FINANCIAL REPORT. Annual Report 2014 VALUE CREATION: THE ACTELION WAY CORPORATE GOVERNANCE AND CSR REPORT COMPENSATION REPORT FINANCIAL REPORT

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1 VALUE CREATION: THE ACTELION WAY CORPORATE GOVERNANCE AND CSR REPORT COMPENSATION REPORT FINANCIAL REPORT Annual Report 2014 FINANCIAL REPORT. THIS IS AN INTERACTIVE PDF PRESS BUTTON TO BEGIN

2 CONTENTS Actelion ensures financial integrity by complying with all applicable laws and accounting standards, using the highest internal standards and proper reporting of Actelion s results. Actelion Ltd. is a leading biopharmaceutical company focused on the discovery, development and commercialization of innovative drugs for diseases with significant unmet medical needs. Actelion is a leader in the field of pulmonary arterial hypertension (PAH). Our portfolio of PAH treatments covers the spectrum of disease, from WHO Functional Class (FC) II through to FC IV, with oral, inhaled and intravenous medications. Although not available in all countries, Actelion has treatments approved by health authorities for a number of specialist diseases including Type 1 Gaucher disease, Niemann-Pick type C disease, Digital Ulcers in patients suffering from systemic sclerosis, and mycosis fungoides type cutaneous T-cell lymphoma. For the ninth consecutive year the Company s internal controls over financial reporting were certified as meeting the requirements of SOX 404 (Sarbanes-Oxley Act 2002, section 404) at 31 December FINANCIAL REPORT. 3

3 5 FINANCE IN BRIEF Actelion in 2014 Product Sales Actelion delivered a strong operational performance in Operating income grew almost twice as fast as sales, demonstrating the organization s earnings power, as well as Actelion s commitment to optimize short-term profitability while carefully balancing investment in R&D programs to ensure mid- to long-term growth. Product sales rose 12% at constant exchange rates (CER) to CHF 1,956 million. Excluding the impact of US rebate reversals, product sales increased by 10% at CER, mainly driven by the strong uptake of Opsumit, the roll-out of Veletri and the solid performance of all other products around the globe including Tracleer, which is still growing in countries where Opsumit has not yet been launched. variance in % of sales (in CHF millions, except % variance) CHF % CER % 1 US GAAP results Net revenue 1,958 1,786 10% 12% 100% 100% Operating results % 24% 29% 27% Net results % 38% 30% 25% Diluted EPS % 37% Dividend per share Operating results Core operating income increased by 25% at CER to CHF 743 million. Excluding the impact of US rebate reversals, core operating income reached CHF 677 million, an increase of 20% at CER. The strong sales performance was supported by increased investment, as the commercial organization launched Opsumit and Valchlor and continued the roll-out of Veletri. R&D expenses increased by 4%, with several exciting early- and late-stage compounds advancing through the pipeline, while G&A expenses remained flat. Core 3 results Product sales 1,956 1,784 10% 12% 100% 100% Operating results % 25% 38% 35% Net results % 34% 33% 29% Diluted EPS % 33% Cash flow Operating cash flow Capital expenditure (32) (258) Free cash flow 327 (245) Net cash position - unrestricted Net cash position - restricted Constant exchange rates ( CER ) constitutes percentage changes calculated by reconsolidating both the 2014 and 2013 results at constant currencies (the average monthly exchange rates for the year 2013). 2 Dividend proposal by the Board of Directors subject to shareholders approval. 3 Actelion continues to measure, report and issue guidance on its core operating performance, which management believes more accurately reflects the underlying business performance. The Group believes that these non-gaap financial measurements provide useful supplementary information to investors. These non-gaap measures are reported in addition to, not as a substitute for US GAAP financial performance. A full reconciliation between US GAAP and core results is available on page 21 of this report. 4 Operating cash flow excluding a litigation settlement. Net results and EPS Operating cash flow US GAAP operating income increased by 24% at CER to CHF 570 million. This was driven by the core operating performance but was impacted by higher amortization expenses relating to the acquisition of Valchlor and by a milestone payment relating to the filing of Selexipag with European and US regulators for marketing authorization. Core net income increased by 34% at CER to CHF 648 million, reflecting the strong operating performance. Core diluted earnings per share (EPS) rose to CHF US GAAP net income increased by 38% at CER to CHF 594 million, driven by the strong operating performance, lower financing costs due to a litigation settlement, and the release of a valuation allowance on deferred tax assets. US GAAP diluted earnings per share rose to CHF Operating free cash flow (excluding a litigation settlement of CHF 458 million) amounted to CHF 584 million, driven by the strong operating performance, limited capital expenditure and the absence of acquisitions in Free cash flow and cash position Free cash flow for 2014 amounted to CHF 327 million and the company s net cash position at 31 December 2014 increased to CHF 970 million. ACTELION FINANCIAL REPORT 2014 The litigation settlement of CHF 458 million was funded by the release of the bail bond of CHF 609 million. Actelion paid an increased dividend of CHF 133 million and acquired treasury shares for a cash consideration of CHF 546 million in order to manage dilution arising from stock-based compensation. Cash proceeds resulting from employee stock option exercises amounted to CHF 249 million. Total shareholder return Actelion s share price rose by 53%, resulting in a total shareholder return (including dividend payment) of 55% in FINANCIAL REPORT. 5

