ebixa is marketed in more than 60 countries worldwide. Lundbeck markets Ebixa in Europe in certain countries together with its inventor Merz and in the rest of the world, excluding the USA and Japan. Forest Laboratories, Inc. and Daiichi Asubio Pharma Co. have the marketing rights in the USA and Japan, respectively. Lundbeck aims to increase Ebixa s market coverage for patients with moderate Alzheimer s disease and to retain its market-leading position among patients in the severe stages of the disease. We intend to achieve this by maintaining focus on sales initiatives in the existing markets and by cultivating new markets. Market position In 2006, memantine was the second-most prescribed pharmaceutical for the treatment of Alzheimer s disease in Europe. A number of clinical studies have shown Ebixa to be an effective and particularly welltolerated treatment of cognitive, functional and behavioural symptoms associated with Alzheimer s disease, and in clinical trials it reduced the number of patients that experience a deterioration of their clinical condition. In 2006, Ebixa continued to increase its market share in Europe, where it accounted for 15.1 per cent by the end of the year, up nine per cent compared with the end of Ebixa has achieved a very high market share in the three largest European markets France, Spain and Germany which combine to represent about 50 per cent of the total European market. A number of other markets also contributed substantially to the growth achieved in In 2006, Lundbeck launched Ebixa in the Chinese market. Ebixa is the first pharmaceutical marketed by our own medical representatives in China. Restrictions Cost reductions in the healthcare sector are high on the political agenda of many authorities responsible for pricing and reimbursement. In the market for pharmaceuticals to treat Alzheimer s disease, this trend is reflected in increasing restrictions on reimbursement schemes. Like other pharmaceuticals, Ebixa is subject to the ongoing evaluation by the healthcare authorities of health-economic rationale and therapeutic efficacy and safety, which may result in price or reimbursement changes. 29

32 DEPRESSION Depression is a serious disease with symptoms that may include persistent low mood, diminished energy, low self-esteem, difficulty concentrating and suicidal thoughts. The patient is no longer in control of his own mood and feelings. For this reason, it is important that people suffering from depression receive treatment. According to WHO, about 154 million cases of depression are reported worldwide each year. In the seven largest markets in the world (USA, Japan, Great Britain, Italy, Germany, France and Spain), the prevalence is estimated at about seven per cent of the population. Only about 40 per cent of depression sufferers consult their doctor, and only about two-thirds of these patients are diagnosed correctly at their first visit (Datamonitor, 3/2006). Accordingly, about 75 per cent of the people who suffer from a depression do not receive the correct treatment. A distinction is made between various types of the disease: single episode depression recurring depression chronic depression bipolar affective disorder (previously referred to as manic-depressive illness) A medical assessment decides whether a patient suffers from a depression, and the doctor prescribes the treatment most appropriate to each individual patient. Some of the most common treatment alternatives for depression are medication, psychotherapy, and light therapy. There is a close correlation between depression and various anxiety disorders. It is estimated that more than half of the patients suffering from anxiety also suffer from another psychiatric disorder, primarily depression. Consequently, it is a huge advantage if an antidepressant also has a documented effect in the treatment of anxiety disorders. The current treatment alternatives remain to cover a number of clinical needs, the most important of which are fast onset of therapeutic effect and achieving a symptom-free condition (remission). Lundbeck has been marketing pharmaceuticals for the treatment of depression since 1961, when we launched the pharmaceutical Saroten. Today, Lundbeck markets six different pharmaceuticals for the treatment of depression. The latest pharmaceutical is Cipralex, which is marketed by our partner Forest Laboratories, Inc. under the Lexapro brand in the USA. The most frequently prescribed branded antidepressant Cipralex /Lexapro has proven to be a very effective pharmaceutical in the treatment of depression and anxiety, becoming the most frequently prescribed branded antidepressant in the world in More than 70 million patients around the world have been treated with Cipralex /Lexapro since it was launched in The Group s defined goal is for Cipralex / Lexapro to remain the leading product in the antidepressants market and to retain this position during the late stage of its lifecycle until the exclusivity period expires. The Group aims to achieve this goal by dedicating its efforts to retaining and expanding a position in the market as the best pharmaceutical with notable differences compared to competing medicines. Concurrently with these efforts, we will secure the best possible conditions for pricing and market access. Market position In Europe, the underlying market grew by seven per cent in terms of volume, and Cipralex sales grew by a corresponding 44 per cent. In 2006, Lundbeck managed to increase its market share in a number of key markets. Cipralex is expected to continue to consolidate its position in the European market. Current medical treatments for depression Mechanism of action Active ingredient Brand name Inventor Marketing partner Allosteric serotonin reuptake inhibitor Escitalopram Cipralex /Lexapro Lundbeck Forest and others Serotonin noradrenaline reuptake inhibitor Duloxetine Cymbalta Eli Lilly Serotonin noradrenaline reuptake inhibitor Venlafaxine Effexor Wyeth Selective serotonin reuptake inhibitor Citalopram Lundbeck Forest and others Selective serotonin reuptake inhibitor Fluoxetine Eli Lilly Selective serotonin reuptake inhibitor Paroxetine GlaxoSmithKline Selective serotonin reuptake inhibitor Sertraline Pfizer Noradrenaline and dopamine Buproprion GlaxoSmithKline In 2006, Cipralex /Lexapro became the most frequently prescribed pharmaceutical for the treatment of depression, both in the USA and in Europe. In the USA, Lexapro retained its market share throughout 2006, feeling no adverse impact from the US launch of generic versions of Pfizer s former market leader Zoloft during the summer period. Also, the introduction of Medicare Part D, the US healthcare reform which subsidises prescription medication for everyone over the age of 30

33 70+ million More than 70 million patients worldwide have been treated with Cipralex /Lexapro since its launch in One reason why it is so difficult to tackle the biological cause of depression is that a depressed cell cannot be removed and examined like one can do with cancer cells. Read more about the causes of depression in the Lundbeck Magazine 2007 page , has not given rise to any change in Lexapro s market growth. The US market grew by five per cent in 2006 measured in terms of daily doses. Similarly, Lexapro sales were up seven per cent. Cipralex sales in International Markets, i.e. markets outside Europe and the USA, climbed 50 per cent, and Cipralex commanded a market share of 7.2 per cent at the end of Since the launch of Cipralex /Lexapro, a key parameter for the success of the pharmaceutical has been our ability to position it as a product offering unambiguous benefits compared with the competing pharmaceuticals. Today, there is comprehensive clinical documentation that Cipralex /Lexapro has: superior efficacy and faster improvement of the patient s condition superior and faster efficacy than the SSRIs at least the same efficacy as the SNRIs very few side effects especially good effect in major depression In 2006, Lundbeck presented clinical data at a number of international medical conferences that consolidated the market position of Cipralex /Lexapro. In December 2006, Lundbeck and Forest announced the results of a head to head study of Cipralex /Lexapro versus Cymbalta (duloxetine). Cipralex /Lexapro demonstrated significantly better effect and was better tolerated than Cymbalta in the treatment of depression. Similarly, in February we presented clinical results, confirming that Cipralex is superior to Paxil /Seroxat (paroxetine) in the treatment of depression. Previous clinical trials have shown superiority of Cipralex in comparison to Paxil /Seroxat in generalised anxiety disorder and social anxiety disorder. In April 2006, Lundbeck filed an application for approval of Cipralex for the treatment of Obsessive-Compulsive Disorder (OCD) in the EU. In January 2007, the health authorities in the EU approved Cipralex for the treatment of OCD, so Cipralex may now be used for treating depression and the most common anxiety indications. Based on comprehensive clinical documentation for Cipralex, a clear insight into the qualities of the pharmaceutical has been established. In our efforts to obtain the best possible conditions for pricing and negotiations for reimbursements, it is essential that we continue to disseminate this know-how to the decisionmaking authorities and doctors. Citalopram and other mature antidepressants In 2006, the market for mature antidepressants was characterised by increasing price pressure and a falling market share in Europe and fluctuating demand in countries outside Europe. At the end of 2006 citalopram had achieved a market share of 3.5 per cent and 0.3 per cent of total sales of antidepressants in Europe and USA respectively. 31

34 PARKINSON S DISEASE Parkinson s disease is a progressive, degenerative disorder caused by the degeneration of dopamine-producing cells in the brain. Symptoms associated with the disease are rigidity, tremors, slower and involuntary movements and impaired balance. According to WHO, about five million cases of Parkinson s disease are reported worldwide each year. It is estimated that the disease affects about one per cent of the population over the age of 65. The disease is chronic and progressive, and is rarely hereditary. It can be difficult to detect and therefore to diagnose early symptoms of Parkinson s disease. As the disease progresses, the characteristic motor and facial expressions manifest themselves, and inhibited and rigid movements may leave the patient unable to take care of himself. In the late stages of the disease, the patient s condition deteriorates strongly, often confining him to a chair or the bed. Treatments of Parkinson s disease most often aim to compensate for the degeneration of dopamine-producing neurons. Therapies primarily rely on levodopa pharmaceuticals, which are converted to dopamine in the brain. Unfortunately, levodopa causes severe longterm side effects in the form of involuntary movements, hallucinations and on-off phenomena, in which the patient experiences sudden changes in muscle strength, ranging from rigidity ( off ) to normal or dyskinetic condition ( on ) and back to rigidity ( off ) within a few minutes. Treatment alternatives such as dopamine agonists and MAO-B inhibitors are designed to replace dopamine and inhibit the catabolism of dopamine in the brain, respectively. Another group of drugs, Catechol-O-methyl transferase inhibitors (COMT inhibitors), are used in advanced-stage Parkinson patients to stabilise the levodopa level. As the disease progresses, the majority of patients will need adjunct treatment with levodopa therapeutics, and late-stage Parkinson patients therefore often receive a combination of different treatments. Even though levodopa has been called one of medicine s great successes and remains the principal treatment option for Parkinson s disease, the therapy only offers efficacy for a few years. Thus, there is still a major need for developing new drugs. Lundbeck has provided treatment for Parkinson s disease since 2005, when we launched the pharmaceutical Azilect. Azilect Rasagiline, the active ingredient in Azilect, has been in-licensed from Teva Pharmaceutical Industries Ltd. in Israel. Azilect is a selective MAO-B inhibitor with a positive effect on the symptoms of Parkinson s disease, in the early stages as monotherapy and in the late stages in combination with levodopa treatment. Current medical treatments for Parkinson s disease Azilect is a safe, simple and effective treatment that may be used during all stages of the disease. The patient is offered access to a simple treatment as, unlike other available treatments, Azilect is a once-a-day tablet treatment. Market position Lundbeck holds the rights to Azilect in Europe, South Africa, Australia and New Zealand, and we have launched the product in more than 20 countries. In addition, Azilect has been launched by Teva in territories such as the USA and Canada. Azilect was launched in a number of principal markets in 2006, including Spain, and by the end of the year our pharmaceutical held 2.9 per cent of the total market for anti-parkinson pharmaceuticals in Europe. The European market grew by nine per cent in terms of value in 2006, with an underlying volume growth of two per cent. Mechanism of action Active ingredient Brand name Inventor Marketing partner MAO-B inhibitor Rasagiline Azilect Teva Lundbeck COMT inhibitor Entacapone Comtess, Comtan Orion Novartis COMT inhibitor plus levodopa Entacapone+levodopa+carbidopa Stalevo Orion Novartis COMT inhibitor Tolcapone Tasmar Roche Valeant Dopamine agonist Pramipexole Mirapexin Boehringer Ingelheim Dopamine agonist Ropinirole Requip GlaxoSmithKline Dopamine agonist Cabergoline Cabaser Pfizer Dopamine agonist Rotigotine Neupro Schwarz Pharma 32

35 Azilect Lundbeck has launched Azilect in more than 20 countries. After my third or fourth appointment, the doctor asked me to walk back and forth in front of him. That made it obvious limp right arm, small steps: clear signs of Parkinson s disease. Read more about Hans-Jürgen Cosmo and his disease in the Lundbeck Magazine 2007 page 16. At the end of 2006, Azilect commanded a share of total sales of pharmaceuticals for the treatment of Parkinson s disease of 2.5 per cent in Germany, 2.1 per cent in the UK and 12.5 per cent in Spain. These three countries cover more than 50 per cent of the total European market. Azilect was launched in Italy in January

36 SCHIZOPHRENIA IA Schizophrenia is a mental disorder that occurs in varying degrees but is most often chronic. Up to one per cent of the population is directly affected by schizophrenia. According to WHO, about 25 million cases of schizophrenia are reported every year. Schizophrenia is the most common psychotic disorder. The disease most often occurs in late adolescence or early adulthood and is characterised by distinct changes in the patient s way of thinking and perception of the outside world. Furthermore, schizophrenia is characterised by short or long periods during which the patient is in an acute psychotic condition, suffering from definite hallucinations and delusions. But there are also stable periods during which the patient experiences a significant reduction in symptoms or is symptom-free. Even in stable periods, many patients have difficulty in establishing social contact, complete an education programme or hold a normal job. Schizophrenia patients have difficulty in performing even everyday activities such as cooking, personal hygiene and cleaning. The disease is often disabling and can be very painful, first and foremost for the patient, but also for the patient s relatives. Marketed pharmaceuticals Two groups of pharmaceuticals are used in the existing treatment alternatives. The first group of pharmaceuticals, the typical antipsychotics, was introduced in the 1950s and 1960s. Typical antipsychotics have demonstrated an effect in the treatment of schizophrenia but are also associated with often disabling side effects such as extrapyramidal symptoms (EPS), which are motor side effects such as slow movements and tremors. The other group of pharmaceuticals, the atypical antipsychotics, was introduced in the 1990s. These more recent pharmaceuticals are effective in the treatment of schizophrenia and are not associated with the same disabling side effects as the previous generation. In the USA, the atypical antipsychotics are the most frequently used pharmaceuticals, preferred in more than 85 per cent of treatments. In Europe, the use of the atypical antipsychotics did not overtake the typical antipsychotics until in 2006, and by the end of the year they represented a little over 50 per cent of the total volume in Europe. The group of new pharmaceuticals rose by seven per cent in the USA and 14 per cent in Europe in terms of volume. In terms of value, the combined market for antipsychotics increased by 11 per cent in the USA and 13 per cent in Europe in In Europe, growth in sales of antipsychotics is driven primarily by the ever-growing use of recent antipsychotics. Between 60 per cent and 70 per cent of all patients discontinue their treatment prematurely, most often causing a relapse. There may be a number of reasons for discontinuing the treatment: side effects such as EPS, major weight gain and drowsiness cause many patients to feel uncomfortable, giving them a feeling of not being themselves. The derivative effect of Current medical treatments for schizophrenia Mechanism of action Active ingredient Brand name Inventor Marketing partner D 2 antagonist, 5-HT 2 antagonist, Sertindole Serdolect Lundbeck Alpha-1 antagonist Partial D 2 agonist Aripiprazole Abilify Otsuka Pharmaceuticals Bristol Meyers Squibb D 2 /D 3 antagonist, 5-HT 2 antagonist Olanzapine Zyprexa Eli Lilly D 2 antagonist, 5-HT 2 antagonist Quetiapine Seroquel AstraZeneca D 2 antagonist, 5-HT 2, - Ziprasidone Geodon Pfizer 5-HT 1C antagonist, 5-HT 1A agonist D 2 antagonist, Risperidone Risperdal Johnson & Johnson 5-HT 2 antagonist Organon, GlaxoSmithKline D 1, D 2, D 3, D 4 antagonist, Clozapine Clorazil Novartis Baxter 5-HT 2A, -5-HT 2C antagonist D 2 antagonist Amisulpride Solian SanofiAventis 34

37 1% Up to one per cent of the population is directly affected by schizophrenia. Read more about the disease on lundbeck.com/ products. Life is wonderful when he is well. One has a different perception of happiness when one actually has to live with a psychiatric disorder. Read more about what it is like to be related to a person with a chronic psychosis in the Lundbeck Magazine 2007 page 12. the side effects of a number of pharmaceuticals, including the risk of developing diabetes caused by excessive weight gain, also gives rise to concern among many healthcare professionals and patients. the lack of a therapeutic effect may cause the patient to discontinue the treatment prematurely. Reasons such as poor living conditions, living a double life (one existence with the disease and another among family members and colleagues), disease progression and a number of unknown factors are believed to influence a patient s way of responding to medical treatment. There remains a large unmet need for pharmaceuticals with a therapeutic effect and with a tolerable level of side effects, which would contribute to a lower rate of relapse among the patients. Serdolect Serdolect effectively treats the symptoms of schizophrenia without causing drowsiness for the patient. The product brings hope for an existence without relapse to many patients who have failed to obtain a stabilising effect from other antipsychotics. Serdolect was discovered and developed by Lundbeck, and the Group holds all rights to the pharmaceutical. In 2006, Lundbeck re-launched Serdolect in 14 countries. Lundbeck expects to continue to roll out Serdolect in markets in and outside Europe in Lundbeck is also investigating the possibilities of marketing Serdolect in the USA. 35

38 How is the the basis of long-term growth secured? INNOVATION Through the development and procurement of innovative pharmaceuticals Lundbeck must facilitate the right combination of access to innovative environments within and outside the Group, including the financial resources necessary to develop new pharmaceuticals. Over the past five years, Lundbeck has brought four new pharmaceuticals to market and expanded the number of late-stage projects so that we currently have four candidates in phase III development and two in phase II. Furthermore, we have expanded our early development portfolio with candidates from our in-house research. The exclusivity protection that Lundbeck has built for its pharmaceuticals will expire from 2012 and onwards. In 2006, these pharmaceuticals accounted for 75 per cent of revenue. Long-term growth builds on an ambition of being able to bring more projects to market before the end of this decade and a long-term goal of launching a new pharmaceutical on the market every three to five years. Business development Lundbeck aims to grow, also in the long run, and in this context, the Group regularly seeks to identify the best possible combination of organic and non-organic growth. Lundbeck systematically scans the market for potential new pharmaceuticals and pharmaceutical candidates. In recent years, the market for development projects has witnessed a trend in which potential takers outnumber the projects available. This trend has pushed up the prices of projects, and the contractual terms have become more complex in the form of co-marketing agreements, development and sales-related milestone payments and various royalty provisions. Lundbeck is confident that the high level of innovation in the Group s pipeline built on inhouse research will attract the right licensees, who will join forces with Lundbeck to optimise the commercial value. Moreover, Lundbeck will be an ideal partner in in-licensing agreements owing to the Group s extensive experience in partnership alliances that meet the requirements of both parties for commercial success and strong involvement in any given project. New activities in the USA Lundbeck is in the process of setting up its own staff of medical representatives in the USA, the world s largest pharmaceuticals market. As an integral part of our collaboration agreement with Merck & Co., Inc. on the development and commercialisation in the USA of the compound gaboxadol for the treatment of sleep disorders, Lundbeck will build and train its own sales force. This set-up involves only limited financial risk. Lundbeck intends to build a sales infrastructure consisting of approximately 250 employees, which will be substantially fewer than the number of medical representatives employed by Merck to market gaboxadol. In addition to marketing gaboxadol in the USA, Lundbeck s medical representatives may market other pharmaceuticals. This could be pharmaceuticals in-licensed by Lundbeck in the future, but also pharmaceuticals based on our own research and development initiatives. Partnerships Lundbeck aims to optimise the value of innovative pharmaceuticals and diversify its exposure to risk associated with their development. To this end, the Group takes part in various types of partnerships at the early research stage as well as for clinical development and commercialisation alliances. Partnership agreements have allowed Lundbeck to integrate the Ebixa and Azilect pharmaceuticals in its own infrastructure and also to launch Cipralex in countries in which the Group does not have its own sales infrastructure. Our partnership with Forest Laboratories, Inc. for the marketing of Lexapro, and before that of Celexa, in the USA has been crucial to Lundbeck s development. In the same way, Lundbeck aims to continue to form partnerships concerning the Group s development projects. Lundbeck recently established a commercial partnership with the Finnish company BioTie Therapies Corp. concerning the compound nalmefene for the treatment of alcohol dependence. In connection with projects that would benefit from commercialisation outside Lundbeck s own sales infrastructure, the Group will seek to form partnerships when the projects advance to clinical development. Phase III projects Gaboxadol is an investigational agent in phase III for the treatment of sleep disorders and the first selective extra-synaptic GABA A -agonist constituting a new class of sleep agents. Gaboxadol is expected to offer patients a more natural sleep pattern, offering good sleep quality that makes them feel rested the following day. In 2006, Lundbeck and its business partner in the US, Merck, published results of two phase II clinical studies of gaboxadol, which demonstrated that the compound is an effective treatment of sleep disorders in respect of both sleep maintenance and induction. Gaboxadol also proved to be well tolerated with no nextday residual effects. 36