4 was an outstanding year for Actelion: the company delivered value for shareholders, continued to serve more patients and positioned itself for long-term growth. In 2012, Actelion made a commitment to return significant capital to shareholders. The company has delivered on that promise, with almost CHF 1.1 billion being returned to shareholders in the form of dividends and share buybacks over the past three years. FINANCIAL REVIEW In keeping with this commitment, the Board of Directors authorized in principle a new share repurchase program of up to 10 million shares of Actelion s common stock subject to approval by the relevant authorities; this share repurchase program would be carried out via a new second trading line at the SIX Swiss Exchange over a period of three years and the Board will propose the cancelation of these repurchased shares at subsequent Annual General Meetings. The Board of Directors will also propose an increased annual dividend payment of CHF 1.30 for approval by shareholders at the upcoming Annual General Meeting in May. The share price rose by 53%, resulting in a total shareholder return (including dividend payment) of 55% in The company s performance reflects strong commercial execution coupled with a continued commitment to operational efficiency. Product sales rose 12% at CER to CHF 1,956 million. Core earnings increased by 25% to CHF 743 million, while core earnings per share rose 33% to CHF Operating cash flow amounted to CHF 616 million (excluding a litigation settlement of CHF 458 million), reflecting the strong operating performance. Free cash flow reached CHF 327 million, resulting in a net cash position at the end of 2014 of CHF 970 million, ensuring financial flexibility. The foreign exchange environment in 2014 continued to negatively impact both sales and core operating income: compared to 2013, the average Swiss franc exchange rate in 2014 was stronger against all major currencies, in particular the Japanese yen and the US dollar. On 15 January 2015, the Swiss National Bank announced that it was discontinuing the minimum exchange rate of CHF 1.20 per euro. This announcement resulted in an immediate appreciation of the Swiss franc against all currencies and a sharp drop in the Swiss stock market. The SNB decision has no impact on the Financial Statements for the full year 2014 since the figures reported do not reflect changes in exchange rates after 31 December Because Actelion reports and presents its consolidated results in Swiss francs, a persistent weakening of foreign currencies against the Swiss franc would negatively impact Actelion s future sales and core operating results. The currency translation sensitivity of Actelion s consolidated results and gross cash position is presented on pages 14, 15, 18 and 19 of the Financial Review. Despite this unfavorable foreign exchange environment, Actelion is confident that its long-term strategy, coupled with tight financial oversight, will result in continued shareholder value creation. 6 FINANCIAL REPORT. 7

5 SALES variance 1 (in CHF millions, except % variance) CHF % CER % Product sales Opsumit nm nm Tracleer 1,481 1,532-3% -1% Veletri % 84% Ventavis % 3% Valchlor 11 0 nm nm Zavesca % 11% Others 5 4 nm nm Total product sales 1,956 1,784 10% 12% 1 nm = not meaningful Actelion s commercial performance during 2014 was very strong across all regions, with excellent demand for key assets. In the US, despite unabated competitive pressures, sales increased by 16% at CER, driven by a successful Opsumit launch, price increases across the portfolio and a net impact of CHF 42 million (at CER) in reversals of rebate accruals relating to patient support programs. European sales increased by 10% at CER, driven by the launches of Opsumit and Veletri in various European markets, as well as the digital ulcer indication for Tracleer, despite a persistently negative pricing environment. Sales in Japan grew by 9%, driven by the strong uptake of Veletri and solid sales for Tracleer. Sales in the rest of the world increased by 8% at CER, driven by new product launches (Opsumit, Veletri) in Australia and by strong growth in emerging PAH markets such as China, Taiwan, Russia and Mexico. Comparing average exchange rates in 2014 with average exchange rates during 2013, the Swiss franc was stronger against major currencies, in particular the Japanese yen and the US dollar. The overall impact resulted in a negative currency variance of CHF 51 million. variance (in CHF millions, except % variance) CHF % CER % Product sales by region United States % 16% Europe % 10% Japan % 9% Rest of the world % 8% Total product sales 1,956 1,784 10% 12% PAH FRANCHISE Opsumit variance (in CHF millions, except % variance) CHF % CER % Sales by region United States nm nm Europe 42 - nm nm Japan - - nm nm Rest of the world 5 - nm nm Total nm nm Sales of Opsumit (macitentan) for 2014 amounted to CHF 180 million, reflecting a highly successful launch in various regions, countries and healthcare systems. The robust SERAPHIN long-term outcome data is perceived as clinically relevant, differentiating Opsumit from other endothelin receptor antagonists (ERAs), and the product is rapidly gaining market share. At the end of 2014, over 6,300 patients were benefiting from Opsumit. Additional important clinical data, further documenting the clinical utility of Opsumit, was presented at various medical congresses throughout the year. By the end of 2014, Opsumit had been successfully launched in the US, Germany, Austria, Switzerland, the UK, Ireland, Denmark, Sweden, the Netherlands, Australia, Italy, Belgium, Luxembourg, Canada, Finland, Mexico (private market), Norway and Iceland. The regulatory process for reimbursement is proceeding well in other European countries, such as Spain and France, where Opsumit should be launched during In Japan, where the registration dossier was filed in June 2014, the regulatory process is proceeding well. The company has also filed for marketing authorization in Russia, Turkey, China, Brazil and other Asian and Latin American markets. Tracleer variance (in CHF millions, except % variance) CHF % CER % Sales by region United States % -4% Europe % 2% Japan % 1% Rest of the world % 1% Total 1,481 1,532-3% -1% Sales of Tracleer (bosentan) amounted to CHF 1,481 million for 2014, a decrease of 1% at CER compared to 2013 due to erosion in markets where Opsumit is available, as well as market price pressures and increased generic competition. Sales were supported by the digital ulcer indication in Europe, as well as continued strong demand for Tracleer in markets where Opsumit is not yet available. US rebate reversals related to patient assistance programs and US price increases mitigated the decline. Underlying units sold decreased by 2%. Amidst increased generic competition, Actelion is successfully defending Tracleer in markets such as Canada, Turkey and Mexico. The company also introduced a generic bosentan in Brazil in 2012 and launched branded generic bosentan under the name of Stayveer in Poland and the Czech Republic to compete with generics, as well as to protect EU Tracleer pricing. Veletri variance (in CHF millions, except % variance) CHF % CER % Sales by region United States % 22% Europe 7 0 nm nm Japan 19 6 nm nm Rest of the world 2 0 nm nm Total % 84% Sales of Veletri (epoprostenol for injection) reached CHF 64 million for the full year 2014, an increase of 84% at CER compared to 2013, driven by successful launches in additional markets (such as Australia, the Netherlands, Spain). Veletri continues to perform well in Japan, despite a 5% price cut on 1 March Veletri is well adopted, approaching an 80% share of new i.v. epoprostenol patients. At the end of 2014, Veletri was available in the US, Japan, the UK, Spain, Italy, the Netherlands, Australia, New Zealand, Portugal, Poland, Belgium, Canada, the Czech Republic and Switzerland. 8 FINANCIAL REPORT. 9