39 250 The US market accounts for 56 per cent of the world market for pharmaceuticals for disorders of the central nervous system. Read more about Lundbeck s activities in the USA in the Lundbeck Magazine 2007 page 28. USA Lundbeck intends to build a sales infrastructure in the USA consisting of approximately 250 employees. Partners Compound Licensor Lundbeck Marketing rights Partner r Marketing rights Escitalopram Lundbeck Worldwide, excluding USA Forest USA (exclusive rights) Memantine Merz Pharma Worldwide, excluding USA, Japan, Central America, Russia, Baltic countries and Bulgaria Rasagiline Teva Europe and a few selected International Markets Gaboxadol Lundbeck* Worldwide Merck USA & Japan (Co-promotion) Bifeprunox Solvay Worldwide, excluding USA, Canada, Mexico, Argentina, Brazil and Japan Desmoteplase PAION Worldwide, excluding North America Nalmefene BioTie Worldwide, excluding North America, Mexico, UK, Ireland, Turkey and South Korea * In-licensed from Garching Innovation GmbH. 37

40 The fact that no one knows with certainty why these disorders arise is a major challenge. Read more about research and development in the Lundbeck Magazine 2007 page 8. Send the sheep home Read more about sleep disorders in the Lundbeck Magazine 2007 page 24. Pharmaceuticals in clinical development Development stage Registration Expected Indication Compound Mechanism of action Phase I Phase II Phase III application launch Sleep disorder Gaboxadol Selective extra-synaptic GABA A -agonist Schizophrenia Bifeprunox Dopamine/serotonin Stroke Desmoteplase Plasminogen activator Alcohol dependence Nalmefene Specific opioid receptor antagonist - Depression Lu AA21004 Serotonin modulator & stimulator Psychosis Lu Monoaminergic Depression Lu AA24530 Multiple targets Depression Lu AA34893 Multiple targets Mood disorders Lu AA44608 Selective NPY receptor antagonist Lundbeck and Merck expect to file an application for registration with the US health authorities in mid Data from the phase III trials will be presented at the medical conferences APA (annual meeting of the American Psychiatric Association) in May 2007 and at APSS (annual meeting of the Associated Professional Sleep Societies) in June Bifeprunox is a new compound (a D partial 2 agonist and 5-HT 1A partial agonist) in phase III clinical development for the treatment of schizophrenia and possibly other mood disorders, such as bipolar affective disorder. Bifeprunox is developed in collaboration with Solvay Pharmaceuticals B.V. of Belgium and US-based Wyeth. In December 2006, phase II and III study results in patients with schizophrenia were presented at an important international scientific conference. The results of these studies showed that bifeprunox demonstrated a clinical effect and a favourable weight and metabolic profile versus placebo or active references. Weight gain and metabolic disturbances are common and serious side effects of many antipsychotic pharmaceuticals which can cause some patients with schizophrenia to stop taking their medication. Lundbeck is planning to initiate new phase III clinical studies with bifeprunox. Desmoteplase is a novel plasminogen activator, or blood clot-dissolving agent, in phase III clinical development with the potential to treat patients with acute ischaemic stroke up to nine hours after onset of symptoms. The only pharmaceuticals currently approved for the treatment of acute ischaemic stroke must be administered within three hours, so desmoteplase has the potential to treat many of the patients that presently have no treatment opportunity. Forest and PAION AG completed the enrolment of patients for the first phase III clinical study at the end of Data from this study will be published around mid

41 The brain. At only 1.35 kg and accounting for less than two per cent of our body weight, the brain is the seat of our intelligence, interpreter of our senses, initiator of body movements, controller of behaviour, and expresser of our mood. Read more about the brain in the Lundbeck Magazine 2007 page 4. Lundbeck and PAION are expected to initiate additional clinical studies during Nalmefene was in-licensed from Finlandbased BioTie in November Nalmefene is a specific opioid receptor antagonist for the treatment of alcohol dependence, and the project is the first oral drug showing efficacy in reducing alcohol abuse in multicentre, controlled studies. On behalf of its collaboration partner in the UK, Britannia Pharmaceuticals Limited, BioTie has filed its first application for marketing authorisation for nalmefene for the treatment of alcohol dependence with the British health authorities (Medicines and Healthcare products Regulatory Agency MHRA). The UK acts as reference country in the EU s mutual recognition procedure for approval of pharmaceuticals. Lundbeck awaits a response from the British authorities in respect of BioTie s clinical package in connection with further development and approval in Lundbeck s territories. Phase II projects In June 2006, Lundbeck decided to investigate Lu AA21004 for the treatment of depression in a phase II clinical trial with 400 patients. The first patient was treated in September The decision was based on positive pre-clinical results as well as positive conclusion of the phase I studies. Lu AA21004 is the most advanced project in Lundbeck within a new chemical class, the bisaryl-sulphanyl amines. The pharmacology of these projects is markedly different from any currently marketed antidepressants. Compared with currently approved antidepressants preclinical models have demonstrated that Lu AA21004 addresses important unmet needs for patients on both fast onset of effect and increased efficacy. After the close of the financial year, Lundbeck announced in March 2007 that Lu , a pharmaceutical candidate for the treatment of schizophrenia, will be investigated in phase II clinical trials. Invented by Lundbeck, Lu has shown in pre-clinical models to address important unmet needs for patients with schizophrenia. Phase I projects In March and November 2006, respectively, Lundbeck announced the initiation of studies of Lu AA34893 for the treatment of depression and anxiety and studies of Lu AA44608 for the treatment of mood disorders. Lu AA44608 is the first candidate from Lundbeck s research facility in the USA (acquired in 2003) to advance into clinical development. Lundbeck expects to initiate additional studies of pharmaceutical candidates from its in-house research during

42 RESPONSIBLE Acting responsibly is a key value for Lundbeck. We know that our decisions and actions may have a great impact on others, and we wish to run our business based on respect, trust and integrity. We have a responsibility towards the patients we wish to help and an obligation to ensure an attractive workplace and a sound working environment for our employees as well as a duty to create financial value for our shareholders. Last, but not least, we have a responsibility to provide society with new pharmaceuticals and knowledge, whilst minimising the environmental impact.

43 ACTIONS Lundbeck remains dedicated to maintaining the position as an attractive workplace with a good working environment and development opportunities was a good year for our environmental initiatives as Lundbeck worked to ensure environmental improvements throughout the value chain. Lundbeck contributes to society s treatment of diseases of the central nervous system by developing innovative pharmaceuticals and through knowledge sharing initiatives. In addition, the Lundbeck Foundation makes substantial contributions to scientific research for the benefit of society. 41

44 How can Lundbeck retain and attract competent and committed employees? AN ATTRACTIVE WORKPLACE Through competence building and a healthy working environment Lundbeck s long-term success hinges on its ability to attract and retain the best employees in the industry. The Group endeavours to ensure that Lundbeck upholds its reputation as an attractive workplace with a healthy working environment and that its employees are given the opportunity to realise their full potential. Today, Lundbeck is an international pharmaceutical company with more than 5,300 employees. Headquartered in Denmark, Lundbeck has subsidiaries and representative offices in 58 countries. Since 2002, the Group has seen a steady increase in the proportion of employees outside Europe as our operations have grown. Lundbeck is a fully integrated pharmaceutical company, possessing competencies throughout the value chain. Of our total staff, 22 per cent are employed in research and development,18 per cent in production, 45 per cent in sales and marketing and 16 per cent in administrative functions. In 2006, we intensified our efforts to improve leadership skills and build competencies, create a diversified labour force and ensure a healthy working environment, focusing on the psychological working environment, health and wellbeing. Battle for talent In recent years, attracting talented employees has become an increasingly difficult challenge for many companies, with large numbers of older employees retiring from the labour market and fewer young people entering the labour market due to a slowing population growth. Lundbeck has a young and dynamic staff with an average age of 39.4 years and average seniority of 5.9 years. Therefore, we are not facing the challenge of many older employees retiring from the labour market. However, the ability to retain Group employees in a time of increased worker mobility and declining unemployment and to attract new talent is just as important to Lundbeck as it is to other businesses. For these reasons, it is important for Lundbeck to be regarded as an attractive workplace for talented employees and for us to be able to retain our employees. In the years ahead, Lundbeck will intensify its efforts by attending a greater number of career fairs for the pharmaceutical industry and increasing its visibility at the educational institutions from which Lundbeck recruits many of its employees. In 2006, Lundbeck s total staff turnover was 13.3 per cent, which is substantially below the average for Danish businesses. Staff turnover from voluntary resignations was eight per cent, which is a small increase compared to 2005, when turnover from voluntary resignations was 6.8 per cent. A number of other Danish companies have also seen an increase in personnel turnover, probably caused by lack of available workforce. Leadership training The ability of our managers to manage, develop and coach staff is pivotal if Lundbeck is to fulfil the Group s vision and goals. In 2006, Lundbeck designed a new leadership development programme currently under implementation in our research and development organisation. Based on the experience we gain from the research and development organisation, the programme will be fine-tuned and gradually rolled out to the rest of our organisation in 2007/ Specific parts of the programme will be mandatory and identical for all business areas, whilst other components will reflect local prerequisites and be aligned with specific needs. 42

45 Meet Lundbeck s employees at lundbeck.com/careers Our leadership development programme builds on three cornerstones: Lundbeck s corporate culture, Lundbeck s leadership principles, and practical management tools. The programme is tailored to Lundbeck s three career paths: line manager, project manager and specialist. The philosophy is to align the development programme with the needs of each individual manager and to follow up with personal development plans. Competent employees Developing employee competencies is instrumental in Lundbeck s efforts to maintain its position as an attractive workplace. Each year, Lundbeck devotes substantial resources to building employee skills. In 2006, our HR function arranged over 150 seminars and courses for more than 1,400 managers and employees. Our individual business units also launched activities to enhance their competencies in areas of particular importance to their staff. In 2006, our research organisation launched a major innovation project aimed at combining increased efficiency with an even higher level of innovation in research into new pharmaceuticals. In terms of both research and process optimisation, we focus strongly on stimulating creativity, knowledge sharing and risk tolerance. Each department has designed its own unique action plan rooted in a general innovation strategy, and our employees have assumed ownership of the activities to be carried out in In 2006, Lundbeck established a Lean academy as part of our activities to build a Lean culture in Group production. For the Lean project to be successful, it is important that we develop specific leadership skills for all managers and ensure that all employees involved in the Lean project have attended general training programmes. Lundbeck has developed three training modules and held courses in Lean leadership, Lean tools and Lean understanding, and 11 employees have been trained as Lean coaches so they can hold workshops. In 2006, we held 40 Kaizen events attended by more than 225 employees. All our production staff members will receive training in fundamental Lean principles in 2007, and the Lean academy will arrange discussions and leadership development for frontline managers in Lundbeck s production units. Employees in our sales and marketing organisation have attended a number of training activities in connection with the launch of the Group s new pharmaceuticals, Azilect for the treatment of Parkinson s disease and Serdolect for the treatment of schizophrenia. In addition, Lundbeck s sales and marketing organisation has set up two new functions at the Group s headquarters, Sales Excellence and Market Access. The idea is to ensure knowledge sharing and to establish best practice in the Group s sales organisation in order to optimise our sales activities and prepare for the growing challenges in the pharmaceuticals market. Diversity Lundbeck defined a diversity policy in We believe that human diversity can strengthen our business, have a favourable effect on creativity and innovation, and offer mutual benefits. To Lundbeck, diversity is a matter of utilising the resources of all its employees. The objective of our diversity policy is to create equal development and career opportunities for all employees at Lundbeck. To this end, the Danish part of our organisation has launched a recruitment programme primarily targeting candidates who may find it difficult to enter the labour market for reasons other than their qualifications. The programme encompasses 15 positions per year during the period

46 Health and safety statistics for Lost-time accidents Registered near-misses Indicators for prevention of accidents: Near-misses per registered lost-time accident Number of lost workdays per accident Frequency of accidents: Number of lost-time accidents per million hours of work Health and well-being Lundbeck aims to ensure that all Group employees enjoy a safe and healthy working environment. As in preceding years, Lundbeck took a number of steps to ensure a healthy working environment in In 2006, we formulated a global health policy, offering a range of health-promoting activities in the Danish part of the organisation for the benefit of our employees and their families. These activities are intended to provide inspiration for Lundbeck s companies around the world so that they can launch initiatives adapted to local conditions in their country. One of the preventive measures of the health policy is well-being interviews. Through a constructive dialogue between manager and employee, these interviews are aimed at preventing long-term illness and job dissatisfaction. In 2006, Lundbeck ran a campaign focused on the psychological working environment. This initiative has clarified some of the issues, encouraging discussions about what it takes to ensure a healthy psychological working environment. The campaign received recognition from the Danish Working Environment Council, which nominated Lundbeck for the Working Environment Award We will continue these efforts in 2007 by focusing on the prevention of work-related stress. One of the initiatives will be to place this topic on the agenda at one of the two annual meetings held for the 100 managers and employees in our health, safety and environment organisation. Accident prevention A healthy and safe working environment requires a constant focus on the prevention of accidents. The number of accidents at Lundbeck has been low in recent years and on a level with the industry average. One of the goals for 2006 was to reduce the number of lost-time accidents relative to However, we failed to achieve that goal; the frequency rose from 7.19 to 7.80 in Although the number of lost workdays per accident also increased in 2006, most of the accidents were of a less serious nature as defined by the Danish National Working Environment Authority classification. The accidents resulted in 0.6 lost hours per 1,000 working hours in 2006, which is well below the industry average. Lundbeck will continue to focus on accident prevention in the years ahead. Our specific target is to bring the accident frequency down from the 2006 level. The registration of near-misses offers the opportunity to change into more safe working procedures. The goal is to register at least seven near-misses per registered losttime accident. Read more about how Lundbeck is working to attract, develop and retain qualified employees on lundbeck.com/careers. 44

47 How can Lundbeck continue to grow without increasing its impact on the environment? ENVIRONMENTAL INITIATIVES Through environmental improvements throughout the value chain Lundbeck aims to conduct its activities in a way that minimises its environmental impact. This philosophy is the foundation of the general ISO system which Lundbeck is currently implementing. The system provides coherence and continuing improvements throughout, from the development of new pharmaceuticals to collaboration with external suppliers. In terms of environmental initiatives, 2006 was another successful year for Lundbeck. Lundbeck s development of pharmaceuticals and manufacturing processes are based on chemical synthesis. This means that our most significant effects on the environment derive from our consumption of raw materials primarily organic solvents, energy and water along with waste production and the emission of solvents into the air. The active ingredients in Lundbeck s pharmaceuticals are manufactured at Seal Sands in the UK, Lumsås in Denmark and Padova in Italy. These factories have been certified to the ISO environmental standard for a number of years. In 2007, this certification will be extended to include Lundbeck s headquarters at Valby and its facilities for manufacturing finished pharmaceuticals and research and development. Lundbeck s research unit in New Jersey, USA, will be certified in With these certifications, we are showing a continuing commitment to making environmental improvements. Three important steps for the environment Environmental assessment of gaboxadol Pharmaceutical residues have been found in nature, and this has aroused public concern. This is especially true of hormone and hormonelike substances such as oestrogens, as they may induce sex reversal in animal species in aquatic environments. EU requirements for the environmental assessment of pharmaceutical products entered into force in As early as 2004, Lundbeck decided to investigate the environmental impact of all new pharmaceutical candidates, and in 2005 the first environmental studies of our development candidates gaboxadol and bifeprunox were initiated by an independent laboratory. Lundbeck believes that the Group has a responsibility to contribute information about the environmental impact of Lundbeck s pharmaceuticals. Even the pharmaceuticals that Lundbeck markets in bulk volumes do not immediately arouse suspicion of any hazardous environmental impact: these pharmaceuticals are typically administered in low doses and their active ingredients do not belong to the groups of substances that pose the greatest threat to the environment. Environmental testing of gaboxadol confirmed this assumption in Gaboxadol does not represent any immediate risk to the water environment, groundwater, micro-organisms or soil, nor does it accumulate in nature. Environmental testing results for bifeprunox, Lundbeck s development candidate for the treatment of schizophrenia, are expected sometime in Voluntary CO 2 strategy The EU quota directive does not apply to Lundbeck, so we are under no legal obligation to reduce our CO 2 emissions. Nevertheless, Lundbeck contributes to this impact on the environment through its energy consumption, and we have been working determinedly to optimise our energy consumption for a number of years. As part of our health, safety and environment strategy for , we have launched a CO 2 strategy. Lundbeck s CO 2 strategy lays the foundation for long-term energy conservation efforts throughout our organisation. As part of its CO 2 strategy, Lundbeck aims to reduce direct and indirect CO 2 emissions through energy optimisation and the use of CO 2 -neutral energy sources identify and implement CO 2 reductions according to a Group-wide prioritisation introduce incentive schemes to promote energy-conscious behaviour amongst our employees. set goals for CO 2 emissions Principles for a sustainable partnership with Lundbeck Lundbeck introduced a requirement in 2006 that its suppliers, in addition to complying with Lundbeck s standards for commercial aspects and quality, must also help protect the environment and provide decent living and working conditions for their employees. Lundbeck has defined seven principles that are key prerequisites for developing sustainable partnerships with its suppliers. Under these principles, Lundbeck and its suppliers undertake to provide a decent living for all employees, secure the same rights and opportunities for everyone, take special care of children and adolescents, protect against coercion and violations, respect the freedom of association, provide safe and healthy working conditions and protect and improve the environment. Following a preliminary risk assessment, Lundbeck s procurement staff team up with in-house specialists to evaluate essential suppliers based on relevant criteria from the UN s Universal Human Rights Declaration, ILO conventions and International Council of Chemical Associations (ICCA) Responsible Care Global Charter. Future supplier contracts will include a clause containing these requirements. 45

48 More production, less environmental impact Lundbeck experienced a positive trend in 2006: we increased our production output whilst also reducing our most significant effects on the environment. This trend can be seen in our key environmental impact figures. The complete set of data is available on lundbeck.com/sustainability. Productivity increased, which is good for the environment In 2006, Lundbeck used 4,490 tonnes of solvents in its chemical production, whilst 36 tonnes were used for research and development and pharmaceutical production at the Group s headquarters. The manufacture of ingredients and intermediates rose by 15 per cent, whilst the production of finished goods increased by five per cent relative to At the same time, overall consumption of raw materials was down five per cent. This figure reflects a ten per cent decline in the consumption of solvents and a four per cent increase in the use of other raw materials, including the active ingredients in Lundbeck s pharmaceuticals. Our energy consumption in 2006 was 120,100 MWh, which is the same level as 2005, resulting in CO 2 emissions totalling 38,630 tonnes from Lundbeck s boiler plant and external supplies of power and district heating in The total consumption of water declined just under five per cent relative to Substantial drop in solvent emissions Lundbeck has been successfully reducing emissions over a number of years, partly by planning its work so processing takes place in a closed system and partly by taking organic solvents out of the ventilation air before it is released into the outdoors. Total emissions of organic solvents were 22 tonnes in 2006, or 24 per cent lower than in The reduction was attributable to lower levels of organic solvent consumption and an increased use of cleaner technologies. The loss of solvents via Lundbeck s ventilation air was less than 0.5 per cent of total solvent consumption in Less waste Chemical waste accounts for 85 per cent of Lundbeck s waste volume. This percentage has remained stable for the past five years, but the total volume of waste has dropped considerably. During this same five-year period, the waste volume was proportional to the production of active ingredients and intermediates. In 2006, only one per cent of Lundbeck s total waste volume was deposited. This risk assessment showed that 100 of Lundbeck s 3,500 suppliers have an impact on the company that calls for dialogue and a mutual understanding of Lundbeck s expectations in this area. The 100 suppliers represent 80 per cent of Lundbeck s total procurement. 46