6 Ventavis variance (in CHF millions, except % variance) CHF % CER % Sales by region United States % 3% Europe Japan Rest of the world Total % 3% During 2014, Ventavis (iloprost) had sales in the US of CHF 112 million, an increase of 3% at CER. This growth was driven entirely by price increases and rebate reversals, as underlying units sold were eroded by 17% due to competitive pressures. These pressures are expected to intensify during 2015 as a consequence of a potential generic entry. SPECIALTY PRODUCTS Valchlor variance (in CHF millions, except % variance) CHF % CER % Sales by region United States 10 0 nm nm Europe 1 - nm nm Japan - - nm nm Rest of the world - - nm nm Total 11 0 nm nm Sales of Valchlor (mechlorethamine) for the full year 2014 amounted to CHF 11 million. Valchlor was launched in the US in November 2013 for stage IA and IB mycosis fungoides-type cutaneous T-cell lymphoma (MF-CTCL) in patients who have received prior skin-directed therapy. In March 2014, expansion of the sales team was completed, and the company is now working with dermatologists beyond the CTCL centers of excellence. We are making progress in establishing Valchlor as an option in the treatment algorithm for early-stage MF-CTCL. Zavesca variance (in CHF millions, except % variance) CHF % CER % Sales by region United States % 2% Europe % 12% Japan 2 2 8% 19% Rest of the world % 17% Total % 11% Sales of Zavesca (miglustat) amounted to CHF 103 million for 2014, an increase of 11% at CER compared to This performance was mainly driven by continued strong patient demand outside the US in the Niemann-Pick type C indication. In the type 1 Gaucher disease market, the performance of Zavesca remained strong, with relatively stable demand and positive price movement in the US. Underlying units sold increased by 14%. The company is anticipating competitive pressures in early 2015, as generic miglustat has been approved (for type 1 Gaucher disease only) in selected European markets. OPERATING EXPENSES Operating expenses break down as follows: variance (in CHF millions, except % variance) CHF % CER % Operating expenses Core cost of sales % 4% Core research and development % 4% Core selling, general and administration % 7% Core operating expenses 1,213 1,165 4% 6% Depreciation of assets % -3% Amortization of acquired intangible assets % 41% Stock-based compensation % 6% Milestone payments 19 - nm nm Doubtful debt movements (1) (12) 90% 90% Accretion expenses % 77% Litigation or arbitration results - 13 nm nm Other expenses - 1 nm nm Non-core operating expenses % 27% Operating expenses US GAAP 1,388 1,303 7% 8% Cost of sales variance (in CHF millions, except % variance) CHF % CER % Cost of sales Royalty expenses % 2% Cost of goods sold % 11% Core cost of sales % 4% Non-core cost of sales % 77% Cost of sales US GAAP % 5% Royalty expenses relate to net sales of our main products. Despite higher sales in 2014, the royalty expenses remained flat; this was mainly due to the mix of product sales, as the company pays a low single-digit royalty rate on sales of Opsumit and a high single-digit rate for Tracleer. Cost of goods sold include all manufacturing costs, internal costs and distribution costs relating to the supply of products to our affiliates. Non-core cost of sales relates to the accretion expense for contingent consideration for Valchlor. Non-core cost of sales does not include any depreciation or amortization since all goods are manufactured by third parties. Research and development ( R&D ) expenses variance (in CHF millions, except % variance) CHF % CER % Research and development expenses Core research and development expenses % 4% Depreciation % -1% Stock-based compensation % 6% Milestone payments 19 - nm nm Restructuring expenses - 1 nm nm Research and development expenses US GAAP % 9% Amortization of acquired intangible assets % -9% Research and development expenses US GAAP % 9% 1 As reported in the consolidated income statements, excluding amortization of acquired intangible assets. 10 FINANCIAL REPORT. 11