49 Strategic objectives for , target status in 2006 and new targets for 2007 Strategic objectives HS&E system* Establish a system certified to ISO and OHSAS for health, safety and environment in relevant sectors of Lundbeck. Data and indicators Identify a systematic approach to collecting and reporting data and indicators for health, safety and the environment. HS&E issues in Research & Development Ensure that systematic attention is paid to health, safety and environment considerations in research and development projects. Consumption of resources Incorporate health, safety and environmental considerations in productivity improvements, minimise resource consumption and increase recycling. CO 2 strategy and energy optimisation Define a CO 2 strategy with the main emphasis on energy optimisation. Supplier evaluation Establish a systematic evaluation of significant environmental and employee conditions at supplier and partner locations. Communication and training Improve Lundbeck s communication with respect to health, safety and the environment and thus increase employee understanding of and knowledge about the topics and consolidate the company s profile in the community. Strategy and organisation Develop Lundbeck s strategy and organisation for health, safety and environmental issues. Target status in 2006 Implement the HS&E system in Production and selected parts of Research & Development. By the end of 2006, only one department in Production had not yet implemented the system. Establish indicators for Lundbeck s most important health, safety and environmental impacts. Conduct environmental toxicology studies of the development candidate gaboxadol. Identify and document proposals for cutting resource consumption in Research & Development and Production. Implement energy savings in an ongoing process. Train employees in departments with the highest energy consumption. Implement procedures to evaluate environmental and employee conditions at key supplier locations. Motivate employees to demonstrate energyconscious behaviour. Introduce employees to Lundbeck s health, safety and environment system. Annual update of strategy and organisation. In 2006, the organisation and activities were aligned in accordance with Lundbeck s HS&E strategy. The only outstanding matter in respect of this target was an editorial update of the strategy document. Target 2007 Implement the HS&E system in Lundbeck in Denmark. Achieve ISO and OHSAS certification of Lundbeck s production sites. Identify unwanted noise in APV (work place assessment) and attenuate all noise above 80 db (A) at stationary work stations when technically and financially feasible. No targets have been defined for this area for Conduct environmental toxicology studies of the development candidate bifeprunox. Replace substances or materials that have an adverse impact on the environment or working environment. Conduct at least 20 energy and resource-saving activities, including identification and energy investigations. Reduce emissions of volatiles through the use of solvent savers, solvent supermarkets, process optimisation or substitution in all relevant areas. Accomplish a CO 2 strategy and adopt longterm targets for CO 2 emissions. Perform audits of two suppliers with respect to environmental and employee conditions. Launch a general and working environment module in Lundbeck s leadership training programme. Prepare a minimum of four business cases that illustrate the financial impact of Lundbeck s HS&E initiatives. Update Lundbeck s HS&E strategy in collaboration with relevant stakeholders. * HS&E = Health, Safety & Environment. = Target met = Target met, with a few exceptions = New targets 47

50 How does Lundbeck contribute to scientific progress? RESEARCH EARC AND KNOWLEDGE SHARING Through innovative pharmaceuticals, donations and knowledge sharing Lundbeck s mission is to improve the quality of life for people suffering from psychiatric and neurological diseases. Lundbeck contributes to society s treatment of patients with disorders of the central nervous system through the development of innovative pharmaceuticals and by sharing research and clinical practice. Furthermore the Lundbeck Foundation makes substantial contributions to scientific research for the benefit of society. Each year, Lundbeck ploughs about 20 per cent of its revenue back into research and development, a figure considerably above the industry average of approximately 15 per cent. In 2006, Lundbeck invested approximately DKK 1.96 billion in the research into and development of new pharmaceuticals. This represents a substantial contribution to society s research and development, corresponding to about 15 per cent of the total public funds allocated to research and development in Denmark, and was on a level with the aggregate research budget for Denmark s largest university, the University of Copenhagen. Adhering to the EU Lisbon strategy Lundbeck is one of the Danish companies that invests the most in research and development. The EU target for 2010 is that each member country should invest three per cent of its gross domestic product (GDP) in research and development each year and private-sector investment in research and development should represent two per cent of GDP. In 2006, Lundbeck s investment in research and development accounted for 0.12 per cent of Denmark s GDP. This means that if just 20 companies invest in research and development to the same degree as Lundbeck, Denmark will meet its Lisbon targets for private enterprises. Knowledge sharing Knowledge is the cornerstone of optimum therapeutic treatments. Accordingly, an important part of Lundbeck s operations is offering training programmes for specialists in depression, anxiety, schizophrenia and dementia. The Lundbeck Institute was established in 1997 as an international non-commercial forum with the aim of helping improve the quality of life for patients suffering from diseases of the central nervous system. All activities build on objective knowledge and involve interactive and international seminars for specialists, educational materials, professional websites and resources for specialists, and web-based forums on depression and dementia that allow experts, patients and their relatives to exchange information. The seminars held by the Institute are accredited by the European Accreditation Committee in CNS (EAC), and the training activities are approved by the Institute faculty, which includes more than 90 leading psychiatrists and neurologists from around the world. The Lundbeck Institute In 2006, the Lundbeck Institute held 15 seminars attended by 366 people from 36 countries. Since it was established in 1997, the Institute has held a total of 122 seminars for 2,758 specialists from 56 countries. These specialists then hold additional seminars and workshops in their home countries, so about 100,000 specialists around the world have benefited from the Lundbeck Institute s direct and indirect training activities over the past ten years. The Association of European Psychiatrists (AEP), Collegium Internationale Neuro-Psychopharmacologicum (CINP), the European Federation of Neurological Societies (EFNS), the European College of Neuropsychopharmacology (ECNP) and the World Psychiatric Association (WPA) support the work of the Institute and are represented in the Lundbeck International Neuroscience Foundation, which manages the Institute s activities. 48

51 specialists around the world have benefited from the Lundbeck Institute s direct and indirect training activities over the past ten years. The Lundbeck Foundation donated DKK 248 million to research in Read more about the Lundbeck Institute in the Lundbeck Magazine 2007, page 32. Donations for independent research The Lundbeck Foundation, the principal shareholder of the Lundbeck Group, holds approximately 70 per cent of the shares, making it the primary recipient of dividends from Lundbeck Group operations. Since Lundbeck s IPO in 1999, the Lundbeck Foundation has in its capacity of principal shareholder received substantial dividends, also in the form of share buybacks. The objectives of the Lundbeck Foundation are to support and expand the activities of the Lundbeck Group and to grant financial support to high-quality scientific research. Group management is pleased with the fact that Lundbeck s value-generating initiatives also benefit society at large through the donations made by the Lundbeck Foundation. Donations from the Foundation have risen considerably in recent years, with more than a tenfold increase from DKK 22 million donated in 1999 to DKK 248 million in Examples of donations from the Lundbeck Foundation in 2006 DKK 65 million to establish three Danish centres in the fields of theoretical physics and chemistry: the Center for Atomic-scale Materials design at the Technical University of Denmark, the Centre for Quantum System Research at the University of Aarhus and the Centre for Theoretical Chemistry at the University of Aarhus DKK 1,734,300 for the development of bio-sensors. By combining the insides of computer chips with the insides of nerve cells, scientists will be able to register very low concentrations of molecules in the blood that may reveal diseases. DKK 20 million to build a CNS research group at the Biotech Research & Innovation Centre, which is to conduct research into molecule structures and the mechanisms of action behind the neuronal pathways. DKK 873,600 to examine whether infections in pregnant women may have a lasting effect on embryos, specifically with respect to ADHD (Attention Deficit Hyperactivity Disorder) and autism. DKK 800,000 to measure the effect of electromagnetism in the treatment of depression. 49

52 FINANCIAL REPORT 50

53 FINANCIAL Revenue 9,500 DKKm Net profit for the year 2,500 DKKm EPS 7.5 DKK REPORT 50 Summary for the Group 56 Income statement 54 Balance sheet 56 Statement of changes in equity 59 Cash flow statement 60 Notes 102 Management statement 103 Auditors report 106 Corporate Governance 107 Supervisory Board 108 Executive management 110 Info on general annual meeting Revenue DKK 9,221 million Profit from operations DKK 1,784 million Net profit for the year DKK 1,107 million Summary for the Group Income statement Balance sheet Statement of changes in equity Cash flow statement Notes to the financial statements Management statement Independent auditors report Supervisory Board Executive Management 51

54 Summary for the Group Income statement (DKKm) Revenue 9,488 9,941 9,733 9,070 9,221 Profit before research and development costs 3,888 4,093 4,342 3,943 3,738 Research and development costs 1,575 1,931 1,776 1,782 1,958 Profit from operations 2,345 2,147 2,554 2,170 1,784 Net financials (286) (76) (64) Profit before tax 2,058 2,068 2,521 2,242 1,633 Net profit for the year 1,259 1,384 1,689 1,574 1,107 Net profit for the year, shareholders in the parent company 1,259 1,387 1,709 1,584 1,107 Assets (DKKm) Non-current assets 5,071 5,972 5,555 5,754 6,104 Inventories 1,052 1,334 1,282 1,267 1,155 Receivables 2,305 2,430 1,770 1,938 1,994 Cash and securities 861 1,334 2,902 2,669 2,378 Total assets 9,289 11,070 11,509 11,628 11,631 Equity and liabilities (DKKm) Equity 5,790 6,901 7,839 7,492 6,765 Non-current liabilities ,171 Current liabilities 3,136 3,502 2,803 3,236 2,695 Total equity and liabilities 9,289 11,070 11,509 11,628 11,631 Cash flow statement (DKKm) Cash flows from operating activities 1,293 1,900 2,678 2,074 1,394 Cash flows from investing activities (1,186) (1,479) (244) (637) (771) Cash flows from operating and investing activities ,434 1, Cash flows from financing activities (270) 55 (863) (1,682) (901) Interest-bearing net cash at year-end ,391 2, Key figures EBIT margin (%) Return on capital employed (%) Return on equity (%) Research and development costs as a percentage of revenue Solvency ratio (%) Capital employed (DKKm) 6,030 7,447 8,351 7,920 8,267 Capital turnover (%) Property, plant and equipment investments, gross (DKKm) Intangible assets investments, gross (DKKm) Financial investments, gross (DKKm) Average number of employees 4,534 5,223 5,155 5,022 5,111 Comments on the consolidated financial performance Income statement In the years from 2002 to 2006, consolidated revenue was characterised by a decline in revenue derived from the Group s pharmaceutical citalopram (Cipramil /Celexa ), whose patent protection expired at the beginning of the period, and the launch of the Group s new pharmaceuticals Cipralex /Lexapro, Ebixa, Azilect and Serdolect, which have grown to account for 75 per cent of revenue in During the period from 2002 to 2006, Lundbeck 52 made research and development investments of about DKK 9 billion, and during the period the Group was able to meet its target of ploughing back about 20 per cent of its total revenue to research and development. Profit from operations peaked in 2004, when the amount included the one-off income of DKK 421 million from Merck & Co., Inc. on the conclusion of the agreement for the development and commercialisation of gaboxadol was adversely affected by the extraordinary reduction of escitalopram inventories at Forest Laboratories, Inc. The Group s EBIT margin, excluding the one-off income from Merck in 2004, rose during the period from 2003 to During this period, Lundbeck launched three new pharmaceuticals while developing an organisation which was reduced from an average of 5,223 employees in 2003 to 5,022 in In 2006, the EBIT margin fell to 19.3 per cent, primarily due to Forest s inventory reduction. During the period, net financials were influenced by large fluctuations, primarily concerning losses on equity

55 Share data Average number of shares (millions) Earnings per share (EPS) (DKK) Diluted earnings per share (DEPS) (DKK) Proposed dividend per share (DKK) Cash flow per share (DKK) Net asset value per share (DKK) Market capitalisation (DKKm) 43,534 23,098 28,517 29,630 33,060 Price/Earnings (DKK) Price/Cash flow (DKK) Price/Net asset value (DKK) Definitions Interest-bearing net cash Cash and securities less interest-bearing debt EBIT margin 2 Profit from operations as a percentage of revenue Return on capital employed Profit from operations plus financial income as a percentage of average capital employed Return on equity 2, 4 Profit attributable to shareholders in the parent company as a percentage of average equity, H. Lundbeck A/S shareholders Solvency ratio 2 Equity, year-end, as a percentage of equity and liabilities, year-end Capital employed Total equity and liabilities less non-interest bearing liabilities Capital turnover Revenue as a percentage of total assets, year-end Earnings per share (EPS) 2, 3 Profit attributable to shareholders in the parent company divided by average number of shares, excl. treasury shares Diluted earnings per share (DEPS) 2, 3 Profit attributable to shareholders in the parent company divided by average number of shares, excl. treasury shares, incl. warrants, fully diluted Dividend per share 2 Dividend payout ratio multiplied by nominal value of share divided by 100 Cash flow per share 2 Cash flow from operating activities divided by average number of shares, excl. treasury shares, incl. warrants, fully diluted Net asset value per share 2, 4 Equity, H. Lundbeck A/S shareholders, year-end, divided by number of shares, year-end, excl. treasury shares, incl. warrants, fully diluted Market capitalisation Total number of shares, year-end, multiplied by the official price quoted on the Copenhagen Stock Exchange, year-end Price/Earnings 2 The official price quoted on the Copenhagen Stock Exchange, year-end, divided by diluted earnings per share Price/Cash flow 2 The official price quoted on the Copenhagen Stock Exchange, year-end, divided by cash flow per share Price/Net asset value 2 The official price quoted on the Copenhagen Stock Exchange, year-end, divided by equity per share 1) Calculation is based on a share denomination of DKK 5. 2) Definitions according to the Danish Society of Financial Analysts Recommendations and Financial Ratios ) Calculated according to IAS 33. 4) Equity, H. Lundbeck A/S shareholders equalled the Group s total equity in 2005 and Comparative figures involving number of shares have been adjusted by an adjustment factor of for the effect of employees exercising warrants. The comparative figures for 2005 have been adjusted due to an amendment to IAS 39 Financial instruments: recognition and measurement. investments at the beginning of the period and foreign exchange gains and losses in 2005 and 2006 respectively. The Group s effective tax rate fell from 38.8 per cent in 2002 to 32.2 per cent in 2006, driven by a declining tax rate in Denmark in 2005, a shift in geographic distribution of the Group s operations and non-deductible expenses/non-taxable income. Net profit for the year rose from DKK 1,259 million in 2002 to its peak in 2004 of DKK 1,689 million. The net profit for 2006 was primarily affected adversely by Forest s inventory reduction. Assets and liabilities Lundbeck s total assets rose by approximately 6 per cent on average during the period from 2002 to Peaking in 2003, inventories fell in the years afterwards driven by the Group s efforts to reduce the capital tied up in inventories. Movements in receivables during the period were mainly caused by large fluctuations in receivables from Forest. During the same period, the Group s cash and securities rose from DKK 861 million in 2002 to DKK 2,378 million in During the period from 2002 to 2006, equity rose from DKK 5,790 million to DKK 6,765 million. In connection with the Group s share buyback programme, equity was adversely affected by DKK 400 million in 2004, DKK 1,227 million in 2005 and DKK 1,591 million in During the period from 2002 to 2005, return on equity was in the range of 21 per cent to 24 per cent, whilst return on equity was lower in 2006 at 15.6 per cent. Cash flow statement In 2002 and 2003, the Group expanded its production and research infrastructure, pushing up investments to DKK 1,000-1,500 million per year. In 2004 to 2006, Lundbeck reduced its level of investment to DKK million per year, which was sufficient to maintain and extend facilities in countries such as the USA and Denmark. In 2004 to 2006, cash flows from financing activities were influenced by the Group s share buyback programmes and the raising of a long-term loan in the amount of DKK 1.1 billion in

56 54

57 Income statement for the year ended 31 December 2006 Parent Parent Group Group DKKm DKKm Notes DKKm DKKm 6, ,976.7 Revenue 2, 24 9, , , ,597.1 Cost of sales 3, 4 1, , , ,379.6 Gross profit 7, , Distribution costs 3, 4 2, , Administrative expenses 3-5 1, , , ,349.6 Profit before research and development costs 3, , , ,063.5 Research and development costs 3, 4 1, , , ,286.1 Profit before other operating items 1, , Other operating income Other operating expenses , ,277.0 Profit from operations 1, , Income from investments in subsidiaries Income from investments in associates 10 (87.4) (35.4) Financial income Financial expenses , ,354.1 Profit before tax 1, , Tax on profit for the year , Net profit for the year 1, ,574.4 Profit for the year allocated to Shareholders in the parent company 1, ,583.5 Minority interests 14 - (9.1) Net profit for the year 1, ,574.4 Proposed distribution Proposed dividend for the year Transferred to distributable reserves , , ,574.4 Earnings per share (EPS) (DKK) Diluted earnings per share (DEPS) (DKK) Proposed dividend per share (DKK) Comments on the income statement for 2006 The Group generated revenue of DKK 9,221 million in 2006, which is an increase of 2 per cent relative to the previous year. Lundbeck s total expenses, exclusive of financial items and tax, were DKK 7,437 million in 2006, up 8 per cent on Cost of sales amounted to DKK 1,646 million in 2006, representing 18 per cent of total revenue and an 11 per cent increase relative to The increase was driven primarily by higher royalty payments concerning Ebixa and higher cost of sales for the Group s other revenue, including external sales from the Group s production units. Distribution costs and administrative expenses rose by 4 per cent and 9 per cent respectively on Research and development costs for 2006 accounted for 21 per cent of consolidated revenue, representing an increase of 10 per cent relative to Depreciation and amortisation charges, which are included in the individual expense categories, totalled DKK 526 million in 2006, down from DKK 530 million in In 2006, the Group s net financials were a net expense of DKK 64 million compared with a net income of DKK 108 million in 2005, driven primarily by exchange rate losses. Tax on profit for 2006 amounted to DKK 526 million, corresponding to an effective tax rate of 32.2 per cent, an increase on the 29.8 per cent effective tax rate in At DKK 1,107 million, profit for the year was down 30 per cent compared with

58 Balance sheet at 31 December 2006 Assets Parent Parent Group Group DKKm DKKm Notes DKKm DKKm - - Goodwill Patent rights Product rights Other rights IT projects Process projects Projects in progress Intangible assets 8 1, , , ,822.8 Land and buildings 2, , Plant and machinery Other fixtures and fittings, tools and equipment Prepayments and plant and equipment in progress , ,752.2 Property, plant and equipment 8 3, , , ,732.0 Investments in subsidiaries Investments in associates Receivables from subsidiaries Receivables from associates Available-for-sale financial assets Other receivables Value of deferred tax assets , ,818.9 Financial assets , ,446.8 Non-current assets 6, , Raw materials and consumables Work in progress Manufactured goods and goods for resale , ,052.4 Inventories 12 1, , Trade receivables 1, , Receivables from subsidiaries Income taxes receivable Other receivables Prepayments , Receivables 1, , , ,182.0 Securities 29 1, , Cash 29 1, , ,980.4 Current assets 5, , , ,427.2 Assets 11, ,628.1 Comments on the balance sheet for 2006 Intangible assets rose by DKK 110 million in 2006 to DKK 1,781 million, driven primarily by addition of product rights partly through the conclusion of an agreement with BioTie Therapies Corp. on the nalmefene project partly the acquisition of the SGS-518 development project by way of the company Saegis Pharmaceuticals, Inc., USA. Property, plant and equipment rose by 5 per cent to DKK 3,667 million in 2006, primarily due to the ongoing extension of facilities in regions such as the USA and Denmark. Inventories fell by DKK 112 million to DKK 1,155 million as part of ongoing efforts to reduce capital tied up in inventories. Cash and securities fell by DKK 291 million in 2006 to a total of DKK 2,378 million at 31 December

59 Balance sheet at 31 December 2006 Equity and liabilities Parent Parent Group Group DKKm DKKm Notes DKKm DKKm 1, ,060.8 Share capital 13 1, , Share premium , ,423.1 Retained earnings 5, , , ,605.5 Equity 6, , Pension obligations and similar obligations Deferred tax liabilities Provisions 3, ,424.8 Mortgage debt 18 1, Employee bonds , Payables to subsidiaries Other long-term debt , ,661.1 Non-current liabilities 2, Provisions 3, Bank debt Mortgage debt Trade payables Payables to subsidiaries Income taxes VAT, taxes and holiday pay commitments Other payables , Prepayments from Forest , Deferred income , ,160.6 Current liabilities 2, , , ,821.7 Liabilities 4, , , ,427.2 Equity and liabilities 11, ,628.1 Accounting policies 1 Minority interests 14 Treasury shares 19 Contractual obligations 20 Contingent liabilities 21 Financial instruments 22 Related parties 23 Segment information 24 Releases in Equity fell from DKK 7,492 million at the end of 2005 to DKK 6,765 million at the end of 2006, among other things due to buyback of treasury shares in 2006 at a value of DKK 1,591 million. Non-current liabilities rose from DKK 900 million at the end of 2005 to DKK 2,171 million at 31 December 2006, primarily due to a mortgage loan taken out in the amount of DKK 1.1 billion in Prepayments from Forest fell by DKK 538 million to DKK 855 million at the end of 2006 due to the extraordinary reduction of escitalopram inventories at Forest Laboratories, Inc. 57

60 Statement of changes in equity at 31 December 2006 Group H. Lundbeck A/S Share Share Retained shareholders, Minority Equity 2006 capital premium earnings total interests Group DKKm DKKm DKKm DKKm DKKm DKKm Equity at , , , ,491.7 Adjustment, deferred gains/losses, hedging Realised gains/losses, hedging Realised gains/losses, trading (transferred from hedging) Exchange adjustment, associates - - (0.5) (0.5) - (0.5) Fair value adjustment of available-for-sale financial assets - - (31.5) (31.5) - (31.5) Tax on equity entries - - (68.9) (68.9) - (68.9) Recognised directly in equity Net profit for the year less proposed dividend Proposed dividend for the financial year Net income - - 1, , ,254.0 Distribution of dividend, gross - - (477.2) (477.2) - (477.2) Distribution of dividend, treasury shares Capital increase through exercise of warrants Capital reduction (77.9) - - (77.9) - (77.9) Nominal value of cancelled treasury shares Buyback of treasury shares - - (1,591.1) (1,591.1) - (1,591.1) Other transactions (75.3) 52.1 (1,957.7) (1,980.9) - (1,980.9) Equity at , , , , Equity at , , , ,876.2 Effect of IFRS changes Incentive plans - - (35.8) (35.8) - (35.8) Minority interests (1.4) (1.4) Equity at , , ,840.4 (1.4) 7,839.0 Adjustment, deferred gains/losses, hedging - - (452.4) (452.4) - (452.4) Realised gains/losses, hedging - - (2.1) (2.1) - (2.1) Realised gains/losses, trading (transferred from hedging) Exchange adjustment, associates - - (1.5) (1.5) - (1.5) Fair value adjustment of available-for-sale financial assets Tax on equity entries Recognised directly in equity - - (296.3) (296.3) - (296.3) Net profit for the year less proposed dividend - - 1, ,106.3 (9.1) 1,097.2 Proposed dividend for the financial year Net income - - 1, ,287.2 (9.1) 1,278.1 Distribution of dividend, gross - - (516.9) (516.9) - (516.9) Distribution of dividend, treasury shares Capital increase through exercise of warrants Capital reduction (36.0) - - (36.0) - (36.0) Nominal value of cancelled treasury shares Buyback of treasury shares - - (1,226.9) (1,226.9) - (1,226.9) Incentive plans Disposals, minority interests Other transactions (32.6) 69.5 (1,672.8) (1,635.9) 10.5 (1,625.4) Equity at , , , ,

61 Statement of changes in equity at 31 December 2006 Parent Reserve for net revaluation according to Share Share the equity Retained Equity capital premium method earnings Parent 2006 DKKm DKKm DKKm DKKm DKKm Equity at , , ,468.0 Adjustment, deferred gains/losses, hedging Realised gains/losses, hedging Realised gains/losses, trading (transferred from hedging) Fair value adjustment of available-for-sale financial assets (31.5) (31.5) Tax on equity entries (69.4) (69.4) Recognised directly in equity Net profit for the year less proposed dividend Proposed dividend for the financial year Net income , ,114.8 Distribution of dividend, gross (477.2) (477.2) Distribution of dividend, treasury shares Capital increase through exercise of warrants Capital reduction (77.9) (77.9) Nominal value of cancelled treasury shares Buyback of treasury shares (1,591.1) (1,591.1) Incentive plans Other transactions (75.3) (1,954.1) (1,977.3) Equity at , , , Equity at , , ,876.2 Effect of IFRS changes Incentive plans (2.9) (2.9) Subsidiaries at cost - - (438.2) Associates at cost Equity at , , ,047.8 Adjustment, deferred gains/losses, hedging (452.4) (452.4) Realised gains/losses, hedging (2.1) (2.1) Realised gains/losses, trading (transferred from hedging) Fair value adjustment of available-for-sale financial assets Tax on equity entries Recognised directly in equity (296.9) (296.9) Net profit for the year less proposed dividend Proposed dividend for the financial year Net income , ,048.1 Distribution of dividend, gross (516.9) (516.9) Distribution of dividend, treasury shares Capital increase through exercise of warrants Capital reduction (36.0) (36.0) Nominal value of cancelled treasury shares Buyback of treasury shares (1,226.9) (1,226.9) Incentive plans Other transactions (32.6) (1,664.8) (1,627.9) Equity at , , ,

62 Cash flow statement 1 January 31 December 2006 Parent Parent Group Group DKKm DKKm Notes DKKm DKKm 1, ,277.0 Profit from operations 1, , Adjustments (424.8) Working capital changes 27 (352.2) (145.1) 2, ,317.8 Cash flows from operations before financial items 1, , Financial receipts (12.7) (151.9) Financial payments (178.4) (42.3) 2, ,289.8 Cash flows from ordinary activities 1, ,633.1 (454.0) (226.6) Income tax paid for the year (382.0) (567.4) Income tax paid for previous years , ,110.1 Cash flows from operating activities 1, ,073.7 (6.6) (32.4) Capital contributions to subsidiaries Dividend from subsidiaries (61.8) Change in payables to/receivables from subsidiaries Acquisition of company (68.0) - Capital contributions to associates 10 - (68.0) - (19.2) Change in payables to/receivables from associates 11 (19.2) - (471.4) (501.3) Investments, property, plant and equipment and intangible assets (757.6) (605.7) Sale of property, plant and equipment and intangible assets (17.4) (4.1) Investments in financial assets (4.5) (17.4) - - Sale of financial assets (419.4) (543.2) Cash flows from investing activities (770.5) (637.0) 1, Cash flows from operating and investing activities , ,059.2 Loan proceeds 1, (2.1) (2.1) Repayments of loans (6.1) (62.9) (1,226.9) (1,591.1) Buyback of treasury shares (1,591.1) (1,226.9) Employee bonds Capital contributions (496.0) (444.5) Dividend paid in the financial year (444.5) (496.0) (1,651.9) (911.2) Cash flows from financing activities (900.8) (1,681.9) (270.4) (344.3) Change in cash and cash equivalents (277.3) (245.2) 2, ,298.7 Cash and cash equivalents at , , Unrealised exchange differences for the year (13.2) 11.6 (270.4) (344.3) Change for the year (277.3) (245.2) 2, ,954.4 Cash and cash equivalents at , ,668.7 Interest-bearing net cash is composed as follows 2, ,954.4 Cash and securities 2, ,668.7 (1,402.3) (2,330.1) Interest-bearing debt (1,502.3) (428.7) (375.7) Interest-bearing net cash at ,240.0 Comments on the cash flow statement for 2006 The reduction of in-house escitalopram inventories at Forest Laboratories, Inc. in 2006 adversely affected Lundbeck s cash flows from operating activities. In addition, the Group posted a DKK 177 million increase in net financial payments and a DKK 185 million reduction in income tax paid. Investments in property, plant and equipment and intangible assets rose from DKK 606 million in 2005 to DKK 758 million in 2006, primarily due to an increase in investments in the Group s facilities in the USA and Denmark. The initiated roll-out of SAP in the Group s subsidiaries in Europe also affected the level of investment in Financing activities generated a cash outflow of DKK 901 million in 2006 compared with an outflow of DKK 1,682 million in The change relative to 2005 was due to the fact that Lundbeck bought back treasury shares in the amount of DKK 1,591 million in 2006, which was an increase of DKK 364 million relative to 2005, and the raising of a mortgage loan with proceeds of DKK 1,074 million in The Group generated a net cash outflow of DKK 277 million in 2006 compared with an outflow of DKK 245 million in

63 NOTES 1. Accounting policies The annual report of H. Lundbeck A/S is presented in accordance with International Financial Reporting Standards as adopted by the EU and additional Danish disclosure requirements for annual reports of listed companies, including the disclosure requirements imposed by the Copenhagen Stock Exchange on annual reports of listed companies and the Danish Statutory Order on Adoption of IFRS. The annual report also complies with the International Financial Reporting Standards issued by the International Accounting Standards Board (IASB). The annual report is presented in Danish kroner (DKK), which also is the functional currency of the Group. Changes in accounting policies The annual report for 2006 is presented in accordance with the new and revised standards (IFRS/ IAS) and new interpretations (IFRIC) which apply for the financial year. This has resulted in a change of accounting policies for certain securities and equity investments due to a change of IAS 39 Financial instruments: recognition and measurement. IAS 39 Financial instruments: recognition and measurement The change to IAS 39 affects the Group s classification of certain securities and equity investments. On initial recognition, securities and equity investments outside the scope of the Group s documented investment strategy are measured at fair value with the addition of directly attributable costs. They are subsequently measured at fair value at the balance sheet date, and changes to the fair value are recognised in equity and dividends are recognised in the income statement. When securities are sold or settled, the accumulated fair value adjustments are recognised in the income statement. The change has not affected the Group s classification of listed Danish bonds, as this portfolio forms part of the Group s documented investment strategy and cash resources for the financing of share buybacks, etc. Accordingly, value changes to listed Danish bonds are still recognised in the income statement under net financials. All other securities and equity investments measured at fair value have been reclassified as available-forsale financial assets. The change has affected the Group s comparative figures for 2005 for net financials and profit for the year by DKK -14 million. Equity was not affected. The effect of this change on earnings per share and diluted earnings per share is described in note 25. In addition to the above, the revised IAS 19 Employee benefits entails that the annual report for 2006 contains additional information about defined benefit pension plans in foreign subsidiaries. Future IFRS changes At the date of the publication of this annual report, a number of new or amended standards and interpretations have not yet entered into force or been adopted by the EU, and are therefore not included in this annual report. Such future IFRS changes are not expected to materially affect the annual report, except for the additional disclosure requirements that follow from the implementation of IFRS 7 Financial instruments: disclosures (to be implemented in 2007), and IFRS 8 Operating segments (to be implemented in 2009 at the latest). Accounting policies critical to financial reporting Management believes that the following accounting policies are most important to the Group s financial reporting. Income from Forest The invoiced price is agreed between Forest and Lundbeck at the beginning of each calendar year. The price is calculated on the basis of expectations for the coming year s development in the elements included in the royalty calculation. These elements are: Forest s net selling prices, quantities used in sold products, quantities used in samples, quantities wasted during processing, and the various dosage levels of the finished goods. Income from sales of citalopram and escitalopram to Forest is recognised as follows: Sales of both citalopram and escitalopram are invoiced at the agreed price but only the minimum price is recognised as income at the time of delivery. The difference between the invoiced price and the minimum price of Forest s inventories is recorded in the balance sheet as prepayments. After the end of each quarter, the final settlement price is calculated. The difference between the minimum price already recognised as income and the final calculated settlement price is recognised as income. At the same time, the prepayment is reduced correspondingly. Development costs Development costs are capitalised if the criteria for such capitalisation are deemed to have been met and it is found to be probable that future earnings will cover the development costs. Due to a very long development period and significant uncertainty in relation to the development of new products, in the opinion of the Group, development costs should not normally be capitalised in the balance sheet until the development of the product has been completed and all the necessary public registration and marketing approvals have been obtained. Otherwise, development costs will be recognised in the income statement as they are incurred. Recognition and measurement Assets are recognised in the balance sheet if it is probable that future economic benefits will flow to the Group and that the value of the asset can be measured reliably. Liabilities are recognised in the balance sheet if they are probable and can be measured reliably. On initial recognition assets and liabilities are measured at cost or fair value. Subsequently assets and liabilities are measured as described for each item below. Certain financial assets and liabilities are measured at amortised cost, implying the recognition of a constant effective rate of interest to maturity. Amortised cost is calculated as original cost less any repayments and plus/less the cumulative amortisation of the difference between cost and the nominal amount. 61

64 1 NOTES Recognition and measurement take into consideration gains, losses and risks that arise before the time of presentation of the annual report and that confirm or invalidate matters existing at the balance sheet date. Income is recognised in the income statement as earned and includes value adjustments of financial assets and liabilities measured at fair value or amortised cost. In addition, expenses incurred to generate the income for the year are recognised, including depreciation, amortisation, impairment losses and provisions as well as reversals of amounts previously recognised in the income statement as a result of changed accounting estimates. Consolidated financial statements The consolidated financial statements comprise the parent company H. Lundbeck A/S and subsidiaries controlled by the parent company. Control is achieved where the parent company directly or indirectly holds more than 50 per cent of the voting rights or is otherwise able to exercise or actually exercises control. Companies in which the Group holds between 20 per cent and 50 per cent of the voting rights and exercises significant influence but not control are regarded as associates. The consolidated financial statements are prepared on the basis of the financial statements of the parent company and the subsidiaries, which are all prepared in accordance with the Group s accounting policies. The consolidated financial statements are prepared by adding together uniform items and eliminating intra-group income and expenses, investments, balances and dividends as well as realised and unrealised gains and losses on transactions between the consolidated companies. Account is taken of the tax effect of these eliminations. Newly acquired or newly formed companies are recognised in the consolidated financial statements from the date of acquisition. Companies sold or discontinued are recognised in the consolidated income statement up to the time of sale or discontinuance. Expected divestment costs are included in the calculation of gains or losses. Newly acquired subsidiaries are accounted for using the purchase method of accounting, according to which the identifiable assets, liabilities and contingent liabilities of the newly acquired companies are measured at fair value at the time of acquisition. Account is taken of the tax effect of the revaluations made. Positive differences (goodwill) between the cost of the acquisition and the fair value of the acquired identifiable assets, liabilities and contingent liabilities are recognised under intangible assets. Negative differences (negative goodwill) between the cost of the acquisition and the fair value of the acquired identifiable assets, liabilities and contingent liabilities are recognised in the income statement at the time of acquisition. Minority interests are recognised at the time of acquisition at the proportionate share of the fair value of the acquired identifiable assets, liabilities and contingent liabilities. Goodwill arising from acquired companies is adjusted until the end of the year following acquisition if additional information about the fair value at the time of acquisition of assets, liabilities and contingent liabilities acquired is obtained after acquisition. However, goodwill will not be recognised by an amount exceeding the expectations of future income from the acquiree. Goodwill and adjustments to fair value in connection with the acquisition of independent foreign entities (subsidiaries or associates) are accounted for as assets and liabilities in the acquiree and translated at the exchange rates at the balance sheet date. Gains or losses on the disposal or discontinuance of subsidiaries and associates are calculated as the difference between the selling price or the discontinuance amount and the carrying amount of net assets at the time of sale as well as anticipated expenses relating to sale or discontinuance. Minority interests The subsidiaries items are fully consolidated in the consolidated financial statements. Minority interests proportionate share of the subsidiaries results and equity is shown as separate items in the income statement and in equity. Translation of foreign currency On initial recognition, transactions denominated in foreign currencies are translated at standard rates which equal the actual exchange rates at the transaction date. Exchange differences arising between the rate at the transaction date and the rate at the date of payment are recognised in the income statement as net financials. Receivables, debt and other monetary items denominated in foreign currencies are translated at the exchange rates at the balance sheet date. The difference between the exchange rates at the balance sheet date and the rates at the time the receivable or payable is created or recognised in the latest annual report is recognised in the income statement under net financials. Non-monetary assets acquired in foreign currencies are translated at the exchange rates at the time of acquisition. Where foreign subsidiaries are regarded as an integral part of the parent s activities, the transactions in the subsidiaries will be accounted for as if they had been executed in the parent. On recognition of foreign subsidiaries, monetary items are translated at the exchange rates at the balance sheet date. Non-monetary items, including goodwill in integrated entities, are translated at the exchange rates at the time of acquisition or at the time of any subsequent revaluation or writedown of the asset. Income statement items are translated at average exchange rates for the year which approximate the actual exchange rates at the transaction date. However, items derived from non-monetary items are translated at the historical exchange rates that apply to the non-monetary item. Exchange differences arising from the translation of both the balance sheets and the income statements of the foreign subsidiaries are recognised in the Group s income statement as net financials. When recognising foreign associates that use a reporting currency different from that used by the parent, assets and liabilities are translated at the exchange rates at the balance sheet date, while the income statement is translated at average exchange rates for the year. 62

65 Exchange differences arising from the translation of foreign associates are recognised in the Group directly in equity. Derivative financial instruments Forward exchange contracts and other derivative financial instruments are initially recognised in the balance sheet at cost, corresponding to the fair value of the consideration paid or received, while subsequent valuations are measured at fair value. Positive and negative fair values are included in other receivables and other payables respectively. Changes in the fair value of derivative financial instruments classified as hedging instruments and meeting the criteria for hedging future cash flows are recognised directly in equity (hedge accounting). Income and expenses related to such hedging transactions are transferred from equity on realisation of the hedged item and included in the same item as the hedged item. Changes in the fair value of derivative financial instruments classified as hedging instruments and meeting the criteria for hedging the fair value of a recognised asset or liability are recognised in the income statement together with changes in the value of the hedged asset or liability (hedge accounting). For derivative financial instruments which do not meet the criteria for accounting treatment as hedging instruments, changes in fair value are recognised in the income statement as they arise. Changes in the fair value of derivative financial instruments used to hedge net investments in independent foreign subsidiaries or associates and which otherwise meet the relevant criteria are recognised directly in equity (hedge accounting). Segment information The Group s activities are exclusively in the business segment of Pharmaceuticals for the treatment of illnesses in the field of CNS. Revenue, segment assets and additions to property, plant and equipment and intangible segment assets are disclosed within the secondary geographical segments. Segment information is provided in accordance with the Group s accounting policies, risks and internal financial management policies. Segment assets are those operating assets that are employed by a segment in its operating activity and that are either directly attributable or can be allocated to the segment on a reasonable basis. Transactions between geographical segments are made at market value. Income statement Revenue Revenue comprises invoiced sales for the year less returned goods and sales taxes consisting mainly of value added taxes and foreign drug taxes. Sales subject to a price adjustment clause are included in revenue at the time of delivery at the minimum price. The balance of the invoiced price is recognised in the balance sheet as a prepayment and is subsequently included in revenue when the price has been finally determined. The price is finally determined as the product is resold by the customer. See Accounting policies critical to financial reporting on page 61 for a description of the accounting treatment of income from Forest. Moreover, revenue includes licence income and royalties from outlicensed products as well as non-refundable down-payments and milestone payments relating to research cooperation when the payments relate to the research results achieved and each payment has been individually agreed. In addition, income from the reduction of investments in research enterprises, considered to represent the sale of research results, is recognised as revenue. Cost of sales Cost of sales comprises the cost of goods sold. Cost includes the cost of raw materials, consumables and goods for resale, direct labour and indirect costs of production, including the cost of operating and depreciating/amortising manufacturing facilities. Cost of sales moreover includes expenses in connection with quality certification of sold products and any writedown to net realisable value of unsaleable and slow moving items. Distribution costs Distribution costs comprise expenses incurred in connection with the distribution of the Group s products sold during the year and in connection with sales campaigns, etc. launched during the year under review, including direct distribution and marketing costs, salaries, etc. for the sales and marketing functions, as well as depreciation/ amortisation and other indirect costs. Administrative expenses Administrative expenses comprise expenses incurred during the year for the management and administration of the Group, including expenses in connection with the administrative functions, management, office premises and office expenses, as well as depreciation/amortisation and other indirect costs. Research and development costs Research and development costs comprise expenses incurred during the year in connection with the Group s research and development functions, including wages and salaries, depreciation/ amortisation and other indirect costs as well as costs relating to research and development cooperation on in-licensed products. Research costs are always recognised in the income statement as they are incurred. Development costs are capitalised if a number of specific criteria for capitalising these costs are deemed to have been met. Otherwise, development costs will be recognised in the income statement as they are incurred. See Accounting policies critical to financial reporting on page 61 for a description of conditions for capitalising development costs. Government loans and grants Forgivable government development loans are recognised as income in the income statement as the research and development costs relating to the project are incurred, provided that these costs are recognised in the income statement. In the event of repayment, the repayments including interest are recognised as an expense in the income statement as the related income is recognised as income. 63