7 Core R&D expenses for 2014 increased by 4% at CER compared to the prior year, as investment in the earlier-stage pipeline and clinical trial expenses increased. Core R&D expenditure represented 19% of product sales in This level may increase going forward, as several promising compounds are advancing through the pipeline. However, Actelion will continue to focus on carefully balancing investments so as to ensure future growth and delivery of appropriate shareholder returns. US GAAP R&D includes depreciation expenses relating to the research building and laboratory equipment of CHF 27 million, stock-based compensation expenses of CHF 22 million and a milestone payment to Nippon Shinyaku of CHF 19 million relating to the filing of Selexipag with the US Food and Drug Administration (FDA) and the European Medicines Agency (EMA) for marketing authorization. Core operating income increased by 25% at CER to CHF 743 million. Excluding the impact of US rebate reversals (see page 15), operating performance remains robust, with an increase of 20% at CER driven by sales growth, which required additional marketing and selling expenses (mainly for the launch of Opsumit and Valchlor). R&D efforts also increased to advance a number of promising compounds in various stages of development. G&A remained almost flat. US GAAP operating income grew by 24% at CER to CHF 570 million, despite higher non-core operating expenses due to higher amortization of acquired intangible assets (driven by the acquisition of Valchlor) and the milestone payment to Nippon Shinyaku. Selling, general and administrative ( SG&A ) expenses variance (in CHF millions, except % variance) CHF % CER % Selling, general and administrative expenses Marketing, selling and distribution expenses % 11% General and administrative expenses % 0% Core selling, general and administrative expenses % 7% Depreciation % -6% Stock-based compensation % 7% Doubtful debt provision (1) (12) -90% -90% Restructuring expenses - 0 nm nm Selling, general and administrative expenses US GAAP % 9% Amortization of acquired intangible assets % 44% Arbitration settlement - 13 nm nm Selling, general and administrative expenses US GAAP % 9% 1 As reported in the consolidated income statements, excluding amortization of acquired intangible asstes and arbitration settlement. Core SG&A increased by 7% at CER to CHF 631 million in This increase was driven entirely by costs related to the launches of Opsumit, Valchlor and Veletri in various markets around the globe. The G&A portion continues to remain flat, as Actelion carefully manages operating expenses. US GAAP SG&A includes depreciation expenses of CHF 11 million; stock-based compensation expenses of CHF 31 million; a CHF 1 million reversal of doubtful debt allowance, as collection in Southern European countries continued to improve (after a CHF 12 million reversal in 2013); and the amortization of acquired intangible assets of CHF 61 million, a significant increase due to the amortization of Valchlor. OPERATING RESULTS variance (in CHF millions, except % variance) CHF % CER % Operating results Net sales 1,956 1,784 10% 12% Core operating expenses (1,213) (1,165) 4% 6% Core operating results % 25% Contract revenue 2 2 nm nm Non core operating expenses (175) (138) 26% 27% Operating results US GAAP % 24% NET RESULTS variance (in CHF millions, except % variance) CHF % CER % Net results Core operating results % 25% Core financial results (18) (13) -38% -38% Core income tax (77) (97) 21% 24% Core net results % 34% The core financial expense of CHF 18 million includes the interest expense of the straight bond (4.875% or CHF 12 million) and CHF 6 million related to the company s hedging programs. The core tax expense of CHF 77 million represents an effective tax rate of 11% on the core results before tax in the various countries where Actelion conducts its business. Core net income grew by 34% at CER to CHF 648 million, mainly driven by the strong operating performance and lower core tax expense. variance (in CHF millions, except % variance) CHF % CER % Net results Operating results % 24% Financial results (33) (53) -37% -37% Income tax % 164% Net results US GAAP % 38% The US GAAP financial expense of CHF 33 million includes non-core financial expenses mainly relating to an interest expense (CHF 10 million) in connection with the Asahi litigation award, which was paid in March 2014, as well as the impairment of a financial asset (CHF 5 million). The US GAAP tax income of CHF 57 million includes one-time deferred tax benefits of CHF 115 million, mainly relating to the release of a valuation allowance on US deferred tax assets. 12 FINANCIAL REPORT. 13