66 1 NOTES If the related development costs are recognised in the balance sheet, the development loan will be recognised in the balance sheet and subsequently recognised as income as the development costs are written off. Other operating income and expenses Other operating income and expenses comprise items of a secondary nature in relation to the Group s activities. Results of investments in subsidiaries and associates in the parent company s financial statements Dividends from subsidiaries and associates are recognised in the parent company s income statement when the shareholders rights to receive dividend have been approved, less any writedowns of the equity investments. Results of investments in associates in the consolidated financial statements The proportionate share of the results of associates is recognised in the consolidated income statement after tax and elimination of the proportionate share of any intra-group gains and losses and after deduction or addition of any writedowns of the equity investments. Net financials Net financials include interest income and expenses which are recognised in the income statement at the amounts relating to the financial year. Value adjustments of financial assets and realised and unrealised gains and losses on investments, items denominated in foreign currencies as well as forward contracts and other derivative financial instruments not used for hedging purposes according to the hedge accounting principle are also included in net financials. Tax As from 2005, the Danish companies of the Group are jointly taxed with the parent company LFI a/s and are included in the Danish provisional tax scheme. The current Danish income tax liability is allocated among the companies of the Danish tax pool in proportion to their taxable income with due consideration to foreign taxes paid. Tax for the year, which consists of the year s current tax and the change in deferred tax, is recognised in the income statement as regards the amount that can be attributed to the net profit or loss for the year and directly in equity as regards the amount that can be attributed to equity items. Exchange rate adjustments of deferred tax are recognised as part of the movements in deferred tax. Balance sheet Intangible assets Goodwill Goodwill is not amortised, but is tested for impairment at least once a year. Development projects Clearly defined and identifiable development projects are recognised as intangible assets where the technical feasibility of the project, the availability of adequate resources and a potential future market or development opportunity in the company can be demonstrated and where the intention is to manufacture, market or use the project if the cost can be measured reliably and it is probable that the future earnings can cover production and selling expenses, administrative expenses as well as the development costs. Other development costs are recognised in the income statement as the costs are incurred. After completion of the development work development costs are amortised on a straight-line basis over the expected useful life, however with a maximum period of 20 years. For development projects protected by intellectual property rights, the maximum amortisation period is the remaining term of the rights concerned, however with a maximum period of 20 years. Other intangible assets Acquired intellectual property rights in the form of product rights, patents, licences and software are measured at cost less accumulated amortisation. The cost of software comprises the cost of planning, including direct labour and costs directly attributable to the project. Product rights are amortised on a straight-line basis over the economic lives of the underlying products. Patents are amortised over the remaining patent period, and licences are amortised over the period of agreement, however with a maximum period of 20 years. Gains and losses on the disposal of development projects, patents and licences are measured as the difference between the selling price less cost to sell and the carrying amount at the time of sale. Property, plant and equipment Property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes the costs of purchase and expenses directly attributable to the purchase until the asset is ready for use. In the case of assets manufactured by the company, cost includes expenses directly attributable to the manufacture of the asset, including materials, components, thirdparty suppliers and labour. Interest relating to property, plant and equipment during the period of building and erection is not capitalised. Property, plant and equipment are depreciated on a straight-line basis over the expected useful lives of the assets, which are expected to be as follows: Buildings Installations Plant and machinery Other fixtures and fittings, tools and equipment Leasehold improvements 30 years 10 years 3-10 years 3-10 years max. 10 years The depreciation base is cost less the estimated residual value at the end of the expected useful life. The cost of a total asset is divided into smaller components that are depreciated separately if such components have different useful lives. Depreciation methods, useful lives and residual values are re-assessed annually. Depreciation is recognised in the income statement under cost of sales, distribution costs, administrative expenses and research and development costs, respectively. The costs of maintaining property, plant and equipment are recognised in the income statement as they are incurred, either directly in the income statement or as part of indirect costs of production. Costs incurred that increase the recoverable amount of the asset concerned are added to the asset s cost as an improvement and are depreciated over the expected useful life of the improvement. 64

67 Gains or losses on the disposal or retirement of items of property, plant and equipment are calculated as the difference between the carrying amount and the selling price reduced by dismantling expenses and cost to sell. Gains and losses are recognised in the income statement under the same items as the associated depreciation. Impairment losses The carrying amount of both intangible assets and property, plant and equipment is analysed in connection with the preparation of the annual report if there is an indication that the carrying amount of an asset may exceed the expectations of future income from the asset (recoverable amount). If this analysis concludes that the future expected net income from the asset will be lower than the carrying amount, the carrying amount will be reduced to the higher of fair value less cost to sell and value in use. Impairment losses are recognised in the income statement under the same items as the associated depreciation or amortisation. Goodwill is amortised through the income statement in those cases where the carrying amount exceeds the future net income expected from the cash-generating unit to which the goodwill relates (recoverable amount). Investments in subsidiaries and associates in the parent company s financial statements Investments in subsidiaries and associates are measured at cost in the parent company s financial statements. Where the recoverable amount of the investments is lower than cost, the investments are written down to this lower value. In addition, cost is written down to the extent that dividend distributed exceeds the accumulated earnings in the company since the acquisition date. Investments in associates in the consolidated financial statements Investments in associates are recognised and measured in the consolidated financial statements according to the equity method, which entails that the investments are measured in the balance sheet at the proportionate share of the associate s net asset value calculated in accordance with the Group accounting policies less or plus unrealised intra-group gains and losses and plus the carrying amount of goodwill. The proportionate share of the results of the associate is recognised in the income statement after tax and elimination of the proportionate share of any intra-group gains and losses and after deduction of any writedowns of the investments. Consolidated equity includes the proportionate share of all transactions and events recognised directly in the equity of the associate. Investments in associates with a negative carrying amount are recognised at DKK 0. Receivables and other long-term financial assets considered to form part of the overall investment in the associate are written down by any remaining negative net asset value. Trade receivables and other receivables are written down to the extent they are deemed to be irrecoverable. A provision to cover the remaining negative net asset value will only be made if the Group has a legal or constructive obligation to cover the liabilities of the relevant associate. Other financial assets Other equity investments that are included in the Group s documented investment strategy are recognised on the basis of the value date and are measured at market price or estimated fair value at the balance sheet date. Both realised and unrealised gains and losses are recognised in the income statement under net financials. On initial reconition, other investments outside the scope of the documented investment strategy are measured at fair value with the addition of directly attributable costs. Other investments are subsequently measured at fair value at the balance sheet date, and changes to the fair value are recognised in equity and dividends are recognised in the income statement. When securities are sold or settled, the accumulated fair value adjustments are recognised in the income statement. Other receivables with a fixed maturity are measured at amortised cost less impairment losses as a result of diminution in value. Other receivables without a fixed maturity are recognised at cost. Inventories Raw materials, packaging and goods for resale are measured at the latest known cost at the balance sheet date, which equals cost computed according to the FIFO method. The cost of raw materials, packaging and goods for resale includes the costs of purchase plus costs incurred in bringing the inventories to their present location and condition. Work in progress and finished goods manufactured by the company are measured at cost, i.e. the cost of raw materials, consumables, direct labour and indirect costs of production. Indirect costs of production include materials and labour as well as maintenance of and depreciation on the machines, factory buildings and equipment used in the manufacturing process as well as the cost of factory management and administration. Writedown to net realisable value is made if it is lower than cost. The net realisable value of inventories is calculated as the selling price less costs of conversion and costs incurred to execute the sale and it is determined having regard to marketability, obsolescence and expected selling price movements. Receivables Short-duration receivables arising in the Group s normal course of business are measured at nominal value less impairment losses to counter the risk of loss calculated on the basis of an individual evaluation. Other securities Other securities that are included in the Group s documented investment strategy and recognised under current assets are recognised on the basis of the value date and are measured at the market price at the balance sheet date. Both realised and unrealised gains and losses are recognised in the income statement under net financials. Other securities outside the scope of the documented investment strategy are measured at fair value with the addition of directly attributable costs. They are subsequently measured at fair value at the balance sheet date, and changes to the fair value are recognised in equity and dividends are recognised in the income statement. When securities are sold or settled, the accumulated fair value adjustments are recognised in the income statement. 65

68 1 NOTES Equity Dividend Proposed dividend is recognised as a liability at the time of adoption of the dividend resolution at the annual general meeting (the time of declaration). Dividend expected to be paid for the year is shown as a separate item in the statement of equity. Treasury shares Cost and selling prices of treasury shares as well as dividends are recognised directly in retained earnings under equity. Gains and losses on sales are therefore not recognised in the income statement. Other equity instruments Cost and selling prices of other equity instruments, including option premiums in connection with option contracts for the purchase of treasury shares, are recognised directly in retained earnings under equity. Share-based payment Share-based incentive programmes in which employees may opt only to buy shares in the parent company (equity schemes) are measured at the equity instruments fair value at the date of grant and recognised in the income statement under staff costs when the employee obtains the right to buy the shares. The balancing item is recognised directly in equity. Share-based incentive programmes in which employees have the difference between the agreed price and the actual share price settled in cash are measured at fair value at the date of grant and recognised in the income statement under staff costs when the final right of cashsettlement is obtained. The incentive programmes are subsequently remeasured on each balance sheet date and upon final settlement, and any changes in the fair value of the programmes are recognised in the income statement under staff costs. The balancing item is recognised under liabilities and equity. Pension obligations The Group has entered into pension agreements and similar agreements with most of the Group s employees. Periodical payments to defined contribution plans are recognised in the income statement at the due date and any contributions payable are recognised in the balance sheet under liabilities. The present value of the Group s obligations relating to future pension payments according to defined benefit plans is measured on an actuarial basis at intervals of not more than three years on the basis of the pensionable period of employment up to the time of the actuarial valuation. Actuarial gains and losses are recognised in the income statement as they are calculated. Provision is made in the balance sheet for the present value of plans which are not funded. The present value of the obligation according to defined benefit plans which are funded by independent pension funds is measured less the fair value of the plan assets, and any net obligation is recognised in the balance sheet under noncurrent liabilities. Any net asset is recognised in the balance sheet as a financial asset. The year s changes in the obligations relating to defined benefit plans are recognised in the income statement. Income tax and deferred tax Current tax liabilities and current tax receivables are recognised in the balance sheet, computed as tax calculated on the taxable income for the year, adjusted for provisional taxes paid. Tax payments for the jointly taxed companies of the Lundbeck Group are settled through intra-group accounts with the parent company LFI a/s. Deferred tax is recognised according to the balance sheet liability method on all temporary differences between the carrying amounts of assets and liabilities and their tax base, except for temporary differences arising either on initial recognition of goodwill or initial recognition of a transaction that is not a business combination and with the temporary difference ascertained at the time of the initial recognition affecting neither the financial results nor the taxable income. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, unless the parent company has a possibility of controlling when the deferred tax is to be realised and it is likely that the deferred tax will not crystallise as current tax. Deferred tax is calculated based on the planned use of each asset and settlement of each liability, respectively. Deferred tax is measured by using the tax rates and tax rules that, based on legislation in force or in reality in force at the balance sheet date, are expected to apply in the respective countries when the deferred tax is expected to crystallise as current tax. Changes in deferred tax as a result of changed tax rates or tax rules are recognised in the income statement. Deferred tax assets, including the tax value of tax loss carry-forwards, are recognised in the balance sheet at the value at which the asset is expected to be realised, either through a set-off against deferred tax liabilities or as net assets to be offset against future positive taxable income. Deferred tax concerning recaptured losses in jointly taxed foreign subsidiaries in previous years is recognised to the extent a tax liability is expected to arise in connection with future profits or on the disposal of the asset. Tax on equity items relating to deferred income and expenses in connection with financial instruments, treasury shares and options to purchase treasury shares as well as payments concerning share option plans and other share price based plans is recognised in equity. However, changes in deferred tax concerning the cost of share-based payments are generally recognised in the income statement. Provisions Provisions are recognised when the Group has a legal or constructive obligation that arises from past events and it is probable that an outflow of financial resources will be required to settle the obligation. Return obligations imposed on the industry are recognised in the balance sheet under provisions. Debt Mortgage debt and debt to credit institutions are recognised at the time of the raising of the loan at proceeds received less transaction costs paid. In subsequent periods the financial liabilities are measured at amortised cost, equivalent to the capitalised value when the effective rate of interest is used, so that the difference between 66

69 the proceeds and the nominal value is recognised in the income statement over the loan period. Debt included in the short-term financial liquidity is also measured at amortised cost in subsequent periods. Other payables, which include trade payables, payables to subsidiaries and associates, as well as other debt are measured at amortised cost. Cash flow statement The consolidated cash flow statement is presented according to the indirect method and shows the composition of cash flows, divided into operating, investing and financing activities respectively, and the cash and cash equivalents at the beginning and the end of the year. Cash flows from acquisitions and divestments of companies are shown separately under cash flows from investing activities. The cash flow statement includes cash flows from acquired companies from the date of acquisition and cash flows from divested companies until the time of divestment. Cash flows from operating activities are calculated as the Group s results before net financials, adjusted for non-cash operating items, working capital changes, financial items paid and received, and income taxes paid. Cash flows from investing activities include payments in connection with purchases and sales of intangible assets, property, plant and equipment and financial assets, including equity investments in companies. Cash flows from financing activities include payments to and from shareholders and related expenses as well as the raising of and repayments on mortgage debt and other non-current liabilities. Cash and cash equivalents include short-term bank debt falling due on demand. Cash and cash equivalents include certain short-term securities shown as current assets in the balance sheet. The securities are Danish listed bonds. Despite the fact that they involve a risk of price changes, these bonds are included in cash and cash equivalents because they actually function as cash due to the special liquid nature of the Danish stock market. Cash flows denominated in foreign currencies, including cash flows in foreign subsidiaries, are translated at the average exchange rates during the year because they approximate the actual rates at the date of payment. Cash and cash equivalents at year-end are translated at the rates at the balance sheet date, and the effect of exchange rate changes on cash and cash equivalents is shown as a separate item in the cash flow statement. Key figures Financial key figures are calculated according to Recommendations and Financial Ratios 2005 issued by the Danish Society of Financial Analysts. For definitions of key figures see Summary for the Group , pages

70 2-3 NOTES 2. Revenue Parent Parent Group Group DKKm DKKm DKKm DKKm Denmark , ,189.8 Rest of Europe 5, , , ,957.6 USA 1, , Rest of the world 1, , , ,976.7 Total 9, ,069.8 Including Downpayments and contributions for joint research, etc Royalty Income from reduced ownership interest in LifeCycle Pharma A/S Income from Forest in the USA Income from sales of citalopram and escitalopram to Forest amounted to DKK 1,930.0 million in 2006 (DKK 2,618.1 million in 2005) based on the minimum price and adjustments of prepayments concerning prior-year shipments. Prepayments, which is the difference between the invoiced price and the minimum price, were DKK million at 31 December 2006 (DKK 1,393.1 million in 2005). See Note 1 Accounting policies for a more elaborate description hereof. The invoiced price is agreed between Forest and Lundbeck at the beginning of each calendar year. The price is calculated on the basis of expectations for the coming year s development in the elements included in the royalty calculation. These elements are: Forest s net selling prices, quantities used in sold products, quantities used in samples, quantities wasted during processing, and the various dosage levels of the finished goods. The agreement with Forest takes into consideration the expiry of the escitalopram patent protection in the USA in Prior to any launch of generic escitalopram, Forest is expected to reduce its escitalopram inventories to a low level. In connection with a launch of generic escitalopram, the agreement allows Forest to convert Lexapro into generic escitalopram. In connection with a conversion of Lexapro inventories, the minimum price will be adjusted by any repayment to Forest of part of the recognised minimum payment. Lundbeck monitors the development in Forest s inventories and net selling price thoroughly, and regularly assesses the risk of the price adjustment clause and repayment of the advance payment being applied. 3. Staff costs Parent Parent Group Group DKKm DKKm DKKm DKKm Wages and salaries, etc Short-term staff benefits 2, , Pension benefits Other social security costs Total 2, ,488.2 The year s staff costs are analysed as follows Cost of sales Distribution costs Administrative expenses Research and development costs Total 2, ,

71 3. Staff costs continued Executives Parent Parent Group Group DKKm DKKm DKKm DKKm Short-term staff benefits Pension benefits Other social security costs Share-based payments Total Executive Management Short-term staff benefits Pension benefits Share-based payments Total The total remuneration of the President and CEO, including bonus, which is a combination of company strategic and individual targets, and share-based payment, for the 2006 financial year amounted to DKK 6.3 million (DKK 6.5 million in 2005 when the President and CEO was granted warrants). The value of the warrant programme for the Executive Management, calculated according to the Black-Scholes formula, was DKK 7.4 million at 31 December 2006 (DKK 5.8 million in 2005). No warrants were granted in The value of the Executive Management s bonus programme must not exceed 3 months salary. Supervisory Board Remuneration of members of the Supervisory Board for 2006 amounted to DKK 3.0 million (DKK 2.8 million in 2005). To this amount should be added remuneration for participation in the Audit Committee of DKK 0.4 million (DKK 0.4 million in 2005), and for participation in the Remuneration Committee of DKK 0.2 million (DKK 0.2 million in 2005). The members of the Supervisory Board held a total of 11,910 Lundbeck shares at 31 December 2006 (10,710 shares in 2005). Some of the board members were replaced in The total remuneration of the chairman of the Supervisory Board for 2006 amounted to DKK 0.9 million (DKK 0.8 million in 2005) including remuneration for participation in the Audit Committee and Remuneration Committee. The total remuneration of the deputy chairman of the Supervisory Board for 2006 amounted to DKK 0.6 million (DKK 0.5 million in 2005) including remuneration for participation in the Audit Committee. Employees Parent Parent Group Group ,902 1,903 Average number of full-time employees in the financial year 5,111 5,022 Number of full-time employees at ,899 1,907 Denmark 1,941 1, Abroad 3,230 3,115 1,899 1,907 Total 5,171 5,050 69

72 3 NOTES 3. Staff costs continued Incentive plans Warrant scheme for the Executive Management and key employees (2004 plan) In 2004, the company established a warrant scheme for the Executive Management and a number of key employees in Denmark and abroad. Approximately 1,100 employees were granted a total of 2,554,092 warrants, including 160,000 granted to the Executive Management. The warrants had vested fully from the commencement of the scheme and may be exercised during the period 9 December August The exercise price is DKK throughout the exercise period. In 2006, 505,609 warrants (674,066 in 2005) were exercised under this scheme. The programme is subject to the transition rules of IFRS 2 Share-based payments as the warrants vested before 1 January 2005 and has therefore not been recognised in the income statement and the balance sheet. Based on the Black-Scholes formula, the market value at 31 December 2006 amounted to DKK 65.1 million (DKK 51.3 million in 2005). Executive Other Market value Total Management Executives employees Total per warrant market value Number Number Number Number DKK DKKm Outstanding at , ,900 2,032,270 2,521, Exercised - (122,700) (551,366) (674,066) Recategorised, granted and cancelled - (28,200) 29,400 1,200 Outstanding at , ,000 1,510,304 1,848, Exercised (44,500) (95,000) (366,109) (505,609) Recategorised, granted and cancelled - 10,400 (10,400) - Outstanding at ,500 93,400 1,133,795 1,342, The calculated market value per warrant is based on an exercise price of DKK , a quoted price of DKK (DKK in 2005), a volatility of per cent (30.11 per cent in 2005), a dividend payout ratio of 1.44 per cent (1.45 per cent in 2005) and a risk-free interest rate of 3.90 per cent (2.90 per cent in 2005). Warrant scheme for the Executive Management and Danish and foreign executives (2005 plan) In 2005, the company established a warrant scheme for the Executive Management and Danish and foreign executives. 76 employees were granted a total of 647,000 warrants, 160,000 of which were granted to the Executive Management. The warrants had vested fully from the commencement of the scheme and may be exercised during the period 2 October March The exercise price is DKK throughout the exercise period. No warrants have been exercised under this scheme. The warrants granted are recognised in the income statement for 2006 at an expense of DKK 0. In 2005, the warrants granted were recognised at an expense of DKK 14.1 million, which corresponded to the market value at the time of grant calculated according to the Black-Scholes formula. Executive Other Market value Total Management Executives employees Total per warrant market value Number Number Number Number DKK DKKm Granted 160, , , ,000 Outstanding at , , , , Recategorised - 37,000 (37,000) - Outstanding at , , , , The calculated market value per warrant is based on the Black-Scholes formula for valuation of options. The calculation is based on an exercise price of DKK , a quoted price of DKK (DKK in 2005), a volatility of per cent (29.40 per cent in 2005), a dividend payout ratio of 1.44 per cent (1.45 per cent in 2005) and a risk-free interest rate of 4.19 per cent (2.90 per cent in 2005). 70

73 3. Staff costs continued Share price based plan for employees in foreign subsidiaries (1999 plan) The plan expired on 3 January 2005 and was recognised in the income statement for 2005 at an expense of DKK 0.6 million. Share price based plan for employees in foreign subsidiaries (2002 plan) In 2002, the employees of foreign subsidiaries received a share price based plan, according to which employees employed by the Group throughout the period 1 June January 2006 received a cash amount equal to 50 per cent of the value of the plan. The remaining 50 per cent of the value of the plan will be paid if the employees have been employed by the Group throughout the period 1 June January The size of the amount depends on how much the price of the Lundbeck share at 2 January 2006 and 2 January 2008 respectively exceeds DKK per share (equal to the special price of the Danish employee share plan). The share price based plan cannot be converted into shares because the value of the plan will be distributed as a cash amount. The year s adjustment of the calculation basis of the share price based plan for employees employed by the Group amounted to 143,068 shares (26,500 shares in 2005) and was due to 50 per cent of the plan expiring in 2006 and resignations. The plan is subject to the rules of IFRS 2 Share-based payments. The value adjustment for the year is recognised in the income statement for 2006 at an expense of DKK 4.7 million (DKK 3.7 million in 2005). The obligation at 31 December 2006 was DKK 8.6 million (DKK 12.6 million in 2005) including social contributions. The calculation of the obligation is adjusted for anticipated employee attrition until the time of payout. Executive Other Market value Total Management Executives employees Total per option obligation Number Number Number Number DKK DKKm Obligation at , , , Cancelled and recategorised 1,200 (1,200) (26,500) (26,500) Obligation at ,200 16, , , Paid out (600) (5,370) (126,860) (132,830) Cancelled and recategorised - (6,020) (4,218) (10,238) Obligation at , , , The calculated market value per option is based on the Black-Scholes formula for valuation of options. The calculation is based on an exercise price of DKK 81.00, a quoted price of DKK (DKK in 2005), a volatility of per cent (30.11 per cent in 2005), a dividend payout ratio of 1.44 per cent (1.45 per cent in 2005) and a risk-free interest rate of 4.19 per cent (2.90 per cent in 2005). 71

74 3-6 NOTES 3. Staff costs continued Stock Appreciation Rights for employees of US subsidiaries (2004 plan) In 2004, key employees of US subsidiaries were granted Stock Appreciation Rights (SARs), a share price based plan with conditions similar to those of the warrant scheme granted in 2004 to the company s Executive Management and a number of key employees. The granted SARs are exercisable during the period 9 December August The size of the amount depends on how much the price of the Lundbeck share at the exercise date exceeds DKK per share (equal to the exercise price of the warrant scheme). The share price based plan for employees of the Group s US subsidiaries cannot be converted into shares because the value of the plan will be distributed as a cash amount. In 2006, 23,004 SARs (67,254 in 2005) were exercised under this plan. The plan is subject to the rules of IFRS 2 Share-based payments. The value adjustment for the year based on the Black-Scholes formula and exercised SARs is recognised in the income statement for 2006 at an expense of DKK 1.5 million (DKK 1.3 million in 2005). The obligation at 31 December 2006 was DKK 2.4 million (DKK 2.1 million in 2005), including social security contributions. The SARs vested at the time of grant. The intrinsic value of outstanding SARs was DKK 2.2 million at 31 December 2006 (DKK 1.6 million in 2005). Executive Other Market value Total Management Executives employees Total per SAR obligation Number Number Number Number DKK DKKm Obligation at , , , Exercised - (12,400) (54,854) (67,254) Recategorised, granted and cancelled - (1,600) (4,700) (6,300) Obligation at ,400 67,196 71, Exercised - - (23,004) (23,004) Recategorised, granted and cancelled - - (2,000) (2,000) Obligation at ,400 42,192 46, The calculated market value per SAR is based on the Black-Scholes formula for valuation of options. The calculation is based on an exercise price of DKK , a quoted price of DKK (DKK in 2005), a volatility of per cent (30.11 per cent in 2005), a dividend payout ratio of 1.44 per cent (1.45 per cent in 2005) and a risk-free interest rate of 3.90 per cent (2.90 per cent in 2005). General information applying to all incentive plans The total number of warrants which are exercisable and in-the-money at 31 December 2006 was 1,342,695 (1,848,304 in 2005). The total expense recognised in the income statement concerning all incentive plans was DKK 6.2 million in 2006 (DKK 19.7 million in 2005), and the total obligation concerning the debt plans at 31 December 2006 amounted to DKK 11.0 million (DKK 14.7 million in 2005). The performance of Lundbeck s shares in 2006 is illustrated in the chart on page 20 in the section The Lundbeck share. 4. Depreciation and amortisation 2006 Parent Parent Parent Group Group Group Property, plant Intangible Property, plant Intangible and equipment assets Total and equipment assets Total DKKm DKKm DKKm DKKm DKKm DKKm Depreciation, amortisation and impairment for the year are analysed as follows Cost of sales Distribution costs Administrative expenses Research and development costs Total Impairment losses on intangible assets are recognised under research and development costs. 72

75 4. Depreciation and amortisation continued 2005 Parent Parent Parent Group Group Group Property, plant Intangible Property, plant Intangible and equipment assets Total and equipment assets Total DKKm DKKm DKKm DKKm DKKm DKKm Depreciation, amortisation and impairment for the year are analysed as follows Cost of sales Distribution costs Administrative expenses Research and development costs Total Audit fees Parent Parent Group Group DKKm DKKm DKKm DKKm Deloitte Auditing services Non-auditing services Total Grant Thornton Auditing services Non-auditing services Total A few small foreign subsidiaries are not audited by the parent company s auditors, a foreign business partner of the auditors, or by an internationally recognised accountancy firm. 6. Net financials Parent Parent Group Group DKKm DKKm DKKm DKKm Interest, cash and securities, etc Interest, subsidiaries Exchange gains Dividend received Realised and unrealised gains: Bonds Derivative financial instruments, trading Total financial income Interest, bank and mortgage debt, etc Interest, subsidiaries Exchange losses Realised and unrealised losses: Bonds Derivative financial instruments, trading Mortgage debt Total financial expenses Net financials (63.8)

76 7-8 NOTES 7. Tax on profit for the year Parent Parent Group Group DKKm DKKm DKKm DKKm Current tax (12.1) (11.7) Prior year adjustment, current tax (12.3) (6.3) (1.0) 2.3 Prior year adjustment, deferred tax 5.0 (31.6) (53.6) Change of deferred tax for the year (11.5) - Change of deferred tax as a result of changed income tax rates (3.0) (14.1) Total tax for the year Tax for the year is composed of (121.0) 69.4 Tax on equity entries 68.9 (123.1) Tax on profit for the year Total tax for the year Explanation of the Group s effective tax rate relative to the Danish tax rate DKKm % DKKm % Profit before tax 1, ,241.8 Tax on pre-tax profit, 28 per cent % % Tax effect of: Differences in the tax rates of foreign subsidiaries from the Danish rate of 28 per cent % % Non-deductible expenses/non-taxable income and other permanent differences % % Change of deferred tax as a result of changed income tax rates (3.0) -0.2% (14.1) -0.6% Prior year tax adjustments, etc., total effect on operations (7.3) -0.4% (37.9) -1.7% Effective tax for the year before market value adjustment of other investments % % Non-deductible losses/non-taxable gains on shares and other equity investments (9.8) -0.6% % Tax effect of result in associates (18.8) -1.2% - - Effective tax for the year % % Explanation of the parent company s effective tax rate DKKm % DKKm % Profit before tax 1, ,820.1 Tax on pre-tax profit, 28 per cent % % Tax effect of: Non-deductible expenses/non-taxable income and other permanent differences % (8.5) -0.5% Change of deferred tax as a result of changed income tax rates - - (11.5) -0.6% Prior year tax adjustments, etc., total effect on operations (9.4) -0.7% (13.1) -0.7% Effective tax for the year before market value adjustment of other investments % % Non-deductible losses/non-taxable gains on shares and other equity investments (9.8) -0.7% (1.4) -0.1% Effective tax for the year % % Tax on equity entries comprises the tax effect of deferred gains on hedging contracts and the tax effect of exercised warrants. 74

77 8. Property, plant and equipment and intangible assets Group Other fixtures Prepayments and fittings, and plant and Property, Land and Plant and tools and equipment in plant and buildings machinery equipment 1 progress equipment 2006 DKKm DKKm DKKm DKKm DKKm Cost at , , , ,621.2 Exchange differences 9.9 (1.2) (8.0) Reclassification 31.3 (31.3) (2.9) - (2.9) Additions Additions through company acquisition Disposals (3.7) (1.9) (23.4) (153.5) (182.5) Cost at , , , ,157.7 Depreciation at ,140.8 Exchange differences (3.8) - (3.3) Reclassification - - (2.1) - (2.1) Depreciation during the year Impairment during the year Depreciation on disposals (0.7) (1.9) (16.5) - (19.1) Depreciation at ,491.0 Carrying amount at , , Cost at , , , ,320.2 Depreciation set-off Exchange differences Reclassification (0.1) - - Transferred to associates - (14.6) (9.3) - (23.9) Additions Disposals (1.9) (14.8) (125.7) (133.4) (275.8) Cost at , , , ,621.2 Depreciation at ,852.9 Set-off against cost Exchange differences Reclassification Transferred to associates - (1.9) (1.2) - (3.1) Depreciation during the year Depreciation on disposals (1.4) (14.3) (82.2) - (97.9) Depreciation at ,140.8 Carrying amount at , , ) Including leasehold improvements. 75

78 8 NOTES 8. Property, plant and equipment and intangible assets continued Group Patent Product Other Process Projects Intangible Goodwill rights rights rights IT projects 1 projects in progress 1 assets 2006 DKKm DKKm DKKm DKKm DKKm DKKm DKKm DKKm Cost at ,239.2 Exchange differences - - (0.1) (0.5) (0.5) Reclassification Additions Additions through company acquisition Disposals (0.4) - - (0.3) (0.1) - (22.3) (23.1) Cost at ,496.2 Amortisation at Exchange differences - - (0.1) (0.2) (0.1) - - (0.4) Reclassification Amortisation during the year Impairment during the year Amortisation on disposals (0.5) (0.5) Amortisation at Carrying amount at , Cost at , ,293.0 Amortisation set-off (136.2) (136.2) Exchange differences Reclassification (18.4) Transferred to associates - - (1.1) (1.1) Additions Disposals - - (76.8) (0.2) - - (2.5) (79.5) Cost at ,239.2 Amortisation at Set-off against cost (136.2) (136.2) Exchange differences Reclassification (17.8) Transferred to associates - - (0.2) (0.2) Amortisation during the year Amortisation on disposals - - (76.8) (0.2) (77.0) Amortisation at Carrying amount at , ) IT projects and projects in progress primarily comprise SAP. The amounts include capitalised internal expenses. 76

79 8. Property, plant and equipment and intangible assets continued Goodwill impairment test The carrying amount of goodwill of DKK million (DKK million in 2005) relates to the acquisition of Lundbeck Research USA, Inc., USA, (DKK million), Lundbeck Pharmaceuticals, Italy S.p.A., Italy (DKK million) and 50 per cent of Lundbeck GmbH, Germany (DKK million). The annual impairment tests are submitted to the Audit Committee for subsequent approval by the Supervisory Board. Based on the impairment tests performed in 2006, it was concluded that there is no need for writing down the goodwill amount. Lundbeck Pharmaceuticals, Italy S.p.A. and Lundbeck GmbH are defined as independent cash-generating units (CGU). In the impairment test, the discounted expected future cash flows (value in use) for each CGU are compared to the carrying amounts. The future cash flows are based on the companies business plans for The key parameters in the calculation of the value in use are sales, EBITDA, working capital and capital investments. The business plans are based on management s specific assessment of the business units expected development during the period For Lundbeck GmbH and Lundbeck Pharmaceuticals, Italy S.p.A., the terminal value for the period after 2011 has been fixed on the assumption of future growth of 2 per cent p.a. The calculation of the value in use is based on a WACC of 8 per cent before tax (7 per cent in 2005), on the basis of an external assessment. Lundbeck Research USA, Inc. is not defined as an independent CGU due to its capacity as a research unit. Goodwill related to the acquisition of the company has therefore been allocated to the uppermost group level along with the other research and development units. The impairment test of goodwill allocated to the uppermost group level is not carried out as a calculation of the value in use but as an assessment of the ratio between the carrying amount of goodwill and the Group s current market value. Impairment of patents In 2006, an impairment charge of DKK 73.7 million was made in the parent company s financial statements and DKK 16.9 million in the consolidated financial statements. In the income statement the impairment charge is recognised under research and development costs. The impairment charge is higher in the parent company as the patents acquired in connection with the acquisition of Lundbeck Research USA, Inc. in 2003 were subsequently transferred to the parent company at a value higher than the cost. The patents were written down because their scope of applications is considered to have been reduced relative to earlier assessments. No impairment charge was made on patents in

80 8 NOTES 8. Property, plant and equipment and intangible assets continued Parent company Other fixtures Prepayments and fittings, and plant and Property, Land and Plant and tools and equipment in plant and buildings machinery equipment 1 progress equipment 2006 DKKm DKKm DKKm DKKm DKKm Cost at , ,163.1 Reclassification Additions Additions through company acquisition Disposals (105.9) (105.9) Cost at , ,489.1 Depreciation at ,472.8 Reclassification Depreciation during the year Impairment during the year Depreciation on disposals Depreciation at ,736.9 Carrying amount at , , Cost at , ,951.8 Reclassification (0.1) - - Additions Disposals (1.5) (14.6) (99.2) (93.2) (208.5) Cost at , ,163.1 Depreciation at ,289.3 Reclassification Depreciation during the year Depreciation on disposals (1.1) (14.1) (63.4) - (78.6) Depreciation at ,472.8 Carrying amount at , , ) Including leasehold improvements. The carrying amount of mortgaged fixed assets in the parent company was DKK 1,810.9 million at 31 December 2006 (DKK 1,582.9 million in 2005). 78

81 8. Property, plant and equipment and intangible assets continued Parent company Patent Product Other Process Projects Intangible Goodwill rights rights rights IT projects 2 projects in progress 2 assets 2006 DKKm DKKm DKKm DKKm DKKm DKKm DKKm DKKm Cost at ,267.9 Reclassification Additions Additions through company acquisition Disposals (9.9) (9.9) Cost at ,443.2 Amortisation at Reclassification Amortisation during the year Impairment during the year Amortisation on disposals Amortisation at Carrying amount at Cost at ,199.9 Reclassification (18.4) Additions Disposals - - (76.8) (76.8) Cost at ,267.9 Amortisation at Reclassification (17.8) Amortisation during the year Amortisation on disposals - - (76.8) (76.8) Amortisation at Carrying amount at ) IT projects and projects in progress primarily comprise SAP. The amounts include capitalised internal expenses. 79

82 9-10 NOTES 9. Investments in subsidiaries Accumulated Accumulated impairment Cost revaluations losses Total 2006 DKKm DKKm DKKm DKKm Carrying amount at , ,699.6 Capital contributions Carrying amount at , ,732.0 Income from investments in subsidiaries amounted to DKK 75.6 million and includes dividends Carrying amount at , (612.7) 2,547.9 Effect of IFRS changes - (438.2) Carrying amount at , ,722.4 Capital contributions Transferred to associates (29.4) - - (29.4) Carrying amount at , ,699.6 Income from investments in subsidiaries amounted to DKK 81.6 million and includes dividends. Share of voting rights and ownership Lundbeck Argentina S.A., Argentina 100% Lundbeck Australia Pty Ltd, Australia, including 100% - CNS Pharma Pty Ltd, Australia 100% Lundbeck S.A., Belgium 100% Lundbeck Americas Ltda., Brazil 100% Lundbeck Brasil Ltda., Brazil 100% Lundbeck Canada Inc., Canada 100% Lundbeck Chile Farmaceútica Ltda., Chile 100% Lundbeck Cognitive Therapeutics A/S, Denmark, including 100% - Cognitive Therapeutics LLC, USA 100% Lundbeck Export A/S, Denmark 100% Lundbeck Insurance A/S, Denmark 100% Lundbeck Pharma A/S, Denmark 100% Lundbeck Group Limited, UK, including 100% - Lundbeck Limited, UK 100% - Lundbeck Pharmaceuticals Ltd., UK 100% Lundbeck Eesti A/S, Estonia 100% OY H. Lundbeck AB, Finland 100% Lundbeck SA, France 100% Lundbeck Hellas S.A., Greece 100% Lundbeck B.V., The Netherlands 100% Lundbeck (Hong Kong) Limited, Hong Kong 100% Lundbeck India Private Limited, India 100% Lundbeck (Ireland) Limited, Ireland 100% Lundbeck Israel Ltd., Israel 100% Lundbeck Italia S.p.A., Italy 100% Lundbeck Pharmaceuticals, Italy S.p.A., Italy, including 100% - Archid S.a., Luxembourg 100% Lundbeck Japan Kabushiki Kaisha, Japan 100% Lundbeck Korea Co., Ltd., Korea 100% Share of voting rights and ownership Lundbeck Croatia d.o.o., Croatia 100% SIA Lundbeck Latvia, Latvia 100% UAB Lundbeck Lietuva, Lithuania 100% Lundbeck México, SA de CV, Mexico 100% Lundbeck New Zealand Limited, New Zealand 100% H. Lundbeck AS, Norway, including 100% - CNS Pharma AS, Norway 100% Lundbeck Pakistan (Private) Limited, Pakistan 100% Lundbeck Poland Sp.z.o.o., Poland 100% Lundbeck Portugal - Produtos Farmacêuticos Lda, Portugal 100% Lundbeck RUS 000, Russia 100% Lundbeck (Schweiz) AG, Switzerland 100% Lundbeck Pharmaceutical GmbH, Switzerland 100% Lundbeck Slovensko s.r.o., Slovakia 100% Lundbeck Pharma d.o.o., Slovenia 100% Axofarma Lab, S.A., Spain 100% Farmaglia S.A., Spain 100% Lundbeck España S.A., Spain 100% H. Lundbeck AB, Sweden, including 100% - CNS Pharma AB, Sweden 100% Lundbeck South Africa (Pty) Limited, South Africa 100% Lundbeck CZ s.r.o., Czech Republic 100% Lundbeck Ìlac Ticaret Limited Sirketi, Turkey 100% Lundbeck GmbH, Germany 100% Lundbeck Hungária KFT, Hungary 100% Lundbeck Inc., USA 100% Lundbeck Research USA, Inc., USA 100% Lundbeck de Venezuela, C.A., Venezuela 100% Lundbeck Austria GmbH, Austria 100% 80

83 10. Investments in associates 2006 Parent Parent Parent Group Group Group Accumulated Accumulated revaluation/ revaluation/ impairment impairment Cost losses Total Cost losses Total DKKm DKKm DKKm DKKm DKKm DKKm (26.7) Carrying amount at (80.9) Income from reduced ownership interest Losses in associates - (87.4) (87.4) Exchange differences - (0.5) (0.5) (26.7) Carrying amount at (14.2) The shares of LifeCycle Pharma A/S were listed on the Copenhagen Stock Exchange on 20 November In this connection, Lundbeck s ownership interest was reduced to 28.8 per cent. The fair value as at 31 December 2006 amounted to DKK million. Share of voting rights and ownership CF Pharma Gyógyszergyártó Kft., Hungary 47.1% LifeCycle Pharma A/S, Denmark 28.8% 2005 Parent Parent Parent Group Group Group Accumulated Accumulated revaluation/ revaluation/ impairment impairment Cost losses Total Cost losses Total DKKm DKKm DKKm DKKm DKKm DKKm 83.7 (26.7) 57.0 Carrying amount at (26.7) Transferred from subsidiaries 29.4 (45.3) (15.9) Capital contributions Income from reduced ownership interest Losses in associates - (35.4) (35.4) Exchange differences - (1.5) (1.5) (26.7) Carrying amount at (80.9) On 1 June 2005, LifeCycle Pharma A/S, Denmark, changed from being a subsidiary to being an associate. Share of voting rights and ownership CF Pharma Gyógyszergyártó Kft., Hungary 47.1% LifeCycle Pharma A/S, Denmark 49.5% Financial highlights of associates Parent Parent Group Group DKKm DKKm DKKm DKKm Assets Liabilities Net assets Group s share of net assets Revenue (94.2) (179.8) Profit/(loss) for the year (179.8) (94.2) Group s share of profit/(loss) for the year (87.4) (35.4) 81

84 11-14 NOTES 11. Other investments and other receivables Group Receivables Available-for-sale from financial Other associates assets receivables 2006 DKKm DKKm DKKm Carrying amount at Additions Disposals - (2.1) (4.9) Value adjustment - (31.5) - Exchange differences - (0.4) (1.7) Carrying amount at Carrying amount at Additions Disposals - - (0.7) Value adjustment Exchange differences Carrying amount at Parent company Receivables Receivables Available-for-sale from from financial Other subsidiaries associates assets receivables 2006 DKKm DKKm DKKm DKKm Carrying amount at Additions Disposals (55.4) - - (0.2) Value adjustment - - (31.5) - Exchange differences (24.7) - - (1.4) Carrying amount at Carrying amount at Effect of IFRS changes Carrying amount at Additions Disposals (0.2) Value adjustment Exchange differences (24.5) Carrying amount at

85 11. Other investments and other receivables continued Fair value adjustment of available-for-sale financial assets Parent Parent Group Group DKKm DKKm DKKm DKKm (164.2) (150.0) Fair value adjustment at (149.9) (164.1) Revaluation during the year (3.7) (48.7) Impairment losses during the year (48.7) (3.7) (150.0) (181.5) Fair value adjustment at (181.4) (149.9) 12. Inventories Parent Parent Group Group DKKm DKKm DKKm DKKm Indirect costs of production (40.0) 15.8 Impairment loss for the year 51.1 (33.2) In 2005, the impairment loss for the year was influenced by reversed impairment losses of DKK 70.0 million. 13. Share capital The share capital of DKK 1,060.8 million at 31 December 2006 is divided into 212,155,154 shares of a nominal value of DKK 5 each DKKm DKKm Share capital at , ,168.7 Exercise of warrants Cancellation of treasury shares (77.9) (36.0) Share capital at , ,136.1 The Supervisory Board recommends distribution of dividend for 2006 of 30 per cent (30 per cent in 2005) of the net profit for the year allocated to the shareholders of the parent company, equivalent to DKK million (DKK million in 2005) inclusive of dividend on treasury shares, or DKK 1.57 per share (DKK 2.10 in 2005). The total share premium of DKK million, which relates to the exercise of warrants (see note 3 Staff costs), increased by DKK 52.1 million in 2006 from DKK 69.5 million in Minority interests DKKm DKKm Minority interests at (1.4) Share of profit for the year - (9.1) Disposals Minority interests at