8 EARNINGS PER SHARE ( EPS ) For 2014, Actelion reported core operating income of CHF 743 million, with: variance (in CHF millions, unless otherwise indicated) CHF % CER % Net results Net results - Core % 34% Net results - US GAAP % 38% Basic earnings per share Weighted number of shares (in millions) nm nm Basic EPS - Core (in CHF) % 34% Basic EPS - US GAAP (in CHF) % 39% Diluted earnings per share Weighted number of shares (in millions) nm nm Diluted EPS - Core (in CHF) % 33% Diluted EPS - US GAAP (in CHF) % 37% Basic EPS for 2014 was CHF 5.34, compared to CHF 4.06 in the prior year. Diluted EPS was CHF 5.11, up 37% at CER over The increase in EPS was driven mostly by the higher net income. The share count for basic EPS was slightly reduced due to the share buyback program completed in August 2013, which was fully weighted in The dilutive share count increased, as the higher share price resulted in an increased share count for the diluted EPS calculation despite a decreased nominal number of outstanding equity instruments. net sales of CHF 1,956 million, of which 98% are denominated in foreign currencies converted at the average exchange rates shown above (47% in US dollars, 32% in euros, 9% in Japanese yen and 10% in other foreign currencies) and core operating expenses of CHF 1,213 million, of which 27% are incurred in Swiss francs at our headquarters (mainly R&D organization, headquarter activities with strategic and support functions) and 73% in foreign currencies at our affiliates in the US, Europe, Japan and the rest of the world. The organization of Actelion, with 98% of sales and 73% of core operating expenses for 2014 in foreign currencies, gives a natural hedge against adverse impacts of foreign currency movements against the Swiss franc. The table below shows the currency translation sensitivity for each 1% adverse change in average exchange rates against the Swiss franc: Average rate Net sales Core operating Core operating 2014 minus 1 % CHF expenses results Exchange rates against Swiss franc US dollar 1 USD (9) 4 (5) Euro 1 EUR (6) 2 (4) Japanese yen 100 JPY (2) 1 (1) All other foreign currencies (2) 1 (1) Total impact (19) 8 (11) -1.0% 0.7% -1.4% IMPACT OF FOREIGN EXCHANGE RATES ON SALES AND OPERATING RESULTS Actelion s exposure to foreign currency movements affecting its sales and operating results as expressed in Swiss francs is summarized in the following tables and comments (in CHF millions, except % variance) CHF % CER % CHF CER CHF % CER % CHF CER Reported growth versus prior year Product sales 10% 12% % 6% Core operating results 20% 25% % 20% Operating results - US GAAP 18% 24% % 20% Core net results 27% 34% % 17% Net results - US GAAP 31% 38% % 57% December 31, Average rate December 31, Average rate Exchange rates against Swiss franc US dollar 1 USD Euro 1 EUR Japanese yen 100 JPY On 15 January 2015, the Swiss National Bank announced that it was discontinuing the minimum exchange rate of CHF 1.20 per euro. This announcement resulted in an immediate appreciation of the Swiss franc against all currencies and a sharp drop in the Swiss stock market. The SNB decision has no impact on the Financial Statements for the full year 2014 since the figures reported do not reflect changes in exchange rates after 31 December Because Actelion reports and presents its consolidated results in Swiss francs, a persistent weakening of foreign currencies against the Swiss franc would negatively impact Actelion s future sales and core operating results. IMPACT OF OTHER EVENTS ON SALES AND OPERATING RESULTS The Group recognizes revenue from product sales when there is persuasive evidence that a sales arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. Provisions for rebates and discounts granted to government agencies, wholesalers, retail pharmacies, managed care organizations and other customers are recorded as a reduction of revenue at the time the related revenues are recognized or when the incentives are offered. They are calculated on the basis of historical experience and the specific terms in the individual agreements. Estimating such rebate accruals is a complex process and requires significant judgment, especially for rebates granted in the context of US reimbursement programs (mainly governmental programs such as Medicaid and Managed Medicaid), due to the time lag between the date of sale and the actual settlement of the liability, changes in regulations for the various rebate programs, and changing utilization rates and patient populations. Actelion has been adjusting its estimates by reversing US rebate accruals during 2013 and 2014, which had a positive impact both on sales and on core operating income. The table below shows Actelion s performance excluding US rebate reversals: variance variance (in CHF millions, except % variance) CHF CHF % CER CER % Product sales performance Product sales as reported 1,956 1, % % Impact of US rebate reversals (73) (35) (38) - (42) - Product sales excluding US rebate reversals 1,883 1, % % Core operating performance Core operating results as reported % % Impact of US rebate reversals (66) (32) (35) - (38) - Core operating results excluding US rebate reversals % % 14 FINANCIAL REPORT. 15

9 CASH FLOW AND CASH POSITION Operating cash flow (in CHF millions) 1 Operating cash flow Net results Depreciation and amortization Stock-based compensation Other non cash items Funds from operations Net change in trade and other receivables 10 (9) Net change in trade and other payables (29) 11 Net change in deferred tax assets and liablilites (87) (93) Net change in other operating assets and liabilities (81) 60 Decrease (increase) in operating working capital (187) (31) Operating cash flow Rounding differences may occur. 2 Excluding litigation settlement. The company continues to be pleased with cash collection in Southern Europe (particularly Italy and Spain), with days sales outstanding (DSO) at a record low of 63 days. Free cash flow (in CHF millions) 1 Free cash flow Operating cash flow Acquisition of tangible, intangible and other assets (31) (27) Acquisition of businesses (1) (231) Operating free cash flow Litigation settlement (458) - Cash released from (restricted for) litigation 609 (250) Dividend paid (133) (113) Acquisition of shares from the second line repurchase program - (417) Acquisition of shares from the first line purchase program (546) (155) Sale of treasury shares - 97 Proceeds from exercise of stock options, net of expense Other items 22 (10) Free cash flow 327 (245) 1 Rounding differences may occur. The company purchased 5.7 million shares for a cash consideration of CHF 546 million on the first line of the Swiss Exchange, at an average stock price of CHF Actelion initiated a 10 million share purchase program in December 2013 in order to mitigate dilution arising from employee stock compensation programs. Actelion employees exercised 4.8 million stock options during 2014, resulting in proceeds of CHF 249 million. Free cash flow for 2014 amounted to CHF 327 million, resulting in a gross cash position of CHF 1.2 billion at year end. BALANCE SHEET (in CHF millions) 1 December 31, 2014 December 31, 2013 variance Assets Gross cash position - unrestricted 2 1, Gross cash position - restricted (613) Trade and other receivables, net (6) Other current assets (2) Tangible assets (13) Intangible assets (24) Goodwill Other non-current assets Total assets 2,748 3,030 (282) Liabilities and shareholders' equity Litigation provision (456) Other current liabilities (86) Financial debt Other non-current liabilities Total liabilities 827 1,321 (493) Share capital and accumulated reserves 2,208 2,252 (44) Treasury shares (288) (543) 255 Total shareholders' equity 1,920 1, Total liabilities and shareholders' equity 2,748 3,030 (282) 1 Rounding differences may occur. 2 Gross cash position includes cash, cash equivalents and short-term deposits. The significant changes in the balance sheet can be explained as follows: The judgment by the Supreme Court of California on the litigation with Asahi Kasei Corporation led to the reversal of the litigation provision of CHF 456 million and the full release of the restricted cash position of CHF 613 million. The free operating cash flow of CHF 584 million (excluding the litigation settlement of CHF 458 million) results from the strong underlying business performance, limited capital expenditure (the Group has already built its headquarter infrastructure) and the absence of acquisitions in 2014 (the US company Ceptaris Therapeutics Inc., with its main drug Valchlor, was acquired in 2013). The reversal of US rebate accruals is the main driver for the decrease of CHF 86 million in other current liabilities. The company paid a litigation settlement of CHF 458 million in March 2014 out of its restricted cash of CHF 609 million, resulting in a net release of CHF 151 million. The company returned CHF 133 million to its shareholders on 15 May 2014 by paying a dividend of CHF 1.20 per share, an increase of CHF 0.20 over FINANCIAL REPORT. 17