86 15 NOTES 15. Pension obligations and similar obligations Group Group DKKm DKKm Present value of funded pension obligations Fair value of plan assets (161.2) (142.6) Funded pension obligations, net Present value of unfunded pension obligations Pension obligations at Other pension-like obligations Pension obligations and similar obligations at The majority of the employees of the Group are covered by pension plans paid for by the companies of the Group. The types of plan vary according to regulatory requirements, tax rules and economic conditions in the countries in which the employees are employed. A summary of the most important plans is given below. Defined contribution plans For the defined contribution plans, the employer undertakes to pay a defined contribution (e.g. a fixed amount or a fixed percentage of the pay). Under a defined contribution plan, the employees will usually bear the risk related to future developments in interest and inflation rates, etc. The major defined contribution plans cover employees in Australia, Belgium, Denmark, Finland, Ireland, Sweden and the UK. The cost of defined contribution plans, representing contributions to the plans, totalled DKK million in 2006 (DKK million in 2005). Parent Parent Group Group DKKm DKKm DKKm DKKm Expenses for the financial year Defined benefit plans For the defined benefit plans, the employer undertakes to pay a defined benefit (e.g. a retirement pension at a fixed amount or a fixed percentage of the employee s final salary). Under the defined benefit plan, the company usually bears the risk relating to future developments in interest and inflation rates, etc. For defined benefit plans, the present value of future benefits, which the company is liable to pay under the plan, is computed using actuarial principles. The computation of present value is based on assumptions about discount rates, increases in pay rates and pensions, investment yield, staff resignation rates, mortality and disability. Present value is computed exclusively for the benefits to which the employees have earned entitlement through their employment with the company up till now. Actuarial gains and losses are recognised in the income statement as they are calculated. The Group s most important defined benefit plans cover employees in the UK and Germany. The UK defined benefit plan is funded by means of an independent pension fund. The actuarial calculation of the obligation as at 31 December 2006 is stated in the Group s balance sheet at an amount of DKK 46.3 million (DKK 45.6 million in 2005). The obligation is calculated as the present value of the future payments of DKK million (DKK million in 2005) less the market value of the pension fund s assets of DKK million (DKK million in 2005). The actuarial calculation was based on a discount rate of 5.10 per cent p.a., a pay rate increase of 4.75 per cent p.a. and a pension increase of 2.90 per cent p.a. The calculation does not include an age-weighted staff resignation rate. The consolidated income statement for 2006 includes an expense of DKK 7.4 million (DKK 8.0 million in 2005). The German defined benefit plan is not funded. The actuarial calculation of the obligation derived from the plan as at 31 December 2006 is stated in the Group s balance sheet at an amount of DKK 78.2 million (DKK 93.1 million in 2005). The actuarial calculation was based on a discount rate of 4.25 per cent p.a., a pay rate increase of 2.25 per cent p.a., a pension increase of 1.50 per cent every third year and an age-weighted staff resignation rate of 0-10 per cent p.a. The consolidated income statement for 2006 includes an income of DKK 4.2 million (expense of DKK 21.9 million in 2005). In addition, the Group operates a defined benefit plan in Norway, which is funded. The actuarial calculation of the obligation as at 31 December 2006 is stated in the Group s balance sheet at an amount of DKK 6.9 million (DKK 6.9 million in 2005). The obligation is calculated as the present value of the future payments of DKK 19.0 million (DKK 16.2 million in 2005) less the market value of the pension fund s assets of DKK 12.1 million (DKK 9.3 million in 2005). The consolidated income statement includes an expense of DKK 3.5 million (DKK 6.9 million in 2005). 84

87 15. Pension obligations and similar obligations continued A pension plan was set up in the USA in The plan is funded through an insurance/investment asset, which is recognised in the consolidated balance sheet. At 31 December 2006, the total obligation amounted to DKK 2.5 million. At 31 December 2006, the value of the insurance/investment asset was DKK 6.3 million. Lundbeck is obliged, under specific terms and conditions, to make payments and pension disbursements to the employees. In the consolidated income statement for 2006, the plan is recognised at an expense of DKK 0.8 million. In addition, the Group has defined benefit plans in France and Pakistan, which are also unfunded. The obligation under these plans is recorded in the consolidated balance sheet at 31 December 2006 at an amount of DKK 16.5 million (DKK 15.1 million in 2005). The consolidated income statement for 2006 includes an expense of DKK 1.5 million (DKK 5.8 million in 2005). There is no defined benefit plans in Denmark and, by extension, no such plans in the parent company. Group Group % distribution % distribution The fair value of plan assets breaks down as follows Shares 57% 56% Bonds 23% 24% Property 15% 15% Other assets 5% 5% Total 100% 100% DKKm DKKm Change in obligation for defined benefit plans Pension obligations at Exchange differences Transferred from other plan Recognised as expense (change recognised in the income statement) Contribution (21.6) (7.9) Employee contributions Pension obligations at Specification of the change recognised in the income statement Pension expenses for the year Interest expenses relating to the obligations Expected return on plan assets (8.4) (6.9) Actuarial gains/losses (9.0) 22.7 Total expenses recognised Realised return on plan assets The expected contribution for 2007 for the defined benefit plans is DKK 13.7 million. Other pension-like obligations An obligation of DKK 54.1 million (DKK 30.5 million in 2005) is recognised in the Group to cover other pension-like obligations, including primarily termination benefits in a number of subsidiaries. The benefit payments are conditional upon specified requirements being met. The total expenses for the year were DKK 23.6 million (DKK 6.0 million in 2005). Other schemes In addition to the above plans, the companies of the Group make payments to certain statutory or contract-based benefit schemes for employees of a nature similar to social, pension or insurance plans. The annual contributions to these plans are recognised as part of the Group s total staff costs. The expenses paid in 2006 totalled DKK million (DKK million in 2005). 85

88 16 NOTES 16. Deferred tax liabilities Group Temporary differences between assets and liabilities as stated in the financial statements and as stated in the tax base. Adjustment of deferred tax Movement Balance at Effect of at beginning Exchange during Balance at IFRS changes of year differences the year DKKm DKKm DKKm DKKm DKKm DKKm Intangible assets Property, plant and equipment 1, ,050.7 Inventories (34.5) 8.5 (133.7) (150.6) Prepayments (1,393.1) (854.7) Other items (23.5) Tax reserves in subsidiaries (6.6) 27.3 Tax loss carry-forwards (311.7) - (5.8) 30.8 (8.8) (295.5) Total temporary differences (123.5) Deferred tax liabilities/(deferred tax assets) (47.0) Intangible assets (63.9) Property, plant and equipment 1, (3.1) 7.9 (11.7) 1,000.1 Inventories (1.3) (2.9) (10.2) 9.1 Prepayments (1,039.8) (353.6) (1,393.1) Other items (216.2) (57.0) 1.9 (34.6) (23.5) Tax reserves in subsidiaries (5.2) (1.9) (13.7) 30.4 Tax loss carry-forwards (228.1) (30.6) (61.0) (311.7) Total temporary differences (57.0) (63.3) (61.7) (127.3) (123.5) Deferred tax liabilities/(deferred tax assets) 39.6 (21.2) (31.6) (29.1) (4.7) (47.0) Deferred tax assets/liabilities Deferred tax Deferred tax Deferred tax Deferred tax assets liabilities Net assets liabilities Net DKKm DKKm DKKm DKKm DKKm DKKm Intangible assets (34.4) (75.3) Property, plant and equipment (12.2) (12.1) Inventories (100.8) 54.8 (46.0) (84.7) 83.8 (0.9) Prepayments (239.3) - (239.3) (390.1) - (390.1) Other items (140.9) (159.7) Deferred tax in respect of tax reserves in subsidiaries (6.7) (6.0) Tax value of loss carry-forwards (116.4) - (116.4) (94.0) - (94.0) Tax (assets)/liabilities (650.7) (821.9) (47.0) Set-off within legal tax entities and jurisdictions (371.6) (537.5) - Total net tax (assets)/liabilities (279.1) (284.4) (47.0) The tax value of all tax losses carried forward was capitalised as at 31 December 2006, as the losses are expected to be utilised against future income in accordance with the Group s business plans. At 31 December 2005, the tax value of non-capitalised tax losses carried forward was disclosed at DKK 59.0 million. The calculation method for the valuation of tax losses carried forward was changed in Under the new calculation method, the tax value at 31 December 2005 of noncapitalised tax losses carried forward would amount to DKK 32.7 million. 86

89 16. Deferred tax liabilities continued Parent company Temporary differences between assets and liabilities as stated in the financial statements and as stated in the tax base. Adjustment of deferred tax Movement Balance at Effect of at beginning during Balance at IFRS changes of year the year DKKm DKKm DKKm DKKm DKKm Intangible assets (144.6) Property, plant and equipment Inventories (34.5) (57.5) Prepayments (1,393.1) (854.7) Other items (77.3) Total temporary differences Deferred tax liabilities/(deferred tax assets) Intangible assets Property, plant and equipment (2.2) Inventories Prepayments (1,039.8) (353.6) (1,393.1) Other items (199.6) (4.1) (5.8) (77.3) Total temporary differences (4.1) (3.6) (191.7) Deferred tax liabilities/(deferred tax assets) (1.2) (1.0) (65.1) Deferred tax assets/liabilities Deferred tax Deferred tax Deferred tax Deferred tax assets liabilities Net assets liabilities Net DKKm DKKm DKKm DKKm DKKm DKKm Intangible assets Property, plant and equipment Inventories Prepayments (239.3) - (239.3) (390.1) - (390.1) Other items (21.6) - (21.6) Tax (assets)/tax liabilities (239.3) (411.7) Amount set-off (239.3) (411.7) - Total net tax (assets)/liabilities The figures stated above show gross deferred tax assets and deferred tax liabilities respectively at an income tax rate of 28 per cent. 87

90 17-18 NOTES 17. Provisions Parent Parent Group Group DKKm DKKm DKKm DKKm Provisions at (2004/2005) Effect of IFRS changes Provisions at Provisions charged during the year (3.4) (3.3) Provisions used during the year (13.1) (48.9) (38.7) - Unused provisions reversed during the year - (38.7) Provisions at Specification of provisions Long-term provisions Short-term provisions Provisions at The provisions cover expenses associated with the defence of the company s intellectual property rights and disbursements under the Group s incentive plans. Of the total provision at 31 December 2006, DKK 11.0 million (DKK 14.7 million in 2005) relates to incentive plans, of which DKK 2.4 million (DKK 8.1 million in 2005) is short-term amounts. Further details about the incentive plans are provided in note 3 Staff costs. 18. Mortgage and bank debt Mortgage debt Parent Parent Group Group DKKm DKKm DKKm DKKm Mortgage debt by maturity Within 1 year from the balance sheet date Between 1 and 2 years from the balance sheet date Between 2 and 3 years from the balance sheet date Between 3 and 4 years from the balance sheet date Between 4 and 5 years from the balance sheet date ,416.3 After more than 5 years from the balance sheet date 1, ,426.9 Mortgage debt at , Specification of mortgage debt ,424.8 Long-term liabilities 1, Short-term liabilities ,426.9 Mortgage debt at ,

91 18. Mortgage and bank debt continued Group Weighted average effective Amortised Nominal Fixed/ interest rate cost value Fair value 2006 Currency Expiry floating % DKKm DKKm DKKm Mortgage debt DKK 2012 fixed 5.82% Mortgage debt, bond loan DKK 2035 floating 3.93% 1, , ,458.7 Mortgage debt, bond loan DKK 2034 floating 3.39% Mortgage debt, bond loan DKK 2034 floating 3.39% Mortgage debt EUR 2008 fixed 5.82% Total 1, , , Mortgage debt DKK 2012 fixed 5.82% Mortgage debt, bond loan DKK 2033 floating 2.98% Mortgage debt, bond loan DKK 2033 floating 2.98% Mortgage debt, bond loan DKK 2033 floating 2.99% Mortgage debt EUR fixed 5.68% Total Amortised cost is calculated as the proceeds received less instalments paid plus or minus amortisation of capital losses. Fair value is calculated as the market value at the balance sheet date. Parent company Weighted average effective Amortised Nominal Fixed/ interest rate cost value Fair value 2006 Currency Expiry floating % DKKm DKKm DKKm Mortgage debt DKK 2012 fixed 5.82% Mortgage debt, bond loan DKK 2035 floating 3.93% 1, , ,458.7 Mortgage debt, bond loan DKK 2034 floating 3.39% Mortgage debt, bond loan DKK 2034 floating 3.39% Total 1, , , Mortgage debt DKK 2012 fixed 5.82% Mortgage debt, bond loan DKK 2033 floating 2.98% Mortgage debt, bond loan DKK 2033 floating 2.98% Mortgage debt, bond loan DKK 2033 floating 2.99% Total Amortised cost is calculated as the proceeds received less instalments paid plus or minus amortisation of capital losses. Fair value is calculated as the market value at the balance sheet date. 89

92 18-20 NOTES 18. Mortgage and bank debt continued Bank debt Parent Parent Group Group DKKm DKKm DKKm DKKm Bank debt by maturity Within 1 year from the balance sheet date Bank debt at Specification of bank debt - - Long-term liabilities Short-term liabilities Bank debt at Group Weighted average effective interest Nominal Fixed/ rate value 2006 Currency Expiry floating % DKKm Overdraft facility SEK 2007 floating 4.07% 1.1 Overdraft facility CZK 2007 floating 2.97% 1.7 Loan EUR 2007 fixed 3.87% 52.2 Total Loan EUR fixed 3.01% 44.8 Total 44.8 Parent company Weighted average effective interest Nominal Fixed/ rate value 2006 Currency Expiry floating % DKKm Overdraft facility SEK 2007 floating 4.07% 1.1 Overdraft facility CZK 2007 floating 2.97% 1.7 Total The parent company had no bank debt in

93 19. Treasury shares Parent company and Group Shares of Nominal Share of DKK 5 nom. value share capital Cost 2006 Number DKKm % DKKm Holding at ,523, % 1,016.0 Additions 12,011, % 1,591.1 Shares cancelled (15,571,908) (77.9) -7.34% (2,080.7) Holding at ,963, % Holding at ,369, % Additions 9,348, % 1,226.9 Disposals at cost (228) (0.0) 0.00% (0.0) Shares cancelled (7,194,598) (36.0) -3.10% (758.3) Holding at ,523, % 1,016.0 Additions of treasury shares consist of shares acquired pursuant to the authority granted by the shareholders in general meeting to purchase treasury shares of up to 10 per cent of the share capital. The shares were purchased in the open market, and the buyback programmes have been implemented with due consideration to market conditions, current legislation and provisions on share buybacks. At the annual general meeting held on 24 April 2006, it was resolved to lower the company s share capital by DKK 77,859,540 nominal value of the company s portfolio of treasury shares, corresponding to 15,571,908 shares. The market value of the entire holding of treasury shares at 31 December 2006 was DKK million (DKK million in 2005). Deferred tax on shares held for less than 3 years was DKK 25.2 million (DKK 0.9 million in 2005). No provision has been made in respect of the amount. 20. Contractual obligations Rental and lease obligations Lundbeck has obligations amounting to DKK million (DKK million in 2005) in the form of rentals and leasing of operating equipment, primarily cars. The future rental and lease payments can be analysed as follows: Land and Operating Land and Operating buildings equipment Total buildings equipment Total DKKm DKKm DKKm DKKm DKKm DKKm Less than 1 year Between 1 and 5 years More than 5 years Total Rental and lease payments recognised in the income statement in 2006 amounted to DKK million (DKK million in 2005). Other purchase obligations The parent company has undertaken to purchase property, plant and equipment in the amount of DKK million (DKK 58.1 million in 2005). Research cooperation The Group is part of multi-year research cooperation projects comprising minimum research and contractual obligations in the order of DKK 28 million (DKK 43 million in 2005). The total amount of the obligations can increase substantially in line with the favourable development of the projects. Other contractual obligations The parent company has capital contribution obligations amounting to DKK 45.2 million (DKK 61.0 million in 2005) and has entered into various service agreements amounting to DKK 48.6 million (DKK 47.8 million in 2005). In connection with the acquisition of Saegis Pharmaceuticals, Inc. the Group has an obligation to pay up to an additional DKK million to the sellers if the acquired project develops positively. 91

94 21-22 NOTES 21. Contingent liabilities Forest See note 2 Revenue in respect of the consequences of any launch of generic escitalopram in the USA. The prepayment from Forest has been translated at the exchange rate at the transaction date or at the forward rate and recognised in the balance sheet at DKK million (DKK 1,393.1 million in 2005). If the translation had been made at the exchange rate at the balance sheet date, the prepayment would have amounted to DKK million (DKK 1,614.0 million in 2005). Letters of intent and bank guarantees The parent company has issued letters of intent to subsidiaries in a total amount of DKK 67.0 million (DKK 51.9 million in 2005). In addition, the parent company has issued general letters of intent to subsidiaries. Furthermore, the parent company s bankers have issued bank guarantees to third parties in the amount of DKK 20.1 million (DKK 40.1 million in 2005). The Group s bankers have issued bank guarantees to third parties in the amount of DKK 66.6 million (DKK 45.3 million in 2005). The parent company has evaluated that the fair value of guarantees is DKK 0 (DKK 0 in 2005). Pending legal proceedings The Group is involved in legal proceedings, including cases with generic competitors. In the opinion of management, the outcome of these proceedings will not have a material impact on the Group s financial position beyond the amount provided for in the financial statements. Due to uncertainty about the outcome of the legal proceedings, the final amount of the provision is still unknown. Moreover, as described on page 8, the parent company is party to legal proceedings in the USA against IVAX Pharmaceuticals, Inc. The company does not expect that this will materially affect its financial position, results of operations or cash flows. Industry obligations The Group has return obligations normal for the industry. Management expects no major loss on these obligations. Joint taxation The parent company is liable jointly and severally with the other jointly taxed companies for the total income taxes under the joint taxation for the income year 2004 and earlier. As from 2005, H. Lundbeck A/S and Danish subsidiaries are subject to compulsory joint taxation with LFI a/s and other Danish affiliated companies. The companies in the tax pool are separately liable for the payment of own taxes until these have been settled with the administration company (LFI a/s). After such time, LFI a/s is liable for the combined taxes in the tax pool. 92

95 22. Financial instruments Foreign currency risk Net forward exchange contracts outstanding for the Group and the parent company. Hedging part Exchange gain/ Averagee Hedge value Market value Exchange (loss) recognised hedge prices according to (forward gain/(loss) in the income of existing the hedge exchange recognised in statement/ forward exchange principle contracts) equity balance sheet contracts 2006 DKKm DKKm DKKm DKKm DKK Maturity period AUD (1.1) (1.6) Jan Dec 2007 CAD (8.8) Jan Dec 2007 CHF Jan Dec 2007 CZK (0.6) Jan Dec 2007 EUR Jan Dec 2007 GBP , Jan Dec 2007 HUF (0.5) Jan Jul 2007 JPY (2.3) (1.3) 5.17 Jan Dec 2007 MXN (0.3) Jan Dec 2007 NOK Jan Dec 2007 SEK (0.4) - TRY (2.3) (0.3) Jan Mar 2007 USD 1, , (35.9) Jan Dec 2007 ZAR Jan Dec 2007 Forward contracts 2, , (41.3) 2005 AUD (2.3) (3.7) Jan Dec 2006 CAD (12.9) (10.1) Jan Dec 2006 CHF Jan Dec 2006 CZK Jan Dec 2006 EUR (0.1) (0.2) Jan Dec 2006 GBP , Jan Dec 2006 HUF (0.2) (0.9) 2.94 Jan Dec 2006 JPY Jan Dec 2006 NOK (1.3) Jan Dec 2006 SEK (0.3) Jan Dec 2006 USD 2, ,857.6 (174.7) Jan 2006 Mar 2007 ZAR (2.7) (2.3) Jan Dec 2006 Forward contracts 3, ,774.6 (190.9) 2.1 The exchange difference between the contract value and the market value of the concluded forward exchange contracts at 31 December 2006 represented a gain of DKK 56.1 million (loss of DKK million in 2005). There were no currency options under the hedging part at 31 December 2006 and 31 December As a result of the downward adjustment in February 2006, the hedging part was changed so that USD 110 million was transferred to trading contracts. The profit impact at the date of reclassification was a loss of DKK 33.2 million. The contracts have subsequently yielded a gain so that the total realised loss amounted to DKK 3.0 million. 93