10 The decrease of treasury shares by CHF 255 million is explained in the table below: Treasury shares (in thousands) Average price (in CHF) Treasury shares (in CHF million) First line treasury shares December 31, , Purchase of treasury shares 5, Exercise of options by employees (4,784) (387) Vesting of Restricted Stock Units (882) (64) Other share allocations (9) (1) December 31, , Second-line treasury shares December 31, , Cancellation of shares after AGM approval (6,148) (349) December 31, Treasury shares - total December 31, , Change in first-line treasury shares - nm 94 Change in second-line treasury shares (6,148) (349) December 31, , The table below shows how foreign currency fluctuations would affect the gross cash position before and after derivative instruments, should the Swiss franc continue to be traded at the sharply increased levels against all currencies seen after the Swiss National Bank s announcement on 15 January 2015 that it was discontinuing the minimum exchange rate of CHF 1.20 per euro. Actual December 31, Closing rate against CHF Pro forma rate against CHF Variance Pro forma December 31, (CHF millions unless otherwise indicated) Currency rate sensitivity analysis Swiss franc US dollar USD = USD = % 145 Euro EUR = EUR = % 153 Japanese yen JPY = JPY = % 25 Other foreign currencies 43-10% 39 Gross cash position excluding derivative instruments 1,205 (57) 1,148 Derivative instruments (32) Gross cash position including derivatie instruments 1,173 (5) 1,168 Actelion s hedging policy significantly reduced the impact of the sharp increase in the value of the Swiss Franc on our gross cash position. The gross cash position increased by CHF 327 million, as explained above in the cash flow analysis, to reach CHF 1,205 million. The net cash position at the end of 2014 is CHF 970 million, taking into account the straight bond of CHF 235 million repayable in December The gross cash position at 31 December 2014 breaks down by currency as follows: December 31, 2014 CHF million in % Closing rate against CHF Gross cash position by currency Swiss franc % - US dollar % 1 USD = 0.99 Euro % 1 EUR = 1.20 Japanese yen 27 2% 100 JPY = 0.83 Other foreign currencies (FX) 43 4% - Total gross cash position 1, % - Actelion has been consistently applying a hedging policy by using derivative instruments (mainly forward contracts) in order to limit volatility in its financial results. Such derivative instruments aim to compensate for the unrealized potential gains or losses on the assets and liabilities denominated in foreign currencies held by Swiss entities of Actelion. At the end of 2014, the derivative instruments had a negative value of CHF 32 million, which would reduce the gross cash position accordingly. QUARTERLY RESULTS Q Q Q Q (in CHF millions, except % variance) 3 months 3 months 3 months 3 months 12 months Core operating results Product sales ,956 Operating expenses (280) (291) (287) (355) (1,213) Operating results Financial results (1) (1) (8) (8) (18) Income tax results (18) (25) (24) (10) (77) Net results Operating results US GAAP Net revenue ,958 Operating expenses (316) (330) (324) (417) (1,388) Operating results Financial results (10) (1) (8) (14) (33) Income tax results (15) 99 (18) (9) 57 Net results FINANCIAL REPORT. 19

11 ACTELION S COMMITMENT TO CREATING VALUE FOR SHAREHOLDERS RECONCILIATION US GAAP TO CORE RESULTS FOR THE 12 MONTHS ENDED DECEMBER 31, 2014 Actelion has made significant progress in delivering on its strategy for value creation. The year s highlights include successfully launching Opsumit (macitentan) and submitting data from the pivotal selexipag (Uptravi ) study to European and US regulators for marketing authorization. A strong commercial performance, combined with rigorous financial discipline, was reflected in Actelion s share price: with an increase of 53%, the company was once again the top performer on the Swiss Market Index (SMI). Market capitalization at the end of 2014 was just over CHF 13 billion, up 45%. During 2014, the company canceled 6.1 million shares (purchased through a second-line share buyback program), resulting in a lower share count. Variance in % Share price (CHF) % Market capitalization (CHF millions) 13,159 9,063 45% In 2012, Actelion made a commitment to return significant capital to shareholders. The company has delivered on that promise, with almost CHF 1.1 billion being returned to shareholders in the form of dividends and share repurchase programs over the past three years. In keeping with this commitment, the Board of Directors authorized in principle a new share repurchase program of up to 10 million shares of Actelion s common stock subject to approval by the relevant authorities; this share repurchase program would be carried out via a new second trading line at the SIX Swiss Exchange over a period of three years and the Board will propose the cancelation of these repurchased shares at subsequent Annual General Meetings. The Board of Directors will also propose an increased annual dividend payment of CHF 1.30 for approval by shareholders at the upcoming Annual General Meeting in May. (in CHF millions, except per share amounts) 1 US GAAP amortization and results Depreciation, impairment Stock-based Doubtful debt Milestones or compensation movements contract Litigation or arbitration Accretion expense Other Core results Net revenue Product sales 1, ,956 Contract revenue (2) Total net revenue 1, (2) ,956 Operating (expenses) Cost of sales (215) (212) Research and development (437) (369) Selling, general and administration (672) (1) (632) Amortization of acquired intangible assets (63) Total operating (expenses) (1,388) (1) (1,213) Operating income (1) Total financial income (expense) (33) (18) Income before income tax benefit (expense) (1) Income tax benefit (expense) 57 (14) (4) - (1) - - (115) (77) Net income (loss) (1) (115) 648 Actelion 2014 share price performance Diluted net income (loss) per share (0.01) (0.99) 5.58 Weighted-average number of common shares (in thousands) 116, ,228 1 Rounding differences may occur. 20 FINANCIAL REPORT. 21

12 CONSOLIDATED FINANCIAL STATEMENTS 22 FINANCIAL REPORT. 23

13 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CONSOLIDATED INCOME STATEMENTS Twelve months ended December 31, (in CHF thousands, except per share amounts) Notes Net revenue Product sales 23 1,956,333 1,784,198 Contract revenue 4/23 1,542 1,542 Total net revenue 1,957,875 1,785,740 Twelve months ended December 31, (in CHF thousands) Net income (loss) 593, ,542 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 8,539 (4,223) Change of unrecognized components of net periodic benefit costs (28,340) 10,970 Reclassification to net income due to settlement of pension plans 2,633 - Amortization of components of net periodic benefit costs Other comprehensive income (loss), net of tax (17,168) 7,718 Comprehensive income (loss) 576, ,260 The accompanying notes form an integral part of these consolidated financial statements. Operating (expenses) 1 Cost of sales 2 (215,465) (209,444) Research and development (437,442) (405,286) Selling, general and administration (672,141) (630,521) Amortization of acquired intangible assets 12 (62,896) (45,135) Arbitration settlement - (12,881) Total operating (expenses) (1,387,944) (1,303,267) Operating income 569, ,473 Interest on litigation 17 (9,814) (39,235) Interest income (expense), net 8/15 (11,768) (9,514) Other financial income (expense), net 1/8 (11,601) (3,983) Total financial income (expense) (33,183) (52,732) Income before income tax benefit (expense) 536, ,741 Income tax benefit (expense) 5 57,048 22,801 Net income (loss) 593, ,542 Basic net income (loss) per share Weighted-average number of common shares (in thousands) 111, ,537 Diluted net income (loss) per share Weighted-average number of common shares (in thousands) 116, ,377 1 Includes stock-based compensation as follows: Research and development (22,470) (21,290) Selling, general and administration (30,258) (28,331) Total stock-based compensation (52,728) (49,621) 2 Excludes amortization of intangible assets as presented separately. The accompanying notes form an integral part of these consolidated financial statements. 24 FINANCIAL REPORT. 25

14 CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF CASH FLOWS (in CHF thousands, except number of shares) Notes December 31, 2014 December 31, 2013 Assets Current assets Cash and cash equivalents 7/8 1,204, ,640 Cash and investments restricted for litigation 8-612,537 Short-term deposits - 250,747 Derivative instruments 8 2,894 10,546 Trade and other receivables, net 9 400, ,915 Inventories 10 60,879 53,241 Other current assets 5/11 57,316 58,937 Total current assets 1,726,338 2,019,563 Non-current assets Property, plant and equipment, net , ,092 Intangible assets, net , ,224 Goodwill , ,392 Deferred tax assets 5 62,648 16,931 Other non-current assets 15,684 20,599 Total non-current assets 1,021,483 1,010,238 Total assets 2,747,821 3,029,801 Liabilities and shareholders' equity Current liabilities Trade and other payables 74, ,614 Accrued expenses , ,399 Short-term financial debt ,137 - Litigation provision ,118 Other current liabilities 2/5/8 52,950 10,874 Total current liabilities 664, ,005 Non-current liabilities Long-term financial debt - 235,284 Pension liability 18 61,807 28,685 Contingent consideration 2 87,007 76,776 Other non-current liabilities 5 13,997 8,048 Total non-current liabilities 162, ,793 Total liabilities 827,398 1,320,798 Shareholders' equity 19 Common shares (par value CHF 0.50 per share, authorized 154,125,927 and 173,901,764 shares; issued 114,128,427 and 120,275,927 shares in 2014 and 2013, respectively) 57,064 60,138 Additional paid-in capital - 500,502 Accumulated profit 2,359,573 1,882,266 Treasury shares, at cost (287,701) (542,558) Accumulated other comprehensive income (loss) 21 (208,513) (191,345) Total shareholders' equity 1,920,423 1,709,003 Total liabilities and shareholders' equity 2,747,821 3,029,801 The accompanying notes form an integral part of these consolidated financial statements. Twelve months ended December 31, (in CHF thousands) Cash flow from operating activities Net income (loss) 593, ,542 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 101,081 84,460 Stock-based compensation, incl. treasury shares to members of Board of Directors 53,608 50,589 Excess tax benefits from share-based payment arrangements (12,417) (3,353) Deferred revenue (1,552) (1,879) Deferred taxes (86,570) (89,592) (Gains) Losses on derivative instruments and marketable securities 42,618 (3,225) Interest expense on bonds and litigation 10,398 38,397 Accretion expense on contingent considerations 3,061 1,965 Changes in operating assets and liabilities: Litigation provision (457,700) - Trade and other receivables 9,958 (9,374) Inventories (7,407) 3,375 Trade and other payables (28,966) 11,155 Accrued expenses (67,776) 61,095 Changes in other operating cash flow items 6,445 (4,174) Net cash flow provided by (used in) operating activities 158, ,981 Cash flow from investing activities Cash and investments released from (restricted for) litigation 608,698 (250,000) Purchase of short-term and long-term deposits (200,000) (250,000) Proceeds from short-term and long-term deposits 450, ,000 Purchase of property, plant and equipment (25,039) (21,396) Purchase of intangible assets (4,198) (6,025) Purchase of other non-current assets (1,794) - Acquisition of a business, incl. deferred and contingent consideration payments (895) (230,779) Net cash flow provided by (used in) investing activities 827,519 (658,200) Cash flow from financing activities Dividend payment (133,389) (113,297) Payments on capital leases (61) (61) Proceeds from exercise of stock options, net of expense 248, ,169 Purchase of treasury shares (546,145) (570,943) Proceeds from sale of treasury shares - 96,734 Excess tax benefits from share-based payment arrangements 12,417 3,353 Net cash flow provided by (used in) financing activities (418,468) (315,045) Net effect of exchange rates on cash and cash equivalents 9,690 (13,368) Net change in cash and cash equivalents 577,318 (394,632) Cash and cash equivalents at beginning of period 627,640 1,022,272 Cash and cash equivalents at end of period 1,204, ,640 Supplemental disclosures of cash flow information Cash paid during the year for: Interest 112,491 13,004 Taxes 40,395 48,717 The accompanying notes form an integral part of these consolidated financial statements. 26 FINANCIAL REPORT. 27