96 22 NOTES 22. Financial instruments continued Trading part Averagee Market value Exchange gain/ hedge prices (forward (loss) recognised of existing exchange in the income forward exchange Hedge value contracts) statement contracts 2006 DKKm DKKm DKKm DKK Maturity period CAD Jan 2007 CHF Jun 2007 EUR TRY USD - - (10.0) - ZAR Forward contracts (6.3) 2005 AUD Jan 2006 CAD (2.8) Jan Dec 2006 CHF Jan 2006 NOK SEK USD (43.7) Jan Dec 2006 ZAR (0.3) Jan Dec 2006 Forward contracts (46.0) The exchange difference between the contract value and the market value of the concluded forward exchange contracts at 31 December 2006 represented a loss of DKK 0.7 million (DKK 28.2 million in 2005). There were no currency options under the trading part at 31 December 2006 and 31 December Deferred recognition of currency gains/losses taken to equity Parent Parent Group Group DKKm DKKm DKKm DKKm (190.9) Deferred exchange gains/losses at (190.9) (452.4) Exchange adjustments for the year, hedging, taken to equity (452.4) (2.1) 41.3 Realised exchange gains/losses, hedging, transferred to the income statement and the balance sheet 41.3 (2.1) Realised exchange gains/losses, trading, transferred to net financials (transferred from hedging) (190.9) 57.1 Deferred exchange gains/losses at (190.9) 94

97 22. Financial instruments continued Credit risks The primary financial instruments shown in the balance sheet are trade receivables, securities and cash. The amounts of these balance sheet items are identical to the maximum credit risk. The Group has no major concentration of credit risk, as the risk is spread over a large number of creditworthy trading partners. The securities portfolio consists exclusively of Danish government and mortgage bonds. The credit risk of cash and derivative financial instruments (forward exchange contracts and options) is limited because the Group deals only with banks with a high credit rating. Lundbeck s products are sold mainly to distributors of pharmaceuticals and hospitals. Historically, the losses sustained have been insignificant. This was also the case in Foreign currency risks Foreign currency management is handled centrally by the parent company. The company hedges a significant part of the Group s anticipated cash flows for a period of approximately 12 months. Currency management focuses on risk minimisation and is carried out in conformity with the foreign currency policy approved by the Supervisory Board. The hedging consists partly of a fixed minimum hedge and partly of a variable part. The fixed part is hedged by forward contracts classified as hedging instruments and meeting the accounting criteria for hedging future cash flows. Changes in the fair value of these contracts are taken to equity as they arise and on realisation of the hedged cash flow transferred from equity for inclusion in the same item as the hedged cash flow. The variable part, which is hedged partly by forward contracts and partly by option contracts, is used to hedge the remaining foreign currency risks in the short term. These contracts are not classified as hedging contracts but as trading contracts, and changes in the fair value are recognised as financial items as they arise. Due to the company s continuous hedging of net currency flows, a falling exchange rate will not affect the company in the short term. Conversely, the company will not benefit fully from a rising exchange rate in the short term, either. The company s USD income derives primarily from invoicing to Forest. According to the Group s accounting policies, the minimum price is recognised as income at the time of invoicing, and the excess amount is recognised in the balance sheet as a prepayment. The prepayments and any remaining settlement will be recognised as Forest subsequently resells the products. Income and expenses relating to hedging contracts covering this part of the hedged cash flows are recognised in the balance sheet together with the prepayments and subsequently recognised in the income statement as Forest resells the products. At 31 December 2006, this amount was a loss of DKK 69.4 million (DKK 14.7 million in 2005) which has been recognised together with prepayments. Exchange adjustment of associates according to the equity method Group DKKm DKKm Exchange adjustment at (1.4) 0.1 Exchange adjustment for the year (0.5) (1.5) Exchange adjustment at (1.9) (1.4) 95

98 22-23 NOTES 22. Financial instruments continued Interest rate risks The interest rate risk has been calculated based on maturity dates. If repricing or interest rate adjustments have been made before the respective maturity dates, the interest rate risk is calculated on the basis of the repricing dates. Less than Between More than Effective 1 year 1 and 5 years 5 years Total interest rates 2006 DKKm DKKm DKKm DKKm % Assets Receivables 1 2, , % Securities 5.4 1, , % Associates % Available-for-sale financial assets % Cash 1, , % Total financial assets 3, , ,028.6 Liabilities Mortgage debt , , % Employee bonds % Other payables 2, , % Bank debt % Total financial liabilities 2, , , Assets Receivables 1 2, , % Securities , , % Associates % Available-for-sale financial assets % Cash % Total financial assets 3, , ,209.4 Liabilities Mortgage debt % Other payables 3, , % Bank debt % Total financial liabilities 3, , ) Including other receivables, receivables from associates and the value of tax assets under financial assets. 96

99 23. Related parties Lundbeck s related parties are - The company s principal shareholder, LFI a/s, Vestagervej 17, DK-2900 Hellerup, which is wholly owned by the Lundbeck Foundation, and the Lundbeck Foundation - Companies in which the principal shareholder exercises controlling influence, i.e. ALK-Abelló A/S - The company s subsidiaries - The company s associates - Members of the company s Executive Management and Supervisory Board as well as close relatives of these persons - Companies in which members of the company s Executive Management and Supervisory Board as well as close relatives of these persons exercise significant influence Transactions and balances with the company s principal shareholder There have been no transactions or balances with the company s principal shareholder other than dividend, the share buyback programme (see description in the section The Lundbeck share on page 20) and repayment of excess tax in the amount of DKK 34.4 million in 2006 (DKK 0 in 2005) concerning the parent company and Danish subsidiaries. See Joint taxation in note 21 Contingent liabilities. LFI a/s/the Lundbeck Foundation have a controlling influence in H. Lundbeck A/S. Transactions and balances with ALK-Abelló A/S There have been no transactions or balances with ALK-Abelló A/S. Transactions and balances with subsidiaries Parent company DKKm DKKm Sale of goods 3, ,183.1 Purchase of goods Sale of production services Purchase of production services Purchase of distribution services Sale of administrative services Purchase of administrative services Purchase of research and development services Dividend Financial income Financial expenses Long-term receivables from subsidiaries Short-term receivables from subsidiaries Long-term payables to subsidiaries ,028.6 Short-term payables to subsidiaries Transactions and balances with subsidiaries include on-account tax payments made by the parent company on behalf of the subsidiaries. Transactions and balances with subsidiaries are eliminated on consolidation. 97

100 23-27 NOTES 23. Related parties continued Transactions and balances with associates Parent Parent Group Group DKKm DKKm DKKm DKKm Sale of administrative services Financial income Long-term receivables from associates Associates comprise CF Pharma Gyógyszergyártó Kft., Hungary, and LifeCycle Pharma A/S, Denmark. Transactions and balances with the company s Executive Management and Supervisory Board In addition to the transactions with members of the company s Executive Management and Supervisory Board outlined in note 3 Staff costs, the company has paid dividend on shares in H. Lundbeck A/S held by members of the Executive Management and Supervisory Board. There are no balances with the company s Executive Management and Supervisory Board. Transactions and balances with other related parties There have been no transactions and balances with other related parties. 24. Segment information Primary segments The Group s activities are exclusively in the business segment of Pharmaceuticals for the treatment of illnesses in the field of CNS. Secondary segments The Group s revenue is divided into the following secondary geographical segments: Revenue Revenue DKKm DKKm Denmark Rest of Europe 5, ,092.3 USA 1, ,633.7 Rest of the world 1, ,248.5 Total 9, ,069.8 The Group s assets and additions to intangible assets and property, plant and equipment, analysed by secondary geographical segments, are as follows: Additions to Additions to property, plant property, plant and equipment and equipment and intangible and intangible Assets 1 Assets 1 assets assets DKKm DKKm DKKm DKKm Denmark 7, , Rest of Europe 2, , USA Rest of the world Total 11, , ) Exclusive of deferred tax assets. 98

101 25. Earnings per share Profit for the year (DKKm) 1, ,574.4 Minority interests (DKKm) Net profit for the year allocated to the shareholders in the parent company (DKKm) 1, ,583.5 Average number of outstanding shares ( 000 shares) 221, ,360 Average number of treasury shares ( 000 shares) (10,036) (6,796) Average number of shares exclusive of treasury shares ( 000 shares) 211, ,564 Average number of warrants, fully diluted ( 000 warrants) Average number of shares, fully diluted ( 000 shares) 211, ,067 Earnings per share (EPS) (DKK) Diluted earnings per share (DEPS) (DKK) The comparative figures for earnings per share have been changed as a result of the changed accounting policies concerning certain securities and investments. See note 1 Accounting policies. This reduced the net profit for 2005 by DKK 14.2 million. Warrants comprised by the warrant scheme established in 2005 for the Executive Management and Danish and foreign executives, a total of 647,000 warrants, were not in-the-money in 2006 and were therefore not exercised. The warrants are not included in the calculation of earnings per share (EPS) and diluted earnings per share (DEPS). The warrants may have a longer term dilutive effect on earnings per share and diluted earnings per share. Warrants comprised by the warrant schemes established in 2004 and 2005, respectively, may be exercised if the price of the Lundbeck share exceeds the fixed exercise price of DKK for the 2004 plan and DKK for the 2005 plan. At 31 December 2006, 1,342,695 warrants from the 2004 plan and 647,000 warrants from the 2005 plan remained outstanding. See note 3 Staff costs for additional information on incentive plans Adjustments Parent Parent Group Group DKKm DKKm DKKm DKKm Depreciation and amortisation Income from reduced ownership interest (154.6) (27.9) Incentive plans Change in pension obligations (42.0) (3.3) Change in provisions (6.9) (83.8) Adjustments Working capital changes Parent Parent Group Group DKKm DKKm DKKm DKKm (35.0) Change in inventories (86.2) Change in receivables (75.7) (171.4) (44.3) (504.7) Change in short-term debt (384.8) (424.8) Change in working capital (352.2) (145.1) 99

102 28-30 NOTES 28. Acquisition of company In 2006, Lundbeck acquired the SGS-518 development project by way of the company Saegis Pharmaceuticals, Inc. In 2006, the company was merged into Cognitive Therapeutics, LLC which will be wound up in The development project will in this connection be legally assigned to Lundbeck Cognitive Therapeutics A/S in Denmark. Shareholding Voting Date of acquired share acquired Cost Name Primary activity acquisition % % DKKm Saegis Pharmaceuticals, Inc., Delaware, USA Development of pharmaceuticals % 100% 46.7 Carrying amount Fair value under IFRS adjustment Fair value DKKm DKKm DKKm Ongoing development projects Tools and equipment 0.1 (0.1) - Other receivables Cash Total assets Trade payables Non-interest-bearing debt Total liabilities Net assets (4.0) Cost of acquisition Cash payment in January Deferred, expected milestone payment in Total cost of acquisition 46.7 Goodwill on acquisition of company - Cost, paid in cash - Cash acquired, see above 3.1 Net cash flow impact 3.1 The above calculation is preliminary as the final balance sheet as at the date of acquisition and the total transaction costs will not become available until after the preparation of the annual report. The acquisition price of Saegis Pharmaceuticals, Inc. nominally DKK million, will be paid in four instalments as the acquired project SGS-518 develops positively and the regulatory approvals are obtained. The first instalment fell due in January 2007, while the remaining instalments are expected to be paid over a period of six years. The opening balance sheet and the cost of the company only include the instalments expected to fall due in 2007, a total of DKK 46.7 million, as these payments are more likely to fall due than the remaining instalments. If the project progresses as expected, and the remaining part of the acquisition price falls due, these payments will be added to the value of the acquired project. In the consolidated profit for the year, Saegis Pharmaceuticals, Inc. is recognised at DKK 0, as the company was aquired immediately prior to the balance sheet date. If the company had been acquired effective 1 January 2006, revenue for 2006 would have been DKK 9,227.8 million and profit for the year DKK 1,085.4 million. There were no business combinations in Cash and cash equivalents 100 Parent Parent Group Group DKKm DKKm DKKm DKKm Securities with a maturity of less than 3 months , ,180.8 Securities with a maturity of more than 3 months 1, , , ,182.0 Securities included as cash and cash equivalents 1 1, , Cash 1, , ,954.4 Cash and cash equivalents at , , ) The securities holding included as cash and cash equivalents consists exclusively of Danish government and mortgage bonds, which are classified as financial assets with value adjustments in the income statement.

103 30. Releases from H. Lundbeck A/S in 2006 No. Date Subject Phase II and III clinical data for bifeprunox in patients with schizophrenia showed improvement of symptoms and maintenance of stability with fewer metabolic side effects Lexapro /Cipralex demonstrated significance on prospectively defined efficacy parameter and was better tolerated than Cymbalta in treatment of depression Share buyback in H. Lundbeck A/S Share capital increase as a result of employees exercising warrants Announcement of transactions with shares and linked securities in H. Lundbeck A/S made by executives and their closely associated persons and legal entities Lundbeck and BioTie sign agreement for nalmefene Announcement of transactions with shares and linked securities in H. Lundbeck A/S made by executives and their closely associated persons and legal entities Share capital increase as a result of employees exercising warrants Announcement of transactions with shares and linked securities in H. Lundbeck A/S made by executives and their closely associated persons and legal entities Lundbeck s portfolio of shares in LifeCycle Pharma Interim report for the third quarter of Update on US Lexapro court case Share buyback in H. Lundbeck A/S Merck and Co., Inc. and Lundbeck announce update in submission plans for U.S. approval of gaboxadol New pharmaceutical candidate in Lundbeck s pipeline Share buyback in H. Lundbeck A/S Share buyback in H. Lundbeck A/S Share buyback in H. Lundbeck A/S Share capital increase as a result of employees exercising warrants Share buyback in H. Lundbeck A/S Announcement of transactions with shares and linked securities in H. Lundbeck A/S made by executives and their closely associated persons and legal entities Share capital increase as a result of employees exercising warrants Announcement of transactions with shares and linked securities in H. Lundbeck A/S made by executives and their closely associated persons and legal entities Share buyback in H. Lundbeck A/S Interim report for the second quarter of Reduction of the share capital of H. Lundbeck A/S has been effected Share buyback in H. Lundbeck A/S Lundbeck and Forest announce federal court upholds Lexapro patent No. Date Subject H. Lundbeck A/S and Forest Laboratories, Inc. file lawsuit against Caraco Pharmaceutical Laboratories, Ltd. for patent infringement Share buyback in H. Lundbeck A/S Share buyback in H. Lundbeck A/S Antidepressant project Lu AA21004 moved into clinical phase II Share buyback in H. Lundbeck A/S Share buyback in H. Lundbeck A/S Share capital increase as a result of employees exercising warrants Share buyback in H. Lundbeck A/S Significant phase II clinical results for gaboxadol (first SEGA sleep agent) announced at the APA conference Share capital increase as a result of employees exercising warrants Share buyback in H. Lundbeck A/S Interim report for the first quarter of Lundbeck files application for approval of Cipralex for the treatment of Obsessive-Compulsive Disorder (OCD) H. Lundbeck A/S held its Annual General Meeting on 24 April 2006 at SAS Radisson Falconer Hotel and Conference Center Notice of Annual General Meeting Share buyback in H. Lundbeck A/S Share capital increase as a result of employees exercising warrants Share buyback in H. Lundbeck A/S New pharmaceutical candidate in Lundbeck s pipeline Share capital increase as a result of employees exercising warrants Share buyback in H. Lundbeck A/S Annual Report Lundbeck s portfolio of treasury shares Share buyback in H. Lundbeck A/S Cipralex - new data supports the superiority of Cipralex compared to Paxil /Seroxat Share buyback in H. Lundbeck A/S Share buyback in H. Lundbeck A/S Lundbeck deviates from 2006 financial target due to reduction in Forest internal escitalopram inventory level - Lundbeck maintains financial targets for Share buyback in H. Lundbeck A/S Share buyback in H. Lundbeck A/S Lundbeck s portfolio of treasury shares Launch of Serdolect commenced in Europe Share buyback in H. Lundbeck A/S Share buyback in H. Lundbeck A/S 101

104 MANAGEMENT STATEMENT We have today presented the annual report of H. Lundbeck A/S for the financial year 1 January 31 December The annual report is prepared in accordance with the International Financial Reporting Standards as adopted by the EU and additional Danish disclosure requirements for annual reports of listed companies. We consider the accounting policies to be appropriate. Accordingly, the annual report gives a true and fair view of the Group s and the parent company s financial position, cash flows and results of operations. We recommend that the annual report be approved at the Annual General Meeting. Copenhagen, 7 March 2007 Executive Management Claus Bræstrup President and CEO Hans Henrik Munch-Jensen Executive Vice President, CFO Lars Bang Executive Vice President Stig Løkke Pedersen Executive Vice President Supervisory Board Flemming Lindeløv Thorleif Krarup Lars Bruhn Chairman Deputy Chairman Kim Rosenville Christensen Peter Kürstein Mats Pettersson Birgit Bundgaard Rosenmeier William Watson Jes Østergaard 102

105 INDEPENDENT AUDITORS REPORT To the shareholders of H. Lundbeck A/S We have audited the annual report of H. Lundbeck A/S for the financial year 1 January 31 December The annual report comprises the statement by management on the annual report, management s review, the income statement, the balance sheet, the statement of changes in equity, the cash flow statement and the notes to the financial statements, including the accounting policies. The annual report has been prepared in accordance with International Financial Reporting Standards as adopted by the EU and additional Danish disclosure requirements for listed companies. Management s responsibility for the annual report Management is responsible for the preparation and fair presentation of an annual report in accordance with International Financial Reporting Standards as adopted by the EU and additional Danish disclosure requirements for listed companies. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of an annual report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s responsibility and basis of opinion Our responsibility is to express an opinion on this annual report based on our audit. We conducted our audit in accordance with Danish and International Standards on auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance that the annual report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual report. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the annual report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of an annual report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the annual report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Our audit has not resulted in any qualification. Opinion In our opinion, the annual report gives a true and fair view of the Group s and the parent company s financial position at 31 December 2006 and of their financial performance and their cash flows for the financial year 1 January to 31 December 2006 in accordance with International Financial Reporting Standards as adopted by the EU and additional Danish disclosure requirements for listed companies. Copenhagen, 7 March 2007 Deloitte Statsautoriseret Revisionsaktieselskab Grant Thornton Statsautoriseret Revisionsaktieselskab Stig Enevoldsen Carsten Vaarby Svend Ørjan Jensen Ole Fabricius State Authorised State Authorised State Authorised State Authorised Public Accountant Public Accountant Public Accountant Public Accountant 103

106 SUPERVISORY BOARD Mats Pettersson Elected at the 2003 General Meeting Born 7 November 1945 CEO, Biovitrum AB Member, Remuneration Committee Lars Bruhn Elected at the 1995 General Meeting Born 17 November 1949 Directorships IVS A/S (chairman) DIEU A/S (chairman) Bruhn NewTech A/S (chairman) EDB Gruppen A/S Ascio Technologies Inc. Scalado AB Directorships SwedenBio AB (deputy chairman) Birgit Bundgaard Rosenmeier Elected by the employees in 1993 Born 12 August 1952 Qualified Person 1st Deputy Flemming Lindeløv Chairman Elected at the 1998 General Meeting Born 20 August 1948 Chairman, Remuneration Committee Member, Audit Committee Directorships Illums Bolighus A/S (chairman) INTEGRAL A/S (chairman) WEEE-system (chairman) Copenhagen Artists A/S (chairman) Creative Nation (chairman) INDEX:2007 (deputy chairman) DDD A/S Parken Sport & Entertainment A/S Comwir A/S Fitness.dk A/S Thorleif Krarup Deputy chairman Elected at the 2004 General Meeting Born 28 August 1952 Member, Audit Committee Directorships Dangaard Telecom A/S (chairman) ALK-Abelló A/S (deputy chairman) LFI a/s (deputy chairman) Group 4 Securicor plc Bang & Olufsen A/S Lundbeck Foundation Scion DTU a/s

107 William Watson Elected by the employees in 2006 Born 28 October 1968 Head of Scientific Licensing Kim Rosenville Christensen Elected by the employees in 2006 Born 17 april 1959 Synthesis Operator Jes Østergaard Elected at the 2003 General Meeting Born 5 March 1948 President, ilochip A/S Member, Remuneration Committee Directorships Glycom ApS (chairman) Lundbeck Foundation LFI a/s Aresa A/S acronordic A/S Peter Kürstein Elected at the 2001 General Meeting Born 28 January 1956 President and CEO, Radiometer A/S Chairman, Audit Committee Directorships Foss A/S (chairman) Radiometer Medical ApS 105

108 EXECUTIVE MANAGEMENT 31 December 2006 Claus Bræstrup Born 18 January 1945 President and CEO Hans Henrik Munch-Jensen Born 15 April 1960 Corporate Finance Stig Løkke Pedersen Born 17 July 1961 Operations Europe/ Australasia & Corporate Affairs Directorships Nuevolution A/S (chairman) Jacob Holm & Sønner STA A/S Directorships LifeCycle Pharma A/S (chairman) University of Copenhagen Santaris Pharma A/S Lars Bang Born 31 July 1962 Supply Operations, Engineering & IT Directorships Fertin Pharma A/S DentoFit A/S Ole Chrintz Born 2 December 1958 Operations Americas & Europe

109 107