15 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY Common shares Accum. other comprehensive (in CHF thousands, except number of shares) Shares Amount Additional paid-in capital Accum. profit Treasury shares income (loss) Shareholders equity At January 1, ,930,722 63, ,580 1,429,724 (718,984) (199,063) 1,518,644 Comprehensive income (loss), net of tax: Net income (loss) , ,542 Other comprehensive income (loss) ,718 7,718 Comprehensive income (loss), net of tax ,542-7, ,260 Excess tax benefits and underrealization from share-based payment arrangements - - (2,498) (2,498) Transactions in treasury shares (1,802,295) - (93,732) - (110,340) - (204,072) Stock-based compensation expense , ,966 Cancelation of treasury shares - (3,249) (283,517) - 286, Dividend payment - - (113,297) (113,297) At December 31, ,128,427 60, ,502 1,882,266 (542,558) (191,345) 1,709,003 Comprehensive income (loss), net of tax: Net income (loss) , ,796 Other comprehensive income (loss) (17,168) (17,168) Comprehensive income (loss), net of tax ,796 - (17,168) 576,628 Excess tax benefits and underrealization from share-based payment arrangements , ,403 Transactions in treasury shares - - (202,349) - (94,207) - (296,556) Stock-based compensation expense , ,334 Cancelation of treasury shares - (3,074) (229,501) (116,489) 349, Dividend payment - - (133,389) (133,389) At December 31, ,128,427 57,064-2,359,573 (287,701) (208,513) 1,920,423 The accompanying notes form an integral part of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CHF thousands, except share and per share amounts) NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Actelion Ltd ( Actelion or the Group ), a biopharmaceutical company headquartered in Allschwil, Switzerland, discovers, develops and commercializes innovative low molecular weight drugs for high unmet medical needs. Basis of presentation The Group s consolidated financial statements have been prepared under Generally Accepted Accounting Principles in the United States ( US GAAP ). All US GAAP references relate to the Accounting Standards Codification ( ASC or Codification ) established by the Financial Accounting Standards Board ( FASB ) as the single authoritative source of US GAAP to be applied by non-governmental entities. All amounts are presented in Swiss francs ( CHF ), unless otherwise indicated. In addition, certain prior period amounts within the consolidated financial statements and related notes have been reclassified to conform to the current presentation. Scope of consolidation The consolidated financial statements include the accounts of the Group and its wholly-owned affiliated companies in which the Group has a direct or indirect controlling financial interest and exercises control over their operations (generally more than 50% of the voting rights). Investments in common stock of entities other than subsidiaries where the Group has the ability to exercise significant influence over the operations of the investee (generally between 20%- 50% of the voting rights) are accounted for under the equity method. Variable interest entities ( VIE ), irrespective of their legal structure, are consolidated if the Group has determined to be the primary beneficiary as defined in the Variable Interest Entities Subsection of FASB ASC ( ASC to 59 ) and thus has the power to direct the activities that most significantly impact the VIE s economic performance and will also absorb the majority of the VIE s expected losses or receive the majority of the VIE s expected residual returns, or both. For determination whether or not an entity is a VIE, the Group considers if the equity at risk for the entity is sufficient to support its operations, if the voting rights of the equity holders are in disproportion to their risk and rewards or if substantially all of the entity s activities are conducted on behalf of the Group. Principles of consolidation Businesses acquired or disposed of during the year are included in the consolidated financial statements from the date of acquisition or until the date of disposal. The acquisition method of accounting follows the guidance codified in the Business Combinations Topic of the FASB ASC ( ASC 805 ). Intercompany transactions and balances are eliminated. Use of estimates The preparation of financial statements in conformity with US GAAP requires management to make judgments, assumptions and estimates that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. On an on-going basis, management evaluates its estimates, including those related to revenue recognition for contract revenue, allowance for doubtful accounts, stock-based compensation, intangible assets, clinical trial and rebate accruals, impairment of indefinite lived intangibles including goodwill, provisions, contingent considerations arising from acquisitions, loss contingencies and income taxes. The Group bases its estimates on historical experience and on various market-specific and other relevant assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates. 28 FINANCIAL REPORT. 29